Chapter 4 - Activity - Based Costing

82. Which of the following is NOT a limitation of a plantwide overhead rate? a. Product diversity may consume overhead activities under differing consumption ratios. b. Overhead usage is not strictly linked to the units produced because some products are more complex and diverse than others. c. Predetermined rates using budgeted overhead are usually the best estimate of the amount of overhead. d. Overhead costs tend to be underallocated to highly complex products.

c. Predetermined rates using budgeted overhead are usually the best estimate of the amount of overhead.

11. Activity-based costing uses only unit-level drivers for costing. a. True b. False

False

17. Product classification attributes define and describe activities and are the basis for product classification. a. True b. False

False

21. Time-driven activity-based costing (TDABC) requires the need to identify resource drivers to assign costs to activities. a. True b. False

False

23. After-the-fact simplification includes two approaches: the approximately relevant reduced ABC system and the equally accurate enhanced ABC system. a. True b. False

False

6. The difference between actual overhead and applied overhead is underapplied overhead. a. True b. False

False

8. The justification for not using a departmental rate for overhead cost assignment is that it increases accuracy. a. True b. False

False

181. Materials handling would be classified as a __________ activity when using activity-level costing.

batch-level

105. Which of the following quantities is an example of an activity driver in activity-based costing? a. number of setups b. number of orders placed c. number of machine hours d. All of these choices

d. All of these choices

70. Products might consume overhead in different proportions due to differences in a. product size. b. setup times. c. product complexity. d. All of these choices

d. All of these choices

84. A possible solution to overcome distortions caused by unit-level rates is a. assign costs by multiplying activity rates times the amount of activity consumed. b. calculate individual rates for each activity with activity drivers. c. increase the number of rates used that reflect the diverse activity and non-unit overhead drivers. d. All of these choices

d. All of these choices

168. Which of the following formulas is used by duration-based costing (DBC) to assign the overhead costs to a particular product? a. Overhead cost per unit = Units of product produced at practical capacity ÷ Activity rate b. Overhead cost per unit = Total overhead cost ÷ Activity rate c. Overhead cost per unit = Overhead rate × Capacity cost rate for a particular product d. Overhead cost per unit = Overhead rate × Cycle time for a particular product

d. Overhead cost per unit = Overhead rate × Cycle time for a particular product

158. Which of the following statements is TRUE? a. A vital attribute of an ABC database is the cost of individual departments. b. The ultimate objective of activity classification is to build homogeneous cost pools. c. When unbundling general ledger costs to an ABC database, there is more concern about how dollars are spent than what is spent. " d. The ultimate objective of activity classification is to build homogeneous cost pools; and when unbundling general ledger costs to an ABC database, there is more concern about how dollars are spent than what is spent.

d. The ultimate objective of activity classification is to build homogeneous cost pools; and when unbundling general ledger costs to an ABC database, there is more concern about how dollars are spent than what is spent.

51. Material amounts of under- or overapplied overhead should be a. treated as an adjustment to cost of goods sold. b. treated as an adjustment to work in process. c. allocated to direct materials, work in process, and finished goods. d. allocated to work in process, finished goods, and cost of goods sold.

d. allocated to work in process, finished goods, and cost of goods sold.

31. The total overhead assigned to actual production at any point in time is called a. non-unit-based overhead. b. budgeted overhead. c. overhead assignment. d. applied overhead.

d. applied overhead.

127. If activity-based costing is used, security is an example of a a. unit-level activity. b. batch-level activity. c. product-level activity. d. facility-level activity.

d. facility-level activity.

129. If activity-based costing is used, insurance on the plant would be classified as a a. unit-level activity. b. batch-level activity. c. product-level activity. d. facility-level activity.

d. facility-level activity.

10. If overhead is a significant proportion of manufacturing costs, the distortion caused by using the wrong drivers or too few drivers can be serious. a. True b. False

True

12. Compared to a single plantwide rate based on units produced, activity-based cost assignment is the most accurate method of costing because it follows a cause-and-effect pattern of overhead consumption. a. True b. False

True

13. An activity-based costing system traces costs to activities and then to products and other cost objects. a. True b. False

True

14. The first step in designing an activity-based costing system is to identify activities. a. True b. False

True

15. A list of the activities of the organization is called an activity dictionary. a. True b. False

True

16. Activity attributes are nonfinancial and financial information items that describe individual activities. a. True b. False

True

18. After identifying and defining activities, the next step is to assign the cost of resources to each activity. a. True b. False

True

19. Classifying activities into primary or secondary activities facilitates product costing. a. True b. False

True

20. Efforts to simplify activity-based costing systems (ABC) involve either before-the-fact simplification or after-the-fact simplification. a. True b. False

True

22. Using the before-the-fact simplification method TDABC eliminates the need for detailed interviewing and surveying to determine resource drivers. a. True b. False

True

24. There are many two-driver combinations that may be used to reduce the ABC system without sacrificing accuracy. a. True b. False

True

7. Overhead assignments should reflect the amount of overhead used to make each product. a. True b. False

True

9. Non-unit-based drivers are factors that measure the demands that cost objects place on activities. a. True b. False

True

174. __________ drivers create distortions when different products utilize resources differently.

Unit-level

99. The simple list of activities identified in an ABC system is called a. activity inventory. b. activity dictionary. c. activity attributes. d. activity driver.

a. activity inventory.

80. Unit-level cost drivers create distortions when a. different products consume resources differently. b. products are produced using resources homogeneously. c. products use resources similarly. d. All of these choices

a. different products consume resources differently.

72. All of the following are non-unit-based activity drivers EXCEPT number of a. direct labor hours. b. inspections. c. setups. d. material moves.

a. direct labor hours.

25. Unit-level product costing assigns a. direct materials and direct labor directly to products and assigns overhead to departmental pools which are assigned to products using predetermined overhead rates based on unit-level drivers. b. direct materials, direct labor, and overhead to departmental cost pools which are assigned to products using predetermined overhead rates based on unit-level drivers. c. direct materials and direct labor directly to products and assigns overhead to departmental pools which are assigned to products using predetermined overhead rates based on non-unit-level drivers. d. direct materials, direct labor, and overhead to departmental cost pools which are assigned to products using predetermined overhead rates based on non-unit-level drivers.

a. direct materials and direct labor directly to products and assigns overhead to departmental pools which are assigned to products using predetermined overhead rates based on unit-level drivers.

163. Time-driven activity-based costing (TDABC) is a before-the-fact simplification method that simplifies the first stage of assigning costs to activities of activity-based costing (ABC) system by a. eliminating the need for detailed interviewing and surveying to determine resource drivers. b. expanding the number of activity rates used so that the rates reflect the actual consumption of overhead costs. c. allocating weights and setting the result equal to the product's consumption ratio. d. recognizing that many of the so-called fixed overhead costs vary in proportion to changes other than production volume.

a. eliminating the need for detailed interviewing and surveying to determine resource drivers.

134. Batch-level costs are assigned using a. non-unit-based activity drivers. b. unit-based activity drivers. c. cost pools. d. departmental rates.

a. non-unit-based activity drivers.

74. All of the following are unit-based activity drivers EXCEPT a. number of setups. b. machine hours. c. number of units. d. direct labor hours.

a. number of setups.

128. If activity-based costing is used, modifications made by engineering to the product design of a particular product would be classified as a a. product-level activity. b. batch-level activity. c. unit-level activity. d. facility-level activity.

a. product-level activity.

169. In which of the following scenarios does duration-based costing match activity-based costing? a. when there is no correlation between the consumption ratio and total activity time b. when the consumption ratio increases with an increase in total activity time c. when there is a direct correlation between activity cost and consumption ratio d. when the consumption ratio decreases with a decrease in total activity time

a. when there is no correlation between the consumption ratio and total activity time

177. A(n) __________ costing system first traces costs to activities and then to products.

activity-based

182. A(n) __________costing database is the collected data sets that are organized and interrelated for use in a company's ABC information system.

activity-based

178. Activity __________ are nonfinancial and financial data that describe individual activities.

attributes

28. A predetermined overhead rate is calculated using which of the following formulas? a. Actual annual overhead ÷ Budgeted annual driver level b. Budgeted annual overhead ÷ Budgeted annual driver level c. Budgeted annual overhead ÷ Actual annual driver level d. Actual annual overhead ÷ Actual annual driver level

b. Budgeted annual overhead ÷ Budgeted annual driver level

94. An activity-based costing system uses which of the following procedures? a. Overhead costs are traced to departments, and then costs are traced to products. b. Overhead costs are traced to activities, and then costs are traced to products. c. Overhead costs are traced directly to products. d. All overhead costs are expensed as incurred.

b. Overhead costs are traced to activities, and then costs are traced to products.

26. Unit-based product costing uses which of the following procedures? a. All overhead costs are expensed as incurred. b. Overhead costs are traced to departments, and then costs are traced to products. c. Overhead costs are traced directly to products. d. Overhead costs are traced to activities, and then costs are traced to products.

b. Overhead costs are traced to departments, and then costs are traced to products.

162. If operations run on less than full capacity, what is the result on cost driver rates? a. They are not affected. b. They are too low. c. They can be either too high or too low. d. They are too high.

b. They are too low.

157. The grouping of logically related information is called a. an activity driver. b. a data set. c. a cost objective. d. both an activity driver and a cost objective.

b. a data set.

98. The nonfinancial and financial data that describe individual activities is called a. activity dictionaries. b. activity attributes. c. concatenated keys. d. ABC inventories.

b. activity attributes.

109. The activity that aids management in achieving objectives such as product or customer costing, continuous improvement and environmental management is called a. activity driver. b. activity classification. c. primary key. d. concatenated key.

b. activity classification.

126. If activity-based costing is used, materials handling would be classified as a a. unit-level activity. b. batch-level activity. c. product-level activity. d. facility-level activity.

b. batch-level activity.

130. If activity-based costing is used, setups would be classified as a a. unit-level activity. b. batch-level activity. c. product-level activity. d. facility-level activity.

b. batch-level activity.

71. The proportion of an overhead activity consumed by a product is the a. overhead ratio. b. consumption ratio. c. quick ratio. d. fixed ratio.

b. consumption ratio.

167. Product i's total time used for all primary activities is equal to a. cycle time for product i plus units of product i produced at practical capacity. b. cycle time for product i multiplied by units of product i produced at practical capacity. c. cycle time for product i minus units of product i produced at practical capacity. d. cycle time for product i divided by units of product i produced at practical capacity.

b. cycle time for product i multiplied by units of product i produced at practical capacity.

32. If unit-based product costing is used, which of the following would be traced directly to the product? a. setup costs b. direct labor c. maintenance of machinery d. inspection costs

b. direct labor

34. For a labor-intensive manufacturing operation, which of the following would be the most appropriate activity driver? a. machine hours b. direct labor hours c. number of employees d. units of output

b. direct labor hours

164. Which of the following costing methods is a before-the-fact simplification method that eliminates the first stage of assigning costs to activities of an activity-based costing (ABC) system and dramatically simplifies the assignment of cost of resources to activities? a. functional-based costing b. duration-based costing c. absorption costing d. batch-level costing

b. duration-based costing

159. In an approximately relevant ABC system, a. all activities still are separated into pools; they are allocated on estimated activity levels. b. only the most expensive activities are allocated using appropriate cause-and-effect drivers. c. cost pools are limited to only two cost pools. d. None of these choices

b. only the most expensive activities are allocated using appropriate cause-and-effect drivers.

81. Consumption ratio is defined as the a. measure of the number of times an activity is performed before receiving an end product. b. proportion of each activity consumed by a product. c. measure of the consumption of resources by activities. d. proportion of non-unit-related overhead costs to total overhead costs.

b. proportion of each activity consumed by a product.

29. The overhead rates of traditional functional-based product costing use a. non-unit-based activity drivers. b. unit-based activity drivers. c. process costing. d. job order costing.

b. unit-based activity drivers.

97. Activity-based costing assigns cost to cost objects by first tracing costs to a. products and then tracing costs to cost objects. b. departments and then tracing costs to products. c. activities and then tracing costs to cost objects. d. customers and then tracing costs to products.

c. activities and then tracing costs to cost objects.

95. More accurate product-costing information is produced by assigning costs using a. a volume-based, plantwide rate. b. volume-based, departmental rates. c. activity-based pool rates. d. All of these choices

c. activity-based pool rates.

166. Which of the following items is required for cost assignment to product i under duration-based costing (DBC)? a. overhead cost per unit of product i b. standard capacity for product i c. cycle time for each product i d. total time for all secondary production activities of product i

c. cycle time for each product i

160. In time-driven ABC systems, managers a. assign resources to departments and then activities. b. assign resource costs first to activities and then to products. c. directly estimate the resource demands imposed by each product. d. None of these choices

c. directly estimate the resource demands imposed by each product.

161. In a time-driven ABC system, once the managers determine the cost per unit of supplying resources to activities, the next step would be a. for managers to determine how long an employee takes to do an activity. b. assign costs of a department's resources to the customer who uses the services. c. for managers to determine the time it takes to carry out one unit of each kind of activity. d. attempt to estimate practical capacity.

c. for managers to determine the time it takes to carry out one unit of each kind of activity.

36. In a department that drills holes in raw materials utilizing a highly automated process, which activity base is likely to be most appropriate for assigning overhead costs? a. units produced b. direct labor hours c. machine hours d. number of batches

c. machine hours

73. Product costs can be distorted if a unit-based activity driver is used and a. non-unit-based overhead costs are a significant proportion of total overhead. b. the consumption ratios differ between unit-based and non-unit-based input categories. c. non-unit-based overhead costs are a significant proportion of total overhead and the consumption ratios differ between unit-based and non-unit-based input categories. d. non-unit-based overhead costs are not a significant proportion of total overhead and the consumption ratios do not differ between unit-based and non-unit-based input categories.

c. non-unit-based overhead costs are a significant proportion of total overhead and the consumption ratios differ between unit-based and non-unit-based input categories.

30. A costing system that uses actual costs for direct materials and labor and predetermined overhead rates to apply overhead is called a(n) a. actual costing system. b. standard costing system. c. normal costing system. d. activity-based costing system.

c. normal costing system.

100. A secondary activity is a. the second activity on the activity list. b. an activity driver. c. one that is consumed by intermediate cost objects. d. one that is consumed by the final cost object.

c. one that is consumed by intermediate cost objects.

48. Assume that actual overhead costs equaled estimated (budgeted) overhead for the period. Actual direct labor hours exceeded estimated direct labor hours used to calculate the predetermined overhead rate. If overhead is applied using the predetermined overhead rate, then overhead is a. $0. b. underapplied. c. overapplied. d. indeterminable from the information given.

c. overapplied.

83. The use of unit-based activity drivers to assign costs can result in significant cost distortions when a. overhead costs are a small percentage of total manufacturing costs. b. direct material costs are a significant percentage of total manufacturing costs. c. overhead costs are a significant percentage of total manufacturing costs. d. direct material costs are a small percentage of total manufacturing costs.

c. overhead costs are a significant percentage of total manufacturing costs.

27. The method that first traces costs to a department and then to products is called a. direct costing. b. absorption costing. c. unit-based costing. d. indirect costing.

c. unit-based costing.

180. Activity __________ helps management achieve objectives such as product or customer costing and continuous improvement.

classification

173. The proportion of an overhead activity consumed by a product is the __________ ratio.

consumption

33. A department that is capital-intensive most likely would use a predetermined departmental overhead rate based on which of the following activity bases? a. units of direct material used b. direct labor hours c. direct labor cost d. machine hours

d. machine hours

165. The expected total time (hours) that a single product spends with primary activities is its cycle time multiplied by the units of the product produced at a. predetermined capacity. b. primary capacity. c. full capacity. d. practical capacity.

d. practical capacity.

96. An activity that is consumed by a final cost object, such as a product or customer, is called a(n) a. overhead activity. b. activity inventory. c. secondary activity. d. primary activity.

d. primary activity.

172. For labor-intensive operations, the most appropriate activity driver would be __________ hours.

direct labor

2. Predetermined overhead rates are calculated at the end of each year for the upcoming budget year using the formula: Overhead rate = Budgeted annual driver level ÷ Budgeted annual driver level. a.True b.False

false

5. Unit-based product costing assigns manufacturing and selling costs to products. a.True b.False

false

179. The activity __________ is a simple list of activities identified in an ABC system.

inventory

171. The formula Budgeted annual overhead ÷ Budgeted annual driver level is used to calculate a __________ rate.

predetermined overhead

183. In __________ ABC systems, managers directly estimate the resource demands imposed by each product.

time-driven

1. Unit-based costing first assigns overhead costs to departmental pools and then assigns these costs to products using predetermined overhead rates based on unit-level drivers. a.True b.False

true

3. Unit-level drivers are factors that measure the demands placed on unit-level activities by products. a. True b. False

true

4. If applied overhead is greater than actual overhead, it is called overapplied overhead. a. True b. False

true

170. Offering greater product accuracy than an activity-based costing system is not a characteristic of a __________ costing system.

unit-based

176. A(n) __________ method first traces costs to a department and then to products.

unit-based costing

175. The use of __________ activity drivers to assign costs tends to __________ high-volume products.

unit-level; overcost