ABC Costing
Medium Practice Test
Medium Practice Test
Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.
1. Using activity based costing that is designed for internal decision making is not in accordance with GAAP because
a. some non manufacturing overhead costs are assigned to products
b. all manufacturing costs are allocated to products
c. the allocation is subject to management judgement
d. direct costs are allocated
Answer
A. Under GAAP, only product costs are assigned to products and are inventory costs and period costs must be expensed. Under ABC costing, all overhead costs, whether manufacturing or administrative can be assigned to the product in order to determine the profitability of the product.
2. A traditional cost system is similar to an activity based costing system in the way
a. direct costs are allocated based on activities
b. cost allocation pools are determined
c. indirect costs are related to an activity
d. all company costs are allocated to the product
Answer
C. Both costing methods allocate overhead costs, which are indirect, based on an activity. Under a traditional cost system cost pools are not used, there is only one overhead rate. (b.). Direct costs are not allocated. (a.) Not all company costs are allocated, organization sustaining activities are not allocated to specific products or customers.
3. One cost driver is required for each
a. cost pool
b. unit level activity
c. type of service
d. product line
Answer
A. The cost pool is accumulated for each activity. The answer must be in a form of dollars so that the dollars can be allocated.
4. ABC can be used by management to manage which of the following?
a. the quality of service
b. customer profitability
c. direct material costs
d. production line assembly workers
Answer
B. ABC is related to overhead allocation and direct material and direct labor are not allocated (c. & d.). The quality of service can not be measured, so ABC is not very applicable. ABC is used to identify the cost of providing a good or service and management can use this information to set the price and manage customer profitability.
5. Which of the following is never a benefit to a company that uses ABC?
a. identify non value added activities
b. increasing profits
c. motivating employees to be more efficient
d. reduced accounting costs
Answer
D. An ABC system is more costly due to the time it takes to accumulate and analyze data. All of the other items are typical benefits of using activity based costing.
6. A company will produce more accurate product costing information by using
a. one rate based on units
b. various department based rates
c. various cost pools and activity based rates
d. none of the above is considered more accurate than the others
Answer
C. Matching costs with the activity that creates the cost is considered more accurate than using one general overhead rate. Departments often do more than one activity and grouping all department costs with a single activity is not as accurate as many cost pools matched with the associated activity.
7. An ABC system is done using the following procedures
a. all overhead costs are expensed as incurred
b. overhead costs are associated with activities and then the cost is allocated to a product or service based on activity
c. overhead costs are allocated to products and then traced to activities
d. pools of costs are accumulated and then activity is determined
Answer
B. The activity is identified first and then overhead costs are associated with the activity. Manufacturing overhead costs are product costs and are not expensed as incurred. (a.)
8. Batch level costs are allocated based on
a. total organization cost drivers
b. direct labor wages
c. unit based cost drivers
d. cost drivers that are not based on units
Answer
D. Batch level are associated with an activity that supports a group of products and therefore is not based on units. (c.) There is no such thing as a total organization cost driver. Direct labor is associated with a unit and therefore not associated with the batch level. (b.)
9. Which of the following would be the considered a key cost driver for an accounting firm?
a. number of purchase orders
b. number of customers
c. number of labor hours worked
d. number of checks processed
Answer
C. The accounting firm’s key activity is working hours to service the client.
10. In activity based costing, the cost allocation is made to the
a. department
b. product or service
c. activity
d. process
Answer
B. Costs are allocated to a product or service in an effort to determine the total cost of the product or service. The total cost consists of direct material, direct labor, and overhead, which must be allocated.
Activity Cost driver Cost Pool $
Material handling purchase orders $ 72,000
Indirect labor direct labor hours $114,000
Facility costs square feet $ 95,000
The company manufactured 6,000 patio chairs and 8,000 lawn chairs. Direct labor is paid $10 per hour and it takes ¼ of an hour to assemble a patio chair and 1/8 of an hour to assemble a lawn chair. The number of purchase orders placed is 1,200 for patio chairs and 2,300 for lawn chairs. The facility is 44,000 square feet and is used 70% for patio chairs and 30% for lawn chairs. Total material costs for patio chairs is $306,000 and $221,200 for lawn chairs.
A. Calculate the cost to make one patio chair and one lawn chair using traditional costing.
B. Calculate the cost to make one patio chair and one lawn chair using ABC costing.
Answer
A. Traditional Costing
patio lawn
Direct materials $ 51 $27.65
Direct labor $2.50 $1.25
Manufacturing O/H $28.10 $14.05
Total product cost $81.60 $42.95
Material – patio $306,000 / 6,000 chairs = $51 per chair
lawn $221,200 / 8,000 chairs = $27.65 per chair
Labor - patio $10 x ¼ hour = $2.50
lawn $10 x 1/8 hour = $1.25
Manufacturing O/H $281,000 total of all cost pool $
2,500 hours
= $112.40 per hour
patio ¼ hour x $112.40 per hour =$28.10 per unit
lawn 1/8 hour x $112.40 per hour = $14.05 per unt
B. ABC Costing
patio lawn
Direct materials $ 51 $27.65
Direct labor $ 2.50 $ 1.25
Manufacturing O/H $26.60 $15.18
Total product cost $80.10 $44.09
Material and labor costs are the same as traditional costing.
For overhead costs you must divide the total cost pool by the cost driver
to get a cost per, then multiply the cost per by the quantity of driver to
get the total cost to each product.
Cost driver patio lawn total
Purchase orders 1,200 2,300 3,500
Direct labor hours 1,500 1,000 2,500
Square feet 30,800 13,200 44,000
Direct labor hours:
patio 6,000 x ¼ hour each = 1,500 hours
lawn 8,000 x 1/8 hour each = 1,000 hours
Square feet:
patio 44,000 x 70% = 30,800
lawn 44,000 x 30% = 13,200
Manufacturing Overhead cost per:
Purchase orders $72,000 / 3,500 = $20.57 per order
Direct labor hours $114,000 / 2,500 = $45.60 per hour
Square feet $ 95,000 / 44,000 = $2.16 per square ft
Take the rate per x the driver quantity for each product and get
patio lawn
Purchase Orders $24,684 $47,311
Direct labor hours $68,400 $45,600
Square feet $66,528 $28,512
Total O/H $ $159,612 $121,423
/ # units 6,000 8,000
O/H Cost per unit $26.60 $15.18
Service Total Cost Driver Quantity Employee time Costs
checking 22,549 3,280 hours $46,023
saving 2,984 724 hours $10,860
loans 883 4,074 hours $73,305
The bank has two business customers that demand a high level of service. During the month these customers have caused the following levels of activity:
Customer A Customer B
checking 407 904
savings 15 27
loans 3 1
Determine the cost to service each customer during this month.
Answer
1) Get a cost per activity for each service provided:
cost / total cost driver = cost per
Checking $46,023 / 22,549 = $2.04
Savings $10,860 / 2,984 = $3.64
Loans $73,305 / 883 = $83.02
2) Multiply the cost per activity x the amount of times it occurred for each
customer and add all costs to get the total cost.
Customer A Customer B
checking 407 x $2.04 = $830.28 904 x $2.04 = $1,844.16
savings 15 x $3.64 = $ 54.60 27 x $3.64 = $98.28
loans 3 x $83.02 = $249.06 1 x $83.02 = $83.02
Total cost $1,133.94 $2,025.46
Employee time is not a cost driver and is not used in this problem.
13. A company has identified the following overhead costs and cost drivers:
Cost Driver Total annual quantity
1) $100,000 orders 2,500
2) $220,000 machine hours 10,000
3) $ 90,000 kilowatt hours 45,000
The company completed two jobs and accumulated the following:
|
Job
1 |
Job
2 |
||
| Direct materials |
$500
|
$1,000
|
|
| Direct labor |
$340
|
$880
|
|
| Units in the job |
50
|
100
|
|
| labor hours |
29
|
79
|
|
| machine hours |
60
|
115
|
|
| kilowatt hours |
22
|
43
|
|
| Sales price |
$8,100
|
$11,200
|
Determine the gross profit of Job 1 and Job 2 using activity based costing.
Answer
1) Determine the cost per for each:
Orders $100,000 / 2,500 = $40 per order
Machine hours $220,000 / 10,000 = $22 per machine hour
Kilowatt hours $ 90,000 / 45,000 = $2 per kilowatt hour
2) Determine the amount of overhead that is applied to each job using activity for the job x the rate per for all 3 activities
Job 1 Job 2
Orders $40 $40 (1 order each x $40)
Machine hours $1,320 $2,530 ( 60 x $22 , 115 x $22)
Kilowatt hours $44 $86 (22 x $2, 43 x $2)
Total O/H costs $1,404 $2,656
3) Add the 3 types of product costs for each job
Job 1 Job 2
Direct materials $500 $1,000
Direct labor $340 $ 880
Manufacturing O/H $1,404 $2,656
Total cost $2,244 $4,536
4) Determine the gross profit from the job
Job 1 Job 2
Sales $8,100 $11,200
- Product costs $2,244 $ 4,536
Gross profit from job $5,856 $ 6,664