COST ACCOUNTING & CONTROL

Quizzer No. 3
ACTIVITY-BASED COSTING & SERVICE COSTS ALLOCATION METHODS

1. Which of the following methods of allocating the costs of service departments

provides the broadest recognition of department served?
a. Reciprocal allocation
b. Step-down allocation
c. Direct allocation
d. Arbitrary allocation

2. The step-down method of allocating service department costs:

a. is a less accurate method than the direct method
b. can’t be used when a company has more than two service departments
c. is a simpler allocation method than the direct method
d. ignores some interdepartmental services

3. A tool that focuses on manufacturing process and seeks to reduce or optimize the
activities performed within the process is
a. Process value analysis
b. Re-engineering
c. Benchmarking
d. Answer not given

4. A non-value adding cost is

a. Usually direct to a product cost
b. The same as a discretionary cost
c. Unavoidable
d. Not essential to manufacturing a product

5. A value-added employee in a construction firm would be

a. An accountant
b. A secretary
c. A painter
d. All of the above

6. “Waste” is another name for

a. Non value-added costs
b. Idle costs
c. Trash costs
d. All of the above

7. Which of the following is typically regarded as a cost driver in traditional costing

practices?
a. Number of purchase order processed
b. Number of customers served
c. Number of transactions processed
d. Number of direct labor hours worked

8.All of the following phrases are used as alternate terminology for "factory overhead"
except:
A. manufacturing expense
 B. indirect manufacturing cost
C. factory expense
D. factory burden
E. other expense

9.The component of per-unit costs that remains constant as the production level varies
is:
A. general and administrative expenses
B. commercial expenses
C. variable factory overhead
D. fixed factory overhead
E. heat, light, and power

10.To express factory overhead as a percentage of direct materials pesos, estimated

factory overhead is divided by estimated:
A. machine hours
B. normal capacity
C. units of materials used
D. materials cost
E. materials requisition usage

11.Estimated factory overhead is P600,000, and the hours usage of machinery is

expected to be 150,000. Factory overhead is applied at the rate of P10 per direct
labor hour. The wage rate for direct labor is P6 per hour, and the total number of
estimated direct labor hours for the period is:
A. 100,000
B. 150,000
C. 300,000
D. 600,000
E. 60,000

12.An objection to the use of a factory overhead rate based on direct labor pesos is that:
A. these items are difficult to measure
B. a job is charged with more overhead when a highly paid operator works on the job
than when a low-paid operator performs the work
C. overhead is allocated in relation to units produced by workers
D. overhead rates will be distributed inequitably when there are no wage differentials
in the department
E. costs of applying this method are excessive

13.Application rates for factory overhead best reflect anticipated fluctuations in sales
over a cycle of years when they are computed under the concept of:
A. practical capacity
B. expected actual capacity
C. theoretical capacity
D. maximum capacity
E. normal capacity

(AICPA Adapted)

14.Underapplied factory overhead related to a significant decrease in production should

be charged to:
A. Finished Goods Inventory
 B. Cost of Goods Sold
C. Work in Process Inventory and Finished Goods Inventory
D. Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold
E. Work in Process Inventory

(CIA Adapted)

15.A base used to allocate the cost of products, customers, or other final cost objects is
a(n):
A. resource driver
B. activity driver
C. final cost object
D. driver
E. none of the above

16.Examples of activities at the batch level of costs include:

A. cutting, painting, and packaging
B. scheduling, setting up, and moving
C. designing, changing, and advertising
D. heating, lighting, and security
E. none of the above

17.Examples of activities at the product level of costs include:

A. cutting, painting, and packaging
B. scheduling, setting up, and moving
C. designing, changing, and advertising
D. heating, lighting, and security
E. none of the above

18.Examples of activities at the plant level of costs include:

A. cutting, painting, and packaging
B. scheduling, setting up, and moving
C. designing, changing, and advertising
D. heating, lighting, and security
E. none of the above

19.Examples of unit-level costs are:

A. portions of electricity and indirect materials
B. salaries of schedulers and setup personnel
C. salaries of designers and programmers
D. depreciation and insurance on buildings
E. none of the above

20.Examples of product-level costs are:

A. portions of electricity and indirect materials
B. salaries of schedulers and setup personnel
C. salaries of designers and programmers
D. depreciation and insurance on buildings
E. none of the above

21.Examples of plant-level costs are:

A. portions of electricity and indirect materials
B. salaries of schedulers and setup personnel
 C. salaries of designers and programmers
D. depreciation and insurance on buildings
E. none of the above

22.Examples of batch-level costs are:

A. portions of electricity and indirect materials
B. salaries of schedulers and setup personnel
C. salaries of designers and programmers
D. depreciation and insurance on buildings
E. none of the above

23.Examples of unit-level activity drivers include:

A. units of output and direct labor hours
B. number of batches and material moves
C. number of products and design changes
D. square footage occupied
E. all of the above

24.Examples of batch-level activity drivers include:

A. units of output and direct labor hours
B. number of batches and material moves
C. number of products and design changes
D. square footage occupied
E. all of the above

25.Examples of product-level activity drivers include:

A. units of output and direct labor hours
B. number of batches and material moves
C. number of products and design changes
D. square footage occupied
E. all of the above

26.Examples of plant-level activity drivers include:

A. units of output and direct labor hours
B. number of batches and material moves
C. number of products and design changes
D. square footage occupied
E. all of the above

27.Unit-level costs are costs that:

A. inevitably increase whenever a unit is produced
B. are caused by the number of batches produced and sold
C. are incurred to support the number of different products produced
D. are incurred to sustain capacity at a production site
E. none of the above

28.Plant-level costs are costs that:

A. inevitably increase whenever a unit is produced
B. are caused by the number of batches produced and sold
C. are incurred to support the number of different products produced
D. are incurred to sustain capacity at a production site
E. none of the above
29.Unit-level drivers are:
A. inversely proportional to the volume of output
B. measures of activities that vary with the number of batches produced and sold
C. measures of activity that vary with the number of different products produced and
sold
D. for assigning plant-level costs
E. none of the above

30.Traditional costing systems are characterized by their use of which of the following
measures as bases for allocating overhead to output:
A. unit-level drivers
B. batch-level drivers
C. product-level drivers
D. plant-level drivers
E. none of the above

31.ABC systems are characterized by their use of which of the following measures as
bases for allocating overhead to output:
A. unit-level drivers
B. batch-level drivers
C. product-level drivers
D. plant-level drivers
E. all of the above

32.All of the following are distinctions that usually exist between traditional and ABC
costing systems, except that:
A. the number of overhead cost pools tends to be lower in ABC systems
B. the number of allocation bases tend to be higher in ABC systems
C. costs within an ABC cost pool tend to be more homogeneous than the costs within
a traditional system's cost pool
D. all ABC systems are two-stage costing systems, while traditional systems may be
one- or two-stage
E. all of the above are distinctions
33.All of the following are distinctions that usually exist between traditional and ABC
costing systems, except that:
A. the number of overhead cost pools tends to be higher in ABC systems
B. the number of allocation bases tend to be higher in ABC systems
C. costs within an ABC cost pool tend to be more homogeneous than the costs within
a traditional system's cost pool
D. all ABC systems are one-stage costing systems, while traditional systems may be
one- or two-stage
E. all of the above are distinctions

34.Compared to an ABC system, a traditional costing system reports:

A. a lower unit cost for high-volume products and a higher unit cost for low-volume
products
B. a higher unit cost for high-volume products and a lower unit cost for low-volume
products
C. the same unit costs for high- and low-volume products as does an ABC system
D. either higher or lower unit cost for high-volume products than an ABC system
depending upon the level of fixed costs
E. none of the above
35.Activity-based management (ABM) is:
A. a costing system in which multiple overhead cost pools are allocated using bases
that include one or more non-volume related factors
B. a base used to allocate the cost of a resource to the different activities using it
C. the use of information obtained from ABC to make improvements in the firm
D. a base used to allocate the cost of an activity to products and customers
E. none of the above

36.All of the following are ways that activities can be managed to achieve improvements
in a process, except:
A. activity induction
B. activity elimination
C. activity selection
D. activity sharing
E. all of the above are ways in which activities may be managed

37.All of the following are examples of non-value-added activities except:

A. ordering
B. receiving
C. assembling
D. inspections
E. setting up

38.Brownfield Company applies factory overhead on the basis of direct labor hours.
Budget and actual data for direct labor and overhead for the year are as follows:
Budget Actual
Direct labor hours.................................................... 600,000 550,000
Factory overhead costs........................................... P720,000 P640,000

The factory overhead for Brownfield for the year is:

A. underapplied by P40,000
B. overapplied by P20,000
C. overapplied by P40,000
D. underapplied by P20,000
E. neither underapplied nor overapplied

(ICMA Adapted)

39.A company manufactures plastic products for the home and restaurant market. The
company also does contract work for other customers and utilizes a job order costing
system. The flexible budget covering next year's expected range of activity is:

Direct labor hours.............................. 50,000 80,000 110,000

Machine hours.................................... 40,000 64,000 88,000
Variable overhead costs..................... P100,000 P160,000 P220,000
Fixed overhead costs......................... 150,000 150,000 150,000
Total overhead costs.......................... P250,000 P310,000 P370,000

A predetermined overhead rate based on direct labor hours at expected actual

capacity is used to apply total overhead. Management has estimated that 100,000
direct labor hours will be used next year. The predetermined overhead rate per direct
labor hour to be used to apply total overhead to individual jobs next year is:
 A. P3.70
B. P3.88
C. P3.36
D. P3.50
E. none of the above

(CIA Adapted)

40.At the end of the last fiscal year, Tiger Company had the following account balances:

Overapplied Overhead................................................................. P 1,000

Cost of Goods Sold....................................................................... 980,000
Work in Process Inventory........................................................... 38,000
Finished Goods Inventory............................................................ 82,000

The most common treatment of the Overapplied Overhead would be to:

A. carry it as a deferred credit on the balance sheet
B. report it as a miscellaneous operating revenue on the income statement
C. credit it to Cost of Goods Sold
D. prorate it between Work in Process Inventory and Finished Goods Inventory
E. prorate it among Work in Process Inventory, Finished Goods Inventory, and Cost of
Goods Sold

(ICMA Adapted)

41.Overapplied factory overhead would result if:

A. factory overhead costs incurred were less than costs charged to production
B. factory overhead costs incurred were unreasonably large in relation to units
produced
C. factory overhead costs incurred were greater than costs charged to production
D. theoretical capacity were used in computing the overhead rate
E. the plant was operating at less than normal capacity

(AICPA Adapted)

42.Clyde Company found that the differences in product costs resulting from the
application of predetermined overhead rates rather than actual overhead rates were
very significant when actual production was substantially less than planned
production. The most likely explanation is that:
A. costs of overhead were substantially less than anticipated
B. overhead was composed chiefly of variable costs
C. several products were produced simultaneously
D. fixed factory overhead was a significant cost
E. costs of overhead items were substantially higher than anticipated

(AICPA Adapted)

43.Avery Co. uses a predetermined factory overhead rate based on direct labor hours.
For the month of October, Avery's budgeted overhead was P300,000 based on a
budgeted volume of 100,000 direct labor hours. Actual overhead amounted to
P325,000 with actual direct labor hours totaling 110,000. How much was the
overapplied or underapplied overhead?
A. P5,000 overapplied
 B. P5,000 underapplied
C. P30,000 overapplied
D. P30,000 underapplied
E. none of the above

(AICPA Adapted)

44.ABC
a. requires the identification of cost drivers
b. is used only in JIT operations
c. applied only to discretionary fixed costs
d. does not help identify activities as value-adding or non-value-adding

45.The term cost driver refers to

a. any activity that can be used to predict cost changes
b. the attempt to control expenditures at a reasonable level
c. the person who gathers and transfers cost data to the management accountant
d. any activity that causes costs to be incurred

46.A cost pool is

a. all costs of a production department
b. the material and labor cost used on a particular job
c. over-applied or under-applied overhead costs
d. a group of overhead costs driven by the same activity

47.The absolute maximum capacity possible under the best conceivable operating
conditions is a description of which type of activity level used in the computation of
overhead rates?
A. theoretical
B. normal
C. practical
D. expected actual
E. currently attainable (expected)

48.All of the following are terms used to describe the phenomenon measured in the
denominator of an overhead rate, except the:
A. base
B. overhead cost base
C. overhead rate base
D. overhead allocation base
E. all of the above are acceptable terms

49.The budget for a given factory overhead cost during a given period was P80,000. The
actual cost for the period was P72,000. Considering these facts, it can be said that
the plant manager has done a better-than-expected job in controlling the cost if:
A. the cost is a discretionary fixed cost and actual production equaled budgeted
production
B. the cost is variable and actual production equaled budgeted production
C. the cost is variable and actual production was 90% of budgeted production
D. the cost is fixed and the actual production was less than budgeted production
E. the cost is variable and actual production was 80% of budgeted production
50.In highly automated manufacturing, all of the following may be appropriate bases for
factory overhead application except:
A. machine hours
B. direct labor hours
C. number of setups
D. number of inspections
E. movement of materials

51.When the amount of overapplied factory overhead is significant, the entry to close
Overapplied Factory Overhead will most likely require:
A. a debit to Cost of Goods Sold
B. debits to Cost of Goods Sold, Finished Goods Inventory, and Work in Process
Inventory
C. a credit to Cost of Goods Sold
D. credits to Cost of Goods Sold, Finished Goods Inventory, and Work in Process
Inventory
E. none of the above

(CIA Adapted)

52.In ABC, preliminary cost allocations assign costs to

a. Departments
b. Processes
c. Products
d. Activities

53.In ABC, final cost allocations assign costs to

a. Departments
b. Processes
c. Products
d. Activities

54.Cadott Manufacturing produces three products. Production and cost information show
the following:
Model X Model Y Model Z
Units produced 1,000 3,000 6,000
Direct labor hours 2,000 1,000 2,000
Number of inspections 20 30 50

Inspection costs totaled P50,000. Using direct labor hours as the allocation base,
inspection costs allocated to each unit of Model X would be
a. P5.00
b. P10.00
c. P20.00
d. Some other amount

55.Using the same data in No. 54, inspection costs allocated to each unit of Model Y
using ABC would be:
a. P3.33
b. P5.00
c. P10.00
d. Some other amount
56.Genco manufactures two versions of a product. Production and cost information show
the following:
Model A Model B
Units produced 100 200
Material moves 10 40
DL hours per unit 1 3

Material handling costs total P100,000. DL hours are used to allocate overhead costs.
The material handling costs allocated to each unit of Model A would be:
a. P143
b. P200
c. P333
d. Some other amount

57.Using the same data in No. 56, the material handling costs allocated to each unit of
Model B using ABC would be:
a. P200
b. P333
c. P400
d. Some other amount

58.Waupaca Company produces three products with the following production and cost
data:
Model A Model B Model C
Units produced 2,000 6,000 12,000
DL hours (total) 4,000 2,000 4,000
Number of setups 100 150 250
Number of shipments 200 225 275
Engineering change 15 10 5
orders

Overhead costs include setups P45,000; shipping costs P70,000; and engineering
costs P90,000. What would be the per unit overhead cost for Model B if ABC were
used?
a. P11.00
b. P33.00
c. P61.50
d. Some other amount

59.Kimball Company produces two products in a single factory. The following production
and cost information has been determined:
Model 1 Model 2
Units produced 10,000 2,000
Material moves (total) 100 40
Testing time (total) 250 125
DL hours per unit 1 5

The controller has determined total overhead to be P480,000. P120,000 relates to

material moves; P150,000 relates to testing; the remainder is related to labor time. If
Kimball uses DL hours to allocate overhead to each model, what would overhead per
unit be for Model 1?
a. P1.00
b. P12.00
 c. P24.00
d. P40.00

60.Sedimentary Co. has two service departments (A and B) and two producing
departments (X and Y). Data provided are as follows:
Service Departments Operating Departments
A B X Y
Direct costs P400 P800
Services performed by Dept. A 20% 40% 40%
Services performed by Dept. B 30% 60% 10%

Sedimentary uses the reciprocal method to allocate service departmental costs. The
service department cost allocated to Department X is
a. P600
b. P680
c. P834
d. P936

61.Sammy Company produces two products in a single factory. The following production
and cost information has been determined:
Model F1 Model G4
Production 10,000 2,000
Material moves (total) 100 40
Product tests (total) 250 125
DL hours per unit 1 5

The controller has determined that total overhead is expected to be P480,000.

P140,000 of which relates to material moves, P150,000 relates to testing and the
remainder is related to labor time. Under ABC, what would be the overhead cost per
unit be for Model F1?
a. P40.00
b. P29.50
c. P24.00
d. P12.00

62.A department that would be classified as a producing department is:

A. Production Control
B. Utilities
C. Finishing
D. Medical
E. Shipping

63.A department that would be classified as a service department is:

A. Refining
B. Receiving
C. Mixing
D. Assembly
E. Finishing

64.In determining the right method for allocating equipment depreciation to

departments, the best recommendation is to:
A. use the cost of equipment in the department as a basis for allocation
B. allocate on the basis of square footage used in a given department
 C. charge the amounts to General Plant
D. use algebraic techniques
E. allocate on the basis of companywide rates

65.The most reasonable basis for allocating worker's compensation insurance is:
A. departmental payroll
B. building depreciation
C. kilowatt-hours
D. number of employees
E. materials used

66.A company is attempting to allocate the costs of electricity in various departments.

The variable portion of electricity expense is to be allocated using kilowatt-hours. The
information needed in order to allocate the fixed portion of the current period's
electricity expense is:
A. rated horsepower of equipment
B. number of machines in each department
C. estimated materials consumption
D. number of employees
E. square footage in each department

67.The method for allocating service department costs that requires the least clerical
work is:
A. use of square footage in each department
B. step method
C. allocation to other service departments only
D. simultaneous method
E. direct method

68.Rapid Falls Corp. has three producing departments, A, B, and C, with 50, 30, and 20
employees, respectively, in each department. Factory payroll costs other than direct
labor are accumulated in a Payroll Department account and are assigned to producing
departments on the basis of number of employees. The total payroll in each
department was: A, P300,000; B, P275,000; C, P325,000; and Payroll, P50,000. Other
costs accumulated in the Payroll Department amounted to P200,000. The amount of
Payroll Department costs chargeable to Department C is:
A. P125,000
B. P100,000
C. P40,000
D. P10,000
E. P50,000

69.The following statement that best describes cost allocation is:

A. a company, as a general rule, should allocate indirect costs randomly or based on
an "ability-to-bear" criterion
B. a company can affect total income the most strongly by using the algebraic method
of allocating indirect costs
C. a company can maximize or minimize total company income by selecting different
bases on which to allocate indirect costs
D. a company should select an allocation base to raise or lower reported income on
given products
E. a company's total income will remain unchanged no matter how indirect costs are
allocated
70.A factor to be considered in deciding the kinds of departments required for
establishing accurate departmental overhead rates with which to control costs is:
A. location of operations, processes, and machinery
B. responsibilities for production and costs
C. number of departments or cost centers
D. similarity of operations, procedures, and machinery in each department
E. all of the above

(CIA Adapted)

71.Services available for the benefit of producing departments and other service
departments can be organized by:
A. establishing a separate service department for each function
B. combining several functions into one department
C. placing service costs in a department called "general factory cost pool"
D. none of the above
E. all of the above

(CIA Adapted)

72.Entities that have practiced departmentalization for many years, by grouping their
activities into categories such as occupancy, sales promotion, purchasing, and
delivery are:
A. hospitals
B. retail stores
C. banks
D. insurance companies
E. colleges

(CIA Adapted)

73.An automotive company has three divisions. One division manufactures new
replacement parts for automobiles; another rebuilds engines; and the third does
repair and overhaul work on a line of trucks. All three divisions use the services of a
central payroll department. The best method of allocating the cost of the payroll
department to the various operating divisions is:
A. total labor hours incurred in the divisions
B. value of production in the divisions
C. direct materials costs incurred in the divisions
D. machine hours used in the divisions
E. none of the above

(CIA Adapted)

74.The Janitorial Department provides cleaning services to all departments of a large

store. Management wishes to allocate the janitorial costs to the various departments
that benefit from the service. The most reasonable allocation base for janitorial costs
would be:
A. sales of each department
B. square footage of each department
C. number of employees in each department
 D. total direct costs of each department before any allocations
E. none of the above

(CIA Adapted)

75.A hospital has a P100,000 expected utility bill this year. The Janitorial, Accounting,
and Orderlies Departments are service functions to the Operating, Hospital Rooms,
and Laboratories Departments. Floor space assigned to each department is:

Department................................................................... Square Footage

Janitorial......................................................................... 1,000
Accounting..................................................................... 2,000
Orderlies........................................................................ 7,000
Operating....................................................................... 4,000
Hospital Rooms.............................................................. 30,000
Laboratories................................................................... 6,000
............................................................................... 50,000

How much of the P100,000 will eventually become the Hospital Rooms Department
total costs, assuming use of the direct method of allocation based on square footage?
A. P60,000
B. P72,000
C. P75,000
D. P80,000
E. none of the above

(CIA Adapted)

76.Serpent Corp. distributes service department overhead costs directly to producing

departments without allocation to the other service department. Information for the
month of June is as follows:
Service Departments
Maintenance Utilities
Overhead costs incurred............................... P20,000 P10,000
Service provided to department:
Maintenance............................................ -- 10%
Utilities..................................................... 20% --
ProducingCA............................................. 40% 30%
ProducingCB............................................. 40% 60%
Totals............................................................. 100% 100%

The amount of Maintenance Department costs distributed to ProducingCA Department

for June was:
A. P8,000
B. P8,800
C. P10,000
D. P11,000
E. none of the above

(CIA Adapted)

77.Multiple overhead rates are most commonly used when:

A. production consists of long runs of a single product
 B. the company has more than one production department
C. manufacturing operations are labor intensive
D. production consists of a diverse product line
E. none of the above

(CIA Adapted)

78.An example of a nonvolume-related overhead base would be:

A. direct materials cost
B. number of setups
C. machine hours
D. direct labor pesos
E. none of the above

(CIA Adapted)

79.An example of a department that would be a prime candidate for multiple overhead
rates would be one whose overhead was primarily:
A. labor driven
B. machine related
C. caused by setups and production design changes
D. materials related
E. none of the above

(AICPA Adapted)