Chapter 5

Question 1

in order to become a cost pool or driver what needs to be able to be measured

Answer 1

total and unit cost basis

Question 2

What is activity-based costing

Answer 2

a more accurate indirect cost allocation approach

Question 3

what does activity-based costing affect

Answer 3

allocation of indirect costs

Question 4

what does a zero sum situation mean

Answer 4

it means there is only one allocation base so therefore the total amount of MOH alloacted remains the same

if one is overcosted the other must be undercosted

Question 5

What are the 3 Reasons for a more refined costing system i.e ABC

Answer 5

1. Increase in product diversity (ex: some products may be less labor driven and more machine driven)
2. increase in indirect costs
3. competition in product markets (company becomes more competitive when they have accurate cost information)

Question 6

what changes when using ABC

Answer 6

• Calc of DM and DL stay same
• there are multiple MOH clearing accounts ex: MOH - utilites and MOH - grease

Question 7

What are the 4 cost hierarchies

Answer 7

1. Unit level (ex: utilities, more units produced, more utilites)
2. Batch level (based off number of batches)
3. product level (different products require different amount of OH)
4. Facility level (ex: rent, rent only changes if a new facility is bought)

Question 8

When should a company use ABC

Answer 8

• multiple products
• indirect cost/unit is large
• ## if most indirect costs are unit/batch costs