Chapter 5
1. When combining activities in an activity-based costing system, activities should be
grouped together at the same level. For example, batch-level activities should not be
combined with unit-level activities.
Ans: True Difficulty: Easy
2. Unit-level activities arise as a result of the total volume of production and are performed
each time a unit is produced.
Ans: True Difficulty: Easy
3. Unit-level production activities are performed each time a unit is made.
Ans: True Difficulty: Easy
4. Organization-sustaining activities are carried out regardless of how many units are made,
how many batches are run, or how many different products are made.
Ans: True Difficulty: Easy
5. Activity-based costing uses a number of activity cost pools, each of which is allocated to
products on the basis of direct labour hours.
Ans: False Difficulty: Easy
6. The first-stage allocation in activity-based costing is the process by which overhead costs
are assigned to products before they are assigned to customers.
Ans: False Difficulty: Medium
7. Activity rates in activity-based costing are computed by dividing costs from the first-
stage allocations by the activity measure for each activity cost pool.
Ans: True Difficulty: Medium
8. In the second-stage allocation in activity-based costing, activity rates are used to apply
costs to products, customers, and other cost objects.
Ans: True Difficulty: Medium
9. In traditional costing systems, all manufacturing costs are assigned to products—even
manufacturing costs that are not caused by the products.
Ans: True Difficulty: Medium
10. When there are batch-level or product-level costs, in comparison to a traditional cost
system, an activity-based costing system ordinarily will shift costs from high-volume to
low-volume products.
Ans: True Difficulty: Hard
Page 1
,11. An activity-based costing system is generally easier to set up and run than a traditional
cost system.
Ans: False Difficulty: Medium
12. Activity-based costing is a costing method that is designed to provide managers with cost
information for strategic and other decisions that potentially affect only variable costs.
Ans: False Difficulty: Medium
13. In activity-based costing, as in traditional costing systems, non-manufacturing costs are
not assigned to products.
Ans: False Difficulty: Medium
14. In activity-based costing, a plant-wide overhead rate is used to apply overhead to
products.
Ans: False Difficulty: Medium
15. Changing a cost accounting system is likely to meet with little resistance in an
organization since it is a technical matter of little interest to individuals outside of the
accounting department.
Ans: False Difficulty: Medium
16. Managing and sustaining product diversity requires many more overhead resources, such
as production schedulers and product design engineers, than managing and sustaining a
single product. The costs of these resources can be accurately allocated to products on the
basis of direct labour hours.
Ans: False Difficulty: Medium
17. Transaction drivers usually take more effort to record than duration drivers.
Ans: False Difficulty: Medium
18. In general, duration drivers are more accurate measures of the consumption of resources
than transaction drivers.
Ans: True Difficulty: Medium
19. (Appendix 5A) An action analysis report reconciles activity-based costing product costs
with traditional product costs based on direct labour.
Ans: False Difficulty: Medium
20. Costs incurred at which of the following activity levels should NOT be allocated to
products for decision-making purposes?
A) Unit-level activities. C) Product-level activities.
B) Batch-level activities. D) Organization-sustaining activities.
Ans: D Difficulty: Medium
, Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
21. Testing a prototype of a new product is an example of an activity at which of the
following levels?
A) Unit-level activity. C) Product-level activity.
B) Batch-level activity. D) Organization-sustaining activity.
Ans: C Difficulty: Easy
22. Setting up equipment is an example of an activity at which of the following levels?
A) Unit-level activity. C) Product-level activity.
B) Batch-level activity. D) Organization-sustaining activity.
Ans: B Difficulty: Medium
23. Which of the following activity levels is an example of the clerical activity associated
with processing purchase orders to produce an order for a standard product?
A) Unit-level activity. C) Product-level activity.
B) Batch-level activity. D) Organization-sustaining activity.
Ans: B Difficulty: Hard
24. Worker recreational facilities are examples of costs that would ordinarily be considered
to be incurred at which of the following activity levels?
A) Unit-level activity. C) Product-level activity.
B) Batch-level activity. D) Organization-sustaining activity.
Ans: D Difficulty: Medium
25. Arranging for a shipment of a number of different products to a customer is an example
of an activity at which of the following levels?
A) Unit-level activity. C) Customer-level activity.
B) Batch-level activity. D) Organization-sustaining activity.
Ans: B Difficulty: Medium
26. Human resource management is an example of an activity at which of the following
levels?
A) Unit-level activity. C) Batch-level activity.
B) Product-level activity. D) Organization-sustaining activity.
Ans: D Difficulty: Medium
27. Which of the following would be classified as a product-level activity?
A) Machine setup for a batch of a standard product.
B) Cafeteria facilities available to and used by all employees.
C) Human resource management.
D) Advertising a product.
Ans: D Difficulty: Medium
Page 3
, 28. Why may departmental overhead rates NOT correctly assign overhead costs?
A) Because of the use of direct labour hours in allocating overhead costs to products
rather than machine time or quantity of materials.
B) Because of the high correlation between direct labour hours and the incurrence of
overhead costs.
C) Because of the over-reliance on volume as a basis for allocating overhead costs
where products differ regarding the number of units produced, lot size, or
complexity of production.
D) Because of the difficulties associated with identifying cost pools for the first stage
of the allocation process.
Ans: C Difficulty: Hard
29. Which of the following statements about overhead allocation based on volume alone is
correct?
A) It is a key aspect of the activity-based costing model.
B) It will systematically overcost high-volume products and undercost low-volume
products.
C) It will systematically overcost low-volume products and undercost high-volume
products.
D) It must be used for external financial reporting.
Ans: B Difficulty: Medium
30. What is a duration driver?
A) A simple count of the number of times an activity occurs.
B) An activity measure that is used for the life of the company.
C) A measure of the amount of time required to perform an activity.
D) An activity measure that is used for the life of an activity-based costing system.
Ans: C Difficulty: Easy
31. What is a transaction driver?
A) An event that causes a transaction to begin.
B) A measure of the amount of time required to perform an activity.
C) An event that causes a transaction to end.
D) A simple count of the number of times an activity occurs.
Ans: D Difficulty: Easy
1. When combining activities in an activity-based costing system, activities should be
grouped together at the same level. For example, batch-level activities should not be
combined with unit-level activities.
Ans: True Difficulty: Easy
2. Unit-level activities arise as a result of the total volume of production and are performed
each time a unit is produced.
Ans: True Difficulty: Easy
3. Unit-level production activities are performed each time a unit is made.
Ans: True Difficulty: Easy
4. Organization-sustaining activities are carried out regardless of how many units are made,
how many batches are run, or how many different products are made.
Ans: True Difficulty: Easy
5. Activity-based costing uses a number of activity cost pools, each of which is allocated to
products on the basis of direct labour hours.
Ans: False Difficulty: Easy
6. The first-stage allocation in activity-based costing is the process by which overhead costs
are assigned to products before they are assigned to customers.
Ans: False Difficulty: Medium
7. Activity rates in activity-based costing are computed by dividing costs from the first-
stage allocations by the activity measure for each activity cost pool.
Ans: True Difficulty: Medium
8. In the second-stage allocation in activity-based costing, activity rates are used to apply
costs to products, customers, and other cost objects.
Ans: True Difficulty: Medium
9. In traditional costing systems, all manufacturing costs are assigned to products—even
manufacturing costs that are not caused by the products.
Ans: True Difficulty: Medium
10. When there are batch-level or product-level costs, in comparison to a traditional cost
system, an activity-based costing system ordinarily will shift costs from high-volume to
low-volume products.
Ans: True Difficulty: Hard
Page 1
,11. An activity-based costing system is generally easier to set up and run than a traditional
cost system.
Ans: False Difficulty: Medium
12. Activity-based costing is a costing method that is designed to provide managers with cost
information for strategic and other decisions that potentially affect only variable costs.
Ans: False Difficulty: Medium
13. In activity-based costing, as in traditional costing systems, non-manufacturing costs are
not assigned to products.
Ans: False Difficulty: Medium
14. In activity-based costing, a plant-wide overhead rate is used to apply overhead to
products.
Ans: False Difficulty: Medium
15. Changing a cost accounting system is likely to meet with little resistance in an
organization since it is a technical matter of little interest to individuals outside of the
accounting department.
Ans: False Difficulty: Medium
16. Managing and sustaining product diversity requires many more overhead resources, such
as production schedulers and product design engineers, than managing and sustaining a
single product. The costs of these resources can be accurately allocated to products on the
basis of direct labour hours.
Ans: False Difficulty: Medium
17. Transaction drivers usually take more effort to record than duration drivers.
Ans: False Difficulty: Medium
18. In general, duration drivers are more accurate measures of the consumption of resources
than transaction drivers.
Ans: True Difficulty: Medium
19. (Appendix 5A) An action analysis report reconciles activity-based costing product costs
with traditional product costs based on direct labour.
Ans: False Difficulty: Medium
20. Costs incurred at which of the following activity levels should NOT be allocated to
products for decision-making purposes?
A) Unit-level activities. C) Product-level activities.
B) Batch-level activities. D) Organization-sustaining activities.
Ans: D Difficulty: Medium
, Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
21. Testing a prototype of a new product is an example of an activity at which of the
following levels?
A) Unit-level activity. C) Product-level activity.
B) Batch-level activity. D) Organization-sustaining activity.
Ans: C Difficulty: Easy
22. Setting up equipment is an example of an activity at which of the following levels?
A) Unit-level activity. C) Product-level activity.
B) Batch-level activity. D) Organization-sustaining activity.
Ans: B Difficulty: Medium
23. Which of the following activity levels is an example of the clerical activity associated
with processing purchase orders to produce an order for a standard product?
A) Unit-level activity. C) Product-level activity.
B) Batch-level activity. D) Organization-sustaining activity.
Ans: B Difficulty: Hard
24. Worker recreational facilities are examples of costs that would ordinarily be considered
to be incurred at which of the following activity levels?
A) Unit-level activity. C) Product-level activity.
B) Batch-level activity. D) Organization-sustaining activity.
Ans: D Difficulty: Medium
25. Arranging for a shipment of a number of different products to a customer is an example
of an activity at which of the following levels?
A) Unit-level activity. C) Customer-level activity.
B) Batch-level activity. D) Organization-sustaining activity.
Ans: B Difficulty: Medium
26. Human resource management is an example of an activity at which of the following
levels?
A) Unit-level activity. C) Batch-level activity.
B) Product-level activity. D) Organization-sustaining activity.
Ans: D Difficulty: Medium
27. Which of the following would be classified as a product-level activity?
A) Machine setup for a batch of a standard product.
B) Cafeteria facilities available to and used by all employees.
C) Human resource management.
D) Advertising a product.
Ans: D Difficulty: Medium
Page 3
, 28. Why may departmental overhead rates NOT correctly assign overhead costs?
A) Because of the use of direct labour hours in allocating overhead costs to products
rather than machine time or quantity of materials.
B) Because of the high correlation between direct labour hours and the incurrence of
overhead costs.
C) Because of the over-reliance on volume as a basis for allocating overhead costs
where products differ regarding the number of units produced, lot size, or
complexity of production.
D) Because of the difficulties associated with identifying cost pools for the first stage
of the allocation process.
Ans: C Difficulty: Hard
29. Which of the following statements about overhead allocation based on volume alone is
correct?
A) It is a key aspect of the activity-based costing model.
B) It will systematically overcost high-volume products and undercost low-volume
products.
C) It will systematically overcost low-volume products and undercost high-volume
products.
D) It must be used for external financial reporting.
Ans: B Difficulty: Medium
30. What is a duration driver?
A) A simple count of the number of times an activity occurs.
B) An activity measure that is used for the life of the company.
C) A measure of the amount of time required to perform an activity.
D) An activity measure that is used for the life of an activity-based costing system.
Ans: C Difficulty: Easy
31. What is a transaction driver?
A) An event that causes a transaction to begin.
B) A measure of the amount of time required to perform an activity.
C) An event that causes a transaction to end.
D) A simple count of the number of times an activity occurs.
Ans: D Difficulty: Easy
