Fundamental Managerial Accounting Concepts Thomas Edmonds 9e - Test Bank

Fundamental Managerial Accounting Concepts Thomas Edmonds 9e – Test Bank

 

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Fundamental Managerial Accounting Concepts, 9e (Edmonds)

Chapter 5   Cost Management in an Automated Business Environment: ABC, ABM, and TQM

 

1) Performance Bicycle Company makes steel and titanium handlebars for bicycles. It requires approximately one hour of labor to make one handlebar of either type. During the most recent accounting period, Barr Company made 7,000 steel bars and 3,000 titanium bars. Setup costs amounted to $84,000. One batch of each type of bar was run each month. If a single companywide overhead rate based on direct labor hours is used to allocate overhead costs to the two products, the amount of setup cost assigned to the steel bars will be:

400. A) $8,400.
401. B) $84,000.
402. C) $49,000.
403. D) $58,800.

 

Answer:  D

Explanation:  Companywide allocation rate = $84,000 ÷ [(7,000 bars + 3,000 bars) × 1 DLH per bar] = $8.40 per DLH

Allocation to steel bars = $8.40 per DLH × (7,000 bars × 1 DLH per bar) = $58,800

Difficulty: 3 Hard

Topic:  Development of a Single Companywide Cost Driver

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

2) In the early days of the industrial revolution, indirect manufacturing costs:

1. A) were a significant cost of producing most products.
2. B) were relatively large compared to the direct costs of producing a product.
3. C) were highly correlated with the use of labor.
4. D) were largely fixed.

 

Answer:  C

Explanation:

Difficulty: 1 Easy

Topic:  Development of a Single Companywide Cost Driver

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

3) Traditionally, the most popular companywide base for allocating overhead to products was:

1. A) machine hours.
2. B) direct labor hours or costs.
3. C) number of units produced.
4. D) number of units sold.

 

Answer:  B

Difficulty: 1 Easy

Topic:  Development of a Single Companywide Cost Driver

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

4) What is the principal reason that direct labor hours are no longer an effective base for allocating indirect costs in many modern manufacturing companies?

1. A) Automation
2. B) Workers are not as productive as they were in the past
3. C) Movement from full-time to part-time workers
4. D) Changes in generally accepted accounting principles

 

Answer:  A

Difficulty: 1 Easy

Topic:  Effects of Automation on Selecting a Cost Driver

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

5) Which of the following costs is likely to be driven by machine usage?

1. A) Factory insurance
2. B) Depreciation on factory building
3. C) Factory utilities
4. D) Factory rent

 

Answer:  C

Difficulty: 2 Medium

Topic:  Effects of Automation on Selecting a Cost Driver

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

6) Which type of cost driver is most appropriate for automated processes?

1. A) Volume-based drivers
2. B) Activity-based drivers
3. C) Direct labor-based drivers
4. D) All of these answers are correct

 

Answer:  B

Difficulty: 1 Easy

Topic:  Effects of Automation on Selecting a Cost Driver

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

7) Which of the following allocation bases for automation costs would be an improvement over direct labor hours?

1. A) Number of units sold
2. B) Direct labor costs
3. C) Machine hours
4. D) Direct material cost

 

Answer:  C

Difficulty: 1 Easy

Topic:  Effects of Automation on Selecting a Cost Driver

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

8) Morris Company allocates overhead based on direct labor hours. It allocates overhead costs of $12,800 to two different jobs as follows:

Job 1: (10 hours) = $6,400; Job 2: (10 hours) = $6,400

The production process for Job 2 was then automated. Now Job 2 requires only two hours of direct labor but four hours of mechanical processing. As a result, total overhead increases to $17,000. With the change in the production process for Job 2, the amount of overhead assigned to:

1. A) each product will increase.
2. B) Job 1 will decrease.
3. C) each product will decrease.
4. D) Job 1 will increase.

 

Answer:  D

Explanation:  Pre automation allocation rate = $12,800 ÷ (10 DLHs + 10 DLHs) = $640 per DLH

Allocation to Job #1 = $640 per DLH × 10 DLHs = $6,400

Allocation to Job #2 = $640 per DLH × 10 DLHs = $6,400

Post automation allocation rate = $17,000 ÷ (10 DLHs + 2 DLHs) = $1,417 per DLH

Allocation to Job #1 = $1,417 per DLH × 10 DLHs = $14,167 (an increase)

Allocation to Job #2 = $1,417 per DLH × 2 DLHs = $2,833 (a decrease)

Difficulty: 2 Medium

Topic:  Effects of Automation on Selecting a Cost Driver

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

9) Keene Company allocates overhead based on direct labor hours. It allocates overhead costs of $8,000 to two different jobs as follows:

Job 1: (10 hours) = $4,000; Job 2: (10 hours) = $4,000

The production process for Job 2 was then automated. Now Job 2 requires only two hours of direct labor but four hours of mechanical processing. As a result, total overhead increased to $12,000. How much overhead cost will be assigned to Job 1 after automation?

1. A) $10,000
2. B) $6,000
3. C) $4,000
4. D) $2,000

 

Answer:  A

Explanation:  Allocation rate = $12,000 ÷ (10 DLHs + 2 DLHs) = $1,000 per DLH

Allocation to Job #1 = $1,000 per DLH × 10 DLHs = $10,000

Difficulty: 3 Hard

Topic:  Effects of Automation on Selecting a Cost Driver

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

10) Hazel Company allocates overhead based on direct labor hours. It allocates overhead costs of $8,000 to two different jobs as follows:

Job 1: (10 hours) = $4,000; Job 2: (10 hours) = $4,000

The production process for Job 2 was then automated. Now Job 2 requires only two hours of direct labor but four hours of mechanical processing. As a result, total overhead increases to $12,000. Select the incorrect statement from the following.

1. A) While the actual processing of Job 1 was not affected by automation, it received an increase of $6,000 in its overhead allocation.
2. B) The use of machine hours as the allocation base would significantly improve the overhead cost allocations.
3. C) Automation and the costing system used by the company cause the cost of Job 1 to be significantly overstated.
4. D) The increased overhead costs associated with automation should be allocated to both jobs.

 

Answer:  D

Explanation:  Using direct labor hours as the cost driver after automating production of Job 2 distorts the overhead cost allocation. Although the company did not change the production process for Job 1 at all, Job 1 received a $6,000 increase (computed below) in its share of allocated overhead cost. The increase in overhead should have been assigned to Job 2 because the automation of production of Job 2 caused overhead costs to increase.

 

To illustrate:

Pre automation allocation rate = $8,000 ÷ (10 DLHs + 10 DLHs) = $400 per DLH

Allocation to Job #1 = $400 per DLH × 10 DLHs = $4,000

Post automation allocation rate = $12,000 ÷ (10 DLHs + 2 DLHs) = $1,000 per DLH

Allocation to Job #1 = $1,000 per DLH × 10 DLHs = $10,000 (an increase of $6,000)

Difficulty: 2 Medium

Topic:  Effects of Automation on Selecting a Cost Driver

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

11) Select the incorrect statement from the following.

1. A) If overhead costs are allocated based on activities, the amount of overhead allocated to a particular product can be reduced by increasing the number of activities required by the product, thereby spreading the overhead costs over more units.
2. B) Activity costs are considered relevant for decision-making because the cost of an activity will be avoided if the activity is eliminated.
3. C) In highly automated environments where companies produce many different products with varying levels of production, activity-based cost drivers are superior to volume-based drivers.
4. D) Activity-based cost drivers produce a better cost allocation than volume-based drivers because they distribute only relevant costs to the appropriate products.

 

Answer:  A

Explanation:  If overhead costs are allocated based on activities, the amount of overhead allocated to a particular product can be reduced by decreasing (rather than increasing) the number of activities required by that product.

Difficulty: 2 Medium

Topic:  Effects of Automation on Selecting a Cost Driver; Activity-Based Cost Drivers; Activity-Based Cost Drivers Enhance Relevance

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

12) Which of the following is an activity-based cost driver?

1. A) Number of machine setups
2. B) Material cost
3. C) Machine hours
4. D) All of these answers are correct.

 

Answer:  A

Difficulty: 1 Easy

Topic:  Activity-Based Cost Drivers

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

13) Which of the following is a volume-based cost driver?

1. A) Machine hours
2. B) Material cost
3. C) Direct labor hours
4. D) All of these answers are correct

 

Answer:  D

Difficulty: 1 Easy

Topic:  Effects of Automation on Selecting a Cost Driver

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

14) Select the correct statement regarding activity-based costing (ABC).

1. A) ABC does not use cost drivers.
2. B) ABC uses a single activity center but multiple cost drivers.
3. C) ABC uses multiple activity cost centers and multiple cost drivers.
4. D) ABC uses multiple activity cost centers but a single cost driver.

 

Answer:  C

Difficulty: 1 Easy

Topic:  Types of Production Activities

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

15) A modern cost allocation process that employs multiple cost drivers is:

1. A) activity-based costing.
2. B) contribution costing.
3. C) process costing.
4. D) job order costing.

 

Answer:  A

Difficulty: 1 Easy

Topic:  Activity-Based Costing

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

16) Actions or units of work undertaken by an organization to accomplish its mission are referred to as:

1. A) costs.
2. B) work in process.
3. C) activities.
4. D) cost objects.

 

Answer:  C

Difficulty: 1 Easy

Topic:  Activity-Based Costing

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

17) The number of activity cost centers used by a company should:

1. A) equal the number of activities required to produce the product.
2. B) equal the number of departments it has.
3. C) equal the number of products it has.
4. D) be determined on a cost/benefit basis.

 

Answer:  D

Difficulty: 1 Easy

Topic:  Identifying Activity Centers

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

18) Which of the following is not a cost resulting from a unit-level activity?

1. A) The cost of electricity to power manufacturing equipment
2. B) The cost of sending monthly statements to customers
3. C) The indirect cost of glue used on each product
4. D) The per unit cost of packaging goods

 

Answer:  B

Difficulty: 2 Medium

Topic:  Unit-Level Activity Center

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

19) Which of the following activity costs would not likely be included in a unit-level activity cost pool?

1. A) Indirect material
2. B) Packaging costs
3. C) Machine setup costs
4. D) Machine-related utilities

 

Answer:  C

Difficulty: 2 Medium

Topic:  Unit-Level Activity Center

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

20) All of the following are hierarchical categories in which a firm’s overhead support costs can be classified except:

1. A) product-level activities.
2. B) industry-level activities.
3. C) batch-level activities.
4. D) facility-level activities.

 

Answer:  B

Difficulty: 2 Medium

Topic:  Types of Production Activities

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

21) Compared to a traditional two-stage cost allocation system, activity-based costing systems:

1. A) Use fewer cost centers.
2. B) Use more cost drivers.
3. C) Are less expensive to maintain.
4. D) All of these answers are correct.

 

Answer:  B

Difficulty: 1 Easy

Topic:  Comparing ABC with Traditional Cost Allocation

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

22) Which of the following activity costs would likely be included in a batch-level activity cost pool?

1. A) Per unit inspection costs.
2. B) Machine set-up costs.
3. C) Quality control costs.
4. D) All of these answers are correct.

 

Answer:  B

Difficulty: 2 Medium

Topic:  Batch-Level Activity Center

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

23) A product-level activity center would likely include all of the following costs except:

1. A) engineering development costs.
2. B) legal fees to obtain and protect patents.
3. C) packaging design costs.
4. D) materials handling costs.

 

Answer:  D

Difficulty: 2 Medium

Topic:  Product-Level Activity Center

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

24) Select the incorrect statement regarding the use of cost drivers in activity-based costing systems.

1. A) ABC uses volume-based and activity-based cost drivers.
2. B) Volume-based drivers are most appropriate for costs that are affected by the number of units produced.
3. C) ABC’s use of multiple cost drivers will produce less accurate unit costs when a company produces many different products that require different types and levels of overhead costs.
4. D) An arbitrary cost driver must be selected when allocating facility-level activity costs.

 

Answer:  C

Explanation:  ABC’s use of multiple cost drivers will produce more (rather than less) accurate unit costs when a company produces many different products that require different types and levels of overhead costs.

Difficulty: 2 Medium

Topic:  Comparing ABC with Traditional Cost Allocation; Facility-Level Activity Center; Selecting Cost Drivers

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

25) Miller Company makes two types of chairs. One of the chairs is a rocking chair. The other is a straight-back chair. Both chairs are made by hand. Miller Company uses a companywide overhead rate that is based on direct labor hours to assign overhead costs to the two products. If Miller automates the production of straight-back chairs and continues to use direct labor hours as a companywide allocation basis:

1. A) rocking chairs will be overcosted.
2. B) straight-back chairs will be overcosted.
3. C) rocking chairs will be undercosted.
4. D) there should be no impact on unit cost.

 

Answer:  A

Explanation:  Automation has changed the nature of the manufacturing process. This change may cause significant distortions in the allocation of overhead costs when the allocation base is a companywide, volume-based cost driver such as direct labor hours. There are two primary reasons for the distortions. First, in an automated environment, the same amount of labor (e.g., flipping a switch) may produce a large or small volume of products. Under these circumstances, labor use is not related to the incurrence of overhead and is not a rational allocation base. Secondly, the distortions may be significant because overhead costs are much higher relative to the cost of labor and material. In this example, the cost of overhead likely increased when the company automated the process for straight-back chairs. Using direct labor hours to allocate costs companywide will result in the rocking chairs receiving an increase in their share of allocated overhead costs. This is because there would be significantly more direct labor hours associated with manufacturing rocking chairs without automation compared to manufacturing straight-back chairs with automation.

Difficulty: 2 Medium

Topic:  Effects of Automation on Selecting a Cost Driver

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

26) Which of the following activity costs should usually be ignored when making a decision regarding whether to eliminate a product?

1. A) Product-level costs
2. B) Batch-level costs
3. C) Unit-level costs
4. D) Facility-level costs

 

Answer:  D

Explanation:  Facility-level activities benefit the production process as a whole and are not related to any specific product, batch, or unit of production. Because no cause-and-effect relationship exists between these facility-level manufacturing costs and the company’s product lines, these costs are allocated arbitrarily. Although facility-level costs are product costs, they are not relevant in deciding whether to eliminate a product line. These costs cannot be avoided even if the company eliminates the product line.

Difficulty: 3 Hard

Topic:  Types of Production Activities; Facility-Level Activity Center; Downstream Costs and Upstream Costs

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.; 05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Industry

 

 

27) Benitez Company makes wicker and wooden slat picnic baskets. It requires approximately one hour of labor to make one basket of either type. Wicker baskets are produced in batches of 100 units and require 0.5 machine hours per basket. Wooden slat baskets are produced in batches of 50 units and require 0.75 machine hours per basket. Setup is required for each batch. During the most recent accounting period, the company made 8,000 wicker baskets and 2,000 wooden slat baskets. Setup costs amounted to $24,000 for the baskets produced during the period. If activity-based costing is used to allocate overhead costs to the two products, the amount of setup cost assigned to the wicker baskets will be:

455. A) $17,455.
456. B) $19,200.
457. C) $12,000.
458. D) $16,000.

 

Answer:  D

Explanation:  Cost per setup = $24,000 ÷ [(8,000 wicker baskets ÷ 100 baskets per batch) + (2,000 wooden slate baskets ÷ 50 baskets per batch)] = $24,000 ÷ (80 batches + 40 batches) = $200 per batch

Allocation to wicker baskets = $200 per batch × 80 batches = $16,000

Difficulty: 3 Hard

Topic:  Batch-Level Activity Center

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

28) Bates Company makes two products. Product X requires 6,000 hours of labor, and Product Y requires 4,000 hours of labor. Bates undertook an automation program that reduced the consumption of labor required by Product X to only 2,000 hours of labor. Product Y was not affected by the automation process. Overhead cost prior to the automation totaled $10,000. After automation, overhead cost amounted to $24,000. Assuming Bates uses direct labor hours as a companywide allocation base before and after the automation, the amount of overhead cost allocated to:

1. A) Product X would be $4,000 prior to automation and $16,000 after automation.
2. B) Product X would be $6,000 prior to automation and $16,000 after automation.
3. C) Product Y would be $8,000 prior to automation and $8,000 after automation.
4. D) Product Y would be $4,000 prior to automation and $16,000 after automation.

 

Answer:  D

Explanation:  Pre automation allocation rate = $10,000 ÷ (6,000 DLHs + 4,000 DLHs) = $1 per DLH

Allocation to Product X = $1 per DLH × 6,000 DLHs = $6,000

Allocation to Product Y = $1 per DLH × 4,000 DLHs = $4,000

Post automation allocation rate = $24,000 ÷ (2,000 DLHs + 4,000 DLHs) = $4 per DLH

Allocation to Product X = $4 per DLH × 2,000 DLHs = $8,000

Allocation to Product Y = $4 per DLH × 4,000 DLHs = $16,000

Difficulty: 3 Hard

Topic:  Development of a Single Companywide Cost Driver

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

29) Chastain Company recently implemented an activity-based costing system. As a result of the ABC allocations, the cost of one of the company’s products was determined to be above its current selling price. Due to competition, the company is unable to raise the price of this product. Which of the following options is most reasonable, assuming Chastain employs a target pricing strategy?

1. A) Use less expensive materials to make the product.
2. B) Raise prices under the assumption that the company’s competitors will follow suit.
3. C) Target advertising to high-income customers.
4. D) Return to the old allocation method, which produces a lower amount of estimated cost.

 

Answer:  A

Explanation:  Target pricing (or target costing) starts with determining the price customers are willing to pay. The company then attempts to produce the product at a low enough cost to sell it at the price customers demand. Since the cost of one of the company’s products is above its current selling price, the company should attempt to reduce one or more components of the product’s cost.

Difficulty: 2 Medium

Topic:  Undercosting and Overcosting

Learning Objective:  05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Understand

AACSB:  Knowledge Application; Ethics

AICPA:  FN Measurement; BB Industry

 

 

30) Rocoe Company produces a variety of garden tools in a highly automated manufacturing facility. The costs and cost drivers associated with four activity cost pools are given below:

 

Activities:	Unit Level					Batch Level						Product Level					Facility Level
Total cost	$	30,000					$	12,000				$	6,000					$		36,000
Total cost driver volume		5,000	labor hours					240	set ups			% of use							36,000		units

 

Production of 10,000 units of a handheld tiller required 1,000 labor hours and 80 setups and consumed 25% of the product sustaining activities. Assuming the company uses activity-based costing, how much total overhead will be allocated to this tool?

1. A) $84,000
2. B) $26,000
3. C) $21,500
4. D) $11,500

 

Answer:  C

Explanation:  Activity rates:

 

	Unit		Batch		Product		Facility
Total cost	$30,000		$12,000		$6,000		$36,000
Total cost driver volume	5,000 DLHs		240 setups		% of use		36,000 units
Activity rate	$6 per DLH		$50 per setup		$60 per %		$1 per unit

 

Allocation to handheld tillers:

 

	Unit		Batch		Product		Facility		Total
Cost driver volume	1,000 DLHs		80 setups		25%		10,000 units
Rate	$6 per DLH		$50 per setup		$60 per %		$1 per unit
Allocation	$6,000		$4,000		$1,500		$10,000		$21,500

Difficulty: 3 Hard

Topic:  Using ABC Information to Trace Costs to Product Lines

Learning Objective:  05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

31) Valpar Company produces several lines of laundry hampers. The factory is highly automated and uses an activity-based costing system to allocate overhead costs to its various products. During the upcoming period, the company expects to produce 72,000 units. The costs and cost drivers associated with four activity cost pools are given below:

 

ACTIVITIES:	UNIT LEVEL		BATCH LEVEL		PRODUCT LEVEL		FACILITY LEVEL
Cost	$30,000		$8,000		$15,000		$36,000
Cost driver	12,000 labor hrs		200 set ups		% of use		72,000 units

 

Production of 20,000 units of its popular foldable hamper required 3,000 labor hours and 75 setups and consumed one-third of the product sustaining activities. What amount of unit-level costs will be allocated to the product?

1. A) $2,500
2. B) $7,500
3. C) $5,000
4. D) $6,000

 

Answer:  B

Explanation:  Activity rate = Total cost ÷ Total cost driver volume

Activity rate = $30,000 ÷ 12,000 DLHs = $2.50 per DLH

Allocation to hamper = Cost driver volume × Activity rate

Allocation to hamper = 3,000 DLHs × $2.50 per DLH  = $7,500

Difficulty: 3 Hard

Topic:  Unit-Level Activity Center

Learning Objective:  05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

32) Sanford Tools produces a variety of scissors and other cutting instruments at its Birmingham manufacturing plant. The plant is highly automated and uses an activity-based costing system to allocate overhead costs to its various product lines. The company expects to produce 24,000 total units during the current period. The costs and cost drivers associated with four activity cost pools are given below:

 

ACTIVITIES:		UNIT LEVEL		BATCH LEVEL		PRODUCT LEVEL		FACILITY LEVEL
Cost		$50,000		?		$10,000		$120,000
Cost Driver		4,000 labor hrs		100 set ups		% of use		24,000 units

 

Production of 1,000 units of a pipe-cutting tool required 400 labor hours and 10 setups, consumed 30% of the product sustaining activities, and resulted in an overhead allocation of $15,400. What amount of batch-level overhead cost was expected during the period?

1. A) $24,000
2. B) $2,400
3. C) $12,500
4. D) None of these answers is correct.

 

 

Answer:  B

Explanation:  After filling in the amounts given (*) in the two tables below, work backwards (as described) to obtain the amount of batch-level overhead costs expected during the period.

 

Activity rates:

 

	Unit		Batch		Product		Facility
Total cost (a)	$50,000*		$24,000#		$10,000*		$120,000*
Total cost driver volume (b)	4,000 DLHs*		100 setups*		% of use*		24,000 units*
Activity rate (a) ÷ (b)	$12.50 per DLH		$240^		$100 per %		$5 per unit

 

^ Computed in table below

# $240 × 100 setups = $24,000

 

Allocation to pipe-cutting tools:

 

	Unit		Batch		Product		Facility		Total
Cost driver volume (a)	400 DLHs*		10 setups*		30%*		1,000*
Rate (b)	$12.50 per DLH^		$240		$100 per %^		$5 per unit^
Allocation (a) × (b)	$5,000		$2,400#		$3,000		$5,000		$15,400*

 

^ Computed in table above

# $15,400 − $5,000 − $3,000 − $5,000 = $2,400

Difficulty: 3 Hard

Topic:  Using ABC Information to Trace Costs to Product Lines

Learning Objective:  05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

33) Pro Tool Company expects to produce 24,000 total units during the current period. The costs and cost drivers associated with four activity cost pools are given below:

 

ACTIVITIES		UNIT LEVEL		BATCH LEVEL		PRODUCT LEVEL		FACILITY LEVEL
Cost		$50,000		$20,000		$10,000		$120,000
Cost Driver		4,000 labor hrs		100 set ups		% of use		24,000 units

 

Production of 1,000 units of an auto towing tool required 800 labor hours and 12 setups and consumed 30% of the product sustaining activities. How much total overhead cost will be allocated to this product if the company allocates overhead using a single overhead allocation rate based on direct labor hours?

1. A) $18,400
2. B) $10,000
3. C) $100,000
4. D) $40,000

 

Answer:  D

Explanation:  Companywide allocation rate = ($50,000 + $20,000 + $10,000 + $120,000) ÷ 4,000 DLHs = $50 per DLH

Allocation to Product = $50 per DLH × 800 DLHs = $40,000

Difficulty: 3 Hard

Topic:  Development of a Single Companywide Cost Driver

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

34) When making a long-term cost plus pricing decision, a company should consider:

1. A) The upstream research and development cost.
2. B) The allocated portion of facility-level cost.
3. C) The direct manufacturing cost.
4. D) All of these answers are correct.

 

Answer:  D

Explanation:  Businesses incur upstream costs before—and downstream costs after—goods are manufactured. To continue in business, companies must sell products at prices that exceed the total cost to develop, make, and sell them. That total cost includes the product cost (made up of direct materials, direct labor, and allocated overhead costs) and upstream costs such as those for research and development.

Difficulty: 2 Medium

Topic:  Downstream Costs and Upstream Costs

Learning Objective:  05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

35) Which of the following is an upstream cost?

1. A) Research and development costs
2. B) Shipping costs to ship completed goods
3. C) Sales commissions
4. D) Sales promotion and advertising costs

 

Answer:  A

Explanation:  Businesses incur upstream costs before—and downstream costs after—goods are manufactured. Upstream costs include research and development costs.

Difficulty: 2 Medium

Topic:  Downstream Costs and Upstream Costs

Learning Objective:  05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

36) All of the following are downstream costs except:

1. A) advertising costs.
2. B) distribution costs.
3. C) patent filing legal costs.
4. D) warehousing costs.

 

Answer:  C

Explanation:  Businesses incur upstream costs before—and downstream costs after—goods are manufactured. The costs to file a patent would be a research and development cost, which is incurred before goods are manufactured. As a result, that cost would be considered an upstream cost.

Difficulty: 2 Medium

Topic:  Downstream Costs and Upstream Costs

Learning Objective:  05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

37) The Tangier Company is considering eliminating the following product line:

 

	Product AXP
Sales	$	80,000
Less variable costs:
Raw materials		50,000
Direct labor		10,000
Contribution margin	$	20,000
Less fixed costs:
Production costs allocated to products		30,000
Profit (Loss)	$	(10,000	)

 

What amount of cost is avoidable if Tangier outsources production of this product?

1. A) $60,000
2. B) $50,000
3. C) $90,000
4. D) $20,000

 

Answer:  A

Explanation:  Costs that are relevant to the decision to eliminate a product line are those that are avoidable if the product line is discontinued. The avoidable costs in this situation are the raw materials costs of $50,000 and the direct labor costs of $10,000 for a total avoidable cost of $60,000.

Difficulty: 3 Hard

Topic:  Downstream Costs and Upstream Costs

Learning Objective:  05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

38) Identify the obstacle(s) in implementing a successful activity-based costing system.

1. A) Gaining the cooperation and support of employees.
2. B) Obtaining accurate cost driver data.
3. C) Condensing a large number of activities down into a manageable number of activity cost pools.
4. D) All of these answers are correct.

 

Answer:  D

Difficulty: 1 Easy

Topic:  Employee Attitudes and the Availability of Data

Learning Objective:  05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

39) Mason Company is planning to introduce an activity-based costing system. Which of the following actions by employees could lower the success of the new system?

1. A) Employees may purposely report on their time cards different amounts of time than they actually worked.
2. B) Employees may decrease their productivity to demonstrate their dissatisfaction with the new system.
3. C) Employees may resist having to maintain additional records (such as the number of setups).
4. D) All of these answers are correct.

 

Answer:  D

Difficulty: 2 Medium

Topic:  Employee Attitudes and the Availability of Data

Learning Objective:  05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Understand

AACSB:  Knowledge Application; Ethics

AICPA:  FN Measurement; BB Industry

 

40) Costs incurred to avoid nonconforming products are:

1. A) prevention costs.
2. B) appraisal costs.
3. C) failure costs.
4. D) voluntary costs.

 

Answer:  A

Difficulty: 1 Easy

Topic:  Total Quality Management

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

41) Concerning the prevention of defects, which of the following statements is true?

1. A) Zero defects is a cost-effective strategy.
2. B) When the product falls to the right of the cost minimization point on the total quality cost curve, then incurring failure costs is wise.
3. C) It is always wiser to spend money on correcting failures than on preventing defects.
4. D) When the product falls to the right of the cost minimization point on the total quality cost curve, then incurring prevention costs is wise.

 

Answer:  B

Difficulty: 2 Medium

Topic:  Minimizing Total Quality Cost

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

42) For most businesses, quality means:

1. A) the degree to which products or services exceed customer expectations.
2. B) absolutely no defects.
3. C) the degree to which products or services conform to design specifications.
4. D) none of these answers are correct.

 

Answer:  C

Difficulty: 1 Easy

Topic:  Total Quality Management

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

43) All of the following are prevention costs except:

1. A) training costs.
2. B) inspection costs.
3. C) regularly scheduled maintenance.
4. D) engineering and design costs.

 

Answer:  B

Difficulty: 2 Medium

Topic:  Total Quality Management

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

44) Which of the following is an appraisal cost?

1. A) Depreciation of testing equipment
2. B) Customer service costs
3. C) Engineering and design costs
4. D) Costs to repair defective units

 

Answer:  A

Difficulty: 1 Easy

Topic:  Total Quality Management

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

45) Which of the following is an internal failure cost?

1. A) Costs to rework defective units
2. B) Warranty replacement costs
3. C) Engineering and design costs
4. D) Depreciation on testing equipment

 

Answer:  A

Difficulty: 1 Easy

Topic:  Total Quality Management

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

46) All of the following are internal failure costs except:

1. A) inventory inspection costs.
2. B) rework costs.
3. C) downtime costs.
4. D) scrap costs.

 

Answer:  A

Difficulty: 1 Easy

Topic:  Total Quality Management

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

47) The voluntary costs of quality include:

1. A) Internal failure costs.
2. B) External failure costs.
3. C) Appraisal costs.
4. D) All of these answers are correct.

 

Answer:  C

Difficulty: 1 Easy

Topic:  Total Quality Management

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

48) The amounts of voluntary costs and failure costs:

1. A) Are equal by definition.
2. B) Tend to move in opposite directions (as one increases the other decreases).
3. C) Tend to move in the same direction (as one increases the other increases).
4. D) None of these answers are correct.

 

Answer:  B

Difficulty: 1 Easy

Topic:  Minimizing Total Quality Cost

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

49) Managing quality costs to achieve the highest level of customer satisfaction is known as:

1. A) activity-based management.
2. B) total quality management.
3. C) strategic management.
4. D) quality costs.

 

Answer:  B

Difficulty: 1 Easy

Topic:  Quality Cost Reports

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

50) The minimum amount of total quality costs is achieved when the:

1. A) marginal voluntary expenditures exceed marginal failure costs.
2. B) marginal voluntary expenditures equal the marginal savings on failure costs.
3. C) marginal voluntary expenditures are less than the marginal savings on failure costs.
4. D) none of the other answers are correct.

 

Answer:  B

Difficulty: 1 Easy

Topic:  Minimizing Total Quality Cost

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

51) The Farber Company recorded the following costs of quality during the current period:

 

Downtime	$	1,500
Inspection		1,000
Product design		4,000
Reliability testing upon completion of production		2,500
Restocking and packaging		1,500
Training		3,000
Warranty repairs and replacements		2,500
Total Costs of Quality	$	16,000

 

Which choice below represents the correct amount of prevention and appraisal costs?

 

	Prevention					Appraisal
A)	$	4,000					$	1,000
B)	$	3,000					$	1,000
C)	$	7,000					$	3,500
D)	$	3,000					$	2,500

 

1. A) Choice A
2. B) Choice B
3. C) Choice C
4. D) Choice D

 

Answer:  C

Explanation:  Companies incur prevention costs to avoid nonconforming products.

Prevention costs = Training costs + Product design costs

Prevention costs = $3,000 + $4,000 = $7,000

Companies incur appraisal costs to identify nonconforming products produced in spite of prevention cost expenditures.

Appraisal costs = Reliability testing upon completion of production of + Inspection costs

Appraisal costs = $2,500 + $1,000 = $3,500

Difficulty: 2 Medium

Topic:  Total Quality Management

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

52) Electricity to run sanding machines in a furniture-making department is an example of a(n):

1. A) unit-level cost.
2. B) batch-level cost.
3. C) product-level cost.
4. D) facility-level cost.

 

Answer:  A

Explanation:  Unit-level activities occur each time a unit of product is made.

Difficulty: 2 Medium

Topic:  Types of Production Activities

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

53) Legal costs to file design patents are an example of a(n):

1. A) unit-level cost.
2. B) batch-level cost.
3. C) product-level cost.
4. D) facility-level cost.

 

Answer:  C

Explanation:  Product-level activities support specific products or product lines. Examples include raw materials inventory holding costs; engineering development costs; and legal fees for patents, copyrights, trademarks, and brand names.

Difficulty: 2 Medium

Topic:  Product-Level Activity Center

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

54) The insurance cost for a large factory would be considered a:

1. A) unit-level cost.
2. B) batch-level cost.
3. C) product-level cost.
4. D) facility-level cost.

 

Answer:  D

Explanation:  Facility-level activities benefit the production process as a whole and are not related to any specific product, batch, or unit of production. For example, insuring the manufacturing facility against fire losses does not benefit any particular product or product line.

Difficulty: 1 Easy

Topic:  Facility-Level Activity Center

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Remember

AACSB:  Knowledge Application; Ethics

AICPA:  FN Measurement; BB Industry

 

55) Invoice processing costs would be considered a:

1. A) unit-level cost.
2. B) batch-level cost.
3. C) product-level cost.
4. D) facility-level cost.

 

Answer:  B

Explanation:  Batch-level activities relate to producing groups of products. Batch-level costs are fixed regardless of the number of units produced in a single batch.

Difficulty: 2 Medium

Topic:  Batch-Level Activity Center

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Understand

AACSB:  Knowledge Application; Ethics

AICPA:  FN Measurement; BB Industry

 

 

56) Which of the following is an appropriate cost driver for electricity used for production equipment in a factory?

1. A) Machine hours
2. B) Number of inspections
3. C) Setup hours
4. D) Number of units

 

Answer:  A

Explanation:  Activity-based costing uses both volume-based cost drivers and activity-based cost drivers. Volume-based drivers are appropriate for indirect costs that increase or decrease relative to the volume of activity. In this situation, the total electricity cost would increase or decrease relative to the volume of machine hours.

Difficulty: 2 Medium

Topic:  Selecting Cost Drivers

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

57) Which of the following is an appropriate cost driver for setting up production equipment for a production run?

1. A) Machine hours
2. B) Number of setups
3. C) Setup hours
4. D) Either number of setups or setup hours would be appropriate

 

Answer:  D

Explanation:  Activity-based costing uses both volume-based cost drivers and activity-based cost drivers. Volume-based drivers are appropriate for indirect costs that increase or decrease relative to the volume of activity. In this situation, the total cost of setting up production equipment would increase or decrease relative to the volume of setup hours or the number of setups.

Difficulty: 2 Medium

Topic:  Selecting Cost Drivers

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

58) Which of the following is an appropriate cost driver for issuance of purchase orders?

1. A) Number of units
2. B) Number of purchase orders
3. C) Number of setups
4. D) Either number of units or number of purchase orders would be appropriate

 

Answer:  B

Explanation:  Activity-based costing uses both volume-based cost drivers and activity-based cost drivers. Volume-based drivers are appropriate for indirect costs that increase or decrease relative to the volume of activity. In this situation, the total cost of processing purchase orders would increase or decrease relative to the volume of purchase orders.

Difficulty: 2 Medium

Topic:  Selecting Cost Drivers

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

59) The first step in developing an ABC system is to:

1. A) allocate costs to activity cost pools.
2. B) identify the cost driver that has the best “cause-and-effect relationship” to the cost pool.
3. C) identify essential activities and the cost of performing those activities.
4. D) calculate activity rates.

 

Answer:  C

Explanation:  The first step in developing an ABC system is to identify essential activities and the costs of performing those activities.

Difficulty: 1 Easy

Topic:  Activity-Based Costing

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

60) All of the following are examples of volume-based drivers except:

1. A) machine hours.
2. B) number of product design changes.
3. C) direct labor hours.
4. D) number of units.

 

Answer:  B

Explanation:  Because direct labor was related to production volume, it was frequently called a volume-based cost driver. Other volume-based cost drivers included machine hours, number of units, and labor dollars.

Difficulty: 1 Easy

Topic:  Effects of Automation on Selecting a Cost Driver

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

61) Which of the following would be classified as a batch-level activity?

1. A) Depreciation on production equipment
2. B) Inspection of a product, where each unit must be individually inspected
3. C) Changing machine configuration before starting a production run
4. D) Sales commissions

 

Answer:  C

Difficulty: 2 Medium

Topic:  Batch-Level Activity Center

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

62) Sales commissions are an example of:

1. A) unit-level activities.
2. B) batch-level activities.
3. C) facility-level activities.
4. D) product-level activities.

 

Answer:  A

Difficulty: 2 Medium

Topic:  Unit-Level Activity Center

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

63) Depreciation on a manufacturing facility is an example of a(n):

1. A) unit-level activity.
2. B) batch-level activity.
3. C) product-level activity.
4. D) facility-level activity.

 

Answer:  D

Difficulty: 2 Medium

Topic:  Facility-Level Activity Center

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

64) Which of the following is the most appropriate cost driver for maintaining parts inventory?

1. A) Number of parts for a product
2. B) Direct labor hours
3. C) Sales dollars
4. D) Number of setups

 

Answer:  A

Difficulty: 2 Medium

Topic:  Selecting Cost Drivers

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

65) Direct labor hours is an appropriate cost driver when:

1. A) production is labor-intensive.
2. B) overhead costs increase.
3. C) production is automated.
4. D) all of these answers are correct.

 

Answer:  A

Difficulty: 1 Easy

Topic:  Selecting Cost Drivers

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

66) Increasing automation in a manufacturing facility will likely:

1. A) Increase the number of direct labor hours and decrease overhead costs.
2. B) Decrease the number of direct labor hours and increase overhead costs.
3. C) Decrease the number of direct labor hours and decrease overhead costs.
4. D) None of these answers is correct.

 

Answer:  B

Difficulty: 1 Easy

Topic:  Effects of Automation on Selecting a Cost Driver

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

67) Which of the following statements regarding activity-based cost drivers is correct?

1. A) Activity-based cost drivers are measures of activity that are directly associated with production.
2. B) Activity-based cost drivers are directly related to the volume of production.
3. C) Activity-based cost drivers improve the accuracy of direct cost allocations.
4. D) None of these answers are correct.

 

Answer:  D

Explanation:  Volume-based (rather than activity-based) cost drivers are measures of activity that are directly associated with or directly related to the volume of production. The more sophisticated ABC approach uses activity drivers such as number of setups or percentage of utilization for overhead costs that are not influenced by volume. Activity-based cost drivers improve the accuracy of indirect (rather than direct) cost allocations.

Difficulty: 2 Medium

Topic:  Effects of Automation on Selecting a Cost Driver; Selecting Cost Drivers

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.; 05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

68) Which activity is likely to be involved in the acquisition of raw materials?

1. A) Identifying potential suppliers
2. B) Getting price quotations
3. C) Preparing purchase orders
4. D) All of the other answers are correct.

 

Answer:  D

Difficulty: 1 Easy

Topic:  Activity-Based Costing

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

69) Which of the following statement(s) regarding activity-based costing is (are) true?

 

1. Use of activity-based costing improves cost tracing by using more cause-and-effect relationships to assign indirect costs to activity centers.
2. An activity-based system is characterized by multiple cost pools and multiple volume and activity cost drivers.

III. Activity-based costing can cause distortion of cost, assigning too much cost to some products and too little to others.

 

1. A) I and III
2. B) I and II
3. C) II and III
4. D) III only

 

Answer:  B

Explanation:  Activity-based costing reduces measurement distortions by more accurately tracing costs to the products that cause their incurrence.

Difficulty: 2 Medium

Topic:  Comparing ABC with Traditional Cost Allocation; Product-Level Activity Center

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

70) Which of the following statements regarding unit-level activities is (are) true?

 

1. Unit-level activities occur each time a batch of units is produced.
2. Unit-level costs follow a variable cost behavior pattern.

III. Unit-level activities benefit the production as a whole and are not related to any specific product.

 

1. A) I only
2. B) I and II
3. C) II and III
4. D) II only

 

Answer:  D

Explanation:  Unit-level activities occur each time a unit of product is made.

Difficulty: 1 Easy

Topic:  Unit-Level Activity Center

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

71) Which of the following costs would be most fairly allocated using a volume-based cost driver?

1. A) Inventory holding costs
2. B) Property taxes
3. C) Setup costs for product batches
4. D) Indirect labor costs

 

Answer:  D

Explanation:  Volume-based drivers are appropriate for indirect costs that increase or decrease relative to the volume of activity.

Difficulty: 2 Medium

Topic:  Selecting Cost Drivers

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

72) Hough Company manufactures a wide variety of products. A high proportion of its indirect costs are batch-level costs, such as acquiring materials, moving materials within the factory, and setting up machines. Hough uses direct labor hours to assign indirect costs to all of its products. How is this use of a traditional product costing system likely to affect the costs of Hough’s high-volume and low-volume products?

1. A) All of its products are undercosted.
2. B) Its low-volume products are overcosted.
3. C) All of its products are overcosted.
4. D) Its high-volume products are overcosted.

 

Answer:  D

Explanation:  The volume-based cost driver overcosts the high-volume product and undercosts the low-volume product.

Difficulty: 1 Easy

Topic:  Activity-Based Cost Drivers

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

73) All of the following are categories of quality costs except:

1. A) prevention costs.
2. B) design costs.
3. C) internal failure costs.
4. D) appraisal costs.

 

Answer:  B

Explanation:  Quality represents the degree to which products or services conform to design specifications. The costs companies incur to ensure quality conformance can be classified into four categories: prevention, appraisal, internal failure, and external failure.

Difficulty: 1 Easy

Topic:  Total Quality Management

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

74) Voluntary costs refer to:

1. A) prevention and appraisal costs.
2. B) prevention and internal failure costs.
3. C) appraisal and external failure costs.
4. D) internal failure costs and external failure costs.

 

Answer:  A

Explanation:  Because prevention and appraisal costs are a function of managerial discretion, they are often called voluntary costs. Management chooses how much to spend on these voluntary costs.

Difficulty: 1 Easy

Topic:  Total Quality Management

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

75) In the below graph, which shows the relationship among components of quality cost, Line “B” depicts:

 

 

1. A) total quality costs.
2. B) external failure quality cost.
3. C) voluntary quality costs.
4. D) internal failure quality costs.

 

Answer:  C

Difficulty: 1 Easy

Topic:  Minimizing Total Quality Cost

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

76) In the below graph, which shows the relationship among components of quality cost, Line “C” depicts:

 

 

1. A) failure costs.
2. B) internal quality cost.
3. C) voluntary quality failure costs.
4. D) prevention costs.

 

Answer:  A

Difficulty: 1 Easy

Topic:  Minimizing Total Quality Cost

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

77) All of the following are external failure costs except:

1. A) warranty repairs and replacement.
2. B) reliability testing
3. C) customer relations.
4. D) restocking and packaging.

 

Answer:  B

Explanation:  Internal failure costs, such as reliability testing, pertain to correcting defects before goods reach customers; external failure costs result from delivering defective goods to customers.

Difficulty: 2 Medium

Topic:  Total Quality Management

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

78) Which of the following is an example of a prevention cost?

1. A) Downtime
2. B) Inventory inspection
3. C) Product design
4. D) Repair and rework

 

Answer:  C

Explanation:  Companies incur prevention costs, such as product design, to avoid nonconforming products. They incur appraisal costs to identify nonconforming products produced in spite of prevention cost expenditures.

Difficulty: 2 Medium

Topic:  Total Quality Management

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

79) Which of the following statements is incorrect?

1. A) An activity-based costing system uses more cause-and-effect relationships in tracing costs than does a traditional cost allocation system.
2. B) An activity-based costing system first assigns or traces costs to the departments in which products are made.
3. C) The hierarchical categories into which activities are grouped are unit-level, batch-level, product-level, and facility-level activities.
4. D) The total amount of unit-level costs changes in proportion to the number of units of product made.

 

Answer:  B

Explanation:  The first step in developing an ABC system is to identify essential activities and the costs of performing those activities.

Difficulty: 1 Easy

Topic:  Types of Production Activities; Activity-Based Costing; Comparing ABC with Traditional Cost Allocation

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

80) Which of the following costs is the result of a facility-level activity?

1. A) Utility costs related to heating and lighting a manufacturing facility
2. B) The cost of landscaping the grounds for the manufacturing unit
3. C) Costs associated with trademarks
4. D) Both utility costs related to heating and lighting a manufacturing facility and the cost of landscaping the grounds for the manufacturing unit are correct

 

Answer:  D

Explanation:  Facility-level activities benefit the production process as a whole and are not related to any specific product, batch, or unit of production.

Difficulty: 2 Medium

Topic:  Facility-Level Activity Center

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

81) Franklin Manufacturing manufactures two models of windows, bay windows and casement windows. Franklin uses an activity-based costing system. The following information about the activities used to produce the company’s products has been provided.

 

Category	Estimated Cost				Cost Driver		Bay Windows		Casement
Unit-level	$	125,000			Labor hours		750		500
Batch-level	$	75,000			Inspections		30		20
Product-level	$	35,000			Storage Space		3,500 sq feet		2,100 sq feet
Facility-level	$	165,000			Machine hours		9,000		6,000

 

The amount of batch-level cost that should be allocated to the bay windows equals:

1. A) $30,000.
2. B) $45,000.
3. C) $75,000.
4. D) $7,500.

 

Answer:  B

Explanation:  Activity rate = Total cost ÷ Total cost driver volume

Activity rate = $75,000 ÷ (30 inspections + 20 inspections) = $1,500 per inspection

Allocation = Cost driver volume × Activity rate

Allocation to bay windows = 30 inspections × $1,500 per inspection = $45,000

Difficulty: 3 Hard

Topic:  Batch-Level Activity Center

Learning Objective:  05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

82) Franklin Manufacturing manufactures two models of windows, bay windows and casement windows. Franklin uses an activity-based costing system. The following information about the activities used to produce the company’s products has been provided.

 

Category	Estimated Cost				Cost Driver		Bay Windows		Casement
Unit-level	$	125,000			Labor hours		750		500
Batch-level	$	75,000			Inspections		30		20
Product-level	$	35,000			Storage Space		3,500 sq feet		2,100 sq feet
Facility-level	$	165,000			Machine hours		9,000		6,000

 

The amount of product-level cost that should be allocated to the casement windows equals:

125. A) $13,125.
126. B) $21,875.
127. C) $30,000.
128. D) $45,000.

 

Answer:  A

Explanation:  Activity rate = Total cost ÷ Total cost driver volume

Activity rate = $35,000 ÷ (3,500 sq. ft. + 2,100 sq. ft.) = $6.25 per sq. ft.

Allocation = Cost driver volume × Activity rate

Allocation to casement windows = $6.25 per sq. ft. × 2,100 sq.ft. = $13,125

Difficulty: 3 Hard

Topic:  Product-Level Activity Center

Learning Objective:  05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

83) Franklin Manufacturing manufactures two models of windows, bay windows and casement windows. Franklin uses an activity-based costing system. The following information about the activities used to produce the company’s products has been provided.

 

Category	Estimated Cost				Cost Driver		Bay Windows		Casement
Unit-level	$	125,000			Labor hours		750		500
Batch-level	$	75,000			Inspections		30		20
Product-level	$	35,000			Storage Space		3,500 sq feet		2,100 sq feet
Facility-level	$	165,000			Machine hours		9,000		6,000

 

If bay windows and casement windows require the same amount of direct labor, using labor hours as the allocation base for facility-level costs would:

1. A) Undercost the casement windows.
2. B) Overcost the bay windows.
3. C) Undercost both the bay windows and casement windows.
4. D) None of these answers are correct.

 

Answer:  D

Explanation:  Activity-based costing:

Activity rate = Total cost ÷ Total cost driver volume

Activity rate = $165,000 ÷ (9,000 MHs + 6,000 MHs) = $11 per MH

Allocation = Cost driver volume × Activity rate

Allocation to bay windows = $11 per MH × 9,000 MHs = $99,000

Allocation to casement windows = $11 per MH × 6,000 MHs = $66,000

Traditional costing:

If DLHs are used to allocated the facility-level costs and both windows require the same number of DLHs, each would receive one-half, or $165,000 × ½ = $82,500, of the facility-level costs. As a result, the bay windows would be undercosted ($82,500 instead of $99,000) and the casement windows would be overcosted ($82,500 instead of $66,000).

Difficulty: 3 Hard

Topic:  Comparing ABC with Traditional Cost Allocation; Facility-Level Activity Center

Learning Objective:  05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

84) Which of the following best describes the impact of undercosting in the allocation of production costs?

1. A) This is a goal of all companies because undercosting all products allows for larger profit margins.
2. B) Companies will use target pricing to undercost products.
3. C) Undercosting some products will lead to overcosting other products, which may then become overpriced and lose market share.
4. D) Undercosting some products can lead to overcosting other products, which is acceptable because it all balances out in the long run.

 

Answer:  C

Difficulty: 1 Easy

Topic:  Undercosting and Overcosting; Using ABC Information to Trace Costs to Product Lines

Learning Objective:  05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

85) An activity center:

1. A) Is an organizational structure where companies are organized into related activities, and the overhead costs associated with performing these activities are combined into cost pools.
2. B) Combines overhead costs into cost pools.
3. C) Is an organizational structure associated with minimal record-keeping tasks.
4. D) None of these answers are correct.

 

Answer:  A

Explanation:  To reduce record-keeping costs, companies group related activities into hubs called activity centers. The overhead costs of these related activities are combined into a cost pool for each activity center. Because the activities assigned to each center are related, a business can obtain rational cost allocations using a common cost driver for an entire cost pool.

Difficulty: 1 Easy

Topic:  Identifying Activity Centers

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

86) Which of the following statements is false regarding upstream and downstream costs?

1. A) Both upstream and downstream costs are unnecessary and should be minimized, if not eliminated.
2. B) Upstream costs occur before and downstream costs occur after goods are manufactured.
3. C) Product design is an example of an upstream cost.
4. D) Customer service is an example of a downstream cost.

 

Answer:  A

Explanation:  Businesses incur upstream costs before—and downstream costs after—goods are manufactured. Although these costs can be minimized, they cannot be eliminated.

Difficulty: 1 Easy

Topic:  Downstream Costs and Upstream Costs

Learning Objective:  05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

87) The objective of using the following graph is to:

 

 

1. A) minimize quality.
2. B) maximize profit.
3. C) minimize total quality costs.
4. D) maximize total quality costs.

 

Answer:  C

Difficulty: 1 Easy

Topic:  Minimizing Total Quality Cost

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

88) Activities that support specific products or product lines are known as:

1. A) facility-level activities
2. B) unit-level activities
3. C) product-level activities
4. D) batch-level activities

 

Answer:  C

Difficulty: 1 Easy

Topic:  Product-Level Activity Center

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

89) All of the following quality costs are directly controllable by management except:

1. A) Repair and rework
2. B) Product design
3. C) Training costs
4. D) Reliability testing

 

Answer:  A

Explanation:  Because prevention and appraisal costs are a function of managerial discretion, they are often called voluntary costs. Management chooses how much to spend on these voluntary costs. In contrast, management does not directly control failure costs. The cost of dissatisfied customers may not be measurable, much less controllable. Even though failure costs may not be directly controllable, they are related to voluntary costs.

Difficulty: 2 Medium

Topic:  Total Quality Management

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

90) Traditional cost systems usually allocate overhead to products based on direct labor.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Development of a Single Companywide Cost Driver

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

91) As companies have become more highly automated, overhead costs have become a larger part of total manufacturing cost.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Effects of Automation on Selecting a Cost Driver

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

92) In a highly automated manufacturing company, labor costs vary considerably with volume of production.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  Effects of Automation on Selecting a Cost Driver

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

93) Many automated processes generate costs that have no cause-and-effect relationship with volume-based cost drivers.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Effects of Automation on Selecting a Cost Driver

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

94) Anderson Company produces a variety of products, some in labor-intensive departments and some in heavily automated departments. Using a companywide overhead allocation rate based on direct labor will result in overcosting some products and undercosting others.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Effects of Automation on Selecting a Cost Driver

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

95) Companies operating in a highly automated environment that produce many different products with varying levels of production should use activity-based cost drivers to improve the accuracy of their cost allocations.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Effects of Automation on Selecting a Cost Driver

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

96) Because volume-based allocation rates assign more cost to high-volume products, low-volume products are often undercosted.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Activity-Based Cost Drivers

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

97) The first step in implementing an activity-based costing system is to trace overhead costs to one or more departments.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  Activity-Based Costing

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

98) One of the advantages of activity-based costing systems over traditional systems is that ABC systems require less record keeping.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  Identifying Activity Centers

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

99) Unit-level activity costs follow a fixed cost behavior pattern (i.e., such costs vary on a per unit basis but are constant in total).

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  Unit-Level Activity Center; Batch-Level Activity Center

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

100) To reduce its total batch-level costs, a company should produce its products in large batches.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Batch-Level Activity Center

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

101) Using a single plant-wide overhead rate is likely to cause some distortion in allocation of product-level costs.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Comparing ABC with Traditional Cost Allocation

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

102) Inspection of products may sometimes be considered a batch-level activity.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Batch-Level Activity Center

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

103) Activity-based costing does not use volume-based cost drivers.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  Selecting Cost Drivers

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

104) In an activity-based costing system, a volume-based cost driver is appropriate for product-level activities.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  Selecting Cost Drivers

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

105) The objective of target pricing is to establish a price that will maximize profits given existing costs.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  Undercosting and Overcosting

Learning Objective:  05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Remember

AACSB:  Knowledge Application; Ethics

AICPA:  FN Measurement; BB Industry

 

 

106) Most companies allocate facility-level activity costs directly to products for decision-making purposes.

 

Answer:  FALSE

Explanation:  Facility-level activities benefit the production process as a whole and are not related to any specific product, batch, or unit of production. As such, they are indirect, rather than direct, costs.

Difficulty: 2 Medium

Topic:  Facility-Level Activity Center

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Understand

AACSB:  Knowledge Application; Ethics

AICPA:  FN Measurement; BB Industry

 

107) Bennett Company pays its salespeople a sales commission on each sale they make. This commission is an example of an upstream cost.

 

Answer:  FALSE

Explanation:  Businesses incur upstream costs before—and downstream costs after—goods are manufactured.

Difficulty: 2 Medium

Topic:  Downstream Costs and Upstream Costs

Learning Objective:  05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

108) Upstream costs are relevant for deciding whether to discontinue a product line.

 

Answer:  TRUE

Explanation:  Businesses incur upstream costs before—and downstream costs after—goods are manufactured. Any costs that can be avoided if the company eliminates the product line are relevant to that decision.

Difficulty: 3 Hard

Topic:  Downstream Costs and Upstream Costs

Learning Objective:  05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Industry

 

 

109) Gaining personnel support and obtaining accurate data are two of the more challenging obstacles to the implementation of a successful activity-based costing system.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Employee Attitudes and the Availability of Data

Learning Objective:  05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

110) Downstream costs are not relevant to a product elimination decision.

 

Answer:  FALSE

Explanation:  Businesses incur upstream costs before—and downstream costs after—goods are manufactured. Any costs that can be avoided if the company eliminates the product line are relevant to that decision.

Difficulty: 2 Medium

Topic:  Downstream Costs and Upstream Costs

Learning Objective:  05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

111) The successful implementation of an activity-based costing system depends on employees’ attitudes and cooperation.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Employee Attitudes and the Availability of Data

Learning Objective:  05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

112) Implementation of an activity-based costing system requires a company to generate more detailed accounting information than would be required by a traditional product cost system.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Employee Attitudes and the Availability of Data

Learning Objective:  05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

113) The term “quality” refers to the degree to which products or services exceed customer expectations.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  Total Quality Management

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

114) Farber Company produces its product in three departments, Prepping, Machining, and Finishing. A customer recently returned a defective product that had not been machined properly. The company’s accountant would classify the repair cost as an internal failure cost.

 

Answer:  FALSE

Explanation:  Internal failure costs pertain to correcting defects before goods reach customers; external failure costs result from delivering defective goods to customers.

Difficulty: 2 Medium

Topic:  Total Quality Management

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

115) Voluntary costs refer to internal and external failure costs.

 

Answer:  FALSE

Explanation:  Because prevention and appraisal costs are a function of managerial discretion, they are often called voluntary costs. Management chooses how much to spend on these voluntary costs.

Difficulty: 1 Easy

Topic:  Total Quality Management

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

116) The concept of cost of quality is not applicable in service-type businesses such as accounting firms.

 

Answer:  FALSE

Explanation:  Quality represents the degree to which products or services conform to design specifications.

Difficulty: 1 Easy

Topic:  Total Quality Management

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

117) Total quality control cost is the sum of voluntary and failure costs.

 

Answer:  TRUE

Explanation:  Quality represents the degree to which products or services conform to design specifications. The costs companies incur to ensure quality conformance can be classified into four categories: prevention, appraisal, internal failure, and external failure.

Difficulty: 1 Easy

Topic:  Total Quality Management

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

118) The goal of zero defects will generally lead to minimizing quality costs.

 

Answer:  FALSE

Explanation:  Although the goal of zero defects is appealing, it is not a cost-effective strategy. Realistic managers seek to minimize total quality cost rather than to eliminate all defects.

Difficulty: 1 Easy

Topic:  Minimizing Total Quality Cost

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

119) An increase in appraisal costs will probably lead to a decrease in internal failure costs and an increase in external failure costs.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  Minimizing Total Quality Cost

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

120) An increase in prevention costs may result in decreases in appraisal, internal failure, and external failure costs and a decrease in total quality costs.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Minimizing Total Quality Cost

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

121) Most firms have found that it is cost-effective to achieve a “zero defects” condition among their products and services.

 

Answer:  FALSE

Explanation:  Although the goal of zero defects is appealing, it is not a cost-effective strategy. Realistic managers seek to minimize total quality cost rather than to eliminate all defects.

Difficulty: 1 Easy

Topic:  Minimizing Total Quality Cost

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

122) An increase in prevention costs will often reduce a firm’s overall costs of quality.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Minimizing Total Quality Cost

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

123) Explain how the competitive global environment has motivated United States companies to increase their use of technology.

 

Answer:  Answers will vary

 

Many US companies face stiff competition, both from other American companies and from abroad. As a result, they must lower their costs, improve the quality of their products, and increase productivity. To compete successfully, they must use automation in their production activities and use current technology to communicate quickly with customers and suppliers.

Difficulty: 1 Easy

Topic:  Effects of Automation on Selecting a Cost Driver

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.

Bloom’s:  Remember

AACSB:  Knowledge Application; Communication

AICPA:  FN Measurement; BB Industry

 

 

124) List and discuss changes in business practices adopted in recent years by world-class companies.

 

Answer:  Answers will vary

 

Among the changes are increased automation, implementation of a quality management system, and use of activity-based management. Companies use robots and computer-controlled machines in producing products in an effort to control costs and produce better, more uniform products. Through a quality management system, companies can calculate the quality costs associated with their products and services. They determine whether increased expenditures for prevention and appraisal costs would more than pay for themselves through increased customer satisfaction and sales. Companies that use activity-based management identify activities that do not add value to their products and services. Nonvalue-added activities can be eliminated without reducing customer satisfaction, thus allowing the company to reduce its costs.

Difficulty: 2 Medium

Topic:  Effects of Automation on Selecting a Cost Driver; Activity-Based Cost Drivers Enhance Relevance; Total Quality Management; Minimizing Total Quality Cost

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.; 05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Understand

AACSB:  Knowledge Application; Communication

AICPA:  FN Measurement; BB Industry

 

125) Explain how the use of direct labor hours as a cost driver can distort costs of products in a highly automated manufacturing environment.

 

Answer:  Answers will vary

 

In a highly automated factory, most overhead costs are caused by activities other than direct labor. In other words, there is not a strong cause-and-effect relationship between direct labor hours and overhead costs. A product that used more direct labor hours than other products would be assigned too much overhead cost. Products that used very little direct labor (but might use large amounts of other activities) would be assigned too little cost.

Difficulty: 2 Medium

Topic:  Effects of Automation on Selecting a Cost Driver; Activity-Based Cost Drivers Enhance Relevance

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.

Bloom’s:  Understand

AACSB:  Knowledge Application; Communication

AICPA:  FN Measurement; BB Industry

 

 

126) Discuss how automation has affected the selection of cost drivers employed in product costing systems.

 

Answer:  Answers will vary

 

Automation has changed the nature of the manufacturing process such that direct labor hours no longer constitute an effective cost allocation base. In a heavily automated environment, production increases or decreases are achieved primarily by regulating the technology, with no impact on the amount of direct labor required. That is, labor is no longer related to the volume of production and so loses its effectiveness as a rational basis for the allocation of overhead costs. Furthermore, automation often results in a significant increase in overhead costs (e.g., increased depreciation charges for expensive automated equipment and higher utilities and maintenance costs). As overhead costs make up an increasingly high percentage of the total costs of production, firms must develop more refined and sophisticated ways to allocate overhead costs.

Difficulty: 2 Medium

Topic:  Effects of Automation on Selecting a Cost Driver; Activity-Based Cost Drivers Enhance Relevance

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.

Bloom’s:  Understand

AACSB:  Knowledge Application; Communication

AICPA:  FN Measurement; BB Industry

 

127) What is the reasoning behind the use of cost pools in an activity-based costing system?

 

Answer:  Answers will vary

 

A company engages in hundreds or thousands of activities. Allocating each cost individually would not be cost-effective—the cost of preparing the accounting information would exceed the benefit from using such detailed information. Therefore, companies group related costs into a limited number of cost pools, then they allocate the total cost in each cost pool.

Difficulty: 2 Medium

Topic:  Identifying Activity Centers

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Understand

AACSB:  Knowledge Application; Communication

AICPA:  FN Measurement; BB Industry

 

 

128) How would a company determine the optimal number of activity centers in an activity-based costing system?

 

Answer:  Answers will vary

 

The company would determine how many activity centers to use based on a cost/benefit analysis. A company should increase the number of activity centers only to the extent that additional accuracy improves decision-making.

Difficulty: 1 Easy

Topic:  Identifying Activity Centers

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Remember

AACSB:  Knowledge Application; Communication

AICPA:  FN Measurement; BB Industry

 

129) What is the likely consequence of using a single overhead rate rather than activity-based costing?

 

Answer:  Answers will vary

 

A company-wide overhead rate would undercost the product line that has high inventory carrying costs and overcost the other product lines. Activity-based costing would identify the product-level activities and assign them to the products that cause the activities to occur.

Difficulty: 1 Easy

Topic:  Undercosting and Overcosting

Learning Objective:  05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Remember

AACSB:  Knowledge Application; Ethics; Communication

AICPA:  FN Measurement; BB Industry

 

130) What is the purpose of target pricing? What are the steps in target pricing?

 

Answer:  Answers will vary

 

The purpose of target pricing is to set a price for products that takes market conditions into account. A company would first determine the price that customers would likely be willing to pay for a product. Then it would determine whether it can produce the product at a cost that is low enough to allow the company to earn an acceptable profit at that selling price.

Difficulty: 2 Medium

Topic:  Undercosting and Overcosting

Learning Objective:  05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Understand

AACSB:  Knowledge Application; Ethics; Communication

AICPA:  FN Measurement; BB Industry

 

131) What is the basic premise behind activity-based costing systems (ABC)? What is an activity? Describe how ABC systems work.

 

Answer:  Answers will vary

 

The basic premise behind ABC is that activities drive costs. Significant reductions in product costs can be achieved only by managing those activities that drive the costs. Activity-based costing is a two-stage allocation process that employs multiple cost pools and cost drivers. Activities are actions taken by an organization to accomplish its mission. Activity cost pools are often established along hierarchical lines (i.e., unit-level, batch-level, product-level, and facility-level) with separate cost drivers (both volume- and activity-based) for each cost pool. In the first stage, overhead costs are traced to specific activity cost pools. In the second stage, activity rates are developed and used to assign activity costs to the firm’s products and services.

Difficulty: 2 Medium

Topic:  Activity-Based Cost Drivers; Activity-Based Cost Drivers Enhance Relevance; Types of Production Activities; Activity-Based Costing; Identifying Activity Centers; Comparing ABC with Traditional Cost Allocation

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.; 05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

132) Discuss how an increase in one or more quality cost(s) can decrease others.

 

Answer:  Answers will vary

 

If a company chooses to spend more on prevention costs, fewer defects are likely to occur. This will likely reduce both internal and external failure costs. Additionally, if a company chooses to spend more on appraisal costs, while internal failure costs are likely to increase, external failure costs will decrease. This is because more defective units will be detected before they reach the customer.

Difficulty: 2 Medium

Topic:  Minimizing Total Quality Cost

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

133) Indicate whether each of the following statements is true or false.

 

In an automated environment, use of a volume-based cost driver may undercost high-volume products. _____

 

In an automated environment, an activity-based cost driver would provide for more accurate allocation of setup costs than would a volume-based cost driver.  _____

 

Activity-based costing is probably not cost beneficial for a company that makes very similar products.  _____

 

In an automated manufacturing environment, use of a volume-based cost driver could lead managers to make poor decisions.  _____

 

Activity-based costing always delivers significantly more accurate cost allocation than does volume-based costing.  _____

 

Answer:  In an automated environment, use of a volume-based cost driver may undercost high-volume products. F

 

In an automated environment, an activity-based cost driver would provide for more accurate allocation of setup costs than would a volume-based cost driver. T

 

Activity-based costing is probably not cost beneficial for a company that makes very similar products. T

 

In an automated manufacturing environment, use of a volume-based cost driver could lead managers to make poor decisions. T

 

Activity-based costing always delivers significantly more accurate cost allocation than does volume-based costing. F

Difficulty: 2 Medium

Topic:  Effects of Automation on Selecting a Cost Driver; Activity-Based Cost Drivers Enhance Relevance; Comparing ABC with Traditional Cost Allocation; Undercosting and Overcosting

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.; 05-02 Identify cost centers and cost drivers in an activity-based costing system.; 05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

134) Indicate whether each of the following statements is true or false.

 

The allocation of indirect costs using activity-based costing is a three-step process. _____

 

The first stage of activity-based costing is to calculate activity rates. _____

 

A typical business may engage in thousands of different activities. _____

 

Determining the number of activity centers to use in an activity-based costing system should be based on a cost/benefit analysis. _____

 

A traditional cost allocation system first assigns costs to activity centers and then uses a single volume-based cost driver to assign the costs to products. _____

 

Answer:  The allocation of indirect costs using activity-based costing is a three-step process. F

 

The first stage of activity-based costing is to calculate activity rates. F

 

A typical business may engage in thousands of different activities. T

 

Determining the number of activity centers to use in an activity-based costing system should be based on a cost/benefit analysis. T

 

A traditional cost allocation system first assigns costs to activity centers and then uses a single volume-based cost driver to assign the costs to products. F

Difficulty: 2 Medium

Topic:  Activity-Based Cost Drivers; Identifying Activity Centers; Comparing ABC with Traditional Cost Allocation

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

135) Indicate whether each of the following statements is true or false.

 

An activity-based costing system uses more cause-and-effect relationships in assigning costs than does a traditional cost allocation system. _____

 

An activity-based costing system first assigns or traces costs to the departments in which products are made. _____

 

The hierarchical categories into which activities are grouped are unit-level, batch-level, department-level, and facility-level activities. _____

 

An activity-based costing system traces the costs of performing activities to the products that cause the activities. _____

 

The total amount of unit-level costs changes in proportion to the number of batches of product made. _____

 

Answer:  An activity-based costing system uses more cause-and-effect relationships in assigning costs than does a traditional cost allocation system. T

 

An activity-based costing system first assigns or traces costs to the departments in which products are made. F

 

The hierarchical categories into which activities are grouped are unit-level, batch-level, department-level, and facility-level activities. F

 

An activity-based costing system traces the costs of performing activities to the products that cause the activities. T

 

The total amount of unit-level costs changes in proportion to the number of batches of product made. F

Difficulty: 2 Medium

Topic:  Effects of Automation on Selecting a Cost Driver; Types of Production Activities; Activity-Based Costing; Unit-Level Activity Center

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.; 05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

136) Indicate whether each of the following statements is true or false.

 

Activity-based costing systems are useful for many manufacturing companies but not for businesses that exist to provide services to their customers. ______

 

Costs that are closely related to volume of production may be classified as unit-level even if they do not change with each individual unit of product.  ______

 

Activities related to producing groups of products are referred to as product-level activities.  ______

 

Batch-level costs are fixed with respect to the number of units produced in a single batch of a product.  ______

 

Machine setup costs are usually classified as batch-level costs.  ______

 

Answer:  Activity-based costing systems are useful for many manufacturing companies but not for businesses that exist to provide services to their customers. F

 

Costs that are closely related to volume of production may be classified as unit-level even if they do not change with each individual unit of product. T

 

Activities related to producing groups of products are referred to as product-level activities. F

 

Batch-level costs are fixed with respect to the number of units produced in a single batch of a product. T

 

Machine setup costs are usually classified as batch-level costs. T

Difficulty: 2 Medium

Topic:  Activity-Based Cost Drivers Enhance Relevance; Unit-Level Activity Center; Batch-Level Activity Center; Product-Level Activity Center

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.; 05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

137) Indicate whether each of the following statements is true or false.

 

In an activity-based costing system, the same amount of facility-level costs should be assigned to all products. ______

 

Raw materials inventory holding costs are usually classified as unit-level costs. ______

 

Costs associated with obtaining and defending a patent generally would be classified as product-level costs. ______

 

Activities that benefit the production process as a whole are product-level activities. ______

 

Manufacturing equipment depreciation is classified as a facility-level activity. ______

 

Answer:  In an activity-based costing system, the same amount of facility-level costs should be assigned to all products. F

 

Raw materials inventory holding costs are usually classified as unit-level costs. T

 

Costs associated with obtaining and defending a patent generally would be classified as product-level costs. T

 

Activities that benefit the production process as a whole are product-level activities. F

 

Manufacturing equipment depreciation is classified as a facility-level activity. F

Difficulty: 2 Medium

Topic:  Unit-Level Activity Center; Product-Level Activity Center; Facility-Level Activity Center

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

138) Indicate whether each of the following statements is true or false.

 

Use of an activity-based costing system may identify products that are overcosted or undercosted by a traditional system. ______

 

Use of an activity-based costing system may prove to company managers that the company is incurring losses on some products they believed to be profitable. ______

 

The starting point for target pricing is to determine the costs that are incurred in making the product. ______

 

Use of a traditional product costing system may put a company at a competitive advantage by overcosting some products. ______

 

Activity-based costing results could lead managers of a company to decide to eliminate some products. ______

 

Answer:  Use of an activity-based costing system may identify products that are overcosted or undercosted by a traditional system. T

Use of an activity-based costing system may prove to company managers that the company is incurring losses on some products they believed to be profitable. T

The starting point for target pricing is to determine the costs that are incurred in making the product. F

Use of a traditional product costing system may put a company at a competitive advantage by overcosting some products. F

Activity-based costing results could lead managers of a company to decide to eliminate some products. T

Difficulty: 2 Medium

Topic:  Undercosting and Overcosting

Learning Objective:  05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

139) Indicate whether each of the following statements is true or false.

 

If a companywide overhead rate undercosts some products, it must overcost others. ______

 

Facility-level costs usually decrease when a company decides to eliminate one product. ______

 

Many companies do not allocate facility-level costs to products for decision-making purposes. ______

 

Batch-level costs are usually not relevant to the decision to eliminate a product. ______

 

Upstream costs are incurred before a product is manufactured. ______

 

Answer:  If a companywide overhead rate undercosts some products, it must overcost others. T

 

Facility-level costs usually decrease when a company decides to eliminate one product. F

 

Many companies do not allocate facility-level costs to products for decision-making purposes. T

 

Batch-level costs are usually not relevant to the decision to eliminate a product. F

 

Upstream costs are incurred before a product is manufactured. T

Difficulty: 2 Medium

Topic:  Batch-Level Activity Center; Facility-Level Activity Center; Downstream Costs and Upstream Costs; Undercosting and Overcosting

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.; 05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

140) Indicate whether each of the following statements is true or false.

 

For a manufacturing company, “quality” means producing products that conform to specifications. ______

 

Companies incur internal failure costs to avoid producing nonconforming products. ______

 

Voluntary costs refer to prevention and appraisal costs. ______

 

Failure costs include appraisal and external failure costs. ______

 

Managers of a company can often reduce failure costs by reducing appraisal costs. ______

 

Answer:  For a manufacturing company, “quality” means producing products that conform to specifications. T

Companies incur internal failure costs to avoid producing nonconforming products. F

Voluntary costs refer to prevention and appraisal costs. T

Failure costs include appraisal and external failure costs. F

Managers of a company can often reduce failure costs by reducing appraisal costs. F

Difficulty: 2 Medium

Topic:  Total Quality Management; Minimizing Total Quality Cost

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

141) Select from the list provided the term that best matches each of the following descriptions.

 

 

 

Answer:

Difficulty: 1 Easy

Topic:  Development of a Single Companywide Cost Driver; Effects of Automation on Selecting a Cost Driver; Activity-Based Costing; Identifying Activity Centers; Unit-Level Activity Center; Batch-Level Activity Center; Product-Level Activity Center; Facility-Level Activity Center; Downstream Costs and Upstream Costs; Employee Attitudes and the Availability of Data

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.; 05-02 Identify cost centers and cost drivers in an activity-based costing system.; 05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Remember

AACSB:  Knowledge Application

AICPA:  BB Industry; FN Measurement

 

 

142) Costs may be classified in a variety of ways. One approach classifies costs into three categories, manufacturing, upstream, and downstream. These costs are sometimes referred to as an organization’s value chain. Costs incurred by the Branscome Bicycle Company are described in the following table:

 

 

Required:

 

Classify each of the above costs as being an upstream, manufacturing, or downstream cost by inserting a check mark in the appropriate column.

 

Answer:

Difficulty: 2 Medium

Topic:  Downstream Costs and Upstream Costs

Learning Objective:  05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  BB Industry; FN Measurement

 

 

143) Décor Carpets incurs a variety of costs in producing several grades of carpet for the residential and commercial housing industries. The different grades and styles are manufactured in batches or production runs. The company uses activity-based costing to assign overhead costs to its different product lines. Selected costs are provided in the following table:

 

	Cost Description	Cost Hierarchy (U, B, P, or F)	Cost Driver
a	Set up costs for each production run
b	Inventory storage costs
c	Batch inspection costs
d	Indirect materials
e	Factory insurance costs
f	Material handling costs
g	Legal costs of protecting various patents
h	Utilities cost incurred to operate machinery
i	Depreciation of factory building

 

Required:

 

For each item identify the cost hierarchy and the cost driver. Use a (U) if the cost described is a unit-level cost, a (B) if a batch-level cost, a (P) if a product-level cost, or an (F) if a facility-level cost. Name a cost driver (for example, direct labor hours) that you believe might be appropriate for allocating that particular cost to units of products.

 

 

Answer:

	Cost Description	Cost Hierarchy (U, B, P, or F)	Cost Driver
a	Set up costs for each production run	B	No. of setups, No. of setup hours
b	Inventory storage costs	P	Volume of products stored, No. of Types of products, square footage
c	Batch inspection costs	B	No. of batches, No. of inspections, No. of inspection hours
d	Indirect materials	U	No. of units produced, % of direct material cost or direct labor cost
e	Factory insurance costs	F	Square footage
f	Material handling costs	B	No. of parts, No. of purchase orders
g	Legal costs of protecting various patents	P	No. of types of products
h	Utilities cost incurred to operate machinery	U	Machine hours, No. of units produced
i	Depreciation of factory building	F	Square footage

Difficulty: 2 Medium

Topic:  Unit-Level Activity Center; Batch-Level Activity Center; Product-Level Activity Center; Facility-Level Activity Center; Selecting Cost Drivers

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

144) A number of quality-related costs are provided in the following table:

 

 

Required:

 

Classify the above costs by cost of quality category. That is, for each item in the table, place a check mark in the appropriate column.

 

 

Answer:

Difficulty: 2 Medium

Topic:  Total Quality Management

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  BB Industry; FN Measurement

 

 

145) Select the term from the list provided that best matches each of the following descriptions.

 

 

Answer:

Difficulty: 2 Medium

Topic:  Total Quality Management

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  BB Industry; FN Measurement

 

 

146) Supply Depot produces a variety of office products including two models (standard and deluxe) of a handheld stapler. A number of the company’s activity-related costs are described in the following table:

 

 

Required:

 

Classify each of the above costs into unit-, batch-, product-, or facility-level cost pools.

 

Answer:

Difficulty: 2 Medium

Topic:  Unit-Level Activity Center; Batch-Level Activity Center; Product-Level Activity Center; Facility-Level Activity Center; Selecting Cost Drivers

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.

Bloom’s:  Understand

AACSB:  Knowledge Application

AICPA:  BB Industry; FN Measurement

 

 

147) ABX Company produces two types of computer speakers. The Prestige line is made to provide excellent sound for the most demanding applications. The Standard line is geared toward workplace use and delivers average performance. During its most recent accounting period, the company incurred $50,000 of inspection costs. Its production activities were classified into four cost centers, unit-level, batch-level, product-level, and facility-level. The following cost and cost driver information is provided for the unit-level and batch-level cost centers:

 

 

 

Required:

 

1) Allocate the inspection cost between the two products, assuming the inspection cost is driven by a) only unit-level activities; b) only batch-level activities.

 

2) How should managers of the company determine which allocation is more appropriate?

 

Answer:

1) The two alternative allocations are shown in the following table:

 

	Unit-Level		Batch-Level
Cost Driver:	Number of direct labor hours		Number of batches
Activity Rate:	$50,000/10,000 = $5 per DLH		$50,000/20 = $2,500 per batch
Cost Center:
Prestige Product	4,000 × $5 = $20,000		15 × $2,500 = $37,500
Standard Product	6,000 × $5 = $30,000		5 × $2,500 = $12,500
Totals	$50,000		$50,000

 

2) If each individual unit is inspected, the unit-level allocation would be appropriate. However, if only a selected number of units are inspected in each batch, then the batch-level allocation would be more appropriate.

Difficulty: 3 Hard

Topic:  Unit-Level Activity Center; Batch-Level Activity Center; Product-Level Activity Center; Facility-Level Activity Center; Selecting Cost Drivers

Learning Objective:  05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  FN Measurement; BB Industry

 

 

148) Playtime Electronics produces two kinds of electronic toys, Wizards and Gizmos. During the current period, 8,000 Wizards and 16,000 Gizmos were produced and sold, generating revenues of $500,000 and $2,000,000, respectively. Unit production costs for the two toys are $50 for Wizards and $70 for Gizmos. In calculating the cost of goods sold, Playtime uses activity-based costing to allocate its overhead costs. However, upstream costs of $240,000 are allocated equally to the two products.

 

Required:

 

1) Compute the total net profit for each product and for the firm as a whole.

 

2) Would you advise eliminating either toy? Why or why not?

 

 

Answer:

1) Net profit

 

			Wizards									Gizmos						Firm
Revenue			$	500,000									$	2,000,000					$	2,500,000
Less Cost of Goods Sold	(8,000 × $50)			400,000					(16,000 × $70)					1,120,000						1,520,000
Gross Profit			$	100,000									$	880,000					$	980,000
Less upstream costs				120,000										120,000						240,000
Net Profit			$	(20,000	)								$	760,000					$	740,000

 

2) Wizards are showing a loss because of the way that upstream costs are allocated. Because twice as many Gizmos are sold as Wizards, Gizmos could be allocated twice as much upstream cost. If such costs are allocated in a 1:2 ratio, the following result occurs:

 

			Wizards									Gizmos						Firm
Gross Profit			$	100,000									$	880,000					$	980,000
Less upstream costs	($240,000 × 1/3)			80,000					($240,000 × 2/3)					160,000						240,000
Net Profit			$	20,000									$	720,000					$	740,000

 

Thus, Wizards should not be eliminated. Additionally, upstream costs might be allocated based on the dollar amount of sales.

Difficulty: 3 Hard

Topic:  Downstream Costs and Upstream Costs

Learning Objective:  05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Apply

AACSB:  Knowledge Application; Communication

AICPA:  FN Measurement; BB Industry

 

 

149) Roadmaster Tires produces a variety of auto and truck tires at its Indianapolis manufacturing plant. The plant is highly automated and uses an activity-based costing system to allocate overhead costs to its various product lines. The costs and cost drivers associated with four activity cost pools are given below:

 

Activities		Unit-Level					Batch-Level						Product-Level						Facility-Level
Cost		$	80,000					$	40,000					$	20,000					$	100,000
Cost Driver			4,000	labor hrs					100	setups				% of use							50,000	units

 

Production of 1,000 units of a small tractor tire required 200 labor hours and two setups and consumed 10% of the product sustaining activities.

 

Required:

 

1) Instead of using ABC, suppose the company had used labor hours as a company-wide allocation base. How much total overhead would have been allocated to the tractor tire?

 

2) How much total overhead cost will be allocated to the tire under activity-based costing?

 

3) What price will be quoted if the product is priced at 25% above cost? Compute the price under both the direct labor hours approach and under activity-based costing. The direct manufacturing costs consist of direct material of $20 and direct labor of $30.

 

4) What implications does ABC have on a company that bids on contracts using the costing approach described in Requirement 3?

 

 

Answer:

1) Overhead allocated using direct labor:

Total overhead/total direct labor hours = allocation rate; $240,000/4,000 = $60 per DLH

Overhead assigned to product = $60 × 200 hours = $12,000

 

2) Overhead allocated using ABC:

Unit-level = $80,000/4,000 = $20 per DLH

Batch-level = $40,000/100 = $400 per setup

Facility-level = $100,000/50,000 = $2 per unit

 

Overhead assigned to product:

Unit-level (200 × $20/DLH)	$	4,000
Batch-level (2 × $400/setup)		800
Product-level ($20,000 × 10%)		2,000
Facility-level (1,000 × $2/unit)		2,000
Total	$	8,800

 

3) Selling price:

Allocated overhead:

DLH $12,000/1,000 = $12.00 per unit

ABC $8,800/1,000 = $8.80 per unit

 

	DLH				ABC
Direct materials	$	20.00			$	20.00
Direct labor		30.00				30.00
Overhead		12.00				8.80
Total cost		62.00				58.80
Markup %	×	1.25			×	1.25
Selling price	$	77.50			$	73.50

 

4) Companies producing a variety of products requiring various types and levels of overhead support should use activity-based costing. Such firms are likely to be more successful because their products are going to be costed more accurately. For example, the tractor tire would have been overcosted under a traditional costing system. This would have resulted in a bid price per unit $4.00 higher than necessary. This difference might have been great enough to cause the company to lose the bid if a competitor having identical costs but using ABC (instead of a traditional costing system) also bid on the same job.

 

Difficulty: 3 Hard

Topic:  Development of a Single Companywide Cost Driver; Unit-Level Activity Center; Comparing ABC with Traditional Cost Allocation; Batch-Level Activity Center; Product-Level Activity Center; Facility-Level Activity Center; Using ABC Information to Trace Costs to Product Lines

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.; 05-02 Identify cost centers and cost drivers in an activity-based costing system.; 05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Apply

AACSB:  Knowledge Application; Communication

AICPA:  FN Measurement; BB Industry

 

 

150) Sweetheart Brands packages single-sized servings of sugar and sugar substitute for fast-food restaurants. The activities required to package sugar are fewer and less complex than for the sugar substitute. The direct costs of producing the two products are as follows:

 

	Sugar					Sugar Substitute
Direct materials	$	0.02					$	0.04
Direct labor		0.04						0.08

 

Overhead is currently assigned to the two products based on machine hours. The following information is provided regarding overhead costs:

 

Activity		Traceable Costs					Cost Driver				Sugar Line					Sugar Sub. Line						Total
Setup		$	50,000					No. of setups				125						125						250
Packing			120,000					No. of machine hrs.				10,000						40,000						50,000
Inspection			30,000					No. of batches				250						350						600
		$	200,000

 

Required:

 

1) Compute the predetermined overhead rate under the current method of overhead cost allocation. How much total overhead cost will be assigned to each product under the current system?

 

2) Compute the three activity rates that would be used in an activity-based system. How much total overhead cost will be assigned to each product under an ABC system?

 

3) Assuming an ABC system to be more precise, by how much does the company’s current costing system over- or undercost the products? Be specific.

 

 

Answer:

1) Allocation rate based on machine hours:

Total overhead/Total machine hours = $200,000/50,000 = $4.00 per machine hour

Total overhead assigned:

Sugar: $4.00 × 10,000 = $40,000

Sugar Substitute: $4.00 × 40,000 = $160,000

 

2) Allocation rate based on ABC:

Setup $50,000/250 = $200 per setup

Packing $120,000/50,000 = $2.40 per machine hour

Inspection $30,000/600 = $50 per inspection

Total overhead assigned:

 

	Sugar					Sugar Substitute
Setup ($200 × 125, 125)	$	25,000					$	25,000
Packing ($2.40 × 10,000, 40,000)		24,000						96,000
Inspection ($50 × 250, 350)		12,500						17,500
Total	$	61,500					$	138,500

 

3) The current system undercosts sugar by $21,500 ($61,500 – $40,000) and overcosts sugar substitute by the same amount.

Difficulty: 3 Hard

Topic:  Development of a Single Companywide Cost Driver; Comparing ABC with Traditional Cost Allocation; Batch-Level Activity Center; Using ABC Information to Trace Costs to Product Lines

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.; 05-02 Identify cost centers and cost drivers in an activity-based costing system.; 05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Apply

AACSB:  Knowledge Application; Communication

AICPA:  FN Measurement; BB Industry

 

 

151) Perez Company manufactures two products. Making Product A requires 6,000 hours of labor, and Product B requires 4,000 hours of labor. Perez undertakes an automation program that reduces the consumption of labor required by Product A to only 3,000 hours of labor. Product B is not affected by the automation process. Overhead cost prior to the automation totaled $30,000. After automation, overhead cost amounted to $56,000. Perez uses direct labor hours as a companywide allocation base before and after the automation.

 

Required:

 

1) Compute the amount of overhead costs allocated to both products before automation.

 

2) Compute the amount of overhead costs allocated to both products after automation.

 

3) Are direct labors hours a good choice for allocation after the automation? Why or why not?

 

Answer:

1) Overhead cost allocation before automation

Product A: $30,000 × {6,000/(4,000 + 6,000)} = $18,000

Product B: $30,000 × {4,000/(4,000 + 6,000)} = $12,000

 

2) Overhead cost allocation after automation

Product A: $56,000 × {3,000/(3,000 + 4,000)} = $24,000

Product B: $56,000 × {4,000/(3,000 + 4,000)} = $32,000

 

3) After the automation, the overhead costs have risen significantly. Even though the rise in overhead costs is completely attributable to Product A, Product B is allocated a larger percentage of the overhead after automation. The choice of direct labor hours as the allocation base over-allocates overhead to Product B. The increase in overhead due to automation of Product A should be applied more fairly to Product A rather than split between the two products.

Difficulty: 3 Hard

Topic:  Development of a Single Companywide Cost Driver; Comparing ABC with Traditional Cost Allocation

Learning Objective:  05-01 Explain how activity-based costing improves accuracy in determining the cost of products and services.

Bloom’s:  Apply

AACSB:  Knowledge Application; Communication

AICPA:  FN Measurement; BB Industry

 

 

152) Ballantine Company manufactures two products. Currently, the company uses a traditional costing system assigning overhead based on direct labor hours. The Industrial product is more complex to produce, requiring two hours of direct labor time per unit, compared to one hour of direct labor time for the Consumer product. Given the company’s total overhead costs of $720,000 and production of 1,000 Industrials and 8,000 Consumers, this results in an overhead allocation rate of $72 per direct labor hour. The following unit data are provided:

 

	Industrial					Consumer
Selling price	$	1,440.00					$	720.00
Direct material		(500.00	)					(250.00	)
Direct labor		(400.00	)					(200.00	)
Overhead		(144.00	)					(72.00	)
Gross profit	$	396.00					$	198.00

 

Because the Industrial product is twice as profitable as the Consumer model, the sales manager wants to reduce or eliminate production of the Consumer product and devote as much capacity as possible to the Industrial product.

 

You are worried that the current cost accounting system may be providing inaccurate results and would like to implement an ABC system. Assume that the company’s overhead costs were traced to four major activities. The amount of overhead costs traceable to each activity for the current year is provided below:

 

								Cost Drive Data
Activity		Cost Driver		Overhead Costs				Industrial						Consumer						Total
Mat’1 handling		No. of Purchase Orders		$	60,000					100						500						600
Setup		No.of setups			288,000					500						250						750
Assembly		No. of machine hrs.			225,000					7,000						3,000						10,000
Maintenance		No. of maintenance requests			147,000					440						295						735
Total				$	720,000

 

 

Required:

 

1) Compute the four activity rates that will be used to assign overhead to the products under activity-based costing:

 

Activity		Application Rate
Mat’1 handling
Setup
Assembly
Maintenance

 

2) Compute the amount of overhead cost which should be assigned to Industrials and Consumers under activity-based costing. Also compute the overhead cost per unit for each product.

 

Activity		1,000 Industrials		8,000 Consumers
Mat’1 handling
Setup
Assembly
Maintenance
Total Overhead Cost
Overhead cost per unit

 

3) Compute the total cost to manufacture one unit of each product if activity-based costing is used.

 

	Industrials					Consumers
Direct materials	$	500.00					$	250.00
Direct labor		400.00						200.00
Overhead
Total cost per unit

 

4) Respond to the sales manager’s recommendation that capacity be diverted from Consumers to Industrials.

 

 

Answer:

1) Activity rates:

 

Activity		Application Rate
Mat’1 handling		$60,000/600 = $100 per order
Setup		$288,000/750 = $384 per setup
Assembly		$225,000/10,000 = $22.50 per MH
Maintenance		$147,000/735 = $200 per request

 

2) Overhead cost assigned to 1,000 Industrials and 8,000 Consumers under activity-based costing:

 

Activity		1,000 Industrials		8,000 Consumers
Mat’1 handling		($100 × 100) = $10,000		($100 × 500) = $50,000
Setup		($384 × 500) = $192,000		($384 × 250) = $96,000
Assembly		($22.50 × 7,000) = $157,500		($22.50 × 3,000) = $67,500
Maintenance		($200 × 440) = $88,000		($200 × 295) = $59,000
Total Overhead Cost		$447,500		$272,500
		/1,000 units		/8,000 units
Overhead cost per unit		$447.50		$34.06

 

3) Total cost to manufacture one unit of each product if activity-based costing used:

 

	Industrials					Consumers
Direct materials	$	500.00					$	250.00
Direct labor		400.00						200.00
Overhead		447.50						34.06
Total cost per unit	$	1,347.50					$	484.06

 

4) When the two products are costed more precisely, the company is actually making much less profit on the Industrial product than currently reported and more profit on the Consumer product than currently reported. Per unit profits comparisons follow:

 

		Industrials										Consumers
		Current					ABC					Current						ABC
Selling price		$	1,440.00				$	1,440.00					$	720.00					$	720.00
COGS			1,044.00					1,347.50						522.00						484.06
Gross profit		$	396.00				$	92.50					$	198.00					$	235.94

 

 

Difficulty: 3 Hard

Topic:  Unit-Level Activity Center; Batch-Level Activity Center; Product-Level Activity Center; Facility-Level Activity Center; Undercosting and Overcosting; Using ABC Information to Trace Costs to Product Lines

Learning Objective:  05-02 Identify cost centers and cost drivers in an activity-based costing system.; 05-03 Use activity-based costing to calculate costs of products and services.

Bloom’s:  Apply

AACSB:  Knowledge Application; Communication

AICPA:  FN Measurement; BB Industry

 

 

153) Gavin Company has asked its management accountant to prepare a cost of quality report. Management is concerned that quality costs are too high relative to the company’s sales. Sales in Year 1 totaled $400,000, while sales in Year 2 were $500,000.

 

Description of Quality Costs		Year 1					%					Year 2						%
Downtime			3,250					14.1	%					3,300						14.7	%
Inspection			4,500					19.5	%					6,100						27.1	%
Product design			1,150					5.0	%					1,440						6.4	%
Reliability testing			2,130					9.2	%					2,500						11.1	%
Repair and rework costs before sale			1,615					7.0	%					2,440						10.8	%
Restocking and packaging			3,320					14.4	%					1,420						6.3	%
Training			1,500					6.5	%					1,975						8.8	%
Warranty repairs and replacements			5,585					24.2	%					3,350						14.9	%
Total costs of quality			23,050					100.0	%					22,525						100.0	%

 

 

Required:

 

1) Prepare a Quality Cost Report for Gavin Company showing its quality costs as a percentage of sales. Organize the costs by type (prevention, appraisal, internal failure, and external failure) and include percentages for each individual cost as well as for the total of each category. Round your answers to three decimal places. The report has been started below:

 

Gavin Company
Quality Cost Report
Year Ended December 31,
	Year 2	%	Year 1	%
Prevention Costs:

 

2) Evaluate Gavin Company’s strategy for reducing its total costs of quality.

 

 

Answer:

1) Quality Cost Report:

 

Gavin Company
Quality Cost Report
Year Ended December 31,
	Year 2					%					Year 1						%
Prevention Costs:
Product design costs		1,440					0.288	%					1,150						0.288	%
Training		1,975					0.395	%					1,500						0.375	%
Total prevention costs		3,415					0.683	%					2,650						0.663	%
Appraisal Costs:
Inspection		6,100					1.220	%					4,500						1.125	%
Reliability testing		2,500					0.500	%					2,130						0.533	%
Total appraisal costs		8,600					1.720	%					6,630						1.658	%
Internal Failure Costs:
Downtime costs		3,300					0.660	%					3,250						0.813	%
Repair and rework costs before sale		2,440					0.488	%					1,615						0.404	%
Total internal failure costs		5,740					1.148	%					4,865						1.216	%
External Failure Costs:
Restocking and packaging costs		1,420					0.284	%					3,320						0.830	%
Warranty repairs and replacements		3,350					0.670	%					5,585						1.396	%
Total external failure costs		4,770					0.954	%					8,905						2.226	%
Total costs of quality		22,525					4.505	%					23,050						5.763	%

 

2) Apparently Gavin is trying to control its quality costs by focusing on both prevention and appraisal costs. Total prevention costs increased from 0.663% to 0.683%, and total appraisal costs increased from 1.658% to 1.720%. As a result, internal failure costs decreased from 1.216% to 1.148%, and total external failure costs decreased dramatically from 2.226% to 0.954%. Clearly, Gavin’s strategy for decreasing overall cost of quality was successful, as total cost of quality decreased from 5.763% to 4.505%.

Difficulty: 3 Hard

Topic:  Total Quality Management; Minimizing Total Quality Cost; Quality Cost Reports

Learning Objective:  05-04 Identify the components of a total quality management program and prepare a quality cost report.

Bloom’s:  Apply

AACSB:  Knowledge Application; Communication

AICPA:  FN Measurement; BB Industry