20+ Activity Based Costing Interview Questions And Answers

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Activity Based Costing Interview Questions

Question 1. What Is Cost Accounting?

Cost accounting entails the methods for:

figuring out the prices of merchandise, processes, initiatives, and so on. with the intention to report the right quantities on the monetary statements, and
aiding administration in making choices and within the planning and management of a company.
For instance, price accounting is used to compute the unit price of a producer’s merchandise with the intention to report the price of stock on its stability sheet and the price of items bought on its earnings assertion. This is achieved with methods such because the allocation of producing overhead prices and thru the usage of course of costing, operations costing, and job-order costing programs.

Cost accounting assists administration by offering evaluation of price habits, cost-volume-profit relationships, operational and capital budgeting, commonplace costing, variance analyses for prices and revenues, switch pricing, activity-based costing, and extra.

Cost accounting had its roots in manufacturing companies, however at present it extends to service companies. For instance, a financial institution will use price accounting to find out the price of processing a buyer’s verify and/or a deposit. This in flip could present administration with steering within the pricing of those providers.

Question 2. What Is Cost Allocation?

Cost allocation is the assigning of a standard price to a number of price objects. For instance, an organization may allocate or assign the price of an costly pc system to the three fundamental areas of the corporate that use the system. An organization with just one electrical meter may allocate the electrical energy invoice to a number of departments within the firm.

Allocation implies that the assigning of the fee is considerably arbitrary. Some folks describe the allocation because the spreading of price, due to the arbitrary nature of the allocation. Efforts have been made through the years to enhance the bases for allocation. In manufacturing, the overhead allocations have moved from plant-wide charges to departmental charges, from direct labor hours to machine hours to exercise based mostly costing. The purpose is to allocate or assign the prices based mostly on the basis causes of the widespread prices as a substitute of merely spreading the prices.

Question 3. What Is A Cost Driver?

Ideally, a price driver is an exercise that’s the root reason behind why a price happens.

In the previous century, the basis reason behind oblique manufacturing prices has modified from a single price driver (equivalent to direct labor hours) to a number of price drivers. Due to stylish manufacturing and elevated calls for from prospects, direct labor is not the principle price driver of oblique manufacturing overhead.

In addition to direct labor, at present’s drivers of oblique manufacturing prices embrace the variety of machine setups required, the variety of engineering change orders, the calls for from prospects for particular inspections, dealing with and storage, the variety of elements within the models produced, and the variety of manufacturing machine hours.

Manufacturers that need to know the true prices of their merchandise must know what’s driving their oblique manufacturing prices. For these corporations it’s not enough to merely unfold overhead prices to merchandise through the use of a single issue equivalent to direct labor hours or manufacturing machine hours.

Question 4. What Is The Traditional Method Used In Cost Accounting?

The conventional technique of price accounting refers back to the allocation of producing overhead prices to the merchandise manufactured. The conventional technique (also referred to as the standard technique) assigns or allocates the manufacturing unit’s oblique prices to the gadgets manufactured on the premise of quantity such because the variety of models produced, the direct labor hours, or the manufacturing machine hours. We will use machine hours in our dialogue.

By utilizing solely machine hours to allocate the manufacturing overhead to merchandise, it’s implying that the machine hours are the underlying reason behind the manufacturing unit overhead. Traditionally, that will have been affordable or not less than enough for the corporate’s exterior monetary statements. However, in latest many years the manufacturing overhead has been pushed or attributable to many different components. For instance, some prospects are more likely to demand extra manufacturing operations for his or her numerous merchandise. Other prospects merely need nice portions of uniform merchandise.

If a producer desires to know the true price to supply particular merchandise for particular prospects, the normal technique of price accounting is insufficient. Activity based mostly costing (ABC) was developed to beat the shortcomings of the normal technique. Instead of only one price driver equivalent to machine hours, ABC will use many price drivers to allocate a producer’s oblique prices. A number of of the fee drivers that may be used beneath ABC embrace the variety of machine setups, the kilos of fabric bought or used, the variety of engineering change orders, the variety of machine hours, and so forth.

Question 5. What Is A Plant-wide Overhead Rate?

A plant-wide overhead price is a single price used to assign or allocate all of an organization’s manufacturing overhead prices to its manufacturing output. (Manufacturing overhead prices are the oblique prices of manufacturing equivalent to repairs, upkeep, depreciation, electrical energy, supervision, and so on.) Often the plant-wide price is an quantity per machine hour, an quantity per labor hour, or a proportion of a product’s direct prices.

Using a plant-wide price is logical when there’s one root reason behind the oblique manufacturing prices and the corporate manufactures comparable merchandise. For instance, an organization with a easy manufacturing operation that produces comparable merchandise might have a plant-wide overhead price of $40 per machine hour if it has budgeted $800,000 of complete manufacturing overhead prices and it expects to supply 20,000 machine hours of fine output.

On the opposite hand, if the corporate manufactures numerous merchandise, a few of which use costly gear whereas some use solely cheap gear, a plant-wide price is just not acceptable. In response to this example, producers have developed departmental overhead charges. Thus, solely the merchandise that use the costly gear in a particular division can be assigned a better overhead price of maybe $70 per departmental machine hour. The merchandise requiring a less complicated operation equivalent to assembling could also be assigned overhead at a price of maybe $20 per direct labor hour.

Some corporations have moved past each the plant-wide price and the departmental charges as a result of they need to take into account all the actions which are driving up manufacturing overhead prices. These corporations are searching for the basis causes of the oblique manufacturing prices to allow them to assign the prices to merchandise in a extra logical method (as a substitute of merely spreading the prices arbitrarily through plant-wide or departmental manufacturing hours). This effort is named exercise based mostly costing.

Question 6. What Is Elastic Demand?

Elastic demand signifies that demand for a product is delicate to cost modifications. For instance, if the promoting worth of a product is elevated, there can be fewer models bought. If the promoting worth of a product decreases, there can be a rise within the variety of models bought. Elastic demand can be known as the value elasticity of demand.

The time period inelastic demand signifies that the demand for a product is just not delicate to cost modifications.

Elastic demand is a significant concern for a producer that makes an attempt to set product costs based mostly on prices. For occasion, if the producer’s manufacturing and gross sales have declined and it fails to chop mounted prices, the producer may very well be worse off by growing promoting costs.

Use the search field on AccountingCoach.com for our Q&A on demise spiral which is pertinent to elastic demand.

Question 7. What Are Indirect Manufacturing Costs?

Indirect manufacturing prices are a producer’s product prices apart from direct supplies and direct labor. Indirect manufacturing prices are additionally known as manufacturing overhead, manufacturing unit overhead, manufacturing unit burden, or burden.

Under conventional price accounting, the oblique manufacturing prices are allotted (or unfold) to the merchandise manufactured based mostly on direct labor hours, direct labor prices, or manufacturing machine hours. However, in latest many years the oblique manufacturing prices have elevated considerably and are much less more likely to be attributable to the amount of direct labor or manufacturing machine hours. (This might not be an issue for monetary reporting if the quantity of stock is persistently small, however it may be an issue for pricing and different choices.)

Examples of oblique manufacturing prices embrace:

depreciation, repairs and upkeep, electrical energy, and so on. for the manufacturing amenities and gear
salaries, wages and fringe advantages of the oblique manufacturing personnel equivalent to manufacturing supervisors, materials handlers, high quality assurance, and different manufacturing unit help personnel
manufacturing unit provides, exterior providers pertaining to manufacturing, and different manufacturing associated prices.

Question 8. What Is Setup Cost?

Setup price is the fee incurred to get gear able to course of a distinct batch of products. Hence, setup price is thought to be a batch-level price in exercise based mostly costing.

Setup prices embrace the prices of adjusting the instruments or dies on the gear, transferring supplies or elements, and testing the preliminary output to make sure it meets the specs. In addition to the out-of-pocket prices, such because the labor price of organising the gear, there’s a a lot larger price. The larger price of setup is the misplaced alternative of producing worthwhile output whereas the machine is idled in the course of the setup time.

Setup price is considered as a non-value-added price that ought to be minimized.

Question 9. What Is The Major Weakness Of The Traditional Method Of Allocating Factory Overhead?

Under the normal technique of allocating manufacturing unit overhead (manufacturing overhead, burden), a lot of the manufacturing unit overhead prices are allotted on the premise of only one issue equivalent to machine hours or direct labor hours. In different phrases, the normal technique implies there is just one driver of the manufacturing unit overhead and the driving force is machine hours (or direct labor hours, or another indicator of quantity produced).

In actuality there are numerous drivers of the manufacturing unit overhead: machine setups, distinctive inspections, particular dealing with, particular storage, and so forth. The extra range in merchandise and/or in buyer calls for, the larger the issue of allocating all the prices of those numerous actions through just one exercise such because the manufacturing machine’s hours.

Under the normal technique, the prices of performing all the numerous actions can be contained in a single price pool and can be divided by the variety of manufacturing machine hours. This outcomes is one common price that’s utilized to all merchandise whatever the variety of actions and the complexity of these actions. Since the price of most of the numerous actions don’t correlate in any respect with the variety of manufacturing machine hours, the ensuing allocations are deceptive.

Activity-based costing is meant to beat the weak point of the normal technique by having numerous swimming pools of prices after which allocating every pool’s prices on the premise of its root trigger.

Question 10. What Is The Death Spiral?

In price accounting and managerial accounting, the time period demise spiral refers back to the repeated elimination of merchandise ensuing from spreading prices on the premise of quantity as a substitute of their root causes. The demise spiral is also referred to as the downward demand spiral.

To illustrate the demise spiral let’s assume that Product X is an easy, high-volume product that requires little manufacturing consideration. If the accountant spreads the corporate’s manufacturing overhead prices based mostly on quantity, Product X will seem to have excessive overhead prices. (In actuality, Product X causes little or no overhead price particularly when in comparison with the corporate’s many complicated, low-volume merchandise.) If administration responds to Product X’s allotted excessive overhead prices and 1) seeks a worth enhance which causes the shopper to maneuver the manufacturing to a competitor with a cheaper price, 2) outsources the manufacturing, or 3) drops the product, then the corporate’s manufacturing quantity will lower.

If the corporate doesn’t cut back its mounted overhead to correspond to the decreased manufacturing quantity and the accountant continues to unfold the overhead prices—together with the price of extra capability—on the premise of quantity, the remaining merchandise must be assigned extra of the overhead prices. If administration once more reacts to the brand new, increased, allotted prices by looking for worth will increase which trigger a lack of gross sales, outsources manufacturing, or drops the merchandise, the corporate’s manufacturing quantity will once more lower. If mounted prices should not decreased accordingly and the accountant once more spreads the overhead on the premise of a brand new, even smaller quantity, all the firm might die from the excessive mounted prices and a small quantity of merchandise being produced and bought.

To keep away from the demise spiral, some corporations try to allocate overhead prices based mostly on actions and product complexities fairly than merely spreading them on quantity. Also, some corporations don’t allocate the prices of extra capability to merchandise with the intention to decrease the demise spiral.

Question 11. What Are Semivariable Costs?

Semivariable prices are prices or bills whose habits is partially mounted and partially variable. Semivariable prices are additionally known as blended prices.

A typical instance of a semivariable price is the annual price of working a automobile. Some of the automobile’s working prices will fluctuate with the variety of miles pushed whereas different prices would be the similar in complete whatever the miles pushed. For instance, the automobile’s gasoline prices can be variable. However, the depreciation, insurance coverage and licensing could also be mounted. Looking solely on the automobile’s upkeep prices could point out that some upkeep is finished every November (whatever the variety of miles pushed) whereas different upkeep is finished each 6,000 miles.

A producer’s electrical energy price is one other instance of a semivariable price. Part of the month-to-month electrical energy invoice will embrace 1) a set quantity, and a pair of) a separate quantity based mostly on the variety of kilowatt hours of electrical energy really utilized by the corporate.

The producer’s electrical energy price can be a semivariable price in relationship with the corporate’s machine hours. The portion of the electrical energy price used to function the manufacturing gear is variable, however the portion of the electrical energy price used for lighting and air con the manufacturing facility is a set price.

These easy examples illustrate that it may be obscure how prices behave. There are many components, actions, and drivers that affect the extent of prices.

Question 12. What Is The Coefficient Of Correlation?

In easy linear regression evaluation, the coefficient of correlation (or correlation coefficient) is a statistic which signifies the connection between the unbiased variable and the dependent variable. The coefficient of correlation is represented by r and it has a variety of -1.00 to +1.00.

When the coefficient of correlation is a optimistic quantity, equivalent to +0.80, it means a rise within the unbiased variable will end in a rise within the dependent variable. (Also, a lower within the unbiased variable will imply a lower within the dependent variable.) When the coefficient of correlation is damaging, equivalent to -0.80, there’s an inverse relationship. (An enhance within the unbiased variable will imply a lower within the dependent variable. A lower within the unbiased variable will imply a rise within the dependent variable.)

A coefficient of correlation of +0.Eight or -0.Eight signifies a robust correlation between the unbiased variable and the dependent variable. An r of +0.20 or -0.20 signifies a weak correlation between the variables. When the coefficient of correlation is 0.00 there isn’t any correlation.

When the coefficient of correlation is squared, it turns into the coefficient of dedication. This signifies that an r of +0.80 or -0.80 will end in a coefficient of dedication of 0.64 or 64%. (This tells you that 64% of the change within the complete of the dependent variable is related to the change within the unbiased variable.) An r of +0.20 or -0.20 signifies that solely 4% (0.20 x 0.20) of the change within the dependent variable is defined by the change within the unbiased variable.

It is vital to appreciate that correlation doesn’t assure {that a} cause-and-effect relationship exists between the unbiased variable and the dependent variable. However, a cause-and-effect relationship will imply there’s correlation. It can be vital to plot the info/observations used within the regression evaluation with the intention to detect and evaluate any outlier.

Question 13. What Is Simple Linear Regression Analysis?

Simple linear regression evaluation is a statistical instrument for quantifying the connection between only one unbiased variable (therefore “easy”) and one dependent variable based mostly on previous expertise (observations). For instance, easy linear regression evaluation can be utilized to precise how an organization’s electrical energy price (the dependent variable) modifications as the corporate’s manufacturing machine hours (the unbiased variable) change.

Fortunately there’s software program to compute the very best becoming straight line (therefore “linear”) that expresses the previous relationship between the dependent and unbiased variable. Continuing our instance, you’ll enter 1) the quantity of the previous month-to-month electrical energy payments, and a pair of) the variety of machine hours occurring in the course of the interval of every of the payments. Next, the software program will seemingly use the least squares technique to supply the components for the very best becoming line. The line will seem within the kind y = a + bx. In addition, the software program will present statistics concerning the correlation, confidence, dispersion across the line, and extra.

(In all chance there are numerous unbiased variables inflicting a change within the quantity of the dependent variable. Therefore, you shouldn’t count on that just one unbiased variable will clarify a excessive proportion of the change within the dependent variable. To enhance the share, you need to consider the numerous unbiased variables that would trigger a change within the dependent variable. Next you need to take a look at the impact of the mix of those unbiased variables or drivers through the use of a number of regression evaluation software program.)

Prior to utilizing easy linear regression evaluation you will need to comply with these preliminary steps:

search an unbiased variable that’s more likely to trigger or drive the change within the dependent variable
make sure that the previous quantities for the unbiased variable happen in the very same interval as the quantity of the dependent variable
plot the previous observations on a graph utilizing the y-axis for the fee (month-to-month electrical energy invoice) and the x-axis for the exercise (machine hours used in the course of the actual interval of the electrical energy invoice)
evaluate the plotted observations for a linear sample and for any outliers
understand that there will be correlation with out trigger and impact
Question 14. How Can A Manufacturer Determine The Precise Cost Of Its Products?

A producer could by no means be capable of decide the exact price of its particular person merchandise. The purpose is that a lot of the manufacturing prices (apart from supplies and a few labor) are oblique prices. This signifies that a lot of the manufacturing prices should not straight traceable to particular person merchandise and can must be allotted to them. Examples of oblique manufacturing prices embrace the hire, property taxes, depreciation, warmth, lighting, oblique manufacturing staff pay and advantages, repairs, upkeep, and others that happen within the manufacturing unit.

In addition to the manufacturing prices, there are promoting, common and administrative (SG&A) bills and maybe curiosity expense. Generally, accountants don’t take into account these bills to be product prices. As a outcome these bills are reported on the earnings assertion once they happen and with none allocation to the merchandise. However, these bills are related to some or all the merchandise.

The producer can try to calculate the prices and bills of every of its merchandise, however I do not assume the outcome would be the true, exact price. In addition to the allocations (that are considered as arbitrary), take into account that modifications in quantity will have an effect on a product’s price. For instance, if an organization’s complete mounted prices stay fixed however its quantity of merchandise decreases by 20%, the price of every product will enhance. If quantity will increase, the price of every product will lower.

Activity-based costing (ABC) is an try to enhance the allocation of prices by figuring out extra of the basis causes of the prices (fairly than merely spreading prices to merchandise based mostly on machine hours). Even with ABC there can be arbitrary allocations which is able to stop realizing every product’s exact price.

Question 15. What Is The Weakness Of Traditional Cost Allocations?

Traditional price allocations are sometimes based mostly on quantity equivalent to variety of merchandise manufactured, variety of direct labor hours, variety of manufacturing machine hours, variety of sq. toes, and so on. Unfortunately, it’s changing into extra frequent that the widespread prices or oblique prices that require allocation should not attributable to quantity. In different phrases, conventional price allocations are sometimes based mostly on one thing apart from the basis causes of the prices.

It is feasible {that a} important quantity of producing overhead won’t be attributable to manufacturing machine hours, but the overhead is allotted utilizing these hours. For instance, a couple of of a producer’s low quantity merchandise could require important quantities of engineering modifications, extra inspections, frequent machine setups with unusually brief manufacturing runs, particular dealing with, extra storage, and so forth. To allocate these particular prices to all merchandise on the premise of the variety of manufacturing machine hours (as a substitute of allocating these prices based mostly on their root causes) will end in particular person product prices which are inaccurate and deceptive.

Question 16. What Is The Coefficient Of Determination?

The coefficient of dedication is a statistic which signifies the share change within the quantity of the dependent variable that’s “defined by” the modifications within the unbiased variables.

For instance, a producer could have discovered via easy linear regression evaluation involving 15 month-to-month observations that 64% of the change within the complete price of electrical energy (the dependent variable) was related to the change within the month-to-month manufacturing machine hours (the unbiased variable). In this instance the coefficient of dedication is 0.64 or 64%.

The coefficient of dedication is symbolized by r-squared, the place r is the coefficient of correlation. Hence, a coefficient of dedication of 0.64 or 64% signifies that the coefficient of correlation was 0.Eight or 80%. (The vary for the coefficient of correlation is -1 to +1, and subsequently the vary for the coefficient of dedication is Zero to +1.)

It is vital to notice {that a} excessive coefficient of dedication doesn’t assure {that a} cause-and-effect relationship exists. However, a cause-and-effect relationship between the unbiased variable and the dependent variable will end in a excessive coefficient of dedication.

Question 17. What Is An Independent Variable?

In accounting, an unbiased variable is ideally an element that causes a change within the complete quantity of the dependent variable. In different phrases, an unbiased variable ought to be one thing that drives a blended price to extend or lower.

To illustrate, let’s assume {that a} producer’s manufacturing gear makes use of a major quantity of electrical energy. Hence, the month-to-month electrical energy price (the dependent variable) will enhance when there is a rise within the variety of manufacturing machine hours (the unbiased variable).

In actuality there are more likely to be many unbiased variables that trigger a change within the quantity of the dependent variable. In the case of the month-to-month electrical energy price, the unbiased variables might additionally embrace the non-production machines utilizing electrical energy, the bodily dimension of the merchandise, the talent stage of the operators, the surface temperature and humidity, and so on.

Multiple regression evaluation is a statistical instrument that may help in figuring out the numerous unbiased variables.

Question 18. Why Does A Cost System Developed For Inventory Valuation Distort Product Cost Information?

The price system for stock valuation could have been developed to supply an inexpensive complete price of stock and an inexpensive complete price of products bought with the intention to have moderately correct monetary statements. If an organization has small stock quantities and important gross sales, a easy price system that spreads manufacturing overhead prices solely on the premise of machine hours can lead to a fairly correct stability sheet and earnings assertion.

While a easy price system utilizing only one price driver (machine hours) could end in correct monetary statements, it typically fails to supply the true price of particular person merchandise that change in complexity. For instance, one product may require only a few machine hours however would require many hours of particular dealing with. The prices assigned on the premise of machine hours alone can be too low in relationship to the true price of producing this product. Another product may require many machine hours however no different actions. This product’s price can be overstated as a result of the speed assigned through the machine hours will embrace an quantity for different actions that typically happen for the opposite merchandise manufactured.

A value system developed for stock valuation is proscribed to the price of direct supplies, direct labor, and manufacturing overhead. The complete price of offering merchandise to a buyer may also embrace nonmanufacturing bills. One buyer may require an organization to incur extra promoting, delivering, storing, and administrative bills. Another buyer won’t require any of these actions and their associated bills.

Activity based mostly costing makes an attempt to calculate the true price of a product and buyer by assigning prices and bills based mostly on their root causes. Because there are numerous root causes, the corporate will assign prices based mostly on many price drivers. This leads to extra accuracy for the fee and expense of a particular product for a particular buyer than merely spreading the manufacturing prices on the premise of 1 price driver equivalent to machine hours.

Question 19. Are There Two Abc Methods In Accounting?

Some accountants use ABC to imply Activity Based Costing. Under this ABC a producer will use many price drivers to assign overhead prices to merchandise. The goal of Activity Based Costing is to assign the overhead prices based mostly on their root causes fairly than merely spreading the prices on the premise of direct labor hours or manufacturing machine hours.

A second use of ABC entails categorizing stock gadgets into “A” gadgets, “B” gadgets, and “C” gadgets. The “A” gadgets are a comparatively small variety of gadgets which account for almost all of the stock’s worth. For instance, the “A” gadgets is likely to be 20% of the gadgets in stock which account for 70% of the stock worth. At the opposite excessive the “C” gadgets is likely to be 60% of the gadgets in stock however they account for less than 10% of the stock worth. The “B” gadgets is likely to be 20% of the gadgets accounting for 20% of the stock worth. Under this technique, the “A” gadgets will obtain essentially the most consideration since they account for 70% of the worth. This ABC is typically known as Pareto evaluation or Pareto’s rule and it may be utilized to greater than stock. For instance, 20% of an organization’s prospects may account for 70% of the corporate’s gross sales.


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