Chapter 3
Systems Design: Activity-Based Costing
True/False
1. Direct labor-hours should never be used as a measure of activity in an activity-based costing system.
Level: Medium LO: 1 Ans: F
2. When there is a great deal of product diversity, activity-based costing will generally yield more
accurate product costs than traditional overhead application rates based on direct labor or machine hours.
Level: Medium LO: 1 Ans: T
3. Product-level activities relate to specific products and typically must be carried out regardless of how
many batches are run or units of product are made.
Level: Medium LO: 1 Ans: T
4. The first-stage allocation in activity-based costing is the process by which overhead costs are assigned
to activity cost pools.
Level: Easy LO: 1 Ans: T
5. In activity-based costing, there are a number of activity cost pools, each of which is allocated to
products using its own unique measure of activity.
Level: Easy LO: 1 Ans: T
6. The activity rates in activity-based costing are computed by dividing the overhead in each production
department by its direct labor-hours.
Level: Easy LO: 2 Ans: F
7. The activity rates in activity-based costing are used to determine how quickly a particular task should
be done.
Level: Easy LO: 2 Ans: F
8. In activity-based costing, unit product costs computed for external financial reports include direct
materials costs.
Level: Easy LO: 3 Ans: T
9. In activity-based costing, unit product costs computed for external financial reports include
manufacturing overhead costs that are computed by multiplying activity rates by the direct labor-hours
required to produce a product.
Level: Medium LO: 3 Ans: F
Brewer, Introduction to Managerial Accounting, 3/e 108
,10. When a company shifts from a traditional cost system in which manufacturing overhead is applied
based on direct labor-hours to an activity-based costing system in which there are batch-level and
product-level costs, the unit product costs of high volume products typically decrease whereas the unit
product costs of low volume products typically increase.
Level: Medium LO: 4 Ans: T
11. When a company changes from a traditional costing system to an activity-based costing system, the
unit product costs of low volume products typically change more than the unit product costs of high
volume products.
Level: Medium LO: 4 Ans: T
12. In an activity-based costing system there is no overhead overapplied or underapplied because the
costing system is much more accurate.
Level: Medium LO: 5 Ans: F
13. In activity-based costing, manufacturing overhead is credited when overhead is applied to products
using activity rates.
Level: Medium LO: 5 Ans: T
Multiple Choice
14. Which of the following would be classified as a product-level activity?
A) Machine setups for standard products.
B) Cafeteria facilities used by all employees.
C) Personnel administration.
D) Testing product prototypes.
Level: Medium LO: 1 Ans: D
15. Would the following activities be best classified at a manufacturer of canned soup as unit-level, batch-
level, product-level, or facility-level activities?
A) A above
B) B above
C) C above
D) D above
E) E above
Level: Medium LO: 1 Ans: D
109 Brewer, Introduction to Managerial Accounting, 3/e
, 16. Guerra Electronics manufactures a variety of electronic gadgets for use in the home. Which of the
following would probably be the most accurate measure of activity to use for allocating the cost of
inspecting the finished products at Guerra?
A) Machine-hours
B) Direct labor-hours
C) Inspection time
D) Number of inspections
Level: Hard LO: 1 Ans: C
17. Designing a new product is an example of a:
A) Unit-level activity.
B) Batch-level activity.
C) Product-level activity.
D) Facility-level activity.
Level: Easy LO: 1 Ans: C
18. Assembling a product is an example of a:
A) Unit-level activity.
B) Batch-level activity.
C) Product-level activity.
D) Facility-level activity.
Level: Medium LO: 1 Ans: A
19. Product engineering is an example of a:
A) Unit-level activity.
B) Batch-level activity.
C) Product-level activity.
D) Facility-level activity.
Level: Medium LO: 1 Ans: C
20. In an activity-based costing system, activity rates are used to:
A) debit Work In Process.
B) set targets for how fast work should be done.
C) debit Manufacturing Overhead.
D) determine the total amount of direct labor-hours required to produce a unit of product.
Level: Hard LO: 2,5 Ans: A
21. In activity-based costing, the total overhead cost in an activity cost pool can be computed by:
A) dividing the total activity in the activity cost pool by the activity rate for the activity cost pool.
B) multiplying the total activity in the activity cost pool by the activity rate for the activity cost pool.
C) dividing the total direct labor-hours in the activity cost pool by the activity rate for the activity cost
pool.
D) multiplying the total direct labor-hours in the activity cost pool by the activity rate for the activity cost
pool.
Level: Hard LO: 2 Ans: B
Brewer, Introduction to Managerial Accounting, 3/e 110
Systems Design: Activity-Based Costing
True/False
1. Direct labor-hours should never be used as a measure of activity in an activity-based costing system.
Level: Medium LO: 1 Ans: F
2. When there is a great deal of product diversity, activity-based costing will generally yield more
accurate product costs than traditional overhead application rates based on direct labor or machine hours.
Level: Medium LO: 1 Ans: T
3. Product-level activities relate to specific products and typically must be carried out regardless of how
many batches are run or units of product are made.
Level: Medium LO: 1 Ans: T
4. The first-stage allocation in activity-based costing is the process by which overhead costs are assigned
to activity cost pools.
Level: Easy LO: 1 Ans: T
5. In activity-based costing, there are a number of activity cost pools, each of which is allocated to
products using its own unique measure of activity.
Level: Easy LO: 1 Ans: T
6. The activity rates in activity-based costing are computed by dividing the overhead in each production
department by its direct labor-hours.
Level: Easy LO: 2 Ans: F
7. The activity rates in activity-based costing are used to determine how quickly a particular task should
be done.
Level: Easy LO: 2 Ans: F
8. In activity-based costing, unit product costs computed for external financial reports include direct
materials costs.
Level: Easy LO: 3 Ans: T
9. In activity-based costing, unit product costs computed for external financial reports include
manufacturing overhead costs that are computed by multiplying activity rates by the direct labor-hours
required to produce a product.
Level: Medium LO: 3 Ans: F
Brewer, Introduction to Managerial Accounting, 3/e 108
,10. When a company shifts from a traditional cost system in which manufacturing overhead is applied
based on direct labor-hours to an activity-based costing system in which there are batch-level and
product-level costs, the unit product costs of high volume products typically decrease whereas the unit
product costs of low volume products typically increase.
Level: Medium LO: 4 Ans: T
11. When a company changes from a traditional costing system to an activity-based costing system, the
unit product costs of low volume products typically change more than the unit product costs of high
volume products.
Level: Medium LO: 4 Ans: T
12. In an activity-based costing system there is no overhead overapplied or underapplied because the
costing system is much more accurate.
Level: Medium LO: 5 Ans: F
13. In activity-based costing, manufacturing overhead is credited when overhead is applied to products
using activity rates.
Level: Medium LO: 5 Ans: T
Multiple Choice
14. Which of the following would be classified as a product-level activity?
A) Machine setups for standard products.
B) Cafeteria facilities used by all employees.
C) Personnel administration.
D) Testing product prototypes.
Level: Medium LO: 1 Ans: D
15. Would the following activities be best classified at a manufacturer of canned soup as unit-level, batch-
level, product-level, or facility-level activities?
A) A above
B) B above
C) C above
D) D above
E) E above
Level: Medium LO: 1 Ans: D
109 Brewer, Introduction to Managerial Accounting, 3/e
, 16. Guerra Electronics manufactures a variety of electronic gadgets for use in the home. Which of the
following would probably be the most accurate measure of activity to use for allocating the cost of
inspecting the finished products at Guerra?
A) Machine-hours
B) Direct labor-hours
C) Inspection time
D) Number of inspections
Level: Hard LO: 1 Ans: C
17. Designing a new product is an example of a:
A) Unit-level activity.
B) Batch-level activity.
C) Product-level activity.
D) Facility-level activity.
Level: Easy LO: 1 Ans: C
18. Assembling a product is an example of a:
A) Unit-level activity.
B) Batch-level activity.
C) Product-level activity.
D) Facility-level activity.
Level: Medium LO: 1 Ans: A
19. Product engineering is an example of a:
A) Unit-level activity.
B) Batch-level activity.
C) Product-level activity.
D) Facility-level activity.
Level: Medium LO: 1 Ans: C
20. In an activity-based costing system, activity rates are used to:
A) debit Work In Process.
B) set targets for how fast work should be done.
C) debit Manufacturing Overhead.
D) determine the total amount of direct labor-hours required to produce a unit of product.
Level: Hard LO: 2,5 Ans: A
21. In activity-based costing, the total overhead cost in an activity cost pool can be computed by:
A) dividing the total activity in the activity cost pool by the activity rate for the activity cost pool.
B) multiplying the total activity in the activity cost pool by the activity rate for the activity cost pool.
C) dividing the total direct labor-hours in the activity cost pool by the activity rate for the activity cost
pool.
D) multiplying the total direct labor-hours in the activity cost pool by the activity rate for the activity cost
pool.
Level: Hard LO: 2 Ans: B
Brewer, Introduction to Managerial Accounting, 3/e 110
