Question

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

7–3 Why are top management support and cross-functional involvement crucial when

attempting to implement an activity-based costing system?

7–4 What are unit-level, batch-level, product-level, customer-level, and organization-sustaining

activities?

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

system?

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

interviews?

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

Answer 1

(7--2) -- Why is direct labor a poor base for allocating overhead in many companies?

Answer -

Direct labor a poor base for allocating overhead in many companies because, 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.

.

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

Answer -

The support of the top management is necessary while attempting to implement an activity-based costing system because they provide leadership that is needed to properly motivate all employees to embrace the activity-based costing system.

The cross-functional involvement is also crucial because they possess intimate knowledge of operations that is needed to design an effective activity-based costing system.

.

(7--4) -- What are unit-level, batch-level, product-level, customer-level, and organization-sustaining activities?

Answer -

Unit Level Activities - Performed for each unit that is produced.

Batch Level Activities - Purchase orders for the batch to be made.

Product Level Activities - Designing, Advertising, Product manager, and Support staff.

Customer Level Activities - Specific to customer.

Organization Sustaining Activities - Carried out regardless of which customer served, product produced etc.

.

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

Answer -

Organization-sustaining costs, Customer level costs, Costs of idle capacity should not be assigned to products in an activity-based costing system.

.

(7--7) -- Why is the first stage of the allocation process in activity-based costing often based on interviews?

Answer -

The first stage of the allocation process in activity-based costing often based on interviews because people are often involved in more than one activity, some way must be found to estimate how much time they spend in each activity. The most practical approach is often to ask employees how they spend their time.

.

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

Answer -

The activity-based costing approach described in the chapter is probably unacceptable for external financial reports due to the following reasons -

1). The first stage of the allocation process in activity-based costing often based on interviews rather than verifiable objective data.

2). Activity-based product costs exclude some manufacturing costs and include some non-manufacturing costs.