Exam 4: Activity-Based Costing Systems

Activity-based costing is an approach that first assigns costs to activities and then to goods and services.

Number of square feet of each product's usage would be an appropriate cost-driver base for product-level activities.

Unit-level resources and activities are the resources acquired and the activities performed specifically for individual units of product or service.

Cost drivers are:

The primary advantage to the top down approach of developing activities is that it is quick and inexpensive.

Customer profitability analysis identifies the costs and benefits of service specific customers or customer types to improve an organization's overall profitability.

Set-up of machinery would be an example of a unit-level resource.

Use the following to answer questions: The Dedham Cooperative Bank is considering either a bank wide overhead rate or departmental overhead rates to allocate $2,000,000 of indirect costs. The bank wide rate would be based on either direct labor hours or the number of loans processed. The departmental rates would be based on direct labor time for Consumer Loans and a dual rate based on direct labor time and the number of loans processed for Commercial Loans. The following information was gathered for the upcoming period: -If Dedham Cooperative uses a bank wide rate based on the number of loans processed, what would be the indirect costs assigned to the Commercial Department?

Badger Boards, Inc.(BBI) is a manufacturer of circuit boards for a handful of computer manufacturers. The following data pertains to the month of February for the assembly of circuit boards for two of BBI's major customers: MBI, Inc. and CAM, Inc. ? Material costs used and supplied for 14,000 boards for MBI, $80,000; 8,000 boards for CAM $80,000 ? Batch setup labor cost used for 20 batches of boards for MBI, $4,000; 8 batches of boards for CAM, $2,400 ? Batch setup materials used and supplied for 28 batches, $11,200 ? Labor supplied for production of boards for both customers, $56,000; usage based on number of manually assembled parts: 8 for each of the boards for MBI and 16 for each of the boards for CAM ? 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, $21,000 shipping, $14,000 for materials, and $28,000 for labor ? Custodial and security service for the manufacturing area, $1,500 Required (a) Prepare an activity matrix as follows: In column 1, list all the activities according to their level of usage (i.e., unit-level, batch-level, etc.). In column 2, list the cost driver base for each activity listed in the previous column. In the remaining columns (3 through 10), fill in the appropriate numbers. Note that columns 3 through 10 are to be labeled as follows: unit-level resources, batch resources, product resources, customer resources, facility resources, total resources supplied, driver base level and cost driver rate. (b) Assume that the boards for MBI and CAM are priced at $11 and $23 per unit respectively. Prepare unit-level and full-ABC profitability reports. (c) Do you think BBI should drop either board? Explain.

ABC full-costing assigns as many costs to products and services as possible based on the use of resources, regardless of the level of resources.

In its advertising, Ford Motor Company says "Quality is Job One." Ford is indicating that good quality is the most important consideration for its customers. This would include customer satisfaction on delivery dates and specific areas of car performance, including properly closing doors, defect rates on parts. Explain how Activity Based Costing ABC. can help supply this information to Ford's management

Richmond Research Institute (RRI) is a private research organization specializing in medical research. It specializes in performing research about the awareness of the general public with respect to common ailments Colds, flu, etc.). Various health organizations contract with RRI to conduct research on their behalf. It carries out this research through phone surveys. The results of such research are then provided to health organizations that use the information to develop pamphlets about these common ailments. In order to better understand its costs, RRI has decided to implement an activity-based information system. It collected the following data for the month of January: ● 60 tele-researchers (labor) to complete 24,000 surveys and 115,000 calls, $110,000. Each survey takes 9 minutes to complete and each call takes 4 minutes. ● Long-distance phone charges for the surveys, $22,000. ● Preparation of scripts for surveys (2), $7,000, and sales pitches (4), $5,000 ● Training of tele-research labor by the training department of RRI to conduct surveys for specific customers, $14,200 ● Automated dialing equipment, $23,000 ● Occupancy costs, $20,000 ● Three supervisors, $30,000 ● Human resources, $11,000 (a) Prepare an activity matrix as follows: In column 1, list all the activities according to their level of usage (i.e., unit-level, batch-level, etc.). In column 2, list the cost driver base for each activity listed in the previous column. In the remaining columns (3 through 10), fill in the appropriate numbers Note that columns 3 through 10 are to be labeled as follows: unit-level resources, batch resources, product resources, customer resources, facility resources, total resources supplied, total driver base level and cost driver rate (b) Does the cost driver rate for unit-level resources have the same meaning as the cost driver rate for a facility level resource? Explain (c) Compute the unit-level and full-ABC costs per unit for the surveys and sales calls

A typical result of Activity-Based Costing analysis is that low-complexity customer business is often more profitable than previously thought and high-complexity customer business is often less profitable.

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. -If the company allocates the cost of the setup mechanics based on the number of units produced, the setup cost per unit in an order of 300,000 Nurturing Face Cream jar covers for Aristedes Cosmetics Company would be:

Activity based costing identifies five different levels of activities and costs that are used in business and production processes. a) Identify the five activity levels an provide a brief definition of each. b) For each activity level, give and example of an activity that would fall into that category

ABC full costing traces only the cost of unit level resources supplied and used to products and services.

Quality inspections are classified as:

Implementing an Activity-Based Costing system is relatively inexpensive.

The cost-driver rate is the estimated cost of resource consumption per unit of cost driver base for each activity.

Listed below are activities incurred by Rhodes Manufacturing Company. The company manufactures a variety of products for sale to large department stores Required: Match each activity to its most likely cost-driver. Cost-driver bases may be used more than once.)