Wileyplus_ACC2020_Chapter17

The most difficult part of computing accurate unit costs is determining the proper amount of direct material cost to assign to each product.

false

Traditional costing systems group costs according to activity cost pools.

false

Two benefits of ABC are that it leads to better management decisions and arbitrary allocations are completely eliminated.

false

Product design is a unit-level activity.

false product design is a product-level activity.

Activity-based costing (ABC): A.can be used only in a process cost system. B.focuses on units of production. C.focuses on activities performed to produce a product. D.uses only a single basis of allocation.

c.focuses on activities performed to produce a product.

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.

c.is a two-stage overhead cost allocation system that identifies activity cost pools and cost drivers.

Which of the following is used to eliminate inventories?

A pull approach This is the approach used in just-in-time systems.

The primary objective of just-in-time processing is to

eliminate or reduce all manufacturing inventories.

plant maintenance

facility-level

property taxes

faility-level

Activity-based costing is an approach for allocating direct labor to products.

false

An advantage of ABC is that it is inexpensive to implement.

false

In today's increasingly automated environment, direct labor is never an appropriate basis for allocating costs to products.

false

In order to achieve the most accurate costing, the cost driver chosen for a given activity must show a ___________ between the cost driver and the actual consumption of overhead costs.

high degree of correlation. The most accurate costing will be achieved when there is a high degree of correlation between the cost driver and the actual consumption of overhead costs

Which of the following is an important element in successfully operating a just-in-time approach to production? A.A multi-skilled workforce B.Completing products in the quickest manner without regard for quality C.Utilizing the lowest cost suppliers D.All of the above are important elements

A.A multi-skilled workforce

Activity-based costing systems rely on multiple bases for overhead cost allocation.

true

Activity-based management leads to the identification of value-added and non-value-added activities.

true

CFO Services provides finance and accounting consulting services to clients. CFO Services incurred 220 hours for Max Printing at a cost of $82 per hour, and billed Max Printing $160 per hour. Overhead is applied at 55% of professional labor cost. How much is the cost of the Max Printing client using traditional costing?

$27,962 The cost of the client includes both professional labor and overhead: Professional labor: 220 hours × $82 = $18,040 Overhead: $18,040 × 55% = $9,922 Total cost = $18,040 + $9,922 = $27,962

WebFlix rents DVDs that are mailed out to customers upon demand. WebFlix has identified three activities involved in getting the videos to its customers. Information on those activities for the month of June follows: Cost Pools Cost Drivers Estimated Overhead Cost Expected Use of Cost Drivers Order taking costs Number of orders $21,600 144,000 orders Technology support Number of minutes 9,000 180,000 minutes Picking and shipping costs Number of DVDs 30,480 254,000 DVDs During June, the Mulaney family placed 26 orders consisting of 42 DVDs. Mulaney required 14 minutes of tech support. Customers pay $9.00 per month to rent unlimited DVDs. Using ABC, how much overhead is applied to the Mulaney family account for order taking costs?

$3.90 The rate per activity is calculated for order taking, and then multiplied by the actual number of orders incurred by Mulaney. Order taking: $21,600/144,000 orders = $0.15 per order Applied to Mulaney: $0.15 × 26 = $3.90

Warren Company manufactures two products, Allegro and Forte. Warren has estimated overhead costs consist of setting up machines, $80,000; machining, $150,000; and inspecting, $50,000. Information on the two products follows: Allegro Forte Direct labor hours 30,000 50,000 Machine setups 1,200 800 Machine hours 48,000 52,000 Inspections 1,600 1,400 Overhead is applied to Allegro using direct labor hours. How much overhead is applied using traditional costing?

105,000 The overhead rate is calculated by dividing estimated overhead divided by estimated direct labor hours. Then, the rate is multiplied by the actual activity. Rate = [($80,000 + $150,000 + $50,000) / 80,000] = $3.50 per direct labor hour Applied = $3.50 × 30,000 = $105,000

How many steps are involved in activity-based costing?

4

Machine setup

Batch-level

How are equipment setups classified?

Batch-level activity

The following activity is value-added: A. Storage of raw materials. B. Moving parts from machine to machine. C. Shaping a piece of metal on a lathe. D. All of the above.

C. Shaping a piece of metal on a lathe.

Which of the following is the third step in applying an activity-based costing system?

Compute the overhead rate for each cost driver.

Paul's Printers Co. manufactures two printers, LoSpeed and HiSpeed. Total overhead of $126,000 is incurred by three departments: Setups $8,000; Machining $88,000; and Shipping $30,000. The company also incurs $40,000 of direct labor. Information concerning the two product lines is shown below: LoSpeed HiSpeed Machine setups 15 15 Machine hours 750 3,000 Orders shipped 150 250 Direct labor costs $10,000 $30,000 Using activity-based costing, how much overhead is assigned to HiSpeed?

93,150 The rate per activity is calculated for each activity, setups, machining, and shipping, and each rate is multiplied by the actual activity: [(15 / 30) × $8,000] + [(3,000 / 3,750) × $88,000] + [(250 / 400) × $30,000] = $93,150

Which of the following is a limitation of activity-based costing?

Activity-based costing can be expensive to use.

Which of the following is a limitation of activity-based costing?

Arbitrary allocations of overhead costs may continue.

Which of the following is the proper classification of the two activities listed? Value-Added Activity Non-Value-Added Activity Packaging Storing Testing Storage Receiving Machining Assembly Inspection

Assembly Inspection

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.

B. Number of parts.

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.

B. eliminate or reduce all manufacturing inventories.

Which of the following statements is false concerning the use of ABC in service industries? A.In most service industries, a large portion of overhead costs are company-wide costs. B.When using ABC for service industries, special methods must be used to identify cost pools and cost drivers due to the unique nature of the services offered. C.The notion regarding eliminating as many non-value-added activities as possible applies equally to manufacturers and service providers. D.All of the statements are true concerning the use of ABC in service industries.

B.When using ABC for service industries, special methods must be used to identify cost pools and cost drivers due to the unique nature of the services offered.

What is the primary barrier to using activity-based costing in a service company? A. A large number of cost pools B. A shortage of potential cost drivers C. A large portion of overhead costs are company-wide costs D. A limited number of arbitrary allocation decisions

C. A large portion of overhead costs are company-wide costs

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.

C. Cost driver

Which of the following is not a reason in support of using activity-based costing? A.Activity-based costing leads to more cost pools. B. Activity-based costing leads to enhanced control over overhead costs. C. Employee turnover will decrease as a result of using activity-based costing. D. Activity-based costing leads to better management decisions.

C. Employee turnover will decrease as a result of using activity-based costing.

A relevant facility-level cost driver for heating costs is: A. machine hours. B. direct material. C. floor space. D. direct labor cost.

C. floor space.

Which one of the following activities for a carpet cleaning service is a value-added activity?

Cleaning carpeted stairways for a customer

Which of the following should not be included as part of the cost pool of machine setups?

Cost of accounts payable supervisor's salary

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.

D. All of the above.

An activity that adds costs to the product but does not increase its market value is a: A. value-added activity. B. cost driver. C. cost-benefit activity. D. non-value-added activity.

D. non-value-added activity.

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.

D.all of the above

Which of the following would not be an overhead activity cost pool?

DIRECT LABOR

The activity-based overhead rate is computed by dividing

Estimated overhead per activity by expected use of cost drivers per activity

Which of the following is a relevant facility-level cost driver for heating costs in a dentist office?

Floor space Floor space is a relevant facility-level cost driver for heating costs since there will be a high correlation between the amount of floor space and the amount of heating costs.

Which of the following is not one of the four steps involved in calculating unit costs under activity-based costing?

Identify the cost driver that has a minor correlation to the costs accumulated in the activity cost pool.

Which statement is true about activity-based costing (ABC)?

It focuses on activities performed to produce a product.

Which of the following is not one of the classification levels of activity-based costing activities?

Macro-level activities This is not one of the four levels in the activity-based costing activity hierarchy. The missing activity is unit-level activities.

What is the primary benefit of activity-based costing?

More accurate product costing

Which of the following is not an important element of just-in-time processing?

Multiple product lines This is not an element of just-in-time processing.

For which of the following activities will direct labor hours and direct labor cost be an appropriate cost driver?

Painting

Which of the following is a value-added activity for a bank?

Processing checks issued by customers

The overhead rate for machine setups is $100 per setup. A total of 140 setups are estimated for the period. At year-end it was determined that Products A and B have 80 and 60 setups, respectively. How much is the overhead cost assigned to each product?

Product A 8,000; Product B 6,000 The overhead cost assigned to each product is the rate times the number of setups. The overhead assigned to product A is $100 x 80 setups, or $8,000 and the overhead assigned to product B is $100 x 60 setups, or $6,000.

Which of the following is an overhead activity cost pool?

Setting up machines

Which of the following activities adds value to a product or service?

Shaping a piece of metal on a lathe

If a traditional costing system allocates too much overhead to one product, the firm is likely to experience which of the following problems?

The firm may lose market share to competitors

Which of the following is the proper classification of activities according to activity level for a computer manufacturing company? Assembly Maintenance Unit Facility Product Unit Product Facility Batch Product

Unit Facility

When is it appropriate to use direct labor as a basis for assigning overhead costs to products?

When direct labor constitutes a significant part of total product costs

The first step in the development of an activity-based costing system is: A. identify and classify activities and allocate overhead to cost pools. B. assign overhead costs to products. C. identify cost drivers. compute overhead rates. D. Compute overhead rate.

a.identify and classify activities and allocate overhead to cost pools.

purchasing raw materials

batch-level

Any activity that causes resources to be consumed is called a

cost driver

Donna Crawford Co. has identified an activity cost pool to which it has allocated estimated overhead of $1,920,000. It has determined the expected 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.

d. Widgets $480,000, Gadgets $360,000, Targets $1,080,000 [(1,920,000/160,000) x 40,000]; [(1920,000/ 160,000) x 30,000]; [(1,920,000/ 160,000) x 90,000]

Activity-based costing is most appropriate to use when labor costs are a ___________ proportion of total product costs and the manufacturing process is __________.

decreasing, complex.

As the complexity of a product's manufacturing operation increases, the number of activities and cost drivers used in an activity-based cost system will likely

increase

Activity-based costing is?

is the initial phase of converting to a just-in-time operating environment.

To reduce product cost distortions, many companies now use ____________ as the basis on which to allocate overhead in an automated manufacturing process.

machine hours

An activity that adds costs to the product but does not increase its market value is a

non-value-added activity.

product design

product-level

To assign overhead costs to an individual product, the activity-based overhead rate is multiplied by

the number of cost drivers used per product.

A cost driver is a factor or activity that has a direct cause-effect relationship with the resources consumed.

true

A cost driver is any factor or activity that has a direct cause-effect relationship with resources consumed

true

Activity-based costing segregates overhead into various cost pools in an effort to provide more accurate cost information.

true

JIT is based on a pull-approach.

true

The reasoning behind ABC cost allocation is that products consume activities and activities consume resources.

true

Activity-based costing is used in service industries as well as manufacturing.

true Service industries need accurate cost information so they can more effectively price products.

Assembly parts

unit-level

Machining parts

unit-level

painting

unit-level

WebFlix rents DVDs that are mailed out to customers upon demand. WebFlix has identified three activities involved in getting the videos to its customers. Information on those activities for the month of June follows: Cost Pools Cost Drivers Estimated Overhead Cost Expected Use of Cost Drivers Order taking costs Number of orders $21,600 144,000 orders Technology support Number of minutes 9,000 180,000 minutes Picking and shipping costs Number of DVDs 30,480 254,000 DVDs During June, the Mulaney family placed 26 orders consisting of 42 DVDs. Mulaney required 14 minutes of tech support. Customers pay $9.00 per month to rent unlimited DVDs. Using ABC, how much overhead is applied to the Mulaney family account for technology support costs?

$0.70 The rate per activity is calculated for technology support, and then multiplied by the actual number of minutes of support required by Mulaney. Technology support: $9,000/180,000 minutes = $0.05 per minute Applied to Mulaney: $0.05 × 14 = $0.70

Warren Company manufactures two products, Allegro and Forte. Warren's overhead costs consist of setting up machines, $80,000; machining, $150,000; and inspecting, $50,000. Information on the two products is: Allegro Forte Direct labor hours 30,000 50,000 Machine setups 1,200 800 Machine hours 48,000 52,000 Inspections 1,600 1,400 If Warren uses ABC, how much overhead will be applied to Forte?

$133,333 Using activity-based costing, overhead is applied using the related cost driver - machine step-ups, machine hours, and inspections, for each of the three cost pools. The rate is multiplied by the actual activity for each cost object. Setups: ($80,000 × 800/(1,800 + 200) = $32,000 Machining: ($150,000 × 52,000/(48,000 + 52,000) = $78,000 Inspecting: ($50,000 X 1,400/(1,600 + 1,400)] = $23,333 Total = $32,000 + $78,000 + $23,333 = $133,333

McCauley Maids cleans hotel rooms at resorts in the Florida Keys. McCauley has identified three activities involved in cleaning. Information on those activities for the month of May follow: Cost Pools Cost Drivers Estimated Overhead Cost Expected Use of Cost Drivers Changing bed linens Number of beds $36,000 24,000 beds Cleaning bath rooms Number of bath rooms 40,000 16,000 bath rooms Other cleaning Number of hotel rooms and public spaces 14,400 18,000 spaces At the Front Street Resort, the company cleaned 1,200 rooms during May, 150 public spaces, changed 1,600 beds, and cleaned 1,250 bath rooms. Using ABC, how much overhead is applied to each hotel room cleaned?

$6,605 The rate per activity is calculated for each activity, setups, machining, and shipping, and each rate is multiplied by the actual activity. Changing bed linens: $36,000/24,000 beds = $1.50 per bed Cleaning bath rooms: $40,000/16,000 bath rooms = $2.50 per bath room Other cleaning: $14.400/18,000 spaces = $0.80 per space Allocated cost: ($1.50 × 1,600) + ($2.50 × 1,250) + ($0.80 × (1,200 + 150)) = $6,605

Which one of the following would be the best cost driver for the activity of purchasing?

The number of purchase orders issued

Donna Crawford Co. has identified an activity cost pool to which it has allocated estimated overhead of $1,920,000. It has determined the expected 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. How much is the overhead assigned to each product?

Widgets $480,000, Gadgets $360,000, Targets $1,080,000 The activity-based overhead rate is $12 per inspection ($1,920,000/160,000 inspections) and the overhead assigned to each product is computed by multiplying this rate times the number of inspections per product. The result is overhead assigned to Widgets of $12 × 40,000 inspections, or $480,000; overhead assigned to Gadgets of $12 × 30,000 inspections or $360,000; and overhead assigned to Targets of $12 × 90,000 inspections or $1,080,000.

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 allocated 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.

b. Certain overhead costs remain to be allocated by means of some arbitrary volume-based cost driver such as labor or machine hours.

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.

b. Product A $8,000, Product B $6,000. (100 X 80); (100 X 60)

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.

d. its product lines differ greatly in volume and manufacturing complexity.