Question 1

Which of the following costs is not related to a batch-related activity?

Accepted Answer

A)  Material handling. 
B)  Machine setups. 
C)  Shipping costs. 
D)  Compliance costs. 
A)  Material handling. 
B)  Machine setups. 
C)  Shipping costs. 
D)  Compliance costs.

Question 2

Chang Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, Plain and Fancy, about which it has provided the following data:
$\begin{array}{lcc}
&\text { Plain }& \text { Fancy }\
\text { Direct materials per unit } & \$  24.50&\$59.30 \
\text { Direct labor per unit } & \$ 5.00 &\$25.00\
\text { Direct labor-hours per unit } &  0.20&1.00 \
\text { Annual production } &  45,000&15,000
\end{array}$

The company's estimated total manufacturing overhead for the year is $985,440 and the company's estimated total direct labor-hours for the year is 24,000.
The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:
$\begin{array}{lc}
&\text { Estimated Overhead }\
\text { Activities and Activity Measures } & \text { Cost } \
\text { Supporting direct labor (DLHs) } & \$ 384,000 \
\text { Setting up machines (setups) } & 255,840\
\text {Parts administration (part types)}&345,600\
\text {Total}&\$985,440
\end{array}$
$$\begin{array} { l r r r } 
& & { \text { Expected Activity } } \
 & { \text { Plain } } & \text { Fancy } & \text { Total } \
\text { DLuHs } & 9,000 & 15,000 & 24,000 \
\text { Setups } & 1,032 & 936 & 1,968 \
\text { Part types } & 624 & 240 & 864
\end{array}$$

-
The manufacturing overhead that would be applied to a unit of product Fancy under the activity-based costing system is closest to:

Accepted Answer

A)  $71.57. 
B)  $41.06. 
C)  $8.11. 
D)  $30.51. 
A)  $71.57. 
B)  $41.06. 
C)  $8.11. 
D)  $30.51.

Question 3

Allure Company manufactures and distributes two products, M and XY. 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:
$$\begin{array} { l l r r r } 
\text { Activity } & \text { Cost Driver } & \text { Amount } & { \text { M } } & { \text { XY } } \
\text { Production setups } & \text { Number of setups } &8 2 , 0 0 0 &8  & 12 \
\text { Material hardling } & \text { Number of parts } & 48,000 & 56 & 24 \
\text { Packaging costs } & \text { Number of urits } & 130,000 & 80,000 & 50,000 \
& &\$ 2 6 0 , 0 0 0 & &
\end{array}$$
-
What is the total overhead per unit allocated to Product M using activity-based costing (ABC)?

Accepted Answer

A)  $2.60. 
B)  $2.27. 
C)  $2.00. 
D)  $1.83. 
A)  $2.60. 
B)  $2.27. 
C)  $2.00. 
D)  $1.83.

Question 4

Which of the following would be a reasonable basis for assigning the materials handling costs to the units produced in an activity-based costing (ABC) system?

Accepted Answer

A)  Number of production runs per year. 
B)  Number of components per completed unit. 
C)  Amount of time required to produce one unit. 
D)  Amount of overhead applied to each completed unit. 
A)  Number of production runs per year. 
B)  Number of components per completed unit. 
C)  Amount of time required to produce one unit. 
D)  Amount of overhead applied to each completed unit.

Question 5

Flawless Cosmetic Company manufactures and distributes several different products. The company currently uses a plantwide allocation method for allocating overhead at a rate of $7 per direct labor hour. Loren is the department manager of the Makeup Department that produces Products - Concealer (C) and Glow Cream (GC). Jennifer is the department manager of the Hair Care Department that manufactures Product - Shampoo (S). The product costs (per case of 24 bottles) and other information are as follows:
$\begin{array}{lccc}
&&\text { Products }\ 
&\text { C } & \text { GC } & \text { S }\
 \text { Direct materials } & \$  100.00 & \$  72.00 & \$ 48.00 \
 \text { Direct labor } &  42.00 & 31.50& 12.00\
 \text { Overhead } &  28.00 & 21.00 & 14.00\
&\$170.00&\$124.50&\$74.00\
\text { Machine hours } & 4 & 2 & 3 \
\text { Number of cases (per year) } & 300 & 500 & 600 
\end{array}$

-
Based on this information, if Flawless changes its allocation basis to machine hours, what is the overhead rate per machine hour?

Accepted Answer

A)  $3.00 
B)  $2.00 
C)  $21.00 
D)  $6.825 
A)  $3.00 
B)  $2.00 
C)  $21.00 
D)  $6.825

Question 6

What is the typical effect on the numbers of cost pools and cost assignment bases when an activity-based costing (ABC) system replaces a traditional costing system? (CPA adapted)
$\begin{array} {cc } 
&  { \text { Cost Pools } } & { \text { Cost Assignment Bases } } \\end{array}$
A.$\begin{array} {cc } & \text { No effect } &&&& \text { No effect } \\end{array}$
B.$\begin{array} {cc }  & \text { Increase } &&&& \text { No effect } \\end{array}$
C.$\begin{array} {cc }  & \text { No effect } &&&& \text { Increase } \\end{array}$
D.$\begin{array} {cc } & \text { Increase } &&&& \text { Increase } \
\end{array}$

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 7

The electricity used for production machinery would be classified as a:

Accepted Answer

A)  Volume-related activity. 
B)  Batch-related activity. 
C)  Product-related activity. 
D)  Facility-related activity. 
A)  Volume-related activity. 
B)  Batch-related activity. 
C)  Product-related activity. 
D)  Facility-related activity.

Question 8

Russell Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, Slow and Fast, about which it has provided the following data:
$\begin{array}{lrrrr}
&\text { Slow}&\text {  Fast }\
\text { Direct materials per unit } & \$  14.10 & \$ 43.40 \
\text { Direct labor per unit } & \$  3.20 & \$  25.60 \
\text { Direct labor-hours per unit } & 0.20 & 1.60 \
\text { Annual production } &  30,000 & 15,000
\end{array}$

The company's estimated total manufacturing overhead for the year is $1,526,700 and the company's estimated total direct labor-hours for the year is 30,000.
The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:
$\begin{array}{lc}
&\text { Estimated Overhead }\
\text { Activities and Activity Measures } & \text { Cost } \
\text { Assembling products (DLHs) } & \$720,000 \
\text { 
Preparing batches (batches) } & 362,700\
\text {Product support (product variations)}&444,000\
\text {Total}&\$1,526,700
\end{array}$

$$\begin{array} { l r r r } 
&  { \text { Expected Activity } } \
& \text { Slow } & \text { Fast } & \text { Total } \
\text { DLHs } & 6,000 & 24,000 & 30,000 \
\text { Batches }  & 1,380 & 1,410& 2,790 \
\text { Product variations }& 570& 540& 1,110
\end{array}$$

-
The manufacturing overhead that would be applied to a unit of product Slow under the company's traditional costing system is closest to:

Accepted Answer

A)  $18.38. 
B)  $28.56. 
C)  $10.18. 
D)  $4.80. 
A)  $18.38. 
B)  $28.56. 
C)  $10.18. 
D)  $4.80.

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

Conway Mountain Analysis offers agriculture and environmental assays. Its Soil Division performs testing on soil (S), as well as examines for the presence of pesticide residue (PR). Aggregated operating costs for the division are $1,050,000 based on a single overhead pool at a rate of $70 per testing hour. S testing uses 5,000 hours and PR uses 10,000 hours. The company is trying to determine whether a better costing structure can be established. The controller has identified the following costs:
(1) Salaries and wages of laboratory techs are $600,000 (based on 45% for S and 55% for PR testing).
(2) Equipment related overhead like depreciation, maintenance, utilities, and insurance amounts to $150,000, with a cost driver of number of test hours.
(3) Setup costs are $120,000 assigned based on 10,000 total setup hours. S testing requires 4,200 setup hours and PR testing requires 5,800 setup hours.
(4) Costs of test designs amount to $180,000, based on the time required to design the tests. S testing requires 3,250 hours and P testing requires 1,750 hours.
Required:
(a) Calculate the cost per test hour for S and PR using an improved costing system.
(b) Explain briefly the reasons why these costs are different from the $70 per test-hour under the current costing system.

Accepted Answer

Solution:
 @#IMG-DLM& (b) The current costing syst

Question 11

The Mega Construction 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 the Finishing Department has gathered the following data:
$\begin{array}{ll}
\text { Activity } & \text { Cost Drivers } & \text { Rate}\
\text { Material handling } & \text { Tons of material handled }&\$80 \
\text { Machine setups } & \text { Number of production runs }&3,750 \
\text { Utilities } & \text { Machine hours }&25 \
\text { Quality control } & \text { Number of inspections }&\$500
\end{array}$

During April, Mega purchased and used $100,000 of direct materials at $20 per ton. There were 8 production runs using a total of 12,000 machine hours in April. The manager of the Finishing Department needed 12 inspections. Actual overhead costs totaled $820,000 for the month.
-
How much overhead costs were applied to the Work-in-Process Inventory during April using activity-based costing?

Accepted Answer

A)  $536,000. 
B)  $720,000. 
C)  $736,000. 
D)  $820,000. 
A)  $536,000. 
B)  $720,000. 
C)  $736,000. 
D)  $820,000.

Question 12

The basic difference between a first-stage cost allocation and a second-stage cost allocation is that:

Accepted Answer

A)  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. 
C)  the first stage prohibits firms from aligning the allocation of costs with the use of resources. 
D)  when used in an ABC system, the first stage assigns costs to activities. 
A)  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. 
C)  the first stage prohibits firms from aligning the allocation of costs with the use of resources. 
D)  when used in an ABC system, the first stage assigns costs to activities.

Question 13

Flawless Cosmetic Company manufactures and distributes several different products. The company currently uses a plantwide allocation method for allocating overhead at a rate of $7 per direct labor hour. Loren is the department manager of the Makeup Department that produces Products - Concealer (C) and Glow Cream (GC). Jennifer is the department manager of the Hair Care Department that manufactures Product - Shampoo (S). The product costs (per case of 24 bottles) and other information are as follows:
$\begin{array}{lccc}
&&\text { Products }\ 
&\text { C } & \text { GC } & \text { S }\
 \text { Direct materials } & \$  100.00 & \$  72.00 & \$ 48.00 \
 \text { Direct labor } &  42.00 & 31.50& 12.00\
 \text { Overhead } &  28.00 & 21.00 & 14.00\
&\$170.00&\$124.50&\$74.00\
\text { Machine hours } & 4 & 2 & 3 \
\text { Number of cases (per year) } & 300 & 500 & 600 
\end{array}$

-
If Flawless changes its allocation basis to machine hours, what is the total product cost per case for Product GC?

Accepted Answer

A)  $163.50 
B)  $144.00 
C)  $138.15 
D)  $117.15 
A)  $163.50 
B)  $144.00 
C)  $138.15 
D)  $117.15

Question 14

JamMaster Audio Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, Boom and Wow, about which it has provided the following data:
 $$\begin{array} { l r r r r } 
& \text { Boom } & { \text { Wow } } \
\text { Direct materials per unit } & \$14.90& \$ 44.30 \
\text { Direct labor per unit } & \$ 4.20 & \$2 5 . 2 0  \
\text { Direct labor-hours per unit } &  0.20 & 1.20 \
\text { Annulual production } &  40,000 & 15,000
\end{array}$$ 
The company's estimated total manufacturing overhead for the year is $1,809,600 and the company's estimated total direct labor-hours for the year is 26,000.
The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:
 $$\begin{array} { l c } 
 { \text { Activities arid Activity Measires } } & \text { Estirnated Overhead Cost } \
\text { Assembling products (DLHs) } & \$ 702,000 \
\text { Preparing batches (batches) } & 132,600 \
\text { Erigrave (MHs) } & \underline{ 975,000} \
\text { Total } &  \underline{\$ 1,809,600}
\end{array}$$ 
 $$\begin{array} { | l | r | r | r | } 
\hline \text { Activities } & \text { Bomm } & \text { Wow } & \text { Total } \
\hline \text { Assernbling products } &8 , 0 0 0  & 18,000 & 26,000 \
\hline \text { Preparing batches } & 884 & 442 & 1,326 \
\hline \text { Engerave } & 702 & 1,248 & 1,950 \
\hline
\end{array}$$ 
Required:
a. Determine the unit product cost of each of the company's two products under the traditional costing system.
b. Determine the unit product cost of each of the company's two products under activity-based costing system.

Accepted Answer

a.Traditional Unit Product Costs:
Predet

Question 15

Harrison Industries has an activity-based costing system with three activity cost pools-Processing, Batch Setup, and Other. The company's overhead costs, which consist of factory utilities and indirect labor, are allocated to the cost pools in proportion to the activity cost pools' consumption of resources. Costs in the Processing cost pool are assigned to products based on machine-hours (MHs) and costs in the Batch Setup cost pool are assigned to products based on the number of batches. Costs in the Other cost pool are not assigned to products. Data concerning the two products appear below:
 $\begin{array}{lrr}
  \text {  Factory utilities} &\$29,000\
 \text {Indirect labor  } &\$7,000\
\end{array}$
 
 $$\begin{array}{l}
\text { Distribution of Resource Consumption Across Activity Cast Pools }\
\begin{array} { | l | c | c | c | } 
\hline & \text { Processing } & \text { Setting Up } & \text { Other } \
\hline \text { Factary utilities } & 0.40 & 0.10 & 0.50 \
\hline \text { Indirect labor } & 0.50 & 0.20 & 0.30 \
\hline
\end{array}
\end{array}$$ 
 $$\begin{array} { l c r } 
& \text { MHs } & \text { Batches } \
\text { Product \#1 } & 2,900 & 700 \
\text { Product \#2 } &\underline{7,100} & \underline{300} \
\text { Total } &\underline{ 10,000}& \underline{1,000} \

\end{array}$$ 
 $\begin{array}{lrr} 
& \text { Product \#1 } & \text { Product \#2 } \
\text { Sales } & \$ 54,000 & \$ 85,100 \
\text { Direct materials } & 19,100& \$ 33,500 \
\text { Direct labor } & 26,300 & \$ 35,000
\end{array}$
 
Required:
a. Assign overhead costs to activity cost pools using activity-based costing.
b. Calculate activity rates for each activity cost pool using activity-based costing.
c. Determine the amount of overhead cost that would be assigned to each product using activity-based costing.
d. Determine the product margins for each product using activity-based costing.

Accepted Answer

a. Assign overhead costs to activity cos

Question 16

Banc Corp. Trust is considering either a bankwide overhead rate or department overhead rates to allocate $396,000 of indirect costs. The bankwide rate could be based on either direct labor hours (DLH) or the number of loans processed. The departmental rates would be based on direct labor hours for Consumer Loans and a dual rate based on direct labor hours and the number of loans processed for Commercial Loans. The following information was gathered for the upcoming period:
$$\begin{array} { l c c r } 
\text { Department } & \text { DLH } & \text { Loans Processed } & \text { Direct Costs } \
\text { Consumer } & 14,000 & 700 & \$ 280,000 \
\text { Commercial } & 8,000 & 300 & \$ 180,000
\end{array}$$
-
Banc Corp. Trust estimates that it costs $500 to analyze and close a commercial loan. This amount has been included in the $396,000 of indirect costs. How much of the $396,000 indirect costs should be allocated to the Commercial Department, if Banc Corp. Trust uses a bankwide rate based on the number of loans processed?

Accepted Answer

A)  $396,000. 
B)  $246,000. 
C)  $223,800. 
D)  $216,000. 
A)  $396,000. 
B)  $246,000. 
C)  $223,800. 
D)  $216,000.

Question 17

Markham Company makes two products: Basic Product and Deluxe Product. Annual production and sales are 1,700 units of Basic Product and 1,100 units of Deluxe Product. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Basic Product requires 0.3 direct labor hours per unit and Deluxe Product requires 0.6 direct labor hours per unit. The total estimated overhead for next period is $98,785.
The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools-Activity 1, Activity 2, and General Factory-with estimated overhead costs and expected activity as follows:
$$\begin{array} { l c c c c } 
& \text { Estimated } & { \text { Expected Activity } } \
& & \text { Basic } & & \
\text { Activity Cost Pool } & \text { Overhead Costs } & \text { Product } & \text { Deluxe Product } & \text { Total } \
\text { Activity 1 } & \$ 30,528 & 1,000 & 600 & 1,600 \
\text { Activity 2 } & 17,385 & 1,700 & 200 & 1,900 \
\text { General Factory } & 50,872 & 510 & 660 & 1,170 \
\text { Total } & \$ 98,785 & & &
\end{array}$$
-
(Note: The General Factory costs are allocated on the basis of direct labor hours.)
The predetermined overhead rate under the traditional costing system is closest to:

Accepted Answer

A)  $9.15. 
B)  $43.48. 
C)  $84.43. 
D)  $19.08. 
A)  $9.15. 
B)  $43.48. 
C)  $84.43. 
D)  $19.08.

Question 18

Traditional product costing systems (e.g., job and process costing) are designed primarily:

Accepted Answer

A)  To derive an allocation base. 
B)  To ensure that a single cost driver allocation base leads to appropriate managerial decisions. 
C)  To accumulate cost information for financial reporting. 
D)  To accumulate cost information for managerial decisions. 
A)  To derive an allocation base. 
B)  To ensure that a single cost driver allocation base leads to appropriate managerial decisions. 
C)  To accumulate cost information for financial reporting. 
D)  To accumulate cost information for managerial decisions.

Question 19

Multiple (departmental) manufacturing overhead rates are considered preferable to a single (plantwide) overhead rate when: (CMA adapted)

Accepted Answer

A)  Manufacturing is limited to a single product flowing through identical departments in a fixed sequence. 
B)  Various products are manufactured that do not pass through the same departments or use the same manufacturing techniques. 
C)  Individual cost drivers cannot accurately be determined with respect to cause-and-effect relationships. 
D)  The single or plantwide rate is related to several identified cost drivers. 
A)  Manufacturing is limited to a single product flowing through identical departments in a fixed sequence. 
B)  Various products are manufactured that do not pass through the same departments or use the same manufacturing techniques. 
C)  Individual cost drivers cannot accurately be determined with respect to cause-and-effect relationships. 
D)  The single or plantwide rate is related to several identified cost drivers.

Question 20

How can activity-based systems help managers in a global marketplace?

Accepted Answer

Activity-based systems are information s

Which of the following costs is not related to a batch-related activity?

Which of the following would be a reasonable basis for assigning the materials handling costs to the units produced in an activity-based costing (ABC) system?

What is the typical effect on the numbers of cost pools and cost assignment bases when an activity-based costing (ABC) system replaces a traditional costing system? (CPA adapted) Cost Pools Cost Assignment Bases A. No effect No effect B. Increase No effect C. No effect Increase D. Increase Increase

The electricity used for production machinery would be classified as a:

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

The basic difference between a first-stage cost allocation and a second-stage cost allocation is that:

Traditional product costing systems (e.g., job and process costing) are designed primarily:

Multiple (departmental) manufacturing overhead rates are considered preferable to a single (plantwide) overhead rate when: (CMA adapted)

How can activity-based systems help managers in a global marketplace?

Cost Accounting: Information for Decision Making

Cost Concepts and Behavior

Fundamentals of Cost-Volume-Profit Analysis

Fundamentals of Cost Analysis for Decision Making

Cost Estimation

Fundamentals of Product and Service Costing

Job Costing

Process Costing

Fundamentals of Cost Management

Service Department and Joint Cost Allocation

Fundamentals of Management Control Systems

Planning and Budgeting

Business Unit Performance Measurement

Transfer Pricing

Fundamentals of Variance Analysis

Additional Topics in Variance Analysis

Performance Measurement to Support Business Strategy

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Exam 9: Activity-Based Costing

Which of the following costs is not related to a batch-related activity?

Which of the following would be a reasonable basis for assigning the materials handling costs to the units produced in an activity-based costing (ABC) system?

What is the typical effect on the numbers of cost pools and cost assignment bases when an activity-based costing (ABC) system replaces a traditional costing system? (CPA adapted) Cost Pools Cost Assignment Bases A. No effect No effect B. Increase No effect C. No effect Increase D. Increase Increase

The electricity used for production machinery would be classified as a:

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

The basic difference between a first-stage cost allocation and a second-stage cost allocation is that:

Traditional product costing systems (e.g., job and process costing) are designed primarily:

Multiple (departmental) manufacturing overhead rates are considered preferable to a single (plantwide) overhead rate when: (CMA adapted)

How can activity-based systems help managers in a global marketplace?

Cost Accounting: Information for Decision Making

Cost Concepts and Behavior

Fundamentals of Cost-Volume-Profit Analysis

Fundamentals of Cost Analysis for Decision Making

Cost Estimation

Fundamentals of Product and Service Costing

Job Costing

Process Costing

Fundamentals of Cost Management

Service Department and Joint Cost Allocation

Fundamentals of Management Control Systems

Planning and Budgeting

Business Unit Performance Measurement

Transfer Pricing

Fundamentals of Variance Analysis

Additional Topics in Variance Analysis

Performance Measurement to Support Business Strategy

Filters