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Chapter 04 Activity-Based Costing and Cost Management Answer Key
True / False Questions
1. A volume-based allocation measure is directly related to the number of units produced or the
number of customers served.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Assign indirect costs to products or services using a single volume-based cost driver.
Topic: Step 1: Determine the cost driver
2. The gross margin is calculated by subtracting total nonmanufacturing cost per unit from the
unit sales price.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Assign indirect costs to products or services using a single volume-based cost driver.
Topic: Step 3: Assign indirect cost to individual products or services
3. Activity Based Costing divides activities into two categories: unit-level activities and facility
level activities.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Classify activities as unit- , batch- , product- , or facility-level activities.
Topic: Step 1: Identify and classify activities
4-1
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McGraw-Hill Education.
4. When forming activity cost pools, the goal is to create as few cost pools as possible, while still
capturing major activities.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-03 Assign indirect costs to activity cost pools and select a cost driver for each pool.
Topic: Step 2: Form activity cost pools and assign indirect costs to each pool
5. Each individual indirect cost should be assigned to one activity when forming activity cost
pools.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-03 Assign indirect costs to activity cost pools and select a cost driver for each pool.
Topic: Step 2: Form activity cost pools and assign indirect costs to each pool
6. Activity-based costing systems include non-volume-based cost drivers.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-03 Assign indirect costs to activity cost pools and select a cost driver for each pool.
Topic: Step 3: Select a cost driver for each activity cost pool
7. To assign activity costs using the activity proportion method, multiply the activity rate by the
activity requirements of each individual product.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
4-2
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McGraw-Hill Education.
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
8. The cost measurement system can impact how indirect costs are spread among product lines,
which may affect decisions managers make.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-06 Compare the results of a volume-based cost system to activity-based costing.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
9. Activity-based costing is not appropriate for service providers since they do not have
manufacturing overhead that needs to be assigned to products.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-07 Apply activity-based costing to a service industry.
Topic: Activity-based costing in service industries
10. Activity-based management is a method of assigning indirect costs to products or services
based on the activities they require.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-08 Describe how managers use activity-based management and other cost management methods.
Topic: Activity-based management (ABM)
4-3
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11. A value-added activity is one that enhances the perceived value of the product or service to
the customer.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-08 Describe how managers use activity-based management and other cost management methods.
Topic: Activity-based management (ABM)
12. Prevention costs are incurred to prevent quality problems from occurring in the first place.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-08 Describe how managers use activity-based management and other cost management methods.
Topic: Total quality management (TQM)
13. Internal failure costs result from defects that are caught during the inspection process.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-08 Describe how managers use activity-based management and other cost management methods.
Topic: Total quality management (TQM)
14. Target costing involves determining what the product price must be in order to meet the target
cost and still provide a profit for the company's shareholders.
AICPA: FN Measurement
4-4
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McGraw-Hill Education.
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-08 Describe how managers use activity-based management and other cost management methods.
Topic: Target costing and life cycle cost management
15. A just-in-time (JIT) system is a demand-push system.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-08 Describe how managers use activity-based management and other cost management methods.
Topic: Just-in-time (JIT)
Multiple Choice Questions
16. A volume-based allocation measure would vary proportionately with:
A. the number of activities.
B. nonmanufacturing costs.
C. the number of units produced.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Assign indirect costs to products or services using a single volume-based cost driver.
Topic: Step 1: Determine the cost driver
4-5
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McGraw-Hill Education.
17. Which of the following would not be directly related to a volume-based allocation measure?
B. The number of units produced.
C. The number of customers served.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Assign indirect costs to products or services using a single volume-based cost driver.
Topic: Step 1: Determine the cost driver
18. A volume-based cost system is likely to assign more manufacturing overhead costs to
products:
A. that are more complex or difficult to manufacture than others.
C. with higher per-unit materials costs than others.
D. with more activity costs than others.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Assign indirect costs to products or services using a single volume-based cost driver.
Topic: Step 1: Determine the cost driver
19. In a traditional volume-based cost system, total manufacturing costs are calculated by:
B. subtracting manufacturing overhead from selling price.
C. adding direct material cost and direct labor cost.
D. adding activity cost, direct material cost, and direct labor cost.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Assign indirect costs to products or services using a single volume-based cost driver.
4-6
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Topic: Step 3: Assign indirect cost to individual products or services
20. The gross margin does not take into account:
A. sales price.
C. manufacturing overhead.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Assign indirect costs to products or services using a single volume-based cost driver.
Topic: Step 3: Assign indirect cost to individual products or services
21. Lincoln, Inc., which uses a volume-based cost system, produces cat condos that sell for $90
each. Direct materials cost $15 per unit, and direct labor costs $10 per unit. Manufacturing
overhead is applied at a rate of 200% of direct labor cost. Nonmanufacturing costs are $27 per
unit. What is the gross profit margin for the cat condos?
A. 20.0%
C. 62.5%
D. 80.0%
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-01 Assign indirect costs to products or services using a single volume-based cost driver.
Topic: Step 3: Assign indirect cost to individual products or services
4-7
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22. Largo, Inc., which uses a volume-based cost system, produces cat condos, and has a gross
profit margin of 50%. Direct materials cost $15 per unit, and direct labor costs $10 per unit.
Manufacturing overhead is applied at a rate of 200% of direct labor cost. Nonmanufacturing
costs are $27 per unit. How much does each cat condo sell for?
A. $50
B. $72
D. $144
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-01 Assign indirect costs to products or services using a single volume-based cost driver.
Topic: Step 3: Assign indirect cost to individual products or services
23. The first step in ABC is:
A. to calculate a manufacturing overhead rate.
B. to form activity cost pools.
C. to select a cost driver for each activity cost pool.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Classify activities as unit- , batch- , product- , or facility-level activities.
Topic: Step 1: Identify and classify activities
24. An activity that is performed to support a specific product line is a(n):
A. batch-level activity.
B. facility-level activity.
D. unit-level activity.
Product-level activities are performed to support a specific product line.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
4-8
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McGraw-Hill Education.
Difficulty: 1 Easy
Learning Objective: 04-02 Classify activities as unit- , batch- , product- , or facility-level activities.
Topic: Step 1: Identify and classify activities
25. An activity that is performed to benefit the organization as a whole is a(n):
A. batch-level activity.
B. product-level activity.
D. unit-level activity.
Facility or companywide activities are performed to benefit the organization as a whole.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Classify activities as unit- , batch- , product- , or facility-level activities.
Topic: Step 1: Identify and classify activities
26. An activity that is performed for a group of units all at once is a(n):
B. product-level activity.
C. facility-level activity.
D. unit-level activity.
Batch-level activities are performed for a group or batch of units all at once.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Classify activities as unit- , batch- , product- , or facility-level activities.
Topic: Step 1: Identify and classify activities
27. An activity that is performed for a specific customer is a(n):
A. batch-level activity.
B. product-level activity.
C. facility-level activity.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Classify activities as unit- , batch- , product- , or facility-level activities.
4-9
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McGraw-Hill Education.
Topic: Step 1: Identify and classify activities
28. An activity that is performed for each individual unit is a ___________ level activity.
A. batch
B. facility
C. product
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Classify activities as unit- , batch- , product- , or facility-level activities.
Topic: Step 1: Identify and classify activities
29. Which of the following best defines a batch-level activity?
A. An activity that is performed for a specific customer
B. An activity that is performed to support a specific product line
C. An activity that is performed for each individual unit
Batch-level activities are performed for a group or batch of units all at once.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Classify activities as unit- , batch- , product- , or facility-level activities.
Topic: Step 1: Identify and classify activities
30. Which of the following best defines a product-level activity?
A. An activity that is performed for a specific customer
C. An activity that is performed for each individual unit
D. An activity that is performed for a group of units all at once
Product-level activities are performed to support a specific product line.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Classify activities as unit- , batch- , product- , or facility-level activities.
Topic: Step 1: Identify and classify activities
4-10
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31. Which of the following best defines a facility-level activity?
B. An activity that is performed to support a specific product line
C. An activity that is performed for each individual unit
D. An activity that is performed for a group of units all at once
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Classify activities as unit- , batch- , product- , or facility-level activities.
Topic: Step 1: Identify and classify activities
32. Which of the following is the best example of a facility-level activity?
B. Research and development
C. Painting a final product
D. Product testing
Facility or companywide activities are performed to benefit the organization as a whole. The
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-02 Classify activities as unit- , batch- , product- , or facility-level activities.
Topic: Step 1: Identify and classify activities
33. Which of the following is the best example of a unit-level activity?
A. Human resources
B. Research and development
D. Product testing
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-02 Classify activities as unit- , batch- , product- , or facility-level activities.
Topic: Step 1: Identify and classify activities
4-11
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34. How is the cost of a batch-level activity similar to the cost of a unit-level activity?
A. Both are incurred for each individual unit.
B. Both decrease as production volume increases.
D. Both are incurred for a group of units all at once.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-02 Classify activities as unit- , batch- , product- , or facility-level activities.
Topic: Step 1: Identify and classify activities
35. Monroe, Inc. randomly selects ten units from each production run to be inspected for quality,
regardless of the size of the production run. The inspection of these units would most likely be
classified as a:
A. facility or companywide activity.
B. product-level activity.
D. unit-level activity.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-02 Classify activities as unit- , batch- , product- , or facility-level activities.
Topic: Step 1: Identify and classify activities
36. The purpose of Stage 1 allocations is to:
B. assign the indirect costs of each activity to products and services.
C. assign direct manufacturing costs to activity cost pools.
D. assign the direct costs of each activity to products and services.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
4-12
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McGraw-Hill Education.
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-03 Assign indirect costs to activity cost pools and select a cost driver for each pool.
Topic: Step 2: Form activity cost pools and assign indirect costs to each pool
37. A large company that uses activity based costing would do which of the following?
A. Use a volume-based cost driver for each activity.
B. Form a cost pool for each activity performed by the company.
C. Use a single cost pool.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-03 Assign indirect costs to activity cost pools and select a cost driver for each pool.
Topic: Step 2: Form activity cost pools and assign indirect costs to each pool
38. Portland, Inc. has formed four activity cost pools: Product Design, Machining and Production,
Machine Setup, and Inspection. Gina Taylor, Production Manager at Portland, oversees
processes that are considered part of Machining and Production, Machine Setup, and
Inspection. Taylor's salary should be:
A. assigned to the activity she spends the most time on.
B. considered as a separate activity.
C. expensed in the period incurred.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-03 Assign indirect costs to activity cost pools and select a cost driver for each pool.
Topic: Step 2: Form activity cost pools and assign indirect costs to each pool
4-13
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McGraw-Hill Education.
39. Linden, Inc. uses a 5,000 square foot factory space that it rents for $2,500 a month for all its
manufacturing activities. Linden has decided to switch to an activity-based costing system, and
has identified its activities as follows: Preparation and Setup, Machining, Finishing, and Quality
Control. 500 square feet of the factory are used for machining, while 2,000 square feet (each)
are used for Preparation and Setup and Quality Control. Finishing uses 500 square feet. When
assigning indirect costs to each activity, how much factory rent should be assigned to the
Preparation and Setup cost pool?
A. $250
B. $500
D. $2,000
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-03 Assign indirect costs to activity cost pools and select a cost driver for each pool.
Topic: Step 2: Form activity cost pools and assign indirect costs to each pool
40. An activity cost driver is:
B. a measure of the volume of units produced or customers sold.
C. a number of activities combined into one cost pool.
D. the cost assigned to an activity.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-03 Assign indirect costs to activity cost pools and select a cost driver for each pool.
Topic: Step 3: Select a cost driver for each activity cost pool
4-14
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41. Which of the following is not true of activity cost drivers?
A. They are measures of the underlying activity that occurs in each activity cost pool.
B. They ideally have a cause and effect relationship with underlying activities.
D. They are used in Stage 2 cost allocations.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-03 Assign indirect costs to activity cost pools and select a cost driver for each pool.
Topic: Step 3: Select a cost driver for each activity cost pool
42. Using non-volume-based activity drivers allows activity-based costing to:
A. assign more indirect costs to products whose production volume is higher.
B. assign more direct costs to products whose production volume is higher.
D. assign more direct costs to products whose complexity is higher.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-03 Assign indirect costs to activity cost pools and select a cost driver for each pool.
Topic: Step 3: Select a cost driver for each activity cost pool
43. Which of the following is the correct formula to compute an activity rate?
B. Divide the total activity driver by the total activity cost
C. Multiply the total activity cost by the total activity driver
D. Add the total activity driver to the total activity cost
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-04 Assign indirect costs to products or services using activity rates.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
4-15
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44. Which of the following would be considered a non-volume-based cost driver?
A. Number of units produced
C. Number of machine hours
D. Direct materials cost
The number of batches is independent of the number of units in each batch, so it is not
necessarily related to volume.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 04-03 Assign indirect costs to activity cost pools and select a cost driver for each pool.
Topic: Step 3: Select a cost driver for each activity cost pool
45. Which of the following statements is correct about the differences between a volume-based
cost system and an ABC system?
B. The only difference is how the methods assign direct costs to products.
C. The methods assign both direct and indirect costs differently to products.
D. There is no difference in how the methods assign direct or indirect costs to products.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-06 Compare the results of a volume-based cost system to activity-based costing.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
46. The activity-rate method involves:
A. dividing the total activity driver by the total activity cost.
B. calculating the proportion of each activity driver used by each product.
D. multiplying the total activity cost by the total activity driver.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
4-16
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Learning Objective: 04-04 Assign indirect costs to products or services using activity rates.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
47. Lynwood, Inc. produces two different products (Product A and Product X) using two different
activities: Machining, which uses machine hours as an activity driver, and Inspection, which
uses number of batches as an activity driver. The activity rate for Machining is $125 per
machine hour, and the activity rate for Inspection is $500 per batch. The activity drivers are
used as follows:
Product A Product X Total
Machine hours 1,000 3,000 4,000
Number of batches 45 15 60
What is the amount of Machining cost assigned to Product X?
A. $22,500
B. $125,000
D. $500,000
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 04-04 Assign indirect costs to products or services using activity rates.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
4-17
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McGraw-Hill Education.
48. Lynwood, Inc. produces two different products (Product A and Product X) using two different
activities: Machining, which uses machine hours as an activity driver, and Inspection, which
uses number of batches as an activity driver. The activity rate for Machining is $125 per
machine hour, and the activity rate for Inspection is $500 per batch. The activity drivers are
used as follows:
Product A Product X Total
Machine hours 1,000 3,000 4,000
Number of batches 45 15 60
What is the amount of Machining cost assigned to Product A?
A. $7,500
C. $375,000
D. $500,000
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 04-04 Assign indirect costs to products or services using activity rates.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
49. Lynwood, Inc. produces two different products (Product A and Product X) using two different
activities: Machining, which uses machine hours as an activity driver, and Inspection, which
uses number of batches as an activity driver. The activity rate for Machining is $125 per
machine hour, and the activity rate for Inspection is $500 per batch. The activity drivers are
used as follows:
Product A Product X Total
Machine hours 1,000 3,000 4,000
Number of batches 45 15 60
What is the amount of Inspection cost assigned to Product A?
A. $7,500
C. $30,000
D. $125,000
AICPA: FN Measurement
Accessibility: Keyboard Navigation
4-18
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McGraw-Hill Education.
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 04-04 Assign indirect costs to products or services using activity rates.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
50. Lynwood, Inc. produces two different products (Product A and Product X) using two different
activities: Machining, which uses machine hours as an activity driver, and Inspection, which
uses number of batches as an activity driver. The activity rate for Machining is $125 per
machine hour, and the activity rate for Inspection is $500 per batch. The activity drivers are
used as follows:
Product A Product X Total
Machine hours 1,000 3,000 4,000
Number of batches 45 15 60
What is the amount of Inspection cost assigned to Product X?
B. $22,500
C. $30,000
D. $125,000
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 04-04 Assign indirect costs to products or services using activity rates.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
51. If the total activity cost were unknown, it could be calculated by:
A. Dividing the total activity driver by the activity rate.
C. Adding the total activity driver to the activity rate.
D. Subtracting the activity rate from the total activity driver.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 04-04 Assign indirect costs to products or services using activity rates.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
4-19
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52. Washington, Inc. produces two different products (Product C and Product 2) using two
different activities: Machining, which uses machine hours as an activity driver, and Inspection,
which uses number of batches as an activity driver. The cost of Machining is $750,000, while
the cost of Inspection is $90,000. The activity drivers are used as follows:
Product C Product 2 Total
Machine hours 1.000 3.000 4.000
Number of batches 45 15 60
What is the activity rate for Machining?
B. $166.67 per machine hour
C. $250.00 per machine hour
D. $5750.00 per machine hour
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 04-04 Assign indirect costs to products or services using activity rates.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
53. Washington, Inc. produces two different products (Product C and Product 2) using two
different activities: Machining, which uses machine hours as an activity driver, and Inspection,
which uses number of batches as an activity driver. The cost of Machining is $750,000, while
the cost of Inspection is $90,000. The activity drivers are used as follows:
Product C Product 2 Total
Machine hours 1,000 3,000 4,000
Number of batches 45 15 60
What is the activity rate for Inspection?
A. $45,000 per batch
C. $6,000 per batch
D. $2,000 per batch
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 04-04 Assign indirect costs to products or services using activity rates.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
4-20
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54. Culver, Inc. produces two different products (Product V3 and Product G8) using two different
activities: Machining, which uses machine hours as an activity driver, and Inspection, which
uses number of batches as an activity driver. The activity drivers are used as follows:
Product V3 Product G8 Total
Machine hours 1,000 3,000 4,000
Number of batches 45 15 60
The activity rate for Machining is $67.50 per machine hour. What is the total cost of
Machining?
A. $274,050
B. $67,500
C. $202,500
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 04-04 Assign indirect costs to products or services using activity rates.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
55. Culver, Inc. produces two different products (Product V3 and Product G8) using two different
activities: Machining, which uses machine hours as an activity driver, and Inspection, which
uses number of batches as an activity driver. The activity drivers are used as follows:
Product V3 Product G8 Total
Machine hours 1,000 3,000 4,000
Number of batches 45 15 60
The activity rate for Inspection is $750 per batch. What is the total cost of Inspection?
A. $11,250
B. $33,750
D. $75,000
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 04-04 Assign indirect costs to products or services using activity rates.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
4-21
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McGraw-Hill Education.
56. Using the activity-proportion method results in:
A. higher cost allocations than the activity rate method.
B. lower cost allocations than the activity rate method.
C. the same cost allocations as the activity rate method.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
57. Jefferson, Inc. produces two different products (Product 5 and Product Z) using two different
activities: Machining, which uses machine hours as an activity driver, and Inspection, which
uses number of batches as an activity driver. The cost of Machining is $500,000, while the cost
of Inspection is $30,000. The activity drivers are used as follows:
Product 5 Product Z Total
Machine hours 1,200 4,800 6,000
Number of batches 60 20 80
What proportion of Machining activity is used by Product 5?
B. 33%
C. 67%
D. 75%
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
4-22
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McGraw-Hill Education.
58. Jefferson, Inc. produces two different products (Product 5 and Product Z) using two different
activities: Machining, which uses machine hours as an activity driver, and Inspection, which
uses number of batches as an activity driver. The cost of Machining is $500,000, while the cost
of Inspection is $30,000. The activity drivers are used as follows:
Product 5 Product Z Total
Machine hours 1,200 4,800 6,000
Number of batches 60 20 80
What proportion of Machining activity is used by Product Z?
A. 25%
B. 33%
C. 67%
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
59. Jefferson, Inc. produces two different products (Product 5 and Product Z) using two different
activities: Machining, which uses machine hours as an activity driver, and Inspection, which
uses number of batches as an activity driver. The cost of Machining is $500,000, while the cost
of Inspection is $30,000. The activity drivers are used as follows:
Product 5 Product Z Total
Machine hours 1,200 4,800 6,000
Number of batches 60 20 80
What proportion of Inspection activity is used by Product 5?
A. 25%
B. 33%
C. 67%
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
4-23
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
60. Jefferson, Inc. produces two different products (Product 5 and Product Z) using two different
activities: Machining, which uses machine hours as an activity driver, and Inspection, which
uses number of batches as an activity driver. The cost of Machining is $500,000, while the cost
of Inspection is $30,000. The activity drivers are used as follows:
Product 5 Product Z Total
Machine hours 1,200 4,800 6,000
Number of batches 60 20 80
What proportion of Inspection activity is used by Product Z?
B. 33%
C. 67%
D. 75%
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
61. Jackson, Inc. produces two different products (Product 5 and Product Z) using two different
activities: Machining, which uses machine hours as an activity driver, and Inspection, which
uses number of batches as an activity driver. The cost of Machining is $500,000, while the cost
of Inspection is $30,000. Product 5 uses 20% of total machine hours and 75% of total batches.
What is the total Machining cost assigned to Product 5?
A. $7,500
B. $22,500
D. $375,000
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
4-24
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McGraw-Hill Education.
62. Jackson, Inc. produces two different products (Product 5 and Product Z) using two different
activities: Machining, which uses machine hours as an activity driver, and Inspection, which
uses number of batches as an activity driver. The cost of Machining is $500,000, while the cost
of Inspection is $30,000. Product 5 uses 20% of total machine hours and 75% of total batches.
What is the total Inspection cost assigned to Product 5?
A. $7,500
C. $125,000
D. $375,000
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
63. Jackson, Inc. produces two different products (Product 5 and Product Z) using two different
activities: Machining, which uses machine hours as an activity driver, and Inspection, which
uses number of batches as an activity driver. The cost of Machining is $500,000, while the cost
of Inspection is $30,000. Product 5 uses 20% of total machine hours and 75% of total batches.
What is the total Machining cost assigned to Product Z?
A. $7,500
B. $22,500
C. $375,000
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
4-25
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
64. Jackson, Inc. produces two different products (Product 5 and Product Z) using two different
activities: Machining, which uses machine hours as an activity driver, and Inspection, which
uses number of batches as an activity driver. The cost of Machining is $500,000, while the cost
of Inspection is $30,000. Product 5 uses 20% of total machine hours and 75% of total batches.
What is the total Inspection cost assigned to Product Z?
B. $22,500
C. $125,000
D. $375,000
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
65. Cottonwood, Inc. produces two different products (Standard and Luxury) using two different
activities: Machining, which uses machine hours as an activity driver, and Inspection, which
uses number of batches as an activity driver. The cost of Machining is $500,000, while the cost
of Inspection is $30,000. Standard uses 30% of total machine hours and 70% of total batches.
What is the total activity cost assigned to Standard?
A. $22,500
B. $125,000
D. $359,000
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
4-26
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McGraw-Hill Education.
66. Cottonwood, Inc. produces two different products (Standard and Luxury) using two different
activities: Machining, which uses machine hours as an activity driver, and Inspection, which
uses number of batches as an activity driver. The cost of Machining is $500,000, while the cost
of Inspection is $30,000. Standard uses 30% of total machine hours and 70% of total batches.
What is the total activity cost assigned to Luxury?
A. $7,500
B. $171,000
C. $375,000
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
67. Calverton, Inc. produces two different products (Standard and Luxury) using two different
activities: Machining, which uses machine hours as an activity driver, and Inspection, which
uses number of batches as an activity driver. The cost of Machining is $500,000, while the cost
of Inspection is $30,000. Standard is assigned $150,000 in Machining cost, and $22,500 in
Inspection cost. What proportion of Machining activity is used by Standard?
B. 33%
C. 67%
D. 75%
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
4-27
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McGraw-Hill Education.
68. Calverton, Inc. produces two different products (Standard and Luxury) using two different
activities: Machining, which uses machine hours as an activity driver, and Inspection, which
uses number of batches as an activity driver. The cost of Machining is $500,000, while the cost
of Inspection is $30,000. Standard is assigned $150,000 in Machining cost, and $22,500 in
Inspection cost. What proportion of Machining activity is used by Luxury?
A. 30%
B. 33%
C. 67%
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
69. Calverton, Inc. produces two different products (Standard and Luxury) using two different
activities: Machining, which uses machine hours as an activity driver, and Inspection, which
uses number of batches as an activity driver. The cost of Machining is $500,000, while the cost
of Inspection is $30,000. Standard is assigned $150,000 in Machining cost, and $22,500 in
Inspection cost. What proportion of Inspection activity is used by Standard?
A. 25%
B. 33%
C. 67%
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
4-28
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McGraw-Hill Education.
70. Calverton, Inc. produces two different products (Standard and Luxury) using two different
activities: Machining, which uses machine hours as an activity driver, and Inspection, which
uses number of batches as an activity driver. The cost of Machining is $500,000, while the cost
of Inspection is $30,000. Standard is assigned $150,000 in Machining cost, and $22,500 in
Inspection cost. What proportion of Inspection activity is used by Luxury?
B. 33%
C. 67%
D. 75%
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
71. Hadley, Inc. manufactures a product that uses $15 in direct materials and $5 in direct labor per
unit. Under the traditional costing system Hadley uses, manufacturing overhead applied to
each unit is $12. However, Hadley is considering switching to an ABC system. Under the ABC
system, the total activity cost would be $25. What is the total manufacturing cost per unit for
Hadley under the ABC system?
A. $20
B. $25
C. $32
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Topic: Assign indirect costs to products or services based on their activity demands
4-29
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McGraw-Hill Education.
72. Pima, Inc. manufactures calculators that sell for $40 each. Each calculator uses $15 in direct
materials and $5 in direct labor per unit. Pima has two activities: Machining, which is applied at
the rate of $4 per machine hour, and Finishing, which is applied at the rate of $20 per batch.
This month, Pima made 400 calculators, using 1,000 machine hours in 40 batches. What is
the total manufacturing cost for one calculator?
A. $20
B. $25
C. $27
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
73. Pima, Inc. manufactures calculators that sell for $40 each. Each calculator uses $15 in direct
materials and $5 in direct labor per unit. Pima has two activities: Machining, which is applied at
the rate of $4 per machine hour, and Finishing, which is applied at the rate of $20 per batch.
This month, Pima made 400 calculators, using 1,000 machine hours in 40 batches. What is
the gross profit for one calculator?
B. $20
C. $25
D. $35
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
4-30
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McGraw-Hill Education.
74. Sherman, Inc. manufactures chainsaws that sell for $58. Each chainsaw uses $10 in direct
materials and $3 in direct labor per unit. Sherman has two activities: Machining, which is
applied at the rate of $2 per machine hour, and Finishing, which is applied at the rate of $20
per batch. This month, Sherman made 200 chainsaws, using 1,000 machine hours in 40
batches. What is the total manufacturing cost for one chainsaw?
A. $13
B. $14
D. $30
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
75. Sherman, Inc. manufactures chainsaws that sell for $58. Each chainsaw uses $10 in direct
materials and $3 in direct labor per unit. Sherman has two activities: Machining, which is
applied at the rate of $2 per machine hour, and Finishing, which is applied at the rate of $20
per batch. This month, Sherman made 200 chainsaws, using 1,000 machine hours in 40
batches. What is the gross profit for one chainsaw?
A. $13
B. $27
D. $47
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
4-31
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McGraw-Hill Education.
76. Yuma, Inc. manufactures teddy bears and dolls. Currently, Yuma makes 2,000 teddy bears
each month. Each teddy bear uses $2.00 in direct materials and $0.50 in direct labor. Yuma
uses two activities in manufacturing the teddy bears: Sewing and Processing. The cost
associated with Sewing is $15,000 a month, allocated on the basis of direct labor hours. The
cost associated with Processing is $10,000 a month, allocated on the basis of batches. Teddy
bears use 1/2 of the direct labor hours, and 35% of total batches. What is the total
manufacturing cost for one teddy bear?
A. $2.50
B. $4.50
C. $7.00
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
77. Yallow, Inc. manufactures teddy bears and dolls. Currently, Yallow makes 2,000 teddy bears
each month. Each teddy bear uses $2.00 in direct materials and $0.50 in direct labor. Yallow
uses two activities in manufacturing the teddy bears: Sewing and Processing. The cost
associated with Sewing is $15,000 a month, allocated on the basis of direct labor hours. The
cost associated with Processing is $10,000 a month, allocated on the basis of batches. The
activity drivers are used as follows:
Teddy Bears Dolls
Direct labor hours 200 200
Batches 35 65
What is the total manufacturing cost for one teddy bear?
A. $2.50
B. $4.50
C. $7.00
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-04 Assign indirect costs to products or services using activity rates.
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
4-32
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McGraw-Hill Education.
78. Parsons and Sons Woodworks manufactures baseball bats and wooden tops. Currently,
Parsons and Sons makes 5,000 baseball bats each month. Each bat uses $1.00 in direct
materials and $0.50 in direct labor. Parsons and Sons uses two activities in manufacturing the
baseball bats: Cutting and Finishing. The cost associated with Cutting is $7,500 a month,
allocated on the basis of direct labor hours. The cost associated with Finishing is $12,000 a
month, allocated on the basis of batches. Baseball bats use 1/3 of the direct labor hours, and
40% of total batches. What is the total manufacturing cost for one baseball bat?
A. $1.46
B. $1.50
D. $3.94
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-04 Assign indirect costs to products or services using activity rates.
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
79. Parker Woodworks manufactures baseball bats and wooden tops. Currently, Parker makes
5,000 baseball bats each month. Each bat uses $1.00 in direct materials and $0.50 in direct
labor. Parker uses two activities in manufacturing the baseball bats: Cutting and Finishing. The
cost associated with Cutting is $7,500 a month, allocated on the basis of direct labor hours.
The cost associated with Finishing is $12,000 a month, allocated on the basis of batches. The
activity drivers are used as follows:
Baseball bats Wooden tops
Direct labor hours 100 200
Batches 4 6
What is the total manufacturing cost for one baseball bat?
A. $1.46
B. $1.50
D. $3.94
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
4-33
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McGraw-Hill Education.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
80. Volume-based cost systems tend to:
A. Under-cost low-volume products and under-cost high-volume products.
C. Over-cost low-volume products and under-cost high-volume products.
D. Over-cost low-volume products and over-cost high-volume products.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 04-06 Compare the results of a volume-based cost system to activity-based costing.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
81. When a traditional, volume-based costing system is used, which of the following products is
most likely to suffer from cost distortion?
A. A high-volume, medium-complexity product
B. A low-volume, low-complexity product
C. A low-volume, medium-complexity product
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 04-06 Compare the results of a volume-based cost system to activity-based costing.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
4-34
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McGraw-Hill Education.
82. Which of the following is most likely to be true of the manufacturing overhead costs assigned
to a product with relatively low volume and high complexity?
volume-based system.
B. A volume-based system will assign more manufacturing overhead costs to the product than
an ABC system.
C. An ABC system will assign the same manufacturing overhead costs to the product as a
volume-based system.
D. An ABC system will assign manufacturing overhead costs to the product, while a volume-
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 04-06 Compare the results of a volume-based cost system to activity-based costing.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
83. When is a volume-based cost system appropriate for a service company?
A. A volume-based cost system is always appropriate for a service company.
B. A volume-based cost system is never appropriate for a service company.
C. A volume-based cost system is appropriate for a service company when certain customers
require more attention and a higher level of service than other customers.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-07 Apply activity-based costing to a service industry.
Topic: Activity-based costing in service industries
4-35
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McGraw-Hill Education.
84. Garfield Personal Training Services is owned by Gina Garfield. Gina provides personal training
and coaching to individuals or small groups using the local fitness facility and pool. Gina rents
the group training room at the local fitness facility or the pool for scheduled classes. For one-
on-one training, she meets clients at the fitness facility where she is a member. Gina is
currently learning Zumba and plans to offer a Zumba class in the group training room on
Wednesday mornings starting next month. The development of Zumba is considered a
___________ activity for Garfield.
A. facility-level
C. group-level
D. customer-level
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-07 Apply activity-based costing to a service industry.
Topic: Activity-based costing in service industries
85. Garfield Personal Training Services is owned by Gina Garfield. Gina provides personal training
and coaching to individuals or small groups using the local fitness facility and pool. Gina rents
the group training room at the local fitness facility or the pool for scheduled classes. For one-
on-one training, she meets clients at the fitness facility where she is a member. Gina is
currently learning Zumba and plans to offer a Zumba class in the group training room on
Wednesday mornings starting next month. The first scheduled Zumba class is considered a
___________ activity for Garfield.
A. facility-level
B. service-level
D. customer-level
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-07 Apply activity-based costing to a service industry.
Topic: Activity-based costing in service industries
4-36
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McGraw-Hill Education.
86. GG's Personal Training Services is owned by Gina Garfield. Gina provides personal training
and coaching to individuals or small groups using the local fitness facility and pool. Gina rents
the group training room at the local fitness facility or the pool for scheduled classes. For one-
on-one training, she meets clients at the fitness facility where she is a member. Gina is
currently learning Zumba and plans to offer a Zumba class in the group training room on
Wednesday mornings starting next month. To advertise this class and all her other services,
Gina developed a company Facebook page. The development of the Facebook page is
considered a ___________ activity for GG's.
B. service-level
C. group-level
D. customer-level
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-07 Apply activity-based costing to a service industry.
Topic: Activity-based costing in service industries
87. Under activity based management, cost management is achieved by:
B. reducing production volume.
C. eliminating value-added activities.
D. assigning indirect costs to products based on their activities.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-08 Describe how managers use activity-based management and other cost management methods.
Topic: Activity-based management (ABM)
4-37
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McGraw-Hill Education.
88. How is activity-based management related to activity-based costing?
A. Activity based management is another term for activity based costing.
B. Activity based management is used when activity based costing is not feasible.
activity based costing data.
D. Activity based management is not related to activity based costing.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-08 Describe how managers use activity-based management and other cost management methods.
Topic: Activity-based management (ABM)
89. Which of the following statements is not correct about how an ABC system might be adapted
to provide managers with sustainability-related information that would affect the triple bottom
line?
A. The system could capture and report information about workplace safety, then allocate it to
activities, then to various products produced.
B. The system could capture and report information about greenhouse gas emissions, then
allocate it to activities, then services provided.
of the triple bottom line.
D. The system can capture and report information about employee retention, particularly for
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-08 Describe how managers use activity-based management and other cost management methods.
Topic: ABM and sustainability
4-38
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McGraw-Hill Education.
90. In target costing, the target cost should be determined:
B. after initial manufacturing prototypes are created.
C. after customers provide feedback about critical features.
D. before goods are shipped to customers, but after manufacturing begins.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-08 Describe how managers use activity-based management and other cost management methods.
Topic: Target costing and life cycle cost management
91. Managers who use activity-based management should begin by asking all of the following
questions except:
A. "What activities does the company perform?"
B. "How much does it cost to perform each activity?"
D. "Does the activity add value to the customer?"
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-08 Describe how managers use activity-based management and other cost management methods.
Topic: Activity-based management
4-39
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McGraw-Hill Education.
92. Which of the following should a manager using activity-based management attempt to reduce
or eliminate?
A. Customer service in the warranty department
B. Sales team to respond to customer needs
D. Professional development workshop for managers to improve customer service
Managers using activity-based management should attempt to reduce or eliminate non-value-
added activities (those that do not add value to the customer). Administrative tasks (like
processing liability insurance payments) do not add value to a customer, whereas customer
service, sales initiatives, and professional development for managers who engage with
customers do add value to the customer experience.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-08 Describe how managers use activity-based management and other cost management methods.
Topic: Activity-based management
93. Firms that use JIT often rely on:
B. More suppliers that must adhere to very strict quality standards.
C. Fewer suppliers that have flexible quality standards.
D. More suppliers that have flexible quality standards.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-08 Describe how managers use activity-based management and other cost management methods.
Topic: Just-in-time (JIT)
4-40
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94. One side benefit of JIT is that:
A. the accounting system is more complicated.
B. the company maintains more connections with suppliers since it uses more of them.
C. the accounting system is simplified.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-08 Describe how managers use activity-based management and other cost management methods.
Topic: Just-in-time (JIT)
95. The approach to cost management that calls for setting cost reduction goals across numerous
stages such as product introduction, growth, maturity, and decline is:
B. Total quality management.
C. Target costing.
D. Just-in-time inventory.
Life cycle cost management calls for setting cost reduction goals across numerous stages
such as product introduction, growth, maturity, and decline.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-08 Describe how managers use activity-based management and other cost management methods.
Topic: Target costing and life cycle cost management
96. Life cycle cost management takes into consideration the fact that costs and revenues:
A. are higher in the early stages of the product life cycle than in later stages.
C. slow down in the maturity stage of the product life cycle.
D. are higher when products use more activities.
Costs are often higher in early stages, while most of the revenues are earned in the growth
and maturity stages of the life cycle.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
4-41
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McGraw-Hill Education.
Difficulty: 2 Medium
Learning Objective: 04-08 Describe how managers use activity-based management and other cost management methods.
Topic: Target costing and life cycle cost management
97. Which of the following is not a type of quality cost?
B. Prevention costs
C. Internal failure costs
D. Appraisal or inspection costs
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-08 Describe how managers use activity-based management and other cost management methods.
Topic: Total quality management (TQM)
98. Prevention costs are costs that:
B. are incurred to identify defective products before products are shipped to the customer.
C. result from defects that are caught before the product is shipped to the customer.
D. occur when a defective product makes its way into the hands of the customer.
Prevention costs are incurred to prevent quality problems from occurring in the first place.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-08 Describe how managers use activity-based management and other cost management methods.
Topic: Total quality management (TQM)
99. Appraisal or inspection costs are costs that:
A. are incurred to prevent quality problems from occurring in the first place.
C. result from defects that are caught before the product is shipped to the customer.
D. occur when a defective product makes its way into the hands of the customer.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
4-42
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-07 Apply activity-based costing to a service industry.
Topic: Total quality management (TQM)
100. Internal failure costs are costs that:
A. are incurred to prevent quality problems from occurring in the first place.
B. are incurred to identify defective products before products are shipped to the customer.
D. occur when a defective product makes its way into the hands of the customer.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-08 Describe how managers use activity-based management and other cost management methods.
Topic: Total quality management (TQM)
101. External failure costs are costs that:
A. are incurred to prevent quality problems from occurring in the first place.
B. are incurred to identify defective products before products are shipped to the customer.
C. result from defects that are caught before the product is shipped to the customer.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-08 Describe how managers use activity-based management and other cost management methods.
Topic: Total quality management (TQM)
102. Which type of quality cost would a firm most want to eliminate or reduce as much as
possible?
A. Prevention costs
B. Appraisal or inspection costs
C. Internal failure costs
External failure costs should be considered a last resort and eliminated to the extent possible.
4-43
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McGraw-Hill Education.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-08 Describe how managers use activity-based management and other cost management methods.
Topic: Total quality management (TQM)
103. The cost of scrap and rework is an example of what type of quality cost?
A. Prevention costs
B. Appraisal or inspection costs
D. External failure costs
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 04-08 Describe how managers use activity-based management and other cost management methods.
Topic: Total quality management (TQM)
104. The cost of quality training is an example of what type of quality cost?
B. Appraisal or inspection costs
C. Internal failure costs
D. External failure costs
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 04-08 Describe how managers use activity-based management and other cost management methods.
Topic: Total quality management (TQM)
4-44
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McGraw-Hill Education.
105. External failure costs occur _________ a defective product makes its way to the customer,
while internal failure costs occur ______ a defective product makes its way to the customer.
A. before, before
B. before, after
D. after, after
External failure costs occur after a defective product makes its way into the hands of the
customer, while internal failure costs occur before.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-08 Describe how managers use activity-based management and other cost management methods.
Topic: Total quality management (TQM)
106. Total quality management aims to improve quality by doing all of the following except:
A. reducing and eliminating errors.
B. streamlining activities.
C. continuously improving the production process.
Total quality management aims to improve quality by reducing and eliminating errors,
streamlining activities, and continuously improving the production process. Although reducing
non-value-added costs may be a focus of activity-based management, managers know that
eliminating non-value-added costs completely isn't feasible.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-08 Describe how managers use activity-based management and other cost management methods.
Topic: Total quality management (TQM)
4-45
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McGraw-Hill Education.
107. Amy Andrews is a CPA who works as a managerial accounting consultant for a variety of firms.
To determine her hourly rate, Amy uses a cost-plus pricing system, which she updates each
year. The hourly cost of her assistant (including taxes and benefits) is $18, the hourly cost of
her office space is $4, the hourly cost of her marketing and other overhead materials is $6,
and Amy's own hourly salary (again, including taxes and benefits) is $62. Amy adds a 20%
premium to her costs. What is her hourly rate using a cost-plus pricing strategy?
A. $90
B. $96
D. $110
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-08 Describe how managers use activity-based management and other cost management methods.
Topic: Target costing and life cycle cost management
108. When target costing is used, the target cost is determined by:
stakeholders.
B. adding the cost of direct materials, direct labor, and activity costs of a product.
C. subtracting all nonvalue-added costs from total manufacturing costs of a product.
D. adding the manufacturing and nonmanufacturing costs of the product.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-08 Describe how managers use activity-based management and other cost management methods.
Topic: Target costing and life cycle cost management
4-46
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McGraw-Hill Education.
109. Which of the following involves analyzing the market and estimating what consumers will be
willing to pay for a product with specific features?
A. Just-in-time inventory
B. Target costing
C. Total quality management
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-08 Describe how managers use activity-based management and other cost management methods.
Topic: Target costing and life cycle cost management
110. Sonora, Inc. is launching a new product that it estimates will sell for $25 per unit. Annual
demand is estimated to be 70,000 units. Sonora estimates that using its current manufacturing
technology, it can manufacture the units for $23 per unit, but if it purchases a new machine,
the units can be manufactured for $22 per unit. Sonora has a target profit of 20% return on
sales. Under target costing, what is the target cost for the new product?
B. $22
C. $23
D. $25
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-08 Describe how managers use activity-based management and other cost management methods.
Topic: Target costing and life cycle cost management
111. Which of the following sets just-in-time systems apart from traditional manufacturing systems?
A. Cost of goods sold includes all manufacturing cost.
C. Cost of goods sold is not calculated.
4-47
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-08 Describe how managers use activity-based management and other cost management methods.
Topic: Just-in-time (JIT)
Essay Questions
4-48
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McGraw-Hill Education.
112. Magnolia Company has identified seven activities as part of its manufacturing process and
chosen corresponding activity drivers for each activity. The chart below lists the total cost of
each activity, the amount of activity driver used for each of Magnolia's two products, the
activity rate, and the activity cost assigned to each product. Fill in the blanks below:
Driver
Usage
Pr
od.
1
Pr
od.
2
Design $60,
000
Desig
n time
80
0
ho
urs
1,2
00
ho
urs
a. b. c.
Prepar
ation
$18,
000
Labor
hours
3,0
00
ho
urs
d. e. $9,0
00 f.
Machin
ing
$90,
000
Machi
ne
hours
g. h. $18.00/
hour
$27,
000 i.
Finishi
ng j. Batch
es
20
0
30
0
$50/bat
ch k. l.
Inspect
ion m. Units n. o. $6/unit $3,0
00
$6,0
00
Packag
ing p. Order
sq. 50 $300/or
der
$13,
500 r.
Shippin
g
$17,
000
Packa
ges 70 s. t. u. $3,0
00
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-04 Assign indirect costs to products or services using activity rates.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
4-50
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McGraw-Hill Education.
4-51
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
113. Elmwood Company has identified seven activities as part of its manufacturing process and
chosen corresponding activity drivers for each activity. The chart below lists the total cost of
each activity, the amount of activity driver used for each of Elmwood's two products, the
activity rate, and the activity cost assigned to each product. Fill in the blanks below:
Driver
Usage
Pr
od.
1
Pr
od.
2
Design $20,
000
Desig
n time
1,6
00
ho
urs
2,4
00
ho
urs
a. b. c.
Prepar
ation
$12,
000
Labor
hours
3,0
00
ho
urs
d. e. $6,0
00 f.
Machini
ng
$45,
000
Machi
ne
hours
g. h. $9.00/
hour
$27,
000 i.
Finishin
gj. Batch
es
10
0
15
0
$100/b
atch k. l.
Inspecti
on m. Units n. o. $4/unit $8,0
00
$6,0
00
Packag
ing p. Order
sq. 50 $90/or
der
$13,
500 r.
Shippin
g
$5,0
00
Packa
ges 70 s. t. u. $1,5
00
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-04 Assign indirect costs to products or services using activity rates.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
4-53
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
114. Magenta Company has identified seven activities as part of its manufacturing process and
chosen corresponding activity drivers for each activity. The chart below lists the total cost of
each activity, the proportion of activity driver used for each of Magenta's two products, and the
activity cost assigned to each product. Fill in the blanks below:
Activity
Cost
Activit
y
Driver
Proporti
on used
by
Activ
ity
Cost:
Prod.
1
Activ
ity
Cost:
Prod.
2
Pro
d. 1
Pro
d. 2
Design $60,0
00
Design
time 40% 60% a. b.
Preparati
on
$18,0
00
Labor
hours 50% c. $9,00
0d.
Machinin
g
$90,0
00
Machin
e hours e. f. $27,0
00 g.
Finishing h. Batche
s40% i. $10,0
00 j.
Inspectio
nk. Units l. m. $3,00
0
$6,00
0
Packagin
gn. Orders o. 20% $13,5
00 p.
Shipping $17,0
00
Packag
es 70% q. r. $5,10
0
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
4-54
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
115. Cricket Company has identified seven activities as part of its manufacturing process and
chosen corresponding activity drivers for each activity. The chart below lists the total cost of
each activity, the proportion of activity driver used for each of Cricket's two products, and the
activity cost assigned to each product. Fill in the blanks below:
Activity
Cost
Activit
y
Driver
Proporti
on used
by
Activ
ity
Cost:
Prod.
1
Activ
ity
Cost:
Prod.
2
Pro
d. 1
Pro
d. 2
Design $20,0
00
Design
time 40% 60% a. b.
Preparati
on
$12,0
00
Labor
hours 30% c. $3,60
0d.
Machinin
g
$45,0
00
Machin
e hours e. f. $27,0
00 g.
Finishing h. Batche
s40% i. $10,0
00 j.
Inspectio
nk. Units l. m. $9,00
0
$6,00
0
Packagin
gn. Orders o. 25% $13,5
00 p.
Shipping $5,00
0
Packag
es 70% q. r. $1,50
0
4-55
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
116. Chipman Inc. produces water pumps. Overhead costs have been identified as follows:
Activity Pool Cost Activity Driver Activity
Material
handling $65,000 Number of
moves 400
Material
maintenance $95,000 Number of
machine hours 38,000
Setups $75,000 Number of
production runs 60
Chipman makes 3 models of pumps with the following details:
Economy Standard Premium
Units produced 10,000 20,000 3,500
Number of moves 100 125 175
Machine hours 9,000 22,000 7,000
Production runs 5 20 35
Required:
a. Calculate the activity rate for each activity.
b. Determine the amount of indirect costs assigned to each of the products.
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-04 Assign indirect costs to products or services using activity rates.
4-56
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McGraw-Hill Education.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
117. Pecan Inc. produces water valves. Overhead costs have been identified as follows:
Activity Pool Cost Activity Driver Activity
Quality control $55,500 Number of
inspections 185
Material
maintenance $87,400 Number of
machine hours 19,000
Setups $75,000 Number of
production runs 60
Pecan makes 3 models of valves with the following details:
Economy Standard Premium
Units produced 20,000 40,000 7,000
Number of
inspections 5 40 140
Machine hours 4,500 12,000 2,500
Production runs 5 20 35
Required:
a. Calculate the activity rate for each activity.
b. Determine the amount of indirect costs assigned to each of the products.
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-04 Assign indirect costs to products or services using activity rates.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
4-57
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McGraw-Hill Education.
118. Walnut Systems produces two different products, Product A, which sells for $120 per unit, and
Product B, which sells for $180 per unit, using three different activities: Design, which uses
Engineering Hours as an activity driver; Machining, which uses machine hours as an activity
driver; and Inspection, which uses number of batches as an activity driver. The cost of each
activity and usage of the activity drivers are as follows:
Cost Usage by
Product A
Usage by
Product B
Design
(Engineering
Hours)
$150,00
0 200 300
Machining
(Machine
Hours)
$500,00
0 1,000 3,000
Inspection
(Batches) $30,000 45 15
Walnut manufactures 10,000 units of Product A and 7,500 units of Product B per month. Each
unit of Product A uses $50 of direct materials and $20 of direct labor, while each unit of
Product B uses $75 of direct materials and $35 of direct labor.
Required:
a. Calculate the activity rate for Design.
b. Calculate the activity rate for Machining.
c. Calculate the activity rate for Inspection.
d. Determine the indirect costs assigned to Product A.
e. Determine the indirect costs assigned to Product B.
f. Determine the manufacturing cost per unit for Product A.
g. Determine the manufacturing cost per unit for Product B.
h. Determine the gross profit per unit for Product A.
i. Determine the gross profit per unit for Product B.
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
4-58
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Learning Objective: 04-04 Assign indirect costs to products or services using activity rates.
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
119. Atlanta Systems produces two different products, Product A, which sells for $250 per unit, and
Product B, which sells for $400 per unit, using three different activities: Design, which uses
Engineering Hours as an activity driver; Machining, which uses machine hours as an activity
driver; and Inspection, which uses number of batches as an activity driver. The cost of each
activity and usage of the activity drivers are as follows:
Cost Usage by
Product A
Usage by
Product B
Design
(Engineering
Hours) $150,000 100 150
Machining
(Machine
Hours)
$1,000,00
0 2,000 3,000
Inspection
(Batches) $80,000 50 30
Atlanta manufactures 10,000 units of Product A and 7,500 units of Product B per month. Each
unit of Product A uses $100 of direct materials and $45 of direct labor, while each unit of
Product B uses $140 of direct materials and $75 of direct labor.
Required:
a. Calculate the activity rate for Design.
b. Calculate the activity rate for Machining.
c. Calculate the activity rate for Inspection.
d. Determine the indirect costs assigned to Product A.
e. Determine the indirect costs assigned to Product B.
f. Determine the manufacturing cost per unit for Product A.
g. Determine the manufacturing cost per unit for Product B.
h. Determine the gross profit per unit for Product A.
i. Determine the gross profit per unit for Product B.
4-59
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-04 Assign indirect costs to products or services using activity rates.
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
4-60
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McGraw-Hill Education.
120. Fremont Systems produces two different products, Product A, which sells for $1,000 per unit,
and Product B, which sells for $2,000 per unit, using three different activities: Design, which
uses Engineering Hours as an activity driver; Machining, which uses machine hours as an
activity driver; and Inspection, which uses number of batches as an activity driver. The cost of
each activity and usage of the activity drivers are as follows:
Cost Usage by
Product A
Usage by
Product B
Design
(Engineering
Hours)
$1,500,00
0 400 600
Machining
(Machine
Hours)
$5,000,00
0 2,000 6,000
Inspection
(Batches) $300,000 90 30
Fremont manufactures 10,000 units of Product A and 7,500 units of Product B per month.
Each unit of Product A uses $500 of direct materials and $200 of direct labor, while each unit
of Product B uses $750 of direct materials and $350 of direct labor.
Required:
a. Calculate the activity rate for Design.
b. Calculate the activity rate for Machining.
c. Calculate the activity rate for Inspection.
d. Determine the indirect costs assigned to Product A.
e. Determine the indirect costs assigned to Product B.
f. Determine the manufacturing cost per unit for Product A.
g. Determine the manufacturing cost per unit for Product B.
h. Determine the gross profit per unit for Product A.
i. Determine the gross profit per unit for Product B.
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-04 Assign indirect costs to products or services using activity rates.
4-61
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
121. Walnut Systems produces two different products, Product A, which sells for $120 per unit, and
Product B, which sells for $180 per unit, using three different activities: Design, which uses
Engineering Hours as an activity driver; Machining, which uses machine hours as an activity
driver; and Inspection, which uses number of batches as an activity driver. The cost of each
activity and usage of the activity drivers are as follows:
Cost Usage by
Product A
Usage by
Product B
Design
(Engineering
Hours)
$150,00
0 200 300
Machining
(Machine
Hours)
$500,00
0 1,000 3,000
Inspection
(Batches) $30,000 45 15
Walnut manufactures 10,000 units of Product A and 7,500 units of Product B per month. Each
unit of Product A uses $50 of direct materials and $20 of direct labor, while each unit of
Product B uses $75 of direct materials and $35 of direct labor.
Required:
a. Calculate the Design activity proportions for Products A and B.
b. Calculate the Machining activity proportions for Products A and B.
c. Calculate the Inspection activity proportions for Products A and B.
d. Determine the indirect costs assigned to Product A.
e. Determine the indirect costs assigned to Product B.
f. Determine the manufacturing cost per unit for Product A.
g. Determine the manufacturing cost per unit for Product B.
h. Determine the gross profit per unit for Product A.
i. Determine the gross profit per unit for Product B.
AICPA: FN Measurement
4-62
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
4-63
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
122. Atlanta Systems produces two different products, Product A, which sells for $250 per unit, and
Product B, which sells for $400 per unit, using three different activities: Design, which uses
Engineering Hours as an activity driver; Machining, which uses machine hours as an activity
driver; and Inspection, which uses number of batches as an activity driver. The cost of each
activity and usage of the activity drivers are as follows:
Cost Usage by
Product A
Usage by
Product B
Design
(Engineering
Hours) $150,000 100 150
Machining
(Machine
Hours)
$1,000,00
0 2,000 3,000
Inspection
(Batches) $80,000 50 30
Atlanta manufactures 10,000 units of Product A and 7,500 units of Product B per month. Each
unit of Product A uses $100 of direct materials and $45 of direct labor, while each unit of
Product B uses $140 of direct materials and $75 of direct labor.
Required:
a. Calculate the Design activity proportions for Products A and B.
b. Calculate the Machining activity proportions for Products A and B.
c. Calculate the Inspection activity proportions for Products A and B.
d. Determine the indirect costs assigned to Product A.
e. Determine the indirect costs assigned to Product B.
f. Determine the manufacturing cost per unit for Product A.
g. Determine the manufacturing cost per unit for Product B.
h. Determine the gross profit per unit for Product A.
i. Determine the gross profit per unit for Product B.
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
4-64
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McGraw-Hill Education.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
123. Fremont Systems produces two different products, Product A, which sells for $1,000 per unit,
and Product B, which sells for $2,000 per unit, using three different activities: Design, which
uses Engineering Hours as an activity driver; Machining, which uses machine hours as an
activity driver; and Inspection, which uses number of batches as an activity driver. The cost of
each activity and usage of the activity drivers are as follows:
Cost Usage by
Product A
Usage by
Product B
Design
(Engineering
Hours)
$1,500,00
0 400 600
Machining
(Machine
Hours)
$5,000,00
0 2,000 6,000
Inspection
(Batches) $300,000 90 30
Fremont manufactures 10,000 units of Product A and 7,500 units of Product B per month.
Each unit of Product A uses $500 of direct materials and $200 of direct labor, while each unit
of Product B uses $750 of direct materials and $350 of direct labor.
Required:
a. Calculate the Design activity proportions for Products A and B.
b. Calculate the Machining activity proportions for Products A and B.
c. Calculate the Inspection activity proportions for Products A and B.
d. Determine the indirect costs assigned to Product A.
e. Determine the indirect costs assigned to Product B.
f. Determine the manufacturing cost per unit for Product A.
g. Determine the manufacturing cost per unit for Product B.
h. Determine the gross profit per unit for Product A.
i. Determine the gross profit per unit for Product B.
AICPA: FN Measurement
Blooms: Apply
4-65
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Difficulty: 3 Hard
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
124. Carter, Inc. produces two different products, Product A and Product B. Carter uses a traditional
volume-based costing system in which direct labor hours are the allocation base. Carter is
considering switching to an ABC system by splitting its manufacturing overhead cost of
$1,000,000 across three activities: Design, Production, and Inspection. Under the traditional
volume-based costing system, the predetermined overhead rate is $2.50/direct labor hour.
Under the ABC system, the rate for each activity and usage of the activity drivers are as
follows:
Activity
Rate
Usage by
Product A
Usage by
Product B
Design
(Engineering
Hours) $600/hour 200 300
Production
(Direct Labor
Hours) $1.25 100,000 300,000
Inspection
(Batches) $500 300 100
Required:
a. Calculate the indirect manufacturing costs assigned to Product A under the traditional
costing system.
b. Calculate the indirect manufacturing costs assigned to Product B under the traditional
costing system
c. Calculate the indirect manufacturing costs assigned to Product A under the ABC system.
d. Calculate the indirect manufacturing costs assigned to Product B under the ABC system.
e. Which product is under-costed and which is over-costed under the volume-based cost
system compared to ABC?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-01 Assign indirect costs to products or services using a single volume-based cost driver.
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Learning Objective: 04-06 Compare the results of a volume-based cost system to activity-based costing.
Topic: Step 3: Assign indirect cost to individual products or services
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
4-66
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125. Harwell, Inc. produces two different products, Product A and Product B. Harwell uses a
traditional volume-based costing system in which direct labor hours are the allocation base.
Harwell is considering switching to an ABC system by splitting its manufacturing overhead cost
of $400,000 across three activities: Setup, Production, and Finishing. Under the traditional
volume-based costing system, the predetermined overhead rate is $4.00/direct labor hour.
Under the ABC system, the rate for each activity and usage of the activity drivers are as
follows:
Activity
Rate
Usage by
Product A
Usage by
Product B
Setup
(Batches) $100/hour 150 350
Production
(Direct
Labor Hours) $3.00 40,000 60,000
Finishing
(Machine
Hours) $500 20 80
Required:
a. Calculate the indirect manufacturing costs assigned to Product A under the traditional
costing system.
b. Calculate the indirect manufacturing costs assigned to Product B under the traditional
costing system
c. Calculate the indirect manufacturing costs assigned to Product A under the ABC system.
d. Calculate the indirect manufacturing costs assigned to Product B under the ABC system.
e. Which product is under-costed and which is over-costed under the volume-based cost
system compared to ABC?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-01 Assign indirect costs to products or services using a single volume-based cost driver.
Learning Objective: 04-04 Assign indirect costs to products or services using activity rates.
Learning Objective: 04-06 Compare the results of a volume-based cost system to activity-based costing.
Topic: Step 3: Assign indirect cost to individual products or services
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
4-67
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126. Hayden, Inc. produces two different products, Product A and Product B. Hayden uses a
traditional volume-based costing system in which direct labor hours are the allocation base.
Hayden is considering switching to an ABC system by splitting its manufacturing overhead
cost of $1,600,000 across three activities: Engineering, Manufacturing, and Inspection. Under
the traditional volume-based costing system, the predetermined overhead rate is $2.00/direct
labor hour. Under the ABC system, the rate for each activity and usage of the activity drivers
are as follows:
Activity
Rate
Usage by
Product A
Usage by
Product B
Engineering
(Engineering
Hours) $60/hour 2,000 8,000
Manufacturing
(Direct Labor
Hours) $1.00 400,000 400,000
Inspection
(Batches) $40 4,000 1,000
Required:
a. Calculate the indirect manufacturing costs assigned to Product A under the traditional
costing system.
b. Calculate the indirect manufacturing costs assigned to Product B under the traditional
costing system
c. Calculate the indirect manufacturing costs assigned to Product A under the ABC system.
d. Calculate the indirect manufacturing costs assigned to Product B under the ABC system.
e. Which product is under-costed and which is over-costed under the volume-based cost
system compared to ABC?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-01 Assign indirect costs to products or services using a single volume-based cost driver.
Learning Objective: 04-04 Assign indirect costs to products or services using activity rates.
Learning Objective: 04-06 Compare the results of a volume-based cost system to activity-based costing.
Topic: Step 3: Assign indirect cost to individual products or services
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
4-68
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127. Carter, Inc. uses a traditional volume-based costing system in which direct labor hours are the
allocation base. Carter produces two different products: Product A, which uses 100,000 direct
labor hours, and Product B, which uses 300,000 direct labor hours. Carter is considering
switching to an ABC system by splitting its manufacturing overhead cost of $1,000,000 across
three activities: Design, Production, and Inspection. Under the traditional volume-based
costing system, the predetermined overhead rate is $2.50/direct labor hour. Under the ABC
system, the cost of each activity and proportion of the activity drivers used by each product are
as follows:
Total
Cost
Proportion
used by
Product A
Proportion
used by
Product B
Design
(Engineering
Hours)
$300,00
0 40% 60%
Production
(Direct
Labor Hours)
$500,00
0 25% 75%
Inspection
(Batches) $200,00
0 75% 25%
Required:
a. Calculate the indirect manufacturing costs assigned to Product A under the traditional
costing system.
b. Calculate the indirect manufacturing costs assigned to Product B under the traditional
costing system
c. Calculate the indirect manufacturing costs assigned to Product A under the ABC system.
d. Calculate the indirect manufacturing costs assigned to Product B under the ABC system.
e. Which product is under-costed and which is over-costed under the volume-based cost
system compared to ABC?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-01 Assign indirect costs to products or services using a single volume-based cost driver.
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Learning Objective: 04-06 Compare the results of a volume-based cost system to activity-based costing.
Topic: Step 3: Assign indirect cost to individual products or services
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
4-69
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McGraw-Hill Education.
128. Harwell, Inc. uses a traditional volume-based costing system in which direct labor hours are
the allocation base. Harwell produces two different products: Product A, which uses 40,000
direct labor hours, and Product B, which uses 60,000 direct labor hours. Harwell is considering
switching to an ABC system by splitting its manufacturing overhead cost of $400,000 across
three activities: Setup, Production, and Finishing. Under the traditional volume-based costing
system, the predetermined overhead rate is $4.00/direct labor hour. Under the ABC system,
the cost of each activity and proportion of the activity drivers used by each product are as
follows:
Total
Cost
Proportion
used by
Product A
Proportion
used by
Product B
Design
(Engineering
Hours)
$50,000 30% 70%
Production
(Direct
Labor Hours)
$300,00
0 40% 60%
Inspection
(Batches) $50,000 20% 80%
Required:
a. Calculate the indirect manufacturing costs assigned to Product A under the traditional
costing system.
b. Calculate the indirect manufacturing costs assigned to Product B under the traditional
costing system
c. Calculate the indirect manufacturing costs assigned to Product A under the ABC system.
d. Calculate the indirect manufacturing costs assigned to Product B under the ABC system.
e. Which product is under-costed and which is over-costed under the volume-based cost
system compared to ABC?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-01 Assign indirect costs to products or services using a single volume-based cost driver.
Learning Objective: 04-05 Assign indirect costs to products or services using activity proportions.
Learning Objective: 04-06 Compare the results of a volume-based cost system to activity-based costing.
Topic: Step 3: Assign indirect cost to individual products or services
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
4-70
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McGraw-Hill Education.
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McGraw-Hill Education.
4-72
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McGraw-Hill Education.
129. Carter, Inc. produces two different products, Product A and Product B. Carter uses a traditional
volume-based costing system in which direct labor hours are the allocation base. Carter is
considering switching to an ABC system by splitting its manufacturing overhead cost across
three activities: Design, Production, and Inspection. The cost of each activity and usage of the
activity drivers are as follows:
Cost Usage by
Product A
Usage by
Product B
Design
(Engineering
Hours)
$300,00
0 200 300
Production
(Direct Labor
Hours)
$500,00
0 100,000 300,000
Inspection
(Batches) $200,00
0 300 100
Carter manufactures 10,000 units of Product A and 7,500 units of Product B per month.
Required:
a. Calculate the predetermined overhead rate under the traditional costing system.
b. Calculate the activity rate for Design.
c. Calculate the activity rate for Machining.
d. Calculate the activity rate for Inspection.
e. Calculate the indirect manufacturing costs assigned to each unit of Product A under the
traditional costing system.
f. Calculate the indirect manufacturing costs assigned to each unit of Product B under the
traditional costing system
g. Calculate the indirect manufacturing costs assigned to each unit of Product A under the
ABC system.
h. Calculate the indirect manufacturing costs assigned to each unit of Product B under the
ABC system.
i. Which product is under-costed and which is over-costed under the volume-based cost
system compared to ABC?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-01 Assign indirect costs to products or services using a single volume-based cost driver.
Learning Objective: 04-04 Assign indirect costs to products or services using activity rates.
Learning Objective: 04-06 Compare the results of a volume-based cost system to activity-based costing.
Topic: Step 3: Assign indirect cost to individual products or services
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
4-74
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4-75
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McGraw-Hill Education.
130. Harwell, Inc. produces two different products, Product A and Product B. Harwell uses a
traditional volume-based costing system in which direct labor hours are the allocation base.
Harwell is considering switching to an ABC system by splitting its manufacturing overhead cost
across three activities: Setup, Production, and Finishing. The cost of each activity and usage
of the activity drivers are as follows:
Cost Usage by
Product A
Usage by
Product B
Setup
(Batches) $50,000 150 350
Production
(Direct Labor
Hours)
$300,00
0 40,000 60,000
Finishing
(Machine
Hours) $50,000 20 80
Harwell manufactures 10,000 units of Product A and 7,500 units of Product B per month.
Required:
a. Calculate the predetermined overhead rate under the traditional costing system.
b. Calculate the activity rate for Setup.
c. Calculate the activity rate for Production.
d. Calculate the activity rate for Finishing.
e. Calculate the indirect manufacturing costs assigned to each unit of Product A under the
traditional costing system.
f. Calculate the indirect manufacturing costs assigned to each unit of Product B under the
traditional costing system
g. Calculate the indirect manufacturing costs assigned to each unit of Product A under the
ABC system.
h. Calculate the indirect manufacturing costs assigned to each unit of Product B under the
ABC system.
i. Which product is under-costed and which is over-costed under the volume-based cost
system compared to ABC?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-01 Assign indirect costs to products or services using a single volume-based cost driver.
Learning Objective: 04-04 Assign indirect costs to products or services using activity rates.
Learning Objective: 04-06 Compare the results of a volume-based cost system to activity-based costing.
Topic: Step 3: Assign indirect cost to individual products or services
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
4-77
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McGraw-Hill Education.
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McGraw-Hill Education.
131. Hayden, Inc. produces two different products, Product A and Product B. Hayden uses a
traditional volume-based costing system in which direct labor hours are the allocation base.
Hayden is considering switching to an ABC system by splitting its manufacturing overhead
cost across three activities: Engineering, Manufacturing, and Inspection. The cost of each
activity and usage of the activity drivers are as follows:
Cost Usage by
Product A
Usage by
Product B
Engineering
(Engineering
Hours)
$600,000 2,000 8,000
Manufacturing
(Direct Labor
Hours)
$800,000 400,000 400,000
Inspection
(Batches) $200,000 4,000 1,000
Hayden manufactures 10,000 units of Product A and 5,000 units of Product B per month.
Required:
a. Calculate the predetermined overhead rate under the traditional costing system.
b. Calculate the activity rate for Engineering.
c. Calculate the activity rate for Manufacturing.
d. Calculate the activity rate for Inspection.
e. Calculate the indirect manufacturing costs assigned to each unit of Product A under the
traditional costing system.
f. Calculate the indirect manufacturing costs assigned to each unit of Product B under the
traditional costing system
g. Calculate the indirect manufacturing costs assigned to each unit of Product A under the
ABC system.
h. Calculate the indirect manufacturing costs assigned to each unit of Product B under the
ABC system.
i. Which product is under-costed and which is over-costed under the volume-based cost
system compared to ABC?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-01 Assign indirect costs to products or services using a single volume-based cost driver.
Learning Objective: 04-04 Assign indirect costs to products or services using activity rates.
Learning Objective: 04-06 Compare the results of a volume-based cost system to activity-based costing.
Topic: Step 3: Assign indirect cost to individual products or services
Topic: Step 4: Assign indirect costs to products or services based on their activity demands
4-80
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McGraw-Hill Education.
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McGraw-Hill Education.
13
2.
Dogs for Diabetes (DFD) is a not-for-profit organization focused on training dogs and handlers to
assist young children with diabetes. The dogs are trained to detect low and high blood sugar
levels, and ring an alarm to notify parents or other caregivers of the potentially dangerous
condition. DFD provides both education for the dogs, and training for handlers (kids or parent).
Currently there are 60 dogs being trained and there are 14,000 hours per year of training
scheduled for these dogs. DFD also provides training for the children and families who will host a
dog, and there are 2,000 hours of such training scheduled for the 20 families who will host a dog
this year. DFD has just hired a new controller who wants to utilize ABC. The controller has
identified 2 key activities performed by the organization as it trains dogs and handlers, and the
cost of each of these activities:
• DFD has 1 building with a total of 30,000 square feet of space. Due to the large space
requirements for kennels, dog runs, and other facilities for the dogs, the dog education service
utilizes 20,000 square feet. The facility is rented at an annual cost of $60,000.
• Salaries for training personnel, $240,000 annually.
Required:
a. Select a cost driver and compute an activity rate for each of the activities identified by the
controller.
b. Compute activity cost driver values and activity proportions for each activity.
c. Determine the amount of costs assigned to each group of students and the cost per student to
UDH to provide these three key activities.
66.66%
33.33%
100%
Personnel Number of hours $240,000 14,000
87.5%
2,000
12.5%
16,000
100%
c.
Activity Activity cost driver Cost Dog training
Facilities Square feet $60,000 ($2.00 × 20,000)
Or 66.66% × $60,000
Personnel Number of hours $240,000 ($15 × 14,000)
Or 87.5% × $240,000
Total cost assigned
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Number of dogs or handlers
Cost to train a dog or handler $4,166.67 (rounded)
Feedback: Activity rate = Cost/Activity driver usage. Activity rate × Activity driver usage = Activity
cost. Sum of activity costs = Indirect costs assigned to each service. Activity proportion × Total cost
= Activity cost. Total cost = Sum of activity costs.
AACSB: Analytical Thinking
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-07 Apply activity-based costing to a service industry.
Topic: Activity-based costing in service industries
4-83
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