CHAPTER 4

ACTIVITY-BASED COSTING AND MANAGEMENT

Louderback

Multiple Choice

a 1. Activity-based costing
a. requires the identification of cost drivers.
b. is used only in JIT operations.
c. applies only to discretionary fixed costs.
d. does not help to identify activities as value-adding or non-
value-adding.

a 2. A company using activity-based costing

a. tries to identify cost drivers.
b. allocates all costs to individual products.
c. looks for the activity with which total costs are most
closely associated.
d. is probably using the JIT philosophy.

a 3. Machine setups is an example of a(n) ____________ activity.

a. Batch
b. Facility-sustaining
c. Product-sustaining
d. Unit

d 4. Machine hours is an example of a(n) ____________ activity.

a. Batch
b. Facility-sustaining
c. Product-sustaining
d. Unit

b 5. Landscaping is an example of a(n) _____________ activity.

a. Batch
b. Facility-sustaining
c. Product-sustaining
d. Unit

d 6. Material cost is an example of a(n) _____________ activity.

a. Batch
b. Facility-sustaining
c. Product-sustaining
d. Unit

c 7. The activities that drive resource requirements are called the

a. activity drivers
b. cost objects
c. resource drivers
d. sustaining activities

b 8. The resource utilized by a given product divided by the total

amount of the resource available is called the
a. activity driver
b. consumption ratio
c. cost object
d. sustaining activity

c 9. The segment for which you are estimating the cost is called the
a. activity driver
b. consumption ratio
c. cost object
d. sustaining activity
Chapter 4 Activity-Based Costing and Management 2

a 10. A tool that focuses on manufacturing processes and seeks to

reduce or optimize the activities performed within the process is
a. process value analysis
b. re-engineering
c. caveat analysis
d. benchmarking

d 11. A tool that compares how tasks are performed internally with the
best practices of industry leaders is
a. process value analysis
b. re-engineering
c. caveat analysis
d. benchmarking

b 12. An approach to developing new ways to perform existing

activities is called
a. process value analysis
b. re-engineering
c. caveat analysis
d. benchmarking

c 13. Which of the following statements is true?

a. The traditional approach to costing uses many different cost
drivers.
b. Costs that are indirect to products are by definition
traceable to directly to products.
c. Costs that are indirect to products are traceable to some
activity.
d. All of the above statements are true.

a 14. Which of the following is NOT a sign of poor cost data?

a. Competitors' prices for high-volume products appear much too
high.
b. The company seems to have a highly profitable niche all to
itself.
c. Customers don't balk at price increases for low-volume
products.
d. Competitors' prices for low-volume products appear much too
high.

d 15. Which of the following is a sign of poor cost data?

a. Competitors' prices for high-volume products appear much too
high.
b. The company seems to have a highly profitable niche all to
itself.
c. Customers don't balk at price increases for low-volume
products.
d. All of the statements are true.

a 16. Number of purchase orders is an example of a(n) ____________

activity.
a. Batch
b. Facility-sustaining
c. Product-sustaining
d. Unit

d 17. Direct labor hours is an example of a(n) ____________ activity.

a. Batch
b. Facility-sustaining
c. Product-sustaining
d. Unit

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Chapter 4 Activity-Based Costing and Management 3

b 18. Property taxes on the plant is an example of a(n) _____________

activity.
a. Batch
b. Facility-sustaining
c. Product-sustaining
d. Unit

d 19. Production volume is an example of a(n) _____________ activity.

a. Batch
b. Facility-sustaining
c. Product-sustaining
d. Unit

d 20. ____________ are those performed each time a unit is produced or

sold.
a. Batch-level activities
b. Facility-sustaining activities
c. Sustaining activities
d. Unit-level activities

a 21. ____________ are those that a company performs when it makes a

group of units.
a. Batch-level activities
b. Facility-sustaining activities
c. Sustaining activities
d. Unit-level activities

b 22. ____________ relate to an entire plant as a whole.

a. Batch-level activities
b. Facility-sustaining activities
c. Sustaining activities
d. Unit-level activities

c 23. ____________ arise because a company maintains a particular

product or service.
a. Batch-level activities
b. Facility-sustaining activities
c. Sustaining activities
d. Unit-level activities

d 24. Which of the following is not a type of sustaining activity?

a. Capacity-sustaining
b. Customer-sustaining
c. Distribution-channel sustaining
d. Unit-sustaining

a 25. Which of the following is true regarding activity-based

management?
a. ABM is using information about activities to manage portions
of the organization other than costs.
b. ABM is applying ABC to external financial reporting.
c. ABM requires the use of re-engineering principles.
d. All of the above are true.

a 26. The quality costs that are incurred to determine whether

particular units of product meet quality standards are
a. appraisal costs.
b. external failure costs.
c. internal failure costs.
d. prevention costs.

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Chapter 4 Activity-Based Costing and Management 4

c 27. The cost of downtime on machines while rework is being performed

is a(n)
a. appraisal cost.
b. external failure cost.
c. internal failure cost.
d. prevention cost.

b 28. The cost of processing customer complaints is a(n)

a. appraisal cost.
b. external failure cost.
c. internal failure cost.
d. prevention cost.

d 29. Worker training is a(n)

a. appraisal cost.
b. external failure cost.
c. internal failure cost.
d. prevention cost.

b 30. The cost to repair a unit of product that fails after it is sold
is a(n)
a. appraisal cost.
b. external failure cost.
c. internal failure cost.
d. prevention cost.

b 31. Genco manufactures two versions of a product. Production and

cost information show the following:

Model A Model B
Units produced 200 400
Material moves (total) 20 80
Direct labor hours per unit 1 2

Material handling costs total $200,000. Under ABC, the material

handling costs allocated to each unit of Model A would be:
a. $10
b. $200
c. $333
d. Some other number

c 32. Genco manufactures two versions of a product. Production and

cost information show the following:

Model A Model B
Units produced 200 400
Material moves (total) 20 80
Direct labor hours per unit 1 2

Material handling costs total $200,000. Under ABC, the material

handling costs allocated to each unit of Model B would be:
a. $200
b. $333
c. $400
d. Some other number

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Chapter 4 Activity-Based Costing and Management 5

a 33. Genco manufactures two versions of a product. Production and

cost information show the following:

Model A Model B
Units produced 200 400
Material moves (total) 20 80
Direct labor hours per unit 1 3

Material handling costs total $200,000. Direct labor hours are

used to allocate overhead costs. The material handling costs
allocated to each unit of Model A would be:
a. $143
b. $200
c. $333
d. Some other number

b 34. Cadott Manufacturing produces three products. Production and

cost information show the following:

Model X Model Y Model Z

Units produced 1,000 3,000 6,000
Direct labor hours 2,000 1,000 2,000
Number of inspections 20 30 50

Inspection costs totaled $100,000. Using ABC, inspections costs

allocated to each unit of Model X would be
a. $10.00
b. $20.00
c. $40.00
d. Some other number

b 35. Cadott Manufacturing produces three products. Production and

cost information show the following:

Model X Model Y Model Z

Units produced 1,000 3,000 6,000
Direct labor hours 2,000 1,000 2,000
Number of inspections 20 30 50

Inspection costs totaled $100,000. Using ABC, inspections costs

allocated to each unit of Model Y would be
a. $ 6.67
b. $10.00
c. $20.00
d. Some other number

b 36. Cadott Manufacturing produces three products. Production and

cost information show the following:

Model X Model Y Model Z

Units produced 1,000 3,000 6,000
Direct labor hours 2,000 1,000 2,000
Number of inspections 20 30 50

Inspection costs totaled $100,000. Using ABC, inspections costs

allocated to each unit of Model Z would be
a. $ 6.67
b. $ 8.33
c. $10.00
d. Some other number

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Chapter 4 Activity-Based Costing and Management 6

c 37. Cadott Manufacturing produces three products. Production and

cost information show the following:

Model X Model Y Model Z

Units produced 1,000 3,000 6,000
Direct labor hours 2,000 1,000 2,000
Number of inspections 20 30 50

Inspection costs totaled $100,000. Using direct labor hours as

the allocation base, inspections costs allocated to each unit of
Model X would be
a. $10.00
b. $20.00
c. $40.00
d. Some other number

a 38. Cadott Manufacturing produces three products. Production and

cost information show the following:

Model X Model Y Model Z

Units produced 1,000 3,000 6,000
Direct labor hours 2,000 1,000 2,000
Number of inspections 20 30 50

Inspection costs totaled $100,000. . Using direct labor hours as

the allocation base, inspections costs allocated to each unit of
Model Y would be
a. $6.67
b. $10.00
c. $20.00
d. Some other number

a 39. Cadott Manufacturing produces three products. Production and

cost information show the following:

Model X Model Y Model Z

Units produced 1,000 3,000 6,000
Direct labor hours 2,000 1,000 2,000
Number of inspections 20 30 50

Inspection costs totaled $100,000. Using direct labor hours as

the allocation base, inspections costs allocated to each unit of
Model Z would be
a. $6.67
b. $8.33
c. $10.00
d. Some other number

b 40. Superior Inc. produces three products. Production and cost

information is as follows:

Model Q Model R Model S

Units produced 2,000 6,000 12,000
Direct labor hours 4,000 2,000 4,000
Number of setups 100 150 250

The consumption ratios for number of setups would be:

Q R S
a. 40%-20%-40%
b. 20%-30%-50%
c. 10%-30%-60%
d. Some other numbers

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Chapter 4 Activity-Based Costing and Management 7

c 41. Superior Inc. produces three products. Production and cost

information is as follows:

Model Q Model R Model S

Units produced 2,000 6,000 12,000
Direct labor hours 4,000 2,000 4,000
Number of setups 100 150 250

The consumption ratios based on units produced would be:

Q R S
a. 40%-20%-40%
b. 20%-30%-50%
c. 10%-30%-60%
d. Some other numbers

a 42. Superior Inc. produces three products. Production and cost

information is as follows:

Model Q Model R Model S

Units produced 2,000 6,000 12,000
Direct labor hours 4,000 2,000 4,000
Number of setups 100 150 250

The consumption ratios for direct labor hours would be:

Q R S
a. 40%-20%-40%
b. 20%-30%-50%
c. 10%-30%-60%
d. Some other numbers

c 43. Waupaca Company produces three products with the following

production and cost information:

Model A Model B Model C

Units produced 2,000 6,000 12,000
Direct labor hours (total) 4,000 2,000 4,000
Number of setups 100 150 250
Number of shipments 200 225 275
Engineering change orders 15 10 5

Overhead costs include setups $90,000; shipping costs $140,000;

and engineering costs $180,000. What would be the per unit
overhead cost for Model A if direct labor hours were the
allocation base?
a. $20.50
b. $41.00
c. $82.00
d. Some other number

b 44. Waupaca Company produces three products with the following

production and cost information:

Model A Model B Model C

Units produced 2,000 6,000 12,000
Direct labor hours (total) 4,000 2,000 4,000
Number of setups 100 150 250
Number of shipments 200 225 275
Engineering change orders 15 10 5

Overhead costs include setups $90,000; shipping costs $140,000;

and engineering costs $180,000. What would be the per unit
overhead cost for Model A if activity-based costing were used?

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Chapter 4 Activity-Based Costing and Management 8

a. $20.50
b. $74.00
c. $82.00
d. Some other number

a 45. Waupaca Company produces three products with the following

production and cost information:

Model A Model B Model C

Units produced 2,000 6,000 12,000
Direct labor hours (total) 4,000 2,000 4,000
Number of setups 100 150 250
Number of shipments 200 225 275
Engineering change orders 15 10 5

Overhead costs include setups $90,000; shipping costs $140,000;

and engineering costs $180,000. What would be the per unit
overhead cost for Model B if activity-based costing were used?
a. $22.00
b. $66.00
c. $123.00
d. Some other number

a 46. Waupaca Company produces three products with the following

production and cost information:

Model A Model B Model C

Units produced 2,000 6,000 12,000
Direct labor hours (total) 4,000 2,000 4,000
Number of setups 100 150 250
Number of shipments 200 225 275
Engineering change orders 15 10 5

Overhead costs include setups $90,000; shipping costs $140,000;

and engineering costs $180,000. What would be the per unit
overhead cost for Model C if activity-based costing were used?
a. $10.83
b. $32.50
c. $245.28
d. Some other number

c 47. Kimball Company produces two products in a single factory. The

following production and cost information has been determined:

Model 1 Model 2
Units produced 1,000 200
Material moves (total) 100 40
Testing time (total) 250 125
Direct labor hours per unit 1 5

The controller has determined total overhead to be $480,000.

$120,000 relates to material moves; $150,000 relates to testing;
the remainder is related to labor time.

If Kimball uses direct labor hours to allocate overhead to each

model, what would overhead per unit be for Model 1?
a. $10.00
b. $120.00
c. $240.00
d. $400.00

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Chapter 4 Activity-Based Costing and Management 9

b 48. Kimball Company produces two products in a single factory. The

following production and cost information has been determined:

Model 1 Model 2
Units produced 1,000 200
Material moves (total) 100 40
Testing time (total) 250 125
Direct labor hours per unit 1 5

The controller has determined total overhead to be $480,000.

$140,000 relates to material moves; $150,000 relates to testing;
the remainder is related to labor time.

If Kimball uses activity-based costing to allocate overhead to

each model, what would overhead per unit be for Model 1?
a. $400.00
b. $295.00
c. $240.00
d. $120.00

d 49. Kimball Company produces two products in a single factory. The

following production and cost information has been determined:

Model 1 Model 2
Units produced 1,000 200
Material moves (total) 100 40
Testing time (total) 250 125
Direct labor hours per unit 1 5

The controller has determined total overhead to be $480,000.

$140,000 relates to material moves; $150,000 relates to testing;
the remainder is related to labor time.

If Kimball uses direct labor hours to allocate overhead to each

model, what would overhead per unit be for Model 2?
a. $158.33
b. $400.00
c. $950.00
d. $1,200.00

c 50. Kimball Company produces two products in a single factory. The

following production and cost information has been determined:

Model 1 Model 2
Units produced 1,000 200
Material moves (total) 100 40
Testing time (total) 250 125
Direct labor hours per unit 1 5

The controller has determined total overhead to be $480,000.

$140,000 relates to material moves; $150,000 relates to testing;
the remainder is related to labor time.

If Kimball uses activity-based costing to allocate overhead to

each model, what would overhead per unit be for Model 2?
a. $158.33
b. $415.93
c. $925.00
d. Some other number