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CHAPTER 5
ACTIVITY-BASED COSTING AND ACTIVITY-
BASED MANAGEMENT
TRUE/FALSE
1. A top-selling product might actually result in losses for the company.
Answer: True Difficulty: 2 Objective: 1 Terms to Learn: product undercosting
2. Companies that undercost products will most likely lose market share.
Answer: False Difficulty: 2 Objective: 1 Terms to Learn: product undercosting
Companies that overcost products will most likely lose market share.
3. If a company undercosts one of its products, then it will overcost at least one of its
other products.
Answer: True Difficulty: 2 Objective: 1 Terms to Learn: product-cost cross-subsidization
4. Direct costs plus indirect costs equal total costs.
Answer: True Difficulty: 1 Objective: 2 Terms to Learn: activity-based costing (ABC)
5. When refining a costing system, a company should classify as many costs as
possible as indirect costs.
Answer: False Difficulty: 1 Objective: 2 Terms to Learn: refined costing system
When refining a costing system, a company should classify as many costs as
possible as direct costs.
6. In a homogeneous cost pool, all costs have a similar cause-and-effect relationship
with the cost-allocation base.
Answer: True Difficulty: 1 Objective: 2 Terms to Learn: activity-based costing (ABC)
7. Indirect
and
distribution costs would most likely be in the same activity-cost labor
pool.
Answer: False Difficulty: 2 Objective: 2 Terms to Learn: activity-based costing (ABC)
Indirect labor and distribution costs would not be in the same activity-cost pool
because their cost drivers are very dissimilar. A cost driver of indirect labor would include direct labor hours, while a cost driver of distribution costs would include, for example, cubic feet of cargo moved.
8. Activity-based costing helps identify various activities that explain why costs are
incurred.
Answer: True Difficulty: 1 Objective: 2 Terms to Learn: activity-based costing (ABC)
9. Direct tracing of costs improves cost accuracy.
Answer: True Difficulty: 1 Objective: 2 Terms to Learn: activity-based costing (ABC)
10. An activity-based costing system is necessary for costing services that are similar.
Answer: False Difficulty: 1 Objective: 3 Terms to Learn: activity-based costing (ABC)
An activity-based costing system is only necessary when services are dissimilar and different amounts of resources are used by each service.
11. Traditional systems are likely to undercost complex products with lower production
volume.
Answer: True Difficulty: 2 Objective: 3 Terms to Learn: product undercosting
12. For activity-based cost systems, activity costs are assigned to products in the
proportion of the demand they place on activity resources.
Answer: True Difficulty: 2 Objective: 3 Terms to Learn: activity-based costing (ABC)
13. Unit-level measures can distort product costing because the demand for overhead
resources may be driven by batch-level or product-sustaining activities.
Answer: True Difficulty: 2 Objective: 4 Terms to Learn: output unit-level costs, batch-level costs, product-sustaining costs
14. Using multiple unit-level cost drivers generally constitutes an effective activity-
based cost system.
Answer: False Difficulty: 2 Objective: 4 Terms to Learn: output unit-level costs
In addition to unit-level cost drivers, an effective activity-based cost system usually uses batch-level, product-sustaining, and facility-sustaining cost drivers.
15. Misleading cost numbers are larger when unit-level assignments and the alternative
activity-cost-driver assignments are proportionately similar to each other.
Answer: False Difficulty: 2 Objective: 4 Terms to Learn: output unit-level costs
Misleading cost numbers are larger when unit-level assignments and the alternative activity-cost-driver assignments are proportionately dissimilar to each other.
16. Availability of reliable data and measures should be considered when choosing a
cost-allocation base.
Answer: True Difficulty: 1 Objective: 5 Terms to Learn: activity-based costing (ABC)
17. When designing a costing system, it is easiest to calculate total costs first, and then
per-unit costs.
Answer: True Difficulty: 1 Objective: 5 Terms to Learn: activity-based costing (ABC)
18. ABC systems attempt to trace more costs as direct costs.
Answer: True Difficulty: 1 Objective: 5 Terms to Learn: activity-based costing (ABC)
19. ABC systems create homogeneous cost pools linked to different activities.
Answer: True Difficulty: 1 Objective: 5 Terms to Learn: activity
20. ABC systems seek a cost allocation base that has a cause-and-effect relationship
with costs in the cost pool.
Answer: True Difficulty: 1 Objective: 5 Terms to Learn: activity-based costing (ABC)
21. For service organizations, activity-based cost systems may be used to clarify
appropriate cost assignments.
Answer: True Difficulty: 1 Objective: 5 Terms to Learn: activity-based costing (ABC)
22. ABC reveals opportunities for improving the way work is done.
Answer: True Difficulty: 1 Objective: 6 Terms to Learn: activity-based management (ABM)
23. Activity-based management refers to the use of information derived from ABC
analysis to analyze and improve operations.
Answer: True Difficulty: 1 Objective: 6 Terms to Learn: activity-based management (ABM)
24. Information derived from an ABC analysis might be used to eliminate nonvalue-
added activities.
Answer: True Difficulty: 1 Objective: 6 Terms to Learn: activity-based management (ABM)
25. Department-costing systems are a further refinement of ABC systems.
Answer: False Difficulty: 1 Objective: 7 Terms to Learn: activity-based costing (ABC)
ABC systems are a further refinement of department-costing systems.
26. ABC systems are useful in manufacturing, but not in the merchandising or service
industries.
Answer: False Difficulty: 1 Objective: 7 Terms to Learn: activity-based costing (ABC)
ABC systems can be useful in manufacturing, merchandising, and service
industries.
27. Costing systems with multiple cost pools are considered ABC systems.
Answer: False Difficulty: 2 Objective: 7 Terms to Learn: activity-based costing (ABC)
The uniqueness of ABC systems is not simply multiple cost pools, but that the cost pools each relate to different activities.
28. ABC systems always provide decision-making benefits that exceed implementation
costs.
Answer: False Difficulty: 1 Objective: 8 Terms to Learn: activity-based costing (ABC)
ABC system decision-making benefits do not always exceed implementation costs.
This issue needs to be evaluated and if the costs exceed the benefits, then an ABC system should not be implemented.
29. The primary costs of an ABC system are the measurements necessary to implement
the system.
Answer: True Difficulty: 1 Objective: 8 Terms to Learn: activity-based costing (ABC)
30. Simply because activity-based costing systems employ more activity-cost drivers,
they provide more accurate product costs than traditional systems.
Answer: False Difficulty: 2 Objective: 8 Terms to Learn: activity-based costing (ABC)
When there are more activity-cost drivers, there is also more room for error, which may not result in more accurate products costs.
MULTIPLE CHOICE
31. If products are alike, then for costing purposes:
a. a simple costing system will yield accurate cost numbers
b. an activity-based costing system should be used
c. multiple indirect-cost rates should be used
d. varying demands will be placed on resources
Answer: a Difficulty: 1 Objective: 1 Terms to Learn: activity-based costing (ABC)
32. Undercosting a particular product may result in:
a. loss of market share
profits
b. lower
inefficiencies
c. operating
d. understating total product costs
Answer: b Difficulty: 2 Objective: 1 Terms to Learn: product undercosting
33. Overcosting of a product is MOST likely to result from:
a. misallocating direct labor costs
the
product
b. overpricing
c. undercosting another product
d. understating total product costs
Answer: c Difficulty: 2 Objective: 1 Terms to Learn: product overcosting
34. A company produces three products; if one product is overcosted then
a. one product is undercosted.
b. one or two products are undercosted.
c. two products are undercoste
d.
d. no products are undercosted.
Answer: b Difficulty: 1 Objective: 1 Terms to Learn: product-cost cross-subsidization
35. Misleading cost numbers are MOST likely the result of misallocating:
a. direct material costs
b. direct manufacturing labor costs
costs
c. indirect
d. All of these answers are correct.
Answer: c Difficulty: 2 Objective: 1 Terms to Learn: activity-based costing (ABC)
36. An accelerated need for refined cost systems is due to:
monopolies
a. global
prices
b. rising
competition
c. intense
d. a shift toward increased direct costs
Answer: c Difficulty: 2 Objective: 1 Terms to Learn: activity-based costing (ABC)
37. The use of a single indirect-cost rate is more likely to:
a. undercost high-volume simple products
b. undercost low-volume complex products
products
c. undercost
lower-priced
d. Both b and c are correct.
Answer: b Difficulty: 2 Objective: 1 Terms to Learn: product undercosting
38. Uniformly assigning the costs of resources to cost objects when those resources are
actually used in a nonuniform way is called:
a. overcosting
b. undercosting
costing
c. peanut-butter
d. department
costing
Answer: c Difficulty: 1 Objective: 1 Terms to Learn: product-cost cross-subsidization
39. Refining a cost system includes:
a. classifying as many costs as indirect costs as is feasible
b. creating as many cost pools as possible
c. identifying the activities involved in a process
d. seeking a lesser level of detail
Answer: c Difficulty: 2 Objective: 2 Terms to Learn: activity
40. Greater indirect costs are associated with:
a. specialized engineering drawings
b. quality specifications and testing
and material control systems
materials
c. inventoried
d. All of these answers are correct.
Answer: d Difficulty: 1 Objective: 2 Terms to Learn: product-cost cross-subsidization
41. Design of an ABC system requires:
a. that the job bid process be redesigned
b. that a cause-and-effect relationship exists between resource costs and
individual activities
c. an adjustment to product mix
d. Both b and c are correct.
Answer: b Difficulty: 1 Objective: 2 Terms to Learn: activity-based costing (ABC)
42. ABC systems create:
a. one large cost pool
b. homogenous
activity-related cost pools
with a broad focus
c. activity-cost
pools
d. activity-cost pools containing many direct costs
Answer: b Difficulty: 1 Objective: 3 Terms to Learn: activity-based costing (ABC)
43. Logical cost allocation bases include:
a. cubic feet of packages moved to measure distribution activity
b. machine hours to measure setup activity
c. direct manufacturing labor hours to measure designing activity
d. All of these answers are correct.
Answer: a Difficulty: 1 Objective: 3 Terms to Learn: activity-based costing (ABC)
44. ABC systems:
a. highlight the different levels of activities
b. limit cost drivers to units of output
c. allocate costs based on the overall level of activity
d. generally undercost complex products
Answer: a Difficulty: 2 Objective: 3 Terms to Learn: activity-based costing (ABC)
45. A single indirect-cost rate may distort product costs because:
a. there is an assumption that all support activities affect all products
b. it recognizes specific activities that are required to produce a product
c. costs are not consistently recorded
d. it fails to measure the correct amount of total costs
Answer: a Difficulty: 2 Objective: 3 Terms to Learn: product-cost cross-subsidization
46. Traditional cost systems distort product costs because:
a. they do not know how to identify the appropriate units
b. competitive pricing is ignored
c. they emphasize financial accounting requirements
d. they apply average support costs to each unit of product
Answer: d Difficulty: 2 Objective: 3 Terms to Learn: product-cost cross-subsidization
47. Which of the following statements about activity-based costing is NOT true?
a. Activity-based costing is useful for allocating marketing and distribution
costs.
b. Activity-based costing is more likely to result in major differences from
traditional costing systems if the firm manufactures only one product rather
than multiple products.
c. Activity-based costing seeks to distinguish batch-level, product-sustaining,
and facility-sustaining costs, especially when they are not proportionate to one
another.
d. Activity-based costing differs from traditional costing systems in that products
are not cross-subsidized.
Answer: b Difficulty: 2 Objective: 3 Terms to Learn: product-cost cross-subsidization
48. Activity-based costing (ABC) can eliminate cost distortions because ABC:
a. develops cost drivers that have a cause-and-effect relationship with the
activities performed
b. establishes multiple cost pools
c. eliminates product variations
d. recognizes interactions between different departments in assigning support
costs
Answer: a Difficulty: 1 Objective: 3 Terms to Learn: product-cost cross-subsidization
49. Product lines that produce different variations (models, styles, or colors) often
require specialized manufacturing activities that translate into:
a. fewer indirect costs for each product line
b. decisions to drop product variations
c. a greater number of direct manufacturing labor cost allocation rates
d. greater overhead costs for each product line
Answer: d Difficulty: 2 Objective: 3 Terms to Learn: product-cost cross-subsidization
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 50 THROUGH 55:
Merriman Company provides the following ABC costing information:
Activities Total Costs Activity-cost drivers
Account inquiry hours $400,000 10,000 hours
Account billing lines $280,000 4,000,000 lines
Account verification accounts $150,000 40,000 accounts
letters Correspondence
letters $ 50,000 4,000 Total costs $880,000
The above activities are used by Departments A and B as follows:
Department A Department B Account inquiry hours 2,000 hours 4,000 hours
Account billing lines 400,000 lines 200,000 lines
Account verification accounts 10,000 accounts 8,000 accounts
Correspondence letters 1,000 letters 1,600 letters
50. How much of the account inquiry cost will be assigned to Department A?
a. $80,000
b. $400,000
c. $160,000
d. None of these answers are correct.
Answer: a Difficulty: 2 Objective: 3 Terms to Learn: activity-based costing (ABC)
($400,000 / 10,000) x 2,000 = $80,000
51. How much of the account billing cost will be assigned to Department B?
a. $28,000
b. $280,000
c. $14,000
d. None of these answers are correct.
Answer: c Difficulty: 2 Objective: 3 Terms to Learn: activity-based costing (ABC)
($280,000 / 4,000,000) x 200,000 = $14,000
52. How much of account verification costs will be assigned to Department A?
a. $30,000
b. $37,500
c. $150,000
d. $10,000
Answer: b Difficulty: 2 Objective: 3 Terms to Learn: activity-based costing (ABC)
($150,000 / 40,000) x 10,000 = $37,500
53. How much of correspondence costs will be assigned to Department B?
a. $1,600
b. $12,500
c. $50,000
d. $20,000
Answer: d Difficulty: 2 Objective: 3 Terms to Learn: activity-based costing (ABC)
($50,000 / 4,000) x 1,600 = $20,000
54. How much of the total costs will be assigned to Department A?
a. $158,000
b. $80,000
c. $224,000
d. $880,000
Answer: a Difficulty: 2 Objective: 3 Terms to Learn: activity-based costing (ABC)
($400,000 / 10,000) x 2,000 = $80,000
($280,000 / 4,000,000) x 400,000 = $28,000
($150,000 / 40,000) x 10,000 = $37,500
($50,000 / 4,000) x 1,000 = $12,500
$158,000
55. How much of the total costs will be assigned to Department B?
a. $158,000
b. $80,000
c. $224,000
d. $880,000
Answer: c Difficulty: 3 Objective: 3 Terms to Learn: activity-based costing (ABC)
($400,000 / 10,000) x 4,000 = $160,000
($280,000 / 4,000,000) x 200,000 = $ 14,000
($150,000 / 40,000) x 8,000 = $ 30,000
($50,000 / 4,000) x 1,600 = $ 20,000
$224,000
56. Dalrymple Company produces a special spray nozzle. The budgeted indirect total
cost of inserting the spray nozzle is $80,000. The budgeted number of nozzles to be inserted is 40,000. What is the budgeted indirect cost allocation rate for this
activity?
a. $0.50
b. $1.00
c. $1.50
d. $2.00
Answer: d Difficulty: 1 Objective: 3 Terms to Learn: activity-based costing (ABC)
$80,000 / 40,000 = $2.00
57. Activity-based costing is most likely to yield benefits for companies with all of the
following characteristics EXCEPT:
a. numerous products that consume different amounts of resources
b. operations that remain fairly consistent
c. a highly competitive environment, where cost control is critical
d. accessible accounting and information systems expertise to maintain the
system
Answer: b Difficulty: 2 Objective: 3 Terms to Learn: activity-based costing (ABC)
58. Each of the following statements is true EXCEPT:
a. traditional product costing systems seek to assign all manufacturing costs to
products
b. ABC product costing systems seek to assign all manufacturing costs to
products
c. traditional product costing systems are more refined than an ABC system
d. cost distortions occur when a mismatch (incorrect association) occurs between
the way indirect costs are incurred and the basis for their assignment to
individual products
Answer: c Difficulty: 1 Objective: 3 Terms to Learn: activity-based costing (ABC)
59. The MOST likely example of an output unit-level cost is:
a. general administrative costs
b. paying suppliers for orders received
costs
c. engineering
d. machine
depreciation
Answer: d Difficulty: 1 Objective: 4 Terms to Learn: output unit-level costs
60. The MOST likely example of a batch-level cost is:
costs
a. utility
repairs
b. machine
costs
c. product-designing
d. setup
costs
Answer: d Difficulty: 1 Objective: 4 Terms to Learn: batch-level costs
61. Design costs are an example of:
a. unit-level
costs
costs
b. batch-level
costs
c. product-sustaining
costs
d. facility-sustaining
Answer: c Difficulty: 1 Objective: 4 Terms to Learn: product-sustaining costs
62. __________ costs support the organization as a whole.
a. Unit-level
b. Batch-level
c. Product-sustaining
d. Facility-sustaining
Answer: d Difficulty: 1 Objective: 4 Terms to Learn: facility-sustaining costs
63. It is usually difficult to find good cause-and-effect relationships between
__________ and a cost allocation base.
costs
a. unit-level
costs
b. batch-level
costs
c. product-sustaining
costs
d. facility-sustaining
Answer: d Difficulty: 1 Objective: 4 Terms to Learn: facility-sustaining costs
64. To set realistic selling prices:
a. all costs should be allocated to products
b. costs should only be allocated when there is a strong cause-and-effect
relationship
c. only unit-level costs and batch-level costs should be allocated
d. only unit-level costs should be allocated
Answer: a Difficulty: 2 Objective: 4 Terms to Learn: facility-sustaining costs
65. Different products consume different proportions of manufacturing overhead costs
because of differences in all of the following EXCEPT:
prices
a. selling
b. customers’ customization specifications
c. setup
times
design
d. product
Answer: a Difficulty: 1 Objective: 4 Terms to Learn: product-cost cross-subsidization
66. Unit-level cost drivers are most appropriate as an overhead assignment base when:
a. several complex products are manufactured
b. only one product is manufactured
c. direct labor costs are low
d. factories produce a varied mix of products
Answer: b Difficulty: 2 Objective: 4 Terms to Learn: output unit-level costs
67. With traditional costing systems, products manufactured in small batches and in
small annual volumes may be __________ because batch-related and product-
sustaining costs are assigned using unit-related drivers.
a. overcosted
costed
b. fairly
c. undercosted
d. ignored
Answer: c Difficulty: 2 Objective: 4 Terms to Learn: output unit-level costs, batch-level costs
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 68 AND 69: Products S5 and CP8 each are assigned $50.00 in indirect costs by a traditional costing system. An activity analysis revealed that although production requirements are identical, S5 requires 45 minutes less setup time than CP8.
68. According to an ABC system, CP8 is __________ under the traditional system.
a. undercosted
b. overcosted
costed
c. fairly
d. accurately
costed
Answer: a Difficulty: 2 Objective: 4 Terms to Learn: product undercosting
69. According to an ABC system, S5 uses a disproportionately:
a. smaller amount of unit-level costs
b. larger amount of unit-level costs
c. smaller amount of batch-level costs
d. larger amount of batch-level costs
Answer: c Difficulty: 2 Objective: 4 Terms to Learn: product overcosting
70. Put the following ABC implementation steps in order:
A Compute the allocation rates.
B Compute the total cost of the products.
C Identify the products that are the cost objects.
D Select the cost allocation bases.
a. DACB
b. DBCA
c. BADC
d. CDAB
Answer: d Difficulty: 1 Objective: 5 Terms to Learn: activity-based costing (ABC)
71. ABC systems identify __________ costs used by products.
a. all
b. short-term fixed
variable
c. short-term
fixed
d. long-term
Answer: a Difficulty: 1 Objective: 5 Terms to Learn: activity-based costing (ABC)
72. The focus of ABC systems is on:
decisions
a. long-term
decisions
b. short-term
decisions
c. make-or-buy
decisions
d. special-pricing
Answer: a Difficulty: 2 Objective: 5 Terms to Learn: activity-based costing (ABC)
73. When designing a costing system, it is easiest to:
a. calculate total costs first and then per-unit cost
b. calculate per-unit costs first and then total costs
c. calculate long-term costs first and then short-term costs
first and then long-term costs
costs
short-term
d. calculate
Answer: a Difficulty: 1 Objective: 5 Terms to Learn: activity-based costing (ABC)
74. ABC assumes all costs are __________ because over the long run management can
adjust the amount of resources employed.
a. fixed
b. variable
c. committed
d. nondiscretionary
Answer: b Difficulty: 2 Objective: 5 Terms to Learn: activity-based costing (ABC)
75. A manufacturing firm produces multiple families of products requiring various
combinations of different types of parts. Of the following, the MOST appropriate
cost driver for assigning materials handling costs to the various products is:
labor
hours
a. direct
b. number of units produced
c. number of parts used
d. number of suppliers involved
Answer: c Difficulty: 1 Objective: 5 Terms to Learn: activity-based costing (ABC)
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 76 THROUGH 79: Barnes Corporation manufactures two models of office chairs, a standard and a deluxe model. The following activity and cost information has been compiled:
Number of Number of Number of Product Setups Components Direct Labor Hours
Standard 22 8 375 Deluxe 28 12 225 costs $20,000 $40,000
Overhead
76. Assume a traditional costing system applies the $60,000 of overhead costs based on
direct labor hours. What is the total amount of overhead costs assigned to the
standard model?
a. $24,800
b. $35,200
c. $37,500
d. $22,500
Answer: c Difficulty: 2 Objective: 5 Terms to Learn: activity-based costing (ABC)
[$60,000 / (375 + 225)] x 375 = $37,500
77. Assume a traditional costing system applies the $60,000 of overhead costs based on
direct labor hours. What is the total amount of overhead costs assigned to the deluxe model?
a. $24,800
b. $35,200
c. $37,500
d. $22,500
Answer: d Difficulty: 2 Objective: 5 Terms to Learn: activity-based costing (ABC)
[$60,000 / (375 + 225)] x 225 = $22,500
78. Number of setups and number of components are identified as activity-cost drivers
for overhead. Assuming an activity-based costing system is used, what is the total amount of overhead costs assigned to the standard model?
a. $24,800
b. $35,200
c. $37,500
d. $22,500
Answer: a Difficulty: 2 Objective: 5 Terms to Learn: activity-based costing (ABC)
Setups: $20,000 / (22 + 28) = $400
Components: $40,000 / (8 + 12) = $2,000
($400 x 22) + ($2,000 x 8) = $24,800
79. Number of setups and number of components are identified as activity-cost drivers
for overhead. Assuming an activity-based costing system is used, what is the total
amount of overhead costs assigned to the deluxe model?
a. $24,800
b. $35,200
c. $37,500
d. $22,500
Answer: b Difficulty: 2 Objective: 5 Terms to Learn: activity-based costing (ABC)
[$20,000 / (22 + 28) x 28] + [$40,000 / (8 + 12) x 12] = $35,200
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 80 THROUGH 84:
Tiger Pride produces two product lines: T-shirts and Sweatshirts. Product
profitability is analyzed as follows:
T-SHIRTS SWEATSHIRT Production and sales volume 60,000 units 35,000 units
Selling price $16.00 $29.00
Direct material $ 2.00 $ 5.00
Direct labor $ 4.50 $ 7.20
overhead $ 2.00 $ 3.00
Manufacturing
Gross profit $ 7.50 $13.80
Selling and administrative $ 4.00 $ 7.00
Operating profit $ 3.50 $ 6.80
Tiger Pride’s managers have decided to revise their current assignment of overhead costs
to reflect the following ABC cost information:
Activity Activity cost Activity-cost driver
Supervision $100,920 Direct labor hours (DLH)
$124,000 Inspections Inspection
Activities demanded
T-SHIRTS SWEATSHIRTS
0.75 DLH/unit 1.2 DLH/unit
45,000 DLHs 42,000 DLHs
60,000 inspections 17,500 inspections
80. Under the revised ABC system, the activity-cost driver rate for the supervision
activity is:
a. $2.58
b. $2.40
c. $2.24
d. $1.16
Answer: d Difficulty: 1 Objective: 5 Terms to Learn: activity-based costing (ABC)
$100,920 / (45,000 dlh + 42,000 dlh) = $1.16 per dlh
81. Under the revised ABC system, supervision costs allocated to Sweatshirts will be:
a. $48,720
b. $100,800
c. $100,920
d. None of these answers are correct.
Answer: a Difficulty: 1 Objective: 5 Terms to Learn: activity-based costing (ABC)
$100,920 / (45,000 dlh + 42,000 dlh) = $1.16 per dlh x 42,000 dlh = $48,720 82. Under the revised ABC system, total overhead costs allocated to Sweatshirts will
be:
a. $ 48,720
b. $ 76,720
c. $224,920
d. None of these answers are correct.
Answer: b Difficulty: 2 Objective: 5 Terms to Learn: activity-based costing (ABC)
$124,000 / (60,000 inspections + 17,500 inspections) = $1.60 per inspection x
17,500 = $28,000 plus
$100,920 / (45,000 dlh + 42,000 dlh) = $1.16 per dlh x 42,000 dlh = $48,720;
$28,000 + $48,720 = $76,720
83. Under the revised ABC system, overhead costs per unit for the Sweatshirts will be:
a. $1.39 per unit
b. $1.60 per unit
c. $2.19 per unit
d. $2.47 per unit
Answer: c Difficulty: 2 Objective: 5 Terms to Learn: activity-based costing (ABC)
$76,720 / 35,000 sweatshirts = $2.19
84. Using an ABC system, next year’s estimates show manufacturing overhead costs
will total $228,300 for 52,000 T-shirts. If all other T-shirt costs and sales prices remain the same, the profitability that can be expected is
a. $5.41 per t-shirt.
b. $4.39 per t-shirt.
c. $1.11 per t-shirt.
per
t-shirt.
d. ($0.81)
Answer: c Difficulty: 3 Objective: 5 Terms to Learn: activity-based costing (ABC)
[52,000 ($16 – $2.00 – $4.50 – $4.00)] – $228,300 = $57,700 / 52,000 = $1.11
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 85 THROUGH 88: Mayan Potters manufactures two sizes of ceramic paperweights, regular and jumbo. The following information applies to their expectations for the planning period: Cost Pool Overhead Costs Activity-cost driver
Materials handling $ 45,000 90,000 orders
Machine maintenance $300,000 15,000 maintenance hours
setups
Setups $270,000 45,000
inspections
Inspections $105,000 21,000
Total support costs $720,000
Production Estimates
Production units:
Regular = 8,000,000 units
Jumbo = 16,000,000 units
Machine-hours = 200,000 mh
Labor-hours = 400,000 dlh
Mayan Potters uses an ABC system and assigns overhead costs based on the overhead activity information provided above.
85. The activity-cost driver for the materials handling activity is:
a. orders
hours
b. maintenance
units
c. production
d. setups
Answer: a Difficulty: 1 Objective: 5 Terms to Learn: activity