Chapter 5 Activity-Based Costing and Activity-Based Management
Objective 5.1
1) If products are different, then for costing purposes:
A) an ABC costing system will yield more accurate cost numbers
B) a simple costing system should be used
C) a single indirect-cost rate should be used
D) none of the above
Answer: A
Diff: 1
Terms: activity-based costing (ABC)
Objective: 1
AACSB: Reflective thinking
2) Overcosting a particular product may result in:
A) loss of market share
B) pricing the product too low
C) operating efficiencies
D) understating total product costs
Answer: A
Diff: 2
Terms: product undercosting
Objective: 1
AACSB: Analytical skills
3) Undercosting of a product is most likely to result from:
A) misallocating direct labor costs
B) underpricing the product
C) overcosting another product
D) overstating total product costs
Answer: C
Diff: 2
Terms: product overcosting
Objective: 1
AACSB: Reflective thinking
4) A company produces three products; if one product is overcosted then:
A) one product is undercosted
B) one or two products are undercosted
C) two products are undercosted
D) no products are undercosted
Answer: B
Diff: 1
Terms: product-cost cross-subsidization
Objective: 1
AACSB: Ethical reasoning
1
Copyright © 2012 Pearson Education, Inc.
,5) Misleading cost numbers are most likely the result of misallocating:
A) direct material costs
B) direct manufacturing labor costs
C) indirect costs
D) All of these answers are correct.
Answer: C
Diff: 2
Terms: activity-based costing (ABC)
Objective: 1
AACSB: Reflective thinking
6) An accelerated need for refined cost systems is due to:
A) global monopolies
B) rising prices
C) intense competition
D) a shift toward increased direct costs
Answer: C
Diff: 2
Terms: activity-based costing (ABC)
Objective: 1
AACSB: Ethical reasoning
7) The use of a single indirect-cost rate is more likely to:
A) undercost high-volume simple products
B) undercost low-volume complex products
C) undercost lower-priced products
D) Both B and C are correct.
Answer: B
Diff: 2
Terms: product undercosting
Objective: 1
AACSB: Reflective thinking
8) Uniformly assigning the costs of resources to cost objects when those resources are actually used in a
nonuniform way is called:
A) overcosting
B) undercosting
C) peanut-butter costing
D) department costing
Answer: C
Diff: 1
Terms: product-cost cross-subsidization
Objective: 1
AACSB: Reflective thinking
2
Copyright © 2012 Pearson Education, Inc.
,9) A top-selling product might actually result in losses for the company.
Answer: TRUE
Diff: 2
Terms: product undercosting
Objective: 1
AACSB: Analytical skills
10) Companies that overcost products will most likely lose market share.
Answer: TRUE
Diff: 2
Terms: product overcosting
Objective: 1
AACSB: Ethical reasoning
11) If companies increase market share in a given product line because their reported costs are less than
their actual costs, they will become more profitable in the long run.
Answer: FALSE
Explanation: The actual costs will increase because of the additional sales and the other product lines
(which are subsidizing the undercosting of the growing product line) will suffer. The net result will be
the company having a lower operating income than it could have had.
Diff: 2
Terms: product undercosting
Objective: 1
AACSB: Reflective thinking
12) As product diversity and indirect costs increase, it is usually best to switch away from an activity
based cost system to a broad averaging system.
Answer: FALSE
Explanation: The potential significant differences in costs relating to the products as well as the
magnitude of indirect costs make a more refined costing system more appropriate.
Diff: 2
Terms: activity-based costing (ABC)
Objective: 1
AACSB: Reflective thinking
13) If a company overcosts one of its products, then it will undercost at least one of its other products.
Answer: TRUE
Diff: 2
Terms: product-cost cross-subsidization
Objective: 1
AACSB: Ethical reasoning
14) Explain how a top-selling product may actually result in losses for the company.
Answer: If indirect costs are not properly allocated to the products, a product may appear to cost less
than it actually does cost to produce. If the selling price is based on these lower costs, the selling price
may actually be lower than the costs needed to produce the product resulting in losses for the company.
Diff: 1
Terms: product-cost cross-subsidization
Objective: 1
AACSB: Reflective thinking
3
Copyright © 2012 Pearson Education, Inc.
, Objective 5.2
1) Refining a cost system includes:
A) classifying as many costs as indirect costs as is feasible
B) creating as many cost pools as possible
C) identifying the activities involved in a process
D) seeking a lesser level of detail
Answer: C
Diff: 2
Terms: activity
Objective: 2
AACSB: Reflective thinking
2) Greater indirect costs are associated with:
A) specialized engineering drawings
B) quality specifications and testing
C) inventoried materials and material control systems
D) All of these answers are correct.
Answer: D
Diff: 1
Terms: product-cost cross-subsidization
Objective: 2
AACSB: Reflective thinking
3) Design of an ABC system requires:
A) that the job bid process be redesigned
B) that a cause-and-effect relationship exists between resource costs and individual activities
C) an adjustment to product mix
D) Both B and C are correct.
Answer: B
Diff: 1
Terms: activity-based costing (ABC)
Objective: 2
AACSB: Reflective thinking
4) Direct costs plus indirect costs equal total costs.
Answer: TRUE
Diff: 1
Terms: activity-based costing (ABC)
Objective: 2
AACSB: Reflective thinking
5) When refining a costing system, a company should classify as many costs as possible as direct costs.
Answer: TRUE
Diff: 1
Terms: refined costing system
Objective: 2
AACSB: Ethical reasoning
4
Copyright © 2012 Pearson Education, Inc.
Objective 5.1
1) If products are different, then for costing purposes:
A) an ABC costing system will yield more accurate cost numbers
B) a simple costing system should be used
C) a single indirect-cost rate should be used
D) none of the above
Answer: A
Diff: 1
Terms: activity-based costing (ABC)
Objective: 1
AACSB: Reflective thinking
2) Overcosting a particular product may result in:
A) loss of market share
B) pricing the product too low
C) operating efficiencies
D) understating total product costs
Answer: A
Diff: 2
Terms: product undercosting
Objective: 1
AACSB: Analytical skills
3) Undercosting of a product is most likely to result from:
A) misallocating direct labor costs
B) underpricing the product
C) overcosting another product
D) overstating total product costs
Answer: C
Diff: 2
Terms: product overcosting
Objective: 1
AACSB: Reflective thinking
4) A company produces three products; if one product is overcosted then:
A) one product is undercosted
B) one or two products are undercosted
C) two products are undercosted
D) no products are undercosted
Answer: B
Diff: 1
Terms: product-cost cross-subsidization
Objective: 1
AACSB: Ethical reasoning
1
Copyright © 2012 Pearson Education, Inc.
,5) Misleading cost numbers are most likely the result of misallocating:
A) direct material costs
B) direct manufacturing labor costs
C) indirect costs
D) All of these answers are correct.
Answer: C
Diff: 2
Terms: activity-based costing (ABC)
Objective: 1
AACSB: Reflective thinking
6) An accelerated need for refined cost systems is due to:
A) global monopolies
B) rising prices
C) intense competition
D) a shift toward increased direct costs
Answer: C
Diff: 2
Terms: activity-based costing (ABC)
Objective: 1
AACSB: Ethical reasoning
7) The use of a single indirect-cost rate is more likely to:
A) undercost high-volume simple products
B) undercost low-volume complex products
C) undercost lower-priced products
D) Both B and C are correct.
Answer: B
Diff: 2
Terms: product undercosting
Objective: 1
AACSB: Reflective thinking
8) Uniformly assigning the costs of resources to cost objects when those resources are actually used in a
nonuniform way is called:
A) overcosting
B) undercosting
C) peanut-butter costing
D) department costing
Answer: C
Diff: 1
Terms: product-cost cross-subsidization
Objective: 1
AACSB: Reflective thinking
2
Copyright © 2012 Pearson Education, Inc.
,9) A top-selling product might actually result in losses for the company.
Answer: TRUE
Diff: 2
Terms: product undercosting
Objective: 1
AACSB: Analytical skills
10) Companies that overcost products will most likely lose market share.
Answer: TRUE
Diff: 2
Terms: product overcosting
Objective: 1
AACSB: Ethical reasoning
11) If companies increase market share in a given product line because their reported costs are less than
their actual costs, they will become more profitable in the long run.
Answer: FALSE
Explanation: The actual costs will increase because of the additional sales and the other product lines
(which are subsidizing the undercosting of the growing product line) will suffer. The net result will be
the company having a lower operating income than it could have had.
Diff: 2
Terms: product undercosting
Objective: 1
AACSB: Reflective thinking
12) As product diversity and indirect costs increase, it is usually best to switch away from an activity
based cost system to a broad averaging system.
Answer: FALSE
Explanation: The potential significant differences in costs relating to the products as well as the
magnitude of indirect costs make a more refined costing system more appropriate.
Diff: 2
Terms: activity-based costing (ABC)
Objective: 1
AACSB: Reflective thinking
13) If a company overcosts one of its products, then it will undercost at least one of its other products.
Answer: TRUE
Diff: 2
Terms: product-cost cross-subsidization
Objective: 1
AACSB: Ethical reasoning
14) Explain how a top-selling product may actually result in losses for the company.
Answer: If indirect costs are not properly allocated to the products, a product may appear to cost less
than it actually does cost to produce. If the selling price is based on these lower costs, the selling price
may actually be lower than the costs needed to produce the product resulting in losses for the company.
Diff: 1
Terms: product-cost cross-subsidization
Objective: 1
AACSB: Reflective thinking
3
Copyright © 2012 Pearson Education, Inc.
, Objective 5.2
1) Refining a cost system includes:
A) classifying as many costs as indirect costs as is feasible
B) creating as many cost pools as possible
C) identifying the activities involved in a process
D) seeking a lesser level of detail
Answer: C
Diff: 2
Terms: activity
Objective: 2
AACSB: Reflective thinking
2) Greater indirect costs are associated with:
A) specialized engineering drawings
B) quality specifications and testing
C) inventoried materials and material control systems
D) All of these answers are correct.
Answer: D
Diff: 1
Terms: product-cost cross-subsidization
Objective: 2
AACSB: Reflective thinking
3) Design of an ABC system requires:
A) that the job bid process be redesigned
B) that a cause-and-effect relationship exists between resource costs and individual activities
C) an adjustment to product mix
D) Both B and C are correct.
Answer: B
Diff: 1
Terms: activity-based costing (ABC)
Objective: 2
AACSB: Reflective thinking
4) Direct costs plus indirect costs equal total costs.
Answer: TRUE
Diff: 1
Terms: activity-based costing (ABC)
Objective: 2
AACSB: Reflective thinking
5) When refining a costing system, a company should classify as many costs as possible as direct costs.
Answer: TRUE
Diff: 1
Terms: refined costing system
Objective: 2
AACSB: Ethical reasoning
4
Copyright © 2012 Pearson Education, Inc.
