Chapter 3 – Cost assignment
MULTIPLE CHOICE
Figure 3-1
The Xiang plant has two categories of overhead: maintenance and inspection. Costs expected for these
categories for the coming year are as follows:
Maintenance
£50,000
Inspection
75,000
The plant currently applies overhead using direct labour hours and expected capacity of 50,000 direct
labour hours. The following data have been assembled for use in developing a bid for a proposed job:
Direct materials
£500
Direct labour
£2,000
Machine hours
500
Number of inspections
4
Direct labour hours
800
Total expected machine hours for all jobs during the year is 25,000, and the total expected number of
inspections is 1,500.
1. Refer to Figure 3-1. Using direct labour hours to assign overhead, the total cost of the potential job
would be
a.
£2,500.
b.
£5,500.
c.
£4,000.
d.
£4,500.
2. Refer to Figure 3-1. Using activity-based costing and the appropriate activity drivers, the total cost of
the potential job would be
a.
£1,200.
b.
£1,800.
c.
£3,700.
d.
£3,875.
Direct labour
Direct materials
Direct labour
(£125,000/50,000) 800
Total
Figure 3-2
Winter Manufacturing has four categories of overhead. The four categories and expected overhead
costs for each category for next year are listed as follows:
Maintenance
£255,000
Materials handling
125,000
Setups
30,000
Inspection
105,000
Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labour
hours. 100,000 direct labour hours are budgeted for next year.
The company has been asked to submit a bid for a proposed job. The plant manager feels that
obtaining this job would result in new business in future years. Usually bids are based upon full
manufacturing cost plus 10 per cent.
Estimates for the proposed job are as follows:
Direct materials
£15,000
Direct labour (8,000 hours)
£12,000
Number of material moves
100
Number of inspections
120
Number of setups
24
Number of machine hours
4,000
3. Refer to Figure 3-2. The plant manager has heard of a new way of applying overhead that uses cost
pools and cost drivers/allocation bases. Expected activity for the four cost drivers that would be used
are:
Machine hours
60,000
Material moves
20,000
Setups
3,000
Quality inspections
12,000
What is the amount of overhead allocated to the proposed job if Winter Manufacturing uses direct
labour hours as its only cost driver?
a.
£41,200
b.
£30,400
c.
£30,000
d.
£20,800
Overhead:
(£50,000/25,000) 500
(£75,000/1,500) 4
Total
4. Refer to Figure 3-2. The plant manager has heard of a new way of applying overhead that uses cost
pools and activity cost drivers. Expected activity for the four activity drivers that would be used are:
Machine hours
60,000
Material moves
20,000
Setups
3,000
Quality inspections
12,000
What is the total cost of the proposed job if Winter Manufacturing uses direct labour hours as its only
activity driver?
a.
£72,000
b.
£68,200
c.
£56,200
d.
£53,200
Direct materials
Direct labour
Overhead (£5.15 8,000)
Total
5. 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.
Figure 3-3
Zipp Company manufactures two products (X and Y). The overhead costs (£84,000) have been
divided into three cost pools that use the following activity cost drivers:
Product
Number of Setups
Machine Hours
Packing Orders
X
10
500
75
Y
10
2,000
175
Cost per pool
£9,000
£60,000
£15,000
6. Refer to Figure 3-3. What is the allocation rate per packing order using activity-based costing?
a.
£15,000
b.
£60
c.
£7,500
d.
£200
7. Refer to Figure 3-3. What is the amount of overhead cost to be assigned to Product X using machine
hours as the activity driver in an activity-based costing system?
a.
£12,000
b.
£60,000
c.
£48,000
d.
£16,800
8. Zang Manufacturing Company manufactures two products (A and B). The overhead costs (£58,000)
have been divided into three cost pools that use the following activity cost drivers:
Number of Labour
Product
Number of Orders
Transactions
Labour Hours
A
15
50
500
B
10
150
2,000
Cost per pool
£10,000
£8,000
£40,000
What is the allocation rate per order using ABC?
a.
£10,000
b.
£2,320
c.
£400
d.
£58,000
Figure 3-4
Quint Manufacturing uses an activity-based costing system. The company produces Model 1 and
Model 2. Information relating to the two products is as follows:
Model 1
Model 2
Units produced
24,000
30,000
Machine hours
7,500
8,500
Direct labour hours
8,000
12,000
Material handling (number of moves)
4,000
6,000
Setups
5,000
7,000
The following costs are reported:
Material handling
£ 40,000
Labour-related overhead
120,000
Setups
60,000
9. Refer to Figure 3-4. Setup costs assigned to Model 2 are
a.
£36,000.
b.
£35,000.
c.
£28,000.
d.
£25,000.
10. Refer to Figure 3-4. Labour-related overhead costs assigned to Model 1 are
a.
£60,000.
b.
£58,000.
c.
£54,400.
d.
£48,000.
11. The calculation of unit costs is important for
a.
inventory valuation.
b.
income determination.
c.
pricing.
d.
all of the above.
12. Traditional-based product costing 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.
13. When actual overhead cost exceeds overhead applied to production,
a.
over-absorbed overhead is added to cost of goods sold.
b.
over-absorbed overhead is deducted from cost of goods sold.
c.
under-absorbed overhead is added to cost of goods sold.
d.
under-absorbed overhead is deducted from cost of goods sold.
14. When applied overhead exceeds actual overhead cost,
a.
over-applied(absorbed) overhead is added to cost of goods sold.
b.
overapplied overhead is deducted from cost of goods sold.
c.
underapplied overhead is added to cost of goods sold.
d.
underapplied overhead is deducted from cost of goods sold.
15. 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.
Figure 3-5
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.
16. Refer to Figure 3-5. 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.
Direct materials
Direct labour
Overhead:
(£320,000/80,000) 750
Total cost
17. Refer to Figure 3-5. 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
Direct labour
Overhead:
(£120,000/40,000) 400
(£200,000/2,500) 6
Total cost
Figure 3-6
Ray Manufacturing has four categories of overhead. The four categories and the expected overhead
costs for each category for next year are as follows:
Maintenance
£510,000
Materials handling
250,000
Setups
60,000
Inspection
210,000
Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labour
hours. For next year, 100,000 direct labour hours are budgeted.
The company has been asked to submit a bid for a proposed job. The plant manager feels that
obtaining this job would result in new business in future years. Usually bids are based upon full
manufacturing cost plus 10 percent.
Estimates for the proposed job are as follows:
Direct materials
£30,000
Direct labour (8,000 hours)
£24,000
Number of materials moves
100
Number of inspections
120
Number of setups
24
Number of machine hours
4,000
The plant manager has heard of a new way of applying overhead that uses cost pools and cost drivers.
Expected activity for the four activity-based cost drivers that would be used are as follows:
Machine hours
60,000
Material moves
20,000
Setups
3,000
Quality inspections
12,000
18. Refer to Figure 3-6. If Ray Manufacturing used activity-based cost drivers to assign overhead, the total
amount of overhead allocated to the proposed job would be
a.
£37,830.
b.
£39,850.
c.
£41,830.
d.
£44,913.
19. Refer to Figure 3-6. If Ray Manufacturing used activity-based cost drivers to assign overhead, the total
cost of the proposed job would be
a.
£98,913.
b.
£95,830.
c.
£93,850.
d.
£91,830.
20. Refer to Figure 3-6. If Ray Manufacturing used activity-based cost drivers to assign overhead and the
company’s bid is full cost plus 10 per cent, the company’s bid would be
a.
£108,804.
b.
£105,413.
c.
£103,235.
d.
£101,013.
Figure 3-7
Granite, Inc., 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
£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.
21. Refer to Figure 3-7. If Granite, Inc., 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.
Direct materials
Direct labour
Overhead:
Maintenance (£8.50 4,000)
Materials handling (£12.50 100)
Setups (£20 24)
Inspection (£17.50 120)
Total cost
22. Refer to Figure 3-7. If Granite, Inc., 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.
23. Refer to Figure 3-7. If Granite’s direct labour hours are used to assign overhead, the unit cost for Job
500 would be
a.
£104.
b.
£105.
c.
£114.
d.
£119.
Figure 3-8
Wheat Manufacturing has four categories of overhead. The four categories and the expected overhead
costs for each category for next year are as follows:
Maintenance
£120,000
Materials handling
18,000
Setups
16,000
Inspection
60,000
Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labour
hours. For next year, 20,000 direct labour hours are budgeted.
The company has been asked to submit a bid for a proposed job. The plant manager feels that
obtaining this job would result in new business in future years. Usually bids are based upon full
manufacturing cost plus 15 per cent.
Estimates for the proposed job are as follows:
Direct materials
£2,000
Direct labour (600 hours)
£6,000
Number of materials moves
4
Number of inspections
6
Number of setups
8
Number of machine hours
80
In the past, full manufacturing cost has been calculated by allocating overhead using a volume-based
cost driver—direct labour hours. The plant manager has heard of a new way of applying overhead that
uses cost pools and cost drivers.
Expected activity for the four activity-based cost drivers that would be used are as follows:
Machine hours
5,000
Material moves
600
Setups
200
Quality inspections
1,000
24. Refer to Figure 3-8. If Wheat Manufacturing used direct labour hours as the cost driver and the
company’s bid is full cost plus 15 per cent, the company’s bid would be
a.
£17,480.
b.
£16,583.
c.
£13,110.
d.
£12,765.
Direct materials
Direct labour
Overhead [(£360,000/4,000) 100]
Total cost
25. ____ refers to the assignment of indirect costs to cost objects.
a.
Allocation
b.
Direct tracing
c.
Physical observation
d.
Cost management
26. Which of the following methods of assigning costs is based on convenience or some assumed linkage,
and reduces the overall accuracy of the cost assignments?
a.
direct tracing
b.
cost driver tracing
c.
allocation
d.
all of the above
27. The optimal level in the trade-off between measurement and error costs is when
a.
measurement costs are greater than error costs.
b.
measurement costs are less than error costs.
c.
measurement costs equal error costs.
d.
the total of measurement costs and error costs are maximized.
28. Support departments
a.
are responsible for manufacturing the products sold to customers.
b.
work directly on the products of the firm.
c.
provide services directly to customers.
d.
provide essential services to the producing departments.
29. Which of the following departments is NOT a support department?
a.
food services
b.
bottling
c.
health services
d.
security
30. Examples of support departments include all of the following EXCEPT
a.
maintenance.
b.
personnel.
c.
machining.
d.
data processing.
31. Examples of producing departments include all of the following EXCEPT
a.
mixing.
b.
molding.
c.
packaging.
d.
accounting.
32. Support department costs are accounted for in which one of the following ways?
a.
They are allocated directly to units of product.
b.
They are allocated to producing departments and then allocated to units of product.
c.
They are allocated to units of product and then allocated to the producing departments.
d.
They are expensed as incurred.
33. A possible causal factor to use when allocating cafeteria costs would be
a.
number of square feet.
b.
number of direct labour hours.
c.
number of employees.
d.
appraised value of square footage.
34. Which of the following allocation methods fully recognizes services that support departments provide
to each other?
a.
direct method
b.
sequential method
c.
reciprocal method
d.
all of the above
35. Staff Company allocates common Building Department costs to producing departments (P1 and P2)
based on space occupied, and it allocates common Personnel Department costs based on the number of
employees. Space occupancy and employee data are as follows:
Building
Personnel
Dept. P1
Dept. P2
Space occupied
2,000 m.
10,000 m.
120,000 m.
70,000 m.
Employees
6
10
80
50
If Staff Company uses the sequential allocation method and the support department with the highest
percentage of interdepartmental services is allocated first, the ratio representing the portion of
Personnel Department costs allocated to Department P2 is
a.
50/146.
b.
90/140.
c.
50/140.
d.
50/130.
36. Oaks Company has two support departments, Maintenance Department (MD) and Personnel
Department (PD), and two producing departments, P1 and P2. The Maintenance Department costs of
£30,000 are allocated on the basis of standard service used. The Personnel Department costs of £4,500
are allocated on the basis of number of employees. The direct costs of Departments P1 and P2 are
£9,000 and £15,000, respectively.
Data on standard service hours and number of employees are as follows:
MD
PD
P1
P2
Standard service hours used
100
50
300
150
Number of employees
10
20
90
90
Direct labour hours
50
50
250
250
Using the sequential method, if the support department with the highest percentage of
interdepartmental service is allocated first, the cost of the support departments allocated to Department
P1 is
a.
£12,750.
b.
£24,000.
c.
£20,295.
d.
£21,750.
Maintenance (300/500 £30,000)
Personnel [90/180 (£4,500 + £3,000)]
37. The method of accounting for inventory that assigns all manufacturing costs to inventory is sometimes
referred to as:
a.
absorption costing.
b.
FIFO.
c.
the weighted average cost method.
d.
conversion costing.
38. Which of the following is a key consideration in selecting an allocation base?
a.
The allocation base should have an indirect association with the cost objective.
b.
The allocation base should be difficult to measure.
c.
There should be logical association between the allocation base and the incidence of costs.
d.
The allocation base should be out of the control of management.
39. Which of the following is a reason to accumulate and separately assign costs by departments?
a.
The company wants to reduce the complexity of its cost accounting system.
b.
The company is comprised of multiple departments, each of which exhibit unique cost
behaviour patterns.
c.
The company wishes to implement an activity based costing system.
d.
The company has a large amount of capital invested in human resource training.
40. Which of the following characteristics is a consequence of the implementation of a plant-wide
allocation rate?
a.
The uniqueness of individual departments is not reflected in the cost numbers.
b.
Allocations are first conducted among departments, and then aggregated for the plant as a
whole.
c.
Downstream costs are not measured at all.
d.
Managers have absolutely no incentive to control costs.
41. Service departments:
a.
are responsible for manufacturing the products sold to customers.
b.
work directly on the firm’s products.
c.
provide services directly to customers.
d.
provide support services to the producing departments.
42. ____ is (are) a method of allocating service department costs that gives partial recognition to
interdepartmental services by using a methodology that allocates service department costs sequentially
both to the remaining service departments and the producing departments.
a.
The direct method
b.
The step method
c.
The linear algebra method
d.
The direct and step methods
43. Which of the following principles should be applied when the step method of allocating service
department costs is used?
a.
The sequence of allocation among departments should be randomly selected.
b.
The sequence of allocation among departments should proceed from the largest
department as measured by total assets to the smallest.
c.
The sequence of allocation among departments should proceed from the largest provider
of interdepartmental services to the smallest.
d.
All possible sequences of service department allocations should be computed. The
sequence that provides the largest allocation of service costs should then be selected.
44. Which of the following accurately describes advantages and disadvantages of employing a system of
allocation that uses a plant-wide rate?
a.
The plant-wide rate approach is the simplest to apply, but it is also the most costly to
implement.
b.
The plant-wide rate approach is the simplest to apply, but most likely provides the least
accurate product costs.
c.
The plant-wide rate may be straightforward, but it is not appropriate for small businesses
that offer a single service or product.
d.
The plant-wide rate really offers no advantage whatsoever.
45. Although adding more activity cost pools to an activity-based costing system may improve the
accuracy of product costing, this increase in accuracy must be judged against:
a.
the cost of the product.
b.
the price of the product.
c.
the cost of developing and maintaining the additional cost pools.
d.
all of the above.
SHORT ANSWER
1. Define the terms cost objectives, cost pools, and allocation bases.
2. Explain the key considerations in establishing cost pools and in selecting an allocation base.
3. Why is it important to have an accurate and reliable product costing system?
PROBLEM
1. The Jewell plant has two categories of overhead: maintenance and inspection. Costs expected for these
categories for the coming year are as follows: