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

Cost of acquiring reliable data is considered when choosing a cost-allocation base to allocate costs in ABC systems.

The Skynet Company is noted for an exceptionally impressive line of Mardi Gras masks.Skynet has established the following selling and distribution support activity-cost pools and their corresponding activity drivers for the year 2015: Activity Marketing \ 150,000 \ 1,250,000 of sales Customer service 50,000 10,000 customer Order execution 15,000 200 orders Warehousing 15,000 125 product lines Required: a.Determine the activity-cost-driver rate for each of the four selling and distribution activities. b.Under what circumstances is it appropriate to use each of the activity-cost drivers? c.Describe at least one possible negative behavioral consequence for each of the four activity-cost drivers.

Brilliant Accents Company manufactures and sells three styles of kitchen faucets: Brass,Chrome,and White.Production takes 25,25,and 10 machine hours to manufacture 1,000-unit batches of brass,chrome,and white faucets,respectively.The following additional data apply: BRASS CHROME WHITE Projected sales in units 30,000 50,000 40,000 PER UNIT data: Selling price \ 40 \ 20 \ 30 Direct materials \ 8 \ 4 \ 8 Direct labor Overhead cost based on direct labor hours (traditional system) \ 15 \ 3 \ 9 Hours per 1000-unit batch: Direct labor hours 40 10 30 Machine hours 25 25 10 Setup hours 1.0 0.5 1.0 Inspection hours 30 20 20 Total overhead costs and activity levels for the year are estimated as follows: Activity Overhead costs Activity levels Direct labor hours 2,900 hours Machine hours 2,400 hours Setups \ 465,500 95 setup hours Inspections \ 405,000 2,700 inspection hours \8 70,500 Required: a.Using the traditional system,determine the operating profit per unit for the brass style of faucet. b.Determine the activity-cost-driver rate for setup costs and inspection costs. c.Using the ABC system,for the brass style of faucet: 1.compute the estimated overhead costs per unit. 2.compute the estimated operating profit per unit. 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: Xylon Corp. 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 10 million pages. For 2015, Xylon 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 \ 160,000 200 design changes Setups 670,000 4,000 setups Inspections 16,000 inspections Total manufacturing overhead costs \ 910,000 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 2 Setups 20 10 Inspections 30 38 -If manufacturing overhead costs are considered one large cost pool and are assigned based on 10 million pages of production capacity,what is the cost driver rate?

ABC systems attempt to trace more costs as indirect costs.

ABC systems help managers to ________.

It only makes sense to implement an ABC system when ________.

Indirect labor and distribution costs would most likely be in the same activity-cost pool.

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 the gas cost will be assigned to the Lawn Department?

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 the total costs will be assigned to Department A?

Machine depreciation can be a cost-driver for a manufacturing company under ABC system.

Do activity-based costing systems always provide more accurate product costs than conventional cost systems? Why or why not?

Answer the following questions using the information below: 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 -Assuming activity-cost pools are used,what are the activity-cost driver rates for design changes,setups,and inspections cost pools?

ABC system is likely to provide high benefits to a company whose products that the company is well-suited to make and show small profits.

Which of the following cost and cost allocation base have a strong cause and effect relationship?

Answer the following questions using the information below: Tiger Pride produces two product lines: T-shirts and Sweatshirts. Product profitability is analyzed as follows: T-SHIRTS SWEATSHIRTS Production and sales volume 60,000 units 35,000 units Selling price \ 16.00 \ 29.00 Direct material \ 2.00 \ 5.00 Direct labor \ 4.50 \ 7.20 Manufacturing overhead \ 2.00 \ 3.00 Gross profit \ 7.50 \ 13.80 Selling and administrative \ 4.00 \ 7.00 Operating profit \ 3.50 \ 6.80 What is projected operating income if direct materials costs of T-Shirts increase to $4.00 per unit and direct labor costs of Sweatshirts increase to $8.20 per unit? -Under the revised ABC system,total overhead costs allocated to Sweatshirts will be ________.

Service-sustaining costs are the costs of activities that managers cannot trace to individual services but that support the organization as a whole.

Service companies,in particular,find great value from ABC because a vast majority of their cost structure is composed of ________ costs.

Which of the following is a reason that has accelerated the demand for refinements to the costing system?

Peanut-butter costing system is a more refined costing system compared to activity-based costing system.