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Discussion questions on activity-based management

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Respond to the following statements.

1. If I had just started the manufacturing business I would use a flexible budget. I would use a flexible budget because I wouldn't have solid sales history to create an accurate static budget. The static budget identifies the income that would be earned at a predetermined level of sales activities. As a new business owner, I wouldn't be able to project my exact sales for the year. A flexible budget would allow me to examine projected income over a range of sales levels. Stated differently, a flexible budget allows managers to observe how sensitive budgets are to changes in production and sales. The flex budget would allow me to avoid overspending given the current market conditions and react to opportunities in the market. A disadvantage of using the flexible budget is the budget could limit the ability to plan because it's hard to predict which scenario to use.

2. From my experience as a Financial Analyst and the leadership role in our budgeting and forecasting process, I tend to favor the idea of a static budget with supplementary forecasts following each quarter. Although the main downside to a static budget is the lack of volume or sales swing analysis, it seems worth it given the remainder of the PnL impact. It is a rather simple KPI I perform on a monthly basis to verify average sales price per kg, average raw material cost per kg, gross margin, and gross profit. These calculations have been automated via Excel formulas that allow me to identify key movements in each KPI to drive deeper analysis as to mix, pricing, standard cost updates, indirect materials, and etc. I would imagine that this process is also used in larger organizations across the globe given the time consuming nature of maintaining a flexible budget on the fly. It seems as though my KPI analysis and the use of flexible budgeting drive the same variance question answers, just through different means. The other upside I see with static budgeting is that it holds the organization accountable for sales volume upside or downside throughout the year more so than in a flexible budget. Another major factor of flexible budgeting is the dissemination of this within the organization; strictly within controlling and finance or further distribution necessary?

3. The main purpose of activity-based management is to create efficiencies in production in a company. Can you think of any of the disadvantages of using activity-based management?
4. Managers whom have access to this ABC information can use this information to determine what steps within a process of value delivery are truly value-added or not. To identify the non-value-added, which simply means that the customer is not going to gain anything directly from a certain process, allows the manager to determine if there is slack or unnecessary steps that are causing less than ideal efficiency or cost structures. There is caution to those managers though as mentioned in the text there are certain processes such as QC that may not be value-added to a customer, but a definite necessity to filter out bad batches, units, lots, and etc. (Davis, 2014). Another informational bit that managers are able to pick up from this process is the ability to remain competitive in the pricing side of things to customers. In our industry, it is common to miss quotes and bids by small amounts due to unfavorable profitability model calculations, which is due to costing not being completely accurate in process resource consumption. Some organizations, mine included, fall victim to placing a conversion cost per pound or ratio to all production items, even though this is not truly accurate as we have products that are routed through a semi-automated mixing and blending process, while some are manually handled. The ABC information to our pricing and production team would be significant as the managers would have a better true cost idea of what cost per pound of ink truly is based on product line or segment as it consumes resources, rather than strictly an allocation of overall totals as is currently done.
5. Managers use the information of activity-based management to identify cost drivers and be able to remove any non-value added activities. The activities can be regulated to a point where it is the same thing every time, and the possibility of increased costs would be a direct result in the change of raw materials pricing. Any possibility of change to the activity would be a decision made my management in order to create a better cost goal for the firm.

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1. If I had just started the manufacturing business I would use a flexible budget. I would use a flexible budget because I wouldn't have solid sales history to create an accurate static budget. The static budget identifies the income that would be earned at a predetermined level of sales activities. As a new business owner, I wouldn't be able to project my exact sales for the year. A flexible budget would allow me to examine projected income over a range of sales levels. Stated differently, a flexible budget allows managers to observe how sensitive budgets are to changes in production and sales. The flex budget would allow me to avoid overspending given the current market conditions and react to opportunities in the market. A disadvantage of using the flexible budget is the budget could limit the ability to plan because it's hard to predict which scenario to use.

A new business owner would be unable to use a flexible budget to begin with as they lack a business cycle to compare their first budget with actual costs and operational fees. The flexible budget is used to analyze the actual costs that were placated upon the business during the previous business cycle. Therefore, a new business owner would be unable to focus on previous cycles as they are new owners, and this would mean that they lack a budget for their first cycle to compare and contrast with. The new business owner would be required to use a static budget to begin their initial budgeting cycle.

2. From my experience as a Financial Analyst and the leadership role in our budgeting and forecasting process, I tend to favor the idea of a static budget with supplementary forecasts following each quarter. Although the main downside to a static budget is the lack of volume or sales swing analysis, it seems worth it given the remainder of the PnL impact. It is a rather simple KPI I perform on a monthly basis to verify average sales price per kg, average raw ...

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cost accounting

10) Which would be an appropriate cost driver for the ordering and receiving activity cost pool?

A. Inspections
B. Machine setups
C. Machine hours
D. Purchase orders

11) Which of the following is NOT typical of traditional costing systems?

A. Use of multiple cost drivers to allocate overhead
B. Use of a single predetermined overhead rate
C. Assumption of correlation between direct labor and incurrence of overhead cost
D. Use of direct labor hours or direct labor cost to assign overhead

12) A well-designed activity-based costing system starts with

A. analyzing the activities performed to manufacture a product
B. identifying the activity-cost pools
C. assigning manufacturing overhead costs for each activity cost pool to products
D. computing the activity-based overhead rate

13) What sometimes makes implementation of activity-based costing difficult in service industries is

A. attempting to reduce or eliminate nonvalue-added activities
B. the labeling of activities as value-added
C. that a larger proportion of overhead costs are company-wide costs
D. identifying activities, activity cost plus, and cost drivers

14) Which of the following factors would suggest a switch to activity-based costing?

A. Production managers use data provided by the existing system.
B. Product lines similar in volume and manufacturing complexity.
C. The manufacturing process has been stable.
D. Overhead costs constitute a significant portion of total costs.

15) All of the following statements are correct EXCEPT that

A. the general approach to identifying activities and activity cost pools is the same in a service company as in a manufacturing company
B. activity-based costing has been widely adopted in service industries
C. a larger proportion of overhead costs are company-wide costs in service industries
D. the objective of installing ABC in service firms is different than it is in a manufacturing firm

17) One of Astro Company's activity cost pools is machine setups, with estimated overhead of $150,000. Astro produces sparklers (400 setups) and lighters (600 setups). How much of the machine setup cost pool should be assigned to sparklers?

A. $90,000
B. $150,000
C. $75,000
D. $60,000

19) The cost to produce Part A was $10 per unit in 2005. During 2006, it has increased to $11 per unit. In 2006, Supplier Company has offered to supply Part A for $9 per unit. For the make-or-buy decision,

A. differential costs are $2 per unit
B. net relevant costs are $1 per unit
C. incremental costs are $1 per unit
D. incremental revenues are $2 per unit

20) Walton, Inc. is unsure of whether to sell its product assembled or unassembled. The unit cost of the unassembled product is $16, while the cost of assembling each unit is estimated at $17. Unassembled units can be sold for $55, while assembled units could be sold for $71 per unit. What decision should Walton make?

A. Process further; the company will save $16 per unit.
B. Process further; the company will save $1 per unit.
C. Sell before assembly; the company will save $15 per unit.
D. Sell before assembly; the company will save $1 per unit.

21) Ace Company sells office chairs with a selling price of $25 and a contribution margin per unit of $15. It takes 3 machine hours to produce one chair. How much is the contribution margin per unit of limited resource?

A. $10
B. $45
C. $3.33
D. $5

22) Hess, Inc. sells a single product with a contribution margin of $12 per unit and fixed costs of $74,400 and sales for the current year of $100,000. How much is Hess's break-even point?

A. 2,133 units
B. 6,200 units
C. $25,600
D. 4,600 units

23) Hartley, Inc. has one product with a selling price per unit of $200, the unit variable cost is $75, and the total monthly fixed costs are $300,000. How much is Hartley's contribution margin ratio?

A. 266.6%
B. 150%.
C. 37.5%
D. 62.5%.

24) Which statement describes a fixed cost?

A. It remains the same per unit regardless of activity level.
B. Its total varies proportionally to the level of activity.
C. The amount per unit varies depending on the activity level.
D. It varies in total at every level of activity.

25) Which cost is charged to the product under variable costing?

A. Fixed administrative expenses
B. Variable administrative expenses
C. Fixed manufacturing overhead
D. Variable manufacturing overhead

26) Variable costing

A. is also known as full costing
B. treats fixed manufacturing overhead as a period cost
C. is required under GAAP
D. is used for external reporting purposes

27) Which cost is NOT charged to the product under variable costing?

A. Fixed manufacturing overhead
B. Variable manufacturing overhead
C. Direct labor
D. Direct materials

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