[Yewizzle]

Can someone please help me w/ this question from Becker:

The use of activity based costing normally results in:

a) Substantially greater unit costs for low volume products than is reported by traditional costing

b) Substantially lower unit costs for low volume products than is reported by traditional costing

What’s the answer and why? I’m not really understanding the explanation per becker

Yup, I'm the one who's been doing and trying to wing this for almost 8 years! 25 attempts later, decided in 2015- God help me, this exam will be done in 2016!
Over $5k later, hoping to be done w/ this exam after sitting for 4 tests a total of 31 times! It's so embarrassing but hoping to be done in February 2016!

FAR: Passed 64,66,64,71,73,71,72,75
REG: Passed 67,66,72,75,59,64,56,69,80
BEC: Passed 64,70,76,77,73,79
AUD: Passed 65,85,71,70,80,89,71,91

[Biff-1955-Tannen]

The answer should be a) Substantially greater unit costs for low volume products than is reported by traditional costing.

Somebody correct me if I'm wrong, but I think what it's getting at is that products with lower volume will have greater costs per unit with activity drivers such as start up. So if it costs $10,000 to start up production and you produce 1 unit, that unit will have $10,000 allocated to it. If it produces 10,000 units, each unit will have $1 allocated to it for startup costs.

AUD - 93
BEC - 83
FAR - 83
REG - 84

Nobody calls me chicken

AUD 93 Jan 16
BEC 83 Feb 16
FAR 83 Apr 16
REG 84 May 16

99% Ninja MCQ only

[FAR_WARS]

I think that's it.

In general, lower volume = greater costs per unit.

Now tack on ABC costing which uses more cost drivers, and is even more accurate than traditional costing, and we have an even better chance of costs per unit being higher.

FAR- 80
BEC- 75
AUD- 78
REG- ?

[Mehow]

I agree with the above posts. For instance, when I worked in a factory in maintenance. If there was a holiday and the factory was closed from Monday to Wednesday, the owner would keep the factory closed for the rest of the week, because the cost to start production wouldn't be worth it for two days. I hope this sort of makes sense in a real application.

FAR = 86 4/22/16
BEC = 80 6/01/16
REG = 07/26/16
AUD = ?

[tuanxn]

Biff is correct. To expand on his answer a little:

The other option is process costing, which uses a single cost driver such as direct labor hours or machine hours.

Say we have 2 products (product A and product B):

We produce 10 units of product A with 2000 total direct labor hours (200 DLH per unit) and 5 set ups (2 units per set up or 1 unit per 1/2 set up)
We produce 5 units of product B with 500 total direct labor hours (100 DLH per unit) and 5 set ups (1 units per set up)

Total set up costs are $10,000 and other indirect labor costs are $20,000

Under process costing we aggregate all costs and allocate them based on direct labor hours:
$30,000 total costs / 2500 direct labor hours = $12 / DLH

So under process costing product A has $2400 of costs per unit
Product B has $1200 of costs per unit

Under Activity based costing, we aggregate the costs in separate pools and allocate them using cost drivers that drive those costs (cause and effect drivers):

Set up costs are $10,000 / 10 total set ups = $1,000 per set up
Other indirect labor costs are $20,000 / 2500 total DLH = $8 per DLH

So under activity based costing, product A now has a per unit cost of $2100 ($1600 of indirect labor costs + $500 set up costs)
Product B now has a per unit cost of $1800 ($800 of indirect labor costs + $1000 set up costs)

As you can see, the lower volume product (product B) has a higher per unit cost under activity based costing. This is a more accurate allocation of costs.

[Yewizzle]

Got it!!! Thanks guys!!! Makes complete sense now!

Yup, I'm the one who's been doing and trying to wing this for almost 8 years! 25 attempts later, decided in 2015- God help me, this exam will be done in 2016!
Over $5k later, hoping to be done w/ this exam after sitting for 4 tests a total of 31 times! It's so embarrassing but hoping to be done in February 2016!

FAR: Passed 64,66,64,71,73,71,72,75
REG: Passed 67,66,72,75,59,64,56,69,80
BEC: Passed 64,70,76,77,73,79
AUD: Passed 65,85,71,70,80,89,71,91

[Yewizzle]

Not sure how to explain how thankful I am. Y'all on another71 are just all kinds of awesome 🙂

Yup, I'm the one who's been doing and trying to wing this for almost 8 years! 25 attempts later, decided in 2015- God help me, this exam will be done in 2016!
Over $5k later, hoping to be done w/ this exam after sitting for 4 tests a total of 31 times! It's so embarrassing but hoping to be done in February 2016!

FAR: Passed 64,66,64,71,73,71,72,75
REG: Passed 67,66,72,75,59,64,56,69,80
BEC: Passed 64,70,76,77,73,79
AUD: Passed 65,85,71,70,80,89,71,91

[Author]

Replies