Chapter 009 Activity-Based Costing

True / False Questions

 

1. Traditional product costing systems (e.g., job and process costing) are designed primarily to
accumulate cost information for financial reporting. 
TRUE

AACSB: Analytic
Difficulty: Simple
Learning Objective: 1
 

2. Applied manufacturing overhead for product costing purposes may lead to inappropriate
managerial decisions because a single cost driver is used as the allocation base. 
TRUE

AACSB: Analytic
Difficulty: Simple
Learning Objective: 1
 

3. The death spiral concept refers to the process of continually decreasing selling prices to
meet foreign competition. 
FALSE

AACSB: Analytic
Difficulty: Simple
Learning Objective: 1
 

4. The usual cost objects used in a first-stage product cost allocation are the manufacturing
overhead accounts themselves. 
TRUE

AACSB: Analytic
Difficulty: Moderate
Learning Objective: 2
 

9-1
 Chapter 009 Activity-Based Costing

5. The basic difference between a first-stage cost allocation and a second-stage cost allocation
is that cost pools are not used in first-stage cost allocations. 
FALSE

AACSB: Analytic
Difficulty: Moderate
Learning Objective: 2
 

6. Predetermined overhead rates are used in first-stage cost allocations but not in second-stage
cost allocations. 
FALSE

AACSB: Analytic
Difficulty: Simple
Learning Objective: 2
 

7. In general, variable costs are allocated using a first-stage cost allocation system and fixed
costs are allocated using a second-stage cost allocation system. 
FALSE

AACSB: Analytic
Difficulty: Simple
Learning Objective: 2
 

8. A company that uses a second-stage cost allocation system will have one unique allocation
base for each cost pool. 
TRUE

AACSB: Analytic
Difficulty: Moderate
Learning Objective: 2
 

9-2
 Chapter 009 Activity-Based Costing

9. The single-stage cost allocation system uses a plant wide rate because the cost pool is the
entire plant. 
TRUE

AACSB: Analytic
Difficulty: Simple
Learning Objective: 3
 

10. The department cost allocation method provides more accurate product cost information
for managerial decision-making that the plant wide cost allocation method. 
TRUE

AACSB: Analytic
Difficulty: Simple
Learning Objective: 3
 

11. The plant wide cost allocation method can be used by either a manufacturer or a
merchandiser. 
TRUE

AACSB: Analytic
Difficulty: Simple
Learning Objective: 3
 

12. The plant wide cost allocation method should be used by companies that manufacture
products that are similar and use the same resources. 
TRUE

AACSB: Analytic
Difficulty: Moderate
Learning Objective: 3
 

9-3
 Chapter 009 Activity-Based Costing

13. Activity-based costing (ABC) is a second-stage cost allocation system that (1) allocates
costs to activities and (2) then to products based on their use of the activities. 
TRUE

AACSB: Analytic
Difficulty: Simple
Learning Objective: 4
 

14. The basic difference between the department cost allocation method and activity-based
costing (ABC) is the number of stages involved in allocating costs to products. 
FALSE

AACSB: Analytic
Difficulty: Moderate
Learning Objective: 4
 

15. In general, the cost drivers used in activity-based costing (ABC) cause an activity's costs
to change. 
TRUE

AACSB: Analytic
Difficulty: Simple
Learning Objective: 4
 

16. The best cost drivers are activities that are causally related to the costs being allocated. 
TRUE

AACSB: Analytic
Difficulty: Simple
Learning Objective: 4
 

9-4
 Chapter 009 Activity-Based Costing

17. The first-stage allocation in activity-based costing (ABC) allocates costs to departments

using appropriate cost drivers. 
FALSE

AACSB: Analytic
Difficulty: Moderate
Learning Objective: 4
 

18. Direct labor cost (DLC) and direct labor hours (DLH) are examples of volume-related cost
drivers in the cost hierarchy. 
TRUE

AACSB: Analytic
Difficulty: Moderate
Learning Objective: 4
 

19. The number of products produced is an example of a facility-related cost driver in the cost
hierarchy. 
FALSE

AACSB: Analytic
Difficulty: Simple
Learning Objective: 4
 

20. Activity-based costing (ABC) provides more detailed measures of costs than do plant
wide or department allocation methods. 
TRUE

AACSB: Analytic
Difficulty: Simple
Learning Objective: 6
 

9-5
 Chapter 009 Activity-Based Costing

21. Before using activity-based costing (ABC), managers must apply the cost-benefit
principle to the additional recordkeeping costs associated with ABC. 
TRUE

AACSB: Analytic
Difficulty: Simple
Learning Objective: 6
 

22. In general, traditional product costing methods allocate less cost to low-volume products
and more costs to high-volume products than activity-based costing (ABC). 
TRUE

AACSB: Analytic
Difficulty: Complex
Learning Objective: 6
 

23. Activity-based costing (ABC) uses more overhead accounts than traditional product
costing systems. 
TRUE

AACSB: Analytic
Difficulty: Simple
Learning Objective: 7
 

24. Using direct labor costs to allocate overhead costs in an activity-based costing (ABC)
system will encourage management to reduce labor costs. 
TRUE

AACSB: Analytic
Difficulty: Moderate
Learning Objective: 7
 

9-6
 Chapter 009 Activity-Based Costing

25. In general, low-volume products (and services) have a lower degree of complexity
associated with them. 
FALSE

AACSB: Analytic
Difficulty: Moderate
Learning Objective: 7
 

26. In general, traditional product costing methods have resulted in lower gross margins for
high-volume products and higher gross margins for low-volume products than activity-based
costing (ABC). 
FALSE

AACSB: Analytic
Difficulty: Complex
Learning Objective: 6
 

27. When overhead is applied based on the volume of output, high-volume products tend to
"subsidize" low-volume products. 
TRUE

AACSB: Analytic
Difficulty: Moderate
Learning Objective: 7
 

28. Activity-based costing (ABC) can be applied to administrative activities (e.g., purchasing)

but not to marketing activities. 
FALSE

AACSB: Analytic
Difficulty: Simple
Learning Objective: 8
 

9-7
 Chapter 009 Activity-Based Costing

29. It is possible to apply activity-based costing (ABC) to segments of an organization

without applying it to the entire organization. 
TRUE

AACSB: Analytic
Difficulty: Simple
Learning Objective: 8
 

30. In general, activity-based costing methods result in higher product costs per unit than
plant wide cost allocation methods. 
FALSE

AACSB: Analytic
Difficulty: Moderate
Learning Objective: 8
 
 

Multiple Choice Questions

 

31.  Which of the following statements is (are) true regarding the potential effects of using
reported product costs for decision making?

(A) Traditional product costing systems (e.g., job and process costing) are designed primarily
to accumulate cost information for financial reporting.
(B) Applied manufacturing overhead for product costing purposes may lead to inappropriate
managerial decisions because a single cost driver is used as the allocation base.  
a.  Only A is true
b.  Only B is true.
C.  Both A and B are true.
d.  Neither A nor B is true.

AACSB: Analytic
Difficulty: Simple
Learning Objective: 1
 

9-8
 Chapter 009 Activity-Based Costing

32.  Which of the following statements is (are) false regarding first-stage and second-stage
cost allocation methods?

(A) The basic difference between a first-stage cost allocation and a second-stage cost
allocation is that cost pools are not used in first-stage cost allocations.
(B) Predetermined overhead rates are used in first-stage cost allocations but not in second-
stage cost allocations.  
a.  Only A is false
b.  Only B is false.
c.  Neither A and B nor false.
D.  Both A and B are false.

AACSB: Analytic
Difficulty: Simple
Learning Objective: 2
 

33. Activity-based costing (ABC) is a costing technique that uses a two stage allocation
process. Which of the following statements best describes these two stages? 
A. The costs are assigned to activities, and then to the products based upon their use of the
activities.
b. The costs are assigned to departments, and then to the products based upon their use of
activity resources.
c. Service department costs are allocated to the production departments, and then to the
products based upon their use of the activities.
d. Indirect costs are assigned to activities, and then to the products based upon the direct cost
resources used by the activities.

AACSB: Analytic
Difficulty: Simple
Learning Objective: 2
 

9-9
 Chapter 009 Activity-Based Costing

34. Which of the following statements is true? 

a. One of the lessons learned from activity-based costing (ABC) is that all costs are really a
function of volume.
b. The primary purpose of the plant wide and department allocation methods is allocating
direct costs to specific products.
C. A problem with activity-based costing (ABC) is that it requires more recordkeeping than
other methods.
d. Service department allocations are required for the plant wide and department allocation
methods.

AACSB: Analytic
Difficulty: Simple
Learning Objective: 3
 

35. Cost pools are used with

    
a. 
b. 
c. 
D. 

AACSB: Analytic
Difficulty: Simple
Learning Objective: 3
 

36. A company is considering the use of a single plant wide rate. Under what conditions
would this choice be justified? 
a. The company has many service departments but only one production department.
B. The company produces a few products with similar characteristics in a few departments.
c. The company has no service departments but many production departments.
d. The company produces a wide selection of products in a single production department.

AACSB: Analytic
Difficulty: Moderate
Learning Objective: 3
 

9-10
 Chapter 009 Activity-Based Costing

37. Which of the following should not be used as the allocation base in a company that
appropriately uses a single plant wide rate? 
A. sales volume
b. machine hours
c. material costs
d. direct labor cost
e. direct labor hours

AACSB: Analytic
Difficulty: Simple
Learning Objective: 3
 

38. The electricity used for computerized machinery would be classified as a(n) 

A. volume-related activity.
b. batch-related activity.
c. product-related activity.
d. facility-related activity.

AACSB: Analytic
Difficulty: Simple
Learning Objective: 4
 

39. The number of services provided by an accounting firm would be classified as a(n) 

a. volume-related activity.
b. batch-related activity.
C. product-related activity.
d. facility-related activity.

AACSB: Analytic
Difficulty: Moderate
Learning Objective: 4
 

9-11
 Chapter 009 Activity-Based Costing

40. Activity analysis is one of the first stages in implementing an activity-based costing

system. Which of the following steps in "activity analysis" is usually performed first? 
a. Classify all activities as value added or nonvalue added.
B. Record, from start to finish, the activities used to complete the product or service.
c. Identify the process objectives that are defined by what the customer wants from the
process.
d. Improve the efficiency of all activities and develop plans to eliminate any nonvalued-added
activities.

AACSB: Analytic
Difficulty: Moderate
Learning Objective: 4
 

41. Which of the following costs is not related to a batch-related activity? 

a. Material handling
b. Machine setups
c. Shipping costs
D. Compliance costs

AACSB: Analytic
Difficulty: Moderate
Learning Objective: 4
 

42. Which of the following measures is used by traditional costing systems as an allocation

base for allocating overhead costs to the units produced? 
A. volume-related activities
b. batch-related activities
c. product-related activities
d. facility-related activities

AACSB: Analytic
Difficulty: Simple
Learning Objective: 4
 

9-12
 Chapter 009 Activity-Based Costing

43. Which of the following measures is used by activity-based costing (ABC) systems as an

allocation base for allocating overhead costs to the units produced? 
a. volume-related activities
b. batch-related activities
c. product-related activities
d. facility-related activities
E. all of these are used by ABC systems

AACSB: Analytic
Difficulty: Simple
Learning Objective: 4
 

44. Which of the following statements is (are) true?

(1) Activity-based costs per unit are greater than volume-based costs per unit.
(2) Volume-based costing has typically resulted in lower gross margins for high volume
products and higher gross margins for low volume products. 
a. Only (1) is true.
B. Only (2) is true.
c. Both (1) and (2) are true.
d. Neither (1) nor (2) are true.

AACSB: Analytic
Difficulty: Moderate
Learning Objective: 6
 

45. Volume-based costing allocates indirect product costs based on the volume of output,
using such allocation bases as direct labor hours, machine hours, and the amount of direct
material used in the production process. Activity-based costing (ABC) has consistently shown
that Volume-based costing 
a. overstates high volume products.
b. overstates low volume products.
c. understates high volume products.
d. understates low volume products.
E. More than one of the above is true.

AACSB: Analytic
Difficulty: Moderate
Learning Objective: 6
 

9-13
 Chapter 009 Activity-Based Costing

46. Which of the following statements regarding traditional costing and activity-based costing
is false? 
a. There are more overhead cost pools in ABC systems.
b. There are more cost allocation bases in ABC systems.
c. ABC cost pools are more homogeneous than the cost pools in traditional costing.
D. ABC systems use more first-stage cost allocations than traditional costing.

AACSB: Analytic
Difficulty: Simple
Learning Objective: 6
 

47. Which one of the following accounts is not used in an activity-based costing (ABC)
system? 
a. Materials Inventory
b. Work-in-Process Inventory
c. Finished Goods Inventory
d. Overhead Applied
E. Allocations Incurred

AACSB: Analytic
Difficulty: Simple
Learning Objective: 7
 

48. Companies using activity-based costing (ABC) have learned that costs are a function of 
A. volume and activities.
b. time and complexity.
c. volume and time.
d. resources and time.
e. volume and resources.

AACSB: Analytic
Difficulty: Simple
Learning Objective: 7
 

9-14
 Chapter 009 Activity-Based Costing

  Smelly Perfume Company manufactures and distributes several different products. They
currently use a plantwide allocation method for allocating overhead at a rate of $7 per direct
labor hour. Cindy is the department manager of Department C which produces Products J and
P. Diane is the department manager of Department D which manufactures Product X. The
product costs (per case of 24 bottles) and other information are as follows:

   

49. If Smelly changes its allocation basis to machine hours, what is the total product cost per
case for Product P? 
a. $163.50
b. $144.00
c. $138.15
D. $117.15
e. Some other answer _______________.

Total overhead = $28(300) + $21(500) + $14(600) = $27,300Total machine hours = 4(300) +

2(500) + 3(600) = 4,000Overhead rate = $27,300/4,000 = $6.825/MHProduct cost for P
$72.00 + $31.50 + $6.825(2) = $117.15

AACSB: Analytic
Difficulty: Moderate
Learning Objective: 5
 

9-15
 Chapter 009 Activity-Based Costing

50. Department D has recently purchased and installed new computerized equipment for
Product X. This equipment will increase the overhead costs by $2,700 and decrease labor
costs in Department D by $3.00 per case. Cindy believes that her department will be allocated
some of Department D's overhead if Smelly uses machine hours to allocate overhead. If
Smelly uses departmental rates, what are the product costs per case for Product X assuming
Departments C and D use direct labor hours and machine hours as their respective allocation
bases? 
A. $81.98
b. $79.50
c. $77.48
d. $75.00
e. Some other answer ________________.

$48.00 (materials) + $9.00 (labor) + [(3 $6.825) + ($2,700/600)] = $81.98

AACSB: Analytic
Difficulty: Simple
Learning Objective: 5
 

9-16
 Chapter 009 Activity-Based Costing

  RS Company manufactures and distributes two products, R and S. Overhead costs are
currently allocated using the number of units produced as the allocation base. The controller
has recommended changing to an activity-based costing (ABC) system. She has collected the
following information:

   

51. What is the total overhead allocated to Product R using the current system? 
a. $113,600
b. $130,000
c. $146,400
D. $160,000
e. Some other answer _______________.

$260,000/130,000 = $2.00 per unit$2(80,000) = $160,000

AACSB: Analytic
Difficulty: Simple
Learning Objective: 5
 

52. What is the total overhead per unit allocated to Product R using activity-based costing
(ABC)? 
a. $2.60
b. $2.27
c. $2.00
D. $1.83
e. Some other answer _______________.

($82,000/20)8 + ($48,000/80)56 + ($130,000/130,000)80,000 = $146,400$146,400/80,000 =

$1.83

AACSB: Analytic
Difficulty: Moderate
Learning Objective: 5
 

9-17
 Chapter 009 Activity-Based Costing

  Terri Martin Nerdmeister, CPA provides bookkeeping and tax services to her clients. She
charges a fee of $60 per hour for bookkeeping and $90 per hour for tax services. Martin
estimates the following costs for the upcoming year:

   

Operating profits declined last year and Ms. Martin has decided to use activity-based costing
(ABC) procedures to evaluate her hourly fees. She gathered the following information from
last year's records:

   

53. What is the total cost allocated to the bookkeeping services using activity-based costing? 
a. $24,000
B. $33,000
c. $35,000
d. $44,000
e. Some other answer _______________.

(16,000/2,000)1,200 + (24,000/1,000)400 + (30,000/100)16 + (18,000/2)1 = $33,000

AACSB: Analytic
Difficulty: Moderate
Learning Objective: 5
 

9-18
 Chapter 009 Activity-Based Costing

54. Martin wants her hourly fees for the tax services to be 160% of their activity-based costs.
What is the fee per hour for tax services in the upcoming year? 
a. $70.40
b. $88.00
C. $110.00
d. $118.40
e. Some other answer _______________.

($88,000 $33,000)/800 = $68.75(1.60)($68.75) = $110.00

AACSB: Analytic
Difficulty: Moderate
Learning Objective: 5
 

55. Martin cannot change the hourly fee for the bookkeeping services because of the number
of competing firms in the area. If Martin wants to earn $60,000 in the upcoming year, how
much will she charge per hour for tax services? 
a. $74
b. $90
C. $95
d. $106
e. Some other answer _______________.

[($60)(1,200) + x(800)] $88,000 = $60,000; x = $95.00

AACSB: Analytic
Difficulty: Complex
Learning Objective: 5
 

9-19
 Chapter 009 Activity-Based Costing

56. A major client has requested bookkeeping service. However, Martin is already billing
100% of her capacity (i.e., 2,000 hours per year) and is reluctant to shift 100 hours from her
tax services to meet this client's request. What is the minimum fee per hour that Martin could
charge this client for bookkeeping services and be no worse off than last year? Assume that
activity-based costing (ABC) is used. 
a. $48.75
b. $60.00
c. $81.25
D. $90.00
e. Some other answer _______________.

[($60)(1,200) + $90(800) $88,000 = $56,000[($60)(1,200) + x(100) + $90(700) $88,000

= $56,000; x = $90.00

AACSB: Analytic
Difficulty: Complex
Learning Objective: 5
 

9-20
 Chapter 009 Activity-Based Costing

  Zela Company is preparing its annual profit plan. As part of its analysis of the profitability of
individual products, the controller estimates the amount of overhead that should be allocated
to the individual product lines from the information provided below. (CMA based)

   

57. Under a traditional costing system that allocates overhead on the basis of direct labor
hours, the materials handling costs allocated to one unit of wall mirrors would be 
a. $1,000
B. $500
c. $2,000
d. $5,000
e. some other answer _______________.

$50,000/(200 + 300) = $100[($100(200)]/40 = $500

AACSB: Analytic
Difficulty: Moderate
Learning Objective: 6
 

58. Under an activity-based costing (ABC) system, the materials handling costs allocated to
one unit of wall mirrors would be 
a. $625.00
B. $312.50
c. $833.33
d. $1,000.00
e. some other answer _______________.

$50,000/(5 + 15) = $2,500[$2,500(5)]/40 = $312.50

AACSB: Analytic
Difficulty: Moderate
Learning Objective: 6
 

9-21
 Chapter 009 Activity-Based Costing

59. Under an activity-based costing (ABC) system, the materials handling costs allocated to
one unit of specialty windows would be 
a. $1875.00
B. $937.50
c. $312.50
d. $1,500.00
e. some other answer _______________.

$50,000/(5 + 15) = $2,500[$2,500(15)]/20 = $1,875.00

AACSB: Analytic
Difficulty: Moderate
Learning Objective: 6
 

  The LMN Company recently switched to activity-based costing (ABC) from the department
allocation method. The department method allocated overhead costs at a rate of $60 per
machine hour. The cost accountant for Department XZ has gathered the following data:

   

During April, LMN purchased and used $100,000 of direct materials at $20 per ton. There
were eight (8) production runs using a total of 12,000 machine hours in April. The manager of
Department XZ needed 12 inspections. Actual overhead costs totaled $820,000 for the month.

60. How much overhead costs were applied to the Work-in-Process Inventory during April? 
a. $536,000
b. $720,000
C. $736,000
d. $820,000
e. some other answer _______________.

($100,000/$20)80 + 8($3,750) + $25(12,000) + $500(12) = $736,000

AACSB: Analytic
Difficulty: Moderate
Learning Objective: 5
 

9-22
 Chapter 009 Activity-Based Costing

61. What account would be credited for $400,000 during April? 

A. Material Inventory
b. Work-in-Process Inventory
c. Overhead Incurred
d. Overhead Applied

AACSB: Analytic
Difficulty: Simple
Learning Objective: 7
 

  The Muskego National Bank is considering either a bankwide overhead rate or department
overhead rates to allocate $250,000 of indirect costs. The bankwide rate could be based on
either direct labor hours (DLH) or the number of loans processed. The departmental rates
would be based on direct labor hours for Consumer Loans and a dual rate based on direct
labor hours and the number of loans processed for Commercial Loans. The following
information was gathered for the upcoming period:

   

62. If Muskego uses a bankwide rate based on direct labor hours, what would be the indirect
costs allocated to the Consumer Department? 
a. $100,000
B. $150,000
c. $250,000
d. $350,000
e. some other answer _______________.

$250,000/(9,000 + 6,000) = $16.6667/DLH9,000(16.6667) = $150,000

AACSB: Analytic
Difficulty: Moderate
Learning Objective: 3
 

9-23
 Chapter 009 Activity-Based Costing

63. If Muskego uses a bankwide rate based on the number of loans processed, what would be
the total costs for the Commercial Department? 
a. $50,000
b. $150,000
C. $200,000
d. $250,000
e. some other answer _______________.

$250,000 (400 + 100) = $500 per loan100($500) = $50,000$50,000 + $150,000 = $200,000

AACSB: Analytic
Difficulty: Moderate
Learning Objective: 3
 

64. Management estimates that it costs $500 to analyze and close a commercial loan. This
amount has been included in the $250,000 of indirect costs. How much of the indirect costs
should be allocated to the Commercial Department? 
a. $40,000
b. $50,000
C. $90,000
d. $120,000
e. some other answer _______________.

$250,000 $500(100) = $200,000$200,000/(400 + 100) = $400 per loan$400(100) +

$500(100) = $90,000

AACSB: Analytic
Difficulty: Moderate
Learning Objective: 3
 

9-24
 Chapter 009 Activity-Based Costing

65. Management estimates that it costs $400 to analyze and close a commercial loan. What is
the overhead rate for the Commercial Loan Department, if Muskego allocates the remaining
indirect costs using direct labor hours? 
A. $14.00 per hour plus $400 per loan
b. $16.67 per hour plus $400 per loan
c. $1,000 per loan
d. $500 per loan
e. some other answer _______________.

$250,000 $400(100) = $210,000$210,000/(9,000 + 6,000) = $14.00 per hour

AACSB: Analytic
Difficulty: Complex
Learning Objective: 3
 

66. Multiple (departmental) manufacturing overhead rates are considered preferable to a

single (plant wide) overhead rate when (CMA adapted) 
a. manufacturing is limited to a single product flowing through identical departments in a
fixed sequence.
B. various products are manufactured that do not pass through the same departments or use
the same manufacturing techniques.
c. individual cost drivers cannot accurately be determined with respect to cause-and-effect
relationships.
d. the single or plant wide rate is related to several identified cost drivers.

AACSB: Analytic
Difficulty: Simple
Learning Objective: 3
 

9-25
 Chapter 009 Activity-Based Costing

67. What is the normal effect on the numbers of cost pools and cost assignment bases when an
activity-based costing (ABC) system replaces a traditional costing system? (CPA adapted)

    
a. 
b. 
c. 
D. 

AACSB: Analytic
Difficulty: Simple
Learning Objective: 4
 

68. Which of the following would be a reasonable basis for assigning the materials handling
costs to the units produced in an activity-based costing (ABC) system? 
a. number of production runs per year
B. number of components per completed unit
c. amount of time required to produce one unit
d. amount of overhead applied to each completed unit

AACSB: Analytic
Difficulty: Moderate
Learning Objective: 7
 

9-26
 Chapter 009 Activity-Based Costing

  A company has identified the following overhead costs and cost drivers for the coming year:
(CIA adapted)

   

Budgeted direct labor cost was $100,000 and budgeted direct material cost was $280,000.
The following information was collected on three jobs that were completed during the year:

   

69. If the company uses activity-based costing (ABC), how much overhead cost should be
assigned to Job 101? 
A. $1,300
b. $2,000
c. $5,000
d. $5,600
e. some other answer _______________.

[($20,000/200) 1] + [($130,000/6,500) 20] + [($80,000/8,000) 30] + [($50,000/1,000)

10] = $1,300

AACSB: Analytic
Difficulty: Moderate
Learning Objective: 5
 

9-27
 Chapter 009 Activity-Based Costing

70. If the company uses activity-based costing (ABC), what is the cost of each unit of Job
102? 
A. $340
b. $392
c. $440
d. $520
e. some other answer ______________.

[($20,000/200) 2] + [($130,000/6,500) 10] + [($80,000/8,000) 10] + [($50,000/1,000)

50] = $3,000$12,000 + 2,000 + 3,000 = $17,000$17,000/50 = $340

AACSB: Analytic
Difficulty: Complex
Learning Objective: 5
 

71. The company prices its products at 140% of cost. If the company uses activity-based
costing (ABC), the price of each unit of Job 103 would be 
A. $98
b. $100
c. $116
d. $140
e. some other answer _______________.

[($20,000/200) 4] + [($130,000/6,500) 30] + [($80,000/8,000) 50] + [($50,000/1,000)

10] = $2,000$8,000 + 4,000 + 2,000 = $14,000[$14,000(1.40)]/20= $98

AACSB: Analytic
Difficulty: Complex
Learning Objective: 5
 

9-28
 Chapter 009 Activity-Based Costing

Essay Questions
 
72. Wayne Shen established Windy City Placement Service (WCPS) to provide executive
counseling and job placement services to its clients. Wayne charges a fee of $450.00 per hour
for each service. The revenues and costs for the year are shown in the following income
statement:

   

Wendy has kept good records of the following data for cost allocation purposes:

   

Required:
a. Complete the income statement using activity-based costing and WCPSs three cost drivers.
b. Recompute the income statement using direct labor-hours as the only allocation base (220
hours for teen counseling; 450 hours for executive coaching).
c. How might Wayne's decisions be altered if he were to allocate all overhead costs using
direct labor-hours?
d. Under what circumstances would the labor-based allocation and activity-based costing
(using Wayne's three cost drivers) result in similar profit results? 

9-29
 Chapter 009 Activity-Based Costing

   
a
$4,000 per client = $60,000/15 clients
b
$144 per visit = $54,000/375 visits
c
$12.50 per computer hour = $30,000/2,400 hours
d
$36,000 = $4,000 per client     9 clients
e
$21,600 = $144 per hour     150 visits
f
$16,875 = $12.50 per computer hour     1,350 hours

   
a
$301,500 revenue/$450 per hour = 670 hours of labor
$214.925 per labor hour = $144,000 of expenses/670 hours
b
$47,284 = $214.925 per labor hour     220 hours of labor

c. Under labor-based costing, teen counseling and executive coaching appear equally
profitable (relative to revenues), so Wayne will not emphasize one or the other. However,
using ABC, Windy City Placement Service appears to be much more profitable.
d. ABC and traditional costing systems generally yield comparable product-line profits when
overhead is a small portion of costs, or when cost drivers are highly correlated with the
volume-related allocation base. In this case, labor hours were distributed 32.8% to Executive
Counseling and 67.2% to Placement Service. If Wayne's three cost drivers were each also
distributed 32.8% to Executive Counseling and 67.5% to Placement Service, the labor-hour
allocation and ABC would have been identical.

AACSB: Analytic
Difficulty: Complex
Learning Objective: 5
 

9-30
 Chapter 009 Activity-Based Costing

73. Delta Parts, Inc., recently switched to activity-based costing from the department
allocation method. The Fabrication Department manager has estimated the following cost
drivers and rates:

   

Direct materials costs were $420,000, and direct labor costs were $210,000 during July, when
the Fabrication Department handled 5,250 pounds of materials, made 1,050 inspections, had
56 setups, and ran the machines for 21,000 hours.
Required
Use T-accounts to show the flow of materials, labor, and overhead costs from the four
overhead activity centers through work-in-process inventory and out to finished goods
inventory. Use the accounts materials inventory, wages payable, work-in-process inventory,
finished goods inventory, and four overhead applied accounts. 

9-31
 Chapter 009 Activity-Based Costing

   

AACSB: Analytic
Difficulty: Complex
Learning Objective: 5
 

9-32
 Chapter 009 Activity-Based Costing

74. Platt Sports Products manufactures and distributes three types of golf clubs: beginners,
intermediate, and advanced. The materials used in these clubs increases in each level and
allows for more precise balancing and longer wear. Production is highly automated for the
beginners' clubs, whereas the intermediate and advanced clubs require a varying degree of
labor, depending on the intricacy of the balancing process. Platt applies all indirect costs
according to a predetermined rate based on direct labor hours. A consultant recently suggested
that Platt switch to an activity-based costing (ABC) system, and identified the following cost
breakdown for the upcoming year:

   

In addition, management estimates 50,000 direct labor hours will be used in the upcoming
year at a rate of $14 per hour.

Assume that the following activity took place in the first month of the upcoming year:

   

Required:
(A) Compute the production costs for each product in the first month of the upcoming year
using direct labor hours as the allocation base.
(B) Compute the production costs for each product in the first month of the upcoming year
using machine hours as the allocation base.
(C) Compute the production costs for each product in the first month of the upcoming year
using activity-based costing. 

9-33
 Chapter 009 Activity-Based Costing

(A) Total estimated costs = $1,053,500

$1,053,500/50,000 = $21.07/DLH

   

(B) $1,053,500/20,000 - $52.675/MH

   

Activity-based rate:

   

   

AACSB: Analytic
Difficulty: Moderate
Learning Objective: 2
Learning Objective: 3
 

9-34
 Chapter 009 Activity-Based Costing

75. ABC Enterprises manufactures and distributes three products; A, B, and C. Over the past
few years, ABC has gradually automated its operations. As a result, total direct labor hours
have substantially declined, while total manufacturing overhead costs have significantly
increased. Because of these changes, ABC wants to evaluate its product costs using activity-
based costing procedures. The following information has been gathered from the company's
internal records and budgetary system:

   

   

ABC Enterprises determines its selling price per unit using a 40% markup on traditional
product cost.

Required:
(A) Use traditional costing procedures and complete the segmented income statement
provided below, using direct labor hours to assign overhead costs to products.

   

(B) Use activity-based costing procedures and complete the segmented income statement
provided below.

9-35
 Chapter 009 Activity-Based Costing

    

9-36
 Chapter 009 Activity-Based Costing

(A) Use traditional costing procedures and complete the segmented income statement
provided below.

Overhead rate = $360,000/6,400 = $56.25/DLH

   

(B) Use activity-based costing procedures complete the segmented income statement provided
below. Use the sales figures from part A.
Activity-based rates = $1,250/part; $5,625/run; $2,500/inspection; $625/sales call; $7.50/unit

   

AACSB: Analytic
Difficulty: Moderate
Learning Objective: 3
Learning Objective: 4
 

9-37