Question 1

Companies that use activity-based costing do NOT need to trace direct materials and direct labor to products as is done in traditional costing systems.

Accepted Answer

Activity-based costing does trace direct materials and direct labor to products, but it also considers other activities and costs that are not traditionally traced to products in a manufacturing environment.

Question 2

The first step in the activity-based costing system is to identify each activity and its total indirect cost.

Accepted Answer

This is correct. The first step in activity-based costing is to identify each activity and its total indirect cost, in order to allocate these costs to specific products or services.

Question 3

Sleep Tight Company manufactures pillows using an activity-based costing system. The following information is provided for the month of June:
 $\begin{array}{|l|r|r|r|}
\hline& \text { Estimated Indirect } & & \text { Estimated Quantity of } \
\text { Activity } & \text { Activity Costs } & \text { Allocation Base } & \text { Allocatinn Base }\
\hline \begin{array}{l}
\text { Materials } \
\text { landling }
\end{array} & \$ 3,150 & \text { Number of parts } & 4,200 \text { parts }\
\hline \text { Assembling } & \$ 13,860 & \text { Number of parts } & 4,200 \text { parts } \
\hline \text { Packaging } & \$ 2,730 & \text { Number of pillows } & 1,050 \text { paillows }\
\hline
\end{array}$
 
Each pillow consists of 4 parts and the total direct materials cost per pillow is $3.50. There is no direct labor. If Sleep Tight sells pillows for $21.00, they will earn a gross profit of $1.30 per pillow.

Accepted Answer

The gross profit per pillow is calculated by subtracting the total cost per pillow from the selling price. The total cost includes direct materials and allocated indirect costs. The indirect costs per pillow are calculated using the activity-based costing rates, which need to be determined first. The given gross profit of $1.30 per pillow is incorrect based on these calculations.

Question 4

Activity-based costing focuses on a single predetermined overhead rate for cost analysis.

Accepted Answer

Activity-based costing uses multiple predetermined overhead rates that are specific to each type of activity or product, unlike traditional costing which uses a single overhead rate for all products.

Question 5

A traditional costing system employs multiple allocation rates, but an activity-based costing system uses only one single allocation rate.

Accepted Answer

A traditional costing system allocates overhead costs to products or services using multiple allocation rates based on certain predetermined criteria such as direct labor hours, machine hours or materials used. On the other hand, an activity-based costing system uses multiple activity cost pools and allocates costs based on the activities that drive the overhead costs. Therefore, an activity-based costing system does not use a single allocation rate, but rather multiple rates based on the different activities involved in the production process.

Question 6

JC Manufacturing produces products that use a variety of components. Which of the following cost drivers would be the MOST applicable for assigning material handling costs to the finished products?

Accepted Answer

Material handling costs would be most directly driven by the number of components used in the production process, as the more components there are, the more handling and movement is required to assemble them into the finished product. Direct labor hours and cost may be used to allocate other types of costs, such as manufacturing overhead or direct labor costs respectively, while the number of units produced may not necessarily directly impact material handling costs.

Question 7

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

Accepted Answer

Activity-based costing systems allocate indirect costs to specific activities, rather than using a single plantwide rate as traditional costing systems do. This allows for a more accurate and precise allocation of costs to products or services. Option B is incorrect as activity-based costing systems are generally considered more accurate than traditional systems. Option C is incorrect as activity-based costing systems do not allocate overhead costs by processing departments, but rather by activity. Option D is also incorrect as activity-based costing systems are typically more complex and costly to implement than traditional systems.

Question 8

Activity-based costing systems combine many various elements of overhead into a single cost pool.

Accepted Answer

Activity-based costing (ABC) systems allocate overhead costs based on multiple activity cost pools, each representing a different type of activity, rather than combining them into a single cost pool.

Question 9

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

Accepted Answer

With increased competition, accurate cost estimation becomes essential for managers to make informed decisions about setting prices and identifying products with the highest profit margins. This helps businesses stay competitive and make strategic decisions that can boost profits.

Question 10

The main difference between activity-based costing and traditional costing systems is that activity-based
costing uses a separate allocation rate for each activity.

Accepted Answer

Activity-based costing allocates costs based on the specific activities that consume resources, and assigns a separate allocation rate for each activity. Traditional costing, on the other hand, uses a single allocation rate to allocate costs across all products or services.

Question 11

Brannon Company manufactures ceiling fans and uses an activity-based costing system. Each ceiling fan consists of 20 separate parts totaling $95 in direct materials, and requires 2.5 hours of machine time to produce. Additional information follows:
$\begin{array}{|l|l|r|}
\hline\text { Activity }&\text { Allocation Base }&\text { Cost Allocation Rate }\
\hline \text { Materials handling } & \text { Number of parts } & \$ .08 \
\hline \text { Machining } & \text { Machine hours } & \$ 7.20 \
\hline \text { Assembling } & \text { Number of parts } & \$ .35 \
\hline \text { Packaging } & \text { Number of finished units } & \$ 2.70\
\hline
\end{array}$

-
What is the cost of machining per ceiling fan?

Accepted Answer

The cost of machining per ceiling fan is calculated by multiplying the machine hours required (2.5 hours) by the cost allocation rate for machining ($7.20 per hour), resulting in $18.00.

Question 12

An activity-based costing system can be a significant competitive advantage for a business which does bidding for manufacturing work.

Accepted Answer

An activity-based costing system can help businesses accurately calculate the costs of manufacturing processes, including indirect costs that may have been previously overlooked. This can lead to more accurate bidding and pricing for manufacturing work, ultimately giving the business a competitive advantage.

Question 13

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

Accepted Answer

The number of orders is most likely to drive the cost of packaging and shipping since each order requires its own packaging and shipping process, regardless of the number of components, hours of testing, or setups involved.

Question 14

The following four steps are necessary in order to use an activity-based costing system:
1) Compute the allocation rate for each activity.
2) Identify activities and estimate their total costs.
3) Identify the cost driver for each activity and then estimate the quantity of each driver's allocation base.
4) Allocate the indirect costs to the cost object.
In what order are these steps performed?

Accepted Answer

The correct sequence for implementing an activity-based costing system is: identifying the activities and estimating their total costs, identifying the cost driver for each activity and estimating the quantity of each driver's allocation base, computing the allocation rate for each activity, and finally allocating the indirect costs to the cost object.

Question 15

An activity-based costing system would be of less value to a business making a single product than it would be for a company with multiple products.

Accepted Answer

Activity-based costing (ABC) is more beneficial for companies with multiple products because it provides detailed information on the costs associated with each product, helping in better decision-making. For a single-product company, the benefits of ABC are less pronounced since the cost structure is simpler and less varied.

Question 16

Activity-based costing creates more precise matching of indirect costs with products.

Accepted Answer

Activity-based costing (ABC) uses a more detailed analysis of the activities involved in the production process to allocate indirect costs to products, resulting in a more accurate matching of costs to products. This is in contrast to traditional costing methods, which rely on arbitrary allocation methods that may not accurately reflect the actual costs incurred by a product.

Question 17

Two main benefits of activity-based costing are more accurate product cost information and more detailed information on costs of activities and the drivers of these costs.

Accepted Answer

Activity-based costing is designed to provide more accurate product cost information by assigning indirect costs to products based on their usage of activities that drive those costs. This approach also provides more detailed information on costs of activities and the drivers of those costs, which can be used to identify areas for cost savings and process improvements.

Question 18

What is the last step in developing an activity-based costing system?

Accepted Answer

The last step in developing an activity-based costing system is to allocate costs to the cost object, which is the final stage where the indirect costs of each activity are assigned to the cost object based on the consumption of cost drivers. Therefore, option D is the correct answer. Option A, estimating the total quantity of the cost driver, is the first step in ABC system development. Option B, estimating the total indirect costs of each activity, is the second step. Option C, identifying the activities, is the third step in the system development.

Question 19

Activity-based management refers to using activity-based cost information to make decisions that increase profits while satisfying customers' needs.

Accepted Answer

Activity-based management uses cost information to make decisions that focus on activities that increase profits and customer satisfaction.

Question 20

Brannon Company manufactures ceiling fans and uses an activity-based costing system. Each ceiling fan consists of 20 separate parts totaling $95 in direct materials and requires 2.5 hours of machine time to produce. Additional information follows:
$\begin{array}{|l|l|r|}
\hline\text { Activity }&\text { Allocation Base }&\text { Cost Allocation Rate }\
\hline \text { Materials handling } & \text { Number of parts } & \$ .08 \
\hline \text { Machining } & \text { Machine hours } & \$ 7.20 \
\hline \text { Assembling } & \text { Number of parts } & \$ .35 \
\hline \text { Packaging } & \text { Number of finished units } & \$ 2.70\
\hline
\end{array}$
-
What is the cost of materials handling per ceiling fan?

Accepted Answer

The cost of materials handling per ceiling fan is $1.60. This is calculated by multiplying the number of parts in a ceiling fan (20) by the cost allocation rate for materials handling ($0.08).

Quiz 18: Activity-Based Costing and Other Cost Management Tools