Chapter 

14 

ACTIVITY ACCOUNTING:  ACTIVITY­BASED COSTING AND
ACTIVITY­BASED MANAGEMENT

MULTIPLE CHOICE

A 1. A base used to allocate the cost of a resource to the different activities using that
resource is a(n):
A. resource driver
B. activity driver
C. final cost object
D. driver
E. none of the above

B 2. A base used to allocate the cost of products, customers, or other final cost
objects is a(n):
A. resource driver
B. activity driver
C. final cost object
D. driver
E. none of the above

B 3. Examples of activities at the batch 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
E. none of the above

C 4. 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
E. none of the above

D 5. Examples of activities at the plant 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
E. none of the above

197
198 Chapter 14

A 6. Examples of activities at the unit 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
E. none of the above

A 7. 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
D. depreciation and insurance on buildings
E. none of the above

C 8. Examples of product-level costs are:

A. portions of electricity and indirect materials
B. salaries of schedulers and setup personnel
C. salaries of designers and programmers
D. depreciation and insurance on buildings
E. none of the above

D 9. Examples of plant-level costs are:

A. portions of electricity and indirect materials
B. salaries of schedulers and setup personnel
C. salaries of designers and programmers
D. depreciation and insurance on buildings
E. none of the above

B 10. Examples of batch-level costs are:

A. portions of electricity and indirect materials
B. salaries of schedulers and setup personnel
C. salaries of designers and programmers
D. depreciation and insurance on buildings
E. none of the above

A 11. Examples of unit-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
E. all of the above

B 12. 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
E. all of the above
Activity Accounting: Activity-Based Costing and Activity-Based Management 199

C 13. Examples of product-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
E. all of the above

D 14. Examples of plant-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
E. all of the above

A 15. 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
E. none of the above

D 16. 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
E. none of the above

E 17. Unit-level drivers are:

A. inversely proportional to the volume of output
B. measures of activities that vary with the number of batches produced and
sold
C. measures of activity that vary with the number of different products
produced and sold
D. for assigning plant-level costs
E. none of the above

A 18. Traditional costing systems are characterized by their use of which of the
following measures as bases for allocating overhead to output:
A. unit-level drivers
B. batch-level drivers
C. product-level drivers
D. plant-level drivers
E. none of the above

E 19. ABC systems are characterized by their use of which of the following measures
as bases for allocating overhead to output:
A. unit-level drivers
B. batch-level drivers
C. product-level drivers
D. plant-level drivers
E. all of the above
200 Chapter 14

A 20. All of the following are distinctions that usually exist between traditional and
ABC costing systems, except that:
A. the number of overhead cost pools tends to be lower in ABC systems
B. the number of allocation bases tend to be higher in ABC systems
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 two-stage costing systems, while traditional systems
may be one- or two-stage
E. all of the above are distinctions

D 21. All of the following are distinctions that usually exist between traditional and
ABC costing systems, except that:
A. the number of overhead cost pools tends to be higher in ABC systems
B. the number of allocation bases tend to be higher in ABC systems
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
E. all of the above are distinctions

B 22. Compared to an ABC system, a traditional costing system reports:

A. a lower unit cost for high-volume products and a higher unit cost for low-
volume products
B. a higher unit cost for high-volume products and a lower unit cost for low-
volume products
C. the same unit costs for high- and low-volume products as does an ABC
system
D. either higher or lower unit cost for high-volume products than an ABC
system depending upon the level of fixed costs
E. none of the above

C 23. 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
E. none of the above

A 24. All of the following are ways that activities can be managed to achieve
improvements in a process, except:
A. activity induction
B. activity elimination
C. activity selection
D. activity sharing
E. all of the above are ways in which activities may be managed

C 25. All of the following are examples of non-value-added activities except:

A. ordering
B. receiving
C. assembling
D. inspections
Activity Accounting: Activity-Based Costing and Activity-Based Management 201

E. setting up
202 Chapter 14

PROBLEMS

PROBLEM

1.
Levels of Activity Drivers

Required: Each of the following is a potential activity driver. Identify the most likely level of
each activity driver by writing U for a unit-level driver, B for a batch-level driver, and P for a
product-level driver.

1.Number of setups
2.Number of work orders
3.Machine hours
4.Pounds of product
5.Number of part numbers
6.Design hours
7.Number of design changes
8.Marketing promotions
9.Direct materials dollars
10.Loads of materials moved

SOLUTION

1. B 2. B 3. U 4. U 5. P
6. P 7. P 8. P 9. U 10. B

PROBLEM

2.
Distortion of Batch­Level Costs. Maupin Company's existing cost system accumulates all
overhead in a single cost pool and allocates it based on direct labor hours. Last year,
overhead costs totaled $1,500,000, and Product A used 3,000 of the 30,000 total direct
labor hours. An ABC study revealed that of the total overhead cost for last year, $100,000
represented batch-level costs; these batch-level costs are driven by work orders; and a total
of 500 work orders were issued, of which 25 were for Product A.

Required: With respect to batch-level costs only, calculate the existing cost system's
direction and amount of cost distortion for Product A.

SOLUTION

The existing system allocated 3,000/30,000 = 10% of all overhead to Product A last year;
but A accounted for only 25/500 = 5% of batch-level activity. So, with respect to batch-level
costs only, the existing system overstated A's cost last year by a total of:

(10% - 5%) x $100,000 = $5,000 overstatement

Activity Accounting: Activity-Based Costing and Activity-Based Management 203

PROBLEM

3.
Value­Added and Non­Value­Added Activities. Sequential Company's sole product, a unique end
table made from lumber, is produced and sold in the following sequence of steps:

(a) wood received and inspected at receiving dock

(b) wood moved to stores inventory
(c) wood moved to Cutting Department
(d) wood cut to size
(e) moved to Planing Department
(f) placed in queue to await planing
(g) wood smoothed and shaped
(h) moved to Inspection Department
(i) inspected
(j) moved to in-process storage area
(k) moved to Assembly Department
(l) various parts of the table are assembled
(m) placed on hand truck to await material handler
(n) moved to Staining Department
(o) tables stained
(p) moved to Inspection Department
(q) inspected
(r) moved to Shipping Department
(s) tables shipped

Required: Which of the steps add value to the product?

SOLUTION

Activities (d), (g), (l), and (o) are the only ones which add value.
204 Chapter 14

PROBLEM

4.
Allocation Rates and Driver Rates. The Barre Division of Scranton Company manufactures
many high-volume products and many low-volume products. Selected information follows
for Barre's most recent year of operations:

Indirect costs:
Machine related:
Machine operation........................................................................................... $ 75,000
Machine setup................................................................................................. 50,000
Total machine overhead............................................................................ $ 125,000

Materials related:
Materials handling.......................................................................................... $ 45,000
Other materials-related................................................................................... 60,000
Total materials overhead.......................................................................... $ 105,000
Other overhead............................................................................................... $ 190,000
Total overhead................................................................................................ $ 420,000

Machine hours....................................................................................................... 10,000

Pounds of materials.............................................................................................. 50,000
Setup hours........................................................................................................... 1,000
Purchase orders.................................................................................................... 1,200
Direct labor hours................................................................................................. 25,000

Barre's existing cost system allocates all machine-related overhead based on machine
hours and all the remaining overhead based on direct labor hours. However, a recent study
determined that machine setup costs and material handling costs are primarily related to
setup hours, and other materials-related costs are primarily related to the number of
purchase orders issued. Barre does not keep significant materials inventories on hand.

Required:

(1) Calculate the two overhead rates in Barre's existing cost system for the most recent
year.
(2) Calculate the overhead (driver) rates that an ABC system would use for the most
recent year, making only the changes suggested by the results of the recent study.
Activity Accounting: Activity-Based Costing and Activity-Based Management 205

SOLUTION

$125,000 of machine- related overhead

= $12.50 per machine hour
10,000 machine hours

$295,000 of remaining overhead costs

= $11.80 per direct labor hour
25,000 DLH
(1)
(2)
206 Chapter 14

$75,000 of machine operation overhead

= $7.50 per machine hour
10,000 machine hours

$50,000 of machine- setup overhead + $45,000 of materials handling overhead

= $95 per setup hour
1,000 setup hours

$60,000 of other materials- related cost

= $50 per purchase order
1,200 purchase orders

$190,000 of _ other overhead _

= $7.60 per direct labor hour
25,000 DLH

PROBLEM

5.
Comparison of ABC and Traditional Costing; Two Products. Blaine Company produces two
products, Nifty and So-So, and uses a costing system in which all overhead is accumulated
in a single cost pool and allocated based on machine hours. Blaine's management has
decided to implement ABC because a cost study has revealed significant amounts of
overhead cost related to setup activity and design activity. The number of setups and the
number of design hours will be the activity drivers for the two new cost pools, and machine
hours will continue as the base for allocating the remaining overhead. Selected information
follows for Blaine Company's most recent year of operations:

Nifty So-So Total

Units produced.......................................................... 500 15,500 16,000

Direct material cost:

Per unit................................................................ $ 200 $ 20
Total.................................................................... $100,000 $310,000 $410,000

Machine hours........................................................... 3,000 47,000 50,000

Direct labor cost........................................................ $50,000 $350,000 $400,000
Setups....................................................................... 120 80 200
Design hours............................................................. 6,000 4,000 10,000

Overhead:
Setup-related....................................................... $250,000
Design-related..................................................... 350,000
Other................................................................... 900,000
Total overhead.................................................... $
1,500,000

Required:
Activity Accounting: Activity-Based Costing and Activity-Based Management 207

(1) Calculate the total and per-unit costs reported for the two products by the existing
costing system.
(2) Calculate the total and per-unit costs reported for the two products by the ABC
system.
208 Chapter 14

SOLUTION

(1) Blaine Company

Product Costs from Existing Cost System

Overhead Rate:
$1,500,000 of overhead divided by 50,000 machine hours = $30 per machine hour

Nifty So-So Total

Direct material.......................................................... $100,000 $310,000 $410,000
Direct labor................................................................ 50,000 350,000 400,000
Overhead:
$30 x 3,000......................................................... 90,000
$30 x 47,000....................................................... 1,410,000
1,500,000
Total cost................................................................... $240,000 $2,070,000 $
2,310,000
Units produced.......................................................... 500 15,500
Cost per unit.............................................................. $480.00 $ 133.55

(2) Blaine Company

Product Costs from Activity-Based Costing System

Overhead Rate:
$250,000 setup-related costs divided by 200 setups = 1,250 per setup
$350,000 design-related costs divided by 10,000 design hours = $35 per design hour
$900,000 of other overhead divided by 50,000 machine hours = $18 per machine hour

Nifty So-So Total

Direct material.......................................................... $100,000 $310,000 $410,000
Direct labor................................................................ 50,000 350,000 400,000
Overhead:
$1,250 x 120 setups............................................ 150,000
$1,250 x 80 setups.............................................. 100,000 250,000
$35 x 6,000 design hours.................................... 210,000
$35 x 4,000 design hours.................................... 140,000 350,000
$18 x 3,000 machine hours................................. 54,000
$18 x 47,000 machine hours............................... 846,000 900,000
Total cost................................................................... $564,000 $1,746,000 $
2,310,000
Units produced.......................................................... 500 15,500
Cost per unit.............................................................. $1,128.00 $ 112.65