Chapter 7 – Activity-Based Costing and Management
1. Unit-level activities are performed each time a unit is produced.
a.
True
b.
False
True
2. Factors that measure the consumption of activities by products and other cost objects are value-added costs.
a.
True
b.
False
False
3. Activity drivers should be classified as either unit-level or nonunit-level.
a.
True
b.
False
True
4. Product diversity means that products consume overhead activities in systematically different proportions.
a.
True
b.
False
True
5. The consumption ratio is the amount of each activity consumed by a product.
a.
True
b.
False
True
6. An activity-based costing system first assigns costs to activities and then to cost objects.
a.
True
b.
False
True
7. A volume-based costing system emphasizes direct tracing and driver tracing.
a.
True
b.
False
False
A volume-based costing system tends to be allocation-intensive.
8. An activity dictionary lists the activities in an organization along with some critical activity attributes.
a.
True
b.
False
True
9. Activity attributes are financial and nonfinancial information items that describe individual activities.
a.
True
b.
False
True
Chapter 7 – Activity-Based Costing and Management
10. A work distribution matrix is derived from an interview or a written survey.
a.
True
b.
False
True
11. Resource drivers are factors that measure the consumption of resources by product.
a.
True
b.
False
False
Resource drivers are factors that measure the consumption of resources by activities.
12. To calculate an activity rate, the practical capacity of each activity must be determined.
a.
True
b.
False
True
13. Activity inputs are the resources consumed by the activity in producing its output.
a.
True
b.
False
True
14. Activity analysis is the effort expended to identify those factors that are the root causes of activity costs.
a.
True
b.
False
False
15. One of the questions answered by activity analysis should be “What activities are done?”
a.
True
b.
False
True
16. Activities necessary to remain in business are called valuable activities.
a.
True
b.
False
False
17. Discretionary activities are necessary to comply with legal mandates.
a.
True
b.
False
False
18. Costs that are caused by the inefficient performance of value-added activities are value added costs.
a.
True
b.
False
False
Chapter 7 – Activity-Based Costing and Management
19. The value-added standard is the waste-free component of the value-added activity.
a.
True
b.
False
True
20. One of the three major dimensions of measuring activity performance is quality.
a.
True
b.
False
True
21. One way to improve efficiency is to produce higher activity output with higher cost.
a.
True
b.
False
False
22. Velocity is the length of time that it takes to produce a unit of output from the time raw materials are received until the
good is delivered.
a.
True
b.
False
False
23. Appraisal costs are incurred to determine whether products and services are conforming to their requirements or
customer needs.
a.
True
b.
False
True
24. A defective product is one that does conform to specifications.
a.
True
b.
False
False
A defective product is one that does not conform to specifications.
25. Environmental costs are costs that are incurred because poor environmental quality may or does exist.
a.
True
b.
False
True
26. Quality improvement can increase profitability by decreasing costs.
a.
True
b.
False
True
Chapter 7 – Activity-Based Costing and Management
27. Zero defects means that most products conform to specifications.
a.
True
b.
False
False
Zero defects means that all products conform to specifications.
28. Activity elimination focuses on nonvalue-added activities.
a.
True
b.
False
True
29. Environmental internal failure costs are the costs of activities performed after discharging contaminants and waste into
the environment.
a.
True
b.
False
False
30. Control activities are performed by an organization or its customers in response to poor quality.
a.
True
b.
False
False
31. Control activities are performed by an organization to prevent or detect poor quality.
a.
True
b.
False
True
32. Environmental costs are associated with the creation, detection, remediation, and prevention of environmental
degradation.
a.
True
b.
False
True
33. Sustainable development is development that meets the needs of the present without compromising the ability of
future generations to meet their own needs.
a.
True
b.
False
True
34. ___________________ are performed each time a unit is produced.
Chapter 7 – Activity-Based Costing and Management
35. _____________________ are factors that measure the consumption of activities by products and other cost objects
and can be classified as either unit-level or nonunit-level.
36. When products consume overhead activities in systematically different proportion due to such things as product size,
product complexity, setup time and size of batches this is known as _________________.
37. The ___________________ is calculated by taking the amount of the activity driver per product and dividing it by
total driver quantity.
38. _________________________ assigns costs to activities and then costs to cost objects.
39. ____________________ are financial and nonfinancial information items that describe individual activities.
40. A company will sometimes use a ____________________ which identifies the amount of labor consumed by each
activity.
41. Accurate ___________________ allow managers to make better pricing decisions, customer-mix decisions, and other
customer-related decisions that improve profitability.
42. Tracing ________________ costs to suppliers can enable managers to choose the true low-cost supplier.
43. _________________________ is a system-wide, integrated approach that focuses management’s attention on
activities with the objective of improving customer value and profit achieved by providing this value.
44. A focus on cost reduction instead of cost assignment and emphasizing the maximization of systemwide performance is
known as _______________________.
45. A ____________________ is classified as value-added provided it simultaneously meets three conditions.
46. When a new product can be designed to use components already being used by other products this is known as
________________.
47. ___________________ are incurred to prevent poor quality in the products and services being produced.
48. The cost of recalls would be an example of a(n) ____________________.
Chapter 7 – Activity-Based Costing and Management
49. Reinspection and design changes are examples of _____________________ costs.
internal failure
50. Cleaning up a polluted lake or an oil spill are examples of __________________ costs.
realized external failure
51. Companies will incur costs to perform such tasks as recycling products, controlling pollution, reducing contaminates.
All of these tasks are examples of _____________________ costs.
environmental prevention
52. ______________ is concerned with doing the activity right the first time it is performed.
Quality
53. Activities necessary to remain in business are known as _____________________.
Value-added activities.
54. Setups, material handling, and inspection are all possible examples of
a.
product diversity.
b.
unit level overhead activities.
c.
nonunit-level overhead activities.
d.
sustainable development.
e.
None of these.
c
55. ____ is present whenever products have different consumption ratios for different overhead activities.
a.
Environmental costs
b.
Activity sharing
c.
Product diversity
d.
Activity inputs
e.
Control costs
c
56. A(n) ____ ratio measures the proportion of an activity consumed by a product.
a.
production
b.
consumption
c.
efficiency
d.
quality
e.
usage
57. Using only unit-based activity drivers to assign nonunit-related overhead costs can cause
a.
product diversity.
b.
distorted product costs.
c.
efficiency.
d.
activity sharing.
e.
None of these.
Chapter 7 – Activity-Based Costing and Management
58. Activity drivers can be classified as either ____ or ____.
a.
unit-level; nonunit-level
b.
exact; inexact
c.
inputs; outputs
d.
right; wrong
a
59. ____ costs in many firms represent a much higher percentage of product costs than direct labor.
a.
Nonvalue-added
b.
Failure
c.
Overhead
d.
Appraisal
e.
Control
c
60. The activity driver for the shipping activity is the number of orders shipped. Product A uses 20 orders and Product B
uses 60 orders. Calculate the consumption ratios for each product.
a.
0.3; 0.7
b.
0.625; 0.375
c.
0.25; 0.75
d.
0.215; 0.785
Product A: 20 / 80 = 0.25 Product B: 60 / 80 = 0.75
61. Receiving provides 12,000 receiving hours and costs $60,000 per year. What is the activity rate for receiving?
a.
$14 per receiving hour
b.
$5 per receiving hour
c.
$4 per receiving hour
d.
$4.50 per receiving hour
e.
cannot be determined from this information
Rate: $60,000 / 12,000 = $5 per receiving hour
62. Producing 10,000 units of a cell phone requires $300,000 of prime costs, uses 2,000 machine hours, and takes 1,200
setup hours. The activity rates are $40 per machine hour and $100 per setup hour. What is the unit cost of a cell phone?
a.
$60
b.
$40
c.
$50
d.
$100
e.
$30
Unit cost: [$300,000 + ($40 × 2,000) + ($100 × 1,200)] / 10,000 = $50
Chapter 7 – Activity-Based Costing and Management
63. The moving activity has an expected cost of $160,000. Expected direct labor hours are 40,000, and the expected
number of moves is 80,000. The best activity rate for moving is
a.
$4 per move.
b.
$1.33 per hour-move.
c.
$4 per hour.
d.
$2 per move.
$160,000 / 80,000 = $2 Each move is an activity, and can be directly traced.
Figure 7-4.
Honeydew Company produces two products, a high end laptop computer under the label Bunsen Laptops, and an
inexpensive desktop computer under the label Beaker Computers. The two products use two overhead activities, with the
following costs:
Setting up equipment
$ 2,000
Machining
12,000
The controller has collected the expected annual prime costs for each product, the machine hours, the setup hours, and the
expected production.
Bunsen
Beaker
Direct Labor
$20,000
$5,000
Direct Materials
15,000
4,000
Expected Production in Units
2,000
2,000
Machine hours
750
1,500
Setup hours
50
50
64. Refer to Figure 7-4. Calculate Beaker’s consumption ratio for setup hours.
a.
0.50
b.
0.45
c.
0.90
d.
0.25
e.
0.75
50 / 100 = 0.5
65. Refer to Figure 7-4. Calculate the overhead cost per unit for Bunsen Laptops, using a plantwide rate based on direct
labor costs.
a.
$9.63 per laptop
b.
$22.45 per laptop
c.
$5.60 per laptop
d.
$7.22 per laptop
e.
$7.50 per laptop
66. Refer to Figure 7-4. Calculate the overhead cost per unit for each Beaker Computer, using overhead rates based on
machine hours and setup hours.
Chapter 7 – Activity-Based Costing and Management
a.
$6.10 per unit
b.
$4.50 per unit
c.
$5.75 per unit
d.
$3.88 per unit
Machining
$5.33 × 1,500 =
$7,995
Setups
$20 × 50 =
$1,000
Total
$8,995
Figure 7-5.
Rizzo Manufacturing produces two types of cameras: 35mm and digital. The cameras are produced using one continuous
process. Four activities have been identified: machining, setups, receiving, and packing. Resource drivers have been used
to assign costs to each activity. The overhead activities, their costs, and the other related data are as follows:
Product
Machine Hours
Setups
Receiving Orders
Packing Orders
35mm
10,000
100
200
400
Digital
10,000
250
800
2,000
Costs
$60,000
$40,000
$8,000
$24,000
67. Refer to Figure 7-5. Calculate the total overhead assigned to the 35mm cameras using only machine hours to calculate
a plantwide rate.
a.
$132,000
b.
$72,000
c.
$60,000
d.
$75,000
e.
$66,000
68. Refer to Figure 7-5. Calculate a consumption ratio for setups on the digital cameras.
a.
0.688
b.
0.730
c.
0.700
d.
0.714
e.
0.500
250 / 350 = 0.714
Chapter 7 – Activity-Based Costing and Management
69. Refer to Figure 7-5. Using an activity rate for receiving based on receiving orders, assign receiving costs to the 35mm
camera.
a.
$1,800
b.
$2,000
c.
$1,600
d.
$1,200
e.
$4,000
Overhead assignment: $8.00 × 200 = $1,600
70. Refer to Figure 7-5. Calculate an activity rate for packing based on packing orders.
a.
$9.00 per packing order
b.
$10.00 per packing order
c.
$8.00 per packing order
d.
$60.00 per packing order
e.
$1.20 per packing order
$24,000 / 2,400 = $10.00 per packing order
71. A costing system that first assigns costs to activities and then to products is
a.
activity-based costing.
b.
job-order costing.
c.
activity-based management.
d.
volume based costing.
e.
nonunit-level costing.
a
72. A list of activities accompanied by information that describes each activity is an activity ____.
a.
manifesto
b.
diary
c.
journal
d.
dictionary
e.
note
73. ____ are assigned using direct tracing and resource drivers.
a.
Resources
b.
Costs
c.
Profits
d.
Materials
e.
Products
Chapter 7 – Activity-Based Costing and Management
74. In an activity dictionary, types of resources consumed is an example of a(n)
a.
activity sharing.
b.
quality.
c.
activity attribute.
d.
allocation.
c
75. A(n) ____ is derived from the interview process (or written survey).
a.
work distribution matrix
b.
activity explanation matrix
c.
driver consumption matrix
d.
value analysis matrix
e.
tracing matrix
a
76. To calculate an activity rate, the ____ of each activity must be determined.
a.
practical capacity
b.
expenditure level
c.
processing ratio
d.
value
a
77. Interviews and surveys are used to identify
a.
cycle time.
b.
velocity.
c.
control costs.
d.
costs.
e.
activities.
e
78. ____ can help a company become more competitive by providing more accurate cost data.
a.
Unit-based costing
b.
Volume-based costing
c.
Kaizen costing
d.
Production costing
e.
Activity-based costing
e
79. A company has two inspectors, each earning a salary of $75,000. One inspector works exclusively on inspecting parts
received from outside suppliers, while the other spends 30% of her time inspecting parts and 70% of her time inspecting
final products. How much labor cost should be assigned to the activity, inspecting parts?
a.
$100,000
b.
$95,000
c.
$75,000
d.
$96,275
Chapter 7 – Activity-Based Costing and Management
e.
$97,500
Cost assigned: $75,000 + (30% × $75,000) = $97,500
80. Last year, Stevita Inc. shipped 3,000,000 kilograms of goods to customers at a cost of $2,400,000. If an individual
customer orders 20,000 kilograms and produces $400,000 of revenue (total revenue is $40 million), the amount of
shipping cost assigned to the customer using activity-based costing would be
a.
$16,000.
b.
$8,000.
c.
$24,000.
d.
$4,000.
e.
$60,000.
Price per kilogram:
$2,400,000 / 3,000,000 = $0.80 per kilogram
Total price:
20,000 × $0.8 = $16,000
81. Rollo Company has developed cost formulas for the drivers of the following production activities:
Driver
Activity
Fixed
Variable
Labor hours
Materials
-0-
20
Labor hours
Labor
-0-
10
Machine hours
Maintenance
10,000
8
Machine hours
Machining
50,000
2
Number of setups
Inspections
30,000
200
Number of setups
Setups
-0-
300
Number of purchase orders
Purchasing
75,000
3
The budgeted inspection cost for 20 setups is
a.
$175,860.
b.
$40,000.
c.
$34,000.
d.
$30,000.
30,000 + ($200 × 20) = $34,000
Figure 7-1.
The receiving department of Owen has three activities: unloading, counting goods, and inspecting. Unloading requires a
forklift that is leased for $15,000 per year. The forklift is used only for unloading. The fuel for the forklift is $2,000 per
year. Inspection requires special testing equipment that has a depreciation of $500 per year and an operating cost of
$1,000 per year. Receiving has four employees who each have an average salary of $35,000 per year. The work
distribution matrix for the receiving personnel is as follows:
Percentage of Time
Activity
on Each Activity
Unloading
25%
Counting
40%
Inspecting
35%
82. Refer to Figure 7-1. Calculate the cost of unloading.
a.
$50,500
b.
$56,000
Chapter 7 – Activity-Based Costing and Management
c.
$52,000
d.
$54,000
Resource
Equipment
Fuel
Operating
Labor*
Total
83. Refer to Figure 7-1. Calculate the cost of counting.
a.
$54,000
b.
$56,000
c.
$52,000
d.
$50,500
Resource
Equipment
Fuel
Operating
Labor*
Total
84. Refer to Figure 7-1. Calculate the cost for inspection.
a.
$56,000
b.
$54,000
c.
$50,500
d.
$52,000
Resource
Equipment
Fuel
Operating
Labor*
Total
85. Which of the following is not a possible source of customer diversity?
a.
sales support
b.
order frequency
c.
delivery frequency
d.
geographic distance
e.
Pricing
e
Chapter 7 – Activity-Based Costing and Management
Figure 7-2.
Steller Manufacturing has two classes of distributors: JIT distributors and non-JIT distributors. The JIT distributor places
small, frequent orders and the non-JIT distributor tends to place larger, less frequent orders. Both types of distributors
purchase the same product. The customer activities and costs for the previous quarter are found below:
Activity
JIT distributors
Non-JIT distributors
Sales Orders
400
25
Sales Calls
20
20
Service Calls
180
80
Average Order Size
75
1,200
Manufacturing cost/unit
$40
$40
Customer Costs:
Processing Sales Orders
$150,000
Selling Goods
$145,000
Servicing Goods
$185,000
Total
$480,000
86. Refer to Figure 7-2. Calculate the activity rate for processing sales orders rounded to 2 decimal places.
a.
$330.09 per order
b.
$525 per order
c.
$275.76 per order
d.
$352.94 per order
e.
$342.43 per order
Ordering rate: $150,000 / 425 = $352.94 per sales order
87. Refer to Figure 7-2. Calculate the activity rate for selling goods.
a.
$3,625 per sales call
b.
$3,550 per sales call
c.
$2,200 per sales call
d.
$4,800 per sales call
e.
$9,400 per sales call
Selling rate: $145,000 / 40 = $3,625 per sales call
88. Refer to Figure 7-2. Calculate the activity rate for servicing goods rounded to 2 decimal places.
a.
$1,089 per service call
b.
$750.10 per service call
c.
$675.50 per service call
d.
$1,000 per service call
e.
$711.54 per service call
Service rate: $185,000 / 260 = $711.54 per service call
89. Refer to Figure 7-2. Calculate the total customer cost for the JIT distributor rounded to the nearest dollar.
Chapter 7 – Activity-Based Costing and Management
a.
$487,500
b.
$341,753
c.
$600,000
d.
$250,050
e.
$448,791
Ordering
$352.94 × 400 =
Selling
$3,625.00 × 20 =
Servicing
$711.54 × 180 =
Total
90. Refer to Figure 7-2. Calculate the total customer cost for the non-JIT distributor.
a.
$150,025
b.
$122,500
c.
$175,200
d.
$138,247
e.
$178,791
Ordering
$352.94 × 25 =
Selling
$3,625.00 × 20 =
Servicing
$711.54 × 80 =
Total
Figure 7-3.
Hamilton Company manufactures engines. Hamilton produces all the parts necessary for its engines except for one
electronic component, which is purchased from two local suppliers: Traynor Inc. and Bello Company. Both suppliers are
reliable and rarely deliver late; however, Traynor sells the component for $10.00 per unit and Bello sells the same
component for $8.95. Hamilton purchases 70% of its components from Bello, because of the lower price. The total annual
demand is 75,000 units.
I. Activity Data
Activity Cost
Inspecting components (sampling only)
$ 190,000
Reworking products (due to failed component)
$2,254,000
Warranty work (due to failed component)
$1,723,000
II. Supplier Data
Traynor
Bello
Inc.
Company
Unit Purchase Price
$10.00
$8.95
Units Purchased
22,500
52,500
Sampling Hours
50
2,450
Rework hours
135
3,625
Warranty hours
475
6,000
91. Refer to Figure 7-3. Calculate the activity rate for inspecting components based on sampling hours.
a.
$78 per hour
b.
$72 per hour
c.
$77.25 per hour
Chapter 7 – Activity-Based Costing and Management
d.
$80 per hour
e.
$76 per hour
92. Refer to Figure 7-3. Calculate the activity rate for reworking products based on rework hours. Round to the nearest
whole dollar.
a.
$599 per hour
b.
$595 per hour
c.
$602 per hour
d.
$605 per hour
e.
$622 per hour
93. Refer to Figure 7-3. Calculate the activity rate for warranty work based on warranty hours. Round to the nearest whole
dollar.
a.
$268 per hour
b.
$266 per hour
c.
$264 per hour
d.
$262 per hour
e.
$287 per hour
94. Refer to Figure 7-3. Calculate the total activity cost per component associated with using Traynor Inc., as the supplier.
a.
$15.75
b.
$10.00
c.
$19.38
d.
$20.00
e.
$22.80
$10 × 22,500
Inspecting
$76 × 50
Rework
$599 × 135
Warranty
$266 × 475
Total
Units
95. Refer to Figure 7-3. Calculate the total cost per component associated with using Bello Company as the supplier.
a.
$12.00
b.
$8.95
c.
$84.26
Chapter 7 – Activity-Based Costing and Management
d.
$15.74
e.
$86.25
Purchase Cost
$10 × 22,500
$8.95 × 52,500
Inspecting
$76 × 50
Rework
$599 × 135
$599 × 3,625
Warranty
$266 × 475
$266 × 6,000
Total
Units
Unit cost
96. Refer to Figure 7-3. Suppose that Hamilton loses $2,500,000 in sales per year because of its reputation for defective
units attributable to failed components. Using warranty hours, assign the proportional cost of lost sales to Traynor Inc.
Then determine what effect this would have on the cost per component.
a.
$4.00 per unit
b.
$25.00 per unit
c.
$8.95 per unit
d.
$8.15 per unit
Lost sales
$386 × 475 =
$386 × 6,000 =
Components sold
Cost per unit
97. Refer to Figure 7-3. Suppose that Hamilton loses $2,500,000 in sales per year because of its reputation for defective
units attributable to failed components. Using warranty hours, assign the proportional cost of lost sales to Bello Company.
Then determine what effect this would have on the cost per component.
a.
$20.00 per unit
b.
$11.34 per unit
c.
$55.00 per unit
d.
$44.11 per unit
Lost sales
$386 × 475 =
$386 × 6,000 =
Cost per unit
98. ____ is the length of time required to produce one product; ____ is the number of units that can be produced in a given
period of time.
a.
Cycle time; velocity
b.
Velocity; cycle time
c.
Activity time; cycle production
Chapter 7 – Activity-Based Costing and Management
d.
Cycle time; activity output
e.
Velocity; cycle production
99. The identification and elimination of activities that fail to add value refers to
a.
external failures.
b.
activity reduction.
c.
internal failures.
d.
activity elimination.
100. The process of choosing among different sets of activities caused by competing strategies refers to
a.
activity drivers.
b.
activity inputs.
c.
activity outputs.
d.
activity selection.
101. The process of decreasing the time and resources required by an activity is known as
a.
activity reduction.
b.
activity output measure.
c.
activity attributes.
d.
activity analysis.
102. Increasing the efficiency of necessary activities by using economies of scale is known as
a.
activity inputs.
b.
activity sharing.
c.
control activities.
d.
cycle time.
103. ____ is concerned with identifying the root causes of activity costs.
a.
Direct analysis
b.
Activity analysis
c.
Driver analysis
d.
Causal analysis
e.
None of these.
104. Which of the following is not one of the three conditions necessary to be classified as a discretionary activity?
a.
the activity produces a change of state
b.
the change of state was not achievable by preceding activities
c.
the activity enables other activities to be performed
d.
the activity increases efficiency
Chapter 7 – Activity-Based Costing and Management
105. ____ activities are unnecessary activities.
a.
Frivolous
b.
Nonvalue-added
c.
Expensive
d.
Under-performing
e.
None of these.
106. All of the following are supplier-driven activities except
a.
receiving.
b.
purchasing.
c.
efficiency.
d.
inspection of incoming components.
c
107. Activity-based management attempts to
a.
identify and eliminate all unnecessary activities.
b.
increase the efficiency of necessary activities.
c.
add new activities that increase value.
d.
do all of these.
108. Which is not a component of process value analysis?
a.
driver analysis
b.
velocity
c.
activity analysis
d.
performance measurement
e.
None of these.
109. Complying with the filing requirements of the IRS is an example of a
a.
recreational activity.
b.
discretionary activity.
c.
recommended activity.
d.
required activity.
110. Which of the following is not an example of a nonvalue-added activity?
a.
inspecting
b.
scheduling
c.
moving
d.
waiting
e.
supervising
Chapter 7 – Activity-Based Costing and Management
e
111. ____ focuses on the relationship of activity inputs to activity outputs.
a.
Activity output measure
b.
Efficiency
c.
Velocity
d.
Activity drivers
e.
None of these.
112. ____ is concerned with doing the activity right the first time it is performed.
a.
Time
b.
Efficiency
c.
Quality
d.
Velocity
e.
None of these.
c
113. ____ activities are performed in response to poor quality.
a.
Failure
b.
Environmental
c.
Value-added
d.
Control
e.
Prevention
a
114. Packaging inspection and process acceptance are examples of ____.
a.
external failure costs
b.
prevention costs
c.
internal failure costs
d.
value costs
e.
appraisal costs
e
115. Field trials and quality engineering are examples of ____.
a.
prevention costs
b.
appraisal costs
c.
failure costs
d.
quality costs
e.
value costs
a
116. Scrap and retesting are examples of ____ failure costs.
a.
detection
b.
external