Operations Management: Cost Measurement Methods and Techniques

Question 1

For purposes of allocating joint costs to joint products, the sales price at point of sale, reduced by cost to complete after split-off, is assumed to be equal to the:

Answer 1

Sales price less the cost to complete is defined as the relative sales value at split-off. In other words, this is the additional contribution to income generated by completing the product.

Question 2

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

Answer 2

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

Question 3

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?

Answer 3

Multiple cause and effect relationships.

Question 4

In a traditional job order cost system, the issue of indirect materials to a production department increases:

Answer 4

Factory overhead control. Indirect materials are included in factory overhead costs as they are used in the production process. Therefore, the issue of indirect materials would decrease stores control and increase factory overhead control.

Question 5

A cost driver is defined as:

Answer 5

a casual factor that increases the total cost of a cost objective.

Question 6

Activity-based costing (ABC) assumes that the resource-consuming activities of an enterprise that generate costs are activities and not outputs. ABC is appropriate for all types of cost accumulation systems, including both job order and process costing.

Answer 6

Activity-based costing (ABC) assumes that the resource-consuming activities of an enterprise that generate costs are activities and not outputs. ABC is appropriate for all types of cost accumulation systems, including both job order and process costing.

Question 7

In an activity-based costing system, cost reduction is accomplished by identifying and eliminating:

Answer 7

Non-Value added activities. Eliminating nonvalue-adding activities would reduce costs, which is one of the objectives of activity-based costing systems.

Question 8

Weighted-average and first in, first out (FIFO) equivalent units would be the same in a period when which of the following occurs?

Answer 8

Beginning inventory equivalent units are less than 50% complete. FIFO and weighted average produce the same equivalent units when there is no beginning inventory. FIFO is a three-step process, while weighted average is a two-step process. The major difference between the two methods is consideration of beginning inventory amounts by FIFO.

Question 9

Which of the following is true regarding inventoriable costs?

a. Inventoriable costs are regarded as assets before the products are sold.
b. Inventoriable costs include only the conversion costs of manufacturing a product.
c. Inventoriable costs exclude fixed factory overhead.
d. Inventoriable costs include only the prime costs of manufacturing a product.

Answer 9

Choice “a” is correct. Inventoriable costs are assets until sold, when they become “cost of goods sold.”

Question 10

Cost drivers are:

Answer 10

Activities that cause costs to increase as the activity increases. The cost driver is often non-financial.

Question 11

Which one of the following best describes direct labor?

a. A prime cost.
b. Both a product cost and a prime cost.
c. Both a period cost and a prime cost.
d. A product cost.

Answer 11

Choice “b” is correct. Direct labor is a prime cost, a conversion cost and a product cost. “b” is the best answer because it includes two of these costs.

Question 12

Conversion cost pricing:

a. Places heavy emphasis on indirect costs and disregards consideration of direct costs.
b. Places heavy emphasis on direct costs and disregards consideration of indirect costs.
c. Could be used when the customer furnishes the material used in manufacturing a product.
d. Places minimal emphasis on the cost of materials used in manufacturing a product

Answer 12

Choice “c” is correct. Conversion cost pricing could be used when the customer furnishes the material used in manufacturing a product.

Question 13

A cost that bears an observable and known relationship to a quantifiable activity base is a(n):

a. Fixed cost.
b. Target cost.
c. Indirect cost.
d. Engineered cost.

Answer 13

Choice “d” is correct. An engineered cost bears an observable and known relationship to a quantifiable activity base.

Question 14

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. Preferring plant-wide application rates that are applied to machine hours rather than incurring the cost of detailed allocations.
b. Using throughput time as an application base to increase awareness of the costs associated with lengthened throughput time.
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 14

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

Question 15

The distribution of overhead costs is known as:

Answer 15

Cost allocation is the distribution of overhead or support costs based on any one of a variety of methods.

Question 16

Costs are allocated to cost objectives in many ways and for many reasons. Which one of the following is a purpose of cost allocation?

a. Implementing activity-based costing.
b. Evaluating revenue center performance.
c. Measuring income and assets for external reporting.
d. Aiding in variable costing for internal reporting.

Answer 16

Choice “c” is correct. Cost allocation is essential for measuring income and assets for external reporting.

Question 17

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. Individual cost drivers cannot accurately be determined with respect to cause-and-effect relationships.
c. Cost drivers, such as direct labor, are the same over all processes.
d. The single or plant-wide rate is related to several identified cost drivers.

Answer 17

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.

Question 18

Which of the following would cause overhead to be overapplied?

a. Actual overhead is less than overhead applied.
b. Actual overhead was equal to the budgeted amount but fewer items were manufactured.
c. Actual overhead is greater than overhead applied.
d. The number of units produced was the budgeted amount but a larger amount of overhead was actually incurred.

Answer 18

Choice “a” is correct. Overapplied overhead occurs when the amount of overhead applied exceeds the actual amount of overhead incurred.

Question 19

Generally, individual departmental rates rather than a plant-wide rate for applying overhead would be used if:

a. Manufacturing overhead is the largest cost component of its product cost.
b. A company’s manufacturing operations are basically labor based.
c. A company’s manufacturing operations are all highly automated.
d. The manufactured products differ in the resources consumed from the individual departments in the plant.

Answer 19

Choice “d” is correct. Generally, individual departmental rates (rather than a plant-wide rate for applying overhead) would be used if the manufactured products differ in the resources consumed from the individual departments in the plant.

Question 20

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. Direct materials usage.
b. Salary of service department employees.
c. Units of product sold.
d. Units of electrical power consumed.

Answer 20

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

Question 21

The benefit that management can expect from traditional costing includes which of the following:

a. Provides management with a more thorough understanding of product costs and product profitability for strategies and pricing decisions.
b. Leads to a more competitive position by evaluating cost drivers, i.e., costs associated with the complexity of the transaction rather than the production volume.
c. Uses a common departmental or factory wide measure of activity, such as direct labor hours or dollars to distribute manufacturing overhead to products.
d. Streamlines production processes by reducing non-value adding activities, e.g., reduced set-up times, optimal plant layout, and improved quality.

Answer 21

Choice “c” is correct. The benefit that management can expect from traditional costing includes using a common departmental or factory wide measure of activity, such as direct labor hours or dollars, to distribute manufacturing overhead to products.

Question 22

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

a. 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.
b. Was designed to value inventory in the aggregate and not relate to product cost information.
c. Emphasizes long-term product analysis (when fixed costs become variable costs).
d. Uses a common departmental or factory wide measure of activity, such as direct labor hours or dollars to distribute manufacturing overhead to products.

Answer 22

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 23

Under ABC, the allocation of costs to particular cost objectives allows a firm to analyze all of the following, except:

a. Whether a product line should be discontinued.
b. Why the sales of a particular product have increased.
c. Whether a particular manager earns a bonus.
d. Whether a particular department should be expanded.

Answer 23

Choice “b” is correct. Cost allocation and analysis will not explain a sales increase.

Question 24

An accounting system that collects financial and operating data on the basis of the underlying nature and extent of the cost drivers is:

a. Variable costing.
b. Activity-based costing.
c. Target costing.
d. Direct costing.

Answer 24

Choice “b” is correct. Activity-based costing is an accounting system that collects financial and operating data on the basis of the underlying nature and extent of the cost drivers.

Question 25

The use of activity-based costing normally results in:

a. Substantially lower unit costs for low-volume products than is reported by traditional product costing.
b. Equalizing set-up costs for all product lines.
c. Decreased set-up costs being charged to low-volume products.
d. Substantially greater unit costs for low-volume products than is reported by traditional product costing.

Answer 25

Choice “d” is correct. The use of activity-based costing normally results in substantially greater unit costs for low-volume products than is reported by traditional product costing.

Question 26

A CPA would recommend implementing an activity-based costing system under which of the following circumstances?

a. Most of the client’s costs currently are classified as direct costs.
b. The client produced products that heterogeneously consume resources.
c. The client is a single-product manufacturer.
d. The client produced many different products that homogeneously consume resources.

Answer 26

Choice “b” is correct. ABC costing is recommended when more than one product is produced and those products do not uniformly consume indirect resources (heterogeneous consumption).

Question 27

Arbor Corporation uses a water cooling system in its manufacturing operations. Gallons of water purchased for engine cooling increases with manufacturing production. Water and sewer utility costs recorded by the Arbor Corporation are billed to the company based on a minimum charge plus a rate for utilization beyond the minimum charge for 5,000 gallons of usage. Arbor would most likely classify its utility costs as:

a. Semivariable costs.
b. Non diversifiable.
c. Variable costs.
d. Fixed costs.

Answer 27

Choice “a” is correct. Utility costs are semivariable. Utility costs share the characteristics of both fixed and variable costs over the relevant range. They are unchanged for the first 5,000 gallons (fixed) and then increase per gallon used in excess of 5,000 gallons after the threshold (variable).

Question 28

Limitations of an activity-based costing system include which of the following?

a. It eliminates arbitrary assignment of overhead costs.
b. The expense of obtaining cost data is relatively high.
c. Control of overhead costs is enhanced.
d. Activity-based costing systems are less reliable.

Answer 28

Choice “b” is correct. Activity based costs anticipates increased cost pools and increased allocation bases. The determination of the amounts that go in these pools and their related cost drivers will likely be more costly than traditional systems. Increased costs of ABC represent a limitation of the system.

Question 29

If a product required a great deal of electricity to produce, and crude oil prices increased, which of the following costs most likely increased?

a. Prime costs.
b. Direct materials.
c. Conversion costs.
d. Direct labor.

Answer 29

Choice “c” is correct. Conversion costs include both direct labor and overhead. Increases in crude oil prices are likely to impact the cost of generating electricity (and, by extension, the rate for electricity). Electricity is significant in manufacture of the product in the fact pattern and would likely increase the overhead costs of the manufacturer.

Question 30

A manufacturing company has several product lines. Traditionally, it has allocated manufacturing overhead costs between product lines based on total machine hours for each product line. Under a new activity-based costing system, which of the following overhead costs would be most likely to have a new cost driver assigned to it?

a. Depreciation expense.
b. Repair and maintenance expense.
c. Employee benefits expense.
d. Electricity expense.

Answer 30

Choice “c” is correct. Activity-based costing seeks to assign overhead costs in a manner that identifies consumption of resources. Employee salaries or even head count are more appropriate cost drivers than machine hours for employee benefits expense. Machine hours would be more likely identified as cost drivers for electric, repairs and maintenance, and depreciation expense.