COST EXAM2 (compiled by Gail)

Theories:

1. Which service department cost allocation method utilizes a "benefits-provided" ranking?

Answers:
a. algebraic method
b. direct method
c. step method
d. indirect method

2. Which of the following activities is a facility-level activity?

Answers:
a. Direct labor.
b. Product design.
c. Depreciation on a highly specialized piece of production equipment.
d. Plant management salaries.

3. Traditionally, overhead has been assigned based on direct labor hours or machine hours. What effect
does this have on the cost of a high-volume item?
Answers:
a. has no effect the product cost
b. over-costs the product
c. under-costs the product
d. cost per unit is unaffected by product volume

4. Rank the following methods of assigning overhead costs from least accurate to most accurate:
Answers:
a. plantwide rate, departmental rates, activity-based costing
b. activity-based costing, departmental rates, plantwide rate
c. departmental rates, plantwide rate, activity-based costing
d. plantwide rate, activity-based costing, departmental rates

5. The ABC Company assigns plant administration costs to the production departments based on the
number of employees. Which of the following would NOT be a good combination of common costs with
an activity driver?
Answers:
a. purchasing department costs based on machine hours
b. cafeteria costs based on meals served
c. personnel department costs based on number of employees
d. warehouse costs based on the value of materials stored

6. When rework occurs because of some action taken by the customer, the cost of the rework should be
charged to:
Answers:
a. Applied Factory Overhead
 COST EXAM2 (compiled by Gail)

b. Factory Overhead Control

c. Spoiled Goods Inventory
d. Work in Process

7. Which of the following is true of normal spoilage?

Answers:
a. This type of spoilage need not be accounted for.
b. It may result from electrical surges or by a leaky roof that allows rain to spoil the jobs beneath.
c. It is expected due to the nature of the production process.
d. This type of spoilage is charged to Loss from Normal Spoilage.

8. When spoilage occurs because of some internal failure, the unrecoverable cost should be charged to:
Answers:
a. Work in Process
b. Spoiled Goods Inventory
c. Applied Factory Overhead
d. Factory Overhead Control

9. Activity drivers can be classified as either ____ or ____.

Answers:
a. inputs; outputs
b. right; wrong
c. unit-level; nonunit-level
d. exact; inexact

10. In a job-order costing system, the net cost of normal spoilage is equal to
Answers:
a. estimated disposal value plus the cost of spoiled work.
b. the units of spoiled work times the predetermined overhead rate.
c. the cost of spoiled work minus estimated spoilage cost.
d. the cost of spoiled work minus the estimated disposal value.

12. Which of the following would likely be the most appropriate cost driver of electric power used by
machines?
Answers:
a. Number of production runs.
b. Number of machine hours.
c. Number of units.
d. Machine size.

13. Examples of support departments include all of the following EXCEPT

Answers:
a. maintenance.
b. personnel.
 COST EXAM2 (compiled by Gail)

c. data processing.
d. machining.

14. The support department costs allocated to producing departments is assigned to individual products
through the use of:
Answers:
a. plantwide overhead rates.
b. direct material cost per unit.
c. departmental overhead rates.
d. direct labor rate per hour.

15. Support departments

Answers:
a. are responsible for manufacturing the products sold to customers.
b. provide essential services to the producing departments.
c. provide services directly to customers.
d. work directly on the products of the firm.

16. Overhead costs are allocated to cost objects in an activity-based costing system in the following
manner:
Answers:
a. Overhead costs are traced from resources to cost objects.
b. Overhead costs are traced to activities, then costs are traced to products.
c. Overhead costs are traced to departments, then costs are traced to products.
d. Overhead costs are traced to activities, then costs are traced to departments and then allocated to
products.

17. The algebraic method

Answers:
a. does not consider interrelationships of the departments nor reflect these relationships in equations.
b. is also referred to as the "benefits-provided" ranking method.
c. is not a service department cost allocation method.
d. considers all interrelationships of the departments and reflects these relationships in equations.

18. When spoilage occurs because of some action taken by the customer, the unrecoverable cost of the
spoilage should be charged to:
Answers:
a. Applied Factory Overhead
b. Spoiled Goods Inventory
c. Factory Overhead Control
d. Work in Process
 COST EXAM2 (compiled by Gail)

19. A costing system that first assigns costs to activities and then to products is:
Answers:
a. activity-based management.
b. job-order costing.
c. volume-based costing.
d. activity-based costing.

20. Abnormal spoilage is

Answers:
a. spoilage that is in excess of planned.
b. accounted for as a product cost.
c. spoilage that is forecasted or planned.
d. debited to Cost of Goods Sold.

21. A measure of the quantity of resources consumed by an activity is:

Answers:
a. A resource consumption cost driver.
b. An activity consumption cost driver.
c. Not a cost driver.
d. A quantity driver.
 COST EXAM2 (compiled by Gail)

Problems:

• (FOR NUMBERS 1-3) Production Department C1 produces product “A” and Production
Department C2 produces product “B”. Data concerning those departments follow:
Service Department Production Department
Dep. A. Dep. B Dep. C1 Dep. C2
Budgeted Direct Cost PHP30,000 PHP50,000 PHP300,000 PHP350,000
Allocation Base for:
Dep. A 3,000 2,000 21,000 14,000
Dep. B 3,000 1,000 39,000 5,000

1. ABC Corporation uses the step- method to allocate service department costs to operating
departments. The company has two service departments, Service Department A and Service Department
B, and two operating departments, Operating Department C1 and Operating Department C2.

Service Department A costs are allocated first on the basis of allocation base A and Service Department
B costs are allocated second on the basis of allocation base B.

The amount of Service Department B cost allocated to Production Department C2 is closest to:
Answers: a. PHP5,681.82
b. PHP13,276.60
c. PHP1,621.62
d. PHP5,866.10
Response Feedback: Dep A Dep B Dep C1 Dep C2
30,000 50,000 300,000 350,000
30,000 (30,000) (2/37)1,621.62
50,000 (51,621.62) (5/44) 5,866.10
 COST EXAM2 (compiled by Gail)

2. The total service department cost allocated to Production Depart C1 is:

Answers: a. PHP362,782.56

b. PHP62,782.56
c. PHP17,217.44
d. PHP317,217.44

Response Feedback: Dep A Dep B Dep C1 Dep C2

30,000 50,000 300,000 350,000

30,000 (30,000) (2/37)1,621.62 (21/37) 17,027.03 (14/37)

11,351.35

50,000 (51,621.62) (39/44) 45,755.53 (5/44) 5,866.10

PHP62,782.56 PHP17,217.44

3. ABC Corporation uses the direct method to allocate service department costs to operating
departments. The company has two service departments, Service Department A and Service Department
B, and two operating departments, Operating Department C1 and Operating Department C2.

The amount of Service Department A cost allocated to Production Department C2 is closest to:
Answers: a. PHP20,000
b. PHP11,351
c. PHP10,500
d. PHP12,000
Response Feedback: (14,000 / 35,000) x PHP30,000 = PHP12,000
 COST EXAM2 (compiled by Gail)

4. Using reciprocal method (algebraic method), what is the total service department cost of Department
B that should be allocated to the production Departments (C1 and C2)?

Service Department Production Department

Dep. A. Dep. B Dep. C1 Dep. C2

Budgeted Direct Cost PHP30,000 PHP50,000 PHP300,000 PHP350,000

Allocation Base for:

Dep. A ---------- 5% 50% 45%

Dep. B 6% --------- 80% 14%

Answers: a. PHP51,654.96
b. PHP33,000
c. PHP30,000
d. PHP33,099.30
Response Feedback: A (S1) = 30,000 + .06 B
B (S2) = 50,000 + .05 A

Therefore:

A = 30,000 + .06 (50,000 + .05 A)

.997 A = 30,000 + 3,000
A = PHP33,099.30
 COST EXAM2 (compiled by Gail)

• (FOR NUMBER 5-8) ABC Corporation has provided the following data from its activity-based costing
system:
Activity Cost Pool Total Cost Activity Capacity Activity Driver
Assembly PHP700,000 40,000 Machine-hours
Processing Orders PHP90,000 2,000 Purchase orders
Inspection PHP120,000 2,000 Inspection- hours
The company makes 400 units of product “A” a year, requiring a total of 710 machine-hours, 80
purchase orders, and 40 inspection-hours per year.

5. The product’s direct material cost is PHP40 per unit, direct labor cost is PHP15 per unit and factory
overhead per unit using traditional costing system is PHP35.

ABC Corp. policy is to set selling price of its product using the non-GAAP activity-based-costing. Target
gross profit rate based on cost is 30%.

For external reporting, how much is the gross profit of product “A” per unit:
Answers: a. PHP27.00
b. PHP23.32
c. PHP42.08
d. PHP30.48
Response Feedback: Cost using ABC System = PHP101.06 x 1.30 = PHP132.08

Selling Price (set using ABC System) PHP132.08

Cost per unit using traditional costing PHP90.00
Gross profit for external reporting PHP42.08

6. The product’s direct material cost is PHP40 per unit and its direct labor cost is PHP15 per unit. The
product sells for PHP130 per unit. For financial accounting purposes gross profit rate on cost is 30%.

Using activity-based costing system, how much is the cost of product “A” per unit:
Answers: a. PHP46.06
b. PHP176.06
c. PHP100.00
d. PHP101.06
 COST EXAM2 (compiled by Gail)

Response Activity Cost Total Cost Activity Activity Rates Product A FOH of P-A
Feedback: Pool Capacity
Assembly PHP700,000 40,000 17.50 710 PHP12,425
Processing PHP90,000 2,000 45 80 PHP3,600
orders
Inspection PHP120,000 2,000 60 40 PHP2,400
Total OH PHP18,425

DM per unit PHP40

DL per unit PHP15
FOH per unit PHP46
Total Cost PHP101

7. The product’s direct material cost is PHP40 per unit and its direct labor cost is PHP15 per unit. The
product sells for PHP130 per unit. For financial accounting purposes gross profit rate on cost is 30%.

Using activity-based costing system, for internal reporting (product profitability analysis) how much is
the gross profit of product “A” per unit:

Answers: a. PHP29
b. PHP(46)
c. PHP30
d. PHP39
Response Feedback: Selling Price PHP 130.00
COGS (using ABC) 101.06
Gross Profit PHP 28.94

8. The product’s direct material cost is PHP40 per unit and its direct labor cost is PHP15 per
unit. Target gross profit rate on cost is 30%.

Using activity-based costing system, what selling price per unit should ABC Corp. use for product “A”?

Answers: a. PHP59.80
b. PHP131.34
c. PHP59.30
d. PHP130.00
Response Feedback: Cost per unit using ABC PHP101.06 x 1.30 = PHP131.34
 COST EXAM2 (compiled by Gail)

• (FOR NUMBERS 9-10) ABC Company manufactures three products (A, B, and C). The overhead
costs have been divided into three cost pools as shown below that use the following activity
drivers:

Product Number of Setups Machine Hours Packing Orders

A 10 500 75
B 10 1,500 125
C 10 500 50
Cost per Pool PHP12,000 PHP58,000 PHP20,000

9. Using activity-based-costing, what is the amount of overhead cost to be assigned to Product “B”?
Answers: a. PHP21,600
b. PHP48,800
c. PHP78,800
d. PHP42,800
Response Cost Pool Cost per Pool Activity Capacity Activity Rates
Feedback: Setups PHP12,000 30 setups 400 per setup
Machining PHP58,000 2,500 machine 23.20 per hours
hours
Packing orders PHP20,000 250 packing orders 80 per packing

Product “B”
Setups 10 x 400 = PHP 4,000
Machining 1,500 x 23.20 = 34,800
Packing O. 125 x 80 = 10,000
Total OH = PHP 48,800

10. Using traditional costing, what is the amount of overhead cost to be assigned to Product “C” using
machine hours as the allocation base?

Answers: a. PHP13,200
b. PHP90,000
c. PHP18,000.00
d. PHP36.00
Response Feedback: POH rate = PHP90,000 / 2,500 machine hours = PHP36 per machine hours
MOH of C = PHP36 x 500 = PHP18,000
 COST EXAM2 (compiled by Gail)

• (FOR NUMBERS 11-13) ABC Company manufactures fabric yarns on a job-order basis. Job 101
is an order for 200 units. It requires the following costs:

Direct Materials (PHP50 per unit) PHP10,000

Direct labor (PHP30 per unit, 2 hours per unit) 6,000

Factory Overhead (PHP22.5 per hour) 9,000

After inspection, 10 units are in need of rework which requires 20 additional direct labor hours and
PHP250 of materials.

11. If the spoilage was considerd abnormal, what is the total cost of Job 101?

Answers: a. PHP24,000

b.PHP25,000
c. PHP26,000
d. PHP24,950
Response Feedback: additional cost is charged to period cost

12. If the spoilage was considered normal and rework is due to change in customer specification, what
is the total cost of Job 101?
Answers: a. PHP24,950
b. PHP25,000
c. PHP26,000
d. PHP24,000
Response Feedback: 10,000 + 6,000 + 9,000 - 1,000 (400 hours x 2.5) + 250 + 300 + 400 = PHP24,950

13. If the spoilage was considered normal and rework is due to change in customer specification, what
is the total cost of Job 101?
Answers: a. PHP24,000

b. PHP25,000
c. PHP26,000
d. PHP24,950
Response Feedback: 10,000 + 6,000 + 9,000 + 300 (20 x 30) + 450 (20 x 22.50) + 250 = PHP26,000
 COST EXAM2 (compiled by Gail)

• (FOR NUMBER 14-16) ABC Company manufactures fabric yarns on a job-order basis. Job 101 is
an order for 200 units. It requires the following costs:

Direct Materials (PHP50 per unit) PHP10,000

Direct labor (PHP30 per unit, 2 hours per unit) 6,000

Factory Overhead (PHP22.5 per hour) 9,000

After inspection, 10 units is considered spoiled goods and can be sold for PHP 50 per unit.

14. If the spoilage was considered normal and is due to change in customer specification, what is the
total cost per unit of Job 101? (NOTE FOH *with allowance for spoiled goods of PHP2.5 per hour)
Answers: a. PHP128.95 per unit
b. PHP117.50 per unit
c. PHP123.68 per unit
d. PHP122.50 per unit
Response 10,000 + 6,000 + 8,000 - 500 = PHP23,500 divided by 190 units (200 - 10) = PHP123.68
Feedback: per unit.

15. If the spoilage was considered normal and is due to change in customer specification, what is the
total cost per unit of Job 101?
Answers: a. PHP125.00 per unit

b. PHP128.95 per unit

c. PHP122.50 per unit
d. PHP123.68 per unit
Response Feedback: 10,000 + 6,000 + 9,000 - 500 = 24,500 divided by 190 units = PHP128.95

16. If the spoilage was considered normal and is due to machine breakdown, what is the total cost per
unit of Job 101?
Answers: a. PHP122.50 per unit

b. PHP128.95 per unit

c. PHP125.00 per unit
d. PHP123.68 per unit
Response Feedback: 10,000 + 6,000 + 9,000 - 1,250 = 23,750 divided by 190 units = PHP125 per unit
 COST EXAM2 (compiled by Gail)

• ABC Company, has identified the following overhead costs and activity drivers for next year:

Expected Expected
Overhead Item Cost Activity Driver Quantity
Setup costs PHP100,000 Number of setups 500
Ordering costs 40,000 Number of orders 3,200
Maintenance 200,000 Machine hours 4,000
Power 20,000 Kilowatt hours 80,000

The following are two of the jobs completed during the year:
Job 101 Job 102
Direct materials PHP375 PHP1,000
Direct labor PHP350 PHP1,200
Units completed 100 160
Direct labor hours 50 80
Number of setups 1 4
Number of orders 4 5
Machine hours 20 25
Kilowatt hours 30 50

The company's expected activity is 4,000 direct labor hours.

17. If the activity drivers are used to allocate overhead costs, the unit cost (rounded to two decimal
places) for Job 101 would be:
Answers: a. PHP19.83
b. PHP262.75
c. PHP27.03
d. PHP192.76

Response Feedback:

Expected
Activity
Overhead Item Cost Quantity
Rate
Setup costs PHP100,000 500 200
Ordering costs 40,000 3,200 12.50
Maintenance 200,000 4,000 50
Power 20,000 80,000 0.25
 COST EXAM2 (compiled by Gail)

Job 101
Direct Materials (375/ 100) PHP 3.75
Direct labor (350/ 100) 3.50
MOH
Setup 1 x 200 = 200
Ordering 4 x 12.50 = 50
Maintenance 20 x 50 = 1,000
Power 30 x 0.25 = 7.50
Total PHP 1,257.50
divided by 100 units 12.58
PHP 19.83
 COST EXAM2 (compiled by Gail)

• (FOR NUMBERS 18-19) ABC Corporation uses the direct method to allocate service department
costs to operating departments. The company has two service departments, Service Department A
and Service Department B, and two operating departments, Operating Department C1 and
Operating Department C2.

Production Department C1 produces product “A” and Production Department C2 produces product
“B”. Data concerning those departments follow:
Service Department Production Department
Budgeted Direct Cost: Dep. A. Dep. B Dep. C1 Dep. C2
Direct Material PHP180,000 PHP200,000
Direct Labor 50,000 100,000
Factory Overhead 70,000 150,000
Total Direct Cost: PHP30,000 PHP50,000 PHP300,000 PHP350,000
Allocation Base for:
Dep. A 3,000 2,000 21,000 14,000
Dep. B 3,000 1,000 39,000 5,000
Budgeted DLHs 5,000 10,000

Predetermined overhead rate is computed using budgeted direct labor hours as cost driver.

18. What is the departmental overhead rate for Production Department C1?
Answers: a. PHP60.00 per direct labor hour
b. PHP16.77 per direct labor hour
c. PHP26.46 per direct labor hour
d. PHP72.46 per direct labor hour
Response Feedback: Dep A. Dep. B Dep C1 Dep C2
Direct Cost 30,000 50,000
Dep A (30,000) (21/35) 18,000 (14/35) 12,000
Dep B (50,000) (39/44) (5/44) 5,681.82
44,318.18
PD FOH 70,000 150,000
Total BFOH PHP132,318.18 PHP167,681.82
BDLHs 5,000 10,000
POH rate PHP26.46 PHP16.77
 COST EXAM2 (compiled by Gail)

19. If 8,000 units are expected output of Department C2, what is the total cost per unit of output of
Production Department C2?

Answers: a. PHP64.71 per unit

b. PHP58.46 per unit

c. PHP70.58 per unit

d. PHP45.29 per unit

Response Feedback: Department C2

Prime Cost PHP 300,000

FOH (PHP16.77 x 10,000) 167,700
Total Cost PHP 467,700 divided by 8,000 units = PHP58.46

ABC Corporation uses an activity-based costing system with three activity cost pools. The company has
provided the following data concerning its costs and its activity-based costing system:

Costs:
Wages and salaries PHP440,000
Depreciation 120,000
Utilities 200,000

Distribution of resource consumption (resource consumption rates):

Activity Cost Pools
Assembly Setting Up Other Total
Wages and salaries 45% 40% 15% 100%
Depreciation 20% 30% 50% 100%
Utilities 15% 55% 30% 100%

20. How much cost, in total, would be allocated in the first-stage allocation to Setting Up activity cost
pool?
Answers: a. PHP333,000
b. PHP301,000
c. PHP322,000
d. PHP252,000
Response Feedback: Wages and salaries PHP440,000 x 40% = PHP176,000
Depreciation PHP120,000 x 30% = PHP36,000
Utilities PHP200,000 x 55% = PHP110,000
Total PHP322,000
COST EXAM2 (compiled by Gail)