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THEORY A. allocation intensive C. narrow and rigid product costing

1. Which of the following statements is true? B. focus on managing activities D. unit-based drivers
A. Costs that are indirect to products are traceable to some activity.
B. The traditional approach to costing uses many different cost drivers. 9. Symptoms of an outdated cost system include all of the following EXCEPT
C. Costs that are indirect to products are by definition traceable directly to products. A. competitors’ prices appear unrealistically low.
D. All of the above statements are true. B. products that are difficult to produce show little profit.
C. the company has a highly profitable niche all to itself.
2. Mass customization can be achieved through the use of D. product costs change because of changes in financial reporting.
A. Activity-based costing. C. Just-in-time inventory.
B. Flexible manufacturing systems. D. all of the above. 10. Which of the following is NOT a sign of poor cost data?
A. The company seems to have a highly profitably niche all to itself.
3. Process value analysis is a key component of activity-based management that links product B. Customers don’t balk at price increases for low-volume products.
costing and C. Competitors’ prices for low-volume products appear much too high.
A. Continuous improvement. D. Competitors’ prices for high-volume products appear much too high.
B. Reduction of the number of cost pools.
C. Overhead rates based on broad averages. 11. Traditionally, managers have focused cost reduction efforts on
D. Accumulation of heterogeneous cost pools. A. activities. C. departments.
B. costs. D. processes.
4. An approach to developing new ways to perform existing activities is called
A. Benchmarking. C. Process value analysis. 12. An objective of activity-based management is to
B. Caveat analysis. D. Re-engineering. A. eliminate the majority of centralized activities in an organization.
B. institute responsibility accounting systems in decentralized organizations.
5. A(n) _______________ method first traces costs to a department and then to products. C. reduce or eliminate non-value-added activities incurred to make a product or provide a
A. absorption costing C. direct costing service.
B. activity-based costing D. traditional costing D. all of the above
6. Traditional overhead allocations result in which of the following situations?
13. A(n)_______________ method first traces costs to activities and then to products.
A. The resulting allocations cannot be used for financial reports.
A. absorption costing C. direct costing
B. Overhead costs are assigned as period costs to manufacturing operations.
B activity-based costing D. traditional costing
C. Low-volume products are assigned too much, and high-volume products are assigned too
little overhead.
14. An accounting system that collects financial and operating data on the basis of the underlying
D. High-volume products are assigned too much overhead, and low-volume products are
nature and extent of the cost drivers is
assigned too little overhead.
A. Activity-based costing. C. Direct costing.
7. Uniformly assigning the costs of resources to cost objects when those resources are actually
B. Cycle-time costing. D. Variable costing.
used in a nonuniform way is called
A. department costing. C. peanut-butter costing.
15. Activity-based costing and generally accepted accounting principles differ in that ABC
B. overcosting. D. undercosting.
A. does not define product costs in the same manner as GAAP.
B. cannot be used to compute an income statement, but GAAP can.
8. Which of the following is NOT a trait of a traditional cost management system?
C. information is useful only to managers, while GAAP information is useful to all

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organizational stakeholders. A. costing individual jobs. C. individual activities.

D. is concerned only with costs generated from automated processes, but GAAP is B. department indirect-cost rates. D. multiple-cost pools.
concerned with costs generated from both manual and automated processes.
21. ABC should be used in which of the following situations?
16. Design of an ABC system requires A. in all manufacturing firms
A. an adjustment to product mix. B. single-product firms with multiple steps
B. that the job bid process be redesigned. C. multiple-product firms with only a single process
C. that a cause-and-effect relationship exists between resource costs and individual D. multiple-product firms with multiple processing steps
activities.
D. both (A) and (C). 22. In activity-based costing, preliminary cost allocations assign costs to
A. activities. C. processes.
17. In an activity-based costing system, what should be used to assign a department’s B. departments. D. products.
manufacturing overhead cost to products produced in varying lot sizes? 23. In activity-based costing, final cost allocations assign costs to
A. A single cause and effect relationship. A. activities. C. processes.
B. Multiple cause and effect relationships. B. departments. D. products.
C. Relative net sales values of the products.
D. A product’s ability to bear cost allocations. 24. ABC systems create
A. one large cost pool.
B. activity-cost pools with a broad focus.
18. A basic assumption of activity-based costing (ABC) is that C. homogenous activity-related cost pools.
A. Only variable costs are included in activity-cost pools. D. activity-cost pools containing many direct costs.
B. All manufacturing costs vary directly with units of production.
C. Only costs that respond to unit-level drivers are product costs. 25. What is the normal effect on the numbers of cost pools and allocation bases when an activity-
D. Products or services require the performance of activities, and activities consume based cost (ABC) system replaces a traditional cost system?
resources. A. B. C. D.
Cost Pools Increase Increase No effect No effect
19. Book Co. uses the activity-based costing approach for cost allocation and product costing Allocation Bases Increase No effect Increase No effect
purposes. Printing, cutting, and binding functions make up the manufacturing process.
Machinery and equipment are arranged in operating cells that produce a complete product 26. If activity-based costing is implemented in an organization without any other changes being
starting with raw materials. Which of the following are characteristic of Boo’s activity-based effected, total overhead costs will
costing approach? A. remain constant and simply be spread over products differently.
I. Cost drivers are used as a basis for cost allocation. B. be reduced because of the elimination of non-value-added activities.
II. Costs are accumulated by department or function for purposes of product costing. C. be reduced because organizational costs will not be assigned to products or services.
III. Activities that do not add value to the product are identified and reduced to the extent D. be increased because of the need for additional people to gather information on cost
possible. drivers and cost pools.
A. I only. C. I and III.
B. I and II. D. II and III. 27. The use of activity-based costing normally results in
A. Equalizing setup costs for all product lines.
20. The UNIQUE feature of an ABC system is the emphasis on

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B. Decreased setup costs being charged to low-volume products. called a

C. Substantially greater unit costs for low-volume products than is reported by traditional A. cost driver. C. mixed cost.
product costing. B. direct cost. D. predictor.
D. Substantially lower unit costs for low-volume products than is reported by traditional
product costing. 35. Which of the following is typically regarded as a cost driver in traditional accounting practices?
A. number of customers served
28. The resource utilized by a given product divided by the total amount of the resource available B. number of direct labor hours worked
is called the C. number of purchase orders processed
A. Activity driver. C. Cost object. D. number of transactions processed
B. Consumption ratio. D. Sustaining activity.
36. A cost pool is
29. In Activity-based Costing, which of the following would be considered a value-added activity? A. All costs that have the same driver.
A. Bookkeeping. C. Repair of machines. B. All of the costs of a particular department.
B. Engineering designs. D. Storage of inventory. C. All costs related to a product or product line.
D. All costs in a group such as variable costs or discretionary fixed costs.
30. In the pharmaceutical or food industries, quality control inspections would most likely be
viewed as 37. The activities that drive resource requirements are called the
A. business-value-added activities. C. process-efficiency activities. A. Activity drivers. C. Resource drivers.
B. non-value-added activities. D. value-added-activities. B. Cost objects. D. Sustaining activities.

31. All of the following are examples of non-value-added activities except: 38. Products make diverse demands on resources because of differences in all of the following
A. assembling C. handling EXCEPT
B. expediting D. reworking A. batch size. C. selling price.
B. complexity. D. volume.
32. The ideal standard quantity for nonvalue-added activities is
A. zero 39. __________________ are causal factors that explain the consumption of overhead.
B. practical capacity A. Activity drivers C. Cost objectives
C. the currently attainable quantity standard B. Cost catchers D. Cost pools
D. the cost of resources acquired in advance of usage

33. The following items are used in tracing costs in an ABC system. In which order are they used?
(1) cost object (3) activity driver 40. Unit-level cost drivers are most appropriate as an overhead assignment base when
(2) cost driver (4) cost pool A. direct labor costs are low.
B. only one product is manufactured.
A. 1, 2, 3, 4 C. 2, 4, 3, 1 C. factories produce a varied mix of products.
B. 2, 3, 4, 1 D. 4, 3, 1, 2 D. several complex products are manufactured.

41. All of the following are unit-based activity drivers EXCEPT

34. An item or event that has a cause-effect relationship with the incurrence of a variable cost is A. direct labor hours C. number of setups

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B. machine hours D. number of units B. designing, changing, and advertising D. scheduling, setting up, and moving

42. All of the following are nonunit-based activity drivers EXCEPT 51. Which of the following is not a type of sustaining activity?
A. number of direct labor hours C. number of material moves A. Capacity-sustaining. C. Distribution-channel sustaining.
B. number of inspections D. number of setups B. Customer-sustaining. D. Unit-sustaining.

43. _____ are those performed each time a unit is produced or sold. 52. _____ relate to an entire plant as a whole.
A. Batch-level activities. C. Sustaining activities. A. Batch-level activities. C. Sustaining activities.
B. Facility-sustaining activities. D. Unit-level activities. B. Facility-sustaining activities. D. Unit-level activities.

44. Examples of activities at the unit level of costs include: 53. Which of the following statements about activity-based costing is not true?
A. heating, lighting, and security C. scheduling, setting up, and moving A. In activity-based costing, cost drivers are what cause costs to be incurred.
B. cutting, painting, and packaging D. designing, changing, and advertising B. Activity-based costing is useful for allocating marketing and distribution costs.
C. Activity-based costing differs from traditional costing systems in that products are not
45. In allocating variable costs to products, cross-subsidized.
A. a volume-based cost driver should be used. D. Activity-based costing is more likely to result in major differences from traditional costing
B. a company should never use more than one cost driver. systems if the firm manufactures only one product rather than multiple products.
C. direct labor hours should always be used as the allocation base. 54. Examples of activities at the plant level of costs include:
D. a company should use the same allocation base that it uses for fixed costs. A. cutting, painting, and packaging C. heating, lighting, and security
B. designing, changing, and advertising D. scheduling, setting up, and moving
46. _____ are those that a company performs when it makes a group of units .
A. Batch-level activities. C. Sustaining activities.
B. Facility-sustaining activities. D. Unit-level activities. PROBLEMS
1. A time-and-motion study revealed that it should take 1 hour to produce a product that currently
47. Examples of activities at the batch level of costs include: takes 3 hours to produce. Labor is $8 per hour. Nonvalue-added costs are
A. heating, lighting, and security C. scheduling, setting up, and moving A. $0 C. $16
B. cutting, painting, and packaging D. designing, changing, and advertising B. $8 D. $24

48. If JIT manufacturing is used, maintenance of the production equipment would be classified as 2. Setup time for a product is six hours. A firm that uses JIT and produces the same product has
a reduced setup time to 30 minutes. Setup labor is $24 per hour. Value-added costs are
A. cell-level activity C. product-level activity A. $12 C. $132
B. facility-level activity D. unit-level activity B. $24 D. $144

49. Testing a prototype of a new product is an example of a 3. Each unit of product requires 8 gallons of raw material. Due to scrap and rework, each unit has
A. Batch-level activity. C. Product-level activity. been averaging 9 gallons of raw material. The raw material costs $4 per gallon. Value-added
B. Organization-sustaining activity. D. Unit-level activity. costs are
A. $2 C. $32
50. Examples of activities at the product level of costs include: B. $4 D. $36
A. cutting, painting, and packaging C. heating, lighting, and security

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4. A company keeps 20 days of raw materials inventory on hand to avoid shutdowns due to raw The total annual cost of OOA was $7.5 million, and the total annual cost of providing
materials shortages. Carrying costs average $2,000 per day. A competitor keeps 10 days of residential space and meals was $7.2 million.
inventory on hand the competitor’s carrying costs average $1,000 per day. Value-added costs
are Accordingly, the ABC analysis indicates that the daily costing rate should be
A. $0 C. $20,000 A. $620.00 for all occupants.
B. $10,000 D. $40,000 B. $182.50 for occupants in the low-usage category.
C. $245.00 for occupants in the high-usage category.
5. New Rage Cosmetics has used a traditional cost accounting system to apply quality control D. $145.00 for occupants in the medium-usage category.
costs uniformly to all products at a rate of 14.5% of direct labor cost. Monthly direct labor cost
for Satin Sheen makeup is $27,500. In an attempt to distribute quality control costs more Questions 7 thru 9 are based on the following information.
equitably, New Rage is considering activity-based costing. The monthly data shown in the Dierich Company uses an activity-based costing system with three activity cost pools. The
chart below have been gathered for Satin Sheen. company has provided the following data concerning its costs and its activity based costing
Quantity for system:
Activity Cost Driver Cost Rates Satin Sheen Costs:
Incoming material inspection Type of material $11.50 per type 12 types Manufacturing overhead $600,000
In-process inspection Number of units $0.14 per unit 17,500 units Selling and admin. expenses $220,000
Product certification Per order $77per order 25 orders Total $820,000
The monthly quality control cost assigned to Satin Sheen makeup using activity-based costing Distribution of resource consumption:
is Activity Cost Pools
A. $8,500.50 Order Size Customer Support Other Total
B. $88.64 per order. Manufacturing overhead 15% 75% 10% 100%
C. $525.50 lower than the cost using the traditional system. Selling and admin. Expenses 60% 20% 20% 100%
D. $525.50 higher than the cost using the traditional system. The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining
costs. You have been asked to complete the first-stage allocation of costs to the activity cost
6. ALF Co. is an assisted-living facility that provides services in the form of residential space, pools.
meals, and other occupant assistance (OOA) to its occupants. ALF currently uses a traditional
7. How much cost, in total, would be allocated in the first-stage allocation to the Order Size
cost account system that defines the service provided as assisted living, with service output
activity cost pool?
measured in terms of occupant days. Each occupant is charged a daily rate equal to ALF’s
A. $123,000 C. $307,500
annual cost of providing residential space, meals and OOA divided by total occupant days.
B. $222,000 D. $492,000
However, an activity-based costing (ABC) analysis has revealed that occupant’s use of OOA
varies substantially. This analysis determined that occupants could be grouped into three
8. How much cost, in total, should NOT be allocated to orders and products in the second stage
categories (low, moderate, and high usage of OOA) and that the activity driver of OOA is
of the allocation process if the activity-based costing system is used for internal decision-
nursing hours. The driver of the other activities is occupant days. The following quantitative
making?
information was also provided:
A. $0. C. $104,000.
Occupant category Annual Occupant Days Annual Nursing Hours
B. $82,000. D. $164,000.
Low Usage 36,000 90,000
9. How much cost, in total, would be allocated in the first-stage allocation to the Customer
Medium Usage 18,000 90,000
Support activity cost pool?
High Usage 6,000 120,000
A. $164,000 C. $494,000
60,000 300,000

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B. $389,500 D. $615,000 A company has identified the following overhead costs and cost drivers for the coming year.
Overhead Item Cost Driver Budgeted Cost Budgeted Activity Level
Questions 10 through 13 are based on the following information. Machine setup No. of setups $ 20,000 200
Zebra Corporation has the following activities: creating bills of materials (BOM), studying Inspection No. of inspections $130,000 6,500
manufacturing capabilities, improving manufacturing processes, training employees, and designing Material handling No. of material moves $ 80,000 8,000
tooling. The general ledger accounts reveal the following expenditures for manufacturing Engineering Engineering hours $ 50,000 1,000
engineering: $280,000
Salaries $150,000 The following information was collected on three jobs that were completed during the year:
Equipment 80,000 Job 101 Job 102 Job 103
Supplies 20,000 Direct materials $5,000 $12,000 $8,000
Total $250,000 Direct labor $2,000 $ 2,000 $4,000
The equipment is used for two activities: improving processes and designing tooling. Thirty-five Units completed 100 50 200
percent of the equipment’s time is used for improving processes and sixty-five percent is used for Number of setups 1 2 4
designing tools. The salaries are for two engineers. One is paid $100,000, while the other earns Number of inspections 20 10 30
$50,000. The $100,000 engineer spends 40% of his time training employees in new processes and Number of material moves 30 10 50
60% of his time on improving processes. The remaining engineer spends equal time on all Engineering hours 10 50 10
activities. Supplies are consumed in the following proportions: Budgeted direct labor cost was $100,000, and budgeted direct material cost was $280,000.
Creating BOMs 25%
Studying capabilities 10% 14. If the company uses activity-based costing, how much overhead cost should be allocable to
Improving processes 20% Job 101?
Training employees 25% A. $1,300 C. $5,000
Designing tooling 20% B. $2,000 D. $5,600
10. What is the cost assigned to the creating BOMs activity?
15. If the company uses activity-based costing, compute the cost of each unit of Job 102.
A. $15,000 C. $87,500
A. $340 C. $440
B. $62,500 D. $250,000
B. $392 D. $520
11. What is the cost assigned to the improving processes activity?
16. The company prices its products at 140% of cost. If the company uses activity-based costing,
A. $50,000 C. $102,000
the price of each unit of Job 103 would be
B. $87,500 D. $250,000
A. $98 C. $116
12. What is the cost assigned to the training employees activity?
B. $100 D. $140
A. $55,000 C. $162,500
B. $62,500 D. $250,000
Questions 17 thru 22 are based on the following information
Special Products recently installed an activity-based relational data base. Using the information
13. What is the cost assigned to the designing tooling activity?
contained in the activity relational table, the following pool rates were computed:
A. $50,000 C. $162,500
$200 per purchase order
B. $66,000 D. $250,000
$12 per machine hour, process A
$15 per machine hour, process B
Questions 14 through 16 are based on the following information.
$40 per engineering hour

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examination, which covered activity-based costing.

Two products are produced by Special Products: A and B. Each product has an area in the plant Alaire Corporation manufactures several different types of printed circuit boards: however, two of
that is dedicated to its production. The plant has two manufacturing processes, process A and the boards account for the majority of the company’s sales. The first of these boards, a television
process B. Other processes include engineering, product handling and procurement. The product (TV) circuit board, has been a standard in the industry for several years. The market for this type
relational table for Special is as follows: of board is competitive and therefore price-sensitive. Alaire plans to sell 65,000 of the TV boards
Activity Usage in 1993 at a price of $150 per unit. The second high-volume product, a persona computer (PC)
Activity Driver # Name Product A Product B circuit board, is a recent addition to Alaire’s product line. Because the PC board incorporates the
1 Units 200,000 25,000 latest technology, it can be sold at a premium price, plans include the sale of 40,000 PC boards at
2 Purchase orders 250 125 $300 per unit.
3 Machine hours 80,000 10,000
4 Engineering hours 1,250 1,500 Alaire’s management group is meeting to discuss strategies for 1993, and the current topic of
conversation is how to spend the sales and promotion dollars for next year. The sales manager
17. How much overhead cost will be assigned to product A using the number of purchase orders? believe that the market share for the TV board could be expanded by concentrating Alaire’s
A. $25,000 C. $66,750 promotional efforts in this area. In response to this suggestion, the production manager said, “Why
B. $50,000 D. $40,000,000 don’t you go after a bigger market for the PV board? The cost sheets that I get show a premium
price for the PC board, selling it should help overall profitability.”
18. How much overhead cost will be assigned to product B using engineering hours? Alaire uses a standard cost system, and the following data apply to the TV and PC boards.
A. $50,000 C. $400,500 TV Board PC Board
B. $60,000 D. $1,000,000 Direct materials $80 $140
Direct labor 1.5 hours 4.0 hours
19. How much overhead cost will be assigned to product A using process A? Machine time 0.5 hours 1.5 hours
A. $120,000 C. $1,200,000 Variable factory overhead is applied on the basis of direct labor hours. For 1993, variable factory is
B. $960,000 D. $2,400,000 budgeted at $1,120,000, and direct labor hours are estimated at 280,000. The hourly rates for
machine time and direct labor are $10 and $14, respectively. Alaire applies a material handling
20. How much overhead cost will be assigned to product B using process B? charge at 10% of materials cost, thus materials handling charge is not included in variable factory
A. $120,000 C. $960,000 overhead. Total 1993 expenditures for materials are budgeted at $10,600,000.
B. $150,000 D. $1,200,000 Ed Watch, Alaire’s controller, believes that, the management group proceeds with the discussion
about allocating sales and promotional dollars to individual products, they should consider the
21. What is the unit cost of Product A? activities involved in the production. As Welch explained to the group, “Activity-based costing
A. $3.76 C. $5.30 integrates the cost of all activities, known as cost drivers, into individual product costs rather than
B. $4.71 D. $252.00 including these costs in overhead pools.” Welch has prepared the schedule shown below to help
the management group understand this concept.
22. What is the unit cost of Product B? “Using this information,” Welch explained, “we can calculate an activity-based cost for each TV
A. $6.00 C. $9.40 board and each PC board and then compare it to the standard cost we have bee using. The only
B. $6.41 D. $252.00 cost that remains the same for both cost methods is the cost of direct materials. The cost drivers
will replace the direct labor, machine time, and overhead costs in the standard cost.”
Question 23 through 26 are based on the following information. Annual Activity
This information was presented as part of Question 3 on Part 3 of the June 1992 CMA Budgeted Cost Cost Driver for Cost Driver
Materials overhead:

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Procurement $400,000 No. of parts 4,000,000 parts

Production scheduling 220,000 No. of boards 110,000 boards Questions 27 thru 30 are based on the following information.
Packaging & shipping 440,000 No. of boards 110,000 boards Acton Company has two products: A and B. The annual production and sales of Product A is 800
$1,060,000 units and of Product B is 500 units. The company has traditionally used direct labor-hours as the
Variable overhead: basis for applying all manufacturing overhead to products. Product A requires 0.3 direct labor hours
Machine setup $446,000 No. of setups 278,750 setups per unit and Product B requires 0.2 direct labor hours per unit. The total estimated overhead for
Hazardous waste disposal 48,000 Lbs. of waste 16,000 lbs. next period is $92,023.
Quality control 560,000 No. of inspections 160,000 inspect’ns The company is considering switching to an activity-based costing system for the purpose of
General supplies 66,000 No. of boards 110,000 boards computing unit product costs for external reports. The new activity-based costing system would
$1,120,000 have three overhead activity cost pools--Activity 1, Activity 2, and General Factory--with estimated
Manufacturing: overhead costs and expected activity as follows:
Machine insertion $1,200,000 No. of parts 3,000,000 parts
Manual insertion 4,000,000 No. of parts 1,000,000 parts Estimated Expected Activity
Wave soldering 132,000 No. of boards 110,000 boards Activity Cost Pool Overhead Costs Product A Product B Total
$5,332,000 Activity 1 $14,487 500 600 1,100
Required per unit TV Board PC Boards Activity 2 $64,800 2,500 500 3,000
Parts 25 55 General Factory $12,736 240 100 340
Machine insertions 24 35 Total $92,023
Manual insertions 1 20 (Note: The General Factory activity cost pool's costs are allocated on the basis of direct labor
Machine setups 2 3 hours.)
Hazardous waste 0.02 lbs. 0.35 lbs.
Inspections 1 2 27. The predetermined overhead rate under the traditional costing system is closest to:
A. $13.17. C. $37.46.
23. On the basis of standard costs, the total contribution budgeted for the TV board is B. $21.60. D. $270.66.
A. $1,950,000 C. $2,340,000
B. $2,275,000 D. $2,470,000 28. The overhead cost per unit of Product B under the traditional costing system is closest to:
A. $2.63. C. $7.49.
24. On the basis of activity-based costs (ABC), the total contribution budgeted for the TV board is B. $4.32. D. $54.13.
A. $1,594,000 C. $2,037,100
B. $1,950,000 D. $2,557,100 29. .The predetermined overhead rate (i.e., activity rate) for Activity 1 under the activity-based
costing system is closest to:
25. On the basis of standard costs, the total contribution budgeted for the PC board is A. $13.17. C. $28.97.
A. $2,360,000 C. $2,960,000 B. $24.15. D. $83.66.
B. $2,920,000 D. $3,000,000
30. The overhead cost per unit of Product A under the activity-based costing system is closest to:
26. On the basis of activity-based costs, the total contribution budgeted for the PC board is A. $11.24. C. $81.20.
A. P1,594,000 C. $2,360,000 B. $70.79. D. $86.97.
B. $1,950,000 D. $2,557,100

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