MA5128 – Integrated Review in Financial Reporting,

Planning, Performance, and Control

Second Term, Academic Year 2021-2022

HANDOUT 4: COST MANAGEMENT

ACTIVITY-BASED COSTING AND LIFE CYCLE COSTING

1. Bear Bakery produces both regular and vegan baked goods. Each quarter, the
research and development department develops a recipe to convert a traditionally
dairy-based product into a vegan product. The new vegan product is then tested in
consumer focus groups. Under activity-based costing, the company is most likely to
classify developing a new vegan recipe as a ________ activity.
A. Unit-level
B. Customer-level
C. Product-level
D. Batch-level

2. All of the following are true statements about activity-based costing except:
A. Activity-based costing discourages the allocation of common fixed costs that are
not consumed by any customer or product line.
B. Activity-based costing is only used for manufacturing products.
C. Activity-based costing helps prevent cross-subsidization errors.
D. Activity-based costing breaks down fixed overhead costs into cost pools that
relate to product or customer lines using activities other than volume of units.

3. All of the following are true statements about life-cycle costing except:
A. Life-cycle costing includes upstream costs such as research and design costs.
B. Life-cycle costing includes downstream costs such as delivery and support costs.
C. With life-cycle costing, organizations are better able to identify and justify
valuable investments in product design that are more than offset in production
savings, product quality, or robust performance that avoids unnecessary post-
sale support.
D. Life-cycle costing methods tend to be limited to measuring and reporting costs
involved in service processes.

4. Spencer Company, a manufacturer of computer hardware components, uses direct

labor cost to allocate its production overhead. In its hard drive division it allocates
P12.50 per direct labor hour as the standard rate. The overhead includes supervision
and machine setup cost. SCSI and SATA drives take the same machine hours and labor
hours to produce, but the setup time for SATA drives is three times as long as the
setup time for SCSI drives. Which statement is true about overhead allocation for the
two drives?
A. SATA carries less than its full share of factory overhead.
B. SATA carries more than its full share of factory overhead.
C. Overhead allocation is fair for both drives.
D. Overhead allocation cannot be directly related to products.11
5. Plum Company manufactures toaster ovens. Each oven contains 15 parts totaling
P140 in direct materials. Each oven requires 3 hours of machine time and 1.5 hours
for inspection. The company has the following information regarding activities,
activity drivers, and cost per driver units:

Activity Activity Driver Cost per Driver Unit

Machining Machine hours P15.00/machine hour
Materials handling Number of parts P4.80/part
Assembly Number of parts P3.40/part
Inspection Inspection hours P47.20/inspection hour

What is the cost of machining per toaster oven?

A. P72.00
B. P51.00
C. P45.00
D. P70.80
6. Earl Grey Company manufactures juicers and blenders. Management has compiled
the following information:

Juicer Blender
Units produced 7,500 15,000
Direct materials/unit P175.00 P112.00
Direct labor/unit P42.00 P14.00
Direct labor hours, production 22,500 15,000
Machine hours, production 30,000 20,000
Batches 10,000 15,000

Production costs are as follows:

Activity Cost Activity Driver

Machining P1,176,000 Machine hours
Moving/ warehousing P714,000 Direct labor hours
Equipment setup P448,0008 Batches
Total overhead cost P2,338,000

What is the cost per driver unit for the cost of equipment setup?
A. P23.52 per machine hour
B. P19.04 per direct labor hour
C. P17.92 per batch
D. P103.91 per unit
7. Amelia Consulting Company is headquartered in Perth and has branch offices in
Sydney and Melbourne. Amelia uses an activity-based costing system. The Perth
headquarters office assigns its costs for administrative and legal services to the two
branch offices. Amelia has the following information:

Activity Cost Pool Cost Driver Cost

Administrative Number of employees at branch P1,960,000
Legal Hours spent on legal research P386,400

Number of Hours Spent on

Employees at Branch Legal Research
Sydney 800 18,000
Melbourne 200 6,000

How much of Perth's headquarters cost of P2,346,400 will be assigned to Sydney?

A. P1,568,000
B. P1,857,800
C. P1,664,600
D. P1,960,000
8. Close Circuit Company (CCC) manufactures two types of computer chips: Basic and
Advanced. CCC has three overhead departments that support the single production
line that makes both products. Budgeted overhead spending for the departments is
as follows:

Department
Engineering Design Material Handling Production Setups Total
P855,000 P570,000 P285,000 P1,710,000

Overhead costs in the three departments are allocated to Basic and Advanced chips
using activity-based costing. Engineering Design is assigned based on number of
engineering changes, Material Handling is assigned based on the parts used, and
Production Setup is based on number of product setups. CCC's budgeted
manufacturing activities and costs for the period are:

Product
Activity Basic Advanced
Units produced and sold 200,000 100,000
Direct materials used P11,400,000 P8,550,000
Direct labor hours used 10,000 15,000
Direct labor cost P1,140,000 P1,710,000
Number of engineering changes 5 10
Number of parts used 55 45
Number of product setups 17 23

What was the amount of overhead costs assigned to the Basic and Advanced
computer chips, respectively?
A. Basic: P719,625; Advanced: P990,375
B. Basic: P855,000; Advanced: P855,000
C. Basic: P684,000; Advanced: P1,026,000
D. Basic: P849,483; Advanced: P860,518
SUPPORT DEPARTMENT COSTING

1. Which of the following describes why companies assign the cost of service
departments to divisions, departments, or activities?
A. Each production department contains service departments, so the costs need to
be assigned to each department.
B. Divisions, departments, or activities use service departments to some extent, so
the cost of the service departments should be assigned accordingly.
C. If any division, department, or activity, has a loss, management can designate the
unit a service department, and the loss can be distributed to other divisions,
departments, or activities.
D. Service department costs should not be assigned to divisions, departments, or
activities.

2. All of the following are goals that organizations generally work to accomplish in the
assignment of support department costs to production departments except:
A. Cost assignment systems are most effective when they establish accountability
within the organization.
B. The cost assignment process should allocate the same amount of support
department costs to each production department.
C. The cost assignment needs to be transparent to all departments involved.
D. The method(s) used to assign support department costs to production
departments should be relevant and useful to the types of decisions being made
based on those costs.
3. Penguin Producers, LLC (PP) manufactures a widget that is sold around the world. PP
has a Janitor support department and an HR support department with two
production departments—Production Dept. 1 and Production Dept. 2. Both of these
support departments provide services to Production Dept. 1 and Production Dept. 2.
The support departments provide janitorial and HR services to each other as well.
Total quarterly costs for the Janitor Dept. and HR Dept. are provided below. Janitor
Dept. costs are assigned based on the occupancy of square footage and HR Dept. costs
are assigned using headcount of personnel.

Janitor Dept. HR Dept. Production Production

Dept. 1 Dept. 2
Square feet 4,000 6,400 16,000 28,000
Headcount 32 40 200 280
Support dept. costs P520,000 P1,000,000

What overhead costs are assigned to Production Dept. 1 and Production Dept. 2 using
the direct assignment method? In order for the solution to balance out with the
original amount of support department cost, DO NOT round intermediate
calculations.

A. Production Dept. 1: P606,150; Production Dept. 2: P913,850

B. Production Dept. 1: P609,259; Production Dept. 2: P910,741
C. Production Dept. 1: P605,758; Production Dept. 2: P914,242
D. Production Dept. 1: P602,443; Production Dept. 2: P917,557
4. Penguin Producers, LLC (PP) manufactures a widget that is sold around the world. PP
has a Janitor support department and an HR support department with two
production departments—Production Dept. 1 and Production Dept. 2. Both of these
support departments provide services to Production Dept. 1 and Production Dept. 2.
The support departments provide janitorial and HR services to each other as well.
Total quarterly costs for the Janitor Dept. and HR Dept. are provided below. Janitor
Dept. costs are assigned based on the occupancy of square footage and HR Dept. costs
are assigned using headcount of personnel.

Janitor Dept. HR Dept. Production Production

Dept. 1 Dept. 2
Square feet 4,000 6,400 16,000 28,000
Headcount 32 40 200 280
Support dept. costs P520,000 P1,000,000

What overhead costs are assigned to Production Dept. 1 and Production Dept. 2 using
the step-down method? Assume that Janitor Dept. costs will be allocated first in the
step-down method process. In order for the solution to balance out with the original
amount of support department cost, DO NOT round intermediate calculations.
A. Production Dept. 1: P605,758; Production Dept. 2: P914,242
B. Production Dept. 1: P602,443; Production Dept. 2: P917,557
C. Production Dept. 1: P609,259; Production Dept. 2: P910,741
D. Production Dept. 1: P606,150; Production Dept. 2: P913,850
5. Penguin Producers, LLC (PP) manufactures a widget that is sold around the world. PP
has a Janitor support department and an HR support department with two
production departments—Production Dept. 1 and Production Dept. 2. Both of these
support departments provide services to Production Dept. 1 and Production Dept. 2.
The support departments provide janitorial and HR services to each other as well.
Total quarterly costs for the Janitor Dept. and HR Dept. are provided below. Janitor
Dept. costs are assigned based on the occupancy of square footage and HR Dept. costs
are assigned using headcount of personnel.

Janitor Dept. HR Dept. Production Production

Dept. 1 Dept. 2
Square feet 4,000 6,400 16,000 28,000
Headcount 32 40 200 280
Support dept. costs P520,000 P1,000,000

What overhead costs are assigned to Production Dept. 1 and Production Dept. 2 using
the step-down method? Assume that HR Dept. costs will be allocated first in the step-
down method process. In order for the solution to balance out with the original
amount of support department cost, DO NOT round intermediate calculations.
A. Production Dept. 1: P605,758; Production Dept. 2: P914,242
B. Production Dept. 1: P609,259; Production Dept. 2: P910,741
C. Production Dept. 1: P606,150; Production Dept. 2: P913,850
D. Production Dept. 1: P602,443; Production Dept. 2: P917,557
6. Penguin Producers, LLC (PP) manufactures a widget that is sold around the world. PP
has a Janitor support department and an HR support department with two
production departments—Production Dept. 1 and Production Dept. 2. Both of these
support departments provide services to Production Dept. 1 and Production Dept. 2.
The support departments provide janitorial and HR services to each other as well.
Total quarterly costs for the Janitor Dept. and HR Dept. are provided below. Janitor
Dept. costs are assigned based on the occupancy of square footage and HR Dept. costs
are assigned using headcount of personnel.

Janitor Dept. HR Dept. Production Production

Dept. 1 Dept. 2
Square feet 4,000 6,400 16,000 28,000
Headcount 32 40 200 280
Support dept. costs P520,000 P1,000,000

What overhead costs are assigned to Production Dept. 1 and Production Dept. 2 using
the reciprocal method? In order for the solution to balance out with the original
amount of support department cost, DO NOT round intermediate calculations.
A. Production Dept. 1: P605,758; Production Dept. 2: P914,242
B. Production Dept. 1: P606,146; Production Dept. 2: P913,841
C. Production Dept. 1: P609,259; Production Dept. 2: P910,741
D. Production Dept. 1: P602,443; Production Dept. 2: P917,557
VARIABLE AND FIXED OVERHEAD COSTS

1. Which of the following describes the process for determining the predetermined
overhead rate using a normal costing system?
A. Actual annual overhead cost divided by actual annual operating activity in the
application base
B. Estimated annual overhead cost divided by actual annual operating activity in the
application base
C. Actual annual overhead cost divided by estimated annual operating activity in the
application base
D. Estimated annual overhead cost divided by estimated annual operating activity
in the application base

2. Which of the following correctly describes the high–low method and regression
analysis?
A. When using the high–low method, all data points are used, which is a strength.
When using regression analysis, only two data points are used, which is a
weakness.
B. When using the high–low method, all data points are used, which is a weakness.
When using regression analysis, only two data points are used, which is a
strength.
C. When using the high–low method, only two data points are used, which is a
weakness. When using regression analysis, all data points are used, which is a
strength.
D. When using the high-low method, only two data points are used, which is a
strength. When using regression analysis, all data points are used, which is a
weakness.

3. If manufacturing overhead is under-applied and the amount is considered significant,

what is the most appropriate adjustment to the accounts of a manufacturing company
at the end of the period?
A. The under-applied amount should be allocated to work-in-process inventory,
finished goods inventory, and cost of goods sold through an adjusting credit that
decreases each of these accounts.
B. The under-applied amount should decrease cost of goods sold through an
adjusting credit.
C. The under-applied amount should be allocated to work-in-process inventory,
finished goods inventory, and cost of goods sold through an adjusting debit that
increases each of these accounts.
D. The under-applied amount should increase cost of goods sold through an
adjusting debit.
4. Dana's real estate agency has increased its listings by offering an extensive
advertising program, but Dana is concerned about her advertising costs. She is not
sure how much she spends on advertising per listing because her advertising costs
have both variable and fixed components.

Month Number of Listings Advertising Cost

March 35 P23,145
April 23 P15,025
May 22 P15,280
June 42 P27,205
July 48 P30,565
August 51 P32,485
September 50 P31,835
October 56 P36,020
November 54 P36,920

Based on the information above and the high–low method, what is Dana's fixed cost
for advertising?
A. P1,213
B. P863
C. P2,230
D. P1,860
5. Children's World Toy Shop is an online toy store specializing in handmade stuffed
animals. Children's World sold 4,000 Donny the Dragon stuffed toys in April and
6,000 in May. Shipping costs for the two months were P12,000 and P16,800,
respectively. Using the data for these two months as a basis for the high–low method,
the fixed cost is estimated as:
A. P6,000.
B. P2,400.
C. P4,800.
D. P4,000.

6. A manufacturer of mobile phones has identified two models for analysis under
activity-based costing. Each model is associated with two activity pools: Soldering
and Assembly. Model J requires 14 solders, and Model P requires 24 solders. Total
direct labor hours required for Models J and P are 0.35 per unit and 1.15 per unit,
respectively. Factory overhead amounting to P550,000 is assigned as follows:
P375,000 to the Soldering cost pool and the balance to the Assembly cost pool. The
cost driver for Soldering is the number of solders, and the cost driver for Assembly is
direct labor hours. Furthermore, P295,000 of product design overhead is also
allocated to these two product lines and is split equally between them. What is the
factory overhead cost per driver unit for Soldering if the company manufactures
500,000 phones, of which 65% are Model J?
A. P0.0429 per solder
B. P0.0337 per solder
C. P0.0824 per solder
D. P0.0892 per solder
7. A manufacturer of wooden furniture has identified two models for analysis under
activity-based costing. Each model is associated with two activity pools: Cutting and
Assembly. Model A requires 25 cuts and 5 direct labor hours per unit, while Model B
requires 30 cuts and 7.5 direct labor hours per unit. Total factory overhead of
P375,000 is split such that 70% is assigned to the Cutting cost pool and 30% is
assigned to the Assembly cost pool. The cost driver for Cutting is the number of cuts,
and the cost driver for Assembly is direct labor hours. Furthermore, P125,000 of
product design overhead is allocated to these two product lines and split equally
between them. What is the factory overhead cost per driver unit for Cutting if the
company manufactures 25,000 pieces of furniture, 60% of which are Model A?
A. P0.875 per cut
B. P0.70 per cut
C. P0.389 per cut
D. P0.1667 per cut

8. Dawson Company manufactures two products, Regular and Deluxe. Manufacturing

overhead costs consist of P2,500,000 for Machining with machine hours as the driver,
and P1,250,000 for Assembly with direct labor hours as the driver. Other recent data
are provided below:

Regular Deluxe
Direct labor hours 10,000 15,000
Machine hours 10,000 30,000
Number of parts 90,000 160,000

Using machine hours and direct labor hours to assign costs, what is the total overhead
assigned to Deluxe?
A. P2,625,000
B. P2,500,000
C. P2,437,500
D. P1,125,000
 9. Leigh M. is working with her production supervisor to compute a predetermined
fixed overhead rate for the coming year. Leigh and her production supervisor have
put together a budget of 1,600 direct labor hours for the coming year. During the same
period, they plan for 2,000 machine hours in the production process. Leigh has
assembled the following information for the upcoming year:

Direct materials P100,000

Direct labor cost 140,000
Salaries for factory janitors 70,000
Sales supervisor salary 102,000
Rent on factory building 24,000
Advertising expense 10,000

If Leigh decides to use a predetermined manufacturing overhead rate based on direct

labor hours, what will be the predetermined manufacturing overhead rate?
A. P47.00 per machine hour
B. P58.75 per direct labor hour
C. P128.75 per direct labor hour
D. P103.00 per machine hour

10. Keystone Company applies overhead on the basis of machine hours, and reported the
following data.

Estimated annual overhead cost P2,250,000

Actual annual overhead cost P2,227,500
Estimated machine hours 300,000
Actual machine hours 295,000

Compute the amount of overhead that is under-applied or over-applied for the period.
A. P22,500 under-applied
B. P22,500 over-applied
C. P15,000 under-applied
D. P15,000 over-applied