ACCT60Chapter3.docVIP

CHAPTER 3 ACTIVITY-BASED MANAGEMENT Questions, Exercises, and Problems: Answers and Solutions 3.1 See text or glossary at the end of the book. 3.2 Disagree. This chapter deals with the problem of allocating indirect costs to products. Indirect costs can be the overhead costs incurred in manufacturing a good or providing a service. 3.3 Step 2 of ABC is to identify the cost drivers associated with each activity. These cost drivers can be selected based on causal relation, benefits received, or reasonableness. 3.4 Companies using a single plantwide rate for their allocation of indirect costs usually select a volume based allocation factor, such as direct labor hours, machine hours, volume of activity, or material costs. 3.5 1. Identify the activities that consume resources. 2. Identify the cost drivers of those activities. 3. Compute a cost rate per cost driver unit. 4. Allocate costs to products by multiplying the cost driver rate times the cost driver volume consumed by the product. 3.6 1. Causal relation. Allocate costs to the product that causes the cost. 2. Benefits received. Allocate costs to the product that receives the most benefit. 3. Reasonableness. Some costs cannot be linked to products based on either causality or benefits received, so they must be allocated on the basis of fairness or reasonableness. 3.7 The traditional approach uses one allocation rate to allocate indirect costs (typically based on direct-labor hours or machine hours), and therefore is simple and relatively inexpensive to implement. The activity-based costing approach uses multiple allocation rates using several different allocation bases (for example, machine setups, number of purchase orders, etc.), and therefore requires more accounting resources to implement. 3.8 Cultures that focus on long-term results are more likely to accept activity-based costing. ABC takes time to be implemented effectively, and requires participation across the organization.