Ch5 | Activity-Based Mgmt – Complete Test Bank

View Product website:

https://selldocx.com/docx/ch5-activity-based-mgmt-complete-test-bank-1545

Horngren's Cost Accounting: A Managerial Emphasis, 17e, Global Edition by Datar/Rajan

Chapter 5 Activity-Based Costing and Activity-Based Management

Objective 5.1

1) Which of the following statements is true of a peanut-butter costing system?

A) A peanut-butter costing system typically has more-homogeneous indirect cost pools.

B) A peanut-butter costing system broadly averages or spreads the cost of resources uniformly to cost objects.

C) A peanut-butter costing system assumes that all costs are variable.

D) In a peanut-butter costing system, costs of activities are used to assign costs to other cost objects such as products or services based on the activities the products or services consume.

Diff: 2

Objective: 1

AACSB: Analytical thinking

2) Overcosting a particular product may result in:

A) pricing the product too high

B) pricing the product too low

C) operating efficiencies

D) understating total product costs

Diff: 2

Objective: 1

AACSB: Analytical thinking

3) For a company with diverse products, undercosting overhead of a product will lead to product-cross -subsidization which means that:

A) direct labor costs of the product are misallocated

B) direct material costs of the product are misallocated

C) indirect costs of another product are misallocated

D) direct costs of another product are misallocated

Diff: 2

Objective: 1

AACSB: Analytical thinking

4) Aqua Company produces two products–Alpha and Beta. Alpha has a high market share and is produced in bulk. Production of Beta is based on customer orders and is custom designed. Also, 55% of Beta's cost is shared between design and setup costs, while Alpha's major portions of costs are direct costs. Alpha is using a single cost pool to allocate indirect costs. Which of the following statements is true of Aqua?

A) Aqua will over cost Beta's direct costs as it is using a single cost pool to allocate indirect costs.

B) Aqua will under cost Alpha's indirect costs because alpha has high direct costs.

C) Aqua will over cost Alpha's indirect costs as it is using a single cost pool to allocate indirect costs.

D) Aqua will over cost Beta's indirect costs because beta has high indirect costs.

Diff: 2

Objective: 1

AACSB: Analytical thinking

5) Product-cost cross-subsidization means that:

A) when one product is overcosted, it results in more than one other product being overcosted

B) when a company under costs more than one of its products, it will over cost more than one of its other products

C) when a company under costs one of its products, it will over cost at least one of its other products

D) when one product is overcosted it results in all other products being overcosted

Diff: 2

Objective: 1

AACSB: Analytical thinking

6) Which of the following has accelerated need for refined cost systems?

A) global monopolies

B) rising prices

C) intense competition

D) a shift toward increased direct costs

Diff: 2

Objective: 1

AACSB: Analytical thinking

7) Uniformly assigning the costs of resources to cost objects when those resources are actually used in a nonuniform way is called activity based costing.

Diff: 1

Objective: 1

AACSB: Analytical thinking

8) Product-cost cross-subsidization is very common when costs are uniformly spread across various products.

Diff: 2

Objective: 1

AACSB: Analytical thinking

9) Companies that over cost products risk becoming less effective on pricing and losing market share when competition utilizes more accurate cost systems.

Diff: 1

Objective: 1

AACSB: Analytical thinking

10) 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.

Diff: 2

Objective: 1

AACSB: Analytical thinking

11) As product diversity and indirect costs increase, it is usually best to switch away from a broad averaging system to an activity-based cost system.

Diff: 1

Objective: 1

AACSB: Analytical thinking

12) The risk of peanut-butter costing rises when broad averages are used across multiple products without managers considering the true amounts of resources consumed in the making of each product.

Diff: 2

Objective: 1

AACSB: Analytical thinking

13) The risk of product-cost cross-subsidization is high when managers of a company with a multi-product offering, carefully study and accurately estimate the amount of resources each product consumes.

Diff: 2

Objective: 1

AACSB: Analytical thinking

14) Explain how a top-selling product may actually result in losses for the company.

Diff: 2

Objective: 1

AACSB: Analytical thinking

Objective 5.2

1) Refining a cost system involves which of the following?

A) classifying as many costs as indirect costs as is feasible

B) creating as many cost pools as possible to capture all costs

C) identifying the activities involved in a process and understanding how those activities consume resources

D) seeking an easier and more cost effective way to calculate average costs

Diff: 1

Objective: 2

AACSB: Analytical thinking

2) Which of the following is true of refinement of a costing system?

A) While refining a costing system, companies should identify as many indirect costs as is economically feasible.

B) A homogeneous cost pool will use multiple cost drivers to allocate costs.

C) It reduces the use of broad averages for assigning the cost of resources to cost objects.

D) It is likely to yield the most decision-making benefits when direct costs are a high percentage of total costs.

Diff: 2

Objective: 2

AACSB: Analytical thinking

3) Which of the following is a reason that has accelerated the demand for refinements to the costing system?

A) The declining demand for customized products has led managers to decrease the variety of products and services their companies offer.

B) The use of product and process technology has led to an increase in indirect costs and a decrease in direct costs.

C) The increased of automated processes has led to the increase in direct manufacturing cost leading to a decrease in break-even point.

D) The increasing competition in product markets has led to an increase in contribution margin resulting in a decrease of break-even point.

Diff: 3

Objective: 2

AACSB: Analytical thinking

4) Demand for refinements to the costing system has accelerated due to:

A) increase in direct costs

B) decrease in product diversity

C) decrease in indirect costs

D) competition in product markets

Diff: 1

Objective: 2

AACSB: Analytical thinking

5) Which of the following is NOT a reason for an increased need to refine cost accounting systems?

A) Increased product diversity in many firms.

B) Broad use of advanced or complex technology, including hardware, software, and robotics to aid the execution of processes.

C) Fierce competition from companies located all over the globe.

D) Increase cost of gathering and validating data.

Diff: 1

Objective: 2

AACSB: Application of knowledge

6) Johnson Superior Products Inc. produces hospital equipment and the setup requirements vary from product to product. Johnson produces its products based on customer orders and uses ABC costing. In one of its indirect cost pools, setup costs and distribution costs are pooled together. Costs in this pool are allocated using number of customer orders for the easiness of costing operations. Based on the information provided, which of the following arguments is valid?

A) Johnson has clearly failed to identify as many direct costs as is economically feasible.

B) All costs in a homogeneous cost pool have the same or a similar cause-and-effect relationship with the single cost driver that is used as the cost-allocation base for Johnson.

C) Johnson has unnecessarily wasted resources by classifying setup and distribution costs as they could have been considered as direct costs.

D) Johnson has failed to use the correct cost driver as the cost-allocation base for setup costs.

Diff: 1

Objective: 2

AACSB: Application of knowledge

7) Increased used of automation, computer integrated manufacturing, and utilization of robots have led to an increase in indirect costs relative to direct costs.

Diff: 2

Objective: 2

AACSB: Analytical thinking

8) Modern manufacturing practices have helped reduce overhead costs relative to direct costs as the reliance on support resources such as scheduling, design, and engineering has diminished.

Diff: 1

Objective: 2

AACSB: Analytical thinking

9) Indirect labor and distribution costs would most likely be in the same activity-cost pool.

Diff: 2

Objective: 2

AACSB: Analytical thinking

10) Managers should look for evidence of cause-and-effect when choosing a cost driver with the driver being the cause and the effect being the cost incurred.

Diff: 1

Objective: 2

AACSB: Analytical thinking

11) Identification of a cost-allocation base is not a critical element when using a strategy that will refine a costing system.

Diff: 1

Objective: 2

AACSB: Analytical thinking

12) 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?

Diff: 2

Objective: 2

AACSB: Analytical thinking

13) What are the implications of refining a company's cost system as a means to accomplish the goal of maximizing customer profitability?

Diff: 2

Objective: 2

AACSB: Analytical thinking

Objective 5.3

1) ABC systems create:

A) one large cost pool

B) homogeneous activity-related cost pools

C) activity-cost pools with a broad focus

D) activity-cost pools containing many direct costs

Diff: 1

Objective: 3

AACSB: Analytical thinking

2) Activity based costing system differs from traditional costing systems in the treatment of:

A) direct labor costs

B) direct material costs

C) prime costs

D) indirect costs

Diff: 1

Objective: 3

AACSB: Analytical thinking

3) The fundamental cost objects of ABC are:

A) activities

B) cost drivers

C) products

D) services

Diff: 2

Objective: 3

AACSB: Analytical thinking

4) Which of the following statements is true of activity-based costing?

A) In activity-based costing, direct labor-hours is always the best allocation base to allocate all non-manufacturing indirect costs.

B) Activity based costing is more suited to companies with high product diversity than companies with single product line.

C) Activity based costing broadly averages or spreads the cost of resources uniformly to cost objects such as products or services.

D) The main advantage of activity-based costing over peanut-butter costing is the accurate distribution of all direct costs to the products.

Diff: 2

Objective: 3

AACSB: Analytical thinking

5) A single indirect-cost rate distorts product costs because:

A) there is an assumption that all support activities affect all products in a uniform way

B) it recognizes specific activities that are required to produce a product

C) competitive pricing is ignored

D) it assumes all costs are product costs

Diff: 2

Objective: 3

AACSB: Analytical thinking

6) Extracts from cost information of Hebar Corp.:

Assuming that setup-hours is considered a more effective cost drive for allocating setup costs than direct labor-hours. Which of the following statements is true of Hebar's setup costs under traditional costing?

A) L3 pack is undercosted by $6,000

B) L7 pack is undercosted by $5,900

C) L3 pack is overcosted by $6,000

D) L7 pack is overcosted by $6,000

Diff: 2

Objective: 3

AACSB: Application of knowledge

7) Which of the following is true with activity based cost accounting?

A) Activity-based costing ignores the allocation of 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) The focus is on activities that account for a sizable fraction of indirect costs .

D) Chances of product-cost cross-subsidization are higher in activity-based costing compared to traditional costing systems.

Diff: 2

Objective: 3

AACSB: Analytical thinking

8) Activity-based costing (ABC) can eliminate cost distortions because ABC systems:

A) establish a cause-and-effect relationship with the activities performed

B) use single cost pool for all overhead costs, thereby enabling simplicity

C) use a broad average to allocate all overhead costs

D) never consider interactions between different departments in assigning support costs

Diff: 2

Objective: 3

AACSB: Analytical thinking

9) When "available time" (i.e., setup-hours) is used to calculate a cost of a resource and to allocate costs to cost objects , the system is called:

A) job costing

B) process costing

C) hybrid costing

D) time-driven activity based costing

Diff: 2

Objective: 3

AACSB: Analytical thinking

10) Extreme Manufacturing Company provides the following ABC costing information:

Activities Total Costs Activity-cost drivers

Account inquiry $390,000 13,000 hours

Account billing $210,000 6,000,000 lines

Account verification accounts $75,000 40,000 accounts

Correspondence letters $36,000 6,000 letters

Total costs $711,000

The above activities are used by Departments A and B as follows:

Department A Department B

Account inquiry hours 2,800 hours 4,300 hours

Account billing lines 900,000 lines 750,000 lines

Account verification accounts 12,000 accounts 10,000 accounts

Correspondence letters 1,000 letters 1,400 letters

How much of the account inquiry cost will be assigned to Department A?

A) $84,000

B) $390,000

C) $195,000

D) $129,000

Diff: 2

Objective: 3

AACSB: Application of knowledge

11) Extreme Manufacturing Company provides the following ABC costing information:

Activities Total Costs Activity-cost drivers

Account inquiry $130,000 13,000 hours

Account billing $300,000 6,000,000 lines

Account verification accounts $99,000 40,000 accounts

Correspondence letters $23,000 4,000 letters

Total costs $552,000

The above activities are used by Departments A and B as follows:

Department A Department B

Account inquiry hours 2,000 hours 3,500 hours

Account billing lines 900,000 lines 750,000 lines

Account verification accounts 13,000 accounts 11,000 accounts

Correspondence letters 1,100 letters 1,500 letters

How much of the account billing cost will be assigned to Department B?

A) $300,000

B) $150,000

C) $37,500

D) $45,000

Diff: 2

Objective: 3

AACSB: Application of knowledge

12) Extreme Manufacturing Company provides the following ABC costing information:

Activities Total Costs Activity-cost drivers

Account inquiry $140,000 14,000 hours

Account billing $120,000 6,000,000 lines

Account verification accounts $198,000 80,000 accounts

Correspondence letters $33,000 6,000 letters

Total costs $491,000

The above activities are used by Departments A and B as follows:

Department A Department B

Account inquiry hours 2,700 hours 4,200 hours

Account billing lines 800,000 lines 650,000 lines

Account verification accounts 8,000 accounts 6,000 accounts

Correspondence letters 1,200 letters 1,600 letters

How much of account verification costs will be assigned to Department A?

A) $14,850

B) $19,800

C) $198,000

D) $99,000

Diff: 2

Objective: 3

AACSB: Analytical thinking

13) Extreme Manufacturing Company provides the following ABC costing information:

Activities Total Costs Activity-cost drivers

Account inquiry $440,000 11,000 hours

Account billing $220,000 4,000,000 lines

Account verification accounts $198,000 80,000 accounts

Correspondence letters $56,250 9,000 letters

Total costs $914,250

The above activities are used by Departments A and B as follows:

Department A Department B

Account inquiry hours 2,600 hours 4,100 hours

Account billing lines 600,000 lines 450,000 lines

Account verification accounts 14,000 accounts 12,000 accounts

Correspondence letters 1,700 letters 2,100 letters

How much of correspondence costs will be assigned to Department A?

A) $56,250

B) $87,500

C) $10,625

D) $10,900

Diff: 2

Objective: 3

AACSB: Application of knowledge

14) Extreme Manufacturing Company provides the following ABC costing information:

Activities Total Costs Activity-cost drivers

Account inquiry $260,000 13,000 hours

Account billing $200,000 4,000,000 lines

Account verification accounts $142,500 60,000 accounts

Correspondence letters $56,250 9,000 letters

Total costs $658,750

The above activities are used by Departments A and B as follows:

Department A Department B

Account inquiry hours 2,400 hours 3,900 hours

Account billing lines 800,000 lines 650,000 lines

Account verification accounts 12,000 accounts 10,000 accounts

Correspondence letters 1,600 letters 2,000 letters

How much of the total costs will be assigned to Department A? (Do not round intermediary calculations and round final calculations to the nearest whole dollar.)

A) $126,500

B) $156,500

C) $166,800

D) $121,750

Diff: 3

Objective: 3

AACSB: Application of knowledge

15) Extreme Manufacturing Company provides the following ABC costing information:

Activities Total Costs Activity-cost drivers

Account inquiry $550,000 11,000 hours

Account billing $125,000 5,000,000 lines

Account verification accounts $103,750 50,000 accounts

Correspondence letters $32,500 5,000 letters

Total costs $811,250

The above activities are used by Departments A and B as follows:

Department A Department B

Account inquiry hours 2,800 hours 4,300 hours

Account billing lines 800,000 lines 650,000 lines

Account verification accounts 10,000 accounts 8,000 accounts

Correspondence letters 1,700 letters 2,100 letters

How much of the total costs will be assigned to Department B? (Do not round intermediary calculations and round final calculations to the nearest whole dollar.)

A) $313,607.5

B) $267,200

C) $261,500

D) $273,550

Diff: 3

Objective: 3

AACSB: Application of knowledge

16) 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

Diff: 2

Objective: 3

AACSB: Application of knowledge

17) Activity-based costing is most likely to yield benefits for companies:

A) with complex product design processes that vary significantly from product to product

B) with operations that remain fairly consistent across product lines

C) in a monopolistic market

D) having nominal percentage of indirect costs

Diff: 1

Objective: 3

AACSB: Analytical thinking

18) Which of the following statements is true of ABC systems?

A) ABC systems are time-driven cost systems.

B) ABC systems classify some direct costs as indirect costs and some indirect costs as direct costs.

C) ABC systems provide valuable information to managers beyond accurate product costs.

D) ABC systems assume all costs are variable costs.

Diff: 2

Objective: 2

AACSB: Analytical thinking

19) Columbus Company provides the following ABC costing information:

Activities Total Costs Activity-cost drivers

Labor $410,000 10,000 hours

Gas $6,000 3,000 gallons

Invoices $40,000 2,500 invoices

Total costs $456,000

The above activities used by their three departments are:

Lawn Department Bush Department Plowing Department

Labor 3,200 hours 1,400 hours 5,400 hours

Gas 1,700 gallons 900 gallons 400 gallons

Invoices 1,100 invoices 400 invoices 1,000 invoices

How much of the labor cost will be assigned to the Bush Department?

A) $131,200

B) $57,400

C) $221,400

D) $63,840

Diff: 2

Objective: 3

AACSB: Analytical thinking

20) Columbus Company provides the following ABC costing information:

Activities Total Costs Activity-cost drivers

Labor $368,000 8,000 hours

Gas $72,000 6,000 gallons

Invoices $130,000 6,500 invoices

Total costs $570,000

The above activities used by their three departments are:

Lawn Department Bush Department Plowing Department

Labor 2,600 hours 1,300 hours 4,100 hours

Gas 1,700 gallons 800 gallons 3,500 gallons

Invoices 1,100 invoices 300 invoices 5,100 invoices

If labor hours are used to allocate the non-labor, overhead costs, what is the overhead allocation rate? (Round the final calculation to the nearest cent.)

A) $71.25 per hour

B) $27.80 per hour

C) $46.00 per hour

D) $25.25 per hour

Diff: 2

Objective: 3

AACSB: Application of knowledge

21) Columbus Company provides the following ABC costing information:

Activities Total Costs Activity-cost drivers

Labor $410,000 10,000 hours

Gas $40,000 4,000 gallons

Invoices $56,000 3,500 invoices

Total costs $506,000

The above activities used by their three departments are:

Lawn Department Bush Department Plowing Department

Labor 2,600 hours 1,500 hours 5,900 hours

Gas 1,900 gallons 1,000 gallons 1,100 gallons

Invoices 1,100 invoices 100 invoices 2,300 invoices

How much of invoice cost will be assigned to the Bush Department?

A) $1,600

B) $36,800

C) $17,600

D) $56,000

Diff: 2

Objective: 3

AACSB: Application of knowledge

22) Columbus Company provides the following ABC costing information:

Activities Total Costs Activity-cost drivers

Labor $440,000 10,000 hours

Gas $72,000 6,000 gallons

Invoices $110,000 5,500 invoices

Total costs $622,000

The above activities used by their three departments are:

Lawn Department Bush Department Plowing Department

Labor 2,600 hours 1,400 hours 6,000 hours

Gas 1,800 gallons 900 gallons 3,300 gallons

Invoices 1,600 invoices 200 invoices 3,700 invoices

How much of the gas cost will be assigned to the Lawn Department?

A) $10,800

B) $21,600

C) $39,600

D) $72,000

Diff: 2

Objective: 3

AACSB: Application of knowledge

23) Columbus Company provides the following ABC costing information:

Activities Total Costs Activity-cost drivers

Labor $450,000 10,000 hours

Gas $30,000 5,000 gallons

Invoices $130,000 6,500 invoices

Total costs $610,000

The above activities used by their three departments are:

Lawn Department Bush Department Plowing Department

Labor 2,800 hours 1,400 hours 5,800 hours

Gas 1,900 gallons 900 gallons 2,200 gallons

Invoices 1,300 invoices 200 invoices 5,000 invoices

How much of the total cost will be assigned to the Plowing Department?

A) $610,000

B) $374,200

C) $203,333

D) $163,400

Diff: 3

Objective: 3

AACSB: Application of knowledge

24) Columbus Company provides the following ABC costing information:

Activities Total Costs Activity-cost drivers

Labor $450,000 10,000 hours

Gas $24,000 3,000 gallons

Invoices $180,000 7,500 invoices

Total costs $654,000

The above activities used by their three departments are:

Lawn Department Bush Department Plowing Department

Labor 3,000 hours 1,200 hours 5,800 hours

Gas 1,800 gallons 900 gallons 300 gallons

Invoices 1,300 invoices 200 invoices 6,000 invoices

How much of the total costs will be assigned to the Lawn Department?

A) $194,605

B) $654,000

C) $180,600

D) $218,000

Diff: 3

Objective: 3

AACSB: Application of knowledge

25) Milan Manufacturing Company has identified three cost pools to allocate overhead costs. The following estimates are provided for the coming year:

Cost Pool Overhead Costs Cost driver Activity level

Supervision of direct labor $794,000 Direct labor-hours 920,000

Machine maintenance $140,000 Machine-hours 1,040,000

Facility rent $216,000 Square feet of area 130,000

Total overhead costs $1,150,000

The accounting records show the Mossman Job consumed the following resources:

Cost driver Actual level

Direct labor-hours 230

Machine-hours 1,547

Square feet of area 50

If direct labor-hours are considered the only overhead cost driver, what is the single cost driver rate for Milan?

A) $0.80 per direct labor-hour

B) $0.86 per direct labor-hour

C) $1.25 per direct labor-hour

D) $1.16 per direct labor-hour

Diff: 2

Objective: 3

AACSB: Application of knowledge

26) Milan Company has identified three cost pools to allocate overhead costs. The following estimates are provided for the coming year:

Cost Pool Overhead Costs Cost driver Activity level

Supervision of direct labor $597,000 Direct labor-hours 910,000

Machine maintenance $100,000 Machine-hours 840,000

Facility rent $213,000 Square feet of area 140,000

Total overhead costs $910,000

The accounting records show the Mossman Job consumed the following resources:

Cost driver Actual level

Direct labor-hours 270

Machine-hours 1,681.68

Square feet of area 50

Under activity-based costing, what is the amount of machine maintenance costs allocated to the Mossman Job? (Do not round any intermediary calculations.)

A) $1,821.82

B) $200.20

C) $1,681.68

D) $210.45

Diff: 2

Objective: 3

AACSB: Application of knowledge

27) Velshi Printers has contracts to complete weekly supplements required by forty-six customers. For the year 2020, manufacturing overhead cost estimates total $1,920,000 for an annual production capacity of 16 million pages.

For 2020 Velshi Printers has decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:

Cost pool Manufacturing overhead costs Activity level

Design changes $160,000 500 design changes

Setups 1,660,000 6,000 setups

Inspections 100,000 8,000 inspections

Total manufacturing overhead costs $1,920,000

During 2020, two customers, Money Managers and Hospital Systems, are expected to use the following printing services:

Activity Money Managers Hospital Systems

Pages 70,000 86,000

Design changes 15 0

Setups 20 10

Inspections 25 33

What is the cost driver rate if manufacturing overhead costs are considered one large cost pool and are assigned based on 16 million pages of production capacity?

A) $0.01 per page

B) $0.12 per page

C) $0.11 per page

D) $0.10 per page

Diff: 2

Objective: 3

AACSB: Application of knowledge

28) Velshi Printers has contracts to complete weekly supplements required by forty-six customers. For the year 2020, manufacturing overhead cost estimates total $1,680,000 for an annual production capacity of 12 million pages.

For 2020 Velshi Printers has decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:

Cost pool Manufacturing overhead costs Activity level

Design changes $120,000 500 design changes

Setups 1,490,000 5,000 setups

Inspections 70,000 9,000 inspections

Total manufacturing overhead costs $1,680,000

During 2020, two customers, Money Managers and Hospital Systems, are expected to use the following printing services:

Activity Money Managers Hospital Systems

Pages 90,000 106,000

Design changes 15 0

Setups 18 8

Inspections 27 35

Using pages printed as the only overhead cost driver, what is the manufacturing overhead cost estimate for Money Managers during 2020?

A) $14,840

B) $11,700

C) $12,600

D) $9,174

Diff: 2

Objective: 3

AACSB: Application of knowledge

29) Xylon Corp. has contracts to complete weekly supplements required by forty-six customers. For the year 2020, manufacturing overhead cost estimates total $930,000 for an annual production capacity of 10 million pages.

For 2020, Xylon decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:

Cost pool Manufacturing overhead costs Activity level

Design changes $160,000 500 design changes

Setups 602,000 3,000 setups

Inspections 168,000 14,000 inspections

Total manufacturing overhead costs $930,000

During 2020, two customers, Money Managers and Hospital Systems, are expected to use the following printing services:

Activity Money Managers Hospital Systems

Pages 50,000 66,000

Design changes 14 6

Setups 20 10

Inspections 26 64

If manufacturing overhead costs are considered one large cost pool and are assigned based on 10 million pages of production capacity, what is the cost driver rate? (Round the final answer to three decimal places.)

A) $0.082 per page

B) $0.033 per page

C) $0.060 per page

D) $0.093 per page

Diff: 2

Objective: 3

AACSB: Application of knowledge

30) Xylon Corp. has contracts to complete weekly supplements required by forty-six customers. For the year 2020, manufacturing overhead cost estimates total $910,000 for an annual production capacity of 10 million pages.

For 2020, Xylon decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:

Cost pool Manufacturing overhead costs Activity level

Design changes $170,000 200 design changes

Setups 590,000 6,000 setups

Inspections 150,000 15,000 inspections

Total manufacturing overhead costs $910,000

During 2020, two customers, Money Managers and Hospital Systems, are expected to use the following printing services:

Activity Money Managers Hospital Systems

Pages 70,000 86,000

Design changes 13 5

Setups 16 6

Inspections 27 65

Under ABC costing, what is the inspection cost allocated to Hospital Systems?

A) $650

B) $150

C) $270

D) $1,573

Diff: 2

Objective: 3

AACSB: Application of knowledge

31) Only indirect costs are included in the cost pools of ABC.

Diff: 2

Objective: 3

AACSB: Analytical thinking

32) When allocating the total indirect cost pool to cost pools such as setup costs including depreciation and maintenance costs of setup equipment, wages of setup employees, and allocation of supervisors is called a second-stage allocation.

Diff: 1

Objective: 3

AACSB: Analytical thinking

33) In activity based costing systems, limiting cost-allocation bases to only units of output strengthens the cause-and-effect relationship between the cost-allocation base and the costs in a cost pool.

Diff: 2

Objective: 3

AACSB: Analytical thinking

34) Activity-based costing attempts to identify the most relevant cause-and-effect relationship for each activity pool without restricting the cost driver to only units of output or variables related to units of output.

Diff: 2

Objective: 3

AACSB: Analytical thinking

35) ABC systems identify activities only in the product function of the value chain as that is where product costs incur.

Diff: 2

Objective: 3

AACSB: Analytical thinking

36) Explain how activity-based costing systems can provide more accurate product costs than traditional cost systems.

Unit-level drivers in traditional cost systems distort product costs because, effectively, these systems assume that all indirect activities affect all products. Thus, these systems assign each unit of product an average cost that fails to recognize the specific activities that are required to produce that product.

Activity-based costing differs from traditional costing systems in that products are not cross-subsidized by support costs being shared by everyone. Activity-based costing is more likely to result in major differences from traditional costing systems if the firm manufactures multiple products rather than only one product.

Diff: 2

Objective: 3

AACSB: Analytical thinking

Objective 5.4

1) ________ is an example of an output unit-level cost in the cost hierarchy.

A) Factory rent expense

B) Building security costs

C) Top management compensation costs

D) Machine depreciation

Diff: 1

Objective: 4

AACSB: Analytical thinking

2) For a company which produce its products in batches, the CEO's salary is a(n) ________ cost.

A) batch-level

B) output unit-level

C) facility-sustaining

D) product-sustaining

Diff: 2

Objective: 4

AACSB: Analytical thinking

3) Top management compensation cost is an example of ________ in the cost hierarchy.

A) unit-level costs

B) batch-level costs

C) product-sustaining costs

D) facility-sustaining costs

Diff: 1

Objective: 4

AACSB: Analytical thinking

4) ________ costs support the organization as a whole.

A) Unit-level

B) Batch-level

C) Product-sustaining

D) Facility-sustaining

Diff: 1

Objective: 4

AACSB: Analytical thinking

5) It is usually difficult to find good cost driver (cause-and-effect relationship) between ________ and a cost allocation base.

A) unit-level costs

B) batch-level costs

C) product-sustaining costs

D) facility-sustaining costs

Diff: 1

Objective: 4

AACSB: Analytical thinking

6) Facility-sustaining costs are the costs of activities:

A) undertaken to support individual products or services regardless of the number of units or batches in which the units are produced

B) related to a group of units of a product or services, rather than each individual unit of product or service

C) that managers cannot trace to individual products or services but that support the organization as a whole

D) performed on each individual unit of a product or service such as the cost of energy, machine depreciation, and repair

Diff: 2

Objective: 4

AACSB: Analytical thinking

7) ________ are the costs of activities undertaken to support individual products or services regardless of the number of units or batches in which the units are produced.

A) Unit-level costs

B) Batch-level costs

C) Product-sustaining costs

D) Facility-sustaining costs

Diff: 1

Objective: 4

AACSB: Analytical thinking

8) Advanced Technology Products produces 10 different fasteners. Each time a type of fastener is produced, the equipment must be stopped and items such as filters and drill bits must be changed, oil must be added to the equipment and some parts need lubrication. This work must be done before the products can be produced; the costs related to this activity would be part of which cost pool?

A) output-level costs

B) batch-level costs

C) product-sustaining costs

D) service-sustaining costs

Diff: 2

Objective: 4

AACSB: Analytical thinking

9) With traditional costing systems, products manufactured in small batches and in small annual volumes may be ________ because batch-related and product-sustaining costs are assigned using unit-related drivers.

A) overcosted

B) fairly costed

C) undercosted

D) ignored

Diff: 2

Objective: 4

AACSB: Analytical thinking

10) Which of the following is the most important reason to classify costs into a four-level hierarchy?

A) The company produces one product but the process is very complex.

B) The company has four departments and the overhead of each department is allocated using a different cost driver.

C) The company has several cost pools and each relates to a different cost allocation base.

D) The company's manufacturing process is very labor intensive.

Diff: 2

Objective: 4

AACSB: Analytical thinking

11) Which of the following ordering of the levels best depicts the cost hierarchy within an ABC system?

A) batch-level, output unit-level, product-sustaining level, and facility-sustaining level

B) batch-level, output unit-level, facility-sustaining levels, product-sustaining levels

C) output unit-level, batch-level, product-sustaining level, and facility-sustaining level

D) facility-sustaining level, output unit-level, batch-level, product-sustaining level

Diff: 2

Objective: 4

AACSB: Application of knowledge

12) Service-sustaining costs are the costs of activities that managers cannot trace to individual services but that support the organization as a whole.

Diff: 2

Objective: 4

AACSB: Analytical thinking

13) Quality-inspection costs is an example of batch-level costs.

Diff: 1

Objective: 4

AACSB: Analytical thinking

14) An effective activity-based cost system always ignores facility-sustaining cost drivers.

Diff: 2

Objective: 4

AACSB: Analytical thinking

15) Over time, the cost of design activities depend largely on the time designers spend on designing and modifying the product not on the number of products made or the number of batches produced.

Diff: 1

Objective: 4

AACSB: Analytical thinking

16) A common cost hierarchy in an ABC system is the four-level structure including: output unit—level costs, batch-level costs, product-sustaining costs, and facility-sustaining costs.

Diff: 1

Objective: 4

AACSB: Analytical thinking

17) Is it advisable to ignore facility-sustaining cost drivers during product costing?

Diff: 2

Objective: 4

AACSB: Analytical thinking

18) What are the four parts of the cost hierarchy? Briefly explain each part, and contrast this cost hierarchy to the fixed-variable dichotomy?

Diff: 2

Objective: 4

AACSB: Analytical thinking

Objective 5.5

1) Put the following ABC implementation steps in order:

A Compute the allocation rates.

B Compute the total cost of the products.

C Identify the products that are the cost objects.

D Select the cost allocation bases.

A) DACB

B) DBCA

C) BADC

D) CDAB

Diff: 2

Objective: 5

AACSB: Analytical thinking

2) ________ is considered while choosing a cost allocation base for activity costs in ABC costing.

A) Marketing strategy and material price level

B) Availability of reliable data and measures

C) Product price level

D) Market share of a product

Diff: 1

Objective: 5

AACSB: Analytical thinking

3) Which of the following cost and cost allocation base have a strong cause and effect relationship?

A) administration costs and cubic feet

B) setup costs and square feet

C) quality control costs and the number of inspections

D) machine maintenance and setup hours

Diff: 2

Objective: 5

AACSB: Analytical thinking

4) Management accountants use the cost hierarchy to first calculate the:

A) labor costs of each product and then they compute material costs

B) overhead costs of each product and then they compute prime costs

C) factory costs of each product and then they compute labor costs

D) total costs of each product and then they compute per-unit costs

Diff: 2

Objective: 5

AACSB: Analytical thinking

5) For a business that offers customers a store where product can be purchased and picked up or a delivery service that can ship the product directly to the customer, which of the following would most likely be the best cost allocation base for distribution costs?

A) number of customer service phone calls and emails per period

B) number of pounds of product shipped or delivered

C) electricity costs for the period

D) number of products sold

Diff: 2

Objective: 5

AACSB: Analytical thinking

6) For a manufacturing firm that produces multiple families of products requiring various combinations of different types of parts, what would be the best allocation base for human resource administration costs?

A) direct labor hours

B) electricity costs

C) number of parts purchased

D) machine hours

Diff: 1

Objective: 5

AACSB: Analytical thinking

7) Assuming a successful implementation of an ABC system, all of the following would be true EXCEPT:

A) Use of a cost hierarchy should result in a fairly accurate estimate of the variable costs consumed by a product and ignore the irrelevant fixed costs.

B) Use of a cost hierarchy should result in a fairly accurate estimate of the cost ALL resources consumed by a product.

C) The system will identify both variable and fixed resources necessary to product a unit.

D) The system will accumulate total costs related to a product and then derive a per unit cost.

Diff: 1

Objective: 5

AACSB: Analytical thinking

8) Comfort Corporation manufactures two models of office chairs, a standard and a deluxe model. The following activity and cost information has been compiled:

Number of Number of Number of

Product Setups Components Direct Labor Hours

Standard 12 10 265

Deluxe 26 16 210

Overhead costs $49,400 $101,400

Assume a traditional costing system applies the overhead costs based on direct labor hours. What is the total amount of overhead costs assigned to the standard model? (Do not round interim calculations. Round the final answer to the nearest whole dollar.)

A) $75,400

B) $66,669

C) $84,131

D) $56,571

Diff: 2

Objective: 5

AACSB: Application of knowledge

9) Dartmouth Corporation manufactures two models of office chairs, a standard and a deluxe model. The following activity and cost information has been compiled:

Number of Number of Number of

Product Setups Components Direct Labor Hours

Standard 12 7 295

Deluxe 29 14 210

Overhead costs $73,800 $77,700

Assume a traditional costing system applies the overhead costs based on direct labor hours. What is the total amount of overhead costs assigned to the deluxe model? (Do not round interim calculations. Round the final answer to the nearest whole dollar.)

A) $32,311

B) $63,000

C) $30,689

D) $75,750

Diff: 3

Objective: 5

AACSB: Application of knowledge

10) Dartmouth Corporation manufactures two models of office chairs, a standard and a deluxe model. The following activity and cost information has been compiled:

Number of Number of Number of

Product Setups Components Direct Labor Hours

Standard 19 9 250

Deluxe 31 18 210

Overhead costs $50,000 $102,600

Number of setups and number of components are identified as activity-cost drivers for overhead. Assuming an activity-based costing system is used, what is the total amount of overhead costs assigned to the standard model?

A) $76,300

B) $81,200

C) $53,200

D) $99,400

Diff: 3

Objective: 5

AACSB: Application of knowledge

11) Dartmouth Corporation manufactures two models of office chairs, a standard and a deluxe model. The following activity and cost information has been compiled:

Number of Number of Number of

Product Setups Components Direct Labor Hours

Standard 16 8 255

Deluxe 30 17 225

Overhead costs $87,400 $100,000

Number of setups and number of components are identified as activity-cost drivers for overhead. Assuming an activity-based costing system is used, what is the total amount of overhead costs assigned to the deluxe model?

A) $93,700

B) $125,000

C) $98,400

D) $89,000

Diff: 3

Objective: 5

AACSB: Application of knowledge

12) Dartmouth Corporation manufactures two models of motorized go-carts, a standard and a deluxe model. The following activity and cost information has been compiled:

Number of Number of Number of

Product Setups Components Direct Labor Hours

Standard 19 6 800

Deluxe 25 20 480

Overhead costs $14,080 $26,000

Assume a traditional costing system applies the $40,080 of overhead costs based on direct labor hours. What is the total amount of overhead cost assigned to the standard model? (Do not round interim calculations. Round the final answer to the nearest whole dollar.)

A) $15,030

B) $25,050

C) $22,773

D) $17,307

Diff: 2

Objective: 5

AACSB: Application of knowledge

13) North Street Corporation manufactures two models of motorized go-carts, a standard and a deluxe model. The following activity and cost information has been compiled:

Number of Number of Number of

Product Setups Components Direct Labor Hours

Standard 20 9 750

Deluxe 33 13 420

Overhead costs $21,200 $21,340

Assume a traditional costing system applies the $42,540 of overhead costs based on direct labor hours. What is the total amount of overhead cost assigned to the deluxe model? (Do not round interim calculations. Round the final answer to the nearest whole dollar.)

A) $15,271

B) $27,269

C) $26,487

D) $16,053

Diff: 2

Objective: 5

AACSB: Application of knowledge

14) North Street Corporation manufactures two models of motorized go-carts, a standard and a deluxe model. The following activity and cost information has been compiled:

Number of Number of Number of

Product Setups Components Direct Labor Hours

Standard 14 10 710

Deluxe 33 13 440

Overhead costs $18,800 $20,930

Number of setups and number of components are identified as activity-cost drivers for overhead. Assuming an activity-based costing system is used, what is the total amount of overhead cost assigned to the standard model? (Do not round interim calculations. Round the final answer to the nearest whole dollar.)

A) $19,865

B) $14,700

C) $16,740

D) $25,030

Diff: 3

Objective: 5

AACSB: Application of knowledge

15) North Street Corporation manufactures two models of motorized go-carts, a standard and a deluxe model. The following activity and cost information has been compiled:

Number of Number of Number of

Product Setups Components Direct Labor Hours

Standard 15 9 780

Deluxe 32 14 490

Overhead costs $17,390 $21,620

Number of setups and number of components are identified as activity-cost drivers for overhead. Assuming an activity-based costing system is used, what is the total amount of overhead cost assigned to the deluxe model?

A) $25,000

B) $19,505

C) $18,710

D) $20,300

Diff: 3

Objective: 5

AACSB: Application of knowledge

16) Tiger Pride produces two product lines: T-shirts and Sweatshirts. Product profitability is analyzed as follows:

T-SHIRTS SWEATSHIRTS

Production and sales volume 56,000 units 22,500 units

Selling price $20.00 $29.00

Direct material $1.90 $ 5.00

Direct labor $4.60 $ 7.20

Manufacturing overhead $6.00 $ 3.00

Gross profit $ 7.50 $13.80

Selling and administrative $4.40 $ 7.00

Operating profit $3.10 $ 6.80

Tiger Pride's managers have decided to revise their current assignment of overhead costs to reflect the following ABC cost information:

Activities Demanded

Under the revised ABC system, the activity-cost driver rate for the supervision activity is:

A) $1.70

B) $2.73

C) $2.34

D) $1.26

Diff: 2

Objective: 5

AACSB: Application of knowledge

17) Tiger Pride produces two product lines: T-shirts and Sweatshirts. Product profitability is analyzed as follows:

T-SHIRTS SWEATSHIRTS

Production and sales volume 64,000 units 37,500 units

Selling price $18.00 $29.00

Direct material $2.00 $ 5.00

Direct labor $5.00 $ 7.20

Manufacturing overhead $3.50 $ 3.00

Gross profit $ 7.50 $13.80

Selling and administrative $4.00 $ 7.00

Operating profit $3.50 $ 6.80

Tiger Pride's managers have decided to revise their current assignment of overhead costs to reflect the following ABC cost information:

Activities Demanded

Under the revised ABC system, supervision costs allocated to Sweatshirts will be: (Do not round interim calculations. Round the final answer to the nearest whole dollar.)

A) $63,000

B) $141,600

C) $130,200

D) None of these answers are correct.

Diff: 2

Objective: 5

AACSB: Application of knowledge

18) Tiger Pride produces two product lines: T-shirts and Sweatshirts. Product profitability is analyzed as follows:

T-SHIRTS SWEATSHIRTS

Production and sales volume 216,000 units 30,000 units

Selling price $17.00 $29.00

Direct material $2.20 $ 5.00

Direct labor $4.50 $ 7.20

Manufacturing overhead $2.80 $ 3.00

Gross profit $ 7.50 $13.80

Selling and administrative $4.00 $ 7.00

Operating profit $3.50 $ 6.80

Tiger Pride's managers have decided to revise their current assignment of overhead costs to reflect the following ABC cost information:

Activities Demanded

Under the revised ABC system, total overhead costs allocated to Sweatshirts will be:

A) $49,950

B) $78,750

C) $246,690

D) None of these answers are correct.

Diff: 3

Objective: 5

AACSB: Application of knowledge

19) Tiger Pride produces two product lines: T-shirts and Sweatshirts. Product profitability is analyzed as follows:

T-SHIRTS SWEATSHIRTS

Production and sales volume 72,000 units 30,000 units

Selling price $16.00 $29.00

Direct material $2.50 $ 5.00

Direct labor $4.80 $ 7.20

Manufacturing overhead $1.20 $ 3.00

Gross profit $ 7.50 $13.80

Selling and administrative $3.90 $ 7.00

Operating profit $3.60 $ 6.80

Tiger Pride's managers have decided to revise their current assignment of overhead costs to reflect the following ABC cost information:

Activities Demanded

Under the revised ABC system, overhead costs per unit for the Sweatshirts will be: (Do not round interim calculations. Round the final answer to the nearest cent)

A) $1.35 per unit

B) $1.50 per unit

C) $3.25 per unit

D) $2.03 per unit

Diff: 3

Objective: 5

AACSB: Application of knowledge

20) Tiger Pride produces two product lines: T-shirts and Sweatshirts. Product profitability is analyzed as follows:

T-SHIRTS SWEATSHIRTS

Production and sales volume 204,000 units 24,375 units

Selling price $20.00 $29.00

Direct material $2.00 $ 5.00

Direct labor $4.50 $ 7.20

Manufacturing overhead $6.00 $ 3.00

Gross profit $ 7.50 $13.80

Selling and administrative $4.50 $ 7.00

Operating profit $3.00 $ 6.80

Tiger Pride's managers have decided to revise their current assignment of overhead costs to reflect the following ABC cost information:

Activities Demanded

Using an ABC system, next year's estimates show manufacturing overhead costs will total $220,300 for 50,000 T-shirts. If all other T-shirt costs and sales prices remain the same, the profitability that can be expected is: (Round the final answer to the nearest whole cent.)

A) $9.00 per t-shirt

B) $4.41 per t-shirt

C) $4.59 per t-shirt

D) ($0.22) per t-shirt

Diff: 3

Objective: 5

AACSB: Application of knowledge

21) Canton Corp. manufactures two sizes of ceramic paperweights, regular and jumbo. The following information applies to their expectations for the planning period:

Cost Pool Overhead Costs Activity-cost driver

Materials handling $50,000 90,000 orders

Machine maintenance $380,000 20,000 maintenance hours

Setups $257,040 45,900 setups

Inspections $134,820 21,400 inspections

Total support costs $821,860

Production Estimates

Production units:

Regular = 8,000,000 units

Jumbo = 16,000,000 units

Machine-hours = 600,000 mh

Labor-hours = 1,200,000 dlh

Expected direct costs amounts to $966,000 for the period. Support cost requirements of both products are substantially different from one another. Canton uses an ABC costing system.

The setups activity-cost driver rate is:

A) $6.30 per setup

B) $5.60 per setup

C) $4.64 per setup

D) $19.00 per setup

Diff: 2

Objective: 5

AACSB: Application of knowledge

22) Canton Corp. manufactures two sizes of ceramic paperweights, regular and jumbo. The following information applies to their expectations for the planning period:

Cost Pool Overhead Costs Activity-cost driver

Materials handling $43,000 96,000 orders

Machine maintenance $330,000 15,000 maintenance hours

Setups $238,500 45,000 setups

Inspections $133,590 21,900 inspections

Total support costs $745,090

Production Estimates

Production units:

Regular = 10,000,000 units

Jumbo = 20,000,000 units

Machine-hours = 400,000 mh

Labor-hours = 800,000 dlh

Expected direct costs amounts to $985,000 for the period. Support cost requirements of both products are substantially different from one another. Zitriks uses an ABC costing system.

Which of the following is true of Canton's overhead costing?

A) Multiple cost pools are appropriate for Canton's because of high direct costs.

B) Single cost pool is appropriate for Canton's because of high direct costs.

C) Multiple cost pools are appropriate for Canton's because of diverse support costs.

D) Single cost pool is appropriate for Canton's because of diverse support costs.

Diff: 2

Objective: 5

AACSB: Application of knowledge

23) Canton's Corp. manufactures two sizes of ceramic paperweights, regular and jumbo. The following information applies to their expectations for the planning period:

Cost Pool Overhead Costs Activity-cost driver

Materials handling $42,000 98,000 orders

Machine maintenance $350,000 20,000 maintenance hours

Setups $241,680 45,600 setups

Inspections $133,920 21,600 inspections

Total support costs $767,600

Production Estimates

Production units:

Regular = 12,000,000 units

Jumbo = 24,000,000 units

Machine-hours = 200,000 mh

Labor-hours = 400,000 dlh

Expected direct costs amounts to $947,000 for the period. Support cost requirements of both products are substantially different from one another. Canton's uses an ABC costing system.

The inspections activity-cost driver rate is:

A) $0.43

B) $5.70

C) $6.20

D) $11.63

Diff: 2

Objective: 5

AACSB: Application of knowledge

24) Canton's Corp. manufactures two sizes of ceramic paperweights, regular and jumbo. The following information applies to their expectations for the planning period:

Cost Pool Overhead Costs Activity-cost driver

Materials handling $44,000 90,000 orders

Machine maintenance $400,000 15,000 maintenance hours

Setups $241,150 45,500 setups

Inspections $133,920 21,600 inspections

Total support costs $819,070

Production Estimates

Production units:

Regular = 8,000,000 units

Jumbo = 16,000,000 units

Machine-hours = 200,000 mh

Labor-hours = 400,000 dlh

Expected direct costs amounts to $9,880,000 for the period. Support cost requirements of both products are substantially different from one another. Canton uses an ABC costing system.

Which of the following statements is true of implementing an ABC system?

A) Managers should never compromise on the cause-and-effect relationship of cost drivers and costs.

B) The three guidelines for refining costing systems should be ignored while implementing an ABC costing system.

C) The heterogeneous cost pools give managers greater confidence in the activity and product cost numbers from the ABC system.

D) Identifying the cost-allocation bases defines the number of activity pools into which costs must be grouped in an ABC system.

Diff: 2

Objective: 5

AACSB: Analytical thinking

25) Nichols Inc. manufactures remote controls. Currently the company uses a plant-wide rate for allocating manufacturing overhead. The plant manager is considering switching-over to ABC costing system and has asked the accounting department to identify the primary production activities and their cost drivers which are as follows:

Activities Cost driver Allocation Rate

Material handling Number of parts $6 per part

Assembly Labor hours $10 per hour

Inspection Time at inspection station $20 per minute

The current traditional cost method allocates overhead based on direct manufacturing labor hours using a rate of $240 per labor hour.

Nichols' management is considering to implement ABC system because:

A) ABC system can be implemented cheaply

B) ABC system provides more accurate direct cost figures

C) ABC system is a highly refined costing system

D) ABC system requires minimal expertise to operate

Diff: 2

Objective: 5

AACSB: Application of knowledge

26) Nichols Inc. manufactures remote controls. Currently the company uses a plant-wide rate for allocating manufacturing overhead. The plant manager is considering switching-over to ABC costing system and has asked the accounting department to identify the primary production activities and their cost drivers which are as follows:

Activities Cost driver Allocation Rate

Material handling Number of parts $7 per part

Assembly Labor hours $20 per hour

Inspection Time at inspection station $10 per minute

The current traditional cost method allocates overhead based on direct manufacturing labor hours using a rate of $40 per labor hour.

What are the indirect manufacturing costs per remote control assuming an activity-based-costing method is used and a batch of 10 remote controls are produced? The batch requires 100 parts, 4 direct manufacturing labor hours, and 1 minutes of inspection time.

A) $4.00 per remote control

B) $79.00 per remote control

C) $37.00 per remote control

D) $790.00 per remote control

Diff: 2

Objective: 5

AACSB: Application of knowledge

27) Nichols Inc. manufactures remote controls. Currently the company uses a plant-wide rate for allocating manufacturing overhead. The plant manager is considering switching-over to ABC costing system and has asked the accounting department to identify the primary production activities and their cost drivers which are as follows:

Activities Cost driver Allocation Rate

Material handling Number of parts $7 per part

Assembly Labor hours $20 per hour

Inspection Time at inspection station $10 per minute

The current traditional cost method allocates overhead based on direct manufacturing labor hours using a rate of $600 per labor hour.

What are the indirect manufacturing costs per remote control assuming an activity-based-costing method is used and a batch of 100 remote controls are produced? The batch requires 470 parts, 9 direct manufacturing labor hours, and 18 minutes of inspection time.

A) $6.00 per remote control

B) $36.50 per remote control

C) $37.00 per remote control

D) $3,650.00 per remote control

Diff: 3

Objective: 5

AACSB: Application of knowledge

28) Nile Corp. has identified three cost pools to allocate overhead costs. The following estimates are provided for the coming year:

Cost Pool Overhead Costs Cost driver Activity level

Supervision of direct labor $312,000 Direct labor-hours 780,000

Machine maintenance $135,800 Machine-hours 970,000

Facility rent $200,000 Square feet of area 125,000

Total overhead costs $647,800

The accounting records show the Mossman Job consumed the following resources:

Cost driver Actual level

Direct labor-hours 210

Machine-hours 1,900

Square feet of area 50

If Nile Corp. uses the three activity cost pools to allocate overhead costs, what are the activity-cost driver rates for supervision of direct labor, machine maintenance, and facility rent, respectively?

A) $0.40 per dlh; $0.14 per mh; $1.50 per sq ft

B) $2.50 per dlh; $7.14 per mh; $0.63 per sq ft

C) $0.40 per dlh; $0.14 per mh; $1.60 per sq ft

D) $0.30 per dlh; $0.14 per mh; $1.68 per sq ft

Diff: 3

Objective: 5

AACSB: Application of knowledge

29) Nile Corp. has identified three cost pools to allocate overhead costs. The following estimates are provided for the coming year:

Cost Pool Overhead Costs Cost driver Activity level

Supervision of direct labor $240,000 Direct labor-hours 800,000

Machine maintenance $165,600 Machine-hours 920,000

Facility rent $195,500 Square feet of area 115,000

Total overhead costs $601,100

The accounting records show the Mossman Job consumed the following resources:

Cost driver Actual level

Direct labor-hours 210

Machine-hours 1,900

Square feet of area 90

Using the three cost pools to allocate overhead costs, what is the total amount of overhead costs to be allocated to the Mossman Job?

A) $549.00

B) $558.00

C) $11,308.50

D) $544.20

Diff: 3

Objective: 5

AACSB: Application of knowledge

30) Velshi Printers has contracts to complete weekly supplements required by forty-six customers. For the year 2020, manufacturing overhead cost estimates total $1,900,000 for an annual production capacity of 19 million pages.

For 2020 Velshi Printers has decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:

Cost pool Manufacturing overhead costs Activity level

Design changes $190,000 300 design changes

Setups 1,640,000 4,000 setups

Inspections 70,000 11,000 inspections

Total manufacturing overhead costs $1,900,000

During 2020, two customers, Money Managers and Hospital Systems, are expected to use the following printing services:

Activity Money Managers Hospital Systems

Pages 100,000 116,000

Design changes 15 0

Setups 17 7

Inspections 28 36

Assuming activity-cost pools are used, what are the activity-cost driver rates for design changes, setups, and inspections cost pools?

A) $633.33 per change, $410.00 per setup, $6.36 per inspection

B) $633.33 per change, $17.50 per setup, $149.09 per inspection

C) $47.50 per change, $6.36 per setup, $410.00 per inspection

D) $17.27 per change, $410.00 per setup, $233.333,333 per inspection

Diff: 3

Objective: 5

AACSB: Application of knowledge

31) Velshi Printers has contracts to complete weekly supplements required by forty-six customers. For the year 2020, manufacturing overhead cost estimates total $750,000 for an annual production capacity of 15 million pages.

For 2020 Velshi Printers has decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:

Cost pool Manufacturing overhead costs Activity level

Design changes $150,000 100 design changes

Setups 550,000 2,000 setups

Inspections 50,000 12,000 inspections

Total manufacturing overhead costs $750,000

During 2020, two customers, Money Managers and Hospital Systems, are expected to use the following printing services:

Activity Money Managers Hospital Systems

Pages 70,000 86,000

Design changes 13 0

Setups 21 11

Inspections 30 38

Using the three cost pools to allocate overhead costs, what is the total manufacturing overhead cost estimate for Money Managers during 2020? (Do not round interim calculations. Round the final answer to the nearest cent.)

A) $9,312.50

B) $3,062.50

C) $25,400.00

D) $21,400.00

Diff: 3

Objective: 5

AACSB: Application of knowledge

32) Answer the following questions using the information below:

Eagle Eye Company produces two types of lenses–L7 and L9.

What is the total indirect costs (a) under ABC system?

A) $48,000

B) $50,000

C) $54,500

D) $37,000

Diff: 2

Objective: 5

AACSB: Application of knowledge

33) Answer the following questions using the information below:

Eagle Eye Company produces two types of lenses–L7 and L9.

What is the total costs assigned to L9 (b) under single indirect-cost pool system?

A) $47,500

B) $53,500

C) $46,500

D) $54,000

Diff: 2

Objective: 5

AACSB: Application of knowledge

34) If the separate activities of design, process design, and prototyping are combined into one activity called "design" in an ABC system, management is forming one homogeneous cost pool.

Diff: 1

Objective: 5

AACSB: Analytical thinking

35) Distribution can be a cost-driver for a manufacturing company under ABC system.

Diff: 1

Objective: 5

AACSB: Analytical thinking

36) ABC systems attempt to trace more costs as indirect costs.

Diff: 1

Objective: 5

AACSB: Analytical thinking

37) The cost data produced by an ABC system for either a service or a product are only derived from indirect costs.

Diff: 2

Objective: 5

AACSB: Analytical thinking

38) Implementing activity-based costing system involves use of different cost rates for different activities to compute indirect costs of a product.

Diff: 1

Objective: 5

AACSB: Analytical thinking

39) Managers consider the accuracy gained by converting from a traditional cost accounting system to the cost of implementation and measurement required by ABC.

Diff: 1

Objective: 5

AACSB: Analytical thinking

40) For each of the following activities identify an appropriate activity-cost driver.

a. machine maintenance

b. machine setup

c. quality control

d. material ordering

e. production scheduling

f. warehouse expense

g. engineering design

Diff: 3

Objective: 5

AACSB: Analytical thinking

Objective 5.6

1) Gregory Enterprises has identified three cost pools to allocate overhead costs. The following estimates are provided for the coming year:

Cost Pool Overhead Costs Cost driver Activity level

Supervision of direct labor $320,000 Direct labor-hours 800,000

Machine maintenance $120,000 Machine-hours 960,000

Facility rent $200,000 Square feet of area 100,000

Total overhead costs $640,000

The accounting records show the Mossman Job consumed the following resources:

Cost driver Actual level

Direct labor-hours 200

Machine-hours 1,600

Square feet of area 50

Which method of allocation probably best estimates actual overhead costs used? Why?

A) Single direct labor-hours cost driver because it is best to allocate total costs uniformly to individual jobs.

B) Single direct labor-hours cost driver because it is easiest to analyze and interpret.

C) Three activity-cost drivers because they best reflect the relative consumption of resources.

D) Three activity-cost drivers because product costs can be significantly cross-subsidized.

Diff: 2

Objective: 6

AACSB: Application of knowledge

2) It only makes sense to implement an ABC system when:

A) a single product is produced in bulk

B) its benefits exceed its implementation costs

C) it traces more costs as direct costs

D) production process is labor-intensive

Diff: 1

Objective: 6

AACSB: Analytical thinking

3) Which of the following is a sign that an ABC system may be useful for an organization?

A) Significant amounts of indirect costs are allocated using multiple cost pools.

B) Products make similar demands on resources because of similarities in volume, process steps, batch size, or complexity.

C) Many indirect costs are described as batch-level costs, product-sustaining costs, or facility-sustaining costs.

D) Operations staff disagrees with accountants about the costs of manufacturing and marketing products and services.

Diff: 2

Objective: 6

AACSB: Analytical thinking

4) Which of the following statements is true of ABC systems?

A) ABC systems provide less insight than traditional systems into the management of the indirect costs.

B) ABC systems are used by managers for strategic decisions rather than for inventory valuation in merchandising companies.

C) Service companies find great value from ABC because a vast majority of their cost structure is composed of direct costs.

D) ABC systems is valuable for pricing decisions but not for understanding, managing, and reducing costs in government institutions.

Diff: 2

Objective: 6

AACSB: Analytical thinking

5) Which of the following statements about ABC is NOT true?

A) A byproduct of ABC implementation can improve the efficiency of operations.

B) ABC should be implemented solely by the accountants as they are the guardians of the accounting information system.

C) ABC may empower employees to also implement cost saving projects.

D) Although implementation of ABC can be a refinement of a cost system, it has its limitations.

Diff: 2

Objective: 6

AACSB: Analytical thinking

6) Which of the following statements is true of ABC systems?

A) ABC system will always result in higher product costs.

B) ABC system employs multiple activity-cost drivers.

C) ABC system is least suited for service companies.

D) ABC system is simpler compared to traditional systems.

Diff: 2

Objective: 6

AACSB: Analytical thinking

7) Recognizing ABC information is NOT always perfect because:

A) it mostly uses far too many indirect cost pools than what is actually required

B) it balances the need for better information against the costs of creating a complex system

C) it lacks the simplicity that traditional systems used to have to allocate overhead costs

D) it never measures how the resources of an organization are used

Diff: 2

Objective: 6

AACSB: Analytical thinking

8) Which of the following is a sign that an ABC system will provide benefits?

A) There are relatively few indirect cost pools associated with the product and the indirect costs are a small percentage of total product cost.

B) All the products produced are similar and sell in equal proportions (sales mix).

C) Operations staff has no substantial disagreements with the reported costs of manufacturing and marketing products and services.

D) All or most indirect costs are treated as output-unit level costs.

Diff: 2

Objective: 6

AACSB: Analytical thinking

Answer the following questions using the information below:

Cannady produces six products. Under their traditional cost system using one cost driver, SR6 costs $168.00 per unit. An analysis of the activities and their costs revealed that three cost drivers would be used under the new ABC system. The new cost of SR6 was determined to be $178.00 per unit.

9) The total amount of indirect costs assigned to product SR6 using the traditional method is ________ the total amount assigned using ABC.

A) more than

B) less than

C) equal to

D) more accurate than

Diff: 1

Objective: 6

AACSB: Application of knowledge

10) Given this change in the cost:

A) SR6 will now command a higher sales price

B) SR6 has benefited from the new system

C) SR6 is definitely more accurately costed

D) the costing results for SR6 under the new system depend on the adequacy and quality of the estimated cost drivers and costs used by the system

Diff: 2

Objective: 6

AACSB: Application of knowledge

Answer the following questions using the information below:

Chess Woods Limited produces two products: wooden chess pieces and wooden inlaid chess boards. Under their traditional cost system using one cost driver (direct manufacturing labor hours), the cost of a set of wooden chess pieces is $325.00. An analysis of the activities and their costs revealed that three cost drivers would be used under a new ABC system. These cost drivers would be equipment usage, storage area for the material, and type of woods used. The new cost of a set of chess pieces was determined to be $298.00 per set.

11) The reduction in cost per unit of wooden chess pieces under ABC system is due to difference in allocation of:

A) labor costs

B) prime costs

C) indirect costs

D) material costs

Diff: 2

Objective: 6

AACSB: Application of knowledge

12) Given this change in the cost structure:

A) the costing results for chess pieces under the new system depend on the adequacy and quality of the estimated cost drivers and costs used by the system

B) chess pieces have benefited from the new system

C) chess pieces are definitely more accurately costed

D) chess will now have a lower sales price

Diff: 2

Objective: 6

AACSB: Application of knowledge

13) The goal of a properly constructed ABC system is to:

A) have the most accurate cost system

B) identify more indirect costs

C) develop the best cost system that meets the cost/benefit test

D) have separate allocation rates for each department

Diff: 2

Objective: 6

AACSB: Analytical thinking

14) As ABC systems get very detailed and more cost pools are created, more allocations are necessary to calculate activity costs for each cost pool, which increases the chances of misidentifying the costs of different activity cost pools.

Diff: 2

Objective: 6

AACSB: Analytical thinking

15) ABC system are likely to provide the most benefits to a company with significant amounts of indirect costs that are allocated using just one or two costs pools and products that make diverse demands on resources.

Diff: 1

Objective: 6

AACSB: Analytical thinking

16) For an ABC system to be useful, it must allocated costs from all "links "of the value chain.

Diff: 2

Objective: 6

AACSB: Analytical thinking

17) Rachel's Pet Supply Corporation manufactures two models of grooming stations, a standard and a deluxe model. The following activity and cost information has been compiled:

Number of Number of Number of

Product Setups Components Direct Labor Hours

Standard 3 30 650

Deluxe 7 50 150

Overhead costs $40,000 $120,000

Assume a traditional costing system applies the $160,000 of overhead costs based on direct labor hours.

a. What is the total amount of overhead costs assigned to the standard model?

b. What is the total amount of overhead costs assigned to the deluxe model?

Assume an activity-based costing system is used and that the number of setups and the number of components are identified as the activity-cost drivers for overhead.

c. What is the total amount of overhead costs assigned to the standard model?

d. What is the total amount of overhead costs assigned to the deluxe model?

e. Explain the difference between the costs obtained from the traditional costing system and the ABC system. Which system provides a better estimate of costs? Why?

a. [$160,000 / (650 + 150)] × 650 = $130,000

b. [$160,000 / (650 + 150)] × 150 = $30,000

c. Setups: $40,000 / (3 + 7) = $4,000

Components: $120,000 / (30 + 50) = $1,500

($4,000 × 3) + ($1,500 × 30) = $57,000

d. ($4,000 × 7) + ($1,500 × 50) = $103,000

e. Because the products do not all require the same proportionate shares of the overhead resources of setup hours and components, the ABC system provides different results than the traditional system which allocates overhead costs on the basis of direct labor hours. The ABC system considers some important differences in overhead resource requirements and thus provides a better picture of the costs from each grooming table style, provided that the activity measures are fairly estimated.

Diff: 3

Objective: 6

AACSB: Application of knowledge

18) Luzent Company produces two types of entry doors: Deluxe and Standard. The assignment basis for support costs has been direct labor dollars. For 2020, Luzent compiled the following data for the two products:

Deluxe Standard

Sales units 50,000 400,000

Sales price per unit $650.00 $475.00

Prime costs per unit $180.00 $130.00

Direct materials cost per unit $95.00 $75.00

Direct labor costs per unit $75.00 $55.00

Manufacturing support costs per unit $ 80.00 $120.00

Last year, Luzent Manufacturing purchased an expensive robotics system to allow for more decorative door products in the deluxe product line. The CFO suggested that an ABC analysis could be valuable to help evaluate a product mix and promotion strategy for the next sales campaign. She obtained the following ABC information for 2020:

Activity Cost Driver Cost Total Deluxe Standard

Setups of setups $ 500,000 500 400 100

Machine-related of machine hours $44,000,000 600,000 300,000 300,000

Packing of shipments $ 5,000,000 250,000 50,000 200,000

Required:

a. Using the current system,what is the estimated

1. total cost of manufacturing one unit for each type of door?

2. profit per unit for each type of door?

b. Using the current system, estimated manufacturing overhead costs per unit are less for the deluxe door ($80 per unit) than the standard door ($120 per unit). What is a likely explanation for this?

c. "ABC systems may result in misallocation of indirect costs." Do you agree? Give reasons for your answer.

d. What considerations need to be examined when determining a sales mix strategy?

e. While implementing an ABC system for the first time, achieving a significant change overnight is difficult and this may de motivate employees. How can managers overcome this problem?

a. Currently estimated deluxe-entry door total cost per unit is $260 = $180 + $80.

Currently estimated standard-entry door total cost per unit is $250 = $130 + $120.

Currently estimated deluxe-entry door profit per unit is $390 = $650 − $260.

Currently estimated standard-entry door profit per unit is $225 = $475 − $250.

b. Support manufacturing costs are currently allocated based on direct labor dollars. Because the deluxe doors are manufactured using the new robotics system, it appears that less direct labor is needed to manufacture each unit in the deluxe product line.

c. When ABC systems get very detailed and more cost pools are created, more allocations are necessary to calculate activity costs for each cost pool, which increases the chances of misidentifying the costs of different activity cost pools. For example, supervisors are more prone to incorrectly identify the time they spend on different activities if they have to allocate their time over five activities rather than only two activities.

Occasionally, managers are also forced to use allocation bases for which data are readily available rather than allocation bases they would have liked to use. When incorrect cost-allocation bases are used, activity-cost information can be misleading. For example, if the cost per load moved decreases, a company may conclude that it has become more efficient in its materials-handling operations. In fact, the lower cost per load may have resulted solely from moving many lighter loads over shorter distances.

d. First, the sales-mix strategy ought to consider the current and future market demands for the two types of entry doors. Other considerations include the capacity-related constraints of the robotics system, other equipment, and the facilities. The fact that customers may be willing to pay more for the deluxe doors should be considered when evaluating the profitability of each product line. Costs do not drive a sales-mix strategy.

e. In many situations, achieving a significant change overnight is difficult. However, showing how ABC information has helped improve a process and save costs, even if only in small ways, motivates the team to stay on course and build momentum. The credibility gained from small victories leads to additional and bigger improvements involving larger numbers of people and different parts of the organization. Eventually ABC becomes rooted in the culture of the organization. Sharing short-term successes also helps motivate employees to be innovative.

Diff: 3

Objective: 6

AACSB: Application of knowledge

19) Brilliant Accents Company manufactures and sells three styles of kitchen faucets: Brass, Chrome, and White. Production takes 25, 25, and 10 machine hours to manufacture 1,000-unit batches of brass, chrome, and white faucets, respectively. The following additional data apply:

BRASS CHROME WHITE

Projected sales in units 30,000 50,000 40,000

PER UNIT data:

Selling price $40 $20 $30

Direct materials $ 8 $ 4 $ 8

Direct labor $15 $ 3 $ 9

Overhead cost based on direct labor hours

(traditional system) $12 $ 3 $ 9

Hours per 1000-unit batch:

Direct labor hours 40 10 30

Machine hours 25 25 10

Setup hours 1.0 0.5 1.0

Inspection hours 30 20 20

Total overhead costs and activity levels for the year are estimated as follows:

Activity Overhead costs Activity levels

Direct labor hours 2,900 hours

Machine hours 2,400 hours

Setups $465,500 95 setup hours

Inspections $405,000 2,700 inspection hours

$870,500

Required:

a. Using the traditional system, determine the operating profit per unit for the brass style of faucet.

b. Determine the activity-cost-driver rate for setup costs and inspection costs.

c. Using the ABC system, for the brass style of faucet:

1. compute the estimated overhead costs per unit.

2. compute the estimated operating profit per unit.

d. Explain the difference between the profits obtained from the traditional system and the ABC system. Which system provides a better estimate of profitability? Why?

a. Traditional system:

Operating profit per unit for Brass faucets is $5 = $40 - ($8 + 15 + 12).

b. The activity-cost-driver rate for setup costs is $4,900 per setup hour = $465,500/95, and for inspection costs is $150 per inspection hour = $405,000/2,700.

c. ABC system:

Overhead costs per unit for Brass faucets are $9.40 per unit.

30,000 units in projected sales / 1000 units per batch = 30 batches;

30 batches × 1 setup hour per batch = 30 setup hours;

30 batches × 30 inspection hours per batch = 900 inspection hours.

30 setup hours × $4,900 = $147,000/30,000 units = $4.90/unit

900 inspection hours × $150 = $135,000/30,000 units = $4.50/unit

Overhead costs for Brass faucets ($4.90 + $4.50) = $9.40 per unit.

Operating profit per unit for Brass faucets is $7.60 = $40 - ($8 + 15 + 9.40).

d. Traditional system: Operating profit per unit for Brass faucets is $5.00.

ABC system: Operating profit per unit for Brass faucets is $7.60.

Because the products do not all require the same proportionate shares of the support resources of setup hours and inspection hours, the ABC system provides different results than the traditional system, which allocates overhead costs on the basis of direct labor hours. The ABC system considers some important differences in overhead resource requirements and thus provides a better picture of the profitability from each faucet style provided that the activity measures are fairly estimated.

Diff: 3

Objective: 6

AACSB: Application of knowledge

20) Brilliant Accents Company manufactures and sells three styles of kitchen faucets: Brass, Chrome, and White. Production takes 25, 25, and 10 machine hours to manufacture 1000-unit batches of brass, chrome and white faucets, respectively. The following additional data apply:

BRASS CHROME WHITE

Projected sales in units 30,000 50,000 40,000

PER UNIT data:

Selling price $40 $20 $30

Direct materials $ 8 $ 4 $ 8

Direct labor $15 $ 3 $ 9

Overhead cost based on direct labor hours

(traditional system) $12 $ 3 $ 9

Hours per 1000-unit batch:

Direct labor hours 40 10 30

Machine hours 25 25 10

Setup hours 1.0 0.5 1.0

Inspection hours 30 20 20

Total overhead costs and activity levels for the year are estimated as follows:

Activity Overhead costs Activity levels

Direct labor hours 2,900 hours

Machine hours 2,400 hours

Setups $465,500 95 setup hours

Inspections $405,000 2,700 inspection hours

$870,500

Required:

a. Using the traditional system, determine the operating profit per unit for each style of faucet.

b. Determine the activity-cost-driver rate for setup costs and inspection costs.

c. Using the ABC system, for each style of faucet

1. compute the estimated overhead costs per unit.

2. compute the estimated operating profit per unit.

d. Explain the differences between the profits obtained from the traditional system and the ABC system. Which system provides a better estimate of profitability? Why?

a. Traditional system:

Operating profit per unit for Brass faucets is $5 = $40 - ($8 + $15 + $12)

Operating profit per unit for Chrome faucets is $10 = $20 - ($4 + $3 + $3)

Operating profit per unit for White faucets is $4 = $30 - ($8 + $9 + $9)

b. The activity-cost-driver rate for setup costs is $4,900 per setup hour = $465,500/95, and for inspection costs is $150 per inspection hour = $405,000/2,700.

c. ABC system:

Overhead costs per unit for Brass faucets are $9.40 per unit.

30,000 units in projected sales / 1,000 units per batch = 30 batches;

30 batches × 1 setup hour per batch = 30 setup hours;

30 batches × 30 inspection hours per batch = 900 inspection hours

30 setup hours × $4,900 = $147,000/30,000 units = $4.90/unit

900 inspection hours × $150 = $135,000/30,000 units = $4.50/unit

Overhead costs for Brass faucets ($4.90 + $4.50) = $9.40 per unit

Operating profit per unit for Brass faucets is $7.60 = $40 - ($8 + $15 + $9.40).

Overhead costs per unit for Chrome faucets are $5.45 per unit.

50,000 units in projected sales / 1,000 units per batch = 50 batches;

50 batches × .5 setup hour per batch = 25 setup hours;

50 batches × 20 inspection hours per batch = 1,000 inspection hours

25 setup hours × $4,900 = $122,500/50,000 units = $2.45/unit

1,000 inspection hours × $150 = $150,000/50,000 units = $3.00/unit

Overhead costs for Chrome faucets ($2.45 + $3.00) = $5.45 per unit

Operating profit per unit for Chrome faucets is $7.55 = $20 - ($4 + $3 + $5.45).

Overhead costs per unit for White faucets are $7.90 per unit.

40,000 units in projected sales/ 1,000 units per batch = 40 batches;

40 batches × 1 setup hour per batch = 40 setup hours;

40 batches × 20 inspection hours per batch = 800 inspection hours

40 setup hours × $4,900 = $196,000/40,000 units = $4.90/unit

800 inspection hours × $150 = $120,000/40,000 units = $3.00/unit

Overhead costs for white faucets ($4.90 + $3.00) = $7.90 per unit.

Operating profit per unit for White faucets is $5.10 = $30 - ($8 + $9 + $7.90).

d. Traditional system:

Operating profit per unit for Brass faucets is $5 = $40 - ($8 + $15 + $12).

Operating profit per unit for Chrome faucets is $10 = $20 - ($4 + $3 + $3).

Operating profit per unit for White faucets is $4 = $30 - ($8 + $9 + $9).

ABC system:

Operating profit per unit for Brass faucets is $7.60 = $40 - ($8 + $15 + $9.40).

Operating profit per unit for Chrome faucets is $7.55 = $20 - ($4 + $3 + $5.45).

Operating profit per unit for White faucets is $5.10 = $30 - ($8 + $9 + $7.90).

Because the products do not all require the same proportionate shares of the overhead resources of setup hours and inspection hours, the ABC system provides different results than the traditional system, which allocates overhead costs on the basis of direct labor hours. The ABC system considers some important differences in overhead resource requirements and thus provides a better picture of the profitability from each faucet style provided that the activity measures are fairly estimated.

Diff: 3

Objective: 6

AACSB: Application of knowledge

21) Aunt Ethel's Fancy Cookie Company manufactures and sells three flavors of cookies: Macaroon, Sugar, and Buttercream. The batch size for the cookies is limited to 1,000 cookies based on the size of the ovens and cookie molds owned by the company. Based on budgetary projections, the information listed below is available:

Macaroon Sugar Buttercream

Projected sales in units 500,000 800,000 600,000

PER UNIT data:

Selling price $0.80 $0.75 $0.60

Direct materials $0.20 $0.15 $0.14

Direct labor $0.04 $0.02 $0.02

Hours per 1000-unit batch:

Direct labor hours 2 1 1

Oven hours 1 1 1

Packaging hours 0.5 0.5 0.5

Total overhead costs and activity levels for the year are estimated as follows:

Activity Overhead costs Activity levels

Direct labor 2,400 hours

Oven $210,000 1,900 oven hours

Packaging $150,000 950 packaging hours

$360,000

Required:

a. Determine the activity-cost-driver rate for packaging costs.

b. Using the ABC system, for the sugar cookie:

1. compute the estimated overhead costs per thousand cookies.

2. compute the estimated operating profit per thousand cookies.

c. Using a traditional system (with direct labor hours as the overhead allocation base), for the sugar cookie:.

1. compute the estimated overhead costs per thousand cookies.

2. compute the estimated operating profit per thousand cookies.

d. Explain the difference between the profits obtained from the traditional system and the ABC system. Which system provides a better estimate of profitability? Why?

a.

activity-cost-driver rate = packaging overhead / packaging hours

= $150,000 / 950 hours

= $157.89 per packaging hour

b.

1. To compute the estimated overhead costs for a batch of sugar cookies (using the ABC system), first calculate the activity-cost-driver rate for the oven activity.

activity-cost-driver rate = oven overhead / oven hours

= $210,000 / 1,900 hours

= $110.53 per oven hour

Then calculate the overhead for a 1,000 cookie batch by multiplying the number of activity hours per batch by the appropriate activity-cost-driver rate for each of the relevant overhead activities and sum to get the total overhead for the batch.

(1 × $110.53) + (.5 × $157.89) = $189.48

2. To compute the estimated operating profit for a batch of sugar cookies (using the ABC system), subtract the costs from the revenues:

Revenue = 1,000 × $0.75 = $ 750.00

Direct Material = 1,000 × $.015 = ($150.00)

Direct Labor = 1,000 × $.02 = ($ 20.00)

Overhead = ($189.48)

Operating Profit = $ 390.52

c. 1. To compute the estimated overhead costs for a batch of sugar cookies (using the traditional system), first calculate the overhead rate per direct labor hour.

Overhead per direct labor hour = Total Overhead / Total Direct Labor Hours

= $ 360,000 / 2,400 hours

= $ 150.00 per direct labor hour

Since it takes 1 direct labor hour per 1,000 sugar cookies, the overhead is $150.00

2. To compute the estimated operating profit for a batch of sugar cookies (using the traditional system), subtract the costs from the revenues:

Revenue = 1,000 × $0.75 = $ 750.00

Direct Material = 1,000 × $.015 = ($150.00)

Direct Labor = 1,000 × $.02 = ($ 20.00)

Overhead = ($150.00)

Operating Profit = $ 430.00

d. Traditional system: Operating profit per batch of sugar cookies is $430.00.

ABC system: Operating profit per batch of sugar cookies is $390.52.

Because the products do not all require the same proportionate shares of the direct labor resources, the allocation of the total overhead on that basis is not as accurate as using the ABC system. The ABC system allocates the overhead based on activity levels for the specific categories as well as activity usage by the product lines.

Diff: 3

Objective: 6

AACSB: Application of knowledge

22) What types of characteristics would indicate the implementation of an ABC system may provide benefits in excess of costs and what is the major cost of adopting such a system?

• There are relatively few indirect cost pools associated with the product and the indirect costs are a small percentage of total product cost

• All the products produced are similar and sell in equal proportions (sales mix)

• Operations staff has no substantial disagreements with the reported costs of manufacturing and the marketing and delivery of products and services

Diff: 3

Objective: 6

AACSB: Application of knowledge

Objective 5.7

1) Excellent Printers has contracts to complete weekly supplements required by forty-six customers. For the year 2020, manufacturing overhead cost estimates total $840,000 for an annual production capacity of 12 million pages.

For 2020 Excellent Printers has decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:

Cost pool Manufacturing overhead costs Activity level

Design changes $ 120,000 300 design changes

Setups 640,000 5,000 setups

Inspections 80,000 8,000 inspections

Total manufacturing overhead costs $840,000

During 2020, two customers, Money Managers and Hospital Systems, are expected to use the following printing services:

Activity Money Managers Hospital Systems

Pages 60,000 76,000

Design changes 10 0

Setups 20 10

Inspections 30 38

When costs are assigned using the single cost driver, number of pages printed, then:

A) Excellent Printers will want to retain this highly profitable customer

B) Money Managers will likely seek to do business with competitors

C) Money Managers is unfairly over billed for its use of printing resources

D) Money Managers is grossly under billed for the job, while other jobs will be unfairly over billed

Diff: 2

Objective: 7

AACSB: Application of knowledge

2) Excellent Printing has contracts to complete weekly supplements required by forty-six customers. For the year 2020, manufacturing overhead cost estimates total $840,000 for an annual production capacity of 12 million pages.

For 2020, Excellent Printing decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:

Cost pool Manufacturing overhead costs Activity level

Design changes $ 120,000 200 design changes

Setups 640,000 4,000 setups

Inspections 80,000 16,000 inspections

Total manufacturing overhead costs $840,000

During 2020, two customers, Money Managers and Hospital Systems, are expected to use the following printing services:

Activity Money Managers Hospital Systems

Pages 60,000 76,000

Design changes 10 2

Setups 20 10

Inspections 30 38

When costs are assigned using the single cost driver, number of pages printed, then Hospital Systems:

A) is fairly billed because resources are allocated uniformly to all jobs

B) is grossly under billed for the job, while other jobs will be unfairly over billed

C) will likely seek to do business with competitors

D) will contribute too little to profits, and Wallace Printing will not want to accept additional work from the company

Diff: 2

Objective: 7

AACSB: Application of knowledge

3) Using Activity Based Management principles when evaluating how a customer might react to the reengineering of a product, resulting in dropping some features while allowing for a cut in the selling price, would be which kind of management decision?

A) pricing decision

B) design decision

C) product-mix decision

D) research and development decision

Diff: 2

Objective: 7

AACSB: Analytical thinking

4) Which of the following statements is true of costing systems?

A) Single-indirect cost pool systems always result in overcosting of products.

B) Single-indirect cost pool systems classify some direct costs as indirect costs.

C) ABC systems always result in overcosting of products.

D) ABC systems classify some indirect costs as direct costs helping to improve processes

Diff: 2

Objective: 7

AACSB: Analytical thinking

5) Lavender Company is a logistics company and has recently implemented ABC system. Using activity-based information, it decides to reduce the bulkiness of the packages delivered, thereby reducing costs. This suggests that ABC system helps managers in ________ decisions.

A) pricing

B) product-mix

C) process-improvement

D) product-design

Diff: 2

Objective: 7

AACSB: Application of knowledge

6) ABC and traditional systems are quite similar in:

A) the treatment of direct costs

B) the allocation of overheads

C) evaluating performance

D) the identification of cost pools

Diff: 2

Objective: 7

AACSB: Analytical thinking

7) It is important that the product costs reflect as much of the diversity and complexity of the manufacturing process so that:

A) total costs reflect market price

B) value-added costs can be eliminated

C) there is high likelihood of cross-subsidizing of product costs

D) product-pricing errors are minimal

Diff: 2

Objective: 7

AACSB: Analytical thinking

8) A well-designed, activity-based cost system helps managers make better decisions because information derived from an ABC analysis:

A) can be used to eliminate nonvalue-added activities

B) is easy to analyze and interpret

C) takes the choices and judgment challenges away from the managers

D) emphasizes how managers can achieve higher sales

Diff: 2

Objective: 7

AACSB: Analytical thinking

9) One reason for assigning selling and distribution costs to products for analytical purposes is:

A) to justify a varied product-mix

B) that these costs should be included in the cost of goods sold in the income statement

C) to ensure that all costs are considered

D) that all direct costs must be assigned

Diff: 2

Objective: 7

AACSB: Analytical thinking

10) ABC systems help managers to:

A) value ending inventory more accurately

B) identify new designs to reduce costs

C) evaluate direct material costs more efficiently

D) improve the inventory turnaround time

Diff: 2

Objective: 7

AACSB: Analytical thinking

11) ABC reveals opportunities to reduce costs on nonvalue added activities.

Diff: 1

Objective: 7

AACSB: Analytical thinking

12) Activity-based management refers to the use of information derived from ABC analysis to analyze and improve operations.

Diff: 1

Objective: 7

AACSB: Analytical thinking

13) Managers implementing ABC systems for the first time always start by analyzing budgeted costs to identify activity-cost pools.

Diff: 2

Objective: 7

AACSB: Analytical thinking

14) ABC costing systems cannot be used in marketing decisions.

Diff: 2

Objective: 7

AACSB: Analytical thinking

15) AMB principles can be applied to process improvement, pricing and product mix decisions.

Diff: 2

Objective: 7

AACSB: Analytical thinking