Exam 8: Activity-Based Costing

Twista Manufacturing has the following activities and activity costs per year: Machining ($20 000); Forklifting ($10 000); machine setup ($32 000), and quality inspection ($40 000). The operation starts with setting up the machines; each batch of products requires a different setup. This is followed by machining, where the cost of machining varies directly with the number of machine hours. Forklifts are used to move the work in progress around. Because quality is important, an inspection is carried out for each batch of products. The following information is also available: Number of machine hours per year: 20 000 machine hours Number of forklift moves per year: 500 moves Number of batches per year: 4000 batches Each year, Twista Manufacturing produces 5000 units of Product X. These units of Product X require 5000 machine hours, 120 moves and 500 batches to produce. The direct materials and direct labour together cost $15 per unit of Product X. The total cost for one unit of Product X is:

Describe how assigning overhead costs differs under a simple activity-based product costing system from a traditional volume-based costing system.

Calculate the cost of processing one sales order if the total activity cost is $1 720 000 p.a., the activity driver is the number of orders received and the annual quantity of the activity driver is 43 000 orders.

Summer Ice Pty Ltd is a manufacturer of a range of ice cream products. The following is a list of activities, costs and quantities of activity drivers for a number of activities that occur in the factory. Under an activity-based system, what is the activity cost per unit of activity division for packing into containers?

In an activity-based costing system, a bill of activities will include:

HiTech Products manufactures three types of CD players: Cheap, Econo and Deluxe. HiTech uses an activity-based product costing system. The company has identified five activities. Each activity, its cost and related activity driver are identified below: The following information pertains to each product line of CD players: Under an activity-based product costing system, what is the cost per unit of Cheap?

Twista Manufacturing has the following activities and activity costs per year: Machining ($20 000); Forklifting ($10 000); machine setup ($32 000), and quality inspection ($40 000). The operation starts with setting up the machines; each batch of products requires a different setup. This is followed by machining, where the cost of machining varies directly with the number of machine hours. Forklifts are used to move the work in progress around. Because quality is important, an inspection is carried out for each batch of products. The following information is also available: Number of machine hours per year: 20 000 machine hours Number of forklift moves per year: 500 moves Number of batches per year: 4000 batches Each year, Twista Manufacturing produces 5000 units of Product X. These units of Product X require 5000 machine hours, 120 moves and 500 batches to produce. The direct materials and direct labour together cost $15 per unit of Product X. The forklifting costs and machine set up costs allocated to Product X are:

When introducing an activity-based costing system which of the following actions are recommended for the changeover to be successful?

Calculate the cost per unit for setup for one run of 10 000 units if setup labour is $20 per hour and 10 hours are required to set up.

Under an activity-based system where budgeted costs have been used, it is necessary to include the cost of unused capacity, when estimating and reporting profit.

Which of the following statements is false?

Consider the following statements. Traditional costing systems can produce distorted product costs if: i. overheads are driven by non-volume factors. ii. overheads are a minor part of the product cost. iii. it fails to recognise non-manufacturing costs as product costs. Which of the statements is true?

The Pinewood Furniture Company Pty Ltd plans to manufacture two lines of chairs in the coming year-lounge and patio. The company is considering introducing an activity-based costing system. Given below are each activity, its cost and its related activity driver. The level of activity for the year is: Under an activity-based costing system, what is the activity cost per unit of activity driver for finishing?

At a recent professional meeting, two accountants discussed product-costing problems in their respective companies. Both accountants are familiar with ABC systems but neither firm uses this method. Accountant A reported that part of the problem in product costing in his firm is that there are major differences between product lines as to volume of units, utilisation of various activities, quality assurance requirements established by customers and size of the products. Accountant B noted that in her firm, which produces consumer products, all products undergo the same basic production processes and in the same sequence, but in an increasing variety of colours and packaging modes. Both accountants are worried about the potential distortion of product costs under their traditional product costing systems. Which accountant should be more concerned about the potential distortion? Explain.

The Pinewood Furniture Company Pty Ltd plans to manufacture two lines of chairs in the coming year-lounge and patio. The company is considering introducing an activity-based costing system. Given below are each activity, its cost and its related activity driver. The level of activity for the year is: Under an activity-based costing system, what is the activity cost per unit of activity driver for machine setups?

Activity-based costing has the potential to improve the accuracy of product costs, however, it is important for management to understand its limitations. Identify and explain two limitations.

ABC is a methodology that can be as simple or as complex as the organisation wants it to be.

Traditional product costing systems result in inaccurate product costs when:

Companies are likely to benefit from activity-based costing systems if:

The Pinewood Furniture Company Pty Ltd plans to manufacture two lines of chairs in the coming year-lounge and patio. The company is considering introducing an activity-based costing system. Given below are each activity, its cost and its related activity driver. The level of activity for the year is: Under an activity-based costing system, what is the total cost of patio chairs for the year?