Chapter 11 – Pricing decisions and profitability analysis
MULTIPLE CHOICE
1. The use of unit-based activity drivers to assign costs tends to
a.
overcost low-volume products.
b.
overcost high-volume products.
c.
undercost all products.
d.
overcost all products.
2. Riley, SA., has identified the following overhead costs and activity drivers for next year:
Expected
Expected
Overhead Item
Cost
Activity Driver
Quantity
Setup costs
£100,000
Number of setups
500
Ordering costs
40,000
Number of orders
3,200
Maintenance
200,000
Machine hours
4,000
Power
20,000
Kilowatt hours
80,000
The following are two of the jobs completed during the year:
Job AA
Direct materials
£375
Direct labour
£350
Units completed
100
Direct labour hours
50
Number of setups
1
Number of orders
4
Machine hours
20
Kilowatt hours
30
The company’s normal activity is 4,000 direct labour hours.
If the activity drivers are used to allocate overhead costs, the unit cost (rounded to two decimal places)
for Job BB would be
a.
£21.40.
b.
£26.56.
c.
£26.95.
d.
£27.03.
Direct materials
Direct labour
Setup [(£100,000/500) ?6? 4]
Ordering [(40,000/3,200) ?6? 5]
Maintenance [(£200,000/4,000) ?? 25]
Power [(£20,000/80,000) ?6? 50]
3. If activity-based costing is used, insurance on the plant would be classified as a
a.
unit-level activity.
b.
batch-level activity.
c.
product-level activity.
d.
facility-level activity.
4. If activity-based costing is used, product inspections would be classified as a
a.
unit-level activity.
b.
batch-level activity.
c.
product-level activity.
d.
facility-level activity.
5. If activity-based costing is used, setups would be classified as a
a.
unit-level activity.
b.
batch-level activity.
c.
product-level activity.
d.
facility-level activity.
6. Maintenance of the production equipment would be classified as a
a.
unit-level activity.
b.
product-level activity.
c.
cell-level activity.
d.
facility-level activity.
Figure 11-1
Ubben Manufacturing uses an activity-based costing system. The company produces Model X and
Model Y. Information relating to the two products is as follows:
Model X
Units produced
20,000
Machine hours
8,000
Direct labour hours
14,000
Engineering labour (hours)
1,000
Setups
40
The following costs are reported:
Engineering
Setups
Machine-related overhead
7. Refer to Figure 11-1. Setups would be classified as a
a.
unit-level activity.
b.
batch-level activity.
c.
product-level activity.
d.
facility-level activity.
8. Refer to Figure 11-1. Machine-related overhead would be classified as a
a.
unit-level activity.
b.
batch-level activity.
c.
product-level activity.
d.
facility-level activity.
Figure 11-2
Owens Ltd. produces specially machined parts. The parts are produced in batches in one continuous
manufacturing process. Each part is custom produced and requires special engineering design activity
(based on customer specifications). Once the design is completed, the equipment can be set up for
batch production. Once the batch is completed, a sample is taken and inspected to see if the parts are
within the tolerances allowed. Thus, the manufacturing process has four activities: engineering, setups,
machining, and inspecting. In addition, there is a sustaining process with two activities: providing
utilities (plantwide) and providing space. Costs have been assigned to each activity using direct tracing
and resource drivers:
Engineering
£1,000,000
Setups
900,000
Machining
2,000,000
Inspection
800,000
Providing space
250,000
Providing utilities
180,000
Activity drivers for each activity have been identified and their practical capacities listed:
Machine hours
25,000
Setups
200
Engineering hours
5,000
Inspection hours
2,500
The costs of facility-level activities are assigned using machine hours.
9. Refer to Figure 11-2. What is(are) the unit-level activity(ies)?
a.
engineering
b.
setups
c.
inspecting
d.
machining
10. Refer to Figure 11-2. What is(are) the batch-level activity(ies)?
a.
engineering
b.
setups
c.
inspecting
d.
all of the above
11. Refer to Figure 11-2. What is(are) the facility-level activity(ies)?
a.
providing utilities
b.
providing space
c.
inspecting
d.
both a and b
12. Refer to Figure 11-2. What is the cost pool overhead rate for the unit-level activities?
a.
£80.00 per machine hour
b.
£13,500.00 per setup
c.
£17.20 per machine hour
d.
£97.20 per machine hour
13. Refer to Figure 11-2. What is the cost pool rate for the batch-level activities?
a.
£80.00 per machine hour
b.
£13,500.00 per setup
c.
£17.20 per machine hour
d.
£97.20 per machine hour
14. Refer to Figure 11-2. What is the cost pool rate for the product-level activities?
a.
£80.00 per machine hour
b.
£13,500.00 per setup
c.
£17.20 per machine hour
d.
none of the above
15. Refer to Figure 11-2. What is the cost pool rate for the facility-level activities?
a.
£80.00 per machine hour
b.
£13,500.00 per setup
c.
£17.20 per machine hour
d.
£97.20 per machine hour
16. Refer to Figure 11-2. What is(are) the product-level activity(ies)?
a.
engineering
b.
setups
c.
inspecting
d.
none of the above
17. All of the following are nonunit-based activity drivers EXCEPT
a.
number of setups.
b.
number of direct labour hours.
c.
number of inspections.
d.
number of material moves.
18. When selecting an activity driver, a company should consider
a.
the cost of measurement.
b.
the time of the year.
c.
the cause and effect between the activity driver and the cost pool.
d.
both a and c.
19. If activity-based costing is used, electricity usage would be an example of a
a.
unit-level activity.
b.
batch-level activity.
c.
product-level activity.
d.
facility-level activity.
20. All of the following are unit-based activity drivers EXCEPT
a.
machine hours.
b.
number of setups.
c.
number of units.
d.
direct labour hours.
21. Which of the following quantities is an example of an activity driver in activity-based costing?
a.
number of setups
b.
number of orders placed
c.
number of machine hours
d.
all of the above
Figure 11-3
Moss Ltd. has the following activities: creating bills of materials (BOM), studying manufacturing
capabilities, improving manufacturing processes, training employees, and designing tooling. The
general ledger accounts reveal the following expenditures for manufacturing engineering:
22. Product costs can be distorted if a unit-based activity driver is used and
a.
nonunit-based overhead costs are a significant proportion of total overhead.
b.
the consumption ratios differ between unit-based and nonunit-based input categories.
c.
both a and b.
d.
neither a nor b.
23. Refer to Figure 11-3. What is the cost assigned to the improving processes activity?
a.
£250,000
b.
£25,000
c.
£43,750
d.
£51,000
24. Refer to Figure 11-3. What is the cost assigned to the training employees activity?
a.
£27,500
b.
£125,000
c.
£31,250
d.
£81,250
25. Refer to Figure 11-3. What is the cost assigned to the creating BOMs activity?
a.
£31,250
b.
£7,500
c.
£43,750
d.
£125,000
26. Refer to Figure 11-3. What is the cost assigned to the designing tooling activity?
a.
£81,250
b.
£33,000
c.
£25,000
d.
£125,000
27. Which of the following items would be classified as flexible resources?
a.
salaried employees
b.
depreciation on building
c.
fuel to generate electricity internally
d.
lease on machinery
28. Which of the following items would be classified as committed resources (short-term)?
a.
salaried employees
b.
depreciation on building
c.
fuel to generate electricity internally
d.
lease on machinery
29. Which of the following items would be classified as committed resources (long-term)?
a.
salaried employees
b.
depreciation on building
c.
lease on machinery
d.
both b and c
30. An activity cost driver is
a.
a factor that causes variations in a cost.
b.
another term for input measure.
c.
the largest single category of cost in a company.
d.
a variable cost.
31. In an activity-based cost system, what types of drivers are used to describe cost behaviour?
a.
activity drivers
b.
production or unit-level drivers
c.
nonunit-level drivers
d.
both production (or unit-level) and nonunit-level drivers
32. An example of a production or unit-level driver is
a.
pounds of direct materials.
b.
number of setups.
c.
number of batches.
d.
number of product lines.
33. An example of a nonunit-level driver is
a.
pounds of direct materials.
b.
number of setups.
c.
number of machine hours where each product manufactured requires one machine hour.
d.
number of labour hours.
34. Resources that are only purchased precisely at the time the resource is needed are called
a.
committed resources.
b.
flexible resources.
c.
scarce resources.
d.
none of the above.
35. Committed resources are
a.
hard to purchase.
b.
purchased precisely at the time the resource is needed and have no unused capacity.
c.
supplied in advance of usage and may have unused capacity.
d.
none of the above.
36. Product costs can be distorted if a unit-based cost driver is used and
a.
nonunit-based overhead costs are a significant proportion of total overhead.
b.
the consumption ratios differ between unit-based and nonunit-based input categories.
c.
both a and b.
d.
neither a nor b.
37. The overhead rates of the traditional-based approach to product costing use
a.
nonunit-based cost drivers.
b.
unit-based cost drivers.
c.
process costing.
d.
job-order costing.
38. More accurate product costing information is produced by assigning costs using
a.
volume-based, plantwide rates.
b.
volume-based, departmental rates.
c.
activity-based pool rates.
d.
All of the above produce accurate product costing information.
39. An activity-based cost system
a.
differs from a traditional-based cost system in the nature and number of the cost drivers
used.
b.
uses both unit-based and nonunit-based cost drivers that reflect a cause-and-effect
relationship.
c.
can trace cost accurately to cost objects other than products.
d.
does all of the above.
40. An activity-based costing system uses which of the following procedures?
a.
Overhead costs are traced to departments, then costs are traced to products.
b.
Overhead costs are traced to activities, then costs are traced to products.
c.
Overhead costs are traced directly to products.
d.
All overhead costs are expensed as incurred.
41. Basing overhead allocation solely on volume
a.
will undercost high-volume products and overcost low-volume products.
b.
will overcost high-volume products and undercost low-volume products.
c.
is the sole basis of the activity-based costing model.
d.
All of the above are correct.
42. What is the initial step in implementing an activity-based costing system?
a.
assigning costs to activities
b.
assigning costs to products
c.
identifying activities and attributes
d.
dividing activity costs by activity drivers
Figure 11-4
The Overdale plant has two categories of overhead: maintenance and inspection. Costs expected for
these categories for the coming year are as follows:
Maintenance
£120,000
Inspection
£200,000
The plant currently applies overhead using direct labour hours and expected capacity of 80,000 direct
labour hours. The following data has been assembled for use in developing a bid for a proposed job:
Direct materials
£1,500
Direct labour
£5,000
Machine hours
400
Number of inspections
6
Direct labour hours
750
Total expected machine hours for all jobs during the year are 40,000, and the total expected number of
inspections is 2,500.
43. Refer to Figure 11-4. Using direct labour hours to assign overhead, the total cost of the potential job
would be
a.
£9,500.
b.
£6,000.
c.
£3,000.
d.
£1,600.
44. Refer to Figure 11-4 above. Using activity-based costing and the appropriate cost drivers, the total cost
of the potential job would be
a.
£9,230.
b.
£8,180.
c.
£2,250.
d.
£1,680.
Direct materials
£1,500
Direct labour
5,000
Overhead:
(£120,000/40,000) ฀ 400
(£200,000/2,500) ฀ 6
Total cost
£8,180
Figure 11-5
Granite, SA., has identified the following overhead costs and cost drivers for next year:
Overhead Item
Expected Cost
Cost Driver
Expected Quantity
Setup costs
£100,000
Number of setups
500
Ordering costs
40,000
Number of orders
3,200
Maintenance
200,000
Machine hours
4,000
Power
20,000
Kilowatt hours
80,000
The following are two of the jobs completed during the year:
Job 500
Job 501
Direct materials
£1,500
Direct labour
5,000
Overhead:
(£320,000/80,000) ฀ 750
Total cost
£9,500
Direct materials
£1,500
£2,000
Direct labour
£1,400
£2,400
Units completed
100
160
Direct labour hours
100
160
Number of setups
2
8
Number of orders
8
10
Machine hours
40
50
Kilowatt hours
60
100
The company’s normal activity is 4,000 direct labour hours.
45. Refer to Figure 11-5. If Granite, SA., used activity-based cost drivers to allocate overhead costs, the
total cost of Job 500 would be
a.
£5,715.
b.
£5,667.
c.
£5,415.
d.
£5,315.
46. Refer to Figure 11-5. If Granite, SA., used activity-based cost drivers to allocate overhead costs, the
unit cost for Job 500 would be
a.
£53.15.
b.
£54.15.
c.
£56.67.
d.
£57.15.
Direct materials
£1,500
Direct labour
1,400
Overhead:
Direct materials
£1,500
Direct labour
1,400
Overhead:
Setups (£200 ฀ 2)
Ordering costs (£12.50 ฀ 8)
Maintenance (£50 ฀ 40)
Power (£0.25 ฀ 60)
Total cost
£5,415
Figure 11-6
Peach, SA., has identified the following overhead costs and cost drivers for next year:
Overhead Item
Expected Cost
Cost Driver
Expected Quantity
Setup costs
£200,000
Number of setups
500
Ordering costs
80,000
Number of orders
3,200
Maintenance
400,000
Machine hours
4,000
Power
40,000
Kilowatt hours
80,000
The following are two of the jobs completed during the year:
Job 400
Direct materials
£750
Direct labour
£700
Units completed
100
Direct labour hours
50
Number of setups
1
Number of orders
4
Machine hours
20
Kilowatt hours
30
The company’s normal activity is 4,000 direct labour hours.
47. Refer to Figure 11-6. If Peach, SA., used direct labour hours to assign overhead, the unit cost for Job
401 would be
a.
£117.50.
b.
£111.88.
c.
£105.00.
d.
£102.50.
Direct materials
Direct labour
Overhead (£720,000/4,000) ฀ 80
Total cost
48. Refer to Figure 11-6. If Peach, SA., used activity-based cost drivers to allocate overhead costs, the unit
cost for Job 401 would be (round to two decimal places)
Ordering costs (£12.50 ฀ 8)
Maintenance (£50 ฀ 40)
Power (£0.25 ฀ 60)
Total cost
£5,415
a.
£42.81.
b.
£53.13.
c.
£53.91.
d.
£54.06.
49. Activity-based costing assigns costs to cost object by first
a.
tracing costs to products and then tracing costs to cost objects.
b.
tracing costs to departments and then tracing costs to products.
c.
tracing costs to activities and then tracing costs to cost objects.
d.
tracing costs to customers and then tracing costs to products.
50. Batch-related costs are added to which of the following costs in break-even analysis?
a.
variable
b.
fixed
c.
mixed
d.
none of the above
SHORT ANSWER
1. Briefly discuss the problem with the unit-level approach to cost estimation and discuss some of the
errors that may occur.