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# Management Accounting: Concepts, Techniques & Controversial Issues Chapter 7 Extra MC Solution

James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

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

1. The total overhead (activity) costs allocated (rounded to dollars) using the current method is

d. 18,367 to R1 and 1,633 to R2

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?

b. 4

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

4. Considering only purchasing and receiving costs, the current allocation method based on direct materials costs

b. overstates the allocation to R1 by approximately \$1,347.

5. The current method based on direct materials costs

c. overstates the costs allocated to R1 for only pools 1, 2 and 4.

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

6. The total overhead (activity) costs allocated using the current method is

b. 30,000 to C1 and 270,000 to C2

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?

c. 3

8. Using the ABC method, the costs allocated (rounded to dollars) are

e. None of the above. 69,500 to C1 and 230,500 to C2

9. Now, considering only engineering costs, the current allocation method

a. understates the allocation to C1 by approximately \$6,000

10. The current cost allocation method

b. distorts the costs allocations for all five activity cost pools.

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.

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

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?

c. high volume, large and simple.

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?

d. duration.

15. Activity based costing was mainly designed to provide information to

d. marketing and product managers.

16. Which of the following types of products would tend to be undercosted by traditional production volume based cost allocations?

b. low volume, small and complex.

17. In the ABC cost hierarchy, costs required each time a unit of product is produced are referred to as

c. unit 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.

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?

e. duration.

20. Activity based costing could be used as

d. an inventory valuation method.

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.

22. Activity based cost consultants recommend using the following method for choosing activity measures to trace costs to products.

b. interviewing managers.

23. Which of the following provides the most accurate description of the theory underlying activity based costing?

c. resources generate costs, activities consume resources and products consume activities.

24. If activity based costing is integrated into the general ledger accounting system it becomes

b. an inventory valuation method.

25. When cost allocations are made to products based on direct labor hours, high volume products tend

d. a. and b.

26. When cost allocations are made to products based on direct labor hours, complex products tend

c. to be under charged with factory overhead.

27. Which statement below is part of the ABC logic?

d. All of the above.

28. The cost concept that is most closely related to activity based costing is

e. the long run variable cost concept.

29. In activity based costing, an activity measurement

e. b. and c.

30. Which of the following would cause less need for activity based costing?

c. A change towards a more focused factory.

31. Using Cooper’s cost categories, which of the following tend to be batch level costs?

c. Setup costs.

32. Using Cooper’s cost categories, which of the following tend to be product level costs?

d. product design costs.

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?

b. A frequency measurement.

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.

34. Based on the characteristics above, M1 would tend to be ____ in a tradition production volume based cost system.

b. under-costed.

35. Based on the characteristics above, M2 would tend to be ____ in a tradition production volume based cost system.

a. over-costed.

36. Based on the characteristics above, M3 would tend to be ____ in a tradition production volume based cost system.

a. over-costed.

37. Based on the characteristics above, M4 would tend to be ____ in a tradition production volume based cost system.

c. accurately costed.

38. Using Cooper’s cost classifications, direct materials and direct labor are defined as

a. unit level costs.

39. Using Cooper’s cost classifications, building maintenance and security are defined as

d. facility level costs.

40. Activity based costing uses which of the following to allocate or assign cost to cost objects?

c. both a. and b.

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.

42. Which statement below is not directly part of the ABC logic?

b. Products, services and customers generate costs.

43. Reasons given by CAM-I and others for developing ABC systems include

e. all of the above.

Chapter 7 Extra MC Questions