Quiz 3 – Activity Based Costing and Activity Based Management

Answers are in green fonts

1. Which of the following is not a reason for the development of activity-based costing systems?

a. Increase harsh and randomize economic b. Increase market competition

meltdowns
c. Increase direct cost as a proportion of total d. Increase product diversity
cost

On page 5 of the slide deck of lecture 5, you will find the reasons for a refined system (ABC system) hence
the odd one out is option A.

2. The production manager of company X was having a performance review with the senior management
team. The discussion centered on the recommendations made by a consultant, regarding, what can be
done in the production process to increase output from a given input level. The team was most likely
engaged in ….

a. Production management b. Operations activity – based management

c. Consultancy management d. Activity – based management

Operations activity – based management specifically looks at efficiency, lowering costs and / or improving
asset utilization this can be found on page 7 of lecture 5 slide deck. Activity – based management includes
operations activity – based management. The increase of output from a given level of input is efficiency.
For example, if I use to get 10 mats from 100kg of raw materials and I know get 12 mats that represents an
increase in efficiency.

3. In an activity-based costing system implementation, the process of forming a coalition to better enable
its success, forms part of …

a. Project management b. Dynamic change

c. Change management d. Influence management

Change management looks at the people aspect of an ABC system implementation. Forming a coalition (a
collective action group of managers and influencers with a specific goal of ensuring a successful system
implementation) is part of change management. The other options do not apply.

4. Activity-based management's primary objectives are:

i. Employee retention ii. Customer satisfaction

iii. Improved profitability iv. Increased market share
 a. i and ii only b. i and iii only
c. iii and iv only d. ii and iii only

Customer satisfaction and improved profitability are the principal goals of ABM – check page 25 of lecture 5
slide deck. Employees retention is a human resources function and forms part of their objective. Market
share can increase if (i) the market contracts and the company’s revenue remain the same, (ii) the market
remains the same and the company portion of market increases among others which are not related to
ABM.

5. Which of the following are potential difficulties encountered with an activity-based costing system?

i. various information systems not being ii. lengthy installation time

integrated
iii. the number of cost pools which have to be iv. it is treated as a project
managed

a. i and iv only b. ii, iii and iv only

c. i, ii and iii only d. all of the above

The difficulties encountered with an activity – based costing system are explained on pages 14 to 20 in
slide deck of lecture 5.
6. UBC Inc. offers two types of car servicing - intermediate and major overhauls. Under its current simple
costing system UBC Inc. consolidates all of its operating costs of $450,000 into a single indirect cost
pool. UBC Inc. utilized 10,000 direct labor hours for intermediate overhauls and 20,000 direct labor
hours for major overhauls. Currently, UBC Inc. uses a blanket indirect cost absorption rate of $15
($450,000/30,000 direct labor hours) per direct labor hour.
a. Direct labor cost of $175,000 can be traced to intermediate overhauls $75,000 and major overhauls
$100,000
b. Set-up costs $130,000. Are allocated to intermediate and major overhauls based on set-up hours.
Intermediate overhauls require 9,000 set-up hours and major overhauls 16,000 set-up hours.
c. Leasing of equipment $100,000 which is allocated based on direct labor hours.
d. Work uniforms $45,000 which is allocated based on headcount. Intermediate overhauls have 10
employees while major overhauls have 15 employees.
 What is the cost per direct labor hour of an intermediate overhaul?

a. $7.50 b. $13.84
c. $17.31 d. $5.00

7. Using the information in question 6, What is the cost per direct labor hour (using total cost) of a major
overhaul?

a. $7.50 b. $13.84
c. $17.31 d. $5.00

These explanations apply to question 6 and 7. The total cost UBC. Inc. incurred for the year is $450,000.

Direct labor. We are given the total cost, $175,000. Further we are told $75,000 is traced to intermediate
overhauls and $100,000 is traced to major overhauls.

Set – up costs. We are given the annual cost of $130,000. This cost is allocated based on set – up hours.
We are told 9,000 hours is required for intermediate overhauls and 16,000 hours for major overhauls so
total set – up hours are 25,000. The cost is thus allocated: $46,800 [(9,000hrs ÷ 25,000hrs) * $130,000] to
intermediate overhauls and $83,200 [(16,000hrs ÷ 25,000hrs) * $130,000] to major overhauls.

Lease payment. We are given the least payment amount of $100,000. Lease payments are allocated based
on direct labor hours. Total direct labor hours are 30,000 – 10,000 (intermediate overhauls) and 20,000
(major overhauls). It is thus allocated: $33,333 [(10,000 DLH ÷ 30,000 DLH) * $100,000] to intermediate
overhauls and $67,667 [(20,000 DLH ÷ 30,000 DLH) * $100,000] to major overhauls.

Work Uniforms. We are given total cost of $45,000. The allocation is based on headcount (number of
employees). We are told 10 employees perform intermediate overhauls and 15 employees perform major
overhauls and hence we have a total headcount of 25 employees. The cost is thus allocated: $18,000 [(10
÷ 25) * $45,000] to intermediate overhauls and $27,000 [(15 ÷ 25) * $45,000)].

Answers

6. Total cost allocated to intermediate overhauls ÷ 10,000 DLH

($75,000 + $46,800 + $33,333 + $18,000) ÷ 10,000 DLH = $17.31/DLH

7. Total cost allocated to major overhauls ÷ 20,000 DLH

($100,000 + $83,200 + $66,667 + $27,000) ÷ 20,000 DLH = $13. 84/DLH

8. Heliotropic Inc. provides accounting services to firms. The company total charges to customers
includes two rates: (a) direct labor hour and (b) support services which is calculated as 25% of direct
labor hour. Three levels of employees are normally assigned to each job;
(a) Partner at a rate of $600 per hour
(b) Senior at a rate of $280 per hour and
(c) Junior at a rate of $150 per hour

Heliotropic Inc. is about to prepare its monthly billing to two customers and share the before information
with you as regards hours utilized:
March Inc. - Partner (10), Senior (20) and Junior (80)
May Inc. - Partner (8), Senior (15) and Junior (60)

What was the invoice total for March Inc. for the period?

a. $29,500 b. $23,600
c. $18,000 d. $22,500

9. Using the information in question 8, what was the invoice total for May Inc. for the period?

a. $29,500 b. $22,500
c. $18,000 d. $22,600

These elucidations are applicable to questions 8 and 9.

We are told there are 3 levels of employees and given their respective hourly rates. Further, we are told
that support services cost is calculates as 25% of the hourly rates. Both for March Inc. and May Inc. we are
given the number of hours each level of employee worked.
Using the information above, the worksheet with the answers is below:
 Heliotropic Inc.
1
Direct professional cost Support services
Client Hourly rate # hours Total Rate Total Grand Total
March Inc.
Partner $600 10 $6,000 25% $1,500 $7,500
Senior $280 20 $5,600 25% $1,400 $7,000
Junior $150 80 $12,000 25% $3,000 $15,000
$23,600 $5,900 $29,500

May Inc.
Partner $600 8 $4,800 25% $1,200 $6,000
Senior $280 15 $4,200 25% $1,050 $5,250
Junior $150 60 $9,000 25% $2,250 $11,250
$18,000 $4,500 $22,500

10. Heliotropic Inc. provides accounting services to firms. The company total charges to customers
includes two rates: (a) direct labor hour and (b) support services which is billed at $80 per direct labor
hour. Three levels of employees are normally assigned to each job;
(a) Partner at a rate of $600 per hour
(b) Senior at a rate of $280 per hour and
(c) Junior at a rate of $150 per hour

Heliotropic Inc. is about to prepare its monthly billing to two customers and share the before information
with you as regards hours utilized:

March Inc. - Partner (10), Senior (20) and Junior (80)

May Inc. - Partner (8), Senior (15) and Junior (60)

What was the total revenue for the period?

a. $32,400 b. $24,640
c. $57,040 d. $52,000

The explanations provided in above question holds expect that the support services are now charged
at a rate of $80 per direct labor hour. The worksheet with answer can be found below,
 Heliotropic Inc.
2
Direct professional cost Support services
Client Hourly rate # hours Total Rate Total Grand Total
March Inc.
Partner $600 10 $6,000 $80 $800 $6,800
Senior $280 20 $5,600 $80 $1,600 $7,200
Junior $150 80 $12,000 $80 $6,400 $18,400
$23,600 $8,800 $32,400

May Inc.
Partner $600 8 $4,800 $80 $640 $5,440
Senior $280 15 $4,200 $80 $1,200 $5,400
Junior $150 60 $9,000 $80 $4,800 $13,800
$18,000 $6,640 $24,640

March Inc. + May Inc. $57,040