Exam 4: Activity-Based Costing Systems

Facility- level activities are at the lowest end of the hierarchy of tracing resources to activities to products and services.

Maintenance costs are typically considered product-level resources.

The Great Island Preserve Company buys fruit and processes it into a variety of jams, jellies, and preserves. The process involves purchasing fresh fruit, cutting, cooking, adding ingredients, testing, and packaging the finished product. Jars, labels, and other packaging are purchased from local packaging suppliers Required: Identify a possible cost-driver base that could be used to assign costs to final product. Some cost-driver bases can be used more than once (1) Purchase of jars, covers, and labels for production of jam and jellies (2) Cost of peaches for peach preserve (3) Cooking strawberries in large kettles to prepare strawberry jam (4) Setup of manually controlled machines (5) Using manually controlled machines to fill jars of grape and blueberry jelly (6) Using computer controlled machines to apply labels to each jar of preserves, jams, and jellies (7) Quality control inspection of each finished jar of product (8) Use of the main building for producing preserves, jams, and jellies

Under activity-based costing, only unit level and batch level costs are assigned to units.

ABC full costing shows how activities may use all levels of resources.

Use the following to answer questions: Ferguson Molding Company produces custom bottle caps and jar covers for large cosmetic companies. Each customer owns the custom-made molds that are used for the caps and jar covers, so caps are produced only to customer order. Each order requires the setting of molds in molding machines. Two full time mechanics, whose combined total annual salary and benefits are $160,000 per year, are employed setting up and breaking down the molding machines. An order consists of anywhere from 50,000 to 500,000 units. 80 orders were received during the year 2008 for individual custom production runs. The total number of units produced was 8 million. -The machine operator's labor to operate the molding machine to produce a run of custom jar covers is an example of:

Setting up a manually controlled compression molding machine is an example of:

The Activity-Based Costing full costing approach says:

Materials consumed would be an example of a unit-level resource.

Arlington Marketing Research is a local market research firm, which provides on site interviews at local malls and retail outlets. The basic unit of service is a completed marketing research survey. All telemarketing personnel, mostly college students, are paid by the hour. Supervisory labor is salaried Required: For each cost listed, indicate whether the activity should be classified as Unit-level, Product-level, Batch- level, Customer-level or Facility-level. Indicate an appropriate cost driver to be used to allocate the cost to products. Justify your answers, if necessary.

Specialized equipment used to make a certain brand of shoes would be an example of a product-level resource.

Dayton Extruded Plastics is a manufacturer of injection-molded extrusions. Scrapped or defective extrusions were ground into powder and fed back into the extruders as raw materials. Defective extrusions were inspected out during line work and in handling returns from customers; they were then ground up in special grinding machines and mixed with new raw material and reused in manually controlled injection-molding machines. The molding machines use utilities provided for the main manufacturing facility. After grinding, maintenance and cleanup of the facilities were performed by general maintenance personnel. Because all scrapped extruders were reused in this way, company management felt that the cost of scrap was "free." The company's traditional cost accounting system did not associate any cost with the cost of processing scrap Required: (a) Identify the activities in bold as unit-level, batch-level, product-level, customer-level or facility-level. (b) Explain why the company's traditional cost accounting system is giving misleading results related to Dayton Extruded Plastics processing of scrap

Refer to the following information concerning products Alpha and Beta for Bayside Manufacturing Corporation: Material costs used and supplied for 5,000 units of Alpha, $80,000; 10,000 units of Beta, $80,000 Batch setup labor cost used for 20 batches of Alpha, $6,000, 8 batches of product Beta, $5,200 Batch setup materials used and supplied for 28 batches, $15,600 Labor supplied for production of both products, $48,000; usage based on number of manually assembled parts per unit: 16 for Alpha; 32 for Beta Facility-level equipment used on a per-unit basis for both products, $50,000 Special packaging and shipping provided on a per unit basis to customers: $25,000 shipping, $7,000 for material, $14,000 for labor Custodial and security service for the manufacturing area, $12,000 Required: Compute the Unit-level and ABC full costs per unit for Products Alpha and Beta

Consulting with customers on distribution arrangements for a specific product is an example of a customer-level resource.

ABC unit-level costing assigns only the cost of unit-level resources to products.

In traditional cost systems, many complex products are overcosted and simple products are undercosted.

Facility- level resources are:

Activity-Based Accounting information can provide unit level costs or full ABC costs. Explain why operating profits may differ depending upon which cost is used in management's analysis. Explain when each can be useful to management

Batch level activities will normally use units produced as a cost driver base.

Setting up manual and computer controlled machines is an example of a batch- level resource.