Multiple Choice Questions 1.

________ and ________ are typically the measures of volume of activity in traditional volume-based cost systems. A. Practical capacity; products sold B. Direct labor hours; practical capacity C. Direct labor hours; machine hours D. Square footage; machine hours 2. Traditional cost systems distort product costs because: A. They do not know how to identify the appropriate units B. Excess capacity costs are ignored C. They emphasize financial accounting requirements D. They use unit-level cost drivers to allocate support costs to products 3. Unit-level drives in traditional cost systems distort product costs because they: A. Assume that all support activities affect all products B. Recognize specific activities that are required to produce a product C. Do not consistently record costs D. Fail to measure the correct amount of total costs for all products 4. The use of unit-level measures to assign support costs is more likely to: A. Undercost high-volume products B. Undercost specialty low-volume products C. Undercost complex products D. Both (b) and (c) are correct 5. Misleading product cost numbers are MOST likely the result of misallocating: A. Direct material costs B. Direct manufacturing labor costs C. Support cost D. All of the above are correct 6. Undercosting a particular product may result in: A. Loss of market share for the product B. Lower profits for the product C. Operating inefficiencies D. Understating total costs of all the products CHOOSE ALL THAT APPLY 7. It is important that the product costs reflect as much of the diversity and complexity of the manufacturing process so that: 1. Product costs will reflect their relative consumption of resources 2. Better information related to resource constraints can be captured and communicated 3. There is less likelihood of cost distortions

4. All of the above are correct 8. Which of the following is a sign that an ABC system may be useful? 1. There are small amounts of support costs 2. Products make diverse demands on resources because of differences in volume, process steps, batch size, or complexity 3. Products a company is less suited to produce and sell show small profits 4. Operations throughout the plant are fairly similar Multiple Choice 9. Units of production are most appropriate as a support cost assignment base when: A. It is a service department B. Only one product is manufactured C. Direct labor costs are low D. Factories produce a complex and varied mix of products 10. Designing an activity-based cost system includes: A. Classifying as many costs as indirect costs as is feasible B. Creating as many cost pools as possible C. Identifying the activities performed by the plants resources D. Seeking a broader focus rather than detail 11. The following information applies to Questions 11 through 13 Merriman Company provides the following ABC costing information: Activities Account inquiry hours Account billing lines Account verification acct. Correspondence letters Total costs $900,000 Total Costs $500,000 $250,000 $100,000 $50,000 Activity-cost drivers 10,000 hours 5,000,000 lines 50,000 accounts 5,000 letters

The above activities are used by Departments A and B as follows: Account inquiry hours Account billing lines Account verification acct. Correspondence letters Department A 1,000 hours 200,000 lines 10,000 accounts 1,000 letters Department B 3,000 hours 300,000 lines 8,000 accounts 1,500 letters

How much of the account inquiry costs will be assigned to Department A? A. $10,000 B. $50,000

C. $150,000 D. $500,000 = ($500,000 / 10,000) * 1,000 12. How much of account verification costs will be assigned to Department A? A. $20,000 B. $50,000 C. $80,000 D. $100,000 = ($100,000 / 50,000) * 10,000 13. How much of the account billing costs will be assigned to Department B? A. $15,000 B. $25,000 C. $30,000 D. $50,000 = ($250,000 / 5,000,000) * 300,000 14. The following information applies to Questions 14 through 15. Zappo Skate Corporation manufacturers two models of skate boards: a standard and a deluxe model. The following activity and cost information has been complied. Product # of setups # of components Standard ; 20 10 Deluxe 30 15 Overhead costs $25,000 $35,000 # of total direct labor hours 375 225

Assume a traditional costing system applies the $60,000 of overhead costs based on direct labor hours. What is the total amount of overhead costs assigned to the standard model? A. $20,000 B. $22,500 C. $25,000 $35,250 None of the choices is correct. Total Labor Hours = 375 + 225 = 600 Total Overhead Costs = $60,000 Predetermined Over head rate = $60,000 / 600 = $100 375 hours used by the Standard Model, therefore total allocated overhead costs = $100 375 = $37,500

15. Number of setups and number of components are identified as activity-cost drivers for overhead costs. Assuming an activity-based costing system is used, what is the total amount of overhead costs assigned to the standard model? A. $10,000 B. $14,500 C. $24,500 D. $30,000 Predetermined overhead rate for Number of Setups = $25,000 / (20 + 30) = $500 Predetermined overhead rate for Number of Components = $35,000 / (10 + 15) = $1,400 Total Allocated Overhead Costs assigned to the standard model = ($500 20) + ($1,400 10) = $24,000 16. If products are alike, then for costing purposes: A. A simple costing system will yield accurate cost numbers B. An activity-based costing system should be used C. Multiple unit-level cost rates should be used D. Varying demands will be placed on resources 17. With traditional costing systems, products manufactured in small batches and in small annual volumes may be ______________ because batch-related and product-sustaining costs are assigned using unit-related cost drivers. A. Overcosted B. Undercosted C. Fairly costed D. Ignored CHOOSE ALL THAT APPLY 18. Under traditional costing systems, selling and administrative costs have been largely ignored because they: 1. Are hard to quantify except at exorbitant cost of measurement 2. Have been negligible in amount relative to total costs now that they are growing in amount 3. In the past they are not inventoriable for financial reporting purposes under GAAP 4. Relate to a varied mix of products Multiple Choice

19. The focus of ABC systems is on: A. Long-term decisions B. Short-term decisions C. Make-or-buy decisions D. Special-pricing decisions 20. It ONLY makes sense to implement an ABC system when: A. ABC provides information to make better decisions B. Its benefits exceed implementation costs C. ABC traces more costs as direct costs D. There is a strong cause-and-effect relationship between costs in the cost pools and their cost-allocation bases