Deck 4: Activity-Based Costing and Analysis

Question 1

The plantwide overhead rate is total plantwide allocation base divided by total budgeted plantwide overhead cost.

Answer 1

False

Question 2

The departmental overhead rate method uses a different overhead rate for each production department.

Answer 2

True

Question 3

The activity-based costing method uses volume-based measures to allocate overhead costs.

Answer 3

False

Question 4

The plantwide overhead rate is determined using volume-related measures.

Question 5

By definition, costs classified as overhead are consumed in basically the same manner regardless of the process involved.

Question 6

Data concerning volume-related measures are readily available in most manufacturing settings.

Question 7

The cost to heat a manufacturing facility can be directly linked to the number of units produced.

Question 8

Departments are the cost objects when the plantwide overhead rate method is used.

Question 9

The departmental overhead rate method allows each department to have its own overhead rate and its own allocation base.

Question 10

Overhead costs are not directly related to production and cannot be traced to units of product like direct materials and direct labor can.

Question 11

The unit of product is the cost object when the plantwide overhead rate method is used.

Question 12

Examples of volume-related measures include direct labor hours and machine hours.

Question 13

Products are the first stage cost objects when using a departmental overhead rate method.

Question 14

Product costs consist of direct labor, direct materials, and overhead (indirect) costs.

Question 15

Distorted product cost information can result in poor decisions.

Question 16

The departmental overhead rate method uses the same overhead rate for each production department.

Question 17

The departmental overhead rate method involves the following four steps: 1) Assign overhead costs to departmental cost pools, 2) select an allocation base for each department, 3) compute overhead allocation rates for each department, and 4) use departmental overhead rates to assign overhead costs to products.

Question 18

Activities are the cost objects of the second stage of ABC.

Question 19

Overhead costs are indirect costs so assigning these costs to products requires an allocation method.

Question 20

The premise of ABC is that it takes activities to make products and provide services and these activities drive costs.

Question 21

Compared to the plantwide overhead rate method, the departmental overhead rate method usually results in more accurate overhead allocations.

Question 22

Multiple cost pools are used when allocating overhead using the plantwide overhead rate method.

Question 23

When products differ in batch size and complexity, they usually consume different amounts of overhead resources.

Question 24

Allocated overhead costs vary depending upon the allocation methods used.

Question 25

A major disadvantage of using a plantwide overhead rate is the extreme difficulty in gathering the needed information.

Question 26

The use of a plantwide overhead rate is not acceptable for external reporting under GAAP.

Question 27

Some companies allocate their overhead cost using a plantwide overhead rate largely because of its simplicity.

Question 28

The usefulness of overhead allocations based on a plantwide overhead rate depends on two crucial assumptions: (1) the overhead cost is correlated with the allocation base; and (2) all products use overhead cost in dissimilar proportions.

Question 29

Because departmental overhead costs are allocated based on measures closely related to production volume, they accurately assign overhead, such as utility costs.

Question 30

The usefulness of overhead allocations based on a plantwide overhead rate depends on two crucial assumptions: (1) the overhead cost is correlated with the allocation base; and (2) all products use overhead cost in similar proportions.

Question 31

A single cost pool is used when allocating overhead using the activity-based costing method.

Question 32

ABC is significantly less costly to implement and maintain than more traditional overhead costing systems.

Question 33

ABC allocates overhead costs to products based on activities rather than direct labor or machine hours.

Question 34

ABC can be used to assign costs to any cost object that is of management interest.

Question 35

A cost pool is a collection of costs that are related to the same or similar activity.

Question 36

Activities are the cost objects of the first stage of ABC.

Question 37

Compared to the departmental overhead rate method, the plantwide overhead rate method usually results in more accurate overhead allocations.

Question 38

Activity-based costing first assigns costs to products and then uses these product costs to assign costs to manufacturing activities.

Question 39

Management's pricing and cost decisions for a product are influenced by that product's cost assignments.

Question 40

Overhead costs are often affected by many issues and are frequently too complex to be explained by any one factor.

Question 41

ABC is more costly to implement and maintain than more traditional overhead costing systems.

Question 42

A company produces computer chips that go through two departments, department A1 and department B2, before they are complete. Expected costs and activities for the two departments are shown below. Departmental overhead rates are based on machine hours in department A1 and direct labor hours in department B2. Therefore, the overhead rates for department A1 and department B2 are $3.62 per machine hour and $5.73 per direct labor hour, respectively.

Question 43

A company produces paint that goes through two operations, operation A and operation B, before it is complete. Expected costs and activities for the two departments are shown below. Given this information, the departmental overhead rate for Department B based on machine hours is $4 per machine hour.

Question 44

Kinetic Company estimates that overhead costs for the next year will be $1,600,000 for indirect labor and $400,000 for factory utilities. The company uses direct labor hours as its overhead allocation base. If 50,000 direct labor hours are planned for this next year, then the plantwide overhead rate is $.025 per direct labor hour.

Question 45

If the direct labor time estimates are met, Malone will allocate $12.59 of overhead cost to each unit of Little X.

Question 46

Activity-based costing involves four steps: (1) identify activities and the costs they cause, (2) group similar activities into cost pools, (3) determine an activity rate for each activity cost pool, and (4) allocate overhead costs to products using those activity rates.

Question 47

Kinetic Company estimates that overhead costs for the next year will be $1,600,000 for indirect labor and $400,000 for factory utilities. The company uses direct labor hours as its overhead allocation base, and plans to use 50,000 direct labor hours for this next year. If a product uses 5 direct labor hours, then it will be assigned $200 in overhead costs.

Question 48

A company produces surgical equipment that goes through three departments, 1A1, 2B2, and 3C3, before they are complete. Expected costs and activities for the three departments are shown below. All departments have departmental overhead rates based on direct labor hours. Therefore, the overhead rate for each department is $5 per direct labor hour.

Question 49

When using the plantwide overhead rate method, total budgeted overhead costs are combined into one overhead cost pool.

Question 50

A company estimates that costs for the next year will be $500,000 for indirect labor, $50,000 for factory utilities, and $1,000,000 for the CEO's salary. The company uses machine hours as its overhead allocation base. If 25,000 machine hours are planned for this next year, then a product requiring 10 machine hours will be assigned $220 in overhead.

Question 51

[The following information applies to the questions displayed below.]
Malone Company sells two products Big X and Little X. Current direct material and direct labor costs are detailed below. Next year, the company wishes to use a plantwide overhead rate with direct labor hours as its allocation base. Next year's overhead is estimated to be $510,000. The direct labor and direct materials costs are estimated to be consistent with the current year. Direct labor costs $20 per hour and the company expects to manufacture 15,000 units of Big X and 18,000 units of Little X next year.

Malone has 33,000 total estimated direct labor hours for next year.

Question 52

Turtle Company produces t-shirts that go through two operations, cutting and sewing, before they are complete. Expected costs and activities for the two departments are shown below. Given this information, the departmental overhead rate for the cutting department based on direct labor hours is $2.69 per direct labor hour (rounded to two decimals).

Question 53

A company produces heating elements that go through two operations, casting and assembling, before they are complete. Expected costs and activities for the two departments are shown below. Given this information, the departmental overhead rate for the assembling department based on direct labor hours is $5 per direct labor hour.

Question 54

A company estimates that costs for the next year will be $500,000 for indirect labor, $50,000 for factory utilities, and $1,000,000 for the CEO's salary. The company uses machine hours as its overhead allocation base. If 25,000 machine hours are planned for this next year, then the plantwide overhead rate is $22 per machine hour.

Question 55

The first step in using the departmental overhead rate method requires that overhead be traced to each of the company's departments.

Question 56

A company produces garden benches that go through two departments, department 1A1 and department 2B2, before they are complete. Expected costs and activities for the two departments are shown below. Both departments have departmental overhead rates based on machine hours. Therefore, the overhead rates for department 1A1 and department 2B2 are the same.

Question 57

The departmental overhead rate method traces costs to each department and then determines an allocation base for each department.

Question 58

A company estimates total overhead costs for the next year to be $1,200,000 and wishes to use direct labor hours as its overhead allocation base. This company makes two products: (1) Fancy X, which requires three direct labor hours per unit, and (2) Plain X, which requires one direct labor hour per unit. If the company plans to make 10,000 units of Fancy X and 10,000 units of Plain X, then each unit produced will be allocated the same amount of overhead.

Question 59

[The following information applies to the questions displayed below.]
Malone Company sells two products Big X and Little X. Current direct material and direct labor costs are detailed below. Next year, the company wishes to use a plantwide overhead rate with direct labor hours as its allocation base. Next year's overhead is estimated to be $510,000. The direct labor and direct materials costs are estimated to be consistent with the current year. Direct labor costs $20 per hour and the company expects to manufacture 15,000 units of Big X and 18,000 units of Little X next year.

Malone's plantwide overhead rate will be $20.99 per direct labor hour next year.

Question 60

The more activities tracked by activity-based costing, the more accurately overhead costs are assigned.

Question 61

Facility-level costs are not traceable to individual product lines, batches or units.

Question 62

Two big benefits of ABC costing are a) more accurate product cost information and b) more detailed information on costs and the drivers of those costs.

Question 63

Unit-level costs vary with the number of units produced.

Question 64

Batch-level costs vary with the number of units produced.

Question 65

Activity-based costing often shifts overhead costs from large volume, standardized products to low-volume, specialty products that consume disproportionate resources.

Question 66

Which of the following would not be considered a product cost?

A) Direct labor costs.
B) Factory supervisor's salary.
C) Factory line worker's salary.
D) Cost accountant's salary.
E) Manufacturing overhead costs.

Question 67

A quality-inspection cost is an example of unit-level costs.

Question 68

Overhead costs:

A) Are directly related to production.
B) Can be traced to units of product in the same way that direct materials can.
C) Cannot be traced to units of product in the same way that direct labor can.
D) Are period costs.
E) Include only fixed costs.

Question 69

Which types of overhead allocation methods result in the use of more than one overhead rate during the same time period?

A) Plantwide overhead rate method and departmental overhead rate method.
B) Cost pool overhead rate method and plantwide overhead rate method.
C) Departmental overhead rate method and activity-based costing.
D) Activity-based costing and plantwide overhead rate method.
E) Departmental overhead rate method and cost pool overhead rate method.

Question 70

Product-level costs do not vary with the number of units or batches produced.

Question 71

A method of assigning overhead costs to a product using a single overhead rate is:

A) Plantwide overhead rate method.
B) Cost pool overhead rate method.
C) Departmental overhead rate method.
D) Activity-based costing.
E) Overhead cost allocation method.

Question 72

Product design costs are an example of a unit level activity.

Question 73

Activities causing overhead cost in an organization are typically separated into four levels: (1) direct activities, (2) indirect activities, (3) batch level activities, and (4) facility level activities.

Question 74

Activity-based costing eliminates the need for overhead allocation rates.

Question 75

Plantwide overhead rates typically do a better job of matching each department's overhead costs to the products using the department's resources than do departmental overhead rates.

Question 76

Facility-level costs vary with the number of units or batches produced.

Question 77

Machine setup costs are an example of a batch level activity.

Question 78

Batch-level costs do not vary with the number of units produced.

Question 79

In activity-based costing, an activity can involve several related tasks.

Question 80

The final step of activity-based costing assigns overhead costs to pools rather than to products.