Exam 5: Activity-Based Costing and Management

Starwatch Manufacturing sells a number of goods whose selling price is heavily influenced by cost.A recent study of product no.520 revealed a traditionally- derived total cost of $1,623 and a selling price of $1,850 based on that figure.A newly computed activity-based total cost is $1,215.Which of the following statements is true?

Towler Inc.manufactures products J and K, applying overhead on the basis of labor hours.J, a low-volume product, requires a variety of complex manufacturing procedures.K, on the other hand, is both a high-volume product and relatively simplistic in nature.What would an activity-based costing system likely disclose about products J and K as a result of Towler's current accounting procedures?

Fortner Technologies manufactures products X and Y, applying overhead on the basis of labor hours.X, a low-volume product, requires a variety of complex manufacturing procedures.Y, on the other hand, is both a high-volume product and relatively simplistic in nature.What would an activity-based costing system likely disclose about products X and Y as a result of Fortner's current accounting procedures?

Tanner Industries manufactures high-end speakers and sub-woofers.The company is now preparing its annual profit plan.As part of its analysis of the profitability of individual products, the controller estimates the amount of overhead that should be allocated to the individual product lines from the following information. Required: 1.Under a costing system that allocates overhead on the basis of direct-labor hours, the material-handling costs allocated to one speaker would be what amount? 2.Answer the same question as in requirement 1, but for sub-woofers. 3.Under activity-based costing (ABC), the material-handling costs allocated to one speaker would be what amount? The cost driver for the material-handling activity is the number of material moves. 4.Answer the same question as in requirement 3, but for sub-woofers.

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 Zeta by using traditional costing procedures would be:

In comparison with a system that uses a single, volume-based cost driver, an activity-based costing system is preferred when a company has:

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: A new customer orders two items that can be shipped in a single box.What is the total shipping department cost that will be allocated to this order?

Traditional product-costing systems are structured on multiple, volume-based cost drivers.

When using ABC, overhead costs assigned to each activity comprise an activity cost pool.

Because labor hours are related closely to the volume of activity in the factory, these traditional product-costing systems often are said to be volume-based costing systems.

Which of the following is not an example of a business-value-added activity?

In an activity-based costing system, direct materials used would typically be classified as a unit-level cost.

In the first stage of ABC, a cost driver is selected for each activity cost pool.

Rocket 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. Assume that Rocket is using a volume-based costing system, and the preceding overhead costs are applied to all products on the basis of direct labor hours. The overhead cost that would be assigned to the Standard product line is closest to:

Which of the following is not a broad, cost classification category typically used in activity-based costing?

Consumption ratios are useful in determining the existence of product-line diversity.

Customer-profitability analysis uses activity-based costing to determine the activities, costs, and profit associated with serving particular customers.

Generally speaking, companies prefer doing business with customers who order small quantities rather than large quantities.

Due to changes that are occurring in the basic operations of many firms, all of the following represent trends in the way indirect costs are allocated except:

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. Assuming the use of activity-based costing, the proper percentage to use in allocating staff support costs to tax planning services is: