Deck 4: Activity-Based Costing, Lean Operations, and the Costs of Quality

Question 1

A departmental overhead rate is calculated by dividing the total estimated departmental overhead cost pool by the estimated total amount of the department's cost allocation base.

Answer 1

True

Question 2

Merchandising and service companies, as well as governmental agencies, can use refined cost allocation systems to provide their managers with better cost information.

Answer 2

True

Question 3

One condition that favors using plantwide overhead rates, rather than departmental overhead rates, is that different jobs or products use the departments to a different extent.

Answer 3

False

Question 4

Cost distortion occurs when some products are overcosted while other products are undercosted by the cost allocation system.

Question 5

If a company's plantwide overhead rate is allocated based on direct labor hours, then each job will be allocated manufacturing overhead based on the total direct labor hours incurred on the job, regardless of the manufacturing department in which those hours were incurred.

Question 6

As a result of cost distortion, some products will be overcosted while other products will be undercosted.

Question 7

When overhead is allocated to every product using the same manufacturing overhead rate, this rate is called the departmental overhead rate.

Question 8

The estimated total manufacturing overhead costs that will be incurred in each department in the coming year are often referred to as activity cost pools.

Question 9

Companies often refine their cost allocation systems to minimize the amount of cost distortion caused by the simpler cost allocation systems.

Question 10

To determine the amount of overhead allocated, the overhead rate is divided by the cost driver.

Question 11

The plantwide overhead cost allocation rate is computed by dividing the estimated total manufacturing overhead costs by the estimated total quantity of the cost allocation base.

Question 12

With increased competition, managers need more accurate estimates of product costs in order to set prices and to identify the most profitable products.

Question 13

Only manufacturers can use refined costing systems to allocate manufacturing overhead.

Question 14

One condition that favors using a departmental overhead rate, rather than plantwide overhead rates, is that different departments incur different amounts and types of manufacturing overhead.

Question 15

The plantwide overhead cost allocation rate is computed by dividing the estimated total manufacturing overhead costs of the department by the estimated total quantity of the department's cost allocation base.

Question 16

A plantwide overhead rate is calculated by multiplying the estimated total manufacturing overhead costs for the year by estimated total amount of the allocation base for the year.

Question 17

A plantwide overhead rate is calculated by dividing the estimated total manufacturing overhead costs for the year by estimated total amount of the allocation base for the year.

Question 18

Companies that use departmental overhead rates trace direct materials and direct labor to cost objects just as they would in a traditional costing system.

Question 19

Using departmental overhead rates is generally less accurate than using a single plantwide overhead rate.

Question 20

Refined costing systems can be used to allocate any indirect costs to any cost objects.

Question 21

Direct labor hours would be the most appropriate cost allocation base for a Machining Department that uses machine robotics extensively.

Question 22

When a company has established separate manufacturing overhead rates for each department, it is using:

A)departmental overhead rates.
B)cost distortion.
C)a plantwide overhead rate.
D)none of the above.

Question 23

Cooper's Bags Company manufactures cloth grocery bags to be sold to grocery stores and other retailers. Cooper's Bags Company sells the bags in cases of 1,000 bags. The bags come in three sizes: Large, Medium, and Small. Currently, Cooper's Bags Company uses a single plantwide overhead rate to allocate its $8,088,000 of annual manufacturing overhead. Of this amount, $2,210,000 is associated with the Large Bag line, $3,418,800 is associated with the Medium Bag line, and $2,459,000 is associated with the Small Bag line. Cooper's Bags Company is currently running a total of 40,000 machine hours: 13,000 in the Large Bag line, 15,400 in the Medium Bag line, and 11,600 in the Small Bag line. Cooper's Bags Company uses machine hours as the cost driver for manufacturing overhead costs. The departmental manufacturing overhead rate for the Small Bag line would be closest to

A)$202.20 per machine hour.
B)$212.00 per machine hour.
C)$170.00 per machine hour.
D)$222.00 per machine hour.

Question 24

Departmental overhead rates typically do a better job of matching each department's overhead costs to the products that use the department's resources than do plantwide overhead rates.

Question 25

Cooper's Bags Company manufactures cloth grocery bags to be sold to grocery stores and other retailers. Cooper's Bags Company sells the bags in cases of 1,000 bags. The bags come in three sizes: Large, Medium, and Small. Currently, Cooper's Bags Company uses a single plantwide overhead rate to allocate its $8,088,000 of annual manufacturing overhead. Of this amount, $2,210,000 is associated with the Large Bag line, $3,418,800 is associated with the Medium Bag line, and $2,459,000 is associated with the Small Bag line. Cooper's Bags Company is currently running a total of 40,000 machine hours: 13,000 in the Large Bag line, 15,400 in the Medium Bag line, and 11,600 in the Small Bag line. Cooper's Bags Company uses machine hours as the cost driver for manufacturing overhead costs. Which product line(s)have been overcosted or undercosted by using the plantwide manufacturing overhead rate?

A)Large Bags has been undercosted; Medium and Small have been overcosted.
B)Large, Medium, and Small Bags have all been overcosted.
C)Large, Medium, and Small Bags have all been undercosted.
D)Large Bags has been overcosted; Medium and Small have been undercosted.

Question 26

If a company uses departmental overhead allocation rates, then the amount of manufacturing overhead allocated to the job is equal to the plantwide overhead rate multiplied by the actual use of the cost allocation base.

Question 27

When calculating a departmental overhead rate, what should the numerator be?

A)Total estimated amount of the departmental allocation base
B)Total estimated departmental overhead cost pool
C)Total estimated amount of manufacturing overhead for the factory
D)Actual quantity of the departmental allocation base used by the job

Question 28

Which of the following condition(s)favors using departmental overhead rates in place of a plantwide overhead rate?

A)Different departments incur different amounts and types of manufacturing overhead.
B)Different jobs or products use the departments to a different extent.
C)Both of the above.
D)Neither of the above.

Question 29

The Braveheart Corporation uses departmental overhead rates to allocate its manufacturing overhead to jobs. The company has two departments: cutting and painting. The Cutting Department uses a departmental overhead rate of $12 per machine hour, while the Painting Department uses a departmental overhead rate of $17 per direct labor hour. Job 422 used the following direct labor hours and machine hours in the two departments:
The cost for direct labor is $20 per direct labor hour and the cost of the direct materials used by Job 422 is $800.
Required: What was the total cost of Job 422 if the Braveheart Corporation used the departmental overhead rates to allocate manufacturing overhead?

Question 30

Which of the following is a result of cost distortion?

A)Overcosting of all products
B)Undercosting of all products
C)Accurate costing of all products
D)Overcosting of some products and undercosting of other products

Question 31

The allocation base selected for each department should be the cost driver of the costs in the departmental overhead pool.

Question 32

James Industries uses departmental overhead rates to allocate its manufacturing overhead to jobs. The company has two departments: Assembly and Sanding. The Assembly Department uses a departmental overhead rate of $35 per machine hour, while the Sanding Department uses a departmental overhead rate of $20 per direct labor hour. Job 603 used the following direct labor hours and machine hours in the two departments: The cost for direct labor is $30 per direct labor hour and the cost of the direct materials used by Job 542 is $1,400.
What was the total cost of Job 542 if James Industries used the departmental overhead rates to allocate manufacturing overhead?

A)$1,850
B)$2,170
C)$2,240
D)$1,790

Question 33

Bobke Technologies manufactures three types of computers for a well known national brand. The three types are: laptops, desktops, and tablets. Currently, Bobke uses a single plant-wide overhead rate to allocate its $1,667,250 of annual manufacturing overhead. Of this amount, $562,000 is associated with laptops, $492,000 is associated with desktops, and $612,750 is associated with tablets. Bobke is currently using a total of 22,150 machine hours: 7,500 for laptops, 8,200 for desktops, and 6,450 for tablets. Bobke uses machine hours to allocate overhead costs.
Required:
a. Calculate the plant-wide manufacturing overhead rate.
b. Calculate the departmental overhead rate for each of the three departments listed.
c. Which product line(s)have been overcosted by using the plant-wide manufacturing overhead rate? By how much per machine hour? Which product line(s)have been undercosted by using the plant-wide manufacturing overhead rate? By how much per machine hour?

Question 34

Ryan Fabrication allocates manufacturing overhead to each job using departmental overhead rates. Ryan's operations are divided into a metal casting department and a metal finishing department. The casting department uses a departmental overhead rate of $52 per machine hour, while the finishing department uses a departmental overhead rate of $28 per direct labor hour. Job A216 used the following direct labor hours and machine hours in the two departments: The cost for direct labor is $32 per direct labor hour and the cost of the direct materials used by Job A216 is $1,800.
How much manufacturing overhead would be allocated to Job A216 using the departmental overhead rates?

A)$544
B)$596
C)$1,360
D)$454

Question 35

When calculating the total amount of manufacturing overhead to allocate to a particular job, the company would multiply each departmental overhead rate by ________ and then ________ together the allocated amounts from each department.

A)the actual amount of the departmental allocation based used by the job; multiply
B)the actual amount of the plantwide allocation based used by the job; add
C)the actual amount of the departmental allocation based used by the job; add
D)the actual amount of the plantwide allocation based used by the job; multiply

Question 36

James Industries uses departmental overhead rates to allocate its manufacturing overhead to jobs. The company has two departments: Assembly and Sanding. The Assembly Department uses a departmental overhead rate of $35 per machine hour, while the Sanding Department uses a departmental overhead rate of $20 per direct labor hour. Job 603 used the following direct labor hours and machine hours in the two departments: The cost for direct labor is $30 per direct labor hour and the cost of the direct materials used by Job 603 is $1,400.
How much manufacturing overhead would be allocated to Job 603 using the departmental overhead rates?

A)$450
B)$380
C)$715
D)$390

Question 37

What will the use of departmental overhead rates generally result in?

A)The use of a separate cost allocation base for each department in the factory
B)The use of a single cost allocation base
C)The use of a single overhead cost pool for the factory
D)The use of separate cost allocation base for each activity in the factory

Question 38

Ryan Fabrication allocates manufacturing overhead to each job using departmental overhead rates. Ryan's operations are divided into a metal casting department and a metal finishing department. The casting department uses a departmental overhead rate of $52 per machine hour, while the finishing department uses a departmental overhead rate of $28 per direct labor hour. Job A216 used the following direct labor hours and machine hours in the two departments: The cost for direct labor is $32 per direct labor hour and the cost of the direct materials used by Job A216 is $1,800.
What was the total cost of Job A216 if Ryan Fabrication used the departmental overhead rates to allocate manufacturing overhead?

A)$2,434
B)$2,344
C)$2,888
D)$2,940

Question 39

Cooper's Bags Company manufactures cloth grocery bags to be sold to grocery stores and other retailers. Cooper's Bags Company sells the bags in cases of 1,000 bags. The bags come in three sizes: Large, Medium, and Small. Currently, Cooper's Bags Company uses a single plant-wide overhead rate to allocate its $8,088,000 of annual manufacturing overhead. Of this amount, $2,210,000 is associated with the Large Bag line, $3,418,800 is associated with the Medium Bag line, and $2,459,200 is associated with the Small Bag line. Cooper's Bags Company is currently running a total of 40,000 machine hours: 13,000 in the Large Bag line, 15,400 in the Medium Bag line, and 11,600 in the Small Bag line. Cooper's Bags Company uses machine hours as the cost driver for manufacturing overhead costs. The plant-wide manufacturing overhead rate would be closest to

A)$ 55.25 per machine hour.
B)$170.00 per machine hour.
C)$222.00 per machine hour.
D)$202.20 per machine hour.

Question 40

High Rise Display Company manufactures display cases to be sold to retail stores. The cases come in three sizes: Large, Medium, and Small. Currently, High Rise Display Company uses a single plant-wide overhead rate to allocate its $3,357,800 of annual manufacturing overhead. Of this amount, $820,000 is associated with the Large Case line, $1,276,800 is associated with the Medium Case line, and $1,261,000 is associated with the Small Case line. Clearview Display Company is currently running a total of 33,000 machine hours: 10,000 in the Large Case line, 13,300 in the Medium Case line, and 9,700 in the Small Case line. High Rise Display Company uses machine hours as the cost driver for manufacturing overhead costs.
Required:
a. Calculate the plant-wide manufacturing overhead rate.
b. Calculate the departmental overhead rate for each of the three departments listed.
c. Which product line(s)have been overcosted by using the plant-wide manufacturing overhead rate? By how much per machine hour? Which product line(s)have been undercosted by using the plant-wide manufacturing overhead rate? By how much per machine hour?

Question 41

Unit-level activities and costs are incurred for every single unit.

Question 42

Facility-level activities and costs are incurred no matter how many units, batches, or products are produced in the plant.

Question 43

Two main benefits of ABC are (1)more accurate product cost information and (2)more detailed information on the costs of activities and the drivers of those costs.

Question 44

The cost of inspecting and packaging each unit the company produces would be considered a facility-level activity cost.

Question 45

Machine set-up would be considered a batch-level cost.

Question 46

Facility-level activities and costs are incurred for every individual unit.

Question 47

Traditional costing systems are generally more accurate than ABC costing.

Question 48

As compared to traditional volume-based costing using a single plantwide overhead rate, activity-based costing (ABC)is a more refined costing system that reduces cost distortion.

Question 49

Product-level activities and costs are incurred for a particular product, regardless of the number of units or batches of the product produced.

Question 50

ABC generally causes the least amount of cost distortion among products because indirect costs are allocated to the products based on

A)types of activities used by the product .
B)the extent to which the activities are used.
C)both A and B.
D)none of the above.

Question 51

It is easier to allocate indirect costs to the products that actually caused those costs if an ABC system is used rather than a traditional costing system.

Question 52

The first step in developing an ABC system is

A)calculate an activity cost allocation rate for each activity.
B)allocate the costs to the cost object using the activity cost allocation rates.
C)select an allocation base for each activity.
D)identify the primary activities and estimate a total cost pool for each.

Question 53

Companies that use ABC trace direct materials and direct labor to cost objects just as would be done using traditional costing systems.

Question 54

In using an ABC system, all of the following steps are performed before the company's year begins except

A)identify the primary activities and estimate a total cost pool for each.
B)select an allocation base for each activity.
C)allocate the costs to the cost object using the activity cost allocation rates.
D)calculate an activity cost allocation rate for each activity.

Question 55

The cost of depreciation, insurance, and property tax on the entire production plant would be considered a facility-level cost.

Question 56

Batch-level activities and costs are incurred again each time a batch is produced.

Question 57

The cost of maintenance on the entire production plant would be considered a facility-level cost.

Question 58

The cost to research and develop, design and market new models would be considered a product-level cost.

Question 59

The cost allocation rate for each activity is equal to the total estimated activity cost pool divided by the total estimated activity allocation base.

Question 60

The cost to design and market new models would be considered a facility-level cost.

Question 61

Which of the following is not likely to be a cost driver of activities associated with determining product cost?

A)Number of material requisitions
B)Number of cost accountant's labor hours
C)Number of product inspections
D)Number of production orders

Question 62

In developing an ABC system, what is the last step?

A)Identify the primary activities and estimate a total cost pool for each.
B)Select an allocation base for each activity.
C)Allocate the costs to the cost object using the activity cost allocation rates.
D)Calculate an activity cost allocation rate for each activity.

Question 63

All of the following describe an ABC system except

A)ABC systems may only be used by service companies.
B)ABC systems can create more accurate product costs.
C)ABC systems are more complex and costly than traditional costing systems.
D)ABC systems are used in both manufacturing and nonmanufacturing companies.

Question 64

Which of the following is not an activity in an ABC system that determines the cost of a manufactured product?

A)Machining
B)Inspecting
C)Accounting
D)Materials handling

Question 65

Using factory utilities would most likely be classified as a ________ cost.

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

Question 66

Regarding activity-based costing systems, which of the following statements is true?

A)ABC systems accumulate overhead costs by departments.
B)ABC costing systems are less complex and, therefore, less costly than traditional systems.
C)ABC costing systems have separate indirect cost allocation rates for each activity.
D)ABC costing systems can be used in manufacturing firms only.

Question 67

Which of the following systems focuses on activities as the fundamental cost objects and uses the costs of those activities as building blocks for compiling the indirect costs of products and other cost objects?

A)Job costing
B)Activity-based costing
C)Process costing
D)Product costing

Question 68

The use of which of the following costing systems is most likely to reduce cost distortion to a minimum?

A)Plantwide overhead rate
B)Departmental overhead allocation rates
C)Traditional costing system
D)Activity-based costing

Question 69

Which of the following is most likely to be the cost driver for the packaging and shipping activity?

A)Number of setups
B)Number of orders shipped
C)Number of units produced
D)Hours of testing

Question 70

Which of the following does ABC take into account?

A)The types of manufacturing activities used by the product
B)The extent to which the manufacturing activities are used by the product
C)Both A and B
D)Neither A nor B

Question 71

Which of the following does activity-based costing consider to be the fundamental cost object?

A)Direct labor hours
B)Activities
C)Direct materials
D)Finished goods

Question 72

Four basic steps are used in an ABC system. List the proper order of these steps, which are currently scrambled below: a. Identify the primary activities and estimate a total cost pool for each.
B) Allocate the costs to the cost object using the activity cost allocation rates.
C) Select an allocation base for each activity.
D) Calculate an activity cost allocation rate for each activity.

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

Question 73

Molding and sanding each unit of product would most likely be classified as a ________ cost.

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

Question 74

Research and development would most likely be classified as a ________ cost.

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

Question 75

Which of the following can be used in conjunction with activity-based costing?

A)Job costing
B)Process costing
C)Both A and B
D)Neither A nor B

Question 76

Machine set-up would most likely be classified as a ________ cost.

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

Question 77

Kramer Company manufactures coffee tables and uses an activity-based costing system. Each coffee table consists of 20 separate parts totaling $240 in direct materials, and requires 5.0 hours of machine time to produce. Additional information follows: What is the cost of materials handling per coffee table?

A)$40.00
B)$20.00
C)$7.75
D)$15.00

Question 78

All of the following are considered to be part of the cost hierarchy often used to implement ABC, with the exception of

A)production-level activity.
B)batch-level activity.
C)product-level activity.
D)unit-level activity.

Question 79

Using traditional costing instead of ABC costing might lead to all of the following except

A)cutting back on high-volume products that appear unprofitable.
B)expanding low-volume products that appear profitable.
C)raising the selling price of low-volume products.
D)raising the selling price of high-volume products.

Question 80

In ABC, how is the activity allocation rate computed?

A)The total estimated activity allocation base is divided by the total estimated activity cost pool.
B)The total estimated activity cost pool is divided by the total estimated activity allocation base.
C)The total estimated activity allocation base is multiplied by the total estimated activity cost pool.
D)You take the total estimated activity allocation base and subtract the total estimated total activity cost pool.