Cost Accounting Systems

(B. Activity-Based Cost System)

B. ACTIVITY-BASED COST SYSTEM

THEORIES:
Outdated cost system
1. Symptoms of an outdated cost system include all of the following EXCEP
A. product costs change because of changes in financial reporting.
B. products that are difficult to produce show little profit.
C. competitors' prices appear unrealistically low.
D. the company has a highly profitable niche all to itself.

2. Which of the following is NOT a sign of poor cost data?

A. Competitors' prices for high-volume products appear much too high.
B. The company seems to have a highly profitable niche all to itself.
C. Customers don't balk at price increases for low-volume products.
D. Competitors' prices for low-volume products appear much too high.

Activity-based management
3. Which system focuses on the management of activities with the objective of improving the value received by the customer and the profit received by providing this
value?
A. activity-based management C. contemporary cost control
B. traditional cost management system D. standard cost system

4. Activity-based management (ABM) is

A. a costing system in which multiple overhead cost pools are allocated using bases that include one or more nonvolume related factors
B. a base used to allocate the cost of a resource to the different activities using it
C. the use of information obtained from ABC to make improvements in the firm
D. a base used to allocate the cost of an activity to products and customers

5. An objective of activity-based management is to

A. eliminate the majority of centralized activities in an organization.
B. reduce or eliminate non-value-added activities incurred to make a product or provide a service.
C. institute responsibility accounting systems in decentralized organizations.
D. all of the above

6. Primary concepts under activity-based management include all of the following except:
A. activity analysis C. activity-based costing
B. total quality management D. cost driver analysis

7. Which of the following falls under the Activity-Based Management umbrella?

Continuous Business process Activity-based
improvement reengineering costing
A. NO NO YES
B. YES NO NO
C. YES YES YES
D. NO YES NO

8. All of the following are ways that activities can be managed to achieve improvements in a process, except
A. activity induction C. activity elimination
B. activity selection D. activity sharing

Traditional Costing vs. ABC system

9. Which of the following is not a distinction between the traditional and ABC costing systems
A. the number of overhead cost pools tends to be higher in ABC systems
B. the number allocation bases tend to be higher in ABC system
C. costs within an ABC cost pool tend to be more homogeneous than the costs within a traditional system’s cost pool
D. all ABC systems are one-stage costing systems, while traditional systems may be one- or two-stage

10. In contrast to a company that uses a single overhead rate, one that uses activity-based costing
A. will have higher product costs than one using a single overhead rate.
B. cannot compute budget variances.
C. will incur additional costs for recordkeeping.
D. must have a preponderance of fixed overhead costs.

Activity-based costing
Reason
11. Of the following, which is the best reason for using activity-based costing?
A. to keep better track of overhead costs
B. to more accurately assign overhead costs to cost pools so that these costs are better controlled
C. to better assign overhead costs to products
D. to assign indirect service overhead costs to direct overhead cost pools

Benefits
12. The primary benefit of using ABC is that it provides
A. better management decisions.
B. enhanced control over overhead costs.
C. more cost pools.
D. more accurate product costing.

13. Which of the following is not a benefit of activity-based costing?

A. More accurate product costing.
B. Enhanced control over overhead costs.
C. Less costly to use.
D. Better management decisions.

Factors suggesting need to switch to ABC

14. Which of the following factors would suggest a need to switch to activity-based costing?
A. Product lines similar in volume and manufacturing complexity.

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B. Overhead costs constitute a significant portion of total costs.

C. The manufacturing process has been stable.
D. Production managers use data provided by the existing system.

15. A least likely reason to use activity-based overhead rates is that

A. some departments are labor-intensive, some are machine-intensive.
B. significant amounts of overhead are driven by different factors.
C. rates calculated for some departments are much higher than for other departments.
D. all jobs require about the same amounts of cost-driving activities.

16. The presence of any of the following factors would suggest a switch to ABC except when
A. product line differ greatly in volume.
B. overhead costs constitute a minor portion of total costs.
C. the manufacturing process has changed significantly.
D. production managers are ignoring data provided by the existing system.

Characteristics
17. Which of the following is typical of activity-based costing systems?
A. Use of a single predetermined overhead rate.
B. Use of direct labor hours or direct labor cost to assign overhead.
C. Assumption of correlation between direct labor and incurrence of overhead cost.
D. Use of multiple cost drivers to allocate overhead.

18. All of the following statements are correct except that

A. activity-based costing has been widely adopted in service industries.
B. the objective of installing ABC in service firms is different than it is in a manufacturing firm.
C. a larger proportion of overhead costs are company-wide costs in service industries.
D. the general approach to identifying activities and activity cost pools is the same in a service company as in a manufacturing company.

Application
19. ABC should be used in which of the following situations?
A. single-product firms with multiple steps
B. multiple-product firms with only a single process
C. multiple-product firms with multiple processing steps
D. in all manufacturing firms

Limitation
20. Which of the following is a limitation of activity-based costing?
A. More cost pools C. Poorer management decisions
B. Less control over overhead costs D. Some arbitrary allocations continue

21. Each of the following is a limitation of activity-based costing system except that:
A. it can be expensive to use.
B. it is more complex than the traditional costing.
C. more cost pools are used.
D. some arbitrary allocations still continue.

Cost behavior of high-volume & low-volume product

22. As compared to a high-volume product, a low-volume product
A. usually requires less special handling.
B. is usually responsible for more overhead costs per unit.
C. requires relatively fewer machine setups.
D. requires use of direct labor hours as the primary cost driver to ensure proper allocation of overhead.

Cost assignment
23. Which of the following lists the most to least accurate method of cost assignment?
A. direct tracing, driver tracing, allocation C. driver tracing, direct tracing, allocation
B. allocation, direct tracing, driver tracing D. allocation, driver tracing, direct tracing

24. An activity-based costing system uses which of the following procedures?

A. Overhead costs are traced to departments, then costs are traced to products.
B. Overhead costs are traced to activities, then costs are traced to products.
C. Overhead costs are traced directly to products.
D. All overhead costs are expensed as incurred.

Steps
25. A well-designed activity-based costing system starts with
A. identifying the activity-cost pools.
B. computing the activity-based overhead rate.
C. assigning manufacturing overhead costs for each activity cost pool to products.
D. analyzing the activities performed to manufacture a product.

26. The first step in activity-based costing is to

A. assign manufacturing overhead costs for each activity cost pool to products.
B. compute the activity-based overhead rate per cost driver.
C. identify and classify the major activities involved in the manufacture of specific products.
D. identify the cost driver that has a strong correlation to the activity cost pool.

27. The last step in activity-based costing is to

A. identify the major activities that pertain to the manufacture of specific products.
B. allocate manufacturing overhead costs to activity cost pools.
C. identify the cost drivers that accurately measure each activity’s contribution to the finished product.
D. assign manufacturing overhead costs for each activity cost pool to products.

28. Successful activity-based costing (ABC) implementation depends upon the firm having:
A. top management support
B. ABC linked to its competitive strategy

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C. adequate resources
D. all of the above

Cost driver, activity driver & resource driver

29. Any activity that causes resources to be consumed is called a
A. just-in-time activity C. facility-level activity
B. cost driver D. nonvalue-added activity

30. A base used to allocate the cost of a resource to the different activities using that resource is
A. resource driver C. activity driver
B. final cost object D. driver

31. A base used to allocate the cost of products, customers, or other final cost objects is a(n)
A. resource driver C. activity driver
B. final cost object D. driver

32. Activity drivers differ from resource drivers in that activity drivers
A. are used to assign indirect costs while resource drivers are used to assign direct costs
B. assign the cost of activities to cost objects while resource drivers assign the cost of resources to activities
C. assign the cost of activities to resources and resource drivers assign the cost of resources to cost objects
D. are used to assign direct costs while resource drivers are used to assign indirect costs

33. An appropriate cost driver base should

A. have a cause-and-effect relationship with the activity and the use of resources
B. predict or explain activities' use of resources with reasonable accuracy
C. be based on the practical capacity of the resource to support activities
D. all of the above

Cost pool
34. A cost pool is
A. all of the costs of a particular department.
B. all costs in a group such as variable costs or discretionary fixed costs.
C. all costs related to a product or product line.
D. all costs that have the same driver.

Cost pool rate

35. More accurate product costing information is produced by assigning costs using
A. a volume-based, plant-wide rate.
B. volume-based, departmental rates.
C. activity-based pool rates.
D. all of the above

Cost allocation
36. Activity-based overhead rates are more useful than a single plant-wide rate if
A. overhead costs are driven by several activities.
B. direct labor cost varies significantly from department to department.
C. all products require about the same amounts of all activities.
D. manufacturing overhead costs are nearly all fixed.

37. In activity-based costing, preliminary cost allocations assign costs to

A. departments. C. products.
B. processes. D. activities.

38. In activity-based costing, final cost allocations assign costs to

A. departments. C. products.
B. processes. D. activities.

39. Which of the following best describes the flow of overhead costs in an activity-based costing system?
A. Overhead costs => direct labor cost or hours => products
B. Overhead costs => products
C. Overhead costs => activity cost pools => cost drivers => products
D. Overhead costs => machine hours => products

40. Finding a single cost driver that changes in the same proportion as all the variable factory overhead costs is:
A. simplified by breaking out the fixed portion of overhead cost
B. the first step in variable overhead cost management
C. difficult, but manageable
D. impossible

41. Total activity cost is the sum of

A. resource driver assigned costs and activity driver assigned costs
B. direct and indirect costs
C. directly traceable resource costs and resource driver assigned costs
D. opportunity costs and realized costs

Activity levels
Unit level
42. Unit-level costs are costs that
A. inevitably increase whenever a unit is produced
B. are caused by the number of batches produced and sold
C. are incurred to support the number of different products produced
D. are incurred to sustain capacity at a production site

43. Examples of unit-level costs are

A. portions of electricity and indirect materials
B. salaries of schedulers and setup personnel
C. salaries of designers and programmers

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D. depreciation and insurance of building

44. Examples of unit level activities are

A. scheduling, setting up, and receiving C. heating, lighting, and security
B. designing, changing, and advertising D. cutting, painting, and packaging

45. All of the following are unit-based cost drivers except

A. machine hours C. number of setups
B. number of units D. direct labor hours

46. An example of a nonvolume-related overhead base would be:

A. Direct materials cost C. Direct Labor cost
B. Machine hours D. Number of setups

Batch level
47. Batch-level resources are acquired
A. for individual units of product or service
B. for making a group of similar products
C. to produce and sell a specific product
D. to provide a general capacity to produce products and services.

48. Examples of batch-level activity drivers include

A. units of output and direct labor hours
B. number of batches and material moves
C. number of products and design changes
D. square footage occupied

49. Which of the following is not a batch-level activity?

A. Engineering changes. C. Inspection.
B. Equipment setups. D. Material handling.

Product-sustaining level
50. Examples of activities at the product level of costs include
A. cutting, painting, and packaging
B. scheduling, setting up, and moving
C. designing, changing, and advertising
D. heating, lighting and security

51. Which of the following activities is directly traceable to a product?

A. batch-level activities C. facility-level activities
B. unit-level activities D. product-sustaining activities

52. Designing and redesigning are activities that are classified as

A. Facility level C. Unit level
B. Batch level D. Product level

53. Which of the following is the best way to consider a product-level cost?.
A. A product-level cost can be avoided when a product line is discontinued.
B. A product-level cost can be avoided when a there is change in the production schedule so the product is not produced this week.
C. A product level cost can be avoided when a business segment is discontinued.
D. A product level cost can be avoided when the corporation is dissolved.

54. Examples of activities at the batch level of costs include

A. scheduling, setting up, and moving
B. designing, changing, and advertising
C. heating, lighting, and security
D. cutting, painting, and packaging

Facilities sustaining level

55. Which of the following activities may support all the organization's processes and are the highest level of activities?
A. batch-level activities C. facility-level activities
B. product-sustaining activities D. unit-level activities

56. In a pure activity-based cost system which of the following might be treated as period costs?
A. facility-level costs C. batch-level costs
B. product-level costs D. unit-level costs

57. Plant-level costs are costs that

A. inevitably increase whenever a unit is produced
B. are caused by the number of batches produced and sold
C. are incurred to support the number of different products produced
D. are incurred to sustain capacity at a production site

58. Which of the following is not considered to be a facility-level cost?

A. Cost of Property Insurance.
B. Cost of personnel administration.
C. Cost of Liability Insurance for only one of the product lines.
D. Cost of building security.

Value adding & Non-value adding activity

59. The following activity is value-added:
A. Storage of raw materials C. Moving parts from machine to machine
B. Turning a piece of metal on a lathe D. All of these

60. An activity that adds cost to the product but does not increase it market value is a
A. value-added activity C. cost driver
B. cost-benefit activity D. nonvalue-added activity

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61. When a firm redesigns a product to reduce the number of component parts, the firm is
A. increasing consumer value.
B. increasing the value added to the product.
C. decreasing product variety.
D. decreasing non-value-added costs.

62. Under activity-based costing, benchmarks for product cost should contain an allowance for
A. idle time. C. spoilage.
B. idle time and scrap materials. D. none of the above.

63. Elimination of non-value-added activities in a firm should:

A. be discouraged because of potential harmful effects
B. not affect customer value
C. not have priority because non-value-added activities do not affect a firm's performance
D. have priority only when a firm is operating at a loss

64. Page Company’s cost allocation and product costing procedures follow activity-based costing principles. The following activities have been identified and
classified as being either value-adding or non-value adding as to each product.
1. Raw materials storage activity
2. Design engineering activity
3. Drill press activity
4. Heat treatment activity
5. Quality control inspection activity
6. Issuance of purchase order activity
How are the foregoing activities classified?
Value-adding Non-value adding
A. 1, 2, 5, 6 3, 4
B. 1, 2, 4 3, 5, 6
C. 2, 4, 5 1, 3, 6
D. 2, 3, 4 1, 5, 6

Productivity Measures
65. Manufacturing cycle efficiency is a measure of
A. bottlenecks. C. efficiency.
B. effectiveness. D. quality.

66. The amount of time between the development and the production of a product is
A. the product life cycle. C. production time.
B. lead time. D. value-added time.

PROBLEMS:
Breakeven Analysis
i. Peal Company had the following information:
Activity Driver Unit Variable Cost Level of Activity Driver
Units sold P40
Setups 1,000 80
Engineering hours 60 2,000
Other data:
Total fixed costs (traditional) P400,000
Total fixed costs (ABC) P150,000
Units selling price P80
What is the breakeven point in units using ABC?
A. 10,000 unit C. 5,000 units
B. 5,000 units D. 8,750 units

Traditional Costing
Overhead cost per unit
ii. Mary Manufacturing Company manufactures two products (X and Y). The overhead costs of P29,000 have been divided into three cost pools that use the
following activity drivers:
Product No. of Orders No. of Labor Transactions No. of Labor Hours
X 30 100 1,000
Y 20 300 4,000
Cost per pool P5,000 P4,000 P20,000
Using traditional costing, what is the amount of overhead cost to be assigned to Product Y using labor hours as the allocatio n base?
A. P21,750 C. P16,000
B. P 5,800 D. P23,200

Unit cost
iii. Arid Company produces products BH and XP. The direct cost of BH is P250 per unit and XP is P350 per unit. Fifty units of BH and 150 units of XP were produced.
Overhead amounting to P130,000 is allocated to products using direct costs as the relevant cost driver.
The cost of XP per unit amounts to
A. P750 C. P1,050
B. P1,000 D. P1,250

Activity-based Costing
Batch-level costs
Allocated overhead
iv. One of Alien Company’s activity cost pools is machine setups, with estimated overhead of P300,000. Alien produces slacks (400 setups) and shirts (600 setups). How
much of the machine setup cost pool should be assigned to slacks?
A. P 0 C. P150,000
B. P120,000 D. P180,000

v. The overhead rate for Machine Setups is P100 per setup. Products A and B have 80 and 60 setups, respectively. The overhead assigned to each product is
A. Product A P8,000, Product B P8,000 C. Product A P8,000, Product B P6,000

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B. Product A, P6,000, Product B P6,000 D. Product A, P6,000, Product B P8,000

vi. Sylvia Company has identified an activity cost pool to which it has allocated estimated overhead of P1,920,000 and determined the expected use of cost drivers per
that activity to by 160,000 inspections. Widgets require 40,000 inspections, Gadgets 30,000 inspections, and Targets, 90,000 inspections.
The overhead assigned to each product is
A. Widgets P40,000, Gadgets P30,000, Targets P90,000
B. Widgets P480,000, Gadgets P360,000, Targets P1,080,000
C. Widgets P360,000, Gadgets P480,000, Targets P1,080,000
D. Widgets P480,000, Gadgets P360,000, Targets P1,080,000

Overhead cost per unit

vii. EMPIRE Company makes two products, E and M. E is being introduced this period, whereas M has been in production for 2 years. For the period about to begin,
1,000 units of each product are to be manufactured. The only relevant overhead item is the cost of engineering change orders. E and M are expected to require eight
and two change orders, respectively. E and M are expected to require 2 and 3 machine hours, respectively. The cost of a change order is P600.
If EMPIRE applies engineering change order cost on the basis of machine hours, the overhead cost per unit to be assigned to E and M, respectively, are
A. P2.40 and P3.60, respectively C. P4.80 and P3.60, respectively
B. P3.60 and P2.40, respectively D. P3.60 and P4.80, respectively

viii. Beltran Company produces products X and Y. The direct cost of X is P250 per unit (P100 materials and P150 labor) and Y is P350 (P230 material and P120 labor) per
unit. Fifty units of X and 150 units of Y were produced. Overhead amounts to P130,000 and is composed of material handling P12,000, labor support P60,000, machine
operation P48,000, and general administration P10,000. Material handling cost driver is material cost, labor support cost driver is labor cost. Machine operation cost
resulted from running the machines a total of 480 hours (three-fourth of which was for product X). General administration effort related equally to product X and Y.
Material handling chargeable per unit of X (rounded) amounts to
A. P30; P 70 C. P60; P140
B. P40; P 80 D. P70; P 30

ix. Genco manufactures two versions of a product. Production and cost information show the following:
Model A Model B
Units produced 200 400
Material moves (total) 20 80
Direct labor hours per unit 1 2
Material handling costs total P200,000. Under ABC, the material handling costs allocated to each unit of Model A and Model B would be:
A. B. C. D.
Model A P100 P200 P333 P130
Model B P333 P400 P200 P100

x. EMPIRE Company makes two products, E and M. E is being introduced this period, whereas M has been in production for 2 years. For the period about to
begin, 1,000 units of each product are to be manufactured. The only relevant overhead item is the cost of engineering change orders. E and M are expected to
require eight and two change orders, respectively. E and M are expected to require 2 and 3 machine hours, respectively. The cost of a change order is P600.
If EMPIRE is using direct tracing, the amount of overhead per unit that will be assigned to E and M, respectively, are
A. P2.40 and P3.60, respectively C. P4.80 and P1.20, respectively
B. P3.60 and P2.40, respectively D. P1.20 and P4.80, respectively

Total allocated overhead

xi. Germie, Inc., has identified the following overhead costs and activity drivers for next year:
Overhead Item Expected Cost Activity Driver Expected Quantity
Setup costs P100,000 Number of setups 500
Ordering costs 40,000 Number of orders 3,200
Maintenance 200,000 Machine hours 4,000
Power 20,000 Kilowatt hours 80,000
The following are two of the jobs completed during the year:
Job 500 Job 501
Direct materials P1,500 P2,000
Direct labor P1,400 P2,400
Units completed 100 160
Direct labor hours 100 160
Number of setups 2 8
Number of orders 8 10
Machine hours 40 50
Kilowatt hours 60 100
The company’s normal activity is 4,000 direct labor hours.
If the four activity drivers are used to allocate overhead costs, total overhead allocated to Job 500 would be
A. P2,766.50. C. P2,515.00.
B. P2,415.00. D. P2,815.00

Unit cost
xii. Wesleyan University Hospital plans to use activity-based costing to assign hospital indirect costs to the care of patients. The hospital has identified the following
activities and activity rates for the hospital’s indirect costs:
Activity Activity Rate
Room and meals P150 per day
Radiology P 95 per image
Pharmacy P 20 per physician order
Chemistry lab P 85 per test
Operating room P550 per operating room hour
The records of two representative patients were analyzed, using the activity rates. The activity information associated with the two patients is as follows:
Patient Flor Patient Laura
Number of days 7.0 3
Number of images 4.0 2
Number of physician orders 5.0 1
Number of tests 6.0 2
Number operating room hours 4.5 1
Determine the activity cost associated with Patient Flor:
A. P4,500 C. P4,495
B. P4,550 D. P4,515

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Total cost
xiii. Food Factory, Inc., has identified the following cost drivers for its expected overhead costs for the year:
Budgeted Cost Cost Cost Driver Level
Cost Pools Driver
Setup P 80,000 Number of setups 100
Ordering 40,000 Number of orders 500
Maintenance 100,000 Machine hours 2,500
Power 20,000 Kilowatt hours 5,000
Total direct labor hours budgeted = 1,000 hours.
The following data applies to one of the products completed during the year:
Cost Product X Activity Driver Driver Consumption
Direct materials P2,000 Number of setups 2
Direct labor P2,400 Number of orders 5
Units completed 200 Machine hours 25
Direct labor hours 80 Kilowatt hours 50
If the activity-based cost drivers are used to allocate overhead cost, the total cost of Product X will be:
A. P7,400 C. P4,400
B. P7,800 D. P7,600

xiv. Ray Manufacturing has four categories of overhead. The four categories and expected overhead costs for each category for next year are listed as follows:
Maintenance P510,000
Material handling 250,000
Setups 60,000
Inspection 210,000
Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labor hours. 100,000 direct labor hours are budgeted for next
year.
The company has been asked to submit a bid for a proposed job. The plant manager feels that obtaining this job would result in a new business in future years.
Usually bids are based upon full manufacturing costs plus 10 percent.
Estimates for the proposed job are as follows:
Direct materials P30,000
Direct labor (8,000 hours) P24,000
Number of material moves 100
Number of inspections 120
Number of setups 24
Number of machine hours 4,000
The plant manager has heard of a new way of applying overhead that uses cost pools and activity drivers. Expected activity for the four activity drivers that would
be used are:
Machine hours 60,000
Material moves 20,000
Setups 3,000
Quality inspections 12,000
What is the total cost of the proposed job if Ray Manufacturing uses direct labor hours as its only activity driver?
A. P144,000 C. P112,400
B. P136,400 D. P106,400

Traditional Costing & Activity-based Costing

Questions 15 & 16 are based on the following information.
Gilmore Company produces two products in a single factory. The following production and cost information has been determined:
Model 1 Model 2
Units produced 1,000 200
Material moves (total) 100 40
Testing time (total) 250 125
Direct labor hours per unit 1 5
The controller has determined total overhead to be P480,000. P140,000 relates to material moves; P150,000 relates to testing; the remainder is related to labor time.

xv. If Gilmore uses direct labor hours to allocate overhead to each model, what would overhead per unit be for Model 2?
A. P 158.33 C. P 950.00
B. P 400.00 D. P1,200.00

xvi. If Gilmore uses activity-based costing to allocate overhead to each model, what would overhead per unit be for Model 2?
A. P158.33 C. P925.00
B. P415.93 D. P815.00

Questions 17 & 18 are based on the following information.

Hughes Company produces three products with the following production and cost information:
Model A Model B Model C
Units produced 2,000 6,000 12,000
Direct labor hours (total) 4,000 2,000 4,000
Number of setups 100 150 250
Number of shipments 200 225 275
Engineering change orders 15 10 5
Overhead costs include setups P90,000; shipping costs P140,000; and engineering costs P180,000.

xvii. What would be the per unit overhead cost for Model A if direct labor hours were the allocation base?
A. P20.50 C. P82.00
B. P41.00 D. P76.00

xviii. What would be the per unit overhead cost for Model A if activity-based costing were used?
A. P20.50 C. P82.00
B. P74.00 D. P76.00

Question Nos. 19 and 20 are based on the following:

Toylandia Company manufactures two products, X-MAN and Machman. Toylandia's overhead costs consist of setting up machines, P400,000; machining, P900,000;
and inspecting, P300,000.

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Information on the two products is:

X-MAN Machman
Direct labor hours 15,000 25,000
Machine setups 600 400
Machine hours 24,000 26,000
Inspections 800 700

xix. Overhead applied to X-MAN using traditional costing is

A. P600,000. C. P832,000.
B. P768,000. D. P960,000.

xx. Overhead applied to Machman using activity-based costing is

A. P 640,000. C. P 832,000.
B. P 768,000. D. P1,000,000.

Questions 21 & 22 are based on the following information.

The Oilfield plant has two categories of overhead: maintenance and inspection. Costs expected for these categories for the coming year are as follows:
Maintenance P100,000
Inspection 150,000
The plant currently applies overhead using direct labor hours and expected capacity of 50,000 direct labor hours. The following data have been assembled for use in
developing a bid for a proposed job:
Direct materials P1,000
Direct labor P4,000
Machine hours 500
Number of inspections 4
Direct labor hours 800
The total number of expected machine hours for all jobs during the year is 25,000, and the total expected number of inspections is 1,500.

xxi. Using activity-based costing system and the appropriate activity drivers, the total cost of the potential job would be
A, P2,400 C. P7,400
B. P3,600 D. P7,750

xxii. Using direct labor hours to assign overhead, the total cost of the potential job would be
A. P 5,000 C. P 8,000
B. P11,000 D. P 9,000

Question Nos. 23 through 25 are based on the following:

Special Products recently installed an activity-based relational data base. Using the information contained in the activity relational table, the following pool rates were
computed:

P200 per purchase order

P12 per machine hour, process A
P15 per machine hours, process B
P40 per engineering hour

Two products are produced by Special Products: A and B. Each product has an area in the plant that is dedicated to its production. The plant has two manufacturing
processes, process A and process B. Other processes include engineering, product handling, and procurement. The product relational table for Special is as follows:
Activity Usage
Activity Driver # and Name Product A: Product B:
1 Units 200,000 25,000
2 Purchase orders 250 125
3 Machine hours 80,000 10,000
4 Engineering hours 1,250 1,500

xxiii. How much overhead cost will be assigned to product B using process B?
A. P1,200,000 C. P120,000
B. P960,000 D. P150,000

xxiv. What is the unit cost of Product A?

A. P4.71 C. P4.80
B. P252.00 D. P5.30

xxv. Dagger Corporation has the following activities: creating bills of materials (BOM), studying manufacturing capabilities, improving manufacturing processes, training
employees, and designing tooling. The general ledger accounts reveal the following expenditures for manufacturing engineering:
Salaries P150,000
Equipment 80,000
Supplies 20,000
Total P250,000
The equipment is used for two activities: improving processes and designing tooling. Thirty-five percent of the equipment’s time is used for improving processes and
sixty-five percent is used for designing tools. The salaries are for two engineers. One is paid P100,000, while the other earns P50,000. The P100,000 engineer
spends 40% of his time training employees in new processes and 60% of his time on improving processes. The remaining engineer spends equal time on all activities.
Supplies are consumed in the following proportions:
Creating BOMs 25%
Studying capabilities 10%
Improving processes 20%
Training employees 25%
Designing tooling 20%
What is the cost assigned to the designing tooling activity?
A. P162,500 C. P50,000
B. P 66,000 D. P250,000

Use the following data to respond to questions 26 through 29

Consider the following facts for NM Company which produces product N and M
Activity Cost Driver N’s share M’s share Unused Cost
Setups # of set ups 10 40 5 P 5,500

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Ordering # of orders 5 10 5 3,200

Receiving # of receipts 22 12 6 2,400
Product Dev. # of parts 180 120 100 2,800
Gen Mgt #, labor hrs 2,900 4,100 1,000 7,200
Security Area covered 3,200 5,400 400 9,000
Materials # of units produced 400 800 120,000
Labor # of DLH 1,700 3,100 1,200 56,000

xxvi. Set up cost chargeable per unit of M accounting for unused capacity amounts to
A. 2.50 C. 5.00
B. 2.75 D. 5.50

xxvii. Ordering cost chargeable per unit of N ignoring unused capacity amounts to
A. 2.00 C. 3.00
B. 2.67 D. 4.00

xxviii. The cost of unused capacity excluding labor costs amounts to

A. 11,260 C. 11,856
B. 11,460 D. 14,856

i. Answer: D
BES (ABC) = 350,000/40 8,750
ABC fixed costs P 150,000
Set ups 80 x P1,000 80,000
Engineering 2,000 x 60 120,000
Total Fixed Costs P 350,000

ii. Answer: D
Total overhead (5,000 + 4,000 + 20,000) 29,000
Allocated OH to Product Y based on labor hours: 4 ÷ 20 x 29,000 P23,200

iii. Answer: D
BH: (50 x P250) P 12,500
XP: (150 x P350) 52,500
Total direct costs P 65,000

Allocated OH to XP based on direct costs: (52,500 ÷ 65,000 x P130,000) P105,000

Unit cost – Product XP:
Direct cost P 350
overhead (P105,000 ÷ 150) 700
Total P1,050

iv. Answer: B
Setup cost per setup (P300,000 ÷ 1,000) P300
Setup costs assigned to slacks (400 x P300) P120,000

v. Answer: C
Overhead allocated to:
Product A: (80 x P100) P8,000
Product B: (60 x P100) 6,000

vi. Answer: D
Overhead rate per inspection: (P1,920,000 ÷ 160,000) P12
Overhead assigned to:
Widgets: (40,000 x P12) P 480,000
Gadgets (30,000 x P12) 360,000
Targets (90,000 x P12) 1,080,000

vii. Answer: A
Cost of change orders 10 x 600 P6,000
Cost of change order per hour P6,000/5,000 hours P1.20/MH
Cost of change order per unit:
E: 2 hours x P1.20 P2.40
M: 3 hours x P1.20 P3.60

viii. Answer: A
Materials cost:
Product X: (50 x P100) P 5,000
Product Y: (150 x P230) 34,500
Total P39,500
Material handling cost based on direct materials cost: (P12,000 ÷ P39,500) P0.3038
Material handling cost per unit chargeable to:
Product X: (50,000 x P0.3038 ÷ 50) P 30.38
Product Y: (34,500 x P0.3038 ÷ 150) P 69.87

ix. Answer: B
Handling cost per move (P200,000 ÷ 100 moves) P2,000
Model A: 20 x P2,000 ÷ 200 P 200
Model B: 80 x P2,000 ÷ 400 P 400

x. Answer: C
Cost of change orders based on ABC
E: 8 x P600 ÷ 1,000 P4.80
M: 2 x P600 ÷ 1,000 P1.20

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xi. Answer: C
Activity Rates:
Setup (P100,000 ÷ 500) P200.00
Ordering (P40,000 ÷ 3,200) 12.50
Maintenance (P200,000 ÷ 4,000) 50.00
Power (P20,000 ÷ 80,000) 0.25
Overhead costs assigned to Job 500:
Setup (2 x P200) P 400
Ordering (8 x P12.50) 100
Maintenance (40 x P50) 2,000
Power (60 x P025) 15
Total P2,515

xii. Answer: D
Room and meals (7 days x P150) P1,050
Radiology (4 images x P95) 380
Pharmacy (5 orders x P20) 100
Chemistry lab (6 tests x P85) 510
Operating room (4.5 hours x P550) 2,475
Total P4,515

xiii. Answer: D
Setup P 80,000 ÷ 100 x 2 P1,600
Ordering P 40,000 ÷ 500 x 5 400
Maintenance P100,000 ÷ 2,500 x 25 1,000
Power P 20,000 ÷ 5,000 x 50 200
Total overhead assigned P3,200
Direct materials 2,000
Direct labor 2,400
Total costs assigned P7,600

xiv. Answer: B
Direct materials P 30,000
Direct labor 24,000
Overhead 82,400
Total cost of the job P136,400
OH rate per DLH:
(P510,000 + P250,000 + P60,000 + P210,000) ÷ 100,000 P10.30 per DLH
Overhead allocated to proposed job: 8,000 x 10.30 82,400

xv. Answer: D
Total DLH used (1,000 x 1) + (20 x 5) 2,000
Overhead allocated to Model 2 (0.5 x P480,000) P240,000
Overhead per unit of Model 2: (P240,000 ÷ 200) P1,200

xvi. Answer: C
Overhead allocated to Model 2:
Handling (P140,000 ÷ 140 x 40 moves) P 40,000
Testing (P150,000 ÷ 375 x 125) 50,000
Labor-related (P190,000 ÷ 2) 95,000
Total P185,000
Overhead per unit, Model 2 (P185,000 ÷ 200) P925

xvii. Answer: B
Overhead rate per DLH (P410,000 ÷ 10,000) P41
Overhead applied to Model A: (4,000 x P41) P164,000
Overhead applied to Model A per unit: (P164,000 ÷ 2,000) P82

xviii. Answer: B
Activity rates;
Setups: (P90,000 ÷ 500 setups) P 180
Shipping: (P140,000 ÷ 700 shipments) 200
Engineering (P180,000 ÷ 30 change orders) 6,000

Overhead assigned to Model A

Setups (100 x P180) P 18,000
Shipping (200 x P200) 40,000
Engineering (15 x P6,000) 90,000
Total P148,000
Overhead per unit of Model A (P148,000 ÷ 2,000) P 74

xix. Answer: A
Total overhead costs: (P400,000 + P900,000 + P300,000) P1,600,000
Overhead applied to X-MAN using direct labor hours
(15,000/40,0000) x P1,600,000 P600,000

xx. Answer: B
Activity Rates:
Setups (400,000/1,000 setups) P400 per set up
Machining (900,000/50,000 MH) P 18 per MH
Inspection (300,000/1,500 Inspection) P200 per inspection
Overhead assigned to Machman using ABC:
(400xP400) + (26,000xP18) + (700xP200) P768,000

xxi. Answer: C
Direct materials P1,000

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Direct labor 4,000

Maintenance 500 x 4 2,000
Inspection 4 x 100 400
Total P7,400
Activity Rate:
Inspection (P150,000 ÷ 1,500) P100/inspection
Maintenance (P100,000 ÷ 25,000) P4/MH

xxii. Answer: D
OH rate per DLH: (P250,000 ÷ 50,000 DLH) = P5.00
Cost of the proposed job:
Direct materials P1,000
Direct labor 4,000
Overhead (800 hours x P5 4,000
Total P9,000

xxiii. Answer: D
OH assigned to Product B: 6,000 MH x P15 per MH = P150,000

xxiv. Answer: D
Purchasing cost (250 x P200) P 50,000
Processing costs (80,000 x P12) 960,000
Engineering cost (1,250 x P40) 50,000
Total costs assigned to Product A P1,060,000
Unit cost: (P1,060,000 ÷ 200,000) P 5.30

xxv. Answer: B
Cost of use of equipment (0.65 x P80,000) P 52,000
Supplies (0.2 x P20,000) 4,000
Salary of second engineer (0.2 x P50,000) 10,000
Total cost assigned to designing tool activity P 66,000

xxvi. Answer: C
Setup cost chargeable to Product M: (40/55 x P5,50 P4,000
Setup cost per unit, Product M: (P4,000 ÷ 800) P 5.00

xxvii. Answer: B
Ordering costs chargeable to Product M: 5/15 x P3,200) P1,066.67
Ordering cost per unit, Product M: (P1,066.67 ÷ 400) P 2.67

xxviii. Answer: D
Activity rate:
Setup cost: (5,500 ÷ 55) P100 per setup
Ordering: (P3,200 ÷ 20) P160 per order
Receiving cost: (P2,400 ÷ 40) P60 per receipt
Product development: (P2,800 ÷ 400) P 7 per part
General management: (P7,200 ÷ 8,000) P 0.90 per hour
Security: (P9,000 ÷ 9,000) P1.00 per sq. m.
Labor cost: (P56,000 ÷ 6,000) P9.33 per DLH

Cost of unused capacity:

(5 x P100) + (5 x P160) + (6 x P60) + (100 x P7) + (1,000 x P0.90)
+ (400 x P1) + (1,200 x P9.33) P14,856

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