She is evaluated based on meeting a cost budget established at the beginning of the fiscal year, which does not include the cafeteria allocation, and she clearly has an incentive to minimize costs. Activity-Based Costing and Activity-Based Management.
Since V1 is a small, low volume product and V3 is a large, high volume product, the direction of the resulting cost distortions is easy to predict. Cost drivers and activity drivers are essentially the same. A driver is an underlying cause of a cost. Normally, whatever drives an activity also drives the costs of the activity. Conceptually, there are primary drivers and secondary drivers. A primary driver represents the initial cause of an activity.
$125 per inspection. $145 per inspection. $116 per inspection. $100 per inspection. Which of the following statements is false regarding first-stage and second-stage cost allocation methods? The basic difference between a first-stage cost allocation and a second-stage cost allocation is that cost pools are not used in first-stage cost allocations. Predetermined overhead rates are used in first-stage cost allocations but not in second-stage cost allocations.
A number of methods can be used to assist in the cost allocation process. For example, the cost of service departments can be allocated to production departments using the direct method.
Use the pool rates to compute per unit overhead costs for the two products. Customer-level activity. Is an activity that relates to specific customers, not specific products. Examples of customer-level activities include IT support, sales calls, sales visits, and catalog mailings. The activities that cause costs to be incurred are also called cost drivers. An entity, such as a particular product, service, or department, to which a cost is assigned is called a cost object.
Discover how to select an appropriate cost structure for CVP, understanding how operating leverage can affect the final decision. Activities are the movements of the company that results in a cost to be incurred. In activity-based costing, it is used to allocate the cost incurred during the period into the cost objects. Organization-sustaining activities are those actions taken to maintain the operations of a business. For example, a company must pay property taxes, utilities, and insurance, irrespective of what it does to produce goods for sale or provide services to customers. Product-sustaining activities are performed as needed to support the production of each different type of product.
We will not dwell on this controversy except to note that it is one of the many unresolved issues in accounting. Are required to produce batches of products and include items such as machine setups and quality inspections. These costs can be changed over a shorter time horizon than product- and facility-level activities and are driven by the number of batches run rather than the number of units produced. For example, a batch can consist of producing 5 units or 10,000 units. The costs in this category are driven by the number of batches, not the number of units in each batch. Costing refers to the estimation of costs or expenses related to the production of a commodity or the delivery of a service.
Such costs are generally the production costs incurred to produce a batch of products consisting of many or even a variety of items. Hence, expenditure on an individual unit of the product is not identifiable. What is level of activity in accounting? What is Activity Level? The activity level is the amount of an activity used by a cost object. The concept is employed in activity-based costing.
Batch level – the cost of an activity required each time a batch of products is produced. Discuss the causes and directions of product cost distortions that occur in traditional which of the following is a batch-level activity? costing. Are costs incurred to detect defective products before they are delivered to customers. The cost of finished goods inspections falls in this category.
Some manufacturing costs may be excluded from product costs. Explain the major differences between activity-based costing and a traditional costing system. The Elements of Cost are the three types of product costs and period costs. Materials costs are the tangible goods used in producing the product.
The actual overhead cost for that cost pool was $ for 5000 inspections. The activity-based overhead rate used to assign the costs of the inspecting cost pool to products is A.
For cost accounting purposes, it may be considered necessary to assign the batch cost to individual units within a batch. Assign each cost pool activity cost drivers, such as hours or units. Under conventional costing methods, overhead costs are applied to products using some measure of volume such as direct labor-hours. In traditional cost accounting, only mfg. costs are assigned to products. Selling, general, and administrative expenses are treated as period expenses and are not assigned to products. Under ABC, however, nonmanufacturing costs such as commissions, paid to salespersons, shipping costs, and warranty repair costs, which can easily traced to individual products are included in the product costs. On the other hand and despite the traditional cost accounting, some manufacturing costs that are not caused by the products (i.e., security guard’s wage), do not participate in product costing under ABC.
These organizational characteristics allow Japanese companies to obtain lower and more accurate product costs than companies that have a considerable amount of product diversity. As we shall see in Chapter 8, support costs (i.e., traditional indirect costs) are not only lower in just-in-time systems relative to traditional manufacturing systems, but also tend to become direct cost.
Identifying activities, activity cost plus, and cost drivers. That a larger proportion of overhead costs are company-wide costs. Plantwide Versus Department Allocations of Overhead. San Juan Company expects to incur $600,000 in overhead costs this coming year—$100,000 in the Cutting department, $300,000 in the Assembly department, and $200,000 in the Finishing department. Direct labor hours worked in all departments are expected to total 40,000 .
Usually equal for both low and high-volume products. Usually greater for high-volume products than for low-volume products. Usually greater for low-volume products than for high-volume products. Identify and classify the major activities involved in the manufacture of specific products.
Information for each production department follows. Calculating Department Predetermined Overhead Rates.
Information for each approach is provided as follows. Journal Entry to Apply Overhead. Caspian Company is deciding which of three approaches it should use to apply overhead to products. Information for each approach is provided in the following. For each service department, provide a possible allocation base. Explain why the base you chose for each service department is reasonable.
To keep the illustrations in this chapter fairly simple, we will concentrate on manufacturing costs, but remember that non-manufacturing costs are also traced to products and services using the ABC approach. Two main problems tend to occur when traditional inventory valuation methods are used to provide information for management decision purposes. One has to do with product cost distortions, or cross-subsidies and the other relates to the exclusiveness of traditional product costing. Are the costs incurred as a result of delivering defective products to customers. Examples include warranty repairs, warranty replacements, and product liability resulting from unsafe defective products. To minimize costs, Hewlett Packard and other large companies often “outsource” services like building maintenance and legal support (i.e., they have other companies provide the services for them).
Assigning overhead costs to products. ABC systems can be costly to implement. Imagine having 15 cost pools , each with a predetermined overhead rate used to assign overhead costs to the company’s 80 products—not an unrealistic example for a large company. The accounting costs incurred to maintain such a system can be prohibitively high. Calculate the unit costs of products V1, V2 and V3 using a traditional cost system where overhead costs are allocated on the basis of direct labor hours.
These additional demands on the various support activities generally cause relatively complex products to be undercosted and relatively simple products to be overcosted. More importantly, whether ABC is used as a replacement for traditional inventory valuation or as a stand alone method, it provides information about how and why resources are consumed. Thus, according to ABC advocates, it is not just an inventory valuation method, or just a separate product costing method.
Activity-based management focuses on managing activities as a way of eliminating waste and reducing delays and defects. In this regard, powerful tools such as TQM, process reengineering, and/or benchmarking can be used which provide a systematic approach to identifying the activities with greatest room for improvement. Assign costs to cost objects using the activity rates and activity measures.
A secondary driver represents an activity or event that is caused by a previous activity or event. For example, the primary drivers of purchasing costs may be factors such as customer demands, product design characteristics (e.g., number of parts required) and the number of vendors selected. Therefore, purchasing is technically a secondary driver of purchasing costs. This terminology is summarized in the middle section of Exhibit 7-3.
Calculate the predetermined overhead rate, and explain how this rate will be used to allocate overhead costs. Calculate the plantwide predetermined overhead rate using direct labor hours as the base. Provide a one-sentence description of how the rate will be used to allocate overhead costs to products. https://simple-accounting.org/ What causes traditional and activity-based costing systems to report different product margins? Traditional cost systems allocate all of the manufacturing overhead costs to products using a volume-related allocation base. Traditional cost systems allocate all manufacturing overhead costs to products.