UFC1 - Chapter 4 Activity based Costing

Traditional Based Costing

A traditional costing system allocates overhead to products on the basis of predetermined plantwide or departmentwide rates such as direct labor or machine hours.

The first step in the development of an activity-based costing system for a service company is: (a)identify and classify activities and allocate overhead to cost pools. (b)assign overhead costs to products. (c)identify cost drivers. (d)compute overhead rates.

(a)identify and classify activities and allocate overhead to cost pools.

Which of the following would be the best cost driver for the assembling cost pool? (a)Number of product lines. (b)Number of parts. (c)Number of orders. (d)Amount of square footage.

(b)Number of parts.

The overhead rate for machine setups is $100 per setup. Products A and B have 80 and 60 setups, respectively. The overhead assigned to each product is: (a)Product A $8,000, Product B $8,000. (b)Product A $8,000, Product B $6,000. (c)Product A $6,000, Product B $6,000. (d)Product A $6,000, Product B $8,000.

(b)Product A $8,000, Product B $6,000.

A frequently cited limitation of activity-based costing is: (a)ABC results in more cost pools being used to assign overhead costs to products. (b)certain overhead costs remain to be allocated by means of some arbitrary volume-based cost driver such as labor or machine hours. (c)ABC leads to poorer management decisions. (d)ABC results in less control over overhead costs.

(b)certain overhead costs remain to be allocated by means of some arbitrary volume-based cost driver such as labor or machine hours.

The primary objective of just-in-time processing is to: (a)accumulate overhead in activity cost pools. (b)eliminate or reduce all manufacturing inventories. (c)identify relevant activity cost drivers. (d)identify value-added activities.

(b)eliminate or reduce all manufacturing inventories.

The following activity is value-added: (a)Storage of raw materials. (b)Moving parts from machine to machine. (c)Shaping a piece of metal on a lathe. (d)All of the above.

(c)Shaping a piece of metal on a lathe.

Any activity that causes resources to be consumed is called a: (a)just-in-time activity. (b)facility-level activity. (c)cost driver. (d)non-value-added activity.

(c)cost driver.

A relevant facility-level cost driver for heating costs is: (a)machine hours. (b)direct materials. (c)floor space. (d)direct labor cost.

(c)floor space.

Activity-based costing (ABC): (a)can be used only in a process cost system. (b)focuses on units of production. (c)focuses on activities needed to produce a good or perform a service. (d)uses only a single basis of allocation.

(c)focuses on activities needed to produce a good or perform a service.

Activity-based costing: (a)is the initial phase of converting to a just-in-time operating environment. (b)can be used only in a job order costing system. (c)is a two-stage overhead cost allocation system that identifies activity cost pools and cost drivers. (d)uses direct labor as its primary cost driver.

(c)is a two-stage overhead cost allocation system that identifies activity cost pools and cost drivers.

Under just-in-time processing: (a)raw materials are received just in time for use in production. (b)subassembly parts are completed just in time for use in assembling finished goods. (c)finished goods are completed just in time to be sold. (d)All of the above.

(d)All of the above.

Donna Crawford Co. has identified an activity cost pool to which it has allocated estimated overhead of $1,920,000. It has determined the expected use of cost drivers for that activity to be 160,000 inspections. Widgets require 40,000 inspections, gadgets 30,000 inspections, and targets 90,000 inspections. The overhead assigned to each product is: (a)Widgets $40,000, gadgets $30,000, targets $90,000. (b)Widgets $640,000, gadgets $640,000, targets $640,000. (c)Widgets $360,000, gadgets $480,000, targets $1,080,000. (d)Widgets $480,000, gadgets $360,000, targets $1,080,000.

(d)Widgets $480,000, gadgets $360,000, targets $1,080,000.

A company should consider using ABC if: (a)overhead costs constitute a small portion of total product costs. (b)it has only a few product lines that require similar degrees of support services. (c)direct labor constitutes a significant part of the total product cost and a high correlation exists between direct labor and changes in overhead costs. (d)its product lines differ greatly in volume and manufacturing complexity.

(d)its product lines differ greatly in volume and manufacturing complexity.

An activity that adds costs to the product but does not increase its perceived value is a: (a)value-added activity. (b)cost driver. (c)cost/benefit activity. (d)non-value-added activity.

(d)non-value-added activity.

Activity based Costing

An ABC system allocates overhead to identified activity cost pools and then assigns costs to products using related cost drivers that measure the activities (resources) consumed. The development of an activity-based costing system involves the following four steps. (1) Identify and classify the major activities involved in the manufacture of specific products and assign overhead to cost pools. (2) Identify the cost driver that has a strong correlation to the costs accumulated in each cost pool. (3) Compute the activity-based overhead rate for each cost pool. (4) Allocate overhead costs to products using the overhead rates determined for each cost pool.

Cost driver

Any factor or activity that has a direct cause-effect relationship with the resources consumed. In ABC, cost drivers are used to assign activity cost pools to products or services.

Explain the benefits and limitations of activity-based costing

Features of ABC that make it a more accurate product costing system include (1) the increased number of cost pools used to assign overhead (including use of the activity-level hierarchy), (2) the enhanced control over overhead costs (including identification of non-value-added activities), and (3) the better management decisions it makes possible. The limitations of ABC are (1) the higher analysis and measurement costs that accompany multiple activity centers and cost drivers, and (2) the necessity still to allocate some costs arbitrarily.

How can activity-based management help managers?

Info Needed: Activities classified as value-added and non-value-added Tools: Activity flowchart Evaluate: The flowchart should motivate managers to minimize non-value-added activities. Managers should better understand the relationship between activities and the resources they consume.

When should we use ABC?

Info Needed: Knowledge of the products or product lines, the manufacturing process, and overhead cost Tools: A detailed and accurate cost accounting system; cooperation between accountants and operating managers Evaluate: Compare the results under both costing systems. If managers are better able to understand and control their operations using ABC and the costs are not prohibitive, the use of ABC would be beneficial.

Explain just-in-time (JIT) processing.

JIT is a processing system dedicated to having on hand the right materials and products just at the time they are needed, thereby reducing the amount of inventory and the time inventory is held. One of the principal accounting effects is that one account, Raw and In-Process Inventory, replaces both the raw materials and work in process inventory accounts.

Apply activity-based costing to a manufacturer.

To identify activity cost pools, a company must perform an analysis of each operation or process, documenting and timing every task, action, or transaction. Cost drivers identified for assigning activity cost pools must (a) accurately measure the actual consumption of the activity by the various products and (b) have related data easily available. The overhead assigned to each activity cost pool is divided by the expected use of cost drivers to determine the activity-based overhead rate for each pool. Overhead is allocated to products by multiplying a particular product's expected use of a cost driver by the activity-based overhead rate. This is done for each activity cost pool and then summed.