Activity Based Costing and Activity Based Management
Managerial Accounting: Making Decisions and Motivating Performance (Datar/Rajan)
Chapter 6 Activity-Based Costing and Activity-Based Management
Learning Objective 6-1
1) The costing system that broadly averages or spreads the cost of resources uniformly to cost objects when individual products or services use those resources in nonuniform ways is ________.
- A) direct costing
- B) service costing
- C) indirect costing
- D) variable-rate costing
- E) peanut-butter costing
Answer: E
Diff: 1 Page Ref: 213
LO: 6-1
EOC: E6-1
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
2) Peanut-butter costing ________.
- A) is not used to spread the cost of resources to cost objects
- B) spreads the cost of resources uniformly to cost objects
- C) spreads the revenues of resources to a single cost object
- D) failed to spread the cost of resources uniformly to cost objects
- E) does not average the cost of resources uniformly to cost objects
Answer: B
Diff: 1 Page Ref: 213
LO: 6-1
EOC: E6-1
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
3) Broad averaging lead to ________.
- A) service product cost
- B) variable product costs
- C) accurate product costs
- D) accurate service costs
- E) inaccurate product costs
Answer: E
Diff: 1 Page Ref: 213
LO: 6-1
EOC: E6-1
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
4) A product consumes a high level of resources per unit, but is reported to have a low cost per unit is known as ________.
- A) product overcosting
- B) product undercosting
- C) strategic consequences
- D) accurate product costs
- E) accurate service costs
Answer: B
Diff: 1 Page Ref: 213
LO: 6-1
EOC: E6-1
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
5) Simple costing systems that allocate indirect costs are most likely to use which of the following steps first?
- A) Identify the products that are the chosen cost objects.
- B) Identify the direct costs of the products.
- C) Select the cost-allocation bases to use for allocating indirect (or overhead) costs to the products to identify the direct costs of the products.
- D) Identify the indirect costs associated with each cost-allocation base.
- E) Compute the rate per unit of each cost allocation base.
Answer: A
Diff: 2 Page Ref: 215
LO: 6-1
EOC: E6-1
AACSB: Analytic Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
6) Managers can use steps as a tool in simple costing systems when they have a single indirect cost pool because it helps them to allocate indirect costs using a single indirect-cost rate. Which of the following is not one of the steps to guide them in this process?
- A) Identify the Products that are the Chosen Cost Objects.
- B) Identify the Direct Costs of the Products.
- C) Select the Cost-Allocation Bases to use for Allocating Indirect (or Overhead) Costs to the Products.
- D) Identify the Indirect Costs Associated with Each Cost-Allocation Base.
- E) Application of the Five-Step Decision Making Platform.
Answer: E
Diff: 2 Page Ref: 215
LO: 6-1
EOC: E6-1
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
7) As product diversity and direct costs increase, it is usually best to switch away from a ________ cost system and move to a ________ cost system.
- A) low; high-based
- B) job; activity-based
- C) broad; job-based
- D) activity; broad-based
- E) broad; activity-based
Answer: E
Diff: 2 Page Ref: 213
LO: 6-1
EOC: E6-1; E6-2
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
8) To compute the rate per unit of each cost-allocation base, managers ________.
- A) add
- B) subtract
- C) multiply
- D) divide
- E) None of these are correct
Answer: D
Diff: 1 Page Ref: 216
LO: 6-1
EOC: E6-3; E6-4
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
9) A group of coworkers went to lunch at the mall. Listed below is the total cost of each individual meal.
Matthew Hank Shawn Rachel Marla Jim
Entrée Cost $12 $21 $16 $15 $61 $14
Dessert 0 8 5 5 17 3
Drinks 3 13 7 5 31 7
Total $15 $42 $28 $25 $109 $24
Required:
Compute the average cost per dinner. When the costs are averaged across all six dinners, is Marla overcosted or undercosted?
- A) $30.10; undercosted.
- B) $42.16; undercosted.
- C) $45.25; overcosted.
- D) $58.19; undercosted.
- E) $62.19; overcosted.
Answer: B
Explanation: B) Explanation: [($15 + $42 + $28 + $25 + $109 + $24) = $241 / 6] = $42.16
Marla is undercosted because the cost of her meal was $109, based on the average dinner cost of $40.16.
Diff: 2 Page Ref: 213
LO: 6-1
EOC: E6-16; E6-18
AACSB: Analytic Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
10) The Heartmore Organization uses a single cost allocation base. The management accountants group all budgeted indirect costs of $4,000,000 into a single overhead cost pool. They also reported a budget of 40,000 direct manufacturing labor-hours during the same period.
Required:
What is the rate per direct manufacturing labor-hour?
- A) $50 per direct manufacturing labor-hour.
- B) $75 per direct manufacturing labor-hour.
- C) $100 per direct manufacturing labor-hour.
- D) $125 per direct manufacturing labor-hour.
- E) $150 per direct manufacturing labor-hour.
Answer: C
Explanation: C) [($4,000,000 / 40,000)] = $100 per direct manufacturing labor-hour
Diff: 1 Page Ref: 216
LO: 6-1
EOC: E6-16; E6-18
AACSB: Analytic Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
11) Zell Company produces a special hammer for carpenters. The budgeted total cost in the indirect-cost pool is $75,000. The budgeted total quantity of cost allocation base is 30,000. What is the budgeted indirect cost rate?
- A) $10.00
- B) $15.00
- C) $20.00
- D) $25.00
- E) $30.00
Answer: D
Explanation: D) [$75,000 / 30,000] = $25.00 per direct manufacturing labor-hour
Diff: 1 Page Ref: 216
LO: 6-1
EOC: E6-33
AACSB: Analytic Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
12) The Monroe Company manufactures a special saddle. The budgeted indirect total cost associated with the production of the saddle is $100,000. The budgeted number of saddles is 55,000. What is the budgeted indirect cost allocation rate?
- A) $1.00
- B) $1.05
- C) $1.18
- D) $1.82
- E) $1.90
Answer: D
Explanation: D) [($100,000 / 55,000)] = $1.82 budgeted indirect-cost allocation rate
Diff: 1 Page Ref: 216
LO: 6-1
EOC: E6-32
AACSB: Analytic Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
13) The Lighting Factory produces two types of light fixtures to sell to consumers. Product A illuminates high-density lighting and Product B illuminates low-density lighting. The manager at the Lighting Factory reported the following information:
Product #1: High-density light
Operating income $200,000
Revenues $3,650,000
Product #2: Low-density light
Operating income $225,000
Revenues $3,500,000
Required:
Compute the profit margin percentage for each product.
- A) 5.47%; 6.42%
- B) 5.95%; 6.66%
- C) 6.05%; 6.75%
- D) 6.42%; 6.85%
- E) 6.80%; 6.92%
Answer: A
Explanation: A) Product A: [($200,000 / $3,650,000)] = 5.47%
Product B: [($225,000 / $3,500,000)] = 6.42%
Diff: 1 Page Ref: 217
LO: 6-1
EOC: E6-30
AACSB: Analytic Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
14) As product diversity and indirect costs increased, broad averaging led to inaccurate product costs.
Answer: TRUE
Diff: 1 Page Ref: 213
LO: 6-1
EOC: E6-1; E6-2
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
15) Broad averaging often results to the undercosting or overcosting of products or services.
Answer: TRUE
Diff: 1 Page Ref: 213
LO: 6-1
EOC: E6-1
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
16) Simple peanut-butter costing broadly averages or spreads the cost of resources uniformly to cost objects.
Answer: TRUE
Diff: 1 Page Ref: 213
LO: 6-1
EOC: E6-1
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
17) Product undercosting occurs when a product consumes a high level of resources per unit but is reported to have a low cost per unit.
Answer: TRUE
Diff: 1 Page Ref: 213
LO: 6-1
EOC: E6-1
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
18) Product-cost cross-subsidization means that if a company undercosts one of its products, it will overcost at least one of its other products.
Answer: TRUE
Diff: 1 Page Ref: 213-214
LO: 6-1
EOC: E6-1; E6-2
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
19) It takes less work for a manager to compute the amount of costs in cost cross-subsidization since the manager considers indirect costs.
Answer: FALSE
Explanation: Calculating the amount of cost cross-subsidization takes more work when indirect costs are considered.
Diff: 1 Page Ref: 214
LO: 6-1
EOC: E6-1; E6-21; E6-23
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
20) Rachel and Joey went to dinner and incurred the following costs:
Joey’s total dinner cost: $30.00
Rachel’s total dinner cost: $21.00
Required:
Compute the average cost of dinner. If they each pay the average cost of dinner, calculate the amount of Rachel’s cross-subsidization to Joey.
Answer: The average cost of the dinner is $25.50. [$30 + $21) / 2].
The amount of cross-subsidization is $4.50 [($25.50 – $21.00)].
Diff: 3 Page Ref: 214
LO: 6-1
EOC: E6-21; E6-23
AACSB: Analytic Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
21) What should managerial accountants understand when prices of their products and services are determined by the market based on competition among companies in the marketplace?
Answer: When a manager is faced with prices that are determined by the market, managers will focus on the wrong products. They will focus on focus their attention on overcosted products that show a low profitability measure on the books when the prices are actually reasonable based on the prices that were determined by the market. As a result, they will not focus on, or they will ignore, the products that are undercosted because they show high profitability ratios on the books. These undercosted products could consume a large amount of resources that could impact long-term profitability.
Diff: 3 Page Ref: 213
LO: 6-1
EOC: E6-1; E6-2
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
22) What are the strategic consequences of product undercosting and overcosting?
Answer: Managers use cost information to help them make decisions about prices. If a manager implements a strategy but undercosts a product, the product will be underpriced and the manager will incur departmental losses because the sales may bring in less revenue than the cost of the resources. A manager that implements a strategy and overprices the products this results in the overcosting of products. As a result, the products will lose the market share to competitors that charge less for the same or similar products.
Diff: 2 Page Ref: 213
LO: 6-1
EOC: E6-1; E6-2
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
Learning Objective 6-2
1) The costing system that reduces the use of broad averages for assigning the cost of resources to cost objects is the ________.
- A) job-costing system
- B) process-costing system
- C) product-costing system
- D) market-costing system
- E) refined-costing system
Answer: E
Diff: 1 Page Ref: 218
LO: 6-2
EOC: E6-25; E6-26
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
2) The growing demand for customized products, which has led managers to ________ the variety of products and services their companies offer.
- A) vary
- B) reduce
- C) decrease
- D) increase
- E) eliminate
Answer: D
Diff: 2 Page Ref: 218
LO: 6-2
EOC: E6-25; E6-26
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
3) Which of the following is not a reason why managers see an accelerated need for refinement?
- A) The growing demand of products and competition in product markets.
- B) The increases in direct costs.
- C) Decreases in indirect costs.
- D) Increases in product diversity with both international and domestic banking facilities.
- E) Use of broad averages fails to capture differences in demand and leads to distorted and inaccurate cost information.
Answer: C
Diff: 3 Page Ref: 218
LO: 6-2
EOC: E6-25; E6-26
AACSB: Ethical Understanding and Reasoning Abilities
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
4) Mug King reported the following information:
Small mugs Large mugs Total
1 Quantity of mugs 50,000 25,000
2 Number of mugs produced per batch 240 75
3 Number of batches ? ?
4 Setup time per batch 3 hours 5 hours
5 Total setup-hours ? ? ?
Required:
Compute the number of batches for small and large mugs, the total setup-hours, and the total setup-hours for both mugs.
- A) Batches: Small = 208.33; Large = 333.33
Total Setup-hours: Small = 624.99; Large = 1,666.65
Total: 2,291.64
- B) Batches: Small = 225.35; Large = 350.50
Total Setup-hours: Small = 650.50; Large = 1,750.25
Total: 2,500.50
- C) Batches: Small = 230.61; Large = 385.64
Total Setup-hours: Small = 695.25; Large = 1,895.62
Total: 3,500
- D) Batches: Small = 260.52; Large = 1,950.62
Total Setup-hours: Small = 685.24; Large = 1,962.35
Total: 4,200
- E) Batches: Small = 275.62; Large = 2,062.25
Total Setup-hours: Small = 285.63; Large = 2,650.36
Total: 4,695
Answer: A
Explanation: A)
Small mugs Large mugs Total
1 Quantity of mugs 50,000 25,000
2 Number of mugs produced per batch 240 75
3 Number of batches 208.33 333.33
4 Setup time per batch 3 hours 5 hours
5 Total setup-hours 624.99 1,666.65 2,291.64
Number of batches small mugs [(50,000 / 240)] = 208.33
Number of batches large mugs [(25,000 / 75)] = 333.33
Total setup-hours small mugs [(208.33 × 3)] = 624.99
Total setup-hours large mugs [(333.33 × 50] = 1,666.65
Diff: 3 Page Ref: 221
LO: 6-2
EOC: E6-12
AACSB: Analytic Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
5) Refined costing systems reduce the use of broad averages for assigning the cost of resources to cost objects.
Answer: TRUE
Explanation: The use of broad averages fails to capture differences in demand and leads to distorted and inaccurate cost information. Refined costing systems enhance the assignment of resources to cost objects.
Diff: 1 Page Ref: 218
LO: 6-2
EOC: E6-3; E6-12
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
6) Advances in information technology have no impact on the implementation of refined costing systems.
Answer: FALSE
Explanation: The advances in information technology facilitate the implementation of refined costing systems. Costing-system refinements require more data gathering and additional analysis, and improvements in information technology have drastically reduced the costs to gather, validate, store, and analyze information.
Diff: 1 Page Ref: 219
LO: 6-2
EOC: E6-3; E6-12; E6-14
AACSB: Use of Information Technology
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
7) Costing-system refinements require more data gathering and more analysis, and improvements in information technology have drastically reduced the costs to gather, validate, store, and analyze vast quantities of data.
Answer: TRUE
Diff: 1 Page Ref: 219
LO: 6-2
EOC: E6-1; E6-3
AACSB: Use of Information Technology
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
8) The three main guidelines that managers use to refine costing systems are direct-cost tracing, indirect-cost pools, and cost-allocation bases.
Answer: TRUE
Diff: 1 Page Ref: 219
LO: 6-2
EOC: E6-3; E6-12
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
9) Why do managers refine costing systems?
Answer: Managers refine costing systems to increase product diversity, increase indirect costs, and to increase productivity in the marketplace.
Diff: 1 Page Ref: 218
LO: 6-2
EOC: E6-14; E6-21
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
10) What are the three main guidelines that managers use when the refine their costing system?
Answer: The three main guidelines for refining a costing system include direct-cost tracing, indirect-cost pools, and cost-allocation bases. Managers us direct-cost tracing when they need to identify the direct costs. The result of direct-cost tracing leads to reduce the amount of indirect costs and minimize the extent to which costs have to be allocated, rather than traced. Managers expand the indirect-cost pool until each pool is more homogenous. All costs in a homogeneous cost pool have the same or similar cause-and-effect relationship with a single cost driver that is used as the cost-allocation base. Managers use the cost-allocation bases because they use the cost driver as the cost-allocation base for each homogenous indirect-cost pool.
Diff: 2 Page Ref: 219
LO: 6-2
EOC: E6-14; E6-21
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
11) How do managers refine costing systems? What is their goal when they chose to refine costing systems?
Answer: Managers can refine costing systems by tracing more direct costs to products or services. In addition, they can create more homogenous cost pools, and identify cost drivers. The goal of managers that seek to refine costing systems is to obtain a better measure of the way that different cost objects use resources.
Diff: 2 Page Ref: 219
LO: 6-2
EOC: E6-12; E6-14
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
Learning Objective 6-3
1) The costing system that refines a costing system by identifying individual activities as the fundamental cost object is ________.
- A) cost hierarchy
- B) cost-allocation base
- C) refined-costing system
- D) activity-based costing system
- E) manager-based costing system
Answer: D
Diff: 1 Page Ref: 219
LO: 6-3
EOC: E6-11
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
2) Determining costs of activity pools requires assigning costs accumulated in various account classifications to each of the activity cost pools. This is referred to as ________.
- A) first-stage allocation
- B) second-stage allocation
- C) third-stage allocation
- D) forth stage allocation
- E) fifth stage allocation
Answer: A
Diff: 1 Page Ref: 220
LO: 6-3
EOC: E6-29
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
3) We define second-stage allocation as ________.
- A) the allocation of costs of activity cost pools to products
- B) the allocation of revenues from earning earned to losses
- C) the allocation of costs of losses to employee expenses
- D) the allocation of costs to earnings in the current quarter
- E) the allocation of costs to corporate profits
Answer: A
Diff: 2 Page Ref: 220
LO: 6-3
EOC: E6-9
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
4) Beaver’s Molding Corporation produces a quantity of 50,000 molds for contractors. The workers produce 220 molds per batch. Compute the total number of batches produced.
- A) 200.01 batches
- B) 210.95 batches
- C) 217.03 batches
- D) 227.27 batches
- E) 237.13 batches
Answer: D
Explanation: D) [(50,000 / 220)] = 227.27 batches produced
Diff: 2 Page Ref: 221
LO: 6-3
EOC: E6-11: E6-15
AACSB: Analytic Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
5) Manufacturing Mates produces special-order tiles for organizations. The company reported that they produced 250 batches of tile and the setup time per batch was 2 hours. Compute the total setup hours.
- A) 300 setup hours
- B) 400 setup hours
- C) 500 setup hours
- D) 600 setup hours
- E) 700 setup hours
Answer: C
Explanation: C) [(250 × 2)] = 500 total setup hours
Diff: 3 Page Ref: 221
LO: 6-3
EOC: E6-17
AACSB: Analytic Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
6) Setup costs never depreciation and maintenance costs of setup equipment, wages of setup workers, and allocated salaries of design engineers, process engineers, and supervisors.
Answer: FALSE
Explanation: Setup costs do include depreciation and maintenance costs of setup equipment, wages of setup workers, and allocated salaries of design engineers, process engineers, and supervisors.
Diff: 1 Page Ref: 220
LO: 6-3
EOC: E6-2; E6-3; E6-4
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
7) When managers structure activity cost pools more finely with cost drivers for each activity cost pool as the cost-allocation base, it leads to more accurate costing of activities.
Answer: TRUE
Diff: 3 Page Ref: 221
LO: 6-3
EOC: E6-2
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
8) Allocating costs to products by measuring the cost-allocation bases of different activities used by different products leads to more accurate production costs.
Answer: TRUE
Diff: 3 Page Ref: 221
LO: 6-3
EOC: E6-2; E6-3
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
9) Activity-based costing attempts to identify the most relevant cause-and-effect relationships for each activity pool without restricting the cost driver to only units of output.
Answer: TRUE
Diff: 2 Page Ref: 222
LO: 6-3
EOC: E6-14
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
10) How do managerial accountants differentiate between the design of a simple-costing system and an activity-based costing system?
Answer: Managerial accountants understand that activity-based costing systems focus on activities. In addition, the activity-based costing system has more homogeneous indirect-cost pools, compared to the simple system, and more cost drivers are used as cost-allocation bases.
Diff: 2 Page Ref: 219-220
LO: 6-3
EOC: E6-14; E6-16; E6-18; E6-20
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
Learning Objective 6-4
1) Which of the following is not a level in the cost hierarchy?
- A) Batch-level costs.
- B) Input-level unit costs.
- C) Output-unit level costs.
- D) Product-sustaining costs.
- E) Facility-sustaining costs.
Answer: B
Diff: 2 Page Ref: 222
LO: 6-4
EOC: E6-11
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
2) Which of the following are costs of activities performed on each individual unit of a product or service?
- A) Batch-level costs.
- B) Input unit-level costs.
- C) Output unit-level costs.
- D) Product-sustaining costs.
- E) Facility-sustaining costs.
Answer: C
Diff: 2 Page Ref: 222
LO: 6-4
EOC: E6-2; E6-4; E6-11
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
3) The costs of activities related to a group of units of a product or service rather than each individual unit of product or service are ________.
- A) batch-level costs
- B) input unit-level costs
- C) output unit-level costs
- D) product-sustaining costs
- E) facility-sustaining costs
Answer: A
Diff: 2 Page Ref: 222
LO: 6-4
EOC: E6-11; E6-12; E6-14
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
4) Which of the following are costs of activities undertaken to support individual products or services regardless of the number of units or batches in which the units are produced?
- A) Batch-level costs.
- B) Input unit-level costs.
- C) Output unit-level costs.
- D) Product-sustaining costs.
- E) Facility-sustaining costs.
Answer: D
Diff: 2 Page Ref: 222
LO: 6-4
EOC: E6-1
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
5) The costs of activities that cannot be traced to individual products or services but that support the organization as a whole are ________.
- A) batch-level costs
- B) input unit-level costs
- C) output unit-level costs
- D) product-sustaining costs
- E) facility-sustaining costs
Answer: E
Diff: 2 Page Ref: 223
LO: 6-4
EOC: E6-2; E6-4; E6-11; E6-12
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
6) A cost hierarchy is useful to managerial accountants because it categorizes various activity cost pools on the basis of the different types of cost drivers, cost-allocation bases, or different degrees of difficulty in determining cause-and-effect relationships.
Answer: TRUE
Diff: 1 Page Ref: 223
LO: 6-4
EOC: E6-11; E6-12; E6-27; E6-28; E6-29
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
7) Machine operations costs that are related to the activity of running the automated molding machines are output unit-level costs.
Answer: TRUE
Diff: 2 Page Ref: 222
LO: 6-4
EOC: E6-7; E6-11; E6-12
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
8) Companies deduct facility-sustaining costs as a separate lump-sum amount from operating income rather
Answer: TRUE
Diff: 3 Page Ref: 223
LO: 6-4
EOC: E6-11; E6-12; E6-27; E6-28
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
9) Examples of product-sustaining costs at companies such as Volvo, Samsung, or General Electric are product research and develop costs, costs of making engineering changes, and marketing costs to launch new products.
Answer: TRUE
Diff: 3 Page Ref: 223
LO: 6-4
EOC: E6-12; E6-14; E6-16; E6-17; E6-33; E6-34
AACSB: Reflective Thinking Skills
Learning Outcome: MA-4: Describe activity-based costing systems and calculate the cost of a job using ABC concepts.
10) Why do managers use cost hierarchies? What are the four levels of the cost hierarchy in activity-based costing systems?
Answer: Managers find cost hierarchies beneficial because they are used to categorize various activity cost pools on the basis of the different types of cost drivers, cost-allocation bases, or different degrees of difficulty in determining the number of benefits received in relationships. In activity-based costing, cost hierarchies with four levels include output unit-level costs, batch-level costs, product-sustaining costs, and facility-sustaining costs.
Diff: 2 Page Ref: 223
LO: 6-4
EOC: E6-11
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
11) Why do some managers in organizations deduct facility-sustaining costs as a separate lump-sum amount from operating income rather than allocate them to products?
Answer: Managers deduct facility-sustaining costs as a separate lump-sum amount from operating income rather than allocate them to products because it is difficult to find a cause-and-effect relationship between these costs and the cost allocation base. Managers that use this approach should note that some of the lump-sum costs have not been allocated. They have the option to sell products at prices that are much greater than the allocated costs in order to absorb some of the unallocated facility-sustaining costs to products.
Diff: 3 Page Ref: 223
LO: 6-4
EOC: E6-11; E6-12; E6-27
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
12) Why is it important for managers to allocate all costs of products or services?
Answer: It is important for managers to allocate all costs to products or services because they pass on to consumers who pay all costs.
Diff: 1 Page Ref: 223
LO: 6-4
EOC: E6-2; E6-5
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
Learning Objective 6-5
1) In indirect cost pools, administrative costs are ________.
- A) direct costs
- B) batch-level costs
- C) output unit-level costs
- D) product-sustaining costs
- E) facility-sustaining costs
Answer: E
Diff: 3 Page Ref: 224
LO: 6-5
EOC: E6-2; E6-11; E6-12
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
2) In indirect cost pools, design costs are ________.
- A) batch-level costs
- B) output unit-level costs
- C) product-sustaining costs
- D) direct costs
- E) facility-sustaining costs
Answer: C
Diff: 2 Page Ref: 224
LO: 6-4
EOC: E6-2; E6-11; E6-12
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
3) In indirect cost pools, shipment setup costs are ________.
- A) direct costs
- B) batch-level costs
- C) output unit-level costs
- D) product-sustaining costs
- E) facility-sustaining costs
Answer: B
Diff: 2 Page Ref: 224
LO: 6-5
EOC: E6-2; E6-11; E6-12
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
4) In indirect cost pools, machine operations costs are ________.
- A) direct costs
- B) batch-level costs
- C) output unit-level costs
- D) product-sustaining costs
- E) facility-sustaining costs
Answer: C
Diff: 2 Page Ref: 224
LO: 6-5
EOC: E6-2; E6-11; E6-12
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
5) In indirect cost pools, distribution costs are ________.
- A) direct costs
- B) batch-level costs
- C) output unit-level costs
- D) product-sustaining costs
- E) facility-sustaining costs
Answer: C
Diff: 2 Page Ref: 224
LO: 6-5
EOC: E6-2; E6-11; E6-12
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
6) In the cause-and-effect relationship between allocation base and activity cost, the distribution costs ________ with cubic feet of packages delivered.
- A) decrease
- B) increase
- C) simplify
- D) subtract
- E) deteriorate
Answer: B
Diff: 3 Page Ref: 224
LO: 6-5
EOC: E6-17
AACSB: Analytic Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
7) In the cause-and-effect relationship between allocation base and activity cost in indirect costing systems, the indirect costs of operating modeling machines ________ with molding machine-hours.
- A) decrease
- B) increase
- C) simplify
- D) subtract
- E) deteriorate
Answer: B
Diff: 3 Page Ref: 224
LO: 6-5
EOC: E6-17
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
8) The Chesapeake Organization reported $400,000 of indirect-cost pool in design activity. The manager reported a cost-allocation base of 110 parts per square feet.
Required:
Compute the amount of design activity per part-square foot.
- A) $3,000.22
- B) $3,025.25
- C) $3,636.36
- D) $399,890
- E) $400,110
Answer: C
Explanation: C) [($400,000 / 110)] = $3,636.36 per part-square foot
Diff: 1 Page Ref: 224
LO: 6-5
EOC: E6-16; E6-18; E6-21
AACSB: Analytic Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
9) The manager at the Atlantic Organization reported $225,000 in Administration Activity. The manager reported that the cost-allocation base was 32,000 in direct manufacturing-labor hours.
Required:
Compute the direct manufacturing labor-hours.
- A) $7.00
- B) $7.03
- C) $7.10
- D) $7.15
- E) $7.25
Answer: B
Explanation: B) [($225,000 / 32,000)] = $7.03 per direct manufacturing labor
Diff: 1 Page Ref: 224
LO: 6-5
EOC: E6-11; E6-15
AACSB: Analytic Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
10) The manager at the Petersburg Organization reported $380,000 in distribution activity. The cost-allocation base is 52,000 cubic feet of material delivered to the New Jersey plant.
Required:
Compute the amount per cubic foot of product delivered.
- A) $7.30
- B) $192.60
- C) $328,000
- D) $432,000
- E) $450,000
Answer: A
Explanation: A) [($380,000 / 52,000)] = $7.30 per cubic foot delivered
Diff: 1 Page Ref: 224
LO: 6-5
EOC: E6-5
AACSB: Analytic Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
11) The Ready Corporation reported the following information:
Compute the budgeted indirect cost rate for each activity.
- A) $4,001; $45.10; $308; $5
- B) $4,010; $50.25; $310; $6
- C) $4,110; $51.50; $325; $7
- D) $4,250; $52.50; $350; $8
- E) $4,375; $58.50; $400; $9
Answer: E
Explanation: E)
Diff: 3 Page Ref: 224
LO: 6-5
EOC: E6-32
AACSB: Analytic Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
12) The auditor at the Yarn Shoppe needs to determine whether it is beneficial to implement a simple costing system using a single indirect-cost pool, or an ABC system. Review and compare the following information:
Simple Costing System Using a Single Indirect-Cost Pool
(1)
ABC System
(2)
Difference
(3) = (2) — (1)
Direct-cost categories 2
Direct materials
Direct manufacturing labor 3
Direct materials
Direct manufacturing
labor
Direct yarn cleaning
and maintenance
labor 1
Total direct costs
Indirect-cost pools $2,500,500
$2,800,000 $299,500
Indirect-cost pools 1 6 5
Required:
The goal of the accountant is to trace more costs as direct costs, create a homogeneous cost pool, and to implement a cost-allocation base that has a cause-and-effect relationship with costs in the cost pool. Which system should the auditor at the Yarn Shoppe implement? Why?
Answer: The auditor at the Yarn Shoppe should implement the ABC system. ABC systems trace more costs as direct costs, they create homogeneous cost pools linked to different activities, and they seek a cost-allocation base that has a cause-and-effect relationship with costs in the cost pool.
Diff: 3 Page Ref: 227
LO: 6-5
EOC: E6-18
AACSB: Analytic Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
13) Identifying the cost-allocation bases defines the number of activity pools into which costs must be grouped into the ABC system.
Answer: TRUE
Diff: 2 Page Ref: 225
LO: 6-5
EOC: E6-6; E6-7; E6-8
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
14) The strength of the cause-and-effect relationship between the cost-allocation base and the cost pools are the same across cost pools.
Answer: FALSE
Explanation: The strength of the cause-and-effect relationship between the cost-allocation base and the cost pools is that it varies across cost pools.
Diff: 3 Page Ref: 226
LO: 6-5
EOC: E6-2; E6-3; E6-4
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
15) All costs can be directly identified with a particular activity.
Answer: FALSE
Explanation: Some costs can be directly identified with a particular activity. Other costs need to be allocated across activities.
Diff: 1 Page Ref: 226
LO: 6-5
EOC: E6-2; E6-3; E6-4
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
16) Homogeneous cost pools and the choice of cost-allocation bases, when tied to the cost hierarchy, provide managers with less confidence when they assign the activity and product cost numbers from the activity-based costing system.
Answer: FALSE
Explanation: Homogeneous cost pools and the choice of cost-allocation bases, when tied to the cost hierarchy provide managers with greater confidence when they assign the activity and product cost numbers from the activity-based costing system.
Diff: 1 Page Ref: 228
LO: 6-5
EOC: E6-9; E6-22; E6-25; E6-26; E6-27; E6-29
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
17) Why is it important for managerial accountants to identify the cost-allocation bases?
Answer: Managerial accountants identify the cost-allocation bases to define the number of activity pools into the costs that will be grouped into the activity-based costing system. For example, rather than define the design activities of product design, process design, and prototyping in separate activities, the managers can combine these three activities together to create a combined design activity.
Diff: 3 Page Ref: 225
LO: 6-5
EOC: E6-5; E6-6; E6-11
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
Learning Objective 6-6
1) Which of the following is not a sign of when an activity-based costing system would likely provide the manager with the most benefits?
- A) Significant amounts of indirect costs are allocated using only one or two cost pools.
- B) All or most indirect costs are identified as output unit-level costs.
- C) Products make diverse demands on resources because of differences in volume, process steps, batch size, or complexity.
- D) Products that a company is will suite to make and sell show small profits, whereas products that a company is less suited to produce and sell show large profits.
- E) Operations staff that agrees with all of the reported costs of manufacturing and marketing products and services.
Answer: E
Diff: 2 Page Ref: 228
LO: 6-6
EOC: E6-5
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
2) Which of the following is not true about the benefits and costs of activity-based costing systems?
- A) It requires managers to estimate the cost of activity pools.
- B) It requires few calculations to determine costs of products and services.
- C) It requires many calculations to determine costs of products and services.
- D) The activity cost rates need to be updated frequently.
- E) The managers can misidentify the time spent implementing the system.
Answer: B
Diff: 3 Page Ref: 228
LO: 6-6
EOC: E6-5
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
3) When incorrect cost-allocation bases are used ________.
- A) activity-cost information is accurate and available
- B) activity-cost information can be misleading
- C) activity-cost information is most useful
- D) activity-cost information is more practical
- E) activity-cost information is the optimal solution
Answer: B
Diff: 2 Page Ref: 229
LO: 6-6
EOC: E6-2; E6-3
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
4) Which of the following is not a behavioral issue that managers consider when they implement activity-based costing systems?
- A) Gaining support of top management and creating a sense of urgency for the ABC effort.
- B) Creating a guiding coalition of managers throughout the value chain for the ABC effort.
- C) Education and training employees in ABC as a basis for employee empowerment.
- D) Seeking only small short-run success as proof that the ABC implementation is yielding results.
- E) Seeking only large long-run success as proof that the ABC implementation is yielding results.
Answer: E
Diff: 2 Page Ref: 229
LO: 6-6
EOC: E6-2; E6-11; E6-12
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
5) The main costs and limitations of activity-based systems are ________.
- A) measurements necessary to implement it
- B) cost associated with the new technology
- C) employees and manpower to implement it
- D) time associated with implementing the system
- E) measurements of managerial opinions and time
Answer: A
Diff: 2 Page Ref: 230
LO: 6-6
EOC: E6-3; E6-11
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
6) Managers can choose the level of detail they choose to use in a costing system when they evaluate the expected costs of the system against the expected benefits that result from better decisions.
Answer: TRUE
Diff: 1 Page Ref: 228
LO: 6-6
EOC: E6-2; E6-3; E6-4
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
7) The more cost pools that managers develop the less allocations are necessary to calculate activity costs for each cost pool.
Answer: FALSE
Explanation: The more cost pools that managers develop the more allocations are necessary to calculate activity costs for each cost pool, which increases the chances of misidentifying the costs of different activity cost pools.
Diff: 2 Page Ref: 228
LO: 6-6
EOC: E6-2; E6-3; E6-4
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
8) Management accountants use the cost hierarchy to first calculate the total costs of each product and then they derive per-unit costs by dividing total costs by the number of units produced.
Answer: TRUE
Diff: 2 Page Ref: 227
LO: 6-6
EOC: E6-11; E6-12
AACSB: Analytic Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
9) Global surveys of company practices suggest that activity-based costing implementation varies among companies.
Answer: TRUE
Diff: 1 Page Ref: 229
LO: 6-6
EOC: E6-2; E6-4; E6-11; E6-12
AACSB: Multinational and Diversity Understanding/Training
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
10) ABC implementation often represents a significant change in the costing system and managers must make important choices about the level of detail to use in activity-based costing systems.
Answer: TRUE
Diff: 1 Page Ref: 229
LO: 6-6
EOC: E6-5; E-6; E6-8
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
11) What should a managerial accountant consider if all or most of the indirect costs are identified as output unit-level costs?
Answer: The manager should evaluate whether or not there are few indirect costs described as batch-level costs, product-sustaining costs, or facility-sustaining costs. In addition the manager should consider implementing an activity-based costing system. There are numerous ways to detect if the activity-based system is likely to provide the most benefits, but the benefits should always outweigh the costs. The manager needs to implement long-run strategies to generate more revenues.
Diff: 2 Page Ref: 228
LO: 6-6
EOC: E6-11; E6-12
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
12) When comparing the strategic and operational benefits of activity-based costing systems, what should managers understand about information technology?
Answer: Smaller companies with no growth opportunities, for example a company with a less-detailed activity-based costing system, may not believe that the costs and challenges associated with an upgrade to their systems are not optimal solutions. However, in organizations that are larger and have more complex costing-systems, upgrades in technology are not only cost effective, but they will enhance the manager’s ability to spend more time with other pertinent issues. As improvements in information technology and accompanying declines in measuring costs continue, more detailed ABC systems will be better able to pass the cost-benefit test.
Diff: 2 Page Ref: 229
LO: 6-6
EOC: E6-2; E6-5; E6-6
AACSB: Use of Information Technology
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
13) What are some important considerations to managers that consider adopting the activity-based costing system?
Answer: Managers need to consider the costs and benefits associated with activity-based costing systems. They need to yield the most decision-making benefits when indirect costs are a high percentage of total costs or when products and services make diverse demands on the indirect resources. They also need to consider the level of difficulty that is associated with the measurements they need to implement and update the systems.
Diff: 3 Page Ref: 230
LO: 6-6
EOC: E6-6; E6-7; E6-8
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
Learning Objective 6-7
1) The method of management decision making that uses activity-based costing information to improve customer satisfaction and profitability is ________.
- A) job-cost management
- B) action-cost management
- C) project-cost management
- D) product-cost management
- E) activity-based management
Answer: E
Diff: 1 Page Ref: 230
LO: 6-7
EOC: E6-8; E6-9
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
2) Which of the following is not a decision that managerial accountants seek when they use activity-based management?
- A) Decisions about cost reduction.
- B) Decisions about process improvement.
- C) Decisions about pricing and product mix.
- D) Decisions about product and process design.
- E) Decisions about human resource department policies and procedures.
Answer: E
Diff: 1 Page Ref: 230
LO: 6-7
EOC: E6-5; E6-6
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
3) Which of the following is not a reason that manufacturing and distribution personnel would implement activity-based costing systems?
- A) Focus on how to reduce costs.
- B) Focus on why to reduce costs.
- C) Set cost-reduction targets to reduce per unit costs.
- D) Reduce work without compromising customer service or perceived value.
- E) Reduce work while disregarding customer service and the perceived value.
Answer: E
Diff: 2 Page Ref: 230
LO: 6-7
EOC: E6-2; E6-3; E6-5; E6-6
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
4) Operating personnel manage costs by ________.
- A) controlling physical cost drivers
- B) controlling nonphysical cost drivers
- C) establishing weekly meetings to train staff
- D) layoff nonessential personnel in various offices
- E) observing employees to ensure they manage time
Answer: A
Diff: 1 Page Ref: 231
LO: 6-7
EOC: E6-5; E6-17; E6-20; E6-30
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
5) Managers set cost reduction targets in terms of reducing the cost per unit of the cost-allocation base in different activity areas.
Answer: TRUE
Diff: 2 Page Ref: 230
LO: 6-7
EOC: E6-3; E6-6; E6-7
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
6) ABC systems help managers evaluate the effect of current product and process designs on activities and costs and to identify new designs to reduce costs.
Answer: TRUE
Diff: 1 Page Ref: 232
LO: 6-7
EOC: E6-7; E6-8; E6-12; E6-13
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
7) The general approach to activity-based costing systems in service and merchandise companies is very different from the activity-based costing approach used in manufacturing industries.
Answer: FALSE
Explanation: The general approach to activity-based costing systems in service and merchandising companies is very similar to the activity-based costing approach used in manufacturing industries.
Diff: 2 Page Ref: 234
LO: 6-7
EOC: E6-7; E6-9; E6-12; E6-13
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
8) Activity-based costing is used in public service institutions, such as the U.S. Postal Service, but it is only used for pricing decisions.
Answer: FALSE
Explanation: The activity-based costing system is used in public service institutions is valuable for understanding, managing, and reducing costs, but not for pricing decisions.
Diff: 2 Page Ref: 234
LO: 6-7
EOC: E6-7; E6-9; E6-12; E6-13; E6-14; E6-16
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
9) What is the benefit to managers that use activity-based costing systems help manufacturing and distribution personnel?
Answer: The benefit to manufacturing and distribution personnel as a result of activity-based costing systems is they gain the ability to understand where they need to reduce costs.
Diff: 2 Page Ref: 230
LO: 6-7
EOC: E6-14; E6-15; E6-16; E6-18
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
10) What are the benefits to managers that use activity-based costing systems to make design decisions?
Answer: When managers use activity-based costing systems they gain the ability to evaluate the effect of current product and process designs on activities and costs. In addition, they have the ability to identify new designs that will reduce costs.
Diff: 2 Page Ref: 231-232
LO: 6-7
EOC: E6-17; E6-22; E6-27
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
11) If a new manager wants to implement activity-based costing systems for the first time, where does he or she begin to consider and implement the system?
Answer: Typically, new managers implement activity-based costing systems for the first time by analyzing the actual costs. They identify the actual cost pools and activity-cost rates. Next, managers calculate the budgeted rate that they expect to use to implement planning, make decisions, and manage activities. Managers compare the budgeted costs and actual costs that they used to evaluate how well activities were managed and make adjustments for overallocated and underallocated costs. As the activities and processes change, managers then calculate new activity costs.
Diff: 2 Page Ref: 232
LO: 6-7
EOC: E6-2; E6-4; E6-7; E6-8
AACSB: Reflective Thinking Skills
Learning Outcome: MA-6: Describe activity-based costing and calculate the cost of a job using ABC concepts.
