Chapter 5

Question 1

Activity–Based Costing (ABC)

Answer 1

ABC is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity, and therefore, affect “fixed” as well as variable costs

Question 2

1st way ABC differs from traditional cost accounting?

Answer 2

ABC assigns both types of costs to products

Question 3

2nd way ABC differs from traditional cost accounting?

Answer 3

ABC does not assign all manufacturing costs to products

Question 4

3rd way ABC differs from traditional cost accounting?

Answer 4

ABC uses more cost pools. Each ABC cost pool has its own unique measure of activity, whereas traditional cost systems usually rely on volume

Question 5

4th way ABC differs from traditional cost accounting?

Answer 5

ABC bases level of activity on capacity. The predetermined overhead rate is based on budgeted activity and in ABC , products are charged for the costs of capacity they use

Question 6

What is an Activity in ABC?

Answer 6

An event that causes the consumption of overhead resources.

Question 7

What is an Activity Cost Pool in ABC?

Answer 7

A “cost bucket” in which costs related to a particular activity measure are accumulated.

Question 8

What is an Activity Measure?

Answer 8

The term cost driver is also used to refer to an activity measure, an allocation base in an activity-based costing system

Question 9

What is a Transaction Driver?

Answer 9

Simple count of the number of times an activity occurs.

Question 10

What is a duration driver?

Answer 10

A measure of the amount of time needed for an activity.

Question 11

How many levels of activity do ABC define?

Answer 11

Unit-Level Activity, Batch-Level Activity, Product-Level Activity, Organization-sustaining Activity, Customer-Level Activity

Question 12

3 Characteristics of a Successful ABC Implementation?

Answer 12

Strong top management support, Link to evaluations and rewards and Cross-functional involvement

Question 13

Implementing ABC (Step 1)

Answer 13

Identify and define activities, activity cost pools and activity measures.

Question 14

Implementing ABC (Step 2)

Answer 14

Assign overhead costs to activity cost pools

Question 15

Implementing ABC (Step 3)

Answer 15

Calculate activity rates.

Question 16

Implementing ABC (Step 4)

Answer 16

Assign overhead costs to cost objects using the activity rates and activity measures.

Question 17

Implementing ABC (Step 5)

Answer 17

Prepare management reports.

Question 18

Examples of Management Reports?

Answer 18

Product Margin Calculations, Customer Profitability Analysis,

Question 19

What is benchmarking?

Answer 19

It can be used to compare activity cost information with world-class standards of performance achieved by other organizations

Question 20

First difference of ABC vs Product Costs

Answer 20

Traditional costing allocates all manufacturing overhead to products. ABC costing only assigns manufacturing overhead costs consumed by products to those products.

Question 21

Second difference of ABC vs Product Costs

Answer 21

Traditional costing allocates all manufacturing overhead costs using a volume-related allocation base. ABC costing also uses non-volume related allocation bases.

Question 22

Third difference of ABC vs Product Costs

Answer 22

Traditional costing disregards selling and administrative expenses because they are assumed to be period expenses. ABC costing directly traces shipping costs to products and includes non-manufacturing overhead costs caused by products

Question 23

First reason why companies do not ABC for external reporting?

Answer 23

External reports are less detailed than internal reports.

Question 24

Second reason why companies do not ABC for external reporting?

Answer 24

It may be difficult to make changes to the company’s accounting system.

Question 25

Third reason why companies do not ABC for external reporting?

Answer 25

ABC does not conform to GAAP.

Question 26

Fourth reason why companies do not ABC for external reporting?

Answer 26

Auditors may be suspect of the subjective allocation process based on interviews with employees.

Question 27

First limitation of ABC?

Answer 27

Substantial resources required to implement and maintain.

Question 28

Second limitation of ABC?

Answer 28

Desire to fully allocate all costs to products.

Question 29

Third limitation of ABC?

Answer 29

Resistance to unfamiliar numbers and reports.

Question 30

Fourth limitation of ABC?

Answer 30

Potential misinterpretation of unfamiliar numbers.

Question 31

Fifth limitation of ABC?

Answer 31

Does not conform to GAAP. Two costing systems may be needed