Management Accounting Information for Decisionn Making And Strategy Execution Atkinson 6th Edition by Anthony A. Atkinson – Test Bank

Complete Test Bank With Answers

 

 

Sample Questions Posted Below

 

Management Accounting, 6e (Atkinson et al.)

Chapter 5   Activity-Based Cost Systems

Objective 1

1) Traditional cost systems use actual departments or cost centers for defining cost pools to accumulate and redistribute costs.

Answer:  TRUE

Diff: 1

Terms:  cost pools

Objective:  1

AACSB:  Reflective thinking

2) Activity-based cost systems use cost centers to accumulate costs.

Answer:  FALSE

Explanation:  Activity-based cost systems use cost pools to accumulate costs.

Diff: 1

Terms:  cost pools

Objective:  1

AACSB:  Reflective thinking

3) Traditional cost systems are likely to overcost simple products with higher production volume.

Answer:  TRUE

Diff: 2

Terms:  traditional costing system

Objective:  1

AACSB:  Reflective thinking

4) The first step in designing an activity-based cost system is to develop an activity dictionary.

Answer:  TRUE

Diff: 1

Terms:  activity based costing

Objective:  1

AACSB:  Reflective thinking

5) Traditional cost systems are likely to overcost complex products with lower production volume.

Answer:  FALSE

Explanation:  Traditional costing systems are likely to undercost complex products with lower production volume.

Diff: 2

Terms:  activity based costing

Objective:  1

AACSB:  Reflective thinking

6) ________ and ________ are typically the measures of volume of activity in traditional volume-based cost systems.

A) Practical capacity; products sold

B) Direct labor hours; practical capacity

C) Direct labor hours; machine hours

D) Square footage; machine hours

Answer:  C

Diff: 1

Terms:  traditional costing system, cost driver

Objective:  1

AACSB:  Reflective thinking

7) Traditional cost systems distort product costs because:

A) they do not know how to identify the appropriate units.

B) excess capacity costs are ignored.

C) they emphasize financial accounting requirements.

D) they use unit-level cost drivers to allocate overhead costs to products.

Answer:  D

Diff: 2

Terms:  traditional costing system, overhead

Objective:  1

AACSB:  Reflective thinking

8) Unit-level cost drivers in traditional cost systems distort product costs because they:

A) assume that all overhead activities affect all products.

B) recognize specific activities that are required to produce a product.

C) do not consistently record costs.

D) fail to measure the correct amount of total costs for all products.

Answer:  A

Diff: 2

Terms:  traditional costing system, cost driver

Objective:  1

AACSB:  Reflective thinking

9) Smaller cost distortions occur when the traditional cost systems’ unit-level assignments and the alternative activity cost driver assignments:

A) are different in proportion to each other.

B) are similar in proportion to each other.

C) are more different than alike.

D) use the same cost driver units.

Answer:  B

Diff: 2

Terms:  volume-based costs systems, cost driver

Objective:  1

AACSB:  Reflective thinking

10) The use of unit-related measures to assign overhead costs is more likely to:

A) undercost high-volume products.

B) undercost specialty low-volume products.

C) undercost complex products.

D) undercost specialty low-volume and complex products.

Answer:  D

Diff: 2

Terms:  volume-based costs systems, overhead

Objective:  1

AACSB:  Reflective thinking

11) Misleading product cost numbers are MOST likely the result of misallocating:

A) direct material costs.

B) direct manufacturing labor costs.

C) overhead costs.

D) All of the above are correct.

Answer:  C

Diff: 1

Terms:  overhead

Objective:  1

AACSB:  Reflective thinking

12) Undercosting of a product is MOST likely to result from:

A) misallocating direct labor costs.

B) underpricing the product.

C) overcosting another product.

D) understating total product costs.

Answer:  C

Diff: 1

Terms:  overhead

Objective:  1

AACSB:  Reflective thinking

13) Overcosting a particular product may result in:

A) gain of market share for the product.

B) higher profits per unit for the product.

C) operating efficiencies.

D) overstating total costs of all the products.

Answer:  B

Diff: 1

Terms:  overhead

Objective:  1

AACSB:  Reflective thinking

14) Explain how traditional cost systems, using only unit level cost drivers, distort product costs.

Answer:  Unit-related measures can distort product costing because the demand for overhead activities may be driven by batch-related, product-sustaining, customer-sustaining, or business-sustaining activities. Volume may not drive the demand for overhead activities, cost distortions are larger when the traditional systems’ unit-level cost drivers and the alternative activity cost drivers differ proportionately more from each other. Traditional cost systems are likely to undercost specialty products with lower production volumes (relatively fewer units of production) and overcost standard products with higher production volumes (relatively greater units of production).

Diff: 2

Terms:  activity based costing, cost driver, traditional costing system

Objective:  1

AACSB:  Reflective thinking

MAL:  This question is not available in MyAccountingLab.

15) Explain how traditional cost systems, using only unit level cost drivers, distort customer costs.

Answer:  Unit-related measures can distort customer costing because different customers may have different demands for overhead activities. Cost distortions are larger when the traditional cost systems’ unit-level cost drivers and the alternative activity cost drivers differ proportionately more from each other. Traditional cost systems are likely to undercost customers who demand specialized services and concessions.

Diff: 2

Terms:  activity based costing, cost driver, traditional costing system

Objective:  1

AACSB:  Reflective thinking

MAL:  This question is not available in MyAccountingLab.

Objective 2

1) Product lines that produce different variations (models, styles, or colors) often require specialized activities that translate into lower overhead costs for each product line.

Answer:  FALSE

Explanation:  Product lines that produce different variations (models, styles, or colors) often require specialized activities that translate into higher costs for each product line.

Diff: 2

Terms:  activity based costing

Objective:  2

AACSB:  Reflective thinking

2) Specialized engineering drawings of products, product quality specifications and quality control testing, inventoried raw materials, and material control systems are examples of activities that equate to greater overhead costs.

Answer:  TRUE

Diff: 1

Terms:  activity based costing, overhead

Objective:  2

AACSB:  Reflective thinking

3) It is important that the product costs reflect as much of the diversity and complexity of the manufacturing process so that:

A) product costs will reflect their relative consumption of resources.

B) better information related to resource constraints can be captured and communicated.

C) there is more likelihood of cost distortions.

D) All of the above are correct.

Answer:  A

Diff: 1

Terms:  activity based costing

Objective:  2

AACSB:  Reflective thinking

4) Activity-based costing (ABC) can eliminate cost distortions because ABC:

A) develops cost drivers that directly link the activities performed to the products manufactured.

B) establishes multiple cost pools.

C) employs capacity-related cost drivers.

D) recognizes interactions between different departments in assigning overhead costs.

Answer:  A

Diff: 1

Terms:  activity based costing, cost drivers

Objective:  2

AACSB:  Reflective thinking

5) Different products consume different proportions of overhead costs because of differences in all of the following EXCEPT:

A) sales prices.

B) customers’ customization specifications.

C) setup times.

D) product design.

Answer:  A

Diff: 1

Terms:  activity based costing, overhead

Objective:  2

AACSB:  Reflective thinking

6) Which of the following is a sign that an ABC system may be useful?

A) There are small amounts of overhead costs.

B) Products make diverse demands on resources because of differences in volume, process steps, batch size, or complexity.

C) Products a company all show large profits.

D) Operations throughout the plant are fairly similar.

Answer:  B

Diff: 1

Terms:  activity based costing

Objective:  2

AACSB:  Reflective thinking

7) Units of production are most appropriate as an overhead cost assignment base when:

A) it is a service department.

B) only one product is manufactured.

C) direct labor costs are low.

D) factories produce a complex and varied mix of products.

Answer:  B

Diff: 1

Terms:  overhead

Objective:  2

AACSB:  Reflective thinking

8) Product lines that produce different variations (models, styles, or colors) often require specialized activities that translate into:

A) lower overhead costs for each product line.

B) decisions to drop product variations.

C) more favorable direct labor cost ratios.

D) more overhead costs for each product line.

Answer:  D

Diff: 2

Terms:  activity based costing, overhead

Objective:  2

AACSB:  Reflective thinking

9) When a company manufactures a variety of complex products, several unit-level cost drivers can capture the complexity and diversity of the production processes:

A) always.

B) frequently.

C) infrequently.

D) never.

Answer:  D

Diff: 1

Terms:  cost driver

Objective:  2

AACSB:  Reflective thinking

10) Greater manufacturing overhead costs are associated with:

A) specialized engineering drawings of new products.

B) quality specifications for products and quality control testing.

C) inventoried materials and material control systems.

D) All of the above are correct.

Answer:  D

Diff: 1

Terms:  overhead

Objective:  2

AACSB:  Reflective thinking

11) A company produces three products; if one product is undercosted then:

A) one product is overcosted.

B) one or two products are overcosted.

C) two products are overcosted.

D) no products are overcosted.

Answer:  B

Diff: 1

Terms:  overhead

Objective:  2

AACSB:  Reflective thinking

12) In general, factories producing a more varied and complex mix of products have higher costs than factories producing only a narrow range of products. Explain why this is generally true.

Answer:  Factories producing a more varied and complex mix of products have higher costs than factories producing only a narrow range of products because more variations and complexities require more activities. The Ericson Ice Cream Company in the text case provides an illustration of why producing more flavors of ice cream adds higher costs. Extending the product lines into new flavors requires special additional activities that translate into greater overhead costs for the new flavors.

Diff: 2

Terms:  activity based costing

Objective:  2

AACSB:  Reflective thinking

MAL:  This question is not available in MyAccountingLab.

13) Provide at least two examples of types of costs that would be higher for factories producing a more varied and complex mix of products than for factories producing only a narrow range of products.

Answer:  Specialized engineering drawings of products, quality specifications for products and quality control testing, inventoried materials and material control systems, and scheduling are examples of activities that equate to greater overhead costs. Different products consume different proportions of manufacturing overhead costs because of differences in customers’ customization specifications, setup times, and product designs.

Diff: 2

Terms:  activity based costing, cost driver

Objective:  2

AACSB:  Reflective thinking

MAL:  This question is not available in MyAccountingLab.

Objective 3

1) For activity-based cost systems, activity costs are assigned to products in the proportion of the demand they place on activity resources.

Answer:  TRUE

Diff: 1

Terms:  activity based costing

Objective:  3

AACSB:  Reflective thinking

2) An activity-based costing system is necessary for costing services that are different.

Answer:  TRUE

Diff: 1

Terms:  activity based costing

Objective:  3

AACSB:  Reflective thinking

3) ABC systems seek an activity cost allocation driver that has a cause-and-effect relationship with costs in the cost pool.

Answer:  TRUE

Diff: 1

Terms:  activity based costing

Objective:  3

AACSB:  Reflective thinking

4) In general, the selection of activity cost drivers requires making trade-offs between accuracy and the cost of measurement.

Answer:  TRUE

Diff: 1

Terms:  activity based costing, cost driver

Objective:  3

AACSB:  Reflective thinking

5) The selection of activity cost drivers requires making choices related to the usage of transaction drivers, duration drivers, and intensity drivers.

Answer:  TRUE

Diff: 1

Terms:  activity based costing, cost driver

Objective:  3

AACSB:  Reflective thinking

6) The goal of a properly constructed ABC system is to:

A) have the most accurate cost system.

B) identify more indirect overhead costs.

C) develop the best cost system for an economically reasonable cost.

D) have separate allocation rates for each department.

Answer:  C

Diff: 1

Terms:  activity based costing

Objective:  3

AACSB:  Reflective thinking

7) Designing an activity-based 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 performed by the plant’s resources.

D) seeking a broader focus rather than detail.

Answer:  C

Diff: 1

Terms:  activity based costing

Objective:  3

AACSB:  Reflective thinking

8) Design of an activity-based cost system requires that:

A) the job bid process be redesigned.

B) resource costs be linked to the activities performed.

C) the cost of activities be linked to cost objects.

D) resource costs be linked to the activities performed and the cost of activities be linked to cost objects.

Answer:  D

Diff: 1

Terms:  activity based costing

Objective:  3

AACSB:  Reflective thinking

9) Which of the following statements about activity-based costing is NOT true?

A) ABC is useful for allocating marketing and distribution costs.

B) ABC is more likely to result in major differences from traditional costing systems if the firm manufactures only one product rather than multiple products.

C) ABC seeks to distinguish batch-related, product-sustaining, and business-sustaining costs, especially when they are not proportionate to one another.

D) ABC differs from traditional costing systems in that products are not cross-subsidized.

Answer:  B

Diff: 1

Terms:  activity based costing, traditional costing system

Objective:  3

AACSB:  Reflective thinking

Schiff Company produces seven products. PQ-6 costs $240.00 per unit under their traditional cost system using one cost driver. An analysis of the activities and their costs revealed that three cost drivers would be used under the new ABC system. The new cost of PQ-6 was determined to be $190.00 per unit.

10) The total amount of overhead costs assigned to product PQ-6 using the traditional cost method is ________ the total amount assigned using ABC.

A) more than

B) less than

C) identical to

D) approximately the same

Answer:  A

Diff: 1

Terms:  activity based costing, overhead, traditional costing system

Objective:  3

AACSB:  Analytical skills

11) Given this change in the cost:

A) PQ-6 costing results under the new system depend on the adequacy and quality of the estimated sales and sales revenue used by the system.

B) PQ-6 will now command a higher sales price.

C) PQ-6 will now command a lower sales price.

D) Schiff’s other products will be assigned a smaller share of overhead costs.

Answer:  C

Diff: 1

Terms:  activity based costing, overhead

Objective:  3

AACSB:  Analytical skills

Webster Company provides the following ABC costing information: 

Activities	Total Costs	Activity-cost drivers
Account inquiry hours	$250,000	10,000 hours
Account billing lines	$125,000	5,000,000 lines
Account verification accounts	$50,000	50,000 accounts
Correspondence letters	$  25,000	5,000 letters
Total costs	$450,000

The above activities are used by Departments A and B as follows:

	Department A	Department B
Account inquiry hours	1,000 hours	3,000 hours
Account billing lines	200,000 lines	300,000 lines
Account verification accounts	10,000 accounts	8,000 accounts
Correspondence letters	1,000 letters	1,500 letters

12) How much of the account inquiry cost will be assigned to Department A?

A) $5,000

B) $25,000

C) $75,000

D) $250,000

Answer:  B

Diff: 2

Terms:  activity based costing, overhead, cost driver rate

Objective:  3

AACSB:  Analytical skills

13) How much of account verification costs will be assigned to Department A?

A) $10,000

B) $25,000

C) $40,000

D) $50,000

Answer:  A

Diff: 2

Terms:  activity based costing, overhead, cost driver rate

Objective:  3

AACSB:  Analytical skills

14) How much of the account billing costs will be assigned to Department B?

A) $7,500

B) $12.500

C) $15,000

D) $25,000

Answer:  A

Diff: 2

Terms:  activity based costing, overhead, cost driver rate

Objective:  3

AACSB:  Analytical skills

Tony’s Skate Corporation manufactures two models of skate boards: a standard and a deluxe model. The following activity and cost information has been compiled.

Product	Number of Setups	Number of Components	Number of total Direct Labor Hours
Standard	20	10	375
Deluxe	30	15	225
Overhead costs	$50,000	$70,000

 

15) Assume a traditional costing system applies the $120,000 of overhead costs based on direct labor hours. What is the total amount of overhead costs assigned to the standard model?

A) $40,000

B) $75,000

C) $50,000

D) $70,500

Answer:  B

Diff: 2

Terms:  traditional costing system, overhead, cost driver rate

Objective:  3

AACSB:  Analytical skills

16) Number of setups and number of components are identified as activity-cost drivers for overhead costs. Assuming an activity-based costing system is used, what is the total amount of overhead costs assigned to the standard model?

A) $20,000

B) $29,000

C) $48,000

D) $60,000

Answer:  C

Diff: 2

Terms:  activity based costing, overhead, cost driver rate

Objective:  3

AACSB:  Analytical skills

Blitzer Enterprises has identified three cost pools and three corresponding cost drivers to allocate overhead costs.  The following estimates are provided for the coming year:

Cost Pool	Overhead Costs	Cost driver	Activity level
Supervision of direct labor	$480,000	Direct labor-hours	800,000
Machine maintenance	$220,000	Machine-hours	550,000
Facility rent	$260,000	Square feet of area	100,000
Total overhead costs	$960,000

The accounting records show the Gergen Job consumed the following resources:

Cost driver	Actual level
Direct labor-hours	600
Machine-hours	2,100
Square feet of area	90

17) If direct labor-hours are considered as the only overhead cost driver, what is the single cost driver rate for Blitzer Enterprises?

A) $0.60 per direct labor-hour

B) $0.80 per direct labor-hour

C) $1.20 per direct labor-hour

D) $6.00 per direct labor-hour

Answer:  C

Diff: 2

Terms:  activity based costing, overhead, cost driver rate

Objective:  3

AACSB:  Analytical skills

18) Using direct labor-hours as the only overhead cost driver, what is the amount of overhead costs allocated to the Gergen Job?

A) $320

B) $720

C) $1,200

D) $1,360

Answer:  B

Diff: 2

Terms:  activity based costing, overhead, cost driver rate

Objective:  3

AACSB:  Analytical skills

19) If Blitzer Enterprises uses the three activity cost pools to allocate overhead costs, what are the activity-cost driver rates for the supervision of direct labor, machine maintenance, and facility rent, respectively?

A) $1.20 per direct labor hour, $0.50 per machine hour, $3.60 per sq ft

B) $2.50 per direct labor hour, $0.50 per machine hour, $1.00 per sq ft

C) $0.80 per direct labor hour, $0.10 per machine hour, $2.40 per sq ft

D) $0.60 per direct labor hour, $0.40 per machine hour, $2.60 per sq ft

Answer:  D

Diff: 2

Terms:  activity based costing, overhead, cost driver rate

Objective:  3

AACSB:  Analytical skills

20) Using the three cost pools to allocate overhead costs, what is the total amount of overhead costs to be allocated to the Gergen Job?

A) $1,434

B) $1,400

C) $1,350

D) $1,074

Answer:  A

Diff: 3

Terms:  activity based costing, overhead, cost driver rate

Objective:  3

AACSB:  Analytical skills

21) Which method of allocation probably best estimates actual overhead costs used for Blitzer Enterprises? Why?

A) Single direct labor-hours cost driver, because it is best to allocate total costs uniformly to individual jobs.

B) Single direct labor-hours cost driver, because it is easiest to analyze and interpret.

C) Three activity-cost drivers, because it best reflects the relative consumption of resources.

D) Three activity-cost drivers, because product costs can be significantly cross-subsidized.

Answer:  C

Diff: 2

Terms:  activity based costing, overhead, cost driver

Objective:  3

AACSB:  Analytical skills

Baldwin Printers has contracts to complete weekly supplements required by forty-two customers. For the year 2011, manufacturing overhead cost estimates total $1,840,000 for an annual production capacity of 20 million pages.

For 2011 Baldwin Printers has decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:

Cost pool	Manufacturing overhead	Activity level
Design changes	$ 520,000	400 design changes
Setups	1,040,000	8,000 setups
Inspections	280,000	14,000 inspections
Total manufacturing overhead costs	$1,840,000

During 2011, two customers, Wellington Drugs and Home Again, are expected to use the following printing services:

Activity	Wellington Drugs	Home Again
Pages Printed	90,000	56,000
Design changes	7	4
Setups	10	10
Inspections	20	18

22) What is the cost driver rate if manufacturing overhead costs are considered one large cost pool and are assigned based on 20 million pages of production capacity?

A) $0.10 per page

B) $0.07 per page

C) $0.092 per page

D) $1.84 per page

Answer:  C

Diff: 2

Terms:  activity based costing, overhead, cost driver rate

Objective:  3

AACSB:  Analytical skills

23) Using pages printed as the only overhead cost driver, what is the manufacturing overhead cost estimate for Wellington Drugs during 2011?

A) $5,000

B) $8,280

C) $11,200

D) $18,500

Answer:  B

Diff: 2

Terms:  activity based costing, overhead, cost driver rate

Objective:  3

AACSB:  Analytical skills

24) Assuming activity-cost pools are used, what are the activity-cost driver rates for design changes, setups, and inspections cost pools?

A) $1,300 per design change, $130.00per setup, $20 per inspection

B) $360 per design change, $3.20per setup, $6.40 per inspection

C) $1,680 per design change, $5.38 per setup, $42 per inspection

D) $286 per design change, $15.38 per setup, $20 per inspection

Answer:  A

Explanation:  A) Design changes: $1,300 per design change = ($520,000 / 400 design changes)

Setups: $130.00 per setup = ($1,040,000 / 8,000 setups)

Inspections: $20 per inspection = ($280,000 / 14,000 inspections)

Diff: 2

Terms:  activity based costing, overhead, cost driver rate

Objective:  3

AACSB:  Analytical skills

25) Using the three cost pools to allocate overhead costs, what is the total manufacturing overhead cost estimate for Wellington Drugs during 2011?

A) $5,400

B) $9,100

C) $10,800

D) $10,192

Answer:  C

Diff: 3

Terms:  activity based costing, overhead, cost driver rate

Objective:  3

AACSB:  Analytical skills

26) When overhead costs are assigned using the single cost driver, number of pages printed, then

A) Baldwin Printers will want to retain this highly-profitable customer.

B) Wellington Drugs will likely seek to do business with competitors in the future.

C) Wellington Drugs is unfairly overbilled for its use of printing resources.

D) Wellington Drugs is grossly underbilled for the job, while other jobs will be unfairly overbilled.

Answer:  D

Diff: 3

Terms:  activity based costing, overhead, cost driver rate

Objective:  3

AACSB:  Analytical skills

Merrill, Inc. manufactures remote controls. Currently the company uses a plant-wide rate for allocating manufacturing overhead costs. The plant manager believes it is time to refine the method of cost allocation and has the accounting department identify the primary production activities and their cost drivers:

Activities	Cost driver	Allocation Rate
Material handling	Number of parts	$4 per part
Assembly	Labor hours	$40 per hour
Inspection	Minutes at inspection station	$6 per minute

The current traditional cost method allocates overhead costs based on direct labor hours using a rate of $400 per labor hour.

27) What are the manufacturing overhead costs per remote control assuming the traditional cost method is used and a batch of 500 remote controls are produced? The batch requires 1,000 parts, 10 direct labor hours, and 15 minutes of inspection time.

A) $4,000.00 per remote control

B) $0.50 per remote control

C) $4.00 per remote control

D) $8.00 per remote control

Answer:  D

Diff: 2

Terms:  traditional costing system, overhead, cost driver rate

Objective:  3

AACSB:  Analytical skills

28) What are the manufacturing overhead costs per remote control assuming an activity-based costing method is used and a batch of 50 remote controls are produced? The batch requires 100 parts, 6 direct manufacturing labor hours, and 2.5 minutes of inspection time.

A) $8.00 per remote control

B) $13.10 per remote control

C) $48.00 per remote control

D) $655.00 per remote control

Answer:  B

Diff: 2

Terms:  activity based costing, overhead, cost driver rate

Objective:  3

AACSB:  Analytical skills

29) Logical cost allocation bases for overhead costs 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 product designing activity.

D) All of the above are correct.

Answer:  A

Diff: 1

Terms:  overhead, cost allocation

Objective:  3

AACSB:  Reflective thinking

30) 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:

A) direct labor hours.

B) number of units produced.

C) number of parts used.

D) number of suppliers involved.

Answer:  C

Diff: 1

Terms:  cost driver

Objective:  3

AACSB:  Reflective thinking

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 unit-level cost rates should be used.

D) varying demands will be placed on resources.

Answer:  A

Diff: 2

Terms:  activity based costing, traditional costing system

Objective:  3

AACSB:  Reflective thinking

32) Activity-based costing systems provide better product costs when they:

A) employ more activity cost drivers.

B) employ fewer activity cost drivers.

C) identify and cost more overhead cost differences among products.

D) always yield more accurate product costs than traditional cost systems.

Answer:  C

Diff: 2

Terms:  overhead, activity based costing

Objective:  3

AACSB:  Reflective thinking

33) With traditional costing systems, products manufactured in large batches and in large annual volumes may be ________ because batch-related and product-sustaining costs are assigned using unit-related cost drivers..

A) overcosted

B) undercosted

C) fairly costed

D) ignored

Answer:  A

Diff: 2

Terms:  traditional costing system

Objective:  3

AACSB:  Reflective thinking

34) Transaction drivers:

A) count the frequency of an activity.

B) involve directly charging for the resources used each time an activity is performed.

C) are the most expensive and accurate type of cost driver.

D) often apply a weighted index approach by estimating the difficulty of the task for various types of situations.

Answer:  A

Diff: 2

Terms:  transaction driver

Objective:  3

AACSB:  Reflective thinking

Products M5 and A8 each are assigned $100.00 in overhead costs by a traditional costing system. An activity analysis revealed that although production requirements are identical, M5 requires 45 minutes less setup time than A8.

35) According to an ABC system, A8 is ________ under the traditional cost system.

A) undercosted

B) overcosted

C) fairly costed

D) accurately costed

Answer:  A

Diff: 2

Terms:  overhead, cost allocation

Objective:  3

AACSB:  Analytical skills

36) According to an ABC system, M5 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

Diff: 2

Terms:  activity based costing

Objective:  3

AACSB:  Analytical skills

37) Provide a diagram of how the activity-based cost system model works and explain the two major components of the model.

Answer:  The diagram would show:

Step #1 is to trace costs to activities

Step #2 is to trace costs from activities to cost objects via the activity cost driver rates.

The Ericson Ice Cream Company case in the text illustrates how one company traced costs to activities and then from activities to products using activity cost drivers. Design of an activity-based cost system requires that the model links resource costs to the activities performed and the model links the costs of activities to the cost objects (products and customers). Activity-based costing can eliminate cost distortions caused by traditional cost systems because activity-based costing develops cost drivers that more directly link the activities performed in product manufacture to the products manufactured.

Diff: 2

Terms:  activity based costing, cost driver rate

Objective:  3

AACSB:  Reflective thinking

MAL:  This question is not available in MyAccountingLab.

38) How are cost drivers selected in activity-based costing systems?

Answer:  The selection of activity cost drivers requires making choices related to how to economize on the number of activity cost drivers, how to isolate events (because activities triggered by the same event often can use the same activity cost driver), and whether to apply transaction drivers, duration drivers, or intensity drivers.

Transaction drivers count how often an activity is performed. Duration drivers represent the amount of time required to perform an activity. Intensity drivers directly charge for the resources used each time an activity is performed. Also, rather than using intensity drivers, a weighted index approach might be used to simulate an intensity driver.

Diff: 2

Terms:  activity based costing, cost driver

Objective:  3

AACSB:  Reflective thinking

MAL:  This question is not available in MyAccountingLab.

Objective 4

1) Reducing the number of production runs provides an economic benefit even though resources remain at the same level.

Answer:  FALSE

Explanation:  Reducing the number of production runs does not provide an economic benefit if resources remain at the same level.

Diff: 1

Terms:  activity based costing

Objective:  4

AACSB:  Reflective thinking

2) Prepackaged ABC software packages must be customized to the products, services and related activities of the company.

Answer:  TRUE

Diff: 1

Terms:  activity based costing

Objective:  4

AACSB:  Reflective thinking

3) Activity-based management (ABM) includes decisions about all of the following EXCEPT:

A) pricing and product mix.

B) smoothing costs.

C) reducing costs.

D) improving efficiency of activities.

Answer:  B

Diff: 2

Terms:  activity based management

Objective:  4

AACSB:  Reflective thinking

4) ABC systems:

A) reveal activities that can be eliminated.

B) help control nonfinancial items such as number of setup hours.

C) help identify new designs to reduce costs.

D) All of the above are correct.

Answer:  D

Diff: 2

Terms:  activity based costing

Objective:  4

AACSB:  Reflective thinking

5) A well-designed, activity-based cost system helps managers make better decisions because information derived from an ABC analysis:

A) can be used to eliminate nonvalue-added activities.

B) is easy to analyze and interpret.

C) takes the choices and judgment challenges away from the managers.

D) emphasizes how managers can achieve higher sales.

Answer:  A

Diff: 1

Terms:  activity based costing

Objective:  4

AACSB:  Reflective thinking

6) The goal of a properly constructed ABC system is to:

A) develop the best cost system by staying within the economizing constraints (relevant benefit versus cost tradeoff for the system).

B) have the most accurate cost system.

C) clone the ABC model processes.

D) adapt the ABC model exactly to the organization.

Answer:  A

Diff: 2

Terms:  activity based costing

Objective:  4

AACSB:  Reflective thinking

7) Explain how activity-based costing systems can provide more accurate product costs than traditional cost systems.

Answer:  A key reason for assigning overhead costs using an ABC system rather than a traditional cost system is ABC cost systems reflect differences required by different processes as well as customers. Activity-based costing systems provide better product costs when they identify and cost more overhead cost differences among products. Activity-based costing seeks to distinguish batch, product sustaining, and business level costs especially when they are not proportional to one another.

Unit level cost drivers in traditional cost systems distort product costs because, effectively, these systems assume that all overhead activities affect all products. Thus, these systems assign each unit of product an average cost that fails to recognize the specific activities that are required to produce that product. Excess capacity costs are typically assigned to all products.

Activity-based costing differs from traditional costing systems in that products are not cross-subsidized by overhead costs being shared by everyone. Activity-based costing is more likely to result in major differences from traditional costing systems if the firm manufactures multiple products rather than only one product.

Diff: 2

Terms:  activity based costing, cost driver, overhead, traditional costing system

Objective:  4

AACSB:  Reflective thinking

MAL:  This question is not available in MyAccountingLab.

8) Do activity-based costing systems always provide more accurate product costs than conventional cost systems? Why or why not?

Answer:  No. Traditional cost systems contain smaller and fewer cost distortions when the traditional cost systems’ unit-level assignments and the alternative activity cost drivers are relatively similar in proportion to each other. Still, the use of unit-related measures to assign overhead costs is more likely to undercost low-volume products and more complex products. Both traditional product-costing systems and ABC product-costing systems seek to assign all manufacturing costs to products. Cost distortions occur when a mismatch (incorrect association) occurs between the way overhead costs are incurred and the basis for their assignment to individual products.

Diff: 2

Terms:  activity based costing, overhead, traditional costing system

Objective:  4

AACSB:  Reflective thinking

MAL:  This question is not available in MyAccountingLab.

9) Transaction drivers, duration drivers, and intensity drivers.

a. For machine maintenance, identify a transaction driver, a duration driver, and an intensity driver.

b. Explain when the intensity driver should be used.

c. Explain the conditions that are assumed when the duration driver is used.

Answer:  

a. Transaction drivers count how often an activity is performed, such as, the number of machines maintained.

Duration drivers represent the amount of time required to perform an activity, such as the number of hours required for performing machine maintenance.

Intensity drivers directly charge for the resources used each time an activity is performed, such as actual times for various maintenances of various machines.

b. Intensity drivers track all the resources used for a product or customer each time the variety of resources from a group of activities is performed. They should be used only when the resources associated with performing an activity are both expensive and variable each time an activity is performed.

c. Duration drivers assume different products/customers use different amounts of resource time, but each hour of overhead time costs the same.

Diff: 2

Terms:  activity based costing, cost driver

Objective:  3, 4

AACSB:  Reflective thinking

MAL:  This question is not available in MyAccountingLab.

10) Transaction drivers count how often an activity is performed.

Duration drivers represent the amount of time required to perform an activity.

Intensity drivers directly charge for the resources used each time an activity is performed.

Also, a weighted index approach might be used to simulate an intensity driver.

a. Give an example of each of the four types of drivers described above.

b. Explain when each of the four types of drivers should be used.

c. For each of the first three types of drivers, explain the assumptions about the activity and the object of the activity.

d. For each of the following activities identify a transaction driver, a duration driver, and an intensity driver.

Machine maintenance

Machine setup

Quality control

Material ordering

Production scheduling

Warehouse expense

Engineering design

Answer:  

a. Transaction drivers count how often an activity is performed, such as, the number of setups, number of receipts, and number of products overheaded. Duration drivers represent the amount of time required to perform an activity, such as the required setup hours, order processing hours, and inspection hours. Intensity drivers directly charge for the resources used each time an activity is performed, such as, special setup efforts that require an engineer and expensive equipment as well as quality specialists. A weighted index approach uses measures such as relative complexity or difficulty of effort for the various types of customers/products.

b.Transaction drivers can be used when all objects make essentially the same demands on the activity and the times spent for each effort are similar in length. For example, scheduling production runs or processing orders may take practically the same time and effort independent of which product is being scheduled or which part is being purchased.  Duration drivers should be used when significant variation exists in the amount of activity required for different outputs.  For example, simple overhead products may require 2-3 minutes for the activity such as setup to be completed, whereas complex, high-precision products may take hours for the setup activity. Intensity drivers track all the resources used for a product or customer each time the variety of resources from a group of activities is performed.  They should be used only when the resources associated with performing an activity are both expensive and variable each time an activity is performed.  A weighted index approach uses measures such as relative complexity or difficulty of effort for the various types of customers/products when intensity drivers are indicated but a simpler method is preferred.  In effect this approach becomes a simulated system that is similar to tracking the relative differences that would otherwise be captured by intensity drivers.

c. For example, for an activity that overheads customers, we could use:

Transaction driver: cost per customer (assumes all customers cost the same);  

Duration driver: cost per customer hour (assumes different customers use different amounts of resource time, but each hour of overhead time costs the same); and

Intensity driver: actual cost per customer (captures actual times and the variety of specific resources committed to specific customers).

d.

Activity	Transaction  Driver	Duration Driver	Intensity Driver
MACHINE MAINTENANCE	# of machines	Machine hours	Actual times for various maintenances of various machines
MACHINE SETUP	# of setups	Setup hours	Actual times for various setups for various machines
QUALITY CONTROL	# of inspections	Inspection hours	Actual times for various inspections for various controls
MATERIAL ORDERING	# of orders	Ordering hours	Actual times for various orders for various materials
PRODUCTION SCHEDULING	# of runs	Scheduling hours	Actual times for various runs for various schedules
WAREHOUSING	# of bins, aisles	Picking hours	Actual times for various parts for various warehousing activities
ENGINEERING DESIGN	# of engineers # of designs	Engineering hours	Actual times for various engineering designs

Diff: 3

Terms:  activity based costing, cost driver

Objective:  3, 4

AACSB:  Analytical skills

MAL:  This question is not available in MyAccountingLab.

11) Brilliant Accents Company manufactures and sells three styles of kitchen faucets:  brass, chrome, and white.  Production takes 25, 25, and 10 machine hours to manufacture 1,000-unit batches of brass, chrome, and white faucets, respectively.  The following additional data apply:

BRASS CHROME WHITE

Projected sales in units 30,000 50,000 40,000

PER UNIT data:

Selling price $40 $20 $30

Direct materials $  8 $  4 $  8

Direct labor $15 $  3 $  9

Overhead cost based on direct labor hours 

(traditional cost system) $12$  3 $  9

 

Hours per 1000-unit batch:

Direct labor hours   40   10   30 

Machine hours   25   25   10

Setup hours 1.0 0.5 1.0

Inspection hours   30   20   20

Total overhead costs and activity levels for the year are estimated as follows:

Activity Overhead costs Activity levels

Direct labor hours 2,900 hours

Machine hours 2,400 hours

Setups $465,000 95 setup hours

Inspections $405,000 2,700 inspection hours

$870,000

a. Using the traditional cost system, determine the operating profit per unit for the brass style of faucet.

b. Determine the activity cost driver rate for setup overhead costs and inspection overhead costs.

c. Using the ABC system, for the brass style of faucet:

1. compute the estimated overhead costs per unit; and

2. compute the estimated operating profit per unit.

d. Explain the difference between the profits obtained from the traditional cost system and the ABC system. Which system provides a better estimate of profitability? Why?

Answer:  

a. Traditional cost system:

Operating profit per unit for Brass faucets is $5 = $40 – ($8 + $15 + $12).

b. The activity cost driver rate for setup overhead costs is $4,895 per setup hour = $465,000/95, and for inspection overhead costs it is $150 per inspection hour = $405,000/2,700.

c. ABC system:

Overhead costs per unit for Brass faucets are $9.40 per unit.

30,000 units in projected sales / 1,000 units per batch = 30 batches;

30 batches × 1 setup hour per batch = 30 setup hours;

30 batches × 30 inspection hours per batch = 900 inspection hours.

30 setup hours × $4,895 = $146,850/30,000 units = $4.895/unit

900 inspection hours × $150 = $135,000/30,000 units = $4.50/unit

Overhead costs for Brass faucets ($4.90 + $4.50) = $9.40 per unit.

Operating profit per unit for Brass faucets is $7.60 = $40 – ($8 + $15 + $9.40).

d. Traditional cost system: Operating profit per unit for Brass faucets is $5.00.

ABC system: Operating profit per unit for Brass faucets is $7.60.

Because the products do not all require the same proportionate shares of the overhead resources of setup hours and inspection hours, the ABC system provides different results than the traditional cost system which allocates overhead costs on the basis of direct labor hours.  The ABC system considers some important differences in overhead resource requirements and thus provides a better picture of the profitability from each faucet style provided that the activity measures are fairly estimated.

Diff: 3

Terms:  activity based costing, cost driver, overhead

Objective:  1, 3, 4

AACSB:  Analytical skills

MAL:  This question is not available in MyAccountingLab.

12) Brilliant Accents Company manufactures and sells three styles of kitchen faucets:  brass, chrome, and white.  Production takes 25, 25, and 10 machine hours to manufacture 1000-unit batches of brass, chrome, and white faucets, respectively.  The following additional data apply:

BRASS CHROME WHITE

Projected sales in units #30,000 #50,000 #40,000

PER UNIT data:

Selling price $40 $20 $30

Direct materials $  8 $  4 $  8

Direct labor $15 $  3 $  9

Overhead cost based on direct labor hours 

(traditional system) $12$  3 $  9

 

Hours per 1000-unit batch:

Direct labor hours   40 10 30

Machine hours   25 25 10

Setup hours 1.0 0.5 1.0

Inspection hours   30 20   20

Total overhead costs and activity levels for the year are estimated as follows:

Activity Overhead costs Activity levels

Direct labor hours 2,900 hours

Machine hours 2,400 hours

Setups $465,500 95 setup hours

Inspections $405,000 2,700 inspection hours

$870,500

a. Using the traditional cost system, determine the operating profit per unit for each style of faucet.

b. Determine the activity cost driver rates for setup overhead costs and inspection overhead costs.

c. Using the ABC system, for each style of faucet:

1.compute the estimated overhead costs per unit; and

2.compute the estimated operating profit per unit.

d. Explain the differences between the profits obtained from the traditional cost system and the ABC system. Which system provides a better estimate of profitability? Why?

Answer:  

a. Traditional cost system:

Operating profit per unit for Brass faucets is$5 = $40 – ($8 + $15 + $12).

Operating profit per unit for Chrome faucets is$10 = $20 – ($4 + $3 + $3).

Operating profit per unit for White faucets is$4 = $30 – ($8 + $9 + $9)

b. The activity cost driver rate for setup overhead costs is $4,900 per setup hour = $465,500/95,

and for inspection overhead costs is $150 per inspection hour = $405,000/2700. 

c. ABC system:

Overhead costs per unit for Brass faucets are $9.40 per unit.

30,000 units in projected sales / 1,000 units per batch = 30 batches; 

30 batches × 1 setup hour per batch = 30 setup hours; 

30 batches × 30 inspection hours per batch = 900 inspection hours. 

30 setup hours × $4,900 =  $147,000/30,000 units = $4.90/unit

900 inspection hours × $150 = $135,000/30,000 units = $4.50/unit

Overhead costs for Brass faucets ($4.90 + $4.50) = $9.40 per unit.

Operating profit per unit for Brass faucets is $7.60 = $40 – ($8 + $15 + $9.40).

Overhead costs per unit for Chrome faucets are $5.45 per unit.

50,000 units in projected sales / 1,000 units per batch = 50 batches; 

50 batches × .5 setup hour per batch = 25 setup hours; 

50 batches × 20 inspection hours per batch = 1,000 inspection hours. 

25 setup hours × $4,900 =  $122,500/50,000 units = $2.45/unit

1,000 inspection hours × $150 = $150,000/50,000 units = $3.00/unit

Overhead costs for Chrome faucets ($2.45 + $3.00) = $5.45 per unit.

Operating profit per unit for Chrome faucets is $7.55 = $20 – ($4 + $3 + $5.45).

Overhead costs per unit for White faucets are $7.90 per unit.

40,000 units in projected sales/ 1,000 units per batch = 40 batches; 

40 batches × 1 setup hour per batch = 40 setup hours; 

40 batches × 20 inspection hours per batch = 800 inspection hours. 

40 setup hours × $4,900 =  $196,000/40,000 units = $4.90/unit

800 inspection hours × $150 = $120,000/40,000 units = $3.00/unit

Overhead costs for Brass faucets ($4.90 + $3.00) = $7.90 per unit.

Operating profit per unit for White faucets is $5.10 = $30 – ($8 +  $9 + $7.90).

d. Traditional cost system:

Operating profit per unit for Brass faucets is$5 = $40 – ($8 + $15 + $12).

Operating profit per unit for Chrome faucets is$10 = $20 – ($4 + $3 + $3).

Operating profit per unit for White faucets is$4 = $30 – ($8 + $9 + $9)

ABC system:

Operating profit per unit for Brass faucets is $7.60 = $40 – ($8 + $15 + $9.40).

Operating profit per unit for Chrome faucets is $7.55 = $20 – ($4 + $3 + $5.45).

Operating profit per unit for White faucets is $5.10 = $30 – ($8 +  $9 + $7.90).

Because the products do not all require the same proportionate shares of the overhead

resources of setup hours and inspection hours, the ABC system provides different results

than the traditional cost system which allocates overhead costs on the basis of direct labor

hours.  The ABC system considers some important differences in overhead resource

requirements and thus provides a better picture of the profitability from each faucet style

provided that the activity measures are fairly estimated.

TraditionalABC

Black $5 $7.60

Chrome $10 $7.55

White $4 $5.10

Diff: 3

Terms:  activity based costing, cost driver, overhead

Objective:  1, 3, 4

AACSB:  Analytical skills

MAL:  This question is not available in MyAccountingLab.

Objective 5

1) Capacity cost rates also change when the denominator, practical capacity, changes.

Answer:  TRUE

Diff: 2

Terms:  capacity cost rate

Objective:  5

AACSB:  Reflective thinking

2) Practical capacity is generally smaller than theoretical capacity.

Answer:  TRUE

Diff: 1

Terms:  practical capacity

Objective:  5

AACSB:  Reflective thinking

3) Updates to time-driven ABC models are triggered by events that require the estimates in the model to be modified, such as a significant change in costs of resources supplied.

Answer:  TRUE

Diff: 2

Terms:  time-driven activity based costing

Objective:  5

AACSB:  Reflective thinking

4) Practical capacity is used as the numerator for activity cost driver calculations to avoid distortions caused by the assignment of excess capacity costs to the products.

Answer:  FALSE

Explanation:  Practical capacity is used as the denominator for activity cost driver calculations to avoid distortions caused by the assignment of excess capacity costs to the products.

Diff: 2

Terms:  practical capacity

Objective:  5

AACSB:  Reflective thinking

5) Unused capacity should be treated as a general cost to be shared across all product lines.

Answer:  FALSE

Explanation:  In general, unused capacity is not assigned to product lines. However, if the capacity was acquired to meet anticipated demands from a particular customer or a particular market segment, the costs of unused capacity due to lower-than-expected demands can be assigned to the person or organizational unit responsible for that customer or segment. Such an assignment is done on a lump-sum basis to the organizational unit; it should not be driven down to the products actually produced during the period in the unit.

Diff: 3

Terms:  practical capacity

Objective:  5

AACSB:  Reflective thinking

6) Cost driver rates calculated using actual work performed include an allocation for the cost of resources used and for unused capacity.

Answer:  TRUE

Diff: 2

Terms:  cost driver rate

Objective:  5

AACSB:  Reflective thinking

7) Assigning selling and distribution costs to product lines is becoming more important because of customer requests for customized services.

Answer:  TRUE

Diff: 1

Terms:  selling and distribution costs

Objective:  5

AACSB:  Reflective thinking

8) Time-driven ABC enables the model to reflect how particular order and activity characteristics cause processing times to vary.

Answer:  TRUE

Diff: 2

Terms:  time-driven activity based costing

Objective:  5

AACSB:  Reflective thinking

9) Committed costs can change because demands for the capacity resource change or because of changes in efficiency in performing activities.

Answer:  FALSE

Explanation:  Committed costs are generally fixed costs.

Diff: 2

Terms:  committed cost

Objective:  5

AACSB:  Reflective thinking

10) Updates to a time-driven ABC system might be triggered by:

A) significant shifts in cost estimates.

B) change in top management.

C) new fiscal year.

D) interviews and surveys.

Answer:  A

Diff: 2

Terms:  time-driven activity based costing

Objective:  5

AACSB:  Reflective thinking

11) A time-driven ABC system:

A) is difficult to update.

B) is time-consuming, expensive and often inaccurate.

C) requires that only two parameters be updated.

D) is based on theoretical capacity.

Answer:  C

Diff: 2

Terms:  time-driven activity based costing

Objective:  5

AACSB:  Reflective thinking

12) Advantages of a time-driven ABC system include:

A) data used are more easily obtained.

B) complex assumptions.

C) theoretical.

D) requires many parameters to be estimated.

Answer:  A

Diff: 2

Terms:  time-driven activity based costing

Objective:  5

AACSB:  Reflective thinking

13) Advantages of the time-driven ABC model include all of the following EXCEPT:

A) cost-driver rates change when there has been a shift in the efficiency of the activity.

B) cost-driver rates can be easily updated.

C) complex assumptions reflect the manufacturing environment.

D) data used are easily observed.

Answer:  C

Diff: 2

Terms:  time-driven activity based costing

Objective:  5

AACSB:  Reflective thinking

14) The best cost estimate for resources required to handle production runs is developed by using ________ as the denominator for activity cost driver calculations.

A) actual driver quantities of actual production runs

B) estimated driver quantities of estimated production runs

C) available capacity

D) practical capacity

Answer:  D

Diff: 2

Terms:  practical capacity

Objective:  5

AACSB:  Reflective thinking

15) The major reason for using practical capacity as the denominator for activity driver calculations is to:

A) avoid distortions induced by the assignment of unused capacity costs to the products produced or customer served.

B) simplify the calculations of the activity cost drivers.

C) reduce the cost of unused capacity.

D) place less emphasis on the cost of unused capacity.

Answer:  A

Diff: 2

Terms:  practical capacity

Objective:  5

AACSB:  Reflective thinking

16) Determining realistic, practical capacity measurements is a(n):

A) fairly simple process.

B) judgmental process.

C) straightforward process.

D) impossible process.

Answer:  B

Diff: 1

Terms:  practical capacity

Objective:  5

AACSB:  Reflective thinking

17) A PRIMARY reason for assigning selling and distribution costs to products and customers for analytical purposes is:

A) to justify a varied product mix.

B) that controllers are required to assign all costs when valuing inventories.

C) that different products, and customers require different quantities of selling and distribution activities.

D) that all indirect costs must be assigned.

Answer:  C

Diff: 2

Terms:  selling and distribution costs

Objective:  5

AACSB:  Reflective thinking

18) Under traditional costing systems, selling and administrative costs have been largely ignored because they:

A) are hard to quantify except at exorbitant cost of measurement.

B) have been negligible in amount relative to total costs.

C) in the past they have been inventoriable for financial reporting purposes under GAAP.

D) relate to a varied mix of products.

Answer:  B

Diff: 2

Terms:  traditional costing systems

Objective:  5

AACSB:  Reflective thinking

19) Aggressive customers who demand low prices and customized services:

A) require high costs to serve.

B) are most profitable to serve.

C) are customers to eliminate.

D) require high costs and are most profitable to serve.

Answer:  A

Diff: 2

Terms:  activity based costing

Objective:  5

AACSB:  Reflective thinking

20) A key reason for using an ABC system rather than a conventional cost system is because ABC assigns overhead costs:

A) because they are indirect costs.

B) more simply than a traditional cost system.

C) based only on transaction drivers.

D) to reflect differences required by different activities as well as customers.

Answer:  D

Diff: 2

Terms:  activity based costing, overhead

Objective:  5

AACSB:  Reflective thinking

21) Discuss the advantages of a time-based ABC system.

Answer:  Time-driven ABC systems are less time-consuming, less expensive to design and easier to update because they require fewer parameters to be estimated and the data are easier to obtain, validate and update. Because they can be easily updated as operating conditions change, these systems will produce more accurate product costs.

Diff: 2

Terms:  time-based activity based costing,

Objective:  5

AACSB:  Reflective thinking

MAL:  This question is not available in MyAccountingLab.

22) The Troubadours Company is noted for an exceptionally impressive line of Mardi Gras masks. Troubadours has established the following selling and distribution overhead activity cost pools and their corresponding activity drivers for the year 2011:

Activity Cost Cost driver

Marketing$60,000$1,000,000 of sales

Customer service $20,0005,000 customers

Order execution $  10,000 100 orders

Warehousing $  10,000 50 product lines

a. Determine the activity cost driver rate for each of the four selling and distribution activities.

b. Under what circumstances would it be appropriate to use each of the activity cost drivers to

determine the cost of the Mardi Gras masks?

c. Describe at least one possible negative behavioral consequence for each of the four activity cost drivers.

Answer:  

a. Activity cost driver rate for Marketing = 6% of sales = $60,000/$1,000,000.

Activity cost driver rate for Customer Service = $4 per customer = $20,000/5,000.

Activity cost driver rate for Order Execution = $100 per order = $10,000/100.

Activity cost driver rate for Warehousing = $200 per product line = $10,000/50.

b. For marketing, using 6% of stipulated sales is appropriate when management wants to limit marketing costs to a budgeted proportion to sales. Using the number of customers for customer service is appropriate when the customer service costs are similar enough to use the average for all customers. Using the number of orders for order execution is appropriate when all orders are sufficiently alike in terms of resources used that they can be averaged. Using the number of product lines for warehousing is appropriate when each product line requires similar proportions of the warehousing efforts.

c. For marketing, using 6% of sales limits the marketing activities to an arbitrary amount without consideration for potential opportunities. Using the number of customers for customer service can lead to customer service initiatives to limit the amount of time servicing each customer to cause the number of customers serviced to increase. Using the number of orders for order execution can result in purchasers splitting orders to increase the number of orders executed. Using the number of product lines for warehousing can lead warehouse personnel to designate more product line differences in the warehouse.

Diff: 3

Terms:  activity based costing, cost driver

Objective:  3, 5

AACSB:  Analytical skills

MAL:  This question is not available in MyAccountingLab.

23) MTM Manufacturing produces two types of pre-fabricated exterior walls:  deluxe and standard. The assignment basis for overhead costs has been direct labor hours. For 2011, MTM compiled the following data for the two products: 

Deluxe Standard

Sales in units5,00040,000

Sales price per unit$13,000.00$9,500.00

Direct material and direct labor costs per unit$3,600.00$2,600.00

Manufacturing overhead costs per unit$  1,800,.00 $2,400.00

Last year, MTM purchased an expensive robotics system to allow for more complex products in the deluxe line. The CFO suggested that an ABC analysis could be valuable to help evaluate a product mix and promotion strategy for the next sales campaign. She obtained the following ABC information for 2011:

Activity Cost Driver Cost Total Deluxe     Standard

Setups # setups $     1,300,000 500 400 100

Machine-related # of machine hours $61,200,000 600,000 300,000 300,000

Packing # shipments $  105,000,000 250,000 50,000 200,000

a. Using the current cost system, what is the estimated:

1.total cost of manufacturing one unit for each type of wall; and

2.profit per unit for each type of wall?

b. Using the current cost system, estimated manufacturing overhead costs per unit are less for the deluxe wall ($1,800 per unit) than the standard wall ($2,400 per unit). What is a likely explanation for this?

c. Review the machine-related costs above. What is a likely explanation for machine-related costs being so high? What might explain why total machining hours for the deluxe walls (300,000 hours) are the same as for the standard walls (300,000 hours)?

d. Using the activity-based costing data presented above, 

1.compute the cost driver rate for each overhead activity.

2.compute the revised manufacturing overhead cost per unit for the deluxe wall.

3.compute the revised total cost to manufacture one unit of the deluxe wall.

e. Is the deluxe wall as profitable as the original data estimated? Why or why not? 

f. What considerations need to be examined when determining a sales mix strategy?

Answer:  

a. Currently estimated deluxe wall total cost per unit is $5,400= $3,600 + $1,800.

Currently estimated standard wall total cost per unit is $5,000 = $2,600 + $2,400.

Currently estimated deluxe wall profit per unit is $7,600 = $13,000 – $5,400.

Currently estimated standard wall profit per unit is $4,500 = $9,500 – $5,000.

b. Overhead manufacturing costs are currently allocated based on direct labor hours. Because the deluxe walls are manufactured using the new robotics system, it appears that less direct labor hours are needed to manufacture each unit in the deluxe product line.

c. The high machine-related costs are probably a result of purchasing the new robotics equipment for the deluxe product line. Yes, the total number of machine hours is the same for each product line, but the deluxe line uses 60 machine hours per unit (300,000 machine hours / 5,000 units), while the standard product line only uses 7.5 machine hours per unit (300,000 machine hours / 40,000 units). By evaluating machine hours per unit rather than total machine hours, these numbers make more sense.

d1. Manufacturing overhead cost driver rates:

Setup overhead activity is $2,600/setup = $1,350,000/500 setups.

Machine-related overhead activity is $102/machine hour = $61,200,000/600,000 machine hours.

Packing overhead activity is $420/shipment = $105,000,000/250,000 shipments.

d2. Revised overhead costs per unit:

Deluxe wall is $6,748 per unit = [($2,600 × 400) + ($102 × 300,000) + ($420 × 50,000)] / 5,000 units.

d3. Revised total cost per unit for the deluxe wall is $10,348.00 = $3,600.00 + $6,748.00.

e. No, the deluxe wall is not as profitable as originally estimated because it requires a disproportionate share of the overhead activities and thus more of the overhead costs are assigned to the deluxe wall when using an ABC system.

f. First, the sales-mix strategy ought to consider the current and future market demands for the two types of walls. Other considerations include the capacity-related constraints of the robotics system, other equipment, and the facilities. The fact that customers may be willing to pay more for the deluxe walls should be considered when evaluating the profitability of each product line. Costs do not drive a sales-mix strategy.

Diff: 3

Terms:  activity based costing

Objective:  1, 2, 3, 4, 5

AACSB:  Analytical skills

MAL:  This question is not available in MyAccountingLab.

Objective 6

1) In general, service companies are ideal candidates for activity-based costing.

Answer:  TRUE

Diff: 1

Terms:  activity based costing

Objective:  6

AACSB:  Reflective thinking

2) For service organizations, activity-based cost systems clarify appropriate cost assignments to services and customers and help to identify the profitability of various products and customers.

Answer:  TRUE

Diff: 2

Terms:  activity based costing

Objective:  6

AACSB:  Reflective thinking

3) For service organizations that bill customers at a predetermined average cost rate, activity-based cost systems can help to:

A) clarify appropriate cost assignments for various service activities.

B) identify the profitability of various service activities.

C) clarify appropriate cost assignments and identify the profitability of various service activities.

D) None of the above is correct.

Answer:  C

Diff: 2

Terms:  activity based costing, cost driver rate

Objective:  6

AACSB:  Reflective thinking

Objective 7

1) The most successful ABC projects occur when a clear business purpose exists for building the ABC model.

Answer:  TRUE

Diff: 2

Terms:  activity based costing

Objective:  7

AACSB:  Reflective thinking

2) When the ABC system has a good model design, ABC can still overcome the barriers to implementation and provide an effective system.

Answer:  TRUE

Diff: 1

Terms:  activity based costing

Objective:  7

AACSB:  Reflective thinking

3) An activity-based costing system is meant to perform the role of operational control as well as to provide the basis for costing inventory for financial reporting.

Answer:  FALSE

Explanation:  Operational control must be performed by management.

Diff: 2

Terms:  activity based costing

Objective:  7

AACSB:  Reflective thinking

4) Even when the ABC project is initiated from the finance group, a multifunctional project team should be formed.

Answer:  TRUE

Diff: 2

Terms:  activity based costing

Objective:  7

AACSB:  Reflective thinking

5) Activity based pricing prices products, not orders.

Answer:  FALSE

Explanation:  Activity based pricing prices orders not products.

Diff: 1

Terms:  activity based pricing

Objective:  7

AACSB:  Reflective thinking

6) All of the following situations cause major deterrents to effective ABC implementation EXCEPT when:

A) the ABC system lacks a clear business purpose.

B) the ABC system’s model design is poor.

C) the ABC consultants fail to adapt the ABC system adequately to the specifics of the organization.

D) senior management communicates their commitment to the change.

Answer:  D

Diff: 2

Terms:  activity based costing

Objective:  7

AACSB:  Reflective thinking

7) The focus of ABC systems is on:

A) long-term decisions.

B) short-term decisions.

C) make-or-buy decisions.

D) special-pricing decisions.

Answer:  A

Diff: 2

Terms:  activity based costing

Objective:  7

AACSB:  Reflective thinking

8) It ONLY makes sense to implement an ABC system when:

A) ABC provides information to make better decisions.

B) its benefits exceed implementation costs.

C) ABC traces more costs as direct costs.

D) there is a strong cause-and-effect relationship between costs in the cost pools and their cost-allocation bases.

Answer:  B

Diff: 2

Terms:  activity based costing

Objective:  7

AACSB:  Reflective thinking

9) At Deutschland Electronics, product lines are charged for call center overhead costs based on sales revenue. Last year’s summary of call center operations revealed the following:

Surveillance Products Specialty Products

Number of calls for information 1,000 4,000

Average call length for information 3 minutes 8 minutes

Number of calls for warranties 300 1,200

Average call length for warranties 7 minutes 15 minutes

Sales revenue $8,000,000 $5,000,000

Deutschland Electronics currently allocates call center overhead costs using a rate of 0.5% of sales revenue.

a. Compute the amount of call center overhead costs allocated to each product line under the current system. 

b. Assume Deutschland decides to use the average call length for information to assign last year’s overhead costs. Does this allocation method seem more appropriate than percentage of sales? Why or why not?

c. Assume Deutschland decides to use the numbers of calls of both types to assign last year’s overhead costs of $65,000. Compute the amount of call center overhead costs assigned to each product line under this revised ABC system.

d. Deutschland Electronics assigns bonuses based on departmental profits. How might the Specialty Products manager try to obtain higher profits for next year if overhead costs are assigned based on the average call length for information?

e. Discuss the barriers for implementing ABC for this call center.

Answer:  

a.  Call center overhead costs allocated to surveillance products is $40,000 = 0.005 × $8,000,000 and to specialty products is $25,000 = 0.005 × $5,000,000.

b. Yes, average call length appears to be a more appropriate allocation method because it allocates more overhead costs to specialty products, which consume a greater portion of the call center’s resources.

c. $65,000 of overhead costs / 6,500 total calls (Surveillance 1,000 + 300 + Specialty 4,000 + 1,200) = $10 per call. Call center overhead costs allocated to surveillance products is $13,000 = 1,300 calls × $10 per call, and to specialty products is $52,000 = 5,200 calls × $10 per call.

d. To increase profits, Specialty Product managers would want less cost allocated to their departments. Therefore, if overhead cost allocation was based on the length of a call, Specialty Products’ management may emphasize keeping calls for their department short and to the point, rather than emphasizing understanding and helping the caller.

e. Poor model design or poor analytical interpretation and accountability consequences may function as barriers to using ABC’s assignments for the call center activities. It is also important to recognize that the call volumes from this year may be an anomaly so that in an average year, the current allocation rate on sales may not be as distortive as it appears for this year.

Diff: 3

Terms:  activity based costing, overhead

Objective:  1, 4, 5, 6, 7

AACSB:  Analytical skills

MAL:  This question is not available in MyAccountingLab.

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