Question 1

Activity-based costing systems:

Accepted Answer

A)  use a single, volume-based cost driver.
B)  assign overhead to products based on the products' relative usage of direct labour.
C)  often reveal products that were undercosted or overcosted by traditional product costing systems.
D)  typically use fewer cost drivers than more traditional costing systems.
E)  have a tendency to distort product costs. C

Question 2

During a recent accounting period, Marty's shipping department processed 26 orders. Each order typically takes four hours to complete; however, the average time increased to five hours because of various departmental inefficiencies. If shipping labour is paid $14 per hour, the company's non-value-added cost would be:

Accepted Answer

A)  $14.
B)  $56.
C)  $364.
D)  $1,456.
E)  $1,820. C

Question 3

The pull method of coordinating steps in the production process would attempt to reduce or eliminate:

Accepted Answer

A)  raw-material inventory.
B)  raw-material inventory and work-in-process inventory.
C)  raw-material inventory, work-in-process inventory, and finished-goods inventory.
D)  work-in-process inventory between production steps.
E)  finished-goods inventory. D

Question 4

The controller for Precise Manufacturing has established the following overhead cost pools and cost drivers: 
$\begin{array}{lll}
&\text { Budgeted }\
\underline{\text { Overhead Cost Pool }} & \underline{\text { Overhead Cost }} & \underline{\text { Cost Driver }} \
 \text { Machine setups } & \$ 300,000 & \text { Number of setups } \
\text { Material handling } & 80,000 & \text { Units of raw material } \
\text { Quality control } & 90,000 & \text { Number of }\
\text { inspection } &&  \text { inspections } \
\text { Other overhead costs } & \underline{150,000}& \text { Machine hours } \
\text { Total } &\underline{\$ 620,000} \
\end{array}$

$\begin{array}{lll}
&\text { Budgeted Level }\
\underline {\text { Overhead Cost Pool } }& \underline {\text { for Cost Driver }} & \underline {\text { Pool Rate } }\
\text { Machine setups } & 300 \text { setups } & \$ 1,400 \text { per setup } \
\text { Material handling } & 40,000 \text { units } & \$ 2.00 \text { per unit } \
\text { Quality control } & 800 \text { inspections } & \$ 60 \text { per inspection } \
\text { Other overhead } & 25,000 \text { machine } & \$ 10 \text { per machine hour }\
&\text { hours }\
\end{array}$

$\text { Order No. } 905 \text { has the following production requirements. }$

$\text { Machine setups: 10 }$
$\text { Raw material: 13,400 units }$
$\text { Inspections: 20 }$
$\text { Machine hours: 900 }$ Required:
A. Compute the total overhead that should be assigned to Order No. 905 by using activity-based costing.
B. Suppose that Precise were to use a single, predetermined overhead rate based on machine hours. Compute the rate per hour and the total overhead assigned to Order No. 905.
C. Discuss the merits of an activity-based costing system in comparison with a traditional costing system.

Accepted Answer

The answer of The controller for Precise Manufacturing has established...

Question 5

A firm that uses a JIT purchasing philosophy probably:

Accepted Answer

A)  has many suppliers.
B)  has extensive inspection of purchased items at the receiving point.
C)  has relatively few suppliers.
D)  has deliveries of purchased items made in small lot sizes immediately before the goods are needed in production.
E)  has relatively few suppliers and has deliveries of purchased items made in small lot sizes immediately before the goods are needed in production.

Question 6

Indiglow Chapstars which sells books to college bookstores and individuals uses activity-based costing and activity-based management. The following information is available for the company's three cost pools.
 \(\begin{array} { | l | l | l | l | l | } 
\hline \underline {\text { Activity }} & \begin{array} { l } 
\underline {\text { Cost }} \
\underline {\text { Driver }}
\end{array} & \begin{array} { l } 
\text { Cost- } \
\text { Driver } \
\underline {\text { Quantity }}
\end{array} & \begin{array} { l } 
\text { Percent of Cost- } \
\text { Driver Activity } \
\text { for } \
\text { Bookstore } \
\underline {\text { Transactions }}
\end{array} & \begin{array} { l } 
\text { Percent of Cost- } \
\text { Driver Activity } \
\text { for Transactions } \
\underline {\text { to Individuals }}
\end{array} \
\hline \begin{array} { l } 
\text { Incoming } \
\text { receipts }
\end{array} & \begin{array} { l } 
\text { Number } \
\text { of } \
\text { purchase } \
\text { orders }
\end{array} & 5,000 & 50 \% & \
\hline \text { Warehousing } & \begin{array} { l } 
\text { Number } \
\text { of } \
\text { inventory } \
\text { moves }
\end{array} & 8,500 & 80 & 90 \% \
\hline \begin{array} { l } 
\text { Outgoing } \
\text { shipments }
\end{array} & \begin{array} { l } 
\text { Number } \
\text { of } \
\text { shipments }
\end{array} & 20,000 & 40 & 30 \
\hline
\end{array}\) Bookstore sales totaled $9,000,000, and sales to individuals amounted to $3,400,000. Costs for the three activities were: Incoming receipts, $500,000; warehousing, $620,000; and outgoing shipments, $620,000. A review of the company's activities found various inefficiencies with respect to the warehousing of textbooks (acquired for eventual sale to bookstores) and outgoing shipments to individuals. These inefficiencies resulted in an extra 600 moves and 800 shipments, respectively.
Required:
A. What is a non-value-added activity?
B. How much did non-value-added activities cost Indiglow Chapstars this past year?
C. Which of the two markets-sales to bookstores or sales to individuals-resulted in lower overall costs for incoming receipts, warehousing, and outgoing shipments? Evaluate these costs in both absolute dollars and as a percentage of sales. In addition, present a possible explanation for your results. Note: Exclude costs that arose from inefficient operations.

Accepted Answer

The answer of Indiglow Chapstars which sells books to college...

Question 7

Which of the following is least likely to be classified as a facility-level activity in an activity-based costing system?

Accepted Answer

A)  Plant maintenance.
B)  Property taxes.
C)  Machine processing cost.
D)  Plant depreciation.
E)  Plant management salaries.

Question 8

Heartland Bank & Trust operates in a very competitive marketplace, using a traditional labour-hour-based system to determine the cost of processing its mortgage loans. Recently, the firm explored a switch to activity-based costing to determine the wisdom of its previous ways. The following information is available: $\begin{array}{ll}
\underline {\text {Activity}}&\underline {\text {Cost}}&\underline {\text {Driver}}&\underline {\text {Driver Units}}\
 \text { Application}&\$ 900,000 & \text { Applications } &4,000\
 \text { processing}&\
 \text { Loan underwriting}&800,000 & \text { Underwriting }&16,000 \
 & \text { hours } \
 \text { Loan closure}& \underline {800,000}& \text { Legal hours } &8,000\
 \text { Total}&\underline {\$ 2.580 .000 }
\end{array}$ Two loan applications, among many others, were originated and closed during the year. No. 7439 consumed 3.5 hours in loan underwriting and 1.5 hours in loan closure, for a total of 5.0 hours. No. 7809 also required 5.0 hours of time, subdivided as follows: 2.0 hours in loan underwriting and 3.0 hours in loan closure. Conversations with management found that, on average, each application took nine labour hours of processing time, excluding underwriting and closure.
Required:
A. Use an activity-based-costing system and determine the cost of processing, underwriting, and closing the two loan applications.
B. Determine the cost of processing the two loans if Heartland uses the traditional labour-hour-based system.
C. Is Heartland making a mistake by continuing to use a traditional system that is based on an average labour cost per hour? Why?

Accepted Answer

The answer of Heartland Bank & Trust operates in a...

Question 9

Which of the following choice of rows correctly depicts a cost that arises from a batch-level activity and one that arises from a facility-level activity? $\begin{array}{|l|l|l|}
\hline &\text { Batch-Level }&\text { Facility- Level }   \
\operatorname{Row} &\text {Activity}&\text {Activity}\
\hline 1& \text { Direct Materials } & \text { Plant Depreciation } \
\hline 2 &\text { Inspection } & \text { Property Taxes } \
\hline 3& \text { Quality Assurance } & \text { Shipping } \
\hline 4 &\text { Plant Maintenance } & \text { Insurance } \
\hline 5 &\text { Management Salaries } & \text { Material Handling } \
\hline
\end{array}$

Accepted Answer

A)  1
B)  2
C)  3
D)  4
E)  5

Question 10

Which of the following is the proper sequence of events in an activity-based costing system?

Accepted Answer

A)  Identification of cost drivers, identification of cost pools, calculation of pool rates, assignment of cost to products.
B)  Identification of cost pools, identification of cost drivers, calculation of pool rates, assignment of cost to products.
C)  Assignment of cost to products, identification of cost pools, identification of cost drivers, calculation of pool rates.
D)  Calculation of pool rates, identification of cost drivers, identification of cost pools, assignment of cost to products.
E)  Identification of cost drivers, assignment of costs to products, calculation of pool rates, identification of cost pools.

Question 11

Pitney Corporation manufactures two types of transponders-no. 156 and no. 157-and applies manufacturing overhead to all units at the rate of $76.50 per machine hour. Production information follows.
 $\begin{array}{lll}
 & \underline{\text { No. } 156}   & \underline{\text { No. } 157}  \
\text { Anticipated volume (units) } & \underline{\underline{6.000}} & \underline{14.000} \
\text { Direct material cost } & \$ 40 & \$ 65 \
\text { Direct labour cost } & 25 & 25
\end{array}$ The controller, who is studying the use of activity-based costing, has determined that the firm's overhead can be identified with three activities: manufacturing setups, machine processing, and product shipping. Data on the number of setups, machine hours worked, and outgoing shipments, the activities' three respective cost drivers, follow. $\begin{array}{lccc}
 & \underline{\text { No. } 156}   & \underline{\text { No. } 157} &\underline {\text { Total } }   \
\text { Setups } & 60 & 40 & 100 \
\text { Machine hours worked } & 15,000 & 25,000 & 40,000 \
\text { Outgoing shipments } & 120 & 80 & 200
\end{array}$ The firm's total overhead of $3,060,000 is subdivided as follows: manufacturing setups, $260,000; machine processing, $2,400,000; and product shipping, $400,000.
Required:
A. Compute the pool rates that would be used for manufacturing setups, machine processing, and product shipping in an activity-based costing system.
B. Assuming use of activity-based costing, compute the unit overhead costs of product nos. 156 and 157 if the expected manufacturing volume is attained.
C. Assuming use of activity-based costing, compute the total cost per unit of product no. 156.
D. If the company's selling price is based heavily on cost, would a switch to activity-based costing from the current traditional system result in a price increase or decrease for product no. 156? Show computations.

Accepted Answer

The answer of Pitney Corporation manufactures two types of transponders-no....

Question 12

Wanda Florists uses an activity-based costing system to compute the cost of making floral bouquets and delivering the bouquets to its commercial customers. Company personnel who earn $90,000 typically perform both tasks; other firm-wide overhead is expected to total $50,000. These costs are allocated as follows: $\begin{array}{llll}
&\text { Bouquet}\
&\text { Production}&\text { Delivery}&\text { Other} \
\hline\text { Wages and }\
\text { Salaries } & 40 \% & 50 \% & 10 \% \
\text { Other overhead } & 60 \% & 25 \% & 15 \%
\end{array}$ Wanda anticipates making 30,000 bouquets and 6,000 deliveries in the upcoming year. The cost of wages and salaries and other overhead that would be charged to each delivery is:

Accepted Answer

A)  $3.89.
B)  $7.50.
C)  $9.58.
D)  $14.00.
E)  $23.33.

Question 13

Scott, Inc., manufactures two products, Regular and Deluxe, and applies overhead on the basis of direct labour hours. Anticipated overhead and direct labour time for the upcoming accounting period are $1,600,000 and 25,000 hours, respectively. Information about the company's products follows.
Regular-
Estimated production volume: 3,000 units
Direct materials cost: $28 per unit
Direct labour per unit: 3 hours at $15 per hour
Deluxe-
Estimated production volume: 4,000 units
Direct materials cost: $42 per unit
Direct labour per unit: 4 hours at $15 per hour
Scott's overhead of $1,600,000 can be identified with three major activities: order processing ($250,000), machine processing ($1,200,000), and product inspection ($150,000). These activities are driven by number of orders processed, machine hours worked, and inspection hours, respectively. Data relevant to these activities follow. $\begin{array} { l l l l } 
&&\text { Machine } \
& \text { Orders }&\text { Hours }&\text { Inspection } \
& \underline { \text { Processed } } & \underline { \text { Worked } } & \underline { \text { Hours } } \
\text { Regular } & 320 &16,000 &  4,000\
\text { Deluxe } & \underline { 180 } & \underline { 24,000 } & \underline { 6,000 } \
\text { Total } & \underline { \underline { 500 } } & \underline { \underline { 40.000 } } & \underline { \underline { 10,000 } }
\end{array}$ Required:
A. Compute the pool rates that would be used for order processing, machine processing, and product inspection in an activity-based costing system.
B. Assuming use of activity-based costing, compute the unit manufacturing costs of Regular and Deluxe if the expected manufacturing volume is attained.
C. How much overhead would be applied to a unit of Regular and Deluxe if the company used traditional costing and applied overhead solely on the basis of direct labour hours? Which of the two products would be undercosted by this procedure? Overcosted?

Accepted Answer

The answer of Scott, Inc., manufactures two products, Regular and...

Question 14

X-Ray Machines Ltd. manufactures three product lines: Standard, Deluxe, and Superior. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below. The following information pertains to the three product lines for next year: $\begin{array}{|l|r|r|r|}
\hline & \text { Standard } & \text { Deluxe } & \text { Supe rior } \
\hline \text { Units to be produced } & 15,000 & 10,000 & 7,000 \
\hline \text { Orders to be shipped } & 1,000 & 500 & 500 \
\hline \text { Number of parts per unit } & 10 & 15 & 25 \
\hline \text { Machine hours per unit } & 3 & 5 & 7 \
\hline \text { Labour hours per unit } & 2 & 2 & 2 \
\hline
\end{array}$ Assume that X-Ray is using a volume-based costing system, and the preceding manufacturing costs are applied to all products based on direct labour hours. How much of the preceding cost, rounded to the nearest dollar, would be assigned to Deluxe?

Accepted Answer

A)  $240,625.
B)  $481,250.
C)  $962,500.
D)  $1,375,000.
E)  $2,200,000.

Question 15

Wanda Florists uses an activity-based costing system to compute the cost of making floral bouquets and delivering the bouquets to its commercial customers. Company personnel who earn $90,000 typically perform both tasks; other firm-wide overhead is expected to total $50,000. These costs are allocated as follows: $\begin{array}{llll}
&\text { Bouquet}\
&\text { Production}&\text { Delivery}&\text { Other} \
\hline\text { Wages and }\
\text { Salaries } & 40 \% & 50 \% & 10 \% \
\text { Other overhead } & 60 \% & 25 \% & 15 \%
\end{array}$ Wanda anticipates making 30,000 bouquets and 6,000 deliveries in the upcoming year. The cost of wages and salaries and other overhead that would be charged to each bouquet made is:

Accepted Answer

A)  $2.20.
B)  $3.89.
C)  $4.67.
D)  $5.56.
E)  $18.33.

Question 16

St. James, Inc., currently uses traditional costing procedures, applying $800,000 of overhead to products Beta and Zeta on the basis of direct labour hours. The company is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labour hours (DLH), production setups (SU), and number of parts components (PC) as cost drivers. Data on the cost pools and respective driver volumes follow. $\begin{array} { | c | c | c | c | } 
\hline \text { Product } & \begin{array} { c } 
\text { Pool No. 1 } \
\text { (Driver: DLH) }
\end{array} & \begin{array} { c } 
\text { Pool No. 2 } \
\text { (Driver: SU) }
\end{array} & \begin{array} { c } 
\text { Pool No. 3 } \
\text { (Driver: PC) }
\end{array} \
\hline \text { Beta } & 1.200 & 45 & 2.250 \
\hline \text { Zeta } & 2.800 & 55 & 750 \
\hline & & & \
\hline \begin{array} { c } 
\text { Pool } \
\text { Cost }
\end{array} & \$ 160,000 & \$ 280,000 & \$ 360,000 \
\hline
\end{array}$ The overhead cost allocated to Zeta by using traditional costing procedures would be:

Accepted Answer

A)  $240,000.
B)  $360,000.
C)  $440,000.
D)  $560,000.
E)  $800,000.

Question 17

Marion Corporation, which produces unique office furniture, recently installed a just-in-time production system. The various steps in the company's manufacturing process are coordinated by using a philosophy known as:

Accepted Answer

A)  supply pull.
B)  the pull method.
C)  supply push.
D)  demand push.
E)  activity based management.

Question 18

The following tasks are associated with an activity-based costing system: 1-Calculation of pool rates
2-Identification of cost drivers
3-Assignment of cost to products
4-Identification of cost pools
Which of the following choices correctly expresses the proper order of the preceding tasks?

Accepted Answer

A)  1, 2, 3, 4.
B)  2, 4, 1, 3.
C)  3, 4, 2, 1.
D)  4, 2, 1, 3.
E)  4, 2, 3, 1.

Question 19

X-Ray Machines Ltd. manufactures three product lines: Standard, Deluxe, and Superior. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below. The following information pertains to the three product lines for next year: $\begin{array}{|l|r|r|r|}
\hline & \text { Standard } & \text { Deluxe } & \text { Supe rior } \
\hline \text { Units to be produced } & 15,000 & 10,000 & 7,000 \
\hline \text { Orders to be shipped } & 1,000 & 500 & 500 \
\hline \text { Number of parts per unit } & 10 & 15 & 25 \
\hline \text { Machine hours per unit } & 3 & 5 & 7 \
\hline \text { Labour hours per unit } & 2 & 2 & 2 \
\hline
\end{array}$ Under an activity-based costing system, what is the per-unit cost of Deluxe?

Accepted Answer

A)  $96.88.
B)  $111.94.
C)  $155.94.
D)  $165.94.
E)  $168.00

Question 20

Steubenville Corporation recently abandoned its traditional production and inventory system in favor of a just-in-time system. The company typically ordered 700 units of raw material at a time and purchased units that scored a 7 on a 10-point quality scale, with 10 being very close to perfection. All other things being equal, which of the following choices denotes a likely scenario under the just-in-time system? $\begin{array} { | l | c | c | } 
\hline & \begin{array} { c } 
\text { Order } \
\text { Size }
\end{array} & \begin{array} { c } 
\text { Quality } \
\text { Purchased }
\end{array} \
\hline 1 & 300 & 7 \
\hline 2 & 300 & 9 \
\hline 3 & 700 & 9 \
\hline 4 & 950 & 7 \
\hline 5 & 950 & 9 \
\hline
\end{array}$

Accepted Answer

A)  1.
B)  2.
C)  3.
D)  4.
E)  5.

Exam 5: Activity-Based Costing and Management