1. Jennifer Company has two products: A and B. The company uses Activity-Based Costing.

The estimated
total cost and expected activity for each of the company's three activity cost pools are as follows:

Activity Cost Pool Estimated Expected Activity

Cost Product A Product B Total
Activity 1................ $23 500 400 100 500
Activity 2................ $18 000 500 200 700
Activity 3................ $34 600 600 300 900

The activity rate under the Activity-Based Costing system for Activity 3 is closest to:
A) $36.24.
B) $38.44.
C) $84.56.
D) $115.33.

The correct answer is B. To calculate the activity rate for activity 3, you would divide:
Estimated Cost / Estimated Driver =$34,600 / 900= $38.44

2. Matt Company uses Activity-Based Costing. The company has two products: A and B. The annual
production and sales of Product A is 8,000 units and of Product B is 6,000 units. There are three activity
cost pools, with estimated total cost and expected activity as follows:

Activity Cost Pool Estimated Expected Activity

Cost Product A Product B Total
Activity 1................ $20,000 100 400 500
Activity 2................ $37,000 800 200 1,000
Activity 3................ $91,200 800 3,000 3,800

The cost per unit of Product A under Activity-Based Costing is closest to:
A) $2.40.
B) $3.90.
C) $10.59.
D) $6.60.

D is correct. First, calculate an activity rate (application rate) for each activity:
Activity Cost Driver Information
A B Total
Activity 1 $20,000 100 400 500
Activity 2 $37,000 800 200 1,000
Activity 3 $91,200 800 3,000 3,800

Activity 1 = $40 per driver unit ($20,000/500).

Activity 2 = $37 per driver unit ($37,000/1,000).
Activity 3 = $24 per driver unit ($91,200/3800).

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 Product A would receive:

Activity Cost Allocated to Product A

Activity 1 $4,000 $40 x 100
Activity 2 $29,600 $37 x 800
Activity 3 $19,200 $24 x 800
Total Cost $52,800
The cost per unit of Product A is $6.60 ($52,800/8,000).

3. Which of the following would not be included in a product’s cost for inventory valuation for the
financial statement?

a. Factory Supplies
b. Quality Control
c. Interest Expense

 A is incorrect because Factory Supplies are included in the manufacturing overhead

 B is incorrect because Quality Control is included in the manufacturing overhead
 C is correct because Interest Expense is an expense associated with the financing function and is not
considered part of the manufacturing function.

4. Which would be the least favourable basis for allocating manufacturing overhead for a fatory with
automated equipment and a significant variation of services by its indirect labor?

a. Activity-based Costing
b. Direct Labor Hours
c. Machine Hours

 A is incorrect because ABC is the most favorable basis for allocating a variety of services provided by
indirect labor
 B is correct because it is highly unlikely that Direct Labor Hours will correlate with the indirect labor
cost
 C is incorrect because since the equipment is automated

5. Which would be the most favourable basis for allocating manufacturing overhead for a fatory with
automated equipment and a significant variation of services by its indirect labor?

a. Activity-based Costing
b. Direct Labor Hours
c. Machine Hours

 A is correct because ABC is the most favorable basis for allocating a variety of services provided by
indirect labor
 B is incorrect because it is highly unlikely that Direct Labor Hours will correlate with the indirect
labor cost

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  C is incorrect because it is highly unlikely that Machine Hours will correlate with the indirect labor
cost

6. It is a subdivision of managerial accounting which related reporting or performance directly with

the person who has the responsibility for its control. It is useful in assessing the performance of
persons responsible for its controlling cost, revenues, or invested capital and analyzing
deviations from planned or prior performance.
a Accounting systems design and installation
b Cost Accounting
c Standard Cost Accounting
d Responsibility Accounting

Responsibility accounting is an accounting information system and a manageria; control device that
includes:

1 identifying responsibility centers with their corresponding objectives

2 developing measures of achievement of such objectives
3 preparing/analyzing reports of such measures by the responsibility centers

7. The basic purpose of responsibility accounting i

a. motivation c. authority
b. variance analysis d. budgeting

The basic purpose of responsibility accounting is to motivate managers and encourage goal
congruence and managerial effort.

8. B Company uses an accounting system that charges costs to the manager who has been given
the authority to make the decisions regarding the incurrence of such costs. For example, if the
Production manager was not able to monitor the efficiency of the workers in his department, so
that he was forced to ask them to work overtime to finish a specific job on time, the additional
cost of working overtime is charged to such manager or his department. This type of accounting
system is known as
a transfer price accounting c. functional accounting
b responsibility accounting d. cost accounting

In a responsibility accounting system, the firm is organized into responsibility centers and holds
the center’s managers responsible for the factors under their control. If a manager is delegated
the authority to make decisions regarding the incurrence of the costs under him, such cost is
charged to him or to his responsibility center.

Transfer price accounting is a means of charging one organizational unit for products/services
acquired from another unit in the same organization.

Gripo, Inc. has several divisions operating as decentralized profit centers. Gripo’s Shower Faucet
Division produces showerhead sets using subcomponents produced by two of Gripo’s other

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 divisions. The Flexi Hose Division manufactures a flexible hose, one type that is made exclusively
for the Shower faucet Division, while other types are sold to outside markets.

The valve Division, on the other hand, sells its valves in a competitive market, although one type
of valve is also used by the Shower faucet Division. The Valve Division is currently operating at
50% capacity level only.

The market prices, as well as the costs per unit of the flexible hose and the valves supplied by
the two other divisions to Shower faucet Division, are as follows:

Flexible Hose Valves

Market Price P125 P220

Costs per unit:
Materials P25 P48
Labor 47 60
Variable Overhead 20 30
Fixed Overhead 8 45
Total Cost per unit P100 P183

9. Considering the given data, which of the following statements is incorrect?

a If the Valves Division would transfer valves to Shower Faucet Division at full-cost-transfer at
P183, there would be no incentive on the part of the Valves Division to control or reduce
production costs.
b If the Shower Faucet Division could buy valves in large volume at P200 per unit, the valve
Division should reduce its transfer price to the same amount in order to optimize the overall
profit goal of Gripo, Inc.
c If the Flexi Hose Division has excess capacity and it has negotiated a transfer price of P112
per unit with the Shower Faucet Division, this price will motivate both divisions to buy and
sell internally as profit is shared.
d None of the above

All the statements are correct.

 Using full-cost as a transfer price provides no incentive to the selling segment to control
production costs.
 If the selling segment has excess capacity, the transfer price should match that of
outside purchase price. This will optimize the profit of the company as a whole because
the selling segment would be able to use its idle capacity.
 The transfer price of P112 is within the range of P92 (minimum) and P125 (maximum).
Setting the transfer price at this amount would motivate both divisions (seller and buyer)
to transact business with each other. In this case, the seller has excess capacity, so any
price above the variable cost would improve its performance. On the part of the buyer,
any transfer price that is below the prevailing purchase price is acceptable, as it will also
improve its performance.

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 10. The managers of the Shower faucet Division and Flexi Hose Division want to set a transfer price
that will divide the resulting profit/savings equally between their divisions. Such transfer price
should amount to
a P108.50 c. P100.00
b P125.00 d. P92.00

The transfer price that would divide the profit equally between the two divisions is equal to the
sum of the minimum and maximum transfer prices divided by 2:

Maximum price- the market price P125.00

Minimum price- the variable cost
(25+47+20) 92.00
Total P217.00
Divided by 2
Transfer price P108.50

PROOF:

Flexi-Hose Division
Transfer price P108.50
Less: variable cost 92.00
Profit from the transfer P16.50

Shower Faucet Division

Purchase price from outsiders P125.00
Less: transfer price if acquired internally 108.50
Savings P16.50

Reference:
 Dr. Michael Constas (California State University)
 Harold Averkamp, CPA, MBA (2017)
 Rodelio Roque

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