Chapter 5 Activity-Based Costing Systems Exam Questions

Chapter 5

Activity-Based Costing Systems

Learning Objectives―Coverage by question type

LO1 – Understand how volume-based cost systems distort product costs.

True / False Multiple Choice Exercises, Problems & Short Answer

1-4 1-13 1, 8, 10, 11

LO2 – Describe why companies producing a more varied and complex mix of products have higher costs than companies producing only a narrow range of products.

True / False Multiple Choice Exercises, Problems & Short Answer

5-6 14-23 2, 3, 10

LO3 – Design an activity-based costing (ABC) system that directly traces resource costs to products.

True / False Multiple Choice Exercises, Problems & Short Answer

7-10 24-49 4, 5, 8, 10

LO4 – Use the information from an ABC system to improve operations and make better decisions about products.

True / False Multiple Choice Exercises, Problems & Short Answer

11 50-52 6-8, 10, 11

LO5 – Understand the importance of measuring the practical capacity of resources and the cost of unused capacity.

True / False Multiple Choice Exercises, Problems & Short Answer

12-20 53-63 9-11

LO6 – Appreciate the role for ABC systems for service companies, such as financial and health-care organizations.

True / False Multiple Choice Exercises, Problems & Short Answer

21-22 64 11

LO7 – Discuss the barriers for implementing ABC systems and how these might be overcome.

True / False Multiple Choice Exercises, Problems & Short Answer

23-26 65-67 11

Chapter 5: Activity-Based Costing Systems

True / False

LO1

Terms: Cost pools

Difficulty: 1

1. Traditional cost systems use actual departments or cost centers for defining cost pools to accumulate and redistribute costs.

Difficulty: 1

2. Activity-based cost systems use cost centers to accumulate costs.

Difficulty: 2

3. Traditional cost systems are likely to overcost simple products with higher production volume.

Difficulty: 2

4. Traditional cost systems are likely to overcost complex products with lower production volume.

Difficulty: 2

5. Product lines that produce different variations (models, styles, or colors) often require specialized activities that translate into lower overhead costs for each product line.

Difficulty: 1

6. Specialized engineering drawings of products, product quality specifications and quality control testing, inventoried raw materials, and material control systems are examples of activities that equate to greater overhead costs.

Difficulty: 1

7. For activity-based cost systems, activity costs are assigned to products in the proportion of the demand they place on activity resources.

Difficulty: 1

8. An activity-based costing system is necessary for accurately costing services that are different.

Difficulty: 1

9. ABC systems seek an activity cost allocation driver that has a cause-and-effect relationship with costs in the cost pool.

Difficulty: 1

10. In general, the selection of activity cost drivers requires making trade-offs between accuracy and the cost of measurement.

Difficulty: 1

11. Reducing the number of production runs provides an economic benefit even though resources remain at the same level.

Difficulty: 2

12. Capacity cost rates also change when the denominator, practical capacity, changes.

Difficulty: 1

13. Practical capacity is generally smaller than theoretical capacity.

Difficulty: 2

14. Updates to time-driven ABC models are triggered by events that require the estimates in the model to be modified, such as a significant change in costs of resources supplied.

Difficulty: 2

15. Practical capacity is used as the numerator for activity cost driver calculations to avoid distortions caused by the assignment of excess capacity costs to the products.

Difficulty: 3

16. Unused capacity should be treated as a general cost to be shared across all product lines.

Difficulty: 2

17. Cost driver rates calculated using actual work performed include an allocation for the cost of resources used and for unused capacity.

Difficulty: 1

18. Assigning selling and distribution costs to product lines is becoming more important because of customer requests for customized services.

Difficulty: 2

19. Time-driven ABC enables the model to reflect how particular order and activity characteristics cause processing times to vary.

Difficulty: 2

20. Committed costs can change in the short run because demands for the capacity resource change or because of changes in efficiency in performing activities.

Difficulty: 1

21. In general, service companies are ideal candidates for activity-based costing.

Difficulty: 2

22. For service organizations, activity-based cost systems clarify appropriate cost assignments to services and customers and help to identify the profitability of various products and customers.

Difficulty: 2

23. The most successful ABC projects occur when a clear business purpose exists for building the ABC model.

Difficulty: 1

24. When the ABC system has a good model design, ABC can still overcome the barriers to implementation and provide an effective system.

Difficulty: 2

25. An activity-based costing system is meant to perform the role of operational control as well as to provide the basis for costing inventory for financial reporting.

Difficulty: 2

26. Even when the ABC project is initiated from the finance group, a multifunctional project team should be formed.

Difficulty: 1

1. ________ and ________ are typically the measures of volume of activity in traditional volume-based cost systems.

A) Practical capacity; products sold

B) Direct labor hours; practical capacity

C) Direct labor hours; machine hours

D) Square footage; machine hours

Difficulty: 1

1. Misleading product cost numbers are most likely the result of misallocating:

A) direct material costs.

B) direct manufacturing labor costs.

C) overhead costs.

D) All of the above are correct.

Difficulty: 1

1. Undercosting of a product is most likely to result from:

A) misallocating direct labor costs.

B) underpricing the product.

C) overcosting another product.

D) understating total product costs.

Difficulty: 1

1. Overcosting a particular product may result in:

A) gain of market share for the product.

B) higher profits per unit for the product.

C) operating efficiencies.

D) overstating total costs of all the products.

Difficulty: 2

1. Traditional cost systems distort product costs because:

A) they do not know how to identify the appropriate units.

B) excess capacity costs are ignored.

C) they emphasize financial accounting requirements.

D) they use volume-based cost drivers to allocate overhead costs to products.

Difficulty: 2

1. Volume-based cost drivers in traditional cost systems distort product costs because they:

A) assume that all products use all overhead resources to a similar extent.

B) recognize specific activities that are required to produce a product.

C) do not consistently record costs.

D) fail to measure the correct amount of total costs for all products.

Difficulty: 2

1. Differences between the costs calculated by activity-based costing systems and traditional costing systems will decrease when volume based assignments and cost driver assignments:

A) are different in proportion to each other.

B) are similar in proportion to each other.

C) are more different than alike.

D) use the same cost driver units.

Difficulty: 2

1. The use of volume-based measures to assign overhead costs is more likely to:

A) undercost high-volume products.

B) undercost specialty low-volume products.

C) undercost complex products.

D) undercost specialty low-volume and complex products.

Difficulty: 2

1. With volume-based costing systems, products manufactured in large batches and in large annual volumes may be ________ because batch-related and product-sustaining costs are assigned using volume-based cost drivers.

A) overcosted

B) undercosted

C) fairly costed

D) ignored

Difficulty: 2

1. According to an ABC system, A8 is ________ under the traditional cost system.

A) undercosted

B) overcosted

C) fairly costed

D) accurately costed

Difficulty: 2

1. According to an ABC system, M5 uses a disproportionately:

A) smaller amount of unit-level (volume-based) costs.

B) larger amount of unit-level (volume-based) costs.

C) smaller amount of batch-level costs.

D) larger amount of batch-level costs.

Difficulty: 3

1. Compared to activity-based costing systems traditional costing systems that use volume cost drivers such as units produced, or direct labour hours can often:
2. Under cost high volume products and over cost low volume products
3. Over cost high volume products and under cost low volume products
4. Always achieve the same result
5. This question cannot be answered using the information provided

Difficulty: 3

1. Which of the following conditions can lead to significant costing differences reported by traditional costing systems and activity-based costing systems?
2. The cost of indirect resources is high relative to direct costs
3. There are significant differences in rate of overhead resource use by the different cost objects
4. There are significant differences in the cost driver rates of different resources
5. All the above

Difficulty: 1

1. It is important that the product costs reflect the diversity and complexity of the manufacturing process so that:

A) product costs will reflect their relative consumption of resources.

B) better information related to resource constraints can be captured and communicated.

C) there is more likelihood of cost distortions.

D) All of the above are correct.

Difficulty: 1

1. Activity-based costing (ABC) can reduce cost distortions because ABC:

A) develops cost drivers that link the activities performed to the products manufactured.

B) establishes multiple cost pools.

C) employs capacity-related cost drivers.

D) recognizes interactions between different departments in assigning overhead costs.

Difficulty: 1

1. Different products consume different proportions of overhead costs because of differences in all the following except:

A) sales prices.

B) product customization specifications.

C) setup times.

D) product design.

Difficulty: 1

1. Which of the following is a sign that an ABC system may be useful?

A) There are small amounts of overhead costs.

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

C) The company’s products all show large profits.

D) Operations throughout the plant are fairly similar.

Difficulty: 1

1. Units of production are most appropriate as an overhead cost assignment base when:

A) service department costs are being allocated.

B) only one product is manufactured.

C) direct labor costs are low.

D) factories produce a complex and varied mix of products.

Difficulty: 2

1. Product lines that produce different variations (models, styles, or colors) often require specialized activities that translate into:

A) lower overhead costs for each product line.

B) decisions to drop product variations.

C) more favorable direct labor cost ratios.

D) more overhead costs for each product line.

Difficulty: 1

1. When a company manufactures a variety of complex products, several volume-based cost drivers can capture the complexity and diversity of the production processes:

A) always.

B) frequently.

C) infrequently.

D) never.

Difficulty: 1

1. Greater manufacturing overhead costs are associated with:

A) specialized engineering drawings of new products.

B) quality specifications for products and quality control testing.

C) inventoried materials and material control systems.

D) All of the above are correct.

Difficulty: 1

1. A company produces three products; if one product is undercosted then:

A) one product is overcosted.

B) one or two products are overcosted.

C) two products are overcosted.

D) no products are overcosted.

Difficulty: 1

1. The shipping activity at Novelty Company uses three labour resources: pickers, wrappers, and shippers. Pickers are paid $120 per day. Wrappers are paid $180 per day. Shippers are paid $150 per day. All workers work 8 hours a day and are allowed 30 minutes for lunch, a 15-minute break in the morning, and a 15-minute break in the afternoon. The shipping activity for order 229 will require 28 picker minutes, 14 wrapper minutes, 7 shipper minutes.

What is the total cost of the shipping activity for order 229?

1. $7.50
2. $14.44
3. $16.50
4. $17.25

Difficulty: 1

1. The goal of a properly constructed ABC system is to:

A) have the most accurate cost system.

B) identify more indirect overhead costs.

C) develop the best cost system for an economically reasonable cost.

D) have separate allocation rates for each department.

Difficulty: 1

1. Designing an activity-based cost system includes:

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

B) creating as many cost pools as possible.

C) identifying the activities performed by the plant's resources.

D) seeking a broader focus rather than detail.

Difficulty: 1

1. Design of an activity-based cost system requires that:

A) the job bid process be redesigned.

B) resource costs be linked to the activities performed.

C) the cost of activities be linked to cost objects.

D) resource costs be linked to the activities performed and the cost of activities be linked to cost objects.

Difficulty: 1

1. Which of the following statements about activity-based costing in manufacturing is not true?

A) ABC is useful for allocating overhead costs.

B) ABC is more likely to result in major differences from traditional costing systems if the firm manufactures only one product rather than multiple products.

C) ABC seeks to distinguish batch-related, product-sustaining, and business-sustaining costs, especially when they are not proportional to production volume.

D) ABC differs from traditional costing systems in that products are not cross-subsidized.

Difficulty: 1

1. The total amount of overhead costs assigned to product PQ-6 using the traditional cost method is ________ the total amount assigned using ABC.

A) more than

B) less than

C) identical to

D) approximately the same

Difficulty: 1

1. Given this change in the cost:

A) PQ-6 costing results under the new system depend on the adequacy and quality of the estimated sales and sales revenue used by the system.

B) Willow should raise the sales price for PQ-6.

C) Willow has been understating the profit for PQ-6.

D) Willow's other products will be assigned a smaller share of overhead costs.

Difficulty: 2

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

A) $5,000

B) $25,000

C) $75,000

D) $250,000

Difficulty: 2

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

A) $10,000

B) $25,000

C) $40,000

D) $50,000

Difficulty: 2

1. How much of the account billing costs will be assigned to Department B?

A) $7,500

B) $12.500

C) $15,000

D) $25,000

Difficulty: 2

1. Assume a traditional costing system applies the $120,000 of overhead costs based on direct labor hours.

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

A) $40,000

B) $75,000

C) $50,000

D) $70,500

Difficulty: 2

1. Number of setups and number of components are identified as activity-cost drivers for overhead costs.

Assuming an activity-based costing system is used, what is the total amount of overhead costs assigned to the standard model?

A) $20,000

B) $29,000

C) $48,000

D) $60,000

Difficulty: 2

1. If direct labor-hours are considered as the only overhead cost driver, what is the single cost driver rate for Global Enterprises?

A) $0.60 per direct labor-hour

B) $0.80 per direct labor-hour

C) $1.20 per direct labor-hour

D) $6.00 per direct labor-hour

Difficulty: 2

1. Using direct labor-hours as the only overhead cost driver, what is the amount of overhead costs allocated to the Leaf Job?

A) $320

B) $720

C) $1,200

D) $1,360

Difficulty: 2

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

A) $1.20 per direct labor hour, $0.50 per machine hour, $3.60 per sq ft

B) $2.50 per direct labor hour, $0.50 per machine hour, $1.00 per sq ft

C) $0.80 per direct labor hour, $0.10 per machine hour, $2.40 per sq ft

D) $0.60 per direct labor hour, $0.40 per machine hour, $2.60 per sq ft

Difficulty: 2

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

A) $1,434

B) $1,400

C) $1,350

D) $1,074

Difficulty: 2

1. Which method of allocation probably best estimates actual overhead costs used for Global Enterprises? 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 it best reflects the relative consumption of resources.

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

Difficulty: 2

1. What is the cost driver rate if manufacturing overhead costs are considered one large cost pool and are assigned based on 20 million pages of production capacity?

A) $0.10 per page

B) $0.07 per page

C) $0.092 per page

D) $1.84 per page

Difficulty: 2

1. Using pages printed as the only overhead cost driver, what is the manufacturing overhead cost estimate for Wellness Drugs during 2020?

A) $5,000

B) $8,280

C) $11,200

D) $18,500

Difficulty: 2

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

A) $1,300 per design change, $130.00per setup, $20 per inspection

B) $360 per design change, $3.20per setup, $6.40 per inspection

C) $1,680 per design change, $5.38 per setup, $42 per inspection

D) $286 per design change, $15.38 per setup, $20 per inspection

Difficulty: 3

1. Using the three cost pools to allocate overhead costs, what is the total manufacturing overhead cost estimate for Wellness Drugs during 2020?

A) $5,400

B) $9,100

C) $10,800

D) $10,192

Difficulty: 3

1. When overhead costs are assigned using the single cost driver, number of pages printed, then

A) Paris Printers will want to retain this highly-profitable customer.

B) Wellness Drugs will likely seek to do business with competitors in the future.

C) Wellness Drugs is unfairly overbilled for its use of printing resources.

D) Wellness Drugs is grossly underbilled for the job, while other jobs will be unfairly overbilled.

Difficulty: 2

1. What are the manufacturing overhead costs per remote control assuming the traditional cost method is used and a batch of 500 remote controls are produced? The batch requires 1,000 parts, 10 direct labor hours, and 15 minutes of inspection time.

A) $4,000.00 per remote control

B) $0.50 per remote control

C) $4.00 per remote control

D) $8.00 per remote control

Difficulty: 2

1. What are the manufacturing overhead costs per remote control assuming an activity-based costing method is used and a batch of 50 remote controls are produced? The batch requires 100 parts, 6 direct manufacturing labor hours, and 2.5 minutes of inspection time.

A) $8.00 per remote control

B) $13.10 per remote control

C) $48.00 per remote control

D) $655.00 per remote control

Difficulty: 1

1. Logical cost allocation bases for overhead costs include:

A) cubic feet of packages moved to measure distribution activity.

B) machine hours to measure setup activity.

C) direct manufacturing labor hours to measure product designing activity.

D) All of the above are correct.

Difficulty: 1

1. A manufacturing firm produces multiple families of products requiring various combinations of different types of parts. Of the following, the MOST appropriate cost driver for assigning materials handling costs to the various products is:

A) direct labor hours.

B) number of units produced.

C) number of parts used.

D) number of suppliers involved.

Difficulty: 2

1. If products are alike, then for costing purposes:

A) a simple costing system will yield accurate cost numbers.

B) an activity-based costing system should be used.

C) multiple volume-based cost rates should be used.

D) varying demands will be placed on resources.

Difficulty: 2

1. ABC systems:

A) reveal activities that can be eliminated.

B) help control nonfinancial items such as number of setup hours.

C) help identify new designs to reduce costs.

D) All of the above are correct.

Difficulty: 1

1. 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.

Difficulty: 2

1. The goal of a properly constructed ABC system is to:

A) develop the best cost system by staying within the economizing constraints (relevant benefit versus cost tradeoff for the system).

B) have the most accurate cost system.

C) clone the ABC model processes.

D) adapt the ABC model exactly to the organization.

Difficulty: 2

1. Updates to a time-driven ABC system might be triggered by:

A) significant shifts in cost estimates.

B) change in top management.

C) new fiscal year.

D) interviews and surveys.

Difficulty: 2

1. A time-driven ABC system:

A) is difficult to update.

B) is time-consuming, expensive and often inaccurate.

C) requires that only two parameters be updated.

D) is based on theoretical capacity.

Difficulty: 2

1. Advantages of a time-driven ABC system include:

A) data used are more easily obtained.

B) complex assumptions.

C) theoretical.

D) requires many parameters to be estimated.

Difficulty: 2

1. Advantages of the time-driven ABC model include all of the following except:

A) cost-driver rates change when there has been a shift in the efficiency of the activity.

B) cost-driver rates can be easily updated.

C) complex assumptions reflect the manufacturing environment.

D) data used are easily observed.

Difficulty: 1

1. Which of the following treatments does your text recommend for dealing with the cost of unused capacity?
2. Charge the full amount to cost of goods sold
3. Allocate the amount among ending work in process, finished goods inventory, and cost of goods sold
4. Allocate the amount between ending work in process and finished goods inventory
5. The text takes no position on this issue

Difficulty: 1

1. Determining realistic, practical capacity measurements is a(n):

A) fairly simple process.

B) judgmental process.

C) straightforward process.

D) impossible process.

Difficulty: 2

1. The best cost estimate for overhead resources required for production is developed by using ________ as the denominator for activity cost driver calculations.

A) actual driver quantities used

B) estimated driver quantities for estimated production

C) available capacity

D) practical capacity

Difficulty: 2

1. The major reason for using practical capacity as the denominator for activity cost driver calculations is to:

A) avoid distortions induced by the assignment of unused capacity costs to the products produced or customer served.

B) simplify the calculations of the activity cost drivers.

C) reduce the cost of unused capacity.

D) place less emphasis on the cost of unused capacity.

Difficulty: 2

1. A primary reason for assigning selling and distribution costs to products and customers for analytical purposes is:

A) to justify a varied product mix.

B) that controllers are required to assign all costs when valuing inventories.

C) that different products, and customers require different quantities of selling and distribution activities.

D) that all indirect costs must be assigned.

Difficulty: 2

1. Under traditional costing systems, selling and administrative costs have been largely ignored because they:

A) are hard to quantify except at exorbitant cost of measurement.

B) have been negligible in amount relative to total costs.

C) in the past they have been inventoriable for financial reporting purposes under GAAP.

D) relate to a varied mix of products.

Difficulty: 2

1. A key reason for using an ABC system rather than a conventional cost system is because ABC assigns overhead costs:

A) because they are indirect costs.

B) more simply than a traditional cost system.

C) based only on volume-based measures.

D) to reflect differences required by different activities.

Difficulty: 2

1. For service organizations that bill customers at a predetermined average cost rate, activity-based cost systems can help to:

A) clarify appropriate cost assignments for various service activities.

B) identify the profitability of various service activities.

C) clarify appropriate cost assignments and identify the profitability of various service activities.

D) None of the above is correct.

Difficulty: 2

1. All of the following situations cause major deterrents to effective ABC implementation except when:

A) the ABC system lacks a clear business purpose.

B) the ABC system's model design is poor.

C) the ABC consultants fail to adapt the ABC system adequately to the specifics of the organization.

D) senior management communicates their commitment to the change.

Difficulty: 2

1. The focus of ABC systems is on:

A) long-term decisions.

B) short-term decisions.

C) make-or-buy decisions.

D) special-pricing decisions.

Difficulty: 2

1. It only makes sense to implement an ABC system when:

A) ABC provides information to make better decisions.

B) its benefits exceed implementation costs.

C) ABC traces more costs as direct costs.

D) there is a strong cause-and-effect relationship between costs in the cost pools and their cost-allocation bases.

Difficulty: 2

1. Explain how traditional cost systems, using only volume-based cost drivers, distort product costs.

Difficulty: 2

1. In general, factories producing a more varied and complex mix of products have higher costs than factories producing only a narrow range of products. Explain why this is generally true.

Difficulty: 2

1. Provide at least two examples of types of costs that would be higher for factories producing a more varied and complex mix of products than for factories producing only a narrow range of products.

Difficulty: 2

1. Provide a diagram of how the original activity-based cost system model works and explain the two major components of the model.

Difficulty: 2

1. How are cost drivers selected in original activity-based costing systems?

Difficulty: 2

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

Difficulty: 2

1. Do activity-based costing systems always provide more accurate product costs than conventional cost systems? Why or why not?

Difficulty: 3

1. Drain 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:

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

Required:

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

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

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

1. compute the estimated overhead costs per unit; and

2. compute the estimated operating profit per unit.

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

Difficulty: 2

1. Discuss the advantages of a time-based ABC system.

Difficulty: 3

1. Border Manufacturing produces two types of pre-fabricated exterior walls: deluxe and standard. The assignment basis for overhead costs has been direct labor hours. For 2021, Border compiled the following data for the two products:

Last year, Border purchased an expensive robotics system to allow for more complex products in the deluxe 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, and obtained the following ABC information for 2021:

Required:

a. Using the current cost system, what is the estimated:

1. total cost of manufacturing one unit for each type of wall; and

2. profit per unit for each type of wall?

b. Using the current cost system, estimated manufacturing overhead costs per unit are less for the deluxe wall ($1,800 per unit) than the standard wall ($2,400 per unit). What is a likely explanation for this?

c. Review the machine-related costs above. What is a likely explanation for machine-related costs being so high? What might explain why total machining hours for the deluxe walls (300,000 hours) are the same as for the standard walls (300,000 hours)?

d. Using the activity-based costing data presented above,

1. compute the cost driver rate for each overhead activity.

2. compute the revised manufacturing overhead cost per unit for the deluxe wall.

3. compute the revised total cost to manufacture one unit of the deluxe wall.

e. Is the deluxe wall as profitable as the original data estimated? Why or why not?

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

Difficulty: 3

1. At Rhine Electronics, product lines are charged for call center overhead costs based on sales revenue. Last year's summary of call center operations revealed the following:

Rhine Electronics currently allocates call center overhead costs using a rate of 0.5% of sales revenue.

Required:

a. Compute the amount of call center overhead costs allocated to each product line under the current system.

b. Assume Rhine decides to use the average call length for information to assign last year's overhead costs. Does this allocation method seem more appropriate than percentage of sales? Why or why not?

c. Assume Rhine decides to use the numbers of calls of both types to assign last year's overhead costs of $65,000. Compute the amount of call center overhead costs assigned to each product line under this revised ABC system.

d. Rhine Electronics assigns bonuses based on departmental profits. How might the Specialty Products manager try to obtain higher profits for next year if overhead costs are assigned based on the average call length for information?

e. Discuss the barriers for implementing ABC for this call center.