Ch11 Product Costing Absorption Costing Test Bank Answers

Chapter 11: Product Costing: Absorption Costing

Test Bank

Type: true-false

Title: Chapter 11 Question 01

1) Knowledge of costs = control

a. True

Heading reference: Introduction

b. False

Heading reference: Introduction

Type: true-false

Title: Chapter 11 Question 02

2) The costs of an organization are the only factor to consider when making selling price decisions.

a. True

Heading reference: Introduction, Costs and Costing

b. False

Heading reference: Introduction, Costs and Costing

Type: true-false

Title: Chapter 11 Question 03

3) Only the direct costs of providing a service or producing a product are taken into account when making decisions on the selling price to charge to customers.

a. True

Heading reference:

Introduction

Costs and Costing

Allocating fixed overhead costs to products: absorption costing

Administration overheads, marketing overheads and finance overheads: period costs

b. False

Heading reference:

Introduction

Costs and Costing

Allocating fixed overhead costs to products: absorption costing

Administration overheads, marketing overheads and finance overheads: period costs

Type: multiple choice question

Title: Chapter 11 Question 04

4) Which one of the following statements is not true?

a. At zero levels of production, total costs = fixed costs.

Heading reference:

Fixed costs

Variable costs, fixed costs and total costs

b. Variable costs are zero when no production takes place.

Heading reference:

Direct costs, variable costs and marginal costs

Variable costs, fixed costs and total costs

c. As the number of products produced decreases, the average total cost per product decreases.

Heading reference:

Fixed costs

Variable costs, fixed costs and total costs

d. The cost of salaried production workers is both a direct and a fixed cost that will not vary directly in line with production.

Heading reference: Direct costs, variable costs and marginal costs

Type: multiple choice question

Title: Chapter 11 Question 05

5) Which of the following is the odd one out?

a. Direct labour

Heading reference:

Direct costs, variable costs and marginal costs

Fixed costs

Variable costs, fixed costs and total costs

Allocating fixed overhead costs to products: absorption costing

Setting the selling price

b. Direct material

Heading reference:

Direct costs, variable costs and marginal costs

Fixed costs

Variable costs, fixed costs and total costs

Allocating fixed overhead costs to products: absorption costing

Setting the selling price

c. Factory overhead.

Heading reference:

Direct costs, variable costs and marginal costs

Fixed costs

Variable costs, fixed costs and total costs

Allocating fixed overhead costs to products: absorption costing

Setting the selling price

d. Direct expense

Heading reference:

Direct costs, variable costs and marginal costs

Fixed costs

Variable costs, fixed costs and total costs

Allocating fixed overhead costs to products: absorption costing

Setting the selling price

Type: multiple choice question

Title: Chapter 11 Question 06

6) In a book printing business, which one of the following would not be classified as a direct labour cost?

a. Proof reading

Heading reference:

Direct costs, variable costs and marginal costs

Administration overheads, marketing overheads and finance overheads: period costs

b. Editing

Heading reference:

Direct costs, variable costs and marginal costs

Administration overheads, marketing overheads and finance overheads: period costs

c. Printers’ salaries

Heading reference:

Direct costs, variable costs and marginal costs

Administration overheads, marketing overheads and finance overheads: period costs

d. Sales representatives’ salaries

Heading reference:

Direct costs, variable costs and marginal costs

Administration overheads, marketing overheads and finance overheads: period costs

Type: multiple choice question

Title: Chapter 11 Question 07

7) Direct costs are

a. The costs directly attributable to a product or service.

Heading reference: Direct costs, variable costs and marginal costs

b. The variable costs of producing a product or service.

Heading reference: Direct costs, variable costs and marginal costs

c. The marginal cost of a product or service.

Heading reference: Direct costs, variable costs and marginal costs

d. The costs incurred in producing one more unit of product or service.

Heading reference: Direct costs, variable costs and marginal costs

Type: multiple response question

Title: Chapter 11 Question 08

8) Direct costs:

Please select all that apply.

Heading reference:

Direct costs, variable costs and marginal costs

a. Can be both fixed and variable.

b. Can be traced to specific units of production.

c. Vary directly in line with production.

d. Are incurred only as a result of producing goods and services.

Type: true-false

Title: Chapter 11 Question 09

9) Direct costs are the marginal cost of production of goods and services.

a. True

Heading reference:

Direct costs, variable costs and marginal costs

b. False

Heading reference:

Direct costs, variable costs and marginal costs

Type: true-false

Title: Chapter 11 Question 10

10) All indirect costs are fixed costs.

a. True

Heading reference: Administration overheads, marketing overheads and finance overheads: period costs

b. False

Heading reference: Administration overheads, marketing overheads and finance overheads: period costs

Type: true-false

Title: Chapter 11 Question 11

11) All direct costs of production are variable costs.

a. True

Heading reference: Direct costs, variable costs and marginal costs

b. False

Heading reference: Direct costs, variable costs and marginal costs

Type: multiple response question

Title: Chapter 11 Question 12

12) Which of the following statements describe fixed costs? Please select all that apply.

Heading reference:

Direct costs, variable costs and marginal costs

Fixed costs

a. These costs remain the same for a given period of time.

b. These costs are still incurred even when production is zero.

c. These costs can form part of the direct costs of production.

d. These costs vary in line with production.

Type: multiple response question

Title: Chapter 11 Question 13

13) Which of the following statements describe variable costs? Please select all that apply.

Heading reference:

Direct costs, variable costs and marginal costs

Fixed costs

Variable costs, fixed costs and total costs

Allocating fixed overhead costs to products: absorption costing

Setting the selling price

Administration overheads, marketing overheads and finance overheads: period costs

a. These costs change in line with changes in production.

b. These costs are absorbed into products on the basis of labour or machine hours in a traditional costing system.

c. These costs are £nil when no production takes place.

d. These costs can be direct costs of production or indirect costs.

Type: multiple choice question

Title: Chapter 11 Question 14

14) Acme Manufacturing produces a standard sized radiator for central heating systems. Parts for each radiator cost £20 and direct labour of £10 is incurred in the production of each radiator along with direct expenses of £5. Annual factory overheads total up to £200,000 for the year. The directors of Acme Manufacturing expect to produce 25,000 radiators each year but due to difficulties in the manufacturing process in the financial year to 31 December 2021, only 20,000 radiators were produced. The selling price of each radiator is £55. At 31 December 2021, there were 1,000 radiators held in inventory. What is the total value of this closing inventory on an absorption costing basis?

a. £35,000

Heading reference:

Closing inventory

Setting the selling price

Absorption costing and inventory valuation

b. £43,000

Heading reference:

Closing inventory

Setting the selling price

Absorption costing and inventory valuation

c. £45,000

Heading reference:

Closing inventory

Setting the selling price

Absorption costing and inventory valuation

d. £55,000

Heading reference:

Closing inventory

Setting the selling price

Absorption costing and inventory valuation

Type: multiple choice question

Title: Chapter 11 Question 15

15) Miller Limited manufactures television sets. The marketing department is setting a selling price for each television set and has received the following details of costs from the accounting department. Variable costs per television set: £80; total departmental overheads: £600,000; total number of departmental labour hours: 25,000; number of departmental labour hours taken to produce each television set: 5. The selling price for television sets has been set at total absorption cost + 25%. What is the selling price that the marketing department should set for each television set?

a. £100

Heading reference: Absorption costing: overhead allocation

b. £130

Heading reference: Absorption costing: overhead allocation

c. £150

Heading reference: Absorption costing: overhead allocation

d. £250

Heading reference: Absorption costing: overhead allocation

Type: multiple choice question

Title: Chapter 11 Question 16

16) Omega Manufacturing has three production departments: milling, finishing, and painting. The painting department has allocated overheads of £120,000 and a normal level of activity of 10,000 labour hours per annum. The repairs and maintenance service department has allocated overheads of £100,000 and the painting department’s usage of the repairs and maintenance department is 30% of the total capacity of that department. Of the 28 employees in the firm, 7 are in the painting department. Canteen costs for Omega Manufacturing are £80,000 per annum. What is the painting department’s hourly overhead absorption rate on a labour-hour basis?

a. £12

Heading reference:

Absorption costing: overhead allocation

Allocating service department overheads

Method

b. £17

Heading reference:

Absorption costing: overhead allocation

Allocating service department overheads

Method

c. £20

Heading reference:

Absorption costing: overhead allocation

Allocating service department overheads

Method

d. £22

Heading reference:

Absorption costing: overhead allocation

Allocating service department overheads

Method

Type: multiple choice question

Title: Chapter 11 Question 17

17) Component ZVA sells for £200. This selling price is calculated by adding 25% to the total absorption cost of each component. Direct costs of production make up 60% of the total absorption cost of Component ZVA. Overhead is absorbed into each Component ZVA at the rate of £8 per labour hour. How many labour hours does each Component ZVA take to produce?

a. 7.5

Heading reference: Absorption costing: overhead allocation

b. 8

Heading reference: Absorption costing: overhead allocation

c. 10

Heading reference: Absorption costing: overhead allocation

d. 12

Heading reference: Absorption costing: overhead allocation

Type: multiple choice question

Title: Chapter 11 Question 18

18) The production department at Geneva Manufacturing incurs annual production overheads of £250,000. There are three support departments for the business, stores, set up and maintenance. The maintenance department’s resources are used as follows: 20% by production, 10% by stores, 15% by set up. The other 55% of the maintenance department’s resources are used by other departments in the business. In addition, the production department uses 40% of the resources of the stores department and 40% of the resources in the set up department. Support department overheads total up as follows: stores: £100,000, set up: £150,000, maintenance: £80,000. What are the total overheads that will be allocated to the production department?

a. £250,000

Heading reference: Allocating service department overheads, Method

b. £358,000

Heading reference: Allocating service department overheads, Method

c. £366,000

Heading reference: Allocating service department overheads, Method

d. £374,000

Heading reference: Allocating service department overheads, Method

Type: multiple choice question

Title: Chapter 11 Question 19

19) Production overheads at Zurich Manufacturing total up to £600,000. There are three support departments for the business, quality control, maintenance and warehousing. Quality control’s total overheads are £100,000 per annum. 60% of quality control’s time is spent on assessing the quality of Zurich Manufacturing’s own production. The other 40% of quality control’s time is spent on assessing the quality of production at other small businesses in the local area. Maintenance overheads total up to £144,000 per annum. 75% of the maintenance department’s time is spent on servicing production machinery, 20% on servicing warehousing’s fork lift trucks and 5% on servicing equipment used by the administration department. 80% of warehousing space is allocated to storing raw materials and finished goods for Zurich Manufacturing with the other 20% being rented out to other local businesses in the area. Warehousing costs total up to £151,200 for the year. Production department employees’ normal working hours are 40,000 each year. During the current financial year, actual hours worked were 48,000. What is the hourly overhead recovery rate (correct to two decimal places) that will be applied to products produced in the production department?

a. £19.00

Heading reference:

Allocating service department overheads

Method

Allocating fixed overhead costs to products: absorption costing

b. £22.22

Heading reference:

Allocating service department overheads

Method

Allocating fixed overhead costs to products: absorption costing

c. £22.80

Heading reference:

Allocating service department overheads

Method

Allocating fixed overhead costs to products: absorption costing

d. £24.88

Heading reference:

Allocating service department overheads

Method

Allocating fixed overhead costs to products: absorption costing

Type: multiple choice question

Title: Chapter 11 Question 20

20) Modigliani Limited manufactures large speaker cabinets. Each speaker cabinet has material costs of £50, direct labour cost of £25 and direct expenses of £15. Each speaker requires 5 hours of machining department time and 6 hours of finishing department time. Total overheads in the machining department are £300,000 per annum while the finishing department incurs total overheads of £150,000. The finishing department’s employees work 25,000 labour hours each year while the machining department machines run for 30,000 hours during the year. What is the absorption cost of each large speaker cabinet?

a. £90

Heading reference: Absorption costing: overhead allocation

b. £126

Heading reference: Absorption costing: overhead allocation

c. £140

Heading reference: Absorption costing: overhead allocation

d. £176

Heading reference: Absorption costing: overhead allocation

Type: multiple choice question

Title: Chapter 11 Question 21

21) Production overheads for a year are totalled up and then absorbed into the cost of products on a labour- or machine-hour basis. Which one of the following expenses will not be classified as a production overhead?

a. Machinery depreciation

Heading reference: Absorption costing: overhead allocation

b. Factory rent

Heading reference: Absorption costing: overhead allocation

c. Product advertising

Heading reference:

Absorption costing: overhead allocation

Administration overheads, marketing overheads and finance overheads: period costs

d. Maintenance department costs

Heading reference: Absorption costing: overhead allocation

Type: multiple choice question

Title: Chapter 11 Question 22

22) The St Godwen Wine Cooperative runs a vineyard and winery. The direct costs of producing one bottle of wine are £5.50. The expected level of production in a year is 250,000 bottles of wine. In the year ended 31 January 2022, only 200,000 bottles of wine were produced due to unfavourable weather conditions in the summer of 2021. Fixed production costs for the year total up to £450,000. At 31 January 2022, the St Godwen Wine Cooperative has 20,000 bottles of wine from the 2021 vintage in its cellars. What is the total value of this wine on an absorption costing basis?

a. £36,000

Heading reference:

Closing inventory

Setting the selling price

Absorption costing and inventory valuation

b. £110,000

Heading reference:

Closing inventory

Setting the selling price

Absorption costing and inventory valuation

c. £146,000

Heading reference:

Closing inventory

Setting the selling price

Absorption costing and inventory valuation

d. £155,000

Heading reference:

Closing inventory

Setting the selling price

Absorption costing and inventory valuation

Type: true-false

Title: Chapter 11 Question 23

23) The actual level of production is used as the basis for allocating indirect costs to products and services.

a. True

Heading reference: Allocating fixed overhead costs to products: absorption costing, Setting the selling price

b. False

Heading reference: Allocating fixed overhead costs to products: absorption costing, Setting the selling price

Type: multiple choice question

Title: Chapter 11 Question 24

24)

Line a

Line b

Line c

0

What does line a on the graph represent?

a. Variable cost

Heading reference:

Fixed costs

Variable costs, fixed costs and total costs

b. Fixed cost

Heading reference:

Fixed costs

Variable costs, fixed costs and total costs

c. Total cost

Heading reference:

Fixed costs

Variable costs, fixed costs and total costs

d. Revenue

Heading reference:

Fixed costs

Variable costs, fixed costs and total costs

Type: multiple choice question

Title: Chapter 11 Question 25

25)

Line a

Line b

Line c

0

What does line b on the graph represent?

a. Variable cost

Heading reference:

Fixed costs

Variable costs, fixed costs and total costs

b. Fixed cost

Heading reference:

Fixed costs

Variable costs, fixed costs and total costs

c. Total cost

Heading reference:

Fixed costs

Variable costs, fixed costs and total costs

d. Revenue

Heading reference:

Fixed costs

Variable costs, fixed costs and total costs

Type: multiple choice question

Title: Chapter 11 Question 26

26)

Line a

Line b

Line c

0

What does line c on the graph represent?

a. Variable cost

Heading reference:

Fixed costs

Variable costs, fixed costs and total costs

b. Fixed cost

Heading reference:

Fixed costs

Variable costs, fixed costs and total costs

c. Total cost

Heading reference:

Fixed costs

Variable costs, fixed costs and total costs

d. Revenue

Heading reference:

Fixed costs

Variable costs, fixed costs and total costs

Type: multiple choice question

Title: Chapter 11 Question 27

27)

Line a

Line b

Line c

Line d

0

What does line a on the graph represent?

a. Variable cost

Heading reference:

Fixed costs

Variable costs, fixed costs and total costs

b. Fixed cost

Heading reference:

Fixed costs

Variable costs, fixed costs and total costs

c. Total cost

Heading reference:

Fixed costs

Variable costs, fixed costs and total costs

d. Total revenue

Heading reference:

Fixed costs

Variable costs, fixed costs and total costs

Type: true-false

Title: Chapter 11 Question 28

28) The variable cost line on the total costs graph starts at zero and rises in a linear fashion in line with the production of goods and services.

a. True

Heading reference: Variable cost behaviour: graphical presentation

b. False

Heading reference: Variable cost behaviour: graphical presentation

Type: true-false

Title: Chapter 11 Question 29

29) The fixed costs line on the total costs graph is a horizontal line starting at the level of fixed costs on the y axis.

a. True

Heading reference: Variable cost behaviour: graphical presentation, Fixed costs

b. False

Heading reference: Variable cost behaviour: graphical presentation, Fixed costs

Type: multiple choice question

Title: Chapter 11 Question 30

30) Which one of the following is not a limitation of traditional absorption costing?

a. Under- or over-allocates overheads to products on machine or labour hour allocation bases.

Heading reference:

Overhead allocation: activity-based costing

Absorption costing

Activity-based costing

b. Allocates costs on the basis of labour or machine hours rather than on the basis of the number of activities consumed by each product.

Heading reference: Overhead allocation: activity-based costing

c. Assumes that costs can be determined with the required precision to enable overhead cost to be allocated to products on the basis of labour or machine hours.

The limitations and assumptions of costing

d. Recognizes that variable costs do not necessarily remain the same for all units of production.

The limitations and assumptions of costing

Type: multiple response question

Title: Chapter 11 Question 31

31) Which of the following statements do not describe absorption costing? Please select all that apply.

Heading reference: Problems with absorption costing

a. Subsidizes some products through the misallocation of overheads on a labour or machine hour basis.

b. Takes into account the unique costs attributable to each product.

c. Recognizes the complexity of modern manufacturing environments and the ways in which costs are driven by activity levels.

d. Suitable for allocating costs to individually designed and manufactured products.

Type: multiple choice question

Title: Chapter 11 Question 32

32) Which one of the following statements is not a criticism of traditional absorption costing?

a. Assumes costs are incurred in a steady, easy to allocate way.

Heading reference: Problems with absorption costing

b. Fails to recognize the demands made by particular products on an entity’s resources.

Heading reference: Problems with absorption costing

c. Able to allocate unique costs to specific units of production

Heading reference: Problems with absorption costing

d. Results in the calculation of inaccurate selling prices.

Heading reference: Problems with absorption costing

Type: multiple choice question

Title: Chapter 11 Question 33

33) Activity-based costing allocates overheads to products on the basis of:

a. Expected levels of production

Heading reference:

Problems with absorption costing

Overhead allocation: activity-based costing

How does activity-based costing work?

b. Labour or machine hours used

Heading reference:

Problems with absorption costing

Overhead allocation: activity-based costing

How does activity-based costing work?

c. Costs consumed by a product

Heading reference:

Problems with absorption costing

Overhead allocation: activity-based costing

How does activity-based costing work?

d. Services consumed on the basis of departmental usage

Heading reference:

Problems with absorption costing

Overhead allocation: activity-based costing

How does activity-based costing work?

Type: multiple response question

Title: Chapter 11 Question 34

34) Which of the following will be required to determine selling prices for products and services when using an activity based costing (ABC) system?

Please select all that apply.

Heading reference: Overhead allocation: activity-based costing

a. Costs allocated to cost pools.

b. Cost drivers for each cost pool.

c. The direct costs of products and services.

d. Total machine or labour hours for the period of operations.

Type: true-false

Title: Chapter 11 Question 35

35) In an activity based costing system, overheads are allocated to products on the basis of activities consumed by each product.

a. True

Heading reference: How does activity-based costing work?

b. False

Heading reference: How does activity-based costing work?

Type: multiple choice question

Title: Chapter 11 Question 36

36) DEF produces a component, G4H125. The company has annual set up costs for 200 set ups a year of £100,000; annual materials handling costs are £75,000 with 10,000 materials handling operations taking place each year; the company deals with 4,000 orders with suppliers each year at a total cost of £80,000. Component G4H125 accounts for 80 set ups each year, 5,000 materials handling operations and 625 supplier orders. Total annual machine hours are 30,000 and component G4H125 uses 6 machine hours for each component. Total annual labour hours are 15,000 and component G4H125 uses 5 labour hours per component. 2,500 G4H125 components are produced each year. What would be the overhead to allocate to each G4H125 component using an activity-based costing approach to overhead allocation?

a. £36

Heading reference:

Overhead allocation: activity-based costing

How does activity-based costing work?

Absorption costing

Activity-based costing

b. £51

Heading reference:

Overhead allocation: activity-based costing

How does activity-based costing work?

Absorption costing

Activity-based costing

c. £85

Heading reference:

Overhead allocation: activity-based costing

How does activity-based costing work?

Absorption costing

Activity-based costing

d. £102

Heading reference:

Overhead allocation: activity-based costing

How does activity-based costing work?

Absorption costing

Activity-based costing

Type: multiple choice question

Title: Chapter 11 Question 37

37) KLM produces a component, N1P442. The company has total annual overheads of £660,000. These are made up of quality inspection costs of £120,000, design costs of £200,000, materials handling costs of £160,000 and set up costs of £180,000. During the financial year there are 3,600 set ups, 6,000 quality inspections, 6,400 materials handling operations and 2,500 design hours. Component N1P442 accounts for 2,400 set ups each year, 2,000 materials handling operations and 1,500 quality inspections. 500 design hours are allocated to the N1P442 component during the year. Total annual machine hours are 50,000 and component N1P442 uses 30 machine hours for each component. Total annual labour hours are 120,000 and component N1P442 uses 64 labour hours per component. 600 N1P442 components are produced each year. What would be the overhead to allocate to each N1P442 component using an activity-based costing approach to overhead allocation?

a. £352

Heading reference:

Overhead allocation: activity-based costing

How does activity-based costing work?

Absorption costing

Activity-based costing

b. £396

Heading reference:

Overhead allocation: activity-based costing

How does activity-based costing work?

Absorption costing

Activity-based costing

c. £400

Heading reference:

Overhead allocation: activity-based costing

How does activity-based costing work?

Absorption costing

Activity-based costing

d. £1,100

Heading reference:

Overhead allocation: activity-based costing

How does activity-based costing work?

Absorption costing

Activity-based costing

Type: true-false

Title: Chapter 11 Question 38

38) Fixed costs will always remain fixed at the same level over a given time period and over all levels of production.

a. True

Heading reference: The limitations and assumptions of costing, Assumption 1: fixed costs are fixed

b. False

Heading reference: The limitations and assumptions of costing, Assumption 1: fixed costs are fixed

Type: true-false

Title: Chapter 11 Question 39

39) Variable costs remain the same for all units of production.

a. True

The limitations and assumptions of costing

b. False

The limitations and assumptions of costing

Type: true-false

Title: Chapter 11 Question 40

40) Costing relies heavily on estimation and the costs allocated to a product or service is a best guess, not an absolutely correct figure.

a. True

Heading reference: Assumption 3: costs can be determined with the required precision

b. False

Heading reference: Assumption 3: costs can be determined with the required precision

Type: multiple choice question

Title: Chapter 11 Question 41

41) Component QXP sells for £300. This selling price is calculated by adding 20% to the total absorption cost of each component. Overhead is absorbed into each unit of QXP at the rate of £8.75 per direct labour hour. Each unit of QXP takes 10 hours of direct labour to produce. What is the direct cost of each unit of component QXP?

a. £87.50

Heading reference: Absorption costing: overhead allocation

Direct costs, variable costs and marginal costs

b. £152.50

Heading reference: Absorption costing: overhead allocation

Direct costs, variable costs and marginal costs

c. £162.50

Heading reference: Absorption costing: overhead allocation

Direct costs, variable costs and marginal costs

d. £212.50

Heading reference: Absorption costing: overhead allocation

Direct costs, variable costs and marginal costs

Type: multiple response question

Title: Chapter 11 Question 42

42) Which of the following are assumptions of costing? Please select all that apply.

Heading reference: The limitations and assumptions of costing

a. Costs can be determined with the required precision

b. At a zero level of production, fixed costs = total costs

c. Fixed costs are fixed

d. Variable costs remain the same for all units of production

Type: multiple choice question

Title: Chapter 11 Question 43

43) Component TDQ sells for £325. This selling price is calculated by adding 30% to the total absorption cost of each component. Direct costs of production of each component are £160. Total overheads for the year are £500,000 and these are absorbed into products on a labour hour basis. During the year to 31 December 2021, 20,000 labour hours were worked but this is 20% lower than the expected level of labour hours that will be worked each year. How many labour hours does each Component TDQ take to produce?

a. 3.60

Heading reference: Absorption costing: overhead allocation

Direct costs, variable costs and marginal costs

b. 4.50

Heading reference: Absorption costing: overhead allocation

Direct costs, variable costs and marginal costs

c. 6.60

Heading reference: Absorption costing: overhead allocation

Direct costs, variable costs and marginal costs

d. 8.25

Heading reference: Absorption costing: overhead allocation

Direct costs, variable costs and marginal costs