Cost Accounting - 14E - Chapter 05

Cost Accounting, 14e (Horngren/Datar/Rajan)

Chapter 5 Activity-Based Costing and Activity-Based Management

Objective 5.1

1) If products are different, then for costing purposes:

A) an ABC costing system will yield more accurate cost numbers B) a simple costing system should be used C) a single indirect-cost rate should be used D) none of the above Answer: A Diff: 1

Terms: activity-based costing (ABC) Objective: 1

AACSB: Reflective thinking

2) Overcosting a particular product may result in: A) loss of market share

B) pricing the product too low C) operating efficiencies

D) understating total product costs Answer: A Diff: 2

Terms: product undercosting Objective: 1

AACSB: Analytical skills

3) Undercosting of a product is most likely to result from: A) misallocating direct labor costs B) underpricing the product C) overcosting another product D) overstating total product costs Answer: C Diff: 2

Terms: product overcosting Objective: 1

AACSB: Reflective thinking

4) A company produces three products; if one product is overcosted then: A) one product is undercosted

B) one or two products are undercosted C) two products are undercosted D) no products are undercosted Answer: B Diff: 1

Terms: product-cost cross-subsidization Objective: 1

AACSB: Ethical reasoning

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5) Misleading cost numbers are most likely the result of misallocating: A) direct material costs

B) direct manufacturing labor costs C) indirect costs

D) All of these answers are correct. Answer: C Diff: 2

Terms: activity-based costing (ABC) Objective: 1

AACSB: Reflective thinking

6) An accelerated need for refined cost systems is due to: A) global monopolies B) rising prices

C) intense competition

D) a shift toward increased direct costs Answer: C Diff: 2

Terms: activity-based costing (ABC) Objective: 1

AACSB: Ethical reasoning

7) The use of a single indirect-cost rate is more likely to: A) undercost high-volume simple products B) undercost low-volume complex products C) undercost lower-priced products D) Both B and C are correct. Answer: B Diff: 2

Terms: product undercosting Objective: 1

AACSB: Reflective thinking

8) Uniformly assigning the costs of resources to cost objects when those resources are actually used in a nonuniform way is called: A) overcosting B) undercosting

C) peanut-butter costing D) department costing Answer: C Diff: 1

Terms: product-cost cross-subsidization Objective: 1

AACSB: Reflective thinking

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9) A top-selling product might actually result in losses for the company. Answer: TRUE Diff: 2

Terms: product undercosting Objective: 1

AACSB: Analytical skills

10) Companies that overcost products will most likely lose market share. Answer: TRUE Diff: 2

Terms: product overcosting Objective: 1

AACSB: Ethical reasoning

11) If companies increase market share in a given product line because their reported costs are less than their actual costs, they will become more profitable in the long run. Answer: FALSE

Explanation: The actual costs will increase because of the additional sales and the other product lines (which are subsidizing the undercosting of the growing product line) will suffer. The net result will be the company having a lower operating income than it could have had. Diff: 2

Terms: product undercosting Objective: 1

AACSB: Reflective thinking

12) As product diversity and indirect costs increase, it is usually best to switch away from an activity based cost system to a broad averaging system. Answer: FALSE

Explanation: The potential significant differences in costs relating to the products as well as the magnitude of indirect costs make a more refined costing system more appropriate. Diff: 2

Terms: activity-based costing (ABC) Objective: 1

AACSB: Reflective thinking

13) If a company overcosts one of its products, then it will undercost at least one of its other products. Answer: TRUE Diff: 2

Terms: product-cost cross-subsidization Objective: 1

AACSB: Ethical reasoning

14) Explain how a top-selling product may actually result in losses for the company.

Answer: If indirect costs are not properly allocated to the products, a product may appear to cost less than it actually does cost to produce. If the selling price is based on these lower costs, the selling price may actually be lower than the costs needed to produce the product resulting in losses for the company. Diff: 1

Terms: product-cost cross-subsidization Objective: 1

AACSB: Reflective thinking

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Objective 5.2

1) Refining a cost system includes:

A) classifying as many costs as indirect costs as is feasible B) creating as many cost pools as possible

C) identifying the activities involved in a process D) seeking a lesser level of detail Answer: C Diff: 2

Terms: activity Objective: 2

AACSB: Reflective thinking

2) Greater indirect costs are associated with: A) specialized engineering drawings B) quality specifications and testing

C) inventoried materials and material control systems D) All of these answers are correct. Answer: D Diff: 1

Terms: product-cost cross-subsidization Objective: 2

AACSB: Reflective thinking

3) Design of an ABC system requires: A) that the job bid process be redesigned

B) that a cause-and-effect relationship exists between resource costs and individual activities C) an adjustment to product mix D) Both B and C are correct. Answer: B Diff: 1

Terms: activity-based costing (ABC) Objective: 2

AACSB: Reflective thinking

4) Direct costs plus indirect costs equal total costs. Answer: TRUE Diff: 1

Terms: activity-based costing (ABC) Objective: 2

AACSB: Reflective thinking

5) When refining a costing system, a company should classify as many costs as possible as direct costs. Answer: TRUE Diff: 1

Terms: refined costing system Objective: 2

AACSB: Ethical reasoning

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6) In a homogeneous cost pool, all costs have a similar cause-and-effect relationship with the cost-allocation base. Answer: TRUE Diff: 1

Terms: activity-based costing (ABC) Objective: 2

AACSB: Reflective thinking

7) Indirect labor and distribution costs would most likely be in the same activity-cost pool. Answer: FALSE

Explanation: Indirect labor and distribution costs would not be in the same activity-cost pool because their cost drivers are very dissimilar. A cost driver of indirect labor would include direct labor hours, while a cost driver of distribution costs would include, for example, cubic feet of cargo moved. Diff: 2

Terms: activity-based costing (ABC) Objective: 2

AACSB: Reflective thinking

8) Direct tracing of costs improves cost accuracy. Answer: TRUE Diff: 1

Terms: activity-based costing (ABC) Objective: 2

AACSB: Reflective thinking

9) A cost-allocation base is a necessary element when using a strategy that will refine a costing system. Answer: TRUE Diff: 1

Terms: activity-based costing (ABC) Objective: 2

AACSB: Reflective thinking

10) What are the factors that are causing many companies to refine their costing systems to obtain more accurate measures of the costs of their products?

Answer: The first cause is increasing product diversity. Companies are producing many more products than they used to, placing strains on more simple, older cost systems. A second cause is the overall increased in indirect costs and the relative decline of direct costs. The indirect nature of these costs requires allocation, and any inaccuracies in allocation of these costs become magnified as these indirect costs increase. A third cause would be advances in information technology that makes complex allocation of indirect costs less burdensome. Finally, increased competition from both national and international competitors has resulted in more pressure to reduce costs, as well as increasing the need for and value of information to support responses to these new threats. Diff: 2

Terms: activity-based costing (ABC) Objective: 2

AACSB: Reflective thinking

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Objective 5.3

1) ABC systems create: A) one large cost pool

B) homogenous activity-related cost pools C) activity-cost pools with a broad focus

D) activity-cost pools containing many direct costs Answer: B Diff: 1

Terms: activity-based costing (ABC) Objective: 3

AACSB: Reflective thinking

2) Logical cost allocation bases include:

A) cubic feet of packages moved to measure distribution activity B) number of setups used to measure setup activity

C) number of design hours to measure designing activity D) All of these answers are correct. Answer: D Diff: 1

Terms: activity-based costing (ABC) Objective: 3

AACSB: Reflective thinking

3) ABC systems:

A) highlight the different levels of activities B) limit cost drivers to units of output

C) allocate costs based on the overall level of activity D) generally undercost complex products Answer: A Diff: 2

Terms: activity-based costing (ABC) Objective: 3

AACSB: Reflective thinking

4) A single indirect-cost rate may distort product costs because:

A) there is an assumption that all support activities affect all products B) it recognizes specific activities that are required to produce a product C) costs are not consistently recorded

D) it fails to measure the correct amount of total costs Answer: A Diff: 2

Terms: product-cost cross-subsidization Objective: 3

AACSB: Communication

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5) Traditional cost systems distort product costs because: A) they do not know how to identify the appropriate units B) competitive pricing is ignored

C) they emphasize financial accounting requirements

D) they apply average support costs to each unit of product Answer: D Diff: 2

Terms: product-cost cross-subsidization Objective: 3

AACSB: Reflective thinking

6) Which of the following statements about activity-based costing is NOT true? A) Activity-based costing is useful for allocating marketing and distribution costs.

B) Activity-based costing is more likely to result in major differences from traditional costing systems if the firm manufactures only one product rather than multiple products.

C) Activity-based costing seeks to distinguish batch-level, product-sustaining, and facility-sustaining costs, especially when they are not proportionate to one another.

D) Activity-based costing differs from traditional costing systems in that products are not cross-subsidized. Answer: B Diff: 2

Terms: product-cost cross-subsidization Objective: 3

AACSB: Reflective thinking

7) Activity-based costing (ABC) can eliminate cost distortions because ABC:

A) develops cost drivers that have a cause-and-effect relationship with the activities performed B) establishes multiple cost pools C) eliminates product variations

D) recognizes interactions between different departments in assigning support costs Answer: A Diff: 1

Terms: product-cost cross-subsidization Objective: 3

AACSB: Reflective thinking

8) Product lines that produce different variations (models, styles, or colors) often require specialized manufacturing activities that translate into: A) fewer indirect costs for each product line B) decisions to drop product variations

C) a greater number of direct manufacturing labor cost allocation rates D) greater overhead costs for each product line Answer: D Diff: 2

Terms: product-cost cross-subsidization Objective: 3

AACSB: Reflective thinking

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Answer the following questions using the information below:

Mertens Company provides the following ABC costing information:

Activities Total Costs Activity-cost drivers Account inquiry hours $200,000 10,000 hours Account billing lines $140,000 4,000,000 lines Account verification accounts $75,000 40,000 accounts Correspondence letters $ 25,000 4,000 letters Total costs $440,000

The above activities are used by Departments A and B as follows: Department A Department B Account inquiry hours 2,000 hours 4,000 hours Account billing lines 400,000 lines 200,000 lines Account verification accounts 10,000 accounts 8,000 accounts Correspondence letters 1,000 letters 1,600 letters

9) How much of the account inquiry cost will be assigned to Department A? A) $40,000 B) $200,000 C) $80,000

D) None of these answers are correct. Answer: A

Explanation: A) ($200,000 / 10,000) × 2,000 = $40,000 Diff: 2

Terms: activity-based costing (ABC) Objective: 3

AACSB: Analytical skills

10) How much of the account billing cost will be assigned to Department B? A) $14,000 B) $140,000 C) $7,000

D) None of these answers are correct. Answer: C

Explanation: C) ($140,000 / 4,000,000) × 200,000 = $7,000 Diff: 2

Terms: activity-based costing (ABC) Objective: 3

AACSB: Analytical skills

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11) How much of account verification costs will be assigned to Department A? A) $15,000 B) $18,750 C) $75,000 D) $5,000 Answer: B

Explanation: B) ($75,000 / 40,000) × 10,000 = $18,750 Diff: 2

Terms: activity-based costing (ABC) Objective: 3

AACSB: Analytical skills

12) How much of correspondence costs will be assigned to Department B? A) $800 B) $6,250 C) $25,000 D) $10,000 Answer: D

Explanation: D) ($25,000 / 4,000) × 1,600 = $10,000 Diff: 2

Terms: activity-based costing (ABC) Objective: 3

AACSB: Analytical skills

13) How much of the total costs will be assigned to Department A? A) $79,000 B) $40,000 C) $112,000 D) $440,000 Answer: A Explanation:

A) ($200,000 / 10,000) x 2,000 = $40,000 ($140,000 / 4,000,000) x 400,000 = $14,000 ($75,000 / 40,000) x 10,000 = $18,750 ($25,000 / 4,000) x 1,000 = $6,250 $79,000 Diff: 2

Terms: activity-based costing (ABC) Objective: 3

AACSB: Analytical skills

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14) How much of the total costs will be assigned to Department B? A) $79,000 B) $40,000 C) $112,000 D) $440,000 Answer: C Explanation:

C) ($200,000 / 10,000) x 4,000 = $ 80,000 ($140,000 / 4,000,000) x 200,000 = $ 7,000 ($75,000 / 40,000) x 8,000 = $ 15,000 ($25,000 / 4,000) x 1,600 = $ 10,000 $112,000 Diff: 3

Terms: activity-based costing (ABC) Objective: 3

AACSB: Analytical skills

15) Dalrymple Company produces a special spray nozzle. The budgeted indirect total cost of inserting the spray nozzle is $80,000. The budgeted number of nozzles to be inserted is 40,000. What is the budgeted indirect cost allocation rate for this activity? A) $0.50 B) $1.00 C) $1.50 D) $2.00 Answer: D

Explanation: D) $80,000 / 40,000 = $2.00 Diff: 1

Terms: activity-based costing (ABC) Objective: 3

AACSB: Analytical skills

16) Activity-based costing is most likely to yield benefits for companies with all of the following characteristics EXCEPT:

A) numerous products that consume different amounts of resources B) operations that remain fairly consistent

C) a highly competitive environment, where cost control is critical

D) accessible accounting and information systems expertise to maintain the system Answer: B Diff: 2

Terms: activity-based costing (ABC) Objective: 3

AACSB: Reflective thinking

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17) Each of the following statements is true EXCEPT:

A) traditional product costing systems seek to assign all manufacturing costs to products B) ABC product costing systems seek to assign all manufacturing costs to products C) traditional product costing systems are more refined than an ABC system

D) cost distortions occur when a mismatch (incorrect association) occurs between the way indirect costs are incurred and the basis for their assignment to individual products Answer: C Diff: 1

Terms: activity-based costing (ABC) Objective: 3

AACSB: Reflective thinking

Answer the following questions using the information below:

Happy Valley Land and Snow Company provides the following ABC costing information:

Activities Total Costs Activity-cost drivers Labor hours $320,000 8,000 hours Gas $36,000 6,000 gallons Invoices $40,000 2,500 invoices Total costs $396,000

The above activities used by their three departments are: Lawn Department Bush Department Plowing Department Labor hours 2,500 hours 1,200 hours 4,300 hours Gas 1,500 gallons 800 gallons 3,700 gallons Invoices 1,600 invoices 400 invoices 500 invoices

18) How much of the labor cost will be assigned to the Lawn Department? A) $100,000 B) $25,600 C) $40,000

D) None of these answers are correct. Answer: A

Explanation: A) ($32,000 / 8,000) × 2,500 = $100,000 Diff: 2

Terms: activity-based costing (ABC) Objective: 3

AACSB: Analytical skills

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19) How much of the gas cost will be assigned to the Plowing Department? A) $50,000 B) $22,200 C) $30,000

D) None of these answers are correct. Answer: B

Explanation: B) ($36,000 / 6,000) × 3,700 = $22,200 Diff: 2

Terms: activity-based costing (ABC) Objective: 3

AACSB: Analytical skills

20) How much of invoice cost will be assigned to the Bush Department? A) $6,400 B) $8,000 C) $25,600 D) $40,000 Answer: A

Explanation: A) ($40,000/ 2,500) × 400 = $6,400 Diff: 2

Terms: activity-based costing (ABC) Objective: 3

AACSB: Analytical skills

21) How much of the gas cost will be assigned to the Lawn Department? A) $4,800 B) $20,000 C) $9,000 D) $22,200 Answer: C

Explanation: C) ($36,000/ 6,000) × 1,500 = $9,000 Diff: 2

Terms: activity-based costing (ABC) Objective: 3

AACSB: Analytical skills

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22) How much of the total cost will be assigned to the Plowing Department? A) $396,000 B) $202.200 C) $134,600 D) $172,000 Answer: B Explanation:

B) ($320,000 / 8,000) x 4,300 = $172,000 ($36,000 / 6,000) x 3,700 = $22,200 ($40,000 / 2,500) x 500 = $8,000 $202,200 Diff: 2

Terms: activity-based costing (ABC) Objective: 3

AACSB: Analytical skills

23) How much of the total costs will be assigned to the Lawn Department? A) $100,000 B) $49,200 C) $200,000 D) $134,600 Answer: D Explanation:

D) ($320,000 / 8,000) x 2,500 = $100,000 ($36,000 / 6,000) x 1,500 = $9,000 ($20,000 / 2,500) x 1,600 = $25,600 $134,600 Diff: 3

Terms: activity-based costing (ABC) Objective: 3

AACSB: Analytical skills

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Answer the following questions using the information below:

Gregory Enterprises has identified three cost pools to allocate overhead costs. The following estimates are provided for the coming year:

Cost Pool Overhead Costs Cost driver Activity level Supervision of direct labor $320,000 Direct labor-hours 800,000 Machine maintenance $120,000 Machine-hours 960,000 Facility rent $200,000 Square feet of area 100,000 Total overhead costs $640,000

The accounting records show the Mossman Job consumed the following resources: Cost driver Actual level Direct labor-hours 200 Machine-hours 1,600 Square feet of area 50

24) If direct labor-hours are considered the only overhead cost driver, what is the single cost driver rate for Gregory Enterprises?

A) $0.50 per direct labor-hour B) $0.80 per direct labor-hour C) $0.40 per direct labor-hour D) $1.20 per direct labor-hour Answer: B

Explanation: B) $640,000 / 800,000 = $0.80 per dlh Diff: 2

Terms: activity-based costing (ABC) Objective: 3

AACSB: Analytical skills

25) Using direct labor-hours as the only overhead cost driver, what is the amount of overhead costs allocated to the Mossman Job? A) $160 B) $120 C) $240 D) $125 Answer: A

Explanation: A) 200 dlh × (640,000 / 800,000) = $160 Diff: 2

Terms: activity-based costing (ABC) Objective: 3

AACSB: Analytical skills

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Answer the following questions using the information below:

Velshi Printers has contracts to complete weekly supplements required by forty-six customers. For the year 2010, manufacturing overhead cost estimates total $840,000 for an annual production capacity of 12 million pages.

For 2010 Velshi Printers has decided to evaluate the use of additional cost pools. After analyzing

manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:

Cost pool Manufacturing overhead costs Activity level Design changes $ 120,000 300 design changes Setups 640,000 5,000 setups Inspections 80,000 8,000 inspections Total manufacturing overhead costs $840,000

During 2010, two customers, Money Managers and Hospital Systems, are expected to use the following printing services:

Activity Money Managers Hospital Systems Pages 60,000 76,000 Design changes 10 0 Setups 20 10 Inspections 30 38

26) What is the cost driver rate if manufacturing overhead costs are considered one large cost pool and are assigned based on 12 million pages of production capacity? A) $0.10 per page B) $0.07 per page C) $0.70 per page D) $0.05 per page Answer: B

Explanation: B) $0.07 per page = ($840,000 / 12,000,000 pages) Diff: 2

Terms: activity-based costing (ABC) Objective: 3

AACSB: Analytical skills

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7) Different products consume different proportions of manufacturing overhead costs because of differences in all of the following EXCEPT: A) selling prices

B) customers' customization specifications C) setup times D) product design Answer: A Diff: 1

Terms: product-cost cross-subsidization Objective: 4

AACSB: Reflective thinking

8) Unit-level cost drivers are most appropriate as an overhead assignment base when: A) several complex products are manufactured B) only one product is manufactured C) direct labor costs are low

D) factories produce a varied mix of products Answer: B Diff: 2

Terms: output unit-level costs Objective: 4

AACSB: Reflective thinking

9) With traditional costing systems, products manufactured in small batches and in small annual volumes may be ________ because batch-related and product-sustaining costs are assigned using unit-related drivers.

A) overcosted B) fairly costed C) undercosted D) ignored Answer: C Diff: 2

Terms: output unit-level costs, batch-level costs Objective: 4

AACSB: Ethical reasoning

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Answer the following questions using the information below:

Products S5 and CP8 each are assigned $100.00 in indirect costs by a traditional costing system. An activity analysis revealed that although production requirements are identical, S5 requires 45 minutes less setup time than CP8.

10) According to an ABC system, CP8 is ________ under the traditional system. A) undercosted B) overcosted C) fairly costed D) accurately costed Answer: A Diff: 2

Terms: product undercosting Objective: 4

AACSB: Reflective thinking

11) According to an ABC system, S5 uses a disproportionately: A) smaller amount of unit-level costs B) larger amount of unit-level costs C) smaller amount of batch-level costs D) larger amount of batch-level costs Answer: C Diff: 2

Terms: product overcosting Objective: 4

AACSB: Reflective thinking

12) Unit-level measures can distort product costing because the demand for overhead resources may be driven by batch-level or product-sustaining activities. Answer: TRUE Diff: 2

Terms: output unit-level costs, batch-level costs, product-sustaining costs Objective: 4

AACSB: Reflective thinking

13) Output unit-level costs CANNOT be determined unless you know how many units are in a given batch.

Answer: FALSE

Explanation: Output unit-level costs are the costs of the activities performed on each individual unit whereas batch-level costs are the costs of activities related to a group of units. Diff: 2

Terms: output unit-level costs, batch-level costs, product-sustaining costs Objective: 4

AACSB: Reflective thinking

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14) Using multiple unit-level cost drivers generally constitutes an effective activity-based cost system. Answer: FALSE

Explanation: In addition to unit-level cost drivers, an effective activity-based cost system usually uses batch-level, product-sustaining, and facility-sustaining cost drivers. Diff: 2

Terms: output unit-level costs Objective: 4

AACSB: Reflective thinking

15) Misleading cost numbers are larger when unit-level assignments and the alternative activity-cost-driver assignments are proportionately dissimilar to each other. Answer: TRUE Diff: 2

Terms: output unit-level costs Objective: 4

AACSB: Communication

16) Explain how traditional cost systems, using a single unit-level cost rate, may distort product costs. Answer: Unit-level measures can distort product costing because the demand for indirect activities may be driven by batch-level, product-sustaining, customer-sustaining, or facility-sustaining activities. Cost distortions are larger when the traditional systems' unit-level cost drivers and the alternative activity-cost drivers differ proportionately more from each other. Traditional systems are likely to undercost products with lower production volumes (relatively fewer units of production) and overcost products with higher production volumes (relatively greater units of production). Diff: 2

Terms: output unit-level costs, product overcosting, product undercosting Objective: 4

AACSB: Reflective thinking

17) What are the four parts of the cost hierarchy. Briefly explain each part, and contrast this cost hierarchy to the fixed-variable dichotomy?

Answer: The four parts of the cost hierarchy are output unit-level costs, batch-level costs, product (or service) sustaining costs, and facility sustaining costs. Output unit-level costs are costs of activities performed on each individual unit of a product or service. Batch-level costs are the costs of activities related to a group of units of products or services rather than to each individual unit of product or service. Product (or service) sustaining costs are the costs of activities undertaken to support individual products or services regardless of the number of units or batches in which the products are produced.

Facility-sustaining costs are the costs of activities that cannot be traced to individual products or services but support the organization as a whole. When compared to the fixed-variable dichotomy, which considers only units of output as a cost driver, the four part cost hierarchy provides opportunity to model many different cost drivers. For example, batch-level costs and product (or service) sustaining costs are driven by the number of batches of a product and the number of different products. Neither of these class of cost drivers are able to be considered in a simple fixed-variable dichotomy. Diff: 2

Terms: cost hierarchy Objective: 4

AACSB: Reflective thinking

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Objective 5.5

1) Put the following ABC implementation steps in order: A Compute the allocation rates. B Compute the total cost of the products. C Identify the products that are the cost objects. D Select the cost allocation bases. A) DACB B) DBCA C) BADC D) CDAB Answer: D Diff: 1

Terms: activity-based costing (ABC) Objective: 5

AACSB: Analytical skills

2) ABC systems identify ________ costs used by products. A) all

B) short-term fixed C) short-term variable D) long-term fixed Answer: A Diff: 1

Terms: activity-based costing (ABC) Objective: 5

AACSB: Reflective thinking

3) The focus of ABC systems is on: A) long-term decisions B) short-term decisions C) make-or-buy decisions D) special-pricing decisions Answer: A Diff: 2

Terms: activity-based costing (ABC) Objective: 5

AACSB: Reflective thinking

4) When designing a costing system, it is easiest to: A) calculate total costs first and then per-unit cost B) calculate per-unit costs first and then total costs

C) calculate long-term costs first and then short-term costs D) calculate short-term costs first and then long-term costs Answer: A Diff: 1

Terms: activity-based costing (ABC) Objective: 5

AACSB: Reflective thinking

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5) ABC assumes all costs are ________ because over the long run management can adjust the amount of resources employed. A) fixed B) variable C) committed

D) nondiscretionary Answer: B Diff: 2

Terms: activity-based costing (ABC) Objective: 5

AACSB: Reflective thinking

6) A manufacturing firm produces multiple families of products requiring various combinations of

different types of parts. Of the following, the most appropriate cost driver for assigning materials handling costs to the various products is: A) direct labor hours

B) number of units produced C) number of parts used

D) number of suppliers involved Answer: C Diff: 1

Terms: activity-based costing (ABC) Objective: 5

AACSB: Reflective thinking

Answer the following questions using the information below:

Fey Corporation manufactures two models of office chairs, a standard and a deluxe model. The following activity and cost information has been compiled: Number of Number of Number of Product Setups Components Direct Labor Hours Standard 22 8 375 Deluxe 28 12 225

Overhead costs $40,000 $80,000

7) Assume a traditional costing system applies the $120,000 of overhead costs based on direct labor hours. What is the total amount of overhead costs assigned to the standard model? A) $49,600 B) $70,400 C) $75,000 D) $45,000 Answer: C

Explanation: C) [$120,000 / (375 + 225)] × 375 = $75,000 Diff: 2

Terms: activity-based costing (ABC) Objective: 5

AACSB: Analytical skills

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Answer the following questions using the information below:

Velshi Printers has contracts to complete weekly supplements required by forty-six customers. For the year 2010, manufacturing overhead cost estimates total $840,000 for an annual production capacity of 12 million pages.

For 2010 Velshi Printers has decided to evaluate the use of additional cost pools. After analyzing

manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:

Cost pool Manufacturing overhead costs Activity level Design changes $ 120,000 300 design changes Setups 640,000 5,000 setups Inspections 80,000 8,000 inspections Total manufacturing overhead costs $840,000

During 2010, two customers, Money Managers and Hospital Systems, are expected to use the following printing services:

Activity Money Managers Hospital Systems Pages 60,000 76,000 Design changes 10 0 Setups 20 10 Inspections 30 38

29) Assuming activity-cost pools are used, what are the activity-cost driver rates for design changes, setups, and inspections cost pools?

A) $400 per change, $128 per setup, $10 per inspection B) $360 per change, $320 per setup, $6.40 per inspection C) $168 per change, $538 per setup, $42 per inspection D) $286 per change, $152 per setup, $20 per inspection Answer: A

Explanation:

A) Design changes: $400 per change = ($120,000 / 300 design changes) Setups: $128 per setup = ($640,000 / 5,000 setups)

Inspections: $10 per inspection = ($80,000 / 8,000 inspections) Diff: 2

Terms: activity-based costing (ABC) Objective: 5

AACSB: Analytical skills

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30) Using the three cost pools to allocate overhead costs, what is the total manufacturing overhead cost estimate for Money Managers during 2010? A) $13,700 B) $6,500 C) $6,860 D) $10,192 Answer: C Explanation: C) $6,860 = (10 × $400 per change = $4,000) + (20 × $128 per setup = $2,560) + (30 × $10 per inspection = $300) Diff: 3

Terms: activity-based costing (ABC) Objective: 5

AACSB: Analytical skills

37

Copyright ? 2012 Pearson Education, Inc.

Answer the following questions using the information below:

Whitman Printing has contracts to complete weekly supplements required by forty-six customers. For the year 20X5, manufacturing overhead cost estimates total $840,000 for an annual production capacity of 12 million pages.

For 2010 Whitman Printing decided to evaluate the use of additional cost pools. After analyzing

manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:

Cost pool Manufacturing overhead costs Activity level Design changes $ 120,000 200 design changes Setups 640,000 4,000 setups Inspections 80,000 16,000 inspections Total manufacturing overhead costs $840,000

During 2010, two customers, Money Managers and Hospital Systems, are expected to use the following printing services:

Activity Money Managers Hospital Systems Pages 60,000 76,000 Design changes 10 2 Setups 20 10 Inspections 30 38

31) Assuming activity-cost pools are used, what are the activity-cost driver rates for design changes, setups, and inspections cost pools?

A) $600 per change, $160 per setup, $5.00 per inspection B) $500 per change, $400 per setup, $7.50 per inspection C) $420 per change, $210 per setup, $52.50 per inspection D) $666 per change, $250 per setup, $8.00 per inspection Answer: A Explanation:

A) Design changes: $600 per change = ($120,000 / 200 design changes) Setups: $160 per setup = ($640,000 / 4,000 setups)

Inspections $5.00 per inspection = ($80,000 / 16,000 inspections) Diff: 2

Terms: activity-based costing (ABC) Objective: 5

AACSB: Analytical skills

38

Copyright ? 2012 Pearson Education, Inc.

32) Using the activity-cost driver rates determined in the previous question, what is the manufacturing overhead cost estimate for Hospital Systems during 2010? A) $6,227.50 B) $2,990.00 C) $4,136.00 D) $6,825.00 Answer: B

Explanation: B) $2,990 = (2 × $600 per change) + (10 × $160 per setup) + (38 × $5.00 per inspection) Diff: 3

Terms: activity-based costing (ABC) Objective: 5

AACSB: Analytical skills

33) Availability of reliable data and measures should be considered when choosing a cost-allocation base. Answer: TRUE Diff: 1

Terms: activity-based costing (ABC) Objective: 5

AACSB: Reflective thinking

34) When designing a costing system, it is easiest to calculate per-unit costs first, and then total costs. Answer: FALSE

Explanation: When designing a costing system, it is easiest to calculate total costs first, and then per-unit costs. Diff: 1

Terms: activity-based costing (ABC) Objective: 5

AACSB: Reflective thinking

35) ABC systems attempt to trace more costs as indirect costs. Answer: FALSE

Explanation: ABC systems attempt to trace more costs as direct costs. Diff: 1

Terms: activity-based costing (ABC) Objective: 5

AACSB: Reflective thinking

36) ABC systems create heterogeneous cost pools linked to different activities. Answer: FALSE

Explanation: ABC systems create homogeneous cost pools linked to different activities. Diff: 1

Terms: activity Objective: 5

AACSB: Reflective thinking

39

Copyright ? 2012 Pearson Education, Inc.

37) ABC systems seek a cost allocation base that has a cause-and-effect relationship with costs in the cost pool.

Answer: TRUE Diff: 1

Terms: activity-based costing (ABC) Objective: 5

AACSB: Reflective thinking

38) For service organizations, activity-based cost systems may be used to clarify appropriate cost assignments. Answer: TRUE Diff: 1

Terms: activity-based costing (ABC) Objective: 5

AACSB: Use of Information Technology

39) For each of the following activities identify an appropriate activity-cost driver.

a. machine maintenance b. machine setup c. quality control d. material ordering

e. production scheduling f. warehouse expense g. engineering design

Answer: Any one of the listed cost drivers is correct. Activity # of machines Machine hours Actual times for various A. Machine maintenances of various machines Maintenance # of setups Setup hours Actual times for various setups for B. Machine various machines Setup # of inspections Inspection hours Actual times for various C. Quality inspections for various controls Control # of orders Ordering hours Actual times for various orders for D. Material various materials Ordering Scheduling Actual times for various runs for E. Production # of runs hours various schedules Scheduling F. Warehousing # of bins, aisles Picking hours Actual times for various parts for various warehousing activities Actual times for various G. Engineering # of engineers Engineering # of designs hours engineering designs Design Diff: 2

Terms: activity Objective: 3, 5

AACSB: Analytical skills

40

Copyright ? 2012 Pearson Education, Inc.

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