Question 1

An activity-based costing system is developed in four steps. 
A. Compute the allocation rate for each activity
B. Identify activities and estimate their total costs
C. Identify the cost driver for each activity and then estimate the quantity of each driver's allocation base
D. Allocate the indirect costs to the cost object
Which of the following is the correct order of performing these steps?

Accepted Answer

A)   a, b, c, d
B)   c, a, b, d
C)   b, c, a, d
D)   b, a, c, d C

Question 2

Direct material costs and direct labor costs cannot be easily traced to products. Therefore, they are allocated to products.

Accepted Answer

A) True 
 B)False  False

Question 3

Increased number of repeat customers and increased rate of on-time deliveries are the indicators of:

Accepted Answer

A)   product quality.
B)   market share.
C)   customer satisfaction.
D)   skills and knowledge of the employees. C

Question 4

The target rate of return is the maximum rate of return that top management expects a division to earn with its average total assets.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following perspectives of the balanced scorecard focuses on revenue growth and productivity?

Accepted Answer

A)   financial perspective
B)   customer perspective
C)   internal business perspective
D)   learning and growth perspective

Question 6

Performance report of a profit center includes both revenues and expenses.

Accepted Answer

A) True 
 B)False

Question 7

Uncontrollable costs are the costs that can be influenced by the decisions of a manager.

Accepted Answer

A) True 
 B)False

Question 8

Managers of investment centers are responsible not only for generating profits, but also for ensuring efficient use of assets of the investment center.

Accepted Answer

A) True 
 B)False

Question 9

One of the advantages of decentralization is that it allows top management to concentrate on long-term strategic planning.

Accepted Answer

A) True 
 B)False

Question 10

A company that uses a balanced scorecard has established a KPI for product quality. If the actual warranty claims are higher than expected it indicates that the quality standards have been met.

Accepted Answer

A) True 
 B)False

Question 11

The ROI (Return on Investment) formula focuses on the amount of operating income earned before other revenue/expense items, such as interest expense, by utilizing the average total assets employed for the year.

Accepted Answer

A) True 
 B)False

Question 12

One part of the balanced scorecard helps management answer the question "How do we look to shareholders?" Which of the four perspectives is being described here?

Accepted Answer

A)   financial perspective
B)   customer perspective
C)   internal business perspective
D)   learning and growth perspective

Question 13

WAX-D Inc. has a division that manufactures a component that sells for $150 and has a variable cost of $45. Another division of the company wants to purchase the component. Fixed cost per unit of component is $25. What is the minimum transfer price if the division is operating at capacity?

Accepted Answer

A)   $150
B)   $45
C)   $55
D)   $140

Question 14

Pitt Jones Company had the following activities, allocated costs, and allocation bases: $$\begin{array} { | l | r | r | } 
\hline \text { Activities } & \text { Allocated Costs } & \text { Allocation Base } \
\hline \text { Account inquiry (hours) } & \$ 60,000 & 2,000 \text { hours } \
\hline \text { Account billing (lines) } & \$ 30,000 & 20,000 \text { lines } \
\hline \text { Account verification (accounts) } & \$ 15,000 & 20,000 \text { accounts } \
\hline \text { Correspondence (letters) } & \$ 10,000 & 1,000 \text { letters } \
\hline
\end{array}$$ The above activities are carried out at two of their regional offices.
$$\begin{array} { | l | r | r | } 
\hline & \text { Northeast Office } & \text { Midwest Office } \
\hline \text { Account inquiry (hours) } & 100 \text { hours } & 200 \text { hours } \
\hline \text { Account billing (lines) } & 10,000 \text { lines } & 7,000 \text { lines } \
\hline \text { Account verification (accounts) } & 1,000 \text { accounts } & 600 \text { accounts } \
\hline \text { Correspondence (letters) } & 50 \text { letters } & 100 \text { letters } \
\hline
\end{array}$$ What is the cost per letter for the correspondence activity?

Accepted Answer

A)   $10.00
B)   $30.50
C)   $25.00
D)   $0.75

Question 15

Pitt Jones Company had the following activities, allocated costs, and allocation bases: $$\begin{array} { | l | r | r | } 
\hline \text { Activities } & \text { Allocated Costs } & \text { Allocation Base } \
\hline \text { Account inquiry (hours) } & \$ 60,000 & 2,000 \text { hours } \
\hline \text { Account billing (lines) } & \$ 30,000 & 20,000 \text { lines } \
\hline \text { Account verification (accounts) } & \$ 15,000 & 20,000 \text { accounts } \
\hline \text { Correspondence (letters) } & \$ 10,000 & 1,000 \text { letters } \
\hline
\end{array}$$ The above activities are carried out at two of their regional offices.
$$\begin{array} { | l | r | r | } 
\hline & \text { Northeast Office } & \text { Midwest Office } \
\hline \text { Account inquiry (hours) } & 100 \text { hours } & 200 \text { hours } \
\hline \text { Account billing (lines) } & 10,000 \text { lines } & 7,000 \text { lines } \
\hline \text { Account verification (accounts) } & 1,000 \text { accounts } & 600 \text { accounts } \
\hline \text { Correspondence (letters) } & 50 \text { letters } & 100 \text { letters } \
\hline
\end{array}$$ What is the cost per account for the account verification activity?

Accepted Answer

A)   $30.00
B)   $0.50
C)   $2.25
D)   $0.75

Question 16

Brannon Company manufactures ceiling fans and uses an activity-based costing system. Each ceiling fan consists of 20 separate parts. The direct material cost is $95 and each ceiling fan requires 2.5 hours of machine time to manufacture. There is no direct labor cost. Additional information is as follows: $$\begin{array} { | l | l | c | } 
\hline{ \text { Activity } } &  { \text { Allocation Base } } & \text { Cost Allocation Rate \$ } \
\hline \text { Materials handling } & \text { Number of parts } & 0.08 \
\hline \text { Machining } & \text { Machine hours } & 7.20 \
\hline \text { Assembling } & \text { Number of parts } & 0.35 \
\hline \text { Packaging } & \text { Number of finished units } & 2.70 \
\hline
\end{array}$$ What is the total manufacturing cost per ceiling fan?

Accepted Answer

A)   $125.75
B)   $121.13
C)   $115.32
D)   $124.30

Question 17

The primary objective in setting transfer prices is to achieve goal congruence by selecting a price that will maximize overall company profits.

Accepted Answer

A) True 
 B)False

Question 18

Responsibility reports for revenue centers show all costs incurred by the department and are useful when management needs to know the total cost of operating the department.

Accepted Answer

A) True 
 B)False

Question 19

Recreation Equipment Company has several divisions which are investment centers. Data for the Boat Division and the Trailer Division are shown here: $$\begin{array} { | l | c | c | } 
\hline & \text { Boat Division } & \text { Trailer Division } \
\hline \text { Operating income } & \$ 90,000 & \$ 36,000 \
\hline \text { Total assets at Jan 1 } & \$ 670,000 & \$ 230,000 \
\hline \text { Total assets at Dec } 31 & \$ 710,000 & \$ 220,000 \
\hline
\end{array}$$ Which of the following statements would be the most meaningful interpretation of this data?

Accepted Answer

A)   Performance of Boat Division is better than that of Trailer Division because Boat Division has higher assets.
B)   Trailer Division uses its assets more efficiently than Boat Division because it has higher ROI.
C)   Boat Division shows more efficient use of assets than Trailer Division because it has higher operating income.
D)   Boat Division is more financially successful than Trailer Division because it shows an increase in assets

Question 20

Orlando Avionics makes three types of radios for small aircraft: Model A, Model B, and Model C. The manufacturing operations are mechanized and there is no direct labor. Manufacturing overhead costs are significant, and Orlando has adopted an activity-based costing system. Direct materials costs per unit for each model are as follows: $$\begin{array} { | l | l | } 
\hline \text { Model A } & \$ 28 \
\hline \text { Model B } & \$ 32 \
\hline \text { Model C } & \$ 40 \
\hline
\end{array}$$ Orlando has three activities: assembly, materials management, and testing. The cost driver for assembly is machine hours. The cost driver for materials management is number of parts, and the cost driver for testing is the number of units of product. Total costs and production volumes for the year 2015 were estimated as follows:
$$\begin{array} { | l | c | c | c | } 
\hline & \text { Total cost } & \text { Total units } & \text { Cost Driver } \
\hline \text { Assembly } & \$ 780,000 & 120,000 & \text { Machine hours } \
\hline \text { Materials management } & \$ 120,000 & 80,000 & \text { Parts } \
\hline \text { Testing } & \$ 22,500 & 5,000 & \text { Units } \
\hline
\end{array}$$ The Model A radio requires 12 parts to construct, and requires 16 machine hours of processing. What is the manufacturing cost to make one unit of Model A?

Accepted Answer

A)   $150.00
B)   $132.00
C)   $126.50
D)   $154.50

Exam 24: Cost Allocation and Responsibility Accounting

Direct material costs and direct labor costs cannot be easily traced to products. Therefore, they are allocated to products.

Increased number of repeat customers and increased rate of on-time deliveries are the indicators of:

The target rate of return is the maximum rate of return that top management expects a division to earn with its average total assets.

Which of the following perspectives of the balanced scorecard focuses on revenue growth and productivity?

Performance report of a profit center includes both revenues and expenses.

Uncontrollable costs are the costs that can be influenced by the decisions of a manager.

Managers of investment centers are responsible not only for generating profits, but also for ensuring efficient use of assets of the investment center.

One of the advantages of decentralization is that it allows top management to concentrate on long-term strategic planning.

A company that uses a balanced scorecard has established a KPI for product quality. If the actual warranty claims are higher than expected it indicates that the quality standards have been met.

The ROI (Return on Investment) formula focuses on the amount of operating income earned before other revenue/expense items, such as interest expense, by utilizing the average total assets employed for the year.

One part of the balanced scorecard helps management answer the question "How do we look to shareholders?" Which of the four perspectives is being described here?

WAX-D Inc. has a division that manufactures a component that sells for $150 and has a variable cost of $45. Another division of the company wants to purchase the component. Fixed cost per unit of component is $25. What is the minimum transfer price if the division is operating at capacity?

The primary objective in setting transfer prices is to achieve goal congruence by selecting a price that will maximize overall company profits.

Responsibility reports for revenue centers show all costs incurred by the department and are useful when management needs to know the total cost of operating the department.