ACC 350 Week 6 Quiz 4 Chapter 5 – Strayer University NEW

ACC 350 Week 6 Quiz – Strayer

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Chapter 5

Activity-Based Costing and Activity-Based Management

1)

A top-selling product might actually result in losses for the company.

2)

Companies that undercost products will most likely lose market share.

3)

If companies increase market share in a given product line because their reported costs are less than their actual costs, they will become more profitable in the long run.

4)

As product diversity and indirect costs increase, it is usually best to switch away from an activity based cost system to a broad averaging system.

5)

If a company undercosts one of its products, then it will overcost at least one of its other products.

6)

Direct costs plus indirect costs equal total costs.

7)

When refining a costing system, a company should classify as many costs as possible as indirect costs.

8)

In a homogeneous cost pool, all costs have a similar cause-and-effect relationship with the cost-allocation base.

9)

Indirect labor and distribution costs would most likely be in the same activity-cost pool.

10)

Activity-based costing helps identify various activities that explain why costs are incurred.

11)

Direct tracing of costs improves cost accuracy.

12)

A cost-allocation base is a necessary element when using a strategy that will refine a costing system.

13)

An activity-based costing system is necessary for costing services that are similar.

14)

Traditional systems are likely to undercost complex products with lower production volume.

15)

For activity-based cost systems, activity costs are assigned to products in the proportion of the demand they place on activity resources.

16)

Unit-level measures can distort product costing because the demand for overhead resources may be driven by batch-level or product-sustaining activities.

17)

Output unit-level costs cannot be determined unless you know how many units are in a given batch.

18)

Using multiple unit-level cost drivers generally constitutes an effective activity-based cost system.

19)

Misleading cost numbers are larger when unit-level assignments and the alternative activity-cost-driver assignments are proportionately similar to each other.

20)

Availability of reliable data and measures should be considered when choosing a cost-allocation base.

21)

When designing a costing system, it is easiest to calculate total costs first, and then per-unit costs.

22)

ABC systems attempt to trace more costs as direct costs.

23)

ABC systems create homogeneous cost pools linked to different activities.

24)

ABC systems seek a cost allocation base that has a cause-and-effect relationship with costs in the cost pool.

25)

For service organizations, activity-based cost systems may be used to clarify appropriate cost assignments.

26)

ABC reveals opportunities for improving the way work is done.

27)

Activity-based management refers to the use of information derived from ABC analysis to analyze and improve operations.

28)

Information derived from an ABC analysis might be used to eliminate nonvalue-added activities.

29)

ABC costing systems are primarily for use in manufacturing and marketing and not for design engineering.

30)

Department-costing systems are a further refinement of ABC systems.

31)

ABC systems are useful in manufacturing, but not in the merchandising or service industries.

32)

Costing systems with multiple cost pools are considered ABC systems.

33)

Regarding department wide systems, the benefits of an ABC system must be balanced against its costs and limitations.

34)

ABC systems always provide decision-making benefits that exceed implementation costs.

35)

The primary costs of an ABC system are the measurements necessary to implement the system.

36)

Simply because activity-based costing systems employ more activity-cost drivers, they provide more accurate product costs than traditional systems.

37)

If products are alike, then for costing purposes:
A)

a simple costing system will yield accurate cost numbers
B)

an activity-based costing system should be used
C)

multiple indirect-cost rates should be used
D)

varying demands will be placed on resources

38)

Undercosting a particular product may result in:
A)

loss of market share
B)

lower profits
C)

operating inefficiencies
D)

understating total product costs

39)

Overcosting of a product is MOST likely to result from:
A)

misallocating direct labor costs
B)

overpricing the product
C)

undercosting another product
D)

understating total product costs

40)

A company produces three products; if one product is overcosted then:
A)

one product is undercosted
B)

one or two products are undercosted
C)

two products are undercosted
D)

no products are undercosted

41)

Misleading cost numbers are MOST likely the result of misallocating:
A)

direct material costs
B)

direct manufacturing labor costs
C)

indirect costs
D)

All of these answers are correct.

42)

An accelerated need for refined cost systems is due to:
A)

global monopolies
B)

rising prices
C)

intense competition
D)

a shift toward increased direct costs

43)

The use of a single indirect-cost rate is more likely to:
A)

undercost high-volume simple products
B)

undercost low-volume complex products
C)

undercost lower-priced products
D)

Both B and C are correct.

44)

Uniformly assigning the costs of resources to cost objects when those resources are actually used in a nonuniform way is called:
A)

overcosting
B)

undercosting
C)

peanut-butter costing
D)

department costing

45)

Refining a cost system includes:
A)

classifying as many costs as indirect costs as is feasible
B)

creating as many cost pools as possible
C)

identifying the activities involved in a process
D)

seeking a lesser level of detail

46)

Greater indirect costs are associated with:
A)

specialized engineering drawings
B)

quality specifications and testing
C)

inventoried materials and material control systems
D)

All of these answers are correct.

47)

Design of an ABC system requires:
A)

that the job bid process be redesigned
B)

that a cause-and-effect relationship exists between resource costs and individual activities
C)

an adjustment to product mix
D)

Both B and C are correct.

48)

ABC systems create:
A)

one large cost pool
B)

homogenous activity-related cost pools
C)

activity-cost pools with a broad focus
D)

activity-cost pools containing many direct costs

49)

Logical cost allocation bases include:
A)

cubic feet of packages moved to measure distribution activity
B)

machine hours to measure setup activity
C)

direct manufacturing labor hours to measure designing activity
D)

All of these answers are correct.

50)

ABC systems:
A)

highlight the different levels of activities
B)

limit cost drivers to units of output
C)

allocate costs based on the overall level of activity
D)

generally undercost complex products

51)

A single indirect-cost rate may distort product costs because:
A)

there is an assumption that all support activities affect all products
B)

it recognizes specific activities that are required to produce a product
C)

costs are not consistently recorded
D)

it fails to measure the correct amount of total costs

52)

Traditional cost systems distort product costs because:
A)

they do not know how to identify the appropriate units
B)

competitive pricing is ignored
C)

they emphasize financial accounting requirements
D)

they apply average support costs to each unit of product

53)

Which of the following statements about activity-based costing is NOT true?
A)

Activity-based costing is useful for allocating marketing and distribution costs.
B)

Activity-based costing is more likely to result in major differences from traditional costing systems if the firm manufactures only one product rather than multiple products.
C)

Activity-based costing seeks to distinguish batch-level, product-sustaining, and facility-sustaining costs, especially when they are not proportionate to one another.
D)

Activity-based costing differs from traditional costing systems in that products are not cross-subsidized.

54)

Activity-based costing (ABC) can eliminate cost distortions because ABC:
A)

develops cost drivers that have a cause-and-effect relationship with the activities performed
B)

establishes multiple cost pools
C)

eliminates product variations
D)

recognizes interactions between different departments in assigning support costs

55)

Product lines that produce different variations (models, styles, or colors) often require specialized manufacturing activities that translate into:
A)

fewer indirect costs for each product line
B)

decisions to drop product variations
C)

a greater number of direct manufacturing labor cost allocation rates
D)

greater overhead costs for each product line

Answer the following questions using the information below:

Merriman Company provides the following ABC costing information:

Activities Total Costs Activity-cost drivers
Account inquiry hours $400,000 10,000 hours
Account billing lines $280,000 4,000,000 lines
Account verification accounts $150,000 40,000 accounts
Correspondence letters $ 50,000 4,000 letters
Total costs $880,000

The above activities are used by Departments A and B as follows:

Department A Department B
Account inquiry hours 2,000 hours 4,000 hours
Account billing lines 400,000 lines 200,000 lines
Account verification accounts 10,000 accounts 8,000 accounts
Correspondence letters 1,000 letters 1,600 letters

56)

How much of the account inquiry cost will be assigned to Department A?
A)

$80,000
B)

$400,000
C)

$160,000
D)

None of these answers are correct.

57)

How much of the account billing cost will be assigned to Department B?
A)

$28,000
B)

$280,000
C)

$14,000
D)

None of these answers are correct.

58)

How much of account verification costs will be assigned to Department A?
A)

$30,000
B)

$37,500
C)

$150,000
D)

$10,000

59)

How much of correspondence costs will be assigned to Department B?
A)

$1,600
B)

$12,500
C)

$50,000
D)

$20,000

60)

How much of the total costs will be assigned to Department A?
A)

$158,000
B)

$80,000
C)

$224,000
D)

$880,000

61)

How much of the total costs will be assigned to Department B?
A)

$158,000
B)

$80,000
C)

$224,000
D)

$880,000

62)

Dalrymple Company produces a special spray nozzle. The budgeted indirect total cost of inserting the spray nozzle is $80,000. The budgeted number of nozzles to be inserted is 40,000. What is the budgeted indirect cost allocation rate for this activity?
A)

$0.50
B)

$1.00
C)

$1.50
D)

$2.00

63)

Activity-based costing is most likely to yield benefits for companies with all of the following characteristics EXCEPT:
A)

numerous products that consume different amounts of resources
B)

operations that remain fairly consistent
C)

a highly competitive environment, where cost control is critical
D)

accessible accounting and information systems expertise to maintain the system

64)

Each of the following statements is true EXCEPT:
A)

traditional product costing systems seek to assign all manufacturing costs to products
B)

ABC product costing systems seek to assign all manufacturing costs to products
C)

traditional product costing systems are more refined than an ABC system
D)

cost distortions occur when a mismatch (incorrect association) occurs between the way indirect costs are incurred and the basis for their assignment to individual products

Answer the following questions using the information below:

Happy Valley Land and Snow Company provides the following ABC costing information:

Activities Total Costs Activity-cost drivers
Labor hours $160,000 8,000 hours
Gas $18,000 6,000 gallons
Invoices $20,000 2,500 invoices
Total costs $198,000

The above activities used by their three departments are:

Lawn Department Bush Department Plowing Department
Labor hours 2,500 hours 1,200 hours 4,300 hours
Gas 1,500 gallons 800 gallons 3,700 gallons
Invoices 1,600 invoices 400 invoices 500 invoices

65)

How much of the labor cost will be assigned to the Lawn Department?
A)

$50,000
B)

$12,800
C)

$20,000
D)

None of these answers are correct.

66)

How much of the gas cost will be assigned to the Plowing Department?
A)

$25,000
B)

$11,100
C)

$15,000
D)

None of these answers are correct.

67)

How much of invoice cost will be assigned to the Bush Department?
A)

$3,200
B)

$4,000
C)

$12,800
D)

$20,000

68)

How much of the gas cost will be assigned to the Lawn Department?
A)

$2,400
B)

$10,000
C)

$4,500
D)

$11,100

69)

How much of the total cost will be assigned to the Plowing Department?
A)

$198,000
B)

$101,100
C)

$67,300
D)

$86,000

70)

How much of the total costs will be assigned to the Lawn Department?
A)

$50,000
B)

$29,600
C)

$100,000
D)

$67,300

71)

The MOST likely example of an output unit-level cost is:
A)

general administrative costs
B)

paying suppliers for orders received
C)

engineering costs
D)

machine depreciation

72)

The MOST likely example of a batch-level cost is:
A)

utility costs
B)

machine repairs
C)

product-designing costs
D)

setup costs

73)

Design costs are an example of:
A)

unit-level costs
B)

batch-level costs
C)

product-sustaining costs
D)

facility-sustaining costs

74)

________ costs support the organization as a whole.
A)

Unit-level
B)

Batch-level
C)

Product-sustaining
D)

Facility-sustaining

75)

It is usually difficult to find good cause-and-effect relationships between ________ and a cost allocation base.
A)

unit-level costs
B)

batch-level costs
C)

product-sustaining costs
D)

facility-sustaining costs

76)

To set realistic selling prices:
A)

all costs should be allocated to products
B)

costs should only be allocated when there is a strong cause-and-effect relationship
C)

only unit-level costs and batch-level costs should be allocated
D)

only unit-level costs should be allocated

77)

Different products consume different proportions of manufacturing overhead costs because of differences in all of the following EXCEPT:
A)

selling prices
B)

customers’ customization specifications
C)

setup times
D)

product design

78)

Unit-level cost drivers are most appropriate as an overhead assignment base when:
A)

several complex products are manufactured
B)

only one product is manufactured
C)

direct labor costs are low
D)

factories produce a varied mix of products

79)

With traditional costing systems, products manufactured in small batches and in small annual volumes may be ________ because batch-related and product-sustaining costs are assigned using unit-related drivers.
A)

overcosted
B)

fairly costed
C)

undercosted
D)

ignored

Answer the following questions using the information below:

Products S5 and CP8 each are assigned $50.00 in indirect costs by a traditional costing system. An activity analysis revealed that although production requirements are identical, S5 requires 45 minutes less setup time than CP8.

80)

According to an ABC system, CP8 is ________ under the traditional system.
A)

undercosted
B)

overcosted
C)

fairly costed
D)

accurately costed

81)

According to an ABC system, S5 uses a disproportionately:
A)

smaller amount of unit-level costs
B)

larger amount of unit-level costs
C)

smaller amount of batch-level costs
D)

larger amount of batch-level costs

82)

Put the following ABC implementation steps in order:
A Compute the allocation rates.
B Compute the total cost of the products.
C Identify the products that are the cost objects.
D Select the cost allocation bases.
A)

DACB
B)

DBCA
C)

BADC
D)

CDAB

83)

ABC systems identify ________ costs used by products.
A)

all
B)

short-term fixed
C)

short-term variable
D)

long-term fixed

84)

The focus of ABC systems is on:
A)

long-term decisions
B)

short-term decisions
C)

make-or-buy decisions
D)

special-pricing decisions

85)

When designing a costing system, it is easiest to:
A)

calculate total costs first and then per-unit cost
B)

calculate per-unit costs first and then total costs
C)

calculate long-term costs first and then short-term costs
D)

calculate short-term costs first and then long-term costs

86)

ABC assumes all costs are ________ because over the long run management can adjust the amount of resources employed.
A)

fixed
B)

variable
C)

committed
D)

nondiscretionary

87)

A manufacturing firm produces multiple families of products requiring various combinations of different types of parts. Of the following, the MOST appropriate cost driver for assigning materials handling costs to the various products is:
A)

direct labor hours
B)

number of units produced
C)

number of parts used
D)

number of suppliers involved

Answer the following questions using the information below:

Barnes Corporation manufactures two models of office chairs, a standard and a deluxe model. The following activity and cost information has been compiled:

Number of Number of Number of
Product Setups Components Direct Labor Hours
Standard 22 8 375
Deluxe 28 12 225

Overhead costs $20,000 $40,000

88)

Assume a traditional costing system applies the $60,000 of overhead costs based on direct labor hours. What is the total amount of overhead costs assigned to the standard model?
A)

$24,800
B)

$35,200
C)

$37,500
D)

$22,500

89)

Assume a traditional costing system applies the $60,000 of overhead costs based on direct labor hours. What is the total amount of overhead costs assigned to the deluxe model?
A)

$24,800
B)

$35,200
C)

$37,500
D)

$22,500

90)

Number of setups and number of components are identified as activity-cost drivers for overhead. Assuming an activity-based costing system is used, what is the total amount of overhead costs assigned to the standard model?
A)

$24,800
B)

$35,200
C)

$37,500
D)

$22,500

91)

Number of setups and number of components are identified as activity-cost drivers for overhead. Assuming an activity-based costing system is used, what is the total amount of overhead costs assigned to the deluxe model?
A)

$24,800
B)

$35,200
C)

$37,500
D)

$22,500

Answer the following questions using the information below:

Speedy Racer Corporation manufactures two models of motorized go-carts, a standard and a deluxe model. The following activity and cost information has been compiled:

Number of Number of Number of
Product Setups Components Direct Labor Hours
Standard 15 10 750
Deluxe 35 15 500

Overhead costs $30,000 $50,000

92)

Assume a traditional costing system applies the $80,000 of overhead costs based on direct labor hours. What is the total amount of overhead cost assigned to the standard model?
A)

$32,000
B)

$48,000
C)

$50,000

D)

$30,000

93)

Assume a traditional costing system applies the $80,000 of overhead costs based on direct labor hours. What is the total amount of overhead cost assigned to the deluxe model?
A)

$32,000
B)

$48,000
C)

$50,000
D)

$30,000

94)

Number of setups and number of components are identified as activity-cost drivers for overhead. Assuming an activity-based costing system is used, what is the total amount of overhead cost assigned to the standard model?
A)

$51,000
B)

$30,000
C)

$29,000
D)

$48,000

95)

Number of setups and number of components are identified as activity-cost drivers for overhead. Assuming an activity-based costing system is used, what is the total amount of overhead cost assigned to the deluxe model?
A)

$51,000
B)

$50,000
C)

$48,000
D)

$25,000

Answer the following questions using the information below:

Tiger Pride produces two product lines: T-shirts and Sweatshirts. Product profitability is analyzed as follows:

T-SHIRTS SWEATSHIRTS
Production and sales volume 60,000 units 35,000 units
Selling price $16.00 $29.00
Direct material $ 2.00 $ 5.00
Direct labor $ 4.50 $ 7.20
Manufacturing overhead $ 2.00 $ 3.00
Gross profit $ 7.50 $13.80
Selling and administrative $ 4.00 $ 7.00
Operating profit $ 3.50 $ 6.80

Tiger Pride’s managers have decided to revise their current assignment of overhead costs to reflect the following ABC cost information:

Activity Activity cost Activity-cost driver
Supervision $100,920 Direct labor hours (DLH)
Inspection $124,000 Inspections

Activities demanded
T-SHIRTS SWEATSHIRTS
0.75 DLH/unit 1.2 DLH/unit
45,000 DLHs 42,000 DLHs
60,000 inspections 17,500 inspections

96)

Under the revised ABC system, the activity-cost driver rate for the supervision activity is:
A)

$2.58
B)

$2.40
C)

$2.24
D)

$1.16

97)

Under the revised ABC system, supervision costs allocated to Sweatshirts will be:
A)

$48,720
B)

$100,800
C)

$100,920
D)

None of these answers are correct.

98)

Under the revised ABC system, total overhead costs allocated to Sweatshirts will be:
A)

$ 48,720
B)

$ 76,720
C)

$224,920
D)

None of these answers are correct.

99)

Under the revised ABC system, overhead costs per unit for the Sweatshirts will be:
A)

$1.39 per unit
B)

$1.60 per unit
C)

$2.19 per unit
D)

$2.47 per unit

100)

Using an ABC system, next year’s estimates show manufacturing overhead costs will total $228,300 for 52,000 T-shirts. If all other T-shirt costs and sales prices remain the same, the profitability that can be expected is:
A)

$5.41 per t-shirt
B)

$4.39 per t-shirt
C)

$1.11 per t-shirt
D)

($0.81) per t-shirt

Answer the following questions using the information below:

Mayan Potters manufactures two sizes of ceramic paperweights, regular and jumbo. The following information applies to their expectations for the planning period:

Cost Pool Overhead Costs Activity-cost driver
Materials handling $ 45,000 90,000 orders
Machine maintenance $300,000 15,000 maintenance hours
Setups $270,000 45,000 setups
Inspections $105,000 21,000 inspections
Total support costs $720,000

Production Estimates
Production units:
Regular = 8,000,000 units
Jumbo = 16,000,000 units
Machine-hours = 200,000 mh
Labor-hours = 400,000 dlh

Mayan Potters uses an ABC system and assigns overhead costs based on the overhead activity information provided above.

101)

The activity-cost driver for the materials handling activity is:
A)

orders
B)

maintenance hours
C)

production units
D)

setups

102)

The materials handling activity-cost driver rate is:
A)

$2.00
B)

$20.00
C)

$0.50
D)

$5.00

103)

The inspections activity-cost driver rate is:
A)

$0.50
B)

$2.00
C)

$20.00
D)

$5.00

104)

During October, Mayan produced 700,000 regular ceramic paperweights and Mayan’s production manager counted 2,000 orders; 1,000 maintenance-hours; 2,000 setups; and 2,000 inspections for the regular product line. For October, Mayan’s controller assigned ________ indirect costs to the regular product line.
A)

$43,000
B)

$25,000
C)

$34,000
D)

None of these answers are correct.

Answer the following questions using the information below:

Nichols, Inc., manufactures remote controls. Currently the company uses a plant-wide rate for allocating manufacturing overhead. The plant manager believes it is time to refine the method of cost allocation and has the accounting department identify the primary production activities and their cost drivers:

Activities Cost driver Allocation Rate
Material handling Number of parts $2 per part
Assembly Labor hours $20 per hour
Inspection Time at inspection station $3 per minute

The current traditional cost method allocates overhead based on direct manufacturing labor hours using a rate of $200 per labor hour.

105)

What are the indirect manufacturing costs per remote control assuming the traditional method is used and a batch of 500 remote controls are produced? The batch requires 1,000 parts, 10 direct manufacturing labor hours, and 15 minutes of inspection time.
A)

$2,000.00 per remote control
B)

$0.25 per remote control
C)

$2.00 per remote control
D)

$4.00 per remote control

106)

What are the indirect manufacturing costs per remote control assuming an activity-based-costing method is used and a batch of 50 remote controls are produced? The batch requires 100 parts, 6 direct manufacturing labor hours, and 2.5 minutes of inspection time.
A)

$4.00 per remote control
B)

$6.55 per remote control
C)

$24.00 per remote control
D)

$327.50 per remote control

107)

What are the indirect manufacturing costs per remote control assuming an activity-based-costing method is used and a batch of 100 remote controls are produced? The batch requires 500 parts, 10 direct manufacturing labor hours, and 5 minutes of inspection time.
A)

$12.15 per remote control
B)

$1215 per remote control
C)

$24.30 per remote control
D)

$48.60 per remote control

Answer the following questions using the information below:

Gregory Enterprises has identified three cost pools to allocate overhead costs. The following estimates are provided for the coming year:

Cost Pool Overhead Costs Cost driver Activity level
Supervision of direct labor $320,000 Direct labor-hours 800,000
Machine maintenance $120,000 Machine-hours 960,000
Facility rent $200,000 Square feet of area 100,000
Total overhead costs $640,000

The accounting records show the Mossman Job consumed the following resources:

Cost driver Actual level
Direct labor-hours 200
Machine-hours 1,600
Square feet of area 50

108)

If direct labor-hours are considered the only overhead cost driver, what is the single cost driver rate for Gregory Enterprises?
A)

$0.50 per direct labor-hour
B)

$0.80 per direct labor-hour
C)

$0.40 per direct labor-hour
D)

$1.20 per direct labor-hour

109)

Using direct labor-hours as the only overhead cost driver, what is the amount of overhead costs allocated to the Mossman Job?
A)

$160
B)

$120
C)

$240
D)

$125

110)

If Gregory Enterprises uses the three activity cost pools to allocate overhead costs, what are the activity-cost driver rates for supervision of direct labor, machine maintenance, and facility rent, respectively?
A)

$0.60 per dlh, $0.025 per mh, $0.80 per sq ft
B)

$1.25 per dlh, $0.25 per mh, $0.50 per sq ft
C)

$0.40 per dlh, $0.05 per mh, $0.20 per sq ft
D)

$0.40 per dlh, $0.125 per mh, $2 per sq ft

111)

Using the three cost pools to allocate overhead costs, what is the total amount of overhead costs to be allocated to the Mossman Job?
A)

$200
B)

$380
C)

$675
D)

$170

112)

Which method of allocation probably best estimates actual overhead costs used? Why?
A)

Single direct labor-hours cost driver because it is best to allocate total costs uniformly to individual jobs.
B)

Single direct labor-hours cost driver because it is easiest to analyze and interpret.
C)

Three activity-cost drivers because they best reflect the relative consumption of resources.
D)

Three activity-cost drivers because product costs can be significantly cross-subsidized.

Answer the following questions using the information below:

Ernsting Printers has contracts to complete weekly supplements required by forty-six customers. For the year 20X5, manufacturing overhead cost estimates total $420,000 for an annual production capacity of 12 million pages.

For 20X5 Ernsting Printers has decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:

Cost pool Manufacturing overhead costs Activity level
Design changes $ 60,000 300 design changes
Setups 320,000 5,000 setups
Inspections 40,000 8,000 inspections
Total manufacturing overhead costs $420,000

During 20X5, two customers, Wealth Managers and Health Systems, are expected to use the following printing services:

Activity Wealth Managers Health Systems
Pages 60,000 76,000
Design changes 10 0
Setups 20 10
Inspections 30 38

113)

What is the cost driver rate if manufacturing overhead costs are considered one large cost pool and are assigned based on 12 million pages of production capacity?
A)

$0.05 per page
B)

$0.035 per page
C)

$0.35 per page
D)

$0.025 per page

114)

Using pages printed as the only overhead cost driver, what is the manufacturing overhead cost estimate for Wealth Managers during 20X5?
A)

$2,500
B)

$1,750
C)

$2,100
D)

$3,000

115)

Assuming activity-cost pools are used, what are the activity-cost driver rates for design changes, setups, and inspections cost pools?
A)

$200 per change, $64 per setup, $5 per inspection
B)

$180 per change, $160 per setup, $3.20 per inspection
C)

$84 per change, $269 per setup, $21 per inspection
D)

$143 per change, $76 per setup, $10 per inspection

116)

Using the three cost pools to allocate overhead costs, what is the total manufacturing overhead cost estimate for Wealth Managers during 20X5?
A)

$6,850
B)

$3,250
C)

$3,430
D)

$5,096

117)

When costs are assigned using the single cost driver, number of pages printed, then:
A)

Ernsting Printers will want to retain this highly profitable customer
B)

Wealth Managers will likely seek to do business with competitors
C)

Wealth Managers is unfairly over billed for its use of printing resources
D)

Wealth Managers is grossly under billed for the job, while other jobs will be unfairly over billed

Answer the following questions using the information below:

Wallace Printing has contracts to complete weekly supplements required by forty-six customers. For the year 20X5, manufacturing overhead cost estimates total $420,000 for an annual production capacity of 12 million pages.

For 20X5 Wallace Printing decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:

Cost pool Manufacturing overhead costs Activity level
Design changes $ 60,000 200 design changes
Setups 320,000 4,000 setups
Inspections 40,000 16,000 inspections
Total manufacturing overhead costs $420,000

During 20X5, two customers, Wealth Managers and Health Systems, are expected to use the following printing services:

Activity Wealth Managers Health Systems
Pages 60,000 76,000
Design changes 10 2
Setups 20 10
Inspections 30 38

118)

If manufacturing overhead costs are considered one large cost pool and are assigned based on 12 million pages of production capacity, what is the cost driver rate?
A)

$0.25 per page
B)

$0.05 per page
C)

$0.025 per page
D)

$0.035 per page

119)

Using the cost driver rate determined in the previous question, what is the manufacturing overhead cost estimate for Health Systems during 20X5?
A)

Manufacturing overhead costs applied to Health Systems total $2,100.
B)

Manufacturing overhead costs applied to Health Systems total $1,900.
C)

Manufacturing overhead costs applied to Health Systems total $2,660.
D)

Manufacturing overhead costs applied to Health Systems total $3,800.

120)

Assuming activity-cost pools are used, what are the activity-cost driver rates for design changes, setups, and inspections cost pools?
A)

$300 per change, $80 per setup, $2.50 per inspection
B)

$250 per change, $200 per setup, $3.75 per inspection
C)

$210 per change, $105 per setup, $26.25 per inspection
D)

$333 per change, $125 per setup, $4.00 per inspection

121)

Using the activity-cost driver rates determined in the previous question, what is the manufacturing overhead cost estimate for Health Systems during 20X5?
A)

$3,113.75
B)

$1,495.00
C)

$2,068.00
D)

$3,412.50

122)

When costs are assigned using the single cost driver, number of pages printed, then Health Systems:
A)

is fairly billed because resources are allocated uniformly to all jobs
B)

is grossly under billed for the job, while other jobs will be unfairly over billed
C)

will likely seek to do business with competitors
D)

will contribute too little to profits, and Wallace Printing will not want to accept additional work from the company

123)

Activity-based-costing information:
A)

should be used when services place similar demands on resources
B)

usually results in peanut-butter costing
C)

will yield inaccurate cost numbers when products are similar
D)

may assist in improving product design and efficiency

124)

Activity-based management (ABM) includes decisions about all EXCEPT:
A)

pricing and product mix
B)

smoothing costs
C)

reducing costs
D)

improving processes

125)

ABC systems:
A)

reveal activities that can be eliminated
B)

help control nonfinancial items such as number of setup hours
C)

help identify new designs to reduce costs
D)

All of these answers are correct.

126)

Companies use ABC system information to:
A)

analyze costs
B)

prepare budgets
C)

evaluate performance
D)

All of these answers are correct.

127)

It is important that the product costs reflect as much of the diversity and complexity of the manufacturing process so that:
A)

product costs will reflect their relative consumption of resources
B)

nonvalue-added costs can be eliminated
C)

there is less likelihood of cross subsidizing of product costs
D)

All of these answers are correct.

128)

A well-designed, activity-based cost system helps managers make better decisions because information derived from an ABC analysis:
A)

can be used to eliminate nonvalue-added activities
B)

is easy to analyze and interpret
C)

takes the choices and judgment challenges away from the managers
D)

emphasizes how managers can achieve higher sales

129)

A PRIMARY reason for assigning selling and distribution costs to products for analytical purposes is:
A)

to justify a varied product mix
B)

that controllers are required to assign all costs when valuing inventories
C)

that different processes, products, and customers require different quantities of selling and distribution activities
D)

that all indirect costs must be assigned

130)

For service organizations that bill customers at a predetermined average rate, activity-based cost systems can help to:
A)

clarify appropriate cost assignments for various service activities
B)

identify the profitability of various service activities
C)

Both A and B are correct.
D)

None of these answers are correct.

131)

Products make diverse demands on resources because of differences in all of the following EXCEPT:
A)

volume
B)

selling price
C)

batch size
D)

complexity

132)

The UNIQUE feature of an ABC system is the emphasis on:
A)

costing individual jobs
B)

department indirect-cost rates
C)

multiple-cost pools
D)

individual activities

133)

One department indirect-cost rate is sufficient when:
A)

activities relate to more than one level of the cost hierarchy
B)

product costs are significantly cross-subsidized
C)

the same allocation base is appropriate for all departmental activities
D)

it is a service department

Answer the following questions using the information below:

King Corporation has two departments, Small and Large. Central costs could be allocated to the two departments in various ways.

Small Department Large Department
Square footage 6,000 18,000
Number of employees 1,120 480
Sales $400,000 $2,000,000

134)

If advertising expense of $300,000 is allocated on the basis of sales, the amount allocated to the Small Department would be:
A)

$50,000
B)

$75,000
C)

$210,000
D)

$250,000

135)

If total advertising expense of $300,000 is allocated on the basis of sales, the amount allocated to the Large Department would be:
A)

$225,000
B)

$90,000
C)

$250,000
D)

$50,000

136)

If total payroll processing costs of $96,000 are allocated on the basis of number of employees, the amount allocated to the Small Department would be:
A)

$67,200
B)

$24,000
C)

$16,000
D)

$28,000

137)

If total payroll processing costs of $60,000 are allocated on the basis of number of employees, the amount allocated to the Large Department would be:
A)

$42,000
B)

$18,000
C)

$45,000
D)

$50,000

138)

If total rent expense of $120,000 is allocated on the basis of square footage, the amount allocated to the Small Department would be:
A)

$20,000
B)

$30,000
C)

$84,000
D)

$90,000

139)

If total rent expense of $288,000 is allocated on the basis of square footage, the amount allocated to the Large Department would be:
A)

$86,400
B)

$240,000
C)

$72,000
D)

$216,000

Answer the following questions using the information below:

Trustme Vehical Rental Corporation has two departments, Car Rental and Truck Rental. Central costs may be allocated to the two departments in various ways.

Car Rental Truck Rental
Number of Vehicles in fleet 700 300
Number of employees 150 50
Sales $1,500,000 $750,000

140)

If administrative expense of $125,000 is allocated on the basis of number of employees, the amount allocated to the Truck Rental Department would be:
A)

$75,000
B)

$125,000
C)

$93,750
D)

$31,250

141)

If administrative expense of $125,000 is allocated on the basis of number of employees, the amount allocated to the Car Rental Department would be:
A)

$75,000
B)

$125,000
C)

$93,750
D)

$31,250

142)

If advertising expense of $150,000 is allocated on the basis of sales, the amount allocated to the Car Rental Department would be:
A)

$100,000
B)

$125,000
C)

$50,000
D)

$75,000

143)

If advertising expense of $225,000 is allocated on the basis of sales, the amount allocated to the Truck Rental Department would be:
A)

$112,500
B)

$125,000
C)

$75,000
D)

$175,000

144)

If the facility lease expense of $350,000 is allocated on the basis of vehicles in the fleet, the amount allocated to the Truck Rental Department would be:
A)

$245,000
B)

$105,000
C)

$200,000
D)

$150,000

145)

If the facility lease expense of $350,000 is allocated on the basis of vehicles in the fleet, the amount allocated to the Car Rental Department would be:
A)

$245,000
B)

$105,000
C)

$200,000
D)

$150,000

146)

Using activity-cost rates rather than department indirect-cost rates to allocate costs results in different product costs when:
A)

a single activity accounts for a sizable portion of department costs
B)

there are several homogeneous cost pools
C)

different activities have the same cost-allocation base
D)

different products use different resources in the same proportion

147)

A key reason for using an ABC system rather than a department-costing system is because ABC assigns indirect costs:
A)

using broader averages
B)

more simply than a department-costing system
C)

in a less costly manner
D)

to reflect differences required by different processes as well as customers

148)

It ONLY makes sense to implement an ABC system when:
A)

ABC provides information to make better decisions
B)

its benefits exceed implementation costs
C)

ABC traces more costs as direct costs
D)

there is a strong cause-and-effect relationship between costs in the cost pools and their cost-allocation bases

149)

Which of the following is a sign that an ABC system may be useful?
A)

There are small amounts of indirect costs.
B)

Products make diverse demands on resources because of differences in volume, process steps, batch size, or complexity.
C)

Products a company is less suited to produce and sell show small profits.
D)

Operations staff agrees with accountants about the costs of manufacturing and marketing products and services.

150)

Smaller cost distortions occur when the traditional systems’ single indirect-cost rate and the activity-cost-driver rates:
A)

use the same total costs for computations
B)

are similar in proportion to each other
C)

are more different than alike
D)

use the same cost driver units

151)

Activity-based costing systems provide better product costs when they:
A)

employ more activity-cost drivers
B)

employ fewer activity-cost drivers
C)

identify and cost more indirect cost differences among products
D)

always yield more accurate product costs than traditional systems

152)

Factories producing a more varied and complex mix of products have higher costs than factories producing only a narrow range of products because:
A)

more variations and complexities require more activities
B)

they require more engineers
C)

they require more direct laborers
D)

they buy more robotics

153)

Which of the following is NOT a sign that a “smoothing out” costing system exists?
A)

Operations managers don’t use the data originated by the cost system.
B)

Products that a company is well suited to make and sell show large profits.
C)

New product variations have been added, but the cost system has not been upgraded.
D)

The company loses bids they believe were priced competitively.

Answer the following questions using the information below:

Cannady produces six products. Under their traditional cost system using one cost driver, SR6 costs $168.00 per unit. An analysis of the activities and their costs revealed that three cost drivers would be used under the new ABC system. The new cost of SR6 was determined to be $178.00 per unit.

154)

The total amount of indirect costs assigned to product SR6 using the traditional method is ________ the total amount assigned using ABC.
A)

more than
B)

less than
C)

identical to
D)

None of these answers are correct.

155)

Given this change in the cost:
A)

SR6 will now command a higher sales price
B)

SR6 has benefited from the new system
C)

SR6 is definitely more accurately costed
D)

the costing results for SR6 under the new system depend on the adequacy and quality of the estimated cost drivers and costs used by the system

Answer the following questions using the information below:

Chess Woods Limited produces two products: wooden chess pieces and wooden inlaid chess boards. Under their traditional cost system using one cost driver (direct manufacturing labor hours), the cost of a set of wooden chess pieces is $325.00. An analysis of the activities and their costs revealed that three cost drivers would be used under a new ABC system. These cost drivers would be equipment usage, storage area for the material, and type of woods used. The new cost of a set of chess pieces was determined to be $298.00 per set.

156)

The total amount of indirect cost assigned to produce chess pieces using the traditional method is ________ the total amount assigned using ABC.
A)

more than
B)

less than
C)

identical to
D)

None of these answers are correct.

157)

Given this change in the cost structure:
A)

The costing results for chess pieces under the new system depend on the adequacy and quality of the estimated cost drivers and costs used by the system.
B)

Chess pieces have benefited from the new system.
C)

Chess pieces are definitely more accurately costed.
D)

Chess will now have a lower sales price.

158)

The goal of a properly constructed ABC system is to:
A)

have the most accurate cost system
B)

identify more indirect costs
C)

develop the best cost system for an economically reasonable cost
D)

have separate allocation rates for each department

159)

Cocoa Pet Corporation manufactures two models of grooming stations, a standard and a deluxe model. The following activity and cost information has been compiled:

Number of Number of Number of
Product Setups Components Direct Labor Hours
Standard 3 30 650
Deluxe 7 50 150

Overhead costs $20,000 $60,000

Assume a traditional costing system applies the $80,000 of overhead costs based on direct labor hours.
a. What is the total amount of overhead costs assigned to the standard model?
b. What is the total amount of overhead costs assigned to the deluxe model?

Assume an activity-based costing system is used and that the number of setups and the number of components are identified as the activity-cost drivers for overhead.
c. What is the total amount of overhead costs assigned to the standard model?
d. What is the total amount of overhead costs assigned to the deluxe model?
e. Explain the difference between the costs obtained from the traditional costing system and the ABC system. Which system provides a better estimate of costs? Why?

160)

Come-On-In Manufacturing produces two types of entry doors: Deluxe and Standard. The assignment basis for support costs has been direct labor dollars. For 20X5, Come-On-In compiled the following data for the two products:

Deluxe Standard
Sales units $50,000 $400,000

Sales price per unit $650.00 $475.00
Direct material and labor costs per unit $180.00 $130.00
Manufacturing support costs per unit $ 80.00 $120.00

Last year, Come-On-In Manufacturing purchased an expensive robotics system to allow for more decorative door products in the deluxe product line. The CFO suggested that an ABC analysis could be valuable to help evaluate a product mix and promotion strategy for the next sales campaign. She obtained the following ABC information for 20X5:

Activity Cost Driver Cost Total Deluxe Standard
Setups of setups $ 500,000 500 400 100
Machine-related of machine hours $44,000,000 600,000 300,000 300,000
Packing of shipments $ 5,000,000 250,000 50,000 200,000

Required:
a. Using the current system, what is the estimated
1. total cost of manufacturing one unit for each type of door?
2. profit per unit for each type of door?

b. Using the current system, estimated manufacturing overhead costs per unit are less for the deluxe door ($80 per unit) than the standard door ($120 per unit). What is a likely explanation for this?

c. Review the machine-related costs above. What is a likely explanation for machine-related costs being so high? What might explain why total machining hours for the deluxe doors (300,000 hours) are the same as for the standard doors (300,000 hours)?

d. Using the activity-based costing data presented above,
1. compute the cost-driver rate for each overhead activity.
2. compute the revised manufacturing overhead cost per unit for each type of entry door.
3. compute the revised total cost to manufacture one unit of each type of entry door.

e. Is the deluxe door as profitable as the original data estimated? Why or why not?

f. What considerations need to be examined when determining a sales mix strategy?

161)

Brilliant Accents Company manufactures and sells three styles of kitchen faucets: Brass, Chrome, and White. Production takes 25, 25, and 10 machine hours to manufacture 1,000-unit batches of brass, chrome, and white faucets, respectively. The following additional data apply:

BRASS CHROME WHITE
Projected sales in units 30,000 50,000 40,000

PER UNIT data:
Selling price $40 $20 $30

Direct materials $ 8 $ 4 $ 8
Direct labor $15 $ 3 $ 9
Overhead cost based on direct labor hours
(traditional system) $12 $ 3 $ 9

Hours per 1000-unit batch:
Direct labor hours 40 10 30
Machine hours 25 25 10
Setup hours 1.0 0.5 1.0
Inspection hours 30 20 20

Total overhead costs and activity levels for the year are estimated as follows:

Activity Overhead costs Activity levels
Direct labor hours 2,900 hours
Machine hours 2,400 hours
Setups $465,500 95 setup hours
Inspections $405,000 2,700 inspection hours
$870,500

Required:
a. Using the traditional system, determine the operating profit per unit for the brass style of faucet.

b. Determine the activity-cost-driver rate for setup costs and inspection costs.

c. Using the ABC system, for the brass style of faucet:
1. compute the estimated overhead costs per unit.
2. compute the estimated operating profit per unit.

d. Explain the difference between the profits obtained from the traditional system and the ABC system. Which system provides a better estimate of profitability? Why?

162)

Brilliant Accents Company manufactures and sells three styles of kitchen faucets: Brass, Chrome, and White. Production takes 25, 25, and 10 machine hours to manufacture 1000-unit batches of brass, chrome and white faucets, respectively. The following additional data apply:

BRASS CHROME WHITE
Projected sales in units 30,000 50,000 40,000

PER UNIT data:
Selling price $40 $20 $30

Direct materials $ 8 $ 4 $ 8
Direct labor $15 $ 3 $ 9
Overhead cost based on direct labor hours
(traditional system) $12 $ 3 $ 9

Hours per 1000-unit batch:
Direct labor hours 40 10 30
Machine hours 25 25 10
Setup hours 1.0 0.5 1.0
Inspection hours 30 20 20

Total overhead costs and activity levels for the year are estimated as follows:

Activity Overhead costs Activity levels
Direct labor hours 2,900 hours
Machine hours 2,400 hours
Setups $465,500 95 setup hours
Inspections $405,000 2,700 inspection hours
$870,500

Required:
a. Using the traditional system, determine the operating profit per unit for each style of faucet.

b. Determine the activity-cost-driver rate for setup costs and inspection costs.

c. Using the ABC system, for each style of faucet
1. compute the estimated overhead costs per unit.
2. compute the estimated operating profit per unit.

d. Explain the differences between the profits obtained from the traditional system and the ABC system. Which system provides a better estimate of profitability? Why?

163)

Aunt Ethel’s Fancy Cookie Company manufactures and sells three flavors of cookies: Macaroon, Sugar, and Buttercream. The batch size for the cookies is limited to 1,000 cookies based on the size of the ovens and cookie molds owned by the company. Based on budgetary projections, the information listed below is available:

Macaroon Sugar Buttercream
Projected sales in units 500,000 800,000 600,000

PER UNIT data:
Selling price $0.80 $0.75 $0.60

Direct materials $0.20 $0.15 $0.14
Direct labor $0.04 $0.02 $0.02

Hours per 1000-unit batch:
Direct labor hours 2 1 1
Oven hours 1 1 1
Packaging hours 0.5 0.5 0.5

Total overhead costs and activity levels for the year are estimated as follows:

Activity Overhead costs Activity levels
Direct labor 2,400 hours
Oven $210,000 1,900 oven hours
Packaging $150,000 950 packaging hours
$360,000

Required:
a. Determine the activity-cost-driver rate for packaging costs.

b. Using the ABC system, for the sugar cookie:
1. compute the estimated overhead costs per thousand cookies.
2. compute the estimated operating profit per thousand cookies.

c. Using a traditional system (with direct labor hours as the overhead allocation base), for the sugar cookie:.
1. compute the estimated overhead costs per thousand cookies.
2. compute the estimated operating profit per thousand cookies.

d. Explain the difference between the profits obtained from the traditional system and the ABC system. Which system provides a better estimate of profitability? Why?

164)

At Deutschland Electronics, product lines are charged for call center support costs based on sales revenue. Last year’s summary of call center operations revealed the following:

Surveillance Products Specialty Products
Number of calls for information 1,000 4,000
Average call length for information 3 minutes 8 minutes
Number of calls for warranties 300 1,200
Average call length for warranties 7 minutes 15 minutes
Sales revenue $8,000,000 $5,000,000

Deutschland Electronics currently allocates call center support costs using a rate of 0.5% of sales revenue.

Required:
a. Compute the amount of call center support costs allocated to each product line under the current system.

b. Assume Deutschland decides to use the average call length for information to assign last year’s support costs. Does this allocation method seem more appropriate than percentage of sales? Why or why not?

c. Assume Deutschland decides to use the numbers of calls for information and for warranties to assign last year’s support costs of $65,000. Compute the amount of call center support costs assigned to each product line under this revised ABC system.

d. Deutschland Electronics assigns bonuses based on departmental profits. How might the Specialty Products manager try to obtain higher profits for next year if support costs are assigned based on the average call length for information?

e. Discuss the barriers for implementing ABC for this call center.

165)

For each of the following activities identify an appropriate activity-cost driver.

a. machine maintenance
b. machine setup
c. quality control
d. material ordering
e. production scheduling
f. warehouse expense
g. engineering design

166)

The Marionettes Company is noted for an exceptionally impressive line of Mardi Gras masks. Marionettes has established the following selling and distribution support activity-cost pools and their corresponding activity drivers for the year 20X5:

Activity Cost Cost driver
Marketing $30,000 $500,000 of sales
Customer service 10,000 5,000 customer
Order execution 5,000 100 orders
Warehousing 5,000 50 product lines

Required:
a. Determine the activity-cost-driver rate for each of the four selling and distribution activities.

b. Under what circumstances is it appropriate to use each of the activity-cost drivers?

c. Describe at least one possible negative behavioral consequence for each of the four activity-cost drivers.

167)

Explain how a top-selling product may actually result in losses for the company.

168)

What are the factors that are causing many companies to refine their costing systems to obtain more accurate measures of the costs of their products?

169)

How are cost drivers selected in activity-based costing systems?

170)

Explain how activity-based costing systems can provide more accurate product costs than traditional cost systems.

171)

Explain how traditional cost systems, using a single unit-level cost rate, may distort product costs.

172)

What are the four parts of the cost hierarchy. Briefly explain each part, and contrast this cost hierarchy to the fixed-variable dichotomy?

173)

Do activity-based costing systems always provide more accurate product costs than conventional cost systems? Why or why not?

174)

How can the need for a more refined costing system be identified?

175)

What is activity-based management and how can it be used to improve the profitability of a company?