Exam 4: Cost Management Systems and Activity-Based Costing

Costs that do not have a relationship to a cost objective

A merchandising firm typically has inventory account(s).

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 verhead 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?

Rainbow Company manufactures paint in two processes: Mixing and Cooking. Total costs incurred in the mixing and cooking departments are as follows: Direct Materials Direct Labor Mixing \ 60,000 \ 80,000 Cooking \ 25,000 \ 50,000 Indirect manufacturing costs were $90,000 for the Mixing department and $180,000 for the Cooking department. Rainbow Company manufactures two products, Superior Paint and Deluxe Paint. Costs are allocated to these products in the following proportions: Mixing Cooking DM DL DM DL Superior \% \% \% \% Deluxe \% \% \% \% Indirect cost is allocated in proportion to the direct labor costs with each department. The Cooking department cost allocated to Deluxe is:

Anything for which a separate measurement of cost is desired in the manufacturing process

A process map is a schematic diagram with symbols that captures the interrelationships among cost objects, activities, and resources.

Direct materials often do not include minor items such as tacks or glue.

A territory is an example of a cost objective.

The controller of Alaska Company is in charge of installing a new costing system which includes the allocation of indirect manufacturing costs to the producing departments. After studying the situation, he found that there were three cost drivers that could be used to assign the indirect costs, each with its own merits. After computing the allocations for the departments on a sample month, he found that each cost driver favored (i.e., assigned less costs to) a different department. Machine hours favored Department X, direct manufacturing labor hours favored Department Y, and number of processing steps performed favored Department Z. Required: What additional factors must the controller consider before deciding on an allocation base for the indirect manufacturing cost assignment to the departments?

Youngblood Corporation had the following activities, traceable costs, and physical flow of driver units: Traceable Physical Flow of Activities Costs DriverUnits Account inquiry (hours) \ 8,000 500 hours Account billing(lines) 5,600 200,000 lines Account verification (accounts) 3,000 2,000 accounts Correspondence (letters) 1,000 200 letters The above activities are used by departments A and B as follows: A B Account inquiry (hours) 50 hours 80 hours Account billing (lines) 25,000 lines 20,000 lines Account verification ( accounts) 200 comtracts 100 comtracts Corresp ondence (letters) 20 letters 100 letters The correspondence cost assigned to Department B is:

The Tweety Company has gathered the following information: Sales \ 88,000 Direct materials used 23,900 Direct labor 15,200 Fixed: Factory overhead 9,400 Selling expenses 4,500 Administrative expenses 7,700 Variable: Factory overhead 9,300 Selling expenses 8,400 Administrative expenses 1,600 There were no beginning or ending inventories. The total period cost is:

Period costs include selling and administrative expenses.

Dickerson Corporation had the following activities, traceable costs, and physical flow of driver units: Traceable Physical Flow of Activities Costs Driver Units Acc ount inquiry (hours) \ 10,000 500 hours Acc ount billing (lines) 5,600 200,000 lines Account verification (accounts) 3,000 2,000 accounts Correspondence (letters) 1,000 200 letters The above activities are used by departments A and B as follows: Acc ount inquiry (hours) 50 hours 80 hours Account billing (lines) 25,000 lines 20,000 lines Account verification (accounts) 200 contracts 100 contracts Correspondence (letters) 20 letters 100 letters The cost per driver unit for the account inquiry activity is:

For each of the numbered items, choose the appropriate classifications for a manufacturing company. If in doubt about whether the cost behavior is basically variable or fixed, decide on the basis of whether the total cost will fluctuate substantially over a wide range of volume. All items have two answers among the following possibilities. A. Selling cost B. Manufacturing costs, direct C. Manufacturing costs, indirect D. General and administrative cost E. Fixed cost F. Variable cost 1. advertising 2. treasurer's salary 3. depreciation on office equipment 4. depreciation on factory equipment 5. direct labor 6. direct materials 7. office supplies 8. foreman's salary 9. indirect labor 10. indirect materials

Costs can be classified only as direct or indirect.

This system first accumulates overhead costs for each of the activities of an organization, and then assigns the costs of activities to the products, services, or other cost objects that caused that activity

A costing system with more than two stages of allocations and cost drivers other than percentages

That part of the cost management system that measures costs for the purposes of management decision making and financial reporting

Managers have greater confidence in the accuracy of costs of products and services reported by activity- based systems because:

In both merchandising and manufacturing accounting, selling and administrative costs are period costs.