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Terminology
Advantage or Disadvantage
Cost Hierarchy
Calculation
Challenge
100
a product consumes a low level of resources per unit but is reported to have a high cost per unit.
What is product over-costing?
100
XZY factory makes automobiles. The company makes many models, but each car in a model line is quite similar with a few customizable options.
What is an advantage?
100
What are 4 levels of a cost hierarchy.
Batch level costs, output-unit costs, product or service sustaining costs, and facility sustaining costs
100
Determine the overhead rate for the direct labor allocation base. Be sure to use the proper cost pool. Cost Pools Allocation Base Assembly support: $50,000 Number of setups: 200 Machining support: $80,000 Machine hours: 2,000 Machine setups: $25,000 Design hours: 500 Design changes: $15,000 Direct labor cost: $75,000
What is $.6667= $50,000/$75,000
100
Describe 3 "tell-tale" signs that an ABC costing system is working.
Any 3 of the following: 1. Significant amounts of indirect costs are allocated using only one or two cost pools. 2. All or most indirect costs are identified as output-unit-level costs (i.e., few indirect costs are described as batch-level, product-sustaining, or facility-sustaining costs). 3. Products make diverse demands on resources because of differences in volume, process steps, batch size, or complexity. 4. Products that a company is well suited to make and sell show small profits, whereas products that a company is less suited to produce and sell show large profits. 5. Operations staff has significant disagreements with the accounting staff about the costs of manufacturing and marketing products and services.
200
The basis used to allocate each of the activity cost pools.
What are cost drivers?
200
Unique chair company makes custom ordered chairs. Each chair is a unique product not the same as any other chair.
What is an advantage?
200
Costs for designing processes, drawing process charts, and making engineering changes for individual products
What is product-sustaining costs?
200
Determine the overhead rate for the machine hours allocation base. Be sure to use the proper cost pool. Cost Pools Allocation Base Assembly support: $50,000 Number of setups: 200 Machining support: $80,000 Machine hours: 2,000 Machine setups: $25,000 Design hours: 500 Design changes: $15,000 Direct labor cost: $75,000
What is $40/ machine hour. $80,000/2,000= 40
200
How do managers cost products or services using ABC systems?
In ABC, costs of activities are used to assign costs to other cost objects such as products or services based on the activities the products or services consume.
300
If a company under-costs one of its products, it will over-cost one or more other products.
What is product-cost cross-subsidization?
300
Pepsi Co. only produces Pepsi in 20oz bottles. Each bottle uses the same amount of DM, DL, and MOH.
What is disadvantage?
300
This cost is associated with plant management, plant rent, and plant insurance.
What is facility sustaining-costs?
300
Determine the overhead rate for the number of setups allocation base. Be sure to use the proper cost pool. Cost Pools Allocation Base Assembly support: $50,000 Number of setups: 200 Machining support: $80,000 Machine hours: 2,000 Machine setups: $25,000 Design hours: 500 Design changes: $15,000 Direct labor cost: $75,000
What is $125 per setup. $25,000/200 setups.
300
What is the difference between ABC costing and the simplified costing.
The ABC system differs from the simple system by its fundamental focus on activities. The ABC system typically has more-homogenous indirect cost pools than a simple system, and more cost drivers are used as cost-allocation bases.
400
The use of activity-based costing information to improve business performance by reducing costs and improving processes.
What is activity based management?
400
Gadgets, Inc. makes gadgets. There are few overhead costs associated with making the gadgets, and each gadget is exactly the same.
What is disadvantage?
400
Costs incurred to set-up machines each time a different product needs to be manufactured.
What is batch-level costs?
400
Determine the overhead rate for the design hours allocation base. Be sure to use the proper cost pool. Cost Pools Allocation Base Assembly support: $50,000 Number of setups: 200 Machining support: $80,000 Machine hours: 2,000 Machine setups: $25,000 Design hours: 500 Design changes: $15,000 Direct labor cost: $75,000
What is $30/design change. $15,000/500
400
ABC systems that use available time to calculate the cost of a resource and to allocate the costs to cost objects.
What are time-driven activity-based costing systems?
500
A system that reduces the use of broad averages for assigning the cost of resources to cost objects, such as jobs, products, and services, and provides better management of the costs of indirect resources used by the different cost objects, no matter how differently various cost objects use indirect resources.
What is a refined cost system?
500
Apple's current product line.
What is advantage?
500
Cost of indirect materials
What is unit-output level costs?
500
Job 19 required $10,000 for DM, $4,000 for DL, 300 DL hours, 150 machine hours, 3 setups, and 5 design changes. The cost pools and overhead rates for each pool follow: Cost Pool Overhead Rate DL support $10/DL hour Machining support $15/machine hour Machine setups $350/setup Design changes $700/design change Determine the cost of Job 19.
DM-$10,000 DL-$4,000 DL support- $10* 300= $3000 Machining support- $15*150= $2250 Machine setups- $350*3= $1050 Design changes- $700*5- $3500 Total= $23,800
500
What steps must a company take to successfully employ ABC costing?
1. Identify non-volume related factory activities that create costs. 2. Estimate the cost of performing each of these activities in the upcoming period. 3. Choose the cost driver that will be used. 4. The estimated cost in each activity pool is divided by the estimated number of cost driver units. 5. Charge each product or job based on its consumption of resources.