Managerial Accounting Balakrishnan Solution Chapter 10

Chapter 10

Activity-based costing and management

solutions

Review Questions

1. Unit profit margin equals a product’s unit contribution margin less the controllable cost of capacity resources.

2. (1) Determine how to form cost pools, (2) identify which cost pools to allocate, (3) identify the cost driver to use for allocating each cost pool, and (4) determine the appropriate denominator volume of each cost driver to calculate allocation rates.

3. A business process converts organizational inputs into a measurable output. Each business process is a collection of activities.

4. In ABC, we form cost pools by the activities that make up a business process.

5. An appropriate cost driver is one that has the strongest causal relation with the costs in the cost pool.

6. Practical capacity is an estimate of the maximum possible activity level. The advantage of a practical-capacity based allocation rate is that it does not change across periods. Practical capacity is higher than both actual- and budgeted capacity, which reflect realized and planned activity usage.

7. Because, ultimately, ABC is just another allocation system. Changing the method for allocating costs does not change total cost.

8. Allocating lower amounts to some products and higher amounts to other products. In such instances, products receiving higher allocations are said to cross-subsidize products receiving lower allocations.

9. By better managing products, customers, and resources.

10. Decisions related to individual customers and market segments, including decisions regarding who to sell to and the prices to charge.

11. Product-level profit analysis groups revenues, variable costs, and capacity costs by product whereas customer-level profit analysis does so by customer.

12. “High cost to serve” customers (1) place small order sizes, (2) have rigid requirements, (2) don’t pay on time, (4) require more customization, and (5) make...