Fast Track: Chapter 10
Designing and operating an ______system usually costs more than using a simple traditional system based on a single activity measure such as direct labor hours.
ABC
The ultimate purpose of an _____system is to help a company make better decisions.
ABC
In an __________, facility support overhead costs are treated as common costs that are not assigned to any specific product, division, or product line.
ABC system
The increased cost of operating an ABC system pays for itself when use of the improved ABC data results in significantly better _________--.
decisions
Identify overhead cost activities. Analyze individual overhead costs in terms of those cost activities. Identify measurable cost drivers. Assign overhead. Use the ABC data to make decisions.
five steps in implementing and using an ABC system, which are:
Example: • Property taxes • Factory insurance • Security • Landscaping • General accounting • General factory administration
Facility support
A __________ is a numerical measure used to reflect the amount of a specific overhead cost that is associated with a particular activity.
cost driver
The total cost identified as being generated by a specific overhead cost activity is called the_____________
cost pool.
Example: • Machine maintenance • Machine depreciation • Electricity and other energy costs
unit level
Machine maintenance Machine depreciation Electricity and other energy costs
unit-level activities. Classic examples of unit-level overhead activities are:
—activities that take place in order to support a batch or production run, regardless of the size of the batch.
Batch
—activities that take place in order to support a product line, regardless of the number of batches or individual units actually produced.
Product line
Unit Batch Product line Facility support
The four general categories of ABC activities are:
When using an ____________-, a company identifies specific business activities that create overhead costs and then assigns overhead to products or divisions based on the level of those activities.
activity-based costing (ABC) system
Activity-based costing systems assume that:
Answer: Activities consume overhead costs
An activity that affects a particular cost is a(n):
Answer: Cost driver
With activity-based costing, overhead costs are assigned using:
Answer: Cost drivers
Which of the following would most likely NOT be considered a facility support activity?
Answer: Factory equipment
Which of the following is the correct sequence of the five steps of implementing and using an activity-based costing system?
Answer: Identify overhead cost activities, analyze individual overhead costs in terms of those cost activities, identify measurable cost drivers, assign overhead, and use the cost data to make decisions
Activity-based costing differs from traditional product costing in the allocation of:
Answer: Manufacturing overhead costs
Usually activity-based costing would be significantly more accurate than traditional product costing in a:
Answer: Multiple-product firm where products are quite different
When assigning cost drivers to facility support activities, an appropriate cost driver would be:
Answer: No cost driver should be assigned
An appropriate cost driver for engineering changes is:
Answer: Number of set-ups performed
If activity-based costing is used, receiving docks would be classified as a:
Answer: Product line activity
In the Lily Ice Cream example, number of purchase orders is an example of an overhead cost associated with
Answer: Servicing the special needs of each individual ice cream flavor
Example: • Inspections • Machine setups • Movement of and accounting for materials
Batch level
________that better understand their costs have an advantage over their competitors.
Companies
________ are used to track how costs of activities are related to specific cost objects such as products or divisions.
Cost drivers
—activities necessary to have a production facility in place. However, these activities are not related to any particular line of products or services.
Facility support
Example: • Engineering product design • Storage in special warehouses • Management by a special supervisor of all activities associated with a particular product line • Ordering, purchasing, and receiving materials unique to a particular product line
Product Line
Activity-based costing is most useful when there are variations in:
Production volume Size of products Complexity of products
Identify the key cost activities. Analyze each overhead cost in terms of these activities in order to compute the cost pools. Specify numerical cost drivers that can be used to assign the overhead costs to production.
The first three steps in implementing an ABC system are:
Gather the overhead cost and numerical cost driver data. Compute the amount of overhead cost per cost driver event. Use these data to assign overhead to production.
To then assign overhead costs to production, the necessary steps are:
Reflects economic reality Motivates correct behavior
Two characteristics of a good management accounting measure are that it:
—activities that take place each time a unit of product is produced.
Unit
