Student

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5
Student: _______________________________________________________________________________________
1. Barr Company makes steel and titanium handle bars for bicycles. It requires approximately 1 hour of labor to make one handle bar of
either type. During the most recent accounting period, Barr Company made 7,000 steel bars and 3,000 titanium bars. Setup costs
amounted to $42,000. One batch of each type of bar was run each month. If a single company-wide overhead rate based on direct labor
hours is used to allocate overhead costs to the two products, the amount of setup cost assigned to the steel bars will be:
A.
B.
C.
D.
$4,200.
$12,600.
$29,400.
$42,000.
2. In the early days of the industrial revolution, indirect manufacturing costs:

A. were highly correlated with the use of labor.
B. were relatively large compared to the direct costs of producing a product.
C. were a significant cost of producing most products.
D. all of the above answers are correct.
3. Traditionally, the most popular company-wide base for allocating overhead to products was:
A. machine hours.
B. number of units sold.
C. number of units produced.
D. direct labor hours or costs.
4. What is the principal reason that direct labor hours is no longer an effective base for allocating indirect costs in many modern
manufacturing companies?
A.
B.
C.
D.
U.S. labor laws

Workers are not as productive as they were in the past
Automation
Changes in generally accepted accounting principles
5. Which of the following costs is likely to be driven by direct labor usage?

A. Factory utilities
B. Depreciation on factory building
C. Factory insurance
D. Factory rent
6. Which type of cost drivers is most appropriate for most automated processes?
A. Activity-based drivers
B. Volume-based drivers
C. Direct labor-based drivers
D. All of the above answers are correct.
7. Which of the following allocation bases for automation costs would be an improvement over direct labor hours?
A. Machine hours
B. Direct labor costs
C. Number of units sold
D. None of the above answers are correct.
8.
Mayer Company allocates overhead on the basis of direct labor hours. It allocates overhead costs of $6,400 to two different jobs as
follows:
Job 1: (10 hours) = $3,200; Job 2: (10 hours) = $3,200
The production process for Job 1 was then automated. Now Job 1 requires only two hours of direct labor but four hours of mechanical
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processing. As a result, total overhead increases to $8,500. With the change in the production process for Job 1:
A. The amount of overhead assigned to each product will increase.
B. The amount of overhead assigned to Job 2 will increase.
C. The amount of overhead assigned to each product will decrease.
D. The amount of overhead assigned to Job 2 will decrease.
9. Kyoto Company allocates overhead on the basis of direct labor hours. It allocates overhead costs of $4,000 to two different jobs as
follows:
processing. As a result, total overhead increased to $6,000. How much overhead cost will be assigned to Job 2 after automation?
A. $1,000
B. $2,000
C. $3,000
D. $5,000
10. Hammond Company allocates overhead on the basis of direct labor hours. It allocates overhead costs of $4,000 to two different jobs as
follows:
processing. As a result, total overhead increases to $6,000. Select the incorrect statement from the following.
A. While the actual processing of Job 2 was not affected by automation, it received an increase of $3,000 in its overhead allocation.
B. The increased overhead costs associated with automation should be allocated to both jobs.
C. Automation and the costing system used by the company causes the cost of Job 2 to be significantly overstated.
D. The use of machine hours as the allocation base would significantly improve the overhead cost allocations.
11. Select the incorrect statement from the following.
A. Activity costs are considered relevant for decision making because the cost of an activity will be avoided if the activity is eliminated.
B. If overhead costs are allocated on the basis of activities, the amount of overhead allocated to a particular product can be reduced by
increasing the number of activities required by the product, thereby spreading the overhead costs over more units.
C. In highly automated environments where companies produce many different products with varying levels of production, activity-based
cost drivers are superior to volume-based drivers.
D. Activity-based cost drivers produce a better cost allocation than volume-based drivers because they distribute only relevant costs to the
appropriate products.
12. Which of the following is an activity-based cost driver?
A. Machine hours
B. Material quantities
C. Number of machine setups
13. Which of the following is a volume-based cost driver?
A. Material dollars
B. Machine hours
C. Direct labor hours
14. Select the correct statement regarding activity-based costing (ABC).
A.
B.
C.
D.
ABC does not use cost drivers.

ABC uses multiple activity centers and multiple cost drivers.
ABC uses a single activity cost center but multiple cost drivers.
ABC uses multiple activity cost centers but a single cost driver.
15. A modern cost allocation process that employs multiple cost drivers is:
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A. relevant costing.
B. contribution costing.
C. process costing.
D. activity-based costing.
16. Actions or units of work undertaken by an organization to accomplish its mission are referred to as:
A. costs.
B. activities.
C. work in process.
D. none of the above answers are correct.
17. The number of activity cost centers used by a company should:
A. equal the number of activities required to produce the product.
B. be determined on a cost-benefit basis.
C. equal the number of products it has.
D. equal the number of departments it has.
18. Which of the following is not a cost resulting from a unit-level activity?
A.
B.
C.
D.
The cost of the company president's salary expressed on a per unit basis
The cost of inspections performed on each unit of product
The indirect cost of glue used on each product
The per unit cost of packaging goods
19. Which of the following activity costs would not likely be included in a unit-level activity cost pool?
A.
B.
C.
D.
Indirect material
Indirect labor
Material handling costs
Machine-related utilities
20. All of the following are hierarchical categories in which a firm's overhead support costs can be classified except:
A. product-level activities.
B. facility-level activities.
C. batch-level activities.
D. industry-level activities.
21. Compared to a traditional two-stage cost allocation system, activity-based costing systems:
A. use more cost centers.
B. use more cost drivers.
C. are more expensive to maintain.
22. Which of the following activity costs would likely be included in a batch-level activity cost pool?
A. Per unit inspection costs
B. Machine set-up costs
C. Quality control costs
23. A product-level activity center would likely include all of the following costs except:
A. engineering development costs.
B. legal fees to obtain and protect patents.
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C. materials handling costs.

D. materials inventory holding costs.
24. Select the incorrect statement regarding the use of cost drivers in activity-based costing systems.
A. ABC uses both volume-based and activity-based cost drivers.
B. Volume-based drivers are most appropriate for costs that are not affected by the number of units produced.
C. ABC's use of multiple cost drivers will produce more precise unit costs when a company produces many different products that require
different types and levels of overhead costs.
D. An arbitrary cost driver must be selected when allocating facility-level activity costs.
25. Martinez Company makes two types of chairs. One of the chairs is a rocking chair. The other is a straight-back chair. Both chairs are
made by hand. Martinez Company uses a company-wide overhead rate that is based on direct labor hours to assign overhead costs to the
two products. If Martinez automates the production of straight-back chairs and continues to use direct labor hours as a company-wide
allocation basis:
A. rocking chairs will be undercosted.
B. straight back chairs will be overcosted.
C. rocking chairs will be overcosted.
D. there should be no impact on unit cost.
26. Which of the following activity costs should usually be ignored when making a decision regarding whether to eliminate a product?
A.
B.
C.
D.
Product-level costs
Facility-level costs
Unit-level costs
Batch-level costs
27. Brannock Company makes steel and titanium handle bars for bicycles. It requires approximately 1 hour of labor to make one handle bar
of either type. During the most recent accounting period, the company made 8,000 steel bars and 2,000 titanium bars. Setup costs
amounted to $48,000 for the 24 batches (i.e., 12 of each type) of bars produced during the period. If activity-based costing is used to
allocate overhead costs to the two products, the amount of setup cost assigned to the titanium bars will be:
A.
B.
C.
D.
$9,600.
$24,000.
$38,400.
$48,000.
28. Aaron Company makes two products. Product X requires 4,000 hours of labor, and Product Y requires 6,000 hours of labor. Aaron
undertook an automation program that reduced the consumption of labor required by Product Y to only 2,000 hours of labor. Product X
was not affected by the automation process. Overhead cost prior to the automation totaled $10,000. After automation, overhead cost
amounted to $24,000. Assuming Aaron uses direct labor hours as a company-wide allocation base before and after the automation, the
amount of overhead cost allocated to:
A. product X would be $4,000 prior to automation and $16,000 after automation.
B. product X would be $6,000 prior to automation and $8,000 after automation.
C. product Y would be $8,000 prior to automation and $8,000 after automation.
D. product Y would be $2,000 prior to automation and $12,000 after automation.
29. Cooper Company recently implemented an activity-based-costing system. As a result of the ABC allocations, the cost of one of the
company's products was determined to be above its current selling price. Due to competition, the company is unable to raise the price of
this product. Which of the following options is most reasonable, assuming Cooper employs a target costing strategy?
A.
B.
C.
D.
Target advertising to high income customers.

Raise prices under the assumption that the company's competitors will follow suit.
Use less expensive materials to make the product.
Return to the old allocation method which produces a lower amount of estimated cost.
30. Rossi Company produces a variety of garden tools in a highly automated manufacturing facility. The costs and cost drivers associated
with four activity cost pools are given below:
Production of 10,000 units of a hand-held tiller required 500 labor hours, 25 setups, and consumed 40% of the product sustaining
activities. Assuming the company decided to change to labor hours as a companywide allocation base, how much total overhead will be
allocated to this tool?
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A. $10,000
B. $16,650
C. $14,250
D. $8,400
31. Valdez Company produces several lines of storage boxes. The factory is highly automated and uses an activity-based costing system to
allocate overhead costs to its various products. During the upcoming period the company expects to produce 72,000 units. The costs and
cost drivers associated with four activity cost pools are given below:
Production of 40,000 units of its popular over-stuffed box required 6,000 labor hours, 150 setups, and consumed one-third of the product
sustaining activities. What amount of unit-level costs will be allocated to the product?
A. $5,000
B. $10,000
C. $12,000
D. $15,000
32. Scott Tools produces a variety of scissors and other cutting instruments at its Statesboro manufacturing plant. The plant is highly
automated and uses an activity-based costing system to allocate overhead costs to its various product lines. The company expects to
produce 24,000 total units during the current period. The costs and cost drivers associated with four activity cost pools are given below:
Production of 1,000 units of a pipe-cutting tool required 400 labor hours, 12 setups, and consumed 30% of the product sustaining
activities and resulted in an overhead allocation of $15,400. What amount of batch-level overhead costs was expected during the period?
A. $2,400
B. $20,000
C. $13,000
33. CraftMade Company expects to produce 24,000 total units during the current period. The costs and cost drivers associated with four
activity cost pools are given below:
Production of 1,000 units of an auto towing tool required 400 labor hours, 12 setups, and consumed 30% of the product sustaining
activities. How much total overhead cost will be allocated to this product if the company allocates overhead on the basis of a single
overhead allocation rate based on direct labor hours?
A. $9,200
B. $5,000
C. $20,000
D. $50,000
34. When making a long-term cost plus pricing decision, a company should consider:
A. the upstream research and development cost.
B. the allocated portion of facility-level cost.
C. the direct manufacturing cost.
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35. Which of the following is an upstream cost?
A. Sales promotion and advertisement cost
B. Shipping costs to ship completed goods
C. Sales commissions
D. Research and development costs
36. All of the following are downstream costs except:
A. marketing costs.
B. distribution costs.
C. advertising costs.
D. legal costs to file for patents for new manufacturing processes.
37. The Ted Company is considering eliminating the following product line:
What amount of cost is avoidable if Ted outsources production of this product?

A. $5,000
B. $25,000
C. $30,000
D. $45,000
38. Identify the obstacle(s) in implementing a successful activity-based costing system.
A. Gaining the cooperation and support of employees.
B. Obtaining accurate cost driver data.
C. Condensing a large number of activities down into a manageable number of activity cost pools.
39. Franklin Company is planning to introduce an activity-based costing system. Which of the following actions by employees could lower
the success of the new system?
A. Employees may purposely report on their time cards different amounts time than they actually worked.
B. Employees may decrease their productivity to demonstrate their dissatisfaction with the new system.
C. Employees may resist having to maintain additional records (such as the number of setups).
40. Costs incurred to avoid nonconforming products are:
A. appraisal costs.
B. failure costs.
C. prevention costs.
D. voluntary costs.
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41. Concerning the prevention of defects, which of the following statements is true?
A. Zero defects is a cost-effective strategy.
B. When the product falls to the left of the cost minimization point on the total quality cost curve, then incurring failure costs is wise.
C. It is always wiser to spend money on correcting failures than on preventing defects.
D. When the product falls to the left of the cost minimization point on the total quality cost curve, then incurring prevention costs is wise.
42. For most businesses, quality means:
A. the degree to which products or services conform to design specifications.
B. absolutely no defects.
C. producing the very best.
43. All of the following are prevention costs except:
A. inspection costs.
B. training costs.
C. regularly scheduled maintenance.
D. engineering and design costs.
44. Which of the following is an appraisal cost?
A.
B.
C.
D.
Costs to repair defective units

Customer service costs
Engineering and design costs
Depreciation of testing equipment
45. Which of the following is an internal failure cost?

A. Costs to repair defective units
B. Customer service costs
C. Engineering and design costs
D. Depreciation on testing equipment
46. All of the following are internal failure costs except:
A. scrap costs.
B. rework costs.
C. downtime costs.
D. inventory inspection costs.
47. The voluntary costs of quality include:
A. internal failure costs.
B. appraisal costs.
C. external failure costs.
48. The amounts of voluntary costs and failure costs:

A. are equal by definition.
B. tend to move in the same direction (as one increases the other increases).
C. tend to move in opposite directions (as one increases the other decreases).
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49. Managing quality costs to achieve the highest level of customer satisfaction is known as:
A. activity based costing.
B. quality costing.
C. strategic management.
D. total quality management.
50. The minimum amount of total quality costs is achieved when the:
A. marginal voluntary expenditures exceed marginal failure costs.
B. marginal voluntary expenditures equal the marginal involuntary costs.
C. marginal voluntary expenditures equal the marginal savings on failure costs.
D. none of the other answers are correct.
51. The Sandusky Company recorded the following costs of quality during the current period:
Which choice below represents the correct amount of prevention and appraisal costs?
A. Choice A
B. Choice B
C. Choice C
D. Choice D
52. Electricity to run sanding machines in a furniture-making department is an example of a(n):
A. batch-level cost.
B. unit-level cost.
C. product-level cost.
D. facility-level cost.
53. Engineering product design costs are an example of a(n):
B. unit-level cost.
54. The human resources department at a large factory would be considered a:
B. unit-level cost.
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55. Machine set up costs would be considered a:
B. unit-level cost.
56. Which of the following is an appropriate cost driver for electricity used for production equipment in a factory?
A.
B.
C.
D.
Number of setups
Number of inspections
Machine hours
Number of units
57. Which of the following is an appropriate cost driver for setting up production equipment for a production run?
A.
B.
C.
D.
Number of setups
Machine hours
Number of units
58. Which of the following is an appropriate cost driver for issuance of purchase orders?
A.
B.
C.
D.
Number of units
Number of purchase orders
Number of set ups
Number of square feet
59. The first step in developing an ABC system is to:

A. identify essential activities and the cost of performing those activities.
B. identify the cost driver that has the best "cause and effect relationship" to the cost pool.
C. allocate costs to activity cost pools.
D. calculate activity rates.
60. All of the following are examples of volume based drivers except:
A. machine hours.
B. number of units.
C. direct labor hours.
D. number of product design changes.
61. Which of the following would be classified as a batch level activity?
A. Changing machine configuration before starting a production run
B. Inspection of a product, where each unit must be individually inspected
C. Depreciation on a factory building
D. Sales commissions
62. Sales commissions are an example of:
A. batch-level activities.
B. unit-level activities.
C. facility-level activities.
D. product-level activities.
63. Depreciation on the manufacturing facility is an example of a(n):
A. batch- level activity.
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B. unit- level activity.

C. facility- level activity.
D. product-level activity.
64. Which of the following is an appropriate cost driver for maintaining parts inventory?
A. Number of machine operators
B. Number of parts for a product
C. Sales dollars
D. Number of setups
65. Direct labor hours is an appropriate cost driver when:
A. production is automated.
B. overhead costs increase.
C. production operations are labor intensive.
66. Increasing automation in a manufacturing facility will likely:
A. decrease the number of direct labor hours and increase overhead costs.
B. increase the number of direct labor hours and increase overhead costs.
C. decrease the number of direct labor hours and decrease overhead costs.
67. Which of the following statements regarding activity based cost drivers is correct?
A. Activity based cost drivers are measures of activity that are directly associated with production.
B. Activity based cost drivers are not directly related to the volume of production.
C. Activity based cost drivers improve the accuracy of direct cost allocations.
68. Which activity is likely to be involved in the acquisition of raw materials?
A.
B.
C.
D.
Identifying potential suppliers

Getting price quotations
Preparing purchase orders
All of the other answers are correct.
69. Which of the following statement(s) regarding activity-based costing is(are) true?
I. Use of activity based costing improves cost tracing by using more cause-and-effect relationship to assign indirect costs to activity
centers.
II. Activity based costing can cause distortion of cost, assigning too much cost to some products and too little to others.
III. An activity-based system is characterized by multiple cost pools and multiple volume and activity cost drivers.
A. I and III
B. I and II
C. II and III
D. III only
70. Which of the following statements regarding unit-level activities is(are) true?
I. Unit-level activities occur each time a unit is produced.
II. Unit-level costs follow a variable cost behavior pattern.
III. Unit-level activities benefit the production as a whole and are not related to any specific product.
A. I only
B. I and II
C. II and III
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D. II only
71. Which of the following costs would be most fairly allocated using a volume based cost driver?
A.
B.
C.
D.
Indirect labor costs

Property taxes
Set up costs for product batches
Inventory holding costs
72. Haze Company manufactures a wide variety of products. A high proportion of its indirect costs are batch-level costs, such as acquiring
materials, moving materials within the factory, and setting up machines. Haze uses direct labor hours to assign indirect costs to all of its
products. How is this use of a traditional product costing system likely to affect the costs of Haze's high-volume and low-volume
products?
A.
B.
C.
D.
All of its products are undercosted.

Its high-volume products are overcosted.
All of its products are overcosted.
Its low-volume products are overcosted.
73. All of the following are categories of quality costs except:

A. prevention costs.
B. appraisal costs.
C. internal failure costs.
D. product-level costs.
74. Voluntary costs refer to:
A. prevention and internal failure costs.
B. prevention and appraisal costs.
C. appraisal and external failure costs.
D. internal failure costs and external failure costs.
75. In the below graph which shows the relationship among components of quality cost, Line "B"depicts:
A. total quality costs.

B. voluntary cost.
C. voluntary quality failure costs.
D. internal failure quality costs.
76. In the below graph which shows the relationship among components of quality cost, Line "C"depicts:
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B. internal quality cost.
D. failure cost.
77. All of the following are external failure costs except:
A. warranty repairs and replacement.
B. restocking and packaging.
C. customer relations.
D. reliability testing.
78. Which of the following is an example of a prevention cost?
A.
B.
C.
D.
Product design
Inventory inspection
Downtime
Repair and rework
79. Which of the following statements is correct?

A. An activity-based costing system uses fewer cause-and-effect relationships in tracing costs than does a traditional cost allocation system.
B. An activity-based costing system first assigns or traces costs to the departments in which products are made.
C. The hierarchical categories into which activities are grouped are unit-level, batch-level, department-level and facility-level activities.
D. The total amount of unit-level costs changes in proportion to the number of units of product made.
80. Which of the following costs is the result of a facility-level activity?
A. Inventory holding costs
B. The cost of landscaping the grounds for the manufacturing unit
C. Costs associated with trademarks
D. Machine set up costs
Franklin Manufacturing manufactures two models of windows, bay windows and casement windows. Franklin uses an activity based
costing system. The following information about the activities used to product the company's products has been provided.
81. The amount of batch-level cost that should be allocated to the casement windows equals:
A. $30,000.
B. $45,000.
C. $75,000.
D. $7,500.
82. The amount of product-level cost that should be allocated to the bay windows equals:
A. $13,125.
B. $21,875.
C. $30,000.
D. $45,000.
83. If bay windows and casement windows require the same amount of direct labor, using labor hours as the allocation base for facility-level
costs would:
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A. overcost the bay windows.

B. overcost the casement windows.
C. undercost both the bay windows and casement windows.
84. Which of the following best describes the impact of undercosting?
A. This is a goal of all companies. Undercosting all products allows for larger profit margins.
B. Companies will use target pricing to undercost products.
C. Undercosting some products will lead to overcosting other products, which is acceptable because it all balances.
D. Undercosting some products can lead to overcosting other products which may become overpriced and lose market share.
85. An activity center:
A. is an organizational structure associated with minimal record-keeping tasks.
B. combines overhead costs into cost pools.
C. is an organizational structure where companies are organized into related activities and the overhead costs associated with performing
these activities are combined into cost pools.
86. Which of the following statements is true regarding upstream and downstream costs?
A. Both upstream and downstream costs are unnecessary and, should be minimized if not eliminated.
B. Upstream costs occur after and downstream costs occur before goods are manufactured.
C. Research and development is an example of a downstream cost and commissions are an example of an upstream cost.
D. Research and development is an example of an upstream cost and commissions are an example of a downstream cost.
87. The objective of using the following graph is to:
A. minimize total quality costs.

B. maximize profit.
C. minimize quality.
D. maximize total quality costs.
88. Activities that support specific products or product lines are known as:
A. facility-level activities
B. unit-level activities
C. batch-level activities
D. product-level activities
89. All of the following quality costs are directly controllable by management except?
A.
B.
C.
D.
Repair and rework

Product design
Training costs
Reliability testing
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90. Traditional cost systems usually allocate overhead to products on the basis of direct labor.
True False
91. As companies have become more highly automated, overhead costs have become a smaller part of total manufacturing cost.
True False
92. In a highly automated manufacturing company, labor costs do not vary much with volume of production.
True False
93. Many automated processes generate costs that have no cause and effect relationship with volume-based cost drivers.
True False
94. Albright Company produces a variety of products, some in labor-intensive departments and some in heavily automated departments.
Using a company-wide overhead allocation rate based on direct labor will result in overcosting some products and undercosting others.
True False
95. Companies operating in a highly automated environment that produce many different products with varying levels of production should
use volume-based cost drivers to improve the accuracy of their cost allocations.
True False
96. Because volume-based allocation rates assign more cost to high-volume products, low-volume products are often overcosted.
True False
97. The first step in implementing an activity-based costing system is to trace overhead costs to one or more departments.
True False
98. One of the advantages of activity-based costing systems over traditional systems is that ABC systems employ fewer cost pools.
True False
99. Unit-level activity costs follow a fixed cost behavior pattern (i.e., such costs vary on a per unit basis but are constant in total).
True False
100. To reduce its total batch-level costs, a company should produce its products in small batches.
True False
101. Using a single plant-wide overhead rate is likely to cause some distortion in allocation of product-level costs.
True False
102. Inspection of products may sometimes be considered a unit-level activity.
True False
103. Activity-based costing does not use volume-based cost drivers.
True False
104. In an activity-based costing system, a volume-based cost driver is appropriate for unit-level activities.
True False
105. The objective of target pricing is to control cost factors in order to produce products that can be sold at a price that customers are willing
to pay.
True False
106. Many companies do not allocate facility-level activity costs directly to products for decision-making purposes.
True False
107. Boothe Company pays its salespeople a sales commission on each sale they make. This commission is an example of a downstream
cost.
True False
108. Upstream costs are not relevant for deciding whether to discontinue a product line.
True False
109.
Gaining personnel support and obtaining accurate data are two of the more challenging obstacles to the implementation of a successful
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activity based costing system.

True False
110. Downstream costs are not relevant to a product elimination decision.
True False
111. The successful implementation of an activity-based costing system depends on employees' attitudes and cooperation.
True False
112. Implementation of an activity-based costing system requires a company to generate more detailed accounting information than would be
required by a traditional product cost system.
True False
113. The term "quality" refers to the degree to which products or services conform to their design specifications.
True False
114. Forte Company produces its product in three departments, Prepping, Machining, and Finishing. A customer recently returned a defective
product that had not been machined properly. The company's accountant would classify the repair cost as an external failure cost.
True False
115. Voluntary costs refer to internal and external failure costs.
True False
116. The concept of cost of quality is not applicable in service-type businesses such as accounting firms.
True False
117. Total quality control cost is the sum of voluntary and failure costs.
True False
118. The goal of zero defects will generally lead to minimizing quality costs.
True False
119. An increase in appraisal costs could lead to an increase in internal failure costs and a decrease in external failure costs.
True False
120. An increase in prevention costs may result in decreases in appraisal, internal failure, and external failure costs and a decrease in total
quality costs.
True False
121. Most firms have found that it is not cost-effective to achieve a "zero defects" condition among their products and services.
True False
122. An increase in prevention costs will often reduce a firm's overall costs of quality.
True False
123. Explain how the competitive global environment has motivated United States companies to increase their use of technology.
124. List and discuss changes in business practices adopted in recent years by world-class companies.
125. Explain how the use of direct labor hours as a cost driver can distort costs of products in a highly automated manufacturing
environment.
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126. Discuss how automation has affected the selection of cost drivers employed in product costing systems.
127. What is the reasoning behind the use of cost pools in an activity-based costing system?
128. How would a company determine the optimal number of activity centers in an activity-based costing system?
129. What is the likely consequence of using a single overhead rate rather than activity-based costing?
130. What is the purpose of target pricing? What are the steps in target pricing?
131. What is the basic premise behind activity-based costing systems (ABC)? What is an activity? Describe how ABC systems work.
132. Discuss how employee attitudes are likely to affect the implementation of an activity-based costing system.
133. Indicate whether each of the following statements is true or false.
1. True
2. True
3. True
4. False
5. True
In an automated environment, use of a volume-based cost driver may overcost highvolume products.
In an automated environment, an activity-based cost driver would provide for more
accurate allocation of set-up costs than would a volume-based cost driver.
Avoidable costs are irrelevant to decision making.
In an automated manufacturing environment, use of a volume-based cost driver could
lead managers to make poor decisions.
Activity based costing improves the accuracy of cost allocations for companies that
make many different products at varying volume levels.
____
____
____
____
____

1. True
2. False
3. False
4. True
5. True
The allocation of indirect costs using activity-based costing is a three-step process.

The first stage of activity-based costing is to assign costs to pools based on the
activities that cause the costs.
A typical business may engage in thousands of different activities.
Determining the number of activity centers to use in an activity-based costing system
should be based on a cost-benefit analysis.
A traditional cost allocation system first assigns costs to activity centers and then uses
a single volume-based cost driver to assign the costs to products.
____
____
____
____
____
1. False
An activity-based costing system uses fewer cause-and-effect relationships in tracing

costs than does a traditional cost allocation system. ____
Page 17 of 57
2. True
3. True
4. False
5. False
An activity-based costing system first assigns or traces costs to the departments in

which products are made.
The hierarchical categories into which activities are grouped are unit-level, batchlevel, department-level and facility-level activities.
An activity-based costing system traces the costs of performing activities to the
products that cause the activities.
The total amount of unit-level costs changes in proportion to the number of units of
product made.
____
____
____
____
1. True
2. True
3. False
4. False
5. False
Activity-based costing systems are useful for many manufacturing companies but not
for businesses that exist to provide services to their customers.
Costs that are closely related to volume of production may be classified as unit-level
even if they do not change with each individual unit of product.
Activities related to producing groups of products are referred to as product-level
activities.
Batch-level costs are fixed with respect to the number of units produced in a single
batch of a product.
Materials-handling costs are usually classified as unit-level costs.
____
____
____
____
____
1. False
2. True
3. False
4. True
5. False
In an activity-based costing system, the same amount of batch-level costs should be

assigned to all products.
Raw materials inventory holding costs are usually classified as batch-level costs.
Costs associated with obtaining and defending a patent generally would be classified
as product-level costs.
Activities that benefit the production process as a whole are product-level activities.
Manufacturing plant security is classified as a facility-level activity.
____
____
____
____
____
1. True
2. True
3. False
4. False
5. True
Use of an activity-based costing system may identify products that are overcosted or
undercosted by a traditional system.
Use of an activity-based costing system may prove to company managers that it is
incurring losses on some products they believed to be profitable.
The starting point for target pricing is to determine the costs that are incurred in
making the product.
Use of a traditional product costing system may put a company at a competitive
advantage by overcosting some products.
Activity-based costing results could lead managers of a company to decide to
eliminate some products.
____
____
____
____
____

1. True
2. False
3. False
4. True
5. False
If a company-wide overhead rate undercosts some products, it must overcost others.

Facility-level costs usually decrease when a company decides to eliminate one
product.
Many companies do not allocate facility-level costs to products for decision-making
purposes.
Batch-level costs are usually not relevant to the decision to eliminate a product.
Upstream costs are incurred after a product is manufactured.
____
____
____
____
____

1. True
2. False
3. False
4. True
5. False
For a manufacturing company, "quality" means producing the best-possible products.

Companies incur internal failure costs to avoid producing non-conforming products.
Voluntary costs refer to prevention and appraisal costs.
Failure costs include appraisal and external failure costs.
Managers of a company can influence but not directly control the amount of failure
costs incurred.
141.
Select from the list provided the term that best matches each of the following descriptions.
____
____
____
____
____
Page 18 of 57
142. Costs may be classified in a variety of ways. One approach classifies costs into three categories, manufacturing, upstream, and
downstream. These costs are sometimes referred to as an organization's value chain. Costs incurred by the Lunsford Bicycle Company
are described in the following table:
Required: Classify each of the above costs as being an upstream, manufacturing, or downstream cost by inserting a check mark in the
appropriate column.
143.
Devon Mills incurs a variety of costs in producing several grades of carpet for the residential and commercial housing industries. The
different grades and styles are manufactured in batches or production runs. The company uses activity-based costing to assign overhead
costs to its different product lines. Selected costs are provided in the following table:
Required: Complete the table provided. In the Cost Hierarchy column, insert a (U) if the cost described is a unit-level cost, a (B) if a
Page 19 of 57
batch-level cost, a (P) if a product-level cost, or (F) if a facility-level cost. In the Cost Driver column enter a cost driver (for example,
direct labor hours) that you believe might be appropriate for allocating that particular cost to units of products.
144. A number of quality-related costs are provided in the following table:
Required: Classify the above costs by cost of quality category. That is, for each item in the table, place a check mark in the appropriate
column.
145. Select the term from the list provided that best matches each of the following descriptions.
146. OfficeBest Products produces a variety of office products including two models (standard and deluxe) of a hand-held stapler. A number
of the company's activity-related costs are described in the following table:
Required: Classify each of the above costs into unit, batch, product, or facility-level cost pools.
147.
Yamamoto Company produces two types of computer speakers. The Prestige line is made to provide excellent sound for the most
demanding applications. The Standard line is geared toward workplace use and delivers average performance. During its most recent
Page 20 of 57
accounting period, the company incurred $100,000 of inspection costs. Its production activities were classified into four cost centers,
unit-level, batch-level, product-level, and facility-level. The following cost and cost driver information is provided for the unit-level and
batch-level cost centers:
Required
1) Allocate the inspection cost between the two products assuming the inspection cost is driven by a) only unit-level activities; b) only
batch-level activities.
2) How should managers of the company determine which allocation is more appropriate?
148. GVC Electronics produces two kinds of electronic toys, Wizards and Gizmos. During the current period, 4,000 Wizards and 8,000
Gizmos were produced and sold, generating revenues of $500,000 and $2,000,000, respectively. Unit production costs for the two toys
are $100 for Wizards and $140 for Gizmos. In calculating the cost of goods sold, GVC uses activity based costing to allocate its
overhead costs. However, upstream costs of $210,000 are allocated equally to the two products.
Required:
1) Compute the total net profit for each product and for the firm as a whole.
2) Would you advise eliminating either toy? Why or why not?
149. Roadster Tires produces a variety of auto and truck tires at its Dayton manufacturing plant. The plant is highly automated and uses an
activity-based costing system to allocate overhead costs to its various product lines. The costs and cost drivers associated with four
Production of 1,000 units of a small tractor tire required 400 labor hours, 2 setups, and consumed 30% of the product sustaining
activities.
Required:
1) Instead of using ABC, suppose the company had used labor hours as a company-wide allocation base. How much total overhead
would have been allocated to the tractor tire?
2) How much total overhead costs will be allocated to the tire under activity-based costing?
3) The tire is priced on a cost plus basis. What price will be quoted if the product is priced at 25% above cost? Compute the price under
both the direct labor hours approach and under activity-based costing. The direct manufacturing costs consist of direct material of $20
and direct labor of $30.
4) What implications does ABC have on a company that bids on contracts using a cost plus basis?
150.
Flavorland Brands packages single-sized servings of sugar and sugar substitute for fast food restaurants. The activities required to
package sugar are fewer and less complex than for sugar substitute. The direct costs of producing the two products are as follows:
Overhead is currently assigned to the two products on the basis of machine hours. The following information is provided regarding
overhead costs:
Required
1) Compute the predetermined overhead rate under the current method of overhead cost allocation. How much total overhead cost will be
assigned to each product under the current system?
2) Compute the three activity rates that would be used in an activity-based system. How much total overhead cost will be assigned to
each product under an ABC system?
Page 21 of 57
3) Assuming an ABC system to be more precise, by how much does the company's current costing system over- or undercost the
products? Be specific.
151. Parvez Company manufactures two products. Making Product A requires 4,000 hours of labor and Product B requires 6,000 hours of
labor. Parvez undertakes an automation program that reduces the consumption of labor required by Product B to only 3,000 hours of
labor. Product A is not affected by the automation process. Overhead cost prior to the automation totaled $15,000. After automation,
overhead cost amounted to $28,000. Parvez uses direct labor hours as a company-wide allocation base before and after the automation.
Required
1) Compute the amount of overhead costs allocated to both products before automation.
2) Compute the amount of overhead costs allocated to both products after automation.
3) Is direct labors hours a good choice for allocation after the automation? Why or why not?
152. Vulcan Company manufactures two products. Currently, the company uses a traditional costing system assigning overhead on the basis
of direct labor hours. The Industrial product is more complex to produce requiring two hours of direct labor time per unit compared to
one hour of direct labor time for the Consumer product. Given the company's total overhead costs of $360,000 and production of 1,000
Industrials and 8,000 Consumers, this results in an overhead allocation rate of $36 per direct labor hour. The following unit data are
provided:
Because the Industrial product is twice as profitable as the Consumer model, the sales manager wants to reduce or eliminate production
of the Consumer product and devote as much capacity as possible to the Industrial product.
You are worried that the current cost accounting system may be providing inaccurate results and would like to implement an ABC
system. Assume that the company's overhead costs were traced to four major activities. The amount of overhead costs traceable to each
activity for the current year is provided below:
Required:
1) In the following table, compute the four activity rates that will be used to assign overhead to the products under activity-based costing:
2) In the following table, compute the amount of overhead cost which should be assigned to Industrials and Consumers under activitybased costing. Also compute the overhead cost per unit for each product.
3) Compute the total cost to manufacture one unit of each product if activity-based costing is used.
4) Respond to the sales manager's recommendation that capacity be diverted from Consumers to Industrials.
Page 22 of 57
153. Harper Company has asked its management accountant to prepare a cost of quality report. Management is concerned that quality costs
are too high relative to the company's sales. Sales in 2009 totaled $800,000, while sales in 2010 were $1,000,000.
Required:
1) Prepare a Quality Cost Report for Harper Company showing its quality costs as a percentage of sales. Organize the costs by type
(prevention, appraisal, internal failure, and external failure) and include percentages for each individual cost as well as for the total of
each category. A schedule has been started below:
2) Evaluate Harper Company's strategy for reducing its total costs of quality.
Page 23 of 57
5 KEY
1. Barr Company makes steel and titanium handle bars for bicycles. It requires approximately 1 hour of labor to make one handle bar of
either type. During the most recent accounting period, Barr Company made 7,000 steel bars and 3,000 titanium bars. Setup costs
amounted to $42,000. One batch of each type of bar was run each month. If a single company-wide overhead rate based on direct labor
hours is used to allocate overhead costs to the two products, the amount of setup cost assigned to the steel bars will be:
A.
B.
C.
D.
$4,200.
$12,600.
$29,400.
$42,000.
AACSB: Analytic
AICPA FN: Measurement
Blooms: Application
Difficulty: Medium
Edmonds - Chapter 05 #1
Learning Objective: 05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.
2. In the early days of the industrial revolution, indirect manufacturing costs:

A. were highly correlated with the use of labor.
B. were relatively large compared to the direct costs of producing a product.
C. were a significant cost of producing most products.
AACSB: Reflective Thinking
AICPA BB: Industry
Blooms: Knowledge
Difficulty: Easy
3. Traditionally, the most popular company-wide base for allocating overhead to products was:
A. machine hours.
B. number of units sold.
C. number of units produced.
D. direct labor hours or costs.
AICPA BB: Industry
Blooms: Knowledge
Difficulty: Easy
4. What is the principal reason that direct labor hours is no longer an effective base for allocating indirect costs in many modern
manufacturing companies?
A.
B.
C.
D.
U.S. labor laws

Workers are not as productive as they were in the past
Automation
Changes in generally accepted accounting principles
AICPA BB: Critical Thinking
AICPA BB: Industry
Blooms: Comprehension
Difficulty: Medium
5. Which of the following costs is likely to be driven by direct labor usage?

A. Factory utilities
B. Depreciation on factory building
C. Factory insurance
D. Factory rent
AACSB: Analytic
Difficulty: Medium
6. Which type of cost drivers is most appropriate for most automated processes?
A. Activity-based drivers
B. Volume-based drivers
C. Direct labor-based drivers
Page 24 of 57

AACSB: Analytic
Difficulty: Medium
7. Which of the following allocation bases for automation costs would be an improvement over direct labor hours?
A. Machine hours
B. Direct labor costs
C. Number of units sold
AACSB: Analytic
Difficulty: Medium
8. Mayer Company allocates overhead on the basis of direct labor hours. It allocates overhead costs of $6,400 to two different jobs as
follows:
processing. As a result, total overhead increases to $8,500. With the change in the production process for Job 1:
A. The amount of overhead assigned to each product will increase.
B. The amount of overhead assigned to Job 2 will increase.
C. The amount of overhead assigned to each product will decrease.
D. The amount of overhead assigned to Job 2 will decrease.
AACSB: Analytic
Blooms: Analysis
Difficulty: Hard
9. Kyoto Company allocates overhead on the basis of direct labor hours. It allocates overhead costs of $4,000 to two different jobs as
follows:
processing. As a result, total overhead increased to $6,000. How much overhead cost will be assigned to Job 2 after automation?
A. $1,000
B. $2,000
C. $3,000
D. $5,000
AACSB: Analytic
Blooms: Analysis
Difficulty: Hard
10. Hammond Company allocates overhead on the basis of direct labor hours. It allocates overhead costs of $4,000 to two different jobs as
follows:
processing. As a result, total overhead increases to $6,000. Select the incorrect statement from the following.
A. While the actual processing of Job 2 was not affected by automation, it received an increase of $3,000 in its overhead allocation.
B. The increased overhead costs associated with automation should be allocated to both jobs.
C. Automation and the costing system used by the company causes the cost of Job 2 to be significantly overstated.
D. The use of machine hours as the allocation base would significantly improve the overhead cost allocations.
AACSB: Analytic
Blooms: Analysis
Difficulty: Hard
Page 25 of 57
11. Select the incorrect statement from the following.

A. Activity costs are considered relevant for decision making because the cost of an activity will be avoided if the activity is eliminated.
B. If overhead costs are allocated on the basis of activities, the amount of overhead allocated to a particular product can be reduced by
increasing the number of activities required by the product, thereby spreading the overhead costs over more units.
C. In highly automated environments where companies produce many different products with varying levels of production, activity-based
cost drivers are superior to volume-based drivers.
D. Activity-based cost drivers produce a better cost allocation than volume-based drivers because they distribute only relevant costs to the
appropriate products.
AACSB: Analytic
Difficulty: Medium
Learning Objective: 05-03 Use activity-based costing to calculate costs of products and services.
12. Which of the following is an activity-based cost driver?

A. Machine hours
B. Material quantities
C. Number of machine setups
AACSB: Analytic
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 05-02 Identify cost centers and cost drivers in an activity-based costing system.
13. Which of the following is a volume-based cost driver?

A. Material dollars
B. Machine hours
C. Direct labor hours
AACSB: Analytic
Blooms: Knowledge
Difficulty: Easy
14. Select the correct statement regarding activity-based costing (ABC).

A.
B.
C.
D.
ABC does not use cost drivers.

ABC uses multiple activity centers and multiple cost drivers.
ABC uses a single activity cost center but multiple cost drivers.
ABC uses multiple activity cost centers but a single cost driver.
Difficulty: Medium
15. A modern cost allocation process that employs multiple cost drivers is:
A. relevant costing.
B. contribution costing.
C. process costing.
D. activity-based costing.
Blooms: Knowledge
Difficulty: Easy
16. Actions or units of work undertaken by an organization to accomplish its mission are referred to as:
A. costs.
B. activities.
C. work in process.
Page 26 of 57

Blooms: Knowledge
Difficulty: Easy
17. The number of activity cost centers used by a company should:

A. equal the number of activities required to produce the product.
B. be determined on a cost-benefit basis.
C. equal the number of products it has.
D. equal the number of departments it has.
AACSB: Analytic
Difficulty: Medium
18. Which of the following is not a cost resulting from a unit-level activity?
A.
B.
C.
D.
The cost of the company president's salary expressed on a per unit basis
The cost of inspections performed on each unit of product
The indirect cost of glue used on each product
The per unit cost of packaging goods
AACSB: Analytic
Difficulty: Easy
19. Which of the following activity costs would not likely be included in a unit-level activity cost pool?
A.
B.
C.
D.
Indirect material
Indirect labor
Material handling costs
Machine-related utilities
AACSB: Analytic
Difficulty: Medium
20. All of the following are hierarchical categories in which a firm's overhead support costs can be classified except:
A. product-level activities.
B. facility-level activities.
C. batch-level activities.
D. industry-level activities.
AACSB: Analytic
Blooms: Knowledge
Difficulty: Easy
21. Compared to a traditional two-stage cost allocation system, activity-based costing systems:
A. use more cost centers.
B. use more cost drivers.
C. are more expensive to maintain.
AACSB: Analytic
Difficulty: Easy
22. Which of the following activity costs would likely be included in a batch-level activity cost pool?
A. Per unit inspection costs
B. Machine set-up costs
C. Quality control costs
Page 27 of 57

AACSB: Analytic
Blooms: Application
Difficulty: Medium
23. A product-level activity center would likely include all of the following costs except:
A. engineering development costs.
B. legal fees to obtain and protect patents.
C. materials handling costs.
D. materials inventory holding costs.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
24. Select the incorrect statement regarding the use of cost drivers in activity-based costing systems.
A. ABC uses both volume-based and activity-based cost drivers.
B. Volume-based drivers are most appropriate for costs that are not affected by the number of units produced.
C. ABC's use of multiple cost drivers will produce more precise unit costs when a company produces many different products that require
different types and levels of overhead costs.
D. An arbitrary cost driver must be selected when allocating facility-level activity costs.
AACSB: Analytic
Blooms: Application
Difficulty: Hard
25. Martinez Company makes two types of chairs. One of the chairs is a rocking chair. The other is a straight-back chair. Both chairs are
made by hand. Martinez Company uses a company-wide overhead rate that is based on direct labor hours to assign overhead costs to the
two products. If Martinez automates the production of straight-back chairs and continues to use direct labor hours as a company-wide
allocation basis:
A. rocking chairs will be undercosted.
B. straight back chairs will be overcosted.
C. rocking chairs will be overcosted.
D. there should be no impact on unit cost.
AACSB: Analytic
Blooms: Analysis
Difficulty: Medium
26. Which of the following activity costs should usually be ignored when making a decision regarding whether to eliminate a product?
A.
B.
C.
D.
Product-level costs
Facility-level costs
Unit-level costs
Batch-level costs
AACSB: Analytic
Difficulty: Easy
27. Brannock Company makes steel and titanium handle bars for bicycles. It requires approximately 1 hour of labor to make one handle bar
of either type. During the most recent accounting period, the company made 8,000 steel bars and 2,000 titanium bars. Setup costs
amounted to $48,000 for the 24 batches (i.e., 12 of each type) of bars produced during the period. If activity-based costing is used to
allocate overhead costs to the two products, the amount of setup cost assigned to the titanium bars will be:
A.
B.
C.
D.
$9,600.
$24,000.
$38,400.
$48,000.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
28. Aaron Company makes two products. Product X requires 4,000 hours of labor, and Product Y requires 6,000 hours of labor. Aaron
undertook an automation program that reduced the consumption of labor required by Product Y to only 2,000 hours of labor. Product X
Page 28 of 57
was not affected by the automation process. Overhead cost prior to the automation totaled $10,000. After automation, overhead cost
amounted to $24,000. Assuming Aaron uses direct labor hours as a company-wide allocation base before and after the automation, the
amount of overhead cost allocated to:
A. product X would be $4,000 prior to automation and $16,000 after automation.
B. product X would be $6,000 prior to automation and $8,000 after automation.
C. product Y would be $8,000 prior to automation and $8,000 after automation.
D. product Y would be $2,000 prior to automation and $12,000 after automation.
AACSB: Analytic
Blooms: Application
Difficulty: Hard
29. Cooper Company recently implemented an activity-based-costing system. As a result of the ABC allocations, the cost of one of the
company's products was determined to be above its current selling price. Due to competition, the company is unable to raise the price of
this product. Which of the following options is most reasonable, assuming Cooper employs a target costing strategy?
A.
B.
C.
D.
Target advertising to high income customers.

Raise prices under the assumption that the company's competitors will follow suit.
Use less expensive materials to make the product.
Return to the old allocation method which produces a lower amount of estimated cost.
AACSB: Analytic
AICPA BB: Marketing
Blooms: Analysis
Difficulty: Medium
30. Rossi Company produces a variety of garden tools in a highly automated manufacturing facility. The costs and cost drivers associated
with four activity cost pools are given below:
Production of 10,000 units of a hand-held tiller required 500 labor hours, 25 setups, and consumed 40% of the product sustaining
activities. Assuming the company decided to change to labor hours as a companywide allocation base, how much total overhead will be
allocated to this tool?
A. $10,000
B. $16,650
C. $14,250
D. $8,400
AACSB: Analytic
Blooms: Application
Difficulty: Medium
31. Valdez Company produces several lines of storage boxes. The factory is highly automated and uses an activity-based costing system to
allocate overhead costs to its various products. During the upcoming period the company expects to produce 72,000 units. The costs and
cost drivers associated with four activity cost pools are given below:
Production of 40,000 units of its popular over-stuffed box required 6,000 labor hours, 150 setups, and consumed one-third of the product
sustaining activities. What amount of unit-level costs will be allocated to the product?
A. $5,000
B. $10,000
C. $12,000
D. $15,000
AACSB: Analytic
Page 29 of 57
Blooms: Application
Difficulty: Medium
32. Scott Tools produces a variety of scissors and other cutting instruments at its Statesboro manufacturing plant. The plant is highly
automated and uses an activity-based costing system to allocate overhead costs to its various product lines. The company expects to
produce 24,000 total units during the current period. The costs and cost drivers associated with four activity cost pools are given below:
Production of 1,000 units of a pipe-cutting tool required 400 labor hours, 12 setups, and consumed 30% of the product sustaining
activities and resulted in an overhead allocation of $15,400. What amount of batch-level overhead costs was expected during the period?
A. $2,400
B. $20,000
C. $13,000
AACSB: Analytic
Blooms: Application
Difficulty: Hard
33. CraftMade Company expects to produce 24,000 total units during the current period. The costs and cost drivers associated with four
Production of 1,000 units of an auto towing tool required 400 labor hours, 12 setups, and consumed 30% of the product sustaining
activities. How much total overhead cost will be allocated to this product if the company allocates overhead on the basis of a single
overhead allocation rate based on direct labor hours?
A. $9,200
B. $5,000
C. $20,000
D. $50,000
AACSB: Analytic
Blooms: Application
Difficulty: Hard
34. When making a long-term cost plus pricing decision, a company should consider:
A. the upstream research and development cost.
B. the allocated portion of facility-level cost.
C. the direct manufacturing cost.
AACSB: Analytic
Blooms: Application
Difficulty: Easy
35. Which of the following is an upstream cost?

A. Sales promotion and advertisement cost
B. Shipping costs to ship completed goods
C. Sales commissions
D. Research and development costs
Page 30 of 57
AACSB: Analytic
Blooms: Knowledge
Difficulty: Easy
36. All of the following are downstream costs except:

A. marketing costs.
B. distribution costs.
C. advertising costs.
D. legal costs to file for patents for new manufacturing processes.
AACSB: Analytic
Blooms: Knowledge
Difficulty: Easy
37. The Ted Company is considering eliminating the following product line:
What amount of cost is avoidable if Ted outsources production of this product?

A. $5,000
B. $25,000
C. $30,000
D. $45,000
AACSB: Analytic
AICPA FN: Decision Making
Blooms: Analysis
Difficulty: Medium
38. Identify the obstacle(s) in implementing a successful activity-based costing system.

A. Gaining the cooperation and support of employees.
B. Obtaining accurate cost driver data.
C. Condensing a large number of activities down into a manageable number of activity cost pools.
AACSB: Analytic
Difficulty: Easy
39. Franklin Company is planning to introduce an activity-based costing system. Which of the following actions by employees could lower
the success of the new system?
A. Employees may purposely report on their time cards different amounts time than they actually worked.
B. Employees may decrease their productivity to demonstrate their dissatisfaction with the new system.
C. Employees may resist having to maintain additional records (such as the number of setups).
AACSB: Ethics
Blooms: Analysis
Difficulty: Medium
40. Costs incurred to avoid nonconforming products are:

A. appraisal costs.
Page 31 of 57
B. failure costs.
C. prevention costs.
D. voluntary costs.
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 05-04 Identify the components of quality costs.
41. Concerning the prevention of defects, which of the following statements is true?
A. Zero defects is a cost-effective strategy.
B. When the product falls to the left of the cost minimization point on the total quality cost curve, then incurring failure costs is wise.
C. It is always wiser to spend money on correcting failures than on preventing defects.
D. When the product falls to the left of the cost minimization point on the total quality cost curve, then incurring prevention costs is wise.
AACSB: Analytic
Difficulty: Medium
42. For most businesses, quality means:

A. the degree to which products or services conform to design specifications.
B. absolutely no defects.
C. producing the very best.
Difficulty: Medium
43. All of the following are prevention costs except:

A. inspection costs.
B. training costs.
C. regularly scheduled maintenance.
D. engineering and design costs.
Difficulty: Medium
44. Which of the following is an appraisal cost?

A.
B.
C.
D.
Costs to repair defective units

Customer service costs
Engineering and design costs
Depreciation of testing equipment
Difficulty: Medium
45. Which of the following is an internal failure cost?

A. Costs to repair defective units
B. Customer service costs
C. Engineering and design costs
D. Depreciation on testing equipment
Difficulty: Medium
Page 32 of 57
46. All of the following are internal failure costs except:

A. scrap costs.
B. rework costs.
C. downtime costs.
D. inventory inspection costs.
Difficulty: Medium
47. The voluntary costs of quality include:

A. internal failure costs.
B. appraisal costs.
C. external failure costs.
Difficulty: Easy
48. The amounts of voluntary costs and failure costs:

A. are equal by definition.
B. tend to move in the same direction (as one increases the other increases).
C. tend to move in opposite directions (as one increases the other decreases).
AACSB: Analytic
Difficulty: Medium
49. Managing quality costs to achieve the highest level of customer satisfaction is known as:
A. activity based costing.
B. quality costing.
C. strategic management.
D. total quality management.
Blooms: Knowledge
Difficulty: Easy
50. The minimum amount of total quality costs is achieved when the:
A. marginal voluntary expenditures exceed marginal failure costs.
B. marginal voluntary expenditures equal the marginal involuntary costs.
C. marginal voluntary expenditures equal the marginal savings on failure costs.
D. none of the other answers are correct.
AACSB: Analytic
Difficulty: Hard
51.
The Sandusky Company recorded the following costs of quality during the current period:
Page 33 of 57
Which choice below represents the correct amount of prevention and appraisal costs?
A. Choice A
B. Choice B
C. Choice C
D. Choice D
AACSB: Analytic
Blooms: Application
Difficulty: Medium
52. Electricity to run sanding machines in a furniture-making department is an example of a(n):

B. unit-level cost.
AACSB: Analytic
Difficulty: Medium
53. Engineering product design costs are an example of a(n):

B. unit-level cost.
AACSB: Analytic
Difficulty: Medium
54. The human resources department at a large factory would be considered a:

B. unit-level cost.
AACSB: Analytic
Difficulty: Medium
55. Machine set up costs would be considered a:
Page 34 of 57
B. unit-level cost.
AACSB: Analytic
Difficulty: Medium
56. Which of the following is an appropriate cost driver for electricity used for production equipment in a factory?
A.
B.
C.
D.
Number of setups
Machine hours
Number of units
AACSB: Analytic
Difficulty: Easy
57. Which of the following is an appropriate cost driver for setting up production equipment for a production run?
A.
B.
C.
D.
Number of setups
Machine hours
Number of units
AACSB: Analytic
Difficulty: Easy
58. Which of the following is an appropriate cost driver for issuance of purchase orders?
A.
B.
C.
D.
Number of units
Number of purchase orders
Number of set ups
Number of square feet
AACSB: Analytic
Difficulty: Easy
59. The first step in developing an ABC system is to:

A. identify essential activities and the cost of performing those activities.
B. identify the cost driver that has the best "cause and effect relationship" to the cost pool.
C. allocate costs to activity cost pools.
D. calculate activity rates.
Difficulty: Easy
60. All of the following are examples of volume based drivers except:
A. machine hours.
B. number of units.
C. direct labor hours.
D. number of product design changes.
AACSB: Analytic
Blooms: Knowledge
Difficulty: Easy
61. Which of the following would be classified as a batch level activity?

A. Changing machine configuration before starting a production run
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B. Inspection of a product, where each unit must be individually inspected

C. Depreciation on a factory building
D. Sales commissions
AACSB: Analytic
Difficulty: Medium
62. Sales commissions are an example of:

A. batch-level activities.
B. unit-level activities.
C. facility-level activities.
D. product-level activities.
AACSB: Analytic
Difficulty: Medium
63. Depreciation on the manufacturing facility is an example of a(n):

A. batch- level activity.
B. unit- level activity.
C. facility- level activity.
D. product-level activity.
AACSB: Analytic
Difficulty: Medium
64. Which of the following is an appropriate cost driver for maintaining parts inventory?
A. Number of machine operators
B. Number of parts for a product
C. Sales dollars
D. Number of setups
AACSB: Analytic
Difficulty: Medium
65. Direct labor hours is an appropriate cost driver when:

A. production is automated.
B. overhead costs increase.
C. production operations are labor intensive.
AACSB: Analytic
AACSB: Communications
AICPA BB: Global
Difficulty: Easy
66. Increasing automation in a manufacturing facility will likely:

A. decrease the number of direct labor hours and increase overhead costs.
B. increase the number of direct labor hours and increase overhead costs.
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C. decrease the number of direct labor hours and decrease overhead costs.
AACSB: Analytic
AICPA BB: Global
Difficulty: Medium
67. Which of the following statements regarding activity based cost drivers is correct?
A. Activity based cost drivers are measures of activity that are directly associated with production.
B. Activity based cost drivers are not directly related to the volume of production.
C. Activity based cost drivers improve the accuracy of direct cost allocations.
AACSB: Analytic
Blooms: Knowledge
Difficulty: Medium
68. Which activity is likely to be involved in the acquisition of raw materials?

A.
B.
C.
D.
Identifying potential suppliers

Getting price quotations
Preparing purchase orders
All of the other answers are correct.
AACSB: Analytic
Blooms: Knowledge
Difficulty: Medium
69. Which of the following statement(s) regarding activity-based costing is(are) true?
I. Use of activity based costing improves cost tracing by using more cause-and-effect relationship to assign indirect costs to activity
centers.
II. Activity based costing can cause distortion of cost, assigning too much cost to some products and too little to others.
III. An activity-based system is characterized by multiple cost pools and multiple volume and activity cost drivers.
A. I and III
B. I and II
C. II and III
D. III only
AACSB: Analytic
Blooms: Knowledge
Difficulty: Medium
70. Which of the following statements regarding unit-level activities is(are) true?
I. Unit-level activities occur each time a unit is produced.
II. Unit-level costs follow a variable cost behavior pattern.
III. Unit-level activities benefit the production as a whole and are not related to any specific product.
A. I only
B. I and II
C. II and III
D. II only
AACSB: Analytic
Blooms: Knowledge
Difficulty: Medium
71. Which of the following costs would be most fairly allocated using a volume based cost driver?
A.
B.
C.
D.
Indirect labor costs

Property taxes
Set up costs for product batches
Inventory holding costs
AACSB: Analytic
Page 37 of 57
Difficulty: Medium
72. Haze Company manufactures a wide variety of products. A high proportion of its indirect costs are batch-level costs, such as acquiring
materials, moving materials within the factory, and setting up machines. Haze uses direct labor hours to assign indirect costs to all of its
products. How is this use of a traditional product costing system likely to affect the costs of Haze's high-volume and low-volume
products?
A.
B.
C.
D.
All of its products are undercosted.

Its high-volume products are overcosted.
All of its products are overcosted.
Its low-volume products are overcosted.
AACSB: Analytic
Difficulty: Medium
73. All of the following are categories of quality costs except:

B. appraisal costs.
C. internal failure costs.
D. product-level costs.
AACSB: Analytic
Difficulty: Easy
74. Voluntary costs refer to:

A. prevention and internal failure costs.
B. prevention and appraisal costs.
C. appraisal and external failure costs.
D. internal failure costs and external failure costs.
AACSB: Analytic
Difficulty: Easy
75. In the below graph which shows the relationship among components of quality cost, Line "B"depicts:
A. total quality costs.

B. voluntary cost.
D. internal failure quality costs.
AACSB: Analytic
Difficulty: Easy
76.
In the below graph which shows the relationship among components of quality cost, Line "C"depicts:
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B. internal quality cost.
D. failure cost.
AACSB: Analytic
Difficulty: Easy
77. All of the following are external failure costs except:

A. warranty repairs and replacement.
B. restocking and packaging.
C. customer relations.
D. reliability testing.
Difficulty: Medium
78. Which of the following is an example of a prevention cost?

A.
B.
C.
D.
Product design
Inventory inspection
Downtime
Repair and rework
Difficulty: Medium
79. Which of the following statements is correct?

A. An activity-based costing system uses fewer cause-and-effect relationships in tracing costs than does a traditional cost allocation system.
B. An activity-based costing system first assigns or traces costs to the departments in which products are made.
C. The hierarchical categories into which activities are grouped are unit-level, batch-level, department-level and facility-level activities.
D. The total amount of unit-level costs changes in proportion to the number of units of product made.
AACSB: Analytic
Difficulty: Medium
80. Which of the following costs is the result of a facility-level activity?

A. Inventory holding costs
B. The cost of landscaping the grounds for the manufacturing unit
C. Costs associated with trademarks
D. Machine set up costs
Blooms: Knowledge
Difficulty: Easy
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Franklin Manufacturing manufactures two models of windows, bay windows and casement windows. Franklin uses an activity based
costing system. The following information about the activities used to product the company's products has been provided.
Edmonds - Chapter 05
81. The amount of batch-level cost that should be allocated to the casement windows equals:
A. $30,000.
B. $45,000.
C. $75,000.
D. $7,500.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
82. The amount of product-level cost that should be allocated to the bay windows equals:
A. $13,125.
B. $21,875.
C. $30,000.
D. $45,000.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
83. If bay windows and casement windows require the same amount of direct labor, using labor hours as the allocation base for facility-level
costs would:
A. overcost the bay windows.
B. overcost the casement windows.
C. undercost both the bay windows and casement windows.
AACSB: Analytic
Blooms: Analysis
Difficulty: Medium
84. Which of the following best describes the impact of undercosting?

A. This is a goal of all companies. Undercosting all products allows for larger profit margins.
B. Companies will use target pricing to undercost products.
C. Undercosting some products will lead to overcosting other products, which is acceptable because it all balances.
D. Undercosting some products can lead to overcosting other products which may become overpriced and lose market share.
AACSB: Analytic
Blooms: Analysis
Difficulty: Medium
85. An activity center:

A. is an organizational structure associated with minimal record-keeping tasks.
B. combines overhead costs into cost pools.
C. is an organizational structure where companies are organized into related activities and the overhead costs associated with performing
these activities are combined into cost pools.
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Difficulty: Easy
86. Which of the following statements is true regarding upstream and downstream costs?
A. Both upstream and downstream costs are unnecessary and, should be minimized if not eliminated.
B. Upstream costs occur after and downstream costs occur before goods are manufactured.
C. Research and development is an example of a downstream cost and commissions are an example of an upstream cost.
D. Research and development is an example of an upstream cost and commissions are an example of a downstream cost.
Difficulty: Easy
87. The objective of using the following graph is to:
A. minimize total quality costs.

B. maximize profit.
C. minimize quality.
D. maximize total quality costs.
AACSB: Analytic
Difficulty: Easy
88. Activities that support specific products or product lines are known as:
A. facility-level activities
B. unit-level activities
C. batch-level activities
D. product-level activities
AACSB: Analytic
Blooms: Knowledge
Difficulty: Easy
89. All of the following quality costs are directly controllable by management except?
A.
B.
C.
D.
Repair and rework

Product design
Training costs
Reliability testing
Difficulty: Medium
90. Traditional cost systems usually allocate overhead to products on the basis of direct labor.
TRUE
Blooms: Knowledge
Difficulty: Easy
Page 41 of 57

91. As companies have become more highly automated, overhead costs have become a smaller part of total manufacturing cost.
FALSE
AACSB: Analytic
Blooms: Knowledge
Difficulty: Easy
92. In a highly automated manufacturing company, labor costs do not vary much with volume of production.
TRUE
AACSB: Analytic
Difficulty: Medium
93. Many automated processes generate costs that have no cause and effect relationship with volume-based cost drivers.
TRUE
AACSB: Analytic
Difficulty: Medium
94. Albright Company produces a variety of products, some in labor-intensive departments and some in heavily automated departments.
Using a company-wide overhead allocation rate based on direct labor will result in overcosting some products and undercosting others.
TRUE
AACSB: Analytic
Difficulty: Easy
95. Companies operating in a highly automated environment that produce many different products with varying levels of production should
use volume-based cost drivers to improve the accuracy of their cost allocations.
FALSE
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
96. Because volume-based allocation rates assign more cost to high-volume products, low-volume products are often overcosted.
FALSE
AACSB: Analytic
Difficulty: Easy
97. The first step in implementing an activity-based costing system is to trace overhead costs to one or more departments.
FALSE
AACSB: Analytic
Blooms: Knowledge
Difficulty: Easy
98. One of the advantages of activity-based costing systems over traditional systems is that ABC systems employ fewer cost pools.
FALSE
AACSB: Analytic
Difficulty: Medium
99. Unit-level activity costs follow a fixed cost behavior pattern (i.e., such costs vary on a per unit basis but are constant in total).
FALSE
AACSB: Analytic
Difficulty: Medium
100. To reduce its total batch-level costs, a company should produce its products in small batches.
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FALSE
AACSB: Analytic
Difficulty: Medium
101. Using a single plant-wide overhead rate is likely to cause some distortion in allocation of product-level costs.
TRUE
AACSB: Analytic
Difficulty: Easy
102. Inspection of products may sometimes be considered a unit-level activity.

TRUE
AACSB: Analytic
Difficulty: Easy
103. Activity-based costing does not use volume-based cost drivers.

FALSE
AACSB: Analytic
Difficulty: Medium
104. In an activity-based costing system, a volume-based cost driver is appropriate for unit-level activities.
TRUE
AACSB: Analytic
Difficulty: Medium
105. The objective of target pricing is to control cost factors in order to produce products that can be sold at a price that customers are willing
to pay.
TRUE
AACSB: Analytic
AICPA BB: Marketing
Difficulty: Easy
106. Many companies do not allocate facility-level activity costs directly to products for decision-making purposes.
TRUE
AACSB: Analytic
Difficulty: Medium
107. Boothe Company pays its salespeople a sales commission on each sale they make. This commission is an example of a downstream
cost.
TRUE
Difficulty: Medium
108. Upstream costs are not relevant for deciding whether to discontinue a product line.
FALSE
AACSB: Analytic
Difficulty: Medium
109. Gaining personnel support and obtaining accurate data are two of the more challenging obstacles to the implementation of a successful
activity based costing system.
TRUE
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AACSB: Ethics
Difficulty: Easy
110. Downstream costs are not relevant to a product elimination decision.

FALSE
AACSB: Analytic
Difficulty: Medium
111. The successful implementation of an activity-based costing system depends on employees' attitudes and cooperation.
TRUE
AACSB: Ethics
Difficulty: Easy
112. Implementation of an activity-based costing system requires a company to generate more detailed accounting information than would be
required by a traditional product cost system.
TRUE
Difficulty: Easy
113. The term "quality" refers to the degree to which products or services conform to their design specifications.
TRUE
Blooms: Knowledge
Difficulty: Easy
114. Forte Company produces its product in three departments, Prepping, Machining, and Finishing. A customer recently returned a defective
product that had not been machined properly. The company's accountant would classify the repair cost as an external failure cost.
TRUE
AACSB: Analytic
Blooms: Application
Difficulty: Medium
115. Voluntary costs refer to internal and external failure costs.

FALSE
Blooms: Knowledge
Difficulty: Medium
116. The concept of cost of quality is not applicable in service-type businesses such as accounting firms.
FALSE
Difficulty: Easy
117. Total quality control cost is the sum of voluntary and failure costs.
TRUE
AACSB: Analytic
Difficulty: Medium
118. The goal of zero defects will generally lead to minimizing quality costs.
FALSE
AACSB: Analytic
Difficulty: Easy
119. An increase in appraisal costs could lead to an increase in internal failure costs and a decrease in external failure costs.
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TRUE
AACSB: Analytic
Blooms: Analysis
Difficulty: Medium
Learning Objective: 05-05 Prepare and interpret quality cost reports.
120. An increase in prevention costs may result in decreases in appraisal, internal failure, and external failure costs and a decrease in total
quality costs.
TRUE
AACSB: Analytic
Blooms: Analysis
Difficulty: Easy
121. Most firms have found that it is not cost-effective to achieve a "zero defects" condition among their products and services.
TRUE
Blooms: Knowledge
Difficulty: Medium
122. An increase in prevention costs will often reduce a firm's overall costs of quality.
TRUE
AACSB: Analytic
Blooms: Analysis
Difficulty: Medium
123. Explain how the competitive global environment has motivated United States companies to increase their use of technology.
Answers will vary
Feedback: Many US companies face stiff competition, both from other American companies and from abroad. As a result, they must lower
their costs, improve the quality of their products, and increase productivity. To compete successfully, they must use automation in their
production activities and use current technology to communicate quickly with customers and suppliers.
AICPA BB: Global
Difficulty: Easy
124. List and discuss changes in business practices adopted in recent years by world-class companies.
Answers will vary
Feedback: Among the changes are increased automation, implementation of a quality management system, and use of activity-based
management. Companies use robots and computer-controlled machines in producing products, in an effort to control costs and produce better,
more uniform products. Through a quality management system, companies can calculate the quality costs associated with their products and
services. They determine whether increased expenditure for prevention and appraisal costs would more than pay for itself through increased
customer satisfaction and sales. Companies that use activity-based management identify activities that do not add value to their products and
services. Non-value-added activities can be eliminated without reducing customer satisfaction, thus allowing the company to reduce its costs.
AICPA BB: Global
Difficulty: Medium
125. Explain how the use of direct labor hours as a cost driver can distort costs of products in a highly automated manufacturing
environment.
Answers will vary
Feedback: In a highly automated factory, most overhead costs are caused by activities other than direct labor. In other words, there is not a
strong cause-and-effect relationship between direct labor hours and overhead costs. A product that used more direct labor hours than other
products would be assigned too much overhead cost. Products that used very little direct labor (but might use large amounts of other
activities) would be assigned too little cost.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
126. Discuss how automation has affected the selection of cost drivers employed in product costing systems.
Answers will vary
Feedback: Automation has changed the nature of the manufacturing process such that direct labor hours no longer constitute an effective cost
allocation base. In a heavily automated environment production increases or decreases are achieved primarily by regulating the technology
Page 45 of 57
with no impact on the amount of direct labor required. That is, labor is no longer related to the volume of production and so loses its
effectiveness as a rational basis for the allocation of overhead costs. Furthermore, automation often results in a significant increase in
overhead costs (e.g., increased depreciation charges for expensive automated equipment and higher utilities and maintenance costs). As
overhead costs make up an increasingly higher percentage of the total costs of production, firms must develop more refined and sophisticated
ways to allocate overhead costs.
AACSB: Analytic
Difficulty: Medium
127. What is the reasoning behind the use of cost pools in an activity-based costing system?
Answers will vary
Feedback: A company engages in hundreds or thousands of activities. Allocating each cost individually would not be cost effective - the cost
of preparing the accounting information would exceed the benefit from using such detailed information. Therefore, companies group related
costs into a limited number of cost pools, then they allocate the total cost in each cost pool.
Difficulty: Medium
128. How would a company determine the optimal number of activity centers in an activity-based costing system?
Answers will vary
Feedback: The company would determine how many activity centers to use, based on a cost/benefit analysis. A company should increase the
number of activity centers only to the extent that additional accuracy improves decision making.
Difficulty: Easy
129. What is the likely consequence of using a single overhead rate rather than activity-based costing?
Answers will vary
Feedback: A company-wide overhead rate would undercost the product line that has high inventory carrying costs and overcost the other two
product lines. Activity-based costing would identify the product-level activities and assign them to the products that cause the activities to
occur.
AACSB: Analytic
Blooms: Analysis
Difficulty: Medium
130. What is the purpose of target pricing? What are the steps in target pricing?
Answers will vary
Feedback: The purpose of target pricing is to set a price for products that takes market conditions into account. A company would first
determine the price that customers would likely be willing to pay for a product. Then it would determine whether it can produce the product at
a cost that is low enough to allow the company to earn an acceptable profit at that selling price.
AICPA BB: Marketing
Difficulty: Medium
131. What is the basic premise behind activity-based costing systems (ABC)? What is an activity? Describe how ABC systems work.
Answers will vary
Feedback: The basic premise behind ABC is that activities drive costs. Significant reductions in product costs can be achieved only by
managing those activities that drive the costs. Activity-based costing is a two-stage allocation process that employs multiple cost pools and
cost drivers. Activities are actions taken by an organization to accomplish its mission. Activity cost pools are often established along
hierarchical lines (i.e., unit-level, batch-level, product-level, and facility-level) with separate cost drivers (both volume and activity-based) for
each cost pool. In the first stage, overhead costs are traced to specific activity cost pools. In the second stage, activity rates are developed and
used to assign activity costs to the firm's products and services.
AACSB: Analytic
Blooms: Analysis
Difficulty: Hard
132. Discuss how employee attitudes are likely to affect the implementation of an activity-based costing system.
Answers will vary
Feedback: Employees may fear that implementation of an activity-based costing system may lead to cost-cutting measures, such as
elimination of some products and, perhaps, loss of some jobs. Fearful of the changes that may result, employees may not cooperate with
Page 46 of 57
efforts to introduce activity-based costing. For example, if employees are asked to keep records about production activities, they may
deliberately report inaccurate information. If managers can convince employees that activity-based costing will be good for the company and
for its employees, better cooperation may result.
AACSB: Ethics
Blooms: Analysis
Difficulty: Medium
1. True
2. True
3. True
4. False
5. True
In an automated environment, use of a volume-based cost driver may overcost highvolume products.
In an automated environment, an activity-based cost driver would provide for more
accurate allocation of set-up costs than would a volume-based cost driver.
Avoidable costs are irrelevant to decision making.
In an automated manufacturing environment, use of a volume-based cost driver could
lead managers to make poor decisions.
Activity based costing improves the accuracy of cost allocations for companies that make
many different products at varying volume levels.
1
1
4
1
1
AACSB: Analytic
AICPA BB: Industry
Blooms: Analysis
Difficulty: Hard

1. True
2. False
3. False
4. True
5. True
The allocation of indirect costs using activity-based costing is a three-step process.

The first stage of activity-based costing is to assign costs to pools based on the activities
that cause the costs.
A typical business may engage in thousands of different activities.
Determining the number of activity centers to use in an activity-based costing system
should be based on a cost-benefit analysis.
A traditional cost allocation system first assigns costs to activity centers and then uses a
single volume-based cost driver to assign the costs to products.
2
1
1
1
2
AACSB: Analytic
Difficulty: Medium
1. False
2. True
3. True
4. False
5. False
An activity-based costing system uses fewer cause-and-effect relationships in tracing

costs than does a traditional cost allocation system.
An activity-based costing system first assigns or traces costs to the departments in which
products are made.
The hierarchical categories into which activities are grouped are unit-level, batch-level,
department-level and facility-level activities.
An activity-based costing system traces the costs of performing activities to the products
that cause the activities.
The total amount of unit-level costs changes in proportion to the number of units of
product made.
1
1
1
2
2
AACSB: Analytic
Difficulty: Medium
1. True
2. True
3. False
4. False
5. False
Activity-based costing systems are useful for many manufacturing companies but not for
businesses that exist to provide services to their customers.
Costs that are closely related to volume of production may be classified as unit-level even
if they do not change with each individual unit of product.
Activities related to producing groups of products are referred to as product-level
activities.
Batch-level costs are fixed with respect to the number of units produced in a single batch
of a product.
Materials-handling costs are usually classified as unit-level costs.
3
1
3
1
3
AICPA BB: Industry

Difficulty: Medium
Page 47 of 57
1. False
2. True
3. False
4. True
5. False
In an activity-based costing system, the same amount of batch-level costs should be

assigned to all products.
Raw materials inventory holding costs are usually classified as batch-level costs.
Costs associated with obtaining and defending a patent generally would be classified as
product-level costs.
Activities that benefit the production process as a whole are product-level activities.
Manufacturing plant security is classified as a facility-level activity.
1
1
2
1
2
AACSB: Analytic
Difficulty: Hard
1. True
2. True
3. False
4. False
5. True
Use of an activity-based costing system may identify products that are overcosted or
undercosted by a traditional system.
Use of an activity-based costing system may prove to company managers that it is
incurring losses on some products they believed to be profitable.
The starting point for target pricing is to determine the costs that are incurred in making
the product.
Use of a traditional product costing system may put a company at a competitive
advantage by overcosting some products.
Activity-based costing results could lead managers of a company to decide to eliminate
some products.
1
1
3
3
1
AACSB: Analytic
Difficulty: Easy

1. True
2. False
3. False
4. True
5. False
If a company-wide overhead rate undercosts some products, it must overcost others.

Facility-level costs usually decrease when a company decides to eliminate one product.
Many companies do not allocate facility-level costs to products for decision-making
purposes.
Batch-level costs are usually not relevant to the decision to eliminate a product.
Upstream costs are incurred after a product is manufactured.
1
2
1
2
2

Difficulty: Easy

1. True
2. False
3. False
4. True
5. False
For a manufacturing company, "quality" means producing the best-possible products.

Companies incur internal failure costs to avoid producing non-conforming products.
Voluntary costs refer to prevention and appraisal costs.
Failure costs include appraisal and external failure costs.
Managers of a company can influence but not directly control the amount of failure costs
incurred.
2
2
1
2
1
AACSB: Analytic
Difficulty: Medium
141.
Select from the list provided the term that best matches each of the following descriptions.
Page 48 of 57
Answers will vary

Feedback:
AACSB: Analytic
Difficulty: Medium
142.
Costs may be classified in a variety of ways. One approach classifies costs into three categories, manufacturing, upstream, and
downstream. These costs are sometimes referred to as an organization's value chain. Costs incurred by the Lunsford Bicycle Company
are described in the following table:
Page 49 of 57
Required: Classify each of the above costs as being an upstream, manufacturing, or downstream cost by inserting a check mark in the
appropriate column.
Answers will vary
Feedback:
AACSB: Analytic
Difficulty: Medium
143. Devon Mills incurs a variety of costs in producing several grades of carpet for the residential and commercial housing industries. The
different grades and styles are manufactured in batches or production runs. The company uses activity-based costing to assign overhead
costs to its different product lines. Selected costs are provided in the following table:
Required: Complete the table provided. In the Cost Hierarchy column, insert a (U) if the cost described is a unit-level cost, a (B) if a
batch-level cost, a (P) if a product-level cost, or (F) if a facility-level cost. In the Cost Driver column enter a cost driver (for example,
direct labor hours) that you believe might be appropriate for allocating that particular cost to units of products.
Answers will vary
Feedback:
Page 50 of 57
AACSB: Analytic
Difficulty: Medium
144. A number of quality-related costs are provided in the following table:
Required: Classify the above costs by cost of quality category. That is, for each item in the table, place a check mark in the appropriate
column.
Answers will vary
Feedback:
AACSB: Analytic
Difficulty: Medium
145. Select the term from the list provided that best matches each of the following descriptions.
Page 51 of 57
Answers will vary

Feedback:
AACSB: Analytic
Difficulty: Medium
146. OfficeBest Products produces a variety of office products including two models (standard and deluxe) of a hand-held stapler. A number
of the company's activity-related costs are described in the following table:
Required: Classify each of the above costs into unit, batch, product, or facility-level cost pools.
Answers will vary
Feedback:
AACSB: Analytic
Difficulty: Medium
147. Yamamoto Company produces two types of computer speakers. The Prestige line is made to provide excellent sound for the most
demanding applications. The Standard line is geared toward workplace use and delivers average performance. During its most recent
accounting period, the company incurred $100,000 of inspection costs. Its production activities were classified into four cost centers,
unit-level, batch-level, product-level, and facility-level. The following cost and cost driver information is provided for the unit-level and
batch-level cost centers:
Required
1) Allocate the inspection cost between the two products assuming the inspection cost is driven by a) only unit-level activities; b) only
batch-level activities.
Page 52 of 57
2) How should managers of the company determine which allocation is more appropriate?
Answers will vary
Feedback: 1) The two alternative allocations are shown in the following table:
2) If each individual unit is inspected, the unit-level allocation would be appropriate. However, if only a selected number of units are
inspected in each batch, then the batch-level allocation would be more appropriate.
Blooms: Application
Difficulty: Medium
148. GVC Electronics produces two kinds of electronic toys, Wizards and Gizmos. During the current period, 4,000 Wizards and 8,000
Gizmos were produced and sold, generating revenues of $500,000 and $2,000,000, respectively. Unit production costs for the two toys
are $100 for Wizards and $140 for Gizmos. In calculating the cost of goods sold, GVC uses activity based costing to allocate its
overhead costs. However, upstream costs of $210,000 are allocated equally to the two products.
Required:
1) Compute the total net profit for each product and for the firm as a whole.
2) Would you advise eliminating either toy? Why or why not?
Answers will vary
Feedback: 1) Net profit
2) Wizards are showing a loss because of the way that upstream costs are allocated. Because twice as many Gizmos are sold as Wizards,
Gizmos will be allocated twice as much upstream costs. If such costs are allocated in a 1:2 ratio, the following result occurs:
Thus, Wizards should not be eliminated. Additionally, upstream costs might be allocated on the basis of the dollar amount of sales.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Application
Difficulty: Medium
149. Roadster Tires produces a variety of auto and truck tires at its Dayton manufacturing plant. The plant is highly automated and uses an
activity-based costing system to allocate overhead costs to its various product lines. The costs and cost drivers associated with four
Production of 1,000 units of a small tractor tire required 400 labor hours, 2 setups, and consumed 30% of the product sustaining
activities.
Required:
1) Instead of using ABC, suppose the company had used labor hours as a company-wide allocation base. How much total overhead
would have been allocated to the tractor tire?
2) How much total overhead costs will be allocated to the tire under activity-based costing?
3) The tire is priced on a cost plus basis. What price will be quoted if the product is priced at 25% above cost? Compute the price under
both the direct labor hours approach and under activity-based costing. The direct manufacturing costs consist of direct material of $20
and direct labor of $30.
4) What implications does ABC have on a company that bids on contracts using a cost plus basis?
Answers will vary
Feedback: 1) Overhead allocated using direct labor:
Total overhead/total direct labor hours = allocation rate; $200,000/4,000 = $50 per DLH
Overhead assigned to product = $50 400 hours = $20,000
2) Overhead allocated using ABC:
Page 53 of 57
Overhead assigned to product:
3) Selling price:
Allocated overhead:
DLH $20,000/1,000 = $20.00 per unit
ABC $13,400/1,000 = $13.40 per unit
4) Companies producing a variety of products requiring various types and levels of overhead support should use activity-based costing. Such
firms are likely to be more successful because their products are going to be costed more accurately. For example, the tractor tire would have
been overcosted under a traditional costing system. This would have resulted in a bid price per unit $8.25 higher than necessary. This
difference might have been great enough to cause the company to lose the bid if a competitor having identical costs but using ABC (instead of
a traditional costing system) also bid on the same job.
AACSB: Analytic
AICPA BB: Marketing
Blooms: Application
Difficulty: Medium
150. Flavorland Brands packages single-sized servings of sugar and sugar substitute for fast food restaurants. The activities required to
package sugar are fewer and less complex than for sugar substitute. The direct costs of producing the two products are as follows:
Overhead is currently assigned to the two products on the basis of machine hours. The following information is provided regarding
overhead costs:
Required
1) Compute the predetermined overhead rate under the current method of overhead cost allocation. How much total overhead cost will be
assigned to each product under the current system?
2) Compute the three activity rates that would be used in an activity-based system. How much total overhead cost will be assigned to
each product under an ABC system?
3) Assuming an ABC system to be more precise, by how much does the company's current costing system over- or undercost the
products? Be specific.
Answers will vary
Feedback: 1) Allocation rate based on machine hours:
Total overhead/Total machine hours = $225,000/25,000 = $9.00 per machine hour
Total overhead assigned:
2) Allocation rate based on ABC:

Setup $75,000/150 = $500 per setup
Packing $125,000/25,000 = $5 per machine hour
Inspection $25,000/500 = $50 per inspection
Total overhead assigned:
3) The current system overcosts sugar by $5,000 ($90,000- $85,000) and undercosts sugar substitute by the same amount.
AACSB: Analytic
Page 54 of 57

Blooms: Application
Difficulty: Medium
151. Parvez Company manufactures two products. Making Product A requires 4,000 hours of labor and Product B requires 6,000 hours of
labor. Parvez undertakes an automation program that reduces the consumption of labor required by Product B to only 3,000 hours of
labor. Product A is not affected by the automation process. Overhead cost prior to the automation totaled $15,000. After automation,
overhead cost amounted to $28,000. Parvez uses direct labor hours as a company-wide allocation base before and after the automation.
Required
1) Compute the amount of overhead costs allocated to both products before automation.
2) Compute the amount of overhead costs allocated to both products after automation.
3) Is direct labors hours a good choice for allocation after the automation? Why or why not?
Answers will vary
Feedback: 1) Overhead cost allocation before automation
Product A: $15,000 {4,000/(4,000 + 6,000)} = $6,000
Product B: $15,000 {6,000/(4,000 + 6,000)} = $9,000
2) Overhead cost allocation after automation
Product A: $28,000 {4,000/(4,000 + 3,000)} = $16,000
Product B: $28,000 {3,000/(4,000 + 3,000)} = $12,000
3) After the automation, the overhead costs have risen significantly. Even though the rise in overhead costs is completely attributable to
product B, product A is allocated a larger percentage of the overhead after automation. The choice of direct labor hours as the allocation base
over-allocates overhead to product A. The increase in overhead due to automation of product B should be applied more fairly to product B
rather than split among the two products.
AACSB: Analytic
Blooms: Analysis
Difficulty: Hard
152.
Vulcan Company manufactures two products. Currently, the company uses a traditional costing system assigning overhead on the basis
of direct labor hours. The Industrial product is more complex to produce requiring two hours of direct labor time per unit compared to
one hour of direct labor time for the Consumer product. Given the company's total overhead costs of $360,000 and production of 1,000
Industrials and 8,000 Consumers, this results in an overhead allocation rate of $36 per direct labor hour. The following unit data are
provided:
Because the Industrial product is twice as profitable as the Consumer model, the sales manager wants to reduce or eliminate production
of the Consumer product and devote as much capacity as possible to the Industrial product.
You are worried that the current cost accounting system may be providing inaccurate results and would like to implement an ABC
system. Assume that the company's overhead costs were traced to four major activities. The amount of overhead costs traceable to each
activity for the current year is provided below:
Required:
1) In the following table, compute the four activity rates that will be used to assign overhead to the products under activity-based costing:
2) In the following table, compute the amount of overhead cost which should be assigned to Industrials and Consumers under activitybased costing. Also compute the overhead cost per unit for each product.
3) Compute the total cost to manufacture one unit of each product if activity-based costing is used.
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4) Respond to the sales manager's recommendation that capacity be diverted from Consumers to Industrials.
Answers will vary
Feedback:
1) Activity rates:
2) Overhead cost assigned to 1,000 Industrials and 8,000 Consumers under activity-based costing:
3) Total cost to manufacture one unit of each product if activity-based costing used:
4) When the two products are costed more precisely, the company is actually making much less profit on the Industrial product than currently
reported and more profit on the Consumer product than currently reported. Profits comparisons follow:
AACSB: Analytic
Blooms: Analysis
Difficulty: Medium
153.
Harper Company has asked its management accountant to prepare a cost of quality report. Management is concerned that quality costs
are too high relative to the company's sales. Sales in 2009 totaled $800,000, while sales in 2010 were $1,000,000.
Required:
1) Prepare a Quality Cost Report for Harper Company showing its quality costs as a percentage of sales. Organize the costs by type
(prevention, appraisal, internal failure, and external failure) and include percentages for each individual cost as well as for the total of
each category. A schedule has been started below:
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2) Evaluate Harper Company's strategy for reducing its total costs of quality.
Answers will vary
Feedback: 1) Quality Cost Report:
2) Apparently Harper is trying to control its quality costs by focusing on detecting and reworking defective units. For example, appraisal costs
jumped from 8.0% to 19.5% of total quality costs and internal failure costs jumped from 22.0% to 39%. While these additional costs led to a
significant reduction in external failure costs, more importantly, the total costs of quality only decreased by $3,000. It is likely that the
company could have reduced its overall total costs more significantly if it had devoted more resources and attention to prevention activities.
AACSB: Analytic
Blooms: Analysis
Difficulty: Medium
Page 57 of 57
5 Summary
Category
AACSB: Analytic
AACSB: Ethics
AICPA BB: Global
AICPA BB: Industry
AICPA BB: Marketing
AICPA FN: Reporting
Blooms: Analysis
Blooms: Application
Blooms: Knowledge
Difficulty: Easy
Difficulty: Hard
Difficulty: Medium
Edmonds - Chapter 05
Learning Objective: 05-01 Explain how activitybased costing improves accuracy in determining the cost of products and services.
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Page 1 of 57

2. In the early days of the industrial revolution, indirect manufacturing costs:

U.S. labor laws

5. Which of the following costs is likely to be driven by direct labor usage?

ABC does not use cost drivers.

C. materials handling costs.

Target advertising to high income customers.

D. All of the above answers are correct.

What amount of cost is avoidable if Ted outsources production of this product?

Costs to repair defective units

45. Which of the following is an internal failure cost?

48. The amounts of voluntary costs and failure costs:

59. The first step in developing an ABC system is to:

B. unit- level activity.

Identifying potential suppliers

Indirect labor costs

All of its products are undercosted.

73. All of the following are categories of quality costs except:

A. total quality costs.

79. Which of the following statements is correct?

A. overcost the bay windows.

A. minimize total quality costs.

Repair and rework

activity based costing system.

133. Indicate whether each of the following statements is true or false.

134. Indicate whether each of the following statements is true or false.

The allocation of indirect costs using activity-based costing is a three-step process.

135. Indicate whether each of the following statements is true or false.

An activity-based costing system uses fewer cause-and-effect relationships in tracing

An activity-based costing system first assigns or traces costs to the departments in

136. Indicate whether each of the following statements is true or false.

137. Indicate whether each of the following statements is true or false.

In an activity-based costing system, the same amount of batch-level costs should be

138. Indicate whether each of the following statements is true or false.

139. Indicate whether each of the following statements is true or false.

If a company-wide overhead rate undercosts some products, it must overcost others.

140. Indicate whether each of the following statements is true or false.

For a manufacturing company, "quality" means producing the best-possible products.

144. A number of quality-related costs are provided in the following table:

2. In the early days of the industrial revolution, indirect manufacturing costs:

U.S. labor laws

5. Which of the following costs is likely to be driven by direct labor usage?

D. All of the above answers are correct.

11. Select the incorrect statement from the following.

12. Which of the following is an activity-based cost driver?

13. Which of the following is a volume-based cost driver?

14. Select the correct statement regarding activity-based costing (ABC).

ABC does not use cost drivers.

AACSB: Reflective Thinking

17. The number of activity cost centers used by a company should:

D. All of the above answers are correct.

Target advertising to high income customers.

35. Which of the following is an upstream cost?

36. All of the following are downstream costs except:

What amount of cost is avoidable if Ted outsources production of this product?

38. Identify the obstacle(s) in implementing a successful activity-based costing system.

40. Costs incurred to avoid nonconforming products are:

42. For most businesses, quality means:

43. All of the following are prevention costs except:

44. Which of the following is an appraisal cost?

Costs to repair defective units

45. Which of the following is an internal failure cost?

46. All of the following are internal failure costs except: