Deck 8: Activity-Based Costing

Question 1

Which of the following would most likely be a unit-level cost?

A) Factory insurance
B) Quality control
C) Lubricants used on factory machinery
D) Research and development costs for a new product line

Answer 1

C

Question 2

As companies experience a shift from labour-intensive operations to machine-automated operations,which of the following costs becomes more difficult to trace to products?

A) Administrative costs
B) Direct labour costs
C) Direct material costs
D) Overhead costs

Answer 2

D

Question 3

Which of the following would most likely be a product-level cost?

A) Salaries related to purchasing and receiving
B) Quality control costs
C) Energy costs for factory machinery
D) Research and development costs for a new product line

Answer 3

D

Question 4

Which of the following statements associated with traditional overhead allocation is true?

A) A traditional overhead allocation method is the most accurate in automated environments with diverse products.
B) A traditional overhead allocation method can also be referred to as activity-based costing.
C) A traditional overhead allocation method provides the most accurate product cost information.
D) A traditional overhead allocation method usually uses one or two volume-based cost drivers.

Question 5

Troxler Inc.produces various types of floor rugs with many different designs.They typically produce at least 200 rugs with a single machine setup.A cost incurred each time a new rug design is developed is called a(n):

A) product-level cost.
B) batch-level cost.
C) unit-level cost.
D) facility-level cost.

Question 6

Which of the following statements regarding activity-based costing (ABC)is true?

A) Resources consume activities and products consume costs.
B) Activities consume resources and products consume activities.
C) Costs consume activities and products cause costs.
D) Resources consume activities and activities cause costs.

Question 7

In activity-based costing (ABC),the wage paid to an assembly-line worker would most likely be classified as:

A) overhead.
B) a product-level cost.
C) direct labour.
D) a facility-level cost.

Question 8

Herndon Brothers Inc.produces a variety of 'all natural' household cleaning supplies that it manufactures and distributes to various grocery stores along the west coast.Which of the following types of costs would most likely be a facility-level cost?

A) A package product design cost
B) A machine setup cost
C) Depreciation on the factory building
D) Utility costs for factory machinery

Question 9

Traditional overhead allocation methods as opposed to activity-based allocation methods work best when:

A) there are many different volume-based cost drivers.
B) most costs are unit-level costs.
C) overhead can be estimated.
D) most costs are facility-level costs.

Question 10

__________ are procedures or processes that cause work to be accomplished.

A) Unit-level costs
B) Overhead costs
C) Activities
D) Batch-level costs

Question 11

Activity-based costing is a method of cost allocation that is useful for assigning _______ costs to products or services.

A) direct materials
B) direct labour
C) manufacturing overhead
D) direct materials and direct labour

Question 12

Troxler Inc.produces various types of floor rugs with many different designs.They typically produce at least 200 rugs with a single machine setup.A cost incurred to sustain the overall manufacturing process is called a(n):

A) product-level cost.
B) batch-level cost.
C) unit-level cost.
D) facility-level cost.

Question 13

Troxler Inc.produces various types of floor rugs with many different designs.They typically produce at least 200 rugs with a single machine setup.A cost incurred each time a machine is set up is called a(n):

A) product-level cost.
B) batch-level cost.
C) unit-level cost.
D) facility-level cost.

Question 14

Herndon Brothers Inc.produces a variety of 'all natural' household cleaning supplies that it manufactures and distributes to various grocery stores along the west coast.Which of the following types of costs would most likely be a batch-level cost?

A) A package product design cost
B) A machine setup cost
C) Depreciation on the factory building
D) Utility costs for factory machinery

Question 15

Which of the following would most likely be a facility-level cost?

A) Depreciation on factory equipment
B) Depreciation on factory building
C) Depreciation of engineering equipment
D) Depreciation of setup equipment

Question 16

Which of the following statements is true regarding activity-based costing (ABC)?

A) It is based on the concept that a single cost driver can drive all overhead costs.
B) It is based on the concept that activities drive overhead costs.
C) It is based on the concept that unit-level costs drive all overhead costs.
D) It is based on the concept that either the number of direct labour or machine hours incurred drives all overhead costs.

Question 17

Herndon Brothers Inc.produces a variety of 'all natural' household cleaning supplies that it manufactures and distributes to various grocery stores along the west coast.Which of the following types of costs would most likely be a product-level cost?

A) A package product design cost
B) A machine setup cost
C) Depreciation on the factory building
D) Utility costs for factory machinery

Question 18

Which of the following would most likely be a batch-level cost?

A) Factory rent
B) Quality control
C) Energy costs for factory machinery
D) Research and development costs for a new product line

Question 19

Herndon Brothers Inc.produces a variety of 'all natural' household cleaning supplies that it manufactures and distributes to various grocery stores along the west coast.Which of the following types of costs would most likely be a unit-level cost?

A) A package product design cost
B) A machine setup cost
C) Depreciation on the factory building
D) Utility costs for factory machinery

Question 20

Troxler Inc.produces various types of floor rugs with many different designs.They typically produce at least 200 rugs with a single machine setup.A cost incurred every time an individual rug is produced is called a(n):

A) product-level cost.
B) batch-level cost.
C) unit-level cost.
D) facility-level cost.

Question 21

Which of the following statements is true regarding activities?

A) An activity that drives overhead costs should only take place within the physical manufacturing facility.
B) Activities can be consumed by resources.
C) Overhead costs can be traced to more than one activity.
D) Activities seldom cause work to be accomplished.

Question 22

Which of the following would be the least likely cost driver for an activity such as the repair and maintenance of factory equipment?

A) Machine hours
B) Direct labour hours
C) Number of units produced
D) Number of new product designs

Question 23

Which of the following would be the least likely cost driver for an activity such as product testing?

A) Number of shipments received
B) Number of tests
C) Hours of testing time
D) Number of change orders

Question 24

Which of the following types of costs are usually not allocated to products?

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

Question 25

Which of the following statements is false regarding the identification of activities in activity-based costing (ABC)?

A) The identification of activities that drive overhead costs is done before cost drivers are selected.
B) An activity can be thought of as a procedure or process that causes work to be accomplished.
C) Each type of overhead cost should be traced to only one activity.
D) An activity that drives overhead costs can occur outside the physical manufacturing facility.

Question 26

Which of the following statements regarding cost drivers is false?

A) Cost drivers can have a motivational effect upon employees.
B) Cost drivers should generally be chosen based on a cause-and-effect relationship between the driver and the specific cost being considered.
C) Cost drivers are groups of overhead costs that are similar.
D) An activity could have more than one potential cost driver.

Question 27

Which of the following would be the least likely cost driver for an activity such as the usage of factory supplies?

A) Machine hours
B) Number of engineering hours
C) Direct labour hours
D) Number of units produced

Question 28

Which of the following statements comparing traditional and activity-based costing (ABC)is false?

A) Traditional systems are generally less accurate than ABC systems.
B) ABC and traditional systems often produce different product cost information.
C) ABC systems focus on activity costing while traditional systems focus on volume costing.
D) ABC systems are generally less expensive to implement than traditional systems.

Question 29

Which of the following statements is true regarding cross-subsidies?

A) They occur when factory workers are trained to work on many different machines.
B) They occur when high-volume products are assigned more than their fair share of overhead costs.
C) They occur when high-volume products have more direct material and direct labour costs than overhead costs.
D) They occur when more than one cost driver can be determined for a particular overhead cost item.

Question 30

In Stage 2 of ABC allocation:

A) cost drivers are determined and costs are traced to each activity.
B) activities are identified.
C) predetermined overhead rates are calculated.
D) equivalent units are computed.

Question 31

What would one expect to occur when cross subsidies are eliminated with the use of activity-based costing (ABC)?

A) Lower-volume products pick up more of their fair share of overhead costs.
B) Higher-volume products pick up more of their fair share of overhead costs.
C) Lower-volume products will be determined as being unprofitable.
D) Higher-volume products will be determined as being unprofitable.

Question 32

Which of the following statements is true regarding a cost driver?

A) Once a particular cost driver has been used for an activity,it may not be used again.
B) Employees should never be made aware of the cost drivers for their department.
C) There may be more than one potential cost driver for a particular activity.
D) Choosing the wrong cost driver should not impact the determination of a product's cost.

Question 33

Which of the following statements is false regarding activities in an ABC system?

A) As a business becomes more complex,more activities will probably need to be identified.
B) Two different manufacturing companies that make the same products may come up with different sets of activities and cost drivers.
C) The maximum number of activities that should be identified as batch-level is two.
D) Overhead costs may be allocated to more than one activity.

Question 34

Which of the following is a key feature of activity-based costing?

A) Overhead costs are assigned on the basis of volume.
B) Overhead costs are assigned on the basis of sales.
C) Overhead costs are assigned on the basis of direct labour hours.
D) Overhead costs are assigned on the basis of activities.

Question 35

What should be done in Stage 1 in an activity-based costing (ABC)system?

A) Total manufacturing costs are calculated.
B) Raw materials are purchased.
C) Cost drivers for activities are chosen.
D) Activities are identified.

Question 36

Which of the following statements is true regarding the identification of activities in an ABC system?

A) All manufacturing companies should have identical types of activities.
B) All merchandising companies should have identical types of activities.
C) As a business becomes more complex,fewer activities need to be identified.
D) Two different businesses which have the same type of activities can still choose different cost drivers.

Question 37

Which of the following statements comparing traditional and activity-based costing (ABC)is true?

A) ABC systems eliminate cross subsidies.
B) Traditional systems eliminate cross subsidies.
C) ABC and traditional systems often produce similar product cost information.
D) All of these are true.

Question 38

Which of the following statements is false regarding cost drivers?

A) A particular cost driver may be used for more than one activity.
B) If employees know the cost driver(s)for their department,it may motivate them to be more efficient.
C) The selection of a cost driver should be based on the correlation it has with direct materials used in the production process.
D) The best cost driver for a particular activity may be different from one company to the next.

Question 39

Which of the following statements accurately describes the basis of activity-based costing?

A) Activities simply sustain a facility's general manufacturing process.
B) Activities are performed as needed to support the production of each different type of product.
C) Activities consume facility-level costs.
D) Activities consume resources and products consume activities.

Question 40

Aunt Lucy’s Candies
Aunt Lucy’s Candies sells standard and premium chocolate confectionary through its catalogue business. Many of the confectionary are sold in bulk to other companies. Last year, the company incurred $300 000 in overhead costs. After implementing activity-based costing (ABC), the company’s controller identified the following information:
$$\begin{array} { l l c } \text { Activity } & \text { Allocation Base } & \text { Proportion of Overhead Cost } \\\hline \text { Purchasing } & \text { Number of purchase orders } & 30 \% \\\text { Processing } & \text { Number of units } & 50 \% \\\text { Sales } & \text { Number of sales orders } & 20 \%\end{array}$$
The number of activities for standard and premium confectionary is as follows:
$\begin{array}{lrr}&\underline{\text { Standard} } &\underline{ \text { Premium }} \\\text {Number of purchase orders}&4000& 2000 \\\text { Number of units }&200000 & 100000 \\\text {Number of sales orders}&3000 & 1000\end{array}$

-What is the overhead rate for the processing activity?

A) $ .97
B) $2.00
C) $ .50
D) $1.00

Question 41

Which of the following types of costs would service-oriented companies be more likely to have proportionately more of than manufacturing companies?

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

Question 42

Which of the following is not a benefit of activity-based costing (ABC)?

A) Increased product cost information
B) Increased accuracy in the budgeting process
C) Increased implementation costs
D) Increased understanding of activities that drive overhead costs

Question 43

The following overhead cost information is available for Henderson Inc.for 2006:
$\begin{array}{llc}\text { Activity } & \text { Allocation Base } & \text { Overhead Cost } \\\hline \text { Purchasing } & \text { Number of purchase orders } & \$ 40000 \\\text { Receiving } & \text { Number of shipments received } & 25000 \\\text { Machine setups } & \text { Number of setups } & 30000 \\\text { Ouality control } & \text { Number of inspections } & 20000\end{array}$
During the year,2000 purchase orders were issued;800 shipments were received;3000 machine setups were performed;and 2500 inspections were conducted.
If Job #101 required 3 purchase orders,4 shipments,4 machine setups,and 2 inspections to complete,how much overhead should be assigned to Job #101?

A) $241.00
B) $ 69.25
C) $180.18
D) $ 13.86

Question 44

Johnson Manufacturing
Johnson Manufacturing anticipates incurring $500 000 in overhead costs this year. After implementing activity-based costing (ABC), the company’s controller identified the following related information:
$$\begin{array} { l l c } \text { Activity } & \text { Allocation Base } & \text { Proportion of Overhead Cost } \\\hline \text { Purchasing } & \text { Number of purchase orders } & 20 \% \\\text { Machine setups } & \text { Number of setups } & 15 \% \\\text { Production } & \text { Number of machine hours } & 65 \%\end{array}$$
The number of activities expected is as follows:
$\begin{array}{llcc} \text { Total number of purchase orders } &4000\\ \text { Total number of setups } &2000\\ \text { Total number of machine hours} &10000\\\end{array}$


-How much total overhead would be applied to a job that required 1 purchase order,5 setups,and 300 machine hours?

A) $9750.00
B) $9962.50
C) $9937.50
D) $9562.50

Question 45

Compton Corporation
The following overhead cost information is available for Compton Corporation for 2006:
$$\begin{array} { l l c } \text { Activity } & \text { Allocation Base } & \text { Overhead Cost } \\\hline \text { Purchasing } & \text { Number of purchase orders } & \$ 100000 \\\text { Receiving } & \text { Number of shipments received } & 60000 \\\text { Machine setups } & \text { Number of setups } & 150000 \\\text { Quality control } & \text { Number of inspections } & 50000\end{array}$$
During the year, 5000 purchase orders were issued; 20 000 shipments were received; 3000 machine setups were performed; and 4000 inspections were conducted.

-What is the overhead rate for the receiving activity?

A) $1.88
B) $6.00
C) $3.00
D) $ .33

Question 46

Jones Construction currently uses traditional costing where overhead is applied based on direct labour hours.Using traditional costing,the applied overhead rate is $20 per direct labour hour.
They are considering a switch to activity-based costing (ABC).The company controller has come up with preliminary overhead rates for each of the following activities:
$\begin{array}{lll}\text { Activity } & \text { Allocation Base } & \text { Overhead rate } \\\hline \text { Material delivery and handling } & \text { Number of deliveries } & \$ 100 \text { per delivery } \\\text { Inspections } & \text { Number of inspections } & \$ 75 \text { per inspection } \\\text { Supervision } & \text { Hours of supervisor time } & \$ 30 \text { per supervisor hour } \\\text { Purchasing } & \text { Number of purchase orders } & \$ 60 \text { per purchase order }\end{array}$

One of the company's current jobs has the following information available:
$\begin{array}{lr} \text { Direct labour hours } & \text { 50 hours } \\ \text {Number of deliveries } &2\\ \text { Number of inspections } &3\\ \text {Hours of supervisor time } &2\\ \text { Number of purchase orders } &5\\\end{array}$

Which of the following statements is true when comparing the total overhead allocated to the job using traditional versus ABC costing?

A) ABC costing will yield $215 less in overhead cost being allocated to the job.
B) ABC costing will yield $735 less in overhead cost being allocated to the job.
C) ABC costing will yield $545 more in overhead cost being allocated to the job.
D) ABC costing will yield $785 more in overhead cost being allocated to the job.

Question 47

Aunt Lucy’s Candies
Aunt Lucy’s Candies sells standard and premium chocolate confectionary through its catalogue business. Many of the confectionary are sold in bulk to other companies. Last year, the company incurred $300 000 in overhead costs. After implementing activity-based costing (ABC), the company’s controller identified the following information:
$$\begin{array} { l l c } \text { Activity } & \text { Allocation Base } & \text { Proportion of Overhead Cost } \\\hline \text { Purchasing } & \text { Number of purchase orders } & 30 \% \\\text { Processing } & \text { Number of units } & 50 \% \\\text { Sales } & \text { Number of sales orders } & 20 \%\end{array}$$
The number of activities for standard and premium confectionary is as follows:
$\begin{array}{lrr}&\underline{\text { Standard} } &\underline{ \text { Premium }} \\\text {Number of purchase orders}&4000& 2000 \\\text { Number of units }&200000 & 100000 \\\text {Number of sales orders}&3000 & 1000\end{array}$

-If a single sales order for premium confectionary requires 2 purchase orders for a total of 500 pieces (units),how much overhead should be assigned to that order?

A) $250.00
B) $ 45.00
C) $272.50
D) $295.00

Question 48

Johnson Manufacturing
Johnson Manufacturing anticipates incurring $500 000 in overhead costs this year. After implementing activity-based costing (ABC), the company’s controller identified the following related information:
$$\begin{array} { l l c } \text { Activity } & \text { Allocation Base } & \text { Proportion of Overhead Cost } \\\hline \text { Purchasing } & \text { Number of purchase orders } & 20 \% \\\text { Machine setups } & \text { Number of setups } & 15 \% \\\text { Production } & \text { Number of machine hours } & 65 \%\end{array}$$
The number of activities expected is as follows:
$\begin{array}{llcc} \text { Total number of purchase orders } &4000\\ \text { Total number of setups } &2000\\ \text { Total number of machine hours} &10000\\\end{array}$


-What will be the overhead rate for the production activity?

A) $32.50
B) $50.00
C) $ .03
D) $31.25

Question 49

Which of the following types of companies would be most likely to benefit from activity-based costing?

A) Companies with a low potential for cost distortions
B) Companies that have a large proportion of unit-level costs
C) Companies that have a relatively high proportion of overhead compared to direct materials and direct labour
D) None of these

Question 50

Which of the following items might cause activity-based costing (ABC)to be more difficult to implement in a service company than in a manufacturing company?

A) The lack of direct labour
B) The lack of facility-level costs
C) The lack of repetitive activities
D) The lack of overhead costs

Question 51

Wake Construction
Wake Construction manufactures and installs standard and custom-made cabinetry for residential homes. Last year, the company incurred $200 000 in overhead costs. After implementing activity-based costing (ABC), the company’s accountant identified the following related information:
$$\begin{array}{l}\begin{array} { l l c } &&\text { Proportion }\\\text { Activity } & \text { Allocation Base } & \text { of Overhead Cost } \\\hline \text { Material delivery and handling } & \text { Number of deliveries } & 30 \% \\\text { Inspections } & \text { Number of inspections } & 25 \% \\\text { Supervision } & \text { Hours of supervisor time } & 20 \% \\\text { Purchasing } & \text { Number of purchase orders } & 25 \%\end{array}\end{array}$$
The number of activities for standard and custom-made cabinets is as follows:
$\begin{array}{lrr}&\underline{\text { Standard }} &\underline{\text { Custom-made }} \\\text {Number of deliveries }&200 & 100 \\\text {Number of inspections }&600 & 400 \\\text {Hours of supervisor time }&1800 & 2200 \\\text {Number of purchase orders}&1000 & 1000\end{array}$

During the past year, Wake accepted a customer order for a set of custom-made cabinets that would require the following:
$\begin{array}{lr}\text { Direct labour cost ( } 25 \text { hours at } \$ 15 \text { per hour) } & \$ 75 \\\text { Direct materials (wood) ( } 900 \mathrm{ft} \text { at } \$ 3.00 \text { per foot) } & \$ 2700 \\\text { Number of deliveries } & 3 \\\text { Number of inspections } & 5 \\\text { Hours of supervisor time } & 3\end{array}$

-What is the total product (manufacturing)cost for the above customer order?

A) $4050
B) $ 285
C) $3360
D) $ 975

Question 52

Aunt Lucy’s Candies
Aunt Lucy’s Candies sells standard and premium chocolate confectionary through its catalogue business. Many of the confectionary are sold in bulk to other companies. Last year, the company incurred $300 000 in overhead costs. After implementing activity-based costing (ABC), the company’s controller identified the following information:
$$\begin{array} { l l c } \text { Activity } & \text { Allocation Base } & \text { Proportion of Overhead Cost } \\\hline \text { Purchasing } & \text { Number of purchase orders } & 30 \% \\\text { Processing } & \text { Number of units } & 50 \% \\\text { Sales } & \text { Number of sales orders } & 20 \%\end{array}$$
The number of activities for standard and premium confectionary is as follows:
$\begin{array}{lrr}&\underline{\text { Standard} } &\underline{ \text { Premium }} \\\text {Number of purchase orders}&4000& 2000 \\\text { Number of units }&200000 & 100000 \\\text {Number of sales orders}&3000 & 1000\end{array}$

-What is the overhead rate for the purchasing activity?

A) $15.00
B) $ .07
C) $50.00
D) $ 1.07

Question 53

Wake Construction
Wake Construction manufactures and installs standard and custom-made cabinetry for residential homes. Last year, the company incurred $200 000 in overhead costs. After implementing activity-based costing (ABC), the company’s accountant identified the following related information:
$$\begin{array}{l}\begin{array} { l l c } &&\text { Proportion }\\\text { Activity } & \text { Allocation Base } & \text { of Overhead Cost } \\\hline \text { Material delivery and handling } & \text { Number of deliveries } & 30 \% \\\text { Inspections } & \text { Number of inspections } & 25 \% \\\text { Supervision } & \text { Hours of supervisor time } & 20 \% \\\text { Purchasing } & \text { Number of purchase orders } & 25 \%\end{array}\end{array}$$
The number of activities for standard and custom-made cabinets is as follows:
$\begin{array}{lrr}&\underline{\text { Standard }} &\underline{\text { Custom-made }} \\\text {Number of deliveries }&200 & 100 \\\text {Number of inspections }&600 & 400 \\\text {Hours of supervisor time }&1800 & 2200 \\\text {Number of purchase orders}&1000 & 1000\end{array}$

During the past year, Wake accepted a customer order for a set of custom-made cabinets that would require the following:
$\begin{array}{lr}\text { Direct labour cost ( } 25 \text { hours at } \$ 15 \text { per hour) } & \$ 75 \\\text { Direct materials (wood) ( } 900 \mathrm{ft} \text { at } \$ 3.00 \text { per foot) } & \$ 2700 \\\text { Number of deliveries } & 3 \\\text { Number of inspections } & 5 \\\text { Hours of supervisor time } & 3\end{array}$

-How much overhead should be applied to the above customer order?

A) $4050
B) $ 285
C) $3360
D) $ 975

Question 54

Activity-based costing (ABC):

A) should not be applied to non-manufacturing activities.
B) should not be applied to service companies.
C) can be applied to administrative activities.
D) can only be used by manufacturing companies.

Question 55

Johnson Manufacturing
Johnson Manufacturing anticipates incurring $500 000 in overhead costs this year. After implementing activity-based costing (ABC), the company’s controller identified the following related information:
$$\begin{array} { l l c } \text { Activity } & \text { Allocation Base } & \text { Proportion of Overhead Cost } \\\hline \text { Purchasing } & \text { Number of purchase orders } & 20 \% \\\text { Machine setups } & \text { Number of setups } & 15 \% \\\text { Production } & \text { Number of machine hours } & 65 \%\end{array}$$
The number of activities expected is as follows:
$\begin{array}{llcc} \text { Total number of purchase orders } &4000\\ \text { Total number of setups } &2000\\ \text { Total number of machine hours} &10000\\\end{array}$


-How much total overhead will be allocated to the production activity?

A) $500 000
B) $325 000
C) $ 10 000
D) $312 500

Question 56

Aunt Lucy’s Candies
Aunt Lucy’s Candies sells standard and premium chocolate confectionary through its catalogue business. Many of the confectionary are sold in bulk to other companies. Last year, the company incurred $300 000 in overhead costs. After implementing activity-based costing (ABC), the company’s controller identified the following information:
$$\begin{array} { l l c } \text { Activity } & \text { Allocation Base } & \text { Proportion of Overhead Cost } \\\hline \text { Purchasing } & \text { Number of purchase orders } & 30 \% \\\text { Processing } & \text { Number of units } & 50 \% \\\text { Sales } & \text { Number of sales orders } & 20 \%\end{array}$$
The number of activities for standard and premium confectionary is as follows:
$\begin{array}{lrr}&\underline{\text { Standard} } &\underline{ \text { Premium }} \\\text {Number of purchase orders}&4000& 2000 \\\text { Number of units }&200000 & 100000 \\\text {Number of sales orders}&3000 & 1000\end{array}$

-What is the overhead rate for the sales activity?

A) $15.00
B) $ .13
C) $12.00
D) $ 1.00

Question 57

If Job #229 required 5 purchase orders,10 shipments,8 machine setups,and 4 inspections to fill,how much overhead should be assigned to Job #229?

A) $ 4.06
B) $303.75
C) $580.00
D) $ 85.50

Question 58

Which of the following is false regarding activity-based costing (ABC)?

A) Companies that have a high potential for cost distortions are more likely to benefit with ABC.
B) Opportunities for continuous improvement are rarely revealed by using ABC.
C) The cost of implementing ABC may outweigh the benefits.
D) Increased accuracy with budgeting resources is often realised.

Question 59

Which of the following statements regarding service companies and activity-based costing (ABC)is true?

A) Service companies are not permitted to use ABC costing.
B) Service companies find it easier to use ABC costing than manufacturing companies.
C) Fewer repetitive activities make ABC costing more difficult to implement in service companies.
D) Service companies have proportionately less facility-level costs than manufacturing companies.

Question 60

Compton Corporation
The following overhead cost information is available for Compton Corporation for 2006:
$$\begin{array} { l l c } \text { Activity } & \text { Allocation Base } & \text { Overhead Cost } \\\hline \text { Purchasing } & \text { Number of purchase orders } & \$ 100000 \\\text { Receiving } & \text { Number of shipments received } & 60000 \\\text { Machine setups } & \text { Number of setups } & 150000 \\\text { Quality control } & \text { Number of inspections } & 50000\end{array}$$
During the year, 5000 purchase orders were issued; 20 000 shipments were received; 3000 machine setups were performed; and 4000 inspections were conducted.

-What is the overhead rate for the purchasing activity?

A) $ .05
B) $20.00
C) $72.00
D) $ 3.13

Question 61

Ken's Carpets sells carpet for both residential and business use.To better estimate costs,the company recently adopted an activity-based costing system.Last year,the company incurred $300 000 in overhead costs.Based on an intense study of their company,the following activities,allocation bases,and percentages of overhead costs were determined:
$\begin{array}{ll}\text { Activity } & \text { Allocation Base }&\text { Proportion of Overhead Cost } \\\hline \text { Purchasing } & \text { Number of purchase orders } &25\%\\\text { Materials processing } & \text { Number of square feet }&50\% \\\text { Sales } & \text { Numher of sales orders }&25\%\end{array}$

The number of activities for residential and business is as follows:
$\begin{array}{lrr} &\underline{\text { Residential}} &\underline{ \text { Business} } \\ \text {Number of purchase orders } &700&500\\ \text { Number of square feet } &4000000&2000000\\\text { Numher of sales ntrlere }&400&100\end{array}$

Required:
A. Calculate the tatal cverhead that should be allocated to each af the three actrites.
B. Calculate the averhead rates for each of the three activities.
C. If a particular residential job reqquires 4 purchase arders and 1 sales arder far tatal af 1500 square feet of carpet how much cverhead should be allocated to the job?

Question 62

Can activity-based costing (ABC)be used by service companies? If so,is the implementation of an ABC system in a service company different than that of a manufacturing company?

Question 63

Which of the following is a likely advantage in activity-based costing (ABC)?

A) A decrease in the need to maintain accurate cost driver information
B) A decrease in the need to maintain accurate overhead cost information
C) An increase in the ability to trace indirect costs to specific activities
D) As increase in the cost of accumulating,tracking,and assigning costs to products and services

Question 64

What is meant by the term 'activity' in activity-based costing (ABC)? How are costs allocated in ABC?

Question 65

Mountaineer Tents manufactures and sells heavy and light duty tents to various outdoor retailers.To better estimate costs,the company recently adopted an activity-based costing system.Last year,the company incurred $900 000 in overhead costs.Based on an intense study of their company,the following activities,allocation bases,and percentages of overhead costs were determined:
$\begin{array}{llc}\text { Activity } & \text { Allocation Base } & \text { Proportion of Overhead cost } \\\hline \text { Purchasing } & \text { Number of purchase orders } & 55 \% \\\text { Inspections } & \text { Number of inspections } & 20 \% \\\text { Sales } & \text { Numher of sales nrders } & 25 \%\end{array}$

The number of activities for heavy and light duty tents is as follows:
$\begin{array}{lrr}& \underline{\text { Heavy-duty}}&\underline{\text { Light-duty}}\\\text { Number of purchase orders } & 5000 & 4000 \\\text { Number of inspections } & 3000 & 1000 \\\text { Number of sales nrders } & 800 & 400\end{array}$
Required:
A. Calculate the tatal cverhead that should be allacated to each of the three actrities.
B. Calculate the averhead rates for each of the three activities.
C. If a single sales arder requires 10 purchase arders and 30 inspections to fill how much cverhead should be agplied to the order?

Question 66

Classify each of the following costs as unit-level (U),batch-level (B),product-level (P),or facility-level (F).
$\begin{array}{c}\begin{array}{lll} \text {Factory supples}&\underline{\quad\quad}\\ \text {Product development costs}&\underline{\quad\quad}\\ \text {Depreciation of set-up equipment}&\underline{\quad\quad}\\ \text {Salaries of product engineers}&\underline{\quad\quad}\\ \text {Repairs of factory machinery}&\underline{\quad\quad}\end{array}\begin{array}{lll}\text {Factory insurance}&\underline{\quad\quad}\\\text {Depreciation of factory equipment}&\underline{\quad\quad}\\\text {Utilities costs for factory machinery}&\underline{\quad\quad}\\\text {Salary of plant manager}&\underline{\quad\quad}\\\text {Factory rent}&\underline{\quad\quad}\end{array}\end{array}$

Question 67

What are the benefits and limitations of activity-based costing (ABC)systems?

Question 68

When comparing traditional product costing and activity-based costing (ABC),which kind(s)of costs are allocated to products in a similar manner and which kind(s)are allocated to products in a different manner? Explain your answers.

Question 69

The following overhead cost information is available for Millennium Inc.for 2009:
$\begin{array}{llc}\text { Activity } & \text { Allocation Base } & \text { Overhead Cost } \\\hline \text { Purchasing } & \text { Number of purchase orders } & \$ 300000 \\\text { Machine setups } & \text { Number of setups } & 150000 \\\text { Ouality control } & \text { Number of inspections } & 50000\end{array}$
During the year,4000 purchase orders were issued;8000 machine setups were performed;and 2000 inspections were conducted.
Required:
A. Calculate the dverhead rates for each of the three actrytaes.

B. If a particular job requures 10 purchase orders, 6 setups, and 5 inspections to fill, how much cverhead should be agplied to the job?

Question 70

Which of the following is true regarding activity-based costing (ABC)?

A) The benefits of using ABC always outweigh its limitations.
B) The lower the proportion of overhead costs as compared to direct materials and direct labour costs,the more likely a company will benefit by using ABC.
C) Companies with a high-proportion of non-unit-level costs should rarely use ABC.
D) High measurement costs associated with ABC may deter some companies from its use.

Question 71

Thurman Brothers Construction manufactures and installs standard and custom-made cabinetry for residential homes.Last year,the company incurred $600 000 in overhead costs when a total of 10 000 direct labour hours were incurred.After implementing activity-based costing (ABC),the company's accountant identified the following related information:
$\begin{array}{llc}&&\text { Proportion of }\\\text { Activity } & \text { Allocation Base } & \text { Overhead Cost } \\\hline \text { Material delivery and handling } & \text { Number of deliveries } & 30 \% \\\text { Inspections } & \text { Number of inspections } & 25 \% \\\text { Supervision } & \text { Hours of supervisor time } & 20 \% \\\text { Purchasing } & \text { Number of purchase orders } & 25 \%\end{array}$
The number of activities for standard and custom-made cabinets is as follows:
$\begin{array}{lrr}&\underline{\text { Standard }} &\underline{\text { Custom-made }}\\\text { Number of deliveries } & 500 & 700 \\\text { Number of inspections } & 600 & 400 \\\text { Hours of supervisor time } & 1000 & 2000 \\\text { Number of purchase orders } & 800 & 400\end{array}$
During the past year,Thurman accepted a customer order for a set of custom-made cabinets that would require the following:
$\begin{array}{llcc} \text {Direct labour hours } &45\\ \text {Number of deliveries } &4\\ \text {Number of inspections } &5\\ \text { Hours of supervisor time } &2\\ \text {Number of purchase orders } &4\\\end{array}$

Required:
A. How much cverhead would be appled to the job if trachional costing using direct labour hours as the cost driver were used?

B. Using activity-based costing (ABC), what wauld be the averhead rate far each of the four activities?

C. Using activity-based costing (ABC), what wauld be the tatal averhead applied to the abuve jab?

D. Compare the averhead applied using traditional costing to ABC costing and remark an the difference. Which ane do you think is more accurate?

Question 72

Give two examples for each of the four types of cost classifications.
$\begin{array}{llcc} \text {Unit-level: } &1.\\&2.\\\\ \text { Batch-level: } &1.\\&2.\\\\ \text {Product-level: } &1.\\&2.\\\\ \text {Facility-level: } &1.\\&2.\\\\\end{array}$

Question 73

Discuss how the shift from labour intensive manufacturing to automation has affected product costing.

Question 74

The following overhead cost information is available for Lowman Inc.for 2006: $\begin{array}{llc}\text { Activity } & \text { Allocation Base } & \text { Overhead Cost } \\\hline \text { Purchasing } & \text { Number of purchase orders } & \$ 200000 \\\text { Machine setups } & \text { Number of setups } & 80000 \\\text { Ouality control } & \text { Number of inspections } & 60000\end{array}$

During the year,2000 purchase orders were issued;500 machine setups were performed;and 1500 inspections were conducted.
Required:
A. Calculate the cverhead rates far each of the three activites.
B. If a particular job requires 8 purchase arders, 3 setups, and 4 inspections to fill, how much [verhead should be applied to the job?

Question 75

For each of the following activities,identify one potential cost driver.
a.
Repair and maintenance of factory equipment
b.
Supplies for factory
c.
Purchasing
d.
Quality control inspections
e.
Machine setups

Question 76

Identify and define each of the four general types of cost classifications used with activity-based costing (ABC).

Question 77

Define 'cross subsidies' and say what kind of product costing system is likely to have them.What happens to cross subsidies in activity-based costing (ABC)?

Question 78

Which of the following would be a likely disadvantage of activity-based costing (ABC)?

A) A decrease in a company's ability to accurately prepare budgets for the upcoming period
B) A decrease in a company's ability to find opportunities for continuous improvement
C) An increase in the accuracy of product cost information
D) An increase in the cost of obtaining accurate product cost information