Cost Accounting: A Managerial Emphasis, 6e
Chapter 5 – Activity-Based Costing and Management
15) Which of the following can be described as a fiduciary duty of cost assignment?
A) ABC should be implemented to ensure adequate cost control regardless of cost.
B) Department managers should select activity cost drivers that increase their chance for success.
C) Effective delegation requires management to maintain close control over processes that incur costs.
D) Managers must avoid expanding their scope beyond the functions they control.
E) Cost assignment should begin with a limited scope of activities that managers believe are critical to the
success of the company.
16) Indications that a product cost system needs revision include
A) the product line consists of a products which are produced at different locations.
B) the product costing computer system does not use the latest technology.
C) the company uses a single allocation base system developed long ago.
D) prime cost represent the vast majority of product cost.
E) managers lose bids they expected to win and win bids they expected to lose.
17) Cecelia Schell is taking four clients (who are not related) on a tour of her retirement development. The
clients incurred the following expenses while on the tour. All tour expenses are paid by Cecelia because
she has business discounts for most of her business dealings. These expenses will be billed to the clients
by Cecelia.
Expense Anna Jim Frank Bud Totals
Bus ticket $80 $80 $80 $80 $320
Morning break 8 10 16 6 40
Lunch 24 20 28 20 88
Afternoon break 10 4 8 10 32
Cecelia’s overhead 56 56 56 56 224
Totals $178 $170 $188 $172 $704
Required:
Compute the total average cost per client showing average indirect (overhead) and average direct (other)
charges separately.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 5 – Activity-Based Costing and Management
18) The plant manager has come to you, as the new management accountant, for assistance. The plant
manufactures sailboards, operating two shifts per day. During March through July, a third shift is added.
The company has to train new machine operators each summer as the demands for its products is very
seasonal. Training always occurs on the day shift, and the plant allocates the costs of training (e.g., extra
supervision required), based on machine hours. This year, the three shift managers cannot agree on who
should be charged for the training. The day shift manager is angry because she has discovered that
machine hours are highest on the day shift. The other two managers argue that the hours are higher due
to the training, so the day shift should be charged for those costs.
Required:
Provide a recommendation to the plant manager? Include in your recommendation two options as an
allocation base for training costs.
19) Analyze the two costing systems below and determine which one is an ABC system, stating the
reasons for your choice.
System A
Total indirect costs
$3,250,000
Costs per unit
$64.21
Total direct costs
$4,565,000
# of Indirect cost pools
10
Direct cost categories
4
System B
Total indirect costs
$2,750,000
Costs per unit
$47.25
Total direct costs
$5,065,000
# of Indirect cost pools
1
Direct cost categories
2
Cost Accounting: A Managerial Emphasis, 6e
Chapter 5 – Activity-Based Costing and Management
20) Hans Sorensen, controller of Franklin Production, has the choice of allocating indirect manufacturing
cost using either direct manufacturing labour hours or manufacturing machine hours. If he uses labour
hours for the month of January, Product A receives $312,000 in manufacturing overhead charges and
Product B receives $448,000. When machine hours are used Product A receives $352,000 in manufacturing
overhead charges while Product B receives only $408,000.
Required:
You are the department manager in charge of Product A and are strongly in favour of using labour hours.
Of course, your co-manager, who is in charge of Product B, is strongly in favour of machine hours. What
are some arguments you may be able to give for the allocation base that favours your department‘s
product?
21) How are cost drivers selected in activity-based costing systems?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 5 – Activity-Based Costing and Management
22) The new manager of the insurance division does not understand how the company can have so many
overhead rates for assigning costs to the activities of the company’s life insurance underwriters. There is
one rate schedule for average assignable costs when agents write standard policies. There is another rate
schedule which the agents must complete when they write special policies, and these policies are costed
out differently from those that are categorized as standard policies.
Required:
a. Why might the company have different costing systems with different overhead rates for the
standard and specialized policies?
b. Which rate (standard or specialized) would cross-subsidize the other if the company used only one
set of overhead rates for costing its policies?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 5 – Activity-Based Costing and Management
23) The list of representative cost drivers in the right column below are randomized with respect to the
list of functions in the left column. That is, they do not match.
Function
Representative Cost Driver
1.
Purchasing
A.
Number of employees
2.
Billing
B.
Number of shipments
3.
Shipping
C.
Number of customers
4.
Computer Support
D.
Number of invoices
5.
Personnel
E.
Number of desktop computers
6.
Customer Service
F.
Number of purchase orders
Required:
Match each business function with its representative cost driver.
Function
Insert letter of appropriate driver
(A through F)
1.
Purchasing
2.
Billing
3.
Shipping
4.
Computer Support
5.
Personnel
6.
Customer Service
Function
(A through F)
1.
Purchasing
2.
Billing
3.
Shipping
4.
Computer Support
5.
Personnel
6.
Customer Service
Cost Accounting: A Managerial Emphasis, 6e
Chapter 5 – Activity-Based Costing and Management
5.4 Assign costs using activity-based costing (ABC).
1) Inaccurate product costs can expose a company to the risk of losing market share to competitors.
2) It may be appropriate to use a departmental costing system when costs are incurred on different
activities within a department but each activity has the same cost allocation base.
3) Many companies use multiple cost pools and multiple cost-allocation bases but do not emphasize
individual activities.
4) If a company uses departmental overhead allocation rates, then the amount of manufacturing overhead
allocated to the job is equal to the plant-wide overhead rate multiplied by the actual use of the cost
allocation base.
5) The estimated total manufacturing overhead costs that will be incurred in each department in the
coming year are often referred to as activity cost pools.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 5 – Activity-Based Costing and Management
Use the information below to answer the following question(s).
A transportation company provides bussing, limo and taxi service. The company charges: $350 per day
for bussing service; $2.00 per kilometre for taxi service; and, $3.50 per kilometre for limo service. Two
individual clients, the school board and the city government offices use the majority of the limo service
on a contract agreement. Bussing services are used exclusively by the school board, and the taxi service is
used almost exclusively by the general public, although the school board uses the taxi services when
individual students have to be transported on occasion. Indirect costs are accumulated on internal
records at $1.50 per kilometre for limo use and $1.00 per kilometre for taxi use, and $195 per day for each
of the twenty buses.
The company’s costing system has tracked the following activities for the month:
Limo Km
Taxi Km
Average
Days/Bus
360
90
19
1,943
125
n/a
6) Compute the billing to each major client for the month.
A) School Board, $134,440.00; City Gov’t, $7,050.50
B) School Board, $8,090.00; City Gov’t, $134,440.00
C) School Board, $134,440.00; City Gov’t, $4,323.50
D) School Board, $7,050.50; City Gov’t, $7,685.00
E) School Board, $8,090.00; City Gov’t, $7,050.50
7) What indirect costs were accumulated for each major client for the month?
A) School Board, $74,730.00; City Gov’t, $3,039.50
B) School Board, $7,050.50; City Gov’t, $74,730.00
C) School Board, $74,730.00; City Gov’t, $7,050.50
D) School Board, $7,050,50; City Gov’t, $7,685.00
E) School Board, $6,925.50; City Gov’t, $141,420.00
Cost Accounting: A Managerial Emphasis, 6e
Chapter 5 – Activity-Based Costing and Management
8) The previous controller at the transportation company had always estimated the indirect costs at 25%
of billings. What indirect costs were accumulated for each major client for the month under this
assumption?
A) School Board, $33,610.00; City Gov’t, $1,080.88
B) School Board, $2,022.50; City Gov’t, $33,610.00
C) School Board, $33,610.00; City Gov’t, $1,762.63
D) School Board, $1,762.63; City Gov’t, $1,921.25
E) School Board, $2,022.50; City Gov’t, $1,762.63
Use the information below to answer the following question(s).
Fran Ferry Company had the following activities, pooled costs, and physical flow of driver units. The
company uses activity-based costing.
Activities
Pooled
Costs
Physical Flow of
Driver Units
Account inquiry (hours)
$200,000
5,000 hours
Account billing (lines)
$140,000
2,000,000 lines
Account verification (accounts)
$5,000
20,000 accounts
Correspondence (letters)
$25,000
2,000 letters
The above activities are used by departments A and B as follows:
A
B
Account inquiry (hours)
1,000
2,000
Account billing (lines)
200,000
100,000
Account verification (accounts)
5,000
4,000
Correspondence (letters)
500
800
9) How much of the account inquiry cost will be assigned to Department A?
A) $200,000
B) $80,000
C) $66,667
D) $133,334
E) $40,000
Cost Accounting: A Managerial Emphasis, 6e
Chapter 5 – Activity-Based Costing and Management
10) How much of the account billing cost will be assigned to Department B?
A) $7,000
B) $14,000
C) $46,667
D) $93,333
E) $140,000
Use the information below to answer the following question(s).
Bill Cobb Corporation had the following activities, pooled costs, and physical flow of driver units. The
company uses activity-based costing.
Activities
Pooled
Costs
Physical Flow of
Driver Units
Account inquiry (hours)
$400,000
5,000
Account billing (lines)
$280,000
2,000,000
Account verification (accounts)
$150,000
20,000
Correspondence (letters)
$50,000
2,000
The above activities are used by departments X and Y as follows:
Y
Account inquiry (hours)
800 hours
Account billing (lines)
200,000 lines
Account verification (accounts)
1,000 accounts
Correspondence (letters)
1,000 letters
11) How much of the correspondence cost will be assigned to Department X?
A) $10,000
B) $8,333
C) $25,000
D) $5,000
E) $50,000
Cost Accounting: A Managerial Emphasis, 6e
Chapter 5 – Activity-Based Costing and Management
12) How much of the account verification cost will be assigned to Department Y?
A) $15,000
B) $7,500
C) $100,000
D) $10,000
E) $50,000
13) Using a department indirect cost rate to allocate costs to products will result in the same product costs
as an ABC system if which of the following is true?
A) if each activity within a department has the same cost allocation base, and the different products use
resources from different activity areas in the same proportion
B) if significant costs are incurred on different activities with different cost-allocation bases within a
department, the different products use resources from different activity areas in different proportions
C) if no single activity accounts for a significant fraction of a department’s costs
D) if information needed for an ABC is too expensive to develop and maintain accurately
E) if each activity in a department has a separate costing system and uses different activity cost drivers
14) When calculating the total amount of manufacturing overhead to allocate to a particular job, the
company would multiply each departmental overhead rate by ________ and then ________ together the
allocated amounts from each department.
A) the actual amount of the departmental allocation base used by the job; add
B) the actual amount of the plant-wide allocation base used by the job; add
C) the actual amount of the departmental allocation base used by the job; multiply
D) the actual amount of the plant-wide allocation base used by the job; multiply
E) the actual amount of the activity allocation base used by the job; add
Cost Accounting: A Managerial Emphasis, 6e
Chapter 5 – Activity-Based Costing and Management
15) Babcock Industries uses departmental overhead rates to allocate its manufacturing overhead to jobs.
The company has two departments: Assembly and Sanding. The Assembly Department uses a
departmental overhead rate of $20 per machine hour, while the Sanding Department uses a departmental
overhead rate of $15 per direct labour hour. Job 396 used the following direct labour hours and machine
hours in the two departments:
Actual results
Assembly
Department
Sanding
Department
Direct labour hours used
4
3
Machine hours used
9
5
The cost for direct labour is $25 per direct labour hour and the cost of the direct materials used by Job 396
is $1,200.
What was the total cost of Job 396 if Babcock Industries used the departmental overhead rates to allocate
manufacturing overhead?
A) $1,375
B) $1,425
C) $1,500
D) $1,600
E) $1,630
Cost Accounting: A Managerial Emphasis, 6e
Chapter 5 – Activity-Based Costing and Management
16) Leonard Industries uses departmental overhead rates to allocate its manufacturing overhead to jobs.
The company has two departments: Building and Inspection. The Building Department uses a
departmental overhead rate of $18 per machine hour, while the Inspection Department uses a
departmental overhead rate of $15 per direct labour hour. Job 611 used the following direct labour hours
and machine hours in the two departments:
Actual results
Building
Department
Inspection
Department
Direct labour hours used
6
2
Machine hours used
10
0
The cost for direct labour is $25 per direct labour hour and the cost of the direct materials used by Job 611
is $1,500.
What was the total cost of Job 611 if Leonard Industries used the departmental overhead rates to allocate
manufacturing overhead?
A) $1,700
B) $1,844
C) $1,880
D) $1,838
E) $1,910
Cost Accounting: A Managerial Emphasis, 6e
Chapter 5 – Activity-Based Costing and Management
Answer the following question(s) using the information below.
Ernsting Printers has contracts to complete weekly supplements required by forty-six customers. For the
year 2012, manufacturing overhead cost estimates total $420,000 for an annual production capacity of 12
million pages.
For 2012 Ernsting Printers has decided to evaluate the use of additional cost pools. After analyzing
manufacturing overhead costs, it was determined that number of design changes, setups, and inspections
are the primary manufacturing overhead cost drivers. The following information was gathered during
the analysis:
Cost pool
Manufacturing
overhead costs
Design changes
$60,000
Setups
320,000
Inspections
40,000
Total manufacturing overhead costs
$420,000
During 2012, two customers, Wealth Managers and Health Systems, are expected to use the following
printing services:
Activity
Wealth
Managers
Health
Systems
Pages
60,000
76,000
Design changes
10
0
Setups
20
10
Inspections
30
38
17) What is the cost driver rate if manufacturing overhead costs are considered one large cost pool and
are assigned based on 12 million pages of production capacity?
A) $0.05 per page
B) $0.035 per page
C) $0.35 per page
D) $0.025 per page
E) $0.045 per page
Cost Accounting: A Managerial Emphasis, 6e
Chapter 5 – Activity-Based Costing and Management
18) Using pages printed as the only overhead cost driver, what is the manufacturing overhead cost
estimate for Wealth Managers during 2012?
A) $2,500
B) $21,000
C) $1,500
D) $2,700
E) $2,100
19) Assuming activity-cost pools are used, what are the activity-cost driver rates for design changes,
setups, and inspections cost pools?
A) $200 per change, $64 per setup, $5 per inspection
B) $180 per change, $76 per setup, $4 per inspection
C) $150 per change, $64 per setup, $4 per inspection
D) $180 per change, $76 per setup, $5 per inspection
E) $200 per change, $5 per setup, $64 per inspection
20) Using activity-based costing to allocate overhead costs, what is the total manufacturing overhead cost
estimate for Wealth Managers during 2012?
A) $6,850
B) $3,250
C) $4,020
D) $3,430
E) $5,096
Cost Accounting: A Managerial Emphasis, 6e
Chapter 5 – Activity-Based Costing and Management
21) When selling price is cost plus 25% and costs are assigned using the single cost driver, number of
pages printed, then
A) Ernsting Printers will want to drop Wealth Managers as a customer.
B) Wealth Managers will likely seek to do business with competitors.
C) Wealth Managers is unfairly over billed for its use of printing resources.
D) Wealth Managers is under billed for the job, while other jobs will be unfairly over billed.
E) All customers will be under billed for their jobs.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 5 – Activity-Based Costing and Management
Answer the following question(s) using the information below.
Wallace Printing has contracts to complete weekly supplements required by forty-six customers. For the
year 2012, manufacturing overhead cost estimates total $420,000 for an annual production capacity of 10
million pages.
For 2012 Wallace Printing decided to evaluate the use of additional cost pools. After analyzing
manufacturing overhead costs, it was determined that number of design changes, setups, and inspections
are the primary manufacturing overhead cost drivers. The following information was gathered during
the analysis:
Cost pool
Manufacturing
overhead costs
Design changes
$60,000
Setups
320,000
Inspections
40,000
Total manufacturing overhead costs
$420,000
During 2012, two customers, Wayward Insurance and Hapless Systems, are expected to use the following
printing services:
Activity
Wayward
Insurance
Hapless
Systems
Pages
60,000
76,000
Design changes
10
2
Setups
20
10
Inspections
30
38
22) If manufacturing overhead costs are considered one large cost pool and are assigned based on 10
million pages of production capacity, what is the cost driver rate?
A) $0.25 per page
B) $0.05 per page
C) $0.025 per page
D) $0.042 per page
E) $0.42 per page
Cost Accounting: A Managerial Emphasis, 6e
Chapter 5 – Activity-Based Costing and Management
23) Using pages printed as the only overhead cost driver, what is the manufacturing overhead cost
estimate for Hapless Systems during 2012?
A) $19,000
B) $3,800
C) $1,900
D) $2,520
E) $3,192
24) Assuming activity-cost pools are used, what are the activity-cost driver rates for design changes,
setups, and inspections cost pools?
A) $300 per change, $80 per setup, $2.50 per inspection
B) $250 per change, $80 per setup, $3.75 per inspection
C) $210 per change, $2.50 per setup, $26.25 per inspection
D) $300 per change, $125 per setup, $4.00 per inspection
E) $300 per change, $2.50 per setup, $80 per inspection
25) Using activity-based costing to allocate overhead costs, what is the total manufacturing overhead cost
estimate for Hapless Systems during 2012?
A) $3,113.75
B) $1,495.00
C) $2,068.00
D) $3,412.50
E) $3,665.00
Cost Accounting: A Managerial Emphasis, 6e
Chapter 5 – Activity-Based Costing and Management
26) When selling prices are based on costs assigned using the single cost driver, number of pages printed,
then Hapless Systems
A) is fairly billed because resources are allocated uniformly to all jobs.
B) is grossly under billed for the job, while other jobs will be unfairly over billed.
C) will be pleased because all customers will be under billed for their jobs.
D) will contribute too little to profits, and Wallace Printing will not want to accept additional work. from
the company
E) will likely seek to do business with competitors.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 5 – Activity-Based Costing and Management
27) Eastern Star Nursing Home has been using an indirect overhead job cost system for allocating general
and nursing overhead charges to all patients. However, during the past few months the facility has been
losing patients because a competing nursing home charges much less for some classes of patients. It
seems that Eastern Star is keeping the well patients and losing those who require special attention. The
facilities manager believes that a refined costing system can improve the allocation of charges to all
patients. Hopefully this will reduce the charges to the more ill patients.
The accounting staff provided information for September. The costs have traditionally been allocated to
patients based on nursing days. However, the accounting staff can separate nursing days by nursing
category. At the request of the facilities manager, the following information was furnished concerning
nursing days.
Critical Special General
Care Care Care Daily
Days Days Days Pay Rate
Senior RN 1,600 1,000 1,600 $150
RN 4,000 2,600 2,000 135
Senior PN 2,000 1,400 5,200 120
PN 400 1,000 4,400 100
Nurse’s aide 0 0 1,800 80
Total days 8,000 6,000 15,000
Overhead rate/day $110 $100 $90
Hazel Jones, a long-time patient, spent 5 days in Critical Care, 4 days in Special Care, and 21 days in
General Care during September. Her monthly assignment of nursing days was: 2 for Senior RN, 6 for RN,
10 for PN, and 12 for Nurse’s aide.
Required:
a. Determine the amount of cost to be covered by Hazel Jones if the daily pay rates presented in the
table are used for staff services and overhead is added on a care area per day basis.
b. For each patient care area determine the total cost per day to be charged to patients using the
weighted average staff services cost for the daily pay rate portion of total costs. What is cost to be covered
by Hazel Jones’ charge for the month of September?