Deck 4: Activity-Based Costing Systems

Question 1

Many traditional cost accounting systems do not trace indirect costs to products.

Answer 1

True

Question 2

In traditional cost systems, many complex products are overcosted and simple products are undercosted.

Answer 2

False

Question 3

Traditional cost accounting systems can be effective if the level of indirect costs is low relative to the level of direct costs and if the accuracy of the cost information is not critical to the company's success.

Answer 3

True

Question 4

Cost pools are groups or categories of individual cost items.

Question 5

Activity-based costing is an approach that first assigns costs to activities and then to goods and services.

Question 6

The first step in activity-based costing is to calculate a cost-driver rate for each activity.

Question 7

The first step in activity-based costing is to identify and classify the activities related to the company's products.

Question 8

The last step in an activity-based costing system is to calculate the cost-driver rate for each activity.

Question 9

Unit-level resources and activities are the resources acquired and the activities performed specifically for individual units of product or service.

Question 10

Setting up manual and computer controlled machines is an example of a batch- level resource.

Question 11

Facility- level activities are at the lowest end of the hierarchy of tracing resources to activities to products and services.

Question 12

The development of a recipe for a specific type of cereal by Kellogg Corporation is an example of a batch-level resource.

Question 13

Research and development would be an example of a batch-level activity.

Question 14

Consulting with customers on distribution arrangements for a specific product is an example of a customer-level resource.

Question 15

The primary advantage to the top down approach of developing activities is that it is quick and inexpensive.

Question 16

The top-down approach to identifying and classifying activities is likely to produce a more accurate result than the interview or participative approach.

Question 17

Materials consumed would be an example of a unit-level resource.

Question 18

Set-up of machinery would be an example of a unit-level resource.

Question 19

Specialized equipment used to make a certain brand of shoes would be an example of a product-level resource.

Question 20

Maintenance costs are typically considered product-level resources.

Question 21

The interview approach usually generates a more accurate activity list than the top-down approach.

Question 22

A cost-driver base should be based on the resource's practical capacity to support activities.

Question 23

Increases or decreases of a cost-driver base cause increases or decreases in the level of activity performed.

Question 24

The cost-driver rate is the estimated cost of resource consumption per unit of cost driver base for each activity.

Question 25

Number of parts per product would be an appropriate cost driver base for facility-level activities.

Question 26

Number of square feet of each product's usage would be an appropriate cost-driver base for product-level activities.

Question 27

Batch level activities will normally use units produced as a cost driver base.

Question 28

ABC full costing traces only the cost of unit level resources supplied and used to products and services.

Question 29

ABC full-costing assigns as many costs to products and services as possible based on the use of resources, regardless of the level of resources.

Question 30

ABC full costing shows how activities may use all levels of resources.

Question 31

A typical result of Activity-Based Costing analysis is that low-complexity customer business is often more profitable than previously thought and high-complexity customer business is often less profitable.

Question 32

ABC costing information can be useful for estimating the costs of new products and services only if the processes and activities to make them are similar.

Question 33

It is always better to use activity-based costing information than to use average cost information.

Question 34

Customer costing identifies the costs and benefits of servicing specific customers or customer types.

Question 35

Customer profitability analysis identifies the costs and benefits of service specific customers or customer types to improve an organization's overall profitability.

Question 36

Customer costing analyzes the costs of activities devoted to service specific customers at each level.

Question 37

ABC costing analysis is used only in the manufacturing sector.

Question 38

Not-for-profit organizations can benefit from the use of activity based costing.

Question 39

Implementing an Activity-Based Costing system is relatively inexpensive.

Question 40

ABC unit-level costing assigns only the cost of unit-level resources to products.

Question 41

Under activity-based costing, only unit level and batch level costs are assigned to units.

Question 42

Which of the following statements regarding traditional cost accounting systems is False?

A) Products are often over or under costed in traditional cost accounting systems
B) Most traditional cost accounting systems do not trace individual costs to products
C) The advantage of traditional cost accounting systems is their simplicity
D)Traditional cost accounting systems can be sufficient to meet managers' cost information needs as long . as the level of indirect costs is relatively high compared to the level of direct costs

Question 43

Which of the following is the first step in Activity-Based Costing?

A) Assign activity costs to products
B) Identify and classify activities related to the company's products
C) Calculate a cost-driver rate for each activity
D) Estimate the cost of activities

Question 44

Which of the following is not a basic step that is used to determine the cost of goods using Activity-Based Costing?

A) Identify and classify the activities related to the company's products
B) Calculate a cost-driver rate for each activity
C) Classify all costs into variable and fixed cost behavior
D) Assign activity costs to products

Question 45

Batch level resources are:

A) Resources acquired as a result of the decision to make a group of similar products
B) Resources acquired as the result of the decision to produce and sell a specific product
C) Resources acquired as a result of the decision to serve specific customers
D) Resources acquired as a result of the decision to provide general capacity to produce products and services

Question 46

The purchase of chemicals to make a special batch of synthetic fiber would be an example of:

A) Customer-level resource
B) Facility-level resource
C) Product-level resource
D) Batch-level resource

Question 47

The review of each tax return by H & R Block would be an example of:

A) Unit-level activity
B) Facility-level activity
C) Product-level activity
D) Batch-level activity

Question 48

Salaries of the human resource staff responsible for hiring production personnel at Dell Computer would be an example of:

A) Unit-level activity
B) Facility-level activity
C) Batch-level activity
D) Product-level activity

Question 49

Setup labor costs required for setting up equipment for flexible production facilities for manufacturing would be an example of:

A) Unit-level activity
B) Batch-level activity
C) Product-level activity
D) Customer-level activity

Question 50

Costs associated with a special machine which sands the edges of all finished products would be an example of:

A) Unit-level activity
B) Batch-level activity
C) Customer-level activity
D) Product-level activity

Question 51

Maintenance of parts inventory for a specific toy in a toy production facility would be an example of:

A) Unit-level activity
B) Batch-level activity
C) Customer-level activity
D) Product-level activity

Question 52

Facility- level resources are:

A) Resources acquired and the activities performed specifically for individual units of products or services
B) Resources acquired as the result of the decision to produce and sell a specific good or service
C) Resources acquired and the activities performed to serve specific customers
D) Resources acquired and the activities performed to provide the general capacity to produce goods and services

Question 53

Setting up a manually controlled compression molding machine is an example of:

A) A facility-level resource or activity
B) A customer-level resource or activity
C) A batch-level resource or activity
D) A product-level resource or activity

Question 54

Quality inspections are classified as:

A) Unit -level resources
B) Batch- level resources
C) Product- level resources
D) Facility -level resources

Question 55

Movement of materials for products in production is classified as:

A) Unit-level resources
B) Batch-level resources
C) Product-level resources
D) Facility-level resources

Question 56

The design and manufacture of a bottle cap mold for Avon Products Company is an example of:

A) A facility-level resource or activity
B) A customer-level resource or activity
C) A batch-level resource or activity
D) A product-level resource or activity

Question 57

The most likely cost driver base for allocating the actual cost of advertising and promotion would be:

A) The amount of time spent per territory on each customer
B) The square footage used in production of each product
C) The percent of advertising budget per product type
D) The budgeted travel and lodging cost by product line

Question 58

Use the following to answer questions:
Ferguson Molding Company produces custom bottle caps and jar covers for large cosmetic companies. Each customer owns the custom-made molds that are used for the caps and jar covers, so caps are produced only to customer order. Each order requires the setting of molds in molding machines. Two full time mechanics, whose combined total annual salary and benefits are $160,000 per year, are employed setting up and breaking down the molding machines. An order consists of anywhere from 50,000 to 500,000 units. 80 orders were received during the year 2008 for individual custom production runs. The total number of units produced was 8 million.

-Each production run of caps or jar covers is an example of

A) Facility-level activity
B) Product- level activity
C) Batch-level activity
D) Customer-level activity

Question 59

Use the following to answer questions:
Ferguson Molding Company produces custom bottle caps and jar covers for large cosmetic companies. Each customer owns the custom-made molds that are used for the caps and jar covers, so caps are produced only to customer order. Each order requires the setting of molds in molding machines. Two full time mechanics, whose combined total annual salary and benefits are $160,000 per year, are employed setting up and breaking down the molding machines. An order consists of anywhere from 50,000 to 500,000 units. 80 orders were received during the year 2008 for individual custom production runs. The total number of units produced was 8 million.

-The cost of setting up the molding machines is an example of

A) Facility-level activity
B) Product-level activity
C) Batch-level activity
D) Customer-level activity

Question 60

Use the following to answer questions:
Ferguson Molding Company produces custom bottle caps and jar covers for large cosmetic companies. Each customer owns the custom-made molds that are used for the caps and jar covers, so caps are produced only to customer order. Each order requires the setting of molds in molding machines. Two full time mechanics, whose combined total annual salary and benefits are $160,000 per year, are employed setting up and breaking down the molding machines. An order consists of anywhere from 50,000 to 500,000 units. 80 orders were received during the year 2008 for individual custom production runs. The total number of units produced was 8 million.

-The machine operator's labor to operate the molding machine to produce a run of custom jar covers is an example of:

A) Facility-level activity
B) Product-level activity
C) Batch-level activity
D) Customer-level activity

Question 61

Use the following to answer questions:
Ferguson Molding Company produces custom bottle caps and jar covers for large cosmetic companies. Each customer owns the custom-made molds that are used for the caps and jar covers, so caps are produced only to customer order. Each order requires the setting of molds in molding machines. Two full time mechanics, whose combined total annual salary and benefits are $160,000 per year, are employed setting up and breaking down the molding machines. An order consists of anywhere from 50,000 to 500,000 units. 80 orders were received during the year 2008 for individual custom production runs. The total number of units produced was 8 million.

-The most appropriate cost driver base to allocate the salaries of the two mechanics under Activity-Based Costing would be:

A) The number of bottle caps and jar covers produced
B) The number of setups
C) The number of hours spent on each setup
D) The number of setup mechanics

Question 62

Use the following to answer questions:
Ferguson Molding Company produces custom bottle caps and jar covers for large cosmetic companies. Each customer owns the custom-made molds that are used for the caps and jar covers, so caps are produced only to customer order. Each order requires the setting of molds in molding machines. Two full time mechanics, whose combined total annual salary and benefits are $160,000 per year, are employed setting up and breaking down the molding machines. An order consists of anywhere from 50,000 to 500,000 units. 80 orders were received during the year 2008 for individual custom production runs. The total number of units produced was 8 million.

-If the company allocates the cost of the setup mechanics based on the number of setups, the setup costs to be allocated to an order of 300,000 Nurturing Face Cream jar covers for Aristedes Cosmetics Company would be:

A) $4,000
B) $2,000
C) $1,000
D) $0, since this is an indirect cost and cannot be traced to the product in question

Question 63

Use the following to answer questions:
Ferguson Molding Company produces custom bottle caps and jar covers for large cosmetic companies. Each customer owns the custom-made molds that are used for the caps and jar covers, so caps are produced only to customer order. Each order requires the setting of molds in molding machines. Two full time mechanics, whose combined total annual salary and benefits are $160,000 per year, are employed setting up and breaking down the molding machines. An order consists of anywhere from 50,000 to 500,000 units. 80 orders were received during the year 2008 for individual custom production runs. The total number of units produced was 8 million.

-If the company allocates the cost of the setup mechanics based on the number of units produced, the setup cost per unit in an order of 300,000 Nurturing Face Cream jar covers for Aristedes Cosmetics Company would be:

A) $0.053 per unit
B) $0.006 per unit
C) $0.02 per unit
D) $0, since this is an indirect cost and cannot be traced to the product in question

Question 64

Use the following to answer questions:
The Dedham Cooperative Bank is considering either a bank wide overhead rate or departmental overhead rates to allocate $2,000,000 of indirect costs. The bank wide rate would be based on either direct labor hours or the number of loans processed. The departmental rates would be based on direct labor time for Consumer Loans and a dual rate based on direct labor time and the number of loans processed for
Commercial Loans. The following information was gathered for the upcoming period:


-If Dedham Cooperative uses a bank-wide rate based on direct labor time, what would be the indirect costs allocated to the Consumer Department?

A) $800,000
B) $1,200,000
C) $1,600,000
D) $400,000

Question 65

Use the following to answer questions:
The Dedham Cooperative Bank is considering either a bank wide overhead rate or departmental overhead rates to allocate $2,000,000 of indirect costs. The bank wide rate would be based on either direct labor hours or the number of loans processed. The departmental rates would be based on direct labor time for Consumer Loans and a dual rate based on direct labor time and the number of loans processed for
Commercial Loans. The following information was gathered for the upcoming period:


-If Dedham Cooperative uses a bank wide rate based on the number of loans processed, what would be the indirect costs assigned to the Commercial Department?

A) $400,000
B) $600,000
C) $800,000
D) $200,000

Question 66

Use the following to answer questions:
The Dedham Cooperative Bank is considering either a bank wide overhead rate or departmental overhead rates to allocate $2,000,000 of indirect costs. The bank wide rate would be based on either direct labor hours or the number of loans processed. The departmental rates would be based on direct labor time for Consumer Loans and a dual rate based on direct labor time and the number of loans processed for
Commercial Loans. The following information was gathered for the upcoming period:


-Management estimates that it now costs $2,000 to analyze and close a commercial loan. This amount has been included in the $2,000,000 of indirect costs. If the remaining indirect costs are allocated based on the number of loans processed, how much of the indirect costs should be allocated to the Consumer Department?

A) $960,000
B) $1,040,000
C) $1,600,000
D) $400,000

Question 67

Use the following to answer questions:
The Dedham Cooperative Bank is considering either a bank wide overhead rate or departmental overhead rates to allocate $2,000,000 of indirect costs. The bank wide rate would be based on either direct labor hours or the number of loans processed. The departmental rates would be based on direct labor time for Consumer Loans and a dual rate based on direct labor time and the number of loans processed for
Commercial Loans. The following information was gathered for the upcoming period:


-The bank estimates that the Commercial Department will result in $3,000,000 of revenues in 2008. If the indirect costs are allocated based on direct labor hours, what profit before tax will be generated by the Commercial Department?

A) $1,900,000
B) $2,300,000
C) $2,800,000
D) $2,000,000
E) *** $2,000,000/20,000 = $100

Question 68

Which of the following statements about activity based costing is not true?

A) Activity based costing differs from traditional costing systems in that products are not cross subsidized
B) In activity based costing, cost drivers are usually what cause costs to be incurred
C) 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
D) Activity based costing is useful for allocating marketing and distribution costs

Question 69

Which of the following is not a "red flag"
Indicating problems with an organization's costing system?

A) Goods and services are complex and require many different processes and inputs
B) Different departments within the company believe that the costs identified for producing goods and . providing services are not accurate
C) Standard high-volume goods and services show significant profits
D) Indirect costs are significant in proportion to direct costs

Question 70

Which of the following indicates that a company may benefit from an Activity-Based Costing system?

A) Standard high-volume goods and services show significant profits
B) Indirect costs are insignificant in proportion to direct costs
C) The company loses relatively high priced bids
D) Goods and services are complex and may require many different processes or inputs

Question 71

Which of the following statements about choosing the best cost driver base is not true?

A) The base should logically have a cause and effect relationship with the activity and the use of resources
B) The cost driver should be based on the theoretical capacity of the resource to support activities
C) The base should be feasible to measure
D) The base should predict or explain activities' use of resources with reasonable accuracy

Question 72

Cost drivers are:

A) Costs linked to two or more other costs
B) A mechanical basis, such as machine hours, computer time, size of equipment, or square footage of . factory, used to assign costs to activities
C) Accounting measurements used to evaluate whether or not performance is proceeding according to plan
D) Activities that cause costs to increase as the activity increases

Question 73

Which of the following statements is true regarding Activity-Based Costing ABC. unit-level costing?

A) It assigns only the costs of unit-level resources to products
B) It assigns only the costs of unit-level and batch level resources to products
C) All costs except facility-level resources are assigned to products
D) It assigns as many costs to products and services as possible, regardless of the level of the resource, based on the use of resources

Question 74

The Activity-Based Costing full costing approach says:

A) Only costs that are clearly and certainly driven by specific units should be assigned to these units
B) Higher-level resources, such as product-level activities should not be assigned to units
C) The firm has costs because it produces units; therefore all costs related to the production and sale of the . units should be assigned to units
D) Only unit-level and batch-level costs should be assigned to units

Question 75

Which of the following is considered a batch-level resource in a bakery?

A) Cost of heating and air-conditioning
B) Testing and quality control for each dozen cookies baked at a bakery
C) Cost of eggs for baked goods
D) Cost of advertising in the local newspaper

Question 76

Which of the following is considered a unit-level resource in auto manufacturing?

A) Building maintenance
B) Factory utilities cost
C) Depreciation of robots
D) Purchased tires for finished cars

Question 77

Listed below are activities incurred by Rhodes Manufacturing Company. The company manufactures a variety of products for sale to large department stores
Required: Match each activity to its most likely cost-driver. Cost-driver bases may be used more than once.)

Question 78

The Great Island Preserve Company buys fruit and processes it into a variety of jams, jellies, and preserves. The process involves purchasing fresh fruit, cutting, cooking, adding ingredients, testing, and packaging the finished product. Jars, labels, and other packaging are purchased from local packaging suppliers
Required: Identify a possible cost-driver base that could be used to assign costs to final product. Some cost-driver bases can be used more than once
(1) Purchase of jars, covers, and labels for production of jam and jellies
(2) Cost of peaches for peach preserve
(3) Cooking strawberries in large kettles to prepare strawberry jam
(4) Setup of manually controlled machines
(5) Using manually controlled machines to fill jars of grape and blueberry jelly
(6) Using computer controlled machines to apply labels to each jar of preserves, jams, and jellies
(7) Quality control inspection of each finished jar of product
(8) Use of the main building for producing preserves, jams, and jellies

Question 79

Listed below are activities incurred by Richardson Manufacturing Company. The company manufactures a variety of products for sale to large department stores
Required: Match each of the following resources and activities with the most likely activity
level

Question 80

Match each of the following resources with the most likely resource level at a personal computer manufacturer. Each computer is custom manufactured to the specifications of the individual customer. Identify the resource levels as: U = Unit-level; B = Batch-level; P = Product-level; C = Customer-level; F = Facility-level