Chapter 7
A company's products had sales of $750,000 and total costs of $360,000. If the net operating income for the company was $215,000, total overhead costs not assigned to products was $
750,000 - 360,000 = 390,000390,000 - 215,000 = 175,000
In activity-based costing, the consumption of overhead resources is caused by
an activity
Providing power to run production equipment is a(n) -level activity because power tends to be consumed in proportion to the number of units produced. (Enter only one word per blank.)
unit
If the activity rate for the customer order cost pool is $250 per order and the total for this cost pool is $425,000, the total number of customer orders is
1700 Reason: $425,000 ÷ $250 = 1,700
Which of the following help companies channel their resources into the most profitable growth opportunities?
Product and customer profitability reports
The most common reports prepared using ABC data are the product and customer
profitability, margin, or profit
Costs that can be easily traced to individual products include
shipping costs warranty repair costs sales commission
An example of a duration driver is the
time spent preparing invoices
Simple counts of the number of times an activity occurs are
transaction
When making decisions using ABC data
unavoidable fixed costs should be ignored
Costs of unused or idle capacity are assigned to products when using a(n)
absorption , traditional, or full
All manufacturing costs are assigned to products in traditional
absorption or full costing systems
In ABC, any event that causes consumption of overhead resources is 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
In ABC, the term cost driver is used to refer to a(n) because it should "drive" the cost being allocated . (Enter only one word per blank.
activity measure
Total cost of each activity divided by the total activity is the computation of
activity rates
Arrange the steps for implementing ABC in the correct order. (Place the first step at the top.)
1. Define activities, activity cost pools, and activity measures. 2. Assign overhead costs to activity cost pools. 3. Calculate activity rates. 4. Assign overhead costs to cost objects. 5. Prepare management reports.
The final step in implementing ABC is
prepare management reports
A function of sales and the direct and indirect costs that the product causes is the
product margin
ABC does not conform to GAAP because it
- Includes some non manufacturing costs - Excludes some manufacturing costs
Organization-sustaining activities include
-heating a factory -setting up a computer network -preparing annual reports
Traditional cost systems tend to undercost standard products and overcost specialty products.
False
True or false: In an activity-based costing system, it is best to combine activities that are not highly correlated.
False
Which of the following can be combined in activity-based costing?
Highly correlated activities
Why is top management support needed when ABC is implemented?
Leadership is instrumental in motivating employees to embrace ABC.
True or false: Activity-based costing can be used for process improvement.
True
Activity-based costing data
can be easily misinterpreted
In activity-based costing, nonmanufacturing and manufacturing costs are assigned to products on a(n)
cause-and-effect
Individual product costs calculated using ABC are not listed on
external
In activity-based costing, the process of assigning overhead costs to activity cost pools is
first
The first major step when implementing an ABC system is
identify the activities
In recent years, direct labor as a percentage of total cost began declining, which caused overhead to
increase, rise, or grow
ABC is generally used for
internal reporting
Identifying the activities that will form the foundation for the system
involves a great deal of judgment often involves interviewing employees can be time-consuming
An activity-based costing system
is costly to maintain produces different numbers than a traditional system requires substantial resources
Compared to traditional systems, activity-based costing uses ______ cost pools and unique measures of activity.
more
Activity-based costing uses numerous
overhead or activity cost pools
To reconcile ABC product margin to net income
subtract overhead costs not assigned to products
What are some of the limitations of activity-based costing systems?
Managers and employees may resist the change to ABC. ABC requires substantial resources. ABC procedures produce numbers that do not match traditional costing.
In a traditional cost accounting system, what type of costs are assigned to products even if the costs are not caused by the products?
Manufacturing
What type of activities are carried out regardless of which customers are served, which products are produced, how many batches are run or how many units are produced?
Organization-sustaining
Which of the following is not essential for the successful implementation of an ABC system?
Top managers must design the ABC system.
Which of the following items are the same under both ABC and traditional costing?
Total sales Net operating income Total costs
Which costing system does not assign selling and administrative costs to products when computing product margin?
Traditional
True or false: In an automated environment, using traditional allocation bases based on volume may distort unit product costs.
True
The first major step in implementing ABC is to identify the that will form the foundation for the system. (Enter only one word per blank.)
activities or activity
Activity based costing provides managers with information that affects
both fixed and variable costs
In activity based costing another term for activity measure is
cost driver
A cost pool including costs to entertain clients and make sales calls is a(n) ______ activity.
customer-level
Costs assigned and/or traced when computing product margin in a traditional cost system are
direct material manufacturing overhead direct labor
The amount of time required to perform an activity is measured by a(n)
duration
Activity-based management is focused on
eliminating waste reducing defects.
An activity cost pool accumulates costs for ______ activity measure(s).
exactly one
Activity-based costing is not used for external reporting because
it is difficult to make changes in the existing accounting system ABC does not comply with GAAP external reports are less detailed than internal reports
Under activity-based costing, nonmanufacturing costs
may be allocated to products based on cause
An example of a transaction driver is the
number of bills sent out to a customer
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.
In activity-based costing, first-stage allocation assigns costs to activity cost pools. (Enter only one word per blank)
overhead
The profit from a product is also called the
product margin
In activity-based costing, ______ are different from those calculated using traditional costing.
product margins
Activity-based costing only charges products for the cost of the capacity used because:
products are only assigned the costs of resources they actually use. it results in a more stable unit product cost.
Customer-level activities include
sales calls mailing catalogs
Activity rates are used to apply overhead costs to products and customers in the
second
Activity-based costing uses activity rates to apply overhead costs to products in
second
A reason that activity-based costing is not often used for external reporting is
the ABC system may not conform to GAAP
Activity-based costing uses more cost than traditional costing. (Enter only one word per blank.)
pools, drivers, or measures
Unit-level activities are:
proportional to the number of units produced
