Ch 4 Managerial Accounting

Under activity-based costing, a degree program at a university is considered a(n) ________________-level activity.

service

A group of similar activities that have been combined together is called an activity _________________ _________________.

Cost pool

True or false: When a manufacturing overhead cost relates to multiple activities, the cost should be allocated to the activity that has the highest total overhead cost.

FALSE

What types of activities are carried out regardless of which products are produced, how many batches are run, or how many units are produced?

Facility-level

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

batch

A company assigns overhead based on direct labor costs. The predetermined overhead rate is $3.00 per direct labor dollar. A job that used a total of 20 direct labor hours ($400 in total direct labor costs) would be assigned _______________________ in total overhead.

$1200

True or false: Activity-based costing is appropriate for every company.

FALSE

True or false: The worst type of quality costs for a company to incur are internal failure costs.

FALSE; Reason: The worst type of quality cost is external failure because of the cost and damage to the company's reputation.

True or false: The best reason to implement an ABC system is to obtain more accurate information about the cost of products and services.

FALSE; This in itself is not a good reason to implement ABC. The real benefit is the information it provides to managers to pursue cost management.

Examples of facility-level activities

Paying factory insurance Human resource hiring fairs

True or false: When computing unit costs, the direct materials and direct labor costs are the same, regardless of whether ABC or a volume-based costing system is used. True false question.

TRUE

Costs incurred to identify defective products before they get to the customer are called _________________ costs.

appraisal

Indirect costs ______.

are not easily traced to products or services

The final step in activity-based costing is ______.

assigning indirect costs to products or services

Which of the following is NOT part of the manufacturing cost per unit? a. direct materials b. sales commission c. manufacturing overhead d. direct labor

b. sales commission

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

batches processed

ABC can be used in ______.

both service and manufacturing companies

Activity-based costing systems typically include ______ cost drivers.

both volume- and non-volume-based

A(n) ______ system is an integrated management information system that encompasses the entire organization.

enterprise resource planning

Selling price per unit minus total manufacturing costs per unit equals ______________ _______________ per unit.

gross margin

Sales price per unit - manufacturing cost per unit = ______ per unit.

gross profit

A local tour company offers charter buses to corporations who have conventions or meetings in the city. Under activity-based costing, renting a bus to a corporation is a(n) _________________-level activity.

group

Traditional costing systems tend to overcost high-volume products because ______.

high-volume products use more labor and machine hours traditional costing systems don't allow for complex activities required by lower-volume products

When a company implements activity-based costing, overhead cost often shifts from ______-volume products to ______-volume products.

high; low

Activity-based management focuses on ______.

improving operations increasing efficiency

A just-in-time (JIT) system ______.

is a demand-pull system is used to help reduce costs

A system that pulls materials and products through the manufacturing system based on customer demand is called ______.

just-in-time

To compute the per-unit manufacturing cost, add ____________________ _________________ to direct materials and direct labor.

manufacturing overhead

To calculate manufacturing overhead cost per unit using ABC, divide the total ______.

manufacturing overhead cost by the number of units produced

A ______ cost driver is not strictly related to the number of units produced or customers served.

non-volume-based

Activity-based costing ______.

offers some advantages over traditional costing systems

Indirect costs are also referred to ___________________ costs.

overhead

Total manufacturing overhead under activity-based costing consists of all ______.

overhead assigned during Stage 2 allocations

The activity proportion method uses __________________ to assign overhead costs to products.

percentages

Comparing ______ is the basis of benchmarking.

performance within the same industry

To keep quality problems from happening, companies incur ___________________ costs.

prevention

Research and development is a(n) _______________________-level activity.

product

The duration of a product from its infancy through its eventual decline is represented by the

product life cycle

Implementing an ABC system ______.

provides information for cost management

Non-volume-based cost drivers may be more appropriate for activities ______.

related to the entire facility that are performed for each batch related to individual products

Non-value-added activities ______.

should be eliminated whenever possible do not enhance the product or service

A network of organizations and activities that move goods and services from suppliers to customers is a(n) ______.

supply chain

A proactive approach managers use to determine what costs should be is called ______.

target costing

Indirect costs can be assigned to products or services using ______.

the activity rate method the activity proportion method

Direct labor hours and machine hours are both examples of _________________-based cost drivers.

volume

When an activity must be performed for each individual unit, an appropriate cost driver is ______.

volume-based

ABC works best in service industries ______.

when different customers require different levels of services

SPL Enterprises assigns overhead based on number of machine hours. For the upcoming year, they plan to use a total of 250,000 machine hours and 50,000 direct labor hours. Total overhead cost is expected to be $500,000. The predetermined overhead rate per machine hour is $______________.

$2

Widgets, Inc., plans to produce 8,000 widgets during the upcoming year. Each widget requires four direct labor hours at $25 per hour and $110 in direct material costs. Manufacturing overhead is assigned based on direct labor hours and is estimated to be $625,000 for the upcoming year. Compute the predetermined overhead rate per direct labor hour.

$19.53; $625,000/(8,000 × 4) = $19.53

Using an ABC system, a company has estimated overhead of $2,100,000. They expect to use 1,000,000 machine hours and 500,000 labor hours. ABC has identified this as a machine-hour related activity. The activity rate for this activity is ______.

$2.10; Reason: $2,100,000/1,000,000 = $2.10 per machine hour

Adele's Attic assigns overhead to products based on direct labor hours. For the upcoming year the business plans to use a total of 25,000 machine hours and 5,000 direct labor hours. Total overhead cost is expected to be $35,000. How much overhead would be assigned to a job that used 180 machine hours and 40 direct labor hours?

$280; Predetermined overhead rate = $35,000/5,000 or $7 per direct labor hour × 40 hours = $280.

Plaster Company expects to have a total cost of $400,000 in its activity cost pool. The total expected activity is 800 machine setups. The activity rate is $___________________ per setup.

$500

Anders Inc. assigns overhead using activity proportions and has a machine setup cost pool. Last year there were 27,500 setups at a total cost of $550,000. Product R3D used a total of 8,250 of those setups and should be assigned_________________% of the total setup cost.

30%

The first step in implementing an ABC system is to identify the organization's major ________________.

Activities

Activity rate formula

Activity rate = total activity cost/ total cost driver

Non-volume-based cost driver

Allocation base that is not directly related to the number of units produced or customers served.

How to determine overhead applied to a particular job?

Overhead applied to a particular job = Predetermined overhead rate × Amount of the allocation base incurred by the job

Installing parts on an automobile is a(n) __________________-level activity.

Unit

Which of the following statements are true? a. Appraisal costs are also known as inspection costs. b. Appraisal costs identify defective products before they get to the customer. c. Appraisal activities address issues that are causing defects. d. Most managers realize it is better to find mistakes than to prevent them.

a. Appraisal costs are also known as inspection costs. b. Appraisal costs identify defective products before they get to the customer.

A technique that attempts to assign overhead costs to products based on the actions they require is called

activity based costing

A method that attempts to assign overhead costs based on what is required to produce products is ______ costing.

activity-based

A technique that attempts to assign overhead costs to products based on the actions they require is called ____________________________________.

activity-based costing

When a specific overhead cost relates to multiple activities, the cost should be ______.

allocated based on some appropriate measure

Non-volume-based cost drivers ______.

allow more indirect costs to be allocated to products are used in ABC systems

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

an activity rate

A group-level activity for a service company is the same as a(n) ___________________ -level activity for a manufacturing company.

batch

The formula to compute activity proportion is ______.

cost driver for product ÷ cost driver for all products

An important part of TQM is the preparation of a(n) _____________________ of _______________________ report that details resources required to prevent, detect, and correct problems.

cost of quality

All of the following are non-volume-based cost drivers except number of ______. a. setups b. inspections c. design changes d. machine hours

d. machine hours

Which of the following is NOT a volume-based cost driver? a. direct labor dollars b. direct materials cost c. sales revenue d. machine setups

d. match setups

An integrated management information system that encompasses the entire organization is called a(n) __________________ __________________ planning system

enterprise resource

Activities performed to design a new type of service to be offered are ______-level activities.

product

Gross profit margin calculates gross margin as a percentage of _________________.

sales

An approach that aims to improve products by reducing and eliminating errors, streamlining activities, and continuously making production processes better is called _________________ _________________ management

total quality

Larson Productions LLC has an activity cost pool called product design and redevelopment. The cost driver for this pool is design hours. A total of 1,000 design hours were used, 620 for Model XLT and 380 for Model TXT. The total cost assigned to the cost pool was $118,000. Using the activity proportion method, determine how much cost should be allocated to each product.

$73,160 to Model XLT and $44,840 to Model TXT; Reason: 620/1000 = 62% to Model XLT and 380/1000 = 38% to TXT

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

activity rate

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

batch

Which of the following statements is true? a. ABC is only suitable for providing detailed cost information. b. In order to provide sustainability information, any current ABC system would have to be redesigned. c. An existing ABC system can report sustainability-related information.

c. An existing ABC system can report sustainability-related information.

Making a single sale at a department store is an example of a ______-level activity.

customer

predetermined over rate formula

estimated manufacturing overhead cost/ estimated total units in the allocation base (cost driver) Example from Practice Exam: Carey Company applies manufacturing overhead costs to products as a percentage of direct labor dollars. Estimated and actual values of manufacturing overhead and direct labor costs are summarized below: Direct labor cost......................Est. $600,000 Act. $550,000 Manufacturing Overhead....Est. $900,000 Act. $850,000 = $1.50 per direct labor hour

The worst type of quality costs for a firm are ______ costs.

external failure

Activities that occur regardless of how many products are produced or how many batches are run or units made are _________________ _______________ activities.

facility level