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

Managers and workers acquire outputs in the form of materials,labour,power,equipment and other resources and transform them into inputs through processes comprising activities.

Companies use ABC system information to:

Put the following steps in a simple costing system for a single indirect-cost pool into correct order: A.Identify the indirect costs associated with each cost-allocation base. B.Calculate the total cost of the products by adding all direct and indirect costs assigned to the products. C.Calculate the rate per unit of each cost-allocation base. D.Identify the direct costs of the products.

The primary costs of an ABC system are the measurements necessary to implement the system.

Indirect costs are costs that cannot be traced to cost objects in an economically feasible way.

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 inquiry cost will be assigned to Department A?

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 -Assume a traditional costing system applies the $80 000 of overhead costs based on direct labour hours.What is the total amount of overhead cost assigned to the deluxe model?

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 an advertising expense of $225 000 is allocated on the basis of sales,the amount allocated to the Truck Rental Department would be:

ABC systems include all resources consumed by cost objects,irrespective of whether the costs are variable or fixed in the short run.

Answer the following questions using the information below: Fremantle Corporation has two departments,Sails and Masts.Central costs could be allocated to the two departments in various ways. Sails Department Masts Department Square metreage 6000 18000 Number of employees 1120 480 Sales \ 400000 \ 2000000 -If an advertising expense of $300 000 is allocated on the basis of sales,the amount allocated to the Sails Department would be:

Answer the following questions using the information below: Warne Limited manufactures remote controls.Currently,the company uses a plant-wide rate for allocating manufacturing overhead.The plant manager believes it is time to refine the method of cost-allocation and has the accounting department identify the primary production activities and their cost drivers: Activities Cost Driver Allocation Rate Material handling Number of parts \ 3 per part Assembly Labour hours \ 30 per hour Inspection Time at inspection station \ 4.50 per minute The current traditional cost method allocates overhead based on direct manufacturing labour hours using a rate of $200 per labour hour. -What are the indirect manufacturing costs per remote control assuming an Activity-based costing method is used and a batch of 50 remote controls is produced? The batch requires 100 parts,6 direct manufacturing labour hours and 2.5 minutes of inspection time.

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 -What is the cost driver rate if manufacturing overhead costs are considered one large cost pool and are assigned based on 12 million pages of production capacity?

Aunt Ethel's Fancy Cookie Company manufactures and sells three flavours of biscuits: Macaroon,Sugar and Buttercream.The batch size for the biscuits is limited to 1000 biscuits based on the size of the ovens and biscuit moulds owned by the company.Based on budgetary projections,the information listed below is available: Macaroon Sugar Buttercream Projected sales in units 500000 800000 600000 PER UNIT data: Selling price \ 0.80 \ 0.75 \ 0.60 Direct materials Direct labour \ 0.20 \ 0.15 \ 0.14 $\text { Hours per } 1000 \text {-unit batch: }$ Direct labour hours 2 1 1 Oven hours 1 1 1 Packaging hours 0.5 0.5 0.5 Total overhead costs and activity levels for the year are estimated as follows: Activity Overhead costs Activity levels Direct labour 2400 hours Oven \ 210000 1900 oven hours Packaging \ 150000 950 packaging hours \ 360000 Required: a.Determine the activity-cost-driver rate for packaging costs. b.Using the ABC system,for the sugar biscuit: 1.compute the estimated overhead costs per thousand biscuits 2.compute the estimated operating profit per thousand biscuits. c.Using a traditional system (with direct labour hours as the overhead allocation base),for the sugar biscuit: 1.compute the estimated overhead costs per thousand biscuits 2.compute the estimated operating profit per thousand biscuits. d.Explain the difference between the profits obtained from the traditional system and the ABC system.Which system provides a better estimate of profitability? Why? _____________________________________________________________________________________________ _____________________________________________________________________________________________

Output unit-level costs cannot be determined unless you know how many units are in a given batch.

With traditional costing systems,products manufactured in small batches and in small annual volumes may be ________ because batch-related and product-sustaining costs are assigned using unit-related drivers.

Answer the following questions using the information below: Barnes Corporation manufactures two models of office chairs,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 22 8 500 Deluxe 28 12 300 Overhead costs \ 30000 \ 60000 -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 costs assigned to the deluxe model?

An activity-based costing system is a ________ model.

If companies increase market share in a given product line because their reported costs are less than their actual costs,they will become more profitable in the long run.

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. -Before anyone is able to evaluate an ABC system,he/she must review all facets of the design,application and context of that ABC system.

Answer the following questions using the information below: Chess Woods Limited produces two products: wooden chess pieces and wooden inlaid chess boards.Under their traditional cost system using one cost driver (direct manufacturing labour hours),the cost of a set of wooden chess pieces is $325.00.An analysis of the activities and their costs revealed that three cost drivers would be used under a new ABC system.These cost drivers would be equipment usage,storage area for the material and types of wood used.The new cost of a set of chess pieces was determined to be $298.00 per set. -What is the goal of a properly constructed ABC system?