Chapter 9-Activity based costing

To assign overhead costs to a product, multiply the cost driver rates by the number of units of the

cost driver in each product

Costs are assigned to individual cost objects (products or services) using appropriate cost allocation bases, or

cost drivers

Costs are assigned to individual cost objects (products or services) using appropriate cost allocation bases, or)

cost drivers

The process where a company attempts to recover costs by increasing the price for a product with decreasing demand describes the

death spiral

The vicious cycle of attempting to cover a fixed amount of costs with fewer and fewer units until the firm is producing no units is known as the

death spiral

As companies have become more automated, including those in the service sector such as banks,

direct labor has become less appropriate as a basis for allocating overhead

With TDABC, the manager is asked to estimate

how much time each activity takes for a single transaction

The best cost driver is one that

is causally related to the cost being allocated

A single cost pool is used to allocate overhead costs to products for all departments using the

plantwide

Activity-based costing

provides more detailed information than plantwide and two-stage allocation helps managers identify cost drivers that were previously unknown requires teamwork between accounting and nonaccounting employees

Identifying the cost drivers is the Blank______ step in developing an ABC system.

second

In the plantwide allocation method,

the cost pool is the entire plant one overhead allocation rate, or set of rates, is used to allocate overhead for all departments

The choice of whether to use a plantwide rate or departmental rates depends on

the costs and benefits of information provided by each system the products and the production process

The major difference between department allocation and plantwide allocation is

the number of cost pools used to allocate overhead costs

Time-driven activity-based costing requires the

time it takes to complete the various activities of the department cost of the resources supplied to a department

If a company is concerned about the cost of maintaining an ABC system, they can consider a modified version called

time-driven activity-based costing

When a company uses only one rate to allocate overhead costs, the accounting system treats all overhead as if the costs were Blank______ with respect to the allocation base.

variable

If budgeted overhead cost is $250,000, and budgeted direct labor cost is $400,000, the overhead rate based on direct labor cost is

62.5% of direct labor cost

Which of the following statements are true?

ABC means different things to different observers. ABC may be applied to parts of an organization but not everywhere. Companies are not likely to announce they have discontinued the use of ABC.

Which of the following are problems with identifying users of ABC?

ABC means different things to different organizations. Organizations may not use ABC throughout their organization.

The formula for calculating a cost driver rate is

estimated indirect cost ÷ estimated volume of allocation base

The basic approach in product costing is to allocate costs in the cost pools to individual cost

objects Reason: Costs are assigned to a cost object using cost drivers such as direct labor costs and machine hours.

Activity-based costing can be applied to administrative activities to compute the cost of

performing an administrative service

TDABC

uses time equations to allow for differences among orders

Which of the following are true of activity-based costing?

Activity-based costing is a two-stage product costing method. Activity-based costing is based on the concept that products consume activities and activities consume resources.

Which of the following are true regarding activity-based costing?

Activity-based costing requires more recordkeeping. Activity-based costing requires teamwork.

Which of the following statements is false regarding cost drivers?

Finding a cost driver that is causally related to the cost being allocated is always possible.

Using plantwide allocation, all actual overhead costs are recorded in

Manufacturing Overhead Control

Which of the following is a facility-related cost?

Plant depreciation

Testing for environmental compliance and design and specification costs are examples of which of the following hierarchy level?

Product related

Which of the following is NOT a typical allocation base companies use when calculating a single plantwide rate?

Purchase orders

Analyzing processes used to produce goods and services can uncover nonvalue-added steps that can be eliminated. At which step does this primarily occur?

Step 1 - Identify the activities.

Which of the following are true regarding TDABC?

TDABC is based primarily on time estimates for different activities. TDABC can be extended to accommodate cost drivers other than time.

Which of the following are true?

The choice of whether to use a plantwide rate or departmental rates depends on the products and the production process. If the company manufactures products that are quite similar and that use the same set of resources, the plantwide rate is probably sufficient. Managers need to choose between plantwide and departmental rates based on the costs and benefits of each.

Which of the following are true of activity-based costing?

With activity-based costing, each activity has an associated cost pool. In the ABC two-stage cost system, the first stage consists of activities.

The two-stage product costing method that assigns costs first to activities and then to the products based on each product's use of activities is called

activity-based costing

With TDABC, the managers Blank______ asked to estimate what proportion of the time the employees spend on each activity.

are not

The final step in the activity-based costing system is to

assign the activity costs to products

Time-driven activity-based costing Blank______ the need to conduct surveys or interviews of multiple managers and employees.

avoids

Plantwide allocation can be used in

both manufacturing and nonmanufacturing organizations

Overhead rates based on machine-hours are calculated as

budgeted overhead costs divided by budgeted machine-hours

Activity-based costing Blank______ be applied to administrative activities.

can

Time equations

can be written if there is a maximum size of an order allow managers to adjust the times for orders with different characteristics

TDABC is based primarily on time estimates for different activities, and

can easily be extended to accommodate other cost drivers

Analyzing the processes managers follow to produce a good or service

can often uncover many nonvalue-added steps that can be eliminated

When low-volume products require more machine setups, overhead should be allocated based on

complexity