Appendix C Activity–Based Costing
MULTIPLE CHOICE QUESTIONS
1) Activity-based costing attempts to better allocate costs to the proper users of overhead by focusing
on activities.
A) True
B) False
2) In activity-based costing, costs are traced to individual activities and then allocated to cost objects.
A) True
B) False
3) An activity-based costing system usually involves a fewer number of allocation bases compared
with a traditional cost allocation system.
A) True
B) False
4) Activity-based costing can be especially effective in situations where many different types of
products are manufactured in the same department or departments.
A) True
B) False
5) Activity cost pools are not a necessary part of the allocation of overhead costs using activity-based
costing.
A) True
B) False
6) Unit costs can be significantly different when using activity-based costing compared to traditional
cost allocation methods.
A) True
B) False
7) Activity-based costing generally requires less effort to implement and maintain than a traditional
cost system.
A) True
B) False
8) Activity-based costing uses pre-determined overhead rates to allocate costs.
A) True
B) False
9) In activity-based costing, there are a number of activity cost pools, which consist of activities that
belong to the same process and/or are caused by the same cost driver.
A) True
B) False
10) When using a plantwide overhead rate method to assign overhead costs, the cost object is always
the unit of product.
A) True
B) False
11) A plantwide overhead rate method is adequate when a company produces only one product or has
multiple products that use about the same amount of indirect resources.
A) True
B) False
12) In activity-based costing, all overhead is lumped together and a predetermined overhead rate per
unit of an allocation base, is computed and used to assign overhead to jobs and processes.
A) True
B) False
13) In traditional costing, all overhead is lumped together and a predetermined overhead rate per unit
of an allocation base is computed and used to assign overhead to jobs and processes.
A) True
B) False
14) In activity-based costing, low-volume complex products are usually undercosted and high volume
simpler products are overcosted, because the method fails to reflect the different uses of indirect
resources.
A) True
B) False
15) With activity-based costing, complex products are assigned a larger portion of overhead.
A) True
B) False
16) Activity-based costing can improve costing activity for:
A) Service companies only.
B) Merchandising companies only.
C) Any company in any industry.
D) Manufacturing companies only.
E) Government entities only.
17) A system of assigning costs to departments and products on the basis of a variety of activities
instead of only one allocation base is called:
A) Plantwide overhead costing.
B) A cost center accounting system.
C) Controllable costing.
D) Performance costing.
E) Activity-based costing.
18) A factor that causes the cost of an activity to go up or down is a(n):
A) Contribution factor.
B) Cost driver.
C) Direct factor.
D) Indirect factor.
E) Product cost.
19) An activity-based cost allocation system:
A) Traces costs to products on the basis of activities performed on them.
B) Does not involve the level of detail and the number of allocations that companies make with
traditional allocation methods.
C) Does not provide total unit cost data.
D) Does not provide for the allocation of any cost to products that cannot be directly traced to
those products.
E) Is one form of a direct or variable costing system.
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20) After all activity costs are accumulated in an activity cost pool account, overhead rates are
computed and costs are allocated to cost objects based on:
A) Indirect factors.
B) Opportunity cost principles.
C) Cost drivers.
D) Joint cost principles.
E) Direct factors.
21) If a firm uses activity-based costing to allocate costs, it does all but which of the following?
A) Combine homogeneous costs in appropriate pools.
B) Calculate an appropriate rate for each pool.
C) Select appropriate cost drivers.
D) Apply a volume-related measure per unit of product.
E) Allocate costs based on predetermined rates for cost pools.
22) The following is taken from Jeffers Company’s internal records of its factory with two operating
departments. The cost driver for indirect labor is direct labor costs, and the cost driver for the
remaining items is number of hours of machine use. Compute the total amount of overhead allocated
to Dept. 1 using activity-based costing.
Direct
Labor
Machine Use
Hours
9
Operating Dept. 1
$ 11,800
Operating Dept. 2
25,600
Totals
$ 37,400
Factory overhead costs
Rent and utilities
Indirect labor
Depreciation – Equipment
Total factory overhead
A) $22,069. B) $22,243. C) $47,512. D) $19,877. E) $18,703.
23) The following is taken from Jeffers Company’s internal records of its factory with two operating
departments. The cost driver for indirect labor is direct labor costs, and the cost driver for the
remaining items is number of hours of machine use. Compute the total amount of overhead allocated
to Dept. 2 using activity-based costing.
Direct
Labor
Machine Use
Hours
Operating Dept. 1 $ 11,800 2,300
Operating Dept. 2 25,600 1,500
Totals $ 37,400 3,800
Factory overhead costs
Rent and utilities
$ 12,900
Indirect labor
11,220
Depreciation – Equipment
18,000
Total factory overhead
$ 42,120
A) $73,600. B) $28,830. C) $16,392. D) $22,243. E) $19,877.
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24) The following is taken from Clausen Company’s internal records of its factory with two operating
departments. The cost driver for indirect labor is direct labor hours, and the cost driver for the
remaining items is number of hours of machine use. Compute the total amount of indirect labor
allocated to Dept. 1 using activity-based costing.
Direct Labor Hours
Machine Hours
Operating Dept. 1
980
9,200
Operating Dept. 2
2,100
6,000
Totals
3,080
15,200
Factory overhead costs
Rent and utilities
$ 21,700
Indirect labor
17,300
Depreciation – Equipment
14,000
Total factory overhead
$ 53,000
A) $54,371. B) $8,073. C) $16,864. D) $5,505. E) $10,471.
25) The following is taken from Clausen Company’s internal records of its factory with two operating
departments. The cost driver for indirect labor is direct labor hours, and the cost driver for the
remaining items is number of hours of machine use. Compute the total amount of rent, utilities, and
depreciation allocated to Dept. 1 using activity-based costing.
Direct Labor Hours
Machine Hours
Operating Dept. 1
980
9,200
Operating Dept. 2
2,100
6,000
Totals
3,080
15,200
Factory overhead costs
Rent and utilities
$ 21,700
Indirect labor
17,300
Depreciation – Equipment
14,000
Total factory overhead $ 53,000
A) $21,608. B) $11,795. C) $13,134. D) $14,092. E) $5,505.
26) The following is taken from Clausen Company’s internal records of its factory with two operating
departments. The cost driver for indirect labor is direct labor hours, and the cost driver for the
remaining items is number of hours of machine use. Compute the total amount of overhead cost
allocated to Dept. 1 using activity-based costing.
Direct Labor Hours
Machine Hours
Operating Dept. 1
980
9,200
Operating Dept. 2
2,100
6,000
Totals
3,080
15,200
Factory overhead costs
Rent and utilities
$ 21,700
Indirect labor
17,300
Depreciation – Equipment
14,000
Total factory overhead
$ 53,000
A) $25,888. B) $27,113. C) $14,092. D) $21,608. E) $5,505.
27) The following is taken from Clausen Company’s internal records of its factory with two operating
departments. The cost driver for indirect labor is direct labor hours, and the cost driver for the
remaining items is number of hours of machine use. Compute the total amount of rent and utilities
allocated to Dept. 2 using activity-based costing.
Direct Labor Hours
Machine Hours
Operating Dept. 1
980
9,200
Operating Dept. 2
2,100
6,000
Totals
3,080
15,200
Factory overhead costs
Rent and utilities
$ 21,700
Indirect labor
17,300
Depreciation – Equipment
14,000
Total factory overhead
$ 53,000
A) $8,566. B) $14,152. C) $6,000. D) $13,134. E) $14,092.
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28) The following is taken from Clausen Company’s internal records of its factory with two operating
departments. The cost driver for indirect labor is direct labor hours, and the cost driver for the
remaining items is number of hours of machine use. Compute the total amount of indirect labor
allocated to Dept. 2 using activity-based costing.
Direct Labor Hours
Machine Hours
Operating Dept. 1
980
9,200
Operating Dept. 2
2,100
6,000
Totals
3,080
15,200
Factory overhead costs
Rent and utilities
$ 21,700
Indirect labor
17,300
Depreciation – Equipment
14,000
Total factory overhead
$ 53,000
A) $13,134. B) $8,566. C) $5,505. D) $11,795. E) $8,474.
29) The following is taken from Clausen Company’s internal records of its factory with two operating
departments. The cost driver for indirect labor is direct labor hours, and the cost driver for the
remaining items is number of hours of machine use. Compute the total amount of overhead allocated
to Dept. 2 using activity-based costing.
Direct Labor Hours
Machine Hours
Operating Dept. 1
980
9,200
Operating Dept. 2
2,100
6,000
Totals
3,080
15,200
Factory overhead costs
Rent and utilities
$ 21,700
Indirect labor
17,300
Depreciation – Equipment
14,000
Total factory overhead $ 53,000
A) $11,795. B) $14,092. C) $25,887. D) $27,112. E) $26,500.
30) Which of the following is not a limitation of activity-based costing?
A) More accurate product costs may result in increasing the selling prices of some products.
B) Complex products are assigned a larger portion of overhead.
C) Changing from a traditional direct labor-based costing system to an activity-based costing
system changes product margins and other key performance indicators used by managers.
Such changes are often resisted by managers.
D) Maintaining an activity-based costing system is more costly than maintaining a traditional
direct labor-based costing system.
E) In practice, most managers insist on fully allocating all costs to products, customers, and
other costing objects in an activity-based costing system. This results in overstated costs.
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31) Borden Corporation uses an activity-based costing system with three activity cost pools. The
company has provided the following data concerning its costs and its activity based costing system:
Overhead Costs:
Indirect labor
$ 260,000
Depreciation
220,000
Utilities
140,000
Total
$ 620,000
Distribution of resource consumption:
Activity Cost Pools
Assembly
Setting up
Other
Total
Indirect labor
50 %
25 %
25 %
100 %
Depreciation
20 %
30 %
50 %
100 %
Utilities
25 %
45 %
30 %
100 %
How much overhead cost, in total, would be allocated to the Assembly activity cost pool?
A) $209,000 B) $310,000 C) $196,333 D) $200,000 E) $155,000
Overhead Costs:
Indirect labor
Depreciation
Utilities
Total
Distribution of resource consumption:
Assembly
Activity Cost Pools
Setting up Other
Total
Indirect labor 50 %
25 % 25 %
100 %
Depreciation 20 %
30 % 50 %
100 %
Utilities 25 %
45 % 30 %
100 %
32) Borden Corporation uses an activity-based costing system with three activity cost pools. The
company has provided the following data concerning its costs and its activity based costing system:
$ 260,000
220,000
140,000
$ 620,000
How much overhead cost, in total, would be allocated to the Setting Up activity cost pool?
A) $206,000 B) $194,000 C) $279,000 D) $217,000 E) $155,000
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33) Quantum Corporation has provided the following data from its activity-based costing system:
Activity Cost Pool
Overhead Cost
Total Activity
Assembly
$ 1,114,920
57,000 machine hours
Processing orders
$ 47,016
1,800 orders
Inspection
$ 107,328
1,560 inspection hours