WGU D101 Cost and Managerial Accounting

What is a price taker?

A company that has to accept the price that the market sets for a good. They have no influence over setting the price.

What is a price maker?

a firm possessing the power to set the price within the market. They still need to track all costs in order to make sure they are making an adequate return.

What is the major purpose and use of job order costing?

a. To create a system that tracks both manufacturing and period costs and assigns both to products

b. To create a system in which manufacturing costs are tracked by period instead of by products

c. To create a system in which manufacturing costs are accumulated by separate product orders or batches

d. To create a system that is exclusively used by price makers and not by price takers

c.

Which statement is true?

a. Having accurate product or service cost information is important for both price takers and price makers.

b. Having accurate product or service cost information is important for price takers, but not price makers.

c. Having accurate produce or service cost information is not important for either price takers or price makers.

d. Having accurate product or service cost information is important for price makers, but not price takers.

a.

Two competitors exist in the same industry. The first company has accurate product cost information while the second company does not.

What is the reason behind why the first company is more successful than the second?

a. With accurate job cost information, the first company can undercut the second company's prices, thus driving the second company out of business.

b. With accurate job cost information, the first company can set prices that guarantee making a profit, can understand which costs need to be worked on, and can determine which actions can be taken to make the company more efficient and profitable.

c. With accurate job cost information, the first company can pay higher wages to employees, thus motivating them more than the employees of the second company.

d. With accurate job cost information, the first company can set prices higher than the second company, thus earning higher profits.

b.

Job order costing is appropriate when which two conditions exist?

a. Products produced are all the same, and the manufacturing processes used to produce them are the same.

b. Products produced are distinct from each other, and the manufacturing processes used are different for different products.

c. Products produced are distinct, but the manufacturing processes used are the same for different products.

d. Products produced are all the same, but the manufacturing processes used to produce them are different for different products.

b.

Why is having accurate product cost information important?

a. So manufacturers can charge a price based on costs and a reasonable markup

b. So companies can minimize the profits they are earning

c. So manufacturers can charge a price based on estimated product costs, not including a reasonable markup

d. So companies can grow faster than all competitors in their industry

a.

Which type of company should use job order costing?

a. Air filter manufacturer

b. Soda bottler

c. Paper towel manufacturer

d. Commercial aircraft manufacturer

d.

What is a condition to using job order costing?

a. Tracking total direct materials for a given period of time

b. Having no manufacturing overhead assigned to the product cost

c. Tracking total direct labor costs for a period of time

d. Identifying each specific job or product manufactured

d.

Which costs should be assigned to each product under a job order costing system?

a. Direct materials, direct labor, and manufacturing overhead

b. Direct labor, manufacturing overhead, and administrative expenses

c. Direct materials, direct labor, and administrative expenses

d. Manufacturing overhead, administrative expenses, and depreciation of office buildings

a.

Which company should use a job ordering costing system?

a. Manufacturer of custom furniture

b. Manufacturer of paint

c. Food processing plant

d. Loan processing firm

a.

The profitability of each separate job or product can only be tracked using which product costing system?

a. Process costing

b. Average unit costing

c. Profitability costing

d. Job order costing

d.

In completing its job order costing journal entries, ABC Company's accountants made a credit entry to finished goods inventory.

When is this entry made?

a. When work-in-process inventory is transferred to finished goods inventory

b. When finished goods inventory is sold

c. When the cost of goods manufactured is being calculated

d. When manufacturing overhead costs are applied to products being made

b.

Which account are the costs of the raw materials, direct labor, and miscellaneous manufacturing overhead transferred to when the product is being manufactured?

a. Finished goods inventory

b. Cost of goods sold

c. Work-in-process inventory

d. Direct materials

c.

When manufacturing is completed on specific products, their costs are transferred to which account?

a. Cost of goods sold

b. Work-in-process inventory

c. Finished goods inventory

d. Direct materials

c.

The cost of which items should be included as a manufacturing overhead cost?

a. The wages of employees who work on production lines

b. The raw materials used in the finishing department

c. The direct materials used to make a product

d. The wages of factory custodians

d.

The glue and nails used in a manufacturing process should be included in which cost?

a. Administrative costs

b. Manufacturing overhead costs

c. Prepaid supplies

d. Direct materials costs

b.

The purchase of raw materials on open account is recorded by which journal entry?

a. Debit to accounts payable

b. Credit to raw materials inventory

c. Credit to work-in-process inventory

d. Debit to raw materials inventory

d.

Which journal entry is used to record payment of factory rent in cash?

a. Debit to finished goods inventory

b. Debit to cost of goods sold

c. Debit to work-in-process inventory

d. Debit to manufacturing overhead

d.

What is the manufacturing overhead rate that is applied to work-in-process during the manufacturing of products?

a. An estimate of what the total overhead will be for the product being made based on how much the completed products should cost to earn a normal profit

b. The actual costs of manufacturing overhead computed by adding together each of the expected manufacturing overhead components

c. An estimate of what the total overhead will be for the product being made based on some allocation method such as machine hours or direct labor hours

d. The actual costs of the manufacturing overhead divided by the number of products expected to be made

c.

In using a job order costing system, the cost accountant for Paradigm Toys made an entry debiting work-in-process inventory and crediting salaries and wages payable.

What was the purpose of this entry?

a. To recognize total labor costs, regardless of whether the labor was directly or indirectly related to products

b. To apply the indirect labor costs to work-in-process inventory

c. To assign direct labor costs to the products being manufactured

d. To pay for the salaries of factory employees

c.

The cost accountant for Bullzai, Inc., made a journal entry debiting manufacturing overhead and crediting salaries and wages payable. What was the purpose of the entry?

a. To record indirect labor costs to manufacturing overhead

b. To pay for the salaries of the indirect laborers associated with manufacturing but not working directly on products

c. To record direct labor costs on products being made

d. To pay for the salaries of direct laborers working in manufacturing

a.

Quiet Flag Industries has decided that direct labor hours are a good basis on which to apply overhead costs to production. Budgeted manufacturing overhead costs for the coming year are $500,000. Budgeted direct materials purchases are $400,000. The budgeted direct labor cost is $720,000, and budgeted direct labor hours for the coming year are 20,000 hours.

What is Quiet Flag Industries' predetermined overhead rate?

a. $36 per direct labor hour

b. $20 per direct labor hour

c. $25 per direct labor hour

d. $61 per direct labor hour

c

What is the order of the steps followed in accounting for manufacturing overhead costs?

a. Budget the estimated manufacturing overhead, eliminate overapplied or underapplied overhead, record actual manufacturing overhead, and apply manufacturing overhead to work-in-process

b. Budget the estimated manufacturing overhead, record actual manufacturing overhead, apply manufacturing overhead to work-in-process, and eliminate overapplied or underapplied overhead

c. Apply manufacturing overhead, budget the estimated manufacturing overhead, eliminate overapplied or underapplied overhead, and record actual manufacturing overhead costs

d. Record actual manufacturing overhead, apply manufacturing overhead, budget the estimated manufacturing overhead, and eliminate overapplied or underapplied overhead

b.

How are actual manufacturing overhead costs incurred throughout the year journalized?

a. As debits to the work-in-process account

b. As debits into the manufacturing overhead account

c. As credits into the manufacturing overhead account

d. As credits to the work-in-process account

b.

What would least likely be assigned to manufacturing overhead?

a. Repairs on factory equipment

b. Rent on the factory warehouse

c. Insurance on the factory where goods are made

d. Materials that are a key component to making manufactured goods

d.

Applied manufacturing overhead is directly recorded as a credit to which account?

a. Cost of goods sold

b. Work-in-process inventory

c. Manufacturing overhead

d. Finished goods inventory

c.

When manufacturing overhead is underapplied, which entry is included in closing the manufacturing overhead account?

a. A debit to cost of goods sold

b. A debit to finished goods inventory

c. A debit to work-in-process inventory

d. A debit to manufacturing overhead

a

At the end of an accounting period, the manufacturing overhead account has debits totaling $25,000 and credits totaling $28,000. In this case, which statement is true?

a. Actual manufacturing costs were $28,000.

b. Manufacturing overhead is underapplied by $3,000.

c. Manufacturing overhead is overapplied by $3,000.

d. Applied manufacturing overhead costs were $25,000.

c.

Smartistry Company uses a job order costing system and closes all underapplied and overapplied manufacturing overhead to cost of goods sold. The company accountant made the following entry at the end of the accounting period: debit to cost of goods sold and credit to manufacturing overhead.

What is the purpose of this entry?

a. To record underapplied manufacturing overhead

b. To transfer the manufacturing overhead costs to work-in-process

c. To record overapplied manufacturing overhead

d. To record actual manufacturing overhead costs for the period

a

The most common way to eliminate overapplied and underapplied manufacturing overhead is to record the amount to cost of goods sold.

What is an alternative way to eliminate these overapplications or underapplications of manufacturing overhead?

a. Allocate overapplied or underapplied manufacturing overhead to finished goods inventory only

b. Allocate overapplied or underapplied manufacturing overhead to work-in-process inventory, finished goods inventory, and cost of goods sold on the basis of ending balances in these accounts

c. Allocate overapplied or underapplied manufacturing overhead to work-in-process inventory only

d. Allocate overapplied or underapplied manufacturing overhead to manufacturing overhead payable

b.

An overapplication of manufacturing overhead would be corrected by which entry?

a. Debiting cost of goods sold and crediting manufacturing overhead

b. Debiting manufacturing overhead and crediting cost of goods sold

c. Debiting work-in-process inventory and crediting manufacturing overhead

d. Debiting finished goods inventory and crediting manufacturing overhead

b.

In which case is it appropriate to use job costing?

a. When a company supports more than one product line

b. When the costs of outsourcing exceed the benefits

c. When the activities performed in each process center are different for all units produced

d. When rental costs are allocated among various product lines

c.

A company has accrued but has not paid direct labor wages in cash. What is part of the journal entry to record the amount of direct labor wages earned?

a. Debit finished goods inventory

b. Debit work-in-process inventory

c. Debit manufacturing overhead

d. Credit work-in-process inventory

b.

What is process costing?

a. A method of product costing in which all costs are accumulated and assigned to selling, general, and administrative expenses

b. A method of product costing in which costs are accumulated and tracked by process and averaged over all products made during the period

c. A method of product costing in which costs are accumulated and tracked by specific jobs or products

d. A method of product costing in which all costs are accumulated and assigned to manufacturing overhead

b.

Which products would be produced using the process costing method?

a. Manufacturing jets for use by commercial airlines

b. Making custom boats for sale, each with different features

c. Preparing tax returns for individuals of extremely high net worth

d. Manufacturing bottles of ketchup for sale in grocery stores

d.

Which is a true statement regarding process costing?

a. Process costing includes only direct materials and direct labor costs and excludes manufacturing overhead costs when computing the cost of finished goods.

b. The focus of the cost computations in process costing is on the unique job being worked on.

c. Process costing assigns costs equally to each unit produced during a period.

d. In process costing, even though manufacturing companies can specifically identify costs for each product being produced, they find it easier to calculate the average cost of all products.

c.

Which manufacturing company should use process costing?

a. A gasoline refinery

b. A passenger airline manufacturing division

c. A manufacturer of custom furniture

d. A manufacturer of engraved t-shirts

a.

A company is using process costing, which cost step should be followed?

a. Calculate the manufacturing overhead costs for each product

b. Calculate the direct labor costs for each product

c. Calculate the direct materials costs for each product

d. Calculate the average cost using total manufacturing costs for each product

d.

When is it appropriate to use process costing?

a. When a company produces a large volume of unique items using a series of item-specific processes

b. When a company produces a large volume of products using a series of uniform processes

c. When a company produces custom-made products only when an order is received from a customer

d. When a company produces a small volume of unique items using a series of item-specific processes

b.

What is a unique feature of process costing?

a. The presence of manufacturing overhead costs

b. The units go through process centers when being produced.

c. The ability to attach specific costs to specific products

d. The presence of direct materials in the finished goods

b.

Why would a soda company and a gasoline company both primarily use process costing?

a. Because they are two of the largest companies in the United States, and all big companies use process costing

b. Because each of their products consume direct labor and direct materials but no manufacturing overhead

c. Because each unit of product produced by the two companies is identical to other products of the same type

d. Because they each only make one product, so process costing is applicable to both companies

c.

What is true about process costing?

a. It allows specific product costs to be applied to each product that is made differently.

b. It can only be used in manufacturing firms and not in-service firms.

c. It is appropriate when the work performed on each product that goes through various work centers is the same.

d. It is always more accurate than job order costing.

c

Process costing would work best when making which products?

a. Manufacturing a brand of trucks

b. Producing chewing gum

c. Constructing a highway bridge

d. Completing the corporate tax return for a corporation

b

In a process costing system, production costs are accumulated in the process centers. Where do the costs go when all production work is completed in the process centers?

a. Finished goods inventory

b. Selling, general, and administrative expenses

c. Manufacturing overhead

d. Raw materials inventory

a

Which is a measure of the amount of work done during the production period under process costing?

a. Direct materials

b. Conversion costs

c. Equivalent units of production

d. Equivalent units in beginning inventory

c.

What are the sum of direct labor and manufacturing overhead costs referred to in a process costing system?

a. Total manufacturing costs

b. Conversion costs

c. Finished goods inventory

d. Manufacturing costs

b.

Assume a production process using process costing starts with a certain number of units in beginning inventory that are partially completed, a certain number of units are started and completed during the period, and the ending inventory at the end of the period is partially complete.

How would you determine the equivalent units of production in this situation for the period?

a. You would add the work required to complete the units in beginning inventory plus the degree of completion of the ending inventory units.

b. You would add the work required to start and complete the units started during the period plus the degree of completion of the ending inventory units.

c. You would add the work required to complete the units in beginning inventory to the number of units started and completed during the period to the degree of completion of the ending inventory units.

d. You would add the work required to complete the units in beginning inventory plus the number of units started and completed during the period.

c. Correct! To determine the equivalent units of production in this situation in this period, you would add the work required to complete the units in beginning inventory plus the number of units started and completed during the period plus the degree of completion of the ending inventory units.

Which cost would most likely be included first in a process center?

a. Direct labor

b. Direct materials

c. Manufacturing overhead

d. Conversion costs

b

In process costing, the units completed and the units remaining in ending work-in-process inventory at the end of the period come from which of the following?

a. The units in beginning inventory and the units started during the current period

b. Only the units started during the current period

c. The units in ending inventory and the units started during the period

d. Only the units in ending inventory in the current period

a. The units in beginning inventory and the units started make up all the units active during the current period. Those "in play" units will either be completed and transferred out or remain in ending work-in-process inventory.

Which of the following are transferred from work-in-process to finished goods inventory?

a. Only the actual inventory items

b. Only the cost of the inventory items

c. Neither the actual goods nor the cost of the finished items

d. Actual inventory items and the costs of those inventory items

d. Both the costs and the actual inventory items must be tracked through the process costing system. When the items are 100% complete, the inventory would be transferred to finished goods inventory at the costs that were expended to make the inventory.

Which costs make up the work-in-process inventory costs in the processing centers?

a. Direct materials and manufacturing overhead costs

b. Direct labor and manufacturing overhead costs

c. Direct materials and coversion costs

d. Direct materials and direct labor costs

c. Direct materials and conversion costs, which are direct labor and manufacturing overhead costs, are costs that make up the work-in-process inventory costs in processing centers.

Which term is used for direct materials and conversion costs associated with items started but not finished?

a. Finished goods inventory

b. Work-in-process inventory

c. Cost of goods sold

d. Direct labor

b

Which statement accurately describes the equivalent number of units?

a. The equivalent number of units is calculated by adding together the physical goods placed in process during the current period with the physical goods in ending inventory.

b. The equivalent number of units is calculated by adding together the physical goods in beginning inventory to the physical goods placed in process during the current period.

c. The equivalent number of units is always the same as the number of physical units transferred to finished goods.

d. The equivalent number of units is not the same as the number of physical units transferred to finished goods.

d. The equivalent number of units is a measure of work done on units and almost always differs from the actual number of units. It is a number used to calculate the cost per unit and not the transfer of actual units.

The costs that are associated with units completed and transferred out this period are the sum of which components?

a. The cost of beginning work-in-process inventory, both materials and conversion cost, and the cost per equivalent unit required to complete those units in beginning inventory

b. The cost of beginning work-in-process inventory, both materials and conversion costs; the cost per equivalent unit required to complete those units in beginning inventory; and the cost per equivalent unit of the items started and completed this period, both materials and conversion costs

c. The cost per equivalent unit required to complete the units in beginning inventory and the cost per equivalent unit of the items started and completed this period, both materials and conversion costs.

d. Only the cost per equivalent unit of the items started and completed this period, both materials and conversion costs.

b. Correct! It is these three costs that make up the costs of the units transferred out to finished goods.

Which statement accurately describes the cost of goods transferred out?

a. The cost of goods transferred out to finished goods is the sum of the goods in only one process but not in all periods.

b. The cost of goods transferred out to finished goods is the sum of the costs to make the finished goods in all processes, both in the current or prior period.

c. The cost of goods transferred out to finished goods is the sum of the costs to make the finished goods in all processes only in the prior periods.

d. The cost of goods transferred out to finished goods is the sum of the costs to make the finished goods in all processes only in the current period.

b. Correct! The costs of all work performed on the finished goods, whether in the current or prior periods. From all processes are the costs that are transferred to finished goods inventory.

Which of the following statements summarizes how the cost of the ending work-in-process inventory should be calculated?

a. The sum of the material costs for only the unfinished units.

b. The sum of the material costs plus the conversion costs for the units in beginning work- in-process inventory

c. The sum of the material costs plus the conversion costs for the unfinished units

d. The sum of the material costs plus the conversion costs for the finished units

c. Correct! The cost of the ending work-in-process inventory is calculated by adding the material costs to the conversion costs for the unfinished units.

Which of the following statements calculates the material's costs in the ending work-in-process inventory at the end of the current period?

a. The sum of the materials and the conversion cost per equivalent units during the current period multiplied by the material's equivalent units in the ending work-in-process inventory

b. The sum of the materials and the conversion cost per equivalent units during the prior period multiplied by the material's equivalent units in the ending work-in-process inventory

c. The materials cost per equivalent unit during the current period multiplied by the material's equivalent units in the ending work-in-process inventory

d. The materials cost per equivalent unit during the prior period multiplied by the material's equivalent units in the ending work-in-process inventory

c. Correct! The material costs in the ending work-in-process inventory at the end of the current period is calculated by taking the materials cost per equivalent unit during the period and multiplying it by the materials equivalent units in the ending work-in-process inventory.

Which statement determines the conversion costs in the ending work-in-process inventory at the end of a current period?

a. The sum of the materials and the conversion cost per equivalent unit during the current period multiplied by the conversion equivalent units in the ending work-in-process inventory

b. The conversion cost per equivalent unit during the current period multiplied by the conversion equivalent units in the ending work-in-process inventory

c. The sum of the materials and the conversion cost per equivalent unit during the prior period multiplied by the conversion equivalent units in the ending work-in-process inventory

d. The conversion cost per equivalent unit during the prior period multiplied by the conversion equivalent units in the ending work-in-process inventory

b. Correct! The conversion costs in the ending work-in-process inventory at the end of the current period is calculated by taking the conversion cost per equivalent unit during the current period and multiplying it by the conversion equivalent units in the ending work-in-process inventory.

The conversion cost of ending work-in-process inventory is equal to which of the following?

a. The conversion cost per equivalent unit this period multiplied by the direct materials cost number of equivalent units

b. The conversion cost per actual units in beginning inventory multiplied by the conversion cost number of equivalent units

c. The conversion cost per equivalent unit this period multiplied by the conversion cost number of equivalent units

d. The conversion cost per actual units transferred out multiplied by the conversion cost number of equivalent units

c. Correct! The conversion cost of ending work-in-process inventory is calculated by multiplying the conversion cost per equivalent unit this period and the conversion cost number of equivalent units.

The costs of ending work-in-process inventory is calculated by which of the following formulas?

a. Cost per unit for conversion costs times the number of equivalent units for conversion costs

b. Cost per unit of direct materials times equivalent units for materials plus conversion costs per unit times the number of equivalent units for conversion costs

c. Cost per unit for direct materials times equivalent units for materials minus conversion costs per unit times the number of equivalent units for conversion costs

d. Cost for direct materials per unit times the number of equivalent units for direct materials

b. Correct! This is the correct formula for calculating the cost of ending work-in-process inventory.

What is the number of equivalent units for direct materials equal to?

a. The sum of equivalent units for units started and completed and equivalent units for ending inventory

b. The sum of equivalent units for beginning work-in-process inventory and ending work-in-process inventory

c. The sum of the equivalent units for beginning work-in-process inventory and units started and completed during the current period

d. The equivalent units for beginning work-in-process inventory plus the equivalent units for units started and completed plus the equivalent units for ending work-in-process inventory

d. Correct! The equivalent units of production is equal to the equivalent units for beginning work-in-process inventory plus the equivalent units for units started and completed plus the equivalent units for ending work-in-process inventory.

When determining the cost per unit of units produced in a processing center, which statement is true?

a. Separate costs are not calculated per unit for direct materials or conversion costs for either beginning work-in-process inventory or current period costs.

b. Separate costs are only calculated per unit for direct materials and conversion costs for the current period costs.

c. Separate costs are only calculated per unit for direct materials and conversion costs for the beginning work-in-process inventory.

d. Separate costs are calculated per unit for direct materials and conversion costs for both beginning work-in-process inventory and current period costs.

a. Correct! Separate unit costs are calculated for direct materials and conversion costs for both beginning work-in-process inventory and conversion costs.

What are the total processing dollars spent during a period in a process center equal to?

a. The sum of the cost of goods transferred out and the cost of ending work-in-process inventory

b. Only the cost of goods transferred out

c. The sum of costs in beginning inventory, the cost of goods transferred out, and the cost of ending work-in-process inventory

d. Only the cost of ending work-in-process

a. Correct! The total dollars in, or total processing dollars spent during a period, is equal to the cost of goods transferred out and the cost of ending work-in-process inventory. Goods worked on were either not finished and are in ending inventory, or they are finished and transferred out. The ending inventory of one period becomes the beginning inventory of the next period and cannot be double counted.

When computing the costs transferred out of a department or processing center, which of the following is true?

a. Only the costs to complete direct materials and the costs to complete conversion of the beginning work-in-process inventory are added to the direct materials costs of the started and completed units.

b. Only the costs to complete direct materials and the costs to complete conversion of the beginning work-in-process inventory are added to the conversion costs of the started and completed units.

c. The costs to complete direct materials in beginning work-in-process inventory are added to the costs to complete conversion of the beginning work-in-process, and the total is added to the costs of the started and completed inventory for the period.

d. Only the conversion cost of the beginning inventory is added to all costs of the started and completed units to determine the total costs transferred out of the processing center.

a. Correct! It is always the direct materials and conversion costs to complete beginning work-in-process inventory that are added to the total costs of the started and completed units that are the total cost of units transferred out.

Which of the following are always considered 100% complete when calculating equivalent units?

a. Units in ending work-in-process conversion costs.

b. Units started during the period.

c. Units started and completed during the period.

d. Units in work-in-process for material costs.

c. Correct! Units started and completed during the period are always considered 100% completed and are 100% completed all the time.

You cannot call them completed units if they are not completed during the period.

Using a traditional overhead allocation method, what is a common measure of activity?

a. Amount spent on research and development

b. CEO salary

c. Forecasted sales increase

d. Direct labor hours

d. Correct! With a traditional overhead allocation method, all overhead is allocated based on one common measure of activity, such as direct labor hours.

Using an ABC overhead allocation method, overhead is allocated based on several different measures of activity. What are these measures of activity called?

a. Total manufacturing costs

b. Direct labor

c. Direct materials

d. Cost drivers

d. Correct! Overhead is allocated based on several different measures of activity, which are called cost drivers.

The traditional approach to allocating overhead involves assigning all the overhead costs to products according to which approach?

a. Multiple measures of activity

b. Using a direct approach

c. One simple measure of activity

d. Using multiple cost drivers

c. Correct! The traditional approach to allocating overhead involves assigning all the overhead costs to products according to one simple measure of activity, such as direct labor or machine hours.

What is important to consider when determining how to allocate overhead costs to a product or a production process?

a. Determining what factors are causing direct labor costs to be incurred

b. Determining what factors are causing all manufacturing costs to be incurred

c. Determining what factors are causing direct materials costs to be incurred

d. Determining what factors are causing overhead costs to be incurred

d. Correct! It is important when determining how to allocate overhead costs to a product or production process to consider what factors are causing overhead costs to be incurred in the manufacturing process in the first place.

What is a change, or measurable factor, directly related to the amount of overhead cost associated with the production of a specific item?

a. A design change

b. A change in direct materials used

c. A change in the union contract

d. A change in direct labor pay rates

a. Correct! A design change is a measurable factor directly related to the amount of overhead cost associated with the production of a specific item.

Implementing an activity-based costing system requires a more careful analysis of which services?

a. The services creating the material costs

b. The services creating a single measure of activity

c. The services creating the overhead costs

d. The services creating the direct labor costs

c. Correct! Implementing an activity-based system requires a more careful analysis of the services creating the overhead costs in the first place.

Implementing an activity-based costing system requires a careful analysis of the products, projects, or services that create which cost?

a. Direct materials costs

b. Direct labor costs

c. Total costs

d. Overhead costs

d. Correct! Implementing an activity-based costing system requires a careful analysis of the products, projects, or services that create the overhead costs in the first place.

Which statement describes activity-based costing (ABC)?

a. ABC includes only manufacturing costs in calculating product costs.

b. ABC includes only costs related to selling and distributing the product.

c. ABC considers nonmanufacturing and manufacturing costs.

d. ABC considers only manufacturing costs in evaluating product costs.

c. Correct! ABC considers both nonmanufacturing and manufacturing costs, which can be associated, both directly and indirectly, in the manufacturing of a product.

What is different about allocating overhead costs using the activity-based costing method versus the traditional method?

a. Overhead is ignored when using the activity-based costing method.

b. Overhead is ignored when using the traditional method of overhead allocation.

c. Overhead is allocated based on a variety of activity measures when using activity-based costing.

d. Overhead is allocated based on a single measure of activity when using activity-based costing.

c. Correct! Overhead is allocated based on a variety of activity measures when using activity-based costing.

Smartistry is producing a custom-made airplane for Alliah Airlines. In particular, one part of the production process for each plane includes custom-made passenger seats, which differ in both comfort and size in first class, business class, and economy class.

Which overhead allocation method should Smartistry use to determine the total cost of each passenger seat in each class of these airplanes?

a. Traditional costing

b. Indirect costing

c. Activity-based costing

d. Direct costing

c. Correct! Because the comfort, size, and complexity of the installation of these seats differ between first, business, and economy class, using activity-based costing would be the most appropriate method to allocate overhead costs in this situation.

In which setting is the use of an ABC overhead allocation system appropriate?

a. Operations involve a variety of different products and processes.

b. Products are different, but the processes are roughly the same.

c. All products being manufactured are the same.

d. All projects and processes in the manufacturing process are the same.

a. Correct! With an activity-based costing (ABC) overhead allocation method, overhead is allocated based on several different measures of activity, which are called cost drivers. Overhead is not allocated based on any particular single measure of activity or single cost driver. Operations involving a variety of different products and processes are well suited to apply the ABC overhead allocation system to allocate overhead.

In which setting is the use of a traditional overhead allocation system most appropriate for allocating manufacturing overhead costs?

a. When multiple processes have been identified as generating the nonmanufacturing overhead costs

b. When multiple products being manufactured require different manufacturing processes

c. When multiple processes have been identified as generating the manufacturing overhead costs

d. When multiple products being manufactured require similar manufacturing processes

d. Correct! When multiple products being manufactured require similar manufacturing processes, the use of a traditional overhead allocation system is most appropriate for allocating manufacturing overhead costs.

Which statement correctly describes the traditional approach of allocating overhead services for products having special design requirements?

a. The traditional approach overstates the amount of overhead services being consumed for products that have special design requirements, are associated with additional inspections, or which necessitate careful monitoring by a supervisor.

b. The traditional approach eliminates the amount of overhead services being consumed for products that have special design requirements, are associated with additional inspections, or which necessitate careful monitoring by a supervisor.

c. The traditional approach reclassifies (as part of gross profit) the amount of overhead services being consumed for products that have special design requirements, are associated with additional inspections, or which necessitate careful monitoring by a supervisor.

d. The traditional approach understates the amount of overhead services being consumed for products that have special design requirements, are associated with additional inspections, or which necessitate careful monitoring by a supervisor.

d. Correct! Allocating overhead based on the number of direct labor hours, as is done with a traditional approach, understates the amount of overhead services being consumed in the creation of products, projects, or process with special needs, such as careful monitoring or inspections as the product is being manufactured.

Why is a traditional overhead allocation system of using direct labor hours to allocate overhead to products, projects, or processes simple to implement?

a. Because maintenance, supervisor, and training costs are ignored in the allocation to each product, project, and process

b. Because the same dollar amount of overhead is allocated to each product, project, and process

c. Because direct labor hours are routinely tracked as part of tracing direct labor costs to products, projects, and processes

d. Because direct materials costs are ignored in the allocation to each product, project, and process

c. Correct! A traditional overhead allocation system is simple to implement because direct labor hours are routinely tracked as part of tracing direct labor costs to products, projects, and processes.

In addition to better cost allocation, what benefit comes from creating and using an ABC overhead allocation system?

a. Reduction in both sales and income taxes

b. Better understanding of the underlying business processes

c. Increase in selling prices through demand management maximization

d. Reduction in direct labor costs

b. Correct! In the right setting, when a company's operations involve a variety of different products and processes, ABC analysis not only results in a better allocation of overhead costs, but it also results in a better understanding of the underlying business processes when those business processes are analyzed.

What is a cost pool?

A cost pool is a group of indirect costs that are being grouped together for allocation on the basis of some cost allocation base. Cost pools can range from very broad, such as all plant overhead costs, to very narrow, such as the cost of operating a specific machine.

In an ice cream production setting, how does the management accountant determine how much of the factory machine cleaners' total wages should be assigned to the "changing ice cream batches" cost pool?

a. Analyze what fraction of the machine cleaners' time is typically taken up in activities associated with changing ice cream batches

b. Examine the trend of machine cleaner wage increases over the past five years

c. Multiply machine cleaner wages by the ratio of direct materials costs to direct labor costs

d. Compute the total direct labor hours of all workers in the production facility associated with changing ice cream batches

a. Correct! Identifying how much of the factory machine cleaners' total wages should be assigned to the "changing ice cream batches" cost pool requires a careful analysis of the fraction of the machine cleaners' time typically taken up in the activities required to change the factory from making a batch of one ice cream flavor to making a batch of a different flavor.

What is the first step for a company in implementing an ABC overhead allocation system?

a. Determine what activities are causing the direct costs associated with production

b. Determine what activities are causing the direct labor costs specifically

c. Determine what activities are causing the direct material costs specifically

d. Determine what activities are causing the miscellaneous costs associated with production

d. Correct! The first step for a company implementing an ABC overhead system is to determine which activities are causing the overhead costs.

What is an important point for companies to remember when deciding whether to implement an ABC overhead allocation system?

a. When implementing an ABC overhead system, it is not important to identify specific business activities that are causing specifically the direct material costs.

b. Companies that understand their costs have an advantage over their competitors that do not understand their costs.

c. When implementing an ABC overhead system, it is not important to identify specific business activities that are causing specifically the direct labor costs.

d. Companies understanding their costs do not have an advantage over their competitors who do not understand their costs.

b. Correct! Companies that understand their costs have an advantage over their competitors that do not understand their costs. For example, companies that understand their costs are able to strategically price their products to a greater extent than companies who do not understand their own costs and thus price their products blindly without such available knowledge.

What does identifying the overhead costs associated with a particular production cost pool require?

a. Analyzing how indirect production personnel involved in a production process spend their time during their breaks during the workday

b. Analyzing how indirect production personnel involved in a production process spend their time during the workday

c. Analyzing how the CEO and the CFO spend their time during the workday

d. Analyzing how sales and marketing personnel spend their time during the workday

b. Correct! Identifying how indirect production personnel involved in a production process spend their time during the workday helps a company identify the overhead costs associated with a particular production cost pool.

What is the collection of overhead costs associated with a specific overhead cost activity called?

a. Cost pool

b. Direct cost pool

c. Indirect materials pool

d. Indirect labor pool

a. Correct! A cost pool is a collection of overhead costs associated with a specific overhead activity.

The cost of preparing documents to order ingredients from various suppliers is an example of which type of ABC support activity?

a. Unit activity

b. Facility support activity

c. Batch activity

d. Product line activity

d. Correct! Preparing documents to order ingredients from various suppliers is an example of a product line activity.

The cost of special machine maintenance, which is necessary because of the frequent starting and stopping of the machines, is an example of which type of ABC support activity?

a. Product line activity

b. Batch activity

c. Unit activity

d. Facility support activity

b. Correct! The cost of special machine maintenance, which is necessary because the machines are frequently starting and stopping, is an example of a batch ABC support activity.

The depreciation of the factory building is an example of which type of ABC support activity?

a. Batch activity

b. Product line activity

c. Unit activity

d. Facility support activity

d. Correct! The depreciation of the factory is an example of an ABC facility support activity.

The cost of electricity to operate the machines in a factory is an example of which type of ABC support activity?

a. Facility support activity

b. Batch activity

c. Product line activity

d. Unit activity

d. Correct! The cost of electricity to operate machines in a factory is an example of an ABC unit support activity.

The security safeguards implemented to protect the manufacturing facility are an example of which type of ABC support activity?

a. Batch activity

b. Facility support activity

c. Product line activity

d. Unit activity

b. Correct! The security safeguards implemented to protect the manufacturing facility are an example of a facility support activity.

How is an ABC cost driver activity rate computed?

a. Direct labor hours divided by the cost pool total

b. Cost pool total divided by the number of cost driver events

c. Cost driver events divided by the number of product lines

d. Selling price total divided by the number of cost driver events

b. Correct! An ABC cost driver activity rate is computed as the overhead cost pool total divided by the number of cost driver events.

A company has a warehouse supervisor whose annual costs to the company are $40,000. The warehouse is used to receive and store packaged goods in boxes. Once a customer's order is received, the boxes are removed and shipped. The company is trying to determine what the best way is to allocate the warehouse supervisor's annual costs to each customer order that is shipped during the year.

What is the appropriate cost driver to allocate the warehouse supervisor's annual costs to each customer order?

a. The number of boxes received in the warehouse throughout the year

b. The number of boxes in the warehouse at the beginning of the year

c. The number of boxes shipped to customers throughout the year

d. The number of boxes in the warehouse at the end of the year

c. Correct! The number of boxes shipped to customers throughout the year is the appropriate cost driver in this situation as the company's objective is to determine the best way to allocate the warehouse person's annual costs to each customer order shipped during the year.

Which is an advantage of using ABC overhead costing over traditional overhead costing?

a. ABC allocates manufacturing overhead more accurately to products and processes that use the various activities.

b. The collection and preparation of ABC cost data is less time consuming than traditional overhead allocation.

c. The collection of ABC costing data is less expensive than traditional overhead allocation.

d. ABC is more useful than traditional overhead costing when all different overhead items can be accurately allocated using the same cost driver.

a. Correct! A key advantage of ABC costing is that even though it may take more time and cost more, it always allocates manufacturing overhead more accurately to products and processes that use the activity.

Which is the definition of activity-based costing (ABC)?

a. A costing method that assigns direct labor to related products and services in a less arbitrarily way than traditional costing systems

b. A costing method that assigns overhead and indirect costs to related products and services in a less arbitrarily way than traditional costing systems

c. A costing method that assigns direct material, direct labor, and manufacturing overhead costs to related products and services

d. A costing method that assigns direct materials to related products and services in a less arbitrarily way than traditional costing systems

b. Correct! ABC is a product costing method that assigns manufacturing overhead costs to products and services based on the relationships that exist between specific overhead costs and activity drivers that determine how much of each overhead item is used.

Which category of overhead includes factory building depreciation, factory insurance, and factory security costs?

a. Facility support

b. Product line

c. Product line

d. Unit

a. Correct! Factory building depreciation, factory insurance, and factory security are overhead costs that remain the same no matter how much production goes on inside the factory. These overhead costs are classified as the cost of keeping the factory open and are given the general label of "facility support costs."

What production-related cost driver is typically used for facility support costs?

a. The number of product lines is the cost driver for facility support costs.

b. Production-related cost drivers are limited in nature for facility support costs.

c. Production-related cost drivers are not used for facility support costs.

d. The number of production batches is the cost driver for facility support costs.

c. Correct! There is no production-related cost driver that matches up with changes in the amount of overhead cost associated with facility support costs.

What would activities such as machine setups, consumed power, and purchase orders be considered as when using ABC costing?

a. Manufacturing overhead costs

b. Cost drivers

c. Cost driver rates

d. Cost pools

b. Correct! Cost drivers are the activities that cause or relate to manufacturing overhead costs be incurred.

In which setting is the use of an ABC overhead allocation system appropriate?

a. When all products are the same

b. When operations involve a variety of different products and processes

c. When products are different, but the processes are roughly the same

d. When all projects and processes are the same

b. Correct! An activity-based ABC overhead allocation system is appropriate when the nature of the production process differs substantially across different products.