Part 1: MCQ

1) Which of the following statements is FALSE?

A) Traditional costing systems generally assign only production costs to products.
B) Traditional costing systems use a single cost pool for all indirect production
costs.
C) Traditional cost systems work well with simple production processes.
D) Traditional cost systems allocate a cost pool to cost objects using multiple cost
drivers.

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

A) indirect costs represent a small proportion of a product's total costs
B) indirect costs represent a large proportion of a product's total costs
C) a company makes one simple product
D) a company has a simple manufacturing process

3) In activity-based costing systems, the system first accumulates indirect costs

for ________, and then assigns these costs to ________.
A) products; departments
B) products; territories
C) cost objects; types of customers
D) activities; cost objects

4) Slocum Company has determined the following information about a new

product. The manufacturing process used for the product is very complex and
it has a higher proportion of indirect costs than direct costs. The company
wants a 100% markup on cost. The following data is available:

Product cost according to traditional costing system $4.00 per unit

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

What price per unit should Slocum Company use for this new product?
A) $4.00
B) $7.00
C) $8.00
D) $14.00

1
5) Examples using activity-based costing generally show that traditional
costing systems ________ high-volume, simple products and ________ low-
volume, complex products.
A) undercost; overcost
B) overcost; undercost
C) undercost; undercost
D) overcost; overcost

PART 2: EXERCISES
Ex1.
Sealing Company manufactures only one product that is available in both a
Deluxe model and a Regular model. The company has manufactured the
Regular model for years and the Deluxe model was recently introduced. The
company is concerned about the accuracy of its costing system because profits
are declining since the Deluxe model was introduced.
Indirect production costs are assigned to the products using direct labor hours. For
the current year, the company estimates $2,000,000 of indirect production costs
and 40,000 direct labor hours. They expect to produce 5,000 units of the Deluxe
model and 40,000 units of the Regular model. The Deluxe model requires 1.6
hours of direct labor time per unit and the Regular model requires 0.8 hours. Other
costs are as follows:

Costs Deluxe Model Regular Model

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

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

Activity (Cost Driver) Costs

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

Deluxe Regular
Cost Drivers Model Model
Number of purchase orders 400 600
Number of rework orders 200 600
2
Number of tests 4,000 6,000
Number of machine hours 20,000 30,000

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

Ex2
Pilot Bank uses activity-based costing. Pilot Bank has the following activities,
traceable costs, and cost drivers:

Activities Traceable CostsCost Drivers

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

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

Activities Downtown North

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

Required:
A) Compute the new account cost assigned to the North branch.
B) Compute the deposit processing cost assigned to the Downtown branch.
C) Compute the withdrawal processing cost assigned to the Downtown branch.

Ex3. Listed next are several activities and related costs that have been observed at
Santana Company, a manufacturing company. The company makes a variety of
products and currently uses a traditional costing system that allocates only
production overhead based on direct-labor hours. It is implementing an ABC
system for the design, production, and distribution functions of its value chain.
You have been asked to complete the following table by indicating for each

3
activity whether the related cost is direct, indirect, or unallocated. For each indirect
cost, indicate one appropriate cost-allocation base (more than one cost-allocation
base may be appropriate). The first two items have been completed for you.

Activity Related Cost Traditional ABC

Setting up for a Mechanic Indirect (direct Indirect (mechanic
production run wages labor hours) labor time)
Purchasing materials Materials and Direct trace Direct trace
and parts to be used in parts cost
products
Shipping sold products Fuel used on
to customers company’s fleet
(distributors) of trucks
Market research study Salaries of
market research
staff
Production scheduling Salaries of
production
scheduling
managers
Purchasing materials Salary of
and parts to be used in purchasing
products agents
Order processing of Salaries of
customer orders order
processing staff
Preparing cost analyses Salary of the
cost accountant
Designing a new product Salaries of
design
engineers who
are fully
dedicated to this
new product
Managing overall Salary of the
operations of the executive
company

4
Ex4
The wireless phone manufacturing division of a consumer electronics company
uses activity-based costing. For simplicity, assume that its accountants have
identified only the following three activities and related cost drivers for indirect
production costs:

5
Ex5