Chapter 5

Question 1

4 steps to Activity Based costing:

Answer 1

1. Identify and classify major activities and assign overhead to cost pools
   2.Identify cost drivers
2. Calculate the activity based overhead rate
3. Assign overhead cost to products

Question 2

1. Identify and classify major activity and assign overhead to cost pool

Answer 2

This analysis should identify all resource-consuming activities

Question 3

2. Identify cost driver examples

Answer 3

Activity Cost Pools
Manufacturing
Machine set-ups
Purchase ordering
Factory maintenance

Cost Drivers
Machine hours
Number of set-ups
Number of purchase orders
25,000 square metres

Question 4

3. Calculate Overhead rate

Answer 4

Estimated over head per activity/ Estimated use of cost driver per activity= activity based overhead rate

Question 5

Benefits of ABC:

Answer 5

1.ABC employs more cost pools and therefore results in more accurate product costing. (More Accuracy)
2.ABC leads to enhanced control over overhead costs.
3.ABC supports better management decisions.

Question 6

4 Levels of cost classification:

Answer 6

Unit-level activities are performed for each unit of production. (Ex: Assembling, drilling, painting, sewing)

Batch-level activities are performed every time a company produces another batch of a product. (Equipment set up,
purchase ordering, inspection, material handling)

Product-level activities are performed every time a company produces a new type of product. (Product design, engineering changes)

Facility-level activities are required to support or sustain an entire production process. (Factory managements, factory depreciation, property taxes, utilities)

Question 7

Value-added activity vs Non-valued activities:

Answer 7

Value added: essential activities of a company’s operations that increase the perceived value of a product or service to customers.

Non-Value: are non-essential activities that, if eliminated, would not reduce the perceived value of a company’s product or service. These activities simply add cost to, or increase the time spent on, a product or service without increasing its perceived value. One example is inventory storage.

Question 8

Some limitations of ABC

Answer 8

ABC can be expensive to use. The increased cost of identifying multiple activities and applying numerous cost drivers discourages many companies from using ABC.

ABC systems are also more complex than traditional systems.

Some arbitrary allocations remain