Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
CHAPTER 17
ACTIVITY-BASED COSTING
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
Item
LO
BT
Item
LO
BT
Item
LO
BT
Item
LO
BT
Item
LO
BT
True-False Statements
1.
1
K
7.
4
C
13.
5
K
19.
6
K
25.
7
K
2.
1
K
8.
4
K
14.
5
C
20.
6
K
26.
7
K
3.
1
K
9.
4
C
15.
5
K
21.
6
C
a27.
9
K
4.
1
C
10.
5
K
16.
6
K
22.
8
K
a28.
9
C
5.
1
C
11.
5
K
17.
6
K
23.
8
K
a29.
9
K
6.
2
K
12.
5
K
18.
6
K
24.
8
K
a30.
9
K
Multiple Choice Questions
31.
1
K
58.
4
K
85.
4
AP
112.
6
K
139.
8
K
32.
1
K
59.
4
K
86.
4
AP
113.
6
K
140.
8
K
33.
1
K
60.
4
K
87.
4
AP
114.
6
K
141.
8
K
34.
1
C
61.
4
K
88.
4
AP
115.
6
K
142.
8
AP
35.
1
K
62.
4
K
89.
4
AP
116.
6
K
143.
8
AP
36.
1
K
63.
4
K
90.
4
AP
117.
6
C
144.
8
AP
37.
1
K
64.
4
K
91.
4
AP
118.
6
C
145.
8
AP
38.
1
C
65.
4
K
92.
4
AP
119.
6
C
146.
8
AP
39.
1
K
66.
4
K
93.
4
AP
120.
6
C
147.
8
AP
40.
1
K
67.
4
AP
94.
4
AP
121.
6
K
148.
8
K
41.
1
K
68.
4
AP
95.
4
AP
122.
6
K
149.
8
K
42.
1
K
69.
4
AP
96.
4
AP
123.
7
C
150.
8
K
43.
1
AP
70.
4
AP
97.
5
K
124.
7
C
151.
8
C
44.
1
AP
71.
4
AP
98.
5
C
125.
7
C
a152.
9
K
45.
1
AP
72.
4
AP
99.
5
K
126.
7
C
a153.
9
K
46.
1
AP
73.
4
AP
100.
5
C
127.
7
C
a154.
9
K
47.
1
AP
74.
4
AP
101.
5
K
128.
7
K
a155.
9
K
48.
2
AP
75.
4
AP
102.
5
K
129.
7
K
a156.
9
K
49.
2
K
76.
4
AP
103.
5
C
130.
7
K
a157.
9
K
50.
2
K
77.
4
AP
104.
5
K
131.
7
K
a158.
9
K
51.
3
K
78.
4
AP
105.
5
K
132.
7
K
a159.
9
K
52.
3
K
79.
4
AP
106.
5
K
133.
7
K
a160.
9
C
53.
3
K
80.
4
AP
107.
5
K
134.
7
K
a161.
9
K
54.
3
AP
81.
4
AP
108.
5
K
135.
7
K
a162.
9
K
55.
3
K
82.
4
C
109.
5
C
136.
7
K
56.
4
AP
83.
4
K
110.
6
K
137.
7
K
57.
4
K
84.
4
AP
111.
6
K
138.
8
K
Brief Exercises
163.
1
AP
165.
4
AP
167.
4
AP
169.
4
AP
171.
6
C
164.
4
AP
166.
4
AP
168.
4
K
170.
6
C
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTUCTOR USE ONLY
17 - 2
Exercises
172.
1,4
AP
176.
4
C
179.
4
E
182.
4,5
AP
185.
7
C
173.
1,4
AP
177.
4
C
180.
4
AP
183.
6
C
186.
7
C
174.
4
AP
178.
4
AP
181
4
C
184.
6
C
187.
8
AP
175.
3
K
Completion Statements
188.
1
K
191.
4
K
194.
6
K
a197.
9
K
189.
1
K
192.
5
K
195.
7
K
a198.
9
K
190.
2
K
193.
5
K
196.
7
K
a This question covers a topic in an Appendix to the chapter.
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
Learning Objective 1
1.
TF
5.
TF
34.
MC
38.
MC
42.
MC
46.
MC
173.
Ex
2.
TF
31.
MC
35.
MC
39.
MC
43.
MC
47.
MC
188.
C
3.
TF
32.
MC
36.
MC
40.
MC
44.
MC
163.
BE
189.
C
4.
TF
33.
MC
37.
MC
41.
MC
45.
MC
172.
Ex
Learning Objective 2
6.
TF
48.
MC
49.
MC
50.
MC
190.
C
Learning Objective 3
51.
MC
52.
MC
53.
MC
54.
MC
55.
MC
175.
Ex
Learning Objective 4
7.
TF
62.
MC
71.
MC
80.
MC
89.
MC
165.
BE
177.
Ex
8.
TF
63.
MC
72.
MC
81.
MC
90.
MC
166.
BE
178.
Ex
9.
TF
64.
MC
73.
MC
82.
MC
91.
MC
167.
BE
179.
Ex
56.
MC
65.
MC
74.
MC
83.
MC
92.
MC
168.
BE
180.
Ex
57.
MC
66.
MC
75.
MC
84.
MC
93.
MC
169.
BE
181.
Ex
58.
MC
67.
MC
76.
MC
85.
MC
94.
MC
172.
Ex
182.
Ex
59.
MC
68.
MC
77.
MC
86.
MC
95.
MC
173.
Ex
191.
C
60.
MC
69.
MC
78.
MC
87.
MC
96.
MC
174.
Ex
61.
MC
70.
MC
79.
MC
88.
MC
164.
BE
176.
Ex
Learning Objective 5
10.
TF
14.
TF
99.
MC
103.
MC
107.
MC
192.
C
11.
TF
15.
TF
100.
MC
104.
MC
108.
MC
193.
C
12.
TF
97.
MC
101.
MC
105.
MC
109.
MC
13.
TF
98.
MC
102.
MC
106.
MC
182.
Ex
Learning Objective 6
16.
TF
20.
TF
112.
MC
116.
MC
120.
MC
171.
BE
17.
TF
21.
TF
113.
MC
117.
MC
121.
MC
183.
Ex
18.
TF
110.
MC
114.
MC
118.
MC
122.
MC
184.
Ex
19.
TF
111.
MC
115.
MC
119.
MC
170.
BE
194.
C
Learning Objective 7
25.
TF
124.
MC
127.
MC
130.
MC
133.
MC
136.
MC
186.
Ex
26.
TF
125.
MC
128.
MC
131.
MC
134.
MC
137.
MC
195.
C
123.
MC
126.
MC
129.
MC
132.
MC
135.
MC
185.
Ex
196.
C
Activity-Based Costing
FOR INSTRUCTOR USE ONLY
17 - 3
Learning Objective 8
22.
TF
138.
MC
141.
MC
144.
MC
147.
MC
150.
MC
23.
TF
139.
MC
142.
MC
145.
MC
148.
MC
151.
MC
24.
TF
140.
MC
143.
MC
146.
MC
149.
MC
187.
Ex
Learning Objective a9
27.
TF
30.
TF
154.
MC
157.
MC
160.
MC
197.
C
28.
TF
152.
MC
155.
MC
158.
MC
161.
MC
198.
C
29.
TF
153.
MC
156.
MC
159.
MC
162.
MC
Note: TF = True-False BE = Brief Exercise C = Completion
MC = Multiple Choice Ex = Exercise
The chapter also contains one set of ten Matching questions and three Short-Answer Essay
questions.
CHAPTER LEARNING OBJECTIVES
1. Recognize the difference between traditional costing and activity-based costing. A
traditional costing system allocates overhead to products on the basis of predetermined
plantwide or departmentwide rates such as direct labor or machine hours. An ABC system
allocates overhead to identified activity cost pools, and then assigns costs to products using
related cost drivers that measure the activities (resources) consumed.
2. Identify the steps in the development of an activity-based costing system. The
development of an activity-based costing system involves four steps: (1) Identify and classify
the major activities involved in the manufacture of specific products, and allocate manu-
facturing overhead costs to the appropriate cost pools. (2) Identify the cost driver that has a
strong correlation to the costs accumulated in the cost pool. (3) Compute the overhead rate
per cost driver. (4) Assign manufacturing overhead costs for each cost pool to products or
services using the overhead rates.
3. Know how companies identify the activity cost pools used in activity-based costing.
To identify activity cost pools, a company must perform an analysis of each operation or
process, documenting and timing every task, action, or transaction.
4. Know how companies identify and use cost drivers in activity-based costing. Cost
drivers identified for assigning activity cost pools must (a) accurately measure the actual
consumption of the activity by the various products and (b) have related data easily
available.
5. Understand the benefits and limitations of activity-based costing. Features of ABC that
make it a more accurate product costing system include: (1) the increased number of cost
pools used to assign overhead, (2) the enhanced control over overhead costs, and (3) the
better management decisions it makes possible. The limitations of ABC are: (1) the higher
analysis and measurement costs that accompany multiple activity centers and cost drivers,
and (2) the necessity still to allocate some costs arbitrarily.
6. Differentiate between value-added and non-value-added activities. Value-added
activities increase the worth of a product or service. Non-value-added activities simply add
cost to or increase the time spent on a product or service without increasing its market
value. Awareness of these classifications encourages managers to reduce or eliminate the
time spent on the non-value-added activities.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
17 - 4
7. Understand the value of using activity levels to activity-based costing. Activities may
be classified as unit-level, batch-level, product-level, and facility-level. Companies control
overhead costs at unit-, batch-, product-, and facility-levels by modifying unit-, batch-,
product-, and facility-level activities, respectively. Failure to recognize this classification of
levels can result in distorted product costing.
8. Apply activity-based costing to service industries. The overall objective of using ABC in
service industries is no different than for manufacturing industries—that is, improved costing
of services provided (by job, service, contract, or customer). The general approach to
costing is the same: analyze operations, identify activities, accumulate overhead costs by
activity cost pools, and identify and use cost drivers to assign the cost pools to the services.
a9. Explain just-in-time (JIT) processing. JIT is a processing system dedicated to having on
hand the right materials and products just at the time they are needed, thereby reducing the
amount of inventory and the time inventory is held. One of the principal accounting effects is
that one account, Raw and In-Process Inventory, replaces both the raw materials and work-
in-process inventory accounts.
TRUE-FALSE STATEMENTS
1. Traditional costing systems use multiple predetermined overhead rates.
2. Traditionally, overhead is allocated based on direct labor cost or direct labor hours.
3. Current trends in manufacturing include less direct labor and more overhead.
4. Activity-based costing allocates overhead to multiple cost pools and assigns the cost
pools to products using cost drivers.
5. A cost driver does not generally have a direct cause-effect relationship with the resources
consumed.
6. The first step in activity-based costing is to assign overhead costs to products, using cost
drivers.
7. To achieve accurate costing, a high degree of correlation must exist between the cost
driver and the actual consumption of the activity cost pool.
8. Low-volume products often require more special handling than high-volume products.
Activity-Based Costing
17 - 5
9. When overhead is properly assigned in ABC, it will usually decrease the unit cost of high-
volume products.
10. ABC leads to enhanced control over overhead costs.
11. ABC usually results in less appropriate management decisions.
12. ABC is generally more costly to implement than traditional costing.
13. ABC eliminates all arbitrary cost allocations.
14. ABC is particularly useful when product lines differ greatly in volume and manufacturing
complexity.
15. ABC is particularly useful when overhead costs are an insignificant portion of total costs.
16. Activity-based management focuses on reducing costs and improving processes.
17. Any activity that increases the cost of producing a product is a value-added activity.
18. Engineering design is a value-added activity.
19. Non-value-added activities increase the cost of a product but not its perceived value.
20. Machining is a non-value-added activity.
21. Not all activities labeled non-value-added are totally wasteful, nor can they be totally
eliminated.
22. The overall objective of installing ABC in service firms is no different than it is in a
manufacturing company.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
17 - 6
23. What sometimes makes implementation of activity-based costing difficult in service
industries is that a smaller proportion of overhead costs are company-wide costs.
24. The general approach to identifying activities, activity cost pools, and cost drivers is used
by a service company in the same manner as a manufacturing company.
25. Plant management is a batch-level activity.
26. Painting is a product-level activity.
a27. Just-in-time strives to eliminate inventories by using a pull approach.
a28. Quality control is less important in just-in-time than in traditional manufacturing
a29. Inventory storage costs are reduced in just-in-time processing.
a30. Rework costs typically increase in just-in-time processing.
Answers to True-False Statements
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
MULTIPLE CHOICE QUESTIONS
31. Which of the following is not typical of traditional costing systems?
a. Use of a single predetermined overhead rate.
b. Use of direct labor hours or direct labor cost to assign overhead.
c. Assumption of correlation between direct labor and incurrence of overhead cost.
d. Use of multiple cost drivers to allocate overhead.
Activity-Based Costing
17 - 7
32. In traditional costing systems, overhead is generally applied based on
a. direct labor.
b. machine hours.
c. direct material dollars.
d. units of production.
33. An activity that has a direct cause-effect relationship with the resources consumed is a(n)
a. cost driver.
b. overhead rate.
c. cost pool.
d. product activity.
34. Which best describes the flow of overhead costs in an activity-based costing system?
a. Overhead costs direct labor cost or hours products
b. Overhead costs products
c. Overhead costs activity cost pools cost drivers products
d. Overhead costs machine hours products
35. The costs that are easiest to trace directly to products are
a. direct materials and direct labor.
b. direct labor and overhead.
c. direct materials and overhead.
d. none of the above; all three costs are equally easy to trace to the product.
36. Often the most difficult part of computing accurate unit costs is determining the proper
amount of _________ to assign to each product, service, or job.
a. direct materials
b. direct labor
c. overhead
d. direct materials and direct labor
37. Predetermined overhead rates in traditional costing are often based on
a. direct labor cost for job order costing and machine hours for process costing.
b. machine hours for job order costing and direct labor cost for process costing.
c. multiple bases for job order costing and direct labor cost for process costing.
d. multiple bases for both job order costing and process costing.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
17 - 8
38. Direct labor is sometimes the appropriate basis for assigning overhead cost to products. It
is appropriate to use direct labor when which of the following is true?
(1) Direct labor constitutes a significant part of total product cost.
(2) A high correlation exists between direct labor and changes in the amount of overhead
costs.
a. (1) only
b. (2) only
c. Either (1) or (2)
d. Both (1) and (2)
39. Advances in computerized systems, technological innovation, global competition, and
automation have changed the manufacturing environment drastically by
a. increasing direct labor costs and increasing overhead costs.
b. increasing direct labor costs and decreasing overhead costs.
c. decreasing direct labor costs and decreasing overhead costs.
d. decreasing direct labor costs and increasing overhead costs.
40. Activity-based costing
a. allocates overhead to activity cost pools, and it then assigns the activity cost pools to
products and services by means of cost drivers.
b. accumulates overhead in one cost pool, then assigns the overhead to products and
services by means of a cost driver.
c. assigns activity cost pools to products and services, then allocates overhead back to
the activity cost pools.
d. allocates overhead directly to products and services based on activity levels.
41. Ordering materials, setting up machines, assembling products, and inspecting products
are examples of
a. cost drivers.
b. overhead cost pools.
c. direct labor costs.
d. nonmanufacturing activities.
42. An “Ordering and Receiving Materials” cost pool would most likely have as a cost driver:
a. machine hours.
b. number of setups.
c. number of purchase orders.
d. number of inspection tests.
Activity-Based Costing
17 - 9
43. Daffodil Company produces two products, Flower and Planter. Flower is a high-volume
item totaling 20,000 units annually. Planter is a low-volume item totaling only 6,000 units
per year. Flower requires one hour of direct labor for completion, while each unit of
Planter requires 2 hours. Therefore, total annual direct labor hours are 32,000 (20,000 +
12,000). Expected annual manufacturing overhead costs are $800,000. Daffodil uses a
traditional costing system and assigns overhead based on direct labor hours. Each unit of
Planter would be assigned overhead of
a. $25.00.
b. $30.77.
c. $50.00.
d. need more information to compute.
44. Sitwell Corporation manufactures titanium and aluminum tennis racquets. Sitwell’s total
overhead costs consist of assembly costs and inspection costs. The following information
is available:
Cost Titanium Aluminum Total Cost
Assembly 500 mach. hours 500 mach. hours $45,000
Inspections 350 150 $75,000
2,100 labor hours 1,900 labor hours
Sitwell is considering switching from one overhead rate based on labor hours to activity-
based costing.
Total overhead costs assigned to titanium racquets, using a single overhead rate, are
a. $60,000.
b. $63,000.
c. $75,000.
d. $84,000.
45. Sitwell Corporation manufactures titanium and aluminum tennis racquets. Sitwell’s total
overhead costs consist of assembly costs and inspection costs. The following information
is available:
Cost Titanium Aluminum Total Cost
Assembly 500 mach. hours 500 mach. hours $45,000
Inspections 350 150 $75,000
2,100 labor hours 1,900 labor hours
Sitwell is considering switching from one overhead rate based on labor hours to activity-
based costing.
Using activity-based costing, how much assembly cost is assigned to titanium racquets?
a. $15,750.
b. $22,500.
c. $23,625.
d. $31,500.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTUCTOR USE ONLY
17 - 10
46. Sitwell Corporation manufactures titanium and aluminum tennis racquets. Sitwell’s total
overhead costs consist of assembly costs and inspection costs. The following information
is available:
Cost Titanium Aluminum Total Cost
Assembly 500 mach. hours 500 mach. hours $45,000
Inspections 350 150 $75,000
2,100 labor hours 1,900 labor hours
Sitwell is considering switching from one overhead rate based on labor hours to activity-
based costing.
Using activity-based costing, how much inspections cost is assigned to titanium racquets?
a. $22,500.
b. $35,625.
c. $37,500.
d. $52,500.
47. Sanborn Industries has the following overhead costs and cost drivers. Direct labor hours
are estimated at 100,000 for the year.
Activity Cost Pool Cost Driver Est. Overhead Cost Driver Activity
Ordering and Receiving Orders $ 120,000 500 orders
Machine Setup Setups 297,000 450 setups
Machining Machine hours 1,500,000 125,000 MH
Assembly Parts 1,200,000 1,000,000 parts
Inspection Inspections 300,000 500 inspections
If overhead is applied using traditional costing based on direct labor hours, the overhead
application rate is
a. $9.60.
b. $12.00.
c. $15.00.
d. $34.17.
48. Sanborn Industries has the following overhead costs and cost drivers. Direct labor hours
are estimated at 100,000 for the year.
Activity Cost Pool Cost Driver Est. Overhead Cost Driver Activity
Ordering and Receiving Orders $ 120,000 500 orders
Machine Setup Setups 297,000 450 setups
Machining Machine hours 1,500,000 125,000 MH
Assembly Parts 1,200,000 1,000,000 parts
Inspection Inspections 300,000 500 inspections
If overhead is applied using activity-based costing, the overhead application rate for
ordering and receiving is
Activity-Based Costing
17 - 11
MC. 48 (cont.)
a. $1.20 per direct labor hour.
b. $240 per order.
c. $0.12 per part.
d. $6,834 per order.
49. The last step in activity-based costing is to
a. assign overhead costs to products, using overhead rates determined for each cost
pool.
b. compute the activity-based overhead rate per cost driver.
c. identify and classify the activities involved in the manufacture of specific products, and
allocate overhead to cost pools.
d. identify the cost driver that has a strong correlation to the activity cost pool.
50. The first step in activity-based costing is to
a. assign overhead costs to products, using overhead rates determined for each
cost pool.
b. compute the activity-based overhead rate per cost driver.
c. identify and classify the activities involved in the manufacture of specific products, and
allocate overhead to cost pools.
d. identify the cost driver that has a strong correlation to the activity cost pool.
51. A well-designed activity-based costing system starts with
a. identifying the activity-cost pools.
b. computing the activity-based overhead rate.
c. assigning overhead costs to products.
d. analyzing the activities performed to manufacture a product.
52. Which of the following is not an example of an activity cost pool?
a. Setting up machines
b. Machining
c. Inspecting
d. Machine hours
53. An example of an activity cost pool is
a. machine hours.
b. setting up machines.
c. number of setups.
d. number of inspections.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
17 - 12
54. Estimated costs for activity cost pools and other item(s) are as follows:
Machining $800,000
Assembling 200,000
Advertising 450,000
Inspecting and testing 175,000
Total estimated overhead is
a. $1,000,000.
b. $1,175,000.
c. $1,450,000.
d. $1,625,000.
55. An example of a cost which would not be assigned to an overhead cost pool is
a. indirect salaries.
b. freight-out.
c. depreciation.
d. supplies.
56. One of Hartman Company's activity cost pools is inspecting, with estimated overhead of
$140,000. Hartman produces throw rugs (700 inspections) and area rugs (1,300
inspections). How much of the inspecting cost pool should be assigned to throw rugs?
a. $49,000.
b. $70,000.
c. $75,384.
d. $140,000.
57. Which would be an appropriate cost driver for the machining activity cost pool?
a. Machine setups
b. Purchase orders
c. Machine hours
d. Inspections
58. Which would be an appropriate cost driver for the purchasing activity cost pool?
a. Machine setups
b. Purchase orders
c. Machine hours
d. Inspections
Activity-Based Costing
17 - 13
59. An activity-based overhead rate is computed as follows:
a. actual overhead divided by actual use of cost drivers.
b. estimated overhead divided by actual use of cost drivers.
c. actual overhead divided by estimated use of cost drivers.
d. estimated overhead divided by estimated use of cost drivers.
60. Use of activity-based costing will result in the development of
a. one overhead rate based on direct labor hours.
b. one plantwide activity-based overhead rate.
c. multiple activity-based overhead rates.
d. no overhead rates; overhead rates are not used in activity-based costing.
61. To use activity-based costing, it is necessary to know the
a. cost driver for each activity cost pool.
b. expected use of cost drivers per activity.
c. expected use of cost drivers per product.
d. all of the above.
62. To assign overhead costs to each product, the company
a. multiplies the activity-based overhead rates per cost driver by the number of cost
drivers expected to be used per product.
b. multiplies the overhead rate by the number of direct labor hours used on each product.
c. assigns the cost of each activity cost pool in total to one product line.
d. multiplies the rate of cost drivers per estimated cost for the cost pool by the estimated
cost for each cost pool.
63. As compared to a low-volume product, a high-volume product
a. usually requires less special handling.
b. is usually responsible for more overhead costs per unit.
c. requires relatively more machine setups.
d. requires use of direct labor hours as the primary cost driver to ensure proper allocation
of overhead.
64. Assigning overhead using ABC will usually
a. decrease the cost per unit for low volume products as compared to a traditional
overhead allocation.
b. increase the cost per unit for low volume products as compared to a traditional
overhead allocation.
c. provide less accurate cost per unit for low volume products than will traditional costing.
d. result in the same cost per unit for low volume products as does traditional costing.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTUCTOR USE ONLY
17 - 14
65. Companies that switch to ABC often find they have
a. been overpricing some products.
b. possibly losing market share to competitors.
c. been sacrificing profitability by underpricing some products.
d. all of the above.
66. Comparing the U.S. to Japan,
a. activity-based costing is used less than in the U.S.
b. U.S. companies show a stronger preference to volume measures such as direct labor
hours to assign overhead costs.
c. labor cost reduction is less of a priority in the U.S.
d. developing more accurate product costs is less of a priority in the U.S.
67. For its inspecting cost pool, Davidson, Inc. expected overhead cost of $300,000 and 4,000
inspections. The actual overhead cost for that cost pool was $360,000 for 5,000
inspections. The activity-based overhead rate used to assign the costs of the inspecting
cost pool to products is
a. $60 per inspection.
b. $72 per inspection.
c. $75 per inspection.
d. $90 per inspection.
68. Addison Company manufactures two products, Regular and Supreme. Addison’s overhead
costs consist of machining, $2,500,000; and assembling, $1,250,000. Information on the
two products is:
Regular Supreme
Direct labor hours 10,000 15,000
Machine hours 10,000 30,000
Number of parts 90,000 160,000
Overhead applied to Regular using traditional costing using direct labor hours is
a. $1,075,000.
b. $1,500,000.
c. $2,250,000.
d. $2,675,000.
69. Addison Company manufactures two products, Regular and Supreme. Addison’s overhead
costs consist of machining, $2,500,000; and assembling, $1,250,000. Information on the
two products is:
Regular Supreme
Direct labor hours 10,000 15,000
Machine hours 10,000 30,000
Number of parts 90,000 160,000
Overhead applied to Supreme using traditional costing using direct labor hours is
Activity-Based Costing
FOR INSTRUCTOR USE ONLY
17 - 15
MC. 69 (cont.)
a. $1,075,000.
b. $1,500,000.
c. $2,250,000.
d. $2,675,000.
70. Addison Company manufactures two products, Regular and Supreme. Addison’s overhead
costs consist of machining, $2,500,000; and assembling, $1,250,000. Information on the
two products is:
Regular Supreme
Direct labor hours 10,000 15,000
Machine hours 10,000 30,000
Number of parts 90,000 160,000
Overhead applied to Regular using activity-based costing is
a. $1,075,000.
b. $1,500,000.
c. $2,250,000.
d. $2,675,000.
71. Addison Company manufactures two products, Regular and Supreme. Addison’s overhead
costs consist of machining, $2,500,000; and assembling, $1,250,000. Information on the
two products is:
Regular Supreme
Direct labor hours 10,000 15,000
Machine hours 10,000 30,000
Number of parts 90,000 160,000
Overhead applied to Supreme using activity-based costing is
a. $1,075,000.
b. $1,500,000.
c. $2,250,000.
d. $2,675,000.
72. Teller, Inc. produces 3 products: P1, Q2, and R3. P1 requires 400 purchase orders, Q2
requires 600 purchase orders, and R3 requires 1,000 purchase orders. Teller has
identified an ordering and receiving activity cost pool with allocated overhead of $180,000
for which the cost driver is purchase orders. Direct labor hours used on each product are
50,000 for P1, 40,000 for Q2, and 110,000 for R3. How much ordering and receiving
overhead is assigned to each product?
P1 Q2 R3
a. $60,000 $60,000 $60,000
b. $45,000 $36,000 $99,000
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
17 - 16
MC. 72 (cont.)
c. $36,000 $54,000 $90,000
d. $40,500 $45,000 $94,500
73. Hagar Co. computed an overhead rate for machining costs ($1,500,000) of $15 per
machine hour. Machining costs are driven by machine hours. If computed based on direct
labor hours, the overhead rate for machining costs would be $30 per direct labor hour.
The company produces two products, Cape and Chap. Cape requires 60,000 machine
hours and 20,000 direct labor hours, while Chap requires 40,000 machine hours and
30,000 direct labor hours. Using activity-based costing, machining costs assigned to each
product is
Cape Chap
a. $600,000 $900,000
b. $750,000 $750,000
c. $800,000 $700,000
d. $900,000 $600,000
Solution: $15 × 60,000 = $900,000; $15 × 40,000 = $600,000
74. Wilder Company manufactures two models of its banjo, the Basic and the Luxury. The
Basic model requires 10,000 direct labor hours and the Luxury requires 30,000 direct
labor hours. The company produces 3,400 units of the Basic model and 600 units of the
Luxury model each year. The company inspects one Basic for every 100 produced, and
inspects one Luxury for every 10 produced. The company expects to incur $84,600 of
total inspecting costs this year. How much of the inspecting costs should be allocated to
the Basic model using ABC costing?
a. $21,150
b. $30,600
c. $42,300
d. $71,910
75. Ben Gordon, Inc. manufactures 2 products, wheels and seats. The company has
estimated its overhead in the assembling department to be $330,000. The company
produces 300,000 wheels and 600,000 seats each year. Each wheel uses 2 parts, and
each seat uses 3 parts. How much of the assembly overhead should be allocated to
wheels?
a. $ 82,500.
b. $110,000.
c. $132,000
d. $141,428.
Activity-Based Costing
FOR INSTRUCTOR USE ONLY
17 - 17
76. Clemson Co. incurs $700,000 of overhead costs each year in its three main departments,
machining ($400,000), inspections ($200,000) and packing ($100,000). The machining
department works 4,000 hours per year, there are 600 inspections per year, and the
packing department packs 1,000 orders per year. Information about Clemson’s two
products is as follows:
Product X Product Y
Machining hours 1,000 3,000
Inspections 100 500
Orders packed 350 650
Direct labor hours 1,700 1,800
If traditional costing based on direct labor hours is used, how much overhead is assigned
to Product X this year?
a. $168,334
b. $242,308
c. $340,000
d. $350,000
77. Clemson Co. incurs $700,000 of overhead costs each year in its three main departments,
machining ($400,000), inspections ($200,000) and packing ($100,000). The machining
department works 4,000 hours per year, there are 600 inspections per year, and the
packing department packs 1,000 orders per year. Information about Clemson’s two
products is as follows:
Product X Product Y
Machining hours 1,000 3,000
Inspections 100 500
Orders packed 350 650
Direct labor hours 1,700 1,800
Using ABC, how much overhead is assigned to Product X this year?
a. $168,334
b. $242,308
c. $340,000
d. $350,000
78. A company incurs $2,700,000 of overhead each year in three departments: Ordering and
Receiving, Mixing, and Testing. The company prepares 2,000 purchase orders, works
50,000 mixing hours, and performs 1,500 tests per year in producing 200,000 drums of
Goo and 600,000 drums of Slime. The following data are available:
Department Expected use of Driver Cost
Ordering and Receiving 2,000 $ 800,000
Mixing 50,000 1,000,000
Testing 1,500 900,000
Production information for Goo is as follows:
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
17 - 18
MC. 78 (cont.)
Department Expected use of Driver
Ordering and Receiving 400
Mixing 20,000
Testing 500
Compute the amount of overhead assigned to Goo using ABC.
a. $ 675,000
b. $ 860,000
c. $1,054,764
d. $1,350,000
79. A company incurs $2,700,000 of overhead each year in three departments: Ordering and
Receiving, Mixing, and Testing. The company prepares 2,000 purchase orders, works
50,000 mixing hours, and performs 1,500 tests per year in producing 200,000 drums of
Goo and 600,000 drums of Slime. The following data are available:
Department Expected use of Driver Cost
Ordering and Receiving 2,000 $ 800,000
Mixing 50,000 1,000,000
Testing 1,500 900,000
Production information for Slime is as follows:
Department Expected use of Driver
Ordering and Receiving 1,600
Mixing 30,000
Testing 1,000
Compute the amount of overhead assigned to Slime using ABC.
a. $1,350,000
b. $1,645,234
c. $1,840,000
d. $2,025,000
80. One of Hatch Company’s activity cost pools is machine setups, with estimated overhead
of $300,000. Hatch produces sparklers (400 setups) and lighters (600 setups). How much
of the machine setup cost pool should be assigned to sparklers?
a. $300,000
b. $120,000
c. $150,000
d. $180,000
Activity-Based Costing
FOR INSTRUCTOR USE ONLY
17 - 19
81. Which would be an appropriate cost driver for the ordering and receiving activity cost pool?
a. Machine setups
b. Purchase orders
c. Machine hours
d. Inspections
82. As compared to a high-volume product, a low-volume product
a. usually requires less special handling.
b. is usually responsible for more overhead costs per unit.
c. requires relatively fewer machine setups.
d. requires use of direct labor hours as the primary cost driver to ensure proper allocation
of overhead.
83. In Japan,
a. activity-based costing is used more than in the U.S.
b. companies prefer volume measures such as direct labor hours to assign overhead
costs.
c. labor cost reduction is less of a priority.
d. developing more accurate product costs is more of a priority.
84. Johnstone Company manufactures two products, Board 12 and Case 165. Johnstone's
overhead costs consist of setting up machines, $1,600,000; machining, $3,600,000; and
inspecting, $1,200,000. Information on the two products is:
Board 12 Case 165
Direct labor hours 15,000 25,000
Machine setups 600 400
Machine hours 24,000 26,000
Inspections 800 700
Overhead applied to Board 12 using traditional costing using direct labor hours is
a. $2,400,000.
b. $3,072,000.
c. $3,340,000.
d. $3,840,000.
85. Johnstone Company manufactures two products, Board 12 and Case 165. Johnstone's
overhead costs consist of setting up machines, $1,600,000; machining, $3,600,000; and
inspecting, $1,200,000. Information on the two products is:
Board 12 Case 165
Direct labor hours 15,000 25,000
Machine setups 600 400
Machine hours 24,000 26,000
Inspections 800 700
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
17 - 20
MC. 85 (cont.)
Overhead applied to Case 165 using traditional costing using direct labor hours is
a. $2,560,000.
b. $3,072,000.
c. $3,340,000.
d. $4,000,000.
86. Johnstone Company manufactures two products, Board 12 and Case 165. Johnstone's
overhead costs consist of setting up machines, $1,600,000; machining, $3,600,000; and
inspecting, $1,200,000. Information on the two products is:
Board 12 Case 165
Direct labor hours 15,000 25,000
Machine setups 600 400
Machine hours 24,000 26,000
Inspections 800 700
Overhead applied to Board 12 using activity-based costing is
a. $2,400,000.
b. $3,072,000.
c. $3,328,000.
d. $3,840,000.
87. Johnstone Company manufactures two products, Board 12 and Case 165. Johnstone's
overhead costs consist of setting up machines, $1,600,000; machining, $3,600,000; and
inspecting, $1,200,000. Information on the two products is:
Board 12 Case 165
Direct labor hours 15,000 25,000
Machine setups 600 400
Machine hours 24,000 26,000
Inspections 800 700
Overhead applied to Case 165 using activity-based costing is
a. $2,560,000.
b. $3,072,000.
c. $3,328,000.
d. $4,000,000.
Activity-Based Costing
FOR INSTRUCTOR USE ONLY
17 - 21
88. Wallace Computer Company produces three products: Earth, Wind, and Fire. Earth
requires 80 machine setups, Wind requires 60 setups, and Fire requires 180 setups.
Wallace has identified an activity cost pool with allocated overhead of $720,000 for which
the cost driver is machine setups. How much overhead is assigned to each product?
Earth Wind Fire
a. $240,000 $240,000 $240,000
b. $150,000 $112,500 $337,500
c. $180,000 $135,000 $405,000
d. $135,000 $240,000 $345,000
89. Sofa Company manufactures two models of its couch, the Mini and the Maxi. The Mini
model requires 10,000 direct labor hours and the Maxi model requires 40,000 direct labor
hours. The company produces 4,000 units of the Mini model and 1,000 units of the Maxi
model each year. The company produces the Mini model in batch sizes of 200, while it
produces the Maxi model in batch sizes of 100. The company expects to incur $240,000
of total setup costs this year. How much of the setup costs are allocated to the Mini model
using ABC costing?
a. $160,000
b. $120,000
c. $48,000
d. $200,000
90. Mask Company manufactures two products, pillows and comforters. The company has
estimated its overhead in the order-processing department to be $480,000. The company
produces 50,000 pillows and 80,000 comforters each year. Pillow production requires
25,000 machine hours, comforter production requires 50,000 machine hours. The
company places raw materials orders 10 times per month, 2 times for raw materials for
pillows and the remainder for raw materials for comforters. How much of the order
processing overhead should be allocated to comforters?
a. $240,000
b. $320,000
c. $295,386
d. $384,000
91. Berg Company incurs $320,000 overhead costs each year in its three main departments,
setup ($20,000), machining ($220,000), and packing ($80,000). The setup department
performs 40 setups per year, the machining department works 5,000 hours per year, and
the packing department packs 500 orders per year. Information about Berg’s two products
is as follows:
Product A1 Product B1
Number of setups 20 20
Machining hours 1,000 4,000
Orders packed 150 350
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
17 - 22
MC. 91 (cont.)
Number of products manufactured 600 400
If machining hours are used as a base, how much overhead is assigned to Product A1
each year?
a. $64,000
b. $160,000
c. $110,000
d. $96,000
92. Berg Company incurs $320,000 overhead costs each year in its three main departments,
setup ($20,000), machining ($220,000), and packing ($80,000). The setup department
performs 40 setups per year, the machining department works 5,000 hours per year, and
the packing department packs 500 orders per year. Information about Berg’s two products
is as follows:
Product A1 Product B1
Number of setups 20 20
Machining hours 1,000 4,000
Orders packed 150 350
Number of products manufactured 600 400
Using ABC, how much overhead is assigned to Product A1 each year?
a. $160,000
b. $242,000
c. $ 64,000
d. $102,000
93. Berg Company incurs $320,000 overhead costs each year in its three main departments,
setup ($20,000), machining ($220,000), and packing ($80,000). The setup department
performs 40 setups per year, the machining department works 5,000 hours per year, and
the packing department packs 500 orders per year. Information about Berg’s two products
is as follows:
Product A1 Product B1
Number of setups 20 20
Machining hours 1,000 4,000
Orders packed 150 350
Number of products manufactured 600 400
Using ABC, how much overhead is assigned to Product B1 each year?
a. $160,000
b. $128,000
c. $218,000
d. $256,000
Activity-Based Costing
17 - 23
94. A company incurs $2,400,000 of overhead each year in three departments: Processing,
Packaging, and Testing. The company performs 800 processing transactions, 200,000
packaging transactions, and 2,000 tests per year in producing 400,000 drums of Oil and
600,000 drums of Sludge. The following data are available:
Department Expected Use of Driver Cost
Processing 800 $1,000,000
Packaging 200,000 1,000,000
Testing 2,000 400,000
Production information for the two products is as follows:
Oil Sludge
Department Expected Use of Driver Expected Use of Driver
Processing 300 500
Packaging 120,000 80,000
Testing 1,600 400
The amount of overhead assigned to Oil is
a. $1,200,000.
b. $1,295,000.
c. $1,105,000.
d. $ 920,000.
95. A company incurs $2,400,000 of overhead each year in three departments: Processing,
Packaging, and Testing. The company performs 800 processing transactions, 200,000
packaging transactions, and 2,000 tests per year in producing 400,000 drums of Oil and
600,000 drums of Sludge. The following data are available:
Department Expected Use of Driver Cost
Processing 800 $1,000,000
Packaging 200,000 1,000,000
Testing 2,000 400,000
Production information for the two products is as follows:
Oil Sludge
Department Expected Use of Driver Expected Use of Driver
Processing 300 500
Packaging 120,000 80,000
Testing 1,600 400
The amount of overhead assigned to Sludge is
a. $1,200,000.
b. $1,105,000.
c. $1,295,000.
d. $ 920,000.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
17 - 24
96. Volcker, Inc. manufactures recliners for the hotel industry. It has two products, the Heater
and the Massager, and total overhead is $1,580,000. The company plans to manufacture
400 Heaters and 100 Massagers this year. In manufacturing the recliners, the company
must perform 600 material moves for the Heater and 400 for the Massager; it processes
900 purchase orders for the Heater and 700 for the Massager; and the company’s
employees work 1,400 direct labor hours on the Heater product and 3,400 on the
Massager. Volcker’s total material handling costs are $1,000,000 and its total processing
costs are $580,000. Using ABC, how much overhead would be assigned to the Heater
product?
a. $ 790,000
b. $ 926,250
c. $ 653,750
d. $1,119,166
97. Which of the following is a limitation of activity-based costing?
a. More cost pools
b. Less control over overhead costs
c. Poorer management decisions
d. Some arbitrary allocations continue
98. Which of the following factors would suggest a switch to activity-based costing?
a. Product lines similar in volume and manufacturing complexity.
b. Overhead costs constitute a significant portion of total costs.
c. The manufacturing process has been stable.
d. Production managers use data provided by the existing system.
99. Which of the following is true of activity-based costing?
a. More cost pools
b. Same base as traditional costing
c. Less costly to use
d. Eliminates arbitrary allocations
100. The primary benefit of ABC is it provides
a. better management decisions.
b. enhanced control over overhead costs.
c. more cost pools.
d. more accurate product costing.
Activity-Based Costing
17 - 25
101. Which of the following is not a benefit of activity-based costing?
a. More accurate product costing
b. Enhanced control over overhead costs
c. Better management decisions
d. Less costly to use
102. Each of the following is a limitation of activity-based costing except that
a. it can be expensive to use.
b. it is more complex than traditional costing.
c. more cost pools are used.
d. some arbitrary allocations continue.
103. The presence of any of the following factors would suggest a switch to ABC except when
a. product lines differ greatly in volume.
b. overhead costs constitute a minor portion of total costs.
c. the manufacturing process has changed significantly.
d. production managers are ignoring data provided by the existing system.
104. Which of the following is a limitation of activity-based costing?
a. More cost pools
b. Less control over overhead costs
c. ABC can be expensive to use
d. Poorer management decisions
105. Which of the following is true about activity-based costing?
a. Less cost pools
b. Same base as traditional costing
c. More costly to use
d. Eliminates arbitrary allocations
106. Each of the following is a limitation of activity-based costing except that
a. it can be expensive to use.
b. it decreases control over overhead costs
c. it is complex and can be difficult to understand
d. some arbitrary allocations continue.
107. The presence of any of the following factors would suggest a switch to ABC except when
a. product lines differ greatly in volume.
b. overhead costs constitute a major portion of total costs.
c. the manufacturing process has changed significantly.
d. production managers are using data provided by the existing system
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
17 - 26
108. Activity-based costing uses
a. one plantwide pool and a single cost driver.
b. departmental pools and a single cost driver.
c. numerous cost pools and numerous cost drivers.
d. one plantwide pool and numerous cost drivers
109. Which of the following statements is false?
a. ABC can weaken control over overhead costs.
b. Under ABC, companies can trace many overhead costs directly to activities.
c. ABC allows some indirect costs to be identified as direct costs.
d. managers become more aware of their responsibility to control the activities that
generate costs.
110. Which of the following is a value-added activity?
a. Inventory storage
b. Machining
c. Building maintenance
d. Bookkeeping
111. Which of the following is a value-added activity?
a. Inventory control
b. Inspections
c. Packaging
d. Repair of machines
112. Which of the following is a non-value-added activity?
a. Inventory control
b. Machining
c. Assembly
d. Painting
113. Which of the following is a non-value-added activity?
a. Painting
b. Finishing
c. Packaging
d. Building maintenance
Activity-Based Costing
17 - 27
114. A non-value-added activity in a service enterprise is
a. providing legal research.
b. delivering packages.
c. consulting.
d. bookkeeping.
115. A value-added activity in a service enterprise is
a. performing landscaping services.
b. reception.
c. billing.
d. ordering supplies.
116. Non-value-added activities
a. should be minimized or eliminated.
b. involve those activities that are essential to a company's operations.
c. increase both the cost and perceived value of a product.
d. cannot be differentiated from value-added activities.
117. Value-added activities
a. increase the perceived worth of a product or service to customers.
b. involve those activities that are essential to a company's operations.
c. include engineering design, machining, and assembly.
d. all of the above.
118. Which of the following is a value-added activity?
a. Engineering design
b. Machinery repair
c. Inventory storage
d. Inspections
119. Which of the following is a non-value-added activity?
a. Engineering design
b. Machining
c. Inspection
d. Packaging
120. A non-value-added activity in a service enterprise is
a. taking appointments.
b. traveling.
c. advertising.
d. all of these.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
17 - 28
121. Value-added activities
a. should be minimized or eliminated.
b. involve those activities that are essential to a company's operations.
c. add cost to a product without affecting selling price.
d. cannot be differentiated from non-value-added activities.
122. All of the following are examples of a value-added activity in a service company except
a. delivering packages by a delivery service.
b. ordering supplies.
c. performing surgery.
d. providing legal research for legal services.
123. Which of the following is not a facility-level activity?
a. Plant management
b. Product design
c. Personnel administration
d. Training
124. Which of the following is not a product-level activity?
a. Product design
b. Engineering changes
c. Inventory management
d. Equipment setups
125. Which of the following is not a batch-level activity?
a. Engineering changes
b. Equipment setups
c. Inspection
d. Materials handling
126. Which of the following is not a unit-level activity?
a. Purchase ordering
b. Assembling
c. Painting
d. Sewing
127. Which of the following is a batch-level activity?
a. Plant management
b. Product design
c. Equipment setups
d. Assembling
Activity-Based Costing
17 - 29
128. Which of the following is not a facility-level activity?
a. Plant depreciation
b. Property taxes
c. Engineering changes
d. Utilities
129. Which of the following is not a product-level activity?
a. Product design
b. Engineering changes
c. Material handling
d. Inventory management
130. Which of the following is not a batch-level activity?
a. Purchase ordering
b. Equipment setups
c. Inspection
d. Assembling
131. Which of the following is not a unit-level activity?
a. Drilling
b. Cutting
c. Sanding
d. Inspecting
132. Which of the following is a unit-level activity?
a. Painting
b. Purchase ordering
c. Inspection
d. Material handling
133. Which of the following is a batch-level activity?
a. Assembling
b. Product design
c. Engineering changes
d. Purchase ordering
134. Which of the following is a product-level activity?
a. Equipment setups
b. Product design
c. Property taxes
d. Utilities
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
17 - 30
135. Which of the following is a facility-level activity?
a. Engineering changes
b. Product design
c. Property taxes
d. Inspection
136. Activities required to support or sustain an entire production process are called
a. unit-level activities.
b. batch-level activities.
c. product-level activities.
d. facility-level activities.
137. Which would be a cost driver for a facility-level activity?
a. Number of setups
b. Number of product designs
c. Square footage
d. Number of purchase orders
138. Activity-based costing has been found to be useful in each of the following service
industries except
a. airlines.
b. railroads.
c. hotels.
d. ABC has been useful in all of these industries.
139. Activity-based costing is used in
Service industries Manufacturing industries
a. Yes No
b. Yes Yes
c. No Yes
d. No No
140. In service industries
a. activities cannot be labeled as value-added or non-value-added.
b. the overall objective of ABC is different than in manufacturing industries.
c. a larger proportion of overhead costs are company-wide costs.
d. activity cost pools cannot be identified.
Activity-Based Costing
17 - 31
141. Activity-based costing is used by
a. accounting firms.
b. law firms.
c. consulting firms.
d. all of the above.
142. Austin Accounting Services estimates for next year revenues of $2,000,000, direct labor of
$400,000, and overhead of $700,000. Under traditional costing, overhead is applied to
audit jobs using the rate of
a. 35% of revenues.
b. 20% of revenues.
c. 56% of direct labor.
d. 175% of direct labor.
143. Port Accounting performs two types of services, Audit and Tax. Port’s overhead costs
consist of computer support, $240,000; and legal support, $120,000. Information on the
two services is:
Audit Tax
Direct labor cost $50,000 $100,000
CPU minutes 40,000 10,000
Legal hours used 200 800
Overhead applied to audit services using traditional costing is
a. $120,000.
b. $144,000.
c. $216,000.
d. $240,000.
144. Port Accounting performs two types of services, Audit and Tax. Port’s overhead costs
consist of computer support, $240,000; and legal support, $120,000. Information on the
two services is:
Audit Tax
Direct labor cost $50,000 $100,000
CPU minutes 40,000 10,000
Legal hours used 200 800
Overhead applied to tax services using traditional costing is
a. $120,000.
b. $144,000.
c. $216,000.
d. $240,000.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
17 - 32
145. Port Accounting performs two types of services, Audit and Tax. Port’s overhead costs
consist of computer support, $240,000; and legal support, $120,000. Information on the
two services is:
Audit Tax
Direct labor cost $50,000 $100,000
CPU minutes 40,000 10,000
Legal hours used 200 800
Overhead applied to audit services using activity-based costing is
a. $120,000.
b. $144,000.
c. $216,000.
d. $240,000.
146. Port Accounting performs two types of services, Audit and Tax. Port’s overhead costs
consist of computer support, $240,000; and legal support, $120,000. Information on the
two services is:
Audit Tax
Direct labor cost $50,000 $100,000
CPU minutes 40,000 10,000
Legal hours used 200 800
Overhead applied to tax services using activity-based costing is
a. $120,000.
b. $144,000.
c. $216,000.
d. $240,000.
147. Port Accounting performs two types of services, Audit and Tax. Port’s overhead costs
consist of computer support, $240,000; and legal support, $120,000. Information on the
two services is:
Audit Tax
Direct labor cost $50,000 $100,000
CPU minutes 40,000 10,000
Legal hours used 200 800
Port Accounting performs tax services for Cathy Kane. Direct labor cost is $1,200; 600
CPU minutes were used; and 1 legal hour was used. What is the total cost of the Kane job
using activity-based costing?
a. $2,880
b. $3,000
c. $4,080
d. $4,200
Activity-Based Costing
FOR INSTRUCTOR USE ONLY
17 - 33
Solution: {[$240,000 (40,000 + 10,000)] × 600} + {[$120,000 (200 + 800)] × 1} + $1,200 = $4,200
148. Activity-based costing has been found to be useful in each of the following service
industries except
a. banks.
b. hospitals.
c. telephone companies.
d. ABC has been useful in any of these industries.
149. What sometimes makes implementation of activity-based costing difficult in service
industries is
a. the labeling of activities as value-added.
b. identifying activities, activity cost plus, and cost drivers.
c. that a larger proportion of overhead costs are company-wide costs.
d. attempting to reduce or eliminate non-value-added activities.
150. All of the following statements are correct except that
a. activity-based costing has been widely adopted in service industries.
b. the objective of installing ABC in service firms is different than it is in a manufacturing
firm.
c. a larger proportion of overhead costs are company-wide costs in service industries.
d. the general approach to identifying activities and activity cost pools is the same in a
service company as in a manufacturing company.
151. The use of activity-based costing in service industries
a. has the same objective as in manufacturing.
b. results in improved costing of services provided.
c. uses cost pools to assign overhead.
d. all of these.
a152. Just-in-time processing
a. is based on a just-in-case philosophy.
b. results in a push approach.
c. minimizes inventory storage and waiting time.
d. all of these.
a153. An element of just-in-time processing is
a. dependable suppliers who are willing to deliver on short notice.
b. a multi-skilled workforce.
c. a total quality control system.
d. all of these.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTUCTOR USE ONLY
17 - 34
a154. Which of the following is not a benefit of just-in-time processing?
a. Control of significant inventory balances
b. Enhanced product quality
c. Reduction of rework costs
d. Production cost savings
a155. Which account is used in just-in-time processing?
a. Raw Materials Inventory
b. Work-in-Process Inventory
c. Merchandise Inventory
d. Raw and In-Process Inventory
a156. Under just-in-time processing, all of the following are received or completed “just in time”
except
a. finished goods.
b. raw materials.
c. subassembly parts.
d. supplies.
a157. Just-in-time processing
a. is based on a just-in-case philosophy.
b. results in higher inventory amounts.
c. eliminates the push approach.
d. all of the above.
a158. Just-in-time processing
a. results in the opposite of a just-in-case philosophy.
b. results in a pull approach.
c. minimizes inventory storage and waiting time.
d. all of the above.
a159. An important element of just-in-time processing is
a. dependable suppliers who are willing to deliver on short notice.
b. a specialized workforce.
c. less emphasis on a quality control system.
d. all of the above.
Activity-Based Costing
FOR INSTRUCTOR USE ONLY
17 - 35
a160. Which of the following is a limitation of just-in-time processing?
a. Significant reduction of manufacturing inventories
b. Less emphasis on product quality
c. Higher production costs
d. None of the above
a161. Which account is not used in just-in-time processing?
a. Accounts Payable
b. Work-in-Process Inventory
c. Finished Goods Inventory
d. Raw and In-Process Inventory
a162. In the pull approach
a. subassembly parts are manufactured and stored just in case they are needed later in
the manufacturing process.
b. Finished goods are completed and stored just in case unexpected and rush customer
orders are received.
c. the manufacturing process begins with a customer placing an order.
d. None of the above.
Answers to Multiple Choice Questions
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTUCTOR USE ONLY
17 - 36
BRIEF EXERCISES
BE 163
Instant Access Services Inc. leases access to high-speed computers to small businesses. It
provides the following information for the year:
Budgeted Actual
Overhead cost $2,100,000 $1,900,000
Computer hours 100,000 90,000
Direct labor hours 200,000 180,000
Overhead is applied on the basis of computer hours.
Instructions
a. Compute the predetermined overhead rate.
b. Determine the amount of overhead applied for the year.
Solution 163 (5 min.)
a. $2,100,000 ÷ 100,000 = $21 per computer hour.
b. 90,000 computer hours X $21 per computer hour = $1,890,000 overhead applied
BE 164
Bark Manufacturing has three activities in its manufacturing process: machine setups, machining,
and inspections. Estimated annual overhead cost for each activity is $90,000, $162,500, and
$28,000, respectively. The expected annual use in each department is 1,000 setups, 12,500
machine hours, and 875 inspections.
Instructions
Compute the overhead rate for each activity.
BE 165
Gail Industries uses activity-based costing to assist management in setting prices for the
company’s three major product lines. The following information is available:
Expected Use of
Activity Cost Pool Estimated Overhead Cost Driver per Activity
Cutting $1,000,000 25,000 labor hours
Stitching 8,000,000 320,000 machine hours
Inspections 2,800,000 160,000 labor hours
Packing 960,000 64,000 finished goods units
Activity-Based Costing
FOR INSTRUCTOR USE ONLY
17 - 37
BE 165. (Cont.)
Instructions
Compute the activity-based overhead rates.
BE 166
Tunes & More, Inc. manufactures speakers and receivers and uses activity-based costing. The
following information is available:
Expected Use of
Activity Cost Pool Estimated Overhead Cost Driver per Activity
Ordering $216,000 24,000 orders
Soldering 192,000 64,000 machine hours
Inspecting 960,000 120,000 labor hours
Packing 840,000 56,000 boxes
Instructions
Compute the activity-based overhead rates.
BE 167
Dolan Tires manufactures tires for dune buggies and has two different products, nubby tires and
smooth tires. The company produces 5,000 nubby tires and 10,000 smooth tires each year and
incurs $167,000 of overhead costs. The following information is available:
Activity Total Cost Cost Driver
Materials handling $60,000 Number of requisitions
Machine setups 50,000 Number of setups
Quality inspections 57,000 Number of inspections
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTUCTOR USE ONLY
17 - 38
BE 167 (Cont.)
For the nubby tires, the company has 400 requisitions, 200 setups, and 200 inspections. The
smooth tires require 600 requisitions, 300 setups, and 400 inspections.
Instructions
Determine the overhead rate for each activity.
BE 168
The legal firm of West, Green, and Ink uses ABC to allocate its overhead costs. The firm has
identified the following activity cost pools:
A. Direct labor fringe benefits.
B. Printing and photocopying.
C. Secretarial support.
D. Client support.
E. Recruiting and training.
F. Computer support.
G. Liability insurance
Instructions
Match these cost pools with the appropriate cost driver listed below.
______ 1. Revenue billed.
______ 2. CPU minutes.
______ 3. Number of pages.
______ 4. Direct labor cost.
______ 5. Number of clients.
______ 6. Number of recruits.
______ 7. Direct professional hours.
Activity-Based Costing
FOR INSTRUCTOR USE ONLY
17 - 39
BE 169
Rhode Company provides architectural services for mall development companies. The following
data are available for 2013
Expected Use of
Activity Cost Pool Estimated Overhead Cost Driver per Activity
Secretarial support $ 220,000 27,500 professional hours
Direct labor fringe benefits 200,000 $500,000 direct labor cost
Printing and copying 30,000 20,000 pages
Computer support 250,000 62,500 minutes
Liability insurance 140,000 $2,800,000 billed revenue
Instructions
Compute the activity-based overhead rates.
BE 170
Hops, Inc. manufactures several types of microbrew beers. Hops has identified the following
activities:
a. Inventory control e. Machine setups
b. Purchasing f. Brewing
c. Receiving g. Packing and shipping
d. Employee training
Instructions
Classify each activity as value-added or non-value-added.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTUCTOR USE ONLY
17 - 40
BE 171
Laredo Services is considering the installation of activity-based costing. The following activities
are performed daily by staff consultants: (1) consulting with clients, (2) staff meetings, (3) on-site
supervision, (4) meals, (5) entertaining prospective clients, and (6) training client personnel.
Instructions
Classify these activities as value-added or non-value-added.
EXERCISES
Ex. 172
Hayward Industries manufactures dining chairs and tables. The following information is available:
Dining Chairs Tables Total Cost
Machine setups 200 600 $48,000
Inspections 250 470 $72,000
Labor hours 2,600 2,400
Hayward is considering switching from one overhead rate based on labor hours to activity-based
costing.
Instructions
Perform the following analyses for these two components of overhead:
a. Compute total machine setups and inspection costs assigned to each product, using a single
overhead rate.
b. Compute total machine setups and inspection costs assigned to each product, using activity-
based costing.
c. Comment on your findings.
Activity-Based Costing
17 - 41
Solution 172 (cont.)
Ex. 173
Sonoma Manufacturing has five activity cost pools and two products (a budget tape vacuum and
a deluxe tape vacuum). Information is presented below:
Cost Drivers by Product
Activity Cost Pool Cost Driver Est. Overhead Budget Deluxe
Ordering and Receiving Orders $ 120,000 600 400
Machine Setup Setups 297,000 500 400
Machining Machine hours 1,000,000 150,000 100,000
Assembly Parts 1,400,000 1,200,000 800,000
Inspection Inspections 300,000 550 450
Instructions
Compute the overhead cost per unit for each product. Production is 700,000 units of Budget and
200,000 units of Deluxe. Round your answer to the nearest cent.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTUCTOR USE ONLY
17 - 42
Ex. 174
Morgan, Player, and Associates, a law firm, employs ABC. The following budgeted data for each
of the activity cost pools is provided for the year 2013.
Estimated Expected Use of
Activity Cost Pools Overhead Cost Drivers per Activity
Researching legal issues $ 31,500 900 research hours
Meeting with clients 1,760,000 8,800 professional hours
Preparing legal documents 480,000 30,000 pages
During 2013 the firm experienced 660 research hours, prepared 25,000 document pages, and
10,000 professional hours.
Instructions
Compute the total overhead applied during 2013.
Ex. 175
Betsy Rose owns a small department store in a metropolitan area. For twenty years, the
accountant has applied overhead to the various departments—Women's Apparel, Men's Apparel,
Cosmetics, Housewares, Shoes, and Electronics—based on the basis of employee hours
worked. Betsy Rose's daughter, who is an accounting student at a local university, has suggested
her mother should consider using activity-based costing (ABC). In an attempt to implement ABC,
Betsy Rose and her daughter have identified the following activities.
Instructions
Determine a cost driver for each of the activities listed below.
Cost Pool Cost Driver
a. Placing orders ______________________________
b. Stocking merchandise ______________________________
c. Waiting on customers ______________________________
d. Janitorial and Maintenance ______________________________
Activity-Based Costing
FOR INSTRUCTOR USE ONLY
17 - 43
Ex 175 (Cont.)
e. Training employees ______________________________
f. Administrative ______________________________
g. Advertising and Marketing ______________________________
h. Accounting and Legal Services ______________________________
i. Wrapping packages ______________________________
Ex. 176
A list of possible cost drivers is presented below:
Code Code
A Engineering hours D Number of subassemblies
B Setups E Boxes
C Machine hours F Orders
Instructions
For each of the following activity cost pools, select the most appropriate cost driver:
Code Cost Pool
_____ 1. Machine setup
_____ 2. Ordering and receiving
_____ 3. Packaging and shipping
_____ 4. Engineering design
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
17 - 44
Ex 176 (Cont.)
_____ 5. Machining
_____ 6. Assembly
Ex. 177
Identify appropriate cost drivers for the following activity cost pools:
1. Human resources
2. Security
3. Receiving
4. Data processing
Ex. 178
Two of the activity cost pools for Kinney Company are (a) machining ($325,000) and (b)
inspections ($42,000). Possible cost drivers are direct labor hours (2,550), machine hours
(12,500), square footage (2,000), and number of inspections (200).
Instructions
Compute the overhead rate for each activity.
Activity-Based Costing
FOR INSTRUCTOR USE ONLY
17 - 45
Ex. 179
Holmes Industries produces two models of televisions, Standard and Luxury. It sells 100,000
Standard televisions and 15,000 Luxury televisions annually. Holmes switched from traditional
costing to activity-based costing and discovered that the cost allocated to Luxury televisions
increased so dramatically that the Luxury was now only marginally profitable.
Instructions
Give a probable explanation for this shift.
Ex. 180
Compute activity-based costing rates from the following budgeted data for Hart Golf Co.:
Activity Cost Pool Budgeted Cost Budgeted Cost Driver
Designing $2,550,000 75,000 designer hours
Machining 525,000 21,000 machine hours
Packing 620,000 31,000 labor hours
EX. 181
We Store It Company rents storage units of various sizes to individuals and companies. The
following activities have been identified as cost pools for accumulating overhead and assigning it
to rental services provided. (a) repairs, (b) customer setups, (c) employee training, (d) supplies
ordering, (e) temperature/humidity control, (f) security, and (g) cleaning. Identify a cost driver
appropriate for each cost pool.
Instructions
For each activity, name a cost driver that might be used to assign overhead costs.
(g) Number of units cleaned
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTUCTOR USE ONLY
17 - 46
Ex. 182
Seasonal Delights manufactures a wide variety of holiday and seasonal decorative items.
Seasonal’s activity-based costing overhead rates are:
Purchasing $380 per order
Storing $2 per square foot/days
Machining $100 per machine hour
Supervision $5 per direct labor hour
The Snow Man project involved three purchase orders, 4,000 square feet/days, 60 machine
hours, and 40 direct labor hours. The cost of direct materials on the job was $19,000 and the
direct labor rate is $30 per hour.
Instructions
Determine the total cost of the Snow Man project.
Ex. 183
Label the following costs as value-adding (VA) or non-value-adding (NVA):
____ 1. Engineering design
____ 2. Machine repair
____ 3. Inventory storage
____ 4. Machining
____ 5. Assembly
____ 6. Painting
____ 7. Inspections
____ 8. Packaging
Activity-Based Costing
FOR INSTRUCTOR USE ONLY
17 - 47
Ex. 184
Parton and Sons is a law firm that uses activity-based costing. Classify these activities as value-
added or non-value-added:
______________ 1. Taking appointments
______________ 2. Reception
______________ 3. Meeting with clients
______________ 4. Bookkeeping
______________ 5. Court time
______________ 6. Meeting with opposing attorneys
______________ 7. Billing
______________ 8. Advertising
Ex. 185
Novotna Manufacturing Company manufactures small tools. Classify each of the following
activity costs of the tool company as either unit-level, batch-level, product-level, or facility-level:
______________ 1. Plant management
______________ 2. Drilling
______________ 3. Painting
______________ 4. Machine setups
______________ 5. Product design
______________ 6. Cutting
______________ 7. Inspection
______________ 8. Inventory management
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTUCTOR USE ONLY
17 - 48
Ex. 186
Castleman, Inc. designs, prints, and delivers advertising copy for companies throughout the tri-
state area. Sometimes this entails designing and printing a single copy and other times multiple
copies of the same advertisement. Listed below are typical activity costs:
(a) Printer ink.
(b) Paper
(c) Depreciation on equipment
(d) Machine setup costs
(e) Designing
(f) Supervisory salaries
(g) Ordering materials
(h) Delivery
(i) Building insurance
(j) Printing
Instructions
Classify each of these activities as either unit-level, batch-level, product-level, or facility-level.
Ex. 187
Norton Brooks, PSC is an architectural firm that uses activity-based costing. The three activity
cost pools used by Norton Brooks are: Salaries and Wages, Travel Expense, and Plan
Reproduction Expense. The firm has provided the following information concerning activity and
costs:
Salaries and wages $390,000
Travel expense 100,000
Plan reproduction expense 120,000
Total $610,000
Activity Cost Pools
Project Business
Assignment Development Other
Salaries and wages 60% 30% 10%
Travel expense 40% 40% 20%
Plan reproduction expense 35% 40% 25%
Activity-Based Costing
17 - 49
Ex 187 (Cont.)
Instructions
Calculate the total cost to be allocated to the (a) Project Assignment, (b) Business Development,
and (c) Other activity cost pools.
COMPLETION STATEMENTS
188. In traditional costing systems, direct labor cost is often used for the assignment of all
____________________.
189. A __________________ is any activity that has a direct cause-effect relationship with the
resources consumed.
190. In activity-based costing, overhead costs are allocated to ____________________, then
assigned to products.
191. The number of ___________________ is an appropriate cost driver for the ordering and
receiving activity cost pool.
192. The primary benefit of activity-based costing is ___________________ product costing.
193. When product lines differ greatly in volume and manufacturing complexity, a switch from
traditional costing to ___________________ is indicated.
194. Some ______________________ increase the perceived worth of a product or service to
customers.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTUCTOR USE ONLY
17 - 50
195. In the hierarchy of activity levels, the four levels are __________, ___________,
____________, and _____________.
196. Equipment setups are a ______________-level activity.
a197. A primary objective of __________________ processing is to eliminate all manufacturing
inventories.
a198. Dependable suppliers, a multi-skilled workforce, and a __________________________
are necessary elements of just-in-time processing.
Answers to Completion Statements
MATCHING
199. Match the items in the two columns below by entering the appropriate code letter in the
space provided.
A. Pull approach F. Just-in-time processing
B. Cost driver G. Batch-level activity
C. Facility-level activity H. Product-level activity
D. Unit-level activity I. Non-value-added activity
E. Activity-based costing J. Value-added activity
_____ 1. Allocates overhead to multiple activity cost pools, then assigns the activity cost pools
to products.
_____ 2. An activity that has a direct cause-effect relationship with the resources consumed.
_____ 3. Increases the worth of a product or service to customers.
_____ 4. Should be eliminated or reduced.
_____ 5. Plant management.
Activity-Based Costing
FOR INSTRUCTOR USE ONLY
17 - 51
_____ 6. Engineering changes.
_____ 7. Equipment setups.
_____ 8. Assembling.
_____ 9. Primary objective is to eliminate all manufacturing inventories.
_____ 10. Used to initiate manufacturing under JIT processing.
SHORT-ANSWER ESSAY QUESTIONS
S-A E 200
Delany Company uses a traditional costing system. Management is considering switching to an
activity-based costing system. What steps must Delany take in initiating an activity-based costing
system?
S-A E 201
Feather, Inc. produces phasers (sales of 200,000 units per year) and force field enhancers (sales
of 25,000 units per year). If Feather switches from traditional costing to activity-based costing,
what is the likely effect on overhead assigned to the two products?
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTUCTOR USE ONLY
17 - 52
S-A E 202
What are the conditions that would indicate to the management of a firm that they should switch
from traditional costing to activity-based costing?
S-A E 203
Describe how the application of ABC to service companies is the same as its application to
manufacturing companies.
