96%(609)582 out of 609 people found this document helpful
This preview shows page 4 - 7 out of 68 pages.
5-17 Nobis Company uses an ABC system. Which of the following statements is/are correct with respect to ABC? I. Departmental costing systems are a refinement of ABC systems. II. ABC systems are useful in manufacturing, but not in merchandising or service industries. III. ABC systems can eliminate cost distortions because ABC develops cost drivers that have a cause-and-effect relationship with the activities performed. 1. I, II, and III are correct. 2. II and III only are correct. 3. III only is correct.
5-5 4. None of the listed choices is correct. SOLUTION Explanation Choice "3" is correct. The question asks which of a series of statements is/are correct with respect to ABC. Statement I says that departmental costing systems are a refinement of ABC systems. Actually, ABC systems are a refinement of departmental costing systems. Statement I is incorrect. Statement II says that ABC systems are useful in manufacturing, but not in merchandising or service industries. ABC systems are useful in all three of these business sectors. Statement II is incorrect. Statement III says that ABC systems can eliminate cost distortions because ABC develops cost drivers that have a cause‐and‐effect relationship with the activities performed. Statement III is correct. 5-18 Cost hierarchy. Roberta, Inc., manufactures elliptical machines for several well-known companies. The machines differ significantly in their complexity and their manufacturing batch sizes. The following costs were incurred in 2017: a. Indirect manufacturing labor costs such as supervision that supports direct manufacturing labor, $935,000 b. Procurement costs of placing purchase orders, receiving materials, and paying suppliers related to the number of purchase orders placed, $650,000 c. Cost of indirect materials, $234,000 d. Costs incurred to set up machines each time a different product needs to be manufactured, $392,000 e. Designing processes, drawing process charts, and making engineering process changes for products, $236,900 f. Machine-related overhead costs such as depreciation, maintenance, and production engineering, $865,000 (These resources relate to the activity of running the machines.) g. Plant management, plant rent, and plant insurance, $498,000 Required: 1. Classify each of the preceding costs as output unit–level, batch-level, product-sustaining, or facility sustaining. Explain each answer. 2. Consider two types of elliptical machines made by Roberta, Inc. One machine, designed for professional use, is complex to make and is produced in many batches. The other machine, designed for home use, is simple to make and is produced in few batches. Suppose that Roberta needs the same number of machine hours to make each type of elliptical machine and that Roberta allocates all overhead costs using machine-hours as the only allocation base. How, if at all, would the machines be miscosted? Briefly explain why. 3. How is the cost hierarchy helpful to Roberta in managing its business? SOLUTION