ACC 212 Chapter 17, 18, and 19

Cool covers makes protective cases for smartphones. Currently, the firm produces eight models, each of which is redesigned once per year. All eight models are produced on the same equipment, but this equipment needs extensive re-calibration and re-engineering each time the firm starts a new production run. Based on this information, which type of overhead costing system is the best fit for Cool Covers

Activity-based costing system using multiple bases for allocation

Activity-based costing

An overhead cost allocation method that uses multiple bases

Activity

Any event, action, transaction, or work sequence that incurs costs when producing a product or performing a service

Cost driver

Any factor or activity that has a direct cause-effect relationship with the resources consumed

Cardinal Manufacturing is switching from a traditional costing system to activity-based costing. Cardinal's management has just finished identifying the appropriate drivers for each of its seven cost pools. What is management's next step in putting the ABC system into place

Calculating the activity-based overhead rate for each of the seven cost pools

For job order costing, we assumed that was was relevant activity base for assigning all overhead costs to jobs

Direct labor cost

Cost pool of engineering design

Engineering

Cost pool of engineering prototypes

Engineering

Cost Driver of Engineering design

Engineering Hours

Cost Driver of Engineering prototypes

Engineering Hours

Cost pool of depreciation, plant

Factory Utilities

Cost pool of electricity, plant lighting

Factory Utilities

Cost pool of insurance, plant

Factory Utilities

Cost pool of oil, heating

Factory Utilities

Cost pool of property taxes

Factory Utilities

Classify cost as Variable, Fixed, or Mixed: Rent

Fixed

Classify cost as Variable, Fixed, or Mixed: Supervisory Salaries

Fixed

Sequence for implementation of an activity-based costing system

Identify activities -> Develop activity cost pools -> Calculate activity cost rates -> Allocate costs to products or services -> Calculate unit product costs

Activity-based costing involves four steps

Identify and classify the activities and assign overhead to cost pools Identify the cost driver Compute the activity-based overhead rate Allocate overhead costs to produce

Cost Driver of Depreciation, machinery

Machine Hours

Cost Driver of Electricity, machinery

Machine Hours

Cost pool of Machine Setup, indirect materials

Machine Setup

Cost pool of machine setup, indirect labor

Machine Setup

For process costing, we assumed that what was the relevant activity base for assigning all overhead to the process or department

Machine hours

Cost pool of depreciation, machinery

Machinery

Cost pool of electricity, machinery

Machinery

Cost pool of machine maintenance wages

Maintenance

Classify cost as Variable, Fixed, or Mixed: Maintenance

Mixed

Classify cost as Variable, Fixed, or Mixed: Utilities

Mixed

Cost Driver of Machine maintenance wages

Number of Machines or Machine Hours

Cost Driver of machine setup, indirect materials

Number of Setups

Cost Driver of Tests

Number of Tests or Inspections

Cost Driver of inspections

Number of Tests or Inspections

Cost Driver of Machine setup, indirect labor

Number of setups

Cost pool of inspections

Quality Control

Cost pool of tests

Quality Control

Predetermined overhead rate

Single or plantwide overhead rate throughout the year for the entire factory operation

Cost Driver of Depreciation, plant

Square Feet or Machine Hours

Cost Driver of Electricity, plant lighting

Square Feet or Machine Hours

Cost Driver of Insurance, plant

Square Feet or Machine Hours

Cost Driver of Oil, heating

Square Feet or Machine Hours

Cost Driver of property taxes

Square Feet or Machine Hours

Spade industries allocates overhead using an activity-based costing system. Spade's director of finance tells you that the firm's system involves six different cost drivers. What, if anything, does the director's statement tell you about the number of activity cost pools in Spade's system

The director's statement tells you that Spade must have exactly six activity cost pools

Activity cost pool

The overhead cost attributed to a distinct activity ex ordering materials or setting up machines

Activity-based costing represents a new approach to allocating overhead costs T/F

True

When implementing an activity-based costing system, the most time-consuming part is identifying activities T/F

True

Classify cost as Variable, Fixed, or Mixed: Direct Materials

Variable

Classify cost as Variable, Fixed, or Mixed: Direct labor

Variable

CVP analysis considers the interrelationships among the components of

Volume or level of activity, Unit selling prices, Variable costs per unit, Total Fixed costs, and Sales mix

Degree of operating leverage provides a measure of

a company's earnings volatility and can be used to compare companies

The theory of constraints is

a specific approach used to identify and manage constraints in order to achieve the company's goals

A company allocates a part of factory overhead among products on the basis of machine hours (the cost driver). Based on this allocation, the allocated overhead most likely pertains to

an automated system, machine depreciation, and electricity usage

If a firm switches from activity-based costing to traditional costing, its record-keeping requirements will likely

be reduced, and its decision-making will likely become poorer

To achieve accurate costing, a high degree of correlation must exist between the

cost driver and the actual consumption of the overhead costs in the cost pool

According to the theory of constraints, a company must continually identify its constraints and

find ways to reduce or eliminate them, where appropriate

Burke industries is transitioning from a traditional costing system to an activity-based costing system. Burke's first step in putting this new system in place should be to

identify and classify the activities involved in the manufacture of each of its products

Companies that have complex process need to use

multiple allocation bases to compute accurate product costs

The reasoning behind ABC cost allocation is that

products consume activities and activities consume resources

CVP analysis is important in

profit planning

The most difficult part of computing accurate unit costs is determining the

proper amount of overhead cost to assign to each product, server, or job

Reducing reliance on human workers and instead investing heavily in computers and online technology will

reduce variable costs and increase fixed costs

Unlike activity-based costing, traditional costing does not allocate

selling and administrative expenses

For the past four years, Horton Helmets has allocated overhead using an ABC system that has featured the same six costs pools and the same six cost drivers. Horton expects to significantly simplify the manufacturing operation associated with its Pro model bike helmet. This suggests that

the Pro model will be associated with fewer cost pools next year than it was this year

With Activity based costing, the goal is to allocate cost in a manner that reflects

the amount of each resource consumed by the activities to produce a product performed

Cost-Volume-profit (CVP) analysis is the study of

the effects of changes in costs and volume on a company's profits

If a firm calculates the per-unit cost of a particular product using both traditional costing and activity-based costing, it should expect the activity-based cost estimate to be higher, because

this method includes allocation of selling and administrative expenses

Activity-based costing segregates overhead into

various cost pools in an effort to provide more accurate cost information