Deck 9: Activity-Based Costing

Question 1

The basic approach in product costing is to allocate costs in the cost pools to the individual cost objects, which are the products or services of interest.

Answer 1

True

Question 2

Any discrete task that an organization undertakes to make or deliver a product or service is known as a stage.

Answer 2

False

Question 3

A cost hierarchy classifies cost drivers by general dimensions or levels of activity.

Answer 3

True

Question 4

The department cost allocation method provides more accurate product cost information for managerial decision-making than the plantwide cost allocation method.

Question 5

Predetermined overhead rates are not used in first-stage cost allocations but are used in second-stage cost allocations.

Question 6

Direct labor cost (DLC) and direct labor hours (DLH) are examples of volume-related cost drivers in the cost hierarchy.

Question 7

The death spiral concept refers to the process of continually decreasing selling prices to meet foreign competition.

Question 8

The single-stage cost allocation system uses a plantwide rate because the cost pool is the entire plant.

Question 9

Activity-based costing (ABC) is a two-stage cost allocation system that (1) allocates costs to activities and (2) then to products based on their use of the activities.

Question 10

Activity-based costing is based on the concept that products produce activities and activities produce resources.

Question 11

The plantwide allocation concept cannot be used in nonmanufacturing organizations.

Question 12

If a company manufactures diverse products using different sets of resources in a plant, it is best to use a plantwide allocation rate.

Question 13

The number of products produced is an example of a facility-related cost driver in the cost hierarchy.

Question 14

The death spiral can occur even in firms with increasing demand.

Question 15

Using the department allocation method, a company establishes a separate overhead allocation rate for each department.

Question 16

When applying activity-based costing, the first step would be to compute the cost driver rates.

Question 17

The basic difference between the department cost allocation method and activity-based costing (ABC) is the number of stages involved in allocating costs to products.

Question 18

The basic difference between a first-stage cost allocation and a second-stage cost allocation is that cost pools are not used in first-stage cost allocations.

Question 19

Companies that manufacture products that are similar and use the same resources should use the plantwide cost allocation method.

Question 20

If a company has identified three major activities as setting up, handling material, and assembling, possible cost drivers would most likely be set-up hours, production runs, and number of shipments, respectively.

Question 21

In general, low-volume products (and services) have a lower degree of complexity associated with them.

Question 22

Activity-based costing (ABC) can be applied to administrative activities (e.g., purchasing) but not to marketing activities.

Question 23

Time-driven activity-based costing (TDABC) is more costly to implement than an unmodified activity-based costing system.

Question 24

Time equations can be used in extended time-driven activity-based costing (TDABC) systems to allow managers to adjust the times for orders with different characteristics.

Question 25

In general, traditional product costing methods allocate less cost to low-volume products and more costs to high-volume products than activity-based costing (ABC).

Question 26

It is possible to apply activity-based costing (ABC) to segments of an organization without applying it to the entire organization.

Question 27

Activity-based costing (ABC) provides more detailed measures of costs than do plantwide or department allocation methods.

Question 28

Activity-based costing is so beneficial because it provides more information about product costs but requires less recordkeeping.

Question 29

When overhead is applied based on the volume of output, high-volume products tend to "subsidize" low-volume products.

Question 30

Installing activity-based costing requires teamwork among employees and departments within an organization.

Question 31

When a department or product line is dropped, the common fixed costs which had been allocated to that department:

A) are eliminated.
B) become variable costs.
C) are allocated to the remaining departments or product lines.
D) become sunk costs.

Question 32

Using direct labor costs to allocate overhead costs in an activity-based costing (ABC) system will encourage management to reduce labor costs.

Question 33

Individual ABC systems do not vary because there is one ABC method.

Question 34

When product costs are used for decision-making, what assumption is most likely to distort the decisions?

A) There is a proportionality of overhead costs and output, regardless of whether a product is dropped or not.
B) Some overhead estimates can decrease when a product is dropped.
C) Some overhead costs could be fixed when a product is dropped.
D) The cost accounting system treats all overheads as if it were variable with respect to the allocation base.

Question 35

Before using activity-based costing (ABC), managers must apply the cost-benefit principle to the additional recordkeeping costs associated with ABC.

Question 36

A two-stage system first allocates costs to:

A) Products or services and then allocates costs to departments or activities.
B) The cost driver and then allocates costs to the cost hierarchy.
C) A product line and then allocates costs to the department.
D) Departments or activities and then allocates costs to products or services.

Question 37

The flow of activity-based costs through the ledger is the same as their flow using traditional methods except that the accounts are based on activities, not departments.

Question 38

Traditional product costing systems (e.g., job and process costing) are designed primarily:

A) To derive an allocation base.
B) To ensure that a single cost driver allocation base leads to appropriate managerial decisions.
C) To accumulate cost information for financial reporting.
D) To accumulate cost information for managerial decisions.

Question 39

Within a purchasing department, a cost driver of the potential number of vendors could best cost the activity of placing orders.

Question 40

Activity-based costs are a function of both volume and complexity.

Question 41

The classification of cost drivers into general levels of activity, volume, batch, product, and so on is known as:

A) Cost allocation.
B) Value-added costing.
C) A cost hierarchy.
D) Cost driver management.

Question 42

Which of the following statements is true?

A) One of the lessons learned from activity-based costing (ABC) is that all costs are really a function of volume.
B) The primary purpose of the plantwide and department allocation methods is allocating direct costs to specific products.
C) A problem with activity-based costing (ABC) is that it requires more recordkeeping than other methods.
D) Direct cost allocations are required for the plantwide and department allocation methods.

Question 43

The electricity used for production machinery would be classified as a:

A) Volume-related activity.
B) Batch-related activity.
C) Product-related activity.
D) Facility-related activity.

Question 44

The number of services provided by an accounting firm would be classified as an:

A) Volume-related activity.
B) Batch-related activity.
C) Product-related activity.
D) Facility-related activity.

Question 45

What is the typical effect on the numbers of cost pools and cost assignment bases when an activity-based costing (ABC) system replaces a traditional costing system? (CPA adapted)
$\begin{array} {cc } & { \text { Cost Pools } } & { \text { Cost Assignment Bases } } \\\end{array}$
A. $\begin{array} {cc } & \text { No effect } &&&& \text { No effect } \\\end{array}$
B. $\begin{array} {cc } & \text { Increase } &&&& \text { No effect } \\\end{array}$
C. $\begin{array} {cc } & \text { No effect } &&&& \text { Increase } \\\end{array}$
D. $\begin{array} {cc } & \text { Increase } &&&& \text { Increase } \\\end{array}$

A) Option A
B) Option B
C) Option C
D) Option D

Question 46

The basic difference between a first-stage cost allocation and a second-stage cost allocation is that:

A) cost pools are not used in first-stage cost allocations.
B) predetermined overhead rates are used in first-stage cost allocations but not in second-stage cost allocations.
C) the first stage prohibits firms from aligning the allocation of costs with the use of resources.
D) when used in an ABC system, the first stage assigns costs to activities.

Question 47

Would the following activities at a manufacturer of canned soup be best classified as volume-related, batch-related, or product-related activities?
$\begin{array} { cc } & \text { Researching new recipes } & \text { Shipping orders to grocery stores } \\\end{array}$
A. $\begin{array} { cc } &&&& \text { Volume } &&&&&&&& \text { Volume } \\\end{array}$
B. $\begin{array} { cc } &&&& \text { Batch }&&&&&&&&& \text { Batch } \\\end{array}$
C. $\begin{array} { cc } &&&& \text { Product } &&&&&&&& \text { Volume } \\\end{array}$
D. $\begin{array} { cc } &&&& \text { Product } &&&&&&&&& \text { Batch } \\\end{array}$

A) Option A
B) Option B
C) Option C
D) Option D

Question 48

Which of the following would not be a batch-related activity?

A) Setting up a machine for a new production run.
B) Performing 100% inspection.
C) Purchasing materials.
D) Processing a customer order.

Question 49

Plant property taxes are an example of a cost that would be considered to be:

A) Volume-related.
B) Batch-related.
C) Product-related.
D) Facility-related.

Question 50

Plant administration is an example of a:

A) Volume-related activity.
B) Batch-related activity.
C) Product-related activity.
D) Facility-related activity.

Question 51

Which of the following costs is not related to a batch-related activity?

A) Material handling.
B) Machine setups.
C) Shipping costs.
D) Compliance costs.

Question 52

Activity-based costing (ABC) is a costing technique that uses a two-stage allocation process. Which of the following statements best describes these two stages?

A) The costs are assigned to activities, and then to the products based upon their use of the activities.
B) The costs are assigned to departments, and then to the products based upon their use of activity resources.
C) Service department costs are allocated to the production departments, and then to the products based upon their use of the activities.
D) Indirect costs are assigned to activities, and then to the products based upon the direct cost resources used by the activities.

Question 53

First stage cost objects do not include:

A) Supplies
B) Depreciation
C) Maintenance and Repair Costs
D) Direct materials

Question 54

Multiple (departmental) manufacturing overhead rates are considered preferable to a single (plantwide) overhead rate when: (CMA adapted)

A) Manufacturing is limited to a single product flowing through identical departments in a fixed sequence.
B) Various products are manufactured that do not pass through the same departments or use the same manufacturing techniques.
C) Individual cost drivers cannot accurately be determined with respect to cause-and-effect relationships.
D) The single or plantwide rate is related to several identified cost drivers.

Question 55

Which of the following activities would be classified as a batch-level activity?

A) Setting up equipment.
B) Designing a new product.
C) Training employees.
D) Milling a part required for the final product.

Question 56

Cost pools are used with:
$\begin{array} { cc} & { \text { Plantwide Rates } } & { \text { Department Rates } } \\\end{array}$
A. $\begin{array} { cc} &&& \text { Yes } &&&&&&& \text { No } \\\end{array}$
B. $\begin{array} { cc} &&& \text { No } &&&&&&& \text { Yes } \\\end{array}$
C. $\begin{array} { cc} &&& \text { No } &&&&&&& \text { No } \\\end{array}$
D. $\begin{array} { cc} &&& \text { Yes } &&&&&&& \text { Yes } \\\end{array}$

A) Option A
B) Option B
C) Option C
D) Option D

Question 57

Which of the following should not be used as the allocation base in a company that appropriately uses a single plantwide rate?

A) Sales volume.
B) Machine hours.
C) Material costs.
D) Direct labor cost.

Question 58

Which of the following measures is not used by activity-based costing (ABC) systems as an allocation base for allocating overhead costs to the units produced?

A) Volume-related activities.
B) Batch-related activities.
C) Product-related activities.
D) Need-related activities.

Question 59

Which of the following measures is used by traditional costing systems as an allocation base for allocating overhead costs to the units produced?

A) Volume-related activities.
B) Batch-related activities.
C) Product-related activities.
D) Facility-related activities.

Question 60

Which of the following would be least likely to be used as an allocation base in a company that applies a single plantwide rate?

A) Machine hours.
B) Direct material costs.
C) Direct labor cost.
D) Direct labor hours.

Question 61

Activity-based costing provides:

A) More detailed measures of costs than do plantwide or department allocation methods.
B) Less detailed measures of costs than do plantwide or department allocation methods.
C) More detailed measures of costs than do plantwide allocations but less than department allocation methods.
D) Less detailed measures of costs than do plantwide allocations but more than department allocation methods.

Question 62

Which of the following is not a step involved in activity-based costing?

A) Identify the activities that consume resources and assign costs to those activities.
B) Determine how to reduce the costs of making products by cutting activities.
C) Assign costs to products by multiplying the cost driver rate by the volume of cost driver units consumed by the product.
D) Compute a cost rate per cost driver unit or transaction.

Question 63

Which of the following statements is true regarding activity-based costing in administration?

A) The principles of ABC are different when applied to administrative services.
B) ABC in administration involves five steps.
C) All cost drivers in an administrative system will be time-related.
D) Activity-based costing for administrative services follows the same four-step procedure described for manufacturing.

Question 64

Which of the following statements is true?

A) Activity-based costs per unit are always greater than volume-based costs per unit.
B) Volume-based costing has typically resulted in lower gross margins for high-volume products and higher gross margins for low-volume products.
C) Different cost allocation methods are constructed so that they typically result in the same or similar estimates of how much it costs to make a product.
D) Activity-based costing typically provides less information about product costs while requiring more recordkeeping.

Question 65

Banc Corp. Trust is considering either a bankwide overhead rate or department overhead rates to allocate $396,000 of indirect costs. The bankwide rate could be based on either direct labor hours (DLH) or the number of loans processed. The departmental rates would be based on direct labor hours for Consumer Loans and a dual rate based on direct labor hours and the number of loans processed for Commercial Loans. The following information was gathered for the upcoming period:
$$\begin{array} { l c c r } \text { Department } & \text { DLH } & \text { Loans Processed } & \text { Direct Costs } \\\text { Consumer } & 14,000 & 700 & \$ 280,000 \\\text { Commercial } & 8,000 & 300 & \$ 180,000\end{array}$$

-
Banc Corp. Trust estimates that it costs $500 to analyze and close a commercial loan. This amount has been included in the $396,000 of indirect costs. How much of the $396,000 indirect costs should be allocated to the Commercial Department, if Banc Corp. Trust uses a bankwide rate based on the number of loans processed?

A) $396,000.
B) $246,000.
C) $223,800.
D) $216,000.

Question 66

Product costs are computed by:

A) Dividing the cost driver rate by the number of units of the cost driver in each product.
B) Multiplying the cost driver rate by the number of units of the cost driver in each product.
C) Adding the cost driver rates of all products.
D) Averaging the plantwide cost driver rate with the cost driver for each product.

Question 67

Companies using activity-based costing (ABC) have learned that costs are a function of:

A) Volume and activities.
B) Time and complexity.
C) Volume and time.
D) Resources and time.

Question 68

Which of the following would be a reasonable basis for assigning the materials handling costs to the units produced in an activity-based costing (ABC) system?

A) Number of production runs per year.
B) Number of components per completed unit.
C) Amount of time required to produce one unit.
D) Amount of overhead applied to each completed unit.

Question 69

Which one of the following accounts is not used in an activity-based costing (ABC) system?

A) Materials Inventory.
B) Work-in-Process Inventory.
C) Finished Goods Inventory.
D) Allocations Incurred.

Question 70

Flawless Cosmetic Company manufactures and distributes several different products. The company currently uses a plantwide allocation method for allocating overhead at a rate of $7 per direct labor hour. Loren is the department manager of the Makeup Department that produces Products - Concealer (C) and Glow Cream (GC). Jennifer is the department manager of the Hair Care Department that manufactures Product - Shampoo (S). The product costs (per case of 24 bottles) and other information are as follows:
$\begin{array}{lccc}&&\text { Products }\\ &\text { C } & \text { GC } & \text { S }\\ \text { Direct materials } & \$ 100.00 & \$ 72.00 & \$ 48.00 \\ \text { Direct labor } & 42.00 & 31.50& 12.00\\ \text { Overhead } & 28.00 & 21.00 & 14.00\\&\$170.00&\$124.50&\$74.00\\\text { Machine hours } & 4 & 2 & 3 \\\text { Number of cases (per year) } & 300 & 500 & 600 \end{array}$


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If Flawless changes its allocation basis to machine hours, what is the total product cost per case for Product C?

A) $161.50.
B) $169.30.
C) $182.44.
D) $183.36.

Question 71

Which of the following would be the most appropriate activity and cost drivers pairing for a Purchasing Department?

A)

Question 72

Banc Corp. Trust is considering either a bankwide overhead rate or department overhead rates to allocate $396,000 of indirect costs. The bankwide rate could be based on either direct labor hours (DLH) or the number of loans processed. The departmental rates would be based on direct labor hours for Consumer Loans and a dual rate based on direct labor hours and the number of loans processed for Commercial Loans. The following information was gathered for the upcoming period:
$$\begin{array} { l c c r } \text { Department } & \text { DLH } & \text { Loans Processed } & \text { Direct Costs } \\\text { Consumer } & 14,000 & 700 & \$ 280,000 \\\text { Commercial } & 8,000 & 300 & \$ 180,000\end{array}$$

-
If Banc Corp. Trust uses a bankwide rate based on the number of loans processed, what would be the total costs for the Commercial Department?

A) $118,800.
B) $180,000.
C) $298,800.
D) $318,000.

Question 73

Volume-based costing allocates indirect product costs based on the volume of output, using such allocation bases as direct labor hours, machine hours, or the amount of direct material used in the production process. Activity-based costing (ABC) has consistently shown that volume-based costing ________ the cost of high-volume products and ________ the cost of low-volume products.
$\begin{array} {cc } & { \text { High-Volume Products } } & { \text { Low-Volume Products } } \\\end{array}$
A. $\begin{array} {cc } &&& \text { Overstates } &&&&&& \text { Overstates } \\\end{array}$
B. $\begin{array} {cc } &&& \text { Overstates } &&&&&& \text { Understates } \\\end{array}$
C. $\begin{array} {cc } &&& \text { Understates } &&&&&& \text { Overstates } \\\end{array}$
D. $\begin{array} {cc } &&& \text { Understates } &&&&&& \text { Understates } \\\end{array}$

A) Option A
B) Option B
C) Option C
D) Option D

Question 74

Banc Corp. Trust is considering either a bankwide overhead rate or department overhead rates to allocate $396,000 of indirect costs. The bankwide rate could be based on either direct labor hours (DLH) or the number of loans processed. The departmental rates would be based on direct labor hours for Consumer Loans and a dual rate based on direct labor hours and the number of loans processed for Commercial Loans. The following information was gathered for the upcoming period:
$$\begin{array} { l c c r } \text { Department } & \text { DLH } & \text { Loans Processed } & \text { Direct Costs } \\\text { Consumer } & 14,000 & 700 & \$ 280,000 \\\text { Commercial } & 8,000 & 300 & \$ 180,000\end{array}$$

-
If Banc Corp. Trust uses a bankwide rate based on direct labor hours, what would be the indirect costs allocated to the Commercial Department?

A) $144,000.
B) $138,000.
C) $180,000.
D) $148,500.

Question 75

Flawless Cosmetic Company manufactures and distributes several different products. The company currently uses a plantwide allocation method for allocating overhead at a rate of $7 per direct labor hour. Loren is the department manager of the Makeup Department that produces Products - Concealer (C) and Glow Cream (GC). Jennifer is the department manager of the Hair Care Department that manufactures Product - Shampoo (S). The product costs (per case of 24 bottles) and other information are as follows:
$\begin{array}{lccc}&&\text { Products }\\ &\text { C } & \text { GC } & \text { S }\\ \text { Direct materials } & \$ 100.00 & \$ 72.00 & \$ 48.00 \\ \text { Direct labor } & 42.00 & 31.50& 12.00\\ \text { Overhead } & 28.00 & 21.00 & 14.00\\&\$170.00&\$124.50&\$74.00\\\text { Machine hours } & 4 & 2 & 3 \\\text { Number of cases (per year) } & 300 & 500 & 600 \end{array}$


-
If Flawless changes its allocation basis to machine hours, what is the total product cost per case for Product GC?

A) $163.50
B) $144.00
C) $138.15
D) $117.15

Question 76

Banc Corp. Trust is considering either a bankwide overhead rate or department overhead rates to allocate $396,000 of indirect costs. The bankwide rate could be based on either direct labor hours (DLH) or the number of loans processed. The departmental rates would be based on direct labor hours for Consumer Loans and a dual rate based on direct labor hours and the number of loans processed for Commercial Loans. The following information was gathered for the upcoming period:
$$\begin{array} { l c c r } \text { Department } & \text { DLH } & \text { Loans Processed } & \text { Direct Costs } \\\text { Consumer } & 14,000 & 700 & \$ 280,000 \\\text { Commercial } & 8,000 & 300 & \$ 180,000\end{array}$$

-
If Banc Corp. Trust uses a bankwide rate based on the number of loans processed, what would be the total costs for the Consumer Department?

A) $280,000.
B) $256,800.
C) $576,000.
D) $557,200.

Question 77

Which of the following statements is true regarding time-driven activity-based costs?

A) A manager needs to determine the cost of resources for each individual item produced.
B) This approach requires interviews and surveys from multiple managers and employees.
C) It is more costly than the unmodified ABC system.
D) It uses the cost of the resources supplied to a department and the time it takes to complete the various activities of the department.

Question 78

Which of the following statements is true regarding time equations used in time-driven activity-based costing?

A) Time equations cannot adjust extra time for new vendors.
B) Time equations allow managers to adjust the times for orders with different characteristics.
C) Time equations cannot be used where there is a maximum size of an order that can be inspected or transported to the warehouse.
D) Time equations are only used as part of unmodified ABC systems.

Question 79

Banc Corp. Trust is considering either a bankwide overhead rate or department overhead rates to allocate $396,000 of indirect costs. The bankwide rate could be based on either direct labor hours (DLH) or the number of loans processed. The departmental rates would be based on direct labor hours for Consumer Loans and a dual rate based on direct labor hours and the number of loans processed for Commercial Loans. The following information was gathered for the upcoming period:
$$\begin{array} { l c c r } \text { Department } & \text { DLH } & \text { Loans Processed } & \text { Direct Costs } \\\text { Consumer } & 14,000 & 700 & \$ 280,000 \\\text { Commercial } & 8,000 & 300 & \$ 180,000\end{array}$$

-
If Banc Corp. Trust uses a bankwide rate based on direct labor hours, what would be the indirect costs allocated to the Consumer Department?

A) $49,000.
B) $252,000.
C) $198,000.
D) $396,000.

Question 80

Flawless Cosmetic Company manufactures and distributes several different products. The company currently uses a plantwide allocation method for allocating overhead at a rate of $7 per direct labor hour. Loren is the department manager of the Makeup Department that produces Products - Concealer (C) and Glow Cream (GC). Jennifer is the department manager of the Hair Care Department that manufactures Product - Shampoo (S). The product costs (per case of 24 bottles) and other information are as follows:
$\begin{array}{lccc}&&\text { Products }\\ &\text { C } & \text { GC } & \text { S }\\ \text { Direct materials } & \$ 100.00 & \$ 72.00 & \$ 48.00 \\ \text { Direct labor } & 42.00 & 31.50& 12.00\\ \text { Overhead } & 28.00 & 21.00 & 14.00\\&\$170.00&\$124.50&\$74.00\\\text { Machine hours } & 4 & 2 & 3 \\\text { Number of cases (per year) } & 300 & 500 & 600 \end{array}$


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Based on this information, if Flawless changes its allocation basis to machine hours, what is the overhead rate per machine hour?

A) $3.00
B) $2.00
C) $21.00
D) $6.825