Multiple Choice Questions
1. Cross subsidies:
a. Occur when high-volume products are assigned less than their fair share of overhead costs
b. Occur when high-volume products are assigned more than their fair share of overhead costs
c. Occur regularly with both traditional and activity-based costing systems
d. Occur when low-volume products are assigned more than their fair share of overhead costs

2. Implementing an activity-based costing (ABC) system in a service company:
a. Is exactly the same as implementing an ABC system in a manufacturing company
b. Can be more difficult than implementing an ABC system in a manufacturing company, partly because there are fewer repetitive activities
c. Differs from implementing an ABC system in a manufacturing company because service companies generally have more batch-level costs than do manufacturing companies
d. Is not possible because of the nature of service companies

3. Activity-based costing (ABC):
a. Can be applied to selling and administrative activities
b. Cannot be applied to selling and administrative activities, as they are nonmanufacturing costs
c. Cannot be applied to service companies
d. Can be applied only to manufacturing companies

4. Why would a company choose to apply activity-based costing techniques to its selling and administrative costs?
a. To obtain a more accurate estimate of various selling and administrative activities
b. To develop a thorough understanding of the activities that drive selling and administrative costs
c. To estimate the selling and administrative costs associated with a particular company division
d. Each of the above is a valid purpose for which activity-based costing may be applied.

5. Which of the following types of companies would be most likely to benefit from activity-based costing?
a. Companies with a low potential for cost distortions
b. Companies that have a large proportion of unit-level costs
c. Companies that have a relatively high proportion of overhead compared to direct materials and direct labor
d. None of the above

6. Which of the following is not generally believed to be a benefit of an activity-based costing system?
a. Managers are able to exercise less control over functional areas due to increased complexities associated with cost accumulation and estimation.
b. Product and services costs are generally more accurately estimated in an activity-based costing system.
c. Managers€™ efforts are more focused on continuous improvement.
d. The budgeting process is enhanced with more detailed and accurate activity data.

7. Which of the following would be classified as a service department?
a. The maternity department in a hospital
b. The employee-training department of a computer manufacturer
c. An assembly department in a factory
d. The jewelry department of a department store

8. Lighthouse Manufacturing Company has a custodial services department that services the company€™s production department and cafeteria. Costs of custodial services are allocated to the other departments on the basis of square footage of space occupied. The amount of space occupied by each department is given below:
Custodial Services .......... 5,000 sq. ft.
Production ............. 90,000 sq. ft.
Cafeteria ............. 10,000 sq. ft.
Budgeted costs in custodial services amount to $25,000. Assuming that Lighthouse Manufacturing allocates custodial services costs first, the amount of custodial services costs allocated to the cafeteria under the step-down method would be:
a. $1,200
b. $21,600
c. $2,500
d. $0

9. Wolfpack Company has two service departments and two production departments. Budgeted costs and budgeted activity in the various departments for the year are shown here:

Custodial service department costs are allocated on the basis of square feet of space occupied. The costs of the cafeteria are allocated on the basis of the number of employees. Assume that the company uses the direct method of allocation. The amount of custodial services cost allocated to the cutting department using the direct method would be:
a. $5,108
b. $5,400
c. $4,725
d. none of theabove

Transcribed Image Text:

Custodial Departmental costs Square feet occupied Number of employees $12,600 1,000 20 Cafeteria $7,000 2,000 Cutting $30,000 8,000 150 Assembly $50,000 10,000 200 30