Quiz 1 Chapter 4 Flashcards
What is the key difference between traditional costing and activity-based costing (ABC)?
Traditional costing allocates overhead using a predetermined rate, while ABC allocates overhead to multiple activity cost pools using cost drivers.
Fill in the blank: Traditional costing systems often use ___ as the activity base in job order costing and ___ in process costing.
Direct labor cost; machine hours.
Which of the following is NOT a step in activity-based costing?
A) Identifying cost drivers
B) Assigning overhead to cost pools
C) Computing the activity-based overhead rate
D) Eliminating direct labor costs
D) Eliminating direct labor costs
True or False: Activity-based costing assigns overhead using a single overhead rate.
False. ABC assigns overhead to multiple activity cost pools and allocates it based on cost drivers.
What is an ‘Activity’ in activity-based costing?
An activity is any event, action, transaction, or work sequence that incurs costs when producing a product or performing a service.
True or False: A cost driver is any factor that has a direct cause-effect relationship with the resources consumed.
True. Cost drivers determine how costs are assigned to different activities in ABC.
List the four steps of activity-based costing.
- Identify and classify activities and assign overhead to cost pools.
- Identify cost drivers and estimate total annual cost driver usage.
- Compute the activity-based overhead rate.
- Assign overhead costs to products using overhead rates and cost drivers.
Which costing method is more suitable for complex manufacturing processes with multiple allocation bases?
Activity-Based Costing (ABC) because it allows for more accurate cost allocation using multiple cost pools and cost drivers.
In ABC, what are the two stages of overhead allocation?
Stage 1: Assign overhead to activity cost pools.
Stage 2: Allocate overhead from activity cost pools to products using cost drivers.
Fill in the blank: The more complex a product’s manufacturing operation, the more ___ and ___ it is likely to have in an activity-based costing system.
Activities; cost drivers.
True or False: As manufacturing processes become more automated, companies increasingly assign overhead based on direct labor costs.
False. Automation reduces direct labor usage, making direct labor a less reliable cost driver.
What are the three primary benefits of activity-based costing?
- More accurate product costing.
- Enhanced control over overhead costs.
- Supports better management decisions.
Match the activity level with its description:
1) Unit-level
2) Batch-level
3) Product-level
4) Facility-level
A) Performed every time a company produces a new type of product
B) Performed for each unit of production
C) Performed every time a company produces another batch of a product
D) Required to support or sustain an entire production process
1 - B, 2 - C, 3 - A, 4 - D
Which of the following is an example of a non-value-added activity?
A) Engineering design
B) Painting
C) Moving inventory
D) Assembly
C) Moving inventory
True or False: Activity-Based Management (ABM) is a tool used to reduce costs and improve processes.
True. ABM focuses on eliminating waste and improving efficiency based on ABC data.
What are two key limitations of activity-based costing?
- It is more expensive and complex than traditional costing.
- Some arbitrary cost allocations remain.
In what situations is activity-based costing most useful?
ABC is useful when:
1. Product lines differ in volume and complexity.
2. Overhead costs are a significant portion of total costs.
3. The manufacturing process has changed significantly.
How does ABC apply to service industries?
ABC in service industries identifies key activities that generate costs and assigns them to services using cost drivers, similar to manufacturing.
What is Just-in-Time (JIT) processing, and what are its benefits?
JIT processing aims to eliminate manufacturing inventories. Benefits include reduced inventory costs, enhanced product quality, and improved process flow.
