Quiz on Activity-Based Costing

A company produces a range of products and uses an absorption costing system. Which of the following are unlikely to be a consequence of the company switching to an activity based costing (ABC) system?

• Indirect overheads will be shared between products on fairer bases

• Product pricing decisions will be improved

• Cost control on indirect overheads will be harder to achieve

• Total production cost of each product will change

A company which makes 2 products, Ay and Be, uses activity-based costing to absorb its overheads, It has recently identified a new overhead cost pool for inspection costs and has decided that the cost driver is the number of inspections. The following information has been provided: Total inspection costs $500,000 Ay Be Production volume (units) 5,000 16,000000 Machine hours per unit 2 33 Units per batch 1,000 2,000000 Inspection per batch 8 2 What is the inspection cost per unit of product Ay?

• $29.76

• $8.93

• $71.43

• $80.00

Which of the following statements about activity based costing is true?

• The cost driver for quality inspection is likely to be batch size

• The cost driver for materials handling and despatch costs is likely to be the number of orders handled

• In the short run, all the overhead costs for an activity vary with the amount of the cost driver for the activity

• A cost is an activity based cost

Which of the following statements about activity based costing is true?

• ABC recognises the complexity of modern manufacturing by use of multiple cost drivers

• ABC reapportions support activity costs

• ABC is an apportion costing system when overheads vary with time spent on production

• Implementation of ABC is unlikely to be cost effective when variable production cost are a low proportion of total production costs are a low proportion of total production costs

A company makes 2 products using the same type of materials and skilled workers. The following information is available: Product A Product B Budgeted volume (units) 1,000 2,000 Material per unit (kg) 10 20 Labour per unit (hours) 5 20 Fixed costs relating to material handling amount to $100,000. The cost driver for these costs is the volume of material purchased. General fixed costs, absorbed on the basis of labour hours, amount to $180,000. Using activity-based costing, what is the total fixed overhead amount to be absorbed into each unit of product A (to be nearest whole 5)?

• $113

• $120

• $40

• $105

In target costing, which of the following would be an appropriate strategy to reduce a cost gap for a product that existed in a competitive industry with demanding shareholders?

• Increase the selling price

• Reduce the expectation gap by reducing the selling price

• Reducing the desired margin on the product

• Mechanizing production in order to reduce average production cost

Which of the following strategies would be an immediately acceptable method to reduce an identified cost gap?

• Reduce the desired margin without discussion with business owners

• Reduce the predicted selling price

• Source similar quality material from another supplier at reduced cost

• Increase the predicted selling price

Which of the following techniques is NOT relevant to……….costing?

• Value analysis

• Variance analysis

• Functional analysis

• Activity analysis

The selling price of product Z is set to be $250 for each unit and sales for the coming year are expected to be 500 units. The company requires a return of 15% in the coming year on its investment of $350,000 in product Z. What is the target cost for each unit of Z for the coming year? Select from the list as appropriate.

• $105

• $145

• $212.5

• $250

Dimo Co. wants to calculate a target cost for a new product X. The price of X will be set at $20,950. The company requires a 12% profit margin on sales. What is the target cost?

• $18,436

• $18,705

• $20,950

• $23,464