Deck 5: Activity-Based Costing and Management

Question 1

How does direct cost tracing improve cost accuracy?

A) It identifies the cause-and-effect relationship between direct costs and indirect costs.
B) It identifies the cause-and-effect relationship between activities and non-activities.
C) It reclassifies costs or costs pools that vary with the quantity of a single activity cost driver as direct.
D) It makes no assumptions about the cause-and-effect relationship between direct costs and activities.
E) Because with a greater number of cost pools, it does not have to be concerned with the overhead costs used by different products.

Answer 1

It reclassifies costs or costs pools that vary with the quantity of a single activity cost driver as direct.

Question 2

Cecelia Schell is taking four clients (who are not related) on a tour of her retirement development. The clients incurred the following expenses while on the tour. All tour expenses are paid by Cecelia because she has business discounts for most of her business dealings. These expenses will be billed to the clients by Cecelia.
?
Required:
Compute the total average cost per client showing average indirect (overhead) and average direct (other) charges separately.

Answer 2

Average direct costs = ($320 + $40 + $88 + $32)/4 = $120 per client
Average indirect costs = $224/4 = $56 per client
Average total costs = $120 + $56 = $176 per client

Question 3

The Celestial Group (CG) provides financial advice to individuals and corporations. CG charges clients for (a) direct professional time, and (b) support services. The three professionals in CG and their rates per professional hour are as follows:

The owner of the two corporations has questioned the June bill. She is wondering why support services is the same amount when XB Corp required no support service for the month.
Required:
Prepare more appropriate bills for June using the activity-based costing approach.

Answer 3

Question 4

A cost accounting system should be revised when

A) the existing cost accounting system provides information that is representative of operations.
B) the existing cost accounting system could be updated, just to keep ahead.
C) the existing cost accounting system does not produce information that reflects the way various products use scarce resources.
D) management wants to change the system, even though the information is relevant and correct.
E) a new system would be easier to understand but would not be reliable.

Question 5

Which of the following statements about activity-based costing is TRUE?

A) It does not affect cost control.
B) Indirect cost allocation bases are unlikely to be cost drivers.
C) It provides less information than traditional cost systems.
D) It provides similar results to traditional costing when one activity creates a substantial amount of total cost.
E) It provides similar results to traditional costing when different products use resources from different activities in different proportions.

Question 6

Which of the following statements does not represent the logic of an ABC system?

A) Activity cost allocation bases are the activity cost drivers of costs in the activity cost pools.
B) A strong cause-and-effect relationship between overhead costs and the cost allocation base is essential.
C) The requirement to measure cost allocation bases of different activities used by different products is essential.
D) The overhead used by different products is not important, as it is a fixed cost.
E) A greater level of detailed information concerning costs will help organizations be more efficient.

Question 7

A division of a company manufactures two products, which are in high demand in the defence industry. Product A is stamped out in a machine press, at the rate of 10,000 per hour. Product B is identical to product A, with the exception that it is made from thicker steel, and requires the machine press to be recalibrated. Product A is produced on the day shift and product B is produced on the afternoon shift, allowing set up changes to be done between shifts.
In this case, set up hours are related to which of the following?

A) units of output
B) batches of output
C) the number of customers
D) machine hours
E) labour hours

Question 8

Analyze the two costing systems below and determine which one is an ABC system, stating the reasons for your choice.
System A

System B

Question 9

Bottle Company operates many bottling plants around the globe. At its Toronto plant, where nine different brands are bottled, the following costs were incurred in the current year to produce 15,000,000 cans of soft drink:
1. Development costs of adding the new product "Soda Plus"
amounted to $614,000.
2. Material handling costs of inspecting and handling concentrate, bottles, packages, and so forth amounted to $433,500.These costs are allocated to each production run.
3. Incoming materials purchase costs that can be directly traced to individual products being canned and packaged. These costs are purely variable with output level and amounted to $2,213,000.
4. Executive salaries and other central administration overhead amounted to $423,000.
5. Plant overhead including costs related to: supervision, safety, energy and plant insurance amounted to $623,000.
6. The cost of cleaning and calibrating equipment for each production run amounted to $171,500.
Required:
a. Classify each of the preceding costs as output unit-level, batch-level, product-sustaining, or facility-sustaining.
b. Compute the cost per unit for the total manufacturing cost.

Question 10

Brewery Company operates many bottling plants around the globe. At its Montreal plant, where six different brands are bottled, the following costs were incurred in 2012 to produce 10,000,000 bottles of beer:
1. Development costs of adding the new product "Light Beer Plus"
amounted to $307,000.
2. Material handling costs of inspecting and handling concentrate, bottles, packages, and so forth amounted to $216,750.These costs are allocated to each production run.
3. Incoming materials purchase costs that can be directly traced to individual products being bottled and packaged. These costs are purely variable with output level and amounted to $1,106,500.
4. Executive salaries and other central administration overhead amounted to $396,000.
5. Plant overhead including costs related to: supervision, safety, energy and plant insurance amounted to $311,500.
6. The cost of cleaning and calibrating equipment for each production run amounted to $85,750.
Required:
a. Classify each of the preceding costs as output unit-level, batch-level, product-sustaining, or facility-sustaining.
b. Compute the cost per unit for the total manufacturing cost.

Question 11

For each of the following activities identify an appropriate activity-cost driver.
a. machine maintenance
b. machine setup
c. quality control
d. material ordering
e. production scheduling
f. warehouse expense
g. engineering design

Question 12

The plant manager has come to you, as the new management accountant, for assistance. The plant manufactures sailboards, operating two shifts per day. During March through July, a third shift is added. The company has to train new machine operators each summer as the demands for its products is very seasonal. Training always occurs on the day shift, and the plant allocates the costs of training (e.g., extra supervision required), based on machine hours. This year, the three shift managers cannot agree on who should be charged for the training. The day shift manager is angry because she has discovered that machine hours are highest on the day shift. The other two managers argue that the hours are higher due to the training, so the day shift should be charged for those costs.
Required:
Provide a recommendation to the plant manager? Include in your recommendation two options as an allocation base for training costs.

Question 13

Hans Sorensen, controller of Franklin Production, has the choice of allocating indirect manufacturing cost using either direct manufacturing labour hours or manufacturing machine hours. If he uses labour hours for the month of January, Product A receives $312,000 in manufacturing overhead charges and Product B receives $448,000. When machine hours are used Product A receives $352,000 in manufacturing overhead charges while Product B receives only $408,000.
Required:You are the department manager in charge of Product A and are strongly in favour of using labour hours. Of course, your co-manager, who is in charge of Product B, is strongly in favour of machine hours. What are some arguments you may be able to give for the allocation base that favours your department's product?

Question 14

The new manager of the insurance division does not understand how the company can have so many overhead rates for assigning costs to the activities of the company's life insurance underwriters. There is one rate schedule for average assignable costs when agents write standard policies. There is another rate schedule which the agents must complete when they write special policies, and these policies are costed out differently from those that are categorized as standard policies.
Required:
a. Why might the company have different costing systems with different overhead rates for the standard and specialized policies?
b. Which rate (standard or specialized) would cross-subsidize the other if the company used only one set of overhead rates for costing its policies?

Question 15

Match the cost driver in the right column below to the appropriate function in the left column.

-Purchasing

A) Number of customers
B) Number of purchase orders
C) Number of invoices
D) Number of desktop computers
E) Number of shipments
F) Number of employees

Question 16

Match the cost driver in the right column below to the appropriate function in the left column.

-Billing

A) Number of customers
B) Number of purchase orders
C) Number of invoices
D) Number of desktop computers
E) Number of shipments
F) Number of employees

Question 17

Match the cost driver in the right column below to the appropriate function in the left column.

-Shipping

A) Number of customers
B) Number of purchase orders
C) Number of invoices
D) Number of desktop computers
E) Number of shipments
F) Number of employees

Question 18

Match the cost driver in the right column below to the appropriate function in the left column.

-Computer Support

A) Number of customers
B) Number of purchase orders
C) Number of invoices
D) Number of desktop computers
E) Number of shipments
F) Number of employees

Question 19

Match the cost driver in the right column below to the appropriate function in the left column.

-Personnel

A) Number of customers
B) Number of purchase orders
C) Number of invoices
D) Number of desktop computers
E) Number of shipments
F) Number of employees

Question 20

Match the cost driver in the right column below to the appropriate function in the left column.

-Customer Service

A) Number of customers
B) Number of purchase orders
C) Number of invoices
D) Number of desktop computers
E) Number of shipments
F) Number of employees

Question 21

Use the information below to answer the following question(s).
A transportation company provides bussing, limo and taxi service. The company charges: $350 per day for bussing service; $2.00 per kilometre for taxi service; and, $3.50 per kilometre for limo service. Two individual clients, the school board and the city government offices use the majority of the limo service on a contract agreement. Bussing services are used exclusively by the school board, and the taxi service is used almost exclusively by the general public, although the school board uses the taxi services when individual students have to be transported on occasion. Indirect costs are accumulated on internal records at $1.50 per kilometre for limo use and $1.00 per kilometre for taxi use, and $195 per day for each of the twenty buses.
The company's costing system has tracked the following activities for the month:


-Compute the billing to each major client for the month.

A) School Board, $134,440.00; City Gov't, $7,050.50
B) School Board, $8,090.00; City Gov't, $134,440.00
C) School Board, $134,440.00; City Gov't, $4,323.50
D) School Board, $7,050.50; City Gov't, $7,685.00
E) School Board, $8,090.00; City Gov't, $7,050.50

Question 22

Use the information below to answer the following question(s).
A transportation company provides bussing, limo and taxi service. The company charges: $350 per day for bussing service; $2.00 per kilometre for taxi service; and, $3.50 per kilometre for limo service. Two individual clients, the school board and the city government offices use the majority of the limo service on a contract agreement. Bussing services are used exclusively by the school board, and the taxi service is used almost exclusively by the general public, although the school board uses the taxi services when individual students have to be transported on occasion. Indirect costs are accumulated on internal records at $1.50 per kilometre for limo use and $1.00 per kilometre for taxi use, and $195 per day for each of the twenty buses.
The company's costing system has tracked the following activities for the month:


-What indirect costs were accumulated for each major client for the month?

A) School Board, $74,730.00; City Gov't, $3,039.50
B) School Board, $7,050.50; City Gov't, $74,730.00
C) School Board, $74,730.00; City Gov't, $7,050.50
D) School Board, $7,050,50; City Gov't, $7,685.00
E) School Board, $6,925.50; City Gov't, $141,420.00

Question 23

Babcock Industries uses departmental overhead rates to allocate its manufacturing overhead to jobs. The company has two departments: Assembly and Sanding. The Assembly Department uses a departmental overhead rate of $20 per machine hour, while the Sanding Department uses a departmental overhead rate of $15 per direct labour hour. Job 396 used the following direct labour hours and machine hours in the two departments:

The cost for direct labour is $25 per direct labour hour and the cost of the direct materials used by Job 396 is $1,200.
What was the total cost of Job 396 if Babcock Industries used the departmental overhead rates to allocate manufacturing overhead?

A) $1,375
B) $1,425
C) $1,500
D) $1,600
E) $1,630

Question 24

Leonard Industries uses departmental overhead rates to allocate its manufacturing overhead to jobs. The company has two departments: Building and Inspection. The Building Department uses a departmental overhead rate of $18 per machine hour, while the Inspection Department uses a departmental overhead rate of $15 per direct labour hour. Job 611 used the following direct labour hours and machine hours in the two departments:
The cost for direct labour is $25 per direct labour hour and the cost of the direct materials used by Job 611 is $1,500.
What was the total cost of Job 611 if Leonard Industries used the departmental overhead rates to allocate manufacturing overhead?

A) $1,700
B) $1,844
C) $1,880
D) $1,838
E) $1,910

Question 25

Using activity-based costing to allocate overhead costs, what is the total manufacturing overhead cost estimate for Hapless Systems during 2016?

A) $3,113.75
B) $1,495.00
C) $2,068.00
D) $3,412.50
E) $3,665.00

Question 26

When selling prices are based on costs assigned using the single cost driver, number of pages printed, then Hapless Systems

A) is fairly billed because resources are allocated uniformly to all jobs.
B) is grossly under billed for the job, while other jobs will be unfairly over billed.
C) will be pleased because all customers will be under billed for their jobs.
D) will contribute too little to profits, and Wallace Printing will not want to accept additional work. from the company
E) will likely seek to do business with competitors.

Question 27

When selling prices are based on costs assigned using the single cost driver, direct labour hours, then the Mossman job

A) is fairly billed because resources are allocated uniformly to all jobs.
B) is grossly under billed for the job, while other jobs will be unfairly over billed.
C) may increase overall sales as other jobs will be cross-subsidized.
D) will contribute too little to profits, and Gregory Enterprises will not want to accept additional work from the company.
E) will likely seek to do business with competitors.

Question 28

Eastern Star Nursing Home has been using an indirect overhead job cost system for allocating general and nursing overhead charges to all patients. However, during the past few months the facility has been losing patients because a competing nursing home charges much less for some classes of patients. It seems that Eastern Star is keeping the well patients and losing those who require special attention. The facilities manager believes that a refined costing system can improve the allocation of charges to all patients. Hopefully this will reduce the charges to the more ill patients.
The accounting staff provided information for September. The costs have traditionally been allocated to patients based on nursing days. However, the accounting staff can separate nursing days by nursing category. At the request of the facilities manager, the following information was furnished concerning nursing days.

Hazel Jones, a long-time patient, spent 5 days in Critical Care, 4 days in Special Care, and 21 days in General Care during September. Her monthly assignment of nursing days was: 2 for Senior RN, 6 for RN, 10 for PN, and 12 for Nurse's aide.
Required:
a. Determine the amount of cost to be covered by Hazel Jones if the daily pay rates presented in the table are used for staff services and overhead is added on a care area per day basis.
b. For each patient care area determine the total cost per day to be charged to patients using the weighted average staff services cost for the daily pay rate portion of total costs. What is cost to be covered by Hazel Jones' charge for the month of September?

Question 29

The Marionettes Company is noted for an exceptionally impressive line of Mardi Gras masks. Marionettes has established the following selling and distribution support activity-cost pools and their corresponding activity drivers for the year 2012:

Required:
a. Determine the activity cost driver rate for each of the four selling and distribution activities.
b. Under what circumstances is it appropriate to use each of the activity cost drivers?
c. Describe at least one possible negative behavioral consequence for each of the four activity cost drivers.

Question 30

At Deutschland Electronics, product lines are charged for call centre support costs based on sales revenue. Last year's summary of call centre operations revealed the following:

Deutschland Electronics currently allocates call centre support costs using a rate of 0.5% of sales revenue.
Required:
a. Compute the amount of call centre support costs allocated to each product line under the current system.
b. Assume Deutschland decides to use the average call length for information to assign last year's support costs. Does this allocation method seem more appropriate than percentage of sales? Why or why not?
c. Assume Deutschland decides to use the numbers of calls for information and for warranties to assign last year's support costs of $65,000. Compute the amount of call centre support costs assigned to each product line under this revised ABC system.
d. Deutschland Electronics assigns bonuses based on departmental profits. How might the Specialty Products manager try to obtain higher profits for next year if support costs are assigned based on the average call length for information?
e. Discuss the barriers for implementing ABC for this call centre.

Question 31

Asian Tools, a manufacturer of precision hand tools, is concerned with the apparent lack of controls over cost incurrence in its Hand Tool Division. The division has always used a plant-wide rate for allocating manufacturing overhead to its products. However, some products cost substantially more than competitors' retail prices while others are substantially less. The division manager believes that a better cost allocation method can be developed.
With the assistance of a plant supervisor, the accounting department has been able to establish the following relationships between production activities and the indirect

The traditional allocation method is based upon direct manufacturing labour hours, and if that method is used the rate is $28 per hour.
Required:
Compute the unit indirect manufacturing costs of a batch of 200 tools if the batch required 220 parts, 8 machine hours, 52 minutes of finishing time, and 46 direct labour hours:

Question 32

A company manufactures household items sold at trade shows. The items, classified as either Trinkets or Widgets are manufactured on a common assembly line. Although different direct materials are used, the direct labour cost is the same for each product line.
The plant-wide rate for allocating manufacturing overhead to its products is no longer acceptable. The production manager has heard about activity-based costing and has assembled some information for use in changing the cost system to a cost driver concept.
With the help of the accounting department, the manager has been able to establish the following relationships between production costs and some of the indirect manufacturing activities for August, along with the production data for the two product lines:

Required:
Using activity-based costing determine the total production cost of each of the two product lines for August and the cost per unit assuming all units started were completed.

Question 33

Cocoa Pet Corporation manufactures two models of grooming stations, a standard and a deluxe model.
The following activity and cost information has been compiled:

Required:
Assume a traditional (simple) costing system applies the $80,000 of overhead costs based on direct labour hours.
a. What is the total amount of overhead costs assigned to the standard model?
b. What is the total amount of overhead costs assigned to the deluxe model?
Assume an activity-based costing system is used and that the number of setups and the number of components are identified as the activity-cost drivers for overhead.
c. What is the total amount of indirect costs assigned to the standard model?
d. What is the total amount of indirect costs assigned to the deluxe model?
e. Explain the difference between the costs obtained from the traditional costing system and the ABC system. Which system provides a better estimate of costs? Why?

Question 34

Come-On-In Manufacturing produces two types of entry doors: Deluxe and Standard. The assignment basis for support costs has been direct labour dollars. For 2012, Come-On-In compiled the following data for the two products:

Required:
a. Using the current traditional (simple) costing system, determine the estimated:
1. total cost of manufacturing one unit for each type of door
2. profit per unit for each type of door
b. Using the current traditional cost system, estimated manufacturing overhead costs per unit are less for the deluxe door ($80 per unit) than the standard door ($120 per unit). What is a likely explanation for this?
c. Review the machine related costs above. What is a likely explanation for machine related costs being so high? What might explain why total machining hours for the deluxe doors (300,000 hours) are the same as for the standard doors (300,000 hours)?
d. Using the activity-based costing data presented above,
1. compute the cost driver rate for each overhead activity
2. compute the revised manufacturing overhead cost per unit for each type of entry door
3. compute the revised total cost to manufacture one unit of each type of entry door
e. Is the deluxe door as profitable as the original data estimated? Why or why not?

Question 35

Summer Daze Corporation manufactures two products, Bocce Ball Sets and Croquet Sets. Croquet Sets were added as a product line two years ago. Croquet Sets are the more complex of the two products, requiring one hour of direct labour time per unit to manufacture, compared to one-half hours of direct labour time for Bocce Ball Set. Croquet Sets are produced on an automated production line.
Indirect costs are currently allocated to the products on the basis of direct labour hours. The company estimated it would incur $332,500 in manufacturing overhead costs and produce 6,000 units of Croquet Sets and 20,000 units of Bocce Ball Sets during the current year.

Required:
a. Determine the unit cost of a Bocce Ball Set using traditional (simple) costing with units as the allocation base.
b. Determine the unit cost of a Bocce Ball Set using activity-based costing.

Question 36

Whitman Printing Ltd. has contracts to complete weekly supplements required by its' customers. For the current year, manufacturing overhead cost estimates total $336,000 for an annual production capacity of 12 million pages.
Whitman Printing decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:

Pages are a direct cost at $0.03 per page. Design costs per job average $1,000 and $1,200 for Money Managers and Hospital Systems, respectively. Whitman Printing sets prices at $0.10 per page plus 120% of design costs.
Assume that all costs are variable.
Required:
Prepare income statements in contribution margin format for both customers using:
a. Traditional (simple) costing with overhead applied on a page capacity basis
b. Activity-based costing
c. How much a page should Money Managers be charged if Whitman Printing wants to breakeven on this customer? Assume that manufacturing overhead costs are fixed and that they are allocated to customers based on pages sold as a percentage of production capacity; and, that design costs are also fixed.

Question 37

Rogers Printing Ltd. has contracts to complete weekly supplements required by its' customers. For the current year, manufacturing overhead cost estimates total $580,000 for an annual production capacity of 14,500,000 pages.
Rogers Printing decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:

Pages are a direct cost at $0.02 per page. Design costs per job average $1,500 and $1,700 for Jackson Sports and Beaufort Travel, respectively. Rogers Printing sets prices at $0.11 per page plus 120% of design costs.
Assume that all costs are variable.
Required:
Prepare income statements in contribution margin format for both customers using:
a. Traditional (simple) costing with overhead applied on a page capacity basis
b. Activity-based costing
c. How much a page should Jackson Sports be charged if Rogers Printing wants to breakeven on this customer? Assume that manufacturing overhead costs are fixed and that they are allocated to customers based on pages sold as a percentage of production capacity; and, that design costs are also fixed.

Question 38

In the monthly management meeting, each manager was asked to come up with suggestions for controlling costs. Some managers favoured a simple across-the-board cut in expenditures, with every department accepting the same percentage reduction in their budget. This was supported by several managers as the fairest means to save costs. Your assistant attended the meeting in your absence and suggested that the company consider switching to activity-based costing. Unfortunately, the more he explained, the less support he received, particularly when he mentioned that more information would have to be collected, there would be implementation costs, and that what really mattered were nonfinancial variables, called activities. The meeting ended with everyone wondering how such an idea could lead to cost savings.
Required: Explain how an ABC system should be able to save money, even though it focuses on activities, rather than just costs. Compare your assistant's suggestion to an across-the-board cut as a means to save money.

Question 39

The benefits of adopting ABC/ABM are higher for companies in competitive markets because

A) accurate product cost information is essential to be competitive, regardless of the cost.
B) ABM can pinpoint opportunities for cost savings, which increase the company's profit or are passed on to customers through lower prices.
C) ABM allows managers to ignore competition when making pricing decisions thus making more accurate decisions.
D) the more competitive the market, the more likely the competition is using ABC.
E) ABC/ABM should not be used in a competitive market because traditional costing is less expensive allowing for lower prices.

Question 40

The Guy Fawkes Company is noted for an exceptionally impressive line of Mardi Gras masks. Guy Fawkes has established the following selling and distribution support activity-cost pools and their corresponding activity drivers for the current year:
?
Required:
a. Determine the activity-cost-driver rate for each of the four selling and distribution activities.
b. Under what circumstances is it appropriate to use each of the activity-cost drivers?
c. Describe at least one possible negative behavioral consequence for each of the four activity-cost drivers.