Accounting-Many traditional costing systems

| January 30, 2017

1. Many traditional costing systems:

a. trace manufacturing overhead to individual activities and require the development of numerous activity-costing rates.

b. write off manufacturing overhead as an expense of the current period.

c. combine widely varying elements of overhead into a single cost pool.

d. use a host of different cost drivers (e.g., number of production setups, inspection hours, orders processed) to improve the accuracy of product costing.

e. produce results far superior to those achieved with activity-based costing.

Use the following information to answer questions 2 and 3:

The controller for Mitchell Manufacturing Company has established the following overhead cost pools and cost drivers:


Overhead Cost Pool

Overhead Cost

Cost Driver

Machine setups


Number of setups

Material handling


Units of raw material

Quality control inspection


Number of inspections

Other overhead costs


Machine hours



Budgeted Level

Overhead Cost Pool

Of Cost Driver

Overhead Rate

Machine setups

100 setups

$1,500 per setup

Material handling

50,000 units

$1.05 per unit

Quality control inspection

1,000 inspections

$37.50 per inspection

Other overhead costs

15,000 machine hours

$6.00 per machine hour

Order no. 610 has the following production requirements:

Machine setups: 5
Raw material: 10,000 units
Inspections: 12
Machine hours: 600

What is the total overhead that should be assigned to order no. 610 by using activity-based costing?
Suppose that Mitchell wee to use a single, predetermined overhead rate based on machine hours. What would be the total overhead costs assigned to order no. 610?
Which of the following is the proper sequence of events in an activity-based costing system?
Identification of cost drivers, calculation of cost application rates, assignment of cost to products, identification of cost pools.
Identification of cost pools, identification of cost drivers, calculation of pool rates, assignment of cost to products.
Assignment of cost to products, identification of cost pools, identification of cost drivers, calculation of pool rates.
Calculation of pool rates, identification of cost drivers, identification of cost pools, assignment of cost to products.
Use the following to answer questions 5 and 6:

Alexander Corporation produces flat-screen computer monitors. Consider the following selected costs that arose during the current year:

Direct materials used: $2,820,000
Plant rent, plant utilities, and plant taxes: $850,000
New technology design engineering: $1,500,000
Materials receiving: $215,000
Manufacturing-run/set-up charges: $80,000
Building depreciation: $75,000
General factory management salaries: $1,350,000

What is the total of the Batch-level costs?
What is the total Facility-level costs?
An on-line pharmacy in Puerto Rico exports drugs to its customers around the world, but not in the USA. Under activity-based costing, the firm accumulates, in one cost pool, all the postage fees paid to the local post office for the deliveries made throughout the world. The post office postage fees are based on the weight of the package and the package’s ship to address. Which would likely be the most recommended way to allocate the cost of the pool to each exported drug product?
Based on the retail price of each of the packages shipped.
Based on the combination of weight of the package and the number of miles the shipped package will travel.
Based on how many orders the customer made last year.
Based on how many orders the customer is expected to make next year.
Allocated evenly to every package shipped.
The choices below depict five costs of Benton Corporation and a possible driver for each cost. Which of these choices likely contains an inappropriate cost driver?
Gasoline consumed – Number of miles driven
Manufacturing overhead incurred in a heavily automated facility – Direct labor hours
Sale commissions – Number of units sold
Building maintenance cost – building square footage
Personnel department cost – number of employees
Which of the following statements about activity-based costing (“ABC”) is false?
ABC cannot be used by service providers.
ABC can help a company eliminate or reduce non-value-added costs.
In comparison with traditional-costing systems, ABC results in less cost “averaging” of various diversified activities.
ABC tends to reduce cost distortion among product lines.
Use the following information to answer questions 10 and 11:

Ernst Company currently uses traditional costing procedures, applying $300,000 of overhead to products X and Yon the basis of direct labor hours. The company is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labor hours (DLH), production setups (SU), and number of parts components (PC) as cost drivers. Data on the cost pools and respective driver volumes follow.

Pool No. 1

Pool No. 2

Pool No. 3


Driver: DLH

Driver: SU

Driver: PC









Pool Cost




The overhead cost allocated to Product Y using traditional costing procedures would be:
The overhead cost allocated to product Y using activity-based costing procedures would be:

Use the following to answer question 12:

Espey Company is a wholesale distributor that uses activity-based costing for all of its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity based costing system:

Annual Overhead costs:

Indirect wages and salaries


Other overhead expenses




Distribution of resource consumption:

Activity Cost Pools

Filling Orders

Customer Support



Indirect wages and salaries





Other overhead expenses





The amount of activity for the year is as follows:

Activity Cost Pool


Filling orders

2,000 orders

Customer support

20 customers

What would be the overall activity rate using activity-based costing for the filling orders activity cost pool? (Round to the nearest whole cent.)
13. In comparison with a system that uses a single, volume-based cost driver, an activity-based costing system is preferred when a company has:

a. a single product.

b. Product diversity and/or a large proportion of nonunit-level activities.

c. minimal product-line diversity and a small proportion of nonunit-level activities.

d. existing variances from budgeted amounts.

14. An activity that consumes firm assets or time, but does not contribute to improving a product in a way that consumers will pay for is best described as:

a. Reengineering

b. Kaizen costing

c. Non-value added activity

d. Supply chain management

e. benchmarking

Foster, Inc., an appliance manufacturer, is developing a new line of ovens that uses controlled-laser technology. The research and testing costs associated with developing the new ovens is said to arise from a:
unit-level activity.
batch-level activity.
product-sustaining activity.
facility-level activity.
competitive-level activity.

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