— Chapter 20

Backflush Costing System and

Activity-Based Costing

Backflush Costing System

introduction

Backflush costing is often used by companies that have adopted a just-in-time (JIT)
regarding inventory control. These companies regard carrying inventory as a nonvalue-
added activity. Hence, they attempt to minimize inventory by making components
available just-in-time to be used in the production process.

Definition

Backflush costing or backflushing is a short-cut approach to accounting for the flow of

manufacturing operations. It delays recording journal entires until the goods moved
through the production process.

Nature of Backflush Costing System

Backflush costing complements JiT because it simplifies the costing of products. A traditional
costing system tracks costs as they are incurred, but backflush costing delays recording of
some cost information. It treats the detailed recording of inventory data as a nonvalue-
added activity.

The following are the features of Backflush Costing:

1. Work-in process is usually eliminated.

2. Journal entires to inventory accounts may be delayed until the time of product
completion.
3. Standard costs are used to assign costs to units when journal entries are made, i.e.,
to flush costs backward to the point at which inventories remain.
Activity-Based Costing

f. Introduction

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

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

II. Definition

ABC Costing is one means of refining a cost system to avoid what has been called
peanut-butter costing. Inaccurately averaging or spreading costs like peanut-butter
over products that use different amounts of resources results in a product-cost-cross-
subsidization.

Product-cost cross-subsidization describes the condition in which the miscosting of

one product causes the miscosting of other products.

In the Accounting Glossary of the Statements of Management Accounting. ABC was

defined as a system that:

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

III. Nature of Activity-Based Costing

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

ABC determines the value-adding activities associated with the incurrence of costs
and then accumulates a cost pool for each activity using the appropriate activity
base (cost driver). Cost pools are then assigned to cost objects. ABC may be
employed with job-order or process-costing methods.

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

First, costs are trace`to activities, and then to products.
 MULTIPLE CHOICE QUESTIONS

Backflush Costing:

1. The Pampanga Manufacturing Company uses a raw and in process (RIP)

inventory account and expenses all conversion costs to the cost of goods
sold account. At the end of each month, all inventories are counted, their
conversion cost components are estimated, and inventory account
balances are adjusted accordingly. Raw material cost is backflushed from
RIP to Finished Goods. The following information is for the month of April:

Beginning balance of RIP account, including P1,400

of conversion cost P 31,000
Raw materials received on credit 367,000
Ending RIP inventory per physical count, including
P1,800 conversion cost estimate 33,000

Compute the amount to be backflushed from RIP to Finished goods:

a. P365,000 c. P367,000
b. 368,600 d. 365,400
(Adapted)

2. The Bulacan Manufacturing Company produces only for customer order and
most work is shipped within thirty-six hours of the receipt of an order. Bulacan
uses a raw and in process (RIP) inventory account and expenses all conversion
costs to the cost of goods sold account. Work is shipped immediately upon
completion, so there is no finished goods account. At the end of each month,
inventory is counted, its conversion cost component is estimated, and the RIP
account balance is adjusted accodingly. Raw material cost is backflushed from
RIP to Cost of Goods Sold. The following information is for the month of May:

Beginning balance of RIP account, including P1,300

of conversion cost P 12,300
Raw materials received on credit 246,000
Ending RIP inventory per physical count, including
P2,100 conversion cost estimate 12,100

Compute the amount to be backflushed from RIP to Cost of Goods Sold:

a. P246,000 c. P247,000
b. 246,200 d. 245,000
(Adapted)
3. Using the same information in No. 2, compute the amount of Cost of Goods
Sold after all transactions and adjustments were made:

a. P246,000
b. 246,200
(Adapted)

4. Changi Ong, general manager of Casio Corporation's Midwest Division,

has provided the following information for transactions that occurred during
March. This division uses a JIT costing system.

(a) Raw materials were purchased at the cost of P97,000.

(b) All materials purchased were requisitioned for production.
(c) Direct labor costs of P77,000 were incurred.
(d) Actual factory overhead costs amounted to P225,000.
(e) Applied conversion costs totaled P300,000. This included P77,000
of direct labor.
(f) All units were completed.

Compute the March 31 balance in the Conversion Cost:

a. P2,000 debit c. P25,000 credit

b. 2,000 credit d. 22,000 debit
(Adapted)

5. Using the same information in No. 4, compute the March 31 balance in the
Finished goods account:

a. P397,000 credit c. P320,000 debit

b. 397,000 debit d. 377,000 debit
(Adapted)

6. Katherine, owner of KCO Supply Company in Cebu, which manufactures

chopsticks for restaurants, has recently decided to implement a JIT costing
system. Transactions for August are as follows:

(a) Raw materials were purchased at the cost of P950,000.

(b) All materials purchased were requisitioned for production.
(c) Direct labor costs of P2,500,000 were incurred.
(d) Actual factory overhead costs amounted to P6,000,000.
(e) Applied conversion costs totaled P8,100,000. This included
P2,500,000 of direct labor.
(f) All units were completed.
Backflush Costing System and Activity-Based Costing \

Compute the amount to be backflushed from RIP to Finished Goods:

a. P2,100,000 c. P 950,000
b. 2,550,000 d. 3,100,000
(Adapted)

7. Using the same information in No. 6, compute the amount of Finished goods
after all transactions have been completed

a. P8,500,000 c. P10,600,000
b. 9,050,000 d. 9,650,000
(Adapted)

8. G. Bello, general manager of a highly automated coffee production plant

in Laguna, (locos Sur, has provided the following information for
transactions
that occurred during October. The production plant uses a JIT costing
system.

a. Raw materials costing P300,000 were purchased.

b. All materials costing P300,000 were requisitioned for production.
c. Direct labor costs of P200,000 were incurred.
d. Actual factory overhead costs amounted to P995,000.
e. Applied conversion costs totaled P1,300,000. This includes the
direct labor cost.
f. All units are completed and immediately sold.

Determined the October 31 balance in the Cost of Goods Sold account.

No adjustment has been made for overapplied or underapplied conversion
cost.

a. PI ,300,000 c. P1,600,000
b. 1,495,000 d. 1,195,000
(Adapted)

9. Using the same information in No. 8, what was the overapplied or

underapplied conversion costs for the month?

a. P305,000 overapplied c. P105,000 overapplied

b. 195,000 underapplied d. 105,000 underapplied
(Adapted)
10. Using the same information in Nos. 8 and 9, what is the Cost of Goods Sold
after all transactions-adjustments have been completed?

a. P1,304,000 c. P1,600,000
b. 1,495,000 d. 1,195,000
(Adapted)

11. Ube Jewelry Factory manufacturer a variety of costume jewelry. The owner
Rita Conrad had recently decided to implement a JIT Costing System.
Transactions during September were as follows:

a. Raw materials totaling P45,000 were purchased.

b. All materials purchased were reqquisitioned for production.
c. Direct labor costs of P11,000 were incurred.
d. Indirect labor costs amounted to P120,000.
e. Utilities costs totaled P15,000.
f. Other actual factory overhead costs amounted to P85,000.
g. Applied conversion costs totaled P221,000. This includes the direct
labor costs.
h. All units were completed.

Determine the September 30 balance in the cost of goods sold amount. No

adjustment has been made for overapplied or underapplied converison cost:

a. P266,000 c. P221,000
b. 276,000 d. 220,000
(Adapted)

12. Using the same information in No. 11, what was the overapplied or
underapplied conversion costs for the month?

a. P16,000 overapplied c. P10,000 underapplied

b. 16,000 underapplied d. (10,000) overapplied
(Adapted)

13. Kara Manufacturing uses backflush costing to account for an electronic

meter it makes. 'During August 2008, the firm produced 16,000 meters, of
which it sold 15,800. The standard cost for each meter is:

Direct materials P20

Conversion costs 44
P64
Backflush Costing System and Activity-Based Costing

1061
Assume that the firm had no inventory on August
took place in August:
1. The following events
1. Purchased P320,000 of direct materials.
2. Incurred P708,000 of conversion costs.
 3. Applied P704,000 of conversion costs to Raw and In Process
Inventory (RIP).
4. Finished 16,000 meters.
5. Sold 15,800 meters for P100 each.

Compute the amount to be backflushed from RIP to Finished goods:

a. P320,000 c. P1,024,000
b. 704,000 d. 1,028,000
(Adapted)

14. Using the same information in No. 13, determine the August 31
(ending
balance) of Finished goods account:

a. P -0- c. P12,962
b. 12,850 d. 12,800
(Adapted)

15. A streamlined accounting system:

a. Standard costing c. Process costing

b. Job Order costing d. Backflush costing
(Adapted)

Activity - Based Costing

16. Ongchan Metal Fabricators has a diverse product line and a

complex cost structure, with some jobs requiring much labor and little
machine use and others requiring the opposite mix. Because no single base
for a predetermined overhead rate will provide Ongchan Metal
management with reliable product cost information, overhead is
classified into two cost pools and two predetermined overhead rates
are used. For 2001, it is estimated that total overhead costs will consist of
P200,000 of overhead related to the usage of direct labor hours and
P300,000 of overhead related to machine usage. Total machine usage
is expected to be 4,000 hours for the year, and total direct labor hours are
expected to be 16,000. Job 345 required P2,000 of direct material, 30
hours of labor at P10 per hour, and 10 hours of machine time.
 Determine the dual predetermined overhead rates:

Per Direct Labor Hour Per Machine Hour

a. P 3.75 P75.00
b. 375.00 7.50
c. 12.50 12.50
d. 12.50 75.00
(Adapted)

17. Using the same information in No. 16, compute the cost of Job 345:

a. P2,300.00 c. P3,425.00
b. 3,162.50 d. 5,800.00
(Adapted)

18. Kate Machine Tool Incorporated produces a varied product line

without
the use of direct labor. An extensive setup procedure is required.
Because
no single base for a predetermined overhead rate will provide Kate
with
reliable product cost information, overhead is classified into two cost
pools
and two predetermined overhead rates are used. For 2017, it is
estimated
that total overhead costs will consist of P525,000 of overhead
related to
setups and P900,000 of overhead related to machine usage. Total
machine
usage is expected to be 3,600 hours for the year, and the total number
of
setups is expected to be 300.

Job 403 required parts and materials costing P56,000, 70 hours of

machine time, and four setups.

Determine the dual predetermined overhead rates:

Per Machine Hour Per Setup

a. P250.00 P1,750.00
b. 1,750.00 250.00
c. 145.83 3,000.00
d. 365.38 365.38
(Adapted)

19. Using the same information in No. 18, compute the cost of Job 403

a. P78,208 c. P 83,038
 b. 80,500 d. 179,500
(Adapted)

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

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

Under a costing system that allocates overhead on the basis of direct

labor hours (traditional), the materials handling costs allocated to one
unit of wall mirrors would be

a. P1,000 c. P2,000
b. 500 d. 5,000
(CM
A)

21. Using the same information in No. 20, the materials handling costs allocated
to one unit of wall mirrors under Activity-Based Costing would be:

a. P1,000 c. P1,500
b. 500 d. 2,500
(CM
A)

22. A company has identified the following overhead costs and cost
drivers
for the coming year:

Budgeted
Overhead Cost Budgeted Activity
Item Driver Cost Level
Machine Number of setups P 20,000 200
setup
Inspection Number of P130,000 6,500
inspections
 Material Number of P 80,000 8,000
handling material moves
Enginering Engineering hours F 50,000 1,000
P280,000

The following information was collected on three jobs that were completed
during the year:

Job 101 Job 102 Job 103

Direct materials P5,000 P12,000 P8,000

Direct labor P2,000 P2,000 P4,000

Units completed 100 50 200

Number of setups 1 2 4

Number of 20 10 30
Inspections

Number of material 30 10 50
moves

Engineering hours 10 50 10

Budgeted direct labor cost was P100,000 and budgeted direct

material cost was P280,000.

If the company uses activity-based costing, how much overhead

cost should be allocated to Job 101?

a. P1,300 c. P5,000
b. 2,000 d. 5,600
(CI
A)

23. Using the same information in No. 22, compute the cost of each unit of
Job 102 using Activity-Based Costing:

a. P340 c. P440
b. • 392 d. 520
 (CI
A)

24. Using the same information in No. 23, assuming the company prices its
products at 140% of cost and the company uses Activity-Based Costing, the
price of each unit of Job 103 would be:

a. P 98 c. P116
b. 100 d. 140
(CIA)

25. Believing that its traditional cost system may be providing misleading
information, an organization is considering an activity-based costing (ABC)
approach. It now employs a full-cost system and has been applying its
manufacturing overhead on the basis of machine hours.

The organization plans on using 50,000 direct labor hours and 30,000 machine
hours in the coming year. The following data show the manufacturing
overhead that is budgeted.

Budgeted Budgeted
Activity . Cost Driver Activity Cost

Materials handling No. of parts handled 6,000,000

P720,000
Setup costs No. of setups 750
315,000
Machining costs Machine hours 30,000
540,000
Quality control No. of batches 500
225,000

Total manufacturing overhead cost: P1,800,000

Cost, sales, and production data for one of the organization's products
for the coming year are as follows:

Prime costs:
Direct material cost per unit P4.40
Direct labor cost per unit
.05 DLH @ P15.00/DLH .75

Total prime cost P5.15

Sale:s and production data:

Expected sales 20,000 units
Batch size 5,000 units
Setups 2 per batch
 Total parts per finished unit 5 parts
Machine hours required 80 MH per
batch

If the organization uses the traditional full-cost system, the cost per unit for
this product for the coming year would be

a. P5.39 c. P6.11
b. 5.44 d. 6.95
(CIA)

26. Using the same information in No. 25, and assuming that the organization
employs an Activity-Based Costing System, the cost per unit of the
product described for the coming year would be:

a. P6.00 c. P6.21
b. 6.08 d. 6.30
(CIA)

27. Katherine Inc. of Cebu Ltd. has decided to institute a pilot activity-based
costing project in its five-person purchasing department. Annual
departmental costs are P473,500. Because finding the best supplier
takes the majority of effort in the department, most of the costs are
allocated to this area.

Number of Total
Activity Allocation Measure People
Cost

Find best suppliers Number of telephone calls 3

P300,000
Issue purchase orders Number of purchase orders 1
100,000
Review receiving reports Number of receiving reports i
73,500

During the year, the purchasing department made 150,000 telephone

calls, issued 10,000 purchase orders, and reviewed 7,000 receiving
reports. Many purchase orders are received in a single shipment.

One product manufactured by Cebu Ltd. required the following purchasing

department activities: 125 telephone calls, 60 purchase orders, and
15
receipts.

What amount of purchasing department cost should be assigned to the

product?

a. P1,007.50 c. P921.48
b. 4,500.00 d. 327.55
28. Using the same information in No. 27, what is the purchasing department cost
per unit would be if 200 units of the product are manufactured during the year?

a. P2.00 c. P10.00
b. 5.04 d. 10.50
(Adapted
)

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

Activity Center Amount Activity Driver Quantity

Professional salaries P900,000 Professional hours 30,000 hours

Building costs 450,000 Square feet used 15,000 square
feet
Risk management 320,000 Patients served 1,000 patients

The hospital provides service in three broad categories. The services are
listed below with their volume measures for the activity centers.

Service Professional Hours Square Feet Number of Patients

Surgery 6,000 1,200 200

Housing patients 20,000 12,000 500
Outpatient care 4,000 1,800 300

Compute the allocation rates for each activity center:

Professional Building Risk

Salaries Costs Management
a. ' P 1 22/hr. P14/sq. ft. P52 per patient
b. 22/hr. 22/sq. ft. 22 per patient
c. 30/hr. 30/sq. ft. 320 per patient
d. 150/hr. 37.50/sq. ft. 1,067 per patient
(Adapted
)
30. Using the same information in No. 29, determine the allocated activity
center costs to the three services provided by the hospital:

Outpatient
Surgery Housing Care

a. P759,200 P2,634,000 P528,800

b. 162,800 715,000 134,200
c. 2,828,400 3,983,500 987,600
d. 280,000 1,120,000 270,000
(Adapte
d)

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

a. P6 c. P60
b. 2 d. 4
(Adapted)

32. Cebu Enterprises is a Philippine exporter of souvenir items manufactured

in the capital city of Jerusalem. The following overhead cost data
have been accumulated:

Amount
Activity Center Cost Driver of Activity Center
Costs

Materials Handling Grams handled 100,000 grams P 50,000

Painting Units painted 50,000 units
200,000
Assembly Labor hours 4,000 hours
120,000

Job 1234 contains 3,000 units. It weighs 10,000 grams and uses 300 hours of
labor.

Compute the total overhead costs that should be assigned to Job 1234.

a. P31,955 c. P26,000
b. 27,750 d. 32,000
(Adapted)
33. Tomas Company manufactures two types of medical syringes: low-unit
and
• med-unit. The overhead activities, costs, and related data are as follows:

Activity
Center
Low-Unit Med-Unit Costs

Receiving orders 100 150 P 7,500

Machine hours 12,000 13,000 125,000
Setups 45 20 9,750
Shipping orders 200 400 30,000

Assume the total costs of all activity centers are allocated on the basis
of
machine hours. Calculate the overall rate and allocate overhead costs
to
the two products using that rate.

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

a. P89,570 P82,680 c. P82,680 P82,680
b. 82,680 89,570 d. 89,570 89,570
(Adapted)

34. Elvie manufactures two versions of a product. Production and cost

information show the following:

Mode/ X Mode! Y

Units produced 100 200

Material moves 10 40
Direct labor hours per unit 1 2

Materials handling costs total P100,000. Under ABC, the materials

handling
costs allocated to each unit of Model would be:

Mode! X Model Y Model X Mode! Y

a. P400 P200 c. P143 P429

b. 200 400 d. 429 143
(Adapted)
35. Using the same information in No. 34, except that direct labor hours
(traditional / conventional) were used to allocate overhead costs. The
material handling costs allocated to each unit of Model would be (assuming
that 2 DLH per unit for Model Y):

Model X Model Y Model X Model Y

a. P400 P200 c. P143 P429

b. 200 400 d. 429 143
(Adapted)

36. Ambrose Company uses three products with the following production and
cost information:

Model S Model M Mode/ L

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

Overhead costs include setups of P45,000; shipping cost of P70,000;

and engineering costs of P90,000. What would be the per unit
overhead cost for each model if direct labor hours
(traditional/conventional costing) were the allocaiton base?

Mode! S Model M Model S Mode/ M.

a. P10.25 P10.25 c. P20.50 P20.50
b. 41.00 20.50 d. 41.00 6.83
(Adapted)

37. Using the same information in No. 36, what would be the per unit overhead
cost for Model S, if ABC costing were used?

a. P10.25 c. P41.00
b. 37.00 d. 20.50
(Adapted)

38. Using the same information in No. 36, what would be the per unit overhead
cost for Model M, if ABC costing were used?

a. P11.00 c. P61.50
b; 33.00 d. 41.00
(Adapted)
39. Using the same information in No. 36, what would be the per unit overhead
cost for Model L, if ABC were used?

a. P 5.42 c. P122.64
b. 16.25 d. 41.00
(Adapted)

40. Sony Ericsson has two major components with the following information:

Indoor Outdoor
Furniture Furniture Total

Annual revenue P300,000 P600,000 P900,000

Material costs P 40,000 P 60,000 P100,000
Labor costs P 50,000 P 75,000 P125,000
Materials hours 80,000 20,000
Number of batches 100 100

The business also has overhead costs as follows:

Cost Pool Cost in Pool Cost driver

Maintenance P200,000 Machine hours

Setups 175,000 Number of batches
Administrative 125,000 Labor costs

P500,000

Determine the income (loss) of each segment if the overhead costs will be
allocated to segment based on labor costs (traditional):

Indoor Outdoor indoor Outdoor

a. P87,500 P(262,500) c. P10,000 P165,000

b. ( 87,500) 262,500 d. ( 10,000) ( 165,000)
(Adapted)

41. Using the same information in No. 40, determine the income (loss) of each
segment if the overhead costs will be allocated to segment under ABC
costing:

Indoor Outdoor Indoor Outdoor

a. P87,500 P(262,500) c. P10,000 P165,000

b. 87,500 262,500 d. ( 10,000) ( 165,000)
'
(Adapte
d)
42. Principal, Inc. produces three products. Production and cost information is
as follows:

Model A Model B Model C

Units produced 2,000 6,000 12,000
Direct labor hours 4,000 2,000 4,000
Number of setups 100 150 250

The consumption ratios for number of setups would be:

A B C A B C
a. 40% 20% 40% c. 10% 30% 60%
b. 20% 30% 50% d. 5% 22% 73%
(Adapted)

43. Using the same information in No. 40, compute the consumption ratios
based on units produced would be:

A B C A B C
a. 40% 20% 40% c. 10% 30% 60%
b. 20% 30% 50% d. 5% 22% 73%
(Adapted)

44. New-Rage cosmetics has used a traditional cost accounting system to

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

Quantity for
Activity Cost Driver Cost Rates Satin Sheen
Income
material
inspection • Type of material P 11.50 per type 12 types
In-process
Inspection Number of units P0.14 per unit 17,500 units
Product
Certification Per order P77 per order 25 orders
 The monthly quality control cost assigned to Satin Sheen makeup
-using activity-based costing is

a. P88.64 per order.

b. P525.50 lower than the cost using the traditional system.
c. P8,500.50
d. P525.50 higher than the cost using the traditional system.

45. Cost allocation is the process of assigning indirect costs to a cost

object. The indirect costs are grouped in cost pools and then allocated by a
common allocation base to the cost object. The base that is employed
to allocate a homopeneous cost pool should

a. Have a cause-and-effect relationship with the cost items in the

cost pool.
b. Assign the costs in the pool uniformly to cost objects even if the
cost objects use resources in a nonuniform way.
c. Be a nonfinancial measure (e.g., number of setups) because a
nonfinancial measure is more objective.
d. Have a high correlation with the cost items in the cost pool as
the sole criterion for selection.

46. Multiple or departmental overhead rates are considered preferable to a

single or plant-wide overhead rate when

a. Manufacturing is limited to a single product flowing through

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

47. An accounting system that collects financial and operating data

on the
basis of the underlying nature and extent of the cost drivers is

a. Activity-based costing.
b. Target costing.
c. Cycle-time costing.
d. Variable costing.
(CM
A)
48. Cost drivers are

a. Activites that cause costs to increase as the activity increases.

b. Accounting techniques used to control costs.
c. Accounting measurements used to evaluate whether
performance is proceeding according to plan.
d. A mechanical basis, such as machine hours, computer time,
size of equipment, or square footage of factory, used to
assign costs to activities.
(CMA)

49. Which of the following statements about activity-based costing is not true?

a. Activity-based costing is useful for allocating marketing and

distribution costs.
b. Activity-based costing is more likely to result in major differences
from traditional costing systems if the firm manufactures only
one product rather than multiple products.
c. In activity-based costing, cost drivers are what cause costs to be
incurred.
d. Activity-based costing differs from traditional costing systems in
that products are not cross-subsidized.
(CIA)

50. Because of changes that are occurring in the basic operations of many firms, all
of the following represent trends in the way indirect costs are allocated except.

a. Treating direct labor as an indirect manufacturing cost in an

automated factory.
b. Using throughput time as an application base to increase awareness
of the costs associated with lengthened throughput time.
c. Preferring plant-wide application rates that are applied to machine
hours rather than incurring the cost of detailed allocations.
d. Using several machine cost pools to measure product costs on
the basis of time in a machine center.
(CMA)

51. What is the normal effect on the numbers of cost pools and allocation
bases
when an activity-based cost (ABC) system replaces a traditional cost
system?

Cost Pools Allocation Bases

a. No effect No effect
b. Increase No effect
c. No effect Increase
d. Increase Increase
(AICPA)
52. In an activity-based costing (ABC) system, cost reduction is accomplished
by identifying and eliminating

Nonvcrlue-Adding
All Cost Drivers Activities

a. No No
b. Yes Yes
c. No Yes
d. Yes No
(AICPA)

53. Chang Co.'s cost allocation and product costing procedures

follow activity-based costing principles. Activities have been
identified and classified as being either value-adding or nonvalue-
adding as to each
product. Which of the following activities, used in Chang's production
process, is nonvalue-adding?

a. Design engineering activity.

b. Heat treatment activity.
c. Drill press activity.
d. Raw materials storage activity.
(AICPA)

54. Which of the following would be a reasonable basis for allocating

the materials handling costs to the units produced in an activity-based
costing
system?

a_ Number of production runs per year.

b. Number of components per completed unit.
c. Amount of time required to produce one unit.
d. Amount of overhead applied to each completed unit.
(AICP
A)