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5. Primary concepts under activity-based management include all of the following except:
A. activity analysis
C. activity-based costing
B. total quality management
D. cost driver analysis
THEORIES:
Outdated cost system
3. Symptoms of an outdated cost system include all of the following EXCEP
A. product costs change because of changes in financial reporting.
B. products that are difficult to produce show little profit.
C. competitors' prices appear unrealistically low.
D. the company has a highly profitable niche all to itself.
18. Which of the following falls under the Activity-Based Management umbrella?
Continuous
Business process
Activity-based
improvement
reengineering
costing
A. NO
NO
YES
B. YES
NO
NO
C. YES
YES
YES
D. NO
YES
NO
29. All of the following are ways that activities can be managed to achieve improvements in a
process, except
A. activity induction
C. activity elimination
B. activity selection
D. activity sharing
Activity-based management
1. Which system focuses on the management of activities with the objective of improving the
value received by the customer and the profit received by providing this value?
A. activity-based management
C. contemporary cost control
B. traditional cost management system
D. standard cost system
32. In contrast to a company that uses a single overhead rate, one that uses activity-based costing
A. will have higher product costs than one using a single overhead rate.
B. cannot compute budget variances.
C. will incur additional costs for recordkeeping.
D. must have a preponderance of fixed overhead costs.
Activity-based costing
Reason
21. Of the following, which is the best reason for using activity-based costing?
A. to keep better track of overhead costs
B. to more accurately assign overhead costs to cost pools so that these costs are better
1
controlled
C. to better assign overhead costs to products
D. to assign indirect service overhead costs to direct overhead cost pools
Benefits
2. The primary benefit of using ABC is that it provides
A. better management decisions.
B. enhanced control over overhead costs.
C. more cost pools.
D. more accurate product costing.
Application
22. ABC should be used in which of the following situations?
A. single-product firms with multiple steps
B. multiple-product firms with only a single process
C. multiple-product firms with multiple processing steps
D. in all manufacturing firms
Limitation
9. Which of the following is a limitation of activity-based costing?
A. More cost pools
C. Poorer management decisions
B. Less control over overhead costs
D. Some arbitrary allocations continue
12. Each of the following is a limitation of activity-based costing system except that:
A. it can be expensive to use.
B. it is more complex than the traditional costing.
C. more cost pools are used.
D. some arbitrary allocations still continue.
8. The presence of any of the following factors would suggest a switch to ABC except when
A. product line differ greatly in volume.
B. overhead costs constitute a minor portion of total costs.
C. the manufacturing process has changed significantly.
D. production managers are ignoring data provided by the existing system.
Characteristics
2
of overhead.
Cost assignment
15. Which of the following lists the most to least accurate method of cost assignment?
A. direct tracing, driver tracing, allocation C. driver tracing, direct tracing, allocation
B. allocation, direct tracing, driver tracing D. allocation, driver tracing, direct tracing
24. A base used to allocate the cost of a resource to the different activities using that resource is
A. resource driver
C. activity driver
B. final cost object
D. driver
42. A base used to allocate the cost of products, customers, or other final cost objects is a(n)
A. resource driver
C. activity driver
B. final cost object
D. driver
Steps
16. A well-designed activity-based costing system starts with
A. identifying the activity-cost pools.
B. computing the activity-based overhead rate.
C. assigning manufacturing overhead costs for each activity cost pool to products.
D. analyzing the activities performed to manufacture a product.
38. Activity drivers differ from resource drivers in that activity drivers
A. are used to assign indirect costs while resource drivers are used to assign direct costs
B. assign the cost of activities to cost objects while resource drivers assign the cost of
resources to activities
C. assign the cost of activities to resources and resource drivers assign the cost of resources
to cost objects
D. are used to assign direct costs while resource drivers are used to assign indirect costs
Cost pool
31. A cost pool is
A. all of the costs of a particular department.
B. all costs in a group such as variable costs or discretionary fixed costs.
C. all costs related to a product or product line.
D. all costs that have the same driver.
65. Successful activity-based costing (ABC) implementation depends upon the firm having:
A. top management support
B. ABC linked to its competitive strategy
C. adequate resources
34. More accurate product costing information is produced by assigning costs using
A. a volume-based, plant-wide rate.
B. volume-based, departmental rates.
C. activity-based pool rates.
D. all of the above
Cost allocation
33. Activity-based overhead rates are more useful than a single plant-wide rate if
A. overhead costs are driven by several activities.
B. direct labor cost varies significantly from department to department.
C. all products require about the same amounts of all activities.
D. manufacturing overhead costs are nearly all fixed.
35. Which of the following best describes the flow of overhead costs in an activity-based costing
system?
A. Overhead costs => direct labor cost or hours => products
B. Overhead costs => products
C. Overhead costs => activity cost pools => cost drivers => products
D. Overhead costs => machine hours => products
36. Finding a single cost driver that changes in the same proportion as all the variable factory
overhead costs is:
A. simplified by breaking out the fixed portion of overhead cost
B. the first step in variable overhead cost management
C. difficult, but manageable
D. impossible
Batch level
54. Batch-level resources are acquired
A. for individual units of product or service
B. for making a group of similar products
C. to produce and sell a specific product
D. to provide a general capacity to produce products and services.
56. In a pure activity-based cost system which of the following might be treated as period costs?
A. facility-level costs
C. batch-level costs
B. product-level costs
D. unit-level costs
Product-sustaining level
43. Examples of activities at the product level of costs include
A. cutting, painting, and packaging
B. scheduling, setting up, and moving
C. designing, changing, and advertising
D. heating, lighting and security
60. Which of the following is the best way to consider a product-level cost?.
A. A product-level cost can be avoided when a product line is discontinued.
B. A product-level cost can be avoided when a there is change in the production schedule
so the product is not produced this week.
C. A product level cost can be avoided when a business segment is discontinued.
D. A product level cost can be avoided when the corporation is dissolved.
48. An activity that adds cost to the product but does not increase it market value is a
A. value-added activity
C. cost driver
B. cost-benefit activity
D. nonvalue-added activity
50. When a firm redesigns a product to reduce the number of component parts, the firm is
A. increasing consumer value.
B. increasing the value added to the product.
C. decreasing product variety.
D. decreasing non-value-added costs.
5
PROBLEMS:
Breakeven Analysis
1
. Peal Company had the following information:
Activity Driver
Unit Variable Cost
Level of Activity Driver
Units sold
P40
Setups
1,000
80
Engineering hours
60
2,000
Other data:
Total fixed costs (traditional)
P400,000
Total fixed costs (ABC)
P150,000
Units selling price
P80
What is the breakeven point in units using ABC?
A. 10,000 unit
C. 5,000 units
B. 5,000 units
D. 8,750 units
52. Under activity-based costing, benchmarks for product cost should contain an allowance for
A. idle time.
C. spoilage.
B. idle time and scrap materials.
D. none of the above.
64. Elimination of non-value-added activities in a firm should:
A. be discouraged because of potential harmful effects
B. not affect customer value
C. not have priority because non-value-added activities do not affect a firm's performance
D. have priority only when a firm is operating at a loss
66. Page Companys cost allocation and product costing procedures follow activity-based
costing principles. The following activities have been identified and classified as being
either value-adding or non-value adding as to each product.
1. Raw materials storage activity
2. Design engineering activity
3. Drill press activity
4. Heat treatment activity
5. Quality control inspection activity
6. Issuance of purchase order activity
How are the foregoing activities classified?
Value-adding
Non-value adding
A.
1, 2, 5, 6
3, 4
B.
1, 2, 4
3, 5, 6
C. 2, 4, 5
1, 3, 6
D. 2, 3, 4
1, 5, 6
Traditional Costing
Overhead cost per unit
2
. Mary Manufacturing Company manufactures two products (X and Y). The overhead costs of
P29,000 have been divided into three cost pools that use the following activity drivers:
Product
No. of Orders No. of Labor Transactions No. of Labor Hours
X
30
100
1,000
Y
20
300
4,000
Cost per pool
P5,000
P4,000
P20,000
Using traditional costing, what is the amount of overhead cost to be assigned to Product Y
using labor hours as the allocation base?
A. P21,750
C. P16,000
B. P 5,800
D. P23,200
Productivity Measures
51. Manufacturing cycle efficiency is a measure of
A. bottlenecks.
C. efficiency.
B. effectiveness.
D. quality.
Unit cost
3
. Arid Company produces products BH and XP. The direct cost of BH is P250 per unit and XP is
P350 per unit. Fifty units of BH and 150 units of XP were produced. Overhead amounting to
P130,000 is allocated to products using direct costs as the relevant cost driver.
The cost of XP per unit amounts to
A. P750
C. P1,050
B. P1,000
D. P1,250
53. The amount of time between the development and the production of a product is
A. the product life cycle.
C. production time.
B. lead time.
D. value-added time.
Activity-based Costing
Batch-level costs
Allocated overhead
4
. One of Alien Companys activity cost pools is machine setups, with estimated overhead of
P300,000. Alien produces slacks (400 setups) and shirts (600 setups). How much of the
machine setup cost pool should be assigned to slacks?
A. P 0
C. P150,000
B. P120,000
D. P180,000
5
materials and P150 labor) and Y is P350 (P230 material and P120 labor) per unit. Fifty units of
X and 150 units of Y were produced. Overhead amounts to P130,000 and is composed of
material handling P12,000, labor support P60,000, machine operation P48,000, and general
administration P10,000. Material handling cost driver is material cost, labor support cost driver
is labor cost. Machine operation cost resulted from running the machines a total of 480 hours
(three-fourth of which was for product X). General administration effort related equally to
product X and Y. Material handling chargeable per unit of X (rounded) amounts to
A. P30; P 70
C. P60; P140
B. P40; P 80
D. P70; P 30
The overhead rate for Machine Setups is P100 per setup. Products A and B have 80 and 60
setups, respectively. The overhead assigned to each product is
A. Product A P8,000, Product B P8,000
C. Product A P8,000, Product B P6,000
B. Product A, P6,000, Product B P6,000
D. Product A, P6,000, Product B P8,000
Sylvia Company has identified an activity cost pool to which it has allocated estimated
overhead of P1,920,000 and determined the expected use of cost drivers per that activity to by
160,000 inspections. Widgets require 40,000 inspections, Gadgets 30,000 inspections, and
Targets, 90,000 inspections.
The overhead assigned to each product is
A. Widgets P40,000, Gadgets P30,000, Targets P90,000
B. Widgets P480,000, Gadgets P360,000, Targets P1,080,000
C. Widgets P360,000, Gadgets P480,000, Targets P1,080,000
D. Widgets P480,000, Gadgets P360,000, Targets P1,080,000
Genco manufactures two versions of a product. Production and cost information show the
following:
Model A
Model B
Units produced
200
400
Material moves (total)
20
80
Direct labor hours per unit
1
2
Material handling costs total P200,000. Under ABC, the material handling costs allocated to
each unit of Model A and Model B would be:
A.
B.
C.
D.
Model A
P100
P200
P333
P130
Model B
P333
P400
P200
P100
10
. EMPIRE Company makes two products, E and M. E is being introduced this period,
whereas M has been in production for 2 years. For the period about to begin, 1,000 units of
each product are to be manufactured. The only relevant overhead item is the cost of
engineering change orders. E and M are expected to require eight and two change orders,
respectively. E and M are expected to require 2 and 3 machine hours, respectively. The
cost of a change order is P600.
If EMPIRE is using direct tracing, the amount of overhead per unit that will be assigned to E
and M, respectively, are
A. P2.40 and P3.60, respectively
C. P4.80 and P1.20, respectively
B. P3.60 and P2.40, respectively
D. P1.20 and P4.80, respectively
Beltran Company produces products X and Y. The direct cost of X is P250 per unit (P100
7
Number of tests
6.0
Number operating room hours
4.5
Determine the activity cost associated with Patient Flor:
A. P4,500
C. P4,495
B. P4,550
D. P4,515
Setup costs
P100,000
Number of setups
500
Ordering costs
40,000
Number of orders
3,200
Maintenance
200,000
Machine hours
4,000
Power
20,000
Kilowatt hours
80,000
The following are two of the jobs completed during the year:
Job 500
Job 501
Direct materials
P1,500
P2,000
Direct labor
P1,400
P2,400
Units completed
100
160
Direct labor hours
100
160
Number of setups
2
8
Number of orders
8
10
Machine hours
40
50
Kilowatt hours
60
100
The companys normal activity is 4,000 direct labor hours.
If the four activity drivers are used to allocate overhead costs, total overhead allocated to
Job 500 would be
A. P2,766.50.
C. P2,515.00.
B. P2,415.00.
D. P2,815.00
2
1
Total cost
13
. Food Factory, Inc., has identified the following cost drivers for its expected overhead costs for
the year:
Budgeted
Cost
Cost
Driver
Cost Pools
Cost
Driver
Level
Setup
P 80,000
Number of setups
100
Ordering
40,000
Number of orders
500
Maintenance
100,000
Machine hours
2,500
Power
20,000
Kilowatt hours
5,000
Total direct labor hours budgeted = 1,000 hours.
The following data applies to one of the products completed during the year:
Cost
Product X Activity Driver
Driver Consumption
Direct materials
P2,000 Number of setups
2
Direct labor
P2,400 Number of orders
5
Units completed
200 Machine hours
25
Direct labor hours
80 Kilowatt hours
50
If the activity-based cost drivers are used to allocate overhead cost, the total cost of Product
X will be:
A. P7,400
C. P4,400
B. P7,800
D. P7,600
Unit cost
12
. Wesleyan University Hospital plans to use activity-based costing to assign hospital indirect
costs to the care of patients. The hospital has identified the following activities and activity
rates for the hospitals indirect costs:
Activity
Activity Rate
Room and meals
P150 per day
Radiology
P 95 per image
Pharmacy
P 20 per physician order
Chemistry lab
P 85 per test
Operating room
P550 per operating room hour
The records of two representative patients were analyzed, using the activity rates. The
activity information associated with the two patients is as follows:
Patient Flor
Patient Laura
Number of days
7.0
3
Number of images
4.0
2
Number of physician orders
5.0
1
14
. Ray Manufacturing has four categories of overhead. The four categories and expected
overhead costs for each category for next year are listed as follows:
Maintenance
P510,000
Material handling
250,000
Setups
60,000
Inspection
210,000
Currently, overhead is applied using a predetermined overhead rate based upon budgeted
direct labor hours. 100,000 direct labor hours are budgeted for next year.
The company has been asked to submit a bid for a proposed job. The plant manager feels
that obtaining this job would result in a new business in future years. Usually bids are based
C. P925.00
D. P815.00
. What would be the per unit overhead cost for Model A if direct labor hours were the allocation
base?
A. P20.50
C. P82.00
B. P41.00
D. P76.00
18
. What would be the per unit overhead cost for Model A if activity-based costing were used?
A. P20.50
C. P82.00
B. P74.00
D. P76.00
15
. If Gilmore uses direct labor hours to allocate overhead to each model, what would overhead
per unit be for Model 2?
A. P 158.33
C. P 950.00
B. P 400.00
D. P1,200.00
19
16
. If Gilmore uses activity-based costing to allocate overhead to each model, what would
9
B. P768,000.
20
D. P960,000.
Two products are produced by Special Products: A and B. Each product has an area in the plant
that is dedicated to its production. The plant has two manufacturing processes, process A and
process B. Other processes include engineering, product handling, and procurement. The product
relational table for Special is as follows:
Activity Usage
Activity Driver # and Name
Product A:
Product B:
1 Units
200,000
25,000
2 Purchase orders
250
125
3 Machine hours
80,000
10,000
4 Engineering hours
1,250
1,500
23
24
21
. Using activity-based costing system and the appropriate activity drivers, the total cost of the
potential job would be
A, P2,400
C. P7,400
B. P3,600
D. P7,750
25
C. P4.80
D. P5.30
. Dagger Corporation has the following activities: creating bills of materials (BOM), studying
manufacturing capabilities, improving manufacturing processes, training employees, and
designing tooling. The general ledger accounts reveal the following expenditures for
manufacturing engineering:
Salaries
P150,000
Equipment
80,000
Supplies
20,000
Total
P250,000
The equipment is used for two activities: improving processes and designing tooling. Thirtyfive percent of the equipments time is used for improving processes and sixty-five percent is
used for designing tools. The salaries are for two engineers. One is paid P100,000, while the
other earns P50,000. The P100,000 engineer spends 40% of his time training employees in
new processes and 60% of his time on improving processes. The remaining engineer spends
equal time on all activities. Supplies are consumed in the following proportions:
Creating BOMs
25%
22
. Using direct labor hours to assign overhead, the total cost of the potential job would be
A. P 5,000
C. P 8,000
B. P11,000
D. P 9,000
Studying capabilities
Improving processes
Training employees
Designing tooling
What is the cost assigned to the designing tooling activity?
A. P162,500
C. P50,000
B. P 66,000
D. P250,000
Use the following data to respond to questions 26 through 29
Consider the following facts for NM Company which produces product N and M
Activity
Cost Driver
Ns share Ms share Unused
Setups
# of set ups
10
40
5
Ordering
# of orders
5
10
5
Receiving
# of receipts
22
12
6
Product Dev.
# of parts
180
120
100
Gen Mgt
#, labor hrs
2,900
4,100
1,000
Security
Area covered
3,200
5,400
400
Materials
# of units produced
400
800
Labor
# of DLH
1,700
3,100
1,200
10%
20%
25%
20%
Cost
P 5,500
3,200
2,400
2,800
7,200
9,000
120,000
56,000
26
. Set up cost chargeable per unit of M accounting for unused capacity amounts to
A. 2.50
C. 5.00
B. 2.75
D. 5.50
27
28
11
Answer: D
BES (ABC) =
ABC fixed costs
Set ups
Engineering
Total Fixed Costs
350,000/40
80 x P1,000
2,000 x 60
. Answer: D
Total overhead
Allocated OH to Product Y based on labor hours:
.
Answer: D
BH: (50 x P250)
XP: (150 x P350)
Total direct costs
8,750
P 150,000
80,000
120,000
P 350,000
(5,000 + 4,000 + 20,000) 29,000
4 20 x 29,000
P23,200
P 12,500
52,500
P 65,000
Answer: B
Setup cost per setup
Setup costs assigned to slacks
. Answer: C
Overhead allocated to:
Product A: (80 x P100)
Product B: (60 x P100)
(P300,000 1,000)
(400 x P300)
P300
P120,000
P8,000
6,000
. Answer: D
Overhead rate per inspection: (P1,920,000 160,000)
Overhead assigned to:
Widgets: (40,000 x P12)
P 480,000
Gadgets (30,000 x P12)
360,000
Targets (90,000 x P12)
1,080,000
. Answer: A
Cost of change orders
Cost of change order per hour
Cost of change order per unit:
E:
2 hours x P1.20
M:
3 hours x P1.20
P105,000
P12
10 x 600
P6,000/5,000 hours
P6,000
P1.20/MH
P2.40
P3.60
Answer: A
Materials cost:
Product X:
(50 x P100)
Product Y:
(150 x P230)
Total
Material handling cost based on direct materials cost: (P12,000 P39,500)
Material handling cost per unit chargeable to:
Product X:
(50,000 x P0.3038 50)
P 5,000
34,500
P39,500
P0.3038
P 30.38
Product Y:
9
10
11
12
13
14
15
16
Answer: B
Handling cost per move
Model A:
Model B:
P 69.87
P2,000
P 200
P 400
Answer: C
Cost of change orders based on ABC
E:
8 x P600 1,000
P4.80
M:
2 x P600 1,000
P1.20
Answer: C
Activity Rates:
Setup
(P100,000 500)
Ordering
(P40,000 3,200)
Maintenance
(P200,000 4,000)
Power
(P20,000 80,000)
Overhead costs assigned to Job 500:
Setup
(2 x P200)
Ordering
(8 x P12.50)
Maintenance
(40 x P50)
Power
(60 x P025)
Total
P2,515
Answer: D
Room and meals
Radiology
Pharmacy
Chemistry lab
Operating room
Total
P200.00
12.50
50.00
0.25
P 400
100
2,000
15
(7 days x P150)
(4 images x P95)
(5 orders x P20)
(6 tests x P85)
(4.5 hours x P550)
P1,050
380
100
510
2,475
P4,515
Answer: D
SetupP 80,000 100 x 2P1,600OrderingP 40,000 500 x 5400MaintenanceP100,000 2,500 x 251,000PowerP
20,000 5,000 x 50 200Total overhead assignedP3,200Direct materials2,000Direct labor 2,400Total costs
assignedP7,600
. Answer: B
Direct materials
P 30,000
Direct labor
24,000
Overhead
82,400
Total cost of the job
P136,400
OH rate per DLH:
(P510,000 + P250,000 + P60,000 + P210,000) 100,000
P10.30 per DLH
Overhead allocated to proposed job: 8,000 x 10.30
82,400
.
Answer: D
Total DLH used (1,000 x 1) + (20 x 5)
Overhead allocated to Model 2 (0.5 x P480,000)
Overhead per unit of Model 2: (P240,000 200)
Answer: C
Overhead allocated to Model 2:
2,000
P240,000
P1,200
Handling
Testing
Labor-related
Total
Overhead per unit, Model 2
17
18
Answer: B
Overhead rate per DLH
Overhead applied to Model A:
Overhead applied to Model A per unit:
Answer: B
Activity rates;
Setups:
Shipping:
Engineering
(P410,000 10,000)
(4,000 x P41)
(P164,000 2,000)
20
21
22
Answer: A
Total overhead costs: (P400,000 + P900,000 + P300,000)
Overhead applied to X-MAN using direct labor hours
(15,000/40,0000) x P1,600,000
Answer: B
Activity Rates:
Setups
(400,000/1,000 setups)
Machining (900,000/50,000 MH)
Inspection (300,000/1,500 Inspection)
Overhead assigned to Machman using ABC:
(400xP400) + (26,000xP18) + (700xP200)
P 40,000
50,000
95,000
P185,000
P925
P41
P164,000
P82
P 180
200
6,000
P 18,000
40,000
90,000
P148,000
P 74
P1,600,000
P600,000
Answer: C
Direct materials
Direct labor
Maintenance 500 x 4
Inspection 4 x 100
Total
Activity Rate:
Inspection (P150,000 1,500)
Maintenance (P100,000 25,000)
P1,000
4,000
2,000
400
P7,400
P100/inspection
P4/MH
Answer: D
OH rate per DLH: (P250,000 50,000 DLH) = P5.00
Cost of the proposed job:
Direct materials
P1,000
Direct labor
4,000
Overhead (800 hours x P5
4,000
Total
P9,000
23
. Answer: D
OH assigned to Product B: 6,000 MH x P15 per MH = P150,000
24
25
26
27
28
Answer: D
Purchasing cost
(250 x P200)
Processing costs
(80,000 x P12)
Engineering cost
(1,250 x P40)
Total costs assigned to Product A
Unit cost: (P1,060,000 200,000)
Answer: B
Cost of use of equipment
(0.65 x P80,000)
Supplies
(0.2 x P20,000)
Salary of second engineer
(0.2 x P50,000)
Total cost assigned to designing tool activity
Answer: C
Setup cost chargeable to Product M:
Setup cost per unit, Product M:
Answer: B
Ordering costs chargeable to Product M:
Ordering cost per unit, Product M:
Answer: D
Activity rate:
Setup cost:
Ordering:
Receiving cost:
Product development:
General management:
Security:
Labor cost:
(40/55 x P5,50
(P4,000 800)
5/15 x P3,200)
(P1,066.67 400)
(5,500 55)
(P3,200 20)
(P2,400 40)
(P2,800 400)
(P7,200 8,000)
(P9,000 9,000)
(P56,000 6,000)
50,000
960,000
50,000
P1,060,000
P 5.30
P 52,000
4,000
10,000
P 66,000
P4,000
P 5.00
P1,066.67
P 2.67
P14,856