Chapter 5: Activity-Based Costing

MULTIPLE CHOICE UE!TIO"!

1. Consider the following statements regarding traditional costing systems: I.Overhead costs are applied to products on the basis of volume-related measures. II.All manufacturing costs are easily traceable to the goods produced. III.Traditional costing systems tend to distort unit manufacturing costs when numerous goods are made that have widely varying production re uirements. !hich of the above statements is "are# true$ A. I only. %. II only. C. III only. &. I and III. '. II and III. Answer: & (O: 1 Type: ) *. +any traditional costing systems: A. trace manufacturing overhead to individual activities and re uire the development of numerous activity-costing rates. %. write off manufacturing overhead as an e,pense of the current period. C. combine widely varying elements of overhead into a single cost pool. &. use a host of different cost drivers "e.g.- number of production setups- inspection hoursorders processed# to improve the accuracy of product costing. '. produce results far superior to those achieved with activity-based costing. Answer: C (O: 1 Type: ) .. The following tas/s are associated with an activity-based costing system: 10Calculation of cost application rates *0Identification of cost drivers .0Assignment of cost to products 10Identification of cost pools !hich of the following choices correctly e,presses the proper order of the preceding tas/s$ A. 1- *- .- 1. %. *- 1- 1- .. C. .- 1- *- 1. &. 1- *- 1- .. '. 1- *- .- 1. Answer: & (O: *- 1 Type: 2C

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1. !hich of the following is the proper se uence of events in an activity-based costing system$ A. Identification of cost drivers- identification of cost pools- calculation of cost application ratesassignment of cost to products. %. Identification of cost pools- identification of cost drivers- calculation of cost application ratesassignment of cost to products. C. Assignment of cost to products- identification of cost pools- identification of cost driverscalculation of cost application rates. &. Calculation of cost application rates- identification of cost drivers- identification of cost pools- assignment of cost to products. '. 3ome other se uence of the four activities listed above. Answer: % (O: *- 1 Type: 2C 4. !hich of the following tas/s is not normally associated with an activity-based costing system$ A. Calculation of cost application rates. %. Identification of cost pools. C. 5reparation of allocation matrices. &. Identification of cost drivers. '. Assignment of cost to products. Answer: C (O: *- 1 Type: 2C 6. !hich of the following is not a broad- cost classification category typically used in activity-based costing$ A. 7nit-level. %. %atch-level. C. 5roduct-sustaining level. &. 8acility-level. '. +anagement-level. Answer: ' (O: . Type: 2C 9. In an activity-based costing system- direct materials used would typically be classified as a: A. unit-level cost. %. batch-level cost. C. product-sustaining cost. &. facility-level cost. '. matri,-level cost. Answer: A (O: . Type: ) :. !hich of the following is least li/ely to be classified as a batch-level activity in an activity-based costing system$ A. 3hipping. %. 2eceiving and inspection. C. 5roduction setup. &. 5roperty ta,es. '. ;uality assurance. Answer: & (O: . Type: 2C

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<. In an activity-based costing system- materials receiving would typically be classified as a: A. unit-level activity. %. batch-level activity. C. product-sustaining activity. &. facility-level activity. '. period-level activity. Answer: % (O: . Type: 2C 1=. 8oster- Inc.- an appliance manufacturer- is developing a new line of ovens that uses controlledlaser technology. The research and testing costs associated with the new ovens is said to arise from a: A. unit-level activity. %. batch-level activity. C. product-sustaining activity. &. facility-level activity. '. competitive-level activity. Answer: C (O: . Type: ) 11. Consider the following statements regarding product-sustaining activities: I.They must be done for each batch of product that is made. II.They must be done for each unit of product that is made. III.They are needed to support an entire product line. !hich of the above statements is "are# true$ A. I only. %. II only. C. III only. &. I and II. '. II and III. Answer: C (O: . Type: 2C 1*. !hich of the following is least li/ely to be classified as a facility-level activity in an activitybased costing system$ A. 5lant maintenance. %. 5roperty ta,es. C. +achine processing cost. &. 5lant depreciation. '. 5lant management salaries. Answer: C (O: . Type: 2C

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1.. The salaries of a manufacturing plant>s management are said to arise from: A. unit-level activities. %. batch-level activities. C. product-sustaining activities. &. facility-level activities. '. direct-cost activities. Answer: & (O: . Type: 2C 11. !hich of the following choices correctly depicts a cost that arises from a batch-level activity and one that arises from a facility-level activity$ %atch-(evel 8acility-(evel Activity Activity A. &irect materials 5lant depreciation %. Inspection 5roperty ta,es C. ;uality assurance 3hipping &. 5lant maintenance Insurance '. +anagement salaries +aterial handling Answer: % (O: . Type: 2C 14. The division of activities into unit-level- batch-level- product-sustaining level- and facility-level categories is commonly /nown as a cost: ob?ect. application method. hierarchy. estimation method. classification scheme that is useful in traditional- volume-based systems. Answer: C (O: . Type: 2C 16. Alamo>s customer service department follows up on customer complaints by telephone in uiry. &uring a recent period- the department initiated 9-=== calls and incurred costs of @*=.-===. If *-<1= of these calls were for the company>s wholesale operation "the remainder were for the retail division#- costs allocated to the retail division should amount to: A. @=. %. @*<. C. @:4-*6=. &. @119-91=. '. @*=.-===. Answer: & (O: 1 Type: A

A. %. C. &. '.

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7se the following to answer uestions 19-1:: 2iverside 8lorists uses an activity-based costing system to compute the cost of ma/ing floral bou uets and delivering the bou uets to its commercial customers. Company personnel who earn @1:=-=== typically perform both tas/sA other firm-wide overhead is e,pected to total @9=-===. These costs are allocated as follows: %ou uet 5roduction 6=B 4=B &elivery .=B .4B Other 1=B 14B

!ages and salaries Other overhead

2iverside anticipates ma/ing *=-=== bou uets and 1-=== deliveries in the upcoming year. 19. The cost of wages and salaries and other overhead that would be charged to each bou uet made is: A. @9.14. %. @:.94. C. @1*.4=. &. @1..94. '. some other amount. Answer: A (O: 1 Type: A 1:. The cost of wages and salaries and other overhead that would be charged to each delivery is: A. @1<.6.. %. @*=..1. C. @*6.94. &. @1=.6.. '. some other amount. Answer: A (O: 1 Type: A

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7se the following to answer uestions 1<-*9: CiTech 5roducts manufactures three types of remote-control devices: 'conomy- 3tandard- and &elu,e. The company- which uses activity-based costing- has identified five activities "and related cost drivers#. 'ach activity- its budgeted cost- and related cost driver is identified below. Activity +aterial handling +aterial insertion Automated machinery 8inishing 5ac/aging Total Cost @ **4-=== *-194-=== :1=-=== 19=-=== 19=-=== @.-::=-=== Cost &river )umber of parts )umber of parts +achine hours &irect labor hours Orders shipped

The following information pertains to the three product lines for ne,t year: 7nits to be produced Orders to be shipped )umber of parts per unit +achine hours per unit (abor hours per unit 'conomy 1=-=== 1-=== 1= 1 * 3tandard 4-=== 4== 14 . * &elu,e *-=== *== *4 4 *

1<. !hat is CiTech>s cost application rate for the material-handling activity$ A. @1.== per part. %. @*.*4 per part. C. @6.6* per labor hour. &. @1..*. per part. '. A rate other than those listed above. Answer: A (O: 1 Type: A *=. !hat is CiTech>s cost application rate for the automated machinery activity$ A. @*1.== per machine hour. %. @*1.4= per labor hour. C. @1<.1* per unit. &. @4=.== per machine hour. '. A rate other than those listed above. Answer: A (O: 1 Type: A *1. !hat is CiTech>s cost application rate for the finishing activity$ A. @4.== per labor hour. %. @4.== per machine hour. C. @4.== per unit. &. @9.4= per unit. '. A rate other than those listed above. Answer: A (O: 1 Type: A

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**. !hat is CiTech>s cost application rate for the pac/aging activity$ A. @1.:6 per machine hour. %. @4.== per labor hour. C. @1=.== per unit. &. @1==.== per order shipped. '. A rate other than those listed above. Answer: & (O: 1 Type: A *.. 7nder an activity-based costing system- what is the per-unit cost of 'conomy$ A. @111. %. @161. C. @**4. &. @**:. '. An amount other than those listed above. Answer: % (O: 1 Type: A *1. 7nder an activity-based costing system- what is the per-unit cost of 3tandard$ A. @161. %. @**:. C. @*9*. &. @*:*. '. An amount other than those listed above. Answer: C (O: 1 Type: A *4. 7nder an activity-based costing system- what is the per-unit cost of &elu,e$ A. @*9*. %. @*:*. C. @.*=. &. @11=. '. An amount other than those listed above. Answer: & (O: 1 Type: A *6. Assume that CiTech is using a volume-based costing system- and the preceding manufacturing costs are applied to all products based on direct labor hours. Cow much of the preceding cost would be assigned to &elu,e$ A. @146-191. %. @616-191. C. @<61-196. &. @1-111-196. '. An amount other than those listed above. Answer: A (O: 1 Type: A

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*9. Assume that CiTech is using a volume-based costing system- and the preceding manufacturing costs are applied to all products based on direct labor hours. Cow much of the preceding cost would be assigned to 3tandard$ A. @146-191. %. @616-191. C. @<61-196. &. @1-111-196. '. An amount other than those listed above. Answer: & (O: 1 Type: A 7se the following to answer uestions *:-.1: Century- Inc.- currently uses traditional costing procedures- applying @1==-=== of overhead to products D and E on the basis of direct labor hours. The firm is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labor hours "&(C#- production setups "37#- and number of parts components "5C# as cost drivers. &ata on the cost pools and respective driver volumes follow. 5roduct D E 5ool Cost 5ool )o. 1 "&river: &(C# 6== 1-1== @:=-=== 5ool )o. * "&river: 37# .= 4= @11=-=== 5ool )o. . "&river: 5C# 1-4== 1-=== @1:=-===

*:. The overhead cost allocated to product D by using traditional costing procedures would be: A. @1*=-===. %. @1:1-4==. C. @*14-4==. &. @*:=-===. '. some other amount. Answer: A (O: 1 Type: A *<. The overhead cost allocated to product E by using traditional costing procedures would be: A. @1*=-===. %. @1:1-4==. C. @*14-4==. &. @*:=-===. '. some other amount. Answer: & (O: 1 Type: A

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.=. The overhead cost allocated to product D by using activity-based costing procedures would be: A. @1*=-===. %. @1:1-4==. C. @*14-4==. &. @*:=-===. '. some other amount. Answer: % (O: 1 Type: A .1. The overhead cost allocated to product E by using activity-based costing procedures would be: A. @1*=-===. %. @1:1-4==. C. @*14-4==. &. @*:=-===. '. some other amount. Answer: C (O: 1 Type: A 7se the following to answer uestions .*-..: Felly and (ogan- an accounting firm- provides consulting and ta, planning services. A recent analysis found that 64B of the firm>s billable hours to clients resulted from ta, planning and for many years- the firm>s total administrative cost "currently @*4=-===# has been allocated to services on this basis. The firm- contemplating a change to activity-based costing- has identified three components of administrative cost- as follows: 3taff support In-house computing charges +iscellaneous office costs Total @1:=-=== 4=-=== *=-=== @*4=-===

A recent analysis of staff support found a strong correlation with the number of clients served "consulting*=A ta, planning- 6=#. In contrast- in-house computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions- respectively. Consulting consumed .=B of the firm>s computer hours and had *=B of the total client transactions. .*. Assuming the use of activity-based costing- the proper percentage to use in allocating staff support costs to ta, planning services is: A. *=B. %. 6=B. C. 64B. &. 94B. '. :=B. Answer: & (O: 1 Type: A

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... If Felly and (ogan switched from its current accounting method to an activity-based costing system- the amount of administrative cost chargeable to consulting services would: A. decrease by @*.-4==. %. increase by @*.-4==. C. decrease by @.*-4==. &. change by an amount other than those listed above. '. change- but the amount cannot be determined based on the information presented. Answer: A (O: 1- 1 Type: A .1. Activity-based costing systems: A. use a single- volume-based cost driver. %. assign overhead to products based on the products> relative usage of direct labor. C. often reveal products that were under- or overcosted by traditional costing systems. &. typically use fewer cost drivers than more traditional costing systems. '. have a tendency to distort product costs. Answer: C (O: 4 Type: 2C .4. &reyfus +anufacturing sells a number of goods whose selling price is heavily influenced by cost. A recent study of product no. 41< revealed a traditionally-derived total cost of @1-=1<- a selling price of @1-:4= based on that figure- and a newly computed activity-based total cost of @1-*14. !hich of the following statements is true$ A. All other things being e ual- the company should consider a drop in its sales price. %. The company may have been e,tremely competitive in the mar/etplace from a price perspective. C. 5roduct no. 41< could be labeled as being overcosted by the firm>s traditional costing procedures. &. If product no. 41< is undercosted by traditional accounting procedures- then all of the company>s other products must be undercosted as well. '. Generally spea/ing- the activity-based cost figure is Hless accurateI than the traditionallyderived cost figure. Answer: % (O: 4 Type: ) .6. Janguard combines all manufacturing overhead into a single cost pool and allocates this overhead to products by using machine hours. Activity-based costing would li/ely show that with Janguard>s current proceduresA. all of the company>s products are undercosted. %. the company>s high-volume products are undercosted. C. all of the company>s products are overcosted. &. the company>s high-volume products are overcosted. '. the company>s low-volume products are overcosted. Answer: & (O: 4 Type: )

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.9. Kac/son manufactures products D and E- applying overhead on the basis of labor hours. D- a low-volume product- re uires a variety of comple, manufacturing procedures. E- on the other hand- is both a high-volume product and relatively simplistic in nature. !hat would an activitybased costing system li/ely disclose about products D and E as a result of Kac/son>s current accounting procedures$ D E A. 7ndercosted 7ndercosted %. 7ndercosted Overcosted C. Overcosted 7ndercosted &. Overcosted Overcosted '. Costed correctly Costed correctly Answer: % (O: 4 Type: 2C .:. Fos/i manufactures products K and F- applying overhead on the basis of labor hours. K- a lowvolume product- re uires a variety of comple, manufacturing procedures. F- on the other handis both a high-volume product and relatively simplistic in nature. !hat would an activity-based costing system li/ely disclose about products K and F as a result of Fos/i>s current accounting procedures$ 7ndercosted Overcosted A. K- F %. K- F C. K F &. F K '. )one of the above- as both products are costed correctly. Answer: C (O: 4 Type: 2C .<. Consider the following statements: I.5roduct diversity creates costing problems because diverse products tend to utiliLe manufacturing activities in different ways. II.Overhead costs that are not incurred at the unit level create costing problems because such costs do not vary with traditional application bases such as direct labor hours or machine hours. III.5roduct diversity typically e,ists when a single product "e.g.- a ballpoint pen# is made in different colors. !hich of the above statements is "are# true$ A. I only. %. II only. C. I and II. &. I and III. '. II and III. Answer: C (O: 4 Type: 2C

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1=. Consumption ratios are useful in determining: A. the e,istence of product-line diversity. %. overhead that is incurred at the unit level. C. if overhead-producing activities are being utiliLed effectively. &. if overhead costs are being applied to products. '. if overhead-producing activities are being utiliLed efficiently. Answer: A (O: 4 Type: 2C 11. !idely varying consumption ratios: A. are reflective of product-line diversity. %. indicate an out-of-control production environment. C. dictate a need for traditional costing systems. &. wor/ against the implementation of activity-based costing. '. create an unsolvable product-costing problem. Answer: A (O: 4 Type: 2C 1*. +oon %ay +anufacturing uses machine hours to apply manufacturing overhead to products. This method of costing would li/ely be acceptable if the company has: A. a large proportion of unit-level activities. %. a large proportion of unit-level activities and fairly identical consumption ratios among product lines. C. a large proportion of unit-level activities and widely varying consumption ratios among product lines. &. a large proportion of nonunit-level activities. '. a large proportion of nonunit-level activities and fairly identical consumption ratios among product lines. Answer: % (O: 4 Type: ) 1.. In comparison with a system that uses a single- volume-based cost driver- an activity-based costing system is preferred when a company has: A. a large proportion of nonunit-level activities. %. product-line diversity or a large proportion of nonunit-level activities. C. minimal product-line diversity and a small proportion of nonunit-level activities. &. e,isting variances from budgeted amounts. '. a situation other than those noted above. Answer: % (O: 4 Type: 2C

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11. Consider the following factors: I.The degree of correlation between consumption of an activity and consumption of a particular cost driver. II.The li/elihood that a particular cost driver will induce a desired behavioral effect. III.The li/elihood that a particular cost driver will cause an increase in the cost of measurement. !hich of these factors should be considered in the selection of a cost driver$ A. I only. %. I and II. C. I and III. &. II and III. '. I- II- and III. Answer: ' (O: 6 Type: 2C 14. !hich of the following activity cost pools and activity measures li/ely has the lowest degree of correlation$ Activity Cost 5ool Activity +easure A. Order department )umber of orders processed %. 3ales management Time spent by managers in each sales territory C. Accounts receivable processing )umber of customers &. Catering )umbers of meals served '. 'mployee travel to ?ob sites "sites are )umber of employees within 1==-mile radius of company head uarters# Answer: ' (O: 6 Type: ) 16. Grossman 'nterprises is converting to an activity-based costing system and needs to depict the various activities in its manufacturing process along with the activities> relationships. !hich of the following is a possible tool that the company can use to accomplish this tas/$ A. 3toryboards. %. Activity relationship charts "A2Cs#. C. &ecision trees. &. 3imulation games. '. 5rocess organiLers. Answer: A (O: 9 Type: 2C

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19. 3uccessful adoptions of activity-based costing typically occur when companies rely heavily on: A. finance personnel. %. accounting personnel. C. manufacturing personnel. &. office personnel. '. multidisciplinary pro?ect teams. Answer: ' (O: 9 Type: 2C 1:. 7nder a traditional costing system- which of the following costs would li/ely be classified as indirect with respect to the various products manufactured$ A. 5lant maintenance. %. 8actory supplies. C. 7tilities. &. +achinery depreciation. '. All of the above would be considered indirect costs. Answer: ' (O: 9 Type: ) 1<. !illiams Corporation is changing from a traditional costing system to an activity-based system. As a result of this action- which of the following costs would li/ely change from indirect to direct$ A. &irect materials. %. 8actory supplies. C. 5roduction setup. &. 5roduction setup and finished-goods inspection. '. 5roduction setup- finished-goods inspection- and product shipping. Answer: ' (O: 9 Type: ) 4=. !hich of the following generally fails to signal the need for a new product-costing system$ A. (ine managers do not believe reported product costs. %. Comple, products have high reported profitability despite the lac/ of premium prices. C. Overhead rates are high and increasing over time. &. (ine managers suggest that seemingly profitable products be dropped. '. 5roduct-line profit margins are easy to e,plain. Answer: ' (O: 9 Type: 2C 41. Of the following organiLations- activity-based costing cannot be used by: A. manufacturers. %. financial-services firms. C. boo/ publishers. &. hotels. '. none of the above- as all are able to use this costing system. Answer: ' (O: : Type: 2C

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4*. !hich of the following statements about activity-based costing "A%C# is false$ A. A%C cannot be used by service businesses. %. In comparison with traditional costing systems- A%C tends to use more cost pools and more cost drivers. C. In comparison with traditional-costing systems- A%C results in less cost HaveragingI of various diversified activities. &. In comparison with traditional-costing systems- A%C results in more costs being classified as direct costs. '. A%C tends to reduce cost distortion among product lines. Answer: A (O: : Type: )

4.. A hospital administrator is in the process of implementing an activity-based-costing system. !hich of

%. C. &. the following tas/s would not be part of this process$ A. Identification of cost pools. Calculation of cost application rates. Assignment of cost to services provided. Identification of cost drivers. '. )one of the above- as all these tas/s would be part of the process. Answer: ' (O: : Type: 2C E#E$CI!E! C%assi&ication o& Activities 41. 3t. Celena Cellars produces wine in northern California. Consider the following selected costs that arose during the current year: 1. *. .. 1. 4. 6. 3afety costs at winery Truc/load shipping costs %uilding maintenance costs %ottle and cor/ cost &evelopment cost of new- after-dinner wine Tasting and testing costs

2e uired: A. %riefly distinguish between unit-level and product-sustaining activities. %. Classify the si, costs listed as arising from a unit-level- batch-level- product-sustaining- or facility-level activity. (O: . Type: 2C- )

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Answer: A. A unit-level activity is performed for each unit of production. In contrast- a productsustaining activity is needed to support an entire product line. The latter is not necessarily performed each time a new unit or batch of products is manufactured. %. 1 . * . . . 1 . 4 . 6 . 8acility-level %atch-level 8acility-level 7nit-level 5roduct-sustaining %atch-level

C%assi&ication o& Activities 44. Consider the following costs that relate to a ban/ and a manufacturer of software: "an# 1. 2eview cost of commercial loan applications *. Operating cost of human resources department .. Immediate processing cost of a specific customer>s cash deposit 1. %an/ membership cost of ?oining local Chamber of Commerce So$t%are &anu$acturer 4. (abel and pac/aging charges from a commercial printer for a new software release 6. Air conditioningMheating costs of the firm>s production plant 9. Transport cost of moving the C&-output from production run no. 1 to the company>s warehouse :. &esign- development- and coding cost of new spreadsheet software 2e uired: A. Classify the eight costs listed as arising from either a unit-level- batch-level- productsustaining- or facility-level activity. %. !ould number of loan applications or number of customers be a more appropriate cost-driver base for the review of loan applications$ %riefly e,plain. (O: .- 6 Type: 2C- ) Answer: A. 1. *. .. 1. %. 7nit-level 8acility-level 7nit-level 8acility-level 4. 6. 9. :. 5roduct-sustaining 8acility-level %atch-level 5roduct-sustaining

The number of loan applications would be more appropriate because it has a higher correlation with the amount of review cost incurred. Applications create review costA customers- on the other handHilton, Managerial Accounting, Seventh Edition

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may not.

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C%assi&ication o& Activities 46. Ale,ander Corporation produces flat-screen computer monitors. Consider the following selected costs that arose during the current year: 1. *. .. 1. 4. 6. 9. &irect materials used: @.-61=-=== 5lant rent- utilities- and ta,es: @1-**<-=== )ew technology design engineering: @*-=1=-=== +aterials receiving: @.1:-=== +anufacturing-runMset-up charges: @114-=== ' uipment depreciation: @<*-=== General management salaries: @1-461-===

2e uired: A. %riefly distinguish between batch-level and facility-level activities. %. &etermine the cost of the firm>s unit-level- batch-level- product-sustaining- and facility-level activities. (O: . Type: 2C- )- A Answer: A. A batch-level activity is performed for each batch of products rather than for each unit. In contrast- a facility-level activity is re uired for an entire process to occur. ',amples of the latter- which support the organiLation as a whole- include plant maintenance and property ta,es.

%. 7nit-level: @.-61=-=== "1#

%atch-level: @.1:-=== "1# N @114-=== "4# O @1..-=== 5roduct-sustaining: @*-=1=-=== ".# 8acility-level: @1-**<-=== "*# N @<*-=== "6# N @1-461-=== "9# O @*-::4-=== Activity-Based Costing' Traditiona% Costing 49. The controller for !olfe +achining has established the following overhead cost pools and cost drivers: Overhead Cost 5ool +achine setups +aterial handling ;uality control inspection Other overhead costs Total Overhead Cost 5ool +achine setups +aterial handling ;uality control Other overhead
126

%udgeted Overhead Cost @*1=-=== <=-=== 1:-=== 16=-=== @4.:-=== %udgeted (evel for Cost &river *== setups 6=-=== units 1-*== inspections *=-=== machine hours

Cost &river )umber of setups 7nits of raw material )umber of inspections +achine hours

Overhead 2ate @1-*== per setup @1.4= per unit @1= per inspection @: per machine hour

Hilton, Managerial Accounting, Seventh Edition

Order no. 914 has the following production re uirements: +achine setups: 9 2aw material: 11-*== units Inspections: 16 +achine hours: :4= 2e uired: A. Compute the total overhead that should be assigned to order no. 914 by using activity-based costing. %. 3uppose that !olfe were to use a single- predetermined overhead rate based on machine hours. Compute the rate per hour and the total overhead assigned to order no. 914. C. &iscuss the merits of an activity-based costing system in comparison with a traditional costing system. (O: 1- 1- 4 Type: A- )

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Answer: A. Overhead Cost 5ool +achine setups +aterial handling ;uality control Other overhead costs Total % C.

5redetermined Overhead 2ate @1-*== per setup @1.4= per unit @1= per inspection @: per machine hour

(evel of Cost &river 9 setups 11-*== units 16 inspections :4= machine hours

Cost @ :-1== 16-:== 61= 6-:== @.*-61=

@4.:-=== *=-=== machine hours O @*6.<= per hourA @*6.<= per hour , :4= hours O @**-:64 Activity-based costing "A%C# uses multiple cost drivers- more closely aligning individual costs with the factors that are creating them. Traditional systems- in contrast- use fewer drivers and therefore result in HlumpingI of unli/e activities together. The end result is that A%C tends to eliminate the cost distortion that sometimes arises with traditional systems- more specifically- the under- or overcosting of products.

Activity-Based Costing: Cost (istortion 4:. Academy 'nterprises uses a traditional-costing system to estimate uality-control costs for its 5&A product line. Costs are estimated at .*B of direct-labor cost- and direct labor totaled @41:-=== for the uarter ?ust ended. +anagement is contemplating a change to activity-based costing- and has established three cost pools: incoming material inspection- in-process inspectionand final product certification. )umber of parts- number of units- and number of orders have been selected as the respective cost drivers. The following data show the application rates that have been calculated by the company along with the uantity of driver units for the 5&As: Cost Application 2ate @ =.4= per part =.1= per unit 11=.== per order &river ;uantities 11 parts *6-=== units := orders

2e uired: A. Calculate the uarterly uality-control cost that is allocated to the 5&A product line under AcademyPs traditional-costing system. %. Calculate the uarterly uality-control cost that is allocated to the 5&As if activity-based costing used. C. &oes the traditional approach under- or overcost the product line$ %y how much$ (O: 1- 1- 4 Type: A- )

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Answer: A. @41:-=== , .*B O @194-.6= %. Incoming inspection "@=.4= , 11 , *6-=== O @1:*-===# N in-process inspection "*6-=== , @=.1= O @*-6==# N final certification ":= , @11= O @:-:==#- which totals @1<.-1==. C. Traditional costing undercosts the 5&As by @1:-=1= "@1<.-1== - @194-.6=#. Activity-Based Costing: )a%itative E*phasis

4<. 3tar +anufacturing- contemplating the adoption of an activity-based costing system- has established three activity-cost pools: machine setup- uality assurance- and engineering. These cost pools- the appropriate cost driver- and the percentage of each cost driver consumed by the company>s products "C14- C16- and C19# follow. Cost 5ool +achine setup ;uality assurance 'ngineering Cost &river )umber of setups )umber of inspections )umber of change orders C14 4=B 9=B 14B C16 *=B 14B 1=B C19 .=B 14B 94B

'stimated costs for these three activities- which account for :=B of the firm>s total overhead- are @1==-===- @4==-===- and @1*=-===- respectively. 3tar currently applies manufacturing overhead to products on the basis of machine hours. 2e uired: A. !ill activity-based costing systems re uire more or fewer cost pools than traditional costing systems$ )o e,planation is necessary. %. Calculate the cost of machine setup- uality assurance- and engineering to be charged to product C19. C. Consider the company>s current overhead application procedure. 1. Is 3tar emphasiLing unit-level activities- batch-level activities- product-sustaining activities- or facility-level activities$ ',plain. *. Cow accurate will the current costing procedure be given the nature of most of the company>s activities$ %riefly discuss. .. Cow accurate will the current costing procedure be given the consumption ratios of the firm$ %riefly discuss. (O: 1- .- 1- 4 Type: A- )

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Answer: A. +ore %. +achine setup: @1==-=== , .=B O @1*=-=== ;uality assurance: @4==-=== , 14B O @94-=== 'ngineering: @1*=-=== , 94B O @<=-=== 1. *. The company currently applies overhead on the basis of machine hours- therefore emphasiLing unit-level activities. +achine hours are consumed for each unit produced. The current procedure is probably not very accurate. The ma?ority of 3tar>s overhead ":=B# is created by setups- inspections- and engineering change orders- not machine hours. In this case- for instance- setups and "li/ely# inspection are really batch-level activities whereas engineering costs are caused by product-sustaining activities. The consumption ratios vary e,tensively from one product to the ne,t- thus indicating product diversity. The use of a single driver "machine hours in this case# will not recogniLe this diversity and will give rise to cost distortion.

C.

..

Activity-Based Costing: Ana%ysis E*phasis 6=. Fenyon Company produces two products "846 and 849#- applying manufacturing overhead on the basis of direct labor hours. Anticipated unit production costs "material- labor- and overhead# and manufacturing volumes are: 846: *-=== units- @*.1 849: .-4== units- @*91 Fenyon>s overhead arises because of various activities- one of which is purchase-order processing. %udgeted cost for this activity is e,pected to be @9=-===. The firm believes that the number of purchase orders processed is a /ey cost driver and e,pects the following activity for its products: 846- 1= purchase ordersA 849- 1= purchase orders. Fenyon>s selling prices are based heavily on cost. 2e uired: A. Activity-based costing "A%C# is said to result in improved costing accuracy when compared with traditional costing procedures. %riefly e,plain how this improved accuracy is attained. %. Compute: 1. the pool application rate for purchase-order processing. *. the purchase-order processing cost to be charged to one unit of 846. C. Assume that Fenyon switched to activity-based costing and calculated total unit production costs as follows: 846- @*:4A 849- @**=. 1. !hich of the two products- 846 or 849- was overcosted prior to the change to A%C$ )o e,planation is necessary. *. !hich of the two products- 846 or 849- may have been less competitive in the mar/etplace prior to the change to A%C$ %riefly e,plain.

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(O: 1- 1- 4 Type: A- ) Answer: A. Activity-based costing "A%C# uses multiple cost drivers- more closely aligning individual costs with the factors that are creating them. Traditional systems- in contrast- use fewer drivers and therefore result in QlumpingQ of unli/e activities "unitlevel- batch-level- and so forth# together. The end result is that A%C tends to eliminate the cost distortion that sometimes arises with traditional systems- more specifically- the under- or overcosting of products. Additionally- the use of multiple cost drivers allows users to better consider variations in consumption ratios that may e,ist among product lines. %. C. 1. *. 1. *. @9=-=== R "1= N 1=# O @1-1== per order @1-1== , 1= O @11-===A @11-=== R *-=== units O @9 849 "traditional- @*91 vs. A%C- @**=# 849. Fenyon>s selling prices are based heavily on cost. An overcosted product will result in a higher selling price- which may ma/e the company less competitive.

Activity-Based Costing: Ana%ysis E*phasis 61. (enno, Industries manufactures two products: A and %. A review of the company>s accounting records revealed the following per-unit costs and production volumes: 5roduction volume "units# &irect material &irect labor: * hours at @1* . hours at @1* +anufacturing overhead: * hours at @<. . hours at @<. A *-4== @ 1= *1 .6 1:6 *9< % 4-=== @ 6=

+anufacturing overhead is currently computed by spreading overhead of @1-:6=-=== over *=-=== direct labor hours. +anagement is considering a shift to activity-based costing in an effort to improve the firm>s accounting procedures- and the following data are available: Cost 5ool 3etups General factory +achine processing Cost @ *1=-=== 1-4==-=== 1*=-=== @1-:6=-=== Cost &river )umber of setups &irect labor hours +achine hours Cost &river Jolume A % Total 1== *= 1*= 4-=== 14-=== *=-=== *-*== :== .-===

(enno, determines selling prices by adding 1=B to a product>s total cost.

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2e uired: A. Compute the per-unit cost and selling price of product % by using (enno,>s current costing procedures. %. Compute %>s per-unit overhead cost of product % if the company switches to activitybased costing. C. Compute the total per-unit cost and selling price under activity-based costing. &. (enno, has recently encountered significant international competition for product %with considerable business being lost to very aggressive suppliers. !ill activity-based costing allow the company to be more competitive with product % from a price perspective$ %riefly e,plain. '. !ill the cost and selling price of product A li/ely increase or decrease if (enno, changes to activity-based costing$ !hy$ Cint: )o calculations are necessary. (O: 1- 1- 4 Type: A- ) Answer: A. &irect material &irect labor +anufacturing overhead 5er-unit cost +ar/up "@.94 , 1=B# 3elling price %. @ 6= .6 *9< @.94 14= @4*4

3etups: @*1=-=== R 1*= setups O @*-=== per setup General factory: @1-4==-=== R *=-=== direct labor hours O @94 per direct labor hour +achine processing: @1*=-=== R .-=== machine hours O @1= per machine hour Overhead cost for product %: 3etups: *= setups , @*-=== General factory: 14-=== labor hours , @94 +achine processing: :== machine hours , @1= Total Overhead per unit: @1-1<9-=== R 4-=== units O @*.<.1= @ 1=-=== 1-1*4-=== .*-=== @1-1<9-===

C.

&irect material &irect labor +anufacturing overhead 5er-unit cost +ar/up "@..4.1= , 1=B# 3elling price

@ 6=.== .6.== *.<.1= @..4.1= 1.1.16 @16<.46

&. '.

Ees. The switch to activity-based costing results in a lower cost being assigned to product % "@..4.1= vs. @.94# and thus a lower selling price. %ecause less overhead cost is assigned to product % under activity-based costing- more will be assigned to product A. A higher cost translates into a higher selling price.

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Activity-Based and Traditiona% Costing+ Cost (istortion 6*. 3cott- Inc.- manufactures two products- 2egular and &elu,e- and applies overhead on the basis of direct labor hours. Anticipated overhead and direct labor time for the upcoming accounting period are @1-6==-=== and *4-=== hours- respectively. Information about the company>s products follows. 'egular( 'stimated production volume: .-=== units &irect materials cost: @*: per unit &irect labor per unit: . hours at @14 per hour )elu*e( 'stimated production volume: 1-=== units &irect materials cost: @1* per unit &irect labor per unit: 1 hours at @14 per hour 3cott>s overhead of @1-6==-=== can be identified with three ma?or activities: order processing "@*4=-===#- machine processing "@1-*==-===#- and product inspection "@14=-===#. These activities are driven by number of orders processed- machine hours wor/ed- and inspection hoursrespectively. &ata relevant to these activities follow. Orders 5rocessed .*= 1:= 4== +achine Cours !or/ed 16-=== *1-=== 1=-=== Inspection Cours 1-=== 6-=== 1=-===

2egular &elu,e Total

2e uired: A. Compute the application rates that would be used for order processing- machine processingand product inspection in an activity-based costing system. %. Assuming use of activity-based costing- compute the unit manufacturing costs of 2egular and &elu,e if the e,pected manufacturing volume is attained. C. Cow much overhead would be applied to a unit of 2egular and &elu,e if the company used traditional costing and applied overhead solely on the basis of direct labor hours$ !hich of the two products would be undercosted by this procedure$ Overcosted$ (O: 1- 1- 4 Type: A- )

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Answer: A. Order processing: @*4=-=== R 4== orders processed "O5# O @4== per O5 +achine processing: @1-*==-=== R 1=-=== machine hours "+C# O @.= per +C 5roduct inspection: @14=-=== R 1=-=== inspection hours "IC# O @14 per IC %. Activity Order processing: .*= O5 , @4== 1:= O5 , @4== +achine processing: 16-=== +C , @.= *1-=== +C , @.= 5roduct inspection: 1-=== IC , @14 6-=== IC , @14 Total 5roduction volume "units# Cost per unit S @9==-=== R .-=== units O @*..... SS@<==-=== R 1-=== units O @**4.== The cost of a 2egular unit is @.=6...- and the cost of a &elu,e unit is @.*9.==: 2egular @ *:.== 14.== *..... @.=6... 6=.== **4.== @.*9.== &elu,e @ 1*.== 2egular @16=-=== @ <=-=== 1:=-=== 9*=-=== 6=-=== @9==-=== .-=== @*.....S <=-=== @<==-=== 1-=== @**4.==SS &elu,e

&irect materials &irect labor: . hours , @14 1 hours , @14 Order processing- machine processing- and inspection Total cost C.

Overhead rate: @1-6==-=== R *4-=== direct labor hours "&(C# O @61 per &(C 2egular: . hours , @61 O @1<* &elu,e: 1 hours , @61 O @*46 2egular is undercosted by this procedure- as the more accurate A%C figure is @*...... In contrast- &elu,e is overcosted because the A%C figure for overhead amounts to only @**4.

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Activity-Based and Traditiona% Costing+ Price Change 6.. 5itney Corporation manufactures two types of transponders0no. 146 and no. 1490and applies manufacturing overhead to all units at the rate of @96.4= per machine hour. 5roduction information follows. Anticipated volume "units# &irect material cost &irect labor cost )o. 146 6-=== @1= *4 )o. 149 11-=== @64 *4

The controller- who is studying the use of activity-based costing- has determined that the firm>s overhead can be identified with three activities: manufacturing setups- machine processing- and product shipping. &ata on the number of setups- machine hours wor/ed- and outgoing shipmentsthe activities> three respective cost drivers- follow. 3etups +achine hours wor/ed Outgoing shipments )o. 146 6= 14-=== 1*= )o. 149 1= *4-=== := Total 1== 1=-=== *==

The firm>s total overhead of @.-=6=-=== is subdivided as follows: manufacturing setups@*6=-===A machine processing- @*-1==-===A and product shipping- @1==-===. 2e uired: A. Compute the application rates that would be used for manufacturing setups- machine processing- and product shipping in an activity-based costing system. %. Assuming use of activity-based costing- compute the unit overhead costs of product nos. 146 and 149 if the e,pected manufacturing volume is attained. C. Assuming use of activity-based costing- compute the total cost per unit of product no. 146. &. If the company>s selling price is based heavily on cost- would a switch to activity-based costing from the current traditional system result in a price increase or decrease for product no. 146$ 3how computations. (O: 1- 1- 4 Type: A- )

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Answer: A. +anufacturing setups: @*6=-=== R 1== setups "37# O @*-6== per 37 +achine processing: @*-1==-=== R 1=-=== machine hours "+C# O @6= per +C 5roduct shipping: @1==-=== R *== outgoing shipments "O3# O @*-=== per O3 %. Activity +anufacturing setup: 6= 37 , @*-6== 1= 37 , @*-6== +achine processing: 14-=== +C , @6= *4-=== +C , @6= 5roduct shipping: 1*= O3 , @*-=== := O3 , @*-=== Total 5roduction volume "units# Cost per unit S @1-*<6-=== R 6-=== units O @*16 SS@1-961-=== R 11-=== units O @1*6 C. &. &irect material "@1=# N direct labor "@*4# N overhead "@*16# O @*:1 +achine hours "14-===# R units produced "6-===# O *.4 hours per unitA *.4 hours , @96.4= O @1<1.*4 overhead applied &irect material "@1=.==# N direct labor "@*4.==# N overhead "@1<1.*4# O @*46.*4 5roduct no. 146 is currently undercosted "@*46.*4 vs. @*:1.==#- so a switch to activitybased costing will li/ely result in a price hi/e. Activity-Based Costing: !ervice App%ication 61. Ceartland %an/ T Trust operates in a very competitive mar/etplace- using a traditional labor-hour-based system to determine the cost of processing its mortgage loans. 2ecently- the firm e,plored a switch to activity-based costing to determine the accuracy of its previous ways. The following information is available: Activity Application processing (oan underwriting (oan closure Total Cost @ <==-=== :==-=== ::=-=== @*-4:=-=== &river Applications 7nderwriting hours (egal hours &river 7nits 1-=== 16-=== :-=== )o. 146 @ 146-=== @ 1=1-=== <==-=== 1-4==-=== *1=-=== @1-*<6-=== 6-=== @*16S 16=-=== @1-961-=== 11-=== @1*6SS )o. 149

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Two loan applications were originated and closed during the year. )o. 91.< consumed ..4 hours in loan underwriting and 1.4 hours in loan closure- for a total of 4.= hours. )o. 9:=< also re uired 4.= hours of time- subdivided as follows: *.= hours in loan underwriting and ..= hours in loan closure. 2e uired: A. 7se an activity-based-costing system and determine the cost of processing- underwritingand closing the two loan applications. %. &etermine the cost of processing the two loans if Ceartland uses the traditional laborhour-based system. Conversations with management found that- on average- each application too/ nine labor hours of processing time- e,cluding underwriting and closure. C. Is Ceartland ma/ing a mista/e by continuing to use a traditional system that is based on an average labor cost per hour$ !hy$ (O: 4- : Type: A- ) Answer: A. Cost pool rates: Application processing: @<==-=== R 1-=== O @**4 per application (oan underwriting: @:==-=== R 16-=== O @4= per underwriting hour (oan closure: @::=-=== R :-=== O @11= per legal hour Application no. 91.<: Application "@**4# N underwriting "..4 , @4= O @194# N closure "1.4 , @11= O @164# O @464 Application no. 9:=<: Application "@**4# N underwriting "*.= , @4= O @1==# N closure "..= , @11= O @..=# O @644 %. Total labor hours: Application processing "1-=== , < O .6-===# N underwriting "16-===# N closure ":-===# O 6=-=== Average rate per hour: @*-4:=-=== R 6=-=== O @1. per hour Application no. 91.<: "< N 4# , @1. O @6=* Application no. 9:=<: "< N 4# , @1. O @6=*

C. Ees. The traditional system results in an average cost per hour of @1.A yet- CeartlandPs hourly charges vary greatly based on the function being performed. 2ates range from @*4 per hour "@**4 R <# for application processing- to @4= per hour for underwriting- to @11= for legal services. A%C produces a more accurate determination of cost because three separate drivers are used rather than ?ust one. (I!CU!!IO" UE!TIO"!

An Overvie, o& Activity-Based Costing 64. Templeton Industries currently assigns overhead to products by using a predetermined rate based on direct labor hours. The company is considering the adoption of an activity-based costing "A%C# system- and management desires a brief overview of this system before it ma/es a final decision. Compare A%C with the company>s current system- focusing on the number of cost pools and cost drivers- costing accuracy- and cost distortion.

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(O: 1- * Type: 2C Answer: Templeton is currently combining all overhead into a single cost pool- to be applied to products by using a single cost driver "direct labor hours#. 3uch a practice results in the calculation of an QaverageQ cost because various cost relationships are being commingled. !ith A%C- cost pools are created for a company>s individual activities- and a cost driver is then selected for each activity0a driver that has a high degree of correlation with the activity>s consumption. The result is an increase in the number of cost pools and cost drivers when compared with current accounting procedures. The abandonment of QaverageQ costing leads to an improvement in costing accuracy and less cost distortion among a company>s products. +ore specifically- product diversity and use of nonunitlevel activities are now ta/en into account. E&&ect o& Environ*ent on Prod)ct-Costing !yste* 66. At a recent professional meeting- two controllers discussed product-costing problems in their respective companies. %oth controllers are familiar with A%C systems- but neither of their firms utiliLes such a system. Controller & reported that part of the problem in his firm results from ma?or differences among product lines with respect to unit volume- utiliLation of activities- uality assurance re uirements established by customers- and product siLe. Controller + noted that in her firm- which manufactures consumer goods- all items undergo the same basic production processes in the same se uence. Cowever- lately there has been a significant increase in the number of item colors. %oth controllers are worried about the potential distortion of product costs under their traditional product-costing systems. 2e uired: !hich controller should be more concerned about the potential distortion$ ',plain. (O: 4 Type: 2C- ) Answer: Controller & should be more concerned. The variety of product lines made in his firm>s facility reflects diversity at the product-line and cost levels. In Controller +>s firm- there still is only one product line- with an increasing number of models differentiated only by color. "In many applications- there is no or very little cost difference among color choices.# Thus- &>s firm may be the victim of cost distortion and a prime candidate for activity-based costing.

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Cost (rivers 69. &efine the term Qcost driverQ and discuss the factors that are important in the selection of appropriate cost drivers. (O: 6 Type: 2C Answer: A cost driver is an event or activity that results in the incurrence of costs. 8or e,ample- many of the costs in an automated environment are created by the operation of machines- and machine hours may be a suitable cost driver for overhead application. The first factor important in the selection of cost drivers is the degree of correlation "i.e.relationship# among the driver- the activity- and the cost. This relationship is crucial to achieve credibility and accuracy. Another factor is the cost of measurement. CostMbenefit tradeoffs must be ta/en into account. The system should contain drivers that identify /ey costs but if too many drivers are used- the system will be burdensome and e,pensive. %ehavioral effects must also be considered in identifying cost drivers. 3uch effects may influence the behavior of decision ma/ers- which could be good or bad depending on the outcome.

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