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Unformatted text preview: Chapter 4 Activity-Based Cost Systems QUESTIONS 4-1 Conventional cost systems are likely to systematically distort product costs because they break the link between the cause for the costs and the basis for assignment of the cost to the individual products. Two factors that contribute to such cost distortions are: (1) the use of unit-related measures to allocate indirect costs and (2) differences in relative consumption ratios of indirect resources between cost objects. Unit-related measures are used to allocate support costs to products, but the demand for activities might be driven by batch-related and product-sustaining cost drivers. Also, cost distortions tend to be greater with greater differences between relative proportions of indirect resources used by cost objects because traditional cost assignments based on unit-related measures do not accurately reflect these differences. 4-2 Conventional costing systems allocate batch-related and product-sustaining costs in proportion to a unit-related measure. In a highly automated plant, costs of batch-related and product-sustaining activities are greater. Allocating these costs based on a unit-related measure distorts costs. Activity-based costing systems correct the distortion by employing appropriate cost drivers for different activities to assign costs to products. 4-3 Yes, conventional costing systems are more likely to overcost high volume products because batch-related and product-sustaining costs are assigned to products in proportion to the number of production units. 1 Atkinson, Solution Manual t/a Management Accounting, 4E 4-4 Activity cost driver is the unit of measurement for the quantity of the activity used to produce individual products or services. Activity cost drivers identify the linkage between activities and cost objects, such as products, services, and customers. An activity cost driver rate is the ratio of the cost of the resources required to provide an activity to the total quantity of the cost driver (that is, the practical capacity quantity made available by those resources). 4-5 The major steps to determine activity cost driver rates in a traditional activity- based cost system are: Step 1. Identify the activities performed by the organization (prepare an activity dictionary). Step 2. Determine the cost of performing each activity. Step 3. Identify a cost driver for each activity. Step 4. Determine the number of units of the cost driver (practical capacity) made available by the resources committed to each activity. Step 5. Divide each activity cost by the relevant activity cost driver units to obtain each activity cost driver rate. 4-6 Under the framework of a conventional cost system, costs are allocated to products based on unit-related measures such as machine hours and direct labor hours. Distortion caused by the use of unit related measures to allocate costs is corrected in activity-based costing systems because batch-related activity costs are assigned to jobs on the basis of batch-related cost drivers.are assigned to jobs on the basis of batch-related cost drivers....
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This note was uploaded on 07/12/2011 for the course BUSINESS 403 taught by Professor Jassica during the Spring '11 term at Seneca.
- Spring '11