Objective 5.3
1) ABC systems create: A) one large cost pool
B) homogenous activity-related cost pools C) activity-cost pools with a broad focus
D) activity-cost pools containing many direct costs Answer: B Diff: 1
Terms: activity-based costing (ABC) Objective: 3
AACSB: Reflective thinking
2) Logical cost allocation bases include:
A) cubic feet of packages moved to measure distribution activity B) number of setups used to measure setup activity
C) number of design hours to measure designing activity D) All of these answers are correct. Answer: D Diff: 1
Terms: activity-based costing (ABC) Objective: 3
AACSB: Reflective thinking
3) ABC systems:
A) highlight the different levels of activities B) limit cost drivers to units of output
C) allocate costs based on the overall level of activity D) generally undercost complex products Answer: A Diff: 2
Terms: activity-based costing (ABC) Objective: 3
AACSB: Reflective thinking
4) A single indirect-cost rate may distort product costs because:
A) there is an assumption that all support activities affect all products B) it recognizes specific activities that are required to produce a product C) costs are not consistently recorded
D) it fails to measure the correct amount of total costs Answer: A Diff: 2
Terms: product-cost cross-subsidization Objective: 3
AACSB: Communication
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5) Traditional cost systems distort product costs because: A) they do not know how to identify the appropriate units B) competitive pricing is ignored
C) they emphasize financial accounting requirements
D) they apply average support costs to each unit of product Answer: D Diff: 2
Terms: product-cost cross-subsidization Objective: 3
AACSB: Reflective thinking
6) Which of the following statements about activity-based costing is NOT true? A) Activity-based costing is useful for allocating marketing and distribution costs.
B) Activity-based costing is more likely to result in major differences from traditional costing systems if the firm manufactures only one product rather than multiple products.
C) Activity-based costing seeks to distinguish batch-level, product-sustaining, and facility-sustaining costs, especially when they are not proportionate to one another.
D) Activity-based costing differs from traditional costing systems in that products are not cross-subsidized. Answer: B Diff: 2
Terms: product-cost cross-subsidization Objective: 3
AACSB: Reflective thinking
7) Activity-based costing (ABC) can eliminate cost distortions because ABC:
A) develops cost drivers that have a cause-and-effect relationship with the activities performed B) establishes multiple cost pools C) eliminates product variations
D) recognizes interactions between different departments in assigning support costs Answer: A Diff: 1
Terms: product-cost cross-subsidization Objective: 3
AACSB: Reflective thinking
8) Product lines that produce different variations (models, styles, or colors) often require specialized manufacturing activities that translate into: A) fewer indirect costs for each product line B) decisions to drop product variations
C) a greater number of direct manufacturing labor cost allocation rates D) greater overhead costs for each product line Answer: D Diff: 2
Terms: product-cost cross-subsidization Objective: 3
AACSB: Reflective thinking
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Answer the following questions using the information below:
Mertens Company provides the following ABC costing information:
Activities Total Costs Activity-cost drivers Account inquiry hours $200,000 10,000 hours Account billing lines $140,000 4,000,000 lines Account verification accounts $75,000 40,000 accounts Correspondence letters $ 25,000 4,000 letters Total costs $440,000
The above activities are used by Departments A and B as follows: Department A Department B Account inquiry hours 2,000 hours 4,000 hours Account billing lines 400,000 lines 200,000 lines Account verification accounts 10,000 accounts 8,000 accounts Correspondence letters 1,000 letters 1,600 letters
9) How much of the account inquiry cost will be assigned to Department A? A) $40,000 B) $200,000 C) $80,000
D) None of these answers are correct. Answer: A
Explanation: A) ($200,000 / 10,000) × 2,000 = $40,000 Diff: 2
Terms: activity-based costing (ABC) Objective: 3
AACSB: Analytical skills
10) How much of the account billing cost will be assigned to Department B? A) $14,000 B) $140,000 C) $7,000
D) None of these answers are correct. Answer: C
Explanation: C) ($140,000 / 4,000,000) × 200,000 = $7,000 Diff: 2
Terms: activity-based costing (ABC) Objective: 3
AACSB: Analytical skills
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11) How much of account verification costs will be assigned to Department A? A) $15,000 B) $18,750 C) $75,000 D) $5,000 Answer: B
Explanation: B) ($75,000 / 40,000) × 10,000 = $18,750 Diff: 2
Terms: activity-based costing (ABC) Objective: 3
AACSB: Analytical skills
12) How much of correspondence costs will be assigned to Department B? A) $800 B) $6,250 C) $25,000 D) $10,000 Answer: D
Explanation: D) ($25,000 / 4,000) × 1,600 = $10,000 Diff: 2
Terms: activity-based costing (ABC) Objective: 3
AACSB: Analytical skills
13) How much of the total costs will be assigned to Department A? A) $79,000 B) $40,000 C) $112,000 D) $440,000 Answer: A Explanation:
A) ($200,000 / 10,000) x 2,000 = $40,000 ($140,000 / 4,000,000) x 400,000 = $14,000 ($75,000 / 40,000) x 10,000 = $18,750 ($25,000 / 4,000) x 1,000 = $6,250 $79,000 Diff: 2
Terms: activity-based costing (ABC) Objective: 3
AACSB: Analytical skills
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14) How much of the total costs will be assigned to Department B? A) $79,000 B) $40,000 C) $112,000 D) $440,000 Answer: C Explanation:
C) ($200,000 / 10,000) x 4,000 = $ 80,000 ($140,000 / 4,000,000) x 200,000 = $ 7,000 ($75,000 / 40,000) x 8,000 = $ 15,000 ($25,000 / 4,000) x 1,600 = $ 10,000 $112,000 Diff: 3
Terms: activity-based costing (ABC) Objective: 3
AACSB: Analytical skills
15) Dalrymple Company produces a special spray nozzle. The budgeted indirect total cost of inserting the spray nozzle is $80,000. The budgeted number of nozzles to be inserted is 40,000. What is the budgeted indirect cost allocation rate for this activity? A) $0.50 B) $1.00 C) $1.50 D) $2.00 Answer: D
Explanation: D) $80,000 / 40,000 = $2.00 Diff: 1
Terms: activity-based costing (ABC) Objective: 3
AACSB: Analytical skills
16) Activity-based costing is most likely to yield benefits for companies with all of the following characteristics EXCEPT:
A) numerous products that consume different amounts of resources B) operations that remain fairly consistent
C) a highly competitive environment, where cost control is critical
D) accessible accounting and information systems expertise to maintain the system Answer: B Diff: 2
Terms: activity-based costing (ABC) Objective: 3
AACSB: Reflective thinking
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