Fundamentals of Cost Accounting, 6e (Lanen)
Chapter 10 Fundamentals of Cost Management
1) Activity-based cost management (ABCM) uses the information provided by activity-based
costing (ABC) to identify ways to improve operations.
2) Activity-based cost management (ABCM) can be used for managerial decision-making in
service, merchandising, and manufacturing companies.
3) Storing materials, work-in-process items, and finished goods in inventory are essential, value-
added activities in most companies.
4) In general, decreasing (or eliminating) the resources committed to nonvalue-added activities
will decrease customer response time.
5) In general, the unit-level (or volume-related) costs in an activity-based costing (ABC) system
are variable costs.
6) In general, the capacity-related costs in an activity-based costing (ABC) system are variable
costs.
7) Managerial decisions based on activity-based costing (ABC) information affect only volume-
related, batch-related, and product-related costs.
8) The basic concepts involved in activity-based costing (ABC) can be used to determine
customer profitability as well as product costs.
9) In activity-based costing, the cost driver rate is computed by dividing the total cost per activity
by the estimated number of units produced.
10) Activity-based costing (ABC) techniques used to evaluate customer profitability can also be
applied to evaluating suppliers.
11) The difference between the resources used and the resources supplied is called unused
resource capacity in a typical activity-based cost management (ABCM) system.
12) Unused resource capacity plus the amount of the resources used is equal to the amount of
resources supplied.
13) Theoretical capacity is the amount of production possible assuming expected downtime for
scheduled maintenance, normal breaks, and vacations.
14) Theoretical capacity is the long-run expected volume based on reasonably attainable working
conditions.
15) Unused capacity costs incurred for the benefit of a company’s customers (e.g., meet seasonal
demands) should be assigned to the customers that require (use) the excess capacity.
16) In general, managerial decisions affecting capacity-related costs and activities also affect
volume-level, batch-level, and product-level cost and activities.
17) Tangible customer expectations include how the product’s salespeople treat customers and
the time required to deliver the product to the customer.
18) Quality can be defined as the degree to which a product or service performs as it was
designed to do.
19) A cost of quality system is based on the trade-off between incurring costs to meet product (or
service) specifications and the costs of failing to meet those specifications.
20) Internal failure costs include materials wasted in the production process and correcting
products before they are sold.
21) Which of the following statements about activity-based costing (ABC) is not true? (CIA
adapted)
A) In ABC, cost drivers are used to link costs to products.
B) ABC is useful for assigning marketing and distribution costs.
C) ABC differs from traditional costing systems in that products are not cross-subsidized.
D) ABC is more likely to result in major differences from traditional costing systems if the firm
manufactures only one product rather than multiple products.
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22) In an activity-based costing (ABC) system, cost reduction is accomplished by identifying and
eliminating: (CPA adapted)
All Cost Drivers Non value-added Activities
A. No No
B. Yes Yes
C. No Yes
D. Yes No
A) Option A.
B) Option B.
C) Option C.
D) Option D.
23) Barter Company’s cost management and product costing procedures follow activity-based
costing (ABC) principles. Activities have been identified and classified as being either value-
added or nonvalue-added for each product. Which of the following activities, used in Barter’s
production process, is nonvalue-added? (CPA adapted)
A) Drill press activity.
B) Heat treatment activity.
C) Design engineering activity.
D) Raw materials storage activity.
24) Activity analysis is one of the first stages in implementing activity-based cost management
(ABCM). Which of the following steps in activity analysis is usually performed first?
A) Classify all activities as value-added or nonvalue-added.
B) Chart, from start to finish, the activities used to complete the product or service.
C) Identify the process objectives that are defined by what the customer wants or expects from
the process.
D) Continuously improve the efficiency of all value-added activities and develop plans to
eliminate or reduce nonvalue-added ones.
25) Activity analysis is an important approach to operations control and the successful
implementation of activity-based cost management (ABCM). Which of the following procedures
is not part of activity analysis?
A) Chart, from start to finish, the activities used to complete the product or service.
B) Classify all activities as either value-added or nonvalue-added activities.
C) Identify the process objectives as defined by what the customer desires from the process.
D) Compute the predetermined rate per activity by dividing the total cost pool by the total cost
drivers.
26) Which of the following is not true of process reengineering?
A) It is the changing of operational processes to improve performance.
B) It often takes place after examining ABC data to determine opportunities for improvement.
C) It involves identifying what the customer wants or expects from the firm’s products or
services.
D) It is the sixth, and final, step of ABCM activity analysis.
27) Which of the following is a value-added activity?
A) Storing items.
B) Moving items.
C) Waiting for work.
D) Assembling items.
28) Which of the following activities is most likely to be classified as value-added for a
manufacturing company?
A) Storing.
B) Ordering.
C) Inspecting.
D) Assembling.
29) Which of the following activities is most likely to be classified as value-added for a
merchandise company?
A) Purchasing.
B) Waiting.
C) Receiving.
D) Setting up.
30) Activity-based cost management (ABCM) can best be defined as:
A) a cost system using multiple departmental overhead rates.
B) the use of cost information gathered using activity-based costing (ABC).
C) a quality-control system focusing on eliminating errors and mistakes.
D) an incentive system for a company’s key decision-makers.
31) Which of the following items would be classified as a volume-related cost in an activity-
based cost management (ABCM) system?
A) Indirect materials.
B) Production supervisor’s salary.
C) Depreciation on factory building.
D) Research and development.
32) Which of the following items would be classified as a batch-related cost in an activity-based
cost management (ABCM) system?
A) Indirect labor.
B) Production supervisor’s salary.
C) Depreciation on factory building.
D) Machinery set-up costs.
33) Which of the following items would be classified as a product-related cost in an activity-
based cost management (ABCM) system?
A) Change order to meet a new customer’s specification.
B) Movement of materials for products in production.
C) Long-term lease payments for factory equipment.
D) Insurance and property taxes on factory building.
34) Which of the following items would not be used as the cost driver for a volume-related cost
in an activity-based cost management (ABCM) system?
A) Direct labor hours.
B) Machine hours.
C) Units produced.
D) Square footage.
35) In an activity-based cost management (ABCM) system, facility-related costs are those that
are incurred to:
A) sustain the company’s marketing program.
B) maintain the plant’s production capacity.
C) support the research and development process.
D) cause a change in the engineering plans for a product.
36) McArthur Company has gathered the following data related to its production process of two
of its products for the week ended April 30:
Model Item #B200 Item #C440
Quantity produced 60 100
Unit-related material costs $ 42,000 $ 100,000
Variable conversion costs 72,000 300,000
Total direct costs $ 114,000 $ 400,000
Indirect costs:
Indirect manufacturing costs 163,200 272,000
Indirect operating costs 255,000 425,000
Total indirect costs 418,200 697,000
Total costs $ 532,200 $ 1,097,000
The costs above that appear to be allocated rather than traced are:
A) Unit-related material costs.
B) Variable conversion costs.
C) Indirect manufacturing costs only.
D) All indirect costs.
37) Fence Industries is preparing its annual profit plan. As part of its analysis of the profitability
of its customers, management estimates that the $12,000 for sales support should be assigned to
the individual customers from the information given as follows:
Customer A Customer B
Units purchased 100,000 200,000
Purchase orders (annual) 5 20
What is the amount of the sales support costs that should be allocated to Customer A assuming
Fence uses units purchased to compute activity-based costs?
A) $2,400.
B) $4,000.
C) $8,000.
D) $9,600.
38) Fence Industries is preparing its annual profit plan. As part of its analysis of the profitability
of its customers, management estimates that the $12,000 for sales support should be assigned to
the individual customers from the information given as follows:
Customer A Customer B
Units purchased 100,000 200,000
Purchase orders (annual) 5 20
What is the amount of the sales support costs that should be allocated to Customer B, assuming
Fence uses units purchased to compute activity-based costs?
A) $2,400.
B) $4,000.
C) $8,000.
D) $9,600.
39) Fence Industries is preparing its annual profit plan. As part of its analysis of the profitability
of its customers, management estimates that the $12,000 for sales support should be assigned to
the individual customers from the information given as follows:
Customer A Customer B
Units purchased 100,000 200,000
Purchase orders (annual) 5 20
What is the amount of the sales support costs that should be allocated to Customer A, assuming
Fence uses purchases orders to compute activity-based costs?
A) $2,400.
B) $4,000.
C) $8,000.
D) $9,600.
40) Fence Industries is preparing its annual profit plan. As part of its analysis of the profitability
of its customers, management estimates that the $12,000 for sales support should be assigned to
the individual customers from the information given as follows:
Customer A Customer B
Units purchased 100,000 200,000
Purchase orders (annual) 5 20
What is the amount of the sales support costs that should be allocated to Customer B, assuming
Fence uses purchases orders to compute activity-based costs?
A) $2,400.
B) $4,000.
C) $8,000.
D) $9,600.
41) Republic Industries decides to price delivery services according to the results of a recent
activity-based costing (ABC) study. The study indicates Republic should charge $8 per order,
2% of annual order value for general delivery costs, $1.25 per item, and $30 for delivery.
A year later, Republic collected the following information for two of its best customers:
Cost driver Customer C Customer D
Number of orders 18 8
Number of deliveries 10 10
Total number of items 2,000 4,000
Annual order value $ 120,000 $ 80,000
What are the total delivery costs charged to Customer D during the year?
A) $5,344.
B) $5,364.
C) $6,900.
D) $6,964.