Exam 5: Activity-Based Costing: A Tool to Aid Decision Making

Which of the following statements about overhead allocation based on volume alone is correct?

In the second-stage allocation in activity-based costing,activity rates are used to apply costs to products,customers,and other cost objects.

Fife & Jones PLC,a consulting firm,uses an activity-based costing in which there are three activity cost pools.The company has provided the following data concerning its costs and its activity-based costing system: Distribution of Resource Consumption: Required: a) How much cost, in total, would be allocated to the Working On Engagements activity cost pool? b) How much cost, in total, would be allocated to the Business Development activity cost pool? c) How much cost, in total, would be allocated to the Other activity cost pool?

Which of the following is NOT a limitation of activity-based costing?

Managing and sustaining product diversity requires many more overhead resources,such as production schedulers and product design engineers,than managing and sustaining a single product.The costs of these resources can be accurately allocated to products on the basis of direct labour hours.

(Appendix 5A)Which of the following best describes a cost object,such as a product or customer,that has a negative green margin?

Goel Company,a wholesale distributor,uses activity-based costing for its overhead costs.The company has provided the following data concerning its annual overhead costs and its activity-based costing system: Distribution of Resource Consumption: The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining costs. The amount of activity for the year is as follows: Required: Compute the activity rates (i.e., cost per unit of activity) for the Filling Orders and Product Support activity cost pools by filling in the table below:

Organization-sustaining activities are carried out regardless of how many units are made,how many batches are run,or how many different products are made.

Groce Catering uses activity-based costing for its overhead costs. The company has provided the following data concerning the activity rates in its activity-based costing system: The number of meals served is the measure of activity for the Preparing Meals activity cost pool. The number of functions catered is used as the activity measure for the Arranging Functions activity cost pool. Management would like to know whether the company made any money on a recent function at which 150 meals were served. The company catered the function for a fixed price of $14.00 per meal. The cost of the raw ingredients for the meals was $8.75 per meal. This cost is in addition to the costs of wages, supplies, and other expenses detailed above. For the purposes of preparing action analyses, management has assigned ease of adjustment codes to the costs as follows: wages are classified as a Yellow cost, supplies and raw ingredients as a Green cost, and other expenses as a Red cost. -According to the activity-based costing system,what was the total cost (including the costs of raw ingredients)of the function mentioned above,rounded to the nearest whole dollar?

Jackson Painting paints the interiors and exteriors of homes and commercial buildings.The company uses an activity-based costing system for its overhead costs.The company has provided the following data concerning its activity-based costing system. The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining costs. The company has already finished the first stage of the allocation process in which costs were allocated to the activity cost centres. The results are listed below: Required: a) Compute the activity rates (i.e., cost per unit of activity) for the Painting and Job Support activity cost pools by filling in the table below. Round off all calculations to the nearest whole cent. b) (Appendix 5A) Prepare an action analysis report in good form of a job that involves painting 63 square metres and has direct materials and direct labour cost of $2,070. The sales revenue from this job is $2,500. For purposes of this action analysis report, direct materials and direct labour should be classified as a Green cost, painting overhead as a Red cost, and office expense as a Yellow cost.

Diehl Company uses an activity-based costing system with three activity cost pools. The company has provided the following data concerning its costs and its activity-based costing system: The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining costs. You have been asked to complete the first-stage allocation of costs to the activity cost pools. -How much cost,in total,should not be allocated to orders and products in the second stage of the allocation process if the activity-based costing system is used for internal decision making?

(Appendix 5A)Which of the following best describes a cost object,such as a product or customer,that has a positive green margin?

Addison Company has two products: A and B. Annual production and sales are 800 units of Product A and 700 units of Product B. The company has traditionally used direct labour-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.2 direct labour hours per unit and Product B requires 0.6 direct labour hours per unit. The total estimated overhead for next period is $71,286. The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three factory overhead activity cost pools—Activity 1, Activity 2, and General Factory—with estimated overhead costs and expected activity as follows: (Note: The General Factory activity cost pool's costs are allocated on the basis of direct labour hours.) -(Appendix 5B)The predetermined overhead rate (i.e.,activity rate)for Activity 2 under the activity-based costing system is closest to:

Transaction drivers usually take more effort to record than duration drivers.

(Appendix 5B)Torri Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labour-hours (DLHs).The company has two products,B40W and C63J,about which it has provided the following data: The company's estimated total manufacturing overhead for the year is $2,656,000 and the company's estimated total direct labour-hours for the year is 64,000. The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below: Required: a. Determine the unit product cost of each of the company's two products under the traditional costing system. b. Determine the unit product cost of each of the company's two products under activity-based costing system.

Which of the following is NOT a technique directly or indirectly useful in process improvements?

(Appendix 5B)Why would an activity-based costing system that is designed for internal decision making NOT conform to generally accepted accounting principles?

Escau Company is a wholesale distributor that uses activity-based costing for all of its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity-based costing system: The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining costs. The activity measures for the activity cost pools for the year are as follows: -To the nearest whole dollar,how much wages and salaries cost would be allocated to a customer who placed eight orders in a year?

Activity-based-costing (ABC)charges products for the cost of capacity used,NOT for idle capacity. Required: a)The use of which activity level,budgeted (same as expected)or maximum capacity,is consistent with ABC? Explain. b)How might the use of ABC based on maximum capacity activity level enhance a firm's ability to compete on price? Explain.

Acton Company has two products: A and B. The annual production and sales of Product A is 800 units and of Product B is 500 units. The company has traditionally used direct labour hours as the basis for applying all manufacturing overhead to products. Product A requires 0.3 direct labour hours per unit, and Product B requires 0.2 direct labour hours per unit. The total estimated overhead for next period is $92,023. The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools—Activity 1, Activity 2, and General Factory—with estimated overhead costs and expected activity as follows: (Note: The General Factory activity cost pool's costs are allocated on the basis of direct labour hours.) -The predetermined overhead rate (i.e.,activity rate)for Activity 1 under the activity-based costing system is closest to which of the following?