CHAPTER 5: 10.

Explain how ABC can help a firm identify its true low-
cost supplies.
1. Describe the two-stage process associated with - Tracing supplier-driven costs to suppliers can enable
plantwide overhead rates. managers to choose the true low-cost suppliers,
- First stage: overhead costs are assigned to an producing a stronger competitive position and
organizational unit (plant or department) increased profitability.
- Second stage: overhead rate is computed and used 11. What is driver analysis? What role does it play in
to assign to cost objects process-value analysis?
2. Describe the two-stage process for departmental - Driver analysis is the effort expended to those
overhead rates. factors that are root causes of activity costs.
- First stage: overhead costs are assigned to Knowing the root causes of activity costs is the
production department
key to improvement of cost efficiency and
- Second stage: individual department rates are used
innovation.
to assign to cost objects as they pass through the
12. What are value-added activities? Value-added costs?
departments
- Value-added activities are necessary for a business
3. What are the nonunit-level overhead activities?
to achieve corporate objectives and remain in
Nonunit-based cost drivers? Give some examples.
business. (Example: compliance with the reporting
- Nonunit level overhead activities are the activities
requirements of SEC and filing requirements of
that are not performed each time a unit of product is
Internal Revenue Securities)
produced. (Example: setups, material handling, and
- Value-added costs are costs caused bay value-added
inspection)
activities.
- Nonunit-based cost drivers are factors that measure
13. What are nonvalue-added activities? Non-value added
the consumption of nonunit-level activities by
costs? Give an example of each.
products and other cost objects. (Example: setup
- Nonvalue-added activities are all activities other
hours, number of moves, and hours of inspection)
than those that are absolutely essential to remain in
4. What is product diversity?
business. (Example: scheduling, moving, waiting,
- Product diversity is the situation present when
inspecting and storing)
products consume overhead in different
- Nonvalue-added costs are caused either by
proportions.
nonvalue-added activities or the inefficient
5. What is an overhead consumption ratio?
performance of the nonvalue-added activities.
- Overhead consumption ratio measures the
(Example: cost of reworking defective products,
proportion of each activity consumed by a product.
inspection costs)
6. What is activity-based product costing?
14. Identify and define 4 different ways to manage
- Activity-based product costing is a cost assignment
activities so that costs can be reduced.
approach that first uses direct and driver tracing to
- Activity elimination – process of eliminating
assign costs to activities and then use drivers to
nonvalue-added activities
assign costs to cost objects.
- Activity Selection – process of choosing among sets
7. What is an activity dictionary?
of activities caused by competing strategies
- Activity dictionary is a list of activities described by
- Activity Reduction – process of decreasing the time
specific attributes such as name, definition,
and resources required by an activity
classification as primary or secondary, and activity
- Activity Sharing – process of increasing the
driver.
efficiency of necessary activities by using economies
8. Explain how costs are assigned to activities.
of scale
- Costs are assigned to activities using direct tracing
15. What is cycle time? Velocity?
and resource drivers.
- Cycle time is the length of time required to produce
9. Describe the value of activity-based customer costing.
one unit of a product.
- Accurate customer costs allow managers to make
- Velocity is the number of units that can be produced
better pricing decisions, customer-mix decisions and
in a given period of time.
other customer-related decisions that improve
profitability.