ACTG 2020 Study Guide - Total Quality Management, Activity-Based Costing, Expense

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2 Mar 2014

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Activity-based costing (abc) has been developed to overcome traditional costing limitations. It increases the accuracy of product costing by using multiple cost pools to develop multiple application rates. Establishes relationships between overhead costs and activities so that the overhead costs can be more precisely allocated to products, services, or customer segments. Products are charged for costs of capacity they use- not for costs of capacity they don"t use. Unused capacity costs are treated as period expenses. Consequence for activity-based is surcharge (i. e. shipping) There is no real solution for abc, just opportunities to approach a solution: ex. Cost: materials purchasing cost driver: number of purchased orders. Activity- based management is a method of identifying and evaluating activities that a business performs using activity-based costing to carry out a value chain analysis or a re-engineering initiative to improve strategic and operational decisions in an organization. Activity is the object of interest where abc is concerned with secondary cost objects.

Related Questions

1- Which of the following costs is the most likely to be allocated to a product in a traditional job costing environment?

A. Direct materials

B. Direct labor

C. Manufacturing overhead

D. Selling and administrative

2. An allocation base that causes overhead costs to be incurred is called a:

A. revenue drives.

B. predetermined driver.

C. cost driver.

D. applied driver.

3. Which of the following statements is true regarding cross-subsidies

A. they occur when factory workers are trained to work on many different machines,

B. they occur when high-volume products are assigned more than their fair share of overhead costs,

C. they occur when high-volume products have more direct material and direct labor costs than overhead costs.

D. They occur when more than one cost driver cat he determined for a particular overhead cost item.

4. Which of the following is true regarding activity-based costing (ABC)?

A. The benefits of using ABC always outweigh its limitations.

B. the lower the proportion of Overhead costs as compared to direct materials and direct labor costs, the more likely a company, will benefit by using ABC.

C. Companies with a high-proportion of non-unit -level costs should rarely use ABC.

D. High measurement costs associated with ABC may deter some companies from its use.

coffeebear826

Section IV: Alternative Costing Method

Hampshire has always produced stick umbrellas. However, it isconsidering expanding its production to include collapsibleumbrellas. This consideration has been spurred by Tours Today, atouring company that is interested in providing its customers withcollapsible umbrellas imprinted with its logo. The management atHampshire is currently working out a deal with the touring companyto produce 3,000 collapsible umbrellas and believes it can sellthose umbrellas for $14.00 each. Here are the costs that can bedirectly traced to this special order:

Direct Materials: $9,300

Direct Labor Hours: 600

Hourly Rate of Direct labor: $8.00

In the traditional costing approach, overhead is applied at therate of $24.60 per labor hour. This expansion in production willadd additional overhead costs. The total overhead costs (assumingproduction of the stick and collapsible umbrellas) to include thecost pools and cost drivers are provided in Table 2.

An alternative costing method that might benefit Hampshire isthe implementation of activity-based costing (ABC).Hampshire would like to implement an ABC approach to analyze theproduction of this special order of collapsible umbrellas. Thecontroller has assembled the following information:

	Stick	Collapsible
Units Sold	60,000	3,000
Selling Price	$12.50	$14.00
Direct Material Cost per Unit	$3	$3.10
Direct Labor Cost per Hour	$7.50	$8.00
Variable Manufacturing Overhead	$0.40	$0.40
Variable Selling Costs	$1.10	$1.10
Labor Hours per Unit	0.2	0.2
Sales Orders	120	1
Purchase Orders	50	3
Production Runs	45	6
Material Moves	86	10
Machine Setups	130	6
Machine Hours	525	32
Inspections	200	10
Shipments	60	3

Table 1: Direct Cost Information and Activities

Activity	Activity Cost	Activity Cost Driver
Order Processing	$35,000	Number of Sales Orders
Purchasing	$36,000	Number of Purchase Orders
Material Handing	$28,000	Material Moves
Machine Setup	$14,000	Machine Setups
Production	$99,000	Production Runs
Assembly	$80,000	Machine Hours
Inspecting	$11,000	Number of Inspections
Shipping	$7,500	Number of Shipments

Table 2: Activity Cost Pools and Cost Drivers

Another alternative to traditional costing and ABC istime-driven activity-based costing (TDABC). You will need todetermine which of these three methods would be the best approachfor the Hampshire Company. The following article may assist you inyour analysis: Time-Driven Activity-Based Costing. Additionally,you may want to use the Shapiro Library to conduct further researchon the three methods. You will need to defend your position whenanswering the prompts for the written portion of this section.

Using the information provided above, complete the following inthe Hampshire Company Spreadsheet in order to assist you inresponding to all components of Section IV:

1.Calculate the allocation rates foreach cost driver using ABC.

2.Use the traditional costing approachto calculate the total cost and the unit cost of the stick andcollapsible umbrellas.

3.Use ABC to compute the total costsand the unit cost for the stick and collapsible umbrellas.

4.Compute the difference between theproduct cost per stick and collapsible umbrellas using the unitcost that you computed with the traditional approach and the onethat you computed using ABC.

coffeemallard453

TAHOS CORPORATION

TAHOS CORPORATION buys coffee beans from around the world and roasts, blends, and packages them for resale. The major cost is direct materials; however, there is substantial manufacturing overhead in the predominately automated roasting and packaging process. The company uses relatively little direct labor.

Some of the coffees are very popular and sell in large volumes, whereas a few of the newer blends sell in very low volumes. TAHOS prices its coffee at budgeted cost, including allocated overhead, plus a markup on cost of 20%. A competitor charges $6.00 per pound of Alpha and $7.00 per pound for Beta.

Data for the 2017 budget include manufacturing overhead of $3,000,000, which has been allocated on the basis of each productâs budgeted direct labor cost. The budgeted direct labor cost for 2017 totals $600,000. Purchases and use of materials (mostly coffee beans) are budgeted to total $6,000,000.

The budgeted direct costs for one-pound bags of two of the companyâs products are:

ALPHA BETA

Direct materials $4.20 $3.20

Direct labor .30 .30

TAHOS believes the existing traditional costing system may be providing misleading information. He has developed an activity based analysis of the 2017 budgeted manufacturing overhead costs, which is shown in the following table:

Activity Cost Driver Cost-Driver Rate

Purchasing Purchase Orders $500

Materials handling Number of parts 400

Quality control Batches 240

Roasting Roasting hours 10

Blending Blending hours 10

Packaging Packaging hours 10

Budgeting data for the 2017 production of the two products follow. There will be no beginning or ending inventories for either of these coffees.

ALPHA BETA

Expected sales 100,000 pounds 2,000 pounds

Purchase orders 4 4

Batches 10 4

Number of parts 30 12

Roasting hours 1,000 20

Blending hours 500 10

Packaging hours 100 2

Required:

1. Calculate the 2017 budgeted manufacturing overhead rate using direct labor cost as the single cost driver.

2. Calculate the 2017 budgeted cost for one pound of each ALPHA and BETA and the corresponding selling price using direct labor cost as the single cost driver.

3. What decisions would you suggest be made given the competitorâs prices for the two products?

________________________________________________________________

4. Using ABC, recalculate the 2017 budgeted cost for one pound of each ALPHA and Beta and the corresponding selling price.

5. Explain how company decisions would be different using ABC rather than the traditional costing system.

6. Explain how activity-based management (ABM) is useful to (1) reduce cost, (2) speed up the manufacture, and (3) improve the quality of the two coffees.

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ACTG 2020 Study Guide - Total Quality Management, Activity-Based Costing, Expense

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