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Activity-Based CostingTrue/False QuestionsT F 1. Traditional product costing systems (e., job and process costing) are designed primarily to accumulate cost information for financial reporting.Answer: TrueT F 2. Applied manufacturing overhead for product costing purposes may lead to inappropriate ma...

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Activity-Based Costing True/False Questions T

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F 9. The single-stage cost allocation system uses a plant wide rate because the cost pool is the entire plant. Answer: True

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F 10. The department cost allocation method provides more accurate product cost information for managerial decision-making that the plant wide cost allocation method. Answer: True

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F 11. The plant wide cost allocation method can be used by either a manufacturer or a merchandiser. Answer: True

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1. Traditional product costing systems (e.g., job and process costing) are designed primarily to accumulate cost information for financial reporting. Answer: True

2. Applied manufacturing overhead for product costing purposes may lead to inappropriate managerial decisions because a single cost driver is used as the allocation base. Answer: True

3. The death spiral concept refers to the process of continually decreasing selling prices to meet foreign competition. Answer: False

4. The usual cost objects used in a first-stage product cost allocation are the manufacturing overhead accounts themselves. Answer: True 5. The basic difference between a first-stage cost allocation and a second-stage cost allocation is that cost pools are not used in first-stage cost allocations. Answer: False 6. Predetermined overhead rates are used in first-stage cost allocations but not in secondstage cost allocations. Answer: False

7. In general, variable costs are allocated using a first-stage cost allocation system and fixed costs are allocated using a second-stage cost allocation system. Answer: False 8. A company that uses a second-stage cost allocation system will have one unique allocation base for each cost pool. Answer: True

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F 12. The plant wide cost allocation method should be used by companies that manufacture products that are similar and use the same resources. Answer: True

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F 13. Activity-based costing (ABC) is a second-stage cost allocation system that (1) allocates costs to activities and (2) then to products based on their use of the activities. Answer: True

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F 14. The basic difference between the department cost allocation method and activity-based costing (ABC) is the number of stages involved in allocating costs to products. Answer: False

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F 15. In general, the cost drivers used in activity-based costing (ABC) cause an activity's costs to change. Answer: True

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F 16. The best cost drivers are activities that are causally related to the costs being allocated. Answer: True

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F 17. The first-stage allocation in activity-based costing (ABC) allocates costs to departments using appropriate cost drivers. Answer: False

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F 18. Direct labor cost (DLC) and direct labor hours (DLH) are examples of volume-related cost drivers in the cost hierarchy. Answer: True

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F 19. The number of products produced is an example of a facility-related cost driver in the cost hierarchy. Answer: False

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F 20. Activity-based costing (ABC) provides more detailed measures of costs than do plant wide or department allocation methods. Answer: True

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F 21. Before using activity-based costing (ABC), managers must apply the cost-benefit principle to the additional recordkeeping costs associated with ABC. Answer: True

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F 22. In general, traditional product costing methods allocate less cost to low-volume products and more costs to high-volume products than activity-based costing (ABC). Answer: True

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F 23. Activity-based costing (ABC) uses more overhead accounts than traditional product costing systems. Answer: True

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F 24. Using direct labor costs to allocate overhead costs in an activity-based costing (ABC) system will encourage management to reduce labor costs. Answer: True

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F 25. In general, low-volume products (and services) have a lower degree of complexity associated with them. Answer: False

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F 26. In general, traditional product costing methods have resulted in lower gross margins for high-volume products and higher gross margins for low-volume products than activitybased costing (ABC). Answer: False

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F 27. When overhead is applied based on the volume of output, high-volume products tend to "subsidize" low-volume products. Answer: True

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F 28. Activity-based costing (ABC) can be applied to administrative activities (e.g., purchasing) but not to marketing activities. Answer: False

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F 29. It is possible to apply activity-based costing (ABC) to segments of an organization without applying it to the entire organization. Answer: True

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F 30. In general, activity-based costing methods result in higher product costs per unit than plant wide cost allocation methods. Answer: False

Multiple Choice Questions

Part A: Conceptual Questions 31. Which of the following statements is (are) true regarding the potential effects of using reported product costs for decision making? (A) Traditional product costing systems (e.g., job and process costing) are designed primarily to accumulate cost information for financial reporting. (B) Applied manufacturing overhead for product costing purposes may lead to inappropriate managerial decisions because a single cost driver is used as the allocation base. A) B) C) D)

Only A is true Only B is true. Both A and B are true. Neither A nor B is true.

Answer: C

32. Which of the following statements is (are) false regarding first-stage and second-stage cost allocation methods?

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(A) The basic difference between a first-stage cost allocation and a second-stage cost allocation is that cost pools are not used in first-stage cost allocations. (B) Predetermined overhead rates are used in first-stage cost allocations but not in second-stage cost allocations. A) B) C) D)

Only A is false Only B is false. Neither A and B nor false. Both A and B are false.

Answer: D 33. Activity-based costing (ABC) is a costing technique that uses a two stage allocation process. Which of the following statements best describes these two stages? A) The costs are assigned to activities, and then to the products based upon their use of the activities. B) The costs are assigned to departments, and then to the products based upon their use of activity resources. C) Service department costs are allocated to the production departments, and then to the products based upon their use of the activities. D) Indirect costs are assigned to activities, and then to the products based upon the direct cost resources used by the activities. Answer: A 34. Which of the following statements is true? A) One of the lessons learned from activity-based costing (ABC) is that all costs are really a function of volume. B) The primary purpose of the plant wide and department allocation methods is allocating direct costs to specific products. C) A problem with activity-based costing (ABC) is that it requires more recordkeeping than other methods. D) Service department allocations are required for the plant wide and department allocation methods. Answer: C

35. Cost pools are used with

A) B) C) D)

Plant wide Rates Yes No No Yes

Department Rates No Yes No Yes

Answer: D

36. A company is considering the use of a single plant wide rate. Under what conditions would this

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choice be justified? A) The company has many service departments but only one production department. B) The company produces a few products with similar characteristics in a few departments. C) The company has no service departments but many production departments. D) The company produces a wide selection of products in a single production department. Answer: B

37. Which of the following should not be used as the allocation base in a company that appropriately uses a single plant wide rate? A) sales volume B) machine hours C) material costs D) direct labor cost E) direct labor hours Answer: A

38. The electricity used for computerized machinery would be classified as a(n) A) volume-related activity. B) batch-related activity. C) product-related activity. D) facility-related activity. Answer: A

39. The number of services provided by an accounting firm would be classified as a(n) A) volume-related activity. B) batch-related activity. C) product-related activity. D) facility-related activity. Answer: C

40. Activity analysis is one of the first stages in implementing an activity-based costing system. Which of the following steps in "activity analysis" is usually performed first? A) Classify all activities as value added or nonvalue added. B) Record, from start to finish, the activities used to complete the product or service. C) Identify the process objectives that are defined by what the customer wants from the process. D) Improve the efficiency of all activities and develop plans to eliminate any nonvalued-added activities. Answer: B

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41. Which of the following costs is not related to a batch-related activity? A) Material handling B) Machine setups C) Shipping costs D) Compliance costs Answer: D

42. Which of the following measures is used by traditional costing systems as an allocation base for allocating overhead costs to the units produced? A) volume-related activities B) batch-related activities C) product-related activities D) facility-related activities Answer: A

43. Which of the following measures is used by activity-based costing (ABC) systems as an allocation base for allocating overhead costs to the units produced A) volume-related activities B) batch-related activities C) product-related activities D) facility-related activities E) all of the above are used by ABC systems Answer: E

44. Which of the following statements is (are) true? (1) Activity-based costs per unit are greater than volume-based costs per unit. (2) Volume-based costing has typically resulted in lower gross margins for high volume products and higher gross margins for low volume products. A) B) C) D)

Only (1) is true. Only (2) is true. Both (1) and (2) are true. Neither (1) nor (2) are true.

Answer: B

45. Volume-based costing allocates indirect product costs based on the volume of output, using such allocation bases as direct labor hours, machine hours, and the amount of direct material used in the production process. Activity-based costing (ABC) has consistently shown that Volume-based costing A) overstates high volume products. B) overstates low volume products.

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C) understates high volume products. D) understates low volume products. E) More than one of the above is true_____________. Answer: E

46. Which of the following statements regarding traditional costing and activity-based costing is false? A) There are more overhead cost pools in ABC systems. B) There are more cost allocation bases in ABC systems. C) ABC cost pools are more homogeneous than the cost pools in traditional costing. D) ABC systems use more first-stage cost allocations than traditional costing. Answer: D

47. Which one of the following accounts is not used in an activity-based costing (ABC) system? A) Materials Inventory B) Work-in-Process Inventory C) Finished Goods Inventory D) Overhead Applied E) Allocations Incurred Answer: E

48. Companies using activity-based costing (ABC) have learned that costs are a function of A) volume and activities. B) time and complexity. C) volume and time. D) resources and time. E) volume and resources. Answer: A

Part B: Computational Questions Use the following to answer questions 49-50: Smelly Perfume Company manufactures and distributes several different products. They currently use a plantwide allocation method for allocating overhead at a rate of $7 per direct labor hour. Cindy is the department manager of Department C which produces Products J and P. Diane is the department manager of Department D which manufactures Product X. The product costs (per case of 24 bottles) and other information are as follows:

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Products P X

Direct materials Direct labor Overhead

Machine hours Number of cases (per year)

$100.00 42.00 28.00 $170.00

$ 72.00 31.50 21.00 $124.50

$48.00 12.00 14.00 $74.00

4 300

2 500

3 600

49. If Smelly changes its allocation basis to machine hours, what is the total product cost per case for Product P? A) $163.50 B) $144.00 C) $138.15 D) $117.15 E) Some other answer _______________. Answer: D Response: Total overhead = $28(300) + $21(500) + $14(600) = $27,300 Total machine hours = 4(300) + 2(500) + 3(600) = 4,000 Overhead rate = $27,300/4,000 = $6.825/MH Product cost for P $72.00 + $31.50 + $6.825(2) = $117.15

50. Department D has recently purchased and installed new computerized equipment for Product X. This equipment will increase the overhead costs by $2,700 and decrease labor costs in Department D by $3.00 per case. Cindy believes that her department will be allocated some of Department D's overhead if Smelly uses machine hours to allocate overhead. If Smelly uses departmental rates, what are the product costs per case for Product X assuming Departments C and D use direct labor hours and machine hours as their respective allocation bases? A) $81.98 B) $79.50 C) $77.48 D) $75.00 E) Some other answer ________________. Answer: A Response: $48.00 (materials) + $9.00 (labor) +[(3 x $6.825) + ($2,700/600)] = $81.98 Use the following to answer questions 51-52: RS Company manufactures and distributes two products, R and S. Overhead costs are currently allocated using the number of units produced as the allocation base. The controller has recommended changing to an activity-based costing (ABC) system. She has collected the following information: Activity

Cost Driver

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Production setups Material handling Packaging costs

Number of setups Number of parts Number of units

$ 82,000 48,000 130,000 $260,000

8 56 80,000

12 24 50,000

51. What is the total overhead allocated to Product R using the current system? A) $113,600 B) $130,000 C) $146,400 D) $160,000 E) Some other answer _______________. Answer: D Response: $260,000/130,000 = $2.00 per unit $2(80,000) = $160,000

52. What is the total overhead per unit allocated to Product R using activity-based costing (ABC)? A) $2.60 B) $2.27 C) $2.00 D) $1.83 E) Some other answer _______________. Answer: D Response: ($82,000/20)8 + ($48,000/80)56 + ($130,000/130,000)80,000 = $146,400 $146,400/80,000 = $1.83

Use the following to answer questions 53-56: Terri Martin Nerdmeister, CPA provides bookkeeping and tax services to her clients. She charges a fee of $60 per hour for bookkeeping and $90 per hour for tax services. Martin estimates the following costs for the upcoming year: Office supplies Computer fees Secretary's salary Rent

$16,000 24,000 30,000 18,000 $88,000

Operating profits declined last year and Ms. Martin has decided to use activity-based costing (ABC) procedures to evaluate her hourly fees. She gathered the following information from last year's records:

Activity Office supplies

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Cost Driver Hours billed

Activity Levels Bookkeeping Tax services 1,200 800

Computer fees Secretary's salary Rent

Computer hours used Number of clients Types of services offered

400 16 1

600 84 1

53. What is the total cost allocated to the bookkeeping services using activity-based costing? A) $24,000 B) $33,000 C) $35,000 D) $44,000 E) Some other answer _______________. Answer: B Response: (16,000/2,000)1,200 + (24,000/1,000)400 + (30,000/100)16 + (18,000/2)1 = $33,000 54. Martin wants her hourly fees for the tax services to be 160% of their activity-based costs. What is the fee per hour for tax services in the upcoming year? A) $ 70.40 B) $ 88.00 C) $110.00 D) $118.40 E) Some other answer _______________. Answer: C Response: ($88,000 - $33,000)/800 = $68.75 (1.60)($68.75) = $110.00

55. Martin cannot change the hourly fee for the bookkeeping services because of the number of competing firms in the area. If Martin wants to earn $60,000 in the upcoming year, how much will she charge per hour for tax services? A) $ 74 B) $ 90 C) $ 95 D) $106 E) Some other answer _______________. Answer: C Response: [($60)(1,200) + x(800)] - $88,000 = $60,000; x = $95.00

56. A major client has requested bookkeeping service. However, Martin is already billing 100% of her capacity (i.e., 2,000 hours per year) and is reluctant to shift 100 hours from her tax services to meet this client's request. What is the minimum fee per hour that Martin could charge this client for bookkeeping services and be no worse off than last year? Assume that activity-based costing

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(ABC) is used. A) $48.75 B) $60.00 C) $81.25 D) $90.00 E) Some other answer _______________. Answer: D Response: [($60)(1,200) + $90(800) - $88,000 = $56,000 [($60)(1,200) + x(100) + $90(700) - $88,000 = $56,000; x = $90.00 Use the following to answer questions 57-59: Zela Company is preparing its annual profit plan. As part of its analysis of the profitability of individual products, the controller estimates the amount of overhead that should be allocated to the individual product lines from the information provided below. (CMA based) Units produced Material moves per product line Direct labor hours per unit Budgeted material handling costs

Wall Mirrors 40 5 200

Specialty Windows 20 15 300 $50,000

57. Under a traditional costing system that allocates overhead on the basis of direct labor hours, the materials handling costs allocated to one unit of wall mirrors would be A) $1,000 B) $ 500 C) $2,000 D) $5,000 E) some other answer _______________. Answer: B Response: $50,000/(200 + 300) = $100 [($100(200)]/40 = $500

58. Under an activity-based costing (ABC) system, the materials handling costs allocated to one unit of wall mirrors would be A) $ 625.00 B) $ 312.50 C) $ 833.33 D) $1,000.00 E) some other answer _______________.

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Answer: B Response: $50,000/(5 + 15) = $2,500 [$2,500(5)]/40 = $312.50

59. Under an activity-based costing (ABC) system, the materials handling costs allocated to one unit of specialty windows would be A) $1875.00 B) $ 937.50 C) $ 312.50 D) $1,500.00 E) some other answer _______________. Answer: B Response: $50,000/(5 + 15) = $2,500 [$2,500(15)]/20 = $1,875.00

Use the following to answer questions 60-61: The LMN Company recently switched to activity-based costing (ABC) from the department allocation method. The department method allocated overhead costs at a rate of $60 per machine hour. The cost accountant for Department XZ has gathered the following data: Activity Material handling Machine setups Utilities Quality control

Cost Drivers Tons of material handled Number of production runs Machine hours Number of inspections

Rate $ 80 $3,750 $ 25 $ 500

During April, LMN purchased and used $100,000 of direct materials at $20 per ton. There ...