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4) Which of the following statements is true of costing systems?
A) Single-indirect cost pool systems always result in overcosting of products.
B) Single-indirect cost pool systems classify some direct costs as indirect costs.
C) ABC systems always result in overcosting of products.
D) ABC systems classify some indirect costs as direct costs helping to improve processes
5) Lavender Company is a logistics company and has recently implemented ABC system. Using activity-
based information, it decides to reduce the bulkiness of the packages delivered, thereby reducing costs.
This suggests that ABC system helps managers in ________ decisions.
A) pricing
B) product-mix
C) process-improvement
D) product-design
6) ABC and traditional systems are quite similar in ________.
A) the treatment of direct costs
B) the allocation of overheads
C) evaluating performance
D) the identification of cost pools
7) It is important that the product costs reflect as much of the diversity and complexity of the
manufacturing process so that ________.
A) total costs reflect market price
B) value-added costs can be eliminated
C) there is high likelihood of cross-subsidizing of product costs
D) product-pricing errors are minimal
8) A well-designed, activity-based cost system helps managers make better decisions because information
derived from an ABC analysis ________.
A) can be used to eliminate nonvalue-added activities
B) is easy to analyze and interpret
C) takes the choices and judgment challenges away from the managers
D) emphasizes how managers can achieve higher sales
9) One reason for assigning selling and distribution costs to products for analytical purposes is ________.
A) to justify a varied product-mix
B) that these costs should be included in the cost of goods sold in the income statement
C) to ensure that all costs are considered
D) that all direct costs must be assigned
10) ABC systems help managers to ________.
A) value ending inventory more accurately
B) identify new designs to reduce costs
C) evaluate direct material costs more efficiently
D) improve the inventory turnaround time
11) ABC reveals opportunities to reduce costs on nonvalue added activities.
12) Activity-based management refers to the use of information derived from ABC analysis to analyze
and improve operations.
13) Managers implementing ABC systems for the first time always start by analyzing budgeted costs to
identify activity-cost pools.
14) ABC costing systems cannot be used in marketing decisions.
Objective 5.8
1) Which of the following statements is true of ABC systems?
A) ABC systems provide less insight than traditional systems into the management of the indirect costs.
B) ABC systems are used by managers for strategic decisions rather than for inventory valuation in
merchandising companies.
C) Service companies find great value from ABC because a vast majority of their cost structure is
composed of direct costs.
D) ABC systems is valuable for pricing decisions but not for understanding, managing, and reducing
costs in government institutions.
2) The unique feature of an ABC system is the emphasis on ________.
A) costing individual jobs
B) department indirect-cost rates
C) multiple-cost pools
D) individual activities
3) Which of the following is a disadvantage of an activity-based costing system?
A) It classifies some indirect costs as direct costs.
B) It assumes all costs as direct costs.
C) It needs activity-cost rates to be updated regularly.
D) It ignores direct costs of a product.
Answer the following questions using the information below:
Luzent Corporation has two departments, Small and Large. Central costs could be allocated to the two
departments in various ways.
Small Department Large Department
Square footage 6,750 17,250
Number of employees 1,120 480
Sales $350,000 $1,750,000
4) If advertising expense of $483,000 is allocated on the basis of sales, the cost per cost driver rate would
be ________.
A) $0.22 per dollar of sales
B) $0.23 per dollar of sales
C) $0.25 per dollar of sales
D) $0.24 per dollar of sales
5) If total advertising expense of $483,000 is allocated on the basis of sales, the amount allocated to the
Large Department would be ________.
A) $407,500
B) $405,000
C) $402,500
D) $405,250
6) If total payroll processing costs of $64,000 are allocated on the basis of number of employees, the
amount allocated to the Small Department would be ________.
A) $44,800
B) $48,400
C) $46,200
D) $45,600
7) If total payroll processing costs of $64,000 are allocated on the basis of number of employees, the
amount allocated to the Large Department would be ________.
A) $18,400
B) $19,200
C) $17,800
D) $19,400
8) If total rent expense of $180,000 is allocated on the basis of square footage, the amount allocated to the
Small Department would be ________.
A) $50,525
B) $50,625
C) $50,725
D) $50,825
9) If total rent expense of $180,000 is allocated on the basis of square footage, the amount allocated to the
Large Department would be ________.
A) $129,175
B) $129,475
C) $129,275
D) $129,375
Answer the following questions using the information below:
Stark Corporation has two departments, Car Rental and Truck Rental. Central costs may be allocated to
the two departments in various ways.
Car Rental Truck Rental
Number of Vehicles in fleet 850 430
Number of employees 125 75
Sales $750,000 $375,000
10) If administrative expense of $62,500 is allocated on the basis of number of employees, the cost per cost
driver rate would be ________.
A) $500.00
B) $312.50
C) $833.33
D) $572.50
11) If administrative expense of $77,500 is allocated on the basis of number of employees, the amount
allocated to the Car Rental Department would be ________.
A) $47,387.50
B) $48,437.50
C) $46,877.50
D) $49,247.50
12) If advertising expense of $125,000 is allocated on the basis of sales, the amount allocated to the Car
Rental Department would be ________.
A) $83,333.33
B) $87,777.67
C) $86,666.67
D) $85,467.33
13) If advertising expense of $112,500 is allocated on the basis of sales, the cost per cost driver rate would
be ________.
A) $0.15
B) $0.11
C) $0.10
D) $0.13
14) If the facility lease expense of $384,000 is allocated on the basis of vehicles in the fleet, the amount
allocated to the Truck Rental Department would be ________.
A) $125,000
B) $127,000
C) $129,000
D) $123,000
15) If the facility lease expense of $384, 000 is allocated on the basis of vehicles in the fleet, the amount
allocated to the Car Rental Department would be ________.
A) $249,000
B) $255,000
C) $267,000
D) $261,000
16) Using activity-cost rates rather than department indirect-cost rates to allocate costs results in different
product costs when ________.
A) a single activity accounts for a sizable portion of department costs
B) there are several homogeneous cost pools
C) different activities have the same cost-allocation base
D) different products use different resources in the same proportion
17) Service companies, in particular, find great value from ABC because a vast majority of their cost
structure is composed of ________ costs.
A) prime
B) factory
C) indirect
D) committed
18) ABC systems and department costing systems use totally different approaches towards indirect cost
allocation and can never be used together.
19) Companies often use costing systems that have features of ABC systems but that do not emphasize
individual activities.
20) Department costing systems always properly recognize how resources are used by products as they
require the creation of multiple indirect cost pools.
21) ABC systems provide greater insight than traditional systems into the management of indirect costs.
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22) At Deutschland Electronics, product lines are charged for call center support costs based on sales
revenue. Last year's summary of call center operations revealed the following:
Surveillance Products Specialty Products
Number of calls for information 1,000 4,000
Average call length for information 3 minutes 8 minutes
Number of calls for warranties 300 1,200
Average call length for warranties 7 minutes 15 minutes
Sales revenue $8,000,000 $5,000,000
Deutschland Electronics currently allocates call center support costs using a rate of 0.5% of sales revenue.
Required:
a. Compute the amount of call center support costs allocated to each product line under the current
system.
b. Assume Deutschland decides to use the average call length for information to assign last year's support
costs. Does this allocation method seem more appropriate than percentage of sales? Why or why not?
c. Assume Deutschland decides to use the numbers of calls for information and for warranties to assign last
year's support costs of $65,000. Compute the amount of call center support costs assigned to each product
line under this revised ABC system.
d. Deutschland Electronics assigns bonuses based on departmental profits. How might the Specialty
Products manager try to obtain higher profits for next year if support costs are assigned based on the
average call length for information?
e. Discuss the barriers for implementing ABC for this call center.
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23) The Skynet Company is noted for an exceptionally impressive line of Mardi Gras masks. Skynet has
established the following selling and distribution support activity-cost pools and their corresponding
activity drivers for the year 2015:
Activity Cost Cost driver
Marketing $150,000 $1,250,000 of sales
Customer service 50,000 10,000 customer
Order execution 15,000 200 orders
Warehousing 15,000 125 product lines
Required:
a. Determine the activity-cost-driver rate for each of the four selling and distribution activities.
b. Under what circumstances is it appropriate to use each of the activity-cost drivers?
c. Describe at least one possible negative behavioral consequence for each of the four activity-cost
drivers.
24) How are cost drivers selected in activity-based costing systems?
25) Do activity-based costing systems always provide more accurate product costs than conventional cost
systems? Why or why not?
26) Even though there are no inventories for service companies, ABC systems are of great use for service
companies. Explain why and how.
27) How does ABC costing system help service companies?
