Chapter 5: Activity-Based Costing and Activity-Based Management

Which of the following statements is true of a peanut-butter costing system? A) A peanut-butter costing system typically has more-homogeneous indirect cost pools. B) A peanut-butter costing system broadly averages or spreads the cost of resources uniformly to cost objects. C) A peanut-butter costing system assumes that all costs are variable. D) In a peanut-butter costing system, costs of activities are used to assign costs to other cost objects such as products or services based on the activities the products or services consume.

A peanut-butter costing system broadly averages or spreads the cost of resources uniformly to cost objects.

Which of the following reasons explain why ABC concepts may be of great value to service companies? A) It allows for more accurate cost accounting for inventory B) It promotes more accurate cost of goods sold reporting C) It helps make financial reporting more accurate D) A significant portion of the cost structure of a service firm is composed of indirect costs

A significant portion of the cost structure of a service firm is composed of indirect costs

Which of the following statements about ABC is not true? A) A byproduct of ABC implementation can improve the efficiency of operations B) ABC should be implemented solely by the accountants as they are the guardians of the accounting information system C) ABC may empower employees to also implement cost saving projects D) Although implementation of ABC can be a refinement of a cost system, it has its limitations

ABC should be implemented solely by the accountants as they are the guardians of the accounting information system

Which of the following statements is true of ABC systems? A) ABC system will always result in higher product costs. B) ABC system employs multiple activity-cost drivers. C) ABC system is least suited for service companies. D) ABC system is simpler compared to traditional systems.

ABC system employs multiple activity-cost drivers.

Which of the following statements is true of ABC systems? A) ABC systems provide less insight than traditional systems into the management of the indirect costs. B) ABC systems are used by managers for strategic decisions rather than for inventory valuation in merchandising companies. C) Service companies find great value from ABC because a vast majority of their cost structure is composed of direct costs. D) ABC systems is valuable for pricing decisions but not for understanding, managing, and reducing costs in government institutions.

ABC systems are used by managers for strategic decisions rather than for inventory valuation in merchandising companies.

Which of the following statements is true of costing systems? A) Single-indirect cost pool systems always result in overcosting of products. B) Single-indirect cost pool systems classify some direct costs as indirect costs. C) ABC systems always result in overcosting of products. D) ABC systems classify some indirect costs as direct costs helping to improve processes

ABC systems classify some indirect costs as direct costs helping to improve processes

Which of the following statements is true of ABC systems? A) ABC systems are time-driven cost systems. B) ABC systems classify some direct costs as indirect costs and some indirect costs as direct costs. C) ABC systems provide valuable information to managers beyond accurate product costs. D) ABC systems assume all costs are variable costs

ABC systems provide valuable information to managers beyond accurate product costs.

Which of the following statements is true of activity-based costing? A) In activity-based costing, direct labor-hours is always the best allocation base to allocate all non-manufacturing indirect costs. B) Activity based costing is more suited to companies with high product diversity than companies with single product line. C) Activity based costing broadly averages or spreads the cost of resources uniformly to cost objects such as products or services. D) The main advantage of activity-based costing over peanut-butter costing is the accurate distribution of all direct costs to the products.

Activity based costing is more suited to companies with high product diversity than companies with single product line.

Which of the following is a sign that an ABC system will provide benefits? A) There are relatively few indirect cost pools associated with the product and the indirect costs are a small percentage of total product cost B) All the products produced are similar and sell in equal proportions (sales mix) C) Operations staff has no substantial disagreements with the reported costs of manufacturing and marketing products and services. D) All or most indirect costs are treated as output-unit level costs.

All or most indirect costs are treated as output-unit level costs.

Aqua Company produces two products-Alpha and Beta. Alpha has a high market share and is produced in bulk. Production of Beta is based on customer orders and is custom designed. Also, 55% of Beta's cost is shared between design and setup costs, while Alpha's major portions of costs are direct costs. Alpha is using a single cost pool to allocate indirect costs. Which of the following statements is true of Aqua? A) Aqua will overcost Beta's direct costs as it is using a single cost pool to allocate indirect costs. B) Aqua will undercost Alpha's indirect costs because alpha has high direct costs. C) Aqua will overcost Alpha's indirect costs as it is using a single cost pool to allocate indirect costs. D) Aqua will overcost Beta's indirect costs because beta has high indirect costs.

Aqua will overcost Alpha's indirect costs as it is using a single cost pool to allocate indirect costs.

________ is considered while choosing a cost allocation base for activity costs in ABC costing. A) Marketing strategy and material price level B) Availability of reliable data and measures C) Product price level D) Market share of a product

Availability of reliable data and measures

Advanced Technology Products produces 10 different fastners. Each time a type of fastener is produced, the equipment must be stopped and items such as filters and drill bits must be changed, oil must be added to the equipment and some parts need lubrication. This work must be done before the products can be produced, the costs related to this activity would be part of which cost pool? A) Output-level costs B) Batch-level costs C) Product-sustaining costs D) Service-sustaining costs

Batch-level costs

Put the following ABC implementation steps in order ________. A Compute the allocation rates. B Compute the total cost of the products. C Identify the products that are the cost objects. D Select the cost allocation bases. A) DACB B) DBCA C) BADC D) CDAB

CDAB

________ costs support the organization as a whole. A) Unit-level B) Batch-level C) Product-sustaining D) Facility-sustaining

Facility-sustaining

Which of the following is true of refinement of a costing system? A) While refining a costing system, companies should identify as many indirect costs as is economically feasible. B) A homogeneous cost pool will use multiple cost drivers to allocate costs. C) It reduces the use of broad averages for assigning the cost of resources to cost objects. D) It is likely to yield the most decision-making benefits when direct costs are a high percentage of total costs.

It reduces the use of broad averages for assigning the cost of resources to cost objects.

Johnson Superior Products Inc. produces hospital equipment and the setup requirements vary from product to product. Johnson produces its products based on customer orders and uses ABC costing. In one of its indirect cost pools, setup costs and distribution costs are pooled together. Costs in this pool are allocated using number of customer orders for the easiness of costing operations. Based on the information provided, which of the following arguments is valid? A) Johnson has clearly failed to identify as many direct costs as is economically feasible. B) All costs in a homogeneous cost pool have the same or a similar cause-and-effect relationship with the single cost driver that is used as the cost-allocation base for Johnson. C) Johnson has unnecessarily wasted resources by classifying setup and distribution costs as they could have been considered as direct costs. D) Johnson has failed to use the correct cost driver as the cost-allocation base for setup costs.

Johnson has failed to use the correct cost driver as the cost-allocation base for setup costs.

________ is an example of an output unit-level cost in the cost hierarchy. A) Factory rent expense B) Building security costs C) Top management compensation costs D) Machine depreciation

Machine depreciation

Which of the following is a sign that an ABC system may be useful for an organization? A) Significant amounts of indirect costs are allocated using multiple cost pools. B) Products make similar demands on resources because of similarities in volume, process steps, batch size, or complexity. C) Many indirect costs are described as batch-level costs, product-sustaining costs, or facility-sustaining costs. D) Operations staff disagrees with accountants about the costs of manufacturing and marketing products and services.

Operations staff disagrees with accountants about the costs of manufacturing and marketing products and services.

________ are the costs of activities undertaken to support individual products or services regardless of the number of units or batches in which the units are produced. A) Unit-level costs B) Batch-level costs C) Product-sustaining costs D) Facility-sustaining costs

Product-sustaining costs

Which of the following is true with activity based cost accounting? A) Activity-based costing ignores the allocation of marketing and distribution costs. B) Activity-based costing is more likely to result in major differences from traditional costing systems if the firm manufactures only one product rather than multiple products. C) The focus is on activities that account for a sizable fraction of indirect costs. D) Chances of product-cost cross-subsidization are higher in activity-based costing compared to traditional costing systems.

The focus is on activities that account for a sizable fraction of indirect costs.

Which of the following is a reason that has accelerated the demand for refinements to the costing system? A) The declining demand for customized products has led managers to decrease the variety of products and services their companies offer. B) The use of product and process technology has led to an increase in indirect costs and a decrease in direct costs. C) The increased of automated processes has led to the increase in direct manufacturing cost leading to a decrease in break even point. D) The increasing competition in product markets has led to an increase in contribution margin resulting in a decrease of break even point.

The use of product and process technology has led to an increase in indirect costs and a decrease in direct costs.

Using department indirect-cost rates to allocate costs will result in results similar to ABC if: A) a single activity accounts for a sizable portion of the costs of the department B) several activities cause a sizable portion of the costs of the department C) a single activity accounts for a small portion of the costs of the department D) several activities cause a small portion of the costs of the department

a single activity accounts for a sizable portion of the costs of the department

The fundamental cost objects of ABC are ________. A) activities B) cost drivers C) products D) services

activities

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

can be used to eliminate nonvalue-added activities

Demand for refinements to the costing system has accelerated due to ________. A) increase in direct costs B) decrease in product diversity C) decrease in indirect costs D) competition in product markets

competition in product markets

For a manufacturing firm that produces multiple families of products requiring various combinations of different types of parts, what would be the best allocation base for human resource adminstration costs? A) direct labor hours B) electricity costs C) number of parts purchased D) machine hours

direct labor hours

Activity-based costing (ABC) can eliminate cost distortions because ABC systems ________. A) establish a cause-and-effect relationship with the activities performed B) use single cost pool for all overhead costs, thereby enabling simplicity C) use a broad average to allocate all overhead costs D) never consider interactions between different departments in assigning support costs

establish a cause-and-effect relationship with the activities performed

For a company which produce its products in batches, the CEO's salary is a(n) ________ cost. A) batch-level B) output unit-level C) facility-sustaining D) product-sustaining

facility-sustaining

It is usually difficult to find good cost driver (cause-and-effect relationship) between ________ and a cost allocation base. A) unit-level costs B) batch-level costs C) product-sustaining costs D) facility-sustaining costs

facility-sustaining costs

Top management compensation cost is an example of ________ in the cost hierarchy. A) unit-level costs B) batch-level costs C) product-sustaining costs D) facility-sustaining costs

facility-sustaining costs

ABC 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

homogeneous activity-related cost pools

ABC systems help managers to ________. A) value ending inventory more accurately B) identify new designs to reduce costs C) evaluate direct material costs more efficiently D) improve the inventory turnaround time

identify new designs to reduce costs

Refining a cost system involves which of the following? A) classifying as many costs as indirect costs as is feasible B) creating as many cost pools as possible to capture all costs C) identifying the activities involved in a process and understanding how those activities consume resources D) Seeking an easier and more cost effective way to calculate average costs

identifying the activities involved in a process and understanding how those activities consume resources

Service companies, in particular, find great value from ABC because a vast majority of their cost structure is composed of ________ costs. A) prime B) factory C) indirect D) committed

indirect

Activity based costing system differs from traditional costing systems in the treatment of ________. A) direct labor costs B) direct material costs C) prime costs D) indirect costs

indirect costs

Chess Woods Limited produces two products: wooden chess pieces and wooden inlaid chess boards. Under their traditional cost system using one cost driver (direct manufacturing labor hours), the cost of a set of wooden chess pieces is $325.00. An analysis of the activities and their costs revealed that three cost drivers would be used under a new ABC system. These cost drivers would be equipment usage, storage area for the material, and type of woods used. The new cost of a set of chess pieces was determined to be $298.00 per set. The reduction in cost per unit of wooden chess pieces under ABC system is due to difference in allocation of ________. A) labor costs B) prime costs C) indirect costs D) material costs Given this change in the cost structure ________. A) The costing results for chess pieces under the new system depend on the adequacy and quality of the estimated cost drivers and costs used by the system. B) Chess pieces have benefited from the new system. C) Chess pieces are definitely more accurately costed. D) Chess will now have a lower sales price. The goal of a properly constructed ABC system is to ________. A) have the most accurate cost system B) identify more indirect costs C) develop the best cost system that meets the cost/benefit test D) have separate allocation rates for each department

indirect costs The costing results for chess pieces under the new system depend on the adequacy and quality of the estimated cost drivers and costs used by the system develop the best cost system that meets the cost/benefit test

For a company with diverse products, undercosting overhead of a product will lead to product-cross -subsidization which means that: A) direct labor costs of the product are misallocated B) direct material costs of the product are misallocated C) indirect costs of another product are misallocated D) direct costs of another product are misallocated

indirect costs of another product are misallocated

Which of the following has accelerated need for refined cost systems? A) global monopolies B) rising prices C) intense competition D) a shift toward increased direct costs

intense competition

Recognizing ABC information is not always perfect because ________. A) it mostly uses far too many indirect cost pools than what is actually required B) it balances the need for better information against the costs of creating a complex system C) it lacks the simplicity that traditional systems used to have to allocate overhead costs D) it never measures how the resources of an organization are used

it balances the need for better information against the costs of creating a complex system

It only makes sense to implement an ABC system when ________. A) a single product is produced in bulk B) its benefits exceed its implementation costs C) it traces more costs as direct costs D) production process is labor-intensive

its benefits exceed its implementation costs

Cannady produces six products. Under their traditional cost system using one cost driver, SR6 costs $168.00 per unit. 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 SR6 was determined to be $178.00 per unit. 9) The total amount of indirect costs assigned to product SR6 using the traditional method is ________ the total amount assigned using ABC. A) more than B) less than C) equal to D) more accurate than

less than

For a business that offers customers a store where product can be purchased and picked up or a delivery service that can ship the product directly to the customer, which of the following would most likely be the best cost allocation base for distribution costs? A) number of customer service phone calls and emails per period B) number of pounds of product shipped or delivered C) Electricity costs for the period D) Number of products sold

number of pounds of product shipped or delivered

Which of the following ordering of the levels best depicts the cost hierarchy within an ABC system? A) batch-level, output unit-level, product-sustaining level, and facility-sustaining level B) batch-level, output unit-level, facility-sustaining levels, product-sustaining levels C) output unit-level, batch-level, product-sustaining level, and facility-sustaining level D) facility-sustaining level, output unit-level, batch-level, product-sustaining level

output unit-level, batch-level, product-sustaining level, and facility-sustaining level

Activity-based costing information can be used for ________. A) product-mix decisions B) pricing decisions C) advertisement decisions D) inventory valuation

pricing decisions

Overcosting a particular product may result in: A) pricing the product too high B) pricing the product too low C) operating efficiencies D) understating total product costs

pricing the product too high

Lavender Company is a logistics company and has recently implemented ABC system. Using activity-based information, it decides to reduce the bulkiness of the packages delivered, thereby reducing costs. This suggests that ABC system helps managers in ________ decisions. A) pricing B) product-mix C) process-improvement D) product-design

process-improvement

It is important that the product costs reflect as much of the diversity and complexity of the manufacturing process so that ________. A) total costs reflect market price B) value-added costs can be eliminated C) there is high likelihood of cross-subsidizing of product costs D) product-pricing errors are minimal

product-pricing errors are minimal

Which of the following cost and cost allocation base have a strong cause and effect relationship? A) administration costs and cubic feet B) setup costs and square feet C) quality control costs and the number of inspections D) machine maintenance and setup hours

quality control costs and the number of inspections

The following conditions with departmental indirect-cost rates will result in allocation of costs similar to ABC costing except: A) a single activity accounts for a sizable portion of the costs of the department B) Significant costs are incurred on different activities within a department C) several activities cause a sizable portion of the costs of the department D) significant costs are incurred for different activities with different cost -allocation bases within a department

several activities cause a sizable portion of the costs of the department

Facility-sustaining costs are the costs of activities ________. A) undertaken to support individual products or services regardless of the number of units or batches in which the units are produced B) related to a group of units of a product or services, rather than each individual unit of product or service C) that managers cannot trace to individual products or services but that support the organization as a whole D) performed on each individual unit of a product or service such as the cost of energy, machine depreciation, and repair

that managers cannot trace to individual products or services but that support the organization as a whole

Given this change in the cost ________. A) SR6 will now command a higher sales price B) SR6 has benefited from the new system C) SR6 is definitely more accurately costed D) the costing results for SR6 under the new system depend on the adequacy and quality of the estimated cost drivers and costs used by the system

the costing results for SR6 under the new system depend on the adequacy and quality of the estimated cost drivers and costs used by the system

ABC and traditional systems are quite similar in ________. A) the treatment of direct costs B) the allocation of overheads C) evaluating performance D) the identification of cost pools

the treatment of direct costs

Using activity-cost rates rather than department indirect-cost rates to allocate costs results in different product costs when ________. A) a single activity accounts for a sizable portion of department costs B) there are several homogeneous cost pools C) different activities have the same cost-allocation base D) different products use different resources in the same proportion

there are several homogeneous cost pools

A single indirect-cost rate distorts product costs because ________. A) there is an assumption that all support activities affect all products in a uniform way B) it recognizes specific activities that are required to produce a product C) competitive pricing is ignored D) it assumes all costs are product costs

there is an assumption that all support activities affect all products in a uniform way

When "available time" (i.e., setup-hours) is used to calculate a cost of a resource and to allocate costs to cost objects , the system is called: A) job costing B) process costing C) hybrid costing D) time-driven activity based costing

time-driven activity based costing

One reason for assigning selling and distribution costs to products for analytical purposes is ________. A) to justify a varied product-mix B) that these costs should be included in the cost of goods sold in the income statement C) to ensure that all costs are considered D) that all direct costs must be assigned

to ensure that all costs are considered

Management accountants use the cost hierarchy to first calculate the ________. A) labor costs of each product and then they compute material costs B) overhead costs of each product and then they compute prime costs C) factory costs of each product and then they compute labor costs D) total costs of each product and then they compute per-unit costs

total costs of each product and then they compute per-unit costs

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) undercosted D) ignored

undercosted

Product-cost cross-subsidization means that: A) when one product is overcosted, it results in more than one other product being overcosted B) when a company undercosts more than one of its products, it will overcost more than one of its other products C) when a company undercosts one of its products, it will overcost at least one of its other products D) when one product is overcosted it results in all other products being overcosted

when a company undercosts one of its products, it will overcost at least one of its other products

Activity-based costing is most likely to yield benefits for companies ________. A) with complex product design processes that vary significantly from product to product B) with operations that remain fairly consistent across product lines C) in a monopolistic market D) having nominal percentage of indirect costs

with complex product design processes that vary significantly from product to product