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1. A time-and-motion study revealed that it should take 1 hour to produce a product that currently Product certification Per order $77per order 25 orders
takes 3 hours to produce. Labor is $8 per hour. Nonvalue-added costs are The monthly quality control cost assigned to Satin Sheen makeup using activity-based costing
A. $0 C. $16 is
B. $8 D. $24 A. $8,500.50
B. $88.64 per order.
2. Setup time for a product is six hours. A firm that uses JIT and produces the same product has C. $525.50 lower than the cost using the traditional system.
reduced setup time to 30 minutes. Setup labor is $24 per hour. Value-added costs are D. $525.50 higher than the cost using the traditional system.
A. $12 C. $132
B. $24 D. $144 6. ALF Co. is an assisted-living facility that provides services in the form of residential space,
meals, and other occupant assistance (OOA) to its occupants. ALF currently uses a traditional
3. Each unit of product requires 8 gallons of raw material. Due to scrap and rework, each unit has cost account system that defines the service provided as assisted living, with service output
been averaging 9 gallons of raw material. The raw material costs $4 per gallon. Value-added measured in terms of occupant days. Each occupant is charged a daily rate equal to ALF’s
costs are annual cost of providing residential space, meals and OOA divided by total occupant days.
A. $2 C. $32 However, an activity-based costing (ABC) analysis has revealed that occupant’s use of OOA
B. $4 D. $36 varies substantially. This analysis determined that occupants could be grouped into three
categories (low, moderate, and high usage of OOA) and that the activity driver of OOA is
4. A company keeps 20 days of raw materials inventory on hand to avoid shutdowns due to raw nursing hours. The driver of the other activities is occupant days. The following quantitative
materials shortages. Carrying costs average $2,000 per day. A competitor keeps 10 days of information was also provided:
inventory on hand the competitor’s carrying costs average $1,000 per day. Value-added costs Occupant category Annual Occupant Days Annual Nursing Hours
are Low Usage 36,000 90,000
A. $0 C. $20,000 Medium Usage 18,000 90,000
B. $10,000 D. $40,000 High Usage 6,000 120,000
60,000 300,000
5. New Rage Cosmetics has used a traditional cost accounting system to apply quality control The total annual cost of OOA was $7.5 million, and the total annual cost of providing
costs uniformly to all products at a rate of 14.5% of direct labor cost. Monthly direct labor cost residential space and meals was $7.2 million.
for Satin Sheen makeup is $27,500. In an attempt to distribute quality control costs more
equitably, New Rage is considering activity-based costing. The monthly data shown in the Accordingly, the ABC analysis indicates that the daily costing rate should be
chart below have been gathered for Satin Sheen. A. $620.00 for all occupants.
Quantity for B. $182.50 for occupants in the low-usage category.
Activity Cost Driver Cost Rates Satin Sheen C. $245.00 for occupants in the high-usage category.
Incoming material inspection Type of material $11.50 per type 12 types D. $145.00 for occupants in the medium-usage category.
In-process inspection Number of units $0.14 per unit 17,500 units

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Questions 7 thru 9 are based on the following information. Zebra Corporation has the following activities: creating bills of materials (BOM), studying
Dierich Company uses an activity-based costing system with three activity cost pools. The manufacturing capabilities, improving manufacturing processes, training employees, and designing
company has provided the following data concerning its costs and its activity based costing tooling. The general ledger accounts reveal the following expenditures for manufacturing
system: engineering:
Costs: Salaries $150,000
Manufacturing overhead $600,000 Equipment 80,000
Selling and admin. expenses $220,000 Supplies 20,000
Total $820,000 Total $250,000
Distribution of resource consumption: The equipment is used for two activities: improving processes and designing tooling. Thirty-five
Activity Cost Pools percent of the equipment’s time is used for improving processes and sixty-five percent is used for
Order Size Customer Support Other Total designing tools. The salaries are for two engineers. One is paid $100,000, while the other earns
Manufacturing overhead 15% 75% 10% 100% $50,000. The $100,000 engineer spends 40% of his time training employees in new processes and
Selling and admin. Expenses 60% 20% 20% 100% 60% of his time on improving processes. The remaining engineer spends equal time on all
The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining activities. Supplies are consumed in the following proportions:
costs. You have been asked to complete the first-stage allocation of costs to the activity cost Creating BOMs 25%
pools. Studying capabilities 10%
Improving processes 20%
7. How much cost, in total, would be allocated in the first-stage allocation to the Order Size
Training employees 25%
activity cost pool?
Designing tooling 20%
A. $123,000 C. $307,500
B. $222,000 D. $492,000 10. What is the cost assigned to the creating BOMs activity?
A. $15,000 C. $87,500
8. How much cost, in total, should NOT be allocated to orders and products in the second stage B. $62,500 D. $250,000
of the allocation process if the activity-based costing system is used for internal decision-
making? 11. What is the cost assigned to the improving processes activity?
A. $0. C. $104,000. A. $50,000 C. $102,000
B. $82,000. D. $164,000. B. $87,500 D. $250,000
9. How much cost, in total, would be allocated in the first-stage allocation to the Customer 12. What is the cost assigned to the training employees activity?
Support activity cost pool? A. $55,000 C. $162,500
A. $164,000 C. $494,000 B. $62,500 D. $250,000
B. $389,500 D. $615,000
13. What is the cost assigned to the designing tooling activity?
Questions 10 through 13 are based on the following information. A. $50,000 C. $162,500
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B. $66,000 D. $250,000 A. $98 C. $116

B. $100 D. $140
Questions 14 through 16 are based on the following information.
A company has identified the following overhead costs and cost drivers for the coming year. Questions 17 thru 22 are based on the following information
Overhead Item Cost Driver Budgeted Cost Budgeted Activity Level Special Products recently installed an activity-based relational data base. Using the information
Machine setup No. of setups $ 20,000 200 contained in the activity relational table, the following pool rates were computed:
Inspection No. of inspections $130,000 6,500 $200 per purchase order
Material handling No. of material moves $ 80,000 8,000 $12 per machine hour, process A
Engineering Engineering hours $ 50,000 1,000 $15 per machine hour, process B
$280,000 $40 per engineering hour
The following information was collected on three jobs that were completed during the year:
Job 101 Job 102 Job 103 Two products are produced by Special Products: A and B. Each product has an area in the plant
Direct materials $5,000 $12,000 $8,000 that is dedicated to its production. The plant has two manufacturing processes, process A and
Direct labor $2,000 $ 2,000 $4,000 process B. Other processes include engineering, product handling and procurement. The product
Units completed 100 50 200 relational table for Special is as follows:
Number of setups 1 2 4 Activity Usage
Number of inspections 20 10 30 Activity Driver # Name Product A Product B
Number of material moves 30 10 50 1 Units 200,000 25,000
Engineering hours 10 50 10 2 Purchase orders 250 125
Budgeted direct labor cost was $100,000, and budgeted direct material cost was $280,000. 3 Machine hours 80,000 10,000
4 Engineering hours 1,250 1,500
14. If the company uses activity-based costing, how much overhead cost should be allocable to
Job 101? 17. How much overhead cost will be assigned to product A using the number of purchase orders?
A. $1,300 C. $5,000 A. $25,000 C. $66,750
B. $2,000 D. $5,600 B. $50,000 D. $40,000,000
15. If the company uses activity-based costing, compute the cost of each unit of Job 102. 18. How much overhead cost will be assigned to product B using engineering hours?
A. $340 C. $440 A. $50,000 C. $400,500
B. $392 D. $520 B. $60,000 D. $1,000,000
16. The company prices its products at 140% of cost. If the company uses activity-based costing, 19. How much overhead cost will be assigned to product A using process A?
the price of each unit of Job 103 would be A. $120,000 C. $1,200,000
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B. $960,000 D. $2,400,000 Alaire uses a standard cost system, and the following data apply to the TV and PC boards.
TV Board PC Board
20. How much overhead cost will be assigned to product B using process B? Direct materials $80 $140
A. $120,000 C. $960,000 Direct labor 1.5 hours 4.0 hours
B. $150,000 D. $1,200,000 Machine time 0.5 hours 1.5 hours
Variable factory overhead is applied on the basis of direct labor hours. For 1993, variable factory is
21. What is the unit cost of Product A? budgeted at $1,120,000, and direct labor hours are estimated at 280,000. The hourly rates for
A. $3.76 C. $5.30 machine time and direct labor are $10 and $14, respectively. Alaire applies a material handling
B. $4.71 D. $252.00 charge at 10% of materials cost, thus materials handling charge is not included in variable factory
overhead. Total 1993 expenditures for materials are budgeted at $10,600,000.
22. What is the unit cost of Product B? Ed Watch, Alaire’s controller, believes that, the management group proceeds with the discussion
A. $6.00 C. $9.40 about allocating sales and promotional dollars to individual products, they should consider the
B. $6.41 D. $252.00 activities involved in the production. As Welch explained to the group, “Activity-based costing
integrates the cost of all activities, known as cost drivers, into individual product costs rather than
Question 23 through 26 are based on the following information. including these costs in overhead pools.” Welch has prepared the schedule shown below to help
This information was presented as part of Question 3 on Part 3 of the June 1992 CMA the management group understand this concept.
examination, which covered activity-based costing. “Using this information,” Welch explained, “we can calculate an activity-based cost for each TV
Alaire Corporation manufactures several different types of printed circuit boards: however, two of board and each PC board and then compare it to the standard cost we have bee using. The only
the boards account for the majority of the company’s sales. The first of these boards, a television cost that remains the same for both cost methods is the cost of direct materials. The cost drivers
(TV) circuit board, has been a standard in the industry for several years. The market for this type will replace the direct labor, machine time, and overhead costs in the standard cost.”
of board is competitive and therefore price-sensitive. Alaire plans to sell 65,000 of the TV boards Annual Activity
in 1993 at a price of $150 per unit. The second high-volume product, a persona computer (PC) Budgeted Cost Cost Driver for Cost Driver
circuit board, is a recent addition to Alaire’s product line. Because the PC board incorporates the Materials overhead:
latest technology, it can be sold at a premium price, plans include the sale of 40,000 PC boards at Procurement $400,000 No. of parts 4,000,000 parts
$300 per unit. Production scheduling 220,000 No. of boards 110,000 boards
Packaging & shipping 440,000 No. of boards 110,000 boards
Alaire’s management group is meeting to discuss strategies for 1993, and the current topic of $1,060,000
conversation is how to spend the sales and promotion dollars for next year. The sales manager Variable overhead:
believe that the market share for the TV board could be expanded by concentrating Alaire’s Machine setup $446,000 No. of setups 278,750 setups
promotional efforts in this area. In response to this suggestion, the production manager said, “Why Hazardous waste disposal 48,000 Lbs. of waste 16,000 lbs.
don’t you go after a bigger market for the PV board? The cost sheets that I get show a premium Quality control 560,000 No. of inspections 160,000 inspect’ns
price for the PC board, selling it should help overall profitability.” General supplies 66,000 No. of boards 110,000 boards

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$1,120,000 next period is $92,023.

Manufacturing: The company is considering switching to an activity-based costing system for the purpose of
Machine insertion $1,200,000 No. of parts 3,000,000 parts computing unit product costs for external reports. The new activity-based costing system would
Manual insertion 4,000,000 No. of parts 1,000,000 parts have three overhead activity cost pools--Activity 1, Activity 2, and General Factory--with estimated
Wave soldering 132,000 No. of boards 110,000 boards overhead costs and expected activity as follows:
$5,332,000
Required per unit TV Board PC Boards Estimated Expected Activity
Parts 25 55 Activity Cost Pool Overhead Costs Product A Product B Total
Machine insertions 24 35 Activity 1 $14,487 500 600 1,100
Manual insertions 1 20 Activity 2 $64,800 2,500 500 3,000
Machine setups 2 3 General Factory $12,736 240 100 340
Hazardous waste 0.02 lbs. 0.35 lbs. Total $92,023
Inspections 1 2 (Note: The General Factory activity cost pool's costs are allocated on the basis of direct labor
hours.)
23. On the basis of standard costs, the total contribution budgeted for the TV board is
A. $1,950,000 C. $2,340,000 27. The predetermined overhead rate under the traditional costing system is closest to:
B. $2,275,000 D. $2,470,000 A. $13.17. C. $37.46.
24. On the basis of activity-based costs (ABC), the total contribution budgeted for the TV board is B. $21.60. D. $270.66.
A. $1,594,000 C. $2,037,100
B. $1,950,000 D. $2,557,100 28. The overhead cost per unit of Product B under the traditional costing system is closest to:
25. On the basis of standard costs, the total contribution budgeted for the PC board is A. $2.63. C. $7.49.
A. $2,360,000 C. $2,960,000 B. $4.32. D. $54.13.
B. $2,920,000 D. $3,000,000
26. On the basis of activity-based costs, the total contribution budgeted for the PC board is 29. .The predetermined overhead rate (i.e., activity rate) for Activity 1 under the activity-based
A. P1,594,000 C. $2,360,000 costing system is closest to:
B. $1,950,000 D. $2,557,100 A. $13.17. C. $28.97.
B. $24.15. D. $83.66.
Questions 27 thru 30 are based on the following information.
Acton Company has two products: A and B. The annual production and sales of Product A is 800 30. The overhead cost per unit of Product A under the activity-based costing system is closest to:
units and of Product B is 500 units. The company has traditionally used direct labor-hours as the A. $11.24. C. $81.20.
basis for applying all manufacturing overhead to products. Product A requires 0.3 direct labor hours B. $70.79. D. $86.97.
per unit and Product B requires 0.2 direct labor hours per unit. The total estimated overhead for
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