Exam 7: Activity-Based Costing and Management

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 Which cost listed above is most likely to be a customer-sustaining cost?

All of the following are uses of Activity-Based Management except:

Tubac Savings and Loan collects fees for 3 service activities: credit risk assessment, loan processing, and other services. During March, the overhead costs related to these three service activities totalled $500,000. Activity information and direct costs for the month were as follows: Service Events Employee Time Direct Costs Credit risk assessment 60,000 150 hours $300,000 Loan processing 1,000 260 hours 130,000 Miscellaneous services 9,000 90 hours 70,000 a)Tubac allocates overhead using one office-wide rate based on employee time. Determine the rate and the amount allocated to each department. b)One of the commercial clients, Desert Dune Buggies, had 1,000 credit risk assessments, 50 loans processed, and 80 miscellaneous services performed this month. The total employee time used for Desert Dune Buggies was estimated to be about 11 hours, of which 8 hours were for processing loans. How much overhead would be allocated to this client using the office-wide rate? c)The overhead costs can be separated by service activity, so that all costs are traced to the service department where possible, and then costs that cannot be traced are allocated. Using this method, cheque processing overhead costs were $120,000, loan processing costs were $200,000, and other activities were $180,000. Number of credit risk assessments is used as the allocation base for credit checks, number of events (services)is used for miscellaneous services, and employee hours are used to allocate the costs of servicing loans. How much overhead would be allocated to Desert Dune Buggies under this system? d)Why are the amounts allocated in parts (b)and (c)different? Be specific in your answer. e)Suppose Tubac's managers would like to compare the profitability from Desert Dune Buggies with the profitability from other commercial clients. Discuss whether the costs you calculated in part (c)represent the incremental cost of overhead for the Desert Dune Buggies account.

Costs assigned to an activity pool for teaching children to swim at the regional park are $2,700 per month. Number of students is chosen as the cost driver. On average, 300 students take swim lessons monthly. What is the ABC allocation rate for this activity?

Phuong is a customer of PVL Corporation. She consistently orders low-margin products, but requires costly services from PVL. In employing ABM techniques to manage customer profitability, PVL's staff should:

One difference between a traditional costing system and an ABC system is:

Managers are most likely to identify activities in an ABC system by:

One of the uncertainties associated with ABC and ABM systems is employee response to design and implementation.

Activity-based costing information can be used to identify the relative cost of maintaining different customers. Managers can use that information, coupled with activity-based management techniques, to manage:

Ideally, activity costs in an ABC system are allocated to cost objects using a driver that explains changes in activity costs.

Quality Limousines maintains a fleet of ten limousines: 5 extended sedans used for airport transportation, 3 stretch limousines used for transportation to and from local events, and 2 ultra-stretch limousines used for all-night parties. Quality considers its "units" as individual vehicle bookings. Product lines are associated with the 3 types of vehicles. A "batch" of units constitutes all of the bookings for a particular date. Various costs associated with Quality's operations are listed below. Indicate whether each cost most likely relates to a(n): (A)organization- or facility-sustaining activity, (B)customer-sustaining activity, (C)product-sustaining activity, (D)batch-level activity, or (E)unit-level activity. ____ 1. Cost of consultants who perform customer-satisfaction surveys for arriving airport passengers ____ 2. Driver salaries for January 20x2 ____ 3. Fuel costs for extended sedans during December 20x1 ____ 4. General advertising campaign promoting all three product lines ____ 5. Supplies for an ultra-stretch limousine booked on February 14, 20x2 ____ 6. Maintenance costs for ultra-stretch limousines ____ 7. Market research conducted in local high schools ____ 8. Salary of Quality's chief operating officer ____ 9. Special advertising promotion in connection with a local football championship ____ 10. Consultant's salary for designing Quality's web page

Explain why ABM might be helpful in determining environmental costs.

The Copy-Mart is a copy centre located next to a university. The store provides a wide range of services for faculty and students, including copying, digital photo printing, providing computer time and technical support for word processing, and other miscellaneous services. The store manager has been concerned about quality problems that have recently increased. Customers have been returning copies because pages are missing or unreadable and new copies must be made. Complaints have also been received about the quality of technical support, and the computer systems have been subject to frequent viruses and crashes. ABC information can be used in an ABM system to manage quality. In such cases, quality costs are often classified as related to prevention activities, appraisal activities, production activities, or post-sales activities. a)Define each type of quality-related activity in your own words. b)Based on the information above and your own creative thinking, give one example of each activity type for Copy-Mart. c)Suppose the managers of Copy-Mart implement an ABC system to measure the costs of quality. How could they use information from this system to improve operations?

Activity-based management information can be used in several ways, including managing quality costs. Various quality-related costs are listed below. Indicate whether each cost most likely relates to a(n): (A)prevention activities, (B)appraisal activities, (C)production activities, or (D)post-sales activities. ____ 1. Routine equipment maintenance ____ 2. Finished product testing before shipment ____ 3. Customer satisfaction surveys ____ 4. Costs of spoilage and rework ____ 5. Warranty repairs ____ 6. Incoming raw materials testing ____ 7. Costs incurred to establish supplier qualifications ____ 8. Extra shipping costs incurred to meet customer deadlines ____ 9. Machinery repair costs ____ 10. Salaries of quality control inspectors

Operating efficiency improves with ABM through the use of ABC information to better manage:

Suppose the Burlington Donor Clinic of Canadian Blood Services has identified an individual blood drive as its cost object. It has established the following cost pools in developing an activity-based costing system: Non-medical personnel costs. Salaries and wages of the office staff who organize blood drives and keep donor records. Medical personnel costs. Salaries and wages of doctors and nurses who staff a blood drive. Medical supplies. Cost of needles, bandages, and containers for donated blood. Non-medical supplies. Costs of refreshments for blood donors and recordkeeping supplies. Blood drives typically require 5 to 7 beds for blood donors. Each donation requires one container (in the medical supplies cost pool), one needle, and one set of bandages. Canadian Blood Services normally receives donated space from a community organization (such as a university or company)for each blood drive. The most likely cost driver for the medical personnel cost pool is:

Discuss the similarities and differences between ABC, GPK, and RCA.

The FSOJ Company undertakes the following activities in its production operation and incurred the following costs during the first half of 20x2: Harvest oranges $25,000 Prepare oranges for processing 20,000 Extract juice from oranges 18,000 Process juice into orange juice concentrate, orange juice, or orange popsicles 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 depreciation 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 orange juice for the next 2 weeks using 160 machine hours. Finally, workers set up the same machines to produce orange popsicles during the last week of each month, using 80 machine hours. During the first half of 20x2, 20% of the oranges harvested were turned into orange juice concentrate, 50% were processed into orange juice, and 30% became orange popsicles. The orange juice concentrate operation takes up 40% of FSOJ's total factory space. Regular orange juice and orange popsicles 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).

Which is an advantage of 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 From the perspective of Riel Hotels, advertising specifically for Le Château Joyal is best described as a(n):