Deck 17: Activity-Based Costing and Other Cost Management Tools

Question 1

Companies that use activity-based costing do not need to trace direct materials and direct labor to cost objects as is done in traditional costing systems.

Answer 1

False

Question 2

The system that focuses on activities as the fundamental cost objects and uses the costs of those activities as building blocks for compiling the costs of products and other cost objects is referred to as which of the following?

A) Activity-based costing
B) Traditional costing
C) Product costing
D) Target costing

Answer 2

Activity-based costing

Question 3

Which of the following statements is correct?

A) Traditional costing systems allocate both manufacturing costs and nonmanufacturing costs.
B) Activity-based costing systems allocate only manufacturing costs.
C) Activity-based costing systems allocate both manufacturing costs and nonmanufacturing costs.
D) Traditional costing systems tend to be more accurate and less expensive.

Answer 3

Activity-based costing systems allocate both manufacturing costs and nonmanufacturing costs.

Question 4

Activity-based costing systems do not:

A) determine a cause and effect relationship with respect to cost and cost drivers.
B) improve the accuracy of the costs allocated to the various products.
C) create homogenous cost pools that are activity based.
D) create a variety of direct manufacturing cost pools.

Question 5

In activity-based costing, which of the following describes how the activity allocation rate is computed?

A) The estimated total indirect cost of the activity divided by the estimated total quantity of cost allocation base
B) The estimated quantity of allocation base times the estimated total indirect cost of the activity
C) The estimated quantity of allocation base divided by the estimated total indirect cost of the activity
D) The estimated quantity of allocation base less the estimated total indirect cost of the activity

Question 6

Which of the following statements does not describe an activity-based costing system?

A) Activity-based costing systems are more complex and costly than traditional systems.
B) Activity-based costing systems may only be used by service companies.
C) Activity-based costing systems are used in both manufacturing and nonmanufacturing companies.
D) Activity-based costing systems can create more accurate product costs.

Question 7

Which of the following is a required step in an activity-based costing system?

A) Estimate the total quantity of each cost.
B) Compute the cost allocation rate for each activity.
C) Allocate the costs to the activities.
D) Estimate the total direct costs of each activity.

Question 8

Brannon Company manufactures ceiling fans and uses an activity-based costing system. Each ceiling fan consists of 20 separate parts totaling $95 in direct materials, and requires 2.5 hours of machine time to produce. Additional information follows:
$$\begin{array} { | l | l | r | } \hline \text { Activity } & \text { Allocation Base } & \text { Cost Allocation Rate } \\\hline \text { Materials handling } & \text { Number of parts } & \$ .08 \\\hline \text { Machining } & \text { Machine hours } & \$ 7.20 \\\hline \text { Assembling } & \text { Number of parts } & \$ .35 \\\hline \text { Packaging } & \text { Number of finished units } & \$ 2.70 \\\hline\end{array}$$ What is the number of finished ceiling fans?

A) 250
B) 100
C) 20
D) Cannot be determined from the information given

Question 9

Brannon Company manufactures ceiling fans and uses an activity-based costing system. Each ceiling fan consists of 20 separate parts totaling $95 in direct materials, and requires 2.5 hours of machine time to produce. Additional information follows:
$$\begin{array} { | l | l | r | } \hline \text { Activity } & \text { Allocation Base } & \text { Cost Allocation Rate } \\\hline \text { Materials handling } & \text { Number of parts } & \$ .08 \\\hline \text { Machining } & \text { Machine hours } & \$ 7.20 \\\hline \text { Assembling } & \text { Number of parts } & \$ .35 \\\hline \text { Packaging } & \text { Number of finished units } & \$ 2.70 \\\hline\end{array}$$ What is the total manufacturing cost per ceiling fan?

A) $125.75
B) $121.13
C) $115.32
D) $124.30

Question 10

Sleep Tight Company manufactures pillows using an activity-based costing system. The following information is provided for the month of June:
$$\begin{array} { | l | l | l | l | } \hline \text { Activity } & \begin{array} { l } \text { Estimated Indirect } \\\text { Activity Costs }\end{array} & \text { Allocation Base } & \begin{array} { l } \text { Estimated Quantity of } \\\text { Allocation Base }\end{array} \\\hline \text { Materials handling } & \$ 3,150 & \text { Number of parts } & 4,200 \text { parts } \\\hline \text { Assembling } & \$ 13,860 & \text { Number of parts } & 4,200 \text { parts } \\\hline \text { Packaging } & \$ 2,730 & \text { Number of pillows } & 1,050 \text { pillows } \\\hline\end{array}$$ Each pillow consists of 4 parts and the total direct materials cost per pillow is $3.50.
What is the total manufacturing cost per pillow?

A) $16.20
B) $22.30
C) $18.50
D) $26.50

Question 11

Sleep Tight Company manufactures pillows using an activity-based costing system. The following information is provided for the month of June:
$$\begin{array} { | l | l | l | l | } \hline \text { Activity } & \begin{array} { l } \text { Estimated Indirect } \\\text { Activity Costs }\end{array} & \text { Allocation Base } & \begin{array} { l } \text { Estimated Quantity of } \\\text { Allocation Base }\end{array} \\\hline \text { Materials handling } & \$ 3,150 & \text { Number of parts } & 4,200 \text { parts } \\\hline \text { Assembling } & \$ 13,860 & \text { Number of parts } & 4,200 \text { parts } \\\hline \text { Packaging } & \$ 2,730 & \text { Number of pillows } & 1,050 \text { pillows } \\\hline\end{array}$$ Each pillow consists of 4 parts and the total direct materials cost per pillow is $3.50.
If the cost to purchase the same pillow from a supplier is $21.00, what should Sleep Tight do to maximize profits?

A) Continue to manufacture the pillow.
B) Since the cost to manufacture the pillow is also $21.00, the company would make the same profit whether it bought the pillow or manufactured it.
C) Purchase the pillow from the supplier.
D) Close down the business.

Question 12

Pitt Jones Company had the following activities, allocated costs, and allocation bases:
$$\begin{array} { | l | l | l | } \hline \text { Activities } & \text { Allocated Costs } & \text { Allocation Base } \\\hline \text { Account inquiry (hours) } & \$ 60,000 & 2,000 \text { hours } \\\hline \text { Account billing (lines) } & \$ 30,000 & 20,000 \text { lines } \\\hline \text { Account verification (accounts) } & \$ 15,000 & 20,000 \text { accounts } \\\hline \text { Correspondence (letters) } & \$ 10,000 & 1,000 \text { letters } \\\hline\end{array}$$ The above activities are used by departments P and Q:
$$\begin{array} { | l | l | l | } \hline & \text { Department P } & \text { Department Q } \\\hline \text { Account inquiry (hours) } & 100 \text { hours } & 200 \text { hours } \\\hline \text { Account billing (lines) } & 10,000 \text { lines } & 7,000 \text { lines } \\\hline \text { Account verification (accounts) } & 1,000 \text { accounts } & 600 \text { accounts } \\\hline \text { Correspondence (letters) } & 50 \text { letters } & 100 \text { letters } \\\hline\end{array}$$ What is the cost per driver unit for the account inquiry activity?

A) $0.75
B) $30.00
C) $10.00
D) $1.50

Question 13

Pitt Jones Company had the following activities, allocated costs, and allocation bases:
$$\begin{array} { | l | l | l | } \hline \text { Activities } & \text { Allocated Costs } & \text { Allocation Base } \\\hline \text { Account inquiry (hours) } & \$ 60,000 & 2,000 \text { hours } \\\hline \text { Account billing (lines) } & \$ 30,000 & 20,000 \text { lines } \\\hline \text { Account verification (accounts) } & \$ 15,000 & 20,000 \text { accounts } \\\hline \text { Correspondence (letters) } & \$ 10,000 & 1,000 \text { letters } \\\hline\end{array}$$ The above activities are used by departments P and Q:
$$\begin{array} { | l | l | l | } \hline & \text { Department P } & \text { Department Q } \\\hline \text { Account inquiry (hours) } & 100 \text { hours } & 200 \text { hours } \\\hline \text { Account billing (lines) } & 10,000 \text { lines } & 7,000 \text { lines } \\\hline \text { Account verification (accounts) } & 1,000 \text { accounts } & 600 \text { accounts } \\\hline \text { Correspondence (letters) } & 50 \text { letters } & 100 \text { letters } \\\hline\end{array}$$ What is the cost per driver unit for the account billing activity?

A) $1.50
B) $30.00
C) $1.60
D) $1.43

Question 14

Pitt Jones Company had the following activities, allocated costs, and allocation bases:
$$\begin{array} { | l | l | l | } \hline \text { Activities } & \text { Allocated Costs } & \text { Allocation Base } \\\hline \text { Account inquiry (hours) } & \$ 60,000 & 2,000 \text { hours } \\\hline \text { Account billing (lines) } & \$ 30,000 & 20,000 \text { lines } \\\hline \text { Account verification (accounts) } & \$ 15,000 & 20,000 \text { accounts } \\\hline \text { Correspondence (letters) } & \$ 10,000 & 1,000 \text { letters } \\\hline\end{array}$$ The above activities are used by departments P and Q:
$$\begin{array} { | l | l | l | } \hline & \text { Department P } & \text { Department Q } \\\hline \text { Account inquiry (hours) } & 100 \text { hours } & 200 \text { hours } \\\hline \text { Account billing (lines) } & 10,000 \text { lines } & 7,000 \text { lines } \\\hline \text { Account verification (accounts) } & 1,000 \text { accounts } & 600 \text { accounts } \\\hline \text { Correspondence (letters) } & 50 \text { letters } & 100 \text { letters } \\\hline\end{array}$$ What is the cost per driver unit for the account verification activity?

A) $30.00
B) $0.50
C) $2.25
D) $0.75

Question 15

Pitt Jones Company had the following activities, allocated costs, and allocation bases:
$$\begin{array} { | l | l | l | } \hline \text { Activities } & \text { Allocated Costs } & \text { Allocation Base } \\\hline \text { Account inquiry (hours) } & \$ 60,000 & 2,000 \text { hours } \\\hline \text { Account billing (lines) } & \$ 30,000 & 20,000 \text { lines } \\\hline \text { Account verification (accounts) } & \$ 15,000 & 20,000 \text { accounts } \\\hline \text { Correspondence (letters) } & \$ 10,000 & 1,000 \text { letters } \\\hline\end{array}$$ The above activities are used by departments P and Q:
$$\begin{array} { | l | l | l | } \hline & \text { Department P } & \text { Department Q } \\\hline \text { Account inquiry (hours) } & 100 \text { hours } & 200 \text { hours } \\\hline \text { Account billing (lines) } & 10,000 \text { lines } & 7,000 \text { lines } \\\hline \text { Account verification (accounts) } & 1,000 \text { accounts } & 600 \text { accounts } \\\hline \text { Correspondence (letters) } & 50 \text { letters } & 100 \text { letters } \\\hline\end{array}$$ What is the cost per driver unit for the correspondence activity?

A) $10.00
B) $30.50
C) $25.00
D) $.75

Question 16

Pitt Jones Company had the following activities, allocated costs, and allocation bases:
$$\begin{array} { | l | l | l | } \hline \text { Activities } & \text { Allocated Costs } & \text { Allocation Base } \\\hline \text { Account inquiry (hours) } & \$ 60,000 & 2,000 \text { hours } \\\hline \text { Account billing (lines) } & \$ 30,000 & 20,000 \text { lines } \\\hline \text { Account verification (accounts) } & \$ 15,000 & 20,000 \text { accounts } \\\hline \text { Correspondence (letters) } & \$ 10,000 & 1,000 \text { letters } \\\hline\end{array}$$ The above activities are used by departments P and Q:
$$\begin{array} { | l | l | l | } \hline & \text { Department P } & \text { Department Q } \\\hline \text { Account inquiry (hours) } & 100 \text { hours } & 200 \text { hours } \\\hline \text { Account billing (lines) } & 10,000 \text { lines } & 7,000 \text { lines } \\\hline \text { Account verification (accounts) } & 1,000 \text { accounts } & 600 \text { accounts } \\\hline \text { Correspondence (letters) } & 50 \text { letters } & 100 \text { letters } \\\hline\end{array}$$ How much of the account inquiry cost will be assigned to Department Q?

A) $2,000
B) $6,500
C) $3,000
D) $6,000

Question 17

Pitt Jones Company had the following activities, allocated costs, and allocation bases:
$$\begin{array} { | l | l | l | } \hline \text { Activities } & \text { Allocated Costs } & \text { Allocation Base } \\\hline \text { Account inquiry (hours) } & \$ 60,000 & 2,000 \text { hours } \\\hline \text { Account billing (lines) } & \$ 30,000 & 20,000 \text { lines } \\\hline \text { Account verification (accounts) } & \$ 15,000 & 20,000 \text { accounts } \\\hline \text { Correspondence (letters) } & \$ 10,000 & 1,000 \text { letters } \\\hline\end{array}$$ The above activities are used by departments P and Q:
$$\begin{array} { | l | l | l | } \hline & \text { Department P } & \text { Department Q } \\\hline \text { Account inquiry (hours) } & 100 \text { hours } & 200 \text { hours } \\\hline \text { Account billing (lines) } & 10,000 \text { lines } & 7,000 \text { lines } \\\hline \text { Account verification (accounts) } & 1,000 \text { accounts } & 600 \text { accounts } \\\hline \text { Correspondence (letters) } & 50 \text { letters } & 100 \text { letters } \\\hline\end{array}$$ How much of the correspondence cost will be assigned to Department P?

A) $500
B) $1,200
C) $2,500
D) $800

Question 18

Pitt Jones Company had the following activities, allocated costs, and allocation bases:
$$\begin{array} { | l | l | l | } \hline \text { Activities } & \text { Allocated Costs } & \text { Allocation Base } \\\hline \text { Account inquiry (hours) } & \$ 60,000 & 2,000 \text { hours } \\\hline \text { Account billing (lines) } & \$ 30,000 & 20,000 \text { lines } \\\hline \text { Account verification (accounts) } & \$ 15,000 & 20,000 \text { accounts } \\\hline \text { Correspondence (letters) } & \$ 10,000 & 1,000 \text { letters } \\\hline\end{array}$$ The above activities are used by departments P and Q:
$$\begin{array} { | l | l | l | } \hline & \text { Department P } & \text { Department Q } \\\hline \text { Account inquiry (hours) } & 100 \text { hours } & 200 \text { hours } \\\hline \text { Account billing (lines) } & 10,000 \text { lines } & 7,000 \text { lines } \\\hline \text { Account verification (accounts) } & 1,000 \text { accounts } & 600 \text { accounts } \\\hline \text { Correspondence (letters) } & 50 \text { letters } & 100 \text { letters } \\\hline\end{array}$$ How much of the account verification costs will be assigned to Department P?

A) $800
B) $2,500
C) $750
D) $1,500

Question 19

Which of the following is not a criticism of traditional costing systems?

A) They tend to be more expensive.
B) They can distort product costs.
C) They tend to use too few cost pools.
D) They are designed to allocate only manufacturing costs.

Question 20

Classic Manufacturing has provided the following information:
Expected production of product KB11 is estimated to be 12,000 units for the upcoming period. Each unit of KB11 takes three direct labor hours to produce and 1,000 material moves are expected.
Expected production of product JL22 is estimated to be 6,000 units for the upcoming period. Each unit of JL22 takes nine direct labor hours to produce and 300 material moves are expected.
Material handling costs are estimated to be $10,800 for the upcoming period and are allocated based on direct labor hours.
What is the material handling cost per unit of JL22?

A) $1.08
B) $0.60
C) $0.42
D) $0.36

Question 21

A traditional cost allocation system may distort product costs because:

A) too many cost pools are used.
B) too many cost drivers are used.
C) of a lack of cause and effect associated with the cost drivers and the allocated costs.
D) they use estimates when allocating costs, whereas an activity-based costing system uses actual costs.

Question 22

A traditional cost allocation system tends to misallocate manufacturing costs because:

A) direct labor costs are misallocated.
B) direct material costs are misallocated.
C) indirect manufacturing costs are misallocated.
D) period costs are misallocated.

Question 23

Activity-based costing minimizes cost distortions because:

A) activity-based costing uses fewer cost pools.
B) activity-based costing allocates costs based on cause and effect.
C) activity-based costing uses fewer cost drivers.
D) activity-based costing only allocates product costs.

Question 24

RJ Company manufactures many products which each use a variety of direct laborers of different skill levels. Which of the following cost drivers would be the most applicable for assigning direct labor scheduling costs to the finished products?

A) Number of products produced
B) Number of direct labor hours incurred
C) Total cost of the direct labor incurred
D) Number of direct laborers assigned to each product

Question 25

A company would not use an activity-based costing system to:

A) evaluate product profitability.
B) assist them in the budgeting process.
C) allocate nonmanufacturing related costs.
D) determine a product's selling price when target costing is being used.

Question 26

Activity-based costing systems and traditional costing systems tend to always identify the same products as being the most profitable.

Question 27

Target cost is the price that customers are willing to pay and is the maximum cost that the manufacturer is willing to incur.

Question 28

Traditional single-allocation-base systems tend to under cost high-volume products and over cost low- volume products.

Question 29

Which of the following statements is not applicable to target pricing?

A) It is based on market research.
B) It is the amount customers are willing to pay for the product or service.
C) It is based on traditional cost-based pricing.
D) The total cost of the product is a function of its target price.

Question 30

A cost management technique that helps managers set goals for cost reductions through product design is called:

A) cost-plus pricing.
B) full costing.
C) target costing.
D) design efficiency pricing.

Question 31

Which of the following statements describes target costing?

A) It generally computes the target cost to be higher than the full product cost of the product or service.
B) It starts with the target sales price and subtracts desired profit to attain the target cost.
C) It is based on traditional cost-based pricing.
D) It starts with the target cost and adds desired profit to attain the target sales price.

Question 32

Quality Stereo Company has provided the following information regarding its activity-based costing system:
Purchasing department costs are allocated based on purchase orders and the cost allocation rate is $75 per purchase order.
Assembly department costs are allocated based on the number of parts used and the cost allocation rate is $1.00 per part.
Packaging department costs are allocated based on the number of units produced and the allocation rate is $2.00 per unit produced.
Each stereo produced has 50 parts and the direct materials cost per unit is $70. Quality Stereo has an order for 1,000 stereos which will require 50 purchase orders. What is the selling price per unit assuming that Quality Stereo adds a 20% markup to total cost?

A) $66.90
B) $146.40
C) $148.50
D) $150.90

Question 33

Crump Manufacturing has provided the following information regarding its activity-based costing system:
Purchasing department costs are allocated based on purchase orders and the cost allocation rate is $52 per purchase order.
Assembly department costs are allocated based on the number of machine hours and the cost allocation rate is $27 per machine hour.
Inspection department costs are allocated based on the number of inspection hours and the allocation rate is $39 per inspection hour.
Each unit produced has a direct materials cost of $70 and a direct labor cost of $65. Crump has an
Order for 500 units which will require 40 purchase orders, 750 machine hours, and 50 inspection hours. What is the selling price per unit assuming that Crump adds a 40% markup to total cost?

A) $183.56
B) $354.20
C) $256.98
D) $67.98

Question 34

Crump Manufacturing has provided the following information regarding its activity-based costing system:
Purchasing department costs are allocated based on purchase orders and the cost allocation rate is $52 per purchase order.
Assembly department costs are allocated based on the number of machine hours and the cost allocation rate is $27 per machine hour.
Inspection department costs are allocated based on the number of inspection hours and the allocation rate is $39 per inspection hour.
Each unit produced has a direct materials cost of $70 and a direct labor cost of $65. Crump has an
Order for 500 units which will require 40 purchase orders, 750 machine hours and 50 inspection hours. What is Crump's operating income from the order if the units are sold for $225 each?

A) $22,670
B) $20,720
C) $45,000
D) $88,220

Question 35

Madrid Manufacturing is considering the manufacture of a new product. Madrid was hoping to sell theproduct for $504 per unit and estimated the total cost per unit to be $360. Madrid conducted market research and found out that the market is only willing to pay $462 for the new product. Using the target costing approach, what does the total per unit cost of the new product have to be if Madrid wants to achieve the same markup on total cost percentage that was used in their initial estimates of cost and selling price?

A) $327
B) $318
C) $300
D) $330

Question 36

A potential disadvantage of a just-in-time inventory system is that the lack of inventory can result in loss of sales in certain situations.

Question 37

Backflush costing is a standard costing system that starts with output completed and then assigns manufacturing costs to units sold and to inventories.

Question 38

Which of the following pertains to a just-in-time production system?

A) An individual does fewer tasks than under a traditional system.
B) Summary journal entries are made when units are completed.
C) Units are produced in larger batches than under a traditional system.
D) Costs are tracked separately as units move through production.

Question 39

Which of the following is not a characteristic of companies using just-in-time production systems?

A) Production is in small batches.
B) Machines are arranged by function.
C) Employees are trained to operate more than one machine.
D) Machine setup times are reduced.

Question 40

A standard costing system that starts with output completed and works backward to apply manufacturing costs to units sold and to inventories is called what?

A) Just-in-time costing
B) Traditional costing
C) Backflush costing
D) Value-added costing

Question 41

Which of the following statements is correct?

A) Activity-based costing is a more detailed and complex costing method than is just-in-time costing.
B) Activity-based costing and just-in-time costing are incompatible.
C) Activity-based costing is a simplified cost system that does not track costs through the sequence of manufacturing operations.
D) Activity-based costing is less informative than a traditional costing system.

Question 42

Which of the following companies would be most likely to use a just-in-time system?

A) A delivery company
B) A paper mill
C) A custom computer manufacturer
D) A steel mill

Question 43

A raw and in-process inventory account is part of which of the following?

A) Activity-based costing
B) Traditional costing
C) Activity based management
D) Just-in time

Question 44

In a just-in-time costing system, the entry to record actual conversion costs incurred would include which of the following?

A) Credit to raw and in process inventory
B) Debit to raw and in process inventory
C) Debit to conversion costs
D) Credit to work in process inventory

Question 45

Which of the following statements does not properly describe just-in-time accounting?

A) The cost of the products is recorded when the products are completed.
B) A work in process inventory account similar to the one used in traditional costing is not used.
C) Just-in-time accounting systems do not use a raw materials inventory account.
D) Just-in-time accounting systems do not utilize a conversion costs account.

Question 46

Which of the following journal entry components is not applicable to recording the cost of completed products using just-in-time accounting?

A) A debit to the finished goods inventory account.
B) A credit to the conversion costs account.
C) A credit to the raw and in-process inventory account.
D) A debit to the manufacturing overhead account.

Question 47

Just-in-time inventory systems track the costs of products from raw materials inventory to work in process inventory to finished goods inventory, like traditional standard costing systems do.

Question 48

Which of the following statements regarding total quality management (TQM) is incorrect?

A) Most prevention costs occur in the research and development stage of the value chain.
B) TQM advocates investing at the front end of the value chain in research and development and design to produce a superior product.
C) Continuous improvement is the goal of TQM.
D) Most appraisal and internal failure costs occur in the research and development stage of the value chain.

Question 49

The cost of overseeing suppliers within the total quality management philosophy is a(n):

A) internal failure cost.
B) appraisal cost.
C) external failure cost.
D) prevention cost.

Question 50

The cost of warranty work within the total quality management philosophy is a(n):

A) appraisal cost.
B) internal failure cost.
C) external failure cost.
D) prevention cost.

Question 51

The cost of improved equipment and processes within the total quality management philosophy is a(n):

A) prevention cost.
B) external failure cost.
C) appraisal cost.
D) internal failure cost.

Question 52

The cost of product liability claims within the total quality management philosophy is a(n):

A) appraisal cost.
B) prevention cost.
C) internal failure cost.
D) external failure cost.

Question 53

The lost profits from not retaining customers within the total quality management philosophy is a(n):

A) prevention cost.
B) appraisal cost.
C) external failure cost.
D) internal failure cost.

Question 54

The cost of training personnel within the total quality management philosophy is a(n):

A) appraisal cost.
B) prevention cost.
C) internal failure cost.
D) external failure cost.

Question 55

Production loss caused by downtime within the total quality management philosophy is a(n):

A) external failure cost.
B) prevention cost.
C) appraisal cost.
D) internal failure cost.

Question 56

Which of the following statements regarding total quality management is incorrect?

A) Total quality management does not utilize any nonfinancial measures.
B) Many costs associated with implementation of a quality program are hard to measure.
C) The goal is to provide customers with superior products and services.
D) Prevention costs are much less than external failure costs.