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Activity Based Costing (Practice Quiz)

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Author:
Harold Averkamp, CPA, MBA

For multiple-choice and true/false questions, simply press or click on what you think is the correct answer. For fill-in-the-blank questions, press or click on the blank space provided.

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1.
Activity based costing is considered to be a traditional costing method.

True

Wrong.

False

Right!
2.
Under ABC, indirect manufacturing costs are predominantly assigned on the basis of direct machine hours.

True

Wrong.

False

Right!
3.
Which of the following would not be included in a product's cost for inventory valuation for the financial statements?

Factory Supplies

Wrong.
Factory supplies are included in manufacturing overhead.

Quality Control

Wrong.
Quality control costs are included in manufacturing overhead.

Interest Expense

Right!
Interest expense is an expense associated with the financing function and is not considered part of the manufacturing function.
4.
Which would be the least favorable basis for allocating manufacturing overhead for a factory with automated equipment and a significant variation of services by its indirect labor?

ABC

Wrong.
ABC is the most favorable basis for allocating a variety of services provided by indirect labor.

Direct Labor Hours

Right!

Machine Hours

Wrong.
Since the equipment is automated, direct labor hours would be the least favorable basis.
5.
Which would be the most favorable basis for allocating manufacturing overhead for a factory with automated equipment and a significant variation of services by its indirect labor?

ABC

Right!

Direct Labor Hours

Wrong.
It is highly unlikely that direct labor hours will correlate with the indirect labor cost.

Machine Hours

Wrong.
It is highly unlikely that machine hours will correlate with the indirect labor cost.
6.
Activity-based costing will provide greater accuracy when allocating costs than a manufacturer's machine hours when its products and customers are __________ diverse.

Less

Wrong.
The more diversity of products and customers the more likely that additional factors will be needed to properly allocate costs.

More

Right!
The more diversity of products and customers the more likely that additional factors will be needed to properly allocate costs.
7.
When using machine hours for allocating manufacturing overhead (instead of activity-based costing), a low-volume item requiring a significant amount of special handling will be assigned too __________ manufacturing overhead.

Little

Right!

Much

Wrong.
A low-volume item will mean a low number of machine hours and a corresponding low amount of manufacturing overhead being assigned to the products. However, the special handling will cause additional costs specifically associated with these items.
8.
The cost to set up production equipment is best allocated directly to products via machine hours.

True

Wrong.
The costs associated with setting up a machine are associated with the batch of items that will be produced by the machine.

False

Right!
Setup costs should not be allocated directly to products via machine hours. Setup costs should be allocated to the batch of products that will be run after the setup occurs.
9.
Setup cost is an example of a batch-level cost.

True

Right!
Setting up a machine is directly associated with the batch of items that will be processed after the setup occurs.

False

Wrong.
10.
Manufacturing costs are often organized in the general ledger by function and department. When applying activity-based costing, these manufacturing costs will be sorted by activities.

True

Right!

False

Wrong.
11.
In activity-based costing, the manufacturing overhead cost per unit will depend partially on the number of units in a batch.

True

Right!
For example, a setup cost of $800 is associated with the batch of items that will be processed. A large quantity of items processed will mean a low setup cost per unit. A small quantity of items being processed will mean a high setup cost per unit.

False

Wrong.
12.
In ABC the assumption is that __________ use resources or cause costs.

Activities

Right!

Products

Wrong.
Some products require very few activities and therefore cause very few costs. Other products might require a large amount of activities and therefore cause a large amount of costs.
13.
If products are uniform and customers are similar in their demands, activity-based costing may not offer a significant advantage over machine hours when assigning overhead.

True

Right!
ABC is most effective when there are variations in batch size, processes, or customer demands.

False

Wrong.
ABC is most effective when there are variations in batch size, processes, or customer demands.
14.
A product with a high gross profit could be an unprofitable product.

True

Right!
Some products with a high gross profit may require some very expensive selling and administrative activities. If these expenses are greater than the gross profit, a loss will occur. Other products with smaller gross profits may actually be more profitable, because they require only a minimal amount of selling and administrative activities and expenses.

False

Wrong.
Some products with a high gross profit may require some very expensive selling and administrative activities. If these expenses are greater than the gross profit, a loss will occur. Other products with smaller gross profits may actually be more profitable, because they require only a minimal amount of selling and administrative activities and expenses.
15.
Activity-based costing can be used to allocate SG&A expenses in order to assist management with pricing and other marketing decisions.

True

Right!
By identifying SG&A activities and the cost of those activities, the SG&A expenses can be better traced to the products and customers requiring those activities.

False

Wrong.
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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

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