MULTIPLE-CHOICE QUIZ

Complete each of the following statements by circling the letter of the best answer.
1. The activities that are performed each time a batch is produced are:
a. batch-level activities.
b. facility-level activities.
c. process-level activities.
d. product-level activities.
e. unit-level activities.

2. In a functional-based cost accounting system, which of the following activity

drivers is used to assign fixed overhead costs to products?
a. batch-level activities
b. facility-level activities
c. process-level activities
d. product-level activities
e. unit-level activities

3. In a “pure” ABC system, which of the following would not be assigned to

products?
a. batch-level activities
b. facility-level activities
c. process-level activities
d. product-level activities
e. unit-level activities

4. Which of the following would be classified as a product-level activity?

a. plant management
b. production scheduling
c. engineering changes
d. material handling
e. machine hours

5. Which of the following would be classified as a batch-level activity?

a. plant management
b. process engineering
c. engineering changes
d. material handling
e. machine hours

6. Which of the following is a true statement?

a. If nonunit-based overhead costs are a large proportion of overhead costs, the use
of non-unit-based drivers will cause large distortions in product costs.
b. If nonunit-based overhead costs are a small proportion of overhead costs, the use
of non-unit-based drivers will cause large distortions in product costs.
c. Nonunit-based activity drivers are factors that are proportional to the number of
units pro-duced.
 d. If products consume the nonunit overhead activities in the same proportion as unit
over-head activities, using a traditional overhead assignment method will cause costs to be dis-
torted.
e. If products consume the nonunit overhead activities in the same proportion as unit
over-head activities, using a traditional overhead assignment method will not cause costs to be
distorted.

7. Consumption ratios are:

a. the activities performed every time a batch is produced.
b. the proportion of each activity consumed by a product.
c. necessary for unit-level activities but not for batch- or product-level activities.
d. factors that cause costs to change as the level of activities change.
e. none of the above.

8. An activity-based costing system is one that:

a. traces costs to activities and then to products.
b. traces costs to resources and then to activities.
c. traces activities to costs and then to resources.
d. traces products to activities and then to resources.
e. uses a single plantwide rate for allocating overhead costs to products.

9. A homogeneous cost pool is one that:

a. does not change over time.
b. needs many activity drivers to be allocated to a cost object.
c. has only one type of material assigned to it.
d. can be explained with a single activity driver.
e. can be used only by the dairy industry.

10. Which of the following statements is incorrect regarding ABC and service
industries?
a. Since service organizations do not have inventories, product costing (and thus
ABC) will not be necessary.
b. The output is more easily defined for a service organization than for a
manufacturing or-ganization.
c. Activities in a service organization tend to be more standardized than activities in
a manu-facturing organization.
d. Since the output of a service organization is consumed when produced, there will
be no batch-level activities.
e. None of the above statements are correct.

11. “Inspection of the first unit produced” is what type of activity?

a. batch-level
b. facility-level
c. process-level
d. product-level
e. unit-level
 12. “Extruding plastic parts” is what type of activity?
a. batch-level
b. facility-level
c. process-level
d. product-level
e. unit-level

PRACTICE TEST
EXERCISE 1
XYZ Company has identified the following overhead activities, costs, and activity drivers for the
coming year:
Activity Expected Cost Activity Driver Activity Capacity
Material-handling costs P45,000 Number of moves 450
Machine costs 80,000 Machine hours 20,000
Order costs 15,000 Number of orders 750
Receiving costs 30,000 Number of parts 50,000
Setup costs 50,000 Number of setups 250

Assume that each activity corresponds to a process. XYZ’s normal activity is 5,000 direct labor
hours. The following two jobs were completed during March:
Job X-1 Job Y-4
Direct materials P1,500 P2,000
Direct labor (P15 per hour) P750 P750
Units completed 200 200
Number of moves 3 6
Machine hours 125 75
Number of orders 3 12
Number of parts 200 800
Number of setups 1 4

Required:
1. Determine the unit cost for each job using direct labor hours to apply overhead.
EXERCISE 1 (Continued)
2. Determine the unit cost for each job using the activity drivers to apply overhead.
3. Which method produces the more accurate cost assignment? Why?

EXERCISE 2
Required:
Classify the following activities as unit-level, batch-level, product-level, or facility-level.
1. Marketing a product
2. Paying rent
3. Drilling a hole
4. Lighting the factory
5. Running the machines
6. Moving a batch
7. Engineering a product
 8. Inspecting a machined part when it is completed
9. Ordering a purchased part
10. Setting up a machine
11. Using janitorial services
12. Paying insurance

EXERCISE 3
Acme Enterprises is a custom manufacturer of specialty circuit boards. The boards are produced
in batches in a single manufacturing facility. Each board requires an engineer to prepare the
speci-fications and schematic drawings. Once this design is complete, the equipment is set up for
the batch production. As each batch is completed, a sample of the units is inspected for quality
and tolerances. Costs have been assigned as follows:
Engineering P75,000
Setups 60,000
Labor 50,000
Inspection 75,000
Factory lease 30,000
Factory utilities 12,000

The following activity drivers have been identified and their capacities determined:
Activity Driver Practical Capacity
Labor hours 5,000
Setup hours 2,000
Engineering hours 2,500
Inspection hours 6,000
Machine hours 10,000

The cost of the facility-level activities are assigned using machine hours.
Required:
1. Identify each activity as unit-level, batch-level, product-level, or facility-level.
2. Create homogeneous cost pools. Identify the activities that belong to each pool
and the activity driver that will be used for computing pool rates. (Use machine hours as the
activity driver for the factory lease and factory utilities cost pools.)
3. Compute the pool rate for each pool you have identified in Requirement 2.

EXERCISE 4
Alcatraz Company makes two models of an antitheft device. The portable model is relatively
small and is primarily for use in automobiles. The standard model is much larger and is designed
for houses and buildings. The Fabricating Department cuts, bends, and welds sheet metal to
produce the external box of the device. The box is also painted in this department. The Assembly
Depart-ment uses purchased parts to produce the internal workings and fits them into the
prepared metal boxes.
Alcatraz has conducted a special study to determine if an activity-based costing system would be
beneficial in determining the costs of the two products. The Fabricating Department is a more
complex department than the Assembly Department and has been chosen for a pilot test of an
ABC system. The following activities have been identified, along with their associated costs:
Depreciation P250,000
Factory lease 125,000
Inspection 75,000
Factory maintenance 150,000
Materials handling 100,000
Power 50,000
Product engineering changes 25,000
Setups 125,000
Department manager salaries 60,000

The analysts have identified the following potential activity drivers and the capacity of each:
Portable Standard
Direct labor (P10 per hour) P75,000 P90,000
Machine hours 4,000 6,000
Materials P450,000 P650,000
Number of moves 1,500 1,500
Number of products 1 1
Number of setups 150 350
Units produced 15,000 17,500

Required:
1. Classify each activity according to activity level and identify an appropriate driver
for each.
2. Create homogeneous cost pools and calculate pool rates. (Use the number of
setups as the activity driver for both inspection and setups costs. Machine hours serve as the
activity driver for depreciation, factory lease, factory maintenance, and department manager
salaries.)
3. Use the pool rates to compute per unit overhead costs for the two products.