Activity-based Costing

1) The death spiral concept refers to the process of continually decreasing selling prices to meet
foreign competition.
2) The basic approach in product costing is to allocate costs in the cost pools to the individual cost
objects, which are the products or services of interest.
3) Predetermined overhead rates are not used in first-stage cost allocations but are used in
second-stage cost allocations.
4) The plantwide allocation concept cannot be used in nonmanufacturing organizations.
5) Using the department allocation method, a company establishes a separate overhead allocation
rate for each department.
6) The department cost allocation method provides more accurate product cost information for
managerial decision-making than the plantwide cost allocation method.
7) Companies that manufacture products that are similar and use the same resources should use
the plantwide cost allocation method.
8) "Activity-based costing (ABC) is a two-stage cost allocation system that (1) allocates costs to
activities and (2) then to products based on their use of the activities.”
9) The basic difference between the department cost allocation method and activity-based costing
(ABC) is the number of stages involved in allocating costs to products.
10) The number of products produced is an example of a facility-related cost driver in the cost
hierarchy.
11) Direct labor cost (DLC) and direct labor hours (DLH) are examples of volume-related cost
drivers in the cost hierarchy.
12) If a company has identified three major activities as setting up, handling material, and
assembling, possible cost drivers would most likely be set-up hours, production runs, and number
of shipments, respectively.
13) Before using activity-based costing (ABC), managers must apply the cost-benefit principle to the
additional recordkeeping costs associated with ABC.
14) Activity-based costing (ABC) can be applied to administrative activities (e.g., purchasing) but not
to marketing activities.
15) "Time-driven activity-based costing (TDABC) is more costly to implement than an unmodified
activity-based costing system.”
16) "When a department or product line is dropped, the common fixed costs which had been
allocated to that department:
a. are eliminated.
b. become variable costs.
c. are allocated to the remaining departments or product lines.
d. become sunk costs
17) "A two-stage system first allocates costs to:
a. Products or services and then allocates costs to departments or activities.
b. The cost driver and then allocates costs to the cost hierarchy.
c. A product line and then allocates costs to the department.
d. Departments or activities and then allocates costs to products or services.
18) "The basic difference between a first-stage cost allocation and a second-stage cost allocation is
that:
a. cost pools are not used in first-stage cost allocations.
b. predetermined overhead rates are used in first-stage cost allocations but not in second-stage
cost allocations.
c. the first stage prohibits firms from aligning the allocation of costs with the use of resources.
d. when used in an ABC system, the first stage assigns costs to activities.
19) "Which of the following would be least likely to be used as an allocation base in a company that
applies a single plantwide rate?
a. Machine hours.
b. Direct material costs.
c. Direct labor cost.
d. Direct labor hours.
20) "Which of the following statements is true?
a. One of the lessons learned from activity-based costing (ABC) is that all costs are really a
function of volume.
b. The primary purpose of the plantwide and department allocation methods is allocating direct
costs to specific products.
c. A problem with activity-based costing (ABC) is that it requires more recordkeeping than other
methods.
d. Direct cost allocations are required for the plantwide and department allocation methods.
21) "The electricity used for production machinery would be classified as a:
a. Volume-related activity.
b. Batch-related activity.
c. Product-related activity.
d. Facility-related activity.
22) "Which of the following costs is not related to a batch-related activity?
a. Material handling.
b. Machine setups.
c. Shipping costs.
d. Compliance costs.
23) "The number of services provided by an accounting firm would be classified as an:
a. Volume-related activity.
b. Batch-related activity.
c. Product-related activity.
d. Facility-related activity.
24) "Which of the following would not be a batch-related activity?
a. Setting up a machine for a new production run.
b. Performing 100% inspection.
c. Purchasing materials.
d. Processing a customer order.
25) "Volume-based costing allocates indirect product costs based on the volume of output, using
such allocation bases as direct labor hours, machine hours, or the amount of direct material used
in the production process. Activity-based costing (ABC) has consistently shown that volume-
based costing ________ the cost of high-volume products and ________ the cost of low-volume
products.

High-Volume Products Low-Volume Products

A. Overstates Overstates
B. Overstates Understates
C. Understates Overstates
D. Understates Understates

a. Option A
b. Option B
c. Option C
d. Option D
26) "Which of the following would be a reasonable basis for assigning the materials handling costs
to the units produced in an activity-based costing (ABC) system?
a. Number of production runs per year.
b. Number of components per completed unit.
c. Amount of time required to produce one unit.
d. Amount of overhead applied to each completed unit.
27) "Which of the following statements is true regarding activity-based costing in administration?
a. The principles of ABC are different when applied to administrative services.
b. ABC in administration involves five steps.
c. All cost drivers in an administrative system will be time-related.
d. Activity-based costing for administrative services follows the same four-step procedure
described for manufacturing.
28) "Which of the following statements is true regarding time equations used in time-driven activity-
based costing?
a. Time equations cannot adjust extra time for new vendors.
b. Time equations allow managers to adjust the times for orders with different characteristics.
c. Time equations cannot be used where there is a maximum size of an order that can be
inspected or transported to the warehouse.
d. Time equations are only used as part of unmodified ABC systems.
29) "Which of the following would be the most appropriate activity and cost drivers pairing for a
Purchasing Department?
a. Activity: Placing orders - Possible Cost Driver: Number of orders.
b. Activity: Placing orders - Possible Cost Driver: Number of new hires.
c. Activity: Placing orders - Possible Cost Driver: Frequency of audits.
d. Activity: Placing orders - Possible Cost Driver: Employee turnover rate.
30) "Which of the following statements is true regarding time-driven activity-based costs?
a. A manager needs to determine the cost of resources for each individual item produced.
b. This approach requires interviews and surveys from multiple managers and employees.
c. It is more costly than the unmodified ABC system.
d. It uses the cost of the resources supplied to a department and the time it takes to complete the
various activities of the department.
31) "Which one of the following accounts is not used in an activity-based costing (ABC) system?
a. Materials Inventory.
b. Work-in-Process Inventory.
c. Finished Goods Inventory.
d. Allocations Incurred.
32) "Which of the following is not a step involved in activity-based costing?
a. Identify the activities that consume resources and assign costs to those activities.
b. Determine how to reduce the costs of making products by cutting activities.
c. Assign costs to products by multiplying the cost driver rate by the volume of cost driver units
consumed by the product.
d. Compute a cost rate per cost driver unit or transaction.
33) "Which of the following statements is true?
a. Activity-based costs per unit are always greater than volume-based costs per unit.
b. Volume-based costing has typically resulted in lower gross margins for high-volume products
and higher gross margins for low-volume products.
c. Different cost allocation methods are constructed so that they typically result in the same or
similar estimates of how much it costs to make a product.
d. Activity-based costing typically provides less information about product costs while requiring
more recordkeeping.
34) "Flawless Cosmetic Company manufactures and distributes several different products. The
company currently uses a plantwide allocation method for allocating overhead at a rate of $7 per
direct labor hour. Loren is the department manager of the Makeup Department that produces
Products - Concealer (C) and Glow Cream (GC). Jennifer is the department manager of the Hair
Care Department that manufactures Product - Shampoo (S). The product costs (per case of 24
bottles) and other information are as follows:

Products C GC S
Direct materials $ 100.00 $ 72.00 $ 48.00
Direct labor 42.00 31.50 12.00
Overhead 28.00 21.00 14.00
$ 170.00 $ 124.50 $ 74.00
Machine hours 4 2 3
Number of cases (per year) 300 500 600

If Flawless changes its allocation basis to machine hours, what is the total product cost per case
for Product GC?
a. $163.50
b. $144.00
c. $138.15
d. $117.15
35) "Allure Company manufactures and distributes two products, M and XY. Overhead costs are
currently allocated using the number of units produced as the allocation base. The controller has
recommended changing to an activity-based costing (ABC) system. She has collected the
following information:

Activity Cost Driver Amount M XY

Production setups Number of setups $82,000 8 12
Material handling Number of parts 48,000 56 24
Packaging costs Number of units 130,000 80,000 50,000
$260,000

What is the total overhead allocated to Product M using the current system?
a. $113,600.
b. $130,000.
c. $146,400.
d. $160,000.
"