Chapter 8 - ABC Costing - Test Bank PDF

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making Multiple Choice Questions 16. Which terms would make the following sentence true? Manufacturing companies that benefit the most from activity-based costing are those where overhead costs are a _________ percentage of total product cost and where there is ___________ diversity among the various products that they produce. A) low, little B) low, considerable C) high, little D) high, considerable 17. Would factory security and assembly activities be best classified at an appliance manufacturing plant as unit-level, batch-level, product-level, or organization-sustaining? Security Assembly A) Product Unit B) Batch Batch C) Organization Unit D) Organization Product 18. Which of the following would be an acceptable measure of activity for a material handling activity cost pool? Number of Weight of material moves material moved A) Yes Yes B) No Yes C) Yes No D) No No 19. An activity-based costing system that is designed for internal decision-making generally will not conform to generally accepted accounting principles. Which of the following is NOT a reason for this happening? A) Some manufacturing costs (i.e., the costs of idle capacity and organization-sustaining costs) will not be assigned to products. B) Some nonmanufacturing costs are assigned to products. C) Allocation bases other than direct labor-hours, direct labor cost, and machine-hours are used. D) First-stage allocations may be based on subjective interview data. 20. Providing the power required to run production equipment is an example of a: A) Unit-level activity. B) Batch-level activity. C) Product-level activity. D) Organization-sustaining activity. Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making 21. Parts administration is an example of a: A) Unit-level activity. B) Batch-level activity. C) Product-level activity. D) Organization-sustaining. 22. If a cost object such as a product or customer has a negative green margin, then: A) its red margin will be positive. B) its red margin may be either positive or negative. C) its red margin will be negative. D) its red margin will be zero. 23. Tatman Corporation uses an activity-based costing system with the following three activity cost pools: Activity Cost Pool Fabrication.................................. Order processing......................... Other...........................................

Total Activity 10,000 machine-hours 800 orders Not applicable

The Other activity cost pool is used to accumulate costs of idle capacity and organization-sustaining costs. The company has provided the following data concerning its costs: Wages and salaries...................... Depreciation................................ Occupancy.................................. Total............................................

$320,000 220,000 120,000 $660,000

The distribution of resource consumption across activity cost pools is given below:

Wages and salaries............... Depreciation......................... Occupancy...........................

Fabrication 20% 15% 5%

Activity Cost Pools Order Processing Other 65% 15% 35% 50% 70% 25%

Total 100% 100% 100%

The activity rate for the Fabrication activity cost pool is closest to: A) $3.30 per machine-hour B) $13.20 per machine-hour C) $10.30 per machine-hour D) $8.80 per machine-hour Solution:

Total Fabrication Cost: Wages and salaries: 20% × $320,000....... $ 64,000 Depreciation: 15% × $220,000................. 33,000 Occupancy: 5% × $120,000..................... 6,000 Total.......................................................... $103,000 8-6

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making (a) ÷ (b) (a) Activity Cost Pool Total Cost Fabrication $103,000

(b) Total Activity 10,000 machine-hours

Activity Rate $10.30 per machine-hour

24. Leaper Corporation uses an activity-based costing system with the following three activity cost pools: Activity Cost Pool Fabrication......................... Order processing................ Other..................................

Total Activity 40,000 machine-hours 200 orders Not applicable

The Other activity cost pool is used to accumulate costs of idle capacity and organization-sustaining costs. The company has provided the following data concerning its costs: Wages and salaries....... Depreciation................. Occupancy.................... Total.............................

$360,000 140,000 160,000 $660,000

The distribution of resource consumption across activity cost pools is given below:

Wages and salaries....... Depreciation................. Occupancy....................

Activity Cost Pools Order Fabrication Processing Other 35% 40% 25% 5% 55% 40% 30% 45% 25%

Total 100% 100% 100%

The activity rate for the Order Processing activity cost pool is closest to: A) $1,485 per order B) $1,540 per order C) $1,465 per order D) $1,320 per order

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making Solution: Total Order Processing Cost: Wages and salaries: 40% × $360,000....... $144,000 Depreciation: 55% × $140,000................. 77,000 Occupancy: 45% × $160,000................... 72,000 Total.......................................................... $293,000 (a) ÷ (b) (a) Activity Cost Pool Total Cost Order Processing $293,000

(b) Total Activity 200 orders

Activity Rate $1,465 per order

25. Huelskamp Corporation has provided the following data concerning its overhead costs for the coming year: Wages and salaries....... Depreciation................. Rent.............................. Total.............................

$360,000 120,000 180,000 $660,000

The company has an activity-based costing system with the following three activity cost pools and estimated activity for the coming year: Activity Cost Pool Total Activity Assembly...................... 60,000 labor-hours Order processing.......... 400 orders Other............................ Not applicable The Other activity cost pool does not have a measure of activity; it is used to accumulate costs of idle capacity and organization-sustaining costs. The distribution of resource consumption across activity cost pools is given below:

Wages and salaries....... Depreciation................. Rent..............................

Activity Cost Pools Order Assembly Processing Other 25% 65% 10% 15% 45% 40% 35% 40% 25%

Total 100% 100% 100%

The activity rate for the Assembly activity cost pool is closest to: A) $2.65 per labor-hour B) $3.85 per labor-hour C) $2.85 per labor-hour D) $2.75 per labor-hour 8-8

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making Solution: Total Assembly Cost: Wages and salaries: 25% × $360,000....... $ 90,000 Depreciation: 15% × $120,000................. 18,000 Rent: 35% × $180,000.............................. 63,000 Total.......................................................... $171,000 (a) ÷ (b) (a) Activity Cost Pool Total Cost Assembly $171,000

(b) Total Activity 60,000 labor-hours

Activity Rate $2.85 per labor-hour

26. Bennette Corporation has provided the following data concerning its overhead costs for the coming year: Wages and salaries....... Depreciation................. Rent.............................. Total.............................

$340,000 120,000 140,000 $600,000

The company has an activity-based costing system with the following three activity cost pools and estimated activity for the coming year: Activity Cost Pool Assembly................... Order processing....... Other.........................

Total Activity 30,000 labor-hours 500 orders Not applicable

The Other activity cost pool does not have a measure of activity; it is used to accumulate costs of idle capacity and organization-sustaining costs. The distribution of resource consumption across activity cost pools is given below:

Wages and salaries....... Depreciation................. Rent..............................

Assembly 40% 15% 35%

Activity Cost Pools Order Processing Other 35% 25% 45% 40% 30% 35%

Total 100% 100% 100%

The activity rate for the Order Processing activity cost pool is closest to: A) $430 per order B) $420 per order C) $360 per order D) $440 per order

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making Solution: Total Order Processing Cost: Wages and salaries: 35% × $340,000....... $119,000 Depreciation: 45% × $120,000................. 54,000 Rent: 30% × $140,000.............................. 42,000 Total.......................................................... $215,000 (a) ÷ (b) (a) Activity Cost Pool Total Cost Order Processing $215,000

(b) Total Activity 500 orders

Activity Rate $430 per order

27. Eccles Corporation uses an activity-based costing system with three activity cost pools. The company has provided the following data concerning its costs and its activity based costing system: Costs: Wages and salaries............. $340,000 Depreciation....................... 180,000 Utilities............................... 200,000 Total................................... $720,000 Distribution of resource consumption: Wages and salaries....... Depreciation................. Utilities.........................

Assembly 20% 15% 5%

Activity Cost Pools Setting Up Other 60% 20% 35% 50% 55% 40%

Total 100% 100% 100%

How much cost, in total, would be allocated in the first-stage allocation to the Assembly activity cost pool? A) $144,000 B) $96,000 C) $36,000 D) $105,000 Solution: Total Assembly Cost: Wages and salaries: 20% × $340,000....... $ 68,000 Depreciation: 15% × $180,000................. 27,000 Utilities: 5% × $200,000.......................... 10,000 Total.......................................................... $105,000

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making 28. Mayeux Corporation uses an activity-based costing system with three activity cost pools. The company has provided the following data concerning its costs and its activity based costing system: Costs: Wages and salaries................. Depreciation.......................... Utilities.................................. Total.......................................

$320,000 160,000 240,000 $720,000

Distribution of resource consumption: Wages and salaries.......... Depreciation.................... Utilities............................

Activity Cost Pools Setting Up Other 40% 10% 55% 35% 50% 35%

Assembly 50% 10% 15%

Total 100% 100% 100%

How much cost, in total, would be allocated in the first-stage allocation to the Setting Up activity cost pool? A) $360,000 B) $336,000 C) $288,000 D) $348,000 Solution: Total Setting Up Cost: Wages and salaries: 40% × $320,000....... $128,000 Depreciation: 55% × $160,000................. 88,000 Utilities: 50% × $240,000........................ 120,000 Total.......................................................... $336,000 29. Gutknecht Corporation uses an activity-based costing system with three activity cost pools. The company has provided the following data concerning its costs and its activity based costing system: Costs: Wages and salaries............. Depreciation....................... Utilities............................... Total...................................

$300,000 180,000 240,000 $720,000

Distribution of resource consumption: Assembly Wages and salaries......... 35% Depreciation.................. 5% Utilities.......................... 10%

Activity Cost Pools Setting Up Other 40% 25% 60% 35% 60% 30%

Total 100% 100% 100%

How much cost, in total, would be allocated in the first-stage allocation to the Other activity cost Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making pool? A) $138,000 B) $210,000 C) $180,000 D) $216,000 Solution: Total Other Cost: Wages and salaries: 25% × $300,000....... $ 75,000 Depreciation: 35% × $180,000................. 63,000 Utilities: 30% × $240,000........................ 72,000 Total.......................................................... $210,000 30. Lakatos Corporation uses an activity-based costing system with three activity cost pools. The company has provided the following data concerning its costs: Costs: Wages and salaries................. Depreciation.......................... Occupancy............................. Total.......................................

$420,000 240,000 220,000 $880,000

The distribution of resource consumption across the three activity cost pools is given below:

Wages and salaries............ Depreciation...................... Occupancy........................

Fabricating 10% 5% 30%

Activity Cost Pools Order Processing Other 75% 15% 50% 45% 35% 35%

Total 100% 100% 100%

How much cost, in total, would be allocated in the first-stage allocation to the Fabricating activity cost pool? A) $88,000 B) $132,000 C) $264,000 D) $120,000 Solution: Total Fabricating Cost: Wages and salaries: 10% × $420,000....... $ 42,000 Depreciation: 5% × $240,000................... 12,000 Occupancy: 30% × $220,000................... 66,000 Total.......................................................... $120,000

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making 31. Perl Corporation uses an activity-based costing system with three activity cost pools. The company has provided the following data concerning its costs: Costs: Wages and salaries............. Depreciation....................... Occupancy.......................... Total...................................

$360,000 200,000 100,000 $660,000

The distribution of resource consumption across the three activity cost pools is given below: Activity Cost Pools Order Fabricating Processing Other Wages and salaries......... 15% 60% 25% Depreciation.................. 20% 35% 45% Occupancy..................... 25% 50% 25%

Total 100% 100% 100%

How much cost, in total, would be allocated in the first-stage allocation to the Order Processing activity cost pool? A) $336,000 B) $319,000 C) $330,000 D) $396,000 Solution: Total Order Processing Cost: Wages and salaries: 60% × $360,000....... $216,000 Depreciation: 35% × $200,000................. 70,000 Occupancy: 50% × $100,000................... 50,000 Total.......................................................... $336,000 32. Hosley Corporation uses an activity-based costing system with three activity cost pools. The company has provided the following data concerning its costs: Costs: Wages and salaries....... Depreciation................. Occupancy.................... Total.............................

$360,000 100,000 120,000 $580,000

The distribution of resource consumption across the three activity cost pools is given below: Activity Cost Pools Order Fabricating Processing Other Total Wages and salaries......... 50% 40% 10% 100% Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making Depreciation.................. Occupancy.....................

10% 5%

45% 60%

45% 35%

100% 100%

How much cost, in total, would be allocated in the first-stage allocation to the Other activity cost pool? A) $123,000 B) $174,000 C) $58,000 D) $203,000 Solution: Total Other Cost: Wages and salaries: 10% × $360,000....... $ 36,000 Depreciation: 45% × $100,000................. 45,000 Occupancy: 35% × $120,000................... 42,000 Total.......................................................... $123,000 33. Feldpausch Corporation has provided the following data from its activity-based costing system: Activity Cost Pool Assembly...................... Processing orders......... Inspection.....................

Total Cost $1,137,360 $28,479 $97,155

Total Activity 84,000 machine-hours 1,100 orders 1,270 inspection-hours

The company makes 470 units of product W26B a year, requiring a total of 660 machine-hours, 50 orders, and 40 inspection-hours per year. The product's direct materials cost is $40.30 per unit and its direct labor cost is $42.22 per unit. The product sells for $118.00 per unit. According to the activitybased costing system, the product margin for product W26B is: A) $6,444.70 per unit B) $4,679.20 per unit C) $3,384.70 per unit D) $16,675.60 per unit Solution: (a) (b) (a) ÷ (b) Activity Cost Pool Total Cost Total Activity Activity Rate Assembly $1,137,360 84,000 machine$13.54 per hours machine-hour Processing Orders 28,479 1,100 orders $25.89 per order Inspection 97,155 1,270 inspection$76.50 per hours inspection-hour Calculation of Overhead Costs: Activity Cost Pool Assembly Processing Orders Inspection 8-14

(a) Activity Rate $13.54 per MH $25.89 per order $76.50 per IH

(b) Total Activity 660 MHs 50 orders 40 IHs

(a) × (b) ABC Cost $8,936.40 $1,294.50 $3,060.00

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making Sales.............................................................................$55,460.00 Costs: Direct materials (470 × $40.30)............................... $18,941.00 Direct labor (470 × $42.22)...................................... 19,843.40 Assembly.................................................................. 8,936.40 Processing................................................................. 1,294.50 Inspection................................................................. 3,060.00 52,075.30 Product margin.............................................................$ 3,384.70 34. Houseal Corporation has provided the following data from its activity-based costing system: Activity Cost Pool Assembly...................... Processing orders......... Inspection.....................

Total Cost $613,250 $46,170 $146,110

Total Activity 55,000 machine-hours 1,500 orders 1,900 inspection-hours

Data concerning one of the company’s products, Product W58B, appear below: Selling price per unit............................ Direct materials cost per unit............... Direct labor cost per unit...................... Annual unit production and sales......... Annual machine-hours......................... Annual orders....................................... Annual inspection-hours......................

$113.70 $48.14 $11.62 360 1,040 60 30

According to the activity-based costing system, the product margin for product W58B is: A) $3,668.60 B) $5,975.60 C) $5,515.40 D) $19,418.40 Solution: Activity Cost Pool Assembly

(a) Total Cost $613,250

Processing Orders Inspection

46,170 146,110

(b) Total Activity 55,000 machinehours 1,500 orders 1,900 inspectionhours

(a) ÷ (b) Activit...