Chapter 5 – Activity-Based Costing and Management
46. Pound Industries’ customer service department follows up on customer complaints by
telephone inquiry. During a recent period, the department initiated 10,000 calls and incurred
costs of $312,000. Of these calls, 3,800 were for the company’s wholesale operation; the
remainder was for the retail division. Costs allocated to the wholesale operation are:
47. Baxter customer service department follows up on customer complaints by telephone
inquiry. During a recent period, the department initiated 10,000 calls and incurred costs of
$312,000. Of these calls, 3,800 were for the company’s wholesale operation; the remainder
was for the retail division. Costs allocated to the retail division are:
Chapter 5 – Activity-Based Costing and Management
Use the following information to answer Questions 48 & 49.
Skyline Florists uses an activity-based costing system to compute the cost of making floral
bouquets and delivering the bouquets to its commercial customers. Company personnel who
earn $180,000 typically perform both tasks; other firm-wide overhead is expected to total
$70,000. These costs are allocated as follows:
Bouquet Production
Delivery
Other
Wages and salaries
60%
30%
10%
Other overhead
50%
35%
15%
Skyline anticipates making 20,000 bouquets and 4,000 deliveries in the upcoming year.
48. The cost of wages and salaries and other overhead that would be charged to each bouquet
made is:
49. The cost of wages and salaries and other overhead that would be charged to each delivery
is closest to:
Chapter 5 – Activity-Based Costing and Management
Use the following information to answer Questions 50-57.
Barnett 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
10,000
5,000
2,000
1,000
500
200
10
15
25
1
3
5
2
2
2
50. What is Barnett’s pool rate for the material-handling activity?
51. What is Barnett’s pool rate for the material-insertion activity?
52. What is Barnett’s pool rate for the automated machinery activity?
53. What is Barnett’s pool rate for the finishing activity?
54. What is Barnett’s pool rate for the packaging activity?
55. Under Barnett’s activity-based costing system, what is the per-unit overhead cost of
Economy?
56. Under Barnett’s activity-based costing system, what is the per-unit overhead cost of
Standard?
57. Under Barnett’s activity-based costing system, what is the per-unit overhead cost of
Deluxe?
Chapter 5 – Activity-Based Costing and Management
Use the following information to answer Questions 58 & 59.
Bridges and Lloyd, an accounting firm, provides consulting and tax planning services. For
many years, the firm’s total administrative cost (currently $250,000) has been allocated to
services on the basis of billable hours to clients. A recent analysis found that 65% of the firm’s
billable hours to clients resulted from tax planning services, while 35% resulted from
consulting services.
The firm, contemplating a change to activity-based costing, has identified three components
of administrative cost, as follows:
Staff Support
$180,000
In-house computing charges
50,000
Miscellaneous office costs
20,000
Total
$250,000
A recent analysis of staff support found a strong correlation between the number of staff
personnel and the number of clients served (consulting, 20; tax planning, 60). 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 consumed 30% of
the firm’s computer hours and had 20% of the total client transactions.
59. If Bridges and Lloyd switched from its current accounting method to an activity-based
costing system, the amount of administrative cost chargeable to consulting services would:
60. Activity-based costing systems:
61. Flavorful Manufacturing sells a number of goods whose selling price is heavily influenced
62. Starwatch Manufacturing sells a number of goods whose selling price is heavily
influenced by cost. A recent study of product no. 520 revealed a traditionally-derived total
cost of $1,623 and a selling price of $1,850 based on that figure. A newly computed activity-
63. Magnolia Industries combines all manufacturing overhead into a single cost pool and
allocates this overhead to products by using machine hours. Activity-based costing would
likely show that with Magnolia’s current procedures that:
64. Fortner Technologies manufactures products X and Y, applying overhead on the basis of
labor hours. X, a low-volume product, requires a variety of complex manufacturing
procedures. Y, on the other hand, is both a high-volume product and relatively simplistic in
nature. What would an activity-based costing system likely disclose about products X and Y
as a result of Fortner’s current accounting procedures?
X
Y
A.
Undercosted
Undercosted
Undercosted
65. Miami Production manufactures products X and Y, applying overhead on the basis of
labor hours. X is a high-volume product and relatively simplistic in nature. Y is both a low-
volume product and requires a variety of complex manufacturing procedures. What would an
activity-based costing system likely disclose about products X and Y as a result of Miami’s
current accounting procedures?
66. Towler Inc. manufactures products J and K, applying overhead on the basis of labor hours.
J, a low-volume product, requires a variety of complex manufacturing procedures. K, on the
other hand, is both a high-volume product and relatively simplistic in nature. What would an
activity-based costing system likely disclose about products J and K as a result of Towler’s
current accounting procedures?
Undercosted Overcosted
67. Consider the following statements:
I. Product diversity creates costing problems because diverse products tend to utilize
manufacturing activities in different ways.
II. Overhead costs that are not incurred at the unit level create costing problems because such
costs do not vary with traditional application bases such as direct labor hours or machine
hours.
III. Product diversity typically exists when a single product (e.g., a ballpoint pen) is made in
different colors.
68. Consumption ratios are useful in determining:
69. Widely varying consumption ratios:
70. In comparison with a system that uses a single, volume-based cost driver, an activity-
based costing system is preferred when a company has:
71. Consider the following factors:
I. The degree of correlation between consumption of an activity and consumption of a
particular cost driver.
II. The likelihood that a particular cost driver will induce a desired behavioral effect.
III. The likelihood that a particular cost driver will cause an increase in the cost of
measurement.
Which of these factors should be considered in the selection of a cost driver?
72. Which of the following activity cost pools and activity measures likely has the lowest
degree of correlation?
Activity Cost Pool
Activity Measure
73. Overton Enterprises is converting to an activity-based costing system It wishes to depict
the various activities in its manufacturing process along with the activities’ relationships.
Which of the following is a tool that the company can use to accomplish this task?
74. Successful adoptions of activity-based costing typically occur when companies rely
heavily on:
75. Which of the following statements is (are) true about non-value-added activities?
I. Non-value-added activities are often unnecessary and dispensable.
II. Non-value-added activities may be necessary but are being performed in an inefficient and
improvable manner.
III. Non-value-added activities can be eliminated without deterioration of product quality,
performance, or perceived value.
76. During a recent accounting period, Falcon Express’ shipping department processed 26
orders. Each order typically takes four hours to complete. However, the average time
increased to five hours because of various departmental inefficiencies. If shipping labor is
paid $14 per hour, the company’s non-value-added cost would be:
77. Flagler Corporation takes eight hours to complete the setup process for a certain electrical
component, with the setup cost averaging $150 per hour. If the company’s competitor can
accomplish the same process in six hours, Flagler’s non-value-added cost would be:
78. Willow Springs produces various wooden bookcases, tables, storage units, and chairs.
Which of the following would be included in a listing of the company’s non-value-added
activities?
79. Motor Mike builds recreational motor homes. All of the following activities add value to
80. An example of a customer-value-added activity is:
81. Which of the following is not an example of a business-value-added activity?
82. The adoption of a 24/7 customer service help line is an example of a: