Exam 5: Activity-Based Costing and Management

Resources sacrificed on activities that cannot be traced to individual products or services,but which support the organization as a whole are which of the following?

Using a broad average to allocate costs to products is called

Traditional cost systems can be used to

If a company undercosts one of its products from indirect cost smoothing,then it will overcost at least one of its other products.

Activity-based costing can "unlock" savings,not apparent when traditional costing is used,because the system requires a closer examination of operations.

In the monthly management meeting,each manager was asked to come up with suggestions for controlling costs.Some managers favoured a simple across-the-board cut in expenditures,with every department accepting the same percentage reduction in their budget.This was supported by several managers as the fairest means to save costs.Your assistant attended the meeting in your absence and suggested that the company consider switching to activity-based costing.Unfortunately,the more he explained,the less support he received,particularly when he mentioned that more information would have to be collected,there would be implementation costs,and that what really mattered were nonfinancial variables,called activities.The meeting ended with everyone wondering how such an idea could lead to cost savings. Required: Explain how an ABC system should be able to save money,even though it focuses on activities,rather than just costs.Compare your assistant's suggestion to an across-the-board cut as a means to save money.

A cost hierarchy describes

One of the aspects of ABM is eliminating activities that do not add value.

Using a broad average to assign costs to products or services may lead to undercosting or overcosting.

Activity-based costing information

In a cost system that doe not consider the cost hierarchy unit-level measures can distort product costing because the demand for overhead resources may be driven by batch-level or product-sustaining activities.

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?

The new manager of the insurance division does not understand how the company can have so many overhead rates for assigning costs to the activities of the company's life insurance underwriters.There is one rate schedule for average assignable costs when agents write standard policies.There is another rate schedule which the agents must complete when they write special policies,and these policies are costed out differently from those that are categorized as standard policies. Required: a.Why might the company have different costing systems with different overhead rates for the standard and specialized policies? b.Which rate (standard or specialized)would cross-subsidize the other if the company used only one set of overhead rates for costing its policies?

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

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

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?

A four-part cost hierarchy includes

Aunt Ethel's Fancy Cookie Company manufactures and sells three flavors of cookies: Macaroon,Sugar,and Buttercream.The batch size for the cookies is limited to 1,000 cookies based on the size of the ovens and cookie molds owned by the company.Based on budgetary projections,the information listed below is available: Required:

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

Output unit-level cost is identical to batch-level cost in a system that costs based on activities.