Chapter 4: Activity-Based Costing
84. Lamar Corporation uses departmental manufacturing overhead rates to apply overhead. Direct labor cost is used
to apply manufacturing overhead in Department A and machine hours are used for Department B.
Dept. A
Dept. B
Direct Labor Cost
$66,000
$33,000
Factory Overhead
$79,200
$60,000
Direct Labor Hours
8,000
9,000
Machine Hours
4,000
15,000
What predetermined overhead rate would be used for departments A and B respectively?
a. 83%; $5
b. 83%; $3
c. 120%; $4
d. $8.40; $5
Chapter 4: Activity-Based Costing
85. The Sterling Company applies manufacturing overhead. At the end of the year the following data were available:
Actual Manufacturing Overhead
$115,00
Estimated Manufacturing Overhead
$110,00
Applied Manufacturing Overhead
$100,00
The following accounts had the unadjusted balances:
Raw Materials Inventory
$100,00
Work-in-Process Inventory
$100,00
Finished Goods Inventory
$100,00
Cost of Goods Sold
$300,00
What is the journal entry if the amount is considered material?
Work in Process $1,000
Finished Goods $1,000
Cost of goods sold $3,000
Manufacturing overhead $5,000
Work in Process $3,000
Finished Goods $3,000
Cost of goods sold $9,000
Manufacturing overhead $15,000
Manufacturing Overhead $5,000
Work in Process $ 1,000
Finished Goods $ 1,000
Cost of goods sold $ 3,000
Manufacturing Overhead $15,000
Work in Process $ 3,000
Finished Goods $ 3,000
Cost of goods sold $ 9,000
none of these
Chapter 4: Activity-Based Costing
Figure 4-7
The Cherokee Company uses a predetermined overhead rate. The following accounts have these unadjusted
balances:
Raw Materials $20,000 Work in Process $40,000 Finished Goods $10,000 Cost of Goods Sold $50,000
86. Refer to Figure 4-7. If overhead is underapplied by $12,000 and considered immaterial, the journal entry would
be
a. Cost of Goods Sold $12,000
Manufacturing Overhead $12,000
b. Manufacturing Overhead $12,000
Cost of Goods Sold $12,000
c. Raw Materials
$2,00
Work in Process
$4,00
Finished Goods
$1,00
Cost of Goods Sold
$5,00
Manufacturing Overhead $12,000
d. Manufacturing Overhead $12,000
Raw Materials
$2,000
Work in Process
$4,000
Finished Goods
$1,000
Cost of Goods Sold
$5,000
e. Manufacturing Overhead $12,000
Work in Process
$4,800
Finished Goods
$1,200
Cost of Goods Sold
$6,000
Chapter 4: Activity-Based Costing
87. Refer to Figure 4-7. If Manufacturing overhead was $12,000 overapplied and considered immaterial, what is
the journal entry?
a. Cost of Goods Sold $12,000
Manufacturing Overhead $12,000
b. Manufacturing Overhead $12,000
Cost of Goods Sold $12,000
c. Manufacturing Overhead $12,000
Raw Materials $2,000 Work in Process $4,000 Finished Goods $1,000 Cost of Goods
Sold $5,000
d. Raw Materials $2,000 Work in Process $4,000 Finished Goods $1,000 Cost of Goods Sold $5,000
Manufacturing Overhead $12,000
e. Manufacturing Overhead $12,000
Work in Process $4,800 Finished Goods $1,200 Cost of Goods Sold $6,000
Chapter 4: Activity-Based Costing
88. Refer to Figure 4-7. If Manufacturing overhead was $12,000 overapplied and considered material, what is the
journal entry?
a. Cost of Goods Sold $12,000
Manufacturing Overhead $12,000
b. Manufacturing Overhead $12,000
Cost of Goods Sold $12,000
c. Manufacturing Overhead $12,000
Raw Materials $2,000 Work in Process $4,000 Finished Goods $1,000 Cost of Goods Sold
$5,000
d. Raw Materials $2,000 Work in Process $4,000 Finished Goods $1,000 Cost of Goods Sold $5,000
Manufacturing Overhead $12,000
e. Manufacturing Overhead $12,000
Work in Process $4,800 Finished Goods $1,200 Cost of Goods Sold $6,000
Chapter 4: Activity-Based Costing
89. Refer to Figure 4-7. If Manufacturing overhead was $12,000 underapplied and considered material, what is the
journal entry?
a. Cost of Goods Sold $12,000
Manufacturing Overhead $12,000
b. Work in Process $4,800
Finished Goods $1,200
Cost of Goods Sold $6,000
Manufacturing Overhead $12,000
c. Manufacturing Overhead $12,000
Raw Materials $2,000
Work in Process $4,000
Finished Goods $1,000
Cost of Goods Sold $5,000
d. Raw Materials $2,000
Work in Process $4,000
Finished Goods $1,000
Cost of Goods Sold $5,000
Manufacturing Overhead $12,000
e. Manufacturing Overhead $12,000
Work in Process $4,800
Finished Goods $1,200
Cost of Goods Sold $6,000
90. Products might consume overhead in different proportions due to differences in
a. product size.
b. setup times.
c. product complexity.
d. all of these.
91. The proportion of an overhead activity consumed by a product is the
a. overhead ratio.
b. consumption ratio.
c. quick ratio.
d. fixed ratio.
Chapter 4: Activity-Based Costing
92. More accurate product costing information is produced by assigning costs using
a. a volume-based, plantwide rate.
b. volume-based, departmental rates.
c. activity-based pool rates.
d. all of these.
93. Thaisom Company applies manufacturing overhead. At the end of the year the following data were available:
Actual Manufacturing Overhead
$115,00
Estimated Manufacturing Overhead
$120,00
Applied Manufacturing Overhead
$118,00
What is the journal entry if the amount of under- or over-applied overhead is considered small?
a. Cost of Goods Sold $5,000
Manufacturing Overhead $5,000
b. Cost of Goods Sold $3,000
Manufacturing Overhead $3,000
c. Cost of Goods Sold $2,000
Manufacturing Overhead $2,000
d. Manufacturing Overhead $5,000
Cost of Goods Sold $5,000
e. Manufacturing Overhead $3,000
Cost of Goods Sold $3,000
Chapter 4: Activity-Based Costing
Figure 4-8
Tandem Company manufactures two products (D and F). The overhead costs ($84,000) have been divided into
three cost pools that use the following activity drivers:
Product
Number of Setups
Machine Hours
Packing Orders
D
10
500
75
F
10
2,000
175
Cost per pool
$11,000
$60,000
$18,750
94. Refer to Figure 4–8. Using functional-based costing, what is the amount of overhead cost to be assigned to Product
D using machine hours as the allocation base?
a. $12,000
b. $60,000
c. $48,000
d. $16,800
95. Refer to Figure 4-8. What is the allocation rate per setup using activity-based costing?
a. $ 550
b. $1,100
c. $11,000
d. $2,200
96. Refer for Figure 4-8. What is the allocation rate per packing order using activity-based costing?
a. $18,750
b. $ 75
c. $ 1,875
d. $ 250
Chapter 4: Activity-Based Costing
97. Refer to Figure 4-8. If the number of machine hours is used to assign machine hour cost, determine the amount of
machine hour cost to be assigned to Product D.
a. $12,000
b. $60,000
c. $48,000
d. $16,800
SUPPORTING CALCULATIONS: $60,000/2,500 = $24 $24 × 500 = $12,000
Figure 4-9
Summer Manufacturing has four categories of overhead. The four categories and expected overhead costs for each
category for next year are listed as follows:
Maintenance
$255,000
Materials handling
125,000
Setups
30,000
Inspection
105,000
Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labor hours.
100,000 direct labor hours are budgeted for next year.
The company has been asked to submit a bid for a proposed job. The plant manager feels that obtaining this job
would result in new business in future years. Usually bids are based upon full manufacturing cost plus 10 percent.
Estimates for the proposed job are as follows:
Direct materials
$15,000
Direct labor (8,000 hours)
$12,000
Number of material moves
100
Number of inspections
120
Number of setups
24
Number of machine hours
4,000
The plant manager has heard of a new way of applying overhead that uses cost pools and activity drivers.
Expected activity for the four activity drivers that would be used are:
Machine hours
60,000
Material moves
20,000
Setups
3,000
Quality inspections
12,000
Chapter 4: Activity-Based Costing
98. Refer to Figure 4-9. What is the amount of overhead allocated to the proposed job if Winter Manufacturing uses
direct labor hours as its only activity driver?
a. $20,800
b. $30,400
c. $30,000
d. $41,200
99. Refer to Figure 4-9. What is the total cost of the proposed job if Winter Manufacturing uses direct labor hours as
its only activity driver?
a. $72,000
b. $68,200
c. $56,200
d. $53,200
100. Unit-level cost drivers create distortions when
a. different products consume resources differently.
b. products are produced using resources homogeneously.
c. products use resources similarly.
d. all of the above.
101. The use of unit-based activity drivers to assign costs tends to
a. overcost low-volume products.
b. overcost high-volume products.
c. undercost all products.
d. overcost all products.
Chapter 4: Activity-Based Costing
102. Which of the following is NOT a limitation of a plantwide overhead rate?
a. Product diversity may consume overhead activities under differing consumption ratios.
b. Overhead usage is not strictly linked to the units produced because some products are more complex and diverse
than others.
c. Predetermined rates using budgeted overhead are usually the best estimate of the amount of overhead.
d. Overhead costs tend to be underallocated to highly complex products.
103. A possible solution to overcome distortions caused by unit level rates is
a. assign costs by multiplying activity rates times the amount of activity consumed.
b. calculate individual rates for each activity with activity drivers.
c. increase the number of rates used that reflect the diverse activity and nonunit overhead drivers.
d. all of these.
Chapter 4: Activity-Based Costing
Figure 4-10
The Manoli Company has collected the following data for use in calculating product costs:
Activity Data: (expected and actual)
Rug cleaners
Sweepers
Total
units produced
50,000
250,000
300,000
prime costs
$200,000
$750,000
$950,000
direct labor hours
10,000
40,000
50,000
machine hours
20,000
10,000
30,000
number of setups
25
75
100
inspection hours
1,200
2,800
4,000
number of moves
140
210
350
Departmental Data: (expected and actual)
Molding
Assembly
Total
direct labor hours
rug cleaners
5,000
5,000
10,000
sweepers
5,000
35,000
40,000
total
10,000
40,000
50,000
machine hours
rug cleaners
17,000
3,000
20,000
sweepers
3,000
7,000
10,000
total
20,000
10,000
30,000
overhead costs
machining
$120,000
$30,000
$150,000
moving materials
40,000
30,000
70,000
setting up
70,000
10,000
80,000
inspecting products
20,000
30,000
50,000
total
250,000
$100,000
$350,000
Chapter 4: Activity-Based Costing
104. Refer to Figure 4-10. What is the unit product cost for rug cleaners if a plantwide rate is used based on direct labor
hours?
a. $11.00
b. $4.00
c. $5.40
d. $4.12
105. Refer to Figure 4-10. Manoli Company uses departmental overhead rates: Molding uses machine hours and
Assembly uses labor hours. What is the unit product cost for sweepers if departmental overhead rates are used?
a. $3.50
b. $8.50
c. $3.00
d. $1.40
106. Refer to Figure 4-10. What are the consumption ratios for rug cleaners and sweepers respectively for the
inspection of products activity?
a. 0.3; 0.7
b. 0.2; 0.8
c. 0.4; 0.6
d. 0.67; 0.33
107. Refer to Figure 4-10. What is the consumption ratio for the plantwide activity rate of direct labor hours?
a. 0.25; 0.75
b. 0.71; 0.29
c. 0.2; 0.8
d. 0.8; 0.2
Chapter 4: Activity-Based Costing
108. Refer to Figure 4-10. What are the consumption ratios for rug cleaners for the departments on the basis of the
departmental drivers (molding ;assembly)?
a. 0.33; 0.87
b. 0.85; 0.125
c. 0.33; 0.25
d. 0.85; 0.5
109. Refer to Figure 4-10. What is the activity rate for moving materials?
a. 0.2
b. $1000
c. $800
d. $200
110. Refer to Figure 4-10. What is the unit product cost for rug cleaners using activity based costing?
a. $11.00
b. $ 7.26
c. $ 4.00
d. $ 3.75
111. An activity-based costing system uses which of the following procedures?
a. Overhead costs are traced to departments, then costs are traced to products.
b. Overhead costs are traced to activities, then costs are traced to products.
c. Overhead costs are traced directly to products.
d. All overhead costs are expensed as incurred.
112. If a firm has implemented activity-based procedures for home office expenses, it will
a. allocate all home office expenses on the basis of sales revenues.
b. allocate all home office expenses to homogeneous cost pools.
c. allocate the costs in a pool using a predetermined rate per unit of activity.
d. both a and b.
Chapter 4: Activity-Based Costing
113. The system that first traces costs to activities and then to products is called:
a. Direct Costing
b. Absorption Costing
c. Functional–Based Costing
d. Activity–Based Costing
114. Activity-based costing assigns cost to cost objects by first tracing costs to
a. products and then tracing costs to cost objects.
b. departments and then tracing costs to products.
c. activities and then tracing costs to cost objects.
d. customers and then tracing costs to products.
115. The nonfinancial and financial data that describe individual activities is called:
a. Activity dictionaries
b. Activity attributes
c. Concatenated keys
d. ABC inventories
116. The simple list of activities identified in an ABC system is called:
a. Activity inventory
b. Activity dictionary
c. Activity attributes
d. Activity driver
117. A secondary activity is
a. the second activity on the activity list.
b. an activity driver.
c. one that is consumed by intermediate cost objects.
d. one that is consumed by the final cost object.
Chapter 4: Activity-Based Costing
Figure 4-11
Longview Manufacturing Company manufactures two products (I and II). The overhead costs ($58,000) have
been divided into three cost pools that use the following activity drivers:
Number of Labor
Product
Number of Orders
Transactions
Labor Hours
I
15
50
500
II
10
150
2,000
Cost per pool
$12,500
$8,000
$40,000
118. Refer to Figure 4–11. What is the allocation rate per order using ABC?
a. $12,500
b. $500
c. $2,320
d. $58,000
119. Refer to Figure 4–11. What is the allocation rate per labor transaction using ABC?
a. $ 8,000
b. $ 16
c. $29,000
d. $ 40
120. Refer to Figure 4-11. If the number of labor hours is used to assign labor costs from the cost pool, determine the
amount of overhead cost to be assigned to Product I.
a. $58,000
b. $ 8,000
c. $ 9,600
d. $32,000
Chapter 4: Activity-Based Costing
121. Refer to Figure 4-11. Using functional-based costing, what is the amount of overhead cost to be assigned to Product
II using labor hours as the allocation base?
a. $58,000
b. $43,500
c. $11,600
d. $46,400
122. Which of the following quantities is an example of an activity driver in activity–based costing?
a. number of setups
b. number of orders placed
c. number of machine hours
d. all of the above
Figure 4-12
The Gardenview Corporation has identified the following overhead costs and activity drivers for next year:
Overhead Item
Expected
Cost
Activity Driver
Expected
Quantity
Setup costs
$200,000
Number of setups
250
Ordering costs
80,000
Number of orders
1,600
Maintenance
400,000
Machine hours
2,000
Power
40,000
Kilowatt hours
40,000
The following are two of the jobs completed during the year:
Job 6A
Job 8B
Direct materials
$3,000
$4,000
Direct labor
$2,800
$4,800
Units completed
100
160
Direct labor hours
50
80
Number of setups
1
4
Number of orders
4
5
Machine hours
20
25
Kilowatt hours
30
50
The company‘s normal activity is 2,000 direct labor hours.
Chapter 4: Activity-Based Costing
123. Refer to Figure 4–12. If the number of setups is used to assign setup costs, the amount of setup costs assigned to
Job 6A would be
a. $1,600.
b. $1,000.
c. $800.
d. $1,680.
124. Refer to Figure 4-12. If the four activity drivers are used to allocate overhead costs, total overhead allocated to Job
6A would be
a. $5,533.
b. $4,830.
c. $5,030.
d. $5,630.
125. Refer to Figure 4–12. If kilowatt hours are used to assign power costs, the amount of power costs assigned to Job
6A would be
a. $33.20.
b. $30.00.
c. $102.00.
d. $53.32.
Chapter 4: Activity-Based Costing
126. The activity that aids management in achieving objectives such as product or customer costing, continuous
improvement and environmental management is called:
a. Activity driver
b. Activity classification
c. Primary key
d. Concatenated key
Figure 4-13
The Molotov plant of Kaboom Industries has two categories of overhead: maintenance and inspection. Costs
expected for these categories for the coming year are as follows:
Maintenance $50,000
Inspection 75,000
The plant currently applies overhead using direct labor hours and expected capacity of 50,000 direct labor hours.
The following data have been assembled for use in developing a bid for a proposed job:
$500
Direct labor
$2,000
Machine hours
500
Number of inspections
4
Direct labor hours
800
Total expected machine hours for all jobs during the year is 25,000, and the total expected number of inspections is
1,500.
127. Refer to Figure 4-13. Using activity-based costing and the appropriate activity drivers, the total cost of the potential
job would be
a. $1,200.
b. $1,800.
c. $3,700.
d. $3,875.
Chapter 4: Activity-Based Costing
128. Refer to Figure 4–13. Using direct labor hours to assign overhead, the total cost of the potential job would be
a. $2,000.
b. $4,000.
c. $4,500.
d. $5,500.
Figure 4-14
Lawson Manufacturing has four categories of overhead. The four categories and expected overhead costs for
each category for next year are as follows:
Maintenance
$180,000
Materials handling
27,000
Setups
24,000
Inspection
90,000
Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labor hours. 20,000
direct labor hours are budgeted for next year.
The company has been asked to submit a bid for a proposed job. The plant manager feels that obtaining this job
would result in new business in future years. Usually bids are based upon full manufacturing cost plus 15 percent.
Estimates for the proposed job are as follows:
Direct materials
$3,000
Direct labor (600 hours)
$9,000
Number of material moves
4
Number of inspections
6
Number of setups
8
Number of machine hours
80
In the past, full manufacturing cost has been calculated by allocating overhead using a volume–based activity driver,
direct labor hours. The plant manager has heard of a new way of applying overhead that uses cost pools and
activity drivers. Expected activity for the four activity drivers that would be used are:
Machine hours
5,000
Material moves
600
Setups
200
Quality inspections
1,000