Activity-Based Costing: A Tool To Aid Decision Making

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

True/False Questions

1. If a manufacturing company is using activity-based costing for internal purposes only, then organization-sustaining overhead costs should not be allocated to any of the products.

Ans:True AACSB:ReflectiveThinking AICPABB:CriticalThinking AICPAFN:Reporting LO:1 Level:Medium

2. Batch-level activities are performed each time a batch of goods is handled or processed.

Ans:True AACSB:ReflectiveThinking AICPABB:CriticalThinking AICPAFN:Reporting LO:1 Level:Easy

3. Organization-sustaining activities are carried out regardless of how many units are made, how many batches are run, or how many different products are made.

Ans:True AACSB:ReflectiveThinking AICPABB:CriticalThinking AICPAFN:Reporting LO:1 Level:Easy

4. Direct labor-hours or direct labor cost should not be used as a measure of activity in an activity-based costing system.

Ans:False AACSB:ReflectiveThinking AICPABB:CriticalThinking AICPAFN:Reporting LO:1 Level:Medium

5. Activity-based costing is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” costs.

Ans:True AACSB:ReflectiveThinking AICPABB:CriticalThinking AICPAFN:Reporting LO:1 Level:Easy

6. Activity-based costing is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect only variable costs.

Ans:False AACSB:ReflectiveThinking AICPABB:CriticalThinking AICPAFN:Reporting LO:1 Level:Medium

7. A duration driver provides a measure of the amount of time required to perform an activity.

Ans:True AACSB:ReflectiveThinking AICPABB:CriticalThinking AICPAFN:Reporting LO:1 Level:Medium

8. In general, transaction drivers are more accurate measures of the consumption of resources than duration drivers.

Ans:False AACSB:ReflectiveThinking AICPABB:CriticalThinking AICPAFN:Reporting LO:1 Level:Medium

9. The costs of idle capacity should not be assigned to products in activity-based costing.

Ans:True AACSB:ReflectiveThinking AICPABB:CriticalThinking AICPAFN:Reporting LO:1 Level:Easy

10. In traditional costing systems, all manufacturing costs are assigned to products--even manufacturing costs that are not caused by the products.

Ans:True AACSB:ReflectiveThinking AICPABB:CriticalThinking AICPAFN:Reporting LO:1 Level:Medium

11. Activity-based costing involves a two-stage allocation in which overhead costs are first assigned to departments and then to jobs on the basis of direct labor hours.

Ans:False AACSB:ReflectiveThinking AICPABB:CriticalThinking AICPAFN:Reporting LO:2,4 Level:Medium

12. In activity-based costing, some costs may be broken down and assigned to two activity cost pools. For example, part of a supervisor's salary may be classified as a product-level activity and part of it may be classified as a batch-level activity.

Ans:True AACSB:ReflectiveThinking AICPABB:CriticalThinking AICPAFN:Reporting LO:2 Level:Medium

13. Activity rates in activity-based costing are computed by dividing costs from the first-stage allocations by the activity measure for each activity cost pool.

Ans:True AACSB:ReflectiveThinking AICPABB:CriticalThinking AICPAFN:Reporting LO:3 Level:Medium

14. In the second-stage allocation in activity-based costing, activity rates are used to apply costs to products, customers, and other cost objects.

Ans:True AACSB:ReflectiveThinking AICPABB:CriticalThinking AICPAFN:Reporting LO:4 Level:Medium

15. When a company shifts from a traditional cost system in which manufacturing overhead is applied based on direct labor-hours to an activity-based costing system in which there are batch-level and product-level costs, the unit product costs of high volume products typically decrease whereas the unit product costs of low volume products typically increase.

Ans:True AACSB:Analytic AICPABB:CriticalThinking AICPAFN:Reporting LO:8 Level:Medium

Multiple Choice Questions

16. Which terms would make the following sentence true? Manufacturing companies that benefit the most from activity-based costing are those where overhead costs are a ______percentage of total product cost and where there is ______diversity among the various products that they produce.

A) low, little

B) low, considerable

C) high, little

D) high, considerable

Ans:D AACSB:Analytic AICPABB:CriticalThinking AICPAFN:Reporting LO:1 Level:Medium

17. Would factory security and assembly activities be best classified at an appliance manufacturing plant as unit-level, batch-level, product-level, or organization-sustaining?

Security / Assembly
A) / Product / Unit
B) / Batch / Batch
C) / Organization / Unit
D) / Organization / Product

Ans:C AACSB:Analytic AICPABB:CriticalThinking AICPAFN:Reporting LO:1 Level:Medium

18. Which of the following would be an acceptable measure of activity for a material handling activity cost pool?

Number of / Weight of
material moves / material moved
A) / Yes / Yes
B) / No / Yes
C) / Yes / No
D) / No / No

Ans:A AACSB:Analytic AICPABB:CriticalThinking AICPAFN:Reporting LO:1 Level:Medium

19. An activity-based costing system that is designed for internal decision-making generally will not conform to generally accepted accounting principles. Which of the following is NOT a reason for this happening?

A) Some manufacturing costs (i.e., the costs of idle capacity and organization-sustaining costs) will not be assigned to products.

B) Some nonmanufacturing costs are assigned to products.

C) Allocation bases other than direct labor-hours, direct labor cost, and machine-hours are used.

D) First-stage allocations may be based on subjective interview data.

Ans:C AACSB:Analytic AICPABB:CriticalThinking AICPAFN:Reporting LO:1 Level:Hard

20. Providing the power required to run production equipment is an example of a:

A) Unit-level activity.

B) Batch-level activity.

C) Product-level activity.

D) Organization-sustaining activity.

Ans:A AACSB:Analytic AICPABB:CriticalThinking AICPAFN:Reporting LO:1 Level:Medium

21. Parts administration is an example of a:

A) Unit-level activity.

B) Batch-level activity.

C) Product-level activity.

D) Organization-sustaining.

Ans:C LO:1 Level:Medium

22. If a cost object such as a product or customer has a negative green margin, then:

A) its red margin will be positive.

B) its red margin may be either positive or negative.

C) its red margin will be negative.

D) its red margin will be zero.

Ans:C AACSB:Analytic AICPABB:CriticalThinking AICPAFN:Reporting Appendix:8A LO:6 Level:Medium

23. Tatman Corporation uses an activity-based costing system with the following three activity cost pools:

Activity Cost Pool / Total Activity
Fabrication / 10,000 machine-hours
Order processing / 800 orders
Other / Not applicable

The Other activity cost pool is used to accumulate costs of idle capacity and organization-sustaining costs.

The company has provided the following data concerning its costs:

Wages and salaries / $320,000
Depreciation / 220,000
Occupancy / 120,000
Total / $660,000

The distribution of resource consumption across activity cost pools is given below:

Activity Cost Pools
Fabrication / Order Processing / Other / Total
Wages and salaries / 20% / 65% / 15% / 100%
Depreciation / 15% / 35% / 50% / 100%
Occupancy / 5% / 70% / 25% / 100%

The activity rate for the Fabrication activity cost pool is closest to:

A) $3.30 per machine-hour

B) $13.20 per machine-hour

C) $10.30 per machine-hour

D) $8.80 per machine-hour

Ans:C AACSB:Analytic AICPABB:CriticalThinking AICPAFN:Reporting LO:2,3 Level:Medium

Solution:

Total Fabrication Cost:

Wages and salaries: 20% × $320,000 / $ 64,000
Depreciation: 15% × $220,000 / 33,000
Occupancy: 5% × $120,000 / 6,000
Total / $103,000
(a) / (b) / (a) ÷ (b)
Activity Cost Pool / Total Cost / Total Activity / Activity Rate
Fabrication / $103,000 / 10,000 machine-hours / $10.30 per machine-hour

24. Leaper Corporation uses an activity-based costing system with the following three activity cost pools:

Activity Cost Pool / Total Activity
Fabrication / 40,000 machine-hours
Order processing / 200 orders
Other / Not applicable

The Other activity cost pool is used to accumulate costs of idle capacity and organization-sustaining costs.

The company has provided the following data concerning its costs:

Wages and salaries / $360,000
Depreciation / 140,000
Occupancy / 160,000
Total / $660,000

The distribution of resource consumption across activity cost pools is given below:

Activity Cost Pools
Fabrication / Order Processing / Other / Total
Wages and salaries / 35% / 40% / 25% / 100%
Depreciation / 5% / 55% / 40% / 100%
Occupancy / 30% / 45% / 25% / 100%

The activity rate for the Order Processing activity cost pool is closest to:

A) $1,485 per order

B) $1,540 per order

C) $1,465 per order

D) $1,320 per order

Ans:C AACSB:Analytic AICPABB:CriticalThinking AICPAFN:Reporting LO:2,3 Level:Medium

Solution:

Total Order Processing Cost:

Wages and salaries: 40% × $360,000 / $144,000
Depreciation: 55% × $140,000 / 77,000
Occupancy: 45% × $160,000 / 72,000
Total / $293,000
(a) / (b) / (a) ÷ (b)
Activity Cost Pool / Total Cost / Total Activity / Activity Rate
Order Processing / $293,000 / 200 orders / $1,465 per order

25. Huelskamp Corporation has provided the following data concerning its overhead costs for the coming year:

Wages and salaries / $360,000
Depreciation / 120,000
Rent / 180,000
Total / $660,000

The company has an activity-based costing system with the following three activity cost pools and estimated activity for the coming year:

Activity Cost Pool / Total Activity
Assembly / 60,000 labor-hours
Order processing / 400 orders
Other / Not applicable

The Other activity cost pool does not have a measure of activity; it is used to accumulate costs of idle capacity and organization-sustaining costs.

The distribution of resource consumption across activity cost pools is given below:

Activity Cost Pools
Assembly / Order Processing / Other / Total
Wages and salaries / 25% / 65% / 10% / 100%
Depreciation / 15% / 45% / 40% / 100%
Rent / 35% / 40% / 25% / 100%

The activity rate for the Assembly activity cost pool is closest to:

A) $2.65 per labor-hour

B) $3.85 per labor-hour

C) $2.85 per labor-hour

D) $2.75 per labor-hour

Ans:C AACSB:Analytic AICPABB:CriticalThinking AICPAFN:Reporting LO:2,3 Level:Medium

Solution:

Total Assembly Cost:

Wages and salaries: 25% × $360,000 / $ 90,000
Depreciation: 15% × $120,000 / 18,000
Rent: 35% × $180,000 / 63,000
Total / $171,000
(a) / (b) / (a) ÷ (b)
Activity Cost Pool / Total Cost / Total Activity / Activity Rate
Assembly / $171,000 / 60,000 labor-hours / $2.85 per labor-hour

26. Bennette Corporation has provided the following data concerning its overhead costs for the coming year:

Wages and salaries / $340,000
Depreciation / 120,000
Rent / 140,000
Total / $600,000

The company has an activity-based costing system with the following three activity cost pools and estimated activity for the coming year:

Activity Cost Pool / Total Activity
Assembly / 30,000 labor-hours
Order processing / 500 orders
Other / Not applicable

The Other activity cost pool does not have a measure of activity; it is used to accumulate costs of idle capacity and organization-sustaining costs.

The distribution of resource consumption across activity cost pools is given below:

Activity Cost Pools
Assembly / Order Processing / Other / Total
Wages and salaries / 40% / 35% / 25% / 100%
Depreciation / 15% / 45% / 40% / 100%
Rent / 35% / 30% / 35% / 100%

The activity rate for the Order Processing activity cost pool is closest to:

A) $430 per order

B) $420 per order

C) $360 per order

D) $440 per order

Ans:A AACSB:Analytic AICPABB:CriticalThinking AICPAFN:Reporting LO:2,3 Level:Medium

Solution:

Total Order Processing Cost:

Wages and salaries: 35% × $340,000 / $119,000
Depreciation: 45% × $120,000 / 54,000
Rent: 30% × $140,000 / 42,000
Total / $215,000
(a) / (b) / (a) ÷ (b)
Activity Cost Pool / Total Cost / Total Activity / Activity Rate
Order Processing / $215,000 / 500 orders / $430 per order

27. Eccles Corporation uses an activity-based costing system with three activity cost pools. The company has provided the following data concerning its costs and its activity based costing system:

Costs:

Wages and salaries / $340,000
Depreciation / 180,000
Utilities / 200,000
Total / $720,000

Distribution of resource consumption:

Activity Cost Pools
Assembly / Setting Up / Other / Total
Wages and salaries / 20% / 60% / 20% / 100%
Depreciation / 15% / 35% / 50% / 100%
Utilities / 5% / 55% / 40% / 100%

How much cost, in total, would be allocated in the first-stage allocation to the Assembly activity cost pool?

A) $144,000

B) $96,000

C) $36,000

PD) $105,000

Ans:D AACSB:Analytic AICPABB:CriticalThinking AICPAFN:Reporting LO:2 Level:Medium

Solution:

Total Assembly Cost:

Wages and salaries: 20% × $340,000 / $ 68,000
Depreciation: 15% × $180,000 / 27,000
Utilities: 5% × $200,000 / 10,000
Total / $105,000

28. Mayeux Corporation uses an activity-based costing system with three activity cost pools. The company has provided the following data concerning its costs and its activity based costing system:

Costs:

Wages and salaries / $320,000
Depreciation / 160,000
Utilities / 240,000
Total / $720,000

Distribution of resource consumption:

Activity Cost Pools
Assembly / Setting Up / Other / Total
Wages and salaries / 50% / 40% / 10% / 100%
Depreciation / 10% / 55% / 35% / 100%
Utilities / 15% / 50% / 35% / 100%

How much cost, in total, would be allocated in the first-stage allocation to the Setting Up activity cost pool?

A) $360,000

B) $336,000

C) $288,000

D) $348,000

Ans:B AACSB:Analytic AICPABB:CriticalThinking AICPAFN:Reporting LO:2 Level:Medium

Solution:

Total Setting Up Cost:

Wages and salaries: 40% × $320,000 / $128,000
Depreciation: 55% × $160,000 / 88,000
Utilities: 50% × $240,000 / 120,000
Total / $336,000

29. Gutknecht Corporation uses an activity-based costing system with three activity cost pools. The company has provided the following data concerning its costs and its activity based costing system:

Costs:

Wages and salaries / $300,000
Depreciation / 180,000
Utilities / 240,000
Total / $720,000

Distribution of resource consumption:

Activity Cost Pools
Assembly / Setting Up / Other / Total
Wages and salaries / 35% / 40% / 25% / 100%
Depreciation / 5% / 60% / 35% / 100%
Utilities / 10% / 60% / 30% / 100%

How much cost, in total, would be allocated in the first-stage allocation to the Other activity cost pool?

A) $138,000

B) $210,000

C) $180,000

D) $216,000

Ans:B AACSB:Analytic AICPABB:CriticalThinking AICPAFN:Reporting LO:2 Level:Medium

Solution:

Total Other Cost:

Wages and salaries: 25% × $300,000 / $ 75,000
Depreciation: 35% × $180,000 / 63,000
Utilities: 30% × $240,000 / 72,000
Total / $210,000

30. Lakatos Corporation uses an activity-based costing system with three activity cost pools. The company has provided the following data concerning its costs:

Costs:

Wages and salaries / $420,000
Depreciation / 240,000
Occupancy / 220,000
Total / $880,000

The distribution of resource consumption across the three activity cost pools is given below:

Activity Cost Pools
Fabricating / Order Processing / Other / Total
Wages and salaries / 10% / 75% / 15% / 100%
Depreciation / 5% / 50% / 45% / 100%
Occupancy / 30% / 35% / 35% / 100%

How much cost, in total, would be allocated in the first-stage allocation to the Fabricating activity cost pool?