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1 Which of the following statements is correct?
INCORRECT
A) Activity-based costing uses a number of activity cost pools, each of which is allocated to products on the basis of direct
labor-hours.
B) Activity rates in activity-based costing are computed by dividing costs from the first-stage allocations by the activity
measure for each activity cost pool.
C) An activity-based costing system is generally easier to implement and maintain than traditional costing system.

D) One of the goals of activity-based management is the elimination of waste by allocating costs to products that waste
resources.
Feedback:
The correct answer is B (Learning Objective 1):
Rather than using a single allocation base (such as direct labor-hours), activity-based costing uses a number of
allocation bases for assigning costs to products (thus statement A is false). Generally, an activity-based costing system
is harder (rather than easier) to implement and maintain than a traditional costing system (thus statement C is false).
Rather than eliminating waste by allocating costs to products that waste resources, activity-based management is a
management approach that focuses on managing activities as a way of eliminating waste and reducing delays and
defects (thus statement D is false). Statement B is true.

2 All of the following are examples of batch-level activities except:

INCORRECT
A) Clerical activity associated with processing purchase orders to produce an order for a standard product.

B) Purchase order processing.

C) Setting up equipment.

D) Worker recreational facilities.

Feedback:
The correct answer is D (Learning Objective 1):
Batch-level activities are activities that are performed each time a batch of goods is handled or processed, regardless of
how many units are in a batch. Further, the amount of resources consumed depends on the number of batches run
rather than on the number of units in the batch. Worker recreational facilities relate to the organization as a whole
rather than to specific batches and, as such, would not be considered a batch-level activity. On the other hand, purchase
order processing, setting up equipment, and the clerical activities described are activities that are performed each time a
batch of goods is handled or processed, and, as such, are batch-level activities.

3 CORRECT All of the following are examples of product-level activities except:

A) Advertising a product.

B) Human resource management.

C) Parts administration.

D) Testing a prototype of a new product.

Feedback:
The correct answer is B (Learning Objective 1):
Product-level activities are activities that relate to specific products that must be carried out regardless of how many
units are produced and sold or batches run. Human resource management activities relate to the organization as a whole
rather than to specific products and, as such, would not be considered a product-level activity. On the other hand,
advertising, testing of prototypes and parts administration are activities that relate to specific products, and, as such,
are product-level activities.

4 Bangayan Company uses activity-based costing to determine the costs of its two products: A and B. The estimated total cost and
INCORRECT expected activity for one of the company's three activity cost pools are as follows.

The activity rate under the activity-based costing system for this activity is closest to:
A) $4.00.

B) $8.59.

C) $18.00.

D) $20.00.
Feedback:
The correct answer is D (Learning Objective 2):
The activity rate for this activity is determined as follows.
Activity rate = Estimated cost ÷ Total expected
Activity rate = $14,000 ÷ (300 + 400) = $20.00

5 CORRECT Ekcer Company uses activity-based costing to compute product costs for external reports. The company has three activity cost
pools and applies overhead using predetermined overhead rates for each activity cost pool. Estimated costs totaled $40,000 and
expected activity equals 2,500 for this activity cost pool Actual activity for the current year was 2,490. The amount of overhead
applied for this activity during the year was closest to:
A) $36,300.
 B) $39,840.
C) $40,000.

D) $96,190.
Feedback:
The correct answer is B (Learning Objectives 2 and 3):
First, determine the activity rate for this activity as follows.
Activity rate = Estimated cost ÷ Total expected activity
Activity rate = $40,000 ÷ 2,500 = $16.00
Then, determine the amount of overhead applied for Activity 3 as follows.
Overhead applied = Actual activity x Activity rate
Amount of overhead applied = 2,490 x $16.00 = $39,840

6 CORRECT Chibucos Company has two products: A and B. The annual production and sales level of Product A is 9,094 units. The annual
production and sales level of Product B is 15,826. The company uses activity-based costing and has prepared the following
analysis showing the estimated total cost and expected activity for each of its three activity cost pools.

The activity rate under the activity-based costing system for Activity 3 is closest to:
A) $29.32.

B) $30.00.

C) $33.33.

D) $41.53.
Feedback:
The correct answer is B (Learning Objective 2):
The activity rate for Activity 3 is determined as follows. Estimated overhead cost of $180,000/total expected activity of
6,000 = Activity rate of $30.00.

7 CORRECT Chibucos Company has two products: A and B. The annual production and sales level of Product A is 9,094 units. The annual
production and sales level of Product B is 15,826. The company uses activity-based costing and has prepared the following
analysis showing the estimated total cost and expected activity for each of its three activity cost pools. (Note that this is the
same data that was provided for the previous question.)

The overhead cost per unit of Product A under activity-based costing is closest to:
A) $1.83.

B) $1.98.

C) $5.00.

D) $10.00.
Feedback:
The correct answer is C (Learning Objective 3):
The overhead cost for Product A is determined as follows.

8 Draus Products Company uses activity-based costing to compute product costs for external reports. The company has three
INCORRECT activity cost pools and applies overhead using predetermined overhead rates for each activity cost pool. Estimated costs and
activities for the current year are presented below for the three activity cost pools:

Actual costs and activities for the current year were as follows.

(Note that this is the same information as provided for the previous question.) The total amount of overhead applied during the
year was closest to:
A) $248,508.

B) $248,988.

C) $250,155.

D) $251,334.
 Feedback:
The correct answer is C (Learning Objectives 3 and 5):
Manufacturing overhead costs applied to production are recorded directly as a credit to the Manufacturing Overhead
account. The total amount of credits to Manufacturing Overhead account (that is, amount of overhead applied to
production) is determined as follows.

9 Draus Products Company uses activity-based costing to compute product costs for external reports. The company has three
INCORRECT activity cost pools and applies overhead using predetermined overhead rates for each activity cost pool. Estimated costs and
activities for the current year are presented below for the three activity cost pools. (Note that this is the same data that was
provided for the previous question.)

Actual costs and activities for the current year were as follows.

The total amount of the debits to the Manufacturing Overhead during the year was closest to:
A) $248,508.

B) $248,988.

C) $251,110.

D) $250,334.
Feedback:
The correct answer is A (Learning Objective 5):
Recall that actual manufacturing overhead costs are recorded directly as a debit to the Manufacturing Overhead account.
As such, the total amount of actual manufacturing overhead costs during the year is determined as follows.

10 When there are batch-level or product-level costs, in comparison to a traditional cost system, an activity-based costing system
INCORRECT ordinarily will shift costs from:
A) High-volume to low-volume products.

B) Low-volume to high-volume products.

C) Specialized to standardized products.

D) Standardized to specialized products.

Feedback:
The correct answer is A (Learning Objective 5):
Under traditional costing methods, overhead costs are allocated to products on the basis of some measure of volume
such as direct labor-hours or machine-hours. This results in most of the overhead cost being allocated to high-volume
products. In contrast, under activity-based costing, some overhead costs are allocated on the basis of batch-level or
product-level activities. This change in allocation bases results in shifting overhead costs from the high-volume products
to low-volume products.

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