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Questions and Answers

What is the purpose of an activity cost pool in activity-based costing?

To track the number of units produced

To measure the amount of time needed for an activity

To accumulate costs related to a single activity measure (correct)

To allocate overhead costs based on direct labor hours

Why has relying exclusively on direct labor hours and/or machine hours to assign overhead costs come under increased scrutiny?

Direct labor and overhead costs have been moving in opposite directions on an economy-wide basis (correct)

Direct labor and machine hours are no longer correlated

Overhead costs have decreased significantly

The variety of products produced by companies has decreased

What is a transaction driver in activity-based costing?

A simple count of the number of times an activity occurs (correct)

A measure of the cost of resources consumed by customer orders

A measure of the amount of time needed for an activity

A measure of the number of units produced

What is a characteristic of a successful ABC implementation according to the text?

Strong top management support Signup and view all the answers

What is the purpose of assigning costs to activity cost pools using a first-stage allocation in activity-based costing?

To allocate all costs of resources consumed by taking and processing customer orders Signup and view all the answers

What are the two common types of activity measures in activity-based costing?

Transaction driver and duration driver Signup and view all the answers

In variable costing, what costs are considered product costs?

Direct and indirect variable costs Signup and view all the answers

What does unit product cost under absorption costing include?

Fixed manufacturing overhead Signup and view all the answers

How are income statements using variable and absorption costing prepared to compute?

Net operating income Signup and view all the answers

Under variable costing, what happens to all fixed manufacturing overhead?

It is expensed Signup and view all the answers

How does absorption costing impact net operating income when the number of units sold is less than the breakeven point?

It can lead to positive operating income Signup and view all the answers

How are changes in net operating income influenced in variable costing compared to absorption costing?

Directly by changes in unit sales Signup and view all the answers

What approach is employed when a company creates overhead rates based on the activities it performs?

Activity-based costing Signup and view all the answers

What is the appeal of using predetermined departmental overhead rates?

They provide a more accurate accounting of the costs caused by jobs Signup and view all the answers

In job-order costing systems, what do all of a company’s job cost sheets collectively form?

A subsidiary ledger Signup and view all the answers

What is the selling price of Job 407 assuming a 75% markup?

$ ext{Cost} + (75 ext{% of Cost})$ Signup and view all the answers

What is the alternative approach to developing multiple predetermined overhead rates?

Activity-based costing Signup and view all the answers

What do managers use activity-based costing systems for?

More accurately measure demands that jobs, products, customers, and other cost objects make on overhead resources Signup and view all the answers

What is the impact of underapplied or overapplied overhead on financial statements?

It impacts cost of goods sold and net operating income Signup and view all the answers

What is the difference between underapplied and overapplied overhead?

Underapplied occurs when less overhead is applied than actually incurred, while overapplied occurs when more is applied Signup and view all the answers

What is the allocation base used for applying overhead to jobs?

Predetermined allocation rate multiplied by the allocation base (actual) Signup and view all the answers

What is the purpose of computing the predetermined overhead rate?

To account for the lack of synchronization between accruing manufacturing overhead and job production Signup and view all the answers

How does variable costing differ from absorption costing?

Variable costing uses only variable costs to compute the cost of the product, while absorption costing includes both fixed and variable components Signup and view all the answers

What approach does the chapter use for costing, and what does it assume as the allocation base?

Actual costing; assumes the actual number of units produced as the allocation base Signup and view all the answers

What method accurately identifies additional variable costs per unit and emphasizes the impact of total fixed costs on profits?

Variable costing Signup and view all the answers

What is the key gauge of the long-run profitability of a segment, computed by subtracting traceable fixed costs from contribution margin?

Segment margin Signup and view all the answers

What type of costs arise due to the existence of a particular segment and would disappear if the segment itself disappeared?

Traceable fixed costs Signup and view all the answers

What is the method designed to provide managers with cost information for strategic decisions affecting capacity and variable costs?

Activity-Based Costing (ABC) Signup and view all the answers

How does common costs allocation affect decision-making according to the text?

It distorts decision-making Signup and view all the answers

What does Decentralization involve according to the text?

Segmenting the overall activity into smaller segments Signup and view all the answers

Study Notes

Managerial Accounting and Decision Making

Absorption costing distorts the fixed manufacturing overhead, making it difficult to perform break-even and cost-volume-profit analysis.
Variable costing accurately identifies additional variable costs per unit and emphasizes the impact of total fixed costs on profits.
Decentralization involves segmenting the overall activity into smaller segments, and managerial accounting provides information by unit and segment.
Segmented income statements use a contribution format to separate fixed from variable costs and calculate segment margin.
Traceable fixed costs arise due to the existence of a particular segment and would disappear if the segment itself disappeared, while common fixed costs arise from the overall operation of the company and would not disappear if any particular segment were eliminated.
The segment margin, computed by subtracting traceable fixed costs from contribution margin, is a key gauge of the long-run profitability of a segment.
Common costs should not be allocated to segments, as it distorts decision-making.
Segment reporting at Webber, Inc. uses the contribution format, listing fixed and variable costs separately, and does not allocate common costs to divisions.
Activity-Based Costing (ABC) is a method designed to provide managers with cost information for strategic decisions affecting capacity and variable costs.
ABC assigns nonmanufacturing and manufacturing costs to products on a cause-and-effect basis and can exclude certain costs from product costs.
ABC differs from traditional cost accounting by using numerous overhead cost pools and a more complex allocation scheme.
ABC addresses the complexity and product differentiation in addition to volume, unlike traditional cost systems.

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Description

Test your knowledge of managerial accounting and decision-making with this quiz. Explore concepts such as absorption costing, variable costing, decentralization, segmented income statements, traceable and common fixed costs, segment margin, segment reporting, and Activity-Based Costing (ABC). Sharpen your understanding of how these principles impact strategic decision-making and profitability analysis.