Chapter 4: Activity-Based Costing SmartBook

How much of an activity is carried out is expressed by a(n) ______, which is used as the allocation base for applying overhead costs to products and services.

activity measure

Total cost of each activity divided by the total activity is the computation of ______.

activity rates

Focusing on activities to eliminate waste, decrease processing time, and reduce defects is the basis of _________ - ________ management.

activity-based

When a company has extensive product diversity and complex overhead, it is best to assign overhead using ______.

activity-based costing

In activity-based costing an activity measure is ______.

an allocation base

Costs at the batch level depend on the number of ______.

batches processed

Activity-based costing ______.

computes product costs in the same way as traditional costing

If the activity rate is $65 per order with a total of 120 orders for a product, the overhead cost assigned to the product is $________.

7,800

Select all that apply Activity-based management is focused on ______. pricing decisions eliminating waste increasing processing time reducing defects

eliminating waste reducing defects

An activity that must be done for each item produced is a(n) _________ - _________ activity.

unit-level

A systematic approach to identifying the activities that need the most improvement is called ________.

benchmarking

Costs that cannot be traced on a cause-and-effect basis to individual products are ______ -levelcosts.

facility

The activity rate is computed by dividing the ______ by the ______.

total cost in the activity cost pool; activity level in the activity cost pool

Setting up equipment, placing purchase orders, and arranging shipments to customers are all examples of ________ -level activities.

batch

A company incurred the following: Total manufacturing costs of $500,000, total production department costs of $300,000, and total production order costs of $275,000. It used a total of 50,000 direct labour hours and 100,000 machine hours, and 2,750 production orders were placed. Use activity-based costing to calculate the activity rate for production orders.

$100 Reason: $275,000 ÷ 2,750 = $100 per production order

A company assigns overhead using a plantwide rate. If total estimated manufacturing overhead is $900,000 and the total estimated activity is 30,000 machine-hours, the overhead cost assigned to a product using 12,000 machine-hours is ______.

$360,000 Reason: ($900,000 ÷ 30,000) × 12,000 = $360,000

A company's total expected overhead for the year is $500,000. Two activity cost pools have been identified: Customer Service with a total cost of $200,000 and a total activity of 25,000 customer service calls; and Product Development with a total cost of $300,000 and total activity of 20,000 development hours. Using activity-based costing, calculate the appropriate activity rate(s).

$8 per customer call and $15 per development hour----------- Reason: $200,000 ÷ 25,000 = $8 per customer call and $300,000 ÷ 20,000 = $15 per development hour.

Total estimated manufacturing overhead is $900,000 and total estimated activity is 30,000 machine-hours. The plantwide overhead rate is $________ per machine hour.

30

Given direct material cost of $10, direct labor cost of $15, direct-labor based overhead of $12 and Activity-Based Costing overhead of $16, the total cost of the product using Activity-Based costing is $______.

41

In activity-based costing, what is calculated by dividing the total cost of each activity by its total cost driver?

Activity rate

Activity-cost rates may either be computed per product or per activity.

False

True or false: Traditional cost systems tend to undercost standard products and overcost specialty products.

False

When two variables move together, they are said to be negatively correlated.

False

Moving from plantwide to departmental overhead rates tends to correct most of the product distortions that can occur with a plantwide system.

False Reason: While departmental rates may be an improvement over plantwide, they still generally rely on a single overhead allocation base and will not be sufficient when a company produces a variety of products with complex overhead.

Select all that apply Which of the following are facility-level activities? Paying factory insurance Arranging for shipping products to a customer Property taxes on plant Setting up factory equipment

Paying factory insurance Property taxes on plant

Select all that apply When cost systems were developed in the 1800's, most companies ______. focused on simplicity assigned overhead based on machine hours produced a small number of similar products believed there was little correlation between labor hours and overhead

focused on simplicity produced a small number of similar products

Select all that apply Benefits of activity-based costing include ______. helping target areas for process improvement more accurate product costs helping managers understand the nature of overhead costs reducing the total overhead costs of a company

helping target areas for process improvement more accurate product costs helping managers understand the nature of overhead costs

Select all that apply Using direct-labor hours or another volume based cost driver to assign overhead ______. ignores other significant causes of overhead may result in overcharging customers for products can badly distort labor and material costs may result in selling products at a loss

ignores other significant causes of overhead may result in overcharging customers for products may result in selling products at a loss

Using volume-based cost drivers to assign overhead when ABC is appropriate ______.

may lead to overpriced or underpriced goods

The cost of implementing and maintaining an activity-based costing system ______ the benefits received.

may outweigh

Usually, traditional costing ______ high-volume products and ______ low-volume products.

overcosts; undercosts

For decision-making purposes, the distinction between manufacturing costs and selling and administrative expenses is ______.

unimportant

An activity that must be done for each item produced is a(n) __ level activity.

unit

When using activity rates, overhead is assigned the same way as when using plantwide or departmental rates.

True

A plantwide overhead rate based on direct labor hours is ______ appropriate.

sometimes

The activity rate for the Customer Orders activity pool is $20 per order. If there are 400 customer orders for a product, the total overhead cost assigned to this product for customer orders is $_____.

8,000

What types of activities are performed each time a group of units is processed, regardless of how many units are in the group?

batch-level

Activity-based management is focused on ______.

eliminating waste and reducing defects.

An activity cost pool accumulates costs for ______ activity measure(s).

exactly one

The basis of benchmarking is comparing ______.

performance within the same industry

Select all that apply Using direct-labor hours or another volume based cost driver to assign overhead ______. may result in overcharging customers for products may result in selling products at a loss can badly distort labor and material costs ignores other significant causes of overhead

may result in overcharging customers for products may result in selling products at a loss ignores other significant causes of overhead

Usually, traditional costing ______ high-volume products and ______ low-volume products.

overcosts; undercosts reason: Traditional costing uses a volume-related allocation base and assigns more costs to high-volume products, resulting in overcosting. In contrast, it assigns fewer costs to low-volume products, resulting in undercosting.

A significant limitation of the ABC model is that the product costs computed will most likely be ______.

overstated for purposes of decision making

Designing and advertising a good are both ______-level activities.

product

Research & development is a(n) _______ - level activity.

product

Select all that apply Which of the following statements are true? Technology has made more complex product systems less expensive to develop and maintain. Product diversity increases the chance of overhead costs that are unrelated to direct labor. Most companies throughout the world have moved away from using direct labor hours or machine hours to allocate overhead. On an economywide basis, direct labor and overhead costs are generally moving in opposite directions.

Technology has made more complex product systems less expensive to develop and maintain. Product diversity increases the chance of overhead costs that are unrelated to direct labor. On an economywide basis, direct labor and overhead costs are generally moving in opposite directions.

True or false: Activity-based costing relies on a number of critical assumptions which could distort information for making decisions.

True

Activity-based costing improves the accuracy of product costs by

Using cost pools that are more homogeneous than departmental cost pools. increasing the number of cost pools used to accumulate overhead cost using a variety of activity measures to assign overhead costs to products

Focusing on activities to eliminate waste, decrease processing time, and reduce defects is the basis of ____________-______________ managemetn

activity

In ABC, any event that causes consumption of overhead resources is a(n) __________.

activity

Setting up machines, billing customers, and performing tests at a lab are all examples of a(n) ______.

activity

A "bucket" in which costs are accumulated that relate to a single activity measure in the ABC system is a(n) ______.

activity cost pool

A cost bucket in which costs related to a particular activity measure are accumulated is called a(n) ______.

activity cost pool

activity based costing ________

always leads to higher product costs than traditional costing because...Costs shift and may be higher or lower

A predetermined overhead rate in an activity-based costing system is called ______.

an activity rate

When evaluating ABC product costs, managers should be particularly alert to costs that contain allocations of _____________ level cost

facility

Activity-cost rates may either be computed per product or per activity.

false Reason: Activity-cost rates are computed per activity and assigned to products based on the use by each product.

Select all that apply Activity-based costing improves the accuracy of product costs by ______. highlighting the activities that could benefit the most from improvement initiatives increasing the number of cost pools used to accumulate overhead cost using cost pools that are more homogeneous than departmental cost pools using a variety of activity measures to assign overhead costs to products

increasing the number of cost pools used to accumulate overhead cost using cost pools that are more homogeneous than departmental cost pools using a variety of activity measures to assign overhead costs to products

Select all that apply Implementing activity-based costing ______. should be done by a cross-functional team requires taking employees away from other tasks requires substantial resources should be done using existing, historical data that can be verified

should be done by a cross-functional team requires taking employees away from other tasks requires substantial resources

When making decisions ______.

some selling and administrative expenses should be assigned to products