Cost Accounting, 14e (Horngren/Datar/Rajan)
Chapter 5 Activity-Based Costing and Activity-Based Management
Objective 5.1
1) If products are different, then for costing purposes:
A) an ABC costing system will yield more accurate cost numbers B) a simple costing system should be used C) a single indirect-cost rate should be used D) none of the above Answer: A Diff: 1
Terms: activity-based costing (ABC) Objective: 1
AACSB: Reflective thinking
2) Overcosting a particular product may result in: A) loss of market share
B) pricing the product too low C) operating efficiencies
D) understating total product costs Answer: A Diff: 2
Terms: product undercosting Objective: 1
AACSB: Analytical skills
3) Undercosting of a product is most likely to result from: A) misallocating direct labor costs B) underpricing the product C) overcosting another product D) overstating total product costs Answer: C Diff: 2
Terms: product overcosting Objective: 1
AACSB: Reflective thinking
4) A company produces three products; if one product is overcosted then: A) one product is undercosted
B) one or two products are undercosted C) two products are undercosted D) no products are undercosted Answer: B Diff: 1
Terms: product-cost cross-subsidization Objective: 1
AACSB: Ethical reasoning
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5) Misleading cost numbers are most likely the result of misallocating: A) direct material costs
B) direct manufacturing labor costs C) indirect costs
D) All of these answers are correct. Answer: C Diff: 2
Terms: activity-based costing (ABC) Objective: 1
AACSB: Reflective thinking
6) An accelerated need for refined cost systems is due to: A) global monopolies B) rising prices
C) intense competition
D) a shift toward increased direct costs Answer: C Diff: 2
Terms: activity-based costing (ABC) Objective: 1
AACSB: Ethical reasoning
7) The use of a single indirect-cost rate is more likely to: A) undercost high-volume simple products B) undercost low-volume complex products C) undercost lower-priced products D) Both B and C are correct. Answer: B Diff: 2
Terms: product undercosting Objective: 1
AACSB: Reflective thinking
8) Uniformly assigning the costs of resources to cost objects when those resources are actually used in a nonuniform way is called: A) overcosting B) undercosting
C) peanut-butter costing D) department costing Answer: C Diff: 1
Terms: product-cost cross-subsidization Objective: 1
AACSB: Reflective thinking
2
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9) A top-selling product might actually result in losses for the company. Answer: TRUE Diff: 2
Terms: product undercosting Objective: 1
AACSB: Analytical skills
10) Companies that overcost products will most likely lose market share. Answer: TRUE Diff: 2
Terms: product overcosting Objective: 1
AACSB: Ethical reasoning
11) If companies increase market share in a given product line because their reported costs are less than their actual costs, they will become more profitable in the long run. Answer: FALSE
Explanation: The actual costs will increase because of the additional sales and the other product lines (which are subsidizing the undercosting of the growing product line) will suffer. The net result will be the company having a lower operating income than it could have had. Diff: 2
Terms: product undercosting Objective: 1
AACSB: Reflective thinking
12) As product diversity and indirect costs increase, it is usually best to switch away from an activity based cost system to a broad averaging system. Answer: FALSE
Explanation: The potential significant differences in costs relating to the products as well as the magnitude of indirect costs make a more refined costing system more appropriate. Diff: 2
Terms: activity-based costing (ABC) Objective: 1
AACSB: Reflective thinking
13) If a company overcosts one of its products, then it will undercost at least one of its other products. Answer: TRUE Diff: 2
Terms: product-cost cross-subsidization Objective: 1
AACSB: Ethical reasoning
14) Explain how a top-selling product may actually result in losses for the company.
Answer: If indirect costs are not properly allocated to the products, a product may appear to cost less than it actually does cost to produce. If the selling price is based on these lower costs, the selling price may actually be lower than the costs needed to produce the product resulting in losses for the company. Diff: 1
Terms: product-cost cross-subsidization Objective: 1
AACSB: Reflective thinking
3
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Objective 5.2
1) Refining a cost system includes:
A) classifying as many costs as indirect costs as is feasible B) creating as many cost pools as possible
C) identifying the activities involved in a process D) seeking a lesser level of detail Answer: C Diff: 2
Terms: activity Objective: 2
AACSB: Reflective thinking
2) Greater indirect costs are associated with: A) specialized engineering drawings B) quality specifications and testing
C) inventoried materials and material control systems D) All of these answers are correct. Answer: D Diff: 1
Terms: product-cost cross-subsidization Objective: 2
AACSB: Reflective thinking
3) Design of an ABC system requires: A) that the job bid process be redesigned
B) that a cause-and-effect relationship exists between resource costs and individual activities C) an adjustment to product mix D) Both B and C are correct. Answer: B Diff: 1
Terms: activity-based costing (ABC) Objective: 2
AACSB: Reflective thinking
4) Direct costs plus indirect costs equal total costs. Answer: TRUE Diff: 1
Terms: activity-based costing (ABC) Objective: 2
AACSB: Reflective thinking
5) When refining a costing system, a company should classify as many costs as possible as direct costs. Answer: TRUE Diff: 1
Terms: refined costing system Objective: 2
AACSB: Ethical reasoning
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6) In a homogeneous cost pool, all costs have a similar cause-and-effect relationship with the cost-allocation base. Answer: TRUE Diff: 1
Terms: activity-based costing (ABC) Objective: 2
AACSB: Reflective thinking
7) Indirect labor and distribution costs would most likely be in the same activity-cost pool. Answer: FALSE
Explanation: Indirect labor and distribution costs would not be in the same activity-cost pool because their cost drivers are very dissimilar. A cost driver of indirect labor would include direct labor hours, while a cost driver of distribution costs would include, for example, cubic feet of cargo moved. Diff: 2
Terms: activity-based costing (ABC) Objective: 2
AACSB: Reflective thinking
8) Direct tracing of costs improves cost accuracy. Answer: TRUE Diff: 1
Terms: activity-based costing (ABC) Objective: 2
AACSB: Reflective thinking
9) A cost-allocation base is a necessary element when using a strategy that will refine a costing system. Answer: TRUE Diff: 1
Terms: activity-based costing (ABC) Objective: 2
AACSB: Reflective thinking
10) What are the factors that are causing many companies to refine their costing systems to obtain more accurate measures of the costs of their products?
Answer: The first cause is increasing product diversity. Companies are producing many more products than they used to, placing strains on more simple, older cost systems. A second cause is the overall increased in indirect costs and the relative decline of direct costs. The indirect nature of these costs requires allocation, and any inaccuracies in allocation of these costs become magnified as these indirect costs increase. A third cause would be advances in information technology that makes complex allocation of indirect costs less burdensome. Finally, increased competition from both national and international competitors has resulted in more pressure to reduce costs, as well as increasing the need for and value of information to support responses to these new threats. Diff: 2
Terms: activity-based costing (ABC) Objective: 2
AACSB: Reflective thinking
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