Managerial Accounting, 16e (Garrison)
Chapter 7: Activity-Based Costing: A Tool to Aid Decision Making
1) When a company shifts from a traditional cost system in which manufacturing overhead is
applied based on direct labor-hours to an activity-based costing system with batch-level and
product-level costs, the unit product costs of high volume products typically decrease whereas
the unit product costs of low volume products typically increase.
2) In activity-based costing, as in traditional costing systems, manufacturing costs are not
assigned to products.
3) Unit-level activities are performed each time a batch is handled or processed.
4) Organization-sustaining activities relate to specific customers and are not tied to any specific
products.
5) In activity-based costing, all manufacturing costs must be included in product costs.
6) Activity-based costing is a costing method that is designed to provide managers with product
cost information for internal decision-making.
7) Batch-level activities are performed each time a unit is produced.
8) When combining activities in an activity-based costing system, batch-level activities should
be combined with unit-level activities whenever possible.
9) Activity-based costing is best proposed, designed and implemented by the accounting
department without requiring the time of busy managers.
10) Managing and sustaining product diversity requires many more overhead resources such as
production schedulers and product design engineers than managing and sustaining a single
product. The costs of these resources can be accurately allocated to products using activity-based
costing than traditional costing which is based entirely on direct labor-hours.
11) A traditional cost system is generally easier to set up and run than an activity-based costing
system.
12) Departmental overhead rates will correctly assign overhead costs in situations where a
company has a range of products that differ in volume, lot size, or complexity of production.
13) When a company implements activity-based costing, manufacturing overhead cost is often
shifted from low volume products to high volume products, with a higher unit cost resulting for
the high volume products.
14) Organization-sustaining activities are carried out regardless of which customers are served,
which products are produced, how many batches are run, or how many units are made.
15) When activity-based costing is used for internal decision-making, the costs of idle capacity
should be assigned to products.
16) A duration driver provides a simple count of the number of times that an activity occurs.
17) Direct labor costs are usually included in the costs that are allocated to activity cost pools in
an activity-based costing system.
18) The first-stage allocation in an ABC system is the process of assigning functionally
organized overhead costs derived from the company’s general ledger to activity cost pools.
19) First-stage allocations in an ABC system should not be based on the opinions of employees
about how costs should be distributed among activity cost pools.
20) In an ABC system, departmental managers are typically interviewed to determine how the
departmental non-personnel costs should be distributed across the activity cost pools.
21) Direct materials costs are usually excluded from the costs that are allocated to activity cost
pools in an activity-based costing system.
22) In the first-stage allocation in an ABC system, some costs may be allocated to a special cost
pool that are not subsequently allocated to products or customers.
23) An activity rate of $512 per product design means that on average a product design
consumes resources that cost $512.
24) In the second-stage allocation in activity-based costing, costs that were not allocated in the
first stage are assigned to the company’s most profitable products.
25) In the second-stage allocation in activity-based costing, activity rates are used to apply
overhead costs to products and customers.
26) To compute a product’s profit or product margin, the product’s sales and direct costs are
needed in addition to the overhead costs computed in an activity-based costing system.
27) In activity-based costing, a product margin may exclude costs from some of the company’s
activity cost pools.
28) Providing the power required to run production equipment is an example of a:
A) Unit-level activity.
B) Batch-level activity.
C) Product-level activity.
D) Organization-sustaining activity.
29) Factory security and assembly activities at an appliance manufacturing plant would be best
classified as unit-level, batch-level, product-level, or organization-sustaining activities?
A)
Security
Assembly
Product
Unit
B)
Security
Assembly
Batch
Batch
C)
Security
Assembly
Organization
Unit
D)
Security
Assembly
Organization
Product
30) Guerra Electronics manufactures a variety of electronic gadgets for use in the home. Which
of the following would probably be the most accurate measure of activity to use for allocating
the costs of inspecting the finished products at Guerra?
A) Machine-hours
B) Direct labor-hours
C) Inspection time
D) Number of inspections
31) An activity-based costing system that is designed for internal decision-making will not
conform to generally accepted accounting principles because:
A) under activity-based costing some manufacturing costs (i.e., the costs of idle capacity and
organization-sustaining costs) will not be assigned to products.
B) under activity-based costing the sum of all product costs does not equal the total costs of the
company.
C) activity-based costing has not been approved by the United Nation’s International Accounting
Board.
D) activity-based costing results in less accurate costs than more traditional costing methods
based on direct labor-hours or machine-hours.
32) Testing a prototype of a new product is an example of a:
A) Unit-level activity.
B) Batch-level activity.
C) Product-level activity.
D) Organization-sustaining activity.
33) Which of the following would be an acceptable measure of activity for a material handling
activity cost pool?
A)
Number of material moves
Weight of material moved
Yes
Yes
B)
Number of material moves
Weight of material moved
No
Yes
C)
Number of material moves
Weight of material moved
Yes
No
D)
Number of material moves
Weight of material moved
No
No
34) Production order processing is an example of a:
A) Unit-level activity.
B) Batch-level activity.
C) Product-level activity.
D) Organization-sustaining activity.
35) Purchase order processing is an example of a:
A) Unit-level activity.
B) Batch-level activity.
C) Product-level activity.
D) Organization-sustaining activity.
36) Parts administration is an example of a:
A) Unit-level activity.
B) Batch-level activity.
C) Product-level activity.
D) Organization-sustaining.
37) Which of the following would be classified as a product-level activity?
A) Setting up a machine for a batch of a standard product.
B) Operating a cafeteria for employees.
C) Running the Human Resource department.
D) Advertising a product.
38) Designing a new backpack at an outdoor sports equipment company is an example of a:
A) Unit-level activity.
B) Batch-level activity.
C) Product-level activity.
D) Facility-level activity.
39) Departmental overhead rates may not correctly assign overhead costs due to:
A) the use of direct labor hours in allocating overhead costs to products rather than machine time
or quantity of materials used.
B) the high correlation between direct labor-hours and the incurrence of overhead costs.
C) overreliance on volume as a basis for allocating overhead costs where products differ
regarding the number of units produced, lot size, or complexity of production.
D) difficulties associated with identifying cost pools for the first stage of the allocation process.
40) Machining a part for a product is an example of a:
A) Unit-level activity.
B) Batch-level activity.
C) Product-level activity.
D) Organization-sustaining activity.
41) In activity-based costing, the activity rate for an activity cost pool is computed by dividing
the total overhead cost in the activity cost pool by:
A) the direct labor-hours required by the product.
B) the machine-hours required by the product.
C) the total activity for the activity cost pool.
D) the total direct labor-hours for the activity cost pool.
42) When switching from a traditional costing system to an activity-based costing system that
contains some batch-level costs:
A) the unit product costs of both high and low volume products typically increase.
B) the unit product costs of both high and low volume products typically decrease.
C) the unit product costs of high volume products typically increase and the unit product costs of
low volume products typically decrease.
D) the unit product costs of high volume products typically decrease and the unit product costs of
low volume products typically increase.
43) Bippus Corporation manufactures two products: Product X08R and Product P56L. The
company uses a plantwide overhead rate based on direct labor-hours. It is considering
implementing an activity-based costing (ABC) system that allocates its manufacturing overhead
to four cost pools. The following additional information is available for the company as a whole
and for Products X08R and P56L.
Activity Cost Pool
Activity Measure
Total Cost
Machining
Machine-hours
$
247,000
13,000
MHs
Machine setups
Number of setups
$
60,000
150
setups
Product design
Number of products
$
56,000
2
products
Order size
Direct labor-hours
$
260,000
10,000
DLHs
Activity Measure
Product X08R
Product P56L
Machine-hours
10,000
3,000
Number of setups
110
40
Number of products
1
1
Direct labor-hours
6,000
4,000
Using the plantwide overhead rate, how much manufacturing overhead cost would be allocated
to Product P56L?
A) $311,500
B) $373,800
C) $249,200
D) $418,000
44) Orear Corporation manufactures two products: Product Z34D and Product J25M. The
company uses a plantwide overhead rate based on direct labor-hours. It is considering
implementing an activity-based costing (ABC) system that allocates its manufacturing overhead
to four cost pools. The following additional information is available for the company as a whole
and for Products Z34D and J25M.
Activity Cost Pool
Activity Measure
Total Cost
Machining
Machine-hours
$
120,000
6,000
MHs
Machine setups
Number of setups
$
90,000
150
setups
Product design
Number of products
$
84,000
2
products
Order size
Direct labor-hours
$
300,000
10,000
DLHs
Activity Measure
Product Z34D
Product J25M
Machine-hours
4,000
2,000
Number of setups
90
60
Number of products
1
1
Direct labor-hours
7,000
3,000
Using the plantwide overhead rate, the percentage of the total overhead cost that is allocated to
Product J25M is closest to:
A) 50.00%
B) 30.00%
C) 15.15%
D) 19.87%
45) Ben Corporation manufactures two products: Product E05G and Product L64Y. The
company uses a plantwide overhead rate based on direct labor-hours. It is considering
implementing an activity-based costing (ABC) system that allocates its manufacturing overhead
to four cost pools. The following additional information is available for the company as a whole
and for Products E05G and L64Y.
Activity Cost Pool
Activity Measure
Total Cost
Machining
Machine-hours
$
285,000
15,000
MHs
Machine setups
Number of setups
$
180,000
300
setups
Product design
Number of products
$
64,000
2
products
Order size
Direct labor-hours
$
350,000
10,000
DLHs
Activity Measure
Product E05G
Product L64Y
Machine-hours
12,000
3,000
Number of setups
170
130
Number of products
1
1
Direct labor-hours
3,000
7,000
Using the plantwide overhead rate, the percentage of the total overhead cost that is allocated to
Product E05G is closest to:
A) 27.87%
B) 19.00%
C) 30.00%
D) 50.00%