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Ch14SM - CHAPTER 14 DISCUSSION QUESTIONS Q14-1 Q14-2 Q14-3...

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CHAPTER 14 DISCUSSION QUESTIONS 14-1 Q14-1. Compared to traditional costing, ABC is a more thorough application of cost traceabil- ity. Traditional costing traces only direct material and direct tabor to output; ABC rec- ognizes that many other costs are traceable, if not to output, then to other cost objects called activities. Q14-2. The role of activities in assigning costs to products, using ABC, is to serve as the link between products and costs: activities are required to produce output, and it is the activities that consume resources, thus causing costs to be incurred. This differs from traditional costing in which output is assumed to cause costs. Q14-3. Examples of significant, costly activities in manufacturing are setting up, changing designs, receiving materials, requisitioning materials, moving materials and products, ordering from vendors, and inspecting. Q14-4. The two circumstances that must be present for a traditional costing system to report dis- torted product costs are a complex cost structure and a diverse product line. Q14-5. A complex cost structure is present if a sig- nificant part of overhead cost is not related to the volume of output. Q14-6. A diverse product line is one in which differ- ent products consume different mixes of vol- ume-related and nonvolume-related costs. Q14-7. The four levels of costs and drivers in ABC are the unit level, the batch level, the prod- uct level, and the plant level. Q14-8. If a product consumes 10% of all unit-level activities and 30% of all batch-level activi- ties, traditional costing will under-report its cost by assigning 10% of all overhead costs to the product, including 10% of batch-level costs, when 30% of batch-level costs should be assigned to the product. Q14-9. When both low-volume and high-volume prod- ucts are produced in a company using tradi- tional costing, the low-volume product is likely to have its cost distorted by a larger percent- age than the high-volume product. The low- volume product’s cost is generally distorted downward by traditional costing, and the high- volume product’s cost is distorted upward. Q14-10. In assigning plant-level costs to products, ABC offers little or no advantage over tradi- tional costing. Q14-11. The difference between CM and ABC is pri- marily explained by the fact that ABC is a long-run decision-making technique, while CM is short-run analysis. Q14-12. If a product is discontinued, the costs reported for that product by ABC will not necessarily be avoided, because ABC only measures how resources are consumed by products, not how spending will be affected by discontinuing a product. Avoiding a cost requires that less be spent on some resource(s), and ABC does not predict changes in spending. (This is also true of traditional absorption costing.) Q14-13. The relationship between ABC and ABM is that ABM uses information obtained from ABC to make improvements in the firm.
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