Exam 8: Activity-Based Management and Activity-Based Costing

Which of the following is NOT a sign that a 'smoothing out' costing system exists?

What is the focus of ABC systems?

Misleading cost numbers are exacerbated when unit-level assignments and the alternative activity-cost-driver assignments are proportionately similar to each other.

Horse Groomers Inc.manufactures two models of grooming stations,a standard and a deluxe model.The following activity and cost information has been compiled: Product Number of Set-ups Number of Components Number of Direct labour hours Standard 3 30 700 Deluxe 7 50 200 Overhead costs \ 30000 \ 70000 Assume a traditional costing system applies the $100 000 of overhead costs based on direct labour hours. a.What is the total amount of overhead costs assigned to the standard model? b.What is the total amount of overhead costs assigned to the deluxe model? Assume an activity-based costing system is used and that the number of set-ups and the number of components are identified as the activity-cost drivers for overhead. c.What is the total amount of overhead costs assigned to the standard model? d.What is the total amount of overhead costs assigned to the deluxe model? e.Explain the difference between the costs obtained from the traditional costing system and the ABC system.Which system provides a better estimate of costs? Why? _____________________________________________________________________________________________ _____________________________________________________________________________________________

Answer the following questions using the information below: The Sparky Electrical Products Company has an Electric Mixer Division and an Electric Lamp Division.Of a $30 000 000 bond issue,the Electric Mixer Division used $21 000 000 and the Electric Lamp Division used $9 000 000 for expansion.Interest costs on the bond totalled $1 500 000 for the year. -What amount of interest costs should be allocated to the Electric Lamp Division?

What should a corporation focus on to manage set-up costs?

Answer the following questions using the information below: Kosciuszko Land and Snow Company provides the following ABC costing information: Activities Total Costs Activity-cost Drivers Labour hours \ 240000 12000 hours Fuel \ 27000 9000 litres Invoices \ 30000 3750 invoices Total costs \ 1912000 The above activities used by their three departments are: Lawn Department Bush Department Ploughing Department Labour hours 2500 hours 1200 hours 4300 hours Fuel 1500 litres 800 litres 3700 litres Invoices 1600 invoices 400 invoices 500 invoices -How much of the labour cost will be assigned to the Lawn Department?

Answer the following questions using the information below: Products S5 and CP8 each are assigned $50.00 in indirect costs by a traditional costing system.An activity analysis revealed that although production requirements are identical,S5 requires 45 minutes less set-up time than CP8. -Although ABC calls for more cost pools,more cost drivers and more calculations,the procedures are similar to those used in traditional systems.

Answer the following questions using the information below: Trustme Vehicle Rental Corporation has two departments,Car Rental and Truck Rental.Central costs may be allocated to the two departments in various ways. Car Rental Truck Rental Number of vehicles in fleet 700 300 Number of employees 150 50 Sales \ 1500000 \ 750000 -If the administrative expense of $125 000 is allocated on the basis of number of employees,the amount allocated to the Truck Rental Department would be:

Answer the following questions using the information below: Products S5 and CP8 each are assigned $50.00 in indirect costs by a traditional costing system.An activity analysis revealed that although production requirements are identical,S5 requires 45 minutes less set-up time than CP8. -According to an ABC system,S5 uses a disproportionately:

An individual cost item can be simultaneously a direct cost of one cost object and an indirect cost of another cost object.

Answer the following questions using the information below: Geelong Publishing has contracts to complete weekly supplements required by 46 customers.For the year 2018,manufacturing overhead cost estimates total $420 000 for an annual production capacity of 12 million pages. For 2018,Geelong Publishing has decided to evaluate the use of additional cost pools.After analysing manufacturing overhead costs,it was determined that the number of design changes,set-ups and inspections are the primary manufacturing overhead cost drivers.The following information was gathered during the analysis: Cost Pool Manufacturing Overhead Costs Activity Level Design changes \ 60000 400 design changes Set-ups 320000 8000 set-ups Inspections 40000 8000 inspections Total manufacturing overhead costs \ 420000 During 2018, two customers, Kidscare Books and Biodata Research, are expected to use the following printing services: Activity Kid scare Books Biodata Research Pages 60000 76000 Design changes 10 0 Set-ups 20 10 Inspections 30 38 -Assuming activity-cost pools are used,what are the activity-cost driver rates for design changes,set-ups and inspections cost pools?

Traditional systems are capable of producing reasonably accurate costs where a single activity accounts for a sizeable proportion of a department's indirect costs.

ABC systems use the concept of a ________ to identify the cost drivers that best demonstrate the cause-and-effect relationship between each activity and the costs in the related cost pool.

Answer the following questions using the information below: Katoomba Company provides the following ABC costing information: Activities Total Costs Activity-cost Drivers Account inquiry hours \ 800000 20000 hours Account billing lines \ 560000 8000 000 lines Account verification accounts \ 300000 80000 accounts Correspondence letters \ 100000 8000 letters Total costs \ 1760000 The above activities are uæed by Departments and as follows: Department A Department B Account inquiry hours 2000 hours 8000 hours Account billing lines 400 o00 lines 200000 lines Account verification accounts 20000 accounts 8000 accounts Correspondence letters 1000 letters 1600 letters -How much of the account verification costs will be assigned to Department A?

For each cost pool listed below,select an appropriate allocation base.An allocation base may be used only once.Assume a manufacturing company. Allocation bases for which the information system can provide data: 1.Number of employees per department. 2.Employee wages and salaries per department. 3.Production facility square metreage. 4.Hours of operation of each production department. 5.Machine-hours by department. 6.Operations costs of each department. 7.Hours of computer use per month per department. 8.Indirect labour-hours per department. Cost pools: ________ a.Vice CEO of Finance's office expenses. ________ b.Computer operations used in conjunction with manufacturing. ________ c.Personnel Department. ________ d.Manufacturing machinery cost. ________ e.Energy costs. _____________________________________________________________________________________________ _____________________________________________________________________________________________

Answer the following questions using the information below: Products S5 and CP8 each are assigned $50.00 in indirect costs by a traditional costing system.An activity analysis revealed that although production requirements are identical,S5 requires 45 minutes less set-up time than CP8. -Managers might be inclined to shy away from ABC systems because of their apparent complexity and the perceived potential for the costs of these systems to exceed the benefits derived.

Come-On-In Manufacturing produces two types of entry doors: deluxe and standard.The assignment basis for support costs has been direct labour dollars.For 2018,Come-On-In compiled the following data for the two products: Sales units Deluxe \ 50000 Standard \ 400000 Sales price per unit \ 650.00 \ 475.00 Direct material and labour costs per unit \ 180.00 \ 130.00 Manufacturing support costs per unit \ 80.00 \ 120.00 Last year, Come-On-In Manufacturing purchased an expensive robotics system to allow for more decorative door products in the deluxe product line. The CFO suggested that an ABC analysis could be valuable to help evaluate a product mix and promotion strategy for the next sales campaign. She obtained the following $\mathrm { ABC }$ information for 2018 : Activity Cost Driver Cost Total Deluxe Standard Set-ups of set-ups \ 500000 500 400 100 Machine-related of machine hours \ 44000000 600000 300000 300000 Packing of shipments \ 5000000 250000 50000 200000 Required: a.Using the current system,what is the estimated: 1.total cost of manufacturing one unit for each type of door? 2.profit per unit for each type of door? b.Using the current system,estimated manufacturing overhead costs per unit are less for the deluxe door ($80 per unit)than the standard door ($120 per unit).What is a likely explanation for this? c.Review the machine-related costs above.What is a likely explanation for machine-related costs being so high? What might explain why total machining hours for the deluxe doors (300 000 hours)are the same as for the standard doors (300 000 hours)? d.Using the activity-based costing data presented above: 1.compute the cost-driver rate for each overhead activity. 2.compute the revised manufacturing overhead cost per unit for each type of entry door. 3.compute the revised total cost to manufacture one unit of each type of entry door. e.Is the deluxe door as profitable as the original data estimated? Why or why not? f.What considerations need to be examined when determining a sales mix strategy? _____________________________________________________________________________________________ _____________________________________________________________________________________________

Answer the following questions using the information below: Kosciuszko Land and Snow Company provides the following ABC costing information: Activities Total Costs Activity-cost Drivers Labour hours \ 240000 12000 hours Fuel \ 27000 9000 litres Invoices \ 30000 3750 invoices Total costs \ 1912000 The above activities used by their three departments are: Lawn Department Bush Department Ploughing Department Labour hours 2500 hours 1200 hours 4300 hours Fuel 1500 litres 800 litres 3700 litres Invoices 1600 invoices 400 invoices 500 invoices -How much of invoice cost will be assigned to the Bush Department?

Answer the following questions using the information below: Mt Panorama Racing Corporation manufactures two models of motorised go-carts,a standard and a deluxe model.The following activity and cost information has been compiled: Product Number of Set-ups Number of Components Number of Direct Labour Hours Standard 15 10 750 Deluxe 35 15 500 Overhead costs \ 30000 \ 50000 -Number of set-ups and number of components are identified as activity-cost drivers for overheads.Assuming an activity-based costing system is used,what is the total amount of overhead cost assigned to the deluxe model?