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Activity Based Costing
Activity Based Costing
THEORIES: 18. Which of the following falls under the Activity-Based Management umbrella?
Outdated cost system Continuous Business process Activity-based
3. Symptoms of an outdated cost system include all of the following EXCEPT improvement reengineering costing
A. product costs change because of changes in financial reporting. A. NO NO YES
B. products that are difficult to produce show little profit. B. YES NO NO
C. competitors' prices appear unrealistically low. C. YES YES YES
D. the company has a highly profitable niche all to itself. D. NO YES NO
13. Which of the following is NOT a sign of poor cost data? 29. All of the following are ways that activities can be managed to achieve improvements in a
A. Competitors' prices for high-volume products appear much too high. process, except
B. The company seems to have a highly profitable niche all to itself. A. activity induction C. activity elimination
C. Customers don't balk at price increases for low-volume products. B. activity selection D. activity sharing
D. Competitors' prices for low-volume products appear much too high.
Traditional Costing vs. ABC system
Activity-based management 27. Which of the following is not a distinction between the traditional and ABC costing systems
1. Which system focuses on the management of activities with the objective of improving the A. the number of overhead cost pools tends to be higher in ABC systems
value received by the customer and the profit received by providing this value? B. the number allocation bases tend to be higher in ABC system
A. activity-based management C. contemporary cost control C. costs within an ABC cost pool tend to be more homogeneous than the costs within a
B. traditional cost management system D. standard cost system traditional system’s cost pool
D. all ABC systems are one-stage costing systems, while traditional systems may be one- or
28. Activity-based management (ABM) is two-stage
A. a costing system in which multiple overhead cost pools are allocated using bases that
include one or more non-volume related factors 32. In contrast to a company that uses a single overhead rate, one that uses activity-based costing
B. a base used to allocate the cost of a resource to the different activities using it A. will have higher product costs than one using a single overhead rate.
C. the use of information obtained from ABC to make improvements in the firm B. cannot compute budget variances.
D. a base used to allocate the cost of an activity to products and customers C. will incur additional costs for recordkeeping.
D. must have a preponderance of fixed overhead costs.
17. An objective of activity-based management is to
A. eliminate the majority of centralized activities in an organization. Activity-based costing
B. reduce or eliminate non-value-added activities incurred to make a product or provide a Reason
service. 21. Of the following, which is the best reason for using activity-based costing?
C. institutes responsibility accounting systems in decentralized organizations. A. to keep better track of overhead costs
D. all of the above B. to more accurately assign overhead costs to cost pools so that these costs are better
controlled
5. Primary concepts under activity-based management include all of the following except: C. to better assign overhead costs to products
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D. to assign indirect service overhead costs to direct overhead cost pools C. Assumption of correlation between direct labor and incurrence of overhead cost.
D. Use of multiple cost drivers to allocate overhead.
Benefits
2. The primary benefit of using ABC is that it provides 14. All of the following statements are correct except that
A. better management decisions. A. activity-based costing has been widely adopted in service industries.
B. enhanced control over overhead costs. B. the objective of installing ABC in service firms is different than it is in a manufacturing firm.
C. more cost pools. C. a larger proportion of overhead costs are company-wide costs in service industries.
D. more accurate product costing. D. the general approach to identifying activities and activity cost pools is the same in a
service company as in a manufacturing company.
10. Which of the following is not a benefit of activity-based costing?
A. More accurate product costing. Application
B. Enhanced control over overhead costs. 22. ABC should be used in which of the following situations?
C. Less costly to use. A. single-product firms with multiple steps
D. Better management decisions. B. multiple-product firms with only a single process
C. multiple-product firms with multiple processing steps
Factors suggesting need to switch to ABC D. in all manufacturing firms
4. Which of the following factors would suggest a need to switch to activity-based costing?
A. Product lines similar in volume and manufacturing complexity. Limitation
B. Overhead costs constitute a significant portion of total costs. 9. Which of the following is a limitation of activity-based costing?
C. The manufacturing process has been stable. A. More cost pools C. Poorer management decisions
D. Production managers use data provided by the existing system. B. Less control over overhead costs D. Some arbitrary allocations continue
7. A least likely reason to use activity-based overhead rates is that 12. Each of the following is a limitation of activity-based costing system except that:
A. some departments are labor-intensive, some are machine-intensive. A. it can be expensive to use.
B. significant amounts of overhead are driven by different factors. B. it is more complex than the traditional costing.
C. rates calculated for some departments are much higher than for other departments. C. more cost pools are used.
D. all jobs require about the same amounts of cost-driving activities. D. some arbitrary allocations still continue.
8. The presence of any of the following factors would suggest a switch to ABC except when Cost behavior of high-volume & low-volume product
A. product line differs greatly in volume. 11. As compared to a high-volume product, a low-volume product
B. overhead costs constitute a minor portion of total costs. A. usually requires less special handling.
C. the manufacturing process has changed significantly. B. is usually responsible for more overhead costs per unit.
D. production managers are ignoring data provided by the existing system. C. requires relatively fewer machine setups.
D. requires use of direct labor hours as the primary cost driver to ensure proper allocation
Characteristics of overhead.
6. Which of the following is typical of activity-based costing systems?
A. Use of a single predetermined overhead rate. Cost assignment
B. Use of direct labor hours or direct labor cost to assign overhead. 15. Which of the following lists the most to least accurate method of cost assignment?
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A. direct tracing, driver tracing, allocation C. driver tracing, direct tracing, allocation B. cost driver D. nonvalue-added activity
B. allocation, direct tracing, driver tracing D. allocation, driver tracing, direct tracing
24. A base used to allocate the cost of a resource to the different activities using that resource is
30. An activity-based costing system uses which of the following procedures? A. resource driver C. activity driver
A. Overhead costs are traced to departments, then costs are traced to products. B. final cost object D. driver
B. Overhead costs are traced to activities, then costs are traced to products.
C. Overhead costs are traced directly to products. 42. A base used to allocate the cost of products, customers, or other final cost objects is a(n)
D. All overhead costs are expensed as incurred. A. resource driver C. activity driver
B. final cost object D. driver
Steps
16. A well-designed activity-based costing system starts with 38. Activity drivers differ from resource drivers in that activity drivers
A. identifying the activity-cost pools. A. are used to assign indirect costs while resource drivers are used to assign direct costs
B. computing the activity-based overhead rate. B. assign the cost of activities to cost objects while resource drivers assign the cost of
C. assigning manufacturing overhead costs for each activity cost pool to products. resources to activities
D. analyzing the activities performed to manufacture a product. C. assign the cost of activities to resources and resource drivers assign the cost of resources
to cost objects
25. The first step in activity-based costing is to D. are used to assign direct costs while resource drivers are used to assign indirect costs
A. assign manufacturing overhead costs for each activity cost pool to products.
B. compute the activity-based overhead rate per cost driver. 55. An appropriate cost driver base should
C. identify and classify the major activities involved in the manufacture of specific products. A. have a cause-and-effect relationship with the activity and the use of resources
D. identify the cost driver that has a strong correlation to the activity cost pool. B. predict or explain activities' use of resources with reasonable accuracy
C. be based on the practical capacity of the resource to support activities
26. The last step in activity-based costing is to D. all of the above
A. identify the major activities that pertain to the manufacture of specific products.
B. allocate manufacturing overhead costs to activity cost pools. Cost pool
C. identify the cost drivers that accurately measure each activity’s contribution to the 31. A cost pool is
finished product. A. all of the costs of a particular department.
D. assign manufacturing overhead costs for each activity cost pool to products. B. all costs in a group such as variable costs or discretionary fixed costs.
C. all costs related to a product or product line.
65. Successful activity-based costing (ABC) implementation depends upon the firm having: D. all costs that have the same driver.
A. top management support
B. ABC linked to its competitive strategy Cost pool rate
C. adequate resources 34. More accurate product costing information is produced by assigning costs using
D. all of the above A. a volume-based, plant-wide rate.
B. volume-based, departmental rates.
Cost driver, activity driver & resource driver C. activity-based pool rates.
23. Any activity that causes resources to be consumed is called a D. all of the above
A. just-in-time activity C. facility-level activity
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19. In activity-based costing, final cost allocations assign costs to 58. Examples of unit level activities are
A. departments. C. products. A. scheduling, setting up, and receiving C. heating, lighting, and security
B. processes. D. activities. B. designing, changing, and advertising D. cutting, painting, and packaging
35. Which of the following best describes the flow of overhead costs in an activity-based costing 41. All of the following are unit-based cost drivers except
system? A. machine hours C. number of setups
A. Overhead costs => direct labor cost or hours => products B. number of units D. direct labor hours
B. Overhead costs => products
C. Overhead costs => activity cost pools => cost drivers => products 62. An example of a nonvolume-related overhead base would be:
D. Overhead costs => machine hours => products A. Direct materials cost C. Direct Labor cost
B. Machine hours D. Number of setups
36. Finding a single cost driver that changes in the same proportion as all the variable factory
overhead costs is: Batch level
A. simplified by breaking out the fixed portion of overhead cost 54. Batch-level resources are acquired
B. the first step in variable overhead cost management A. for individual units of product or service
C. difficult, but manageable B. for making a group of similar products
D. impossible C. to produce and sell a specific product
D. to provide a general capacity to produce products and services.
37. Total activity cost is the sum of
A. resource driver assigned costs and activity driver assigned costs 45. Examples of batch-level activity drivers include
B. direct and indirect costs A. units of output and direct labor hours
C. directly traceable resource costs and resource driver assigned costs B. number of batches and material moves
D. opportunity costs and realized costs C. number of products and design changes
D. square footage occupied
Activity levels
Unit level 63. Which of the following is not a batch-level activity?
46. Unit-level costs are costs that A. Engineering changes. C. Inspection.
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Activity-based Costing
PROBLEMS: Batch-level costs
Breakeven Analysis Allocated overhead
i
. Peal Company had the following information: iv
. One of Alien Company’s activity cost pools is machine setups, with estimated overhead of
Activity Driver Unit Variable Cost Level of Activity Driver P300,000. Alien produces slacks (400 setups) and shirts (600 setups). How much of the
Units sold P40 machine setup cost pool should be assigned to slacks?
Setups 1,000 80 A. P 0 C. P150,000
Engineering hours 60 2,000 B. P120,000 D. P180,000
Other data:
Total fixed costs (traditional) P400,000 v
. The overhead rate for Machine Setups is P100 per setup. Products A and B have 80 and 60
Total fixed costs (ABC) P150,000 setups, respectively. The overhead assigned to each product is
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A. Product A P8,000, Product B P8,000 C. Product A P8,000, Product B P6,000 Model A Model B
B. Product A, P6,000, Product B P6,000 D. Product A, P6,000, Product B P8,000 Units produced 200 400
Material moves (total) 20 80
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. Sylvia Company has identified an activity cost pool to which it has allocated estimated Direct labor hours per unit 1 2
overhead of P1,920,000 and determined the expected use of cost drivers per that activity to by Material handling costs total P200,000. Under ABC, the material handling
160,000 inspections. Widgets require 40,000 inspections, Gadgets 30,000 inspections, and costs allocated to each unit of Model A and Model B would be:
Targets, 90,000 inspections. A. B. C. D.
The overhead assigned to each product is Model A P100 P200 P333 P130
A. Widgets P40,000, Gadgets P30,000, Targets P90,000 Model B P333 P400 P200 P100
B. Widgets P480,000, Gadgets P360,000, Targets P1,080,000
C. Widgets P360,000, Gadgets P480,000, Targets P1,080,000 x
. EMPIRE Company makes two products, E and M. E is being introduced this period,
D. Widgets P480,000, Gadgets P360,000, Targets P1,080,000
whereas M has been in production for 2 years. For the period about to begin, 1,000 units of
each product are to be manufactured. The only relevant overhead item is the cost of
Overhead cost per unit engineering change orders. E and M are expected to require eight and two change orders,
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. EMPIRE Company makes two products, E and M. E is being introduced this period, whereas
respectively. E and M are expected to require 2 and 3 machine hours, respectively. The
M has been in production for 2 years. For the period about to begin, 1,000 units of each
cost of a change order is P600.
product are to be manufactured. The only relevant overhead item is the cost of engineering
If EMPIRE is using direct tracing, the amount of overhead per unit that will be assigned to E
change orders. E and M are expected to require eight and two change orders, respectively. E
and M, respectively, are
and M are expected to require 2 and 3 machine hours, respectively. The cost of a change
A. P2.40 and P3.60, respectively C. P4.80 and P1.20, respectively
order is P600.
B. P3.60 and P2.40, respectively D. P1.20 and P4.80, respectively
If EMPIRE applies engineering change order cost on the basis of machine hours, the
overhead cost per unit to be assigned to E and M, respectively, are
Total allocated overhead
A. P2.40 and P3.60, respectively C. P4.80 and P3.60, respectively xi
. Germie, Inc., has identified the following overhead costs and activity drivers for next year:
B. P3.60 and P2.40, respectively D. P3.60 and P4.80, respectively
Overhead Item Expected Cost Activity Driver Expected Quantity
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. Beltran Company produces products X and Y. The direct cost of X is P250 per unit (P100 Setup costs P100,000 Number of setups 500
materials and P150 labor) and Y is P350 (P230 material and P120 labor) per unit. Fifty units of Ordering costs 40,000 Number of orders 3,200
X and 150 units of Y were produced. Overhead amounts to P130,000 and is composed of Maintenance 200,000 Machine hours 4,000
material handling P12,000, labor support P60,000, machine operation P48,000, and general Power 20,000 Kilowatt hours 80,000
administration P10,000. Material handling cost driver is material cost, labor support cost driver The following are two of the jobs completed during the year:
is labor cost. Machine operation cost resulted from running the machines a total of 480 hours Job 500 Job 501
(three-fourth of which was for product X). General administration effort related equally to Direct materials P1,500 P2,000
product X and Y. Material handling chargeable per unit of X (rounded) amounts to Direct labor P1,400 P2,400
A. P30; P 70 C. P60; P140 Units completed 100 160
B. P40; P 80 D. P70; P 30 Direct labor hours 100 160
Number of setups 2 8
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. Genco manufactures two versions of a product. Production and cost infor- Number of orders 8 10
mation show the following: Machine hours 40 50
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activity drivers. Expected activity for the four activity drivers that would be used are: Direct labor hours (total) 4,000 2,000 4,000
Machine hours 60,000 Number of setups 100 150 250
Material moves 20,000 Number of shipments 200 225 275
Setups 3,000 Engineering change orders 15 10 5
Quality inspections 12,000 Overhead costs include setups P90,000; shipping costs P140,000; and engineering costs
What is the total cost of the proposed job if Ray Manufacturing uses direct labor hours as its P180,000.
only activity driver?
A. P144,000 C. P112,400 xvii
. What would be the per unit overhead cost for Model A if direct labor hours were the allocation
B. P136,400 D. P106,400 base?
A. P20.50 C. P82.00
Traditional Costing & Activity-based Costing B. P41.00 D. P76.00
Questions 15 & 16 are based on the following information.
i
Gilmore Company produces two products in a single factory. The following . Answer: D
production and cost information has been determined: BES (ABC) = 350,000/40 8,750
ABC fixed costs P 150,000
Model 1 Model 2
Set ups 80 x P1,000 80,000
Units produced 1,000 200
Engineering 2,000 x 60 120,000
Material moves (total) 100 40
Total Fixed Costs P 350,000
Testing time (total) 250 125
Direct labor hours per unit 1 5 ii
. Answer: D
The controller has determined total overhead to be P480,000. P140,000 relates to material moves;
Total overhead (5,000 + 4,000 + 20,000) 29,000
P150,000 relates to testing; the remainder is related to labor time.
Allocated OH to Product Y based on labor hours: 4 ÷ 20 x 29,000 P23,200
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. If Gilmore uses direct labor hours to allocate overhead to each model, what would overhead iii
. Answer: D
per unit be for Model 2?
BH: (50 x P250) P 12,500
A. P 158.33 C. P 950.00
XP: (150 x P350) 52,500
B. P 400.00 D. P1,200.00
Total direct costs P 65,000
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. If Gilmore uses activity-based costing to allocate overhead to each model, what would
Allocated OH to XP based on direct costs: (52,500 ÷ 65,000 x P130,000) P105,000
overhead per unit be for Model 2?
Unit cost – Product XP:
A. P158.33 C. P925.00
Direct cost P 350
B. P415.93 D. P815.00
overhead (P105,000 ÷ 150) 700
Total P1,050
Questions 17 & 18 are based on the following information.
Hughes Company produces three products with the following production and cost iv
. Answer: B
information: Setup cost per setup (P300,000 ÷ 1,000) P300
Model A Model B Model C Setup costs assigned to slacks (400 x P300) P120,000
Units produced 2,000 6,000 12,000
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Cost Accounting Systems
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The total number of expected machine hours for all jobs during the year is 25,000, and the total
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. What would be the per unit overhead cost for Model A if activity-based costing were used? expected number of inspections is 1,500.
A. P20.50 C. P82.00
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B. P74.00 D. P76.00 . Using activity-based costing system and the appropriate activity drivers, the total cost of the
potential job would be
Question Nos. 19 and 20 are based on the following: A, P2,400 C. P7,400
Toylandia Company manufactures two products, X-MAN and Machman. Toylandia's overhead B. P3,600 D. P7,750
costs consist of setting up machines, P400,000; machining, P900,000; and inspecting,
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P300,000. . Using direct labor hours to assign overhead, the total cost of the potential job would be
Information on the two products is: A. P 5,000 C. P 8,000
X-MAN Machman B. P11,000 D. P 9,000
Direct labor hours 15,000 25,000
Machine setups 600 400 Question Nos. 23 through 25 are based on the following:
Machine hours 24,000 26,000 Special Products recently installed an activity-based relational data base. Using the information
Inspections 800 700 contained in the activity relational table, the following pool rates were computed:
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. Overhead applied to X-MAN using traditional costing is P200 per purchase order
A. P600,000. C. P832,000. P12 per machine hour, process A
B. P768,000. D. P960,000. P15 per machine hours, process B
P40 per engineering hour
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. Overhead applied to Machman using activity-based costing is
A. P 640,000. C. P 832,000. Two products are produced by Special Products: A and B. Each product has an area in the plant
B. P 768,000. D. P1,000,000. that is dedicated to its production. The plant has two manufacturing processes, process A and
process B. Other processes include engineering, product handling, and procurement. The product
Questions 21 & 22 are based on the following information. relational table for Special is as follows:
The Oilfield plant has two categories of overhead: maintenance and inspection. Costs expected for Activity Usage
these categories for the coming year are as follows: Activity Driver # and Name Product A: Product B:
Maintenance P100,000 1 Units 200,000 25,000
Inspection 150,000 2 Purchase orders 250 125
The plant currently applies overhead using direct labor hours and expected capacity of 50,000 3 Machine hours 80,000 10,000
direct labor hours. The following data have been assembled for use in developing a bid for a 4 Engineering hours 1,250 1,500
proposed job:
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Direct materials P1,000 . How much overhead cost will be assigned to product B using process B?
Direct labor P4,000 A. P1,200,000 C. P120,000
Machine hours 500 B. P960,000 D. P150,000
Number of inspections 4
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Direct labor hours 800 . What is the unit cost of Product A?
A. P4.71 C. P4.80
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Cost Accounting Systems
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B. P252.00 D. P5.30 The equipment is used for two activities: improving processes and designing tooling. Thirty-
five percent of the equipment’s time is used for improving processes and sixty-five percent is
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. Dagger Corporation has the following activities: creating bills of materials (BOM), studying used for designing tools. The salaries are for two engineers. One is paid P100,000, while the
manufacturing capabilities, improving manufacturing processes, training employees, and other earns P50,000. The P100,000 engineer spends 40% of his time training employees in
designing tooling. The general ledger accounts reveal the following expenditures for new processes and 60% of his time on improving processes. The remaining engineer spends
manufacturing engineering: equal time on all activities. Supplies are consumed in the following proportions:
Salaries P150,000 Creating BOMs 25%
Equipment 80,000 Studying capabilities 10%
Supplies 20,000 Improving processes 20%
Total P250,000 Training employees 25%
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Designing tooling 20%
. Answer: D What is the cost assigned to the designing tooling activity?
Overhead rate per inspection: (P1,920,000 ÷ 160,000) P12 A. P162,500 C. P50,000
Overhead assigned to:
Widgets: (40,000 x P12) P 480,000 E: 8 x P600 ÷ 1,000 P4.80
Gadgets (30,000 x P12) 360,000 M: 2 x P600 ÷ 1,000 P1.20
Targets (90,000 x P12) 1,080,000
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. Answer: C
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. Answer: A Activity Rates:
Cost of change orders 10 x 600 P6,000 Setup (P100,000 ÷ 500) P200.00
Cost of change order per hour P6,000/5,000 hours P1.20/MH Ordering (P40,000 ÷ 3,200) 12.50
Cost of change order per unit: Maintenance (P200,000 ÷ 4,000) 50.00
E: 2 hours x P1.20 P2.40 Power (P20,000 ÷ 80,000) 0.25
M: 3 hours x P1.20 P3.60 Overhead costs assigned to Job 500:
Setup (2 x P200) P 400
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. Answer: A Ordering (8 x P12.50) 100
Materials cost: Maintenance (40 x P50) 2,000
Product X: (50 x P100) P 5,000 Power (60 x P025) 15
Product Y: (150 x P230) 34,500 Total P2,515
Total P39,500
Material handling cost based on direct materials cost: (P12,000 ÷ P39,500) P0.3038 xii
. Answer: D
Material handling cost per unit chargeable to: Room and meals (7 days x P150) P1,050
Product X: (50,000 x P0.3038 ÷ 50) P 30.38 Radiology (4 images x P95) 380
Product Y: (34,500 x P0.3038 ÷ 150) P 69.87 Pharmacy (5 orders x P20) 100
Chemistry lab (6 tests x P85) 510
Operating room (4.5 hours x P550) 2,475
x
. Answer: C Total P4,515
Cost of change orders based on ABC
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Cost Accounting Systems
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B. P 66,000 D. P250,000
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. Set up cost chargeable per unit of M accounting for unused capacity amounts to
A. 2.50 C. 5.00
B. 2.75 D. 5.50
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. Ordering cost chargeable per unit of N ignoring unused capacity amounts to
A. 2.00 C. 3.00
B. 2.67 D. 4.00
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. The cost of unused capacity excluding labor costs amounts to
A. 11,260 C. 11,856
B. 11,460 D. 14,856
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v
. Answer: C
Overhead allocated to:
Product A: (80 x P100) P8,000
Product B: (60 x P100) 6,000
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. Answer: B
Handling cost per move (P200,000 ÷ 100 moves) P2,000
Model A: 20 x P2,000 ÷ 200 P 200
Model B: 80 x P2,000 ÷ 400 P 400
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. Answer: B
Direct materials P 30,000
Direct labor 24,000
Overhead 82,400
Total cost of the job P136,400
OH rate per DLH:
(P510,000 + P250,000 + P60,000 + P210,000) ÷ 100,000 P10.30 per DLH
Overhead allocated to proposed job: 8,000 x 10.30 82,400
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. Answer: D
Total DLH used (1,000 x 1) + (20 x 5) 2,000
Overhead allocated to Model 2 (0.5 x P480,000) P240,000
Overhead per unit of Model 2: (P240,000 ÷ 200) P1,200
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. Answer: C
Overhead allocated to Model 2:
Handling (P140,000 ÷ 140 x 40 moves) P 40,000
Testing (P150,000 ÷ 375 x 125) 50,000
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Labor-related (P190,000 ÷ 2) 95,000
. Answer: B
Overhead rate per DLH (P410,000 ÷ 10,000) P41
Overhead applied to Model A: (4,000 x P41) P164,000
Overhead applied to Model A per unit: (P164,000 ÷ 2,000) P82
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. Answer: B
Activity rates;
Setups: (P90,000 ÷ 500 setups) P 180
Shipping: (P140,000 ÷ 700 shipments) 200
Engineering (P180,000 ÷ 30 change orders) 6,000
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Cost Accounting Systems
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Total P185,000
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. Answer: C
Direct materials P1,000
Direct labor 4,000
Maintenance 500 x 4 2,000
Inspection 4 x 100 400
Total P7,400
Activity Rate:
Inspection (P150,000 ÷ 1,500) P100/inspection
Maintenance (P100,000 ÷ 25,000) P4/MH
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. Answer: D
OH rate per DLH: (P250,000 ÷ 50,000 DLH) = P5.00
Cost of the proposed job:
Direct materials P1,000
Direct labor 4,000
Overhead (800 hours x P5 4,000
Total P9,000
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. Answer: D
OH assigned to Product B: 6,000 MH x P15 per MH = P150,000
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. Answer: D
Purchasing cost (250 x P200) P 50,000
Processing costs (80,000 x P12) 960,000
Engineering cost (1,250 x P40) 50,000
Total costs assigned to Product A P1,060,000
Unit cost: (P1,060,000 ÷ 200,000) P 5.30
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(B. Activity-Based Cost System)
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