Deck 4: Activity-Based Costing

Question 1

A cost driver does not generally have a direct cause-effect relationship with the resources consumed.

Answer 1

False

Question 2

ABC is particularly useful when overhead costs are an insignificant portion of total costs.

Answer 2

False

Question 3

ABC leads to enhanced control over overhead costs.

Answer 3

True

Question 4

The first step in activity-based costing is to assign overhead costs to products, using cost drivers.

Question 5

Low-volume products often require more special handling than high-volume products.

Question 6

ABC is particularly useful when product lines differ greatly in volume and manufacturing complexity.

Question 7

Activity-based costing allocates overhead to multiple cost pools and assigns the cost pools to products using cost drivers.

Question 8

Engineering design is a value-added activity.

Question 9

Non-value-added activities increase the cost of a product but not its perceived value.

Question 10

ABC usually results in less appropriate management decisions.

Question 11

Any activity that increases the cost of producing a product is a value-added activity.

Question 12

Current trends in manufacturing include less direct labor and more overhead.

Question 13

Traditionally, overhead is allocated based on direct labor cost or direct labor hours.

Question 14

Traditional costing systems use multiple predetermined overhead rates.

Question 15

ABC is generally more costly to implement than traditional costing.

Question 16

Machining is a non-value-added activity.

Question 17

Activity-based management focuses on reducing costs and improving processes.

Question 18

To achieve accurate costing, a high degree of correlation must exist between the cost driver and the actual consumption of the activity cost pool.

Question 19

ABC eliminates all arbitrary cost allocations.

Question 20

When overhead is properly assigned in ABC, it will usually decrease the unit cost of high-volume products.

Question 21

In traditional costing systems, overhead is generally applied based on

A) direct labor.
B) machine hours.
C) direct material dollars.
D) units of production.

Question 22

Which of the following is not typical of traditional costing systems?

A) Use of a single predetermined overhead rate.
B) Use of direct labor hours or direct labor cost to assign overhead.
C) Assumption of correlation between direct labor and incurrence of overhead cost.
D) Use of multiple cost drivers to allocate overhead.

Question 23

The costs that are easiest to trace directly to products are

A) direct materials and direct labor.
B) direct labor and overhead.
C) direct materials and overhead.
D) none of the above; all three costs are equally easy to trace to the product.

Question 24

The overall objective of installing ABC in service firms is no different than it is in a manufacturing company.

Question 25

An activity that has a direct cause-effect relationship with the resources consumed is a(n)

A) cost driver.
B) overhead rate.
C) cost pool.
D) product activity.

Question 26

What sometimes makes implementation of activity-based costing difficult in service industries is that a smaller proportion of overhead costs are company-wide costs.

Question 27

Advances in computerized systems, technological innovation, global competition, and automation have changed the manufacturing environment drastically by

A) increasing direct labor costs and increasing overhead costs.
B) increasing direct labor costs and decreasing overhead costs.
C) decreasing direct labor costs and decreasing overhead costs.
D) decreasing direct labor costs and increasing overhead costs.

Question 28

Plant management is a batch-level activity.

Question 29

Quality control is less important in just-in-time than in traditional manufacturing philosophies.

Question 30

Direct labor is sometimes the appropriate basis for assigning overhead cost to products. It is appropriate to use direct labor when which of the following is true?
(1) Direct labor constitutes a significant part of total product cost.
(2) A high correlation exists between direct labor and changes in the amount of overhead costs.

A) (1) only
B) (2) only
C) Either (1) or (2)
D) Both (1) and (2)

Question 31

Rework costs typically increase in just-in-time processing.

Question 32

Activity-based costing

A) allocates overhead to activity cost pools, and it then assigns the activity cost pools to products and services by means of cost drivers.
B) accumulates overhead in one cost pool, then assigns the overhead to products and services by means of a cost driver.
C) assigns activity cost pools to products and services, then allocates overhead back to the activity cost pools.
D) allocates overhead directly to products and services based on activity levels.

Question 33

Often the most difficult part of computing accurate unit costs is determining the proper amount of _________ to assign to each product, service, or job.

A) direct materials
B) direct labor
C) overhead
D) direct materials and direct labor

Question 34

An "Ordering and Receiving Materials" cost pool would most likely have as a cost driver:

A) machine hours.
B) number of setups.
C) number of purchase orders.
D) number of inspection tests.

Question 35

The general approach to identifying activities, activity cost pools, and cost drivers is used by a service company in the same manner as a manufacturing company.

Question 36

Predetermined overhead rates in traditional costing are often based on

A) direct labor cost for job order costing and machine hours for process costing.
B) machine hours for job order costing and direct labor cost for process costing.
C) multiple bases for job order costing and direct labor cost for process costing.
D) multiple bases for both job order costing and process costing.

Question 37

Painting is a product-level activity.

Question 38

Not all activities labeled non-value-added are totally wasteful, nor can they be totally eliminated.

Question 39

Inventory storage costs are reduced in just-in-time processing.

Question 40

Ordering materials, setting up machines, assembling products, and inspecting products are examples of

A) cost drivers.
B) overhead cost pools.
C) direct labor costs.
D) nonmanufacturing activities.

Question 41

Hartley Company produces two products, Flower and Planter. Flower is a high-volume item totaling 20,000 units annually. Planter is a low-volume item totaling only 6,000 units per year. Flower requires one hour of direct labor for completion, while each unit of Planter requires 2 hours. Therefore, total annual direct labor hours are 32,000 (20,000 + 12,000). Expected annual manufacturing overhead costs are $960,000. Hartley uses a traditional costing system and assigns overhead based on direct labor hours. Each unit of Planter would be assigned overhead of

A) $30.00.
B) $36.91.
C) $60.00.
D) need more information to compute.

Question 42

The first step in activity-based costing is to

A) assign overhead costs to products, using overhead rates determined for each cost pool.
B) compute the activity-based overhead rate per cost driver.
C) identify and classify the activities involved in the manufacture of specific products, and allocate overhead to cost pools.
D) identify the cost driver that has a strong correlation to the activity cost pool.

Question 43

The last step in activity-based costing is to

A) assign overhead costs to products, using overhead rates determined for each cost pool.
B) compute the activity-based overhead rate per cost driver.
C) identify and classify the activities involved in the manufacture of specific products, and allocate overhead to cost pools.
D) identify the cost driver that has a strong correlation to the activity cost pool.

Question 44

An example of an activity cost pool is

A) machine hours.
B) setting up machines.
C) number of setups.
D) number of inspections.

Question 45

Which would be an appropriate cost driver for the purchasing activity cost pool?

A) Machine setups
B) Purchase orders
C) Machine hours
D) Inspections

Question 46

Tidwell Industries has the following overhead costs and cost drivers. Direct labor hours are estimated at 100,000 for the year. $\begin{array}{llrl}\text { Activity Cost Pool}&\text { Cost Driver }&\text {Est. Overhead}&\text { Cost Driver Activity }\\\hline\text { Ordering and Receiving } & \text { Orders } & \$ 120,000 & 500 \text { orders } \\\text { Machine Setup } & \text { Setups } & 297,000 & 450 \text { setups } \\\text { Machining } & \text { Machine hours } & 1,500,000 & 125,000 \mathrm{MH} \\\text { Assembly } & \text { Parts } & 1,200,000 & 1,000,000 \text { parts } \\\text { Inspection } & \text { Inspections } & 300,000 & 500 \text { inspections }\end{array}$ If overhead is applied using traditional costing based on direct labor hours, the overhead application rate is

A) $9.60.
B) $12.00.
C) $15.00.
D) $34.17.

Question 47

A well-designed activity-based costing system starts with

A) identifying the activity-cost pools.
B) computing the activity-based overhead rate.
C) assigning overhead costs to products.
D) analyzing the activities performed to manufacture a product.

Question 48

To use activity-based costing, it is necessary to know the

A) cost driver for each activity cost pool.
B) estimated use of cost drivers per activity.
C) estimated use of cost drivers per product.
D) all of the above.

Question 49

An activity-based overhead rate is computed as follows:

A) actual overhead divided by actual use of cost drivers.
B) estimated overhead divided by actual use of cost drivers.
C) actual overhead divided by estimated use of cost drivers.
D) estimated overhead divided by estimated use of cost drivers.

Question 50

To assign overhead costs to each product, the company

A) multiplies the activity-based overhead rates per cost driver by the number of cost drivers estimated to be used per product.
B) multiplies the overhead rate by the number of direct labor hours used on each product.
C) assigns the cost of each activity cost pool in total to one product line.
D) multiplies the rate of cost drivers per estimated cost for the cost pool by the estimated cost for each cost pool.

Question 51

Use of activity-based costing will result in the development of

A) one overhead rate based on direct labor hours.
B) one plantwide activity-based overhead rate.
C) multiple activity-based overhead rates.
D) no overhead rates; overhead rates are not used in activity-based costing.

Question 52

An example of a cost which would not be assigned to an overhead cost pool is

A) indirect salaries.
B) freight-out.
C) depreciation.
D) supplies.

Question 53

Reynoso Corporation manufactures titanium and aluminum tennis racquets. Reynoso's total overhead costs consist of assembly costs and inspection costs. The following information is available: $\begin{array}{cccc}\text { Cost }&\text {Titanium }&\text {Aluminum}&\text { Total Cost }\\\hline\text { Assembly } & 500 \text { mach. hours } & 500 \text { mach. hours } & \$45,000 \\\text { Inspections } & 350 & 150 & \$ 75,000 \\& 2,100 \text { labor hours } & 1,900 \text { labor hours } &\end{array}$ Reynoso is considering switching from one overhead rate based on labor hours to activity-based costing. Using activity-based costing, how much inspections cost is assigned to titanium racquets?

A) $30,000.
B) $47,500.
C) $50,000.
D) $52,500

Question 54

Which of the following is not an example of an activity cost pool?

A) Setting up machines
B) Machining
C) Inspecting
D) Machine hours

Question 55

Tidwell Industries has the following overhead costs and cost drivers. Direct labor hours are estimated at 100,000 for the year. $\begin{array}{llrl}\text { Activity Cost Pool}&\text { Cost Driver }&\text {Est. Overhead}&\text { Cost Driver Activity }\\\hline\text { Ordering and Receiving } & \text { Orders } & \$ 120,000 & 500 \text { orders } \\\text { Machine Setup } & \text { Setups } & 297,000 & 450 \text { setups } \\\text { Machining } & \text { Machine hours } & 1,500,000 & 125,000 \mathrm{MH} \\\text { Assembly } & \text { Parts } & 1,200,000 & 1,000,000 \text { parts } \\\text { Inspection } & \text { Inspections } & 300,000 & 500 \text { inspections }\end{array}$ If overhead is applied using activity-based costing, the overhead application rate for ordering and receiving is

A) $1.20 per direct labor hour.
B) $240 per order.
C) $0.12 per part.
D) $6,834 per order.

Question 56

One of Matheny Company's activity cost pools is inspecting, with estimated overhead of $200,000. Matheny produces throw rugs (700 inspections) and area rugs (1,300 inspections). How much of the inspecting cost pool should be assigned to throw rugs?

A) $70,000.
B) $100,000.
C) $107,692.
D) $200,000.

Question 57

Reynoso Corporation manufactures titanium and aluminum tennis racquets. Reynoso's total overhead costs consist of assembly costs and inspection costs. The following information is available: $\begin{array}{cccc}\text { Cost }&\text {Titanium }&\text {Aluminum}&\text { Total Cost }\\\hline\text { Assembly } & 500 \text { mach. hours } & 500 \text { mach. hours } & \$ 60,000 \\\text { Inspections } & 350 & 150 & \$ 100,000 \\& 2,100 \text { labor hours } & 1,900 \text { labor hours } &\end{array}$ Reynoso is considering switching from one overhead rate based on labor hours to activity-based costing. Total overhead costs assigned to titanium racquets, using a single overhead rate, are

A) $80,000.
B) $84,000.
C) $100,000.
D) $112,000.

Question 58

Reynoso Corporation manufactures titanium and aluminum tennis racquets. Reynoso's total overhead costs consist of assembly costs and inspection costs. The following information is available: $\begin{array}{cccc}\text { Cost }&\text {Titanium }&\text {Aluminum}&\text { Total Cost }\\\hline\text { Assembly } & 500 \text { mach. hours } & 500 \text { mach. hours } & \$ 60,000 \\\text { Inspections } & 350 & 150 & \$ 100,000 \\& 2,100 \text { labor hours } & 1,900 \text { labor hours } &\end{array}$ Reynoso is considering switching from one overhead rate based on labor hours to activity-based costing. Using activity-based costing, how much assembly cost is assigned to titanium racquets?

A) $21,000.
B) $30,000.
C) $31,500.
D) $42,000.

Question 59

Which would be an appropriate cost driver for the machining activity cost pool?

A) Machine setups
B) Purchase orders
C) Machine hours
D) Inspections

Question 60

Estimated costs for activity cost pools and other item(s) are as follows: $$\begin{array} { l r } \text { Machining } & \$ 500,000 \\\text { Assembling } & 200,000 \\\text { Advertising } & 450,000 \\\text { Inspecting and testing } & 175,000\end{array}$$ Total estimated overhead is

A) $700,000.
B) $875,000.
C) $1,150,000.
D) $1,325,000.

Question 61

A company incurs $4,050,000 of overhead each year in three departments: Ordering and Receiving, Mixing, and Testing. The company prepares 2,000 purchase orders, works 50,000 mixing hours, and performs 1,500 tests per year in producing 200,000 drums of Goo and 600,000 drums of Slime. The following data are available: $\begin{array}{crr}\text { Department}&\text {Estimated use of Driver }&\text { Cost}\\\text { Ordering and Receiving } & 2,000 & \$ 1,200,000 \\\text { Mixing } & 50,000 & 1,500,000 \\\text { Testing } & 1,500 & 1,350,000\end{array}$

$\text { Production information for Slime is as follows: }$

$\begin{array}{cr}\text { Department}&\text {Estimated use of Driver }\\\text { Ordering and Receiving } & 1,600 \\\text { Mixing } & 30,000 \\\text { Testing } & 1,000\end{array}$ Compute the amount of overhead assigned to Slime.

A) $2,025,000
B) $2,467,851
C) $2,760,000
D) $3,037,500

Question 62

Noland Company manufactures two models of its banjo, the Basic and the Luxury. The Basic model requires 10,000 direct labor hours and the Luxury requires 30,000 direct labor hours. The company produces 3,400 units of the Basic model and 600 units of the Luxury model each year. The company inspects one Basic for every 100 produced, and inspects one Luxury for every 10 produced. The company expects to incur $112,800 of total inspecting costs this year. How much of the inspecting costs should be allocated to the Basic model using ABC costing?

A) $28,200
B) $40,800
C) $56,400
D) $95,880

Question 63

Assigning overhead using ABC will usually

A) decrease the cost per unit for low volume products as compared to a traditional overhead allocation.
B) increase the cost per unit for low volume products as compared to a traditional overhead allocation.
C) provide less accurate cost per unit for low volume products than will traditional costing.
D) result in the same cost per unit for low volume products as does traditional costing.

Question 64

For its inspecting cost pool, Ellsworth, Inc. expected overhead cost of $400,000 and 4,000 inspections. The actual overhead cost for that cost pool was $480,000 for 5,000 inspections. The activity-based overhead rate used to assign the costs of the inspecting cost pool to products is

A) $80 per inspection.
B) $96 per inspection.
C) $100 per inspection.
D) $120 per inspection.

Question 65

A company incurs $4,050,000 of overhead each year in three departments: Ordering and Receiving, Mixing, and Testing. The company prepares 2,000 purchase orders, works 50,000 mixing hours, and performs 1,500 tests per year in producing 200,000 drums of Goo and 600,000 drums of Slime. The following data are available: $\begin{array}{crr}\text { Department}&\text { Estimated use of Driver}&\text { Cost }\\\text { Ordering and Receiving } & 2,000 & \$ 1,200,000 \\\text { Mixing } & 50,000 & 1,500,000 \\\text { Testing } & 1,500 & 1,350,000\end{array}$
$\text { Production information for Goo is as follows: }$
$\begin{array}{cr}\text { Department }&\text { Estimated use of Driver }\\\text { Ordering and Receiving } & 400 \\\text { Mixing } & 20,000 \\\text { Testing } & 500\end{array}$ Compute the amount of overhead assigned to Goo.

A) $1,012,500
B) $1,290,000
C) $1,582,146
D) $2,025,000

Question 66

One of Stine Company's activity cost pools is machine setups, with estimated overhead of $360,000. Stine produces sparklers (400 setups) and lighters (600 setups). How much of the machine setup cost pool should be assigned to sparklers?

A) $360,000
B) $144,000
C) $180,000
D) $216,000

Question 67

As compared to a high-volume product, a low-volume product

A) usually requires less special handling.
B) is usually responsible for more overhead costs per unit.
C) requires relatively fewer machine setups.
D) requires use of direct labor hours as the primary cost driver to ensure proper allocation of overhead.

Question 68

Boswell Company manufactures two products, Regular and Supreme. Boswell's overhead costs consist of machining, $3,000,000; and assembling, $1,500,000. Information on the two products is: $$\begin{array} { l c c } & \text { Regular } & \text { Supreme } \\\text { Direct labor hours }& 10,000 & 15,000 \\\text { Machine hours } & 10,000 & 30,000 \\\text { Number of parts } & 90,000 & 160,000\end{array}$$ Overhead applied to Supreme using traditional costing using direct labor hours is

A) $1,290,000.
B) $1,800,000.
C) $2,700,000.
D) $3,210,000.

Question 69

Companies that switch to ABC often find they have

A) been overpricing some products.
B) possibly losing market share to competitors.
C) been sacrificing profitability by underpricing some products.
D) All of the these answers are correct.

Question 70

As compared to a low-volume product, a high-volume product

A) usually requires less special handling.
B) is usually responsible for more overhead costs per unit.
C) requires relatively more machine setups.
D) requires use of direct labor hours as the primary cost driver to ensure proper allocation of overhead.

Question 71

Boswell Company manufactures two products, Regular and Supreme. Boswell's overhead costs consist of machining, $3,000,000; and assembling, $1,500,000. Information on the two products is: $$\begin{array} { l c c } & \text { Regular } & \text { Supreme } \\\text { Direct labor hours }& 10,000 & 15,000 \\\text { Machine hours } & 10,000 & 30,000 \\\text { Number of parts } & 90,000 & 160,000\end{array}$$ Overhead applied to Regular using traditional costing using direct labor hours is

A) $1,290,000.
B) $1,800,000.
C) $2,700,000.
D) $3,210,000.

Question 72

Identifying and classifying activities is the

A) last step under ABC.
B) first step under ABC.
C) second step under ABC.
D) None of these answers is correct.

Question 73

Windsor Co. incurs $1,050,000 of overhead costs each year in its three main departments, machining ($600,000), inspections ($300,000) and packing ($150,000). The machining department works 4,000 hours per year, there are 600 inspections per year, and the packing department packs 1,000 orders per year. Information about Windsor's two products is as follows: $\begin{array}{lrr}&\text { Broduct } X &\text { Broduct } Y\\\text { Machining hours } & 1,000 & 3,000 \\\text { Inspections } & 100 & 500 \\\text { Orders packed } & 350 & 650 \\\text { Direct labor hours } & 1,700 & 1,800\end{array}$ Using ABC, how much overhead is assigned to Product X this year?

A) $252,500
B) $363,462
C) $510,000
D) $525,000

Question 74

Which would be an appropriate cost driver for the ordering and receiving activity cost pool?

A) Machine setups
B) Purchase orders
C) Machine hours
D) Inspections

Question 75

Windsor Co. incurs $1,050,000 of overhead costs each year in its three main departments, machining ($600,000), inspections ($300,000) and packing ($150,000). The machining department works 4,000 hours per year, there are 600 inspections per year, and the packing department packs 1,000 orders per year. Information about Windsor's two products is as follows: $\begin{array}{lrr}&\text { Broduct } X &\text { Broduct } Y\\\text { Machining hours } & 1,000 & 3,000 \\\text { Inspections } & 100 & 500 \\\text { Orders packed } & 350 & 650 \\\text { Direct labor hours } & 1,700 & 1,800\end{array}$ If traditional costing based on direct labor hours is used, how much overhead is assigned to Product X this year?

A) $252,501
B) $363,462
C) $510,000
D) $525,000

Question 76

Zimmerman Company manufactures two products, Board 12 and Case 165. Zimmerman's overhead costs consist of setting up machines, $2,400,000; machining, $5,400,000; and inspecting, $1,800,000. Information on the two products is: $\begin{array}{lrr}&\text { Board } 12&\text { Case } 165\\\text { Direct labor hours } & 15,000 & 25,000 \\\text { Machine setups } & 600 & 400 \\\text { Machine hours } & 24,000 & 26,000 \\\text { Inspections } & 800 & 700\end{array}$ Overhead applied to Board 12 using traditional costing using direct labor hours is

A) $3,600,000.
B) $4,608,000.
C) $5,010,000.
D) $5,760,000.

Question 77

Boswell Company manufactures two products, Regular and Supreme. Boswell's overhead costs consist of machining, $3,000,000; and assembling, $1,500,000. Information on the two products is: $$\begin{array} { l c c } & \text { Regular } & \text { Supreme } \\\text { Direct labor hours }& 10,000 & 15,000 \\\text { Machine hours } & 10,000 & 30,000 \\\text { Number of parts } & 90,000 & 160,000\end{array}$$ Overhead applied to Supreme using activity-based costing is

A) $1,290,000.
B) $1,800,000.
C) $2,700,000.
D) $3,210,000.

Question 78

As compared to high-volume products, low-volume products

A) require more special handling.
B) require less machine setups.
C) are frequently responsible for less overhead costs.
D) None of these answers are correct.

Question 79

Ben Gordon, Inc. manufactures 2 products, wheels and seats. The company has estimated its overhead in the assembling department to be $660,000. The company produces 300,000 wheels and 600,000 seats each year. Each wheel uses 2 parts, and each seat uses 3 parts. How much of the assembly overhead should be allocated to wheels?

A) $165,000.
B) $220,000.
C) $264,000
D) $282,856.

Question 80

Boswell Company manufactures two products, Regular and Supreme. Boswell's overhead costs consist of machining, $3,000,000; and assembling, $1,500,000. Information on the two products is: $$\begin{array} { l c c } & \text { Regular } & \text { Supreme } \\\text { Direct labor hours }& 10,000 & 15,000 \\\text { Machine hours } & 10,000 & 30,000 \\\text { Number of parts } & 90,000 & 160,000\end{array}$$ Overhead applied to Regular using activity-based costing is

A) $1,290,000.
B) $1,800,000.
C) $2,700,000.
D) $3,210,000.