Chapter 5 MCQ - Multiple choice as well as math problems. PDF

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Multiple choice as well as math problems....

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CHAPTER 5 MCQ – COMM305 1. The most difficult part of calculating accurate unit costs is determining the proper amount of direct material cost to assign to each product. True False 2. Activity-based costing systems rely on multiple bases for overhead cost allocation. True False 3. Traditional costing systems group costs according to activity cost pools. True False 4. A cost driver is a factor or activity that has a direct cause-effect relationship with the resources consumed. True False 5. Two benefits of ABC are that it leads to better management decisions and arbitrary allocations are completely eliminated. True False 6. Activity-based costing (ABC) can be used only in a process cost system. focuses on units of production. focuses on activities performed to produce a product. uses only a single basis of allocation. 7. Activity-based costing is the initial phase of converting to a just-in-time operating environment. can be used only in a job order costing system. is a 4step overh cost allocation process that identifies activity cost pools and cost drivers. uses direct labour as its primary cost driver.

8. Any activity that causes resources to be consumed is called a just-in-time activity. facility-level activity. cost driver. non-value-added activity. 9. Which of the following would be the best cost driver for the activity of purchasing? The number of employees in the purchasing department Total number of items ordered Total dollar value of item orders The number of purchase orders issued 10. The overhead rate for machine setups is $100 per setup. Products A and B have 80 and 60 setups, respectively. The overhead assigned to each product is product A $8,000, product B $8,000. product A $8,000, product B $6,000. product A $6,000, product B $6,000. product A $6,000, product B $8,000. 100x80 100x60 11. Donna Crawford Co. has identified an activity cost pool and has estimated overhead of $1,920,000 to it. It has determined the expected use of cost drivers for that activity to be 160,000 inspections. Widgets require 40,000 inspections, gadgets 30,000 inspections, and targets 90,000 inspections. The overhead assigned to each product is widgets $40,000, gadgets $30,000, targets $90,000. widgets $480,000, gadgets $360,000, targets $108,000. widgets $360,000, gadgets $480,000, targets $1,080,000. widgets $480,000, gadgets $360,000, targets $1,080,000 12. To reduce product cost distortions, many companies now use ___ as the basis on which to allocate overhead in an automated manufacturing process. direct labour direct materials machine hours

13. As the complexity of a product's manufacturing operation increases, the number of activities and cost drivers used in an activity-based costing system will likely increase. stay about the same. decrease. vary randomly. 14. Which of the following should not be included as part of the cost pool of machine set-ups? Amortization on machines and parts used for different set-ups Salaries of those supervising machine operators Supplies needed in changing machines from one production setting to another The accounts payable supervisor's salary 15. An activity that adds costs to the product but does not increase its market value is a value-added activity. cost driver. cost-benefit activity. non-value-added activity. 16. The following activity is value-added: storage of raw materials. moving parts from machine to machine. shaping a piece of metal on a lathe. all of the above. 17. A relevant facility-level cost driver for heating costs is machine hours. direct material. floor space. direct labour cos

18. Which of the following statements regarding ABC in service industries is false? The objective is the same as in manufacturing industries. It does not seek to find non-value-added activities. It typically results in the improved costing of the services provided. The general approach is the same as for manufacturers. 19. Which of the following sometimes makes the implementation of activity-based costing difficult in service industries? A larger proportion of overhead costs are company-wide costs. It does not apply to airlines, railroads and hotels. Non-value-added activities are more difficult to identify for services. The cost of a service cannot be determined. 20. The activity-based overhead rate for services is calculated by dividing estimated overhead per activity by expected use of cost drivers per activity. actual overhead per activity by expected use of cost drivers per activity. estimated overhead per activity by actual use of cost drivers per activity. actual overhead per activity by actual use of cost drivers per activity. 21. Indicate whether the following statements are true or false. (a) The reasoning behind ABC cost allocation is that products consume activities and activities consume resources. TRUE (b Activity-based costing is an approach for allocating direct labour to products. ) FALSE (c) In today’s increasingly automated environment, direct labour is never an appropriate basis for allocating costs to products. FALSE (d) A cost driver is any factor or activity that has a direct cause–effect relationship with resources consumed. TRUE (e) Activity-based costing segregates overhead into various cost pools in an effort to provide more accurate cost information. TRUE

22.

23.

24.

Q1. A cost driver does NOT generally have a direct cause-effect relationship with the resources consumed. True False Q2 Non-value-added activities increase the cost of a product but not its market value. True False Q3 ABC is particularly useful when product lines differ greatly in volume and manufacturing complexity. True False Q4. What sometimes makes implementation of activity-based costing difficult in service industries is that a smaller proportion of overhead costs are company-wide costs.

True False Q9. A well designed activity-based costing system starts with identifying the activity-cost pools. computing the activity-based overhead rate. assigning manufacturing overhead costs for each activity cost pool to products. analyzing the activities performed to manufacture a product. Q10. Activity-based costing normally allocates overhead costs to products only. more accurately than traditional costing systems. to services, where as traditional costing systems normally allocate overhead costs to products. based on no more than three cost drivers. Q11. CALCULATING OVERHEAD FOR PRODUCT A USING ABC Q12. SAME Q14. SAME Q15. SAME Q27.SAME

Q13. Swifty Company manufactures two models of its hammock, the Superior and the Deluxe. The Superior model requires 10000 direct labour hours and the Deluxe requires 39200 direct labour hours. The company produces 4500 units of the Superior model and 1000 units of the Deluxe model each year. The company produces the Superior model in batch sizes of 200, while it produces the Deluxe model in batch sizes of 100. The company expects to incur $117000 of total setup costs this year. How much of the setup costs are allocated to the Superior model using ABC costing? $81000 $58500 $21273 $100000 Total number of Supreme Inspections: 4500/200=22.50 Total number of Deluxe Models: 1000/100=10.00 Total number of Inspections:22.5+10=32.5 Cost per Inspection:117,000/32.50=3600$

Cost of inspection for Supreme model: 3600$*22.50=81,000 Q16. Which of the following is true of activity-based costing? more cost pools same base as traditional costing less costly to use eliminates arbitrary allocations Q17. The primary benefit of ABC is it provides faster management decisions. enhanced control over overhead costs. more cost pools. more accurate product costing. Q18. Each of the following is a limitation of activity-based costing except that it can be expensive to use. it is more complex than traditional costing. more cost pools are used. some arbitrary allocations continue.

Q19. The presence of any of the following factors would suggest a switch to ABC except when product lines differ greatly in volume. overhead costs constitute a minor portion of total costs. the manufacturing process has changed significantly. production managers are ignoring data provided by the existing system. Q20. What might be an impediment in changing from a traditionally based costing system to an activity-based costing system? Management may not be in favour of a change. Excessive costs may be incurred to assist in capturing costs. Some costs would still have to be allocated arbitrarily after the changeover. All of the above are impediments.

Q21. What might be a reason to not change from a traditionally based costing system to an activity-based costing system? Products or services are similar in volume and activity. Support services are spread evenly throughout the company’s activities. Overhead is a low component of the overall cost. All of the above are valid reasons. Q22. Which of the following is a product-level activity? Regulatory approval of a new prescription drug. An advertisement campaign that focuses on the large number of products the company produces. Equipment cleaning between batches. Material handling. Q23. Which of the following is a facility-level activity? The Human Resources Department. The Product Manager’s salary. Insurance on the factory that is used exclusively to manufacture one of the company’s seven products. Inspections.

Q24. Which of the following is an example of batch-level activity in a company marketing cell phones? Internet advertising. Preparing monthly customer invoices. Rent for kiosks in shopping malls. Offering discounts on monthly payment plans. Q25. A non-value-added activity in a service enterprise is taking appointments. travelling. advertising. all of these.

Q26. All of the following are examples of a value-added activity in a service company except delivering packages by a delivery service. ordering supplies. performing surgery. providing legal research for legal services. Q28. Infotrac Inc. sells a high-speed retrieval system for information. It provides the following information for the year. Budgeted Actual Overhead cost $1,215,360 $955,400 Machine hours

50,640

45,490

Direct labour 141,300 93,030 hours Overhead is applied on the basis of machine hours. Calculate the predetermined overhead rate. Budgeted overhead/budgeted machine hours =1215360/50640=24 Determine the amount of overhead applied for the year. Actual machine hours*overhead rate =45,490*24=1,091,760

Q29. Coats Galore Inc. uses activity-based costing as the basis for information to set prices for its six lines of seasonal coats. Calculate the activity-based overhead rates using the following budgeted data for each of the activity cost pools. (Round answers to 2 decimal places, e.g. 15.25.)

Activity Cost Pools Designing Sizing and cutting Stitching and trimming Wrapping and packing Cost Pool

Estimated Estimated Use of Cost Overhead Drivers per Activity $450,000 12,000 designer hours 4,000,000 160,000 machine hours 1,440,000 336,000

80,000 labour hours 32,000 finished units Rate

Designing

$ 37.50 per designer hr.

Sizing and cutting

$ 25.00 per machine hr.

Stitching and trimming

$ 18.00 per labour hr.

Wrapping and packing

$ 10.50 per unit

Q30. Wu and Martin is an architectural firm that is contemplating the installation of activitybased costing. The following activities are performed daily by staff architects. Classify these activities as value-added or non–value-added: (a) designing and drafting, 3 hours; (b) staff meetings, 1 hour; (c) on-site supervision, 2 hours; (d) lunch, 1 hour; (e) consultation with client on specifications, 1.5 hours; and (f) entertaining a prospective client for dinner, 2 hours. (a Designing and ) drafting VALUE ADDED (b Staff meetings ) NON VALUE (c On-site supervision ) VALUE (d) Lunch NON VALUE (e Consultation with ) client VALUE (f Entertaining prospective client ) NON VALUE

Q31. Elle Inc. makes two types of handbags: standard and custom. The controller has decided to use a plant-wide overhead rate based on direct labour costs. The president has heard of activity-based costing and wants to see how the results would differ if this system were used. Two activity cost pools were developed: machining and machine set-up. Presented below is information related to the company’s operations.

Direct labour

Standard

Custom

$50,000

$100,000

costs Machine hours

500

1,000

Set-up hours

100

400

Total estimated overhead costs are $307,500. The overhead cost allocated to the machining activity cost pool is $175,500, and $132,000 is allocated to the machine set-up activity cost pool. Calculate the overhead rate using the traditional (plant-wide) approach. PREDETERMINED OVERH RATE=ESTIMATED OVERH COST/DIRECT LABOUR COST =307,500/(50,000+100,000) =2.05=205% Calculate the overhead rate using the activity-based costing approach. MACHINING=175,500/1500=117 SET-UP=132,000/500=264 Determine the difference in allocation between the two approaches....