Chapter 5 – True / False Questions

1. In an activity-based costing system, direct materials used would typically be classified as a unit-
level cost.
2. Activity-based costing systems have a tendency to distort product costs.
3. ABC is particularly useful when product lines differ greatly in volume and manufacturing
complexity.
4. A cost-allocation base assigns direct costs to cost objects.
5. An undercosted product consumes a low level of resources per unit but is reported to have a high
cost per unit.
6. An undercosted product is underpriced and may lead to sales that result in losses.
7. The use of an activity-based costing system generally decreases the accuracy of the resulting
product costs.
8. An ABC system allocates indirect costs to products by using different cost-allocation bases for
different activities.
9. ABC emphasizes the cause-and-effect relationship between cost-allocation base and costs in a cost
pool.
10. ABC combines small homogeneous activities that are likely driven by a common cost driver into a
single cost pool.
11. Product under-costing occurs when a product consumes a relatively low level of resource but is
allocated a relatively high amount of indirect costs than what it actually consumed.
12. Product-cost cross-subsidization indicates that if a company undercosts one of its products, it will
definitely over-cost at least one of its other products.
13. The under-costed products will be erroneously underpriced, which in turn could lead the company
to lose market share to its competitors.
14. Facility-level costs are the costs of activities that cannot be traced to individual products or
services but that support the organization as a whole.
15. A cost driver is qualitative factor that has a direct cause-effect relationship with the resources
consumed.
16. The salaries of a general plant manager most likely arise from facility-level activities.
17. The salaries of a production line manager most likely arise from product-level activities.
18. Current trends in manufacturing include less direct cost and more overhead.
 Chapter 5 – Multiple Choice Questions

1) A product that consumes a relatively low level of resources but is reported to have a relatively high cost,
may result in
A) product sub optimization
B) product over costing.
C) product under costing.
D) product-cost cross-subsidization.

2. Provided a single allocation base is used, jobs are typically undercosted if:
A) jobs require more employees.
B) jobs consume relatively more of the resources than the revenue they bring in.
C) jobs cannot be undercosted; only products or service can be undercosted
D) jobs require more travel and communication between the two parties.

3. The term used to describe a situation when at least one miscosted product causes other products to be
miscosted in the organization is known as
A) product over costing.
B) product marketing.
C) product-cost cross-subsidization.
D) product sub optimization.
E) product under costing.

4. In ABC costing, an activity includes all of the following EXCEPT

A) an event.
B) A unit of work.
C) A process.
D) A task.
E) An indirect cost.

5. A costing system which focuses on individual event or tasks as the fundamental cost objects is called
A) normal costing.
B) job costing.
C) activity-based costing.
D) direct costing.

6. A four-part cost hierarchy includes all of the following EXCEPT

A) market-sustaining costs.
B) product-sustaining costs.
C) batch-level costs.
D) output unit-level costs.
E) facility-sustaining costs.
Use the information below to answer the following two question(s).

Fran Ferry Company had the following activities, traceable costs, and physical

flow of driver units: Traceable Physical Flow

Activities of Costs Driver Units
Account inquiry (hours) $ 200,000 5,000 hours
Account billing (lines) 140,000 2,000,000 lines
Account verification 75,000 20,000 accounts
(accounts)
Correspondence (letters) 25,000 2,000 letters

The above activities are used by departments A and B as follows:

A B
Account inquiry (hours) 1,000 2,000
Account billing (lines) 200,000 100,000

Account verification 5,000 4,000

(accounts)
Correspondence (letters) 500 800

7. How much of the account inquiry cost will be assigned to Department A?

A) $80,000
B) $200,000
C) $40,000
D) $100,000
E) $140,000

8. How much of the account billing cost will be assigned to Department B?

A) $7,000
B) $14000
C) $100,000
D) $140,000

9. Stanley Corp. manufactures two models of its roasting pans, a standard and a deluxe model.
Three activities have been identified as cost drivers. The related costs pools and the cost
driver usage are given below:

Number Number of Number

Product of Setups Components of Orders
------- ------ ---------- ------
Standard 12 8 440
Deluxe 16 14 750

Costs per pool $30,000 $76,000 $14,000

If activity-based costing is used, then the total amount of overhead allocated to the deluxe model
would be:
a. $ 45,670.
b. $ 74,330.
c. $120,000.
d. $ 80,000.
Use the following information to answer the next two questions:
Scissors Inc. is a manufacturer of scissors. The company has always used a traditional
plant-wide rate for allocating manufacturing overhead to its products. The plant manager
believes it is time to change to a better method of cost allocation. The accounting
department has been able to establish some new relationships between production
activities and the manufacturing overhead. They are as follows:
Activity Cost Driver Allocation Rate
Material handling Number of parts $ 4 per part
Assembly Labour hours $40 per hour
Inspection Time item is at $ 6 per minute
Inspection station

The previous allocation method is based upon direct manufacturing labour hours, and if that
method is used the rate is $400 per labour hour. A batch of 1,000 scissors was produced. The
batch requires 2,000 parts, 20 direct manufacturing labour hours, and 30 minutes of
inspection time.

10. What are the indirect manufacturing costs per scissor assuming the traditional method
is used?
a. $ 8.00
b. $ 9.80
c. $ 8,000,000
d. $ 8,980,000
e. None of the above

11. What are the indirect manufacturing costs for a batch of scissors assuming the ABC
method is used and a batch of 1,000 scissors were produced?
a. $ 8.00
b. $ 9.80
c. $ 8,000,000
d. $ 8,980
e. None of the above

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Use the following information for the next two questions
Chris has a custom curtain and chair cover shop. The job-costing system was designed using
an activity-based approach. There are two direct-cost categories (direct materials and direct
labor) and three indirect cost pools. These three cost pools represent three activity areas of
work at the shop.

Activity Area Cost Driver used for Allocation Cost-Allocation Rate

Materials handling Number of pieces in the pattern $ 2.00 per piece
Stitching Number of pieces in the pattern $25.00 per piece
Assembly/Installation Direct labor hours $15.00 per hour

In October Chris made and installed five sets of curtains and chair covers for clients.
A set includes curtains for two windows and coverings for three chairs. The direct
labor rate is $20.00 per hour. Cost data for curtains and covers is as follows:

Direct Direct
Units Material Number Labor
Produced Costs of Pieces Hours
per unit per unit per unit

Curtains 10 $200 1 2
Chair coverings 15 $225 6 6

12. The cost for a set of curtains and chair coverings would be
a. $1,253
b. $2,085
c. $2,385
d. $5,375
e. None of the above

13. The indirect costs for the shop in October were

a. $4,350
b. $4,900
c. $5,375
d. $11,925
e. None of the above

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14. The following information is available pertaining to Bonita Division, that uses a
plant- wide overhead rate based on direct machine hours:

Mixing Finishing Total

dept. dept.
Overhead $30,000 $60,000 $90,000
Direct labor-hours 7,500 2,500 10,000
Machine-hours 2,500 7,500 10,000

Production information pertaining to Job 101:

Mixing Finishing Total

Dept. Dept.
Prime costs $5,000 $0 $5,000
Direct Labor-hours 250 0 250
Machine-hours 10 10 20
Units produced 500 0 500

What are the total overhead costs assigned to Job 101?

a. $120
b. $200
c. $90
d. $180
e. None of the above

15. The use of a single indirect-cost rate is more likely to:

a. undercost high-volume simple products
b. undercost low-volume complex products
c. undercost lower-priced products
d. Both B and C are correct
e. None of the above

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16. Vex Corporation manufactures a variety of products. In the past, Vex had been using
a traditional overhead allocation system based on machine-hours. For the current
year, Vex decided to switch to an activity-based costing system using machine-hours
and the number of inspections as measures of activity. Information on these measures
of activity and related overhead rates for the current year are as follows:

Estimated Predetermined
Activity Overhead Rate
Machine-hours ............... 50,000 $8 per machine-hour
Number of inspections ... 3,000 $40 per inspection

Job #812 for the current year required 15 machine-hours and 2 inspections. Would this
job have been overcosted or undercosted under the traditional system and by how much?
a. undercosted by $36
b. undercosted by $44
c. overcosted by $80
d. undercosted by $80
e. None of the above

17. Anfuso Corporation uses activity-based costing to determine product costs for
external financial reports. The company has provided the following data concerning
its activity-based costing system:

Estimated
Activity Cost Pools (and Activity Measures) Overhead Cost
Machine related (machine-hours) .................... $159,500
Batch setup (setups) ......................................... $269,000
General factory (direct labor-hours) ................ $166,500

Expected Activity
Activity Cost Pools Total Product X Product Y
Machine related............ 11,000 8,000 3,000
Batch setup................... 10,000 6,000 4,000
General factory............. 9,000 5,000 4,000
Assuming that actual activity turns out to be the same as expected activity, the total
amount of overhead cost allocated to Product X would be closest to:
a. $269,000
b. $297,500
c. $369,900
d. $357,000

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 18. In a job-order costing system, the incurrence of indirect labor costs would usually be
recorded as a debit to:
a. Manufacturing Overhead
b. Finished Goods
c. Work in Process
d. Cost of Goods Sold
e. None of the above

19. If overhead is underapplied, then:

a. actual overhead cost is less than budgeted overhead cost
b. the amount of overhead cost applied to Work in Process is less than the actual
overhead cost incurred
c. actual quantity used of the allocation base is greater than the budgeted base
d. All of the above are correct
e. None of the above

Use the following information to answer the next three questions:

Esmere Company is a wholesale distributor that uses activity-based costing for all of its
overhead costs. The company has provided the following data concerning its
annual overhead costs and its activity based costing system:
Overhead costs:
Wages and salaries ............ $620,000
Other expenses ..................
$240,000 Total
.................................. $860,000

Distribution of resource consumption:

Activity Cost Pools
Filling Customer
Orders Support Other Total
Wages and salaries ............. 30% 60% 10% 100%
Other expenses ................... 45% 35% 20% 100%

The “Other” activity cost pool consists of the costs of idle capacity and organization-
sustaining costs.
The amount of activity for the year is as follows:
Activity Cost Pool Activity
Filling orders .................. 3,000 orders
Customer support ........... 70 customers

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20. What would be the total overhead cost per order according to the activity based
costing system? In other words, what would be the overall activity rate for the filling
orders activity cost pool? (Round to the nearest whole cent.)
a. $129.00
b. $86.00
c. $107.50
d. $98.00
e. None of the above

21. What would be the total overhead cost per customer according to the activity based
costing system? In other words, what would be the overall activity rate for the
customer support activity cost pool? (Round to the nearest whole dollar.)
a. $6,514
b. $5,836
c. $4,300
d. $7,371
e. None of the above

22. To the nearest whole dollar, how much wages and salaries cost would be allocated to
a customer who made 8 orders in a year?
a. $4,920
b. $4,030
c. $8,059
d. $5,810
e. None of the above

23. Which of the following is a reason for acceleration in the demand for refinement of
costing systems?
a. A reduction in product diversity
b. An increase in indirect costs
c. An increase in direct-cost tracing
d. A decrease in cost drivers

24. Feinstein, Inc., an appliance manufacturer, is developing a new line of ovens that
uses controlled-laser technology. The research and testing costs associated with the
new ovens is said to arise from a:
a. unit level activity
b. batch level activity
c. product sustaining activity
d. facility level activity
e. competitive level activity

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25. Which of the following choices correctly depicts a cost that arises from a batch-level
activity and one that arises from a facility-level activity?

26. Jackson manufactures products X and Y, applying overhead on the basis of labor hours.
X, a low-volume product, requires a variety of complex manufacturing procedures. Y, on the
other hand, is both a high-volume product and relatively simplistic in nature. What would an
activity-based costing system likely disclose about products X and Y as a result of Jackson's
current accounting procedures?

27. Alamo's customer service department follows up on customer complaints by

telephone inquiry. The company produces and sells to different types of products: Product A
and Product B. At the beginning of the month the company estimated 10,000 calls with
estimated costs of $300,000. During the period, the customer service department answered
7,000 calls and incurred costs of $203,000. If 2,940 of these calls were related to Product A,
the total costs that should be assigned to Product A is:
A. $114,800
B. $121,800
C. $211,800
D. $117,740
E. $88,200

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Use the following Information to answer the next 2 questions
Sharp Enterprises manufactures two products—a basic product called VDI and an advanced
product called XLI. The company is using an activity-based costing system. They have
identified three activities for allocation of indirect costs.
Activity Cost Driver Cost-Allocation Rate
Materials receiving Number of parts $4.00 per part
Production setup Number of setups $1,500 per setup
Quality inspection Inspection time $180 per hour

A production run for the basic model is 300 units, for the advanced model, 200 units.
Each unit of product consumes the following activities:

Number of Parts Number of Setups Inspection Time

Basic VDI 15 1 20 minutes
Advanced XLI 20 1 40 minutes

Direct costs for the two products are as follows:

Direct Materials Direct Labor
Basic VDI $44.00 $ 70.00
Advanced XLI $60.00 $ 98.50

28. The amount of overhead allocated to one unit of the basic model would be:
a. $366.
b.$37.
c. $162.
d.$125.

29. The total cost of an advanced model would be:

a. $162.
b.$366.
c. $200.
d.$265.

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Use the following Information to answer the next 2 questions

Riverside Florists uses an activity-based costing system to compute the cost of making floral
bouquets and delivering the bouquets to its commercial customers. Company personnel who
earn $180,000 typically perform both tasks; other firm-wide overhead is expected to total
$70,000. These costs are allocated as follows:

Riverside anticipates making 20,000 bouquets and 4,000 deliveries in the upcoming year.

30. The cost of wages and salaries and other overhead that would be charged to each
bouquet made is:
A. $7.15.
B. $8.75.
C. $12.50.
D. $13.75.

31. The cost of wages and salaries and other overhead that would be charged to each
delivery is closest to:
A. $19.63.
B. $20.31.
C. $26.75.
D. $40.63.

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Use the following Information to answer the next 9 questions

HiTech Products manufactures three types of remote-control devices: Economy, Standard, and
Deluxe. The company, which uses activity-based costing, has identified five activities (and related
cost drivers). Each activity, its budgeted cost, and related cost driver is identified below.

The following information pertains to the three product lines for next year:

32. What is HiTech's pool rate for the material-handling activity?

A. $1.00 per part.
B. $2.25 per part.
C. $6.62 per labor hour.
D. $13.23 per part.
E. A rate other than those listed above.

33. What is HiTech's pool rate for the automated machinery activity?
A. $24.00 per machine hour.
B. $24.50 per labor hour.
C. $49.42 per unit.
D. $50.00 per machine hour.
E. A rate other than those listed above.

34. What is HiTech's pool rate for the finishing activity?

A. $5.00 per labor hour.
B. $5.00 per machine hour.
C. $5.00 per unit.
D. $7.50 per unit.
E. A rate other than those listed above.

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35. What is HiTech's pool rate for the packaging activity?
A. $4.86 per machine hour.
B. $5.00 per labor hour.
C. $10.00 per unit.
D. $100.00 per order shipped.
E. A rate other than those listed above.

36. Under an activity-based costing system, what is the per-unit overhead cost of
Economy?
A. $141.
B. $164.
C. $225.
D. $228.

37. Under an activity-based costing system, what is the per-unit overhead cost of Standard?
A. $164.
B. $228.
C. $272.
D. $282.
E. An amount other than those listed above.

38. Under an activity-based costing system, what is the per-unit overhead cost of Deluxe?
A. $272.
B. $282.
C. $320.
D. $440.

39. Assume that HiTech is using a volume-based costing system, and the preceding
overhead costs are applied to all products on the basis of direct labor hours. The overhead
cost that would be assigned to the Deluxe product line is closest to:
A. $456,471.
B. $646,471.
C. $961,176.
D. $1,141,176.

40. Assume that HiTech is using a volume-based costing system, and the preceding
overhead costs are applied to all products on the basis of direct labor hours. The overhead
cost that would be assigned to the Standard product line is closest to:
A. $456,471.
B. $646,471.
C. $961,176.
D. $1,141,176.

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Use the following Information to answer the next 4 questions

St. James, Inc., currently uses traditional costing procedures, applying $800,000 of overhead
to products Beta and Zeta on the basis of direct labor hours. The company is considering a
shift to activity-based costing and the creation of individual cost pools that will use direct
labor hours (DLH), production setups (SU), and number of parts components (PC) as cost
drivers. Data on the cost pools and respective driver volumes follow.

41. The overhead cost allocated to Beta by using traditional costing procedures would be:
A. $240,000.
B. $356,000.
C. $444,000.
D. $560,000.
E. some other amount.

42. The overhead cost allocated to Zeta by using traditional costing procedures would be:
A. $240,000.
B. $356,000.
C. $444,000.
D. $560,000.
E. some other amount.

43. The overhead cost allocated to Beta by using activity-based costing procedures would
be:
A. $240,000.
B. $356,000.
C. $444,000.
D. $560,000.
E. some other amount.

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44. The overhead cost allocated to Zeta by using activity-based costing procedures would
be:
A. $240,000.
B. $356,000.
C. $444,000.
D. $560,000.
E. some other amount.

ANSWER KEY

T/F MCQ MCQ

1 T 1 B 23 B
2 F 2 B 24 C
3 T 3 C 25 B
4 F 4 E 26 B
5 F 5 C 27 E
6 T 6 A 28* D
7 F 7 C 29* B
8 T 8 A 30 A
9 T 9 B 31 A
10 T 10 A 32 A
11 F 11 D 33 A
12 T 12 C 34 A
13 F 13 A 35 D
14 T 14 D 36 B
15 T 15 B 37 C
16 T 16 B 38 D
17 T 17 C 39 A
18 T 18 A 40 D
19 B 41 A
20 D 42 D
21 A 43 C
22 D 44 B

* 28. ($4 15) + ($1,500 ÷ 300) + ($180 ÷ 60  20) = $125

* 29. $60 + $98.5 + ($4  20) + ($1,500 ÷ 200) + ($180 ÷ 60  40) = $366

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