11) According to an ABC system, S5 uses a disproportionately ________.
A) smaller amount of unit-level costs
B) larger amount of unit-level costs
C) smaller amount of batch-level costs
D) larger amount of batch-level costs
12) Service-sustaining costs are the costs of activities that managers cannot trace to individual services but
that support the organization as a whole.
13) Quality-inspection costs is an example of batch-level costs.
14) An effective activity-based cost system always ignores facility-sustaining cost drivers.
15) Misleading cost numbers are larger when only unit-level cost drivers are used for allocating
overheads of multiple complex products.
16) Is it advisable to ignore facility-sustaining cost drivers during product costing?
17) What are the four parts of the cost hierarchy. Briefly explain each part, and contrast this cost hierarchy
to the fixed-variable dichotomy?
Objective 5.5
1) Put the following ABC implementation steps in order ________.
A Compute the allocation rates.
B Compute the total cost of the products.
C Identify the products that are the cost objects.
D Select the cost allocation bases.
A) DACB
B) DBCA
C) BADC
D) CDAB
2) ________ is considered while choosing a cost allocation base for activity costs in ABC costing.
A) Marketing strategy and material price level
B) Availability of reliable data and measures
C) Product price level
D) Market share of a product
3) Which of the following cost and cost allocation base have a strong cause and effect relationship?
A) administration costs and cubic feet
B) setup costs and square feet
C) machine depreciation and output units
D) machine maintenance and setup hours
4) Management accountants use the cost hierarchy to first calculate the ________.
A) labor costs of each product and then they compute material costs
B) overhead costs of each product and then they compute prime costs
C) factory costs of each product and then they compute labor costs
D) total costs of each product and then they compute per-unit costs
5) ABC assumes all costs are ________ because over the long run management can adjust the amount of
resources employed.
A) fixed
B) variable
C) committed
D) nondiscretionary
6) A manufacturing firm produces multiple families of products requiring various combinations of
different types of parts. Of the following, the most appropriate cost driver for assigning materials
handling costs to the various products is ________.
A) direct labor hours
B) number of units produced
C) number of parts used
D) number of suppliers involved
Answer the following questions using the information below:
Comfort Corporation manufactures two models of office chairs, a standard and a deluxe model. The
following activity and cost information has been compiled:
Number of Number of Number of
Product Setups Components Direct Labor Hours
Standard 12 8 255
Deluxe 28 12 245
Overhead costs $52,000 $78,000
7) Assume a traditional costing system applies the overhead costs based on direct labor hours. What is
the total amount of overhead costs assigned to the standard model?
A) $65,700
B) $63,600
C) $66,300
D) $66,700
8) Assume a traditional costing system applies the overhead costs based on direct labor hours. What is
the total amount of overhead costs assigned to the deluxe model?
A) $64,300
B) $63,700
C) $63,300
D) $63,600
9) Number of setups and number of components are identified as activity-cost drivers for overhead.
Assuming an activity-based costing system is used, what is the total amount of overhead costs assigned
to the standard model?
A) $49,200
B) $45,600
C) $46,800
D) $47,400
10) Number of setups and number of components are identified as activity-cost drivers for overhead.
Assuming an activity-based costing system is used, what is the total amount of overhead costs assigned
to the deluxe model?
A) $84,400
B) $83,200
C) $82,600
D) $80,800
Trintal Corporation manufactures two models of motorized go-carts, a standard and a deluxe model. The
following activity and cost information has been compiled:
Number of Number of Number of
Product Setups Components Direct Labor Hours
Standard 15 10 750
Deluxe 35 15 500
Overhead costs $16,500 $23,500
11) Assume a traditional costing system applies the $40,000 of overhead costs based on direct labor hours.
What is the total amount of overhead cost assigned to the standard model?
A) $16,000
B) $24,000
C) $25,000
D) $15,000
12) Assume a traditional costing system applies the $40,000 of overhead costs based on direct labor hours.
What is the total amount of overhead cost assigned to the deluxe model?
A) $16,000
B) $24,000
C) $25,000
D) $15,000
13) Number of setups and number of components are identified as activity-cost drivers for overhead.
Assuming an activity-based costing system is used, what is the total amount of overhead cost assigned to
the standard model?
A) $13,450
B) $14,350
C) $14,650
D) $15,150
14) Number of setups and number of components are identified as activity-cost drivers for overhead.
Assuming an activity-based costing system is used, what is the total amount of overhead cost assigned to
the deluxe model?
A) $25,650
B) $24,350
C) $26,550
D) $25,350
Answer the following questions using the information below:
Tiger Pride produces two product lines: T-shirts and Sweatshirts. Product profitability is analyzed as
follows:
T-SHIRTS SWEATSHIRTS
Production and sales volume 60,000 units 35,000 units
Selling price $16.00 $29.00
Direct material $ 2.00 $ 5.00
Direct labor $ 4.50 $ 7.20
Manufacturing overhead $ 2.00 $ 3.00
Gross profit $ 7.50 $13.80
Selling and administrative $ 4.00 $ 7.00
Operating profit $ 3.50 $ 6.80
What is projected operating income if direct materials costs of T-Shirts increase to $4.00 per unit and
direct labor costs of Sweatshirts increase to $8.20 per unit?
15) Under the revised ABC system, the activity-cost driver rate for the supervision activity is ________.
A) $2.58
B) $2.40
C) $2.24
D) $1.16
16) Under the revised ABC system, supervision costs allocated to Sweatshirts will be ________.
A) $48,720
B) $100,800
C) $100,920
D) None of these answers are correct.
17) Under the revised ABC system, total overhead costs allocated to Sweatshirts will be ________.
A) $ 48,720
B) $ 76,720
C) $224,920
D) None of these answers are correct.
18) Under the revised ABC system, overhead costs per unit for the Sweatshirts will be ________.
A) $1.39 per unit
B) $1.60 per unit
C) $2.19 per unit
D) $2.47 per unit
19) Using an ABC system, next year‘s estimates show manufacturing overhead costs will total $228,300
for 52,000 T-shirts. If all other T-shirt costs and sales prices remain the same, the profitability that can be
expected is ________.
A) $5.41 per t-shirt
B) $4.39 per t-shirt
C) $1.11 per t-shirt
D) ($0.81) per t-shirt
Answer the following questions using the information below:
Zitriks Corp. manufactures two sizes of ceramic paperweights, regular and jumbo. The following
information applies to their expectations for the planning period:
Cost Pool Overhead Costs Activity-cost driver
Materials handling $ 45,000 90,000 orders
Machine maintenance $300,000 15,000 maintenance hours
Setups $270,000 45,500 setups
Inspections $139,750 21,500 inspections
Total support costs $754,750
Production Estimates
Production units:
Regular = 8,000,000 units
Jumbo = 16,000,000 units
Machine-hours = 200,000 mh
Labor-hours = 400,000 dlh
Expected direct costs amounts to $960,000 for the period. Support cost requirements of both products are
substantially different from one another. Zitriks uses an ABC costing system.
20) The setups activity-cost driver rate is ________.
A) $6.50 per setup
B) $5.93 per setup
C) $5.75 per setup
D) $5.24 per setup
21) Which of the following is true of Zitriks’ overhead costing?
A) Multiple cost pools are appropriate for Zitriks because of high direct costs.
B) Single cost pool is appropriate for Zitriks because of high direct costs.
C) Multiple cost pools are appropriate for Zitriks because of diverse support costs.
D) Single cost pool is appropriate for Zitriks because of diverse support costs.
22) The inspections activity-cost driver rate is ________.
A) $5.50
B) $6.00
C) $6.50
D) $5.00
23) Which of the following statements is true of implementing an ABC system?
A) Managers should never compromise on the cause-and-effect relationship of cost drivers and costs.
B) The three guidelines for refining costing systems should be ignored while implementing an ABC
costing system.
C) The heterogeneous cost pools give managers greater confidence in the activity and product cost
numbers from the ABC system.
D) Identifying the cost-allocation bases defines the number of activity pools into which costs must be
grouped in an ABC system.
Answer the following questions using the information below:
Nichols Inc. manufactures remote controls. Currently the company uses a plant-wide rate for allocating
manufacturing overhead. The plant manager is considering switching-over to ABC costing system and
has asked the accounting department to identify the primary production activities and their cost drivers
which are as follows:
Activities Cost driver Allocation Rate
Material handling Number of parts $2 per part
Assembly Labor hours $20 per hour
Inspection Time at inspection station $3 per minute
The current traditional cost method allocates overhead based on direct manufacturing labor hours using
a rate of $200 per labor hour.
24) Nichols’ management is considering to implement ABC system because ________.
A) ABC system can be implemented cheaply
B) ABC system provides more accurate direct cost figures
C) ABC system is a highly refined costing system
D) ABC system requires minimal expertise to operate
25) What are the indirect manufacturing costs per remote control assuming an activity-based-costing
method is used and a batch of 50 remote controls are produced? The batch requires 100 parts, 6 direct
manufacturing labor hours, and 2.5 minutes of inspection time.
A) $4.00 per remote control
B) $6.55 per remote control
C) $24.00 per remote control
D) $327.50 per remote control
26) What are the indirect manufacturing costs per remote control assuming an activity-based-costing
method is used and a batch of 100 remote controls are produced? The batch requires 450 parts, 8 direct
manufacturing labor hours, and 10 minutes of inspection time.
A) $11.00 per remote control
B) $10.90 per remote control
C) $11.05 per remote control
D) $10.95 per remote control
Answer the following questions using the information below:
Nile Corp. 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 $380,000 Direct labor-hours 760,000
Machine maintenance $120,000 Machine-hours 960,000
Facility rent $200,000 Square feet of area 125,000
Total overhead costs $640,000
The accounting records show the Mossman Job consumed the following resources:
Cost driver Actual level
Direct labor-hours 200
Machine-hours 1,600
Square feet of area 50
27) If Nile Corp. uses the three activity cost pools to allocate overhead costs, what are the activity-cost
driver rates for supervision of direct labor, machine maintenance, and facility rent, respectively?
A) $0.50 per dlh; $0.125 per mh; $1.50 per sq ft
B) $1.25 per dlh; $0.25 per mh; $1.67 per sq ft
C) $0.50 per dlh; $0.125 per mh; $1.60 per sq ft
D) $0.40 per dlh; $0.125 per mh; $1.68 per sq ft
28) Using the three cost pools to allocate overhead costs, what is the total amount of overhead costs to be
allocated to the Mossman Job?
A) $389.00
B) $380.00
C) $385.50
D) $376.00
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
29) Assuming activity-cost pools are used, what are the activity-cost driver rates for design changes,
setups, and inspections cost pools?
A) $400 per change, $128 per setup, $10 per inspection
B) $360 per change, $320 per setup, $6.40 per inspection
C) $168 per change, $538 per setup, $42 per inspection
D) $286 per change, $152 per setup, $20 per inspection
30) Using the three cost pools to allocate overhead costs, what is the total manufacturing overhead cost
estimate for Money Managers during 2015?
A) $13,700
B) $6,500
C) $6,860
D) $10,192
Answer the following questions using the information below:
Eagle Eye Company produces two types of lenses–L7 and L9.
Single Indirect-Cost
Pool System
ABC System
Total direct costs
$77,500
$58,000
Total indirect costs
$37,500
(a)
Total costs assigned to L7
$62,000
$49,500
Total costs assigned to L9
(b)
$65,500
31) What is the total indirect costs (a) under ABC system?
A) $53,000
B) $57,000
C) $57,500
D) $40,000
32) What is the total costs assigned to L9 (b) under single indirect-cost pool system?
A) $53,000
B) $57,000
C) $55,000
D) $54,000
33) Cost of acquiring reliable data is considered when choosing a cost-allocation base to allocate costs in
ABC systems.
34) Machine depreciation can be a cost-driver for a manufacturing company under ABC system.
35) ABC systems attempt to trace more costs as indirect costs.
36) The homogeneous cost pools and the choice of cost-allocation bases give managers greater confidence
in the activity and product cost numbers from single indirect-cost pool systems.
37) Implementing activity-based costing system involves use of different cost rates for different activities
to compute indirect costs of a product.
38) For service organizations, activity-based cost systems may be used to clarify appropriate cost
assignments.
39) For each of the following activities identify an appropriate activity-cost driver.
a. machine maintenance
b. machine setup
c. quality control
d. material ordering
e. production scheduling
f. warehouse expense
g. engineering design
Objective 5.6
1) Gregory Enterprises 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 $320,000 Direct labor-hours 800,000
Machine maintenance $120,000 Machine-hours 960,000
Facility rent $200,000 Square feet of area 100,000
Total overhead costs $640,000
The accounting records show the Mossman Job consumed the following resources:
Cost driver Actual level
Direct labor-hours 200
Machine-hours 1,600
Square feet of area 50
Which method of allocation probably best estimates actual overhead costs used? Why?
A) Single direct labor-hours cost driver because it is best to allocate total costs uniformly to individual
jobs.
B) Single direct labor-hours cost driver because it is easiest to analyze and interpret.
C) Three activity-cost drivers because they best reflect the relative consumption of resources.
D) Three activity-cost drivers because product costs can be significantly cross-subsidized.
2) It only makes sense to implement an ABC system when ________.
A) a single product is produced in bulk
B) its benefits exceed its implementation costs
C) it traces more costs as direct costs
D) production process is labor-intensive
3) Which of the following is a sign that an ABC system may be useful for an organization?
A) Significant amounts of indirect costs are allocated using multiple cost pools.
B) Products make similar demands on resources because of similarities in volume, process steps, batch
size, or complexity.
C) Many indirect costs are described as batch-level costs, product-sustaining costs, or facility-sustaining
costs.
D) Operations staff disagrees with accountants about the costs of manufacturing and marketing products
and services.
4) Smaller cost distortions occur when the traditional systems’ single indirect-cost rate and the activity-
cost-driver rates ________.
A) use the same total costs for computations
B) are similar in proportion to each other
C) are more different than alike
D) use the same cost driver units
5) Which of the following statements is true of ABC systems?
A) ABC system will always result in higher product costs.
B) ABC system employs multiple activity-cost drivers.
C) ABC system is least suited for service companies.
D) ABC system is simpler compared to traditional systems.
6) Recognizing ABC information is not always perfect because ________.
A) it mostly uses far too many indirect cost pools than what is actually required
B) it balances the need for better information against the costs of creating a complex system
C) it lacks the simplicity that traditional systems used to have to allocate overhead costs
D) it never measures how the resources of an organization are used
7) Which of the following is a sign that a “smoothing out” costing system exists?
A) Very few indirect costs are identified as output unit-level costs.
B) Products that a company is well suited to make and sell show large profits.
C) Operations staff has no substantial disagreements with the reported costs of manufacturing and
marketing products and services.
D) The company loses bids they believe were priced competitively.
Answer the following questions using the information below:
Cannady produces six products. Under their traditional cost system using one cost driver, SR6 costs
$168.00 per unit. An analysis of the activities and their costs revealed that three cost drivers would be
used under the new ABC system. The new cost of SR6 was determined to be $178.00 per unit.
8) The total amount of indirect costs assigned to product SR6 using the traditional method is ________ the
total amount assigned using ABC.
A) more than
B) less than
C) identical to
D) None of these answers are correct.
9) Given this change in the cost ________.
A) SR6 will now command a higher sales price
B) SR6 has benefited from the new system
C) SR6 is definitely more accurately costed
D) the costing results for SR6 under the new system depend on the adequacy and quality of the estimated
cost drivers and costs used by the system
Answer the following questions using the information below:
Chess Woods Limited produces two products: wooden chess pieces and wooden inlaid chess boards.
Under their traditional cost system using one cost driver (direct manufacturing labor hours), the cost of a
set of wooden chess pieces is $325.00. An analysis of the activities and their costs revealed that three cost
drivers would be used under a new ABC system. These cost drivers would be equipment usage, storage
area for the material, and type of woods used. The new cost of a set of chess pieces was determined to be
$298.00 per set.
10) The reduction in cost per unit of wooden chess pieces under ABC system is due to difference in
allocation of ________.
A) labor costs
B) prime costs
C) indirect costs
D) material costs
11) Given this change in the cost structure ________.
A) The costing results for chess pieces under the new system depend on the adequacy and quality of the
estimated cost drivers and costs used by the system.
B) Chess pieces have benefited from the new system.
C) Chess pieces are definitely more accurately costed.
D) Chess will now have a lower sales price.
12) The goal of a properly constructed ABC system is to ________.
A) have the most accurate cost system
B) identify more indirect costs
C) develop the best cost system for an economically reasonable cost
D) have separate allocation rates for each department
13) As ABC systems get very detailed and more cost pools are created, more allocations are necessary to
calculate activity costs for each cost pool, which increases the chances of misidentifying the costs of
different activity cost pools.