Question;ACTIVITY BASED COSTINGMultiple 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.;D. I and III.;E. II and III.;13. Consumption ratios are useful in determining;A. the existence of product-line diversity.;B. overhead that is incurred at the unit level.;C. if overhead-producing activities are being;utilized effectively.;D. if overhead costs are being applied to;products.;E. if overhead-producing activities are being;utilized efficiently;14. Widely varying consumption ratios;A. are reflective of product-line diversity.;B. indicate an out-of-control production;environment.;C. dictate a need for traditional costing;systems.;D. work against the implementation of;activity-based costing.;E. create an unsolvable product-costing problem.;15. Moon Bay Manufacturing uses machine hours to;apply manufacturing overhead to products.;This method of costing would likely be acceptable if the company has;A. a large proportion of unit-level activities.;B. a large proportion of unit-level activities;and fairly identical consumption ratios among product lines.;C. a large proportion of unit-level activities;and widely varying consumption ratios among product lines.;D. a large proportion of nonunit-level;activities.;E. a large proportion of nonunit-level;activities and fairly identical consumption ratios among product lines.;16. In comparison with a system that uses a;single, volume-based cost driver, an activity-based costing system is preferred;when a company has;A. a large proportion of nonunit-level;activities.;B. product-line diversity or a large proportion;of nonunit-level activities.;C. minimal product-line diversity and a small;proportion of nonunit-level activities.;D. existing variances from budgeted amounts.;E. a situation other than those noted above.;17. Consider the following factors;I.;The;degree of correlation between consumption of an activity and consumption of a;particular cost driver.;II.;The;likelihood that a particular cost driver will induce a desired behavioral;effect.;III.;The;likelihood that a particular cost driver will cause an increase in the cost of;measurement.;Which;of these factors should be considered in the selection of a cost driver?;A. I only.;B. I and II.;C. I and III.;D. II and III.;E. I, II, and III.;18. Which of the following activity cost pools;and activity measures likely has the lowest degree of correlation?;Activity Cost Pool;Activity Measure;A.;Order department;Number of orders processed;B.;Sales management;Time spent by managers in;each sales territory;C.;Accounts receivable;processing;Number of customers;D.;Catering;Numbers of meals served;E.;Employee travel to job;sites (sites are within 100-mile radius of company headquarters);Number of employees;19.;Grossman Enterprises is converting;to an activity-based costing system and needs to depict the various activities;in its manufacturing process along with the activities' relationships. Which of the following is a possible tool;that the company can use to accomplish this task?;A. Storyboards.;B. Activity relationship charts (ARCs).;C. Decision trees.;D. Simulation games.;E. Process organizers.;20. Successful adoptions of;activity-based costing typically occur when companies rely heavily on;A. finance personnel.;B. accounting personnel.;C. manufacturing personnel.;D. office personnel.;E. multidisciplinary project teams.;21. Under;a traditional costing system, which of the following costs would likely be;classified as indirect with respect to the various products manufactured?;A. Plant maintenance.;B. Factory supplies.;C. Utilities.;D. Machinery depreciation.;E. All of the above would be considered indirect;costs.;22. Williams;Corporation is changing from a traditional costing system to an activity-based;system. As a result of this action;which of the following costs would likely change from indirect to direct?;A. Direct materials.;B. Factory supplies.;C. Production setup.;D. Production setup and finished-goods;inspection.;E. Production setup, finished-goods inspection;and product shipping.;23. Which;of the following generally fails to signal the need for a new;product-costing system?;A. Line managers do not believe reported product;costs.;B. Complex products have high reported;profitability despite the lack of premium prices.;C. Overhead rates are high and increasing over;time.;D. Line managers suggest that seemingly;profitable products be dropped.;E. Product-line profit margins are easy to;explain.;24. Of the following;organizations, activity-based costing cannot be used by;A. manufacturers.;B. financial-services firms.;C. book publishers.;D. hotels.;E. none of the above, as all are able to use;this costing system.;25. Which of the following;statements about activity-based costing (ABC) is false?;A. ABC cannot be used by service businesses.;B. In comparison with traditional costing;systems, ABC tends to use more cost pools and more cost drivers.;C. In comparison with traditional-costing;systems, ABC results in less cost ?averaging? of various diversified;activities.;D. In comparison with traditional-costing;systems, ABC results in more costs being classified as direct costs.;E. ABC tends to reduce cost distortion among;product lines.;26.A hospital administrator;is in the process of implementing an activity-based-costing system. which of the following tasks would not;be part of this process?;A.;Identification of;cost pools.;B.;Calculation of;cost application rates.;C.;Assignment of;cost to services provided.;D.;Identification of;cost drivers.;E. None of the above, as all these tasks would;be part of the process.
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