Deck 10: Activity-Based Costing Management

Question 1

Non-value adding activities cost money but do not provide commensurate benefits.

Answer 1

True

Question 2

Which of the following is an example of a product- or customer-level activity

A)Activities performed by security personnel.
B)Setting up a machine for production.
C)First-part inspections.
D)The work of a product engineer.
E)Work of production employees.

Answer 2

D

Question 3

An ABC system may be used to measure the profitability or profit potential of a market segment, but not an individual customer.

Answer 3

False

Question 4

Profit margin is the appropriate measure for evaluating long-term profitability.

Question 5

For a bank, maintaining the ATM computer network would be a product-level activity.

Question 6

Changing the allocation method never affects the reported profit margins for each product line.

Question 7

Rosenbrook Corporation has provided the following data from its activity-based costing system: $\begin{array}{rrl}\text { Activity Cost} & \text { Pool Total Cost } & \text { Total Activity }\\\text { Assembly }&\$ 477,900 & 29,500 \text { machine-hours } \\\text { Packaging }&\$ 35,400 & 1,200 \text { orders } \\\text { Shipping }&\$ 45,778 & 748 \text { shipments }\end{array}$ Data concerning one of the company's products appear below: $\begin{array}{ll}\text {Selling price per unit }&\$189.50\\\text {Direct materials cost per unit }&\$41.59\\\text {Direct labor cost per unit. }&\$38.21\\\text {Annual unit production and sales. }&280\\\text {Annual machine-hours. }&405\\\text {Annual orders. }&62\\\text {Annual shipments }&7\\\end{array}$

According to the activity-based costing system, the annual product margin for this product is:

A)$21,898
B)$30,716
C)$30,609
D)$24,155

Question 8

Activity-based costing helps resource planning by isolating the cost of excess demand from particular customers.

Question 9

Implementing a full-fledged activity-based costing system is often a costly, time-consuming, and tedious exercise.

Question 10

Which of the following is not a major decision when allocating capacity costs to products?

A)How to form cost pools?
B)Which costs (pools) to allocate?
C)What drivers to use?
D)How to measure denominator volume?
E)All of the above are major decisions when allocating capacity costs to products.

Question 11

Activity-based costing (ABC) is an approach to determining product costs.

Question 12

Which of the following is not a step in designing a product costing system?

A)Determine how to form cost pools.
B)Identify which cost pools to allocate.
C)Identify the cost driver to use for allocating each cost pool.
D)Determine the appropriate denominator volume of each cost driver to calculate allocation rates.
E)All of the above are steps in designing a product costing system.

Question 13

A curve that plots customer profitability, after ranking customers in order of their profitability is know as a whale curve.

Question 14

Because ABC is an allocation, it involves the two steps involved in any allocation - compute the allocation rate and multiply the rate by the number of cost driver units in a cost object.

Question 15

A survey by the Institute of Management Accountants found that only 8% of responding firms in the U.S.use activity-based costing.

Question 16

Which of the following is not one of the defining elements that are common to all cost allocations?

A)Contribution margin.
B)Cost pools.
C)Cost drivers.
D)Denominator volume.
E)All of the above are defining elements that are common to all cost allocations.

Question 17

ABC provides useful information for product planning by providing accurate estimates of profit margins.

Question 18

To obtain the activity rate for each cost pool, divide the total cost in each pool by the unallocated cost.

Question 19

When allocating capacity costs to products, controllable and non-controllable cost pools need to be allocated to cost objects.

Question 20

Profit margin equals a product's gross margin less the cost of capacity resources needed to support its production.

Question 21

Which of the following is not a characteristic of low-profit customers?

A)Small order size.
B)Demand immediate deliveries.
C)Predictable ordering patterns.
D)Frequent sales force contact.
E)All of the above are characteristics of low-profit customers.

Question 22

Which of the following is the correct sequence of steps to improve efficiency once a process is selected?

A)Identify value- and non-value adding activities; Develop a process map for each activity/process chosen; Seek ways to improve value-adding activities.
B)Develop a process map for each activity/process chosen; Identify value- and non-value adding activities; Seek ways to improve value-adding activities.
C)Identify value- and non-value adding activities; Seek ways to improve value-adding activities; Develop a process map for each activity/process.
D)Seek ways to improve value-adding activities; Identify value- and non-value adding activities; Develop a process map for each activity/process chosen.
E)Develop a process map for each activity/process chosen; Seek ways to improve value-adding activities; Identify value- and non-value adding activities.

Question 23

Which of the following is not a way in which activity-based costing helps resource planning?

A)It pinpoints activities and business processes that are costly.
B)It isolates the cost of excess capacity from the productive use of capacity.
C)It allows firms to target specific areas for improving efficiencies.
D)It provides information that helps firms find profitable ways to deal with excess capacity.
E)All of the above are ways activity-based costing helps resource planning.

Question 24

Perry Manufacturing Company produces two products: Standard and Deluxe.Perry uses the activity-based costing method.The estimated cost and activity for these products are as follows: $\begin{array}{llccr} &\text { Estimated Cost }&&\text { Expected Activity }\\& & \text { Standard } & \text { Deluxe } & \text { Total } \\\text { Activity 1 } & \$ 25,000 & 200 & 300 & 500 \\\text { Activity 2 } & \$ 32,000 & 400 & 200 & 600 \\\text { Activity 3 } & \$ 20,000 & 300 & 400 & 700 \\\text { Total } & \$ 77,000 & \mathbf{9 0 0} & \mathbf{9 0 0} & \mathbf{1 , 8 0 0}\end{array}$ What is the activity rate for activity 2?

A)$42.78
B)$17.78
C)$80.00
D)$160.00
E)$53.33

Question 25

An advantage of using a practical capacity-based allocation rate is:

A)It does not change across products.
B)It spreads all capacity costs over budgeted, rather than actual, volume.
C)When there is idle capacity, capacity costs are spread over a smaller production volume.
D)It does not change across periods.
E)All of the above are advantages of using a practical capacity-based allocation rate.

Question 26

As to customer-level profit analysis, batch-level costs relate to:

A)Customers' order volume.
B)Tailoring a product to customers' desires.
C)Customers' frequency of ordering or order size.
D)Warehousing of customers' desires.
E)All of the above are batch-level costs.

Question 27

Which of the following is not a disadvantage of a full-fledged activity-based costing system?

A)Implementing a full-fledged ABC system is often very costly.
B)Implementing a full-fledged ABC system is time consuming.
C)The assignment of controllable costs of capacity resources is not as reliable using ABC as with traditional systems.
D)None of the above is a disadvantage of ABC.
E)All of the above are disadvantages of ABC.

Question 28

Kemper Consulting Company is headquartered in Little Rock with offices in Memphis and Tulsa.All administrative duties are centralized in the Little Rock office.Canterbury's administrative costs are assigned to two activity cost pools, Accounting and Computer, with the costs allocated to the three offices.Estimated data for year are as follows: $\begin{array}{lll}\text { Activity Cost Pool }&\text { Activity Measure }&\text { Estimated Costs }\\\hline\text { Accounting } & \text { Time spent for office }\{\%\} & \$ 70,000 \\\text { Computer } & \text { Time used by office }\{\text { hrs\} } & \$ 25,000\end{array}$

$\begin{array}{lrr}&\text { Time spent }\{\% \text { \} }&\text { Time used (hrs) }\\\hline\text { Little Rock } & 35 \% & 624 \\\text { Memphis } & 40 \% & 1,560 \\\text { Tulsa } & 25 \% & 936\end{array}$ How much of the administrative costs will be allocated to the Memphis office?

A)$40,500
B)$47,500
C)$38,000
D)$95,000
E)$70,000

Question 29

Managers use Information from ABC systems to improve profitability by managing:

A)Products.
B)Resources.
C)Customers.
D)A and B only.
E)A, B and C

Question 30

Tabby Totes, a manufacturer of travel carriers for felines, uses an ABC system.Tabby produces two carriers, Comfort Carrier and Luxury Carrier.Production and sales for Comfort Carrier is 800 units and Luxury Carrier is 600 units.Tabby uses thee activity cost pools.Estimated costs and expected activities is as follows: $\begin{array}{lllll}\text { Activity Cost } & \text { Estimated } \\\text { Pool } & \text { Cost } & \text { Expected Activity }\\\hline&&\text { Comfort } & \text { Luxury } & \\&&\text { Carrier } & \text { Carrier } & \text { Total }\\\hline \text { Activity 1 } & \$ 12,000 & 200 & 100 & 300 \\\text { Activity 2 } & \$ 18,000 & 400 & 200 & 600 \\\text { Activity 3 } & \$ 10,000 & 400 & 400 & 800\end{array}$ The cost per unit of the Comfort Carrier is:

A)$40.00
B)$23.53
C)$42.00
D)$31.25
E)$28.57