Question 1

Which of the following rates would not be used to assign manufacturing overhead costs to products?

Accepted Answer

Facility rates are not typically used to assign manufacturing overhead costs to products. This is because facility costs, such as rent or property taxes, are not directly related to the production of a specific product or activity. Activity-based rates, plantwide rates, and departmental rates are all commonly used to assign manufacturing overhead costs to products.

Question 2

Cofission Electronics make small electronic parts. The management accountant at Cofission, Jasmine Vake, decides to implement an activity-based costing (ABC) system. She lists the following points to support her decision:
i. The recent cost report shows that the ratio of prime costs to manufacturing overhead cost is approximately 1:3.
ii. Cofission is a small company.
iii. Cofission has three product lines: basic parts (parts that are common to many products and many suppliers), customised parts (electronic parts that are highly customised to very specialised electric motors), prototypes (where Cofission Electronics need to design as well as manufacture these specialised electronic parts).
iv. Cofission Electronics has recently implemented a flexible manufacturing system; this practically eliminates any setup costs; with this system, product customisation takes very little additional time.
You are not convinced that all of the above points support Jasmine's decision. Which of the above points support the use of ABC in Cofission?

Accepted Answer

Activity-based costing (ABC) is most beneficial in environments where products consume resources differently, which is evident in point (i), where the high overhead cost suggests complexity in allocating costs, and in point (iii), where the diversity in product lines (basic parts, customized parts, and prototypes) indicates varying activities and resource consumption patterns. Point (ii), the company's size, and point (iv), the implementation of a flexible manufacturing system that reduces setup costs, do not inherently support the need for ABC.

Question 3

When moving from a traditional costing system to an activity-based system, there is a significant improvement in the accuracy of the product costs because:

Accepted Answer

Simple activity-based costing allocates overheads based on the cost per activity driver, resulting in more accurate allocation of manufacturing overheads to products. This means that by identifying and allocating costs based on the specific activities that create them, an activity-based costing system is able to provide a more accurate reflection of the actual costs associated with producing each product. This is a significant improvement over traditional costing systems, which often rely on less precise and less relevant cost drivers, such as direct labor hours or machine hours.

Question 4

As an organisation expands it is common for their product offering to become diversified. Explain the reasons that would cause management to change to an activity based costing system and the benefits that could be expected by the organisation.

Accepted Answer

The answer of As an organisation expands it is common...

Question 5

At a recent professional meeting, two accountants discussed product-costing problems in their respective companies. Both accountants are familiar with ABC systems but neither firm uses this method.
Accountant A reported that part of the problem in product costing in his firm is that there are major differences between product lines as to volume of units, utilisation of various activities, quality assurance requirements established by customers and size of the products. Accountant B noted that in her firm, which produces consumer products, all products undergo the same basic production processes and in the same sequence, but in an increasing variety of colours and packaging modes.
Both accountants are worried about the potential distortion of product costs under their traditional product costing systems.
Which accountant should be more concerned about the potential distortion? Explain.

Accepted Answer

The answer of At a recent professional meeting, two accountants...

Question 6

Twista Manufacturing has the following activities and activity costs per year: Machining ($20 000); Forklifting ($10 000); machine setup ($32 000), and quality inspection ($40 000). The operation starts with setting up the machines; each batch of products requires a different setup. This is followed by machining, where the cost of machining varies directly with the number of machine hours. Forklifts are used to move the work in progress around. Because quality is important, an inspection is carried out for each batch of products.
The following information is also available:
Number of machine hours per year: 20 000 machine hours
Number of forklift moves per year: 500 moves
Number of batches per year: 4000 batches
Each year, Twista Manufacturing produces 5000 units of Product X. These units of Product X require 5000 machine hours, 120 moves and 500 batches to produce. The direct materials and direct labour together cost $15 per unit of Product X.
Which of the following are the correct activity rates for machining and quality inspection?

Accepted Answer

To calculate the activity rates for machining and quality inspection, we need to divide the total activity cost for each activity by the total level of activity.

For machining:
Activity rate = Total machining cost / Total machine hours
Activity rate = $20,000 / 20,000 machine hours
Activity rate = $1 per machine hour

For quality inspection:
Activity rate = Total inspection cost / Total batches
Activity rate = $40,000 / 4,000 batches
Activity rate = $10 per batch

Therefore, the correct choice is D, with an activity rate of $1 per machine hour for machining and $10 per batch for quality inspection.

Question 7

Activity-based costing has the potential to improve the accuracy of product costs, however, it is important for management to understand its limitations. Identify and explain two limitations.

Accepted Answer

The answer of Activity-based costing has the potential to improve...

Question 8

Twista Manufacturing has the following activities and activity costs per year: Machining ($20 000); Forklifting ($10 000); machine setup ($32 000), and quality inspection ($40 000). The operation starts with setting up the machines; each batch of products requires a different setup. This is followed by machining, where the cost of machining varies directly with the number of machine hours. Forklifts are used to move the work in progress around. Because quality is important, an inspection is carried out for each batch of products.
The following information is also available:
Number of machine hours per year: 20 000 machine hours
Number of forklift moves per year: 500 moves
Number of batches per year: 4000 batches
Each year, Twista Manufacturing produces 5000 units of Product X. These units of Product X require 5000 machine hours, 120 moves and 500 batches to produce. The direct materials and direct labour together cost $15 per unit of Product X.
The machining costs and quality inspection costs allocated to each unit of Product X are:

Accepted Answer

Machining cost per machine hour = $20,000 / 20,000 machine hours = $1 per machine hour. Product X uses 5000 machine hours, so the machining cost per unit = $1. Quality inspection cost per batch = $40,000 / 4000 batches = $10 per batch. Product X requires 500 batches, so the quality inspection cost per unit = $10 / 500 units = $1.

Question 9

Activity based costing focuses on the cost of resources:

Accepted Answer

Activity based costing focuses on the cost of resources used, not simply the budgeted or committed costs. This method allocates costs to specific activities based on the resources they consume, providing a more accurate picture of costs than traditional costing methods that may allocate costs based on assumptions or averages. The goal is to identify and eliminate activities that are unnecessarily costly or do not contribute enough value to the overall operation.

Question 10

Twista Manufacturing has the following activities and activity costs per year: Machining ($20 000); Forklifting ($10 000); machine setup ($32 000), and quality inspection ($40 000). The operation starts with setting up the machines; each batch of products requires a different setup. This is followed by machining, where the cost of machining varies directly with the number of machine hours. Forklifts are used to move the work in progress around. Because quality is important, an inspection is carried out for each batch of products.
The following information is also available:
Number of machine hours per year: 20 000 machine hours
Number of forklift moves per year: 500 moves
Number of batches per year: 4000 batches
Each year, Twista Manufacturing produces 5000 units of Product X. These units of Product X require 5000 machine hours, 120 moves and 500 batches to produce. The direct materials and direct labour together cost $15 per unit of Product X.
The forklifting costs and machine set up costs allocated to Product X are:

Accepted Answer

The answer of Twista Manufacturing has the following activities and...

Question 11

Puff Animal Hospital looks after the health of household pets such as dogs, cats, birds and rabbits. The hospital wants to use an activity based costing system to allocate costs to each animal case it handles. These cases tend to vary in their complexity: some pets are here for a regular check ups and immunization; other pets have emergencies that require surgery. Some pets are very exotic and require the attention of the supervisor vet, others are common animals with common problems such that only the junior vets are needed. Puff Animal Hospital is quite large; on average there are five vets, a general assistant, and two receptionists on duty at one time.
Which of the following is an example of a facility sustaining activity for Puff Animal Hospital?

Accepted Answer

Facility sustaining activities are those that are necessary to keep the hospital running but do not directly contribute to the treatment of the animals. Cleaning the hospital is an example of a facility sustaining activity. The other choices describe activities directly related to treating the animals.

Question 12

Cofission Electronics make small electronic parts. The management accountant at Cofission, Jasmine Vake, decides to implement an activity-based costing (ABC) system. She lists the following points to support her decision:
i. The recent cost report shows that the ratio of prime costs to manufacturing overhead cost is approximately 1:3
ii. Cofission is a small company.
iii. Cofission has three product lines: basic parts (parts that are common to many products and many suppliers), customized parts (electronic parts that are highly customized to very specialized electric motors), prototypes (where Cofission Electronics need to design as well as manufacture these specialized electronic parts).
iv. Cofission Electronics has recently implemented a flexible manufacturing system; this practically eliminates any setup costs; with this system, product customization takes very little additional time.
You are not convinced that all of the above points support Jasmine's decision. Which of the above points contradict Jasmine's decision?

Accepted Answer

Point iv contradicts Jasmine's decision to implement ABC, as the implementation of a flexible manufacturing system eliminates any setup costs and therefore reduces the need for ABC. Point ii is not necessarily a contradiction but does not necessarily support Jasmine's decision either. Point i could potentially support the decision to implement ABC, as it suggests a higher proportion of overhead costs that could benefit from allocation through ABC, but it is not a clear contradiction. Therefore, the best choice is D.

Question 13

Plant, equipment and supervision that have been supplied in advance for use in production are known as:

Accepted Answer

The term "committed resources" is commonly used to refer to plant, equipment, and supervision that have been supplied in advance for use in production. These resources are already dedicated to the production process and cannot be easily diverted to other uses. Other options such as "supplied resources," "used resources," and "budgeted resources" do not accurately describe this concept.

Question 14

When introducing an activity-based costing system which of the following actions are recommended for the changeover to be successful?

Accepted Answer

All of the recommendations are necessary for a successful changeover to activity-based costing system. Increased involvement of non-accounting staff in the design and implementation stages ensures that the system is user-friendly and meets the needs of various departments. Preparation of a change management plan that considers behavioural issues helps to manage resistance to change and ensures a smooth transition. A bottom-up approach encourages buy-in from employees and allows them to see the benefits of the new system to their work. Therefore, all of the answers are recommended.

Question 15

Describe how assigning overhead costs differs under a simple activity-based product costing system from a traditional volume-based costing system.

Accepted Answer

The answer of Describe how assigning overhead costs differs under...

Question 16

Puff Animal Hospital looks after the health of household pets such as dogs, cats, birds and rabbits. The hospital wants to use an activity based costing system to allocate costs to each animal case it handles. These cases tend to vary in their complexity: some pets are here for a regular check ups and immunisation; other pets have emergencies that require surgery. Some pets are very exotic and require the attention of the supervisor vet; others are common animals with common problems such that only the junior vets are needed. Puff Animal Hospital is quite large; on average there are five vets, a general assistant, and two receptionists on duty at one time.
Which of the following is NOT a reason that supports the use of activity-based costing at Puff Animal Hospital?

Accepted Answer

While tracing the time spent by each vet on different animals may be a useful component of an activity-based costing system, it is not the only reason to adopt such a system. A better reason might be the fact that the hospital handles a variety of different activities for cases that vary in complexity or that it has a large number of indirect costs. The need to use different facilities depending on the type of animal case is also a valid reason to use activity-based costing.

Question 17

Twista Manufacturing has the following activities and activity costs per year: Machining ($20 000); Forklifting ($10 000); machine setup ($32 000), and quality inspection ($40 000). The operation starts with setting up the machines; each batch of products requires a different setup. This is followed by machining, where the cost of machining varies directly with the number of machine hours. Forklifts are used to move the work in progress around. Because quality is important, an inspection is carried out for each batch of products.
The following information is also available:
Number of machine hours per year: 20 000 machine hours
Number of forklift moves per year: 500 moves
Number of batches per year: 4000 batches
Each year, Twista Manufacturing produces 5000 units of Product X. These units of Product X require 5000 machine hours, 120 moves and 500 batches to produce. The direct materials and direct labour together cost $15 per unit of Product X.
The total cost for one unit of Product X is:

Accepted Answer

To calculate the total cost for one unit of Product X, we need to calculate the total cost of all the activities that go into producing one unit.

Total cost of machining:
Each unit of Product X requires 1 machine hour (5000 machine hours for 5000 units), and there are a total of 20,000 machine hours per year. So, the cost of machining for one unit of Product X is:

(1/20,000) * $20,000 = $1.00

Total cost of forklifting:
Each unit of Product X requires 0.024 forklift moves (120 moves for 5000 units), and there are a total of 500 moves per year. So, the cost of forklifting for one unit of Product X is:

(0.024/500) * $10,000 = $0.48

Total cost of machine setup:
Each unit of Product X requires 0.125 machine setups (500 batches for 4000 batches), and there are a total of 4000 batches per year. So, the cost of machine setup for one unit of Product X is:

(0.125/4000) * $32,000 = $1.00

Total cost of quality inspection:
Each unit of Product X requires 1 quality inspection, and there are 5000 units produced per year. So, the cost of quality inspection for one unit of Product X is:

(1/5000) * $40,000 = $8.00

Total cost of direct materials and direct labour:
The cost of direct materials and direct labour together is given as $15 per unit.

Adding up all the costs, we get:

$1.00 + $0.48 + $1.00 + $8.00 + $15.00 = $25.48

So, the total cost for one unit of Product X is $25.48.

However, we need to divide this by the number of units produced to get the cost per unit:

$25.48 / 5000 = $0.0051

Therefore, the total cost for one unit of Product X is $15.00 + $0.0051 = $18.28.

The best choice is B.

Question 18

When using average costs in activity-based costing, which of the following costs, are not divided by the number of units produced to estimate the cost per unit of product?

Accepted Answer

The answer of When using average costs in activity-based costing,...

Question 19

ABC is a methodology that can be as simple or as complex as the organisation wants it to be.

Accepted Answer

ABC (Activity-Based Costing) is a flexible methodology that can be implemented in a simple or complex manner depending on the needs and goals of the organization.

Question 20

Prepare a list of 14 possible indications that a new product costing system is likely to be needed.

Accepted Answer

The answer of Prepare a list of 14 possible indications...

Quiz 8: Activity-Based Costing