Question 1

Setting up equipment is an example of an activity at which of the following levels?
A) Unit-level activity.
B) Batch-level activity.
C) Product-level activity.
D) Organization-sustaining activity.

Accepted Answer

Setting up equipment is an activity that is performed each time a batch is produced, making it a batch-level activity.

Question 2

Arranging for a shipment of a number of different products to a customer is an example of an activity at which of the following levels?
A) Unit-level activity.
B) Batch-level activity.
C) Customer-level activity.
D) Organization-sustaining activity.

Accepted Answer

Arranging for a shipment of a number of different products to a customer is an activity that involves grouping or batching different products together, hence it is a batch-level activity.

Question 3

Testing a prototype of a new product is an example of an activity at which of the following levels?
A) Unit-level activity.
B) Batch-level activity.
C) Product-level activity.
D) Organization-sustaining activity.

Accepted Answer

Testing a prototype is part of the product-level activities, which are incurred for each product line, such as design, engineering, and testing. Unit-level activities are performed for each individual unit, such as assembly of a product, batch-level activities are performed for each batch of products, and organization-sustaining activities are performed to support the overall organization, such as maintenance of facilities or management salaries.

Question 4

(Appendix 5B)Why would an activity-based costing system that is designed for internal decision making NOT conform to generally accepted accounting principles?
A) Some manufacturing costs (i.e.,the costs of idle capacity and organization-sustaining costs)will not be assigned to products.
B) Some non-manufacturing costs are assigned to products.
C) First-stage allocations may be based on subjective interview data.
D) All of the above.

Accepted Answer

Activity-based costing systems are designed to provide more accurate product costs for internal decision making by assigning costs to products based on their specific activities. However, this may not conform to generally accepted accounting principles because: 
A) Certain costs such as idle capacity and organization-sustaining costs are difficult to assign to products accurately.
B) Some non-manufacturing costs such as marketing and administrative expenses may also be assigned to products, which may not be in accordance with traditional costing methods.
C) First-stage allocations may be based on subjective interview data, which may not be considered reliable under generally accepted accounting principles. Therefore, activity-based costing may deviate from the principles of traditional cost accounting methods.

Question 5

What is a duration driver?
A) A simple count of the number of times an activity occurs.
B) An activity measure that is used for the life of the company.
C) A measure of the amount of time required to perform an activity.
D) An activity measure that is used for the life of an activity-based costing system.

Accepted Answer

A duration driver is a measure of the amount of time required to perform an activity. This is used to allocate overhead costs to products or services based on the amount of time they consume. For example, if assembling a product takes more time than packaging it, then more overhead costs would be allocated to the product assembly activity compared to the packaging activity.

Question 6

Worker recreational facilities are examples of costs that would ordinarily be considered to be incurred at which of the following activity levels?
A) Unit-level activity.
B) Batch-level activity.
C) Product-level activity.
D) Organization-sustaining activity.

Accepted Answer

Worker recreational facilities are considered organization-sustaining activities since they are costs incurred for the benefit of the entire organization, rather than for a specific product, batch, or unit.

Question 7

(Appendix 5A)Which of the following best describes a cost object,such as a product or customer,that has a positive red margin?
A) Its green margin will be positive.
B) Its green margin may be positive,negative,or zero.
C) Its green margin will be negative.
D) Its green margin will be zero.

Accepted Answer

A positive red margin indicates that the cost object (product or customer) is generating a profit. As a result, its green margin (revenue minus variable costs) will also be positive, as revenue exceeds the variable costs associated with producing the product or serving the customer.

Question 8

Which of the following is NOT a limitation of activity-based costing?
A) Maintaining an activity-based costing system is more costly than maintaining a traditional direct labour-based costing system.
B) Changing from a traditional direct labour-based costing system to an activity-based costing system changes product margins and other key performance indicators used by managers.Such changes are often resisted by managers.
C) In practice,most managers insist on fully allocating all costs to products,customers,and other costing objects in an activity-based costing system.This results in overstated costs.
D) More accurate product costs may result in increasing the selling prices of some products.

Accepted Answer

Activity-based costing (ABC) aims to provide more accurate product costing by allocating overhead costs based on the actual activities that drive those costs. The assertion that ABC may result in increasing the selling prices of some products is not a limitation of the system itself but a potential outcome based on more accurate cost information.

Question 9

Which of the following activity levels is an example of the clerical activity associated with processing purchase orders to produce an order for a standard product?
A) Unit-level activity.
B) Batch-level activity.
C) Product-level activity.
D) Organization-sustaining activity.

Accepted Answer

Batch-level activity involves processing a group of similar transactions together to reduce costs. In this scenario, processing purchase orders for a standard product would involve grouping similar orders together and processing them as a batch, which is an example of a batch-level activity.

Question 10

What is a transaction driver?
A) An event that causes a transaction to begin.
B) A measure of the amount of time required to perform an activity.
C) An event that causes a transaction to end.
D) A simple count of the number of times an activity occurs.

Accepted Answer

The answer of What is a transaction driver?
A) An event...

Question 11

Why may departmental overhead rates NOT correctly assign overhead costs?
A) Because of the use of direct labour hours in allocating overhead costs to products rather than machine time or quantity of materials.
B) Because of the high correlation between direct labour hours and the incurrence of overhead costs.
C) Because of the over-reliance on volume as a basis for allocating overhead costs where products differ regarding the number of units produced,lot size,or complexity of production.
D) Because of the difficulties associated with identifying cost pools for the first stage of the allocation process.

Accepted Answer

Departmental overhead rates may not correctly assign overhead costs because of the over-reliance on volume as a basis for allocating overhead costs where products differ regarding the number of units produced, lot size, or complexity of production. This means that products that require more setup time, engineering work, or special handling will end up bearing higher overhead costs compared to simpler products, even if the simpler products require more volume. Using other allocation bases like machine hours or quantity of materials may be more appropriate in such cases.

Question 12

Which of the following would be classified as a product-level activity?
A) Machine setup for a batch of a standard product.
B) Cafeteria facilities available to and used by all employees.
C) Human resource management.
D) Advertising a product.

Accepted Answer

Product-level activities are those that support specific products regardless of the number of units or batches produced. Advertising a product directly relates to a specific product, making it a product-level activity.

Question 13

Dideda Company uses an activity-based costing system with three activity cost pools. The company has provided the following data concerning its costs and its activity-based costing system:

The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining costs. You have been asked to complete the first-stage allocation of costs to the activity cost pools.
-How much cost,in total,would be allocated in the first-stage allocation to the Order Size activity cost pool?
A) $150,000.
B) $234,000.
C) $255,000.
D) $360,000.

Accepted Answer

The answer of Dideda Company uses an activity-based costing system...

Question 14

Human resource management is an example of an activity at which of the following levels?
A) Unit-level activity.
B) Product-level activity.
C) Batch-level activity.
D) Organization-sustaining activity.

Accepted Answer

Human resource management is an organization-sustaining activity as it is concerned with managing the resources (people) who sustain the organization. It involves activities such as recruitment and selection, training and development, performance management, compensation and benefits, and employee relations, which have an impact on the entire organization.

Question 15

Costs incurred at which of the following activity levels should NOT be allocated to products for decision-making purposes?
A) Unit-level activities.
B) Batch-level activities.
C) Product-level activities.
D) Organization-sustaining activities.

Accepted Answer

Organization-sustaining activities are not directly related to production or sale of products, thus should not be allocated to products for decision-making purposes.

Question 16

(Appendix 5A)Which of the following best describes a cost object,such as a product or customer,that has a negative green margin?
A) Its yellow margin will be positive.
B) Its yellow margin may be either positive or negative.
C) Its yellow margin will be negative.
D) Its yellow margin will be zero.

Accepted Answer

A negative green margin means that the cost of producing the product or serving the customer exceeds the revenue earned from it. Therefore, the yellow margin (which represents the contribution margin) will also be negative as it is calculated by subtracting the variable costs from the revenue.

Question 17

(Appendix 5A)Which of the following statements concerning ease of adjustment codes is NOT correct?
A) "Green" costs adjust automatically to changes in activity.
B) "Yellow" costs could be adjusted to changes in activity,but such adjustments require management action; the adjustment is not automatic.
C) "Red" costs cannot be adjusted to changes in activity.
D) The costs of idle capacity and organization-sustaining costs are not assigned codes.

Accepted Answer

This statement is not correct since "Red" costs can be adjusted to changes in activity, but the adjustment requires significant management action and may not be easy to make.

Question 18

(Appendix 5A)Which of the following best describes a cost object,such as a product or customer,that has a positive green margin?
A) Its yellow margin will be positive.
B) Its yellow margin may be either positive,negative,or zero.
C) Its yellow margin will be negative.
D) Its yellow margin will be zero.

Accepted Answer

A positive green margin indicates that the revenue exceeds the costs directly associated with the cost object, but it does not guarantee the status of the yellow margin, which includes additional indirect costs.

Question 19

Which of the following statements about overhead allocation based on volume alone is correct?
A) It is a key aspect of the activity-based costing model.
B) It will systematically overcost high-volume products and undercost low-volume products.
C) It will systematically overcost low-volume products and undercost high-volume products.
D) It must be used for external financial reporting.

Accepted Answer

The answer of Which of the following statements about overhead...

Question 20

(Appendix 5A)Which of the following best describes a cost object,such as a product or customer,that has a negative red margin?
A) Its yellow margin will be positive.
B) Its yellow margin may be positive,negative,or zero.
C) Its yellow margin will be negative.
D) Its yellow margin will be zero.

Accepted Answer

A negative red margin indicates that the cost object is not covering its direct costs. However, the yellow margin, which includes additional costs or revenues, can vary and may be positive, negative, or zero depending on other factors.

Quiz 5: Activity-Based Costing: A Tool to Aid Decision Making

Setting up equipment is an example of an activity at which of the following levels?

Arranging for a shipment of a number of different products to a customer is an example of an activity at which of the following levels?

Testing a prototype of a new product is an example of an activity at which of the following levels?

(Appendix 5B) Why would an activity-based costing system that is designed for internal decision making NOT conform to generally accepted accounting principles?

What is a duration driver?

Worker recreational facilities are examples of costs that would ordinarily be considered to be incurred at which of the following activity levels?

(Appendix 5A) Which of the following best describes a cost object,such as a product or customer,that has a positive red margin?

Which of the following is NOT a limitation of activity-based costing?

Which of the following activity levels is an example of the clerical activity associated with processing purchase orders to produce an order for a standard product?

What is a transaction driver?

Why may departmental overhead rates NOT correctly assign overhead costs?

Which of the following would be classified as a product-level activity?

Human resource management is an example of an activity at which of the following levels?

Costs incurred at which of the following activity levels should NOT be allocated to products for decision-making purposes?

(Appendix 5A) Which of the following best describes a cost object,such as a product or customer,that has a negative green margin?

(Appendix 5A) Which of the following statements concerning ease of adjustment codes is NOT correct?

(Appendix 5A) Which of the following best describes a cost object,such as a product or customer,that has a positive green margin?

Which of the following statements about overhead allocation based on volume alone is correct?

(Appendix 5A) Which of the following best describes a cost object,such as a product or customer,that has a negative red margin?