Accounting Chapters 6 & 7
A cost pool including costs to entertain clients and make sales calls is a(n) ______ activity. - customer-level - batch-level - unit-level - product-level
customer-level
Which of the following is NOT an ABC level of activity? - Employee - Batch - Customer - Unit - Organization
Employee
True or false: Absorption costing and variable costing always result in the same net operating income each year. - True - False
False
True or false: Absorption costing net income may be computed by multiplying the number of units sold by the contribution margin per unit and subtracting total fixed expenses. - True - False
False
True or false: Segment margin is most useful in decisions involving short-run changes in sales volume such as pricing special orders. - True - False
False
Fixed manufacturing overhead costs are included as part of Work in Process inventory under ______. - variable costing only - both variable and absorption costing - absorption costing only - neither variable and absorption costing
absorption costing only
A fixed cost that supports the operations of more than one segment, but is not traceable in whole or part to any one segment is a(n) __ fixed cost.
common
An otherwise profitable segment may appear to be unprofitable if __ fixed costs are allocated to it.
common
One mistake companies make when preparing segmented income statements is arbitrarily assigning __ fixed costs to segments.
common
Variable costing income statements are based upon a ______ format. - product vs. period costs - contribution margin - traditional
contribution margin
In activity-based costing, another term for allocation base or activity measure is __ __ .
cost driver
The first major step when implementing an ABC system is ______. - identify the activities - compute the activity measure - assign overhead costs - classify cost pools
identify the activities
A traceable fixed cost ______. - is incurred because of the existence of the segment - will continue if the segment is discontinued - varies with the activity level in a particular segment - supports the operations of more than one segment
is incurred because of the existence of the segment
External reports are __ (more/less) detailed than internal reports.
less
Compared to traditional systems, activity-based costing uses ______ cost pools and unique measures of activity. - the same number of - more - fewer
more
The greater number of activities in an ABC system, the (more/less) __ costly it is for the company to develop.
more
When inventory decreases, cost of goods sold under absorption costing will generally be ______ cost of goods sold under variable costing. - more than - equal to - less than
more than
A product's _________ is a function of sales and the direct and indirect costs that the product causes. - product margin - net profit - gross margin - contribution margin
product margin
The profit from a product is also called the __ __.
product margin
Advocates of __ costing believe the matching principle dictates that fixed costs should be recognized as an expense in the current period.
variable
Direct costing or marginal costing are other terms for __ costing.
variable
The variable costing income statement separates ______. - product and period costs - selling and administrative expenses - variable and fixed expenses - direct and indirect expenses
variable and fixed expenses
The two general costing approaches used by manufacturing companies to prepare income statements __ are costing and __ costing.
variable, absorption
Costs that are totally unaffected by which products are made during a period are ______ costs. - batch-level - unit-level - manufacturing overhead - customer-level - organization-sustaining
organization-sustaining
Usually, traditional costing ______ high-volume products and ______ low-volume products. - undercosts; overcosts - overcosts; undercosts - overcosts; overcosts - undercosts; undercosts
overcosts; undercosts
Activity-based costing uses numerous __ cost pools.
overhead
In activity-based costing, first-stage allocation assigns __ costs to activity cost pools.
overhead
Decision-making problems that could occur when using absorption costing include inappropriate ______ decisions, and decisions made to ______ products that are, in fact, profitable. - pricing; drop - strategy; produce - reporting; add - production; focus upon
pricing; drop
When allocating fixed manufacturing overhead cost to units under absorption costing, the total fixed overhead costs must be divided by the number of units __.
produced
Individual customer __ minus individual customer __ equals customer margin.
sales, cost
Activity rates are used to apply overhead costs to products and customers in the __-stage allocation.
second
Activity-based costing uses activity rates to apply overhead costs to products in ______ stage allocation. - third - fourth - first - second
second
Costs that can be traced directly to a segment ______. - should be allocated to all segments - may be treated as common costs - should not be allocated to other segments
should not be allocated to other segments
To reconcile ABC product margin to net income ______. - subtract overhead costs not assigned to products - do nothing; product margin is equal to net income/loss - add overhead costs not assigned to products
subtract overhead costs not assigned to products
A reason that activity-based costing is not often used for external reporting is ______. - the ABC system may not conform to GAAP - auditors prefer to base allocations on personnel interviews - individual product costs need to be reported on external reports - ABC product costs exclude nonmanufacturing costs
the ABC system may not conform to GAAP
Assigning common fixed costs to segments impacts ______. - both segment margin and total corporate profit - total corporate profit only - segment margin only - neither segment margin nor total corporate profit
segment margin only
In activity-based costing, what costs are not assigned to products? (Multiple) - Direct labor - Sales commissions - Organization-sustaining - Unused capacity
- Organization-sustaining - Unused capacity
Costs that can be easily traced to individual products include ______. (Multiple) - shipping costs - sales commission - factory supervisor's salary - warranty repair costs
- shipping costs - sales commission - warranty repair costs
Which of the following is NOT an organizational sustaining cost? - Security guard wages - Set-up labor wages - Plant administrative supplies - Plant controller's salary
Set-up labor wages
Under activity-based costing, overhead includes ______. - both direct and indirect costs - only indirect manufacturing costs - only indirect non-manufacturing costs - all indirect costs
all indirect costs
In activity-based costing, the process of assigning overhead costs to activity cost pools is ______ stage allocation. - first - third - second - fourth
first
An example of a transaction driver is the ______. - number of hours spent setting up equipment - time spent repairing equipment - number of bills sent out to a customer - time spent preparing invoices
number of bills sent out to a customer
If some products are overcosted and some are undercosted the errors will ______. - offset each other in cost of goods sold and inventory valuations - cause inventory valuations to be incorrect - cause cost of goods sold to be either overstated or understated
offset each other in cost of goods sold and inventory valuations
In traditional costing, ______ costs are assigned to products. - both manufacturing and selling and administrative - neither manufacturing nor selling and administrative - only selling and administrative - only manufacturing
only manufacturing
Segment break-even calculations include ______ fixed expenses. - only traceable - only common - both traceable and common
only traceable
Variable costing treats ______ manufacturing costs as product costs. - all - only fixed - only variable - no
only variable
Using absorption costing for segmented income statements can lead to ______. (Multiple) - omission of upstream and downstream costs - under-costing of segments - inconsistencies between internal and external reports - the need to maintain two costing systems
- omission of upstream and downstream costs - under-costing of segments
An activity-based costing system ______. (Multiple) - produces different numbers than a traditional system - requires substantial resources - provides benefits of improved accuracy that always outweigh the costs - is costly to maintain
- produces different numbers than a traditional system - requires substantial resources - is costly to maintain
Activity-based costing only charges products for the cost of the capacity used because ______. (Multiple) - products are only assigned the costs of resources they actually use - it results in a more stable unit product cost - assigning costs of unused capacity artificially reduces product cost per unit
- products are only assigned the costs of resources they actually use - it results in a more stable unit product cost
The activity rate for the Customer Orders activity pool is $20 per order. If there are 400 customer orders for a product, the total overhead cost assigned to this product for customer orders is $ __.
400 x 20 = 8000
If the activity rate is $65 per order with a total of 120 orders for a product, the overhead cost assigned to the product is $__.
65x120=$7800
A company's products had sales of $750,000 and total costs of $360,000. If the net operating income for the company was $215,000, total overhead costs not assigned to products was $ __.
750,000 - 360,000 = 390,000390,000 - 215,000 = 175,000
Blissful Breeze manufactures and sells ceiling fans. Each fan has a unit product cost of $112 and a unit selling price of $190. If Blissful Breeze produces 900 fans and sells 842 fans this month, the total cost of goods sold will be $__.
842 * $112 = $94,304
The unit product cost of a blender is $24. If 900 blenders are produced and 849 blenders are sold, the total cost of goods sold is $__.
849 * $24 = $20,376
What type of activities are carried out regardless of which customers are served, which products are produced, how many batches are run or how many units are produced? - Product-sustaining - Organization-sustaining - Customer-sustaining - Unit-level - Batch-level
Organization-sustaining
Which of the following help companies channel their resources into the most profitable growth opportunities? - Product and customer profitability reports - Balance sheet - Activity based costing allocation reports - Income statements
Product and customer profitability reports
What is the benefit of a cross-functional team designing an ABC system? - The team can evaluate and reward employees. - The team feels powerful and can make executive decisions. - Resistance to change is reduced.
Resistance to change is reduced.
Under absorption costing product costs consist of ______. - only variable manufacturing costs - both variable and fixed manufacturing costs - all manufacturing and selling and administrative costs - only fixed manufacturing costs
both variable and fixed manufacturing costs
Activity-based costing data ______. - can be easily misinterpreted - only assigns relevant costs - is well suited to decision making
can be easily misinterpreted
When a segment cannot cover its own costs, that segment should ______. - probably be dropped - be combined with another profitable segment - recalculate its segment margin without including common fixed costs
probably be dropped
Activity based costing provides managers with information that affects ______. - both fixed and variable costs - neither fixed nor variable costs - only fixed costs - only variable costs
both fixed and variable costs
Variable costing net income may be computed by multiplying the number of units sold by the __ __ per unit and subtracting total __ expenses.
contribution margin, fixed
In activity based costing another term for activity measure is ______. - cost driver - cost pool - overhead - volume
cost driver
The most appropriate activity measure for a cost pool consisting of the costs of resources consumed taking and processing individual customer sales is the number of ______. - customer orders - items sold - customers - sales employees
customer orders
The most appropriate activity measure for a cost pool consisting of the costs of resources consumed taking and processing individual customer sales is the number of ______. - customer orders - sales employees - items sold - customers
customer orders
Activity-based costing uses more cost __ than traditional costing.
driver
The amount of time required to perform an activity is measured by a(n) __ driver.
duration
An activity cost pool accumulates costs for ______ activity measure(s). - multiple - one or more - exactly one
exactly one
Absorption costing can lead managers to mistakenly believe that fixed manufacturing overhead costs will ______ in total as the number of units produced increases. - remain the same - increase - decrease
increase
In activity-based costing, first-stage allocations are usually based on the results of ______. - interviews with the top executive team - using a traditional costing system - interviews with employees
interviews with employees
The most appropriate activity measure for a cost pool consisting of equipment depreciation and power to run machines is ______. - customer orders - product designs - direct labor hours - machine hours
machine hours
The most appropriate activity measure for a cost pool consisting of equipment depreciation and power to run machines is ______. - product designs - machine hours - direct labor hours - customer orders
machine hours
Customer sales minus direct material, direct labor, and overhead cost pools used for each customer equal customer __.
margin / profitability
The segment margin represents the ______. - margin available after a segment has covered all of its own costs - excess of the segment revenue over the segment cost of goods sold - margin remaining after traceable and common fixed costs have been deducted - margin available to cover fixed costs
margin available after a segment has covered all of its own costs
Activity-based costing ______ include activities that do not relate to the number of units produced. - may not - may
may
Under activity-based costing, nonmanufacturing costs ______. - may be allocated to products based on cause - are always treated as period costs - are never assigned to products - are always assigned to products, regardless of cause
may be allocated to products based on cause
Segmented income statements ______. - may be prepared for the various departments in the company, but not for specific product lines - are best used to determine which locations are profitable, rather than which product lines are profitable - should only be used for profit centers - may be prepared for activities at many levels in a company
may be prepared for activities at many levels in a company
Costs should be allocated to segments for internal decision-making purposes ______ the allocation base actually drives the cost being allocated. - only when - whether or not
only when
Activities that occur regardless of which customers are served, which products are produced or how many batches are run or units made are facility-level or __ - __ activities.
organization sustaining
When using absorption costing, fixed manufacturing overhead cost per unit = Total fixed manufacturing overhead divided by units ______. - sold - in ending inventory - produced - (produced - units sold)
produced
In activity-based costing, ______ are different from those calculated using traditional costing. - net operating incomes - direct labor costs - product margins - sales
product margins
A company's operations can be divided by product lines, geographical area, manufacturing plants, service centers or sales territories, which are known as __.
segments
When there is no change in inventory, net operating income will be ______ costing. - higher under absorption than under variable - higher under variable than under absorption - the same under both absorption and variable
the same under both absorption and variable
SPS Products has two divisions—Catalog Sales and Online Sales. For the last quarter the Catalog Sales segment margin was ($5,000). Online sales were $100,000. Online Sales contribution margin was $60,000, and its segment margin was $40,000. If Catalog Sales are discontinued, it is estimated that online sales will increase by 10%. Discontinuing Catalog Sales should increase company profits by ______. - $5,000 - $9,000 - $11,000 - $6,000
Increased online sales contribution margin ($100,000 × 10% ×$60,000 ÷ $100,000) is $6,000 + $5,000 saved from stopping catalog sales = $11,000.
In order to comply with GAAP and IFRS, the ______ costing method must be used for external reporting in the United States. - variable - segmented - absorption
absorption
Net operating income under absorption costing is generally ______ net operating income under variable costing in periods in which inventory increases. - equal to - less than - higher than
higher than
The company-wide break-even sales will always be ______ the sum of the segment break-even sales. - higher than - lower than - equal to - either higher or lower than
higher than
A part or activity within an organization about which managers would like cost, revenue or profit data is called a(n) __.
segment
A company with three segments has $10,000 in common fixed expenses. All three segments are at the break-even point. As a result, the company ______. - has an overall net operating income of $10,000 - is at the break-even point - has an overall net operating loss of $10,000
has an overall net operating loss of $10,000
Selling and administrative expenses are ______ on both the absorption and variable costing income statements. - the same amount and reported the same way - the same amount - reported the same way
the same amount
Frames, Inc. manufactures large wooden picture frames. Each frame requires $19 of direct materials and $40 of direct labor. Variable manufacturing overhead cost is $9 per frame produced, and variable selling and administrative expense is $13 per frame sold. The company produces 5,000 units each month and total fixed manufacturing overhead cost per month is $15,000. The unit product cost of each frame using variable costing is $__.
$19 + $40 + $9 = $68
Granny's Touch manufactures and sells cookbooks. The company's variable cost of goods sold is $39,200 and variable selling and administrative expense is $6,200. Fixed manufacturing overhead is $19,700 and fixed selling and administrative expense is $9,290. An income statement prepared using variable costing shows $__ as the total fixed expenses.
$19,700 + $9,290 = $28,990
What is the total amount of indirect factory wages if the amount allocated to product design was $200,000 and product design consumes 40% of indirect factory wages? - $800,000 - $500,000 - $80,000 - $200,000
$200,000 ÷ 0.40 = $500,000
Sleep Tight manufactures pillows. The company incurred $42,000 of fixed manufacturing overhead cost this year. Variable unit product cost was $17. Variable selling and administrative cost was $9 per unit and fixed selling and administrative expenses totaled $59,000. The company manufactured 28,000 pillows and sold 15,408. Total fixed expenses on the variable costing contribution format income statement equal ______. - $59,000 - $101,000 - $671,096 - $708,768
$42,000 + $59,000 = $101,000
If the activity rate for the customer order cost pool is $250 per order and the total for this cost pool is $425,000, the total number of customer orders is ______. - 2,500 - 1,700 - 4,250 - 2,000
$425,000 ÷ $250 = 1,700
JPL Company has two segments - Retail and Commercial. The Retail segment has a contribution margin ratio of 40% and traceable fixed expenses of $70,000. Commercial has traceable fixed expenses of $50,000 and a contribution margin ratio of 55%. The company also has $30,000 of common fixed expenses. The break-even point in dollar sales for the Retail segment equals ______. - $250,000 - $175,000 - $212,500 - $116,667
$70,000 ÷ 40% = $175,000
Pearls, Pearls, Pearls! manufactures and sells jewelry. The total variable cost of goods sold this month is $72,490. Variable selling and administrative cost is $22 per unit sold. If 350 units are produced and 314 units are sold this month, the total variable cost reported on the income statement for the month is $ __.
$72,490 + ($22 + 314) = $79,398
What are some of the limitations of activity-based costing systems? (Multiple) - The benefits of accuracy always outweigh the costs. - ABC procedures produce numbers that do not match traditional costing. - ABC requires substantial resources. - Managers and employees may resist the change to ABC.
- ABC procedures produce numbers that do not match traditional costing. - ABC requires substantial resources. - Managers and employees may resist the change to ABC.
On an absorption costing income statement, selling and administrative expenses ______. (Multiple) - are separated into fixed and variable components - equal the amounts reported on a variable costing income statement - are reported exactly the same way as on a variable costing income statement - are reported as a single amount
- equals the amounts reported on a variable costing income statement - are reported as a single amount
Product costs under absorption costing include ______. (Multiple) - fixed selling and administrative - fixed manufacturing overhead - direct labor - variable manufacturing overhead - direct materials - variable selling and administrative
- fixed manufacturing overhead - direct labor - variable manufacturing overhead - direct materials
Which group is likely to be uncomfortable using ABC allocations that are based on personnel interviews? - Employees - Shareholders - Auditors - Board of directors
Auditors
Which of the following is NOT an organizational sustaining cost? - Security guard wages - Plant controller's salary - Plant administrative supplies - Set-up labor wages
Set-up labor wages
Which costing method assigns only manufacturing costs to products? - Activity-based costing - Neither traditional absorption nor activity-based costing - Both traditional absorption and activity-based costing - Traditional absorption costing
Traditional absorption costing
Advocates of __ costing believe fixed costs are an essential part of product production.
absorption
Financial statement users need to be aware of changes in inventory levels when using __ costing.
absorption
Focusing on activities to eliminate waste, decrease processing time, and reduce defects is the basis of __-__ __ .
activity based management
A "bucket" in which costs are accumulated that relate to a single activity measure in the ABC system is a(n) ______. - activity measure - duration driver - transaction driver - activity cost pool
activity cost pool
Overhead includes both manufacturing and nonmanufacturing costs under ______ costing. - activity-based - traditional absorption - both activity-based and traditional absorption - neither activity-based or traditional absorption
activity-based
In activity-based costing, the consumption of overhead resources is caused by ______. - an activity - material purchases - direct labor - overhead
an activity
When inventory increases, absorption costing net operating income is higher than variable costing net income due to the fixed manufacturing overhead ______. - deferred in the inventory account on the balance sheet - released to the cost of goods sold account on the income statement
deferred in the inventory account on the balance sheet
In the 19th and 20th centuries ______. - departmental overhead rates were rarely used - the most common allocation base was number of units produced - direct labor hours was a satisfactory overhead allocation base
direct labor hours was a satisfactory overhead allocation base
Employees may be asked to estimate their time spent dealing with cost pool activities so that ______. - distribution of non-personnel costs can be determined - the availability of factory capacity can be determined - employees will understand their role in the company - first-stage allocations will be more accurate
first-stage allocations will be more accurate
Absorption and variable costing net income are usually different due to the accounting for ______. - fixed manufacturing overhead - all manufacturing overhead - selling and administrative costs - variable manufacturing overhead - all product costs
fixed manufacturing overhead
Absorption costing net operating income may not agree with the net operating income calculated for CVP analysis due to the way in which ______ is handled in absorption costing. - fixed manufacturing overhead - variable manufacturing overhead - fixed selling and administrative expense - direct labor cost
fixed manufacturing overhead
The difference between reported net income on variable costing and absorption costing income statements is based on how ______. - cost classifications are defined - fixed overhead is accounted for - the statements are formatted - expenses are organized
fixed overhead is accounted for
Absorption costing net income is calculated by subtracting selling and administrative expenses from __ __.
gross margin
If ABC is not implemented correctly and organization-sustaining costs are included in product costs, then product costs will be ______ and margins will be ______. - understated; overstated - understated; understated - overstated; overstated - overstated; understated
overstated; understated
To assist in first-stage allocations in ABC, employees designated as indirect factory workers should provide the ______. - non-personnel costs distributed to each cost pool - available capacity of the factory and equipment - wages received for each employee activity - percentage of employee time spent for each activity pool
percentage of employee time spent for each activity pool
The basis of benchmarking is comparing ______. - performance within the same industry - manufacturing and nonmanufacturing costs - traditional and ABC systems - performance in different industries
performance within the same industry
Activity-based costing treats organization-sustaining costs as __ expenses.
period
Under both variable costing and absorption costing, variable and fixed selling and administrative costs are treated as ______ costs. - product - period
period
The final step in implementing ABC is ______. - assign overhead costs to cost objects - prepare management reports - calculate activity rates
prepare management reports
The most common reports prepared using ABC data are the product and customer __ reports.
profitibility
Unit-level activities are ______. - performed for each group of units - proportional to the number of units produced - related to specific products produced - performed for specific customers
proportional to the number of units produced
U.S. GAAP and IFRS ______ publicly traded companies include segmented financial data prepared for external users that use the same methods used in internal segment reports. - do not recommend - require - recommend
require
An example of a duration driver is the ______. - time spent preparing invoices - number of bills sent out to a customer - number of children who attended day care orientation - number of employees who received training
time spent preparing invoices
Only costs that would disappear over time if a segment disappeared should be treated as __ fixed costs.
traceable
The segment margin equals the segment's contribution margin less the segment's __ fixed costs.
traceable
All manufacturing costs are assigned to products in __ costing.
traditional
The first major step in implementing ABC is to identify the __ that will form the foundation for the system.
activities
If a segment is entirely eliminated, common fixed costs will ______. - be eliminated - not change - decrease
not change
The total cost in the Product Design cost pool is $200,000 with a total activity of 1,600 designs. The total cost assigned to a customer who had 7 designs done is $ .
$200,000/1600 = $125$125*7= $875
Which of the following items are the same under both ABC and traditional costing? - Net operating income - Total sales - Total costs - Product margins
- Net operating income - Total sales - Total costs
The customer orders cost pool uses 25% of indirect factory wages. If total indirect factory wages are $500,000, the amount allocated to this cost pool in the first-stage allocation is: - $120,000 - $150,000 - $125,000 - $500,000
$500,000 × 0.25 = $125,000
Total estimated manufacturing overhead is $900,000 and total estimated activity is 30,000 machine-hours. The plantwide overhead rate is $__ per machine hour.
$900,000 / 30,000 = $30
When calculating the profit impact of discontinuing a segment, consider _____. (Multiple) - the segment's traceable fixed costs - the segment's contribution margin - common costs allocated to the segment
- the segment's traceable fixed costs - the segment's contribution margin
Place the steps for implementing ABC in order
1. define activities, activity cost pools, and activity measure 2. assign overhead costs to activity cost pools' 3. calculate activity rate 4. assign overhead costs to cost objects 5. prepare management reports.
In recent years, direct labor as a percentage of total cost began declining, which caused overhead to __.
increase
ABC is generally used for ______ reporting. - both internal and external - external - internal
internal
Costs of unused or idle capacity are assigned to products when using a(n) __ costing system.
traditional / absorption / full
Put'er There manufactures baseball gloves. Each glove requires $22 of direct materials and $18 of direct labor. Variable manufacturing overhead cost is $7 per unit and fixed manufacturing overhead cost is $19,000 in total. Variable selling and administrative costs are $11 per unit sold and fixed selling and administrative costs are $13,200. Last period, 800 gloves were produced, and 585 gloves were sold. The unit product cost using variable costing is ______ per unit. - $81.75 - $58 - $70.75 - $47
$22 + $18 + $7 = $47
A company has two activity cost pools—Customer Orders and Product Design. The activity rates are $300 per order for Customer Orders and $500 per design for Product Design. How much overhead cost would be assigned to a customer placing 4 orders and requiring 10 designs? - $6,200 - $5,000 - $8,000 - $800
($300 × $4) + ($500 × 10) = $6,200
Why is CVP analysis more difficult when using absorption costing than when using variable costing? - Fixed manufacturing overhead is ignored when performing CVP analysis. - CVP analysis requires costs to be broken down into product and period costs, which is not done in absorption costing. - Selling and administrative costs are ignored when performing CVP analysis. - CVP analysis requires costs to be broken down between variable and fixed which is not done in absorption costing.
CVP analysis requires costs to be broken down between variable and fixed which is not done in absorption costing.
True or false: Traditional cost systems tend to undercost standard products and overcost specialty products. - True - False
False
Which of the following can be combined in activity-based costing? - Batch and product level activities - Highly correlated activities - Activities should not be combined in activity based costing - Labor and overhead activities
Highly correlated activities
Why is top management support needed when ABC is implemented? - Leadership is instrumental in motivating employees to embrace ABC. - Management needs to create and design the ABC system. - Management must deliver data needed to support ABC.
Leadership is instrumental in motivating employees to embrace ABC.
Why is top management support needed when ABC is implemented? - Management must deliver data needed to support ABC. - Leadership is instrumental in motivating employees to embrace ABC. - Management needs to create and design the ABC system.
Leadership is instrumental in motivating employees to embrace ABC.
In a traditional cost accounting system, what type of costs are assigned to products even if the costs are not caused by the products? - Nonmanufacturing - Both manufacturing and nonmanufacturing - Manufacturing
Manufacturing
Which of the following is not essential for the successful implementation of an ABC system? - Top managers must support the ABC system. - A cross-functional team should be created to design and implement the ABC system. - Top managers should ensure that ABC data is linked to how employees are evaluated and rewarded. - Top managers must design the ABC system.
Top managers must design the ABC system.
A company has two segments with total sales of $500,000 and total variable costs of $343,750. Traceable fixed expenses are $50,000 and common fixed expenses are $80,000. The break even in dollars for the company as a whole equals $ __.
Total fixed expenses = Traceable fixed expenses + Common fixed expenses = $50,000 + $80,000 = $130,000 Contribution margin ratio = (Sales - Variable costs) / Sales * 100 = ($500,000 - $343,750) / $500,000 * 100 = 31.25% Break-eve dollars = Fixed expenses / Contribution margin ratio = $130,000 / 31.25% = $416,000
True or false: A cost that can be traced directly to a specific segment should be charged directly to that segment and not allocated to other segments. - True - False
True
True or false: Activity-based costing can be used for process improvement. - True - False
True
True or false: As the number of activities increases, the cost to implement an ABC system also increases. - True - False
True
True or false: In an automated environment, using traditional allocation bases based on volume may distort unit product costs. - True - False
True
True or false: Some manufacturing costs may be excluded from product cost when using ABC. - True - False
True
The best team to create an ABC system should include employees from ______. - legal - custodial - marketing
marketing
Which costing system does not assign selling and administrative costs to products when computing product margin? - Both traditional and activity-based - Neither traditional nor activity-based - Traditional - Activity-based
traditional
A company's total expected overhead for the year is $500,000. Two activity cost pools have been identified: Customer Service with a total cost of $200,000 and a total activity of 25,000 customer service calls; and Product Development with a total cost of $300,000 and total activity of 20,000 development hours. Using activity-based costing, calculate the appropriate activity rate(s). - $8 per customer call and $15 per development hour - $20 per customer call and $25 per development hour - $11.11 per customer call or per development hour
$200,000 ÷ 25,000 = $8 per customer call and $300,000 ÷ 20,000 = $15 per development hour.
A company assigns overhead using a plantwide rate. If total estimated manufacturing overhead is $900,000 and the total estimated activity is 30,000 machine-hours, the overhead cost assigned to a product using 12,000 machine-hours is ______. - $900,000 - $360,000 - $2,250,000 - $450,000
($900,000 ÷ 30,000) × 12,000 = $360,000
What are some of the limitations of activity-based costing systems? (Multiple) - The benefits of accuracy always outweigh the costs. - ABC procedures produce numbers that do not match traditional costing. - Managers and employees may resist the change to ABC. - ABC requires substantial resources.
- ABC procedures produce numbers that do not match traditional costing. - Managers and employees may resist the change to ABC. - ABC requires substantial resources.
What causes traditional and activity-based costing systems to report different product margins? - The traditional cost system assigns period costs to all products that are produced during the period. - Traditional cost systems allocate all of the manufacturing overhead costs to products using a volume-related allocation base. - Traditional cost systems allocate all manufacturing overhead costs to products. - The ABC system assigns nonmanufacturing overhead costs to products on a cause-and-effect basis as appropriate.
- Traditional cost systems allocate all of the manufacturing overhead costs to products using a volume-related allocation base. - Traditional cost systems allocate all manufacturing overhead costs to products. - The ABC system assigns nonmanufacturing overhead costs to products on a cause-and-effect basis as appropriate.
Advocates of variable costing believe fixed manufacturing costs ______. (Multiple) - should be ignored when preparing income statements - are period expenses - must be assigned to products - are not caused by and cannot be meaningfully traced to specific units of production
- are period expenses - are not caused by and cannot be meaningfully traced to specific units of production
A variable costing income statement ______. (Multiple) - calculates contribution margin while the absorption costing income statement calculates gross margin - is constructed exactly like an absorption costing income statement - focuses on fixed and variable expenses, while an absorption costing income statement focuses on period and product costs - does not include fixed manufacturing overhead, which is included on an absorption costing income statement
- calculates contribution margin while the absorption costing income statement calculates gross margin - focuses on fixed and variable expenses, while an absorption costing income statement focuses on period and product costs
When managers allocate organization-sustaining and unused capacity costs to products ______. (Multiple) - costs will be overstated - prices will be more accurate than under traditional costing - product margins will be overstated - incorrect decisions may be made
- costs will be overstated - incorrect decisions may be made
When managers allocate organization-sustaining and unused capacity costs to products ______. (Multiple) - prices will be more accurate than under traditional costing - costs will be overstated - product margins will be overstated - incorrect decisions may be made
- costs will be overstated - incorrect decisions may be made
Activities that could be combined into one batch-level activity are the number of ______. (Multiple) - customer orders received - power to run machines - shipped orders - products designed
- customer orders received - shipped orders
ABC does not conform to GAAP because it ______. (Multiple) - includes direct materials and direct labor - excludes some nonmanufacturing costs - includes some nonmanufacturing costs - excludes some manufacturing costs
- includes some nonmanufacturing costs - excludes some manufacturing costs
In the 19th and 20th centuries, cost systems relied on allocation bases such as ______. (Multiple) - the number of products made - the number of products sold - machine hours - labor hours
- machine hours - labor hours
Costs assigned and/or traced when computing product margin in a traditional cost system are ______. (Multiple) - manufacturing overhead - direct material - selling and administrative - direct labor
- manufacturing overhead - direct material - direct labor
Absorption costing is ______. (Multiple) - rarely used - the preferred method for internal decision making - required by GAAP and IFRS - used by most companies for both internal and external reports
- required by GAAP and IFRS - used by most companies for both internal and external reports
Customer-level activities include ______. (Multiple) - placing purchase orders - sales calls - advertising - mailing catalogs
- sales calls - mailing catalogs
A systematic approach to identifying the activities that need the most improvement is called __.
benchmarking
Because nonmanufacturing costs are not included as costs of a product, the use of __ costing can lead to the omission of segment costs.
absorption
In ABC, any event that causes consumption of overhead resources is a(n) __.
activity
Overhead includes both manufacturing and nonmanufacturing costs under ______ costing. - both activity-based and traditional absorption - neither activity-based or traditional absorption - traditional absorption - activity-based
activity-based
Some manufacturing costs may be excluded from product costs when using ______ costing. - either traditional absorption or activity-based - activity-based - traditional absorption - neither traditional absorption nor activity-based
activity-based
ABC is not used for external reporting because __ would not be comfortable using allocations based on employee interviews.
auditors
Arbot Co. manufactures appliances at three manufacturing facilities in the United States. Each location has a plant manager who oversees the manufacturing process for that location. Segmented income statements are prepared for each plant and for each product manufactured in the plant. The salary of each plant manager is a ______ for the individual product lines made in the plant. - common fixed cost for the plant and a traceable fixed cost - traceable fixed cost for both the plant and - traceable fixed cost to the plant and a common fixed cost - common fixed cost for both the plant and
traceable fixed cost to the plant and a common fixed cost
Simple counts of the number of times an activity occurs are __ drivers.
transaction
When making decisions using ABC data ______. - all assigned costs are relevant - all variable costs should be ignored - unavoidable fixed costs should be ignored
unavoidable fixed costs should be ignored
Power to run production equipment is a(n) __ -level activity.
unit
The number of units produced does not affect net operating income when using __ costing.
variable
Traditional cost systems allocate all manufacturing costs using ______ allocation base(s). - overhead-related - materials-related - volume-related - activity-related
volume-related
Citrus Scents produces body sprays. Each bottle has a unit product cost of $5.38. The company produced 1,490 bottles this month and sold 1,203 of those bottles. Total cost of goods sold was ______. - $1,544.06 - $8,016.20 - $6,472.14
$5.38 × 1,203 = $6,472.14
Citrus Scents produces body sprays. Variable selling and administrative expense is $1.05 per bottle and fixed selling and administrative expense is $4,500 per month. The company produced 1,490 bottles this month, and sold 1,203 of those bottles. Total selling and administrative expense for the month was ______. - $6,064.50 - $1,564.50 - $5,763.15 - $4,500.00
($1.05 × 1,203) + $4,500 = $5,763.15
The Quaint Quilt produces and sells handmade quilts. Variable manufacturing costs total $140 per quilt. Fixed manufacturing overhead totals $68,250 per quarter. Variable selling and administrative costs are $19 per quilt sold, and fixed selling and administrative costs are $50,000 per quarter. Last quarter, the company produced 910 quilts and sold 780 quilts. The total variable cost reported on Quaint Quilt's variable costing income statement is ______. - $124,020 - $144,690 - $109,200 - $167,700
($140 + $19) × 780 quilts sold = $124,020
Selling and administrative expenses ______. - may be treated as either product or period costs - are always treated as period costs - are treated as period costs under absorption costing only - are treated as period costs under variable costing only
are always treated as period costs
Bart's Inc. operates retail stores in various cities. Segmented income statements are prepared for each store and for each product line in each store. The property tax for the store is a(n) __ fixed cost for the store, and a(n) __ fixed cost for each product line sold in the store.
traceable, common
Given the following information, calculate the unit product cost under absorption costing. Direct materials: $50/unit; Direct labor: $75/unit; Variable manufacturing overhead: $27/unit; Fixed manufacturing overhead: $30,000; Units produced: 10,000; Units sold: 6,000. - $157 - $152 - $128 - $155
$50 + $75 + $27 + ($30,000 ÷ 10,000) = $155 per unit
Blink sells and manufactures frames for eyeglasses. The unit product cost for frame #47320 is $76.35. Last period, Blink produced 200 frames and sold 155 of them. Total cost of goods sold equals ______. - $11,834.25 - $231.35 - $15,270.00 - $3,435.75
$76.35 × 155 = $11,834.25
Blissful Breeze manufactures and sells ceiling fans. Variable selling and administrative expense is $11.50 per fan and fixed selling and administrative expense is $7,800 per month. If Blissful Breeze produces 900 fans and sells 842 fans this month, total selling and administrative expenses will be $ __.
$7800 + ($11.50 * 842) = $17,483
Which of the following is NOT a common mistake made in preparing segmented income statements? - Arbitrarily dividing common costs among segments. - Omitting costs that should be included. - Using inappropriate allocations bases. - Computing contribution margin instead of gross margin.
Computing contribution margin instead of gross margin.
Managers who believe that all manufacturing costs must be assigned to products in order to properly match the cost of production with sales are advocates of __ costing.
absorption
Net income computed under ______ costing may not agree with the results of CVP analysis. - marginal - absorption - direct - variable
absorption
When inventory increases, which costing method generally results in higher net income? - The two costing methods would show the same net income - Variable costing - Absorption costing
absorption costing
Fixed manufacturing overhead costs are expensed as units are sold as part of cost of goods sold under __ costing, and expensed in full with period costs under __ costing.
absorption, variable
For external reporting, income statements are generally prepared using __ costing, while __ costing is used for internal decision making purposes.
absorption, variable
An absorption costing income statement calculates ______. - gross margin by deducting cost of goods sold from sales - net income by deducting fixed costs from contribution margin - net income by deducting selling and administrative costs from contribution margin - contribution margin by deducting variable costs from sales
gross margin by deducting cost of goods sold from sales
When units sold exceed units produced, net income under variable costing will generally be _______ net income under absorption costing. - .lower than - equal to - higher than
higher than
Costs should be allocated to segments for internal decision-making purposes ______. - equally over all segments - only when the allocation base actually drives the cost being allocated - even when the cost is non-traceable, so that all costs will be considered in the decisions - even if the allocation base does not actually drive the cost
only when the allocation base actually drives the cost being allocated
Costs are separated between variable and fixed expenses when using ______ costing, whereas ______ costing separates costs between product and period. - variable, absorption - absorption, variable
variable, absorption
Variable costing income statements separate __ expenses from __ expenses.
variable, fixed
Dollar break-even for a company is calculated as ______. - Common fixed expenses ÷ Overall CM ratio - (Traceable fixed expenses - Common fixed expenses) ÷ Overall CM ratio - (Traceable fixed expenses + Common fixed expenses) ÷ Overall CM ratio - Traceable fixed expenses ÷ Overall CM ratio
(Traceable fixed expenses + Common fixed expenses) ÷ Overall CM ratio
When the number of units produced equals the number of units sold, ______ (Multiple) - all fixed overhead incurred flows to the income statement under both costing methods - absorption costing net income is equal to variable costing net income - absorption costing total expense is lower than variable costing total expense - absorption costing total expense is higher than variable costing total expense
- all fixed overhead incurred flows to the income statement under both costing methods - absorption costing net income is equal to variable costing net income
A segment should be discontinued when the segment ______. (Multiple) - has important side effects on other segments - cannot cover its own costs - has a positive segment margin but cannot cover any common fixed costs - has a contribution margin that cannot cover traceable fixed costs
- cannot cover its own costs - has a contribution margin that cannot cover traceable fixed costs
When a segment is eliminated, a ______. - common fixed cost will disappear - common fixed cost will remain unchanged - traceable fixed cost will remain unchanged - traceable fixed cost will disappear
- common fixed cost will remain unchanged - traceable fixed cost will disappear
Incorrectly or arbitrarily assigning common costs to segments ______. (Multiple) - ensures all common costs will be covered - causes company net income to be reported incorrectly - could reduce the overall profits of the company - distorts the profitability of segments - holds managers responsible for costs they cannot control
- could reduce the overall profits of the company - distorts the profitability of segments - holds managers responsible for costs they cannot control
GAAP and IFRS rules ______. (Multiple) - require that the same method be used for both internal and external segment reporting - create incentives for companies to use the contribution margin format in segment reporting - create problems in reconciling internal and external reports - require segmented financial data be included in annual reports
- require that the same method be used for both internal and external segment reporting - create problems in reconciling internal and external reports -require segmented financial data be included in annual reports
When preparing a segment margin income statement ______. (Multiple) - traceable fixed expenses are deducted from contribution margin - cost of goods sold consists of only variable manufacturing costs - common fixed expenses are excluded from the statement - fixed manufacturing costs are included in cost of goods sold
- traceable fixed expenses are deducted from contribution margin - cost of goods sold consists of only variable manufacturing costs
An absorption costing income statement calculates ______. - contribution margin by deducting variable costs from sales - net income by deducting selling and administrative costs from contribution margin - gross margin by deducting cost of goods sold from sales - net income by deducting fixed costs from contribution margin
gross margin by deducting cost of goods sold from sales
From a decision making point of view, __ margin is most useful for major capacity decisions and __ margin is most useful for short-term sales volume decisions.
segment, contribution
Segment contribution margin equals segment revenue minus the __ expenses for the segment.
variable
Comfy Cozy Chairs makes and sells rockers. Each rocker requires $45 of direct materials and $37 of direct labor. Variable manufacturing overhead is $8 per unit, and fixed manufacturing overhead totals $58,000. Variable selling and administrative costs are $15 per unit, and fixed selling and administrative costs total $102,000. During the period, 2,000 rockers were produced and 1,640 were sold. The unit product cost using absorption costing is ______. - $105 - $90 - $119 - $125
$45 + $37 + $8 + ($58,000 ÷ 2,000) = $119
