Multiple Choice Answers

1. In refining a cost system,
total direct costs are unchanged because they can be traced to the product in an economically feasible way and traced costs are more accurate.
the costs are grouped in homogeneous pools of the same or similar amounts.
the criterion of cause and effect is used to relate indirect costs to a factor that systematically links to a cost object.
the organization looks for cost-allocation bases that will provide a uniform spreading of indirect costs to each product.

2. The allocation of indirect costs in an activity-based costing system
may require other costs to be allocated to activities before the costs of the activities can be allocated to the products.
is simplified because more costs are identified as direct costs.
requires the use of heterogeneous cost pools.
is simplified because a limited number of activities are identified as cost objects.

3. A significant limitation of activity-based costing is the
attention given to indirect cost allocation.
many necessary calculations.
operations staff’s attitude toward the accounting staff.
use it makes of technology.

4. Overcosting of a product is MOST likely to result from
misallocating direct labor costs.
overpricing the product.
undercosting another product.
understating total product costs.

5. The MOST likely example of a batch-level cost is
utility costs.
machine repairs.
product-designing costs.
setup costs.

6. Which method of allocation probably best estimates actual overhead costs used? Why?
Single direct labor-hours cost driver because it is best to allocate total costs uniformly to individual jobs.
Single direct labor-hours cost driver because it is easiest to analyze and interpret.
Three activity-cost drivers because they best reflect the relative consumption of resources.
Three activity-cost drivers because product costs can be significantly cross-subsidized.

7. Activity-based management (ABM) includes decisions about all EXCEPT
pricing and product mix.
smoothing costs.
reducing costs.
improving processes.

8. The UNIQUE feature of an ABC system is the emphasis on
costing individual jobs.
department indirect-cost rates.
multiple-cost pools.
individual activities.

9. For service organizations that bill customers at a predetermined average rate, activity-based cost systems can help to
clarify appropriate cost assignments for various service activities.
identify the profitability of various service activities.
Both A and B
None of the above