Chapter 4- Managerial Accounting
Reason why volume-based cost allocation causes distortions in product costing
Failure to recognize classification of activities
T/F An advantage of ABC is that it is inexpensive to implement.
False
T/F JIT is based on a push-approach.
False
T/F The most difficult part of computing accurate unit costs is determining the correct amount of direct labor cost to assign to each product.
False
T/F Traditional costing systems group costs according to activity cost pools.
False
T/F When using ABC for service industries, special methods must be used to identify cost pools and cost drivers due to the unique nature of the services offered.
False
T/F Product design is a unit-level activity.
False It is a product-level activity
T/F Low-volume products often require less special handles, such as setups.
False they require more special handles. Low-volume product is responsible for more overhead costs per unit than high volume product.
relevant facility-level cost driver for air conditioning costs in a chiropractor's office?
Floor Space
A relevant facility=level cost driver for heating costs is: (a)machine hours. (b)direct materials. (c)floor space. (d)direct labor cost.
Floor space
When is it appropriate to use direct labor as a basis for assigning overhead costs to products?
When direct labor constitutes a significant part of total product costs.
Important element in successfully operating a just-in-time approach to production?
Multi-Skilled workforce
Cost Driver Quality Control
Number of Inspections
Cost Driver Materials Handling
Number of Requisitions
Cost Driver Machine Setups
Number of Setups
Cost Driver Factory Supervision
Number of employees
Which of the following would be the best cost driver for the assembling cost pool? (a)Number of product lines. (b)Number of parts. (c)Number of orders. (d)Amount of square footage.
Number of parts
Activity-based overhead rate is computed by
estimated overhead per activity/ expected use of cost drivers per activity = activity-based overhead rate
activity based management (ABM)
extension of ABC from a product costing system to a management function that focuses on reducing costs and improving processes and decision making
An activity that adds costs to the product but does not increase its perceived value is a
non-value-added activity
The reasoning behind ABC cost allocation
products consume activities activities consume resources
Push Approach
raw materials and subassembly parts are pushed through each process
Any activity that causes resources to be consumed is called a
cost driver
Activity-based costing (ABC)
allocates overhead to multiple activity cost pools and assigns the activity cost pools to production by means of cost drivers. focuses on activities needed to produce a good or perform a service
Activity (in ABC)
an event that causes the consumption of overhead resources
The primary objective of just-in-time processing is to
eliminate or reduce all manufacturing inventories.
If a traditional costing system allocates too much overhead to one product, the firm is likely to experience which of the following problems?
the firm may lose market share to competitors
To assign overhead costs to an individual product, the activity-based overhead rate is multiplied by
the number of cost drivers used per product
Unit-level activities
activities that are performed each time a unit is produced
Benefits of JIT Systems
-Significant reduction or elimination of manufacturing inventories -enhanced product quality -reduction or elimination of rework costs and inventory storage costs -production cost savings from the improved flow of goods through the process
steps of activity based costing
1. Identify and classify the activities 2. Identify the cost driver 3. Compute the activity-based overhead rate 4. Allocate overhead costs to products
When to use ABC
1. Product lines differ greatly in volume and manufacturing complexity. 2. Product lines are numerous and diverse, and they require differing degrees of support services. 3. Overhead costs constitute a significant portion of total costs. 4. The manufacturing process or the number of products has changed significantly—for example, from labor-intensive to capital-intensive due to automation. 5. Production or marketing managers are ignoring data provided by the existing system and are instead using "bootleg" costing data or other alternative data when pricing or making other product decisions.
Levels of Classification of ABC activites
1. Unit-level 2. Batch-level 3. Product-level 4. Facility-level
How many steps are involved in activity-based costing?
4
activity cost pool
A "bucket" in which costs are accumulated that relate to a single activity measure in an activity-based costing system.
What is the primary barrier to using activity-based costing in a service company?
A large portion of overhead costs are company-wide costs.
What approach is used to eliminate inventories?
A pull approach
Under just-in-time processing: (a)raw materials are received just in time for use in production. (b)subassembly parts are completed just in time for use in assembling finished goods. (c)finished goods are completed just in time to be sold. (d)All of the above.
All of the above
Service industries tend to adopt which type of accounting practice?
ABC
Batch-level activities
Activities performed for each batch of products rather than for each unit.
Facility-level activities
Activities required to support or sustain an entire production process.
Pull Approach
Approach begins with the customer placing an order with the company, which starts the process of pulling he product through the manufacturing process
proper classification of activities according to activity level for a computer manufacturing company? Assembly Maintenance
Assembly-Unit Maintenance- Facility
Most difficult part of computing accurate unit costs
Assigning overhead costs
The activity-based overhead rate is computed by dividing
Estimated overhead per activity by expected use of cost drivers per activity.
How are equipment setups classified?
Batch-level activity
Limitations of ABC
Can be expensive to use. Some arbitrary allocations continue.
Third step in applying an activity-based costing system?
Compute the overhead rate for each cost driver
Activity-based costing is most appropriate to use when labor costs are a(n) ___________ proportion of total product costs and the manufacturing process is __________.
Decreasing Complex
Which of the following would not be an overhead activity cost pool? Direct materials Shipping Packaging Inspecting and testing
Direct materials
As the complexity of a product's manufacturing operation increases, the number of activities and cost drivers used in an activity-based cost system will likely
Increase
Value-added activities
Increase the worth of the product or service to customers They involve resource usage and related costs and related costs that customers are willing to pay for.
Just in case
Inventories of raw materials are maintained just in case some items are of poor quality or a key supplier is shut down by a strike
What overhead allocation basis is used by many companies with automated manufacturing processes to reduce product cost distortions?
Machine Hours
Cost Driver Factory machine maintenance
Machine Hours Used
Primary benefit of ABC
More accurate product costing -More cost pools Enhanced control over overhead costs
Why does ABC lead to better management decisions?
More accurate product costing helps in setting selling prices and in deciding to whether make or buy components
Which one fo the following would be the best cost driver for the activity of purchasing? The number of purchase orders issued Total number of items ordered The number of employees in the purchasing department Total dollar value of items orders
The number of purchase orders issued
T/F A cost driver is a factor or activity that has a direct cause-effect relationship with the resources consumed.
True
T/F Activity-based costing is used in service industries as well as manufacturing.
True
T/F Activity-based costing systems rely on multiple bases for overhead cost allocation
True
T/F Activity-based management leads to the identification of value-added and non-value-added activities.
True
T/F Assigning overhead using ABC will usually increase the cost per unit for low-volume products compared to traditional overhead allocation.
True
T/F In most service industries, a large portion of overhead costs are company-wide costs.
True
T/F The notion regarding eliminating as many non-value-added activities as possible applies equally to manufacturers and service providers.
True
T/F Two benefits of ABC are that it leads to better management decisions and increases the accuracy of overhead cost allocations.
True
T/F Resources consumed by batch-, product-, and facility-level supporting activities vary at the unit-level and cannot be controlled at the unit level
True. Dividing these types of costs by the number of units produced gives the mistaken impression that these costs vary with the number of units
Product-level activities
activities and costs incurred for a particular product, regardless of the number of units or batches of the product produced
Primary objective of just-in-time processing is to
eliminate or reduce all manufacturing inventories
Just in Time processing
dedicated to having the right amount of materials, parts or products just as they are needed.
Important elements of just-in-time processing
dependable suppliers multi-skilled workforce total quality control system
In order to achieve the most accurate costing, the cost driver chosen for a given activity must show a ___________ between the cost driver and the actual consumption of overhead costs.
high degree of correlation
The first step in the development of an activity-based costing system for a service company is
identify and classify activities and allocate overhead to cost pools
cost driver
the primary factor that causes a cost
Refinement of Activity based costing are classified activities as either
value-added or non-value-added
