Podcast
Questions and Answers
What type of activities are considered organization-sustaining activities?
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?
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?
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?
Which task involves determining the link between cost drivers and costs accumulated in each cost pool?
Which of the following activities does NOT qualify as an organization-sustaining activity?
Which of the following activities does NOT qualify as an organization-sustaining activity?
What characterizes unit-level activities in activity-based costing?
What characterizes unit-level activities in activity-based costing?
How are batch-level activities distinct from unit-level activities?
How are batch-level activities distinct from unit-level activities?
What is an example of a product-level activity?
What is an example of a product-level activity?
Which activity is categorized as a customer-level activity?
Which activity is categorized as a customer-level activity?
How do traditional cost systems primarily determine overhead costs?
How do traditional cost systems primarily determine overhead costs?
Which of the following statements about activity-based costing is true?
Which of the following statements about activity-based costing is true?
What would be an example of a batch-level cost?
What would be an example of a batch-level cost?
Which of the following best describes how customer-level activities are defined?
Which of the following best describes how customer-level activities are defined?
What is the primary drawback of peanut butter costing?
What is the primary drawback of peanut butter costing?
In activity-based costing, what does a cost driver represent?
In activity-based costing, what does a cost driver represent?
How does activity-based costing allocate overhead costs?
How does activity-based costing allocate overhead costs?
What is a value-adding activity?
What is a value-adding activity?
When should a company consider switching to activity-based costing?
When should a company consider switching to activity-based costing?
What does an activity cost pool represent in the ABC system?
What does an activity cost pool represent in the ABC system?
Which of the following is NOT a factor that indicates the superiority of ABC over traditional costing?
Which of the following is NOT a factor that indicates the superiority of ABC over traditional costing?
What is meant by product cost cross-subsidization?
What is meant by product cost cross-subsidization?
What is the estimated overhead rate for purchasing materials?
What is the estimated overhead rate for purchasing materials?
How many setups are estimated to incur machine setup costs?
How many setups are estimated to incur machine setup costs?
Calculate the overhead rate for inspections per inspection hour.
Calculate the overhead rate for inspections per inspection hour.
What is the total estimated overhead for the activity of running machines?
What is the total estimated overhead for the activity of running machines?
Which activity has the highest overhead rate based on the given cost calculations?
Which activity has the highest overhead rate based on the given cost calculations?
What is the estimated number of machine hours?
What is the estimated number of machine hours?
If the inspection overhead rate is ₱200 per hour, what will be the total overhead for 8,000 hours?
If the inspection overhead rate is ₱200 per hour, what will be the total overhead for 8,000 hours?
How much total estimated overhead is allocated towards purchasing materials?
How much total estimated overhead is allocated towards purchasing materials?
What is the total manufacturing cost per unit for Product A using Activity-Based Costing (ABC)?
What is the total manufacturing cost per unit for Product A using Activity-Based Costing (ABC)?
Calculate the total overhead cost per unit for Product B using Activity-Based Costing (ABC).
Calculate the total overhead cost per unit for Product B using Activity-Based Costing (ABC).
Using traditional costing, what is the overhead cost per unit for Product A?
Using traditional costing, what is the overhead cost per unit for Product A?
What is the total manufacturing cost per unit for Product B using traditional costing?
What is the total manufacturing cost per unit for Product B using traditional costing?
What percentage of direct labor cost is assigned to overhead for Product B using traditional costing?
What percentage of direct labor cost is assigned to overhead for Product B using traditional costing?
Which method results in a lower overhead cost per unit for Product A?
Which method results in a lower overhead cost per unit for Product A?
What is the total overhead cost assigned to Product A using the traditional costing method?
What is the total overhead cost assigned to Product A using the traditional costing method?
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.
