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1. Direct labor is an appropriate allocation base for overhead when overhead costs and direct
labor are highly correlated.
2. Batch-level activities are performed each time a batch of goods is processed. The cost of
a batch-level activity is proportional to the number of units in the batch.
3. Facility-level costs can be traced on a cause-and-effect basis to individual products.
4. Activity-based costing involves a two-stage allocation process in which overhead costs are
first assigned to departments and then allocated to products using activity measures.
5. In the second-stage allocation in activity-based costing, overhead costs are allocated from
activity cost pools to products.
6. The challenge in designing an activity-based costing system is to identify a reasonably
small number of activities that explain the bulk of the variation in overhead costs.
7. Managing and sustaining product diversity requires many more overhead resources such
as production schedulers and product design engineers. The costs of these resources have no
obvious connection with direct labor.
8. Facility-level activities are activities that are carried out regardless of which products are
produced, how many batches are run, or how many units are made.
9. Companies use three common approaches to assign overhead costs to products—
plantwide overhead rate, departmental overhead rates, and activity-based costing. The most
accurate of these three approaches is departmental overhead rates.
10. An activity in activity-based costing is an event that causes the consumption of overhead
resources.
11. When designing an activity-based costing system, accountants should be tasked with
identifying the activities they think are important and that consume most of the resources in the
organization.
12. If a company has a great deal of product diversity, activity-based costing will generally
yield less accurate product costs than traditional methods based on direct labor or machine
hours.
13. A plantwide predetermined overhead rate based on direct labor-hours results in high
overhead costs for products with a high direct labor-hour content and low overhead costs for
products with a low direct labor-hour content.
14. In general, activities and costs should be combined in an activity-based costing system
only if they fall within the same level in the cost hierarchy.
15. Activities consume resources. In activity-based costing an attempt is made to trace the
costs of those activities directly to the products that cause them.
16. An activity measure in activity-based costing expresses how much of an activity is carried
out and it is used as the allocation base for assigning overhead costs to departments.
17. An activity rated is computed for each activity cost pool—not for each product.
18. The activity rates in activity-based costing are not intended to set targets for how quickly
a task should be completed.
19. Activity rates in activity-based costing are computed by dividing costs from the first-stage
cost assignments by the activity measure for each activity cost pool.
20. In activity-based costing, unit product costs computed for external financial reports
include direct materials costs.
21. In activity-based costing, unit product costs computed for external financial reports
include direct materials, direct labor, and only a part of manufacturing overhead costs.
22. When a company changes from a traditional costing system to an activity-based costing
system, the unit product costs of low-volume products typically change more than the unit
product costs of high-volume products.
23. When a company changes from a traditional costing system to an activity-based costing
system, costs will ordinarily shift from low-volume products to high-volume products when the
activity-based costing system includes batch-level or product-level costs.
24. When a company changes from a traditional cost system in which manufacturing overhead
is applied based on direct labor-hours to an activity-based costing system in which there are
batch-level and product-level costs, the unit product costs of high-volume products typically
increase whereas the unit product costs of low-volume products typically decrease.
25. Which of the following would be classified as a product-level activity?
26. Setting up a machine to change from producing one product to another is an example of
a:
3-14
27. Would the following activities at a manufacturer of canned soup be best classified as
unit-level, batch-level, product-level, or facility-level activities?
Researching new recipes Shipping orders to grocery stores
A) Unit Unit
B) Batch Batch
C) Product Unit
D) Product Batch
28. Testing a prototype of a new product is an example of a:
29. Material handling is an example of a:
30. Assembling a product is an example of a:
31. The plant manager's work is an example of a:
32. Which of the following would be classified as a product-level activity?
33. In activity-based costing, the activity rate for an activity cost pool is computed by dividing
the total overhead cost in the activity cost pool by:
34. In activity-based costing, unit product costs computed for external financial reports do
NOT include:
35. When switching from a traditional costing system to an activity-based costing system
that contains some batch-level costs:
36. All other things the same, the unit product costs of high volume products will decrease
and the unit product costs of low volume products will increase when switching from a traditional
costing system to an activity-based costing system if:
