Exam 5: Activity-Based Costing and Management

How are cost drivers selected in activity-based costing systems?

Eastern Star Nursing Home has been using an indirect overhead job cost system for allocating general and nursing overhead charges to all patients. However, during the past few months the facility has been losing patients because a competing nursing home charges much less for some classes of patients. It seems that Eastern Star is keeping the well patients and losing those who require special attention. The facilities manager believes that a refined costing system can improve the allocation of charges to all patients. Hopefully this will reduce the charges to the more ill patients. The accounting staff provided information for September. The costs have traditionally been allocated to patients based on nursing days. However, the accounting staff can separate nursing days by nursing category. At the request of the facilities manager, the following information was furnished concerning nursing days. Hazel Jones, a long-time patient, spent 5 days in Critical Care, 4 days in Special Care, and 21 days in General Care during September. Her monthly assignment of nursing days was: 2 for Senior RN, 6 for RN, 10 for PN, and 12 for Nurse's aide. Required: a. Determine the amount of cost to be covered by Hazel Jones if the daily pay rates presented in the table are used for staff services and overhead is added on a care area per day basis. b. For each patient care area determine the total cost per day to be charged to patients using the weighted average staff services cost for the daily pay rate portion of total costs. What is cost to be covered by Hazel Jones' charge for the month of September?

If a company uses departmental overhead allocation rates, then the amount of manufacturing overhead allocated to the job is equal to the plant-wide overhead rate multiplied by the actual use of the cost allocation base.

Which of the following is not an activity under an ABC system?

Resources sacrificed on activities undertaken to support product lines are which of the following?

Which of the following is relevant concerning cost hierarchies?

Brewery Company operates many bottling plants around the globe. At its Montreal plant, where six different brands are bottled, the following costs were incurred in 2012 to produce 10,000,000 bottles of beer: 1. Development costs of adding the new product "Light Beer Plus" amounted to $307,000. 2. Material handling costs of inspecting and handling concentrate, bottles, packages, and so forth amounted to $216,750.These costs are allocated to each production run. 3. Incoming materials purchase costs that can be directly traced to individual products being bottled and packaged. These costs are purely variable with output level and amounted to $1,106,500. 4. Executive salaries and other central administration overhead amounted to $396,000. 5. Plant overhead including costs related to: supervision, safety , energy and plant insurance amounted to $311,500. 6. The cost of cleaning and calibrating equipment for each production run amounted to $85,750. Required: a. Classify each of the preceding costs as output unit-level, batch-level, product-sustaining, or facility-sustaining. b. Compute the cost per unit for the total manufacturing cost.

A division of a company manufactures two products, which are in high demand in the defence industry. Product A is stamped out in a machine press, at the rate of 10,000 per hour. Product B is identical to product A, with the exception that it is made from thicker steel, and requires the machine press to be recalibrated. Product A is produced on the day shift and product B is produced on the afternoon shift, allowing set up changes to be done between shifts. In this case, set up hours are related to which of the following?

Indications that a product cost system needs revision include

Answer the following question(s) using the information below. Ernsting Printers has contracts to complete weekly supplements required by forty-six customers. For the year 2012, manufacturing overhead cost estimates total $420,000 for an annual production capacity of 12 million pages. For 2012 Ernsting Printers has decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis: During 2012, two customers, Wealth Managers and Health Systems, are expected to use the following printing services: -When selling price is cost plus 25% and costs are assigned using the single cost driver, number of pages printed, then

Answer the following question(s) using the information below. Ernsting Printers has contracts to complete weekly supplements required by forty-six customers. For the year 2012, manufacturing overhead cost estimates total $420,000 for an annual production capacity of 12 million pages. For 2012 Ernsting Printers has decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis: During 2012, two customers, Wealth Managers and Health Systems, are expected to use the following printing services: -Assuming activity-cost pools are used, what are the activity-cost driver rates for design changes, setups, and inspections cost pools?

Explain how a top-selling product may actually result in losses for the company.

Product-sustaining (service-sustaining),and facility-sustaining costs are equivalent terms in ABC systems.

Use the information below to answer the following question(s). A transportation company provides bussing, limo and taxi service. The company charges: $350 per day for bussing service; $2.00 per kilometre for taxi service; and, $3.50 per kilometre for limo service. Two individual clients, the school board and the city government offices use the majority of the limo service on a contract agreement. Bussing services are used exclusively by the school board, and the taxi service is used almost exclusively by the general public, although the school board uses the taxi services when individual students have to be transported on occasion. Indirect costs are accumulated on internal records at $1.50 per kilometre for limo use and $1.00 per kilometre for taxi use, and $195 per day for each of the twenty buses. The company's costing system has tracked the following activities for the month: -Compute the billing to each major client for the month.

Many companies use multiple cost pools and multiple cost-allocation bases but do not emphasize individual activities.

A busy law office has a central administration set up, with the administration work for all lawyers shared by the clerical staff. Clients are billed at the firm's hourly rate by the firm. The arrangement is that whenever there is administration work to be done, it is assigned to whoever is available at the time. One of the lawyers has complained that she hardly ever uses the administration services, and so her year end bonus should be larger than those who require the administration services. Therefore they are considering tracking the administration work done for each lawyer separately so that they know how many hours of administration services is being used by each lawyer. At the end of the year, the bonus of each lawyer would be reduced by a charge reflecting the administration services she/he used in the year. If the firm institutes this new approach, this will mean that

A critical distinction in activity-based costing is the difference between an activity and an event.

Use the information below to answer the following question(s). Bill Cobb Corporation had the following activities, pooled costs, and physical flow of driver units. The company uses activity-based costing. The above activities are used by departments X and Y as follows: -How much of the correspondence cost will be assigned to Department X?

The benefits of adopting ABC/ABM are higher for companies in competitive markets because

Bottle Company operates many bottling plants around the globe. At its Toronto plant, where nine different brands are bottled, the following costs were incurred in 2012 to produce 15,000,000 cans of soft drink: 1. Development costs of adding the new product "Soda Plus" amounted to $614,000. 2. Material handling costs of inspecting and handling concentrate, bottles, packages, and so forth amounted to $433,500.These costs are allocated to each production run. 3. Incoming materials purchase costs that can be directly traced to individual products being canned and packaged. These costs are purely variable with output level and amounted to $2,213,000. 4. Executive salaries and other central administration overhead amounted to $423,000. 5. Plant overhead including costs related to: supervision, safety , energy and plant insurance amounted to $623,000. 6. The cost of cleaning and calibrating equipment for each production run amounted to $171,500. Required: a. Classify each of the preceding costs as output unit-level, batch-level, product-sustaining, or facility-sustaining. b. Compute the cost per unit for the total manufacturing cost.