Chapter 7: Activity Based Costing

Question 1

Activity

Answer 1

An event that causes the consumption of overhead resources

Question 2

Activity Cost Pool

Answer 2

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

Question 3

Activity Measure

Answer 3

(Cost Driver) An allocation base in an activity-based costing system.

Question 4

Two common types of activity measures

Answer 4

Transaction Driver and Duration Driver

Question 5

Transaction Driver

Answer 5

A simple count of the number of times an activity occurs.

Question 6

Duration Driver

Answer 6

A measure of the amount of time needed for an activity

Question 7

True or False:
Traditional cost systems rely exclusively on allocation bases that are driven by the volume of production

Answer 7

True

Question 8

True or False:
ABC defines five levels of activity that mostly do not relate to volume of production

Answer 8

True

Question 9

ABC five levels of activity

Answer 9

Unit Level Activity
Batch Level Activity
Product Level Activity
Organization Sustaining Activity
Customer Level Activity

Question 10

What is Activity-based management used for

Answer 10

used in conjunction with ABC to identify areas that would benefit from process improvements by focusing on activities to eliminate waste decrease processing time, and reduce defects.

Question 11

T or F
ABC activity rates provide insight into where waste could be

Answer 11

T

Question 12

Benchmarking

Answer 12

used to compare activity cost info with standards of performance achieved by other organizations

Question 13

Five limitations of ABC costing

Answer 13

1. Substantial resources required to implement and maintain
2. Resistance to unfamiliar numbers and reports
3. Desire to fully allocate all costs to products
4. Potential misinterpretation of unfamiliar numbers
5. Does not conform to GAAP. Two costing systems may be needed

Question 14

3 reasons for a difference in product margins between ABC costing and traditional costing

Answer 14

1. Traditional Costing allocates all manufacturing overhead to products. ABC costing only assigns manufacturing overhead costs CONSUMED BY PRODUCTS to those products
2. Traditional Costing allocates all manufacturing overhead costs using a volume-related allocation base. ABC costing includes non-volume related allocation bases
3. Traditional Costing disregards selling and admin expenses assuming them as period costs. ABC Costing directly traces shipping costs to products and includes nonmanufacturing overhead costs caused by products in the activity cost pools that are assigned to products

Question 15

Activity rate formula for an activity rate pool

Answer 15

Overhead Cost / Activity = activity rate