Cost Accounting Part 3

Question 1

MCQ-03632

In an activity-based costing system, what should be used to assign a department’s manufacturing overhead costs 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 1

Choice “B” is correct. Activity-based costing assigns costs to activities or transactions and allocates them to products according to their use of each activity. This method means multiple cause and effect relationships may exist.

Choice “A” is incorrect. Activity-based costing assigns costs to activities or transactions and allocates them to products according to their use of each activity.
Choice “C” is incorrect. The essence of activity-based costing is determining the activities that are involved in producing a product. Relative sales value is not based on this approach.
Choice “D” is incorrect. Assigning costs to departments should not be based on ability
to bear costs. It should be based on each department’s appropriate share of these
costs, based on cause and effect.

Question 2

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. No effect No effect
B. Increase No effect
C. No effect Increase
D. Increase Increase

Answer 2

Choice “D” is correct

Activity-based costing (ABC) tends to increase both the number of cost pools and the number of allocation bases. ABC breaks down a production
process into many activities. It then accumulates costs by activity (i.e., cost pools) using an appropriate allocation base for each activity. A traditional cost system would use one cost and one allocation base (i.e., for factory overhead). On the other hand,
ABC would designate many activities within the process and allocate costs by activity using a different allocation base for each activity

Question 3

Because of changes that are occurring in the basic operations of many firms, all of the
following represent trends in the way indirect costs are allocated, except:
A. Using throughput time as an application base to increase awareness of the costs
associated with lengthened throughput time.
B. Preferring plant-wide application rates that are applied to machine hours rather
than incurring the cost of detailed allocations.
C. Using several machine cost pools to measure product costs on the basis of time
in a machine center.
D. Using cost drivers as application bases to increase the accuracy of reported
product costs.

Answer 3

Choice “B” is correct.

Plant-wide application rates applied to machine hours is a traditional costing approach. More detailed cost allocations are now preferred.

Question 4

Multiple or departmental overhead rates are considered preferable to a single or plant-wide
overhead rate when:

A. Various products are manufactured that do not pass through the same departments or use the same manufacturing techniques.

B. Cost drivers, such as direct labor, are the same over all processes.

C. Individual cost drivers cannot accurately be determined with respect to cause and-effect relationships.

D. The single or plant-wide rate is related to several identified cost drivers.

Answer 4

Choice “A” is correct. When various products are manufactured, multiple overhead rates are preferable to a single overhead rate. Activity-based costing would be better still.

Choice “B” is incorrect. If cost drivers were the same over all processes, a single rate could be used.

Choice “C” is incorrect. If individual cost drivers cannot be determined, multiple overhead rates will be meaningless.

Choice “D” is incorrect. If a single or plant-wide rate is related to several identified cost drivers, then the single rate is accurate and appropriate.

Question 5

MCQ-03950
In allocating factory service department costs to producing departments, which one of the
following items would most likely be used as an activity base?

A. Units of product sold.
B. Salary of service department employees.
C. Units of electrical power consumed.
D. Direct materials usage.

Answer 5

Choice “C” is correct. Units of electrical power consumed would be a good indication of
producing departments’ demand on the service department.

Choice “A” is incorrect. Units sold is not a good base with which to allocate to production departments. It relates more to a sales department.
Choice “B” is incorrect. The salaries of service department employees represent the
costs to be allocated, not the activity base on which to base the allocation.
Choice “D” is incorrect. Although direct materials are used in production, they may not be the best base for allocation because they do not always have a direct relationship to the incurrence of service department costs.

Question 6

Under ABC, what would be the most appropriate cost driver for:
Repair and Maint, Electricity expense, and Depriciation Expense.

Answer 6

Total Machine Hours

Question 7

What is the most appropriate cost driver for employee benefit expense?

Answer 7

Employee salaries OR Headcount

Question 8

What measures of activity does a traditional costing system typically use to distribute mfc. overhead to products?

Answer 8

Direct Labor Hours
Dollars

Question 9

Activity based costing refines product cost information because the cost system:

A. Was designed to value inventory in the aggregate and not relate to product cost information.

B. Uses a common departmental or factory wide measure of activity, such as direct labor hours or dollars to distribute manufacturing overhead to products.

C. Emphasizes long-term product analysis (when fixed costs become variable costs).

D. Causes managers, who are aware of distortions in the traditional cost system, to make intuitive, imprecise adjustments to the traditional cost information without understanding the complete impact

Answer 9

Choice “C” is correct.

Activity-based costing refines product cost information because the cost system emphasizes long-term product analysis (when fixed costs become
variable costs)

Question 10

Activity-based costing uses cause and effect relationships to capitalize costs to inventory. This is not acceptable for ___________________.

Answer 10

external reporting

ONLY useful for internal reporting to management

Question 11

_______________ (a simple accumulation of cost associated with a specific job) is acceptable for both internal and external purposes.

Answer 11

Job costing

Question 12

______________ does not capitalize fixed factory overhead into inventory. It is not acceptable for external reporting but is often used for internal purposes.

Answer 12

Variable costing

Question 13

______________ costing is an averaging of actual costs. This is acceptable for BOTH internal and external reporting.

Answer 13

Process

Question 14

__________________ is an accounting system that collects financial and operating data on the basis of the underlying nature and extent of the cost
drivers.

Answer 14

Activity-based costing

Question 15

__________________ costing (more accurately called variable or marginal costing) capitalizes only the variable production costs (direct materials, direct
labor, and variable overhead) to inventory (product costs), while fixed costs are expensed.

Answer 15

Direct

Question 16

___________ costing carefully predetermines standard costs that should be attained.

Answer 16

Target

Question 17

The use of activity-based costing normally results in substantially ____________ unit costs for low-volume products than is reported by traditional product
costing.

Answer 17

greater

Question 18

A CPA would recommend ______________ costing when more than one product is produced and those products do not uniformly consume indirect resources (heterogeneous consumption).

Answer 18

Activity Based

Example: Suppose 50 kilowatts of electricity are used to produce a single unit of item A and 500 kilowatts of electricity are used to produce a single unit of item B. To assign the cost of electricity (an indirect cost) based on the number of items produced would
not reflect the true costs of producing the items

Question 19

_______________ is used to assign indirect costs based on the product’s demands for resource-consuming activities. If the majority of the costs are
direct, then ____________ would not be recommended.

Answer 19

Activity Based Costing

Question 20

What cost system would be used when resources are consumed in a homogeneous or uniform manner?

Answer 20

A traditional cost system that uses a single cost driver.

Question 21

MCQ-04346
Each of the following should be considered in the selection of appropriate cost drivers for
an activity based costing system, except:

A. Volume-based production.
B. Behavioral effects.
C. Cost of measurement.
D. Degree of correlation.

Answer 21

Choice “A” is correct. Volume-based production (and the associated usage of each cost driver activity) will determine HOW you allocate costs once cost drivers have already been established; it will not be considered as a means for determining WHAT
the appropriate cost drivers are for specific activities. Also, volume-based production is
a hallmark of traditional costing where the volume alone is the essential driver of how
costs are allocated.

Choices “B”, “C”, and “D” are incorrect. Behavioral effects, costs of measurement, and degree of correlation are all factors that should be considered when selecting appropriate cost drivers to apply for activity based costing.

Question 22

MCQ-03961
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 overhead that should be allocated to the individual product lines from the information given below.

Wall Mirrors / Specialty Windows
Units produced 25 / 25
Material moves per product line 5 / 15
Direct labor hours per unit 200 / 200

Budgeted materials handling costs $50,000

Under activity-based costing (ABC), the materials handling costs allocated to one unit of
wall mirrors would be:

A. $1,000
B. $500
C. $1,500
D. $2,500

Answer 22

Choice “B” is correct.
$500.

Activity-based costing allocates costs based on the activity driving those costs (material moves in this example). In comparing the activity required for wall mirrors and specialty windows, an allocation factor can be developed:

Total material moves: 5 + 15 = 20
Percentage of moves related to wall mirrors: 5 ÷ 20 = 25%
Percentage of moves related to specialty windows: 15 ÷ 20 = 75%

Budgeted materials handling costs $50,000
Allocation factor × .25
Costs allocated to wall mirrors 12,500
Units produced ÷ 25
Costs allocated to one wall mirror $500

Question 23

MCQ-04347

A company would most benefit from using an activity-based costing (ABC) system as
opposed to a traditional costing system under which of the following conditions?

A. When indirect costs are a high percentage of total costs.
B. When each department within the company has a single activity.
C. When different products use the different activities of the department in the same proportions.
D. When batch-level and product-sustaining costs are immaterial.

Answer 23

Choice “A” is correct. Activity-based costing (ABC) is very beneficial for allocating indirect costs when there are multiple activities. Each activity is evaluated
independently and assigned a cost driver, which results in an allocation rate unique to that activity. The greater the percentage of total costs that are considered “indirect,” the greater the need for appropriate cost allocations for each activity.

Choice “B” is incorrect. If each department has a single activity, a traditional costing
system (which uses one cost driver and therefore, one allocation rate) will work well.
Choice “C” is incorrect. ABC is designed to eliminate much of the distortion associated
with allocating indirect costs when proportional usage differs. If activities are used in
the same proportions, traditional costing will work as well as ABC.
Choice “D” is incorrect. If batch-level and product-sustaining costs are immaterial, ABC
will not provide much of a benefit over traditional costing

Question 24

A basic assumption of activity-based costing (ABC) is that:

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

Answer 24

Choice “B” is correct. Activity-based costing divides the production process into activities where costs are accumulated. The production process assumes activities consume resources (direct materials, direct labor, and manufacturing overhead), and that the outcome of the production process requires performance of the activities.

Choice “A” is incorrect. All manufacturing costs do not vary directly with units of
production. Fixed manufacturing costs are an element in the production process.
Choice “C” is incorrect. Product costs include all manufacturing costs, regardless of
whether the costs respond to unit-level drivers.
Choice “D” is incorrect. Activity-based costing divides the production process into
activities where costs are accumulated. The production process assumes activities
consume resources (direct materials, direct labor, and manufacturing overhead). Both
variable and fixed manufacturing costs are accumulated in the activity-cost pools.

Question 25

An ______________ cost bears an observable and known relationship to a quantifiable activity base.

Answer 25

engineered

Question 26

_______________ are all manufacturing costs
other than direct material and direct labor.

Answer 26

Indirect costs (overhead costs)

Question 27

_________________ is carefully predetermined standard cost that should be attained.

Answer 27

A target cost

Question 28

_____________ are all those organization and plant costs that continue to be incurred and cannot be reduced without damaging the organization’s ability to meet long-range goals.

Answer 28

Fixed costs

Question 29

____________________ represents a series of activities in which elements useful to the customer are added to the product.

Answer 29

A value chain

The value chain consists of primary
activities (operations, inbound and outbound logistics, marketing and sales, and service) and support activities (procurement, human resources management, firm infrastructure, and technology development), all of which are designed to add value to the end customer.

The value chain considers both internal and external
processes.

The value chain is concerned with both pre- and
postproduction functions.

Question 30

____________________ costs provides a benefit to the customer.

Answer 30

Value Added

The cost of inventorying products, generally moving, handling and storing them, does not add value to the product and is generally considered one of the most significant non-value activities/costs that a manufacturer should reduce because it can be controlled

Question 31

MCQ-03444
Which one of the following statements pertaining to the return on investment (ROI) as a performance measurement is incorrect?

A. When the average age of assets differs substantially across segments of a business, the use of ROI may not be appropriate.

B. ROI relies on financial measures that are capable of being independently verified while other forms of performance measures are subject to manipulation.

C. The use of ROI may lead managers to reject capital investment projects that can
be justified by using discounted cash flow models.

D. The use of ROI can make it undesirable for a skillful manager to take on troubleshooting assignments such as those involving turning around unprofitable divisions.

Answer 31

Choice “B” is correct. ROI is no more and no less capable of being independently verified or manipulated than other performance measures.

Choice “A” is incorrect. Old fixed assets may be undervalued and make comparison with a segment with newer assets inappropriate.

Choice “C” is incorrect. Investment projects with positive present value may be rejected because ROI is too low.

Choice “D” is incorrect. Turning around an unprofitable division would be good for the company but would probably lower a manager’s ROI.

Question 32

MCQ-08313
Which of the following performance measures may lead a manager of an investment center to forgo investments that could benefit the company as a whole?

A. Return on investment.
B. Residual income.
C. Profitability index.
D. Economic value added.

Answer 32

Choice “A” is correct. Return on investment (ROI) measures may discourage managers from avoiding investments that could benefit the company as a whole. Use of the ROI
exclusively as a measure of performance can inadvertently focus managers purely on maximizing short-term returns. Profitable units are reluctant to invest in additional
productive resources because their short-term result will be to reduce ROI.

Question 33

______________________ (including economic value added)
focus on target return and amount and encourage managers to invest in projects that exceed the hurdle rate. As a result, divisions with high rates of return do not fear dilution of their rates and are not discouraged from making investments that demonstrate strong residual income performance.

Answer 33

Residual income methods

Question 34

___________________ is a method for ranking previously screened investments and rationing available capital. It would not discourage a
manager from making an investment.

Answer 34

The profitability index