29 Jun Question ACTIVITY BASED COSTING
Question
ACTIVITY BASED COSTING
Multiple Choice Questions
Use the following to answer questions 1- 4 :
Century, Inc., currently uses traditional costing procedures, applying $400,000 of overhead to products X and Y on the basis of direct labor hours. The firm is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labor hours (DLH), production setups (SU), and number of parts components (PC) as cost drivers. Data on the cost pools and respective driver volumes follow.
Product
Pool No. 1
(Driver: DLH)
Pool No. 2
(Driver: SU)
Pool No. 3
(Driver: PC)
X
600
30
1,500
Y
1,400
50
1,000
Pool Cost
$80,000
$140,000
$180,000
1. The overhead cost allocated to product X by using traditional costing procedures would be:
A. $120,000.
B. $184,500.
C. $215,500.
D. $280,000.
E. some other amount.
2. The overhead cost allocated to product Y by using traditional costing procedures would be:
A. $120,000.
B. $184,500.
C. $215,500.
D. $280,000.
E. some other amount.
3. The overhead cost allocated to product X by using activity-based costing procedures would be:
A. $120,000.
B. $184,500.
C. $215,500.
D. $280,000.
E. some other amount.
4. The overhead cost allocated to product Y by using activity-based costing procedures would be:
A. $120,000.
B. $184,500.
C. $215,500.
D. $280,000.
E. some other amount.
Use the following to answer questions 5 – 6 :
Kelly and Logan, an accounting firm, provides consulting and tax planning services. A recent analysis found that 65% of the firm’s billable hours to clients resulted from tax planning and for many years, the firm’s total administrative cost (currently $250,000) has been allocated to services on this basis.
The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows:
Staff support
$180,000
In-house computing charges
50,000
Miscellaneous office costs
20,000
Total
$250,000
A recent analysis of staff support found a strong correlation with the number of clients served (consulting, 20; tax planning, 60). In contrast, in-house computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively. Consulting consumed 30% of the firm’s computer hours and had 20% of the total client transactions.
5. Assuming the use of activity-based costing, the proper percentage to use in allocating staff support costs to tax planning services is:
A. 20%.
B. 60%.
C. 65%.
D. 75%.
E. 80%
6. If Kelly and Logan switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to consulting services would:
A. decrease by $23,500.
B. increase by $23,500.
C. decrease by $32,500.
D. change by an amount other than those listed above.
E. change, but the amount cannot be determined based on the information presented.
7. Activity-based costing systems:
A. use a single, volume-based cost driver.
B. assign overhead to products based on the products’ relative usage of direct labor.
C. often reveal products that were under- or overcosted by traditional costing systems.
D. typically use fewer cost drivers than more traditional costing systems.
E. have a tendency to distort product costs.
8. Dreyfus Manufacturing sells a number of goods whose selling price is heavily influenced by cost. A recent study of product no. 519 revealed a traditionally-derived total cost of $1,019, a selling price of $1,850 based on that figure, and a newly computed activity-based total cost of $1,215. Which of the following statements is true?
A. All other things being equal, the company should consider a drop in its sales price.
B. The company may have been extremely competitive in the marketplace from a price perspective.
C. Product no. 519 could be labeled as being overcosted by the firm’s traditional costing procedures.
D. If product no. 519 is undercosted by traditional accounting procedures, then all of the company’s other products must be undercosted as well.
E. Generally speaking, the activity-based cost figure is “less accurate” than the traditionally-derived cost figure.
9. Vanguard combines all manufacturing overhead into a single cost pool and allocates this overhead to products by using machine hours. Activity-based costing would likely show that with Vanguard’s current procedures,
A. all of the company’s products are undercosted.
B. the company’s high-volume products are undercosted.
C. all of the company’s products are overcosted.
D. the company’s high-volume products are overcosted.
E. the company’s low-volume products are overcosted.
10. Jackson manufactures products X and Y, applying overhead on the basis of labor hours. X, a low-volume product, requires a variety of complex manufacturing procedures. Y, on the other hand, is both a high-volume product and relatively simplistic in nature. What would an activity-based costing system likely disclose about products X and Y as a result of Jackson’s current accounting procedures?
X
Y
A.
Undercosted
Undercosted
B.
Undercosted
Overcosted
C.
Overcosted
Undercosted
D.
Overcosted
Overcosted
E.
Costed correctly
Costed correctly
11. Koski manufactures products J and K, applying overhead on the basis of labor hours. J, a low-volume product, requires a variety of complex manufacturing procedures. K, on the other hand, is both a high-volume product and relatively simplistic in nature. What would an activity-based costing system likely disclose about products J and K as a result of Koski’s current accounting procedures?
Undercosted
Overcosted
A.
J, K
B.
J, K
C.
J
K
D.
K
J
E.
None of the above, as both products are costed correctly.
12. Consider the following statements:
I. Product diversity creates costing problems because diverse products tend to utilize manufacturing activities in different ways.
II. Overhead costs that are not incurred at the unit level create costing problems because such costs do not vary with traditional application bases such as direct labor hours or machine hours.
III. Product diversity typically exists when a single product (e.g., a ballpoint pen) is made in different colors.
Which of the above statements is (are) true?
A. I only.
B. II only.
C. I and II.
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