Chapter 8 Test 1

Front 1

WEAKNESS OF VOLUME-BASED OVERHEAD ALLOCATION

Back 1

1. Economies of Scale -- Companies that produce more than one product will sell varying quantities causing production volumes to be different between products.
2. Because fixed costs are allocated to the products, cost savings can be achieved by producing more units (i.e. lower unit cost)
3. The allocation base chosen over which to allocate overhead costs may not have any relation to how the overhead costs are incurred.
4. In companies producing multiple products, a single, volume-based overhead allocation formula tends to over-allocate costs to high-volume, low cost products and under-allocate costs to low-volume, high-cost products.

Front 2

STUDIES HAVE DETERMINED THAT __________ PERFORMED IN THE MANUFACTURING PROCESS ARE WHAT “DRIVE” (CAUSE) THE OVERHEAD COSTS, NOT A SINGLE VOLUME BASE SUCH AS MACHINE HOURS OR LABOR HOURS.

Back 2

THE PHYSICAL ACTIVITIES &

Front 3

Activity-Based Costing has been developed to measure the costs of ______that are required to produce products or services.

Back 3

ACTIVITIES

Front 4

Levels of Activities

Back 4

Creates 5 categories to identify how overhead costs can behave in relation to various activities.

Front 5

5 Levels of Activities

Back 5

1.) Unit-Level Activities 2.) Batch-Level Costs 3.) Product-Level Costs 4.) Customer-Level Costs 5.) Organization-sustaining Costs

Front 6

Unit-Level Activities

Back 6

activities that are performed for each unit produced.

Front 7

Batch-Level Costs

Back 7

costs of producing a batch of similar products.

Front 8

Product-Level Costs

Back 8

costs associated with producing and selling a particular product line.

Front 9

Customer-Level Costs

Back 9

costs that relate to specific (groups of) customers.

Front 10

Organization-sustaining Costs

Back 10

costs that cannot be associated with any of the above. (Facility level costs relate to fixed factory costs that must be allocated).

Front 11

In activity based costing, Costs of Products and Services are accumulated based on

Back 11

the amount of each ACTIVITY that is used in producing goods or providing services.

Front 12

Activity based costing Allocates Overhead to products based on

Back 12

cost of activities required to produce the products & services. Not all products produced require the same activities.

Front 13

In activity based costing utilizes _______ that are used to collect costs that relate to a specific activity

Back 13

activity (cost) pools

Front 14

Activity based costing 2-stage allocation process:

Back 14

1. Allocate overhead costs to the appropriate activity pool
2. Allocate costs from the activity pools to the products and/or services

Front 15

6 STEPS REQUIRED IN AN ACTIVITY-BASED COSTING SYSTEM (pg. 316-327)

Back 15

1. Define activities, cost pools, and activity measures
2. Assign overhead costs to activity cost pools
3. Calculate predetermined activity (overhead) rates for EACH cost pool
4. Allocate overhead costs to cost objects (products) using the rates from step 3.
5. Compute total product cost (DM + DL + Allocated FOH from step 4).
6. Compute product profit (margin) by subtracting total product cost (from step 5) from product sale price.

Front 16

4 BENEFITS OF ACTIVITY BASED COSTING:

Back 16

1. Recognizes that ACTIVITIES cause costs to be incurred.
2. Recognizes that different products require different activities and therefore different products should NOT be allocated overhead on an arbitrary basis
3. Can result in more accurate allocation of overhead costs
4. Provides management with more detailed information regarding costs of products and services

Front 17

4 RISKS AND PROBLEMS OF ACTIVITY BASED COSTING:

Back 17

1. Requires a “buy-in” from all departments
2. Requires more effort & resources to implement ABC
3. Requires constant maintenance and evaluation
4. Requires that costs be captured in a different form than what the accounting system is set up for.