Chapter 4—Activity-Based Costing Key
1. Unit based costing first assigns overhead costs to departmental pools and then assigns these costs to products
using predetermined overhead rates.
2. Management information systems can be divided into a unit-based type and activity-based type.
3. Predetermined overhead rates are calculated at the end of each year using the formula: overhead rate =
budgeted annual driver level/budgeted annual driver level.
4. Unit-level drivers are factors that measure the demands placed on unit-level activities by products.
5. If applied overhead is greater than actual overhead it is called overapplied overhead.
6. Unit-based product costing assigns manufacturing and selling costs to products.
7. The difference between actual overhead and applied overhead is an underapplied overhead.
8. Overhead assignments should reflect the amount of overhead demanded by each product.
9. The justification for not using a departmental rate for overhead cost assignment is that it increases accuracy.
10. Non-unit-based drivers are factors that measure the demands that cost objects place on activities.
11. If overhead is a significant proportion of the unit manufacturing costs, the distortion caused by using multi–
level drivers can be serious.
12. Activity-based costing uses only unit-level drivers for costing.
13. The activity-based cost assignment is the most accurate method of costing because it follows a cause-and-
effect pattern of overhead consumption.
14. An activity-based costing system traces costs to activities and then to products and other cost objects.
15. The first step in designing an activity-based costing system is to identify activities.
16. A list of the activities identified in the design of an activity-based system is called an activity inventory.
17. Activity attributes are nonfinancial and financial information items that describe individual activities.
18. Product classification attributes define and describe activities and are the basis for product classification.
19. After identifying and describing activities, the next step is to determine the cost of the performance of each
activity.
20. Classifying activities into four general categories facilitates product costing by associating the response to
different types of activity drivers.
21. Efforts to simplify activity-based costing systems (ABC) involve either before-the-fact simplification or
after-the-fact simplification.
22. Time driven activity-based costing (TDABC) requires the need to identify resource drivers to assign costs to
activities.
23. Using the before-the-fact simplification method TDABC eliminates the need for detailed interviewing and
surveying to determine resource drivers.
24. After-the-fact simplification includes two approaches: the approximately relevant reduced ABC system and
the equally accurate enhanced ABC system.
25. There are many two-driver combinations that may be used to reduce the ABC system without sacrificing
accuracy.
26. A(n) __________ method first traces costs to a department and then to products.
unit-based costing or
27. Offering greater product accuracy than an activity-based costing system is not a characteristic of a
__________ costing system.
28. The formula Budgeted annual overhead/Budgeted annual driver level is used to calculate a __________
rate.
29. For labor-intensive operations, the most appropriate activity driver would be the __________ hours.
30. The proportion of an overhead activity consumed by a product is the __________ ratio.
31. __________ drivers create distortions when different products utilize resources differently.
32. The use of __________ activity drivers to assign costs tends to __________ high-volume products.
33. A(n) __________ costing system first traces costs to activities and then to products.
34. Activity __________ are nonfinancial and financial data that describe individual activities.
35. The activity __________ is a simple list of activities identified in an ABC system.
36. Activity __________ helps management achieve objectives such as product or customer costing and
continuous improvement.
37. Materials handling would be classified as a __________ activity when using activity-level costing.
38. An __________costing database is the collected data sets that are organized and interrelated for use in a
company’s ABC information system.
39. A(n) __________ is a grouping of logically related information.
40. In the __________ ABC systems, managers directly estimate the resource demands imposed by each
product.
41. Unit-level product costing assigns
42. Which is NOT a characteristic of a unit-based costing system?
43. Unit-based product costing uses which of the following procedures?
44. The method that first traces costs to a department and then to products is called:
45. A predetermined overhead rate is calculated using which of the following formulas?
46. The overhead rates of the traditional functional-based product costing use
47. A costing system that uses actual costs for direct materials and labor and predetermined overhead rates to
apply overhead is called a(n)
48. Common measures of production activity include
49. If unit-based product costing is used, which of the following would be traced directly to the product?
50. Product costs can be distorted if a unit-based activity driver is used and
51. All of the following are non-unit-based activity drivers EXCEPT
52. For a labor-intensive manufacturing operation, which of the following would be the most appropriate
activity driver?
53. In a department that is drilling holes in materials, which activity base is likely to be most appropriate for
assigning overhead costs?
54. All of the following are unit-based activity drivers EXCEPT
55. A department that is capital-intensive most likely would use a predetermined departmental overhead rate
based on which of the following activity bases?
56. Figure 4-1
The Foremost Company predicted factory overhead for 2013 and 2014 would be $120,000 for each year. The
predicted activity for 2013 and 2014 were 30,000 and 20,000 direct labor hours, respectively. Additional data
are as follows:
2013
2014
Sales in units
25,000
25,000
Selling price per unit
$20
$20
Direct materials and direct labor per unit
$10
$10
The company assumes that the long-run normal production level is 20,000 direct labor hours per year. The actual factory overhead cost for the end of
2013 and 2014 was $120,000. Assume that it takes one direct labor hour to make one finished unit.
Refer to Figure 4-1. When the annual estimated factory overhead rate is used, the gross profits for 2013 and 2014, respectively, are
57. Figure 4-1
The Foremost Company predicted factory overhead for 2013 and 2014 would be $120,000 for each year. The
predicted activity for 2013 and 2014 were 30,000 and 20,000 direct labor hours, respectively. Additional data
are as follows:
2013
2014
Sales in units
25,000
25,000
Selling price per unit
$20
$20
Direct materials and direct labor per unit
$10
$10
The company assumes that the long-run normal production level is 20,000 direct labor hours per year. The actual factory overhead cost for the end of
2013 and 2014 was $120,000. Assume that it takes one direct labor hour to make one finished unit.
Refer to Figure 4-1. When the normal factory overhead rate is used, the gross profits for 2013 and 2014, respectively, are
58. Figure 4-2
The following information is provided by the Sandman Corporation for the year:
46,000
$300,000
30,000
$460,000
Refer to Figure 4-2. If normal costing is used, the amount of overhead applied for the year is
59. Figure 4-2
The following information is provided by the Sandman Corporation for the year:
46,000
$300,000
30,000
$460,000
Refer to Figure 4-2. The actual overhead rate for applying manufacturing overhead is
60. Avatar Corporation uses a predetermined rate to apply overhead. At the beginning of the year, Avatar
estimated its overhead costs at $240,000, direct labor hours at 40,000, and machine hours at 10,000. Actual
overhead costs incurred were $249,280, actual direct labor hours were 41,000, and actual machine hours were
11,000.
What is the predetermined overhead rate per machine hour for Avatar?
61. Figure 4 – 3
The records of Family Manufacturing show the following information:
Estimated manufacturing overhead
$690,000
Estimated machine hours
46,000
Actual machine hours worked
50,000
Actual costs incurred:
Indirect materials
$170,000
Indirect labor
230,000
Utilities
120,000
Insurance
100,000
Rent
80,000
Refer to Figure 4-3. The amount of overapplied or underapplied overhead is
62. Figure 4 – 3
The records of Family Manufacturing show the following information:
$690,000
46,000
50,000
$170,000
230,000
120,000
100,000
80,000
Refer to Figure 4-3. The company uses a predetermined overhead rate to apply overhead. Manufacturing overhead applied is
63. The following information pertains to Whitestone Industries for 2014:
Estimated total overhead costs for 2014
$37,500
Estimated direct labor costs for 2014
25,000
Actual direct labor costs
22,500
Actual overhead costs
36,000
Activity base
Direct labor costs
What is the predetermined overhead rate for Whitestone Industries for 2014?
64. Figure 4-4
Mannitou Company made the following predictions for 2014:
Factory overhead costs
$300,000
Direct labor hours
50,000 hours
Machine hours
100,000 hours
Job A2 (which was started and completed in June) used 3,000 direct labor hours, 2,000 machine hours, and $57,000 of prime costs.
Refer to Figure 4-4. If factory overhead is applied based on machine hours, the cost of Job A2 for the Mannitou Company is
65. Figure 4-4
Mannitou Company made the following predictions for 2014:
Factory overhead costs
$300,000
Direct labor hours
50,000 hours
Machine hours
100,000 hours
Job A2 (which was started and completed in June) used 3,000 direct labor hours, 2,000 machine hours, and $57,000 of prime costs.
Refer to Figure 4-4. If factory overhead is applied based on direct labor hours, the cost of Job A2 for the Mannitou Company is
66. The Magnanimous Company uses a predetermined overhead rate of $12 per direct labor hour to apply
overhead. During the year, 30,000 direct labor hours were worked. Actual overhead costs for the year were
$320,000. The overhead variance is
67. The following information is provided for the year:
27,500
$525,000
30,000
$481,250
If normal costing is used, the amount of overhead applied for the year is
68. The following information is provided by the Sutton Corporation for the year:
Actual overhead
$450,000
Actual machine hours worked
25,000
Budgeted machine hours
27,500
Applied overhead
$487,500
If normal costing is used, budgeted overhead used to calculate the predetermined rate would be
69. Assume the following: Actual overhead costs equaled estimated overhead. Actual direct labor hours
exceeded estimated direct labor hours used to calculate the predetermined overhead rate. If overhead is applied
using the predetermined overhead rate, then overhead is
70. Bear Claw Industries uses a job-order costing system. The Molding Department applies overhead based on
machine hours, while the Assembly Department applies overhead based on direct labor hours. The company
made the following estimates at the beginning of the current year:
Molding
Assembly
Manufacturing overhead cost
$700,000
$400,000
Machine hours
10,000
4,000
Direct labor hours
12,000
16,000
The following information was available for Job No. 7-29, which was started and completed during August:
Job No. 7-29
Molding
Assembly
Direct materials
$3,500
$ 7,500
Direct labor
$9,000
$12,500
Direct labor hours
900
1,250
Machine hours
500
400
The predetermined overhead rate for the molding department is
71. Lonestar Corporation uses a job-order costing system to account for product costs. The following
information pertains to 2014:
$140,000
40,000
160,000
60,000
100,000
30,000
Factory overhead rate is $18 per direct labor hour.
What is the amount of under- or overapplied overhead for Lonestar Corporation in 2014?
72. Material amounts of underapplied or overapplied overhead should be
73. Account balances from the Boilermakers Company are as follows:
Manufacturing overhead
$240,000 underapplied
Work in process
100,000
Finished goods
300,000
Cost of goods sold
800,000
If underapplied or overapplied overhead is material and is allocated to Work in Process, Finished Goods, and Cost of Goods Sold (based on ending
account balances), Cost of Goods Sold after adjustment would have a balance of
74. Figure 4-5
The Brookstone Company produces 9 volt batteries and AAA batteries. The Brookstone Company uses a
plantwide rate to apply overhead based on direct labor hours. The following data is given:
Actual overhead
$325,000
Estimated Overhead
$350,000
Estimated activity:
9 volt battery
100,000 direct labor hours
AAA battery
400,000 direct labor hours
Actual activity:
9 volt battery
125,000 direct labor hours
AAA battery
400,000 direct labor hours
Units produced:
9 volt battery
500,000
AAA battery
250,000
Refer to Figure 4-5. What is the predetermined overhead rate? (round to 2 decimal places)
75. Figure 4-5
The Brookstone Company produces 9 volt batteries and AAA batteries. The Brookstone Company uses a
plantwide rate to apply overhead based on direct labor hours. The following data is given:
Actual overhead
$325,000
Estimated Overhead
$350,000
Estimated activity:
9 volt battery
100,000 direct labor hours
AAA battery
400,000 direct labor hours
Actual activity:
9 volt battery
125,000 direct labor hours
AAA battery
400,000 direct labor hours
Units produced:
9 volt battery
500,000
AAA battery
250,000
Refer to Figure 4-5. How much overhead is applied to each 9 volt batteries and AAA batteries respectively? (round to 2 decimal places)
76. Figure 4-5
The Brookstone Company produces 9 volt batteries and AAA batteries. The Brookstone Company uses a
plantwide rate to apply overhead based on direct labor hours. The following data is given:
Actual overhead
$325,000
Estimated Overhead
$350,000
Estimated activity:
9 volt battery
100,000 direct labor hours
AAA battery
400,000 direct labor hours
Actual activity:
9 volt battery
125,000 direct labor hours
AAA battery
400,000 direct labor hours
Units produced:
9 volt battery
500,000
AAA battery
250,000
Refer to Figure 4-5. How much was overhead over/underapplied?
77. Figure 4-5
The Brookstone Company produces 9 volt batteries and AAA batteries. The Brookstone Company uses a
plantwide rate to apply overhead based on direct labor hours. The following data is given:
Actual overhead
$325,000
Estimated Overhead
$350,000
Estimated activity:
9 volt battery
100,000 direct labor hours
AAA battery
400,000 direct labor hours
Actual activity:
9 volt battery
125,000 direct labor hours
AAA battery
400,000 direct labor hours
Units produced:
9 volt battery
500,000
AAA battery
250,000
Refer to Figure 4-5. If the accounts had the following balances, how much will cost of goods sold be adjusted?
raw materials inventory
$200,000
work in process inventory
$100,000
finished goods inventory
$200,000
cost of goods sold
$500,000
78. Figure 4-6
The Fast & Furious Company produces two products: toy planes and toy race cars. They use departmental
overhead rates for the two production departments: molding and finishing. Molding uses machine hours to
assign overhead and Finishing uses direct labor hours. 50,000 planes and 250,000 race cars are produced. Please
find the following data:
Molding
Finishing
Total
Estimated Overhead
$250,000
$100,000
$350,000
Actual Overhead
$240,000
$120,000
$360,000
Expected direct labor hours
planes
5,000
5,000
10,000
race cars
5,000
35,000
40,000
Expected machine hours
planes
17,000
3,000
20,000
race cars
3,000
7,000
10,000
Actual direct labor hours
planes
4,500
5,300
10,000
race cars
5,500
34,500
40,000
Actual machine hours
planes
16,500
3,500
20,000
race cars
3,200
6,800
10,000
Refer to Figure 4-6. What are the departmental overhead rates for the molding and finishing department respectively?
79. Figure 4-6
The Fast & Furious Company produces two products: toy planes and toy race cars. They use departmental
overhead rates for the two production departments: molding and finishing. Molding uses machine hours to
assign overhead and Finishing uses direct labor hours. 50,000 planes and 250,000 race cars are produced. Please
find the following data:
Molding
Finishing
Total
Estimated Overhead
$250,000
$100,000
$350,000
Actual Overhead
$240,000
$120,000
$360,000
Expected direct labor hours
planes
5,000
5,000
10,000
race cars
5,000
35,000
40,000
Expected machine hours
planes
17,000
3,000
20,000
race cars
3,000
7,000
10,000
Actual direct labor hours
planes
4,500
5,300
10,000
race cars
5,500
34,500
40,000
Actual machine hours
planes
16,500
3,500
20,000
race cars
3,200
6,800
10,000
Refer to Figure 4-6. How much overhead is applied to the planes?
80. Figure 4-6
The Fast & Furious Company produces two products: toy planes and toy race cars. They use departmental
overhead rates for the two production departments: molding and finishing. Molding uses machine hours to
assign overhead and Finishing uses direct labor hours. 50,000 planes and 250,000 race cars are produced. Please
find the following data:
Molding
Finishing
Total
Estimated Overhead
$250,000
$100,000
$350,000
Actual Overhead
$240,000
$120,000
$360,000
Expected direct labor hours
planes
5,000
5,000
10,000
race cars
5,000
35,000
40,000
Expected machine hours
planes
17,000
3,000
20,000
race cars
3,000
7,000
10,000
Actual direct labor hours
planes
4,500
5,300
10,000
race cars
5,500
34,500
40,000
Actual machine hours
planes
16,500
3,500
20,000
race cars
3,200
6,800
10,000
Refer to Figure 4-6. What is the overhead per unit for race cars? (round to 3 decimal places)
81. Figure 4-6
The Fast & Furious Company produces two products: toy planes and toy race cars. They use departmental
overhead rates for the two production departments: molding and finishing. Molding uses machine hours to
assign overhead and Finishing uses direct labor hours. 50,000 planes and 250,000 race cars are produced. Please
find the following data:
Molding
Finishing
Total
Estimated Overhead
$250,000
$100,000
$350,000
Actual Overhead
$240,000
$120,000
$360,000
Expected direct labor hours
planes
5,000
5,000
10,000
race cars
5,000
35,000
40,000
Expected machine hours
planes
17,000
3,000
20,000
race cars
3,000
7,000
10,000
Actual direct labor hours
planes
4,500
5,300
10,000
race cars
5,500
34,500
40,000
Actual machine hours
planes
16,500
3,500
20,000
race cars
3,200
6,800
10,000
Refer to Figure 4-6. How much was overhead over or underapplied?
82. Motorsports, Inc. had a predetermined overhead rate of $2 per direct labor hour. The direct labor hours were
estimated to be 25,000. The actual manufacturing overhead incurred was $47,000 and 24,000 actual direct labor
hours were worked. How much was overhead over/under applied last year?
83. Tarot Company has a predetermined overhead rate of $6 per direct labor hour. Last year the company
incurred $156,600 of actual manufacturing overhead cost and the account was $12,600 underapplied. How
many direct labor hours were worked during the year?