Chapter 9: Activity-Based Costing

True or false: When using activity-based costing, the predetermined overhead rate applies to any type of indirect cost.

true

The process where a company attempts to recover costs by increasing price for a product with decreasing demand describes the ______ _______.

death spiral

Automation has caused direct labor costs in companies to (decrease/increase) ______.

decrease

When a company uses one allocation base, it gives the appearance that when a company drops a segment, all overhead costs will (increase/decrease) ______.

decrease

To assign overhead costs to a product, multiply the cost driver rates by the number of units of the cost ______.

driver in each product

True or false: The cost estimate to make a product is the same regardless of the cost allocation method used.

false

Which of the following is a facility-related cost? Setup Compliance Machine repair Plant depreciation

Plant depreciation

The best ______ ______ is one that is causally related to the cost being allocated.

cost driver

The cause of an activity cost is called a(n) ______ ______.

cost driver

Time-driven activity-based costing ______ the need to conduct surveys or interviews of multiple managers and employees.

avoids

True or false: Time-based activity-based costing only uses time estimates to allocate costs.

false

Given budgeted overhead cost of $250,000 and budgeted machine-hours of 125,000, the overhead rate is $______ per machine-hour.

2

Costs are assigned to individual cost objects (products or services) using appropriate cost allocation ______ or ______.

bases, drivers

When choosing to use more complex allocation methods, the incremental costs of additional information must be justified by an increase in ______ from the improved decisions.

benefits

The product costs produced by an ABC system ______.

may be worse than a traditional system in some cases

The cost driver rate per minute for an activity is calculated by dividing the cost of the activity by ______ ______.

minutes available

Testing for environmental compliance and design and specification are examples of ______ related costs.

product

Assuming that 4 employees work 48 weeks each year, and 35 hours out of a 40 hour week, the minutes of capacity available equals ______.

403,200 Reason: 48 weeks x 35 hours/wk x 60 min/hr x 4 employees

If budgeted overhead cost is $250,000 and budgeted direct labor cost is $400,000 then the overhead rate equals:

62.5% of direct labor cost

Which of the following statements are true? (all that apply) ABC may be applied to parts of an organization but not everywhere. ABC means different things to different observers. Companies are not likely to announce they have discontinued the use of ABC. It is generally easy to identify companies that use ABC.

ABC may be applied to parts of an organization but not everywhere. ABC means different things to different observers. Companies are not likely to announce they have discontinued the use of ABC.

Which of the following are problems with identifying users of ABC? (all that apply) ABC means different things to different organizations Organizations will announce the discontinuance of ABC Organizations may not use ABC throughout their organization

ABC means different things to different organizations Organizations may not use ABC throughout their organization

Which of the following statements are true? (all that apply) Assigning overhead based on direct labor produces incentive to increase the labor content of products. The magnitude of the overhead rate based on direct labor is of more concern when resources are used proportionately. Allocating overhead on the basis of labor signals labor is more expensive than it really is. Small errors in assigning labor to products are magnified when overhead rates are several hundred percent or more of labor costs.

Allocating overhead on the basis of labor signals labor is more expensive than it really is. Small errors in assigning labor to products are magnified when overhead rates are several hundred percent or more of labor costs.

Any discrete task that an organization undertakes to make or deliver a product or service is called a(n) ______.

activity

The final step in the activity-based costing system is to assign the ______ ______ to products.

activity cost

The method that first assigns costs to activities and then assigns them to products based on the product's consumption of activities is ______-______ ______.

activity-based costing

ABC systems ______. (all that apply) allocate cost using volume and batch bases are inexpensive to maintain must be maintained and updated

allocate cost using volume and batch bases must be maintained and updated

With TDABC, the managers ______ asked to estimate what proportion of the time the employees spend on each activity.

are not

Activity-based costing ______ be applied to administrative activities.

can

When low-volume products require more machine setups, overhead should be allocated based on______.

complexity

If a company is concerned about the cost of maintaining an ABC system, they should ______.

consider time-driven activity-based costing

In an ABC two-stage cost system, each activity has an associated ______ ______.

cost pool

The process where a company attempts to recover costs by increasing price for a product with decreasing demand describes the ______ ______.

death spiral

Identifying the activities is the ______ step in developing an ABC system.

first

With TDABC, the manager is asked to estimate ______.

how much time each activity takes for a single transaction

The first step in activity-based costing is ______.

identify the activities

The second step in activity-based costing is ______.

identify the cost drivers

TDABC ______. (all that apply) is based on time estimates for different activities is less expensive to maintain than traditional ABC cannot be extended to accommodate cost drivers other than time

is based on time estimates for different activities is less expensive to maintain than traditional ABC

DABC ______. (all that apply) is less expensive to maintain than traditional ABC is based on time estimates for different activities cannot be extended to accommodate cost drivers other than time

is less expensive to maintain than traditional ABC is based on time estimates for different activities

As companies have become more automated, including those in the service sector such as banks, direct labor has become (more/less) ______ appropriate as a basis for allocating overhead.

less

The basic approach in product costing is to allocate costs in the cost pools to individual cost ______.

objects

When overhead is applied based on the volume of output, high-volume products are generally ______ (over/under)-costed and low-volume products are ______ (over/under)-costed.

over, under

Activity-based costing can be applied to administrative activities to compute the cost of ______.

performing an administrative service

The term ______ refers to an entire factory, store, or hospital.

plant

When one cost pool is used to allocate overhead costs to products for all departments the ______ allocation method is in use.

plantwide

Which of the following is NOT a typical allocation base companies use when calculating a single plantwide rate?

purchase orders

Identifying the cost drivers is the ______ step in developing an ABC system.

second

Examples of batch related activities include ______. (all that apply) setup costs machine repair regulatory compliance costs material handling

setup costs material handling

Plantwide allocation is a ______-______ approach to allocating overhead cost.

single stage

Plantwide allocation is a ______-_______ approach to allocating overhead cost.

single-stage

Activity-based costing assigns costs to products by multiplying the cost driver rate by the ______ of cost driver units consumed by the product.

size

The choice of whether to use a plantwide rate or departmental rates depends on ______. (all that apply) the products and the production process the costs and benefits of information provided by each system types of allocation drivers to be used

the products and the production process the costs and benefits of information provided by each system

A TDABC can be extended to allow for differences among orders by using ______ ______.

time equations

Time-driven activity-based costing requires the ______

time it takes to complete the various activities of the department cost of the resources supplied to a department

A method that addresses the costs of maintaining an ABC system is called ______-______ activity-based costing.

time-driven

TDABC ______.

uses time equations to allow for differences among orders

When a company uses only one rate to allocate overhead costs, the accounting system treats all overhead as if the costs were ______.

variable

Activity-based costing system recognizes that overhead is not necessarily related to the ______ of output.

volume

Which of the following statements are true? (all that apply) Allocating overhead on the basis of labor signals labor is less expensive than it really is. Large errors in assigning labor to products are hidden when overhead rates are several hundred percent or more of labor costs. Assigning overhead based on direct labor produces an incentive to decrease the labor content of products. In modern manufacturing, a proportionality between machine hours and labor hours is uncommon.

Assigning overhead based on direct labor produces an incentive to decrease the labor content of products. In modern manufacturing, a proportionality between machine hours and labor hours is uncommon.

Which of the following statements is false? In ABC, the selection of a cost driver is often easy because a measure of the activity volume can be used. The best cost driver is the one that is causally related to the cost being allocated. Finding a cost driver that is causally related to the cost being allocated is easier with plantwide allocation.

Finding a cost driver that is causally related to the cost being allocated is easier with plantwide allocation.

The process that begins by attempting to increase price to meet reported product costs, losing market, reporting higher costs, and so on until out if business is the ______ ______.

death spiral