Florida National University Chapter 5 Activity Based Cost Systems Questions

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1) Traditional cost systems use actual departments or cost centers for defining cost pools to accumulate and redistribute costs. Yes/no – Explain 2) Activity-based cost systems use cost centers to accumulate costs. Yes/no – Explain 5) Traditional cost systems are likely to overcost complex products with lower production volume. Yes/no – Explain 14) Explain how traditional cost systems, using only unit level cost drivers, distort product costs. 15) Explain how traditional cost systems, using only unit level cost drivers, distort customer costs. 1) Product lines that produce different variations (models, styles, or colors) often require specialized activities that translate into lower overhead costs for each product line. Yes/no – Explain 2) Specialized engineering drawings of products, product quality specifications and quality control testing, inventoried raw materials, and material control systems are examples of activities that equate to greater overhead costs. Yes/no – Explain 12) In general, factories producing a more varied and complex mix of products have higher costs than factories producing only a narrow range of products. Explain why this is generally true. 13) Provide at least two examples of types of costs that would be higher for factories producing a more varied and complex mix of products than for factories producing only a narrow range of products. 3) ABC systems seek an activity cost allocation driver that has a cause-and-effect relationship with costs in the cost pool. Yes/no – Explain 8) Do activity-based costing systems always provide more accurate product costs than conventional cost systems? Why or why not? 11) Brilliant Accents Company manufactures and sells three styles of kitchen faucets: brass, chrome, and white. Production takes 25, 25, and 10 machine hours to manufacture 1,000-unit batches of brass, chrome, and white faucets, respectively. The following additional data apply: a. Using the traditional cost system, determine the operating profit per unit for the brass style of faucet. b. Determine the activity cost driver rate for setup overhead costs and inspection overhead costs. c. Using the ABC system, for the brass style of faucet: 1. compute the estimated overhead costs per unit; and 2. compute the estimated operating profit per unit. d. Explain the difference between the profits obtained from the traditional cost system and the ABC system. Which system provides a better estimate of profitability? Why? 22) The Troubadours Company is noted for an exceptionally impressive line of Mardi Gras masks. Troubadours has established the following selling and distribution overhead activity cost pools and their corresponding activity drivers for the year 2011: Activity Cost Cost driver Marketing $60,000 $1,000,000 of sales Customer service $20,000 5,000 customers Order execution $ 10,000 100 orders Warehousing $ 10,000 50 product lines a. Determine the activity cost driver rate for each of the four selling and distribution activities. b. Under what circumstances would it be appropriate to use each of the activity cost drivers to determine the cost of the Mardi Gras masks? c. Describe at least one possible negative behavioral consequence for each of the four activity cost drivers. 9) At Deutschland Electronics, product lines are charged for call center overhead costs based on sales revenue. Last year’s summary of call center operations revealed the following: Surveillance Products Specialty Products Number of calls for information 1,000 4,000 Average call length for information 3 minutes 8 minutes Number of calls for warranties 300 1,200 Average call length for warranties 7 minutes 15 minutes Sales revenue $8,000,000 $5,000,000 Deutschland Electronics currently allocates call center overhead costs using a rate of 0.5% of sales revenue. a. Compute the amount of call center overhead costs allocated to each product line under the current system. b. Assume Deutschland decides to use the average call length for information to assign last year’s overhead costs. Does this allocation method seem more appropriate than percentage of sales? Why or why not? c. Assume Deutschland decides to use the numbers of calls of both types to assign last year’s overhead costs of $65,000. Compute the amount of call center overhead costs assigned to each product line under this revised ABC system. d. Deutschland Electronics assigns bonuses based on departmental profits. How might the Specialty Products manager try to obtain higher profits for next year if overhead costs are assigned based on the average call length for information? e. Discuss the barriers for implementing ABC for this call center.

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business and finance

marketing

cost accounting

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