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Introduction to Management Accounting, 16e, Global Edition (Horngren)

Chapter 4 Cost Management Systems and Activity-Based Costing

4.1 Questions

1) To support managers' decisions, accountants develop cost management systems that are ________.
A) also used by external users such as investors and lenders
B) computer programs with specialized accounting language
C) a collection of tools and techniques that identify how decisions affect costs
D) composed of at least 400 cost pools
Answer: C
Diff: 1
LO: 4-1
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

2) External users of financial reports need ________ measures of inventory and cost of goods sold.
Internal users of financial reports need ________ cost information about products.
A) strategic; operational
B) operational; strategic
C) aggregate; detailed
D) detailed; aggregate
Answer: C
Diff: 1
LO: 4-1
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

3) What is an example of a tool or technique that is used in a cost management system?


A) retail method
B) lower of cost or market rule
C) conservatism principle
D) cost-volume-profit analysis
Answer: D
Diff: 1
LO: 4-1
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

1
Copyright © 2014 Pearson Education
4) A cost management system provides ________.
A) measures of inventory value and cost of goods sold for financial reporting
B) cost information for strategic management decisions
C) cost information for operational control
D) all of the above
Answer: D
Diff: 1
LO: 4-1
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

5) Which of the following is an example of a strategic management decision that uses cost information?
A) determining the ending balance of Merchandise Inventory for financial reporting to external users
B) determining the product mix
C) assessing a cost control program in a factory
D) determining the amount of Cost of Goods Sold for financial reporting to external users
Answer: B
Diff: 1
LO: 4-1
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

6) Which of the following is an example of using cost information for operational control?
A) determination of Cost of Goods Sold for the income statement
B) identification of capital assets to acquire for expansion purposes
C) selection of value-chain function to emphasize in corporate mission
D) evaluation of process improvement efforts in a manufacturing process
Answer: D
Diff: 2
LO: 4-1
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

7) Which of the following is an example of a strategic management decision that uses cost information?
A) determination of Cost of Goods Sold for the income statement
B) identification of value-chain function to outsource
C) evaluation of operational cost control program
D) assessment of process improvement efforts in quality control
Answer: B
Diff: 2
LO: 4-1
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

2
Copyright © 2014 Pearson Education
8) A cost management system provides information for strategic management decisions and financial
reporting.
Answer: TRUE
Diff: 1
LO: 4-1
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

9) An example of a strategic management decision is the decision to outsource a particular value-chain


function.
Answer: TRUE
Diff: 1
LO: 4-1
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

10) An example of a strategic management decision is the selection of the product mix that maximizes
profits.
Answer: TRUE
Diff: 1
LO: 4-1
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

11) Investors need more detailed information about products or services than managers.
Answer: FALSE
Diff: 1
LO: 4-1
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

12) An example of a strategic management decision is the establishment of a pricing policy for a new
product.
Answer: TRUE
Diff: 1
LO: 4-1
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

3
Copyright © 2014 Pearson Education
4.2 Questions

1) A product such as Sure-Fine Graham Crackers, and a customer such as an Internet customer, are both
examples of ________.
A) cost accounting
B) cost management system
C) cost assignment
D) cost objects
Answer: D
Diff: 1
LO: 4-2
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

2) To determine the cost of a product, which of the following are followed?


A) first step, cost assignment and second step, cost allocation
B) first step, cost accumulation and second step, cost assignment
C) first step, cost allocation and second step, cost apportionment
D) first step, cost absorption and second step, cost attribution
Answer: B
Diff: 1
LO: 4-2
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

3) To determine the cost of serving a specific type of customer, such as the retail customer, which of the
following are followed?
A) first step, cost assignment and second step, cost allocation
B) first step, cost accumulation and second step, cost assignment
C) first step, cost allocation and second step, cost apportionment
D) first step, cost absorption and second step, cost attribution
Answer: B
Diff: 1
LO: 4-2
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

4) If the Machining Department is the cost object, attaching costs to the Machining Department is called
________.
A) cost pooling
B) cost accumulation
C) cost assignment
D) applying a cost driver
Answer: C
Diff: 1
LO: 4-2
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

4
Copyright © 2014 Pearson Education
5) Which of the following types of organizations need cost accounting?
A) manufacturing firms and service organizations only
B) service organizations and nonprofit organizations only
C) manufacturing firms and nonprofit organizations only
D) all types of organizations
Answer: D
Diff: 1
LO: 4-2
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

6) Which of the following statements is FALSE?


A) A cost may be defined as a sacrifice or giving up of resources for a particular purpose.
B) Costs are frequently measured by the monetary units that must be paid for goods and services.
C) Only manufacturing firms need some form of cost accounting.
D) A cost accounting system typically has two processes that include cost accumulation and cost
assignment.
Answer: C
Diff: 2
LO: 4-2
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

7) Which of the following statements about cost accounting systems is FALSE?


A) The cost accounting system provides the cost data that managers use for decision making.
B) The cost accounting system is the most fundamental component of a cost management system.
C) A cost accounting system that provides accurate information is a key success factor for all types of
organizations.
D) Some types of organizations do not need cost accounting systems.
Answer: D
Diff: 2
LO: 4-2
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

8) The process of collecting costs by some natural classification is called ________.


A) cost accounting
B) cost allocation
C) cost accumulation
D) cost assignment
Answer: C
Diff: 1
LO: 4-2
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

5
Copyright © 2014 Pearson Education
9) Cost accounting is that part of the cost management system that measures costs for the sole purpose of
financial reporting.
Answer: FALSE
Diff: 1
LO: 4-2
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

10) A cost is a sacrifice of resources for a particular purpose.


Answer: TRUE
Diff: 1
LO: 4-2
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

11) A cost object is anything for which a separate measurement of costs is desired.
Answer: TRUE
Diff: 1
LO: 4-2
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

12) Customers, departments and territories are examples of cost objects.


Answer: TRUE
Diff: 1
LO: 4-2
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

13) Company activities such as processing orders, billing customers, and moving materials can be cost
objects.
Answer: TRUE
Diff: 2
LO: 4-2
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

14) A cost accounting system typically includes two processes: cost allocation and cost determination.
Answer: FALSE
Diff: 1
LO: 4-2
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

6
Copyright © 2014 Pearson Education
15) Cost assignment is attaching costs to one or more cost objects, such as activities and departments.
Answer: TRUE
Diff: 2
LO: 4-2
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

16) Accountants initially collect costs by some natural classification such as activities performed.
Answer: TRUE
Diff: 1
LO: 4-2
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

4.3 Questions

1) Which of the following types of costs cannot be specifically and exclusively identified with a cost object
in an economically feasible manner?
A) variable costs
B) fixed costs
C) direct costs
D) indirect costs
Answer: D
Diff: 1
LO: 4-3
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

2) The cost object is an upholstered chair made by craftsmen in a factory. An accountant can identify the
amount and cost of fabric used to manufacture the chair. This is called ________ a ________ to a cost
object.
A) assigning; indirect cost
B) allocating; indirect cost
C) allocating; direct cost
D) tracing; direct cost
Answer: D
Diff: 1
LO: 4-3
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

7
Copyright © 2014 Pearson Education
3) Today, in most manufacturing companies, workers oversee automated production processes that
produce many different products. With respect to the products manufactured, the labor costs are
considered to be ________.
A) direct labor costs
B) indirect production costs
C) direct production costs
D) period costs
Answer: B
Diff: 2
LO: 4-3
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

4) To assign indirect costs to cost objects, which of the following methods is used?
A) cost pooling
B) cost accumulation
C) cost allocation
D) cost tracing
Answer: C
Diff: 1
LO: 4-3
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

5) When allocating indirect production costs to cost objects, which of the following is/are a cost-allocation
base(s)?
A) some measure of input or output that determines the amount of cost to be allocated to a cost object
B) a measure used to assign indirect costs to cost objects
C) a measure used to assign direct costs to cost objects
D) A and B
Answer: D
Diff: 2
LO: 4-3
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

6) When allocating indirect production costs to cost objects, most cost-allocation bases are ________.
A) assigned to a cost object
B) accumulated for a cost object
C) traced to the cost object
D) cost drivers
Answer: D
Diff: 2
LO: 4-3
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

8
Copyright © 2014 Pearson Education
7) When assigning indirect costs to a cost object, an ideal cost-allocation base measures ________.
A) the proportion of indirect costs to direct costs
B) the extent a particular cost is caused by a cost object
C) multiple cost drivers
D) the proportion of direct costs to indirect costs
Answer: B
Diff: 2
LO: 4-3
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

8) An allocated cost is a(n) ________ assigned to a cost object using a ________.


A) direct cost; cost-allocation base
B) indirect cost; cost-allocation base
C) direct cost; cost pool
D) indirect cost; cost pool
Answer: B
Diff: 1
LO: 4-3
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

9) How do we assign indirect costs to cost objects?


A) based on the proportion of indirect costs to total costs
B) based on the proportion of indirect costs to direct costs
C) in proportion to the cost object's use of a cost-allocation base
D) based on the amount of direct cost used by the cost object
Answer: C
Diff: 2
LO: 4-3
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

10) The monthly indirect production cost is Depreciation Expense on Assembly Equipment of $100,000.
The cost allocation base is number of machine hours. The expected level of production in a month is
10,000 machine hours. What is the amount of indirect production cost per unit assigned to Product 1 and
Product 2. Product 1 requires 10 machine hours per unit. Product 2 requires 20 machine hours per unit.
Product 1 Product 2
A) $1 $2
B) $10 $20
C) $100 $200
D) none of the above
Answer: C
Diff: 2
LO: 4-3
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

9
Copyright © 2014 Pearson Education
11) Which of these costs is a direct cost for a manufactured wood chair?
A) Rent Expense for factory building
B) Depreciation Expense on factory equipment
C) Wood used to manufacture chair
D) Salary Expense of factory supervisor
Answer: C
Diff: 2
LO: 4-3
AACSB: Analytic skills, Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

12) Which of the following costs is a direct cost for a manufactured product?
A) Depreciation Expense on factory equipment used for several products
B) Wages Expense of an assembly worker who works specifically on the product
C) Accountants who determine the product costs for all the products manufactured
D) Factory Supervisor Salary Expense where the supervisor oversees the production of several different
types of products
Answer: B
Diff: 2
LO: 4-3
AACSB: Analytic skills, Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

13) When a laptop computer is the cost object, the keyboard would be classified as a(n) ________.
A) direct cost
B) allocated cost
C) indirect cost
D) unallocated cost
Answer: A
Diff: 2
LO: 4-3
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

14) When an automobile made in a Toyota factory is the cost object, the wages of the security guard in the
factory would probably be classified as a(n) ________.
A) direct production cost
B) indirect production cost
C) direct nonproduction cost
D) indirect nonproduction cost
Answer: B
Diff: 2
LO: 4-3
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

10
Copyright © 2014 Pearson Education
15) When an upholstered chair is the cost object, minor materials, such as tacks and nails, used to
manufacture the chair would probably be classified as a(n) ________.
A) direct production cost
B) direct nonproduction cost
C) indirect production cost
D) indirect nonproduction cost
Answer: C
Diff: 2
LO: 4-3
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

16) Indirect production costs can be ignored because they do not affect the cost of a product.
Answer: FALSE
Diff: 1
LO: 4-3
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

17) Costs can be classified as direct or indirect with respect to a particular cost object.
Answer: TRUE
Diff: 1
LO: 4-3
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

18) The wages of the janitor in the factory are direct costs for a manufactured product.
Answer: FALSE
Diff: 1
LO: 4-3
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

19) Depreciation expense on assembly equipment used for several products is an example of a direct cost
for a manufactured product.
Answer: FALSE
Diff: 2
LO: 4-3
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

20) Costs that can be allocated to a cost object are called direct costs.
Answer: FALSE
Diff: 1
LO: 4-3
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

11
Copyright © 2014 Pearson Education
21) A century ago, a large proportion of labor costs were direct costs.
Answer: TRUE
Diff: 1
LO: 4-3
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

4.4 Questions

1) Which of the following purposes of cost allocation provides information for operational control in an
organization?
A) to compute income and asset valuations for financial reports
B) to compute Cost of Goods Sold for financial reports
C) to determine the number of cost drivers for a product
D) to provide the desired motivation and to give feedback for performance evaluation
Answer: D
Diff: 2
LO: 4-4
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

2) If fixed production costs are not allocated to manufactured products, this conveys the idea that
________.
A) fixed costs are not necessary to manufacture a product.
B) fixed costs are necessary to manufacture a product.
C) variable costs are less important than fixed costs to manufacture a product.
D) fixed costs are more important than variable costs to manufacture a product.
Answer: A
Diff: 1
LO: 4-4
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

3) When companies develop cost management systems, which of the following purposes of cost
allocation usually dominates?
A) to predict the economic effects of strategic and operational control decisions
B) to provide the desired motivation and to give feedback for performance evaluation
C) to compute income and asset valuations for financial reporting
D) to justify costs or obtain reimbursement
Answer: C
Diff: 1
LO: 4-4
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

12
Copyright © 2014 Pearson Education
4) Monthly indirect production costs are $400,000. The cost-allocation base for indirect costs is machine
hours. The budgeted capacity for the month is 40,000 machine hours. Product X used 5,000 machine
hours, Product Y used 15,000 machine hours and Product Z used 20,000 machine hours. How much of the
indirect costs are allocated to Products X and Y?
Product X Product Y
A) $2,500 $7,500
B) $5,000 $15,000
C) $50,000 $150,000
D) none of the above
Answer: C
Diff: 2
LO: 4-4
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

5) Rent Expense on the Factory Building of $100,000 is allocated to three departments. The cost-allocation
base for this expense is number of square feet, which equals 50,000 square feet. Information for the three
departments housed in the factory building are as follows:

Department Square Feet Cubic Feet


Department A 15,000 15,000
Department B 5,000 5,000
Department C 30,000 20,000

How much Rent Expense is allocated to the three departments?


Department A Department B Department C
A) $15,000 $5,000 $30,000
B) $37,500 $12,500 $50,000
C) $30,000 $10,000 $60,000
D) none of the above
Answer: C
Diff: 2
LO: 4-4
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

6) When determining the cost of a product, which of the following costs is often not allocated?
A) Customer Service Expense
B) Research and Development Expense
C) Marketing Expense
D) Administrative Salaries Expense
Answer: D
Diff: 2
LO: 4-4
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

13
Copyright © 2014 Pearson Education
7) Depreciation Expense on the Heating and Air Conditioning Equipment for the factory of $50,000 is
allocated to five departments. The cost-allocation base for this expense is the number of cubic feet, which
equals 100,000 cubic feet. Information for five departments is below:

Department Square Feet Cubic Feet


Department A 15,000 15,000
Department B 5,000 5,000
Department C 30,000 20,000
Department D 20,000 35,000
Department E 10,000 25,000

How much Depreciation Expense is allocated to Department A?


A) $2,500
B) $7,500
C) $15,000
D) $18,750
Answer: B
Diff: 2
LO: 4-4
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

8) If the Production Department is the cost object, the salary of the factory supervisor is a(n) ________ cost
for the department. If the product made in the factory is the cost object, the salary of the factory
supervisor is a(n) ________ cost for the product.
A) direct; indirect
B) indirect; direct
C) direct; direct
D) indirect, indirect
Answer: A
Diff: 2
LO: 4-4
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

9) In general, many more costs are direct costs instead of indirect costs when the cost object is a ________
instead of a(n) ________.
A) product; department
B) product; activity
C) product; resource
D) department; product
Answer: D
Diff: 2
LO: 4-4
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

14
Copyright © 2014 Pearson Education
10) Which of the following is NOT a stated purpose of cost allocation?
A) Predict the economic effects of strategic and operational control decisions.
B) Obtain reimbursement.
C) Provide motivation to managers.
D) Determine product cost.
Answer: D
Diff: 2
LO: 4-4
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

11) What is the final step in the four-step process to allocate indirect costs to cost objects?
A) Accumulate indirect costs for a period of time in a cost pool.
B) Select an allocation base for each cost pool.
C) Multiply the percentage of total cost-allocation units used for each cost object by the total costs in the
cost pool to determine the cost allocated to each cost object.
D) Measure the units of the cost-allocation base used for each cost object and compute the total units used
for all cost objects.
Answer: C
Diff: 2
LO: 4-4
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

12) Unallocated costs ________.


A) are not recorded in the cost accounting system
B) do not have cost drivers that can be used to relate the costs to cost objects
C) have a direct relationship to a cost object
D) have an identifiable relationship with a cost object
Answer: B
Diff: 2
LO: 4-4
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

13) Companies must assign all nonproduction costs to cost objects for internal management purposes.
Answer: FALSE
Diff: 2
LO: 4-4
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

15
Copyright © 2014 Pearson Education
14) Companies must assign all production-related costs to cost objects for external financial reporting
purposes.
Answer: TRUE
Diff: 2
LO: 4-4
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

15) A cost pool is a group of individual costs that is allocated to cost objects.
Answer: TRUE
Diff: 1
LO: 4-4
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

16) Due to the decline in indirect costs in most companies, allocating indirect costs is no longer necessary
to determine accurate product costs.
Answer: FALSE
Diff: 1
LO: 4-4
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

17) An unallocated cost in one company may be an allocated cost in another company.
Answer: TRUE
Diff: 2
LO: 4-4
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

18) The number of cubic feet is a logical cost driver for allocating depreciation expense of heating
equipment to cost objects.
Answer: TRUE
Diff: 3
LO: 4-4
AACSB: Analytic skills, Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

19) Allocation of costs to cost objects may be described as absorb or apply.


Answer: TRUE
Diff: 1
LO: 4-4
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

16
Copyright © 2014 Pearson Education
20) Indirect manufacturing costs are the same as manufacturing overhead costs.
Answer: TRUE
Diff: 1
LO: 4-4
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

21) In general, more costs are direct when a department is the cost object than when a product or service
is the cost object.
Answer: TRUE
Diff: 2
LO: 4-4
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

4.5 Questions

1) Merchandising and manufacturing companies account for ________ in the same way.
A) design expenses
B) customer service expenses
C) selling expenses
D) all of the above
Answer: D
Diff: 2
LO: 4-5
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

2) A merchandising firm has ________ inventory account(s). A manufacturing firm has ________
inventory account(s).
A) one; three
B) three; one
C) two; three
D) three; three
Answer: A
Diff: 2
LO: 4-5
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

17
Copyright © 2014 Pearson Education
3) Factory overhead does NOT include ________.
A) electricity bill in factory
B) insurance Expense on factory building
C) supplies used in factory
D) wages of janitors in corporate headquarters
Answer: D
Diff: 2
LO: 4-5
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

4) Indirect production costs do NOT include ________.


A) property taxes on factory building
B) rent expense on factory building
C) wages of security guards at corporate headquarters
D) wages of forklift truck operators in assembly area
Answer: C
Diff: 2
LO: 4-5
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

5) In a merchandising company, ________.


A) selling and administrative costs are period costs
B) insurance expense on the corporate building is a product cost
C) Work-In-Process Inventory may be present
D) Finished Goods Inventory may be present
Answer: A
Diff: 2
LO: 4-5
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

6) In a manufacturing company, ________.


A) inventoriable costs only become an expense when the company sells the inventory
B) inventoriable costs become an expense as soon as the company finishes manufacturing the product
C) there is only one inventory account
D) period expenses are reported as expenses in a future period
Answer: A
Diff: 2
LO: 4-5
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

18
Copyright © 2014 Pearson Education
7) When looking at a manufactured product, an example of an inventoriable cost is ________.
A) depreciation expense on office equipment in corporate office
B) insurance expense on vehicles used by sales staff
C) wages of plant security guard
D) clerical salaries in corporate office
Answer: C
Diff: 2
LO: 4-5
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

8) For manufacturing companies, an example of a period cost is ________.


A) direct materials
B) research and development expense
C) direct labor
D) factory overhead
Answer: B
Diff: 2
LO: 4-5
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

9) Goods undergoing the production process but not fully complete are called ________.
A) Merchandise Inventory
B) Raw Materials Inventory
C) Finished Goods Inventory
D) Work-in-Process Inventory
Answer: D
Diff: 1
LO: 4-5
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

10) Which of the following is NOT an example of indirect production costs?


A) factory supplies
B) depreciation expense on factory building
C) depreciation expense on office equipment in corporate headquarters
D) wages of material handlers in factory
Answer: C
Diff: 2
LO: 4-5
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

19
Copyright © 2014 Pearson Education
11) Which of the following is NOT a period expense in a merchandising firm?
A) Selling Expense
B) Administrative Expenses
C) R&D Expenses
D) Cost of Goods Sold
Answer: D
Diff: 2
LO: 4-5
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

12) Period costs include selling and administrative expenses.


Answer: TRUE
Diff: 1
LO: 4-5
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

13) In a manufacturing company, unsold, fully complete products are called Work-In-Process Inventory.
Answer: FALSE
Diff: 1
LO: 4-5
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

14) Period costs become expenses during a future period.


Answer: FALSE
Diff: 1
LO: 4-5
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

15) A merchandising company has Raw Materials Inventory.


Answer: FALSE
Diff: 1
LO: 4-5
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

16) For both merchandising and manufacturing firms, selling and administrative costs are period costs.
Answer: TRUE
Diff: 2
LO: 4-5
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

20
Copyright © 2014 Pearson Education
17) A manufacturing company has identified several costs. Indicate whether each of the following costs is
an Inventoriable cost(I) or a Period cost(P):

_____ 1. Rent Expense on factory equipment


_____ 2. Cost of subassemblies used in producing product
_____ 3. Wages of machine operators in factory
_____ 4. Rent Expense on computers at corporate office
_____ 5. Wage Expense for janitors in factory
_____ 6. Repairs Expense for factory equipment
_____ 7. Office Supplies Expense at corporate office
_____ 8. Wage Expense for janitors at corporate office
_____ 9. Wages of security guards at corporate office
_____ 10. Property taxes on factory building and land
_____ 11. Wages of security guards at factory
_____ 12. Wages of forklift driver in factory
_____ 13. Supplies Expense for factory
_____ 14. Wages of forklift operators in factory
_____ 15. Distribution Expenses
Answer:
1. I
2. I
3. I
4. P
5. I
6. I
7. P
8. P
9. P
10. I
11. I
12. I
13. I
14. I
15. P
Diff: 2
LO: 4-5
AACSB: Analytic skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization

21
Copyright © 2014 Pearson Education
4.6 Questions

1) In a manufacturing company, product costs used for external reporting include ________.
A) direct material costs plus direct labor cost only
B) indirect production costs only
C) direct material costs plus direct labor cost plus indirect production costs
D) direct material costs plus nonproduction costs
Answer: C
Diff: 2
LO: 4-6
AACSB: Reflective thinking skills
Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for
different types of organizations

2) Which of the following statements about period costs is FALSE?


A) Period costs refer to distribution costs and design costs.
B) Period costs include R&D expenses, marketing costs and customer service costs.
C) Merchandising and manufacturing firms treat period costs differently.
D) For merchandising firms, Cost of Goods Sold is not a period cost.
Answer: C
Diff: 2
LO: 4-6
AACSB: Reflective thinking skills
Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for
different types of organizations

3) A merchandising firm reports ________ as a current asset on the balance sheet.


A) Raw Materials Inventory
B) Finished Goods Inventory
C) Work-in-Process Inventory
D) Merchandise Inventory
Answer: D
Diff: 2
LO: 4-6
AACSB: Reflective thinking skills
Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for
different types of organizations

22
Copyright © 2014 Pearson Education
4) The computation for Cost of Goods Manufactured on the income statement is ________. (Assume there
are no Work-In-Process Inventories.)
A) direct materials used plus direct production costs
B) direct materials used plus direct labor plus indirect production costs
C) direct materials used plus direct labor
D) direct materials used plus direct labor minus indirect production costs
Answer: B
Diff: 2
LO: 4-6
AACSB: Reflective thinking skills
Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for
different types of organizations

5) ________ would appear on an income statement of both a retailer and a manufacturer.


A) Direct materials used
B) Ending balance in Finished Goods Inventory
C) Selling expenses
D) Ending balance in Merchandise Inventory
Answer: C
Diff: 2
LO: 4-6
AACSB: Analytic skills
Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for
different types of organizations

6) In a manufacturing firm, which inventory account is NOT used?


A) Raw Materials Inventory
B) Work-In-Process Inventory
C) Finished Goods Inventory
D) Merchandise Inventory
Answer: D
Diff: 1
LO: 4-6
AACSB: Reflective thinking skills
Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for
different types of organizations

23
Copyright © 2014 Pearson Education
7) The following information was taken from the accounting records of Henry Manufacturing Company:

Direct materials purchased $75,000


Direct materials used $56,000
Direct manufacturing labor costs $20,000
Indirect manufacturing labor costs $10,000
Sales Salaries Expense $35,000
Miscellaneous Factory Expenses $5,000
Administrative Expenses $40,000
Finished Goods Inventory, beginning $10,000
Finished Goods Inventory, end $12,000
Work-In-Process Inventory, beginning 0
Work-In-Process Inventory, end 0

What is Cost of Goods Manufactured?


A) $86,000
B) $89,000
C) $91,000
D) $96,000
Answer: C
Diff: 2
LO: 4-6
AACSB: Analytic skills
Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for
different types of organizations

24
Copyright © 2014 Pearson Education
8) The following information was obtained from the accounting records of Stevenson Incorporated:

Direct materials purchased $80,000


Direct materials used $54,000
Direct manufacturing labor costs $12,000
Indirect manufacturing labor costs $11,000
Selling expenses $16,000
Administrative expenses $22,000
Factory utilities costs $20,000
Rental cost of factory machines $50,000
Work in process inventory, beginning 0
Work in process inventory, end 0
Finished goods inventory, beginning $10,000
Finished goods inventory, end $30,000

What is Cost of Goods Sold?


A) $57,000
B) $77,000
C) $127,000
D) $147,000
Answer: C
Diff: 2
LO: 4-6
AACSB: Analytic skills
Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for
different types of organizations

9) In a merchandising firm, the computation of Cost of Goods Sold does NOT use ________.
A) Merchandise Inventory, beginning balance
B) Merchandise Inventory, ending balance
C) purchases of raw materials
D) purchases of merchandise inventory
Answer: C
Diff: 1
LO: 4-6
AACSB: Analytic skills
Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for
different types of organizations

25
Copyright © 2014 Pearson Education
10) In a manufacturing firm, the computation of Cost of Goods Manufactured does NOT use ________.
A) Finished Goods Inventory, ending balance
B) indirect production costs
C) direct labor costs
D) direct materials used
Answer: A
Diff: 2
LO: 4-6
AACSB: Analytic skills
Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for
different types of organizations

11) Which of the following costs is NOT an inventoriable cost for a manufacturing firm?
A) Marketing Expense
B) Factory Supervisor's Salary Expense
C) Wages Expense for security guard in factory
D) Wages Expense for forklift operator in factory
Answer: A
Diff: 2
LO: 4-6
AACSB: Analytic skills
Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for
different types of organizations

12) In a manufacturing firm, the Finished Goods Inventory account is only found on the balance sheet.
Answer: FALSE
Diff: 2
LO: 4-6
AACSB: Reflective thinking skills
Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for
different types of organizations

13) A manufacturer has three types of inventory that include Raw Materials Inventory, Work-In-Process
Inventory and Merchandise Inventory.
Answer: FALSE
Diff: 1
LO: 4-6
AACSB: Reflective thinking skills
Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for
different types of organizations

26
Copyright © 2014 Pearson Education
14) The McCain Company manufactures several products. The McCain Company has gathered the
following information for the year ended December 31, 2015:

Sales $110,000
Direct materials used $10,700
Fixed indirect production costs $10,900
Variable indirect production costs $7,900
Fixed direct labor $10,300
Variable direct labor $12,300
Fixed selling expenses $33,040
Variable selling expenses $3,440
Finished Goods Inventory, January 1, 2015 $24,000
Finished Goods Inventory, December 31, 2015 $22,000
Work-In-Process Inventory, January 1, 2015 0
Work-In-Process Inventory, December 31, 2015 0

Requirements:
A) Compute the Cost of Goods Manufactured for the year ended December 31, 2015.
B) Compute the Cost of Goods Sold for the year ended December 31, 2015.
C) Compute the Net Income for the year ended December 31, 2015.
Answer:
A) $52,100($10,700 + $10,900 + $7,900 + $10,300 + $12,300)
B) $54,100($52,100 + $24,000 - $22,000)
C) Net Income = $19,420 = $110,000 - $54,100 - $33,040 - $3,440
Diff: 2
LO: 4-6
AACSB: Analytic skills
Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for
different types of organizations

27
Copyright © 2014 Pearson Education
15) Donahoo Manufacturing Company had the following information available for the year:

Direct materials used $44,000


Direct labor costs incurred $7,700
Indirect labor costs incurred $3,030
Depreciation Expense on factory building $19,000
Depreciation Expense on factory machines $100,000
Insurance Expense on factory building $1,200
Depreciation Expense on office equipment $12,000
Insurance expense on corporate office $1,300
Supplies Expense for factory $5,000
Utilities Expense for factory $2,000
Wages Expense for factory janitors $5,000
Lease Expense for factory computers $10,000
Finished Goods Inventory, end of year $32,000
Finished Goods Inventory, beginning of year $12,000

Work-In-Process Inventories and Raw Materials Inventories were negligible at the beginning and end of
the year.

Required:
A) Compute the Cost of Goods Manufactured for the year.
B) Compute the Cost of Goods Sold for the year.
Answer:
A) $196,930 ($44,000 + $7,700 + $3,030 + $100,000 + $19,000 + $1,200 + $5,000 + $2,000 + $5,000 + $10,000)
B) $176,930 ($196,930 + $12,000 - $32,000)
Diff: 2
LO: 4-6
AACSB: Analytic skills
Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for
different types of organizations

28
Copyright © 2014 Pearson Education
16) Gollerowski Company has determined the following information for the year ended December 31,
2015:

Direct labor used $16,840


Direct material used $26,300
General and administrative expenses $14,240
Indirect production costs $56,780
Selling expenses $13,599
Work-In-Process Inventory, January 1, 2015 0
Work-In-Process Inventory, December 31, 2015 0
Finished Goods Inventory, January 1, 2015 0
Finished Goods Inventory, December 31, 2015 ?
Cost of Goods Sold $80,000

Requirements:
A) What is the Cost of Goods Manufactured for the year ended December 31, 2015?
B) What is Finished Goods Inventory at December 31, 2015?
Answer:
A) $99,920 ($26,300 + $16,840 + $56,780)
B) $19,920 ($99,920 - $80,000)
Diff: 2
LO: 4-6
AACSB: Analytic skills, Reflective thinking skills
Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for
different types of organizations

29
Copyright © 2014 Pearson Education
4.7 Questions

1) Swanson Company has identified the following activities related to indirect production costs:

Activity Activity Costs Cost Drivers


Machine Setup $180,000 1,500 setup hours
Materials Handling $50,000 12,500 pounds of materials
Electric Power $20,000 20,000 kilowatt hours

Swanson Company has obtained the following data concerning two products:

Product 1 Product 2
Number of units produced 4,000 20,000
Direct materials cost $20,000 $25,000
Direct labor cost $12,000 $20,000
Number of setup hours 100 120
Pounds of materials used 500 1,500
Kilowatt-hours 1,000 2,000

Using activity-based costing, what amount of machine setup cost is assigned to Products 1 and 2?
Product 1 Product 2
A) $12,000 $14,400
B) $30,000 $150,000
C) $50,000 $130,000
D) $81,818 $98,182
Answer: A
Diff: 3
LO: 4-7
AACSB: Analytic skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

30
Copyright © 2014 Pearson Education
2) Stanley Company has identified the following activities related to indirect production costs:

Activity Activity Costs Cost Drivers


Machine Setup $180,000 1,500 setup hours
Materials Handling $50,000 12,500 pounds of materials
Electric Power $20,000 20,000 kilowatt hours

Stanley Company has obtained the following data concerning two products:

Product 1 Product 2
Number of units produced 4,000 20,000
Direct materials cost $20,000 $25,000
Direct labor cost $12,000 $20,000
Number of setup hours 100 120
Pounds of materials used 500 1,500
Kilowatt-hours 1,000 2,000

Using an activity-based costing system, what amount of materials handling cost is assigned to Products 1
and 2?
Product 1 Product 2
A) $2,000 $6,000
B) $8,333 $41,667
C) $12,500 $37,500
D) $20,000 $30,000
Answer: A
Diff: 3
LO: 4-7
AACSB: Analytic skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

31
Copyright © 2014 Pearson Education
3) Sandler Company has identified the following activities related to indirect production costs:

Activity Activity Costs Cost Drivers


Machine Setup $180,000 1,500 setup hours
Materials Handling $50,000 12,500 pounds of materials
Electric Power $20,000 20,000 kilowatt hours

Sandler Company has obtained the following data concerning two products:

Product A Product B
Number of units produced 4,000 20,000
Direct materials cost $20,000 $25,000
Direct labor cost $12,000 $20,000
Number of setup hours 100 120
Pounds of materials used 500 1,500
Kilowatt-hours 1,000 2,000

Using activity-based costing, what amount of electric power cost is assigned to Product A and Product B?
Product A Product B
A) $1,000 $2,000
B) $3,333 $16,667
C) $5,000 $15,000
D) $6,667 $13,333
Answer: A
Diff: 3
LO: 4-7
AACSB: Analytic skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

32
Copyright © 2014 Pearson Education
4) Goldman Company has identified the following activities related to indirect production costs:

Activity Activity Costs Cost Drivers


Machine Setup $180,000 1,500 setup hours
Materials Handling $50,000 12,500 pounds of materials
Electric Power $20,000 20,000 kilowatt hours

Goldman Company has obtained the following data concerning two products:

Product A Product B
Number of units produced 4,000 20,000
Direct materials cost $20,000 $25,000
Direct labor cost $12,000 $20,000
Number of setup hours 100 120
Pounds of materials used 500 1,500
Kilowatt-hours 1,000 2,000

Using activity-based costing, what is the total production cost per unit for Product A?
A) $8.00 per unit
B) $10.25 per unit
C) $11.75 per unit
D) $70.50 per unit
Answer: C
Diff: 3
LO: 4-7
AACSB: Analytic skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

33
Copyright © 2014 Pearson Education
5) Godwin Company has identified the following activities related to indirect production costs:

Activity Activity Costs Cost Drivers


Machine Setup $180,000 1,500 setup hours
Materials Handling $50,000 12,500 pounds of materials
Electric Power $20,000 20,000 kilowatt hours

Godwin Company has obtained the following data concerning two products:

Product A Product B
Number of units produced 4,000 20,000
Direct materials cost $20,000 $25,000
Direct labor cost $12,000 $20,000
Number of setup hours 100 120
Pounds of materials used 500 1,500
Kilowatt-hours 1,000 2,000

Using activity-based costing, what is the total production cost per unit for Product B?
A) $1.12 per unit
B) $2.25 per unit
C) $3.00 per unit
D) $3.37 per unit
Answer: D
Diff: 3
LO: 4-7
AACSB: Analytic skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

6) In activity-based costing systems, the system first accumulates indirect costs for ________, and then
assigns these costs to ________.
A) products; departments
B) products; territories
C) cost objects; types of customers
D) activities; cost objects
Answer: D
Diff: 2
LO: 4-7
AACSB: Reflective thinking skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

34
Copyright © 2014 Pearson Education
7) Activity-based costing systems should be used instead of traditional costing systems if ________.
A) indirect production costs are a large percentage of production costs
B) different products consume resources at different rates
C) only one product is produced
D) A and B
Answer: D
Diff: 2
LO: 4-7
AACSB: Reflective thinking skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

8) In two-stage activity-based costing systems, the cost objects in the first stage are ________ and the cost
objects in the second stage are ________.
A) departments; products or services
B) departments; territories
C) resources; departments
D) activities; products or services
Answer: D
Diff: 2
LO: 4-7
AACSB: Reflective thinking skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

9) When using a two stage activity-based costing system, which of the following is NOT a legitimate step?
A) Identify a cost pool for each significant activity.
B) Assign the indirect resource cost to the appropriate cost pool.
C) Allocate the costs in each pool to products or services using multiple cost drivers.
D) Select an allocation base for each cost pool.
Answer: D
Diff: 2
LO: 4-7
AACSB: Reflective thinking skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

10) ________ is a name for a system that first accumulates indirect resource costs for each of the activities
of an organization and then assigns the cost of each activity to the cost objects that require that activity.
A) Activity-based management
B) Activity-based costing
C) Cost accounting
D) Activity-based cost allocation
Answer: B
Diff: 1
LO: 4-7
AACSB: Analytic skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

35
Copyright © 2014 Pearson Education
11) Which of the following statements is FALSE?
A) Traditional costing systems generally assign only production costs to products.
B) Traditional costing systems use a single cost pool for all indirect production costs.
C) Traditional cost systems work well with simple production processes.
D) Traditional cost systems allocate a cost pool to cost objects using multiple cost drivers.
Answer: D
Diff: 2
LO: 4-7
AACSB: Analytic skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

12) Activity-based costing systems should be adopted when ________.


A) indirect costs represent a small proportion of a product's total costs
B) indirect costs represent a large proportion of a product's total costs
C) a company makes one simple product
D) a company has a simple manufacturing process
Answer: B
Diff: 2
LO: 4-7
AACSB: Analytic skills, Reflective thinking skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

13) Process maps are used ________.


A) to make investment decisions regarding capital assets
B) as a guide for strategic decisions
C) as a tool for managers to understand operations
D) for operational control
Answer: C
Diff: 1
LO: 4-7
AACSB: Reflective thinking skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

36
Copyright © 2014 Pearson Education
14) Slocum Company has determined the following information about a new product. The manufacturing
process used for the product is very complex and it has a higher proportion of indirect costs than direct
costs. The company wants a 100% markup on cost. The following data is available:

Product cost according to traditional costing system $4.00 per unit


Product cost according to activity-based costing system $7.00 per unit

What price per unit should Slocum Company use for this new product?
A) $4.00
B) $7.00
C) $8.00
D) $14.00
Answer: D
Diff: 2
LO: 4-7
AACSB: Analytic skills, Reflective thinking skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

15) Fandry Company has obtained the following data concerning a new product:

Production Costs, Using traditional costing method $3.00 per unit


Production Costs, Using activity-based costing method $5.00 per unit
Nonproduction Costs, Using activity-based costing method $2.50 per unit

Fandry Company wants the price of the new product to cover all costs plus a 100% markup. The
production process used for the low volume product is very complicated and it has a higher proportion
of indirect costs than direct costs.

What price per unit should Fandry Company charge for the new product?
A) $6.00
B) $10.00
C) $11.00
D) $15.00
Answer: D
Diff: 2
LO: 4-7
AACSB: Analytic skills, Reflective thinking skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

16) Traditional costing systems generally assign only production costs to products.
Answer: TRUE
Diff: 1
LO: 4-7
AACSB: Reflective thinking skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

37
Copyright © 2014 Pearson Education
17) Traditional costing systems generally allocate nonproduction value-chain costs to products.
Answer: FALSE
Diff: 1
LO: 4-7
AACSB: Reflective thinking skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

38
Copyright © 2014 Pearson Education
18) Sealing Company manufactures only one product that is available in both a Deluxe model and a
Regular model. The company has manufactured the Regular model for years and the Deluxe model was
recently introduced. The company is concerned about the accuracy of its costing system because profits
are declining since the Deluxe model was introduced.
Indirect production costs are assigned to the products using direct labor hours. For the current year, the
company estimates $2,000,000 of indirect production costs and 40,000 direct labor hours. They expect to
produce 5,000 units of the Deluxe model and 40,000 units of the Regular model. The Deluxe model
requires 1.6 hours of direct labor time per unit and the Regular model requires 0.8 hours. Other costs are
as follows:

Costs Deluxe Model Regular Model


Direct materials $150 $112
Direct labor $16 $8

Assume the company's indirect production costs can be traced to four activities with the following cost
drivers:

Activity (Cost Driver) Costs


Purchase orders (number of purchase orders) $84,000
Rework orders (number of rework orders) $216,000
Product testing (number of tests) $450,000
Machining (number of machine hours) $1,250,000

Deluxe Regular
Cost Drivers Model Model
Number of purchase orders 400 600
Number of rework orders 200 600
Number of tests 4,000 6,000
Number of machine hours 20,000 30,000

Required:
A) Assume direct labor hours are the only cost-allocation base. What is the cost to manufacture one unit
of each model?
B) Assume the activity-based costing method is used. What is the cost to manufacture one unit of each
model?
C) Based on the results obtained from the activity-based costing method, what are the implications for
pricing policy for the two models?

39
Copyright © 2014 Pearson Education
Answer:
A)
Costs Deluxe Model Regular Model
Direct materials $150 $112
Direct labor $16 $8
Indirect production
costs $80 $40
Total costs $246 $160

B)
Costs Deluxe Model Regular Model
Direct materials $150.00 $112.00
Direct labor $16.00 $8.00
Indirect production
costs $153.52 $30.81
Total cost $319.52 $150.81

Deluxe Regular
Activity (Cost Driver) Costs Model Model
Purchase orders (number of orders) $84,000 $33,600 $50,400
Rework orders (number of orders) $216,000 $54,000 $162,000
Product testing (number of tests) $450,000 $180,000 $270,000
Machining (number of machine hours) $1,250,000 $500,000 $750,000
Total cost $767,600 $1,232,400
Cost per unit ($767,600/ 5,000; $1,232,400/40,000) $153.52 $30.81
C) Under activity-based costing, the Deluxe model is more costly to produce than under the traditional
costing method. As a result, the selling price of the Deluxe model should be increased to cover the
production costs. This will increase profitability of the company.
Diff: 3
LO: 4-7
AACSB: Analytic skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

40
Copyright © 2014 Pearson Education
19) Pilot Bank uses activity-based costing. Pilot Bank has the following activities, traceable costs, and cost
drivers:

Activities Traceable Costs Cost Drivers


Open new accounts $40,000 1,000 accounts
Process deposits $72,000 360,000 deposits
Process withdrawals $100,000 200,000 withdrawals

The above activities are used by Downtown branch and North branch as follows:

Activities Downtown North


Open new accounts 200 400
Process deposits 40,000 20,000
Process withdrawals 15,000 18,000

Required:
A) Compute the new account cost assigned to the North branch.
B) Compute the deposit processing cost assigned to the Downtown branch.
C) Compute the withdrawal processing cost assigned to the Downtown branch.
Answer:
A) $16,000 = ($40,000/1,000) × 400 accounts
B) $8,000 = ($72,000/360,000) × 40,000
C) $7,500 = ($100,000/200,000) × 15,000
Diff: 2
LO: 4-7
AACSB: Analytic skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

41
Copyright © 2014 Pearson Education
20) The manufacturing division of an electronics company uses activity-based costing. The company has
identified three activities and the related cost drivers for indirect production costs.

Activity Cost Driver


Activity 1 Direct materials cost
Activity 2 Direct labor cost
Activity 3 Kilowatt hours

Three types of products are produced. Direct costs and cost-driver activity for each product for a month
are as follows:

Product A Product B Product C


Direct materials cost $75,000 $50,000 $125,000
Direct labor cost $6,000 $1,000 $3,000
Direct labor hours 2,000 1,000 2,000
Kilowatt hours 150,000 200,000 150,000

Indirect production costs for the month are as follows:

Activity 1 $30,000
Activity 2 20,000
Activity 3 16,000
Total $66,000

Required:
A) Compute the indirect production costs allocated to each product using the ABC system.
B) Compute the indirect production costs allocated to each product using a traditional costing system.
Assume indirect production costs are allocated to each product using the cost driver: direct labor hours.

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Answer:
A)
Product A:
Activity 1: ($75,000/$250,000) × $30,000 = $9,000
Activity 2: ($6,000/$10,000) × $20,000 = $12,000
Activity 3: (150,000/500,000) × $16,000 = $4,800
Total $25,800

Product B:
Activity 1: ($50,000/$250,000) × $30,000 = $6,000
Activity 2: ($1,000/$10,000) × $20,000 = $2,000
Activity 3: (200,000/500,000) × $16,000 = $6,400
Total $14,400

Product C:
Activity 1: ($125,000/$250,000) × $30,000 = $15,000
Activity 2: ($3,000/$10,000) × $20,000 = $6,000
Activity 3: (150,000/500,000) × $16,000 = $4,800
Total $25,800

B)
Product A: (2,000/5,000) × $66,000 = $26,400
Product B: (1,000/5,000) × $66,000 = $13,200
Product C: (2,000/5000) × $66,000 = $26,400
Diff: 2
LO: 4-7
AACSB: Analytic skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

4.8 Questions

1) ________ costs can be eliminated from a product. ________ costs cannot be eliminated from a product
but can be reduced.
A) Value-added; Non-value-added
B) Non-value-added; Value-added
C) Resource; Activity
D) Activity; Resource
Answer: B
Diff: 2
LO: 4-8
AACSB: Reflective thinking skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

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2) All of the following are differences between GPK and activity-based costing systems EXCEPT for
________.
A) GPK applies only variable costs to products. Activity-based costing systems apply fixed and variable
costs to products.
B) GPK focuses on cost centers. Activity-based costing systems focus on activities.
C) GPK may have thousands of cost centers. Activity-based costing systems may have only a few
activities.
D) GPK uses many cost pools. Activity-based costing systems use one cost pool.
Answer: D
Diff: 3
LO: 4-8
AACSB: Reflective thinking skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

3) A cost accounting system called GPK uses ________ cost pools to allocate ________.
A) 10-20; indirect manufacturing costs
B) 1-10; direct manufacturing costs
C) 400 to 2000; indirect manufacturing costs
D) 1-20; direct manufacturing costs
Answer: C
Diff: 2
LO: 4-8
AACSB: Reflective thinking skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

4) ________ use(s) the output of an activity-based cost accounting system to improve the operational
control of an organization.
A) Cost accounting
B) Cost-volume-profit models
C) Activity-based management
D) Traditional costing system
Answer: C
Diff: 2
LO: 4-8
AACSB: Reflective thinking skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

5) Which of the following is an example of a value-added cost to a manufactured product?


A) the cost of handling inventory
B) the cost of storing inventory
C) changing the setup of production-line operations
D) the depreciation expense of robots that assemble the product
Answer: D
Diff: 2
LO: 4-8
AACSB: Analytic skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

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6) All of the following can be sources of benchmarks EXCEPT for ________.
A) competitors
B) organization itself
C) organizations with dissimilar processes
D) organizations with similar processes
Answer: C
Diff: 1
LO: 4-8
AACSB: Analytic skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

7) A hospital radiology department has the following activities:

Activity Number Activity Description


1 Repair X-ray equipment
2 Taking X-ray with X-ray equipment
3 Wait time between patients
4 Repeating an X-ray because the X-ray technician forgot to
load the film in the X-ray equipment

Which activity is a value-added activity?


A) Activity 1
B) Activity 2
C) Activity 3
D) Activity 4
Answer: B
Diff: 2
LO: 4-8
AACSB: Analytic skills, Reflective thinking skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

8) Why are more organizations adopting activity-based costing systems?


A) Computer technology has increased the costs of developing and operating ABC systems.
B) Indirect costs are more important in automated manufacturing environments.
C) Less competition.
D) Less diversity in product mix offered to customers.
Answer: B
Diff: 2
LO: 4-8
AACSB: Analytic skills, Use of information technology
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

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9) A value-added cost is the cost of an activity that a company can eliminate without affecting the
product's value to the customer.
Answer: FALSE
Diff: 1
LO: 4-8
AACSB: Reflective thinking skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

10) Value-added costs are not necessary for most products.


Answer: FALSE
Diff: 1
LO: 4-8
AACSB: Analytic skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

11) Storing inventories and transporting incomplete products in a plant are examples of non-value-added
activities.
Answer: TRUE
Diff: 1
LO: 4-8
AACSB: Analytic skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

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12) Classify each step below as a value-added activity or a non-value-added activity. Use V for value-
added activity and N for non-value-added activity.

_____ 1. Raw materials are transferred to a storage area pending use in production.
_____ 2. Raw materials are transferred to the production area for use in products.
_____ 3. Partially complete products are waiting to be worked on because equipment failed.
_____ 4. Raw materials are placed on pallets before they are used in production.
_____ 5. Finished products are transferred to the warehouse awaiting sale.
_____ 6. Finished products are checked for defects by Quality Control Department.
_____ 7. Partially complete products are transferred to the Finishing Department.
_____ 8. Completed products are transported to another building that has the Packaging Department.
_____ 9. Partially complete products are checked for defects by the supervisor.
_____ 10. Units of partially complete products are assembled by union workers.
Answer:
1. N
2. N
3. N
4. N
5. N
6. N
7. N
8. N
9. N
10. V
Diff: 2
LO: 4-8
AACSB: Reflective thinking skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

13) List and explain five reasons why more firms are adopting activity-based costing systems.
Answer:
1. Fierce competitive pressure has resulted in shrinking profit margins.
2. Greater diversity in the types of products and services as well as customer classes results in greater
operating complexity.
3. Indirect costs are more important in today's automated, world-class manufacturing environment than
they were in the past.
4. The rapid pace of technological change has shortened product life cycles.
5. The costs associated with bad decisions that result from inaccurate cost estimates are substantial.
6. Computer technology has reduced the costs of developing and operating ABC systems.
Diff: 2
LO: 4-8
AACSB: Reflective thinking skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

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4.9 Questions

1) In designing an activity-based cost accounting system, what is the first step?


A) Collect data about costs and the physical flow of the cost-driver units.
B) Determine the relationships among cost objects, activities, and resources.
C) Determine the key components of the activity-based cost accounting system.
D) Calculate and interpret the new activity-based cost information.
Answer: C
Diff: 2
LO: 4-9
AACSB: Reflective thinking skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

2) Which of the following is NOT a valid step when designing an activity-based cost accounting system?
A) Determine the key components of the system.
B) Determine the relationships between cost objects, activities, and resources.
C) Collect relevant data concerning costs and cost drivers.
D) Use a process map to identify areas for operational improvement.
Answer: D
Diff: 2
LO: 4-9
AACSB: Reflective thinking skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

3) Examples using activity-based costing generally show that traditional costing systems ________ high-
volume, simple products and ________ low-volume, complex products.
A) undercost; overcost
B) overcost; undercost
C) undercost; undercost
D) overcost; overcost
Answer: B
Diff: 2
LO: 4-9
AACSB: Reflective thinking skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

4) When comparing traditional costing systems to activity-based costing systems, the analysis reveals that
________.
A) high volume products are undercosted with traditional costing systems
B) high volume products are overcosted with traditional costing systems
C) low volume products are overcosted with traditional costing systems
D) both high volume and low volume products are undercosted with traditional costing systems
Answer: B
Diff: 2
LO: 4-9
AACSB: Reflective thinking skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

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5) Determining the key components of an Activity-Based Costing (ABC) system is the first step in the
design of an ABC system.
Answer: TRUE
Diff: 1
LO: 4-9
AACSB: Reflective thinking skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

6) Determining the relationships among cost objects, activities, and resources is the second step in the
design of an ABC system.
Answer: TRUE
Diff: 1
LO: 4-9
AACSB: Reflective thinking skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

7) Collecting cost and operational data is the first step in the design of an Activity-Based Costing system.
Answer: FALSE
Diff: 1
LO: 4-9
AACSB: Reflective thinking skills
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

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