Activity-Based Costing 5-7

MULTIPLE CHOICE QUESTIONS

6. Which of the following is typical of traditional costing systems?

a) Uses multiple cost drivers to allocate overhead.
b) Is more complicated than Activity-Based Costing systems.
c) Is still the best way to allocate direct labour costs.
d) Uses a single cost driver to allocate overhead.

7. In traditional costing systems, overhead is generally applied based on

a) direct labour for job-order costing, and machine hours for process-costing.
b) direct material for job-order costing, and direct labour for process-costing.
c) factory usage for both job-order costing and process-costing.
d) units of production.

8. A cost driver is
a) any factor or activity that has a direct cause-effect relationship with the resources consumed.
b) always based on time consumed by the activity.
c) another name for cost pool.
d) a term used only in traditional costing systems.

9. Which best describes the flow of overhead costs in an activity-based costing system?
a) overhead costs – direct labour cost or hours – products
b) overhead costs – products
c) overhead costs – activity cost pools – cost drivers – products
d) overhead costs – machine hours – products

10. Sleep-Tight manufactures mattresses for the hotel industry. It has two products, Downy and
Firm, and total overhead of $504,000. The company plans to manufacture 200 Downy
mattresses and 300 Firm mattresses this year. In manufacturing the mattresses, the company
must perform 700 material moves for the Downy and 300 for the Firm; it processes 114
purchase orders for the Downy and 90 for the Firm; and the company’s employees work 2,800
direct labour hours on the Downy product and 3,500 on the Firm. Sleep-Tight’s total material
handling costs are $300,000 and its total purchasing costs are $204,000.
Under a traditional costing approach based on direct labour hours, how much overhead would
be assigned to the Downy product?
a) $224,000
b) $252,000
c) $280,000
d) $336,000
Solution: ($504,000 / (2800 + 3500) = $80/dlhr.; $80 x 2,800 = $224,000

11. In companies where there is good reason to change from a traditionally based costing
system to an activity-based costing system, management might expect
a) products or services with high volumes will have higher overhead costs.
b) products or services with high volumes will have lowered overhead costs.

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5-8 Test Bank for Managerial Accounting, Fifth Canadian Edition

c) products or services with low volumes will have lowered overhead costs.
d) products or services with high volumes are generally costed accurately.

12. The first step in activity-based costing is to

a) assign manufacturing overhead costs for each activity cost pool to products.
b) calculate the activity-based overhead rate per cost driver.
c) identify and classify the major activities involved in the manufacture of specific products.
d) identify the cost driver that has a strong correlation to the activity cost pool.

13. A well designed activity-based costing system starts with

a) identifying the activity-cost pools.
b) computing the activity-based overhead rate.
c) assigning manufacturing overhead costs for each activity cost pool to products.
d) analyzing the activities performed to manufacture a product.

14. One of Astro Fireworks Company's activity cost pools is machine setups, with estimated
overhead of $200,000. Astro produces sparklers (75 setups) and lighters (25 setups). How
much of the machine setup cost pool should be assigned to sparklers?
a) $50,000
b) $150,000
c) $166,666
d) $200,000
Solution: ($200,000 / (75 + 25) = $2000/machine setup. $2000 x 75 = $150,000

15. Activity-based costing normally allocates overhead costs

a) to products only.
b) more accurately than traditional costing systems.
c) to services, where as traditional costing systems normally allocate overhead costs to
products.
d) based on no more than three cost drivers.

16. When using a single cost driver to allocate overhead costs, the amount of overhead costs
that are applied is
a) usually greater for low-volume products than for high-volume products.
b) usually greater for high-volume products than for low-volume products.
c) usually equal for both low and high-volume products.
d) sometimes greater for higher-volume products, and sometimes greater for low-volume
products.

17. A good cost driver should have a high correlation with

a) the actual number of units produced.
b) the actual consumption of overhead costs.
c) the actual number of products produced.
d) the actual consumption of direct costs.

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 Activity-Based Costing 5-9

Use the following information to answer questions 18–21.

Poodle Company manufactures two products, Mini A and Maxi B. Poodle's overhead costs
consist of setting up machines, $800,000; machining, $2,000,000; and inspecting, $600,000.
Information on the two products is:
Mini A Maxi B
Direct labour hours 15,000 25,000
Machine setups 600 400
Machine hours 24,000 26,000
Inspections 800 700

18. Overhead applied to Mini A using traditional costing and direct labour hours is
a) $1,275,000.
b) $1,536,000.
c) $1,670,000.
d) $1,700,000.
Solution: ($800,000 + $2,000,000 + $600,000 / (15,000 + 25,000) = $85/machine setup. $85 x 15,000 = $1,275,000

19. Overhead applied to Maxi B using traditional costing and direct labour hours is
a) $1,280,000.
b) $1,664,000.
c) $1,700,000.
d) $2,125,000.
Solution: ($800,000 + $2,000,000 + $600,000 / (15,000 + 25,000) = $85/machine setup. $85 x 25,000 = $2,125,000

20. Overhead applied to Mini A using activity-based costing is

a) $1,275,000.
b) $1,536,000.
c) $1,760,000.
d) $1,920,000.
Solution: ($800,000 / (600 + 400) x 600) + ($2,000,000 / (24,000 + 26,000) x 24,000) + ($600,000 / (800 + 700) x 800) = $1,760,000

21. Overhead applied to Maxi B using activity-based costing is

a) $1,280,000.
b) $1,640,000.
c) $1,664,000.
d) $2,125,000.
Solution: ($800,000 / (600 + 400) x 400) + ($2,000,000 / (24,000 + 26,000) x 26,000) + ($600,000 / (800 + 700) x 700) = $1,640,000

22. Veronica Co. produces three products, Products Rain, Snow, and Wind. Product Rain
requires 15 machine setups, Product Snow requires 20 setups, and Product Wind requires 35
setups. Veronica has identified an activity cost pool with allocated overhead of $420,000 for
which the cost driver is machine setups. How much overhead is assigned to each product?
Rain Snow Wind
a) $140,000 $140,000 $140,000
b) $28,000 $21,000 $12,000

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5 - 10 Test Bank for Managerial Accounting, Fifth Canadian Edition

c) $90,000 $120,000 $210,000

d) $12,000 $21,000 $28,000
Solution: Rain: ($420,000 / (15 + 20 + 35) x 15) = $90,000; Snow: ($420,000 / (15 + 20 + 35) x 20) = $120,000; Wind: ($420,000 / (15 + 20 + 35) x 35)
= $210,000

23. GoFish Inc. has an overhead rate for machine setups of $200 per machine setup, for a total
of $56,000 of overhead. The company produces two products, Product Salamander and
Product Gold, which require 120 and 160 setups each, respectively. The overhead assigned to
each product is
Salamander Gold
a) $28,000 $28,000
b) $32,000 $24,000
c) $26,000 $30,000
d) $24,000 $32,000
Solution: Salamander: ($200 x 120) = $24,000; Gold: ($200 x 160) = $32,000)

24. Hammock Company manufactures two models of its hammock, the Superior and the
Deluxe. The Superior model requires 10,000 direct labour hours and the Deluxe requires 40,000
direct labour hours. The company produces 4,000 units of the Superior model and 1,000 units of
the Deluxe model each year. The company produces the Superior model in batch sizes of 200,
while it produces the Deluxe model in batch sizes of 100. The company expects to incur
$120,000 of total setup costs this year. How much of the setup costs are allocated to the
Superior model using ABC costing?
a) $80,000
b) $60,000
c) $24,000
d) $100,000
Solution: ($120,000 / [(4,000 / 200) + (1,000 / 100)] x 4,000 / 200) = $80,000

25. Jaime Inc. manufactures two products, sweaters and jackets. The company has estimated
its overhead in the order-processing department to be $180,000. The company produces
50,000 sweaters and 80,000 jackets each year. Sweater production requires 25,000 machine
hours, jacket production requires 50,000 machine hours. The company places raw materials
orders 10 times per month, 2 times for raw materials for sweaters and the remainder for raw
materials for jackets. How much of the order-processing overhead should be allocated to
jackets?
a) $90,000
b) $120,000
c) $110,770
d) $144,000
Solution: $180,000 / 10 orders = $18,000 per order; $18,000 x 8 = $144,000

26. Canterra Co. incurs $160,000 of overhead costs each year in its three main departments,
setup ($10,000), machining ($110,000), and packing ($40,000). The setup department performs
40 setups per year, the machining department works 5,000 hours per year, and the packing
department packs 500 orders per year. Information about Canterra’s 2 products is as follows:
Product One Product Two
Number of setups 20 20
Machining hours 1,000 4,000

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 Activity-Based Costing 5 - 11

Orders packed 150 350

If machining hours are used as a base, how much overhead is assigned to Product One each
year?
a) $32,000
b) $80,000
c) $55,000
d) $48,000
Solution: $160,000 / 5,000 x 1,000 = $32,000

27. Canterra Co. incurs $540,000 of overhead costs each year in its three main departments,
setup ($40,000), machining ($400,000), and packing ($100,000). The setup department
performs 50 setups per year, the machining department works 8,000 hours per year, and the
packing department packs 200 orders per year. Information about Canterra’s 2 products is as
follows:
Product One Product Two
Number of setups 10 40
Machining hours 3,000 5,000
Orders packed 110 90
Using ABC, how much overhead is assigned to Product One each year?
a) $540,000
b) $327,000
c) $270,000
d) $213,000
Solution: ($40,000 / (10 + 40) x 10) + ($400,000 / (3,000 + 5,000) x 3,000) + ($100,000 / (110 + 90) x 110) = $213,000

28. Canterra Co. incurs $160,000 of overhead costs each year in its three main departments,
setup ($10,000), machining ($110,000), and packing ($40,000). The setup department performs
40 setups per year, the machining department works 5,000 hours per year, and the packing
department packs 500 orders per year. Information about Canterra’s 2 products is as follows:
Product One Product Two
Number of setups 20 20
Machining hours 1,000 4,000
Orders packed 150 350
Number of product
Manufactured 600 400
Using ABC, how much overhead is assigned to Product Two each year?
a) $80,000
b) $64,000
c) $121,000
d) $128,000
Solution: ($10,000 / 40 x 20) + ($110,000 / 5,000) x 4,000) + ($40,000 / 500 x 350) = $121,000

29. A company incurs $1,200,000 of overhead each year in three departments, Processing,
Packaging, and Testing. The company performs 800 processing transactions, 200,000
packaging transactions, and 2,000 tests per year in producing 400,000 drums of oil and 600,000
drums of sludge. The following data are available:
Department Estimated use of Driver Cost
Processing 800 $500,000
Packaging 200,000 500,000

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5 - 12 Test Bank for Managerial Accounting, Fifth Canadian Edition

Testing 2,000 200,000

Production information for oil is as follows:

Department Estimated use of Driver
Processing 300
Packaging 120,000
Testing 1,600
Calculate the amount of overhead assigned to oil.
a) $600,000
b) $647,500
c) $552,500
d) $460,000
Solution: ($500,000 / 800 x 300) + ($500,000 / 200,000) x 120,000) + ($200,000 / 2,000 x 1,600) = $647,500

30. A company incurs $1,200,000 of overhead each year in three departments, Processing,
Packaging, and Testing. The company performs 800 processing transactions, 200,000
packaging transactions, and 2,000 tests per year in producing 400,000 drums of oil and 600,000
drums of sludge. The following data are available:
Department Estimated use of Driver Cost
Processing 800 $500,000
Packaging 200,000 500,000
Testing 2,000 200,000

Production information for sludge is as follows:

Department Estimated use of Driver
Processing 500
Packaging 80,000
Testing 400
Calculate the amount of overhead assigned to sludge.
a) $600,000
b) $552,500
c) $647,500
d) $460,000
Solution: ($500,000 / 800 x 500) + ($500,000 / 200,000) x 80,000) + ($200,000 / 2,000 x 400) = $552,500

31. Sleep-Tight manufactures mattresses for the hotel industry. It has two products, Downy and
Firm and total overhead of $504,000. The company plans to manufacture 200 Downy
mattresses and 300 Firm mattresses this year. In manufacturing the mattresses, the company
must perform 700 material moves for the Downy and 300 for the Firm; it processes 114
purchase orders for the Downy and 90 for the Firm; and the company’s employees work 2,800
direct labour hours on the Downy product and 3,500 on the Firm. Sleep-Tight’s total material
handling costs are $300,000 and its total purchasing costs are $204,000.
Using ABC, how much overhead would be assigned to the Downy product?
a) $504,000
b) $324,000
c) $252,000
d) $180,000
Solution: $300,000 / (700 + 300) x 700 + $204,000 / (114 + 90) x 114 = $324,000

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 Activity-Based Costing 5 - 13

32. A relevant unit-level cost driver for a spa is

a) advertising the offerings in the spa.
b) products used for facial care.
c) training of new staff.
d) hours patrons spend in the whirlpool.

33. A critical component of an activity-based accounting system is

a) the ability to accurately measure activities that consume cost.
b) few areas in the facility that capture costs.
c) the ability to eliminate non-value-added activities.
d) flexible job-order costing information.

34. Which of the following is true?

a) Any activity that increases the cost of producing a product is a value-added activity.
b) Engineering design is a non-value-added activity.
c) Machining is a non-value-added activity.
d) Not all activities labelled non-value-added are totally wasteful, nor can they be totally
eliminated.

35. Which of the following is a limitation of activity-based costing?

a) more cost pools
b) less control over overhead costs
c) poorer management decisions
d) some arbitrary allocations continue

36. Which of the following factors would suggest a switch to activity-based costing?
a) product lines similar in volume and manufacturing complexity
b) overhead costs constitute a significant portion of total costs
c) the manufacturing process has been stable
d) production managers use data provided by the existing system

37. Which of the following is true of activity-based costing?

a) more cost pools
b) same base as traditional costing
c) less costly to use
d) eliminates arbitrary allocations

38. The primary benefit of ABC is it provides

a) faster management decisions.
b) enhanced control over overhead costs.
c) more cost pools.
d) more accurate product costing.

39. Which of the following is not a benefit of activity-based costing?

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5 - 14 Test Bank for Managerial Accounting, Fifth Canadian Edition

a) more accurate product costing

b) enhanced control over overhead costs
c) better management decisions
d) less costly to use

40. Each of the following is a limitation of activity-based costing except that

a) it can be expensive to use.
b) it is more complex than traditional costing.
c) more cost pools are used.
d) some arbitrary allocations continue.

41. The presence of any of the following factors would suggest a switch to ABC except when
a) product lines differ greatly in volume.
b) overhead costs constitute a minor portion of total costs.
c) the manufacturing process has changed significantly.
d) production managers are ignoring data provided by the existing system.

42. What might be an impediment in changing from a traditionally based costing system to an
activity-based costing system?
a) Management may not be in favour of a change.
b) Excessive costs may be incurred to assist in capturing costs.
c) Some costs would still have to be allocated arbitrarily after the changeover.
d) All of the above are impediments.

43. What might be a reason to not change from a traditionally based costing system to an
activity-based costing system?
a) Products or services are similar in volume and activity.
b) Support services are spread evenly throughout the company’s activities.
c) Overhead is a low component of the overall cost.
d) All of the above are valid reasons.

44. A major advantage in changing from a traditionally based costing system to an activity-
based costing system is
a) a company’s customers can benefit from any reduction in costs.
b) management will be able to identify the true cost of non-added-value activities.
c) direct labour and material costs will be reduced.
d) supplier costs will be reduced after the changeover.

45. Which of the following is a value-added activity?

a) engineering design
b) machinery repair
c) inventory storage
d) inspections

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 Activity-Based Costing 5 - 15

46. Which of the following is a non-value-added activity?

a) engineering design
b) machining
c) inspection
d) packaging

47. Value-added activities

a) should be reduced or eliminated.
b) involve resource usage customers are willing to pay for.
c) add cost to a product without affecting selling price.
d) cannot be differentiated from non-value-added activities.

48. Which of the following is a unit-level activity?

a) cleaning the paint sprayer when switching from one colour of paint to another
b) paint used in the manufacturing process
c) test marketing to see which colour of paint customers prefer
d) painting the executive offices

49. Which of the following is a batch-level activity?

a) sandpaper used to smooth the wood used in the manufacture of a chair
b) the design of a chair
c) the chairs in the staff cafeteria
d) shipment of chairs to a customer

50. Which of the following is a product-level activity?

a) regulatory approval of a new prescription drug
b) an advertisement campaign that focuses on the large number of products the company
produces
c) equipment cleaning between batches
d) material handling

51. Which of the following is a facility-level activity?

a) the Human Resources Department
b) the Product Manager’s salary
c) insurance on the factory that is used exclusively to manufacture one of the company’s seven
products
d) inspections

52. Which of the following is a batch-level activity?

a) plant management
b) product design
c) equipment setups
d) assembling

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5 - 16 Test Bank for Managerial Accounting, Fifth Canadian Edition

53. Which of the following is an example of a product-level activity in a refinery?

a) transportation of fuel to gas stations
b) product testing for quality control
c) advertising the benefits of the company’s products
d) maintenance activities in the refinery

54. Which of the following is an example of unit-level activity in a major automotive parts
distribution company?
a) preparing cheques for suppliers
b) promotional materials
c) packing parts for shipment
d) shipping costs of parts to dealers

55. Which of the following is an example of batch-level activity in a company marketing cell
phones?
a) internet advertising
b) preparing monthly customer invoices
c) rent for kiosks in shopping malls
d) offering discounts on monthly payment plans

56. Which of the following is an example of a facility-level activity in an airport?

a) wages for security screening personnel
b) parking lot revenue and expenses
c) airline landing fees
d) salaries of air traffic controllers

57. A non-value-added activity in a service enterprise is

a) taking appointments.
b) travelling.
c) advertising.
d) all of these

58. All of the following are examples of a value-added activity in a service company except
a) delivering packages by a delivery service.
b) ordering supplies.
c) performing surgery.
d) providing legal research for legal services.

59. Activity-based costing is used in

Service industries Manufacturing industries
a) Yes No
b) Yes Yes
c) No Yes
d) No No
AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

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 Activity-Based Costing 5 - 17

60. Activity-based costing has been found to be useful in each of the following service industries
except
a) banks.
b) hospitals.
c) telephone companies.
d) ABC has been useful in any of these industries.

61. What sometimes makes implementation of activity-based costing difficult in service

industries is
a) the labelling of activities as value-added.
b) identifying activities, activity cost plus, and cost drivers.
c) that a larger proportion of overhead costs are company-wide costs.
d) attempting to reduce or eliminate non-value-added activities.

62. All of the following statements are correct except that

a) activity-based costing has been widely adopted in service industries.
b) the objective of installing ABC in service firms is different than it is in a manufacturing firm.
c) a larger proportion of overhead costs are company-wide costs in service industries.
d) the general approach to identifying activities and activity cost pools is the same in a service
company as in a manufacturing company.

63. The use of activity-based costing in service industries

a) has the same objective as in manufacturing.
b) results in improved costing of services provided.
c) uses cost pools to assign overhead.
d) all of these

64. All of the following are examples of a value-added activity in a service company except
a) delivering packages by a delivery service.
b) ordering supplies.
c) performing surgery.
d) providing legal research for legal services.

65. Port Accounting performs two types of services, audit and tax. Port’s overhead costs consist
of computer support, $240,000; and legal support, $120,000. Information on the two services is:
Audit Tax
Direct labour cost $50,000 $100,000
CPU minutes 40,000 10,000
Legal hours used 200 800
Overhead applied to audit services using ABC is
a) $120,000.
b) $144,000.
c) $216,000.
d) $240,000.

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5 - 18 Test Bank for Managerial Accounting, Fifth Canadian Edition

Solution: ($240,000 / (40,000 + 10,000) x 40,000) + ($120,000 / (200 + 800) x 200) = $216,000

66. Port Accounting performs two types of services, audit and tax. Port’s overhead costs consist
of computer support, $240,000; and legal support, $120,000. Information on the two services is:
Audit Tax
Direct labour cost $50,000 $100,000
CPU minutes 40,000 10,000
Legal hours used 200 800
Overhead applied to audit services using traditional costing is
a) $120,000.
b) $144,000.
c) $216,000.
d) $240,000.
Solution: ($240,000 + $120,000) / ($50,000 + $100,000) x $50,000 = $120,000

67. Jackal Security Inc. provides security guards to shopping malls. Data related to Jackal’s
overhead costs for the current year are as follows:
Head Office Activity Total Overhead Cost Driver Estimated
Cost Activity
Supervision $128,000 # of employees 80
Technology fees 58,000 computer hours 2,000
Rent/Utilities/Taxes 42,000 direct labour hours 160,000
Total $228,000
During the year, Jackal provided security to the Apple Creek Mall including 5 employees, 150
computer hours and 10,800 labour hours. Overhead applied to the Apple Creek Mall job for the
year using ABC is
a) $1,629.26.
b) $15,185.00.
c) $15,390.00.
d) $17,100.00.
Solution: ($128,000 / 80 x 5) + (58,000 / 2,000 x 150) + ($42,000 / 160,000 x 10,800) = $15,185

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 Activity-Based Costing 5 - 19

ANSWERS TO MULTIPLE CHOICE QUESTIONS

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
6. d 15. b 24. a 33. a 42. d 51. a 60. d
7. a 16. b 25. d 34. d 43. d 52. c 61. c
8. a 17. b 26. a 35. d 44. b 53. b 62. b
9. c 18. a 27. d 36. b 45. a 54. c 63. d
10. a 19. d 28. c 37. a 46. c 55. b 64. b
11. b 20. c 29. b 38. d 47. b 56. d 65. c
12. c 21. b 30. b 39. d 48. b 57. d 66. a
13. d 22. c 31. b 40. c 49. d 58. b 67. b
14. b 23. d 32. d 41. b 50. a 59. b

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