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CHAPTER 11
SYSTEMS DESIGN: ACTIVITY-BASED COSTING
AND MANAGEMENT
I.
Questions
1. The three levels available are: Level 1, in which a company uses a
plantwide overhead rate; Level 2, in which a company uses departmental
overhead rates; and Level 3, in which a company uses activity-based
costing.
2. New approaches to costing are needed because events of the last few
decades have made drastic changes in many organizations. Automation
has greatly decreased the amount of direct labor required to manufacture
products; product diversity has increased in that companies are
manufacturing a wider range of products and these products differ
substantially in volume, lot size, and complexity of design; and total
overhead cost has increased to the point in some companies that a
correlation no longer exists between it and direct labor.
3. The departmental approach to assigning overhead cost to products relies
solely on volume as an assignment base. Where diversity exists between
products (that is, where products differ in terms of number of units
produced, lot size, or complexity of production), volume alone is not
adequate for overhead costing. Overhead costing based on volume will
systematically overcost high-volume products and undercost low-volume
products.
4. Process value analysis (PVA) is a systematic approach to gaining an
understanding of the steps associated with a product or service. It
identifies all resource-consuming activities involved in the production
process and labels these activities as being either value-added or nonvalue-added. Thus, it is the beginning point in designing an activity-based
costing system since management must know what activities are involved
with each product before activity centers can be designated and cost
drivers established. Also, PVA helps management to eliminate any nonvalue-added activities and thereby streamline operations and minimize
costs.
5. The four general levels of activities are:
11-1
11-2
3. False
4. True
5. False
6. False
7. True
8. True
III. Exercises
Exercise 1
Activity
a. Materials are moved
from the receiving
dock to product flow
lines by a materialhandling crew
Activity
Classification
Batch-level
Examples of
Traceable
Costs
Labor cost;
depreciation
of equipment;
space cost
Examples of
Cost
Drivers
Number of
receipts;
pounds handled
Unit-level
Direct labor
cost; indirect
labor cost;
labor benefits
Direct laborhours
c. Ongoing training is
Facility-level*
Space cost;
training costs;
administration
costs
Hours of
training time;
number trained
d. A product is
designed by a
specialized design
team
Product-level
Space cost;
supplies used;
depreciation of
design
equipment
Hours of
design time;
number of
engineering
change orders
e. Equipment setups
are performed on a
regular basis
Batch-level
Labor cost;
supplies used;
depreciation of
equipment
Number of
setups; hours
or setup time
provided to all
employees in the
company
11-3
f. Numerical control
(NC) machines are
used to cut and
shape materials
Unit-level
Power;
supplies used;
maintenance;
depreciation
Machinehours; number
of units
Exercise 2
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
IV. Problems
Problem 1
Cost
Systems
Traditional cost system
ABC system
Labor
Machining
Setup
Production order
Material handling
Parts administration
Pool
Rate
350%
Cost Driver
Consumption
P10,000
Cost
Assignment
P35,000
10%
P25/hour
P10/hour
P100/order
P20/requisition
P40/part
P10,000
800 hours
100 hours
12 orders
5 requisitions
18 parts
P 1,000
20,000
1,000
1,200
100
720
P24,020
Problem 2
Requirement 1
(a)
Total overhead = P200,000 + P32,000 + P100,000 + P120,000
= P452,000
11-4
Overhead rate
P 6,000
9,040
P25,040
P5,000
240
80
300
P5,620
P 6,000
5,620
P21,620
A
D
C
B
A
D
A
B
D
C
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
B
D
C
A
C
D
D
C
B
A
21.
21.
22.
23.
24.
25.
26.
27.
28.
29.
D
A
B
A
B
D
B
C
A
C
11-6
P6,000
10,000
P5,000
240
80
300
5,620
P21,620
120%
P25,944