Exam 5: Activity-Based Costing and Management

Overton Enterprises is converting to an activity-based costing system It wishes to depict the various activities in its manufacturing process along with the activities' relationships. Which of the following is a tool that the company can use to accomplish this task?

The following tasks are associated with an activity-based costing system: 1- Assignment of cost to products 2- Calculation of pool rates 3- Identification of cost drivers 4- Identification of cost pools Which of the following choices correctly expresses the proper order of the preceding tasks?

Which of the following is least likely to be classified as a facility-level activity in an activity-based costing system?

Consumption ratios are useful in determining:

The salaries of a manufacturing plant's management are said to arise from:

Use the following information to answer the following Questions Barnett Products manufactures three types of remote-control devices: Economy, Standard, and Deluxe. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below. -What is Barnett's pool rate for the automated machinery activity?

Use the following information to answer the following Questions St. Vincent’s, Inc., currently uses traditional costing procedures, applying $800,000 of overhead to products Beta and Zeta on the basis of direct labor hours. The company is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labor hours (DLH), production setups (SU), and number of parts components (PC) as cost drivers. Data on the cost pools and respective driver volumes follow. -The overhead cost allocated to Zeta by using traditional costing procedures would be:

Use the following information to answer the following Questions Barnett Products manufactures three types of remote-control devices: Economy, Standard, and Deluxe. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below. -Under Barnett's activity-based costing system, what is the per-unit overhead cost of Standard?

Consider the following costs that relate to a bank and a manufacturer of software: Bank 1. Review costs of commercial loan applications 2. Operating costs of human resources department 3. Immediate processing costs of a specific customer's cash deposit 4. Bank membership costs of joining local Chamber of Commerce Software manufacturer 5. Label and packaging charges from a commercial printer for a new software release 6. Air conditioning/heating costs of the firm's production plant 7. Transport costs of moving the finished products from production run no. 1 to the company's warehouse 8. Design and development costs of new spreadsheet software Required: A. Classify the eight costs listed as arising from either a unit-level, batch-level, product-sustaining, or facility-level activity. B. Would number of loan applications or number of customers be a more appropriate cost-driver base for #1 above? Briefly explain.

Starwatch Manufacturing sells a number of goods whose selling price is heavily influenced by cost. A recent study of product no. 520 revealed a traditionally-derived total cost of $1,623 and a selling price of $1,850 based on that figure. A newly computed activity-based total cost is $1,215. Which of the following statements is true?

In an activity-based costing system, direct materials used would typically be classified as a unit-level cost.

Whitman Enterprises uses a traditional-costing system to estimate quality-control costs for its Dragon product line. Costs are estimated at 32% of direct-labor cost, and direct labor totaled $860,000 for the quarter just ended. Management is contemplating a change to activity-based costing, and has established three cost pools: incoming material inspection, in-process inspection, and final product certification. Number of parts, number of units, and number of orders have been selected as the respective cost drivers. The following data show the pool rates that have been calculated by the company along with the quantity of driver units for the Dragon's: Required: A. Calculate the quarterly quality-control cost that is allocated to the Dragon product line under Whitman's traditional-costing system. B. Calculate the quarterly quality-control cost that is allocated to the Dragon product line if activity-based costing is used. C. Does the traditional approach under- or overcost the product line? By what amount?

Anton's Fresh Fish and Produce is a wholesale distributor that operates in central Florida. An analysis of two of the company's customers, Seaside Spa and Sigma Assisted Living, reveals the data that follows the requirements for this problem for a recent 12-month period. Anton's uses activity-based costing to determine the cost of servicing its customers. The company had total delivery costs during the year of $576,000 and 8,000 deliveries, along with cost of $765,000 for the administrative processing of 90,000 invoices. Required: A. Compute the pool rates for deliveries and invoice processing. B. Compute the operating income that Anton's earned from these two customers. C. Compute the total of customer-related costs (deliveries and invoice processing) for each customer as a percentage of gross margin, and analyze the results for management. Explain any significant differences that you find.

Trayton Enterprises, which manufactures lawn mowers, recently installed a just-in-time purchasing system and an activity-based management program. Required: A. Determine whether the following items would be apt to increase or decrease as a result of the just-in-time system: 1. Inventory storage costs. 2. Number of suppliers used. 3. Number of raw material shipments handled. 4. Dollars available for alternative investment opportunities. 5. Quality of raw materials purchased. B. Identify the following items as value-added activities, non-value-added activities, or both. 1. Attaching the engine to the mower's body. 2. Installing a new air-conditioning system in the executive offices. 3. Replacing a defective wheel with a new wheel. 4. Designing and printing an owner's instruction manual for a new model. 5. Moving completed mowers to the finished-goods warehouse. 6. Attaching the handle to the mower's body. The process took longer than normal because of a worker slowdown caused by disgruntled employees.

In an activity-based costing system, direct materials used would typically be classified as a:

Traditional product-costing systems are structured on multiple, volume-based cost drivers.

Consumption ratios are useful in determining the existence of product-line diversity.

Fairchild, Inc., manufactures two products, Regular and Deluxe, and applies overhead on the basis of direct labor hours. Anticipated overhead and direct labor time for the upcoming accounting period are $1,600,000 and 25,000 hours, respectively. Information about the company's products follows. Regular- Estimated production volume: 3,000 units Direct materials cost: $28 per unit Direct labor per unit: 3 hours at $15 per hour Deluxe- Estimated production volume: 4,000 units Direct materials cost: $42 per unit Direct labor per unit: 4 hours at $15 per hour Fairchild's overhead of $1,600,000 can be identified with three major activities: order processing ($250,000), machine processing ($1,200,000), and product inspection ($150,000). These activities are driven by number of orders processed, machine hours worked, and inspection hours, respectively. Data relevant to these activities follow. Required: A. Compute the pool rates that would be used for order processing, machine processing, and product inspection in an activity-based costing system. B. Assuming use of activity-based costing, compute the unit manufacturing costs of Regular and Deluxe if the expected manufacturing volume is attained. C. How much overhead would be applied to a unit of Regular and Deluxe if the company used traditional costing and applied overhead solely on the basis of direct labor hours? Which of the two products would be undercosted by this procedure? Overcosted?

One of the important factors when selecting appropriate cost drivers is the ability to overcost related services.

Customer-profitability analysis uses activity-based costing to determine the activities, costs, and profit associated with serving particular customers.