Deck 5: Activity-Based Costing

Question 1

To achieve accurate costing, a high degree of correlation must exist between the cost driver and the actual consumption of the activity cost pool.

Answer 1

True

Question 2

Current trends in manufacturing include less direct labour and more overhead.

Answer 2

True

Question 3

Any activity that increases the cost of producing a product is a value-added activity.

Answer 3

False

Question 4

Activity-based management focuses on reducing costs and improving processes.

Question 5

The first step in activity-based costing is to assign overhead costs to products, using cost drivers.

Question 6

Traditionally, overhead is allocated based on direct labour cost or direct labour hours.

Question 7

A cost driver does NOT generally have a direct cause-effect relationship with the resources consumed.

Question 8

Engineering design is a value-added activity.

Question 9

ABC is generally more costly to implement than traditional costing.

Question 10

Low-volume products often require more special handling than high-volume products.

Question 11

Non-value-added activities increase the cost of a product but NOT its market value.

Question 12

ABC leads to enhanced control over overhead costs.

Question 13

When overhead is properly assigned in ABC, it will usually decrease the unit cost of high-volume products.

Question 14

ABC is particularly useful when overhead costs are an insignificant portion of total costs.

Question 15

Traditional costing systems use multiple predetermined overhead rates.

Question 16

ABC usually results in less appropriate management decisions.

Question 17

Machining is a non-value-added activity.

Question 18

ABC eliminates all arbitrary cost allocations.

Question 19

Activity-based costing allocates overhead to multiple cost pools and assigns the cost pools to products using cost drivers.

Question 20

ABC is particularly useful when product lines differ greatly in volume and manufacturing complexity.

Question 21

Which of the following is typical of traditional costing systems?

A)Uses multiple cost drivers to allocate overhead.
B)It is more complicated than Activity Based Costing systems.
C)Is still the best way to allocate direct labour costs.
D)Uses a single cost driver to allocate overhead.

Question 22

Plant management is a batch-level activity.

Question 23

The overall objective of installing ABC in service firms is no different than it is in a manufacturing company.

Question 24

Not all activities labelled non-value-added are totally wasteful, nor can they be totally eliminated.

Question 25

A well designed activity-based costing system starts with

A)identifying the activity-cost pools.
B)computing the activity-based overhead rate.
C)assigning manufacturing overhead costs for each activity cost pool to products.
D)analyzing the activities performed to manufacture a product.

Question 26

When using a single cost driver to allocate overhead costs, the amount of overhead costs that are applied is

A)usually greater for low-volume products than for high-volume products.
B)usually greater for high-volume products than for low-volume products.
C)usually equal for both low and high-volume products.
D)sometimes greater for higher-volume products, and sometimes greater for low-volume products.

Question 27

The general approach to identifying activities, activity cost pools, and cost drivers is used by a service company in the same manner as a manufacturing company.

Question 28

The first step in activity-based costing is to

A)assign manufacturing overhead costs for each activity cost pool to products.
B)calculate the activity-based overhead rate per cost driver.
C)identify and classify the major activities involved in the manufacture of specific products.
D)identify the cost driver that has a strong correlation to the activity cost pool.

Question 29

Activity-based costing normally allocates overhead costs

A)to products only.
B)more accurately than traditional costing systems.
C)to services, where as traditional costing systems normally allocate overhead costs to products.
D)based on no more than three cost drivers.

Question 30

Use the following information to answer questions
Poodle Company manufactures two products, Mini A and Maxi B.Poodle's overhead costs consist of setting up machines, $800,000; machining, $2,000,000; and inspecting, $600,000.Information on the two products is: $$\begin{array} { l r r } & \text { Mini A } & \ \text { Maxi B } \\\text { Direct labour hours } & 15,000 & 25,000 \\\text { Machine setups } & 600 & 400 \\\text { Machine hours } & 24,000 & 26,000 \\\text { Inspections } & 800 & 700\end{array}$$

-Overhead applied to Maxi B using traditional costing and direct labour hours is

A)$1,280,000.
B)$1,664,000.
C)$1,700,000.
D)$2,125,000.

Question 31

Which best describes the flow of overhead costs in an activity-based costing system?

A)overhead costs - direct labour cost or hours - products
B)overhead costs - products
C)overhead costs - activity cost pools - cost drivers - products
D)overhead costs - machine hours - products

Question 32

A good cost driver should have a high correlation with

A)the actual number of units produced.
B)the actual consumption of overhead costs.
C)the actual number of products produced.
D)the actual consumption of direct costs.

Question 33

Painting is a product-level activity.

Question 34

Sleep-Tight manufactures mattresses for the hotel industry.It has two products, Downy and Firm, and total overhead of $504,000.The company plans to manufacture 200 Downy mattresses and 300 Firm mattresses this year.In manufacturing the mattresses, the company must perform 700 material moves for the Downy and 300 for the Firm; it processes 114 purchase orders for the Downy and 90 for the Firm; and the company's employees work 2,800 direct labour hours on the Downy product and 3,500 on the Firm.Sleep-Tight's total material handling costs are $300,000 and its total purchasing costs are $204,000. Under a traditional costing approach based on direct labour hours, how much overhead would be assigned to the Downy product?

A)$224,000
B)$252,000
C)$280,000
D)$336,000

Question 35

In companies where there is good reason to change from a traditionally-based costing system to an activity-based costing system, management might expect

A)products or services with high volumes will have higher overhead costs.
B)products or services with high volumes will have lowered overhead costs.
C)products or services with low volumes will have lowered overhead costs.
D)products or services with high volumes are generally costed accurately.

Question 36

One of Astro Fireworks Company's activity cost pools is machine setups, with estimated overhead of $200,000.Astro produces sparklers (75 setups)and lighters (25 setups).How much of the machine setup cost pool should be assigned to sparklers?

A)$50,000
B)$150,000
C)$166,666
D)$200,000

Question 37

In traditional costing systems, overhead is generally applied based on

A)direct labour for job-order costing, and machine hours for process-costing.
B)direct material for job-order costing, and direct labour for process-costing.
C)factory usage for both job-order costing and process-costing.
D)units of production.

Question 38

A cost driver is

A)any factor or activity that has a direct cause-effect relationship with the resources consumed.
B)always based on time consumed by the activity.
C)another name for cost pool.
D)a term used only in traditional costing systems.

Question 39

What sometimes makes implementation of activity-based costing difficult in service industries is that a smaller proportion of overhead costs are company-wide costs.

Question 40

Use the following information to answer questions
Poodle Company manufactures two products, Mini A and Maxi B.Poodle's overhead costs consist of setting up machines, $800,000; machining, $2,000,000; and inspecting, $600,000.Information on the two products is: $$\begin{array} { l r r } & \text { Mini A } & \ \text { Maxi B } \\\text { Direct labour hours } & 15,000 & 25,000 \\\text { Machine setups } & 600 & 400 \\\text { Machine hours } & 24,000 & 26,000 \\\text { Inspections } & 800 & 700\end{array}$$

-Overhead applied to Mini A using traditional costing and direct labour hours is

A)$1,275,000.
B)$1,536,000.
C)$1,670,000.
D)$1,700,000.

Question 41

GoFish Inc.has an overhead rate for machine setups of $200 per machine setup, for a total of $56,000 of overhead.The company produces two products, Product Salamander and Product Gold, which require 120 and 160 setups each, respectively.The overhead assigned to each product is $\underline{\text { Salamander} } \quad \underline{\text { Gold }}$
a) $\$28,000\quad\quad\$28,000$
b) $\$32,000\quad\quad\$24,000$
c) $\$26,000\quad\quad\$30,000$
d) $\$24,000\quad\quad\$32,000$

Question 42

Hammock Company manufactures two models of its hammock, the Superior and the Deluxe.The Superior model requires 10,000 direct labour hours and the Deluxe requires 40,000 direct labour hours.The company produces 4,000 units of the Superior model and 1,000 units of the Deluxe model each year.The company produces the Superior model in batch sizes of 200, while it produces the Deluxe model in batch sizes of 100.The company expects to incur $120,000 of total setup costs this year.How much of the setup costs are allocated to the Superior model using ABC costing?

A)$80,000
B)$60,000
C)$24,000
D)$100,000

Question 43

Canterra Co.incurs $160,000 of overhead costs each year in its three main departments, setup ($10,000), machining ($110,000), and packing ($40,000).The setup department performs 40 setups per year, the machining department works 5,000 hours per year, and the packing department packs 500 orders per year.Information about Canterra's 2 products is as follows: $$\begin{array} { l r r } & \text { Product One } & \text { Product Two } \\\text { Number of setups } & 20 & 20 \\\text { Machining hours } & 1,000 & 4,000 \\\text { Orders packed } & 150 & 350 \\\text { Number of product } & & \\\text { Manufactured } & 600 & 400\end{array}$$ Using ABC, how much overhead is assigned to Product Two each year?

A)$80,000
B)$64,000
C)$121,000
D)$128,000

Question 44

Which of the following is true of activity-based costing?

A)more cost pools
B)same base as traditional costing
C)less costly to use
D)eliminates arbitrary allocations

Question 45

Veronica Co.produces 3 products, Products Rain, Snow, and Wind.Product Rain requires 15 machine setups, Product Snow requires 20 setups, and Product Wind requires 35 setups.Veronica has identified an activity cost pool with allocated overhead of $420,000 for which the cost driver is machine setups.How much overhead is assigned to each product? $\begin{array} {l r r r } \text { Rain } & \text { Snow } & \text { Wind } \\</strong><div>A) \$ 140,000 & \$ 140,000 & \$ 140,000 \\B) \$ 28,000 & \$ 21,000 & \$ 12,000 \\C) \$ 90,000 & \$ 120,000 & \$ 210,000 \\D) \$ 12,000 & \$ 21,000 & \$ 28,000\end{array}$

Question 46

Jaime Inc.manufactures 2 products, sweaters and jackets.The company has estimated its overhead in the order-processing department to be $180,000.The company produces 50,000 sweaters and 80,000 jackets each year.Sweater production requires 25,000 machine hours, jacket production requires 50,000 machine hours.The company places raw materials orders 10 times per month, 2 times for raw materials for sweaters and the remainder for raw materials for jackets.How much of the order processing overhead should be allocated to jackets?

A)$90,000
B)$120,000
C)$110,770
D)$144,000

Question 47

Which of the following is NOT a benefit of activity-based costing?

A)more accurate product costing
B)enhanced control over overhead costs
C)better management decisions
D)less costly to use

Question 48

Sleep-Tight manufactures mattresses for the hotel industry.It has two products, Downy and Firm and total overhead of $504,000.The company plans to manufacture 200 Downy mattresses and 300 Firm mattresses this year.In manufacturing the mattresses, the company must perform 700 material moves for the Downy and 300 for the Firm; it processes 114 purchase orders for the Downy and 90 for the Firm; and the company's employees work 2,800 direct labour hours on the Downy product and 3,500 on the Firm.Sleep-Tight's total material handling costs are $300,000 and its total purchasing costs are $204,000. Using ABC, how much overhead would be assigned to the Downy product?

A)$504,000
B)$324,000
C)$252,000
D)$180,000

Question 49

Which of the following factors would suggest a switch to activity-based costing?

A)product lines similar in volume and manufacturing complexity
B)overhead costs constitute a significant portion of total costs
C)the manufacturing process has been stable
D)production managers use data provided by the existing system

Question 50

Which of the following is a limitation of activity-based costing?

A)more cost pools
B)less control over overhead costs
C)poorer management decisions
D)some arbitrary allocations continue

Question 51

A relevant unit-level cost driver for a spa is

A)advertising the offerings in the spa.
B)products used for facial care.
C)training of new staff.
D)hours patrons spend in the whirlpool.

Question 52

Each of the following is a limitation of activity-based costing EXCEPT that

A)it can be expensive to use.
B)it is more complex than traditional costing.
C)more cost pools are used.
D)some arbitrary allocations continue.

Question 53

Use the following information to answer questions
Poodle Company manufactures two products, Mini A and Maxi B.Poodle's overhead costs consist of setting up machines, $800,000; machining, $2,000,000; and inspecting, $600,000.Information on the two products is: $$\begin{array} { l r r } & \text { Mini A } & \ \text { Maxi B } \\\text { Direct labour hours } & 15,000 & 25,000 \\\text { Machine setups } & 600 & 400 \\\text { Machine hours } & 24,000 & 26,000 \\\text { Inspections } & 800 & 700\end{array}$$

-Overhead applied to Mini A using activity-based costing is

A)$1,275,000.
B)$1,536,000.
C)$1,760,000.
D)$1,920,000.

Question 54

A company incurs $1,200,000 of overhead each year in three departments, Processing, Packaging, and Testing.The company performs 800 processing transactions, 200,000 packaging transactions, and 2,000 tests per year in producing 400,000 drums of oil and 600,000 drums of sludge.The following data are available: $$\begin{array} { l c r } \text { Department } & \text { Expected use of Driver } & \text { Cost } \\\hline \text { Processing } & 800 & \$ 500,000 \\\text { Packaging } & 200,000 & 500,000 \\\text { Testing } & 2,000 & 200,000\end{array}$$ Production information for oil is as follows: $$\begin{array} { l c } \text { Department } & \text { Expected use of Driver } \\\hline \text { Processing } & 300 \\\text { Packaging } & 120,000 \\\text { Testing } & 1,600\end{array}$$ Calculate the amount of overhead assigned to oil.

A)$600,000
B)$647,500
C)$552,500
D)$460,000

Question 55

Use the following information to answer questions
Poodle Company manufactures two products, Mini A and Maxi B.Poodle's overhead costs consist of setting up machines, $800,000; machining, $2,000,000; and inspecting, $600,000.Information on the two products is: $$\begin{array} { l r r } & \text { Mini A } & \ \text { Maxi B } \\\text { Direct labour hours } & 15,000 & 25,000 \\\text { Machine setups } & 600 & 400 \\\text { Machine hours } & 24,000 & 26,000 \\\text { Inspections } & 800 & 700\end{array}$$

-Overhead applied to Maxi B using activity-based costing is

A)$1,280,000.
B)$1,640,000.
C)$1,664,000.
D)$2,125,000.

Question 56

Canterra Co.incurs $160,000 of overhead costs each year in its three main departments, setup ($10,000), machining ($110,000), and packing ($40,000).The setup department performs 40 setups per year, the machining department works 5,000 hours per year, and the packing department packs 500 orders per year.Information about Canterra's 2 products is as follows: $$\begin{array} { l r r } & \underline{\text { Product One }} & \underline{\text { Product Two }} \\ \text { Number of setups } & 20 & 20 \\\text { Machining hours } & 1,000 & 4,000 \\\text { Orders packed } & 150 & 350\end{array}$$ If machining hours are used as a base, how much overhead is assigned to Product One each year?

A)$32,000
B)$80,000
C)$55,000
D)$48,000

Question 57

Canterra Co.incurs $540,000 of overhead costs each year in its three main departments, setup ($40,000), machining ($400,000), and packing ($100,000).The setup department performs 50 setups per year, the machining department works 8,000 hours per year, and the packing department packs 200 orders per year.Information about Canterra's 2 products is as follows: $$\begin{array} { l r r } & \text { Product One } & \text { Product Two } \\\text { Number of setups } & 10 & 40 \\\text { Machining hours } & 3,000 & 5,000 \\\text { Orders packed } & 110 & 90\end{array}$$ Using ABC, how much overhead is assigned to Product One each year?

A)$540,000
B)$327,000
C)$270,000
D)$213,000

Question 58

The primary benefit of ABC is it provides

A)faster management decisions.
B)enhanced control over overhead costs.
C)more cost pools.
D)more accurate product costing.

Question 59

A company incurs $1,200,000 of overhead each year in three departments, Processing, Packaging, and Testing.The company performs 800 processing transactions, 200,000 packaging transactions, and 2,000 tests per year in producing 400,000 drums of oil and 600,000 drums of sludge.The following data are available: $$\begin{array} { l c r } \text { Department } & \text { Expected use of Driver } & \text { Cost } \\\hline \text { Processing } & 800 & \$ 500,000 \\\text { Packaging } & 200,000 & 500,000 \\\text { Testing } & 2,000 & 200,000\end{array}$$ Production information for sludge is as follows: $$\begin{array} { l c } \text { Department } & \text { Expected use of Driver } \\\hline \text { Processing } & 500 \\\text { Packaging } & 80,000 \\\text { Testing } & 400\end{array}$$ Calculate the amount of overhead assigned to sludge.

A)$600,000
B)$552,500
C)$647,500
D)$460,000

Question 60

A critical component of an activity-based accounting system is

A)the ability to accurately measure activities that consume cost.
B)few areas in the facility that capture costs.
C)the ability to eliminate non-value-added activities.
D)flexible job-order costing information.

Question 61

A non-value-added activity in a service enterprise is

A)taking appointments.
B)travelling.
C)advertising.
D)all of these.

Question 62

The presence of any of the following factors would suggest a switch to ABC EXCEPT when

A)product lines differ greatly in volume.
B)overhead costs constitute a minor portion of total costs.
C)the manufacturing process has changed significantly.
D)production managers are ignoring data provided by the existing system.

Question 63

Which of the following is a batch-level activity?

A)sandpaper used to smooth the wood used in the manufacture of a chair
B)the design of a chair
C)the chairs in the staff cafeteria
D)shipment of chairs to a customer

Question 64

Which of the following is a batch-level activity?

A)plant management
B)product design
C)equipment setups
D)assembling

Question 65

A major advantage in changing from a traditionally-based costing system to an activity-based costing system is

A)a company's customers can benefit from any reduction in costs.
B)management will be able to identify the true cost of non-added-value activities.
C)direct labour and material costs will be reduced.
D)supplier costs will be reduced after the changeover.

Question 66

What sometimes makes implementation of activity-based costing difficult in service industries is

A)the labelling of activities as value-added.
B)identifying activities, activity cost plus, and cost drivers.
C)that a larger proportion of overhead costs are company-wide costs.
D)attempting to reduce or eliminate non-value-added activities.

Question 67

Which of the following is a product-level activity?

A)regulatory approval of a new prescription drug
B)an advertisement campaign that focuses on the large number of products the company produces
C)equipment cleaning between batches
D)material handling

Question 68

Which of the following is an example of a facility-level activity in an airport?

A)wages for security screening personnel
B)parking lot revenue and expenses
C)airline landing fees
D)salaries of air traffic controllers

Question 69

What might be a reason to NOT change from a traditionally-based costing system to an activity-based costing system?

A)Products or services are similar in volume and activity.
B)Support services are spread evenly throughout the company's activities.
C)Overhead is a low component of the overall cost.
D)All of the above are valid reasons.

Question 70

Value-added activities

A)should be reduced or eliminated.
B)involve resource usage customers are willing to pay for.
C)add cost to a product without affecting selling price.
D)cannot be differentiated from non-value-added activities.

Question 71

Which of the following is a value-added activity?

A)engineering design
B)machinery repair
C)inventory storage
D)inspections

Question 72

Which of the following is an example of a product-level activity in a refinery?

A)transportation of fuel to gas stations
B)product testing for quality control
C)advertising the benefits of the company's products
D)maintenance activities in the refinery

Question 73

Activity-based costing has been found to be useful in each of the following service industries EXCEPT

A)banks.
B)hospitals.
C)telephone companies.
D)ABC has been useful in any of these industries.

Question 74

What might be an impediment in changing from a traditionally-based costing system to an activity-based costing system?

A)Management may not be in favour of a change.
B)Excessive costs may be incurred to assist in capturing costs.
C)Some costs would still have to be allocated arbitrarily after the changeover.
D)All of the above are impediments.

Question 75

Which of the following is an example of batch-level activity in a company marketing cell phones?

A)internet advertising
B)preparing monthly customer invoices
C)rent for kiosks in shopping malls
D)offering discounts on monthly payment plans

Question 76

All of the following are examples of a value-added activity in a service company EXCEPT

A)delivering packages by a delivery service.
B)ordering supplies.
C)performing surgery.
D)providing legal research for legal services.

Question 77

Which of the following is a facility-level activity?

A)the Human Resources Department
B)the Product Manager's salary
C)insurance on the factory that is used exclusively to manufacture one of the company's seven products
D)inspections

Question 78

Which of the following is an example of unit-level activity in a major automotive parts distribution company?

A)preparing cheques for suppliers
B)promotional materials
C)packing parts for shipment
D)shipping costs of parts to dealers

Question 79

Which of the following is a unit-level activity?

A)cleaning the paint sprayer when switching from one colour of paint to another
B)paint used in the manufacturing process
C)test marketing to see which colour of paint customers prefer
D)painting the executive offices

Question 80

Which of the following is a non-value-added activity?

A)engineering design
B)machining
C)inspection
D)packaging