ABC Costing
Self Test
Cost Accounting
Self Test
Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.
1. In activity based costing, an activity is best defined as
a. a group of costs associated with one department
b. a group of activities within one department
c. a type of task performed that causes overhead dollars to be spent
d. a group of costs associated with managing the organization
Answer
C. By definition, an activity is something that is done that causes overhead dollars to be spent.
2. A cost driver is
a. not used in a traditional cost system
b. related to cost changes in a traditional cost system
c. a quantity of activity that causes costs to increase
d. only used in an activity based costing system
Answer
C. A cost driver is an activity that occurs that causes costs to increase that can be counted. One cost driver is used in a traditional cost system
3. A cost pool is best defined as
a. a group of costs that supports an activity
b. a group of direct costs that will be allocated to the product
c. the total overhead that must be allocated
d. a general ledger total amount
Answer
A. By definition, a cost pool is the total of the types of costs that are required to accomplish an activity. Direct costs are not allocated. There are several cost pools that make up total overhead.
4. Which of the following are similar terms
a. cost pool and total overhead
b. cost driver and transaction driver
c. cost pool and activity
d. cost per activity and cost pool
Answer
B. The cost driver and the transaction driver both are terms which mean the activity that causes the company to spend overhead dollars.
5. ABC costing would be useful to a company with
a. one product
b. one product, one very large customer and two very small customers
c. many products which require lots of support
d. many services which require very little support
Answer
C. ABC costing identifies the cost every time an activity occurs and then determines the cost of making a product or providing a service. No allocation is necessary if the company has one product or spends very little in support of the service provided.
Do you understand how to apply ABC costing?
1. ABC costing, as compared to traditional costing, usually
a. involves fewer cost pools
b. involves more cost pools
c. involves the same number of cost pools.
d. involves cost pools with larger dollars
Answer
B. ABC uses more than one activity and matches the activity with cost pools. Traditional costing uses only one activity and a total cost pool. The amount of dollars being allocated does not differ.a
2. Which of the following must occur first when implementing ABC costing?
a. identify activities
b. assign costs to activities
c. calculate a cost per activity
d. allocate overhead costs to a product
Answer
A. The activities must be identified first. Then the costs that are caused by the activity are accumulated into a cost pool. The order is as listed a. – d.
3. What is the overall objective of using ABC costing?
a. determine the amount of activity that occurs
b. allocate overhead cost to a product or customer
c. determine total overhead costs
d. separate overhead costs to manufacturing and nonmanufacturing
Answer
B. ABC is used to allocate overhead to products or services. The overhead is indirect costs that can be manufacturing costs or administrative or selling costs and the type of overhead is not relevant. Determining the amount of activity and amount of overhead costs are steps to take and are not the objective.
4. To implement ABC costing, a cost driver must be identified for each
a. activity
b. cost pool
c. unit level activity
d. product level activity
Answer
B. The cost driver, or activity, must be matched to the pool of costs that are caused by the activity. The level of activity is not relevant.
5. In order to implement ABC costing, the accountant must determine the following in this particular order.
a. cost pools, cost drivers, and rate per activity
b. cost drivers, cost pools, and rate per activity
c. rate per activity, cost pools, and cost drivers
d. none of the above is correct
Answer
B. The activity must be determined first, then the cost driver, and a cost pool is associated with the activity, and using both, a rate per is calculated.
6. A difference in activity based costing and traditional costing is
a. ABC costing defines product costs differently than GAAP
b. ABC costing only uses product costs in the analysis
c. only manufacturing costs are allocated to products in ABC costing
d. defining what type of driver is used is most important
Answer
A. ABC defines a product cost as any cost associated with the product or service, not just the cost of making/providing the product or service. The idea behind ABC is that the price must cover all costs, not just the cost of making the product. ABC allocates both product and period costs to the product or service. GAAP requires that only product costs be allocated to the product as the cost of inventory. Defining the activities is very important, defining the type of driver is not very important to the implementation as it is really determined by the activity.
Can you identify the type of activity?
1. When activity based costing is used in a highly automated facility, utilities would be a
a. batch level activity
b. organization level activity
c. unit level activity
d. product level activity
Answer
C. Utilities are used to make each product, therefore, it is a unit level activity
2. A unit level cost:
a. would be the cost of advertising a product
b. would be the cost of a machine set-up for a group of products
c. would be the cost of indirect materials
d. is the same as a fixed cost
Answer
C. Indirect materials are used to make each product, therefore it is unit level.
3. A product level cost would be
a. raw materials
b. executive salaries
c. advertising the products
d. depreciation on the corporate office furniture
Answer
C. Product level costs are incurred for all products at one time and done regardless of the number of units.
4. A batch level cost would be
a. raw materials
b. tooling for a custom group of products
c. advertising the product
d. depreciation on the corporate office furniture
Answer
B. Batch level costs are done each time a batch is handled. A custom group of products is considered a batch.
5. Direct material costs is an example of what type of activity?
a. product level
b. batch level
c. unit level
d. organization level
Answer
C. Direct material is required for each unit, therefore, it is a unit level activity.
6. Receipt of raw materials is an example of what type of activity?
a. product level
b. batch level
c. unit level
d. organization level
Answer
B. Batch level costs are done each time a batch is handled. Receiving several raw materials at one time is considered a batch
7. This type of activity occurs because a company is in business.
a. product level
b. batch level
c. unit level
d. organization level
Answer
D. This type of cost must be incurred regardless of how many products or services are provided.
8. This type of activity occurs because a company has a particular product.
a. product level
b. batch level
c. unit level
d. organization level
Answer
A. Product level costs must be carried out because a company has a particular product, regardless of units sold.
9. The design of new products is an example of a:
a. batch level activity
b. product level activity
c. organization sustaining activity
d. unit level activity
Answer
B. Product level activity because it is done to produce a product, regardless of how many is sold.