Question 1

Activity-based costing is not appropriate for service providers since they do not have manufacturing overhead that needs to be assigned to products.Although service providers do not have manufacturing overhead,they incur many indirect costs,such as rent,supplies,supervision,advertising,and administrative expenses.ABC can be used to assign these costs to different services and customers.

Accepted Answer

Activity-based costing (ABC) is appropriate for service providers as it helps assign indirect costs to services and customers, improving cost accuracy and decision-making.

Question 2

The first step in ABC is to calculate a manufacturing overhead rate.The first step in ABC is to identify the activities required to make the product or provide the service,so indirect costs can be assigned to them.

Accepted Answer

The first step in Activity-Based Costing (ABC) is to identify the activities involved in the production process, not to calculate a manufacturing overhead rate.

Question 3

The only difference between a volume-based cost system and an ABC system is how the methods assign indirect costs to products.Both systems trace direct costs to products;the only difference is how they treat indirect costs.

Accepted Answer

This statement is true. A volume-based cost system and an ABC system both trace direct costs to products, but they differ in how they assign indirect costs. Volume-based cost systems typically use a single predetermined overhead rate based on a volume driver, such as direct labor hours or machine hours, to allocate indirect costs to products. ABC systems use multiple cost pools and activity drivers to more accurately allocate indirect costs to products based on the specific activities that consume those costs.

Question 4

In target costing,the target cost should be determined before manufacturing ever starts.Determining cost before manufacturing starts enables the firm to better plan manufacturing costs.

Accepted Answer

Target costing is a cost management tool used by companies to control costs while producing quality products. Target cost is calculated by deducting a desired profit margin from the expected selling price. This target cost should be determined before manufacturing starts as it allows the company to plan its manufacturing process according to the set cost target. This helps in ensuring that cost overruns are avoided during production and the final product is delivered at the expected price.

Question 5

A volume-based allocation measure is directly related to the number of units produced or the number of customers served.Units produced and customers served are measures of volume.

Accepted Answer

A volume-based allocation measure is determined by the volume of production or number of customers served, hence it is directly related to units produced or customers served.

Question 6

To compute an activity rate,divide the total activity cost by the total activity driver.This is the formula for an activity rate.

Accepted Answer

This formula is correct for computing an activity rate.

Question 7

Life cycle cost management involves analyzing the functionality of the product to determine which functions add value to the customer and then finding ways to deliver those functions while meeting the target cost.Value engineering involves analyzing the functionality of the product to determine which functions add value to the customer and then finding ways to deliver those functions while meeting the target cost.

Accepted Answer

The answer of Life cycle cost management involves analyzing the...

Question 8

Internal failure costs result from defects that are caught before the product is shipped to the customer.This is the definition of internal failure costs.

Accepted Answer

Internal failure costs occur when defects are identified and corrected before the product is shipped to the customer, therefore the definition is true.

Question 9

When forming activity cost pools,the goal is to create as few cost pools as possible,while still capturing major activities.Minimizing cost pools while still capturing major activities keeps the cost system manageable.

Accepted Answer

This statement is true. By minimizing cost pools while still capturing major activities, the cost system can be kept manageable and efficient. However, it is important to ensure that all major activities are captured in the cost pools to ensure accurate allocation of costs.

Question 10

A just-in-time (JIT)system is a demand-push system.JIT is a demand-pull system in which materials and products are pulled through the manufacturing system based on customer demand.

Accepted Answer

The statement in the question is incorrect. JIT is a demand-pull system where materials and products are pulled based on customer demand, not demand-push.

Question 11

To assign activity costs using the activity proportion method,multiply the activity rate by the activity requirements of each individual product.To assign activity costs using the activity proportion method,multiply the total activity cost by the activity proportion for each product.

Accepted Answer

The answer of To assign activity costs using the activity...

Question 12

Activity based costing systems include non-volume-based cost drivers.ABC systems should also include measures that capture factors other than volume,or non-volume based cost drivers.

Accepted Answer

ABC systems use non-volume-based cost drivers to allocate indirect costs to products or services. These non-volume-based cost drivers may include activities, such as setup time, quality inspections, or design changes, that consume resources but are not directly related to production volume or units produced. Including these non-volume-based cost drivers in the ABC system provides a more accurate picture of the actual costs of producing a product or providing a service.

Question 13

Target costing involves determining what the product price must be in order to meet the target cost and still provide a profit for the company's shareholders.Target costing involves determining what the product's cost must be,given its market price and desired profit.

Accepted Answer

The first sentence is a better definition of target costing, while the second sentence describes cost-plus pricing.

Question 14

A value-added activity is one that enhances the perceived value of the product or service to the customer.This is the definition of a value-added activity.

Accepted Answer

This statement accurately defines a value-added activity as one that increases the perceived value of the product or service to the customer.

Question 15

The gross margin is calculated by subtracting total nonmanufacturing cost per unit from the unit sales price.The gross margin is calculated by subtracting the total manufacturing cost per unit from the unit sales price.

Accepted Answer

The gross margin is calculated by subtracting the total manufacturing cost per unit from the unit sales price.

Question 16

Prevention costs are incurred to prevent quality problems from occurring in the first place.This is the definition of prevention costs.

Accepted Answer

Prevention costs are incurred to prevent quality problems from occurring in the first place, and this is a true statement. These costs are proactive measures taken to avoid defects or non-conformance in products or services, and include activities such as employee training, equipment maintenance, and quality planning.

Question 17

Each individual indirect cost should be assigned to one activity when forming activity cost pools.Some costs will need to be allocated among several activities.

Accepted Answer

The answer of Each individual indirect cost should be assigned...

Question 18

Activity based management is a method of assigning indirect costs to products or services based on the activities they require.This describes activity based costing,not activity based management.

Accepted Answer

Activity based management is a broader concept that includes the use of activity based costing, but also involves optimizing processes, identifying value-added activities, and making improvements to increase efficiency and profitability.

Question 19

External failure costs occur before a defective product makes its way into the hands of the customer.External failure costs occur after a defective product makes its way into the hands of the customer.

Accepted Answer

External failure costs occur after a defective product has been delivered to the customer, not before.

Question 20

Activity Based Costing divides activities into two categories: unit-level activities and facility level activities.Activity Based Costing divides activities into four categories.

Accepted Answer

Activity Based Costing typically divides activities into four categories: unit-level activities, batch-level activities, product-level activities, and facility-level activities.

Quiz 4: Activity-Based Costing and Cost Management