Activity-Based Costing Quiz
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Questions and Answers

What type of activities are considered organization-sustaining activities?

  • Activities that support the organization regardless of product or customer specifics (correct)
  • Activities that involve direct interaction with customers
  • Activities that directly relate to producing products for customers
  • Activities performed mainly during peak production times

    • What should be calculated after identifying major activities and assigning overhead costs to activity cost pools?

  • Annual reports for shareholders
  • Activity-based overhead rates for each cost pool (correct)
  • Overhead costs for each cost object
  • Total amount of product units made

    • What is the first step in implementing an activity-based costing system?

  • Identify and classify major activities and assign overhead costs to activity cost pools (correct)
  • Assign overhead costs to cost objects using activity rates
  • Calculate activity-based overhead rates for each cost pool
  • Identify the cost driver for each cost pool

    • Which task involves determining the link between cost drivers and costs accumulated in each cost pool?

    <p>Identifying the cost driver</p> Signup and view all the answers

    Which of the following activities does NOT qualify as an organization-sustaining activity?

    <p>Producing products based on customer demand</p> Signup and view all the answers

    What characterizes unit-level activities in activity-based costing?

    <p>They are proportional to the number of units produced.</p> Signup and view all the answers

    How are batch-level activities distinct from unit-level activities?

    <p>Batch-level activities occur once for every batch processed, independent of unit volume.</p> Signup and view all the answers

    What is an example of a product-level activity?

    <p>Advertising a specific product.</p> Signup and view all the answers

    Which activity is categorized as a customer-level activity?

    <p>Conducting a sales call.</p> Signup and view all the answers

    How do traditional cost systems primarily determine overhead costs?

    <p>Using volume-driven allocation bases.</p> Signup and view all the answers

    Which of the following statements about activity-based costing is true?

    <p>It incorporates a hierarchy of activity levels.</p> Signup and view all the answers

    What would be an example of a batch-level cost?

    <p>Costs associated with machine setups for a batch.</p> Signup and view all the answers

    Which of the following best describes how customer-level activities are defined?

    <p>They occur independently of specific products.</p> Signup and view all the answers

    What is the primary drawback of peanut butter costing?

    <p>It may result in undercosting or overcosting of products.</p> Signup and view all the answers

    In activity-based costing, what does a cost driver represent?

    <p>A factor that causes a change in a cost pool.</p> Signup and view all the answers

    How does activity-based costing allocate overhead costs?

    <p>To multiple activity cost pools based on activity measures.</p> Signup and view all the answers

    What is a value-adding activity?

    <p>An activity necessary for producing the product.</p> Signup and view all the answers

    When should a company consider switching to activity-based costing?

    <p>When product lines differ greatly in volume and complexity.</p> Signup and view all the answers

    What does an activity cost pool represent in the ABC system?

    <p>A 'bucket' for accumulating costs related to a single activity measure.</p> Signup and view all the answers

    Which of the following is NOT a factor that indicates the superiority of ABC over traditional costing?

    <p>Products requiring similar support services.</p> Signup and view all the answers

    What is meant by product cost cross-subsidization?

    <p>Undercosting one product leading to overcosting another.</p> Signup and view all the answers

    What is the estimated overhead rate for purchasing materials?

    <p>₱25 per pack</p> Signup and view all the answers

    How many setups are estimated to incur machine setup costs?

    <p>800 setups</p> Signup and view all the answers

    Calculate the overhead rate for inspections per inspection hour.

    <p>₱200 per inspection hour</p> Signup and view all the answers

    What is the total estimated overhead for the activity of running machines?

    <p>₱2,000,000</p> Signup and view all the answers

    Which activity has the highest overhead rate based on the given cost calculations?

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

    What is the estimated number of machine hours?

    <p>40,000 hours</p> Signup and view all the answers

    If the inspection overhead rate is ₱200 per hour, what will be the total overhead for 8,000 hours?

    <p>₱1,600,000</p> Signup and view all the answers

    How much total estimated overhead is allocated towards purchasing materials?

    <p>₱1,000,000</p> Signup and view all the answers

    What is the total manufacturing cost per unit for Product A using Activity-Based Costing (ABC)?

    <p>P1,240</p> Signup and view all the answers

    Calculate the total overhead cost per unit for Product B using Activity-Based Costing (ABC).

    <p>P300</p> Signup and view all the answers

    Using traditional costing, what is the overhead cost per unit for Product A?

    <p>P240</p> Signup and view all the answers

    What is the total manufacturing cost per unit for Product B using traditional costing?

    <p>P2,100</p> Signup and view all the answers

    What percentage of direct labor cost is assigned to overhead for Product B using traditional costing?

    <p>150%</p> Signup and view all the answers

    Which method results in a lower overhead cost per unit for Product A?

    <p>Activity-Based Costing (ABC)</p> Signup and view all the answers

    What is the total overhead cost assigned to Product A using the traditional costing method?

    <p>P300</p> Signup and view all the answers

    Study Notes

    Peanut Butter Costing vs. Activity-Based Costing (ABC)

    • Peanut butter costing spreads overhead costs uniformly, often resulting in inaccurate product costing.
    • Common issues include:
      • Product undercosting: High resource consumers appear low-cost.
      • Product overcosting: Low resource consumers appear high-cost.
      • Cross-subsidization: Undercosted products lead to overcosting of others.
    • ABC aims to improve costing by analyzing individual activities as specific cost objects, enhancing overhead measurement.

    Key Components of Activity-Based Costing

    • Cost Driver: A factor that influences the cost pool, directly linked to resource consumption.
    • Activity Cost Pool: A category where costs related to a single activity are collected.
    • Value-Adding Activities: Necessary activities that increase product value.
    • Nonvalue-Adding Activities: Activities that do not enhance product value for the customer.

    When to Use ABC

    • Product lines significantly differ in volume and complexity.
    • Diverse product lines require varying support services.
    • Overhead costs form a large part of total costs.
    • Notable changes in the manufacturing process or product variety.
    • Managerial disregard for existing system data.

    Hierarchy of Activity Levels

    • Unit-Level Activities: Costs incurred every time a unit is produced; proportional to production volume.
    • Batch-Level Activities: Costs incurred per batch processed, independent of batch size.
    • Product-Level Activities: Costs associated with a particular product, regardless of batch or unit production.
    • Customer-Level Activities: Costs related to serving specific customers, not tied to products.
    • Organization-Sustaining Activities: Costs necessary for overall operation, not linked to specific outputs.

    Steps in Implementing ABC

    • Identify major activities and classify associated overhead costs into activity cost pools.
    • Determine strong cost drivers that correlate with costs in each pool.
    • Calculate overhead rates for each activity cost pool.
    • Assign overhead costs to products based on calculated activity rates.

    Example of ABC Implementation

    • Faith Manufacturing Company tracks the following activities:
      • Purchasing materials: 40,000 packs
      • Machine setups: 800 setups
      • Inspections: 8,000 hours
      • Running machines: 40,000 hours

    Activity-Based Overhead Rates Calculation

    • Purchasing materials: P25 per pack
    • Machine setups: P5,000 per setup
    • Inspections: P200 per inspection hour
    • Running machines: P50 per machine hour

    Overhead Cost Assignment

    • Product costs for Product A and B include purchasing materials, machine setups, inspections, and machine running costs, leading to total manufacturing costs:
      • Product A: P1,240
      • Product B: P1,860

    Traditional Costing Comparison

    • Under peanut butter costing:
      • Product A: Total cost of P1,300
      • Product B: Total cost of P2,100
    • Indicates potential over and under costing issues present in traditional approaches compared to ABC.

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    Description

    Dive into the fundamentals of Activity-Based Costing and its comparison with peanut butter costing. This quiz will test your understanding of how overhead costs can impact product costing and decision-making in accounting. Analyze the implications of cost allocations on resource consumption.

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