Ch. 17: Activity Based Costing

1. (LO 1) Activity-based costing (ABC): a. can be used only in a process cost system. b. focuses on units of production. c. focuses on activities needed to produce a good or perform a service. d. uses only a single basis of allocation.

1. c. Focusing on activities needed to produce a good or perform a service is an accurate statement about activity-based costing. The other choices are incorrect because ABC (a) can be used in either a process cost or a job order cost system; (b) focuses on activities performed to produce a product, not on units of production; and (d) uses multiple bases of allocation, not just a single basis of allocation.

10. (LO 3) The following activity is value-added: a. storage of raw materials. b. moving parts from machine to machine. c. producing a necessary product component on a machine. d. All of the above.

10. c. Producing a necessary product component on a machine is a value-added activity as it is an integral part of manufacturing a product. Choices (a) and (b) are non-value-added activities, so therefore choice (d) is incorrect as well.

11. (LO 3) A relevant facility-level cost driver for heating costs is: a. machine hours. b. direct materials. c. floor space. d. direct labor cost.

11. c. Floor space is a relevant facility-level cost driver for heating costs as a larger space will result in higher heating costs. The other choices are incorrect because (a) machine hours, (b) direct materials, and (d) direct labor cost are all unit-level cost drivers.

12. (LO 4) The first step in the development of an activity-based costing system for a service company is: a. identify and classify activities and allocate overhead to cost pools. b. assign overhead costs to products. c. identify cost drivers. d. compute overhead rates. *

12. a. The first step in developing an ABC system is to identify and classify activities and allocate overhead to cost pools. The other choices are incorrect because (b) is Step 4, (c) is Step 2, and (d) is Step 3.

13. (LO 5) Under just-in-time processing: a. raw materials are received just in time for use in production. b. subassembly parts are completed just in time for use in assembling finished goods. c. finished goods are completed just in time to be sold. d. All of the above.

13. d. All of the choices are accurate statements about just-in-time processing.

*14. (LO 5) The primary objective of just-in-time processing is to: a. accumulate overhead in activity cost pools. b. eliminate or reduce all manufacturing inventories. c. identify relevant activity cost drivers. d. identify value-added activities.

14. b. Eliminating or reducing all manufacturing inventories is the primary objective of just-in-time processing. The other choices are incorrect because choices (a), (c), and (d) are part of the process of implementing an ABC system.

2. (LO 1) Activity-based costing: a. is the initial phase of converting to a just-in-time operating environment. b. can be used only in a job order costing system. c. is a two-stage overhead cost allocation system that identifies activity cost pools and cost drivers. d. uses direct labor as its primary cost driver.

2. c. ABC is a two-stage overhead cost allocation system that identifies activity cost pools and cost drivers. The other choices are incorrect because ABC (a) is not necessarily part of the conversion to a just-in-time operating environment, (b) can be used in either a process cost or a job order cost system, and (d) uses other activities in addition to direct labor as cost drivers.

3. (LO 1) Any activity that causes resources to be consumed is called a: a. just-in-time activity. b. facility-level activity. c. cost driver. d. non-value-added activity.

3. c. Activities that cause resources to be consumed are called cost drivers, not (a) just-in-time activities, (b) facility-level activities, or (d) non-value-added activities.

4. (LO 2) Which of the following would be the best cost driver for the assembling cost pool? a. Number of product lines. b. Number of parts. c. Number of orders. d. Amount of square footage.

4. b. The number of parts would be the best cost driver for the assembling cost pool as it has a higher degree of correlation with the actual consumption of the overhead costs, that is, the assembling of parts, than (a) number of product lines, (c) number of orders, or (d) amount of square footage.

5. (LO 2) The overhead rate for machine setups is $100 per setup. Products A and B have 80 and 60 setups, respectively. The overhead assigned to each product is: a. Product A $8,000, Product B $8,000. b. Product A $8,000, Product B $6,000. c. Product A $6,000, Product B $6,000. d. Product A $6,000, Product B $8,000.

5. b. The overhead assigned to Product A is $8,000 ($100 × 80) and to Product B is $6,000 ($100 × 60), not (a) $8,000, $8,000; (c) $6,000, $6,000; or (d) $6,000, $8,000.

6. (LO 2) Donna Crawford Co. has identified an activity cost pool to which it has allocated estimated overhead of $1,920,000. It has estimated use of cost drivers for that activity to be 160,000 inspections. Widgets require 40,000 inspections, gadgets 30,000 inspections, and targets 90,000 inspections. The overhead assigned to each product is: a. Widgets $40,000, gadgets $30,000, targets $90,000. b. Widgets $640,000, gadgets $640,000, targets $640,000. c. Widgets $360,000, gadgets $480,000, targets $1,080,000. d. Widgets $480,000, gadgets $360,000, targets $1,080,000.

6. d. The overhead assigned to widgets is $480,000 [($1,920,000 ÷ 160,000) × 40,000], to gadgets is $360,000 [($1,920,000 ÷ 160,000) × 30,000], and to targets is $1,080,000 [($1,920,000 ÷ 160,000) × 90,000]. Therefore, choices (a) $40,000, $30,000, and $90,000; (b) $640,000, $640,000, and $640,000; and (c) $360,000, $480,000, and $1,080,000 are incorrect.

7. (LO 3) A frequently cited limitation of activity-based costing is: a. ABC results in more cost pools being used to assign overhead costs to products. b. certain overhead costs remain to be assigned by means of some arbitrary volume-based cost driver such as labor or machine hours. c. ABC leads to poorer management decisions. d. ABC results in less control over overhead costs.

7. b. A limitation of ABC is that certain overhead costs remain to be assigned by means of some arbitrary volume-based cost driver. The other choices are incorrect because (a) more cost pools is an advantage of ABC, (c) ABC can lead to better management decisions, and (d) ABC results in more control over overhead costs.

8. (LO 3) A company should consider using ABC if: a. overhead costs constitute a small portion of total product costs. b. it has only a few product lines that require similar degrees of support services. c. direct labor constitutes a significant part of the total product cost and a high correlation exists between direct labor and changes in overhead costs. d. its product lines differ greatly in volume and manufacturing complexity.

8. d. A company should consider using ABC if its product lines differ greatly in volume and manufacturing complexity. For choices (a), (b), and (c), a traditional costing system should be sufficient and less expensive to implement.

9. (LO 3) An activity that adds costs to the product but does not increase its perceived value is a: a. value-added activity. b. cost driver. c. cost/benefit activity. d. non-value-added activity.

9. d. Non-value-added activities add costs to a product but do not increase its perceived value, not (a) value-added activities, (b) cost drivers, or (c) cost/benefit activities.