Managerial Accounting 6th Edition Jiambalvo Test Bank

Managerial Accounting 6th Edition
Jiambalvo Test Bank

Visit to download the full and correct content document: https://testbankdeal.com/dow
nload/managerial-accounting-6th-edition-jiambalvo-test-bank/
CH APTER 6
Cost Allocation and Activity-Based Costing
Summary of Questions by Objectives and Bloom’s Taxonomy
Item LO BT Item LO BT Item LO BT Item LO BT Item LO BT

True-False Statements
1. 1 K 7. 1 K 13. 1 K 19. 2 K 25. 2 K
2. 1 K 8. 1 K 14. 1 K 20. 2 K *26. A1 K
3. 1 K 9. 1 K 15. 1 K 21. 2 K *27. A1 K
4. 1 K 10. 1 K 16. 1 K 22. 2 K 28. 2 K
5. 1 K 11. 1 K 17. 2 K 23. 2 C
6. 1 K 12. 1 K 18. 2 K 24. 2 K
Multiple Choice Questions
29. 1 K 54. 1 C 79. 2 AP 104. 1 AP 129. 2 AP
30. 1 K 55. 1 K 80. 1 AP 105. 1 AP 130. 2 AP
31. 1 K 56. 2 K 81. 1 AP 106. 1 AP 131. 2 AP
32. 1 K 57. 2 K 82. 1 AP 107. 1 AN 132. 2 AP
33. 1 K 58. 2 K 83. 1 AP 108. 1 AP 133. 2 AP
34. 1 C 59. 2 K 84. 1 AP 109. 1 AP 134. 2 AP
35. 1 K 60. 2 K 85. 1 AP 110. 1 AP 135. 2 AN
36. 1 K 61. 2 K 86. 1 AP 111. 1 AP 136. 2 AP
37. 1 C 62. 1 C 87. 1 AP 112. 1 AP 137. 2 AP
38. 1 C 63. 1,2 C 88. 2 AP 113. 1 AP 138. 2 AP
39. 1 K 64. 1 C 89. 2 AP 114. 1 AP 139. 2 AP
40. 1 K 65. 2 K 90. 1 AP 115. 1 AP 140. 2 AP
41. 1 K 66. 2 C 91. 1 AP 116. 1 AP 141. 2 AP
42. 1 C 67. 2 K 92. 1 AP 117. 1 AP 142. 2 AP
43. 1 K 68. 2 K 93. 1 AP 118. 1 AP 143. 2 AP
44. 1 K 69. 2 K 94. 2 AP 119. 1 AP 144. 2 AP
45. 2 K 70. 2 K 95. 2 AP 120. 1 AN 145. 2 AP
46. 1 K 71. 2 K 96. 2 AP 121. 1 AN 146. 2 AP
47. 1 K 72. 2 C 97. 1 AP 122. 2 AP 147. 2 AP
48. 1 K 73. 2 C 98. 2 AP 123. 2 AP 148. 2 AP
49. 1 K 74. 2 C 99. 1 AP 124. 2 AP 149. 2 AP
50. 1 K 75. 2 K 100. 2 AP 125. 2 AP 150. 2 AP
51. 1 K 76. A1 K 101. 1 AP 126. 2 AP 151. 2 C
52. 1 K 77. 2 AP 102. 1 AP 127. 2 AP
53. 1 K 78. 2 AP 103. 1 AP 128. 2 AP
Matching
152. 1,2 K
Exercises
153. 1 AP 157. 2 AP 161. 1 AP 165. 1 AP 169. 1,2 AP
154. 1 C 158. 2 AP 162. 1 AP 166. 2 AP 170. 2 AN
155. 2 AP 159. 1 AP 163. 1 AP 167. 2 AP
156. 2 AP 160. 1 AP 164. 1 AP 168. 2 C
6-2 Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
Challenge Exercises
171. 1,2 AN 172. 2 AP 173. 1 AN
Short-Answer Essays
174. 1 K 176. 1 K 178. 1 C 180. 2 C *182. A1 K
175. 1 C 177. 1 C 179. 1 C *181. A1 C
TRUE-FALSE STATEMENTS
1. Indirect costs occur because resources are shared by more than one cost objective.
2. Cost allocation is the process of assigning direct and indirect costs to products.
3. Cost allocation methods that provide the most accurate full cost information for financial
reporting, also provide the most accurate information for cost-plus contracts.
4. One of the reasons that companies allocate costs is to allow for the frivolous use of
common resources.
5. One of the reasons that companies allocate costs is to encourage managers to use
externally provided services, rather than those that are internally provided.
6. From a decision-making standpoint, the allocated cost should measure the opportunity
cost of using a company resource.
7. Once the opportunity cost associated with a shared resource is determined, it is unlikely
to change.
8. In order to provide full cost information for external reporting purposes, indirect
production costs must be allocated to goods produced.
9. Cost-plus contracts guarantee that the supplier will pay for production costs and the
customer will pay a fixed amount or percentage of the cost.
10. The more costs that are allocated to a cost-plus contract, the smaller the profit will be for
the supplier of the contract.
11. A cost objective is the product, service, or department that will receive the allocated cost.
12. Large cost pools that contain many different kinds of costs are most useful to managers
in making decisions.
13. The allocation base selected should ideally have a relative benefits relationship with the
costs to be allocated.
14. In the direct method of allocating costs, service department costs are allocated only to
production departments, not to other service departments.
15. When service department costs are allocated using actual costs and actual usage, the
amount allocated to one department will depend on the usage of other departments.
Chapter 6 Cost Allocation and Activity-Based Costing 6-3
16. Allocating actual service department costs allows the service departments to pass on the
costs of inefficiencies to the production departments.
17. Managers should not be held responsible for noncontrollable costs.
18. Allocating unitized fixed and variable costs leads to better decision making than
allocating total costs.
19. Allocating fixed costs on a per unit basis will often cause the managers receiving the
allocations to perceive the costs as variable.
20. ABC is more likely than traditional costing systems to undercost complex, low-volume
products.
21. ABC allocates cost pools to cost objectives using cost drivers as the allocation base.
22. Under the ABC approach, costs are assigned to cost drivers based on a chosen cost
objective.
23. An example of a unit-level activity is the design of a particular product.
24. Activity-based management aims at improving the efficiency and effectiveness of

business processes.
25. Activity-based costing uses benchmarking to compare the cost of an activity in one
organization to the cost for a similar activity in another organization.
*26. Before resources used by the major activities of a business can be identified, managers
using activity-based management must identify ways to improve the effectiveness of the
activities.
*27. The process of determining major activities occurs before the resources used by each
activity are identified in performing an activity-based management study.
28. A batch-level activity is an activity that supports all other activities.
Answers to True-False
1 T 6 T 11 T 16 T 21 T *26 F
2 F 7 F 12 F 17 T 22 F *27 T
3 T 8 T 13 F 18 F 23 F 28 F
4 F 9 F 14 T 19 T 24 T
5 F 10 F 15 T 20 F 25 F
MULTIPLE CHOICE
29. Indirect costs occur when
A. resources are shared by more than one product or service.
B. costs are directly traced to products or services.
C. controllable costs are incurred by cost objectives.
D. All of these answer choices are correct.
30. The process of assigning indirect costs is called

A. benchmarking.
B. tracing.
C. cost allocation.
D. cost unitizing.
31. Which of the following is not a reason that companies allocate costs?
A. To calculate the full cost of products for financial reporting purposes
B. To discourage managers from using external suppliers
C. To reduce the frivolous use of company resources
D. To provide information needed by managers to make appropriate decisions
32. Costs may not be allocated to

A. cost drivers.
B. services.
C. departments.
D. cost objectives.
33. From a decision-making standpoint, the allocated cost should measure the
A. sunk cost of the resource involved.
B. variable costs of the materials purchased.
C. opportunity cost of using a company resource.
D. product cost of the goods produced.
34. If managers are not charged for centrally administered services, what may managers
likely do?
A. Seek outside suppliers
B. Limit their frivolous use of these services
C. Consider the services as free
D. Evaluate and consider lower-cost alternatives for the services
35. Full cost information

A. is required by GAAP for internal reporting purposes.
B. requires the allocation of indirect costs.
C. provides managers with cost information on uncontrollable costs.
D. treats all costs as fixed costs.
36. A contract that specifies that the supplier will be paid for the cost of production as well as
some fixed amount or percentage of cost is called a(n)
A. relative-benefits contract.
B. cost-plus contract.
C. allocation cost pool.
D. indirect cost budget.
37. In which of the following industries are cost-plus contracts common?

A. Hybrid car manufacturers
B. Soft drink bottlers
C. Governmental defense suppliers
D. Newspaper publishers
38. A major problem with cost-plus contracts is that they

A. include costs that do not follow GAAP.
B. cause the supplier to take significant financial risks.
C. require the supplier to use variable costing.
D. create an incentive to allocate as much cost as possible to the goods produced
under the contract.
39. Which of the following is not a step in the cost allocation process?
A. Calculate the cost involved in each step of the production process.
B. Select an allocation base to relate the cost pools to the cost objectives.
C. Form cost pools.
D. Identify the cost objectives.
40. A cost objective is the

A. reason for allocating the cost.
B. basis on which costs are allocated.
C. product, service, or department that is to receive the allocation.
D. relative benefit received from using a resource.
41. What is the product, service, or department that is to receive the cost allocation called?
A. Cost-plus recipient
B. Cost objective
C. Cost driver
D. Cost pool
42. Which of the following is least likely to be a cost objective?

A. Salaries such as those in the accounting and personnel departments
B. Individual products such as spades and mowers
C. Product lines such as loans and estate plans
D. Departments such as assembly and finishing
43. Which of the following is a grouping of individual costs whose total is allocated using one
allocation base?
A. Cost objective
B. Cost pool
C. Direct cost
D. Cost driver
44. A cost pool is

A. not necessary in cost-plus contracts.
B. useful when separating mixed costs into their fixed and variable components.
C. allocated using a single allocation base.
D. a method of allocating costs among service departments.
45. Which of the following is a measure of activity used to distribute indirect costs?
A. Cost objective
B. Cost pool
C. Cost driver
D. Cost unitization
46. Which of the following is the overriding concern in forming a cost pool?
A. To ensure that there are no variable costs in the cost pool
B. To ensure that the total amount in the cost pool is less than the direct costs for
the product
C. To ensure that only costs which have been budgeted are included in the cost
pool
D. To ensure the costs in the pool are homogeneous or similar
47. Which of the following statements about cost pools is true?

A. The costs in each of the cost pools should be homogeneous or similar.
B. The number of cost pools must be the same as the number of products produced
by a company.
C. Only four different kinds of costs may be included in a single cost pool.
D. Each cost pool should include the costs of one expense account.
48. An allocation base

A. is the minimum amount to be allocated to a cost objective.
B. is also called a cost pool.
C. represents the items to which a cost will be allocated.
D. relates the cost pool to the cost objectives.
49. An allocation base

A. is also called a cost objective.
B. is a characteristic that is the same for all cost drivers.
C. ideally uses a cause-and-effect relationship to the cost pool.
50. Which of the following is not a criterion typically used to allocate indirect fixed costs?
A. Ability to bear costs
B. Equity
C. Feasible outcomes
D. Relative benefits
51. Which of the following is not a service department in a typical manufacturing firm?
A. Security
B. Fabrication
C. Maintenance
D. Personnel
52. Which of the following is a method of allocation used to assign service department costs
to production departments, but not to other service departments?
A. Equity method
B. Direct method
C. Lump-sum method
D. Traditional method
53. Service department costs are allocated to producing departments

A. so that the costs can be allocated to the products in the producing departments.
B. so that less cost is allocated to service departments.
C. so that the service will not be purchased externally.
54. Which of the following allocations would not occur when the direct method is used in a
manufacturing company?
A. Personnel department costs are allocated to the maintenance department.
B. Maintenance department costs are allocated to the mixing department.
C. Security department costs are allocated to the packaging department.
D. Payroll department costs are allocated to the assembly department.
55. The advantage of allocating budgeted rather than actual service department costs is that
A. managers are not motivated to evaluate the charges.
B. only one cost pool is necessary.
C. service departments cannot pass on the costs of inefficiencies and waste.
D. this practice is acceptable under GAAP.
56. What costs are affected by the manager’s decisions for which the manager should be
held accountable?
A. Indirect costs
B. Controllable costs
C. Sunk costs
D. Pooled costs
57. Managers are correct when they perceive that almost all cost allocations are
A. insignificant.
B. arbitrary.
C. designed to make them look bad.
D. unnecessary.
58. When fixed costs are unitized, they

A. are stated on a per unit basis.
B. may appear to remain the same in total at all levels of activity.
C. may cause managers to use volume-related allocation.
59. An allocation of a predetermined amount that is not affected by changes in the activity
level of the organizational unit receiving the allocation is called a(n)
A. allocation base.
B. unitized cost.
C. lump-sum allocation.
D. cost driver.
60. Lump-sum allocations

A. generally changes year after year.
B. do not change when the activity levels of any of the user departments change.
C. are impacted by the usage of the allocated resource by other departments.
D. make fixed costs appear variable.
61. Which of the following statements is true concerning lump-sum allocations of service
department costs?
A They make fixed costs appear to be variable to the manager receiving the
allocation.
B. They are not affected by the activity level in the department receiving the
allocation.
C. They make fixed costs appear to be variable to the manager receiving the
allocation and are not affected by the activity level in the department receiving
the allocation.
D. They do not make fixed costs appear to be variable to the manager receiving the
allocation and are affected by the activity level in the department receiving the
allocation
62. Which of the following is not a problem caused by assigning actual service department
costs to operating departments based on actual usage of service department activities
by the operating departments?
A. The cost assigned to one manager will be affected by the service usage of
another manager.
B. Inefficiencies in the service department will be passed along to the operating
departments.
C. Operating managers having high peak capacity requirements will not have to
bear the full cost of meeting this peak capacity.
D. All of these answer choices are problems caused by assigning actual service
costs to operating departments.
63. The Copy Department of Hernandez Hardware is budgeted to incur $30,000 per month
in fixed costs plus a cost of $0.02 per copy. The company allocates copy costs to user
departments as follows:
 Fixed costs are allocated as a lump sum based on budgeted fixed costs and
estimated peak demand for each department.
 Variable costs are allocated based on the budgeted rate per copy times the
department's actual usage.
Which of the following is an advantage of this allocation scheme over allocating all actual
service costs based on actual usage?
A. Departments that use copy services are charged for cost overruns in the copy
department.
B. The amount charged to a particular user department is affected by the number of
copies used by another department.
C. Managers in departments that use services pay for the fixed costs that fluctuate
based on their changing needs.
D. Managers are charged for the activities they use.
64. From the perspective of a manager of a producing department, which of the following is
a desired feature of a cost allocation received from a service department?
A. The amount of the allocation should be based solely on the usage of the service
by the producing department and not a function of the usage of the service by
other departments.
B. The budgeted cost should be allocated rather than actual service department
costs.
C. The allocation should force the production manager to pay for fluctuating
demands that the production manager is creating.
65. Companies that use only one or two cost pools rather than several cost pools
A. incurs more cost of record keeping.
B. will experience more profit than if more pools are used.
C. may price products incorrectly due to inaccurate cost allocation.
D. are likely to be using ABC.
66. When activity-based costing is implemented, the initial outcome is that

A. the unit cost of all products will be higher.
B. the unit cost of all products will be lower.
C. the unit cost of low-volume products will be higher and the unit cost of high-
volume products will be lower.
D. the unit cost of low-volume products will be lower and the unit cost of high-
volume products will be higher.
67. Which of the following is likely to occur when fewer overhead cost pools are used?
A. Product costs will be less accurate.
B. Recordkeeping will be more expensive.
C. Decisions such as product pricing will be improved.
D. All products will be undercosted.
68. The traditional approach to cost allocation

A. tends to over-cost high volume core products.
B. usually requires more cost pools than ABC.
C. attempts to identify the activities that cause costs.
D. produces more accurate costs than other allocation methods.
69. Which of the following steps is not involved in the ABC approach?
A. Identify activities that cause costs to be incurred.
B. Allocate costs to products based on activity usage.
C. Group costs of activities into cost pools.
D. Improve processes based on benchmarking.
70. How many distinct activities are used by most companies that design ABC systems?
A. Fewer than 3
B. 3 to 10
C. 11 to 24
D. 25 to 100
71. Happy Foods uses ABC costing. Which of the following is most likely to be a cost driver
for the cost of cashiering at a convenience store?
A. Cost of items purchased
B. Direct labor cost
C. Number of customers processed
D. Number of employees handling the job
72. Which of the following is generally true when a company compares activity-based
costing (ABC) and traditional volume-based costing?
A. ABC uses fewer cost drivers in an effort to reduce total costs.
B. ABC allocates costs based primarily on production volume.
C. ABC is less expensive.
D. ABC is less likely to undercost complex, low-volume products.
73. Which of the following is not an advantage of activity-based costing over traditional
volume-based costing systems?
A. ABC may lead to cost control improvement as managers are charged for using
activities.
B. ABC is less likely than a traditional system to undercost complex, low-volume
products.
C. ABC is less costly to implement than traditional systems.
D. ABC allows managers to get an understanding of the cost of their respective
department’s activities.
74. What is the major difference between ABC and ABM?
A. ABC is used in managerial accounting, while ABM is used in financial
accounting.
B. ABC focuses on measurement, while ABM focuses on control.
C. The goal of ABC is to accurately control costs, while the goal of ABM is to
allocate costs most effectively to cost objectives.
D. There is no difference; ABC and ABM are two names for the same thing.
75. Activity-based management
A. is the management of activities that cause costs.
B. requires cost pools to be formed consisting of costs that are homogenous in
nature.
C. allocates costs in a cause and effect manner to cost objectives.
D. is a method of allocating direct costs to cost objectives.
*76. Which one of the following lists the major steps in activity-based management in the
correct order?
A. Determine major activities, form cost pools, evaluate the performance of the
activities, and identify ways to improve the activities
B. Determine major activities, identify resources used by each activity, evaluate the
performance of the activities, and identify ways to improve the activities
C. Determine major activities, identify ways to improve the activities, evaluate the
performance of the activities, and identify resources used by each activity
D. Determine major activities, evaluate the performance of activities, form cost
pools, and identify ways to improve the activities
77. Teal Sports offers 2 different types of water sport activities—sailfish rental and banana
boat rides. The company has two different activities—lifeguarding and maintenance—
that provide input into its cost objectives. Data on estimated overhead for the year
follows:
Estimated
Sailfish Rental Boat Rides
Activity Driver Overhead
Estimate Estimate
Cost
Lifeguarding # of Labor hours $63,940 3,280 hours 2,280 hours
Maintenance Hours of riding time $88,000 1,500 hours 2,500 hours
What overhead rates will be used in each department to assign costs to the banana boat
rides?
Lifeguarding Maintenance
A. $28.04 $22.00
B. $11.50 $22.00
C. $28.04 $35.20
D. $11.50 $35.20
78. Terrel Gifts produces logo platters and cups bearing the name of the city in which the
items will be sold to tourists. Indirect logo printing costs are allocated to platters and
cups based on the amount of time spent on the logo machine. The company has
budgeted indirect logo costs of $4,224 per month and expects to spend 4,800 hours on
printing logos each month. Each platter uses 24 minutes and each cup spends 6
minutes on the logo machine. How much of the logo printing costs will be allocated to
each platter?
A. $0.35
B. $0.88
C. $21.12
D. $8.12
79. Teal Sports offers 2 different types of water sport activities—sailfish rental and banana
boat rides. The company has two different activities—lifeguarding and maintenance—
that provide input into its cost objectives. Data on estimated overhead for the year
follows:
Estimated
Sailfish Rental Boat Rides
Estimate Estimate
Cost
Lifeguarding # of Labor hours $63,940 3,280 hours 2,280 hours
Maintenance Hours of riding time $88,000 1,500 hours 2,500 hours
The company provides 2,400 banana boat rides and 1,200 sailfish rentals each year.
How much overhead will be assigned to each banana boat ride?
A. $42.20
B $73.24
C $22.56
D. $33.84
80. The law firm of Barnes & Cohen purchased a new $17,600 copier. Copying costs will be
shared by the purchasing, accounting, and information technology departments since
those are the only departments that will have access to the machine. The company has
decided to allocate the copying cost based on the number of copies made by each
department. The sales person who sold the copier to the attorneys expects it will
generate 1,000,000 copies. The manager of each department has estimated the number
of copies that his or her department will make over the life of the copier:
Department Copies
Purchasing 150,000
Accounting 450,000
Information Technology 200,000
How much overhead will be allocated each time a copy is made by the accounting
department?
A. 2.2 cents
B. 3.9 cents
C. 1.76 cents
D. None of these answer choices are correct.
81. Marley Music produces toy instruments—trumpet and flute— for children. Molding costs
are allocated to products based on a percentage of material costs. Molding costs of
$15,000 per month are budgeted and the store anticipates spending $30,000 in
materials. By the end of the month, it was determined that actual molding costs were
$14,500. If the company spends $6.50 per trumpet for materials, and $3.50 per flute for
materials, how much of the molding costs will be allocated to each trumpet?
A. $0.50
B. $0.48
C. $3.14
D. $3.25
82. The law firm of Barnes & Cohen purchased a new $17,600 copier. Copying costs will be
shared by the purchasing, accounting, and information technology departments since
those are the only departments that will have access to the machine. The company has
decided to allocate the copying cost based on the number of copies made by each
department. The sales person who sold the copier to the attorneys expects it will
generate 1,000,000 copies. The manager of each department has estimated the number
of copies that his or her department will make over the life of the copier:
Department Copies
Purchasing 150,000
Accounting 450,000
Information Technology 200,000
If the purchasing department makes 23,000 copies this quarter, how much copying cost
will Barnes & Cohen allocate to purchasing?
A. $405
B. $2,699
C. $506
83. Ransom Widgets allocates the estimated cost of its accounting department, $200,000, to
its production and sales departments since the accounting department supports these
departments with regard to payroll and accounts payable functions. The accounting
department costs will be allocated based on the number of employees using the direct
method. Information regarding employees follows:
Department Employees
Accounting 4
Production 36
Sales 12
How much of the accounting department costs will be allocated to the production and
sales departments, respectively?
Production Sales
A. $150,000 $50,000
B. $180,000 $60,000
C. $1,800,000 $600,000
D. $22,222 $66,667
84. Intermodal Moving uses the direct method and allocates its maintenance costs on the
basis of repair hours and its payroll department costs on the basis of employees.
Estimated costs and information on the services and production departments follows:
Payroll $36,000
Maintenance $48,000
Packing 30 employees, 280 repair hours
Driving 10 employees, 1,960 repair hours
How much of the payroll and maintenance costs will be allocated to the packing
department?
Payroll Maintenance
A. $900 $171.43
B. $27,000 $6,000
C. $27,000 $21.43
D. $1,200 $6,000
85. Freely Service provides residential and commercial monthly swimming pool cleaning
services. Information on this service is as follows:
Service revenue $140,000
Direct materials 18,000
Direct labor 44,000
Estimated travel costs for the month total $2,340 and are allocated to each client based
on miles driven to each pool cleaning. The company estimates it will clean 50 residential
pools and 80 commercial pools per month with 1,200 total miles used for commercial
pools and 2,400 total miles used for residential pools. Because commercial pools are
much larger, they take 3 hours to clean, while residential pools take a half hour each.
During the month, the actual mileage totaled 2,600 miles. How much is the rate at which
travel costs will be allocated to residential pools?
A. $0.65
B. $0.975
C. $18.00
D. $8.83
86. The building maintenance department for Advantage Toys budgets annual costs of
$4,200,000 based on the expected operating level for the coming year. The costs are
allocated to two production departments. The following data relate to the potential
allocation bases:
Production Dept. A Production Dept. B
Square footage 15,000 45,000
Direct labor hours 25,000 50,000
If Advantage assigns costs to departments based on square footage, how much
maintenance cost will be allocated to Production Department A?
A. $1,400,000
B. $1,050,000
C. $1,575,000
D. $2,100,000
87. The building maintenance department for Advantage Toys budgets annual costs of
$4,200,000 based on the expected operating level for the coming year. The costs are
allocated to two production departments. The following data relate to the potential
allocation bases:
Production Dept. A Production Dept. B
Direct labor hours 25,000 50,000
If Advantage assigns costs to departments based on direct labor hours, how much
maintenance cost will be allocated to Production Department B?
A. $1,400,000
B. $1,050,000
C. $2,800,000
D. $2,100,000
88. Sweet Cocoa produces chocolate syrup used by candy companies. Recently, the
company has had excess capacity due to a foreign supplier entering its market. Sweet
Cocoa is currently bidding on a potential order from Kilwin’s Candy for 5,000 cases of
syrup. The estimated cost of each case is $27.50, as follows: direct material, $10; direct
labor, $5; and manufacturing overhead, $12.50. The overhead rate of $2.50 per direct
labor dollar is based on estimated annual overhead of $1,500,000 and estimated direct
labor cost of $600,000, composed 40% of variable costs and 60% of fixed costs. The
largest fixed cost relates to depreciation of plant and equipment. How much is the
variable cost of producing a case of chocolate syrup?
A. $16.00
B. $27.50
C. $11.00
D. $20.00
89. Sweet Cocoa produces chocolate syrup used by candy companies. Recently, the
company has had excess capacity due to a foreign supplier entering its market. Sweet
Cocoa is currently bidding on a potential order from Kilwin’s Candy for 5,000 cases of
syrup. The estimated cost of each case is $27.50, as follows: direct material, $10; direct
labor, $5; and manufacturing overhead, $12.50. The overhead rate of $2.50 per direct
labor dollar is based on estimated annual overhead of $1,500,000 and estimated direct
labor cost of $600,000, composed 40% of variable costs and 60% of fixed costs. The
largest fixed cost relates to depreciation of plant and equipment. Should Sweet Cocoa
bid on the Kilwin’s Candy business at $21 per case?
A. No, because the incremental loss will be $6.50 per case
B. Yes, because the incremental profit will be $1.00 per case
C. No, because there are too many qualitative considerations
D. Yes, because the incremental profit will be $10 per case
90. Maintenance costs at Sturgeon Company are allocated to the production departments
based on area occupied. Maintenance costs of $300,000 are budgeted to maintain a
60,000 square foot production area. If the finishing department occupies 25,000 square
feet, how much of the maintenance department costs will be allocated to the finishing
department?
A. $125,000
B. $175,000
C. $100,000
D. $5,000
91. Dewey, Cheatham, and How, Attorneys-at-Law, specialize in three areas: criminal, civil,
and family law. When specifications for a new IT system were established, the partners
agreed to allocate fixed costs based on gigabytes needed by each department. The
criminal law division needed 40% of the capacity, civil law needed 35%, and family law
needed 25%. Variable costs for the IT department are allocated on the amount of
bandwidth used by each division used. The IT department’s budgeted monthly fixed
costs are $640,000, and the budgeted monthly variable costs are $160,000. The firm
estimates that 8,000,000 gigabytes of computer time will be used in June. The criminal
law division actually used 3,040,000 gigabytes of bandwidth during June. How much
fixed IT costs will be allocated to the criminal law division during June?
A. $256,000
B. $240,000
C. $512,000
estimates that 8,000,000 gigabytes of computer time will be used in June. During June,
the family law division used 1,900,000 gigabytes of bandwidth. How much are total
variable IT costs to be allocated to the family law division during June? Compute cost
allocation rates to 3 significant digits.
A. $160,000
B. $60,000
C. $40,000
D. $38,000
estimates that 8,000,000 gigabytes of computer time will be used in June. The criminal
law division actually used 3,040,000 gigabytes of bandwidth during June. The family law
division used 2,100,000 and the civil law division used 3,100,000 gigabytes of bandwidth
during June. What amount of the IT fixed costs will be allocated to the civil law division
during June? (Compute cost allocation rates to 3 significant digits.)
A. $224,000
B. $248,000
C. $241,984
94. Dragon Fire Hot Sauce makes two types of hot sauces—meek and mild. Budgeted
information for the two flavors appears below:
Meek Mild
Sales $600,000 $400,000
Direct materials $100,000 $120,000
Direct labor cost $108,000 $180,000
Labor hourly cost $12.00 $12.00
The company estimates it will incur $345,600 in overhead costs for the period. Dragon
Fire allocates overhead cost to products based on the labor hours worked on each
product. What is the overhead application rate to be used when allocating to Meek?
A. $14.40
B. $1.20
C. $3.20
95. Manufacturing overhead is allocated to products based on the number of machine hours
required. In a year when 40,000 machine hours and 60,000 direct labor hours were
anticipated, indirect costs were budgeted at $252,000. If production of wagons requires
9,000 machine hours and 10,800 direct labor hours, how much manufacturing overhead
will be allocated to wagons?
A. $45,360
B. $56,700
C. $2,268
D. $28
Meek Mild
Sales $600,000 $400,000
Fire allocates overhead cost to products based on the labor hours worked on each
product. How much is the total overhead applied to Meek?
A. $130,500
B. $129,600
C. $1,566
D. $348,000
97. The production departments at Windsor Parke occupy a total area of 50,000 square feet.
Heating costs total $600,000 and are allocated based on the area that each department
occupies. The finishing department occupies 30,000 square feet and the packaging
department occupies 20,000 square feet. What amount of heating cost will be allocated
to the finishing and packaging departments, respectively?
A. $360,000 and $240,000
B. $300,000 and $300,000
C. $36,000 and $24,000
D. $32,727 and $21,818
Meek Mild
Sales $600,000 $400,000
Fire allocates overhead cost to products based on the labor cost incurred. How much
overhead is assigned to Mild?
A. $216,000
B. $28,800
C. $56,250
99. Maintenance cost is allocated to Wakshaw’s three producing departments based on the
machine hours used in each department. The maintenance cost expected for June is
$200,000. The three departments had the following usage for June:
Department Machine hours used Direct labor hours used
Assembly 600 2,000
Fabrication 600 5,000
Testing 800 3,000
How much maintenance cost should be allocated to the fabrication department for June?
A. $60,000
B. $100,000
C. $66,667
D. $6,000
100. Excellence Pastries produces baked goods. Utility costs are allocated to the products
based on the baking time required for the product. Utility costs of $291,500 are budgeted
in a period when 550,000 total minutes of baking time and 100,000 minutes of cooling
time are anticipated. If a batch of rolls bakes for 45 minutes, and then cools for 15
minutes, what amount of utility cost will be allocated to each batch of rolls?
A. $38.87
B. $23.85
C. $20.18
D. $31.80
101. ZanaTech has an on-site cafeteria in which it provides free meals for employees. The
company allocates the cost of the cafeteria to production departments using the direct
method based on the number of employees in each department. The four production
departments in the company have the following number of employees: molding, 15;
polishing, 20; engraving, 10; and packaging, 15. There are 20 employees in the
cafeteria. The cafeteria’s costs are budgeted at $144,000 for the year. When the
cafeteria’s costs are allocated, what is the amount per employee that will be allocated to
the packaging department each year?
A. $2,400
B. $9,600
C. $1,800
cafeteria. The cafeteria’s costs are budgeted at $144,000 for the year. What amount of
the cafeteria’s cost will be allocated to the molding department?
A. $27,000
B. $9,600
C. $2,400
D. $36,000
cafeteria. The cafeteria’s costs are budgeted at $144,000 for the year. What amount of
cafeteria cost will be allocated to the engraving department? Use 4 significant digits for
calculations.
A. $2,400
B. $24,000
C. $18,000
D. $14,400
cafeteria. The cafeteria’s costs are budgeted at $144,000 for the year. The actual
cafeteria costs totaled $147,000 for the year. What is the total amount of the cafeteria’s
costs that will be allocated to the production departments?
A. $108,000
B. $144,000
C. $147,000
105. Ransall Auto Parts has two service departments—maintenance and personnel, and
three production departments—fabrication, assembly, and packaging. Service costs are
allocated to producing departments using the direct method. Information on overhead in
each department and possible allocation bases appear below:
Maintenance Personnel Fabrication Assembly Packaging
Cost $90,000 $130,000
Machine hours 12,000 30,000 18,000
Employees 4 16 24 30 26
Using the most logical activity base, how much maintenance cost will be allocated to
packaging?
A. $3,600
B. $27,000
C. $33,750
D. $30,000
Cost $90,000 $130,000
Machine hours 12,000 30,000 18,000
Employees 4 16 24 30 26
Using the most logical activity base, how much personnel cost will be allocated to the
packaging department?
A. $7,150
B. $39,000
C. $33,800
D. $42,250
Cost $90,000 $130,000
Machine hours 12,000 30,000 18,000
Employees 4 16 24 30 26
Using the most logical activity base, how much maintenance cost will be allocated to the
personnel department?
A. $26,000
B. $39,000
C. $18,000
D. $0
108. Ernst & Gray, CPAs has three divisions: audit, tax, and business consulting. When the
specifications for the new computer system were established, the audit division needed
50% of the capacity, the tax division required 30%, and business consulting required
20%. The fixed computer department costs are allocated based on computer needs. The
variable costs of the computer department are allocated based on the minutes of
computer time that each department uses. The computer division budget for fixed costs
is $450,000, and the budget for variable costs is $145,600. The company anticipates
using 520,000 minutes of computer time. What amount of variable costs will be allocated
when a division uses a minute of computer time?
A. $4.50
B. $2.80
C. $1.15
D. $0.28
using 520,000 minutes of computer time. If the audit division uses 250,000 minutes of
computer time, what amount of variable costs will be allocated to the audit division
(round your intermediate calculation to two decimal places)?
A. $70,000
B. $302,848
C. $286,346
D. $48,533
using 520,000 minutes of computer time. If the tax division uses 104,000 minutes of
computer time this year, what is the total amount of computer department costs that will
be allocated to the tax division (round your intermediate calculation to two decimal
places)?
A. $173,680
B. $135,000
C. $164,120
D. $119,120
using 520,000 minutes of computer time. What amount of the computer department’s
fixed costs will be allocated to the business consulting division?
A. $150,000
B. $29,120
C. $90,000
D. $119,120
using 520,000 minutes of computer time. If the business consulting division uses 78,000
minutes of computer time, what is the total amount of computer department costs that
will be allocated to the business consulting division (round your intermediate calculation
to two decimal places)?
A. $21,840
B. $89,340
C. $111,840
D. $119,120
113. Bayard Backup is a manufacturer of data storage devices. Bayard operates two service
departments—maintenance and technology, and two production departments—
assembly and testing. Maintenance costs are allocated on the basis of square footage
occupied, and technology costs are allocated on the basis of the number of
workstations. The following data relate to allocations of service department costs:
Maintenance Technology Assembly Testing
Service department costs $400,000 $230,000
Square footage 2,000 3,000 20,000 30,000
Workstations 4 16 10 30
How much maintenance costs will be allocated to the assembly department using the
direct method?
A. $160,000
B. $133,333
C. $266,667
D. $4,000
114. Bayard Backup is a manufacturer of data storage devices. Bayard operates two service
departments—maintenance and technology, and two production departments—
assembly and testing. Maintenance costs are allocated on the basis of square footage
occupied, and technology costs are allocated on the basis of the number of
workstations. The following data relate to allocations of service department costs:
Maintenance Technology Assembly Testing
Square footage 2,000 3,000 20,000 30,000
Workstations 4 16 10 30
How much technology department costs will be allocated to the testing department using
the direct method?
A. $92,000
B. $65,714
C. $172,500
D. $115,000
115. VelCraft allocates costs from its payroll department and the maintenance department to
its production departments using the direct method of allocation. Payroll department
costs are allocated based on the number of employees in the department and
maintenance department costs are allocated based on the number of square feet that
the production department occupies within the factory. Information about the
departments is presented below:
Number of Number of Square
Department Costs Employees Feet Occupied
Payroll $150,000 2 2,000
Maintenance $220,000 8 64,000
Molding 75 100,000
Finishing 50 60,000
Packaging 25 40,000
What amount of the payroll department costs will be allocated to the molding
department?
A. $70,313
B. $185,000
C. $75,000
D. $132,353
Payroll $150,000 2 2,000
Maintenance $220,000 8 64,000
Molding 75 100,000
Finishing 50 60,000
Packaging 25 40,000
When the payroll department costs are allocated, what is the amount per employee that
will be charged to each of the departments?
A. $937.50
B. $15,000
C. $6.67
D. $1,000
Payroll $150,000 2 2,000
Maintenance $220,000 8 64,000
Molding 75 100,000
Finishing 50 60,000
Packaging 25 40,000
What amount of the payroll department costs will be allocated to the packaging
department?
A. $23,438
B. $73,333
C. $25,000
D. $36,667
Payroll $150,000 2 2,000
Maintenance $220,000 8 64,000
Molding 75 100,000
Finishing 50 60,000
Packaging 25 40,000
When the maintenance department costs are allocated, what amount will be charged to
the packaging department? (Round your intermediate calculation to two decimal places)
A. $44,000
B. $33,083
C. $70,400
D. $52,932
Payroll $150,000 2 2,000
Maintenance $220,000 8 64,000
Molding 75 100,000
Finishing 50 60,000
Packaging 25 40,000
When the maintenance department costs are allocated, what amount will be charged to
the molding department? (Round your intermediate calculation to two decimal places)
A. $44,000
B. $82,707
C. $110,000
D. $52,932
120. The manager of the molding department at the Category Products Company is
evaluated based on the profit performance of his department. Personnel costs at
Category Products are estimated to be $40,000. These costs are allocated based on the
number of employees in each production department. The welding department has 40
employees, and the molding department has 60 employees. The personnel department
actually incurred $52,000 in personnel costs. The profit of the molding department is
down this year because the molding department’s share of allocated personnel costs is
much higher than last year. The allocation of personnel costs to the molding department
is higher in the current year. This is most likely due to
A. the increase in the company’s total production costs.
B. allocating actual personnel costs to the production departments.
C. more number of efficient employees in the welding department.
D. more number of employees in the molding department.
121. Vystar Credit Union has six service departments (human resources, duplicating,
janitorial, accounting, graphic design, and food services) whose fixed costs are allocated
to the company’s two subsidiaries (Vystar Personal Banking and Vystar Business
Banking) on the basis of their relative revenue. What type of costs will the president of
Vystar Business Banking subsidiary perceive the allocated service department costs to
be?
A. Fixed costs
B. Opportunity costs
C. Direct costs
D. Variable costs
122. Unique Finds sells fine collectible statues and has implemented activity-based costing.
Costs in the shipping department have been divided into three cost pools. The first cost
pool contains costs that are related to packaging and shipping. Unique has determined
that the number of boxes shipped is an appropriate cost driver for these costs. The
second cost pool is made up of costs related to the final inspection of each item before it
is shipped and the cost driver for this pool is the number of individual items that are
inspected. The final cost pool is used for general operations of the department and the
cost driver is the number of orders. Information about the activities is summarized below:
Estimated Estimated
Cost Pool Total Cost Driver Annual
Costs Activity
Packaging and 16,000
$ 67,200 Number of boxes shipped
shipping boxes
Number of individual items 100,000
Final inspection 200,000
inspected items
General 10,000
85,000 Number of orders
operations orders
During June, 2,100 boxes were packed and shipped. How much is the packaging and
shipping cost for each box shipped?
A. $0.24
B. $7.62
C. $4.20
D. $32.00
Estimated Estimated
Costs Activity
Packaging and $ 67,200 Number of boxes shipped 16,000 boxes
shipping
Final inspection 200,000 Number of individual items 100,000 items
inspected
General operations 85,000 Number of orders 10,000 orders
During June, 4,000 items were sold reflecting 800 orders that were packed and shipped
in 2,100 boxes. What amount is allocated to each order for general operations of the
department?
A. $4.20
B. $29.53
C. $8.50
D. $10.00
Estimated Estimated
Costs Activity
shipping
inspected
An order is shipped to a retail customer who has ordered 6 individual items. This order
will be shipped in 3 separate boxes. What is the packing and shipping cost that will be
allocated to the order?
A. $4.20
B. $4.03
C. $25.20
D. $12.60
Estimated Estimated
Costs Activity
shipping
inspected
A new customer orders two items that can be shipped in a single box. What is the total
shipping department cost that will be allocated to this order?
A. $16.70
B. $14.70
C. $8.20
Estimated Estimated
Costs Activity
shipping
inspected
During the period, the Eastern sales office generated 240 orders for a total of 3,560
items of which were shipped in 1,200 boxes. What amount of shipping department costs
should be allocated to these sales?
A. $9,480
B. $5,040
C. $14,200
127. Fox Hunting Gear manufactures two products: camouflage jackets and camouflage hats.
The company makes 50,000 jackets and 20,000 hats each year. Information for
overhead costs and for the two products appears below.
Estimated
Total
Activity Driver Jackets Hats
Overhead
Cost
Setups # of setups $ 200,000 500 setups 1,500 setups
Ordering # of parts 300,000 60,000 parts 40,000 parts
parts
Machining # of machine 600,000 12,000 machine 6,000 machine
hours hrs. hrs.
Inspections # of inspections 400,000 10,000 inspections 40,000 inspections
Shipping # of shipments 300,000 10,000 shipments 10,000 shipments
Total $1,800,000
overhead
Assume that all overhead is assigned to products using machine hours. How much
overhead will be assigned to each jacket?
A. $100,000 per jacket
B. $24 per jacket
C. $150 per jacket
D. $17.20 per jacket
Estimated
Total
Overhead
Cost
parts
hours hrs. hrs.
Total $1,800,000
overhead
Assume that activity-based costing is used. What is the rate per setup that should be
used to assign setup cost to hats?
A. $100 per setup
B. $200,000 per setup
C. $133.33 per setup
D. $900 per setup
Estimated
Total
Overhead
Cost
parts
hours hrs. hrs.
Total $1,800,000
overhead
How much is the overhead cost of each hat if all overhead is assigned using ABC?
A. $159.33 per hat
B. $24.00 per hat
C. $100.00 per hat
D. $47.00 per hat
Estimated
Total
Overhead
Cost
parts
hours hrs. hrs.
Total $1,800,000
overhead
If the company uses a single cost pool and assigns overhead using machine hours, how
much overhead will be assigned to each hat?
A. $24.00 per hat
B. $100 per hat
C. $30.00 per hat
D. $300.00 per hat
Estimated
Total
Overhead
Cost
parts
hours hrs. hrs.
Total $1,800,000
overhead
Fox Hunting Gear uses activity-based costing. What is the rate per inspection that
should be used to assign inspection cost to hats?
A. $10 per inspection
B. $40 per inspection
C. $8 per inspection
D. $16 per inspection
Estimated
Total
Jackets Hats
Cost
parts
hours hrs. hrs.
Total $1,800,000
overhead
What will be the overhead cost of each jacket if overhead is assigned using ABC?
A. $159.33 per jacket
B. $100 per jacket
C. $47 per jacket
D. $17.20 per jacket
133. Rather Bedding makes two types of pillow—down and foam. It is currently implementing
an activity-based costing system. In the past, all overhead had been applied on the basis
of machine hours. The company produces 6,000 down pillows and 18,000 foam pillows
per year.
Driver and Estimated Use of Driver by Use of Driver by
Cost Pool
Level Costs Down Pillows Foam Pillows
Equipment
360 setups $216,000 120 setups 240 setups
setup
Materials
6,000 orders $60,000 2,400 orders 3,600 orders
ordering
2,000
Quality control $36,000 800 inspections 1,200 inspections
inspections
8,000
4,200 machine 3,800 machine
Machining machine $86,800
hours hours
hours
What is the overhead cost for each foam pillow when all overhead is applied based on
machine hours?
A. $10.52 per foam pillow
B. $638.85 per foam pillow
C. $49.85 per foam pillow
D. $20.67 per foam pillow
per year.
Cost Pool
Equipment
setup
Materials
ordering
2,000
inspections
8,000
hours hours
hours
What is the overhead cost for each down pillow using ABC?
A. $50.00 per down pillow
B. $26.00 per down pillow
C. $13.49 per down pillow
D. $16.67 per down pillow
per year.
Cost Pool
Equipment
setup
Materials
ordering
2,000
inspections
8,000
hours hours
hours
Which two cost pools could be combined without affecting the unit costs using ABC?
A. Equipment setup and machining
B. Materials ordering and quality control
C. Materials ordering and machining
D. None. The drivers for each activity differ.
per year.
Cost Pool
Equipment
setup
Materials
ordering
2,000
inspections
8,000
hours hours
hours
Using ABC, what is the cost per setup to be assigned to down pillows?
A. $600 per setup
B. $0.10 per setup
C, $3.02 per setup
per year.
Cost Pool
Equipment
setup
Materials
ordering
2,000
inspections
8,000
hours hours
hours
What is the overhead cost for each down pillow when all overhead is applied based on
machine hours?
A. $34.90 per down pillow
B. $49.85 per down pillow
C. $10.85 per down pillow
per year.
Cost Pool
Equipment
setup
Materials
ordering
2,000
inspections
8,000
hours hours
hours
What is the overhead cost for each foam pillow using ABC?
A. $10.56 per foam pillow
B. $26.00 per foam pillow
C. $13.49 per foam pillow
D. $50.00 per foam pillow
per year.
Cost Pool
Equipment
setup
Materials
ordering
2,000
inspections
8,000
hours hours
hours
Using ABC, what is the cost per machine hour in the machining pool?
A. $10.85 per machine hour
B. $20.67 per machine hour
C. $50.00 per machine hour
140. Recker Recreational uses activity-based costing. The company produces wooden
playground equipment. It has two models manufactured in its Texas plant—swings and
slides. The estimated costs and expected activity for each of the overhead activity pools
follow:
Activity Estimated Expected Activity
Cost Pool Cost Swings Slides Total
Activity 1 $15,675 800 300 1,100
Activity 2 $11,900 500 200 700
Activity 3 $36,000 800 400 1,200
Which of the following is the rate for Activity 3 that will used to allocate costs to swings?
A. $90
B. $12,000
C. $30
D. There is not enough information provided to determine the answer.
141. Random House uses activity-based costing. The company produces soft and hardcover
books. The estimated costs and expected activity for each of the overhead activity pools
follow:
Activity Estimated Expected Activity
Cost Pool Cost Hard-Cover Soft-Cover Total
Activity 1 $15,000 800 700 1,500
Activity 2 $14,900 500 1,500 2,000
Activity 3 $27,600 800 400 1,200
How much are total overhead costs to be charged to hardcover books?
A. $30,125
B. $8,000
C. $84,945
D. $25,691
142. Hurst Productions uses activity-based costing. The company produces weekly and
monthly magazines. The estimated costs and expected activity for each of the activity
pools follow:
Expected Activity
Cost Pool Estimated
Weekly Monthly Total
Cost
Pressing $24,600 600 400 1,000
Printing 6,250 400 100 500
Binding 9,000 800 1,200 2,000
How much pressing cost will be assigned to monthly magazines?
A. $24.60
B. $9,840
C. $61.50
143. Hurst Productions uses activity-based costing. The company produces weekly and
monthly magazines. The estimated costs and expected activity for each of the activity
pools follow:
Expected Activity
Estimated
Cost Pool Weekly Monthly Total
Cost
Pressing $24,600 600 400 1,000
Printing 6,250 400 100 500
Binding 9,000 800 1,200 2,000
How much are the total costs to be allocated to monthly magazines?
A. $16,490
B. $41.60
C. $131.50
144. PaperPro produces two models of staplers—Executive and Basic. The annual
production and sales of Executive and Basic are 800 and 500 units, respectively. The
company has traditionally used direct labor hours to apply manufacturing overhead.
Executive requires 0.3 labor hours per unit and Basic requires 0.2 labor hours per unit.
The company has decided to utilize activity-based costing with three cost pools.
Estimated costs for each pool are as follows:
Estimated
Activity Overhead Expected Activity
Cost Pool Costs Executive Basic Total
Assembly $24,025 450 420 870
Packaging 16,880 2,000 750 2,750
General Factory 32,014 120 150 270
Total $72,919
Which of the following is closest to the overhead rate for assembly using activity-based
costing?
A. $81.81
B. $53.39
C. $57.20
D. $27.61
145. Kamber Designs produces floral bouquets for commercial businesses (i.e. hotels) and
uses an activity-based costing system. The company estimated that it would design
15,000 bouquets, make 2,000 deliveries totaling 25,000 miles, and accept 300 online
orders. Data concerning overhead costs and activity pools is as follows:
Bouquet designs $60,000
Deliveries 21,000
Online ordering 6,000
Total $87,000
During May, the company made 1,400 bouquets using 1,300 designs, made 420
deliveries, and accepted 30 online orders. Using activity-based costing, what is the
approximate overhead cost per bouquet during May?
A. $16.50
B. $7.29
C. $62.14
146. Gator Dockside produces two products, A and B. The annual production and sales of
product A and B are 600 and 400 units, respectively. The company has traditionally used
direct labor hours to apply manufacturing overhead. Product A requires 0.5 labor hours
per unit and product B requires 1.2 labor hours per unit. The company has decided to
utilize activity-based costing with three cost pools. Estimated costs for each pool are as
follows:
Estimated
Activity Overhead Expected Activity
Cost Pool Costs Product A Product B Total
Activity 1 $24,000 1,500 500 2,000
Activity 2 10,800 450 1,350 1,800
General factory 19,200 80 320 400
Total $54,000
When using activity-based costing, to which of the following amounts is the total
overhead cost for one unit of product A closest?
A. $66.00
B. $280.00
C. $40.90
D. $61.35
147. Fifth Third Bank is a banking services company that offers several different types of
checking accounts. The bank has recently adopted an activity-based costing system to
assign costs to its checking accounts. The following data relate to the Mind Your Money
checking accounts and the ABC cost pools:
Annual number of accounts = 60,000 accounts
Cost Pool Cost Cost Drivers

Returned check costs $3,000,000 Number of returned checks
Account reconciliation costs 60,000 Number of account reconciliation requests
New account setup 650,000 Number of new accounts
Archive requests 400,000 Number of archive requests
Web site costs 195,000 Per account type
Total checking account costs $4,305,000
Annual activity information related to cost drivers:
Cost Pool All Products Mind Your Money Checking

Returned checks 200,000 returned checks 18,000
Account reconciliation costs 3,000 reconciliation requests 420
New account setups 60,000 new accounts 15,000
Archive requests 100,000 archive requests 60,000
Web site costs 10 types of accounts 1
How much is the rate to be used to apply the cost of new accounts to each Mind Your
Money checking account?
A. $10.83
B. $43.33
C. $71.75
D. $60.39
148. Kamber Designs produces floral bouquets for commercial businesses (i.e. hotels) and
uses an activity-based costing system. The company estimated that it would design
15,000 bouquets, make 2,000 deliveries totaling 25,000 miles, and accept 300 online
orders. Data concerning overhead costs and activity pools is as follows:
Bouquet designs $60,000
Deliveries 21,000
Online ordering 6,000
Total $87,000
During June, the company made 1,500 bouquets using 1,100 designs, made 325
deliveries and accepted 45 online orders. Using activity-based costing, what is the
approximate overhead cost per bouquet during June?
A. $7.92
B. $5.81
C. $5
149. Fifth Third Bank is a banking services company that offers several different types of
checking accounts. The bank has recently adopted an activity-based costing system to
assign costs to its checking accounts. The following data relate to the Mind Your Money
checking accounts and the ABC cost pools:
Annual number of accounts = 60,000 accounts
Cost Pool Cost Cost Drivers

Returned check costs $3,000,000 Number of returned checks
Account reconciliation costs 60,000 Number of account reconciliation requests
New account setup 650,000 Number of new accounts
Archive requests 400,000 Number of archive requests
Web site costs 195,000 Per account type
Total checking account costs $4,305,000
Annual activity information related to cost drivers:
Cost Pool All Products Mind Your Money Checking

Returned checks 200,000 returned checks 18,000
Account reconciliation costs 3,000 reconciliation requests 420
New account setups 60,000 new accounts 15,000
Archive requests 100,000 archive requests 60,000
Web site costs 10 types of accounts 1
How much is the rate to be used to allocate account reconciliation cost to each Mind
Your Money checking account?
A. $20.00
B. $1.00
C. $0.14
D. $142.85
150. Retirement Planning is a consulting firm with clients across the nation. Within the
company is a travel group that arranges flights and hotel accommodations for its 250
consultants. The overhead cost of operating the travel group amounts to approximately
$204,000 annually. Recently the company conducted an ABM study that has determined
the following:
 Each consultant completed approximately 15 business trips per year.
 On average, 17 trips are scheduled, with 2 trips cancelled and rescheduled.
 Benchmarking with a Retirement Planning’s client indicates that the client
incurs a cost of $60 per scheduled trip to book travel.
How much overhead cost should be allocated to each completed trip?
A. $54.40
B. $48.00
C. $60.00
151. Sanford Tracking has two production plants. Recently, the company conducted an ABM
study to determine the cost of activities involved in processing orders for parts at each of
the plants. How might an operations manager use this information to manage the cost of
processing orders?
A. By closing down the plant with the highest cost
B. By comparing the cost to process an order at each plant and the nature of the
orders to determine if costs are out of control—if out of control, investigate
C. By setting up an ABC costing system
D. By including all manufacturing overhead in a single cost pool to reduce the cost
of analysis
Answers to Multiple Choice
29 A 51 B 73 C 95 B 117 C 139 A
30 C 52 B 74 B 96 B 118 A 140 C
31 B 53 A 75 A 97 A 119 C 141 A
32 A 54 A *76 B 98 A 120 B 142 B
33 C 55 C 77 B 99 A 121 D 143 A
34 C 56 B 78 A 100 B 122 C 144 D
35 B 57 B 79 D 101 A 123 C 145 B
36 B 58 A 80 A 102 D 124 D 146 C
37 C 59 C 81 D 103 B 125 A 147 A
38 D 60 B 82 C 104 B 126 C 148 B
39 A 61 B 83 A 105 B 127 B 149 A
40 C 62 D 84 B 106 D 128 A 150 A
41 B 63 D 85 A 107 D 129 D 151 B
42 A 64 D 86 B 108 D 130 C
43 B 65 C 87 C 109 A 131 C
44 C 66 C 88 D 110 C 132 D
45 C 67 A 89 B 111 C 133 A
46 D 68 A 90 A 112 C 134 B
47 A 69 D 91 A 113 A 135 D
48 D 70 D 92 D 114 C 136 A
49 C 71 C 93 A 115 C 137 A
50 C 72 D 94 A 116 D 138 C
MATCHING
152. Match each of the following terms with the phrase that most closely describes it. Each
answer may be used only once.
_____ 1. Cost driver
_____ 2. Cost objective
_____ 3. Cost pool
_____ 4. Cost-plus contract
_____ 5. Lump-sum allocation
_____ 6. Unitized costs
_____ 7. Ability to bear costs
_____ 8. Activity-based costing
_____ 9. Activity-based management
_____ 10. Cost allocation
A. Assigning indirect costs to cost objectives

B. A method of allocation that assigns more costs to more profitable cost objectives
C. A measure of the activity that is used to allocate costs
D. Fixed costs stated on a per unit basis
E. Price for this includes actual costs plus a fixed amount or percentage
F. A method of cost allocation that uses cost drivers to allocate costs to products
G. The object or recipient of the cost allocation
H. A management tool that involves analyzing and costing activities with the goal of
improving efficiency and effectiveness
I. A grouping of individual costs whose total is allocated using one allocation base
J. Allocations of fixed costs in which predetermined amounts are allocated regardless of
changes in the level of activity
Answers to Matching
1. C 6. D
2. G 7. B
3. I 8. F
4. E 9. H
5. J 10. A
EXERCISES
153. APC Service’s copy department, which does almost all of the photocopying for the sales
and administrative departments, budgets the following costs for the year, based on the
expected activity of 4,000,000 copies:
Salaries $90,000
Employee benefits for salaried employees 10,000
Depreciation of copy machines 10,000
Utilities (fixed) 5,000
Paper (variable, 1 cent per copy) 40,000
Toner (variable, 1 cent per copy) 40,000
The costs are assigned to two cost pools—one for fixed and one for variable costs. The
costs are then assigned to the sales department and the administrative department.
Fixed costs are assigned on a lump-sum basis, 30 percent to sales and 70 percent to
administration. During the year, 4,800,000 copies were made consisting of 2,500,000 for
Sales and 2,300,000 for Administration. Calculate the copy department costs allocated
to the Sales Department and separately to the Administration Department.
Answer
Total fixed costs to be allocated = $90,000 + $10,000 + $10,000 + $5,000 = $115,000
Variable cost per unit = $80,000 ÷ 4,000,000 = $0.02 per copy
Fixed costs allocated to Sales ($115,000  .30) $34,500
Variable costs allocated to Sales (2,500,000 copies  $0.02) 50,000
Total costs allocated to Sales $84,500
Fixed costs allocated to Administration ($115,000  .70) $ 80,500
Variable costs allocated to Administration (2,300,000 copies  $0.02) 46,000
Total costs allocated to Administration $126,500
154. Cheez-It Financial has a website department that maintains and updates its website
used by clients of the company’s two subsidiaries—Commercial Banking and Personal
Banking. For practical purposes, the costs of the website department are primarily fixed
and consist primarily of salaries of the department’s two employees and depreciation on
workstations and the web server.
Each subsidiary receives a cost allocation of $35 per website hour. Jobs
requested by the subsidiaries generally take weeks to complete often causing the
subsidiaries to go outside the company for emergency services rather than wait for jobs
to be completed. Outside website maintenance services cost $65 per hour. How does
the allocation of $35 per website hour compare to the opportunity cost of using internal
services?
Answer
The allocation of $35 per hour must be less than the opportunity cost (subsidiaries are
willing to pay $65 per hour to avoid delays). Subsidiaries must have a benefit that
exceeds $65 per hour.
155. Harrod Productions manufactures small electric motors used by appliance companies. In
the past year, the company has experienced severe excess capacity due to competition
from a foreign company that has entered Harrod’s market. The company is currently
bidding on a potential order from Kenmore Elite for 4,000 Model 44 motors. The
estimated cost of each motor follows:
Direct material $ 40
Direct labor 20
Overhead 110
Total $170
The predetermined overhead rate is $5.50 per direct labor dollar based on estimated
annual overhead of $2,640,000 and estimated annual direct labor of $480,000. The
overhead is composed of $1,104,000 of variable costs and $1,536,000 of fixed costs.
The largest fixed cost relates to depreciation of plant and equipment.
a. What is the incremental cost of producing one Model 44 motor?

b. Suppose Harrod can win the Kenmore Elite business by bidding a price of $160
per motor. Should Harrod bid $160? Support your answer with explanation.
c. Discuss how an allocation of overhead based on opportunity cost would facilitate
an appropriate bidding decision.
Answer
a. Direct material $40
Direct labor 20
Variable overhead ($2.30 × $20)* 46
Total $106
* Variable overhead rate = $1,104,000 ÷ $480,000
b. Any bid won that is greater than $106 will generate incremental profit. If Harrod
can win a bid of $160, the company should bid this amount as it will generate an
incremental profit of $54 per motor.
c. The opportunity cost related to overhead, in this case, is the variable overhead
amount. An allocation based on the opportunity cost idea, helps managers focus
on incremental costs—the information needed for decision making.
156. Sanders Enterprises allocates manufacturing overhead costs to its two products—gears
and rims—based on the machine hours used. Manufacturing overhead costs are
expected to total $108,800 in the coming year and the company plans to use 34,000
machine hours in the year. The production of rims requires 2 machine hours per rim and
gears require 15 minutes per gear. The current production schedule calls for 2,000 rims
and 15,000 gears during the year.
a. What is the overhead rate per machine hour?
b. If production and overhead costs occur as scheduled, how much manufacturing
overhead will be allocated to each of the two products?
Answer
a. $108,800 ÷ 34,000 hours = $3.20 per machine hour
b. Gears = 15,000 × 15/60 machine hours × $3.20 per machine hour = $12,000
Rims = 2,000 × 2 machine hours × $3.20 per machine hour = $12,800
157. Likewise Instruments manufactures a variety of electronic instruments that are used in
military and civilian applications. Sales to the military are generally on a cost-plus profit
basis with profit equal to 10 percent of cost. Instruments used in military applications
require more direct labor time because “fail-safe” devices must be installed.
At the start of the year, Likewise estimates that the company will incur
$50,000,000 of overhead, $8,000,000 of direct labor, and 250,000 machine hours.
Consider the Model ET40 gauge that is produced for both civilian and military uses:
Civilian Military
Direct material $3,000 $3,500
Direct labor $900 $1,200
Machine hours 42 45
a. Calculate the cost of civilian and military versions of Model ET40 using both
direct labor dollars and machine hours as alternative allocation bases.
b. Explain why Likewise Instruments may decide to use machine hours as an
overhead allocation base.
Answer
a. Overhead rate based on direct labor dollars:
($50,000,000 ÷ $8,000,000 labor) = $6.25 per dollar of labor
Overhead rate based on machine hours:
($50,000,000 ÷ 250,000 machine hours) = $200 per machine hour
Civilian Military
Labor $ Mach. Hrs. Labor $ Mach. Hrs.
Direct material $3,000 $ 3,000 $ 3,500 $ 3,500
Direct labor 900 900 1,200 1,200
Overhead 5,625 8,400 7,500 9,000
Cost $9,525 $12,300 $12,200 $13,700
b. The price charged for the civilian version of the Model ER40 does not depend on
allocated costs. However, the military version is sold for “cost” plus 10 percent of
cost. Therefore, the company has an incentive to make cost appear higher rather
than lower. This can be accomplished by allocating overhead cost using machine
hours as the allocation base. This base results in a higher cost ($13,700)
compared to an allocation based on direct labor dollars, which results in a cost of
only $12,200.
158. Venus Swimwear is the designer and maker of elite swimwear. The president of Venus
wants to switch to an activity-based costing approach in the upcoming year to assign
prices to the suits. Production line setups are a major activity at Venus. In the coming
year, Venus expects to perform 450 setups at a total cost of $81,000. Venus plans to
produce bandeau swimsuits that will require 2 setups for the batch of 40. How much
setup cost will be allocated to each bandeau swimsuit that is produced?
Answer
Cost per setup = $81,000 ÷ 450 = $180
Cost of setups related to the bandeau swim suits = 2  $180 = $360
Setup cost per swim suit = $360 ÷ 40 = $9.00
159. Fanatics Company has three service departments (C1, C2, and C3) and two production
departments (B1 and B2). The following data relate to Fanatic’s allocation of service
department costs:
Budgeted Costs Number of Employees
C1 $3,000,000 80
C2 2,000,000 60
C3 1,000,000 30
B1 300
B2 500
Service department costs are allocated by the direct method. The number of employees
is used as the allocation base for all service department costs. Calculate the total service
department cost allocated to each production department.
Answer
B1: 300 ÷ 800 = 37.5% of production department employees
B2: 500 ÷ 800 = 62.5% of production department employees
Cost Allocated to
Department Costs B1 B2
C1 $3,000,000 $1,125,000 $1,875,000
C2 2,000,000 750,000 1,250,000
C3 1,000,000 375,000 625,000
Total cost $6,000,000 $2,250,000 $3,750,000
160. CSI Equipment produces surveillance equipment for security purposes. Maintenance
costs are allocated to assembly and testing on the basis of square footage occupied,
and computing costs are allocated on the basis of the number of computer terminals.
The following data relate to allocations of service department costs:
Maintenance Computing Assembly Testing
Terminals 35 15
Allocate the service department costs to production departments using the direct
method.
Answer
Assembly Testing
Maintenance
$400,000 × (24,000 ÷ 40,000) $240,000
$400,000 × (16,000 ÷ 40,000) $160,000
Computing
$340,000 × (35 ÷ 50) 238,000
$340,000 × (15 ÷ 50) 102,000
Total $478,000 $262,000
161. Rickets Consulting has two divisions: Internal Audit and Management Services. The
firm’s accountants are in the process of selecting an allocation base to allocate centrally
provided personnel costs to the two departments. Two allocation bases have been
proposed—dollars of salary and number of employees. Personnel costs are expected to
be $2,500,000. The following data relate to the allocations:
Internal Audit Management Services
Salaries in dollars $14,000,000 $18,000,000
Number of employees 150 50
a. Prepare a schedule showing the allocations to the two divisions using each
allocation base.
b. Referring to your answer to part a, explain why allocations are sometimes
considered arbitrary.
Answer
a.
Internal Audit Management Services
Proportion Amount Proportion Amount
Salaries .4375 $1,093,750 .5625 $1,406,250
Employees .75 1,875,000 .25 625,000
b. Both number of employees and salary appear to be plausible allocation bases,

but they result in very different allocations. This suggests that in many cases
allocations are somewhat arbitrary.
162. The personnel department at Dansford Company has $45,000 in budgeted costs for the
coming period. Dansford is trying to determine whether to allocate these costs to the two
production departments based on the number of employees or based on machine hours
used in the department. Information about the production departments is given below:
Molding Engraving
Number of employees 15 35
Anticipated machine hours 600 400
Calculate the costs allocated to each of the production departments using each
allocation base. Which allocation base is preferable?
Answer
When number of employees is used as the allocation base:
Molding = $45,000 × (15 ÷ 50) = $13,500
Engraving = $45,000 × (35 ÷ 50) = $31,500
When number of machine hours is used as the allocation base:

Molding = $45,000 × (600 ÷ 1,000) = $27,000
Engraving = $45,000 × (400 ÷ 1,000) = $18,000
The number of employees is a better allocation base because it is more closely related
to personnel department costs.
163. The costs of the personnel department at Mama Maids total $37,800 annually. These
costs are allocated based on the number of employees in the production departments
using the direct method. If 12 of Mama Maids’ 36 employees work in the residential
services department, what amount of the personnel department costs should be
allocated to the residential services?
Answer
($37,800 ÷ 36) × 12 = $12,600
164. Sentry Company has three departments, Civil, Criminal, and Probate. Each department
uses the services of the photocopying department. The photocopying department has 10
copiers, and each copier can produce 100,000 copies per month and has a budgeted
fixed annual cost of $7,800. The variable cost to produce a copy is $0.031 per copy.
During March, the Copying Department incurred $6,930 fixed and $23,870 in variable
copying costs. Following is the three production departments’ monthly consumption
information:
Peak Demand Average Demand March Usage
Civil 600,000 copies 300,000 copies 410,000 copies
Criminal 200,000 copies 180,000 copies 190,000 copies
Probate 200,000 copies 180,000 copies 170,000 copies
a. Describe three alternative ways that the production departments can be charged
for services.
b. Assign the actual cost of March copying to the production departments based on
the actual copies used by each department. What is the cost per copy? (Round
cost per copy to two decimal places and charges to departments to nearest
whole dollar.)
c. Assign the cost of March copying to the production departments, where the
budgeted fixed cost is based on peak usage requirements, and the budgeted
variable cost is based on actual usage. What is the total cost per copy assigned
to each department?
d. Which allocation do you believe is more equitable? Why?
Answer
a. 1. Actual cost per copy on actual copies used
2. Budgeted total cost per copy based on average usage times actual
copies used
3. Fixed costs allocated on budgeted amounts; variable costs allocated on
actual usage
b. $30,800 ÷ 770,000 = $0.04 per copy
Civil - $0.04 × 410,000 = $16,400
Criminal - $0.04 × 190,000 = $7,600
Probate - $0.04 × 170,000 = $6,800
c. Civil: 4.24 cents per copy
(600,000/1,000,000 × $7,800) + (410,000 × $0.031) = $17,390
Criminal: 3.92 cents per copy
(200,000/1,000,000 × $7,800) + (190,000 × $0.031) = $7,450
Probate: 4.02 cents per copy
(200,000/1,000,000 × $7,800) + (170,000 × $0.031) = $6,830
d. Dual rate (c) will encourage the departments demanding the capacity to pay
capacity costs.
165. Waller Company has a regional division and a national division. A travel department
supports the employees in both divisions. The fixed costs of the travel department
($54,000 per month) are allocated based on the peak usage of reservation services. The
national division has a peak monthly usage of 160 reservations and the regional has a
peak usage of 240 reservations. The variable costs of the travel department are
allocated to the divisions based on the number of reservations made at a rate of $15 per
reservation.
a. If the national division requires 28 reservations in November and the regional

division requires 20 reservations during November, calculate the amount of travel
department costs that will be allocated to each of the divisions.
b. Explain why the allocation is higher to the regional division when it uses fewer
reservations.
Answer
a. Regional division = [$54,000 × (240 ÷ 400)] + ($15 × 20) = $32,700
National division = [$54,000 × (160 ÷ 400)] + ($15 × 28) = $22,020
b. Regional has higher peak needs, so it is being charged a higher amount for
capacity.
166. Hanson Inc. is operating at 60 percent of its capacity. Hanson has received an offer from
a retail company to purchase 600 granite tables for $158 each. Hanson’s accountants
determined that the order can be accommodated within the excess capacity. The
following costs information is provided:
Direct material $ 80
Direct labor 55
Manufacturing overhead 40
Total $175
Of the $40 of overhead, $18 is variable and $22 relates to fixed costs. The $22 of fixed
overhead is allocated as $3.00 per direct labor hour.
a. What will be the effect on profit if the order is accepted?

b. Explain why managers who focus on the full reported cost per unit may be
inclined to turn down the order.
Answer
a. The manufacturing overhead allocation includes $22 of fixed cost which will not
increase if the special order is accepted (i.e., it is not an incremental cost). The
incremental revenue and incremental costs associated with the order suggests
that the company will be better off by $3,000 if the order is accepted.
Incremental revenue (600  $158) $94,800
Incremental costs
Material (600  $80) $48,000
Labor (600  $55) 33,000
Variable overhead (600  $18) 10,800 91,800
Incremental net income $3,000
b. Managers who focus on the full reported cost may incorrectly treat the $22 of
fixed cost as an incremental cost. In this case, they will incorrectly conclude that
the order should not be accepted because the total full cost of $175 is more than
the offer price of $158.
167. Bowcock Manufacturing allocates factory overhead using one cost pool with direct labor
hours as the allocation base. Bowcock has two production departments (A1 and A2).
The new accountant at Bowcock estimates that next year the total factory overhead
costs will be $4,000,000 and approximately 500,000 direct labor hours will be worked.
The accountant also estimates that A1 will use 150,000 direct labor hours and there will
be about $2,000,000 in overhead costs in A1. A2 will use 350,000 direct labor hours and
there will be $2,000,000 in overhead costs in A2. Bowcock has two products: R4 and
R5. It takes two direct labor hours in A1 and three direct labor hours in A2 to complete
one unit of R4. It takes one direct labor hour in A1 and four direct labor hours in A2 to
complete one unit of R5.
Which product will be undercosted and which will be overcosted using a single cost pool
system? Support your answer with appropriate calculations.
Answer
One-cost pool overhead rate = $4,000,000 ÷ 500,000 DLH = $8 per DLH
Product R4: $8  5 hours = $40
Product R5: $8  5 hours = $40
Separate cost pools:

A1’s overhead rate will be $2,000,000 ÷ 150,000 DLH = $13.33 per direct labor hour
A2’s overhead rate will be $2,000,000 ÷ 350,000 DLH = $5.71 per direct labor hour
Overhead allocated to each R4 = (2 labor hours  $13.33) + (3 labor hours  $5.71) = $43.79
Overhead allocated to each R5 = (1 labor hour  $13.33) + (4 labor hours  $5.71) = $36.17
The use of a single cost pool causes R4 to be undercosted and R5 to be overcosted.

With a single cost pool, both products receive the same allocation of cost per labor hour.
However, R4 uses relatively more time in A1 where overhead costs are high, while R5
uses relatively more time in A2, where overhead costs are low.
168. The following are six cost pools established for a company using activity-based costing.
The pools are related to the company’s products using cost drivers. For each of the cost
pools, identify a possible cost driver.
COST POOL COST DRIVER

(1) Handling of raw materials
(2) Production equipment repairs

and maintenance
(3) Raw materials storage
(4) Plant heat, light, water, and

power
(5) Finished product quality control
(6) Production line setups
Answer
(1) Number of inspections (4) Hours of usage
(2) Number of machine hours (5) Number of inspections
(3) Square footage (6) Number of setups
169. Carriage Hill Tooling produces specialized equipment. Currently, overhead costs are
allocated at a rate of $25 per machine hour and the company used 4,200 machine hours
last year. Carriage Hill’s CEO, Ralston, would like to see if ABC would make any
difference in the costs allocated to jobs at the company. The accounting staff has
provided the following information about manufacturing overhead:
Amount Cost Driver
Setups $31,200 Number of setups
Equipment 11,340 Number of machine hours
Inspection 62,460 Number of inspections
The company estimates that it will perform 120 setups and 400 inspections each year
and will use 4,200 machine hours. Job 345 will require 5 setups, 700 machine hours,
and 12 inspections.
a. Using ABC, what amount of manufacturing overhead will be allocated to Job
345?
b. What amount would Ralston allocate to job 345 using the company’s current,
traditional system?
c. Why do the two methods yield such different answers?
Answer
a. [5 × ($31,200 ÷ 120)] + [700 × ($11,340 ÷ 4,200)] + [12 × ($62,460 ÷ 400)] =
$5,063.80
b. 700 × ($105,000 ÷ 4,200) = $17,500
c. Job 345 uses 4.17% of annual setups, 16.67% of machine hours, and 3.00% of
annual inspections. It is a heavy user of machine hours, and is costed much
higher when its usage of machine hours is viewed as the job’s primary resource.
170. GH Mcgraw Appliances supplies parts for laundry and kitchen appliances. Customer
orders are placed over the Internet and are generally filled in one or two days using
express mail services. The company is conducting an ABM study of inventory
management. Management has determined that the cost of filling customer orders in the
past year consisted primarily of $250,000 of salary expense related to five workers who
“pick” parts from the warehouse and $550,000 of salary expense related to six workers
who pack the orders for shipment. In the past year, the company filled 100,000 orders
annually. Based on work performed for a chain of appliance manufacturers,
management has determined a benchmark cost of $4 per order.
a. Comment on the advisability of comparing the costs at GH McGraw Appliances

to those at the appliance manufacturers’ chain store.
b. Management has observed the following: Workers go to a box that contains
individual customer order sheets. They take the bottom order (the “oldest”) and
go into the warehouse with a handcart and a box. They then fill the order and
carry the parts to a packing station. Can you suggest ways of improving this
process?
Answer
a. The cost of filling orders at GH McGraw Appliances is:
($250,000 + $550,000) ÷ 100,000 = $8 per order
The cost of filling orders at the appliance chain is only $4 per order. While the
chain has a lower cost per order, it may be that, due to its size, the appliance
chain has a “state of the art” warehouse. It may be unrealistic for GH McGraw
Appliances, which is relatively small, to compare itself to such a large company.
b. Order “pickers” can take multiple order sheets out to the warehouse when
individual orders are small. This will save considerable time going back and forth
to the warehouse and may lead to lower costs if the company is willing to fire or
reassign one or more of the five workers who pick parts. In addition, the packing
station can be moved close to the area where the parts are being picked from the
warehouse to avoid time used to take the parts to the packing station.
CHALLENGE EXERCISES
171. VeraTrac has traditionally used direct labor cost to allocate overhead to its two
products—hammers and mallets. To improve cost determination, VeraTrac set up 3
activity pools: setups, purchase ordering, and quality control. VeraTrac provided the
following information for the last quarter of 2017 related to the actual production of 2,400
hammers and 1,600 mallets:
Estimated Expected Actual Actual Activity

Cost Activity Cost Hammers Mallets
Setups $78,000 240 setups $81,400 145 setups 90 setups
Purchase ordering 35,100 900 orders 34,800 420 orders 470 orders
Quality control 41,000 500 inspections 42,300 220 inspections 275 inspections
Direct labor 43,800 3,650 hours 46,875 2,150 hours 1,600 hours
Direct materials 19,360 4,400 pounds 19,800 2,100 pounds 3,400 pounds
Actual labor cost is $12.50 per hour and actual material cost is $3.60 per pound.
a. How much is the overhead unit cost of each hammer using activity-based
costing?
b. How much is the overhead unit cost of each hammer if the company continues
to use one cost pool? (Round your intermediate calculations to two decimal
places)
c. Is the cost of the hammer over or undercosted? Explain some possible
consequences of this.
Answer
a.
Setups: $78,000 ÷ 240 = $325 per setup $325 × 145 = $47,125
Orders: $35,100 ÷ 900 = $39 per order $39 × 420 = 16,380
Quality control: $41,000 ÷ 500 = $82 per inspection $82 × 220 = 18,040
Total overhead cost for all hammers 81,545
Number of hammers 2,400
Overhead cost per hammer $ 33.98
b. Rate: ($78,000 + $35,100 + $41,000) ÷ $43,800 = $3.52 per direct labor dollar
Allocate overhead: $3.52 × 2,150 × $12.50 = $94,600
Overhead cost per hammer: $94,600 ÷ 2,400 hammers = $39.42
c. The hammers are overcosted because the amount allocated under the more
accurate, activity-based costing method assigns $5.44 less to each hammer than
the allocation assigns using one cost pool. If managers rely on the $39.42
overhead cost per hammer, they may price the product too high and lose
customers to competitors.
172. Sandifer Company is contemplating the establishment of an activity-based costing

system. It current applies all overhead cost based on direct labor costs. The company
has estimated the following costs and activities for May:
Cost Activity
Machine Setups $33,600 400 setups
Utilities 60,000 200,000 usage hours
Materials Handling 84,000 12,500 crates
Direct labor 35,520 $20 per labor hour
Direct material 60,000 $1 per pound
Direct labor cost is $20 per hour. The following information pertains to the actual
production of buckets and pails during May:
Buckets Pails
Units produced 60,000 40,000
Direct material cost incurred $30,000 $31,200
Direct labor cost incurred ($20 per hour) $24,000 $12,000
Setups implemented 120 290
Crates handled 6,800 5,200
Utility hours used 80,000 125,000
a. 1. Which items are cost pools?

2. Which are cost drivers?
3. Which are cost objectives?
b. How much is the product cost per pail if Sandifer uses one cost pool to allocate
all overhead costs to the cost objectives?
c. How much is the product cost per pail if Sandifer uses ABC?
Answers
a. 1. Machine setups, utilities, materials handling
2. ABC: Number of setups, number of usage hours, number of crates
One cost pool: Direct labor cost
3. Buckets and pails
b.
Estimated MOH $33,600 + $60,000 + $84,000
=
Estimated DL $ $35,520
= $5.00 per direct labor dollar
Direct materials $ 31,200

Direct labor 12,000
Overhead ($5 × $12,000) 60,000
Cost of all pails $103,200
Number of pails 40,000
Product cost of each pail $ 2.58
c.
Setups:
$33,600 ÷ 400 = $84 per
setup $84 × 290 setups.= $24,360
Utilities:
$60,000 ÷ 200,000 = $0.30 per hour $0.30 ×125,000 hours = 37,500
Materials handling:
$84,000 ÷ 12,500 = $6.72 per crate $6.72 × 5,200 crates = 34,944
Direct materials 31,200
Direct labor 12,000
Total cost $140,004
Total units 40,000
Product cost per pail $ 3.50
173. Clark Inc. has 3 operating departments—commercial, industry, and private for which the
corporate office provides 2 kinds of services, accounting and housekeeping. Accounting
costs are allocated on the basis of number of employees, and housekeeping costs are
allocated based on the basis of number of square feet.
Direct # of Square
# of Employees
costs feet
Accounting $ 56,000 2,000 10
Housekeeping 33,000 3,000 5
Commercial 116,000 6,000 35
Industry 124,000 4,000 40
Private 105,000 8,000 25
a. How much total cost will Clark, Inc. allocate to the commercial department?
b. As it relates to Clark, Inc., what is meant by a cause-and-effect relationship?
Answer:
a, Accounting allocated to commercial: $56,000 × (35 ÷ 100) = $19,600
Housekeeping allocated to commercial: $33,000 × (6,000 ÷ 18,000) = $11,000
Total = $30,600
b. If the cost driver (the allocation base) selected relates costs to cost objectives
that caused the costs to be incurred, the allocation is said to be based on a
cause-and-effect relationship One expects that when the activity or driver
increases, the cost pool should increase. The more activity generated by a
particular production department, the more cost that should be allocated to that
department.
SHORT-ANSWER ESSAYS
174. List the four major reasons that companies allocate costs.
Answer
Companies allocate costs (1) to provide information needed to make appropriate
decisions, (2) to reduce the frivolous use of common resources, (3) to encourage
managers to evaluate the efficiency of internally provided services, and (4) to calculate
the “full cost” of products for financial reporting purposes and for determining cost-based
prices.
175. What is a cost-plus contract? Why are cost-plus contracts used?
Answer
The supplier is paid for all costs of production as well as some fixed amount or
percentage of cost in a cost-plus contract. Cost-plus contracts are used when suppliers
need to be assured that they will be reimbursed for their costs and will not bear any of
the financial risk associated with the project.
176. What is the difference between a cost pool and a cost objective?
Answer
A cost pool is a grouping of individual costs whose total is allocated using one allocation
base. A cost objective is the product, service, or department that will receive the cost
allocation.
177. Why is it better to allocate budgeted rather than actual service department costs?
Answer
If budgeted costs are allocated, service departments cannot pass on the costs of
inefficiencies and waste to the user departments. If actual service department costs are
allocated, the service departments will have no incentive to control their costs. Budgeted
allocations can also be more timely.
178. Why is lump-sum allocations used to allocate fixed costs?
Answer
When lump-sum allocations are used to allocate fixed costs, the costs will appear fixed
to the managers whose departments receive the allocations. If lump-sum allocations are
not used, an increase in volume will lead to an increased allocation of fixed costs and
may cause incorrect decisions.
179. If a manager is allocated the costs of service departments based on actual costs and
actual activity usage levels, what frustrations might the manager feel?
Answer
The manager will not be able to plan or control costs since the charge the manager
receives will be a function of the manager’s usage as well as cost control in the service
department.
180. Describe the difference between the traditional approach to allocating costs and activity-
based costing.
Answer
The traditional approach to allocating costs assumes that all overhead costs are
proportional to production volume. In activity-based costing, the company identifies the
activities that cause costs and allocates costs based on the volume of the activities that
caused the costs. These activities may or may not be related to production volume.
*181. What is the difference between ABC and ABM?
Answer
While ABC focuses on activities with the goal of measuring the costs of products and
services produced by them, ABM focuses on activities with the goal of managing the
activities themselves.
*182. What are the four steps in ABM?
Answer
1. Determine major activities.
2. Identify resource used by each activity.
3. Evaluate the performance of the activities.
4. Identify ways to improve the efficiency and effectiveness of the activities.

Managerial Accounting 6th Edition Jiambalvo Test Bank

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Managerial Accounting 6th Edition Jiambalvo Test Bank

Uploaded by

Copyright:

Available Formats

Managerial Accounting 6th Edition

Jiambalvo Test Bank

Item LO BT Item LO BT Item LO BT Item LO BT Item LO BT

17. Managers should not be held responsible for noncontrollable costs.

23. An example of a unit-level activity is the design of a particular product.

24. Activity-based management aims at improving the efficiency and effectiveness of

28. A batch-level activity is an activity that supports all other activities.

30. The process of assigning indirect costs is called

32. Costs may not be allocated to

35. Full cost information

37. In which of the following industries are cost-plus contracts common?

38. A major problem with cost-plus contracts is that they

40. A cost objective is the

42. Which of the following is least likely to be a cost objective?

44. A cost pool is

47. Which of the following statements about cost pools is true?

48. An allocation base

49. An allocation base

53. Service department costs are allocated to producing departments

58. When fixed costs are unitized, they

60. Lump-sum allocations

66. When activity-based costing is implemented, the initial outcome is that

68. The traditional approach to cost allocation

Cost Pool Cost Cost Drivers

Annual activity information related to cost drivers:

Cost Pool All Products Mind Your Money Checking

Cost Pool Cost Cost Drivers

Annual activity information related to cost drivers:

Cost Pool All Products Mind Your Money Checking

Answers to Multiple Choice

_____ 1. Cost driver

_____ 2. Cost objective

_____ 3. Cost pool

_____ 4. Cost-plus contract

_____ 5. Lump-sum allocation

_____ 6. Unitized costs

_____ 7. Ability to bear costs

_____ 8. Activity-based costing

_____ 9. Activity-based management

_____ 10. Cost allocation

A. Assigning indirect costs to cost objectives

a. What is the incremental cost of producing one Model 44 motor?

b. Both number of employees and salary appear to be plausible allocation bases,

When number of machine hours is used as the allocation base:

a. If the national division requires 28 reservations in November and the regional

a. What will be the effect on profit if the order is accepted?

Separate cost pools:

The use of a single cost pool causes R4 to be undercosted and R5 to be overcosted.

COST POOL COST DRIVER

(2) Production equipment repairs

(3) Raw materials storage

(4) Plant heat, light, water, and

(5) Finished product quality control

(6) Production line setups

a. Comment on the advisability of comparing the costs at GH McGraw Appliances

Estimated Expected Actual Actual Activity

172. Sandifer Company is contemplating the establishment of an activity-based costing

a. 1. Which items are cost pools?

Direct materials $ 31,200

175. What is a cost-plus contract? Why are cost-plus contracts used?

178. Why is lump-sum allocations used to allocate fixed costs?

*181. What is the difference between ABC and ABM?

*182. What are the four steps in ABM?

You might also like