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Practice Set 4
Practice Set 4
Practice Set 4
MULTIPLE CHOICE
THEORIES:
Outdated cost system
3. Symptoms of an outdated cost system include all of the following EXCEP
A. product costs change because of changes in financial reporting.
B. products that are difficult to produce show little profit.
C. competitors' prices appear unrealistically low.
D. the company has a highly profitable niche all to itself.
Activity-based management
1. Which system focuses on the management of activities with the objective of improving the value received by the customer
and the profit received by providing this value?
A. activity-based management C. contemporary cost control
B. traditional cost management system D. standard cost system
5. Primary concepts under activity-based management include all of the following except:
A. activity analysis C. activity-based costing
B. total quality management D. cost driver analysis
18. Which of the following falls under the Activity-Based Management umbrella?
Continuous Business process Activity-based
improvement reengineering costing
A. NO NO YES
B. YES NO NO
C. YES YES YES
D. NO YES NO
29. All of the following are ways that activities can be managed to achieve improvements in a process, except
A. activity induction C. activity elimination
B. activity selection D. activity sharing
32. In contrast to a company that uses a single overhead rate, one that uses activity-based costing
A. will have higher product costs than one using a single overhead rate.
B. cannot compute budget variances.
C. will incur additional costs for recordkeeping.
D. must have a preponderance of fixed overhead costs.
Practice Set 4: ACTIVITY-BASED COST SYSTEM 2
Activity-based costing
Reason
21. Of the following, which is the best reason for using activity-based costing?
A. to keep better track of overhead costs
B. to more accurately assign overhead costs to cost pools so that these costs are better controlled
C. to better assign overhead costs to products
D. to assign indirect service overhead costs to direct overhead cost pools
Benefits
2. The primary benefit of using ABC is that it provides
A. better management decisions.
B. enhanced control over overhead costs.
C. more cost pools.
D. more accurate product costing.
8. The presence of any of the following factors would suggest a switch to ABC except when
A. product line differ greatly in volume.
B. overhead costs constitute a minor portion of total costs.
C. the manufacturing process has changed significantly.
D. production managers are ignoring data provided by the existing system.
Characteristics
6. Which of the following is typical of activity-based costing systems?
A. Use of a single predetermined overhead rate.
B. Use of direct labor hours or direct labor cost to assign overhead.
C. Assumption of correlation between direct labor and incurrence of overhead cost.
D. Use of multiple cost drivers to allocate overhead.
Application
22. ABC should be used in which of the following situations?
A. single-product firms with multiple steps
B. multiple-product firms with only a single process
C. multiple-product firms with multiple processing steps
D. in all manufacturing firms
Limitation
9. Which of the following is a limitation of activity-based costing?
A. More cost pools C. Poorer management decisions
Practice Set 4: ACTIVITY-BASED COST SYSTEM 3
12. Each of the following is a limitation of activity-based costing system except that:
A. it can be expensive to use.
B. it is more complex than the traditional costing.
C. more cost pools are used.
D. some arbitrary allocations still continue.
Cost assignment
15. Which of the following lists the most to least accurate method of cost assignment?
A. direct tracing, driver tracing, allocation C. driver tracing, direct tracing, allocation
B. allocation, direct tracing, driver tracing D. allocation, driver tracing, direct tracing
Steps
16. A well-designed activity-based costing system starts with
A. identifying the activity-cost pools.
B. computing the activity-based overhead rate.
C. assigning manufacturing overhead costs for each activity cost pool to products.
D. analyzing the activities performed to manufacture a product.
65. Successful activity-based costing (ABC) implementation depends upon the firm having:
A. top management support
B. ABC linked to its competitive strategy
C. adequate resources
D. all of the above
24. A base used to allocate the cost of a resource to the different activities using that resource is
A. resource driver C. activity driver
B. final cost object D. driver
42. A base used to allocate the cost of products, customers, or other final cost objects is a(n)
A. resource driver C. activity driver
B. final cost object D. driver
Practice Set 4: ACTIVITY-BASED COST SYSTEM 4
38. Activity drivers differ from resource drivers in that activity drivers
A. are used to assign indirect costs while resource drivers are used to assign direct costs
B. assign the cost of activities to cost objects while resource drivers assign the cost of resources to activities
C. assign the cost of activities to resources and resource drivers assign the cost of resources to cost objects
D. are used to assign direct costs while resource drivers are used to assign indirect costs
Cost pool
31. A cost pool is
A. all of the costs of a particular department.
B. all costs in a group such as variable costs or discretionary fixed costs.
C. all costs related to a product or product line.
D. all costs that have the same driver.
Cost allocation
33. Activity-based overhead rates are more useful than a single plant-wide rate if
A. overhead costs are driven by several activities.
B. direct labor cost varies significantly from department to department.
C. all products require about the same amounts of all activities.
D. manufacturing overhead costs are nearly all fixed.
35. Which of the following best describes the flow of overhead costs in an activity-based costing system?
A. Overhead costs => direct labor cost or hours => products
B. Overhead costs => products
C. Overhead costs => activity cost pools => cost drivers => products
D. Overhead costs => machine hours => products
36. Finding a single cost driver that changes in the same proportion as all the variable factory overhead costs is:
A. simplified by breaking out the fixed portion of overhead cost
B. the first step in variable overhead cost management
C. difficult, but manageable
D. impossible
Activity levels
Unit level
46. Unit-level costs are costs that
A. inevitably increase whenever a unit is produced
B. are caused by the number of batches produced and sold
Practice Set 4: ACTIVITY-BASED COST SYSTEM 5
Batch level
54. Batch-level resources are acquired
A. for individual units of product or service
B. for making a group of similar products
C. to produce and sell a specific product
D. to provide a general capacity to produce products and services.
Product-sustaining level
43. Examples of activities at the product level of costs include
A. cutting, painting, and packaging
B. scheduling, setting up, and moving
C. designing, changing, and advertising
D. heating, lighting and security
60. Which of the following is the best way to consider a product-level cost?
A. A product-level cost can be avoided when a product line is discontinued.
B. A product-level cost can be avoided when a there is change in the production schedule so the product is not
produced this week.
C. A product level cost can be avoided when a business segment is discontinued.
D. A product level cost can be avoided when the corporation is dissolved.
56. In a pure activity-based cost system which of the following might be treated as period costs?
A. facility-level costs C. batch-level costs
B. product-level costs D. unit-level costs
48. An activity that adds cost to the product but does not increase it market value is a
A. value-added activity C. cost driver
B. cost-benefit activity D. nonvalue-added activity
50. When a firm redesigns a product to reduce the number of component parts, the firm is
A. increasing consumer value.
B. increasing the value added to the product.
C. decreasing product variety.
D. decreasing non-value-added costs.
52. Under activity-based costing, benchmarks for product cost should contain an allowance for
A. idle time. C. spoilage.
B. idle time and scrap materials. D. none of the above.
66. Page Company’s cost allocation and product costing procedures follow activity-based costing principles. The following
activities have been identified and classified as being either value-adding or non-value adding as to each product.
1. Raw materials storage activity
2. Design engineering activity
3. Drill press activity
4. Heat treatment activity
5. Quality control inspection activity
6. Issuance of purchase order activity
How are the foregoing activities classified?
Value-adding Non-value adding
A. 1, 2, 5, 6 3, 4
B. 1, 2, 4 3, 5, 6
C. 2, 4, 5 1, 3, 6
D. 2, 3, 4 1, 5, 6
Productivity Measures
Practice Set 4: ACTIVITY-BASED COST SYSTEM 7
53. The amount of time between the development and the production of a product is
A. the product life cycle. C. production time.
B. lead time. D. value-added time.
PROBLEMS:
Breakeven Analysis
1. Peal Company had the following information:
Activity Driver Unit Variable Cost Level of Activity Driver
Units sold P40
Setups 1,000 80
Engineering hours 60 2,000
Other data:
Total fixed costs (traditional) P400,000
Total fixed costs (ABC) P150,000
Units selling price P80
What is the breakeven point in units using ABC?
A. 10,000 unit C. 5,000 units
B. 5,000 units D. 8,750 units
Traditional Costing
Overhead cost per unit
2. Mary Manufacturing Company manufactures two products (X and Y). The overhead costs of P29,000 have been
divided into three cost pools that use the following activity drivers:
Product No. of Orders No. of Labor Transactions No. of Labor Hours
X 30 100 1,000
Y 20 300 4,000
Cost per pool P5,000 P4,000 P20,000
Using traditional costing, what is the amount of overhead cost to be assigned to Product Y using labor hours as the
allocation base?
A. P21,750 C. P16,000
B. P 5,800 D. P23,200
Unit cost
3. Arid Company produces products BH and XP. The direct cost of BH is P250 per unit and XP is P350 per unit. Fifty units
of BH and 150 units of XP were produced. Overhead amounting to P130,000 is allocated to products using direct costs as
the relevant cost driver.
The cost of XP per unit amounts to
A. P750 C. P1,050
B. P1,000 D. P1,250
Activity-based Costing
Batch-level costs
Allocated overhead
4. One of Alien Company’s activity cost pools is machine setups, with estimated overhead of P300,000. Alien produces
slacks (400 setups) and shirts (600 setups). How much of the machine setup cost pool should be assigned to slacks?
A. P 0 C. P150,000
B. P120,000 D. P180,000
5. The overhead rate for Machine Setups is P100 per setup. Products A and B have 80 and 60 setups, respectively. The
overhead assigned to each product is
A. Product A P8,000, Product B P8,000 C. Product A P8,000, Product B P6,000
B. Product A, P6,000, Product B P6,000 D. Product A, P6,000, Product B P8,000
6. Sylvia Company has identified an activity cost pool to which it has allocated estimated overhead of P1,920,000 and
determined the expected use of cost drivers per that activity to by 160,000 inspections. Widgets require 40,000
inspections, Gadgets 30,000 inspections, and Targets, 90,000 inspections.
The overhead assigned to each product is
A. Widgets P40,000, Gadgets P30,000, Targets P90,000
Practice Set 4: ACTIVITY-BASED COST SYSTEM 8
8. Beltran Company produces products X and Y. The direct cost of X is P250 per unit (P100 materials and P150 labor) and
Y is P350 (P230 material and P120 labor) per unit. Fifty units of X and 150 units of Y were produced. Overhead amounts
to P130,000 and is composed of material handling P12,000, labor support P60,000, machine operation P48,000, and
general administration P10,000. Material handling cost driver is material cost, labor support cost driver is labor cost.
Machine operation cost resulted from running the machines a total of 480 hours (three-fourth of which was for product X).
General administration effort related equally to product X and Y. Material handling chargeable per unit of X (rounded)
amounts to
A. P30; P 70 C. P60; P140
B. P40; P 80 D. P70; P 30
9. Genco manufactures two versions of a product. Production and cost information show the following:
Model A Model B
Units produced 200 400
Material moves (total) 20 80
Direct labor hours per unit 1 2
Material handling costs total P200,000. Under ABC, the material handling costs allocated to each unit of Model A and
Model B would be:
A. B. C. D.
Model A P100 P200 P333 P130
Model B P333 P400 P200 P100
10. EMPIRE Company makes two products, E and M. E is being introduced this period, 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 engineering change orders. E and M are expected to require eight and two
change orders, respectively. E and M are expected to require 2 and 3 machine hours, respectively. The cost of a
change order is P600.
If EMPIRE is using direct tracing, the amount of overhead per unit that will be assigned to E and M, respectively, are
A. P2.40 and P3.60, respectively C. P4.80 and P1.20, respectively
B. P3.60 and P2.40, respectively D. P1.20 and P4.80, respectively
If the four activity drivers are used to allocate overhead costs, total overhead allocated to Job 500 would be
A. P2,766.50. C. P2,515.00.
B. P2,415.00. D. P2,815.00
Unit cost
12. Wesleyan University Hospital plans to use activity-based costing to assign hospital indirect costs to the care of
patients. The hospital has identified the following activities and activity rates for the hospital’s indirect costs:
Activity Activity Rate
Room and meals P150 per day
Radiology P 95 per image
Pharmacy P 20 per physician order
Chemistry lab P 85 per test
Operating room P550 per operating room hour
The records of two representative patients were analyzed, using the activity rates. The activity information associated
with the two patients is as follows:
Patient Flor Patient Laura
Number of days 7.0 3
Number of images 4.0 2
Number of physician orders 5.0 1
Number of tests 6.0 2
Number operating room hours 4.5 1
Determine the activity cost associated with Patient Flor:
A. P4,500 C. P4,495
B. P4,550 D. P4,515
Total cost
13. Food Factory, Inc., has identified the following cost drivers for its expected overhead costs for the year:
14. Ray Manufacturing has four categories of overhead. The four categories and expected overhead costs for each
category for next year are listed as follows:
Maintenance P510,000
Material handling 250,000
Setups 60,000
Inspection 210,000
Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labor hours. 100,000
direct labor hours are budgeted for next year.
The company has been asked to submit a bid for a proposed job. The plant manager feels that obtaining this job would
result in a new business in future years. Usually bids are based upon full manufacturing costs plus 10 percent.
Estimates for the proposed job are as follows:
Direct materials P30,000
Direct labor (8,000 hours) P24,000
Number of material moves 100
Number of inspections 120
Number of setups 24
Number of machine hours 4,000
The plant manager has heard of a new way of applying overhead that uses cost pools and activity drivers. Expected
activity for the four activity drivers that would be used are:
Practice Set 4: ACTIVITY-BASED COST SYSTEM 10
15. If Gilmore uses direct labor hours to allocate overhead to each model, what would overhead per unit be for Model 2?
A. P 158.33 C. P 950.00
B. P 400.00 D. P1,200.00
16. If Gilmore uses activity-based costing to allocate overhead to each model, what would overhead per unit be for Model 2?
A. P158.33 C. P925.00
B. P415.93 D. P815.00
17. What would be the per unit overhead cost for Model A if direct labor hours were the allocation base?
A. P20.50 C. P82.00
B. P41.00 D. P76.00
18. What would be the per unit overhead cost for Model A if activity-based costing were used?
A. P20.50 C. P82.00
B. P74.00 D. P76.00
21. Using activity-based costing system and the appropriate activity drivers, the total cost of the potential job would be
A, P2,400 C. P7,400
B. P3,600 D. P7,750
22. Using direct labor hours to assign overhead, the total cost of the potential job would be
A. P 5,000 C. P 8,000
B. P11,000 D. P 9,000
Two products are produced by Special Products: A and B. Each product has an area in the plant 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 relational table for Special is as follows:
Activity Usage
Activity Driver # and Name Product A: Product B:
1 Units 200,000 25,000
2 Purchase orders 250 125
3 Machine hours 80,000 10,000
4 Engineering hours 1,250 1,500
23. How much overhead cost will be assigned to product B using process B?
A. P1,200,000 C. P120,000
B. P960,000 D. P150,000
25. Dagger Corporation has the following activities: creating bills of materials (BOM), studying manufacturing capabilities,
improving manufacturing processes, training employees, and designing tooling. The general ledger accounts reveal the
following expenditures for manufacturing engineering:
Salaries P150,000
Equipment 80,000
Supplies 20,000
Total P250,000
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 used for designing tools. The salaries are for
two engineers. One is paid P100,000, while the other earns P50,000. The P100,000 engineer spends 40% of his time
training employees in new processes and 60% of his time on improving processes. The remaining engineer spends
equal time on all activities. Supplies are consumed in the following proportions:
Practice Set 4: ACTIVITY-BASED COST SYSTEM 12
26. 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
27. Ordering cost chargeable per unit of N ignoring unused capacity amounts to
A. 2.00 C. 3.00
B. 2.67 D. 4.00
done