Exam 5: Activity-Based Costing and Activity-Based Management

It is usually difficult to find good cause-and-effect relationships between ________ and a cost allocation base.

Answer the following questions using the information below: Nichols Inc. manufactures remote controls. Currently the company uses a plant-wide rate for allocating manufacturing overhead. The plant manager is considering switching-over to ABC costing system and has asked the accounting department to identify the primary production activities and their cost drivers which are as follows: Activities Cost driver Allocation Rate Material handling Number of parts \ 2 per part Assembly Labor hours \ 20 per hour Inspection Time at inspectionstation \ 3 per minute The current traditional cost method allocates overhead based on direct manufacturing labor hours using a rate of $200 per labor hour. -Nichols' management is considering to implement ABC system because ________.

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: Macaroon Sugar Buttercream Projected sales in units 500,000 800,000 600,000 PER UNIT data: Selling price \ 0.80 \ 0.75 \ 0.60 Direct materials \ 0.20 \ 0.15 \ 0.14 Direct labor \ 0.04 \ 0.02 \ 0.02 Hours per 1000-unit batch: Direct labor hours 2 1 1 Oven hours 1 1 1 Packaging hours 0.5 0.5 0.5 $\text { Total overhead costs and activity levels for the year are estimated as follows: }$ Activity Overhead costs Activity levels Direct labor 2,400 hours Oven \ 210,000 1,900 oven hours Packaging \ 150,000 950 packaging hours \3 60,000 Required: a.Determine the activity-cost-driver rate for packaging costs. b.Using the ABC system,for the sugar cookie: 1.compute the estimated overhead costs per thousand cookies. 2.compute the estimated operating profit per thousand cookies. c.Using a traditional system (with direct labor hours as the overhead allocation base),for the sugar cookie:. 1.compute the estimated overhead costs per thousand cookies. 2.compute the estimated operating profit per thousand cookies. 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?

Answer the following questions using the information below: Eagle Eye Company produces two types of lenses-L7 and L9. Single Indirect-Cost Pool System ABC System Total direct costs \ 77,500 \ 58,000 Total indirect costs \ 37,500 (a) Total costs assigned to L7 \ 62,000 \ 49,500 Total costs assigned to L9 (b) \ 65,500 -What is the total costs assigned to L9 (b)under single indirect-cost pool system?

Gregory Enterprises has identified three cost pools to allocate overhead costs.The following estimates are provided for the coming year: Cost Pool Overhead Costs Cost driver Activity level Supervision of direct labor \ 320,000 Direct labor-hours 800,000 Machine maintenance \ 120,000 Machine-hours 960,000 Facility rent \ 200,000 Square feet of area 100,000 Total overhead costs \ 640,000 The accounting records show the Mossman Job consumed the following resources: Cost driver Actual level Direct labor-hours 200 Machine-hours 1,600 Square feet of area 50 Which method of allocation probably best estimates actual overhead costs used? Why?

Velshi Printers has contracts to complete weekly supplements required by forty-six customers.For the year 2015,manufacturing overhead cost estimates total $840,000 for an annual production capacity of 12 million pages. For 2015 Velshi 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: Cost pool Manufacturing overhead costs Activity level Design changes \ 120,000 300 design changes Setups 640,000 5,000 setups Inspections 8,000 inspections Total manufacturing overhead costs \ 840,000 During 2015,two customers,Money Managers and Hospital Systems,are expected to use the following printing services: Activity Money Managers Hospital Systems Pages 60,000 76,000 Design changes 10 0 Setups 20 10 Inspections 30 38 When costs are assigned using the single cost driver,number of pages printed,then ________.

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

Dalrymple Company produces a special spray nozzle.The budgeted indirect total cost of inserting the spray nozzle is $80,000.The budgeted number of nozzles to be inserted is 40,000.What is the budgeted indirect cost allocation rate for this activity?

Lavender Company is a logistics company and has recently implemented ABC system.Using activity-based information,it decides to reduce the bulkiness of the packages delivered,thereby reducing costs.This suggests that ABC system helps managers in ________ decisions.

ABC reveals opportunities to reduce costs on nonvalue added activities.

Answer the following questions using the information below: Nichols Inc. manufactures remote controls. Currently the company uses a plant-wide rate for allocating manufacturing overhead. The plant manager is considering switching-over to ABC costing system and has asked the accounting department to identify the primary production activities and their cost drivers which are as follows: Activities Cost driver Allocation Rate Material handling Number of parts \ 2 per part Assembly Labor hours \ 20 per hour Inspection Time at inspectionstation \ 3 per minute The current traditional cost method allocates overhead based on direct manufacturing labor hours using a rate of $200 per labor hour. -What are the indirect manufacturing costs per remote control assuming an activity-based-costing method is used and a batch of 100 remote controls are produced? The batch requires 450 parts,8 direct manufacturing labor hours,and 10 minutes of inspection time.

Teecorp Company provides the following ABC costing information: Activities Total Costs Activity-cost drivers Labor \ 320,000 8,000 hours Gas \ 36,000 6,000 gallons Invoices \ 40,000 2,500 invoices Total costs \ 396,000 The above activities used by their three departments are: Lawn Department Bush Department Plowing Department Labor 2,500 hours 1,200 hours 4,300 hours Gas 1,700 gallons 800 gallons 3,500 gallons Invoices 1,600 invoices 400 invoices 500 invoices -How much of invoice cost will be assigned to the Bush Department?

Luzent Company produces two types of entry doors: Deluxe and Standard.The assignment basis for support costs has been direct labor dollars.For 2015,Luzent compiled the following data for the two products: Deluxe Standard Sales units 50,000 400,000 Sales price per unit \ 650.00 \ 475.00 Prime costs per unit \ 180.00 \ 130.00 Direct materials cost per unit \ 95.00 \ 75.00 Direct labor costs per unit \ 75.00 \ 55.00 Manufacturing support costs per unit \ 80.00 \ 120.00 Last year,Luzent 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 ABC information for 2015: Activity Cost Driver Cost Total Deluxe Standard Setups of setups \ 500,000 500 400 100 Machine-related of machine hours \ 44,000,000 600,000 300,000 300,000 Packing of shipments \ 5,000,000 250,000 50,000 200,000 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."ABC systems may result in misallocation of indirect costs." Do you agree? Give reasons for your answer. d.What considerations need to be examined when determining a sales mix strategy? e.While implementing an ABC system for the first time,achieving a significant change overnight is difficult and this may demotivate employees.How can managers overcome this problem?

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 labor 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 type of woods used. The new cost of a set of chess pieces was determined to be $298.00 per set. -The reduction in cost per unit of wooden chess pieces under ABC system is due to difference in allocation of ________.

Answer the following questions using the information below: Gregory Company has identified three cost pools to allocate overhead costs. The following estimates are provided for the coming year: Cost Pool Overhead Costs Costdriver Activity level Supervision of direct labor \ 326,000 Direct labor-hours 900,000 Machine maintenance \ 132,000 Machine-hours 960,000 Facility rent \ 217,000 Square feet of area 100,000 Total overhead costs \ 675,000 The accounting records show the Mossman Job consumed the following resources: Cost driver Actual level Direct labor-hours 200 Machine-hours 1,500 Square feet of area 70 -If direct labor-hours are considered the only overhead cost driver,what is the single cost driver rate for Gregory?

Product-cost cross-subsidization ________.

Which of the following statements is true of a peanut-butter costing system?

Answer the following questions using the information below: Products S5 and CP8 each are assigned $100.00 in indirect costs by a traditional costing system. An activity analysis revealed that although production requirements are identical, S5 requires 45 minutes less setup time than CP8. -According to an ABC system,CP8 is ________ under the traditional system.

Answer the following questions using the information below: Luzent Corporation has two departments, Small and Large. Central costs could be allocated to the two departments in various ways. Small Department Large Department Square footage 6,750 17,250 Number of employees 1,120 480 Sales \ 350,000 \ 1,750,000 -If total advertising expense of $483,000 is allocated on the basis of sales,the amount allocated to the Large Department would be ________.

Premium Company provides the following ABC costing information: Activities Total Costs Activity-cost drivers Account inquiry \ 200,000 10,000 hours Account billing \ 140,000 4,000,000 lines Account verificationaccounts \ 75,000 40,000 accounts Correspondence letters \ 25,000 4,000 letters Total costs \ 440,000 The above activities are used by Departments A and B as follows: Department Department Account inquiry hours 2,500 hours 4,000 hours Account billing lines 400,000 lines 250,000 lines Account verification accounts 10,000 accounts 8,000 accounts Correspondence letters 1,200 letters 1,600 letters -How much of account verification costs will be assigned to Department A?