Exam 7: Activity-Based Costing and Management

List two benefits and two costs companies incur when they implement an ABC costing system.

The terms "cost driver" and "allocation base" are interchangeable.

How can ABC information be used to manage constrained resources?

Franklin Fireplace Inserts manufactures two premium models of fireplace inserts that provide more BTUs of heat per cord of wood than any other wood burning fireplace insert or stove. One model, the Heatilator, sells for $1,800, and a new model, the Heat Queen, sells for $1,200. Franklin's marketing department suggested that the company should concentrate on the new Heat Queen model and begin to phase out the Heatilator model. Franklin currently uses a traditional costing system. The following cost information has been used as a basis for pricing decisions over the past year: Per-Unit Data Heatilator Heat Queen Direct materials $200 $280 Direct labour hours 1.5 1.5 Machine hours 5.0 4.0 Units produced 11,000 4,000 Direct labour cost is $20 per hour, and the machine usage cost is $18 per hour. Manufacturing overhead costs were estimated at $4,800,000 and were allocated on the basis of machine hours. Gwen Freely, the new company controller, suggested that an activity-based costing analysis first be performed to obtain a better picture of the true manufacturing cost. The following data were collected: Activity Centre Cost Driver Traceable Costs Soldering Number of solder joints $ 942,000 Shipments Number of shipments 860,000 Quality control Number of inspections 1,240,000 Purchase orders Number of orders 950,400 Machining Machine hours 57,600 Machine setups Number of setups 750,000 Total traceable costs $4,800,000 Number of Events during the year: Activity Heatilator Heat Queen Total Soldering 296,250 96,250 392,500 Shipments 4,050 950 5,000 Quality control 14,050 5,325 19,375 Purchase orders 20,025 27,495 47,520 Machining 44,000 4,000 48,000 Machine setups 4,000 3,500 7,500 Selling, general, and administrative costs per unit sold are $175.00 for Heatilator and $125 for Heat Queen. a)Calculate the manufacturing cost per unit for Heatilator and Heat Queen under: 1. A traditional costing system 2. The ABC system b)Which system would most likely do a better job of measuring costs for this product emphasis/keep or drop decision? Explain. c)Franklin's controller points out that the ABC information could also be used to identify and eliminate non-value added activities. Explain how ABC and ABM can be used for this purpose.

Unit-level costs in ABC:

In general, the risk of measurement error in an ABC system increases when:

In an ABC system, committed costs:

ABC systems are typically associated with:

In an ABC system costs are first assigned to cost pools, then always to units of product.

Product-sustaining costs include:

Activity-Based Costing can be used for: I. Allocating manufacturing overhead II. Allocating non-manufacturing department costs III. Determining customer-related costs

Administrative salaries are an example of an organization-sustaining cost in an ABC system.

Which of the following is not part of the process used to assign costs in an ABC system?

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 If Le Château Joyal is the cost object, which of the following best describes the general manager's salary?

Regarding the use of ABC product cost information for short-term decision making, which of the following is likely to be true?

Under GPK a cost center is a department or larger cost object.

Offices-On-The-Go rents temporary office space to business travelers; provides copying and fax services; and sells small amounts of office supplies, such as paper, pens and notebooks. It maintains 6 facilities in the Phoenix, Arizona area, all of which report to a single corporate office. You have been hired by Priscilla Solara, the manager of Store #2, to analyze costs and make recommendations regarding quality improvements. You decide to analyze Store #2's activities and develop an activity-based costing and activity-based management system to achieve those objectives. After reviewing documents, interviewing employees, and observing daily operations, you have compiled the following list of activities: * Purchase office supplies. Two purchasing agents process approximately 50 purchase orders per month from 5 vendors. Their salaries total $5,000 each month. Each purchasing agent uses a computer and other office equipment, and monthly depreciation charges total $300. The purchasing operation occupies 1,200 square feet of the store's 8,500 square-foot facility. Monthly purchases average $2,000, and about 60% of the supplies purchased are sold to customers. The remaining 40% are used in the store's operations. * Provide office space to customers. The store's main source of revenue is renting office cubicles to customers. Each cubicle is 200 square feet and contains a desk, chair, filing cabinet, computer with Internet access, printer, and telephone. Each Offices on the Go site maintains 15 such cubicles, and the monthly depreciation on cubicle furniture and equipment totals $500. * Copy and fax documents for customers. The copy and fax center contains 5 self-service copiers and 3 fax machines. Monthly depreciation on those items totals $250. The copy and fax center occupies 1,500 square feet. * Maintain company operations. Store #2 employs one bookkeeper at a salary of $3,000 per month and one human resource manager at a salary of $2,800 per month. Their offices contain the same equipment as the purchasing agents with the same depreciation charges; both the bookkeeper and the human resource manager occupy 500 square-foot offices. * Sell office supplies to customers. Office supply displays occupy 1,000 square feet. The display racks were replaced at a cost of $1,500 last month and were expensed at that time. * Ring up sales and collect payments. Priscilla employs 10 part-time customer service representatives. Each representative works between 25 and 30 hours per month at $12 per hour. The customer service counter and related equipment (such as cash registers)occupy the remaining 500 square feet. In addition to costs for the above activities, Store #2 incurs the following costs every month: rent, $1500; utilities, $600; and maintenance, $800. Each month, 25% of profits are sent to the corporate office to help cover corporate expenses. a)Store #2 currently uses a traditional costing system, allocating indirect costs to its three product lines (office space rental, copy and fax services, and office supplies sales)based on direct labor hours. Analyze the strengths and weaknesses of the current system from the perspective of the store manager. Explain why an activity-based costing system will or will not provide better information for making decisions. b)Store #2 currently uses a traditional costing system, allocating indirect costs to its three product lines (office space rental, copy and fax services, and office supplies sales)based on the number of customers in each area. If an individual customer purchases goods or services from more than one area, they are counted with the area in which they provide the most revenue. Explain how the current system is both similar to and different from an activity-based costing system. c)Activities in an ABC system often are classified as one of six types: organization-sustaining, facility-sustaining, customer-sustaining, product-sustaining, batch-level, or unit-level. Using the list above and your own creativity, suggest one example of each activity type for Offices on the Go. Your organization-sustaining activity should focus on the corporate office; all the others should be focused on Store #2. d)List and discuss the steps you would use to assign costs in Store #2's ABC system. e)One of the steps in designing an ABC system is assigning costs to ABC cost pools. Another step is selecting a cost driver for each pool. Based on the preceding narrative, suggest two cost pools for Priscilla's store. For each cost pool, suggest two potential cost drivers. Explain your choices of cost pools and cost drivers. f)As you are completing the project for Priscilla, her bookkeeper shows some resistance to the ABC system. He comments: "We've always done just fine allocating costs using direct labor hours. Now you're complicating matters by talking about cost pools, cost drivers, and allocation bases. I don't understand why we can't just continue doing things the old way!" Explain the similarities and differences between cost drivers and allocation bases, and respond to the bookkeeper's concerns. g)You have completed the first part of your task, designing the ABC system. Priscilla also wants you to begin working with her on an activity-based management system for Store #2. In your own words, define activity-based management. If you and Priscilla work together to improve operations using the ABC information, explain why it is impossible to be certain that Store #2 will achieve any benefits.

Which of the following statements about costing systems is true?

In an ABC system, an activity is best defined as a:

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. Which of the preceding costs would most likely have "number of setups" as its cost driver?