Chapter 05 – Activity-Based Costing and Management
5-1
CHAPTER 5
Activity-Based Costing and Management
ANSWERS TO REVIEW QUESTIONS
5-1 In a traditional, volume-based product-costing system, only a single predetermined
overhead rate is used. All manufacturing-overhead costs are combined into one cost
5-2 Management was being misled by the traditional product-costing system, because
the high-volume product lines were being overcosted and the low-volume product
5-3 An activity-based costing system is a two-stage process of assigning costs to
products. In stage one, activity-cost pools are established. In stage two a cost driver
5-4 A cost driver is a characteristic of an event or activity that results in the incurrence
of costs by that event or activity. In activity–based costing systems, the most
5-5 The four broad categories of activities identified in an activity-based costing system
are as follows:
5-2
5-6 An activity-based costing system alleviated the problems management was having
under its traditional, volume-based product-costing system by more accurately
5-7 Product-costing systems based on a single, volume-based cost driver tend to
overcost high-volume products, because all overhead costs are combined into one
5-8 In traditional, volume-based costing systems, only direct material and direct labor
are considered direct costs. In contrast, under an activity-based costing system, an
5-9 The pool rate is calculated by dividing the budgeted amount of an activity cost pool
5-10 Two factors that tend to result in product cost distortion under traditional, volume-
based product-costing systems are as follows:
5-11 Three important factors in selecting cost drivers for an ABC system are as follows:
5-12 An activity dictionary lists all of the activities identified and used in an activity-based
5-13 Line managers are close to the production process and may realize that a complex
product, which is difficult to manufacture, is undercosted by a traditional, volume-
5-14 Diverse products typically consume support activities (such as purchasing, material
handling, engineering, and inspection) in differing degrees. When there are
5-15 Activity-based costing is just as appropriate in the service industry as in the
manufacturing industry. Just as in manufacturing firms, diverse services typically
5-16 As indicated in the chapter, Pennsylvania Blue Shield, like many manufacturers,
classifies activities as unit level, batch level, product-sustaining level, or facility
5-17 Management could use the ABC information about the cost of various types of
5-4
5-18 At Patio Grill Company, every unit of each product line manufactured requires all
eight of the support activities covered by the ABC system. In contrast, at Delaware
5-19 The two-dimensional activity-based costing model provides one way of picturing the
relationship between ABC and ABM. The vertical dimension of the model depicts the
cost assignment view of an ABC system. From the cost assignment viewpoint, the
ABC system uses two-stage cost allocation to assign the costs of resources to the
5-20 Activity analysis is the detailed identification and description of the activities
conducted in an enterprise. Activity analysis entails the identification not only of
activities, but also of their root causes, of the events that trigger them, and of the
linkages among them. Three criteria for determining whether an activity adds value
are as follows:
(a) Is the activity necessary?
(b) Is the activity efficiently performed?
(c) Is the activity sometimes value-added and sometimes non-value-added?
Chapter 05 – Activity-Based Costing and Management
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Diagram of two-dimensional ABC model (from review question 5-19 on preceding page):
Cost Assignment View
RESOURCE COSTS
Chapter 05 – Activity-Based Costing and Management
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5-21 An activity’s trigger is the preceding event that indicates that the activity should be
performed. The activity’s root cause is the event or activity that, if it had not
5-22 Customer profitability analysis refers to using the concepts of activity-based costing
to determine how serving particular customers causes activities to be performed and
5-23 Activity-based costing is used to analyze customer-related costs and determine the
5-24 A customer profitability profile, usually expressed in graphical form, shows the
5-25 Examples of customer-value-added activities in a hotel are express check-out
service, room service for meals, and concierge services for local activities and
Chapter 05 – Activity-Based Costing and Management
SOLUTIONS TO EXERCISES
EXERCISE 5-26 (15 MINUTES)
1.
Material-handling cost per mirror:
*The total number of direct-labor hours.
*The total number of units (of both types) produced.
3.
Material-handling cost per mirror:
4.
Material-handling cost per lens:
*The number of material moves for the lens product line.
$90,000
5-8
EXERCISE 5-27 (20 MINUTES)
There is no single correct answer to this exercise. There are many reasonable solutions.
Cost pool 1:
Raw materials and components …………………………………………………………….
3,835,000 yen
Inspection ……………………………………………………………………………………………
Total …………………………………………………………………………………………………….
Cost driver: raw-material cost
Cost pool 2:
Depreciation, machinery ……………………………………………………………………….
1,820,000 yen
Electricity, machinery ……………………………………………………………………………
2,210,000 yen
Cost driver: number of units produced.
Cost pool 3:
Cost driver: number of production runs.
Cost pool 4:
Cost driver: number of parts in a product.
Chapter 05 – Activity-Based Costing and Management
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EXERCISE 5-27 (CONTINUED)
Cost pool 5:
Depreciation, plant ………………………………………………………………………………..
910,000 yen
Insurance, plant ……………………………………………………………………………………
Electricity, light ……………………………………………………………………………………
Custodial wages, plant ………………………………………………………………………….
Property taxes ………………………………………………………………………………………
Natural gas, heating ………………………………………………………………………………
Total …………………………………………………………………………………………………….
EXERCISE 5-28 (5 MINUTES)
Cost pool 1: unit-level
EXERCISE 5-29 (15 MINUTES)
1.
a.
Quality-control costs assigned to the enamel paint line under the traditional
system:
16% direct-labor cost
16% $98,000
=
$15,680
Chapter 05 – Activity-Based Costing and Management
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EXERCISE 5-29 (CONTINUED)
b.
Quality-control costs assigned to the enamel paint line under activity-based
costing:
Quantity for
Assigned
Activity
Pool Rate
Enamel Paint
Cost
Incoming material inspection …….
$23.00 per type …..
24 types ……..
$ 552
.28 per unit ……
35,000 units ..
Product certification …………………
144.00 per order …
50 orders …….
EXERCISE 5-30 (20 MINUTES)
Wheelco’s product-costing system probably is providing misleading cost information to
management. A common problem in a traditional, volume-based costing system is that
high-volume products are overcosted and low-volume products are undercosted. There is
Chapter 05 – Activity-Based Costing and Management
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EXERCISE 5-31 (15 MINUTES)
1.
Key features of an activity-based costing system:
(a)
Two-stage procedure for cost assignment.
(b)
Stage one: Establish activity cost pools.
2.
As described in the answer to the preceding exercise, the new system probably will
3.
Strategic options:
(a)
Lower the prices on the firm’s high-volume products to compete more effectively.
(b)
Increase the prices on low-volume specialty products.
EXERCISE 5-32 (20 MINUTES)
The activities of the Seneca Falls Winery may be classified as follows:
Chapter 05 – Activity-Based Costing and Management
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EXERCISE 5-32 (CONTINUED)
Activity
Classification
Activity
Classification
(1)
P
(11)
B
(2)
P
(12)
B
(3)
P
(13)
U
(4)
P
(14)
U
(5)
P
(15)
U
(6)
P
(16)
U
(7)
P
(17)
B
(8)
B
(18)
F
(9)
B
(19)
F
B
Chapter 05 – Activity-Based Costing and Management
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EXERCISE 5-33 (30 MINUTES)
1.
ZODIAC MODEL ROCKETRY COMPANY
COMPUTATION OF SELLING COSTS
BY ORDER SIZE AND PER MOTOR WITHIN EACH ORDER SIZE
Order Size
Small
Medium
Large
Total
Sales commissionsa
Costs of catalog salesc
Credit and collectiond
(Unit cost: $675,000/225,000
Units (motors) solde …………………………..
103,000
592,000
2,180,000
Total cost for all orders of a
Unit cost per order of a given
aRetail sales in boxes unit cost:
eSmall: (2,000 12) + 79,000 = 103,000
Chapter 05 – Activity-Based Costing and Management
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EXERCISE 5-33 (CONTINUED)
2.
The analysis of selling costs shows that small orders cost more than large orders.
EXERCISE 5-34 (20 MINUTES)
The definitions used by Carrier Corporation for each of the activity levels are given below.
(See Robert Adams and Ray Carter, “United Technologies’ Activity-Based Accounting Is a
Catalyst for Success” As Easy as ABC, 18, p.4.) Note that United Technologies uses the
term structural-level activity, instead of facility-level activity as used in the text.
These definitions are consistent with those given in the chapter. An argument for the
ABC project team’s classification would be that the activity or account in question was
Chapter 05 – Activity-Based Costing and Management
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EXERCISE 5-35 (30 MINUTES)
EXERCISE 5-36 (30 MINUTES)
EXERCISE 5-37 (25 MINUTES)
1.
Airline:
(c)
Returning, repairing, or replacing lost or mishandled luggage.
2.
Bank:
(a)
Correcting customer account errors due to keypunch errors in the bank.
(b)
Following up on checks or deposit slips lost by the bank.
(c)
Performing banking procedures manually when the computer is down.
(d)
Defaulted loans made to risky borrowers as a result of inadequate credit checks.
(e)
Losses due to employee embezzlement and petty theft.
5-16
EXERCISE 5-37 (CONTINUED)
3.
Hotel:
EXERCISE 5-38 (30 MINUTES)
EXERCISE 5-39 (15 MINUTES)
Several activities performed (or at least supported) by an airline’s ground employees, along
with possible performance measures, are as follows:
Activity
Performance Measure
Making reservations over the phone
Reservations booked per hour
Percentage of reservations with
errors
Number of customer complaints
Tagging luggage
Bags tagged per hour
Percentage of bags incorrectly tagged
Handling luggage
Bags handled per hour, per employee
Number of bags damaged
Percentage of bags sent to wrong
destination
5-17
EXERCISE 5-39 (CONTINUED)
Maintaining aircraft
Maintenance procedures per shift, per
employee (both routine and repair)
Number of repair incidents per month
Number of flight delays due to
maintenance problems
Enplaning passengers
Number of passengers enplaned
Number of customer complaints
Average time required at gate to enplane
passengers
Preparing aircraft for departure
Number of aircraft departures per month
Percentage of flights with delays
Average delay per flight delayed
Chapter 05 – Activity-Based Costing and Management
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EXERCISE 5-40 (40 MINUTES, PLUS TIME AT RESTAURANT)
Several restaurant activities are listed in the following table, along with the required
characteristics for each activity. Many other possibilities could be listed, depending on the
level of detail.
Activity Description
Value-Added
or Non-Value-
Added
Activity Trigger
Root Cause
Taking reservations
VA
customers arrive without
Customer calls on
Customer desires
Taking orders
VA
Customers indicate
readiness to order
Kitchen staff needs to know
what to prepare
Customers eating
VA
Meals are served and
Customers are hungry
Clearing the table
VA
Customers are
finished
Customers have finished
eating
Serving meals to
VA
Meals are ready
Meals are ready; customers
5-19
EXERCISE 5-40 (CONTINUED)
Delivering check to
VA
Customers are
Customers need to know
EXERCISE 5-41 (30 MINUTES)
EXERCISE 5-42 (25 MINUTES)
1. Customers ranked by sales revenue:
(1)
108
(11)
113
(2)
114
(12)
135
(3)
112
(13)
106
(4)
116
(14)
111
(5)
110
(15)
133
(6)
124
(16)
107
(7)
121
(17)
134
(8)
127
(18)
119
(9)
125
(19)
136
(10)
128
(20)
137
5-20
EXERCISE 5-42 (CONTINUED)
4. A customer characterized by high sales revenue would not necessarily be the most
EXERCISE 5-43 (30 MINUTES)
Memorandum
Date: Today
To: President, Windy City Design Company