ACCT 3201 Activity-Based Costing and Activity-Based Management ASSESMENT PRACTICE QUESTIONS 2021/2022, ALL ANSWERS CORRECT

1) Which of the following statements is true of a peanut-butter costing system? A) A peanut-butter costing system typically has more-homogeneous indirect cost pools. B) A peanut-butter costing system broadly averages or spreads the cost of resources uniformly to cost objects. C) A peanut-butter costing system assumes that all costs are variable. D) In a peanut-butter costing system, costs of activities are used to assign costs to other cost objects such as products or services based on the activities the products or services consume. Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking 2) Overcosting a particular product may result in: A) pricing the product too high B) pricing the product too low C) operating efficiencies D) understating total product costs Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking 3) For a company with diverse products, undercosting overhead of a product will lead toproductcross -subsidization which means that: A) direct labor costs of the product are misallocated B) direct material costs of the product are misallocated C) indirect costs of another product are misallocated D) direct costs of another product are misallocated Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking 4) Aqua Company produces two products–Alpha and Beta. Alpha has a high market share and is produced in bulk. Production of Beta is based on customer orders and is custom designed. Also, 55% of Beta's cost is shared between design and setup costs, while Alpha's major portions of costs are direct costs. Alpha is using a single cost pool to allocate indirectcosts. Which of the following statements is true of Aqua? A) Aqua will overcost Beta's direct costs as it is using a single cost pool to allocate indirectcosts. B) Aqua will undercost Alpha's indirect costs because alpha has high direct costs. C) Aqua will overcost Alpha's indirect costs as it is using a single cost pool to allocate indirect costs. D) Aqua will overcost Beta's indirect costs because beta has high indirect costs. Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking 5) Product-cost cross-subsidization means that: A) when one product is overcosted, it results in more than one other product being overcosted B) when a company undercosts more than one of its products, it will overcost more thanone of its other products C) when a company undercosts one of its products, it will overcost at least one of its otherproducts D) when one product is overcosted it results in all other products being overcosted Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking 6) Which of the following has accelerated need for refined cost systems? A) global monopolies B) rising prices C) intense competition D) a shift toward increased direct costs Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking 7) Uniformly assigning the costs of resources to cost objects when those resources areactually used in a nonuniform way is called activity based costing. Answer: FALSE Explanation: Peanut butter costing occurs when costs are assigned uniformly amount multiple products using average costs that do not take into account the nonuniform waythe resources are consumed to produce the different products. Diff: 1 Objective: 1 AACSB: Analytical thinking 8) Product-cost cross-subsidization is very common when costs are uniformly spread acrossvarious products. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking 9) Companies that overcost products risk becoming less effective on pricing and losingmarket share when competition utilizes more accurate cost systems. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking 10) If companies increase market share in a given product line because their reported costsare less than their actual costs, they will become more profitable in the long run. Answer: FALSE Explanation: The actual costs will increase because of the additional sales and the otherproduct lines (which are subsidizing the undercosting of the growing product line) will suffer. The net result will be the company having a lower operating income than it could have had. Diff: 2 Objective: 1 AACSB: Analytical thinking 11) As product diversity and indirect costs increase, it is usually best to switch away from abroad averaging system to an activity-based cost system. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking 12) The risk of peanut-butter costing rises when broad averages are used across multipleproducts without managers considering the true amounts of resources consumed in the making of each product. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking 13) Explain how a top-selling product may actually result in losses for the company. Answer: If indirect costs are not properly allocated to the products, a product may appear to cost less than it actually does cost to produce. If the selling price is based on these lowercosts, the selling price may actually be lower than the costs needed to produce the product resulting in losses for the company. This would make undercosted products appear more profitable and therefore making marketing efforts to promote the undercosted product counter productive. Diff: 2 Objective: 1 AACSB: Analytical thinking 5.1 Objective 5.2 1) Refining a cost system involves which of the following? A) classifying as many costs as indirect costs as is feasible B) creating as many cost pools as possible to capture all costs C) identifying the activities involved in a process and understanding how those activitiesconsume resources D) Seeking an easier and more cost effective way to calculate average costs Answer: C Diff: 1 Objective: 2 AACSB: Analytical thinking 2) Which of the following is true of refinement of a costing system? A) While refining a costing system, companies should identify as many indirect costs as is economically feasible. B) A homogeneous cost pool will use multiple cost drivers to allocate costs. C) It reduces the use of broad averages for assigning the cost of resources to cost objects. D) It is likely to yield the most decision-making benefits when direct costs are a high percentage of total costs. Answer: C Diff: 2 Objective: 2 AACSB: Analytical thinking 3) Which of the following is a reason that has accelerated the demand for refinements tothe costing system? A) The declining demand for customized products has led managers to decrease the varietyof products and services their companies offer. B) The use of product and process technology has led to an increase in indirect costs and adecrease in direct costs. C) The increased of automated processes has led to the increase in direct manufacturingcost leading to a decrease in break even point. D) The increasing competition in product markets has led to an increase in contributionmargin resulting in a decrease of break even point. Answer: B Diff: 3 Objective: 2 AACSB: Analytical thinking 4) Demand for refinements to the costing system has accelerated due to . A) increase in direct costs B) decrease in product diversity C) decrease in indirect costs D) competition in product markets Answer: D Diff: 1 Objective: 2 AACSB: Analytical thinking 5) Johnson Superior Products Inc. produces hospital equipment and the setup requirementsvary from product to product. Johnson produces its products based on customer orders anduses ABC costing. In one of its indirect cost pools, setup costs and distribution costs are pooled together. Costs in this pool are allocated using number of customer orders for the easiness of costing operations. Based on the information provided, which of the following arguments is valid? A) Johnson has clearly failed to identify as many direct costs as is economically feasible. B) All costs in a homogeneous cost pool have the same or a similar cause-and-effect relationship with the single cost driver that is used as the cost-allocation base for Johnson. C) Johnson has unnecessarily wasted resources by classifying setup and distribution costs as they could have been considered as direct costs. D) Johnson has failed to use the correct cost driver as the cost-allocation base for setup costs. Answer: D Diff: 1 Objective: 2 AACSB: Application of knowledge 6) Increased used of automation, computer integrated manufacturing, and utilization of robots have lead to an increase in indirect costs relative to direct costs. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking 7) Modern manufacturing practices have helped reduce overhead costs relative to direct costs as the reliance on support resources such as scheduling, design, and engineering has diminished. Answer: FALSE Explanation: Managing complex technology and producing diverse products require additional support functions such as production scheduling, product and process design, and engineering. Diff: 1 Objective: 2 AACSB: Analytical thinking 8) Indirect labor and distribution costs would most likely be in the same activity-cost pool. Answer: FALSE Explanation: Indirect labor and distribution costs would not be in the same activity-cost pool because their cost drivers are very dissimilar. A cost driver of indirect labor would include direct labor hours, while a cost driver of distribution costs would include, for example, cubic feet of cargo moved. Diff: 2 Objective: 2 AACSB: Analytical thinking 9) Managers should look for evidence of cause-and-effect when choosing a cost driver with the driver being the cause and the effect being the cost incurred. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking 10) Identification of a cost-allocation base is not a critical element when using a strategy that will refine a costing system. Answer: FALSE Explanation: Managers refine their cost systems by looking for effective cost=allocation basis (cost driver) and seek evidence of cause-and-effect when choosing a cost driver with the driver being the cause and the effect being the cost incurred. Diff: 1 Objective: 2 AACSB: Analytical thinking 11) What are the factors that are causing many companies to refine their costing systems to obtain more accurate measures of the costs of their products? Answer: The first cause is increasing product diversity. Companies are producing many more products than they used to, placing strains on more simple, older cost systems. A second cause is the overall increased in indirect costs and the relative decline of direct costs. The indirect nature of these costs requires allocation, and any inaccuracies in allocation of these costs become magnified as these indirect costs increase. A third cause would be advances in information technology that makes complex allocation of indirect costs less burdensome. Finally, increased competition from both national and international competitors has resulted in more pressure to reduce costs, as well as increasing the need for and value of information to support responses to these new threats. Diff: 2 Objective: 2 AACSB: Analytical thinking 5.2 Objective 5.3 1) ABC systems create . A) one large cost pool B) homogeneous activity-related cost pools C) activity-cost pools with a broad focus D) activity-cost pools containing many direct costs Answer: B Diff: 1 Objective: 3 AACSB: Analytical thinking 2) Activity based costing system differs from traditional costing systems in the treatment of . A) direct labor costs B) direct material costs C) prime costs D) indirect costs Answer: D Diff: 1 Objective: 3 AACSB: Analytical thinking 3) The fundamental cost objects of ABC are . A) activities B) cost drivers C) products D) services Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking 4) Which of the following statements is true of activity-based costing? A) In activity-based costing, direct labor-hours is always the best allocation base to allocate all non-manufacturing indirect costs. B) Activity based costing is more suited to companies with high product diversity than companies with single product line. C) Activity based costing broadly averages or spreads the cost of resources uniformly to cost objects such as products or services. D) The main advantage of activity-based costing over peanut-butter costing is the accurate distribution of all direct costs to the products. Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking 5) A single indirect-cost rate distorts product costs because . A) there is an assumption that all support activities affect all products in a uniform way B) it recognizes specific activities that are required to produce a product C) competitive pricing is ignored D) it assumes all costs are product costs Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking 6) Extracts from cost information of Hebar Corp.: Simple L3 Pack Complex L7 Pack Total Setup cost allocated using direct laborhours $19,250 $5,750 $25,000 Setup cost allocated using setup-hours $13,400 $11,600 $25,000 Assuming that setup-hours is considered a more effective cost drive for allocating setup costs than direct labor-hours. Which of the following statements is true of Hebar's setup costs under traditional costing? A) L3 pack is undercosted by $5,850 B) L7 pack is undercosted by $5,750 C) L3 pack is overcosted by $5,850 D) L7 pack is overcosted by $5,850 Answer: C Explanation: Setup cost allocated using direct labor-hours - Setup cost allocated using setup-hours = $19,250 − $13,400 = $5,850 Diff: 2 Objective: 3 AACSB: Application of knowledge 7) Which of the following is true with activity based cost accounting? A) Activity-based costing ignores the allocation of marketing and distribution costs. B) Activity-based costing is more likely to result in major differences from traditional costing systems if the firm manufactures only one product rather than multiple products. C) The focus is on activities that account for a sizable fraction of indirect costs . D) Chances of product-cost cross-subsidization are higher in activity-based costing compared to traditional costing systems. Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking 8) Activity-based costing (ABC) can eliminate cost distortions because ABC systems . A) establish a cause-and-effect relationship with the activities performed B) use single cost pool for all overhead costs, thereby enabling simplicity C) use a broad average to allocate all overhead costs D) never consider interactions between different departments in assigning support costs Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking 9) When "available time" (i.e., setup-hours) is used to calculate a cost of a resource and to allocate costs to cost objects , the system is called: A) job costing B) process costing C) hybrid costing D) time-driven activity based costing Answer: D Diff: 2 Objective: 3 AACSB: Analytical thinking 10) Extreme Manufacturing Company provides the following ABC costing information: Activities Total Costs Activity-cost drivers Account inquiry $320,000 16,000 hours Account billing $200,000 4,000,000 lines Account verification accounts $173,250 70,000 accounts Correspondence letters $24,000 4,000 letters Total costs $717,250 The above activities are used by Departments A and B as follows: Department A Department B Account inquiry hours 2,700 hours 4,200 hours Account billing lines 900,000 lines 750,000 lines Account verification accounts 8,000 accounts 6,000 accounts Correspondence letters 1,400 letters 1,800 letters How much of the account inquiry cost will be assigned to Department A? A) $54,000 B) $320,000 C) $160,000 D) $84,000 Answer: A Explanation: Account inquiry costs - Department A = ($320,000 ÷ 16,000) × 2,700 = $54,000 Diff: 2 Objective: 3 AACSB: Application of knowledge 11) Extreme Manufacturing Company provides the following ABC costing information: Activities Total Costs Activity-cost drivers Account inquiry $320,000 16,000 hours Account billing $220,000 4,000,000 lines Account verification accounts $182,000 80,000 accounts Correspondence letters $25,000 4,000 letters Total costs $747,000 The above activities are used by Departments A and B as follows: Department A Department B Account inquiry hours 2,200 hours 3,700 hours Account billing lines 600,000 lines 450,000 lines Account verification accounts 5,000 accounts 3,000 accounts Correspondence letters 1,000 letters 1,400 letters How much of the account billing cost will be assigned to Department B? A) $220,000 B) $110,000 C) $24,750 D) $33,000 Answer: C Explanation: Billing costs - Department B = ($220,000 ÷ 4,000,000) × 450,000 = $24,750 Diff: 2 Objective: 3 AACSB: Application of knowledge 12) Extreme Manufacturing Company provides the following ABC costing information: Activities Total Costs Activity-cost drivers Account inquiry $420,000 14,000 hours Account billing $225,000 5,000,000 lines Account verification accounts $95,000 40,000 accounts Correspondence letters $46,000 8,000 letters Total costs $786,000 The above activities are used by Departments A and B as follows: Department A Department B Account inquiry hours 2,900 hours 4,400 hours Account billing lines 600,000 lines 450,000 lines Account verification accounts 12,000 accounts 10,000 accounts Correspondence letters 1,800 letters 2,200 letters How much of account verification costs will be assigned to Department A? A) $23,750 B) $28,500 C) $95,000 D) $47,500 Answer: B Explanation: Account verification costs - Department A = ($95,000/ 40,000) × 12,000 = $28,500 Diff: 2 Objective: 3 AACSB: Analytical thinking 13) Extreme Manufacturing Company provides the following ABC costing information: Activities Total Costs Activity-cost drivers Account inquiry $390,000 13,000 hours Account billing $275,000 5,000,000 lines Account verification accounts $130,500 60,000 accounts Correspondence letters $22,000 4,000 letters Total costs $817,500 The above activities are used by Departments A and B as follows: Department A Department B Account inquiry hours 2,500 hours 4,000 hours Account billing lines 800,000 lines 650,000 lines Account verification accounts 9,000 accounts 7,000 accounts Correspondence letters 2,000 letters 2,400 letters How much of correspondence costs will be assigned to Department A? A) $22,000 B) $49,500 C) $11,000 D) $11,242 Answer: C Explanation: Correspondence costs - Department A = ($22,000 ÷ 4,000) × 2,000 = $11,000 Diff: 2 Objective: 3 AACSB: Application of knowledge 14) Extreme Manufacturing Company provides the following ABC costing information: Activities Total Costs Activity-cost drivers Account inquiry $280,000 14,000 hours Account billing $350,000 7,000,000 lines Account verification accounts $93,750 50,000 accounts Correspondence letters $29,000 4,000 letters Total costs $752,750 The above activities are used by Departments A and B as follows: Department A Department B Account inquiry hours 2,100 hours 3,600 hours Account billing lines 500,000 lines 350,000 lines Account verification accounts 7,000 accounts 5,000 accounts Correspondence letters 1,200 letters 1,600 letters How much of the total costs will be assigned to Department A? A) $88,825 B) $118,825 C) $120,000 D) $85,075 Answer: A Explanation: Account inquiry costs = ($280,000 ÷ 14,000) × 2,100 = $42,000 Billing costs = ($350,000 ÷ 7,000,000) × 500,000 = $25,000 Account verification costs = ($93,750 ÷ 50,000) × 7,000 = $13,125 Correspondence costs = ($29,000 ÷ 4,000) × 1,200 = $8,700 $88,825 Diff: 3 Objective: 3 AACSB: Application of knowledge