Test Bank Horngren’s Cost Accounting A Managerial Emphasis 16th Edition by Srikant M. Datar, Madhav V. Rajan

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Sample Chapter

Cost Accounting: A Managerial Emphasis, 16e (Horngren)

Chapter 5   Activity-Based Costing and Activity-Based Management

 

5.1   Objective 5.1

 

1) Which of the following statements is true of a peanut-butter costing system?

  1. A) A peanut-butter costing system typically has more-homogeneous indirect cost pools.
  2. B) A peanut-butter costing system broadly averages or spreads the cost of resources uniformly to cost objects.
  3. C) A peanut-butter costing system assumes that all costs are variable.
  4. D) In a peanut-butter costing system, costs of activities are used to assign costs to other cost objects such as products or services based on the activities the products or services consume.

Answer:  B

Diff: 2

Objective:  1

AACSB:  Analytical thinking

 

2) Overcosting a particular product may result in:

  1. A) pricing the product too high
  2. B) pricing the product too low
  3. C) operating efficiencies
  4. D) understating total product costs

Answer:  A

Diff: 2

Objective:  1

AACSB:  Analytical thinking

 

3) For a company with diverse products, undercosting overhead of a product will lead to product-cross -subsidization which means that:

  1. A) direct labor costs of the product are misallocated
  2. B) direct material costs of the product are misallocated
  3. C) indirect costs of another product are misallocated
  4. D) direct costs of another product are misallocated

Answer:  C

Diff: 2

Objective:  1

AACSB:  Analytical thinking

 

4) Aqua Company produces two products–Alpha and Beta. Alpha has a high market share and is produced in bulk. Production of Beta is based on customer orders and is custom designed. Also, 55% of Beta’s cost is shared between design and setup costs, while Alpha’s major portions of costs are direct costs. Alpha is using a single cost pool to allocate indirect costs. Which of the following statements is true of Aqua?

  1. A) Aqua will overcost Beta’s direct costs as it is using a single cost pool to allocate indirect costs.
  2. B) Aqua will undercost Alpha’s indirect costs because alpha has high direct costs.
  3. C) Aqua will overcost Alpha’s indirect costs as it is using a single cost pool to allocate indirect costs.
  4. D) Aqua will overcost Beta’s indirect costs because beta has high indirect costs.

Answer:  C

Diff: 2

Objective:  1

AACSB:  Analytical thinking

 

5) Product-cost cross-subsidization  means that:

  1. A) when one product is overcosted, it results in more than one other product being overcosted
  2. B) when a company undercosts more than one of its products, it will overcost more than one of its other products
  3. C) when a company undercosts one of its products, it will overcost at least one of its other products
  4. D) when one product is overcosted it results in all other products being overcosted

Answer:  C

Diff: 2

Objective:  1

AACSB:  Analytical thinking

 

6) Which of the following has accelerated need for refined cost systems?

  1. A) global monopolies
  2. B) rising prices
  3. C) intense competition
  4. D) a shift toward increased direct costs

Answer:  C

Diff: 2

Objective:  1

AACSB:  Analytical thinking

 

7) Uniformly assigning the costs of resources to cost objects when those resources are actually used in a nonuniform way is called activity based costing.

Answer:  FALSE

Explanation:  Peanut butter costing occurs when costs are assigned uniformly amount multiple products using average costs that do not take into account the nonuniform way the resources are consumed to produce the different products.

Diff: 1

Objective:  1

AACSB:  Analytical thinking

 

8) Product-cost cross-subsidization is very common when costs are uniformly spread across various products.

Answer:  TRUE

Diff: 2

Objective:  1

AACSB:  Analytical thinking

 

9) Companies that overcost products risk becoming less effective on pricing  and losing market share when competition utilizes more accurate cost systems.

Answer:  TRUE

Diff: 1

Objective:  1

AACSB:  Analytical thinking

 

10) If companies increase market share in a given product line because their reported costs are less than their actual costs, they will become more profitable in the long run.

Answer:  FALSE

Explanation:  The actual costs will increase because of the additional sales and the other product lines (which are subsidizing the undercosting of the growing product line) will suffer. The net result will be the company having a lower operating income than it could have had.

Diff: 2

Objective:  1

AACSB:  Analytical thinking

 

11) As product diversity and indirect costs increase, it is usually best to switch away from a broad averaging system to an activity-based cost system.

Answer:  TRUE

Diff: 1

Objective:  1

AACSB:  Analytical thinking

 

12) The risk of peanut-butter costing rises when broad averages are used across multiple products without managers considering the true amounts of resources consumed in the making of each product.

Answer:  TRUE

Diff: 2

Objective:  1

AACSB:  Analytical thinking

 

13) Explain how a top-selling product may actually result in losses for the company.

Answer:  If indirect costs are not properly allocated to the products, a product may appear to cost less than it actually does cost to produce. If the selling price is based on these lower costs, the selling price may actually be lower than the costs needed to produce the product resulting in losses for the company. This would make undercosted products appear more profitable and therefore making marketing efforts to promote the undercosted product counter productive.

Diff: 2

Objective:  1

AACSB:  Analytical thinking

 

5.2   Objective 5.2

 

1) Refining a cost system involves which of the following?

  1. A) classifying as many costs as indirect costs as is feasible
  2. B) creating as many cost pools as possible to capture all costs
  3. C) identifying the activities involved in a process and understanding how those activities consume resources
  4. D) Seeking an easier and more cost effective way to calculate average costs

Answer:  C

Diff: 1

Objective:  2

AACSB:  Analytical thinking

 

2) Which of the following is true of refinement of a costing system?

  1. A) While refining a costing system, companies should identify as many indirect costs as is economically feasible.
  2. B) A homogeneous cost pool will use multiple cost drivers to allocate costs.
  3. C) It reduces the use of broad averages for assigning the cost of resources to cost objects.
  4. D) It is likely to yield the most decision-making benefits when direct costs are a high percentage of total costs.

Answer:  C

Diff: 2

Objective:  2

AACSB:  Analytical thinking

 

3) Which of the following is a reason that has accelerated the demand for refinements to the costing system?

  1. A) The declining demand for customized products has led managers to decrease the variety of products and services their companies offer.
  2. B) The use of product and process technology has led to an increase in indirect costs and a decrease in direct costs.
  3. C) The increased of automated processes has led to the increase in direct manufacturing cost leading to a decrease in break even point.
  4. D) The increasing competition in product markets has led to an increase in contribution margin resulting in a decrease of break even point.

Answer:  B

Diff: 3

Objective:  2

AACSB:  Analytical thinking

 

4) Demand for refinements to the costing system has accelerated due to ________.

  1. A) increase in direct costs
  2. B) decrease in product diversity
  3. C) decrease in indirect costs
  4. D) competition in product markets

Answer:  D

Diff: 1

Objective:  2

AACSB:  Analytical thinking

5) Johnson Superior Products Inc. produces hospital equipment and the setup requirements vary from product to product. Johnson produces its products based on customer orders and uses ABC costing. In one of its indirect cost pools, setup costs and distribution costs are pooled together. Costs in this pool are allocated using number of customer orders for the easiness of costing operations. Based on the information provided, which of the following arguments is valid?

  1. A) Johnson has clearly failed to identify as many direct costs as is economically feasible.
  2. B) All costs in a homogeneous cost pool have the same or a similar cause-and-effect relationship with the single cost driver that is used as the cost-allocation base for Johnson.
  3. C) Johnson has unnecessarily wasted resources by classifying setup and distribution costs as they could have been considered as direct costs.
  4. D) Johnson has failed to use the correct cost driver as the cost-allocation base for setup costs.

Answer:  D

Diff: 1

Objective:  2

AACSB:  Application of knowledge

 

6) Increased used of automation, computer integrated manufacturing, and utilization of robots have lead to an increase in indirect costs relative to direct costs.

Answer:  TRUE

Diff: 2

Objective:  2

AACSB:  Analytical thinking

 

7) Modern manufacturing practices have helped reduce overhead costs relative to direct costs as the reliance on support resources such as scheduling, design, and engineering has diminished.

Answer:  FALSE

Explanation:  Managing complex technology and producing diverse products require additional support functions such as production scheduling, product and process design, and engineering.

Diff: 1

Objective:  2

AACSB:  Analytical thinking

 

8) Indirect labor and distribution costs would most likely be in the same activity-cost pool.

Answer:  FALSE

Explanation:  Indirect labor and distribution costs would not be in the same activity-cost pool because their cost drivers are very dissimilar. A cost driver of indirect labor would include direct labor hours, while a cost driver of distribution costs would include, for example, cubic feet of cargo moved.

Diff: 2

Objective:  2

AACSB:  Analytical thinking

 

9) Managers should look for evidence of cause-and-effect when choosing a cost driver with the driver being the cause and the effect being the cost incurred.

Answer:  TRUE

Diff: 1

Objective:  2

AACSB:  Analytical thinking

 

10) Identification of a cost-allocation base is not a critical  element when using a strategy that will refine a costing system.

Answer:  FALSE

Explanation:  Managers refine their cost systems by looking for effective cost=allocation basis  (cost driver) and seek evidence of cause-and-effect when choosing a cost driver with the driver being the cause and the effect being the cost incurred.

Diff: 1

Objective:  2

AACSB:  Analytical thinking

 

11) What are the factors that are causing many companies to refine their costing systems to obtain more accurate measures of the costs of their products?

Answer:  The first cause is increasing product diversity. Companies are producing many more products than they used to, placing strains on more simple, older cost systems. A second cause is the overall increased in indirect costs and the relative decline of direct costs. The indirect nature of these costs requires allocation, and any inaccuracies in allocation of these costs become magnified as these indirect costs increase. A third cause would be advances in information technology that makes complex allocation of indirect costs less burdensome. Finally, increased competition from both national and international competitors has resulted in more pressure to reduce costs, as well as increasing the need for and value of information to support responses to these new threats.

Diff: 2

Objective:  2

AACSB:  Analytical thinking

 

5.3   Objective 5.3

 

1) ABC systems create ________.

  1. A) one large cost pool
  2. B) homogeneous activity-related cost pools
  3. C) activity-cost pools with a broad focus
  4. D) activity-cost pools containing many direct costs

Answer:  B

Diff: 1

Objective:  3

AACSB:  Analytical thinking

 

2) Activity based costing system differs from traditional costing systems in the treatment of ________.

  1. A) direct labor costs
  2. B) direct material costs
  3. C) prime costs
  4. D) indirect costs

Answer:  D

Diff: 1

Objective:  3

AACSB:  Analytical thinking

 

3) The fundamental cost objects of ABC are ________.

  1. A) activities
  2. B) cost drivers
  3. C) products
  4. D) services

Answer:  A

Diff: 2

Objective:  3

AACSB:  Analytical thinking

 

4) Which of the following statements is true of activity-based costing?

  1. A) In activity-based costing, direct labor-hours is always the best allocation base to allocate all non-manufacturing indirect costs.
  2. B) Activity based costing is more suited to companies with high product diversity than companies with single product line.
  3. C) Activity based costing broadly averages or spreads the cost of resources uniformly to cost objects such as products or services.
  4. D) The main advantage of activity-based costing over peanut-butter costing is the accurate distribution of all direct costs to the products.

Answer:  B

Diff: 2

Objective:  3

AACSB:  Analytical thinking

 

5) A single indirect-cost rate distorts product costs because ________.

  1. A) there is an assumption that all support activities affect all products in a uniform way
  2. B) it recognizes specific activities that are required to produce a product
  3. C) competitive pricing is ignored
  4. D) it assumes all costs are product costs

Answer:  A

Diff: 2

Objective:  3

AACSB:  Analytical thinking

 

6) Extracts from cost information of Hebar Corp.:

 

  Simple L3 Pack Complex L7 Pack Total

 

Setup cost allocated using direct labor-hours $19,250 $5,750 $25,000
Setup cost allocated using setup-hours $13,400 $11,600 $25,000

 

Assuming that setup-hours is considered a more effective cost drive for allocating setup costs than direct labor-hours. Which of the following statements is true of Hebar’s setup costs under traditional costing?

  1. A) L3 pack is undercosted by $5,850
  2. B) L7 pack is undercosted by $5,750
  3. C) L3 pack is overcosted by $5,850
  4. D) L7 pack is overcosted by $5,850

Answer:  C

Explanation:  Setup cost allocated using direct labor-hours – Setup cost allocated using setup-hours

= $19,250 − $13,400 = $5,850

Diff: 2

Objective:  3

AACSB:  Application of knowledge

 

7) Which of the following is true with activity based cost accounting?

  1. A) Activity-based costing ignores the allocation of marketing and distribution costs.
  2. B) Activity-based costing is more likely to result in major differences from traditional costing systems if the firm manufactures only one product rather than multiple products.
  3. C) The focus is on activities that account for a sizable fraction of indirect costs .
  4. D) Chances of product-cost cross-subsidization are higher in activity-based costing compared to traditional costing systems.

Answer:  C

Diff: 2

Objective:  3

AACSB:  Analytical thinking

 

8) Activity-based costing (ABC) can eliminate cost distortions because ABC systems ________.

  1. A) establish a cause-and-effect relationship with the activities performed
  2. B) use single cost pool for all overhead costs, thereby enabling simplicity
  3. C) use a broad average to allocate all overhead costs
  4. D) never consider interactions between different departments in assigning support costs

Answer:  A

Diff: 2

Objective:  3

AACSB:  Analytical thinking

 

9) When “available time” (i.e., setup-hours) is used to calculate a cost of a resource and to allocate costs to cost objects , the system is called:

  1. A) job costing
  2. B) process costing
  3. C) hybrid costing
  4. D) time-driven activity based costing

Answer:  D

Diff: 2

Objective:  3

AACSB:  Analytical thinking

 

10) Extreme Manufacturing Company provides the following ABC costing information:

 

Activities                                         Total Costs        Activity-cost drivers

        Account inquiry                                 $320,000                   16,000 hours

        Account billing                                   $200,000                    4,000,000 lines

        Account verification accounts       $173,250                    70,000 accounts

        Correspondence letters                       $24,000                    4,000 letters

               Total costs                                     $717,250

 

The above activities are used by Departments A and B as follows:

 

Department A         Department B

        Account inquiry hours                     2,700 hours               4,200 hours

        Account billing lines                        900,000 lines             750,000 lines

        Account verification accounts       8,000 accounts         6,000 accounts

        Correspondence letters                    1,400  letters             1,800 letters

 

How much of the account inquiry cost will be assigned to Department A?

  1. A) $54,000
  2. B) $320,000
  3. C) $160,000
  4. D) $84,000

Answer:  A

Explanation:  Account inquiry costs – Department A = ($320,000 ÷ 16,000) × 2,700 = $54,000

Diff: 2

Objective:  3

AACSB:  Application of knowledge

 

11) Extreme Manufacturing Company provides the following ABC costing information:

 

Activities                                         Total Costs        Activity-cost drivers

        Account inquiry                                 $320,000                   16,000 hours

        Account billing                                   $220,000                    4,000,000 lines

        Account verification accounts       $182,000                    80,000 accounts

        Correspondence letters                       $25,000                    4,000 letters

               Total costs                                     $747,000

 

The above activities are used by Departments A and B as follows:

 

Department A         Department B

        Account inquiry hours                     2,200 hours               3,700 hours

        Account billing lines                        600,000 lines             450,000 lines

        Account verification accounts       5,000 accounts         3,000 accounts

        Correspondence letters                    1,000  letters             1,400 letters

 

How much of the account billing cost will be assigned to Department B?

  1. A) $220,000
  2. B) $110,000
  3. C) $24,750
  4. D) $33,000

Answer:  C

Explanation:  Billing costs – Department B = ($220,000 ÷ 4,000,000) × 450,000 = $24,750

Diff: 2

Objective:  3

AACSB:  Application of knowledge

 

12) Extreme Manufacturing Company provides the following ABC costing information:

 

Activities                                         Total Costs        Activity-cost drivers

        Account inquiry                                 $420,000                   14,000 hours

        Account billing                                   $225,000                    5,000,000 lines

        Account verification accounts         $95,000                    40,000 accounts

        Correspondence letters                       $46,000                    8,000 letters

               Total costs                                     $786,000

 

The above activities are used by Departments A and B as follows:

 

Department A         Department B

        Account inquiry hours                     2,900 hours               4,400 hours

        Account billing lines                        600,000 lines             450,000 lines

        Account verification accounts       12,000 accounts       10,000 accounts

        Correspondence letters                    1,800  letters             2,200 letters

 

How much of account verification costs will be assigned to Department A?

  1. A) $23,750
  2. B) $28,500
  3. C) $95,000
  4. D) $47,500

Answer:  B

Explanation:  Account verification costs – Department A = ($95,000/ 40,000) × 12,000 = $28,500

Diff: 2

Objective:  3

AACSB:  Analytical thinking

 

13) Extreme Manufacturing Company provides the following ABC costing information:

 

Activities                                         Total Costs        Activity-cost drivers

        Account inquiry                                 $390,000                   13,000 hours

        Account billing                                   $275,000                    5,000,000 lines

        Account verification accounts       $130,500                    60,000 accounts

        Correspondence letters                       $22,000                    4,000 letters

               Total costs                                     $817,500

 

The above activities are used by Departments A and B as follows:

 

Department A         Department B

        Account inquiry hours                     2,500 hours               4,000 hours

        Account billing lines                        800,000 lines             650,000 lines

        Account verification accounts       9,000 accounts         7,000 accounts

        Correspondence letters                    2,000  letters             2,400 letters

 

How much of correspondence costs will be assigned to Department A?

  1. A) $22,000
  2. B) $49,500
  3. C) $11,000
  4. D) $11,242

Answer:  C

Explanation:  Correspondence costs – Department A = ($22,000 ÷ 4,000) × 2,000 = $11,000

Diff: 2

Objective:  3

AACSB:  Application of knowledge

 

14) Extreme Manufacturing Company provides the following ABC costing information:

 

Activities                                         Total Costs        Activity-cost drivers

        Account inquiry                                 $280,000                   14,000 hours

        Account billing                                   $350,000                    7,000,000 lines

        Account verification accounts         $93,750                    50,000 accounts

        Correspondence letters                       $29,000                    4,000 letters

               Total costs                                     $752,750

 

The above activities are used by Departments A and B as follows:

 

Department A         Department B

        Account inquiry hours                     2,100 hours               3,600 hours

        Account billing lines                        500,000 lines             350,000 lines

        Account verification accounts       7,000 accounts         5,000 accounts

        Correspondence letters                    1,200  letters             1,600 letters

 

How much of the total costs will be assigned to Department A?

  1. A) $88,825
  2. B) $118,825
  3. C) $120,000
  4. D) $85,075

Answer:  A

Explanation:  Account inquiry costs                          = ($280,000 ÷ 14,000) × 2,100  = $42,000

Billing costs                         = ($350,000 ÷ 7,000,000) × 500,000       = $25,000

Account verification costs                                             = ($93,750 ÷ 50,000) × 7,000     =                                                 $13,125

Correspondence costs       = ($29,000 ÷ 4,000)           × 1,200           = $8,700

$88,825

Diff: 3

Objective:  3

AACSB:  Application of knowledge

 

15) Extreme Manufacturing Company provides the following ABC costing information:

 

Activities                                         Total Costs        Activity-cost drivers

        Account inquiry                                 $750,000                   15,000 hours

        Account billing                                   $250,000                    5,000,000 lines

        Account verification accounts       $173,250                    70,000 accounts

        Correspondence letters                       $42,000                    7,000 letters

               Total costs                                  $1,215,250

 

The above activities are used by Departments A and B as follows:

 

Department A         Department B

        Account inquiry hours                     2,000 hours               3,500 hours

        Account billing lines                        900,000 lines             750,000 lines

        Account verification accounts       9,000 accounts         7,000 accounts

        Correspondence letters                    1,200  letters             1,600 letters

 

How much of the total costs will be assigned to Department B?

  1. A) $282,460
  2. B) $246,925
  3. C) $239,425
  4. D) $256,825

Answer:  C

Explanation:  Account inquiry costs                              = ($750,000  ÷ 15,000) × 3,500             = $175,000

Billing costs                          = ($250,000 ÷ 5,000,000)    × 750,000       =  $37,500

Account verification costs                                                = ($173,250 ÷ 70,000) × 7,000              =  $17,325

Correspondence costs        = ($42,000 ÷ 7,000)              × 1,600             =  $9,600

$239,425

Diff: 3

Objective:  3

AACSB:  Application of knowledge

 

16) Dalrymple Company produces a special spray nozzle. The budgeted indirect total cost of inserting the spray nozzle is $68,750. The budgeted number of nozzles to be inserted is 11,000. What is the budgeted indirect cost allocation rate for this activity?

  1. A) $0.16
  2. B) $0.32
  3. C) $1.16
  4. D) $6.25

Answer:  D

Explanation:  $68,750 / 11,000 = $6.25

Diff: 2

Objective:  3

AACSB:  Application of knowledge

 

17) Activity-based costing is most likely to yield benefits for companies ________.

  1. A) with complex product design processes that vary significantly from product to product
  2. B) with operations that remain fairly consistent across product lines
  3. C) in a monopolistic market
  4. D) having nominal percentage of indirect costs

Answer:  A

Diff: 1

Objective:  3

AACSB:  Analytical thinking

 

18) Which of the following statements is true of ABC systems?

  1. A) ABC systems are time-driven cost systems.
  2. B) ABC systems classify some direct costs as indirect costs and some indirect costs as direct costs.
  3. C) ABC systems provide valuable information to managers beyond accurate product costs.
  4. D) ABC systems assume all costs are variable costs.

Answer:  C

Diff: 2

Objective:  2

AACSB:  Analytical thinking

 

19) Columbus Company provides the following ABC costing information:

 

Activities                                     Total Costs              Activity-cost drivers

Labor                                               $392,000                           8,000  hours

Gas                                                     $30,000                           5,000  gallons

Invoices                                           $180,000                           7,500  invoices

Total costs                                $602,000

 

The above activities used by their three departments are:

 

                                                         Lawn Department       Bush Department Plowing Department

Labor                                                      2,600  hours              1,300  hours                          4,100 hours

Gas                                                          1,800  gallons            1,000  gallons                       2,200 gallons

Invoices                                                 1,600  invoices             100  invoices                   5,800 invoices

 

How much of the labor cost will be assigned to the Bush Department?

  1. A) $127,400
  2. B) $63,700
  3. C) $200,900
  4. D) $97,825

Answer:  B

Explanation:  Labor cost assigned = ($392,000 ÷ 8,000) × 1,300 = $63,700

Diff: 2

Objective:  3

AACSB:  Analytical thinking

 

20) Columbus Company provides the following ABC costing information:

 

Activities                                     Total Costs              Activity-cost drivers

Labor                                               $336,000                           8,000  hours

Gas                                                     $84,000                           7,000  gallons

Invoices                                           $180,000                           7,500  invoices

Total costs                                $600,000

 

The above activities used by their three departments are:

 

                                                         Lawn Department       Bush Department Plowing Department

Labor                                                      3,100  hours              1,500  hours                          3,400 hours

Gas                                                          1,900  gallons               900  gallons                       4,200 gallons

Invoices                                                 1,300  invoices             400  invoices                   5,800 invoices

 

If labor hours are used to allocate the non-labor, overhead costs, what is the overhead allocation rate?

  1. A) $75.00 per hour
  2. B) $26.67 per hour
  3. C) $42.00 per hour
  4. D) $33.00 per hour

Answer:  D

Explanation:  Overhead allocation rate = ($84,000 + $180,000) ÷ 8,000 = $33.00

Diff: 2

Objective:  3

AACSB:  Application of knowledge

 

21) Columbus Company provides the following ABC costing information:

 

Activities                                     Total Costs              Activity-cost drivers

Labor                                               $384,000                           8,000  hours

Gas                                                     $36,000                           6,000  gallons

Invoices                                           $180,000                           7,500  invoices

Total costs                                $600,000

 

The above activities used by their three departments are:

 

                                                         Lawn Department       Bush Department Plowing Department

Labor                                                      2,500  hours              1,400  hours                          4,100 hours

Gas                                                          1,800  gallons            1,000  gallons                       3,200 gallons

Invoices                                                 1,300  invoices             300  invoices                   5,900 invoices

 

How much of invoice cost will be assigned to the Bush Department?

  1. A) $7,200
  2. B) $141,600
  3. C) $31,200
  4. D) $180,000

Answer:  A

Explanation:  ($180,000 / 7,500 invoices) × 300 invoices = $7,200

Diff: 2

Objective:  3

AACSB:  Application of knowledge

 

22) Columbus Company provides the following ABC costing information:

 

Activities                                     Total Costs              Activity-cost drivers

Labor                                               $352,000                           8,000  hours

Gas                                                        $8,000                           4,000  gallons

Invoices                                           $110,000                           5,500  invoices

Total costs                                $470,000

 

The above activities used by their three departments are:

 

                                                         Lawn Department       Bush Department Plowing Department

Labor                                                      3,200  hours              1,200  hours                          3,600 hours

Gas                                                          1,900  gallons               900  gallons                       1,200 gallons

Invoices                                                 1,500  invoices             300  invoices                   3,700 invoices

 

How much of the gas cost will be assigned to the Lawn Department?

  1. A) $1,800
  2. B) $3,800
  3. C) $2,400
  4. D) $8,000

Answer:  B

Explanation:  Gas cost = ($8,000 ÷ 4,000 gallons) × 1,900 gallons = $3,800

Diff: 2

Objective:  3

AACSB:  Application of knowledge

 

23) Columbus Company provides the following ABC costing information:

 

Activities                                     Total Costs              Activity-cost drivers

Labor                                               $490,000                         10,000  hours

Gas                                                     $18,000                           3,000  gallons

Invoices                                             $56,000                           3,500  invoices

Total costs                                $564,000

 

The above activities used by their three departments are:

 

                                                         Lawn Department       Bush Department Plowing Department

Labor                                                      2,800  hours              1,400  hours                          5,800 hours

Gas                                                          1,800  gallons               900  gallons                       300 gallons

Invoices                                                 1,600  invoices             300  invoices                   1,600 invoices

 

How much of the total cost will be assigned to the Plowing Department?

  1. A) $564,000
  2. B) $311,600
  3. C) $188,000
  4. D) $173,600

Answer:  B

Explanation:  ($490,000 / 10,000)        × 5,800        =  $284,200

($18,000 / 3,000)              × 300           =  $1,800

($56,000 / 3,500)              × 1,600      =  $25,600

$311,600

Diff: 3

Objective:  3

AACSB:  Application of knowledge

 

24) Columbus Company provides the following ABC costing information:

 

Activities                                     Total Costs              Activity-cost drivers

Labor                                               $384,000                           8,000  hours

Gas                                                     $40,000                           4,000  gallons

Invoices                                             $40,000                           2,500  invoices

Total costs                                $464,000

 

The above activities used by their three departments are:

 

                                                         Lawn Department       Bush Department Plowing Department

Labor                                                      2,800  hours              1,500  hours                          3,700 hours

Gas                                                          1,800  gallons               900  gallons                       1,300 gallons

Invoices                                                 1,400  invoices             300  invoices                   800 invoices

 

How much of the total costs will be assigned to the Lawn Department?

  1. A) $192,000
  2. B) $464,000
  3. C) $174,800
  4. D) $154,667

Answer:  C

Diff: 3

Objective:  3

AACSB:  Application of knowledge

 

25) Milan Manufacturing Company has identified three cost pools to allocate overhead costs. The following estimates are provided for the coming year:

 

Cost Pool                                         Overhead Costs        Cost driver                       Activity level

Supervision of direct labor                       $539,000        Direct labor-hours                      920,000

Machine maintenance                               $120,000        Machine-hours                         1,000,000

Facility rent                                                   $215,000        Square feet of area                      160,000

Total overhead costs                               $874,000

 

The accounting records show the Mossman Job consumed the following resources:

 

                                      Cost driver               Actual level

Direct labor-hours               300

Machine-hours               1,675

Square feet of area               70

 

If direct labor-hours are considered the only overhead cost driver, what is the single cost driver rate for Milan?

  1. A) $1.05 per direct labor-hour
  2. B) $0.59 per direct labor-hour
  3. C) $0.95 per direct labor-hour
  4. D) $1.71 per direct labor-hour

Answer:  C

Explanation:  Cost driver rate = $874,000 ÷ 920,000 = 0.95 per dlh

Diff: 2

Objective:  3

AACSB:  Application of knowledge

 

26) Milan Company has identified three cost pools to allocate overhead costs. The following estimates are provided for the coming year:

 

Cost Pool                                         Overhead Costs        Cost driver                       Activity level

Supervision of direct labor                       $624,000        Direct labor-hours                      940,000

Machine maintenance                               $100,000        Machine-hours                            840,000

Facility rent                                                   $216,000        Square feet of area                      140,000

Total overhead costs                               $940,000

 

The accounting records show the Mossman Job consumed the following resources:

 

                                      Cost driver               Actual level

Direct labor-hours               290

Machine-hours               1,681.68

Square feet of area               50

 

Under activity-based costing, what is the amount of machine maintenance costs allocated to the Mossman Job? (Do not round any intermediary calculations.)

  1. A) $1,881.88
  2. B) $200.20
  3. C) $1,681.68
  4. D) $210.45

Answer:  B

Explanation:  Machine maintenance costs = 1,681.68 mh × ($100,000 ÷ 840,000) = $200.20

Diff: 2

Objective:  3

AACSB:  Application of knowledge

 

27) Velshi Printers has contracts to complete weekly supplements required by forty-six customers. For the year 2018, manufacturing overhead cost estimates total $1,500,000 for an annual production capacity of 10 million pages.

 

For 2018 Velshi Printers has decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:

 

Cost pool                               Manufacturing overhead costs               Activity level

Design changes                                                               $100,000     400 design changes

Setups                                                                               1,300,000                  3,000 setups

Inspections                                                                         100,000       10,000 inspections

Total manufacturing overhead costs                 $1,500,000

 

During 2018, two customers, Money Managers and Hospital Systems, are expected to use the following printing services:

 

Activity                                                           Money Managers       Hospital Systems

Pages                                                                                      90,000                           106,000

Design changes                                                                           13                                       0

Setups                                                                                            18                                       8

Inspections                                                                                   30                                     38

 

What is the cost driver rate if manufacturing overhead costs are considered one large cost pool and are assigned based on 10 million pages of production capacity?

  1. A) $0.01 per page
  2. B) $0.15 per page
  3. C) $0.14 per page
  4. D) $0.13 per page

Answer:  B

Explanation:  $0.15 per page = ($1,500,000 / 10,000,000 pages)

Diff: 2

Objective:  3

AACSB:  Application of knowledge

 

28) Velshi Printers has contracts to complete weekly supplements required by forty-six customers. For the year 2018, manufacturing overhead cost estimates total $600,000 for an annual production capacity of 12 million pages.

 

For 2018 Velshi Printers has decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:

 

Cost pool                               Manufacturing overhead costs               Activity level

Design changes                                                               $120,000     500 design changes

Setups                                                                                  380,000                  4,000 setups

Inspections                                                                         100,000         9,000 inspections

Total manufacturing overhead costs                     $600,000

 

During 2018, two customers, Money Managers and Hospital Systems, are expected to use the following printing services:

 

Activity                                                           Money Managers       Hospital Systems

Pages                                                                                      70,000                             86,000

Design changes                                                                           12                                       0

Setups                                                                                            17                                       7

Inspections                                                                                   26                                     34

 

Using pages printed as the only overhead cost driver, what is the manufacturing overhead cost estimate for Money Managers during 2018?

  1. A) $4,300
  2. B) $2,800
  3. C) $3,500
  4. D) $4,784

Answer:  C

Explanation:  $3,500 = [70,000 pages × ($600,000 / 12,000,000)]

Diff: 2

Objective:  3

AACSB:  Application of knowledge

 

29) Xylon Corp. has contracts to complete weekly supplements required by forty-six customers. For the year 2018, manufacturing overhead cost estimates total $900,000 for an annual production capacity of 10 million pages.

 

For 2018, Xylon decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:

 

Cost pool                       Manufacturing overhead costs                       Activity level

Design changes                                                       $190,000                                        200 design changes

Setups                                                                          550,000                                       5,000 setups

Inspections                                                                 160,000                                     16,000 inspections

Total manufacturing overhead costs            $900,000

 

During 2018, two customers, Money Managers and Hospital Systems, are expected to use the following printing services:

 

Activity                                        Money Managers                          Hospital Systems

Pages                                                                   70,000                                                86,000

Design changes                                                        15                                                          7

Setups                                                                         18                                                          8

Inspections                                                                25                                                        63

 

If manufacturing overhead costs are considered one large cost pool and are assigned based on 10 million pages of production capacity, what is the cost driver rate? (Round the final answer to three decimal places.)

  1. A) $0.078 per page
  2. B) $0.035 per page
  3. C) $0.055 per page
  4. D) $0.09 per page

Answer:  D

Explanation:  Cost driver rate  = ($900,000  ÷ 10 million pages) = $0.09 per page

Diff: 2

Objective:  3

AACSB:  Application of knowledge

 

30) Xylon Corp. has contracts to complete weekly supplements required by forty-six customers. For the year 2018, manufacturing overhead cost estimates total $940,000 for an annual production capacity of 10 million pages.

 

For 2018, Xylon decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:

 

Cost pool                       Manufacturing overhead costs                       Activity level

Design changes                                                       $160,000                                        500 design changes

Setups                                                                          692,000                                       2,000 setups

Inspections                                                                   88,000                                       8,000 inspections

Total manufacturing overhead costs            $940,000

 

During 2018, two customers, Money Managers and Hospital Systems, are expected to use the following printing services:

 

Activity                                        Money Managers                          Hospital Systems

Pages                                                                   70,000                                                86,000

Design changes                                                        11                                                          3

Setups                                                                         19                                                          9

Inspections                                                                26                                                        64

 

Under ABC costing, what is the inspection cost allocated to Hospital Systems?

  1. A) $704
  2. B) $80
  3. C) $286
  4. D) $6,574

Answer:  A

Explanation:  Inspection cost = ($88,000 ÷ 8,000 inspections) × 64 = $704

Diff: 2

Objective:  3

AACSB:  Application of knowledge

 

31) Only indirect costs are included in the cost pools of ABC.

Answer:  FALSE

Explanation:  Both direct and indirect costs are included in the cost pools associated with activities.

Diff: 2

Objective:  3

AACSB:  Analytical thinking

 

 

32) When allocating the total indirect cost pool to cost pools such as setup costs including depreciation and maintenance costs of setup equipment, wages of setup employees, and allocation of supervisors is called a second-stage allocation.

Answer:  FALSE

Explanation:  What is described is a first-stage allocation.

Diff: 1

Objective:  3

AACSB:  Analytical thinking

33) In activity based costing systems, limiting cost-allocation bases to only units of output strengthens the cause-and-effect relationship between the cost-allocation base and the costs in a cost pool.

Answer:  FALSE

Explanation:  Limiting cost-allocation bases to only units of output weakens the cause-and-effect relationship between the cost-allocation base and the costs in a cost pool.

Diff: 2

Objective:  3

AACSB:  Analytical thinking

 

34) Activity-based costing attempts to identify the most relevant cause-and-effect relationship for each activity pool without restricting the cost driver to only units of output or variables related to units of output.

Answer:  TRUE

Diff: 2

Objective:  3

AACSB:  Analytical thinking

 

35) Explain how activity-based costing systems can provide more accurate product costs than traditional cost systems.

Answer:  A key reason for assigning indirect costs using an ABC system rather than a traditional system is that ABC cost systems reflect differences required by different processes. Activity-based costing systems provide better product costs when they identify and cost more indirect cost differences among products. Activity-based costing seeks to distinguish batch-level, product-sustaining, and facility-sustaining costs especially when they are not proportionate to one another.

 

Unit-level drivers in traditional cost systems distort product costs because, effectively, these systems assume that all indirect activities affect all products. Thus, these systems assign each unit of product an average cost that fails to recognize the specific activities that are required to produce that product.

 

Activity-based costing differs from traditional costing systems in that products are not cross-subsidized by support costs being shared by everyone. Activity-based costing is more likely to result in major differences from traditional costing systems if the firm manufactures multiple products rather than only one product.

Diff: 2

Objective:  3

AACSB:  Analytical thinking

 

 

5.4   Objective 5.4

 

1) ________ is an example of an output unit-level cost in the cost hierarchy.

  1. A) Factory rent expense
  2. B) Building security costs
  3. C) Top management compensation costs
  4. D) Machine depreciation

Answer:  D

Diff: 1

Objective:  4

AACSB:  Analytical thinking

2) For a company which produce its products in batches, the CEO’s salary is a(n) ________ cost.

  1. A) batch-level
  2. B) output unit-level
  3. C) facility-sustaining
  4. D) product-sustaining

Answer:  C

Diff: 2

Objective:  4

AACSB:  Analytical thinking

 

3) Top management compensation cost is an example of ________ in the cost hierarchy.

  1. A) unit-level costs
  2. B) batch-level costs
  3. C) product-sustaining costs
  4. D) facility-sustaining costs

Answer:  D

Diff: 1

Objective:  4

AACSB:  Analytical thinking

 

4) ________ costs support the organization as a whole.

  1. A) Unit-level
  2. B) Batch-level
  3. C) Product-sustaining
  4. D) Facility-sustaining

Answer:  D

Diff: 1

Objective:  4

AACSB:  Analytical thinking

 

 

5) It is usually difficult to find good cost driver (cause-and-effect relationship) between ________ and a cost allocation base.

  1. A) unit-level costs
  2. B) batch-level costs
  3. C) product-sustaining costs
  4. D) facility-sustaining costs

Answer:  D

Diff: 1

Objective:  4

AACSB:  Analytical thinking

6) Facility-sustaining costs are the costs of activities ________.

  1. A) undertaken to support individual products or services regardless of the number of units or batches in which the units are produced
  2. B) related to a group of units of a product or services, rather than each individual unit of product or service
  3. C) that managers cannot trace to individual products or services but that support the organization as a whole
  4. D) performed on each individual unit of a product or service such as the cost of energy, machine depreciation, and repair

Answer:  C

Diff: 2

Objective:  4

AACSB:  Analytical thinking

 

7) ________ are the costs of activities undertaken to support individual products or services regardless of the number of units or batches in which the units are produced.

  1. A) Unit-level costs
  2. B) Batch-level costs
  3. C) Product-sustaining costs
  4. D) Facility-sustaining costs

Answer:  C

Diff: 1

Objective:  4

AACSB:  Analytical thinking

 

8) Advanced Technology Products produces 10 different fastners.  Each time a type of fastener is produced, the equipment must be stopped and items such as filters and drill bits must be changed, oil must be added to the equipment and some parts need lubrication.  This work must be done before the products can be produced, the costs related to this activity would be part of which cost pool?

  1. A) Output-level costs
  2. B) Batch-level costs
  3. C) Product-sustaining costs
  4. D) Service-sustaining costs

Answer:  B

Diff: 2

Objective:  4

AACSB:  Analytical thinking

 

 

9) With traditional costing systems, products manufactured in small batches and in small annual volumes may be ________ because batch-related and product-sustaining costs are assigned using unit-related drivers.

  1. A) overcosted
  2. B) fairly costed
  3. C) undercosted
  4. D) ignored

Answer:  C

Diff: 2

Objective:  4

AACSB:  Analytical thinking

10) Which of the following ordering of the levels best depicts the  cost hierarchy within an ABC system?

  1. A) batch-level, output unit-level, product-sustaining level, and facility-sustaining level
  2. B) batch-level, output unit-level, facility-sustaining levels, product-sustaining levels
  3. C) output unit-level, batch-level, product-sustaining level, and facility-sustaining level
  4. D) facility-sustaining level, output unit-level, batch-level, product-sustaining level

Answer:  C

Diff: 2

Objective:  4

AACSB:  Application of knowledge

 

11) Service-sustaining costs are the costs of activities that managers cannot trace to individual services but that support the organization as a whole.

Answer:  FALSE

Explanation:  Service-sustaining costs are the costs of activities undertaken to support individual services regardless of the number of units or batches in which the units are produced. they are similar to the product-sustaining costs in a manufacturing setting.

Diff: 2

Objective:  4

AACSB:  Analytical thinking

 

12) Quality-inspection costs is an example of batch-level costs.

Answer:  TRUE

Diff: 1

Objective:  4

AACSB:  Analytical thinking

 

13) An effective activity-based cost system always ignores facility-sustaining cost drivers.

Answer:  FALSE

Explanation:  An effective activity-based cost system usually uses facility-sustaining cost drivers along with other cost drivers. Facility-sustaining cost drivers are ignored only when it is difficult to find a good cause-and-effect relationship between these costs and the cost-allocation base.

Diff: 2

Objective:  4

AACSB:  Analytical thinking

 

 

14) Over time, the cost of design activities depend largely on the time designers spend on designing and modifying the product not on the number of products made or the number of batches produced.

Answer:  TRUE

Diff: 1

Objective:  4

AACSB:  Analytical thinking

15) Is it advisable to ignore facility-sustaining cost drivers during product costing?

Answer:  Facility-sustaining cost drivers are ignored only when it is difficult to find a good cause-and-effect relationship between these costs and the cost-allocation base. So, some companies deduct facility-sustaining costs as a separate lump-sum amount from operating income rather than allocate them to products. Managers who follow this approach need to keep in mind that when making decisions based on costs (such as pricing), some lump-sum costs have not been allocated. They must set prices that are much greater than the allocated costs to recover some of the unallocated facility-sustaining costs. Allocating all costs to products or services ensures that managers have taken into account all costs when making decisions based on costs.

Diff: 2

Objective:  4

AACSB:  Analytical thinking

 

16) What are the four parts of the cost hierarchy. Briefly explain each part, and contrast this cost hierarchy to the fixed-variable dichotomy?

Answer:  The four parts of the cost hierarchy are output unit-level costs, batch-level costs, product (or service) sustaining costs, and facility sustaining costs. Output unit-level costs are costs of activities performed on each individual unit of a product or service. Batch-level costs are the costs of activities related to a group of units of products or services rather than to each individual unit of product or service. Product (or service) sustaining costs are the costs of activities undertaken to support individual products or services regardless of the number of units or batches in which the products are produced. Facility-sustaining costs are the costs of activities that cannot be traced to individual products or services but support the organization as a whole. When compared to the fixed-variable dichotomy, which considers only units of output as a cost driver, the four part cost hierarchy provides opportunity to model many different cost drivers. For example, batch-level costs and product (or service) sustaining costs are driven by the number of batches of a product and the number of different products. Neither of these class of cost drivers are able to be considered in a simple fixed-variable dichotomy.

Diff: 2

Objective:  4

AACSB:  Analytical thinking

 

 

5.5   Objective 5.5

 

1) Put the following ABC implementation steps in order ________.

A    Compute the allocation rates.

B     Compute the total cost of the products.

C     Identify the products that are the cost objects.

D    Select the cost allocation bases.

  1. A) DACB
  2. B) DBCA
  3. C) BADC
  4. D) CDAB

Answer:  D

Diff: 2

Objective:  5

AACSB:  Analytical thinking

2) ________ is considered while choosing a cost allocation base for activity costs in ABC costing.

  1. A) Marketing strategy and material price level
  2. B) Availability of reliable data and measures
  3. C) Product price level
  4. D) Market share of a product

Answer:  B

Diff: 1

Objective:  5

AACSB:  Analytical thinking

 

3) Which of the following cost and cost allocation base have a strong cause and effect relationship?

  1. A) administration costs and cubic feet
  2. B) setup costs and square feet
  3. C) quality control costs and the number of inspections
  4. D) machine maintenance and setup hours

Answer:  C

Diff: 2

Objective:  5

AACSB:  Analytical thinking

 

4) Management accountants use the cost hierarchy to first calculate the ________.

  1. A) labor costs of each product and then they compute material costs
  2. B) overhead costs of each product and then they compute prime costs
  3. C) factory costs of each product and then they compute labor costs
  4. D) total costs of each product and then they compute per-unit costs

Answer:  D

Diff: 2

Objective:  5

AACSB:  Analytical thinking

 

 

5) For a business that offers customers a store where product can be purchased and picked up or a delivery service that can ship the product directly to the customer, which of the following would most likely be the best cost allocation base for distribution costs?

  1. A) number of customer service phone calls and emails per period
  2. B) number of pounds of product shipped or delivered
  3. C) Electricity costs for the period
  4. D) Number of products sold

Answer:  B

Diff: 2

Objective:  5

AACSB:  Analytical thinking

6) For a manufacturing firm that produces multiple families of products requiring various combinations of different types of parts, what would be the best allocation base for human resource adminstration costs?

  1. A) direct labor hours
  2. B) electricity costs
  3. C) number of parts purchased
  4. D) machine hours

Answer:  A

Diff: 1

Objective:  5

AACSB:  Analytical thinking

 

7) Comfort Corporation manufactures two models of office chairs, a standard and a deluxe model. The following activity and cost information has been compiled:

 

                                       Number of                     Number of                           Number of

Product                                Setups                  Components          Direct Labor Hours

Standard                                      18                                        6                                         265

Deluxe                                          29                                      12                                         200

 

Overhead costs                 $61,100                           $64,800

 

Assume a traditional costing system applies the overhead costs based on direct labor hours. What is the total amount of overhead costs assigned to the standard model? (Do not round interim calculations. Round the final answer to the nearest whole dollar.)

  1. A) $62,950
  2. B) $54,151
  3. C) $71,749
  4. D) $36,929

Answer:  C

Explanation:  Total amount of overhead costs = [($61,100 + $64,800) ÷ (265 + 200)] × 265 = $71,749

Diff: 2

Objective:  5

AACSB:  Application of knowledge

 

8) Dartmouth Corporation manufactures two models of office chairs, a standard and a deluxe model. The following activity and cost information has been compiled:

 

                                       Number of                     Number of                           Number of

Product                                Setups                  Components          Direct Labor Hours

Standard                                      11                                        5                                         265

Deluxe                                          35                                      15                                         200

 

Overhead costs                 $82,800                           $74,000

 

Assume a traditional costing system applies the overhead costs based on direct labor hours. What is the total amount of overhead costs assigned to the deluxe model?

  1. A) $31,828
  2. B) $67,441
  3. C) $35,613
  4. D) $78,400

Answer:  B

Explanation:  The total amount of overhead costs = [($82,800 + $74,000) ÷ (265 + 200)] × 200 = $67,441

Diff: 3

Objective:  5

AACSB:  Application of knowledge

 

9) Dartmouth Corporation manufactures two models of office chairs, a standard and a deluxe model. The following activity and cost information has been compiled:

 

                                       Number of                     Number of                           Number of

Product                                Setups                  Components          Direct Labor Hours

Standard                                      18                                        9                                         275

Deluxe                                          32                                      14                                         215

 

Overhead costs                 $75,000                           $87,400

 

Number of setups and number of components are identified as activity-cost drivers for overhead. Assuming an activity-based costing system is used, what is the total amount of overhead costs assigned to the standard model?

  1. A) $81,200
  2. B) $81,900
  3. C) $61,200
  4. D) $101,200

Answer:  C

Explanation:  Setups: $75,000 ÷ (18 + 32) = $1,500

Components: $87,400 ÷ (9 + 14) = $3,800

Total amount of overhead costs = ($1,500 × 18) + ($3,800 × 9) = $61,200

Diff: 3

Objective:  5

AACSB:  Application of knowledge

 

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