Activity Based Costing and Target Costing
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Questions and Answers

Which of the following is a characteristic of the traditional approach to overhead allocation?

  • Indirect costs are ignored entirely
  • Overheads are allocated based on actual usage
  • Costs are distributed based on production volumes (correct)
  • Direct costs are more difficult to allocate

    • What is the primary focus of Activity Based Costing?

  • Maximizing production volume
  • Allocation of direct costs
  • Absorbing all costs equally
  • Charging indirect costs to products (correct)

    • What is a key step in the traditional approach to apportionment of indirect costs?

  • Allocation of service department overheads (correct)
  • Elimination of overhead costs
  • Direct allocation of costs to end products
  • Reapportionment of direct costs

    • In Activity Based Costing, indirect costs are allocated based on what principle?

    <p>Consumption of resources</p> Signup and view all the answers

    What does Life Cycle Costing focus on?

    <p>Total costs incurred over the product’s life span</p> Signup and view all the answers

    What is the goal of Target Costing?

    <p>To reduce the costs to meet a specified target price</p> Signup and view all the answers

    How does Activity Based Costing improve accuracy in cost allocation?

    <p>By identifying activities that drive costs</p> Signup and view all the answers

    Which method divides costs based on departmental functions rather than product volume?

    <p>Activity Based Costing</p> Signup and view all the answers

    What is the predetermined overhead rate based on direct labor hours for the company?

    <p>RO2.00</p> Signup and view all the answers

    How much overhead is assigned to product A using activity-based costing?

    <p>RO100,000</p> Signup and view all the answers

    Which product has the highest activity cost assigned using the traditional method?

    <p>Product B</p> Signup and view all the answers

    How is the activity cost driver rate for machine setup calculated?

    <p>Total overhead cost divided by total machine setup hours</p> Signup and view all the answers

    What is the total number of direct labor hours across all products A, B, and C?

    <p>50,000 hours</p> Signup and view all the answers

    What is the total overhead allocated to product C using activity-based costing?

    <p>RO80,000</p> Signup and view all the answers

    Which statement correctly describes the relationship between direct labor hours and overhead allocation in the traditional method?

    <p>Overhead allocation is directly proportional to direct labor hours.</p> Signup and view all the answers

    What is one major disadvantage of using activity-based costing compared to traditional overhead allocation?

    <p>It can be more complex and time-consuming to calculate.</p> Signup and view all the answers

    What is an example of a cost driver in activity-based costing (ABC)?

    <p>Number of machine set ups</p> Signup and view all the answers

    What calculation is used to determine the activity cost driver rate in ABC?

    <p>Total cost allocated to a cost center divided by the number of set ups</p> Signup and view all the answers

    In activity-based costing, how are costs charged to products?

    <p>Based on demand by products as measured by cost drivers</p> Signup and view all the answers

    Which of the following is the first step in the activity-based costing process?

    <p>Identifying the activity</p> Signup and view all the answers

    What does the activity cost driver indicate?

    <p>The relationship between the cost and the number of times an activity occurs</p> Signup and view all the answers

    What is the total annual overhead cost provided for the company?

    <p>RO260,000</p> Signup and view all the answers

    In the context of procurement expenses, what activity is used for cost allocation?

    <p>Purchase orders placed</p> Signup and view all the answers

    Which activity cost is allocated the highest annual expense?

    <p>Set up related costs</p> Signup and view all the answers

    What is one of the last steps in the activity-based costing process?

    <p>Charging the cost of activities to products</p> Signup and view all the answers

    What is the main advantage of using Activity Based Costing (ABC)?

    <p>More accurate and reliable costing</p> Signup and view all the answers

    How many machine hours were recorded for product A?

    <p>1200 hours</p> Signup and view all the answers

    Which of the following best describes the purpose of creating a cost pool in ABC?

    <p>To combine all costs related to a specific activity</p> Signup and view all the answers

    What is a drawback of the traditional method of overhead costing?

    <p>Subjective approach to cost apportionment</p> Signup and view all the answers

    How many units of product B were produced annually?

    <p>450 units</p> Signup and view all the answers

    In terms of setups, how many were recorded for product B?

    <p>10 setups</p> Signup and view all the answers

    Which of the following does NOT represent an advantage of ABC?

    <p>Simplifies accounting records</p> Signup and view all the answers

    What is the formula for calculating target cost?

    <p>Target Cost = Target Selling Price - Target Profit</p> Signup and view all the answers

    If a product is intended to be sold at $12 with a desired profit of $4, what is the target cost?

    <p>$8</p> Signup and view all the answers

    What is a potential advantage of using standard components in production?

    <p>Reduces overall production costs</p> Signup and view all the answers

    Which of the following actions can be implemented to meet target costs?

    <p>Train staff in more efficient techniques</p> Signup and view all the answers

    What is meant by the target cost gap?

    <p>The estimated cost less the target cost</p> Signup and view all the answers

    In the context of target costing, what is the importance of monitoring cost reductions?

    <p>To confirm that actions lead to anticipated results</p> Signup and view all the answers

    Which of the following could lead to increased costs in other areas when reducing costs in one area?

    <p>Using cheaper staffing resources</p> Signup and view all the answers

    How should a company continuously apply target costing throughout a product's life?

    <p>By implementing cost-saving strategies continuously</p> Signup and view all the answers

    Study Notes

    Activity Based Costing

    • Traditional approach allocates overhead based on direct labor hours or production volume.
    • Activity based costing (ABC) allocates overhead based on activities that drive cost.
    • Steps in ABC:
      • Identify the activity.
      • Create the cost pool.
      • Determine the activity cost driver.
      • Calculate the activity cost driver rate.
      • Charge the costs of activities to products.

    Advantages of ABC

    • More accurate and reliable cost allocation
    • Enables better pricing decisions
    • Provides a realistic approach to overhead allocation.
    • Controls costs by focusing on activities that drive overhead costs.

    Target Costing

    • Focuses on designing and producing products that meet a predetermined target cost.
    • Target cost is the maximum allowable cost to produce, distribute, and dispose of a product
    • Target cost = Target Selling Price – Target Profit
    • Process:
      • Calculate the target cost based on market price and profit margin.
      • Evaluate actions to reduce costs and achieve the target.
      • Monitor the cost reductions to ensure the actions are effective.

    Target Cost Gap

    • The difference between the estimated cost and the target cost.
    • Methods to close the gap:
      • Reduce the number of components.
      • Use standard components.
      • Train staff in more efficient techniques.
      • Use different materials.
      • Use cheaper labor.
      • Acquire efficient technology.
      • Eliminate non-value-added activities.

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    Chapter 2 - Alternative Costing Methods PDF

    Description

    Explore the principles of activity based costing (ABC) and target costing in this quiz. Understand how ABC improves cost allocation accuracy and the significance of target costing in product pricing and cost control. Test your knowledge on key concepts and advantages of these costing methods.

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