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MBA 613 Chapter 6

Terms in this set (15)

Activity-Based Costing (ABC) is a two-stage method of cost assignment that assigns overhead costs to key activities, and then assigns those costs to products or services based on their use of those activities. True or False?
True
ABC is particularly useful when product lines differ greatly in volume and in manufacturing complexity. True or False?
True
Which of the following procedures best describes activity-based costing?
a) All overhead costs are recorded as expenses as incurred.
b) Overhead costs are assigned directly to products.
c) Overhead costs are assigned to activities; then costs are assigned to products.
d) Overhead costs are assigned to departments; then costs are assigned to products.
c) Overhead costs are assigned to activities; then costs are assigned to products.
Sunflower, Inc. uses activity-based costing. The company produces two products, A and B. Information relating to the two products is as follows:

Units produced
A 19,000
B 25,000
Machine-hours
A 7,500
B 8,500
Direct labor-hours
A 8,000
B 12,000
Materials handling (number of moves)
A 4,000
B 6,000
Setups
A 5,000
B 7,000


The following costs are reported:

Materials handling
$160,000
Labor-related overhead
480,000
Setups
300,000

Setup costs assigned to B are:


a) $140,000
b) $112,000:
c) $175,000
d) $144,000
c) $175,000
Total setup costs of $300,000 / 12,000 total setups = $25 per set up. Product B setups of 7,000 x $25 = $175,000.
Which of the following is a true characteristic of activity-based costing?
a) Activity-based costing uses a smaller number of cost pools than does organizational-based costing.
b) Relative to traditional costing methods, activity-based costing is more concerned with identifying processes and less concerned with causal factors of overhead costs.
c) Activity-based costing removes the use of judgment from the allocation process.
d) Activity-based costing cannot be used to assign costs unless the activity cost drivers of those costs are identified.
d) Activity-based costing cannot be used to assign costs unless the activity cost drivers of those costs are identified.
Assume that total costs assigned to the setup activity cost pool in June are $60,000 and 50 setups were completed in June. Further, assume that during June machines were setup 10 times to make product K12. The total setup cost that would be assigned to product K12 would be:

a) $1,600
b) $12,000
c) $24,000
d) cannot be determined
b) $12,000

$60,000/ (50 setups/10 times) = $12,000
The following information is available pertaining to Ian Division that uses a plantwide overhead rate based on machine hours:

Mixing Dept.
Finishing Dept.
Total
Overhead
MD $30,000
FD $73,500
Total $103,500
Direct labor-hours
MD 4,000
FD 1,250
Total 5,250
Machine-hours
MD 1,500
FD 3,000
Total 4,500

Production information pertaining to Job 302:


Mixing Dept.
Finishing Dept.
Total
Prime costs
MD $5,000
FD $ 0
Total $5,000
Direct Labor-hours
MD 125
FD 0
Total 125
Machine-hours
MD 5
FD 4
Total 9
Units produced
MD 250
FD 0
Total 250

What are the total overhead costs assigned to Job 302?

a) $240
b) $207
c) $360
d) $180
b) $207

The plantwide rate for Evan is $103,500 of overhead / 4,500 machine hours = $23 per machine hour. The number of machine hours used to produce Job 501 was 9 hours x $23 per machine hour of overhead = $207 of overhead assigned to Job 302.
Which of the following product costing methods produces the most precise product costing information?
a) Activity-based costing
b) Departmental overhead rate methods
c) Organization-based costing
d) Plantwide overhead rates
a) Activity-based costing
Activity-based costing is a technique for more precisely measuring the cost and profitability of:
a) Products
b) Customers
c) Distribution channels
d) All of the above
d) All of the above
Which of the following aspects of manufacturing must be understood in order to implement activity based costing in a production setting?
a) The production process
b) The activities that occur in the production process must be known
c) The cost drivers that generate activities within the production process
d) All of the above
d) All of the above
Which of the following statements describes the typical effect of creating a large number of refined activity cost pools for a given costing application?
a) A complex ABC system with numerous cost pools provides substantial cost improvement over a smaller system with only seven to ten cost pools.
b) A system containing a large number of cost pools will not tend to exhibit substantial cost accuracy over a system containing seven to ten cost pools.
c) With the aid of a computer, every public company should strive to develop as many cost pools as possible because there is virtually no disadvantage of so doing.
d) Employees normally develop a deep appreciation for the complexity of a large, tedious ABC system.
b) A system containing a large number of cost pools will not tend to exhibit substantial cost accuracy over a system containing seven to ten cost pools.
Activity-based costing systems tend to _____________________ high-volume, low-complexity products.
a) Undercost
b) Overcost
c) Accurately Cost
d) None of the above
c) Accurately Cost
Although adding more activity cost pools to an activity-based costing system may improve the precision of product costing, this increase in precision must be judged against:
a) The cost of the product
b) The price of the product
c) The cost of developing and maintaining the additional cost pools
d) All of the above
c) The cost of developing and maintaining the additional cost pools
Deca Electronics Company produces two products, Resistors and Transistors in a small manufacturing plant which had total manufacturing overhead of $21,000 in June and used 300 direct labor hours. The factory has two departments, Design, which incurred $10,000 of manufacturing overhead, and Production which incurred $11,000 of manufacturing overhead. Design used 200 hours of direct labor and Production used 80 machine hours.

During June, 150 direct labor hours were used in making 100 units of Resistors, and 150 direct labor hours were used in making 100 units of Transmitters.

If Deca Electronics Company uses a plantwide rate based on direct labor hours to assign manufacturing costs to products, the total manufacturing overhead assigned to each unit of Resistors and Transistors in June were:

a) $105 for Resistors and $105 for Transistors
b) $225 for Resistors and $225 for Transistors
c) $250 for Resistors and $200 for Transistors
d) $107.14 for Resistors, and $42.86 for Transistors
a) $105 for Resistors and $105 for Transistors

$21,000 / 300 direct labor hours = $70 overhead rate

Resistors 150 direct labor hours x $70 = $10,500 / 100 units = $105 MOH per unit

Transistors: 150 direct labor hours x $70 = $10,500 / 100 units = $105 MOH per unit.
Deca Electronics Company produces two products, Resistors and Transistors in a small manufacturing plant which had total manufacturing overhead of $21,000 in June and used 300 direct labor hours. The factory has two departments, Design, which incurred $10,000 of manufacturing overhead, and Production which incurred $11,000 of manufacturing overhead. Design used 200 hours of direct labor and Production used 80 machine hours.

During June, 150 direct labor hours were used in making 100 units of Resistors, and 150 direct labor hours were used in making 100 units of Transmitters.

If Deca Electronics Company uses a plantwide rate based on direct labor hours to assign manufacturing costs to products, the total manufacturing overhead assigned to each unit of Resistors and Transistors in June were:

a) $ 50 per direct labor hour for both Design and Production
b) $ 62.50 per direct labor hour for Design, and $125 per machine hour for Production
c) $125 per direct labor hour for Design, and $62.50 per machine hour for Production
d) $ 50 per direct labor hour for Design, and $137.50 per machine hour for Production
d) $ 50 per direct labor hour for Design, and $137.50 per machine hour for Production

Design Dept.: $10,000 / 200 = $50.00; Processing Dept.: $11,000 / 80 = $137.50
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