Module 18
Activity-Based Costing,
Customer Profitability, and
Activity-Based Management
Learning Objectives – coverage by question
True/False Multiple Choice Exercises Problems Essays
LO1 – Explain the changes in
the modern production
1, 2
environment that have affected
cost structures.
LO2 –Understand the concept
of activity based costing (ABC) 3-5 1-13 1, 2 1-3 1
and how it is applied.
LO3 – Explain the difference
between traditional plantwide
6 14-16 3-7 3 2, 3
and departmental overhead
methods and ABC.
LO4 – Describe the
implementation of an activity- 7, 8 17-22 4
based costing system.
LO5 – Explain customer
profitability analysis based on 9, 10 5
ABC.
LO6 – Explain the difference
between ABC and activity- 11 23-25
based management.
©Cambridge Business Publishers, 2015
Test Bank, Module 18 18-1
,Module 18: Activity-Based Costing, Customer Profitability, and
Activity-Based Management
True/False
Topic: Changing Cost Environment
LO: 1
1. The twentieth century saw an accelerating shift from traditional manufacturing activities to production
procedures requiring large investments in raw materials and labor.
Answer: False
Rationale: The shift was from traditional labor-based techniques to large investments in automated
equipment.
Topic: Changing Cost Environment
LO: 1
2. Over the past century, overhead costs have increased as a percentage of total product cost.
Answer: True
Rationale: Production employees spend significantly less time on actual production and more time on
scheduling, setting up, maintaining, and moving materials. In combination with increased automation,
the result is an increase in manufacturing overhead costs.
Topic: Activity-Based Costing
LO: 2
3. Activity-based costing determines the cost of activities and traces their costs to cost objects on the
basis of the cost object’s utilization of units of activity.
Answer: True
Rationale: Activity-based costing is a system of analysis that identifies and measures the cost of key
activities, and then traces these activity costs to products or other cost objects based on the quantity
of activity consumed by the cost object.
Topic: Purchasing Department Cost Allocation
LO: 2
4. The number of purchase orders is a reasonable basis for allocating to jobs the purchasing
department costs.
Answer: True
Rationale: This is a reasonable basis for allocating purchasing department costs. The dollar value of
purchase orders is also a reasonable basis.
©Cambridge Business Publishers, 2015
18-2 Financial & Managerial Accounting for MBAs, 4th Edition
, Topic: Activity-Based Costing
LO: 2
5. Activity-Based Costing (ABC) is a two-stage method of cost assignment that assigns overhead costs
to key activities, and then assigns those costs to products or services based on their use of those
activities.
Answer: True
Rationale: ABC determines the major activities (such as machine setups or materials moves) that
drive overhead costs, and it measures the cost for each unit of activity. Production is then charged for
the use of those activities at the ABC rate.
Topic: Plantwide Allocation Rate
LO: 3
6. The plantwide rate approach is the simplest to apply, but it is also the most costly to implement,
compared to a departmental or activity-based cost allocation system.
Answer: False
Rationale: The plantwide rate approach is the simplest, and least costly, to apply, but it provides the
least precise measurement of product costs.
Topic: ABC Implementation
LO: 4
7. ABC is generally more costly to implement than traditional costing.
Answer: True
Rationale: Often companies maintain traditional costing for external purposes and ABC for pricing and
other internal decision-making purposes. In addition, ABC systems must be built facility by facility
rather than being embedded in a software system that can be used by all facilities within the
company.
Topic: ABC Implementation
LO: 4
8. ABC is particularly useful when product lines differ greatly in volume and in manufacturing complexity.
Answer: True
Rationale: Traditional systems tend to over cost high-volume, low-complexity products and they tend
to under cost low-volume, high-complexity products.
Topic: Customer Profitability
LO: 5
9. ABC is useful for product costing, but traditional costing is superior for customer profitability.
Answer: False
Rationale: One of the most beneficial applications of ABC is in the analysis of the profitability of
customers.
©Cambridge Business Publishers, 2015
Test Bank, Module 18 18-3
Activity-Based Costing,
Customer Profitability, and
Activity-Based Management
Learning Objectives – coverage by question
True/False Multiple Choice Exercises Problems Essays
LO1 – Explain the changes in
the modern production
1, 2
environment that have affected
cost structures.
LO2 –Understand the concept
of activity based costing (ABC) 3-5 1-13 1, 2 1-3 1
and how it is applied.
LO3 – Explain the difference
between traditional plantwide
6 14-16 3-7 3 2, 3
and departmental overhead
methods and ABC.
LO4 – Describe the
implementation of an activity- 7, 8 17-22 4
based costing system.
LO5 – Explain customer
profitability analysis based on 9, 10 5
ABC.
LO6 – Explain the difference
between ABC and activity- 11 23-25
based management.
©Cambridge Business Publishers, 2015
Test Bank, Module 18 18-1
,Module 18: Activity-Based Costing, Customer Profitability, and
Activity-Based Management
True/False
Topic: Changing Cost Environment
LO: 1
1. The twentieth century saw an accelerating shift from traditional manufacturing activities to production
procedures requiring large investments in raw materials and labor.
Answer: False
Rationale: The shift was from traditional labor-based techniques to large investments in automated
equipment.
Topic: Changing Cost Environment
LO: 1
2. Over the past century, overhead costs have increased as a percentage of total product cost.
Answer: True
Rationale: Production employees spend significantly less time on actual production and more time on
scheduling, setting up, maintaining, and moving materials. In combination with increased automation,
the result is an increase in manufacturing overhead costs.
Topic: Activity-Based Costing
LO: 2
3. Activity-based costing determines the cost of activities and traces their costs to cost objects on the
basis of the cost object’s utilization of units of activity.
Answer: True
Rationale: Activity-based costing is a system of analysis that identifies and measures the cost of key
activities, and then traces these activity costs to products or other cost objects based on the quantity
of activity consumed by the cost object.
Topic: Purchasing Department Cost Allocation
LO: 2
4. The number of purchase orders is a reasonable basis for allocating to jobs the purchasing
department costs.
Answer: True
Rationale: This is a reasonable basis for allocating purchasing department costs. The dollar value of
purchase orders is also a reasonable basis.
©Cambridge Business Publishers, 2015
18-2 Financial & Managerial Accounting for MBAs, 4th Edition
, Topic: Activity-Based Costing
LO: 2
5. Activity-Based Costing (ABC) is a two-stage method of cost assignment that assigns overhead costs
to key activities, and then assigns those costs to products or services based on their use of those
activities.
Answer: True
Rationale: ABC determines the major activities (such as machine setups or materials moves) that
drive overhead costs, and it measures the cost for each unit of activity. Production is then charged for
the use of those activities at the ABC rate.
Topic: Plantwide Allocation Rate
LO: 3
6. The plantwide rate approach is the simplest to apply, but it is also the most costly to implement,
compared to a departmental or activity-based cost allocation system.
Answer: False
Rationale: The plantwide rate approach is the simplest, and least costly, to apply, but it provides the
least precise measurement of product costs.
Topic: ABC Implementation
LO: 4
7. ABC is generally more costly to implement than traditional costing.
Answer: True
Rationale: Often companies maintain traditional costing for external purposes and ABC for pricing and
other internal decision-making purposes. In addition, ABC systems must be built facility by facility
rather than being embedded in a software system that can be used by all facilities within the
company.
Topic: ABC Implementation
LO: 4
8. ABC is particularly useful when product lines differ greatly in volume and in manufacturing complexity.
Answer: True
Rationale: Traditional systems tend to over cost high-volume, low-complexity products and they tend
to under cost low-volume, high-complexity products.
Topic: Customer Profitability
LO: 5
9. ABC is useful for product costing, but traditional costing is superior for customer profitability.
Answer: False
Rationale: One of the most beneficial applications of ABC is in the analysis of the profitability of
customers.
©Cambridge Business Publishers, 2015
Test Bank, Module 18 18-3
