Multiple Choice Questions
1. Consider the following statements regarding
traditional costing systems:
I.
Overhead
costs are applied to products on the basis of volume-related measures.
II.
All
manufacturing costs are easily traceable to the goods produced.
III.
Traditional
costing systems tend to distort unit manufacturing costs when numerous goods
are made that have widely varying production requirements.
Which
of the above statements is (are) true?
A. I only.
B. II only.
C. III only.
D. I and III.
E. II and III.
Answer:
D LO: 1 Type: N
2. Many traditional costing systems:
A. trace manufacturing overhead to individual
activities and require the development of numerous activity-costing rates.
B. write off manufacturing overhead as an expense
of the current period.
C. combine widely varying elements of overhead
into a single cost pool.
D. use a host of different cost drivers (e.g.,
number of production setups, inspection hours, orders processed) to improve the
accuracy of product costing.
E. produce results far superior to those
achieved with activity-based costing.
Answer:
C LO: 1 Type: N
3. The following tasks are associated with an
activity-based costing system:
1—Calculation of cost application rates
2—Identification of cost drivers
3—Assignment of cost to products
4—Identification of cost pools
Which
of the following choices correctly expresses the proper order of the preceding
tasks?
A. 1, 2, 3, 4.
B. 2, 4, 1, 3.
C. 3, 4, 2, 1.
D. 4, 2, 1, 3.
E. 4, 2, 3, 1.
Answer:
D LO: 2, 4 Type: RC
4. Which of the following is the proper sequence
of events in an activity-based costing system?
A. Identification of cost drivers,
identification of cost pools, calculation of cost application rates, assignment
of cost to products.
B. Identification of cost pools, identification
of cost drivers, calculation of cost application rates, assignment of cost to
products.
C. Assignment of cost to products,
identification of cost pools, identification of cost drivers, calculation of
cost application rates.
D. Calculation of cost application rates,
identification of cost drivers, identification of cost pools, assignment of
cost to products.
E. Some other sequence of the four activities
listed above.
Answer: B LO: 2, 4
Type: RC
5. Which of the following tasks is not
normally associated with an activity-based costing system?
A. Calculation of cost application rates.
B. Identification of cost pools.
C. Preparation of allocation matrices.
D. Identification of cost drivers.
E. Assignment of cost to products.
Answer:
C LO: 2, 4 Type: RC
6. Which of the following is not a broad,
cost classification category typically used in activity-based costing?
A. Unit-level.
B. Batch-level.
C. Product-sustaining level.
D. Facility-level.
E. Management-level.
Answer:
E LO: 3 Type: RC
7. In an activity-based costing system, direct
materials used would typically be classified as a:
A. unit-level cost.
B. batch-level cost.
C. product-sustaining cost.
D. facility-level cost.
E. matrix-level cost.
Answer:
A LO: 3 Type: N
8. Which of the following is least likely
to be classified as a batch-level activity in an activity-based costing system?
A. Shipping.
B. Receiving and inspection.
C. Production setup.
D. Property taxes.
E. Quality assurance.
Answer:
D LO: 3 Type: RC
9. In an activity-based costing system,
materials receiving would typically be classified as a:
A. unit-level activity.
B. batch-level activity.
C. product-sustaining activity.
D. facility-level activity.
E. period-level activity.
Answer:
B LO: 3 Type: RC
10. Foster, Inc., an appliance manufacturer, is
developing a new line of ovens that uses controlled-laser technology. The research and testing costs associated
with the new ovens is said to arise from a:
A. unit-level activity.
B. batch-level activity.
C. product-sustaining activity.
D. facility-level activity.
E. competitive-level activity.
Answer:
C LO: 3
Type: N
11. Consider the following statements regarding
product-sustaining activities:
I.
They
must be done for each batch of product that is made.
II.
They
must be done for each unit of product that is made.
III.
They
are needed to support an entire product line.
Which
of the above statements is (are) true?
A. I only.
B. II only.
C. III only.
D. I and II.
E. II and III.
Answer:
C LO: 3 Type: RC
12. Which of the following is least likely
to be classified as a facility-level activity in an activity-based costing
system?
A. Plant maintenance.
B. Property taxes.
C. Machine processing cost.
D. Plant depreciation.
E. Plant management salaries.
Answer:
C LO: 3 Type: RC
13. The salaries of a manufacturing plant's
management are said to arise from:
A. unit-level activities.
B. batch-level activities.
C. product-sustaining activities.
D. facility-level activities.
E. direct-cost activities.
Answer:
D LO: 3 Type: RC
14. Which of the following choices correctly
depicts a cost that arises from a batch-level activity and one that arises from
a facility-level activity?
Batch-Level
Activity
|
Facility-Level
Activity
|
|||
A.
|
Direct materials
|
Plant depreciation
|
||
B.
|
Inspection
|
Property taxes
|
||
C.
|
Quality assurance
|
Shipping
|
||
D.
|
Plant maintenance
|
Insurance
|
||
E.
|
Management salaries
|
Material handling
|
||
Answer:
B LO: 3 Type: RC
15.
The division of
activities into unit-level, batch-level, product-sustaining level, and
facility-level categories is commonly known as a cost:
A.
object.
B.
application
method.
C.
hierarchy.
D.
estimation
method.
E.
classification
scheme that is useful in traditional, volume-based systems.
Answer: C LO:
3 Type: RC
16. Alamo's customer service department follows
up on customer complaints by telephone inquiry.
During a recent period, the department initiated 7,000 calls and
incurred costs of $203,000. If 2,940 of
these calls were for the company's wholesale operation (the remainder were for
the retail division), costs allocated to the retail division should amount to:
A. $0.
B. $29.
C. $85,260.
D. $117,740.
E. $203,000.
Answer:
D LO: 4 Type: A
Use the
following to answer questions 17-18:
Riverside
Florists uses an activity-based costing system to compute the cost of making
floral bouquets and delivering the bouquets to its commercial customers. Company personnel who earn $180,000 typically
perform both tasks; other firm-wide overhead is expected to total $70,000. These costs are allocated as follows:
Bouquet Production
|
Delivery
|
Other
|
|
Wages and
salaries
|
60%
|
30%
|
10%
|
Other overhead
|
50%
|
35%
|
15%
|
Riverside
anticipates making 20,000 bouquets and 4,000 deliveries in the upcoming year.
17. The cost of wages and salaries and other
overhead that would be charged to each bouquet made is:
A. $7.15.
B. $8.75.
C. $12.50.
D. $13.75.
E. some other amount.
Answer:
A LO: 4 Type: A
18. The cost of wages and salaries and other
overhead that would be charged to each delivery is:
A. $19.63.
B. $20.31.
C. $26.75.
D. $40.63.
E. some other amount.
Answer:
A LO: 4 Type: A
Use the
following to answer questions 19-27:
HiTech Products
manufactures three types of remote-control devices: Economy, Standard, and
Deluxe. The company, which uses
activity-based costing, has identified five activities (and related cost
drivers). Each activity, its budgeted
cost, and related cost driver is identified below.
Activity
|
Cost
|
Cost
Driver
|
||
Material
handling
|
$
225,000
|
Number of
parts
|
||
Material
insertion
|
2,475,000
|
Number of
parts
|
||
Automated
machinery
|
840,000
|
Machine hours
|
||
Finishing
|
170,000
|
Direct labor
hours
|
||
Packaging
|
170,000
|
Orders
shipped
|
||
Total
|
$3,880,000
|
|||
The following
information pertains to the three product lines for next year:
Economy
|
Standard
|
Deluxe
|
|
Units to be
produced
|
10,000
|
5,000
|
2,000
|
Orders to be
shipped
|
1,000
|
500
|
200
|
Number of
parts per unit
|
10
|
15
|
25
|
Machine hours
per unit
|
1
|
3
|
5
|
Labor hours
per unit
|
2
|
2
|
2
|
19. What is HiTech's cost application rate for
the material-handling activity?
A. $1.00 per part.
B. $2.25 per part.
C. $6.62 per labor hour.
D. $13.23 per part.
E. A rate other than those listed above.
Answer:
A LO: 4 Type: A
20. What is HiTech's cost application rate for
the automated machinery activity?
A. $24.00 per machine hour.
B. $24.50 per labor hour.
C. $49.42 per unit.
D. $50.00 per machine hour.
E. A rate other than those listed above.
Answer:
A LO: 4 Type: A
21. What is HiTech's cost application rate for
the finishing activity?
A. $5.00 per labor hour.
B. $5.00 per machine hour.
C. $5.00 per unit.
D. $7.50 per unit.
E. A rate other than those listed above.
Answer:
A LO: 4 Type: A
22. What is HiTech's cost application rate for
the packaging activity?
A. $4.86 per machine hour.
B. $5.00 per labor hour.
C. $10.00 per unit.
D. $100.00 per order shipped.
E. A rate other than those listed above.
Answer:
D LO: 4 Type: A
23. Under an activity-based costing system, what
is the per-unit cost of Economy?
A. $141.
B. $164.
C. $225.
D. $228.
E. An amount other than those listed above.
Answer:
B LO: 4 Type: A
24. Under an activity-based costing system, what
is the per-unit cost of Standard?
A. $164.
B. $228.
C. $272.
D. $282.
E. An amount other than those listed above.
Answer:
C LO: 4 Type: A
25. Under an activity-based costing system, what
is the per-unit cost of Deluxe?
A. $272.
B. $282.
C. $320.
D. $440.
E. An amount other than those listed above.
Answer:
D LO: 4 Type: A
26. Assume that HiTech is using a volume-based
costing system, and the preceding manufacturing costs are applied to all
products based on direct labor hours.
How much of the preceding cost would be assigned to Deluxe?
A. $456,471.
B. $646,471.
C. $961,176.
D. $1,141,176.
E. An amount other than those listed above.
Answer:
A LO: 1 Type: A
27. Assume that HiTech is using a volume-based
costing system, and the preceding manufacturing costs are applied to all
products based on direct labor hours.
How much of the preceding cost would be assigned to Standard?
A. $456,471.
B. $646,471.
C. $961,176.
D. $1,141,176.
E. An amount other than those listed above.
Answer:
D LO: 1 Type: A
Use the
following to answer questions 28-31:
Century, Inc., currently
uses traditional costing procedures, applying $400,000 of overhead to products
X and Y on the basis of direct labor hours.
The firm is considering a shift to activity-based costing and the
creation of individual cost pools that will use direct labor hours (DLH),
production setups (SU), and number of parts components (PC) as cost
drivers. Data on the cost pools and
respective driver volumes follow.
Product
|
Pool No. 1
(Driver: DLH)
|
Pool No. 2
(Driver: SU)
|
Pool No. 3
(Driver: PC)
|
|
X
|
600
|
30
|
1,500
|
|
Y
|
1,400
|
50
|
1,000
|
|
Pool Cost
|
$80,000
|
$140,000
|
$180,000
|
|
28. The overhead cost allocated to product X by
using traditional costing procedures would be:
A. $120,000.
B. $184,500.
C. $215,500.
D. $280,000.
E. some other amount.
Answer:
A LO: 1 Type: A
29. The overhead cost allocated to product Y by
using traditional costing procedures would be:
A. $120,000.
B. $184,500.
C. $215,500.
D. $280,000.
E. some other amount.
Answer:
D LO: 1 Type: A
30. The overhead cost allocated to product X by
using activity-based costing procedures would be:
A. $120,000.
B. $184,500.
C. $215,500.
D. $280,000.
E. some other amount.
Answer:
B LO: 4
Type: A
31. The overhead cost allocated to product Y by
using activity-based costing procedures would be:
A. $120,000.
B. $184,500.
C. $215,500.
D. $280,000.
E. some other amount.
Answer:
C LO: 4 Type: A
Use the
following to answer questions 32-33:
Kelly and
Logan, an accounting firm, provides consulting and tax planning services. A recent analysis found that 65% of the
firm's billable hours to clients resulted from tax planning and for many years,
the firm's total administrative cost (currently $250,000) has been allocated to
services on this basis.
The firm,
contemplating a change to activity-based costing, has identified three
components of administrative cost, as follows:
Staff support
|
$180,000
|
In-house computing charges
|
50,000
|
Miscellaneous office costs
|
20,000
|
Total
|
$250,000
|
A recent
analysis of staff support found a strong correlation with the number of clients
served (consulting, 20; tax planning, 60).
In contrast, in-house computing and miscellaneous office cost varied
directly with the number of computer hours logged and number of client
transactions, respectively. Consulting
consumed 30% of the firm's computer hours and had 20% of the total client
transactions.
32. Assuming the use of activity-based costing,
the proper percentage to use in allocating staff support costs to tax planning
services is:
A. 20%.
B. 60%.
C. 65%.
D. 75%.
E. 80%.
Answer:
D LO: 4 Type: A
33. If Kelly and Logan switched from its current
accounting method to an activity-based costing system, the amount of
administrative cost chargeable to consulting services would:
A. decrease by $23,500.
B. increase by $23,500.
C. decrease by $32,500.
D. change by an amount other than those listed
above.
E. change, but the amount cannot be determined
based on the information presented.
Answer: A LO: 1, 4
Type: A
34. Activity-based costing systems:
A. use a single, volume-based cost driver.
B. assign overhead to products based on the
products' relative usage of direct labor.
C. often reveal products that were under- or
overcosted by traditional costing systems.
D. typically use fewer cost drivers than more
traditional costing systems.
E. have a tendency to distort product costs.
Answer: C LO: 5
Type: RC
35. Dreyfus Manufacturing sells a number of goods
whose selling price is heavily influenced by cost. A recent study of product no. 519 revealed a
traditionally-derived total cost of $1,019, a selling price of $1,850 based on
that figure, and a newly computed activity-based total cost of $1,215. Which of the following statements is true?
A. All other things being equal, the company
should consider a drop in its sales price.
B. The company may have been extremely
competitive in the marketplace from a price perspective.
C. Product no. 519 could be labeled as being
overcosted by the firm's traditional costing procedures.
D. If product no. 519 is undercosted by
traditional accounting procedures, then all of the company's other products
must be undercosted as well.
E. Generally speaking, the activity-based cost
figure is “less accurate” than the traditionally-derived cost figure.
Answer:
B LO: 5 Type: N
36. Vanguard combines all manufacturing overhead
into a single cost pool and allocates this overhead to products by using
machine hours. Activity-based costing
would likely show that with Vanguard's current procedures,
A. all of the company's products are
undercosted.
B. the company's high-volume products are undercosted.
C. all of the company's products are overcosted.
D. the company's high-volume products are
overcosted.
E. the company's low-volume products are
overcosted.
Answer:
D LO: 5 Type: N
37. Jackson manufactures products X and Y,
applying overhead on the basis of labor hours.
X, a low-volume product, requires a variety of complex manufacturing
procedures. Y, on the other hand, is both
a high-volume product and relatively simplistic in nature. What would an activity-based costing system
likely disclose about products X and Y as a result of Jackson's current
accounting procedures?
X
|
Y
|
|||
A.
|
Undercosted
|
Undercosted
|
||
B.
|
Undercosted
|
Overcosted
|
||
C.
|
Overcosted
|
Undercosted
|
||
D.
|
Overcosted
|
Overcosted
|
||
E.
|
Costed correctly
|
Costed correctly
|
||
Answer:
B LO: 5 Type: RC
38. Koski manufactures products J and K, applying
overhead on the basis of labor hours. J,
a low-volume product, requires a variety of complex manufacturing
procedures. K, on the other hand, is both
a high-volume product and relatively simplistic in nature. What would an activity-based costing system
likely disclose about products J and K as a result of Koski's current
accounting procedures?
Undercosted
|
Overcosted
|
||
A.
|
J, K
|
||
B.
|
J, K
|
||
C.
|
J
|
K
|
|
D.
|
K
|
J
|
|
E.
|
None of the above, as both
products are costed correctly.
|
||
Answer:
C LO: 5 Type: RC
39. Consider the following statements:
I.
Product
diversity creates costing problems because diverse products tend to utilize
manufacturing activities in different ways.
II.
Overhead
costs that are not incurred at the unit level create costing problems because
such costs do not vary with traditional application bases such as direct labor
hours or machine hours.
III.
Product
diversity typically exists when a single product (e.g., a ballpoint pen) is
made in different colors.
Which
of the above statements is (are) true?
A. I only.
B. II only.
C. I and II.
D. I and III.
E. II and III.
Answer:
C LO: 5 Type: RC
40. Consumption ratios are useful in determining:
A. the existence of product-line diversity.
B. overhead that is incurred at the unit level.
C. if overhead-producing activities are being
utilized effectively.
D. if overhead costs are being applied to
products.
E. if overhead-producing activities are being
utilized efficiently.
Answer:
A LO: 5 Type: RC
41. Widely varying consumption ratios:
A. are reflective of product-line diversity.
B. indicate an out-of-control production
environment.
C. dictate a need for traditional costing
systems.
D. work against the implementation of
activity-based costing.
E. create an unsolvable product-costing problem.
Answer:
A LO: 5 Type: RC
42. Moon Bay Manufacturing uses machine hours to
apply manufacturing overhead to products.
This method of costing would likely be acceptable if the company has:
A. a large proportion of unit-level activities.
B. a large proportion of unit-level activities
and fairly identical consumption ratios among product lines.
C. a large proportion of unit-level activities
and widely varying consumption ratios among product lines.
D. a large proportion of nonunit-level
activities.
E. a large proportion of nonunit-level
activities and fairly identical consumption ratios among product lines.
Answer:
B LO: 5 Type: N
43. In comparison with a system that uses a
single, volume-based cost driver, an activity-based costing system is preferred
when a company has:
A. a large proportion of nonunit-level
activities.
B. product-line diversity or a large proportion
of nonunit-level activities.
C. minimal product-line diversity and a small
proportion of nonunit-level activities.
D. existing variances from budgeted amounts.
E. a situation other than those noted above.
Answer:
B LO: 5 Type: RC
44. Consider the following factors:
I.
The
degree of correlation between consumption of an activity and consumption of a
particular cost driver.
II.
The
likelihood that a particular cost driver will induce a desired behavioral
effect.
III.
The
likelihood that a particular cost driver will cause an increase in the cost of
measurement.
Which
of these factors should be considered in the selection of a cost driver?
A. I only.
B. I and II.
C. I and III.
D. II and III.
E. I, II, and III.
Answer:
E LO: 6 Type: RC
45. Which of the following activity cost pools
and activity measures likely has the lowest degree of correlation?
Activity Cost Pool
|
Activity Measure
|
||
A.
|
Order department
|
Number of orders processed
|
|
B.
|
Sales management
|
Time spent by managers in each
sales territory
|
|
C.
|
Accounts receivable
processing
|
Number of customers
|
|
D.
|
Catering
|
Numbers of meals served
|
|
E.
|
Employee travel to job
sites (sites are within 100-mile radius of company headquarters)
|
Number of employees
|
Answer:
E LO: 6 Type: N
46. Grossman Enterprises is converting to an
activity-based costing system and needs to depict the various activities in its
manufacturing process along with the activities' relationships. Which of the following is a possible tool
that the company can use to accomplish this task?
A. Storyboards.
B. Activity relationship charts (ARCs).
C. Decision trees.
D. Simulation games.
E. Process organizers.
Answer:
A LO: 7 Type: RC
47. Successful adoptions of activity-based
costing typically occur when companies rely heavily on:
A. finance personnel.
B. accounting personnel.
C. manufacturing personnel.
D. office personnel.
E. multidisciplinary project teams.
Answer:
E LO: 7 Type: RC
48. Under a traditional costing system, which of
the following costs would likely be classified as indirect with respect to the
various products manufactured?
A. Plant maintenance.
B. Factory supplies.
C. Utilities.
D. Machinery depreciation.
E. All of the above would be considered indirect
costs.
Answer:
E LO: 7 Type: N
49. Williams Corporation is changing from a
traditional costing system to an activity-based system. As a result of this action, which of the
following costs would likely change from indirect to direct?
A. Direct materials.
B. Factory supplies.
C. Production setup.
D. Production setup and finished-goods
inspection.
E. Production setup, finished-goods inspection,
and product shipping.
Answer:
E LO: 7 Type: N
50. Which of the following generally fails
to signal the need for a new product-costing system?
A. Line managers do not believe reported product
costs.
B. Complex products have high reported
profitability despite the lack of premium prices.
C. Overhead rates are high and increasing over
time.
D. Line managers suggest that seemingly
profitable products be dropped.
E. Product-line profit margins are easy to
explain.
Answer:
E LO: 7 Type: RC
51. Of the following organizations,
activity-based costing cannot be used by:
A. manufacturers.
B. financial-services firms.
C. book publishers.
D. hotels.
E. none of the above, as all are able to use
this costing system.
Answer:
E LO: 8 Type: RC
52. Which of the following statements about
activity-based costing (ABC) is false?
A. ABC cannot be used by service businesses.
B. In comparison with traditional costing
systems, ABC tends to use more cost pools and more cost drivers.
C. In comparison with traditional-costing
systems, ABC results in less cost “averaging” of various diversified
activities.
D. In comparison with traditional-costing
systems, ABC results in more costs being classified as direct costs.
E. ABC tends to reduce cost distortion among
product lines.
Answer:
A LO: 8 Type: N
53.
A hospital
administrator is in the process of implementing an activity-based-costing
system. Which of the following tasks
would not be part of this process?
A.
Identification of
cost pools.
B.
Calculation of
cost application rates.
C.
Assignment of
cost to services provided.
D.
Identification of
cost drivers.
E. None of the above, as all these tasks would
be part of the process.
Answer: E LO: 8
Type: RC
EXERCISES
Classification
of Activities
54. St. Helena Cellars produces wine in northern
California. Consider the following
selected costs that arose during the current year:
1.
Safety
costs at winery
2.
Truckload
shipping costs
3.
Building
maintenance costs
4.
Bottle
and cork cost
5.
Development
cost of new, after-dinner wine
6.
Tasting
and testing costs
Required:
A.
Briefly
distinguish between unit-level and product-sustaining activities.
B.
Classify
the six costs listed as arising from a unit-level, batch-level,
product-sustaining, or facility-level activity.
LO: 3 Type: RC, N
Answer:
A.
|
A unit-level
activity is performed for each unit of production. In contrast, a product-sustaining activity
is needed to support an entire product line.
The latter is not necessarily performed each time a new unit or batch
of products is manufactured.
|
||
B.
|
1.
|
Facility-level
|
|
2.
|
Batch-level
|
||
3.
|
Facility-level
|
||
4.
|
Unit-level
|
||
5.
|
Product-sustaining
|
||
6.
|
Batch-level
|
||
Classification
of Activities
55. Consider the following
costs that relate to a bank and a manufacturer of software:
Bank
1. Review cost of
commercial loan applications
2. Operating cost of human resources department
3. Immediate processing cost of a specific
customer's cash deposit
4. Bank membership cost of joining local Chamber
of Commerce
Software
manufacturer
5. Label and packaging charges from a commercial
printer for a new software release
6. Air conditioning/heating costs of the firm's
production plant
7. Transport cost of
moving the CD-output from production run no. 1 to the company's warehouse
8. Design, development, and coding cost of new
spreadsheet software
Required:
A.
Classify
the eight costs listed as arising from either a unit-level, batch-level,
product-sustaining, or facility-level activity.
B.
Would
number of loan applications or number of customers be a more appropriate
cost-driver base for the review of loan applications? Briefly explain.
LO: 3, 6 Type: RC, N
Answer:
A.
|
1.
|
Unit-level
|
5.
|
Product-sustaining
|
|
2.
|
Facility-level
|
6.
|
Facility-level
|
||
3.
|
Unit-level
|
7.
|
Batch-level
|
||
4.
|
Facility-level
|
8.
|
Product-sustaining
|
||
B.
|
The number of loan
applications would be more appropriate because it has a higher correlation
with the amount of review cost incurred.
Applications create review cost; customers, on the other hand, may
not.
|
||||
Classification of
Activities
56. Alexander Corporation produces flat-screen
computer monitors. Consider the
following selected costs that arose during the current year:
1. Direct materials used: $3,640,000
2. Plant rent, utilities, and taxes: $1,229,000
3. New technology design engineering: $2,040,000
4. Materials receiving: $318,000
5. Manufacturing-run/set-up charges: $115,000
6. Equipment depreciation: $92,000
7. General management salaries: $1,564,000
Required:
A.
Briefly
distinguish between batch-level and facility-level activities.
B.
Determine
the cost of the firm's unit-level, batch-level, product-sustaining, and
facility-level activities.
LO: 3 Type: RC, N, A
Answer:
A.
A
batch-level activity is performed for each batch of products rather than for
each unit. In contrast, a facility-level
activity is required for an entire process to occur. Examples of the latter, which support the
organization as a whole, include plant maintenance and property taxes.
B.
Unit-level:
$3,640,000 (1)
Batch-level:
$318,000 (4) + $115,000 (5) = $433,000
Product-sustaining:
$2,040,000 (3)
Facility-level:
$1,229,000 (2) + $92,000 (6) + $1,564,000 (7) = $2,885,000
Activity-Based
Costing, Traditional Costing
57. The controller for Wolfe Machining has
established the following overhead cost pools and cost drivers:
Overhead Cost Pool
|
Budgeted
Overhead Cost
|
Cost
Driver
|
|
Machine
setups
|
$240,000
|
Number of
setups
|
|
Material
handling
|
90,000
|
Units of raw
material
|
|
Quality
control inspection
|
48,000
|
Number of
inspections
|
|
Other
overhead costs
|
160,000
|
Machine hours
|
|
Total
|
$538,000
|
||
Overhead Cost Pool
|
Budgeted Level
for Cost Driver
|
Overhead Rate
|
|
Machine
setups
|
200 setups
|
$1,200 per
setup
|
|
Material
handling
|
60,000 units
|
$1.50 per
unit
|
|
Quality
control
|
1,200
inspections
|
$40 per
inspection
|
|
Other
overhead
|
20,000 machine
hours
|
$8 per
machine hour
|
|
Order
no. 715 has the following production requirements:
|
|||
Machine
setups: 7
|
|||
Raw
material: 11,200 units
|
|||
Inspections:
16
|
|||
Machine
hours: 850
|
|||
Required:
A.
Compute
the total overhead that should be assigned to order no. 715 by using
activity-based costing.
B.
Suppose
that Wolfe were to use a single, predetermined overhead rate based on machine
hours. Compute the rate per hour and the
total overhead assigned to order no. 715.
C.
Discuss
the merits of an activity-based costing system in comparison with a traditional
costing system.
LO: 1, 4,
5 Type: A, N
Answer:
A.
|
Overhead Cost Pool
|
Predetermined
Overhead Rate
|
Level of
Cost Driver
|
Cost
|
||
Machine setups
|
$1,200 per
setup
|
7 setups
|
$ 8,400
|
|||
Material handling
|
$1.50 per unit
|
11,200 units
|
16,800
|
|||
Quality control
|
$40 per
inspection
|
16
inspections
|
640
|
|||
Other overhead costs
|
$8 per
machine hour
|
850 machine
hours
|
6,800
|
|||
Total
|
$32,640
|
|||||
B
|
$538,000 ¸ 20,000
machine hours = $26.90 per hour;
$26.90 per
hour x 850 hours = $22,865
|
|||||
C.
|
Activity-based
costing (ABC) uses multiple cost drivers, more closely aligning individual
costs with the factors that are creating them. Traditional systems, in contrast, use fewer
drivers and therefore result in “lumping” of unlike activities together. The end result is that ABC tends to
eliminate the cost distortion that sometimes arises with traditional systems,
more specifically, the under- or overcosting of products.
|
|||||
Activity-Based
Costing: Cost Distortion
58. Academy
Enterprises uses a traditional-costing system to estimate quality-control costs
for its PDA product line. Costs are
estimated at 32% of direct-labor cost, and direct labor totaled $548,000 for
the quarter just ended. Management is
contemplating a change to activity-based costing, and has established three
cost pools: incoming material inspection, in-process inspection, and final
product certification. Number of parts,
number of units, and number of orders have been selected as the respective cost
drivers.
The following data show the application rates that
have been calculated by the company along with the quantity of driver units for
the PDAs:
Cost Application Rate
|
Driver Quantities
|
|
$ 0.50 per part
|
14 parts
|
|
0.10 per unit
|
26,000 units
|
|
110.00 per
order
|
80 orders
|
|
Required:
A.
Calculate the
quarterly quality-control cost that is allocated to the PDA product line under
Academy’s traditional-costing system.
B.
Calculate the
quarterly quality-control cost that is allocated to the PDAs if activity-based
costing used.
C.
Does the
traditional approach under- or overcost the product line? By how much?
LO: 1, 4, 5 Type: A, N
Answer:
A.
$548,000 x 32% =
$175,360
B.
Incoming
inspection ($0.50 x 14 x 26,000 = $182,000) + in-process inspection (26,000 x
$0.10 = $2,600) + final certification (80 x $110 = $8,800), which totals
$193,400.
C.
Traditional
costing undercosts the PDAs by $18,040 ($193,400 - $175,360).
Activity-Based Costing:
Qualitative Emphasis
59. Star Manufacturing, contemplating the
adoption of an activity-based costing system, has established three
activity-cost pools: machine setup, quality assurance, and engineering. These cost pools, the appropriate cost
driver, and the percentage of each cost driver consumed by the company's
products (H15, H16, and H17) follow.
Cost Pool
|
Cost Driver
|
H15
|
H16
|
H17
|
|
Machine setup
|
Number of
setups
|
50%
|
20%
|
30%
|
|
Quality
assurance
|
Number of
inspections
|
70%
|
15%
|
15%
|
|
Engineering
|
Number of
change orders
|
15%
|
10%
|
75%
|
Estimated
costs for these three activities, which account for 80% of the firm's total
overhead, are $400,000, $500,000, and $120,000, respectively. Star currently applies manufacturing overhead
to products on the basis of machine hours.
Required:
A.
Will
activity-based costing systems require more or fewer cost pools than
traditional costing systems? No
explanation is necessary.
B.
Calculate
the cost of machine setup, quality assurance, and engineering to be charged to
product H17.
C.
Consider
the company's current overhead application procedure.
1.
Is
Star emphasizing unit-level activities, batch-level activities,
product-sustaining activities, or facility-level activities? Explain.
2.
How
accurate will the current costing procedure be given the nature of most
of the company's activities? Briefly
discuss.
3.
How
accurate will the current costing procedure be given the consumption ratios of
the firm? Briefly discuss.
LO: 1, 3,
4, 5 Type: A, N
Answer:
A.
|
More
|
||
B.
|
Machine
setup: $400,000 x 30% = $120,000
|
||
Quality
assurance: $500,000 x 15% = $75,000
|
|||
Engineering:
$120,000 x 75% = $90,000
|
|||
C.
|
1.
|
The company
currently applies overhead on the basis of machine hours, therefore
emphasizing unit-level activities.
Machine hours are consumed for each unit produced.
|
|
2.
|
The current
procedure is probably not very accurate.
The majority of Star's overhead (80%) is created by setups,
inspections, and engineering change orders, not machine hours. In this case, for instance, setups and (likely)
inspection are really batch-level activities whereas engineering costs are
caused by product-sustaining activities.
|
||
3.
|
The
consumption ratios vary extensively from one product to the next, thus
indicating product diversity. The use
of a single driver (machine hours in this case) will not recognize this
diversity and will give rise to cost distortion.
|
||
Activity-Based
Costing: Analysis Emphasis
60. Kenyon Company produces two products (F56 and
F57), applying manufacturing overhead on the basis of direct labor hours. Anticipated unit production costs (material,
labor, and overhead) and manufacturing volumes are:
F56:
2,000 units, $234
F57:
3,500 units, $271
Kenyon's
overhead arises because of various activities, one of which is purchase-order
processing. Budgeted cost for this
activity is expected to be $70,000. The
firm believes that the number of purchase orders processed is a key cost driver
and expects the following activity for its products: F56, 10 purchase orders;
F57, 40 purchase orders. Kenyon's
selling prices are based heavily on cost.
Required:
A.
Activity-based
costing (ABC) is said to result in improved costing accuracy when compared with
traditional costing procedures. Briefly
explain how this improved accuracy is attained.
B.
Compute:
1.
the
pool application rate for purchase-order processing.
2.
the
purchase-order processing cost to be charged to one unit of F56.
C.
Assume
that Kenyon switched to activity-based costing and calculated total unit
production costs as follows: F56, $285; F57, $220.
1.
Which
of the two products, F56 or F57, was overcosted prior to the change to
ABC? No explanation is necessary.
2.
Which
of the two products, F56 or F57, may have been less competitive in the
marketplace prior to the change to ABC?
Briefly explain.
LO: 1, 4,
5 Type: A, N
Answer:
A.
|
Activity-based
costing (ABC) uses multiple cost drivers, more closely aligning individual
costs with the factors that are creating them. Traditional systems, in contrast, use fewer
drivers and therefore result in "lumping" of unlike activities
(unit-level, batch-level, and so forth) together. The end result is that ABC tends to
eliminate the cost distortion that sometimes arises with traditional systems,
more specifically, the under- or overcosting of products. Additionally, the use of multiple cost
drivers allows users to better consider variations in consumption ratios that
may exist among product lines.
|
||
B.
|
1.
|
$70,000 ÷ (10
+ 40) = $1,400 per order
|
|
2.
|
$1,400 x 10 =
$14,000; $14,000 ÷ 2,000 units = $7
|
||
C.
|
1.
|
F57
(traditional, $271 vs. ABC, $220)
|
|
2.
|
F57. Kenyon's selling prices are based heavily
on cost. An overcosted product will
result in a higher selling price, which may make the company less
competitive.
|
||
Activity-Based
Costing: Analysis Emphasis
61. Lennox Industries manufactures two products:
A and B. A review of the company's
accounting records revealed the following per-unit costs and production
volumes:
A
|
B
|
|||||
Production volume (units)
|
2,500
|
5,000
|
||||
Direct material
|
$ 40
|
$ 60
|
||||
Direct labor:
|
||||||
2
hours at $12
|
24
|
|||||
3
hours at $12
|
36
|
|||||
Manufacturing overhead:
|
||||||
2
hours at $93
|
186
|
|||||
3
hours at $93
|
279
|
|||||
Manufacturing
overhead is currently computed by spreading overhead of $1,860,000 over 20,000
direct labor hours. Management is considering
a shift to activity-based costing in an effort to improve the firm's accounting
procedures, and the following data are available:
Cost Driver Volume
|
||||||||||
Cost Pool
|
Cost
|
Cost Driver
|
A
|
B
|
Total
|
|||||
Setups
|
$ 240,000
|
Number of setups
|
100
|
20
|
120
|
|||||
General factory
|
1,500,000
|
Direct labor hours
|
5,000
|
15,000
|
20,000
|
|||||
Machine processing
|
120,000
|
Machine hours
|
2,200
|
800
|
3,000
|
|||||
$1,860,000
|
||||||||||
Lennox
determines selling prices by adding 40% to a product's total cost.
Required:
A.
Compute
the per-unit cost and selling price of product B by using Lennox's current
costing procedures.
B.
Compute
B's per-unit overhead cost of product B if the company switches to
activity-based costing.
C.
Compute
the total per-unit cost and selling price under activity-based costing.
D.
Lennox
has recently encountered significant international competition for product B,
with considerable business being lost to very aggressive suppliers. Will activity-based costing allow the company
to be more competitive with product B from a price perspective? Briefly explain.
E.
Will
the cost and selling price of product A likely increase or decrease if Lennox
changes to activity-based costing? Why? Hint: No calculations are necessary.
LO: 1, 4, 5 Type: A, N
Answer:
A.
|
Direct material
|
$ 60
|
|||
Direct labor
|
36
|
||||
Manufacturing overhead
|
279
|
||||
Per-unit cost
|
$375
|
||||
Markup ($375 x 40%)
|
150
|
||||
Selling price
|
$525
|
||||
B.
|
Setups: $240,000 ÷ 120
setups = $2,000 per setup
General factory: $1,500,000
÷ 20,000 direct labor hours = $75 per direct labor hour
Machine processing:
$120,000 ÷ 3,000 machine hours = $40 per machine hour
Overhead cost for product
B:
|
||||
Setups:
20 setups x $2,000
|
$ 40,000
|
||||
General
factory: 15,000 labor hours x $75
|
1,125,000
|
||||
Machine
processing: 800 machine hours x $40
|
32,000
|
||||
Total
|
$1,197,000
|
||||
Overhead per unit:
$1,197,000 ÷ 5,000 units = $239.40
|
|||||
C.
|
Direct material
|
$ 60.00
|
|||
Direct labor
|
36.00
|
||||
Manufacturing overhead
|
239.40
|
||||
Per-unit cost
|
$335.40
|
||||
Markup ($335.40 x 40%)
|
134.16
|
||||
Selling price
|
$469.56
|
||||
D.
|
Yes. The switch to activity-based costing
results in a lower cost being assigned to product B ($335.40 vs. $375) and
thus a lower selling price.
|
||||
E.
|
Because less overhead cost
is assigned to product B under activity-based costing, more will be assigned
to product A. A higher cost translates
into a higher selling price.
|
||||
Activity-Based and
Traditional Costing; Cost Distortion
62. Scott, Inc., manufactures two products,
Regular and Deluxe, and applies overhead on the basis of direct labor
hours. Anticipated overhead and direct
labor time for the upcoming accounting period are $1,600,000 and 25,000 hours,
respectively. Information about the
company's products follows.
Regular—
Estimated production volume: 3,000 units
Direct materials cost: $28 per unit
Direct labor per unit: 3 hours at $15 per
hour
Deluxe—
Estimated production volume: 4,000 units
Direct materials cost: $42 per unit
Direct labor per unit: 4 hours at $15 per
hour
Scott's overhead of $1,600,000 can be identified with three major
activities: order processing ($250,000), machine processing ($1,200,000), and
product inspection ($150,000). These
activities are driven by number of orders processed, machine hours worked, and
inspection hours, respectively. Data
relevant to these activities follow.
Orders
Processed
|
Machine
Hours Worked
|
Inspection
Hours
|
|
Regular
|
320
|
16,000
|
4,000
|
Deluxe
|
180
|
24,000
|
6,000
|
Total
|
500
|
40,000
|
10,000
|
Required:
A.
Compute
the application rates that would be used for order processing, machine
processing, and product inspection in an activity-based costing system.
B.
Assuming
use of activity-based costing, compute the unit manufacturing costs of Regular
and Deluxe if the expected manufacturing volume is attained.
C. How much overhead would be applied to a
unit of Regular and Deluxe if the company used traditional costing and applied
overhead solely on the basis of direct labor hours? Which of the two products would be
undercosted by this procedure?
Overcosted?
LO: 1, 4,
5 Type: A, N
Answer:
A.
|
Order
processing: $250,000 ÷ 500 orders processed (OP) = $500 per OP
|
Machine
processing: $1,200,000 ÷ 40,000 machine hours (MH) = $30 per MH
|
|
Product
inspection: $150,000 ÷ 10,000 inspection hours (IH) = $15 per IH
|
B.
|
Activity
|
Regular
|
Deluxe
|
|||||
Order processing:
|
||||||||
320 OP x $500
|
$160,000
|
|||||||
180 OP x $500
|
$ 90,000
|
|||||||
Machine processing:
|
||||||||
16,000 MH x $30
|
480,000
|
|||||||
24,000 MH x $30
|
720,000
|
|||||||
Product inspection:
|
||||||||
4,000 IH x $15
|
60,000
|
|||||||
6,000 IH x $15
|
90,000
|
|||||||
Total
|
$700,000
|
$900,000
|
||||||
Production volume (units)
|
3,000
|
4,000
|
||||||
Cost per unit
|
$233.33*
|
$225.00**
|
||||||
*
$700,000 ÷ 3,000 units = $233.33
|
||||||||
**$900,000 ÷ 4,000 units = $225.00
|
||||||||
The
cost of a Regular unit is $306.33, and the cost of a Deluxe unit is $327.00:
|
||||||||
Regular
|
Deluxe
|
|||||||
Direct materials
|
$ 28.00
|
$ 42.00
|
||||||
Direct labor:
|
||||||||
3 hours x $15
|
45.00
|
|||||||
4 hours x $15
|
60.00
|
|||||||
Order processing, machine processing,
and inspection
|
233.33
|
225.00
|
||||||
Total cost
|
$306.33
|
$327.00
|
||||||
C.
|
Overhead
rate: $1,600,000 ÷ 25,000 direct labor hours (DLH) = $64 per DLH
|
|
Regular: 3 hours x $64 = $192
|
||
Deluxe: 4 hours x $64 = $256
|
||
Regular is
undercosted by this procedure, as the more accurate ABC figure is
$233.33. In contrast, Deluxe is
overcosted because the ABC figure for overhead amounts to only $225.
|
||
Activity-Based and Traditional Costing;
Price Change
63. Pitney Corporation manufactures two types of
transponders—no. 156 and no. 157—and applies manufacturing overhead to all
units at the rate of $76.50 per machine hour.
Production information follows.
No. 156
|
No. 157
|
||||
Anticipated volume (units)
|
6,000
|
14,000
|
|||
Direct material cost
|
$40
|
$65
|
|||
Direct labor cost
|
25
|
25
|
|||
The
controller, who is studying the use of activity-based costing, has determined
that the firm's overhead can be identified with three activities: manufacturing
setups, machine processing, and product shipping. Data on the number of setups, machine hours
worked, and outgoing shipments, the activities' three respective cost drivers,
follow.
No. 156
|
No. 157
|
Total
|
||||
Setups
|
60
|
40
|
100
|
|||
Machine hours worked
|
15,000
|
25,000
|
40,000
|
|||
Outgoing shipments
|
120
|
80
|
200
|
|||
The
firm's total overhead of $3,060,000 is subdivided as follows: manufacturing
setups, $260,000; machine processing, $2,400,000; and product shipping,
$400,000.
Required:
A.
Compute
the application rates that would be used for manufacturing setups, machine
processing, and product shipping in an activity-based costing system.
B.
Assuming
use of activity-based costing, compute the unit overhead costs of product nos. 156
and 157 if the expected manufacturing volume is attained.
C.
Assuming
use of activity-based costing, compute the total cost per unit of product no. 156.
D.
If
the company's selling price is based heavily on cost, would a switch to
activity-based costing from the current traditional system result in a price
increase or decrease for product no. 156?
Show computations.
LO: 1, 4,
5 Type: A, N
Answer:
A.
|
Manufacturing
setups: $260,000 ÷ 100 setups (SU) = $2,600 per SU
Machine
processing: $2,400,000 ÷ 40,000 machine hours (MH) = $60 per MH
Product
shipping: $400,000 ÷ 200 outgoing shipments (OS) = $2,000 per OS
|
B.
|
Activity
|
No. 156
|
No. 157
|
|
Manufacturing setup:
|
||||
60 SU x $2,600
|
$ 156,000
|
|||
40 SU x $2,600
|
$ 104,000
|
|||
Machine processing:
|
||||
15,000 MH x $60
|
900,000
|
|||
25,000 MH x $60
|
1,500,000
|
|||
Product shipping:
|
||||
120 OS x $2,000
|
240,000
|
|||
80 OS x $2,000
|
160,000
|
|||
Total
|
$1,296,000
|
$1,764,000
|
||
Production volume (units)
|
6,000
|
14,000
|
||
Cost per unit
|
$216*
|
$126**
|
||
* $1,296,000 ÷ 6,000 units = $216
|
||||
**$1,764,000 ÷ 14,000 units
= $126
|
||||
C.
|
Direct material ($40) + direct labor ($25) + overhead
($216) = $281
|
|||
D.
|
Machine hours
(15,000) ÷ units produced (6,000) = 2.5 hours per unit;
2.5 hours x $76.50 = $191.25 overhead applied
Direct material ($40.00) + direct labor ($25.00) +
overhead ($191.25) = $256.25
Product no.
156 is currently undercosted ($256.25 vs. $281.00), so a switch to
activity-based costing will likely result in a price hike.
|
|||
Activity-Based Costing:
Service Application
64.
Heartland Bank
& Trust operates in a very competitive marketplace, using a traditional
labor-hour-based system to determine the cost of processing its mortgage
loans. Recently, the firm explored a
switch to activity-based costing to determine the accuracy of its previous
ways. The following information is
available:
Activity
|
Cost
|
Driver
|
Driver Units
|
||
Application
processing
|
$ 900,000
|
Applications
|
4,000
|
||
Loan
underwriting
|
800,000
|
Underwriting
hours
|
16,000
|
||
Loan
closure
|
880,000
|
Legal
hours
|
8,000
|
||
Total
|
$2,580,000
|
||||
Two loan applications were originated and closed
during the year. No. 7439 consumed 3.5
hours in loan underwriting and 1.5 hours in loan closure, for a total of 5.0
hours. No. 7809 also required 5.0 hours
of time, subdivided as follows: 2.0 hours in loan underwriting and 3.0 hours in
loan closure.
Required:
A.
Use an
activity-based-costing system and determine the cost of processing,
underwriting, and closing the two loan applications.
B.
Determine the
cost of processing the two loans if Heartland uses the traditional
labor-hour-based system. Conversations
with management found that, on average, each application took nine labor hours
of processing time, excluding underwriting and closure.
C.
Is Heartland
making a mistake by continuing to use a traditional system that is based on an
average labor cost per hour? Why?
LO: 5, 8 Type: A, N
Answer:
A. Cost pool rates:
Application processing: $900,000 ÷ 4,000 = $225 per
application
Loan underwriting: $800,000 ÷ 16,000 = $50 per
underwriting hour
Loan closure: $880,000 ÷ 8,000 = $110 per legal hour
Application no. 7439: Application ($225) +
underwriting (3.5 x $50 = $175) + closure (1.5 x $110 = $165) = $565
Application no. 7809: Application ($225) +
underwriting (2.0 x $50 = $100) + closure (3.0 x $110 = $330) = $655
B.
Total labor
hours: Application processing (4,000 x 9 = 36,000) + underwriting (16,000) +
closure (8,000) = 60,000
Average
rate per hour: $2,580,000 ÷ 60,000 = $43 per hour
Application
no. 7439: (9 + 5) x $43 = $602
Application
no. 7809: (9 + 5) x $43 = $602
C. Yes. The traditional system results in an average
cost per hour of $43; yet, Heartland’s hourly charges vary greatly based on the
function being performed. Rates range
from $25 per hour ($225 ÷ 9) for application processing, to $50 per hour for
underwriting, to $110 for legal services.
ABC produces a more accurate determination of cost because three separate
drivers are used rather than just one.
DISCUSSION
QUESTIONS
An Overview
of Activity-Based Costing
65. Templeton Industries currently assigns
overhead to products by using a predetermined rate based on direct labor
hours. The company is considering the
adoption of an activity-based costing (ABC) system, and management desires a
brief overview of this system before it makes a final decision.
Compare
ABC with the company's current system, focusing on the number of cost pools and
cost drivers, costing accuracy, and cost distortion.
LO: 1, 2 Type: RC
Answer:
Templeton
is currently combining all overhead into a single cost pool, to be applied to
products by using a single cost driver (direct labor hours). Such a practice results in the calculation of
an "average" cost because various cost relationships are being
commingled. With ABC, cost pools are
created for a company's individual activities, and a cost driver is then
selected for each activity—a driver that has a high degree of correlation with
the activity's consumption. The result
is an increase in the number of cost pools and cost drivers when compared with
current accounting procedures.
The
abandonment of "average" costing leads to an improvement in costing
accuracy and less cost distortion among a company's products. More specifically, product diversity and use
of nonunit-level activities are now taken into account.
Effect of
Environment on Product-Costing System
66. At a recent professional meeting, two
controllers discussed product-costing problems in their respective
companies. Both controllers are familiar
with ABC systems, but neither of their firms utilizes such a system.
Controller
D reported that part of the problem in his firm results from major differences
among product lines with respect to unit volume, utilization of activities,
quality assurance requirements established by customers, and product size. Controller M noted that in her firm, which
manufactures consumer goods, all items undergo the same basic production
processes in the same sequence. However,
lately there has been a significant increase in the number of item colors.
Both
controllers are worried about the potential distortion of product costs under
their traditional product-costing systems.
Required:
Which
controller should be more concerned about the potential distortion? Explain.
LO: 5 Type: RC, N
Answer:
Controller
D should be more concerned. The variety
of product lines made in his firm's facility reflects diversity at the
product-line and cost levels. In
Controller M's firm, there still is only one product line, with an increasing
number of models differentiated only by color.
(In many applications, there is no or very little cost difference among
color choices.) Thus, D's firm may be
the victim of cost distortion and a prime candidate for activity-based costing.
Cost
Drivers
67. Define the term "cost driver" and
discuss the factors that are important in the selection of appropriate cost
drivers.
LO: 6 Type: RC
Answer:
A cost
driver is an event or activity that results in the incurrence of costs. For example, many of the costs in an
automated environment are created by the operation of machines, and machine
hours may be a suitable cost driver for overhead application.
The first
factor important in the selection of cost drivers is the degree of correlation
(i.e., relationship) among the driver, the activity, and the cost. This relationship is crucial to achieve
credibility and accuracy. Another factor
is the cost of measurement. Cost/benefit
tradeoffs must be taken into account.
The system should contain drivers that identify key costs but if too
many drivers are used, the system will be burdensome and expensive. Behavioral effects must also be considered in
identifying cost drivers. Such effects
may influence the behavior of decision makers, which could be good or bad
depending on the outcome.
No comments:
Post a Comment