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Exam 5: Activity-Based Costing and Activity-Based Management

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Question 1

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Dalrymple Company produces a special spray nozzle. The budgeted indirect total cost of inserting the spray nozzle is $68,750. The budgeted number of nozzles to be inserted is 11,000. What is the budgeted indirect cost allocation rate for this activity?

A) $0.16
B) $0.32
C) $1.16
D) $6.25

E) All of the above
F) A) and B)

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Question 2

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Johnson Superior Products Inc. produces hospital equipment and the setup requirements vary from product to product. Johnson produces its products based on customer orders and uses ABC costing. In one of its indirect cost pools, setup costs and distribution costs are pooled together. Costs in this pool are allocated using number of customer orders for the easiness of costing operations. Based on the information provided, which of the following arguments is valid?

A) Johnson has clearly failed to identify as many direct costs as is economically feasible.
B) All costs in a homogeneous cost pool have the same or a similar cause-and-effect relationship with the single cost driver that is used as the cost-allocation base for Johnson.
C) Johnson has unnecessarily wasted resources by classifying setup and distribution costs as they could have been considered as direct costs.
D) Johnson has failed to use the correct cost driver as the cost-allocation base for setup costs.

E) C) and D)
F) B) and D)

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Question 3

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Service companies, in particular, find great value from ABC because a vast majority of their cost structure is composed of ________ costs.

Activity-based costing (ABC) can eliminate cost distortions because ABC systems ________.

Answer the following questions using the information below: Chess Woods Limited produces two products: wooden chess pieces and wooden inlaid chess boards. Under their traditional cost system using one cost driver (direct manufacturing labor hours) , the cost of a set of wooden chess pieces is $325.00. An analysis of the activities and their costs revealed that three cost drivers would be used under a new ABC system. These cost drivers would be equipment usage, storage area for the material, and type of woods used. The new cost of a set of chess pieces was determined to be $298.00 per set. -The goal of a properly constructed ABC system is to ________.

Which of the following is a sign that an ABC system may be useful for an organization?

Companies often use costing systems that have features of ABC systems but that do not emphasize individual activities.

Nichols Inc. manufactures remote controls. Currently the company uses a plant-wide rate for allocating manufacturing overhead. The plant manager is considering switching-over to ABC costing system and has asked the accounting department to identify the primary production activities and their cost drivers which are as follows: The current traditional cost method allocates overhead based on direct manufacturing labor hours using a rate of $30 per labor hour. Nichols' management is considering to implement ABC system because ________.

Implementing activity-based costing system involves use of different cost rates for different activities to compute indirect costs of a product.

Rachel's Pet Supply Corporation manufactures two models of grooming stations, a standard and a deluxe model. The following activity and cost information has been compiled: Assume a traditional costing system applies the $160,000 of overhead costs based on direct labor hours. a.What is the total amount of overhead costs assigned to the standard model? b.What is the total amount of overhead costs assigned to the deluxe model? Assume an activity-based costing system is used and that the number of setups and the number of components are identified as the activity-cost drivers for overhead. c.What is the total amount of overhead costs assigned to the standard model? d.What is the total amount of overhead costs assigned to the deluxe model? e.Explain the difference between the costs obtained from the traditional costing system and the ABC system. Which system provides a better estimate of costs? Why?

Answer the following questions using the information below: Eagle Eye Company produces two types of lenses-L7 and L9. What is the total indirect costs (a) under ABC system?

Aqua Company produces two products-Alpha and Beta. Alpha has a high market share and is produced in bulk. Production of Beta is based on customer orders and is custom designed. Also, 55% of Beta's cost is shared between design and setup costs, while Alpha's major portions of costs are direct costs. Alpha is using a single cost pool to allocate indirect costs. Which of the following statements is true of Aqua?

How does ABC costing system help service companies?

Extreme Manufacturing Company provides the following ABC costing information: The above activities are used by Departments A and B as follows: How much of the account inquiry cost will be assigned to Department A?

Nichols Inc. manufactures remote controls. Currently the company uses a plant-wide rate for allocating manufacturing overhead. The plant manager is considering switching-over to ABC costing system and has asked the accounting department to identify the primary production activities and their cost drivers which are as follows: The current traditional cost method allocates overhead based on direct manufacturing labor hours using a rate of $600 per labor hour. What are the indirect manufacturing costs per remote control assuming an activity-based-costing method is used and a batch of 100 remote controls are produced? The batch requires 460 parts, 5 direct manufacturing labor hours, and 18 minutes of inspection time.

Stark Corporation has two departments, Car Rental and Truck Rental. Central costs may be allocated to the two departments in various ways. If the facility lease expense of $380,000 is allocated on the basis of vehicles in the fleet, the amount allocated to the Truck Rental Department would be ________. (Do not round interim calculations. Round the final answer to the nearest whole dollar.)

Increased used of automation, computer integrated manufacturing, and utilization of robots have lead to an increase in indirect costs relative to direct costs.

ABC costing systems cannot be used in marketing decisions.

Columbus Company provides the following ABC costing information: The above activities used by their three departments are: How much of the gas cost will be assigned to the Lawn Department?

Activity-based costing information can be used for ________.