ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 42  October 2021 CPA Licensure Exam  Week No. 11

MANAGEMENT ADVISORY SERVICES C. Lee  E. Arañas  K. Manuel

MAS-42K: ABC, BALANCED SCORECARD & STRATEGIC COST MANAGEMENT

ACTIVITY-BASED COSTING (ABC)
 ABC is a costing method that uses ‘activities’ as basis to allocate overhead and indirect costs to products.
 ABC provides reliable data for product costing by using multiple cost drivers that are reflective of the actual
causes of incurred overhead costs on the basis of causal relation, benefits received & reasonableness.
 ABC is an alternative to the broad-averaging, volume-based conventional practice of Traditional Costing.
✓ Under TRADITIONAL COSTING, overhead costs are allocated to products by using a single cost driver
(usually labor hour). This costing is suitable for labor-intensive, low-overhead companies. Traditional
costing (a.k.a. peanut-butter costing) is simple and inexpensive to implement.
✓ Under ABC, overhead costs are allocated to products using several cost drivers associated with the
identified cost pools. ABC is suitable for capital-intensive, product-diverse and high-overhead companies.
ABC often leads to accurate product costing and elimination of non-value-added activities.
 While ABC is mostly applied on manufacturing costs, ABC may also be used for shared or common period
costs (e.g., customer service, promotion, record keeping and shipping costs).
 ABC is typically a ‘two-stage’ allocation process: First, overhead costs are traced to activities (intial cost
object); then, overhead costs are allocated to products (final cost object) on the basis of the activities done.
 ABC implementation usually involves the following steps:
1) Identify activities, cost drivers and cost pools.
➢ Activities are commonly grouped into four categories:
1) Unit-level activities - performed for each unit of product (e.g., direct materials).
2) Batch-level activities - performed for each batch of production or sales (e.g., setup, inspection).
3) Product-level activities - performed to support product line as a whole (e.g., advertisement)
4) Facility-level activities - performed to sustain an entire facility’s overall process (e.g., security)
➢ COST DRIVER is the particular activity that causes the incurrence of certain costs.
➢ COST POOL is a group of mostly homogeneous costs associated with a common cost driver.
2) Calculate predetermined overhead rates for each identified activity.
Predetermined overhead rate = Estimated overhead costs ÷ Estimated activity level
NOTE: Estimated figures are used because actual figures are not yet known at the start of the period.
3) Allocate overhead costs to the products on the basis of predetermined overhead rates.
 ACTIVITY-BASED MANAGEMENT (ABM) refers to the application of ABC and process value analysis (identifying
value-added vs. non-value-added activities) in evaluating business activities to improve strategic and
operational decisions in an organization. The main goal of ABM is to maximize customer value and minimize
non-value-added activities/costs.
✓ VALUE-ADDED activities are necessary activities that incur costs but increase the perceived value of a
particular product to the customer. Example: engineering designs modification.
✓ NON-VALUE-ADDED activities are operations that are either (1) unnecessary or dispensable, or (2)
necessary, but inefficient and improvable. Example: rework of defective units.
BALANCED SCORECARD
 BALANCED SCORECARD (BSC) is an approach to performance measurement that combines traditional
financial measures with non-financial performance measures.
 BSC was created by David Norton and Robert Kaplan in response to VALUE-BASED MANAGEMENT, which is a
performance evaluation technique that focuses on traditional financial measures.
 BSC translates an organization’s mission and strategy into a comprehensive set of financial (lagging
indicators) and non-financial performance (leading indicators) metrics classified into four (4) perspectives:
1) FINANCIAL (“How do we look to shareholders?”)
Measures: profit, return on investment (RoI), operational cash flows
2) CUSTOMER (“How do customers see us?”)
Measures: rank in customer surveys, repeat order rate, market share, number of complaints
3) INTERNAL BUSINESS PROCESSES (“What must we excel at?”)
Measures: manufacturing cycle efficiency, delivery cycle time, scrap and rework, productivity factor
4) LEARNING & GROWTH (“Can we continue to improve and create value?”)
Measures: employee satisfaction ratings, employee turnover rate, training days for employees
NOTE: Measures in the internal business process, learning and growth perspectives (controllable factors) are
the primary drivers of measures in the customer and financial perspectives (non-controllable factors).
 STRATEGY MAPPING is a process that links the four BSC perspectives with company strategies based on a
cause-and-effect pattern to see where value can be added further. A typical BSC report contains:
✓ STRATEGIC OBJECTIVES – statements of what the strategy must achieve & what is critical to its success.
✓ STRATEGIC INITIATIVES – key action programs required to achieve strategic objectives.
✓ PERFORMANCE MEASURES – describe how success in achieving the strategy will be measured.
✓ BASELINE PERFORMANCE – the current level of performance for the performance measure.
✓ TARGETS – the level of performance or rate of improvement needed in the performance measure.
NOTE: Strategic objectives focus on WHAT is to be achieved. Strategic initiatives focus on HOW it will be
achieved. Performance measures, baseline performance and targets relate to how it will be MEASURED.
 KEY PERFORMANCE INDICATORS (KPIs) are specific, measurable financial and non-financial elements of a
firm’s performance that are vital to its competitive advantage.
 BSC provides a framework not only for performance measurement but also for execution of company
strategies by helping management identify what needs to be done and how its achievement can be measured
to determine organizational success.

Page 1 of 12 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY MAS-42K
Week 11: ABC, BALANCED SCORECARD & STRATEGIC COST MANAGEMENT

STRATEGIC COST MANAGEMENT

 STRATEGIC COST MANAGEMENT (SCM) is the process of reducing total costs while improving the strategic
position of a business, accomplished by managing costs and aligning them to the business strategy.
 Three (3) generic strategies in order to achieve sustainable competitive advantage are:
1) COST LEADERSHIP – providing same or better value to customers at a cost lower than competitors’.
2) DIFFERENTIATION – strives to increase customer value by increasing what the customer receives.
3) FOCUS – a firm selects and emphasizes a customer segment in which to compete (i.e., market niche)
 SCM involves recognition of the importance of cost relationships among various activities in the VALUE CHAIN
(a sequence of activities required to design, develop, produce, market and deliver products and services to
customers) in relation to CUSTOMER VALUE (the difference between what is received and given up by the
customer when buying a product or service).
 LIFE-CYCLE COSTING determines the total cost of a product over its life cycle by dividing costs into:
✓ UPSTREAM or UPWARD costs (examples: R&D, design engineering, target costing, testing)
✓ Production costs
✓ DOWNSTREAM or DOWNWARD costs (examples: marketing, distribution, sales, customer service)
WHOLE-LIFE COSTS = LIFE-CYCLE COSTS + after-purchase costs incurred by the customers
Product’s life cycle (marketing viewpoint) is also based on: 1) introduction 2) growth 3) maturity 4) decline
 TARGET COSTING involves the determination of the desired product cost based on a given market price and
given desired profit. In target costing, a company may reduce its cost to reach the target level through VALUE
ENGINEERING, which involves a thorough examination of the value chain aimed at reducing product costs
without sacrificing customer satisfaction. [See MAS-42D on Target Costing for more details]
 TOTAL QUALITY MANAGEMENT (TQM) is a management technique that integrates all organizational functions
(marketing, finance, design, engineering, production, and customer service) to focus on meeting customer
expectation and business objectives.
✓ TQM requires developing policies to ensure that products and services exceed customer’s expectations.
✓ TQM is a formal effort to ensure and improve quality throughout an entity’s value chain.
 QUALITY COSTS are incurred on quality related processes to prevent defects or incurred as a result of defects
occurring. Quality costs are classified into:
1) CONFORMANCE COSTS are incurred to keep defective products from falling into the hands of customers.
✓ Prevention Costs (examples: employee training, equipment maintenance, systems development)
✓ Appraisal Costs (examples: inspection and testing)
2) NON-CONFORMANCE COSTS are incurred because defects are produced despite efforts to avoid them.
✓ Internal Failure Costs (examples: scrap, spoilage, rework, downtime)
✓ Externa Failure Costs (examples: warranty repairs, product lawsuits)
 CONTINUOUS IMPROVEMENT is the constant effort to eliminate waste, reduce response time, simplify the
design of both products and processes, improve quality and enhance customer service. Continuous
improvement can be done in two ways:
1) KAIZEN is the gradual process of reducing costs during the manufacturing phase of an existing product
through small and continual improvements rather than through radical “big-time” changes.
2) BUSINESS PROCESS REENGINEERING (BPR) involves redesigning business process to reduce costs and
eliminate inefficiencies and opportunities for errors. Common features of BPR include:
✓ Radical, quick, significant and drastic approach to improvement
✓ Business process is diagrammed in details, analyzed and completely redesigned
✓ Simplification of business process
✓ Elimination of non-value-added activities.
 JUST-IN-TIME (JIT) is a “demand-pull” system where inventories are purchased/produced only as needed for
production/sale, reduced to the minimum level and, in some cases, reduced to zero (i.e., elimination of non-
value-added costs). JIT can be classified into two categories:
✓ JIT Purchasing - raw materials are received just in time for production; goods for sale are received just
in time for delivery or sale.
✓ JIT Manufacturing – manufactured materials are completed just in time for production; products are
completed just in time for delivery.
JIT NON-JIT (Traditional/Conventional)
Demand-pull system Push-through system
Insignificant or zero inventories Significant inventories
Small supplier base Large supplier base
Long-term supplier contracts Short-term supplier contracts
Cellular structure (Manufacturing cells) Departmental structure (Process structure)
Multi-skilled labor Specialized labor
Decentralized services Centralized services
High employee involvement Low employee involvement
Facilitating management style Supervisory management style
Total quality management Acceptable quality level
Value-chain focus Value-added focus
 BENCHMARKING involves the three steps: 1) Identifying critical success factors 2) Studying the best practices
of other firms based on identified success factors 3) Implementing needed improvements to match or beat
the performance of other firms.
 THEORY OF CONSTRAINTS (TOC) emphasizes the importance of managing a company’s constraints that
hinder progress toward an objective. TOC is a perfect complement to TQM and BPR – it focuses improvement
efforts where they are likely to be most effective.

Page 2 of 12 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY MAS-42K
Week 11: ABC, BALANCED SCORECARD & STRATEGIC COST MANAGEMENT

EXERCISES: ACTIVITY-BASED COSTING, BALANCED SCORECARD & STRATEGIC COST MANAGEMENT

1. Activity Levels
Determine the appropriate level for each of the following activities or costs. Indicate whether the activity is
unit-level (UL), batch-level (BL), product-level (PL), facility-level (FL):
A) Machine setups F) Designing, changing and advertising
B) Direct materials G) Heating, lighting and security
C) Plant supervision H) Research and development
D) Packaging and shipments I) Quality inspection
E) Building depreciation J) Product order processing

2. Traditional Costing vs. ABC

CPA Company incurs P 800,000 in manufacturing overhead costs. The company has been allocating overhead
to individual product lines based on direct labor hours.
Cost Driver Amount in Cost Pool Amount of Activity
Direct labor hours P 300,000 40,000
Number of batches 300,000
, 1,000
Number of shipments 200,000 500
Total overhead costs P 800,000
Two products have the following characteristics:
Product ABS Product CBN
Direct labor hours 2,000 1,000
Number of batches 39 20
Number of shipments 2 150
REQUIRED:
Determine the overhead costs to be allocated to each product (ABS and CBN) using:
A) Traditional costing (based on direct labor hours)
B) Activity-based costing (ABC)
3. Application of Overhead Costs
3A) CMA Company uses a predetermined overhead rate based on direct labor hours to apply manufacturing
overhead to jobs. Estimated and actual data for direct labor and manufacturing overhead are as follows:
Estimated Actual
Manufacturing overhead P 720,000 P 680,000
Direct labor hours 60,000 55,000

What was the manufacturing overhead for CMA Company for last year?
a. Over-applied by P 20,000 c. Over-applied by P 40,000
b. Under-applied by P 20,000 d. Under-applied by P 40,000

3B) CIA Company uses activity-based costing to compute product costs for external reports. The company
has three activity centers and applies overhead using predetermined overhead rates for each activity
center. Estimated costs and activities for the current year are presented below:
Estimated Overhead Cost Expected Activity
Activity 1 P 18,000 1,200
Activity 2 P 57,600 2,400
Activity 3 P 97,200 3,600
Actual costs and activities for the current year were as follows:
Actual Overhead Cost Actual Activity
Activity 1 P 19,500 1,250
Activity 2 P 55,000 2,500
Activity 3 P 90,000 3,750

What was the amount of overhead applied for Activity 2 during the year?
a. P 5,000 over-applied c. P 2,400 over-applied
b. P 5,000 under-applied d. P 2,400 under-applied

4. Manufacturing Cycle Efficiency

CFA Company keeps careful track of the time related to orders and their production. During the most recent
quarter, the following average times were recorded for each unit or order:
Inspection time 12 days
Process time 16 days
Queue time 4 days
Move time 8 days
Wait time 20 days
REQUIRED:
A) How long in days is the manufacturing cycle time or throughput time?
B) What is the manufacturing cycle efficiency ratio?
C) What percentage of the production time is spent on non-value-added activities?
D) How long in days is the delivery cycle time?

Page 3 of 12 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY MAS-42K
Week 11: ABC, BALANCED SCORECARD & STRATEGIC COST MANAGEMENT

5. Productivity Measures
CISA Company manufactures and sells a single product. The following information was made available:
2020 2021
Unit sales (P 60 per unit) 10,000 15,000
Material usage 4,000 pounds 5,000 pounds
Material cost P 5 per pound P 10 per pound
Labor hours 2,000 hours 2,500 hours
Labor cost P 20 per hour P 25 per hour
5A) Determine the operational partial productivity of DIRECT MATERIAL for (1) 2020 and (2) 2021.
a. (1) 2.50 (2) 3.00 c. (1) 0.25 (2) 0.24
b. (1) 5.00 (2) 6.00 d. (1) 0.50 (2) 0.30
5B) Determine the financial partial productivity of DIRECT MATERIAL for (1) 2020 and (2) 2021.
a. (1) 2.50 (2) 3.00 c. (1) 0.25 (2) 0.24
b. (1) 5.00 (2) 6.00 d. (1) 0.50 (2) 0.30
5C) Determine the operational partial productivity of DIRECT LABOR for (1) 2020 and (2) 2021.
a. (1) 2.50 (2) 3.00 c. (1) 0.25 (2) 0.24
b. (1) 5.00 (2) 6.00 d. (1) 0.50 (2) 0.30
5D) Determine the financial partial productivity of DIRECT LABOR for (1) 2020 and (2) 2021.
a. (1) 2.50 (2) 3.00 c. (1) 0.25 (2) 0.24
b. (1) 5.00 (2) 6.00 d. (1) 0.50 (2) 0.30
5E) Determine the total productivity for 2020 as measured in both (1) units and (2) sales pesos.
a. (1) 0.667 (2) 40.00 c. (1) 1.667 (2) 100.00
b. (1) 0.167 (2) 10.00 d. (2) 6.667 (2) 400.00

WRAP-UP EXERCISES (MULTIPLE-CHOICE QUESTIONS)

1. Activity-based costing (ABC) can be applied to
a. Selling overheads c. Manufacturing overheads
b. Administrative overheads d. All of the choices
2. Which of these situations is most likely to use traditional costing rather than ABC?
a. High-overhead operations c. Labor-intensive production
b. Product-diverse companies d. Capital-intensive production
3. A good example of a unit-level activity is:
a. Machine hours c. TV advertisement
b. Machine setups d. Landscaping
4. A major objective of activity-based management (ABM) is to reduce or eliminate
a. Value-added activities c. Capital-intensive activities
b. Non-value-added activities d. Labor-intensive activities
5. In activity-based costing, which of the following would be considered as a value-added activity?
a. Repair of machines c. Storage and warehousing
b. Engineering design d. Bookkeeping and accounting
6. CFE Company produces two products in a single factory. The controller has determined total overhead
costs to be P 480,000: P 140,000 of which relates to material moves, P 150,000 relates to testing and
the remainder is related to labor time.
Product A1 Product B2
Production 10,000 2,000
Material moves (total) 100 40
Product tests (total) 250 125
Direct labor hours per unit 1 5
Under activity-based costing (ABC), how much is product B2’s overhead cost per unit?
a. P 12.00 c. P 29.50
b. P 24.00 d. P 40.00
7. The most common treatment of under-applied and over-applied overhead costs is to close it out to
a. Work in process c. Cost of goods sold
b. Retained earnings d. Finished goods
8. It translates an organization’s mission and strategy into a comprehensive set of performance measures
that provide the framework for implementing the company’s strategy.
a. Focus c. Balanced scorecard
b. Cost leadership d. Product differentiation
9. What is the MOST important purpose of a balanced scorecard?
a. Develop strategy c. Develop cause-and-effect linkages
b. Measure performance d. Set priorities
10. The balanced scorecard is said to be “balanced” because it measures
a. Internal and external objectives c. Financial and non-financial objectives
b. Short-term and long-term objectives d. All of the choices
11. Which of the following is NOT one of the four perspectives of the balanced scorecard?
a. Investment in resources perspective c. Customer perspective
b. Learning and growth perspective d. Financial perspective

Page 4 of 12 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY MAS-42K
Week 11: ABC, BALANCED SCORECARD & STRATEGIC COST MANAGEMENT

12. Which balance scorecard perspective is considered to be a lagging (rather than leading) indicator?
a. Customer c. Learning & growth
b. Financial d. Internal business processes
13. What is the correct order of strategy mapping that links the four balanced scorecard perspectives?
a. Financial, customer, internal business processes, learning & growth
b. Internal business processes, learning & growth, financial, customer
c. Learning & growth, internal business processes, customer, financial
d. Customer, financial, learning & growth, internal business processes
14. Which of the following is NOT a component of a typical balanced scorecard report?
a. Strategic objectives c. Strategy initiatives
b. Targets d. Assessment of human resources
15. Which is NOT among the three (3) generic strategies for a company to achieve competitive advantage?
a. Focus c. Market segmentation
b. Cost leadership d. Product differentiation
16. What is the correct formula for manufacturing cycle efficiency (MCE) ratio?
a. Value-added time ÷ Lead time c. Throughput time ÷ Delivery cycle time
b. Value-added time ÷ Throughput time d. Non-value-added time ÷ Throughput time
17. In MCE computation, which of the following is considered as a value-added activity?
a. Inspection time c. Move time
b. Processing time d. Idle time
18. The unyielding and continuing improving effort by everyone in the organization to understand, meet and
exceed the customer expectations and uses front-line workers to solve problems systematically.
a. Just-in-time manufacturing c. Total quality management
b. Conventional manufacturing d. Total quantity management
19. Total Quality Management (TQM) should be viewed as
a. Goal centered and standard driven c. Customer centered and employee driven
b. Policy centered and procedure driven d. Management centered and technology driven
20. What are the four categories of quality costs?
a. Prevention, appraisal, internal failure, and external failure costs
b. Internal failure, external failure, carrying and ordering costs
c. Product liability, warranty, appraisal, and training costs
d. Training, testing, failure, and conformance costs
21. Identify the two (2) CONFORMANCE costs of quality.
a. Prevention and appraisal costs c. Appraisal and internal failure costs
b. Internal and external failure costs d. Prevention and internal failure costs
22. Identify the two (2) NON-CONFORMANCE costs of quality.
a. Prevention and appraisal costs c. Appraisal and internal failure costs
b. Internal and external failure costs d. Prevention and internal failure costs
23. Quality is achieved more economically if the company focuses on
a. Appraisal costs c. Internal failure costs
b. Prevention costs d. External failure costs
24. A quality cost incurred to detect individual units that do not conform to specifications is an example of
a. Appraisal cost c. Internal failure cost
b. Prevention cost d. External failure cost
25. Determine the false statement regarding failure costs.
a. Internal failure costs result from identification of defects during the appraisal process.
b. It is generally better to incur internal failure costs than to incur external failure costs.
c. Internal failure costs include scrap, rejected products, rework and downtime.
d. External failure costs are generally classified as value-added costs.
26. Following are items included in the quality cost report prepared for the last month:
Employee training costs P 50,000
Product testing P 20,000
Equipment maintenance P 80,000
Rework upon inspection P 25,000
a. Appraisal cost is P 25,000 c. External failure cost is P 20,000
b. Prevention cost is P 130,000 d. Internal failure cost is P 105,000
27. In a product’s life cycle, the first symptom of the decline stage is a decline in
a. Product’s prices c. Product’s production cost
b. Product’s sales d. Firm’s inventory level
28. Determine the correct order of target costing process.
a. Market price, desired profit, target cost, cost reduction thru value engineering
b. Cost reduction thru value engineering, target cost, desired profit, market price
c. Target cost, desired profit, market price, cost reduction thru value engineering
d. Market price, target cost, cost reduction thru value engineering, desired profit
29. Value engineering
a. Is a basis for product costing and pricing
b. Determines the outcome and value added by each activity
c. Is a way of understanding how a company generates its output
d. Is a systematic approach to reaching a targeted cost level during a value chain analysis
without reducing customer satisfaction

Page 5 of 12 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY MAS-42K
Week 11: ABC, BALANCED SCORECARD & STRATEGIC COST MANAGEMENT

30. Which of the following is at the core of the definition of total quality management (TQM)?
a. Customer surveys c. Employee satisfaction
b. Continuous improvement d. Supplier inspections
31. A company desiring to achieve radical or drastic improvements in customer relationship management
would most likely undertake:
a. Kaizen c. Total quality management
b. Benchmarking d. Business process reengineering
32. Which of the following quality tools is another term for gradual yet continuous improvement?
a. Theory of constraints c. Six-sigma
b. Kaizen d. Lean manufacturing
33. “Kaizen costing” refers to
a. Radical cost reductions during the design phase of a product
b. Radical cost reductions during the manufacturing phase of a product
c. Small, continual cost reductions during the design phase of a product
d. Small, continual cost reductions during the manufacturing phase of a product
34. The just-in-time manufacturing (JIT) system is also called the
a. Job-in-training system c. Zero-cost system
b. Job-in-transit system d. Zero-inventories system
35. In JIT system, work is initiated only in response to customer orders. This practice is described as
a. Demand-pull c. Supply-pull
b. Demand-push d. Supply-push
36. Just-in-time purchasing (demand-pull system) requires
a. Smaller and more frequent purchase orders
b. Larger and more frequent purchase orders
c. Smaller and less frequent purchase orders
d. Larger and less frequent purchase orders
37. Which of the following is among the benefits of adopting a JIT system?
a. Increase in the number of suppliers
b. Reduction in the number of deliveries
c. Performance of non-value-added activities
d. Maximization of standard delivery quality
38. The comparison of a company's practices and performance levels against those of other organizations (or
against the best possible level of performance) is most commonly known as
a. Benchmarking c. Comparative analysis
b. Re-engineering d. Continuous improvement
39. The Theory of Constraints suggests that improvement efforts shall be focused on the company’s
a. Value-added activities c. Constraints
b. Non-value-added activities d. Non-Constraints
40. Which of the following scenarios is considered as counter-productive?
a. Same outputs, fewer inputs c. More outputs, fewer inputs
b. More outputs, same inputs d. Fewer outputs, same inputs

SELF-TEST QUESTIONS - with suggested answers

(Sources: CMA/CIA/RPCPA/AICPA/Various test banks)
1. An objective of activity-based management (ABM) is to
C 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 done to make a product or provide a service
d. All of the above
2. What is a non-value-adding cost?
D a. Usually direct to a product c. Unavoidable
b. The same as a discretionary cost d. Not essential to manufacturing a product
3. A tool that focuses on manufacturing processes and seeks to optimize the activities performed within the process is
A a. Process value analysis c. Benchmarking
b. Re-engineering d. None of the above
4. What would be a value-added employee in a construction firm?
C a. An accountant c. A painter
b. A secretary d. All of the above
5. A well-designed Activity-Based Costing (ABC) system helps managers make better decisions because information derived
from an ABC analysis:
C a. Is easy to analyze and interpret
b. Emphasizes how managers can achieve higher sales
c. Can be used to reduce or eliminate non-value-added activities
d. Take the choices and judgment challenges away from the managers
6. Which of the following is least likely classified as a unit-level activity?
a. Peso sales c. Direct labor hours
b. Production volume d. Number of inspections
7. Which level of costs should NOT be included in product costs (mainly because indirect to product line segment) for
internal management reports that are used for decision making?
D a. Unit-level activities c. Product-level activities
b. Batch-level activities d. Facility-level activities

Page 6 of 12 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY MAS-42K
Week 11: ABC, BALANCED SCORECARD & STRATEGIC COST MANAGEMENT

8. These activities arise because a company does or maintains a particular type of business or product.
C a. Batch-level activities c. Sustaining activities
b. Facility-sustaining activities d. Unit-level activities
9. Property taxes and insurance is an example of a cost that would be considered to be
D a. Unit-level c. Product-level
b. Batch-level d. Organization-sustaining
10. Which of the following is typically regarded as a cost driver in traditional costing practices?
D a. Number of purchase order processed c. Number of transactions processed
b. Number of customers served d. Number of direct labor hours worked
11. Activity-based costing (ABC)
B a. Applied only to discretionary fixed costs
b. Requires the identification of cost drivers
c. Is used only in just-in-time (JIT) operations
d. Does not help to identify activities as value-adding or non-value-adding
12. A company using activity-based costing
A a. Tries to identify cost drivers
b. Is probably using the JIT philosophy
c. Allocates all costs to individual products
d. Looks for the activity with which total costs are most closely associated
13. What is a cost driver?
D a. Any activity that can be used to predict cost changes
b. The attempt to control expenditures at a reasonable level
c. The person who gathers and transfers cost data to the management accountant
d. Any activity that causes costs to be incurred
14. What is a cost pool?
D a. All costs of a production department
b. Over-applied or under-applied overhead costs
c. The material and labor cost used on a particular job
d. A group of overhead costs driven by the same activity
15. In ABC, preliminary cost allocations assign costs to
D a. Departments c. Products
b. Processes d. Activities
16. In ABC, final cost allocations assign costs to
C a. Departments c. Products
b. Processes d. Activities
17. Iran Manufacturing produces three products. Production and cost information show the following:
Model F Model A Model Q
Units produced 1,000 3,000 6,000
Direct labor hours 2,000 1,000 2,000
Number of inspections 20 30 50
Using ABC, what would be the inspection costs of P 50,000 allocated to each unit of Model F?
B a. P 5.00 c. P 20.00
b. P 10.00 d. Some other number
18. The resource utilized by a given product divided by the total amount of the resource available is called
B a. Activity driver c. Cost object
b. Consumption ratio d. Sustaining activity
19. Syria Inc. produces three products. Production and cost information is as follows:
Model Y Model O Model U
Units produced 2,000 6,000 12,000
Direct labor hours 4,000 2,000 4,000
Number of setups 100 150 250
What would be the consumption ratio for the number of setups?
Y O U Y O U
B a. 40% - 20% - 40% c. 10% - 30% - 60%
b. 20% - 30% - 50% d. Some other numbers
Items 20 and 21 are based on the following information
Zaire Company is preparing its annual profit plan. The controller estimates the amount of overhead that should be
allocated to the individual product lines from the information given as follows:
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 P 50,000
20. Under a costing system that allocates overhead on the basis of direct labor hours, what would be the materials handling
costs allocated to one unit of wall mirrors?
B a. P 500 c. P 2,000
b. P 1,000 d. P 5,000
21. Under ABC, what would be the materials handling costs allocated to one unit of wall mirrors?
A a. P 500 c. P 1,500
b. P 1,000 d. P 2,500

Page 7 of 12 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY MAS-42K
Week 11: ABC, BALANCED SCORECARD & STRATEGIC COST MANAGEMENT

22. Somalia Co. has used a traditional cost accounting system to apply quality control costs uniformly to all products at a
rate of 15% of direct labor cost. Monthly direct labor cost for its main product is P 30,000. In an attempt to distribute
quality control cost more equitably, Somalia is considering ABC. The monthly data shown below have been gathered for
the main product. The three activities are (1) income materials inspection, (2) in-process inspection, and (3) product
certification. Costs are to be allocated to each activity on the basis of cost drivers.
Activity Cost Driver Cost Rate Quantity for Main Product
(1) Number of types of materials P 12 per type 12 types
(2) Number of units P 0.14 per unit 17,500 units
(3) Number of orders P 77 per unit 30 orders
What is the monthly quality control cost assigned to the main product using ABC?
D a. P 150 per order c. P 404 lower than using the traditional system
b. P 4,500 d. P 404 higher than using the traditional system
23. Afghanistan Company uses ABC to compute product costs for external reports. The company has three activity centers
and applies overhead using predetermined overhead rates for each activity center. Estimated costs and activities for the
current year are presented below for the three activity centers:
Estimated overhead cost Expected activity
Activity 1 P 61,387 2,300
Activity 2 P 34,076 2,800
Activity 3 P 69,075 2,500
Actual costs and activities for the current year were as follows:
Actual overhead cost Actual activity
Activity 1 P 61,392 2,290
Activity 2 P 33,941 2,795
Activity 3 P 69,080 1,340
What was the amount of overhead over or under-applied for Activity 1 during the year?
B a. P 271.90 over-applied c. P 5.00 over-applied
b. P 271.90 under-applied d. P 5.00 under-applied
24. A company using activity-based overhead rates
D a. Will usually have higher budget variances than one using a single rate
b. Will usually have higher volume variances than one using a single rate
c. Cannot compute fixed and variable components of overhead cost
d. Should have better information for planning and control than one using a single rate
25. The use of activity-based costing normally results in
A a. Greater unit costs for low-volume products than is reported by traditional product costing
b. Lower unit costs for low-volume products than is reported by traditional product costing
c. Decreased setup costs being charged to volume products
d. Equalizing setup costs for all product lines
26. Predetermined overhead rates are based on activity measured by
D a. Actual overhead cost and actual activity c. Budgeted overhead cost and actual activity
b. Actual overhead cost and budgeted activity d. Budgeted overhead cost and budgeted activity
27. What is the numerator in computing a predetermined overhead rate?
A a. Budgeted manufacturing overhead cost c. Budgeted activity
b. Actual manufacturing overhead cost d. Fixed manufacturing overhead cost
28. What is the denominator in computing a predetermined overhead rate?
C a. Budgeted manufacturing overhead cost c. Budgeted activity
b. Actual manufacturing overhead cost d. Fixed manufacturing overhead cost
29. A predetermined overhead rate cannot be used
A a. If a company does not budget its overhead costs
b. By a company that uses job-order costing
c. In a multi-product company
d. By a highly automated company where labor is a minor part of product cost
30. Assigning overhead to jobs using a predetermined overhead rate is called
A a. Application c. Product costing
b. Budgeting d. Job-order costing
31. Angola applies overhead based on direct labor cost. It had budgeted factory overhead of P 500,000 and budgeted direct
labor of P 250,000. Actual overhead was P 525,000 while actual labor cost was P 270,000. Overhead was:
A a. Over-applied by P 15,000 c. Over-applied by P 25,000
b. Over-applied by P 20,000 d. Under-applied by P 20,000
32. Sudan Company applies overhead at P 4 per machine hour. During March, it worked 10,000 hours and over-applied
overhead by P 3,000. Actual overhead was:
C a. P 43,000 c. P 37,000
b. P 40,000 d. P 35,000
33. Sahara Company applied overhead at P 6 per direct labor hour. In March, Sahara incurred overhead of P 144,000.
Under-applied overhead was P 6,000. How many direct labor hours did Sahara work?
C a. 25,000 c. 23,000
b. 24,000 d. 22,000
34. Machine hours used to set the predetermined overhead rate were 50,000, actual hours were 48,000, and overhead
applied was P 120,000. Budgeted overhead for the year was:
D a. P 115,200 c. P 120,000
b. P 118,000 d. P 125,000

Page 8 of 12 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY MAS-42K
Week 11: ABC, BALANCED SCORECARD & STRATEGIC COST MANAGEMENT

35. The appropriate method for the disposition of under-applied or over-applied factory overhead
D a. Is to cost of goods sold only
b. Is to finished goods inventory only
c. Is apportioned to cost of goods sold and finished goods inventory
d. Depends on the significance of the amount
36. A report that measures financial and non-financial performance measures for various units in a single report is a(n):
A a. Balanced scorecard c. Imbalanced scorecard
b. Financial report scorecard d. Unbalanced scorecard
37. A balanced scorecard is primarily concerned with
B a. Staff c. Systems
b. Strategy d. Structure
38. Measures of those aspects of the firm’s performance that are crucial to its competitive advantage, and therefore to its
success, are termed:
B a. Cost targets c. Operational controls
b. Critical success factors d. Cost and activity drivers
39. Which one of the following is not one of the perspectives on the business into which critical success factors are commonly
grouped in the balanced scorecard?
B a. Employee innovation and learning c. Internal business processes
b. Competitor business strategies d. Financial performance
40. In balanced scorecard, a survey of employee satisfaction is a potential measure in which of the four perspectives?
D a. Financial c. Internal business processes
b. Customer d. Learning and growth
41. Which is considered to be a performance measurement that is a non-financial rather than a financial measure?
C a. Return on investment c. Customer satisfaction
b. Economic valued-added d. Profit margin
42. Which of the following is an example of an efficiency measure?
C a. The rate of absenteeism
b. The goal of becoming a leader manufacturer
c. The number of insurance claims processed per day
d. The rate of customer complaints
43. Which performance measure would be part of those used for internal business processes perspective?
A a. Cycle time c. Hours of training per employee
b. Employee satisfaction d. Customer retention
44. Which of the following represents value-added time in the manufacturing cycle?
D a. Inspection time. c. Move time.
b. Queue time. d. Process time.
Items 45 to 47 are based on the following information
China Manufacturing Corporation has the following information:
Moving time 8 days
Inspection time 2 days
Processing time 10 days
Storage time 30 days

45. What is the total amount of value-added time?

A a. 10 days c. 40 days
b. 30 days d. 50 days
46. What is the product’s cycle time?
D a. 10 days c. 40 days
b. 30 days d. 50 days
47. What is the manufacturing cycle efficiency (MCE)?
C a. 25.0% c. 20.0%
b. 80.0% d. 60.0%
48. The primary reason for adopting TQM is to achieve
A a. Greater customer satisfaction c. Reduced delivery charges
b. Greater employee participation d. Reduced delivery time
49. A characteristic of TQM is
C a. Quality by final inspection
b. Management by objectives
c. Education and self-improvement
d. On-the-job training by other workers
50. In which of the following organizations does total quality management (TQM) work best?
D a. Hierarchal
b. Specialists working individually
c. Teams of people from the same specialty
d. Teams of people from different specialties
51. Under a total quality management (TQM) approach
a. A large number of suppliers are used in order to obtain the lowest possible prices
b. Quality control is performed by well-trained inspectors at the end of production process
c. Top management assumes the primary responsibility for the quality of products and services
d. Measurement occurs throughout the process, errors are caught and corrected at the source

Page 9 of 12 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY MAS-42K
Week 11: ABC, BALANCED SCORECARD & STRATEGIC COST MANAGEMENT

52. What is the ultimate test of a quality product or service?

D a. Whether the product is able to reduce the conformance costs
b. Whether the product is able to reduce the non-conformance costs
c. Whether the product is able to reduce the conformance and non-conformance costs
d. Whether the product meets or exceeds the customers’ expectation
53. These are quality costs incurred to determine whether particular units of product meet quality standards.
A a. Appraisal costs c. Internal failure costs
b. Prevention costs d. External failure costs
54. These are quality costs incurred when company determines units that do not meet quality standards.
C a. Appraisal costs c. Internal failure costs
b. Prevention costs d. External failure costs
55. These are quality costs incurred when a unit of product fails to perform to customer expectations.
D a. Appraisal costs c. Internal failure costs
b. Prevention costs d. External failure costs
56. The cost of disposing defective units would be classified as a(n):
C a. Preventive cost c. Internal failure cost
b. Appraisal cost d. External failure cost
57. The cost of statistical quality control in a product quality cost system is categorized as a(n)
D a. Internal failure cost c. External failure cost
b. Training cost d. Appraisal cost
58. The cost of scrap, rework, and tooling changes in a product quality cost system is categorized as a(n)
C a. Training cost c. Internal failure cost
b. External failure cost d. Prevention cost
59. The cost of processing customer complaints
D a. Appraisal costs c. Internal failure costs
b. Prevention costs d. External failure costs
60. As prevention costs increase, other costs of quality generally
C a. Are not affected c. Decrease
b. Increase, but a slower pace d. Change, but the direction cannot be predicted
61. An increase in appraisal costs in a quality improvement program would usually have the following initial effects on (I)
internal failure costs and (II) external failure costs:
B a. (I) Increase (II) Increase c. (I) Decrease (II) Increase
b. (I) Increase (II) Decrease d. (I) Decrease (II) Decrease
62. All of the following would generally be included in a cost-of-quality report, EXCEPT
D a. Warranty claims c. Supplier evaluations
b. Design engineering d. Lost contribution margin
63. Management of a company is attempting to build a reputation as a world-class manufacturer of quality products. Which
of the following measures would NOT be used by the firm to measure quality?
B a. The percentage of shipments returned by customers because of poor quality
b. The number of parts shipped per day
c. The number of defective parts per million
d. The percentage of products passing quality tests the first time
64. Quality cost index is often used to measure and analyze cost of maintaining a given level of quality. One example of a
quality cost index, which uses a direct labor base, is computed as:
Total quality costs
Quality cost index = X 100
Direct labor costs
The following quality cost data were collected for May and June:
May June
Prevention costs P 4,000 5,000
Appraisal costs 6,000 5,000
Internal failure costs 12,000 15,000
External failure costs 14,000 11,000
Direct labor costs 90,000 100,000
Based upon these cost data, the quality cost index
A a. Decreased 4 points from May to June c. Increased 10 points from May to June
b. Was unchanged from May to June d. Decreased 10 points from May to June
65. The value chain is the sequence of business functions in which
D a. Products and services are evaluated with respect to their value to the supply chain
b. Value is proportionately added to the products or services of an organization
c. Value is deducted from the products or services of an organization
d. Usefulness is added to the products or services of an organization
66. R & D, production and customer service are business functions that are all included as part of
A a. Value chain c. Marketing
b. Benchmarking d. Supply chain
67. Which of the following activities would not be considered as adding value?
C a. Redesign of a product c. Rework of defective products
b. Quality assurance activities d. Client support services for product fulfillment

Page 10 of 12 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY MAS-42K
Week 11: ABC, BALANCED SCORECARD & STRATEGIC COST MANAGEMENT

68. The concept of value added is best described as

A a. Activities that convert resources into products and services consistent with external customer
requirements
b. A series of transactions between employees to deliver an end product to external customers and external
suppliers
c. A series of transactions between employees or between internal customers and internal suppliers to
deliver an end product
d. Activities that can be eliminated with no deterioration in product service, functionality, performance or
quality in the eyes of the end user
69. Which of the following determines the desired cost for a product based upon a given competitive price?
B a. Benchmarking c. Reengineering
b. Target costing d. Life-cycle costing
70. During the growth stage of a product’s life cycle,
B a. The quality of products is poor
b. New product models and features are introduced
c. There is little difference among competing products
d. The quality of the products becomes more variable and products are less differentiated
71. A company’s product has an expected 4-year life cycle from research, development, and design through its withdrawal
from the market. Budgeted costs are:
Upstream costs (R & D, design) P 2,000,000
Manufacturing costs 3,000,000
Downstream costs (marketing, distribution, customer service) 1,200,000
After-purchase costs 1,000,000
The company plans to produce 200,000 units and price the product at 125% of the whole-life unit cost. Thus,
what is the budgeted unit selling price?
D a. P 15 c. P 36
b. P 31 d. P 45
72. In Business Process Reengineering (BPR), the main objectives are to simplify and to possibly eliminate
B a. Value-added activities c. Constraint
b. Non-value-added activities d. Non-constraint
73. Which of the following statements is true regarding BPR?
C a. It requires a change in the company’s products
b. It involves redesigning business processes and eliminating value-added activities
c. It involves completely redesigning business processes and it is often implemented by outside consultants
d. It empowers front-line workers to solve problems and it focuses attention on solving problems rather
than on finger-pointing
74. Business Process Reengineering
C a. Affects employees in a way that boosts their morale
b. Is less likely to result in employee resistance than total quality management
c. Is more likely to result in employee resistance than total quality management
d. Does not affect employees, hence, no resistance from employees is expected when it is applied
75. JIT purchasing can be used by
D a. Retailers c. Manufacturers
b. Wholesalers d. All of the choices
76. Ideally, the number of units that should be produced in a JIT manufacturing system is equal to the:
B a. Maximum productive capacity
b. Actual demand for the current period
c. Budgeted demand for the current period
d. Budgeted demand for the following period
77. In JIT, the flow of goods is controlled by a “pull” approach. It means that:
A a. Work is initiated only in response to customer orders
b. Customers are pulled to buy more units to reduce the company’s inventory
c. Warehouses should always be full to be sure that customer demands are always met
d. Production officers see to it that there is always something to do to keep everyone busy
78. All of the following are characteristics of a just-in-time manufacturing environment, EXCEPT:
D a. Frequent deliveries of materials c. Little or no inventory of finished product
b. Manufacturing cells d. Longer production cycle
79. A just-in-time manufacturer is more likely than a conventional manufacturer to
A a. Receive more frequent deliveries of materials
b. Hold large inventories to serve as buffers
c. Spend less money on advertising
d. Need workers with fewer skills
80. A conventional manufacturer is more likely than a just-in-time manufacturer to
C a. Have a short production cycle
b. Produce goods in small batches
c. Hold large inventories to serve as buffers
d. Receive more frequent deliveries of materials

Page 11 of 12 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY MAS-42K
Week 11: ABC, BALANCED SCORECARD & STRATEGIC COST MANAGEMENT

81. Which of the following is a characteristic of just-in-time (JIT) inventory management systems?
D a. JIT users determine the optimal level of safety stocks
b. JIT is applicable only to large companies
c. JIT does not really increase overall economic efficiency because it merely shifts inventory levels further
up the supply chain
d. JIT relies heavily on good-quality materials
82. All of the following are potential financial benefits of JIT, EXCEPT:
A a. Reducing the risk of obsolescence
b. Reducing manufacturing lead time
c. Lower investments in inventories
d. Lower investments in plant space for inventories
83. Which of the following do just-in-time (JIT) operations try to eliminate?
B a. Discretionary fixed costs
b. Non-value-adding costs
c. Avoidable costs
d. Direct costs
84. Well-implemented just-in-time production and purchasing techniques
B a. Result in large stockpiles of inventory to keep production running
b. Strengthen a company’s ability to compete in the marketplace
c. Increase a reliance on long-term customer forecasts
d. Reduce a company’s competitive edge
85. When product demand exceeds production capacity, what is the first step that managers should take?
C a. Change the throughput of the operations
b. Spend money to eliminate the bottleneck
c. Focus their efforts on constraint identification
d. Apply activity-based management to solve the problem
86. Under Theory of Constraints (TOC), improvement efforts should be focused
A a. Work center that is a constraint
b. Work center that has no constraint
c. Cost center that incurs the highest costs
d. Cost center that has least number of constraints
87. The immediate goal of a TOC analysis is to
B a. Minimize direct materials cost
b. Maximize contribution margin through the constraint
c. Maximize the efficiency of the entire production process
d. Smooth production flow to eliminate backup in the system
88. Under TOC,
C a. No company has constraints
b. Improvement efforts should be focused on non-constraints
c. Efforts that would improve output of a workstation shall be focused on the constraints
d. A company that wants to improve its operation shall focus on workstation with the highest productive
capacity
89. An organization will directly gain all of the following benefits from ToC methodology, EXCEPT:
D a. Reduced bottlenecks
b. Increase profitability
c. Improved quality of products and services
d. Assessment of long-term product profitability
90. It refers to the efforts of a company to employ sustainable business practices regarding its employees and environment.
C a. Value chain analysis
b. Environmental accounting
c. Total quality management
d. Corporate social responsibility
- nothing follows -

Page 12 of 12 0915-2303213  www.resacpareview.com