chapter 5 from book: activity-based costing Flashcards

1
Q

why are direct material and direct labor costs the easiest to determine?

A

because they can be traced directly to the product by examining material requisition forms and payroll time sheets

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2
Q

what is often the most difficult part of calculating accurate unit costs?

A

determining the proper amount of overhead cost to assign to each product, service, or job

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3
Q

when is it appropriate to allocate overhead costs on the basis of direct labor?

A

when direct labor is a significant part of the total product cost

when there is a high correlation between direct labour and change in the amount of overhead costs

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4
Q

what has dramatically changed the manufacturing environment in the past years?

A

advances in computerized systems

technological innovation

global competition

automation

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5
Q

why does the drastic changes in the manufacturing environment cause the need for a change on way we allocate overhead?

A

we used to base it a lot on direct labor costs

nowadays, the changes has drastically decreases actual direct labor costs

furthermore, overhead costs from depreciation, maintenance, repairs, and utilities, have increased

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6
Q

since there is no more correlation between overhead costs and direct labor with the reduced direct labor hours, what do many companies now use to base their overhead costs?

is it gyu or nah

A

machine hours

this is not the best tho, it can often be inadequate

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7
Q

activity based costing

A

an approach to allocating overhead costs

allocates overhead on multiple activity cost pools

then assigns activity cost pools to products and services

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8
Q

how does activity based costing assign activity cost pools to products and services?

A

by using cost drivers

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9
Q

activity

A

any event, action, transaction, or work sequence that incurs cost when producing a product or performing a service

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10
Q

activity cost pool

A

the overhead cost attributed to a distinct activity

ex: ordering materials
ex: setting up machines

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11
Q

cost driver

A

any factor or activity that has a direct cause-and-effect relationship with the resources consumed

measures the number of individual activities that are performed to produce products or services

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12
Q

what is the basic logic for activity based costing

A

products consume activities

activities consume resources

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13
Q

what are the 4 steps of activity based costing

A
  1. identify and classify the major activities and assign overhead cost to pools
  2. identify the cost drivers
  3. calculate the activity based overhead rate for each cost pool
  4. allocate overhead costs to products
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14
Q

how do you calculate the activity based overhead for each cost pool?

A

you divide step 1 by step 2

you identify the cost of the major activities, and then you divide by the number influencing the total cost in cost pools (cost drivers)

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15
Q

what happens if there is little to no correlation between the cost drivers and the total cost in the activity cost pools?

A

there will be inaccurate product costs

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16
Q

indicate if the following is true or false

activity based costing allocates overhead costs in a two stage process?

A

true

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17
Q
  1. identify and classify the major activities and assign overhead cost to pools
A

identify all resource consuming activities that are then identified as the cost pools

allocate the costs to each cost pool

as you add up all the costs of cost pools, it gives the estimated overhead

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18
Q

how ca you estimate the overhead costs?

A

you add up all the costs of the cost pools

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19
Q
  1. identify the cost drivers
A

actual measures of the actual consumption of activity by the various products

must be a high degree of correlation between cost driver and actual consumption

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20
Q
  1. calculate the activity based overhead rate for each cost pool
A

dividing estimated overhead per activity by the number of cost drivers estimated

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21
Q
  1. allocate overhead costs to products
A

must estimate the use of cost drivers for each product

you then multiply the activity based overhead rates by the corresponding cost drivers for each product

22
Q

does activity based costing change the amount of overhead costs?

A

nah boy

overhead just assigned in a more accurate manner

23
Q

what are the three primary benefits of ABC?

A
  1. employs more cost pools and therefore results in more accurate product costing
  2. leads to enhanced control over overhead costs
  3. supports better management decisions
24
Q

advantages of multiple cost pools

A

costs are allocated more directly on the basis of the cost drivers used to produce each product

25
how do you gain multiple the full advantage of having multiple cost pools?
costs within the pool must be correlated with the driver to achieve this, managers characterize activities as
26
how do you ensure the the costs within the multiple cost pools are correlated with their corresponding drivers?
to achieve this, managers characterize activities as : unit-level activities batch-level activities product level activities facility level activities
27
unit-level activities
performed for each unit of production ex: assembly of cellphone
28
why is the assembly of cellphone a unit level activity
because the amount of assembly the company performs increases with each additional cellphone made
29
batch-level activities
performed everytime a company produces another batch of product ex: setting up machines to process a new batch of ice cream
30
product level activities
performed every time a company produces a new type of product
31
facility level activities
required to support or sustain an entire production process
32
value added activities
activities of a company's operations that increase the perceived value or service to customers
33
non value added activities
if eliminated, these activities would not take away any customer perceived value to the product or service only increase costs, or increase time spent on them ex: inventory storage
34
why are activity flowcharts gyu?
they can help you find which activities add value and which dont
35
should all non value added activities be eliminated?
nah boy such as inspection
36
activity based management
extends beyond ABC and helps with reducing costs, improving processes and decision making by becoming comprehensive management tool
37
what are the main limitations of ABC?
can be expensive to use more complex to use does not offer complete accuracy because some arbitrary allocations remain
38
how does a company know when to use ABC?
there has to be the presence of at least one of the following factors: product lines differ greatly in volume and manufacturing complexity product lines are numerous and diverse, requiring various degrees of support services overhead costs constitute a significant portion of total costs the manufacturing process of the number of products has changed significantly production or marketing managers are ignoring data provided by the existing system
39
classify the following activity as either a unit level, batch level, product level, or facility level activity engineering design
product level
40
classify the following activity as either a unit level, batch level, product level, or facility level activity machine set up
batch level
41
classify the following activity as either a unit level, batch level, product level, or facility level activity toy design
product level
42
classify the following activity as either a unit level, batch level, product level, or facility level activity interviews of prospective employees
facility level
43
classify the following activity as either a unit level, batch level, product level, or facility level activity inspections after each set up
batch level
44
classify the following activity as either a unit level, batch level, product level, or facility level activity polishing parts
unit level
45
classify the following activity as either a unit level, batch level, product level, or facility level activity assembling parts
unit level
46
classify the following activity as either a unit level, batch level, product level, or facility level activity health and safety
facility level
47
is ABC widely used in service industries?
ye brooo
48
what sometimes makes the implementation of ABC in service industries difficult?
compared to manufacturers, a larger proportion of overhead costs are company wide costs they cannot be easily traced so specific services performed by the company
49
what are three conditions that should be present in order to implement ABC?
The consumption ratios of unit-based and non-unit-based activities must differ Non-unit-based costs should be a significant portion of total overhead costs Measurement costs of the identified cost pools must be relatively low
50
Three ways that ABC leads to more accurate product costs
i) ABC increases the number of cost pools used to accumulate overhead costs --> costs are accumulated by activity --> As a result, many pools are created with cost-driving activities that are better related to the incurrence of cost ii) ABC changes the base used to assign overhead costs to products --> costs are assigned on a basis of cost-driving activities that can be traced to the product or job involved iii) ABC changes a manager’s perception that many of the overhead costs are indirect --> many overhead costs can now be recognized as being traceable to individual products
51
2 limitations to ABC
can be expensive to use because of the increased cost of identifying multiple activities and applying numerous cost drivers Certain overhead costs still need to be allocated using some arbitrary volume-based cost driver, such as labour or machine hours