Unit 4: Activity Based Costing

Cost objects

A product or division for which costs are accumulated and tracked

Which statement describes activity-based costing (ABC)? ABC considers only manufacturing costs in evaluating product costs. ABC considers nonmanufacturing and manufacturing costs. ABC includes only manufacturing costs in calculating product costs. ABC includes only costs related to selling and distributing the product.

ABC considers nonmanufacturing and manufacturing costs. Correct! ABC considers both nonmanufacturing and manufacturing costs, which can be associated, both directly and indirectly, in the manufacturing of a product.

Facility support activities

Activities necessary to have a facility to participate in the development and production of products or services; activities are not related to any particular line of products or services

Unit-level activities

Activities that take place each time a unit of product is produced.

Batch-level activities

Activities that take place to support a batch or production run, regardless of the size of the batch

Product-line activities

Activities that take place to support a product line, regardless of the number of batches or individual units produced.

The unit-level activity overhead cost increases with more >

units produced (gallons, pounds, pieces)

The product line-level activity overhead cost increases with more >

complexity of the goods/services

5 steps in implementing an ABC system

1) Identify overhead cost activities. 2) Analyze individual overhead costs in terms of those cost activities. 3) Identify measurable cost drivers. 4) Assign overhead. 5) Use the ABC data to make decisions.

Four general categories of ABC activities

1) Unit level overhead 2) Batch level overhead 3) Product line overhead 4) Facility support overhead

What is a change, or measurable factor, directly related to the amount of overhead cost associated with the production of a specific item? A change in direct materials used A change in direct labor pay rates A design change A change in the union contract

A design change Correct! A design change is a measurable factor directly related to the amount of overhead cost associated with the production of a specific item.

Activity based costing (ABC)

A method of allocating overhead based on each product's use of activities in making the product. (Cost drivers)

Smartistry is producing a custom-made airplane for Alliah Airlines. In particular, one part of the production process for each plane includes custom-made passenger seats, which differ in both comfort and size in first class, business class, and economy class. Which overhead allocation method should Smartistry use to determine the total cost of each passenger seat in each class of these airplanes? Indirect costing Direct costing Activity-based costing Traditional costing

Activity-based costing Correct! Because the comfort, size, and complexity of the installation of these seats differ between first, business, and economy class, using activity-based costing would be the most appropriate method to allocate overhead costs in this situation.

In an ice cream production setting, how does the management accountant determine how much of the factory machine cleaners' total wages should be assigned to the "changing ice cream batches" cost pool? Multiply machine cleaner wages by the ratio of direct materials costs to direct labor costs Compute the total direct labor hours of all workers in the production facility associated with changing ice cream batches Examine the trend of machine cleaner wage increases over the past five years Analyze what fraction of the machine cleaners' time is typically taken up in activities associated with changing ice cream batches

Analyze what fraction of the machine cleaners' time is typically taken up in activities associated with changing ice cream batches Correct! Identifying how much of the factory machine cleaners' total wages should be assigned to the "changing ice cream batches" cost pool requires a careful analysis of the fraction of the machine cleaners' time typically taken up in the activities required to change the factory from making a batch of one ice cream flavor to making a batch of a different flavor.

The cost of special machine maintenance, which is necessary because of the frequent starting and stopping of the machines, is an example of which type of ABC support activity? Unit activity Facility support activity Batch activity Product line activity

Batch activity Correct! The cost of special machine maintenance, which is necessary because the machines are frequently starting and stopping, is an example of a batch ABC support activity.

Why is a traditional overhead allocation system of using direct labor hours to allocate overhead to products, projects, or processes simple to implement? Because direct materials costs are ignored in the allocation to each product, project, and process Because direct labor hours are routinely tracked as part of tracing direct labor costs to products, projects, and processes Because the same dollar amount of overhead is allocated to each product, project, and process Because maintenance, supervisor, and training costs are ignored in the allocation to each product, project, and process

Because direct labor hours are routinely tracked as part of tracing direct labor costs to products, projects, and processes Correct! A traditional overhead allocation system is simple to implement because direct labor hours are routinely tracked as part of tracing direct labor costs to products, projects, and processes.

In addition to better cost allocation, what benefit comes from creating and using an ABC overhead allocation system? Reduction in direct labor costs Better understanding of the underlying business processes Increase in selling prices through demand management maximization Reduction in both sales and income taxes

Better understanding of the underlying business processes Correct! In the right setting, when a company's operations involve a variety of different products and processes, ABC analysis not only results in a better allocation of overhead costs, but it also results in a better understanding of the underlying business processes when those business processes are analyzed.

How are the costs belonging to a cost pool identified in an ABC system? Computation of the difference between total overhead cost and direct materials . Careful analysis of overhead allocated using a traditional technique. Computation of the difference between total overhead cost and total cost of direct labor. Careful analysis of which activities cause the need for each specific overhead cost.

Careful analysis of which activities cause the need for each specific overhead cost. Correct! Identifying the costs associated with a particular cost pool requires a careful analysis of how support and supervisory people spend their time, what activities use electricity and cause depreciation and what overhead cost activities cause other overhead costs such as travel, supplies, training, and so forth.

What would activities such as machine setups, consumed power, and purchase orders be considered as when using ABC costing? Cost drivers Manufacturing overhead costs Cost driver rates Cost pools

Cost drivers Correct! Cost drivers are the activities that cause or relate to manufacturing overhead costs be incurred.

Using an ABC overhead allocation method, overhead is allocated based on several different measures of activity. What are these measures of activity called? Direct labor Total manufacturing costs Cost drivers Direct materials

Cost drivers Correct! Overhead is allocated based on several different measures of activity, which are called cost drivers.

How is an ABC cost driver activity rate computed? Cost pool total divided by the number of cost driver events Direct labor hours divided by the cost pool total Cost driver events divided by the number of product lines Selling price total divided by the number of cost driver events

Cost pool total divided by the number of cost driver events Correct! An ABC cost driver activity rate is computed as the overhead cost pool total divided by the number of cost driver events.

What is the first step for a company in implementing an ABC overhead allocation system? Determine what activities are causing the miscellaneous costs associated with production Determine what activities are causing the direct costs associated with production Determine what activities are causing the direct labor costs specifically Determine what activities are causing the direct material costs specifically

Determine what activities are causing the miscellaneous costs associated with production Correct! The first step for a company implementing an ABC overhead system is to determine which activities are causing the overhead costs.

What is important to consider when determining how to allocate overhead costs to a product or a production process? Determining what factors are causing direct materials costs to be incurred Determining what factors are causing all manufacturing costs to be incurred Determining what factors are causing overhead costs to be incurred Determining what factors are causing direct labor costs to be incurred

Determining what factors are causing overhead costs to be incurred Correct! It is important when determining how to allocate overhead costs to a product or production process to consider what factors are causing overhead costs to be incurred in the manufacturing process in the first place.

Using a traditional overhead allocation method, what is a common measure of activity? CEO salary Direct labor hours Forecasted sales increase Amount spent on research and development

Direct labor hours Correct! With a traditional overhead allocation method, all overhead is allocated based on one common measure of activity, such as direct labor hours.

Cost pool

Total cost being generated by a specific overhead cost activity.

An ABC system is being implemented at a certain factory. An analyst finds that one of the cost drivers for overhead costs relates to manufacturing staff time. Which information needs to be gathered next to properly allocate overhead costs in this situation? Employee time logs and employee interviews Process costing computations of equivalent units Direct materials warehouse requisition ticket numbers Detailed analysis of general ledger posting procedures

Employee time logs and employee interviews Correct! Analyzing the percentage of time employees spend on each overhead cost activity could involve asking the employees to keep a log of their daily activities, assigning someone from the accounting staff to watch employees to verify the accuracy of these logs or simply conducting interviews with the employees to determine approximately how much time is spent in various overhead-related activities.

The depreciation of the factory building is an example of which type of ABC support activity? Unit activity Facility support activity Product line activity Batch activity

Facility support activity Correct! The depreciation of the factory is an example of an ABC facility support activity.

The security safeguards implemented to protect the manufacturing facility are an example of which type of ABC support activity? Batch activity Unit activity Facility support activity Product line activity

Facility support activity Correct! The security safeguards implemented to protect the manufacturing facility are an example of a facility support activity.

Facility Support overhead costs increases as the level of activity increases. True or False

False

Cost driver

Numerical measure used to reflect the amount of a specific cost associated with a particular activity.

The traditional approach to allocating overhead involves assigning all the overhead costs to products according to which approach? Using multiple cost drivers Using a direct approach Multiple measures of activity One simple measure of activity

One simple measure of activity Correct! The traditional approach to allocating overhead involves assigning all the overhead costs to products according to one simple measure of activity, such as direct labor or machine hours.

In which setting is the use of an ABC overhead allocation system appropriate? All projects and processes in the manufacturing process are the same. All products being manufactured are the same. Products are different, but the processes are roughly the same. Operations involve a variety of different products and processes.

Operations involve a variety of different products and processes. Correct! With an activity-based costing (ABC) overhead allocation method, overhead is allocated based on several different measures of activity, which are called cost drivers. Overhead is not allocated based on any particular single measure of activity or single cost driver. Operations involving a variety of different products and processes are well suited to apply the ABC overhead allocation system to allocate overhead

Implementing an activity-based costing system requires a careful analysis of the products, projects, or services that create which cost? Total costs Direct materials costs Overhead costs Direct labor costs

Overhead costs Correct! Implementing an activity-based costing system requires a careful analysis of the products, projects, or services that create the overhead costs in the first place.

What is different about allocating overhead costs using the activity-based costing method versus the traditional method? Overhead is ignored when using the activity-based costing method. Overhead is allocated based on a variety of activity measures when using activity-based costing. Overhead is allocated based on a single measure of activity when using activity-based costing. Overhead is ignored when using the traditional method of overhead allocation.

Overhead is allocated based on a variety of activity measures when using activity-based costing. Correct! Overhead is allocated based on a variety of activity measures when using activity-based costing.

The cost of preparing documents to order ingredients from various suppliers is an example of which type of ABC support activity? Batch activity Product line activity Facility support activity Unit activity

Product line activity Correct! Preparing documents to order ingredients from various suppliers is an example of a product line activity.

What is a cost driver? The ratio between a product's cost of goods sold and its selling price The difference between the overhead allocated using a traditional system and the overhead allocated using an ABC system The collection of overhead costs associated with a specific overhead cost activity The numerical measure reflecting the amount of a cost associated with a particular overhead cost activity

The numerical measure reflecting the amount of a cost associated with a particular overhead cost activity Correct! A cost driver is a numerical measure used to reflect the amount of a specific cost associated with a particular activity.

What statement describes when a traditional overhead allocation system is appropriate? The production process for each different product, project, or process is basically the same. The production process for each different product, project, or process is very different. Direct materials costs are less than or equal to the sum of direct labor costs and overhead costs. Direct materials costs are greater than or equal to the sum of direct labor costs and overhead costs.

The production process for each different product, project, or process is basically the same. Correct! A traditional overhead allocation system works well when the production process for each different product, project, or process is basically the same.

Implementing an activity-based costing system requires a more careful analysis of which services? The services creating the direct labor costs The services creating the material costs The services creating a single measure of activity The services creating the overhead costs

The services creating the overhead costs Correct! Implementing an activity-based system requires a more careful analysis of the services creating the overhead costs in the first place.

Which statement correctly describes the traditional approach of allocating overhead services for products having special design requirements? The traditional approach understates the amount of overhead services being consumed for products that have special design requirements, are associated with additional inspections, or which necessitate careful monitoring by a supervisor. The traditional approach eliminates the amount of overhead services being consumed for products that have special design requirements, are associated with additional inspections, or which necessitate careful monitoring by a supervisor. The traditional approach overstates the amount of overhead services being consumed for products that have special design requirements, are associated with additional inspections, or which necessitate careful monitoring by a supervisor. The traditional approach reclassifies (as part of gross profit) the amount of overhead services being consumed for products that have special design requirements, are associated with additional inspections, or which necessitate careful monitoring by a supervisor.

The traditional approach understates the amount of overhead services being consumed for products that have special design requirements, are associated with additional inspections, or which necessitate careful monitoring by a supervisor. Correct! Allocating overhead based on the number of direct labor hours, as is done with a traditional approach, understates the amount of overhead services being consumed in the creation of products, projects, or process with special needs, such as careful monitoring or inspections as the product is being manufactured.

The cost of electricity to operate the machines in a factory is an example of which type of ABC support activity? Unit activity Batch activity Product line activity Facility support activity

Unit activity Correct! The cost of electricity to operate machines in a factory is an example of an ABC unit support activity.

In which setting is the use of a traditional overhead allocation system most appropriate for allocating manufacturing overhead costs? When multiple processes have been identified as generating the nonmanufacturing overhead costs When multiple products being manufactured require different manufacturing processes When multiple products being manufactured require similar manufacturing processes When multiple processes have been identified as generating the manufacturing overhead costs

When multiple products being manufactured require similar manufacturing processes Correct! When multiple products being manufactured require similar manufacturing processes, the use of a traditional overhead allocation system is most appropriate for allocating manufacturing overhead costs.

Which statement is correct with respect to overhead with an activity-based costing (ABC) system? With an ABC system, some routine overhead costs are allocated based on direct labor hours. With an ABC system, no overhead is allocated based on direct labor hours. With an ABC system, overhead is not allocated but instead is added to selling expenses. With an ABC system, all overhead is allocated based on direct labor hours.

With an ABC system, some routine overhead costs are allocated based on direct labor hours. Correct! Even when using activity-based costing, some routine overhead costs, such as electricity and routine cleanup costs, are still allocated in certain situations based on direct labor hours. For example, the more hours worked by the craftspeople, the more electricity they use.

The batch-level activity overhead cost increases with more >

batches produced