Exam 5: Activity-Based Costing and Management

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

A company manufactures household items sold at trade shows.The items,classified as either Trinkets or Widgets are manufactured on a common assembly line.Although different direct materials are used,the direct labour cost is the same for each product line. The plant-wide rate for allocating manufacturing overhead to its products is no longer acceptable.The production manager has heard about activity-based costing and has assembled some information for use in changing the cost system to a cost driver concept. With the help of the accounting department,the manager has been able to establish the following relationships between production costs and some of the indirect manufacturing activities for August,along with the production data for the two product lines: Direct costs: Required: Using activity-based costing determine the total production cost of each of the two product lines for August and the cost per unit assuming all units started were completed.

The plant manager has come to you,as the new management accountant,for assistance.The plant manufactures sailboards,operating two shifts per day.During March through July,a third shift is added.The company has to train new machine operators each summer as the demands for its products is very seasonal.Training always occurs on the day shift,and the plant allocates the costs of training (e.g. ,extra supervision required),based on machine hours.This year,the three shift managers cannot agree on who should be charged for the training.The day shift manager is angry because she has discovered that machine hours are highest on the day shift.The other two managers argue that the hours are higher due to the training,so the day shift should be charged for those costs. Required: Provide a recommendation to the plant manager? Include in your recommendation two options as an allocation base for training costs.

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.

Assuming activity-cost pools are used,what are the activity-cost driver rates for design changes,setups,and inspections cost pools?

With simple 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.

Cocoa Pet Corporation manufactures two models of grooming stations,a standard and a deluxe model. The following activity and cost information has been compiled: Required: Assume a traditional (simple)costing system applies the $80,000 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 setups and the number of components are identified as the activity-cost drivers for overhead. c.What is the total amount of indirect costs assigned to the standard model? d.What is the total amount of indirect 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?

Activity-based cost systems

Inaccurate product costs can expose a company to the risk of losing market share to competitors.

Companies use activity-based management to

Designing a new model of washing machine would be classified in the ABC cost hierarchy as a (an)

Answer the following question(s)using the information below. Wallace Printing has contracts to complete weekly supplements required by forty-six customers.For the year 2016,manufacturing overhead cost estimates total $420,000 for an annual production capacity of 10 million pages. For 2016 Wallace Printing 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 2016,two customers,Wayward Insurance and Hapless Systems,are expected to use the following printing services: -Using activity-based costing to allocate overhead costs,what is the total manufacturing overhead cost estimate for Hapless Systems during 2016?

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: -The previous controller at the transportation company had always estimated the indirect costs at 25% of billings.What indirect costs were accumulated for each major client for the month under this assumption?

Batch-level costs are resources sacrificed on activities undertaken to support specific products or services.

Which of the following does not characterize an ABC system,as compared to a traditional costing system?

Significant amounts of direct costs allocated using only one or two cost pools is evidence that a company may benefit from implementing ABC.

Activity-based management describes management decisions that use activity-based costing information to

Engineering costs incurred to change product designs are which of the following?

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.

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