ACCT361 Chapter 5

10) Using multiple unit-level cost drivers generally constitutes an effective activity-based cost system.

F

7) A cost accounting system should be revised when A) the existing cost accounting system provides information that is representative of operations. B) the existing cost accounting system could be updated, just to keep ahead. C) the existing cost accounting system does not produce information that reflects the way various products use scarce resources. D) management wants to change the system, even though the information is relevant and correct. E) a new system would be easier to understand but would not be reliable.

C

7) Determining what activities add customer value is an example of what facet of activity-based management? A) increase effective coordination among business function activities B) reduce costs of non-value-added activities C) improve selection of process activities to enhance profit D) match the company's use of resources to customer demand E) achieve planned growth

C

7) Using a broad average to allocate costs to products is called A) activity-based costing. B) refined costing. C) cost smoothing. D) product undercoating. E) job costing.

C

5) Activity-based costing can "unlock" savings, not apparent when traditional costing is used, because the system requires a closer examination of operations.

T

5) Product-sustaining (service-sustaining) costs are the costs of resources sacrificed on activities undertaken to support specific services.

T

6) If a company undercosts one of its products from indirect cost smoothing, then it will overcost at least one of its other products.

T

7) Understanding the hierarchy of costs is critical when allocating costs to products.

T

8) Unit-level measures can distort product costing because the demand for overhead resources may be driven by batch-level or product-sustaining activities.

T

16) Activity-based costing is a technique to improve the reliability of cost assignment A) to work-in-process inventory. B) from direct cost pools to distinct types of outputs. C) from both direct and indirect cost pools to distinct types of outputs. D) to all types of inventory. E) from indirect cost pools to distinct types of outputs.

E

16) Indications that a product cost system needs revision include A) the product line consists of a products which are produced at different locations. B) the product costing computer system does not use the latest technology. C) the company uses a single allocation base system developed long ago. D) prime cost represent the vast majority of product cost. E) managers lose bids they expected to win and win bids they expected to lose.

E

22) Resources sacrificed on activities that cannot be traced to individual products or services, but which support the organization as a whole are which of the following? A) output unit-level costs B) service-sustaining costs C) batch-level costs D) product-sustaining costs E) facility-sustaining costs

E

25) Activity-based cost systems A) apply average support costs to each unit of product. B) limit cost drivers to units of output. C) allocate costs based on the overall level of activity. D) generally undercost complex products. E) highlight the different levels of activities.

E

5) A primary reason for assigning selling and distribution costs to products 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 selling and distribution costs are also primary costs. D) that all indirect costs must be assigned. E) that different processes, products, and customers require different quantities of selling and distribution activities.

E

8) Which of the following statements is true regarding activity-based costing systems? A) ABC systems accumulate overhead costs by departments. B) ABC costing systems are less complex and, therefore, less costly than traditional systems. C) ABC costing systems can be used in manufacturing firms only. D) ABC costing systems have multiple indirect cost allocation rates for each activity. E) ABC systems provide a greater level of detail to understand how an organization uses its common inputs differently for distinct products.

E

9) Direct cost tracing will accomplish which of the following? A) identify homogeneous costs B) classify more costs as indirect C) focus on the cause-and-effect criterion when choosing allocation bases D) expand the number of indirect cost pools E) classify as many of the costs as direct costs, as is economically feasible

E

5) A top-selling product might actually result in losses for the company.

T

6) Product-sustaining (service-sustaining),and facility-sustaining costs are equivalent terms in ABC systems.

F

9) Output unit-level costs cannot be determined unless you know how many units are in a given batch.

F

18) If the cost of an activity increases with the quantity of items purchased, it is which of the following? A) market-sustaining cost B) output unit-level cost C) batch-level cost D) product-sustaining (service-sustaining) costs E) facility-sustaining cost

B

10) When using activity-based costing in a manufacturing setting, its distinctive feature is the focus on A) activities as the fundamental cost objects. B) minimizing the number of journal entries related to the manufacturing process. C) minimizing manufacturing costs. D) materials handling. E) materials sorting.

A

12) The term used to describe a situation when at least one miscosted product causes other products to be miscosted in the organization is known as A) cross-subsidization. B) product marketing. C) product overcosting. D) product undercosting. E) product sub-optimization.

A

13) A costing system which focuses on individual event or tasks as the cost pool to be allocated is called A) activity-based costing. B) direct costing. C) job costing. D) process costing. E) normal costing.

A

13) Provided a single allocation base is used, jobs are typically overcosted if A) jobs consume proportionately less of the indirect activity but is reported to have higher cost. B) jobs require more employees. C) jobs consume proportionately more of the indirect activity and is reported to have higher cost. D) jobs consume proportionately more of the indirect activity but is reported to have lower cost. E) jobs cannot be overcosted; only products or service can be overcosted.

A

14) A well designed, activity-based cost system helps managers make better decisions because information derived from an ABC analysis A) can be used to improve the efficiency of activities. B) is easy to analyze and interpret. C) takes the choices and judgement challenges away from managers. D) emphasizes how managers can achieve higher sales. E) helps identify trends in the market place.

A

14) Which of the following is relevant concerning cost hierarchies? A) activity levels B) determining whether costs are variable or fixed C) costing on the value chain D) separating inventoriable costs from period costs E) minimum cost required for a particular process

A

30) Which of the following is not a characterization of activity-based costing? A) identification of only variable costs B) a focus on both operating and strategic decisions C) identifying all resources used by activities regardless of how individual costs behave in the short run D) using the cost hierarchy to allocate costs to products E) identification of all costs used by activities

A

4) Activity-based management describes management decisions that use activity-based costing information to A) improve product pricing, cost reduction and design. B) identify potential customers. C) smooth indirect costs. D) eliminate activities that add value but are not cost drivers. E) anticipate changes in the market.

A

6) Which of the following is not a feature of costing system refinement? A) budget costing allocation B) cost allocation bases C) direct cost tracing D) indirect cost pools E) activity cost drivers

A

3) One of the aspects of ABM is eliminating activities that do not add value.

T

10) Which of the following is not a decision within the framework of Activity-based management (ABM)? A) pricing and product mix B) smoothing costs C) reducing costs D) manufacturing design E) changing processes

B

13) In an activity-cost pool, A) a measure of the activity performed serves as the cost allocation base. B) the costs have a cause-and-effect relationship with the cost-allocation base for that activity. C) the cost pools are homogeneous over time. D) costs in a cost pool can always be traced directly to products. E) each pool pertains to a narrow and focused set of costs.

B

13) The benefits of adopting ABC/ABM are higher for companies in competitive markets because A) accurate product cost information is essential to be competitive, regardless of the cost. B) ABM can pinpoint opportunities for cost savings, which increase the company's profit or are passed on to customers through lower prices. C) ABM allows managers to ignore competition when making pricing decisions thus making more accurate decisions. D) the more competitive the market, the more likely the competition is using ABC. E) ABC/ABM should not be used in a competitive market because traditional costing is less expensive allowing for lower prices.

B

14) The use of a single indirect cost rate is more likely to A) undercost high volume simple products. B) undercost low volume complex products. C) undercost lower priced products. D) overcost higher priced products. E) overcost low volume complex products.

B

16) If the cost of an activity increases with each hour of machine time, it is which of the following? A) market-sustaining cost B) output unit-level cost C) batch-level cost D) product-sustaining (service-sustaining) costs E) facility-sustaining cost

B

21) A division of a company manufactures two products, which are in high demand in the defence industry. Product A is stamped out in a machine press, at the rate of 10,000 per hour. Product B is identical to product A, with the exception that it is made from thicker steel, and requires the machine press to be recalibrated. Product A is produced on the day shift and product B is produced on the afternoon shift, allowing set up changes to be done between shifts. In this case, set up hours are related to which of the following? A) units of output B) batches of output C) the number of customers D) machine hours E) labour hours

B

24) Activity-based cost systems create A) one large cost pool. B) homogeneous activity-related cost pools. C) activity-cost pools with a broad focus. D) activity-cost pools containing many direct costs. E) heterogenous activity-related cost pools.

B

8) Outsourcing the accounting function is an example of what facet of activity-based management? A) increase effective coordination among business function activities B) reduce costs of non-value-added activities C) improve selection of process activities to enhance profit D) match the company's use of resources to customer demand E) achieve planned growth

B

8) Which of the following statements is true concerning product costing systems? A) Companies that undercost products always sell products at a loss. B) Companies that overcost run the risk of losing customers. C) Undercosting or overcosting does not relate to product cost cross-subsidization. D) Peanut butter costing is another term for direct costing. E) Companies that overcost will make more profit by passing along higher prices to customers.

B

14) How does direct cost tracing improve cost accuracy? A) It identifies the cause-and-effect relationship between direct costs and indirect costs. B) It identifies the cause-and-effect relationship between activities and non-activities. C) It reclassifies costs or costs pools that vary with the quantity of a single activity cost driver as direct. D) It makes no assumptions about the cause-and-effect relationship between direct costs and activities. E) Because with a greater number of cost pools, it does not have to be concerned with the overhead costs used by different products.

C

19) Which of the following is true concerning selecting a cost-allocation base in an ABC system? A) Cost-allocation bases are not relevant in defining the number of activity pools. B) All costs can be directly identified with a specific activity. C) The allocation base chosen may be constrained by the availability of reliable data. D) Costs may need to be allocated to services first, before the costs of services can be allocated to activities. E) Output unit-level costs cannot be related to a cost-allocation base.

C

10) A product that consumes a relatively low level of resources but is reported to have a relatively high cost, may result in A) increased market share. B) product marketing. C) product undercosting. D) product overcosting. E) product sub-optimization.

D

20) Resources sacrificed on activities undertaken to support product lines are which of the following? A) market-sustaining costs B) output unit-level costs C) batch-level costs D) facility-sustaining costs E) product-sustaining (service-sustaining) costs

E

11) Which of the following statements about activity-based costing is true? A) It does not affect cost control. B) Indirect cost allocation bases are unlikely to be cost drivers. C) It provides less information than traditional cost systems. D) It provides similar results to traditional costing when one activity creates a substantial amount of total cost. E) It provides similar results to traditional costing when different products use resources from different activities in different proportions.

D

12) Which of the following statements does not represent the logic of an ABC system? A) Activity cost allocation bases are the activity cost drivers of costs in the activity cost pools. B) A strong cause-and-effect relationship between overhead costs and the cost allocation base is essential. C) The requirement to measure cost allocation bases of different activities used by different products is essential. D) The overhead used by different products is not important, as it is a fixed cost. E) A greater level of detailed information concerning costs will help organizations be more efficient.

D

15) A four-part cost hierarchy includes A) market-sustaining costs. B) research and development costs. C) manufacturing-level costs. D) output unit-level costs. E) period costs.

D

17) 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. E) they assign direct costs using direct cost tracing.

D

6) An ABC system is one building block of activity-based management (ABM). The second building block is A) that senior management support is crucial. B) understanding the components of indirect cost pools. C) knowing the limitations of allocating indirect costs. D) the ability for managers to understand that the demand for output is central to profitability. E) automating the costing system.

D

9) Activity-based costing information A) should be used when services place similar demands on resources. B) usually results in peanut-butter costing. C) will yield inaccurate cost numbers when products are similar. D) helps management reduce costs along the value chain. E) is best used when overhead costs are minimal.

D

17) If the cost of an activity increases with the number of purchase orders placed, rather than to the quantity of items purchased, it is which of the following? A) market-sustaining cost B) output unit-level cost C) facility-sustaining cost D) product-sustaining (service-sustaining) costs E) batch-level cost

E

18) Which of the following does not characterize an ABC system, as compared to a traditional costing system? A) smaller cost pools B) more cost drivers C) more homogeneous cost pools D) focus on activities E) less expensive to set up and maintain

E

11) Traditional cost systems can be used to 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) can be used to enhance budgeting. E) accurately assign direct costs.

E

23) The costs of hiring building security would be which of the following? A) output unit-level costs B) batch-level costs C) general-level costs D) product-sustaining costs E) facility-sustaining costs

E

4) Improved direct cost tracing is a benefit of activity-based costing.

T

1) A refined costing system results in a better measure of the nonuniformity of a company's resources by jobs, products, or services than by using broad averages to assign costs.

T

1) Management can identify and evaluate new designs to improve performance by evaluating how product and process designs affect activities and costs.

T

2) A cost hierarchy is a categorization of costs into different cost pools on the basis of different classes of cost drivers or different degrees of difficulty in determining cause-and-effect relationships.

T

2) It may be appropriate to use a departmental costing system when costs are incurred on different activities within a department but each activity has the same cost allocation base.

T

3) By defining activities and identifying the costs of performing each activity, ABC systems provide detailed information regarding how an organization utilizes its available resources.

T

3) Many companies use multiple cost pools and multiple cost-allocation bases but do not emphasize individual activities.

T

15) A busy law office has a central administration set up, with the administration work for all lawyers shared by the clerical staff. Clients are billed at the firm's hourly rate by the firm. The arrangement is that whenever there is administration work to be done, it is assigned to whoever is available at the time. One of the lawyers has complained that she hardly ever uses the administration services, and so her year end bonus should be larger than those who require the administration services. Therefore they are considering tracking the administration work done for each lawyer separately so that they know how many hours of administration services is being used by each lawyer. At the end of the year, the bonus of each lawyer would be reduced by a charge reflecting the administration services she/he used in the year. If the firm institutes this new approach, this will mean that A) there will be no more cross subsidization. B) there will still be cross-subsidization between lawyers but not between their clients. C) the new information gathered will enable the firm to be able to reduce its costs. D) there will still be cross-subsidization between clients but not between lawyers. E) they will be using a departmental costing system.

D

19) Engineering costs incurred to change product designs are which of the following? A) market-sustaining costs B) output unit-level costs C) batch-level costs D) product-sustaining (service-sustaining) costs E) facility-sustaining costs

D

26) 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 B) fairly costed C) costed the same as in activity-based costing D) undercosted E) ignored

D

29) A cost hierarchy describes A) a technique for direct cost tracing. B) the process of arranging costs by importance. C) the logic of segregating costs by value-chain classification. D) the logic of separating one indirect cost pool into multiple pools according to activity level. E) a technique of differentiating fixed and variable costs

D

11) Which of the following is a sign that a "smoothing out" costing system exists? A) Managers rely on data originated by the cost system. B) The company wins bids they thought had low margins. C) A batch consumes a relatively high level of input materials and conversion activities and is reported to have a relatively high cost. D) A batch consumes a relatively low level of input materials and conversion activities and is reported to have a relatively low cost. E) The company loses bids they thought had low margins.

E

11) Which of the following is not an activity under an ABC system? A) an event B) a task C) a unit of work D) a process E) indirect cost

E

12) Companies use activity-based management to A) allocate the cost of activities to cost objects. B) forecast customer demand. C) develop systems for direct cost tracing and indirect cost allocation. D) plan and organize the implementation of activity-based costing. E) eliminate non-value added activities.

E

12) Which of the following is not an activity under an ABC system? A) designing products B) engineering C) setting up equipment D) distributing products E) customers

E

15) Which of the following can be described as a fiduciary duty of cost assignment? A) ABC should be implemented to ensure adequate cost control regardless of cost. B) Department managers should select activity cost drivers that increase their chance for success. C) Effective delegation requires management to maintain close control over processes that incur costs. D) Managers must avoid expanding their scope beyond the functions they control. E) Cost assignment should begin with a limited scope of activities that managers believe are critical to the success of the company.

E

9) Uniformly assigning the costs of resources to cost objects when those resources are actually used in a non-uniform way is called A) activity-based costing. B) menu-based costing. C) full product-cost allocation. D) variable product-cost allocation. E) cost smoothing or peanut butter costing.

E

1) Cost smoothing involves assigning costs in a non uniform manner to reflect the different utilization of resources by different products or services.

F

1) One of the benefits of an ABC system is that by highlighting different activities, you can ignore the different levels of activities, such as individual units of output versus batches of output.

F

2) A refined costing system accounts for indirect cost allocation bases as non-financial variables.

F

2) Activity-based costing is not adaptable to merchandising organizations.

F

3) A critical distinction in activity-based costing is the difference between an activity and an event.

F

3) Output unit-level cost is identical to batch-level cost in a system that costs based on activities.

F

4) Activity-based costing relies heavily on broad averages to assign costs to jobs, products, and services.

F

4) Batch-level costs are resources sacrificed on activities undertaken to support specific products or services.

F

4) If a company uses departmental overhead allocation rates, then the amount of manufacturing overhead allocated to the job is equal to the plant-wide overhead rate multiplied by the actual use of the cost allocation base.

F

5) The estimated total manufacturing overhead costs that will be incurred in each department in the coming year are often referred to as activity cost pools.

F

1) Inaccurate product costs can expose a company to the risk of losing market share to competitors.

T

2) Using a broad average to assign costs to products or services may lead to undercosting or overcosting.

T