Management Accounting: Concepts, Techniques & Controversial Issues

James R. Martin

Chapter 7
Activity Based Product Costing
Extra MC Questions

The Sam Ritchie Company produces two products, R1 and R2. Information for the previous year is provided below.

The Company is currently using direct materials costs as a basis for allocating all overhead costs to products, but is considering replacing the current method with the activity cost pools and activity measurements below.

1. The total overhead (activity) costs allocated (rounded to dollars) using the current method is
    a. 11,111 to R1 and 8,889 to R2
    b. 18,000 to R1 and 2,000 to R2
    c. 180,000 to R1 and 16,000 to R2
    d. 18,367 to R1 and 1,633 to R2
    e. None of the above.

2. Based on the information given above, what is the minimum number of homogeneous cost pools that can be used to accurately allocate Sam Ritchie’s activity costs using the ABC concept?    
    a. 5
    b. 4
    c. 3
    d. 2
    e. 1

3. Using the ABC method, the purchasing and receiving cost allocated (rounded to dollars) is
    a. 6,000 to R1 and 2,000 to R2
    b. 7,200 to R1 and 800 to R2
    c. 7,347 to R1 and 653 to R2
    d. 5,333 to R1 and 2,667 to R2
    e. None of the above.

4. Considering only purchasing and receiving costs, the current allocation method based on direct materials costs
    a. accurately allocates these costs to R1.
    b. overstates the allocation to R1 by approximately $1,347.
    c. understates the allocation to R1 by approximately $1,200.
    d. overstates the allocation to R1 by approximately $1,200.
    e. understates the allocation to R1 by approximately $147.

5. The current method based on direct materials costs
    a. overstates the costs allocated to R1 for all four activity cost pools.
    b. understates the costs allocated to R1 for all four activity cost pools.
    c. overstates the costs allocated to R1 for only pools 1, 2 and 4.
    d. understates the costs allocated to R1 for only pools 1, 2 and 4.
    e. None of these.

The Coop Company produces two products, C1 and C2. Information for the previous year is provided in the table below.

The Company is currently using direct labor costs as a basis for allocating all overhead costs to products, but is considering the ABC method based on the activity cost pools and activity measurements below.

6. The total overhead (activity) costs allocated using the current method is
    a. 15,000 to C1 and 285,000 to C2
    b. 30,000 to C1 and 270,000 to C2
    c. 32,000 to C1 and 288,000 to C2
    d. 72,000 to C1 and 228,000 to C2
    e. None of the above.

7. Based on the information given above, what is the minimum number of homogeneous cost pools that can be used to accurately allocate the Company’s activity costs using the ABC method?
    a. 5 
    b. 4 
    c. 3 
    d. 2 
    e. 1

8. Using the ABC method, the costs allocated (rounded to dollars) are
    a. 15,000 to C1 and 285,000 to C2
    b. 30,000 to C1 and 270,000 to C2
    c. 32,000 to C1 and 288,000 to C2
    d. 72,000 to C1 and 228,000 to C2
    e. None of the above.

9. Now, considering only engineering costs, the current allocation method
    a. understates the allocation to C1 by approximately $6,000
    b. overstates the allocation to C1 by approximately $6,000
    c. overstates the allocation to C1 by approximately $7,000
    d. understates the allocation to C1 by approximately $7,000
    e. None of the above.

10. The current cost allocation method
    a. provides accurate allocations for all five activity cost pools.
    b. distorts the costs allocations for all five activity cost pools.
    c. provides accurate cost allocations for only activity cost pool number 4.
    d. provides accurate cost allocations for only activity cost pool number 1.
    e. None of these.

11. Assume that you are designing the cost allocation system for Coop Company, but you have been told by top management to use only one allocation basis for assigning the $300,000 activity cost to products C1 and C2. Which one would provide the most accurate product cost?
    a. Number of machine hours. 
    b. Number of machine setups. 
    c. Number of purchase orders.
    d. Number of material dollars. 
    e. Number of engineering work orders.

12. Assume that Coop Company uses cost plus pricing and sells the 1,000 units of C1, but sells only 10,000 units of C2. Using the current cost allocation method based on direct labor costs, net income would be
    a. understated relative to net income based on the ABC cost allocations.
    b. overstated relative to net income based on the ABC cost allocations.
    c. acceptable according to the rules of GAAP.
    d. a and c.
    e. b and c.

13. Which of the following types of products would tend to be over costed by traditional production volume based cost allocations?
    a. high volume, large and complex.
    b. low volume, small and complex.
    c. high volume, large and simple.
    d. low volume, small and simple.
    e. none of these.

14. Which type of ABC activity measure would be needed to trace engineering costs to products if the time required for engineering work orders is significantly different for each product?
    a. frequency. 
    b. arbitrary. 
    c. physical.
    d. duration. 
    e. none of these.

15. Activity based costing was mainly designed to provide information to
    a. outside investors. 
    b. production managers. 
    c. production workers.
    d. marketing and product managers. 
    e. public accountants.

16. Which of the following types of products would tend to be undercosted by traditional production volume based cost allocations?
    a. high volume, large and complex.
    b. low volume, small and complex.
    c. high volume, large and simple.
    d. low volume, small and simple.
    e. none of these.

17. In the ABC cost hierarchy, costs required each time a unit of product is produced are referred to as
    a. product level costs.
    b. batch level costs.
    c. unit level costs.
    d. facility level costs.
    e. customer level costs.

18. In the ABC cost hierarchy, costs required to support a specific type of product are referred to as
    a. product level costs.
    b. batch level costs.
    c. unit level costs.
    d. facility level costs.
    e. customer level costs.

19. Which type of ABC activity measure would be needed to trace setup costs to products if the time required for setups is significantly different for each product?
    a. production volume based.
    b. frequency.
    c. arbitrary.
    d. physical.
    e. duration.

20. Activity based costing could be used as
    a. a cost accumulation method.
    b. a cost flow assumption.
    c. an input measurement basis.
    d. an inventory valuation method.
    e. none of these.

21. A controversy concerning ABC involves whether a company should use one combined accounting system or separate systems for financial accounting and management decision support. The CAM-I conceptual design recommended
    a. a single data base system.
    b. a single traditional accounting system.
    c. separate data base systems for both financial accounting and management accounting.
    d. a traditional financial accounting system and a separate data base system for management.
    e. none of these.

22. Activity based cost consultants recommend using the following method for choosing activity measures to trace costs to products.
    a. account analysis.
    b. interviewing managers.
    c. correlation analysis.
    d. regression analysis.
    e. none of these.

23. Which of the following provides the most accurate description of the theory underlying activity based costing?
    a. resources consume activities, and products consume resources.
    b. activities consume costs and products consume resources.
    c. resources generate costs, activities consume resources and products consume activities.
    d. products generate costs, activities consume products and resources consume activities.
    e. none of these.

24. If activity based costing is integrated into the general ledger accounting system it becomes
    a. an input measurement basis.
    b. an inventory valuation method.
    c. a cost accumulation method.
    d. a cost flow assumption.
    e. none of the above.

25. When cost allocations are made to products based on direct labor hours, high volume products tend
    a. to be over charged with factory overhead.
    b. to subsidize the low volume products.
    c. to be under charged with factory overhead.
    d. a. and b.
    e. b and c.

26. When cost allocations are made to products based on direct labor hours, complex products tend
    a. to be over charged with factory overhead.
    b. to subsidize the simple or less complex products.
    c. to be under charged with factory overhead.
    d. a. and b.
    e. b and c.

27. Which statement below is part of the ABC logic?
    a. Resources generate costs.
    b. Activities consume resources.
    c. Products consume activities.
    d. All of the above.
    e. None of the above.

28. The cost concept that is most closely related to activity based costing is
    a. the absorption costing concept.
    b. the direct costing concept.
    c. the short run variable cost concept.
    d. the short run fixed cost concept.
    e. the long run variable cost concept.

29. In activity based costing, an activity measurement
    a. is usually a primary cost driver.
    b. measures the volume of work associated with the activity.
    c. is usually a secondary cost driver.
    d. a. and b.
    e. b. and c.

30. Which of the following would cause less need for activity based costing?
    a. A change towards more production volume diversity.
    b. A change towards more product diversity.
    c. A change towards a more focused factory.
    d. A change to a more automated factory.
    e. None of the above.

31. Using Cooper’s cost categories, which of the following tend to be batch level costs?
    a. Direct material costs.
    b. Direct labor costs.
    c. Setup costs.
    d. product design costs.
    e. None of these.

32. Using Cooper’s cost categories, which of the following tend to be product level costs?
    a. Direct material costs.
    b. Direct labor costs.
    c. Setup costs.
    d. product design costs.
    e. None of these.

33. Which type of activity measurement tends to be applicable when the time required to perform each occurrence of an activity is approximately the same?
    a. A duration measurement.
    b. A frequency measurement.
    c. A physical measurement.
    d. A batch measurement.
    e. None of these.

Martini Company produces products M1, M2 , M3 and M4 with the characteristics given in the table below. Assume, for simplicity, that each of the characteristics (production volume, complexity, number of parts, and size) has an equal effect on whether the product will be over-costed or under-costed. For example, a product would tend to be accurately costed in a traditional production volume based cost system if the product had two characteristics that tend to cause over-costing and two that tend to cause under-costing since these characteristics would offset each other based on the assumption that each has an equal effect.

*M2 and M3 contain the same parts. M1 and M4 contains parts only applicable to those products.

34. Based on the characteristics above, M1 would tend to be ____ in a tradition production volume based cost system. 
    a. over-costed. 
    b. under-costed. 
    c. accurately costed.

35. Based on the characteristics above, M2 would tend to be ____ in a tradition production volume based cost system. 
    a. over-costed. 
    b. under-costed. 
    c. accurately costed.

36. Based on the characteristics above, M3 would tend to be ____ in a tradition production volume based cost system.
    a. over-costed. 
    b. under-costed. 
    c. accurately costed.

37. Based on the characteristics above, M4 would tend to be ____ in a tradition production volume based cost system. 
    a. over-costed. 
    b. under-costed.
    c. accurately costed.

38. Using Cooper’s cost classifications, direct materials and direct labor are defined as
    a. unit level costs. 
    b. batch level costs. 
    c. product level costs. 
    d. facility level costs. 
    e. customer level costs.

39. Using Cooper’s cost classifications, building maintenance and security are defined as
    a. unit level costs. 
    b. batch level costs. 
    c. product level costs.
    d. facility level costs. 
    e. customer level costs.

40. Activity based costing uses which of the following to allocate or assign cost to cost objects?
    a. production volume based measurements like direct labor hours and machine hours.
    b. non production volume based measurements like the number of purchase orders.
    c. both a. and b. 
    d. none of these.

41. Traditional costing uses which of the following to allocate or assign cost to cost objects?
    a. production volume based measurements like direct labor hours and machine hours.
    b. non production volume based measurements like the number of purchase orders.
    c. both a. and b. 
    d. none of these.

42. Which statement below is not directly part of the ABC logic?
    a. Resources generates costs. 
    b. Products, services and customers generate costs.
    c. Activities consume resources. 
    d. products, services and customers consume activities.

43. Reasons given by CAM-I and others for developing ABC systems include
    a. greater competition that requires more accurate costing and pricing.
    b. an increasing level of automation that causes more potential for cost distortions.
    c. low inflation that requires more careful pricing. 
    d. a and b. 
    e. all of the above.

Chapter 7 Extra MC Solution