Costing Systems

1 January 2017

Many traditional costing systems: A. trace manufacturing overhead to individual activities and require the development of numerous activity-costing rates. B. write off manufacturing overhead as an expense of the current period. C. combine widely varying elements of overhead into a single cost pool. D. use a host of different cost drivers (e. g. , number of production setups, inspection hours, orders processed) to improve the accuracy of product costing. E. produce results far superior to those achieved with activity-based costing.

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 The following tasks are associated with an activity-based costing system: 1—Calculation of cost application rates 2—Identification of cost drivers 3—Assignment of cost to products 4—Identification of cost pools Which of the following choices correctly expresses the proper order of the preceding tasks?

Controller D reported that part of the problem in his firm results from major differences among product lines with respect to unit volume, utilization of activities, quality assurance requirements established by customers, and product size. Controller M noted that in her firm, which manufactures consumer goods, all items undergo the same basic production processes in the same sequence. However, lately there has been a significant increase in the number of item colors. Both controllers are worried about the potential distortion of product costs under their traditional product-costing systems.

Which controller should be more concerned about the potential distortion? Explain. LO: 5 Type: RC, N Answer: Controller D should be more concerned. The variety of product lines made in his firm’s facility reflects diversity at the product-line and cost levels. In Controller M’s firm, there still is only one product line, with an increasing number of models differentiated only by color. (In many applications, there is no or very little cost difference among color choices. ) Thus, D’s firm may be the victim of cost distortion and a prime candidate for activity-based costing. 38 Hilton

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