Topic 4 - Activity Based Costing

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

A) activities

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

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

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

A) pricing the product too high

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 cost

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

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

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

TRUE OR FALSE Testing a prototype of a new product is an example of a product level activity

True

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.

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

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

B) Batch-level costs

TRUE OR FALSE An effective activity-based cost system always ignores facility-sustaining cost drivers.

FALSE

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

B) homogeneous activity-related cost pools

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.

C) ABC systems provide valuable information to managers beyond accurate product 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.

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

TRUE OR FALSE When combining activities in an activity-based costing system, activities should be grouped together at the same level. For example, batch-level activities should not be combined with unit-level activities.

True

_______ 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

C) 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.

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

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

C) facility-sustaining

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

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

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

C) 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

C) intense competition

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

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

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

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

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

C) 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

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

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

D) Facility-sustaining

TRUE OR FALSE If a company switches from a traditional costing system to an activity-based costing system in which some activities are batch-level and product-level, costs ordinarily shift from high-volume to low-volume products

True

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

D) 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

D) Machine depreciation

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

D) 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

D) facility-sustaining costs

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

D) indirect costs

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

D) time-driven activity based costing

TRUE OR FALSE Activity-based costing uses a number of activity cost pools, each of which is allocated to products on the basis of direct labor-hours

False

TRUE OR FALSE An action analysis report reconciles activity-based costing product costs with traditional product costs based on direct labor.

False

TRUE OR FALSE An activity-based costing system is generally easier to set-up and run than a traditional cost system.

False

TRUE OR FALSE Changing a cost accounting system is likely to meet with little resistance in an organization since it is a technical matter of little interest to individuals outside of the accounting department

False

TRUE OR FALSE 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

TRUE OR FALSE In Activity-based costing, as in traditional costing systems, nonmanufacturing costs are not assigned to products.

False

TRUE OR FALSE 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

TRUE OR FALSE In activity-based costing, a plantwide overhead rate is used to apply overhead to products

False

TRUE OR FALSE Indirect labor and distribution costs would most likely be in the same activity-cost pool

False

TRUE OR FALSE 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

TRUE OR FALSE Overhead allocation based solely on a measure of volume such as direct-labor hours is a key aspect of the activity-based costing model

False

TRUE OR FALSE Purchase order processing is an example of a product level activity

False

TRUE OR FALSE Service-sustaining costs are the costs of activities that managers cannot trace to individual services but that support the organization as a whole.

False

TRUE OR FALSE Simply because activity-based costing systems employ more activity cost drivers, they provide more accurate product costs than traditional systems

False

TRUE OR FALSE The first-stage allocation in activity-based costing is the process by which overhead costs are assigned to products before they are assigned to customers

False

TRUE OR FALSE Uniformly assigning the costs of resources to cost objects when those resources are actually used in a nonuniform way is call activity based costing

False

TRUE OR FALSE 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

TRUE OR FALSE Unit-level production activities are performed each time a unit is made

TRUE

TRUE OR FALSE 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

TRUE OR FALSE Companies that overcost products risk becoming less effective on pricing and losing market share when competition utilizes more accurate cost systems

True

TRUE OR FALSE Duration drivers ordinarily require more effort to record than transaction drivers.

True

TRUE OR FALSE In activity-based costing, organization-sustaining costs should not be included in product costs for internal management reports that are used in decision-making. However, companies frequently include organization-sustaining costs in product cost to satisfy external reporting requirements

True

TRUE OR FALSE Increased used of automation, computer integrated manufacturing, and utilization of robots have lead to an increase in indirect costs relative to direct costs.

True

TRUE OR FALSE 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

TRUE OR FALSE Over time, the cost of design activities depend largely on the time designers spend on designing and modifying the product not on the number of products made or the number of batches produced.

True

TRUE OR FALSE Product-cost cross-subsidization is very common when costs are uniformly spread across various products.

True

TRUE OR FALSE Quality-inspection costs is an example of batch-level costs.

True

TRUE OR FALSE Specialized engineering drawings, quality specifications and testing, inventoried materials, and material control systems are examples of activities that equate to greater support costs

True

Cannady produces six products, SR6 costs 168 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 sued under the new ABC system. The new cost of SR6 was determined to be 178 per unit. The total amount of support costs assigned to product SR6 using the traditional method is __ the total amount assigned using ABC. a. less than b. identical to c. indeterminate from d. more than

a. less than

An objective of activity-based management is to a. Eliminate the majority of centralized activities in an organization b. Reduce or eliminate non-value added activities incurred to make a product or provide a service c. Institute responsibility accounting systems in decentralized organizations d. all of the choices are correct

b. Reduce or eliminate non-value added activities incurred to make a product or provide a service

Cannady produces six prod. SR6 costs 168 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 SR6 was determined to be 178 per unit. Given this change in the cost a. SR6 is definitely more accurately costed b. SR6's costing results under the new system depend on the adequacy and quality of the estimated cost drivers and costs used by the system c. SR6 has benefited from the new system d. SR6 will now command a higher sales price

b. SR6's costing results under the new system depend on the adequacy and quality of the estimated cost drivers and costs used by the system

Suppose that the company decides that the present activity-based costing system is too complex and that all costs (except for the costs of purchased decorations) should be allocated on the basis of the number of guests. In that event, what would you expect to happen to the costs of cakes? a. the costs of all cakes would go up b. the costs of all cakes would go down c. The cost of cakes for receptions with fewer than the average number of guests would go down d. The cost of cakes for receptions with more than the average number of guests would go up

c. The cost of cakes for receptions with fewer than the average number of guests would go down

Smaller cost distortions occur when the traditional systems' unit-level assignments and the alternative cost driver assignments: a. are different in proportion to each other b. use the same cost driver units c. are similar in proportion to each other d. are more different than alike

c. are similar in proportion to each other

It is usually difficult to find good cause-and-effect relationships between__ and a cost allocation base a. unit-level costs b. product-sustaining costs c. facility-sustaining costs d. batch-level costs

c. facility-sustaining costs

Product s5 and CP8 are assigned 50.00 in support costs by a traditional costing system. An activity analysis revealed that although production requirements are identical, s5 requires 45 minutes less setup time than CP8. According to an ABC system, CP8 is __ under the traditional system. a. fairly costed b. accurately costed c. undercosted d. overcosted

c. undercosted

Which of the following factors would suggest a need to switch to activity-based costing? a. The manufacturing process has been stable b. Production managers use date provided by the existing system. c. Product lines similar in volume and manufacturing complexity d. Overhead costs constitute a significant portion of total costs

d. Overhead costs constitute a significant portion of total costs

Unit-level cost drivers in traditional cost systems distort product costs because they: a. do not consistently record costs b. recognize specific activities that are required to produce a product c. fail to measure the correct amount of total costs for all products d. assume that all support activities affect all products.

d. assume that all support activities affect all products.

Activity-based management (ABM) includes decisions about all of the following EXCEPT; a. reducing costs b. improving processes c. pricing and product mix d. smoothing costs

d. smoothing costs