Question

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1)A transportation company provides bussing, limo and taxi service. The company charges: $350 per day for bussing service; $2.00 per kilometre for taxi service; and, $3.50 per kilometre for limo service. Two individual clients, the school board and the city government offices use the majority of the limo service on a contract agreement. Bussing services are used exclusively by the school board, and the taxi service is used almost exclusively by the general public, although the school board uses the taxi services when individual students have to be transported on occasion. Indirect costs are accumulated on internal records at $1.50 per kilometre for limo use and $1.00 per kilometre for taxi use, and $195 per day for each of the twenty buses.

The company's costing system has tracked the following activities for the month:

Client	Limo Km	Taxi Km	Average Days/Bus
School board	360	90	19
City gov't	1,943	125	n/a

The previous controller at the transportation company had always estimated the indirect costs at 25% of billings. What indirect costs were accumulated for each major client for the month under this assumption?

1A) A transportation company provides bussing, limo and taxi service. The company charges: $350 per day for bussing service; $2.00 per kilometre for taxi service; and, $3.50 per kilometre for limo service. Two individual clients, the school board and the city government offices use the majority of the limo service on a contract agreement. Bussing services are used exclusively by the school board, and the taxi service is used almost exclusively by the general public, although the school board uses the taxi services when individual students have to be transported on occasion. Indirect costs are accumulated on internal records at $1.50 per kilometre for limo use and $1.00 per kilometre for taxi use, and $195 per day for each of the twenty buses.

The company's costing system has tracked the following activities for the month:

Client	Limo Km	Taxi Km	Average Days/Bus
School board	360	90	19
City gov't	1,943	125	n/a

What indirect costs were accumulated for each major client for the month?

2) Which of the following statements is TRUE concerning product costing systems?

A. Companies that overcost will make more profit by passing along higher prices to customers.
B. Undercosting or overcosting does not relate to product cost cross-subsidization.
C. Companies that overcost run the risk of losing customers.
D. Companies that undercost products always sell products at a loss.
E. Peanut butter costing is another term for direct costing.

3)Which of the following is NOT an activity under an ABC system?

A. engineering
B. setting up equipment
C. designing products
D. customers
E. distributing products

4)Which of the following statements is TRUE regarding activity-based costing systems?

A. ABC systems accumulate overhead costs by departments.
B. ABC costing systems have multiple indirect cost allocation rates for each activity.
C. ABC systems provide a greater level of detail to understand how an organization uses its common inputs differently for distinct products.
D. ABC costing systems can be used in manufacturing firms only.
E. ABC costing systems are less complex and, therefore, less costly than traditional systems.

5)With simple costing systems, products manufactured in small batches and in small annual volumes may be ________ because batch-related and product-sustaining costs are assigned using unit-related drivers.

A. overcosted
B. undercosted
C. costed the same as in activity-based costing
D. fairly costed
E. ignored

6)Products S5 and CP8 each are assigned $50.00 in indirect costs by a traditional costing system. An activity analysis revealed that although production requirements are identical, S5 requires 45 minutes less setup time than CP8.
Compared to an activity-based cost system, CP8 is ________ under the traditional system.

A. fairly costed
B. accurately costed
C. undercosted
D. overcosted
E. costed the same

7)Leonard Industries uses departmental overhead rates to allocate its manufacturing overhead to jobs. The company has two departments: Building and Inspection. The Building Department uses a departmental overhead rate of $18 per machine hour, while the Inspection Department uses a departmental overhead rate of $15 per direct labour hour. Job 611 used the following direct labour hours and machine hours in the two departments:

Actual results	Building Department	Inspection Department
Direct labour hours used	6	2
Machine hours used	10	0

The cost for direct labour is $25 per direct labour hour and the cost of the direct materials used by Job 611 is $1,500.
What was the total cost of Job 611 if Leonard Industries used the departmental overhead rates to allocate manufacturing overhead?

8)Which of the following is a sign that a "smoothing out" costing system exists?

A. Managers rely on data originated by the cost system.
B. A batch consumes a relatively high level of input materials and conversion activities and is reported to have a relatively high cost.
C. The company loses bids they thought had low margins.
D. A batch consumes a relatively low level of input materials and conversion activities and is reported to have a relatively low cost.
E. The company wins bids they thought had low margins.

9)Products S5 and CP8 each are assigned $50.00 in indirect costs by a traditional costing system. An activity analysis revealed that although production requirements are identical, S5 requires 45 minutes less setup time than CP8.
According to an ABC system, S5 uses a disproportionately
A. larger amount of unit-level costs.
B. smaller amount of product-sustaining costs.
C. smaller amount of unit-level costs.
D. larger amount of batch-level costs.
E. smaller amount of batch-level costs.

10)A busy law office has a central administration set up, with the administration work for all lawyers shared by the clerical staff. Clients are billed at the firm's hourly rate by the firm. The arrangement is that whenever there is administration work to be done, it is assigned to whoever is available at the time. One of the lawyers has complained that she hardly ever uses the administration services, and so her year end bonus should be larger than those who require the administration services. Therefore they are considering tracking the administration work done for each lawyer separately so that they know how many hours of administration services is being used by each lawyer. At the end of the year, the bonus of each lawyer would be reduced by a charge reflecting the administration services she/he used in the year. If the firm institutes this new approach, this will mean that

A. they will be using a departmental costing system.
B. there will still be cross-subsidization between lawyers but not between their clients.
C. the new information gathered will enable the firm to be able to reduce its costs.
D. there will still be cross-subsidization between clients but not between lawyers.
E. there will be no more cross subsidization.

11)How does direct cost tracing improve cost accuracy?

A. It makes no assumptions about the cause-and-effect relationship between direct costs and activities.
B. It identifies the cause-and-effect relationship between direct costs and indirect costs.
C. It reclassifies costs or costs pools that vary with the quantity of a single activity cost driver as direct.
D. It identifies the cause-and-effect relationship between activities and non-activities.
E. Because with a greater number of cost pools, it does not have to be concerned with the overhead costs used by different products.

Answer 1

1..
Client	Limo Km& cost		Taxi Km & cost		Average days/Bus & cost		Total indirect costs for each client
1	2	3	4	5	6	7	(3+5+7)
School	1.50*360=	540	1*90=	90	195*20*19=	74100	74730
City Govt.	1943*1.50=	2914.5	1*125=	125			3039.5
		3454.5		215		74100	77769.5

2.ANSWER: C

C. Companies that overcost run the risk of losing customers.

Product costs includes all costs right from raw materials, labor, all overheads such as munufacturing, administrative and selling--that is all costs for bringing a product into existence & to the market for ultimate sale.

Hence overcosting of any of these ingredients, may turn away the existing customers , to some other similar brands.

3. ANSWER: D. Customers

ABC system of costing involves allocating overhead costs to products depending upon the activities required to be undergone, during the production of a product.

This is done after costing each unit of the activity individually as also after determining the volume of activity required by each product.

So, ABC is used to determine accurately the OH costs assigned , apart from direct costs like raw materials, labor .

A,B, C& E are activities carried out during the above process & can be costed using scientific methods.

Whereas,

customers are created after the product is sold & hence not involved during the costing stage of a product.

4. ANSWER: C

C. ABC systems provide a greater level of detail to understand how an organization uses its common inputs differently for distinct products.

As said in 3,

ABC system of costing involves allocating overhead costs to products depending upon the quantum of activities required to be undergone, during the production of different products.

This is done after costing each unit of the activity individually as also after determining the volume of activity required by each product,by scientific methods.

5.C. costed the same as in activity-based costing

Here, unit-related drivers are designed the same way as activity drivers for different activities under ABC system.

6.C. Undercosted

As per ABC CP8's total cost for the setup activity will be more than that for S5 --as the latter consumes less setup time.

Naturally, CP8's cost will go up as per ABC than under traditional system.

7..
Job 611
Direct materials	1500
Direct Labor(6+2)*25	200
Mfg. OH at :
Bldg. dept.dept.
(6*15)+(10*18)	270
Inspn. Dept.(2*15)	30
Total cost of Job 611	2000

8..A sign that "smoothing out" costing system exists----

C. The company loses bids they thought had low margins.

Ie.The company ignores bids thinking they will result in low profit margins --due to their overcosting subsequent to cost smoothing--when it is exactly the opposite--costs may be much lower for that lin eof product & margin might be considerable.

9..E. smaller amount of batch-level costs---as it is individually under-costed

10..D. there will still be cross-subsidization between clients but not between lawyers.

as administration cost is based on client's work-arrival & the time taken for it to be completed & not collected lawyer-wise--ie. The inter-change of costs will be only between clients & not the lawyers.

11..C. It reclassifies costs or costs pools that vary with the quantity of a single activity cost driver as direct.

as it tries to bring as many costs as possible, into the direct cost category