18 terms

Ch 5 Activity Based Costing

STUDY
PLAY
Overcosting a particular product may result in ________.
A) loss of market share
B) pricing the product too low
C) operating efficiencies
D) understating total product costs
A) loss of market share
For a company with diverse products, undercosting overhead of a product will lead to ________.
A) misallocating direct labor costs of the product.
B) misallocating direct material costs of the product
C) misallocating indirect costs of another product
D) misallocating direct costs of another product
C) misallocating indirect costs of another product
Aqua Company produces two products-Alpha and Beta. Alpha has a high market share and is produced in bulk. Production of Beta is based on customer orders and is custom designed. Also, 55% of Beta's cost is shared between design and setup costs, while Alpha's major portions of costs are direct costs. Alpha is using a single cost pool to allocate indirect costs. Which of the following statements is true of Aqua?
A) Aqua will overcost Beta's direct costs as it is using a single cost pool to allocate indirect costs.
B) Aqua will undercost Alpha's indirect costs because alpha has high direct costs.
C) Aqua will overcost Alpha's indirect costs as it is using a single cost pool to allocate indirect costs.
D) Aqua will overcost Beta's indirect costs because beta has high indirect costs.
C) Aqua will overcost Alpha's indirect costs as it is using a single cost pool to allocate indirect costs.
Product-cost cross-subsidization ________.
A) exists when one overcosted product results in more than one other product being overcosted
B) means that if a company undercosts more than one of its products, it will overcost more than one of its other products
C) means that if a company undercosts one of its products, it will overcost at least one of its other products
D) exists only when one overcosted product results in all other products being overcosted
C) means that if a company undercosts one of its products, it will overcost at least one of its other products
An accelerated need for refined cost systems is due to ________.
A) global monopolies
B) rising prices
C) intense competition
D) a shift toward increased direct costs
C) intense competition
Which of the following is a reason that has accelerated the demand for refinements to the costing system?
A) The declining demand for customized products has led managers to decrease the variety of products and services their companies offer.
B) The use of product and process technology has led to an increase in indirect costs and a decrease in direct costs.
C) The increased of automated processes has led to the increase in direct manufacturing cost leading to a decrease in breakeven point.
D) The increasing competition in product markets has led to an increase in contribution margin resulting in a decrease of breakeven point.
B) The use of product and process technology has led to an increase in indirect costs and a decrease in direct costs.
Which of the following is true of refinement of a costing system?
A) While refining a costing system, companies should identify as many indirect costs as is economically feasible.
B) A homogeneous cost pool will use multiple cost drivers to allocate costs.
C) It reduces the use of broad averages for assigning the cost of resources to cost objects.
D) It is likely to yield the most decision-making benefits when direct costs are a high percentage of total
C) It reduces the use of broad averages for assigning the cost of resources to cost objects.
Demand for refinements to the costing system has accelerated due to ________.
A) increase in direct costs
B) decrease in product diversity
C) decrease in indirect costs
D) competition in product markets
D) competition in product markets
Collin Inc. produces hospital equipment and the setup requirements vary from product to product. Collin produces its products based on customer orders and uses ABC costing. In one of its indirect cost pools, setup costs and distribution costs are pooled together. Costs in this pool are allocated using number of customer orders for the easiness of costing operations. Based on the information provided, which of the following arguments is valid?
A) Collin has clearly failed to identify as many direct costs as is economically feasible.
B) All costs in a homogeneous cost pool have the same or a similar cause-and-effect relationship with the single cost driver that is used as the cost-allocation base for Collin.
C) Collin has unnecessarily wasted resources by classifying setup and distribution costs as they could have been considered as direct costs.
D) Collin has failed to use the correct cost driver as the cost-allocation base for setup costs.
D) Collin has failed to use the correct cost driver as the cost-allocation base for setup costs.
ABC systems create ________.
A) one large cost pool
B) homogenous activity-related cost pools
C) activity-cost pools with a broad focus
D) activity-cost pools containing many direct costs
B) homogenous activity-related cost pools
Activity based costing system differs from traditional costing systems in the treatment of ________.
A) direct labor costs
B) direct material costs
C) prime costs
D) indirect costs
D) indirect costs
ABC systems ________.
A) highlight the different levels of activities
B) limit cost drivers to units of output
C) allocate costs based on the overall level of activity
D) generally undercost complex products
A) highlight the different levels of activities
Which of the following statements is true of activity-based costing?
A) In activity-based costing, direct labor-hours is always the best allocation base to allocate all non-manufacturing indirect costs.
B) Activity based costing is more suited to companies with high product diversity than companies with single product line.
C) Activity based costing broadly averages or spreads the cost of resources uniformly to cost objects such as products or services.
D) The main advantage of activity-based costing over peanut-butter costing is the accurate distribution of all direct costs to the products.
B) Activity based costing is more suited to companies with high product diversity than companies with single product line.
A single indirect-cost rate distort product costs because ________.
A) there is an assumption that all support activities affect all products
B) it recognizes specific activities that are required to produce a product
C) competitive pricing is ignored
D) it assumes all costs are product costs
A) there is an assumption that all support activities affect all products
Extracts from cost information of Hebar Corp.:

Setup Costs allocated w/ DL Hours:
Simple L3 Pack - $18,750
Complex L7 Pack - $6250
Total- $25,000

Setup Costs allocated w/ setup hours:

Simple L3 Pack - $13,200
Complex L7 Pack - $11,800
Total- $25,000

Which of the following statement is true of Hebar's setup costs under traditional costing?
A) L3 pack is undercosted by $5,550
B) L7 pack is undercosted by $5,450
C) L3 pack is overcosted by $5,550
D) L7 pack is overcosted by $5,550
C) L3 pack is overcosted by $5,550

(Setup cost allocated using direct labor-hours )- (Setup cost allocated using setup-hours)
= $18,750 − $13,200 = $5,550
Which of the following statements is true of activity-based costing?
A) Activity-based costing ignores the allocation of marketing and distribution costs.
B) Activity-based costing is more likely to result in major differences from traditional costing systems if the firm manufactures only one product rather than multiple products.
C) Activity-based costing classifies some of the indirect costs as direct costs.
D) Chances of product-cost cross-subsidization are higher in activity-based costing compared to traditional costing systems.
C) Activity-based costing classifies some of the indirect costs as direct costs.
Activity-based costing (ABC) can eliminate cost distortions because ABC systems ________.
A) establish a cause-and-effect relationship with the activities performed
B) use single cost pool for all overhead costs, thereby enabling simplicity
C) use a broad average to allocate all overhead costs
D) never consider interactions between different departments in assigning support costs
A) establish a cause-and-effect relationship with the activities performed
Product lines that produce different variations (models, styles, or colors) often require specialized manufacturing activities that translate into ________.
A) fewer indirect costs for each product line
B) decisions to drop product variations
C) a greater number of direct manufacturing labor cost allocation rates
D) greater overhead costs for each product line
D) greater overhead costs for each product line