Chapter 5. Activity-based Costing: A Tool to Aid Decision Making

Identifying the activities that will form the foundation for the system

-involves a great deal of judgment -can be time-consuming -often involves interviewing employees

Strengths of time-driven activity-based costing (TDABC) include

-it helps estimate the financial impact of aligning capacity with demand -it is easy to update -employees do not have to self-report idle time

An activity-based costing system

-produces different numbers than a traditional system -requires substantial resources -is costly to maintain

Customer-level activities include

-sales calls -mailing catalogs

What level of activity is performed each time a single product item is produced?

Unit-level

Activity based costing provides managers with information that potentially affects

both fixed and variable costs Reason: ABC provides information for decisions about capacity and therefore includes fixed as well as variable costs.

Time-driven activity-based costing (TDABC) performs ______to evaluate employee idle time

capacity analysis

In activity-based costing, nonmanufacturing and manufacturing costs are assigned to products on a(n)

cause-and-effect basis

Entertaining clients and making sales calls are

customer-level activities

Time-driven activity-based costing (TDABC) ______ require extensive interviews with employees.

does not

An activity cost pool accumulates costs for

exactly one activity measure

Individual product costs calculated using ABC are not listed on

external reports

In activity-based costing, the process of assigning overhead costs to activity cost pools is

first stage allocation

In the second-stage allocation, activity rates are used to apply overhead costs to products and customers which is the ______ step in the implementation of activity-based costing.

fourth

The first major step when implementing an ABC system is

identify the activities

ABC is generally used for ______ reporting.

internal Reason: ABC is generally not used for external reporting as it does not comply with GAAP.

Focusing on activities to eliminate waste, decrease processing time, and reduce defects is the basis of activity-based

management

In traditional absorption costing, _____ costs are assigned to products.

only manufacturing

In traditional absorption costing, ______ costs are assigned to products.

only manufacturing

A company's total expected overhead for the year is $500,000. Two activity cost pools have been identified: Customer Service with a total cost of $200,000 and a total activity of 25,000 customer service calls; and Product Development with a total cost of $300,000 and total activity of 20,000 development hours. Using activity-based costing, the activity rates are

$8 per customer call and $15 per development hour Reason: Activity Rate = Total cost of activity/total activity $200,000 ÷ 25,000 = $8 per customer call and $300,000 ÷ 20,000 = $15 per development hour.

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. -The benefits of accuracy may not outweigh the costs.

Customer cost analysis using time-driven activity-based costing (TDABC)

-assists with measuring customer profitability -uses estimates based on practical capacity

The most common management reports using ABC data are

-customer profitability -product profitability

Costs assigned and/or traced when computing product margin in a traditional cost system are

-direct material -manufacturing overhead -direct labor Reason: Traditional cost systems include only manufacturing costs.

Time-driven activity-based costing (TDABC)

-does not assume employees will self-report idle time -overcomes some important limitations of ABC

Activity-based management is focused on

-eliminating waste -reducing defects Reason: Activity-based management is focused on process improvements. Activity-based management focuses on decreasing, not increasing, processing time.

Activity-based costing is not used for external reporting because

-external reports are less detailed than internal reports -ABC does not comply with GAAP -it is difficult to make changes in the existing accounting system Reason: ABC would disclose too much information about individual products.

Organization-sustaining activities include

-heating a factory -preparing annual reports -setting up a computer network

Customer cost analysis using time-driven activity-based costing (TDABC)

-helps manage customer mix -does not require employee interviews

Arrange the steps for implementing ABC in the correct order. (Place the first step at the top.) Instructions

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.

In traditional absorption costing systems only manufacturing costs that are caused by the products are assigned to products.

False Reason: In traditional absorption costing systems, all manufacturing costs are assigned to products—even manufacturing costs that are not caused by the products.

A benefit of TDABC is that it only requires about half the number of employee interviews that are needed with traditional ABC.

False Reason: TDABC is easy to update because it does not require any employee interviews.

Traditional cost systems tend to undercost standard products and overcost specialty products.

False Reason: The opposite is true - traditional systems undercost specialty products that tend to consume more overhead.

Why is top management support needed when ABC is implemented?

Leadership is instrumental in motivating employees to embrace ABC.

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 only

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 help companies channel their resources into the most profitable growth opportunities?

Product and customer profitability reports

Which costing system does not assign selling and administrative costs to products when computing product margin?

Traditional

Which costing method assigns only manufacturing costs to products?

Traditional absorption costing Reason: Activity-based costing assigns both manufacturing and nonmanufacturing cost to products.

A characteristic essential for successful implementation of ABC is:

a link to how people are evaluated and rewarded. Reason: Top management must strongly support the implementation. A cross-functional team should design and implement the system.

The first major step in implementing ABC is to identify the ________ that will form the foundation for the system

activities

A "bucket" in which costs are accumulated that relate to a single activity measure in the ABC system is a(n)

activity cost pool

Total cost of each activity divided by the total activity is the computation of

activity rates

Some manufacturing costs may be excluded from product costs when using

activity-based Reason: Activity-based costing assigns costs on a cause-and-effect basis. Some manufacturing costs may be excluded. Traditional absorption costing includes all manufacturing costs.

Setting up equipment, placing purchase orders, and arranging shipments to customers are all examples of

batch-level activities

Costs at the batch level depend on the number of

batches processed

Usually, traditional costing Blank______ high-volume products and Blank______ 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

overhead costs to activity pools

The final step in implementing ABC is

prepare management reports

Activities that are carried out to support entire product lines, but are not performed every time a new unit or batch is produced, are

product-level activities

Designing and advertising a product are examples of

product-level activities

Unit-level activities are

proportional to the number of units produced

In the ___-stage allocation, activity rates are used to apply the overhead costs to products and consumers.

second

Customer service employees are a ______ cost.

step-fixed

An ABC system usually ______ a traditional cost system.

supplements