Answers

[Solved] Because indirect costs cannot be directly traced to specific products or services.

Page:of 31 Automatic Zoom Actual Size ... [Show More] Page Fit Page Width 50% 75% 100% 125% 150% 200% 300% 400% Chapter 04 - Activity Based Cost Management Chapter 4 Activity Based Cost Management ANSWERS TO QUESTIONS 1. An allocation base is an observable measure used to assigned costs to products because indirect costs cannot be directly traced to specific products or services. 2. Volume-based measures include drivers such as machine hours and direct labor hours which increase in proportion to increases in production volume. Non- volume drivers do not vary with production volume and include items such as number of batches or square footage of the facility. 3. In the traditional cost system, indirect costs are assigned on the basis of volume- based allocation measures such as direct labor hours or machine hours regardless of whether they are incurred relative to that volume-based measure. 4. Traditional costing systems tend to over-cost high volume products and under- cost low volume products that are often more complex to produce. 5. Businesses that produce a variety of products or services that differ in production volume, resources consumed, and/or attention required during the manufacturing process would be candidates for activity based costing. 6. Activity Based Costing (ABC) assigns indirect costs to products and services based on the activities they require. Costs are assigned to various activity pools and then products are “charged” for the activities they consume. Traditional costing systems allocate overhead strictly on the basis of volume using cost drivers such as direct labor hours or machine hours. 7. ABC uses a two-stage process in which indirect costs are first assigned to activities, and then assigned to individual products and services based on their activities requirements. 8. The categories of activity pools include facility level, product level, customer level, batch level and unit level. 9. Activity based costing (ABC) classifies costs into different categories because some costs are related to production volume while others are not. Thus, ABC groups costs on the basis of level (unit, batch, product, customer or facility) and appropriate cost drivers. 4- 1 Chapter 04 - Activity Based Cost Management 10. Facility level – company payroll; customer level – customer design changes; product level – architectural drawing for a particular floor plan; batch – paving costs for a planned community; unit level – inspection costs 4- 2 Chapter 04 - Activity Based Cost Management 11. The activity rate method involves computing an activity rate by dividing the total cost pool by the estimated amount of allocation base. This activity rate is then multiplied by the amount of allocation base consumed by each product. The activity proportion method assigns activity costs to individual products by calculating the proportion of the total cost driver consumed by each product line. 12. Activity based management (ABM) encompasses all of the actions that managers take to improve operations or reduce costs based on the ABC data. To get benefits of ABC, managers must use it to manage the underlying activities and identify activities that would benefit from process improvements. 13. Benchmarking is a process in which managers can compare their own activity rates to other firms in the industry, or to the best performing firms in other industries. Benchmarking can be used to pinpoint areas where the company is ahead or behind the competition, and provides managers with incentives to improve their own operations. 14. A non-value-added activity is one that, if eliminated, would not reduce the value of the product or service in the eyes of the customer. For a construction company, a value-added activity would be installation of the carpet or plumbing. A non-value-added activity would be costs of storing components of the house such as cabinetry or appliances prior to their installation. 15. The four types of quality costs are prevention costs, appraisal or inspection costs, internal failure costs, and external failure costs. 16. Target costing determines what the product’s cost must be in order to meet the market price and still provide a profit for the company's shareholders. It is also sometimes called cost planning because it requires managers to think about costs "up-front" so that they can design and manufacture products to a cost that will satisfy both customers (through the market price) and shareholders (through a target profit). 17. In a JIT system, materials are purchased and units are made only as they are needed to satisfy customer demand. JIT is a "demand pull" system, where materials and products are pulled through the manufacturing system based on customer demand, as opposed to a traditional manufacturing setting where products are pushed through the system and often end up sitting in inventory. The primary benefit of JIT is the elimination of inventory storage costs which are a non-value-added activity. 18. Advantages of activity based costing include more accurate product costing and better information about different products’ relative consumption of manufacturing resources. The primary disadvantage is the complexity of ABC and the effort needed to determine multiple cost pools and cost drivers. 4- 3 [Show Less]

Preview 4 out of 31 pages