Cost Management A Strategic Emphasis 7th Edition Blocher Test Bank 1

Cost Management A Strategic Emphasis
7th Edition by Blocher Stout Juras Cokins

ISBN 9780077733773
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Chapter 05
Activity-Based Costing and Customer Profitability Analysis
Multiple Choice Questions
1. The major limitation of volume-based costing systems is the use of volume-based:
A. Criteria.
B. Standards.
C. Rates.
D. Variances.
E. Restrictions.
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Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
2. Volume-based rates produce inaccurate product cost when:
A. A large portion of factory overhead cost is not volume-based.

B. Firms produce a diverse mix of products.
C. Large volumes of a product are manufactured.
D. Both a lack of volume-based overhead and there is a large range of products.
E. None of these answer choices are correct.
3. If the usage of project activities is not proportional to the number of units produced, then
some managers will be overcharged and others undercharged under the:
A. Activity-based costing
B. Volume-based costing
C. Overhead costing
D. Process costing
4. Volume-based overhead rates may cause undesirable strategic effects such as:
A. Incorrect decisions.
B. Unprofitable cross-subsidization of products.
C. Ineffective management of operations for process improvement.
D. All of these answer choices are correct.
5. Activity-based costing (ABC) differs from other costing approaches in that it more accurately
measures the cost of activities that are:
A. Not proportional to the volume of outputs produced.

B. Directly proportional to the volume of outputs produced.
C. Inversely proportional to the volume of outputs produced.
D. Non-value adding.
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6. In performing activity analysis during the design of an activity-based costing (ABC) system,
the management accountant studies:
A. The cost drivers and managers in the plant.

B. The advice of operation-level managers.
C. The resources, activities, and cost drivers in the operation.
D. The cost allocation methods applicable to the firm.
E. The implementation problems for an ABC system.
7. Effective implementation of activity-based costing (ABC) requires:
A. Normally the assistance of a consultant.

B. A sophisticated and expensive computer system.
C. Support of top management and key employees.
D. Capturing properly the complexity of the data.
E. ABC has no significant implementation issues.
8. Elimination of low-value-added activities in a firm should:
A. Be discouraged because of potential harmful effects.

B. Not affect customer value.
C. Not have priority because low-value-added activities have little effect on a firm's
performance.
D. Have priority only when a firm is operating at a loss.
E. Happen naturally if the firm is well-managed.
9. When gathering activity data, which of the following would not be a question that ABC project
team members typically ask employees or managers?
A. Time spent performing the activity

B. Resources required for the activity
C. Where the activity takes place
D. Value the activity has for the customer
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10. Successful activity-based costing (ABC) implementation depends upon the firm:
A. Having support of consultants with needed expertise.

B. Having a thorough activity analysis.
C. Starting with a relatively simple system.
D. Having well-trained managers.
E. Having adequate computer resources.
11. A measure of the quantity of resources consumed by an activity is:
A. A quantity driver.
B. A resource consumption cost driver.
C. Not a cost driver.
D. An activity consumption cost driver.
E. A consumption cost driver.
12. A measure of frequency and intensity of demands placed on activities by cost objects is:
13. An activity that is performed for each unit of production is a(n):
A. Product-level activity.
B. Facility-level activity.
C. Unit-level activity.
D. Performance-level activity.
E. Batch-level activity.
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14. An activity that is performed to support the production of a new custom-order product is a:
D. Customer-support activity.
15. Which one of the following is not a unit-level cost driver?
A. Direct labor hours.

B. Direct material dollars.
C. Machine hours.
D. Production orders.
16. The management of activities to improve the value received by the customer and the
competitiveness of the organization is:
A. Cost driver analysis.

B. Customer profitability analysis.
C. Activity-based management.
D. Performance measurement.
E. Activity analysis.
17. The examination of the efficiency of each of a firm's activities is:
A. Activity analysis.
B. Pareto analysis.
E. Attribute-based management.
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18. Which one of the following is a high value-added activity?
A. Set-up.
B. Rework.
C. Repair.
D. Storage.
E. Processing.
19. In regard to selling activities, which one of the following would not be a cost driver for selling
expense?
A. Number of invoices.
B. Number of sales calls.
C. Number of production runs.
D. Number of shipments.
20. Which one of the following is not a recommendation for a successful implementation of
ABC/M?
A. Obtain support of management and personnel.

B. Complete an activity analysis.
C. Start with a relatively simple system.
D. Use ABC/M on a job that will succeed.
E. All of these answer choices are features of successful ABC/M implementations.
21. Which of the following activities is a facility-level activity?
A. Plant management salaries.

B. Depreciation on a highly specialized piece of production equipment.
C. Direct labor.
D. Product design.
E. Materials handling.
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22. A company using a volume-based overhead assignment (allocation) method will tend to:
A. Overstate the cost of low volume products.

B. Understate the cost of low volume products.
C. Understate the cost of high volume products.
D. Understate the cost of all products.
E. Either understate or overstate the cost of high volume products depending on the specific
manufacturing factors involved.
23. Which of the following is a batch-level cost driver?
A. Output units.
B. Number of engineering change orders.
C. Number of materials handling transactions.
D. Square feet of plant area occupied.
E. Number of employees.
A. Materials handling.
B. Plant maintenance.
C. Product inspection.
D. Design engineering.
E. Purchase orders.
25. In an organization that makes furniture, which of the following is a high value-added activity?
A. Using direct materials in production.

B. Inspecting production.
C. Storing finished goods inventory.
D. Moving work-in-process inventory between work stations.
E. Reworking the product to repair defects.
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26. Overhead costs are allocated to cost objects in an activity-based costing system in the
following manner:
A. Overhead costs are traced to departments, then costs are traced to products.
B. Overhead costs are traced to activities, then costs are traced to products.
C. Overhead costs are traced to activities, then costs are traced to departments and then
allocated to products.
D. Overhead costs are traced from resources to cost objects.
A. Output units.
B. Number of employees.
C. Number of orders.
D. Number of parts.
E. Machine hours.
28. Which of the following has the weakest linkage between activity and cost driver?
Activity Cost Driver
A) Machine setup Number of setups
B) Machine maintenance Machine hours
C) Lighting on shop floor Number of kilowatt-hours
D) Quality control Square feet of floor space
E) Materials Handling Weight of materials in process
A. Option A
B. Option B
C. Option C
D. Option D
E. Option E
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29. A volume-based rate is an appropriate overhead application base when:
A. Several well-differentiated products are manufactured.

B. Direct labor costs are large.
C. Direct material costs are large relative to direct labor costs incurred.
D. Only one product is manufactured.
E. Manufacturing is process-based.
30. Which of the following would likely be the most appropriate cost driver of electric power used
by machines?
A. Number of units.
B. Machine size.
C. Number of machine hours.
D. Number of production runs.
E. Purchase cost of machines.
31. Using a volume-based overhead rate based on machine hours to assign manufacturing
overhead to a product line that uses relatively few machine hours is likely to:
A. Overapply overhead to the product line.

B. Underapply overhead to the product line.
C. Understate direct labor costs.
D. Overstate direct labor costs.
E. Either over- or under-apply overhead to the product line depending on many other factors.
32. Which of the following is an example of a high-value-added activity?
A. Shipping the customer's order.

B. Scheduling the customer order for production.
C. Inspecting goods to ensure the right quantity is being shipped.
D. E-mailing a customer to assure that a complaint will be resolved expeditiously.
E. More than one of these answer choices is a high-value-added activity.
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33. Engineering change orders, maintenance of equipment used in manufacturing, and product
design costs are examples of:
A. Unit costs.
B. Batch costs.
C. Product-level costs.
D. Facility-level costs.
E. Unit, batch, and customer-sustaining costs, respectively.
34. In an activity-based costing system, overhead costs are divided into separate:
A. Cost objects.
B. Activity cost pools.
C. Resource consumption and activity consumption cost drivers.
D. Product-line cost pools.
E. Plantwide or departmental cost pools.
35. Which of the following would likely be the most appropriate cost driver to allocate machine
set-up costs to products?
A. Machine hours.
B. Direct labor hours.
D. Number of products.
E. Number of purchase orders.
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36. A firm has many products, some produced in an automated production process and some
produced in a manual production process. Using direct labor hours to assign manufacturing
overhead to a product manufactured with a highly automated process is likely to:
A. Overstate overhead of the product.

B. Understate overhead of the product.
C. Overapply overhead to the period.
D. Underapply overhead to the period.
E. Have no effect on overhead of the product.
37. Activity-based costing for manufacturing operations is used to assign:
A. Direct material and direct labor costs to products.

B. Direct labor and manufacturing overhead costs to products.
C. Manufacturing overhead costs to products.
D. Selling and general administrative overhead costs to products.
E. Selling and general administrative overhead and manufacturing overhead costs to
products.
38. The use of activity-based costing is most appropriate for:
A. Firms that manufacture multiple product lines.

B. Firms that have very low manufacturing overhead costs relative to other costs of
production.
C. Firms with high levels of production activity.
D. Firms that are labor intensive.
E. Firms that manufacture a small number of product lines.
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39. Which of the following is a benefit of activity-based costing?
A. Reduced overhead costs.

B. More accurate measures of production volume.
C. Facilitate better product pricing decisions.
D. Having fewer cost drivers than volume-based costing systems.
E. More streamlined manufacturing processes.
40. Which of the following is not normally associated with activity-based costing?
A. Activity cost pools.

B. Multiple cost drivers.
C. Reduction of non-value-adding costs.
D. High direct labor costs relative to manufacturing overhead costs.
E. Improved decision-making and pricing.
41. Which of the following is not considered a benefit of activity-based costing?
A. Decreased production activity levels.

B. Improved understanding of cost of capacity.
C. A better understanding of processes.
D. Improved planning.
E. Improved strategic decisions.
42. Which of the following would be the most appropriate cost driver to allocate factory electricity
costs to products?
A. Machinery depreciation expense.

B. Machinery maintenance work orders.
C. Machinery down-time.
D. Machine hours.
E. Machine productivity.
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43. Which of the following activity cost pools would most likely be allocated based on the number
of production runs?
A. Machinery set-up costs.

B. Raw materials warehousing costs.
C. Factory heating costs.
D. Factory janitorial costs.
E. Indirect labor costs.
44. Which of the following is most likely to be the cost driver for the packaging and shipping
activity?
A. Number of setups.
B. Number of components.
D. Hours of testing.
E. Number of production runs.
45. Activity-based costing systems:
A. Accumulate overhead costs by departments.

B. Are less complex and therefore less costly than volume-based systems.
C. Can be used in manufacturing firms only.
D. Have separate overhead rates for each activity.
E. Eliminate multiple-stage cost allocation.
46. Which of the following is not true regarding activity-based costing (ABC) systems?
A. ABC can provide more accurate product costs.

B. ABC identifies more costs as indirect costs than do traditional volume-based systems.
C. ABC is likely to be more time-consuming than volume-based systems.
D. ABC is used in both manufacturing and non-manufacturing companies.
E. ABC is likely to have more overhead rates than volume-based systems.
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47. All of the following are low-value-added activities except:
A. Processing.
B. Reworking.
C. Moving.
D. Inspection.
E. Warranty service.
48. Which of the following cost pools are used to classify costs under activity-based costing?
Unit Batch Product Facility
A) Yes Yes Yes No
B) Yes Yes Yes Yes
C) No Yes Yes No
D) Yes No Yes Yes
E) Yes Yes No No
A. Option A
B. Option B
C. Option C
D. Option D
E. Option E
49. Purchase order, set-up, and inspection costs are examples of:
A. Unit-level costs.
B. Batch-level costs.
E. Department-level costs.
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50. Which of the following would not be considered a facility-level activity?
A. Providing security for the plant.

B. Factory property taxes and insurance.
C. Closing the books each month.
D. Placing purchase orders.
51. Costs at the unit-level of activity should be allocated to products using cost drivers that are:
A. Customer-oriented.
B. Design-related.
C. Volume-related.
D. Product-related.
E. Order-related.
52. If a costing system uses a single base to allocate overhead costs that are results of several
production activities:
A. Products that use relatively more of this base tend to be undercosted.

B. Products that use relatively less of this base tend to be overcosted.
C. Products that use relatively more of this base tend to be overcosted.
D. Products may be over- or under-costed, depending on the activity level.
E. Products may be over- or under-costed, depending on the overhead rate.
53. Procurement costs such as costs of placing orders for materials and paying suppliers are
usually classified as:
A. Output-unit-level costs.
E. Vendor costs.
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54. The cost of sales visits is a:
A. Customer unit-level cost.

B. Customer batch-level cost.
C. Customer-sustaining cost.
D. Distribution-channel cost.
E. Sales-sustaining cost.
55. Freight charges based on number of units shipped to customers is a:

E. Sales-level cost.
56. Processing sales returns and allowances is usually classified as a:

57. Invoicing cost is an example of a:

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58. The cost to process monthly statements is an example of a:

59. The costs of operating a regional warehouse is an example of a:

60. General corporate sales expenditures are:
A. Customer unit-level costs.

B. Customer batch-level costs.
C. Customer-sustaining costs.
D. Distribution-channel costs.
E. Sales-sustaining costs.
61. The general sales manager's salary is an example of a:

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62. Which of the following is a description of categorizing related customer costs into cost pools
on the basis of cost drivers?
A. Customer revenue analysis.

B. Customer cost analysis.
C. Customer profitability analysis.
D. Customer value assessment.
E. Customer equity analysis.
5-18
63. Wings Co. budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours, and had
the following manufacturing overhead:
Overhead Cost Budgeted Overhead Budgeted Level for Cost Overhead Cost
Pool Cost Driver Driver
Materials handling $160,000 3,200 pounds Weight of materials
Machine setup 13,200 390 setups Number of setups
Machine repair 1,380 30,000 machine hours Machine hours
Number of
Inspections 10,560 160 inspections
inspections
Requirements for Job #971 which manufactured 4 units of product:
Direct labor 20 hours
Direct materials 130 pounds
Machine setup 30 setups
Machine hours 15,000 machine hours
Inspections 15 inspections
If Wings uses a volume-based overhead rate based on direct labor hours, the manufacturing
overhead for Job #971 is:
A. $990.
B. $1,020.
C. $1,600.
D. $3,460.
E. $6,400.
5-19
Number of
inspections
Using ABC, the materials handling overhead cost assigned to Job #971 is:
A. $2,300.
B. $990.
C. $6,500.
D. $690.
E. $1,020.
5-20
Number of
inspections
Using ABC, overhead cost assigned to Job #971 for machine setup is:
A. $2,300.
B. $990.
C. $6,500.
D. $690.
E. $1,020.
5-21
Number of
inspections
Using ABC, overhead cost assigned to Job #971 for machine repair is:
A. $2,300.
B. $990.
C. $6,500.
D. $690.
E. $1,020.
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Overhead Cost Budgeted Overhead Overhead Cost

Budgeted Level for Cost Driver
Pool Cost Driver
Number of
inspections
Using ABC, overhead cost assigned to Job #971 for inspections is:
A. $2,300.
B. $990.
C. $6,500.
D. $690.
E. $1,020.
5-23
Number of
inspections
The total overhead of Job #971 under the ABC costing is:
A. $95.
B. $380.
C. $1,520.
D. $2,300.
E. $9,200.
5-24
69. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and
digital camcorders.
Model Annual Sales in Units
High F 10,000
Great P 16,000
National uses a volume-based costing system to apply factory overhead based on direct
labor dollars. The unit prime costs of each product were as follows:
High F Great P
Direct materials $38.00 $25.40
Direct labor $17.52 $13.14
Budget factory overhead:
Engineering and Design 2,409 engineering hours $404,712
Quality Control 12,848 inspection hours 269,808
Machinery 33,726 machine hours 539,616
Miscellaneous Overhead 26,400 direct labor hours 134,904
Total $1,349,040
National's controller had been researching activity-based costing and decided to switch to it.
A special study determined National's two products have the following budgeted activities:
High F Great P
Engineering and design hours 969 1,440
Quality control inspection hours 5,648 7,200
Machine hours 20,286 13,440
Labor hours 12,000 14,400
What is the overhead application rate using the firm's volume-based costing system
(rounded to the nearest percent or cents)?
A. 350 percent of direct labor cost.

B. $51.89 per direct labor-hour.
C. 68 per cent of direct labor cost.
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D. 5,189 percent of direct labor cost.
E. 5,110 percent of direct labor cost.
5-26
digital camcorders.
High F 10,000
Great P 16,000
High F Great P
Budget factory
overhead:
Total $1,349,040
High F Great P
Using the firm's volume-based costing, applied factory overhead per unit for the High F
model is (rounded to the nearest cent):
A. $61.32.
B. $65.43.
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C. $43.42.
D. $45.99.
E. $54.04.
5-28
digital camcorders.
High F 10,000
Great P 16,000
High F Great P
Total $1,349,040
High F Great P
Using the firm's volume- based costing, applied factory overhead per unit for the Great P
A. $61.32.
B. $65.43.
C. $43.42.
5-29
D. $45.99.
E. $54.04.
5-30
digital camcorders.
High F 10,000
Great P 16,000
High F Great P
Total $1,349,040
High F Great P
Using activity-based costing, applied engineering and design factory overhead for the High F
model per unit is (rounded to the nearest cent):
A. $6.13.
B. $11.86.
C. $16.28.
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D. $32.46.
E. $66.73.
5-32
digital camcorders.
High F 10,000
Great P 16,000
High F Great P
Total $1,349,040
High F Great P
Using activity-based costing, applied quality control factory overhead for the High F model
per unit is (rounded to the nearest cent):
A. $6.13.
B. $11.86.
C. $16.28.
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D. $32.46.
E. $66.73.
5-34
digital camcorders.
High F 10,000
Great P 16,000
High F Great P
Total $1,349,040
High F Great P
Using activity-based costing, applied machinery overhead for the High F model per unit is
(rounded to the nearest cent):
A. $6.13.
B. $11.86.
C. $16.28.
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D. $32.46.
E. $66.73.
5-36
digital camcorders.
High F 10,000
Great P 16,000
High F Great P
Total $1,349,040
High F Great P
Using activity-based costing, applied miscellaneous overhead for the High F model per unit
is (rounded to the nearest cent):
A. $6.13.
B. $11.86.
C. $16.28.
5-37
D. $32.36.
E. $66.73.
5-38
digital camcorders.
High F 10,000
Great P 16,000
High F Great P
Total $1,349,040
High F Great P
Using activity-based costing, total overhead per unit of the High F model is (rounded to the
nearest cent):
A. $42.61.
B. $45.99.
C. $61.32.
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D. $66.73.
E. $168.00.
5-40
digital camcorders.
High F 10,000
Great P 16,000
High F Great P
Total $1,349,040
High F Great P
Using activity-based costing, applied engineering and design factory overhead for the Great
P model per unit is (rounded to the nearest cent):
A. $4.60.
B. $9.45.
C. $13.44.
5-41
D. $15.12.
E. $42.61.
5-42
digital camcorders.
High F 10,000
Great P 16,000
High F Great P
Total $1,349,040
High F Great P
Using activity-based costing, applied quality control factory overhead for the Great P model
per unit is (rounded to the nearest cent):
A. $4.60.
B. $9.45.
C. $13.44.
5-43
D. $15.12.
E. $42.61.
5-44
digital camcorders.
High F 10,000
Great P 16,000
High F Great P
Total $1,349,040
High F Great P
Using activity-based costing, applied machinery overhead for the Great P model per unit is
A. $4.60.
B. $9.45.
C. $13.44.
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D. $15.12.
E. $42.61.
5-46
digital camcorders.
High F 10,000
Great P 16,000
High F Great P
Total $1,349,040
High F Great P
Using activity-based costing, applied miscellaneous overhead for the Great P model per unit
A. $4.60.
B. $9.45.
C. $13.44.
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D. $15.12.
E. $42.61.
5-48
digital camcorders.
High F 10,000
Great P 16,000
High F Great P
Total $1,349,040
High F Great P
Using activity-based costing, total overhead per unit of Great P model is (rounded to the
nearest cent):
A. $42.61.
B. $45.99.
C. $61.32.
5-49
D. $66.73.
E. $168.00.
82. Sheen Co. manufacturers laser printers. It has outlined the following overhead cost drivers:
Overhead Costs Pool Cost Driver Overhead Cost Budgeted Level for Cost Driver
Quality control Number of inspections $64,800 1,080
Machine operation Machine hours 132,000 1,100
Materials handling Number of batches 900 30
Miscellaneous overhead cost Direct labor hours 48,000 4,000
Sheen Co. has an order for 1,000 laser printers that has the following production
requirements:
Number of inspections 175
Machine hours 180
Number of batches 5
Direct labor hours 650
Using activity-based costing, applied quality control factory overhead for the 1,000 laser
printers order is:
A. $7,800.
B. $10,000.
C. $10,500.
D. $150.
E. $21,600.
5-50
requirements:
Machine hours 180
Number of batches 5
Using activity-based costing, applied machine repetition overhead for the 1,000 laser printers
order is:
A. $7,800.
B. $10,000.
C. $10,500.
D. $150.
E. $21,600.
5-51
requirements:
Machine hours 180
Number of batches 5
Using activity-based costing, applied materials handling factory overhead for the 1,000 laser
printers order is:
A. $7,800.
B. $10,000.
C. $10,500.
D. $150.
E. $21,600.
5-52
requirements:
Machine hours 180
Number of batches 5
Using activity-based costing, applied miscellaneous factory overhead for the 1,000 laser
printers order based on direct labor hours is:
A. $7,800.
B. $10,000.
C. $10,500.
D. $150.
E. $21,600.
5-53
requirements:
Machine hours 180
Number of batches 5
What is the total overhead cost per unit of the laser printers order using activity-based
costing (rounded to the nearest cent)?
A. $39.55.
B. $40.05.
C. $42.25.
D. $50.65.
E. $58.30.
5-54
87. Diamond Cleats Co. manufactures cleats for baseball shoes. It has outlined the following
overhead cost drivers:
Overhead Cost Budgeted Level for Cost

Overhead Cost Pool Cost Driver Budgeted
Driver
Quality Control # of inspections $78,000 1,200
Machine Time Machine hours 188,000 800
Materials Handling # of Batches 1,200 50
Miscellaneous Overhead Direct labor

59,000 5,000
Cost hours
Diamond Cleats Co. has an order for cleats that has the following production requirements:
Number of Inspections 375
Number of Machine hours 220
Number of Batches 8
Direct Labor Hours 840
Using activity-based costing, applied quality control factory overhead for the baseball cleat
order is:
A. $28,450.
B. $30,220.
C. $24,375.
D. $21,150.
E. $19,600.
5-55

Driver

59,000 5,000
Cost hours
Number of Batches 8
Using activity-based costing, applied machine overhead for the baseball cleat order is:
A. $47,800.
B. $55,300.
C. $40,500.
D. $59,150.
E. $51,700.
5-56

Driver

59,000 5,000
Cost hours
Number of Batches 8
Using activity-based costing, applied materials handling factory overhead for the baseball
cleat order is:
A. $338.
B. $584.
C. $192.
D. $353.
E. $686.
5-57

Driver

59,000 5,000
Cost hours
Number of Batches 8
Using activity-based costing, applied miscellaneous factory overhead for the baseball cleat
order based on direct labor hours is:
A. $8,745.
B. $10,312.
C. $10,489.
D. $9,912.
E. $8,456.
5-58

Driver

59,000 5,000
Cost hours
Number of Batches 8
ABC costing helps an organization implement its strategy through all of the following means
except:
A. Providing accurate cost information.

B. Identifying the most profitable products and customers.
C. Helping improve cycle time.
D. Identifying value added and non-value added activities.
E. Providing a basis for effective utilization of capacity.
92. If Activity X had a budgeted cost of $125,000 and a budgeted activity consumption of 10,000
engineering hours, what would the activity consumption rate be?
A. $10 per hour.

B. $12.50 per hour.
C. $0.08 per hour.
D. 0.10 per hour.
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93. Customer lifetime value is a type of analysis used to:
A. Assess the ethical practices of each salesperson-customer relationship.

B. Assess the current profit potential of a customer.
C. Assess the long term profit potential of a customer.
D. Assess the current profit potential of all the firm's customers.
E. Assess the long term profit potential of all the firm's customers.
94. The cost of unused capacity can be determined using ABC costing for the purpose of:
A. Determining more accurately the ABC costs.

B. Helping managers plan the short and longer-term use of the operating resources.
C. Determining product profitability.
D. Completing an effective activity analysis.
E. All of these answer choices are correct.
95. Multistage ABC is used when:
A. There are many departments in the organization.

B. Management wants a higher level of accuracy from the ABC calculations.
C. There are complex relationships among the activities.
D. To simplify the ABC calculations.
E. There is no such thing as Multistage ABC.
96. An adaptation of ABC costing that simplifies ABC by assigning resource costs directly to cost
objects is called:
B. Multistage ABC.
C. Time-Driven ABC.
D. Resource Consumption Accounting.
E. Customer profitability analysis.
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97. The Time Equation is used in ABC to:
A. Track the implementation of the ABC system.

B. Assess the amount of time required for each activity, in determining the application rate.
C. Incorporate complexities in the application of ABC.
D. Plan for the implementation of an ABC system.
98. In the context of ABC, cross-subsidization refers to:
A. Production departments subsidizing each other.

B. Costing inaccuracies which affect the relative profitability of products.
C. Cross-selling products lines, which affect customer profitability.
D. Efforts to increased coordination among department heads.
99. Important concepts in resource consumption accounting include all of the following except:
A. Variable costing.
B. Resource interrelationships.
C. Activity interrelationships.
D. Detail level cost information.
E. Treatment of idle capacity.
100.Time-driven ABC provides a direct way to measure:
A. Production efficiency.
B. Unused capacity.
C. Product line profitability.
D. Value-adding activities.
E. Customer value.
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101.Everlast Co. manufactures a variety of drill bits. The company's plant is partially automated.
The budget for the year includes $432,000 payroll for 4,800 direct labor-hours. Listed below
is cost driver information used in the product-costing system:
Overhead Cost Pool Budgeted Overhead Cost Driver Estimated Cost Driver Level
Machine setups $120,000 # of setups 120 setups
Materials handling 104,400 # of barrels 8,700 barrels
Quality control 264,000 # of inspections 1,100 inspections
Other overhead cost 144,000 # of machine hours 12,000 machine hours
Total overhead $632,400
A current product order has the following requirements:
Machine setups 8 setups
Materials handling 606 barrels
Quality inspections 80 inspections
Machine hours 830 machine hours
Direct labor hour 336 hours
What is the total manufacturing overhead for the current product order if the firm uses a
plantwide rate based on direct labor-hours?
A. $9,960.
B. $30,240.
C. $43,741.
D. $44,268.
E. $109,352.
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What is the total manufacturing overhead for the current product order if the firm assigns
overhead costs based on machine hours?
A. $9,960.
B. $30,240.
C. $43,741.
D. $44,268.
E. $109,352.
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Using ABC, how much machine setup overhead is assigned to the order?
A. $19,200.
B. $8,000.
C. $11,108.
D. $9,960.
E. $7,272.
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Using ABC, how much material handling overhead is assigned to the order?
A. $19,200.
B. $8,000.
C. $11,108.
D. $9,960.
E. $7,272.
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Using ABC, how much quality control overhead is assigned to the order?
A. $8,000.
B. $9,960.
C. $11,108.
D. $19,200.
E. $45,933.
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Using ABC, how much other overhead is assigned to the order?
A. $8,000.
B. $9,960.
C. $11,108.
D. $19,200.
E. $45,992.
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Using ABC, how much total overhead is assigned to the order?
A. $42,160.
B. $43,740.
C. $44,268.
D. $44,432.
E. $45,993.
5-68
108.Shaver Co. manufactures a variety of electric razors for men and women. The company's
plant is partially automated. Listed below is cost driver information used in the product-
costing system:
Budgeted Overhead Budgeted Cost Driver

Overhead Cost Pool Cost Driver
Cost Level
Machinery
$168,640 27,200 Machine hours
depreciation/maintenance
Factory
127,840 27,200 Machine hours
depreciation/utilities/insurance
Product design 554,400 38,500 Hours in design
Pounds of raw
Material handling 1,078,000 134,750
materials
In addition, Shaver expects to spend $514,368 for 8,037 direct labor-hours. Two current
product orders had the following requirements:
Men’s Women’s
Razors Razors
Units produced and

20,000 26,000
sold
Direct labor hours 30 40
Pounds of raw
860 750
materials
Hours in design 20 23
Machine hours 65 50
What is the total manufacturing overhead assigned to the current order for Men's Razors if
the firm uses a volume-based plant wide overhead rate based on direct labor dollars?
A. $112.50.
B. $150.00.
C. $243.75.
D. $7,200.00.
E. $15,600.00.
5-69
costing system:

Cost Level
Machinery
Factory
Pounds of raw
materials
Men’s Women’s
Razors Razors
Units produced and

20,000 26,000
sold
Pounds of raw
860 750
materials
Machine hours 65 50
What is the total manufacturing overhead assigned to the current order for Women's Razors
if the firm uses a volume-based plant wide overhead rate based on direct labor hours?
A. $112.50.
B. $150.00.
C. $187.50.
D. $9,600.00.
E. $12,000.00.
5-70
costing system:

Cost Level
Machinery
Factory
Pounds of raw
materials
Men’s Women’s
Razors Razors
Units produced and

20,000 26,000
sold
Pounds of raw
860 750
materials
Machine hours 65 50
Using ABC, how much facility-level overhead is assigned to the current order for Men's
Razors?
A. $403.00.
B. $310.00.
C. $708.50.
D. $545.00.
E. $936.00.
5-71
costing system:

Cost Level
Machinery
Factory
Pounds of raw
materials
Men’s Women’s
Razors Razors
Units produced and

20,000 26,000
sold
Pounds of raw
860 750
materials
Machine hours 65 50
Using ABC, how much product-level overhead is assigned to the current order for Men's
Razors?
A. $218.00.
B. $250.70.
C. $331.20.
D. $284.00.
E. $288.00.
5-72
costing system:

Cost Level
Machinery
Factory
Pounds of raw
materials
Men’s Women’s
Razors Razors
Units produced and

20,000 26,000
sold
Pounds of raw
860 750
materials
Machine hours 65 50
Using ABC, how much product-level overhead is assigned to the current order for Women's
Razors?
A. $218.00.
B. $250.70.
C. $331.20.
D. $284.00.
E. $288.00.
5-73
costing system:

Cost Level
Machinery
Factory
Pounds of raw
materials
Men’s Women’s
Razors Razors
Units produced and

20,000 26,000
sold
Pounds of raw
860 750
materials
Machine hours 65 50
Using ABC, how much batch-level overhead is assigned to the current order for Women's
Razors based on pounds of raw materials?
A. $6,000.
B. $6,880.
C. $5,332.
D. $8,175.
E. $9,374.
5-74
114.Wang Company has established the following overhead cost pools and cost drivers for the
month of May:
Overhead Cost Driver

Cost Pool
Costs Levels
Purchase
$30,000 50 orders
orders
Machine
50,000 100 setups
setups
10,000 kilowatt
Electricity 10,000
hours
The following information pertains to the actual consumption of activity resources for two
sample jobs completed during May.
Job M1 Job M2
Number of units produced 500 1,000
Number of purchase orders 15 10
Number of setups 20 10
Number of kilowatt hours 500 1,000
What is the activity-based overhead rate per purchase order?
A. $615.
B. $600.
C. $575.
D. $550.
E. $500.
5-75
115.Wang Company has established the following overhead cost pools and cost drivers for the
month of May:

Cost Pool
Costs Levels
Purchase
$30,000 50 orders
orders
Machine
50,000 100 setups
setups
10,000 kilowatt
Electricity 10,000
hours
Job M1 Job M2
Using ABC, what is the overhead cost per unit produced for Job M2?
A. $39.
B. $25.
C. $20.
D. $12.
E. $10.
5-76
116.Orange, Inc. has identified the following cost drivers for its expected overhead costs for the
year:
Cost
Budgeted Cost
Cost Pools Driver
Cost Driver
Level
Number of
Setup $40,000 200
setups
Number of
Ordering 20,000 1,000
orders
Machine
Maintenance 50,000 5,000
hours
Kilowatt
Power 10,000 10,000
hours
Total direct labor hours budgeted = 2,000 hours.
The following data applies to Product X, one of the products completed during the year.
Direct materials $1,000
Direct labor $1,200
Units completed 100
Number of setups 4
Number of orders 8
Machine hours 50
Kilowatt hours 100
If a volume-based costing system based on direct labor hours to assign overhead is used,
the total overhead cost for Product X will be:
A. $1,500.
B. $1,560.
C. $2,000.
D. $2,400.
E. $2,560.
5-77
117.Orange, Inc. has identified the following cost drivers for its expected overhead costs for the
year:
Cost
Budgeted Cost
Cost Pools Driver
Cost Driver
Level
Number of
Setup $40,000 200
setups
Number of
Ordering 20,000 1,000
orders
Machine
hours
Kilowatt
Power 10,000 10,000
hours
Direct labor $1,200
Units completed 100
Number of setups 4
Number of orders 8
Machine hours 50
Kilowatt hours 100
If the activity-based cost drivers are used to allocate overhead cost, the total overhead cost
of Product X will be:
A. $1,500.
B. $1,560.
C. $2,000.
D. $2,400.
E. $2,560.
5-78
118.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 manufacturing overhead that
should be assigned to each of the two product lines from the information given below.
Wall Specialty
Mirrors Windows
Total units produced 25 25
Total number of
5 15
material moves
Direct labor hours per

200 200
unit
Budgeted material-handling costs are $50,000.
Under a costing system that allocates manufacturing overhead on the basis of direct labor
hours, the material-handling cost per wall mirror is:
A. $0.
B. $500.
C. $1,000.
D. $2,000.
E. $5,000.
5-79
119.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 manufacturing overhead that
Wall Specialty
Mirrors Windows
Total number of
5 15
material moves

200 200
unit
The material-handling cost per wall mirror under ABC is:
A. $0.
B. $500.
C. $1,000.
D. $2,000.
E. $5,000.
5-80
120.Pasternik Company produces and sells two products, Alpha and Zeta. The following
information is available relating to its setup activities:
Alpha Zeta
Units produced 250 20,000
Batch size (units) 10 500
Total direct labor hours 1,000 39,000
Cost per setup $2,000 $2,000
With a volume-based costing system that applies overhead based on direct labor hours, the
setup cost portion of overhead for each unit is (rounded to the nearest cent):
Alpha Zeta
A) $3.25 $3.25
B) $13.00 $6.34
C) $8.00 $0.10
D) $25.50 $25.50
E) $102.00 $49.73
A. Option A
B. Option B
C. Option C
D. Option D
E. Option E
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Alpha Zeta
Use of activity-based costing would allocate the following amounts of setup cost to each
unit (rounded to the nearest cent):
Alpha Zeta
A) $200.00 $4.00
B) $500.00 $1,025.64
C) $6.42 $6.50
D) $80.00 $50.00
E) $8.00 $0.10
A. Option A
B. Option B
C. Option C
D. Option D
E. Option E
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Alpha Zeta
Assume the cost per setup remains at $2,000 but that the batch size for product Alpha is
changed from 10 to 25 units per batch. Using activity-based and a volume-based overhead
costing that uses direct labor-hours to assign overhead, the amount of setup cost applied to
each unit of product Alpha would be (rounded to the nearest cent):
Activity Based Volume Based

Costing Costing
A) $400.00 $9.00
B) $500.00 $8.00
C) $80.00 $10.00
D) $2.25 $4.50
E) None of these answer choices is correct.
A. Option A
B. Option B
C. Option C
D. Option D
E. Option E
5-83
123.Nerrod Company sells its products at $500 per unit, net 30. The firm's gross margin ratio is
40 percent. The firm has estimated the following operating costs:
Activity Cost Driver and Rate
Sales calls $400 per visit
Order
$100 per order
processing
Deliveries $50 per order + $0.50 per mile
$60 per return and $3 restocking

Sales returns
per unit returned
Nerrod Company has gathered the following data pertaining to activities it performed for two
of its customers:
XBT NINTO
Number of orders 10 2
Number of parts per

500 2.000
order
Sales returns:
Number of returns 4 10
Number of units
40 50
returned
Number of sales calls 6 10
Miles per delivery 10 20
FOB, FOB,
Shipping terms
Factory Destination
What is Nerrod's total customer-sustaining cost applicable to Ninto?
A. $400.
B. $600.
C. $4,000.
D. $6,300.
E. $6,420.
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Order
$100 per order
processing

Sales returns
per unit returned
of its customers:
XBT NINTO
Number of parts per

500 2.000
order
Sales returns:
Number of units
40 50
returned
FOB, FOB,
Shipping terms
Factory Destination
What is Nerrod's total customer batch-level cost applicable to Ninto?
A. $800.
B. $920.
C. $2,300.
D. $2,420.
E. $6,300.
5-85
Order
$100 per order
processing

Sales returns
per unit returned
of its customers:
XBT NINTO
Number of parts per

500 2.000
order
Sales returns:
Number of units
40 50
returned
FOB, FOB,
Shipping terms
Factory Destination
What is Nerrod's total sales-sustaining cost applicable to XBT as a customer?
A. $0.
B. $920.
C. $4,120.
D. $6,300.
E. $6,420.
5-86
Order
$100 per order
processing

Sales returns
per unit returned
of its customers:
XBT NINTO
Number of parts per

500 2.000
order
Sales returns:
Number of units
40 50
returned
FOB, FOB,
Shipping terms
Factory Destination
What is Nerrod's total customer unit-level cost applicable to XBT as a customer?
A. $50.
B. $480.
C. $4,120.
D. $4,125.
E. $6,300.
5-87
127.Service and not-for-profit organizations often:
A. Have ABC systems which are similar to those of manufacturing firms.

B. Do not have changeable outputs.
C. Are unable to benefit from ABC costing.
D. Do not have ABC systems which are similar to those of manufacturing firms.
128.Customer profitability analysis:
A. Always shows that the company with the highest total sales generates the highest net
customer profit.
B. Always shows that the company with the lowest total sales generates the lowest net
customer profit.
C. Produces the same results as a Pareto analysis.
D. Helps identify actions that affect customer profitability.
Essay Questions
5-88
129.Scott Cameras produces digital cameras and have decided to switch from a volume-based
system to an activity-based system. Scott produced 100,000 digital cameras in the most
recent quarter and has determined that their total activity costs were: $3,000,000 of
materials cost, $500,000 of labor costs, $1,000,000 of inspection costs, and $500,000 of
packaging costs. It takes 30 minutes of labor to produce each camera, inspections are done
for 20% of all cameras produced, and cameras are packaged individually.
Required:
What are the driver rates for each activity?
130.Plant overhead for ABC Corp in $150 million per year, a portion of which (20%) is attributable
to inspection costs which are charged to products on the basis the number of parts in the
products. The plant produces 500,000 units per year, and on the average, each product has
20 parts.
Required:
What is the average inspection cost in a product? What is the inspection cost for a product
with 50 parts?
5-89
131.Johnson Associates is a catering firm in Tucson, Arizona, with revenue of $4 million. The
business began ten years ago as a one-owner bakery, but has dramatically changed in size
and function during the past five years. The four partners foresee the business doubling in
sales revenue within two years, and expect the firm to expand into other services including
flowers, furnishings, decorations, and music. Johnson Associates employs six full-time and
ten part-time employees. The four partners also work full-time, each partner managing a
separate business function. The firm currently uses a volume-based costing system installed
seven years ago and modified three years later.
Required:
(1) With just the above information, comment on Johnson Associates changing and future
costing system needs.
(2) Is Johnson Associates a probable candidate for an activity-based costing system (ABC)?
Why or why not?
5-90
132.Two students in a cost accounting class were arguing about the need to gather good unit
cost information for manufacturing. One student, Travis, maintained that a firm producing
and selling large quantities of relatively few products would have no need for an ABC system,
since an ABC system is usually more expensive to implement than a volume-based system.
Alicia countered that even firms with high-volume homogeneous products could benefit from
a cost management technique like activity-based costing (ABC).
Required:
Choose sides in this discussion and present justifications for your choice.
5-91
133.The controller for Alabama Cooking Oil Co. established the following overhead cost pools and
cost drivers:
Material handling 124,800 # of barrels 7,800 barrels
Other overhead cost 172,500 # of machine hrs 11,500 machine hrs
An order of 800 barrels of cooking oil used:
# of setups 14
# of barrels 800
# of inspections 22
# of machine hours 1,100
Required:
(1) What is the overhead rate per machine hour if the number of machine hours is used as a
single cost driver under traditional costing system? (Round your intermediate calculation to
the nearest cent and final answer to the nearest whole dollar.)
(2) Using volume-based costing, how much overhead is assigned to the order based on
machine hours as a single cost driver?
(3) Using ABC costing, how much total overhead is assigned to the order?
5-92
134.Blackwelder Co. manufactures a variety of electric razors used by both men and women. The
company's plant is partially automated. The company uses an activity-based cost system.
Listed below is cost driver information used in the product-costing system:

Overhead Cost pool Cost Driver
Cost Level
Machine
Machine depreciation/ $227,500 25,000
hours
Maintenance Factory depreciation/ Machine

154,940 25,400
Utilities/insurance hours
Hours in
Product design 665,720 35,600
design
Raw
Material purchasing/storing 1,293,760 124,400
materials
Two current product orders had the following requirements:
Men’s Women’s
Razors Razor
Units produced and

26,000 30,000
sold
Pounds of raw
980 1,120
materials
Machine hours 85 60
Required:
1. Using ABC costing, how much overhead is assigned to the order for men's razors?
2. Using ABC costing, how much overhead is assigned to the order for women's razors?
5-93
135.Classify each of the following costs as unit-level (U), batch-level (B), product-level (P), or
facility-level (F) costs and identify an appropriate example of a possible cost driver for each
item:
(1) Parts administration

(2) Production scheduling
(3) Materials handling
(4) Machine operations
(5) Personnel administration and training
(6) Plant security
(7) Machine setups
(8) Engineering changes
(9) Product design
(10) Rent for factory plant
5-94
136.Pairing Company has the following cost drivers identified as A through F for determining
product manufacturing overhead costs.
(A) Number of pieces of equipment

(B) Number of direct material purchase orders
(C) Number of production runs
(D) Square feet of warehouse space
(E) Number of machine hours
(F) Square feet of factory space
For each of the following activity cost pools, choose the letter of the most appropriate cost
driver for each cost pool.
Heating costs
Machinery power costs
Machinery set-up costs
Equipment maintenance costs
Materials storage costs
Purchasing department costs
5-95
137.Altima Company uses an overhead costing system based on direct labor hours for its two
products X and Y. The company is considering adopting an activity-based costing system,
and collects the following information for the month of October.
Product X Product Y
Production units 20,000 2,000
Direct materials
$50.00 $40.00
cost per unit
Direct labor cost

$10.00 $10.00
per hour
Direct labor
34,000 6,000
hours
Activity
Overhead Overhead Total
Consumption
Product Product
Cost pool cost activity
X Y
Machine 1,000
$60,000 300 700
setup setups
Engineering
100
change 40,000 20 80
orders
order
1,000
Facility rent 90,000 300 700
sq. feet
Required:
(1) Compute the unit manufacturing cost of each product under a volume-based costing
system based on direct labor hours.
(2) Compute the unit manufacturing cost of each product under the activity-based costing
system.
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5-97
138.Castenet Company uses a volume-based costing system that applies overhead cost based on
direct labor hours at $250 per direct labor hour.
The company is considering adopting an activity-based costing system with the following
data:
Cost Driver
Activity Area Cost Driver
Rate
Materials Number of
$1.20
handling parts
Number of
Lathe work 0.30
turns
Number of
Milling 16.00
machine hours
Number of
Grinding 1.25
parts
Number of units
Testing 12.00
tested
The two jobs processed in the month of June had the following characteristics:
Job A Job B
Direct materials costs $10,000 $50,000
Direct labor costs $1,000 $10,000
Number of direct labor hours 40 400
Number of parts 500 2,000
Number of turns 25,000 50,000
Number of machine hours 140 1,000
Number of units in each job (all

15 200
tested)
Required:
1. Compute the unit manufacturing cost of each job under the firm's current volume-based
costing system.
2. Compute the unit manufacturing cost of each job under the activity-based costing system.
3. Compare the unit manufacturing cost for Jobs A and B computed in requirements 1 and 2.
(a) Why do the two cost systems differ in their total cost for each job?
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(b) Why might these differences be important to the Company?
5-99
139.Demski Company has used a two-stage cost allocation system for many years. In the first
stage, plant overhead costs are allocated to two production departments, P1 and P2, based
on machine hours. In the second stage, Demski uses direct labor hours to assign overhead
costs from the production departments to individual products A and B.
Budgeted factory overhead costs for the year are $300,000. Both the budgeted and actual
machine hours in P1 and P2 are 12,000 and 28,000 hours, respectively.
After attending a seminar to learn the potential benefits of adopting an activity-based

costing system (ABC), Ted Demski, the president of Demski Company, is considering
implementing an ABC system. Upon his request, the controller at Demski Company has
compiled the following information for analysis:
Factory Expected
Activity
Cost Pool overhead activity
cost driver
costs level
Machine Setup
$100,000 1,000
setup hours
Inspection
Inspection 50,000 2,500
hours
Kilowatt
Power 50,000 25,000
hours
Direct labor
Supervision 100,000 10,000
hours
Total
overhead $300,000
cost
Demski manufactures two types of product, A and B, for which the following information is
available:
A B
Units produced and sold 5,000 10,000
Direct materials $200,000 $250,000
Direct labor costs $80,000 150,000
Direct labor hours in P1 1,500 3,000
Setup hours 700 300
5-100
Inspection hours 1,500 1,000
Power (kilowatt hours) 12,500 12,500
Required:
1. Determine the unit cost for each of the two products using the traditional two-stage
allocation method. Round calculations to 2 decimal places.
2. Determine the unit cost for each of the two products using the proposed ABC system.
3. Compare the unit manufacturing costs for product A and product B computed in
requirements 1 and 2.
(a) Why do two the cost systems differ in their total cost for each product?
(b) Why might these differences be important to the Demski Company?
5-101
140.Swenson Company manufactures 4,000 units of Deluxe Product and 20,000 units of Regular
Product each year. The company currently uses direct labor-hours to assign overhead cost to
products. The pre-determined overhead rate is:
Manufacturing overhead cost

= $20/DLH
Direct labor hours
Deluxe Regular
Direct labor 20.00 15.00
Factory
overhead:
2.5 DLH ×
50.00
$20/DLH
2.0 DLH ×
40.00
$20/DLH
Total cost per

$110.00 $85.00
unit
Suppose, however, that factory overhead costs are actually caused by the five activities
listed below:
Activity Costs
Machine setups $300,000
Quality Inspections 200,000
Production orders 90,000
Machine-hours worked 330,000
Material receipts 80,000
Total $1,000,000
Also suppose the following transaction data has been collected:
Number of Transactions
Activity Total Deluxe Regular
Machine setups 5,000 3,000 2,000
Quality inspections 8,000 5,000 3,000
Production orders 600 200 400
5-102
Machine-hours worked 33,000 10,000 23,000
Material receipts 800 200 600
Required:
Using the activity-based costing method to calculate unit costs of Deluxe and Regular
products, and compare them with the current direct labor hours-based costing system.
5-103
141.Moss Manufacturing has just completed a major change in its quality control (QC) process.
Previously, products had been reviewed by QC inspectors at the end of each major process,
and the company's ten QC inspectors were charged as direct labor to the operation or job. In
an effort to improve efficiency and quality, a computerized video QC system was purchased
for $250,000. The system consists of a minicomputer, 15 video cameras, other peripheral
hardware, and software.
The new system used cameras stationed by QC engineers at key points in the production
process. Each time an operation changes or there is a new operation, the cameras are
moved, and a new master picture is loaded into the computer by a QC engineer. The camera
takes pictures of the units in process, and the computer compares them to the picture of a
"good" unit. Any differences are sent to a QC engineer who removes the bad units and
discusses the flaws with the production supervisors. The new system has replaced the ten
QC inspectors with two QC engineers.
The operating costs of the new QC system, including the salaries of the QC engineers, have
been included as factory overhead in calculating the company's volume-based factory
overhead rate which is based on direct labor dollars.
The company's president is confused. His vice president of production has told him how
efficient the new system is, yet there is a large increase in the factory overhead rate. The
computation of the rate before and after automation is shown below.
Before After
Budgeted overhead $1,900,000 $2,100,000
Budgeted direct labor 1,000,000 700,000
Budgeted overhead rate 190% 300%
"Three hundred percent," lamented the president, "How can we compete with such a high
factory overhead rate?"
Required:
1. a. Define factory overhead, and cite three examples of typical costs that would be
included in factory overhead.
b. Explain why companies develop factory overhead rates.
2. Explain why the increase in the overhead rate should not have a negative financial impact
on Moss Manufacturing.
3. Explain, in the greatest detail possible, how Moss Manufacturing could change its
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overhead accounting system to eliminate confusion over product costs.
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142.The controller for Ocean Sailboats Inc., a company which uses an automated process to
make sailboats, established the following overhead cost pools and cost drivers:
Budgeted Estimated
Overhead Cost Driver Level
A recent order for sailboats used:
Required:
1. What is the overhead rate per machine hour if the number of machine hours is used as a
single cost driver under traditional costing system?
2. Utilizing traditional costing, how much overhead is assigned to the order based on
3. Utilizing ABC, how much total overhead is assigned to the order?
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143.Skateline Inc. designs and manufactures roller skates. The following data pertain to two of its
major customers: FantasticSkates and SkateToday.
FantasticSkates SkateToday
Total sales $1,500,000 $1,450,000
Sales discount 4% 3%
Sales terms 2/10, n/30 2/10, n/30
Sales returns 5% 2%
Assume sales discounts are taken on total invoice

amount and that returns occur within 10 days of
the sale.
Required:
Compare the net proceeds from each customer to Skateline Inc. 30 days after sale. (rounded
to nearest dollar for each step where applicable).
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144.Certo Health Products was formed two years ago to produce and distribute a newly-patented
protein supplement. Two variations of the original supplement have since been developed
and introduced for general sale. The three products are processed in essentially the same
way, but Ann Marshall, the owner of Certo, anticipates that a half-dozen new products will be
developed for sale in the next two years. These products will not be variations of the
patented supplement, and will require a different production process other than the one
currently used. Ann has asked you to review the current use of a single volume-based rate
and explain the arguments for using departmental rates with activity-based drivers.
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145.Cost Pools and Cost Drivers: Based on a recent study of its manufacturing operations
Johnston Manufacturing Corporation has identified six resource consumption cost drivers.
These cost drivers and their budgeted activity levels for the coming year are:
Activity
Cost Driver
Level
Number of purchase orders 6
Number of production runs (2,500

40
units per production run)
Machine-hours 100,000
Factory space (square feet) 24,000
Units of production 100,000
Engineering hours 20,000
The firm has budgeted the following costs for the year:
Engineering design $600,000
Depreciation—building 50,000
Depreciation—machine 40,000
Electrical power (for factory building) 6,000
Electrical power (for machining) 30,000
Insurance 20,000
Property taxes 15,000
Machine maintenance—labor 11,000
Machine maintenance—materials 9,000
Natural gas (for heating) 8,000
Inspection of finished goods 7,000
Setup wages 20,000
Receiving 10,000
Inspection of direct materials on

3,000
receiving
Purchasing 20,000
Custodial labor 51,000
With the exception of the factory space cost pool, which uses machine-hours as the activity
consumption cost driver, other cost pools have identical resource and activity consumption
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cost drivers.
Required:
1. Identify the most appropriate activity cost pool for each of the cost items and cost driver
for each activity cost pool you identified.
2. Johnston has received a request to quote the price for 4,000 units of a new product. The
production will require 100 engineering-hours and 4,250 machine-hours. What is the
manufacturing overhead per unit the firm should use in determining the price?
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146.Volume-Based Costing Versus ABC: Gorden Company produces a variety of electronic
products. One of its plants produces two laser printers, Speedy and Deluxe. At the beginning
of 2013, the following data were prepared for this plant:
Deluxe Speedy
Quantity 50,000 400,000
Selling price $475.00 $300.00
Unit prime cost 180.00 110.00
Unit overhead cost 20.00 153.60
The unit overhead cost is calculated using the predetermined overhead application rate
based on direct labor-hours.
Upon examining the data, the marketing manager was particularly impressed with the per-
unit profitability of the Deluxe printer and suggested that more emphasis be placed on
producing and selling this product. The plant supervisor objected to this strategy, arguing
that the Deluxe model required a very delicate manufacturing process. The supervisor
believed that the cost of the Deluxe printer was likely to be much higher than reported.
The controller suggests an activity-based costing system and provides the following budget
data pertaining to the period:
Activity Consumption
Overhead Pool
Cost Driver Deluxe Speedy
Activity Rate*
Number of
Setups $2,800 200 100
setups
Machine Machine-
100 100,000 400,000
costs hours
Engineering-
Engineering 40 45,000 120,000
hours
Packing
Packing 20 50,000 200,000
orders
* Cost per unit of cost driver
Required:
1. Using the projected data based on the firm's current costing system, calculate gross profit
per unit and gross profit percentage for each product. Round calculations to 2 decimal
places.
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2. Using the suggested multiple cost drivers' overhead rates, calculate the overhead cost per
unit for each product and determine gross profit per unit and gross profit percentage for each
product.
3. Based on your results, evaluate the suggestion of the marketing manager to emphasize
the Deluxe model.
4. How does ABC contribute to Gorden's competitive advantage?
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147.Customer Profitability Analysis: Boston Depot sells office supplies to area corporations and
organizations. Tom Delayne, founder and CEO, has been disappointed with the operating
results and the profit margin for the last two years. Business forms are mostly a "commodity"
business with low profit margins. To increase profit margins and gain competitive
advantages, Delayne introduced "Desk-Top Delivery" service. The business seems to be as
busy as ever. Yet, the operating income has been declining. To help identify the root cause of
declining profits, he decided to analyze the profitability of two of the firm's major customers:
Omega International (OI) and City of Albion (CA).
According to the customer profitability analysis that Boston Depot conducts regularly,
Boston Depot has the same amount of total sales with both OI and CA. However, the firm
earns a higher gross margin and gross margin ratio from CA than those from the sales to OI,
as demonstrated here:
Customer Profitability Analysis
Omega
City of Albion
International
Sales $80,000 $80,000
Product cost (50,000) (48,000)
Service fees
(14,000) (14,000)
(17.5% of sales)
Gross margin $16,000 $18,000
Gross margin
20% 22.5%
percent
Boston Depot adds a flat 17.5 percent to all sales for expenses incurred in such activities as
handling customers' requests, pick-packing, order delivery, warehousing, and data entry.
However, not all customers require the same level of services. Operation Manager, Jamie
Steel, points out that CA has been a much heavier service user than OI. She shows the
following data to support her belief:
Distribution Services Activities for OI and CA
OI CA
Number of
300 700
requisitions
Requisition line
(all pick- 900 2,100
packing)
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Average number
of cartons in 50 500
warehouse
Number of miles
5 6
per delivery
Controller Rod Jay has been investigating ways to determine the costs of performing various
activities. He summarized his findings:
Total Estimated Estimated Annual
Annual Activity
Expense Level
Requisitions
$3,000,000 Requisitions 300,000
handling
Number of
Warehouse 1,050,000 70,000
cartons
Pick- Pick-pack
900,000 600,000
packing lines
Pick-pack
Data entry 600,000 600,000
lines
Delivery $10 per requisition (delivery) plus

charge $0.30 per mile
Steel points out that activities cost money. Two customers who request different service
activities most likely are not costing the firm the same.
Required:
1. Using activity-based costing, compute the charges per unit of service activities.
2. Using activity-based costing, compute the total distribution costs for each of the
customers.
3. Is the City of Albion a more profitable customer?
4. Is Omega International a better customer for Boston Depot?
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148.Customer Profitability Analysis: Spring Company collected the following data pertaining to
its activities with selected customers.
HS Inc. Adventix Baldwin
Total sales $600,000 $750,000 $900,000
Sales
2% 3% 2%
discount a
Sales terms 2/10,

b
2/10, n/30 1/15, n/60
n/eom
FOB
Shipping FOB FOB
Shipping
terms Destination Destination
point
Sales
returns rate 2% 4% 3%
c
Number of
10 5 50
orders d
Units per
100 250 30
order
Expedited
0 2 5
order
Sales visits 1 1 2
Number of
sales 3 4 10
returns
a
Sales discounts are incentives offered on the full
invoice price
b
Sales terms are an incentive in the form of a
reduction of the net invoice amount to customers
that pay an invoice early
c
Sales returns are all completed within the first
10 days of this billing month
d
Each order is filled in a single delivery
Spring Company mails monthly statements on or before the first day of each month. HS pays
all of its account payables within the payment discount periods. Adventix does not take the
early payment discounts. In fact, the company pays half of its accounts on the date that
these accounts are due and pays the remainder at the end of the following month. Baldwin
also does not take advantage of discounts for early payments. However, it pays its accounts
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on the specified due date. Cost of goods sold is sixty percent of gross sales price. Joan
Lieberman, the controller of Spring Company, has estimated that the cost of working capital
is approximately 2 percent per month.
Lieberman also gathered the following cost data:
Order taking $50 per order
Order processing $75 per order
Delivery $300 per delivery
Expedited orders $500 per order
$10 per unit plus $200

Restocking
per return
Sales visits $800 per visit
Required:
Prepare and interpret a customer profitability analysis for Spring Company. How does it help
Spring Company become more competitive and profitable?
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149.Volume-based Versus ABC Overhead Rate: Medical Arts Hospital (MAH) uses a hospital-
wide overhead rate based on nurse-hours. The intensive care unit (ICU), which has 30 beds,
applies overhead using patient-days. Its budgeted cost and operating data for the year
follow:
Hospital Budget Information
Hospital total overhead $57,600,000
Hospital total nurse-

1,152,000
hours
Budget Cost Driver Information for ICU for the

Month of June
Budget
Budget Cost
Cost Pool Cost Driver
Cost Driver
Activity
Number of
Facilities and
$2,400,000 patient- 7,500
equipment
days
Number of
Nursing care 3,000,000 nurse- 80,000
hours
In June, MAH's intensive care unit had the following operating data:
81,000 nurse-hours
7,250 patient-days
Required:
1. Calculate the ICU's overhead costs for the month of June using
a. The hospital-wide rate

b. The ICU department-wide rate
c. The cost driver rates for the ICU department
2. Explain the differences and determine which overhead assignment method is more
appropriate.
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Chapter 05 Activity-Based Costing and Customer Profitability
Analysis Answer Key
Multiple Choice Questions
1. The major limitation of volume-based costing systems is the use of volume-based:
A. Criteria.
B. Standards.
C. Rates.
D. Variances.
E. Restrictions.
AACSB: Reflective Thinking

AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-01 Explain the strategic role of activity-based costing.
Topic: Strategic Role-Volume-Based Costing
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2. Volume-based rates produce inaccurate product cost when:
A. A large portion of factory overhead cost is not volume-based.

B. Firms produce a diverse mix of products.
C. Large volumes of a product are manufactured.
D. Both a lack of volume-based overhead and there is a large range of products.

Blooms: Understand
Difficulty: 3 Hard
3. If the usage of project activities is not proportional to the number of units produced, then
some managers will be overcharged and others undercharged under the:
A. Activity-based costing
B. Volume-based costing
C. Overhead costing
D. Process costing

Blooms: Understand
Difficulty: 2 Medium
Topic: A Comparison of Volume-Based and Activity-Based Costing
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4. Volume-based overhead rates may cause undesirable strategic effects such as:
A. Incorrect decisions.
B. Unprofitable cross-subsidization of products.
C. Ineffective management of operations for process improvement.
D. All of these answer choices are correct.

Blooms: Understand
Learning Objective: 05-02 Describe activity-based costing (ABC), the steps in developing an ABC system, and the
benefits of an ABC system.
5. Activity-based costing (ABC) differs from other costing approaches in that it more
accurately measures the cost of activities that are:
A. Not proportional to the volume of outputs produced.

B. Directly proportional to the volume of outputs produced.
C. Inversely proportional to the volume of outputs produced.
D. Non-value adding.

Blooms: Understand
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6. In performing activity analysis during the design of an activity-based costing (ABC)
system, the management accountant studies:
A. The cost drivers and managers in the plant.

B. The advice of operation-level managers.
C. The resources, activities, and cost drivers in the operation.
D. The cost allocation methods applicable to the firm.
E. The implementation problems for an ABC system.

AICPA: FN Risk Analysis
Blooms: Remember
Difficulty: 1 Easy
Topic: Identify Cost Drivers
7. Effective implementation of activity-based costing (ABC) requires:
A. Normally the assistance of a consultant.

B. A sophisticated and expensive computer system.
C. Support of top management and key employees.
D. Capturing properly the complexity of the data.
E. ABC has no significant implementation issues.

Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-07 Identify key factors for successful ABC/M implementation.
Topic: ABC/M-Implementation and Enhancement
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8. Elimination of low-value-added activities in a firm should:
A. Be discouraged because of potential harmful effects.

B. Not affect customer value.
C. Not have priority because low-value-added activities have little effect on a firm's
performance.
D. Have priority only when a firm is operating at a loss.
E. Happen naturally if the firm is well-managed.

Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-04 Explain activity-based management (ABM).
Topic: Value-Added Analysis
9. When gathering activity data, which of the following would not be a question that ABC
project team members typically ask employees or managers?
A. Time spent performing the activity

B. Resources required for the activity
C. Where the activity takes place
D. Value the activity has for the customer

AICPA: BB Resource Management
Blooms: Understand
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10. Successful activity-based costing (ABC) implementation depends upon the firm:
A. Having support of consultants with needed expertise.

B. Having a thorough activity analysis.
C. Starting with a relatively simple system.
D. Having well-trained managers.
E. Having adequate computer resources.

Blooms: Understand
11. A measure of the quantity of resources consumed by an activity is:

Blooms: Remember
Difficulty: 1 Easy
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12. A measure of frequency and intensity of demands placed on activities by cost objects is:

Blooms: Remember
Difficulty: 1 Easy
13. An activity that is performed for each unit of production is a(n):
D. Performance-level activity.

Blooms: Understand
Difficulty: 1 Easy
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14. An activity that is performed to support the production of a new custom-order product is
a:
D. Customer-support activity.

Blooms: Understand
Difficulty: 1 Easy
15. Which one of the following is not a unit-level cost driver?
A. Direct labor hours.

B. Direct material dollars.
C. Machine hours.
D. Production orders.

Blooms: Understand
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16. The management of activities to improve the value received by the customer and the
competitiveness of the organization is:
A. Cost driver analysis.

B. Customer profitability analysis.
E. Activity analysis.

Blooms: Remember
Difficulty: 1 Easy
Topic: Activity-Based Costing
17. The examination of the efficiency of each of a firm's activities is:
B. Pareto analysis.
E. Attribute-based management.

Blooms: Remember
Difficulty: 1 Easy
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18. Which one of the following is a high value-added activity?
A. Set-up.
B. Rework.
C. Repair.
D. Storage.
E. Processing.

Blooms: Remember
Difficulty: 1 Easy
19. In regard to selling activities, which one of the following would not be a cost driver for
selling expense?
A. Number of invoices.
B. Number of sales calls.
D. Number of shipments.

Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-06 Use an activity-based approach to analyze customer profitability.
Topic: Customer Cost Analysis
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20. Which one of the following is not a recommendation for a successful implementation of
ABC/M?
A. Obtain support of management and personnel.

B. Complete an activity analysis.
C. Start with a relatively simple system.
D. Use ABC/M on a job that will succeed.
E. All of these answer choices are features of successful ABC/M implementations.

Blooms: Remember
A. Plant management salaries.

B. Depreciation on a highly specialized piece of production equipment.
C. Direct labor.
D. Product design.
E. Materials handling.

Blooms: Understand
Difficulty: 1 Easy
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22. A company using a volume-based overhead assignment (allocation) method will tend to:
A. Overstate the cost of low volume products.

B. Understate the cost of low volume products.
C. Understate the cost of high volume products.
D. Understate the cost of all products.
E. Either understate or overstate the cost of high volume products depending on the
specific manufacturing factors involved.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-03 Determine product costs under both the volume-based method and the activity-based method
and contrast the two.
Topic: Product Costing
A. Output units.
B. Number of engineering change orders.
C. Number of materials handling transactions.
D. Square feet of plant area occupied.
E. Number of employees.

Blooms: Understand
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A. Materials handling.
B. Plant maintenance.
C. Product inspection.
D. Design engineering.
E. Purchase orders.

Blooms: Understand
Difficulty: 1 Easy
25. In an organization that makes furniture, which of the following is a high value-added
activity?
A. Using direct materials in production.

B. Inspecting production.
C. Storing finished goods inventory.
D. Moving work-in-process inventory between work stations.
E. Reworking the product to repair defects.

Blooms: Remember
Difficulty: 1 Easy
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26. Overhead costs are allocated to cost objects in an activity-based costing system in the
following manner:
A. Overhead costs are traced to departments, then costs are traced to products.
B. Overhead costs are traced to activities, then costs are traced to products.
C. Overhead costs are traced to activities, then costs are traced to departments and then
allocated to products.
D. Overhead costs are traced from resources to cost objects.

Blooms: Remember
A. Output units.
B. Number of employees.
D. Number of parts.
E. Machine hours.

Blooms: Understand
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28. Which of the following has the weakest linkage between activity and cost driver?
A) Machine setup Number of setups
Machine
B) Machine hours
maintenance
Lighting on shop Number of kilowatt-

C)
floor hours
Square feet of floor

D) Quality control
space
Weight of materials in
E) Materials Handling
process
A. Option A
B. Option B
C. Option C
D. Option D
E. Option E
AACSB: Analytical Thinking

Blooms: Analyze
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29. A volume-based rate is an appropriate overhead application base when:
A. Several well-differentiated products are manufactured.

B. Direct labor costs are large.
C. Direct material costs are large relative to direct labor costs incurred.
D. Only one product is manufactured.
E. Manufacturing is process-based.

Blooms: Understand
30. Which of the following would likely be the most appropriate cost driver of electric power
used by machines?
A. Number of units.
B. Machine size.
C. Number of machine hours.
D. Number of production runs.
E. Purchase cost of machines.

Blooms: Analyze
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31. Using a volume-based overhead rate based on machine hours to assign manufacturing
overhead to a product line that uses relatively few machine hours is likely to:
A. Overapply overhead to the product line.

B. Underapply overhead to the product line.
C. Understate direct labor costs.
D. Overstate direct labor costs.
E. Either over- or under-apply overhead to the product line depending on many other
factors.

Blooms: Analyze
32. Which of the following is an example of a high-value-added activity?
A. Shipping the customer's order.

B. Scheduling the customer order for production.
C. Inspecting goods to ensure the right quantity is being shipped.
D. E-mailing a customer to assure that a complaint will be resolved expeditiously.
E. More than one of these answer choices is a high-value-added activity.

Blooms: Understand
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33. Engineering change orders, maintenance of equipment used in manufacturing, and
product design costs are examples of:
A. Unit costs.
B. Batch costs.
E. Unit, batch, and customer-sustaining costs, respectively.

Blooms: Remember
Difficulty: 1 Easy
34. In an activity-based costing system, overhead costs are divided into separate:
A. Cost objects.
B. Activity cost pools.
C. Resource consumption and activity consumption cost drivers.
D. Product-line cost pools.
E. Plantwide or departmental cost pools.

Blooms: Remember
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35. Which of the following would likely be the most appropriate cost driver to allocate machine
set-up costs to products?
A. Machine hours.
B. Direct labor hours.
D. Number of products.
E. Number of purchase orders.

Blooms: Analyze
Difficulty: 3 Hard
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36. A firm has many products, some produced in an automated production process and some
produced in a manual production process. Using direct labor hours to assign
manufacturing overhead to a product manufactured with a highly automated process is
likely to:
A. Overstate overhead of the product.

B. Understate overhead of the product.
C. Overapply overhead to the period.
D. Underapply overhead to the period.
E. Have no effect on overhead of the product.

Blooms: Analyze
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37. Activity-based costing for manufacturing operations is used to assign:
A. Direct material and direct labor costs to products.

B. Direct labor and manufacturing overhead costs to products.
C. Manufacturing overhead costs to products.
D. Selling and general administrative overhead costs to products.
E. Selling and general administrative overhead and manufacturing overhead costs to
products.

Blooms: Remember
Difficulty: 1 Easy
38. The use of activity-based costing is most appropriate for:
A. Firms that manufacture multiple product lines.

B. Firms that have very low manufacturing overhead costs relative to other costs of
production.
C. Firms with high levels of production activity.
D. Firms that are labor intensive.
E. Firms that manufacture a small number of product lines.

Blooms: Understand
Difficulty: 1 Easy
Topic: Strategic Role-Activity-Based Costing
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39. Which of the following is a benefit of activity-based costing?
A. Reduced overhead costs.

B. More accurate measures of production volume.
C. Facilitate better product pricing decisions.
D. Having fewer cost drivers than volume-based costing systems.
E. More streamlined manufacturing processes.

Blooms: Understand
40. Which of the following is not normally associated with activity-based costing?
A. Activity cost pools.

B. Multiple cost drivers.
C. Reduction of non-value-adding costs.
D. High direct labor costs relative to manufacturing overhead costs.
E. Improved decision-making and pricing.

Blooms: Remember
Difficulty: 1 Easy
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41. Which of the following is not considered a benefit of activity-based costing?
A. Decreased production activity levels.

B. Improved understanding of cost of capacity.
C. A better understanding of processes.
D. Improved planning.
E. Improved strategic decisions.

Blooms: Understand
Difficulty: 1 Easy
42. Which of the following would be the most appropriate cost driver to allocate factory
electricity costs to products?
A. Machinery depreciation expense.

B. Machinery maintenance work orders.
C. Machinery down-time.
D. Machine hours.
E. Machine productivity.

Blooms: Understand
Difficulty: 1 Easy
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43. Which of the following activity cost pools would most likely be allocated based on the
number of production runs?
A. Machinery set-up costs.

B. Raw materials warehousing costs.
C. Factory heating costs.
D. Factory janitorial costs.
E. Indirect labor costs.

Blooms: Understand
Difficulty: 1 Easy
44. Which of the following is most likely to be the cost driver for the packaging and shipping
activity?
A. Number of setups.
B. Number of components.
D. Hours of testing.
E. Number of production runs.

Blooms: Understand
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45. Activity-based costing systems:
A. Accumulate overhead costs by departments.

B. Are less complex and therefore less costly than volume-based systems.
C. Can be used in manufacturing firms only.
D. Have separate overhead rates for each activity.
E. Eliminate multiple-stage cost allocation.

Blooms: Remember
Difficulty: 1 Easy
46. Which of the following is not true regarding activity-based costing (ABC) systems?
A. ABC can provide more accurate product costs.

B. ABC identifies more costs as indirect costs than do traditional volume-based systems.
C. ABC is likely to be more time-consuming than volume-based systems.
D. ABC is used in both manufacturing and non-manufacturing companies.
E. ABC is likely to have more overhead rates than volume-based systems.

Blooms: Remember
Difficulty: 1 Easy
5-143
47. All of the following are low-value-added activities except:
A. Processing.
B. Reworking.
C. Moving.
D. Inspection.
E. Warranty service.

Blooms: Remember
Difficulty: 1 Easy
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48. Which of the following cost pools are used to classify costs under activity-based costing?
Unit Batch Product Facility
A) Yes Yes Yes No
B) Yes Yes Yes Yes
C) No Yes Yes No
D) Yes No Yes Yes
E) Yes Yes No No
A. Option A
B. Option B
C. Option C
D. Option D
E. Option E

Blooms: Remember
Difficulty: 1 Easy
5-145
49. Purchase order, set-up, and inspection costs are examples of:
A. Unit-level costs.
E. Department-level costs.

Blooms: Remember
50. Which of the following would not be considered a facility-level activity?
A. Providing security for the plant.

B. Factory property taxes and insurance.
C. Closing the books each month.
D. Placing purchase orders.

Blooms: Understand
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51. Costs at the unit-level of activity should be allocated to products using cost drivers that
are:
A. Customer-oriented.
B. Design-related.
C. Volume-related.
D. Product-related.
E. Order-related.

Blooms: Remember
52. If a costing system uses a single base to allocate overhead costs that are results of
several production activities:
A. Products that use relatively more of this base tend to be undercosted.

B. Products that use relatively less of this base tend to be overcosted.
C. Products that use relatively more of this base tend to be overcosted.
D. Products may be over- or under-costed, depending on the activity level.
E. Products may be over- or under-costed, depending on the overhead rate.

Blooms: Analyze
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53. Procurement costs such as costs of placing orders for materials and paying suppliers are
usually classified as:
A. Output-unit-level costs.
E. Vendor costs.

Blooms: Remember
54. The cost of sales visits is a:


Blooms: Remember
Difficulty: 1 Easy
5-148
55. Freight charges based on number of units shipped to customers is a:


Blooms: Remember
Difficulty: 1 Easy
56. Processing sales returns and allowances is usually classified as a:


Blooms: Remember
5-149
57. Invoicing cost is an example of a:


Blooms: Remember
58. The cost to process monthly statements is an example of a:


Blooms: Remember
Difficulty: 1 Easy
5-150
59. The costs of operating a regional warehouse is an example of a:


Blooms: Remember
Difficulty: 1 Easy
Topic: Customer Profitability
60. General corporate sales expenditures are:
A. Customer unit-level costs.

B. Customer batch-level costs.
C. Customer-sustaining costs.
D. Distribution-channel costs.
E. Sales-sustaining costs.

Blooms: Remember
Difficulty: 1 Easy
5-151
61. The general sales manager's salary is an example of a:


Blooms: Remember
Difficulty: 1 Easy
62. Which of the following is a description of categorizing related customer costs into cost
pools on the basis of cost drivers?
A. Customer revenue analysis.

B. Customer cost analysis.
C. Customer profitability analysis.
D. Customer value assessment.
E. Customer equity analysis.

Blooms: Understand
Difficulty: 1 Easy
5-152
63. Wings Co. budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours, and
had the following manufacturing overhead:
Number of
inspections
If Wings uses a volume-based overhead rate based on direct labor hours, the
manufacturing overhead for Job #971 is:
A. $990.
B. $1,020.
C. $1,600.
D. $3,460.
E. $6,400.
1. ($160,000 + $13,260 + $1,380 + $10,560) ÷ 2,315 budgeted hours = $80 per direct
labor hour
2. $80 × 20 Direct labor hours = $1,600 = Manufacturing overhead for Job #971
5-153
AACSB: Knowledge Application
Blooms: Apply
Difficulty: 1 Easy
5-154
Number of
inspections
Using ABC, the materials handling overhead cost assigned to Job #971 is:
A. $2,300.
B. $990.
C. $6,500.
D. $690.
E. $1,020.
1. $160,000 ÷ 3,200 pounds = $50 per pound of direct materials

2. $50 × 130 pounds = $6,500
5-155
Blooms: Apply
Difficulty: 1 Easy
5-156
Number of
inspections
Using ABC, overhead cost assigned to Job #971 for machine setup is:
A. $2,300.
B. $990.
C. $6,500.
D. $690.
E. $1,020.
1. $13,260 ÷ 390 set-ups = $34

2. $34 × 30 setups = $1,020
5-157
Blooms: Apply
Difficulty: 1 Easy
5-158
Number of
inspections
Using ABC, overhead cost assigned to Job #971 for machine repair is:
A. $2,300.
B. $990.
C. $6,500.
D. $690.
E. $1,020.
1. $1,380 ÷ 30,000 machine hours = $.046 per machine hour

2. $.046 × 15,000 machine hours = $690
5-159
Blooms: Apply
Difficulty: 1 Easy
5-160
Overhead Cost Budgeted Overhead Overhead Cost

Budgeted Level for Cost Driver
Pool Cost Driver
Materials Weight of
$160,000 3,200 pounds
handling materials
Number of
inspections
Using ABC, overhead cost assigned to Job #971 for inspections is:
A. $2,300.
B. $990.
C. $6,500.
D. $690.
E. $1,020.
1. $10, 560 ÷ 160 inspections = $66 per inspection

2. $66 × 15 inspections = $990
5-161
Blooms: Apply
Difficulty: 1 Easy
5-162
Number of
inspections
The total overhead of Job #971 under the ABC costing is:
A. $95.
B. $380.
C. $1,520.
D. $2,300.
E. $9,200.
$6,500 + $1,020 + $690 + $990 = $9,200
5-163
Blooms: Apply
5-164
5-165
digital camcorders.
High F 10,000
Great P 16,000
High F Great P
Total $1,349,040
National's controller had been researching activity-based costing and decided to switch to
it. A special study determined National's two products have the following budgeted
activities:
High F Great P
What is the overhead application rate using the firm's volume-based costing system
(rounded to the nearest percent or cents)?
A. 350 percent of direct labor cost.

B. $51.89 per direct labor-hour.
5-166
C. 68 per cent of direct labor cost.
D. 5,189 percent of direct labor cost.
E. 5,110 percent of direct labor cost.
$1,349,040 ÷ [(10,000 × $17.52) + (16,000 × $13.14)] = 3.5

Blooms: Apply
5-167
5-168
digital camcorders.
High F 10,000
Great P 16,000
High F Great P
Total $1,349,040
activities:
High F Great P
Using the firm's volume-based costing, applied factory overhead per unit for the High F
A. $61.32.
B. $65.43.
5-169
C. $43.42.
D. $45.99.
E. $54.04.
$17.52 × 350% = $61.32

Blooms: Apply
5-170
5-171
digital camcorders.
High F 10,000
Great P 16,000
High F Great P
Total $1,349,040
activities:
High F Great P
Using the firm's volume- based costing, applied factory overhead per unit for the Great P
A. $61.32.
B. $65.43.
5-172
C. $43.42.
D. $45.99.
E. $54.04.
$13.14 × 350% = $45.99

Blooms: Apply
5-173
5-174
digital camcorders.
High F 10,000
Great P 16,000
High F Great P
Total $1,349,040
activities:
High F Great P
Using activity-based costing, applied engineering and design factory overhead for the
High F model per unit is (rounded to the nearest cent):
A. $6.13.
B. $11.86.
5-175
C. $16.28.
D. $32.46.
E. $66.73.
1. $404,712 ÷ 2,409 hours = $168 per engineering & design hour

2. $168 × 969 hours = $162,792
3. $162, 792 ÷ 10,000 High F units = $16.28

Blooms: Apply
5-176
5-177
digital camcorders.
High F 10,000
Great P 16,000
High F Great P
Total $1,349,040
activities:
High F Great P
Using activity-based costing, applied quality control factory overhead for the High F
A. $6.13.
B. $11.86.
5-178
C. $16.28.
D. $32.46.
E. $66.73.
1. $269,808 ÷ 12,848 inspection hours = $21 per inspection hour

2. $21 × 5,648 = $118,608
3. $118,608 ÷ 10,000 High F units = $11.86

Blooms: Apply
5-179
5-180
digital camcorders.
High F 10,000
Great P 16,000
High F Great P
Total $1,349,040
activities:
High F Great P
Using activity-based costing, applied machinery overhead for the High F model per unit is
A. $6.13.
B. $11.86.
5-181
C. $16.28.
D. $32.46.
E. $66.73.
1. $539,616 ÷ 33,726 machine hours = $16 per machine hour

2. $16 × 20,286 = $324,576
3. $324,576 ÷ 10,000 High F units = $32.46

Blooms: Apply
5-182
5-183
digital camcorders.
High F 10,000
Great P 16,000
High F Great P
Total $1,349,040
activities:
High F Great P
Using activity-based costing, applied miscellaneous overhead for the High F model per
unit is (rounded to the nearest cent):
A. $6.13.
B. $11.86.
5-184
C. $16.28.
D. $32.36.
E. $66.73.
1. $134,904 ÷ 26,400 = $5.11

2. ($5.11 × 12,000) ÷ 10,000 = $6.13

Blooms: Apply
5-185
5-186
digital camcorders.
High F 10,000
Great P 16,000
High F Great P
Total $1,349,040
activities:
High F Great P
Using activity-based costing, total overhead per unit of the High F model is (rounded to
the nearest cent):
A. $42.61.
B. $45.99.
5-187
C. $61.32.
D. $66.73.
E. $168.00.
$16.28 + $11.86 + $32.46 + $6.13 = $66.73

Blooms: Apply
Difficulty: 3 Hard
5-188
5-189
digital camcorders.
High F 10,000
Great P 16,000
High F Great P
Total $1,349,040
activities:
High F Great P
Using activity-based costing, applied engineering and design factory overhead for the
Great P model per unit is (rounded to the nearest cent):
A. $4.60.
B. $9.45.
5-190
C. $13.44.
D. $15.12.
E. $42.61.
1. $404,712 ÷ 2,409 hours = $168 per engineering & design hour

2. $168 × 1,440 hours = $241,920
3. $241,920 ÷ 16,000 Great P units = $15.12

Blooms: Apply
5-191
5-192
digital camcorders.
High F 10,000
Great P 16,000
High F Great P
Total $1,349,040
activities:
High F Great P
Using activity-based costing, applied quality control factory overhead for the Great P
A. $4.60.
B. $9.45.
5-193
C. $13.44.
D. $15.12.
E. $42.61.
1. $269,808 ÷ 12,848 inspection hours = $21 per inspection hour

2. $21 × 7,200 = $151,200
3. $151,200 ÷ 16,000 Great P units = $9.45

Blooms: Apply
5-194
5-195
digital camcorders.
High F 10,000
Great P 16,000
High F Great P
Total $1,349,040
activities:
High F Great P
Using activity-based costing, applied machinery overhead for the Great P model per unit
A. $4.60.
B. $9.45.
5-196
C. $13.44.
D. $15.12.
E. $42.61.
1. $539,616 ÷ 33,726 machine hours = $16 per machine hour

2. $16 × 13,440 = $215,040
3. $215,040 ÷ 16,000 Great P units = $13.44

Blooms: Apply
5-197
5-198
digital camcorders.
High F 10,000
Great P 16,000
High F Great P
Total $1,349,040
activities:
High F Great P
Using activity-based costing, applied miscellaneous overhead for the Great P model per
unit is (rounded to the nearest cent):
A. $4.60.
B. $9.45.
5-199
C. $13.44.
D. $15.12.
E. $42.61.
1. $134,904 ÷ 26,400 = $5.11

2. ($5.11 × 14,400) ÷ 16,000 = $4.60

Blooms: Apply
Difficulty: 3 Hard
5-200
5-201
digital camcorders.
High F 10,000
Great P 16,000
High F Great P
Total $1,349,040
activities:
High F Great P
Using activity-based costing, total overhead per unit of Great P model is (rounded to the
nearest cent):
A. $42.61.
B. $45.99.
5-202
C. $61.32.
D. $66.73.
E. $168.00.
$15.12 + $9.45 + $13.44 + $4.60 = $42.61

Blooms: Apply
Difficulty: 3 Hard
5-203
82. Sheen Co. manufacturers laser printers. It has outlined the following overhead cost
drivers:
Overhead Budgeted Level for Cost

Overhead Costs Pool Cost Driver
Cost Driver
Number of
Quality control $64,800 1,080
inspections
Miscellaneous overhead
Direct labor hours 48,000 4,000
cost
requirements:
Machine hours 180
Number of batches 5
Using activity-based costing, applied quality control factory overhead for the 1,000 laser
printers order is:
A. $7,800.
B. $10,000.
C. $10,500.
D. $150.
E. $21,600.
1. $64,800 ÷ 1,080 = $60 per inspection

2. $60 × 175 = $10,500
5-204
Blooms: Apply
Difficulty: 1 Easy
5-205
drivers:

Cost Driver
Number of
inspections
cost
requirements:
Machine hours 180
Number of batches 5
Using activity-based costing, applied machine repetition overhead for the 1,000 laser
printers order is:
A. $7,800.
B. $10,000.
C. $10,500.
D. $150.
E. $21,600.
1. $132,000 ÷ 1,100 = $120 per machine hour

2. $120 × 180 = $21,600
5-206
Blooms: Apply
Difficulty: 1 Easy
5-207
drivers:

Cost Driver
Number of
inspections
cost
requirements:
Machine hours 180
Number of batches 5
Using activity-based costing, applied materials handling factory overhead for the 1,000
laser printers order is:
A. $7,800.
B. $10,000.
C. $10,500.
D. $150.
E. $21,600.
1. $900 ÷ 30 = $30 per batch

2. $30 × 5 batches = $150
5-208
Blooms: Apply
Difficulty: 1 Easy
5-209
drivers:

Cost Driver
Number of
inspections
cost
requirements:
Machine hours 180
Number of batches 5
Using activity-based costing, applied miscellaneous factory overhead for the 1,000 laser
printers order based on direct labor hours is:
A. $7,800.
B. $10,000.
C. $10,500.
D. $150.
E. $21,600.
1. $48,000 ÷ 4,000 direct labor hours = $12 per labor hour

2. $12 × 650 labor hours = $7,800
5-210
Blooms: Apply
Difficulty: 1 Easy
5-211
drivers:

Cost Driver
Number of
inspections
cost
requirements:
Machine hours 180
Number of batches 5
What is the total overhead cost per unit of the laser printers order using activity-based
costing (rounded to the nearest cent)?
A. $39.55.
B. $40.05.
C. $42.25.
D. $50.65.
E. $58.30.
($10,500 + $21,600 + $150 + $7,800) ÷ 1,000 = $40.05
5-212
Blooms: Apply
5-213

Driver

59,000 5,000
Cost hours
Diamond Cleats Co. has an order for cleats that has the following production
requirements:
Number of Batches 8
Using activity-based costing, applied quality control factory overhead for the baseball
cleat order is:
A. $28,450.
B. $30,220.
C. $24,375.
D. $21,150.
E. $19,600.
1. $78,000 ÷ 1,200 = $65 per inspection

2. $65 × 375 = $24,375
5-214
Blooms: Apply
Difficulty: 1 Easy
5-215

Driver

59,000 5,000
Cost hours
requirements:
Number of Batches 8
Using activity-based costing, applied machine overhead for the baseball cleat order is:
A. $47,800.
B. $55,300.
C. $40,500.
D. $59,150.
E. $51,700.
1. $188,000 ÷ 800 = $235 per machine hour

2. $235 × 220 = $51,700
5-216
Blooms: Apply
Difficulty: 1 Easy
5-217

Driver

59,000 5,000
Cost hours
requirements:
Number of Batches 8
Using activity-based costing, applied materials handling factory overhead for the baseball
cleat order is:
A. $338.
B. $584.
C. $192.
D. $353.
E. $686.
1. $1200 ÷ 50 = $24 per batch

2. $24 × 8 batches = $192
5-218
Blooms: Apply
Difficulty: 1 Easy
5-219

Driver

59,000 5,000
Cost hours
requirements:
Number of Batches 8
Using activity-based costing, applied miscellaneous factory overhead for the baseball
cleat order based on direct labor hours is:
A. $8,745.
B. $10,312.
C. $10,489.
D. $9,912.
E. $8,456.
1. $59,000 ÷ 5,000 direct labor hours = $11.80 per labor hour

2. $11.80 × 840 labor hours = $9,912
5-220
Blooms: Apply
Difficulty: 1 Easy
5-221

Driver

59,000 5,000
Cost hours
requirements:
Number of Batches 8
ABC costing helps an organization implement its strategy through all of the following
means except:
A. Providing accurate cost information.

B. Identifying the most profitable products and customers.
C. Helping improve cycle time.
D. Identifying value added and non-value added activities.
E. Providing a basis for effective utilization of capacity.

Blooms: Remember
Difficulty: 1 Easy
5-222
92. If Activity X had a budgeted cost of $125,000 and a budgeted activity consumption of
10,000 engineering hours, what would the activity consumption rate be?
A. $10 per hour.

B. $12.50 per hour.
C. $0.08 per hour.
D. 0.10 per hour.

Blooms: Apply
Difficulty: 1 Easy
93. Customer lifetime value is a type of analysis used to:
A. Assess the ethical practices of each salesperson-customer relationship.

B. Assess the current profit potential of a customer.
C. Assess the long term profit potential of a customer.
D. Assess the current profit potential of all the firm's customers.
E. Assess the long term profit potential of all the firm's customers.

Blooms: Remember
Difficulty: 1 Easy
5-223
94. The cost of unused capacity can be determined using ABC costing for the purpose of:
A. Determining more accurately the ABC costs.

B. Helping managers plan the short and longer-term use of the operating resources.
C. Determining product profitability.
D. Completing an effective activity analysis.
E. All of these answer choices are correct.

Blooms: Remember
Difficulty: 1 Easy
95. Multistage ABC is used when:
A. There are many departments in the organization.

B. Management wants a higher level of accuracy from the ABC calculations.
C. There are complex relationships among the activities.
D. To simplify the ABC calculations.
E. There is no such thing as Multistage ABC.

Blooms: Remember
5-224
96. An adaptation of ABC costing that simplifies ABC by assigning resource costs directly to
cost objects is called:
B. Multistage ABC.
C. Time-Driven ABC.
D. Resource Consumption Accounting.
E. Customer profitability analysis.

Blooms: Remember
Difficulty: 1 Easy
97. The Time Equation is used in ABC to:
A. Track the implementation of the ABC system.

B. Assess the amount of time required for each activity, in determining the application
rate.
C. Incorporate complexities in the application of ABC.
D. Plan for the implementation of an ABC system.

Blooms: Remember
Difficulty: 1 Easy
5-225
98. In the context of ABC, cross-subsidization refers to:
A. Production departments subsidizing each other.

B. Costing inaccuracies which affect the relative profitability of products.
C. Cross-selling products lines, which affect customer profitability.
D. Efforts to increased coordination among department heads.

Blooms: Understand
99. Important concepts in resource consumption accounting include all of the following
except:
A. Variable costing.
B. Resource interrelationships.
C. Activity interrelationships.
D. Detail level cost information.
E. Treatment of idle capacity.

Blooms: Analyze
Difficulty: 3 Hard
5-226
100. Time-driven ABC provides a direct way to measure:
A. Production efficiency.
B. Unused capacity.
C. Product line profitability.
D. Value-adding activities.
E. Customer value.

Blooms: Remember
Difficulty: 1 Easy
5-227
101. Everlast Co. manufactures a variety of drill bits. The company's plant is partially
automated. The budget for the year includes $432,000 payroll for 4,800 direct labor-hours.
What is the total manufacturing overhead for the current product order if the firm uses a
plantwide rate based on direct labor-hours?
A. $9,960.
B. $30,240.
C. $43,741.
D. $44,268.
E. $109,352.
1. $632,400 ÷ 4,800 direct labor hours = $131.75 per direct labor hour
2. $131.75 × 336 hours = $44,268
5-228
Blooms: Apply
Difficulty: 1 Easy
5-229
What is the total manufacturing overhead for the current product order if the firm assigns
overhead costs based on machine hours?
A. $9,960.
B. $30,240.
C. $43,741.
D. $44,268.
E. $109,352.
1. $632,400 ÷ 12,000 = $52.70 per machine hour

2. $52.70 × 830 machine hours = $43,741
5-230
Blooms: Apply
Difficulty: 1 Easy
5-231
Using ABC, how much machine setup overhead is assigned to the order?
A. $19,200.
B. $8,000.
C. $11,108.
D. $9,960.
E. $7,272.
($120,000 ÷ 120) × 8 set-ups = $8,000
5-232
Blooms: Apply
Difficulty: 1 Easy
5-233
Using ABC, how much material handling overhead is assigned to the order?
A. $19,200.
B. $8,000.
C. $11,108.
D. $9,960.
E. $7,272.
($104,400 ÷ 8,700) × 606 barrels = $7,272
5-234
Blooms: Apply
Difficulty: 1 Easy
5-235
Using ABC, how much quality control overhead is assigned to the order?
A. $8,000.
B. $9,960.
C. $11,108.
D. $19,200.
E. $45,933.
($264,000 ÷ 1,100) × 80 inspections = $19,200
5-236
Blooms: Apply
Difficulty: 1 Easy
5-237
Using ABC, how much other overhead is assigned to the order?
A. $8,000.
B. $9,960.
C. $11,108.
D. $19,200.
E. $45,992.
($144,000 ÷ 12,000) × 830 = $9,960
5-238
Blooms: Apply
Difficulty: 1 Easy
5-239
Using ABC, how much total overhead is assigned to the order?
A. $42,160.
B. $43,740.
C. $44,268.
D. $44,432.
E. $45,993.
$8,000 + $7,272 + $19,200 + $9,960 = $44,432
5-240
Blooms: Apply
5-241
5-242
108. Shaver Co. manufactures a variety of electric razors for men and women. The company's
costing system:
Budgeted Budgeted Cost

Machinery
Factory
Pounds of raw
materials
Men’s Women’s
Razors Razors
Units produced and

20,000 26,000
sold
Pounds of raw
860 750
materials
Machine hours 65 50
What is the total manufacturing overhead assigned to the current order for Men's Razors
if the firm uses a volume-based plant wide overhead rate based on direct labor dollars?
A. $112.50.
B. $150.00.
C. $243.75.
D. $7,200.00.
E. $15,600.00.
5-243
1. ($168,640 + $127,840 + $554,400 + $1,078,000) ÷ $514,368 = $3.75 per direct-labor
dollar
2. $514,368 ÷ 8,037 hours = $64 per hour for labor
3. $64 per hour × 30 direct labor hours × $3.75 overhead per labor dollar = $7,200

Blooms: Apply
5-244
5-245
costing system:

Machinery
Factory
Pounds of raw
materials
Men’s Women’s
Razors Razors
Units produced and

20,000 26,000
sold
Pounds of raw
860 750
materials
Machine hours 65 50
What is the total manufacturing overhead assigned to the current order for Women's
Razors if the firm uses a volume-based plant wide overhead rate based on direct labor
hours?
A. $112.50.
B. $150.00.
C. $187.50.
D. $9,600.00.
E. $12,000.00.
5-246
1. ($168,640 + $127,840 + $554,400 + $1,078,000) ÷ 8,037 = $240 per direct-labor hour
2. $240 × 40 direct labor hours = $9,600

Blooms: Apply
5-247
5-248
costing system:

Machinery
Factory
Pounds of raw
materials
Men’s Women’s
Razors Razors
Units produced and

20,000 26,000
sold
Pounds of raw
860 750
materials
Machine hours 65 50
Using ABC, how much facility-level overhead is assigned to the current order for Men's
Razors?
A. $403.00.
B. $310.00.
C. $708.50.
D. $545.00.
E. $936.00.
[($168,640 + $127,840) ÷ 27,200)] × 65 = $708.50
5-249
Blooms: Apply
5-250
5-251
costing system:

Machinery
Factory
Pounds of raw
materials
Men’s Women’s
Razors Razors
Units produced and

20,000 26,000
sold
Pounds of raw
860 750
materials
Machine hours 65 50
Using ABC, how much product-level overhead is assigned to the current order for Men's
Razors?
A. $218.00.
B. $250.70.
C. $331.20.
D. $284.00.
E. $288.00.
($554,400 ÷ 38,500) × 20 = $288.00
5-252
Blooms: Apply
5-253
5-254
costing system:

Machinery
Factory
Pounds of raw
materials
Men’s Women’s
Razors Razors
Units produced and

20,000 26,000
sold
Pounds of raw
860 750
materials
Machine hours 65 50
Using ABC, how much product-level overhead is assigned to the current order for
Women's Razors?
A. $218.00.
B. $250.70.
C. $331.20.
D. $284.00.
E. $288.00.
($554,400 ÷ $38,500) × 23 = $331.20
5-255
Blooms: Apply
5-256
5-257
costing system:

Machinery
Factory
Pounds of raw
materials
Men’s Women’s
Razors Razors
Units produced and

20,000 26,000
sold
Pounds of raw
860 750
materials
Machine hours 65 50
Using ABC, how much batch-level overhead is assigned to the current order for Women's
Razors based on pounds of raw materials?
A. $6,000.
B. $6,880.
C. $5,332.
D. $8,175.
E. $9,374.
($1,078,000 ÷ 134,750) × 750 = $6,000
5-258
Blooms: Apply
5-259
114. Wang Company has established the following overhead cost pools and cost drivers for the
month of May:

Cost Pool
Costs Levels
Purchase
$30,000 50 orders
orders
Machine
50,000 100 setups
setups
10,000 kilowatt
Electricity 10,000
hours
Job M1 Job M2
What is the activity-based overhead rate per purchase order?
A. $615.
B. $600.
C. $575.
D. $550.
E. $500.
($30,000 ÷ 50 orders) = $600
5-260
Blooms: Apply
Difficulty: 1 Easy
5-261
115. Wang Company has established the following overhead cost pools and cost drivers for the
month of May:

Cost Pool
Costs Levels
Purchase
$30,000 50 orders
orders
Machine
50,000 100 setups
setups
10,000 kilowatt
Electricity 10,000
hours
Job M1 Job M2
Using ABC, what is the overhead cost per unit produced for Job M2?
A. $39.
B. $25.
C. $20.
D. $12.
E. $10.
1. ($30,000 ÷ 50) × 10 + ($50,000 ÷ 100) × 10 + ($10,000 ÷ 10,000) × 1,000 = $12,000

2. $12,000 ÷ 1,000 = $12
5-262
Blooms: Apply
Difficulty: 1 Easy
5-263
5-264
116. Orange, Inc. has identified the following cost drivers for its expected overhead costs for
the year:
Cost
Budgeted Cost
Cost Pools Driver
Cost Driver
Level
Number of
Setup $40,000 200
setups
Number of
Ordering 20,000 1,000
orders
Machine
hours
Kilowatt
Power 10,000 10,000
hours
Direct labor $1,200
Units completed 100
Number of setups 4
Number of orders 8
Machine hours 50
Kilowatt hours 100
If a volume-based costing system based on direct labor hours to assign overhead is used,
the total overhead cost for Product X will be:
A. $1,500.
B. $1,560.
C. $2,000.
D. $2,400.
E. $2,560.
5-265
1. ($40,000 + $20,000 + $50,000 + $10,000) ÷ 2,000 hours = $60 per direct labor hour
2. $60 × 40 direct labor hours = $2,400

Blooms: Apply
Difficulty: 1 Easy
5-266
5-267
117. Orange, Inc. has identified the following cost drivers for its expected overhead costs for
the year:
Cost
Budgeted Cost
Cost Pools Driver
Cost Driver
Level
Number of
Setup $40,000 200
setups
Number of
Ordering 20,000 1,000
orders
Machine
hours
Kilowatt
Power 10,000 10,000
hours
Direct labor $1,200
Units completed 100
Number of setups 4
Number of orders 8
Machine hours 50
Kilowatt hours 100
If the activity-based cost drivers are used to allocate overhead cost, the total overhead
cost of Product X will be:
A. $1,500.
B. $1,560.
C. $2,000.
D. $2,400.
E. $2,560.
5-268
[($40,000 ÷ 200) × 4] + [($20,000 ÷ 1,000) × 8] + [($50,000 ÷ 5,000) × 50] +
[($10,000 ÷ 10,000) × 100] = $1,560

Blooms: Apply
Difficulty: 1 Easy
5-269
118. 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 manufacturing overhead that
Wall Specialty
Mirrors Windows
Total number of
5 15
material moves

200 200
unit
Under a costing system that allocates manufacturing overhead on the basis of direct labor
hours, the material-handling cost per wall mirror is:
A. $0.
B. $500.
C. $1,000.
D. $2,000.
E. $5,000.
1. $50,000 budgeted material-handling costs ÷ 400 total direct labor hours = $125 per
direct labor hour
2. $125 × 200 direct labor hours for wall mirrors = $25,000
3. $25,000 ÷ 25 units = $1,000 = material-handling cost per wall mirror.

Blooms: Apply
5-270
119. 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 manufacturing overhead that
Wall Specialty
Mirrors Windows
Total number of
5 15
material moves

200 200
unit
The material-handling cost per wall mirror under ABC is:
A. $0.
B. $500.
C. $1,000.
D. $2,000.
E. $5,000.
1. $50,000 ÷ 20 material moves = $2,500 per material move

2. $2,500 per material move × 5 material moves = $12,500
3. $12,500 ÷ 25 wall mirror units produced = material-handling cost per wall mirror =
$500

Blooms: Apply
5-271
5-272
120. Pasternik Company produces and sells two products, Alpha and Zeta. The following
Alpha Zeta
With a volume-based costing system that applies overhead based on direct labor hours,
the setup cost portion of overhead for each unit is (rounded to the nearest cent):
Alpha Zeta
A) $3.25 $3.25
B) $13.00 $6.34
C) $8.00 $0.10
D) $25.50 $25.50
E) $102.00 $49.73
A. Option A
B. Option B
C. Option C
D. Option D
E. Option E
1. General Calculations:
a. # of Alpha batches = 250 ÷ 10 = 25

b. # of Zeta batches = 20,000 ÷ 500 = 40
c. Total number of batches = 65 = 25 + 40
d. Total Set-up Cost = $2,000 × 65 batches = $130,000
e. Set-up cost per direct labor hour = $130,000 ÷ 40,000 total direct labor hours = $3.25
per direct labor hour
2. Alpha:
5-273
a. Set-up cost for Alpha = $3.25 × 1,000 Alpha direct labor hours = $3,250
b. Total Alpha Units Produced = 250 units
c. Alpha overhead cost per unit = $3,250 ÷ 250 units = $13.00
3. Zeta:
a. Set-up cost for Zeta = $3.25 × 39,000 Zeta direct labor hours = $126,750
b. Total Zeta Units Produced = 20,000 units
c. Zeta overhead cost per unit = $126,750 ÷ 20,000 = $6.3375 = $6.34 (rounded)

Blooms: Apply
Difficulty: 3 Hard
5-274
5-275
Alpha Zeta
Use of activity-based costing would allocate the following amounts of setup cost to each
unit (rounded to the nearest cent):
Alpha Zeta
A) $200.00 $4.00
B) $500.00 $1,025.64
C) $6.42 $6.50
D) $80.00 $50.00
E) $8.00 $0.10
A. Option A
B. Option B
C. Option C
D. Option D
E. Option E
i. # of Alpha batches = 250 ÷ 10 = 25

ii. # of Zeta batches = 20,000 ÷ 500 = 40
iii. Total batches = 65 = 40 + 25
2. Alpha:
i. Total Set-up Cost = 25 × $2,000 = $50,000

ii. $50,000 ÷ 250 units = $200 per unit
5-276
3. Zeta:

ii. $80,000 ÷ 20,000 = $4 per unit

Blooms: Apply
5-277
5-278
Alpha Zeta
Assume the cost per setup remains at $2,000 but that the batch size for product Alpha is
changed from 10 to 25 units per batch. Using activity-based and a volume-based overhead
costing that uses direct labor-hours to assign overhead, the amount of setup cost applied
to each unit of product Alpha would be (rounded to the nearest cent):
Activity Based Volume Based

Costing Costing
A) $400.00 $9.00
B) $500.00 $8.00
C) $80.00 $10.00
D) $2.25 $4.50
None of these answer choices is

E)
correct.
A. Option A
B. Option B
C. Option C
D. Option D
E. Option E
i. # of Alpha batches = 250 ÷ 25 = 10

ii. # of Zeta batches = 20,000 ÷ 500 = 40
iii. Total number of batches = 50 = 10 + 40
iv. Total Set-up Cost = $2,000 × 50 batches = $100,000
v. Set-up cost per direct labor hour = $100,000 ÷ 40,000 total direct labor hours = $2.50
5-279
per direct labor hour
2. Alpha Activity-Based:

ii. $20,000 ÷ 250 units = $80 per unit
3. Alpha Volume-Based:
i. Set-up cost for Alpha = $2.50 × 1,000 Alpha direct labor hours = $2,500
ii. Total Alpha Units Produced = 250 units
iii. Alpha overhead cost per unit = $2,500 ÷ 250 units = $10

Blooms: Apply
Difficulty: 3 Hard
5-280
5-281
123. Nerrod Company sells its products at $500 per unit, net 30. The firm's gross margin ratio is
Order
$100 per order
processing

Sales returns
per unit returned
Nerrod Company has gathered the following data pertaining to activities it performed for
two of its customers:
XBT NINTO
Number of parts per

500 2.000
order
Sales returns:
Number of units
40 50
returned
Number of sales
6 10
calls
FOB, FOB,
Shipping terms
Factory Destination
What is Nerrod's total customer-sustaining cost applicable to Ninto?
A. $400.
B. $600.
C. $4,000.
D. $6,300.
E. $6,420.
5-282
10 sales calls × $400 per sales call = $4,000

Blooms: Apply
Difficulty: 1 Easy
5-283
5-284
Order
$100 per order
processing

Sales returns
per unit returned
XBT NINTO
Number of parts per

500 2.000
order
Sales returns:
Number of units
40 50
returned
Number of sales
6 10
calls
FOB, FOB,
Shipping terms
Factory Destination
What is Nerrod's total customer batch-level cost applicable to Ninto?
A. $800.
B. $920.
C. $2,300.
D. $2,420.
E. $6,300.
5-285
Order Processing and Number of sales returns ($100 × 2) + ($60 × 10) = $800

Blooms: Apply
Difficulty: 3 Hard
5-286
5-287
Order
$100 per order
processing

Sales returns
per unit returned
XBT NINTO
Number of parts per

500 2.000
order
Sales returns:
Number of units
40 50
returned
Number of sales
6 10
calls
FOB, FOB,
Shipping terms
Factory Destination
What is Nerrod's total sales-sustaining cost applicable to XBT as a customer?
A. $0.
B. $920.
C. $4,120.
D. $6,300.
E. $6,420.
5-288
0 since no sales-sustaining costs are listed above

Blooms: Apply
5-289
5-290
Order
$100 per order
processing

Sales returns
per unit returned
XBT NINTO
Number of parts per

500 2.000
order
Sales returns:
Number of units
40 50
returned
Number of sales
6 10
calls
FOB, FOB,
Shipping terms
Factory Destination
What is Nerrod's total customer unit-level cost applicable to XBT as a customer?
A. $50.
B. $480.
C. $4,120.
D. $4,125.
E. $6,300.
5-291
Restocking sales returns, 4 × 40 × $3 = $480

Blooms: Apply
127. Service and not-for-profit organizations often:
A. Have ABC systems which are similar to those of manufacturing firms.

B. Do not have changeable outputs.
C. Are unable to benefit from ABC costing.
D. Do not have ABC systems which are similar to those of manufacturing firms.

Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-05 Describe how ABC/M is used in organizations.
Text Feature: Service
5-292
128. Customer profitability analysis:
A. Always shows that the company with the highest total sales generates the highest net
customer profit.
B. Always shows that the company with the lowest total sales generates the lowest net
customer profit.
C. Produces the same results as a Pareto analysis.
D. Helps identify actions that affect customer profitability.

Blooms: Remember
Difficulty: 1 Easy
Topic: Customer Profitability Analysis
Essay Questions
5-293
129. Scott Cameras produces digital cameras and have decided to switch from a volume-based
system to an activity-based system. Scott produced 100,000 digital cameras in the most
recent quarter and has determined that their total activity costs were: $3,000,000 of
materials cost, $500,000 of labor costs, $1,000,000 of inspection costs, and $500,000 of
packaging costs. It takes 30 minutes of labor to produce each camera, inspections are
done for 20% of all cameras produced, and cameras are packaged individually.
Required:
What are the driver rates for each activity?
Materials Cost = $3,000,000 ÷ 100,000 = $30 per camera

Labor Cost = $500,000 ÷ (100,000 × .5) = $10 per camera
Inspection Cost = $50,000 ÷ (100,000 × .2) = $2.50 per camera inspected
Packaging Cost = $500,000 ÷ 100,000 = $5 per camera

Blooms: Apply
Difficulty: 1 Easy
5-294
130. Plant overhead for ABC Corp in $150 million per year, a portion of which (20%) is
attributable to inspection costs which are charged to products on the basis the number of
parts in the products. The plant produces 500,000 units per year, and on the average, each
product has 20 parts.
Required:
What is the average inspection cost in a product? What is the inspection cost for a product
with 50 parts?
$150 million × .2 = $30 million

500,000 × 20 = 10 million parts
$30 million ÷ 10 million = $3 per part
Total inspection cost:

$3 × 20 = $60 for 20 parts
$3 × 50 = $150 for 50 parts

Blooms: Apply
Difficulty: 1 Easy
5-295
131. Johnson Associates is a catering firm in Tucson, Arizona, with revenue of $4 million. The
business began ten years ago as a one-owner bakery, but has dramatically changed in size
and function during the past five years. The four partners foresee the business doubling in
sales revenue within two years, and expect the firm to expand into other services including
flowers, furnishings, decorations, and music. Johnson Associates employs six full-time and
ten part-time employees. The four partners also work full-time, each partner managing a
separate business function. The firm currently uses a volume-based costing system
installed seven years ago and modified three years later.
Required:
(1) With just the above information, comment on Johnson Associates changing and future
costing system needs.
(2) Is Johnson Associates a probable candidate for an activity-based costing system
(ABC)? Why or why not?
(1) Johnson Associates has experienced rapid growth, and expects the same rapid growth
in the near future. However, growth by itself would not necessarily create a need for a new
cost accounting system. More significant is Johnson's expanding line of service. A costing
system like ABC gives a firm more precise cost information on specific products and
services, which would allow Johnson to better control product and service development,
manufacture and marketing. Whatever strategies Johnson Associates choose, they should
have a costing system that reports costs and their causal relationships.
(2) An ABC system can work for most firms, including service type firms like Johnson
Associates. Future growth needs a precise cost basis for direction and control. Many, if
not most, of Johnson Associates' costs are activity driven, and the variety of service is
noticeably expanding. The major potential limitations of ABC for Johnson would be the
high resource cost and time commitment to develop and install an appropriate ABC
system.
5-296
AACSB: Communication
AICPA: FN Decision Making
Blooms: Evaluate
Difficulty: 1 Easy
Text Feature: Service
Text Feature: Strategy
132. Two students in a cost accounting class were arguing about the need to gather good unit
cost information for manufacturing. One student, Travis, maintained that a firm producing
and selling large quantities of relatively few products would have no need for an ABC
system, since an ABC system is usually more expensive to implement than a volume-
based system. Alicia countered that even firms with high-volume homogeneous products
could benefit from a cost management technique like activity-based costing (ABC).
Required:
Choose sides in this discussion and present justifications for your choice.
ABC is most useful in firms making a wide variety of products, because ABC tracks costs
to their causes, and generates more precise cost bases for individual products and
services than a volume-based costing system usually does. This precision facilitates
strategic analyses. Alicia would have to agree with Travis on the higher cost in resources
and time to use ABC, but could argue for a favorable benefit/cost ratio that most firms
experience when ABC is correctly designed and implemented.

AICPA: Decision Making
Blooms: Evaluate
Difficulty: 1 Easy
5-297
5-298
133. The controller for Alabama Cooking Oil Co. established the following overhead cost pools
and cost drivers:
Material handling 124,800 # of barrels 7,800 barrels
An order of 800 barrels of cooking oil used:
# of setups 14
# of barrels 800
# of inspections 22
# of machine hours 1,100
Required:
(1) What is the overhead rate per machine hour if the number of machine hours is used as
a single cost driver under traditional costing system? (Round your intermediate calculation
to the nearest cent and final answer to the nearest whole dollar.)
(2) Using volume-based costing, how much overhead is assigned to the order based on
(3) Using ABC costing, how much total overhead is assigned to the order?
(1)
Machine Setup $186,000
Materials Handling $124,800
Quality Control $316,200
Other Overhead $172,500
$799,500
÷11,500
Volume-Based Rate = $69.52
5-299
(2) 1,100 machine hours × $69.52 per machine hour = $76,472
(3)
Cost Pools Activity Costs Cost Driver Units Overhead Rate
Machine Setup $186,000 120 $1,550.00
Materials Handling $124,800 7,800 $16.00
Quality Control $316,200 1,020 $310.00
Other Overhead $172,500 11,500 $15.00
Cost Assignment:
Machine Setup $1,550 × 14 $21,700
Materials Handling $16 × 800 $12,800
Quality Control $310 × 22 $6,820
Other Overhead $15 × 1,100 $16,500
Total Product Cost $57,820
Barrels Produced 800
Cost per barrel $72.28

Blooms: Apply
5-300
5-301
134. Blackwelder Co. manufactures a variety of electric razors used by both men and women.
The company's plant is partially automated. The company uses an activity-based cost
system. Listed below is cost driver information used in the product-costing system:

Overhead Cost pool Cost Driver
Machine
Machine depreciation/ $227,500 25,000
hours
Maintenance Factory depreciation/ Machine

154,940 25,400
Utilities/insurance hours
Hours in
Product design 665,720 35,600
design
Raw
Material purchasing/storing 1,293,760 124,400
materials
Two current product orders had the following requirements:
Men’s Women’s
Razors Razor
Units produced and

26,000 30,000
sold
Pounds of raw
980 1,120
materials
Machine hours 85 60
Required:
1. Using ABC costing, how much overhead is assigned to the order for men's razors?
2. Using ABC costing, how much overhead is assigned to the order for women's razors?
1. $12,082. 2. $13,271
Feedback:
5-302
Machine machine
$227,500 25,000
depreciation/maintenance Hours
Factory
machine
depreciation/utilities $154,940 25,400
Hours
insurance
hours in
Product design $665,720 35,600
design
Materials raw
$1,293,760 124,400
purchasing/storage materials
Men’s Women’s
Product
Razors Razors
No. of units produced 26,000 20,000
DM Cost ($)
DL Cost ($)
Machine Hours 85 60
Hours in Design 32 38
Pounds of Raw Materials 980 1,120
Cost
Activity Overhead
Cost Pools Driver
Costs Rate
Units
Machine
$227,500 25,000 $9.10
Factory
depreciation/utilities $154,940 25,400 $6.10
insurance
Product design $665,720 35,600 $18.70
Materials
$1,293,760 124,400 $10.40
purchasing/storage
Men’s Women’s
Cost Assignment
Razors Razors
Machine
$774 $546
Factory
depreciation/utilities $519 $366
insurance
Product design $598 $711
5-303
Materials
$10,192 $11,648
purchasing/storage
Total Overhead $12,082 $13,271

Blooms: Apply
5-304
135. Classify each of the following costs as unit-level (U), batch-level (B), product-level (P), or
facility-level (F) costs and identify an appropriate example of a possible cost driver for
each item:
(1) Parts administration

(2) Production scheduling
(3) Materials handling
(4) Machine operations
(5) Personnel administration and training
(6) Plant security
(7) Machine setups
(8) Engineering changes
(9) Product design
(10) Rent for factory plant
(1) Parts administration: (P); number of parts

(2) Production scheduling: (B); number of production runs or schedules
(3) Materials handling: (B); number of units or weight of materials handled
(4) Machine operations: (U); machine hours
(5) Personnel administration and training: (F); number of employees trained, number of
new employees
(6) Plant security: (F); number of square feet
(7) Machine setups: (B); number of setups or setup hours
(8) Engineering changes: (P); number of change orders issued, number of products
(9) Product design: (P); design hours or number of products
(10) Rent for factory plant: (F); number of square feet

Blooms: Analyze
5-305
136. Pairing Company has the following cost drivers identified as A through F for determining
product manufacturing overhead costs.
(A) Number of pieces of equipment

(B) Number of direct material purchase orders
(C) Number of production runs
(D) Square feet of warehouse space
(E) Number of machine hours
(F) Square feet of factory space
For each of the following activity cost pools, choose the letter of the most appropriate
cost driver for each cost pool.
Heating costs
Machinery power costs
Machinery set-up costs
Equipment maintenance costs
Materials storage costs
Purchasing department costs
F Heating costs
E Machinery power costs
C Machinery set-up costs
A or E Equipment maintenance costs
D Materials storage costs
B Purchasing department costs

Blooms: Understand
Difficulty: 1 Easy
5-306
5-307
137. Altima Company uses an overhead costing system based on direct labor hours for its two
products X and Y. The company is considering adopting an activity-based costing system,
and collects the following information for the month of October.
Product X Product Y
Production
20,000 2,000
units
Direct materials
$50.00 $40.00
cost per unit
Direct labor
$10.00 $10.00
cost per hour
Direct labor
34,000 6,000
hours
Activity
Overhead Overhead Total
Consumption
Product Product
Cost pool cost activity
X Y
Machine 1,000
$60,000 300 700
setup setups
Engineering
100
change 40,000 20 80
orders
order
1,000
Facility rent 90,000 300 700
sq. feet
Required:
(1) Compute the unit manufacturing cost of each product under a volume-based costing
system based on direct labor hours.
(2) Compute the unit manufacturing cost of each product under the activity-based costing
system.
1.
5-308
Volume-
Based (calculations) Total
Method
Direct $50 × 20,000;

$1,000,000 $80,000 $1,080,000
Materials $40 × 2,000
Direct $10 × 34,000;

$340,000 $60,000 $400,000
Labor $10 × 6,000
$4.75 ×
Overhead 34,000; $4.75 $161,500 $28,500 $190,000
× 6,000
Total
$1,501,500 $168,500 $1,670,000
Cost
Unit
20,000 2,000
Produced
Cost per
$75.08 $84.25
Unit
OH Rate = $190,000 ÷ (34,000 + 6,000) = $4.75/hr
2.
Product Product X Product Y
No. of units
20,000 2,000
produced
DM Cost ($) $50 $40
Direct labor
$10 $10
rate
Direct labor
34,000 6,000
hours
Direct labor
hours per 1.70 3.00
unit
Direct labor
costs per $17.00 $30.00
unit
Machine
300 700
Setup
5-309
Engineering
Change 20 80
Order
Facility
300 700
Rent
Cost
Activity Activity
Cost Pools Driver
Costs Rate
Units
Machine
$60,000 1,000 $60.00
Setup
Engineering
Change $40,000 100 $400.00
Order
Facility
$90,000 1,000 $90.00
Rent
Cost
Assignment:
Product
(calculations) Product X
Y
Direct
$1,000,000 $80,000
Materials
Direct
$340,000 $60,000
Labor
Machine $60 × 300;

$18,000 $42,000
Setup $60 × 700
Engineering
$400 × 20;
Change $8,000 $32,000
$400 × 80
Order
Facility $90 × 300;

$27,000 $63,000
Rent $90 × 700
Total
Product $1,393,000 $277,000
Cost
Units
20,000 2,000
Produced
Cost per
$69.65 $138.50
Unit
5-310
Note that the direct labor based costing system overcosted the high volume product X
and undercosted the low volume product Y.

Blooms: Apply
5-311
5-312
138. Castenet Company uses a volume-based costing system that applies overhead cost based
on direct labor hours at $250 per direct labor hour.
The company is considering adopting an activity-based costing system with the following
data:
Cost Driver
Activity Area Cost Driver
Rate
Materials Number of
$1.20
handling parts
Number of
Lathe work 0.30
turns
Number of
Milling 16.00
machine hours
Number of
Grinding 1.25
parts
Number of
Testing 12.00
units tested
The two jobs processed in the month of June had the following characteristics:
Job A Job B
Direct materials costs $10,000 $50,000
Direct labor costs $1,000 $10,000
Number of direct labor hours 40 400
Number of parts 500 2,000
Number of turns 25,000 50,000
Number of machine hours 140 1,000
Number of units in each job (all

15 200
tested)
Required:
1. Compute the unit manufacturing cost of each job under the firm's current volume-
based costing system.
2. Compute the unit manufacturing cost of each job under the activity-based costing
system.
3. Compare the unit manufacturing cost for Jobs A and B computed in requirements 1 and
5-313
2.
(a) Why do the two cost systems differ in their total cost for each job?
(b) Why might these differences be important to the Company?
(below)
1. Per unit manufacturing costs under the volume-based costing system. $1,400 for Job A
and $800 for Job B.
Using Volume-
Job A Job B Total
Based Method
Direct
$10,000 $50,000 $60,000
Materials
Direct
$1,000 $10,000 $11,000
Labor
$250 ×
Overhead 40;
$10,000 $100,000 $110,000
($per DLH) $250 ×
400
Total Cost $21,000 $160,000 $181,000
Unit cost $1,400 $800
2. Per unit manufacturing costs under the ABC costing system.
Job A Job B
Direct
$10,000 $50,000
Materials
Direct Labor $1,000 $10,000
Materials $1.20 × 500;

$600 $2,400
Handling $1.20 × 2,000
$.30 × 25,000;
Lathe Work $7,500 $15,000
$.30 × 50,000
$16 × 140;
Milling $2,240 $16,000
$16 × 1,000
5-314
$1.25 × 500;
Grinding $625 $2,500
$1.25 × 2,000
$12 × 500;
Testing $180 $2,400
$12 × 2,000
Total
$22,145 $98,300
Product Cost
Unit Cost $1,476,33 $491.50
3. a) The volume-based cost system ignores these differences while the ABC costing
system assigns overhead costs based on usages of each of the activity areas. The two
cost systems differ in their job costs because the jobs differ in the way they use each of
five activity areas and activity areas differs in their factory overhead cost drivers.
b) These differences will affect the accuracy of job costs for A and B. Therefore, it will
affect the company's pricing, product mix, and product design decisions.

Blooms: Analyze
Blooms: Apply
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5-316
139. Demski Company has used a two-stage cost allocation system for many years. In the first
stage, plant overhead costs are allocated to two production departments, P1 and P2,
based on machine hours. In the second stage, Demski uses direct labor hours to assign
overhead costs from the production departments to individual products A and B.
Budgeted factory overhead costs for the year are $300,000. Both the budgeted and actual
machine hours in P1 and P2 are 12,000 and 28,000 hours, respectively.
After attending a seminar to learn the potential benefits of adopting an activity-based

costing system (ABC), Ted Demski, the president of Demski Company, is considering
implementing an ABC system. Upon his request, the controller at Demski Company has
compiled the following information for analysis:
Factory Expected
Activity
Cost Pool overhead activity
cost driver
costs level
Machine Setup
$100,000 1,000
setup hours
Inspection
Inspection 50,000 2,500
hours
Kilowatt
Power 50,000 25,000
hours
Direct
Supervision 100,000 10,000
labor hours
Total
overhead $300,000
cost
Demski manufactures two types of product, A and B, for which the following information
is available:
A B
Units produced and sold 5,000 10,000
Direct materials $200,000 $250,000
Direct labor costs $80,000 150,000
Setup hours 700 300
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Inspection hours 1,500 1,000
Power (kilowatt hours) 12,500 12,500
Required:
1. Determine the unit cost for each of the two products using the traditional two-stage
allocation method. Round calculations to 2 decimal places.
2. Determine the unit cost for each of the two products using the proposed ABC system.
3. Compare the unit manufacturing costs for product A and product B computed in
requirements 1 and 2.
(a) Why do two the cost systems differ in their total cost for each product?
(b) Why might these differences be important to the Demski Company?
1. Unit cost for each of two products using the traditional two-stage allocation method:
Stage 1: Dept. 1 (P1) Dept. 2 (P2)
Overhead assignment:
$300,000 × 12,000 ÷ 40,000 $90,000
$300,000 × 28,000 ÷ 40,000 $210,000
Divided by direct labor hours:
1,500 + 3,000 = 4,500
1,500 + 4,000 = 5,500
Department overhead rate per DLH $20.00 $38.18
Stage 1: Product A Product B
Overhead assignment:
P1: $20 × 1,500 = $30,000
$20 × 3,000 = $60,000
P2: $38.18 × 1,500 = 57,270
$38.18 × 4,000 = 152,720
Overhead $87,270 $212,720
Direct materials 200,000 250,000
Direct Labor 80,000 150,000
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Total manufacturing $367,270 $612,720
Divided by production units 5,000 10,000
Unit cost $73.45 $61.27
2. Unit cost for each product using the ABC system.
A B
Direct Materials $200,000 $250,000
Direct Labor $80,000 $150,000
Machine setup $100 × 700; $100 × 300 $70,000 $30,000
Inspection $20 × 1,500; $20 × 1,000 $30,000 $20,000
Power $2 × 12,500; $2 × 12,500 $25,000 $25,000
Supervision $10 × 3,000; $10 × 7,000 $30,000 $70,000
Total Product Cost $435,000 $545,000
Units Produced 5,000 10,000
Cost per Unit $87.00 $54.50
3. a) Under the volume based costing, low-volume product A was undercosted because
the products differ in the way they use each of four activity areas and activity areas differ
in their factory overhead cost drivers.
b) These differences will affect the accuracy of product costs for A and B. Therefore, it
will affect Demski Company's pricing, product mix, and product design decisions.

Blooms: Analyze
Blooms: Apply
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5-320
140. Swenson Company manufactures 4,000 units of Deluxe Product and 20,000 units of
Regular Product each year. The company currently uses direct labor-hours to assign
overhead cost to products. The pre-determined overhead rate is:
Manufacturing overhead cost

= $20/DLH
Direct labor hours
Deluxe Regular
Factory overhead:
2.5 DLH × $20/DLH 50.00
2.0 DLH × $20/DLH 40.00
Total cost per unit $110.00 $85.00
Suppose, however, that factory overhead costs are actually caused by the five activities
listed below:
Activity Costs
Quality Inspections 200,000
Production orders 90,000
Machine-hours worked 330,000
Material receipts 80,000
Total $1,000,000
Also suppose the following transaction data has been collected:
Number of Transactions
Activity Total Deluxe Regular
Machine setups 5,000 3,000 2,000
Quality inspections 8,000 5,000 3,000
Production orders 600 200 400
Machine-hours worked 33,000 10,000 23,000
Material receipts 800 200 600
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Required:
Using the activity-based costing method to calculate unit costs of Deluxe and Regular
products, and compare them with the current direct labor hours-based costing system.
Overhead rates for each of the five activities:
Activity Costs Transactions Rate per Transaction
Machine setups $300,000 5,000 $60/setup
Quality inspections 200,000 8,000 $25/inspection
Production orders 90,000 600 $150/order
Machine-hours worked 330,000 33,000 $10/hour
Material receipts 80,000 800 $100/receipt
Assign overhead costs to products:
Deluxe Product
Activity Rates Transactions Amount
Machine setups $60.00 3,000 $180,000
Quality
25.00 5,000 125,000
inspections
Production
150.00 200 30,000
orders
Machine-hours
10.00 10,000 100,000
worked
Material receipts 100.00 200 20,000
Total overhead
$455,000
(a)
Number of units
4,000
(b)
Overhead per
$113.75
unit (a) ÷ (b)
Regular Product
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Activity Rates Transactions Amount
Machine setups $60.00 2,000 $120,000
Quality
25.00 3,000 75,000
inspections
Production
150.00 400 60,000
orders
Machine-hours
10.00 23,000 230,000
worked
Material receipts 100.00 600 60,000
Total overhead
$545,000
(a)
Number of units
20,000
(b)
Overhead per
$27.25
unit (a) ÷ (b)
Product costs computed using the direct labor hours-based different methods can now be
contrasted:
Product costs using activity-based costing:
Deluxe Regular
Direct Materials $40.00 $30.00
Manufacturing overhead 113.75 27.25
Product costs using the direct labor hours-based costing system:
Deluxe Regular
Direct Materials $40.00 $30.00
Manufacturing overhead 50.00 40.00
Note that the adoption of activity-based costing usually results in a shift of overhead
costs from high volume to low volume products.
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• The per unit costs of the low volume products increase and the per unit costs of the
high volume products decrease.
• The effects are not symmetrical - there is a bigger dollar effect on the per unit costs of
the low volume products.

Blooms: Analyze
Blooms: Apply
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5-325
141. Moss Manufacturing has just completed a major change in its quality control (QC)
process. Previously, products had been reviewed by QC inspectors at the end of each
major process, and the company's ten QC inspectors were charged as direct labor to the
operation or job. In an effort to improve efficiency and quality, a computerized video QC
system was purchased for $250,000. The system consists of a minicomputer, 15 video
cameras, other peripheral hardware, and software.
The new system used cameras stationed by QC engineers at key points in the production
process. Each time an operation changes or there is a new operation, the cameras are
moved, and a new master picture is loaded into the computer by a QC engineer. The
camera takes pictures of the units in process, and the computer compares them to the
picture of a "good" unit. Any differences are sent to a QC engineer who removes the bad
units and discusses the flaws with the production supervisors. The new system has
replaced the ten QC inspectors with two QC engineers.
The operating costs of the new QC system, including the salaries of the QC engineers,
have been included as factory overhead in calculating the company's volume-based
factory overhead rate which is based on direct labor dollars.
The company's president is confused. His vice president of production has told him how
efficient the new system is, yet there is a large increase in the factory overhead rate. The
computation of the rate before and after automation is shown below.
Before After
Budgeted overhead $1,900,000 $2,100,000
Budgeted direct labor 1,000,000 700,000
Budgeted overhead rate 190% 300%
"Three hundred percent," lamented the president, "How can we compete with such a high
factory overhead rate?"
Required:
1. a. Define factory overhead, and cite three examples of typical costs that would be
included in factory overhead.
b. Explain why companies develop factory overhead rates.
2. Explain why the increase in the overhead rate should not have a negative financial
impact on Moss Manufacturing.
3. Explain, in the greatest detail possible, how Moss Manufacturing could change its
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overhead accounting system to eliminate confusion over product costs.
1. a. Factory overhead costs include all indirect costs (all production costs except direct
material and direct labor). These costs cannot be practically or economically traced to end
products and, therefore, must be assigned by some allocation method. Typical factory
overhead costs include
ο indirect labor, i.e., lift-truck driver's wages, maintenance and inspection labor,
engineering labor, and supervisors.
ο other indirect factory costs, i.e., building maintenance, machine and tool maintenance,
property taxes, property insurance, pension costs, depreciation on plant and equipment,
rent expense, and utility expense.
b. Companies develop factory overhead rates to facilitate the costing of products as they
are completed and shipped, rather than waiting until actual costs are accumulated for the
period of production.
2. The overhead rate increase should not have a negative impact on Moss Manufacturing
because the increase in indirect costs was offset by a decrease in direct labor.
3. Rather than using a universal volume-based overhead rate, Moss Manufacturing could
implement separate overhead pools and allocate the overheads to the activities using the
appropriate pools. Examples are as follows.
ο Separate costs into departmental overhead accounts (or other relevant pools), with
one account for each production and service department. Each department would allocate
its overhead to products on the basis that best reflects the use of these overhead services.
ο Individual machines (or other more relevant allocations bases) could be treated as
separate cost centers with the machine costs collected and charged to the products using
the machine(s).
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Blooms: Understand
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5-329
142. The controller for Ocean Sailboats Inc., a company which uses an automated process to
make sailboats, established the following overhead cost pools and cost drivers:
Budgeted Estimated
A recent order for sailboats used:
Required:
1. What is the overhead rate per machine hour if the number of machine hours is used as
a single cost driver under traditional costing system?
2. Utilizing traditional costing, how much overhead is assigned to the order based on
3. Utilizing ABC, how much total overhead is assigned to the order?
1.
Budgeted
Overhead Cost Pool
Overhead
Quality control 419,500
Other overhead cost 180,000
Total estimated overhead $850,000
Estimated machine hours ÷20,000
Overhead rate per machine

$42.50
hour
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2. 2,024 machine hours × $42.50 per machine hour = $86,020
3.
Cost Actual Actual

Overhead Budgeted
Driver Overhead Cost Overhead
Cost pool Overhead
Level Rate Drivers for Order
Machine setups $250,500 500 $501.00 50 $25,050
Quality control 419,500 2,500 167.80 305 51,179
Other overhead cost 180,000 20,000 9.00 2,024 18,216
Totals $850,000 $94,445

Blooms: Apply
Difficulty: 1 Easy
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143. Skateline Inc. designs and manufactures roller skates. The following data pertain to two of
its major customers: FantasticSkates and SkateToday.
FantasticSkates SkateToday
Total sales $1,500,000 $1,450,000
Sales discount 4% 3%
Sales terms 2/10, n/30 2/10, n/30
Sales returns 5% 2%
Assume sales discounts are taken on total

invoice amount and that returns occur within 10
days of the sale.
Required:
Compare the net proceeds from each customer to Skateline Inc. 30 days after sale.
(rounded to nearest dollar for each step where applicable).
Fantastic Skate Today
Total Sales $1,500,000 $1,450,000
Less Sales Discounts (4%, 3%) 60,000 43,500
Net Sales after discounts $1,440,000 $1,406,500
Less Sales returns (5%, 2%) $72,000 $28,130
Net Sales $1,368,000 $1,378,370

Blooms: Apply
Difficulty: 1 Easy
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144. Certo Health Products was formed two years ago to produce and distribute a newly-
patented protein supplement. Two variations of the original supplement have since been
developed and introduced for general sale. The three products are processed in essentially
the same way, but Ann Marshall, the owner of Certo, anticipates that a half-dozen new
products will be developed for sale in the next two years. These products will not be
variations of the patented supplement, and will require a different production process
other than the one currently used. Ann has asked you to review the current use of a single
volume-based rate and explain the arguments for using departmental rates with activity-
based drivers.
A single volume-based rate is appropriate in situations where product are processed in

similar ways and departments, and where little variation exists in the "causes" of costs.
Once multiple variations of production processes are required, departmental rates
probably will provide more accurate cost reporting. Different processes (departments)
cause different costs to happen for different reasons. A simple example is the
manufacture of writing instruments. Pencils require one set of processes, ballpoint pens a
different set, and highlighting pens another set. Within the production processes of each
type of writing instrument, different departments have costs "caused" by different factors,
e.g., labor-intensive vs. machine-intensive departments. By using activity as a basis for
allocation of overhead, a clearer distinction is made between volume-related costs and
capacity-related costs. This distinction provides the basis for selection of correct cost
drivers for different products in different departments, which results in more accurate cost
data for product pricing and strategic operational decisions.

Blooms: Analyze
Difficulty: 1 Easy
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5-334
145. Cost Pools and Cost Drivers: Based on a recent study of its manufacturing operations
Johnston Manufacturing Corporation has identified six resource consumption cost drivers.
These cost drivers and their budgeted activity levels for the coming year are:
Activity
Cost Driver
Level
Number of purchase orders 6
Number of production runs (2,500

40
units per production run)
Machine-hours 100,000
Factory space (square feet) 24,000
Engineering hours 20,000
The firm has budgeted the following costs for the year:
Depreciation—building 50,000
Depreciation—machine 40,000
Electrical power (for factory building) 6,000
Electrical power (for machining) 30,000
Insurance 20,000
Machine maintenance—labor 11,000
Machine maintenance—materials 9,000
Inspection of finished goods 7,000
Setup wages 20,000
Receiving 10,000
Inspection of direct materials on

3,000
receiving
Purchasing 20,000
With the exception of the factory space cost pool, which uses machine-hours as the
activity consumption cost driver, other cost pools have identical resource and activity
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consumption cost drivers.
Required:
1. Identify the most appropriate activity cost pool for each of the cost items and cost
driver for each activity cost pool you identified.
2. Johnston has received a request to quote the price for 4,000 units of a new product.
The production will require 100 engineering-hours and 4,250 machine-hours. What is the
manufacturing overhead per unit the firm should use in determining the price?
Cost pool 1: Cost driver: Number of

purchase orders
Receiving $10,000
Inspection of direct materials 3,000
Purchasing 20,000
Total $33,000
Cost pool 2: Cost driver: Number of

production runs
Setup wages $20,000
Cost pool 3: Cost driver: Machine hours
Depreciation, machine $40,000
Electrical power (machining) 30,000
Machine maintenance - labor 11,000
Machine maintenance - materials 9,000
Total $90,000
Cost pool 4: Cost driver: Factory space
Depreciation, building $50,000
Electrical power (factory building) 6,000
Insurance 20,000
Total $150,000
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Note: However, the problem indicated that the firm uses machine hours as the base for
assigning facility-level costs. An alternative solution is to combine cost pools 3 and 4.
Cost pool 5: Cost driver: production (in

units)
Inspection of finished goods $7,000
Cost pool 6: Cost driver: engineering

hours
2. Overhead Rates:
Cost pool 1: Total cost $33,000
Number of
purchase 6
orders
Cost per
$5,500
purchase order
Number of
40
production runs
Cost per
$500
production run
Number of
100,000
machine hours
Cost per
$0.90
machine hour
Number of
100,000
machine hours
Cost per
$1.50
machine hour
Number of
100,000
units
Cost per unit $0.07
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Total
engineering 20,000
hours
Cost per
engineering $30.00
hour
Manufacturing overhead:
Unit level:
Cost pool 3 – Cost per machine hour $0.90
Number of machine hours × 4,250 $3,825
Cost pool 5 – Cost per unit $0.07
Number of units × 4,000 280
Batch level:
Cost pool 2 – Cost per production run $500
Number of production runs

(4,000 units ÷ 2,500 = 1.6) × 2 1,000
Product-level level:
Cost pool 1 – Cost per purchase order $5,500
Number of purchase orders × 1 5,500
Cost pool 6 – Cost per engineering hour $30
Number of engineering hours × 100 3,000
Facility-level level*:
Cost pool 4 – Cost per machine hour $1.50
Number of machine hours × 4,250 6,375
Total manufacturing overhead $19,980
Number of units ÷ 4,000
Manufacturing overhead per unit $4.995
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* There are at least one alternative activity consumption drivers for assigning facility-level
cost besides number of machine hours (shown below):
Based on machine hours:
Total facility-level cost (Cost pool 4) $150,000
Number of machine hours 100,000
Cost per machine hour $1.50
Alternatively, the firm may use number of units to assign facility-level cost.
Based on number of units:
Total facility-level cost (Cost pool 4) $150,000
Cost per unit $1.50
Unit level:
Cost pool 3 $3,825
Cost pool 5 280
Batch level:
Cost pool 2 1,000
Product-level level:
Cost pool 1 5,500
Cost pool 6 3,000
Facility-level level:
Cost pool 4 – Cost per unit $1.50
×
Number of units 6,000
4,000
Total manufacturing overhead $19,605
5-339
Number of units ÷ 4,000
Manufacturing overhead per

$4.90125
unit

Blooms: Apply
Difficulty: 3 Hard
5-340
5-341
146. Volume-Based Costing Versus ABC: Gorden Company produces a variety of electronic
products. One of its plants produces two laser printers, Speedy and Deluxe. At the
beginning of 2013, the following data were prepared for this plant:
Deluxe Speedy
Quantity 50,000 400,000
Selling price $475.00 $300.00
Unit prime cost 180.00 110.00
Unit overhead cost 20.00 153.60
The unit overhead cost is calculated using the predetermined overhead application rate
based on direct labor-hours.
Upon examining the data, the marketing manager was particularly impressed with the
per-unit profitability of the Deluxe printer and suggested that more emphasis be placed on
producing and selling this product. The plant supervisor objected to this strategy, arguing
that the Deluxe model required a very delicate manufacturing process. The supervisor
believed that the cost of the Deluxe printer was likely to be much higher than reported.
The controller suggests an activity-based costing system and provides the following
budget data pertaining to the period:
Overhead Pool
Cost Driver Deluxe Speedy
Activity Rate*
Number of
Setups $2,800 200 100
setups
Machine Machine-
100 100,000 400,000
costs hours
Engineering-
Engineering 40 45,000 120,000
hours
Packing
Packing 20 50,000 200,000
orders
* Cost per unit of cost driver
Required:
1. Using the projected data based on the firm's current costing system, calculate gross
profit per unit and gross profit percentage for each product. Round calculations to 2
decimal places.
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2. Using the suggested multiple cost drivers' overhead rates, calculate the overhead cost
per unit for each product and determine gross profit per unit and gross profit percentage
for each product.
3. Based on your results, evaluate the suggestion of the marketing manager to emphasize
the Deluxe model.
4. How does ABC contribute to Gorden's competitive advantage?
1. Current costing system (direct-labor hour)
Deluxe % Speedy %
Price $475 100 $300.00 100
Prime
180 38 110.00 37
Cost
Overhead 20 4 153.60 51
Unit
gross $27558 $36.40 12
profit
2. Multiple drivers costing system
Calculation of unit overhead costs

Deluxe
- Deluxe:
$2,800
Setups 200 = $560,000
×
100,000
Machine costs $100 × 10,000,000
=
Engineering $40 × 45,000 = 1,800,000
Packing $20 × 50,000 = 1,000,000
Total overhead $13,360,000
Number of
÷50,000
Units
Overhead per
$267.20
unit
5-343
Calculation of unit overhead costs
Speedy
- Speedy:
$2,800
Setups 100 = $280,000
×
400,000
Machine costs $100 × 40,000,000
=
120,000
Engineering $40 × 4,800,000
=
200,000
Packing $20 × 4,000,000
=
Total overhead $49,080,000
Number of
÷400,000
Units
Overhead per
$122.70
unit
Deluxe % Speedy %
Price $475.00 100 $300.00 100
Cost
Prime
$180.00 $110.00
cost
Overhead 267.20 447.20 94 122.70 232.70 78
Unit gross
$27.80 6 $67.30 22
profit
3. Using the activity-based costing, a much different picture on profitability of the Deluxe
and Speedy models emerges. The Speedy model is actually more profitable than the
Deluxe model. The revised cost data suggests that shifting the emphasis to the Deluxe
model may very well be a mistake. The Deluxe printer is a much heavier user of overhead
resources as can be seen in the table below that compares uses of overhead.
Overhead Activity Consumption

Activity Deluxe Speedy
Setups 250 units per setup 4000 units per setup
Machine costs 2 MH per unit 1 MH per unit
Engineering 0.9 Engr. Hr. per unit 0.3 Engr. Hr. per unit
Packing 1 unit per packing order 2 unit per packing order
5-344
Supporting calculations
Deluxe Speedy
Total Per Activity Measure Total Per Activity Measure
Units 50,000 400,000
Setups 200 250 units per setup 100 4,000 units per setup
Machine Costs 100,000 2 MH per unit 400,000 1 MH per unit
Engineering 45,000 0.9 Engineering Hours per unit 120,000 0.3 Engineering hours per unit
Packing 50,000 1 unit per packing order 200,000 2 unit per packing order
4. The ABC method is likely to provide Gordon Company a more accurate product cost
picture. It also directs the management's attention to the high volume, more profitable
Speedy printers.
Given the low profit margin of the Deluxe, the firm may want to investigate the feasibility
of raising the price, the possibility of reducing product cost, or both.

Blooms: Analyze
Blooms: Apply
5-345
5-346
147. Customer Profitability Analysis: Boston Depot sells office supplies to area corporations
and organizations. Tom Delayne, founder and CEO, has been disappointed with the
operating results and the profit margin for the last two years. Business forms are mostly a
"commodity" business with low profit margins. To increase profit margins and gain
competitive advantages, Delayne introduced "Desk-Top Delivery" service. The business
seems to be as busy as ever. Yet, the operating income has been declining. To help
identify the root cause of declining profits, he decided to analyze the profitability of two of
the firm's major customers: Omega International (OI) and City of Albion (CA).
According to the customer profitability analysis that Boston Depot conducts regularly,
Boston Depot has the same amount of total sales with both OI and CA. However, the firm
earns a higher gross margin and gross margin ratio from CA than those from the sales to
OI, as demonstrated here:
Customer Profitability
Analysis
Omega
City of Albion
International
Sales $80,000 $80,000
Product cost (50,000) (48,000)
Service fees
(14,000) (14,000)
(17.5% of sales)
Gross margin $16,000 $18,000
Gross margin
20% 22.5%
percent
Boston Depot adds a flat 17.5 percent to all sales for expenses incurred in such activities
as handling customers' requests, pick-packing, order delivery, warehousing, and data
entry. However, not all customers require the same level of services. Operation Manager,
Jamie Steel, points out that CA has been a much heavier service user than OI. She shows
the following data to support her belief:
Distribution Services Activities for OI and CA
OI CA
Number of
300 700
requisitions
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Requisition line
(all pick- 900 2,100
packing)
Average
number of
50 500
cartons in
warehouse
Number of
miles per 5 6
delivery
Controller Rod Jay has been investigating ways to determine the costs of performing
various activities. He summarized his findings:
Total Estimated Estimated Annual
Annual Activity
Expense Level
Requisitions
$3,000,000 Requisitions 300,000
handling
Number of
Warehouse 1,050,000 70,000
cartons
Pick- Pick-pack
900,000 600,000
packing lines
Pick-pack
Data entry 600,000 600,000
lines
Delivery $10 per requisition (delivery) plus

charge $0.30 per mile
Steel points out that activities cost money. Two customers who request different service
activities most likely are not costing the firm the same.
Required:
1. Using activity-based costing, compute the charges per unit of service activities.
2. Using activity-based costing, compute the total distribution costs for each of the
customers.
3. Is the City of Albion a more profitable customer?
4. Is Omega International a better customer for Boston Depot?
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1. Service cost rate per unit of activity
Estimated Annual Estimated Annual Cost Service Cost

Activities Cost Driver
Expense Driver Units Per Unit
Requisition
$3,000,000 Requisitions 300,000 $10.00
Handling
Warehouse $1,050,000 Cartons 70,000 $15.00
Pick Packing $900,000 (PP) Lines 600,000 $1.50
Data Entry $600,000 (PP) Lines 600,000 $1.50
Delivery charge $10 per delivery (requisition) + $0.30 per mile
2. Service Costs
Omega International City of Albion
Requisition
Handling
(700
(300 $3,000 $7,000
requisitions ×
requisitions ×
$10/requisition)
$10/requisition)
Warehouse
Activity
(500 cartons ×
(50 cartons × 750 7,500
$15.00 per
$15.00 per
carton)
carton)
Pick-Packing
(2,100 pick-
(900 pick-pack 1,350 3,150
pack lines ×
lines × $1.50)
$1.50)
Data Entry
(900 lines × 900 (2,100 lines × 2,100
$1.00/line) $1.00/line)
Freight Out
($10 × 300) + ($10 × 700) +
3,450 8,260
($0.30 × 5 × ($0.30 × 6 ×
300) 700)
Total Service
$9,450 $28,010
Costs
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3. Customer Profitability Analysis-Activity Based
Omega
City of Albion
International
Sales $80,000 $80,000
Product Cost (50,000) (48,000)
Service costs ( 9,450) (28,010)
Gross Margin $20,550 $3,990
Gross Margin % 25.69% 4.99%
The above profitability analysis indicates that, under activity-based costing, Omega
International, not City of Albion, is more profitable to Boston Depot. The apparent higher
gross margin percentage of the City of Albion relative to the Omega International was the
result of not recognizing differences in the service activities requested by different
customers under the firm's existing costing system.
City of Albion is a much heavier user of services provided by Boston Depot. Although both
customers had the same total sales, City of Albion made more desktop delivery requests in
smaller quantities and maintained more inventory by Boston Depot.
4. The answer depends on the competitive strategy of the firm. The gross profit margin
ratios show that Omega is the better customer of the two. Omega does not use much of
the desktop delivery service Boston offers. Most likely Omega is a buyer of "commodity"
items and does not need the convenience of desktop delivery. However, Boston's pricing is
likely to have incorporated the average cost of desktop deliveries. If Omega realizes that it
is paying for services not used, it may buy the commodity it needs elsewhere, unless
Boston lowers the price to Omega.
All custom-printed business forms by different suppliers are likely to be the same.
Delayne wanted to "differentiate" its forms from those of competitors' by offering desktop
delivery services. In the long-run, Omega is not likely to be a customer staying with Boston
Depot. Boston Depot needs to be prepared to lower the price to Omega.
If the firm desires to compete on a differentiation strategy it needs to price accordingly.
Boston Depot needs to raise prices to City of Albion. If City of Albion is willing to pay a
higher price for the convenience of desktop delivery, it is the kind of customer that
Delayne wants.
5-350
Blooms: Apply
Blooms: Evaluate
Difficulty: 3 Hard
5-351
5-352
148. Customer Profitability Analysis: Spring Company collected the following data pertaining
to its activities with selected customers.
Total sales $600,000 $750,000 $900,000
Sales
2% 3% 2%
discount a
Sales 2/10,
2/10, n/30 1/15, n/60
terms b n/eom
FOB
Shipping FOB FOB
Shipping
terms Destination Destination
point
Sales
returns rate 2% 4% 3%
c
Number of
10 5 50
orders d
Units per
100 250 30
order
Expedited
0 2 5
order
Sales visits 1 1 2
Number of
sales 3 4 10
returns
a
Sales discounts are incentives offered on the
full invoice price
b
Sales terms are an incentive in the form of a
reduction of the net invoice amount to customers
that pay an invoice early
c
Sales returns are all completed within the first
10 days of this billing month
d
Each order is filled in a single delivery
Spring Company mails monthly statements on or before the first day of each month. HS
pays all of its account payables within the payment discount periods. Adventix does not
take the early payment discounts. In fact, the company pays half of its accounts on the
date that these accounts are due and pays the remainder at the end of the following
month. Baldwin also does not take advantage of discounts for early payments. However, it
5-353
pays its accounts on the specified due date. Cost of goods sold is sixty percent of gross
sales price. Joan Lieberman, the controller of Spring Company, has estimated that the cost
of working capital is approximately 2 percent per month.
Lieberman also gathered the following cost data:
Order taking $50 per order
Order processing $75 per order
Delivery $300 per delivery
Expedited orders $500 per order
$10 per unit plus $200

Restocking
per return
Sales visits $800 per visit
Required:
Prepare and interpret a customer profitability analysis for Spring Company. How does it
help Spring Company become more competitive and profitable?
Customer revenue analysis
Total sales $600,000 $750,000 $900,000
Less: Sales discount 12,000 22,500 18,000
Net invoice $588,000 $727,500 $882,000
Less: Sales returns 11,760 7,275 26,460
Net sales $576,240 $720,225 $855,540
Less: Early payment discounts 11,525
Finance charge: working capital 3,765 1 36,011 2 __17,011 3
Net proceeds $560,950 $684,214 $838,429
Cost of goods sold 360,000 450,000 540,000
Gross margin $200,950 $234,214 $298,429
Customer cost analysis
5-354
Customer unit-level cost:
Sales return (restocking) 4 $200 $500 $450
Customer batch-level costs:
Order taking $50 × 10; 5; 50 500 250 2,500
Order processing $75 × 10; 5; 50 750 375 3,750
Sales return $200 × 3; 4; 10 600 800 2,000
Delivery $300 × 10; 5; 50 3,000 1,500 15,000
Expediting order $500 × 0; 2; 5 1,000 2,500
Customer sustaining costs:
Sales visits $800 × 1; 1; 2 800 800 1,600
Total customer cost $5,850 $5,225 $27,800
Net customer profit $195,100 $228,989 $270,629
1
Net proceeds: $576,240 - (2% × 576,240) = 576,240 - $11,525 = $564,715
Finance charge for working capital: $564,715 × 2% × (10 ÷ 30) = $7,530
2
The net amount is carried for 60 days, when Adventix pays half of its amount due. The
remainder of the balance is paid on the 90th day:
Finance charge for

$720,225 × 2% ×
60 days working $28,809
(60 ÷ 30) =
capital
Payment received on $720,225 ÷ 2 =

the 90th day: $360,112.50
Finance charge for

$360,112.50 × 2%
30 days working 7,202
× (30 ÷ 30) =
capital
Net finance
$36,011
charge
3
The net amount is carried for 30 days when Baldwin pays its balance due.
Finance charge for 30 days working capital $855,540 × 2% × (30 ÷ 30) = $17,111
4
Restocking cost:
HS Inc: 10 × 100 × 2% × $10 = $200
Adventix: 5 × 250 × 1% × $10 = $125
Baldwin: 50 × 30 × 3% × $10 = $450
5-355
There are many possible ways to interpret the information contained in the customer
profitability analysis, and a few suggestions are offered her. Certainly, Spring should
consider a some type of billing policy for delivery charges. While some customers have
only a few deliveries, a customer like Baldwin costs $15,000 with so many deliveries.
Maybe there should be a set number of deliveries that would be free and then have a
delivery charge for all deliveries in excess of that level. Another possibility is that the
delivery charge would be on a sliding scale. Spring should also reevaluate the early
payment discounts and trade discounts offered to each customer. Looking at HS, the early
payment discount taken by this customer is saving $7,530 for 20 days of working capital
charge; perhaps Spring should consider lowering its trade discount for Advantix and offer
a larger early payment discount. Aside from working with its customers, Spring needs to
look at its internal cost structure. For example, the cost of a return is $200 and this needs
to be reviewed for its components. How many hours is this taking? It is a fixed cost - are
there employees handling it who should be doing more advanced work?
Customer profitability analysis helps the company become more competitive by

identifying the most profitable and least profitable customers. This information can then
be used by management to adjust pricing policies, identify ways to reduce the cost to
serve customers, and change the customer mix for a more profitable group of customers.

Blooms: Analyze
Blooms: Apply
Difficulty: 3 Hard
5-356
5-357
149. Volume-based Versus ABC Overhead Rate: Medical Arts Hospital (MAH) uses a
hospital-wide overhead rate based on nurse-hours. The intensive care unit (ICU), which
has 30 beds, applies overhead using patient-days. Its budgeted cost and operating data
for the year follow:
Hospital Budget Information
Hospital total overhead $57,600,000
Hospital total nurse-

1,152,000
hours
Budget Cost Driver Information for ICU for the

Month of June
Budget
Budget Cost Cost
Cost Pool
Cost Driver Driver
Activity
Facilities Number of
and $2,400,000 patient- 7,500
equipment days
Number of
Nursing care 3,000,000 nurse- 80,000
hours
In June, MAH's intensive care unit had the following operating data:
81,000 nurse-hours
7,250 patient-days
Required:
1. Calculate the ICU's overhead costs for the month of June using
a. The hospital-wide rate

b. The ICU department-wide rate
c. The cost driver rates for the ICU department
2. Explain the differences and determine which overhead assignment method is more
appropriate.
5-358
MAH’s ICU overhead costs for the month of
June using:
a. Hospital-Wide Rate Based on Nurse-Hours
Per nurse- $57,600,000 ÷

$50
hour: 1,152,000 =
Total ICU
$50 × 81,000
applied $4,050,000
=
overhead costs:
b. The ICU Department-Wide Rate Based on

Patient-Days
Total
$2,400,000 +
budgeted ICU $5,400,000
$3,000,000 =
overhead:
Overhead
rate per $5,400,000 ÷
$720
budgeted 7,500 =
patient-day:
Total ICU
$720 × 7,250
applied $5,220,000
=
overhead costs:
c. Activity Cost Driver Rates
Budgeted Budgeted Budgeted Budgeted Total Applied

Cost Pool Cost Activity OH Rate Activity Overhead
Facilities $2,400,000 7,500 $320.00 7,250 $2,320,000
Nurse
3,000,000 80,000 37.50 81,000 3,037,500
care
Total applied overhead costs $5,357,500
2. The first method uses a hospital-wide overhead rate, which likely bears no relationship
with the overhead activities performed in the intensive care unit (ICU). In particular, it is
likely to be too low a rate because the equipment used in the ICU is more complex and
expensive than in the other units of the hospital. The second method uses the patient-day
overhead rate for the ICU department. This is an improvement over the first method
because it uses the overhead and usage information in the ICU. But a single patient-day
cost driver may not have direct relationships with some of the activities performed in the
5-359
ICU department. The third method is the preferred method because it uses a cost driver
for each of the cost pools that reflects the resources consumed by activities of the cost
pool. Notice however that there is little difference in the costs for the second and third
methods because there is a high correlation between the number patient days and nursing
hours in the ICU.

Blooms: Apply
Blooms: Evaluate
5-360

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Cost Management A Strategic Emphasis

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Activity-Based Costing and Customer Profitability Analysis

Multiple Choice Questions

1. The major limitation of volume-based costing systems is the use of volume-based:

A. A large portion of factory overhead cost is not volume-based.

A. Not proportional to the volume of outputs produced.

A. The cost drivers and managers in the plant.

7. Effective implementation of activity-based costing (ABC) requires:

A. Normally the assistance of a consultant.

8. Elimination of low-value-added activities in a firm should:

A. Be discouraged because of potential harmful effects.

A. Time spent performing the activity

A. Having support of consultants with needed expertise.

11. A measure of the quantity of resources consumed by an activity is:

13. An activity that is performed for each unit of production is a(n):

15. Which one of the following is not a unit-level cost driver?

A. Direct labor hours.

A. Cost driver analysis.

17. The examination of the efficiency of each of a firm's activities is:

A. Obtain support of management and personnel.

21. Which of the following activities is a facility-level activity?

A. Plant management salaries.

A. Overstate the cost of low volume products.

23. Which of the following is a batch-level cost driver?

24. Which of the following activities is a facility-level activity?

A. Using direct materials in production.

27. Which of the following is a batch-level cost driver?

Activity Cost Driver

A) Machine setup Number of setups

B) Machine maintenance Machine hours

C) Lighting on shop floor Number of kilowatt-hours

D) Quality control Square feet of floor space

E) Materials Handling Weight of materials in process

A. Several well-differentiated products are manufactured.

A. Overapply overhead to the product line.

32. Which of the following is an example of a high-value-added activity?

A. Shipping the customer's order.

A. Overstate overhead of the product.

37. Activity-based costing for manufacturing operations is used to assign:

A. Direct material and direct labor costs to products.

38. The use of activity-based costing is most appropriate for:

A. Firms that manufacture multiple product lines.

A. Reduced overhead costs.

A. Activity cost pools.

41. Which of the following is not considered a benefit of activity-based costing?

A. Decreased production activity levels.

A. Machinery depreciation expense.

A. Machinery set-up costs.

45. Activity-based costing systems:

A. Accumulate overhead costs by departments.

A. ABC can provide more accurate product costs.

Unit Batch Product Facility

A) Yes Yes Yes No

B) Yes Yes Yes Yes

D) Yes No Yes Yes

A. Providing security for the plant.

A. Products that use relatively more of this base tend to be undercosted.

A. Customer unit-level cost.

55. Freight charges based on number of units shipped to customers is a:

A. Customer unit-level cost.

56. Processing sales returns and allowances is usually classified as a: