1.VPS Is a large manufacturing business that Is Introducing an activity based costing system into its business. VPS ships components via 1ts own logistics operation to its central manufacturing center In Glasgow from a wide variety of locations. It is attempting to identify the correct cost driver for the cost pool called 'component handling'.
Which of the following would be the correct figure to use?
A.Average components per unit
B.Total number of components shipped
C.Average distance travelled by a component
D.Total components-distance travelled
A total figure is needed and assuming distance travelled increases the costs of handling, then the correct answer is D.
2.Weaver ltd prints two weekly newspapers: the Crystal Courier (40,000 copies In one weekly production run) and the Palace Bugle (25,000 copies in total, split over two production runs every week.) Production run set-up costs amount to $2,150 every week. Weaver uses Activity Based Costing and the number of production runs as a cost driver. 1
What is the set-up cost for each copy of the Pa lace Bugle?
A. $0.018 per copy
B. $0.033 per copy
C. $0.043 per copy
D. $0.057 per copy
The overhead absorption rate per production run is calculated as
OAR = (Production set-up costs, in)/ (Number of production runs)
OAR = $2,150/ (3 production runs every week)
OAR = $716.67 per production run.
For the Palace Bugle, 2 set-up runs* $716.67 per run = $1,433.33. Spread over 25,000
H $1,433.33 $ copies, t is amounts to _ 0.057 per copy. 25,000 papers
3.The following statements have been made about ABC and cost drivers.
(1) A cost driver is any factor that causes a change in the cost of an activity.
(2) For long-term variable overhead costs, the cost driver will be the volume of activity.
(3) Traditional absorption costing tends to under-allocate overhead costs to low-volume products.
Which of the above statements is/are true?
A.and (3) only
B.and (3) only
C.and (2) only
D.(1), (2) and (3)
Statement (1) provides a definition of a cost driver. Cost drivers for long-term variable overhead costs will be the volume of a particular activity to which the cost driver relates, so Statement (2) is correct. Statement (3) is also correct. In traditional absorption costing, standard high -volume products receive a higher amount of overhead costs than with ABC. ABC allows for the unusually high costs of support activities for low-volume products (such as relatively higher set-up costs, order processing costs and so on).