ACTIVITY-BASED COSTING

TRUE-FALSE STATEMENTS
1. Traditional costing systems use multiple predetermined overhead rates.
2. Traditionally, overhead is allocated based on direct labor cost or direct labor hours.
3. Current trends in manufacturing include less direct labor and more overhead.
4. Activity-based costing allocates overhead to multiple cost pools and assigns the cost pools to
products using cost drivers.
. A cost driver does not generally have a direct cause-effect relationship !ith the resources
consumed.
". The first step in activity-based costing is to assign overhead costs to products, using cost drivers.
#. To achieve accurate costing, a high degree of correlation must e$ist bet!een the cost driver and the
actual consumption of the activity cost pool.
%. &o!-volume products often re'uire more special handling than high-volume products.
(. )hen overhead is properly assigned in A*C, it !ill usually decrease the unit cost of high-volume
products.
1+. A*C leads to enhanced control over overhead costs.
11. A*C usually results in less appropriate management decisions.
12. A*C is generally more costly to implement than traditional costing.
13. A*C eliminates all arbitrary cost allocations.
14. A*C is particularly useful !hen product lines differ greatly in volume and manufacturing
comple$ity.
1. A*C is particularly useful !hen overhead costs are an insignificant portion of total costs.
1". Activity-based management focuses on reducing costs and improving processes.
1#. Any activity that increases the cost of producing a product is a value-added activity.
1%. ,ngineering design is a value-added activity.
1(. -onvalue-added activities increase the cost of a product but not its mar.et value.
2+. /achining is a nonvalue-added activity.
21. -ot all activities labeled nonvalue-added are totally !asteful, nor can they be totally eliminated.
Activity-Based Costing
22. The overall ob0ective of installing A*C in service firms is no different than it is in a manufacturing
company.
23. )hat sometimes ma.es implementation of activity-based costing difficult in service industries is
that a smaller proportion of overhead costs are company-!ide costs.
24. The general approach to identifying activities, activity cost pools, and cost drivers is used by a
service company in the same manner as a manufacturing company.
2. 1nventory storage costs are reduced in 0ust-in-time processing.
2". 2e!or. costs typically increase in 0ust-in-time processing.
2#. 3ust-in-time strives to eliminate inventories by using a pull approach.
2%. 4uality control is less important in 0ust-in-time than in traditional manufacturing philosophies.
52(. 6lant management is a batch-level activity.
53+. 6ainting is a product-level activity.
Answers to True-False Statements
Item Ans Item Ans Item Ans Item Ans Item Ans Item Ans
1. F 6. F 11. F 16. T 21. T 26. F
2. T 7. T 12. T 17. F 22. T 27. T
3. T 8. T 13. F 18. T 23. F 28. F
4. T 9. F 14. T 19. T 24. T *29. F
5. F 10. T 15. F 20. F 25. T *30. F
!-"
Activity-Based Costing
/7&T16&, C891C, 47,:T19-:
31. )hich of the follo!ing is not typical of traditional costing systems;
a. 7se of a single predetermined overhead rate.
b. 7se of direct labor hours or direct labor cost to assign overhead.
c. Assumption of correlation bet!een direct labor and incurrence of overhead cost.
d. 7se of multiple cost drivers to allocate overhead.
32. 1n traditional costing systems, overhead is generally applied based on
a. direct labor.
b. machine hours.
c. direct material dollars.
d. units of production.
33. An activity that has a direct cause-effect relationship !ith the resources consumed is a<n=
a. cost driver.
b. overhead rate.
c. cost pool.
d. product activity.
34. )hich best describes the flo! of overhead costs in an activity-based costing system;
a. 9verhead costs direct labor cost or hours products
b. 9verhead costs products
c. 9verhead costs activity cost pools cost drivers products
d. 9verhead costs machine hours products
3. The first step in activity-based costing is to
a. assign manufacturing overhead costs for each activity cost pool to products.
b. compute the activity-based overhead rate per cost driver.
c. identify and classify the ma0or activities involved in the manufacture of specific products.
d. identify the cost driver that has a strong correlation to the activity cost pool.
3". A !ell-designed activity-based costing system starts !ith
a. identifying the activity-cost pools.
b. computing the activity-based overhead rate.
c. assigning manufacturing overhead costs for each activity cost pool to products.
d. analy>ing the activities performed to manufacture a product.
3#. 9ne of &ara ?ole Company@s activity cost pools is machine setups, !ith estimated overhead of
A3++,+++. ?ole produces flares <4++ setups= and health pac.s <"++ setups=. 8o! much of the
machine setup cost pool should be assigned to flares;
a. A+.
b. A12+,+++.
c. A1+,+++.
d. A1%+,+++.
3%. )hich !ould be an appropriate cost driver for the ordering and receiving activity cost pool;
a. /achine setups
b. 6urchase orders
c. /achine hours
d. 1nspections
3(. As compared to a high-volume product, a lo!-volume product
a. usually re'uires less special handling.
!-#
Test Ban$ %or Mana&er'al A((ount'n&) Se(on* E*'t'on
b. is usually responsible for more overhead costs per unit.
c. re'uires relatively fe!er machine setups.
d. re'uires use of direct labor hours as the primary cost driver to ensure proper allocation of
overhead.
4+. 1n 3apan,
a. activity-based costing is used more than in the 7.:.
b. companies prefer volume measures such as direct labor hours to assign overhead costs.
c. labor cost reduction is less of a priority.
d. deveo!ing "o#e acc$#ate !#od$ct costs is "o#e o% a !#io#ity.
7se the follo!ing information to ans!er 'uestions 41B44.
&o'ot Toy Co"!any "an$%act$#es t(o !#od$cts) *-+-T#on and ,ec-o"an. &o'ot.s ove#-ead
costs consist o% setting $! "ac-ines) /400)0000 "ac-ining) /900)0000 and ins!ecting) /300)000.
1n%o#"ation on t-e t(o !#od$cts is2
C-9-Tron /echoman
?irect labor hours 1,+++ 2,+++
/achine setups "++ 4++
/achine hours24,+++ 2",+++
1nspections %++ #++
41. 9verhead applied to C-9-Tron using traditional costing is
a. A"++,+++.
b. A#"%,+++.
c. A%32,+++.
d. A("+,+++.
42. 9verhead applied to /echoman using traditional costing is
a. A"4+,+++.
b. A#"%,+++.
c. A%32,+++.
d. A1,+++,+++.
43. 9verhead applied to C-9-Tron using activity-based costing is
a. A"++,+++.
b. A#"%,+++.
c. A%32,+++.
d. A("+,+++.
44. 9verhead applied to /echoman using activity-based costing is
a. A"4+,+++.
b. A#"%,+++.
c. A%32,+++.
d. A1,+++,+++.
4. )hich of the follo!ing is a limitation of activity-based costing;
a. /ore cost pools
b. &ess control over overhead costs
!-!
Activity-Based Costing
c. 6oorer management decisions
d. :ome arbitrary allocations continue
4". )hich of the follo!ing factors !ould suggest a s!itch to activity-based costing;
a. 6roduct lines similar in volume and manufacturing comple$ity.
b. 9verhead costs constitute a significant portion of total costs.
c. The manufacturing process has been stable.
d. 6roduction managers use data provided by the e$isting system.
4#. )hich of the follo!ing is true of activity-based costing;
a. /ore cost pools
b. :ame base as traditional costing
c. &ess costly to use
d. ,liminates arbitrary allocations
4%. The primary benefit of A*C is it provides
a. better management decisions.
b. enhanced control over overhead costs.
c. more cost pools.
d. more accurate product costing.
4(. )hich of the follo!ing is not a benefit of activity-based costing;
a. /ore accurate product costing
b. ,nhanced control over overhead costs
c. *etter management decisions
d. &ess costly to use
+. ,ach of the follo!ing is a limitation of activity-based costing e$cept that
a. it can be e$pensive to use.
b. it is more comple$ than traditional costing.
c. more cost pools are used.
d. some arbitrary allocations continue.
1. The presence of any of the follo!ing factors !ould suggest a s!itch to A*C e$cept
!hen
a. product lines differ greatly in volume.
b. overhead costs constitute a minor portion of total costs.
c. the manufacturing process has changed significantly.
d. production managers are ignoring data provided by the e$isting system.
2. )hich of the follo!ing is a value-added activity;
a. ,ngineering design
b. /achinery repair
c. 1nventory storage
d. 1nspections
3. )hich of the follo!ing is a nonvalue-added activity;
a. ,ngineering design
b. /achining
!-+
Test Ban$ %or Mana&er'al A((ount'n&) Se(on* E*'t'on
c. 1nspection
d. 6ac.aging
4. A nonvalue-added activity in a service enterprise is
a. ta.ing appointments.
b. traveling.
c. advertising.
d. all of these.
. Dalue-added activities
a. should be reduced or eliminated.
b. involve resource usage customers are !illing to pay for.
c. add cost to a product !ithout affecting selling price.
d. cannot be differentiated from nonvalue-added activities.
". All of the follo!ing are e$amples of a value-added activity in a service company
e$cept
a. delivering pac.ages by a delivery service.
b. ordering supplies.
c. performing surgery.
d. providing legal research for legal services.
#. Activity-based costing has been found to be useful in each of the follo!ing service
industries e$cept
a. ban.s.
b. hospitals.
c. telephone companies.
d. A*C has been useful in any of these industries.
%. )hat sometimes ma.es implementation of activity-based costing difficult in
service industries is
a. the labeling of activities as value-added.
b. identifying activities, activity cost plus, and cost drivers.
c. that a larger proportion of overhead costs are company-!ide costs.
d. attempting to reduce or eliminate nonvalue-added activities.
(. All of the follo!ing statements are correct e$cept that
a. activity-based costing has been !idely adopted in service industries.
b. the ob0ective of installing A*C in service firms is different than it is in a
manufacturing firm.
c. A larger proportion of overhead costs are company-!ide costs in service
industries.
d. the general approach to identifying activities and activity cost pools is the
same in a service company as in a manufacturing company.
"+. The use of activity-based costing in service industries
a. has the same ob0ective as in manufacturing.
b. results in improved costing of services provided.
c. uses cost pools to assign overhead.
!-,
Activity-Based Costing
d. all of these.
"1. 3ust-in-time processing
a. is based on a 0ust-in-case philosophy.
b. results in a push approach.
c. minimi>es inventory storage and !aiting time.
d. all of these.
"2. An element of 0ust-in-time processing is
a. dependable suppliers !ho are !illing to deliver on short notice.
b. a multi-s.illed !or.force.
c. a total 'uality control system.
d. all of these.
"3. )hich of the follo!ing is not a benefit of 0ust-in-time processing;
a. Control of significant inventory balances
b. ,nhanced product 'uality
c. 2eduction of re!or. costs
d. 6roduction cost savings
"4. )hich account is used in 0ust-in-time processing;
a. 2a! materials inventory
b. )or.-in-process inventory
c. /erchandise inventory
d. 2a! and 1n-6rocess inventory
". 7nder 0ust-in-time processing, all of the follo!ing are received or completed E0ust in
timeF e$cept
a. finished goods.
b. ra! materials.
c. subassembly parts.
d. supplies.
5"". )hich of the follo!ing is not a facility-level activity;
a. 6lant management
b. 6roduct design
c. 6ersonnel administration
d. Training
5"#. )hich of the follo!ing is not a product-level activity;
a. 6roduct design
b. ,ngineering changes
c. 1nventory management
d. ,'uipment setups
5"%. )hich of the follo!ing is not a batch-level activity;
a. ,ngineering changes
b. ,'uipment setups
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Test Ban$ %or Mana&er'al A((ount'n&) Se(on* E*'t'on
c. 1nspection
d. /aterials handling
5"(. )hich of the follo!ing is not a unit-level activity;
a. 6urchase ordering
b. Assembling
c. 6ainting
d. :e!ing
5#+. )hich of the follo!ing is a batch-level activity;
a. 6lant management
b. 6roduct design
c. ,'uipment setups
d. Assembling
Answers to Mult'.le C/o'(e 0uest'ons
Item Ans Item Ans Item Ans Item Ans Item Ans Item Ans Item Ans
31. d 37. ' 43. c 49. d 55. ' 61. c *67. d
32. a 38. ' 44. ' 50. c 56. ' 62. d *68. a
33. a 39. ' 45. d 51. ' 57. d 63. a *69. a
34. c 40. ' 46. ' 52. a 58. c 64. d *70. c
35. c 41. a 47. a 53. c 59. ' 65. d
36. d 42. d 48. d 54. d 60. d *66. '
E1ERCISES
E2 -3
2eese Corporation manufactures easy chairs and recliners. The follo!ing information is availableG
,asy Chairs 2ecliners Total Cost
/achine setups 2++ "++ A1",+++
1nspections 2+ ++ A2#,+++
&abor hours 2,"++ 2,4++
2eese is considering s!itching from one overhead rate based on labor hours to activity-based
costing.
1nstructions
6erform the follo!ing analyses for these t!o components of overheadG
1. Compute total machine setups and inspection costs assigned to each product, using a single
overhead rate.
2. Compute total machine setups and inspection costs assigned to each product, using activity-
based costing.
3. Comment on your findings.
!-4
Activity-Based Costing
Solut'on -3 38412 "in.5
1. :ingle overhead rate
<A1",+++ H A2#,+++= I ,+++ J A%."+ per labor hour
,asy chairsG 2,"++ K A%."+ J A22,3"+
2eclinersG 2,4++ $ A%."+ J 2+,"4+
A43,+++
2. Activity-based costing
/achine setupsG A1",+++ I %++ J A2+ per setup
1nspectionsG A2#,+++ I #+ J A3" per inspection
,asy chairsG <2++ K A2+= H <2+ K A3"= J A13,+++
2eclinersG <"++ K A2+= H <++ K A3"= J 3+,+++
A43,+++
Solut'on -3 3cont.5
3. The use of activity-based costing resulted in the allocation of less cost to easy chairs and more
cost to recliners. The change in cost allocation reflects a more accurate allocation based on
cause and effect.
E2 -"
Did-saver, 1nc. has five activity cost pools and t!o products <a budget tape re!inder and a delu$e
tape re!inder=. 1nformation is presented belo!G
Cost ?rivers by 6roduct
Activity Cost 6ool Cost ?river ,st. 9verhead *udget ?elu$e
9rdering and 2eceiving 9rders A 12+,+++ "++ 4++
/achine :etup :etups 2(#,+++ ++ 4++
/achining /achine hours1,++,+++ 1+,+++ 1++,+++
Assembly 6arts 1,2++,+++ 1,2++,+++ %++,+++
1nspection 1nspections 3++,+++ + 4+
1nstructions
Compute the overhead cost per unit for each product. 6roduction is #++,+++ units of *udget and
2++,+++ units of ?elu$e.
!-5
Test Ban$ %or Mana&er'al A((ount'n&) Se(on* E*'t'on
Solut'on -" 315420 "in.5
Activity Cost 6ool ,st. 9verhead I Total ,st. Activity J 9verhead 2ate
9rdering L 2eceivingA 12+,+++ 1,+++ orders A12+Morder
/achine :etup 2(#,+++ (++ setups A33+Msetup
/achining 1,++,+++ 2+,+++ mach. hours A"Mmachine hour
Assembly 1,2++,+++ 2,+++,+++ parts A."+Mpart
1nspection 3++,+++ 1,+++ inspections A3++Minspection
*udget ?elu$e
Cost Cost Cost Cost
Activity Cost 6ool ?river K 2ate J Assigned ?river K
2ate J Assigned
9rdering L 2eceiving"++ A12+ A #2,+++ 4++ A12+ A 4%,+++
/achine :etup ++ 33+ 1",+++ 4++ 33+ 132,+++
/achining 1+,+++ " (++,+++ 1++,+++ " "++,+++
Assembly 1,2++,+++ ."+ #2+,+++ %++,+++ ."+ 4%+,+++
1nspection + 3++ 1",+++ 4+ 3++ 13,+++
A2,+22,+++ A1,3(,+++
I #++,+++ I 2++,+++
A2.%( per unit A".(% per unit
!-36
Activity-Based Costing
,$. #3
,s. Bentey o(ns a s"a de!a#t"ent sto#e in a "et#o!oitan a#ea. Fo# t(enty yea#s) t-e
acco$ntant -as a!!ied ove#-ead to t-e va#io$s de!a#t"ents67o"en.s A!!a#e) ,en.s A!!a#e)
Cos"etics) 8o$se(a#es) 9-oes) and :ect#onics6'ased on t-e 'asis o% e"!oyee -o$#s
(o#;ed. ,s. Bentey.s da$g-te#) (-o is an acco$nting st$dent at a oca $nive#sity) -as s$ggested
-e# "ot-e# s-o$d conside# $sing activity-'ased costing 3ABC5. 1n an atte"!t to i"!e"ent ABC)
,s. Bentey and -e# da$g-te# -ave identi%ied t-e %oo(ing activities.
Instructions
?etermine a cost driver for each of the activities listed belo!.
Cost <oo Cost =#ive#
a. <acing o#de#s>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
b. :toc.ing merchandise NNNNNNNNNNNNNNNNNNNNNNNNNNNNNN
c. )aiting on customers NNNNNNNNNNNNNNNNNNNNNNNNNNNNNN
d. ?anito#ia and ,aintenance>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
e. Training employees NNNNNNNNNNNNNNNNNNNNNNNNNNNNNN
f. Administrative NNNNNNNNNNNNNNNNNNNNNNNNNNNNNN
g. Advertising and /ar.eting NNNNNNNNNNNNNNNNNNNNNNNNNNNNNN
h. Accounting and &egal :ervices NNNNNNNNNNNNNNNNNNNNNNNNNNNNNN
i. )rapping pac.ages NNNNNNNNNNNNNNNNNNNNNNNNNNNNNN
Solut'on -# 3649 "in.5
Cost 6ool Cost ?river
a. <acing o#de#sn$"'e# o% o#de#s0 vo$"e o% individ$a o#de#s
b. :toc.ing merchandise number of ordersO dollar volume of orders
c. )aiting on customers number of customersO dollar volume of sales
d. 3anitorial and /aintenance s'uare feet occupiedO traffic through area
e. T#aining e"!oyeestota n$"'e# o% e"!oyees0 n$"'e# o% ne(
e"!oyees
f. Administrative number of employeesO dollar volume of business
g. Advertising and /ar.eting number of ad campaigns
h. Accounting and &egal :ervices dollar volume of sales
i. )rapping pac.ages number of pac.ages
!-33
Test Ban$ %or Mana&er'al A((ount'n&) Se(on* E*'t'on
,$. #4
A list of possible cost drivers is presented belo!G
Code Code
A ,ngineering hours ? -umber of subassemblies
B 9et$!s
: Bo@es
C /achine hoursP 9rders
Instructions
Por each of the follo!ing activity cost pools, select the most appropriate cost driverG
Code Cost 6ool
NNNNN 1. /achine setup
NNNNN 2. 9rdering and receiving
NNNNN 3. 6ac.aging and shipping
NNNNN 4. ,ngineering design
NNNNN . /achining
NNNNN ". Assembly
Solution 74 <4B" min.=
1. * 4. A
2. P . C
3. , ". ?
E2 -+
1dentify appropriate cost drivers for the follo!ing activity cost poolsG
1. 8uman resources
2. :ecurity
3. 2eceiving
4. ?ata processing
Solut'on -+ 3345 "in.5
1. -umber of employees, number of hires
!-3"
Activity-Based Costing
2. :'uare footage
3. :hipments received
4. &ines printed, C67 minutes, storage units
!-3#
Test Ban$ %or Mana&er'al A((ount'n&) Se(on* E*'t'on
,$. #"
T!o of the activity cost pools for :abrina Company are <a= machining <A%++,+++= and <b=
inspections <A%4,+++=. 6ossible cost drivers are direct labor hours <,+++=, machine hours
<2,+++=, s'uare footage <4,+++=, and number of inspections <3++=.
1nstructions
Compute the overhead rate for each activity.
Solut'on -, 3446 "in.5
A%++,+++
<a= /achiningG QQQQQQQQQQ J A32 per machine hour
2,+++ machine hours
A%4,+++
<b= 1nspectionsG QQQQQQQ- J A2%+ per inspection
3++ inspections
E2 --
Tanner, 1nc. produces t!o models of cameras, :tandard and &u$ury. They sell 1++,+++ :tandard
cameras and 1,+++ &u$ury cameras annually. Tanner s!itched from traditional costing to
activity-based costing and discovered that the cost allocated to &u$ury cameras increased so
dramatically that the &u$ury !as no! only marginally profitable.
1nstructions
Rive a probable e$planation for this shift.
Solut'on -- 3446 "in.5
&o!-volume products often re'uire more special handling, such as more machine setups and
inspections, than high-volume products. Also, the overhead costs incurred by the lo!-volume
product are often disproportionate to a traditional allocation base such as direct labor hours.
E2 -4
Compute activity-based costing rates from the follo!ing budgeted data for Preddy@s PashionsG
Activity Cost 6ool *udgeted Cost *udgeted Cost ?river
Cutting and stitching A,1++,+++ 1+,+++ machine hours
Trimming and pac.ing 1,++,+++ 42,+++ operator hours
?esigning (3+,+++ "2,+++ designer hours
!-3!
Activity-Based Costing !-3+
Test Ban$ %or Mana&er'al A((ount'n&) Se(on* E*'t'on
:olution #% <3B min.=
Cutting and stitching <A,1++,+++ I 1+,+++= J A34
Trimming and pac.ing <A1,++,+++ I 42,+++=J A2
?esigning <A(3+,+++ I "2,+++= J A1
E2 -5
Cool ?esigns manufactures metal trim used for a variety of pro0ects. Cool ?esigns@ activity-based
costing overhead rates areG
6urchasing A1#+ per order
:toringA1 per s'uare footMdays
/achining A+ per machine hour
:upervision A2 per direct labor hour
3ob 31( involved three purchase orders, 4,+++ s'uare feetMdays, "+ machine hours, and 3+ direct
labor hours. The cost of direct materials on the 0ob !as A%,++ and the direct labor rate is A1 per
hour.
1nstructions
?etermine the total cost of 3ob 31(.
Solut'on -5 3547 "in.5
?irect materials A %,++
?irect labor <3+ K A1= 4+
Pactory overhead
6urchasing <3 K A1#+=A 1+
:toring <4,+++ K A1= 4,+++
/achining <"+ K A+= 3,+++
:upervision <3+ K A2= "+ #,#+
Total cost A1",2+
E2 46
&abel the follo!ing costs as value-adding <DA= or nonvalue-adding <-DA=G
>>>> 1. :nginee#ing design
NNNN 2. /achine repair
>>>> 3. 1nvento#y sto#age
NNNN 4. /achining
NNNN . Assembly
NNNN ". 6ainting
!-3,
Activity-Based Costing
NNNN #. 1nspections
NNNN %. 6ac.aging
Solut'on 46 3345 "in.5
1. DA . DA
2. -DA ". DA
3. -DA #. -DA
4. DA %. DA
E2 43
*or.e and Palvery is a la! firm that uses activity-based costing. Classify these activities as value-
added or nonvalue-addedG
1. Ta.ing appointments
2. 2eception
3. /eeting !ith clients
4. *oo..eeping
. Court time
". /eeting !ith opposing attorneys
#. *illing
%. Advertising
Solut'on 43 3345 "in.5
1. -onvalue-added . Dalue-added
2. -onvalue-added ". Dalue-added
3. Dalue-added #. -onvalue-added
4. -onvalue-added %. -onvalue-added
E2 4"
B#e(e# A Ca##) <9C is an a#c-itect$#a %i#" t-at $ses activity-'ased costing. T-e t-#ee activity
cost !oos $sed 'y B#e(e# A Ca## a#e2 9aa#ies and 7ages) T#ave :@!ense) and <an
&e!#od$ction :@!ense. T-e %i#" -as !#ovided t-e %oo(ing in%o#"ation conce#ning activity and
costs2
9aa#ies and (ages /360)000
Travel e$pense %+,+++
6lan reproduction e$pense 12+,+++
Total A"+,+++
Activity Cost 6ools
!-3-
Test Ban$ %or Mana&er'al A((ount'n&) Se(on* E*'t'on
<#oBect
B$siness
Assign"ent
=eveo!"ent +t-e#
9aa#ies and (ages 60C
30C 10C
Travel e$pense 4+S 4+S 2+S
<an #e!#od$ction e@!ense 30C
40C 30C
E2 4" 3cont.5
1nstructions
Cac$ate t-e tota cost to 'e aocated to t-e 3a5 <#oBect Assign"ent) 3'5 B$siness =eveo!"ent)
and 3c5 +t-e# activity cost !oos.
Solut'on 4" 3649 "in.5
Activity Cost 6ools
<a= <b= <c=
<#oBect
B$siness
Assignment ?evelopment 9ther Total
9aa#ies and (ages /216)000 /108)000
/36)000 /360)000
Travel e$pense 32,+++ 32,+++ 1",+++ %+,+++
6lan reproduction e$pense 3",+++ 4%,+++ 3",+++ 12+,+++
Total A2%4,+++ A1%%,+++ A%%,+++ A"+,+++
E2 74#
Ti" Tayo# Too Co"!any "an$%act$#es s"a toos. Cassi%y eac- o% t-e %oo(ing activity costs
o% t-e too co"!any as eit-e# $nit eve) 'atc- eve) !#od$ct eve) o# %aciity eve2
1.
<ant "anage"ent
2. ?rilling
3. 6ainting
4. /achine setups
. 6roduct design
". Cutting
#. 1nspection
!-34
Activity-Based Costing
%. 1nventory management
Solut'on 74# 3446 "in.5
1. Pacility . 6roduct
2. 7nit ". 7nit
3. 7nit #. *atch
4. *atch %. 6roduct
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Test Ban$ %or Mana&er'al A((ount'n&) Se(on* E*'t'on
C9/6&,T19- :TAT,/,-T:
%4. 1n traditional costing systems, direct labor cost is often used for the assignment of all
NNNNNNNNNNNNNNNNNNNN.
%. A NNNNNNNNNNNNNNNNNN is any activity that has a direct cause-effect relationship !ith the resources
consumed.
%". 1n activity-based costing, overhead costs are allocated to NNNNNNNNNNNNNNNNNNNN, then assigned to
products.
%#. The number of NNNNNNNNNNNNNNNNNNN is an appropriate cost driver for the ordering and receiving
activity cost pool.
%%. The primary benefit of activity-based costing is NNNNNNNNNNNNNNNNNNN product costing.
%(. )hen product lines differ greatly in volume and manufacturing comple$ity, a s!itch from
traditional costing to NNNNNNNNNNNNNNNNNNN is indicated.
(+. NNNNNNNNNNNNNNNNNNNNNN increase the !orth of a product or service to customers.
(1. A primary ob0ective of NNNNNNNNNNNNNNNNNN processing is to eliminate all manufacturing
inventories.
(2. ?ependable suppliers, a multi-s.illed !or.force, and a NNNNNNNNNNNNNNNNNNNNNNNNNN are
necessary elements of 0ust-in-time processing.
5(3. 1n the hierarchy of activity levels, the four levels are NNNNNNNNNN, NNNNNNNNNNN, NNNNNNNNNNNN,
and NNNNNNNNNNNNN.
5(4. ,'uipment setups are a NNNNNNNNNNNNNN-level activity.
Answers to Com.let'on Statements
%4. overhead costs
%. cost driver
%". activity cost pools
%#. purchase orders
%%. more accurate
%(. activity-based costing
(+. value-added activities
(1. 0ust-in-time
(2. total 'uality control system
5(3. unit, batch, product, facility
5(4. batch
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Activity-Based Costing
/ATC81-R
(. /atch the items in the t!o columns belo! by entering the appropriate code letter in the space
provided.
A. 6ull approach P. 3ust-in-time processing
*. Cost driver R. *atch-level activity
C. Pacility-level activity 8. 6roduct-level activity
?. 7nit-level activity 1. -onvalue-added activity
,. Activity-based costing 3. Dalue-added activity
NNNNN 1. Allocates overhead to multiple activity cost pools, then assigns the activity cost pools to
products.
NNNNN 2. An activity that has a direct cause-effect relationship !ith the resources consumed.
NNNNN 3. 1ncreases the !orth of a product or service to customers.
NNNNN 4. :hould be eliminated or reduced.
NNNNN . 6lant management.
NNNNN ". ,ngineering changes.
NNNNN #. ,'uipment setups.
NNNNN %. Assembling.
NNNNN (. 6rimary ob0ective is to eliminate all manufacturing inventories.
NNNNN 1+. 7sed to initiate manufacturing under 31T processing.
Answers to Mat(/'n&
1. , ". 8
2. * #. R
3. 3 %. ?
4. 1 (. P
. C 1+. A
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Test Ban$ %or Mana&er'al A((ount'n&) Se(on* E*'t'on
:892T-A-:),2 ,::AT 47,:T19-:
S-A E 5,
*org Corporation uses a traditional costing system. /anagement is considering s!itching to an
activity-based costing system. )hat steps must *org ta.e in initiating an activity-based costing
system;
Solut'on 5,
*org Corporation must first identify the ma0or activities that pertain to the manufacture of specific
products, then allocate manufacturing overhead to activity cost pools. -e$t, *org must identify
the cost drivers that accurately measure each activity@s contribution to the finished product and
compute activity-level overhead rates for each pool. Pinally, the manufacturing overhead costs for
each activity pool must be allocated to products, using the activity-based overhead rates.
S-A E 5-
:even Company produces phasers <sales of 2++,+++ units per year= and force field enhancers
<sales of 2,+++ units per year=. 1f :even s!itches from traditional costing to activity-based
costing, !hat is the li.ely effect on overhead assigned to the t!o products;
Solut'on 5-
)hen overhead is properly assigned in A*C, it !ill usually increase the unit cost of lo!-volume
products li.e the force field enhancers. This is because lo!-volume products often re'uire more
special handling, such as machine setups and inspections, than high-volume products. Also,
overhead costs incurred by lo!-volume products often are disproportionate to a traditional
allocation base.
S-A E 54
)hat are the conditions that !ould indicate to the management of a firm that they should s!itch
from traditional costing to activity-based costing;
Solut'on 54
The presence of one or more of the follo!ing conditions indicates A*C as the superior costing
systemG
1= 6roduct lines differ greatly in volume and manufacturing comple$ity.
2= 6roduct lines are numerous, diverse, and re'uire differing degrees of support services.
3= 9verhead costs constitute a significant portion of total costs.
4= The manufacturing process or the number of products has changed significantly.
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Activity-Based Costing
= 6roduction or mar.eting managers are ignoring data provided by the e$isting system and are,
instead, using alternative data in decision-ma.ing.
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