ABC Costing

Easy Practice Test

Cost Accounting

Easy Practice Test

Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.

1. An ABC costing system is different from a traditional cost system in the way

a. that direct costs are allocated to cost objects
b. that multiple cost pools are used to allocate direct costs
c. that multiple cost pools are used to allocate overhead costs
d. that costs are assigned only by units produced


C. With ABC costing, overhead is divided into cost pools and a cost per activity is computed for each cost pool. Traditional costing uses only one overhead allocation. Direct costs are not allocated. (a. & b.) Costs can be assigned using any measurable activity. (d.)

2. Managers are most likely to identify activities to use for ABC costing by

a. looking at the financial statements
b. consulting with employees
c. examining general ledger account balances
d. talking with customers


B. Activities are generally what people in the organization do repeatedly to support production or the customer. This can not be determined by looking at accounting records or discussing with people outside the company.

3. A company that spends a material amount on collecting accounts receivable from customers would most likely use a cost driver of

a. number of journal entries made
b. number of invoices
c. average amount of sales dollars per customer
d. number of different products sold


B. Invoices are what cause the company to have to collect. The more invoices that a company has, the more collection activity is required. The other answers would not cause the company to have to collect more accounts receivable.

4. A company allocated the purchasing department cost based on the number of purchase orders processed. The number of purchase orders is

a. a direct cost
b. cost driver
c. a cost pool
d. an overhead rate


B. A cost driver is what the company does that causes them to spend overhead dollars that can be counted. In this case, issuing a purchase order causes the company to have to incur costs for the purchasing department.

5. The most accurate method for determining a product cost is

a. direct tracing of costs
b. traditional product costing
c. activity based costing
d. the use of allocations


A. Direct tracing of costs is not an allocation and is therefore more accurate. Allocations are estimates. Traditional costing and activity based costing uses of estimates to allocate overhead costs. When you know the cost that is direct to the product, you do not have to allocate.

6. An appropriate cost driver for the salaries of quality inspectors is

a. the number of products produced
b. the number of products inspected
c. indirect salaries
d. square feet


B. The requirement to inspect the product is what requires the company to pay the salaries of the quality inspectors. The number of products inspected can be measured and is directly related to the costs incurred.

7. Which of the following is a cost driver?

a. research and development
b. maintenance
c. purchase orders
d. purchasing


C. A cost driver must be something that you can count how often it occurs. The number of purchase orders is the only answer that can be counted.

8. The term cost driver

a. the activity that causes a company to incur costs that can be counted
b. any activity that causes a company to incur costs
c. an activity that allows a company to predict costs
d. the same thing as a cost pool


A. By definition, a cost driver is what is done that causes the company to incur costs and can be counted.

9. Cost should be allocated in an activity based costing system based on

a. cost drivers
b. departments within the organization
c. processes that occur in the organization
d. value added activities


A. Costs should be matched with the cost driver that causes the cost. Departments and process can have several different activities. Value added activities are usually direct costs which do not have to be allocated.

10. Given the following, which is the best reason to use activity based costing?

a. to determine total overhead costs
b. to better allocate direct costs
c. to better allocate overhead costs to products
d. all of the above are good reasons and none are the best


C. Matching costs to the activity that causes the cost gives a better allocation of overhead costs. Total overhead costs are already known and ABC puts the costs into cost pools. Direct costs are not allocated.

11. The manufacturing company has two products, gloves and mittens. Annual production is 10,000 gloves and 25,000 mittens. Under the traditional cost accounting system, the company allocates manufacturing overhead costs using direct labor hours. It takes .2 hours to make a glove and .1 hours to make a mitten. Total estimated overhead for the year is $96,000.

The company is considering changing to an activity based costing system. They have determined that overhead costs are incurred for three primary activities, as follows:

Activity          Estimated                            Quantity of Cost Driver
                           Cost                         Gloves          Mittens          Total
   #1                $15,000                      10,000          25,000       35,000 
   #2                $60,000                      20,000          30,000       50,000
   #3                $21,000                        1,000            5,000          6,000

Determine the following:

A. The predetermined overhead rate using traditional costing
B. The manufacturing overhead cost per unit for each product using traditional costing
C. The cost per activity for each activity using activity based costing.
D. The overhead cost per unit for a glove and a mitten using activity based costing.

A. Traditional costing uses one overhead rate based on direct labor hours.
You must first calculate the total estimated direct labor hours for the company.
                                          units          hours per unit       = total hours
         gloves                   10,000                 .2                   = 2,000
         mittens                  25,000                 .1                   = 2,500
            total company                                                          4,500
         total overhead $96,000 / 4,500 hours = $21.33 per direct labor hour
B. Convert the rate per direct labor hour to a per unit rate:
                                    hours per unit x rate per hour = rate per unit
         gloves                          .2           x    $21.33       = $4.27
         mittens                         .1           x    $21.33       = $2.13 
C. Take the total $ in the cost pool / total activity
         #1          $15,000          /          35,000    = $0.43
         #2          $60,000          /          50,000    = $1.20
         #3          $21,000          /          6,000      = $3.50
D. Take the cost per unit x the amount of activity for each product:
                                             gloves                  mittens
         #1                              $4,300                 $10,750
         #2                            $24,000                 $36,000
         #3                              $3,500                 $17,500
            Total                     $31,800                 $64,250
          / total units                10,000                   25,000
         = O/H cost per unit      $3.18                    $2.57

12. A company has two major sales divisions and has accumulated the following information to be used to implement ABC costing.

Sales salaries expense
Miles driven
Number of customers
Number of products
Cost Driver
Cost Pool $
miles driven

Do the following:

A. Allocate the overhead costs to each division.
B. Determine the profitability of each division given that all costs are provided above.


A. To allocate the overhead cost you must do the following:

1) Total the cost driver and then divide the cost pool by the total cost driver

         Travel                            $205,000 / 50,000             = $4.10 per mile
         Entertainment                 $88,000 / 220                  = $400 per customer
         Administrative              $465,000 / $2,200,000     = .211 % of revenues
2) Take the rate per x the total cost driver for each division
                                          North                South
         Miles                   123,000              82,000
         Customers           48,000              40,000
         Revenues           211,000            253,200
            Total              $382,000          $375,200
B. Determine profitability: Revenues less all costs given:
                                                       North                   South
         Revenues                     1,000,000           1,200,000
         - sales salaries             (250,000)           (400,000)
         - overhead costs           (382,000)           (375,200)
         profits                               368,000              424,800

13. List the steps that you must take to work through an ABC problem. If you can’t write them out, you do not really know what you are doing.


1) Determine the types of activity that drives the overhead costs

2) Determine the cost pool of dollars that is associated with the activity

3) Divide each cost pool by the total associated cost driver to get a cost per

4) Multiply the cost per by the cost driver for the product or service to get total overhead for the product or service.

5) Get cost per unit by dividing the total overhead by the # of units.

Follow these steps for all ABC problems