ABC

COST ACCOUNTING & CONTROL

TEST BANK – ACTIVITY-BASED COSTING

Activity-Based Costing

I. Introduction

Activity-based costing (ABC) has been popularized because of the rapid increase in the
automation of manufacturing process, which has led to a significant increase in the
incurrence of indirect costs and a consequent need for more accurate cost allocation.

Under the activity-based costing, as the name implies, costs are accumulated by activity
rather than by department or function for purposes of product costing.

II. Definition

ABC Costing is one means of refining a cost system to avoid what has been called
peanut-butter costing. Inaccurately averaging or spreading costs like peanut-butter over
products that use different amounts of resources results in a product-cost-cross-
subsidization.
Product-cost cross-subsidization describes the condition in which the miscasting of one
product causes the miscasting of other products.
In the Accounting Glossary of the Statements of Management Accounting. ABC was
defined as a system that:

1. Identifies the causal relationship between the incurrence of cost and activities
2. Determines the underlying driver of the activities
3. Established cost pools related to individual drivers
4. Develops costing rates
5. Applies cost to product on the basis of resources consumed (drivers)

III. Nature of Activity-Based Costing

In this costing system, cost drivers are identified and used as a basis for cost allocation.
Cost drivers are the factors that will contribute to increasing or decreasing costs. In
addition, under the activity-based costing approach, those activities that do not add value
to the product are reduced to the extent possible.

ABC determines the value-adding activities associated with the incurrence of costs and

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then accumulates a cost pool for each activity using the appropriate activity base (cost
driver). Cost pools are then assigned to cost objects. ABC may be employed with job-
order or process-costing methods.

An Activity-Based Costing is a two-stage allocation process traced to departments. First,

costs are trace to activities, and then to products.

MCQ – THEORY

1. An accounting system that collects financial and operating data o the basis of the underlying
nature and extent of the cost drivers is
a. Activity-based costing. c. Delivery cycle time costing.
b. Target costing. d. Variable costing. Punzalan 2014

2. Multiple or departmental manufacturing overhead rates are considered preferable to a single

or plant-wide overhead when
a. Manufacturing is limited to a single product flowing through identical departments in a
fixed sequence. Punzalan 2014
b. Various products are manufactured that do not pass through the same departments or
use the same manufacturing techniques.
c. Individual cost drivers cannot accurately be determined with respect to cause and effect
relationships.
d. The single or plant-wide rate is related to several identified cost drivers.

3. Cost drivers are

a. Activities that causes costs to increase as the activity increases.
b. Accounting techniques used to control costs.
c. Accounting measurements used to evaluate whether performance is proceeding
according to plan.
d. A mechanical basis, such as machine hours, computer time, size of equipment, or
square footage of factory, used to assign costs to activities. Punzalan 2014

4. A base used to allocate the cost of a resource to the different activities using that resource is
called.
a. Resource Driver c. Final cost driver
b. Activity Driver d. Driver Punzalan 2014

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5. A base used to allocate the cost of products, customer, or others final cost objects is called
a. Resource Driver c. Final cost driver
b. Activity Driver d. Driver Punzalan 2014

6. Activity-based management (ABM) is Punzalan 2014

a. A costing system in which multiple overhead cost pools are allocated using bases that
include one or more non-volume related factors.
b. A base used to allocate the cost of a resource to the different activities using it.
c. The use of information obtained from ABC to make improvements in the firm
d. A base used to allocate the cost of an activity to products and customers.
7. What is the normal effect on the numbers of cost pools and cost assignment bases when an
activity-based cost system replaces a traditional cost system.
Cost pools Cost assignment bases
a. No Effect No Effect
b. Increase No Effect
c. No Effect Increase
d. Increase Increase Punzalan 2014

8. Activities, their drivers, and their costs may be classified as unit level, product level, batch level,
and plant level. If activity-based costing information is prepared for internal purposes, which
costs are most likely to be treated as period costs?
a. Unit level. c. Product level.
b. Batch level. d. Plant level. Punzalan 2014

9. In an activity-based costing system, cost reduction is accomplished by identifying and

eliminating
All Cost Nonvalue-
Drivers adding Activites
a. No No
b. Yes Yes
c. No Yes
d. Yes No Punzalan 2014

10. Nile Co.'s cost assignment and product costing procedures follow activity-based costing
principles. Activities have been identified and classified as being either value-adding or non
value-adding as to each product. Which of the following activities, used in Nile's production
process, is non value-adding? Punzalan 2014
a. Design engineering activity. c. Drill press activity.
b. Heat treatment activity. d. Raw materials storage activity.

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11. One of the requirements for a JIT system to be successful is

a. Cyclical production.
b. Adequate inventory stock.
c. Coupling it with job order costing.
d. High quality and balanced work loads. Punzalan 2014
12. All of the following are terms used to describe the JIT effort to reduce inventories of work in
process and raw materials, except
a. Backflush production c. Lean production
b. Stockless production d. ZIP production Punzalan 2014
13. In backflush costing, if the conversion cost in the Raw and In Process was P500 on July 1 and
P1,000 on July 31, the account to be credited at the end of July for the P500 increase would
be
a. Raw and In Process c. Raw Materials
b. Finished Goods d. Cost of Goods Sold Punzalan 2014
14. Cost allocation is the process of assigning indirect costs to a cost object. The indirect costs
are grouped in cost pools and then allocated by a common allocation base to the cost object.
The base that is employed to allocate a homopeneous cost pool should
a. Have a cause-and-effect relationship with the cost items in the cost pool.
b. Assign the costs in the pool uniformly to cost objects even if the cost objects use
resources in a non-uniform way.
c. Be a nonfinancial measure (e.g., number of setups) because a nonfinancial measure is
more objective.
d. Have a high correlation with the cost items in the cost pool as the sole criterion for
selection. Dayag 2013
15. Multiple or departmental overhead rates are considered preferable to a single or plant-wide
overhead rate when
a. Manufacturing is limited to a single product flowing through identical departments in a
fixed sequence.
b. Various products are manufactured that do not pass through the same departments or
use the same manufacturing techniques.
c. Individual cost drivers cannot accurately be determined with respect to cause-and-effect
relationships. Dayag 2013
d. The single or plant-wide rate is related to several identified cost drivers.
16. An accounting system that collects financial and operating data on the basis of the underlying
nature and extent of the cost drivers is
a. Activity-based costing.

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b. Target costing.
c. Cycle-time costing.
d. Variable costing. Dayag 2013
17. Cost drivers are
a. Activities that cause costs to increase as the activity increases.
b. Accounting techniques used to control costs.
c. Accounting measurements used to evaluate whether performance is proceeding
according to plan.
d. A mechanical basis, such as machine hours, computer time, size of equipment, or
square footage of factory, used to assign costs to activities. Dayag 2013
18. Which of the following statements about activity-based costing is not true?
a. Activity-based costing is useful for allocating 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. In activity-based costing, cost drivers are what cause costs to be incurred.
d. Activity-based costing differs from traditional costing systems in that products are not
cross-subsidized. Dayag 2013

19. Because of changes that are occurring in the basic operations of many firms, all of the
following represent trends in the way indirect costs are allocated except.
a. Treating direct labor as an indirect manufacturing cost in an automated factory.
b. Using throughput time as an application base to increase awareness of the costs
associated with lengthened throughput time.
c. Preferring plant-wide application rates that are applied to machine hours rather than
incurring the cost of detailed allocations.
d. Using several machine cost pools to measure product costs on the basis of time in a
machine center. Dayag 2013

20. What is the normal effect on the numbers of cost pools and allocation bases when an activity-
based cost (ABC) system replaces a traditional cost system?
Cosf Pools Allocation Bases
a. No effect No effect
b. Increase No effect
c. No effect Increase
d. Increase Increase Dayag 2013
21. In an activity-based costing (ABC) system, cost reduction is accomplished by identifying and
eliminating
All Cost Drivers Nonvalue-Adding Activities

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a. No No
b. Yes Yes
c. No Yes
d. Yes No Dayag 2013
22. Which of the following would be a reasonable basis for allocating the materials handling costs
to the units produced in an activity-based costing 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. Dayag 2013
23. Chang Co.'s cost allocation and product costing procedures follow activity-based costing
principles. Activities have been identified and classified as being either value-adding or
nonvalue-adding as to each product. Which of the following activities, used in Chang's
production process, is nonvalue-adding?
a. Design engineering activity.
b. Heat treatment activity.
c. Drill press activity.
d. Raw materials storage activity. Dayag 2013

24. A streamlined accounting system:

a. Standard costing c. Process costing
b. Job Order costing d. Backflush costing Dayag 2013

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ACTIVITY-BASED COSTING
Consumption Ratio

Questions 1 & 2 are based on the following: Dayag 2013

25. Principal, Inc. produces three products. Production and cost information is as follows:
Model A Model B Model C
Units produced 2,000 6,000 12,000
Direct labor hours 4,000 2,000 4,000
Number of setups 100 150 250
The consumption ratios for number of setups would be:
A B C A B C
a. 40% 20% 40% c. 10% 30% 60%
b. 20% 30% 50% d. 5% 22% 73%

26. Using the same information in No. 40, compute the consumption ratios based on units
produced would be:
A B C A B C
a. 40% 20% 40% c. 10% 30% 60%
b. 20% 30% 50% d. 5% 22% 73%

Activity Rates
Comprehensive
27. Product 53 uses 200 hours of direct labor and has 2,000 machine steps. Kate Ong, the cost
accountant, has been considering using either direct labor hours or machine steps as the
cost driver. The ratio of overhead cost to direct labor hours is P60. The assignment of
overhead cost to Product 53 using direct labor hours would result in a higher charge by
P4,000 than if machine steps were used as the cost driver.
Determine the ratio of overhead cost to machine steps.
a. P6 c. P60
b. 2 d. 4 Dayag 2013

Applied Overhead
Labor-Related Overhead Cost
28. Cebu Enterprises is a Philippine exporter of souvenir items manufactured in the capital city of
Jerusalem. The following overhead cost data have been accumulated:
Amount
Activity Center Cosf Driver of Activity Center Costs
Materials Handling Grams handled 100,000 grams P 50,000
Painting Units painted 50,000 units 200,000

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Assembly Labor hours 4,000 hours 120,000

Job 1234 contains 3,000 units. It weighs 10,000 grams and uses 300 hours of labor.
Compute the total overhead costs that should be assigned to Job 1234.
a. P31,955 c. P26,000
b. 27,750 d. 32,000 Dayag 2013

Comprehensive
Questions 1 & 2 are based on the following: Dayag 2013
29. UST Community Hospital has found itself under increasing pressure to be accountable for the
charges it assesses its patients. Its current pricing system is ad hoc, based on pricing norms
for the geographical area, and it only explicitly considers direct costs for surgery, medication,
and other treatments. UST's controller has suggested that the hospital try to improve its
pricing policies by seeking a tighter relationship between costs and pricing. This approach
would make prices for services less arbitrary. As a first step, the controller has determined
that most costs can be assigned to one of three cost pools. The three cost pools follow along
with the estimated amounts and activity drivers.

Activity Center Amount Activity Driver

Quantity
Professional salaries P900,000 Professional hours 30,000 hours
Building costs 450,000 Square feet used 15,000 square feet
Risk management 320,000 Patients served 1,000 patients

The hospital provides service in three broad categories. The services are listed below with
their volume measures for the activity centers.
Service Professional Hours Square Feet Number of Patients
Surgery 6,000 1,200 200
Housing patients 20,000 12,000 500
Outpatient care 4,000 1,800 300

Compute the allocation rates for each activity center:

Professional Building Risk
Salaries Costs Management
a. P122/hr. P14/sq. ft. P52 per patient
b. 22/hr. 22/sq. ft. 22 per patient
c. 30/hr. 30/sq. ft. 320 per patient
d. 150/hr. 37.50/sq. ft. 1,067 per patient

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30. Using the same information in No. 29, determine the allocated activity center costs to the
three services provided by the hospital:
Surgery Housing Outpatient Care
a. P759,200 P2,634,000 P528,800
b. 162,800 715,000 134,200
c. 2,828,400 3,983,500 987,600
d. 280,000 1,120,000 270,000

31. Delta Machine Tool Incorporated produces a varied product line without the use of direct
labor. An extensive setup procedure is required. Because no single base for a predetermined
overhead rate will provide Delta with reliable product cost information, overhead is classified
into two cost pools and two predetermined overhead rates are used. For 2013, it is estimated
that total overhead costs will consist of P525,000 of overhead related to setups and P900,000
of overhead related to ma¬ chine usage. Total machine usage is expected to be 3,600 hours
for the year, and the total number of setups is expected to be 300. Job RST required parts
and materials costing P56,000, 70 hours of machine time, and four setups. What is the cost
of Job RST?
a. P80,500 c. P83,050
b. P78,500 d. P79,500 Guerrero 2013

Unit Cost
Questions 1 & 2 are based on the following: Dayag 2013
32. Katherine Inc. of Cebu Ltd. has decided to institute a pilot activity-based costing project in its
five-person purchasing department. Annual departmental costs are P473,500. Because
finding the best supplier takes the majority of effort in the department, most of the costs are
allocated to this area.
Number of Total
Activity Allocation Measure People Cost
Find best suppliers Number of telephone calls 3 P300,000
Issue purchase orders Number of purchase orders 1 100,000
Review receiving reports Number of receiving reports 1 73,500
During the year, the purchasing department made 150,000 telephone calls, issued
10,000 purchase orders, and reviewed 7,000 receiving reports. Many purchase orders
are received in a single shipment.
One product manufactured by Cebu Ltd. required the following purchasing department
activities: 125 telephone calls, 60 purchase orders, and 15 receipts.
What amount of purchasing department cost should be assigned to the product?
a. P1,007.50 c. P921.48
b. 4,500.00 d. 327.55

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33. Using the same information in No. 27, what is the purchasing department cost per unit would
be if 200 units of the product are manufactured during the year?
a. P2.00 c. P10.00
b. 5.04 d. 10.50
34. Believing that its traditional cost system may be providing misleading information, BMW
company is considering an activity based costing approach. It now employs a full cost system
and has been applying its manufacturing overhead on the basis of machine hours. The
company plans on using 50,000 direct labor hours and 30,000 machine hours in the coming
year. The following data show the manufacturing overhead that is budgeted.
Activity Cost Driver Budgeted Activity Budgeted Cost
Material Handling No. of parts handled 6,000,000 P720,000
Setup costs No. of setups 750 315,000
Machining costs Machine hours 30,000 540,000
Quality control No. of batches 500 225,000
Cost, sales, and production data for one of the company's product for the coming year are as
follows:
Prime Costs:
Direct material cost per unit P4.40
Direct labor cost per unit, .05 direct labor
hour@P 15 per hour 0.75
Sales and production data:
Expected sales 20,000units
Batch size 5,000units
Setups 2per batch
Total parts per finished unit 5parts
Machine hours required 80machine hours per batch
If the company employs an activity-based costing system, the cost per unit for the product
described for the coming year will be:
a. P6.00 c. P6.21
b. P6.08 d. P6.30 Guerrero 2013
35. Uratex Company manufactures a variety of classroom chairs. Its job-costing system uses an
activity-based approach. There are two direct-cost categories (direct materials and direct
labor) and three indirect cost pools. The cost pools represent three activity areas at the plant.
Manufacturing Budgeted Cost Driver used Cost-allocation
Activity Area Cost for 2013 as Allocation Base Rate
Materials Handling P 200,000 Parts P 0.25
Cutting 2,000,000 Parts 2.50
Assembly 2,000,000 Direct labor hours 25,000

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Two styles of chairs were produced in March, the high school chair, and the college chair.
Their quantities, direct material costs, and other data for March 2013
are as follows:
Direct Direct
Units Materials Number Manufacturing
Produced Costs of Parts Labor hours
High school chair 5,000 P600,000 100,000 7,500
College chair 100 25,000 3,500 500
The direct labor rate is P20 per hour. Assume no beginning or ending inventory. What are the
unit cost of the high school chair and the college chair?
a. P240.50 and P571.75 respectively
b. P242.50 and P570.25 respectively
c. P252.50 and P571.25 respectively
d. P242.50 and P571.25 respectively Guerrero 2013

Comprehensive
Activity Rate, Unit Cost
Questions 1 & 2 are based on the following: Dayag 2013
36. Ongchan Metal Fabricators has a diverse product line and a complex cost structure, with
some jobs requiring much labor and little machine use and others requiring the opposite mix.
Because no single base for a predetermined overhead rate will provide Ongchan Metal
management with reliable product cost information, overhead is classified into two cost pools
and two predetermined overhead rates are used. For 2001, it is estimated that total overhead
costs will consist of P200,000 of overhead related to the usage of direct labor hours and
P300,000 of overhead related to machine usage. Total machine usage is expected to be
4,000 hours for the year, and total direct labor hours are expected to be 16,000.
Job 345 required P2,000 of direct material, 30 hours of labor at P10 per hour, and 10
hours of machine time.
Determine the dual predetermined overhead rates:
Per Direct Labor Hour Per Machine Hour
a. P 3.75 P75.00
b. 375.00 7.50
c. 12.50 12.50
d. 12.50 75.00
37. Using the same information in No. 1, compute the cost of Job 345:
a. P2,300.00 c. P3,425.00
b. 3,162.50 d. 5,800.00

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Questions 1 & 2 are based on the following: Dayag 2013

38. Kate Machine Tool Incorporated produces a varied product line without the use of direct
labor. An extensive setup procedure is required. Because no single base for a predetermined
overhead rate will provide Kate with reliable product cost information, overhead is classified
into two cost pools and two predetermined overhead rates are used. For 2011, it is estimated
that total overhead costs will consist of P525,000 of overhead related to setups and P900,000
of overhead related to machine usage. Total machine usage is expected to be 3,600 hours
for the year, and the total number of setups is expected to be 300.
Job 403 required parts and materials costing P56,000, 70 hours of machine time, and
four setups.

Determine the dual predetermined overhead rates:

Per Machine Hour Per Setup
a. P250.00 P1,750.00
b. 1,750.00 250.00
c. 145.83 3,000.00
d. 365.38 365.38

39. Using the same information in No. 1, compute the cost of Job 403
a. P78,208 c. P 83,038
b. 80,500 d. 179,500

Applied Overhead, Unit Cost & Unit Price

Questions 1 thru 3 are based on the following: Dayag 2013
40. A company has identified the following overhead costs and cost drivers for the coming year:

The
Overhead Item Cost Driver Budgeted Cost Budgeted
following
information Activity Level
was Machine setup Number of setups P 20,000 200
collected Inspection Number of inspections P130,000 6,500
on three Material Handling Number of material P 80,000 8,000
jobs that moves
were Engineering Engineering hours P 50,000 1,000
completed
P280,000
during the
year:

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Job 101 Job 102 Job 103

Budgeted direct
Direct materials P5,000 P12,000 P8,000
labor cost was
P100,000 and Direct labor P2,000 P2,000 P4,000
budgeted direct Units completed 100 50 200
material cost was Number of setups 1 2 4
P280,000. Number of 20 10 30
inspections
If the company Number of material 30 10 50
uses activity-
based costing, moves
how much Engineering hours 10 50 10
overhead cost should be allocated to Job 101 ?
a. P1,300 c. P5,000
b. 2,000 d. 5,600

41. Using the same information in No. 1, compute the cost of each unit of Job 102 using Activity-
Based Costing:
a. P340 c. P440
b. 392 d. 520

42. Using the same information in No. 1, assuming the company prices its products at 140% of
cost and the company uses Activity-Based Costing, the price of each unit of Job 103 would
be:
a. P 98 c. P116
b. 100 d. 140

Activity Rate & Applied Overhead

43. Tomas Company manufactures two types of medical syringes: low-unit and med-unit. The
overhead activities, costs, and related data are as follows:
Low-Unit Med-Unit Activity Center
Costs
Receiving orders 100 150 P7,500
Machine hours 12,000 13,000 125,000
Setups 45 20 9,750
Shipping orders 200 400 30,000
Assume the total costs of all activity centers are allocated on the basis of machine hours.
Calculate the overall rate and allocate overhead costs to the two products using that rate.

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Low-Unit Med-Unit Low-Unit Med-Unit

a. P89,570 P82,680 c. P82,680 P82,680
b. 82,680 89,570 d. 89,570 89,570 Dayag 2013

Questions 1 thru 3 are based on the following: Punzalan 2014

New Wave Co. produces two products, Product Side A and Product Side B. Units produced for the
period totaled 13,625 for Side A and 11,100 for Side B. Total manufacturing overhead cost are
P550,000. The company uses the activity-based costing in allocating its manufacturing overhead
cost. The following additional information were gathered:
Product
Activity Cost Driver A B Total
Setups No. of setups 100 400 100,000
Machining Machine hours 3,000 2,000 400,000
Inspections No. of inspections 100 300 50,000
44. What would be the overhead rate for each activity?
Setups Machining Inspections
a. 200.00 80.00 125.00
b. 100.00 40.00 62.50
c. 183.33 183.33 183.00
d. 25.00 45.00 20.00

45. How would the total overhead cost of P550,000 be allocated between
Products Side A and Side B?
Side A Side B
a. 640,000 540,000
b. 586,656 494,991
c. 275,000 275,000
d. 272,500 277,500

46. What would be the overhead cost per unit for Products Side A and Side B?
Side A Side B
a. P46.97 P48.65
b. 43.06 44.59
c. 20.18 24.77
d. 20.00 25.00

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ABC & TRADITIONAL COSTING

Overhead Cost per Unit
Setup Cost
47. Product BDE uses 200 hours of direct labor hours and has 2,000 machine steps. The company
has been considering using either direct labor hours or machine steps as the cost driver. The
ratio of overhead cost to direct labor hours is P60. The assignment of overhead cost to Product
BDE using the direct labor hours would result in a higher charge by P4,000 than if machine steps
were used as the cost driver. What is the ratio of overhead cost to machine steps?
a. 1.00 per step c. 4.00 per step
b. 2.00 per step d. 6.00 per step Punzalan 2014

48. Yokomo Inc. accumulated the following cost information for its two products, A and B.

Product A Product B
Units produced 2,000 1,000
Total direct labor hours 5,000 20,000
Set-up cost per batch PI,000 P2,000
Batch size 100 50
Total set-up cost incurred P20,000 P40,000
Direct labor hour per unit 2 1
A traditional costing system would allocate setup costs on the basis of direct labor hours. An
ABC system would trace costs by spreading the cost per batch over the units in a batch. What
is the setup cost per unit of Product A under each costing system.
Traditional Costing ABC
A. P 4.80 P 10
B. P 2.40 P 10
C. P40.00 P200
D. P4.80 P 20 Guerrero 2013

Material Handling Cost

Questions 1 & 2 are based on the following: Dayag 2013
49. Elvie manufactures two versions of a product. Production and cost information show the
following:
Model X Model Y
Units produced 100 200
Material moves 10 40
Direct labor hours per unit 1 2
Materials handling costs total PI00,000. Under ABC, the materials handling costs allocated to
each unit of Model would be:

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Model X Model Y Model X Model Y

a. P400 P200 c. P143 P429
b. 200 400 d. 429 143

50. Using the same information in No. 1, except that direct labor hours (traditional / conventional)
were used to allocate overhead costs. The material handling costs allocated to each unit of
Model would be (assuming that 2 DLH per unit for Model Y):

Model X Model Y Model X Model Y

a. P400 P200 c. P143 P429
b. 200 400 d. 429 143

Questions 1 & 2 are based on the following: Dayag 2013

51. Zeta Company is preparing its annual profit plan. As part of its analysis of the profitability of
individual products, the controller estimates the amount of overhead that should be allocated
to the individual product lines from the information given as follows:

Wall Specialty
Mirrors Windows
Units produced 25 25
Material moves per product line 5 15
Direct labor hours per unit 200 200
Budgeted materials handling costs. P50,000

Under a costing system that allocates overhead on the basis of direct labor hours
(traditional), the materials handling costs allocated to one unit of wall mirrors would be
a. P1,000 c. P2,000
b. 500 d. 5,000

52. Using the same information in No. 1, the materials handling costs allocated to one unit of wall
mirrors under Activity-Based Costing would be:
a. P1,000 c. P1,500
b. 500 d. 2,500

Numbers 1 and 2 are based on the following data: Guerrero 2013

Omega company is preparing its annual profit plan. As part of its analysis of the profitability of
individual products, the controller estimates the amount of overhead that should be allocated to the
individual product lines from the information given as follows:

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Wall Specialty
Mirrors Windows
Units produced 25 25
Material moves per product line 5 15
Direct labor hours per unit 200 200
Budgeted materials handling costs P50,000

53. Under a costing system that allocates overhead on the basis of direct labor hours
(traditional), the materials handling costs allocated to one unit of wall mirrors Would be
a. P1,000 c. P2,000
b. P500 d. P5,000
54. Under activity based costing (ABC), what is the materials handling costs allocated to one unit
of wall mirrors?
a. P1,000 c. P1,500
b. P500 d. P2,500
Comprehensive
Questions 1 thru 4 are based on the following: Dayag 2013
55. Ambrose Company uses three products with the following production and cost information:

Model S Model M Model L

Units produced 2,000 6,000 12,000
Direct labor hours (total) 4,000 2,000 4,000
Number of setups 100 150 250
Number of shipments 200 225 275
Engineering change orders 15 10 5

Overhead costs include setups of P45,000; shipping cost of P70,000; and engineering
costs of P90,000. What would be the per unit overhead cost for each model if direct labor
hours (traditional/conventional costing) were the allocation base?
Model S Model M Model S Model M.
a. P10.25 P10.25 c. P20.50 P20.50
b. 41.00 20.50 d. 41.00 6.83

56. Using the same information in No. 1, what would be the per unit overhead cost for Model S, if
ABC costing were used?
a. P10.25 c. P41.00
b. 37.00 d. 20.50

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57. Using the same information in No. 1, what would be the per unit overhead cost for Model M, if
ABC costing were used?
a. P11.00 c. P61.50
b. 33.00 d. 41.00

58. Using the same information in No. 1, what would be the per unit overhead cost for Model L, if
ABC were used?
a. P 5.42 c. P122.64
b. 16.25 d. 41.00

59. In manufacturing roller blades, Wesley Co.'s plant used 400 direct labor hours, 500 machine
hours, and 20 set ups. The following overhead costs were taken from the factory accounts:
Overhead Expenses Volume of Activities
Machine center P 120,000 20,000 machine hours
Set up center 40,000 100 set ups
Total P 160,000 4,000 direct labor hours
The plant was using a factory-wide overhead rate based on direct labor hours. A new ABC
system will use machine hours in the Machining Department and number of set ups in the Set
up Department as cost drivers. By what amount would overhead costs assigned to roller blades
differ between the prior system and the ABC system?
a. 7,800 c. 5,000
b. 7,000 d. 4,800 Punzalan 2014

Net Income (Loss)

Questions 1 & 2 are based on the following: Dayag 2013
60. Sony Ericsson has two major components with the following information:
Indoor Outdoor
Furniture Furniture Total
Annual revenue P300,000 P600,000 P900,000
Material costs P 40,000 P 60,000 P100,000
Labor costs P 50,000 P 75,000 P125,000
Materials hours 80,000 20,000
Number of batches 100 100
The business also has overhead costs as follows:
Cost Pool Cost in Pool Cost driver
Maintenance P200,000 Machine hours
Setups 175,000 Number of batches
Administrative 125,000 Labor costs
P500,000

ABC & Backflush – MCQ – Problems Page 18

 ABC

Determine the income (loss) of each segment if the overhead costs will be allocated to
segment based on labor costs (traditional):
Indoor Outdoor Indoor Outdoor
a. P87,500 P(262,500) c. P10,000 P165,000
b. (87,500) 262,500 d. (10,000) (165,000)

61. Using the same information in No. 1, determine the income (loss) of each segment if the
overhead costs will be allocated to segment under ABC costing:
Indoor Outdoor Indoor Outdoor
a. P87,500 P(262,500) c. P10,000 P165,000
b. 87,500 262,500 d. (10,000) (165,000)

Total Production Cost

62. New-Rage cosmetics has used a traditional cost accounting system to apply quality control
costs uniformly to all products at a rate of 14.5% of direct labor cost. Monthly direct labor cost
for Satin Sheen makeup is P27,500. In an attempt to distribute quality control costs more
equitably, New-Rage is considering activity-based costing. The monthly data shown in the
chart below have been gathered for Satin Sheen makeup.

Quantity for
Activity Cost Driver Cost Rates Satin Sheen
Income
material
inspection Type of material P11.50 per type 12 types
In-process
Inspection Number of units P0.14 per unit 17,500 units
Product
Certification Per order P77 per order 25 orders

The monthly quality control cost assigned to Satin Sheen makeup using activity-based
costing is
a. P88.64 per order.
b. P525.50 lower than the cost using the traditional system.
c. P8,500.50
d. P525.50 higher than the cost using the traditional system. Dayag 2013

ABC & Backflush – MCQ – Problems Page 19

 COST ACCOUNTING

Questions 1 & 2 are based on the following: Dayag 2013

63. Believing that its traditional cost system may be providing misleading information, an
organization is considering an activity-based costing (ABC) approach. It now employs a full-
cost system and has been applying its manufacturing overhead on the basis of machine
hours.
The organization plans on using 50,000 direct labor hours and 30,000 machine hours in the
coming year. The following data show the manufacturing overhead that is budgeted.
Budgeted Budgeted
Activity Cost Driver Activity Cost
Materials handling No. of parts handled 6,000,000 P720,000
Setup costs No. of setups 750 315,000
Machining costs Machine hours 30,000 540,000
Quality control No. of batches 500 225,000
Total manufacturing overhead cost: P1,800,000

Cost, sales, and production data for one of the organization's products for the coming year
are as follows:
Prime costs:
Direct material cost per unit P4.40
Direct labor cost per unit
.05 DLH @ P15.00/DLH 75
Total prime cost P5.15

Sales and production data:

Expected sales 20,000 units
Batch size 5,000 units
Setups 2 per batch
Total parts per finished unit 5 parts
Machine hours required 80 MH per batch
If the organization uses the traditional full-cost system, the cost per unit for this product for
the coming year would be
a. P5.39 c. P6.11
b. 5.44 d. 6.95

64. Using the same information in No. 1, and assuming that the organization employs an Activity-
Based Costing System, the cost per unit of the product described for the coming year would
be:
a. P6.00 c. P6.21
b. 6.08 d. 6.30

ABC & Backflush – MCQ – Problems Page 20

 ABC

65. Tamiya Corporation has used a traditional costing system to apply quality control costs
uniformly to all products at a rate of 14.5% of direct labor cost. Monthly direct labor cost for its
Product X is P275,000. In an attempt to distribute quality control costs more equitable, Tamiya
is considering activity-based costing (ABC). The June data shown below have been gathered
for Product X.

Activity Cost Driver Cost Rates Quantity

1. Material handling Type of materials P115 per type 12 types
2. Inspection Number of units P1.40 per unit 17,500 units
3. Product certification Per order P770 per order 25 orders

What is the monthly quality control assigned to product X using the ABC?
a. P686.40 per order.
b. P5,255 higher than the traditional costing system.
c. P8 5,000
d. P5,255 lower than the traditional costing system. Guerrero 2013

66. The Manila Company manufactures and sells packaging machines. It recently used an
activity-based approach to refine the job costing system at its Bulacan plant. The resulting job
costing system has one direct-cost category (direct materials) and four indirect manufacturing
cost pools. These four indirect cost pools and their allocation bases are:

Indirect Manufacturing Cost-Allocation Budgeted Cost-

Cost Pool Base Allocation Rate
1. Material handling Component parts P8 per part
2. Machining Machine-hours P68 per hour
3. Assembly Assembly-hours P75 per hour
4. Inspection Inspection-hours PI04 per hour

Manila Company recently sold 50 can-packaging machines to Ilocos Company. Each machine
has direct material costs of P3,000 requires 50 component parts, 12 machine-hours, 15
assembly-hours, and 4 inspection hours. Manila Company's previous costing system had one
direct-cost category (direct materials) and one indirect-cost category (manufacturing overhead
allocated at the rate of PI00 per assembly-hour). In comparison to the traditional costing system
used by Manila Company, the total manufacturing cost of the machines sold under the ABC is:
a. P114,850 higher c. P114,950 higher
b. P141,850 lower d. Equal Guerrero 2013

ABC & Backflush – MCQ – Problems Page 21

 COST ACCOUNTING

ABC vs TRADITIONAL COSTING

Cross Subsidy per Unit
67. Factory Co. makes two products, X and Z. X is being introduced this period, whereas Z has
been in production for 2 years. For the period about to begin, 1,000 units of each product are
to be manufactured. Assume that the only relevant overhead item is the cost of engineering
change orders; that X and Z are expected to require 8 and 2 change orders, respectively; that
X and Z are expected to require 2 and 3 machine hours, respectively; and that the cost of a
change order is P600. If Factory Co.- applies engineering change order costs on the basis of
machine hours, the cross-subsidy per unit arising from this peanut butter costing approach is
a. 1.20 c. 3.60
b. 2.40 d. 4.80 Punzalan 2014

ABC & Backflush – MCQ – Problems Page 22

 ABC

ANSWER KEY
1.A 26.C 51.A
2.B 27.D 52.B
3.A 28.C 53.A
4.A 29.C 54.B
5.B 30.D 55.D
6.C 31.A 56.B
7.D 32.A 57.A
8.A 33.B 58.A
9.C 34.D 59.C
10.D 35.D 60.C
11.D 36.D 61.B
12.A 37.C 62.D
13.D 38.A 63.C
14.A 39.B 64.D
15.B 40.A 65.B
16.A 41.A 66.A
17.A 42.A 67.B
18.B 43.B
19.C 44.A
20.D 45.D
21.C 46.D
22.B 47.C
23.D 48.A
24.D 49.B
25.B 50.C

Answer Key Page 23

 COST ACCOUNTING

SOLUTIONS
1. Suggested answer (a) Activity-based costing
An activity-based costing system identifies the causal relationship between incurrence of costs
and activities, determines the driver for each activity, and applies costs to products or services
on the basis of resources (drivers) consumed

2. Suggested answer (b)

Multiple rates are appropriate when a process differs substantially among departments or when
products do not go through all departments or all processes. The trend in cost accounting is
toward activity-based costing, which divides production into numerous activities and attempts
to identify the driver/s most relevant to each. A driver is a factor that causes changes in a cost.
Thus, activity-based costing emphasizes cost assignment based on trading rather than
allocation. The result is a more accurate assignment of costs

3. Suggested answer (a)

A cost driver is a measure of activity, such as direct labor hours, machine hours, beds occupied,
computer time used, flight hours, etc., that is causal factor in the incurrence of cost to an entity.
It is a basis used to assign costs to cost objects.

4. Suggested answer (a) resource driver

The name resources driver is new, but the idea is not. For example, most traditional accounting
system allocate some plant-wide costs to departments based on each department's allocation
bases like the number of employees or square footage occupied. If an ABC system allocates
the cost of a resource to several activities based on the square footage or number of employees
devoted to each activity, then square footage and the number of employees are called resource
drivers.

5. Suggested answer (b) activity driver

An activity driver is a base used to allocate the cost of an activity to products, customers, or
other final cost objects. The word final refers to the last step in cost allocation. The nature and
variety of activity drivers is what distinguishes ABC from traditional costing.

Answer Key Page 24

 ABC

6. Suggested answer (c) the use of information obtained from ABC to make improvements in the
firm

Activity-based management is a detailed analysis of activities and expenses created by those

activities used as a basis for controlling and improving efficiency or the use of information
obtained from activity-based costing to make improvement in a firm.

7. Suggested answer (d) Increase, Increase

In an activity-based cost system, cost assignment is more precise than in traditional cost
system, because activities rather than functions or departments are defined as cost objects.
This structure permits assignment to more cost pools and the identification of a driver
specifically related to each.. A driver is a factor that causes a change in a cost. Thus an activity
based cost system uses more cost pools and cost assignment bases than a traditional system

8. Suggested answer (d) Increase, Increase

In an activity-based cost system, cost assignment is more precise than in traditional cost
system, because activities rather than functions or departments are defined as cost objects.
This structure permits assignment to more cost pools and the identification of a driver
specifically related to each.. A driver is a factor that causes a change in a cost. Thus an activity
based cost system uses more cost pools and cost assignment bases than a traditional system

9. Suggested answer (c) No, Yes

An ABC system determines activities associated with the incurrence of costs and then
accumulates a cost pools for each activity. It identifies the driver/s used to trace those costs to
such cost object as products or services. A driver is a factor that causes a change in a cost.
Activities that do not add value are identified arid eliminated to the extent possible. However,
all drivers cannot be eliminated.

10. Suggested answer (d) Raw materials storage activity

ABC assign costs more precisely than traditional cost system because cost pools are
accumulated for activities rather than functions or departments. This structure permits
assignment to more cost pools and the identification of the driver/s used to reassign costs to
cost objects. Analysis by activity also provides for better cost control, because of identification
of nonvalue activities. For example, raw materials storage may be greatly reduced or eliminated
in a JIT system without affecting customer value.

Answer Key Page 25

 COST ACCOUNTING

11. Suggested answer (d) high quality and balanced work loads

Just in time is a philosophy centered on the reduction of costs through elimination of inventory.
Elimination of inventories eliminates storage and carrying costs, however, it also eliminates the
cushion against production errors and imbalances that inventories provide. As a result, high
quality and balanced work loads are required in a JIT system to avoid costly shutdowns and
customer ill will. Because of the need for quality and balanced production, JIT has come to be
closely identified with efforts to eliminate waste in all its forms, and thus it is an important part
of many total quality management (TQM) efforts.

12. Suggested answer (a) backflush production

The most visible aspect of JIT is the effort to reduce inventories of work in process and raw
materials. Most writing on JIT concentrate on this one aspect, which is called stockless
production, lean production, or zero inventory production. While backflush costing is an
abbreviated approach to accounting for the flow of manufacturing costs, which is applicable to
mature JIT system in which velocity is too high that traditional accounting is impractical.

13. Suggested answer (d) Cost of goods sold

In backflush costing, direct labor and overhead costs are expensed to the cost of goods sold
account. The estimated conversion cost components of the RIP and finished goods inventory
account balances are adjusted at the end of each month, with the offsetting entry representing
a correction of cost of goods sold. If conversion cost increased during the month, cost of goods
sold is credited; however, when conversion cost decreased, cost of goods sold is debited.

14.(a)
A cost allocation base is the common denominator for systematically correlating indirect costs
and a cost object. The cost driver of the indirect costs is ordinarily the allocation base. In a
homogeneous cost pool, all costs should have the same or a similar cause and-effect
relationship with the cost allocation base.

15.(b)
Multiple rates are appropriate when a process differs substantially among departments or when
products do not go through all departments or all processes. The trend in cost accounting is
toward activity-based costing, which divides production into numerous activities and identifies
the cost driver(s) most relevant to each. The result is a more accurate assignment of costs.
Answer (a) is incorrect because one rate may be cost beneficial when a single product
proceeds through homogeneous processes. Answer (c) is incorrect because individual cost

Answer Key Page 26

 ABC

drivers for all relationships must be known to use multiple application rates. Answer
(d) is incorrect because, if one rate is related to several cost drivers, it can be used as a
surrogate for multiple rates.

16 .(a)
An activity-based costing (ABC) system identifies the causal relationship between the
incurrence of costs and activities, determines the cost driver for each activity, and applies costs
to products on the basis of resources (drivers) consumed.

Answer (b) is incorrect because target costing determines the maximum allowable cost of a
product before the product is designed or produced: it deducts an acceptable profit margin from
a forecasted selling price. Answer (c) is incorrect because cycle time is the period from the time
a customer places an order to the time that product is delivered. Answer (d) is incorrect
because variable costing expenses fixed factory overhead as incurred.

17.(a)
A cost driver is "a measure of activity, such as direct labor hours, machine hours, beds
occupied, computer time used, flight hours, miles driven, or contracts, that is a causal factor in
the incurrence of cost to an entity." It is a basis used to assign costs to cost objects.
Answer (b) is incorrect because cost drivers are not controls. Answer (c) is incorrect because
cost drivers are measures of activities that cause costs. Answer (d) is incorrect because,
although cost drivers may be used to assign costs, they are not necessarily mechanical. For
example, a cost driver for pension benefits is employee salaries.

18.(b)
A%C determines the activities associated with the incurrence of costs and then accumulates a
cost pool for each activity using the appropriate activity base (cost driver). However, given one
product, all costs are assigned to the one product; the particular method used to allocate the
costs does not matter.

Answer (a) is incorrect because marketing and distribution costs should be allocated to specific
products. Answer (c) is incorrect because, by definition, a cost driver is a factor that affects
(drives) the incurrence of a cost. Answer (d) is incorrect because product-cost-cross-
subsidization occurs when products are miscosted. The more accurate cost allocation provided
by ABC minimizes the subsidy received by undercosted products at the expense of overcosted
products.

Answer Key Page 27

 COST ACCOUNTING

19.(C)
Given the automation of factories and the corresponding emphasis on ABC, plantwide
application rates are being used less often because better information can be provided at
reasonable cost. ABC results in a more accurate application of indirect costs because it
provides more refined data. Instead of a single cost pool for a process, a department, or an
entire plant, an indirect cost pool is established for each identified activity. The related cost
driver, the factor that changes the cost of the activity, is also identified.
Answer (a) is incorrect because one effect of automation is a decrease in direct labor usage.
Thus, some companies no longer track direct labor costs closely. They treat direct labor as a
factory overhead cost. Answer (b) is incorrect because throughout is the rate of production over
a stated time. It clearly drives (influences) costs. Answer (d) is incorrect because multiple cost
pools permit a better allocation of indirect costs to cost objects.

20.(d)
In an ABC system, cost allocation is more precise than in traditional systems because activities
rather than functions or departments are defined as cost objects. This structure permits
allocation to more cost pools and the identification of a cost driver specifically related to each.
A cost driver is a factor that causes a change in the cost pool for a particular activity. Thus, an
ABC system uses more cost pools and allocation bases than a traditional system.
Answer (a), (b), and (c) are incorrect because the numbers of cost pools and allocation bases
increase.

21.(c)
An ABC system determines activities associated with the incurrence of costs and then
accumulates a cost pool for each activity. It then identifies the cost driver for each activity. A
cost driver is a factor that causes a change in the cost pool for a particular cost object. Activities
that do not add customer value are identified and eliminated to the extent possible. A clear
understanding of what causes a cost (the cost driver) helps eliminate the non-value-adding
activities. However, all cost drivers cannot be eliminated.
Answer (a),(b), and (d) are incorrect because non value-adding activities are
unnecessary and therefore are eliminated, but not all cost drivers are eliminated.

22 .(b)
A%C identifies the causal relationship between costs and activities, determines the drivers of
the activities, establishes cost pools related to individual drivers, develops costing rates, and
applies cost to products on the basis of resources consumed (drivers). The relationship
between the number of components in a finished product and materials handling costs is direct
and causal.

Answer Key Page 28

 ABC

Answer (a) is incorrect because the number of production runs per year does not provide
individual unit costs. Answer (c)\ is incorrect because the time to produce one unit is
traditionally used to allocate overhead to units produced in a labor-intensive process. Answer
(d) is incorrect because overhead applied to each completed unit is the result of, not a basis
for, allocation.

23.(d)
ABC allocates costs more precisely than traditional systems because cost pools are
accumulated for activities rather than functions or departments. This structure permits
allocation to more cost pools and the identification of a cost driver specifically related to each.
Analysis by activity also provides for better cost control because of identification of nonvalue-
adding activities. For example, raw materials storage may be greatly reduced or eliminated in
a JIT system without affecting customer value.

Answers (a), (b), and (c) are incorrect because design engineering activity, heat treatment
activity, and drill press activity add value to products in the production process.

24.(d)

25.(b)
Ratios based on set-up:
Model A:100- (100+ 150 + 250) 20%
Model B:150 + (100 + 150 + 250) 30%
Model C: 250 - (100 + 150 + 250) 50%

26 (c)
Ratios based on units produced:
Model A: 2,000 * (2,000 + 6,000 + 12,000) 10%
Model B:' 6,000 + (2,000 + 6,000 + 12,000) 30%
Model C: 12,000 + (2,000 + 6,000 + 12,000) 60%

27.(d)
Overhead charge using labor hours: P60 x 200 P12,000
Overhead charge using machine hours: P12,000 - P4,000 P 8,000
Ratio of overhead costs to machine steps
P8,000/2,000 P4/step

Answer Key Page 29

 COST ACCOUNTING

28.(c)
Cost Assignment:
Materials Handling: (P50,000 * 100,000) x 10,000 P5,000
Painting: (P200,000 + 50,000) x 3,000 12,000
Assembly: (P120,000 + 4,000) x 300 9,000
P26,000

29 .(c)
Professional Salaries: P900,000 4- 30,000 P 30 per hour
Building Costs: P450,000 + 15,000 P 30 per sq. ft.
Risk Management: P320,000 * 1,000 P320
perpatient (c)

30.(d)
Surgery: (6,000 x P30) + (1,200 x P30) + (200 x P320) P280,000
Housing: (20,000 x P30) + (12,000 x P30) + (500 x P320) P1,120,000
Outpatient Case: (4,000 x P30) + (1,800 x P30) + (300 x P320) P270,000

31. Overhead Rates:

Per Machine Hour: P900,000/3,600 machine hours 250

Per Setup: P525,000/300 setups P1,750

Cost of Job RST:
Parts and materials P56,000
Applied overhead:
Machine hours (70 x P250) P17,500
Setup (4 xP 1,750) 7,000 24,500
Total cost of Job RST P 80,500

32.(a)
Calls: P300,000 * 150,000 calls P2 per call
Purchase Orders: PI 00,000 -f-10,000 purchase orders P10per
Reports: P73,500 -=- 7,000 receiving reports P10.50perR.R.

Answer Key Page 30

 ABC

Cost Assignment:
125 calls x P2 per call P250.00
60 purchase orders x P10 per p.o 600.00
15 receiving report x P10.50 per R.R 157.50
Total costs P1,007.50

33.(b)
Amount of purchasing department costs P1,007.50
Divided by: No. of units 200
P5.04/unit
34. Overhead rates:
Material handling (P720.000 +6,000,000 parts) P0.12
Setupcosts(P315,000/750setups) 420
Machining costs (P540,000 * 30,000 hours) 18.00
Quality control (P225,000 + 500batches) 450
Overhead costs:

Material handling (20,000 units x 5 parts) x P0.12P 12,000

Setup costs activity (20,000 units / 5,000 x 2 setups) x P420 3,360
Machining activity (20,000 units / 5,000 x 80 hrs.) x P185,760
Quality control activity (20,000 units / 5,000) P450 1,800
Total P 22,920
Overhead cost per unit (P22,920/20,000 units) P1.15
Direct material cost per unit 4.40
Direct labor cost per unit 0.75
Total unit cost P6.30

35. High school chair:

Direct materials P600,000
Direct labor (7,500 x P20) 150,000
Overhead:
Material handling (100,000 x P0.25) P 25,000
Cutting (100,000 xP2.50) 250,000
Assembly (7,500 x P25) 187,500 462,500
Total cost P1,212,500
Units produced -5,000
Unit cost P 242.50

Answer Key Page 31

 COST ACCOUNTING

College chair:
Direct materials P25,000
Direct labor (500 x P20) 10,000
Overhead:
Material handling (3,500 x P0.25) 875
Cutting (3,500 xP2.50) 8,750
Assembly (500 x P25) 12,500 22,125
Total cost P57,125
Units produced -100
Unit cost P571.25

36.(d)
Per Direct Labor Hour: P200,000 / 16,000 DL hours P12.50
Per Machine Hour: P300,000 / 4,000 machine hours P75.00

37.(c)
Job # 345:
Direct Materials P2,000
Direct Labor (30 x PI0) 300
Applied Overhead: [(30 x PI2.50) + (10 x P75)] 1,125
P3,425

38.(a)
Per Machine Hour: P900,000/3,600 machine hours P250
Per Setup: P525,000/300 setups P1,750

39.(b)
Job# 103:
Parts and Materials P56,000
Applied Overhead [(70 x P250) + (4 x PI ,750)] 24,500
P80,500
40 (a)
A&C allocates overhead costs more precisely than traditional methods. It identifies the activities
associated with the incurrence of costs, determines the cost driver for each activity, and
allocates cost accordingly. Thus me cost per setup is P100 (P20,000 + 200), per inspection
P20 (PI30,000 +6,500), per material move P10 (P80.000 +8,000), and per engineering hour
P50 (P50,000 + 1,000). The overhead allocated to Job 101 is thereforeP 1,300 {(1 setup x
P100) + (20 inspections x P20] + (30 material moves x P10) + (10 enginering hours x P50)].

Answer Key Page 32

 ABC

Answers (b) is incorect because P2,000 equals the overhead allocation for Job 103. Answer
(c) is incorrect because P5.000 equals the allocation of overhead using direct materials cost
as a base. Answer (d) is incorrect because P5.600 equals 2% (2,000 DL cost + P 100,000
budgeted annual DL cost) of budgeted overhead.

41.(a)
The overhead costs for the activities are PI00 per setup, P20 per inspection, P10. per material
move, and P50 per engineering hour. Thus, overhead allocated to Job 102 is P3.000 [(2 setups
x P100) + (10 inspections x P20) + (10 material moves x P10) + (50 engineering hours x P50)}.
The production cost of Job 102 is P17.000 (P12,000 DM + P2.000 DL + P3.000 OH), and the
cost per unit is P340 (P17,000 + 50).
Answer (b) is incorrect because P392 assumes overhead is allocated based on direct labor
cost. Answer (c) is incorrect because P440 assumes an overhead allocation of P8.000. Answer
(d) is incorrect because P520 assumes overhead is allocated based on direct materials cost.

42.(a)
The costs per job for the activities are P100 per setup, P20 per inspection, P10 per material
move, and P50 per engineering hour. Overhead allocated to Job 103 is P2.000 [(4 setups x
P100) + (30 inspections x P20j + (50 material moves x P10) + (10 engineering hours x P50)].
Hence, the production cost of Job 103 is P14,000 (P8.000 DM + P4.000 DL + P2,000 OH), the
cost per unit is P70:(P14,000 + 200), and the price is P98 (140% x P70j.
Answer (b) is incorrect because PI00 is the unit cost if overhead is allocated based on direct
materials cost. Answer (c) is incorrect because PI 16 is the unit cost if overhead is allocated
based on direct labor cost. Answer (d) is incorrect because P140 assumes cost is P100.
43.(b)
Allocation of Costs using an overall rate:
Total Activity Center Costs (P7,500 + P125,000 + P9,750
+ P30.000) P172,250
Divided by: No. of Machine hours (12,000 + 13,000) 25,000
Overall rate P6.89
For Low-Unit: 12,000 x P6.89 P 82,680
ForMed-Unit: 13,000xP6.89 P 89,570
44. Suggested answer (a) P200.00 P80.00 P125.00
Setups Machining Inspections
Overhead rate:
P100,000/500 P 200.00
P400,000/5,000 P80.00
P50.000/400 P125.00

Answer Key Page 33

 COST ACCOUNTING

If in traditional costing system, a single unit level basis of allocation is used to allocate overhead
costs to products; ABC recognizes that to have accurate and meaningful cost data, more than
one basis of allocating activity costs to product is needed. In selecting the basis, ABC seeks to
identify the cost drivers that measure the activities performed on the products. Since this case,
there were two products produced, the measurement of activities should be the total for the
two products

45. Suggested answer (d)?272,500 P277,500

Side A Side B
Setups (200x100) P20,000
(200x400) P80,000
Machining (80 x 3,000) 240,000
(80 x 2,000) 160,000
Inspections (125 x 100) 12,500
(125 x 300) 37,500
Total P 272,500 P 277,500
After determining the overhead rate, to compute the allocated overhead cost, overhead rate
will be multiplied by the number of activities for each product.

46. Suggested answer (d)P20.00 P25.00

Side A Side B
Overhead cost per unit
(P272,500/l 3,625 units) P20.00
(P277.500/11,100 units) P25.00
47. Suggested answer (c) 4.00 per step

Overhead using direct labor hours (60 x 200) 12,000

Overhead using machine hours (12,000 - 4,000) 8,000
Ratio of overhead to machine steps (8,000/2,000) 4.00/step
Given the ratio of overhead to direct labor hours of P60, which is higher by P4.000 than machine
steps as the cost driver, the resulting difference of P8.000 is the overhead cost using machine
steps. Therefore, the ratio of overhead to machine steps is P4.00 per step.

48. Traditional costing f(P60,000 -f 25,000) x 2 direct labor hours)] P4.80

ABC(P1,000*100) P 10.00

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49.(b)
Using material moves under ABC costing:
P100,000 4- (10 + 40) = P2,000 per material moves
Model X:P2,000 per mat. moves x 10 mat. moves = P20,000
P20,000 -r 100 units produced = P200 (b)
Material Y: P2,000 per mat. moves x 40 mat. moves = P80,000
P80,000 -r 200 units produced = P400 (b)

50.(c)
Using direct labor hours under traditional costing:
P100,000 * [(100 units x 1 hr./unit) + (200 units x 3 hrs./unit)]
P100,000 -r 700 hours = P143 per DL hour
Model X: P143 per DL hr. x 1 hr. per unit = 143
Model Y: PI 43 per DL hr. x 3 hrs. per unit = P429

51.(a)
The P50.000 of costs is allocated over 10,000 hours 1(25 x 200 hrs.) + (25 x 200 hrs.}]. Thus,
the overhead cost per hour is P5 (P50,000 + 10,000 hrs.), and the per unit overhead cost of
wall mirrors is PI,000 (PS x 200 direct labor hours).

Answer (b) is incorrect because P500 is the allocation based on number of material moves.
Answer (c) is incorrect because P2.000 assumes that all the overhead is allocated to the wall
mirrors. Answer (d) is incorrect because P5.000 assumes overhead of P250,000.

52.(b)
A8C allocates overhead costs on the basis of some causal relationship between the incurrence
of cost and activities. Because the moves for wall mirrors constitute 25% (5 -r 20) of total
moves, the mirrors should absorb 25% of the total materials handling costs, or P12.500 {25%
x P50.000). The remaining P37.500 is allocated to specialty windows. The cost per unit of wall
mirrors is P500 (P12.500 + 25).

Answer (a) is incorrect because PI,000 uses direct labor as the allocation basis. Answer
(c) is incorrect because P4,500 is the allocation per unit of specialty windows. Answer
(d) js incorrect because P2.500 is not based on the number of material moves.

53. The P50,000 of costs is allocated over 10,000 hours [(P25 x 200 hrs.) + (25 x 200 hrs.)]. Thus,
the overhead cost per hour is P5 (P50,000 - 10,000 hrs.), and the per unit overhead cost of
wall mirrors is P1,000 (P5 x 200 direct labor hours).

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Answer (b) is incorrect because P500 is the allocation based on number of material moves.
Answer (c) is incorrect because P2,000 assumes that all the overhead is allocated to the wall
mirrors. Answer (d) is incorrect because P5,000 assumes overhead of P250,000.

54. ABC allocates overhead costs on the basis of some causal relationship between the incurrence
of cost and activities. Because the moves for wall mirrors constitute 25% (5 t 20) of total moves,
the mirrors should absorb 25% of the total materials handling costs, or P12,500 (25% x
P50,000). The remaining P37,500 is allocated to specialty windows. The cost per unit of wall
mirrors is P500 (P 12,500 *25).
Answer (a) is incorrect because P1,000 uses direct labor as the allocation basis. Answer (c) is
incorrect because P4,500 is the allocation per unit of specialty windows. Answer (d) is incorrect
because P2,500 is not based on the number of material moves.

55.(d)
Traditional Costing (DL hours):
= (P45,000 + P70,000 + P90,000) * (4,000 hrs. + 2,000 hr. + 4,000 hr.)
= P20.5 per DL hr.
Model S: P20.5 per DL hr. x 4,000 hrs. = P82,000 + 2,000 units =P41
Model M: P20.5 per DL hr. x 2,000 hr. = P41,000/6,000 units =P6.83

56.(b)
ABC Costing - Model S:
Setups: P45,000 4- (100 + 150 + 25) = P90 x 100 = P 9,000
Shipping: P70,000 * (200 + 225 + 275) = P100 x 200 = 20,000
Eng'g.: P90,000 + (15 + 10 + 5) = P3,000 x 15 = 45,000
Total allocated costs P74,000
Divided by: No. of units produced 2,000
Cost per unit P37

57.(a)
ABC Costing - Model M: (refer to No. 37)
Setups: P90x 150 P13,500
Shipping: PI00x225 22,500
Eng'.: P300x 10 30,000
Total allocated cost P66,000
Divided by: No. of units produced 6,000

P11

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58.(a)
ABC Costing - Model L: (refer to No. 37)
Setups: P90 x 250 P22,500
Shipping: PI00x275 27,500
Eng'.: P3,000 x 5 15,000
Total allocated cost P65,000
Divided by: No. of units produced 12,000
P5.42
59. Suggested answer (c) 5,000

Traditional costing (160,000/40,000 x 400) 16,000

Activity-based costing:
Machine hours (120,000/20,000 x 500) 3,000
Set-ups (40,000/100x20) 8,000 11,000
Difference (cross subsidy) 5,000
In traditional costing system, a single pool of costs (overhead) is accumulated for a given
organization unit, and these costs are then assigned using an allocative rather than a tracing
procedure. The effect is an averaging of costs that may result in significant inaccuracy when
products or service units do not use similar amounts of resources.

Activity-based costing attempts to improve costing by assigning cost to activities rather than to
an organizational unit. Accordingly, activity-based costing requires identification of the activities
that consume resources and that are subject to demands by ultimate cost objects.

60.(c)
Indoor Outdoor
Annual revenue P300,000 P600,000
Less: Costs:
Materials P 40,000 P 60,000
Labor 50,000 75,000
Overhead:
Indoor: P500,000/P 125,000
x P50,000 200,000
Outdoor:P500,000/P 125,000
xP75,000 300,000
Total Costs P290.000 P435,000
Income (Loss) P 10,000

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61.(b)
Indoor Outdoor
Annual revenue P300,000 P600,000
Less: Costs:
Materials P 40,000 P 60,000
Labor 50,000 75,000
Overhead:
Maintenance:
Indoor: P200,000 / 100,000
x 80,000 160,000
OutdoorP200,000 / 100,000
x 20,000 40,000
Setups:
Indoor: P175,000/200 x 100 87,5000
Outdoor: P175,000/200 x 100 87,500
Administrative:
Indoor: PI25,000/ PI25,000
x P50.000 50,000
Outdoor:P125,000/ PI 25,000
xP75,000 75,000
Total Costs P387,500 P337,500
Income (Loss) P(.87,500) P26Z500

62 (d)
A&C identifies the causal relationship between the incurrence of cost and activities, determines
the drivers of the activities, establishes cost pools related to the drivers and activities, and
assigns costs to ultimate cost objects on the basis of the demands (resources or drivers
consumed) placed on the activities by those cost objects. Hence, ABC assigns overhead costs
based on multiple allocation bases or cost drivers. Under the traditional, single-base system,
the amount allocated is P3.987.50 (P27.5Q0 x 14.5%). Under ABC, the amount allocated is
P4.513 [(PI 1.50 x 12) + (P. 14 x 17,500) + (P77 x25)], or P525.50 more than under the
traditional system.
Answer (A) is incorrect because the ABC assignment of P4.513 is at a rate of P180.52 for each
of the 25 orders. Answer (Bj is incorrect because ABC yields a higher allocation. Answer (C) is
incorrect because the total is P4.513 on the ABC basis.

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63.(c)
Given that manufacturing overhead is applied on the basis of machine hours, the overhead
rate is P60 per hour (P1,800,000 . 30,000) or P.96 per unit [(P60 x 80 machine hours per batch)
+ 5,000 units per batch]. Accordingly, the unit full cost is P6.11 (P5.15 unit prime cost + P.96).
Answer (a) is incorrect because P5.39 assumes that 80 machine hours are required for the
total production of 20,000 units. Answer (b) is incorrect because P5.44 is based on the
machining overhead rate (P18). Answer (d) is incorrect because P6.95 is based on the direct
labor hour manufacturing overhead rate.

64 (d)
Materials handling cost per part is P.12 (P720.000 + 6,000,000), cost per setup is P420
(P315.000 + 750), machining cost per hour is P18 (P540.000 + 30,000), and quality cost per
batch is P450 (P225.000 + 500). Hence, total manufacturing overhead applied is P22.920 [(5
parts per unit x 20,000 units x P.12) + (4 batches x 2 setups per batch x P420J + (4
batches x 80 machine hours per batch x PI8) + (4 batches x P450)]. The total unit cost is P6.296
[P5.15 prime cost + (P22.920 + 20,000 units) overhead].
Answer (A) is incorrect because P6.00 assumes one setup per batch and 80 total machine
hours. Answer (b) is incorrect because P6.08 assumes that only 80 machine hours were used.
Answer (c) is incorrect because P6.21 assumes one setup per botch.

65. ABC:
Material handling (115x12) P1,380
Inspection (P1.40 x 17,500) 24,500
Product certification (P770 x 25) 19,250 P45,130
Traditional costing (P275,000 x 14.5%) 39,875
ABC higher than the traditional costing by P5,255

66. Traditional costing system:

Direct materials (50 x P3,000) P150,000
Overhead (50 x 15) x P100 75,000
Total cost P225,000
Activity based costing system:
Direct materials P150,000
Overhead:
Material handling (50x50) x P8 20,000
Machining (50x12) xP68 40,800'
Assembly (50x 15) x P75 56,250
Inspection (50x14) xP104 72,800 P339,850
Higher P114,8 50

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67. Suggested answer (b) P2.40

Total overhead [P600 x (8 +2)] P6,000
Cost per machine hour [P6,000/(5 x 1,000)] P1.20

X Z
Traditional cost system
(P1.20x 2 machine hours) P 2.40
(P1.20 x 3 machine hours) P 3.60
Activity-based cost system
(P600x 8/1,000 units) 4.80
(P600 x 2/1,000 units) 1.20
Cross-subsidy per unit (Under) over cost (P 2.40) P 2.40
Peanut butter costing is an inaccurate averaging or spreading of costs over products or service
units that use different amounts of resources results in product cost cross subsidization. This
term describes the condition in which the miscasting of one product causes the miscasting of
other product. Thus, the unit amount by which machine hour based assignment over costs Z
and at the same time under costs X (cross-subsidy) is P2.40.

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