Question

1.Which of the following would be classified as a product-level activity?

A. Setting up a machine for a batch of a standard product.

B. Operating a cafeteria for employees.

C. Running the Human Resource department.

D. Advertising a product.

 

2.The plant manager's work is an example of a:

A.Unit-level activity.

B.Batch-level activity.

C.Product-level activity.

D. Facility-level activity.                                                                                                                                                           

3.In activity-based costing, the activity rate for an activity cost pool is computed by dividing the total overhead cost in the activity cost pool by:

A.the direct labor-hours required by the product.

B.the machine-hours required by the product.

C.the total activity for the activity cost pool.

D.the total direct labor-hours for the activity cost pool.

Answer 1

Concepts and reason

Traditional costing system: It is a method of distribution of overheads between various jobs and products. Under this system, the overheads are determined and divided by the volume of the cost driver which was identified. The cost driver is decided according to the factor which majorly influences the costs and expenses.

Activity based costing (ABC): It is a method of distribution of overheads between various jobs or products. Under this system, main activities of the business are determined and divided into cost pools. Cost drivers of these main activities have been decided and estimated. Then, the cost pools of these activities are divided with the significant cost drivers.

Fundamentals

Activity cost pools: The budgeted overheads of an organization are divided into various major activities. Cost pool of an activity is an aggregate of individual costs which are affected through common cost driver.

‎Activity cost drivers: These are the factors which affect the individual cost. A cost driver is a factor which can influence the individual cost belongs to an activity. For example- Machine hours are the cost driver for machine running expenses such as electricity expense, repair, and maintenance expense of machine. More the machine will run, more will be the amount of expenses.

Unit-level activities: It arises every time when the production of a product and performance of the service took place. The examples of this activity are maintenance of the machine, direct labor, and direct material.

Batch-level activities: Whenever the production of units in batch or performance of services in series is produced, then these costs arise. The examples of this activity are setup of a machine, quality tests, and purchase orders.

Product-line activities: It is an action which is taken by the company in the support of a particular activity or a product. The examples of this activity are changes in the assembly line, changes in the design of the product, and warehousing.

Facility-level activity: These are referred to as those activities which are important for the production and development of the product. The nature of these costs is administrative costs which contain depreciation on building, property taxes and insurance.

(1)

Setting up of a machine for a batch of a standard product would not be considered as a product-level activity. It would be considered as the batch-level activities.

Operating a cafeteria for employees would not be considered as a product-level activity. It would be considered as the facility support activities.

Running the human resource department would not be considered as a product-level activity. It would be considered as the facility support activities.

Product-Level Activity is an action which is taken by the company in the support of a particular activity or a product. The actions taken in the support of the product are considered irrespective of the production amount or volume of the sales related to the product. Advertising a product is an action that the company considers as a product-level activity.

(2)

The work of a plant manager is not a unit-level activity. As the unit-level activity refers to the direct material, direct labor, and maintenance of the machine.

The work of a plant manager is not a batch-level activity. As the batch-level activity includes purchase order, setup of a machine, and quality tests.

The work of a plant manager is not a product-level activity. As the product-level activity includes changes in the assembly line, changes in the design of the product, and warehousing.

The main role of a plant manager is to direct, coordinate and look over the operations of a manufacturing plant on the daily basis. And to maintain the neat and clean working environment for the workers. The work of a plant manager is an example of facility-level activity.

(3)

In activity based costing, the activity rate for an activity cost pool is not computed by dividing the total overhead cost in the activity cost pool by direct labor-hours required by the product.

In activity based costing, the activity rate for an activity cost pool is not computed by dividing the total overhead cost in the activity cost pool by the machine-hours required by the product.

In activity based costing, the activity rate for an activity cost pool is not computed by dividing the total overhead cost in the activity cost pool by the total direct labor-hours for the activity cost pool.

Cost pool of an activity is an aggregate of individual costs which are effected through common cost driver. The activity cost pool is computed by dividing the total overhead cost in the activity cost pool by the total activity for the cost pool.

Ans: Part 1

Advertising a product would be considered as a product-level activity.

Part 2

The plant manager’s work is an example of a facility-level activity.

Part 3

The activity cost pool is computed by dividing the total overhead cost in the activity cost pool by the total activity for the activity cost pool.