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Exam 4: Accrual Accounting Concepts

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Question 71

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Activity-based costing is used by

A) accounting firms.
B) law firms.
C) consulting firms.
D) all of the above.

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Question 72

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A company incurs $3,600,000 of overhead each year in three departments: Processing, Packaging, and Testing.The company performs 800 processing transactions, 200,000 packaging transactions, and 2,000 tests per year in producing 400,000 drums of Oil and 600,000 drums of Sludge.The following data are available: $\begin{array}{l}\begin{array} { l c r } \text { Department } & \text { Expected Use of Driver } & { \text { Cost } } \\\text { Processing } & 800 & \$ 1,500,000 \\\text { Packaging } & 200,000 & 1,500,000 \\\text { Testing } & 2,000 & 600,000\end{array}\\\text { Production information for the two products is as follows: }\\\\\begin{array}{ll}&\text { Oil }&\text { Sludae }\\\text { Department }&\text { Expected Use of Driver }&\text { Expected Use of Driver }\\\hline \text { Processing } & 300 & 500 \\\text { Packaging } & 120,000 & 80,000 \\\text { Testing } & 1,600 & 400\end{array}\end{array}$ The amount of overhead assigned to Sludge using ABC is

A) $1,800,000.
B) $1,657,500.
C) $1,942,500.
D) $1,380,000.

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Question 73

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Which of the following factors would suggest a switch to activity-based costing?

Reynoso Corporation manufactures titanium and aluminum tennis racquets.Reynoso's total overhead costs consist of assembly costs and inspection costs.The following information is available: $\begin{array}{lccc}\text { Cost }&\text { Titanium }&\text { Aluminum }&\text { Total Cost }\\\text { Assembly } & 500 \text { mach. hours } & 500 \text { mach. hours } & \$ 45,000 \\\text { Inspections } & 350 & 150 & \$ 75,000 \\& 2,100 \text { labor hours } & 1,900 \text { labor hours } &\end{array}$ Reynoso is considering switching from one overhead rate based on labor hours to activity-based costing. Using activity-based costing, how much inspections cost is assigned to titanium racquets?

Which of the following is not a facility-level activity?

Which would be a cost driver for a facility-level activity?

In service industries

To achieve accurate costing, a high degree of correlation must exist between the cost driver and the actual consumption of the activity cost pool.

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

Tidwell Industries has the following overhead costs and cost drivers.Direct labor hours are estimated at 100,000 for the year. $\begin{array}{llrl}\text { Activitu Cost Pool }&\text { Cost Driver }&\text { Est Overhead }&\text { Cost Driver Activity }\\\hline\text { Ordering and Receiving } & \text { Orders } & \$ 120,000 & 500 \text { orders } \\\text { Machine Setup } & \text { Setups } & 297,000 & 450 \text { setups } \\\text { Machining } & \text { Machine hours } & 1,500,000 & 125,000 \mathrm{MH} \\\text { Assembly } & \text { Parts } & 1,200,000 & 1,000,000 \text { parts } \\\text { Inspection } & \text { Inspections } & 300,000 & 500 \text { inspections }\end{array}$ If overhead is applied using traditional costing based on direct labor hours, the overhead application rate is

Which would be an appropriate cost driver for the purchasing activity cost pool?

Each of the following is a limitation of activity-based costing except that

Activity-based costing has been found to be useful in each of the following service industries except

Which of the following is a product-level activity?

Thomsen Computer Company produces three products: Earth, Wind, and Fire.Earth requires 80 machine setups, Wind requires 60 setups, and Fire requires 180 setups.Thomsen has identified an activity cost pool with allocated overhead of $960,000 for which the cost driver is machine setups.How much overhead is assigned to each product? $\begin{array}{llll}&\text { Earth }&\text { Wind }&\text { Fire }\\\text { a. } & \$ 320,000 & \$ 320,000 & \$ 320,000 \\\text { b. } & \$ 200,000 & \$ 150,000 & \$ 450,000 \\\text { c. } & \$ 240,000 & \$ 180,000 & \$ 540,000 \\\text { d. } & \$ 180,000 & \$ 320,000 & \$ 460,000\end{array}$

ABC is particularly useful when overhead costs are an insignificant portion of total costs.

What sometimes makes implementation of activity-based costing difficult in service industries is

Hartley Company produces two products, Flower and Planter.Flower is a high-volume item totaling 20,000 units annually.Planter is a low-volume item totaling only 6,000 units per year.Flower requires one hour of direct labor for completion, while each unit of Planter requires 2 hours.Therefore, total annual direct labor hours are 32,000 (20,000 + 12,000) .Expected annual manufacturing overhead costs are $960,000.Hartley uses a traditional costing system and assigns overhead based on direct labor hours.Each unit of Planter would be assigned overhead of

In the pull approach

Noland Company manufactures two models of its banjo, the Basic and the Luxury.The Basic model requires 10,000 direct labor hours and the Luxury requires 30,000 direct labor hours.The company produces 3,400 units of the Basic model and 600 units of the Luxury model each year.The company inspects one Basic for every 100 produced, and inspects one Luxury for every 10 produced.The company expects to incur $112,800 of total inspecting costs this year.How much of the inspecting costs should be allocated to the Basic model using ABC costing?