Accounting 202 Ch. 5

53. A hospital administrator is in the process of implementing an activity-based-costing system. Which of the following tasks would not be part of this process?

None of the above, as all these tasks would be part of the process.

Of the following organizations, activity-based costing cannot be used by:

none of the above, as all are able to use this costing system.

Activity-based costing systems:

often reveal products that were under- or overcosted by traditional costing systems.

In comparison with a system that uses a single, volume-based cost driver, an activity-based costing system is preferred when a company has:

product-line diversity or a large proportion of nonunit-level activities.

Foster, Inc., an appliance manufacturer, is developing a new line of ovens that uses controlled-laser technology. The research and testing costs associated with the new ovens is said to arise from a:

product-sustaining activity

Vanguard combines all manufacturing overhead into a single cost pool and allocates this overhead to products by using machine hours. Activity-based costing would likely show that with Vanguard's current procedures,

the company's high-volume products are overcosted.

Consumption ratios are useful in determining:

the existence of product-line diversity.

In an activity-based costing system, direct materials used would typically be classified as a:

unit-level cost

The following tasks are associated with an activity-based costing system: 1—Calculation of cost application rates 2—Identification of cost drivers 3—Assignment of cost to products 4—Identification of cost pools Which of the following choices correctly expresses the proper order of the preceding tasks?

4, 2, 1, 3

Define the term "cost driver" and discuss the factors that are important in the selection of appropriate cost drivers.

A cost driver is an event or activity that results in the incurrence of costs. For example, many of the costs in an automated environment are created by the operation of machines, and machine hours may be a suitable cost driver for overhead application. The first factor important in the selection of cost drivers is the degree of correlation (i.e., relationship) among the driver, the activity, and the cost. This relationship is crucial to achieve credibility and accuracy. Another factor is the cost of measurement. Cost/benefit tradeoffs must be taken into account. The system should contain drivers that identify key costs but if too many drivers are used, the system will be burdensome and expensive. Behavioral effects must also be considered in identifying cost drivers. Such effects may influence the behavior of decision makers, which could be good or bad depending on the outcome.

Consider the following costs that relate to a bank and a manufacturer of software: Bank: 1. Review cost of commercial loan applications 2. Operating cost of human resources department 3. Immediate processing cost of a specific customer's cash deposit 4. Bank membership cost of joining local Chamber of Commerce Software manufacturer: 5. Label and packaging charges from a commercial printer for a new software release 6. Air conditioning/heating costs of the firm's production plant 7. Transport cost of moving the CD-output from production run no. 1 to the company's warehouse 8. Design, development, and coding cost of new spreadsheet software Required: A. Classify the eight costs listed as arising from either a unit-level, batch-level, product-sustaining, or facility-level activity. B. Would number of loan applications or number of customers be a more appropriate cost-driver base for the review of loan applications? Briefly explain.

A. 1. Unit-level 2. Facility-level 3. Unit-level 4. Facility-level B. The number of loan applications would be more appropriate because it has a higher correlation with the amount of review cost incurred. Applications create review cost; customers, on the other hand, may not.

Alexander Corporation produces flat-screen computer monitors. Consider the following selected costs that arose during the current year: 1. Direct materials used: $3,640,000 2. Plant rent, utilities, and taxes: $1,229,000 3. New technology design engineering: $2,040,000 4. Materials receiving: $318,000 5. Manufacturing-run/set-up charges: $115,000 6. Equipment depreciation: $92,000 7. General management salaries: $1,564,000 Required: A. Briefly distinguish between batch-level and facility-level activities. B. Determine the cost of the firm's unit-level, batch-level, product-sustaining, and facility-level activities.

A. A batch-level activity is performed for each batch of products rather than for each unit. In contrast, a facility-level activity is required for an entire process to occur. Examples of the latter, which support the organization as a whole, include plant maintenance and property taxes. B. Unit-level: $3,640,000 (1) Batch-level: $318,000 (4) + $115,000 (5) = $433,000 Product-sustaining: $2,040,000 (3) Facility-level: $1,229,000 (2) + $92,000 (6) + $1,564,000 (7) = $2,885,000

St. Helena Cellars produces wine in northern California. Consider the following selected costs that arose during the current year: 1. Safety costs at winery 2. Truckload shipping costs 3. Building maintenance costs 4. Bottle and cork cost 5. Development cost of new, after-dinner wine 6. Tasting and testing costs Required: A. Briefly distinguish between unit-level and product-sustaining activities. B. Classify the six costs listed as arising from a unit-level, batch-level, product-sustaining, or facility-level activity.

A. A unit-level activity is performed for each unit of production. In contrast, a product-sustaining activity is needed to support an entire product line. The latter is not necessarily performed each time a new unit or batch of products is manufactured. B. 1. Facility-level 2. Batch-level 3. Facility-level 4. Unit-level 5. Product-sustaining 6. Batch-level

Which of the following statements about activity-based costing (ABC) is false?

ABC cannot be used by service businesses.

Which of the following activity cost pools and activity measures likely has the lowest degree of correlation?

Activity Cost Pool: employee travel to job sites (sites are within 100-mile radius of company headquarters) Activity Measure: Number of employees

Under a traditional costing system, which of the following costs would likely be classified as indirect with respect to the various products manufactured?

All of the above would be considered indirect costs.

Which of the following choices correctly depicts a cost that arises from a batch-level activity and one that arises from a facility-level activity?

Batch-Level Activity: Inspection Facility-Level Activity: Property taxes

At a recent professional meeting, two controllers discussed product-costing problems in their respective companies. Both controllers are familiar with ABC systems, but neither of their firms utilizes such a system. Controller D reported that part of the problem in his firm results from major differences among product lines with respect to unit volume, utilization of activities, quality assurance requirements established by customers, and product size. Controller M noted that in her firm, which manufactures consumer goods, all items undergo the same basic production processes in the same sequence. However, lately there has been a significant increase in the number of item colors. Both controllers are worried about the potential distortion of product costs under their traditional product-costing systems. Required: Which controller should be more concerned about the potential distortion? Explain.

Controller D should be more concerned. The variety of product lines made in his firm's facility reflects diversity at the product-line and cost levels. In Controller M's firm, there still is only one product line, with an increasing number of models differentiated only by color. (In many applications, there is no or very little cost difference among color choices.) Thus, D's firm may be the victim of cost distortion and a prime candidate for activity-based costing.

Consider the following statements regarding traditional costing systems: I. Overhead costs are applied to products on the basis of volume-related measures. II. All manufacturing costs are easily traceable to the goods produced. III. Traditional costing systems tend to distort unit manufacturing costs when numerous goods are made that have widely varying production requirements. Which of the above statements is (are) true?

I and III

Consider the following statements: I. Product diversity creates costing problems because diverse products tend to utilize manufacturing activities in different ways. II. Overhead costs that are not incurred at the unit level create costing problems because such costs do not vary with traditional application bases such as direct labor hours or machine hours. III. Product diversity typically exists when a single product (e.g., a ballpoint pen) is made in different colors. Which of the above statements is (are) true?

I and III

Consider the following factors: I. The degree of correlation between consumption of an activity and consumption of a particular cost driver. II. The likelihood that a particular cost driver will induce a desired behavioral effect. III. The likelihood that a particular cost driver will cause an increase in the cost of measurement. Which of these factors should be considered in the selection of a cost driver?

I, II, and III

Consider the following statements regarding product-sustaining activities: I. They must be done for each batch of product that is made. II. They must be done for each unit of product that is made. III. They are needed to support an entire product line. Which of the above statements is (are) true?

III

Which of the following is the proper sequence of events in an activity-based costing system?

Identification of cost pools, identification of cost drivers, calculation of cost application rates, assignment of cost to products.

Which of the following is not a broad, cost classification category typically used in activity-based costing?

Management-level

Which of the following tasks is not normally associated with an activity-based costing system?

Preparation of allocation matrices.

Which of the following generally fails to signal the need for a new product-costing system?

Product-line profit margins are easy to explain.

Williams Corporation is changing from a traditional costing system to an activity-based system. As a result of this action, which of the following costs would likely change from indirect to direct?

Production setup, finished-goods inspection, and product shipping.

Which of the following is least likely to be classified as a batch-level activity in an activity-based costing system?

Property taxes

Grossman Enterprises is converting to an activity-based costing system and needs to depict the various activities in its manufacturing process along with the activities' relationships. Which of the following is a possible tool that the company can use to accomplish this task?

Storyboards

Templeton Industries currently assigns overhead to products by using a predetermined rate based on direct labor hours. The company is considering the adoption of an activity-based costing (ABC) system, and management desires a brief overview of this system before it makes a final decision. Compare ABC with the company's current system, focusing on the number of cost pools and cost drivers, costing accuracy, and cost distortion.

Templeton is currently combining all overhead into a single cost pool, to be applied to products by using a single cost driver (direct labor hours). Such a practice results in the calculation of an "average" cost because various cost relationships are being commingled. With ABC, cost pools are created for a company's individual activities, and a cost driver is then selected for each activity—a driver that has a high degree of correlation with the activity's consumption. The result is an increase in the number of cost pools and cost drivers when compared with current accounting procedures. The abandonment of "average" costing leads to an improvement in costing accuracy and less cost distortion among a company's products. More specifically, product diversity and use of nonunit-level activities are now taken into account.

Dreyfus Manufacturing sells a number of goods whose selling price is heavily influenced by cost. A recent study of product no. 519 revealed a traditionally-derived total cost of $1,019, a selling price of $1,850 based on that figure, and a newly computed activity-based total cost of $1,215. Which of the following statements is true?

The company may have been extremely competitive in the marketplace from a price perspective.

Koski manufactures products J and K, applying overhead on the basis of labor hours. J, a low-volume product, requires a variety of complex manufacturing procedures. K, on the other hand, is both a high-volume product and relatively simplistic in nature. What would an activity-based costing system likely disclose about products J and K as a result of Koski's current accounting procedures?

Undercosted: J Overcosted: K

Jackson manufactures products X and Y, applying overhead on the basis of labor hours. X, a low-volume product, requires a variety of complex manufacturing procedures. Y, on the other hand, is both a high-volume product and relatively simplistic in nature. What would an activity-based costing system likely disclose about products X and Y as a result of Jackson's current accounting procedures?

X: Undercosted Y: Overcosted

Moon Bay Manufacturing uses machine hours to apply manufacturing overhead to products. This method of costing would likely be acceptable if the company has:

a large proportion of unit-level activities and fairly identical consumption ratios among product lines.

Widely varying consumption ratios:

are reflective of product-line diversity.

In an activity-based costing system, materials receiving would typically be classified as a:

batch-level activity

Many traditional costing systems:

combine widely varying elements of overhead into a single cost pool.

The salaries of a manufacturing plant's management are said to arise from:

facility-level activities.

The division of activities into unit-level, batch-level, product-sustaining level, and facility-level categories is commonly known as a cost:

hierarchy

Which of the following is least likely to be classified as a facility-level activity in an activity-based costing system?

machine processing cost

Successful adoptions of activity-based costing typically occur when companies rely heavily on:

multidisciplinary project teams.