Cost accounting| Lecture notes| exam notes, Study notes of Cost Accounting

Download Cost accounting| Lecture notes| exam notes and more Study notes Cost Accounting in PDF only on Docsity! CPA REVIEW SCHOOL OF THE PHILIPPINES Manila MANAGEMENT ADVISORY SERVICES ACTIVITY-BASED COSTING THEORY 1. An accounting system that collects financial and operating data on the basis of the underlying nature and extent of the cost drivers is a. Direct costing. c. Cycle-time costing. b. Activity-based costing. d. Variable costing. 2. The resource utilized by a given product divided by the total amount of the resource available is called the a. Activity driver. c. Cost object. b. Consumption ratio. d. Sustaining activity. 3. Which of the following statements is true? a. The traditional approach to costing uses many different cost drivers. b. Costs that are indirect to products are by definition traceable directly to products. c. Costs that are indirect to products are traceable to some activity. d. All of the above statements are true. 4. Mass customization can be achieved through the use of a. Activity-based costing. c. Flexible manufacturing systems. b. just-in-time inventory. d. all of the above. 5. Process value analysis is a key component of activity-based management that links product costing and a. Reduction of the number of cost pools. b. Continuous improvement. c. Accumulation of heterogeneous cost pools. d. Overhead rates based on broad averages. 6. An approach to developing new ways to perform existing activities is called a. Process value analysis. c. Caveat analysis. b. Re-engineering. d. Benchmarking. 7. A(n) _______________ method first traces costs to a department and then to products. a. direct costing c. traditional costing b. absorption costing d. activity-based costing 8. A(n)_______________ method first traces costs to activities and then to products. a. direct costing c. traditional costing b. absorption costing d activity-based costing 9. Uniformly assigning the costs of resources to cost objects when those resources are actually used in a nonuniform way is called a. overcosting. c. peanut-butter costing. b. undercosting. d. department costing. 10. An objective of activity-based management is to a. eliminate the majority of centralized activities in an organization. b. reduce or eliminate non-value-added activities incurred to make a product or provide a service. c. institute responsibility accounting systems in decentralized organizations. d. all of the above MSQ-12 Page 1 11. Symptoms of an outdated cost system include all of the following EXCEPT a. product costs change because of changes in financial reporting. b. products that are difficult to produce show little profit. c. competitors’ prices appear unrealistically low. d. the company has a highly profitable niche all to itself. 12. Traditional overhead allocations result in which of the following situations? a. Overhead costs are assigned as period costs to manufacturing operations. b. High-volume products are assigned too much overhead, and low-volume products are assigned too little overhead. c. Low-volume products are assigned too much, and high-volume products are assigned too little overhead. d. The resulting allocations cannot be used for financial reports. 13. Traditionally, managers have focused cost reduction efforts on a. activities. b. processes. c. departments. d. costs. 14. Which of the following is NOT a trait of a traditional cost management system? a. unit-based drivers c. allocation intensive b. focus on managing activities d. narrow and rigid product costing 15. Unit-level cost drivers are most appropriate as an overhead assignment base when a. several complex products are manufactured. b. only one product is manufactured. c. direct labor costs are low. d. factories produce a varied mix of products. 16. Which of the following is NOT a sign of poor cost data? a. Competitors’ prices for high-volume products appear much too high. b. The company seems to have a highly profitably niche all to itself. c. Customers don’t balk at price increases for low-volume products. d. Competitors’ prices for low-volume products appear much too high. 17. In Activity-based Costing, which of the following would be considered a value-added activity? a. Repair of machines. c. Bookkeeping. b. Engineering designs. d. Storage of inventory. 18. In the pharmaceutical or food industries, quality control inspections would most likely be viewed as a. non-value-added activities. c. value-added-activities. b. business-value-added activities. d. process-efficiency activities. 19. A basic assumption of activity-based costing (ABC) is that a. All manufacturing costs vary directly with units of production. b. Products or services require the performance of activities, and activities consume resources. c. Only costs that respond to unit-level drivers are product costs. d. Only variable costs are included in activity-cost pools. 20. Activity-based costing and generally accepted accounting principles differ in that ABC a. does not define product costs in the same manner as GAAP. b. cannot be used to compute an income statement, but GAAP can. c. is concerned only with costs generated from automated processes, but GAAP is concerned with costs generated from both manual and automated processes. d. information is useful only to managers, while GAAP information is useful to all organizational stakeholders. MSQ-12 Page 2 42. The following items are used in tracing costs in an ABC system. In which order are they used? (1) cost object (2) cost driver (3) activity driver (4)cost pool a. 1, 2, 3, 4 b. 2, 3, 4, 1 c. 2, 4, 3, 1 d. 4, 3, 1, 2 43. _____ relate to an entire plant as a whole. a. Batch-level activities. c. Sustaining activities. b. Facility-sustaining activities. d. Unit-level activities. 44. Examples of activities at the plant level of costs include: A. cutting, painting, and packaging C. designing, changing, and advertising B. scheduling, setting up, and moving D. heating, lighting, and security 45. An item or event that has a cause-effect relationship with the incurrence of a variable cost is called a a. mixed cost. b. predictor. c. direct cost. d. cost driver. 46. Which of the following is typically regarded as a cost driver in traditional accounting practices? a. number of purchase orders processed c. number of transactions processed b. number of customers served d. number of direct labor hours worked 47. A cost pool is a. All of the costs of a particular department. b. All costs in a group such as variable costs or discretionary fixed costs. c. All costs related to a product or product line. d. All costs that have the same driver. 48. The activities that drive resource requirements are called the a. Activity drivers. c. Resource drivers. b. Cost objects. d. Sustaining activities. 49. __________________ are causal factors that explain the consumption of overhead. a. Activity drivers b. Cost pools d. Cost catchers c. Cost objectives 50. All of the following are unit-based activity drivers EXCEPT a. machine hours b. number of setups c. number of units d. direct labor hours 51. All of the following are nonunit-based activity drivers EXCEPT a. number of setups c. number of inspections b. number of direct labor hours d. number of material moves 52. In an activity-based costing system, what should be used to assign a department’s manufacturing overhead cost to products produced in varying lot sizes? a. A single cause and effect relationship. c. Relative net sales values of the products. b. Multiple cause and effect relationships. d. A product’s ability to bear cost allocations. 53. In activity-based costing, preliminary cost allocations assign costs to a. departments. b. processes. c. products. d. activities. 54. In activity-based costing, final cost allocations assign costs to a. departments. b. processes. c. products. d. activities. PROBLEMS 1. A time-and-motion study revealed that it should take 1 hour to produce a product that currently takes 3 hours to produce. Labor is $8 per hour. Nonvalue-added costs are a. $8 b. $16 c. $24 d. $0 MSQ-12 Page 5 2. Setup time for a product is six hours. A firm that uses JIT and produces the same product has reduced setup time to 30 minutes. Setup labor is $24 per hour. Value-added costs are a. $144 b. $132 c. $24 d. $12 3. Each unit of product requires 8 gallons of raw material. Due to scrap and rework, each unit has been averaging 9 gallons of raw material. The raw material costs $4 per gallon. Value- added costs are a. $2 b. $4 c. $32 d. $36 4. A company keeps 20 days of raw materials inventory on hand to avoid shutdowns due to raw materials shortages. Carrying costs average $2,000 per day. A competitor keeps 10 days of inventory on hand the competitor’s carrying costs average $1,000 per day. Value-added costs are a. $40,000 b. $20,000 c. $10,000 d. $0 5. New Rage Cosmetics has used a traditional cost accounting system to apply quality control costs uniformly to all products at a rate of 14.5% of direct labor cost. Monthly direct labor cost for Satin Sheen makeup is $27,500. In an attempt to distribute quality control costs more equitably, New Rage is considering activity-based costing. The monthly data shown in the chart below have been gathered for Satin Sheen. Activity Cost Driver Cost Rates Quantity for Satin Sheen Incoming material inspection Type of material $11.50 per type 12 types In-process inspection Number of units $0.14 per unit 17,500 units Product certification Per order $77per order 25 orders The monthly quality control cost assigned to Satin Sheen makeup using activity-based costing is a. $88.64 per order. b. $525.50 lower than the cost using the traditional system. c. $8,500.50 d. $525.50 higher than the cost using the traditional system. Questions 6 thru 8 are based on the following information. Dierich Company uses an activity-based costing system with three activity cost pools. The company has provided the following data concerning its costs and its activity based costing system: Costs: Manufacturing overhead $600,000 Selling and admin. expenses $220,000 Total $820,000 Distribution of resource consumption: Activity Cost Pools Order Size Customer Support Other Total Manufacturing overhead 15% 75% 10% 100% Selling and admin. Expenses 60% 20% 20% 100% The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining costs. You have been asked to complete the first-stage allocation of costs to the activity cost pools. 6. How much cost, in total, would be allocated in the first-stage allocation to the Order Size activity cost pool? a. $222,000 b. $307,500 c. $123,000 d. $492,000 7. How much cost, in total, should NOT be allocated to orders and products in the second stage of the allocation process if the activity-based costing system is used for internal decision- making? a. $82,000. b. $104,000. c. $0. d. $164,000. MSQ-12 Page 6 8. How much cost, in total, would be allocated in the first-stage allocation to the Customer Support activity cost pool? a. $389,500 b. $615,000 c. $164,000 d. $494,000 9. ALF Co. is an assisted-living facility that provides services in the form of residential space, meals, and other occupant assistance (OOA) to its occupants. ALF currently uses a traditional cost account system that defines the service provided as assisted living, with service output measured in terms of occupant days. Each occupant is charged a daily rate equal to ALF’s annual cost of providing residential space, meals and OOA divided by total occupant days. However, an activity-based costing (ABC) analysis has revealed that occupant’s use of OOA varies substantially. This analysis determined that occupants could be grouped into three categories (low, moderate, and high usage of OOA) and that the activity driver of OOA is nursing hours. The driver of the other activities is occupant days. The following quantitative information was also provided: Occupant category Annual Occupant Days Annual Nursing Hours Low Usage 36,000 90,000 Medium Usage 18,000 90,000 High Usage 6,000 120,000 60,000 300,000 The total annual cost of OOA was $7.5 million, and the total annual cost of providing residential space and meals was $7.2 million. Accordingly, the ABC analysis indicates that the daily costing rate should be a. $182.50 for occupants in the low-usage category. b. $145.00 for occupants in the medium-usage category. c. $245.00 for occupants in the high-usage category. d. $620.00 for all occupants. Questions 10 through 13 are based on the following information. Zebra Corporation has the following activities: creating bills of materials (BOM), studying manufacturing capabilities, improving manufacturing processes, training employees, and designing tooling. The general ledger accounts reveal the following expenditures for manufacturing engineering: Salaries $150,000 Equipment 80,000 Supplies 20,000 Total $250,000 The equipment is used for two activities: improving processes and designing tooling. Thirty-five percent of the equipment’s time is used for improving processes and sixty-five percent is used for designing tools. The salaries are for two engineers. One is paid $100,000, while the other earns $50,000. The $100,000 engineer spends 40% of his time training employees in new processes and 60% of his time on improving processes. The remaining engineer spends equal time on all activities. Supplies are consumed in the following proportions: Creating BOMs 25% Studying capabilities 10% Improving processes 20% Training employees 25% Designing tooling 20% 10. What is the cost assigned to the creating BOMs activity? a. $62,500 b. $15,000 c. $87,500 d. $250,000 11. What is the cost assigned to the improving processes activity? a. $250,000 b. $50,000 c. $87,500 d. $102,000 12. What is the cost assigned to the training employees activity? a. $55,000 b. $250,000 c. $62,500 d. $162,500 13. What is the cost assigned to the designing tooling activity? a. $162,500 b. $66,000 c. $50,000 d. $250,000 MSQ-12 Page 7 TV Board PC Board Direct materials $80 $140 Direct labor 1.5 hours 4.0 hours Machine time 0.5 hours 1.5 hours Variable factory overhead is applied on the basis of direct labor hours. For 1993, variable factory is budgeted at $1,120,000, and direct labor hours are estimated at 280,000. The hourly rates for machine time and direct labor are $10 and $14, respectively. Alaire applies a material handling charge at 10% of materials cost, thus materials handling charge is not included in variable factory overhead. Total 1993 expenditures for materials are budgeted at $10,600,000. Ed Watch, Alaire’s controller, believes that, the management group proceeds with the discussion about allocating sales and promotional dollars to individual products, they should consider the activities involved in the production. As Welch explained to the group, “Activity-based costing integrates the cost of all activities, known as cost drivers, into individual product costs rather than including these costs in overhead pools.” Welch has prepared the schedule shown below to help the management group understand this concept. “Using this information,” Welch explained, “we can calculate an activity-based cost for each TV board and each PC board and then compare it to the standard cost we have bee using. The only cost that remains the same for both cost methods is the cost of direct materials. The cost drivers will replace the direct labor, machine time, and overhead costs in the standard cost.” Budgeted Cost Cost Driver Annual Activity for Cost Driver Materials overhead: Procurement $400,000 No. of parts 4,000,000 parts Production scheduling 220,000 No. of boards 110,000 boards Packaging & shipping 440,000 No. of boards 110,000 boards $1,060,000 Variable overhead: Machine setup $446,000 No. of setups 278,750 setups Hazardous waste disposal 48,000 Lbs. of waste 16,000 lbs. Quality control 560,000 No. of inspections 160,000 inspect’ns General supplies 66,000 No. of boards 110,000 boards $1,120,000 Manufacturing: Machine insertion $1,200,000 No. of parts 3,000,000 parts Manual insertion 4,000,000 No. of parts 1,000,000 parts Wave soldering 132,000 No. of boards 110,000 boards $5,332,000 Required per unit TV Board PC Boards Parts 25 55 Machine insertions 24 35 Manual insertions 1 20 Machine setups 2 3 Hazardous waste 0.02 lbs. 0.35 lbs. Inspections 1 2 27. On the basis of standard costs, the total contribution budgeted for the TV board is a. $1,950,000 b. $2,275,000 c. $2,340,000 d. $2,470,000 28. On the basis of activity-based costs (ABC), the total contribution budgeted for the TV board is a. $1,594,000 b. $1,950,000 c. $2,037,100 d. $2,557,100 29. On the basis of standard costs, the total contribution budgeted for the PC board is a. $3,000,000 b. $2,960,000 c. $2,920,000 d. $2,360,000 30. On the basis of activity-based costs, the total contribution budgeted for the PC board is a. P1,594,000 b. $1,950,000 c. $2,360,000 d. $2,557,100 MSQ-12 Page 10 Answer Key Theory 1. B 11. B 21. C 31. D 41. A 51. B 2. B 12. B 22. C 32. C 42. C 52. B 3. C 13. D 23. B 33. D 43. B 53. D 4. C 14. B 24. D 34. A 44. D 54. C 5. B 15. B 25. B 35. A 45. D 6. B 16. A 26. B 36. B 46. D 7. C 17. B 27. B 37. C 47. D 8. D 18. C 28. D 38. D 48. C 9. C 19. B 29. A 39. C 49. A 10. B 20. A 30. D 40. C 50. B Problems 1. B 11. D 21. D 2. D 12. A 22. A 3. C 13. B 23. D 4. D 14. A 24. A 5. D 15. A 25. B 6. A 16. A 26. A 7. B 17. A 27. A 8. D 18. B 28. D 9. A 19. C 29. D 10. B 20. D 30. A MSQ-12 Page 11