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Activity-Based Costing
FOR INSTRUCTOR USE ONLY
17 - 21
88. Wallace Computer Company produces three products: Earth, Wind, and Fire. Earth
requires 80 machine setups, Wind requires 60 setups, and Fire requires 180 setups.
Wallace has identified an activity cost pool with allocated overhead of $720,000 for which
the cost driver is machine setups. How much overhead is assigned to each product?
Earth Wind Fire
a. $240,000 $240,000 $240,000
b. $150,000 $112,500 $337,500
c. $180,000 $135,000 $405,000
d. $135,000 $240,000 $345,000
89. Sofa Company manufactures two models of its couch, the Mini and the Maxi. The Mini
model requires 10,000 direct labor hours and the Maxi model requires 40,000 direct labor
hours. The company produces 4,000 units of the Mini model and 1,000 units of the Maxi
model each year. The company produces the Mini model in batch sizes of 200, while it
produces the Maxi model in batch sizes of 100. The company expects to incur $240,000
of total setup costs this year. How much of the setup costs are allocated to the Mini model
using ABC costing?
a. $160,000
b. $120,000
c. $48,000
d. $200,000
90. Mask Company manufactures two products, pillows and comforters. The company has
estimated its overhead in the order-processing department to be $480,000. The company
produces 50,000 pillows and 80,000 comforters each year. Pillow production requires
25,000 machine hours, comforter production requires 50,000 machine hours. The
company places raw materials orders 10 times per month, 2 times for raw materials for
pillows and the remainder for raw materials for comforters. How much of the order
processing overhead should be allocated to comforters?
a. $240,000
b. $320,000
c. $295,386
d. $384,000
91. Berg Company incurs $320,000 overhead costs each year in its three main departments,
setup ($20,000), machining ($220,000), and packing ($80,000). The setup department
performs 40 setups per year, the machining department works 5,000 hours per year, and
the packing department packs 500 orders per year. Information about Berg’s two products
is as follows:
Product A1 Product B1
Number of setups 20 20
Machining hours 1,000 4,000
Orders packed 150 350
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
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MC. 91 (cont.)
Number of products manufactured 600 400
If machining hours are used as a base, how much overhead is assigned to Product A1
each year?
a. $64,000
b. $160,000
c. $110,000
d. $96,000
92. Berg Company incurs $320,000 overhead costs each year in its three main departments,
setup ($20,000), machining ($220,000), and packing ($80,000). The setup department
performs 40 setups per year, the machining department works 5,000 hours per year, and
the packing department packs 500 orders per year. Information about Berg’s two products
is as follows:
Product A1 Product B1
Number of setups 20 20
Machining hours 1,000 4,000
Orders packed 150 350
Number of products manufactured 600 400
Using ABC, how much overhead is assigned to Product A1 each year?
a. $160,000
b. $242,000
c. $ 64,000
d. $102,000
93. Berg Company incurs $320,000 overhead costs each year in its three main departments,
setup ($20,000), machining ($220,000), and packing ($80,000). The setup department
performs 40 setups per year, the machining department works 5,000 hours per year, and
the packing department packs 500 orders per year. Information about Berg’s two products
is as follows:
Product A1 Product B1
Number of setups 20 20
Machining hours 1,000 4,000
Orders packed 150 350
Number of products manufactured 600 400
Using ABC, how much overhead is assigned to Product B1 each year?
a. $160,000
b. $128,000
c. $218,000
d. $256,000
Activity-Based Costing
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94. A company incurs $2,400,000 of overhead each year in three departments: Processing,
Packaging, and Testing. The company performs 800 processing transactions, 200,000
packaging transactions, and 2,000 tests per year in producing 400,000 drums of Oil and
600,000 drums of Sludge. The following data are available:
Department Expected Use of Driver Cost
Processing 800 $1,000,000
Packaging 200,000 1,000,000
Testing 2,000 400,000
Production information for the two products is as follows:
Oil Sludge
Department Expected Use of Driver Expected Use of Driver
Processing 300 500
Packaging 120,000 80,000
Testing 1,600 400
The amount of overhead assigned to Oil is
a. $1,200,000.
b. $1,295,000.
c. $1,105,000.
d. $ 920,000.
95. A company incurs $2,400,000 of overhead each year in three departments: Processing,
Packaging, and Testing. The company performs 800 processing transactions, 200,000
packaging transactions, and 2,000 tests per year in producing 400,000 drums of Oil and
600,000 drums of Sludge. The following data are available:
Department Expected Use of Driver Cost
Processing 800 $1,000,000
Packaging 200,000 1,000,000
Testing 2,000 400,000
Production information for the two products is as follows:
Oil Sludge
Department Expected Use of Driver Expected Use of Driver
Processing 300 500
Packaging 120,000 80,000
Testing 1,600 400
The amount of overhead assigned to Sludge is
a. $1,200,000.
b. $1,105,000.
c. $1,295,000.
d. $ 920,000.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
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96. Volcker, Inc. manufactures recliners for the hotel industry. It has two products, the Heater
and the Massager, and total overhead is $1,580,000. The company plans to manufacture
400 Heaters and 100 Massagers this year. In manufacturing the recliners, the company
must perform 600 material moves for the Heater and 400 for the Massager; it processes
900 purchase orders for the Heater and 700 for the Massager; and the company’s
employees work 1,400 direct labor hours on the Heater product and 3,400 on the
Massager. Volcker’s total material handling costs are $1,000,000 and its total processing
costs are $580,000. Using ABC, how much overhead would be assigned to the Heater
product?
a. $ 790,000
b. $ 926,250
c. $ 653,750
d. $1,119,166
97. Which of the following is a limitation of activity-based costing?
a. More cost pools
b. Less control over overhead costs
c. Poorer management decisions
d. Some arbitrary allocations continue
98. Which of the following factors would suggest a switch to activity-based costing?
a. Product lines similar in volume and manufacturing complexity.
b. Overhead costs constitute a significant portion of total costs.
c. The manufacturing process has been stable.
d. Production managers use data provided by the existing system.
99. Which of the following is true of activity-based costing?
a. More cost pools
b. Same base as traditional costing
c. Less costly to use
d. Eliminates arbitrary allocations
100. The primary benefit of ABC is it provides
a. better management decisions.
b. enhanced control over overhead costs.
c. more cost pools.
d. more accurate product costing.
Activity-Based Costing
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101. Which of the following is not a benefit of activity-based costing?
a. More accurate product costing
b. Enhanced control over overhead costs
c. Better management decisions
d. Less costly to use
102. Each of the following is a limitation of activity-based costing except that
a. it can be expensive to use.
b. it is more complex than traditional costing.
c. more cost pools are used.
d. some arbitrary allocations continue.
103. The presence of any of the following factors would suggest a switch to ABC except when
a. product lines differ greatly in volume.
b. overhead costs constitute a minor portion of total costs.
c. the manufacturing process has changed significantly.
d. production managers are ignoring data provided by the existing system.
104. Which of the following is a limitation of activity-based costing?
a. More cost pools
b. Less control over overhead costs
c. ABC can be expensive to use
d. Poorer management decisions
105. Which of the following is true about activity-based costing?
a. Less cost pools
b. Same base as traditional costing
c. More costly to use
d. Eliminates arbitrary allocations
106. Each of the following is a limitation of activity-based costing except that
a. it can be expensive to use.
b. it decreases control over overhead costs
c. it is complex and can be difficult to understand
d. some arbitrary allocations continue.
107. The presence of any of the following factors would suggest a switch to ABC except when
a. product lines differ greatly in volume.
b. overhead costs constitute a major portion of total costs.
c. the manufacturing process has changed significantly.
d. production managers are using data provided by the existing system
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108. Activity-based costing uses
a. one plantwide pool and a single cost driver.
b. departmental pools and a single cost driver.
c. numerous cost pools and numerous cost drivers.
d. one plantwide pool and numerous cost drivers
109. Which of the following statements is false?
a. ABC can weaken control over overhead costs.
b. Under ABC, companies can trace many overhead costs directly to activities.
c. ABC allows some indirect costs to be identified as direct costs.
d. managers become more aware of their responsibility to control the activities that
generate costs.
110. Which of the following is a value-added activity?
a. Inventory storage
b. Machining
c. Building maintenance
d. Bookkeeping
111. Which of the following is a value-added activity?
a. Inventory control
b. Inspections
c. Packaging
d. Repair of machines
112. Which of the following is a non-value-added activity?
a. Inventory control
b. Machining
c. Assembly
d. Painting
113. Which of the following is a non-value-added activity?
a. Painting
b. Finishing
c. Packaging
d. Building maintenance
Activity-Based Costing
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114. A non-value-added activity in a service enterprise is
a. providing legal research.
b. delivering packages.
c. consulting.
d. bookkeeping.
115. A value-added activity in a service enterprise is
a. performing landscaping services.
b. reception.
c. billing.
d. ordering supplies.
116. Non-value-added activities
a. should be minimized or eliminated.
b. involve those activities that are essential to a company's operations.
c. increase both the cost and perceived value of a product.
d. cannot be differentiated from value-added activities.
117. Value-added activities
a. increase the perceived worth of a product or service to customers.
b. involve those activities that are essential to a company's operations.
c. include engineering design, machining, and assembly.
d. all of the above.
118. Which of the following is a value-added activity?
a. Engineering design
b. Machinery repair
c. Inventory storage
d. Inspections
119. Which of the following is a non-value-added activity?
a. Engineering design
b. Machining
c. Inspection
d. Packaging
120. A non-value-added activity in a service enterprise is
a. taking appointments.
b. traveling.
c. advertising.
d. all of these.
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121. Value-added activities
a. should be minimized or eliminated.
b. involve those activities that are essential to a company's operations.
c. add cost to a product without affecting selling price.
d. cannot be differentiated from non-value-added activities.
122. All of the following are examples of a value-added activity in a service company except
a. delivering packages by a delivery service.
b. ordering supplies.
c. performing surgery.
d. providing legal research for legal services.
123. Which of the following is not a facility-level activity?
a. Plant management
b. Product design
c. Personnel administration
d. Training
124. Which of the following is not a product-level activity?
a. Product design
b. Engineering changes
c. Inventory management
d. Equipment setups
125. Which of the following is not a batch-level activity?
a. Engineering changes
b. Equipment setups
c. Inspection
d. Materials handling
126. Which of the following is not a unit-level activity?
a. Purchase ordering
b. Assembling
c. Painting
d. Sewing
127. Which of the following is a batch-level activity?
a. Plant management
b. Product design
c. Equipment setups
d. Assembling
Activity-Based Costing
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128. Which of the following is not a facility-level activity?
a. Plant depreciation
b. Property taxes
c. Engineering changes
d. Utilities
129. Which of the following is not a product-level activity?
a. Product design
b. Engineering changes
c. Material handling
d. Inventory management
130. Which of the following is not a batch-level activity?
a. Purchase ordering
b. Equipment setups
c. Inspection
d. Assembling
131. Which of the following is not a unit-level activity?
a. Drilling
b. Cutting
c. Sanding
d. Inspecting
132. Which of the following is a unit-level activity?
a. Painting
b. Purchase ordering
c. Inspection
d. Material handling
133. Which of the following is a batch-level activity?
a. Assembling
b. Product design
c. Engineering changes
d. Purchase ordering
134. Which of the following is a product-level activity?
a. Equipment setups
b. Product design
c. Property taxes
d. Utilities
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135. Which of the following is a facility-level activity?
a. Engineering changes
b. Product design
c. Property taxes
d. Inspection
136. Activities required to support or sustain an entire production process are called
a. unit-level activities.
b. batch-level activities.
c. product-level activities.
d. facility-level activities.
137. Which would be a cost driver for a facility-level activity?
a. Number of setups
b. Number of product designs
c. Square footage
d. Number of purchase orders
138. Activity-based costing has been found to be useful in each of the following service
industries except
a. airlines.
b. railroads.
c. hotels.
d. ABC has been useful in all of these industries.
139. Activity-based costing is used in
Service industries Manufacturing industries
a. Yes No
b. Yes Yes
c. No Yes
d. No No
140. In service industries
a. activities cannot be labeled as value-added or non-value-added.
b. the overall objective of ABC is different than in manufacturing industries.
c. a larger proportion of overhead costs are company-wide costs.
d. activity cost pools cannot be identified.
Activity-Based Costing
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141. Activity-based costing is used by
a. accounting firms.
b. law firms.
c. consulting firms.
d. all of the above.
142. Austin Accounting Services estimates for next year revenues of $2,000,000, direct labor of
$400,000, and overhead of $700,000. Under traditional costing, overhead is applied to
audit jobs using the rate of
a. 35% of revenues.
b. 20% of revenues.
c. 56% of direct labor.
d. 175% of direct labor.
143. Port Accounting performs two types of services, Audit and Tax. Port’s overhead costs
consist of computer support, $240,000; and legal support, $120,000. Information on the
two services is:
Audit Tax
Direct labor cost $50,000 $100,000
CPU minutes 40,000 10,000
Legal hours used 200 800
Overhead applied to audit services using traditional costing is
a. $120,000.
b. $144,000.
c. $216,000.
d. $240,000.
144. Port Accounting performs two types of services, Audit and Tax. Port’s overhead costs
consist of computer support, $240,000; and legal support, $120,000. Information on the
two services is:
Audit Tax
Direct labor cost $50,000 $100,000
CPU minutes 40,000 10,000
Legal hours used 200 800
Overhead applied to tax services using traditional costing is
a. $120,000.
b. $144,000.
c. $216,000.
d. $240,000.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
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145. Port Accounting performs two types of services, Audit and Tax. Port’s overhead costs
consist of computer support, $240,000; and legal support, $120,000. Information on the
two services is:
Audit Tax
Direct labor cost $50,000 $100,000
CPU minutes 40,000 10,000
Legal hours used 200 800
Overhead applied to audit services using activity-based costing is
a. $120,000.
b. $144,000.
c. $216,000.
d. $240,000.
146. Port Accounting performs two types of services, Audit and Tax. Port’s overhead costs
consist of computer support, $240,000; and legal support, $120,000. Information on the
two services is:
Audit Tax
Direct labor cost $50,000 $100,000
CPU minutes 40,000 10,000
Legal hours used 200 800
Overhead applied to tax services using activity-based costing is
a. $120,000.
b. $144,000.
c. $216,000.
d. $240,000.
147. Port Accounting performs two types of services, Audit and Tax. Port’s overhead costs
consist of computer support, $240,000; and legal support, $120,000. Information on the
two services is:
Audit Tax
Direct labor cost $50,000 $100,000
CPU minutes 40,000 10,000
Legal hours used 200 800
Port Accounting performs tax services for Cathy Kane. Direct labor cost is $1,200; 600
CPU minutes were used; and 1 legal hour was used. What is the total cost of the Kane job
using activity-based costing?
a. $2,880
b. $3,000
c. $4,080
d. $4,200
Activity-Based Costing
FOR INSTRUCTOR USE ONLY
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148. Activity-based costing has been found to be useful in each of the following service
industries except
a. banks.
b. hospitals.
c. telephone companies.
d. ABC has been useful in any of these industries.
149. What sometimes makes implementation of activity-based costing difficult in service
industries is
a. the labeling of activities as value-added.
b. identifying activities, activity cost plus, and cost drivers.
c. that a larger proportion of overhead costs are company-wide costs.
d. attempting to reduce or eliminate non-value-added activities.
150. All of the following statements are correct except that
a. activity-based costing has been widely adopted in service industries.
b. the objective of installing ABC in service firms is different than it is in a manufacturing
firm.
c. a larger proportion of overhead costs are company-wide costs in service industries.
d. the general approach to identifying activities and activity cost pools is the same in a
service company as in a manufacturing company.
151. The use of activity-based costing in service industries
a. has the same objective as in manufacturing.
b. results in improved costing of services provided.
c. uses cost pools to assign overhead.
d. all of these.
a152. Just-in-time processing
a. is based on a just-in-case philosophy.
b. results in a push approach.
c. minimizes inventory storage and waiting time.
d. all of these.
a153. An element of just-in-time processing is
a. dependable suppliers who are willing to deliver on short notice.
b. a multi-skilled workforce.
c. a total quality control system.
d. all of these.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTUCTOR USE ONLY
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a154. Which of the following is not a benefit of just-in-time processing?
a. Control of significant inventory balances
b. Enhanced product quality
c. Reduction of rework costs
d. Production cost savings
a155. Which account is used in just-in-time processing?
a. Raw Materials Inventory
b. Work-in-Process Inventory
c. Merchandise Inventory
d. Raw and In-Process Inventory
a156. Under just-in-time processing, all of the following are received or completed “just in time”
except
a. finished goods.
b. raw materials.
c. subassembly parts.
d. supplies.
a157. Just-in-time processing
a. is based on a just-in-case philosophy.
b. results in higher inventory amounts.
c. eliminates the push approach.
d. all of the above.
a158. Just-in-time processing
a. results in the opposite of a just-in-case philosophy.
b. results in a pull approach.
c. minimizes inventory storage and waiting time.
d. all of the above.
a159. An important element of just-in-time processing is
a. dependable suppliers who are willing to deliver on short notice.
b. a specialized workforce.
c. less emphasis on a quality control system.
d. all of the above.
Activity-Based Costing
FOR INSTRUCTOR USE ONLY
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a160. Which of the following is a limitation of just-in-time processing?
a. Significant reduction of manufacturing inventories
b. Less emphasis on product quality
c. Higher production costs
d. None of the above
a161. Which account is not used in just-in-time processing?
a. Accounts Payable
b. Work-in-Process Inventory
c. Finished Goods Inventory
d. Raw and In-Process Inventory
a162. In the pull approach
a. subassembly parts are manufactured and stored just in case they are needed later in
the manufacturing process.
b. Finished goods are completed and stored just in case unexpected and rush customer
orders are received.
c. the manufacturing process begins with a customer placing an order.
d. None of the above.
Answers to Multiple Choice Questions
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTUCTOR USE ONLY
17 - 36
BRIEF EXERCISES
BE 163
Instant Access Services Inc. leases access to high-speed computers to small businesses. It
provides the following information for the year:
Budgeted Actual
Overhead cost $2,100,000 $1,900,000
Computer hours 100,000 90,000
Direct labor hours 200,000 180,000
Overhead is applied on the basis of computer hours.
Instructions
a. Compute the predetermined overhead rate.
b. Determine the amount of overhead applied for the year.
BE 164
Bark Manufacturing has three activities in its manufacturing process: machine setups, machining,
and inspections. Estimated annual overhead cost for each activity is $90,000, $162,500, and
$28,000, respectively. The expected annual use in each department is 1,000 setups, 12,500
machine hours, and 875 inspections.
Instructions
Compute the overhead rate for each activity.
BE 165
Gail Industries uses activity-based costing to assist management in setting prices for the
company’s three major product lines. The following information is available:
Expected Use of
Activity Cost Pool Estimated Overhead Cost Driver per Activity
Cutting $1,000,000 25,000 labor hours
Stitching 8,000,000 320,000 machine hours
Inspections 2,800,000 160,000 labor hours
Packing 960,000 64,000 finished goods units
