New Era University

College of Accountancy

Assignment No. 5 Part 2

Activity-Based Management and Costing

I. Theories

1. An objective of activity-based management is to

a. eliminate the majority of centralized activities in an organization.
b. reduce or eliminate non-value-added activities incurred to make a product or
provide a service.
c. institute responsibility accounting systems in decentralized organizations.
d. all of the above

2. The sum of the non-value-added time and the value-added time equals
a. inspection time.
b. production time.
c. the product life cycle.
d. cycle time.

3. Which of the following add customer value?

a. setup time
b. storage time
c. idle time
d. processing time

4. Non-value-added activities that are necessary to businesses, but not costs that customers are
willing to pay for are known as
a. business-value-added activities.
b. long-term variable activities.
c. short-term variable activities.
d. superior business activities.

5. Which of the following would not be considered a value-added activity in the preparation of a
tax return?
a. printing a copy of the return for the client
b. printing a copy of the return for the IRS
c. installing tax software
d. checking for accuracy

6. Which of the following is considered a value-added activity?

Idle time Inspection time Transfer time

a. yes yes no
 b. no no no
c. yes no yes
d. no yes yes

7. Which of the following is typically regarded as a cost driver in traditional accounting practices?
a. number of purchase orders processed
b. number of customers served
c. number of transactions processed
d. number of direct labor hours worked

8. When a company is labor-intensive, the cost driver that is probably least significant would be
a. direct labor hours.
b. direct labor dollars.
c. machine hours.
d. cost of materials used.

9. The term cost driver refers to

a. any activity that can be used to predict cost changes.
b. the attempt to control expenditures at a reasonable level.
c. the person who gathers and transfers cost data to the management accountant.
d. any activity that causes costs to be incurred.

10. Costs that are common to many different activities within an organization are known as
____________ costs.
a. product- or process-level
b. organizational-level
c. batch-level
d. unit-level

11. For traditional costing purposes, R&D costs are

a. capitalized and allocated over the product life cycle.
b. expensed as incurred.
c. capitalized and amortized over three years.
d. charged to the future accounting periods that receive the benefit of the R&D
expenditures.

12. Traditional overhead allocations result in which of the following situations?

a. Overhead costs are assigned as period costs to manufacturing operations.
b. High-volume products are assigned too much overhead, and low-volume products
are assigned too little overhead.
c. Low-volume products are assigned too much, and high-volume products are
assigned too little overhead.
d. The resulting allocations cannot be used for financial reports.

13. Relative to traditional product costing, activity-based costing differs in the way costs are
a. processed.
b. allocated.
 c. benchmarked.
d. incurred.

14. Of the following, which is the best reason for using activity-based costing?
a. to keep better track of overhead costs
b. to more accurately assign overhead costs to cost pools so that these costs are better
controlled
c. to better assign overhead costs to products
d. to assign indirect service overhead costs to direct overhead cost pools

15. ABC should be used in which of the following situations?

a. single-product firms with multiple steps
b. multiple-product firms with only a single process
c. multiple-product firms with multiple processing steps
d. in all manufacturing firms

II. Problems

Smithson Company
Smithson Company produces two products (A and B). Direct material and labor costs for
Product A total P35 (which reflects 4 direct labor hours); direct material and labor costs for
Product B total P22 (which reflects 1.5 direct labor hours). Three overhead functions are needed
for each product. Product A uses 2 hours of Function 1 at P10 per hour, 1 hour of Function 2 at
P7 per hour, and 6 hours of Function 3 at P18 per hour. Product B uses 1, 8, and 1 hours of
Functions 1, 2, and 3, respectively. Smithson produces 800 units of A and 8,000 units of B each
period.

1. Refer to Smithson Company If total overhead is assigned to A and B on the basis of units
produced, Product A will have an overhead cost per unit of
a. P 88.64.
b. P123.64.
c. P135.00.
d. None of the responses are correct.

2. Refer to Smithson Company If total overhead is assigned to A and B on the basis of units
produced, Product B will have an overhead cost per unit of
a. P84.00.
b. P88.64.
c. P110.64.
d. None of the responses are correct.

3. Refer to Smithson Company If total overhead is assigned to A and B on the basis of direct labor
hours, Product A will have an overhead cost per unit of
a. P51.32.
b. P205.28.
 c. P461.88.
d. None of the responses are correct.

4. Refer to Smithson Company If total overhead is assigned to A and B on the basis of direct labor
hours, Product B will have an overhead cost per unit of
a. P51.32.
b. P76.98.
c. P510.32.
d. None of the responses are correct.

5. Refer to Smithson Company If total overhead is assigned to A and B on the basis of overhead
activity hours used, the total product cost per unit assigned to Product A will be
a. P86.32.
b. P95.00.
c. P115.50.
d. None of the responses are correct.

6. Refer to Smithson Company If total overhead is assigned to A and B on the basis of overhead
activity hours used, the total product cost per unit assigned to Product B will be
a. P115.50.
b. P73.32.
c. P34.60.
d. None of the responses are correct.

Lafayette Savings and Loan

Lafayette Savings and Loan had the following activities, traceable costs, and
physical flow of driver units:

Traceable Physical flow of

Activities Costs Driver Units

Open new accounts P50,000 1,000 accounts

Process deposits 36,000 400,000 deposits
Process withdrawals 15,000 200,000 withdrawals
Process loan applications 27,000 900 applications

The above activities are used by the Jennings branch and the Crowley branch:

Jennings Crowley

New accounts 200 400

Deposits 40,000 20,000
Withdrawals 15,000 18,000
Loan applications 100 160
7. Refer to Lafayette Savings and Loan. What is the cost per driver unit for new account activity?
a. P0.09 c. P30.00
b. P0.075 d. P50.00

8. Refer to Lafayette Savings and Loan. What is the cost per driver unit for the deposit activity?
a. P0.09 c. P30.00
b. P0.075 d. P50.00

9. Refer to Lafayette Savings and Loan. What is the cost per driver unit for the withdrawal
activity?
a. P0.09 c. P30.00
b. P0.075 d. P50.00

10. Refer to Lafayette Savings and Loan. What is the cost per driver unit for the loan application
activity?
a. P0.09 c. P30.00
b. P0.075 d. P50.00

11. Refer to Lafayette Savings and Loan. How much of the loan application cost will be assigned to
the Jennings branch?
a. P3,000 c. P 7,800
b. P4,800 d. P27,000

12. Refer to Lafayette Savings and Loan. How much of the deposit cost will be assigned to the
Crowley branch?
a. P1,800 c. P 5,400
b. P3,600 d. P36,000

13. Refer to Lafayette Savings and Loan. How much of the new account cost will be assigned to the
Crowley branch?
a. P10,000 c. P30,000
b. P20,000 d. P50,000

Hazel Company
Hazel Company uses activity-based costing. The company produces two products: coats and
hats. The annual production and sales volume of coats is 8,000 units and of hats is 6,000 units.
There are three activity cost pools with the following expected activities and estimated total
costs:

Activity Estimated Expected Expected

Cost Pool Cost Activity Activity
Coats Hats Total
Activity 1 P20,000 100 400 500
Activity 2 P37,000 800 200 1,000
Activity 3 P91,200 800 3,000 3,800
14. Refer to Hazel Company. Using ABC, the cost per unit of coats is approximately:
a. P2.40 c. P 6.60
b. P3.90 d. P10.59

15. Refer to Hazel Company. Using ABC, the cost per unit of hats is approximately:
a. P2.40 c. P12.00
b. P3.90 d. P15.90