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Chapter 5 class solutions

Chapter 5 class solutions - d in stage I for more inputs a...

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Activity Triggers Activities Cost Objects (products or services produced; customers) Assignment of activity costs to cost objects using second-stage cost drivers Performance Measures Activity evaluation Activity analysis Process View Assignment of resource costs to activity cost pools associated with significant activities Resource Costs Cost Assignment View Root Causes ed in stage I for more inputs. s a need in stage II for more inputs. is a need in stage III for more inputs. ts more finished units. This signal triggers manufacturing activity in the final stage of production (stage III). oods. ion. CHAPTER 5 Activity-Based Costing and Management Answers to Review Questions 5-1 In a traditional, volume-based product-costing system, only a single predetermined overhead rate is used. All manufacturing-overhead costs are combined into one cost pool, and they are applied to products on the basis of a single cost driver that is closely related to production volume. The most frequently used cost drivers in traditional product-costing systems are direct-labour hours, direct-labour dollars, machine hours, and units of production. 5-2 Management was being misled by the traditional product- costing system, because the high-volume product lines were being overcosted and the low-volume product line was being undercosted. The high-volume products essentially were subsidizing the low-volume line. The traditional product-costing system failed to show that the low-volume products were driving more than their share of overhead costs. As a result of these misleading costs, the company's management was mispricing its products. 5-3 An activity-based costing system is a two-stage process of assigning costs to products. In stage one, activity-cost pools are established. In stage two a cost driver is identified for each activity-cost pool. Then the costs in each pool are assigned to each product line in proportion to the amount of the cost driver consumed by each product line. 5-4 A cost driver is a characteristic of an event or activity that results in the incurrence of costs by that event or activity. In activity-based costing systems, the most significant cost drivers are identified. Then a database is created that shows how these cost drivers are distributed across products. This database is used to assign costs to the various products depending on the extent to which they use each cost driver. 5-5 The four broad categories of activities identified in an activity-based costing system are as follows:
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(a) Unit-level activities: Must be done for each unit of production. (b) Batch-level activities: Must be performed for each batch of products. (c) Product-sustaining activities: Needed to support an entire product line. (d) Facility-level (or general-operations-level) activities: Required for the entire production process to occur.
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