Exam 10: Activity Analysis: Costing and Management

The risk of mismeasurement decreases when costs are allocated instead of traced to an ABC cost pool.

Activity based management should not be used to change required activities.

The Supreme Juice Company undertakes the following activities in its production operation and incurred the following costs during the first half of 2019: Harvest oranges \2 5,000 Prepare oranges for processing 20,000 Extract juice from oranges 18,000 Process juice into orange juice concentrate, 15,000 orange juice or orange smoothies Package completed products 9,000 Processing the juice into 3 final products involves the use of 2 machines, each of which incurred depreciation costs of $15,000 for the first half of 2019. Each product requires a different set up on the processing machines, so Supreme Juice normally sets up the machines to produce concentrate for the first week of each month. The machine is then set up to produce orange juice for the next 2 weeks. Finally, workers set up the same machines to produce orange smoothies during the last week of each month. During the first half of 2019, 30% of the oranges harvested were turned into orange juice concentrate, 45% were processed into orange juice, and 25% became orange smoothies. The relative sales values of each product were: 5% for orange juice, 20% for orange juice concentrate, and 10% for smoothies. The orange juice concentrate operation takes up 40% of Supreme Juice's total factory space. Regular orange juice and orange smoothies occupy 35% and 25%, respectively. Which of the costs above would most likely have "number of setups" as its cost driver?

Swim4Life provides swimming classes and training in South East Queensland. Swim4Life offers four training levels: Learn to Swim Baby, Learn to Swim Junior, Learn to Swim Senior, Swim Squad. In November 2019, the firm's information system produced the following data No of Swirn Teachers No of Students Area Occupied Number of Classes Direct Costs Baby 4 20 10\% 108 \ 1,000 Jurior 3 24 40\% 94 \ 1,500 Serior 5 15 20\% 84 \ 3,000 Squad 3 9 30\% 48 \ 1,000 Regardless of level, students pay $15 per hour for lessons. Only 5 swimmers can be supervised by the teacher in each lesson. Swim4Life also provides lessons to school students who come with their school during school hours. These lessons are provided at a discounted rate of $12 per child. Costs associated with the Swim4Life operations for November 2019 included: Facility rent $2,500 Provision of Life Savers $800 Utilities $1,100 Computer equipment depreciation $800 Advertising $400 Training $1,500 The number of students in each level is most likely to be a cost driver for:

In ABC systems value added activities are more likely to be identified and eliminated from operations.

Complex operating functions cannot be incorporated into a time driven ABC system.

Roberts Ltd allocates overhead to cost objects using a two-stage process. From this information, we can infer that Roberts Ltd:

Skyfire Manufacturing has two departments, Assembly and Testing. You are given the following information about the costs of 4 activities that occur at the manufacturing plant monthly: Material handling Supervision on of direct labor Maintenance and cleaning Machining Total costs \ 100,000 105,000 150,000 200,000 parts 70 employees 3,000 hours 6,000 machine hours The above activities are used by the two departments as follows: Material handling 150,000 parts 50,000 parts Supervision of direct labor 30 employees 40 employees Time spent cleaning 2,000 hours 1,000 hours Number of machine hours 4,000 machine hours 2,000 machine hours How much of the total overhead costs will be allocated to Testing?

Resources supplied and resources consumed are the same in organisations using activity based management.

From the perspective of the customer, value added activities increase the worth of an entity's goods or service.

Advantages of time driven ABC include:

As the number of activities increase in an ABC system, measurement error also tends to increase.

The Supreme Juice Company undertakes the following activities in its production operation and incurred the following costs during the first half of 2019: Harvest oranges \2 5,000 Prepare oranges for processing 20,000 Extract juice from oranges 18,000 Process juice into orange juice concentrate, 15,000 orange juice or orange smoothies Package completed products 9,000 Processing the juice into 3 final products involves the use of 2 machines, each of which incurred depreciation costs of $15,000 for the first half of 2019. Each product requires a different set up on the processing machines, so Supreme Juice normally sets up the machines to produce concentrate for the first week of each month. The machine is then set up to produce orange juice for the next 2 weeks. Finally, workers set up the same machines to produce orange smoothies during the last week of each month. During the first half of 2019, 30% of the oranges harvested were turned into orange juice concentrate, 45% were processed into orange juice, and 25% became orange smoothies. The relative sales values of each product were: 5% for orange juice, 20% for orange juice concentrate, and 10% for smoothies. The orange juice concentrate operation takes up 40% of Supreme Juice's total factory space. Regular orange juice and orange smoothies occupy 35% and 25%, respectively. If juice extraction costs are allocated to product lines based on usage of factory space, the amount allocated to smoothies will be:

Unit level costs are performed for every unit of product and the cost is proportional to the number of units produced.

In ABC multiple cost pools are used and each has the same cost driver.

A recent development in ABC is:

Each cost pool in an ABC system has at least one allocation base.

For small manufacturing firms, ABC systems that combine complex technology with flexible manufacturing practices are most successful.

Ovahead Ltd employs 4 sales clerks. Eve processes sales orders for customers starting with the letters A through H, while Kat does the same task for customers from I through N. Martin deals with customers in the O through R range, and Desiree handles the rest of the alphabet. The most likely cost driver for the sales team wages is the:

The accuracy of ABC systems may be reduced if employees provide misleading or incorrect information.