Activity-Based Costing: True / False Questions

Chapter 09
Activity-Based Costing

True / False Questions

1. The death spiral can occur even in firms with increasing demand.

True False

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

True False

3. The basic approach in product costing is to allocate costs in the cost pools to the individual cost objects,
which are the products or services of interest.

True False

4. 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.

True False

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

True False

6. The plantwide allocation concept cannot be used in nonmanufacturing organizations.

True False

7. The single-stage cost allocation system uses a plantwide rate because the cost pool is the entire plant.

True False

8. The department cost allocation method provides more accurate product cost information for managerial
decision-making than the plantwide cost allocation method.

True False

9-1
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
9. The plantwide cost allocation method should be used by companies that manufacture products that are
similar and use the same resources.

True False

10. Using the department allocation method, a company establishes a separate overhead allocation rate for each
department.

True False

11. If a company manufactures diverse products using different sets of resources in a plant, it is best to use a
plantwide allocation rate.

True False

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

True False

13. 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.

True False

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

True False

15. Any discrete task that an organization undertakes to make or deliver a product or service is known as a
stage.

True False

16. Activity-based costing is based on the concept that products produce activities and activities produce
resources.

True False

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

True False

18. A cost hierarchy classifies cost drivers by general dimensions or levels of activity.

True False

9-2
19. If a company has identified three major activities as setting up, handling material, and assembling, possible
cost drivers would most likely be set-up hours, production runs, and number of shipments, respectively.

True False

20. When applying activity based costing, the first step would be to compute the cost driver rates.

True False

21. Activity-based costing (ABC) provides more detailed measures of costs than do plantwide or department
allocation methods.

True False

22. Activity-based costing is so beneficial because it provides more information about product costs but
requires less recordkeeping.

True False

23. Installing activity-based costing requires teamwork among employees and departments within an
organization.

True False

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

True False

25. 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 False

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

True False

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

True False

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

True False

9-3
29. The flow of activity-based costs through the ledger is the same as their flow using traditional methods
except that the accounts are based on activities, not departments.

True False

30. Activity-based costs are a function of both volume and complexity.

True False

31. Activity-based costing (ABC) can be applied to administrative activities (e.g., purchasing) but not to
marketing activities.

True False

32. Within a purchasing department, the activity of placing orders could best be costed by a cost driver of the
potential number of vendors.

True False

33. Individual ABC systems do not vary because there is one ABC method.

True False

34. It is possible to apply activity-based costing (ABC) to segments of an organization without applying it to
the entire organization.

True False

35. Time-driven activity based costing (TDABC) is more costly to implement than an unmodified activity-
based costing system.

True False

36. Time equations can be used in extended time-driven activity based costing (TDABC) systems to allow
managers to adjust the times for orders with different characteristics.

True False

Multiple Choice Questions

9-4
37. When product costs are used for decision-making, what assumption is most likely to distort the decisions?

A. There is a proportionality of overhead costs and output, regardless of whether a product is dropped or
not.
B. Some overhead estimates can decrease when a product is dropped.
C. Some overhead costs could be fixed when a product is dropped.
D. The cost accounting system treats all overhead as if it were variable with respect to the allocation base.

38. When a department or product line is dropped, the common fixed costs which had been allocated to that
department:

A. are eliminated.
B. become variable costs.
C. are allocated to the remaining departments or product lines.
D. become sunk costs.

39. Traditional product costing systems (e.g., job and process costing) are designed primarily:

A. To derive an allocation base.

B. To ensure that a single cost driver allocation base leads to appropriate managerial decisions.
C. To accumulate cost information for financial reporting.
D. To accumulate cost information for managerial decisions.

40. A two-stage system first allocates costs to:

A. products or services and then allocates costs to departments or activities.

B. the cost driver and then allocates costs to the cost hierarchy.
C. a product line and then allocates costs to the department.
D. departments or activities and then allocates costs to products or services.

41. First stage cost objects do not include:

A. Supplies
B. Depreciation
C. Maintenance and Repair Costs
D. Direct materials

9-5
42. The basic difference between a first-stage cost allocation and a second-stage cost allocation is that:

A. 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.
C. the first stage prohibits firms from aligning the allocation of costs with the use of resources.
D. when used in an ABC system, the first stage assigns costs to activities.

43. 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.

44. Cost pools are used with:
Plantwide Rates Department Rates

A. Yes No
B. No Yes
C. No No
D. Yes Yes

A. Option A
B. Option B
C. Option C
D. Option D

45. Which of the following should not be used as the allocation base in a company that appropriately uses a
single plantwide rate?

A. Sales volume.
B. Machine hours.
C. Material costs.
D. Direct labor cost.

9-6
46. Which of the following would be least likely to be used as an allocation base in a company that applies a

A. Machine hours.
B. Direct material costs.
C. Direct labor cost.
D. Direct labor hours.

47. Multiple (departmental) manufacturing overhead rates are considered preferable to a single (plantwide)
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 plantwide rate is related to several identified cost drivers.

48. The classification of cost drivers into general levels of activity, volume, batch, product, and so on is known
as:

A. cost allocation.
B. value-added costing.
C. a cost hierarchy.
D. cost driver management.

49. 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 plantwide 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. Direct cost allocations are required for the plantwide and department allocation methods.

50. The electricity used for production machinery would be classified as a:

A. volume-related activity.
B. batch-related activity.
C. product-related activity.
D. facility-related activity.

9-7
51. The number of services provided by an accounting firm would be classified as an:


52. 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.

53. Which of the following would not be a batch-related activity?

A. Setting up a machine for a new production run.

B. Performing 100% inspection.
C. Purchasing materials.
D. Processing a customer order.

54. 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.

55. 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?

D. Need-related activities.

9-8
56. What is the typical 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)
Cost Pools Cost Assignment Bases

A. No effect No effect
B. Increase No effect
C. No effect Increase
D. Increase Increase

A. Option A
B. Option B
C. Option C
D. Option D

57. Personnel administration is an example of a:

A. unit-level activity.
B. batch-level activity.
C. product-level activity.
D. organization-sustaining activity.

58. Which of the following activities would be classified as a batch-level activity?

A. Setting up equipment.
B. Designing a new product.
C. Training employees.
D. Milling a part required for the final product.

9-9
59. Would the following activities at a manufacturer of canned soup be best classified as unit-level, batch-level,
product-level, or organization-sustaining activities?
Researching new Shipping orders to grocery

recipes stores
A. Unit Unit
B. Batch Batch
C. Product Unit
D. Product Batch

A. Option A
B. Option B
C. Option C
D. Option D

60. Property taxes are an example of a cost that would be considered to be:

A. Unit-level.
B. Batch-level.
C. Product-level.
D. Organization-sustaining.

61. Product costs are computed by:

A. dividing the cost driver rate by the number of units of the cost driver in each product.
B. multiplying the cost driver rate by the number of units of the cost driver in each product.
C. adding the cost driver rates of all products.
D. averaging the plantwide cost driver rate with the cost driver for each product.

62. Which of the following is not a step involved in activity-based costing?

A. Identify the activities that consume resources and assign costs to those activities.
B. Determine how to reduce the costs of making products by cutting activities.
C. Assign costs to products by multiplying the cost driver rate by the volume of cost driver units consumed
by the product.
D. Compute a cost rate per cost driver unit or transaction.

9-10
63. Which of the following statements is(are) true?

A. Activity-based costs per unit are always greater than volume-based costs per unit.
B. Volume-based costing has typically resulted in lower gross margins for high volume products and
higher gross margins for low volume products.
C. Different cost allocation methods are constructed so that they typically result in the same or similar
estimates of how much it costs to make a product.
D. Activity-based costing typically provides less information about product costs while requiring more
recordkeeping.

64. Volume-based costing allocates indirect product costs based on the volume of output, using such allocation
bases as direct labor hours, machine hours, or the amount of direct material used in the production process.
Activity-based costing (ABC) has consistently shown that Volume-based costing ___________ the cost of
high volume products and ______________ the cost of low volume products.
High Volume Products Low Volume Products

A. Overstates Overstates
B. Overstates Understates
C. Understates Overstates
D. Understates Understates

A. Option A
B. Option B
C. Option C
D. Option D

65. 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.

66. Activity-based costing provides:

A. more detailed measures of costs than do plantwide or department allocation methods.

B. less detailed measures of costs than do plantwide or department allocation methods.
C. more detailed measures of costs than do plantwide allocations but less than department allocation
methods.
D. less detailed measures of costs than do plantwide allocations but more than department allocation
methods.

9-11
67. 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. Allocations Incurred.

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.

69. Which of the following statements is true regarding activity based costing in administration?

A. The principles of ABC are different when applied to administrative services.

B. ABC in administration involves five steps.
C. All cost drivers in an administrative system will be time related.
D. Activity-based costing for administrative services follows the same four-step procedure described for
manufacturing.

70. Which of the following would be the most appropriate activity and cost drivers pairing for a Purchasing
Department?

A. Activity: Placing orders - Possible Cost Driver: Number of orders

B. Activity: Placing orders - Possible Cost Driver: Number of new hires
C. Activity: Placing orders - Possible Cost Driver: Frequency of audits
D. Activity: Placing orders - Possible Cost Driver: Employee turnover rate

71. Which of the following statements is true regarding time-driven activity based costs?

A. A manager needs to determine the cost of resources for each individual item produced.
B. This approach requires interviews and surveys from multiple managers and employees.
C. It is more costly than the unmodified ABC system.
D. The cost of the resources supplied to a department and the time it takes to complete the various activities
of the department are used.

9-12
72. Which of the following statements is true regarding time equations used in time-driven activity based
costing?

A. Time equations cannot adjust extra time for new vendors.

B. Time equations allow managers to adjust the times for orders with different characteristics.
C. Time equations cannot be used where there is a maximum size of an order that can be inspected or
transported to the warehouse.
D. Time equations are only used as part of unmodified ABC systems.

73. Flawless Cosmetic Company manufactures and distributes several different products. The company
currently uses a plantwide allocation method for allocating overhead at a rate of $7 per direct labor hour.
Loren is the department manager of the Makeup Department which produces Products - Concealer (C) and
Glow Cream (GC). Jennifer is the department manager of the Hair Care Department which manufactures
Product - Shampoo (S). The product costs (per case of 24 bottles) and other information are as follows:
Products
C GC S
Direct materials $100.00 $72.00 $48.00
Direct labor 42.00 31.50 12.00
Overhead 28.00 21.00 14.00
$170.00 $124.50 $74.00
Machine hours 4 2 3
Number of cases (per year) 300 500 600
Based on this information, if Flawless changes its allocation basis to machine hours, what is the overhead
rate per machine hour?

A. $3.00
B. $2.00
C. $21.00
D. $6.825

9-13
Products
C GC S
Direct labor 42.00 31.50 12.00
Overhead 28.00 21.00 14.00
$170.00 $124.50 $74.00
Machine hours 4 2 3
If Flawless changes its allocation basis to machine hours, what is the total product cost per case for
Product GC?

A. $163.50
B. $144.00
C. $138.15
D. $117.15

9-14
Products
C GC S
Direct labor 42.00 31.50 12.00
Overhead 28.00 21.00 14.00
$170.00 $124.50 $74.00
Machine hours 4 2 3
Product C?

A. $161.50.
B. $169.30.
C. $182.44.
D. $183.36.

76. Banc Corp. Trust is considering either a bankwide overhead rate or department overhead rates to allocate
$396,000 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:
Department DLH Loans Processed Direct Costs

Consumer 14,000 700 $280,000
Commercial 8,000 300 $180,000
If Banc Corp. Trust uses a bankwide rate based on direct labor hours, what would be the indirect costs
allocated to the Consumer Department?

A. $49,000.
B. $252,000.
C. $198,000.
D. $396,000.

9-15

Consumer 14,000 700 $280,000
Commercial 8,000 300 $180,000
allocated to the Commercial Department?

A. $144,000.
B. $138,000.
C. $180,000.
D. $148,500.


Consumer 14,000 700 $280,000
Commercial 8,000 300 $180,000
If Banc Corp. Trust uses a bankwide rate based on the number of loans processed, what would be the total
costs for the Commercial Department?

A. $118,800.
B. $180,000.
C. $298,800.
D. $318,000.

9-16

Consumer 14,000 700 $280,000
Commercial 8,000 300 $180,000
If Banc Corp. Trust uses a bankwide rate based on the number of loans processed, what would be the total
costs for the Consumer Department?

A. $280,000.
B. $256,800.
C. $576,000.
D. $557,200.


Consumer 14,000 700 $280,000
Commercial 8,000 300 $180,000
Banc Corp. Trust estimates that it costs $500 to analyze and close a commercial loan. This amount has
been included in the $396,000 of indirect costs. How much of the $396,000 indirect costs should be

A. $396,000.
B. $246,000.
C. $223,800.
D. $216,000.

9-17

Consumer 14,000 700 $280,000
Commercial 8,000 300 $180,000

A. $246,000.
B. $280,000.
C. $172,200.
D. $116,000.


Consumer 14,000 700 $280,000
Commercial 8,000 300 $180,000
Banc Corp. Trust estimates that it costs $400 to analyze and close a commercial loan. What is the overhead
rate if Banc Corp. Trust allocates the remaining indirect costs using direct labor hours?

A. $12.55 per hour.

B. $18.00 per hour.
C. $1,000 per loan.
D. $800 per loan.

9-18
83. Vanguard Corporation has provided the following data from its activity-based costing system:
Activity Cost Pool Total Cost Total Activity

Assembly $942,480 66,000 machine-hours
Processing orders $85,050 1,800 orders
Inspection $126,854 1,820 inspection-hours
The company makes 430 units of product O37W a year, requiring a total of 690 machine-hours, 40 orders,
and 10 inspection-hours per year. The product's direct materials cost is $35.72 per unit and its direct labor
cost is $29.46 per unit.
According to the activity-based costing system, the average cost of product O37W is closest to:

A. $94.11 per unit.

B. $89.72 per unit.
C. $65.18 per unit.
D. $92.49 per unit.

84. Pinnocle Corporation has provided the following data from its activity-based costing system:
Activity Cost
Total Cost Total Activity
Pool
Assembly $1,114,920 57,000 machine-hours
The company makes 430 units of product S78N a year, requiring a total of 1,120 machine-hours, 40
orders, and 30 inspection-hours per year. The product's direct materials cost is $49.81 per unit and its direct
labor cost is $12.34 per unit. The product sells for $129.90 per unit.
According to the activity-based costing system, the product margin for product S78N is:

A. $4,116.50.
B. $29,132.50.
C. $6,180.50.
D. $5,161.30.

9-19
85. Donnati Corporation has provided the following data from its activity-based costing system:

Data concerning one of the company's products, Product A43V, appear below:
Selling price per unit $124.60

Direct materials cost per unit $22.08
Direct labor cost per unit $45.77
Annual unit production and sales 210
Annual machine-hours 320
Annual orders 80
Annual inspection-hours 10
According to the activity-based costing system, the product margin for product A43V is:

A. $2,891.90.
B. $5,931.30.
C. $11,917.50.
D. $2,236.90.

86. Allure Company manufactures and distributes two products, M and XY. 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:
Activity Cost Driver Amount M XY

Production Number of
$82,000 8 12
setups setups
Material Number of
48,000 56 24
handling parts
Packaging Number of
130,000 80,000 50,000
costs units
$260,000
What is the total overhead allocated to Product M using the current system?

A. $113,600.
B. $130,000.
C. $146,400.
D. $160,000.

9-20

$82,000 8 12
setups setups
Material Number of
48,000 56 24
handling parts
Packaging Number of
130,000 80,000 50,000
costs units
$260,000
What is the total overhead per unit allocated to Product M using activity-based costing (ABC)?

A. $2.60.
B. $2.27.
C. $2.00.
D. $1.83.


$82,000 8 12
setups setups
Material Number of
48,000 56 24
handling parts
Packaging Number of
130,000 80,000 50,000
costs units
$260,000
What is the total overhead allocated to Product XY using the current system?

A. $113,600.
B. $100,000.
C. $146,400.
D. $160,000.

9-21

$82,000 8 12
setups setups
Material Number of
48,000 56 24
handling parts
Packaging Number of
130,000 80,000 50,000
costs units
$260,000
What is the total overhead per unit allocated to Product XY using activity-based costing (ABC)?

A. $2.60.
B. $2.27.
C. $2.00.
D. $1.83.

90. The Mega Construction 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 the Finishing Department has gathered the following data:
Activity Cost Drivers Rate

Material handling Tons of material handled $80
Machine setups Number of production runs 3,750
Utilities Machine hours 25
Quality control Number of inspections 500
During April, Mega 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 the Finishing Department
needed 12 inspections. Actual overhead costs totaled $820,000 for the month.
How much overhead costs were applied to the Work-in-Process Inventory during April using activity-
based costing?

A. $536,000.
B. $720,000.
C. $736,000.
D. $820,000.

9-22
91. The Mega Construction 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 the Finishing Department has gathered the following data:

During April, Mega 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 the Finishing Department
needed 12 inspections. Actual overhead costs totaled $820,000 for the month.
How much overhead costs were applied to the Work-in-Process Inventory during April using traditional
costing?

A. $536,000.
B. $720,000.
C. $736,000.
D. $820,000.

9-23
92. Markham Company makes two products: Basic Product and Deluxe Product. Annual production and sales
are 1,700 units of Basic Product and 1,100 units of Deluxe Product. The company has traditionally used
direct labor-hours as the basis for applying all manufacturing overhead to products. Basic Product requires
0.3 direct labor hours per unit and Deluxe Product requires 0.6 direct labor hours per unit. The total
estimated overhead for next period is $98,785.
The company is considering switching to an activity-based costing system for the purpose of computing
unit product costs for external reports. The new activity-based costing system would have three overhead
activity cost pools—Activity 1, Activity 2, and General Factory—with estimated overhead costs and
expected activity as follows:
Estimated Expected Activity

Activity Overhead Basic Deluxe
Total
Cost Pool Costs Product Product
Activity 1 $30,528 1,000 600 1,600
Activity 2 17,385 1,700 200 1,900
General
50,872 510 660 1,170
Factory
Total $98,785
(Note: The General Factory activity cost pool's costs are allocated on the basis of direct labor hours.)
The predetermined overhead rate under the traditional costing system is closest to:

A. $9.15.
B. $43.48.
C. $84.43.
D. $19.08.

9-24

Total
Activity 1 $30,528 1,000 600 1,600
Activity 2 17,385 1,700 200 1,900
General
50,872 510 660 1,170
Factory
Total $98,785
The overhead cost per unit of Deluxe Product under the traditional costing system is closest to:

A. $50.66.
B. $5.49.
C. $26.09.
D. $11.45.

9-25

Total
Activity 1 $30,528 1,000 600 1,600
Activity 2 17,385 1,700 200 1,900
General
50,872 510 660 1,170
Factory
Total $98,785
The predetermined overhead rate (i.e., activity rate) for Activity 2 under the activity-based costing system
is closest to:

A. $9.15.
B. $51.99.
C. $86.93.
D. $10.23.

9-26

Total
Activity 1 $30,528 1,000 600 1,600
Activity 2 17,385 1,700 200 1,900
General
50,872 510 660 1,170
Factory
Total $98,785
The overhead cost per unit of Deluxe Product under the activity-based costing system is closest to:

A. $50.66.
B. $26.09.
C. $35.28.
D. $38.16.

9-27
96. Chang Manufacturing Corporation has a traditional costing system in which it applies manufacturing
overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The
company has two products, Plain and Fancy, about which it has provided the following data:
Plain Fancy
Direct materials per unit $24.50 $59.30
Direct labor per unit $5.00 $25.00
Direct labor-hours per unit 0.20 1.00
Annual production 45,000 15,000
The company's estimated total manufacturing overhead for the year is $985,440 and the company's
estimated total direct labor-hours for the year is 24,000.
The company is considering using a variation of activity-based costing to determine its unit product costs
for external reports. Data for this proposed activity-based costing system appear below:
Activities and Activity Estimated Overhead

Measures Cost
Supporting direct labor (DLHs) $384,000
Setting up machines (setups) 255,840
Parts administration (part types) 345,600
Total $985,440
Expected Activity
Plain Fancy Total
DLHs 9,000 15,000 24,000
Setups 1,032 936 1,968
Part types 624 240 864
The manufacturing overhead that would be applied to a unit of Plain under the company's traditional
costing system is closest to:

A. $8.21.
B. $3.20.
C. $11.73.
D. $19.94.

9-28
Plain Fancy

Measures Cost
Parts administration (part types) 345,600
Total $985,440
Expected Activity
Plain Fancy Total
DLHs 9,000 15,000 24,000
Setups 1,032 936 1,968
The manufacturing overhead that would be applied to a unit of product Fancy under the activity-based

A. $71.57.
B. $41.06.
C. $8.11.
D. $30.51.

9-29
98. Russell Manufacturing Corporation has a traditional costing system in which it applies manufacturing
company has two products, Slow and Fast, about which it has provided the following data:
Slow Fast
Direct materials
$14.10 $43.40
per unit
Direct labor per
$3.20 $25.60
unit
Direct labor-hours
0.20 1.60
per unit
The company's estimated total manufacturing overhead for the year is $1,526,700 and the company's

Measures Cost
Assembling products (DLHs) $720,000
Preparing batches (batches) 362,700
Product support (product
444,000
variations)
Total $1,526,700
Expected Activity
Slow Fast Total
DLHs 6,000 24,000 30,000
Batches 1,380 1,410 2,790
Product variations 570 540 1,110
The manufacturing overhead that would be applied to a unit of product Slow under the company's
traditional costing system is closest to:

A. $18.38.
B. $28.56.
C. $10.18.
D. $4.80.

9-30
Slow Fast
Direct materials
$14.10 $43.40
per unit
Direct labor per
$3.20 $25.60
unit
Direct labor-hours
0.20 1.60
per unit

Measures Cost
444,000
variations)
Total $1,526,700
Expected Activity
Slow Fast Total
DLHs 6,000 24,000 30,000
Batches 1,380 1,410 2,790
The manufacturing overhead that would be applied to a unit of product Fast under the activity-based

A. $81.42.
B. $65.02.
C. $146.44.
D. $12.22.

9-31
100. Upton Manufacturing Corporation has a traditional costing system in which it applies manufacturing
company has two products, Long and Short, about which it has provided the following data:
Long Short

Measures Cost
Direct labor support (DLHs) $1,740,000
Part administration (part types) 1,008,000
Total $3,170,400
Expected Activity
Long Short Total
DLHs 36,000 24,000 60,000
Setups 1,140 1,500 2,640
Part types 900 2,460 3,360
The unit product cost of product Long under the company's traditional costing system is closest to:

A. $54.20.
B. $73.27.
C. $64.25.
D. $31.00.

9-32
Long Short

Measures Cost
Part administration (part types) 1,008,000
Total $3,170,400
Expected Activity
Long Short Total
DLHs 36,000 24,000 60,000
Setups 1,140 1,500 2,640
Part types 900 2,460 3,360
Unit product cost of Product Short under the activity-based costing system is closest to:

A. $266.10.
B. $98.70.
C. $167.40.
D. $225.52.

9-33
102. Cassidy Manufacturing Corporation has a traditional costing system in which it applies manufacturing
company has two products, VIP and Kommander, about which it has provided the following data:
VIP Kommander

Measures Cost
1,134,000
variations)
Total $2,449,440
Expected Activity
VIP Kommander Total
DLHs 24,000 30,000 54,000
Batches 1,458 1,026 2,484
Product variations 2,592 1,188 3,780
The unit product cost of Product VIP under the company's traditional costing system is closest to:

A. $53.30.
B. $70.32.
C. $43.10.
D. $78.57.

9-34
VIP Kommander

Measures Cost
1,134,000
variations)
Total $2,449,440
Expected Activity
VIP Kommander Total
DLHs 24,000 30,000 54,000
Batches 1,458 1,026 2,484
The unit product cost of Product Kommander under the activity-based costing system is closest to:

A. $204.82.
B. $68.70.
C. $182.80.
D. $114.10.

9-35
104. Miracle Consulting Corporation has its headquarters in Chicago and operates from three branch offices in
Portland, Dallas, and Miami. Two of the company's activity cost pools are General Service and Research
Service. These costs are allocated to the three branch offices using an activity-based costing system.
Information for next year follows:
Activity Cost Estimated

Activity Measure
Pool Cost
% of time devoted to
General service $700,000
branch
Research
Computer time $140,000
service
Estimated branch data for next year is as follows:
% of time Computer time

Portland 30% 200,000 minutes
Dallas 60% 150,000 minutes
Miami 10% 50,000 minutes
How much of the headquarters cost allocation should the Dallas office expect to receive next year?

A. $280,000.
B. $409,500.
C. $472,500.
D. $504,000.

105. A basic assumption of activity based costing (ABC) is that:

A. All manufacturing costs vary directly with units of production.

B. Products or services require the performance of activities and activities consume resources.
C. Only costs that respond to unit-level drivers are product costs.
D. Only variable costs are included in the activity cost pools.

106. In an activity-based costing (ABC) system, what should be used to assign departmental manufacturing
overhead costs to products produces in varying lot sizes?

A. A product's ability to bear cost allocations.

B. A single cause-and-effect relationship.
C. Multiple cause-and-effect relationships.
D. Relative net sales values of the products.

9-36
107. Mission 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)
Wall Specialty

Mirrors Windows
Units Produced 40 20
Material moves per product
5 15
line
Direct labor hours per
200 300
product line
Budgeted material handling costs: $50,000
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.

Wall Specialty

Mirrors Windows
5 15
line
200 300
product line
Under a traditional costing system that allocates overhead on the basis of direct labor hours, the materials
handling costs allocated to one unit of specialty windows would be:

A. $1,500.
B. $500.
C. $2,000.
D. $5,000.

9-37
Wall Specialty

Mirrors Windows
5 15
line
200 300
product line
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.

Wall Specialty

Mirrors Windows
5 15
line
200 300
product line
Under an activity-based costing (ABC) system, the materials handling costs allocated to one unit of
specialty windows would be:

A. $1,875.00.
B. $937.50.
C. $312.50.
D. $1,500.00.

9-38
Essay Questions

111. Falcon Company manufactures and sells two models of a computer tablets. The Basic Model is has limited
networking capability while the Explorer Model has significantly more features. The tablets are produced
to order and the company has no inventories at the end of the year.
The cost accounting system at Falcon allocates overhead to products based on direct-labor cost. Overhead
in year 1, which just ended, was $4,012,500. Other data for year 1 for the two products follow:
Basic Model Explorer Model

(20,000 units) (3,000 units)
Sales revenue $6,600,000 $3,645,000
Direct materials 3,200,000 450,000
Direct labor 1,600,000 675,000
Required:
a. Compute product line profits for the Basic Model and the Explorer Model for year 1.
b. A study of overhead shows that without the Basic Model, overhead would fall to $2,750,000. Assume
all other revenues and costs would remain the same for the Explorer Model in year 2. Compute product
line profits for the Explorer Model in year 2 assuming the Basic Model was not produced or sold.

9-39
112. Brenda's Big Burgers, a small hamburger restaurant and take-out drive-through, has identified the
following resources that it uses in its business:
Required:
Fill in the chart above indicating the activity level of each of these costs:
Unit- Batch- Product- Facility-

level level level level
A. Bread for burger

buns
B. Take-out bags
assuming one per
customer order
C. Ground sirloin
D. Mayonnaise,
catsup, pickles, and
onions
E. Salary of the

restaurant manager
F. Restaurant rent
G. Workers hourly

wages
H. Advertising and
coupons for Brenda’s
Colossal Burger
I. Utilities
J. Brenda’s Buy- Any
One Burger and Get

one Free Burger
Promotion

9-40

113. Conway Mountain Analysis offers agriculture and environmental assays. Its Soil Division performs testing
on soil (S) as well as examines for the presence of pesticide residue (PR). Aggregated operating costs for
the division are $1,050,000 based on a single overhead pool at a rate of $70 per testing hour. S testing uses
5,000 hours and PR uses 10,000 hours. The company is trying to determine whether a better costing
structure can be established. As such the controller identifies the following costs.
(1) Salaries and wages of laboratory techs are $600,000 based on 45% to S testing and 55% to PR testing.
(2) Equipment related overhead like depreciation, maintenance, utilities, and insurance amount to
$150,000, with a cost driver of number of test hours.
(3) Setup costs are $120,000 assigned on 10,000 total setup hours. S testing requires 4,200 of the setup
hours and PR testing requires 5,800 of the setup hours.
(4) Costs of test designs amount to $180,000, based on the time required to design the tests. S testing
requires 3,250 hours and P testing requires 1,750 hours.
Required:
Classify (1) through (4) above as output-, batch-, product-, or facility-level costs.

9-41
114. Conform Foam Products produces different kinds of industrial packing materials, all in one manufacturing
facility. They have identified four activities for their costing system:
Materials management—allocated by number of purchase orders

Chemical processing—allocated on metric tons
Molding—allocated on direct labor hours
Packaging—allocated by number of units produced
The activity rates are as follows:
Materials management $10.00 Per purchase order

Chemical processing $6.50 Per metric ton
Molding $23.50 Per direct labor hour
Packaging $0.25 Per unit
Engineering design shows that the order will require direct material worth $775, direct labor cost being
$125, require 5 purchase orders to be placed, use 6 metric tons of chemical base, need 12 direct labor
hours. The size of the order is to produce 5,000 units of product.
Required:
(1) Calculate the overhead cost of the order.

(2) Calculate total cost of production of the order.

9-42
115. Blalock Company manufactures and distributes several different products. The company currently uses a
plantwide allocation method for allocating overhead at a rate of $10 per direct labor hour. Department A
produces Products #101X and #102Y. Department A has $262,000 in traceable overhead. Department B
manufactures Product #103Z. Department B has $128,000 in traceable overhead. The product costs (per
unit) and other information are as follows:
Products
101X 102Y 103Z
Direct
$60.00 $58.00 $46.00
materials
Direct
42.00 31.50 12.00
labor
Overhead 40.00 30.00 20.00
$142.00 $119.50 $78.00
Machine
hours (per 4 2 3
unit)
Number of
cases (per 3,000 5,000 6,000
year)
Required:
a. If Blalock changes its allocation basis to machine hours, what is the total product cost per unit for
Product 101X, 102Y, and 103Z?
b. If Blalock changes its overhead allocation to departmental rates, what are the product costs per unit for
Product 101X, 102Y, and 103Z, assuming Departments A and B use direct labor hours and machine hours
as their respective allocation bases?

9-43
116. Conway Mountain Analysis offers agriculture and environmental assays. Its Soil Division performs testing
on soil (S) as well as examines for the presence of pesticide residue (PR). Aggregated operating costs for
the division are $1,050,000 based on a single overhead pool at a rate of $70 per testing hour. S testing uses
5,000 hours and PR uses 10,000 hours. The company is trying to determine whether a better costing
structure can be established. As such the controller identifies the following costs.
(1) Salaries and wages of laboratory techs are $600,000 (based on 45% for S and 55% for PR testing).
Required:
(a) Calculate the cost per test hour for S and PR using an improved costing system.
(b) Explain briefly the reasons for why these costs are different from the $70 per test-hour under the
current costing system.

9-44
117. Pretty Dog Corporation manufactures two models of grooming stations, a standard and a deluxe model.
The following activity and cost information has been compiled:
Number of
Number of Number of
Product Direct Labor
Setups Components
Hours
Standard 3 30 650
Deluxe 7 50 150
Overhead
$30,000 $50,000
costs
Assume a traditional costing system applies the overhead costs based on direct labor hours.
Required:
a. What is the total amount of overhead costs assigned to the standard model?
b. What is the total amount of overhead costs assigned to the deluxe model?
Assume an activity-based costing system is used and that the number of setups and the number of
components are identified as the activity-cost drivers for overhead.
c. What is the total amount of overhead costs assigned to the standard model?
d. What is the total amount of overhead costs assigned to the deluxe model?

9-45
118. JennerMaid Company manufactures and distributes several different products. The company currently uses
a plantwide allocation method for allocating overhead at a rate of $20 per direct labor hour. Department 1
produces Product X. Department 1 has $256,000 in traceable overhead. Department 2 manufactures
Products Y and Z. Department 2 has $524,000 in traceable overhead. The product costs (per unit) and other
information are as follows:
Products
X Y Z
Direct
$85.00 $74.00 $66.00
materials
Direct
42.00 31.50 22.00
labor
Overhead 40.00 30.00 20.00
$167.00 $135.50 $108.00
Machine
hours (per 4 2 3
unit)
Number of
units (per 6,000 10,000 12,000
year)
Required:
a. If JennerMaid changes its allocation basis to machine hours, what is the overhead cost per unit for
Product X, Y, and Z?
b. If JennerMaid changes its overhead allocation to departmental rates, what are the overhead costs per
unit for Product X, Y, and Z, assuming Department 1 uses direct labor hours and Department 2 uses
machine hours as their respective allocation bases?

9-46
119. Cameron Company has two major segments with the following information:
East West Total

Annual Revenue $400,000 $1,200,000 $1,600,000
Annual salesperson
300,000 450,000 750,000
salaries
Number of
60 90 150
customers
Miles driven 180,000 120,000 300,000
The business also has overhead costs as follows:
Cost Pool Cost in Pool Cost driver

Travel $72,000 Number of miles driven
Entertainment 288,000 Number of customers
Administrative 289,000 Salaries
Total $649,000
NOTE: overhead does not include salesperson salaries.
Required:
a. Determine the income of each segment if overhead costs are allocated based on sales revenue.
b. Determine the income of each segment if overhead costs are allocated using activity-based cost drivers.

9-47
120. The Sparkle Cleaning Company provides housecleaning services to its clients. The company uses an
activity-based costing system for its overhead costs. The company has provided the following data from its
activity-based costing system.

Cleaning $101,574 16,200 hours
Job support 32,724 1,800 jobs
Client support 5,472 320 clients
Other 100,000 Not applicable
Total $239,770
The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining costs.
One particular client, the Smith family, requested 32 jobs during the year that required a total of 192 hours
of housecleaning. For this service, the client was charged $2,200.
Required:
a. Using the activity-based costing system, compute the client margin for the Smith family. Round off all
calculations to the nearest whole cent.
b. Assume the company decides instead to use a traditional costing system in which ALL costs are
allocated to clients on the basis of cleaning hours. Compute the margin for the Smith family. Round off all

9-48
121. Cooke Company manufactures two products, Product F and Product G. The company expects to produce
and sell 1,400 units of Product F and 1,800 units of Product G during the current year. The company uses
activity-based costing to compute unit product costs for external reports. Below are current year data for
the company's three activity cost pools.
Total Activity
Activity
Total
Cost Product F Product G Total
Cost
Pool
Machine $10,80
80 setups 100 setups 180 setups
setups 0
Purchase $77,52 1,01 1,52
510 orders orders orders
orders 0 0 0
General $75,92 2,24 3,60 5,84
hours hours hours
factory 0 0 0 0
Required: Using the activity-based costing approach, determine the overhead cost per unit for each
product.

9-49
122. Barnard Corporation has provided the following data from its activity-based costing accounting system:
Activity Cost Total

Total Activity
Pools Cost
product design
Designing products $806,715 6,895
hours
Batch Setup $23,660 910 batch set-ups
Assembling
$42,240 3,520 assembly hours
products
Required:
Compute the activity rates for each of the three cost pools. Show your work!

123. Data concerning three of Parkeman Corporation's activity cost pools appear below:
Activity Cost Total

Total Activity
Pools Cost
Assembling
products
product design
Designing products $557,220 3,012
hours
Required:

9-50
124. Safety Corporation uses the following activity rates from its activity-based costing to assign overhead costs
to products.
Activity Cost Pools Activity Rate

Batch Setup $62.52 per batch
Processing customer orders $19.58 per customer order
Assembling products $8.71 per assembly hour
Data concerning two products appear below:
Product C Product E
Number of batches 66 53
Number of customer orders 46 31
Number of assembly hours 419 162
Required:
How much overhead cost would be assigned to each of the two products using the company's activity-
based costing system?

9-51
125. Work Horse Corporation uses the following activity rates from its activity-based costing to assign overhead
costs to products.
Activity Cost
Activity Rate
Pools
Assembling
$2.88 per assembly hour
products
Processing per customer
$50.41
customer orders order
Product J Product S
Required:
a. How much overhead cost would be assigned to Product J using the company's activity-based costing
system? Show your work!
b. How much overhead cost would be assigned to Product S using the company's activity-based costing

9-52
126. Maxim Corporation uses the following activity rates from its activity-based costing to assign overhead
costs to products.

Last year, Product P involved 33 batches, 1 customer orders, and 368 assembly hours.
Required:
How much overhead cost would be assigned to Product P using the company’s activity-based costing

9-53
127. Sarno Corporation has an activity-based costing system with three activity cost pools-Processing, Batch
Setup, and Other. Costs in the Processing cost pool are assigned to products based on machine-hours
(MHs) and costs in the Batch Setup cost pool are assigned to products based on the number of batches.
Costs in the Other cost pool are not assigned to products. Data concerning the two products and the
company's costs and activity-based costing system appear below:
Activity Cost Pools

Processing $3,000
Batch Setup $9,800
Other $9,200
MHs Batches
Product #1 5,800 700
Product #2 4,200 300
Total 10,000 1,000
Product #1 Product #2
Sales (total) $45,300 $48,400
Direct materials (total) $19,600 $16,900
Direct labor (total) $15,900 $24,200
Required:
a. Calculate activity rates for each activity cost pool using activity-based costing.
b. Determine the amount of overhead cost that would be assigned to each product using activity-based
costing.
c. Determine the product margins for each product using activity-based costing.

9-54
128. Market Corporation has an activity-based costing system with three activity cost pools-Processing, Batch
Setup, and Other. The company's overhead costs, which consist of factory utilities and indirect labor, are
allocated to the cost pools in proportion to the activity cost pools' consumption of resources. Data
concerning the company's costs and activity-based costing system appear below:
Factory utilities (total) $39,000

Indirect labor (total) $3,000
Distribution of Resource Consumption Across Activity

Cost Pools
Processing Batch Setup Other
Factory utilities 0.10 0.60 0.30
Indirect labor 0.30 0.10 0.60
Required:
Assign overhead costs to activity cost pools using activity-based costing.

9-55
129. Vargus Corporation has an activity-based costing system with three activity cost pools-Processing, Batch
Setup, and Other. The company's overhead costs consist of equipment depreciation and indirect labor and
are allocated to the cost pools in proportion to the activity cost pools' consumption of resources. Equipment
depreciation totals $72,000 and indirect labor totals $8,000. Data concerning the distribution of resource
consumption across activity cost pools appear below:
Batch Othe
Processing
Setup r
Equipment depreciation 0.20 0.40 0.40
Required:

9-56
130. Yang Corporation has an activity-based costing system with three activity cost pools-Machining, Batch
Setup, and Other. The company's overhead costs, which consist of equipment depreciation and indirect
labor, have been allocated to the cost pools already and are provided in the table below.
Activity Cost Pools

Machinin Setting
Other Total
g Up
Equipment
$27,200 $6,800 $34,000 $68,000
depreciation
Indirect labor 2,500 1,000 1,500 5,000
Total $29,700 $7,800 $35,500 $73,000
Costs in the Machining cost pool are assigned to products based on machine-hours (MHs) and costs in the
Batch Setup cost pool are assigned to products based on the number of batches. Costs in the Other cost
pool are not assigned to products. Data concerning the two products and the company's costs appear
below:
MHs Batches
Product Z 4,400 400
Product Q 5,600 1,600
Total 10,000 2,000
Product Z Product Q
Sales (total) $137,900 $173,300
Required:
costing.

9-57
131. Air Dream Products has contracted with you to analyze and update its costing and pricing practices. The
company product line has changed over time from general air conditioning units to customizable mini-split
units. Although some large orders are received, the majority of business is now generated from products
designed and produced in small lots in order to meet specific detailed environmental and technical
standards.
The company has experienced increased overhead growth, including costs in customer service, production
scheduling, inventory control and laboratory work. Overhead has doubled since the shift in product lines
and management believes that the larger orders are being penalized, while smaller orders are receiving
favorable cost and selling price treatment.
Required:
1. Why would the shift in product lines have caused such major increases in overhead?
2. Is it possible that management is correct in its belief about the costs of the large and small orders and, if
so, why?
3. Write a memo to management suggesting how it might change the cost accounting system to reflect the
changes in the business.

132. How can activity-based systems help managers in a global marketplace?

9-58
Required:
Suggest a proper cost driver for each of the following items
Example
A. Bread for burger buns
B. Take-out bags assuming
one per drive-through
customer order
C. Ground sirloin
D. Mayonnaise, catsup,

pickles, and onions
E. Salary of the restaurant

manager
F. Restaurant rent
G. Workers hourly wages
H. Coupons for Brenda’s

Colossal Burger
I. Utilities
J. Brenda’s Buy-Any One
Burger and Get one Free
Burger Promotion

9-59
134. Required:
For each of the following important costs in manufacturing companies, identify a cost driver and explain
why it is appropriate.
Driver and why

Manufacturing Costs
appropriate
A. Equipment maintenance
B. Building utilities
C. Computer operations
D. Quality control
E. Material handling
F. Material storage
G. Factory depreciation
H. Set up costs
I. Engineering changes
J. Advertising expense

135. Why is a plantwide allocation often considered to be a single-stage allocation approach? Explain.

9-60
136. Describe the four steps involved in activity-based costing.

137. Describe four classifications of cost drivers.

138. Last year, Jasmine Taylor opened a gift store in a busy shopping center. She spent a lot on advertising and
attracted many customers into the store, but very few customers made purchases and sales were declining.
Jasmine paid attention to questions and requests made by customers and determined that they often
requested items that were within the scope of her business but that she did not carry. When she offered to
order items for her customers, delivery was usually too late and, again, sales were lost. What measures
should Jasmine take to improve her business?

9-61
139. "Activity-based costing is just a more precise form of product costing and is only usable in a production
setting." Do you agree or disagree. Explain why.

140. Explain how activity-based costing provides a more detailed measure of costs than do plantwide or
department allocation methods.

141. In recent years, why has labor become such a small part of product costs and how can its use in overhead
allocation perpetrate errors in decision-making?

9-62
142. Lamar Company manufactures two products, Product K9 and Product L43. Product L43 is of fairly recent
origin, having been developed as an attempt to enter a market closely related to that of Product K9. Product
L43 is the more complex of the two products, requiring 2.0 hours of direct labor time per unit to
manufacture compared to 1.0 hour of direct labor time for Product K9. Product L43 is produced on an
automated production line.
Overhead currently is applied to the products on the basis of direct labor-hours. The company estimated it
would incur $510,000 in manufacturing overhead costs and produce 10,000 units of Product L43 and
40,000 units of Product K9 during the current year.
Unit costs for materials and labor are:
Product K9 Product L43

Direct material $11 $24
Direct labor $6 $12
Required:
a. Compute the predetermined overhead rate under the current method, and determine the unit product cost
of each product for the current year.
b. The company is considering the use of activity-based costing as an alternative to its traditional costing
method for manufacturing overhead. Data relating to the company's activity cost pools for the current year
are given below:
Total Activity
Activity Cost Total Product Product
Total
Pool Cost K9 L43
Machine setups
$204,000 800 1,600 2,400
required
Purchase orders
43,500 500 100 600
issued
Machine-hours
105,000 7,000 10,500 17,500
required
Maintenance
157,500 650 850 1,500
requests issued
$510,000
Using the data above, determine the unit product cost of each product for the current year.
c. What items of overhead cost make Product L43 so costly to produce according to the activity-based
costing system? What influence might the activity-based costing data have on management's opinions
regarding the profitability of Product L43?

9-63

143. Sylvia's Housecleaning Service provides housecleaning services to its clients. The company uses an
activity-based costing system for its overhead costs. The company has provided the following data from its

Total $564,213
One particular client, the Layton family, requested 49 jobs during the year that required a total of 245
hours of housecleaning. For this service, the client was charged $2,500.
Required:
a. Compute the activity rates (i.e., cost per unit of activity) for the activity cost pools. Round off all
b. Using the activity-based costing system, compute the customer margin for the Layton family. Round off
all calculations to the nearest whole cent.
c. Assume the company decides instead to use a traditional costing system in which ALL costs are
allocated to customers on the basis of cleaning hours. Compute the margin for the Layton family. Round
off all calculations to the nearest whole cent.

9-64
144. Harrison Industries has an activity-based costing system with three activity cost pools-Processing, Batch
Setup, and Other. The company's overhead costs, which consist of factory utilities and indirect labor, are
allocated to the cost pools in proportion to the activity cost pools' consumption of resources. Costs in the
Processing cost pool are assigned to products based on machine-hours (MHs) and costs in the Batch Setup
cost pool are assigned to products based on the number of batches. Costs in the Other cost pool are not
assigned to products. Data concerning the two products and the company's costs and activity-based costing
system appear below:


Cost Pools
Processing Setting Up Other
Factory
0.40 0.10 0.50
utilities
MHs Batches
Product #1 2,900 700
Product #2 7,100 300
Total 10,000 1,000
Sales (total) $54,000 $85,100
Direct materials
$19,100 $33,500
(total)
Required:
a. Assign overhead costs to activity cost pools using activity-based costing.

b. Calculate activity rates for each activity cost pool using activity-based costing.
c. Determine the amount of overhead cost that would be assigned to each product using activity-based
costing.
d. Determine the product margins for each product using activity-based costing.

9-65
145. Excel Manufacturing has an activity-based costing system with three activity cost pools-Machining, Batch
Setup, and Other. The company's overhead costs have already been allocated to the cost pools and total
$28,000 for the Machining cost pool, $13,800 for the Batch Setup cost pool, and $27,200 for the Other cost
pool.
pool are not assigned to products. Data concerning the two products and the company's costs appear
below:
MHs Batches
Product A 5,200 500
Product B 14,800 500
Total 20,000 1,000
Product A Product B
Sales (total) $124,300 $166,000
Direct materials
$53,100 $71,500
(total)
Required:
costing.

9-66
146. Sebastian Corporation's activity-based costing system has three activity cost pools-Machining, Batch
labor, are allocated to the cost pools in proportion to the activity cost pools' consumption of resources.
Equipment depreciation (total) $27,000


Cost Pools
Batch
Machining Other
Setup
Equipment
0.40 0.30 0.30
depreciation
pool are not assigned to products.
MHs Batches
Product Snorkel 8,100 400
Product Fin 1,900 1,600
Total 10,000 2,000
Additional data concerning the company's products appears below:
Product Snorkel Product Fin

Sales (total) $71,400 $57,600
Required:

costing.

9-67

9-68
147. Farris Corporation's activity-based costing system has three activity cost pools-Machining, Batch Setup,
and Other. The company's overhead costs have already been allocated to these cost pools as follows:
Machining $15,200
Batch Setup $44,800
Other $16,000
pool are not assigned to products. The following table shows the machine-hours and number of batches
associated with each of the company's two products:
MHs Batches
Product Sea 2,000 800
Product Air 8,000 200
Total 10,000 1,000
Product Sea Product Air

Sales (total) $220,700 $165,500
Required:
costing.

9-69

9-70
148. Swannee Company manufactures two products, Product A and Product B. The company estimated it would
incur $160,790 in manufacturing overhead costs during the current period. Overhead currently is applied to
the products on the basis of direct labor-hours. Data concerning the current period's operations appear
below:
Product A Product B
Estimated volume 3,400 units 4,800 units
Direct labor-hours per unit 1.40 hour 1.90 hours
Direct materials cost per unit $7.40 $12.70
Direct labor cost per unit $14.00 $19.00
Required:
a. Compute the predetermined overhead rate under the current method, and determine the unit product cost
of each product for the current year.
b. The company is considering using an activity-based costing system to compute unit product costs for
external financial reports instead of its traditional system based on direct labor-hours. The activity-based
costing system would use three activity cost pools. Data relating to these activities for the current period
are given below:
Expected Activity
Estimated
Activity Product Product
Overhead Total
Cost Pool A B
Costs
Machine
$12,190 80 150 230
setups
Purchase
79,200 730 920 1,650
orders
General
69,400 4,760 9,120 13,880
factory
$160,790
Determine the unit product cost of each product for the current period using the activity-based costing
approach.

9-71
149. Merkel Industries has a traditional costing system in which it applies manufacturing overhead to its
products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two
products, Large and Small, about which it has provided the following data:
Large Small
Direct materials
$17.80 $55.40
per unit
Direct labor per
$16.10 $55.20
unit
Direct labor-hours
0.70 2.40
per unit

Measures Cost
Parts administration (part
1,071,600
types)
Total $1,793,790
Activities Large Small Total

Supporting direct labor 21,000 36,000 57,000
Setting up machines 798 2,565 3,363
Parts administration 1,539 1,140 2,679
Required:
a. Determine the unit product cost of each of the company's two products under the traditional costing
system.
b. Determine the unit product cost of each of the company's two products under activity-based costing
system.

9-72

9-73
150. JamMaster Audio Corporation has a traditional costing system in which it applies manufacturing overhead
to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has
two products, Boom and Wow, about which it has provided the following data:
Boom Wow

Measures Cost
Engrave (MHs) 975,000
Total $1,809,600
Activities Boom Wow Total

Assembling
8,000 18,000 26,000
products
Preparing
884 442 1,326
batches
Engrave 702 1,248 1,950
Required:
system.
system.

9-74

9-75
151. Smithville Industries has a traditional costing system in which it applies manufacturing overhead to its
products, Manual and Power, about which it has provided the following data:
Manual Power

Measures Cost
Supporting direct labor (DLHs) $1,326,000
892,500
types)
Total $2,675,460
Manual Power Total

Supporting
24,000 27,000 51,000
direct labor
Setting up
2,346 510 2,856
machines
Parts
1,122 663 1,785
administration
Required:
a. Determine the manufacturing overhead cost per unit of each of the company's two products under the
traditional costing system.
b. Determine the manufacturing overhead cost per unit of each of the company's two products under

9-76

9-77
152. Matchbox Manufacturing has a traditional costing system in which it applies manufacturing overhead to its
products, Utility and Super, about which it has provided the following data:
Utility Super

Measures Cost
Axial milling (MHs) 722,000
Total $1,527,600
Utility Super Total

Assembling products 21,000 17,000 38,000
Preparing batches 456 1,520 1,976
Axial milling 570 874 1,444
Required:

9-78
153. The manager of the Personnel Department at King Enterprises has been reading about time-driven ABC
and wants to apply it to her department. She has identified four basic activities where her employees spend
the most time: Interviewing; Hiring, Assessment, and Separation Processing. The Department employs five
staff who perform these activities. The manager provides the following estimates for the amount of time it
takes to complete each of these activities:
• Interviewing: 40 minutes;
• Hiring: 60 minutes;
• Assessment: 85 minutes;
• Separation processing: 95 minutes.
Employees in Personnel work 35 hour weeks with four weeks for vacation. Of the 35 hours, five are
reserved for administrative tasks, training, and so on. The costs of the personnel department, including any
allocated costs from other staff functions is $1,404,000. During the year, Personnel conducted 1,200
interviews, made 405 hires, made 2,850 assessments, and had 235 separations.
Required:
a. What is the cost per minute for activities in Personnel?

b. What is the cost of interviewing and hiring one employee?
c. How many minutes of unused capacity did Personnel have for the year?
d. What was the cost of the unused capacity in Personnel?

9-79
Chapter 09 Activity-Based Costing Answer Key
True / False Questions

1. The death spiral can occur even in firms with increasing demand.

TRUE
It is possible for firms with increasing demand to experience the death spiral.

AACSB: Analytical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 09-01 Understand the potential effects of using reported product costs for decision making.
Topic: Reported Product Costs and Decision Making

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

FALSE
The death spiral is continually increasing the prices to match the increased reported costs.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

3. The basic approach in product costing is to allocate costs in the cost pools to the individual cost objects,
which are the products or services of interest.

TRUE
The basic approach in product cost is to allocate costs in the cost pools to individual cost objects that are
the key products/services.

9-80
Blooms: Remember
Gradable: automatic
Learning Objective: 09-02 Explain how a two-stage product costing system works.
Topic: Two-Stage Cost Allocation

4. 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
Cost pools are used in both first-stage and second-stage cost allocations.

Blooms: Remember
Gradable: automatic

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

FALSE
Predetermined overhead rates are used in both first-stage and second-stage cost allocations.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

6. The plantwide allocation concept cannot be used in nonmanufacturing organizations.

FALSE
The plantwide allocation concept can be used in both manufacturing and nonmanufacturing
organizations.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 09-03 Compare and contrast plantwide and department allocation methods.
9-81

7. The single-stage cost allocation system uses a plantwide rate because the cost pool is the entire plant.

TRUE
In the plantwide allocation method, the cost pool is the entire plant.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

8. The department cost allocation method provides more accurate product cost information for managerial
decision-making than the plantwide cost allocation method.

TRUE
The information is more accurate because some of the variations in the product can be captured.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

9. The plantwide cost allocation method should be used by companies that manufacture products that are
similar and use the same resources.

TRUE
Since the products are similar and use the same resources, all of the products should cost roughly the
same.

Blooms: Apply
Gradable: automatic

9-82
10. Using the department allocation method, a company establishes a separate overhead allocation rate for
each department.

TRUE
A separate overhead allocation rate is established for each department using a department allocation
method.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

11. If a company manufactures diverse products using different sets of resources in a plant, it is best to use a
plantwide allocation rate.

FALSE
Diverse products with different sets of resources need a more refined allocation rate than that used
plantwide, where allocations are roughly the same.

Blooms: Apply
Gradable: automatic

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

TRUE
This is a fundamental concept of ABC.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 09-04 Explain how activity-based costing and a two-stage product system are related.
Topic: Activity-Based Costing

9-83
13. 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
It is not the number of stages that are different between ABC and the department cost allocation; it is the
use of activity cost pools and different cost drivers that creates a basic difference between the allocation
methods.

Blooms: Remember
Gradable: automatic

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

TRUE
Both DLC and DLH change as volume changes.

Blooms: Remember
Gradable: automatic
Topic: Cost Hierarchies

15. Any discrete task that an organization undertakes to make or deliver a product or service is known as a
stage.

FALSE
Any discrete task that an organization uses to make or deliver a product/service is an activity.

Blooms: Remember
Gradable: automatic

9-84
16. Activity-based costing is based on the concept that products produce activities and activities produce
resources.

FALSE
Activity-based costing allocates costs to activities and then to products based on their use of the
activities.

Blooms: Remember
Gradable: automatic

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

FALSE
Number of products is a product-related cost driver.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

18. A cost hierarchy classifies cost drivers by general dimensions or levels of activity.

TRUE
A cost hierarchy classifies cost drivers by general dimensions or levels of activity.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Topic: Activity-Based Costing Illustrated

9-85
19. If a company has identified three major activities as setting up, handling material, and assembling,
possible cost drivers would most likely be set-up hours, production runs, and number of shipments,
respectively.

FALSE
While set-up hours could be a cost driver for the set-up activity and production runs could be a cost
driver for the material handling activity, the activity of assembly is driven by machine or labor hours.

Blooms: Remember
Gradable: automatic
Learning Objective: 09-05 Compute product costs using activity-based costing.

20. When applying activity based costing, the first step would be to compute the cost driver rates.

FALSE
When applying activity-based costing, the first step is to identify the activities. Computing the cost
driver rates is the third step in the application of activity-based costing.

Blooms: Remember
Gradable: automatic

21. Activity-based costing (ABC) provides more detailed measures of costs than do plantwide or

TRUE
This is due to ABC using more causal relationships that are not limited to the production floor.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 09-06 Compare activity-based product costing to traditional department product costing methods.

9-86
22. Activity-based costing is so beneficial because it provides more information about product costs but
requires less recordkeeping.

FALSE
While ABC has the benefit of providing more information about product costs, it also requires more
recordkeeping.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

23. Installing activity-based costing requires teamwork among employees and departments within an
organization.

TRUE
Installing activity-based costing requires teamwork between accounting, production, marketing,

management, and other nonaccounting employees.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

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

TRUE
Applying cost-benefit principles is fundamental to choosing any costing system.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

9-87
25. 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
Low volume products get less cost under traditional costing since they use less of the volume cost
drivers.

Blooms: Remember
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 09-07 Demonstrate the flow of costs through accounts using activity-based costing.

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

TRUE
Allocating overhead on the basis of direct labor sends signals that direct labor is more expensive than it
really is. This also creates tremendous incentives to reduce the labor content of products.

Blooms: Apply
Gradable: automatic
Topic: Choice of Activity Bases in Modern Production Settings

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

FALSE
Low-volume products may have just as much complexity as higher-volume products. Complexity is a
function of the product and its design, not its volume.

Blooms: Remember
Gradable: automatic

9-88
28. When overhead is applied based on the volume of output, high-volume products tend to "subsidize"
low-volume products.

TRUE
When overhead is applied based on the volume of output, high-volume products are allocated relatively
more overhead than are low-volume products. High-volume products "subsidize" low-volume products.

Blooms: Apply
Gradable: automatic

29. The flow of activity-based costs through the ledger is the same as their flow using traditional methods
except that the accounts are based on activities, not departments.

TRUE
The ledger flow for ABC is the same as that of traditional methods except that the accounts are based on
activities rather than departments.

Blooms: Apply
Gradable: automatic

30. Activity-based costs are a function of both volume and complexity.

TRUE
Activity-based costs are a function of both volume and complexity.

Blooms: Apply
Gradable: automatic

9-89
31. Activity-based costing (ABC) can be applied to administrative activities (e.g., purchasing) but not to
marketing activities.

FALSE
ABC can be used in marketing as well as administrative activities.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 09-08 Apply activity-based costing to marketing and administrative services.
Topic: Activity-Based Costing in Administration

32. Within a purchasing department, the activity of placing orders could best be costed by a cost driver of
the potential number of vendors.

FALSE
The cost of placing orders and an appropriate cost driver is most likely measured by the number of
orders.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

33. Individual ABC systems do not vary because there is one ABC method.

FALSE
ABC systems vary substantially because there is no one ABC method.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

9-90
34. It is possible to apply activity-based costing (ABC) to segments of an organization without applying it
to the entire organization.

TRUE
ABC can be applied in a single portion or segment of an organization as well as the entire organization.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

35. Time-driven activity based costing (TDABC) is more costly to implement than an unmodified activity-
based costing system.

FALSE
TDABC is less costly to use than unmodified activity-based costing.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 09-09 Explain how time-driven activity-based costing works.
Topic: Time-Driven Activity-Based Costing

36. Time equations can be used in extended time-driven activity based costing (TDABC) systems to allow
managers to adjust the times for orders with different characteristics.

TRUE
TDABC can be extended by using time equations that allow managers to adjust the times for orders
with different characteristics.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

9-91
Multiple Choice Questions

37. When product costs are used for decision-making, what assumption is most likely to distort the
decisions?

A. There is a proportionality of overhead costs and output, regardless of whether a product is dropped
or not.
B. Some overhead estimates can decrease when a product is dropped.
C. Some overhead costs could be fixed when a product is dropped.
D. The cost accounting system treats all overhead as if it were variable with respect to the allocation
base.
When product costs are used for making decisions, the assumption about proportionality of the cost and
output can distort decisions.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

38. When a department or product line is dropped, the common fixed costs which had been allocated to that
department:

A. are eliminated.

B. become variable costs.
C. are allocated to the remaining departments or product lines.
D. become sunk costs.
When a department or product line is dropped, the common fixed costs which had been allocated to that
department are allocated to the remaining departments or product lines.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

9-92
39. Traditional product costing systems (e.g., job and process costing) are designed primarily:

A. To derive an allocation base.

B. To ensure that a single cost driver allocation base leads to appropriate managerial decisions.
C. To accumulate cost information for financial reporting.
D. To accumulate cost information for managerial decisions.
Traditional product costing systems (e.g., job and process costing) are designed primarily to accumulate
cost information for financial reporting.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

40. A two-stage system first allocates costs to:

A. products or services and then allocates costs to departments or activities.

B. the cost driver and then allocates costs to the cost hierarchy.
C. a product line and then allocates costs to the department.
D. departments or activities and then allocates costs to products or services.
A two-stage system first allocates costs to departments or activities and then allocates costs from the
departments or activities to the products or services.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

9-93
41. First stage cost objects do not include:

A. Supplies
B. Depreciation
C. Maintenance and Repair Costs
D. Direct materials
The first-stage cost objects are the overhead accounts.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

42. The basic difference between a first-stage cost allocation and a second-stage cost allocation is that:

A. 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.
C. the first stage prohibits firms from aligning the allocation of costs with the use of resources.
D. when used in an ABC system, the first stage assigns costs to activities.
It is true that when a two stage system is used in ABC, the first stage assigns costs to activities.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

9-94
43. 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.
Costs are assigned to activities first; activity usage is then used to allocate the activity costs.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

44. Cost pools are used with:
Plantwide Rates Department Rates

A. Yes No
B. No Yes
C. No No
D. Yes Yes

A. Option A
B. Option B
C. Option C
D. Option D
Cost pools are used with both plantwide and departmental rates.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

9-95
45. Which of the following should not be used as the allocation base in a company that appropriately uses a

A. Sales volume.

B. Machine hours.
C. Material costs.
D. Direct labor cost.
Sales volume is not related to production, while all the others are.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

46. Which of the following would be least likely to be used as an allocation base in a company that applies
a single plantwide rate?

A. Machine hours.

B. Direct material costs.
C. Direct labor cost.
D. Direct labor hours.
Common allocation bases are direct labor-hours, direct labor costs, and machine-hours; somewhat less
common is direct material costs.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

9-96
47. Multiple (departmental) manufacturing overhead rates are considered preferable to a single (plantwide)
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 plantwide rate is related to several identified cost drivers.
Multiple rates are preferred when there are variations in the products.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

48. The classification of cost drivers into general levels of activity, volume, batch, product, and so on is
known as:

A. cost allocation.

B. value-added costing.
C. a cost hierarchy.
D. cost driver management.
The classification of cost drivers into general levels of activity, volume, batch, product, and so on is
known as a cost hierarchy.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

9-97
49. 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 plantwide 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. Direct cost allocations are required for the plantwide and department allocation methods.
Costs are a function of activities rather than volume (a) and allocations are of indirect costs rather than
direct costs (b and d).

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

50. The electricity used for production machinery would be classified as a:


The more units are produced, the more the machines run and the more electricity is consumed.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

9-98
51. The number of services provided by an accounting firm would be classified as an:


The services provided are the products, so product-related is the best category.

Blooms: Remember
Gradable: automatic

52. 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.
Compliance costs are more likely a product-related activity.

Blooms: Apply
Gradable: automatic

53. Which of the following would not be a batch-related activity?

A. Setting up a machine for a new production run.

B. Performing 100% inspection.
C. Purchasing materials.
D. Processing a customer order.
Performing 100% inspection would be a volume-related activity.

9-99
Blooms: Apply
Gradable: automatic

54. Which of the following measures is used by traditional costing systems as an allocation base for
allocating overhead costs to the units produced?


D. Facility-related activities.
Traditional costing uses volume-related activities exclusively.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

55. 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?


D. Need-related activities.
Need-related activities is not an allocation base for allocating overhead costs to units produced.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

9-100
56. What is the typical 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)
Cost Pools Cost Assignment Bases

A. No effect No effect
B. Increase No effect
C. No effect Increase
D. Increase Increase

A. Option A
B. Option B
C. Option C
D. Option D
There are typically more cost pools under ABC and more bases as well.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

57. Personnel administration is an example of a:

A. unit-level activity.

B. batch-level activity.
C. product-level activity.
D. organization-sustaining activity.
Organization-sustaining activities are carried out regardless of which customers are served, which
products are produced, how many batches are run, or how many units are made.

AACSB: Reflective Thinking
Blooms: Remember
Gradable: automatic

9-101
58. Which of the following activities would be classified as a batch-level activity?

A. Setting up equipment.

B. Designing a new product.
C. Training employees.
D. Milling a part required for the final product.
Batch-level - Activities that are performed each time a batch of goods is handled or processed,
regardless of how many units are in the batch. The amount of resource consumed depends on the
number of batches run rather than on the number of units in the batch.

Blooms: Remember
Gradable: automatic

59. Would the following activities at a manufacturer of canned soup be best classified as unit-level, batch-
level, product-level, or organization-sustaining activities?
Researching new Shipping orders to grocery

recipes stores
A. Unit Unit
B. Batch Batch
C. Product Unit
D. Product Batch

A. Option A
B. Option B
C. Option C
D. Option D
See solution below.
Product - Activities that relate to specific products that must be carried out regardless of how many
units are produced and sold or batches run.
Batch - Activities that are performed each time a batch of goods is handled or processed regardless of
how many units are in the batch. The amount of resource consumed depends on the number of batches
run rather than on the number of units in the batch.

9-102
Blooms: Remember
Gradable: automatic

60. Property taxes are an example of a cost that would be considered to be:

A. Unit-level.
B. Batch-level.
C. Product-level.
D. Organization-sustaining.
Organization-sustaining activities are carried out regardless of which customers are served, which
products are produced, how many batches are run, or how many units are made.

Blooms: Remember
Gradable: automatic

61. Product costs are computed by:

A. dividing the cost driver rate by the number of units of the cost driver in each product.
B. multiplying the cost driver rate by the number of units of the cost driver in each product.
C. adding the cost driver rates of all products.
D. averaging the plantwide cost driver rate with the cost driver for each product.
Product costs are computed by multiplying the cost driver rate by the number of units of the cost driver
in each product.

Blooms: Apply
Gradable: automatic

9-103
62. Which of the following is not a step involved in activity-based costing?

A. Identify the activities that consume resources and assign costs to those activities.
B. Determine how to reduce the costs of making products by cutting activities.
C. Assign costs to products by multiplying the cost driver rate by the volume of cost driver units
consumed by the product.
D. Compute a cost rate per cost driver unit or transaction.
This is not a step involved in activity-based costing.

Blooms: Apply
Gradable: automatic

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

A. Activity-based costs per unit are always greater than volume-based costs per unit.
B. Volume-based costing has typically resulted in lower gross margins for high volume products and
higher gross margins for low volume products.
C. Different cost allocation methods are constructed so that they typically result in the same or similar
estimates of how much it costs to make a product.
D. Activity-based costing typically provides less information about product costs while requiring more
recordkeeping.
Activity-based costs are typically greater for the low volume products but not for high volume.

Blooms: Apply
Gradable: automatic

9-104
64. Volume-based costing allocates indirect product costs based on the volume of output, using such
allocation bases as direct labor hours, machine hours, or the amount of direct material used in the
production process. Activity-based costing (ABC) has consistently shown that Volume-based costing
___________ the cost of high volume products and ______________ the cost of low volume products.
High Volume Products Low Volume Products

A. Overstates Overstates
B. Overstates Understates
C. Understates Overstates
D. Understates Understates

A. Option A
B. Option B
C. Option C
D. Option D
High volume products have too much allocated because they have more of the volume activity. The
opposite is true for low volume.

Blooms: Apply
Gradable: automatic

65. 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.
Volume still affects costs since there are volume-related activities.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

9-105
66. Activity-based costing provides:

A. more detailed measures of costs than do plantwide or department allocation methods.
B. less detailed measures of costs than do plantwide or department allocation methods.
C. more detailed measures of costs than do plantwide allocations but less than department allocation
methods.
D. less detailed measures of costs than do plantwide allocations but more than department allocation
methods.
Activity-based costing provides more detailed measures of costs than do plantwide or department
allocation methods.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

67. 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. Allocations Incurred.
Allocations Incurred is not an account. ABC uses the same accounts that a traditional cost has, the
overhead accounts are classified by activity.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic
Topic: Cost Flows Through Accounts

9-106
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.
Material handling would logically be related to the amount of material in a product.

Blooms: Apply
Gradable: automatic

69. Which of the following statements is true regarding activity based costing in administration?

A. The principles of ABC are different when applied to administrative services.
B. ABC in administration involves five steps.
C. All cost drivers in an administrative system will be time related.
D. Activity-based costing for administrative services follows the same four-step procedure described
for manufacturing.
Activity-based costing for administrative services follows the same four-step procedure described for
manufacturing.

Blooms: Apply
Gradable: automatic

9-107
70. Which of the following would be the most appropriate activity and cost drivers pairing for a Purchasing
Department?

A. Activity: Placing orders - Possible Cost Driver: Number of orders

B. Activity: Placing orders - Possible Cost Driver: Number of new hires
C. Activity: Placing orders - Possible Cost Driver: Frequency of audits
D. Activity: Placing orders - Possible Cost Driver: Employee turnover rate
The most appropriate pairing of activities with cost drivers in a Purchasing Department would be
Activity: Placing orders - Possible Cost Driver: Number of orders.

Blooms: Apply
Gradable: automatic

71. Which of the following statements is true regarding time-driven activity based costs?

A. A manager needs to determine the cost of resources for each individual item produced.
B. This approach requires interviews and surveys from multiple managers and employees.
C. It is more costly than the unmodified ABC system.
D. The cost of the resources supplied to a department and the time it takes to complete the various
activities of the department are used.
This approach only requires the cost of departmental resources and the time it takes to complete various
activities in the department.

Blooms: Apply
Gradable: automatic

9-108
72. Which of the following statements is true regarding time equations used in time-driven activity based
costing?

A. Time equations cannot adjust extra time for new vendors.
B. Time equations allow managers to adjust the times for orders with different characteristics.
C. Time equations cannot be used where there is a maximum size of an order that can be inspected or
transported to the warehouse.
D. Time equations are only used as part of unmodified ABC systems.
Time equations allow managers to adjust the times for orders with different characteristics using the
TDABC system.

Blooms: Apply
Gradable: automatic

9-109
currently uses a plantwide allocation method for allocating overhead at a rate of $7 per direct labor
hour. Loren is the department manager of the Makeup Department which produces Products - Concealer
(C) and Glow Cream (GC). Jennifer is the department manager of the Hair Care Department which
manufactures Product - Shampoo (S). The product costs (per case of 24 bottles) and other information
are as follows:
Products
C GC S
Direct labor 42.00 31.50 12.00
Overhead 28.00 21.00 14.00
$170.00 $124.50 $74.00
Machine hours 4 2 3
Based on this information, if Flawless changes its allocation basis to machine hours, what is the
overhead rate per machine hour?

A. $3.00
B. $2.00
C. $21.00
D. $6.825
Total overhead Total overhead = $28(300) + $21(500) + $14(600) = $27,300; Total machine hours =
4(300) + 2(500) + 3(600) = 4,000; Overhead rate = $27,300/4,000 = $6.825/MH

Blooms: Apply
Gradable: automatic

9-110
are as follows:
Products
C GC S
Direct labor 42.00 31.50 12.00
Overhead 28.00 21.00 14.00
$170.00 $124.50 $74.00
Machine hours 4 2 3
Product GC?

A. $163.50
B. $144.00
C. $138.15
D. $117.15
Total overhead = $28(300) + $21(500) + $14(600) = $27,300; Total machine hours = 4(300) + 2(500) +
3(600) = 4,000; Overhead rate = $27,300/4,000 = $6.825/MH; Product cost for P: $72.00 + $31.50 +
$6.825(2) = $117.15

Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic

9-111
are as follows:
Products
C GC S
Direct labor 42.00 31.50 12.00
Overhead 28.00 21.00 14.00
$170.00 $124.50 $74.00
Machine hours 4 2 3
Product C?

A. $161.50.
B. $169.30.
C. $182.44.
D. $183.36.
Total overhead = $28(300) + $21(500) + $14(600) = $27,300; Total machine hours = 4(300) + 2(500) +
3(600) = 4,000; Overhead rate = $27,300/4,000 = $6.825/MH; Product cost for J: $100.00 + $42.00 +
$6.825(4) = $169.30

Blooms: Apply
Gradable: automatic

9-112
76. Banc Corp. Trust is considering either a bankwide overhead rate or department overhead rates to
allocate $396,000 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:

Consumer 14,000 700 $280,000
Commercial 8,000 300 $180,000

A. $49,000.
B. $252,000.
C. $198,000.
D. $396,000.
$396,000/(14,000 + 8,000) = $18.00/DLH; 14,000(18.00) = $252,000

Blooms: Apply
Gradable: automatic

9-113

Consumer 14,000 700 $280,000
Commercial 8,000 300 $180,000

A. $144,000.
B. $138,000.
C. $180,000.
D. $148,500.
$396,000/(14,000 + 8,000) = $18.00/DLH; 8,000(18.00) = $144,000

Blooms: Apply
Gradable: automatic

9-114

Consumer 14,000 700 $280,000
Commercial 8,000 300 $180,000
If Banc Corp. Trust uses a bankwide rate based on the number of loans processed, what would be the
total costs for the Commercial Department?

A. $118,800.
B. $180,000.
C. $298,800.
D. $318,000.
$396,000/(700 + 300) = $396 per loan; 300($396) = $118,800; $118,800 + $180,000 = $298,800

Blooms: Apply
Gradable: automatic

9-115

Consumer 14,000 700 $280,000
Commercial 8,000 300 $180,000
If Banc Corp. Trust uses a bankwide rate based on the number of loans processed, what would be the
total costs for the Consumer Department?

A. $280,000.
B. $256,800.
C. $576,000.
D. $557,200.
$396,000/(700 + 300) = $396 per loan; 700($396) = $277,200; $277,200 + $280,000 = $557,200

Blooms: Apply
Gradable: automatic

9-116

Consumer 14,000 700 $280,000
Commercial 8,000 300 $180,000

A. $396,000.
B. $246,000.
C. $223,800.
D. $216,000.
$396,000 - $500(300) = $246,000; $246,000/(300 + 700) = $246 per loan; $246(300) + $500(300) =
$223,800

Blooms: Analyze
Gradable: automatic

9-117

Consumer 14,000 700 $280,000
Commercial 8,000 300 $180,000

A. $246,000.
B. $280,000.
C. $172,200.
D. $116,000.
$396,000 - $500(300) = $246,000; $246,000/(300 + 700) = $246 per loan; $246(700) + $500(0) =
$172,200

Blooms: Analyze
Gradable: automatic

9-118

Consumer 14,000 700 $280,000
Commercial 8,000 300 $180,000
Banc Corp. Trust estimates that it costs $400 to analyze and close a commercial loan. What is the
overhead rate if Banc Corp. Trust allocates the remaining indirect costs using direct labor hours?

A. $12.55 per hour.

B. $18.00 per hour.
C. $1,000 per loan.
D. $800 per loan.
$396,000 - $400(300) = $276,000; $276,000/(14,000 + 8,000) = $12.55 per hour

Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic

9-119
9-120
83. Vanguard Corporation has provided the following data from its activity-based costing system:
Activity Cost
Pool
The company makes 430 units of product O37W a year, requiring a total of 690 machine-hours, 40
orders, and 10 inspection-hours per year. The product's direct materials cost is $35.72 per unit and its
direct labor cost is $29.46 per unit.
According to the activity-based costing system, the average cost of product O37W is closest to:

A. $94.11 per unit.

B. $89.72 per unit.
C. $65.18 per unit.
D. $92.49 per unit.
See calculation below.
The activity rates for each activity cost pool are computed as follows:
Total
Total Activity Activity Rate
Cost
per
$942,48 66,00 machine- $14.2
Assembly machine-
0 0 hours 8
hour
Processin $47.2
$85,050 1,800 orders per order
g orders 5
per
$126,85 inspectio $69.7
Inspection 1,820 inspectio
4 n-hours 0
n-hour
The overhead cost charged to Product O37W is:
Activity Rate Activity ABC Cost

per
$14.2 69 machine-
Assembly machine- $9,853.20
8 0 hours
hour
Processin $47.2
per order 40 Orders 1,890.00
g orders 5
per
$69.7 inspection
Inspection inspection 10 697.00
0 -hours
-hour
Total $12,440.2
9-121
overhead
0
cost
Direct materials (430 units ×

$15,359.60
$35.72 per unit)
Direct labor (430 units ×
12,667.80
$29.46 per unit)
Overhead 12,440.20 $40,467.60
Cost per unit (430
$94.11
units)

Blooms: Apply
Gradable: automatic

9-122
9-123
84. Pinnocle Corporation has provided the following data from its activity-based costing system:
Activity Cost
Pool
Assembly $1,114,920 57,000 machine-hours
inspection-
Inspection $107,328 1,560
hours
The company makes 430 units of product S78N a year, requiring a total of 1,120 machine-hours, 40
orders, and 30 inspection-hours per year. The product's direct materials cost is $49.81 per unit and its
direct labor cost is $12.34 per unit. The product sells for $129.90 per unit.
According to the activity-based costing system, the product margin for product S78N is:

A. $4,116.50.
B. $29,132.50.
C. $6,180.50.
D. $5,161.30.
Total
Cost
per
$1,114,92 57,00 machine- $19.5
Assembly machine-
0 0 hours 6
hour
Processin $26.1
$47,016 1,800 Orders per order
g orders 2
per
Inspectio inspectio $68.8
$107,328 1,560 inspectio
n n-hours 0
n-hour
The overhead cost charged to Product S78N is:
ABC
Activity Rate Activity
Cost
per
$19.5 1,12 Machine- $21,907.2
Assembly machine-
6 0 hours 0
hour
Processin $26.1
g orders 2
Inspectio $68.8 per 30 Inspectio 2,064.0
n 0 inspectio n-hours 0
9-124
n-hour
Total
$25,016.0
overhead
0
cost
Sales (430 units × $129.90

$55,857.00
per unit)
$21,418.30
$49.81 per unit)
5,306.20
$12.34 per unit)
Overhead 25,016.00 51,740.50
Product margin $4,116.50

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic

9-125
9-126
85. Donnati Corporation has provided the following data from its activity-based costing system:
Activity Cost
Pool
Data concerning one of the company's products, Product A43V, appear below:
Selling price per unit $124.60

Direct materials cost per unit $22.08
Direct labor cost per unit $45.77
Annual unit production and sales 210
Annual machine-hours 320
Annual orders 80
Annual inspection-hours 10
According to the activity-based costing system, the product margin for product A43V is:

A. $2,891.90.
B. $5,931.30.
C. $11,917.50.
D. $2,236.90.
Total
Cost
per
$383,18 23,00 machine- $16.6
Assembly machine-
0 0 hours 6
hour
Processin $46.1
$50,798 1,100 orders per order
g orders 8
per
$106,11 inspectio $65.5
Inspection 1,620 inspectio
0 n-hours 0
n-hour
The overhead cost charged to Product A43V is:
ABC
Cost
9-127
per
$16.6 32 machine- $5,331.2
Assembly machine-
6 0 hours 0
hour
Processing $46.1
orders 8
per
$65.5 inspection
Inspection inspection 10 655.00
0 -hours
-hour
Total
$9,680.6
overhead
0
cost
Sales (210 units × $124.60 per

$26,166.00
unit)
$4,636.80
$22.08 per unit)
9,611.70
$45.77 per unit)
Overhead 9,680.60 23,929.10
Product margin $2,236.90

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic

9-128

$82,000 8 12
setups setups
Material Number of
48,000 56 24
handling parts
Packaging Number of
130,000 80,000 50,000
costs units
$260,000
What is the total overhead allocated to Product M using the current system?

A. $113,600.
B. $130,000.
C. $146,400.
D. $160,000.
$260,000/130,000 = $2.00 per unit; $2(80,000) = $160,000

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

9-129

$82,000 8 12
setups setups
Material Number of
48,000 56 24
handling parts
Packaging Number of
130,000 80,000 50,000
costs units
$260,000
What is the total overhead per unit allocated to Product M using activity-based costing (ABC)?

A. $2.60.
B. $2.27.
C. $2.00.
D. $1.83.
($82,000/20)8 + ($48,000/80)56 + ($130,000/130,000)80,000 = $146,400; $146,400/80,000 = $1.83

Blooms: Apply
Gradable: automatic

9-130

$82,000 8 12
setups setups
Material Number of
48,000 56 24
handling parts
Packaging Number of
130,000 80,000 50,000
costs units
$260,000
What is the total overhead allocated to Product XY using the current system?

A. $113,600.
B. $100,000.
C. $146,400.
D. $160,000.
$260,000/130,000 = $2.00 per unit; $2(50,000) = $100,000

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

9-131

$82,000 8 12
setups setups
Material Number of
48,000 56 24
handling parts
Packaging Number of
130,000 80,000 50,000
costs units
$260,000
What is the total overhead per unit allocated to Product XY using activity-based costing (ABC)?

A. $2.60.
B. $2.27.
C. $2.00.
D. $1.83.
($82,000/20)12 + ($48,000/80)24 + ($130,000/130,000)50,000 = $113,600; $113,600/50,000 = $2.27

Blooms: Apply
Gradable: automatic

9-132
90. The Mega Construction 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 the Finishing Department has gathered the following data:

During April, Mega 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 the Finishing
Department needed 12 inspections. Actual overhead costs totaled $820,000 for the month.
How much overhead costs were applied to the Work-in-Process Inventory during April using activity-
based costing?

A. $536,000.
B. $720,000.
C. $736,000.
D. $820,000.
($100,000/$20)80 + 8($3,750) + $25(12,000) + $500(12) = $736,000

Blooms: Apply
Gradable: automatic

9-133
91. The Mega Construction 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 the Finishing Department has gathered the following data:

During April, Mega 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 the Finishing
Department needed 12 inspections. Actual overhead costs totaled $820,000 for the month.
How much overhead costs were applied to the Work-in-Process Inventory during April using
traditional costing?

A. $536,000.
B. $720,000.
C. $736,000.
D. $820,000.
$60(12,000) = $720,000

Blooms: Apply
Gradable: automatic

9-134
92. Markham Company makes two products: Basic Product and Deluxe Product. Annual production and
sales are 1,700 units of Basic Product and 1,100 units of Deluxe Product. The company has traditionally
used direct labor-hours as the basis for applying all manufacturing overhead to products. Basic Product
requires 0.3 direct labor hours per unit and Deluxe Product requires 0.6 direct labor hours per unit. The
total estimated overhead for next period is $98,785.
unit product costs for external reports. The new activity-based costing system would have three
overhead activity cost pools—Activity 1, Activity 2, and General Factory—with estimated overhead
costs and expected activity as follows:

Total
Activity 1 $30,528 1,000 600 1,600
Activity 2 17,385 1,700 200 1,900
General
50,872 510 660 1,170
Factory
Total $98,785
The predetermined overhead rate under the traditional costing system is closest to:

A. $9.15.
B. $43.48.
C. $84.43.
D. $19.08.
Direct labor-hour calculation:
Basic Product 1,700 units × .3 direct labor-hours 510

Deluxe Product 1,100 units × .6 direct labor-
660
hours
Total direct labor-hours 1,170
$98,785 total overhead ÷ 1,170 direct labor-hours = $84.43 per direct labor-hour

Blooms: Apply
Gradable: automatic
9-135


Total
Activity 1 $30,528 1,000 600 1,600
Activity 2 17,385 1,700 200 1,900
General
50,872 510 660 1,170
Factory
Total $98,785
The overhead cost per unit of Deluxe Product under the traditional costing system is closest to:

A. $50.66.
B. $5.49.
C. $26.09.
D. $11.45.
$84.43 × .6 direct labor-hours = $50.66 per unit

Blooms: Apply
Gradable: automatic

9-136

Total
Activity 1 $30,528 1,000 600 1,600
Activity 2 17,385 1,700 200 1,900
General
50,872 510 660 1,170
Factory
Total $98,785
The predetermined overhead rate (i.e., activity rate) for Activity 2 under the activity-based costing
system is closest to:

A. $9.15.
B. $51.99.
C. $86.93.
D. $10.23.
Total Cost Total Activity Activity Rate

Activity 1 $30,528 1,600 $19.08
Activity 2 17,385 1,900 $9.15
General Factory 50,872 1,170 $43.48
$98,785

Blooms: Apply
9-137
Gradable: automatic

9-138

Total
Activity 1 $30,528 1,000 600 1,600
Activity 2 17,385 1,700 200 1,900
General
50,872 510 660 1,170
Factory
Total $98,785
The overhead cost per unit of Deluxe Product under the activity-based costing system is closest to:

A. $50.66.
B. $26.09.
C. $35.28.
D. $38.16.
The overhead cost charged to Deluxe Product is:
Activity
Activity ABC Cost
Rate
Activity 1 $19.08 600 $11,448.00
Activity 2 $9.15 200 1,830.00
General
$43.48 660 28,696.80
Factory
41,974.80
# of
1,100
units
Per unit $38.16

9-139
Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic

9-140
9-141
Plain Fancy
The company is considering using a variation of activity-based costing to determine its unit product
costs for external reports. Data for this proposed activity-based costing system appear below:

Measures Cost
Supporting direct labor
$384,000
(DLHs)
345,600
types)
Total $985,440
Expected Activity
Plain Fancy Total
DLHs 9,000 15,000 24,000
Setups 1,032 936 1,968
The manufacturing overhead that would be applied to a unit of Plain under the company's traditional

A. $8.21.
B. $3.20.
C. $11.73.
D. $19.94.
9-142
Product Plain 45,000 units × .2 direct labor-
9,000
hours
Product Fancy 15,000 units × 1.0 direct labor-
15,000
hour
$985,440 total overhead ÷ 24,000 direct labor-hours = $41.06 per direct labor-hour
$41.06 per direct labor-hour × .2 direct labor-hours = $8.21 per unit

Blooms: Apply
Gradable: automatic

9-143
9-144
Plain Fancy

Measures Cost
$384,000
(DLHs)
345,600
types)
Total $985,440
Expected Activity
Plain Fancy Total
DLHs 9,000 15,000 24,000
Setups 1,032 936 1,968
The manufacturing overhead that would be applied to a unit of product Fancy under the activity-based

A. $71.57.
B. $41.06.
C. $8.11.
D. $30.51.
9-145
Total
Cost
Supporting
Per
direct labor $384,000 24,000 DLHs $16.00
DLH
(DLHs)
Setting up
Per
machines 255,840 1,968 Setups $130.00
Setup
(setups)
Parts Per
Part
administratio 345,600 864 $400.00 Part
types
n (part types) Type
$985,440
The overhead cost charged to Product Fancy is:
ABC
Cost
Supporting
Per
direct labor $16.00 15,000 DLHs $240,000
DLH
(DLHs)
Setting up
Per
machines $130.00 936 Setups 121,680
Setup
(setups)
Parts Per
Part
administratio $400.00 Part 240 96,000
types
n (part types) Type
$457,680
# of
15,000
units
Per
$30.51
unit

Blooms: Apply
Gradable: automatic

9-146
9-147
Slow Fast
Direct materials
$14.10 $43.40
per unit
Direct labor per
$3.20 $25.60
unit
Direct labor-hours
0.20 1.60
per unit

Measures Cost
444,000
variations)
Total $1,526,700
Expected Activity
Slow Fast Total
DLHs 6,000 24,000 30,000
Batches 1,380 1,410 2,790
The manufacturing overhead that would be applied to a unit of product Slow under the company's
traditional costing system is closest to:

A. $18.38.
B. $28.56.
C. $10.18.
D. $4.80.
9-148
Product Slow 30,000 units × .2 direct labor-

6,000
hours
Product Fast 15,000 units × 1.6 direct labor-
24,000
hours
$1,526,700 total overhead ÷ 30,000 direct labor-hours = $50.89 per direct labor-hour

Blooms: Apply
Gradable: automatic

9-149
Slow Fast
Direct materials
$14.10 $43.40
per unit
Direct labor per
$3.20 $25.60
unit
Direct labor-hours
0.20 1.60
per unit

Measures Cost
444,000
variations)
Total $1,526,700
Expected Activity
Slow Fast Total
DLHs 6,000 24,000 30,000
Batches 1,380 1,410 2,790
The manufacturing overhead that would be applied to a unit of product Fast under the activity-based

A. $81.42.
B. $65.02.
C. $146.44.
D. $12.22.
9-150
Total
Cost
Assemblin
30,00 Per
g products $720,000 DLHs $24.00
0 DLH
(DLHs)
Preparing
$130.0 Per
batches 362,700 2,790 Batches
0 Batch
(batches)
Product Per
Product
support $400.0 Product
1,110 variation
(product 444,000 0 Variatio
s
variations) n
$1,526,70

0
The overhead cost charged to Product Fast is:
ABC
Cost
Assemblin
Per 24,00 $576,00
g products $24.00 DLHs
DLH 0 0
(DLHs)
Preparing
$130.0 Per
batches 1,410 Batches 183,300
0 Batch
(batches)
Product Per
Product
support Product
(product $400.0
540 Variation 216,000
0 Variatio
s
variations) n
$975,30

0
# of units 15,000
Per unit $65.02

Blooms: Apply
Gradable: automatic
9-151

9-152
9-153
Long Short

Measures Cost
Part administration (part
1,008,000
types)
Total $3,170,400
Expected Activity
Long Short Total
DLHs 36,000 24,000 60,000
Setups 1,140 1,500 2,640
Part types 900 2,460 3,360
The unit product cost of product Long under the company's traditional costing system is closest to:

A. $54.20.
B. $73.27.
C. $64.25.
D. $31.00.
Product Long 45,000 units × .8 direct labor-

36,000
hours
9-154
Product Short 10,000 units × 2.4 direct labor-
24,000
hours
Direct materials $14.20

Direct labor 16.80
Processing 42.27
Unit product cost $73.27

Blooms: Apply
Gradable: automatic

9-155
9-156
Long Short

Measures Cost
Part administration (part
1,008,000
types)
Total $3,170,400
Expected Activity
Long Short Total
DLHs 36,000 24,000 60,000
Setups 1,140 1,500 2,640
Part types 900 2,460 3,360
Unit product cost of Product Short under the activity-based costing system is closest to:

A. $266.10.
B. $98.70.
C. $167.40.
D. $225.52.
Total
Total Cost Activity Rate
Activity
9-157
Direct labor
DLH Per
support $1,740,000 60,000 $29.00
s DLH
(DLHs)
Setting up
Per Per
machines 422,400 2,640 $160.00
Setup Setup
(setups)
Part Per Per
administratio 1,008,000 3,360 Part $300.00 Part
n (part types) Type Type
$3,170,400
The overhead cost charged to Product Short is:

Direct labor
Per DLH
support $29.00 24,000 $696,000
DLH s
(DLHs)
Setting up
Per Per
machines $160.00 1,500 240,000
Setup Setup
(setups)
Part Per Per
administratio $300.00 Part 2,460 Part 738.000
n (part types) Type Type
$1,674,000
# of
10,000
units
Per
$167.40
unit

Blooms: Apply
Gradable: automatic

9-158
9-159
VIP Kommander

Measures Cost
1,134,000
variations)
Total $2,449,440
Expected Activity
VIP Kommander Total
DLHs 24,000 30,000 54,000
Batches 1,458 1,026 2,484
The unit product cost of Product VIP under the company's traditional costing system is closest to:

A. $53.30.
B. $70.32.
C. $43.10.
D. $78.57.
Product VIP 40,000 units × .6 direct labor-hours 24,000

Product Kommander 15,000 units × 2.0 direct 30,000
9-160
labor-hours
Direct materials $27.50

Direct labor 15.60
Processing 27.22
Unit product cost $70.32

Blooms: Apply
Gradable: automatic

9-161
9-162
VIP Kommander

Measures Cost
1,134,000
variations)
Total $2,449,440
Expected Activity
VIP Kommander Total
DLHs 24,000 30,000 54,000
Batches 1,458 1,026 2,484
The unit product cost of Product Kommander under the activity-based costing system is closest to:

A. $204.82.
B. $68.70.
C. $182.80.
D. $114.10.
Total Cost Total Activity Activity Rate

Assembling products (DLH) $918,000 54,000 DLHs $17.00 Per DLH
9-163
Preparing batches (batches) 397,440 2,484 Batches $160.00 Per Batch
Product support (product Product
Per Product Variation
variations) 1,134,000 3,780 variations $300.00
$2,449,440
The overhead cost charged to Product Kommander is:

Assembling products (DLHs) $17.00 Per DLH 30,000 DLHs $510,000
Preparing batches (batches) $160.00 Per Batch 1,026 Batches 164,160
Product support (product Per Product Product
variations) $300.00 Variation 1,188 Variations 356,400
$1,030,560
# of units 15,000
Per unit $68.70

Blooms: Apply
Gradable: automatic

9-164
104. Miracle Consulting Corporation has its headquarters in Chicago and operates from three branch offices
in Portland, Dallas, and Miami. Two of the company's activity cost pools are General Service and
Research Service. These costs are allocated to the three branch offices using an activity-based costing
system. Information for next year follows:
Activity Cost Estimated

Activity Measure
Pool Cost
% of time devoted to
General service $700,000
branch
Research
Computer time $140,000
service
Estimated branch data for next year is as follows:
% of time Computer time

Portland 30% 200,000 minutes
Dallas 60% 150,000 minutes
Miami 10% 50,000 minutes
How much of the headquarters cost allocation should the Dallas office expect to receive next year?

A. $280,000.
B. $409,500.
C. $472,500.
D. $504,000.
Allocations to the Dallas office:
General service (60% × $700,000) $420,000

Research service* 52,500
Total $472,500
*$140,000 ÷ 400,000 minutes × 150,000 minutes = $52,500

Blooms: Apply
Gradable: automatic

9-165
105. A basic assumption of activity based costing (ABC) is that:

A. All manufacturing costs vary directly with units of production.

B. Products or services require the performance of activities and activities consume resources.
C. Only costs that respond to unit-level drivers are product costs.
D. Only variable costs are included in the activity cost pools.
ABC identifies activities needed to provide products and services, assigns costs to activities, and then
reassigns them to products or services based on their consumption of resources.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

106. In an activity-based costing (ABC) system, what should be used to assign departmental manufacturing
overhead costs to products produces in varying lot sizes?

A. A product's ability to bear cost allocations.

B. A single cause-and-effect relationship.
C. Multiple cause-and-effect relationships.
D. Relative net sales values of the products.
An ABC system determines the multiple activities associated with costs incurred and accumulates a cost
pool for each activity using a cost driver.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

9-166
107. Mission 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)
Wall Specialty

Mirrors Windows
Material moves per
5 15
product line
200 300
product line
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.
$50,000/(200 + 300) = $100; ($100 × 200)/40 = $500

Blooms: Apply
Gradable: automatic

9-167
Wall Specialty

Mirrors Windows
Material moves per
5 15
product line
200 300
product line
Under a traditional costing system that allocates overhead on the basis of direct labor hours, the
materials handling costs allocated to one unit of specialty windows would be:

A. $1,500.
B. $500.
C. $2,000.
D. $5,000.
$50,000/(200 + 300) = $100; ($100 × 300)/20 = $1,500

Blooms: Apply
Gradable: automatic

9-168
Wall Specialty

Mirrors Windows
Material moves per
5 15
product line
200 300
product line
wall mirrors would be:

A. $625.00.
B. $312.50.
C. $833.33.
D. $1,000.00.
$50,000/(5 + 15) = $2,500; ($2,500 × 5)/40 = $312.50

Blooms: Apply
Gradable: automatic

9-169
Wall Specialty

Mirrors Windows
Material moves per
5 15
product line
200 300
product line
specialty windows would be:

A. $1,875.00.
B. $937.50.
C. $312.50.
D. $1,500.00.
$50,000/(5 + 15) = $2,500; ($2,500 × 15)/20 = $1,875.00

Blooms: Apply
Gradable: automatic

Essay Questions

9-170
111. Falcon Company manufactures and sells two models of a computer tablets. The Basic Model is has
limited networking capability while the Explorer Model has significantly more features. The tablets are
produced to order and the company has no inventories at the end of the year.
The cost accounting system at Falcon allocates overhead to products based on direct-labor cost.
Overhead in year 1, which just ended, was $4,012,500. Other data for year 1 for the two products
follow:
Basic Model Explorer Model

(20,000 units) (3,000 units)
Sales revenue $6,600,000 $3,645,000
Direct materials 3,200,000 450,000
Direct labor 1,600,000 675,000
Required:
a. Compute product line profits for the Basic Model and the Explorer Model for year 1.
b. A study of overhead shows that without the Basic Model, overhead would fall to $2,750,000.
Assume all other revenues and costs would remain the same for the Explorer Model in year 2. Compute
product line profits for the Explorer Model in year 2 assuming the Basic Model was not produced or
sold.

Basic Explorer Total

Sales
a. $6,600,000 $3,645,000 $10,245,000
revenue
Direct
3,200,000 450,000 3,650,000
material
Direct
1,600,000 675,000 2,275,000
labor
Overhead
2,400,000 b 1,012,500 c 3,412,500
(@150%)a
Product
$7,200,000 $2,137,500 $9,337,500
cost
Profit ($600,000) $1,507,500 $907,500
a
150% = ($4,012,500 overhead ÷ $2,275,000 direct labor).
b
$2,400,000 = $1,600,000 direct labor × 150%.
c
$1,012,500 = $675,000 direct labor × 150%.
b. After dropping the Basic Model, the profit on the Explorer Model (and for the company) becomes
negative.
Explorer Total
9-171
Sales revenue $3,645,000 $3,645,000
Direct Labor 450,000 450,000
Direct materials 675,000 675,000
Overhead 2,750,000 a 2,750,000
Product cost $3,875,000 $3,875,000
Profit ($230,000) ($230,000)
a
Given.

Blooms: Analyze
Gradable: manual

9-172
9-173
Required:
Fill in the chart above indicating the activity level of each of these costs:

A. Bread for burger

buns
B. Take-out bags
assuming one per
customer order
C. Ground sirloin
D. Mayonnaise,
onions
E. Salary of the

restaurant manager
F. Restaurant rent
G. Workers hourly

wages
H. Advertising and
coupons for

Brenda’s Colossal
Burger
I. Utilities
J. Brenda’s Buy-
Any One Burger

and Get one Free
Burger Promotion


A. Bread for burger
X
buns
B. Take-out bags
assuming one per X
customer order
C. Ground sirloin X
D. Mayonnaise, X
9-174
onions
E. Salary of the
X
restaurant manager
F. Restaurant rent X
G. Workers hourly
X
wages
H. Advertising and
coupons for
X
Brenda’s Colossal
Burger
I. Utilities X
J. Brenda’s Buy-
Any One Burger
X
and Get one Free
Burger Promotion

Blooms: Analyze
Gradable: manual

9-175
113. Conway Mountain Analysis offers agriculture and environmental assays. Its Soil Division performs
testing on soil (S) as well as examines for the presence of pesticide residue (PR). Aggregated operating
costs for the division are $1,050,000 based on a single overhead pool at a rate of $70 per testing hour. S
testing uses 5,000 hours and PR uses 10,000 hours. The company is trying to determine whether a better
costing structure can be established. As such the controller identifies the following costs.
(1) Salaries and wages of laboratory techs are $600,000 based on 45% to S testing and 55% to PR
testing.
Required:
Classify (1) through (4) above as output-, batch-, product-, or facility-level costs.

Output unit-level costs:
1. Salaries and wages of lab technicians $600,000

2. Equipment-related costs $150,000
These costs are likely to vary with the number of test-hours, which are functions of the output units
(test).
Batch-level costs:
3. Setup costs $120,000

Setup costs are incurred each time a batch of tests is setup for either S or PR, regardless of the number
of hours of the tests.
Product-level costs:
4. Costs of test designs $180,000

These costs are incurred in designing S and PR tests, regardless of the number of test-hours or number
of batches tested.

Blooms: Analyze
Gradable: manual

9-176
9-177
114. Conform Foam Products produces different kinds of industrial packing materials, all in one
manufacturing facility. They have identified four activities for their costing system:
Materials management—allocated by number of purchase orders

Chemical processing—allocated on metric tons
Molding—allocated on direct labor hours
Packaging—allocated by number of units produced
The activity rates are as follows:
Materials management $10.00 Per purchase order

Chemical processing $6.50 Per metric ton
Molding $23.50 Per direct labor hour
Packaging $0.25 Per unit
Engineering design shows that the order will require direct material worth $775, direct labor cost being
$125, require 5 purchase orders to be placed, use 6 metric tons of chemical base, need 12 direct labor
hours. The size of the order is to produce 5,000 units of product.
Required:
(1) Calculate the overhead cost of the order.

(2) Calculate total cost of production of the order.

(1) Computation of overhead cost of the order:*
Level of
Cost
Cost utilizatio Cost
Activity driver
driver n of allocated
rate
activity
Materials Purchase
5 $10.00 $50.00
management order
Chemical Metric
6 $6.50 $39.00
processing ton
Direct
Molding 12 $23.50 $282.00
labor hour
Number
Packaging 5,000 $0.25 $1,250.00
of units
Total
$1,621.00
overhead cost
(2) Calculation of total cost of the order:
9-178
Direct material $775.00
Direct labor 125.00
Overhead cost* 1,621.00
Total production cost $2,521.00

Blooms: Analyze
Gradable: manual

9-179
115. Blalock Company manufactures and distributes several different products. The company currently uses
a plantwide allocation method for allocating overhead at a rate of $10 per direct labor hour. Department
A produces Products #101X and #102Y. Department A has $262,000 in traceable overhead. Department
B manufactures Product #103Z. Department B has $128,000 in traceable overhead. The product costs
(per unit) and other information are as follows:
Products
101X 102Y 103Z
Direct
$60.00 $58.00 $46.00
materials
Direct
42.00 31.50 12.00
labor
Overhead 40.00 30.00 20.00
$142.00 $119.50 $78.00
Machine
hours (per 4 2 3
unit)
Number of
cases (per 3,000 5,000 6,000
year)
Required:
a. If Blalock changes its allocation basis to machine hours, what is the total product cost per unit for
Product 101X, 102Y, and 103Z?
b. If Blalock changes its overhead allocation to departmental rates, what are the product costs per unit
for Product 101X, 102Y, and 103Z, assuming Departments A and B use direct labor hours and machine
hours as their respective allocation bases?

a. 101X: $39.00; 102Y: $19.50; 103Z: $29.25

b. 101X: $38.8148; 102Y: $29.1111; 103Z: $21.3333
a. Overhead rate: ($262,000 + 128,000)/(4 × 3,000 + 2 × 5,000 + 3 × 6,000) = $9.75/MH; 101X: $9.75
× 4 MH = $39.00; 102Y: $9.75 × 2 MH = $19.50; 103Z: $9.75 × 3 MH = $29.25
b. Labor time: 101X: OH $40/$10 rate = 4 hrs; 102Y: $30/$10 = 3 hrs; 103Z: $20/$10 = 2 hrs
Dept A: $262,000/(4 × 3,000 + 3 × 5,000) = $9.7037/DLH; 101X: $9.7037 × 4 DLH = $38.8148; 102Y:
$9.7037 × 3 DLH = $29.1111
Dept B: $128,000/(3 × 6,000) = $7.1111/MH; 103Z: $7.1111 × 3 MH = $21.3333

Blooms: Analyze
Gradable: manual

9-180
9-181
116. Conway Mountain Analysis offers agriculture and environmental assays. Its Soil Division performs
testing on soil (S) as well as examines for the presence of pesticide residue (PR). Aggregated operating
costs for the division are $1,050,000 based on a single overhead pool at a rate of $70 per testing hour. S
testing uses 5,000 hours and PR uses 10,000 hours. The company is trying to determine whether a better
costing structure can be established. As such the controller identifies the following costs.
(1) Salaries and wages of laboratory techs are $600,000 (based on 45% for S and 55% for PR testing).
Required:
(a) Calculate the cost per test hour for S and PR using an improved costing system.
(b) Explain briefly the reasons for why these costs are different from the $70 per test-hour under the
current costing system.

Soil (S) Pesticide (PR)

Per Per
(a) TOTAL TOTAL TOTAL
Hour Hour
10,00
Test hours 5,000 15,000
0
Salaries $270,00 $54.0 $330,00 $33.0 $600,00
and Wages 0 0 0 0 0
Equipment-
related
costs*
$10.0
S 50,000
0
$10.0
PR 100,000
0
Setup

costs#
$10.0
S 50,400
8
PR 69,600 $6.96
Test design

costs&
$23.4
S 117,000
0
PR 63,000 6.30
9-182
TOTA $487,40 $97.4 $562,60 $56.2

L 0 8 0 6
*Equipmen
$150,00
t-related
0
costs
Test
5,000 10,000 15,000
hours
Per test
$10
hour
Total 50,000 100,000
#
Setup $120,00

costs: 0
Setup
4,200 5,800 10,000
hours
Per hour $12.00
Total 50,400 69,600
&
Test
$180,00
design
0
costs:
Test
design 3,250 1,750 5,000
hours
Per hour $36.00
Total 117,000 63,000
(b) The current costing system of charging $70 per test-hour for overhead undercosts the soil analyses
(S) and overcosts the pesticide residues analyses (PRT). Soil analyses use more setup costs and test
design costs than pesticide residue analyses, even though S has less test hours than PR. On average, S
tests take longer to setup (0.84 versus 0.58 setup hour per test hour) and it is more difficult to design the
test (0.65 versus 0.175 setup hours per test hour).
Test Design Hours
Setup Hours
Per Per
Test-
Total Test- Total Test-
Hours
Hour Hour
S 5,000 4,200 0.84 3,250 0.65
PR 10,000 5,800 0.58 1,750 0.175

Blooms: Analyze
Gradable: manual

9-183
117. Pretty Dog Corporation manufactures two models of grooming stations, a standard and a deluxe model.
The following activity and cost information has been compiled:
Number of
Number Number of Direct
Product
of Setups Components Labor
Hours
Standard 3 30 650
Deluxe 7 50 150
Overhead
$30,000 $50,000
costs
Assume a traditional costing system applies the overhead costs based on direct labor hours.
Required:
a. What is the total amount of overhead costs assigned to the standard model?
b. What is the total amount of overhead costs assigned to the deluxe model?
Assume an activity-based costing system is used and that the number of setups and the number of
components are identified as the activity-cost drivers for overhead.
c. What is the total amount of overhead costs assigned to the standard model?
d. What is the total amount of overhead costs assigned to the deluxe model?

a. $65,000
b. $15,000
c. $27,750
d. $52,250
a. Overhead rate: ($30,000 + 50,000)/(650 + 150) = $100/DLH: Std: $100 × 650 = $65,000
b. Deluxe: $100 × 150 = $15,000
c. Setups: $30,000/(3 + 7) = $3,000/Setup; Components: $50,000/(30 + 50) = $625/component; Std:
($3,000 × 3) + ($625 × 30) = $27,750
d. Deluxe: ($3,000 × 7) + ($625 × 50) = $52,250

Blooms: Analyze
Difficulty: 1 Easy
Gradable: manual

9-184
118. JennerMaid Company manufactures and distributes several different products. The company currently
uses a plantwide allocation method for allocating overhead at a rate of $20 per direct labor hour.
Department 1 produces Product X. Department 1 has $256,000 in traceable overhead. Department 2
manufactures Products Y and Z. Department 2 has $524,000 in traceable overhead. The product costs
(per unit) and other information are as follows:
Products
X Y Z
Direct
$85.00 $74.00 $66.00
materials
Direct
42.00 31.50 22.00
labor
Overhead 40.00 30.00 20.00
$167.00 $135.50 $108.00
Machine
hours (per 4 2 3
unit)
Number of
units (per 6,000 10,000 12,000
year)
Required:
a. If JennerMaid changes its allocation basis to machine hours, what is the overhead cost per unit for
Product X, Y, and Z?
b. If JennerMaid changes its overhead allocation to departmental rates, what are the overhead costs per
unit for Product X, Y, and Z, assuming Department 1 uses direct labor hours and Department 2 uses
machine hours as their respective allocation bases?

a. X: $39.00; Y: $19.50; Z: $29.25

b. X: $42.6667; Y: $18.7142; Z: $28.0714
a. Overhead rate: ($256,000 + 524,000)/(4 × 6,000 + 2 × 10,000 + 3 × 12,000) = 9.75/MH; X: $9.75 ×

4 MH = $39.00; Y: $9.75 × 2 MH = $19.50; Z: $9.75 × 3 MH = $29.25;
b. Labor time: X: OH $40/$20 rate = 2 hr; Y: $30/$20 = 1.5 hr; Z: $20/$20 = 1 hr
Dept 1: $256,000/(2 × 6,000) = $21.3333/DLH; X: $21.3333 × 2 DLH = $42.6667;
Dept 2: $524,000/(2 × 10,000 + 3 × 12,000) = $9.3571/MH; Y: $9.3571 × 2 MH = $18.7142; Z:
$9.3571 × 3 MH = $28.0714

Blooms: Analyze
Gradable: manual

9-185
9-186
119. Cameron Company has two major segments with the following information:
East West Total

Annual Revenue $400,000 $1,200,000 $1,600,000
Annual
salesperson 300,000 450,000 750,000
salaries
Number of
60 90 150
customers
Miles driven 180,000 120,000 300,000
The business also has overhead costs as follows:
Cost Pool Cost in Pool Cost driver

Travel $72,000 Number of miles driven
Entertainment 288,000 Number of customers
Administrative 289,000 Salaries
Total $649,000
NOTE: overhead does not include salesperson salaries.
Required:
a. Determine the income of each segment if overhead costs are allocated based on sales revenue.
b. Determine the income of each segment if overhead costs are allocated using activity-based cost
drivers.

a. East: $-62,250; West: $263,250

b. East: $-174,000; West: $375,000
a. $649,000/$1,600,000 = 40.5625%; East: 40.5625% × $400,000 = $162,250; West: 40.5625% ×

$1,200,000 = $486,750
East West Total

Annual Revenue $400,000 $1,200,000 $1,600,000
Annual
salesperson 300,000 450,000 750,000
salaries
Overhead 162,250 486,750 649,000
Income ($62,250) $263,250 $201,000
b. Travel: $72,000/300,000 = $0.24/mile; East: $0.24 × 180,000 = $43,200; West: $0.24 × 120,000 =
$28,800; Entertainment: $288,000/150 = $1,920/customer; East: $1,920 × 60 = $115,200; West: $1,920
9-187
× 90 = $172,800; Admin: $289,000/$750,000 = 38.5333%; East 38.5333% × $300,000 = $115,600;
West: 38.5333% × 450,000 = $173,400
East West Total

Annual Revenue $400,000 $1,200,000 $1,600,000
Annual
salesperson 300,000 450,000 750,000
salaries
Travel 43,200 28,800 72,000
Entertainment 115,200 172,800 288,000
Administrative 115,600 173,400 289,000
Income ($174,000) $375,000 $201,000

Blooms: Analyze
Gradable: manual

9-188
9-189
120. The Sparkle Cleaning Company provides housecleaning services to its clients. The company uses an
activity-based costing system for its overhead costs. The company has provided the following data from
its activity-based costing system.

Total $239,770
One particular client, the Smith family, requested 32 jobs during the year that required a total of 192
Required:
a. Using the activity-based costing system, compute the client margin for the Smith family. Round off
b. Assume the company decides instead to use a traditional costing system in which ALL costs are
allocated to clients on the basis of cleaning hours. Compute the margin for the Smith family. Round off

a. The first step is to compute activity rates:
Total
Cost
per
Cleaning $101,574 16,200 hours $6.27
hour
Job support $32,724 1,800 jobs $18.18 per job
Client per
$5,472 320 clients $17.10
support client
b. The overhead cost charged to the family is:

Per
Cleaning $6.27 192 hours $1,203.84
hour
Job support $18.18 Per job 32 jobs 581.76
Per
Client support $17.10 1 client 17.10
client
Total overhead
$1,802.70
cost
9-190
The client margin for the family is computed as follows:
Client charges $2,200.00

Costs:
Cleaning $1,203.84
Job support 581.76
Client support 17.10 1,802.70
Client margin $397.30
b. The margin if all costs are allocated on the basis of cleaning hours:
Predetermined overhead rate = Estimated total overhead cost ÷ Estimated total amount of the allocation
base = $239,770 ÷ 16,200 hours = $14.80 per hour

Allocated costs (192 hours
2,841.60
× $14.80 per hour)
Client margin ($641.60)

Blooms: Apply
Gradable: manual

9-191
9-192
121. Cooke Company manufactures two products, Product F and Product G. The company expects to
produce and sell 1,400 units of Product F and 1,800 units of Product G during the current year. The
company uses activity-based costing to compute unit product costs for external reports. Below are
current year data for the company's three activity cost pools.
Total Activity
Activity
Total
Cost Product F Product G Total
Cost
Pool
Machine $10,80 setup setup setup
80 100 180
setups 0 s s s
Purchas $77,52 order 1,01 order 1,52 order
510
e orders 0 s 0s 0s
General $75,92 2,24 3,60 5,84
hours hours hours
factory 0 0 0 0
Required: Using the activity-based costing approach, determine the overhead cost per unit for each
product.

Total Total
Activity Rate
Cost Activity
Machine per
$10,800 180 setups $60.00
setups setup
Purchase per
$77,520 1,520 orders $51.00
orders order
General per
$75,920 5,840 hours $13.00
factory hour
The overhead cost charged to Product F is:
ABC
Cost
Machine per
$60.00 80 setups $4,800
setups setup
Purchase per
$51.00 510 orders 26,010
orders order
General per
$13.00 hours 2,240 29,120
factory hour
Total
overhead $59,930
cost
9-193
The overhead cost charged to Product G is:
ABC
Cost
Machine per
$60.00 100 setups $6,000
setups setup
Purchase per
$51.00 1,010 orders 51,510
orders order
General per
$13.00 hours 3,600 46,800
factory hour
Total
overhead $104,310
cost
Overhead cost per unit:

Product F: $59,930 ÷ 1,400 units = $42.81 per unit
Product G: $104,310 ÷ 1,800 units = $57.95 per unit

Blooms: Apply
Gradable: manual

9-194
122. Barnard Corporation has provided the following data from its activity-based costing accounting system:
Activity Cost Total

Total Activity
Pools Cost
Designing product design
$806,715 6,895
products hours
Assembling
products
Required:

Total
Cost
per
product
Designing product
$806,715 6,895 design $117
products design
hours
hour
Batch batch set- per batch
$23,660 910 $26
Setup ups set-up
per
Assembling assembly
$42,240 3,520 $12 assembly
products hours
hour

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

9-195
123. Data concerning three of Parkeman Corporation's activity cost pools appear below:
Activity Cost Total

Total Activity
Pools Cost
Assembling
products
Designing product design
$557,220 3,012
products hours
Required:

Total
Cost
per
Assembling assembly
$49,830 4,530 $11 assembly
products hours
hour
per
product
Designing product
$557,220 3,012 design $185
products design
hours
hour
Batch batch set- per batch
$38,180 830 $46
Setup ups set-up

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

9-196
9-197
124. Safety Corporation uses the following activity rates from its activity-based costing to assign overhead
costs to products.

Product C Product E
Required:
How much overhead cost would be assigned to each of the two products using the company's activity-
based costing system?

The overhead cost charged to Product C is:
ABC
Cost
Batch
$62.52 per batch 66 batch $4,126.32
Setup
Processing per
customer
customer $19.58 customer 46 900.68
orders
orders order
per
Assemblin assembly
$8.71 assembly 419 3,649.49
g products hour
hour
Total
overhead $8,676.49
cost
The overhead cost charged to Product C is:
ABC
Cost
Batch
$62.52 per batch 53 batch $3,313.56
Setup
Processing $19.58 per 31 customer 606.98
9-198
customer customer
orders
orders order
per
Assemblin assembly
$8.71 assembly 162 1,411.02
g products hour
hour
Total
overhead $5,331.56
cost

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

9-199
125. Work Horse Corporation uses the following activity rates from its activity-based costing to assign
overhead costs to products.
Activity Cost
Activity Rate
Pools
Assembling per assembly
$2.88
products hour
Processing per customer
$50.41
customer orders order
Product J Product S
Required:
a. How much overhead cost would be assigned to Product J using the company's activity-based costing
b. How much overhead cost would be assigned to Product S using the company's activity-based costing

a. Product J
Batch Setup (34 batches × $83.75 per batch) $2,847.50

Assembling products (105 assembly hours ×
302.40
$2.88 per assembly hour)
Processing customer orders (17 customer
856.97
orders × $50.41 per customer order)
Total overhead cost $4,006.87
b. Product S

2,373.12
1,915.58
9-200

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

126. Maxim Corporation uses the following activity rates from its activity-based costing to assign overhead
costs to products.

Last year, Product P involved 33 batches, 1 customer orders, and 368 assembly hours.
Required:
How much overhead cost would be assigned to Product P using the company’s activity-based costing


55.40
500.48

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

9-201
9-202
127. Sarno Corporation has an activity-based costing system with three activity cost pools-Processing, Batch
Setup, and Other. Costs in the Processing cost pool are assigned to products based on machine-hours
(MHs) and costs in the Batch Setup cost pool are assigned to products based on the number of batches.
Costs in the Other cost pool are not assigned to products. Data concerning the two products and the
company's costs and activity-based costing system appear below:
Activity Cost Pools

Processing $3,000
Batch Setup $9,800
Other $9,200
MHs Batches
Product #1 5,800 700
Product #2 4,200 300
Total 10,000 1,000
Sales (total) $45,300 $48,400
Required:
costing.

a. The activity rates for each activity cost pool are computed as follows:
Total
Cost
per
Processing $3,000 10,000 MHs $0.30
MH
per
Batch Setup $9,800 1,000 Batches $9.80
batch
b. The overhead cost charged to Product #1 is:
ABC
Cost
Processing $0.30 per 5,800 MHs $1,740
9-203
MH
per
Batch Setup $9.80 700 batches 6,860
batch
Total overhead
$8,600
cost
The overhead cost charged to Product #2 is:
ABC
Cost
per
Processing $0.30 4,200 MHs $1,260
MH
per
batch
Total overhead
$4,200
cost
c. Determine product margins:
Sales $45,300 $48,400
Direct materials $19,600 $16,900
Direct labor 15,900 24,200
Processing 1,740 1,260
Batch Setup 6,860 44,100 2,940 45,300
Product margin $1,200 $3,100

Blooms: Apply
Gradable: manual

9-204
128. Market Corporation has an activity-based costing system with three activity cost pools-Processing,
Batch Setup, and Other. The company's overhead costs, which consist of factory utilities and indirect
Data concerning the company's costs and activity-based costing system appear below:

Distribution of Resource Consumption Across

Activity Cost Pools
Processing Batch Setup Other
Factory utilities 0.10 0.60 0.30
Required:

Assign overhead costs to activity cost pools by applying the percentages in the Distribution of Resource
Consumption Across Activity Cost Pools table to the respective costs. For example, the first entry in the
table is computed as follows: $39,000 × 0.10 = $3,900.
Activity Cost Pools

Batch
Processing Other Total
Setup
Factory
$3,900 $23,400 $11,700 $39,000
utilities
Indirect
900 300 1,800 3,000
labor
Total $4,800 $23,700 $13,500 $42,000

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

9-205
129. Vargus Corporation has an activity-based costing system with three activity cost pools-Processing,
Batch Setup, and Other. The company's overhead costs consist of equipment depreciation and indirect
labor and are allocated to the cost pools in proportion to the activity cost pools' consumption of
resources. Equipment depreciation totals $72,000 and indirect labor totals $8,000. Data concerning the
distribution of resource consumption across activity cost pools appear below:
Batch Othe
Processing
Setup r
Equipment
0.20 0.40 0.40
depreciation
Required:

Assign overhead costs to activity cost pools by applying the percentages in the above table to the
respective costs. For example, the first entry in the below table is computed as follows: $72,000 × 0.20
= $14,400.
Activity Cost Pools

Batch
Setup
Equipment
$14,400 $28,800 $28,800 $72,000
depreciation
Indirect labor 1,600 2,400 4,000 8,000
Total $16,000 $31,200 $32,800 $80,000

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

9-206
9-207
130. Yang Corporation has an activity-based costing system with three activity cost pools-Machining, Batch
labor, have been allocated to the cost pools already and are provided in the table below.
Activity Cost Pools

Machinin Setting
Other Total
g Up
Equipment
$27,200 $6,800 $34,000 $68,000
depreciation
Indirect labor 2,500 1,000 1,500 5,000
Total $29,700 $7,800 $35,500 $73,000
Costs in the Machining cost pool are assigned to products based on machine-hours (MHs) and costs in
the Batch Setup cost pool are assigned to products based on the number of batches. Costs in the Other
cost pool are not assigned to products. Data concerning the two products and the company's costs
appear below:
MHs Batches
Product Z 4,400 400
Product Q 5,600 1,600
Total 10,000 2,000
Product Z Product Q
Sales (total) $137,900 $173,300
Required:
costing.

a. Computation of activity rates:
Activity Cost Total Total Activity

Pools Cost Activity Rate
$2.97 per
Machining $29,700 10,000 MHs
MH
2,000 $3.90 per
Batch Setup $7,800
batches batch
9-208
b. Assign overhead costs to products:
Overhead cost for Product Z:

Machining $2.97 per MH 4,400 MHs $13,068
Batch Setup $3.90 per batch 400 batches 1,560
Total $14,628
Overhead cost for Product Q:

ABC
Cost
Machining $2.97 per MH 5,600 MHs $16,632
Batch Setup $3.90 per batch 1,600 batches 6,240
Total $22,872
Product Z Product Q
Sales $137,900 $173,300
Direct
$59,700 $43,400
materials
Machining 13,068 16,632
Batch Setup 1,560 131,828 6,240 162,272
Product
$6,072 $11,028
margin

Blooms: Apply
Gradable: manual

9-209
131. Air Dream Products has contracted with you to analyze and update its costing and pricing practices. The
company product line has changed over time from general air conditioning units to customizable mini-
split units. Although some large orders are received, the majority of business is now generated from
products designed and produced in small lots in order to meet specific detailed environmental and
technical standards.
The company has experienced increased overhead growth, including costs in customer service,
production scheduling, inventory control and laboratory work. Overhead has doubled since the shift in
product lines and management believes that the larger orders are being penalized, while smaller orders
are receiving favorable cost and selling price treatment.
Required:
1. Why would the shift in product lines have caused such major increases in overhead?
2. Is it possible that management is correct in its belief about the costs of the large and small orders and,
if so, why?
3. Write a memo to management suggesting how it might change the cost accounting system to reflect
the changes in the business.

1. It is possible that as variety in products increases, costs will also increase. Therefore, the shift to
small special orders will increase costs in purchasing (more orders, more calls to get prices, more space
required for catalogs, etc.), receiving (more orders and receipts to handle and account for), storage
(different products must be grouped together and differentiated from other products for easy
accessibility), accounting (more inventory to account for, potentially more suppliers to pay), customer
service (new larger catalogs, possible complaints from customers receiving wrong or slightly wrong
orders, more time for sales calls), production scheduling (variety in setups, increase in movement of
materials depending on production run), and laboratory work (research and development tests incurred
to make certain that the products meet the appropriate environmental and technical requirements).
2. It is extremely possible that management is correct, because total overhead costs are typically
allocated to products based on some single allocation base such as direct labor hours or machine hours.
These single allocation bases do not reflect the actual cause-and-effect relationships between cost
drivers and overhead costs.
3. Student submissions will vary. However, the memo should suggest that management consider the use
of multiple overhead allocation bases and activity-based costing. This method of overhead allocation
attempts to more fairly attach costs to the products and/or services that actually caused the costs to be
incurred.

Blooms: Remember
Gradable: manual

9-210
132. How can activity-based systems help managers in a global marketplace?

Activity-based systems are information systems that provide cost data about the activities within the
organization. With this information, managers can make better decisions about their products and
product lines as well as about pricing their products or services and remain competitive in the global
marketplace.

Blooms: Remember
Gradable: manual

9-211
9-212
Required:
Suggest a proper cost driver for each of the following items
Example
A. Bread for burger buns
customer order
C. Ground sirloin

pickles, and onions
E. Salary of the restaurant

manager
F. Restaurant rent
G. Workers hourly wages
H. Coupons for Brenda’s

Colossal Burger
I. Utilities
Burger Promotion

Example
A. Bread for burger buns Number of burgers served
Number of customers in
drive-through
customer order
Number of burgers served
C. Ground sirloin
and/or size of burgers sold
Number of burgers served
pickles, and onions
E. Salary of the restaurant Number of hours restaurant
manager is open
F. Restaurant rent Square feet of restaurant
G. Workers hourly wages Number of hours worked
H. Coupons for Brenda’s Number of coupons
Colossal Burger distributed
I. Utilities Square feet of restaurant
9-213
Number of multiple burger
orders
Burger Promotion
(Student examples may differ.)

Blooms: Remember
Gradable: manual

9-214
9-215
134. Required:
For each of the following important costs in manufacturing companies, identify a cost driver and
explain why it is appropriate.
Driver and why

Manufacturing Costs
appropriate
A. Equipment maintenance
B. Building utilities
C. Computer operations
D. Quality control
E. Material handling
F. Material storage
G. Factory depreciation
H. Set up costs
I. Engineering changes
J. Advertising expense

Manufacturing
Driver and why appropriate
Costs
• machine hours (for maintenance
related to the volume of usage of
A. Equipment machinery),
maintenance •average age of equipment (for
obsolescence and age-related
maintenance)
• machine hours (for machine-driven
B. Building usage),
utilities • outside air temperature (for
weather-related usage)
C. Computer • number of transactions processed
operations (valid volume measure)
• number of product defects (volume
of quality defects),
• pounds of scrap and waste
D. Quality control
(volume of quality defects),
• number of quality inspections
(number of batches)
E. Material • pounds of material processed
handling (volume of work processed),
• number of different types of
material handled (complexity of
material handling),
9-216
• number of purchase orders
(volume of work processed by staff
and number of suppliers used)
• average amount of material
inventory (volume of material
F. Material storage stored),
• square footage of storage area
(storage capacity)
• amount of investment in factory
G. Factory
machinery and buildings (total cost
depreciation
basis for depreciation)
• number of setups (volume driver),
H. Set up costs • total time of setups (alternative
volume measure)
• number of engineering changes
(volume of engineering changes),
• number of process changes
I. Engineering (volume of changes to the
changes manufacturing processes),
• number of engineering change
orders (number of requests for
changes to products and processes)
• number of print ads (volume
measure),
J. Advertising
• seconds of air time (cost measure),
expense
• number of new ads developed
(measure of professional time)
(Student examples may differ.)

Blooms: Remember
Gradable: manual

135. Why is a plantwide allocation often considered to be a single-stage allocation approach? Explain.

A plantwide allocation uses only a single cost pool and a single allocation base. There is no distinction
made as to the department or activity that drives the costs.

Blooms: Remember
Gradable: manual
9-217

136. Describe the four steps involved in activity-based costing.

1. Identify the activities that consume resources and assign costs to them.
2. Identify the cost driver(s) associated with each activity.
3. Compute a cost rate per cost driver unit or transaction.
4. Assign costs to products by multiplying the cost driver rate by the volume of cost driver units
consumed by the product.

Blooms: Remember
Gradable: manual

137. Describe four classifications of cost drivers.

Volume related drivers are proportional to production volume. Batch related drivers are related to the
number of production runs or batches. Product related drivers are related to the number of products and
facility related drivers are related to the overall manufacturing capacity.

Blooms: Remember
Gradable: manual

9-218
138. Last year, Jasmine Taylor opened a gift store in a busy shopping center. She spent a lot on advertising
and attracted many customers into the store, but very few customers made purchases and sales were
declining. Jasmine paid attention to questions and requests made by customers and determined that they
often requested items that were within the scope of her business but that she did not carry. When she
offered to order items for her customers, delivery was usually too late and, again, sales were lost. What
measures should Jasmine take to improve her business?

Jasmine has learned that customer value means revenue generated. The money spent on advertising did
bring customers into the store, but it was not a value-adding activity as far as the customers were
concerned. An attractive storefront and in-store displays would decrease the cost of this non-value-
adding activity. Jasmine should also examine her product lines and find suppliers who can make faster
deliveries to meet customer requests. She will improve her business if she listens to her customers'
requests and offers quality goods at reasonable prices in a timely manner.

Blooms: Remember
Gradable: manual

139. "Activity-based costing is just a more precise form of product costing and is only usable in a production
setting." Do you agree or disagree. Explain why.

Activity-based costing can also be used in a not-for-profit context since ABC recognizes the cause of
costs. ABC can also be used for administrative activities.

Blooms: Remember
Gradable: manual

9-219
140. Explain how activity-based costing provides a more detailed measure of costs than do plantwide or

Activity-based costing first allocates costs to activities rather than departments. This means costs are
grouped by what causes them rather than the location of the cost. Second, different types of cost drivers
are used. Plantwide or department rates are normally based on volume related drivers while activity-
based costing also recognizes batch related and product related drivers. This more closely relates the
costs with their causal factors.

Blooms: Remember
Gradable: manual

141. In recent years, why has labor become such a small part of product costs and how can its use in
overhead allocation perpetrate errors in decision-making?

When cost systems were first being developed in industry, companies were far more labor intensive
than they are today. Much of the overhead cost was incurred to support labor, so it made sense to
allocate overhead to products based on the amount of labor in the products. Labor is still a major
product cost in many companies, especially service organizations such as consulting, law, and public
accounting firms. In those cases, overhead is often allocated to products (called jobs) on the basis of the
amount of labor in the product.
Despite automation, some companies stubbornly continue to allocate overhead to products based on
direct labor and are experiencing rates as high as 500 percent or more. When labor is such a small part
of product costs, there is little, if any, relation between labor and overhead. In addition, small errors in
assigning labor to products are magnified many times when overhead rates are several hundred percent
or more of labor costs. Finally, allocating overhead on the basis of direct labor sends signals that direct
labor is more expensive than it really is.

Blooms: Remember
Gradable: manual
Topic: Cost Flows Through Accounts

9-220
9-221
142. Lamar Company manufactures two products, Product K9 and Product L43. Product L43 is of fairly
recent origin, having been developed as an attempt to enter a market closely related to that of Product
K9. Product L43 is the more complex of the two products, requiring 2.0 hours of direct labor time per
unit to manufacture compared to 1.0 hour of direct labor time for Product K9. Product L43 is produced
on an automated production line.
Overhead currently is applied to the products on the basis of direct labor-hours. The company estimated
it would incur $510,000 in manufacturing overhead costs and produce 10,000 units of Product L43 and
40,000 units of Product K9 during the current year.
Unit costs for materials and labor are:

Direct material $11 $24
Direct labor $6 $12
Required:
a. Compute the predetermined overhead rate under the current method, and determine the unit product
cost of each product for the current year.
b. The company is considering the use of activity-based costing as an alternative to its traditional
costing method for manufacturing overhead. Data relating to the company's activity cost pools for the
current year are given below:
Total Activity
Activity Cost Total Product Product
Total
Pool Cost K9 L43
Machine setups
$204,000 800 1,600 2,400
required
Purchase orders
43,500 500 100 600
issued
Machine-hours
105,000 7,000 10,500 17,500
required
Maintenance
157,500 650 850 1,500
requests issued
$510,000
Using the data above, determine the unit product cost of each product for the current year.
c. What items of overhead cost make Product L43 so costly to produce according to the activity-based
costing system? What influence might the activity-based costing data have on management's opinions
regarding the profitability of Product L43?

a. The company expects to work 60,000 direct labor-hours during the current year, computed as follows:
9-222
Product K9: 40,000 units × 1 hour 40,000 hours
Product L43: 10,000 units × 2 hours 20,000 hours
Total direct labor-hours 60,000 hours
Using these hours as a base, the predetermined overhead using direct labor-hours would be:
Predetermined overhead rate = Estimated overhead cost ÷ Estimated direct labor-hours
= $510,000 ÷ 60,000 hours = $8.50 per hour
Using this overhead rate, the unit product cost of each product would be:

Direct materials $11.00 $24.00
Direct labor 6.00 12.00
Manufacturing overhead:
Product K9, 1.0 hour 8.50
Product L43, 2.0 hours 17.00
Total unit product cost $25.50 $53.00
b. The activity rates for each activity cost pool are as follows:
Total
Cost
Machine $204,00 per
2,400 setups $85.00
setups 0 setup
Purchase per
$43,500 600 orders $72.50
orders order
Machine- $105,00 17,50 per
hours $6.00
hours 0 0 hour
Maintenanc $157,50 $105.0 per
1,500 requests
e requests 0 0 request
The overhead cost charged to Product K9 is:
ABC
Cost
Machine per
$85.00 800 setups $68,000
setups setup
Purchase per
$72.50 500 orders 36,250
orders order
Machine- per
$6.00 7,000 hours 42,000
hours hour
Maintenance per
$105.00 650 requests 68,250
requests request
9-223
Total
overhead $214,500
cost
The overhead cost charged to Product L43 is:
ABC
Cost
Machine per $136,00
$85.00 1,600 setups
setups setup 0
Purchase per
$72.50 100 orders 7,250
orders order
Machine- per 10,50
$6.00 hours 63,000
hours hour 0
Maintenanc $105.0 per
850 requests 89,250
e requests 0 request
Total
$295,50
overhead
0
cost

Product K9: $214,500 ÷ 40,000 units = $5.3625 per unit
Product L43: $295,500 ÷ 10,000 units = $29.5500 per unit
Using activity-based costing, the unit product cost of each product would be:

Manufacturing overhead 5.3625 29.5500
c. Product L43 accounts for 20% of the company's total product, but requires two-thirds of the total
machine set-ups and sixty percent of the machine-hours worked in addition to more than half of the
maintenance requests. These factors are concealed when direct labor-hours are used to assign overhead
cost to product. Activity-based costing, however, assigns a larger amount of overhead cost to Product
L43. Indeed, Product L43 may be less profitable than the company has been led to believe under the
traditional direct labor approach.

Blooms: Apply
Difficulty: 3 Hard
Gradable: manual

9-224
9-225
143. Sylvia's Housecleaning Service provides housecleaning services to its clients. The company uses an
activity-based costing system for its overhead costs. The company has provided the following data from
its activity-based costing system.

Total $564,213
One particular client, the Layton family, requested 49 jobs during the year that required a total of 245
Required:
a. Compute the activity rates (i.e., cost per unit of activity) for the activity cost pools. Round off all
b. Using the activity-based costing system, compute the customer margin for the Layton family. Round
c. Assume the company decides instead to use a traditional costing system in which ALL costs are
allocated to customers on the basis of cleaning hours. Compute the margin for the Layton family. Round

a. The computation of the activity rates follow:
Total
Cost
per
Cleaning $252,787 44,900 hours $5.63
hour
Job
$73,758 5,700 jobs $12.94 per job
support
Client per
$7,668 270 clients $28.40
support client
b. The overhead cost charged to the family is:

per
Cleaning $5.63 245 hours $1,379.35
hour
Job support $12.94 per job 49 jobs 634.06
Client support $28.40 per 1 client 28.40
9-226
client
Total overhead
$2,041.81
cost
The customer margin for the family is computed as follows:

Costs:
Cleaning $1,379.35
Job support 634.06
Client support 28.40 2,041.81
Customer margin $458.19
c. The margin if all costs are allocated on the basis of cleaning hours:
Predetermined overhead rate = Estimated total overhead cost ÷ Estimated total amount of the allocation
base = $564,213 ÷ 44,900 hours = $12.57 per hour

Allocated costs (245 hours
3,079.65
× $12.57 per hour)
Customer margin ($579.65)

Blooms: Apply
Gradable: manual

9-227
9-228
144. Harrison Industries has an activity-based costing system with three activity cost pools-Processing, Batch
Setup, and Other. The company's overhead costs, which consist of factory utilities and indirect labor,
are allocated to the cost pools in proportion to the activity cost pools' consumption of resources. Costs in
the Processing cost pool are assigned to products based on machine-hours (MHs) and costs in the Batch
Setup cost pool are assigned to products based on the number of batches. Costs in the Other cost pool
are not assigned to products. Data concerning the two products and the company's costs and activity-
based costing system appear below:


Activity Cost Pools
Processing Setting Up Other
Factory
0.40 0.10 0.50
utilities
MHs Batches
Product #1 2,900 700
Product #2 7,100 300
Total 10,000 1,000
Sales (total) $54,000 $85,100
Direct materials
$19,100 $33,500
(total)
Required:

costing.

a. Assign overhead costs to activity cost pools by applying the percentages in the Distribution of
Resource Consumption Across Activity Cost Pools table to the respective costs. For example, the first
entry in the table is computed as follows: 0.40 × $29,000 = $11,600.
Activity Cost Pools
9-229
Setting
Up
Factory
$11,600 $2,900 $14,500 $29,000
utilities
Indirect
3,500 1,400 2,100 7,000
labor
Total $15,100 $4,300 $16,600 $36,000
b. The activity rates for each activity cost pool are computed as follows:
Total
Cost
per
Processing $15,100 10,000 MHs $1.51
MH
per
Batch Setup $4,300 1,000 batches $4.30
batch
c. The overhead cost charged to Product #1 is:
ABC
Cost
per
Processing $1.51 2,900 MHs $4,379
MH
per
batch
Total overhead
$7,389
cost
The overhead cost charged to Product #2 is:
ABC
Cost
per
Processing $1.51 7,100 MHs $10,721
MH
per
batch
Total
$12,011
overhead cost
d. Determine product margins:
Sales $54,000 $85,100
Direct
$19,100 $33,500
materials
Processing 4,379 10,721
9-230
Batch Setup 3,010 52,789 1,290 80,511
Product
$1,211 $4,589
margin

Blooms: Apply
Gradable: manual

9-231
9-232
145. Excel Manufacturing has an activity-based costing system with three activity cost pools-Machining,
Batch Setup, and Other. The company's overhead costs have already been allocated to the cost pools and
total $28,000 for the Machining cost pool, $13,800 for the Batch Setup cost pool, and $27,200 for the
Other cost pool.
cost pool are not assigned to products. Data concerning the two products and the company's costs
appear below:
MHs Batches
Product A 5,200 500
Product B 14,800 500
Total 20,000 1,000
Product A Product B
Sales (total) $124,300 $166,000
Direct materials
$53,100 $71,500
(total)
Required:
costing.

Activity Total Activity

Total Cost
Cost Pools Activity Rate
$1.40 per
MH
1,000 $13.80 per
Batch Setup $13,800
batches batch
Overhead cost for Product A:

Activity
Activity ABC Cost
Rate
9-233
$1.40 per
Machining 5,200 MHs $7,280
MH
$13.80 per
Batch Setup 500 batches 6,900
batch
Total $14,180
Overhead cost for Product B:

Activity
Activity ABC Cost
Rate
$1.40 per
MH
$13.80 per
Batch Setup 500 batches 6,900
batch
Total $27,620
Product A Product B
Sales $124,300 $166,000
Direct
$53,100 $71,500
materials
Direct
54,000 56,600
labor
Machining 7,280 20,720
Batch
6,900 121,280 6,900 155,720
Setup
Product
$3,020 $10,280
margin

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

9-234
9-235
146. Sebastian Corporation's activity-based costing system has three activity cost pools-Machining, Batch
Equipment depreciation (total) $27,000


Activity Cost Pools
Batch
Machining Other
Setup
Equipment
0.40 0.30 0.30
depreciation
cost pool are not assigned to products.
MHs Batches
Product Snorkel 8,100 400
Product Fin 1,900 1,600
Total 10,000 2,000

Sales (total) $71,400 $57,600
Required:

costing.

9-236
Activity Cost Pools
Machinin Batch
Other Total
g Setup
Equipment
$10,800 $8,100 $8,100 $27,000
depreciation
Indirect labor 1,400 2,100 3,500 7,000
Total $12,200 $10,200 $11,600 $34,000
b. Computation of activity rates:
Activity Cost Total Total Activity

Pools Cost Activity Rate
$1.22 per
MH
2,000 $5.10 per
Batch Setup $10,200
batches batch
c. Assign overhead costs to products:
Overhead cost for

Product Snorkel:
Activity ABC
Activity
Rate Cost
$1.22 per 8,100
Machining $9,882
MH MHs
$5.10 per 400
Batch Setup 2,040
batch batches
Total $11,922
Overhead cost for

Product Fin:
Activity ABC
Activity
Rate Cost
$1.22 per
MH
$5.10 per 1,600
Batch Setup 8,160
batch batches
Total $10,478
d. Determine product margins:

Sales $71,400 $57,600
Direct $21,900 $19,900
9-237
materials
Batch Setup 2,040 67,522 8,160 55,478
Product
$3,878 $2,122
margin

Blooms: Apply
Gradable: manual

9-238
9-239
147. Farris Corporation's activity-based costing system has three activity cost pools-Machining, Batch Setup,
and Other. The company's overhead costs have already been allocated to these cost pools as follows:
Machining $15,200
Batch Setup $44,800
Other $16,000
cost pool are not assigned to products. The following table shows the machine-hours and number of
batches associated with each of the company's two products:
MHs Batches
Product Sea 2,000 800
Product Air 8,000 200
Total 10,000 1,000

Sales (total) $220,700 $165,500
Required:
costing.

Activity Cost Total Total

Activity Rate
Pools Cost Activity
Machining $15,200 10,000 MHs $1.52 per MH
1,000 $44.80 per
Batch Setup $44,800
batches batch
Overhead cost for
9-240
Product Sea:
Activity
Activity ABC Cost
Rate
$1.52 per 2,000
Machining $3,040
MH MHs
$44.80 per 800
Batch Setup 35,840
batch batches
Total $38,880
Overhead cost for

Product Air:
Activity ABC
Activity
Rate Cost
$1.52 per 8,000
Machining $12,160
MH MHs
$44.80 per 200
Batch Setup 8,960
batch batches
Total $21,120

Sales $220,700 $165,500
Direct
$78,600 $83,100
materials
Batch Setup 35,840 207,080 8,960 162,220
Product
$13,620 $3,280
margin

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

9-241
9-242
148. Swannee Company manufactures two products, Product A and Product B. The company estimated it
would incur $160,790 in manufacturing overhead costs during the current period. Overhead currently is
applied to the products on the basis of direct labor-hours. Data concerning the current period's
operations appear below:
Product A Product B
Estimated volume 3,400 units 4,800 units
Direct labor-hours per unit 1.40 hour 1.90 hours
Direct materials cost per unit $7.40 $12.70
Direct labor cost per unit $14.00 $19.00
Required:
a. Compute the predetermined overhead rate under the current method, and determine the unit product
cost of each product for the current year.
b. The company is considering using an activity-based costing system to compute unit product costs for
external financial reports instead of its traditional system based on direct labor-hours. The activity-based
costing system would use three activity cost pools. Data relating to these activities for the current period
are given below:
Expected Activity
Estimated
Activity Product Product
Overhead Total
Cost Pool A B
Costs
Machine
$12,190 80 150 230
setups
Purchase
79,200 730 920 1,650
orders
General
69,400 4,760 9,120 13,880
factory
$160,790
Determine the unit product cost of each product for the current period using the activity-based costing
approach.

a. The expected total direct labor-hours during the period are computed as follows:
Product A: 3,400 units × 1.4 hours per

4,760 hours
unit
Product B: 4,800 units × 1.9 hours per
9,120 hours
unit
Total direct labor-hours 13,880 hours
9-243
Using these hours as a base, the predetermined overhead using direct labor-hours would be:
Predetermined overhead rate = Estimated total overhead cost ÷ Estimated total direct labor-hours =
$160,790 ÷ 13,880 DLHs = $11.58 per DLH
Using this overhead rate, the unit product costs are:
Product A Product B
Manufacturing overhead 16.22 22.01
b. The activity rates for each activity cost pool are computed as follows:
Estimated
Expected
Overhead
Activity Activity Rate
Cost
Machine per
$12,190 230 setups $53.00
setups setup
Purchase per
$79,200 1,650 orders $48.00
orders order
General per
$69,400 13,880 DLHs $5.00
factory DLH
The overhead cost charged to Product A is:
Activity Rate Activity Amount

Machine per
$53.00 80 setups $4,240
setups setup
Purchase per
$48.00 730 orders 35,040
orders order
General per
$5.00 4,760 DLHs 23,800
factory DLH
Total
$63,080
overhead cost
The overhead cost charged to Product B is:
Activity Rate Activity Amount

Machine per
$53.00 150 setups $7,950
setups setup
Purchase per
$48.00 920 orders 44,160
orders order
General per
$5.00 9,120 DLHs 45,600
factory DLH
Total $63,080
9-244
overhead cost

Product A: $63,080 ÷ 3,400 units = $18.55 per unit.
Product B: $97,710 ÷ 4,800 units = $20.36 per unit.
Using activity-based costing, the unit product cost of each product would be:
Product A Product B
Manufacturing
18.55 20.36
overhead
Total unit product
$39.95 $52.06
cost

Blooms: Apply
Difficulty: 3 Hard
Gradable: manual

9-245
9-246
149. Merkel Industries has a traditional costing system in which it applies manufacturing overhead to its
products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has
two products, Large and Small, about which it has provided the following data:
Large Small
Direct materials
$17.80 $55.40
per unit
Direct labor per
$16.10 $55.20
unit
Direct labor-hours
0.70 2.40
per unit

Measures Cost
$285,000
(DLHs)
1,071,600
types)
Total $1,793,790
Activities Large Small Total

Supporting direct labor 21,000 36,000 57,000
Setting up machines 798 2,565 3,363
Parts administration 1,539 1,140 2,679
Required:
system.
system.

9-247
Large Small
Manufacturing overhead (0.7 DLHs ×
$31.47 per DLH; 2.4 DLHs × $31.47
22.03 75.53
per DLH)
Unit product cost $55.93 $186.13
b. ABC Unit Product Costs
Estimated Total
Activity
Overhead Expected
Rate
Cost Activity
Supporting 57,000 $5 per
$285,000
direct labor DLHs DLH
Setting up $130 per
$437,190 3,363 setups
machines setup
Parts 2,679 part $400 per
$1,071,600
administration types part type
Overhead cost for Large
Activity
Activity ABC Cost
Rate
Supporting 21,000
$5 per DLH $105,000
direct labor DLHs
Setting up $130 per
798 setups 103,740
machines setup
Parts $400 per 1,539 part
615,600
administration part type types
Total $824,340
Overhead cost for Small
Activity
Activity ABC Cost
Rate
Supporting 36,000
$5 per DLH $180,000
direct labor DLHs
Setting up $130 per
2,565 setups 333,450
machines setup
Parts $400 per 1,140 part
456,000
administration part type types
Total $969,450
9-248
Large Small
Manufacturing overhead ($824,300 ÷
30,000
27.48 64.63
units; $969,450 ÷ 15,000 units)

Blooms: Apply
Gradable: manual

9-249
9-250
150. JamMaster Audio Corporation has a traditional costing system in which it applies manufacturing
company has two products, Boom and Wow, about which it has provided the following data:
Boom Wow

Measures Cost
Engrave (MHs) 975,000
Total $1,809,600
Activities Boom Wow Total

Assembling
8,000 18,000 26,000
products
Preparing
884 442 1,326
batches
Engrave 702 1,248 1,950
Required:
system.
system.

a. Traditional Unit Product Costs

Predetermined overhead rate = $1,809,600 ÷ 26,000 DLHs = $69.60 per DLH
Boom Wow
9-251
Manufacturing overhead (0.2 DLHs ×
$69.60 per DLH; 1.2 DLHs × $69.60
13.92 83.52
per DLH)
b. ABC Unit Product Costs
Estimated Total
Activity
Overhead Expected
Rate
Cost Activity
Assembling $27 per
$702,000 26,000 DLHs
products DLH
Preparing $100 per
$132,600 1,326 batches
batches setup
$500 per
Engrave $975,000 1,950 MHs
MH
Overhead cost for Boom
Activity
Activity ABC Cost
Rate
Assembling
$27 per DLH 8,000 DLHs $216,000
products
Preparing $100 per
884 batches 88,400
batches setup
Engrave $500 per MH 702 MHs 351,000
Total $655,400
Overhead cost for Wow
Activity
Activity ABC Cost
Rate
Assembling 18,000
$27 per DLH $486,000
products DLHs
Preparing $100 per
442 batches 44,200
batches setup
Engrave $500 per MH 1,248 MHs 624,000
Total $1,154,200
Boom Wow
Manufacturing overhead ($655,400 ÷
40,000 units;
16.39 76.95
$1,154,200 ÷ 15,000 units)
9-252

Blooms: Apply
Gradable: manual

9-253
9-254
151. Smithville Industries has a traditional costing system in which it applies manufacturing overhead to its
products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has
two products, Manual and Power, about which it has provided the following data:
Manual Power

Measures Cost
$1,326,000
(DLHs)
892,500
types)
Total $2,675,460
Manual Power Total

Supporting
24,000 27,000 51,000
direct labor
Setting up
2,346 510 2,856
machines
Parts
1,122 663 1,785
administration
Required:

9-255
Manua
Power
l
Direct labor-hours 0.60 1.80
Predetermined overhead rate per DLH $52.46 $52.46
Manufacturing overhead cost per unit $31.48 $94.43
b. ABC Manufacturing Overhead Costs
Estimated Total
Activity
Overhead Expected
Rate
Cost Activity
Supporting 51,000 $26 per
$1,326,000
direct labor DLHs DLH
Setting up $160 per
$456,960 2,856 setups
machines setup
Parts 1,785 part $500 per
$892,500
administration types part type
Overhead cost for Product Manual
Activity
Activity ABC Cost
Rate
Supporting direct $26 per 24,000
$624,000
labor DLH DLHs
$160 per 2,346
Setting up machines 375,360
setup setups
$500 per 1,122
Parts administration 561,000
part type part types
Total $1,560,360
Annual production 40,000
Manufacturing
overhead cost per $39.01
unit
Overhead cost for Product Power
Activity
Activity ABC Cost
Rate
Supporting direct $26 per 27,000
$702,000
labor DLH DLHs
$160 per 510
Setting up machines 81,600
setup setups
$500 per 663 part
Parts administration 331,500
part type types
9-256
Total $1,115,100
Annual production 15,000
Manufacturing
overhead cost per $74.34
unit

Blooms: Apply
Gradable: manual

9-257
9-258
152. Matchbox Manufacturing has a traditional costing system in which it applies manufacturing overhead to
its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has
two products, Utility and Super, about which it has provided the following data:
Utility Super

Measures Cost
Axial milling (MHs) 722,000
Total $1,527,600
Utility Super Total

Assembling products 21,000 17,000 38,000
Preparing batches 456 1,520 1,976
Axial milling 570 874 1,444
Required:

a. Traditional Manufacturing Overhead Costs

Predetermined overhead rate = $1,527,600 ÷ 38,000 DLHs = $40.20 per DLH
Utility Super
Direct labor-hours 0.70 1.70
Predetermined overhead rate per DLH $40.20 $40.20
9-259
Manufacturing overhead cost per unit $28.14 $68.34
b. ABC Manufacturing Overhead Costs
Estimated Total
Activity
Overhead Expected
Rate
Cost Activity
Assembling $16 per
$608,000 38,000 DLHs
products DLH
Preparing $100 per
$197,600 1,976 batches
batches batch
$500 per
Axial milling $722,000 1,444 MHs
MH
Overhead cost for Product Utility
Activity
Activity ABC Cost
Rate
Assembling $16 per 21,000
$336,000
products DLH DLHs
$100 per
Preparing batches 456 batches 45,600
batch
$500 per
Axial milling 570 MHs 285,000
MH
Total $666,600
Annual
30,000
production
Manufacturing overhead cost per unit $22.22
Overhead cost for Product Super
Activity
Activity ABC Cost
Rate
Assembling $16 per 17,000
$272,000
products DLH DLHs
$100 per 1,520
Preparing batches 152,000
batch batches
$500 per
Axial milling 874 MHs 437,000
MH
Total $861,000
Annual
10,000
production
Manufacturing overhead cost per unit $86.10

Blooms: Apply
Gradable: manual
9-260

9-261
9-262
153. The manager of the Personnel Department at King Enterprises has been reading about time-driven ABC
and wants to apply it to her department. She has identified four basic activities where her employees
spend the most time: Interviewing; Hiring, Assessment, and Separation Processing. The Department
employs five staff who perform these activities. The manager provides the following estimates for the
amount of time it takes to complete each of these activities:
• Interviewing: 40 minutes;
• Hiring: 60 minutes;
• Assessment: 85 minutes;
• Separation processing: 95 minutes.
Employees in Personnel work 35 hour weeks with four weeks for vacation. Of the 35 hours, five are
reserved for administrative tasks, training, and so on. The costs of the personnel department, including
any allocated costs from other staff functions is $1,404,000. During the year, Personnel conducted 1,200
interviews, made 405 hires, made 2,850 assessments, and had 235 separations.
Required:
a. What is the cost per minute for activities in Personnel?

b. What is the cost of interviewing and hiring one employee?
c. How many minutes of unused capacity did Personnel have for the year?
d. What was the cost of the unused capacity in Personnel?

a. $2.25
Total cost in
$1,404,000
Personnel
Total minutes
432,000
availablea
(= $1,404,000 ÷
Cost per minute $3.25
432,000)
a 5 employees × 48 weeks × 30 hours per week × 60
minutes per hour.
b. $236.25
Interviewin Hirin
Total
g g
Minutes
per 40 + 60 = 100
activity
Cost per
$3.25
minute
Total
$325.00
costs
9-263
95,125
c
minute
.
s.
Sep.
Intervi
Hire Assess Proces Total
ew
s
432,00

0
Minute
s per 40 60 85 95
activity
Numbe
r of 2,85
1,200 405 235
activiti 0
es
Minute 24,30 242,25 336,87
48,000 + + + 22,325
s used 0 0 5
Unuse
d
95,125
minute
s
d
$309,156.25 (= 95,125 minutes × $3.25 per minute).
.

Blooms: Apply
Gradable: manual

9-264

Activity-Based Costing: True / False Questions

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Activity-Based Costing: True / False Questions

Uploaded by

Copyright:

Available Formats

Chapter 09

True / False Questions

Multiple Choice Questions

A. To derive an allocation base.

A. products or services and then allocates costs to departments or activities.

A. cost pools are not used in first-stage cost allocations.

Plantwide Rates Department Rates

A. Setting up a machine for a new production run.

Cost Pools Cost Assignment Bases

Researching new Shipping orders to grocery

High Volume Products Low Volume Products

A. volume and activities.

A. more detailed measures of costs than do plantwide or department allocation methods.

A. Number of production runs per year.

A. The principles of ABC are different when applied to administrative services.

A. Activity: Placing orders - Possible Cost Driver: Number of orders

A. Time equations cannot adjust extra time for new vendors.

Department DLH Loans Processed Direct Costs

Department DLH Loans Processed Direct Costs

Department DLH Loans Processed Direct Costs

Department DLH Loans Processed Direct Costs

Department DLH Loans Processed Direct Costs

Department DLH Loans Processed Direct Costs

Department DLH Loans Processed Direct Costs

A. $12.55 per hour.

Activity Cost Pool Total Cost Total Activity

A. $94.11 per unit.

Activity Cost Pool Total Cost Total Activity

Selling price per unit $124.60

Activity Cost Driver Amount M XY

Activity Cost Driver Amount M XY

Activity Cost Driver Amount M XY

Activity Cost Driver Amount M XY

Activity Cost Drivers Rate

Activity Cost Drivers Rate

Estimated Expected Activity

Estimated Expected Activity

Estimated Expected Activity

Estimated Expected Activity

Activities and Activity Estimated Overhead

Activities and Activity Estimated Overhead

Activities and Activity Estimated Overhead

Activities and Activity Estimated Overhead

Activities and Activity Estimated Overhead

Activities and Activity Estimated Overhead

Activities and Activity Estimated Overhead

Activity Cost Estimated

Estimated branch data for next year is as follows:

% of time Computer time

A. All manufacturing costs vary directly with units of production.

A. A product's ability to bear cost allocations.

Basic Model Explorer Model

Unit- Batch- Product- Facility-

Materials management—allocated by number of purchase orders

The activity rates are as follows:

Materials management $10.00 Per purchase order

(1) Calculate the overhead cost of the order.

East West Total

The business also has overhead costs as follows:

Cost Pool Cost in Pool Cost driver

NOTE: overhead does not include salesperson salaries.

Activity Cost Pool Total Cost Total Activity

Activity Cost Total