Ch.5
31) Only indirect costs are included in the cost pools of ABC.
FALSE
10) Extreme Manufacturing Company provides the following ABC costing information: Activities Total Costs Activity-cost drivers Account inquiry $320,000 16,000 hours Account billing $200,000 4,000,000 lines Account verification accounts $173,250 70,000 accounts Correspondence letters $24,000 4,000 letters Total costs $717,250 The above activities are used by Departments A and B as follows: Department A Department B Account inquiry hours 2,700 hours 4,200 hours Account billing lines 900,000 lines 750,000 lines Account verification accounts 8,000 accounts 6,000 accounts Correspondence letters 1,400 letters 1,800 letters How much of the account inquiry cost will be assigned to Department A?
A) $54,000 Explanation: Account inquiry costs - Department A = ($320,000 ÷ 16,000) × 2,700 = $54,000
21) Columbus Company provides the following ABC costing information: Activities Total Costs Activity-cost drivers Labor $384,000 8,000 hours Gas $36,000 6,000 gallons Invoices $180,000 7,500 invoices Total costs $600,000 The above activities used by their three departments are: Lawn Department Bush Department Plowing Department Labor 2,500 hours 1,400 hours 4,100 hours Gas 1,800 gallons 1,000 gallons 3,200 gallons Invoices 1,300 invoices 300 invoices 5,900 invoices How much of invoice cost will be assigned to the Bush Department?
A) $7,200 Explanation: ($180,000 / 7,500 invoices) × 300 invoices = $7,200
14) Extreme Manufacturing Company provides the following ABC costing information: Activities Total Costs Activity-cost drivers Account inquiry $280,000 14,000 hours Account billing $350,000 7,000,000 lines Account verification accounts $93,750 50,000 accounts Correspondence letters $29,000 4,000 letters Total costs $752,750 The above activities are used by Departments A and B as follows: Department A Department B Account inquiry hours 2,100 hours 3,600 hours Account billing lines 500,000 lines 350,000 lines Account verification accounts 7,000 accounts 5,000 accounts Correspondence letters 1,200 letters 1,600 letters How much of the total costs will be assigned to Department A?
A) $88,825 Explanation: Account inquiry costs = ($280,000 ÷ 14,000) × 2,100 = $42,000 Billing costs = ($350,000 ÷ 7,000,000) × 500,000 = $25,000 Account verification costs = ($93,750 ÷ 50,000) × 7,000 = $13,125 Correspondence costs = ($29,000 ÷ 4,000) × 1,200 = $8,700 $88,825
3) The fundamental cost objects of ABC are ________.
A) activities
8) Activity-based costing (ABC) can eliminate cost distortions because ABC systems ________.
A) establish a cause-and-effect relationship with the activities performed
2) Overcosting a particular product may result in:
A) pricing the product too high
5) 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
17) Activity-based costing is most likely to yield benefits for companies ________.
A) with complex product design processes that vary significantly from product to product
3) For a company with diverse products, undercosting overhead of a product will lead to product-cross -subsidization which means that:
C) indirect costs of another product are misallocated
6) Which of the following has accelerated need for refined cost systems?
C) intense competition
27) Velshi Printers has contracts to complete weekly supplements required by forty-six customers. For the year 2018, manufacturing overhead cost estimates total $1,500,000 for an annual production capacity of 10 million pages. For 2018 Velshi 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 costs Activity level Design changes $100,000 400 design changes Setups 1,300,000 3,000 setups Inspections 100,000 10,000 inspections Total manufacturing overhead costs $1,500,000 During 2018, two customers, Money Managers and Hospital Systems, are expected to use the following printing services: Activity Money Managers Hospital Systems Pages 90,000 106,000 Design changes 13 0 Setups 18 8 Inspections 30 38 What is the cost driver rate if manufacturing overhead costs are considered one large cost pool and are assigned based on 10 million pages of production capacity?
B) $0.15 per page Explanation: $0.15 per page = ($1,500,000 / 10,000,000 pages)
26) Milan Company has identified three cost pools 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 $624,000 Direct labor-hours 940,000 Machine maintenance $100,000 Machine-hours 840,000 Facility rent $216,000 Square feet of area 140,000 Total overhead costs $940,000 The accounting records show the Mossman Job consumed the following resources: Cost driver Actual level Direct labor-hours 290 Machine-hours 1,681.68 Square feet of area 50 Under activity-based costing, what is the amount of machine maintenance costs allocated to the Mossman Job? (Do not round any intermediary calculations.)
B) $200.20 Explanation: Machine maintenance costs = 1,681.68 mh × ($100,000 ÷ 840,000) = $200.20
12) Extreme Manufacturing Company provides the following ABC costing information: Activities Total Costs Activity-cost drivers Account inquiry $420,000 14,000 hours Account billing $225,000 5,000,000 lines Account verification accounts $95,000 40,000 accounts Correspondence letters $46,000 8,000 letters Total costs $786,000 The above activities are used by Departments A and B as follows: Department A Department B Account inquiry hours 2,900 hours 4,400 hours Account billing lines 600,000 lines 450,000 lines Account verification accounts 12,000 accounts 10,000 accounts Correspondence letters 1,800 letters 2,200 letters How much of account verification costs will be assigned to Department A?
B) $28,500 Explanation: Account verification costs - Department A = ($95,000/ 40,000) × 12,000 = $28,500
22) Columbus Company provides the following ABC costing information: Activities Total Costs Activity-cost drivers Labor $352,000 8,000 hours Gas $8,000 4,000 gallons Invoices $110,000 5,500 invoices Total costs $470,000 The above activities used by their three departments are: Lawn Department Bush Department Plowing Department Labor 3,200 hours 1,200 hours 3,600 hours Gas 1,900 gallons 900 gallons 1,200 gallons Invoices 1,500 invoices 300 invoices 3,700 invoices How much of the gas cost will be assigned to the Lawn Department?
B) $3,800 Explanation: Gas cost = ($8,000 ÷ 4,000 gallons) × 1,900 gallons = $3,800
23) Columbus Company provides the following ABC costing information: Activities Total Costs Activity-cost drivers Labor $490,000 10,000 hours Gas $18,000 3,000 gallons Invoices $56,000 3,500 invoices Total costs $564,000 The above activities used by their three departments are: Lawn Department Bush Department Plowing Department Labor 2,800 hours 1,400 hours 5,800 hours Gas 1,800 gallons 900 gallons 300 gallons Invoices 1,600 invoices 300 invoices 1,600 invoices How much of the total cost will be assigned to the Plowing Department?
B) $311,600 Explanation: ($490,000 / 10,000) × 5,800 = $284,200 ($18,000 / 3,000) × 300 = $1,800 ($56,000 / 3,500) × 1,600 = $25,600 $311,600
19) Columbus Company provides the following ABC costing information: Activities Total Costs Activity-cost drivers Labor $392,000 8,000 hours Gas $30,000 5,000 gallons Invoices $180,000 7,500 invoices Total costs $602,000 The above activities used by their three departments are: Lawn Department Bush Department Plowing Department Labor 2,600 hours 1,300 hours 4,100 hours Gas 1,800 gallons 1,000 gallons 2,200 gallons Invoices 1,600 invoices 100 invoices 5,800 invoices How much of the labor cost will be assigned to the Bush Department?
B) $63,700 Explanation: Labor cost assigned = ($392,000 ÷ 8,000) × 1,300 = $63,700
1) Which of the following statements is true of a peanut-butter costing system?
B) A peanut-butter costing system broadly averages or spreads the cost of resources uniformly to cost objects.
4) Which of the following statements is true of activity-based costing?
B) Activity based costing is more suited to companies with high product diversity than companies with single product line.
8) 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?
B) Batch-level costs
3) Which of the following is a reason that has accelerated the demand for refinements to the costing system?
B) The use of product and process technology has led to an increase in indirect costs and a decrease in direct costs.
1) ABC systems create ________.
B) homogeneous activity-related cost pools
25) Milan Manufacturing Company has identified three cost pools 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 $539,000 Direct labor-hours 920,000 Machine maintenance $120,000 Machine-hours 1,000,000 Facility rent $215,000 Square feet of area 160,000 Total overhead costs $874,000 The accounting records show the Mossman Job consumed the following resources: Cost driver Actual level Direct labor-hours 300 Machine-hours 1,675 Square feet of area 70 If direct labor-hours are considered the only overhead cost driver, what is the single cost driver rate for Milan?
C) $0.95 per direct labor-hour Explanation: Cost driver rate = $874,000 ÷ 920,000 = 0.95 per dlh
13) Extreme Manufacturing Company provides the following ABC costing information: Activities Total Costs Activity-cost drivers Account inquiry $390,000 13,000 hours Account billing $275,000 5,000,000 lines Account verification accounts $130,500 60,000 accounts Correspondence letters $22,000 4,000 letters Total costs $817,500 The above activities are used by Departments A and B as follows: Department A Department B Account inquiry hours 2,500 hours 4,000 hours Account billing lines 800,000 lines 650,000 lines Account verification accounts 9,000 accounts 7,000 accounts Correspondence letters 2,000 letters 2,400 letters How much of correspondence costs will be assigned to Department A?
C) $11,000 Explanation: Correspondence costs - Department A = ($22,000 ÷ 4,000) × 2,000 = $11,000
24) Columbus Company provides the following ABC costing information: Activities Total Costs Activity-cost drivers Labor $384,000 8,000 hours Gas $40,000 4,000 gallons Invoices $40,000 2,500 invoices Total costs $464,000 The above activities used by their three departments are: Lawn Department Bush Department Plowing Department Labor 2,800 hours 1,500 hours 3,700 hours Gas 1,800 gallons 900 gallons 1,300 gallons Invoices 1,400 invoices 300 invoices 800 invoices How much of the total costs will be assigned to the Lawn Department?
C) $174,800
15) Extreme Manufacturing Company provides the following ABC costing information: Activities Total Costs Activity-cost drivers Account inquiry $750,000 15,000 hours Account billing $250,000 5,000,000 lines Account verification accounts $173,250 70,000 accounts Correspondence letters $42,000 7,000 letters Total costs $1,215,250 The above activities are used by Departments A and B as follows: Department A Department B Account inquiry hours 2,000 hours 3,500 hours Account billing lines 900,000 lines 750,000 lines Account verification accounts 9,000 accounts 7,000 accounts Correspondence letters 1,200 letters 1,600 letters How much of the total costs will be assigned to Department B?
C) $239,425 Explanation: Account inquiry costs = ($750,000 ÷ 15,000) × 3,500 = $175,000 Billing costs = ($250,000 ÷ 5,000,000) × 750,000 = $37,500 Account verification costs = ($173,250 ÷ 70,000) × 7,000 = $17,325 Correspondence costs = ($42,000 ÷ 7,000) × 1,600 = $9,600 $239,425
11) Extreme Manufacturing Company provides the following ABC costing information: Activities Total Costs Activity-cost drivers Account inquiry $320,000 16,000 hours Account billing $220,000 4,000,000 lines Account verification accounts $182,000 80,000 accounts Correspondence letters $25,000 4,000 letters Total costs $747,000 The above activities are used by Departments A and B as follows: Department A Department B Account inquiry hours 2,200 hours 3,700 hours Account billing lines 600,000 lines 450,000 lines Account verification accounts 5,000 accounts 3,000 accounts Correspondence letters 1,000 letters 1,400 letters How much of the account billing cost will be assigned to Department B?
C) $24,750 Explanation: Billing costs - Department B = ($220,000 ÷ 4,000,000) × 450,000 = $24,750
28) Velshi Printers has contracts to complete weekly supplements required by forty-six customers. For the year 2018, manufacturing overhead cost estimates total $600,000 for an annual production capacity of 12 million pages. For 2018 Velshi 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 costs Activity level Design changes $120,000 500 design changes Setups 380,000 4,000 setups Inspections 100,000 9,000 inspections Total manufacturing overhead costs $600,000 During 2018, two customers, Money Managers and Hospital Systems, are expected to use the following printing services: Activity Money Managers Hospital Systems Pages 70,000 86,000 Design changes 12 0 Setups 17 7 Inspections 26 34 Using pages printed as the only overhead cost driver, what is the manufacturing overhead cost estimate for Money Managers during 2018?
C) $3,500 Explanation: $3,500 = [70,000 pages × ($600,000 / 12,000,000)]
18) Which of the following statements is true of ABC systems?
C) ABC systems provide valuable information to managers beyond accurate product costs.
4) 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?
C) Aqua will overcost Alpha's indirect costs as it is using a single cost pool to allocate indirect costs.
2) Which of the following is true of refinement of a costing system?
C) It reduces the use of broad averages for assigning the cost of resources to cost objects.
6) Extracts from cost information of Hebar Corp.: Simple L3 Pack Complex L7 Pack Total Setup cost allocated using direct labor-hours $19,250 $5,750 $25,000 Setup cost allocated using setup-hours $13,400 $11,600 $25,000 Assuming that setup-hours is considered a more effective cost drive for allocating setup costs than direct labor-hours. Which of the following statements is true of Hebar's setup costs under traditional costing?
C) L3 pack is overcosted by $5,850 Explanation: Setup cost allocated using direct labor-hours - Setup cost allocated using setup-hours = $19,250 − $13,400 = $5,850
7) ________ 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.
C) Product-sustaining costs
7) Which of the following is true with activity based cost accounting?
C) The focus is on activities that account for a sizable fraction of indirect costs .
2) For a company which produce its products in batches, the CEO's salary is a(n) ________ cost.
C) facility-sustaining
1) Refining a cost system involves which of the following?
C) identifying the activities involved in a process and understanding how those activities consume resources
6) Facility-sustaining costs are the costs of activities ________.
C) that managers cannot trace to individual products or services but that support the organization as a whole
5) Product-cost cross-subsidization means that:
C) when a company undercosts one of its products, it will overcost at least one of its other products
20) Columbus Company provides the following ABC costing information: Activities Total Costs Activity-cost drivers Labor $336,000 8,000 hours Gas $84,000 7,000 gallons Invoices $180,000 7,500 invoices Total costs $600,000 The above activities used by their three departments are: Lawn Department Bush Department Plowing Department Labor 3,100 hours 1,500 hours 3,400 hours Gas 1,900 gallons 900 gallons 4,200 gallons Invoices 1,300 invoices 400 invoices 5,800 invoices If labor hours are used to allocate the non-labor, overhead costs, what is the overhead allocation rate?
D) $33.00 per hour Explanation: Overhead allocation rate = ($84,000 + $180,000) ÷ 8,000 = $33.00
16) Dalrymple Company produces a special spray nozzle. The budgeted indirect total cost of inserting the spray nozzle is $68,750. The budgeted number of nozzles to be inserted is 11,000. What is the budgeted indirect cost allocation rate for this activity?
D) $6.25 Explanation: $68,750 / 11,000 = $6.25
4) ________ costs support the organization as a whole.
D) Facility-sustaining
5) 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?
D) Johnson has failed to use the correct cost driver as the cost-allocation base for setup costs.
1) ________ is an example of an output unit-level cost in the cost hierarchy.
D) Machine depreciation
4) Demand for refinements to the costing system has accelerated due to ________.
D) competition in product markets
3) Top management compensation cost is an example of ________ in the cost hierarchy.
D) facility-sustaining costs
5) It is usually difficult to find good cost driver (cause-and-effect relationship) between ________ and a cost allocation base.
D) facility-sustaining costs
2) Activity based costing system differs from traditional costing systems in the treatment of ________.
D) indirect costs
9) 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:
D) time-driven activity based costing
10) Identification of a cost-allocation base is not a critical element when using a strategy that will refine a costing system.
FALSE
10) If companies increase market share in a given product line because their reported costs are less than their actual costs, they will become more profitable in the long run.
FALSE
32) When allocating the total indirect cost pool to cost pools such as setup costs including depreciation and maintenance costs of setup equipment, wages of setup employees, and allocation of supervisors is called a second-stage allocation.
FALSE
33) In activity based costing systems, limiting cost-allocation bases to only units of output strengthens the cause-and-effect relationship between the cost-allocation base and the costs in a cost pool.
FALSE
7) Modern manufacturing practices have helped reduce overhead costs relative to direct costs as the reliance on support resources such as scheduling, design, and engineering has diminished.
FALSE
7) Uniformly assigning the costs of resources to cost objects when those resources are actually used in a nonuniform way is called activity based costing.
FALSE
8) Indirect labor and distribution costs would most likely be in the same activity-cost pool.
FALSE
11) As product diversity and indirect costs increase, it is usually best to switch away from a broad averaging system to an activity-based cost system.
TRUE
12) The risk of peanut-butter costing rises when broad averages are used across multiple products without managers considering the true amounts of resources consumed in the making of each product.
TRUE
34) Activity-based costing attempts to identify the most relevant cause-and-effect relationship for each activity pool without restricting the cost driver to only units of output or variables related to units of output.
TRUE
6) Increased used of automation, computer integrated manufacturing, and utilization of robots have lead to an increase in indirect costs relative to direct costs.
TRUE
8) Product-cost cross-subsidization is very common when costs are uniformly spread across various products.
TRUE
9) Managers should look for evidence of cause-and-effect when choosing a cost driver with the driver being the cause and the effect being the cost incurred.
TRUE