CH 07

Chapter 7
Activity-Based Costing and Activity Based Management
CHAPTER LEARNING OBJECTIVES
1. Classify activities as unit-level, batch-level, product-level, customer-level, or

organization level.
Unit-level activities are performed for each individual unit. Since each unit of a
particular product requires the same level of activity, each unit consumes the same
amount of resources that provide for that activity. The total level of activity performed
varies proportionately with the number of units produced.
Batch-level activities are performed on groups, or batches, of products at one time.
Since the activity is based on the existence of the batch rather than on the number of
units in the batch, a batch consumes the same quantity of resources whether it includes
20 units or 2,000 units.
Product-level activities, also referred to as product-sustaining activities, support the
products or services provided by the company. These activities are performed for the
entire product line, regardless of how many units or batches are produced.
Customer-level activities are performed for specific customers. These activities, and the
resources consumed to perform them, do not affect product costs. Rather, the
resources are consumed in the delivery of customer support services, and the
associated costs are then used to determine the cost to serve a particular customer.
Organization-level activities are required to provide productive capacity and to keep
the business in operation. Although these activities do not provide identifiable benefits
to specific products or services, without them there would be no business.
2. Calculate activity-based product costs.

Step 1: Identify activities.
Step 2: Develop activity cost pools.
Step 3: Calculate activity cost pool rates.
Step 4: Allocate costs to products or services.

Step 5: Calculate unit product costs.
3. Explain the difference between traditional product costs and activity-based product
costs.
The difference between traditional product costs and activity-based product costs lies in
the way manufacturing overhead is allocated and in the inclusion of selling and
administrative costs as a component of product cost. (Direct materials and direct labor
costs do not differ between the two methods.) Activity-based product costs are based
on the consumption of activities by each product rather than on consumption of the
overhead base as in the traditional method.
4. Distinguish between value-added and non-value-added activities.

Value-added activities are those activities that create the product or service the
customer wants to buy. Non-value-added activities are those activities that consume
resources but do not contribute to the product’s value.
5. Explain how information about activities can be used to make decisions.

Activity-based management uses activity-based costing information to manage business
activities. Decisions regarding pricing, customer profitability, distribution channel
profitability, and process improvement can all benefit from the use of activity-based
costing information.
TRUE-FALSE STATEMENTS
1. Calculating the direct materials and direct labor cost that have been incurred to produce a
product or deliver a service is a relatively complex process.
Unit 7-1, LO1 – False – Calculating the direct materials and direct labor cost that have been incurred to
produce a product or deliver a service is a relatively simple.
LO: 1, Bloom: K, Unit: 7-1, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving
and Decision Making, IMA: Cost Management
2. Even when direct materials and direct labor comprise the majority of product costs,
manufacturing overhead allocation is still a major issue.
Unit 7-1, LO1 – False - When direct materials and direct labor comprise the majority of product costs,
manufacturing overhead allocation is not a major issue.
3. Activity-based costing is a costing technique that assigns costs to cost objects such as products
or customers, based on the activities those cost objects require.
Unit 7-1, LO1 – True
LO: 1, Bloom: K, Unit: 7-1, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: Communication, IMA: Cost
Management
4. A simple ABC model can have fewer than 20 activities; a complex model may include up to 100
activities, but no more.
Unit 7-1, LO1 – False – A simple ABC model can have fewer than 20 activities; a complex model may
include over 500 activities
Management
5. With activity-based costing, the goal is to develop a product cost that captures the amount of
each resource consumed by the activities performed to produce a specific product.
LO: 1, Bloom: K, Unit: 7-1, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and
Decision Making, IMA: Cost Management
6. An activity-based analysis that focuses only on manufacturing overhead improves GAAP-based

financial statements.
Unit 7-1, LO1 – False – An activity-based analysis that focuses only on manufacturing overhead does not
improve GAAP-based financial statements.
LO: 1, Bloom: C, Unit: 7-1, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving
7. For unit-level activities, the total level of activity performed varies proportionately with the
number of units produced.
8. Product-level activities are also referred to as product-sustaining activities.
Management
9. Customer-level activities are also referred to as customer-sustaining activities.

Unit 7-1, LO1 – False - Product-level activities are also referred to as product-sustaining activities.
LO: 1, Bloom: K, Unit: 7-1, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: Communication, IMA:
Cost Management
10. Customer-level activities and the resources consumed to perform them do not affect product
costs.
11. Organizational-level activities provide identifiable benefits to specific products or services.

Unit 7-1, LO1 – False – Organizational-level activities do not provide identifiable benefits to specific
products or services, but without them there would be no business.
Cost Management
12. Under activity-based costing, selling and administrative costs should be allocated to products if
they are incurred to provide resources that are consumed by unit-level, batch-level, or product-
level activities.
13. The first step in developing activity-based product costs is to develop activity cost pools.
Unit 7-2, LO2 – False – The first step in developing activity-based product costs is to identify the
activities performed in the organization.
14. Identifying the activities performed in the organization is the most time consuming part of
implementing an activity-based costing system.
15. In an activity-based costing system, a critical question to ask during activity identification is,
“How important is this activity to the overall strategy of the organization?”
Unit 7-2, LO2 – False – A critical question to ask during activity identification is, “What level of detail
does the company want to collect?”
16. In an activity-based costing system, the greater the level of detail the company wants to collect,
the greater the chance of misclassifying some costs and activities.
LO: 2, Bloom: C, Unit: 7-2, Difficulty: Difficult, Min: 1, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and
17. In an activity-based costing system, the benefits of defining more detailed activities will always
outweigh the effort needed to monitor activity performance, and the resulting potential for
error.
Unit 7-2, LO2 – False – The benefits of defining more detailed activities will not always outweigh the
effort needed to monitor activity performance, and the resulting potential for error
18. In an activity-based costing system, after all the activities have been identified and the
appropriate level of detail selected, the activities are combined into activity cost pools based on
their cost drivers.
19. First-stage allocation is the process of assigning manufacturing overhead costs to activity pools.
20. In an activity-based costing system, after the manufacturing overhead costs have been assigned
to activity cost pools, the next step is to calculate the unit product cost.
Unit 7-2, LO2 – False – In an activity-based costing system, after the manufacturing overhead costs have
been assigned to activity cost pools, the next step in developing activity-based product cost is to
calculate an activity rate for each cost pool.
21. The calculation to allocate cost to products or services is to divide the activity driver
consumption by the activity rate.
Unit 7-2, LO2 – False – The calculation to allocate cost to products or services is to multiply the activity
rate by the activity driver consumption.
22. The total amount of manufacturing overhead allocated to a particular product will always be the
same for both the traditional overhead allocation method based on direct labor hours and the
activity-based costing overhead allocation.
Unit 7-2, LO3 – False – The total amount of manufacturing overhead allocated to a product will differ
between the two methods.
23. Although the total amount of allocated overhead differs between a traditional overhead
allocation method and activity-based overhead allocations, we can still compare the percentage
of overhead allocated to each product.
LO: 3, Bloom: K, Unit: 7-2, Difficulty: Difficult, Min: 1, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and
24. Activity-based management focuses on using the cost of performing the activities required to
produce and sell products to identify activities that are non-value added.
and Decision Making, IMA: Strategic Planning
25. Non-value added costs cannot be eliminated without affecting the quality of products.
Unit 7-3, LO4 – False – Non-valued added costs can be eliminated without affecting the quality of
products.
26. The two categories – valued-added and non-value added – are defined from the organization’s
management perspective.
Unit 7-3, LO4 – False – The two categories – valued-added and non-value added – are defined from the
customers’ perspective.
Decision Making, IMA: Strategic Planning
27. Process improvement is the examination of business processes to identify incremental changes
that may reduce operating costs.
28. The process of using activity-based costing information to manage a business’s activities, and
thus its costs, is called total quality management.
Unit 7-3, LO5 – False – The process of using activity-based costing information to manage a business’s
activities, and thus its costs, is called activity-based management.
29. The greatest use of activity-based costing information is for product costing and cost control.
30. Activity-based costing information can be used to make decisions regarding pricing, customer
profitability, distribution channel profitability, and process improvement.
Answers to True-False Questions
Item Ans Item Ans Item Ans Item Ans
1. F 9. F 17. F 25. F
2. F 10. T 18. T 26. F
3. T 11. F 19. T 27. T
4. F 12. T 20. F 28. F
5. T 13. F 21. F 29. T
6. F 14. T 22. F 30. T
7. T 15. F 23. T
8. T 16. T 24. T
MULTIPLE-CHOICE QUESTIONS
31. A costing technique that assigns costs to cost objects such as products or customers, based on
the activities those cost objects require is referred to as
a. activity-job costing.
b. activity-based costing.
c. activity-pool costing.
d. activity-trace costing.
Unit 7-1, LO1 – B
32. Frederick Taylor was the first to understand the importance of a business’s activities. He
examined workers’ jobs as a set of tasks, each of which had a standard completion time in the
a. early 1800s.
b. late 1800s.
c. early 1900s.
d. late 1900s.
Unit 7-1, LO1 – C
Management
33. Activity-based costing did not gain widespread popularity until

a. 1887.
b. 1907.
c. 1957.
d. 1987.
Unit 7-1, LO1 – D
Management
34. With activity-based costing, the goal is to

a. develop a product cost that captures the amount of each resource consumed by the
activities performed to produce a specific product.
b. develop a product cost that allocates manufacturing overhead to each resource consumed
by the activities performed to a group of similar products.
c. develop a product cost that eliminates all waste such as machine down time and defective
products.
d. develop a product cost by revenue allocations.
Unit 7-1, LO1 – A
35. Indicators that an activity-based costing analysis may be appropriate include all the following
except
a. bids for complex products are accepted, while bids for simple products are rejected.
b. products are similar and consume resources in the same way.
c. high-volume jobs show losses or minimal profits, while low-volume jobs show healthy
profits.
d. bids for jobs that require “special” processing are always accepted.
Unit 7-1, LO1 – B
36. An activity-based analysis that focused only on manufacturing overhead would

a. not improve GAAP-based financial statements.
b. improve GAAP-based financial statements.
c. improve statement sent to the SEC by publicly-traded companies.
d. both improve GAAP-based financial statements and statement sent to the SEC by publicly-
traded companies.
Unit 7-1, LO1 – A
37. The main reason for generating new information provided by activity-based costing is to
a. help managers make better decisions.
b. provide employees in the accounting department with work to do.
c. calculate variances.
d. help human resources hire new staff.
Unit 7-1, LO1 – A
Management
38. In an activity-based costing system, which of the following is not a category in which activities
are classified?
a. Unit-level
b. Batch-level
c. Product-level
d. Factory-level
Unit 7-1, LO1 – D
Management
are classified?
a. Product-level
b. Operations-level
c. Customer-level
d. Organization-level
Unit 7-1, LO1 – B
Management
are classified?
a. Unit-level
b. Product-level
c. Industry-level
d. Customer-level
Unit 7-1, LO1 – C
Management
are classified?
a. Variable-level
b. Batch-level
c. Product-level
d. Organization-level
Unit 7-1, LO1 – A
Management
are classified?
a. Unit-level
b. Batch-level
c. Product-level
d. Delivery-level
Unit 7-1, LO1 – D
Management
43. An activity that is performed for each individual unit of product is classified as a
a. variable cost-level activity.
b. unit-level activity.
c. batch-level activity.
d. operations-level activity.
Unit 7-1, LO1 – B
Cost Management
44. For a unit-level activity, the total level of activity performed varies
a. proportionately with the number of units produced.
b. inversely with the number of units produced.
c. inversely with the number of units produced and does not change with a change in activity.
d. It does not change with a change in activity.
Unit 7-1, LO1 – A
45. Activities that are performed all at once on groups of products is classified as a(n)
a. unit-level activity.
b. group-level activity.
c. batch-level activity.
d. operations-level activity.
Unit 7-1, LO1 – C
Cost Management
46. Since a batch-level activity is based on the existence of the batch, a batch consumes resources
a. proportionately with the number of units in the batch.
b. inversely with the number of units in the batch
c. the same amount whether it contains 20 units or 2,000 units.
d. a different amount whether it contains 20 units or 2,000 units.
Unit 7-1, LO1 – C
47. Product-level activities are also referred to as

a. product-sustaining activities.
b. product resource activities.
c. batch-level activities.
d. group-level activities.
Unit 7-1, LO1 – A
Management
48. Activities that support the products or services a company provides is classified as a(n)
a. unit-level activity.
b. batch-level activity.
c. product-level activity.
d. organization-level activity.
Unit 7-1, LO1 – C
LO: 1, Bloom: K, Unit: 7-1, Difficulty: Moderate, Min: 2, AACSB: Reporting, AICPA FN: Communication, AICPA PC: Problem
Solving and Decision Making, IMA: Cost Management
49. Activities that are performed for specific customers are classified as a(n)
a. delivery-level activity.
b. customer-level activity.
c. accounts receivable-level activity.
d. organization-level activity.
Unit 7-1, LO1 – B
Cost Management
50. Processing a sales order is an example of a
a. product-level activity.
b. unit-level activity.
c. customer-level activity.
d. group-level activity.
Unit 7-1, LO1 – C
LO: 1, Bloom: AP, Unit: 7-1, Difficulty: Difficult, Min: 2, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: Communication, IMA:
Cost Management
51. Activities that are required to provide productive capacity and to keep the business in operation
are
a. batch-level activities.
b. product-level activities.
c. customer-level activities.
d. organization-level activities.
Unit 7-1, LO1 – D
Cost Management
52. An example of an organization-level activity is

a. providing electricity to the factory to run the sewing machines.
b. creating a pattern for a new line of dresses.
c. renting factory space.
d. processing a sales order.
Unit 7-1, LO1 – C
Cost Management
53. Which of the following is not a product- or service-related activity?

a. Unit-level
b. Product-level
c. Batch-level
d. Customer-level
Unit 7-1, LO1 – D
LO: 1, Bloom: C, Unit: 7-1, Difficulty: Difficult, Min: 2, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: Communication, IMA:
Cost Management
54. Which of the following is a product- or service-related activity?

a. Batch-level
b. Customer-level
c. Organization-level
d. Group-level
Unit 7-1, LO1 – A
LO: 1, Bloom: C, Unit: 7-1, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: Communication, IMA:
Cost Management
55. A difference in GAAP-based product costing and activity-based costing is that under activity-
based costing
a. all costs are classified as product and period costs whereas under GAAP they are classified
by behavior.
b. sales less cost of goods sold is classified as gross profit whereas under GAAP this subtotal is
titled contribution margin.
c. selling and administrative costs are allocated to products if they are incurred to provide
resources that are consumed by unit-level, batch-level or product-level activities.
d. all costs are traceable whereas in GAAP-based costing all costs are not traceable.
Unit 7-1, LO1 – C
56. Which of the following would be considered a unit-level activity?

a. Ordering direct materials
b. Direct labor
c. Preparing the annual budget
d. Performing quality tests
Unit 7-1, LO1 – B
LO: 1, Bloom: AP, Unit: 7-1, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: Communication, IMA:
Cost Management
57. Which of the following would be considered a unit-level activity?

a. Preparing purchase orders
b. Machine set-up
c. Quality tests
d. Direct labor
Unit 7-1, LO1 – D
Cost Management
58. Which of the following would be considered a batch-level activity?

a. Machine set-up
b. Preparing the annual budget
c. Direct labor
d. Warehouse costs
Unit 7-1, LO1 – A
Cost Management
59. Which of the following would be considered a batch-level activity?

a. Engineering changes made on the assembly line
b. Quality tests
c. Warehouse costs
d. Preparing the annual budget
Unit 7-1, LO1 – B
Cost Management
60. Which of the following would be considered a product-level activity?
a. Product design changes
b. Quality tests
c. Preparing purchase orders
d. Direct labor
Unit 7-1, LO1 – A
Cost Management
61. Which of the following would be considered a product-level activity?

a. Quality tests
b. Engineering changes made in the assembly line
c. Machine set-up
d. Preparing purchase orders
Unit 7-1, LO1 – B
Cost Management
62. Which of the following would not be considered a customer-level activity?

a. Making a sales call
b. Processing a sales order
c. Delivery costs
d. Preparing purchase orders
Unit 7-1, LO1 – D
Cost Management
63. Which of the following would be considered a customer-level activity?

a. Ordering direct materials used in all products
b. Engineering changes made that will affect all products
c. Cleaning the machines before beginning production
d. Processing a sales order
Unit 7-1, LO1 – D
Cost Management
64. Estimated costs for activity cost pools and other item(s) are as follows:
Machining $800,000
Assembling 200,000
Advertising 450,000
Inspecting and testing 175,000
Total estimated overhead is
a. $1,000,000.
b. $1,175,000.
c. $1,450,000.
d. $1,625,000.
Unit 7-1, LO1 – B
LO: 2, Bloom AP, Unit 7-1, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving
Solution: $800,000 + $200,000 + $175,000 =$1,175,000
65. The first step in implementing an activity-based costing system begins with
a. developing activity cost pools.
b. identifying activities.
c. calculating activity cost pool rates.
d. calculate the unit product cost.
Unit 7-2, LO2 – B
66. Which of the following is not a step in implementing an activity-based costing system?
a. Developing activity cost pools
b. Identifying activities
c. Calculating predetermined overhead rates
d. Calculate the unit product cost
Unit 7-2, LO2 – C
67. Identifying activities performed in the organization is the first step in developing activity-based
product costs. Which of the following is a way to identify these activities?
a. Asking employees what they do
b. Analyzing industry averages
c. Both asking employees what they do and analyzing industry averages
d. Neither asking employees what they do nor analyzing industry averages
Unit 7-2, LO2 – A
68. Identifying activities performed in the organization is the first step in developing activity-based
product costs. Which of the following is a way to identify these activities?
a. Asking employees what they do
b. Observe what employees do
c. Both asking employees what they do and observing what employees do
d. Neither asking employees what they do nor observing what employees do
Unit 7-2, LO2 – C
69. Which of the following is the most time consuming part of implementing an activity-based
costing system?
a. Identifying activities
b. Developing activity cost pools
c. Calculating activity cost pool rates
Unit 7-2, LO2 – A
70. Which of the following is the step in implementing an activity-based costing system that can
generate the greatest error?
a. Identifying activities
b. Developing activity cost pools
c. Calculating activity cost pool rates
Unit 7-2, LO2 – A
71. Which of the following is a reason that employees must estimate how much time employees
spend performing each activity?
a. So that the budget committee will know how to allocate direct material
b. So that the resources consumed by the activities can be calculated
c. So that the level of detail will not become too burdensome
d. So that the budget committee will know how to allocate direct material and the level of
detail will not become too burdensome
Unit 7-2, LO2 – B
72. In the activity identification stage of implementing an activity-based costing system, the greater
the level of detail
a. the less likely the company will be to have a net loss.
b. the greater the chance of misclassifying some costs and activities
c. the less likely to misclassify some costs and activities
d. the less likely the company will be to break-even.
Unit 7-2, LO2 – B
73. In the activity identification stage of implementing an activity-based costing system, defining
activities in greater detail will
a. require more monitoring.
b. lessen the change of misclassifying some costs and activities.
c. both require more monitoring and lessen the change of misclassifying some costs and
activities.
d. neither require more monitoring nor lessen the change of misclassifying some costs and
activities.
Unit 7-2, LO2 – A
74. In implementing an activity-based costing system, after all the activities have been identified
and the appropriate level of detail selected, the activities are combined into activity cost pools
based on their
a. behavior.
b. function.
c. cost drivers.
d. cost levels.
Unit 7-2, LO2 – C
75. Which of the following would be a likely activity driver for warehousing/packaging?
a. Direct labor hours
b. Number of machine set-ups
c. Number of product lines
d. Number of batches
Unit 7-2, LO2 – D
76. Which of the following would be a likely activity driver for product design?
a. Number of product lines
b. Number of direct labor hours
c. Number of machine hours
d. Number of batches
Unit 7-2, LO2 – A
77. In implementing an activity-based costing system, once the activity pools have been
determined, manufacturing overhead costs can be assigned to them. This is referred to as
a. predetermined overhead allocation.
b. overhead application.
c. first-stage allocation.
d. activity allocation.
Unit 7-2, LO2 – C
78. Assigning manufacturing overhead cost to activity pools is referred to as first-stage allocation
because
a. costs are assigned first to the activity pools before being assigned to cost objects.
b. costs are assigned first to the activity pools before being assigned to cost drivers.
c. costs are assigned first to the activity pools before being assigned to activity drivers.
d. costs are assigned first to the activity pools before being assigned to activity objects.
Unit 7-2, LO2 – A
79. Calculating the activity rate is similar to the calculation of the

a. activity pools.
b. predetermined overhead rate.
c. overhead leverage rate.
d. contribution margin rate.
Unit 7-2, LO2 – B
80. Which of the following is formula for calculating the activity rate in an activity-based costing
system?
a. Activity cost pool resources divided by activity driver
b. Activity driver divided by activity cost pool resources
c. Activity cost pool resources divided by estimated total cost pool
d. Estimated cost pool divided by activity cost pool resources
Unit 7-2, LO2 – A
81. Assume that activity cost is $93,000, predetermined total overhead is $120,000, actual overhead
is $98,000, and the company has three product lines, the activity rate is
a. $32,667 per product line.
b. $31,000 per product line.
c. $40,000 per product line.
d. $50,000 per product line.
Unit 7-2, LO2 – B
LO: 2, Bloom: AP, Unit: 7-2, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving
Solution: $93,000 activity cost ÷ 3 product lines = $31,000 per product line
82. Assume that activity cost totals $180,000. The company produced an average of 40 units per
batch and the number of batches produced is 9,000. Calculate the activity rate.
a. $20 per batch
b. $4,500 per batch
c. 225 per batch
d. .005 per batch
Unit 7-2, LO2 – A
Solution: $180,000 activity cost ÷ 9,000 batches = $20 per batch
83. A&W Manufacturing uses an activity-based costing system for its cutting department. The
activity cost totals $148,000. The number of cuts is the cost driver. The cutting department
processed a total of 9,000 batches with an average cuts per batch of 6 and total cuts of 46,250.
What is the activity rate for the cutting department?
a. $1,500 per cut
b. $247 per cut
c. $16.45 per batch
d. $3.20 per cut
Unit 7-2, LO2 – D
LO: 2, Bloom: AP, Unit: 7-2, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving
Solution: $148,000 ÷ 46,250 cuts = $3.20 per cut
84. When using an activity-based costing system, which of the following is the formula for allocating
costs to products or services?
a. Activity rate x activity driver consumption
b. Activity rate x amount in activity pool
c. Predetermined manufacturing overhead rate x actual activity
d. Predetermined manufacturing overhead rate x planned activity
Unit 7-2, LO2 – A
85. When using an activity-based costing system, which of the following is the formula for allocating
costs to products or services?
a. Activity cost pool resources divided by activity driver
b. Activity cost pool resources times activity driver
c. Activity rate divided by activity driver consumption
d. Activity rate times activity driver consumption
Unit 7-2, LO2 – D
86. The last step in the preparation of activity-based costing data is to

a. determine the cost pool resources.
b. determine the activity driver.
c. allocate cost to products.
Unit 7-2, LO2 – D
87. The second step in the preparation of activity-based costing data is to

a. calculate activity cost pool rates.
b. develop activity cost pools.
c. allocate costs to products.
Unit 7-2, LO2 – B
88. The activity rate for each cost pool is

a. computed as Total activity driver volume/Total activity cost pool resources.
b. similar to the predetermined overhead rate calculation under traditional job order costing.
c. computed as part of the last step in the preparation of activity-based costing data.
d. similar to process costing.
Unit 7-2, LO2 – B
89. The easiest part of calculating the total product cost is

a. separating direct material and indirect material.
b. allocating costs to products.
c. adding the direct materials and direct labor costs to overhead.
d. only adding direct materials to overhead.
Unit 7-2, LO2 – C
90. Which of the following would probably not be included in the allocation of overhead costs to
products, but would be included in the “general” category?
a. Depreciation on factory equipment
b. Maintenance of factory equipment
c. Indirect material
d. Factory rent
Unit 7-2, LO2 – D
91. Which of the following would be the most appropriate cost driver for the purchasing
department?
a. Number of orders placed
b. Direct labor hours
c. Machine hours
d. Direct labor cost
Unit 7-2, LO2 – A
92. Which of the following would be the most appropriate cost driver for delivery of goods?
a. Wages of the delivery drivers
b. Number of deliveries made
c. Depreciation on delivery trucks
d. Insurance on delivery trucks
Unit 7-2, LO2 – B
93. Mounce Catering Service uses an activity-based costing system. What would be the most
appropriate cost driver for the activity of preparing meals?
a. Number of meals prepared
b. Number of orders taken
c. Number of rolls used
d. Rent on building
Unit 7-2, LO2 – A
94. A firm produces and sells two products, Standard and Deluxe. The following information relates
to setup costs (a part of factory overhead) of $180,000.
Standard Deluxe
Units Produced 1,600 1,600
Number of setups 100 125
Direct labor hours per unit 9 9
Total direct labor costs $9,000 $9,000
Activity-based costing would allocate which of the following amounts of setup cost to each unit
(rounded to the nearest dollar)?
Standard Deluxe
a. $ 56 $ 56
b. $ 50 $ 63
c. $126 $101
d. $356 $444
Unit 7-2, LO2 – B
Units per setup for Standard: 1,600 ÷100 = 16; Units per setup for Deluxe: 1,600 ÷125 = 12.8
$180,000 ÷ 225 = $800 per setup
Solution: Standard setup cost per unit = $800 ÷ 16 = $50;
Deluxe setup cost per unit = $800 ÷ 12.8 = $62.50 (rounded to nearest dollar is $63.00)
95. Brandon Consulting Company is headquartered in Atlanta and has branch offices in Nashville
and Birmingham. Brandon uses an activity-based costing system. The Atlanta office has its costs
for Administration and Legal allocated to the two branch offices. Brandon has provided the
following information:
Activity Cost Pool Cost Driver Costs
Administration % of time devoted to branch $700,000
Legal Hours spent on legal research $138,000
% of time Hours spend on
devoted to branch legal research
Nashville 80% 18,000
Birmingham 20% 6,000
How much of Atlanta’s cost will be allocated to Nashville?

a. $628,500
b. $663,500
c. $670,400
d. $665,300
Unit 7-2, LO2 – B
Administration: $700,000 x 80% = $560,000
Legal: $138,000 x [18,000 ÷ (18,000 + 6,000)] = $103,500
Solution: $560,000 + $103,500 = $663,500
96. Brandon Consulting Company is headquartered in Atlanta and has branch offices in Nashville
and Birmingham. Brandon uses an activity-based costing system. The Atlanta office has its costs
for Administration and Legal allocated to the two branch offices. Brandon has provided the
following information:
Activity Cost Pool Cost Driver Costs
Administration % of time devoted to branch $700,000
Legal Hours spent on legal research $138,000
% of time Hours spend on

devoted to branch legal research
Nashville 80% 18,000
Birmingham 20% 6,000
How much of Atlanta’s cost will be allocated to Birmingham?

a. $174,500
b. $167,600
c. $209,500
d. $175,400
Unit 7-2, LO2 – A
Administration: $700,000 x 20% = $140,000
Legal: $138,000 x [6,000 ÷ (18,000 + 6,000)] = $34,500
Solution: $140,000 + $34,500 = $174,500
97. Murphy Company produces two products: Standard and Deluxe. The company uses an activity-
based costing system. Murphy produces 8,000 units of Standard and 2,000 units of Deluxe. The
company uses two activity cost pools, with estimated total cost and activity as follows:
Expected Activity
Activity Cost Pool Estimated Cost Standard Deluxe
#1 $12,000 500 250
#2 $24,000 400 1,200
What is the cost per unit of Standard under activity-based costing?
a. $1.75
b. $9.00
c. $15.00
d. $16.00
Unit 7-2, LO2 – A
Activity #1: $12,000 x [500 ÷ (500 + 250)] = $8,000
Activity #2: $24,000 x [400 ÷ (400 + 1,200)] = $6,000
Solution: ($8,000 + $6,000) ÷ 8,000 units of Standard = $1.75 per unit of Standard
98. Murphy Company produces two products: Standard and Deluxe. The company uses an activity-
based costing system. Murphy produces 8,000 units of Standard and 2,000 units of Deluxe. The
company uses two activity cost pools, with estimated total cost and activity as follows:
Expected Activity
Activity Cost Pool Estimated Cost Standard Deluxe
#1 $12,000 500 250
#2 $24,000 400 1,200
What is the cost per unit of Deluxe under activity-based costing?
a. $1.75
b. $11.00
c. $15.00
d. $16.00
Unit 7-2, LO2 – B
Activity #1: $12,000 x [250 ÷ (500 + 250)] = $4,000
Activity #2: $24,000 x [1,200 ÷ (400 + 1,200)] = $18,000
Solution: ($4,000 + $18,000) ÷ 2,000 units of Deluxe = $11.00 per unit of Deluxe
99. Sampson Company manufactures two products, plain and complex. The company has estimated
its overhead in the order-processing department to be $480,000. The company produces 50,000
plain and 80,000 complex each year. Plain production requires 25,000 machine hours, complex
production requires 50,000 machine hours. The company places raw materials orders 10 times
per month, 2 times for raw materials for plain and the remainder for raw materials for complex.
How much of the order processing overhead should be allocated to complex?
a. $240,000
b. $320,000
c. $295,386
d. $384,000
Unit 7-2, LO2 – D
Solution: $480,000 x (8 ÷ 10) = $384,000
100. Morrow Co. produces 3 products: Beta, Delta, and Gamma. Beta requires 400 purchase orders,
Delta requires 600 purchase orders, and Gamma requires 1,000 purchase orders. Morrow has
identified an ordering and receiving activity cost pool with allocated overhead of $180,000 for
which the cost driver is purchase orders. Direct labor hours used on each product are 50,000 for
Beta, 40,000 for Delta, and 110,000 for Gamma. How much ordering and receiving overhead is
assigned to each product?
Beta Delta Gamma
a. $60,000 $60,000 $60,000
b. $45,000 $36,000 $99,000
c. $36,000 $54,000 $90,000
d. $40,500 $45,000 $94,500
Unit 7-2, LO2 – C
Solution: Beta = $180,000 x [400 ÷ (400 + 600 + 1,000 purchase orders) = $36,000
Delta = $180,000 x [600 ÷ (400 + 600 + 1,000 purchase orders) = $54,000
Gamma = $180,000 x [1,000 ÷ (400 + 600 + 1,000 purchase orders) = $90,000
101. Ayala Inc. computed an overhead rate for machining costs ($1,500,000) of $15 per machine
hour. Machining costs are driven by machine hours. If computed based on direct labor hours,
the overhead rate for machining costs would be $30 per direct labor hour. The company
produces two products, Hammer and Tong. Hammer requires 60,000 machine hours and 20,000
direct labor hours, while Tong requires 40,000 machine hours and 30,000 direct labor hours.
Using activity-based costing, machining costs assigned to each product is
Hammer Tong
a. $600,000 $900,000
b. $750,000 $750,000
c. $800,000 $700,000
d. $900,000 $600,000
Unit 7-2, LO2 – D
Solution: Hammer: $1,500,000 x [60,000 MH ÷ (60,000 + 40,000)] = $900,000
Tong: $1,500,000 x [40,000 MH ÷ (60,000 + 40,000)] = $600,000
102. Gooding Company manufactures two models of its skillet, the Kitchen and the Campfire. The
Kitchen model requires 10,000 direct labor hours and the Campfire requires 30,000 direct labor
hours. The company produces 3,400 units of the Kitchen model and 600 units of the Campfire
model each year. The company inspects one Kitchen for every 100 produced, and inspects one
Campfire for every 10 produced. The company expects to incur $84,600 of total inspecting costs
this year. How much of the inspecting costs should be allocated to the Kitchen model using ABC
costing?
a. $21,150
b. $30,600
c. $42,300
d. $71,910
Unit 7-2, LO2 – B
Total number of Inspections: Kitchen = 3,400 units ÷ 100 = 34 inspections; Campfire = 600 units ÷ 10 = 60 inspections
Total inspections = 34 + 60 = 94
Solution: $84,600 x (34 ÷ 94) = $30,600
103. Mantle Co. manufactures baseball bats. The company’s total overhead consists of assembly
costs and inspection costs. The following data is available:
Cost Pool Wood Aluminum Total Cost
Assembly 500 machine hrs. 500 machine hrs. $ 45,000
Inspections 350 inspections 150 inspections 75,000
2,100 labor hrs. 1,900 labor hrs.

Total overhead assigned to wood bats assuming a single overhead rate and using activity based
costing, respectively, are:
a. $63,000 and $75,000
b. $63,000 and $57,000
c. $57,000 and $45,000
d. $57,000 and $75,000
Unit 7-2, LO3 – A
Solution for Single OH Rate: ($45,000 + 75,000) ÷ (2,100 + 1,900) = $30/DLH
$30/DLH x 2,100 DLH = $63,000
Solution for ABC: Assembly $45,000 ÷ (500 + 500 MH) = $45/MH
Inspections: $75,000 ÷ (350 + 150 inspections) = $150/inspection
ABC: ($45 x 500) + ($150 x 350) = $75,000
104. Mantle Co. manufactures baseball bats. The company’s total overhead consists of assembly
costs and inspection costs. The following data is available:
Cost Pool Wood Aluminum Total Cost
Assembly 500 machine hrs. 500 machine hrs. $ 45,000
Inspections 350 inspections 150 inspections 75,000
2,100 labor hrs. 1,900 labor hrs.

Total overhead assigned to aluminum bats assuming a single overhead rate and using activity
based costing, respectively, are:
a. $63,000 and $75,000
b. $57,000 and $45,000
c. $63,000 and $57,000
d. $57,000 and $75,000
Unit 7-2, LO3 – B
Solution for Single OH Rate: ($45,000 + 75,000) ÷ (2,100 + 1,900) = $30/DLH
$30/DLH x 1,900 DLH = $57,000
Solution for ABC: Assembly $45,000 ÷ (500 + 500 MH) = $45/MH
Inspections: $75,000 ÷ (350 + 150 inspections) = $150/inspection
ABC: ($45 x 500) + ($150 x 150) = $45,000
105. Dawson Company manufactures two products, Regular and Deluxe. Overhead costs consist of
machining, $2,500,000; and assembly, $1,250,000. Recent data are provided below:
Regular Deluxe
Direct labor hours 10,000 15,000
Machine hours 10,000 30,000
Number of parts 90,000 160,000
Overhead allocated to Regular using a single overhead rate (based on number of parts) and
using activity based costing, respectively, are:
a. $2,400,000 and $2,625,000
b. $937,500 and $2,812,500
c. $1,350,000 and $1,125,000
d. $1,075,000 and $2,675,000
Unit 7-2, LO3 – C
Solution for Single OH Rate: ($2,500,000 + 1,250,000) ÷ (90,000 + 160,000) = $15/part
Regular: $15/part x 90,000 DLH = $1,350,000
Solution for ABC: Machining: $2,500,000 ÷ (10,000 + 30,000 MH) = $62.50/MH
Assembly: $1,250,000 ÷ (10,000 + 15,000 DLH) = $50/DLH
ABC for Regular: ($62.50 x 10,000) + ($50 x 10,000) = $1,125,000
106. Dawson Company manufactures two products, Regular and Deluxe. Overhead costs consist of
machining, $2,500,000; and assembly, $1,250,000. Recent data are provided below:
Regular Deluxe
Number of parts 90,000 160,000
Overhead allocated to Deluxe using a single overhead rate (based on number of parts) and using
activity based costing, respectively, are:
a. $2,400,000 and $2,625,000
b. $937,500 and $2,812,500
c. $1,350,000 and $1,125,000
d. $1,075,000 and $2,675,000
Unit 7-2, LO3 – A
Solution for Single OH Rate: ($2,500,000 + 1,250,000) ÷ (90,000 + 160,000) = $15/part
Deluxe: $15/part x 160,000 DLH = $2,400,000
Solution for ABC: Machining: $2,500,000 ÷ (10,000 + 30,000 MH) = $62.50/MH
Assembly: $1,250,000 ÷ (10,000 + 15,000 DLH) = $50/DLH
ABC for Deluxe: ($62.50 x 30,000) + ($50 x 15,000) = $2,625,000
107. Auburn, Inc.‘s overhead costs of $700,000 consist of machining $400,000; inspecting $200,000;
and packaging $100,000. Machining works 4,000 hours a year, 500 inspections occur each year,
and 1,000 packing order occur each year. Information on the company’s two products are as
follows:
Alpha Omega
Machining hours 1,000 3,000
Inspections 100 400
Packing orders 350 650
Determine how much overhead is allocated to Alpha assuming the use of a single overhead rate
(based on direct labor hours) and assuming the use of ABC, respectively.
a. $340,000 and $360,000
b. $340,000 and $175,000
c. $360,000 and $175,000
d. $360,000 and $525,000
Unit 7-2, LO3 – B
Solution for Single OH Rate: $700,000 ÷ (1,700 + 1,800) = $200/DLH
Alpha: $200/DLH x 1,700 DLH = $340,000
Solution for ABC: Machining: $400,000 ÷ 4,000 = $100.00/MH
Inspection: $200,000 ÷ 500 inspections = $400/inspection
Packaging: $100,000 ÷ 1,000 orders = $100/order
ABC for Alpha: ($100 x 1,000) + ($400 x 100) + ($100 x 350) = $175,000
108. Auburn, Inc.‘s overhead costs of $700,000 consist of machining $400,000; inspecting $200,000;
and packaging $100,000. Machining works 4,000 hours a year, 500 inspections occur each year,
and 1,000 packing order occur each year. Information on the company’s two products are as
follows:
Alpha Omega
Machining hours 1,000 3,000
Inspections 100 400
Determine how much overhead is allocated to Omega assuming the use of a single overhead rate (based
on direct labor hours) and assuming the use of ABC, respectively.
a. $340,000 and $360,000
b. $340,000 and $175,000
c. $360,000 and $175,000
d. $360,000 and $525,000
Unit 7-2, LO3 – D
Solution for Single OH Rate: $700,000 ÷ (1,700 + 1,800) = $200/DLH
Omega: $200/DLH x 1,800 DLH = $360,000
Solution for ABC: Machining: $400,000 ÷ 4,000 = $100.00/MH
Inspection: $200,000 ÷ 500 inspections = $400/inspection
Packaging: $100,000 ÷ 1,000 orders = $100/order
ABC for Omega: ($100 x 3,000) + ($400 x 400) + ($100 x 650) = $525,000
109. Austin Company manufactures 2 products, Flacca and Gordo. Overhead costs are comprised of
machine set-ups $1,600,000; machining $3,600,000; and inspecting $1,200,000. Recent data are
shown below:
Flacca Gordo
Machine setups 600 400
Inspections 800 700
Overhead assigned to Flacca using a single overhead rate based on direct labor hours and using
ABC, respectively, would be:
a. $4,000,000 and $2,400,000
b. $4,000,000 and $3,072,000
c. $2,400,000 and $3,328,000
d. $2,400,000 and $3,072,000
Unit 7-2, LO3 – C
Solution for Single OH Rate: ($1,600,000 + $3,600,000 + $1,200,000) ÷ (15,000 + 25,000 DLH) = $160/DLH
Flacca: $160/DLH x 15,000 DLH = $2,400,000
Solution for ABC: Setups: $1,600,000 ÷ (600 + 400) = $1,600/setup
Machining: $3,600,000 ÷ (24,000 + 26,000 MH) = $72/MH
Inspections: $1,200,000 ÷ (800 + 700 inspections) = $800/inspection
ABC for Flacca: ($1,600 x 600) + ($72 x 24,000) + ($800 x 800) = $3,328,000
110. Austin Company manufactures 2 products, Flacca and Gordo. Overhead costs are comprised of
machine set-ups $1,600,000; machining $3,600,000; and inspecting $1,200,000. Recent data are
shown below:
Flacca Gordo
Machine setups 600 400
Inspections 800 700
Overhead assigned to Gordo using a single overhead rate based on direct labor hours and using
ABC, respectively, would be:
a. $4,000,000 and $2,400,000
b. $4,000,000 and $3,072,000
c. $2,400,000 and $3,328,000
d. $2,400,000 and $3,072,000
Unit 7-2, LO3 – B
Solution for Single OH Rate: ($1,600,000 + $3,600,000 + $1,200,000) ÷ (15,000 + 25,000 DLH) = $160/DLH
Gordo: $160/DLH x 25,000 DLH = $4,000,000
Solution for ABC: Setups: $1,600,000 ÷ (600 + 400) = $1,600/setup
Machining: $3,600,000 ÷ (24,000 + 26,000 MH) = $72/MH
Inspections: $1,200,000 ÷ (800 + 700 inspections) = $800/inspection
ABC for Gordo: ($1,600 x 400) + ($72 x 26,000) + ($800 x 700) = $3,072,000
111. Turnbull Company produces two products and their overhead consists of setups $20,000;
machining $2,220,000; and packing $80,000. Data for the current year follow:
Beta Delta
Number of units produced 600 400
The overhead allocated to Beta assuming a single overhead rate based on machine hours and
assuming ABC, respectively, are:
a. $256,000 and $478,000
b. $464,000 and $456,000
c. $256,000 and $242,000
d. $464,000 and $478,000
Unit 7-2, LO3 – D
Solution: Total costs = $20,000 + $2,220,000 + $80,000 = $2,320,000; Single OH Rate Beta: $2,320,000 x [1,000 ÷ (1,000 +
4,000)] = $464,000
Setups: $20,000 ÷ (20 + 20 setups) = $500 per setup
Machining: $2,220,000 ÷ (1,000 + 4,000 MH) = $444 per MH
Packing: $80,000 ÷ (150 + 350 orders) = $160 per order
Solution for ABC: Beta: (20 x $500) + (1,000 x $444) + (150 x $160) = $478,000
112. Turnbull Company produces two products and their overhead consists of setups $20,000;
machining $2,220,000; and packing $80,000. Data for the current year follow:
Beta Delta
Number of units produced 600 400
The overhead allocated to Delta assuming a single overhead rate based on machine hours and
assuming ABC, respectively, are:
a. $1,856,000 and $1,878,000
b. $1,864,000 and $2,056,000
c. $1,856,000 and $1,842,000
d. $1,864,000 and $1,878,000
Unit 7-2, LO3 – C
Solution: Total costs = $20,000 + $2,220,000 + $80,000 = $2,320,000
Single OH Rate Beta: $2,320,000 x [4,000 ÷ (1,000 + 4,000)] = $1,856,000
Setups: $20,000 ÷ (20 + 20 setups) = $500 per setup
Machining: $2,220,000 ÷ (1,000 + 4,000 MH) = $444 per MH
Packing: $80,000 ÷ (150 + 350 orders) = $160 per order
Solution for ABC: Beta: (20 x $500) + (4,000 x $444) + (350 x $160) = $1,842,000
113. In changing from a traditional costing system to an activity-based costing system, overhead costs
tend to shift from high-volume standard products to low-volume premium products because
a. all overhead costs are indirect.
b. premium products usually consume more activities per unit than standard products.
c. standard products use more total activities than premium products.
d. all overhead costs are direct.
Unit 7-2, LO3 – B
114. Which of the following might be a reason that allocating overhead under an activity-based
approach might have less manufacturing overhead allocated to the products?
a. The general overhead cost pool is not allocated to products under activity-based costing.
b. The product mix includes products that are not similar in material and labor.
c. The product mix has all products that are similar in makeup of materials and labor.
d. The general overhead cost pool is allocated to products under activity-based costing.
Unit 7-2, LO3 – A
115. Those activities that consume resources but do not contribute to the value of the product are
referred as
a. contribution activities.
b. non-value-added activities.
c. manufacturing overhead.
d. period costs.
Unit 7-3, LO4 – B
116. Those activities that create the product the customer wants to buy are referred to as
a. profitability activities.
b. manufacturing burden.
c. value-added activities.
d. period costs.
Unit 7-3, LO4 – C
117. The categories of activities that are required to produce and sell products, non-value-added and
value-added, are defined from which of the following perspectives?
a. Industry
b. Management
c. Customer
d. Organization
Unit 7-3 – LO4 – C
118. Which of the following activities would be classified as non-value added in the manufacture of
wooden bird houses?
a. Moving materials
b. Nailing
c. Painting
d. Sanding
Unit 7-3, LO4 – A
119. Which of the following activities would be classified as non-value-added in the manufacture of
dresses?
a. Cutting
b. Sewing
c. Hemming
d. Inspecting
Unit 7-3, LO4 – D
decorative pillows?
a. Cutting
b. Sewing
c. Storing
d. Stuffing
Unit 7-3, LO4 – C
sports jackets?
a. Machine setup
b. Cutting
c. Sewing
d. Lettering
Unit 7-3, LO4 – A
122. As non-value-added activities and their associated resources are eliminated, a company’s
a. costs will decrease.
b. fixed costs will be eliminated.
c. variable costs will increase.
d. fixed costs will increase.
Unit 7-3, LO4 – A
123. The key to reducing costs through activity management is

a. reducing the number of activities.
b. eliminating the resources associated with the reduced activities.
c. reducing the work force.
d. reducing the commissions of sales force.
Unit 7-3, LO4 – B
124. The key to reducing costs through activity management is

a. eliminating high-cost executive positions.
b. eliminating activities such as inspections.
c. eliminating the resources associated with the reduced activities.
d. eliminating high-cost executive positions, activities such as inspections, and the resources
associated with the reduced activities.
Unit 7-3, LO4 – C
125. A characteristic of non-value-added activities is that they

a. can always be eliminated.
b. can never be eliminated.
c. can sometimes be eliminated.
d. are always related to fixed costs.
Unit 7-3, LO4 – C
126. A characteristic of non-value-added activities is that they

a. can always be eliminated.
b. can never be eliminated.
c. are always related to fixed costs.
d. are sometimes essential to production or business operations.
Unit 7-3, LO4 – D
127. Which of the following characteristics relate to non-value-added activities?
a. They are sometimes essential to production.
b. They can sometimes be decreased without affecting the quality of operations.
c. Both they are sometimes essential to production and they can sometimes be decreased
without affecting the quality of operations.
d. Neither that they are sometimes essential to production nor that they can sometimes be
decreased without affecting the quality of operations.
Unit 7-3, LO4 – C
128. Which of the following is not a characteristic of a non-value-added activity?

a. An activity may be non-value-added in one scenario but value-added in another.
b. Non-value-added activities may be decreased without affecting the quality of the product.
c. Non-valued-added activities cannot be eliminated entirely.
d. Non-value-added activities always relate to fixed costs.
Unit 7-3, LO4 – D
129. Inspection would be classified as value-added in which of the following scenarios?

a. Production of motorcycles
b. Manufacture of baseball jerseys
c. Processing meat for compliance with FDA regulations
d. Production of cereal
Unit 7-3, LO4 – C
130. The examination of business processes to identify incremental changes that may reduce
operating costs is referred to as
a. process improvement.
b. incremental analysis.
c. business process analysis.
d. activity-based management.
Unit 7-3, LO4 – A
131. The examination of business processes to identify incremental changes that may reduce
operating costs is referred to as
a. variance analysis.
b. incremental analysis.
c. process improvement.
d. total quality management.
Unit 7-3, LO4 – C
132. A management tool that focuses on improving the efficiency and effectiveness of an
organization’s business processes through radical change is referred to as
a. business process reengineering.
b. process improvement.
c. radical analysis.
d. activity-based management.
Unit 7-3, LO4 – A
133. A company that is interested in maximizing profits will instruct its sales force to emphasize its
a. products with the least non-value-added activities.
b. oldest products.
c. most profitable products.
d. least profitable products.
Unit 7-3, LO4 – C
134. In order to increase a company’s bottom line, it can

a. increase sales.
b. decrease costs.
c. either increase sales or decrease costs.
d. neither increase sales or decrease costs.
Unit 7-3, LO4 – C
135. Which of the following is a way a company can use information about activities to manage its
operations?
a. Activity-based costing
b. Activity-based management
c. Activity-based budgeting
d. Activity-based costing, activity-based management, and activity-based budgeting
Unit 7-3, LO4 – D
136. Which of the following is not a way a company can use information about activities to manage
its operations?
a. Activity-based budgeting
b. Activity-based resource reduction
c. Activity-based costing
d. Activity-based budgeting, activity-based resource reduction, and activity-based costing.
Unit 7-3, LO4 – B
137. At a Dole pineapple processing plant, which of the following is not a value-added activity?
a. Washing the pineapples
b. Coring the pineapples
c. Slicing the pineapples
d. Labeling the packages
Unit 7-3, LO4 – D
138. The process of using activity-based costing information to manage a business’s activities, and
thus its costs, is called
a. activities’ management.
b. product management.
c. activity-based management.
d. neither Activities’ management, product management, or activity-based management.
Unit 7-3, LO5 – C
139. The greatest use of activity-based costing information for managers is for
a. product costing.
b. pricing decisions.
c. channel profitability decisions.
d. process improvement.
Unit 7-3, LO5 – A
140. Activity-based costing information may be used by managers for

a. process improvement.
b. distribution channel profitability decisions.
c. pricing decisions.
d. process improvement, distribution channel profitability decisions, and pricing decisions.
Unit 7-3, LO5 – D
141. Which of the following is not a reason that managers use activity-based costing information?
a. Pricing decisions
b. Distribution channel profitability decisions
c. Product costing
d. Pricing decisions, distribution channel profitability decisions, and product costing
Unit 7-3, LO5 – D
142. Which of the following is not a consequence of poor management of an organization’s
activities?
a. The company may see an increase in costs
b. Employees may experience a decrease in job satisfaction
c. Non-value added activities are generally eliminated
d. The company may see an increase in costs, employees may experience a decrease in job
satisfaction, and non-value added activities are generally eliminated
Unit 7-3, LO5 – C
143. When managers reduce the workforce without considering the activities that employees
performs, which of the following is not a likely consequence?
a. The amount of work will be reduced.
b. There will be a decrease in job satisfaction.
c. The company will have to pay overtime.
d. The amount of work will increase.
Unit 7-3, LO5 – A
Answers to Multiple-Choice Questions
Item Ans Item Ans Item Ans Item Ans Item Ans
31. B 54. A 77. C 100. C 123. B
32. C 55. C 78. A 101. D 124. C
33. D 56. B 79. B 102. B 125. C
34. A 57. D 80. A 103. A 126. D
35. B 58. A 81. B 104. B 127. C
36. A 59. B 82. A 105. C 128. D
37. A 60. A 83. D 106. A 129. C
38. D 61. B 84. A 107. B 130. A
39. B 62. D 85. D 108. D 131. C
40. C 63. D 86. D 109. C 132. A
41. A 64. B 87. B 110. B 133. C
42. D 65. B 88. B 111. D 134. C
43. B 66. C 89. C 112. C 135. D
44. A 67. A 90. D 113. B 136. B
45. C 68. C 91. A 114. A 137. D
46. C 69. A 92. B 115. B 138. C
47. A 70. A 93. A 116. C 139. A
48. C 71. B 94. B 117. C 140. D
49. B 72. B 95. B 118. A 141. D
50. C 73. A 96. A 119. D 142. C
51. D 74. C 97. A 120. C 143. A
52. C 75. D 98. B 121. A
53. D 76. A 99. D 122. A
Matching
144. Match the following terms to the appropriate statements by placing the letter to the left of each
statement.
a. Activity-based costing g. Non-valued-added allocation

b Activity-based management h Organizational-level allocation
. .
c. Activity rate i. Process improvement
d Batch-level activity j. Product-level activity
.
e. Business process reengineering k. Unit-level activity
f. Customer-level activity l. Value-added activity
____ 1. Activities that are performed for specific customers.

____ 2. The process of using activity-based costing information to manage a business’s activities.
____ 3. Activities that are performed for each individual unit of product.
____ 4. Activities that consume resources but do not contribute to the value of a product.
____ 5. A managerial tool that focuses on improving the efficiency and effectiveness of an
organization’s business processes through radical change.
____ 6. A costing technique that assigns costs to cost objects such as products or customers, based
on the activities those cost objects require.
____ 7. Calculation similar to the pre-determined overhead rate under traditional job order costing.
____ 8. Also referred to as product-sustaining activities.
____ 9. The examination of business processes to identify incremental changes that may reduce
operating costs.
____ 10. Activities that create the product the customer wants to buy.
____ 11. Activities required to provide productive capacity and to keep the business in operation.
____ 12. Activities that are performed all at once on groups of products.
Unit 7-1, 2, 3, LO 1, 2, 4
Solution:
1. f– Customer-level activity
2. b – Activity-based management
3. k – Unit-level activity
4. g – Non-value-added activity
5. e – Business process reengineering
6. a – Activity-based costing
7. c – Activity rate
8. j – Product-level activity
9. i – Process improvement
10. l – Value-added activity
11. h – Organizational-level activity
12. d – Batch-level activity
Ans: N/A, LO: 1,2,3,4, Bloom: K, Unit: 7-1,7-2,7-3, Difficulty: Moderate, Min: 18, AACSB: Analytic, AICPA FN: Measurement,
AICPA PC: Problem Solving and Decision Making, IMA: Cost Management, Strategic Planning

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CH 07

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Chapter 7

Activity-Based Costing and Activity Based Management

CHAPTER LEARNING OBJECTIVES

1. Classify activities as unit-level, batch-level, product-level, customer-level, or

2. Calculate activity-based product costs.

Step 4: Allocate costs to products or services.

4. Distinguish between value-added and non-value-added activities.

5. Explain how information about activities can be used to make decisions.

6. An activity-based analysis that focuses only on manufacturing overhead improves GAAP-based

9. Customer-level activities are also referred to as customer-sustaining activities.

11. Organizational-level activities provide identifiable benefits to specific products or services.

33. Activity-based costing did not gain widespread popularity until

34. With activity-based costing, the goal is to

36. An activity-based analysis that focused only on manufacturing overhead would

47. Product-level activities are also referred to as

52. An example of an organization-level activity is

53. Which of the following is not a product- or service-related activity?

54. Which of the following is a product- or service-related activity?

56. Which of the following would be considered a unit-level activity?

57. Which of the following would be considered a unit-level activity?

58. Which of the following would be considered a batch-level activity?

59. Which of the following would be considered a batch-level activity?

61. Which of the following would be considered a product-level activity?

62. Which of the following would not be considered a customer-level activity?

63. Which of the following would be considered a customer-level activity?

79. Calculating the activity rate is similar to the calculation of the

86. The last step in the preparation of activity-based costing data is to

87. The second step in the preparation of activity-based costing data is to

88. The activity rate for each cost pool is

89. The easiest part of calculating the total product cost is

How much of Atlanta’s cost will be allocated to Nashville?

% of time Hours spend on

How much of Atlanta’s cost will be allocated to Birmingham?

2,100 labor hrs. 1,900 labor hrs.

2,100 labor hrs. 1,900 labor hrs.

123. The key to reducing costs through activity management is

124. The key to reducing costs through activity management is

125. A characteristic of non-value-added activities is that they

126. A characteristic of non-value-added activities is that they

128. Which of the following is not a characteristic of a non-value-added activity?

129. Inspection would be classified as value-added in which of the following scenarios?

134. In order to increase a company’s bottom line, it can

140. Activity-based costing information may be used by managers for

a. Activity-based costing g. Non-valued-added allocation

____ 1. Activities that are performed for specific customers.

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