Deck 9: Activity-Based Costing

Question 1

The department cost allocation method provides more accurate product cost information for managerial decision-making than the plantwide cost allocation method.

Answer 1

True

Question 2

The death spiral concept refers to the process of continually decreasing selling prices to meet foreign competition.

Answer 2

False

Question 3

Predetermined overhead rates are not used in first-stage cost allocations but are used in second-stage cost allocations.

Answer 3

False

Question 4

The number of products produced is an example of a facility-related cost driver in the cost hierarchy

Question 5

The basic difference between the department cost allocation method and activity-based costing (ABC)is the number of stages involved in allocating costs to products.

Question 6

If a company has identified three major activities as setting up,handling material,and assembling,possible cost drivers would most likely be set-up hours,production runs,and number of shipments,respectively.

Question 7

A cost hierarchy classifies cost drivers by general dimensions or levels of activity.

Question 8

The death spiral can occur even in firms with increasing demand.

Question 9

Direct labor cost (DLC)and direct labor hours (DLH)are examples of volume-related cost drivers in the cost hierarchy.

Question 10

The basic difference between a first-stage cost allocation and a second-stage cost allocation is that cost pools are not used in first-stage cost allocations.

Question 11

The single-stage cost allocation system uses a plantwide rate because the cost pool is the entire plant.

Question 12

Activity-based costing is based on the concept that products produce activities and activities produce resources.

Question 13

Any discrete task that an organization undertakes to make or deliver a product or service is known as a stage.

Question 14

The basic approach in product costing is to allocate costs in the cost pools to the individual cost objects,which are the products or services of interest.

Question 15

When applying activity based costing,the first step would be to compute the cost driver rates.

Question 16

The plantwide cost allocation method should be used by companies that manufacture products that are similar and use the same resources.

Question 17

If a company manufactures diverse products using different sets of resources in a plant,it is best to use a plantwide allocation rate.

Question 18

Activity-based costing (ABC)is a two-stage cost allocation system that (1)allocates costs to activities and (2)then to products based on their use of the activities.

Question 19

Using the department allocation method,a company establishes a separate overhead allocation rate for each department.

Question 20

The plantwide allocation concept cannot be used in nonmanufacturing organizations.

Question 21

Time-driven activity based costing (TDABC)is more costly to implement than an unmodified activity-based costing system.

Question 22

A two-stage system first allocates costs to:

A) products or services and then allocates costs to departments or activities.
B) the cost driver and then allocates costs to the cost hierarchy.
C) a product line and then allocates costs to the department.
D) departments or activities and then allocates costs to products or services.

Question 23

Using direct labor costs to allocate overhead costs in an activity-based costing (ABC)system will encourage management to reduce labor costs.

Question 24

The flow of activity-based costs through the ledger is the same as their flow using traditional methods except that the accounts are based on activities,not departments.

Question 25

When product costs are used for decision-making,what assumption is most likely to distort the decisions?

A) There is a proportionality of overhead costs and output,regardless of whether a product is dropped or not.
B) Some overhead estimates can decrease when a product is dropped.
C) Some overhead costs could be fixed when a product is dropped.
D) The cost accounting system treats all overhead as if it were variable with respect to the allocation base.

Question 26

In general,traditional product costing methods allocate less cost to low-volume products and more costs to high-volume products than activity-based costing (ABC).

Question 27

When a department or product line is dropped,the common fixed costs which had been allocated to that department:

A) are eliminated.
B) become variable costs.
C) are allocated to the remaining departments or product lines.
D) become sunk costs.

Question 28

Installing activity-based costing requires teamwork among employees and departments within an organization.

Question 29

Activity-based costing (ABC)provides more detailed measures of costs than do plantwide or department allocation methods.

Question 30

It is possible to apply activity-based costing (ABC)to segments of an organization without applying it to the entire organization.

Question 31

Activity-based costs are a function of both volume and complexity.

Question 32

Activity-based costing (ABC)can be applied to administrative activities (e.g. ,purchasing)but not to marketing activities.

Question 33

Time equations can be used in extended time-driven activity based costing (TDABC)systems to allow managers to adjust the times for orders with different characteristics.

Question 34

Individual ABC systems do not vary because there is one ABC method.

Question 35

Before using activity-based costing (ABC),managers must apply the cost-benefit principle to the additional recordkeeping costs associated with ABC.

Question 36

Traditional product costing systems (e.g. ,job and process costing)are designed primarily:

A) To derive an allocation base.
B) To ensure that a single cost driver allocation base leads to appropriate managerial decisions.
C) To accumulate cost information for financial reporting.
D) To accumulate cost information for managerial decisions.

Question 37

Within a purchasing department,the activity of placing orders could best be costed by a cost driver of the potential number of vendors.

Question 38

In general,low-volume products (and services)have a lower degree of complexity associated with them.

Question 39

Activity-based costing is so beneficial because it provides more information about product costs but requires less recordkeeping.

Question 40

When overhead is applied based on the volume of output,high-volume products tend to "subsidize" low-volume products.

Question 41

Which of the following measures is used by activity-based costing (ABC)systems as an allocation base for allocating overhead costs to the units produced?

A) Volume-related activities.
B) Batch-related activities.
C) Product-related activities.
D) Need-related activities.

Question 42

Which of the following would not be a batch-related activity?

A) Setting up a machine for a new production run.
B) Performing 100% inspection.
C) Purchasing materials.
D) Processing a customer order.

Question 43

Which of the following costs is not related to a batch-related activity?

A) Material handling.
B) Machine setups.
C) Shipping costs.
D) Compliance costs.

Question 44

Which of the following should not be used as the allocation base in a company that appropriately uses a single plantwide rate?

A) Sales volume.
B) Machine hours.
C) Material costs.
D) Direct labor cost.

Question 45

The electricity used for production machinery would be classified as a:

A) volume-related activity.
B) batch-related activity.
C) product-related activity.
D) facility-related activity.

Question 46

Property taxes are an example of a cost that would be considered to be:

A) Unit-level.
B) Batch-level.
C) Product-level.
D) Organization-sustaining.

Question 47

Cost pools are used with: $$\begin{array} { | c | c | c | } \hline & \text { Plantwide Rates } & \text { Department Rates } \\\hline \text { A. } & \text { Yes } & \text { No } \\\hline \text { B. } & \text { No } & \text { Yes } \\\hline \text { C. } & \text { No } & \text { No } \\\hline \text { D. } & \text { Yes } & \text { Yes } \\\hline\end{array}$$

A) Option A
B) Option B
C) Option C
D) Option D

Question 48

Multiple (departmental)manufacturing overhead rates are considered preferable to a single (plantwide)overhead rate when: (CMA adapted)

A) manufacturing is limited to a single product flowing through identical departments in a fixed sequence.
B) various products are manufactured that do not pass through the same departments or use the same manufacturing techniques.
C) individual cost drivers cannot accurately be determined with respect to cause-and-effect relationships.
D) the single or plantwide rate is related to several identified cost drivers.

Question 49

Personnel administration is an example of a:

A) unit-level activity.
B) batch-level activity.
C) product-level activity.
D) organization-sustaining activity.

Question 50

Which of the following measures is used by traditional costing systems as an allocation base for allocating overhead costs to the units produced?

A) Volume-related activities.
B) Batch-related activities.
C) Product-related activities.
D) Facility-related activities.

Question 51

Which of the following activities would be classified as a batch-level activity?

A) Setting up equipment.
B) Designing a new product.
C) Training employees.
D) Milling a part required for the final product.

Question 52

Which of the following would be least likely to be used as an allocation base in a company that applies a single plantwide rate?

A) Machine hours.
B) Direct material costs.
C) Direct labor cost.
D) Direct labor hours.

Question 53

The classification of cost drivers into general levels of activity,volume,batch,product,and so on is known as:

A) cost allocation.
B) value-added costing.
C) a cost hierarchy.
D) cost driver management.

Question 54

First stage cost objects do not include:

A) Supplies
B) Depreciation
C) Maintenance and Repair Costs
D) Direct materials

Question 55

Activity-based costing (ABC)is a costing technique that uses a two stage allocation process.Which of the following statements best describes these two stages?

A) The costs are assigned to activities,and then to the products based upon their use of the activities.
B) The costs are assigned to departments,and then to the products based upon their use of activity resources.
C) Service department costs are allocated to the production departments,and then to the products based upon their use of the activities.
D) Indirect costs are assigned to activities,and then to the products based upon the direct cost resources used by the activities.

Question 56

Would the following activities at a manufacturer of canned soup be best classified as unit-level,batch-level,product-level,or organization-sustaining activities? $$\begin{array} { | c | c | c | } \hline & \begin{array} { c } \text { Researching new } \\\text { recipes }\end{array} & \begin{array} { c } \text { Shipping orders to grocery } \\\text { stores }\end{array} \\\text { A. } & \text { Unit } & \text { Unit } \\\hline \text { B. } & \text { Batch } & \text { Batch } \\\hline \text { C. } & \text { Product } & \text { Unit } \\\hline \text { D. } & \text { Product } & \text { Batch } \\\hline\end{array}$$

A) Option A
B) Option B
C) Option C
D) Option D

Question 57

The basic difference between a first-stage cost allocation and a second-stage cost allocation is that:

A) cost pools are not used in first-stage cost allocations.
B) predetermined overhead rates are used in first-stage cost allocations but not in second-stage cost allocations.
C) the first stage prohibits firms from aligning the allocation of costs with the use of resources.
D) when used in an ABC system,the first stage assigns costs to activities.

Question 58

The number of services provided by an accounting firm would be classified as an:

A) volume-related activity.
B) batch-related activity.
C) product-related activity.
D) facility-related activity.

Question 59

Which of the following statements is true?

A) One of the lessons learned from activity-based costing (ABC)is that all costs are really a function of volume.
B) The primary purpose of the plantwide and department allocation methods is allocating direct costs to specific products.
C) A problem with activity-based costing (ABC)is that it requires more recordkeeping than other methods.
D) Direct cost allocations are required for the plantwide and department allocation methods.

Question 60

What is the typical effect on the numbers of cost pools and cost assignment bases when an activity-based costing (ABC)system replaces a traditional costing system? (CPA adapted) $$\begin{array} { | l | c | c | } \hline & \text { Cost Pook } & \text { Cost Assignment Bases } \\\hline \text { A. } & \text { No effect } & \text { No effect } \\\hline \text { B. } & \text { Increase } & \text { No effect } \\\hline \text { C. } & \text { No effect } & \text { Increase } \\\hline \text { D. } & \text { Increase } & \text { Increase } \\\hline\end{array}$$

A) Option A
B) Option B
C) Option C
D) Option D

Question 61

Which of the following statements is true regarding activity based costing in administration?

A) The principles of ABC are different when applied to administrative services.
B) ABC in administration involves five steps.
C) All cost drivers in an administrative system will be time related.
D) Activity-based costing for administrative services follows the same four-step procedure described for manufacturing.

Question 62

Which of the following would be the most appropriate activity and cost drivers pairing for a Purchasing Department?

A) Activity: Placing orders - Possible Cost Driver: Number of orders
B) Activity: Placing orders - Possible Cost Driver: Number of new hires
C) Activity: Placing orders - Possible Cost Driver: Frequency of audits
D) Activity: Placing orders - Possible Cost Driver: Employee turnover rate

Question 63

Product costs are computed by:

A) dividing the cost driver rate by the number of units of the cost driver in each product.
B) multiplying the cost driver rate by the number of units of the cost driver in each product.
C) adding the cost driver rates of all products.
D) averaging the plantwide cost driver rate with the cost driver for each product.

Question 64

Banc Corp.Trust is considering either a bankwide overhead rate or department overhead rates to allocate $396,000 of indirect costs.The bankwide rate could be based on either direct labor hours (DLH)or the number of loans processed.The departmental rates would be based on direct labor hours for Consumer Loans and a dual rate based on direct labor hours and the number of loans processed for Commercial Loans.The following information was gathered for the upcoming period:
\[\begin{array} { | l | l | l | l | }
\hline \text { Department } & \text { DLH } & \text { Loans Processed } & \text { Drect Costs } \\
\hline \text { Consumer } & 14,000 & 700 & \$ 280,000 \\
\hline \text { Commercial } & 8,000 & 300 & \$ 180,000 \\
\hline
\end{array}\
If Banc Corp.Trust uses a bankwide rate based on direct labor hours,what would be the indirect costs allocated to the Commercial Department?
]

A) $144,000.
B) $138,000.
C) $180,000.
D) $148,500.

Question 65

Banc Corp.Trust is considering either a bankwide overhead rate or department overhead rates to allocate $396,000 of indirect costs.The bankwide rate could be based on either direct labor hours (DLH)or the number of loans processed.The departmental rates would be based on direct labor hours for Consumer Loans and a dual rate based on direct labor hours and the number of loans processed for Commercial Loans.The following information was gathered for the upcoming period:
$$\begin{array} { | l | l | l | r | } \hline \text { Department } & \text { DLH } & \text { Loans Processed } & \text { Direct Costs } \\\hline \text { Consumer } & 14,000 & 700 & \$ 280,000 \\\hline \text { Commercial } & 8,000 & 300 & \$ 180,000 \\\hline\end{array}$$
If Banc Corp.Trust uses a bankwide rate based on the number of loans processed,what would be the total costs for the Consumer Department?

A) $280,000.
B) $256,800.
C) $576,000.
D) $557,200.

Question 66

Flawless Cosmetic Company manufactures and distributes several different products.The company currently uses a plantwide allocation method for allocating overhead at a rate of $7 per direct labor hour.Loren is the department manager of the Makeup Department which produces Products - Concealer (C)and Glow Cream (GC).Jennifer is the department manager of the Hair Care Department which manufactures Product - Shampoo (S).The product costs (per case of 24 bottles)and other information are as follows:

If Flawless changes its allocation basis to machine hours,what is the total product cost per case for Product C?

A) $161.50.
B) $169.30.
C) $182.44.
D) $183.36.

Question 67

Which of the following would be a reasonable basis for assigning the materials handling costs to the units produced in an activity-based costing (ABC)system?

A) Number of production runs per year.
B) Number of components per completed unit.
C) Amount of time required to produce one unit.
D) Amount of overhead applied to each completed unit.

Question 68

Which of the following statements is(are)true?

A) Activity-based costs per unit are always greater than volume-based costs per unit.
B) Volume-based costing has typically resulted in lower gross margins for high volume products and higher gross margins for low volume products.
C) Different cost allocation methods are constructed so that they typically result in the same or similar estimates of how much it costs to make a product.
D) Activity-based costing typically provides less information about product costs while requiring more recordkeeping.

Question 69

Banc Corp.Trust is considering either a bankwide overhead rate or department overhead rates to allocate $396,000 of indirect costs.The bankwide rate could be based on either direct labor hours (DLH)or the number of loans processed.The departmental rates would be based on direct labor hours for Consumer Loans and a dual rate based on direct labor hours and the number of loans processed for Commercial Loans.The following information was gathered for the upcoming period:
$$\begin{array} { | l | l | l | r | } \hline \text { Department } & \text { DLH } & \text { Loans Processed } & \text { Direct Costs } \\\hline \text { Consumer } & 14,000 & 700 & \$ 280,000 \\\hline \text { Commercial } & 8,000 & 300 & \$ 180,000 \\\hline\end{array}$$
If Banc Corp.Trust uses a bankwide rate based on the number of loans processed,what would be the total costs for the Commercial Department?

A) $118,800.
B) $180,000.
C) $298,800.
D) $318,000.

Question 70

Which one of the following accounts is not used in an activity-based costing (ABC)system?

A) Materials Inventory.
B) Work-in-Process Inventory.
C) Finished Goods Inventory.
D) Allocations IncurreD.
Allocations Incurred is not an account.ABC uses the same accounts that a traditional cost has,the overhead accounts are classified by activity.

Question 71

Banc Corp.Trust is considering either a bankwide overhead rate or department overhead rates to allocate $396,000 of indirect costs.The bankwide rate could be based on either direct labor hours (DLH)or the number of loans processed.The departmental rates would be based on direct labor hours for Consumer Loans and a dual rate based on direct labor hours and the number of loans processed for Commercial Loans.The following information was gathered for the upcoming period:
$$\begin{array} { | l | l | l | r | } \hline \text { Department } & \text { DLH } & \text { Loans Processed } & \text { Direct Costs } \\\hline \text { Consumer } & 14,000 & 700 & \$ 280,000 \\\hline \text { Commercial } & 8,000 & 300 & \$ 180,000 \\\hline\end{array}$$
Banc Corp.Trust estimates that it costs $500 to analyze and close a commercial loan.This amount has been included in the $396,000 of indirect costs.How much of the $396,000 indirect costs should be allocated to the Commercial Department?

A) $396,000.
B) $246,000.
C) $223,800.
D) $216,000.

Question 72

Which of the following is not a step involved in activity-based costing?

A) Identify the activities that consume resources and assign costs to those activities.
B) Determine how to reduce the costs of making products by cutting activities.
C) Assign costs to products by multiplying the cost driver rate by the volume of cost driver units consumed by the product.
D) Compute a cost rate per cost driver unit or transaction.

Question 73

Volume-based costing allocates indirect product costs based on the volume of output,using such allocation bases as direct labor hours,machine hours,or the amount of direct material used in the production process.Activity-based costing (ABC)has consistently shown that Volume-based costing ___________ the cost of high volume products and ______________ the cost of low volume products. $$\begin{array} { | c | c c | } \hline & \text { High Volume Products } & \text { Low } \text { Volume Products } \\\hline \text { A. } & \text { Overstates } & \text { Overstates } \\\hline \text { B. } & \text { Overstates } & \text { Understates } \\\hline \text { C. } & \text { Understates } & \text { Overstates } \\\hline \text { D. } & \text { Understates } & \text { Understates } \\\hline\end{array}$$

A) Option A
B) Option B
C) Option C
D) Option D

Question 74

Activity-based costing provides:

A) more detailed measures of costs than do plantwide or department allocation methods.
B) less detailed measures of costs than do plantwide or department allocation methods.
C) more detailed measures of costs than do plantwide allocations but less than department allocation methods.
D) less detailed measures of costs than do plantwide allocations but more than department allocation methods.

Question 75

Which of the following statements is true regarding time-driven activity based costs?

A) A manager needs to determine the cost of resources for each individual item produced.
B) This approach requires interviews and surveys from multiple managers and employees.
C) It is more costly than the unmodified ABC system.
D) The cost of the resources supplied to a department and the time it takes to complete the various activities of the department are useD.
This approach only requires the cost of departmental resources and the time it takes to complete various activities in the department.

Question 76

Banc Corp.Trust is considering either a bankwide overhead rate or department overhead rates to allocate $396,000 of indirect costs.The bankwide rate could be based on either direct labor hours (DLH)or the number of loans processed.The departmental rates would be based on direct labor hours for Consumer Loans and a dual rate based on direct labor hours and the number of loans processed for Commercial Loans.The following information was gathered for the upcoming period:
$$\begin{array} { | l | l | l | l | } \hline \text { Department } & \text { DLH } & \text { Loans Processed } & \text { Drect Costs } \\\hline \text { Consumer } & 14,000 & 700 & \$ 280,000 \\\hline \text { Commercial } & 8,000 & 300 & \$ 180,000 \\\hline\end{array}$$
If Banc Corp.Trust uses a bankwide rate based on direct labor hours,what would be the indirect costs allocated to the Consumer Department?

A) $49,000.
B) $252,000.
C) $198,000.
D) $396,000.

Question 77

Which of the following statements is true regarding time equations used in time-driven activity based costing?

A) Time equations cannot adjust extra time for new vendors.
B) Time equations allow managers to adjust the times for orders with different characteristics.
C) Time equations cannot be used where there is a maximum size of an order that can be inspected or transported to the warehouse.
D) Time equations are only used as part of unmodified ABC systems.

Question 78

Flawless Cosmetic Company manufactures and distributes several different products.The company currently uses a plantwide allocation method for allocating overhead at a rate of $7 per direct labor hour.Loren is the department manager of the Makeup Department which produces Products - Concealer (C)and Glow Cream (GC).Jennifer is the department manager of the Hair Care Department which manufactures Product - Shampoo (S).The product costs (per case of 24 bottles)and other information are as follows:

If Flawless changes its allocation basis to machine hours,what is the total product cost per case for Product GC?

A) $163.50
B) $144.00
C) $138.15
D) $117.15

Question 79

Companies using activity-based costing (ABC)have learned that costs are a function of:

A) volume and activities.
B) time and complexity.
C) volume and time.
D) resources and time.

Question 80

Flawless Cosmetic Company manufactures and distributes several different products.The company currently uses a plantwide allocation method for allocating overhead at a rate of $7 per direct labor hour.Loren is the department manager of the Makeup Department which produces Products - Concealer (C)and Glow Cream (GC).Jennifer is the department manager of the Hair Care Department which manufactures Product - Shampoo (S).The product costs (per case of 24 bottles)and other information are as follows:

Based on this information,if Flawless changes its allocation basis to machine hours,what is the overhead rate per machine hour?

A) $3.00
B) $2.00
C) $21.00
D) $6.825