Question 1

Facility-level activities are activities that are carried out regardless of which products are produced, how many batches are run, or how many units are made.

Accepted Answer

Facility-level activities, such as maintenance, rent, and utilities, are necessary to keep the factory running regardless of the specific products being produced or the production volume.

Question 2

The challenge in designing an activity-based costing system is to identify a reasonably small number of activities that explain the bulk of the variation in overhead costs.

Accepted Answer

This is true. The goal of activity-based costing is to identify the few activities that drive most of the overhead costs, so that resources can be allocated to those activities more efficiently. By focusing on the most important activities, a company can reduce costs while maintaining or improving quality.

Question 3

Facility-level costs can be traced on a cause-and-effect basis to individual products.

Accepted Answer

Facility-level costs are indirect costs that cannot be traced to individual products on a cause-and-effect basis.

Question 4

Batch-level activities are performed each time a batch of goods is processed. The cost of a batch-level activity is proportional to the number of units in the batch.

Accepted Answer

Batch-level activities are related to processing a batch of goods, but their costs are not directly proportional to the number of units in the batch; they are incurred once per batch regardless of the batch size.

Question 5

In the second-stage allocation in activity-based costing, overhead costs are allocated from activity cost pools to products.

Accepted Answer

That is correct. In the second-stage allocation, the overhead costs that have been accumulated in activity cost pools are then allocated to specific products based on their usage of each activity.

Question 6

When designing an activity-based costing system, accountants should be tasked with identifying the activities they think are important and that consume most of the resources in the organization.

Accepted Answer

The answer of When designing an activity-based costing system, accountants...

Question 7

Managing and sustaining product diversity requires many more overhead resources such as production schedulers and product design engineers. The costs of these resources have no obvious connection with direct labor.

Accepted Answer

Managing and sustaining product diversity requires additional resources such as production schedulers and product design engineers, which have no direct connection to labor costs. Therefore, the statement is true.

Question 8

An activity in activity-based costing is an event that causes the consumption of overhead resources.

Accepted Answer

An activity in activity-based costing is defined as any event or task that causes the consumption of overhead resources. These activities are identified and measured in order to more accurately assign overhead costs to specific products or services.

Question 9

Activity rates in activity-based costing are computed by dividing costs from the first-stage cost assignments by the activity measure for each activity cost pool.

Accepted Answer

This is correct. Activity rates are computed by dividing costs from the first-stage cost assignments by the activity measure for each activity cost pool.

Question 10

An activity rated is computed for each activity cost pool-not for each product.

Accepted Answer

The activity rate is calculated for each activity cost pool, which is then used to allocate costs to different products based on their consumption of the activity.

Question 11

In general, activities and costs should be combined in an activity-based costing system only if they fall within the same level in the cost hierarchy.

Accepted Answer

In an activity-based costing system, activities and costs are grouped based on the cost hierarchy levels (unit-level, batch-level, product-level, and facility-level) to accurately allocate costs according to the resources consumed by each activity.

Question 12

An activity measure in activity-based costing expresses how much of an activity is carried out and it is used as the allocation base for assigning overhead costs to departments.

Accepted Answer

An activity measure in activity-based costing is used to allocate overhead costs to products or services, not departments.

Question 13

The activity rates in activity-based costing are not intended to set targets for how quickly a task should be completed.

Accepted Answer

The activity rates in activity-based costing are simply meant to allocate costs to products or services based on their usage of specific activities, not to determine how quickly those activities should be completed.

Question 14

Activity-based costing involves a two-stage allocation process in which overhead costs are first assigned to departments and then allocated to products using activity measures.

Accepted Answer

Activity-based costing involves assigning overhead costs to activities first, not departments, and then allocating these costs to products based on their use of these activities.

Question 15

A plantwide predetermined overhead rate based on direct labor-hours results in high overhead costs for products with a high direct labor-hour content and low overhead costs for products with a low direct labor-hour content.

Accepted Answer

A plantwide predetermined overhead rate based on direct labor-hours assumes that overhead costs are directly proportional to direct labor-hours. Therefore, products with a high direct labor-hour content will be allocated more overhead costs, while products with a low direct labor-hour content will be allocated less overhead costs. This can result in high overhead costs for some products and low overhead costs for others.

Question 16

Activities consume resources. In activity-based costing an attempt is made to trace the costs of those activities directly to the products that cause them.

Accepted Answer

Activity-based costing (ABC) is a costing method that identifies activities in an organization and assigns the cost of each activity to products and services based on their actual consumption of resources. ABC aims to provide a more accurate estimation of the cost of a product/service by directly linking the cost of each activity to the product that caused it. Therefore, the statement that activities consume resources and the attempt is made to trace the costs of those activities directly to the products that cause them is true.

Question 17

If a company has a great deal of product diversity, activity-based costing will generally yield less accurate product costs than traditional methods based on direct labor or machine hours.

Accepted Answer

Activity-based costing is designed to provide more accurate product costs in cases of product diversity by allocating overhead more precisely based on activities that drive costs, rather than using broad averages like direct labor or machine hours.

Question 18

Companies use three common approaches to assign overhead costs to products-plantwide overhead rate, departmental overhead rates, and activity-based costing. The most accurate of these three approaches is departmental overhead rates.

Accepted Answer

Activity-based costing is generally considered the most accurate method as it assigns overhead costs based on actual activities that drive costs, rather than using broad averages.

Question 19

In activity-based costing, unit product costs computed for external financial reports include direct materials costs.

Accepted Answer

Unit product costs computed for external financial reports in activity-based costing include direct materials costs as one of the components.

Question 20

Direct labor is an appropriate allocation base for overhead when overhead costs and direct labor are highly correlated.

Accepted Answer

Direct labor can be a good allocation base because it is often correlated with overhead costs. For example, if a company's manufacturing process requires a lot of labor-intensive work, then more direct labor hours will likely result in more overhead costs for things like electricity, maintenance, and equipment depreciation. However, it's important to note that direct labor may not always be the most appropriate allocation base depending on the nature of a company's operations. In some cases, it may make more sense to use machine hours, units produced, or some other allocation base instead.

Quiz 3: Activity-Based Costing