Cost Accounting, 15e Global Edition (Horngren/Datar/Rajan)
Chapter 5 Activity-Based Costing and Activity-Based Management
Objective 5.1
1) Which of the following statements is true of a peanut-butter costing system?
A) A peanut-butter costing system typically has more-homogeneous indirect cost pools.
B) A peanut-butter costing system broadly averages or spreads the cost of resources uniformly to cost
objects.
C) A peanut-butter costing system assumes that all costs are variable.
D) In a peanut-butter costing system, costs of activities are used to assign costs to other cost objects such
as products or services based on the activities the products or services consume.
2) Overcosting a particular product may result in ________.
A) loss of market share
B) pricing the product too low
C) operating efficiencies
D) understating total product costs
3) For a company with diverse products, undercosting overhead of a product will lead to ________.
A) misallocating direct labor costs of the product.
B) misallocating direct material costs of the product
C) misallocating indirect costs of another product
D) misallocating direct costs of another product
4) Aqua Company produces two products–Alpha and Beta. Alpha has a high market share and is
produced in bulk. Production of Beta is based on customer orders and is custom designed. Also, 55% of
Beta’s cost is shared between design and setup costs, while Alpha’s major portions of costs are direct
costs. Alpha is using a single cost pool to allocate indirect costs. Which of the following statements is true
of Aqua?
A) Aqua will overcost Beta’s direct costs as it is using a single cost pool to allocate indirect costs.
B) Aqua will undercost Alpha’s indirect costs because alpha has high direct costs.
C) Aqua will overcost Alpha’s indirect costs as it is using a single cost pool to allocate indirect costs.
D) Aqua will overcost Beta’s indirect costs because beta has high indirect costs.
5) Product-cost cross-subsidization ________.
A) exists when one overcosted product results in more than one other product being overcosted
B) means that if a company undercosts more than one of its products, it will overcost more than one of its
other products
C) means that if a company undercosts one of its products, it will overcost at least one of its other
products
D) exists only when one overcosted product results in all other products being overcosted
6) An accelerated need for refined cost systems is due to ________.
A) global monopolies
B) rising prices
C) intense competition
D) a shift toward increased direct costs
7) Uniformly assigning the costs of resources to cost objects when those resources are actually used in a
nonuniform way is called ________.
A) activity-based costing
B) uniform costing
C) peanut-butter costing
D) department costing
8) Product-cost cross-subsidization is very common when costs are uniformly spread across various
products.
9) Companies that overcost products will most likely lose market share.
10) If companies increase market share in a given product line because their reported costs are less than
their actual costs, they will become more profitable in the long run.
11) As product diversity and indirect costs increase, it is usually best to switch away from a broad
averaging system to an activity-based cost system.
12) Peanut-butter costing system is a more refined costing system compared to activity-based costing
system.
13) Explain how a top-selling product may actually result in losses for the company.
Objective 5.2
1) Refining a cost system includes ________.
A) classifying as many costs as indirect costs as is feasible
B) creating as many cost pools as possible
C) identifying the activities involved in a process
D) seeking a lesser level of detail
2) Which of the following is true of refinement of a costing system?
A) While refining a costing system, companies should identify as many indirect costs as is economically
feasible.
B) A homogeneous cost pool will use multiple cost drivers to allocate costs.
C) It reduces the use of broad averages for assigning the cost of resources to cost objects.
D) It is likely to yield the most decision-making benefits when direct costs are a high percentage of total
costs.
3) Which of the following is a reason that has accelerated the demand for refinements to the costing
system?
A) The declining demand for customized products has led managers to decrease the variety of products
and services their companies offer.
B) The use of product and process technology has led to an increase in indirect costs and a decrease in
direct costs.
C) The increased of automated processes has led to the increase in direct manufacturing cost leading to a
decrease in breakeven point.
D) The increasing competition in product markets has led to an increase in contribution margin resulting
in a decrease of breakeven point.
4) Demand for refinements to the costing system has accelerated due to ________.
A) increase in direct costs
B) decrease in product diversity
C) decrease in indirect costs
D) competition in product markets
5) Collin Inc. produces hospital equipment and the setup requirements vary from product to product.
Collin produces its products based on customer orders and uses ABC costing. In one of its indirect cost
pools, setup costs and distribution costs are pooled together. Costs in this pool are allocated using
number of customer orders for the easiness of costing operations. Based on the information provided,
which of the following arguments is valid?
A) Collin has clearly failed to identify as many direct costs as is economically feasible.
B) All costs in a homogeneous cost pool have the same or a similar cause-and-effect relationship with the
single cost driver that is used as the cost-allocation base for Collin.
C) Collin has unnecessarily wasted resources by classifying setup and distribution costs as they could
have been considered as direct costs.
D) Collin has failed to use the correct cost driver as the cost-allocation base for setup costs.
6) When refining a costing system, a company should classify as many costs as possible as indirect costs,
thereby minimizing the extent to which costs have to be traced rather than allocated.
7) A refined costing system provides better measurement of the costs of indirect resources used by
different cost objects, no matter how differently various cost objects use indirect resources.
8) Indirect labor and distribution costs would most likely be in the same activity-cost pool.
9) Direct tracing of costs reduces the amount of costs classified as indirect costs.
10) A cost-allocation base is a necessary element when using a strategy that will refine a costing system.
11) What are the factors that are causing many companies to refine their costing systems to obtain more
accurate measures of the costs of their products?
Objective 5.3
1) ABC systems create ________.
A) one large cost pool
B) homogenous activity-related cost pools
C) activity-cost pools with a broad focus
D) activity-cost pools containing many direct costs
2) Activity based costing system differs from traditional costing systems in the treatment of ________.
A) direct labor costs
B) direct material costs
C) prime costs
D) indirect costs
3) ABC systems ________.
A) highlight the different levels of activities
B) limit cost drivers to units of output
C) allocate costs based on the overall level of activity
D) generally undercost complex products
4) Which of the following statements is true of activity-based costing?
A) In activity-based costing, direct labor-hours is always the best allocation base to allocate all non-
manufacturing indirect costs.
B) Activity based costing is more suited to companies with high product diversity than companies with
single product line.
C) Activity based costing broadly averages or spreads the cost of resources uniformly to cost objects such
as products or services.
D) The main advantage of activity-based costing over peanut-butter costing is the accurate distribution of
all direct costs to the products.
5) A single indirect-cost rate distort product costs because ________.
A) there is an assumption that all support activities affect all products
B) it recognizes specific activities that are required to produce a product
C) competitive pricing is ignored
D) it assumes all costs are product costs
6) Extracts from cost information of Hebar Corp.:
Simple L3
Pack
Complex L7 Pack
Total
Setup cost allocated using direct labor-hours
$18,750
$6,250
$25,000
Setup cost allocated using setup-hours
$13,200
$11,800
$25,000
Which of the following statement is true of Hebar’s setup costs under traditional costing?
A) L3 pack is undercosted by $5,550
B) L7 pack is undercosted by $5,450
C) L3 pack is overcosted by $5,550
D) L7 pack is overcosted by $5,550
7) Which of the following statements is true of activity-based costing?
A) Activity-based costing ignores the allocation of marketing and distribution costs.
B) Activity-based costing is more likely to result in major differences from traditional costing systems if
the firm manufactures only one product rather than multiple products.
C) Activity-based costing classifies some of the indirect costs as direct costs.
D) Chances of product-cost cross-subsidization are higher in activity-based costing compared to
traditional costing systems.
8) Activity-based costing (ABC) can eliminate cost distortions because ABC systems ________.
A) establish a cause-and-effect relationship with the activities performed
B) use single cost pool for all overhead costs, thereby enabling simplicity
C) use a broad average to allocate all overhead costs
D) never consider interactions between different departments in assigning support costs
9) Product lines that produce different variations (models, styles, or colors) often require specialized
manufacturing activities that translate into ________.
A) fewer indirect costs for each product line
B) decisions to drop product variations
C) a greater number of direct manufacturing labor cost allocation rates
D) greater overhead costs for each product line
Premium Company provides the following ABC costing information:
Activities Total Costs Activity-cost drivers
Account inquiry $200,000 10,000 hours
Account billing $140,000 4,000,000 lines
Account verification accounts $75,000 40,000 accounts
Correspondence letters $ 25,000 4,000 letters
Total costs $440,000
The above activities are used by Departments A and B as follows:
Department A Department B
Account inquiry hours 2,500 hours 4,000 hours
Account billing lines 400,000 lines 250,000 lines
Account verification accounts 10,000 accounts 8,000 accounts
Correspondence letters 1,200 letters 1,600 letters
10) How much of the account inquiry cost will be assigned to Department A?
A) $50,000
B) $200,000
C) $60,000
D) $80,000
11) How much of the account billing cost will be assigned to Department B?
A) $8,500
B) $8,250
C) $8,750
D) $8,540
12) How much of account verification costs will be assigned to Department A?
A) $15,000
B) $18,750
C) $75,000
D) $5,000
13) How much of correspondence costs will be assigned to Department A?
A) $4,000
B) $6,250
C) $7,500
D) $10,000
14) How much of the total costs will be assigned to Department A?
A) $90,250
B) $90,650
C) $90,350
D) $90,750
15) How much of the total costs will be assigned to Department B?
A) $117,350
B) $113,250
C) $113,750
D) $112,350
16) Dalrymple Company produces a special spray nozzle. The budgeted indirect total cost of inserting the
spray nozzle is $80,000. The budgeted number of nozzles to be inserted is 40,000. What is the budgeted
indirect cost allocation rate for this activity?
A) $0.50
B) $1.00
C) $1.50
D) $2.00
17) Activity-based costing is most likely to yield benefits for companies ________.
A) with complex product design processes
B) with operations that remain fairly consistent
C) in a monopolistic market
D) having nominal percentage of indirect costs
18) Which of the following statements is true of ABC systems?
A) ABC systems are time-driven cost systems.
B) ABC systems classify some direct costs as indirect costs and some indirect costs as direct costs.
C) ABC systems provide valuable information to managers beyond accurate product costs.
D) ABC systems assume all costs are variable costs.
Teecorp Company provides the following ABC costing information:
Activities Total Costs Activity-cost drivers
Labor $320,000 8,000 hours
Gas $36,000 6,000 gallons
Invoices $40,000 2,500 invoices
Total costs $396,000
The above activities used by their three departments are:
Lawn Department Bush Department Plowing Department
Labor 2,500 hours 1,200 hours 4,300 hours
Gas 1,700 gallons 800 gallons 3,500 gallons
Invoices 1,600 invoices 400 invoices 500 invoices
19) How much of the labor cost will be assigned to the Bush Department?
A) $42,000
B) $48,000
C) $40,000
D) $50,000
20) If labor hours are used to allocate the non-labor, overhead costs, what is the overhead allocation rate?
A) $49.50 per hour
B) $24 per hour
C) $4.60 per hour
D) $9.50 per hour
21) How much of invoice cost will be assigned to the Bush Department?
A) $6,400
B) $8,000
C) $25,600
D) $40,000
22) How much of the gas cost will be assigned to the Lawn Department?
A) $12,000
B) $10,200
C) $10,020
D) $10,000
23) How much of the total cost will be assigned to the Plowing Department?
A) $396,000
B) $201,000
C) $134,600
D) $172,000
24) How much of the total costs will be assigned to the Lawn Department?
A) $134,500
B) $135,600
C) $135,800
D) $134,600
Answer the following questions using the information below:
Gregory Company has identified three cost pools to allocate overhead costs. The following estimates are
provided for the coming year:
Cost Pool Overhead Costs Cost driver Activity level
Supervision of direct labor $326,000 Direct labor-hours 900,000
Machine maintenance $132,000 Machine-hours 960,000
Facility rent $217,000 Square feet of area 100,000
Total overhead costs $675,000
The accounting records show the Mossman Job consumed the following resources:
Cost driver Actual level
Direct labor-hours 200
Machine-hours 1,500
Square feet of area 70
25) If direct labor-hours are considered the only overhead cost driver, what is the single cost driver rate
for Gregory?
A) $1.33 per direct labor-hour
B) $0.80 per direct labor-hour
C) $0.75 per direct labor-hour
D) $1.25 per direct labor-hour
26) Under activity-based costing, what is the amount of machine maintenance costs allocated to the
Mossman Job?
A) $206.00
B) $206.25
C) $206.75
D) $206.50
Answer the following questions using the information below:
Velshi Printers has contracts to complete weekly supplements required by forty-six customers. For the
year 2015, manufacturing overhead cost estimates total $840,000 for an annual production capacity of 12
million pages.
For 2015 Velshi Printers has decided to evaluate the use of additional cost pools. After analyzing
manufacturing overhead costs, it was determined that number of design changes, setups, and inspections
are the primary manufacturing overhead cost drivers. The following information was gathered during
the analysis:
Cost pool Manufacturing overhead costs Activity level
Design changes $ 120,000 300 design changes
Setups 640,000 5,000 setups
Inspections 80,000 8,000 inspections
Total manufacturing overhead costs $840,000
During 2015, two customers, Money Managers and Hospital Systems, are expected to use the following
printing services:
Activity Money Managers Hospital Systems
Pages 60,000 76,000
Design changes 10 0
Setups 20 10
Inspections 30 38
27) What is the cost driver rate if manufacturing overhead costs are considered one large cost pool and
are assigned based on 12 million pages of production capacity?
A) $0.10 per page
B) $0.07 per page
C) $0.70 per page
D) $0.05 per page
28) Using pages printed as the only overhead cost driver, what is the manufacturing overhead cost
estimate for Money Managers during 2015?
A) $5,000
B) $3,500
C) $4,200
D) $6,000
Answer the following questions using the information below:
Xylon Corp. has contracts to complete weekly supplements required by forty-six customers. For the year
2015, manufacturing overhead cost estimates total $840,000 for an annual production capacity of 10
million pages.
For 2015, Xylon decided to evaluate the use of additional cost pools. After analyzing manufacturing
overhead costs, it was determined that number of design changes, setups, and inspections are the
primary manufacturing overhead cost drivers. The following information was gathered during the
analysis:
Cost pool Manufacturing overhead costs Activity level
Design changes $ 160,000 200 design changes
Setups 670,000 4,000 setups
Inspections 80,000 16,000 inspections
Total manufacturing overhead costs $910,000
During 2015, two customers, Money Managers and Hospital Systems, are expected to use the following
printing services:
Activity Money Managers Hospital Systems
Pages 60,000 76,000
Design changes 10 2
Setups 20 10
Inspections 30 38
29) If manufacturing overhead costs are considered one large cost pool and are assigned based on 10
million pages of production capacity, what is the cost driver rate?
A) $0.750 per page
B) $0.240 per page
C) $0.670 per page
D) $0.091 per page
30) Under ABC costing, what is the inspection cost allocated to Xylon Corp.?
A) $190
B) $160
C) $150
D) $180
31) An activity-based costing system with many activities can become overly detailed and unwieldy to
operate.
32) An activity-based costing system is necessary for costing services that are similar.
33) In activity based costing systems, limiting cost-allocation bases to only units of output strengthens the
cause-and-effect relationship between the cost-allocation base and the costs in a cost pool.
34) Activity-based costing attempts to identify the most relevant cause-and-effect relationship for each
activity pool without restricting the cost driver to only units of output or variables related to units of
output.
35) Explain how activity-based costing systems can provide more accurate product costs than traditional
cost systems.
Objective 5.4
1) ________ is an example of an output unit-level cost in the cost hierarchy.
A) Factory rent expense
B) Building security costs
C) Top management compensation costs
D) Machine depreciation
2) For a company which produce its products in batches, the CEO‘s salary is a(n) ________ cost.
A) batch-level
B) output unit-level
C) facility-sustaining
D) product-sustaining
3) Top management compensation cost is an example of ________ in the cost hierarchy.
A) unit-level costs
B) batch-level costs
C) product-sustaining costs
D) facility-sustaining costs
4) ________ costs support the organization as a whole.
A) Unit-level
B) Batch-level
C) Product-sustaining
D) Facility-sustaining
5) It is usually difficult to find good cause-and-effect relationships between ________ and a cost allocation
base.
A) unit-level costs
B) batch-level costs
C) product-sustaining costs
D) facility-sustaining costs
6) Facility-sustaining costs are the costs of activities ________.
A) undertaken to support individual products or services regardless of the number of units or batches in
which the units are produced
B) related to a group of units of a product or service rather than each individual unit of product or service
C) that managers cannot trace to individual products or services but that support the organization as a
whole
D) performed on each individual unit of a product or service such as the cost of energy, machine
depreciation, and repair
7) ________ are the costs of activities undertaken to support individual products or services regardless of
the number of units or batches in which the units are produced.
A) Unit-level costs
B) Batch-level costs
C) Product-sustaining costs
D) Facility-sustaining costs
8) Unit-level cost drivers are most appropriate as an overhead assignment base when ________.
A) several complex products are manufactured
B) only one product is manufactured
C) direct material costs are low
D) prime costs are low
9) With traditional costing systems, products manufactured in small batches and in small annual volumes
may be ________ because batch-related and product-sustaining costs are assigned using unit-related
drivers.
A) overcosted
B) fairly costed
C) undercosted
D) ignored
Answer the following questions using the information below:
Products S5 and CP8 each are assigned $100.00 in indirect costs by a traditional costing system. An
activity analysis revealed that although production requirements are identical, S5 requires 45 minutes less
setup time than CP8.
10) According to an ABC system, CP8 is ________ under the traditional system.
A) undercosted
B) overcosted
C) fairly costed
D) accurately costed