Exam 8: Activity-Based Costing

Despite the obvious advantages of ABC, many firms are still reluctant to implement it. What are the reasons for this reluctance? i. Uncertainty about the benefits of ABC. ii. The opinion that the current system serves all the firm's needs. iii. Lack of resources to implement ABC.

Behavioural issues may be important in implementing an ABC system. Which of the following are some of the methods employed to minimise adverse outcomes? i. Use a top down approach. ii. Use a bottom up approach. iii. Ensure all employees have a sense of ownership in the system.

Cofission Electronics make small electronic parts. The management accountant at Cofission, Jasmine Vake, decides to implement an activity-based costing (ABC) system. She lists the following points to support her decision: i. The recent cost report shows that the ratio of prime costs to manufacturing overhead cost is approximately 1:3. ii. Cofission is a small company. iii. Cofission has three product lines: basic parts (parts that are common to many products and many suppliers), customised parts (electronic parts that are highly customised to very specialised electric motors), prototypes (where Cofission Electronics need to design as well as manufacture these specialised electronic parts). iv. Cofission Electronics has recently implemented a flexible manufacturing system; this practically eliminates any setup costs; with this system, product customisation takes very little additional time. You are not convinced that all of the above points support Jasmine's decision. Which of the above points support the use of ABC in Cofission?

While ABC can be used with service industries, it can be difficult to implement because service industries do not always have repetitive individual activities.

Activity management:

Which of the following statements is true? Indicators of problems with product cost systems exist when: i. non-manufacturing costs that are product related become insignificant. ii. the proportion of manufacturing overhead not driven by production volume increases. iii. there is an increase in product diversity.

Consider the following statements. i. Product diversity creates problems in product costing because diverse products tend to utilise productive activities in very different ways. ii. Overhead costs that are not incurred at the unit level create product-costing problems because they do not vary with measures such as direct labour hours or machine hours. iii. Product diversity exists when a single product, such as pens, are made in different colours. Which of the above statement/s is/are true?

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 Econo (to the nearest dollar)?

Which of the following are indicators of an outdated costing system? i. Products which are difficult to make have high profit margins. ii. Competitors prices appear unrealistically low. iii. Customers are not deterred by price increases. iv. A lot of time is spent on special product cost projects.

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 lounge chairs for the year?

Recent developments in manufacturing and marketing have resulted in significant changes to cost manufacturing structures. Which of the following statements is/are false? i. The proportion of direct labour increases. ii. The proportion of manufacturing overhead increases. iii. Product diversity decreases. iv. The proportion of non-volume-related manufacturing overheads increases.