chapter 5 from book: activity-based costing

Question 1

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

Answer 1

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

Question 2

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

Answer 2

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

Question 3

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

Answer 3

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

Question 4

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

Answer 4

advances in computerized systems

technological innovation

global competition

automation

Question 5

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

Answer 5

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

Question 6

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

Answer 6

machine hours

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

Question 7

activity based costing

Answer 7

an approach to allocating overhead costs

allocates overhead on multiple activity cost pools

then assigns activity cost pools to products and services

Question 8

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

Answer 8

by using cost drivers

Question 9

activity

Answer 9

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

Question 10

activity cost pool

Answer 10

the overhead cost attributed to a distinct activity

ex: ordering materials
ex: setting up machines

Question 11

cost driver

Answer 11

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

Question 12

what is the basic logic for activity based costing

Answer 12

products consume activities

activities consume resources

Question 13

what are the 4 steps of activity based costing

Answer 13

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

Question 14

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

Answer 14

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)

Question 15

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

Answer 15

there will be inaccurate product costs

Question 16

indicate if the following is true or false

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

Answer 16

true

Question 17

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

Answer 17

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

Question 18

how ca you estimate the overhead costs?

Answer 18

you add up all the costs of the cost pools

Question 19

2. identify the cost drivers

Answer 19

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

Question 20

3. calculate the activity based overhead rate for each cost pool

Answer 20

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

Question 21

4. allocate overhead costs to products

Answer 21

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

Question 22

does activity based costing change the amount of overhead costs?

Answer 22

nah boy

overhead just assigned in a more accurate manner

Question 23

what are the three primary benefits of ABC?

Answer 23

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

Question 24

advantages of multiple cost pools

Answer 24

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

Question 25

how do you gain multiple the full advantage of having multiple cost pools?

Answer 25

costs within the pool must be correlated with the driver

to achieve this, managers characterize activities as

Question 26

how do you ensure the the costs within the multiple cost pools are correlated with their corresponding drivers?

Answer 26

to achieve this, managers characterize activities as :

unit-level activities

batch-level activities

product level activities

facility level activities

Question 27

unit-level activities

Answer 27

performed for each unit of production

ex: assembly of cellphone

Question 28

why is the assembly of cellphone a unit level activity

Answer 28

because the amount of assembly the company performs increases with each additional cellphone made

Question 29

batch-level activities

Answer 29

performed everytime a company produces another batch of product

ex: setting up machines to process a new batch of ice cream

Question 30

product level activities

Answer 30

performed every time a company produces a new type of product

Question 31

facility level activities

Answer 31

required to support or sustain an entire production process

Question 32

value added activities

Answer 32

activities of a company’s operations that increase the perceived value or service to customers

Question 33

non value added activities

Answer 33

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

Question 34

why are activity flowcharts gyu?

Answer 34

they can help you find which activities add value and which dont

Question 35

should all non value added activities be eliminated?

Answer 35

nah boy

such as inspection

Question 36

activity based management

Answer 36

extends beyond ABC and helps with reducing costs, improving processes and decision making by becoming comprehensive management tool

Question 37

what are the main limitations of ABC?

Answer 37

can be expensive to use

more complex to use

does not offer complete accuracy because some arbitrary allocations remain

Question 38

how does a company know when to use ABC?

Answer 38

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

Question 39

classify the following activity as either a unit level, batch level, product level, or facility level activity

engineering design

Answer 39

product level

Question 40

classify the following activity as either a unit level, batch level, product level, or facility level activity

machine set up

Answer 40

batch level

Question 41

classify the following activity as either a unit level, batch level, product level, or facility level activity

toy design

Answer 41

product level

Question 42

classify the following activity as either a unit level, batch level, product level, or facility level activity

interviews of prospective employees

Answer 42

facility level

Question 43

classify the following activity as either a unit level, batch level, product level, or facility level activity

inspections after each set up

Answer 43

batch level

Question 44

classify the following activity as either a unit level, batch level, product level, or facility level activity

polishing parts

Answer 44

unit level

Question 45

classify the following activity as either a unit level, batch level, product level, or facility level activity

assembling parts

Answer 45

unit level

Question 46

classify the following activity as either a unit level, batch level, product level, or facility level activity

health and safety

Answer 46

facility level

Question 47

is ABC widely used in service industries?

Answer 47

ye brooo

Question 48

what sometimes makes the implementation of ABC in service industries difficult?

Answer 48

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

Question 49

what are three conditions that should be present in order to implement ABC?

Answer 49

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

Question 50

Three ways that ABC leads to more accurate product costs

Answer 50

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

Question 51

2 limitations to ABC

Answer 51

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