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True/False Questions 1. If a manufacturing company is using activity-based costing for internal purposes only, then organization-sustaining overhead costs should not be allocated to any of the products. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium 2. Batch-level activities are performed each time a batch of goods is handled or processed. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 3. Organization-sustaining activities are carried out regardless of how many units are made, how many batches are run, or how many different products are made. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 4. Direct labor-hours or direct labor cost should not be used as a measure of activity in an activity-based costing system. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium 5. Activity-based costing is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” costs. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 6. Activity-based costing is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect only variable costs. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

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7. A duration driver provides a measure of the amount of time required to perform an activity. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium 8. In general, transaction drivers are more accurate measures of the consumption of resources than duration drivers. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium 9. The costs of idle capacity should not be assigned to products in activity-based costing. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 10. In traditional costing systems, all manufacturing costs are assigned to products--even manufacturing costs that are not caused by the products. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium 11. Activity-based costing involves a two-stage allocation in which overhead costs are first assigned to departments and then to jobs on the basis of direct labor hours. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2,4 Level: Medium 12. In activity-based costing, some costs may be broken down and assigned to two activity cost pools. For example, part of a supervisor's salary may be classified as a productlevel activity and part of it may be classified as a batch-level activity. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium 13. Activity rates in activity-based costing are computed by dividing costs from the firststage allocations by the activity measure for each activity cost pool. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium

14. In the second-stage allocation in activity-based costing, activity rates are used to apply costs to products, customers, and other cost objects. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium 15. When a company shifts from a traditional cost system in which manufacturing overhead is applied based on direct labor-hours to an activity-based costing system in which there are batch-level and product-level costs, the unit product costs of high volume products typically decrease whereas the unit product costs of low volume products typically increase. Ans: True AACSB: Analytic AICPA FN: Reporting LO: 8

AICPA BB: Critical Thinking Level: Medium

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 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium 17. Would factory security and assembly activities be best classified at an appliance manufacturing plant as unit-level, batch-level, product-level, or organizationsustaining? Security Assembly A) Product Unit B) Batch Batch C) Organization Unit D) Organization Product Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

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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 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium 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 organizationsustaining 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 machinehours are used. D) First-stage allocations may be based on subjective interview data. Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Hard 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. Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium 21. Parts administration is an example of a: A) Unit-level activity. B) Batch-level activity. C) Product-level activity. D) Organization-sustaining. Ans: C

LO: 1

Level: Medium

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. Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 8A LO: 6 Level: Medium 23. Tatman Corporation uses an activity-based costing system with the following three activity cost pools: Activity Cost Pool Total Activity Fabrication......................... 10,000 machine-hours Order processing................ 800 orders Other.................................. 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...................................

$320,00 0 220,000 120,000 $660,00 0

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

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

Activity Cost Pools Order Fabrication Processing Other 20% 65% 15% 15% 35% 50% 5% 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 Ans: C

AACSB: Analytic

AICPA BB: Critical Thinking

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AICPA FN: Reporting

LO: 2,3

Level: Medium

Solution: Total Fabrication Cost: Wages and salaries: 20% × $320,000..... Depreciation: 15% × $220,000............... Occupancy: 5% × $120,000.................... Total........................................................

$ 64,000 33,000 6,000 $103,000 (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.............................

$360,00 0 140,000 160,000 $660,00 0

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

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

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D)

$1,320 per order

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2,3 Level: Medium Solution: Total Order Processing Cost: Wages and salaries: 40% × $360,000..... Depreciation: 55% × $140,000............... Occupancy: 45% × $160,000.................. Total........................................................

$144,000 77,000 72,000 $293,000 (a) ÷ (b)

(a) Activity Cost Pool Total Cost Order Processing $293,000

(b) Total Activity 200 orders

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Activity Rate $1,465 per order

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25. Huelskamp Corporation has provided the following data concerning its overhead costs for the coming year:

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

$360,00 0 120,000 180,000 $660,00 0

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%

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 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2,3 Level: Medium

Total 100% 100% 100%

Solution: Total Assembly Cost: Wages and salaries: 25% × $360,000..... Depreciation: 15% × $120,000............... Rent: 35% × $180,000............................ Total........................................................

$ 90,000 18,000 63,000 $171,000 (a) ÷ (b)

(a) Activity Cost Pool Total Cost Assembly $171,000

(b) Total Activity 60,000 labor-hours

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Activity Rate $2.85 per labor-hour

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26. Bennette Corporation has provided the following data concerning its overhead costs for the coming year:

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

$340,00 0 120,000 140,000 $600,00 0

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 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2,3 Level: Medium

Solution: Total Order Processing Cost: Wages and salaries: 35% × $340,000..... Depreciation: 45% × $120,000............... Rent: 30% × $140,000............................ Total........................................................

$119,000 54,000 42,000 $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............. Depreciation....................... Utilities.............................. Total...................................

$340,00 0 180,000 200,000 $720,00 0

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 PD) $105,000 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

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Solution: Total Assembly Cost: Wages and salaries: 20% × $340,000..... Depreciation: 15% × $180,000............... Utilities: 5% × $200,000......................... Total........................................................

$ 68,000 27,000 10,000 $105,000

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...................................

$320,00 0 160,000 240,000 $720,00 0

Distribution of resource consumption:

Wages and salaries....... Depreciation................. Utilities.........................

Assembly 50% 10% 15%

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

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 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: Total Setting Up Cost: Wages and salaries: 40% × $320,000..... Depreciation: 55% × $160,000............... Utilities: 50% × $240,000....................... Total........................................................

$128,000 88,000 120,000 $336,000

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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...................................

$300,00 0 180,000 240,000 $720,00 0

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 pool? A) $138,000 B) $210,000 C) $180,000 D) $216,000 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: Total Other Cost: Wages and salaries: 25% × $300,000..... Depreciation: 35% × $180,000............... Utilities: 30% × $240,000....................... Total........................................................

$ 75,000 63,000 72,000 $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...................................

$420,00 0 240,000 220,000 $880,00 0

The distribution of resource consumption across the three activity cost pools is given below: Activity Cost Pools Order Fabricating Processing Other Wages and salaries........ 10% 75% 15% Depreciation.................. 5% 50% 45% Occupancy..................... 30% 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 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: Total Fabricating Cost: Wages and salaries: 10% × $420,000..... Depreciation: 5% × $240,000................. Occupancy: 30% × $220,000.................. Total........................................................

$ 42,000 12,000 66,000 $120,000

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

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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...................................

$360,00 0 200,000 100,000 $660,00 0

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% Oc...