Activity Based Costing [THEORY]

Question 1

Which of the following statements is true?
A. Costs that are indirect to products are traceable to some activity.
B. The traditional approach to costing uses many different cost drivers.
C. Costs that are indirect to products are by definition traceable directly to products.
D. All of the above statements are true.

Answer 1

A. Costs that are indirect to products are traceable to some activity.

Question 2

Mass customization can be achieved through the use of
A. Activity-based costing. C. Just-in-time inventory.
B. Flexible manufacturing systems. D. all of the above.

Answer 2

B. Flexible manufacturing systems.

Question 3

Process value analysis is a key component of activity-based management that links product
costing and
A. Continuous improvement.
B. Reduction of the number of cost pools.
C. Overhead rates based on broad averages.
D. Accumulation of heterogeneous cost pools.

Answer 3

A. Continuous improvement.

Question 4

An approach to developing new ways to perform existing activities is called
A. Benchmarking. C. Process value analysis.
B. Caveat analysis. D. Re-engineering.

Answer 4

D. Re-engineering.

Question 5

A(n) _______________ method first traces costs to a department and then to products.
A. absorption costing C. direct costing
B. activity-based costing D. traditional costing

Answer 5

D. traditional costing

Question 6

Traditional overhead allocations result in which of the following situations?
A. The resulting allocations cannot be used for financial reports.
B. Overhead costs are assigned as period costs to manufacturing operations.
C. Low-volume products are assigned too much, and high-volume products are assigned too little overhead.
D. High-volume products are assigned too much overhead, and low-volume products are assigned too little overhead.

Answer 6

D. High-volume products are assigned too much overhead, and low-volume products are assigned too little overhead.

Question 7

Uniformly assigning the costs of resources to cost objects when those resources are actually used in a nonuniform way is called
A. department costing. C. peanut-butter costing.
B. overcosting. D. undercosting.

Answer 7

C. peanut-butter costing.

Question 8

Which of the following is NOT a trait of a traditional cost management system?
A. allocation intensive C. narrow and rigid product costing
B. focus on managing activities D. unit-based drivers

Answer 8

B. focus on managing activities

Question 9

Symptoms of an outdated cost system include all of the following EXCEPT
A. competitors’ prices appear unrealistically low.
B. products that are difficult to produce show little profit.
C. the company has a highly profitable niche all to itself.
D. product costs change because of changes in financial reporting.

Answer 9

B. products that are difficult to produce show little profit.

Question 10

Which of the following is NOT a sign of poor cost data?
A. The company seems to have a highly profitably niche all to itself.
B. Customers don’t balk at price increases for low-volume products.
C. Competitors’ prices for low-volume products appear much too high.
D. Competitors’ prices for high-volume products appear much too high.

Answer 10

D. Competitors’ prices for high-volume products appear much too high.

Question 11

Traditionally, managers have focused cost reduction efforts on
A. activities. C. departments.
B. costs. D. processes.

Answer 11

B. costs.

Question 12

An objective of activity-based management is to
A. eliminate the majority of centralized activities in an organization.
B. institute responsibility accounting systems in decentralized organizations.
C. reduce or eliminate non-value-added activities incurred to make a product or provide a service.
D. all of the above

Answer 12

C. reduce or eliminate non-value-added activities incurred to make a product or provide a service.

Question 13

A(n)_______________ method first traces costs to activities and then to products.
A. absorption costing C. direct costing
B activity-based costing D. traditional costing

Answer 13

B activity-based costing

Question 14

An accounting system that collects financial and operating data on the basis of the underlying
nature and extent of the cost drivers is
A. Activity-based costing. C. Direct costing.
B. Cycle-time costing. D. Variable costing.

Answer 14

A. Activity-based costing.

Question 15

Activity-based costing and generally accepted accounting principles differ in that ABC
A. does not define product costs in the same manner as GAAP.
B. cannot be used to compute an income statement, but GAAP can.
C. information is useful only to managers, while GAAP information is useful to all
organizational stakeholders.
D. is concerned only with costs generated from automated processes, but GAAP is
concerned with costs generated from both manual and automated processes.

Answer 15

A. does not define product costs in the same manner as GAAP.

Question 16

Design of an ABC system requires
A. an adjustment to product mix.
B. that the job bid process be redesigned.
C. that a cause-and-effect relationship exists between resource costs and individual activities.
D. both (A) and (C).

Answer 16

C. that a cause-and-effect relationship exists between resource costs and individual activities.

Question 17

In an activity-based costing system, what should be used to assign a department’s
manufacturing overhead cost to products produced in varying lot sizes?
A. A single cause and effect relationship.
B. Multiple cause and effect relationships.
C. Relative net sales values of the products.
D. A product’s ability to bear cost allocations.

Answer 17

B. Multiple cause and effect relationships.

Question 18

A basic assumption of activity-based costing (ABC) is that
A. Only variable costs are included in activity-cost pools.
B. All manufacturing costs vary directly with units of production.
C. Only costs that respond to unit-level drivers are product costs.
D. Products or services require the performance of activities, and activities consume resources.

Answer 18

D. Products or services require the performance of activities, and activities consume resources.

Question 19

Book Co. uses the activity-based costing approach for cost allocation and product costing purposes. Printing, cutting, and binding functions make up the manufacturing process. Machinery and equipment are arranged in operating cells that produce a complete product starting with raw materials. Which of the following are characteristic of Boo’s activity-based costing approach?
I. Cost drivers are used as a basis for cost allocation.
II. Costs are accumulated by department or function for purposes of product costing.
III. Activities that do not add value to the product are identified and reduced to the extent possible.
A. I only. C. I and III.
B. I and II. D. II and III.

Answer 19

C. I and III.

Question 20

The UNIQUE feature of an ABC system is the emphasis on
A. costing individual jobs. C. individual activities.
B. department indirect-cost rates. D. multiple-cost pools.

Answer 20

C. individual activities.

Question 21

ABC should be used in which of the following situations?
A. in all manufacturing firms
B. single-product firms with multiple steps
C. multiple-product firms with only a single process
D. multiple-product firms with multiple processing steps

Answer 21

D. multiple-product firms with multiple processing steps

Question 22

In activity-based costing, preliminary cost allocations assign costs to
A. activities. C. processes.
B. departments. D. products.

Answer 22

A. activities.

Question 23

In activity-based costing, final cost allocations assign costs to
A. activities. C. processes.
B. departments. D. products.

Answer 23

D. products.

Question 24

ABC systems create
A. one large cost pool.
B. activity-cost pools with a broad focus.
C. homogenous activity-related cost pools.
D. activity-cost pools containing many direct costs.

Answer 24

C. homogenous activity-related cost pools.

Question 25

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

Cost Pools || Allocation Bases 
A. Increase Increase 
B. No effect No effect
C. Increase No effect 
D. Increase No effect

Answer 25

A. Increase Increase

Question 26

If activity-based costing is implemented in an organization without any other changes being effected, total overhead costs will
A. remain constant and simply be spread over products differently.
B. be reduced because of the elimination of non-value-added activities.
C. be reduced because organizational costs will not be assigned to products or services.
D. be increased because of the need for additional people to gather information on cost drivers and cost pools.

Answer 26

A. remain constant and simply be spread over products differently.

Question 27

The use of activity-based costing normally results in
A. Equalizing setup costs for all product lines.
B. Decreased setup costs being charged to low-volume products.
C. Substantially greater unit costs for low-volume products than is reported by traditional product costing.
D. Substantially lower unit costs for low-volume products than is reported by traditional product costing.

Answer 27

C. Substantially greater unit costs for low-volume products than is reported by traditional product costing.

Question 28

The resource utilized by a given product divided by the total amount of the resource available is called the
A. Activity driver. C. Cost object.
B. Consumption ratio. D. Sustaining activity.

Answer 28

B. Consumption ratio.

Question 29

In Activity-based Costing, which of the following would be considered a value-added activity?
A. Bookkeeping. C. Repair of machines.
B. Engineering designs. D. Storage of inventory.

Answer 29

B. Engineering designs.

Question 30

In the pharmaceutical or food industries, quality control inspections would most likely be
viewed as
A. business-value-added activities. C. process-efficiency activities.
B. non-value-added activities. D. value-added-activities.

Answer 30

D. value-added-activities.

Question 31

All of the following are examples of non-value-added activities except:
A. assembling C. handling
B. expediting D. reworking

Answer 31

A. assembling

Question 32

The ideal standard quantity for nonvalue-added activities is
A. zero
B. practical capacity
C. the currently attainable quantity standard
D. the cost of resources acquired in advance of usage

Answer 32

A. zero

Question 33

The following items are used in tracing costs in an ABC system. In which order are they used?
(1) cost object (3) activity driver
(2) cost driver (4) cost pool
A. 1, 2, 3, 4 C. 2, 4, 3, 1
B. 2, 3, 4, 1 D. 4, 3, 1, 2

Answer 33

C. 2, 4, 3, 1

Question 34

An item or event that has a cause-effect relationship with the incurrence of a variable cost is called a
A. cost driver. C. mixed cost.
B. direct cost. D. predictor.

Answer 34

A. cost driver.

Question 35

Which of the following is typically regarded as a cost driver in traditional accounting practices?
A. number of customers served
B. number of direct labor hours worked
C. number of purchase orders processed
D. number of transactions processed

Answer 35

B. number of direct labor hours worked

Question 36

A cost pool is
A. All costs that have the same driver.
B. All of the costs of a particular department.
C. All costs related to a product or product line.
D. All costs in a group such as variable costs or discretionary fixed costs.

Answer 36

A. All costs that have the same driver.

Question 37

The activities that drive resource requirements are called the
A. Activity drivers. C. Resource drivers.
B. Cost objects. D. Sustaining activities.

Answer 37

C. Resource drivers.

Question 38

Products make diverse demands on resources because of differences in all of the following
EXCEPT
A. batch size. C. selling price.
B. complexity. D. volume.

Answer 38

C. selling price.

Question 39

__________________ are causal factors that explain the consumption of overhead.
A. Activity drivers C. Cost objectives
B. Cost catchers D. Cost pools

Answer 39

A. Activity drivers

Question 40

Unit-level cost drivers are most appropriate as an overhead assignment base when
A. direct labor costs are low.
B. only one product is manufactured.
C. factories produce a varied mix of products.
D. several complex products are manufactured.

Answer 40

B. only one product is manufactured.

Question 41

All of the following are unit-based activity drivers EXCEPT
A. direct labor hours C. number of setups
B. machine hours D. number of units

Answer 41

C. number of setups

Question 42

All of the following are nonunit-based activity drivers EXCEPT
A. number of direct labor hours C. number of material moves
B. number of inspections D. number of setups

Answer 42

A. number of direct labor hours

Question 43

_____ are those performed each time a unit is produced or sold.
A. Batch-level activities. C. Sustaining activities.
B. Facility-sustaining activities. D. Unit-level activities.

Answer 43

D. Unit-level activities.

Question 44

Examples of activities at the unit level of costs include:
A. heating, lighting, and security C. scheduling, setting up, and moving
B. cutting, painting, and packaging D. designing, changing, and advertising

Answer 44

B. cutting, painting, and packaging

Question 45

In allocating variable costs to products,
A. a volume-based cost driver should be used.
B. a company should never use more than one cost driver.
C. direct labor hours should always be used as the allocation base.
D. a company should use the same allocation base that it uses for fixed costs.

Answer 45

A. a volume-based cost driver should be used.

Question 46

_____ are those that a company performs when it makes a group of units .
A. Batch-level activities. C. Sustaining activities.
B. Facility-sustaining activities. D. Unit-level activities.

Answer 46

A. Batch-level activities.

Question 47

Examples of activities at the batch level of costs include:
A. heating, lighting, and security C. scheduling, setting up, and moving
B. cutting, painting, and packaging D. designing, changing, and advertising

Answer 47

C. scheduling, setting up, and moving

Question 48

If JIT manufacturing is used, maintenance of the production equipment would be classified as a
A. cell-level activity C. product-level activity
B. facility-level activity D. unit-level activity

Answer 48

A. cell-level activity

Question 49

Testing a prototype of a new product is an example of a
A. Batch-level activity. C. Product-level activity.
B. Organization-sustaining activity. D. Unit-level activity.

Answer 49

C. Product-level activity.

Question 50

Examples of activities at the product level of costs include:
A. cutting, painting, and packaging C. heating, lighting, and security
B. designing, changing, and advertising D. scheduling, setting up, and moving

Answer 50

B. designing, changing, and advertising

Question 51

Which of the following is not a type of sustaining activity?
A. Capacity-sustaining. C. Distribution-channel sustaining.
B. Customer-sustaining. D. Unit-sustaining.

Answer 51

D. Unit-sustaining.

Question 52

_____ relate to an entire plant as a whole.
A. Batch-level activities. C. Sustaining activities.
B. Facility-sustaining activities. D. Unit-level activities.

Answer 52

D. Unit-level activities.

Question 53

Which of the following statements about activity-based costing is not true?
A. In activity-based costing, cost drivers are what cause costs to be incurred.
B. Activity-based costing is useful for allocating marketing and distribution costs.
C. Activity-based costing differs from traditional costing systems in that products are not cross-subsidized.
D. Activity-based costing is more likely to result in major differences from traditional costing systems if the firm manufactures only one product rather than multiple products.

Answer 53

D. Activity-based costing is more likely to result in major differences from traditional costing systems if the firm manufactures only one product rather than multiple products.

Question 54

Examples of activities at the plant level of costs include:
A. cutting, painting, and packaging C. heating, lighting, and security
B. designing, changing, and advertising D. scheduling, setting up, and moving

Answer 54

C. heating, lighting, and security