IMA Exam 3 - Ch. 5
1) If products are different, then for costing purposes: A) an ABC costing system will yield more accurate cost numbers B) a simple costing system should be used C) a single indirect-cost rate should be used D) none of the above
A
2) ABC systems identify ________ costs used by products. A) all B) short-term fixed C) short-term variable D) long-term fixed
A
2) Overcosting a particular product may result in: A) loss of market share B) pricing the product too low C) operating efficiencies D) understating total product costs
A
3) ABC systems: A) highlight the different levels of activities B) limit cost drivers to units of output C) allocate costs based on the overall level of activity D) generally undercost complex products
A
3) The focus of ABC systems is on: A) long-term decisions B) short-term decisions C) make-or-buy decisions D) special-pricing decisions
A
4) A single indirect-cost rate may distort product costs because: A) there is an assumption that all support activities affect all products B) it recognizes specific activities that are required to produce a product C) costs are not consistently recorded D) it fails to measure the correct amount of total costs
A
4) When designing a costing system, it is easiest to: A) calculate total costs first and then per-unit cost B) calculate per-unit costs first and then total costs C) calculate long-term costs first and then short-term costs D) calculate short-term costs first and then long-term costs
A
6) Factories producing a more varied and complex mix of products have higher costs than factories producing only a narrow range of products because: A) more variations and complexities require more activities B) they require more engineers C) they require more direct laborers D) they buy more robotics
A
6) To set realistic selling prices: A) all costs should be allocated to products B) costs should only be allocated when there is a strong cause-and-effect relationship C) only unit-level costs and batch-level costs should be allocated D) only unit-level costs should be allocated
A
7) Activity-based costing (ABC) can eliminate cost distortions because ABC: A) develops cost drivers that have a cause-and-effect relationship with the activities performed B) establishes multiple cost pools C) eliminates product variations D) recognizes interactions between different departments in assigning support costs
A
7) Different products consume different proportions of manufacturing overhead costs because of differences in all of the following EXCEPT: A) selling prices B) customers' customization specifications C) setup times D) product design
A
8) 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
A
Explain how activity-based costing systems can provide more accurate product costs than traditional cost systems.
A key reason for assigning indirect costs using an ABC system rather than a traditional system is that ABC cost systems reflect differences required by different processes. Activity-based costing systems provide better product costs when they identify and cost more indirect cost differences among products. Activity-based costing seeks to distinguish batch-level, product-sustaining, and facility-sustaining costs especially when they are not proportionate to one another. Unit-level drivers in traditional cost systems distort product costs because, effectively, these systems assume that all indirect activities affect all products. Thus, these systems assign each unit of product an average cost that fails to recognize the specific activities that are required to produce that product. Activity-based costing differs from traditional costing systems in that products are not cross-subsidized by support costs being shared by everyone. Activity-based costing is more likely to result in major differences from traditional costing systems if the firm manufactures multiple products rather than only one product.
What is activity-based management and how can it be used to improve the profitability of a company?
Activity-based management is a method of management decision making that uses activity-based costing information to improve customer satisfaction and profitability. Some of the typical issues that require a refined costing system (such as ABC) are pricing and product mix decisions, cost reduction initiatives, streamlining of processes, and decisions that can lead to improved product design based on knowledge of detailed costs of the existing product lines. The gathering of timely and accurate information is one of the crucial steps in the decision-making process. A properly designed ABC system will be likely to efficiently provide detailed costing information to managers in companies that manufacture and distribute diverse product lines.
1) ABC systems create: A) one large cost pool B) homogenous activity-related cost pools C) activity-cost pools with a broad focus D) activity-cost pools containing many direct costs
B
1) Products make diverse demands on resources because of differences in all of the following EXCEPT: A) volume B) selling price C) batch size D) complexity
B
16) Activity-based costing is most likely to yield benefits for companies with all of the following characteristics EXCEPT: A) numerous products that consume different amounts of resources B) operations that remain fairly consistent C) a highly competitive environment, where cost control is critical D) accessible accounting and information systems expertise to maintain the system
B
16) 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
B
3) Design of an ABC system requires: A) that the job bid process be redesigned B) that a cause-and-effect relationship exists between resource costs and individual activities C) an adjustment to product mix D) Both B and C are correct.
B
4) A company produces three products; if one product is overcosted then: A) one product is undercosted B) one or two products are undercosted C) two products are undercosted D) no products are undercosted
B
4) Activity-based management (ABM) includes decisions about all EXCEPT: A) pricing and product mix B) smoothing costs C) reducing costs D) improving processes
B
4) Smaller cost distortions occur when the traditional systems' single indirect-cost rate and the activity-cost-driver rates: A) use the same total costs for computations B) are similar in proportion to each other C) are more different than alike D) use the same cost driver units
B
5) ABC assumes all costs are ________ because over the long run management can adjust the amount of resources employed. A) fixed B) variable C) committed D) nondiscretionary
B
6) Which of the following statements about activity-based costing is NOT true? A) Activity-based costing is useful for allocating 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) Activity-based costing seeks to distinguish batch-level, product-sustaining, and facility-sustaining costs, especially when they are not proportionate to one another. D) Activity-based costing differs from traditional costing systems in that products are not cross-subsidized.
B
7) The use of a single indirect-cost rate is more likely to: A) undercost high-volume simple products B) undercost low-volume complex products C) undercost lower-priced products D) Both B and C are correct.
B
7) Which of the following is NOT a sign that a "smoothing out" costing system exists? A) Operations managers don't use the data originated by the cost system. B) Products that a company is well suited to make and sell show large profits. C) New product variations have been added, but the cost system has not been upgraded. D) The company loses bids they believe were priced competitively.
B
8) Unit-level cost drivers are most appropriate as an overhead assignment base when: A) several complex products are manufactured B) only one product is manufactured C) direct labor costs are low D) factories produce a varied mix of products
B
) Design costs are an example of: A) unit-level costs B) batch-level costs C) product-sustaining costs D) facility-sustaining costs
C
1) Refining a cost system includes: A) classifying as many costs as indirect costs as is feasible B) creating as many cost pools as possible C) identifying the activities involved in a process D) seeking a lesser level of detail
C
10) For service organizations that bill customers at a predetermined average rate, activity-based cost systems can help to: A) clarify appropriate cost assignments for various service activities B) identify the profitability of various service activities C) Both A and B are correct. D) None of these answers are correct.
C
12) 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 for an economically reasonable cost D) have separate allocation rates for each department
C
17) Each of the following statements is true EXCEPT: A) traditional product costing systems seek to assign all manufacturing costs to products B) ABC product costing systems seek to assign all manufacturing costs to products C) traditional product costing systems are more refined than an ABC system D) cost distortions occur when a mismatch (incorrect association) occurs between the way indirect costs are incurred and the basis for their assignment to individual products
C
2) When costs are assigned using the single cost driver, number of pages printed, then Hospital Systems: A) is fairly billed because resources are allocated uniformly to all jobs B) is grossly under billed for the job, while other jobs will be unfairly over billed C) will likely seek to do business with competitors D) will contribute too little to profits, and Wallace Printing will not want to accept additional work from the company
C
3) One department indirect-cost rate is sufficient when: A) activities relate to more than one level of the cost hierarchy B) product costs are significantly cross-subsidized C) the same allocation base is appropriate for all departmental activities D) it is a service department
C
3) Undercosting of a product is most likely to result from: A) misallocating direct labor costs B) underpricing the product C) overcosting another product D) overstating total product costs
C
5) Activity-based costing systems provide better product costs when they: A) employ more activity-cost drivers B) employ fewer activity-cost drivers C) identify and cost more indirect cost differences among products D) always yield more accurate product costs than traditional systems
C
5) Misleading cost numbers are most likely the result of misallocating: A) direct material costs B) direct manufacturing labor costs C) indirect costs D) All of these answers are correct.
C
6) A manufacturing firm produces multiple families of products requiring various combinations of different types of parts. Of the following, the most appropriate cost driver for assigning materials handling costs to the various products is: A) direct labor hours B) number of units produced C) number of parts used D) number of suppliers involved
C
6) An accelerated need for refined cost systems is due to: A) global monopolies B) rising prices C) intense competition D) a shift toward increased direct costs
C
8) Uniformly assigning the costs of resources to cost objects when those resources are actually used in a nonuniform way is called: A) overcosting B) undercosting C) peanut-butter costing D) department costing
C
9) A primary reason for assigning selling and distribution costs to products for analytical purposes is: A) to justify a varied product mix B) that controllers are required to assign all costs when valuing inventories C) that different processes, products, and customers require different quantities of selling and distribution activities D) that all indirect costs must be assigned
C
9) 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
1) 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
D
1) The most likely example of an output unit-level cost is: A) general administrative costs B) paying suppliers for orders received C) engineering costs D) machine depreciation
D
17) A key reason for using an ABC system rather than a department-costing system is because ABC assigns indirect costs: A) using broader averages B) more simply than a department-costing system C) in a less costly manner D) to reflect differences required by different processes as well as customers
D
2) Greater indirect costs are associated with: A) specialized engineering drawings B) quality specifications and testing C) inventoried materials and material control systems D) All of these answers are correct.
D
2) Logical cost allocation bases include: A) cubic feet of packages moved to measure distribution activity B) number of setups used to measure setup activity C) number of design hours to measure designing activity D) All of these answers are correct.
D
2) The most likely example of a batch-level cost is: A) utility costs B) machine repairs C) product-designing costs D) setup costs
D
2) The unique feature of an ABC system is the emphasis on: A) costing individual jobs B) department indirect-cost rates C) multiple-cost pools D) individual activities
D
3) Activity-based-costing information: A) should be used when services place similar demands on resources B) usually results in peanut-butter costing C) will yield inaccurate cost numbers when products are similar D) may assist in improving product design and efficiency
D
4) ________ costs support the organization as a whole. A) Unit-level B) Batch-level C) Product-sustaining D) Facility-sustaining
D
5) ABC systems: A) reveal activities that can be eliminated B) help control nonfinancial items such as number of setup hours C) help identify new designs to reduce costs D) All of these answers are correct.
D
5) It is usually difficult to find good cause-and-effect relationships between ________ and a cost allocation base. A) unit-level costs B) batch-level costs C) product-sustaining costs D) facility-sustaining costs
D
5) Traditional cost systems distort product costs because: A) they do not know how to identify the appropriate units B) competitive pricing is ignored C) they emphasize financial accounting requirements D) they apply average support costs to each unit of product
D
6) Companies use ABC system information to: A) analyze costs B) prepare budgets C) evaluate performance D) All of these answers are correct.
D
7) It is important that the product costs reflect as much of the diversity and complexity of the manufacturing process so that: A) product costs will reflect their relative consumption of resources B) nonvalue-added costs can be eliminated C) there is less likelihood of cross subsidizing of product costs D) All of these answers are correct.
D
8) Product lines that produce different variations (models, styles, or colors) often require specialized manufacturing activities that translate into: A) fewer indirect costs for each product line B) decisions to drop product variations C) a greater number of direct manufacturing labor cost allocation rates D) greater overhead costs for each product line
D
15) Dalrymple Company produces a special spray nozzle. The budgeted indirect total cost of inserting the spray nozzle is $80,000. The budgeted number of nozzles to be inserted is 40,000. What is the budgeted indirect cost allocation rate for this activity? A) $0.50 B) $1.00 C) $1.50 D) $2.00
D $80,000 / 40,000 = $2.00
) Indirect labor and distribution costs would most likely be in the same activity-cost pool.
FALSE Indirect labor and distribution costs would not be in the same activity-cost pool because their cost drivers are very dissimilar. A cost driver of indirect labor would include direct labor hours, while a cost driver of distribution costs would include, for example, cubic feet of cargo moved.
12) As product diversity and indirect costs increase, it is usually best to switch away from an activity based cost system to a broad averaging system.
FALSE The potential significant differences in costs relating to the products as well as the magnitude of indirect costs make a more refined costing system more appropriate.
20) Costing systems with multiple cost pools are considered ABC systems.
FALSE The uniqueness of ABC systems is not simply multiple cost pools, but that the cost pools each relate to different activities
19) ABC systems are useful in manufacturing, but NOT in the merchandising or service industries.
FALSE : ABC systems can be useful in manufacturing, merchandising, and service industries.
14) ABC costing systems are primarily for use in manufacturing and marketing and NOT for design engineering.
FALSE Management can evaluate how its current product and process designs affect activities and costs as a way of identifying new designs to reduce costs.
11) 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 The actual costs will increase because of the additional sales and the other product lines (which are subsidizing the undercosting of the growing product line) will suffer. The net result will be the company having a lower operating income than it could have had.
13) ABC systems always provide decision-making benefits that exceed implementation costs.
False ABC system decision-making benefits do not always exceed implementation costs. This issue needs to be evaluated and if the costs exceed the benefits, then an ABC system should not be implemented.
24) How are cost drivers selected in activity-based costing systems?
First, indirect costs are divided into homogeneous cost pools and classified as output unit-level, batch-level, product-sustaining, or facility-sustaining costs. The cost pools correspond to activities. Costs are allocated to products, services, or customers using activity drivers or cost-allocation bases that have a cause-and-effect relationship with each cost pool. Choices about how to economize on the number of activity-cost drivers, how to isolate events (because activities triggered by the same event often can use the same activity cost driver), and which cost drivers to select are influenced by the fact that the benefit of obtaining cost driver information needs to exceed implementation costs.
14) Explain how a top-selling product may actually result in losses for the company.
If indirect costs are not properly allocated to the products, a product may appear to cost less than it actually does cost to produce. If the selling price is based on these lower costs, the selling price may actually be lower than the costs needed to produce the product resulting in losses for the company.
) Do activity-based costing systems always provide more accurate product costs than conventional cost systems? Why or why not?
No. Traditional systems contain smaller and fewer cost distortions when the traditional systems' unit-level assignments and the alternative activity-cost drivers are relatively similar in proportion to each other. Still, the use of unit-level measures to assign indirect costs is more likely to undercost low-volume products and more complex products. Both traditional product-costing systems and ABC product-costing systems seek to assign all manufacturing costs to products. Cost distortions occur when a mismatch (incorrect association) occurs between the way support costs are incurred and the basis for their assignment to individual products.
26) How can the need for a more refined costing system be identified?
Signs that there is a need for a more refined costing system include the following: a. Significant amounts of indirect costs are allocated using only one or two cost pools. b. All or most indirect costs are identified as output unit-level costs rather than batch-level, product-sustaining, or facility-sustaining activities. c. Products make diverse demands on resources because of differences in volume, process steps, batch size, or complexity. d. Products that a company is well suited to make and sell show small profits; whereas, products that a company is less suited to make and sell show large profits. e. Operations staff have significant disagreements with the accounting staff about the costs of manufacturing and marketing products and services
10) Companies that overcost products will most likely lose market share.
TRUE
11) ABC reveals opportunities to focus on value added activities.
TRUE
12) Activity-based management refers to the use of information derived from ABC analysis to analyze and improve operations.
TRUE
13) If a company overcosts one of its products, then it will undercost at least one of its other products.
TRUE
13) Information derived from an ABC analysis might be used to eliminate nonvalue-added activities.
TRUE
18) ABC systems are a further refinement of department-costing systems.
TRUE
21) Regarding department wide systems, the benefits of an ABC system must be balanced against its costs and limitations.
TRUE
4) Direct costs plus indirect costs equal total costs.
TRUE
5) When refining a costing system, a company should classify as many costs as possible as direct costs.
TRUE
6) In a homogeneous cost pool, all costs have a similar cause-and-effect relationship with the cost-allocation base.
TRUE
8) Direct tracing of costs improves cost accuracy.
TRUE
9) A cost-allocation base is a necessary element when using a strategy that will refine a costing system.
TRUE
10) What are the factors that are causing many companies to refine their costing systems to obtain more accurate measures of the costs of their products?
The first cause is increasing product diversity. Companies are producing many more products than they used to, placing strains on more simple, older cost systems. A second cause is the overall increased in indirect costs and the relative decline of direct costs. The indirect nature of these costs requires allocation, and any inaccuracies in allocation of these costs become magnified as these indirect costs increase. A third cause would be advances in information technology that makes complex allocation of indirect costs less burdensome. Finally, increased competition from both national and international competitors has resulted in more pressure to reduce costs, as well as increasing the need for and value of information to support responses to these new threats.
What are the four parts of the cost hierarchy. Briefly explain each part, and contrast this cost hierarchy to the fixed-variable dichotomy?
The four parts of the cost hierarchy are output unit-level costs, batch-level costs, product (or service) sustaining costs, and facility sustaining costs. Output unit-level costs are costs of activities performed on each individual unit of a product or service. Batch-level costs are the costs of activities related to a group of units of products or services rather than to each individual unit of product or service. Product (or service) sustaining costs are the costs of activities undertaken to support individual products or services regardless of the number of units or batches in which the products are produced. Facility-sustaining costs are the costs of activities that cannot be traced to individual products or services but support the organization as a whole. When compared to the fixed-variable dichotomy, which considers only units of output as a cost driver, the four part cost hierarchy provides opportunity to model many different cost drivers. For example, batch-level costs and product (or service) sustaining costs are driven by the number of batches of a product and the number of different products. Neither of these class of cost drivers are able to be considered in a simple fixed-variable dichotomy.
9) A top-selling product might actually result in losses for the company.
True
) Explain how traditional cost systems, using a single unit-level cost rate, may distort product costs.
Unit-level measures can distort product costing because the demand for indirect activities may be driven by batch-level, product-sustaining, customer-sustaining, or facility-sustaining activities. Cost distortions are larger when the traditional systems' unit-level cost drivers and the alternative activity-cost drivers differ proportionately more from each other. Traditional systems are likely to undercost products with lower production volumes (relatively fewer units of production) and overcost products with higher production volumes (relatively greater units of production).
ABC systems create heterogeneous cost pools linked to different activities.
false ABC systems create homogeneous cost pools linked to different activities.
31) An activity-based costing system is necessary for costing services that are similar
false An activity-based costing system is only necessary when services are dissimilar and different amounts of resources are used by each service.
14) Using multiple unit-level cost drivers generally constitutes an effective activity-based cost system
false In addition to unit-level cost drivers, an effective activity-based cost system usually uses batch-level, product-sustaining, and facility-sustaining cost drivers.
13) Output unit-level costs CANNOT be determined unless you know how many units are in a given batch.
false Output unit-level costs are the costs of the activities performed on each individual unit whereas batch-level costs are the costs of activities related to a group of units.
32) Traditional systems are likely to overcost complex products with lower production volume
false Traditional systems are likely to undercost complex products with lower production volume.
Simply because activity-based costing systems employ more activity-cost drivers, they provide more accurate product costs than traditional systems.
false When there are more activity-cost drivers, there is also more room for error, which may not result in more accurate products costs
ABC systems attempt to trace more costs as indirect costs.
false : ABC systems attempt to trace more costs as direct costs.
34) When designing a costing system, it is easiest to calculate per-unit costs first, and then total costs.
false When designing a costing system, it is easiest to calculate total costs first, and then per-unit costs.
12) Unit-level measures can distort product costing because the demand for overhead resources may be driven by batch-level or product-sustaining activities.
true
15) Misleading cost numbers are larger when unit-level assignments and the alternative activity-cost-driver assignments are proportionately dissimilar to each other.
true
30) Activity-based costing helps identify various activities that explain why costs are incurred.
true
33) Availability of reliable data and measures should be considered when choosing a cost-allocation base.
true
33) For activity-based cost systems, activity costs are assigned to products in the proportion of the demand they place on activity resources.
true
ABC systems seek a cost allocation base that has a cause-and-effect relationship with costs in the cost pool.
true
For service organizations, activity-based cost systems may be used to clarify appropriate cost assignments.
true
The primary costs of an ABC system are the measurements necessary to implement the system.
true
