Management And Accounting Web

Discussion Questions Related to ABC

Provided by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

ABC MC Questions | ABC Main Page | Graduate Management Accounting Course


1. Is activity based costing an inventory valuation method or a cost accumulation method? (See Exhibit 2-1 and Chapter 7).

2. Do traditional cost systems tend to apply too much, or too little overhead cost to high volume products in multi-product companies assuming other product characteristics are equal? Why? (See Chapter 7 Exhibit 7-1 and related discussion. The first example in Chapter 7 illustrates this. Compare Figure 7-2 with Figure 7-3.)

3. Do traditional cost systems tend to apply too much, or too little overhead costs to small products in multi-product companies assuming other product characteristics are equal? Why? (See Chapter 7 Exhibit 7-1 and related discussion.)

4. Which of the following products will be overcosted in a traditional cost system? A company produces two products. Product X is a small, high volume product while product Y a large, low volume product.

5. How does the treatment of engineering, marketing and distribution costs differ between traditional cost systems and ABC systems? (See Chapter 7).

6. How does the treatment of customer service costs differ in ABC systems as opposed to traditional cost systems? (See Chapter 7).

7. Describe the logic underlying ABC systems. (See Figure 7-1 and related discussion).

8. How is the concept of fixed and variable costs viewed in an ABC system? (See Chapter 7 and ABKY Chapter 3 for some new terminology).

9. What is the "rule of one"? (See Chapter 7).

10. Do the terms production volume and activity volume mean the same thing? Explain. (See Chapter 7).

11. How are activity measures chosen in an ABC system? (See Chapter 7 and the summary of Landry, Wood & Lindquist).

12. When would high correlation between an activity measure and overhead costs be misleading in choosing an allocation basis? (See Chapter 7).

13. List and define the cost categories in the ABC cost hierarchy. (See Chapter 7).

14. How are batch and product level activity costs treated differently in ABC systems as opposed to traditional production volume based systems? (See Chapter 7).

15. Are activity measures, activities or drivers, both or neither? Explain. (See Chapter 7 Exhibit 7-3 and related discussion).

16. Why are ABC systems designed around main activities as opposed to all activities? (See the Rupp and Landry, Wood & Lindquist summaries).

17. What are three types of activity measures and when would each be appropriately used in an ABC system? (See Chapter 7 Exhibit 7-3 and the ABKY Chapter 5 summary).

18. What are the four steps involved in designing an ABC system? (See Chapter 7 and the ABKY Chapter 5 summary).

19. What is a homogeneous cost pool? (See Chapter 7 Example 1 or the Chapter 7 Exhibits, the Chapter 7 Class Problem and the Rupp illustration).

20. What are the three steps needed to calculate ABC product cost per unit? (See Chapter 7).

21. Assume that two multi-product companies have the same cost structure and both companies produce product P1. However, the first company calculates the unit cost of P1 to be $100 and the second company calculates the unit cost of P1 to be $200. Explain how this could have occurred when both companies use direct labor hours as the cost allocation basis.

22. What is CAM-I? (See Chapter 7 and the CAM-I section).

23. What provides the foundation for the CAM-I CMS conceptual design? (See Chapter 7 and the CAM-I Summary).

24. What factors have motivated companies to develop ABC systems? (See Chapter 7 and the CAM-I Summary).

25. What is a focused factory? (See Chapter 7).

26. What capacity level should be used to calculate activity rates, i.e., practical capacity, planned capacity or some other capacity level? Why? (See ABKY Chapter 4 summary, Cooper & Kaplan 92, ABC variance analysis illustration and the summaries of Brausch & Taylor and McNair 94). (Other relevant summaries include: Cheatham & Cheatham, Stammerjohan, Ruhl 95 and Greer 66.

27. Which audience in Exhibit 2-4 is ABC mainly designed to serve?

28. Should ABC systems be used as replacements for traditional cost systems or as separate systems for management decision purposes? (See the summaries of Cooper 1990, Kaplan 1990, Cooper & Kaplan 92, Cooper & Kaplan 1998, Rupp and Troxel & Weber). (See the Krumwiede summary for some survey results). Does it matter from the GAAP perspective?

29. What are some arguments for using ABC as a separate stand alone system, i.e., using ABC to support strategic decisions such as pricing, outsourcing etc. and using the old production volume based allocation system for external reporting? (See the summaries listed for the question above and the Controversy over ABC and Krumwiede summary).

30. What are some arguments for a single integrated system, i.e., integrating ABC with the general ledger system? (See the summaries for question 28 and the Controversy over ABC ).

31. Why have many ABC systems failed? (See the summaries of Roberts & Sylvester, Landry, Wood and Lindquist, Rupp and Krumwiede).

32. Are ABC systems applicable to service organizations? Why? (See the summaries of Zeller, Thurston, Keleman & MacArthur, West & West and Carter, Sedaghat & Williams).

33. An illustration on the original CAM-I video shows how the costs of expediting an order could be determined using ABC. An order is late, so the current work in process is taken off the line so that the late order can be completed. Explain, in general terms, how ABC could be used to determine how much it cost to expedite this order.

34. There are two related summaries on "Causal-Based accounting" (See Edersheim & Vanderbosch) and Feature Costing" (See Brimson 98). How are these methods different from ABC?

35. What's wrong with traditional standard cost variance analysis? (See Chapter 10). How could some of these problems be reduced without using ABC? (See Cheatham & Cheatham).

36. How does activity-based variance analysis differ from traditional standard cost variance analysis? Does it solve the behavioral problems associated with the traditional variance analysis? (See the Example of ABC analysis, Ruhl and Stammerjohan summaries.