Chapter 5 Solutions
Chapter 5
|Activity-Based Cost Systems |[pic] |
QUESTIONS
5-1 Traditional volume-based cost allocation systems that use only drivers that vary directly with the volume of products produced—such as direct labor dollars, direct labor hours, or machine hours—are likely to systematically distort product costs because they break the link between the cause for the costs and the basis for assignment of the costs to the individual products. Costs may vary not only with respect to volume of production, but also, for example, with batch-related activities (e.g., changeovers, setups, and inspection of the first item of production run) and the number of products (e.g., scheduling materials receipts and improving products). Also, cost distortions tend to be greater with greater differences between relative proportions of indirect resources used by cost objects because traditional cost assignments based on volume-related measures do not accurately reflect these differences.
5-2 Volume-based traditional product costing systems that use only drivers that vary directly with the volume of products produced—such as direct labor dollars, direct labor hours, or machine hours—are most likely to distort product costs under the following two conditions: (1) Indirect and support expenses are high, especially when they exceed the cost of the allocation base itself (such as direct labor cost); and (2) Product diversity is high: the plant produces both high-volume and low-volume products, standard and custom products, and complex and simple products. The combination of these two conditions will magnify the distortions that arise because volume-based product costing systems do not accurately reflect differences in non-volume-related resource usage across products or other cost objects.
Activity-based costing systems provide more accurate costs when these two conditions hold
|Activity-Based Cost Systems |[pic] |
QUESTIONS
5-1 Traditional volume-based cost allocation systems that use only drivers that vary directly with the volume of products produced—such as direct labor dollars, direct labor hours, or machine hours—are likely to systematically distort product costs because they break the link between the cause for the costs and the basis for assignment of the costs to the individual products. Costs may vary not only with respect to volume of production, but also, for example, with batch-related activities (e.g., changeovers, setups, and inspection of the first item of production run) and the number of products (e.g., scheduling materials receipts and improving products). Also, cost distortions tend to be greater with greater differences between relative proportions of indirect resources used by cost objects because traditional cost assignments based on volume-related measures do not accurately reflect these differences.
5-2 Volume-based traditional product costing systems that use only drivers that vary directly with the volume of products produced—such as direct labor dollars, direct labor hours, or machine hours—are most likely to distort product costs under the following two conditions: (1) Indirect and support expenses are high, especially when they exceed the cost of the allocation base itself (such as direct labor cost); and (2) Product diversity is high: the plant produces both high-volume and low-volume products, standard and custom products, and complex and simple products. The combination of these two conditions will magnify the distortions that arise because volume-based product costing systems do not accurately reflect differences in non-volume-related resource usage across products or other cost objects.
Activity-based costing systems provide more accurate costs when these two conditions hold