Chapter 4—Activity-Based Costing
MULTIPLE CHOICE
1. Activity-based costing is a method of cost allocation that is useful for assigning ____ costs to products
or services.
a.
direct materials
b.
direct labor
c.
overhead
d.
direct materials and direct labor
2. As companies experience a shift from labor-intensive operations to automated operations, which of the
following costs becomes more difficult to trace to products?
a.
Administrative costs
b.
Direct labor costs
c.
Direct material costs
d.
Overhead costs
3. Traditional overhead allocation methods as opposed to activity-based allocation methods work best
when:
a.
there are many different volume-based cost drivers.
b.
most costs are unit-level costs.
c.
overhead can be estimated.
d.
most costs are facility-level costs.
4. Which of the following statements associated with traditional overhead allocation is true?
a.
A traditional overhead allocation method is the most accurate in automated environments
with diverse products.
b.
A traditional overhead allocation method can also be referred to as activity-based costing.
c.
A traditional overhead allocation method provides the most accurate product cost
information.
d.
A traditional overhead allocation method usually uses one or two volume-based cost
drivers.
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):
a.
product-level cost.
b.
batch-level cost.
c.
unit-level cost.
d.
facility-level cost.
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):
a.
product-level cost.
b.
batch-level cost.
c.
unit-level cost.
d.
facility-level cost.
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):
a.
product-level cost.
b.
batch-level cost.
c.
unit-level cost.
d.
facility-level cost.
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):
a.
product-level cost.
b.
batch-level cost.
c.
unit-level cost.
d.
facility-level cost.
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?
a.
A package product design cost
b.
A machine setup cost
c.
Depreciation on the factory building
d.
Energy costs for factory machinery
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?
a.
A package product design cost for a new product line
b.
A machine setup cost
c.
Depreciation on the factory building
d.
Energy costs for factory machinery
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?
a.
A package product design cost for a new product line
b.
A machine setup cost
c.
Depreciation on the factory building
d.
Energy costs for factory machinery
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?
a.
A package product design cost for a new product line
b.
A machine setup cost
c.
Depreciation on the factory building
d.
Utility costs for factory machinery
13. Which of the following would most likely be a unit-level cost?
a.
Factory insurance
b.
Quality control
c.
Lubricants used on factory machinery
d.
Research and development costs for a new product line
14. Which of the following would most likely be a batch-level cost?
a.
Factory rent
b.
Quality control
c.
Energy costs for factory machinery
d.
Research and development costs for a new product line
15. Which of the following would most likely be a product-level cost?
a.
Salaries related to purchasing and receiving
b.
Quality control costs
c.
Energy costs for factory machinery
d.
Research and development costs for a new product line
16. Which of the following would most likely be a facility-level cost?
a.
Depreciation on factory equipment
b.
Depreciation on factory building
c.
Depreciation of engineering equipment
d.
Depreciation of setup equipment
17. In activity-based costing (ABC), wages paid to an assembly-line worker would most likely be
classified as:
a.
overhead.
b.
a product-level cost.
c.
direct labor.
d.
a facility-level cost.
18. Which of the following statements is true regarding activity-based costing (ABC)?
a.
It is based on the concept that a single cost driver can drive all overhead costs.
b.
It is based on the concept that activities drive overhead costs.
c.
It is based on the concept that unit-level costs drive all overhead costs.
d.
It is based on the concept that either the number of direct labor or machine hours incurred
drives all overhead costs.
19. ____ are procedures or processes that cause work to be accomplished.
a.
Unit-level costs
b.
Overhead costs
c.
Activities
d.
Batch-level costs
20. Which of the following types of costs are usually not allocated to products?
a.
Unit-level costs
b.
Batch-level costs
c.
Facility-level costs
d.
Product-level costs
21. Which of the following statements regarding activity-based costing (ABC) is true?
a.
Resources consume activities and products consume costs.
b.
Activities consume resources and products consume activities.
c.
Costs consume activities and products cause costs.
d.
Resources consume activities and activities cause costs.
22. Which of the following is a key feature of activity-based costing?
a.
Overhead costs are assigned on the basis of volume.
b.
Overhead costs are assigned on the basis of sales.
c.
Overhead costs are assigned on the basis of direct labor hours.
d.
Overhead costs are assigned on the basis of activities.
23. Which of the following statements accurately describes the basis of activity-based costing?
a.
Activities simply sustain a facility’s general manufacturing process.
b.
Activities refer to batch-level costs incurred to support the production of each different
type of product.
c.
Activities consume facility-level costs.
d.
Activities consume resources and products consume activities.
24. What should be done in Stage 1 in an activity-based costing (ABC) system?
a.
Total manufacturing costs are calculated.
b.
Raw materials are purchased.
c.
Cost drivers for activities are chosen.
d.
Activities are identified.
25. Which of the following statements is false regarding the identification of activities in activity–based
costing (ABC)?
a.
The identification of activities that drive overhead costs is done before cost drivers are
selected.
b.
An activity can be thought of as a procedure or process that causes work to be
accomplished.
c.
Overhead costs should not be traced to more than one activity.
d.
Because of different types of production processes and products, every business will have
a different set of activities and cost drivers.
26. Which of the following statements is true regarding activities?
a.
An activity that drives overhead costs should only take place within the physical
manufacturing facility.
b.
Activities can be consumed by resources.
c.
Overhead costs can be traced to more than one activity.
d.
Activities seldom cause work to be accomplished.
27. Which of the following statements is true regarding the identification of activities in an ABC system?
a.
All manufacturing companies have identical types of activities.
b.
All merchandising companies have identical types of activities.
c.
As a business becomes more complex, fewer activities need to be identified.
d.
Two different businesses which have the same type of activities can still choose different
cost drivers.
28. Which of the following statements is false regarding activities in an ABC system?
a.
As a business becomes more complex, more activities will probably need to be identified.
b.
Two different manufacturing companies that make the same products may come up with
different sets of activities and cost drivers.
c.
The maximum number of activities that should be identified as batch-level is two.
d.
Overhead costs may be allocated to more than one activity.
29. In Stage 2 of ABC allocation:
a.
cost drivers are determined and costs are traced to each activity.
b.
activities are identified.
c.
predetermined overhead rates are calculated.
d.
equivalent units are computed.
30. Which of the following statements regarding cost drivers is false?
a.
Different businesses can have different sets of cost drivers.
b.
Cost drivers should generally be chosen based on a cause-and-effect relationship between
the driver and the specific cost being considered.
c.
Cost drivers are groups of overhead costs that are similar.
d.
An activity could have more than one potential cost driver.
31. Which of the following statements is true regarding a cost driver?
a.
Once a particular cost driver has been used for an activity, it may not be used again.
b.
Employees should never be made aware of the cost drivers for their department.
c.
There may be more than one potential cost driver for a particular activity.
d.
Choosing the wrong cost driver should not impact the determination of a product’s cost.
32. Which of the following statements is false regarding cost drivers?
a.
A particular cost driver may be used for more than one activity.
b.
If employees know the cost driver(s) for their department, it may motivate them to be
more efficient.
c.
The selection of a cost driver should be based on the correlation it has with direct
materials used in the production process.
d.
The best cost driver for a particular activity may be different from one company to the
next.
33. Which of the following would be the least likely cost driver for an activity such as the usage of factory
supplies?
a.
Machine hours
b.
Number of engineering hours
c.
Direct labor hours
d.
Number of units produced
34. Which of the following would be the least likely cost driver for an activity such as the repair and
maintenance of factory equipment?
a.
Machine hours
b.
Direct labor hours
c.
Number of units produced
d.
Number of new product designs
35. Which of the following would be the least likely cost driver for an activity such as product testing?
a.
Number of shipments received
b.
Number of tests
c.
Hours of testing time
d.
Number of change orders
36. Which of the following statements comparing traditional and activity-based costing (ABC) is false?
a.
Traditional systems are generally less accurate than ABC systems.
b.
ABC and traditional systems often produce different product cost information.
c.
ABC systems focus on activity costing while traditional systems focus on volume costing.
d.
ABC systems are generally less expensive to implement than traditional systems.
37. Which of the following statements comparing traditional and activity-based costing (ABC) is true?
a.
ABC systems eliminate cross subsidies.
b.
Traditional systems eliminate cross subsidies.
c.
ABC and traditional systems often produce similar product cost information.
d.
All of the above are true.
38. Which of the following statements is true regarding cross subsidies?
a.
They occur when factory workers are trained to work on many different machines.
b.
They occur when high-volume products are assigned more than their fair share of
overhead costs.
c.
They occur when high-volume products have more direct material and direct labor costs
than overhead costs.
d.
They occur when more than one cost driver can be determined for a particular overhead
cost item.
39. What would one expect to occur when cross subsidies are eliminated with the use of activity-based
costing (ABC)?
a.
That lower-volume products pick up more of their fair share of overhead costs.
b.
That higher-volume products pick up more of their fair share of overhead costs.
c.
That lower-volume products will be determined as being unprofitable.
d.
That higher-volume products will be determined as being unprofitable.
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 $400,000 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:
Number of purchase orders
Number of units
Number of sales orders
40. Refer to the Aunt Lucy’s Candies information above. What is the overhead rate for the processing
activity?
a.
$0.92 per unit
b.
$1.44 per unit
c.
$0.40 per unit
d.
$0.72 per unit
41. Refer to the Aunt Lucy’s Candies information above. What is the overhead rate for the purchasing
activity?
a.
$12.00 per purchase order
b.
$18.28 per purchase order
c.
$40.63 per purchase order
d.
$36.56 per purchase order
42. Refer to the Aunt Lucy’s Candies information above. What is the overhead rate for the sales activity?
a.
$16.00 per sales order
b.
$102.63 per sales order
c.
$10.26 per sales order
d.
$52.23 per sales order
43. 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?
a.
$201.08
b.
$204.93
c.
$262.56
d.
$240.00
Compton Corporation
The following overhead cost information is available for Compton Corporation for 2011:
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.
44. Refer to the Compton Corporation information above. What is the overhead rate for the purchasing
activity?
a.
$0.05 per purchase order
b.
$20.00 per purchase order
c.
$72.00 per purchase order
d.
$3.13 per purchase order
45. Refer to the Compton Corporation information above. What is the overhead rate for the receiving
activity?
a.
$1.88 per shipment received
b.
$6.00 per shipment received
c.
$3.00 per shipment received
d.
$0.33 per shipment received
46. 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?
a.
$ 4.06
b.
$303.75
c.
$580.00
d.
$ 85.50
47. The following overhead cost information is available for Henderson Inc. for 2008:
Activity
Allocation Base
Overhead Cost
Purchasing
Number of purchase orders
$80,000
Receiving
Number of shipments received
60,000
Machine setups
Number of setups
45,000
Quality control
Number of inspections
30,000
During the year, 4,000 purchase orders were issued; 2,400 shipments were received; 4,500 machine
setups were performed; and 2,500 inspections were conducted.
If Job #101 required 2 purchase orders, 6 shipments, 3 machine setups, and 5 inspections to complete,
how much overhead should be assigned to Job #101?
a.
$280.00
b.
$60.00
c.
$150.00
d.
$40.00
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:
Custom-made
Number of deliveries
100
Number of inspections
400
Hours of supervisor time
2,200
Number of purchase orders
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)
Direct materials (wood) (900 ft at $3.00 per foot)
Number of deliveries
Number of inspections
Hours of supervisor time
Number of purchase orders
48. Refer to the Wake Construction information above. How much overhead should be applied to the
above customer order?
a.
$4,050
b.
$285
c.
$3,360
d.
$975
49. Refer to the Wake Construction information above. What is the total product (manufacturing) cost for
the above customer order?
a.
$4,050
b.
$285
c.
$3,360
d.
$975
Johnson Manufacturing
Johnson Manufacturing anticipates incurring $850,000 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
Total number of setups
Total number of machine hours
50. Refer to the Johnson Manufacturing information above. How much total overhead will be allocated to
the production activity?
a.
$170,000
b.
$552,500
c.
$30,000
d.
$127,500
51. Refer to the Johnson Manufacturing information above. What will be the overhead rate for the
production activity?
a.
$25.00 per machine hour
b.
$60.00 per machine hour
c.
$50.00 per machine hour
d.
$42.25 per machine hour