1. ________ and ________ are typically the measures of volume of activity in traditional
volume-based cost systems.
Practical capacity; products sold
Direct labor hours; practical capacity
Direct labor hours; machine hours
Square footage; machine hours
2. Traditional cost systems distort product costs because:
they do not know how to identify the appropriate units
excess capacity costs are ignored
they emphasize financial accounting requirements
they use unit-level cost drivers to allocate support costs to products
3. Unit-level cost drivers in traditional cost systems distort product costs because they:
assume that all support activities affect all products
recognize specific activities that are required to produce a product
do not consistently record costs
fail to measure the correct amount of total costs for all products
4. The use of unit-related measures to assign support costs is more likely to:
undercost high-volume products
undercost specialty low-volume products
undercost complex products
Both (b) and (c) are correct.
5. Misleading product cost numbers are MOST likely the result of misallocating:
direct material costs
direct manufacturing labor costs
All of the above are correct.
6. Undercosting a particular product may result in:
loss of market share for the product
lower profits for the product
understating total costs of all the products
7. It is important that the product costs reflect as much of the diversity and complexity of
the manufacturing process so that:
product costs will reflect their relative consumption of resources
better information related to resource constraints can be captured and communicated
there is less likelihood of cost distortions
All of the above are correct.
8. Which of the following is a sign that an ABC system may be useful?
There are small amounts of support costs.
Products make diverse demands on resources because of differences in volume,
process steps, batch size, or complexity.
Products a company is less suited to produce and sell show small profits.
Operations throughout the plant are fairly similar.
9. Units of production are most appropriate as a support cost assignment base when:
it is a service department
only one product is manufactured
direct labor costs are low
factories produce a complex and varied mix of products
10. Designing an activity-based cost system includes:
classifying as many costs as indirect costs as is feasible
creating as many cost pools as possible
identifying the activities performed by the plant’s resources
seeking a broader focus rather than detail
11. The following information applies to Questions 11 through 13.
Merriman Company provides the following ABC costing information:
Activities Total Costs Activity-cost drivers
Account inquiry hours $500,000 10,000 hours
Account billing lines $250,000 5,000,000 lines
Account verification accounts $100,000 50,000 accounts
Correspondence letters $ 50,000 5,000 letters
Total costs $900,000
The above activities are used by Departments A and B as follows:
Department A Department B
Account inquiry hours 1,000 hours 3,000 hours
Account billing lines 200,000 lines 300,000 lines
Account verification accounts 10,000 accounts 8,000 accounts
Correspondence letters 1,000 letters 1,500 letters
How much of the account inquiry cost will be assigned to Department A?
($500,000 / 10,000) x 1,000 = $50,000
12. How much of account verification costs will be assigned to Department A?
($100,000 / 50,000) x 10,000 = $20,000
13. How much of the account billing costs will be assigned to Department B?
($250,000/5,000,000) x 300,000 = $15,000
14. The following information applies to Questions 14 through 15.
Zappo Skate Corporation manufactures two models of skate boards: a standard and a
deluxe model. The following activity and cost information has been compiled.
Product Number of Steups Number of Components Number of total Direct Labor
Standard 20 10 375
Deluxe 30 15 225
Overhead costs $25,000 $35,000
Assume a traditional costing system applies the $60,000 of overhead costs based on
direct labor hours. What is the total amount of overhead costs assigned to the standard
15. Number of setups and number of components are identified as activity-cost drivers
for overhead costs. Assuming an activity-based costing system is used, what is the total
amount of overhead costs assigned to the standard model?
16. If products are alike, then for costing purposes:
a simple costing system will yield accurate cost numbers
an activity-based costing system should be used
multiple unit-level cost rates should be used
varying demands will be placed on resources
17. With traditional costing systems, products manufactured in small batches and in small
annual volumes may be _____________ because batch-related and product-sustaining
costs are assigned using unit-related cost drivers.
18. Under traditional costing systems, selling and administrative costs have been largely
ignored because they:
are hard to quantify except at exorbitant cost of measurement
have been negligible in amount relative to total costs now they are growing in
in the past they are not inventoriable for financial reporting purposes under GAAP
relate to a varied mix of products
19. The focus of ABC systems is on:
20. It ONLY makes sense to implement an ABC system when:
ABC provides information to make better decisions
its benefits exceed implementation costs
ABC traces more costs as direct costs
there is a strong cause-and-effect relationship between costs in the cost pools and
their cost-allocation bases