Deck 5: Activity-Based Costing and Management

Question 1

Inaccurate product costs can expose a company to the risk of losing market share to competitors.

Answer 1

True

Question 2

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

Answer 2

If indirect costs are not properly allocated to the products, a product may appear to cost less than it actually does cost to produce.If the selling price is based on these lower costs, the selling price may actually be lower than the costs needed to produce the product resulting in losses for the company.

Question 3

Peanut butter costing involves assigning costs in a non uniform manner to reflect the different utilization of resources by different products or services.

Answer 3

False

Question 4

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

Question 5

Which of the following is a sign that a "smoothing out" costing system exists?

A)Managers rely on data originated by the cost system.
B)The company wins bids they thought had low margins.
C)A batch consumes a relatively high level of input materials and conversion activities and is reported to have a relatively high cost.
D)A batch consumes a relatively low level of input materials and conversion activities and is reported to have a relatively low cost.
E)The company loses bids they thought had low margins.

Question 6

Which of the following statements is TRUE concerning product costing systems?

A)Companies that undercost products always sell products at a loss.
B)Companies that overcost run the risk of losing customers.
C)Undercosting or overcosting does not relate to product cost cross-subsidization.
D)Peanut butter costing is another term for direct costing.
E)Companies that overcost will make more profit by passing along higher prices to customers.

Question 7

Uniformly assigning the costs of resources to cost objects when those resources are actually used in a non-uniform way is called

A)activity-based costing.
B)menu-based costing.
C)full product-cost allocation.
D)variable product-cost allocation.
E)broad averaging or peanut butter costing.

Question 8

A busy law office has a central administration set up, with the administration work for all lawyers shared by the clerical staff.Clients are billed at the firm's hourly rate by the firm.The arrangement is that whenever there is administration work to be done, it is assigned to whoever is available at the time.One of the lawyers has complained that she hardly ever uses the administration services, and so her year end bonus should be larger than those who require the administration services.Therefore they are considering tracking the administration work done for each lawyer separately so that they know how many hours of administration services is being used by each lawyer.At the end of the year, the bonus of each lawyer would be reduced by a charge reflecting the administration services she/he used in the year.If the firm institutes this new approach, this will mean that

A)there will be no more cross subsidization.
B)there will still be cross-subsidization between lawyers but not between their clients.
C)the new information gathered will enable the firm to be able to reduce its costs.
D)there will still be cross-subsidization between clients but not between lawyers.
E)they will be using a departmental costing system.

Question 9

Using a broad average to assign costs to products or services may lead to undercosting or overcosting.

Question 10

Indications that a product cost system needs revision include

A)the product line consists of a products which are produced at different locations.
B)the product costing computer system does not use the latest technology.
C)the company uses a single allocation base system developed long ago.
D)prime cost represent the vast majority of product cost.
E)managers lose bids they expected to win and win bids they expected to lose.

Question 11

The term used to describe a situation when at least one miscosted product causes other products to be miscosted in the organization is known as

A)cross-subsidization.
B)product marketing.
C)product overcosting.
D)product undercosting.
E)product sub-optimization.

Question 12

A product that consumes a relatively low level of resources but is reported to have a relatively high cost, is an example of

A)increased market share.
B)product marketing.
C)product undercosting.
D)product overcosting.
E)product sub-optimization.

Question 13

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)overcost higher priced products.
E)overcost low volume complex products.

Question 14

A product that consumes a relatively high level of resources but is reported to have a relatively low cost, is an example of

A)increased market share.
B)product marketing.
C)product undercosting.
D)product overcosting.
E)product sub-optimization.

Question 15

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

Question 16

Simple 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.
E)they assign direct costs using direct cost tracing.

Question 17

Using a broad average to allocate costs to products is called

A)activity-based costing.
B)refined costing.
C)peanut butter costing.
D)product undercoating.
E)job costing.

Question 18

Product-cost cross-subsidization means that if a company undercosts one of its products, it will gain market share due to a more competitive price.

Question 19

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

Question 20

Provided a single allocation base is used, jobs are typically overcosted if

A)jobs consume proportionately less of the indirect activity but is reported to have higher cost.
B)jobs require more employees.
C)jobs consume proportionately more of the indirect activity and is reported to have higher cost.
D)jobs consume proportionately more of the indirect activity but is reported to have lower cost.
E)jobs cannot be overcosted; only products or service can be overcosted.

Question 21

Cecelia Schell is taking four clients (who are not related)on a tour of her retirement development.The clients incurred the following expenses while on the tour.All tour expenses are paid by Cecelia because she has business discounts for most of her business dealings.These expenses will be billed to the clients by Cecelia. Required:
Compute the total average cost per client showing average indirect (overhead)and average direct (other)charges separately.

Question 22

An ABC system results in a better measure of the nonuniformity of a company's resources by jobs, products, or services than by using broad averages to assign costs.

Question 23

Product-sustaining (service-sustaining)costs are the costs of resources sacrificed on activities undertaken to support specific services.

Question 24

Output unit-level cost is identical to batch-level cost in a system that costs based on activities.

Question 25

Understanding the hierarchy of costs is critical when allocating costs to products.

Question 26

By defining activities and identifying the costs of performing each activity, ABC systems provide detailed information regarding how an organization utilizes its available resources.

Question 27

Improved direct cost tracing is a benefit of activity-based costing.

Question 28

A cost hierarchy is a categorization of costs into different cost pools on the basis of different classes of cost drivers or different degrees of difficulty in determining cause-and-effect relationships.

Question 29

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

Question 30

Direct cost tracing will accomplish which of the following?

A)identify homogeneous costs
B)classify more costs as indirect
C)focus on the cause-and-effect criterion when choosing allocation bases
D)expand the number of indirect cost pools
E)classify as many of the costs as direct costs, as is economically feasible

Question 31

One of the benefits of an ABC system is that by highlighting different activities, you can ignore the different levels of activities, such as individual units of output versus batches of output.

Question 32

How does direct cost tracing improve cost accuracy?

A)It identifies the cause-and-effect relationship between direct costs and indirect costs.
B)It identifies the cause-and-effect relationship between activities and non-activities.
C)It reclassifies costs or costs pools that vary with the quantity of a single activity cost driver as direct.
D)It makes no assumptions about the cause-and-effect relationship between direct costs and activities.
E)Because with a greater number of cost pools, it does not have to be concerned with the overhead costs used by different products.

Question 33

Activity-based costing relies heavily on broad averages to assign costs to jobs, products, and services.

Question 34

All costs in a homogeneous cost pool have

A)only one cost driver that will accurately represent the relationship between the costs and the activity.
B)to be adjusted at year end to actual costs.
C)the same cost behaviour.
D)the same or a similar cause-and-effect (or benefits-received)relationship with a single cost driver that is used as the cost-allocation base.
E)a causal relationship with manufacturing costs.

Question 35

When ever possible use the number of units produced as the cost-allocation base for homogeneous indirect cost pools.

Question 36

Batch-level costs are resources sacrificed on activities undertaken to support specific products or services.

Question 37

List and describe the purposes of the three main guidelines for refining a cost system.

Question 38

The Celestial Group (CG)provides financial advice to individuals and corporations.CG charges clients for (a)direct professional time, and (b)support services.The three professionals in CG and their rates per professional hour are as follows:
Monthly support service costs are as follows:
Clients are charged a standard support service fee of $200 per month.There is one receptionist who covers the office and spends her time equally on each of the companies sixty clients.The three associate advisors work together on client files.They work a total of 500 hours per month on client accounts.During June they worked a total of 0 hours on the XB Corp file; and, 18 hours on the JN Corp file.The associates provide support for the professional advisors and give advice to clients on matters that do not require a securities license.CG has just prepared the June bills for two client corporations owned by the same person.:
The owner of the two corporations has questioned the June bill.She is wondering why support services is the same amount when XB Corp required no support service for the month.Required:
Prepare more appropriate bills for June using the activity-based costing approach.

Question 39

Product-sustaining (service-sustaining),and facility-sustaining costs are equivalent terms in ABC systems.

Question 40

A critical distinction in activity-based costing is the difference between an activity and an event.

Question 41

Which of the following statements is TRUE regarding activity-based costing systems?

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 can be used in manufacturing firms only.
D)ABC costing systems have multiple indirect cost allocation rates for each activity.
E)ABC systems provide a greater level of detail to understand how an organization uses its common inputs differently for distinct products.

Question 42

A four-part cost hierarchy includes

A)market-sustaining costs.
B)research and development costs.
C)manufacturing-level costs.
D)output unit-level costs.
E)period costs.

Question 43

Activity-based costing is a technique to improve the reliability of cost assignment

A)to work-in-process inventory.
B)from direct cost pools to distinct types of outputs.
C)from both direct and indirect cost pools to distinct types of outputs.
D)to all types of inventory.
E)from indirect cost pools to distinct types of outputs.

Question 44

Which of the following statements about activity-based costing is TRUE?

A)It does not affect cost control.
B)Indirect cost allocation bases are unlikely to be cost drivers.
C)It provides less information than traditional cost systems.
D)It provides similar results to traditional costing when one activity creates a substantial amount of total cost.
E)It provides similar results to traditional costing when different products use resources from different activities in different proportions.

Question 45

A costing system which focuses on individual event or tasks as the cost pool to be allocated is called

A)activity-based costing.
B)direct costing.
C)job costing.
D)process costing.
E)normal costing.

Question 46

Which of the following statements does not represent the logic of an ABC system?

A)Activity cost allocation bases are the activity cost drivers of costs in the activity cost pools.
B)A strong cause-and-effect relationship between overhead costs and the cost allocation base is essential.
C)The requirement to measure cost allocation bases of different activities used by different products is essential.
D)The overhead used by different products is not important, as it is a fixed cost.
E)A greater level of detailed information concerning costs will help organizations be more efficient.

Question 47

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

Question 48

If the cost of an activity increases with the number of purchase orders placed, rather than to the quantity of items purchased, it is which of the following?

A)market-sustaining cost
B)output unit-level cost
C)facility-sustaining cost
D)product-sustaining (service-sustaining)costs
E)batch-level cost

Question 49

Which of the following is NOT an activity under an ABC system?

A)designing products
B)engineering
C)setting up equipment
D)distributing products
E)customers

Question 50

If the cost of an activity increases with the quantity of items used, it is which of the following?

A)market-sustaining cost
B)output unit-level cost
C)batch-level cost
D)product-sustaining (service-sustaining)costs
E)facility-sustaining cost

Question 51

When using activity-based costing in a manufacturing setting, its distinctive feature is the focus on

A)activities as the fundamental cost objects.
B)minimizing the number of journal entries related to the manufacturing process.
C)minimizing manufacturing costs.
D)materials handling.
E)materials sorting.

Question 52

A cost accounting system should be revised when

A)the existing cost accounting system provides information that is representative of operations.
B)the existing cost accounting system could be updated, just to keep ahead.
C)the existing cost accounting system does not produce information that reflects the way various products use scarce resources.
D)management wants to change the system, even though the information is relevant and correct.
E)a new system would be easier to understand but would not be reliable.

Question 53

If the cost of an activity increases with each hour of machine time, it is which of the following?

A)market-sustaining cost
B)output unit-level cost
C)batch-level cost
D)product-sustaining (service-sustaining)costs
E)facility-sustaining cost

Question 54

Which of the following is NOT an activity under an ABC system?

A)an event
B)a task
C)a unit of work
D)a process
E)indirect cost

Question 55

In an activity-cost pool

A)a measure of the activity performed serves as the cost allocation base.
B)the costs have a cause-and-effect relationship with the cost-allocation base for that activity.
C)the cost pools are homogeneous over time.
D)costs in a cost pool can always be traced directly to products.
E)each pool pertains to a narrow and focused set of costs.

Question 56

In a cost system that doe not consider the cost hierarchy unit-level measures can distort product costing because the demand for overhead resources may be driven by batch-level or product-sustaining activities.

Question 57

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

Question 58

Resources sacrificed on activities undertaken to support product lines are which of the following?

A)market-sustaining costs
B)output unit-level costs
C)batch-level costs
D)facility-sustaining costs
E)product-sustaining (service-sustaining)costs

Question 59

Engineering costs incurred to change product designs are which of the following?

A)market-sustaining costs
B)output unit-level costs
C)batch-level costs
D)product-sustaining (service-sustaining)costs
E)facility-sustaining costs

Question 60

Which of the following is relevant concerning cost hierarchies?

A)activity levels
B)determining whether costs are variable or fixed
C)costing on the value chain
D)separating inventoriable costs from period costs
E)minimum cost required for a particular process

Question 61

A division of a company manufactures two products, which are in high demand in the defence industry.Product A is stamped out in a machine press, at the rate of 10,000 per hour.Product B is identical to product A, with the exception that it is made from thicker steel, and requires the machine press to be recalibrated.Product A is produced on the day shift and product B is produced on the afternoon shift, allowing set up changes to be done between shifts.In this case, set up hours are related to which of the following?

A)units of output
B)batches of output
C)the number of customers
D)machine hours
E)labour hours

Question 62

The plant manager has come to you, as the new management accountant, for assistance.The plant manufactures sailboards, operating two shifts per day.During March through July, a third shift is added.The company has to train new machine operators each summer as the demands for its products is very seasonal.Training always occurs on the day shift, and the plant allocates the costs of training (e.
g., extra supervision required), based on machine hours.This year, the three shift managers cannot agree on who should be charged for the training.The day shift manager is angry because she has discovered that machine hours are highest on the day shift.The other two managers argue that the hours are higher due to the training, so the day shift should be charged for those costs.Required:
Provide a recommendation to the plant manager? Include in your recommendation two options as an allocation base for training costs.

Question 63

Analyze the two costing systems below and determine which one is an ABC system, stating the reasons for your choice.

Question 64

ABC provides a cost-benefit analysis of the unequally shared benefits of a support activity.The technique also discloses the scope of business functions where cost control will have a positive effect.Required:
Provide three benefits that the identification of the scope of cost control focused on different activity levels should lead to.

Question 65

Resources sacrificed on activities that cannot be traced to individual products or services, but which support the organization as a whole are which of the following?

A)output unit-level costs
B)service-sustaining costs
C)batch-level costs
D)product-sustaining costs
E)facility-sustaining costs

Question 66

Designing a new model of washing machine would be classified in the ABC cost hierarchy as a (an)

A)output unit-level cost.
B)batch-level cost.
C)product-sustaining cost.
D)facility-sustaining cost.
E)period cost because it is not related to the cost hierarchy.

Question 67

Describe each of the four cost hierarchies used to define levels for activities in activity-based costing.

Question 68

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

Question 69

Brewery Company operates many bottling plants around the globe.At its Montreal plant, where six different brands are bottled, the following costs were incurred in 2012 to produce 10,000,000 bottles of beer:
1.Development costs of adding the new product "Light Beer Plus" amounted to $307,000.2.Material handling costs of inspecting and handling concentrate, bottles, packages, and so forth amounted to $216,750.These costs are allocated to each production run.3.Incoming materials purchase costs that can be directly traced to individual products being bottled and packaged.These costs are purely variable with output level and amounted to $1,106,500.4.Executive salaries and other central administration overhead amounted to $396,000.5.Plant overhead including costs related to: supervision, safety, energy and plant insurance amounted to $311,500.6.The cost of cleaning and calibrating equipment for each production run amounted to $85,750.Required:
a.Classify each of the preceding costs as output unit-level, batch-level, product-sustaining, or facility-sustaining.
b.Compute the cost per unit for the total manufacturing cost.

Question 70

Match the cost driver in the right column below to the appropriate function in the left column.

A)Number of shipments
B)Number of purchase orders
C)Number of employees
D)Number of customers
E)Number of desktop computers
F)Number of invoices
Purchasing

Question 71

The new manager of the insurance division does not understand how the company can have so many overhead rates for assigning costs to the activities of the company's life insurance underwriters.There is one rate schedule for average assignable costs when agents write standard policies.There is another rate schedule which the agents must complete when they write special policies, and these policies are costed out differently from those that are categorized as standard policies.Required:
a.Why might the company have different costing systems with different overhead rates for the standard and specialized policies?

Question 72

Activity-based cost systems create

A)one large cost pool.
B)homogeneous activity-related cost pools.
C)activity-cost pools with a broad focus.
D)activity-cost pools containing many direct costs.
E)heterogenous activity-related cost pools.

Question 73

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

Question 74

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

A)identification of only variable costs
B)a focus on both operating and strategic decisions
C)identifying all resources used by activities regardless of how individual costs behave in the short run
D)using the cost hierarchy to allocate costs to products
E)identification of all costs used by activities

Question 75

A cost hierarchy describes

A)a technique for direct cost tracing.
B)the process of arranging costs by importance.
C)the logic of segregating costs by value-chain classification.
D)the logic of separating one indirect cost pool into multiple pools according to activity level.
E)a technique of differentiating fixed and variable costs.

Question 76

Installing a new control panel on a factory production machine would be classified in the ABC cost hierarchy as a (an)

A)output unit-level cost.
B)batch-level cost.
C)product-sustaining cost.
D)facility-sustaining cost.
E)period cost because it is not related to the cost hierarchy.

Question 77

Hans Sorensen, controller of Franklin Production, has the choice of allocating indirect manufacturing cost using either direct manufacturing labour hours or manufacturing machine hours.If he uses labour hours for the month of January, Product A receives $312,000 in manufacturing overhead charges and Product B receives $448,000.When machine hours are used Product A receives $352,000 in manufacturing overhead charges while Product B receives only $408,000.Required:You are the department manager in charge of Product A and are strongly in favour of using labour hours.Of course, your co-manager, who is in charge of Product B, is strongly in favour of machine hours.What are some arguments you may be able to give for the allocation base that favours your department's product?

Question 78

Activity-based cost systems

A)apply average support costs to each unit of product.
B)limit cost drivers to units of output.
C)allocate costs based on the overall level of activity.
D)generally undercost complex products.
E)highlight the different levels of activities.

Question 79

Bottle Company operates many bottling plants around the globe.At its Toronto plant, where nine different brands are bottled, the following costs were incurred in the current year to produce 15,000,000 cans of soft drink:
1.Development costs of adding the new product "Soda Plus" amounted to $614,000.2.Material handling costs of inspecting and handling concentrate, bottles, packages, and so forth amounted to $433,500.These costs are allocated to each production run.3.Incoming materials purchase costs that can be directly traced to individual products being canned and packaged.These costs are purely variable with output level and amounted to $2,213,000.4.Executive salaries and other central administration overhead amounted to $423,000.5.Plant overhead including costs related to: supervision, safety, energy and plant insurance amounted to $623,000.6.The cost of cleaning and calibrating equipment for each production run amounted to $171,500.Required:
a.Classify each of the preceding costs as output unit-level, batch-level, product-sustaining, or facility-sustaining.
b.Compute the cost per unit for the total manufacturing cost.

Question 80

The costs of hiring building security would be which of the following?

A)output unit-level costs
B)batch-level costs
C)general-level costs
D)product-sustaining costs
E)facility-sustaining costs