MAS Bobadilla 01-Activity Based Costing PDF

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THEORY Which of the following statements is true? A. Costs that are indirect to products are traceable to some activity. B. The traditional approach to costing uses many different cost drivers. C. Costs that are indirect to products are by definition traceable directly to products. D. All of the abo...

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MANAGEMENT ADVISORY SERVICES THEORY 1. Which of the following statements is true? A. Costs that are indirect to products are traceable to some activity. B. The traditional approach to costing uses many different cost drivers. C. Costs that are indirect to products are by definition traceable directly to products. D. All of the above statements are true. 2. Mass customization can be achieved through the use of A. Activity-based costing. C. Just-in-time inventory. B. Flexible manufacturing systems. D. all of the above. 3. Process value analysis is a key component of activity-based management that links product costing and A. Continuous improvement. B. Reduction of the number of cost pools. C. Overhead rates based on broad averages. D. Accumulation of heterogeneous cost pools. 4. An approach to developing new ways to perform existing activities is called A. Benchmarking. C. Process value analysis. D. Re-engineering. B. Caveat analysis. 5. A(n) _______________ method first traces costs to a department and then to products. A. absorption costing C. direct costing B. activity-based costing D. traditional costing 6. Traditional overhead allocations result in which of the following situations? A. The resulting allocations cannot be used for financial reports. B. Overhead costs are assigned as period costs to manufacturing operations. C. Low-volume products are assigned too much, and high-volume products are assigned too little overhead. D. High-volume products are assigned too much overhead, and low-volume products are assigned too little overhead. MSQ-12 ACTIVITY-BASED COSTING

HILARIO TAN 7. Uniformly assigning the costs of resources to cost objects when those resources are actually used in a nonuniform way is called A. department costing. C. peanut-butter costing. B. overcosting. D. undercosting. 8. Which of the following is NOT a trait of a traditional cost management system? A. allocation intensive C. narrow and rigid product costing B. focus on managing activities D. unit-based drivers 9. Symptoms of an outdated cost system include all of the following EXCEPT A. competitors’ prices appear unrealistically low. B. products that are difficult to produce show little profit. C. the company has a highly profitable niche all to itself. D. product costs change because of changes in financial reporting. 10. Which of the following is NOT a sign of poor cost data? A. The company seems to have a highly profitably niche all to itself. B. Customers don’t balk at price increases for low-volume products. C. Competitors’ prices for low-volume products appear much too high. D. Competitors’ prices for high-volume products appear much too high. 11. Traditionally, managers have focused cost reduction efforts on A. activities. C. departments. B. costs. D. processes. 12. An objective of activity-based management is to A. eliminate the majority of centralized activities in an organization. B. institute responsibility accounting systems in decentralized organizations. C. reduce or eliminate non-value-added activities incurred to make a product or provide a service. D. all of the above Page 1 of 10

MANAGEMENT ADVISORY SERVICES 13. A(n)_______________ method first traces costs to activities and then to products. A. absorption costing C. direct costing B activity-based costing D. traditional costing 14. An accounting system that collects financial and operating data on the basis of the underlying nature and extent of the cost drivers is A. Activity-based costing. C. Direct costing. B. Cycle-time costing. D. Variable costing. 15. Activity-based costing and generally accepted accounting principles differ in that ABC A. does not define product costs in the same manner as GAAP. B. cannot be used to compute an income statement, but GAAP can. C. information is useful only to managers, while GAAP information is useful to all organizational stakeholders. D. is concerned only with costs generated from automated processes, but GAAP is concerned with costs generated from both manual and automated processes. 16. Design of an ABC system requires A. an adjustment to product mix. B. that the job bid process be redesigned. C. that a cause-and-effect relationship exists between resource costs and individual activities. D. both (A) and (C). 17. In an activity-based costing system, what should be used to assign a department’s manufacturing overhead cost to products produced in varying lot sizes? A. A single cause and effect relationship. B. Multiple cause and effect relationships. C. Relative net sales values of the products. D. A product’s ability to bear cost allocations.

MSQ-12 ACTIVITY-BASED COSTING

HILARIO TAN 18. A basic assumption of activity-based costing (ABC) is that A. Only variable costs are included in activity-cost pools. B. All manufacturing costs vary directly with units of production. C. Only costs that respond to unit-level drivers are product costs. D. Products or services require the performance of activities, and activities consume resources. 19. Book Co. uses the activity-based costing approach for cost allocation and product costing purposes. Printing, cutting, and binding functions make up the manufacturing process. Machinery and equipment are arranged in operating cells that produce a complete product starting with raw materials. Which of the following are characteristic of Boo’s activity-based costing approach? I. Cost drivers are used as a basis for cost allocation. II. Costs are accumulated by department or function for purposes of product costing. III. Activities that do not add value to the product are identified and reduced to the extent possible. C. I and III. A. I only. B. I and II. D. II and III. 20. The UNIQUE feature of an ABC system is the emphasis on A. costing individual jobs. C. individual activities. B. department indirect-cost rates. D. multiple-cost pools. 21. ABC should be used in which of the following situations? A. in all manufacturing firms B. single-product firms with multiple steps C. multiple-product firms with only a single process D. multiple-product firms with multiple processing steps 22. In activity-based costing, preliminary cost allocations assign costs to A. activities. C. processes. B. departments. D. products. Page 2 of 10

MANAGEMENT ADVISORY SERVICES 23. In activity-based costing, final cost allocations assign costs to A. activities. C. processes. B. departments. D. products. 24. ABC systems create A. one large cost pool. B. activity-cost pools with a broad focus. C. homogenous activity-related cost pools. D. activity-cost pools containing many direct costs. 25. What is the normal effect on the numbers of cost pools and allocation bases when an activitybased cost (ABC) system replaces a traditional cost system? A. B. C. D. Cost Pools Increase Increase No effect No effect Allocation Bases Increase No effect Increase No effect 26. If activity-based costing is implemented in an organization without any other changes being effected, total overhead costs will A. remain constant and simply be spread over products differently. B. be reduced because of the elimination of non-value-added activities. C. be reduced because organizational costs will not be assigned to products or services. D. be increased because of the need for additional people to gather information on cost drivers and cost pools. 27. The use of activity-based costing normally results in A. Equalizing setup costs for all product lines. B. Decreased setup costs being charged to low-volume products. C. Substantially greater unit costs for low-volume products than is reported by traditional product costing. D. Substantially lower unit costs for low-volume products than is reported by traditional product costing. MSQ-12 ACTIVITY-BASED COSTING

HILARIO TAN 28. The resource utilized by a given product divided by the total amount of the resource available is called the A. Activity driver. C. Cost object. B. Consumption ratio. D. Sustaining activity. 29. In Activity-based Costing, which of the following would be considered a value-added activity? A. Bookkeeping. C. Repair of machines. B. Engineering designs. D. Storage of inventory. 30. In the pharmaceutical or food industries, quality control inspections would most likely be viewed as A. business-value-added activities. C. process-efficiency activities. D. value-added-activities. B. non-value-added activities. 31. All of the following are examples of non-value-added activities except: A. assembling C. handling B. expediting D. reworking 32. The ideal standard quantity for nonvalue-added activities is A. zero B. practical capacity C. the currently attainable quantity standard D. the cost of resources acquired in advance of usage 33. The following items are used in tracing costs in an ABC system. In which order are they used? (1) cost object (3) activity driver (2) cost driver (4) cost pool A. 1, 2, 3, 4 B. 2, 3, 4, 1

C. 2, 4, 3, 1 D. 4, 3, 1, 2

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MANAGEMENT ADVISORY SERVICES 34. An item or event that has a cause-effect relationship with the incurrence of a variable cost is called a A. cost driver. C. mixed cost. B. direct cost. D. predictor. 35. Which of the following is typically regarded as a cost driver in traditional accounting practices? A. number of customers served B. number of direct labor hours worked C. number of purchase orders processed D. number of transactions processed 36. A cost pool is A. All costs that have the same driver. B. All of the costs of a particular department. C. All costs related to a product or product line. D. All costs in a group such as variable costs or discretionary fixed costs. 37. The activities that drive resource requirements are called the C. Resource drivers. A. Activity drivers. B. Cost objects. D. Sustaining activities. 38. Products make diverse demands on resources because of differences in all of the following EXCEPT C. selling price. A. batch size. B. complexity. D. volume. 39. __________________ are causal factors that explain the consumption of overhead. A. Activity drivers C. Cost objectives B. Cost catchers D. Cost pools

MSQ-12 ACTIVITY-BASED COSTING

HILARIO TAN 40. Unit-level cost drivers are most appropriate as an overhead assignment base when A. direct labor costs are low. B. only one product is manufactured. C. factories produce a varied mix of products. D. several complex products are manufactured. 41. All of the following are unit-based activity drivers EXCEPT C. number of setups A. direct labor hours B. machine hours D. number of units 42. All of the following are nonunit-based activity drivers EXCEPT A. number of direct labor hours C. number of material moves B. number of inspections D. number of setups 43. _____ are those performed each time a unit is produced or sold. A. Batch-level activities. C. Sustaining activities. B. Facility-sustaining activities. D. Unit-level activities. 44. Examples of activities at the unit level of costs include: A. heating, lighting, and security C. scheduling, setting up, and moving B. cutting, painting, and packaging D. designing, changing, and advertising 45. In allocating variable costs to products, A. a volume-based cost driver should be used. B. a company should never use more than one cost driver. C. direct labor hours should always be used as the allocation base. D. a company should use the same allocation base that it uses for fixed costs. 46. _____ are those that a company performs when it makes a group of units . A. Batch-level activities. C. Sustaining activities. B. Facility-sustaining activities. D. Unit-level activities. Page 4 of 10

MANAGEMENT ADVISORY SERVICES

HILARIO TAN

47. Examples of activities at the batch level of costs include: C. scheduling, setting up, and moving A. heating, lighting, and security B. cutting, painting, and packaging D. designing, changing, and advertising 48. If JIT manufacturing is used, maintenance of the production equipment would be classified as a A. cell-level activity C. product-level activity B. facility-level activity D. unit-level activity 49. Testing a prototype of a new product is an example of a A. Batch-level activity. C. Product-level activity. B. Organization-sustaining activity. D. Unit-level activity. 50. Examples of activities at the product level of costs include: A. cutting, painting, and packaging C. heating, lighting, and security B. designing, changing, and advertising D. scheduling, setting up, and moving 51. Which of the following is not a type of sustaining activity? A. Capacity-sustaining. C. Distribution-channel sustaining. B. Customer-sustaining. D. Unit-sustaining. 52. _____ relate to an entire plant as a whole. A. Batch-level activities. B. Facility-sustaining activities.

C. Sustaining activities. D. Unit-level activities.

53. Which of the following statements about activity-based costing is not true? A. In activity-based costing, cost drivers are what cause costs to be incurred. B. Activity-based costing is useful for allocating marketing and distribution costs. C. Activity-based costing differs from traditional costing systems in that products are not cross-subsidized. D. 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. MSQ-12 ACTIVITY-BASED COSTING

54. Examples of activities at the plant level of costs include: C. heating, lighting, and security A. cutting, painting, and packaging B. designing, changing, and advertising D. scheduling, setting up, and moving PROBLEMS 1. A time-and-motion study revealed that it should take 1 hour to produce a product that currently takes 3 hours to produce. Labor is $8 per hour. Nonvalue-added costs are A. $0 C. $16 B. $8 D. $24 2. Setup time for a product is six hours. A firm that uses JIT and produces the same product has reduced setup time to 30 minutes. Setup labor is $24 per hour. Value-added costs are A. $12 C. $132 B. $24 D. $144 3. Each unit of product requires 8 gallons of raw material. Due to scrap and rework, each unit has been averaging 9 gallons of raw material. The raw material costs $4 per gallon. Value-added costs are A. $2 C. $32 B. $4 D. $36 4. A company keeps 20 days of raw materials inventory on hand to avoid shutdowns due to raw materials shortages. Carrying costs average $2,000 per day. A competitor keeps 10 days of inventory on hand the competitor’s carrying costs average $1,000 per day. Value-added costs are A. $0 C. $20,000 B. $10,000 D. $40,000 5. New Rage Cosmetics has used a traditional cost accounting system to apply quality control costs uniformly to all products at a rate of 14.5% of direct labor cost. Monthly direct labor cost for Satin Sheen makeup is $27,500. In an attempt to distribute quality control costs more Page 5 of 10

MANAGEMENT ADVISORY SERVICES equitably, New Rage is considering activity-based costing. The monthly data shown in the chart below have been gathered for Satin Sheen. Quantity for Activity Cost Driver Cost Rates Satin Sheen Incoming material inspection Type of material $11.50 per type 12 types In-process inspection Number of units $0.14 per unit 17,500 units Product certification Per order $77per order 25 orders The monthly quality control cost assigned to Satin Sheen makeup using activity-based costing is A. $8,500.50 B. $88.64 per order. C. $525.50 lower than the cost using the traditional system. D. $525.50 higher than the cost using the traditional system. 6. ALF Co. is an assisted-living facility that provides services in the form of residential space, meals, and other occupant assistance (OOA) to its occupants. ALF currently uses a traditional cost account system that defines the service provided as assisted living, with service output measured in terms of occupant days. Each occupant is charged a daily rate equal to ALF’s annual cost of providing residential space, meals and OOA divided by total occupant days. However, an activity-based costing (ABC) analysis has revealed that occupant’s use of OOA varies substantially. This analysis determined that occupants could be grouped into three categories (low, moderate, and high usage of OOA) and that the activity driver of OOA is nursing hours. The driver of the other activities is occupant days. The following quantitative information was also provided: Occupant category Annual Occupant Days Annual Nursing Hours Low Usage 36,000 90,000 Medium Usage 18,000 90,000 High Usage 6,000 120,000 60,000 300,000 The total annual cost of OOA was $7.5 million, and the total annual cost of providing residential space and meals was $7.2 million. MSQ-12 ACTIVITY-BASED COSTING

HILARIO TAN Accordingly, the ABC analysis indicates that the daily costing rate should be A. $620.00 for all occupants. B. $182.50 for occupants in the low-usage category. C. $245.00 for occupants in the high-usage category. D. $145.00 for occupants in the medium-usage category. Questions 7 thru 9 are based on the following information. Dierich Company 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: Manufacturing overhead $600,000 Selling and admin. expenses $220,000 Total $820,000 Distribution of resource consumption: Activity Cost Pools Order Size Customer Support Other Total Manufacturing overhead 15% 75% 10% 100% Selling and admin. Expenses 60% 20% 20% 100% The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining costs. You have been asked to complete the first-stage allocation of costs to the activity cost pools. 7. How much cost, in total, would be allocated in the first-stage allocation to the Order Size activity cost pool? A. $123,000 C. $307,500 B. $222,000 D. $492,000 8. How much cost, in total, should NOT be allocated to orders and products in the second stage of the allocation process if the activity-based costing system is used for internal decisionmaking? C. $104,000. A. $0. B. $82,000. D. $164,000. Page 6 of 10

MANAGEMENT ADVISORY SERVICES 9. How much cost, in total, would be allocated in the first-stage allocation to the Customer Support activity cost pool? A. $164,000 C. $494,000 B. $389,500 D. $615,000 Questions 10 through 13 are based on the following information. Zebra Corporation has the following activities: creating bills of materials (BOM), studying manufacturing capabilities, improving manufacturing processes, training employees, and designing tooling. The general ledger accounts reveal the following expenditures for manufacturing engineering: Salaries $150,000 Equipment 80,000 Supplies 20,000 Total $250,000 The equipment is used for two activities: improving processes and designing tooling. Thirty-five percent of the equipment’s time is used for improving processes and sixty-five percent is used for designing tools. The salaries are for two engineers. One is paid $100,000, while the other earns $50,000. The $100,000 engineer spends 40% of his time training employees in new processes and 60% of his time on improving processes. The remaining engineer spends equal time on all activities. Supplies are consumed in the following proportions: Creating BOMs 25% Studying capabilities 10% Improving processes 20% Training employees 25% Designing tooling 20% 10. What is the cost assigned to the creating BOMs activity? A. $15,000 C. $87,500 B. $62,500 D. $250,000 11. What is the cost assigned to the improving processes activity? C. $102,000 A. $50,000 B. $87,500 D. $250,000 MSQ-12 ACTIVITY-BASED COSTING

HILARIO TAN 12. What is the cost assigned to the training employees activity? A. $55,000 C. $162,500 B. $62,500 D. $250,000 13. What is the cost assigned to the designing tooling activity? A. $50,000 C. $162,500 B. $66,000 D. $250,000 Questions 14 through 16 are based on the following information. A company has identified the following overhead costs and cost drivers for the coming year. Overhead Item Cost Driver Budgeted Cost Budgeted Activity Level Machine setup No. of setups $ 20,000 200 Inspection No. of inspections $130,000 6,500 Material handling No. of material moves $ 80,000 8,000 Engineering Engineering hours $ 50,00...