Chapter 6—Activity-Based Costing Key
1. Activity-based costing is a method of cost allocation that is useful for assigning ____ costs to products or
services.
2. As companies experience a shift from labor-intensive operations to machine-automated operations, which of
the following costs becomes more difficult to trace to products?
3. Traditional overhead allocation methods as opposed to activity-based allocation methods work best when:
4. Which of the following statements associated with traditional overhead allocation is true?
5. Troxler Inc. produces various types of floor rugs with many different designs. They typically produce at least
200 rugs with a single machine setup. A cost incurred every time an individual rug is produced is called a(n):
6. Troxler Inc. produces various types of floor rugs with many different designs. They typically produce at least
200 rugs with a single machine setup. A cost incurred each time a machine is set up is called a(n):
7. Troxler Inc. produces various types of floor rugs with many different designs. They typically produce at least
200 rugs with a single machine setup. A cost incurred each time a new rug design is developed is called a(n):
8. Troxler Inc. produces various types of floor rugs with many different designs. They typically produce at least
200 rugs with a single machine setup. A cost incurred to sustain the overall manufacturing process is called
a(n):
9. Herndon Brothers Inc. produces a variety of “all natural” household cleaning supplies that it manufactures
and distributes to various grocery stores along the west coast. Which of the following types of costs would most
likely be a unit-level cost?
10. Herndon Brothers Inc. produces a variety of “all natural” household cleaning supplies that it manufactures
and distributes to various grocery stores along the west coast. Which of the following types of costs would most
likely be a product-level cost?
11. Herndon Brothers Inc. produces a variety of “all natural” household cleaning supplies that it manufactures
and distributes to various grocery stores along the west coast. Which of the following types of costs would most
likely be a batch-level cost?
12. Herndon Brothers Inc. produces a variety of “all natural” household cleaning supplies that it manufactures
and distributes to various grocery stores along the west coast. Which of the following types of costs would most
likely be a facility-level cost?
13. Which of the following would most likely be a unit-level cost?
14. Which of the following would most likely be a batch-level cost?
15. Which of the following would most likely be a product-level cost?
16. Which of the following would most likely be a facility-level cost?
17. In activity-based costing (ABC), the wage paid to an assembly-line worker would most likely be classified
as:
18. Which of the following statements is true regarding activity-based costing (ABC)?
19. ____ are procedures or processes that cause work to be accomplished.
20. Which of the following statements regarding activity-based costing (ABC) is true?
21. Which of the following is a key feature of activity-based costing?
22. Which of the following statements accurately describes the basis of activity-based costing?
23. What should be done in Stage 1 in an activity-based costing (ABC) system?
24. Which of the following statements is false regarding the identification of activities in activity-based costing
(ABC)?
25. Which of the following statements is true regarding activities?
26. Which of the following statements is true regarding the identification of activities in an ABC system?
27. Which of the following statements is false regarding activities in an ABC system?
28. Which of the following types of costs are usually not allocated to products?
29. In Stage 2 of ABC allocation:
30. Which of the following statements regarding cost drivers is false?
31. Which of the following statements is true regarding a cost driver?
32. Which of the following statements is false regarding cost drivers?
33. Which of the following would be the least likely cost driver for an activity such as the usage of factory
supplies?
34. Which of the following would be the least likely cost driver for an activity such as the repair and
maintenance of factory equipment?
35. Which of the following would be the least likely cost driver for an activity such as product testing?
36. Which of the following statements regarding activity-based costing (ABC) systems in a just-in-time (JIT)
environment is true?
37. Which of the following statements comparing traditional and activity-based costing (ABC) is false?
38. Which of the following statements comparing traditional and activity-based costing (ABC) is true?
39. Which of the following statements is true regarding cross-subsidies?
40. What would one expect to occur when cross-subsidies are eliminated with the use of activity-based costing
(ABC)?
41. Aunt Lucy’s Candies
Aunt Lucy’s Candies sells standard and premium chocolate candies through its catalog business. Many of the
candies are sold in bulk to other companies. Last year, the company incurred $300,000 in overhead costs. After
implementing activity-based costing (ABC), the company’s controller identified the following information:
Activity
Allocation Base
Proportion of Overhead Cost
Purchasing
Number of purchase orders
30%
Processing
Number of units
50%
Sales
Number of sales orders
20%
The number of activities for standard and premium candies is as follows:
Standard
Premium
Number of purchase orders
4,000
2,000
Number of units
200,000
100,000
Number of sales orders
3,000
1,000
Refer to the Aunt Lucy’s Candies information above. What is the overhead rate for the processing activity?
42. Aunt Lucy’s Candies
Aunt Lucy’s Candies sells standard and premium chocolate candies through its catalog business. Many of the
candies are sold in bulk to other companies. Last year, the company incurred $300,000 in overhead costs. After
implementing activity-based costing (ABC), the company’s controller identified the following information:
Activity
Allocation Base
Proportion of Overhead Cost
Purchasing
Number of purchase orders
30%
Processing
Number of units
50%
Sales
Number of sales orders
20%
The number of activities for standard and premium candies is as follows:
Standard
Premium
Number of purchase orders
4,000
2,000
Number of units
200,000
100,000
Number of sales orders
3,000
1,000
Refer to the Aunt Lucy’s Candies information above. What is the overhead rate for the purchasing activity?
43. Aunt Lucy’s Candies
Aunt Lucy’s Candies sells standard and premium chocolate candies through its catalog business. Many of the
candies are sold in bulk to other companies. Last year, the company incurred $300,000 in overhead costs. After
implementing activity-based costing (ABC), the company’s controller identified the following information:
Activity
Allocation Base
Proportion of Overhead Cost
Purchasing
Number of purchase orders
30%
Processing
Number of units
50%
Sales
Number of sales orders
20%
The number of activities for standard and premium candies is as follows:
Standard
Premium
Number of purchase orders
4,000
2,000
Number of units
200,000
100,000
Number of sales orders
3,000
1,000
Refer to the Aunt Lucy’s Candies information above. What is the overhead rate for the sales activity?
44. Aunt Lucy’s Candies
Aunt Lucy’s Candies sells standard and premium chocolate candies through its catalog business. Many of the
candies are sold in bulk to other companies. Last year, the company incurred $300,000 in overhead costs. After
implementing activity-based costing (ABC), the company’s controller identified the following information:
Activity
Allocation Base
Proportion of Overhead Cost
Purchasing
Number of purchase orders
30%
Processing
Number of units
50%
Sales
Number of sales orders
20%
The number of activities for standard and premium candies is as follows:
Standard
Premium
Number of purchase orders
4,000
2,000
Number of units
200,000
100,000
Number of sales orders
3,000
1,000
Refer to the Aunt Lucy’s Candies information above. If a single sales order for premium candies requires 2 purchase orders for a total of 500 pieces
(units), how much overhead should be assigned to that order?
45. Compton Corporation
The following overhead cost information is available for Compton Corporation for 2006:
Activity
Allocation Base
Overhead Cost
Purchasing
Number of purchase orders
$100,000
Receiving
Number of shipments received
60,000
Machine setups
Number of setups
150,000
Quality control
Number of inspections
50,000
During the year, 5,000 purchase orders were issued; 20,000 shipments were received; 3,000 machine setups were performed; and 4,000 inspections
were conducted.
Refer to the Compton Corporation information above. What is the overhead rate for the purchasing activity?
46. Compton Corporation
The following overhead cost information is available for Compton Corporation for 2006:
Activity
Allocation Base
Overhead Cost
Purchasing
Number of purchase orders
$100,000
Receiving
Number of shipments received
60,000
Machine setups
Number of setups
150,000
Quality control
Number of inspections
50,000
During the year, 5,000 purchase orders were issued; 20,000 shipments were received; 3,000 machine setups were performed; and 4,000 inspections
were conducted.
Refer to the Compton Corporation information above. What is the overhead rate for the receiving activity?
47. Compton Corporation
The following overhead cost information is available for Compton Corporation for 2006:
Activity
Allocation Base
Overhead Cost
Purchasing
Number of purchase orders
$100,000
Receiving
Number of shipments received
60,000
Machine setups
Number of setups
150,000
Quality control
Number of inspections
50,000
During the year, 5,000 purchase orders were issued; 20,000 shipments were received; 3,000 machine setups were performed; and 4,000 inspections
were conducted.
Refer to the Compton Corporation information above. If Job #229 required 5 purchase orders, 10 shipments, 8 machine setups, and 4 inspections to
fill, how much overhead should be assigned to Job #229?
48. The following overhead cost information is available for Henderson Inc. for 2006:
Activity
Allocation Base
Overhead Cost
Purchasing
Number of purchase orders
$40,000
Receiving
Number of shipments received
25,000
Machine setups
Number of setups
30,000
Quality control
Number of inspections
20,000
During the year, 2,000 purchase orders were issued; 800 shipments were received; 3,000 machine setups were performed; and 2,500 inspections were
conducted.
If Job #101 required 3 purchase orders, 4 shipments, 4 machine setups, and 2 inspections to complete, how much overhead should be assigned to Job
#101?
49. Wake Construction
Wake Construction manufactures and installs standard and custom-made cabinetry for residential homes. Last
year, the company incurred $200,000 in overhead costs. After implementing activity-based costing (ABC), the
company’s accountant identified the following related information:
Proportion
Activity
Allocation Base
of Overhead Cost
Material delivery and handling
Number of deliveries
30%
Inspections
Number of inspections
25%
Supervision
Hours of supervisor time
20%
Purchasing
Number of purchase orders
25%
The number of activities for standard and custom-made cabinets is as follows:
Standard
Custom-made
Number of deliveries
200
100
Number of inspections
600
400
Hours of supervisor time
1,800
2,200
Number of purchase orders
1,000
1,000
During the past year, Wake accepted a customer order for a set of custom-made cabinets that would require the following:
Direct labor cost (25 hours at $15 per hour)
$ 375
Direct materials (wood) (900 ft at $3.00 per foot)
$2,700
Number of deliveries
3
Number of inspections
5
Hours of supervisor time
5
Number of purchase orders
3
Refer to the Wake Construction information above. How much overhead should be applied to the above customer order?
50. Wake Construction
Wake Construction manufactures and installs standard and custom-made cabinetry for residential homes. Last
year, the company incurred $200,000 in overhead costs. After implementing activity-based costing (ABC), the
company’s accountant identified the following related information:
Proportion
Activity
Allocation Base
of Overhead Cost
Material delivery and handling
Number of deliveries
30%
Inspections
Number of inspections
25%
Supervision
Hours of supervisor time
20%
Purchasing
Number of purchase orders
25%
The number of activities for standard and custom-made cabinets is as follows:
Standard
Custom-made
Number of deliveries
200
100
Number of inspections
600
400
Hours of supervisor time
1,800
2,200
Number of purchase orders
1,000
1,000
During the past year, Wake accepted a customer order for a set of custom-made cabinets that would require the following:
Direct labor cost (25 hours at $15 per hour)
$ 375
Direct materials (wood) (900 ft at $3.00 per foot)
$2,700
Number of deliveries
3
Number of inspections
5
Hours of supervisor time
5
Number of purchase orders
3
Refer to the Wake Construction information above. What is the total product (manufacturing) cost for the above customer order?
51. Johnson Manufacturing
Johnson Manufacturing anticipates incurring $500,000 in overhead costs this year. After implementing activity-
based costing (ABC), the company’s controller identified the following related information:
Activity
Allocation Base
Proportion of Overhead Cost
Purchasing
Number of purchase orders
20%
Machine setups
Number of setups
15%
Production
Number of machine hours
65%
The number of activities expected is as follows:
Total number of purchase orders
4,000
Total number of setups
2,000
Total number of machine hours
10,000
Refer to the Johnson Manufacturing information above. How much total overhead will be allocated to the production activity?
52. Johnson Manufacturing
Johnson Manufacturing anticipates incurring $500,000 in overhead costs this year. After implementing activity-
based costing (ABC), the company’s controller identified the following related information:
Activity
Allocation Base
Proportion of Overhead Cost
Purchasing
Number of purchase orders
20%
Machine setups
Number of setups
15%
Production
Number of machine hours
65%
The number of activities expected is as follows:
Total number of purchase orders
4,000
Total number of setups
2,000
Total number of machine hours
10,000
Refer to the Johnson Manufacturing information above. What will be the overhead rate for the production activity?
53. Johnson Manufacturing
Johnson Manufacturing anticipates incurring $500,000 in overhead costs this year. After implementing activity-
based costing (ABC), the company’s controller identified the following related information:
Activity
Allocation Base
Proportion of Overhead Cost
Purchasing
Number of purchase orders
20%
Machine setups
Number of setups
15%
Production
Number of machine hours
65%
The number of activities expected is as follows:
Total number of purchase orders
4,000
Total number of setups
2,000
Total number of machine hours
10,000
Refer to the Johnson Manufacturing information above. How much total overhead would be applied to a job that required 1 purchase order, 5 setups,
and 300 machine hours?
54. Jones Construction currently uses traditional costing where overhead is applied based on direct labor hours.
Using traditional costing, the applied overhead rate is $20 per direct labor hour.
They are considering a switch to activity-based costing (ABC). The company controller has come up with
preliminary overhead rates for each of the following activities:
Activity
Allocation Base
Overhead rate
Material delivery and handling
Number of deliveries
$100 per delivery
Inspections
Number of inspections
$75 per inspection
Supervision
Hours of supervisor time
$30 per supervisor hour
Purchasing
Number of purchase orders
$60 per purchase order
One of the company’s current jobs has the following information available:
Direct labor hours
50 hours
Number of deliveries
2
Number of inspections
3
Hours of supervisor time
2
Number of purchase orders
5
Which of the following statements is true when comparing the total overhead allocated to the job using traditional versus ABC costing?