Management Accounting Information For Managing and Creating Value 7th Edition Smith Test Bank

Management Accounting Information
for Managing and Creating Value 7th

Edition Smith Test Bank
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Chapter 08 Testbank
Student: ___________________________________________________________________________
1. Which of the following statements is false?

A. Traditional costing systems tend to over cost high-volume product lines.
B. Traditional costing systems tend to create a product cost distortion problem.
C. In traditional costing, the high-volume products are often subsidising the low-volume products.
D. Traditional product costing systems recognise a range of non-volume-based cost drivers.

A. Under traditional costing, product cost distortions will be relatively insignificant if overhead costs are a small proportion
of product cost.
B. Activity-based costing will significantly improve the product cost accuracy where overhead costs are a small proportion
of total costs.
C. Activity-based costing will significantly improve product cost accuracy where there is significant product diversity.
D. Upstream and downstream costs are often a significant part of a product's costs.
3. Which of the following statements regarding activity-based costing (ABC) is false?

A. ABC can be used to measure the cost of cost objects.
B. ABC can be used to analyse the profitability of customers.
C. ABC is not an appropriate tool for analysing non-manufacturing costs.
D. ABC evolved as a response to problems with traditional costing systems.
4. Which of the following can signal the need for a new product costing system?
A. Line managers do not believe reported product costs.
B. Complex products have high reported profitability while more basic high-volume products show small margins or even
losses.
C. Overhead rates are high and increasing.
D. All of the given answers.
A. Bids won and lost are difficult to explain.
B. Competitors' high-volume products are priced unreasonably low.
C. Our low-volume products are priced low compared to competitors.
6. A resource driver is:

A. a factor that causes a cost.
B. a unit of work performed within the organisation.
C. used to estimate the cost of resources consumed by an activity.
D. a factor that causes a cost AND is used to estimate the cost of resources consumed by an activity.
7. A cost driver:
A. is a factor that causes a cost.
B. may also be a resource driver.
C. is a unit of work performed within the organisation.
D. is a factor that causes a cost AND may also be a resource driver.
8. Activity management:
A. is another name for activity-based costing.
B. is the same as the comprehensive activity-based product costing system.
C. uses activity information to monitor and control what is happening in a business.
D. None of the given answers.
9. Which of the following statements is/are true?

i. Activity management requires analysis of overhead activities only.
ii. Activity management requires analysis of all activities.
iii. Activity management requires identification of detailed activities, rather than broad activities.
A. iii
B. ii
C. i and iii
D. ii and iii
10. Characteristics of activity-based costing include:

A. a greater number of overhead cost application bases compared to traditional costing systems.
B. the overhead cost application bases are likely to be more accurate cost drivers than would be the case in traditional
costing systems.
C. the simplicity of the system makes it easy to implement.
D. a greater number of overhead cost application bases compared to traditional costing systems AND the overhead cost
application bases are likely to be more accurate cost drivers than would be the case in traditional costing systems.
11. Companies are likely to benefit from activity-based costing systems if:
A. they have wide variations in the volume of individual production runs and setups are costly.
B. they have a narrow range of products with similar volumes and setups are costly.
C. they have a narrow range of products and setups are not costly.
12. Consider the following statements. Which of the statements is true?

A. As the activity-based system accuracy increases, the cost of inferior decisions based on distorted product costs
decreases.
B. As the activity-based system accuracy increases, the costs of implementing and operating the system increase.
C. As the activity-based system accuracy increases, the total cost from inferior decisions and the cost to implement and
operate the system decrease.
D. As the activity-based system accuracy increases, the cost of inferior decisions based on distorted product costs
decreases AND as the activity-based system accuracy increases, the costs of implementing and operating the system
increase.
13. Activity-based costing has most to offer where:
A. overhead is high and volume driven.
B. overhead is high and non-volume driven.
C. overhead is low and non-volume driven.
D. direct labour is a major proportion of total costs.
14. Consider the following statements. Traditional costing systems can produce distorted product costs if:
i. overheads are driven by non-volume factors.
ii. overheads are a minor part of the product cost.
iii. it fails to recognise non-manufacturing costs as product costs.
Which of the statements is true?
A. i
B. ii
C. iii
D. i and iii
15. Consider the following statements. Activity-based costing is more difficult in a service business because:
i. service businesses have a low proportion of overhead in their total costs.
ii. service businesses tend to have a higher level of facility costs than most manufacturers.
iii. it is often difficult to identify service activities because they are non-repetitive.
Which of the above statements is true?
A. i
B. ii
C. ii and iii
D. i, ii and iii
16. Consider the following statements.

i. The optimal product costing system is the most accurate system.
ii. The optimal product costing system is the one that minimises the cost of poor decisions from inferior information.
iii. The optimal product costing system is the most expensive one.
A. i
B. ii
C. iii
D. None of the given answers
17. In a simple activity-based product costing system:

A. direct material, direct labour, manufacturing overhead and non-manufacturing overhead are assigned to products on an
activity basis.
B. direct material is traced using a traditional approach, while direct labour, manufacturing overhead and non-
manufacturing overhead are assigned to products on an activity basis.
C. direct material and direct labour are traced using a traditional approach, manufacturing overhead is assigned on an
activity basis and non-manufacturing overhead is expensed as it is incurred.
D. direct material, direct labour and manufacturing overhead are traced using a traditional approach, and non-
manufacturing overhead is assigned on an activity basis.
18. Calculate the cost per unit for setup for one run of 10 000 units if setup labour is $20 per hour and 10 hours are
required to set up.
A. $0.04 per unit.
B. $0.06 per unit.
C. $2.00 per unit.
D. $0.02 per unit.
19. Calculate the activity cost per unit of activity driver if the activity cost is $3500, the activity driver is the number of
batches and the total quantity of the activity driver is 1750 batches.
A. $3.00 per batch.
B. $1.50 per batch.
C. $2.00 per batch.
D. $2.50 per batch.
20. Calculate the cost of processing one sales order if the total activity cost is $1 720 000 p.a., the activity driver is the
number of orders received and the annual quantity of the activity driver is
43 000 orders.
A. $20 per order.
B. $25 per order.
C. $40 per order.
D. $50 per order.
21. An activity cost pool:

A. is a combination of a number of activities.
B. must be made up of activities at the same level.
C. can only be used at the product level.
D. is a combination of a number of activities AND must be made up of activities at the same level.
22.
Quality Carvings manufactures furniture. They have decided to develop an activity-based costing system. Shown below is each activity,
its cost and the activity driver used to assign these costs to products.
Under an activity-based costing system, what is the activity cost per unit of activity driver for processing orders?
A. $93.33
B. $25.20
C. $25.40
D. $62.00
23.
Under an activity-based costing system, what is the activity cost per unit of activity driver for making patterns?
A. $4.73
B. $10.00
C. $17.50
D. $21.50
24.
Summer Ice Pty Ltd is a manufacturer of a range of ice cream products. The following is a list of activities, costs and quantities of
activity drivers for a number of activities that occur in the factory.
Under an activity-based costing system, what is the activity cost per unit of activity driver for measuring ingredients?
A. $12.90
B. $15.00
C. $13.80
D. $14.00
25.
Under an activity-based system, what is the activity cost per unit of activity division for packing into containers?
A. $0.06
B. $0.05
C. $0.02
D. $0.04
26. In an activity-based costing system, a bill of activities will include:

A. a charge for allocated overhead.
B. the activity cost per unit of activity driver.
C. the quantity of activity consumed.
D. the activity cost per unit of activity driver AND the quantity of activity consumed.
27. Which of the following is not a useful broad category of cost classification in activity-based costing?
A. The unit level activity.
B. The batch level activity.
C. The facility level activity.
D. The differential level activity.
28. Which of the following are examples of batch level activities?

A. Machine setup.
B. Materials handling.
C. Machining.
D. Machine setup AND materials handling.
29. Consider the following statements regarding traditional costing systems.

i. All overhead costs are assumed to be driven by volume of production.
ii. All product costs are direct costs.
iii. Traditional costing systems tend to distort product costs when numerous products are made that vary in their
production requirements.
Which statement/s is/are true?
A. i
B. ii and iii
C. i and iii
D. ii

i. Product diversity creates problems in product costing because diverse products tend to utilise productive activities in
very different ways.
ii. Overhead costs that are not incurred at the unit level create product-costing problems because they do not vary with
measures such as direct labour hours or machine hours.
iii. Product diversity exists when a single product, such as pens, are made in different colours.
Which of the above statement/s is/are true?
A. i
B. ii
C. i and ii
D. i and iii
31.
HiTech Products manufactures three types of CD players: Cheap, Econo and Deluxe. HiTech uses an activity-based product costing
system. The company has identified five activities. Each activity, its cost and related activity driver are identified below:
The following information pertains to each product line of CD players:
Under an activity-based product costing system, what is the cost per unit of Cheap?
A. $141.00
B. $272.00
C. $164.00
D. $228.24
32.
Under an activity-based product costing system, what is the cost per unit of Econo (to the nearest dollar)?
A. $272
B. $282
C. $228
D. $320
33.
The Pinewood Furniture Company Pty Ltd plans to manufacture two lines of chairs in the coming year—lounge and patio. The company
is considering introducing an activity-based costing system. Given below are each activity, its cost and its related activity driver.
The level of activity for the year is:
Under an activity-based costing system, what is the activity cost per unit of activity driver for machine setups?
A. $5000 per setup.

B. $2500 per setup.
C. $1200 per setup.
D. $1667 per setup.
34.
Under an activity-based costing system, what is the activity cost per unit of activity driver for material handling?
A. $2.00 per part.

B. $16.67 per part.
C. $2.50 per part.
D. $5.00 per part.
35.
Under an activity-based costing system, what is the activity cost per unit of activity driver for assembly?
A. $4.80 per part

B. $24 per direct labour hour
C. $10 per part
D. $10 per direct labour hour
36.
Under an activity-based costing system, what is the activity cost per unit of activity driver for finishing?
A. $7.50 per direct labour hour.

B. $30.00 per direct labour hour.
C. $25.00 per unit.
D. $30.00 per unit.
37.
Under an activity-based costing system, what is the total cost of lounge chairs for the year?
A. $1 710 000
B. $1 410 000
C. $890 000
D. $1 150 000
38.
Under an activity-based costing system, what is the total cost of patio chairs for the year?
A. $1 150 000
B. $890 600
C. $1 710 000
D. $590 000
39. Traditional product costing systems result in inaccurate product costs when:
A. direct labour increases.
B. the proportion of direct labour and raw material increases.
C. product diversity increases.
D. the proportion of direct labour and raw material increases AND product diversity increases.
40. Which of the following statements is true? Indicators of problems with product cost systems exist when:
i. non-manufacturing costs that are product related become insignificant.
ii. the proportion of manufacturing overhead not driven by production volume increases.
iii. there is an increase in product diversity.
A. i
B. ii
C. iii
D. ii and iii
41. Which of the following statements, as indicators of product cost systems, are out of date?
i. Highly profitable products are difficult to make.
ii. Competitors' prices appear to be very low.
iii. The market easily absorbs price increases.
A. i
B. i and iii
C. ii and iii
D. i, ii and iii
42. The benefits arising from the introduction of activity-based costing are likely to be greater where:
i. overhead is a large proportion of total cost.
ii. implementation costs are not high due to the support of advanced IT systems.
iii. batches are of a similar size.
A. i and ii
B. i and iii
C. ii and iii
43. Which of the following are usually included in traditional cost systems?
i. Direct material is traced to products.
ii. Non-manufacturing costs are assigned to products.
iii. Manufacturing overhead is allocated using a production-volume-based cost driver.
A. i
B. ii
C. iii
D. i and iii
44. Which of the following are common production volume measures?

i. Direct labour hours.
ii. Machine hours.
iii. Direct material cost.
A. i and ii
B. ii and iii
C. i and iii
D. iii only
45. Recent developments in manufacturing and marketing have resulted in significant changes to cost manufacturing
structures. Which of the following statements is/are false?
i. The proportion of direct labour increases.
ii. The proportion of manufacturing overhead increases.
iii. Product diversity decreases.
iv. The proportion of non-volume-related manufacturing overheads increases.
A. i and ii
B. i and iii
C. ii and iii
D. iii and iv
46. Recent increases in downstream costs have occurred because of:
i. increased advertising and product promotion.
ii. increased customer servicing.
iii. increased competition.
iv. increases in product design.
A. i and ii
B. ii and iii
C. iii and iv
D. i, ii and iii
47. Which of the following are indicators of an outdated costing system?

i. Products which are difficult to make have high profit margins.
ii. Competitors prices appear unrealistically low.
iii. Customers are not deterred by price increases.
iv. A lot of time is spent on special product cost projects.
A. i, ii and iii
B. ii, iii and iv
C. i, iii and iv
D. i, ii, iii and iv
48. In which of the following may a traditional costing system result?

A. The product costs are distorted.
B. Complex products are under-costed.
C. Simple products are over-costed.
D. All the given answers.
49. One of the results of the inaccuracies arising from traditional costing systems may be:
A. overhead costs are overapplied.
B. overhead costs are underapplied.
C. actual overheads exceed overhead applied.
D. overhead costs are underapplied AND actual overheads exceed overhead applied.
50. Despite the obvious advantages of ABC, many firms are still reluctant to implement it. What are the reasons for this
reluctance?
i. Uncertainty about the benefits of ABC.
ii. The opinion that the current system serves all the firm's needs.
iii. Lack of resources to implement ABC.
A. i and ii
B. ii and iii
C. i and iii
D. i, ii and iii
i. Both traditional cost systems and ABC focus on resources supplied.
ii. Plant and equipment is an example of a committed resource under an ABC system.
iii. Committed resources always equal resources used.
A. i
B. ii
C. iii
D. ii and iii
52. Behavioural issues may be important in implementing an ABC system. Which of the following are some of the
methods employed to minimise adverse outcomes?
i. Use a top down approach.
ii. Use a bottom up approach.
iii. Ensure all employees have a sense of ownership in the system.
A. i and ii
B. ii and iii
C. iii
D. i and iii
53. Which of the following are limitations of ABC?

i. The system requires significantly more data.
ii. The system requires extensive updating if the product range changes.
iii. The inclusion of facility level costs greatly increases the accuracy of cost per unit.
A. i and ii
B. i and iii
C. i, ii and iii
54. Which of the following statements best completes this sentence: 'Activity-based costing'
A. asserts that cost behaviour can best be determined if the split between fixed and variable cost is ignored.
B. has replaced standard costing as the preferred method of allocating costs to products.
C. is based on allocating fixed overheads based on the elements that drive them.
D. emphasises the need to obtain a better understanding of the behaviour of overhead costs.
55. A cost driver is:

A. a collection of cost pools.
B. a cost-allocation base chosen arbitrarily.
C. any factor that caused costs to be incurred.
D. costs that behave in a similar manner.
56. Appropriate cost-driver identification depends on:

A. a cause-and-effect relationship existing between the cost driver and costs of the activity.
B. the number of cost pools used.
C. homogeneity of cost pools.
D. the number of products produced or services provided.
57. Volume-based measures may be used to apply overhead when:
A. production runs are of various sizes and overhead costs are directly proportional to the size of the run.
B. production runs are of various sizes but each run has a constant setup time.
C. purchasing costs are related to the number of purchase orders not the number of items bought.
D. material handling costs are driven by the number of materials issued to production, and components are used
differentially by different products.
58. Direct labour hours or direct labour dollars are suitable overhead allocation bases when:
A. overhead costs are insignificant.
B. direct labour details are readily available.
C. direct material costs are highly correlated with direct labour hours.
D. they have been used satisfactorily in the past.
59. Which of the following is not an indicator of a company whose costing system needs to be more accurate?
A. Competitors' prices seem unrealistically low.
B. Products that are difficult to make have low profit margin.
C. At the end of the year, there is a significant amount of overapplied overhead.
D. Customers are not deterred by a significant increase in prices.
60. Twista Manufacturing has the following activities and activity costs per year: Machining ($20 000); Forklifting ($10
000); machine setup ($32 000) and quality inspection ($40 000). The operation starts with setting up the machines; each
batch of products requires a different setup. This is followed by machining, where the cost of machining varies directly
with the number of machine hours. Forklifts are used to move the work in progress around. Because quality is important,
an inspection is carried out for each batch of products.
The following information is also available:
Number of machine hours per year: 20 000 machine hours
Number of forklift moves per year: 500 moves
Number of batches per year: 4000 batches
Each year, Twista Manufacturing produces 5000 units of Product X. These units of Product X require 5000 machine
hours, 120 moves and 500 batches to produce. The direct materials and direct labour together cost $15 per unit of
Product X.
Which of the following activities should be grouped together in the same activity cost pool?
A. Machining and machine set up.
B. Machine set up and quality inspection.
C. Forklifting and quality inspection.
D. Machining and forklifting.
000); machine setup ($32 000), and quality inspection ($40 000). The operation starts with setting up the machines; each
Product X.
Which of the following are the correct activity rates for machining and quality inspection?
A. $1 per machine hour and $2 per machine hour.
B. $5 per batch and $10 per batch.
C. $2400 and $5000.
D. $1 per machine hour, and $10 per batch.
Product X.
The forklifting costs and machine set up costs allocated to Product X are:
A. $2400 and $4000.
B. $5000 and $9000.
C. $2400 and $5000.
D. $5000 and $4000.
Product X.
The machining costs and quality inspection costs allocated to each unit of Product X are:
A. $0.16 and $0.32
B. $1 and $2
C. $0.5 and $1
D. $1 and $1
Product X.
The total cost for one unit of Product X is:
A. $20.10
B. $18.28
C. $5.10
D. $3.28
65. Puff Animal Hospital looks after the health of household pets such as dogs, cats, birds and rabbits. The hospital wants
to use an activity based costing system to allocate costs to each animal case it handles. These cases tend to vary in their
complexity: some pets are here for a regular check ups and immunisation; other pets have emergencies that require
surgery. Some pets are very exotic and require the attention of the supervisor vet; others are common animals with
common problems such that only the junior vets are needed. Puff Animal Hospital is quite large; on average there are five
vets, a general assistant, and two receptionists on duty at one time.
Which of the following is NOT a reason that supports the use of activity-based costing at Puff Animal Hospital?
A. There are a variety of different activities involved for cases that vary in complexity.
B. It is easy to trace the time each vet spent on different animals.
C. The hospital is large and therefore likely to have a lot of indirect costs.
D. Some cases require surgery which means using surgery facilities; other cases do not.
complexity: some pets are here for a regular check ups and immunization; other pets have emergencies that require
surgery. Some pets are very exotic and require the attention of the supervisor vet, others are common animals with
Which of the following is an example of a facility sustaining activity for Puff Animal Hospital?
A. The supervisor vet supervises junior vets in some of the more complex cases.
B. Processing invoices.
C. The general vet gives health checks for small dogs.
D. The general assistant cleans the hospital.
67. Cofission Electronics make small electronic parts. The management accountant at Cofission, Jasmine Vake, decides
to implement an activity-based costing (ABC) system. She lists the following points to support her decision:
i. The recent cost report shows that the ratio of prime costs to manufacturing overhead cost is approximately 1:3.
ii. Cofission is a small company.
iii. Cofission has three product lines: basic parts (parts that are common to many products and many suppliers),
customised parts (electronic parts that are highly customised to very specialised electric motors), prototypes (where
Cofission Electronics need to design as well as manufacture these specialised electronic parts).
iv. Cofission Electronics has recently implemented a flexible manufacturing system; this practically eliminates any setup
costs; with this system, product customisation takes very little additional time.
You are not convinced that all of the above points support Jasmine's decision. Which of the above points support the use
of ABC in Cofission?
A. i, ii and iii
B. ii, iii and iv
C. i and iii
D. iii and iv
i. The recent cost report shows that the ratio of prime costs to manufacturing overhead cost is approximately 1:3
customized parts (electronic parts that are highly customized to very specialized electric motors), prototypes (where
Cofission Electronics need to design as well as manufacture these specialized electronic parts).
costs; with this system, product customization takes very little additional time.
You are not convinced that all of the above points support Jasmine's decision. Which of the above points contradict
Jasmine's decision?
A. i and ii
B. ii
C.
i, ii and iv
D. ii and iv
69. Which of the following rates would not be used to assign manufacturing overhead costs to products?
A. Activity-based rates
B. Facility rates
C. Plantwide rates
D. Departmental rates
70. When moving from a traditional costing system to an activity-based system, there is a significant improvement in the
accuracy of the product costs because:
A. simple activity costing assumes that all manufacturing overhead costs are driven by the volume of production.
B. simple activity-based costing allocates overheads based on the cost per activity driver.
C. improved identification of cost drivers results in more accurate allocation of manufacturing overheads to products.
D. simple activity-based costing allocates overheads based on the cost per activity driver, resulting in more accurate
allocation of manufacturing overheads to products.
71. Activity based costing focuses on the cost of resources:
A. budgeted.
B. used.
C. committed.
D. supplied.
72. When introducing an activity-based costing system which of the following actions are recommended for the
changeover to be successful?
A. Increased involvement of non-accounting staff in the design and implementation stages.
B. Preparation of a change management plan that considers behavioural issues.
C. A bottom-up approach to encourage staff to own the new system and to see it as a tool to help them with their work.
D. All of the answers are recommended.
73. Plant, equipment and supervision that have been supplied in advance for use in production are known as:
A. supplied resources.
B. committed resources.
C. used resources.
D. budgeted resources.
74. When using average costs in activity-based costing, which of the following costs, are not divided by the number of
units produced to estimate the cost per unit of product?
A. Unit level
B. Batch level
C. Facility level
D. Product level
75. Prepare a list of 14 possible indications that a new product costing system is likely to be needed.
76. At a recent professional meeting, two accountants discussed product-costing problems in their respective companies.
Both accountants are familiar with ABC systems but neither firm uses this method.
Accountant A reported that part of the problem in product costing in his firm is that there are major differences between
product lines as to volume of units, utilisation of various activities, quality assurance requirements established by
customers and size of the products. Accountant B noted that in her firm, which produces consumer products, all products
undergo the same basic production processes and in the same sequence, but in an increasing variety of colours and
packaging modes.
Both accountants are worried about the potential distortion of product costs under their traditional product costing
systems.
Which accountant should be more concerned about the potential distortion? Explain.
77. Describe how assigning overhead costs differs under a simple activity-based product costing system from a traditional
volume-based costing system.
78. As an organisation expands it is common for their product offering to become diversified. Explain the reasons that
would cause management to change to an activity based costing system and the benefits that could be expected by the
organisation.
79. Activity-based costing has the potential to improve the accuracy of product costs, however, it is important for
management to understand its limitations. Identify and explain two limitations.
80. ABC is a methodology that can be as simple or as complex as the organisation wants it to be.
True False
81. Activities in ABC can be classified as batch-level activities, product-sustaining activities, facility-sustaining activities
and departmental activities.
True False
82. While ABC can be used with service industries, it can be difficult to implement because service industries do not
always have repetitive individual activities.
True False
83. The ABC model links resources to activities via resource drivers and activities to cost objects via activity drivers.
True False
84. Prime indicators of problems with a traditional costing system include company profits being eroded and production
managers not being able to make sense of product costs.
True False
85. Traditional product costing does not generally include non-manufacturing costs despite the fact that these costs are
now a significant proportion of most organisations' total costs.
True False
86. One of the major benefits of ABC is that there are virtually no behavioural implications of introducing such a costing
system, as there is no real change in the way data are collected and analysed.
True False
87. The activity drivers used with ABC can include labour hours, machine parts, numbers of setups and kilograms of
materials.
True False
88. There does not need to be a strong correlation between overhead costs and the cost driver to ensure accurate
product costs.
True False
89. Resource drivers are used to estimate the cost of resources consumed by a cost object.
True False
90. Underlying factors that cause activities to be performed and their costs to be incurred are known as root cause cost
drivers.
True False
91. Under an activity-based system where budgeted costs have been used, it is necessary to include the cost of unused
capacity, when estimating and reporting profit.
True False
Chapter 08 Testbank Key

A. Traditional costing systems tend to over cost high-volume product lines.
B. Traditional costing systems tend to create a product cost distortion problem.
C. In traditional costing, the high-volume products are often subsidising the low-volume products.
D. Traditional product costing systems recognise a range of non-volume-based cost drivers.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 8.01 Explain the problems associated with traditional costing systems

A. Under traditional costing, product cost distortions will be relatively insignificant if overhead costs are a small proportion
of product cost.
B. Activity-based costing will significantly improve the product cost accuracy where overhead costs are a small proportion
of total costs.
C. Activity-based costing will significantly improve product cost accuracy where there is significant product diversity.
D. Upstream and downstream costs are often a significant part of a product's costs.
AACSB: Reflective
Difficulty: Easy
3. Which of the following statements regarding activity-based costing (ABC) is false?

A. ABC can be used to measure the cost of cost objects.
B. ABC can be used to analyse the profitability of customers.
C. ABC is not an appropriate tool for analysing non-manufacturing costs.
D. ABC evolved as a response to problems with traditional costing systems.
AACSB: Reflective
Difficulty: Easy
A. Line managers do not believe reported product costs.
B. Complex products have high reported profitability while more basic high-volume products show small margins or even
losses.
C. Overhead rates are high and increasing.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 8.02 Recognise common indicators of an outdated product costing system
A. Bids won and lost are difficult to explain.
B. Competitors' high-volume products are priced unreasonably low.
C. Our low-volume products are priced low compared to competitors.
AACSB: Reflective
Difficulty: Easy
6. A resource driver is:

A. a factor that causes a cost.
B. a unit of work performed within the organisation.
C. used to estimate the cost of resources consumed by an activity.
D. a factor that causes a cost AND is used to estimate the cost of resources consumed by an activity.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 8.03 Describe both the costing view and the activity-management view of the activity-based costing (ABC) model
7. A cost driver:
A. is a factor that causes a cost.
B. may also be a resource driver.
C. is a unit of work performed within the organisation.
D. is a factor that causes a cost AND may also be a resource driver.
AACSB: Reflective
Difficulty: Easy
8. Activity management:
A. is another name for activity-based costing.
B. is the same as the comprehensive activity-based product costing system.
C. uses activity information to monitor and control what is happening in a business.
AACSB: Reflective
Difficulty: Easy
i. Activity management requires analysis of overhead activities only.
ii. Activity management requires analysis of all activities.
iii. Activity management requires identification of detailed activities, rather than broad activities.
A. iii
B. ii
C. i and iii
D. ii and iii
AACSB: Reflective
Difficulty: Easy
10. Characteristics of activity-based costing include:

A. a greater number of overhead cost application bases compared to traditional costing systems.
B. the overhead cost application bases are likely to be more accurate cost drivers than would be the case in traditional
costing systems.
C. the simplicity of the system makes it easy to implement.
D. a greater number of overhead cost application bases compared to traditional costing systems AND the overhead cost
application bases are likely to be more accurate cost drivers than would be the case in traditional costing systems.
AACSB: Reflective
Difficulty: Easy
11. Companies are likely to benefit from activity-based costing systems if:
A. they have wide variations in the volume of individual production runs and setups are costly.
B. they have a narrow range of products with similar volumes and setups are costly.
C. they have a narrow range of products and setups are not costly.
AACSB: Reflective
Difficulty: Medium
12. Consider the following statements. Which of the statements is true?

A. As the activity-based system accuracy increases, the cost of inferior decisions based on distorted product costs
decreases.
B. As the activity-based system accuracy increases, the costs of implementing and operating the system increase.
C. As the activity-based system accuracy increases, the total cost from inferior decisions and the cost to implement and
operate the system decrease.
D. As the activity-based system accuracy increases, the cost of inferior decisions based on distorted product costs
decreases AND as the activity-based system accuracy increases, the costs of implementing and operating the system
increase.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 8.07 Recognise which types of organisations can gain the greatest benefits from activity-based costing
13. Activity-based costing has most to offer where:
A. overhead is high and volume driven.
B. overhead is high and non-volume driven.
C. overhead is low and non-volume driven.
D. direct labour is a major proportion of total costs.
AACSB: Reflective
Difficulty: Easy
14. Consider the following statements. Traditional costing systems can produce distorted product costs if:
i. overheads are driven by non-volume factors.
ii. overheads are a minor part of the product cost.
iii. it fails to recognise non-manufacturing costs as product costs.
A. i
B. ii
C. iii
D. i and iii
AACSB: Reflective
Difficulty: Medium
15. Consider the following statements. Activity-based costing is more difficult in a service business because:
i. service businesses have a low proportion of overhead in their total costs.
ii. service businesses tend to have a higher level of facility costs than most manufacturers.
iii. it is often difficult to identify service activities because they are non-repetitive.
Which of the above statements is true?
A. i
B. ii
C. ii and iii
D. i, ii and iii
AACSB: Reflective
Difficulty: Easy
Learning Objective: 8.12 Describe the difficulties of implementing activity-based costing in service organisations

i. The optimal product costing system is the most accurate system.
ii. The optimal product costing system is the one that minimises the cost of poor decisions from inferior information.
iii. The optimal product costing system is the most expensive one.
A. i
B. ii
C. iii
AACSB: Reflective
Difficulty: Medium
17. In a simple activity-based product costing system:
A. direct material, direct labour, manufacturing overhead and non-manufacturing overhead are assigned to products on an
activity basis.
B. direct material is traced using a traditional approach, while direct labour, manufacturing overhead and non-
manufacturing overhead are assigned to products on an activity basis.
C. direct material and direct labour are traced using a traditional approach, manufacturing overhead is assigned on an
activity basis and non-manufacturing overhead is expensed as it is incurred.
D. direct material, direct labour and manufacturing overhead are traced using a traditional approach, and non-
manufacturing overhead is assigned on an activity basis.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 8.04 Describe the different approaches to activity-based costing, which include different subsets of costs
18. Calculate the cost per unit for setup for one run of 10 000 units if setup labour is $20 per hour and 10 hours are
required to set up.
A. $0.04 per unit.
B. $0.06 per unit.
C. $2.00 per unit.
D. $0.02 per unit.
AACSB: Analytical
Difficulty: Easy
Learning Objective: 8.05 Use the activity-based costing model to measure the overhead costs of activities and assign these activity costs to products
19. Calculate the activity cost per unit of activity driver if the activity cost is $3500, the activity driver is the number of
batches and the total quantity of the activity driver is 1750 batches.
A. $3.00 per batch.
B. $1.50 per batch.
C. $2.00 per batch.
D. $2.50 per batch.
AACSB: Analytical
Difficulty: Easy
20. Calculate the cost of processing one sales order if the total activity cost is $1 720 000 p.a., the activity driver is the
number of orders received and the annual quantity of the activity driver is
43 000 orders.
A. $20 per order.
B. $25 per order.
C. $40 per order.
D. $50 per order.
AACSB: Analytical
Difficulty: Easy
21. An activity cost pool:
A. is a combination of a number of activities.
B. must be made up of activities at the same level.
C. can only be used at the product level.
D. is a combination of a number of activities AND must be made up of activities at the same level.
AACSB: Reflective
Difficulty: Easy
22.
Under an activity-based costing system, what is the activity cost per unit of activity driver for processing orders?
A. $93.33
B. $25.20
C. $25.40
D. $62.00
AACSB: Analytical
Difficulty: Easy
23.
Under an activity-based costing system, what is the activity cost per unit of activity driver for making patterns?
A. $4.73
B. $10.00
C. $17.50
D. $21.50
AACSB: Analytical
Difficulty: Easy
24.
Under an activity-based costing system, what is the activity cost per unit of activity driver for measuring ingredients?
A. $12.90
B. $15.00
C. $13.80
D. $14.00
AACSB: Analytical
Difficulty: Easy
25.
Under an activity-based system, what is the activity cost per unit of activity division for packing into containers?
A. $0.06
B. $0.05
C. $0.02
D. $0.04
AACSB: Analytical
Difficulty: Easy
26. In an activity-based costing system, a bill of activities will include:

A. a charge for allocated overhead.
B. the activity cost per unit of activity driver.
C. the quantity of activity consumed.
D. the activity cost per unit of activity driver AND the quantity of activity consumed.
AACSB: Reflective
Difficulty: Medium
27. Which of the following is not a useful broad category of cost classification in activity-based costing?
A. The unit level activity.
B. The batch level activity.
C. The facility level activity.
D. The differential level activity.
AACSB: Reflective
Difficulty: Easy
28. Which of the following are examples of batch level activities?
A. Machine setup.
B. Materials handling.
C. Machining.
D. Machine setup AND materials handling.
AACSB: Reflective
Difficulty: Easy
29. Consider the following statements regarding traditional costing systems.

i. All overhead costs are assumed to be driven by volume of production.
ii. All product costs are direct costs.
iii. Traditional costing systems tend to distort product costs when numerous products are made that vary in their
production requirements.
Which statement/s is/are true?
A. i
B. ii and iii
C. i and iii
D. ii
AACSB: Reflective
Difficulty: Easy

i. Product diversity creates problems in product costing because diverse products tend to utilise productive activities in
very different ways.
ii. Overhead costs that are not incurred at the unit level create product-costing problems because they do not vary with
measures such as direct labour hours or machine hours.
iii. Product diversity exists when a single product, such as pens, are made in different colours.
Which of the above statement/s is/are true?
A. i
B. ii
C. i and ii
D. i and iii
AACSB: Reflective
Difficulty: Medium
31.
Under an activity-based product costing system, what is the cost per unit of Cheap?
A. $141.00
B. $272.00
C. $164.00
D. $228.24
AACSB: Analytical
Difficulty: Hard
32.
Under an activity-based product costing system, what is the cost per unit of Econo (to the nearest dollar)?
A. $272
B. $282
C. $228
D. $320
AACSB: Analytical
Difficulty: Hard
33.
Under an activity-based costing system, what is the activity cost per unit of activity driver for machine setups?
A. $5000 per setup.

B. $2500 per setup.
C. $1200 per setup.
D. $1667 per setup.
AACSB: Analytical
Difficulty: Easy
34.
Under an activity-based costing system, what is the activity cost per unit of activity driver for material handling?
A. $2.00 per part.

B. $16.67 per part.
C. $2.50 per part.
D. $5.00 per part.
AACSB: Analytical
Difficulty: Easy
35.
Under an activity-based costing system, what is the activity cost per unit of activity driver for assembly?
A. $4.80 per part

B. $24 per direct labour hour
C. $10 per part
D. $10 per direct labour hour
AACSB: Analytical
Difficulty: Easy
36.
Under an activity-based costing system, what is the activity cost per unit of activity driver for finishing?
A. $7.50 per direct labour hour.

B. $30.00 per direct labour hour.
C. $25.00 per unit.
D. $30.00 per unit.
AACSB: Analytical
Difficulty: Easy
37.
Under an activity-based costing system, what is the total cost of lounge chairs for the year?
A. $1 710 000
B. $1 410 000
C. $890 000
D. $1 150 000
AACSB: Analytical
Difficulty: Medium
38.
Under an activity-based costing system, what is the total cost of patio chairs for the year?
A. $1 150 000
B. $890 600
C. $1 710 000
D. $590 000
AACSB: Analytical
Difficulty: Medium
39. Traditional product costing systems result in inaccurate product costs when:
A. direct labour increases.
B. the proportion of direct labour and raw material increases.
C. product diversity increases.
D. the proportion of direct labour and raw material increases AND product diversity increases.
AACSB: Reflective
Difficulty: Medium
40. Which of the following statements is true? Indicators of problems with product cost systems exist when:
i. non-manufacturing costs that are product related become insignificant.
ii. the proportion of manufacturing overhead not driven by production volume increases.
iii. there is an increase in product diversity.
A. i
B. ii
C. iii
D. ii and iii
AACSB: Reflective
Difficulty: Easy
41. Which of the following statements, as indicators of product cost systems, are out of date?
i. Highly profitable products are difficult to make.
ii. Competitors' prices appear to be very low.
iii. The market easily absorbs price increases.
A. i
B. i and iii
C. ii and iii
D. i, ii and iii
AACSB: Reflective
Difficulty: Easy
42. The benefits arising from the introduction of activity-based costing are likely to be greater where:
i. overhead is a large proportion of total cost.
ii. implementation costs are not high due to the support of advanced IT systems.
iii. batches are of a similar size.
A. i and ii
B. i and iii
C. ii and iii
AACSB: Reflective
Difficulty: Medium
43. Which of the following are usually included in traditional cost systems?
i. Direct material is traced to products.
ii. Non-manufacturing costs are assigned to products.
iii. Manufacturing overhead is allocated using a production-volume-based cost driver.
A. i
B. ii
C. iii
D. i and iii
AACSB: Reflective
Difficulty: Easy
44. Which of the following are common production volume measures?
i. Direct labour hours.
ii. Machine hours.
iii. Direct material cost.
A. i and ii
B. ii and iii
C. i and iii
D. iii only
AACSB: Reflective
Difficulty: Easy
45. Recent developments in manufacturing and marketing have resulted in significant changes to cost manufacturing
structures. Which of the following statements is/are false?
i. The proportion of direct labour increases.
ii. The proportion of manufacturing overhead increases.
iii. Product diversity decreases.
iv. The proportion of non-volume-related manufacturing overheads increases.
A. i and ii
B. i and iii
C. ii and iii
D. iii and iv
AACSB: Reflective
Difficulty: Easy
46. Recent increases in downstream costs have occurred because of:

i. increased advertising and product promotion.
ii. increased customer servicing.
iii. increased competition.
iv. increases in product design.
A. i and ii
B. ii and iii
C. iii and iv
D. i, ii and iii
AACSB: Reflective
Difficulty: Easy
47. Which of the following are indicators of an outdated costing system?
i. Products which are difficult to make have high profit margins.
ii. Competitors prices appear unrealistically low.
iii. Customers are not deterred by price increases.
iv. A lot of time is spent on special product cost projects.
A. i, ii and iii
B. ii, iii and iv
C. i, iii and iv
D. i, ii, iii and iv
AACSB: Reflective
Difficulty: Easy
48. In which of the following may a traditional costing system result?

A. The product costs are distorted.
B. Complex products are under-costed.
C. Simple products are over-costed.
D. All the given answers.
AACSB: Reflective
Difficulty: Medium
49. One of the results of the inaccuracies arising from traditional costing systems may be:
A. overhead costs are overapplied.
B. overhead costs are underapplied.
C. actual overheads exceed overhead applied.
D. overhead costs are underapplied AND actual overheads exceed overhead applied.
AACSB: Reflective
Difficulty: Medium
50. Despite the obvious advantages of ABC, many firms are still reluctant to implement it. What are the reasons for this
reluctance?
i. Uncertainty about the benefits of ABC.
ii. The opinion that the current system serves all the firm's needs.
iii. Lack of resources to implement ABC.
A. i and ii
B. ii and iii
C. i and iii
D. i, ii and iii
AACSB: Reflective
Difficulty: Easy
Learning Objective: 8.08 Outline various design issues to be considered when implementing activity-based costing, including budgeted versus actual
costs, implementation of activity-based costing as a ‘project’ and the inclusion of other cost objects
i. Both traditional cost systems and ABC focus on resources supplied.
ii. Plant and equipment is an example of a committed resource under an ABC system.
iii. Committed resources always equal resources used.
A. i
B. ii
C. iii
D. ii and iii
AACSB: Reflective
Difficulty: Easy
Learning Objective: 8.09 Explain the implications of spare capacity for estimating the cost of activities
52. Behavioural issues may be important in implementing an ABC system. Which of the following are some of the
methods employed to minimise adverse outcomes?
i. Use a top down approach.
ii. Use a bottom up approach.
iii. Ensure all employees have a sense of ownership in the system.
A. i and ii
B. ii and iii
C. iii
D. i and iii
AACSB: Reflective
Difficulty: Easy
Learning Objective: 8.10 Appreciate the importance of 'behavioural issues' in implementing activity-based costing
53. Which of the following are limitations of ABC?

i. The system requires significantly more data.
ii. The system requires extensive updating if the product range changes.
iii. The inclusion of facility level costs greatly increases the accuracy of cost per unit.
A. i and ii
B. i and iii
C. i, ii and iii
AACSB: Reflective
Difficulty: Medium
Learning Objective: 8.08 Outline various design issues to be considered when implementing activity-based costing, including budgeted versus actual
costs, implementation of activity-based costing as a ‘project’ and the inclusion of other cost objects
54. Which of the following statements best completes this sentence: 'Activity-based costing'
A. asserts that cost behaviour can best be determined if the split between fixed and variable cost is ignored.
B. has replaced standard costing as the preferred method of allocating costs to products.
C. is based on allocating fixed overheads based on the elements that drive them.
D. emphasises the need to obtain a better understanding of the behaviour of overhead costs.
AACSB: Reflective
Difficulty: Medium
55. A cost driver is:
A. a collection of cost pools.
B. a cost-allocation base chosen arbitrarily.
C. any factor that caused costs to be incurred.
D. costs that behave in a similar manner.
AACSB: Reflective
Difficulty: Easy
56. Appropriate cost-driver identification depends on:

A. a cause-and-effect relationship existing between the cost driver and costs of the activity.
B. the number of cost pools used.
C. homogeneity of cost pools.
D. the number of products produced or services provided.
AACSB: Reflective
Difficulty: Easy
57. Volume-based measures may be used to apply overhead when:

A. production runs are of various sizes and overhead costs are directly proportional to the size of the run.
B. production runs are of various sizes but each run has a constant setup time.
C. purchasing costs are related to the number of purchase orders not the number of items bought.
D. material handling costs are driven by the number of materials issued to production, and components are used
differentially by different products.
AACSB: Reflective
Difficulty: Hard
58. Direct labour hours or direct labour dollars are suitable overhead allocation bases when:
A. overhead costs are insignificant.
B. direct labour details are readily available.
C. direct material costs are highly correlated with direct labour hours.
D. they have been used satisfactorily in the past.
AACSB: Reflective
Difficulty: Medium
59. Which of the following is not an indicator of a company whose costing system needs to be more accurate?
A. Competitors' prices seem unrealistically low.
B. Products that are difficult to make have low profit margin.
C. At the end of the year, there is a significant amount of overapplied overhead.
D. Customers are not deterred by a significant increase in prices.
AACSB: Reflective
Difficulty: Easy
000); machine setup ($32 000) and quality inspection ($40 000). The operation starts with setting up the machines; each
Product X.
Which of the following activities should be grouped together in the same activity cost pool?
A. Machining and machine set up.
B. Machine set up and quality inspection.
C. Forklifting and quality inspection.
D. Machining and forklifting.
AACSB: Reflective
Difficulty: Medium
Product X.
Which of the following are the correct activity rates for machining and quality inspection?
A. $1 per machine hour and $2 per machine hour.
B. $5 per batch and $10 per batch.
C. $2400 and $5000.
D. $1 per machine hour, and $10 per batch.
AACSB: Analytical
Difficulty: Medium
Product X.
The forklifting costs and machine set up costs allocated to Product X are:
A. $2400 and $4000.
B. $5000 and $9000.
C. $2400 and $5000.
D. $5000 and $4000.
AACSB: Analytical
Difficulty: Medium
Product X.
The machining costs and quality inspection costs allocated to each unit of Product X are:
A. $0.16 and $0.32
B. $1 and $2
C. $0.5 and $1
D. $1 and $1
AACSB: Analytical
Difficulty: Medium
Product X.
The total cost for one unit of Product X is:
A. $20.10
B. $18.28
C. $5.10
D. $3.28
AACSB: Analytical
Difficulty: Hard
complexity: some pets are here for a regular check ups and immunisation; other pets have emergencies that require
surgery. Some pets are very exotic and require the attention of the supervisor vet; others are common animals with
Which of the following is NOT a reason that supports the use of activity-based costing at Puff Animal Hospital?
A. There are a variety of different activities involved for cases that vary in complexity.
B. It is easy to trace the time each vet spent on different animals.
C. The hospital is large and therefore likely to have a lot of indirect costs.
D. Some cases require surgery which means using surgery facilities; other cases do not.
AACSB: Reflective
Difficulty: Medium
complexity: some pets are here for a regular check ups and immunization; other pets have emergencies that require
surgery. Some pets are very exotic and require the attention of the supervisor vet, others are common animals with
Which of the following is an example of a facility sustaining activity for Puff Animal Hospital?
A. The supervisor vet supervises junior vets in some of the more complex cases.
B. Processing invoices.
C. The general vet gives health checks for small dogs.
D. The general assistant cleans the hospital.
AACSB: Reflective
Difficulty: Hard
i. The recent cost report shows that the ratio of prime costs to manufacturing overhead cost is approximately 1:3.
customised parts (electronic parts that are highly customised to very specialised electric motors), prototypes (where
Cofission Electronics need to design as well as manufacture these specialised electronic parts).
costs; with this system, product customisation takes very little additional time.
You are not convinced that all of the above points support Jasmine's decision. Which of the above points support the use
of ABC in Cofission?
A. i, ii and iii
B. ii, iii and iv
C. i and iii
D. iii and iv
AACSB: Analytical
Difficulty: Medium
i. The recent cost report shows that the ratio of prime costs to manufacturing overhead cost is approximately 1:3
customized parts (electronic parts that are highly customized to very specialized electric motors), prototypes (where
Cofission Electronics need to design as well as manufacture these specialized electronic parts).
costs; with this system, product customization takes very little additional time.
You are not convinced that all of the above points support Jasmine's decision. Which of the above points contradict
Jasmine's decision?
A. i and ii
B. ii
C.
i, ii and iv
D. ii and iv
AACSB: Reflective
Difficulty: Hard
69. Which of the following rates would not be used to assign manufacturing overhead costs to products?
A. Activity-based rates
B. Facility rates
C. Plantwide rates
D. Departmental rates
AACSB: Reflective
Difficulty: Easy
Learning Objective: 8.06 Explain the differences between product costs prepared under activity-based costing and those prepared under traditional
costing systems
70. When moving from a traditional costing system to an activity-based system, there is a significant improvement in the
accuracy of the product costs because:
A. simple activity costing assumes that all manufacturing overhead costs are driven by the volume of production.
B. simple activity-based costing allocates overheads based on the cost per activity driver.
C. improved identification of cost drivers results in more accurate allocation of manufacturing overheads to products.
D. simple activity-based costing allocates overheads based on the cost per activity driver, resulting in more accurate
allocation of manufacturing overheads to products.
AACSB: Reflective
Difficulty: Medium
costing systems
71. Activity based costing focuses on the cost of resources:

A. budgeted.
B. used.
C. committed.
D. supplied.
AACSB: Reflective
Difficulty: Easy
72. When introducing an activity-based costing system which of the following actions are recommended for the
changeover to be successful?
A. Increased involvement of non-accounting staff in the design and implementation stages.
B. Preparation of a change management plan that considers behavioural issues.
C. A bottom-up approach to encourage staff to own the new system and to see it as a tool to help them with their work.
D. All of the answers are recommended.
AACSB: Reflective
Difficulty: Medium
73. Plant, equipment and supervision that have been supplied in advance for use in production are known as:
A. supplied resources.
B. committed resources.
C. used resources.
D. budgeted resources.
AACSB: Reflective
Difficulty: Easy
74. When using average costs in activity-based costing, which of the following costs, are not divided by the number of
units produced to estimate the cost per unit of product?
A. Unit level
B. Batch level
C. Facility level
D. Product level
AACSB: Reflective
Difficulty: Medium
Learning Objective: 8.11 Identify the limitations of activity-based costing in providing accurate product costs
75. Prepare a list of 14 possible indications that a new product costing system is likely to be needed.
1. Sales are increasing, but profits are decreasing.

2. Product lines are diverse.
3. Only a small percentage of total costs are in direct labour.
4. Competitors' high-volume products seem to be priced very low.
5. Line managers do not believe the product costs reported by the accounting department.
6. Product line profit margins are difficult to explain.
7. Line managers suggest that profitable products be dropped.
8. Competitors do not sell some of the products in which our system reports high profit margins.
9. Marketing personnel are unwilling to use reported product costs in making pricing decisions.
10. Complex products that are difficult to manufacture are reported to be very profitable, although they are not priced at a
premium.
11. The firm seems to have captured a highly profitable product line for itself.
12. Overhead rates are very high and increasing over time.
13. It is difficult to explain bids won and bids lost.
14. The accounting department spends significant amounts of time on special costing projects to support bids or pricing
decisions.
AACSB: Reflective, Communication

Difficulty: Hard
76. At a recent professional meeting, two accountants discussed product-costing problems in their respective companies.
Both accountants are familiar with ABC systems but neither firm uses this method.
Accountant A reported that part of the problem in product costing in his firm is that there are major differences between
product lines as to volume of units, utilisation of various activities, quality assurance requirements established by
customers and size of the products. Accountant B noted that in her firm, which produces consumer products, all products
undergo the same basic production processes and in the same sequence, but in an increasing variety of colours and
packaging modes.
Both accountants are worried about the potential distortion of product costs under their traditional product costing
systems.
Which accountant should be more concerned about the potential distortion? Explain.
Accountant A should be more concerned. The variety of product lines made in his firm's facility reflects product diversity at
the product line level. In accountant B's firm, there still is only one product line with an increasing number of models based
on colour and packaging. While more attention may need to be devoted to assigning the packaging costs (perhaps
through a version of operation costing), the situation in that firm is not as severe as in the firm with several product lines.
AACSB: Reflective, Communication

Difficulty: Medium
costing systems
77. Describe how assigning overhead costs differs under a simple activity-based product costing system from a traditional
volume-based costing system.
Under a traditional volume-based system, a predetermined overhead rate based on direct labour hours or some other
measure of volume is used to apply overhead to the product. Many manufacturers use direct labour hours assuming that
they are closely related to the volume of activity in the factory.
Under a simple activity-based product costing system, overhead is applied in two steps. The first step is to identify
significant activities and group costs by these activities into activity cost pools. The second step is to find an activity driver
for each pool and apply the costs to products according to their relative use of the activity drivers.
AACSB: Communication
Difficulty: Easy
costing systems
78. As an organisation expands it is common for their product offering to become diversified. Explain the reasons that
would cause management to change to an activity based costing system and the benefits that could be expected by the
organisation.
In many businesses, product diversity has increased and cost structures have become more overhead-intensive and less
volume-driven. Under these circumstances, traditional costing systems are likely to overstate the costs of high-volume
simple products produced in large batches, and understate the costs of low-volume customised products produced in
small batches. Where product costs are an essential part of the strategic decision making and planning and control
processes, these businesses are likely to experience considerable difficulty because of the inadequate information from
their traditional costing systems, and to reap substantial benefits from implementing activity-based costing. Given the
emerging business environment and its implications for product and cost structures, we might have expected a strong
trend towards the adoption of ABC since its introduction in the late 1980s. The decision of whether or not to implement
ABC should be based on a careful assessment of the costs and benefits.
The benefits from ABC will be greatest where:
a. overhead costs are a significant portion of total costs and a large part of overhead is not directly related to production
volume;
b. the business has a diverse product range, and individual products' use of support resources differs from their use of
volume-based cost drivers;
c. production activity involves diverse batch sizes and product complexity;
d. the proportion of product-related costs incurred outside of manufacturing is increasing relative to manufacturing costs;
e. there are likely to be high 'costs' associated with making inappropriate decisions based on inaccurate product costs
(this is most likely in a highly competitive environment where product cost is a key input to strategic decision making and
where competitors have accurate product cost information);
f. the cost of designing, implementing and maintaining the ABC system is likely to be relatively low due to sophisticated IT
support.
Difficulty: Medium
79. Activity-based costing has the potential to improve the accuracy of product costs, however, it is important for
management to understand its limitations. Identify and explain two limitations.
While ABC has the potential to improve the accuracy of product costs, it is important to understand its limitations:
Facility-level costs.
Some proponents of ABC recommend that virtually all costs, including facility costs, be assigned to products. However, facility-level
activities may bear no obvious relationship to products. If these facility-level costs are assigned to products, the allocation basis must
be arbitrary. The higher the proportion of allocated facility costs, the greater the arbitrary element of the product costs. Of course a
business must cover its facility-level costs to make a profit but, in the income statement, it is better to deduct them after estimating the
product-related profit margin, rather than include them in the product costs.
Use of average costs.
Activity-based estimates of the cost per unit of product, such as the costs of the Hensley Tooth and the Custom Cast Tooth in Exhibits
8.7 and 8.8, are average costs. Unit level costs are incurred for each unit of product, but batch-level, product-level and facility-level
costs must be divided by the number of units produced to estimate the cost per unit of product. It is important that managers
understand this. Many product-related decisions are better based on either unit-level costs in the short term or total product costs in the
longer term, rather than looking at the average cost per unit of product.
Complexity.
When ABC is set up as an ongoing costing system, it involves more detailed recording and analysis than for conventional costing
systems. If the company is changing rapidly, the data in the activity-based system must be updated frequently to avoid the production of
outdated, irrelevant information. This can be expensive. The level of complexity increases dramatically when the system is used for
activity management as well as for product costing, because activity management requires a more extensive and detailed analysis of
costs and activities.
Difficulty: Medium
Learning Objective: 8.11 Identify the limitations of activity-based costing in providing accurate product costs
80. ABC is a methodology that can be as simple or as complex as the organisation wants it to be.
TRUE
AACSB: Reflective
Difficulty: Medium
Learning Objective: 8.04 Describe the different approaches to activity-based costing, which include different subsets of costs
81. Activities in ABC can be classified as batch-level activities, product-sustaining activities, facility-sustaining activities
and departmental activities.
FALSE
AACSB: Reflective
Difficulty: Easy
82. While ABC can be used with service industries, it can be difficult to implement because service industries do not
always have repetitive individual activities.
TRUE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 8.12 Describe the difficulties of implementing activity-based costing in service organisations
83. The ABC model links resources to activities via resource drivers and activities to cost objects via activity drivers.
TRUE
AACSB: Reflective
Difficulty: Easy
84. Prime indicators of problems with a traditional costing system include company profits being eroded and production
managers not being able to make sense of product costs.
TRUE
AACSB: Reflective
Difficulty: Easy
85. Traditional product costing does not generally include non-manufacturing costs despite the fact that these costs are
now a significant proportion of most organisations' total costs.
TRUE
AACSB: Reflective
Difficulty: Easy
86. One of the major benefits of ABC is that there are virtually no behavioural implications of introducing such a costing
system, as there is no real change in the way data are collected and analysed.
FALSE
AACSB: Reflective
Difficulty: Easy
87. The activity drivers used with ABC can include labour hours, machine parts, numbers of setups and kilograms of
materials.
TRUE
AACSB: Reflective
Difficulty: Easy
88. There does not need to be a strong correlation between overhead costs and the cost driver to ensure accurate
product costs.
FALSE
AACSB: Reflective
Difficulty: Easy
89. Resource drivers are used to estimate the cost of resources consumed by a cost object.
FALSE
AACSB: Reflective
Difficulty: Easy
90. Underlying factors that cause activities to be performed and their costs to be incurred are known as root cause cost
drivers.
TRUE
AACSB: Reflective
Difficulty: Easy
91. Under an activity-based system where budgeted costs have been used, it is necessary to include the cost of unused
capacity, when estimating and reporting profit.
TRUE
AACSB: Reflective
Difficulty: Easy
Chapter 08 Testbank Summary
Category # of Q
uestion
s
AACSB: Analytical 20
AACSB: Communication 3
AACSB: Reflective 66
AACSB: Reflective, Communication 2
Difficulty: Easy 57
Difficulty: Hard 7
Difficulty: Medium 27
Learning Objective: 8.01 Explain the problems associated with traditional costing systems 15
Learning Objective: 8.02 Recognise common indicators of an outdated product costing system 11
Learning Objective: 8.03 Describe both the costing view and the activity-management view of the activity- 9
based costing (ABC) model
Learning Objective: 8.04 Describe the different approaches to activity- 2
based costing, which include different subsets of costs
Learning Objective: 8.05 Use the activity- 30
based costing model to measure the overhead costs of activities and assign these activity costs to products
Learning Objective: 8.06 Explain the differences between product costs prepared under activity- 4
based costing and those prepared under traditional costing systems
Learning Objective: 8.07 Recognise which types of organisations can gain the greatest benefits from activity-based costing 7
Learning Objective: 8.08 Outline various design issues to be considered when implementing activity- 2
based costing, including budgeted versus actual costs, implementation of activity-
based costing as a ‘project’ and the inclusion of other cost objects
Learning Objective: 8.09 Explain the implications of spare capacity for estimating the cost of activities 4
Learning Objective: 8.10 Appreciate the importance of 'behavioural issues' in implementing activity-based costing 3
Learning Objective: 8.11 Identify the limitations of activity-based costing in providing accurate product costs 2
Learning Objective: 8.12 Describe the difficulties of implementing activity-based costing in service organisations 2

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Management Accounting Information For Managing and Creating Value 7th Edition Smith Test Bank

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Management Accounting Information

for Managing and Creating Value 7th

1. Which of the following statements is false?

2. Which of the following statements is false?

3. Which of the following statements regarding activity-based costing (ABC) is false?

6. A resource driver is:

9. Which of the following statements is/are true?

10. Characteristics of activity-based costing include:

12. Consider the following statements. Which of the statements is true?

16. Consider the following statements.

17. In a simple activity-based product costing system:

21. An activity cost pool:

26. In an activity-based costing system, a bill of activities will include:

28. Which of the following are examples of batch level activities?

29. Consider the following statements regarding traditional costing systems.

30. Consider the following statements.

The following information pertains to each product line of CD players:

The following information pertains to each product line of CD players:

The level of activity for the year is:

A. $5000 per setup.

The level of activity for the year is:

A. $2.00 per part.

The level of activity for the year is:

A. $4.80 per part

The level of activity for the year is:

A. $7.50 per direct labour hour.

The level of activity for the year is:

The level of activity for the year is:

44. Which of the following are common production volume measures?

47. Which of the following are indicators of an outdated costing system?

48. In which of the following may a traditional costing system result?

53. Which of the following are limitations of ABC?

55. A cost driver is:

56. Appropriate cost-driver identification depends on:

1. Which of the following statements is false?

2. Which of the following statements is false?

3. Which of the following statements regarding activity-based costing (ABC) is false?

6. A resource driver is:

10. Characteristics of activity-based costing include:

12. Consider the following statements. Which of the statements is true?

16. Consider the following statements.

26. In an activity-based costing system, a bill of activities will include:

29. Consider the following statements regarding traditional costing systems.

30. Consider the following statements.

The following information pertains to each product line of CD players:

The following information pertains to each product line of CD players:

The level of activity for the year is:

A. $5000 per setup.

The level of activity for the year is:

A. $2.00 per part.

The level of activity for the year is:

A. $4.80 per part

The level of activity for the year is:

A. $7.50 per direct labour hour.

The level of activity for the year is:

The level of activity for the year is:

46. Recent increases in downstream costs have occurred because of:

48. In which of the following may a traditional costing system result?

53. Which of the following are limitations of ABC?

56. Appropriate cost-driver identification depends on:

57. Volume-based measures may be used to apply overhead when:

71. Activity based costing focuses on the cost of resources: