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Exam 7: Activity-Based Costing and Management

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Question 1

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List the six ABC cost hierarchies and provide an example of one activity for each hierarchy.

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The activities and one example each are ...

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Explain why measurement error could increase as the number of cost pools increase in an ABC system.

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Each cost pool could have errors in the ...

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Offices-On-The-Go rents temporary office space to business travellers; provides copying and fax services; and sells small amounts of office supplies, such as paper, pens and notebooks. It maintains 6 facilities in the Greater Toronto Area, all of which report to a single corporate office. You have been hired by Priscilla Solara, the manager of Store #2, to analyze costs and make recommendations regarding quality improvements. You decide to analyze Store #2's activities and develop an activity-based costing and an activity-based management system to achieve those objectives. After reviewing documents, interviewing employees, and observing daily operations, you have compiled the following list of activities: * Purchase office supplies. Two purchasing agents process approximately 50 purchase orders per month from 5 vendors. Their salaries total $5,000 each month. Each purchasing agent uses a computer and other office equipment, and monthly amortization charges total $300. The purchasing operation occupies 1,200 square metres of the store's 8,500 square metres facility. Monthly purchases average $2,000, and about 60% of the supplies purchased are sold to customers. The remaining 40% are used in the store's operations. * Provide office space to customers. The store's main source of revenue is renting office cubicles to customers. Each cubicle is 200 square metres and contains a desk, chair, filing cabinet, computer with Internet access, printer, and telephone. Each Offices-on-the-Go site maintains 15 such cubicles, and the monthly amortization on cubicle furniture and equipment totals $500. * Copy and fax documents for customers. The copy and fax centre contains 5 self-service copiers and 3 fax machines. Monthly amortization on those items totals $250. The copy and fax centre occupies 1,500 square metres. * Maintain company operations. Store #2 employs one bookkeeper at a salary of $3,000 per month and one human resource manager at a salary of $2,800 per month. Their offices contain the same equipment as the purchasing agents with the same amortization charges; both the bookkeeper and the human resource manager occupy 500 square metres offices. * Sell office supplies to customers. Office supply displays occupy 1,000 square metres. The display racks were replaced at a cost of $1,500 last month and were expensed at that time. * Ring up sales and collect payments. Priscilla employs 10 part-time customer service representatives. Each representative works between 25 and 30 hours per month at $12 per hour. The customer service counter and related equipment (such as cash registers)occupy the remaining 500 square metres. In addition to costs for the above activities, Store #2 incurs the following costs every month: rent, $1500; utilities, $600; and maintenance, $800. Each month, 25% of profits are sent to the corporate office to help cover corporate expenses. a)Store #2 currently uses a traditional costing system, allocating indirect costs to its three product lines (office space rental, copy and fax services, and office supplies sales)based on direct labour hours. Analyze the strengths and weaknesses of the current system from the perspective of the store manager. Explain why an activity-based costing system will or will not provide better information for making decisions. b)Store #2 currently uses a traditional costing system, allocating indirect costs to its three product lines (office space rental, copy and fax services, and office supplies sales)based on the number of customers in each area. If an individual customer purchases goods or services from more than one area, they are counted with the area in which they provide the most revenue. Explain how the current system is both similar to and different from an activity-based costing system. c)Activities in an ABC system often are classified as one of six types: organization-sustaining, facility-sustaining, customer-sustaining, product-sustaining, batch-level, or unit-level. Using the list above and your own creativity, suggest one example of each activity type for Offices-on-the-Go. Your organization-sustaining activity should focus on the corporate office; all the others should focus on Store #2. d)List and discuss the steps you would use to assign costs in Store #2's ABC system. e)One of the steps in designing an ABC system is assigning costs to ABC cost pools. Another step is selecting a cost driver for each pool. Based on the preceding narrative, suggest two cost pools for Priscilla's store. For each cost pool, suggest two potential cost drivers. Explain your choices of cost pools and cost drivers. f)As you are completing the project for Priscilla, her bookkeeper shows some resistance to the ABC system. He comments: "We've always done just fine allocating costs using direct labour hours. Now you're complicating matters by talking about cost pools, cost drivers, and allocation bases. I don't understand why we can't just continue doing things the old way!" Explain the similarities and differences between cost drivers and allocation bases, and respond to the bookkeeper's concerns. g)You have completed the first part of your task, designing the ABC system. Priscilla also wants you to begin working with her on an activity-based management system for Store #2. In your own words, define activity-based management. If you and Priscilla work together to improve operations using the ABC information, explain why it is impossible to be certain that Store #2 will achieve any benefits.

Suppose the Burlington Donor Clinic of Canadian Blood Services has identified an individual blood drive as its cost object. It has established the following cost pools in developing an activity-based costing system: Non-medical personnel costs. Salaries and wages of the office staff who organize blood drives and keep donor records. Medical personnel costs. Salaries and wages of doctors and nurses who staff a blood drive. Medical supplies. Cost of needles, bandages, and containers for donated blood. Non-medical supplies. Costs of refreshments for blood donors and recordkeeping supplies. Blood drives typically require 5 to 7 beds for blood donors. Each donation requires one container (in the medical supplies cost pool) , one needle, and one set of bandages. Canadian Blood Services normally receives donated space from a community organization (such as a university or company) for each blood drive. The most likely cost driver for non-medical supplies is:

The Copy-Mart is a copy center located next to a university. The store provides a wide range of services for faculty and students, including copying, digital photo printing, providing computer time and technical support for word processing, and other miscellaneous services. The store manager has been concerned about quality problems that have recently increased. Customers have been returning copies because pages are missing or are unreadable, and new copies must be made. Complaints have also been received about the quality of technical support, and the computer systems have been subject to frequent viruses and crashes. ABC information can be used in an ABM system to manage quality. In such cases, quality costs are often classified as related to prevention activities, appraisal activities, production activities, or postsales activities. a)Define each type of quality-related activity in your own words. b)Based on the information above and your own creative thinking, give one example of each activity type for Copy-Mart. c)Suppose the managers of Copy-Mart implement an ABC system to measure the costs of quality. How could they use information from this system to improve operations?

Activity-based management relies on:

Several terms associated with activity-based costing and activity-based management and definitions are listed on.Match each definition with the term it best describes. Each numbered item has only one correct answer. Each lettered item may be used only once or not at all.

APL Corporation allocates overhead to cost objects using a two-stage process. From this information, we can infer that APL:

Organizations interested in using activity-based management must first implement an activity-based costing system.

Le Château Joyal is an historic hotel in the heart of old Quebec City. It is owned by Riel Hotels, which operates additional properties in Halifax, Montreal, and Winnipeg. Le Château Joyal has 9 floors, with approximately 20 rooms per floor. Facilities also include a workout room, restaurant, and pool. The hotel is organized into 5 departments: front desk, engineering, housekeeping, food & beverage, and customer relations. As part of its operation, Le Château Joyal regularly incurs the following costs: General manager's salary Housekeeping supplies Utility costs Amortization on workout room equipment Advertising Food and beverage costs Amortization on restaurant equipment Advertising for the Riel Hotels chain is best described as a(n) :

Product inspections are an example of:

Which of the following factors are associated with successful ABC implementations?

Describe activity based management.

Which of the following statements is true?

Costs associated with developing an ABC system most likely include:

In an ABC system, a "cost object" could be a unit of product, a product line, or a customer.

In general, the risk of measurement error in an ABC system increases when:

Activity-based management and activity-based costing are two ways of describing the same thing.

Describe customer-sustaining activities and give one example.

(CMA) Flagler Corporation is preparing its annual profit plan. As part of its analysis of the profitability of individual products, the controller estimates the amount of overhead that should be assigned to the individual product lines from the information given as follows: Wall Mirrors Specialty Windows Units produced 25 25 Material moves per product line 5 15 Direct labour hours per unit 200 200 Budgeted materials handling costs are $50,000. Under a costing system that assigns overhead on the basis of direct labour hours, the materials handling costs allocated to one unit of wall mirrors would be: