OpenStax Principles of Accounting, Volume 2: Managerial Accounting
Chapter 6: Activity-Based, Variable, and Absorption Costing
Principles of Accounting, Volume 2: Managerial Accounting
Chapter 6: Activity-Based, Variable, and Absorption Costing
Multiple Choice
1. LO 6.1 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?
A. $933.33
B. $157,500
C. $322.500
D. $402,500
Solution
B. The overhead rate = $560,000/(45,000 + 115,000) = $3.50 per direct labor hour. The labor
applied to the clear product = $3.50 per direct labor hour × 45,000 direct labor hours.
2. LO 6.1 TyeDye Lights makes two products: Party and Holiday. It takes 80,900 direct labor
hours to manufacture the Party Line and 93,500 direct labor hours to manufacture the Holiday
Line. Overhead consists of $225,000 in the machine setup cost pool and $149,960 in the
packaging cost pool. The machine setup pool has 52,000 setups for the Party product and 98,000
setups for the Holiday product. The packaging cost pool has 26,000 parts in the Party product
and 39,200 parts for the Holiday product. Using the traditional cost method of direct labor hours,
what is the predetermined overhead rate?
A. $1.50 per direct labor hour
B. $2.15 per direct labor hour
C. $2.30 per direct labor hour
D. $3.80 per direct labor hour
Solution
B ($225,000 + $149,960)/(80,900 + 93,500)
3. LO 6.2 Which is not a step in analyzing the cost driver for manufacturing overhead?
A. identify the cost
B. identify non-value-added costs
C. analyze the effect on manufacturing overhead
D. identify the correlation between the potential driver and manufacturing overhead
Solution
B
4. LO 6.2 Overhead costs are assigned to each product based on ________.
A. the proportion of that product’s use of the cost driver
B. a predetermined overhead rate for a single cost driver
C. price of the product
D. machine hours per product
Solution
A
5. LO 6.3 Which of the following is a reason a company would implement activity-based
costing?
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,OpenStax Principles of Accounting, Volume 2: Managerial Accounting
Chapter 6: Activity-Based, Variable, and Absorption Costing
A. The cost of record keeping is high.
B. The additional data obtained through traditional allocation are not worth the cost.
C. They want to improve the data on which decisions are made.
D. A company only has one cost driver.
Solution
C
6. LO 6.3 Which is the correct formula for computing the overhead rate?
A. estimated use of the cost driver for production/estimated overhead for the activity
B. estimated overhead for the product/estimated use of the cost driver for the activity
C. estimated use of the cost driver for production/estimated overhead for the activity
D. estimated overhead for the activity/estimated use of the cost driver for the activity
Solution
D
7. LO 6.3 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?
A. $30/square foot
B. $4.20/square foot
C. $11/square foot
D. $15.20/square foot
Solution
A
8. LO 6.3 A company calculated the predetermined overhead based on an estimated overhead of
$70,000, and the activity for the cost driver was estimated as 2,500 hours. If product A utilized
1,350 hours and product B utilized 1,100 hours, what was the total amount of overhead assigned
to the products?
A. $35,000
B. $30,800
C. $37,800
D. $68,600
Solution
D
9. LO 6.3 Which is not a step in activity-based costing?
A. identify the activities performed by the organization
B. identify the cost driver(s) associated with each activity
C. compute a cost rate per production
D. assign costs to products by multiplying the cost driver rate by the volume of the cost
driver units consumed by the product
Solution
C
10. LO 6.3 What is the proper order of tasks in an ABC system?
A. identify the cost drivers, assign the costs to the products, calculate the overhead
application rate for each cost pool, identify the cost pools
B. assign the costs to the products, identify the cost drivers, calculate the overhead
application rate for each cost pool, identify the cost pools
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,OpenStax Principles of Accounting, Volume 2: Managerial Accounting
Chapter 6: Activity-Based, Variable, and Absorption Costing
C. identify the cost drivers, identify the cost pools, calculate the overhead application rate
for each cost pool, assign the costs to the products
D. identify the cost pools, identify the cost drivers, calculate the overhead application rate
for each cost pool, assign the costs to the products
Solution
D
11. LO 6.3 Which is not a task typically associated with ABC systems?
A. calculating the overhead application rate for each cost pool
B. applying a single cost rate
C. identifying a cost driver
D. more correctly allocating overhead costs
Solution
B
12. LO 6.4 Which statement is correct?
A. Activity-based cost systems are less costly than traditional cost systems.
B. Activity-based cost systems are easier to implement than traditional cost systems.
C. Activity-based cost systems are more accurate than traditional cost systems.
D. Activity-based cost systems provide the same data as traditional cost systems.
Solution
C
13. LO 6.4 Activity-based costing systems:
A. use a single predetermined overhead rate based on machine hours instead of on direct
labor
B. frequently increase the overhead allocation to at least one product while decreasing the
overhead allocation to at least one other product
C. limit the number of cost pools
D. always result in an increase of at least one product’s selling price
Solution
B
14. LO 6.4 Activity-based costing is preferable in a system:
A. when multiple products have similar product volumes and costs
B. with a large direct labor cost as a percentage of the total product cost
C. with multiple, diverse products
D. where management needs to support an increase in sales price
Solution
C
15. LO 6.5 Absorption costing is also referred to as:
A. direct costing
B. marginal costing
C. full costing
D. variable costing
Solution
C
16. LO 6.5 Under variable costing, a unit of product includes which costs?
A. direct material, direct labor, and manufacturing overhead
B. direct material, direct labor, and variable manufacturing overhead
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, OpenStax Principles of Accounting, Volume 2: Managerial Accounting
Chapter 6: Activity-Based, Variable, and Absorption Costing
C. direct material, direct labor, and fixed manufacturing overhead
D. direct material, direct labor, and all variable manufacturing overhead
Solution
B
17. LO 6.5 Under absorption costing, a unit of product includes which costs?
A. direct material, direct labor, and manufacturing overhead
B. direct material, direct labor, and variable manufacturing overhead
C. direct material, direct labor, and fixed manufacturing overhead
D. direct material, direct labor, and all variable manufacturing overhead
Solution
A
18. LO 6.5 A downside to absorption costing is:
A. not including fixed manufacturing overhead in the cost of the product
B. that it is not really useful for managerial decisions
C. that it is not allowable under GAAP
D. that it is not well designed for cost-volume-profit analysis
Solution
D
19. LO 6.5 When the number of units in ending inventory increases through the year, which of
the following is true?
A. Net income is the same for variable and absorption costing.
B. Net income is higher for variable costing than for absorption costing.
C. Net income is higher for absorption costing than for variable costing.
D. There is no relationship between net income and the costing method.
Solution
C
20. LO 6.5 Product costs under variable costing are typically:
A. higher than under absorption costing
B. lower than under absorption costing
C. the same as with absorption costing
D. higher than absorption costing when inventory increases
Solution
B
Questions
1. LO 6.1 What is the predetermined overhead rate, and when is it typically estimated?
Solution
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.
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Chapter 6: Activity-Based, Variable, and Absorption Costing
Principles of Accounting, Volume 2: Managerial Accounting
Chapter 6: Activity-Based, Variable, and Absorption Costing
Multiple Choice
1. LO 6.1 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?
A. $933.33
B. $157,500
C. $322.500
D. $402,500
Solution
B. The overhead rate = $560,000/(45,000 + 115,000) = $3.50 per direct labor hour. The labor
applied to the clear product = $3.50 per direct labor hour × 45,000 direct labor hours.
2. LO 6.1 TyeDye Lights makes two products: Party and Holiday. It takes 80,900 direct labor
hours to manufacture the Party Line and 93,500 direct labor hours to manufacture the Holiday
Line. Overhead consists of $225,000 in the machine setup cost pool and $149,960 in the
packaging cost pool. The machine setup pool has 52,000 setups for the Party product and 98,000
setups for the Holiday product. The packaging cost pool has 26,000 parts in the Party product
and 39,200 parts for the Holiday product. Using the traditional cost method of direct labor hours,
what is the predetermined overhead rate?
A. $1.50 per direct labor hour
B. $2.15 per direct labor hour
C. $2.30 per direct labor hour
D. $3.80 per direct labor hour
Solution
B ($225,000 + $149,960)/(80,900 + 93,500)
3. LO 6.2 Which is not a step in analyzing the cost driver for manufacturing overhead?
A. identify the cost
B. identify non-value-added costs
C. analyze the effect on manufacturing overhead
D. identify the correlation between the potential driver and manufacturing overhead
Solution
B
4. LO 6.2 Overhead costs are assigned to each product based on ________.
A. the proportion of that product’s use of the cost driver
B. a predetermined overhead rate for a single cost driver
C. price of the product
D. machine hours per product
Solution
A
5. LO 6.3 Which of the following is a reason a company would implement activity-based
costing?
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,OpenStax Principles of Accounting, Volume 2: Managerial Accounting
Chapter 6: Activity-Based, Variable, and Absorption Costing
A. The cost of record keeping is high.
B. The additional data obtained through traditional allocation are not worth the cost.
C. They want to improve the data on which decisions are made.
D. A company only has one cost driver.
Solution
C
6. LO 6.3 Which is the correct formula for computing the overhead rate?
A. estimated use of the cost driver for production/estimated overhead for the activity
B. estimated overhead for the product/estimated use of the cost driver for the activity
C. estimated use of the cost driver for production/estimated overhead for the activity
D. estimated overhead for the activity/estimated use of the cost driver for the activity
Solution
D
7. LO 6.3 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?
A. $30/square foot
B. $4.20/square foot
C. $11/square foot
D. $15.20/square foot
Solution
A
8. LO 6.3 A company calculated the predetermined overhead based on an estimated overhead of
$70,000, and the activity for the cost driver was estimated as 2,500 hours. If product A utilized
1,350 hours and product B utilized 1,100 hours, what was the total amount of overhead assigned
to the products?
A. $35,000
B. $30,800
C. $37,800
D. $68,600
Solution
D
9. LO 6.3 Which is not a step in activity-based costing?
A. identify the activities performed by the organization
B. identify the cost driver(s) associated with each activity
C. compute a cost rate per production
D. assign costs to products by multiplying the cost driver rate by the volume of the cost
driver units consumed by the product
Solution
C
10. LO 6.3 What is the proper order of tasks in an ABC system?
A. identify the cost drivers, assign the costs to the products, calculate the overhead
application rate for each cost pool, identify the cost pools
B. assign the costs to the products, identify the cost drivers, calculate the overhead
application rate for each cost pool, identify the cost pools
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,OpenStax Principles of Accounting, Volume 2: Managerial Accounting
Chapter 6: Activity-Based, Variable, and Absorption Costing
C. identify the cost drivers, identify the cost pools, calculate the overhead application rate
for each cost pool, assign the costs to the products
D. identify the cost pools, identify the cost drivers, calculate the overhead application rate
for each cost pool, assign the costs to the products
Solution
D
11. LO 6.3 Which is not a task typically associated with ABC systems?
A. calculating the overhead application rate for each cost pool
B. applying a single cost rate
C. identifying a cost driver
D. more correctly allocating overhead costs
Solution
B
12. LO 6.4 Which statement is correct?
A. Activity-based cost systems are less costly than traditional cost systems.
B. Activity-based cost systems are easier to implement than traditional cost systems.
C. Activity-based cost systems are more accurate than traditional cost systems.
D. Activity-based cost systems provide the same data as traditional cost systems.
Solution
C
13. LO 6.4 Activity-based costing systems:
A. use a single predetermined overhead rate based on machine hours instead of on direct
labor
B. frequently increase the overhead allocation to at least one product while decreasing the
overhead allocation to at least one other product
C. limit the number of cost pools
D. always result in an increase of at least one product’s selling price
Solution
B
14. LO 6.4 Activity-based costing is preferable in a system:
A. when multiple products have similar product volumes and costs
B. with a large direct labor cost as a percentage of the total product cost
C. with multiple, diverse products
D. where management needs to support an increase in sales price
Solution
C
15. LO 6.5 Absorption costing is also referred to as:
A. direct costing
B. marginal costing
C. full costing
D. variable costing
Solution
C
16. LO 6.5 Under variable costing, a unit of product includes which costs?
A. direct material, direct labor, and manufacturing overhead
B. direct material, direct labor, and variable manufacturing overhead
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, OpenStax Principles of Accounting, Volume 2: Managerial Accounting
Chapter 6: Activity-Based, Variable, and Absorption Costing
C. direct material, direct labor, and fixed manufacturing overhead
D. direct material, direct labor, and all variable manufacturing overhead
Solution
B
17. LO 6.5 Under absorption costing, a unit of product includes which costs?
A. direct material, direct labor, and manufacturing overhead
B. direct material, direct labor, and variable manufacturing overhead
C. direct material, direct labor, and fixed manufacturing overhead
D. direct material, direct labor, and all variable manufacturing overhead
Solution
A
18. LO 6.5 A downside to absorption costing is:
A. not including fixed manufacturing overhead in the cost of the product
B. that it is not really useful for managerial decisions
C. that it is not allowable under GAAP
D. that it is not well designed for cost-volume-profit analysis
Solution
D
19. LO 6.5 When the number of units in ending inventory increases through the year, which of
the following is true?
A. Net income is the same for variable and absorption costing.
B. Net income is higher for variable costing than for absorption costing.
C. Net income is higher for absorption costing than for variable costing.
D. There is no relationship between net income and the costing method.
Solution
C
20. LO 6.5 Product costs under variable costing are typically:
A. higher than under absorption costing
B. lower than under absorption costing
C. the same as with absorption costing
D. higher than absorption costing when inventory increases
Solution
B
Questions
1. LO 6.1 What is the predetermined overhead rate, and when is it typically estimated?
Solution
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.
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