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True / False: Activity-based costing can be used with (1) job costing, (2) processing costing?
True - it can be used for all types of cost accumulation systems.
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Why is activity-based costing (ABC) used?
When one single overhead application rate isn't applicable because there are multiple causes and effects that influence how overhead should be applied to product cost
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When switching from traditional product costing to activity based costing; for a low-volume product are unit cost higher or lower when using ABC?
typically substantially higher
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What are the benefits of using ABC costing compared to traditional costing?
- More accurate because it applies more overhead to areas that use more resources (as opposed to being based simply on quantity)
- More flexible
- Takes a long-term viewpoint
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What are the limitations of ABC Costing?
- Cannot be used for external reporting
- Very expensive to create and implement
- Not always accepted by the employees
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What are the steps involved in implementing an ABC Costing system?
- DEVELOP A BUDGET WITH THE FOLLOWING INFO
- (1) identify activity centers
- (2) identify the cost driver within each activity center(3) determine how much cost per activity center is accumulated
- (4) determine the activity level within each activity center based on the cost driver
- (5) determine a cost/driver
- APPLY THE OVERHEAD TO ACTUALS
- Apply the cost/driver to the actual driver amount to calculate total cost per activity
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What are the 2 methods of service cost allocation using ABC? Provide a brief description.
- (1) Direct Method: costs are allocated to production w/o concern for whether services are performed for other service areas.
- (2) Step-Down Method: Costs are assigned to other service centers and then allocated to production.
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Provide definitions for the following regarding joint product costing: (1) joint products, (2) by-products, (3) split-off point, (4) separable costs
- (1) two or more products that are generated from a common input
- (2) minor products of relatively small value that result from the manufacture of the main product
- (3) the point at which the joint products can be recognized as individual products
- (4) costs incurred on a product after the split-off point
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What are the two methods of assigning joint costs to more than one product line?
- (1) based on volume
- (2) based on relative net realizable values at split-off point
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How are joint costs assigned to separate products? Assume ProdA produces 10,000gal, ProdB produces 20,000gal. How would joint costs be assigned
- (1) determine a cost driver, such as production hours, units of product, or similar
- (2) Use a proportional method based on the cost driver
- Example: 1/3 of joint costs would go to ProdA (10,000gal/30,000gal total), 2/3 to ProdB
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When using the net realizable value method of assigning joint costs, which 2 methods can be used?
- (1) If NRV at split off is known, use proportional amounts based on total NRV per product.
- (2) If NRV is unknown, calculate the NRV at split off = final selling price - identifiable costs incurred after split-off
- (3) when more than one product is involved, use the NRV at split off if known, calculate for the others.
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If by-products can be sold at the end of the joint production process, how is the amount received applied to the cost allocation?
- Proceeds from the sale reduce the common costs for joint product costing OR
- The revenue can be considered miscellaneous income.
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For purposes of allocating joint costs to joint products, the sales price at point of sale, reduced by cost to complete after split-off, is assumed to be equal to what?
Net (or relative) sales value at split off
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