Deck 17: Activity-Based Costing and Analysis

Question 1

Departments are the cost objects when the plantwide overhead rate method is used.

Answer 1

False

Question 2

Examples of volume-related measures include direct labor hours, direct labor cost dollars and machine hours.

Answer 2

True

Question 3

Data concerning volume-related measures are readily available in most manufacturing settings.

Answer 3

True

Question 4

A cost pool is a collection of costs that are related to the same or similar activity.

Question 5

A major disadvantage of using a plantwide overhead rate is the extreme difficulty in gathering the needed information.

Question 6

Management's pricing and cost decisions for a product are influenced by that product's cost assignments.

Question 7

The premise of ABC is that it takes activities to make products and provide services and these activities drive costs.

Question 8

The plantwide overhead rate is determined by using volume-related measures.

Question 9

The usefulness of overhead allocations based on a plantwide overhead rate depends on two crucial assumptions: (1) the overhead cost is correlated with the allocation base; and (2) all products use overhead cost in dissimilar proportions.

Question 10

Activity-based costing first assigns costs to products and then uses these product costs to assign costs to manufacturing activities.

Question 11

The departmental overhead rate method uses a different overhead rate for each production department.

Question 12

Multiple cost pools are used when allocating overhead using the plantwide overhead rate method.

Question 13

Products are the first stage cost objects when using a departmental overhead rate method.

Question 14

In competitive markets, the price of a given product is established through the forces of supply and demand.

Question 15

The cost to heat a manufacturing facility can be directly linked to the number of units produced.

Question 16

Distorted product cost information can result in poor decisions.

Question 17

The departmental overhead rate method allows each department to have its own overhead rate and its own allocation base.

Question 18

By definition, costs classified as overhead are consumed in basically the same manner regardless of the process involved.

Question 19

Product costs consist of direct labor, direct materials, manufacturing overhead and indirect costs.

Question 20

Activities are the cost objects of the second stage of ABC.

Question 21

If the direct labor time estimates are met, Kudzu will allocate $10.50 of overhead cost to each unit of Little X.
2 units of Little X are produced each hour.
$21/2 = $10.50

Question 22

Some companies allocate their overhead cost using a plantwide overhead rate largely because of its simplicity.

Question 23

Overhead costs are often affected by many issues and are frequently too complex to be explained by any one factor.

Question 24

When products differ in batch size and complexity, they usually consume different amounts of overhead resources.

Question 25

A company estimates that costs for the next year will be $600,000 for indirect labor, $40,000 for factory utilities and $1,000,000 for the CEO's salary. The company uses machine hours as its overhead allocation base. If 80,000 machine hours are planned for this next year, then the plantwide overhead rate is $8 per machine hour.

Question 26

Allocated overhead costs vary depending upon the allocation methods used.

Question 27

The first step in using the departmental overhead rate method requires that overhead be traced to each of the company's departments.

Question 28

The departmental overhead rate method traces costs to each department and then determines an allocation base for each department.

Question 29

The use of a plantwide overhead rate is not acceptable for external reporting under GAAP.

Question 30

Because departmental overhead costs are allocated based on measures closely related to production volume, they accurately assign overhead, such as utility costs.

Question 31

Kinetic Company estimates that overhead costs for the next year will be $1,600,000 for indirect labor and $400,000 for factory utilities. The company uses direct labor hours as its overhead allocation base. If 50,000 direct labor hours are planned for this next year, then the plantwide overhead rate is $.025 per direct labor hour.

Question 32

Compared to the departmental overhead rate method, the plantwide overhead rate method usually results in more accurate overhead allocations.

Question 33

Kudzu Company sells two products Big X and Little X. Current direct material and direct labor costs are detailed below. Next year, the company wishes to use a plantwide overhead rate with direct labor hours as its allocation base. Next year's overhead is estimated to be $525,000. The direct labor and direct materials costs are estimated to be consistent with the current year. Direct labor costs $20 per hour and the company expects to manufacture 16,000 units of Big X and 18,000 units of Little X next year.
$\begin{array}{|c|c|c|}\hline & \text { Direct } & \text { Direct } \\& \text { Material } & \text { Labor Dollars } \\&\text { Per Unit } & \text { Per Unit } \\\hline \text { Big X } & \$ 5 & \$ 20 \\\hline \text { Little X } & \$ 3 & \$ 10 \\\hline\end{array}$

-Kudzu has 34,000 total estimated direct labor hours for next year.
Direct labor hours per unit of Big X = $20/$20 = 1 DLH
Direct labor hours per unit of Little X = $10/$20 = .5 DLH
Estimated direct labor hours = (1 x 16,000) + (.5 x 18,000) = 25,000 direct labor hours

Question 34

ABC is significantly less costly to implement and maintain than more traditional overhead costing systems.

Question 35

Kudzu Company sells two products Big X and Little X. Current direct material and direct labor costs are detailed below. Next year, the company wishes to use a plantwide overhead rate with direct labor hours as its allocation base. Next year's overhead is estimated to be $525,000. The direct labor and direct materials costs are estimated to be consistent with the current year. Direct labor costs $20 per hour and the company expects to manufacture 16,000 units of Big X and 18,000 units of Little X next year.
$\begin{array}{|c|c|c|}\hline & \text { Direct } & \text { Direct } \\& \text { Material } & \text { Labor Dollars } \\&\text { Per Unit } & \text { Per Unit } \\\hline \text { Big X } & \$ 5 & \$ 20 \\\hline \text { Little X } & \$ 3 & \$ 10 \\\hline\end{array}$

-Kudzu's plantwide overhead rate will be $21 per direct labor hour next year.
Plantwide overhead rate = $525,000/25,000 DLH = $21 per DLH

Question 36

When using the plantwide overhead rate method, total budgeted overhead costs are combined into one overhead cost pool.

Question 37

Turtle Company produces t-shirts which go through two operations, cutting and sewing, before they are complete. Expected costs and activities for the two departments are shown below. Given this information, the departmental overhead rate for the cutting department based on direct labor hours is $2.69 per direct labor hour (rounded to two decimals).
$\begin{array}{ccc} & \text { Cutting } & \text { Sewing } \\\text { Direct labor hours } & 250,000 & 75,000 \mathrm{DLH}\\&\text { DLH }\\\text { Machine hours } & 125,000 & 150,000 \mathrm{MH} \\& \mathrm{MH} & \\\text { Overhead costs } & \$ 500,000 & \$ 375,000\end{array}$

Question 38

ABC can be used to assign costs to any cost object that is of management interest.

Question 39

A company estimates total overhead costs for the next year to be $1,500,000 and wishes to use direct labor hours as it overhead allocation base. This company makes two products: (1) Fancy X, which requires 3 direct labor hours per unit; and (2) Plain X, which requires 1 direct labor hour per unit. If the company plans to make 20,000 units of Fancy X and 20,000 units of Plain X then each unit produced will be allocated the same amount of overhead.

Question 40

ABC allocates overhead costs to products based on input measures rather than output measures.

Question 41

Machine setup costs are an example of a batch level activity.

Question 42

A company produces computer chips which go through two operations, operation A1 and operation B2, before they are complete. Expected costs and activities for the two departments are shown below. Departmental overhead rates are based on machine hours in department A1 and direct labor hours in department B2. Therefore, the overhead rates for department A1 and department B2 are $3.62 per machine hour and $5.73 per direct labor hour, respectively.
$$\begin{array} { l c c } & \text { Department } & \text { Department } \\& \mathrm { A } 1 & \mathrm {~B} 2 \\\text { Machine hours } & 40,000 \mathrm { MH } & 30,000 \mathrm { MH } \\\text { Direct labor hours } & 36,200 \mathrm { DLH } & 28,650 \mathrm { DLH } \\\text { Overhead costs } & \$ 144,800 & \$ 171,900\end{array}$$

Question 43

A company produces garden benches which go through two operations, operation 1A1 and operation 2B2, before they are complete. Expected costs and activities for the two departments are shown below. Both departments have departmental overhead rates based on machine hours. Therefore, the overhead rates for department 1A1 and department 2B2 are the same.
$\begin{array}{lcc}&\text { Department } & \text { Department } \\&1 \mathrm{~A} 1 & 2 \mathrm{~B} 2\\\text { Machine hours } & 70,000 \mathrm{MH} & 60,000 \mathrm{MH} \\\text { Direct labor hours } & 56,350 \mathrm{DLH} & 50,160 \mathrm{DLH} \\\text { Overhead costs } & \$ 225,400 & \$ 250,800\end{array}$

Question 44

Which types of overhead allocation methods result in the use of more than one overhead rate during the same time period?

A) Plantwide overhead rate method and departmental overhead rate method.
B) Cost pool overhead rate method and plantwide overhead rate method.
C) Departmental overhead rate method and activity based costing.
D) Activity-based costing and plantwide overhead rate method.
E) Departmental overhead rate method and cost pool overhead rate method.

Question 45

Batch level costs vary with the number of units produced.

Question 46

The more activities tracked by activity-based costing, the more accurately overhead costs are assigned.

Question 47

Activities causing overhead cost in an organization are typically separated into four levels: (1) direct activities, (2) indirect activities, (3) batch level activities, and (4) facility level activities.

Question 48

A method of assigning overhead costs to a product using a single overhead rate is:

A) Plantwide overhead rate method.
B) Cost pool overhead rate method.
C) Departmental overhead rate method.
D) Activity-based costing.
E) Overhead cost allocation method.

Question 49

Product level costs do not vary with the number of units or batches produced.

Question 50

Facility level costs are not traceable to individual product lines, batches or units.

Question 51

The final step of activity-based costing assigns overhead costs to pools rather than to products.

Question 52

A company produces surgical equipment which goes through threes processes, 1A1, 2B2 and 3C3, before they are complete. Expected costs and activities for the three departments are shown below. All departments have departmental overhead rates based on direct labor hours. Therefore, the overhead rate for each department is $5 per direct labor hour.
$$\begin{array} { l c c c } & \text { Department } & \text { Department } & \text { Department } \\& 1 \mathrm {~A} 1 & 2 \mathrm {~B} 2 & 3 \mathrm { C } 3 \\\text { Machine hours } & 15,000 \mathrm { MH } & 25,000 \mathrm { MH } & 20,000 \mathrm { MH } \\\text { Direct labor hours } & 22,830 \mathrm { DLH } & 10,650 \mathrm { DLH } & 29,200 \mathrm { DLH } \\\text { Overhead costs } & \$ 114,150 & \$ 213,000 & \$ 73,000\end{array}$$

Question 53

Facility level costs vary with the number of units or batches produced.

Question 54

Product design costs are an example of a unit level activity.

Question 55

In activity-based costing, an activity can involve several related tasks.

Question 56

Activity-based costing involves four steps: (1) identify activities and the costs they cause, (2) group similar activities into cost pools, (3) determine an activity rate for each activity cost pool, and (4) allocate overhead costs to products using those activity rates.

Question 57

Activity-based costing eliminates the need for overhead allocation rates.

Question 58

Activity-based costing often shifts overhead costs from large volume, standardized products to low-volume, specialty products that consume disproportionate resources.

Question 59

A company produces paint which goes through two operations, operation A and operation B, before it is complete. Expected costs and activities for the two departments are shown below. Given this information, the departmental overhead rate for Department B based on machine hours is $4.00 per machine hour.
$$\begin{array} { l c c } & \text { Department } & \text { Department } \\& \mathrm { A } & \mathrm { B } \\\text { Machine hours } & 50,000 \mathrm { MH } & 60,000 \mathrm { MH } \\\text { Direct labor hours } & 78,500 \mathrm { DLH } & 100,800 \mathrm { DLH } \\\text { Overhead costs } & \$ 392,500 & \$ 403,200\end{array}$$

Question 60

A company produces heating elements which go through two operations, casting and assembling, before they are complete. Expected costs and activities for the two departments are shown below. Given this information, the departmental overhead rate for the assembling department based on direct labor hours is $5 per direct labor hour.
$$\begin{array} { l c c } & \text { Casting } & \text { Assembling } \\\text { Direct labor hours } & 1,875 \mathrm { DLH } & 7,500 \mathrm { DLH } \\\text { Machine hours } & 12,500 \mathrm { MH } & 3,750 \mathrm { MH } \\\text { Overhead costs } & \$ 75,000 & \$ 37,500\end{array}$$

Question 61

Which of the following statements is true with regard to the plantwide overhead rate method?

A) The rate is determined using volume-related measures.
B) It is logical to use this method when overhead costs are not closely tied to volume-related measures.
C) This method uses multiple overhead rates.
D) The rate is determined using measures that are not closely related to volume.
E) The method provides the most accurate means of allocating overhead costs.

Question 62

Which of the following is a disadvantage of the departmental overhead rate method?

A) The departmental overhead rate method assigns overhead on the basis of volume-related measures.
B) The departmental overhead rate method is more refined than the plantwide overhead rate method.
C) The departmental overhead rate method does not assign overhead on the basis of volume-related measures.
D) The departmental overhead rate method is simpler and less costly to implement than the plantwide rate method.
E) There are no disadvantages of the departmental overhead rate method.

Question 63

What are three advantages of activity-based costing over traditional volume-based allocation methods?

A) Ease of use, more accurate product costing, and more effective cost control.
B) Fewer allocation bases, ease of use, and a direct correlation to production volume.
C) More accurate product costing, more effective cost control, and better focus on the relevant factors for decision making.
D) More accurate product costing, fewer cost objects, and a direct correlation to production volume.
E) More accurate product costing, ease of use, less costly to implement.

Question 64

Which of the following statements is true with regard to activity-based costing rates?

A) The premise of ABC is that activities are what cause costs to be incurred.
B) ABC is another way to refer to a multiple departmental rate situation.
C) There one basic stage to ABC.
D) ABC is simpler and less expensive to implement than other traditional methods of allocating overhead costs.
E) All cost drivers used to determine the rates will be unit-level drivers.

Question 65

Which of the following is true?

A) Overhead costs are often affected by many issues and are frequently too complex to be explained by any one factor.
B) The departmental overhead rate is not usually based on measures closely related to production volume.
C) The departmental overhead rate is most accurate in assigning overhead costs that are not driven by production volume.
D) Allocated overhead costs will be the same no matter which allocation method is used.
E) When cost analysts are able to logically trace cost objects to costs, costing accuracy is improved.

Question 66

Which of the following are advantages of using the plantwide overhead rate method?

A) The use of cost pools is considerably more accurate than other overhead allocations.
B) The necessary information is readily available.
C) It is more accurate than traditional overhead allocations.
D) Each department has its own overhead rate and its own allocation base.
E) It takes into account that when products differ in batch size and complexity, they usually consume different amounts of overhead resources.

Question 67

Which of the following companies would be best served by a plantwide overhead rate?

A) A company which manufactures many different products and whose operations are an equal mix of labor and mechanized work.
B) A company which manufactures few products and whose operations are labor intensive.
C) A company which manufactures many different products and whose operations are highly mechanized.
D) A company whose products use overhead resources in very different ways.
E) A company whose products differ in batch size and complexity, and consume different amounts of overhead resources.

Question 68

Overhead costs:

A) Are directly related to production.
B) Can be traced to units of product in the same way that direct materials can.
C) Cannot be traced to units of product in the same way that direct labor can.
D) Are period costs.
E) Include only fixed costs.

Question 69

The cost object of the departmental overhead rate method is:

A) The unit of product.
B) The production departments of the company.
C) The production departments in the first stage and the unit of product in the second stage.
D) The unit of product in the first stage and the production departments in the second stage.
E) The production activities of the company.

Question 70

Which of the following would not be considered a product cost?

A) Direct labor costs.
B) Factory supervisor's salary.
C) Factory line worker's salary.
D) Cost accountant's salary.
E) Manufacturing overhead costs.

Question 71

From an ABC perspective, what causes costs to be incurred?

A) Financial transactions.
B) The volume of units produced.
C) Debits and credits.
D) Management decisions.
E) Activities.

Question 72

The cost object of the plantwide overhead rate method is:

A) The unit of product.
B) The production departments of the company.
C) The production activities of the company.
D) Manufacturing cost pools.
E) The time period.

Question 73

Ridley Company estimates that overhead costs for the next year will be $6,870,000 for indirect labor and $450,000 for factory utilities. The company uses machine hours as its overhead allocation base. If 160,000 machine hours are planned for this next year, what is the company's plantwide overhead rate?

A) $.02186 per machine hour.
B) $42.9375 per machine hour.
C) $45.75 per machine hour.
D) $2.8125 per machine hour.
E) $.3555 per machine hour.

Question 74

What is the reason for pooling costs?

A) To shift costs from low-volume to high-volume products.
B) It is a budgeting technique designed to accurately track fixed costs.
C) Determining a pool rate for all costs incurred by the same activity reduces the number of cost assignments required.
D) This procedure helps to determine which costs are directly related to production volume.
E) It simplifies departmental overhead costing procedures.

Question 75

What are the main advantages of traditional volume-based allocation methods compared to activity-based costing?

A) Traditional volume-based methods are easier to use and less costly to implement and maintain.
B) Traditional volume-based methods are more accurate and allowed by GAAP.
C) Traditional volume-based methods are less accurate and easier to use.
D) Traditional volume-based methods are harder to use and more costly to implement and maintain.
E) There are no advantages to using traditional volume-based methods.

Question 76

Which of the following is not true?

A) The departmental overhead method assigns overhead on the basis of volume-related measures.
B) The departmental overhead rate method is more refined than the plantwide overhead rate method.
C) Overhead costing accuracy is improved by the use of multiple departmental rates rather than a single overhead rate.
D) The departmental overhead rate method does not assign overhead on the basis of volume-related measures.
E) The departmental overhead rate method is more costly to implement than the traditional overhead rate method.

Question 77

Which of the following statements is true with regard to the departmental overhead rate method?

A) It is logical to use this method when overhead resources are consumed by various products in substantially the same way throughout multiple departments.
B) It is logical to use this method when overhead resources are consumed by various products in substantially different ways throughout multiple departments.
C) Each department has the same rate for the same activity pool.
D) It requires one overhead cost pool and one rate.
E) It is synonymous with Activity Based Costing.

Question 78

The cost object(s) of the activity-based costing method is(are):

A) The unit of product.
B) The production departments of the company.
C) The production activities of the company.
D) The production activities in the first stage and the unit of product in the second stage.
E) The unit of product in the first stage and the production activities in the second stage.

Question 79

A company estimates that overhead costs for the next year will be $9,234,000 for indirect labor and $156,800 for factory utilities. The company uses machine hours as its overhead allocation base. If 500,000 machine hours are planned for this next year, what is the company's plantwide overhead rate? (Round to two decimal places)

A) $0.05 per machine hour.
B) $18.47 per machine hour.
C) $18.78 per machine hour.
D) $0.31 per machine hour.
E) $3.19 per machine hour.

Question 80

K Company estimates that overhead costs for the next year will be $2,900,000 for indirect labor and $800,000 for factory utilities. The company uses direct labor hours as its overhead allocation base. If 80,000 direct labor hours are planned for this next year, what is the company's plantwide overhead rate?

A) $.02 per direct labor hour.
B) $46.25 per direct labor hour.
C) $36.25 per direct labor hour.
D) $10 per direct labor hour.
E) $.10 per direct labor hour.