Exam 7: Activity-Based Costing and Management

Outdoor Amusement Fun is an amusement park located in Vancouver, British Columbia. It is organized into 6 departments: arcades and shows, food and beverage, rides, communications, human resources, and maintenance. Outdoor Amusement Fun is implementing an ABC system to allocate the costs of the service activities (communications, human resources, and maintenance)to product-line departments (arcades and shows, food and beverage, and rides). Thus, the product-line departments are the cost objects. The total costs and cost drivers for each service activity are: Activity Total Cost Cost Driver Communication $16,000 Number of department-specific memos prepared and distributed Human resources 21,000 Number of employees Maintenance 18,000 Square metres Information regarding cost drivers and allocation bases is as follows: Number of Department- Number Square Specific Memos of Employees Metres Prepared & Distributed Arcades & shows 20 5,000 6 Food & beverage 50 7,000 4 Rides 30 6,000 6 Communications 10 1,000 4 Human resources 10 1,000 3 Maintenance 30 1,000 1 Direct costs and revenues for each product-line department are as follows: Revenues Direct Costs Arcades & shows $50,000 $8,000 Food & beverage 125,000 6,000 Rides 150,000 4,000 a)Calculate the allocation rate for each service activity. b)Interpret the allocation rate for each service activity (i.e., explain what it means). c)Calculate the total service activity costs allocated to each product-line department. d)Calculate the operating profit (revenues - direct costs - allocated costs)for each product-line department. [Note to Professors: The data in exercise #4 is the same as the data in multiple choice questions #27-31. However, the exercise questions differ from the multiple choice questions.]

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

Caring Change Medical Practice specializes in plastic surgery. Which of the following costs is most likely to be a committed cost in its operations?

Which method(s)do traditional accounting systems use to assign the following costs to cost objects (departments or units)? Direct Costs Overhead Costs

All organizations that use activity-based costing also use activity-based management.

Unlike activity-based costing, traditional costing systems never use multiple cost pools for overhead allocation.

Accountants normally can determine cost drivers for all cost pools on their own, without consulting other employees in the organization.

List two advantages and two disadvantages of implementing an ABC system compared to traditional costing.

Tutors-R-Us provides academic enrichment and review activities for high school students in 4 subject areas: English, mathematics, science, and history. In November 20x1, the firm's information system produced the following data: Number of Number of Percent of Direct Tutors Students Faculty Costs English 4 20 10% $ 6,000 Mathematics 3 24 25 8,000 Science 5 15 50 12,000 History 2 8 15 3,000 Regardless of subject area, clients pay $50 per hour for tutoring services. Costs associated with the Tutors-R-Us operations for November 20x1 included: Facility rent $2,500 Custodial services 1,800 Utilities 600 Computer equipment amortization 800 Advertising 400 Which of the following is the most logical allocation base for facility rent if the relevant cost object is a subject area (product line)?

Both activity-based costing and traditional costing allocate overhead costs to cost objects.

Which of the following is not a benefit of an ABC system?

For small manufacturing firms, ABC systems are best with: Number of Number of Activities Cost Drivers

Which of the following do managers use in choosing activities and cost drivers to include in an ABC system?

For small manufacturing firms, ABC systems are best with: Number of Number of Activities Cost Drivers

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 the Heat Queen, a new model that 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 labor hours 1.5 1.5 Machine hours 5.0 4.0 Units produced 11,000 4,000 Direct labor 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 Center 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.

Caring Change Medical Practice specializes in plastic surgery. Which of the following is least likely to be a committed cost in its operations?

Lookin' for a Home is an animal shelter in Saskatoon, Saskatchewan. The shelter relies on government grants and private donations for funding. It takes in homeless dogs and cats and keeps them until they are adopted by qualified individuals. One of the shelter's cost pools is animal recordkeeping, which involves maintaining a database with details about each animal in the shelter. Which of the following is the most appropriate cost driver for the animal recordkeeping cost pool?

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

The availability of activity costs is inversely related to the cost of implementing an ABC system.