Exam 7: Activity-Based Costing and Management

An activity is a type of task or function performed in an organization.

The costs of designing and implementing an ABC system include employee time and training.

Each cost pool in an ABC system has at least one cost driver.

Le Château Joyal is an historic hotel in the heart of old Quebec City. It is owned by Riel Hotels, which operates additional properties in Halifax, Montreal, and Winnipeg. Le Château Joyal has 9 floors, with approximately 20 rooms per floor. Facilities also include a workout room, restaurant, and pool. The hotel is organized into 5 departments: front desk, engineering, housekeeping, food & beverage, and customer relations. As part of its operation, Le Château Joyal regularly incurs the following costs: General manager's salary Housekeeping supplies Utility costs Amortization on workout room equipment Advertising Food and beverage costs Amortization on restaurant equipment Le Château Joyal could define its cost objects as: I. Customers only II. Departments only III. Number of employees

International Rental Cars incurred the following costs in a recent fiscal period: Refuelling cost for reservation #081859 $ 200 Custodial services for branch office in Ottawa 250 Painting costs for luxury sports cars 320 Salaries for corporate accountants 395 Generalized advertising for the firm 460 Amortization on home office computer equipment 665 Office equipment amortization for Vancouver branch 775 Market research with business travellers 860 Total $3,925 Calculate the total cost in each of the following categories: a)Organization-sustaining activities b)Facility-sustaining activities c)Customer-sustaining activities d)Product-sustaining activities e)Batch-level activities f)Unit-level activities

Activity-based costing increases the accuracy of cost measurement by using arbitrary cost allocation bases for overhead.

BVH Corporation manufactures and sells cellular phones. Which of the following activities is least likely to be considered a value-added activity for BVH?:

Which of the following factors are associated with successful ABC implementations?

The cost of implementing an ABC system is likely to be lower if the number of times an activity is performed:

The FSOJ Company undertakes the following activities in its production operation and incurred the following costs during the first half of 20x2: Harvest apples $25,000 Prepare apples for processing 20,000 Extract juice from apples 18,000 Process juice into apple juice concentrate, apple juice, or apple cider 30,000 Package completed products 9,000 In addition to the costs listed above, processing the juice into 3 final products involves the use of 2 machines, each of which incurred amortization costs of $10,000 for the first half of 20x2. Each product requires a different set up on the processing machines, so FSOJ normally sets up the machines to produce concentrate for the first week of each month using 80 machine hours. The machine is then set up to produce apple juice for the next 2 weeks using 160 machine hours. Finally, workers set up the same machines to produce apple cider during the last week of each month, using 80 machine hours. During the first half of 20x2, 20% of the apples harvested were turned into apple juice concentrate, 50% were processed into apple juice, and 30% became apple cider. The apple juice concentrate operation takes up 40% of FSOJ's total factory space. Regular apple juice and apple cider occupy 35% and 25%, respectively. a)Calculate the total costs included in the processing activity cost pool. b)Choose a cost driver for the processing activity and explain your choice. Calculate the ABC allocation rate for this activity. c)Allocate processing costs to each product line using the ABC allocation rate developed in part (b).

Similar to other costing systems that include allocation, ABC cost information may be misleading for decision making purposes. To combat this problem, costs within an activity can be classified as:

Managers can use activity-based management to control environmental costs.

ABC systems allow managers to focus on measurement at the activity level.

At least one cost driver is required for each ABC cost:

When managers use ABC cost allocation rates for decision making without distinguishing between flexible and committed costs, their estimates of incremental costs are biased upward or downward. If activity levels are steadily increasing over time, this bias would provide:

ABC systems differ from traditional costing systems because ABC systems use:

The FSOJ Company undertakes the following activities in its production operation and incurred the following costs during the first half of 20x2: Harvest apples $25,000 Prepare apples for processing 20,000 Extract juice from apples 18,000 Process juice into apple juice concentrate, Apple juice or apple cider 30,000 Package completed products 9,000 Processing the juice into 3 final products involves the use of 2 machines, each of which incurred amortization costs of $15,000 for the first half of 20x2. Each product requires a different set up on the processing machines, so FSOJ normally sets up the machines to produce concentrate for the first week of each month. The machine is then set up to produce apple juice for the next 2 weeks. Finally, workers set up the same machines to produce apple cider during the last week of each month. During the first half of 20x2, 20% of the apples harvested were turned into apple juice concentrate, 50% were processed into apple juice, and 30% became apple cider. The relative sales values of each product were: 75% for apple juice, 20% for apple juice concentrate, and 5% for apple cider. The apple juice concentrate operation takes up 40% of FSOJ's total factory space. Regular apple juice and apple cider occupy 35% and 25%, respectively. Assume processing costs are allocated on the basis of number of machine setups. How much processing cost will be allocated to each product line?

Value-added activities:

ABC systems are similar to traditional costing systems in the way they:

In an ABC system, a cost driver must be chosen for each: