IRS CPA REVIEW

Iloilo City and Leganes, Iloilo

MANAGEMENT ADVISORY SERVICES

ACTIVITY-BASED COSTING AND MANAGEMENT

1. In this costing system, the various activities performed in a business segment

or in the entire organization are identified, costs are collected on the basis of
the underlying nature and extent of such activities, and then assigned to the
products or services based on consumption of such activities by the product
or services.

a. Operation costing system

b. Activity-based costing system
c. Job-order costing system
d. Process costing system

2. Of the following, which is the best reason for using activity-based costing?

a. to assign indirect overhead costs to different overhead pools

b. to better assign overhead costs to products
c. to keep better track of overhead costs
d. to more accurately assign overhead costs to cost pools so that these
costs are better controlled

3. A base use to allocate the cost of products, customers, or other final cost
objects is called

a. resource driver c. final cost object

b. activity driver d. driver

4. Which of the following statement is not correct?

a. ABC tends to increase the number of cost pools and cost drivers used.
b. ABC’s philosophy is to accumulate heterogeneous cost pools.
c. In ABC system, homogenizing cost pools minimizes broad averaging of
costs that have different drivers.
d. Design of an ABC system starts with process value analysis, a
comprehensive understanding of how an organization generate its output

5. Relative to traditional product costing, activity-based costing differs in the way

costs are

a. Incurred. c. allocated.
b. Benchmarked. d. Processed.

6. In allocating variable costs to products,

a. A company should never use more than one cost driver.

b. A volume-based cost driver should be used.
c. A company should always use the same allocation base that it uses for
fixed costs.
d. Direct labor hours should always be used as the allocation based.

7. In allocating fixed costs to products in activity-based costing,

a. direct labor hours should always be used as the allocation base.

b. a company should use the same allocation base that it uses for variable
costs.
c. a cost driver that is not volume related should be used.
d. machine hours should always be used.

1
8. Activities, their drivers, and their costs may be classified as unit level, product
level, batch level and plant level. If activity-based costing information is
prepared for internal purposes, which costs are most likely to be treated as
period costs?

a. Unit level c. Product level

b. Batch level d. Plant level

9. Set-up, receiving and inspection, are example of:

a. Batch-level activities c. Facility-level activities

b. Unit-level activities d. Product-level activities

10. Costs that are common to many different activities within an organization are
known as _______ costs.

a. product- or process level c. organizational level

b. unit-level d. batch-level

11. Newton Corp. has used a traditional cost accounting system to apply quality
control costs uniformly to all products at a rate of 14.5% of direct labor cost.
Monthly direct labor cost for its Product Excel is P27,500. In an attempt to
distribute quality control costs more equitably, Newton is considering activity-
based costing. The monthly data shown below have been gathered for
Product Excel:

Activity Cost Driver Cost Rates Quantity

Incoming materials
inspection Type of materials P11.50/type 12 types
In process inspection Number of units P0.14/unit 17,500 units
Product certification Per order P77/order 25 orders

What is the monthly quality control costs assigned to Product Excel using the
activity-based costing?

a. P68.64 per order

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

ITEMS 12 AND 13 ARE BASED ON THE FOLLOWING INFORMATION:

Kimmy Company has identified the following overhead cost pools and cost
drivers:

Cost Pools Activity Costs Cost Drivers

Machine setup P180,000 1,500 setup hours
Materials handling 50,000 12,500 pounds of materials
Electric power 20,000 20,000 kilowatt-hours

The following cost information pertains to the production of products X and Y:

X Y
Number of units produced 4,000 20,000
Direct materials cost (P) P20,000 P25,000
Direct labor cost (P) P12,000 P20,000
Number of setup hours 100 120
Pounds of materials used 500 1,500
Kilowatt-hours 1,000 2,000

12. The unit cost for Product X is

a. P11.00 c. P10.00
b. P11.75 d. P10.50

2
13. The unit cost for Product Y is

a. P3.37 c. P4.27
b. P4.50 d. P3.50

ITEMS 14 TO 16 ARE BASED ON THE FOLLOWING INFORMATION:

New Wave Co. produces two products, Product Side A and Product Side B.
Units produced for the period totaled 13,625 for Side A and 11,100 for Side B.
Total manufacturing overhead costs are P550,000. The company uses the
activity-based costing in allocating its manufacturing overhead cost. The
following additional information were gathered:

Product
Activity Cost Driver A B Total
Setups No. of setups 100 400 100,000
Machining Machine hours 3,000 2,000 400,000
Inspections No. of inspections 100 300 50,000

14. What would be the overhead rate for each activity?

Setups Machining Inspections

a. 200.00 80.00 125.00
b. 100.00 40.00 62.50
c. 183.33 183.33 183.00
d. 25.00 45.00 20.00

15. How would the total overhead cost of P550,000 be allocated between
Products Side A and Side B?

Side A Side B
a. 640,000 540,000
b. 586,656 494,991
c. 275,000 275,000
d. 272,500 277,500

16. What would be the overhead cost per unit for Products Side A and Side B?

Side A Side B
a. P 46.97 P 48.65
b. 43.06 44.59
c. 20.18 24.77
d. 20.00 25.00

17. Nemo Company has the following data:

OH Cost Pool Budgeted Budgeted Level Cost Driver OH Rate

OH Cost for Cost Driver
Weight of
Direct materials 120,000 3,000 pounds raw material 40
Number of
Machine set-up 9,750 325 repetitions repetitions 30
Machine repair
time 1,045 5 units Unit of time* 209
Number of
Inspections 8,100 135 inspections inspections 60

Requirements for Job 222

Raw materials 100 pounds
Machine setup 25 repetitions
Machine repair time 0.5 hours
Inspections 10 inspections

*One unit equals 15-minute intervals

3
 The total overhead that should be assigned to job 222 is

a. P5,350 c. P4,750
b. P4,000 d. P5,768

ITEMS 18 AND 19 ARE BASED ON THE FOLLOWING INFORMATION:

The cost accountant or L. Rosales. Inc. is considering to use the ABC system
in determining the cost of its products.

At present, the company uses the traditional costing system wherein factory
overhead costs are allocated based on direct later hours. The cost accountant
believes that the present system may be providing misleading cost information,
hence, the plan to change to the ABC system.

For the corning period, the company is planning to use 5,000 direct labor
hours, and its total budgeted factory overhead amounts to P90,000 broken
down as follows:

Budgeted Budgeted
Activity Cost Driver Activity Cost
1. Setup costs Number of setups 40 P20,000
2. Production monitoring Number of batches 20 40,000
3. Quality control Number of inspections 1,000 30,000
Total overhead cost P90,000

Projected data for one of the company’s products, Product X, for the coming
period are as follows:

Production and sales 1,000 units

Direct labor hours 2,000 hours
Units per batch 500
Number of set-ups 4
Number of inspections 200
Direct material cost P10 per unit
Direct labor rate P20 per hour

18. If the company will use the traditional full cost system, the cost per unit of
product X for the coming period will be

a. P36 c. P86
b. P50 d. P68

19. If the company will use the ABC system, the cost per unit of product X for the
coming period will be

a. P62 c. P86
b. P50 d. P12

20. Mitch Roxa Corp. produces and sells two products, A and B. Data about the
two products are as follows:

Product A Product B
Budgeted production 3,000 units 3,000 units
Direct labor hours 9,000 hours 15,000 hours
Number of setups 4 6
Cost per setup P1,800

If Mitch applies the setup cost on the basis of direct labor hours, the cross
subsidy per unit arising from this peanut-butter costing approach is

a. P0.15 c. P3.00
b. P1.20 d. P1.50

End