Exam 4: Activity-Based Costing Systems

Batch level resources are:

Consider the following ABC Full Costing Report by the Sacks Toy Company, which manufactures specialty dolls: Management is considering adding a third product line, the Riana doll. Assume the company obtains sufficient additional capacity to offer this product line that has the following characteristics: ? Uses 50% more materials than the Alissa doll ? Is made on a new, dedicated molding machine ? A week's production would be 12,000 dolls in three batches ? Customers would place two orders per week and there would be no warehousing ? Sales and forecasting costs would be the same as other products ? A team of five employees would produce the product Required: a) Estimate the unit-level and full ABC cost of this product. b) What additional information would you like to have before deciding whether to recommend this product?

Briefly distinguish between the top down approach, the interview approach and the recycling approach of identifying activities. Identify any major advantages or deficiencies of each approach.

ABC costing analysis is used only in the manufacturing sector.

Fun and Games, Inc. (FGI), headquartered in Boston, is a software consulting company specializing in games. It has been growing at an alarming pace. Mr. Furst, president of the company is considering expanding his operations by opening his seventh office in Portsmouth. FGI recently completed an ABC analysis of its Boston office to better understand the supply and use of facility-level resources. Mr. Furst does not expect the Portsmouth office to be different from the one in Boston in terms of resource requirement and consumption. For example, he expects to hire as many employees as in the Portsmouth office and also exert as much sales effort. However, he expects that business ( of projects) and sales revenue will be only 75% of that in Boston during the first year. Miss Bridges tracked the following information to assist in the decision. Required (a) Using the information given above, estimate the cost of supporting the new office in Portsmouth. Assume that the resources used is the same as resources supplied. (b) Should the level of resources used always be equal to the level of resources supplied? Why or why not? (c) Is activity-based information always better than average-cost information? Explain.

Not-for-profit organizations can benefit from the use of activity based costing.

Assist Lake in identifying all the relevant issues you believe he should include in his presentation and briefly explain why it is important to cover the issue Chatham Company provides internet services to various types of clients. Similar to most internet companies, Chatham has also grown rapidly, thereby breaking all records. Cary Koch, the executive director of Chatham, recently returned from a conference which featured leading companies sharing their experiences of ABC implementation in their respective organizations. After returning, she called Tom Lake, one of her new recruits and a fresh business graduate from a reputed mid-western university, into her office. She instructed him to prepare a one-hour presentation to introduce the notion of activity-based costing to members of the executive committee All old-timers with little knowledge of modern management accounting practices) Although Lake studied about ABC in his cost management systems course, he has no real world experience, and is nervous about the presentation. He meets you and expresses his concern Lake: The big boss has asked me to prepare this presentation You: What are you worried about? You know all about ABC Lake: You don't seem to understand. I have to present to the top most people in our company. This is going to be very important. I feel like my whole life depends on this. You: How can I help? Lake: I just wanted your opinion of what you think I should cover in my presentation Required:

The first step in activity-based costing is to calculate a cost-driver rate for each activity.

The most likely cost driver base for allocating the actual cost of advertising and promotion would be:

The top-down approach to identifying and classifying activities is likely to produce a more accurate result than the interview or participative approach.

Number of parts per product would be an appropriate cost driver base for facility-level activities.

Which of the following is not a "red flag" Indicating problems with an organization's costing system?

Which of the following statements about choosing the best cost driver base is not true?

Which of the following is considered a unit-level resource in auto manufacturing?

Increases or decreases of a cost-driver base cause increases or decreases in the level of activity performed.

Costs associated with a special machine which sands the edges of all finished products would be an example of:

Which of the following indicates that a company may benefit from an Activity-Based Costing system?

Assume the role of one of the top, well-regarded CMAs. Identify the crucial issues in the case and address the problem. What can be done? Tubes of All Sizes (TAS) manufactures a variety of tubes for many different customers. These pipes are different with respect to size (length, thickness and diameter), material, finish Coarse versus fine) and even color (green, red, yellow, black and navy blue). The typical manufacturing process consists of cutting the materials to desired lengths, grinding the cut pieces, forming (shaping) them, finishing the formed pipes, spray painting the finished pipes and packaging them in bundles of 25 pipes each. The pipes range from 2 feet to 6 feet in length, ½ an inch to 3 inches in thickness, and 6 to 18 inches in diameter TAS caters to three different types of customers: large, medium and small. The large customers buy only three times during a year in large quantities. The delivery is also made three times as per the order quantities. On the other hand, the smaller customers order many times and in smaller quantities. Besides, the smaller customers buy a greater variety of tubes (i.e., each order is likely to be different from the previous one). Consequently, TAS cannot anticipate the needs of the smaller customers TAS's cost accounting system is tailored for the large customers in terms of how the data are captured. The activity cost driver rates are set based on the large customer's use of resources extrapolated for all customers. Prices are also set based on the large customers' consumption of resources. Karen Kent, the marketing manager, has not been very happy about the accounting system because the actual marketing costs have turned out to be much greater than what the accounting system has been suggesting. Similarly, Norman Neusom, the operations manager has also been troubled by the cost numbers. Both Kent and Neusom decided to meet with the controller Janet Hines, to discuss their concerns Hines: Karen and Norman, in my office together? I'm surprised! Neusom: You shouldn't be, Janet. Didn't you guys tell us that we should all work together as a team? I have stopped fighting with my colleagues in marketing. Kent: Let's just say that we are beginning to behave like reasonable adults Hines: Isn't it nice to work as a team? However, it looks like we have a serious problem given that the two of you have come to my office together. Am I under attack? Neusom: No attacks, no blame. We have a problem and we don't quite know where and how to begin Kent: Both Norman and I are getting messages that conflict with our wisdom regarding our individual functions (or processes, as we should say these days). It looks like our costing system is designed to handle the big guys (I mean our large customers) but does not estimate the marketing and sales related costs for the smaller customers. Consequently, I am unable to determine which customers are profitable and which are not. I would love it if our costing system could provide finer information Neusom: Added to that, Janet, is the fact that these smaller customers seem to be upsetting my people too. There is something about these small customers' orders that throw my people off guard. They would love it if we got rid of all our small customers and take one or two more big guys. I am sure that would make Karen's life easy too Kent: You are right, Norman. It would make my life easier but I do not know if I want to make that conclusion before I can better assess the situation Hines:Let me see what I can do. I will also talk to a couple of my old buddies who are top CMAs and well regarded for their knowledge in cost management Required:

The design and manufacture of a bottle cap mold for Avon Products Company is an example of:

Research and development would be an example of a batch-level activity.