Short Quiz (Based on Lecture 3 – Activity-Based Costing)

1. Traditional cost accounting systems can be effective if the level of indirect costs is
low relative to the level of direct costs and if the accuracy of the cost information is
not critical to the company's success.
True False

2. Which of the following is not a basic step that is used to determine the cost of goods
using Activity- Based Costing?

(a) Identify and classify the activities related to the company’s products
(b) Calculate a cost-driver rate for each activity
(c) Classify all costs into variables and fixed cost behaviour
(d) Assign activity costs to products

3.
4.

The Dedham Cooperative Bank is considering either a bank wide overhead rate or
departmental overhead rates to allocate €2,000,000 of indirect costs. The bank wide
rate would be based on either direct labour hours or the number of loans processed.
The departmental rates would be based on direct labour time for Consumer Loans and a
dual rate based on direct labour time and the number of loans processed for
Commercial Loans. The following information was gathered for the upcoming period:

If Dedham Cooperative uses a bank-wide rate based on direct labour time, what would be
the indirect costs allocated to the Consumer Department?

(a) €800,000
(b) €1,200,000
(c) €1,600,000
(d) €400,000

€2,000,000/(12,000+8,000) = €100.

€100 x 12,000 = €1,200,000

4 If Dedham Cooperative uses a bank wide rate based on the number of loans
processed, what would be the indirect costs assigned to the Commercial
Department?
(a) €400,000
(b) €600,000
(c) €800,000
(d) €200,000

€2,000,000/(1,600+400) = €1,000
€1,000 x 400 = €400,000

5. Management estimates that it now costs €2,000 to analyze and close a commercial
loan. This amount has been included in the €2,000,000 of indirect costs. If the
remaining indirect costs are allocated based on the number of loans processed, how
much of the indirect costs should be allocated to the Consumer Department?
(a) €960,000
(b) €1,040,000
(c) €1,600,000
(d) €400,000

€2,000 x 400 = €800,000

€2,000,000 - €800,000 = €1,200,000
€1,200,000/(1,600+400) x 1,600 = €960,000

6. Implementing an Activity-Based Costing system is relatively inexpensive.

True False

7. Which of the following indicates that a company may benefit from an Activity-Based
Costing system?

(a) Standard high-volume goods and services show significant profits

(b) Indirect costs are insignificant in proportion to direct costs
(c) The company loses relatively high priced bids
(d) Goods and services are complex and may require many different processes or
inputs

8. A cost-driver base should be based on the resource's practical capacity to support

activities.

True False