Exam 8: Activity-Based Costing

Puff Animal Hospital looks after the health of household pets such as dogs,cats,birds and rabbits.The hospital wants to use an activity based costing system to allocate costs to each animal case it handles.These cases tend to vary in their complexity: some pets are here for a regular check ups and immunization;other pets have emergencies which require surgery.Some pets are very exotic and require the attention of the supervisor vet,others are common animals with common problems such that only the junior vets are needed.Puff Animal Hospital is quite large;on average there are five vets,a general assistant,and two receptionists on duty at one time.Which of the following is an example of a facility sustaining activity for Puff Animal Hospital?

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.Which of the following are the correct activity rates for machining and quality inspection?

Which of the following are limitations of ABC? i.The system requires significantly more data ii.The system requires extensive updating if the product range changes. iii.The inclusion of facility level costs greatly increases the accuracy of cost per unit.

Quality Carvings manufactures furniture.They have decided to develop an activity-based costing system.Shown below is each activity,its cost and the activity driver used to assign these costs to products.Under an activity-based costing system,what is the activity cost per unit of activity driver for making patterns?

Volume-based measures may be used to apply overhead when:

Which of the following can signal the need for a new product costing system?

A cost driver is:

One of the major benefits of ABC is that there are virtually no behavioural implications of introducing such a costing system,as there is no real change in the way data are collected and analysed.

A cost driver:

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.

Which of the following can signal the need for a new product costing system?

A resource driver is:

There does not need to be a strong correlation between overhead costs and the cost driver to ensure accurate product costs.

Recent increases in downstream costs have occurred because of: i.increased advertising and product promotion ii.increased customer servicing iii.increased competition iv.increases in product design

Consider the following statements.Conventional 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?

Which of the following statements regarding activity-based costing (ABC)is false?

Activities in ABC can be classified as batch level activities,product-sustaining activities,facility-sustaining activities and departmental activities.

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 specialized electronic parts).iv.Cofission Electronics has recently implemented a flexible manufacturing system;this practically eliminates any setup costs;with this system,product customization takes very little additional time.You are not convinced that all of these points support Jasmine's decision.Which of the above points support the use of ABC in Cofission?

The benefits arising from the introduction of activity-based costing are likely to be greater where: i.overhead is a large proportion of total cost ii.implementation costs are not high due to the support of advanced IT systems iii.batches are of a similar size

Which of the following statements is/are true? i.Both conventional cost systems and ABC focus on resources supplied ii.Plant and equipment is an example of a committed resource under an ABC system. iii.Committed resources always equal resources used.