Question

• 7–1:In what fundamental ways does activity-based costing differ from traditional costing methods such as job-order costing as described in Chapters 2 and 3?

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• 7–2:Why is direct labor a poor base for allocating overhead in many companies?

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• 7–3:Why are top management support and cross-functional involvement crucial when attempting to implement an activity-based costing system?

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• 7–4:What are unit-level, batch-level, product-level, customer-level, and organization-sustaining activities?

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• 7–5:What types of costs should not be assigned to products in an activity-based costing system?

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• 7–6:What are the two stages of allocation in activity-based costing?

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• 7–7:Why is the first stage of the allocation process in activity-based costing often based on interviews?

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• 7–8:When activity-based costing is used, why do manufacturing overhead costs often shift from high-volume products to low-volume products?

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• 7–9:How can the activity rates (i.e., cost per activity) for the various activities be used to target process improvements?

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• 7–10:Why is the form of activity-based costing described in this chapter unacceptable for external financial reports?

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Answer 1

Traditional costing adds an average overhead rate to the direct costs of manufacturing products and is best used when the overhead of a company is low compared to the direct costs of production. Activity-based costing identifies all of the specific overhead operations related to the manufacture of each product.

There is no longer a direct link between direct labor and overhead. Direct labor is often replaced by machines; and decrease in direct labor leads to an increase in overhead. Overhead costs are driven by factors such as product diversity and complexity as well as volume

Management:

-provide leadership that is needed to properly motivate all employees to embrace the ABC system

-Top managers have the authority to link ABC data to the employee evaluation and reward system.

Cross functional:

-possess intimate knowledge of operations that is needed to design an effective ABC system.

-By using their knowledge it lessens the resistance to ABC because they feel that they have helped the process

organization-sustaining costs

-customer level costs

Costs of idle capacity should not be assigned to products, these costs represent resources that are not consumed by the products