CHAPTER 17
ACTIVITY-BASED COSTING
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
Item
LO
BT
Item
LO
BT
Item
LO
Item
LO
BT
Item
LO
BT
True-False Statements
1.
1
K
7.
4
C
13.
5
K
19.
6
K
25.
7
K
2.
1
K
8.
4
K
14.
5
C
20.
6
K
26.
7
K
3.
1
K
9.
4
C
15.
5
K
21.
6
C
a27.
9
K
4.
1
C
10.
5
K
16.
6
K
22.
8
K
a28.
9
C
5.
1
C
11.
5
K
17.
6
K
23.
8
K
a29.
9
K
6.
2
K
12.
5
K
18.
6
K
24.
8
K
a30.
9
K
Multiple Choice Questions
31.
1
K
58.
4
K
85.
4
AP
112.
6
K
139.
8
K
32.
1
K
59.
4
K
86.
4
AP
113.
6
K
140.
8
K
33.
1
K
60.
4
K
87.
4
AP
114.
6
K
141.
8
K
34.
1
C
61.
4
K
88.
4
AP
115.
6
K
142.
8
AP
35.
1
K
62.
4
K
89.
4
AP
116.
6
K
143.
8
AP
36.
1
K
63.
4
K
90.
4
AP
117.
6
C
144.
8
AP
37.
1
K
64.
4
K
91.
4
AP
118.
6
C
145.
8
AP
38.
1
C
65.
4
K
92.
4
AP
119.
6
C
146.
8
AP
39.
1
K
66.
4
K
93.
4
AP
120.
6
C
147.
8
AP
40.
1
K
67.
4
AP
94.
4
AP
121.
6
K
148.
8
K
41.
1
K
68.
4
AP
95.
4
AP
122.
6
K
149.
8
K
42.
1
K
69.
4
AP
96.
4
AP
123.
7
C
150.
8
K
43.
1
AP
70.
4
AP
97.
5
K
124.
7
C
151.
8
C
44.
1
AP
71.
4
AP
98.
5
C
125.
7
C
a152.
9
K
45.
1
AP
72.
4
AP
99.
5
K
126.
7
C
a153.
9
K
46.
1
AP
73.
4
AP
100.
5
C
127.
7
C
a154.
9
K
47.
1
AP
74.
4
AP
101.
5
K
128.
7
K
a155.
9
K
48.
2
AP
75.
4
AP
102.
5
K
129.
7
K
a156.
9
K
49.
2
K
76.
4
AP
103.
5
C
130.
7
K
a157.
9
K
50.
2
K
77.
4
AP
104.
5
K
131.
7
K
a158.
9
K
51.
3
K
78.
4
AP
105.
5
K
132.
7
K
a159.
9
K
52.
3
K
79.
4
AP
106.
5
K
133.
7
K
a160.
9
C
53.
3
K
80.
4
AP
107.
5
K
134.
7
K
a161.
9
K
54.
3
AP
81.
4
AP
108.
5
K
135.
7
K
a162.
9
K
55.
3
K
82.
4
C
109.
5
C
136.
7
K
56.
4
AP
83.
4
K
110.
6
K
137.
7
K
57.
4
K
84.
4
AP
111.
6
K
138.
8
K
Brief Exercises
163.
1
AP
165.
4
AP
167.
4
AP
169.
4
AP
171.
6
C
164.
4
AP
166.
4
AP
168.
4
K
170.
6
C
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTUCTOR USE ONLY
17 – 2
Exercises
172.
1,4
AP
176.
4
C
179.
4
E
182.
4,5
AP
185.
7
C
173.
1,4
AP
177.
4
C
180.
4
AP
183.
6
C
186.
7
C
174.
4
AP
178.
4
AP
181
4
C
184.
6
C
187.
8
AP
175.
3
K
Completion Statements
188.
1
K
191.
4
K
194.
6
K
a197.
9
K
189.
1
K
192.
5
K
195.
7
K
a198.
9
K
190.
2
K
193.
5
K
196.
7
K
a This question covers a topic in an Appendix to the chapter.
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
Learning Objective 1
1.
TF
5.
TF
34.
MC
MC
MC
MC
Ex
2.
TF
31.
MC
35.
MC
MC
MC
MC
C
3.
TF
32.
MC
36.
MC
MC
MC
BE
C
4.
TF
33.
MC
37.
MC
MC
MC
Ex
Learning Objective 2
6.
TF
48.
MC
49.
MC
MC
C
Learning Objective 3
51.
MC
52.
MC
53.
MC
MC
MC
Ex
Learning Objective 4
7.
TF
62.
MC
71.
MC
MC
MC
BE
Ex
8.
TF
63.
MC
72.
MC
MC
MC
BE
Ex
9.
TF
64.
MC
73.
MC
MC
MC
BE
Ex
56.
MC
65.
MC
74.
MC
MC
MC
BE
Ex
57.
MC
66.
MC
75.
MC
MC
MC
BE
Ex
58.
MC
67.
MC
76.
MC
MC
MC
Ex
Ex
59.
MC
68.
MC
77.
MC
MC
MC
Ex
C
60.
MC
69.
MC
78.
MC
MC
MC
Ex
61.
MC
70.
MC
79.
MC
MC
BE
Ex
Learning Objective 5
10.
TF
14.
TF
99.
MC
MC
MC
C
11.
TF
15.
TF
100.
MC
MC
MC
C
12.
TF
97.
MC
101.
MC
MC
MC
13.
TF
98.
MC
102.
MC
MC
Ex
Learning Objective 6
16.
TF
20.
TF
112.
MC
MC
MC
BE
17.
TF
21.
TF
113.
MC
MC
MC
Ex
18.
TF
110.
MC
114.
MC
MC
MC
Ex
19.
TF
111.
MC
115.
MC
MC
BE
C
Learning Objective 7
25.
TF
124.
MC
127.
MC
MC
MC
MC
Ex
26.
TF
125.
MC
128.
MC
MC
MC
MC
C
123.
MC
126.
MC
129.
MC
MC
MC
Ex
C
Activity-Based Costing
FOR INSTRUCTOR USE ONLY
17 – 3
Learning Objective 8
22.
TF
138.
MC
141.
MC
MC
MC
MC
23.
TF
139.
MC
142.
MC
MC
MC
MC
24.
TF
140.
MC
143.
MC
MC
MC
Ex
Learning Objective a9
27.
TF
30.
TF
154.
MC
MC
MC
C
28.
TF
152.
MC
155.
MC
MC
MC
C
29.
TF
153.
MC
156.
MC
MC
MC
Note: TF = True-False BE = Brief Exercise C = Completion
MC = Multiple Choice Ex = Exercise
The chapter also contains one set of ten Matching questions and three Short-Answer Essay
questions.
CHAPTER LEARNING OBJECTIVES
1. Recognize the difference between traditional costing and activity-based costing. A
traditional costing system allocates overhead to products on the basis of predetermined
plantwide or departmentwide rates such as direct labor or machine hours. An ABC system
allocates overhead to identified activity cost pools, and then assigns costs to products using
related cost drivers that measure the activities (resources) consumed.
2. Identify the steps in the development of an activity-based costing system. The
development of an activity-based costing system involves four steps: (1) Identify and classify
the major activities involved in the manufacture of specific products, and allocate manu–
facturing overhead costs to the appropriate cost pools. (2) Identify the cost driver that has a
strong correlation to the costs accumulated in the cost pool. (3) Compute the overhead rate
per cost driver. (4) Assign manufacturing overhead costs for each cost pool to products or
services using the overhead rates.
3. Know how companies identify the activity cost pools used in activity-based costing.
To identify activity cost pools, a company must perform an analysis of each operation or
process, documenting and timing every task, action, or transaction.
4. Know how companies identify and use cost drivers in activity-based costing. Cost
drivers identified for assigning activity cost pools must (a) accurately measure the actual
consumption of the activity by the various products and (b) have related data easily
available.
5. Understand the benefits and limitations of activity-based costing. Features of ABC that
make it a more accurate product costing system include: (1) the increased number of cost
pools used to assign overhead, (2) the enhanced control over overhead costs, and (3) the
better management decisions it makes possible. The limitations of ABC are: (1) the higher
analysis and measurement costs that accompany multiple activity centers and cost drivers,
and (2) the necessity still to allocate some costs arbitrarily.
6. Differentiate between value-added and non-value-added activities. Value-added
activities increase the worth of a product or service. Non-value-added activities simply add
cost to or increase the time spent on a product or service without increasing its market
value. Awareness of these classifications encourages managers to reduce or eliminate the
time spent on the non-value-added activities.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
17 – 4
7. Understand the value of using activity levels to activity-based costing. Activities may
be classified as unit-level, batch-level, product-level, and facility-level. Companies control
overhead costs at unit-, batch-, product-, and facility-levels by modifying unit-, batch-,
product-, and facility-level activities, respectively. Failure to recognize this classification of
levels can result in distorted product costing.
8. Apply activity-based costing to service industries. The overall objective of using ABC in
service industries is no different than for manufacturing industries—that is, improved costing
of services provided (by job, service, contract, or customer). The general approach to
costing is the same: analyze operations, identify activities, accumulate overhead costs by
activity cost pools, and identify and use cost drivers to assign the cost pools to the services.
a9. Explain just-in-time (JIT) processing. JIT is a processing system dedicated to having on
hand the right materials and products just at the time they are needed, thereby reducing the
amount of inventory and the time inventory is held. One of the principal accounting effects is
that one account, Raw and In-Process Inventory, replaces both the raw materials and work–
in-process inventory accounts.
TRUE-FALSE STATEMENTS
1. Traditional costing systems use multiple predetermined overhead rates.
2. Traditionally, overhead is allocated based on direct labor cost or direct labor hours.
3. Current trends in manufacturing include less direct labor and more overhead.
4. Activity-based costing allocates overhead to multiple cost pools and assigns the cost
pools to products using cost drivers.
5. A cost driver does not generally have a direct cause-effect relationship with the resources
consumed.
6. The first step in activity-based costing is to assign overhead costs to products, using cost
drivers.
7. To achieve accurate costing, a high degree of correlation must exist between the cost
driver and the actual consumption of the activity cost pool.
8. Low-volume products often require more special handling than high-volume products.
Activity-Based Costing
17 – 5
9. When overhead is properly assigned in ABC, it will usually decrease the unit cost of high–
volume products.
10. ABC leads to enhanced control over overhead costs.
11. ABC usually results in less appropriate management decisions.
12. ABC is generally more costly to implement than traditional costing.
13. ABC eliminates all arbitrary cost allocations.
14. ABC is particularly useful when product lines differ greatly in volume and manufacturing
complexity.
15. ABC is particularly useful when overhead costs are an insignificant portion of total costs.
16. Activity-based management focuses on reducing costs and improving processes.
17. Any activity that increases the cost of producing a product is a value-added activity.
18. Engineering design is a value-added activity.
19. Non-value-added activities increase the cost of a product but not its perceived value.
20. Machining is a non-value-added activity.
21. Not all activities labeled non-value-added are totally wasteful, nor can they be totally
eliminated.
22. The overall objective of installing ABC in service firms is no different than it is in a
manufacturing company.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
17 – 6
23. What sometimes makes implementation of activity-based costing difficult in service
industries is that a smaller proportion of overhead costs are company-wide costs.
24. The general approach to identifying activities, activity cost pools, and cost drivers is used
by a service company in the same manner as a manufacturing company.
25. Plant management is a batch–level activity.
26. Painting is a product-level activity.
a27. Just-in-time strives to eliminate inventories by using a pull approach.
a28. Quality control is less important in just-in-time than in traditional manufacturing
philosophies.
a29. Inventory storage costs are reduced in just-in–time processing.
a30. Rework costs typically increase in just–in-time processing.
Answers to True-False Statements
MULTIPLE CHOICE QUESTIONS
31. Which of the following is not typical of traditional costing systems?
a. Use of a single predetermined overhead rate.
b. Use of direct labor hours or direct labor cost to assign overhead.
c. Assumption of correlation between direct labor and incurrence of overhead cost.
d. Use of multiple cost drivers to allocate overhead.
Activity-Based Costing
17 – 7
32. In traditional costing systems, overhead is generally applied based on
a. direct labor.
b. machine hours.
c. direct material dollars.
d. units of production.
33. An activity that has a direct cause-effect relationship with the resources consumed is a(n)
a. cost driver.
b. overhead rate.
c. cost pool.
d. product activity.
34. Which best describes the flow of overhead costs in an activity-based costing system?
a. Overhead costs direct labor cost or hours products
b. Overhead costs products
c. Overhead costs activity cost pools cost drivers products
d. Overhead costs machine hours products
35. The costs that are easiest to trace directly to products are
a. direct materials and direct labor.
b. direct labor and overhead.
c. direct materials and overhead.
d. none of the above; all three costs are equally easy to trace to the product.
36. Often the most difficult part of computing accurate unit costs is determining the proper
amount of _________ to assign to each product, service, or job.
a. direct materials
b. direct labor
c. overhead
d. direct materials and direct labor
37. Predetermined overhead rates in traditional costing are often based on
a. direct labor cost for job order costing and machine hours for process costing.
b. machine hours for job order costing and direct labor cost for process costing.
c. multiple bases for job order costing and direct labor cost for process costing.
d. multiple bases for both job order costing and process costing.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
17 – 8
38. Direct labor is sometimes the appropriate basis for assigning overhead cost to products. It
is appropriate to use direct labor when which of the following is true?
(1) Direct labor constitutes a significant part of total product cost.
(2) A high correlation exists between direct labor and changes in the amount of overhead
costs.
a. (1) only
b. (2) only
c. Either (1) or (2)
d. Both (1) and (2)
39. Advances in computerized systems, technological innovation, global competition, and
automation have changed the manufacturing environment drastically by
a. increasing direct labor costs and increasing overhead costs.
b. increasing direct labor costs and decreasing overhead costs.
c. decreasing direct labor costs and decreasing overhead costs.
d. decreasing direct labor costs and increasing overhead costs.
40. Activity-based costing
a. allocates overhead to activity cost pools, and it then assigns the activity cost pools to
products and services by means of cost drivers.
b. accumulates overhead in one cost pool, then assigns the overhead to products and
services by means of a cost driver.
c. assigns activity cost pools to products and services, then allocates overhead back to
the activity cost pools.
d. allocates overhead directly to products and services based on activity levels.
41. Ordering materials, setting up machines, assembling products, and inspecting products
are examples of
a. cost drivers.
b. overhead cost pools.
c. direct labor costs.
d. nonmanufacturing activities.
42. An “Ordering and Receiving Materials” cost pool would most likely have as a cost driver:
a. machine hours.
b. number of setups.
c. number of purchase orders.
d. number of inspection tests.
Activity-Based Costing
17 – 9
43. Daffodil Company produces two products, Flower and Planter. Flower is a high-volume
item totaling 20,000 units annually. Planter is a low-volume item totaling only 6,000 units
per year. Flower requires one hour of direct labor for completion, while each unit of
Planter requires 2 hours. Therefore, total annual direct labor hours are 32,000 (20,000 +
12,000). Expected annual manufacturing overhead costs are $800,000. Daffodil uses a
traditional costing system and assigns overhead based on direct labor hours. Each unit of
Planter would be assigned overhead of
a. $25.00.
b. $30.77.
c. $50.00.
d. need more information to compute.
44. Sitwell Corporation manufactures titanium and aluminum tennis racquets. Sitwell’s total
overhead costs consist of assembly costs and inspection costs. The following information
is available:
Cost Titanium Aluminum Total Cost
Assembly 500 mach. hours 500 mach. hours $45,000
Inspections 350 150 $75,000
2,100 labor hours 1,900 labor hours
Sitwell is considering switching from one overhead rate based on labor hours to activity–
based costing.
Total overhead costs assigned to titanium racquets, using a single overhead rate, are
a. $60,000.
b. $63,000.
c. $75,000.
d. $84,000.
45. Sitwell Corporation manufactures titanium and aluminum tennis racquets. Sitwell’s total
overhead costs consist of assembly costs and inspection costs. The following information
is available:
Cost Titanium Aluminum Total Cost
Assembly 500 mach. hours 500 mach. hours $45,000
Inspections 350 150 $75,000
2,100 labor hours 1,900 labor hours
Sitwell is considering switching from one overhead rate based on labor hours to activity–
based costing.
Using activity-based costing, how much assembly cost is assigned to titanium racquets?
a. $15,750.
b. $22,500.
c. $23,625.
d. $31,500.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTUCTOR USE ONLY
17 – 10
46. Sitwell Corporation manufactures titanium and aluminum tennis racquets. Sitwell’s total
overhead costs consist of assembly costs and inspection costs. The following information
is available:
Cost Titanium Aluminum Total Cost
Assembly 500 mach. hours 500 mach. hours $45,000
Inspections 350 150 $75,000
2,100 labor hours 1,900 labor hours
Sitwell is considering switching from one overhead rate based on labor hours to activity–
based costing.
Using activity-based costing, how much inspections cost is assigned to titanium racquets?
a. $22,500.
b. $35,625.
c. $37,500.
d. $52,500.
47. Sanborn Industries has the following overhead costs and cost drivers. Direct labor hours
are estimated at 100,000 for the year.
Activity Cost Pool Cost Driver Est. Overhead Cost Driver Activity
Ordering and Receiving Orders $ 120,000 500 orders
Machine Setup Setups 297,000 450 setups
Machining Machine hours 1,500,000 125,000 MH
Assembly Parts 1,200,000 1,000,000 parts
Inspection Inspections 300,000 500 inspections
If overhead is applied using traditional costing based on direct labor hours, the overhead
application rate is
a. $9.60.
b. $12.00.
c. $15.00.
d. $34.17.
48. Sanborn Industries has the following overhead costs and cost drivers. Direct labor hours
are estimated at 100,000 for the year.
Activity Cost Pool Cost Driver Est. Overhead Cost Driver Activity
Ordering and Receiving Orders $ 120,000 500 orders
Machine Setup Setups 297,000 450 setups
Machining Machine hours 1,500,000 125,000 MH
Assembly Parts 1,200,000 1,000,000 parts
Inspection Inspections 300,000 500 inspections
If overhead is applied using activity-based costing, the overhead application rate for
ordering and receiving is
Activity-Based Costing
17 – 11
MC. 48 (cont.)
a. $1.20 per direct labor hour.
b. $240 per order.
c. $0.12 per part.
d. $6,834 per order.
49. The last step in activity-based costing is to
a. assign overhead costs to products, using overhead rates determined for each cost
pool.
b. compute the activity-based overhead rate per cost driver.
c. identify and classify the activities involved in the manufacture of specific products, and
allocate overhead to cost pools.
d. identify the cost driver that has a strong correlation to the activity cost pool.
50. The first step in activity-based costing is to
a. assign overhead costs to products, using overhead rates determined for each
cost pool.
b. compute the activity-based overhead rate per cost driver.
c. identify and classify the activities involved in the manufacture of specific products, and
allocate overhead to cost pools.
d. identify the cost driver that has a strong correlation to the activity cost pool.
51. A well-designed activity-based costing system starts with
a. identifying the activity-cost pools.
b. computing the activity-based overhead rate.
c. assigning overhead costs to products.
d. analyzing the activities performed to manufacture a product.
52. Which of the following is not an example of an activity cost pool?
a. Setting up machines
b. Machining
c. Inspecting
d. Machine hours
53. An example of an activity cost pool is
a. machine hours.
b. setting up machines.
c. number of setups.
d. number of inspections.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
17 – 12
54. Estimated costs for activity cost pools and other item(s) are as follows:
Machining $800,000
Assembling 200,000
Advertising 450,000
Inspecting and testing 175,000
Total estimated overhead is
a. $1,000,000.
b. $1,175,000.
c. $1,450,000.
d. $1,625,000.
55. An example of a cost which would not be assigned to an overhead cost pool is
a. indirect salaries.
b. freight-out.
c. depreciation.
d. supplies.
56. One of Hartman Company’s activity cost pools is inspecting, with estimated overhead of
$140,000. Hartman produces throw rugs (700 inspections) and area rugs (1,300
inspections). How much of the inspecting cost pool should be assigned to throw rugs?
a. $49,000.
b. $70,000.
c. $75,384.
d. $140,000.
57. Which would be an appropriate cost driver for the machining activity cost pool?
a. Machine setups
b. Purchase orders
c. Machine hours
d. Inspections
58. Which would be an appropriate cost driver for the purchasing activity cost pool?
a. Machine setups
b. Purchase orders
c. Machine hours
d. Inspections
Activity-Based Costing
17 – 13
59. An activity-based overhead rate is computed as follows:
a. actual overhead divided by actual use of cost drivers.
b. estimated overhead divided by actual use of cost drivers.
c. actual overhead divided by estimated use of cost drivers.
d. estimated overhead divided by estimated use of cost drivers.
60. Use of activity-based costing will result in the development of
a. one overhead rate based on direct labor hours.
b. one plantwide activity-based overhead rate.
c. multiple activity-based overhead rates.
d. no overhead rates; overhead rates are not used in activity-based costing.
61. To use activity-based costing, it is necessary to know the
a. cost driver for each activity cost pool.
b. expected use of cost drivers per activity.
c. expected use of cost drivers per product.
d. all of the above.
62. To assign overhead costs to each product, the company
a. multiplies the activity-based overhead rates per cost driver by the number of cost
drivers expected to be used per product.
b. multiplies the overhead rate by the number of direct labor hours used on each product.
c. assigns the cost of each activity cost pool in total to one product line.
d. multiplies the rate of cost drivers per estimated cost for the cost pool by the estimated
cost for each cost pool.
63. As compared to a low-volume product, a high-volume product
a. usually requires less special handling.
b. is usually responsible for more overhead costs per unit.
c. requires relatively more machine setups.
d. requires use of direct labor hours as the primary cost driver to ensure proper allocation
of overhead.
64. Assigning overhead using ABC will usually
a. decrease the cost per unit for low volume products as compared to a traditional
overhead allocation.
b. increase the cost per unit for low volume products as compared to a traditional
overhead allocation.
c. provide less accurate cost per unit for low volume products than will traditional costing.
d. result in the same cost per unit for low volume products as does traditional costing.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTUCTOR USE ONLY
17 – 14
65. Companies that switch to ABC often find they have
a. been overpricing some products.
b. possibly losing market share to competitors.
c. been sacrificing profitability by underpricing some products.
d. all of the above.
66. Comparing the U.S. to Japan,
a. activity-based costing is used less than in the U.S.
b. U.S. companies show a stronger preference to volume measures such as direct labor
hours to assign overhead costs.
c. labor cost reduction is less of a priority in the U.S.
d. developing more accurate product costs is less of a priority in the U.S.
67. For its inspecting cost pool, Davidson, Inc. expected overhead cost of $300,000 and 4,000
inspections. The actual overhead cost for that cost pool was $360,000 for 5,000
inspections. The activity-based overhead rate used to assign the costs of the inspecting
cost pool to products is
a. $60 per inspection.
b. $72 per inspection.
c. $75 per inspection.
d. $90 per inspection.
68. Addison Company manufactures two products, Regular and Supreme. Addison’s overhead
costs consist of machining, $2,500,000; and assembling, $1,250,000. Information on the
two products is:
Regular Supreme
Direct labor hours 10,000 15,000
Machine hours 10,000 30,000
Number of parts 90,000 160,000
Overhead applied to Regular using traditional costing using direct labor hours is
a. $1,075,000.
b. $1,500,000.
c. $2,250,000.
d. $2,675,000.
69. Addison Company manufactures two products, Regular and Supreme. Addison’s overhead
costs consist of machining, $2,500,000; and assembling, $1,250,000. Information on the
two products is:
Regular Supreme
Direct labor hours 10,000 15,000
Machine hours 10,000 30,000
Number of parts 90,000 160,000
Overhead applied to Supreme using traditional costing using direct labor hours is
Activity-Based Costing
FOR INSTRUCTOR USE ONLY
17 – 15
MC. 69 (cont.)
a. $1,075,000.
b. $1,500,000.
c. $2,250,000.
d. $2,675,000.
70. Addison Company manufactures two products, Regular and Supreme. Addison’s overhead
costs consist of machining, $2,500,000; and assembling, $1,250,000. Information on the
two products is:
Regular Supreme
Direct labor hours 10,000 15,000
Machine hours 10,000 30,000
Number of parts 90,000 160,000
Overhead applied to Regular using activity-based costing is
a. $1,075,000.
b. $1,500,000.
c. $2,250,000.
d. $2,675,000.
71. Addison Company manufactures two products, Regular and Supreme. Addison’s overhead
costs consist of machining, $2,500,000; and assembling, $1,250,000. Information on the
two products is:
Regular Supreme
Direct labor hours 10,000 15,000
Machine hours 10,000 30,000
Number of parts 90,000 160,000
Overhead applied to Supreme using activity-based costing is
a. $1,075,000.
b. $1,500,000.
c. $2,250,000.
d. $2,675,000.
72. Teller, Inc. produces 3 products: P1, Q2, and R3. P1 requires 400 purchase orders, Q2
requires 600 purchase orders, and R3 requires 1,000 purchase orders. Teller has
identified an ordering and receiving activity cost pool with allocated overhead of $180,000
for which the cost driver is purchase orders. Direct labor hours used on each product are
50,000 for P1, 40,000 for Q2, and 110,000 for R3. How much ordering and receiving
overhead is assigned to each product?
P1 Q2 R3
a. $60,000 $60,000 $60,000
b. $45,000 $36,000 $99,000
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
17 – 16
MC. 72 (cont.)
c. $36,000 $54,000 $90,000
d. $40,500 $45,000 $94,500
73. Hagar Co. computed an overhead rate for machining costs ($1,500,000) of $15 per
machine hour. Machining costs are driven by machine hours. If computed based on direct
labor hours, the overhead rate for machining costs would be $30 per direct labor hour.
The company produces two products, Cape and Chap. Cape requires 60,000 machine
hours and 20,000 direct labor hours, while Chap requires 40,000 machine hours and
30,000 direct labor hours. Using activity-based costing, machining costs assigned to each
product is
Cape Chap
a. $600,000 $900,000
b. $750,000 $750,000
c. $800,000 $700,000
d. $900,000 $600,000
74. Wilder Company manufactures two models of its banjo, the Basic and the Luxury. The
Basic model requires 10,000 direct labor hours and the Luxury requires 30,000 direct
labor hours. The company produces 3,400 units of the Basic model and 600 units of the
Luxury model each year. The company inspects one Basic for every 100 produced, and
inspects one Luxury for every 10 produced. The company expects to incur $84,600 of
total inspecting costs this year. How much of the inspecting costs should be allocated to
the Basic model using ABC costing?
a. $21,150
b. $30,600
c. $42,300
d. $71,910
75. Ben Gordon, Inc. manufactures 2 products, wheels and seats. The company has
estimated its overhead in the assembling department to be $330,000. The company
produces 300,000 wheels and 600,000 seats each year. Each wheel uses 2 parts, and
each seat uses 3 parts. How much of the assembly overhead should be allocated to
wheels?
a. $ 82,500.
b. $110,000.
c. $132,000
d. $141,428.
Activity-Based Costing
FOR INSTRUCTOR USE ONLY
17 – 17
76. Clemson Co. incurs $700,000 of overhead costs each year in its three main departments,
machining ($400,000), inspections ($200,000) and packing ($100,000). The machining
department works 4,000 hours per year, there are 600 inspections per year, and the
packing department packs 1,000 orders per year. Information about Clemson’s two
products is as follows:
Product X Product Y
Machining hours 1,000 3,000
Inspections 100 500
Orders packed 350 650
Direct labor hours 1,700 1,800
If traditional costing based on direct labor hours is used, how much overhead is assigned
to Product X this year?
a. $168,334
b. $242,308
c. $340,000
d. $350,000
77. Clemson Co. incurs $700,000 of overhead costs each year in its three main departments,
machining ($400,000), inspections ($200,000) and packing ($100,000). The machining
department works 4,000 hours per year, there are 600 inspections per year, and the
packing department packs 1,000 orders per year. Information about Clemson’s two
products is as follows:
Product X Product Y
Machining hours 1,000 3,000
Inspections 100 500
Orders packed 350 650
Direct labor hours 1,700 1,800
Using ABC, how much overhead is assigned to Product X this year?
a. $168,334
b. $242,308
c. $340,000
d. $350,000
78. A company incurs $2,700,000 of overhead each year in three departments: Ordering and
Receiving, Mixing, and Testing. The company prepares 2,000 purchase orders, works
50,000 mixing hours, and performs 1,500 tests per year in producing 200,000 drums of
Goo and 600,000 drums of Slime. The following data are available:
Department Expected use of Driver Cost
Ordering and Receiving 2,000 $ 800,000
Mixing 50,000 1,000,000
Testing 1,500 900,000
Production information for Goo is as follows:
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
17 – 18
MC. 78 (cont.)
Department Expected use of Driver
Ordering and Receiving 400
Mixing 20,000
Testing 500
Compute the amount of overhead assigned to Goo using ABC.
a. $ 675,000
b. $ 860,000
c. $1,054,764
d. $1,350,000
79. A company incurs $2,700,000 of overhead each year in three departments: Ordering and
Receiving, Mixing, and Testing. The company prepares 2,000 purchase orders, works
50,000 mixing hours, and performs 1,500 tests per year in producing 200,000 drums of
Goo and 600,000 drums of Slime. The following data are available:
Department Expected use of Driver Cost
Ordering and Receiving 2,000 $ 800,000
Mixing 50,000 1,000,000
Testing 1,500 900,000
Production information for Slime is as follows:
Department Expected use of Driver
Ordering and Receiving 1,600
Mixing 30,000
Testing 1,000
Compute the amount of overhead assigned to Slime using ABC.
a. $1,350,000
b. $1,645,234
c. $1,840,000
d. $2,025,000
80. One of Hatch Company’s activity cost pools is machine setups, with estimated overhead
of $300,000. Hatch produces sparklers (400 setups) and lighters (600 setups). How much
of the machine setup cost pool should be assigned to sparklers?
a. $300,000
b. $120,000
c. $150,000
d. $180,000
Activity-Based Costing
FOR INSTRUCTOR USE ONLY
17 – 19
81. Which would be an appropriate cost driver for the ordering and receiving activity cost pool?
a. Machine setups
b. Purchase orders
c. Machine hours
d. Inspections
82. As compared to a high-volume product, a low-volume product
a. usually requires less special handling.
b. is usually responsible for more overhead costs per unit.
c. requires relatively fewer machine setups.
d. requires use of direct labor hours as the primary cost driver to ensure proper allocation
of overhead.
83. In Japan,
a. activity-based costing is used more than in the U.S.
b. companies prefer volume measures such as direct labor hours to assign overhead
costs.
c. labor cost reduction is less of a priority.
d. developing more accurate product costs is more of a priority.
84. Johnstone Company manufactures two products, Board 12 and Case 165. Johnstone’s
overhead costs consist of setting up machines, $1,600,000; machining, $3,600,000; and
inspecting, $1,200,000. Information on the two products is:
Board 12 Case 165
Direct labor hours 15,000 25,000
Machine setups 600 400
Machine hours 24,000 26,000
Inspections 800 700
Overhead applied to Board 12 using traditional costing using direct labor hours is
a. $2,400,000.
b. $3,072,000.
c. $3,340,000.
d. $3,840,000.
85. Johnstone Company manufactures two products, Board 12 and Case 165. Johnstone’s
overhead costs consist of setting up machines, $1,600,000; machining, $3,600,000; and
inspecting, $1,200,000. Information on the two products is:
Board 12 Case 165
Direct labor hours 15,000 25,000
Machine setups 600 400
Machine hours 24,000 26,000
Inspections 800 700
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
17 – 20
MC. 85 (cont.)
Overhead applied to Case 165 using traditional costing using direct labor hours is
a. $2,560,000.
b. $3,072,000.
c. $3,340,000.
d. $4,000,000.
86. Johnstone Company manufactures two products, Board 12 and Case 165. Johnstone’s
overhead costs consist of setting up machines, $1,600,000; machining, $3,600,000; and
inspecting, $1,200,000. Information on the two products is:
Board 12 Case 165
Direct labor hours 15,000 25,000
Machine setups 600 400
Machine hours 24,000 26,000
Inspections 800 700
Overhead applied to Board 12 using activity-based costing is
a. $2,400,000.
b. $3,072,000.
c. $3,328,000.
d. $3,840,000.
87. Johnstone Company manufactures two products, Board 12 and Case 165. Johnstone’s
overhead costs consist of setting up machines, $1,600,000; machining, $3,600,000; and
inspecting, $1,200,000. Information on the two products is:
Board 12 Case 165
Direct labor hours 15,000 25,000
Machine setups 600 400
Machine hours 24,000 26,000
Inspections 800 700
Overhead applied to Case 165 using activity-based costing is
a. $2,560,000.
b. $3,072,000.
c. $3,328,000.
d. $4,000,000.