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Exam 8: Activity-Based Management and Activity-Based Costing

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Question 91

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Activities are at the heart of both ABM and ABC.

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Question 92

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Answer the following questions using the information below: The Sparky Electrical Products Company has an Electric Mixer Division and an Electric Lamp Division.Of a $30 000 000 bond issue,the Electric Mixer Division used $21 000 000 and the Electric Lamp Division used $9 000 000 for expansion.Interest costs on the bond totalled $1 500 000 for the year. -What amount of interest costs should be allocated to the Electric Mixer Division?

A) $4 300 000
B) $1 050 000
C) $450 000
D) $21 000 000

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Question 93

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ABC costing systems are primarily for use in manufacturing and marketing and not for design engineering.

Which of the following illustrates a purpose for allocating costs to cost objects?

Traditional systems are capable of producing reasonably accurate costs,but only under certain conditions.

Answer the following questions using the information below: Geelong Publishing has contracts to complete weekly supplements required by 46 customers.For the year 2018,manufacturing overhead cost estimates total $420 000 for an annual production capacity of 12 million pages. For 2018,Geelong Publishing has decided to evaluate the use of additional cost pools.After analysing manufacturing overhead costs,it was determined that the number of design changes,set-ups and inspections are the primary manufacturing overhead cost drivers.The following information was gathered during the analysis: $\begin{array} { l r r } \text { Cost Pool } & \text { Manufacturing Overhead Costs } & \text { Activity Level } \\ \text { Design changes } & \$ 60000 & 400 \text { design changes } \\ \text { Set-ups } & 320000 & 8000 \text { set-ups } \\ \text { Inspections } & 40000 & 8000 \text { inspections } \\ \text { Total manufacturing overhead costs } & \$ 420000 & \end{array}$ During 2018, two customers, Kidscare Books and Biodata Research, are expected to use the following printing services: $\begin{array} { l r r } \text { Activity } & \text { Kid scare Books } & \text { Biodata Research } \\ \text { Pages } & 60000 & 76000 \\ \text { Design changes } & 10 & 0 \\ \text { Set-ups } & 20 & 10 \\ \text { Inspections } & 30 & 38 \end{array}$ -When costs are assigned using the single cost driver,number of pages printed,then:

Once a cost pool has been established,it should not need to be revisited or revised.

Some well-known companies have achieved significant benefits from ABC systems with relatively few cost drivers.

Explain how activity-based costing systems can provide more accurate product costs than traditional cost systems. _____________________________________________________________________________________________ _____________________________________________________________________________________________

Answer the following questions using the information below: Kosciuszko Land and Snow Company provides the following ABC costing information: $\begin{array}{l}\begin{array} { l r c } \text { Activities } & \text { Total Costs } & \text { Activity-cost Drivers } \\\text { Labour hours } & \$ 240000 & 12000 \text { hours } \\\text { Fuel } & \$ 27000 & 9000 \text { litres } \\\text { Invoices } & \$ 30000 & 3750 \text { invoices } \\ { \text { Total costs } } & \$ 1912000 &\end{array}\\\\\text { The above activities used by their three departments are: }\\\\\begin{array} { l c c c } & \text { Lawn Department } & \text { Bush Department } & \text { Ploughing Department } \\\text { Labour hours } & 2500 \text { hours } & 1200 \text { hours } & 4300 \text { hours } \\\text { Fuel } & 1500 \text { litres } & 800 \text { litres } & 3700 \text { litres } \\\text { Invoices } & 1600 \text { invoices } & 400 \text { invoices } & 500 \text { invoices }\end{array}\end{array}$ -How much of the fuel cost will be assigned to the Ploughing Department?

Answer the following questions using the information below: Geelong Publishing has contracts to complete weekly supplements required by 46 customers.For the year 2018,manufacturing overhead cost estimates total $420 000 for an annual production capacity of 12 million pages. For 2018,Geelong Publishing has decided to evaluate the use of additional cost pools.After analysing manufacturing overhead costs,it was determined that the number of design changes,set-ups and inspections are the primary manufacturing overhead cost drivers.The following information was gathered during the analysis: $\begin{array} { l r r } \text { Cost Pool } & \text { Manufacturing Overhead Costs } & \text { Activity Level } \\ \text { Design changes } & \$ 60000 & 400 \text { design changes } \\ \text { Set-ups } & 320000 & 8000 \text { set-ups } \\ \text { Inspections } & 40000 & 8000 \text { inspections } \\ \text { Total manufacturing overhead costs } & \$ 420000 & \end{array}$ During 2018, two customers, Kidscare Books and Biodata Research, are expected to use the following printing services: $\begin{array} { l r r } \text { Activity } & \text { Kid scare Books } & \text { Biodata Research } \\ \text { Pages } & 60000 & 76000 \\ \text { Design changes } & 10 & 0 \\ \text { Set-ups } & 20 & 10 \\ \text { Inspections } & 30 & 38 \end{array}$ -Using the three cost pools to allocate overhead costs,what is the total manufacturing overhead cost estimate for Kidscare Books during 2018?

Smaller cost distortions occur when the traditional system's single indirect-cost rate and the activity-cost-driver rates:

________ are at the heart of both ABM and ABC.

Activity-based management focuses on observing and analysing activities as a basis for making a range of decisions,including pricing outputs,deciding on output mix,how to reduce costs,how to improve processes,product design,profitability and customer satisfaction.

Answer the following questions using the information below: Warne Limited manufactures remote controls.Currently,the company uses a plant-wide rate for allocating manufacturing overhead.The plant manager believes it is time to refine the method of cost-allocation and has the accounting department identify the primary production activities and their cost drivers: $\begin{array} { l r r } \text { Activities } & \text { Cost Driver } & \text { Allocation Rate } \\\text { Material handling } & \text { Number of parts } & \$ 3 \text { per part } \\\text { Assembly } & \text { Labour hours } & \$ 30 \text { per hour } \\\text { Inspection } & \text { Time at inspection station } & \$ 4.50 \text { per minute }\end{array}$ The current traditional cost method allocates overhead based on direct manufacturing labour hours using a rate of $200 per labour hour. -What are the indirect manufacturing costs per remote control assuming the traditional method is used and a batch of 500 remote controls is produced? The batch requires 1000 parts,10 direct manufacturing labour hours and 15 minutes of inspection time.

ABC assumes all costs are ________ because over the long run management can adjust the amount of resources employed.

Managers set cost reduction targets in terms of reducing the cost per unit of the activity:

To calculate the activity-driver rate,the total cost of resources in the form of indirect costs,including personnel,supervision,insurance,space occupancy,technology and supplies,is divided by ________ capacity.

From a purely ________ standpoint,department rates and activity-cost-driver rates will give the same product costs if significant costs are incurred for different activities within a department but different outputs use resources from the different activities in the same proportions.

Department-costing systems are a further refinement of ABC systems.