Exam 5: Activity-Based Costing and Management

Bridges and Lloyd, an accounting firm, provides consulting and tax planning services.For many years, the firm's total administrative cost (currently $250,000) has been allocated to services on the basis of billable hours to clients.A recent analysis found that 65% of the firm's billable hours to clients resulted from tax planning services, while 35% resulted from consulting services. The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows: A recent analysis of staff support found a strong correlation between the number of staff personnel and the number of clients served (consulting, 20; tax planning, 60).In contrast, in-house computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively.Consulting consumed 30% of the firm's computer hours and had 20% of the total client transactions. If Bridges and Lloyd switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to consulting services would:

Consider the nine activities that follow. 1.A software company: Developing computer coding for a new spreadsheet package. 2.A breakfast cereal company: Painting the office of a maintenance supervisor at a plant that produces cereal. 3.A major metropolitan hospital: Examining a new patient. 4.A regional airline carrier: The 90 minutes that a Boeing 757 sits idle on the ground between flights. 5.A retail office supply store: Moving cases of paper from one location to another in the same warehouse. 6.A company that makes watches: Attaching a watch band to the watch's face. 7.A shipping company: Reprocessing cargo that had been sorted incorrectly on a malfunctioning sorting machine. 8.An investment company: Correcting errors made by company personnel in customer accounts. 9.A major hotel chain: Upgrading the quality of bedding used at hotels in very competitive marketplaces. Required: Categorize each of the activities as either value-added or non-value-added for the companies noted.

International Gems sells fine jewelry and has implemented activity-based costing.Costs in the shipping department have been divided into three cost pools. The first cost pool contains costs that are related to packaging and shipping.International has determined that the number of boxes shipped is an appropriate cost driver for these costs.The second cost pool is made up of costs related to the final inspection of each item before it is shipped and the cost driver for this pool is the number of individual items that are inspected.The final cost pool is used for general operations of the department and the cost driver is the number of orders.Information about the activities is summarized below: An order is shipped to a retail customer who has ordered 6 individual items.This order will be shipped in 3 separate boxes.What is the packing and shipping cost that will be allocated to the order?

Pound Industries' customer service department follows up on customer complaints by telephone inquiry.During a recent period, the department initiated 10,000 calls and incurred costs of $312,000.Of these calls, 3,800 were for the company's wholesale operation; the remainder was for the retail division.Costs allocated to the wholesale operation are:

St.Vincent's, Inc., currently uses traditional costing procedures, applying $800,000 of overhead to products Beta and Zeta on the basis of direct labor hours. The company is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labor hours (DLH), production setups (SU), and number of parts components (PC) as cost drivers.Data on the cost pools and respective driver volumes follow. The overhead cost allocated to Beta by using activity-based costing procedures would be:

Carlin and Marley, an accounting firm, provides consulting and tax planning services.For many years, the firm's total administrative cost (currently $270,000) has been allocated to services on this basis of billable hours to clients.A recent analysis found that 55% of the firm's billable hours to clients resulted from tax planning services, while 45% resulted from consulting services. The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows: A recent analysis of staff support found a strong correlation with the number of clients served.In contrast, in-house computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively.Consulting clients served totaled 35% of the total client base, consumed 30% of the firm's computer hours, and accounted for 20% of the total client transactions. If Carlin and Marley switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to consulting services would:

Pound Industries' customer service department follows up on customer complaints by telephone inquiry.During a recent period, the department initiated 7,000 calls and incurred costs of $203,000.If 2,940 of these calls were for the company's wholesale operation (the remainder were for the retail division), costs allocated to the wholesale operation should amount to:

If Fowler Corporation changes to activity-based costing (ABC), this method normally results in:

Non-value-added activities are the events that trigger activities and linkages among activities.

Cozy Nights Industries manufactures down-filled comforters and uses activity-based costing.The following information is provided for September. Each comforter consists of 4 parts and the direct materials cost per comforter is $14.00. Based on the information given for Cozy Nights Industries, what is the cost of materials handling and assembly per comforter?

Widely varying consumption ratios:

Overton Enterprises is converting to an activity-based costing system.It wishes to depict the various activities in its manufacturing process along with the activities' relationships.Which of the following is a tool that the company can use to accomplish this task?

Which of the following best explains the main advantages of time-driven-activity-based costing for services over the use of conventional ABC?

Sleek, Inc.is a manufacturer that assigns cost using activity-based costing principles.Activities have been identified and classified as being either value-added or non-value-added as to each product.Which of the following activities used in Sleek's production process is non-value-added?

International Gems sells fine jewelry and has implemented activity-based costing.Costs in the shipping department have been divided into three cost pools. The first cost pool contains costs that are related to packaging and shipping.International has determined that the number of boxes shipped is an appropriate cost driver for these costs.The second cost pool is made up of costs related to the final inspection of each item before it is shipped and the cost driver for this pool is the number of individual items that are inspected.The final cost pool is used for general operations of the department and the cost driver is the number of orders.Information about the activities is summarized below: During December, 2,100 boxes were packed and shipped.How much is the packaging and shipping cost for each box shipped?

Motor Mike builds recreational motor homes.All of the following activities add value to the finished product except:

Activity-based costing systems have a tendency to distort product costs.

Generally inspecting time is considered ____________ and delivering the product is considered _____________.

The pool rate is defined as the cost per unit of the cost driver for a particular activity cost pool.

Barnett Products manufactures three types of remote-control devices: Economy, Standard, and Deluxe.The company, which uses activity-based costing, has identified five activities (and related cost drivers).Each activity, its budgeted cost, and related cost driver is identified below. What is Barnett's pool rate for the material-handling activity?