8.3 Activity-Based Costing Flashcards
Activity-based costing (ABC) is a response to the significant increase in ___________ costs resulting from the rapid advance of technology.
Indirect costs
Traditional Costing System
Volume-based costing system
____________ based system uses a single cost pool to combine the costs in all the related accounts.
Traditional-based system (volume-based)
An assisted-living facility provides services in the form of residential space, meals, and other occupant assistance (OOA) to its occupants. The facility currently uses a traditional cost accounting system that charges each occupant a daily rate equal to the facility’s annual cost of providing residential space, meals, and OOA divided by total occupant days. However, an activity-based costing (ABC) analysis has revealed that occupants’ use of OOA varies substantially. This analysis determined that occupants could be grouped into three categories (low, moderate, and high usage of OOA) and that the activity driver of OOA should be nursing hours. The driver of the residential space and meals is occupant days. The following quantitative information was also provided:
Low usage
- Annual occupant days: 36,000
- Annual nursing hours: 90,000
Medium usage
- Annual occupant days: 18,000
- Annual nursing hours: 90,000
High usage
- Annual occupant days: 6,000
- Annual nursing hours: 120,000
Total
- Annual occupant days: 60,000
- Annual nursing hours: 300,000
The total annual cost of OOA was $7.5 million, and the total annual cost of providing residential space and meals was $7.2 million. Accordingly, the ABC analysis indicates that the daily costing rate for providing residential space, meals, and OOA should be
A. $182.50 for occupants in the low-usage category
B. $620.00 for all occupants
C. $245.00 for occupants in the high-usage category
D. $145.00 for occupants in the medium-usage category
A. $182.50 for occupants in the low-usage category
This service organization produces three “products” (the three occupant categories), and the “units produced” equal occupant days.
According to the ABC analysis, production involves two activities: (1) provision of residential space and meals and (2) OOA. The drivers of these activities are occupant days and nursing hours, respectively. Thus the cost pool rate for the first activity (residential space and meals) is $120 per occupant day ($7,200,000 / 60,000 days), and the cost pool rate for the second activity (OOA) is $25 ($7,500,000 / 300,000 hours). The total cost for providing services to occupants in the low-usage category is 6,570,000 ([$120 x 36,000 days) + ($25 x 90,000 hours)]. The daily cost rate for these occupant is therefore $182.40 (6,570,000 / 36,000 occupant days)
A plant has two departments, Machining and Assembly. This year’s budget for the plant contained the following information.
Manufacturing overhead
- Machining $4,000,000
- Assembly $2,000,000
Direct labor hours
- Machining 100,000
- Assembly 200,000
Machine hours
- Machining 410,000
- Assembly 40,000
If the plant uses a corporate-wide overhead rate based on direct labor hours, what would the rate be?
A. $40 per hour
B. $10 per hour
C. $75 per hour
D. $20 per our
D. $20 per hour
The total manufacturing overhead is $6,000,000, and the total direct labor hours are 300,000. Because the plant uses a corporate-wide overhead rate based on direct labor hours, the rate will be $20 per hour (6,000,000 / 300,000).
A company’s operations include a high level of fixed costs and produce a variety of products. What type of costing system should be recommended?
A. Job-order costing.
B. Activity-based costing.
C. Process costing.
D. Process value analysis.
B. Activity-based costing.
Activity-based costing (ABC) is a response to the significant increase in indirect costs resulting from the rapid advance of technology. The real benefits of ABC occur when a company has a high level of fixed costs and produces a wide variety of products with widely varying levels of production. ABC allows costs to be allocated to products based on cost drivers (operations that drive, or cause, costs).
All of the following are likely to be used as a cost allocation base in activity-based costing except the
A. Units of materials used to manufacture the product.
B. Number of vendors supplying the materials used to manufacture the product.
C. Cost of materials used to manufacture the product.
D. Number of different materials used to manufacture the product.
C. Cost of materials used to manufacture the product.
Activity-based costing is founded on the idea that drivers for indirect cost assignment should be based on some level of activity. Cost of materials does not directly reflect a level of a given activity.
A company is implementing an activity-based budgeting system. Set-up overhead is allocated based on set-up hours and manufacturing overhead is allocated based on direct manufacturing labor hours. Budget information is listed in the table below.
Cost driver information
Numbers of units per batch
- Product A: 50
- Product B: 25
Set-up time per batch
- Product A: 1.75 hours
- Product B: 1.25 hours
Direct manufacturing labor time per batch
- Product A: 1.00 hours
- Product B: 0.75 hours
The company plans to produce 1,000 units of Product A and 750 units of Product B. The activity rates are $100 per set-up hour and $150 per direct manufacturing labor hour. What is the total budgeted overhead?
A. $13,625
B. $10,063
C. $22,188
D. $15,125
A. $13,625
Because every batch of Product A contains 50 units and every batch of Product B contains 25 units, the company will produce 20 (1,000 ÷ 50) batches of Product A and 30 (750 ÷ 25) batches of Product B. Thus, the budgeted overhead is calculated as follows:
Product A: (20 batches × 1.75 hours × $100) + (20 batches × 1.00 hours × $150) = $6,500
Product B: (30 batches × 1.25 hours × $100) + (30 batches × 0.75 hours × $150) = $7,125
Therefore, total budgeted overhead is $13,625.
