Deck 4: Activity-Based Costing

Question 1

In activity-based costing (ABC), wages paid to an assembly-line worker would most likely be classified as:

A) overhead.
B) a product-level cost.
C) direct labor.
D) a facility-level cost.

Answer 1

C

Question 2

Which of the following would most likely be a batch-levelcost?

A) Factory rent
B) Quality control
C) Energy costs for factory machinery
D) Research and development costs for a new product line

Answer 2

B

Question 3

Herndon Brothers Inc. produces a variety of "all natural" household cleaning supplies that it manufactures and distributes to various grocery stores along the west coast. Which of the following types of costs would most likely be a product-level cost?

A) A package product design cost for a new product line
B) A machine setup cost
C) Depreciation on the factory building
D) Energy costs for factory machinery

Answer 3

A

Question 4

Troxler Inc. produces various types of floor rugs with many different designs. They typically produce at least 200 rugs with a single machine setup. A cost incurred to sustain the overall manufacturing process is called a(n):

A) product-level cost.
B) batch-level cost.
C) unit-level cost.
D) facility-level cost.

Question 5

Activity-based costing is a method of cost allocation that is useful for assigning ____ costs to products or services.

A) direct materials
B) direct labor
C) overhead
D) direct materials and direct labor

Question 6

____ are procedures or processes that cause work to be accomplished.

A) Unit-level costs
B) Overhead costs
C) Activities
D) Batch-level costs

Question 7

Troxler Inc. produces various types of floor rugs with many different designs. They typically produce at least 200 rugs with a single machine setup. A cost incurred each time a new rug design is developed is called a(n):

A) product-level cost.
B) batch-level cost.
C) unit-level cost.
D) facility-level cost.

Question 8

Herndon Brothers Inc. produces a variety of "all natural" household cleaning supplies that it manufactures and distributes to various grocery stores along the west coast. Which of the following types of costs wouldmost likely be a facility-level cost?

A) A package product design cost for a new product line
B) A machine setup cost
C) Depreciation on the factory building
D) Utility costs for factory machinery

Question 9

Troxler Inc. produces various types of floor rugs with many different designs. They typically produce at least 200 rugs with a single machine setup. A cost incurred each time a machine is set up is called a(n):

A) product-level cost.
B) batch-level cost.
C) unit-level cost.
D) facility-level cost.

Question 10

Herndon Brothers Inc. produces a variety of "all natural" household cleaning supplies that it manufactures and distributes to various grocery stores along the west coast. Which of the following types of costs would most likely be a unit-level cost?

A) A package product design cost
B) A machine setup cost
C) Depreciation on the factory building
D) Energy costs for factory machinery

Question 11

Herndon Brothers Inc. produces a variety of "all natural" household cleaning supplies that it manufactures and distributes to various grocery stores along the west coast. Which of the following types of costs would most likely be a batch-level cost?

A) A package product design cost for a new product line
B) A machine setup cost
C) Depreciation on the factory building
D) Energy costs for factory machinery

Question 12

Which of the following would most likely be a product-level cost?

A) Salaries related to purchasing and receiving
B) Quality control costs
C) Energy costs for factory machinery
D) Research and development costs for a new product line

Question 13

Which of the following statements associated with traditional overhead allocation is true?

A) A traditional overhead allocation method is the most accurate in automated environments with diverse products.
B) A traditional overhead allocation method can also be referred to as activity-based costing.
C) A traditional overhead allocation method provides the most accurate product cost information.
D) A traditional overhead allocation method usually uses one or two volume-based cost drivers.

Question 14

Which of the following types of costs are usually not allocated to products?

A) Unit-level costs
B) Batch-level costs
C) Facility-level costs
D) Product-level costs

Question 15

As companies experience a shift from labor-intensive operations to automated operations, which of the following costs becomes more difficult to trace to products?

A) Administrative costs
B) Direct labor costs
C) Direct material costs
D) Overhead costs

Question 16

Troxler Inc. produces various types of floor rugs with many different designs. They typically produce at least 200 rugs with a single machine setup. A cost incurred every time an individual rug is produced is called a(n):

A) product-level cost.
B) batch-level cost.
C) unit-level cost.
D) facility-level cost.

Question 17

Traditional overhead allocation methods as opposed to activity-based allocation methods work best when:

A) there are many different volume-based cost drivers.
B) most costs are unit-level costs.
C) overhead can be estimated.
D) most costs are facility-level costs.

Question 18

Which of the following would most likely be a facility-level cost?

A) Depreciation on factory equipment
B) Depreciation on factory building
C) Depreciation of engineering equipment
D) Depreciation of setup equipment

Question 19

Which of the following statements is true regarding activity-based costing (ABC)?

A) It is based on the concept that a single cost driver can drive all overhead costs.
B) It is based on the concept that activities drive overhead costs.
C) It is based on the concept that unit-level costs drive all overhead costs.
D) It is based on the concept that either the number of direct labor or machine hours incurred drives all overhead costs.

Question 20

Which of the following would most likely be a unit-level cost?

A) Factory insurance
B) Quality control
C) Lubricants used on factory machinery
D) Research and development costs for a new product line

Question 21

Which of the following statements comparing traditional and activity-based costing (ABC) is false?

A) Traditional systems are generally less accurate than ABC systems.
B) ABC and traditional systems often produce different product cost information.
C) ABC systems focus on activity costing while traditional systems focus on volume costing.
D) ABC systems are generally less expensive to implement than traditional systems.

Question 22

Which of the following statements is true regarding cross subsidies?

A) They occur when factory workers are trained to work on many different machines.
B) They occur when high-volume products are assigned more than their fair share of overhead costs.
C) They occur when high-volume products have more direct material and direct labor costs than overhead costs.
D) They occur when more than one cost driver can be determined for a particular overhead cost item.

Question 23

Which of the following statements is true regarding the identification of activities in an ABC system?

A) All manufacturing companies have identical types of activities.
B) All merchandising companies have identical types of activities.
C) As a business becomes more complex, fewer activities need to be identified.
D) Two different businesses which have the same type of activities can still choose different cost drivers.

Question 24

What would one expect to occur when cross subsidies are eliminated with the use of activity-based costing (ABC)?

A) That lower-volume products pick up more of their fair share of overhead costs.
B) That higher-volume products pick up more of their fair share of overhead costs.
C) That lower-volume products will be determined as being unprofitable.
D) That higher-volume products will be determined as being unprofitable.

Question 25

Which of the following statements is false regarding activities in an ABC system?

A) As a business becomes more complex, more activities will probably need to be identified.
B) Two different manufacturing companies that make the same products may come up with different sets of activities and cost drivers.
C) The maximum number of activities that should be identified as batch-level is two.
D) Overhead costs may be allocated to more than one activity.

Question 26

Which of the following statements comparing traditional and activity-based costing (ABC) is true?

A) ABC systems eliminate cross subsidies.
B) Traditional systems eliminate cross subsidies.
C) ABC and traditional systems often produce similar product cost information.
D) All of the above are true.

Question 27

Which of the following would be the least likely cost driver for an activity such as product testing?

A) Number of shipments received
B) Number of tests
C) Hours of testing time
D) Number of change orders

Question 28

Aunt Lucy's Candies Aunt Lucy's Candies sells standard and premium chocolate candies through its catalog business. Many of the candies are sold in bulk to other companies. Last year, the company incurred $400,000 in overhead costs. After implementing activity-based costing (ABC), the company's controller identified the following information:
The number of activities for standard and premium candies is as follows:
Refer to the Aunt Lucy's Candies information above. What is the overhead rate for the processing activity?

A) $0.92 per unit
B) $1.44 per unit
C) $0.40 per unit
D) $0.72 per unit

Question 29

Which of the following is a key feature of activity-based costing?

A) Overhead costs are assigned on the basis of volume.
B) Overhead costs are assigned on the basis of sales.
C) Overhead costs are assigned on the basis of direct labor hours.
D) Overhead costs are assigned on the basis of activities.

Question 30

Which of the following statements is false regarding the identification of activities in activity-based costing (ABC)?

A) The identification of activities that drive overhead costs is done before cost drivers are selected.
B) An activity can be thought of as a procedure or process that causes work to be accomplished.
C) Overhead costs should not be traced to more than one activity.
D) Because of different types of production processes and products, every business will have a different set of activities and cost drivers.

Question 31

Which of the following statements is true regarding activities?

A) An activity that drives overhead costs should only take place within the physical manufacturing facility.
B) Activities can be consumed by resources.
C) Overhead costs can be traced to more than one activity.
D) Activities seldom cause work to be accomplished.

Question 32

Which of the following would be the least likely cost driver for an activity such as the repair and maintenance of factory equipment?

A) Machine hours
B) Direct labor hours
C) Number of units produced
D) Number of new product designs

Question 33

Which of the following would be the least likely cost driver for an activity such as the usage of factory supplies?

A) Machine hours
B) Number of engineering hours
C) Direct labor hours
D) Number of units produced

Question 34

Which of the following statements regarding activity-based costing (ABC) is true?

A) Resources consume activities and products consume costs.
B) Activities consume resources and products consume activities.
C) Costs consume activities and products cause costs.
D) Resources consume activities and activities cause costs.

Question 35

Which of the following statements accurately describes the basis of activity-based costing?

A) Activities simply sustain a facility's general manufacturing process.
B) Activities refer to batch-level costs incurred to support the production of each different type of product.
C) Activities consume facility-level costs.
D) Activities consume resources and products consume activities.

Question 36

Which of the following statements is false regarding cost drivers?

A) A particular cost driver may be used for more than one activity.
B) If employees know the cost driver(s) for their department, it may motivate them to be more efficient.
C) The selection of a cost driver should be based on the correlation it has with direct materials used in the production process.
D) The best cost driver for a particular activity may be different from one company to the next.

Question 37

What should be done in Stage 1 in an activity-based costing (ABC) system?

A) Total manufacturing costs are calculated.
B) Raw materials are purchased.
C) Cost drivers for activities are chosen.
D) Activities are identified.

Question 38

In Stage 2 of ABC allocation:

A) cost drivers are determined and costs are traced to each activity.
B) activities are identified.
C) predetermined overhead rates are calculated.
D) equivalent units are computed.

Question 39

Which of the following statements regarding cost drivers is false?

A) Different businesses can have different sets of cost drivers.
B) Cost drivers should generally be chosen based on a cause-and-effect relationship between the driver and the specific cost being considered.
C) Cost drivers are groups of overhead costs that are similar.
D) An activity could have more than one potential cost driver.

Question 40

Which of the following statements is true regarding a cost driver?

A) Once a particular cost driver has been used for an activity, it may not be used again.
B) Employees should never be made aware of the cost drivers for their department.
C) There may be more than one potential cost driver for a particular activity.
D) Choosing the wrong cost driver should not impact the determination of a product's cost.

Question 41

Aunt Lucy's Candies Aunt Lucy's Candies sells standard and premium chocolate candies through its catalog business. Many of the candies are sold in bulk to other companies. Last year, the company incurred $400,000 in overhead costs. After implementing activity-based costing (ABC), the company's controller identified the following information:
The number of activities for standard and premium candies is as follows:
Refer to the Aunt Lucy's Candies information above. What is the overhead rate for the sales activity?

A) $16.00 per sales order
B) $102.63 per sales order
C) $10.26 per sales order
D) $52.23 per sales order

Question 42

Which of the following is not a benefit of activity-based costing (ABC)?

A) Increased product cost information
B) Increased accuracy in the budgeting process
C) Increased implementation costs
D) Increased understanding of activities that drive overhead costs

Question 43

Johnson Manufacturing Johnson Manufacturing anticipates incurring $850,000 in overhead costs this year. After implementing activity-based costing (ABC), the company's controller identified the following related information:
The number of activities expected is as follows:
Refer to the Johnson Manufacturing information above. What will be the overhead rate for the production activity?

A) $25.00 per machine hour
B) $60.00 per machine hour
C) $50.00 per machine hour
D) $42.25 per machine hour

Question 44

Compton Corporation The following overhead cost information is available for Compton Corporation for 2011:
During the year, 5,000 purchase orders were issued; 20,000 shipments were received; 3,000 machine setups were performed; and 4,000 inspections were conducted.
Refer to the Compton Corporation information above. What is the overhead rate for the purchasing activity?

A) $0.05 per purchase order
B) $20.00 per purchase order
C) $72.00 per purchase order
D) $3.13 per purchase order

Question 45

Wake Construction Wake Construction manufactures and installs standard and custom-made cabinetry for residential homes. Last year, the company incurred $200,000 in overhead costs. After implementing activity-based costing (ABC), the company's accountant identified the following related information:
The number of activities for standard and custom-made cabinets is as follows:
During the past year, Wake accepted a customer order for a set of custom-made cabinets that would require the following:
Refer to the Wake Construction information above. How much overhead should be applied to the above customer order?

A) $4,050
B) $285
C) $3,360
D) $975

Question 46

Johnson Manufacturing Johnson Manufacturing anticipates incurring $850,000 in overhead costs this year. After implementing activity-based costing (ABC), the company's controller identified the following related information:
The number of activities expected is as follows:
Refer to the Johnson Manufacturing information above. How much total overhead will be allocated to the production activity?

A) $170,000
B) $552,500
C) $30,000
D) $127,500

Question 47

Which of the following items might cause activity-based costing (ABC) to be more difficult to implement in a service company than in a manufacturing company?

A) The lack of direct labor.
B) The lack of facility-level costs.
C) The lack of repetitive activities.
D) The lack of overhead costs.

Question 48

The following overhead cost information is available for Henderson Inc. for 2008: During the year, 4,000 purchase orders were issued; 2,400 shipments were received; 4,500 machine setups were performed; and 2,500 inspections were conducted.
If Job #101 required 2 purchase orders, 6 shipments, 3 machine setups, and 5 inspections to complete, how much overhead should be assigned to Job #101?

A) $280.00
B) $60.00
C) $150.00
D) $40.00

Question 49

Johnson Manufacturing Johnson Manufacturing anticipates incurring $850,000 in overhead costs this year. After implementing activity-based costing (ABC), the company's controller identified the following related information:
The number of activities expected is as follows:
Refer to the Johnson Manufacturing information above. How much total overhead would be applied to a job that required 2 purchase order, 4 setups, and 400 machine hours?

A) $14,723.55
B) $10,280.00
C) $14,413.45
D) $14,005.64

Question 50

Compton Corporation The following overhead cost information is available for Compton Corporation for 2011:
During the year, 5,000 purchase orders were issued; 20,000 shipments were received; 3,000 machine setups were performed; and 4,000 inspections were conducted.
Refer to the Compton Corporation information above. What is the overhead rate for the receiving activity?

A) $1.88 per shipment received
B) $6.00 per shipment received
C) $3.00 per shipment received
D) $0.33 per shipment received

Question 51

Wake Construction Wake Construction manufactures and installs standard and custom-made cabinetry for residential homes. Last year, the company incurred $200,000 in overhead costs. After implementing activity-based costing (ABC), the company's accountant identified the following related information:
The number of activities for standard and custom-made cabinets is as follows:
During the past year, Wake accepted a customer order for a set of custom-made cabinets that would require the following:
Refer to the Wake Construction information above. What is the total product (manufacturing) cost for the above customer order?

A) $4,050
B) $285
C) $3,360
D) $975

Question 52

Aunt Lucy's Candies Aunt Lucy's Candies sells standard and premium chocolate candies through its catalog business. Many of the candies are sold in bulk to other companies. Last year, the company incurred $400,000 in overhead costs. After implementing activity-based costing (ABC), the company's controller identified the following information:
The number of activities for standard and premium candies is as follows:
Refer to the Aunt Lucy's Candies information above. If a single sales order for premium candies requires 2 purchase orders for a total of 500 pieces (units), how much overhead should be assigned to that order?

A) $201.08
B) $204.93
C) $262.56
D) $240.00

Question 53

Which of the following is false regarding activity-based costing (ABC)?

A) Companies that have a high potential for cost distortions are more likely to benefit with ABC.
B) Opportunities for continuous improvement are rarely revealed by using ABC.
C) The cost of implementing ABC may outweigh the benefits.
D) Increased accuracy with budgeting resources is often realized.

Question 54

Compton Corporation The following overhead cost information is available for Compton Corporation for 2011:
During the year, 5,000 purchase orders were issued; 20,000 shipments were received; 3,000 machine setups were performed; and 4,000 inspections were conducted.
Refer to the Compton Corporation information above. If Job #229 required 5 purchase orders, 10 shipments, 8 machine setups, and 4 inspections to fill, how much overhead should be assigned to Job #229?

A) $ 4.06
B) $303.75
C) $580.00
D) $ 85.50

Question 55

Activity-based costing (ABC):

A) should not be applied to non-manufacturing activities.
B) should not be applied to service companies.
C) can be applied to administrative activities.
D) can only be used by manufacturing companies.

Question 56

Which of the following statements regarding service companies and activity-based costing (ABC) is true?

A) Service companies are not permitted to use ABC costing.
B) Service companies find it easier to use ABC costing than manufacturing companies.
C) Fewer repetitive activities make ABC costing more difficult to implement in service companies.
D) Service companies have proportionately less facility-level costs than manufacturing companies.

Question 57

Aunt Lucy's Candies Aunt Lucy's Candies sells standard and premium chocolate candies through its catalog business. Many of the candies are sold in bulk to other companies. Last year, the company incurred $400,000 in overhead costs. After implementing activity-based costing (ABC), the company's controller identified the following information:
The number of activities for standard and premium candies is as follows:
Refer to the Aunt Lucy's Candies information above. What is the overhead rate for the purchasing activity?

A) $12.00 per purchase order
B) $18.28 per purchase order
C) $40.63 per purchase order
D) $36.56 per purchase order

Question 58

Jones Construction currently uses traditional costing where overhead is applied based on direct labor hours. Using traditional costing, the applied overhead rate is $24 per direct labor hour. They are considering a switch to activity-based costing (ABC). The company controller has come up with preliminary overhead rates for each of the following activities:
One of the company's current jobs has the following information available:
Which of the following statements is true when comparing the total overhead allocated to the job using traditional versus ABC costing?

A) ABC costing will yield $362.50 less in overhead cost being allocated to the job.
B) ABC costing will yield $725.50 less in overhead cost being allocated to the job.
C) ABC costing will yield $345.50 more in overhead cost being allocated to the job.
D) ABC costing will yield $725.50 more in overhead cost being allocated to the job.

Question 59

Which of the following types of costs would service-oriented companies be more likely to have proportionately more of than manufacturing companies?

A) Facility-level costs
B) Product-level costs
C) Batch-level costs
D) Unit-level costs

Question 60

Which of the following types of companies would be most likely to benefit from activity-based costing?

A) Companies with a low potential for cost distortions
B) Companies that have a large proportion of unit-level costs
C) Companies that have a relatively high proportion of overhead compared to direct materials and direct labor
D) None of these

Question 61

Mountaineer Tents manufactures and sells heavy and light duty tents to various outdoor retailers. To better estimate costs, the company recently adopted an activity-based costing system. Last year, the company incurred $1,200,000 in overhead costs. Based on an intense study of their company, the following activities, allocation bases, and percentages of overhead costs were determined:
The number of activities for heavy and light duty tents is as follows:
Required:

Question 62

For each of the following activities, identify one potential cost driver.

Question 63

The following overhead cost information is available for Lowman Inc. for 2008:
During the year, 2,000 purchase orders were issued; 500 machine setups were performed; and 1,500 inspections were conducted.
Required:

Question 64

When comparing traditional product costing and activity-based costing (ABC) methods, which kind(s) of costs are allocated to products in a similar manner and which kind(s) are allocated to products in a different manner? Explain your answers.

Question 65

Which of the following is true regarding activity-based costing (ABC)?

A) The benefits of using ABC always outweigh its limitations.
B) The lower the proportion of overhead costs as compared to direct materials and direct labor costs, the more likely a company will benefit by using ABC.
C) Companies with a high-proportion of non-unit-level costs should rarely use ABC.
D) High measurement costs associated with ABC may deter some companies from its use.

Question 66

Give two examples for each of the four types of cost classifications.

Question 67

Which of the following would be a likely disadvantage of activity-based costing (ABC)?

A) A decrease in a company's ability to accurately prepare budgets for the upcoming period.
B) A decrease in a company's ability to find opportunities for continuous improvement.
C) An increase in the accuracy of product cost information.
D) An increase in the cost of obtaining accurate product cost information.

Question 68

The following overhead cost information is available for Millennium Inc. for 2011:
During the year, 7,500 purchase orders were issued; 18,000 machine setups were performed; and 3,000 inspections were conducted.
Required:

Question 69

What is meant by the term "activity" in activity-based costing (ABC)? How are costs allocated in ABC?

Question 70

Can activity-based costing (ABC) be used by service companies? If so, is the implementation of an ABC system in a service company different than that of a manufacturing company?

Question 71

What are the benefits and limitations of activity-based costing (ABC) systems?

Question 72

Identify and define each of the four general types of cost classifications used with activity-based costing (ABC).

Question 73

Discuss how the shift from labor intensive manufacturing to automation has affected product costing.

Question 74

Which of the following is a likely advantage in activity-based costing (ABC)?

A) A decrease in the need to maintain accurate cost driver information.
B) A decrease in the need to maintain accurate overhead cost information.
C) An increase in the ability to trace indirect costs to specific activities.
D) As increase in the cost of accumulating, tracking, and assigning costs to products and services.

Question 75

Classify each of the following costs as unit-level (U), batch-level (B), product-level (P), or facility-level (F).

Question 76

Thurman Brothers Construction manufactures and installs standard and custom-made cabinetry for residential homes. Last year, the company incurred $600,000 in overhead costs when a total of 10,000 direct labor hours were incurred. After implementing activity-based costing (ABC), the company's accountant identified the following related information:
The number of activities for standard and custom-made cabinets is as follows:
During the past year, Thurman accepted a customer order for a set of custom-made cabinets that would require the following:
Required:

Question 77

Define "cross subsidies" and tell what kind of product costing system is likely to have them. What happens to cross subsidies in activity-based costing (ABC)?

Question 78

Ken's Carpets sells carpet for both residential and business use. To better estimate costs, the company recently adopted an activity-based costing system. Last year, the company incurred $300,000 in overhead costs. Based on an intense study of their company, the following activities, allocation bases, and percentages of overhead costs were determined:
The number of activities for residential and business is as follows:
Required: