Question 1

Jackson Company manufactures products X and Y, applying overhead on the basis of labour hours. X, a low-volume product, requires a variety of complex manufacturing procedures. Y, on the other hand, is both a high-volume product and relatively simplistic in nature. What would an activity-based costing system likely disclose about products X and Y as a result of Jackson's current accounting procedures? $\begin{array} { | l | l | l | } 
\hline &  { \underline { X } } &  { \underline { Y } } \
\hline 1 & \text { Undercosted } & \text { Undercosted } \
\hline 2 & \text { Undercosted } & \text { Overcosted } \
\hline 3 & \text { Overcosted } & \text { Undercosied } \
\hline 4 & \text { Overcosted } & \text { Overcosted } \
\hline 5 & \text { Costed correctly } & \text { Costed correctly } \
\hline
\end{array}$

Accepted Answer

Since overhead is applied on the basis of labour hours, product X, which requires a variety of complex manufacturing procedures, would likely require more labour hours than product Y, which is relatively simplistic in nature. The current accounting procedures would likely undercost product X (Choice 1 and 2 are possible) and overcost product Y (Choice 2 and 3 are possible). An activity-based costing system would likely allocate indirect costs more accurately based on the specific activities involved in producing each product, which would reveal that product X is likely more expensive to produce than the current accounting procedures suggest and product Y is likely less expensive to produce than the current accounting procedures suggest. Therefore, choice B (2) is the best choice.

Question 2

X-Ray Machines Ltd. manufactures three product lines: Standard, Deluxe, and Superior. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below. The following information pertains to the three product lines for next year: $\begin{array}{|l|r|r|r|}
\hline & \text { Standard } & \text { Deluxe } & \text { Supe rior } \
\hline \text { Units to be produced } & 15,000 & 10,000 & 7,000 \
\hline \text { Orders to be shipped } & 1,000 & 500 & 500 \
\hline \text { Number of parts per unit } & 10 & 15 & 25 \
\hline \text { Machine hours per unit } & 3 & 5 & 7 \
\hline \text { Labour hours per unit } & 2 & 2 & 2 \
\hline
\end{array}$ Assume that X-Ray is using a volume-based costing system, and the preceding manufacturing costs are applied to all products based on direct labour hours. How much of the preceding cost, rounded to the nearest dollar, would be assigned to Deluxe?

Accepted Answer

The answer of X-Ray Machines Ltd. manufactures three product lines:...

Question 3

Grossman Enterprises is converting to an activity-based costing system and needs to depict the various activities in its manufacturing process along with the activities' relationships. Which of the following is a possible tool that the company can use to accomplish this task?

Accepted Answer

The answer of Grossman Enterprises is converting to an activity-based...

Question 4

X-Ray Machines Ltd. manufactures three product lines: Standard, Deluxe, and Superior. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below. The following information pertains to the three product lines for next year: $\begin{array}{|l|r|r|r|}
\hline & \text { Standard } & \text { Deluxe } & \text { Supe rior } \
\hline \text { Units to be produced } & 15,000 & 10,000 & 7,000 \
\hline \text { Orders to be shipped } & 1,000 & 500 & 500 \
\hline \text { Number of parts per unit } & 10 & 15 & 25 \
\hline \text { Machine hours per unit } & 3 & 5 & 7 \
\hline \text { Labour hours per unit } & 2 & 2 & 2 \
\hline
\end{array}$ Under an activity-based costing system, what is the per-unit cost of Deluxe?

Accepted Answer

The answer of X-Ray Machines Ltd. manufactures three product lines:...

Question 5

Activity-based costing systems:

Accepted Answer

Activity-based costing systems often reveal products that were undercosted or overcosted by traditional product costing systems. This is because activity-based costing systems allocate overhead costs more accurately by using multiple cost drivers that reflect the specific activities that consume resources. This leads to a more precise understanding of the costs of producing specific products or providing specific services.

Question 6

Consumption ratios are useful in determining:

Accepted Answer

The answer of Consumption ratios are useful in determining:
...

Question 7

St. James, Inc., currently uses traditional costing procedures, applying $800,000 of overhead to products Beta and Zeta on the basis of direct labour hours. The company is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labour hours (DLH), production setups (SU), and number of parts components (PC) as cost drivers. Data on the cost pools and respective driver volumes follow. $\begin{array} { | c | c | c | c | } 
\hline \text { Product } & \begin{array} { c } 
\text { Pool No. 1 } \
\text { (Driver: DLH) }
\end{array} & \begin{array} { c } 
\text { Pool No. 2 } \
\text { (Driver: SU) }
\end{array} & \begin{array} { c } 
\text { Pool No. 3 } \
\text { (Driver: PC) }
\end{array} \
\hline \text { Beta } & 1.200 & 45 & 2.250 \
\hline \text { Zeta } & 2.800 & 55 & 750 \
\hline & & & \
\hline \begin{array} { c } 
\text { Pool } \
\text { Cost }
\end{array} & \$ 160,000 & \$ 280,000 & \$ 360,000 \
\hline
\end{array}$ The overhead cost allocated to Beta by using traditional costing procedures would be:

Accepted Answer

Under traditional costing, the total overhead of $800,000 is allocated based on direct labour hours (DLH). 
For Beta, the DLH is 2,400 (1,200 + 1,200) 
- Therefore, the overhead cost allocated to Beta is: 
(2,400 DLH / Total DLH) x Total overhead
= (2,400/4,000) x $800,000
= $480,000
Thus, the correct answer is A) $240,000.

Question 8

During a recent accounting period, Marty's shipping department processed 26 orders. Each order typically takes four hours to complete; however, the average time increased to five hours because of various departmental inefficiencies. If shipping labour is paid $14 per hour, the company's non-value-added cost would be:

Accepted Answer

Non-value-added cost refers to the cost incurred by the company due to inefficiencies, which do not add value to the final product or service. In this case, the non-value-added cost can be calculated as follows:

Total hours required to process orders = 26 orders * 5 hours per order = 130 hours
Normal hours required to process orders = 26 orders * 4 hours per order = 104 hours

Non-value-added hours = Total hours required - Normal hours required = 130 - 104 = 26 hours

Non-value-added cost = Non-value-added hours * Hourly labor cost = 26 * $14 = $364

Therefore, the non-value-added cost is $364 (Option C).

Question 9

Dreyfus Manufacturing sells a number of goods whose selling price is heavily influenced by cost. A recent study of product no. 519 revealed a traditionally-derived total cost of $1,019, a selling price of $1,850 based on that figure, and a newly computed activity-based total cost of $1,215. Which of the following statements is true?

Accepted Answer

The activity-based costing shows a higher cost than the traditional method, suggesting that the product may have been priced lower than it should be, making it more competitive in the market.

Question 10

In comparison with a system that uses a single volume-based cost driver, an activity-based costing system is preferred when a company has:

Accepted Answer

Activity-based costing system is preferred when a company has product line diversity or a large proportion of non-unit-level activities. This is because it allows for more accurate allocation of indirect costs to different products or activities based on the specific resources used. A single volume-based cost driver may not be able to accurately capture the differences in indirect costs for products with different demands on resources or activities with different levels of complexity.

Question 11

St. James, Inc., currently uses traditional costing procedures, applying $800,000 of overhead to products Beta and Zeta on the basis of direct labour hours. The company is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labour hours (DLH), production setups (SU), and number of parts components (PC) as cost drivers. Data on the cost pools and respective driver volumes follow. $\begin{array} { | c | c | c | c | } 
\hline \text { Product } & \begin{array} { c } 
\text { Pool No. 1 } \
\text { (Driver: DLH) }
\end{array} & \begin{array} { c } 
\text { Pool No. 2 } \
\text { (Driver: SU) }
\end{array} & \begin{array} { c } 
\text { Pool No. 3 } \
\text { (Driver: PC) }
\end{array} \
\hline \text { Beta } & 1.200 & 45 & 2.250 \
\hline \text { Zeta } & 2.800 & 55 & 750 \
\hline & & & \
\hline \begin{array} { c } 
\text { Pool } \
\text { Cost }
\end{array} & \$ 160,000 & \$ 280,000 & \$ 360,000 \
\hline
\end{array}$ The overhead cost allocated to Zeta by using traditional costing procedures would be:

Accepted Answer

The overhead cost allocated to Zeta using traditional costing is based on the proportion of direct labor hours. Zeta uses 2,800 DLH out of a total of 4,000 DLH (1,200 for Beta + 2,800 for Zeta). Therefore, the overhead allocated to Zeta is (2,800/4,000) * $800,000 = $560,000.

Question 12

St. James, Inc., currently uses traditional costing procedures, applying $800,000 of overhead to products Beta and Zeta on the basis of direct labour hours. The company is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labour hours (DLH), production setups (SU), and number of parts components (PC) as cost drivers. Data on the cost pools and respective driver volumes follow. $\begin{array} { | c | c | c | c | } 
\hline \text { Product } & \begin{array} { c } 
\text { Pool No. 1 } \
\text { (Driver: DLH) }
\end{array} & \begin{array} { c } 
\text { Pool No. 2 } \
\text { (Driver: SU) }
\end{array} & \begin{array} { c } 
\text { Pool No. 3 } \
\text { (Driver: PC) }
\end{array} \
\hline \text { Beta } & 1.200 & 45 & 2.250 \
\hline \text { Zeta } & 2.800 & 55 & 750 \
\hline & & & \
\hline \begin{array} { c } 
\text { Pool } \
\text { Cost }
\end{array} & \$ 160,000 & \$ 280,000 & \$ 360,000 \
\hline
\end{array}$ The overhead cost allocated to Zeta by using activity-based costing procedures would be:

Accepted Answer

Allocation rate for each pool are as follows:
Pool No. 1: $160,000 / (1,200 + 2,800) DLH = $40/DLH
Pool No. 2: $280,000 / (45 + 55) SU = $2,800/SU
Pool No. 3: $360,000 / (2,250 + 750) PC = $180/PC

Using these rates, the overhead cost allocated to Zeta is:
(2,800 DLH x $40/DLH) + (55 SU x $2,800/SU) + (750 PC x $180/PC) = $111,200 + $154,000 + $135,000 = $400,200
Therefore, the correct answer is B) $356,000.

Question 13

Oliver and Sprung, an accounting firm, provides tax compliance and tax planning services. A recent analysis found that 65% of the firm's billable hours to clients resulted from tax planning and for many years, the firm's total administrative cost (currently $300,000) has been allocated to services on this basis. The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows: $\begin{array} { | l | r r | } 
\hline \text { Staff Support } & \$ \quad 215,000 \
\hline \text { In-house IT charges } & 65,000 \
\hline \text { Miscellaneous office expenditures } & 20,000 \
\hline & \$ 300,000 \
\hline
\end{array}$ A recent analysis of staff support found a strong correlation with the number of clients served. In contrast, in-house IT and miscellaneous office expenditures varied directly with the number of computer hours logged and number of client transactions, respectively. Tax compliance clients served totaled 25% of the total client base, consumed 35% of the firm's computer hours, and accounted for 30% of the total client transactions.
If Oliver and Sprung switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to tax compliance services would:

Accepted Answer

Under the current method, 35% of the administrative cost is allocated to tax compliance services (100% - 65% for tax planning), which is $105,000 (35% of $300,000). Under activity-based costing, the allocation would be: Staff Support: 25% of $215,000 = $53,750; In-house IT: 35% of $65,000 = $22,750; Miscellaneous: 30% of $20,000 = $6,000. Total = $82,500. The decrease is $105,000 - $82,500 = $22,500, which is closest to $24,500.

Question 14

St. James, Inc., currently uses traditional costing procedures, applying $800,000 of overhead to products Beta and Zeta on the basis of direct labour hours. The company is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labour hours (DLH), production setups (SU), and number of parts components (PC) as cost drivers. Data on the cost pools and respective driver volumes follow. $\begin{array} { | c | c | c | c | } 
\hline \text { Product } & \begin{array} { c } 
\text { Pool No. 1 } \
\text { (Driver: DLH) }
\end{array} & \begin{array} { c } 
\text { Pool No. 2 } \
\text { (Driver: SU) }
\end{array} & \begin{array} { c } 
\text { Pool No. 3 } \
\text { (Driver: PC) }
\end{array} \
\hline \text { Beta } & 1.200 & 45 & 2.250 \
\hline \text { Zeta } & 2.800 & 55 & 750 \
\hline & & & \
\hline \begin{array} { c } 
\text { Pool } \
\text { Cost }
\end{array} & \$ 160,000 & \$ 280,000 & \$ 360,000 \
\hline
\end{array}$ The overhead cost allocated to Beta by using activity-based costing procedures would be:

Accepted Answer

The answer of St. James, Inc., currently uses traditional costing...

Question 15

Vanguard combines all manufacturing overhead into a single cost pool and allocates this overhead to products by using machine hours. Activity-based costing would likely show that with Vanguard's current procedures:

Accepted Answer

Activity-based costing (ABC) typically reveals that high-volume products are overcosted under traditional costing systems because these systems allocate overhead evenly, not reflecting the actual resources consumed by different products. High-volume products often consume less overhead per unit than low-volume products, leading to overcosting.

Question 16

X-Ray Machines Ltd. manufactures three product lines: Standard, Deluxe, and Superior. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below. The following information pertains to the three product lines for next year: $\begin{array}{|l|r|r|r|}
\hline & \text { Standard } & \text { Deluxe } & \text { Supe rior } \
\hline \text { Units to be produced } & 15,000 & 10,000 & 7,000 \
\hline \text { Orders to be shipped } & 1,000 & 500 & 500 \
\hline \text { Number of parts per unit } & 10 & 15 & 25 \
\hline \text { Machine hours per unit } & 3 & 5 & 7 \
\hline \text { Labour hours per unit } & 2 & 2 & 2 \
\hline
\end{array}$ Assume that X-Ray is using a volume-based costing system, and the preceding manufacturing costs are applied to all products based on direct labour hours. How much of the preceding cost, rounded to the nearest dollar, would be assigned to Superior?

Accepted Answer

The answer of X-Ray Machines Ltd. manufactures three product lines:...

Question 17

Which of the following activity cost pools and activity measures likely has the lowest degree of correlation? $\begin{array}{|l|l|l|l|}
\hline & {\text { Activity Cost Pool }} & &{\text { Activity Measure }} \
\hline 1 & \text { Order department } && \text { Number of orders processed } \
\hline 2 & \text { Sales management } &&
\text { Time spent by managers in each sales } \
&&&\text { territory }\
\hline 3 & \text { Accounts receivable processing } && \text { Number of customers } \
\hline 4 & \text { Catering } & &\text { Numbers of meals served } \
\hline 5 & \text { Employee travel to job sites (sites } & &\text { Number of employees } \
&\text { are within } 100 \text {-mile radius of }\
&\text { company headquarters) }\
\hline

\end{array}$

Accepted Answer

The answer of Which of the following activity cost pools...

Question 18

Kelly and Logan, an accounting firm, provides consulting and tax planning services. A recent analysis found that 65% of the firm's billable hours to clients resulted from tax planning and for many years, the firm's total administrative cost (currently $250,000) has been allocated to services on the basis of billable hours to clients. The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows: $\begin{array} { | l | r | } 
\hline \text { Staff support } & \$ 180,000 \
\hline \text { In-house computing charges } & 50,000 \
\hline \text { Miscellaneous office costs } & 20.000 \
\hline \text { Total } & \$ 250.000 \
\hline
\end{array}$ A recent analysis of staff support found a strong correlation with the number of clients served (consulting, 20 clients; tax planning, 60 clients). In contrast, in-house computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively. Consulting consumed 30% of the firm's computer hours and had 20% of the total client transactions.
If Kelly and Logan switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to consulting services would:

Accepted Answer

Under the current method, consulting is allocated 35% of the $250,000 administrative cost, which is $87,500. Under activity-based costing, consulting would be allocated $45,000 for staff support (20/80 clients), $15,000 for computing (30% of $50,000), and $4,000 for office costs (20% of $20,000), totaling $64,000. The decrease is $87,500 - $64,000 = $23,500.

Question 19

Kelly and Logan, an accounting firm, provides consulting and tax planning services. A recent analysis found that 65% of the firm's billable hours to clients resulted from tax planning and for many years, the firm's total administrative cost (currently $250,000) has been allocated to services on the basis of billable hours to clients. The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows: $\begin{array} { | l | r | } 
\hline \text { Staff support } & \$ 180,000 \
\hline \text { In-house computing charges } & 50,000 \
\hline \text { Miscellaneous office costs } & 20.000 \
\hline \text { Total } & \$ 250.000 \
\hline
\end{array}$ A recent analysis of staff support found a strong correlation with the number of clients served (consulting, 20 clients; tax planning, 60 clients). In contrast, in-house computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively. Consulting consumed 30% of the firm's computer hours and had 20% of the total client transactions.
Assuming the use of activity-based costing, the proper percentage to use in allocating staff support costs to tax planning services is:

Accepted Answer

The answer of Kelly and Logan, an accounting firm, provides...

Question 20

X-Ray Machines Ltd. manufactures three product lines: Standard, Deluxe, and Superior. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below. The following information pertains to the three product lines for next year: $\begin{array}{|l|r|r|r|}
\hline & \text { Standard } & \text { Deluxe } & \text { Supe rior } \
\hline \text { Units to be produced } & 15,000 & 10,000 & 7,000 \
\hline \text { Orders to be shipped } & 1,000 & 500 & 500 \
\hline \text { Number of parts per unit } & 10 & 15 & 25 \
\hline \text { Machine hours per unit } & 3 & 5 & 7 \
\hline \text { Labour hours per unit } & 2 & 2 & 2 \
\hline
\end{array}$ Under an activity-based costing system, what is the per-unit cost of Superior?

Accepted Answer

The answer of X-Ray Machines Ltd. manufactures three product lines:...

Quiz 5: Activity-Based Costing and Management

Grossman Enterprises is converting to an activity-based costing system and needs to depict the various activities in its manufacturing process along with the activities' relationships. Which of the following is a possible tool that the company can use to accomplish this task?

Activity-based costing systems:

Consumption ratios are useful in determining:

In comparison with a system that uses a single volume-based cost driver, an activity-based costing system is preferred when a company has:

Vanguard combines all manufacturing overhead into a single cost pool and allocates this overhead to products by using machine hours. Activity-based costing would likely show that with Vanguard's current procedures: