ch4 Horrgern

Chapter 4
Cost Management Systems and Activity-Based Costing
4.4 Questions
1) Which of the following purposes of cost allocation provides information for operational control in an
organization?
A) to compute income and asset valuations for financial reports
B) to compute Cost of Goods Sold for financial reports
C) to determine the number of cost drivers for a product
D) to provide the desired motivation and to give feedback for performance evaluation
Answer: D
Diff: 2
LO: 4-4
AACSB: Reflective thinking skills
Learning Outcome: Describe the basics of managerial accounting and its function within an organization
2) If fixed production costs are not allocated to manufactured products, this conveys the idea that
________.
A) fixed costs are not necessary to manufacture a product.
B) fixed costs are necessary to manufacture a product.
C) variable costs are less important than fixed costs to manufacture a product.
D) fixed costs are more important than variable costs to manufacture a product.
Answer: A
Diff: 1
LO: 4-4
3) When companies develop cost management systems, which of the following purposes of cost
allocation usually dominates?
A) to predict the economic effects of strategic and operational control decisions
B) to provide the desired motivation and to give feedback for performance evaluation
C) to compute income and asset valuations for financial reporting
D) to justify costs or obtain reimbursement
Answer: C
Diff: 1
LO: 4-4
Accounting for Managers Page 1

Chapter 4

4) Monthly indirect production costs are $400,000. The cost-allocation base for indirect costs is machine
hours. The budgeted capacity for the month is 40,000 machine hours. Product X used 5,000 machine
hours, Product Y used 15,000 machine hours and Product Z used 20,000 machine hours. How much of the
indirect costs are allocated to Products X and Y?
Product X Product Y
A) $2,500 $7,500
B) $5,000 $15,000
C) $50,000 $150,000
D) none of the above
Answer: C
Diff: 2
LO: 4-4
AACSB: Analytic skills
5) Rent Expense on the Factory Building of $100,000 is allocated to three departments. The cost-allocation
base for this expense is number of square feet, which equals 50,000 square feet. Information for the three
departments housed in the factory building are as follows:
Department Square Feet Cubic Feet

Department A 15,000 15,000
Department B 5,000 5,000
Department C 30,000 20,000
How much Rent Expense is allocated to the three departments?

Department A Department B Department C
A) $15,000 $5,000 $30,000
B) $37,500 $12,500 $50,000
C) $30,000 $10,000 $60,000
D) none of the above
Answer: C
Diff: 2
LO: 4-4
6) When determining the cost of a product, which of the following costs is often not allocated?
A) Customer Service Expense
B) Research and Development Expense
C) Marketing Expense
D) Administrative Salaries Expense
Answer: D
Diff: 2

Chapter 4

LO: 4-4
7) Depreciation Expense on the Heating and Air Conditioning Equipment for the factory of $50,000 is
allocated to five departments. The cost-allocation base for this expense is the number of cubic feet, which
equals 100,000 cubic feet. Information for five departments is below:
Department Square Feet Cubic Feet

Department A 15,000 15,000
Department B 5,000 5,000
Department C 30,000 20,000
Department D 20,000 35,000
Department E 10,000 25,000
How much Depreciation Expense is allocated to Department A?

A) $2,500
B) $7,500
C) $15,000
D) $18,750
Answer: B
Diff: 2
LO: 4-4
8) If the Production Department is the cost object, the salary of the factory supervisor is a(n) ________ cost
for the department. If the product made in the factory is the cost object, the salary of the factory
supervisor is a(n) ________ cost for the product.
A) direct; indirect
B) indirect; direct
C) direct; direct
D) indirect, indirect
Answer: A
Diff: 2
LO: 4-4

Chapter 4
9) In general, many more costs are direct costs instead of indirect costs when the cost object is a ________
instead of a(n) ________.
A) product; department
B) product; activity
C) product; resource
D) department; product
Answer: D
Diff: 2
LO: 4-4
10) Which of the following is NOT a stated purpose of cost allocation?

A) Predict the economic effects of strategic and operational control decisions.
B) Obtain reimbursement.
C) Provide motivation to managers.
D) Determine product cost.
Answer: D
Diff: 2
LO: 4-4
11) What is the final step in the four-step process to allocate indirect costs to cost objects?
A) Accumulate indirect costs for a period of time in a cost pool.
B) Select an allocation base for each cost pool.
C) Multiply the percentage of total cost-allocation units used for each cost object by the total costs in the
cost pool to determine the cost allocated to each cost object.
D) Measure the units of the cost-allocation base used for each cost object and compute the total units used
for all cost objects.
Answer: C
Diff: 2
LO: 4-4
12) Unallocated costs ________.

A) are not recorded in the cost accounting system
B) do not have cost drivers that can be used to relate the costs to cost objects
C) have a direct relationship to a cost object
D) have an identifiable relationship with a cost object
Answer: B

Chapter 4

Diff: 2
LO: 4-4
4.5 Questions
1) Merchandising and manufacturing companies account for ________ in the same way.
A) design expenses
B) customer service expenses
C) selling expenses
D) all of the above
Answer: D
Diff: 2
LO: 4-5
2) A merchandising firm has ________ inventory account(s). A manufacturing firm has ________
inventory account(s).
A) one; three
B) three; one
C) two; three
D) three; three
Answer: A
Diff: 2
LO: 4-5
3) Factory overhead does NOT include ________.

A) electricity bill in factory
B) insurance Expense on factory building
C) supplies used in factory
D) wages of janitors in corporate headquarters
Answer: D
Diff: 2
LO: 4-5
4) Indirect production costs do NOT include ________.

Chapter 4

A) property taxes on factory building
B) rent expense on factory building
C) wages of security guards at corporate headquarters
D) wages of forklift truck operators in assembly area
Answer: C
Diff: 2
LO: 4-5
5) In a merchandising company, ________.

A) selling and administrative costs are period costs
B) insurance expense on the corporate building is a product cost
C) Work-In-Process Inventory may be present
D) Finished Goods Inventory may be present
Answer: A
Diff: 2
LO: 4-5
6) In a manufacturing company, ________.

A) inventoriable costs only become an expense when the company sells the inventory
B) inventoriable costs become an expense as soon as the company finishes manufacturing the product
C) there is only one inventory account
D) period expenses are reported as expenses in a future period
Answer: A
Diff: 2
LO: 4-5
7) When looking at a manufactured product, an example of an inventoriable cost is ________.

A) depreciation expense on office equipment in corporate office
B) insurance expense on vehicles used by sales staff
C) wages of plant security guard
D) clerical salaries in corporate office
Answer: C
Diff: 2
LO: 4-5

Chapter 4

8) For manufacturing companies, an example of a period cost is ________.
A) direct materials
B) research and development expense
C) direct labor
D) factory overhead
Answer: B
Diff: 2
LO: 4-5
9) Goods undergoing the production process but not fully complete are called ________.
A) Merchandise Inventory
B) Raw Materials Inventory
C) Finished Goods Inventory
D) Work-in-Process Inventory
Answer: D
Diff: 1
LO: 4-5
10) Which of the following is NOT an example of indirect production costs?

A) factory supplies
B) depreciation expense on factory building
C) depreciation expense on office equipment in corporate headquarters
D) wages of material handlers in factory
Answer: C
Diff: 2
LO: 4-5
11) Which of the following is NOT a period expense in a merchandising firm?

A) Selling Expense
B) Administrative Expenses
C) R&D Expenses
D) Cost of Goods Sold
Answer: D
Diff: 2
LO: 4-5

Chapter 4
12) Period costs include selling and administrative expenses.

Answer: TRUE
Diff: 1
LO: 4-5
13) In a manufacturing company, unsold, fully complete products are called Work-In-Process Inventory.
Answer: FALSE
Diff: 1
LO: 4-5
14) Period costs become expenses during a future period.

Answer: FALSE
Diff: 1
LO: 4-5
15) A merchandising company has Raw Materials Inventory.

Answer: FALSE
Diff: 1
LO: 4-5
16) For both merchandising and manufacturing firms, selling and administrative costs are period costs.
Answer: TRUE
Diff: 2
LO: 4-5

Chapter 4

17) A manufacturing company has identified several costs. Indicate whether each of the following costs is
an Inventoriable cost(I) or a Period cost(P):
_____ 1. Rent Expense on factory equipment

_____ 2. Cost of subassemblies used in producing product
_____ 3. Wages of machine operators in factory
_____ 4. Rent Expense on computers at corporate office
_____ 5. Wage Expense for janitors in factory
_____ 6. Repairs Expense for factory equipment
_____ 7. Office Supplies Expense at corporate office
_____ 8. Wage Expense for janitors at corporate office
_____ 9. Wages of security guards at corporate office
_____ 10. Property taxes on factory building and land
_____ 11. Wages of security guards at factory
_____ 12. Wages of forklift driver in factory
_____ 13. Supplies Expense for factory
_____ 14. Wages of forklift operators in factory
_____ 15. Distribution Expenses
Answer:
1. I
2. I
3. I
4. P
5. I
6. I
7. P
8. P
9. P
10. I
11. I
12. I
13. I
14. I
15. P
Diff: 2
LO: 4-5

Chapter 4
4.6 Questions
1) In a manufacturing company, product costs used for external reporting include ________.
A) direct material costs plus direct labor cost only
B) indirect production costs only
C) direct material costs plus direct labor cost plus indirect production costs
D) direct material costs plus nonproduction costs
Answer: C
Diff: 2
LO: 4-6
Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for
different types of organizations
2) Which of the following statements about period costs is FALSE?

A) Period costs refer to distribution costs and design costs.
B) Period costs include R&D expenses, marketing costs and customer service costs.
C) Merchandising and manufacturing firms treat period costs differently.
D) For merchandising firms, Cost of Goods Sold is not a period cost.
Answer: C
Diff: 2
LO: 4-6
3) A merchandising firm reports ________ as a current asset on the balance sheet.

A) Raw Materials Inventory
B) Finished Goods Inventory
C) Work-in-Process Inventory
D) Merchandise Inventory
Answer: D
Diff: 2
LO: 4-6

Chapter 4
4) The computation for Cost of Goods Manufactured on the income statement is ________. (Assume there
are no Work-In-Process Inventories.)
A) direct materials used plus direct production costs
B) direct materials used plus direct labor plus indirect production costs
C) direct materials used plus direct labor
D) direct materials used plus direct labor minus indirect production costs
Answer: B
Diff: 2
LO: 4-6
5) ________ would appear on an income statement of both a retailer and a manufacturer.

A) Direct materials used
B) Ending balance in Finished Goods Inventory
C) Selling expenses
D) Ending balance in Merchandise Inventory
Answer: C
Diff: 2
LO: 4-6
6) In a manufacturing firm, which inventory account is NOT used?

A) Raw Materials Inventory
B) Work-In-Process Inventory
C) Finished Goods Inventory
D) Merchandise Inventory
Answer: D
Diff: 1
LO: 4-6
7) The following information was taken from the accounting records of Henry Manufacturing Company:
Direct materials purchased $75,000

Direct materials used $56,000
Direct manufacturing labor costs $20,000

Chapter 4

Indirect manufacturing labor costs $10,000
Sales Salaries Expense $35,000
Miscellaneous Factory Expenses $5,000
Administrative Expenses $40,000
Finished Goods Inventory, beginning $10,000
Finished Goods Inventory, end $12,000
Work-In-Process Inventory, beginning 0
Work-In-Process Inventory, end 0
What is Cost of Goods Manufactured?

A) $86,000
B) $89,000
C) $91,000
D) $96,000
Answer: C
Diff: 2
LO: 4-6
8) The following information was obtained from the accounting records of Stevenson Incorporated:
Direct materials purchased $80,000

Direct manufacturing labor costs $12,000
Indirect manufacturing labor costs $11,000
Selling expenses $16,000
Administrative expenses $22,000
Factory utilities costs $20,000
Rental cost of factory machines $50,000
Work in process inventory, beginning 0
Work in process inventory, end 0
Finished goods inventory, beginning $10,000
Finished goods inventory, end $30,000
What is Cost of Goods Sold?

A) $57,000
B) $77,000
C) $127,000
D) $147,000
Answer: C
Diff: 2

Chapter 4

LO: 4-6
9) In a merchandising firm, the computation of Cost of Goods Sold does NOT use ________.
A) Merchandise Inventory, beginning balance
B) Merchandise Inventory, ending balance
C) purchases of raw materials
D) purchases of merchandise inventory
Answer: C
Diff: 1
LO: 4-6
10) In a manufacturing firm, the computation of Cost of Goods Manufactured does NOT use ________.
A) Finished Goods Inventory, ending balance
B) indirect production costs
C) direct labor costs
D) direct materials used
Answer: A
Diff: 2
LO: 4-6
11) Which of the following costs is NOT an inventoriable cost for a manufacturing firm?
A) Marketing Expense
B) Factory Supervisor's Salary Expense
C) Wages Expense for security guard in factory
D) Wages Expense for forklift operator in factory
Answer: A
Diff: 2
LO: 4-6

Chapter 4
12) In a manufacturing firm, the Finished Goods Inventory account is only found on the balance sheet.
Answer: FALSE
Diff: 2
LO: 4-6
13) A manufacturer has three types of inventory that include Raw Materials Inventory, Work-In-Process
Inventory and Merchandise Inventory.
Answer: FALSE
Diff: 1
LO: 4-6
14) The McCain Company manufactures several products. The McCain Company has gathered the
following information for the year ended December 31, 2015:
Sales $110,000
Fixed indirect production costs $10,900
Variable indirect production costs $7,900
Fixed direct labor $10,300
Variable direct labor $12,300
Fixed selling expenses $33,040
Variable selling expenses $3,440
Finished Goods Inventory, January 1, 2015 $24,000
Finished Goods Inventory, December 31, 2015 $22,000
Work-In-Process Inventory, January 1, 2015 0
Work-In-Process Inventory, December 31, 2015 0
Requirements:
A) Compute the Cost of Goods Manufactured for the year ended December 31, 2015.
B) Compute the Cost of Goods Sold for the year ended December 31, 2015.
C) Compute the Net Income for the year ended December 31, 2015.
Answer:
A) $52,100($10,700 + $10,900 + $7,900 + $10,300 + $12,300)
B) $54,100($52,100 + $24,000 - $22,000)
C) Net Income = $19,420 = $110,000 - $54,100 - $33,040 - $3,440
Diff: 2

Chapter 4

LO: 4-6
15) Donahoo Manufacturing Company had the following information available for the year:

Direct labor costs incurred $7,700
Indirect labor costs incurred $3,030
Depreciation Expense on factory building $19,000
Depreciation Expense on factory machines $100,000
Insurance Expense on factory building $1,200
Depreciation Expense on office equipment $12,000
Insurance expense on corporate office $1,300
Supplies Expense for factory $5,000
Utilities Expense for factory $2,000
Wages Expense for factory janitors $5,000
Lease Expense for factory computers $10,000
Finished Goods Inventory, end of year $32,000
Finished Goods Inventory, beginning of year $12,000
Work-In-Process Inventories and Raw Materials Inventories were negligible at the beginning and end of
the year.
Required:
A) Compute the Cost of Goods Manufactured for the year.
B) Compute the Cost of Goods Sold for the year.
Answer:
A) $196,930 ($44,000 + $7,700 + $3,030 + $100,000 + $19,000 + $1,200 + $5,000 + $2,000 + $5,000 + $10,000)
B) $176,930 ($196,930 + $12,000 - $32,000)
Diff: 2
LO: 4-6

Chapter 4

16) Gollerowski Company has determined the following information for the year ended December 31,
2015:
Direct labor used $16,840
Direct material used $26,300
General and administrative expenses $14,240
Indirect production costs $56,780
Selling expenses $13,599
Work-In-Process Inventory, January 1, 2015 0
Work-In-Process Inventory, December 31, 2015 0
Finished Goods Inventory, January 1, 2015 0
Finished Goods Inventory, December 31, 2015 ?
Cost of Goods Sold $80,000
Requirements:
A) What is the Cost of Goods Manufactured for the year ended December 31, 2015?
B) What is Finished Goods Inventory at December 31, 2015?
Answer:
A) $99,920 ($26,300 + $16,840 + $56,780)
B) $19,920 ($99,920 - $80,000)
Diff: 2
LO: 4-6
AACSB: Analytic skills, Reflective thinking skills
4.7 Questions
1) Swanson Company has identified the following activities related to indirect production costs:
Activity Activity Costs Cost Drivers

Machine Setup $180,000 1,500 setup hours
Materials Handling $50,000 12,500 pounds of materials
Electric Power $20,000 20,000 kilowatt hours
Swanson Company has obtained the following data concerning two products:
Product 1 Product 2
Number of units produced 4,000 20,000
Direct materials cost $20,000 $25,000
Direct labor cost $12,000 $20,000
Number of setup hours 100 120
Pounds of materials used 500 1,500
Kilowatt-hours 1,000 2,000

Chapter 4
Using activity-based costing, what amount of machine setup cost is assigned to Products 1 and 2?
Product 1 Product 2
A) $12,000 $14,400
B) $30,000 $150,000
C) $50,000 $130,000
D) $81,818 $98,182
Answer: A
Diff: 3
LO: 4-7
Learning Outcome: Compare a traditional cost allocation system to an activity based costing system
2) Stanley Company has identified the following activities related to indirect production costs:

Stanley Company has obtained the following data concerning two products:
Product 1 Product 2
Using an activity-based costing system, what amount of materials handling cost is assigned to Products 1
and 2?
Product 1 Product 2
A) $2,000 $6,000
B) $8,333 $41,667
C) $12,500 $37,500
D) $20,000 $30,000
Answer: A
Diff: 3
LO: 4-7

Chapter 4

3) Sandler Company has identified the following activities related to indirect production costs:

Sandler Company has obtained the following data concerning two products:
Product A Product B
Using activity-based costing, what amount of electric power cost is assigned to Product A and Product B?
Product A Product B
A) $1,000 $2,000
B) $3,333 $16,667
C) $5,000 $15,000
D) $6,667 $13,333
Answer: A
Diff: 3
LO: 4-7
4) Goldman Company has identified the following activities related to indirect production costs:

Goldman Company has obtained the following data concerning two products:
Product A Product B

Chapter 4

Using activity-based costing, what is the total production cost per unit for Product A?
A) $8.00 per unit
B) $10.25 per unit
C) $11.75 per unit
D) $70.50 per unit
Answer: C
Diff: 3
LO: 4-7
5) Godwin Company has identified the following activities related to indirect production costs:

Godwin Company has obtained the following data concerning two products:
Product A Product B
Using activity-based costing, what is the total production cost per unit for Product B?
A) $1.12 per unit
B) $2.25 per unit
C) $3.00 per unit
D) $3.37 per unit
Answer: D
Diff: 3
LO: 4-7

Chapter 4
6) In activity-based costing systems, the system first accumulates indirect costs for ________, and then
assigns these costs to ________.
A) products; departments
B) products; territories
C) cost objects; types of customers
D) activities; cost objects
Answer: D
Diff: 2
LO: 4-7
7) Activity-based costing systems should be used instead of traditional costing systems if ________.
A) indirect production costs are a large percentage of production costs
B) different products consume resources at different rates
C) only one product is produced
D) A and B
Answer: D
Diff: 2
LO: 4-7
8) In two-stage activity-based costing systems, the cost objects in the first stage are ________ and the cost
objects in the second stage are ________.
A) departments; products or services
B) departments; territories
C) resources; departments
D) activities; products or services
Answer: D
Diff: 2
LO: 4-7
9) When using a two stage activity-based costing system, which of the following is NOT a legitimate step?
A) Identify a cost pool for each significant activity.
B) Assign the indirect resource cost to the appropriate cost pool.
C) Allocate the costs in each pool to products or services using multiple cost drivers.
D) Select an allocation base for each cost pool.
Answer: D
Diff: 2

Chapter 4

LO: 4-7
10) ________ is a name for a system that first accumulates indirect resource costs for each of the activities
of an organization and then assigns the cost of each activity to the cost objects that require that activity.
A) Activity-based management
B) Activity-based costing
C) Cost accounting
D) Activity-based cost allocation
Answer: B
Diff: 1
LO: 4-7
11) Which of the following statements is FALSE?

A) Traditional costing systems generally assign only production costs to products.
B) Traditional costing systems use a single cost pool for all indirect production costs.
C) Traditional cost systems work well with simple production processes.
D) Traditional cost systems allocate a cost pool to cost objects using multiple cost drivers.
Answer: D
Diff: 2
LO: 4-7
12) Activity-based costing systems should be adopted when ________.

A) indirect costs represent a small proportion of a product's total costs
B) indirect costs represent a large proportion of a product's total costs
C) a company makes one simple product
D) a company has a simple manufacturing process
Answer: B
Diff: 2
LO: 4-7
13) Process maps are used ________.

A) to make investment decisions regarding capital assets
B) as a guide for strategic decisions
C) as a tool for managers to understand operations
D) for operational control

Chapter 4

Answer: C
Diff: 1
LO: 4-7
14) Slocum Company has determined the following information about a new product. The manufacturing
process used for the product is very complex and it has a higher proportion of indirect costs than direct
costs. The company wants a 100% markup on cost. The following data is available:
Product cost according to traditional costing system $4.00 per unit

Product cost according to activity-based costing system $7.00 per unit
What price per unit should Slocum Company use for this new product?
A) $4.00
B) $7.00
C) $8.00
D) $14.00
Answer: D
Diff: 2
LO: 4-7
15) Fandry Company has obtained the following data concerning a new product:
Production Costs, Using traditional costing method $3.00 per unit

Production Costs, Using activity-based costing method $5.00 per unit
Nonproduction Costs, Using activity-based costing method $2.50 per unit
Fandry Company wants the price of the new product to cover all costs plus a 100% markup. The
production process used for the low volume product is very complicated and it has a higher proportion
of indirect costs than direct costs.
What price per unit should Fandry Company charge for the new product?
A) $6.00
B) $10.00
C) $11.00
D) $15.00
Answer: D
Diff: 2
LO: 4-7

Chapter 4

16) Traditional costing systems generally assign only production costs to products.
Answer: TRUE
Diff: 1
LO: 4-7
17) Traditional costing systems generally allocate nonproduction value-chain costs to products.
Answer: FALSE
Diff: 1
LO: 4-7
18) Sealing Company manufactures only one product that is available in both a Deluxe model and a
Regular model. The company has manufactured the Regular model for years and the Deluxe model was
recently introduced. The company is concerned about the accuracy of its costing system because profits
are declining since the Deluxe model was introduced.
Indirect production costs are assigned to the products using direct labor hours. For the current year, the
company estimates $2,000,000 of indirect production costs and 40,000 direct labor hours. They expect to
produce 5,000 units of the Deluxe model and 40,000 units of the Regular model. The Deluxe model
requires 1.6 hours of direct labor time per unit and the Regular model requires 0.8 hours. Other costs are
as follows:
Costs Deluxe Model Regular Model

Direct materials $150 $112
Direct labor $16 $8
Assume the company's indirect production costs can be traced to four activities with the following cost
drivers:
Activity (Cost Driver) Costs

Purchase orders (number of purchase orders) $84,000
Rework orders (number of rework orders) $216,000
Product testing (number of tests) $450,000
Machining (number of machine hours) $1,250,000
Deluxe Regular
Cost Drivers Model Model
Number of purchase orders 400 600
Number of rework orders 200 600

Chapter 4

Number of tests 4,000 6,000
Number of machine hours 20,000 30,000
Required:
A) Assume direct labor hours are the only cost-allocation base. What is the cost to manufacture one unit
of each model?
B) Assume the activity-based costing method is used. What is the cost to manufacture one unit of each
model?
C) Based on the results obtained from the activity-based costing method, what are the implications for
pricing policy for the two models?
Answer:
A)
Direct materials $150 $112
Direct labor $16 $8
Indirect production
costs $80 $40
Total costs $246 $160
B)
Direct materials $150.00 $112.00
Direct labor $16.00 $8.00
Indirect production
costs $153.52 $30.81
Total cost $319.52 $150.81
Deluxe Regular
Activity (Cost Driver) Costs Model Model
Purchase orders (number of orders) $84,000 $33,600 $50,400
Rework orders (number of orders) $216,000 $54,000 $162,000
Product testing (number of tests) $450,000 $180,000 $270,000
Machining (number of machine hours) $1,250,000 $500,000 $750,000
Total cost $767,600 $1,232,400
Cost per unit ($767,600/ 5,000; $1,232,400/40,000) $153.52 $30.81
C) Under activity-based costing, the Deluxe model is more costly to produce than under the traditional
costing method. As a result, the selling price of the Deluxe model should be increased to cover the
production costs. This will increase profitability of the company.
Diff: 3
LO: 4-7

Chapter 4

19) Pilot Bank uses activity-based costing. Pilot Bank has the following activities, traceable costs, and cost
drivers:
Activities Traceable Costs Cost Drivers

Open new accounts $40,000 1,000 accounts
Process deposits $72,000 360,000 deposits
Process withdrawals $100,000 200,000 withdrawals
The above activities are used by Downtown branch and North branch as follows:
Activities Downtown North

Open new accounts 200 400
Process deposits 40,000 20,000
Process withdrawals 15,000 18,000
Required:
A) Compute the new account cost assigned to the North branch.
B) Compute the deposit processing cost assigned to the Downtown branch.
C) Compute the withdrawal processing cost assigned to the Downtown branch.
Answer:
A) $16,000 = ($40,000/1,000) × 400 accounts
B) $8,000 = ($72,000/360,000) × 40,000
C) $7,500 = ($100,000/200,000) × 15,000
Diff: 2
LO: 4-7

Chapter 4

20) The manufacturing division of an electronics company uses activity-based costing. The company has
identified three activities and the related cost drivers for indirect production costs.
Activity Cost Driver

Activity 1 Direct materials cost
Activity 2 Direct labor cost
Activity 3 Kilowatt hours
Three types of products are produced. Direct costs and cost-driver activity for each product for a month
are as follows:
Product A Product B Product C

Direct materials cost $75,000 $50,000 $125,000
Direct labor cost $6,000 $1,000 $3,000
Direct labor hours 2,000 1,000 2,000
Kilowatt hours 150,000 200,000 150,000
Indirect production costs for the month are as follows:
Activity 1 $30,000
Activity 2 20,000
Activity 3 16,000
Total $66,000
Required:
A) Compute the indirect production costs allocated to each product using the ABC system.
B) Compute the indirect production costs allocated to each product using a traditional costing system.
Assume indirect production costs are allocated to each product using the cost driver: direct labor hours.

Chapter 4

Answer:
A)
Product A:
Activity 1: ($75,000/$250,000) × $30,000 = $9,000
Activity 2: ($6,000/$10,000) × $20,000 = $12,000
Activity 3: (150,000/500,000) × $16,000 = $4,800
Total $25,800
Product B:
Activity 1: ($50,000/$250,000) × $30,000 = $6,000
Activity 2: ($1,000/$10,000) × $20,000 = $2,000
Activity 3: (200,000/500,000) × $16,000 = $6,400
Total $14,400
Product C:
Activity 1: ($125,000/$250,000) × $30,000 = $15,000
Activity 2: ($3,000/$10,000) × $20,000 = $6,000
Activity 3: (150,000/500,000) × $16,000 = $4,800
Total $25,800
B)
Product A: (2,000/5,000) × $66,000 = $26,400
Product B: (1,000/5,000) × $66,000 = $13,200
Product C: (2,000/5000) × $66,000 = $26,400
Diff: 2
LO: 4-7

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Chapter 4

Cost Management Systems and Activity-Based Costing

Accounting for Managers Page 1

Cost Management Systems and Activity-Based Costing

Department Square Feet Cubic Feet

How much Rent Expense is allocated to the three departments?

Accounting for Managers Page 2

Cost Management Systems and Activity-Based Costing

Department Square Feet Cubic Feet

How much Depreciation Expense is allocated to Department A?

Accounting for Managers Page 3

Cost Management Systems and Activity-Based Costing

10) Which of the following is NOT a stated purpose of cost allocation?

12) Unallocated costs ________.

Accounting for Managers Page 4

Cost Management Systems and Activity-Based Costing

3) Factory overhead does NOT include ________.

4) Indirect production costs do NOT include ________.

Accounting for Managers Page 5

Cost Management Systems and Activity-Based Costing

5) In a merchandising company, ________.

6) In a manufacturing company, ________.

7) When looking at a manufactured product, an example of an inventoriable cost is ________.

Accounting for Managers Page 6

Cost Management Systems and Activity-Based Costing

10) Which of the following is NOT an example of indirect production costs?

11) Which of the following is NOT a period expense in a merchandising firm?

Accounting for Managers Page 7

Cost Management Systems and Activity-Based Costing

12) Period costs include selling and administrative expenses.

14) Period costs become expenses during a future period.

15) A merchandising company has Raw Materials Inventory.

Accounting for Managers Page 8

Cost Management Systems and Activity-Based Costing

_____ 1. Rent Expense on factory equipment

Accounting for Managers Page 9

Cost Management Systems and Activity-Based Costing

2) Which of the following statements about period costs is FALSE?

3) A merchandising firm reports ________ as a current asset on the balance sheet.

Accounting for Managers Page 10

Cost Management Systems and Activity-Based Costing

5) ________ would appear on an income statement of both a retailer and a manufacturer.

6) In a manufacturing firm, which inventory account is NOT used?

Direct materials purchased $75,000

Accounting for Managers Page 11

Cost Management Systems and Activity-Based Costing

What is Cost of Goods Manufactured?

Direct materials purchased $80,000

What is Cost of Goods Sold?

Accounting for Managers Page 12

Cost Management Systems and Activity-Based Costing

Accounting for Managers Page 13

Cost Management Systems and Activity-Based Costing

Accounting for Managers Page 14

Cost Management Systems and Activity-Based Costing

Direct materials used $44,000

Accounting for Managers Page 15

Cost Management Systems and Activity-Based Costing