Chapter 5 – Activity-Based Costing and Management
Chapter 5
Activity-Based Costing and Management
True / False Questions
1. Because labor hours are related closely to the volume of activity in the factory, these
traditional product-costing systems often are said to be volume-based costing systems.
2. Traditional product-costing systems are structured on multiple, volume-based cost drivers.
3. In the first stage of ABC, a cost driver is selected for each activity cost pool.
4. When using ABC, overhead costs assigned to each activity comprise an activity cost pool.
5. In an activity-based costing system, direct materials used would typically be classified as a
unit-level cost.
6. Engineering design costs are typically known as batch-level activities.
7. The pool rate is defined as the cost per unit of the cost driver for a particular activity cost
pool.
8. A product’s cost is the sum of its direct-material cost, its direct-labor cost, and its overhead
cost, which is the accumulation of all the resource costs driven to the product by the various
cost drivers selected for the ABC system.
9. Activity-based costing systems have a tendency to distort product costs.
10. Consumption ratios are useful in determining the existence of product-line diversity.
11. There are six important factors when selecting appropriate cost drivers.
12. One of the important factors when selecting appropriate cost drivers is the ability to
overcost related services.
13. Storyboarding may be used to develop a detailed process flowchart.
14. A bill of activities is a complete listing of the activities identified and used in the ABC
analysis.
15. An example of a customer-value-added activity is final painting and polishing of the
product.
16. Non-value-added activities are the events that trigger activities and linkages among
activities.
17. Customer-profitability analysis uses activity-based costing to determine the activities,
costs, and profit associated with serving particular customers.
18. Generally speaking, companies prefer doing business with customers who order small
quantities rather than large quantities.
19. A version of ABC that has found wide acceptance in service-industry settings is called
volume-based activity-costing.
20. Simplified forms of ABC use time-driven elements for service companies that are well
aligned with the resources deployed in terms of units of time of labor.
Chapter 5 – Activity-Based Costing and Management
Multiple Choice Questions
Use this information to answer Questions 21-22:
Rocket Products manufactures three types of remote-control devices: Economy, Standard, and
Deluxe. The company, which uses activity-based costing, has identified five activities (and
related cost drivers). Each activity, its budgeted cost, and related cost driver is identified
below.
Activity
Cost
Cost Driver
Material handling
$225,000
Number of parts
Material insertion
2,475,000
Number of parts
Automated machinery
840,000
Machine hours
Finishing
170,000
Direct labor hours
Packaging
170,000
Orders shipped
Total
$3,880,000
The following information pertains to the three product lines for next year:
Economy
Standard
Deluxe
Units to be produced
10,000
5,000
2,000
Orders to be shipped
1,000
500
200
Number of parts per unit
10
15
25
Machine hours per unit
1
3
5
Labor hours per unit
2
2
2
21. Assume that Rocket is using a volume-based costing system, and the preceding overhead
costs are applied to all products on the basis of direct labor hours. The overhead cost that
would be assigned to the Deluxe product line is closest to:
22. Assume that Rocket is using a volume-based costing system, and the preceding overhead
costs are applied to all products on the basis of direct labor hours. The overhead cost that
would be assigned to the Standard product line is closest to:
23. Consider the following statements regarding traditional costing systems:
I. Overhead costs are applied to products on the basis of volume-related measures.
II. All manufacturing costs are easily traceable to the goods produced.
III. Traditional costing systems tend to distort unit manufacturing costs when numerous goods
are made that have widely varying production requirements.
Which of the above statements is (are) true?
24. Many traditional costing systems:
Chapter 5 – Activity-Based Costing and Management
Use the following information to answer Questions 25 through 28.
St. Vincent’s, Inc., currently uses traditional costing procedures, applying $800,000 of
overhead to products Beta and Zeta on the basis of direct labor hours. The company is
considering a shift to activity-based costing and the creation of individual cost pools that will
use direct labor hours (DLH), production setups (SU), and number of parts components (PC)
as cost drivers. Data on the cost pools and respective driver volumes follow.
Product
Pool No.1 (Driver: DLH)
Pool No. 2 (Driver: SU)
Pool No. 3 (Driver: PC)
Beta
1,200
45
2,250
Zeta
2,800
55
750
Pool Cost
$160,000
$280,000
$360,000
25. The overhead cost allocated to Beta by using traditional costing procedures would be:
26. The overhead cost allocated to Zeta by using traditional costing procedures would be:
27. The overhead cost allocated to Beta by using activity-based costing procedures would be:
28. The overhead cost allocated to Zeta by using activity-based costing procedures would be:
29. Carlin and Marley, an accounting firm, provides consulting and tax planning services. For
many years, the firm’s total administrative cost (currently $270,000) has been allocated to
services on this basis of billable hours to clients. A recent analysis found that 55% of the
firm’s billable hours to clients resulted from tax planning services, while 45% resulted from
consulting services.
The firm, contemplating a change to activity-based costing, has identified three components
of administrative cost, as follows:
Staff Support
$200,000
In-house computing charges
50,000
Miscellaneous office costs
20,000
Total
$270,000
A recent analysis of staff support found a strong correlation with the number of clients served.
In contrast, in-house computing and miscellaneous office cost varied directly with the number
of computer hours logged and number of client transactions, respectively. Consulting clients
served totaled 35% of the total client base, consumed 30% of the firm’s computer hours, and
accounted for 20% of the total client transactions.
If Carlin and Marley switched from its current accounting method to an activity-based costing
system, the amount of administrative cost chargeable to consulting services would:
30. The following tasks are associated with an activity-based costing system:
1— Assignment of cost to products
2— Calculation of pool rates
3— Identification of cost drivers
4— Identification of cost pools
Which of the following choices correctly expresses the proper order of the preceding tasks?
31. Which of the following is the proper sequence of events in an activity-based costing
system?
32. Which of the following tasks is not normally associated with an activity-based costing
system?
33. Which of the following is not a broad, cost classification category typically used in
activity-based costing?
34. In an activity-based costing system, direct materials used would typically be classified as
a:
35. Which of the following is least likely to be classified as a batch-level activity in an
activity-based costing system?
36. In an activity-based costing system, materials receiving would typically be classified as a:
37. Rosen, Inc., an appliance manufacturer, is developing a new line of ovens that uses
controlled-laser technology. The research and testing costs associated with the new ovens is
said to arise from a:
38. Consider the following statements regarding product-sustaining activities:
I. They must be performed for each batch of product that is made.
II. They must be performed for each unit of product that is made.
III. They are needed to support an entire product line.
39. Which of the following is least likely to be classified as a facility-level activity in an
activity-based costing system?
40.The salaries of a manufacturing plant’s management are said to arise from:
41. Which of the following choices correctly depicts a cost that arises from a batch-level
activity and one that arises from a facility-level activity?
Batch-Level Activity
Facility-Level Activity
42. Which of the following choices correctly depicts the proper classification of direct
materials used and management salaries?
Direct Materials Used
Management Salaries
43. The division of activities into unit-level, batch-level, product-sustaining level, and facility-
level categories is commonly known as a cost:
44. Pound Industries’ customer service department follows up on customer complaints by
telephone inquiry. During a recent period, the department initiated 7,000 calls and incurred
costs of $203,000. If 2,940 of these calls were for the company’s wholesale operation (the
remainder were for the retail division), costs allocated to the retail division should amount to:
45. Pound Industries’ customer service department follows up on customer complaints by
telephone inquiry. During a recent period, the department initiated 7,000 calls and incurred
costs of $203,000. If 2,940 of these calls were for the company’s wholesale operation (the
remainder were for the retail division), costs allocated to the wholesale operation should
amount to: