Activity based questions

ACTIVITY BASED COSTING

Multiple Choice Questions

Use the following to answer questions 1- 4 :

Century, Inc., currently uses traditional costing procedures, applying $400,000 of overhead to products X and Y on the basis of direct labor hours. The firm is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labor hours (DLH), production setups (SU), and number of parts components (PC) as cost drivers. Data on the cost pools and respective driver volumes follow.

Product	Pool No. 1 (Driver: DLH)	Pool No. 2 (Driver: SU)	Pool No. 3 (Driver: PC)
X	600		30	1,500
Y	1,400		50	1,000
Pool Cost	$80,000	$140,000	$180,000

1. The overhead cost allocated to product X by using traditional costing procedures would be:

A. $120,000.

B. $184,500.

C. $215,500.

D. $280,000.

E. some other amount.

2. The overhead cost allocated to product Y by using traditional costing procedures would be:

A. $120,000.

B. $184,500.

C. $215,500.

D. $280,000.

E. some other amount.

3. The overhead cost allocated to product X by using activity-based costing procedures would be:

A. $120,000.

B. $184,500.

C. $215,500.

D. $280,000.

E. some other amount.

4. The overhead cost allocated to product Y by using activity-based costing procedures would be:

A. $120,000.

B. $184,500.

C. $215,500.

D. $280,000.

E. some other amount.

Use the following to answer questions 5 – 6 :

Kelly and Logan, an accounting firm, provides consulting and tax planning services. A recent analysis found that 65% of the firm's billable hours to clients resulted from tax planning and for many years, the firm's total administrative cost (currently $250,000) has been allocated to services on this basis.

The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows:

Staff support	$180,000
In-house computing charges	50,000
Miscellaneous office costs	20,000
Total	$250,000

A recent analysis of staff support found a strong correlation with the number of clients served (consulting, 20; tax planning, 60). In contrast, in-house computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively. Consulting consumed 30% of the firm's computer hours and had 20% of the total client transactions.

5. Assuming the use of activity-based costing, the proper percentage to use in allocating staff support costs to tax planning services is:

A. 20%.

B. 60%.

C. 65%.

D. 75%.

E. 80%

6. If Kelly and Logan switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to consulting services would:

A. decrease by $23,500.

B. increase by $23,500.

C. decrease by $32,500.

D. change by an amount other than those listed above.

E. change, but the amount cannot be determined based on the information presented.

7. Activity-based costing systems:

A. use a single, volume-based cost driver.

B. assign overhead to products based on the products' relative usage of direct labor.

C. often reveal products that were under- or overcosted by traditional costing systems.

D. typically use fewer cost drivers than more traditional costing systems.

E. have a tendency to distort product costs.

8. Dreyfus Manufacturing sells a number of goods whose selling price is heavily influenced by cost. A recent study of product no. 519 revealed a traditionally-derived total cost of $1,019, a selling price of $1,850 based on that figure, and a newly computed activity-based total cost of $1,215. Which of the following statements is true?

A. All other things being equal, the company should consider a drop in its sales price.

B. The company may have been extremely competitive in the marketplace from a price perspective.

C. Product no. 519 could be labeled as being overcosted by the firm's traditional costing procedures.

D. If product no. 519 is undercosted by traditional accounting procedures, then all of the company's other products must be undercosted as well.

E. Generally speaking, the activity-based cost figure is “less accurate” than the traditionally-derived cost figure.

9. Vanguard combines all manufacturing overhead into a single cost pool and allocates this overhead to products by using machine hours. Activity-based costing would likely show that with Vanguard's current procedures,

A. all of the company's products are undercosted.

B. the company's high-volume products are undercosted.

C. all of the company's products are overcosted.

D. the company's high-volume products are overcosted.

E. the company's low-volume products are overcosted.

10. Jackson manufactures products X and Y, applying overhead on the basis of labor hours. X, a low-volume product, requires a variety of complex manufacturing procedures. Y, on the other hand, is both a high-volume product and relatively simplistic in nature. What would an activity-based costing system likely disclose about products X and Y as a result of Jackson's current accounting procedures?

	X	Y
A.	Undercosted	Undercosted
B.	Undercosted	Overcosted
C.	Overcosted	Undercosted
D.	Overcosted	Overcosted
E.	Costed correctly	Costed correctly

11. Koski manufactures products J and K, applying overhead on the basis of labor hours. J, a low-volume product, requires a variety of complex manufacturing procedures. K, on the other hand, is both a high-volume product and relatively simplistic in nature. What would an activity-based costing system likely disclose about products J and K as a result of Koski's current accounting procedures?

	Undercosted	Overcosted
A.	J, K
B.		J, K
C.	J	K
D.	K	J
E.	None of the above, as both products are costed correctly.

12. Consider the following statements:

I. Product diversity creates costing problems because diverse products tend to utilize manufacturing activities in different ways.

II. Overhead costs that are not incurred at the unit level create costing problems because such costs do not vary with traditional application bases such as direct labor hours or machine hours.

III. Product diversity typically exists when a single product (e.g., a ballpoint pen) is made in different colors.

Which of the above statements is (are) true?

A. I only.

B. II only.

C. I and II.

D. I and III.

E. II and III.

13. Consumption ratios are useful in determining:

A. the existence of product-line diversity.

B. overhead that is incurred at the unit level.

C. if overhead-producing activities are being utilized effectively.

D. if overhead costs are being applied to products.

E. if overhead-producing activities are being utilized efficiently

14. Widely varying consumption ratios:

A. are reflective of product-line diversity.

B. indicate an out-of-control production environment.

C. dictate a need for traditional costing systems.

D. work against the implementation of activity-based costing.

E. create an unsolvable product-costing problem.

15. Moon Bay Manufacturing uses machine hours to apply manufacturing overhead to products. This method of costing would likely be acceptable if the company has:

A. a large proportion of unit-level activities.

B. a large proportion of unit-level activities and fairly identical consumption ratios among product lines.

C. a large proportion of unit-level activities and widely varying consumption ratios among product lines.

D. a large proportion of nonunit-level activities.

E. a large proportion of nonunit-level activities and fairly identical consumption ratios among product lines.

16. In comparison with a system that uses a single, volume-based cost driver, an activity-based costing system is preferred when a company has:

A. a large proportion of nonunit-level activities.

B. product-line diversity or a large proportion of nonunit-level activities.

C. minimal product-line diversity and a small proportion of nonunit-level activities.

D. existing variances from budgeted amounts.

E. a situation other than those noted above.

17. Consider the following factors:

I. The degree of correlation between consumption of an activity and consumption of a particular cost driver.

II. The likelihood that a particular cost driver will induce a desired behavioral effect.

III. The likelihood that a particular cost driver will cause an increase in the cost of measurement.

Which of these factors should be considered in the selection of a cost driver?

A. I only.

B. I and II.

C. I and III.

D. II and III.

E. I, II, and III.

18. Which of the following activity cost pools and activity measures likely has the lowest degree of correlation?

	Activity Cost Pool		Activity Measure
A.	Order department		Number of orders processed
B.	Sales management		Time spent by managers in each sales territory
C.	Accounts receivable processing		Number of customers
D.	Catering		Numbers of meals served
E.	Employee travel to job sites (sites are within 100-mile radius of company headquarters)		Number of employees

19. Grossman Enterprises is converting to an activity-based costing system and needs to depict the various activities in its manufacturing process along with the activities' relationships. Which of the following is a possible tool that the company can use to accomplish this task?

A. Storyboards.

B. Activity relationship charts (ARCs).

C. Decision trees.

D. Simulation games.

E. Process organizers.

20. Successful adoptions of activity-based costing typically occur when companies rely heavily on:

A. finance personnel.

B. accounting personnel.

C. manufacturing personnel.

D. office personnel.

E. multidisciplinary project teams.

21. Under a traditional costing system, which of the following costs would likely be classified as indirect with respect to the various products manufactured?

A. Plant maintenance.

B. Factory supplies.

C. Utilities.

D. Machinery depreciation.

E. All of the above would be considered indirect costs.

22. Williams Corporation is changing from a traditional costing system to an activity-based system. As a result of this action, which of the following costs would likely change from indirect to direct?

A. Direct materials.

B. Factory supplies.

C. Production setup.

D. Production setup and finished-goods inspection.

E. Production setup, finished-goods inspection, and product shipping.

23. Which of the following generally fails to signal the need for a new product-costing system?

A. Line managers do not believe reported product costs.

B. Complex products have high reported profitability despite the lack of premium prices.

C. Overhead rates are high and increasing over time.

D. Line managers suggest that seemingly profitable products be dropped.

E. Product-line profit margins are easy to explain.

24. Of the following organizations, activity-based costing cannot be used by:

A. manufacturers.

B. financial-services firms.

C. book publishers.

D. hotels.

E. none of the above, as all are able to use this costing system.

25. Which of the following statements about activity-based costing (ABC) is false?

A. ABC cannot be used by service businesses.

B. In comparison with traditional costing systems, ABC tends to use more cost pools and more cost drivers.

C. In comparison with traditional-costing systems, ABC results in less cost “averaging” of various diversified activities.

D. In comparison with traditional-costing systems, ABC results in more costs being classified as direct costs.

E. ABC tends to reduce cost distortion among product lines.

26.A hospital administrator is in the process of implementing an activity-based-costing system. which of the following tasks would not be part of this process?

A. Identification of cost pools.

B. Calculation of cost application rates.

C. Assignment of cost to services provided.

D. Identification of cost drivers.

E. None of the above, as all these tasks would be part of the process.