Deck 5: Activity-Based Costing and Activity-Based Management

Question 1

For a company with diverse products, undercosting overhead of a product will lead to product-cross -subsidization which means that:

A) direct labor costs of the product are misallocated
B) direct material costs of the product are misallocated
C) indirect costs of another product are misallocated
D) direct costs of another product are misallocated

Answer 1

indirect costs of another product are misallocated

Question 2

Uniformly assigning the costs of resources to cost objects when those resources are actually used in a nonuniform way is called activity based costing.

Answer 2

False

Question 3

Modern manufacturing practices have helped reduce overhead costs relative to direct costs as the reliance on support resources such as scheduling, design, and engineering has diminished.

Answer 3

False

Question 4

Product-cost cross-subsidization is very common when costs are uniformly spread across various products.

Question 5

Increased used of automation, computer integrated manufacturing, and utilization of robots have lead to an increase in indirect costs relative to direct costs.

Question 6

Which of the following has accelerated need for refined cost systems?

A) global monopolies
B) rising prices
C) intense competition
D) a shift toward increased direct costs

Question 7

Which of the following is true of refinement of a costing system?

A) While refining a costing system, companies should identify as many indirect costs as is economically feasible.
B) A homogeneous cost pool will use multiple cost drivers to allocate costs.
C) It reduces the use of broad averages for assigning the cost of resources to cost objects.
D) It is likely to yield the most decision-making benefits when direct costs are a high percentage of total costs.

Question 8

The risk of peanut-butter costing rises when broad averages are used across multiple products without managers considering the true amounts of resources consumed in the making of each product.

Question 9

Aqua Company produces two products-Alpha and Beta. Alpha has a high market share and is produced in bulk. Production of Beta is based on customer orders and is custom designed. Also, 55% of Beta's cost is shared between design and setup costs, while Alpha's major portions of costs are direct costs. Alpha is using a single cost pool to allocate indirect costs. Which of the following statements is true of Aqua?

A) Aqua will overcost Beta's direct costs as it is using a single cost pool to allocate indirect costs.
B) Aqua will undercost Alpha's indirect costs because alpha has high direct costs.
C) Aqua will overcost Alpha's indirect costs as it is using a single cost pool to allocate indirect costs.
D) Aqua will overcost Beta's indirect costs because beta has high indirect costs.

Question 10

As product diversity and indirect costs increase, it is usually best to switch away from a broad averaging system to an activity-based cost system.

Question 11

Companies that overcost products risk becoming less effective on pricing and losing market share when competition utilizes more accurate cost systems.

Question 12

Demand for refinements to the costing system has accelerated due to ________.

A) increase in direct costs
B) decrease in product diversity
C) decrease in indirect costs
D) competition in product markets

Question 13

Explain how a top-selling product may actually result in losses for the company.

Question 14

Overcosting a particular product may result in:

A) pricing the product too high
B) pricing the product too low
C) operating efficiencies
D) understating total product costs

Question 15

If companies increase market share in a given product line because their reported costs are less than their actual costs, they will become more profitable in the long run.

Question 16

Refining a cost system involves which of the following?

A) classifying as many costs as indirect costs as is feasible
B) creating as many cost pools as possible to capture all costs
C) identifying the activities involved in a process and understanding how those activities consume resources
D) Seeking an easier and more cost effective way to calculate average costs

Question 17

Which of the following is a reason that has accelerated the demand for refinements to the costing system?

A) The declining demand for customized products has led managers to decrease the variety of products and services their companies offer.
B) The use of product and process technology has led to an increase in indirect costs and a decrease in direct costs.
C) The increased of automated processes has led to the increase in direct manufacturing cost leading to a decrease in break even point.
D) The increasing competition in product markets has led to an increase in contribution margin resulting in a decrease of break even point.

Question 18

Which of the following statements is true of a peanut-butter costing system?

A) A peanut-butter costing system typically has more-homogeneous indirect cost pools.
B) A peanut-butter costing system broadly averages or spreads the cost of resources uniformly to cost objects.
C) A peanut-butter costing system assumes that all costs are variable.
D) In a peanut-butter costing system, costs of activities are used to assign costs to other cost objects such as products or services based on the activities the products or services consume.

Question 19

Product-cost cross-subsidization means that:

A) when one product is overcosted, it results in more than one other product being overcosted
B) when a company undercosts more than one of its products, it will overcost more than one of its other products
C) when a company undercosts one of its products, it will overcost at least one of its other products
D) when one product is overcosted it results in all other products being overcosted

Question 20

Johnson Superior Products Inc. produces hospital equipment and the setup requirements vary from product to product. Johnson produces its products based on customer orders and uses ABC costing. In one of its indirect cost pools, setup costs and distribution costs are pooled together. Costs in this pool are allocated using number of customer orders for the easiness of costing operations. Based on the information provided, which of the following arguments is valid?

A) Johnson has clearly failed to identify as many direct costs as is economically feasible.
B) All costs in a homogeneous cost pool have the same or a similar cause-and-effect relationship with the single cost driver that is used as the cost-allocation base for Johnson.
C) Johnson has unnecessarily wasted resources by classifying setup and distribution costs as they could have been considered as direct costs.
D) Johnson has failed to use the correct cost driver as the cost-allocation base for setup costs.

Question 21

Activity based costing system differs from traditional costing systems in the treatment of ________.

A) direct labor costs
B) direct material costs
C) prime costs
D) indirect costs

Question 22

Indirect labor and distribution costs would most likely be in the same activity-cost pool.

Question 23

Extreme Manufacturing Company provides the following ABC costing information:

The above activities are used by Departments A and B as follows:

How much of the account inquiry cost will be assigned to Department A?

A) $54,000
B) $320,000
C) $160,000
D) $84,000

Question 24

Extreme Manufacturing Company provides the following ABC costing information:

The above activities are used by Departments A and B as follows:

How much of the account billing cost will be assigned to Department B?

A) $220,000
B) $110,000
C) $24,750
D) $33,000

Question 25

What are the factors that are causing many companies to refine their costing systems to obtain more accurate measures of the costs of their products?

Question 26

Extreme Manufacturing Company provides the following ABC costing information:

The above activities are used by Departments A and B as follows:

How much of the total costs will be assigned to Department B?

A) $282,460
B) $246,925
C) $239,425
D) $256,825

Question 27

Extreme Manufacturing Company provides the following ABC costing information:

The above activities are used by Departments A and B as follows:

How much of the total costs will be assigned to Department A?

A) $88,825
B) $118,825
C) $120,000
D) $85,075

Question 28

Activity-based costing (ABC) can eliminate cost distortions because ABC systems ________.

A) establish a cause-and-effect relationship with the activities performed
B) use single cost pool for all overhead costs, thereby enabling simplicity
C) use a broad average to allocate all overhead costs
D) never consider interactions between different departments in assigning support costs

Question 29

ABC systems create ________.

A) one large cost pool
B) homogeneous activity-related cost pools
C) activity-cost pools with a broad focus
D) activity-cost pools containing many direct costs

Question 30

Which of the following statements is true of activity-based costing?

A) In activity-based costing, direct labor-hours is always the best allocation base to allocate all non-manufacturing indirect costs.
B) Activity based costing is more suited to companies with high product diversity than companies with single product line.
C) Activity based costing broadly averages or spreads the cost of resources uniformly to cost objects such as products or services.
D) The main advantage of activity-based costing over peanut-butter costing is the accurate distribution of all direct costs to the products.

Question 31

When "available time" (i.e., setup-hours) is used to calculate a cost of a resource and to allocate costs to cost objects , the system is called:

A) job costing
B) process costing
C) hybrid costing
D) time-driven activity based costing

Question 32

Identification of a cost-allocation base is not a critical element when using a strategy that will refine a costing system.

Question 33

Which of the following is true with activity based cost accounting?

A) Activity-based costing ignores the allocation of marketing and distribution costs.
B) Activity-based costing is more likely to result in major differences from traditional costing systems if the firm manufactures only one product rather than multiple products.
C) The focus is on activities that account for a sizable fraction of indirect costs .
D) Chances of product-cost cross-subsidization are higher in activity-based costing compared to traditional costing systems.

Question 34

Dalrymple Company produces a special spray nozzle. The budgeted indirect total cost of inserting the spray nozzle is $68,750. The budgeted number of nozzles to be inserted is 11,000. What is the budgeted indirect cost allocation rate for this activity?

A) $0.16
B) $0.32
C) $1.16
D) $6.25

Question 35

The fundamental cost objects of ABC are ________.

A) activities
B) cost drivers
C) products
D) services

Question 36

Managers should look for evidence of cause-and-effect when choosing a cost driver with the driver being the cause and the effect being the cost incurred.

Question 37

Extreme Manufacturing Company provides the following ABC costing information:

The above activities are used by Departments A and B as follows:

How much of account verification costs will be assigned to Department A?

A) $23,750
B) $28,500
C) $95,000
D) $47,500

Question 38

Extreme Manufacturing Company provides the following ABC costing information:

The above activities are used by Departments A and B as follows:

How much of correspondence costs will be assigned to Department A?

A) $22,000
B) $49,500
C) $11,000
D) $11,242

Question 39

Extracts from cost information of Hebar Corp.:

Assuming that setup-hours is considered a more effective cost drive for allocating setup costs than direct labor-hours. Which of the following statements is true of Hebar's setup costs under traditional costing?

A) L3 pack is undercosted by $5,850
B) L7 pack is undercosted by $5,750
C) L3 pack is overcosted by $5,850
D) L7 pack is overcosted by $5,850

Question 40

A single indirect-cost rate distorts product costs because ________.

A) there is an assumption that all support activities affect all products in a uniform way
B) it recognizes specific activities that are required to produce a product
C) competitive pricing is ignored
D) it assumes all costs are product costs

Question 41

Only indirect costs are included in the cost pools of ABC.

Question 42

Milan Manufacturing Company has identified three cost pools to allocate overhead costs. The following estimates are provided for the coming year:

The accounting records show the Mossman Job consumed the following resources:

If direct labor-hours are considered the only overhead cost driver, what is the single cost driver rate for Milan?

A) $1.05 per direct labor-hour
B) $0.59 per direct labor-hour
C) $0.95 per direct labor-hour
D) $1.71 per direct labor-hour

Question 43

In activity based costing systems, limiting cost-allocation bases to only units of output strengthens the cause-and-effect relationship between the cost-allocation base and the costs in a cost pool.

Question 44

Columbus Company provides the following ABC costing information:

The above activities used by their three departments are:

How much of the gas cost will be assigned to the Lawn Department?

A) $1,800
B) $3,800
C) $2,400
D) $8,000

Question 45

Columbus Company provides the following ABC costing information:

The above activities used by their three departments are:

How much of the total costs will be assigned to the Lawn Department?

A) $192,000
B) $464,000
C) $174,800
D) $154,667

Question 46

________ is an example of an output unit-level cost in the cost hierarchy.

A) Factory rent expense
B) Building security costs
C) Top management compensation costs
D) Machine depreciation

Question 47

When allocating the total indirect cost pool to cost pools such as setup costs including depreciation and maintenance costs of setup equipment, wages of setup employees, and allocation of supervisors is called a second-stage allocation.

Question 48

Milan Company has identified three cost pools to allocate overhead costs. The following estimates are provided for the coming year:

The accounting records show the Mossman Job consumed the following resources:

Under activity-based costing, what is the amount of machine maintenance costs allocated to the Mossman Job? (Do not round any intermediary calculations.)

A) $1,881.88
B) $200.20
C) $1,681.68
D) $210.45

Question 49

Explain how activity-based costing systems can provide more accurate product costs than traditional cost systems.

Question 50

Velshi Printers has contracts to complete weekly supplements required by forty-six customers. For the year 2018, manufacturing overhead cost estimates total $600,000 for an annual production capacity of 12 million pages.
For 2018 Velshi Printers has decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:

During 2018, two customers, Money Managers and Hospital Systems, are expected to use the following printing services:

Using pages printed as the only overhead cost driver, what is the manufacturing overhead cost estimate for Money Managers during 2018?

A) $4,300
B) $2,800
C) $3,500
D) $4,784

Question 51

Activity-based costing attempts to identify the most relevant cause-and-effect relationship for each activity pool without restricting the cost driver to only units of output or variables related to units of output.

Question 52

Columbus Company provides the following ABC costing information:

The above activities used by their three departments are:

If labor hours are used to allocate the non-labor, overhead costs, what is the overhead allocation rate?

A) $75.00 per hour
B) $26.67 per hour
C) $42.00 per hour
D) $33.00 per hour

Question 53

Xylon Corp. has contracts to complete weekly supplements required by forty-six customers. For the year 2018, manufacturing overhead cost estimates total $900,000 for an annual production capacity of 10 million pages.
For 2018, Xylon decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:

During 2018, two customers, Money Managers and Hospital Systems, are expected to use the following printing services:

If manufacturing overhead costs are considered one large cost pool and are assigned based on 10 million pages of production capacity, what is the cost driver rate? (Round the final answer to three decimal places.)

A) $0.078 per page
B) $0.035 per page
C) $0.055 per page
D) $0.09 per page

Question 54

Which of the following statements is true of ABC systems?

A) ABC systems are time-driven cost systems.
B) ABC systems classify some direct costs as indirect costs and some indirect costs as direct costs.
C) ABC systems provide valuable information to managers beyond accurate product costs.
D) ABC systems assume all costs are variable costs.

Question 55

Columbus Company provides the following ABC costing information:

The above activities used by their three departments are:

How much of the labor cost will be assigned to the Bush Department?

A) $127,400
B) $63,700
C) $200,900
D) $97,825

Question 56

Columbus Company provides the following ABC costing information:

The above activities used by their three departments are:

How much of the total cost will be assigned to the Plowing Department?

A) $564,000
B) $311,600
C) $188,000
D) $173,600

Question 57

Velshi Printers has contracts to complete weekly supplements required by forty-six customers. For the year 2018, manufacturing overhead cost estimates total $1,500,000 for an annual production capacity of 10 million pages.
For 2018 Velshi Printers has decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:

During 2018, two customers, Money Managers and Hospital Systems, are expected to use the following printing services:

What is the cost driver rate if manufacturing overhead costs are considered one large cost pool and are assigned based on 10 million pages of production capacity?

A) $0.01 per page
B) $0.15 per page
C) $0.14 per page
D) $0.13 per page

Question 58

Xylon Corp. has contracts to complete weekly supplements required by forty-six customers. For the year 2018, manufacturing overhead cost estimates total $940,000 for an annual production capacity of 10 million pages.
For 2018, Xylon decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:

During 2018, two customers, Money Managers and Hospital Systems, are expected to use the following printing services:

Under ABC costing, what is the inspection cost allocated to Hospital Systems?

A) $704
B) $80
C) $286
D) $6,574

Question 59

Columbus Company provides the following ABC costing information:

The above activities used by their three departments are:

How much of invoice cost will be assigned to the Bush Department?

A) $7,200
B) $141,600
C) $31,200
D) $180,000

Question 60

Activity-based costing is most likely to yield benefits for companies ________.

A) with complex product design processes that vary significantly from product to product
B) with operations that remain fairly consistent across product lines
C) in a monopolistic market
D) having nominal percentage of indirect costs

Question 61

________ costs support the organization as a whole.

A) Unit-level
B) Batch-level
C) Product-sustaining
D) Facility-sustaining

Question 62

________ is considered while choosing a cost allocation base for activity costs in ABC costing.

A) Marketing strategy and material price level
B) Availability of reliable data and measures
C) Product price level
D) Market share of a product

Question 63

Is it advisable to ignore facility-sustaining cost drivers during product costing?

Question 64

What are the four parts of the cost hierarchy. Briefly explain each part, and contrast this cost hierarchy to the fixed-variable dichotomy?

Question 65

Facility-sustaining costs are the costs of activities ________.

A) undertaken to support individual products or services regardless of the number of units or batches in which the units are produced
B) related to a group of units of a product or services, rather than each individual unit of product or service
C) that managers cannot trace to individual products or services but that support the organization as a whole
D) performed on each individual unit of a product or service such as the cost of energy, machine depreciation, and repair

Question 66

With traditional costing systems, products manufactured in small batches and in small annual volumes may be ________ because batch-related and product-sustaining costs are assigned using unit-related drivers.

A) overcosted
B) fairly costed
C) undercosted
D) ignored

Question 67

Which of the following cost and cost allocation base have a strong cause and effect relationship?

A) administration costs and cubic feet
B) setup costs and square feet
C) quality control costs and the number of inspections
D) machine maintenance and setup hours

Question 68

Quality-inspection costs is an example of batch-level costs.

Question 69

Management accountants use the cost hierarchy to first calculate the ________.

A) labor costs of each product and then they compute material costs
B) overhead costs of each product and then they compute prime costs
C) factory costs of each product and then they compute labor costs
D) total costs of each product and then they compute per-unit costs

Question 70

Over time, the cost of design activities depend largely on the time designers spend on designing and modifying the product not on the number of products made or the number of batches produced.

Question 71

It is usually difficult to find good cost driver (cause-and-effect relationship) between ________ and a cost allocation base.

A) unit-level costs
B) batch-level costs
C) product-sustaining costs
D) facility-sustaining costs

Question 72

Which of the following ordering of the levels best depicts the cost hierarchy within an ABC system?

A) batch-level, output unit-level, product-sustaining level, and facility-sustaining level
B) batch-level, output unit-level, facility-sustaining levels, product-sustaining levels
C) output unit-level, batch-level, product-sustaining level, and facility-sustaining level
D) facility-sustaining level, output unit-level, batch-level, product-sustaining level

Question 73

Service-sustaining costs are the costs of activities that managers cannot trace to individual services but that support the organization as a whole.

Question 74

For a business that offers customers a store where product can be purchased and picked up or a delivery service that can ship the product directly to the customer, which of the following would most likely be the best cost allocation base for distribution costs?

A) number of customer service phone calls and emails per period
B) number of pounds of product shipped or delivered
C) Electricity costs for the period
D) Number of products sold

Question 75

An effective activity-based cost system always ignores facility-sustaining cost drivers.

Question 76

Advanced Technology Products produces 10 different fastners. Each time a type of fastener is produced, the equipment must be stopped and items such as filters and drill bits must be changed, oil must be added to the equipment and some parts need lubrication. This work must be done before the products can be produced, the costs related to this activity would be part of which cost pool?

A) Output-level costs
B) Batch-level costs
C) Product-sustaining costs
D) Service-sustaining costs

Question 77

________ are the costs of activities undertaken to support individual products or services regardless of the number of units or batches in which the units are produced.

A) Unit-level costs
B) Batch-level costs
C) Product-sustaining costs
D) Facility-sustaining costs

Question 78

Put the following ABC implementation steps in order ________.
ACompute the allocation rates.
BCompute the total cost of the products.
CIdentify the products that are the cost objects.
DSelect the cost allocation bases.

A) DACB
B) DBCA
C) BADC
D) CDAB

Question 79

Top management compensation cost is an example of ________ in the cost hierarchy.

A) unit-level costs
B) batch-level costs
C) product-sustaining costs
D) facility-sustaining costs

Question 80

For a company which produce its products in batches, the CEO's salary is a(n) ________ cost.

A) batch-level
B) output unit-level
C) facility-sustaining
D) product-sustaining