N12401 MAD II

Seminar 3
Activity-Based Costing

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These exercises are meant to confirm your understanding of the topic concerned. You are expected
to have gone through the class materials and directed readings thoroughly before attempting these
exercises. As you work through these questions, you may find new terminologies/ideas popping out
occasionally, dont get worried at all, as these are deliberate to trigger further exploration of the
issues concerned. So be adventurous and have fun!
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1. Which
a.
b.
c.
d.

of the following is not typical of traditional costing systems?

Use of a single predetermined overhead rate.
Use of direct labor hours or direct labor cost to assign overhead.
Assumption of correlation between direct labor and incurrence of overhead cost.
Use of multiple cost drivers to allocate overhead.

2. An activity that has a direct cause-effect relationship with the resources consumed is a(n)
a. cost driver.
b. overhead rate.
c. cost pool.
d. product activity.
3. Which
a.
b.
c.
d.

best describes the flow of overhead costs in an activity-based costing system?

Overhead costs direct labor cost or hours products
Overhead costs products
Overhead costs activity cost pools cost drivers products
Overhead costs machine hours products

4. The first step in activity-based costing is to

a. assign manufacturing overhead costs for each activity cost pool to products.
b. compute the activity-based overhead rate per cost driver.
c. identify and classify the major activities involved in the manufacture of specific products.
d. identify the cost driver that has a strong correlation to the activity cost pool.
5. A well-designed activity-based costing system starts with
a. identifying the activity-cost pools.
b. computing the activity-based overhead rate.
c. assigning manufacturing overhead costs for each activity cost pool to products.
d. analyzing the activities performed to manufacture a product.
6. One of Lara Dole Company's activity cost pools is machine setups, with estimated overhead of
$300,000. Dole produces flares (400 setups) and health packs (600 setups). How much of the
machine setup cost pool should be assigned to flares?
a. $0.
b. $120,000.
c. $150,000.
d. $180,000.
7. Which
a.
b.
c.
d.

would be an appropriate cost driver for the ordering and receiving activity cost pool?
Machine setups
Purchase orders
Machine hours
Inspections

8. As compared to a high-volume product, a low-volume product

a. usually requires less special handling.
b. is usually responsible for more overhead costs per unit.
c. requires relatively fewer machine setups.

N12401 MAD II

Seminar 3
Activity-Based Costing

d. requires use of direct labor hours as the primary cost driver to ensure proper allocation of
overhead.
9. Which
a.
b.
c.
d.

of the following is a limitation of activity-based costing?

More cost pools
Less control over overhead costs
Poorer management decisions
Some arbitrary allocations continue

10. Which
a.
b.
c.
d.

of the following factors would suggest a switch to activity-based costing?

Product lines similar in volume and manufacturing complexity.
Overhead costs constitute a significant portion of total costs.
The manufacturing process has been stable.
Production managers use data provided by the existing system.

11. The primary benefit of ABC is it provides

a. better management decisions.
b. enhanced control over overhead costs.
c. more cost pools.
d. more accurate product costing.
12. What sometimes makes implementation of activity-based costing difficult in service industries is
a. the labeling of activities as value-added.
b. identifying activities, activity cost plus, and cost drivers.
c. that a larger proportion of overhead costs are company-wide costs.
d. attempting to reduce or eliminate nonvalue-added activities.
13. The use of activity-based costing in service industries
a. has the same objective as in manufacturing.
b. results in improved costing of services provided.
c. uses cost pools to assign overhead.
d. all of these.
14. Which
a.
b.
c.
d.

of the following is not a facility-level activity?

Plant management
Product design
Personnel administration
Training

15. Which
a.
b.
c.
d.

of the following is not a product-level activity?

Product design
Engineering changes
Inventory management
Equipment setups

16. Which
a.
b.
c.
d.

of the following is not a batch-level activity?

Engineering changes
Equipment setups
Inspection
Materials handling

17. Which
a.
b.
c.
d.

of the following is not a unit-level activity?

Purchase ordering
Assembling
Painting
Sewing

N12401 MAD II

Seminar 3
Activity-Based Costing

Question 18
QSS Inc. produces three products: Quality, Superior, and Superb. The cost accounting system
applied conversion costs using a plant-wide allocation rate with direct labour hours as the cost driver.
QSS is thinking of employing an ABC system for conversion costs.
QSS concluded that its plant had six activities with the following cost drivers and costs
budgeted for the upcoming year:
Activity Area
Material Handling
Production Scheduling
Setups
Machinery Cost & Maintenance
Finishing
Packaging & Shipping

Budgeted Costs
$ 258,400
114,000
160,000
3,510,000
1,092,000
190,000

Cost Driver
Number of parts
Number of prod. orders
Number of prod. setups
Machine hours
Direct Labour Hours
Number of orders shipped

The following information summarizes QSSs projections of the cost drivers listed above by product
type.
Cost Driver
Units to be produced
Number of parts per unit
Production orders
Production setups
Machine hours per unit
Direct Labour Hours per unit
Orders shipped

Quality

Superior

Superb

10,000
30
300
100
7
2
1,000

5,000
50
70
50
7
5
2,000

800
120
200
50
15
12
800

It is estimated that there will be 54,600 direct labour hours in the upcoming year.
Required:
Using the information above,
(a)

Calculate (i) the traditional plant-wide allocation Rate for conversion costs using direct labour
hours as the cost driver; and (ii) the predetermined allocation rates for each activity.

(b)

The conversion costs applied to each units using (i) the traditional plant-wide allocation rate;
and (ii) the ABC rate calculated in part (a) above.

(c)

Comment on the results in part (b).

(d)

It is the companys practice to measure its contribution by comparing the selling price with the
corresponding conversion costs. The company policy requires a minimum estimated
contribution-to-sales ratio of 40% before proceeding with the production or sale of any product.
If the estimated unit selling price for Quality, Superior and Superb were $350, $610 and $2,340
respectively, advice the management of QSS, solely on financial ground, whether these three
products should remain in the production.