Copyright © 2018 by Nelson Education Ltd. 7-1
CHAPTER 7
ACTIVITY-BASED COSTING AND MANAGEMENT
DISCUSSION QUESTIONS
1. For plantwide rates, overhead is first
collected in a plantwide pool, using direct
tracing. Next, an overhead rate is computed
and used to assign overhead to products.
2. First stage: Overhead is assigned to
production department pools using direct
tracing, driver tracing, and allocation. Second
stage: Individual departmental rates are used
to assign overhead to products as they pass
through the departments.
3. Non-unit-level overhead activities are those
overhead activities that are not highly
correlated with production volume measures.
Examples include setups, materials handling,
and inspection. Non-unit-based cost drivers
are causal factors—factors that explain the
consumption of non-unit-level overhead.
Examples include setup hours, number of
moves, and hours of inspection.
4. Product diversity is present whenever
products have different consumption ratios
for different overhead activities.
5. An overhead consumption ratio measures
the proportion of an overhead activity
consumed by a product.
6. Activity-based product costing is an overhead
costing approach that first assigns costs to
activities and then to products. The
assignment is made possible through the
identification of activities, their costs, and the
use of cost drivers.
7. An activity dictionary is a list of activities
accompanied by information that describes
each activity (called attributes).
8. Costs are assigned using direct tracing and
resource drivers.
9. Activity-based customer costing can identify
what it is costing to service different
customers. Once known, a firm can then
devise a strategy to increase its profitability
by focusing more on profitable customers,
converting unprofitable customers to
profitable ones where possible, and “firing”
customers that cannot be made profitable.
10. Activity-based supplier costing traces all
supplier-caused activity costs to suppliers.
Often many costs are overlooked by
traditional costing. By assigning all costs that
are caused by suppliers, a company may find
that its low-cost supplier does not correspond
to the one that has the lowest purchase price.
11. Driver analysis is concerned with identifying
the root causes of activity costs. Knowing
these root causes is the key to improvement
and innovation. Once a manager
understands why costs are being incurred,
efforts can be taken to improve cost
efficiency.
12. Value-added activities are necessary
activities. Activities are necessary if they are
mandated or if they are not mandated and (1)
they cause a change of state, (2) the change
of state is not achievable by preceding
activities, and (3) they enable other activities
to be performed. Value-added costs are
costs caused by activities that are necessary
and efficiently executed.
13. Non-value-added activities are unnecessary
activities or activities that are necessary, but
inefficient and improvable. An example is
moving goods. Non-value-added costs are
those costs caused by non-value-added
activities. An example is the cost of materials
handling.
14. (1) Activity elimination—the identification
and elimination of activities that fail to add
value. (2) Activity selection—the process of
choosing among different sets of activities
caused by competing strategies. (3) Activity
reduction— the process of decreasing the
time and resources required by an activity. (4)
Activity sharing—increasing the efficiency of
necessary activities using economies of
scale.
15. Cycle time is the length of time required to
produce one product; velocity is the number
of units that can be produced in a given
period of time.