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Exam 7: Activity-Based Costing and Management

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Question 41

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Which of the steps listed below normally occurs first when assigning costs in an ABC system?

A) Assign costs to activity-based pools
B) Allocate activity costs to each cost object
C) Identify activities
D) Identify the relevant cost object

E) A) and D)
F) B) and C)

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Question 42

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Flowing Wells Corporation is preparing its annual budget. As part of its analysis of the contribution of individual products to overall profitability, the controller estimates the amount of overhead that should be assigned to the individual product lines. Budgeted inspection costs are $4,800. Additional information is as follows: Small Pumps Large Pumps Units inspected 120 120 Hours spent inspecting 2.5 17.5 Direct labour hours per unit 2 2 Under activity-based costing (ABC) , the inspection cost assigned to one small pump would be:

A) $2.50
B) $5.00
C) $12.50
D) $10.00

E) A) and D)
F) B) and D)

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Question 43

Multiple Choice

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Activities performed to insure defect-free production are called:

List the four types of quality-related activities and give one example of each.

One of the uncertainties associated with ABC and ABM systems is employee response to design and implementation.

The cost hierarchy for an ABC system includes: I. Unit-level activities II. Marketing activities III. Product-sustaining activities IV. Administrative activities

The steps to assign costs in an ABC system are listed below in random order. Number the steps in the correct order (1 through 6). ____ Assign costs to activity-based cost pools ____ Calculate an allocation rate for each cost pool ____ Choose a cost driver for each cost pool ____ For each ABC cost pool, allocate activity costs to the cost object ____ Identify activities ____ Identify the relevant cost object

What is the normal effect on the numbers of cost pools and allocation bases when an ABC system replaces a traditional cost system? Cost Pools Allocation Bases

BCH Corporation produces and sells two types of sofa pillows: plain and fancy. Currently, BCH uses a traditional costing system with direct labour hours as the allocation base. Actual hours for 20x3 were 20,000. In anticipation of developing an activity-based costing system, BCH has identified the following cost pools and activities associated with pillow production: Estimated Costs Actual Costs Activity Driver for 20x4 for 20x3 Material cutting Number of cuts $16,000 $13,665 Sewing machine setups Number of setups 27,000 24,800 Factory maintenance Number of direct labour hours 15,000 17,000 $58,000 $55,465 Direct costs for a plain sofa pillow are $1.25 for material and $2.00 for direct labour (15 minutes @ $8.00 per hour). Direct costs for a fancy sofa pillow are $1.50 for material and $4.00 for direct labour (30 minutes @ $8.00 per hour). In 20x4, BCH expects to make 8,000 fancy pillows and 10,000 plain pillows. Those output levels will require 5 setups for fancy pillows and 10 setups for plain pillows. For the material cutting activity, the number of cuts is estimated at 10,000 for each type of pillow. a)Calculate the cost per unit for each type of pillow under traditional costing. b)Calculate the cost per unit for each type of pillow under ABC. c)Under traditional costing, which type of pillow cross-subsidizes the other pillow? Explain.

Product advertising for a new product is an example of a customer-sustaining cost in an ABC system.

Tutors-R-Us provides academic enrichment and review activities for high school students in 4 subject areas: English, mathematics, science, and history. In November 20x1, the firm's information system produced the following data: Number of Number of Percent of Direct Tutors Students Faculty Costs English 4 20 10% $ 6,000 Mathematics 3 24 25 8,000 Science 5 15 50 12,000 History 2 8 15 3,000 Regardless of subject area, clients pay $50 per hour for tutoring services. Costs associated with the Tutors-R-Us operations for November 20x1 included: Facility rent $2,500 Custodial services 1,800 Utilities 600 Computer equipment amortization 800 Advertising 400 Which of the following could be a cost object for Tutors-R-Us? I. A student II. A subject area III. A cost pool

Why might an organization want to track customer-related costs?

In an ABC system, flexible costs:

Suppose the Burlington Donor Clinic of Canadian Blood Services has identified an individual blood drive as its cost object. It has established the following cost pools in developing an activity-based costing system: Non-medical personnel costs. Salaries and wages of the office staff who organize blood drives and keep donor records. Medical personnel costs. Salaries and wages of doctors and nurses who staff a blood drive. Medical supplies. Cost of needles, bandages, and containers for donated blood. Non-medical supplies. Costs of refreshments for blood donors and recordkeeping supplies. Blood drives typically require 5 to 7 beds for blood donors. Each donation requires one container (in the medical supplies cost pool) , one needle, and one set of bandages. Canadian Blood Services normally receives donated space from a community organization (such as a university or company) for each blood drive. Non-medical personnel costs would be most appropriately allocated using:

Information about potential cost drivers may be requested from employees directly involved in activities.

The best allocation base choice for an ABC cost pool is a(n) :

Generally speaking, activity-based costing traces direct costs more accurately than traditional costing.

Which is an advantage of an ABC system?

(CMA) Cost drivers are:

As the number of activities in an ABC system increases, measurement error tends to: