Question 1

The benefits arising from the introduction of activity-based costing are likely to be greater where:
i. overhead is a large proportion of total cost.
ii. implementation costs are not high due to the support of advanced IT systems.
iii. batches are of a similar size.

Accepted Answer

Activity-based costing is particularly useful when overhead costs make up a large proportion of total costs, as it allows for a more accurate allocation of these costs to products or services. The use of advanced IT systems can also reduce implementation costs and make the process easier. The similarity of batch sizes is not necessarily a key factor in the benefits of activity-based costing.

Question 2

Volume-based measures may be used to apply overhead when:

Accepted Answer

Volume-based measures are most appropriate when overhead costs are directly proportional to the size of the production run. This means that the larger the run, the more overhead costs that will be incurred. Therefore, using a volume-based measure, such as direct labor hours or machine hours, to apply overhead costs would be appropriate in this situation.

Question 3

Which of the following are usually included in traditional cost systems?
i. Direct material is traced to products.
ii. Non-manufacturing costs are assigned to products.
iii. Manufacturing overhead is allocated using a production-volume-based cost driver.

Accepted Answer

Traditional cost systems typically trace direct material costs to products, and allocate manufacturing overhead costs using a production-volume-based cost driver. Non-manufacturing costs are typically not assigned to products in traditional cost systems.

Question 4

Appropriate cost-driver identification depends on:

Accepted Answer

Appropriate cost-driver identification depends on a cause-and-effect relationship existing between the cost driver and costs of the activity. In other words, the cost driver should be the factor that influences or causes the costs of the activity to change. Homogeneity of cost pools and the number of products or services provided may be relevant factors in determining appropriate cost drivers but are not the most important factors. The number of cost pools used is not necessarily relevant to identifying appropriate cost drivers.

Question 5

One of the results of the inaccuracies arising from traditional costing systems may be:

Accepted Answer

Inaccuracies in traditional costing systems may result in the underapplication of overhead costs, meaning that actual overhead costs exceed the amount of overhead applied to products. Therefore, the correct answer is D, as it includes both choices B (underapplication of overhead costs) and C (actual overhead costs exceed overhead applied).

Question 6

Which of the following are common production volume measures?
i. Direct labour hours.
ii. Machine hours.
iii. Direct material cost.

Accepted Answer

Direct labour hours and machine hours are commonly used as production volume measures because they directly relate to the amount of time it takes to produce a unit of product. Direct material cost is not a production volume measure as it does not directly relate to the amount of product produced.

Question 7

Which of the following is not an indicator of a company whose costing system needs to be more accurate?

Accepted Answer

The answer of Which of the following is not an...

Question 8

Which of the following are limitations of ABC?
i. The system requires significantly more data.
ii. The system requires extensive updating if the product range changes.
iii. The inclusion of facility level costs greatly increases the accuracy of cost per unit.

Accepted Answer

i. The system requires significantly more data: ABC requires more detailed and accurate data on the cost drivers, which can increase the amount of time and effort needed to collect and process the information.
ii. The system requires extensive updating if the product range changes: If new products or changes are introduced, the entire ABC system may need to be updated, which can be time-consuming and costly.
iii. The inclusion of facility level costs greatly increases the accuracy of cost per unit: This is a benefit of ABC, not a limitation. Including facility-level costs, such as maintenance and rent, can provide a more accurate picture of the true cost of producing a product.

Question 9

Direct labour hours or direct labour dollars are suitable overhead allocation bases when:

Accepted Answer

The answer of Direct labour hours or direct labour dollars...

Question 10

Which of the following statements is/are true?
i. Both traditional cost systems and ABC focus on resources supplied.
ii. Plant and equipment is an example of a committed resource under an ABC system.
iii. Committed resources always equal resources used.

Accepted Answer

Plant and equipment is considered a committed resource under an ABC system because it represents a long-term investment that cannot be easily adjusted. Traditional cost systems and ABC do not both focus on resources supplied, and committed resources do not always equal resources used.

Question 11

Despite the obvious advantages of ABC, many firms are still reluctant to implement it. What are the reasons for this reluctance?
i. Uncertainty about the benefits of ABC.
ii. The opinion that the current system serves all the firm's needs.
iii. Lack of resources to implement ABC.

Accepted Answer

The reluctance to implement Activity-Based Costing (ABC) can stem from uncertainty about its benefits, satisfaction with the current system, and a lack of resources. These factors contribute to firms' hesitation to adopt ABC despite its potential advantages.

Question 12

Which of the following are indicators of an outdated costing system?
i. Products which are difficult to make have high profit margins.
ii. Competitors prices appear unrealistically low.
iii. Customers are not deterred by price increases.
iv. A lot of time is spent on special product cost projects.

Accepted Answer

All four indicators suggest an outdated costing system. Products that are difficult to make but still have high profit margins may indicate that the costing system is not accurately capturing the complexity and cost of production. Competitors' prices appearing unrealistically low could suggest that the company's costing system is not competitive or accurate. Customers not being deterred by price increases might indicate that the prices are not set based on a current understanding of value and costs. Spending a lot of time on special product cost projects suggests inefficiencies and inaccuracies in the standard costing system, necessitating frequent adjustments.

Question 13

A cost driver is:

Accepted Answer

A cost driver is any factor that causes costs to be incurred, such as number of units produced or hours worked. It is not a collection of cost pools (A), a cost-allocation base chosen arbitrarily (B), or costs that behave in a similar manner (D).

Question 14

Recent developments in manufacturing and marketing have resulted in significant changes to cost manufacturing structures. Which of the following statements is/are false?
i. The proportion of direct labour increases.
ii. The proportion of manufacturing overhead increases.
iii. Product diversity decreases.
iv. The proportion of non-volume-related manufacturing overheads increases.

Accepted Answer

i. False. The proportion of direct labor in manufacturing costs has generally decreased due to automation and improvements in manufacturing efficiency.iii. False. Product diversity tends to increase as companies strive to meet varied consumer demands and customize products.

Question 15

Behavioural issues may be important in implementing an ABC system. Which of the following are some of the methods employed to minimise adverse outcomes?
i. Use a top down approach.
ii. Use a bottom up approach.
iii. Ensure all employees have a sense of ownership in the system.

Accepted Answer

A bottom-up approach involves involving employees in the implementation and design process, which can increase their sense of ownership in the system. Ensuring that employees have a sense of ownership is important to minimize adverse outcomes. A top-down approach may not involve employees in the process, which can result in resistance and lack of buy-in. Therefore, options i and iii are not the best choices.

Question 16

Which of the following statements, as indicators of product cost systems, are out of date?
i. Highly profitable products are difficult to make.
ii. Competitors' prices appear to be very low.
iii. The market easily absorbs price increases.

Accepted Answer

The statements reflect outdated views on product cost systems. i) Modern manufacturing and automation have made it possible to produce highly profitable products efficiently. ii) Competitors' pricing strategies may involve efficiencies or cost savings not visible externally, making their low prices feasible. iii) In today's competitive and transparent markets, significant price increases are often challenging to implement without affecting demand.

Question 17

Twista Manufacturing has the following activities and activity costs per year: Machining ($20 000); Forklifting ($10 000); machine setup ($32 000) and quality inspection ($40 000). The operation starts with setting up the machines; each batch of products requires a different setup. This is followed by machining, where the cost of machining varies directly with the number of machine hours. Forklifts are used to move the work in progress around. Because quality is important, an inspection is carried out for each batch of products.
The following information is also available:
Number of machine hours per year: 20 000 machine hours
Number of forklift moves per year: 500 moves
Number of batches per year: 4000 batches
Each year, Twista Manufacturing produces 5000 units of Product X. These units of Product X require 5000 machine hours, 120 moves and 500 batches to produce. The direct materials and direct labour together cost $15 per unit of Product X.
Which of the following activities should be grouped together in the same activity cost pool?

Accepted Answer

Machine setup and quality inspection should be grouped together because both are batch-level activities, meaning they are performed each time a batch of products is processed, regardless of the number of units in the batch or the machine hours required.

Question 18

Recent increases in downstream costs have occurred because of:
i. increased advertising and product promotion.
ii. increased customer servicing.
iii. increased competition.
iv. increases in product design.

Accepted Answer

Downstream costs refer to expenses incurred after the production phase, such as marketing, distribution, and customer service. Increased advertising and product promotion (i), increased customer servicing (ii), and increased competition (iii) can all lead to higher downstream costs. Increased competition often necessitates more spending on advertising and customer service to maintain or grow market share. Increases in product design (iv) are typically considered upstream or production-related costs, not downstream.

Question 19

In which of the following may a traditional costing system result?

Accepted Answer

A traditional costing system may result in distorted product costs, under-costing of complex products, and over-costing of simple products.

Question 20

Which of the following statements best completes this sentence: 'Activity-based costing...'

Accepted Answer

Activity-based costing (ABC) emphasizes the need to obtain a better understanding of the behaviour of overhead costs by identifying the activities that drive those costs and assigning those costs more accurately to the products or services that benefit from those activities. Option A is incorrect because ABC does consider the split between fixed and variable costs. Option B is incorrect because while ABC has gained popularity, it has not completely replaced standard costing. Option C is partially correct, as ABC does allocate overhead costs based on the drivers of those costs, but it also allocates variable and other indirect costs.

Quiz 8: Activity-Based Costing

The benefits arising from the introduction of activity-based costing are likely to be greater where: i. overhead is a large proportion of total cost. ii. implementation costs are not high due to the support of advanced IT systems. iii. batches are of a similar size.

Volume-based measures may be used to apply overhead when:

Which of the following are usually included in traditional cost systems? i. Direct material is traced to products. ii. Non-manufacturing costs are assigned to products. iii. Manufacturing overhead is allocated using a production-volume-based cost driver.

Appropriate cost-driver identification depends on:

One of the results of the inaccuracies arising from traditional costing systems may be:

Which of the following are common production volume measures? i. Direct labour hours. ii. Machine hours. iii. Direct material cost.

Which of the following is not an indicator of a company whose costing system needs to be more accurate?

Which of the following are limitations of ABC? i. The system requires significantly more data. ii. The system requires extensive updating if the product range changes. iii. The inclusion of facility level costs greatly increases the accuracy of cost per unit.

Direct labour hours or direct labour dollars are suitable overhead allocation bases when:

Which of the following statements is/are true? i. Both traditional cost systems and ABC focus on resources supplied. ii. Plant and equipment is an example of a committed resource under an ABC system. iii. Committed resources always equal resources used.

Despite the obvious advantages of ABC, many firms are still reluctant to implement it. What are the reasons for this reluctance? i. Uncertainty about the benefits of ABC. ii. The opinion that the current system serves all the firm's needs. iii. Lack of resources to implement ABC.

Which of the following are indicators of an outdated costing system? i. Products which are difficult to make have high profit margins. ii. Competitors prices appear unrealistically low. iii. Customers are not deterred by price increases. iv. A lot of time is spent on special product cost projects.

A cost driver is:

Behavioural issues may be important in implementing an ABC system. Which of the following are some of the methods employed to minimise adverse outcomes? i. Use a top down approach. ii. Use a bottom up approach. iii. Ensure all employees have a sense of ownership in the system.

Which of the following statements, as indicators of product cost systems, are out of date? i. Highly profitable products are difficult to make. ii. Competitors' prices appear to be very low. iii. The market easily absorbs price increases.

Recent increases in downstream costs have occurred because of: i. increased advertising and product promotion. ii. increased customer servicing. iii. increased competition. iv. increases in product design.

In which of the following may a traditional costing system result?

Which of the following statements best completes this sentence: 'Activity-based costing...'