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12e_GNB_CH08_Solutions_Manual - Chapter 8 Activity-Based...

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Sheet1 Page 1 Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making Solutions to Questions 8-1 Activity-based costing differs from tradi-tional costing systems in a number of ways. In activity-based costing, nonmanufac t u y product costs. An activity-based costing system typically includes a number of activity cost pools, each of which has its unique measure of activity. These measures of activity often differ from the allocation bases used in traditional costing sys- tems. 8-2 When direct labor is used as an allocation base for overhead, it is implicitly assumed that overhead cost is directly proportional to direct labor. When cost systems were originally devel- oped in the 1800s, this assumption may have been reasonably accurate. However, direct labor has declined in importance over the years while overhead has been increasing. This suggests that there is no longer a direct link between the level of direct labor and overhead. Indeed, when a company automates, direct labor is replaced by machines nied by an increase in overhead. This violates the assumption that overhead cost is directly propor- tional to direct labor. Overhead cost appears to be driven by factors such as product diversity and complexity as well as by volume, for which direct labor has served as a convenient measure. 8-3 Employees may resist activity-based cost- ing because it changes the • rules of the game.± ABC changes some of the key measures, such as product costs, used in making decisions and may affect how individuals are evaluated. Without top management support, employees may have little interest in making these changes. In addition, if top managers continue to make decisions based on the numbers generated by the traditional cost- ing system, subordinates will quickly conclude that the activity-based costing system can be ig- nored. 8-4 Unit-level activities are performed for each unit that is produced. Batch-level activities are performed for each batch regardless of how many units are in the batch. Product-level activi-
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Sheet1 Page 2 ties must be carried out to support a product re- gardless of how many batches are run or units produced. Customer-level activities must be car- ried out to support customers regardless of what products or services they buy. Organization- sustaining activities are carried out regardless of the company¶ s precise product mix or mix of cus- tomers. 8-5 Organization-sustaining costs, customer- level costs, and the costs of idle capacity should not be assigned to products. These costs represent resources that are not consumed by the products. 8-6 In activity-based costing, costs must first
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12e_GNB_CH08_Solutions_Manual - Chapter 8 Activity-Based...

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