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Chapter 6: Activity-Based, Variable, and Absorption Costing

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Chapter 6: Activity-Based, Variable, and Absorption Costing

18 problems · 0 figures

Multiple Choice 6.1 §6.1 source ↗

Active Frame, Inc., manufactures clear and tinted sport glasses. The manufacturing of clear glasses takes 45,000 direct labor hours and involves 1,700 parts and 115 inspections. The manufacturing of tinted glasses takes 115,000 direct labor hours and involves 1,400 parts and 450 inspections. The traditional method applies $560,000 of overhead on the basis of direct labor hours. What is the amount of overhead per direct labor hour applied to the clear glass products?
  1. a.
    $933.33
  2. b.
    $157,500
  3. c.
    $322.500
  4. d.
    $402,500

Answer

B. $157,500

Multiple Choice 6.3 §6.2 source ↗

Which is not a step in analyzing the cost driver for manufacturing overhead?
  1. a.
    identify the cost
  2. b.
    identify non-value-added costs
  3. c.
    analyze the effect on manufacturing overhead
  4. d.
    identify the correlation between the potential driver and manufacturing overhead

Answer

B. identify non-value-added costs

Multiple Choice 6.5 §6.3 source ↗

Which of the following is a reason a company would implement activity-based costing?
  1. a.
    The cost of record keeping is high.
  2. b.
    The additional data obtained through traditional allocation are not worth the cost.
  3. c.
    They want to improve the data on which decisions are made.
  4. d.
    A company only has one cost driver.

Answer

C. They want to improve the data on which decisions are made.

Multiple Choice 6.7 §6.3 source ↗

A company anticipates the cost to heat the building will be $21,000. Product A takes up 500 square feet of space, while Product B takes up 200 square feet. The activity rate per product using activity-based costing would be which of the following?
  1. a.
    $30/square foot
  2. b.
    $4.20/square foot
  3. c.
    $11/square foot
  4. d.
    $15.20/square foot

Answer

A. $30/square foot

Multiple Choice 6.9 §6.3 source ↗

Which is not a step in activity-based costing?
  1. a.
    identify the activities performed by the organization
  2. b.
    identify the cost driver(s) associated with each activity
  3. c.
    compute a cost rate per production
  4. d.
    assign costs to products by multiplying the cost driver rate by the volume of the cost driver units consumed by the product

Answer

C. compute a cost rate per production

Multiple Choice 6.11 §6.3 source ↗

Which is not a task typically associated with ABC systems?
  1. a.
    calculating the overhead application rate for each cost pool
  2. b.
    applying a single cost rate
  3. c.
    identifying a cost driver
  4. d.
    more correctly allocating overhead costs

Answer

B. applying a single cost rate

Multiple Choice 6.13 §6.4 source ↗

Activity-based costing systems:
  1. a.
    use a single predetermined overhead rate based on machine hours instead of on direct labor
  2. b.
    frequently increase the overhead allocation to at least one product while decreasing the overhead allocation to at least one other product
  3. c.
    limit the number of cost pools
  4. d.
    always result in an increase of at least one product’s selling price

Answer

B. frequently increase the overhead allocation to at least one product while decreasing the overhead allocation to at least one other product

Multiple Choice 6.15 §6.5 source ↗

Absorption costing is also referred to as:
  1. a.
    direct costing
  2. b.
    marginal costing
  3. c.
    full costing
  4. d.
    variable costing

Answer

C. full costing

Multiple Choice 6.17 §6.5 source ↗

Under absorption costing, a unit of product includes which costs?
  1. a.
    direct material, direct labor, and manufacturing overhead
  2. b.
    direct material, direct labor, and variable manufacturing overhead
  3. c.
    direct material, direct labor, and fixed manufacturing overhead
  4. d.
    direct material, direct labor, and all variable manufacturing overhead

Answer

A. direct material, direct labor, and manufacturing overhead

Multiple Choice 6.19 §6.5 source ↗

When the number of units in ending inventory increases through the year, which of the following is true?
  1. a.
    Net income is the same for variable and absorption costing.
  2. b.
    Net income is higher for variable costing than for absorption costing.
  3. c.
    Net income is higher for absorption costing than for variable costing.
  4. d.
    There is no relationship between net income and the costing method.

Answer

C. Net income is higher for absorption costing than for variable costing.

Question 6.1 §6.1 source ↗

What is the predetermined overhead rate, and when is it typically estimated?

Answer

The predetermined overhead rate is the amount of manufacturing overhead that is estimated to be applied to each product or department depending on the cost system used (job order costing or process costing). It typically is estimated at the beginning of each period by dividing the estimated manufacturing overhead by an activity base. While it is most commonly a year, the period can be a year, quarter, or month as determined by management. In traditional allocation systems, that base is typically direct labor hours, direct labor dollars, or machine hours. In activity-based costing systems, the activity base is one or more cost drivers.

Question 6.3 §6.2 source ↗

What is the advantage of labeling activities as value added or nonvalue added?

Answer

Non-value-added costs can often be eliminated since they are rarely essential, and identifying them helps managers reduce their costs.

Question 6.5 §6.2 source ↗

For each cost pool, identify an appropriate cost driver.

A. order department

B. accounts receivable processing

C. catering

D. raw material inventory

Answer

Answers may vary but should be similar to the following: A. number of orders; B. number of customers; C. number of meals; D. number of material requisitions received.

Question 6.7 §6.3 source ↗

What are the primary differences between traditional and activity-based costing?

Answer

Activity-based costing has multiple cost drivers and focuses on the overhead-related activities performed during manufacturing. Traditional allocation has a single unit-level base for allocating overhead and focuses on the units of production.

Question 6.9 §6.3 source ↗

How are costs allocated in an ABC system?

Answer

Estimated overhead costs are first allocated to activity cost pools. Then, an allocation rate is determined based on the estimated usage of the cost driver for that pool. Then the costs are allocated to each product based on that product’s cost driver usage.

Question 6.11 §6.4 source ↗

Why is it important to know the true cost for a product or service?

Answer

The traditional method of applying overhead does not allocate overhead as precisely as with the ABC method. Management relies on the costing information when setting selling prices and bidding on service jobs. If the costing method is not accurate, some products may be considered profitable under traditional allocation, when those products are actually operating at a loss.

Question 6.13 §6.5 source ↗

Why would managers prefer variable costing over absorption costing?

Answer

While variable costing is not acceptable for financial reporting purposes, some managers prefer variable costing because they believe fixed costs are period costs and do not change during the period. Variable costing separates variable and fixed manufacturing overhead, and using only variable costs allows them to make decisions based on the more reliable variations in unit costs.

Question 6.15 §6.5 source ↗

Can a company gather information for both variable and absorption costing systems?

Answer

Yes, as long as the system computes the amount of fixed manufacturing overhead per unit. The total amount can be expensed under variable costing and assigned to overhead produced during absorption costing. This will allow a portion to be included in ending inventory for absorption costing and not included for variable costing.

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Problems and answers are adapted from Principles of Accounting, Volume 2: Managerial Accounting by Mitchell Franklin, Patty Graybeal and Dixon Cooper, OpenStax, and are used under the CC BY-NC-SA 4.0 licence. Access for free at https://openstax.org/books/principles-managerial-accounting/pages/1-why-it-matters. Illustrations: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license. This adaptation is released under the same licence, is non-commercial, and is neither affiliated with nor endorsed by OpenStax or Rice University.