ACTIVITY BASED SYSTEM

Question 1

describes a costing approach that uses broad averages for assigning the cost of resource uniformly to cost objects when the individual products or services, in fac use those resources in non-uniform ways

Answer 1

Broad Averaging or Peanut Butter Costing System

Question 2

happens when a product consumes high level of resources but is reported to a lower cost per unit.

Answer 2

Product undercosting

Question 3

happens when a product consumes low level of resources but is reported to a higher cost per unit

Answer 3

Product overcosting

Question 4

allocates overhead costs to multiple activity cost pools and assigns the activity cost pools to products by means of cost drivers.

Answer 4

Activity Based Costing System

Question 5

is a factor that causes change in the cost pool for a particular activity.

Answer 5

Cost driver

Question 6

is a bucket in which costs are accumulated that relate to a single measure in ABC system.

Answer 6

Activity cost pool

Question 7

It is used a basis for cost allocation; any factor of activity that has a direct cause-effect relationship.

Answer 7

cost driver

Question 8

benefits of activity based system

Answer 8

1. Provides realistic costs of manufacturing for specific products.
2. Allocates manufacturing overhead more accurately to products and processes that use the activity.
3. Identifies inefficient processes and target for improvements.
4. Determines product profit margins more precisely.
5. Discovers which processes have unnecessary and wasted costs.
6. Offers better understanding and justification of costs in manufacturing overhead

Question 9

limitations of activity based system

Answer 9

1. Collection and preparation of data is time-consuming.
2. Costs more to accumulate and analyze information.
3. Source data isn’t always readily available from normal accounting reports.
4. Reports from ABC don’t always conform to generally accepted accounting principles and can’t be used for external reporting.
5. Data produced by ABC may conflict with managerial performance standards previously established from traditional costing methods.
6. May not be as useful for companies where overhead is small in proportion to total operating costs.

Question 10

when to switch to activity based system

Answer 10

1. Product lines differ greatly in volume and manufacturing complexity.
2. Product lines are numerous, diverse, and require differing degrees of support service.
3. Overhead costs constitute a significant portion of total costs.
4. The manufacturing process or the number of products has changed significantly.
5. Production or marketing managers are ignoring data provided by the existing system.