Chapter 5Activity-Based Management and Activity-Based Costing

LEARNING OBEC!I"E#
LO 1 On what items does activity-based management focus?
LO 2 Why do non-value-added activities cause costs to increase unnecessarily?
LO 3 Why must cost drivers be designated in an activity-based costing system?
LO 4 How does activity-based costing differ from a traditional cost accounting system?
LO What new ty!es of information does an activity-based costing"management
system offer management?
LO # When is activity-based costing a!!ro!riate in an organi$ation?
$%E#!ION GRI&
True/False
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"o#$letion
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Multi$le "%oice

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11
&%ort'(ns)er

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*roble#s
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12
!R%E'(AL#E
1' (usiness value-added activities add value to a !roduct'
)*+, - ./-, 0asy O(1, -1
2' 2anagement should strive to reduce or eliminate non-value added activities from a !roduction
!rocess'
)*+, 3 ./-, 0asy O(1, -1
3' (usiness value-added activities increase the value of a !roduct without increasing !roduction time'
)*+, - ./-, 2oderate O(1, -1
4' 3he first ste! in !erforming activity analysis is to !re!are a !rocess ma!'
)*+, 3 ./-, 0asy O(1, -1
' 4re!aration of a value chart is the first ste! in activity analysis
)*+, - ./-, 2oderate O(1, -1
#' Lead time in a !roduction !rocess includes both value and non-value added time'
)*+, 3 ./-, 2oderate O(1, -2
5' ) com!any should strive to reduce all non-value added activities to a minimum'
)*+, 3 ./-, 2oderate O(1, -2
6' When non-value added time is greater7 manufacturing cycle efficiency is higher'
)*+, - ./-, 2oderate O(1, -2
%' When non-value added time is greater7 manufacturing cycle efficiency is lower'
)*+, 3 ./-, 2oderate O(1, -2
1&' .irect materials are normally considered as unit-level costs'
)*+, 3 ./-, 0asy O(1, -3
11' .irect materials are normally considered as batch-level costs'
)*+, - ./-, 0asy O(1, -3
12' 8nit level costs occur once for each unit !roduced'
)*+, 3 ./-, 2oderate O(1, -3
13
13' (atch level costs occur once for each unit !roduced'
)*+, - ./-, 2oderate O(1, -3
14' 2achine setu! is normally considered a batch-level cost
)*+, 3 ./-, 2oderate O(1, -3
1' 2achine setu! is normally considered a unit-level cost
)*+, - ./-, 2oderate O(1, -3
1#' (uilding de!reciation is generally considered an organi$ational or facility cost'
)*+, 3 ./-, 2oderate O(1, -3
15' (uilding de!reciation is generally considered an !roduct or !rocess level cost'
)*+, - ./-, 2oderate O(1, -3
16' )ctivity-based costing is a!!ro!riate for a com!any that manufactures a wide variety of !roducts
)*+, 3 ./-, 0asy O(1, -4
1%' )ctivity-based costing is a!!ro!riate for a com!any that manufactures a single !roduct'
)*+, - ./-, 0asy O(1, -4
2&' )ctivity-based costing is a!!ro!riate for a com!any that has low overhead costs that are !ro!ortional
to the unit volumes of !roducts'
)*+, - ./-, 2oderate O(1, -4
21' )ctivity-based costing is a!!ro!riate for a com!any that has high overhead costs that are not
!ro!ortional to unit volumes of individual !roducts'
)*+, 3 ./-, 2oderate O(1, -4
22' 3here is a direct relationshi! between the com!le9ity of a !roduction !rocess and overhead costs'
)*+, 3 ./-, 2oderate O(1, -
23' )ctivity-based costing conforms to :))4 with regard to which costs should be e9!ensed'
)*+, - ./-, 2oderate O(1, -#
24' )n activity-based costing system should be evaluated with regard to the benefits it can !rovide an
organi$ation versus the costs of im!lementing it'
)*+, 3 ./-, 2oderate O(1, -#;
14
COM)LE!ION
1' )n activity that a customer is willing to !ay for and increases the worth of a !roduct is referred to as a
<<<<<<<<<<<<<<<<<<<<<<< activity'
)*+, value-added
./-, 0asy O(1, -1
2' )n activity that does not increase the value of a !roduct for a customer is referred to as a
<<<<<<<<<<<<<<<<<<<<<<< activity'
)*+, non-value added
./-, 0asy O(1, -1
3' )n activity that is essential for business o!erations but does not add value to a !roduct is referred to as
a <<<<<<<<<<<<<<<<<<<<<<<<<< activity'
)*+, business value-added
./-, 0asy O(1, -1
4' ) chart that indicates each ste! in a !roduction !rocess is referred to as a <<<<<<<<<<<<<<<<<<<<'
)*+, !rocess ma!
./-, 0asy O(1, -1
' ) series of activities that when !erformed together satisfy a s!ecific ob=ective is referred to as a
<<<<<<<<<<<<<'
)*+, !rocess
./-, 0asy O(1, -1
#' 3he actual time ta>en to !erform all necessary manufacturing functions in a !rocess is referred to as
<<<<<<<<<<<<<<<<<<<<<<'
)*+, !rocessing or service time
./-, 0asy O(1, -2
5' 3he sum of value-added !rocessing time !lus non-value added time e?uals
<<<<<<<<<<<<<<<<<<<<<<<<<<'
)*+, cycle @leadA time
./-, 2oderate O(1, -2
1
6' 3he !ro!ortion of value added !rocessing time to total cycle time e?uals
<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<'
)*+, manufacturing cycle efficiency @2B0A'
./-, 0asy O(1, -2
%' Bosts that are associated with the !roduction of a single unit of a !roduct are referred to as
<<<<<<<<<<<<<<<<<<<<<<<<'
)*+, unit-level costs
./-, 0asy O(1, -3
1&' Bosts that are associated with the !roduction of a grou! of similar !roducts at the same time are
referred to as <<<<<<<<<<<<<<<<<<<<<<<<'
)*+, batch-level costs
./-, 0asy O(1, -3
11' Bosts that su!!ort a !roduct ty!e or !rocess are referred to as <<<<<<<<<<<<<<<<<<<<<<<<'
)*+, !roduct"!rocess level costs
./-, 0asy O(1, -3
12' Bosts that su!!ort an overall !roduction or service !rocess are referred to as
<<<<<<<<<<<<<<<<<<<<<<<<'
)*+, organi$ational or facility costs
./-, 0asy O(1, -3
13' ) segment of a !roduction or service !rocess for which management wants a se!arate re!ort is referred
to as a@nA <<<<<<<<<<<<<<<<<<<<<<<<<<<<<<'
)*+, activity center
./-, 2oderate O(1, -4
14' )@nA <<<<<<<<<<<<<<<<<<<<<<<<<< measures the resources consumed by a manufacturing !rocess'
)*+, activity driver
./-, 2oderate O(1, -4
1#
1' <<<<<<<<<<<<<<<<<<<<<<<<<<<<< refers to the number of different !rocesses through which a
!roduct flows'
)*+, 4rocess com!le9ity
./-, 0asy O(1, -
M%L!I)LE C*OICE
1' )n ob=ective of activity-based management is to
a' eliminate the ma=ority of centrali$ed activities in an organi$ation'
b' reduce or eliminate non-value-added activities incurred to ma>e a !roduct or !rovide a
service'
c' institute res!onsibility accounting systems in decentrali$ed organi$ations'
d' all of the above
)*+, ( ./-, 0asy O(1, -1
2' Which of the following is"are !art of activity-based management?
)ctivity analysis Bost driver analysis
a'
yes yes
b'
no yes
c'
no no
d'
yes no
)*+, ) ./-, 0asy O(1, -3
3' Which of the following falls under the )ctivity-(ased 2anagement umbrella?
Bontinuous
im!rovement
(usiness !rocess
reengineering
)ctivity-based
costing
a'
no no yes
b'
yes no no
c'
yes yes yes
d'
no yes no
)*+, B ./-, 0asy O(1, -
4' 3he sum of the non-value-added time and the value-added time e?uals
a' ins!ection time'
b' !roduction time'
c' the !roduct life cycle'
d' cycle time'
)*+, . ./-, 0asy O(1, -2
15
' Which of the following add customer value?
a' setu! time
b' storage time
c' idle time
d' !rocessing time
)*+, . ./-, 0asy O(1, -2
#' Lead time minus !roduction time is e?ual to
a' idle time'
b' storage time'
c' non-value-added time'
d' value-added time'
)*+, B ./-, 0asy O(1, -2
5' When a firm redesigns a !roduct to reduce the number of com!onent !arts7 the firm is
a' increasing consumer value'
b' increasing the value added to the !roduct'
c' decreasing !roduct variety'
d' decreasing non-value-added costs'
)*+, . ./-, 2oderate O(1, -1
6' *on-value-added activities that are necessary to businesses7 but not costs that customers are willing to
!ay for are >nown as
a' business-value-added activities'
b' long-term variable activities'
c' short-term variable activities'
d' su!erior business activities'
)*+, ) ./-, 2oderate O(1, -1
%' Which of the following would not be considered a value-added activity in the !re!aration of a ta9
return?
a' !rinting a co!y of the return for the client
b' !rinting a co!y of the return for the /C+
c' installing ta9 software
d' chec>ing for accuracy
)*+, B ./-, 0asy O(1, -1
1&' Which of the following is considered a value-added activity?
/dle time /ns!ection time 3ransfer time
a'
yes yes no
b'
no no no
c'
yes no yes
d'
no yes yes
)*+, ( ./-, 0asy O(1, -2
16
11' ) !rocess ma!
a' should indicate only value-added activities'
b' is also >nown as a detailed flowchart'
c' should indicate only those ste!s"!rocesses that are obvious in the !roduction of
goods"services'
d' is also >nown as a value chart'
)*+, ( ./-, 0asy O(1, -2
12' ) value chart should include which of the following?
+ervice time /ns!ection time 3ransfer time
a'
yes no yes
b'
no no yes
c'
yes yes no
d'
yes yes yes
)*+, . ./-, 0asy O(1, -2
13' 3he actual time it ta>es to !erform a s!ecific tas> is called
a' ins!ection time'
b' service time'
c' transfer time'
d' ?uality time'
)*+, ( ./-, 0asy O(1, -2
14' 2anufacturing cycle efficiency is a measure of
a' bottlenec>s'
b' effectiveness'
c' efficiency'
d' ?uality'
)*+, B ./-, 0asy O(1, -2
1' Which of the following is ty!ically regarded as a cost driver in traditional accounting !ractices?
a' number of !urchase orders !rocessed
b' number of customers served
c' number of transactions !rocessed
d' number of direct labor hours wor>ed
)*+, . ./-, 0asy O(1, -3
1#' When a com!any is labor-intensive7 the cost driver that is !robably +east significant would be
a' direct labor hours'
b' direct labor dollars'
c' machine hours'
d' cost of materials used'
)*+, B ./-, 0asy O(1, -3
1%
15' )n activity driver is used for which of the following reasons?
3o measure demands 3o measure resources consumed
a'
yes yes
b'
yes no
c'
no yes
d'
no no
)*+, ) ./-, 0asy O(1, -3
16' 3he term cost driver refers to
a' any activity that can be used to !redict cost changes'
b' the attem!t to control e9!enditures at a reasonable level'
c' the !erson who gathers and transfers cost data to the management accountant'
d' any activity that causes costs to be incurred'
)*+, . ./-, 2oderate O(1, -3
1%' Bost allocation bases in activity-based costing should be
a' cost drivers'
b' value-added activities'
c' activity centers'
d' !rocesses'
)*+, ) ./-, 0asy O(1, -3
2&' Bosts that are common to many different activities within an organi$ation are >nown as <<<<<<<<<<<<
costs'
a' !roduct- or !rocess-level
b' organi$ational-level
c' batch-level
d' unit-level
)*+, ( ./-, 0asy O(1, -3
21' /n activity-based costing7 cost reduction efforts are directed at s!ecific
a' cost categories'
b' cost !ools'
c' !rocesses'
d' cost drivers'
)*+, . ./-, 0asy O(1, -3
22' +etu! time is
) batch cost ) value-added cost ) !roduction cost
a'
no no yes
b'
yes yes no
c'
yes no yes
d'
no yes yes
)*+, B ./-, 0asy O(1, -3
1#&
23' Which of the following have an im!act on long-term variable costs?
4roduct variety 4roduct com!le9ity 4rocess com!le9ity
a'
no no no
b'
no yes yes
c'
yes no yes
d'
yes yes yes
)*+, . ./-, 2oderate O(1, -4
24' /n allocating variable costs to !roducts7
a' a volume-based cost driver should be used'
b' direct labor hours should always be used as the allocation base'
c' a com!any should use the same allocation base that it uses for fi9ed costs'
d' a com!any should never use more than one cost driver'
)*+, ) ./-, 0asy O(1, -4
2' Which of the following is not a drawbac> of mass customi$ation?
a' 3he choices are too numerous'
b' 3he !otential for errors is great'
c' Only a small !ercentage of available choices is normally selected'
d' )ll of the above are drawbac>s'
)*+, . ./-, 2oderate O(1, -
2#' +imultaneous engineering hel!s com!anies accom!lish which of the following?
Ceduces !roduct Ceduces !rocess
com!le9ity com!le9ity
a'
no no
b'
yes yes
c'
yes no
d'
no yes
)*+, ( ./-, 0asy O(1, -
25' -or traditional costing !ur!oses7 CD. costs are
a' ca!itali$ed and allocated over the !roduct life cycle'
b' e9!ensed as incurred'
c' ca!itali$ed and amorti$ed over three years'
d' charged to the future accounting !eriods that receive the benefit of the CD. e9!enditures'
)*+, ( ./-, 0asy O(1, -#
26' 3raditionally7 managers have focused cost reduction efforts on
a' activities'
b' !rocesses'
c' de!artments'
d' costs'
)*+, . ./-, 0asy O(1, -
1#1
2%' 3oday7 traditional accounting methods are
a' still a!!ro!riate for financial re!orting'
b' still a!!ro!riate for !roviding useful cost information to internal managers'
c' still a!!ro!riate for both internal and e9ternal financial re!orting'
d' outdated for all !ur!oses'
)*+, ) ./-, 0asy O(1, -#
3&' 4roduct costing systems in use over the last 4& years
a' concentrated on using multi!le cost !ools and cost drivers'
b' were often technologically inca!able of handling activity-based costing information'
c' have generally been res!onsive to changes in the manufacturing environment'
d' have been a!!ro!riate for managerial decision !ur!oses as long as they met the
re?uirements of generally acce!ted accounting !rinci!les'
)*+, ( ./-, 2oderate O(1, -
31' 3raditional overhead allocations result in which of the following situations?
a' Overhead costs are assigned as !eriod costs to manufacturing o!erations'
b' High-volume !roducts are assigned too much overhead7 and low-volume !roducts are
assigned too little overhead'
c' Low-volume !roducts are assigned too much7 and high-volume !roducts are assigned too
little overhead'
d' 3he resulting allocations cannot be used for financial re!orts'
)*+, ( ./-, 0asy O(1, -
32' 3raditionally7 overhead has been assigned based on direct labor hours or machine hours' What effect
does this have on the cost of a high-volume item?
a' over-costs the !roduct
b' under-costs the !roduct
c' has no effect the !roduct cost
d' cost !er unit is unaffected by !roduct volume
)*+, ) ./-, 0asy O(1, -
33' Celative to traditional !roduct costing7 activity-based costing differs in the way costs are
a' !rocessed'
b' allocated'
c' benchmar>ed'
d' incurred'
)*+, ( ./-, 0asy O(1, -
34' 8nder activity-based costing7 benchmar>s for !roduct cost should contain an allowance for
a' idle time'
b' idle time and scra! materials'
c' s!oilage'
d' *one of the res!onses are correct'
)*+, . ./-, 2oderate O(1, -4
1#2
3' /n activity-based costing7 final cost allocations assign costs to
a' de!artments'
b' !rocesses'
c' !roducts'
d' activities'
)*+, B ./-, 0asy O(1, -4
3#' /n activity-based costing7 !reliminary cost allocations assign costs to
a' de!artments'
b' !rocesses'
c' !roducts'
d' activities'
)*+, . ./-, 0asy O(1, -4
35' /n allocating fi9ed costs to !roducts in activity-based costing7
a' direct labor hours should always be used as the allocation base'
b' a com!any should use the same allocation base that it uses for variable costs'
c' a cost driver that is not volume-related should be used'
d' machine hours should always be used'
)*+, B ./-, 2oderate O(1, -4
36' Of the following7 which is the best reason for using activity-based costing?
a' to >ee! better trac> of overhead costs
b' to more accurately assign overhead costs to cost !ools so that these costs are better
controlled
c' to better assign overhead costs to !roducts
d' to assign indirect service overhead costs to direct overhead cost !ools
)*+, B ./-, 0asy O(1, -
3%' )(B should be used in which of the following situations?
a' single-!roduct firms with multi!le ste!s
b' multi!le-!roduct firms with only a single !rocess
c' multi!le-!roduct firms with multi!le !rocessing ste!s
d' in all manufacturing firms
)*+, B ./-, 0asy O(1, -
4&' )ctivity-based costing and activity-based management are effective in hel!ing managers do all of the
following e,cept
a' trace technology costs to !roducts'
b' !romote e9cellence standards'
c' identify only value-added activities'
d' analy$e !erformance !roblems'
)*+, B ./-, 2oderate O(1, -
41' :lobal com!etition has forced )merican industry to
a' see> increased governmental regulation'
b' im!rove !roduct ?uality and customer service'
c' narrow !roduct lines'
d' decrease its social res!onsibility'
1#3
)*+, ( ./-, 0asy O(1, -1
42' 3he costs of non-?uality wor> do not include
a' the cost of handling com!laints'
b' the cost of scra!'
c' warranty costs'
d' original design costs'
)*+, . ./-, 0asy O(1, -#
43' /n the Enew eraE of manufacturing7 good !erformance indicators are
a' !roduction-based'
b' sales-based'
c' cost-based'
d' consumer-based'
)*+, . ./-, 0asy O(1, -#
44' 3raditional standard costs are ina!!ro!riate measures for !erformance evaluation in the Enew eraE of
manufacturing because they
a' build in allowances for non-value-adding activities'
b' are based on historical information'
c' donFt reflect current costs'
d' are ideal goals'
)*+, ) ./-, 2oderate O(1, -#
4' 3he amount of time between the develo!ment and the !roduction of a !roduct is
a' the !roduct life cycle'
b' lead time'
c' !roduction time'
d' value-added time'
)*+, ( ./-, 0asy O(1, -1
4#' -or one !roduct that a firm !roduces7 the manufacturing cycle efficiency is 2& !ercent' /f the total
!roduction time is 12 hours7 what is the total manufacturing time?
a' 1'& hours
b' #&'& hours
c' 12'& hours
d' 2'4 hours
)*+, ( ./-, 0asy O(1, -2
45' )ctivity analysis allows managers to
a' classify activities so that !rocesses can be eliminated'
b' devise ways to minimi$e or eliminate non-value-added activities'
c' evaluate !rocess !erformance to gain com!etitive advantages'
d' all of the above'
)*+, ( ./-, 0asy O(1, -3
1#4
46' Which of the following statements about business-value-added activities @(G)sA is true?
a' (G)s reflect the same !rocesses in all organi$ations'
b' ) !rocess ma! will not reflect (G)s because such activities are not essential to !rocess
!erformance'
c' (G)s are actually value-added activities of an organi$ation that relate to administrative
!rocesses'
d' /t is im!ossible to eliminate all (G)s in an organi$ation'
)*+, . ./-, 0asy O(1, -1
4%' ) value chart indicates
a' all ste!s in a !rocess and the time it ta>es for them to be com!leted'
b' the value-added ste!s in a !rocess and the time it ta>es for them to be com!leted'
c' the time and cost of all value-added ste!s in a !rocess'
d' the time and costs of all value-added and non-value-added ste!s in a !rocess'
)*+, ) ./-, 2oderate O(1, -1
&' /n the !harmaceutical or food industries7 ?uality control ins!ections would most li>ely be viewed as
a' non-value-added activities'
b' business-value-added activities'
c' value-added-activities'
d' !rocess-efficiency activities'
)*+, B ./-, .ifficult O(1, -1
1' ) =ust-in-time manufacturing !rocess should have s-.stantia++y less of which of the following than a
traditional manufacturing !rocess?
/dle time 3ransfer time Galue-added time Bycle time
a'
yes yes yes yes
b'
yes no no yes
c'
yes yes no yes
d'
no yes yes no
)*+, B ./-, .ifficult O(1, -#
2' 2anufacturing cycle efficiency should be increased by em!loying which of the following techni?ues?
1/3 -le9ible (atch
/nventory 2anufacturing +ystems 2anufacturing
a'
yes yes yes
b'
yes yes no
c'
no no no
d'
yes no yes
)*+, ( ./-, 2oderate O(1, -2
1#
3' ) >ey conce!t underlying cost driver analysis is that
a' all cost drivers identified should be used for cost accumulation'
b' the cost of measuring a driver does not e9ceed the benefits of using it'
c' only costs occurring at the unit-level should be assigned to !roducts or services'
d' organi$ational"facility costs are non-value-added and should never be assigned to !roducts
or services'
)*+, ( ./-, 2oderate O(1, -3
4' When cost driver analysis is used7 organi$ational !rofit or loss can be determined by subtracting
a' organi$ational costs from total margin !rovided by !roducts'
b' organi$ational costs from total !roduct revenue'
c' total !roduct costs from total !roduct revenue'
d' total unit7 batch7 !roduct"!rocess7 and organi$ational level costs incurred for a !eriod from
total !roduct revenue'
)*+, ) ./-, 2oderate O(1, -3
' )n activity center is an organi$ational unit
a' that ma>es a single !roduct or !erforms a single service'
b' in which only value-added activities are !erformed'
c' that incurs only unit7 batch7 or !roduct"!rocess level costs'
d' for which management wants se!arate activity information'
)*+, . ./-, 0asy O(1, -4
#' 3he following items are used in tracing costs in an )(B system' /n which order are they used?
@1A cost ob=ect
@2A cost driver
@3A activity driver
@4A cost !ool
a' 17 27 37 4
b' 27 37 47 1
c' 27 47 37 1
d' 47 37 17 2
)*+, B ./-, .ifficult O(1, -4
5' 3he ECule of OneE underlies the !remise that all costs are
a' variable'
b' fi9ed'
c' unit-based'
d' short-term'
)*+, ) ./-, 0asy O(1, -4
1##
6' Brawford Bom!any ma>es ten different styles of ine9!ensive feather mas>s' Which of the following is
this com!any most li>ely to have?
a' 4roduct com!le9ity
b' 4rocess com!le9ity
c' 4roduct variety
d' 4rocess customi$ation
)*+, B ./-, 0asy O(1, -
%' 2ass customi$ation can be achieved through the use of
a' activity-based costing'
b' =ust-in-time inventory'
c' fle9ible manufacturing systems'
d' all of the above'
)*+, B ./-, 0asy O(1, -
#&' 2ass customi$ation is closely associated with
4roduct 4roduct 4rocess 4areto
variety com!le9ity errors !rinci!le
a'
yes no no yes
b'
yes yes yes no
c'
no yes no no
d'
yes no yes yes
)*+, . ./-, .ifficult O(1, -
#1' 3he 4areto !rinci!le is im!ortant to consider when an organi$ation is
a' assessing whether to em!loy activity-based costing versus attribute-based costing'
b' evaluating the number of activities that are value-added versus those that are non-value-
added'
c' deciding whether to offer a !roduct in one color versus in ten colors'
d' determining whether simultaneous engineering activities will be im!acted by the ECule of
One'E
)*+, B ./-, 2oderate O(1, -
#2' +imultaneous engineering can be used to
a' reduce both !roduct and !rocess com!le9ity'
b' integrate activity-based costing with value chain analysis'
c' reduce the time-to-mar>et of new !roducts through elimination of batch-level activities'
d' reduce manufacturing cycle efficiency by reducing !rocess waste'
)*+, ) ./-, 0asy O(1, -
#3' /f only one or two overhead cost !ools are used7
a' it will be easy to determine which !roducts or services are creating the most costs'
b' overhead created by a s!ecific !roduct will be assigned to all !roducts'
c' the reduction in cost accumulation and allocation time will raise com!any !rofits'
d' allocations should be made using only unit-based cost drivers'
)*+, ( ./-, 0asy O(1, -4
1#5
#4' ) cost accumulation system should most li>ely be reevaluated when a com!any has
a' automated one or more !roduction !rocesses'
b' introduced new !roducts to its customers'
c' had its industry deregulated'
d' all of the above'
)*+, . ./-, 0asy O(1, -
#' 0ngaging in which of the following will result in radical changes being made to an organi$ationFs
!rocesses?
a' Bontinuous im!rovement
b' (enchmar>ing
c' Ceengineering
d' 2ass customi$ation
)*+, B ./-, 2oderate O(1, -
##' 8se of activity-based costing and activity-based management re?uires
a' the creation of an environment for change in an organi$ation'
b' elimination of all non-value-added activities in an organi$ation'
c' that com!any !rocesses be automated and the use of direct labor be minimal'
d' each !rocess be fully ma!!ed and all activities be identified as value-added or non-value-
added'
)*+, ) ./-, 0asy O(1, -
#5' Which of the following is most li>ely to ma>e the im!lementation of )(B")(2 slow and difficult?
a' 3he inability of all em!loyees to understand the com!utations involved in )(B'
b' ) lac> of involvement by or su!!ort from u!!er management'
c' 3he need for dual costing systems'
d' )n inability to eliminate all business-value-added activities'
)*+, ( ./-, 2oderate O(1, -#
#6' )ctivity-based costing and generally acce!ted accounting !rinci!les differ in that )(B
a' does not define !roduct costs in the same manner as :))4'
b' cannot be used to com!ute an income statement7 but :))4 can'
c' is concerned only with costs generated from automated !rocesses7 but :))4 is concerned
with costs generated from both manual and automated !rocesses'
d' information is useful only to managers7 while :))4 information is useful to all
organi$ational sta>eholders'
)*+, ) ./-, 2oderate O(1, -#
#%' /f activity-based costing is im!lemented in an organi$ation without any other changes being
im!lemented7 total overhead costs will
a' be reduced because of the elimination of non-value-added activities'
b' be reduced because organi$ational costs will not be assigned to !roducts or services'
c' be increased because of the need for additional !eo!le to gather information on cost
drivers and cost !ools'
d' remain constant and sim!ly be s!read over !roducts differently'
)*+, . ./-, .ifficult O(1, -
1#6
#mithson Company
+mithson Bom!any !roduces two !roducts @) and (A' .irect material and labor costs for 4roduct )
total H3 @which reflects 4 direct labor hoursAI direct material and labor costs for 4roduct ( total H22
@which reflects 1' direct labor hoursA' 3hree overhead functions are needed for each !roduct' 4roduct
) uses 2 hours of -unction 1 at H1& !er hour7 1 hour of -unction 2 at H5 !er hour7 and # hours of
-unction 3 at H16 !er hour' 4roduct ( uses 17 67 and 1 hours of -unctions 17 27 and 37 res!ectively'
+mithson !roduces 6&& units of ) and 67&&& units of ( each !eriod'
5&' Cefer to +mithson Bom!any /f total overhead is assigned to ) and ( on the basis of units !roduced7
4roduct ) will have an overhead cost !er unit of
a' H 66'#4'
b' H123'#4'
c' H13'&&'
d' *one of the res!onses are correct'
)*+, )
3otal Overhead
4roduct ) -unction Hourly
Cate
Hours 3otal
1 H 1& 2 H 2&
2 H 5 1 H 5
3 H 16 # H 1&6
3otals % H 13
4roduct ( -unction Hourly
Cate
Hours 3otal
1 H 1& 1 H 1&
2 H 5 6 H #
3 H 16 1 H 16
3otals 1& H 64
OH"8nit 8nits
4roduced
3otal
H 13 6&& H 1&67&&&
H 64 6&&& H #527&&&
H 56&7&&&
3otal OH 4ro!ortion )llocated
OH
8nits
4roduced
OH !er
8nit
H 56&7&&& &'&%&%&%&%1 H 5&7%&%'&% 6&& H 66'#4
@6&&"66&&A
./-, 2oderate O(1, -3
1#%
51' Cefer to +mithson Bom!any /f total overhead is assigned to ) and ( on the basis of units !roduced7
4roduct ( will have an overhead cost !er unit of
a' H64'&&'
b' H66'#4'
c' H11&'#4'
d' *one of the res!onses are correct'
)*+, (
+ee J5& for 3otal Overhead Bom!utations
3otal OH 4ro!ortion )llocated
OH
8nits
4roduced
OH !er
8nit
H 56&7&&& &'%&%&%&%&% H 5&%7&%&'%1 6&&& H 66'#4
@6&&&"66&&A
./-, 2oderate O(1, -3
52' Cefer to +mithson Bom!any /f total overhead is assigned to ) and ( on the basis of direct labor hours7
4roduct ) will have an overhead cost !er unit of
a' H1'32'
b' H2&'26'
c' H4#1'66'
d' *one of the res!onses are correct'
)*+, (
4roduct .L Hrs"8nit 8nits 4roduced 3otal .L
Hours
) 4 6&& 32&&
( 1' 6&&& 12&&&
12&&
3otal OH 4ro!ortion )llocated
OH
8nits
4roduced
OH !er
8nit
H 56&7&&& &'21&2#31# H 1#4721&'3 6&& / 015203
@372&&"172&&A
./-, 2oderate O(1, -3
15&
53' Cefer to +mithson Bom!any /f total overhead is assigned to ) and ( on the basis of direct labor hours7
4roduct ( will have an overhead cost !er unit of
a' H1'32'
b' H5#'%6'
c' H1&'32'
d' *one of the res!onses are correct'
)*+, (
+ee J52 for .irect Labor Bom!utations
3otal OH 4ro!ortion )llocated
OH
8nits
4roduced
OH !er
8nit
H 56&7&&& &'56%453#64 H #1756%'45 6&&& / 45263
@127&&&"172&&A
./-, 2oderate O(1, -3
54' Cefer to +mithson Bom!any /f total overhead is assigned to ) and ( on the basis of overhead activity
hours used7 the total !roduct cost !er unit assigned to 4roduct ) will be
a' H6#'32'
b' H%'&&'
c' H11'&'
d' *one of the res!onses are correct'
)*+, B
3otal OH 4ro!ortion )llocated
OH
8nits
4roduced
OH !er
8nit
.2 and
.L"8nit
3otal
H 56&7&&& &'&62#66&5 H #474&3'#5 6&& H 6&'& H 3'&& / 775251
@572&&"6572&&A
./-, 2oderate O(1, -3
5' Cefer to +mithson Bom!any /f total overhead is assigned to ) and ( on the basis of overhead activity
hours used7 the total !roduct cost !er unit assigned to 4roduct ( will be
a' H11'&'
b' H53'32'
c' H34'#&'
d' *one of the res!onses are correct'
)*+, .
3otal OH 4ro!ortion )llocated
OH
8nits
4roduced
OH !er
8nit
.2 and
.L"8nit
3otal
H 56&7&&& &'%154311%3 H 517%#'33 6&&& H 6%'44 H 22'&& / 777288
@6&7&&&"6572&&A
./-, 2oderate O(1, -3
151
)he+ps Company
4hel!s Bom!any !roduces &7&&& units of 4roduct K and #7&&& units of 4roduct L during a !eriod' /n
that !eriod7 four set-u!s were re?uired for color changes' )ll units of 4roduct K are blac>7 which is the
color in the !rocess at the beginning of the !eriod' ) set-u! was made for 17&&& blue units of 4roduct
LI a set-u! was made for 47&& red units of 4roduct LI a set-u! was made for && green units of
4roduct L' ) set-u! was then made to return the !rocess to its standard blac> coloration and the units
of 4roduct K were run' 0ach set-u! costs H&&'
5#' Cefer to 4hel!s Bom!any' /f set-u! cost is assigned on a volume basis for the de!artment7 what is the
a!!ro9imate !er-unit set-u! cost for 4roduct L?
a' H'&1&'
b' H'&3#'
c' H'&4&'
d' *one of the res!onses are correct'
)*+, (
3otal setu! cost, H&& 9 4 M H27&&&
H27&&&"#7&&& M /121954
./-, 2oderate O(1, -3
55' Cefer to 4hel!s Bom!any' /f set-u! cost is assigned on a volume basis for the de!artment7 what is the
a!!ro9imate !er-unit set-u! cost for the red units of 4roduct L?
a' H'&3#'
b' H'111'
c' H'2&'
d' *one of the res!onses are correct'
)*+, )
3otal setu! cost, H&& 9 4 M H27&&&
H27&&&"#7&&& M /121954
./-, 2oderate O(1, -3
56' Cefer to 4hel!s Bom!any' )ssume that 4hel!s Bom!any has decided to allocate overhead costs using
levels of cost drivers' What would be the a!!ro9imate !er-unit set-u! cost for the blue units of 4roduct
L?
a' H'&4'
b' H'2'
c' H'&'
d' *one of the res!onses are correct'
)*+, B
+etu! cost for blue units M H&&'&&
*umber of blue units !roduced M 17&&&
H&&"17&&& M H'&
./-, 2oderate O(1, -3
152
5%' Cefer to 4hel!s Bom!any' )ssume that 4hel!s Bom!any has decided to allocate overhead costs using
levels of cost drivers' What would be the a!!ro9imate !er-unit set-u! cost for the green units of
4roduct L?
a' H1'&&'
b' H&'2'
c' H&'&4'
d' *one of the res!onses are correct'
)*+, )
+etu! cost M H&&'&&
8nits !roduced M &&
H&&'&&"&& M H1'&&"unit
./-, 2oderate O(1, -3
La:ayette #avings and Loan
Lafayette +avings and Loan had the following activities7 traceable costs7 and
!hysical flow of driver units,
3raceable 4hysical flow of
)ctivities Bosts .river 8nits
O!en new accounts H&7&&& 17&&& accounts
4rocess de!osits 3#7&&& 4&&7&&& de!osits
4rocess withdrawals 17&&& 2&&7&&& withdrawals
4rocess loan a!!lications 257&&& %&& a!!lications
3he above activities are used by the 1ennings branch and the Browley branch,
1ennings Browley
*ew accounts 2&& 4&&
.e!osits 4&7&&& 2&7&&&
Withdrawals 17&&& 167&&&
Loan a!!lications 1&& 1#&
6&' Cefer to Lafayette +avings and Loan' What is the cost !er driver unit for new account activity?
a' H&'&% c' H3&'&&
b' H&'&5 d' H&'&&
)*+, .
H&7&&& " 17&&& M H&'&& !er account
./-, 0asy O(1, -4
153
61' Cefer to Lafayette +avings and Loan' What is the cost !er driver unit for the de!osit activity?
a' H&'&% c' H3&'&&
b' H&'&5 d' H&'&&
)*+, )
H3#7&&&"4&&7&&& M H&'&%
./-, 0asy O(1, -4
62' Cefer to Lafayette +avings and Loan' What is the cost !er driver unit for the withdrawal activity?
a' H&'&% c' H3&'&&
b' H&'&5 d' H&'&&
)*+, (
H17&&&"2&&7&&& M H&'&5
./-, 0asy O(1, -4
63' Cefer to Lafayette +avings and Loan' What is the cost !er driver unit for the loan a!!lication activity?
a' H&'&% c' H3&'&&
b' H&'&5 d' H&'&&
)*+, B
H257&&&"%&& M H3&'&&
./-, 0asy O(1, -4
64' Cefer to Lafayette +avings and Loan' How much of the loan a!!lication cost will be assigned to the
1ennings branch?
a' H37&&& c' H 576&&
b' H476&& d' H257&&&
)*+, )
H3&'&& 9 1&& M H37&&&
./-, 0asy O(1, -4
6' Cefer to Lafayette +avings and Loan' How much of the de!osit cost will be assigned to the Browley
branch?
a' H176&& c' H 74&&
b' H37#&& d' H3#7&&&
)*+, )
H&'&% N 2&7&&& M H176&&
./-, 0asy O(1, -4
154
6#' Cefer to Lafayette +avings and Loan' How much of the new account cost will be assigned to the
Browley branch?
a' H1&7&&& c' H3&7&&&
b' H2&7&&& d' H&7&&&
)*+, (
4&& N H& M H2&7&&&
./-, 0asy O(1, -4
Ha$el Bom!any uses activity-based costing' 3he com!any !roduces two !roducts, coats and hats'
3he annual !roduction and sales volume of coats is 67&&& units and of hats is #7&&& units' 3here are
three activity cost !ools with the following e9!ected activities and estimated total costs,
Activity
Cost )oo+
Estimated
Cost
E,pected
Activity
Coats
E,pected
Activity
*ats !ota+
)ctivity 1 H2&7&&& 1&& 4&& &&
)ctivity 2 H357&&& 6&& 2&& 17&&&
)ctivity 3 H%172&& 6&& 37&&& 376&&
65' Cefer to Ha$el Bom!any' 8sing )(B7 the cost !er unit of coats is a!!ro9imately,
a' H2'4& c' H #'#&
b' H3'%& d' H1&'%
)*+, B
Activity Cost A++ocation Cost per %nit
1 H2&7&&& N 1&&"&& M H 47&&& " 67&&& H&'&
2 H357&&& N 6&&"17&&& M H2%7#&& " 67&&& 3'5&
3 H%172&& N 6&&"376&& M H1%72&& " 67&&& 2'4&
!ota+ Cost per %nit 5251
./-, .ifficult O(1, -4
66' Cefer to Ha$el Bom!any' 8sing )(B7 the cost !er unit of hats is a!!ro9imately,
a' H2'4& c' H12'&&
b' H3'%& d' H1'%&
)*+, .
Activity Cost A++ocation Cost per %nit
1 H2&7&&& N 4&&"&& M H 1#7&&& " #7&&& H2'#5
2 H357&&& N 2&&"17&&& M H 574&&" #7&&& 1'23
3 H%172&& N 37&&&"376&& M H527&&& " #7&&& 12'&&
!ota+ Cost per %nit 75261
./-, .ifficult O(1, -4
15
#*OR! AN#;ER
1' How has the increase in !roduct variety affected the costs of )merican business?
)*+,
3he increase in !roduct variety has increased the overhead costs of )merican firms' 3hese costs
include significant setu! costs to switch from the !roduction of one !roduct to another7 costs of
additional technology7 inventory carrying costs7 !urchasing costs7 and scheduling costs'
./-, 2oderate O(1, -1
2' What are the three classes of activities defined by activity-based management' What is customer
res!onse to each of these activities? What is managementOs reaction to each of these activities?
)*+,
Galue added activities--increase the worth of a !roduct or service to a customer and are activities for
which the customer is willing to !ay' 2anagement is willing to >ee! !erforming these activities'
*on-value added activities--increase the time s!ent on a !roduct or service but does not increase its
worth' +uch activities are unnecessary from the customerOs !oint of viewI therefore management will
strive to reduce or eliminate such activities'
(usiness value-added activities--are essential to business o!erationsI however7 the customer is not
willing to !ay for them' 2anagement must decide which of these activities are truly essential and
reduce those which are not in order to achieve a higher !rofit margin'
./-, 2oderate O(1, -1
3' /n activity-based costing7 how are cost drivers selected?
)*+,
Bost drivers are selected based on their underlying relationshi! to organi$ational costs' /deally7 a
causal relationshi! e9ists between the cost driver and a cost !ool' Once identified7 cost drivers are used
to allocate organi$ational costs to activities and !roducts and are the focus of cost control efforts'
./-, 2oderate O(1, -3
4' .iscuss the characteristics of a com!any for which )(B would be a!!ro!riate'
)*+,
Bom!anies having the following characteristics find )(B useful, @1A hard-to-ma>e !roducts that show
large !rofits and easy-to-ma>e !roducts that show lossesI @2A !rofit margins that are difficult to
e9!lainI @3A considerable automation that ma>es it difficult to assign overhead to !roducts that use
machine hours or direct labor as basesI @4A substantial overhead costs that are not in !ro!ortion to the
number of !roductsI and @A a wide variety of services or !roducts'
./-, 2oderate O(1, -#
15#
' .iscuss the four different levels of costs identified by activity based costing @)(BA' How should these
ty!es of costs be treated in the determination of !roduct cost?
)*+,
3he four different levels are unit-level costs7 batch-level costs7 !roduct- or !rocess-level costs7 and
organi$ational or facility costs' 8nit-level costs include direct material7 direct labor7 and some
traceable machine costs' 3hese are incurred once for each item !roduced and are considered !art of
total !roduct cost' (atch-level costs include machine setu!7 material handling7 and !urchasing or
ordering costs' 3hese are incurred once for each batch of items !roduced and are allocated over the
total number of units in the batch' 3hese are also considered !art of total !roduct cost' 4roduct- or
!rocess-level costs include engineering changes7 design7 and develo!ment costs' 3hese are allocated to
the total number of units !roduced in the !roduct line and are considered !art of total !roduct cost'
Organi$ational or facility costs include building de!reciation7 administrative salaries7 and
organi$ational advertising' 3hese costs are not !roduct-related and should be deducted from net
!roduct revenue'
./-, 2oderate O(1, -3
#' )(B has been critici$ed for a variety of reasons' .iscuss these criticisms'
)*+,
One criticism is that )(B does not !romote total ?uality management and continuous im!rovement'
)nother criticism of )(B is that )(B does not adhere to generally acce!ted accounting !rinci!les' )n
)(B system might allocate non!roduct costs @research and develo!mentA to !roducts7 while not
allocating some traditional !roduct costs @factory de!reciation on machinesA to !roducts' ) third
criticism of )(B relates to the cost of im!lementation' )n )(B system ta>es considerable time to
im!lement7 and therefore7 it is very costly'
./-, 2oderate O(1, -#
)ROBLEM
1' Heirloom Bom!any' manufactures hand-made !ine storage bo9es for a variety of clients' )s
!roduction manager7 you have develo!ed the following value chart,
O!eration )verage *umber of .ays
Ceceiving materials 1
+toring materials 2
Handling materials 3
Butting"measuring materials #
)ssembling materials 4
(uilding bo9es 5
)ttaching hinges 2
/ns!ection 1
a' .etermine the value-added activities and their total time'
b' .etermine the non-value-added activities and their total time'
c' Balculate the manufacturing cycle efficiency'
155
)*+,
a' Galue-added activities 3ime
Butting"measuring materials #
)ssembling materials 4
(uilding bo9es 5
)ttaching hinges 2
3otal !roduction time @daysA 1%
b' *on-value-added activities 3ime
Ceceiving 1
+toring 2
Handling 3
/ns!ection 1
3otal non!roduction time @daysA 5
c' 3otal lead time M 1% P 5 M 2# days
2B0 M 1%"2# M 53'1Q
./-, 0asy O(1, -2
2' 2c2ahon Bom!any would li>e to institute an activity-based costing system to !rice !roducts' 3he
com!anyFs 4urchasing .e!artment incurs costs of H&7&&& !er year and has si9 em!loyees'
4urchasing has determined the three ma=or activities that occur during the year'

)ctivity
)llocation
2easure
J of
4eo!le
3otal
Bost
/ssuing !urchase orders J of !urchase orders 1 H1&7&&&
Ceviewing receiving re!orts J of receiving re!orts 2 H157&&&
2a>ing !hone calls J of !hone calls 3 H227&&&
.uring the year7 &7&&& !hone calls were made in the de!artmentI 17&&& !urchase orders were issuedI
and 1&7&&& shi!ments were received' 4roduct ) re?uired 2&& !hone calls7 1& receiving re!orts7 and
& !urchase orders' 4roduct ( re?uired 3& !hone calls7 4&& receiving re!orts7 and 1&& !urchase
orders'
a' .etermine the amount of !urchasing de!artment cost that should be assigned to each
of these !roducts'
b' .etermine !urchasing de!artment cost !er unit if 17&& units of 4roduct ) and 37&&&
units of 4roduct ( were manufactured during the year'
156
)*+,
a' H1&7&&&"17&&& M H1& !er !urchase order
H157&&&"1&7&&& M H15'& !er receiving re!ort
H227&&&"&7&&& M H4'& !er !hone call
4roduct ) 4roduct (
& !urchase orders H1& $ 500
1&& !urchase orders H1& $1,000
1& receiving re!orts H15'& 2,625
4&& receiving re!orts H15'& 7,000
2&& !hone calls H4'& 900
3& !hone calls H4'& 1,575
3otal cost
$4,025 $9,575
b' 4roduct )M H47&2"17&& M H2'#6 !er unit
4roduct (M H%75"37&&& M H3'1% !er unit
./-, 2oderate O(1, -4
15%