Chapter 07 Testbank Key

 
1. Which of the following statements is false?
(p. 286) Manufacturing overhead costs are:  
 

A.  sometimes called factory burden

B.  indirect product costs
C.  all manufacturing costs other than direct material and direct labour
D.  non-existent in service firms
 
AACSB: Reflective
Difficulty: Easy
Learning Objective: 07-01 Explain the nature of overhead costs and other indirect costs
 
2. A cost pool is: 
(p. 287)  

A.  a collection of costs to be assigned

B.  the joint result of several subunit activities
C.  the primary function of a responsibility accounting system
D.  a performance report of the lowest level manager
 
AACSB: Reflective
Difficulty: Easy
Learning Objective: 07-02 Describe the general principles for allocating indirect costs to cost objects
 
3. The process of assigning the costs in a cost pool to the cost objects is called: 
(p. 287)  

A.  cost allocation

B.  segmented profit and loss statement
C.  variance
D.  absorption costing
 
AACSB: Reflective
Difficulty: Easy
Learning Objective: 07-02 Describe the general principles for allocating indirect costs to cost objects
 
4. Which of the following is a common base to distribute the cost of building depreciation to responsibility centres? 
(p. 297)  

A.  Number of employees in responsibility centre

B.  Budgeted sales dollars in responsibility centre
C.  Square metres of space occupied by responsibility centre
D.  Budgeted direct costs of operating the responsibility centre
 
AACSB: Reflective
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-07 Explain the relevant issues in estimating overhead rates, including identifying cost drivers, choosing volume-based and non-volume-based
cost drivers and deciding between budgeted and actual overhead rates
 
5. An allocation base may also be referred to as a: 
(p. 286)  

A.  cost object

B.  common cost
C.  cost driver
D.  joint base
 
Difficulty: Easy
Learning Objective: 07-01 Explain the nature of overhead costs and other indirect costs
 
6. Each cost pool is distributed to each responsibility centre in: 
(p. 287)  

A.  proportion to that centre's relative amount of allocation base

B.  proportion to that centre's relative amount of direct cost
C.  proportion to that centre's relative amount of liabilities
D.  proportion to that centre's relative amount of profit
 
Difficulty: Easy
Learning Objective: 07-02 Describe the general principles for allocating indirect costs to cost objects
 
7. Consider the following statements regarding cost allocation.
(p. 301) i. Allocation of budgeted costs is preferred to actual cost as this minimises the possibility that the actions of one user
department will affect the costs allocated to another user department.
ii. Allocation of standard budgeted rates is preferred, so the user department does not have to bear the inefficiencies of
support departments.
iii. Knowing the standard rates in advance allows the user departments to plan their activities with greater certainty.
Which statement/s is/are true? 
 

A.  i
B.  i and ii
C.  i, ii and iii
D.  ii and iii
 
AACSB: Reflective
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-09 Discuss the general principles and reasons for allocating indirect costs to responsibility centres
 
8. Budgeted amounts of allocation bases, rather than actual amounts, are preferable allocation bases because: 
(p. 301)  

A.  when actual amounts are used the behaviour of one responsibility centre affects the costs allocated to other responsibility
centres.
B.  budgeted amounts are known in advance, therefore costs are easier to allocate.
C.  the use of actual amounts could cause fluctuations in the prices charged for a company's products or services.
D.  budgeted amounts are known in advance, therefore costs are easier to allocate AND the use of actual amounts could
cause fluctuations in the prices charged for a company's products or services.
 
AACSB: Reflective
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-09 Discuss the general principles and reasons for allocating indirect costs to responsibility centres
 
9. The step/s used in cost allocation include/s: 
(p. 292)  

A.  cost application

B.  cost distribution
C.  support department cost allocation
D.  All of the given answers
 
AACSB: Reflective
Difficulty: Easy
Learning Objective: 07-04 Use the two-stage allocation process to estimate departmental overhead rates and allocate overhead costs to products
 
10. If the relationship between overhead costs and the cost drivers differs substantially across production departments, the firm
(p. 292) should use: 
 

A.  a plantwide overhead rate

B.  multiple-departmental overhead rates
C.  actual overhead activity
D.  machine hours to determine the overhead rate
 
AACSB: Reflective
Difficulty: Easy
Graduate Attribute: Problem Solving
Learning Objective: 07-04 Use the two-stage allocation process to estimate departmental overhead rates and allocate overhead costs to products
 
11. Consider the following statements about the two-stage cost allocation process.
(p. 292) i. Costs in various cost pools are distributed to all departments, including support and production departments.
ii. Support department costs are allocated to production departments.
iii. Costs are assigned to each production department that has worked on the product.
Which statement/s is/are correct? 
 

A.  i, ii and iii

B.  i and iii
C.  ii
i
D.  i
i
 
AACSB: Reflective
Difficulty: Easy
Graduate Attribute: Problem Solving
Learning Objective: 07-04 Use the two-stage allocation process to estimate departmental overhead rates and allocate overhead costs to products
 
12. Consider the following statements about support department costs.
(p. 292) i. In order to assign all manufacturing costs to products, support department costs must be allocated to production
departments.
ii. Support department costs are period costs rather than product costs because the support departments are not directly
involved in production.
iii. Support departments are not considered crucial to the production process.
Which statement/s is/are correct? 
 

A.  i, ii and iii

B.  i and iii
C.  ii
i
D.  i
 
AACSB: Reflective
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-04 Use the two-stage allocation process to estimate departmental overhead rates and allocate overhead costs to products
 
13. Which of the following would NOT be a volume-based cost driver in a conventional costing system? 
(p. 297)  

A.  Quantity of direct material

B.  Factory floor area in square metres
C.  Direct labour hours
D.  Machine hours
 
AACSB: Reflective
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-07 Explain the relevant issues in estimating overhead rates, including identifying cost drivers, choosing volume-based and non-volume-based
cost drivers and deciding between budgeted and actual overhead rates
 
14. The mutual provision of service between support departments is called: 
(p. 304)  

A.  joint service

B.  shared services
C.  reciprocal services
D.  allocated services
 
Difficulty: Easy
Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down method and the reciprocal services
method
 
15. Normal costing is when: 
(p. 297)  

A.  actual material, labour and overhead costs are added to work in process.
B.  actual material, and predetermined labour and overhead costs are added to work in process.
C.  actual labour, and predetermined material and overhead costs are added to work in process.
D.  actual material and labour and predetermined overhead costs are added to work in process.
 
Difficulty: Easy
Graduate Attribute: Problem Solving
Learning Objective: 07-07 Explain the relevant issues in estimating overhead rates, including identifying cost drivers, choosing volume-based and non-volume-based
cost drivers and deciding between budgeted and actual overhead rates
  
16. For management accounting purposes, the denominator volume for applying overhead to products may be: 
(p. 300)  

A.  budgeted capacity

B.  practical capacity
C.  normal capacity
D.  All of the given answers
 
AACSB: Reflective
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-08 Explain the effect of alternative capacity measures on overhead rates
 
17. The following information relates to the Moonie Park Manufacturing Company for the year 2012.
(p. 291)

The predetermined overhead rates per machine hour based on practical capacity, normal capacity and budgeted capacity
respectively are:  
 

A.  $4.50, $5.00 and $6.00

B.  $6.00, $4.50 and $5.00
C.  $6.00, $5.00 and $4.50
D.  $5.00, $4.50 and $6.00
 
AACSB: Analytical
Difficulty: Easy
Graduate Attribute: Problem Solving
Learning Objective: 07-03 Allocate overhead costs to products, using a plantwide rate
 
18. The following information relates to the Moonie Park Manufacturing Company for the year 2012.
(p. 291)

What would be the amount of underapplied or overapplied overhead at the end of the month if overhead rates were
calculated based on practical capacity, normal capacity and budgeted capacity respectively.  
 

A.  $17 500 under; neither under or over; $35 000 over
B.  $17 500 under; $35 000 over; neither under or over
C.  Neither under or over; $17 500 under; $35 000 over
D.  Neither under or over; $35 000 over; $17 500 under
 
AACSB: Analytical
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-03 Allocate overhead costs to products, using a plantwide rate
 
19. The most widely used methods of support department cost allocations are the: 
(p. 304)  

A.  direct method and cost application.

B.  cost distribution and step-down method.
C.  direct method and step-down method.
D.  step-down method and cost application.
 
Difficulty: Easy
Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down method and the reciprocal services
method
 
20. The ‘direct method' ignores the fact that:  
(p. 304)  

A.  some support departments provide services to other support departments

B.  cost allocation is a major factor in its accountability
C.  each department's cost is allocated only for the service consumed by it
D.  All of the given answers
 
AACSB: Reflective
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down method and the reciprocal services
method
 
21. The support department cost allocation method that completely ignores reciprocal services between support departments is
(p. 304) called the: 
 

A.  direct method

B.  step-down method
C.  reciprocal method
D.  direct method AND step-down method
 
AACSB: Reflective
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down method and the reciprocal services
method
 
22. The support department cost allocation method that recognises some of the reciprocal services between support departments
(p. 304) is called the: 
 

A.  step-down method

B.  reciprocal method
C.  dual cost allocation method
D.  joint cost method
 
AACSB: Reflective
Difficulty: Easy
Graduate Attribute: Problem Solving
Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down method and the reciprocal services
method
 
23. The support department cost allocation method that fully accounts for the mutual provision of services between support
(p. 304) departments is called the: 
 

A.  direct method

B.  step-down method
C.  reciprocal method
D.  dual cost allocation method
 
Difficulty: Easy
Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down method and the reciprocal services
method
 
24. The first step under the step-down method is: 
(p. 304)  

A.  allocate total support department costs to production departments.

B.  choose a sequence in which to allocate support department costs.
C.  apply a cost to the secondary support departments.
D.  determine the overhead base for each production department.
 
Difficulty: Easy
Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down method and the reciprocal services
method
 
25. When the step-down method is used to allocate support department costs, a common way to select the first support
(p. 304) department in the sequence is to choose the support department which: 
 

A.  obtains the highest yield

B.  serves no other support department
C.  serves the greatest number of other support departments
D.  obtains the highest yield AND serves no other support department
 
Difficulty: Easy
Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down method and the reciprocal services
method
 
26. After all manufacturing overhead costs have been assigned to the production departments, the step to assign all
(p. 304) manufacturing overhead costs accumulated in a production department to the jobs that the department has worked on is
called: 
 

A.  support department cost allocation

B.  cost distribution
C.  overhead application
D.  cost apportionment
 
Difficulty: Easy
Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down method and the reciprocal services
method
 
27. Assume a firm uses job costing. Which of the following is NOT a good reason to use departmental overhead rates rather than
(p. 292) a single plantwide rate? 
 

A.  Total overhead costs amount to about 5 per cent of total prime costs.
B.  The various products made by the firm follow different sequences of manufacturing activities.
C.  Overhead costs in some departments are a very large proportion of total department cost, but are a very small proportion
in other departments.
D.  The firm makes multiple products using common equipment and employees.
 
AACSB: Reflective
Difficulty: Easy
Graduate Attribute: Problem Solving
Learning Objective: 07-04 Use the two-stage allocation process to estimate departmental overhead rates and allocate overhead costs to products
 
28. The Lots More Store has a Janitorial Department and a Personnel Department that provide services to three Sales
(p. 304) Departments. The Janitorial Department cost is allocated based on space and the Personnel Department cost is allocated
based on employees. The following information is available.

Using the direct method, calculate the amount of Personnel Department cost allocated to Sales Department #3.  
 

A.  $12 000

B.  $15 000
C.  $12 857
D.  $13 500
 
AACSB: Reflective
Difficulty: Easy
Graduate Attribute: Problem Solving
Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down method and the reciprocal services
method
 
29. The Lots More Store has a Janitorial Department and a Personnel Department that provide services to three Sales
(p. 304) Departments. The Janitorial Department cost is allocated based on space and the Personnel Department cost is allocated
based on employees. The following information is available.

Using the direct method, calculate the amount of Janitorial Department cost allocated to Sales Department #2.  
 

A.  $8654
B.  $8571
C.  $9000
D.  $10 350
 
AACSB: Analytical
Difficulty: Easy
Graduate Attribute: Problem Solving
 Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down method and the reciprocal services
method
 
30. The Lots More Store has a Janitorial Department and a Personnel Department that provide services to three Sales
(p. 304) Departments. The Janitorial Department cost is allocated based on space and the Personnel Department cost is allocated
because of employees. The following information is available.

Using the step-down method, calculate the amount of Personnel Department cost allocated to Sales Department #3, if the
Personnel Department is allocated first.  
 

A.  $13 500

B.  $12 857
C.  $12 000
D.  $15 000
 
AACSB: Analytical
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down method and the reciprocal services
method
 
31. The Lots More Store has a Janitorial Department and a Personnel Department that provide services to three Sales
(p. 304) Departments. The Janitorial Department cost is allocated based on space and the Personnel Department cost is allocated
based on employees. The following information is available.

Using the step-down method, calculate the amount of Janitorial Department cost allocated to Sales Department #2, if the
Personnel Department is allocated first.  
 

A.  $10 247

B.  $8571
C.  $9857
D.  $10 350
 
AACSB: Analytical
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down method and the reciprocal services
method
 
32. The process of allocating fixed and variable costs separately is called: 
(p. 297)  

A.  variable cost application

B.  fixed cost separation
C.  reciprocal cost allocation
D.  dual cost allocation
 
Difficulty: Easy
Learning Objective: 07-07 Explain the relevant issues in estimating overhead rates, including identifying cost drivers, choosing volume-based and non-volume-based
cost drivers and deciding between budgeted and actual overhead rates
 
33. Under dual cost allocation, variable costs are allocated based on the user departments of the support department's output: 
(p. 297)  

A.  long-run usage

B.  short-run usage
C.  long-run usage and short-run usage
D.  neither the long- or short-run usage
 
AACSB: Reflective
Difficulty: Medium
Learning Objective: 07-07 Explain the relevant issues in estimating overhead rates, including identifying cost drivers, choosing volume-based and non-volume-based
cost drivers and deciding between budgeted and actual overhead rates
 
34. Under dual cost allocation, fixed costs are allocated based on the user departments of the support department's output: 
(p. 297)  

A.  long-run average usage

B.  short-run usage
C.  long-run usage and short-run usage
D.  forecasted short-run usage
 
AACSB: Reflective
Difficulty: Medium
Learning Objective: 07-07 Explain the relevant issues in estimating overhead rates, including identifying cost drivers, choosing volume-based and non-volume-based
cost drivers and deciding between budgeted and actual overhead rates
 
35. The size and scale of support departments is usually determined by the: 
(p. 304)  

A.  capital budget

B.  average fixed and variable costs
C.  short-term needs of the user departments
D.  projected long-run needs of the user departments
 
AACSB: Reflective
Difficulty: Easy
Graduate Attribute: Problem Solving
Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down method and the reciprocal services
method
 
36. When allocating support department costs, the costs that should be used are: 
(p. 304)  

A.  actual fixed costs and budgeted variable costs

B.  actual fixed costs and actual variable costs
C.  budgeted fixed costs and actual variable costs
D.  budgeted fixed costs and budgeted variable costs
 
AACSB: Reflective
Difficulty: Easy
Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down method and the reciprocal services
method
 
37. Consider the following statements about support department cost allocations.
(p. 301) i. The allocation of actual costs encourages support department managers to control the costs in their departments.
ii. When budgeted costs are allocated, any efficiency in support department operations are passed along to user departments.
iii. The allocation of budgeted costs rather than actual costs gives an incentive for support department managers to control
costs in their departments.
Which statement/s is/are true? 
 

A.  i
B.  i
i
C.  i and ii
D.  ii
i
 
AACSB: Reflective
Difficulty: Medium
Graduate Attribute: Problem Solving
 Learning Objective: 07-09 Discuss the general principles and reasons for allocating indirect costs to responsibility centres
 
38. Consider the following statements about support department cost allocations.
(p. 304) i. In a modern manufacturing environment, it is not necessary to allocate support department costs.
ii. Support department cost allocations continue to be necessary when a highly automated system is in use.
iii. In a flexible manufacturing system, the need to allocate costs diminishes because more costs have become traceable to the
product.
Which statement/s is/are true? 
 

A.  i
B.  i and ii
C.  ii and iii
D.  i, ii and iii
 
AACSB: Reflective
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down method and the reciprocal services
method
 
39. Which of the following statement/s is/are true? 
(p. 294)  

A.  A two-stage allocation process is not suitable under an activity-based costing system.
B.  Under activity-based costing, the emphasis is on the cost of activities.
C.  Under an activity-based costing system, the cost of activities may include the cost of labour.
D.  Under activity-based costing, the emphasis is on the cost of activities AND under an activity-based costing system, the
cost of activities may include the cost of labour.
 
AACSB: Reflective
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-05 Use activity-based costing principles to assign overheads to products
 
40. The Kelsey Manufacturing Company Ltd has two production departments (Assembly and Finishing) and two support
(p. 304) departments (Janitorial and Personnel). The usage of the two support departments in 2012 is as follows:

The budgeted costs in the support departments of 2012 were as follows:

Using the direct method, what is the Personnel Department cost allocated to the Assembly Department?  
 

A.  $60 000

B.  $54 000
C.  $21 053
D.  $78 842
 
AACSB: Analytical
Difficulty: Easy
Graduate Attribute: Problem Solving
Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down method and the reciprocal services
method
 
41. The Kelsey Manufacturing Company Ltd has two production departments (Assembly and Finishing) and two support
(p. 304) departments (Janitorial and Personnel). The usage of the two support departments in 2012 is as follows:

The budgeted costs in the support departments of 2012 were as follows:

Using the direct method, what is the Janitorial Department cost allocated to the Assembly Department?  
 

A.  $28 948

B.  $21 053
C.  $34 158
D.  $25 000
 
AACSB: Analytical
Difficulty: Easy
Graduate Attribute: Problem Solving
Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down method and the reciprocal services
method
 
42. The Kelsey Manufacturing Company Ltd has two production departments (Assembly and Finishing) and two support
(p. 304) departments (Janitorial and Personnel). The usage of the two support departments in 2012 is as follows:

The budgeted costs in the support departments of 2012 were as follows:

Using the step-down method, what is the amount of Personnel Department cost allocated to the Assembly Department with
the Personnel Department cost allocated first?  
 

A.  $60 000

B.  $54 000
C.  $21 053
D.  $28 948
 
AACSB: Analytical
Difficulty: Easy
Graduate Attribute: Problem Solving
Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down method and the reciprocal services
method
 
43. The Kelsey Manufacturing Company Ltd has two production departments (Assembly and Finishing) and two support
(p. 304) departments (Janitorial and Personnel). The usage of the two support departments in 2012 is as follows:

The budgeted costs in the support departments of 2012 were as follows:

Using the step-down method, what is the amount of Janitorial Department cost allocated to the Assembly Department with
the Personnel Department cost allocated first?  
 

A.  $24 842

B.  $28 948
C.  $34 158
D.  $23 600
 
AACSB: Analytical
Difficulty: Difficult
Graduate Attribute: Problem Solving
Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down method and the reciprocal services
method
 
44. The Kelsey Manufacturing Company Ltd has two production departments (Assembly and Finishing) and two support
(p. 304) departments (Janitorial and Personnel). The usage of the two support departments in 2012 is as follows:

The budgeted costs in the support departments of 2012 were as follows:

Using the step-down method, what is the total support department costs allocated to the Finishing Department with the
Personnel Department cost allocated first?  
 

A.  $81 052

B.  $74 000
C.  $61 158
D.  $78 842
 
AACSB: Analytical
Difficulty: Easy
Graduate Attribute: Problem Solving
Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down method and the reciprocal services
method
 
45. Management would prefer to use either absorption costing or variable costing depending on: 
(p. 316)  

A.  which gives the highest profit figure

B.  which is required by the Australian accounting standards
C.  whether they consider the benefits of using variable costing outweigh the additional costs involved
D.  which is provided at the least cost
 
AACSB: Analytical
Difficulty: Easy
Graduate Attribute: Problem Solving
Learning Objective: 07-11 Understand and evaluate variable and absorption costing and prepare income statements using both approaches.
 
46. Variable costing is more useful than absorption costing for:
(p. 316) i. special order decisions
ii. short-term pricing of products
iii. long-term pricing of products 
 

A.  i
B.  ii
i
C.  i and ii
D.  i, ii and iii
 
AACSB: Reflective
Difficulty: Easy
Graduate Attribute: Problem Solving
Learning Objective: 07-11 Understand and evaluate variable and absorption costing and prepare income statements using both approaches.
 
47. Consider the following statements regarding absorption costing and variable costing.
(p. 316) i. Profit reported under absorption costing for a year will likely differ from that reported under variable costing because
production and sales differ.
ii. Total profit when added together over a ten-year period will be approximately equal under absorption costing and variable
costing because production and sales will be approximately the same.
iii. Total profit when added together over a ten-year period will be significantly different under absorption and variable
costing because fixed costs will generally increase significantly over that long.
Which statement/s is/are true? 
 

A.  i
B.  i and ii
C.  i and iii
D.  i
i
 
AACSB: Reflective
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-11 Understand and evaluate variable and absorption costing and prepare income statements using both approaches.
 
48. Assume that the predetermined fixed overhead rate per unit remains the same from 2007 to 2008 and inventory decreases in
(p. 316) 2008. Which of the following statements is true? 
 

A.  The fixed overhead expended in 2008 under variable costing will be greater than that expended under absorption costing.
B.  The fixed overhead expended in 2008 under absorption costing will be greater than that expended under variable costing.
C.  The amount of fixed overhead expended will be the same under both methods.
D.  It is impossible to determine what effect the decrease in inventory will have on net profit under absorption costing.
 
AACSB: Reflective
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-11 Understand and evaluate variable and absorption costing and prepare income statements using both approaches.
 
49. Monex reported $65 000 in net profit for the year using absorption costing. The company had no units in beginning
(p. 316) inventory, planned and actual production was 20 000 units and sales were 18 000 units during the year. Variable
manufacturing costs were $20 per unit and total budgeted fixed manufacturing overhead was $100 000. There was no
underapplied or overapplied overhead reported during the year. Determine the net profit under variable costing. 
 

A.  $115 000

B.  $75 000
C.  $65 000
D.  $55 000
 
AACSB: Analytical
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-11 Understand and evaluate variable and absorption costing and prepare income statements using both approaches.
 
50. Classix Products reported $28 000 in net profit for the year using variable costing. The company had no units in beginning
(p. 316) inventory, planned and actual production was 30 000 units, and sales were 25 000 units during the year. Variable
manufacturing costs were $15 per unit and total budgeted fixed manufacturing overhead was $150 000. There was no
underapplied or overapplied overhead reported during the year. Determine the net profit under absorption costing. 
 

A.  $28 000

B.  $30 000
C.  $53 000
D.  $58 000
 
AACSB: Analytical
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-11 Understand and evaluate variable and absorption costing and prepare income statements using both approaches.
 
51. Gallison Company's net profit under absorption costing was $15 000 higher than under variable costing. During the year, the
(p. 316) company produced 20 000 units for total variable production costs of $80 000. If fixed manufacturing overhead was $40 000,
how many units were sold?  
 

A.  20 000 units

B.  12 500 units
C.  10 000 units
D.  7500 units
 
AACSB: Analytical
Difficulty: Easy
Graduate Attribute: Problem Solving
Learning Objective: 07-11 Understand and evaluate variable and absorption costing and prepare income statements using both approaches.
 
52. The income of a company for a year on a variable costing basis is $85 000 and on an absorption costing basis is $73 000.
(p. 316) Fixed costs per unit were the same in both the prior and current year ($1.20 per unit). What was the change in inventory over
the year? 
 

A.  Decrease of 10 000 units

B.  Increase of 10 000 units
C.  Increase of 12 000 units
D.  None of the given answers
 
AACSB: Analytical
 Difficulty: Easy
Graduate Attribute: Problem Solving
Learning Objective: 07-11 Understand and evaluate variable and absorption costing and prepare income statements using both approaches.
 
53. A normal absorption costing system charges work in process with: 
(p. 297)  

A.  actual prime costs and actual overhead costs.

B.  applied prime costs and all overhead costs using a budgeted rate.
C.  actual prime costs and all overhead costs using a budgeted rate.
D.  applied direct materials and all conversion costs using a budgeted rate.
 
Difficulty: Easy
Learning Objective: 07-07 Explain the relevant issues in estimating overhead rates, including identifying cost drivers, choosing volume-based and non-volume-based
cost drivers and deciding between budgeted and actual overhead rates
 
54. Absorption costing profit is always equal to: 
(p. 316)  

A.  variable costing profit + fixed overhead in opening inventory – fixed overhead in closing inventory
B.  fixed overhead in opening inventory + fixed overhead in closing inventory
C.  fixed overhead in opening inventory – fixed overhead in closing inventory
D.  variable costing profit + fixed overhead in closing inventory – fixed overhead in opening inventory
 
AACSB: Reflective
Difficulty: Easy
Learning Objective: 07-11 Understand and evaluate variable and absorption costing and prepare income statements using both approaches.
 
55. Where the fixed overhead rate in both opening and closing inventories is the same, which of the following statements is
(p. 316) correct? 
 

A.  If inventory remains the same, absorption costing profit will be greater than variable costing profit.
B.  If inventory has decreased, absorption costing profit will be greater than variable costing profit.
C.  Absorption costing profit is always greater than variable costing profit.
D.  If inventory has increased, absorption costing profit will be greater than variable costing profit.
 
AACSB: Reflective
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-11 Understand and evaluate variable and absorption costing and prepare income statements using both approaches.
 
56. Which of the following statements is correct? 
(p. 316)  

A.  Inventories under absorption costing are always higher than under variable costing.
B.  Cost of goods sold under absorption costing is always higher than under variable costing.
C.  The amount of fixed overhead expensed under absorption costing is always higher than under variable costing.
D.  Inventories under absorption costing are always higher than under variable costing AND cost of goods sold under
absorption costing is always higher than under variable costing.
 
AACSB: Analytical
Difficulty: Easy
Graduate Attribute: Problem Solving
Learning Objective: 07-11 Understand and evaluate variable and absorption costing and prepare income statements using both approaches.
 
57. Using the information below, what would be the profit under variable costing and absorption costing, respectively?
(p. 316)

 
 

A.  $10 044; $8220

B.  $9000; $13 176
C.  $10 044; $14 220
D.  Insufficient data to calculate
 
AACSB: Analytical
Difficulty: Difficult
Graduate Attribute: Problem Solving
Learning Objective: 07-11 Understand and evaluate variable and absorption costing and prepare income statements using both approaches.
 
58. The Browning Company manufactures a single product; the standard costs per unit being variable manufacturing $8, fixed
(p. 316) manufacturing $6. Selling and administrative costs are $2 per unit sold. The selling price is $20 per unit. Actual and
budgeted fixed overhead is $900 000 for the year. Information about Browning's production activity for the year follows:

What is the value of closing inventory of finished goods under absorption costing?  
 

A.  $420 000

B.  $240 000
C.  $120 000
D.  $480 000
 
AACSB: Analytical
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-11 Understand and evaluate variable and absorption costing and prepare income statements using both approaches.
 
59. The Browning Company manufactures a single product; the standard costs per unit being variable manufacturing $8, fixed
(p. 316) manufacturing $6. Selling and administrative costs are $2 per unit sold. The selling price is $20 per unit. Actual and
budgeted fixed overhead is $900 000 for the year. Information about Browning's production activity for the year follows:

What is the value of closing inventory of finished goods under variable costing?  
 

A.  $420 000

B.  $180 000
C.  $240 000
D.  $120 000
 
AACSB: Analytical
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-11 Understand and evaluate variable and absorption costing and prepare income statements using both approaches.
 
60. The Browning Company manufactures a single product; the standard costs per unit being variable manufacturing $8, fixed
(p. 316) manufacturing $6. Selling and administrative costs are $2 per unit sold. The selling price is $20 per unit. Actual and
budgeted fixed overhead is $900 000 for the year. Information about Browning's production activity for the year follows:

What is the profit under absorption costing?  

 

A.  $750 000

B.  $1 250 000
C.  $350 000
D.  $500 000
 
AACSB: Analytical
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-11 Understand and evaluate variable and absorption costing and prepare income statements using both approaches.
 
61. The Browning Company manufactures a single product; the standard costs per unit being variable manufacturing $8, fixed
(p. 316) manufacturing $6. Selling and administrative costs are $2 per unit sold. The selling price is $20 per unit. Actual and
budgeted fixed overhead is $900,000 for the year. Information about Browning's production activity for the year follows:

What is the profit under variable costing?  

 

A.  $1 250 000

B.  $350 000
C.  $500 000
D.  Insufficient information to determine
 
AACSB: Analytical
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-11 Understand and evaluate variable and absorption costing and prepare income statements using both approaches.
 
62. The Browning Company manufactures a single product; the standard costs per unit being variable manufacturing $8, fixed
(p. 316) manufacturing $6. Selling and administrative costs are $2 per unit sold. The selling price is $20 per unit. Actual and
budgeted fixed overhead is $900 000 for the year. Information about Browning's production activity for the year follows:

Assuming all information is provided above, the difference in profit between absorption and variable costing would be
expected to be:  
 

A.  25 000 × $8
B.  30 000 × $8
C.  25 000 × $6
D.  30 000 × $6
 
AACSB: Reflective
Difficulty: Easy
Graduate Attribute: Problem Solving
Learning Objective: 07-11 Understand and evaluate variable and absorption costing and prepare income statements using both approaches.
 
63. Absorption costing is a method of allocating cost to inventories such that the cost of inventory includes: 
(p. 316)  

A.  both variable and fixed costs, irrespective of the level of operating capacity
B.  an appropriate share of both variable and fixed costs with fixed costs being allocated based on normal operating capacity
C.  all costs other than fixed costs based on normal operating capacity
D.  both variable and fixed costs, both of which are allocated based on normal operating capacity
 
AACSB: Reflective
 Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-11 Understand and evaluate variable and absorption costing and prepare income statements using both approaches.
 
64. Which of the following statement/s is/are correct? 
(p. 316)  

A.  Absorption costing is required by the Australian accounting standards.

B.  Variable costing records are more useful than absorption costing records for management decision making.
C.  Firms that are required to comply with the accounting standards are likely to use variable costing if the benefits of
keeping a second set of records exceed the costs.
D.  All of the given answers.
 
AACSB: Analytical
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-11 Understand and evaluate variable and absorption costing and prepare income statements using both approaches.
 
65. The production section of a firm is serviced by personnel and computing as follows:
(p. 304)

Personnel costs are allocated on the number of employees and computing costs on service hours. Overhead rates are based
on labour hours. If the direct method is used to allocate support department costs, what is the overhead rate for the Assembly
Department?  
 

A.  $8
B.  $9.25
C.  $9.44
D.  $10.69
 
AACSB: Analytical
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down method and the reciprocal services
method
 
66. The production section of a firm is serviced by personnel and computing as follows:
(p. 304)

Personnel costs are allocated on the number of employees and computing costs on service hours. Overhead rates are based
on labour hours. If the reciprocal services method is used to allocate support department costs, the total cost (rounded)
allocated out of Personnel would be:  
 

A.  $40 000

B.  $44 444
C.  $56 715
D.  $55 636
 
AACSB: Analytical
Difficulty: Difficult
Graduate Attribute: Problem Solving
Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down method and the reciprocal services
method
 
67. The production section of a firm is serviced by personnel and computing as follows:
(p. 304)

Personnel costs are allocated on the number of employees and computing costs on service hours. Overhead rates are based
on labour hours. If the reciprocal services method is used to allocate support department costs, the total support department
costs allocated to the Assembly Department (rounded) would be:  
 

A.  $55 927

B.  $52 800
C.  $53 800
D.  $56 072
 
AACSB: Analytical
Difficulty: Difficult
Graduate Attribute: Problem Solving
Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down method and the reciprocal services
method
 
68. Appleford Ltd is a furniture manufacturer. It has a small range of products. Its manufacturing processes are characterised by
(p. 297) a high level of automation. Appleford Ltd decides to choose a volume-based cost driver for its indirect manufacturing costs.
Which of the following cost drivers is most appropriate? 
 

A.  The number of units produced.

B.  The number of machine hours.
C.  The number of manufacturing batches.
D.  Direct labour hours.
 
AACSB: Reflective
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-07 Explain the relevant issues in estimating overhead rates, including identifying cost drivers, choosing volume-based and non-volume-based
cost drivers and deciding between budgeted and actual overhead rates
 
69. When a company is choosing between different types of volume based cost drivers, which of the following factors suggest
(p. 297) the use of outputs as a cost driver?
i. The company has only one product.
ii. The company is labour intensive.
iii. The company uses large quantities of direct materials. 
 

A.  i
B.  i and iii
C.  i
i
D.  ii and iii
 
AACSB: Reflective
Difficulty: Easy
Graduate Attribute: Problem Solving
Learning Objective: 07-07 Explain the relevant issues in estimating overhead rates, including identifying cost drivers, choosing volume-based and non-volume-based
cost drivers and deciding between budgeted and actual overhead rates
 
70. Jasmine Doh is considering using cost drivers that are measured in dollars (rather than physical units) for her company. Your
(p. 297) advice is: 
 

A.  This is a good idea as cost drivers measured in dollars are usually already recorded in the accounting system.
B.  This is a good idea as it avoids estimating costs associated with each physical unit of cost driver.
C.  This is a bad idea because dollar-based cost drivers are subject to price change.
D.  This is a bad idea because using dollar-based cost drivers oversimplifies the cost allocation process.
 
AACSB: Reflective
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-07 Explain the relevant issues in estimating overhead rates, including identifying cost drivers, choosing volume-based and non-volume-based
cost drivers and deciding between budgeted and actual overhead rates
 
71. Theoretical capacity refers to: 
(p. 300)  

A.  the maximum level of production that a plant will produce under normal, efficient operating conditions
B.  the maximum level of production that a plant will produce under peak efficiency
C.  the minimum level of production that a plan can produce under peak efficiency
D.  the level of production given the theoretical level of customer demand
 
Difficulty: Easy
Learning Objective: 07-08 Explain the effect of alternative capacity measures on overhead rates
 
72. The East Coast University uses a printing machine, the FL200, to print exam papers. According to the operation manual,
(p. 300) FL200 can print 2000 sets of exam papers per hour when it is operating at peak efficiency. However, Edgo Liew, the head
printer, notes that in normal (but still efficient) operations, the machine can produce only 1800 sets of exam papers in an
hour. Further, Edgo also notes that given the small number of students enrolled in the East Coast University, the machine is
never required to print more than 1500 sets of exam papers per hour.
The practical capacity of the FL200 is: 
 

A.  2000 sets of exam papers per hour

B.  1800 sets of exam papers per hour
C.  1500 sets of exam papers per hour
D.  500 sets of exam papers per hour
 
AACSB: Reflective
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-08 Explain the effect of alternative capacity measures on overhead rates
 
73. The East Coast University uses a printing machine, the FL200, to print exam papers. According to the operation manual,
(p. 300) FL200 can prints 2000 sets of exam papers per hour when it is operating at peak efficiency. However, Edgo Liew, the head
printer, notes that in normal (but still efficient) operations, the machine can produce only 1800 sets of exam papers in an
hour. Further, Edgo also notes that given the small number of students enrolled in the East Coast University, the machine is
never required to print more than 1500 sets of exam papers per hour.
The theoretical capacity of the FL200 is: 
 

A.  2000 sets of exam papers per hour

B.  1800 sets of exam papers per hour
C.  1500 sets of exam papers per hour
D.  500 sets of exam papers per hour
 
AACSB: Reflective
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-08 Explain the effect of alternative capacity measures on overhead rates
 
74. The following information about Monfort Manufacturing is available:
(p. 304)

Using the direct method, the cost allocated from both of the support departments to Machining Department is:  
 

A.  $170 000

B.  $155 000
C.  $160 000
D.  $180 000
 
AACSB: Analytical
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down method and the reciprocal services
method
 
75. The following information about Monfort Manufacturing is available:
(p. 304)

Using the reciprocal method, the equations required to calculate the costs of the support departments are: (where T= the cost of
Training Department; M=the cost of Maintenance Department)  
 

A.  T=$300,000 + 0.25*M; M=$200,000+0.30*T

B.  T=$300,000 + 0.30*M; M=$200,000+0.25*T
C.  T=$200,000 + 0.30*M; M=$300,000+0.25*T
D.  T=$200,000 + 0.25*M; M=$300,000+0.30*T
 
AACSB: Analytical
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down method and the reciprocal services
method
 
76. The following information about Monfort Manufacturing is available:
(p. 304)

Using the reciprocal method, the cost allocated from Training Department to Polishing Department is:  
 

A.  $297,297
B.  $106,177
C.  $79,279
D.  $74,324
 
AACSB: Analytical
Difficulty: Difficult
Graduate Attribute: Problem Solving
Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down method and the reciprocal services
method
 
77. The following information about Monfort Manufacturing is available:
(p. 304)

Using the step-down method and starting with Training Department, the cost allocated from Training Department to
Machining Department is:  
 

A.  $50,000
B.  $98,214
C.  $106,667
D.  $80,000
 
AACSB: Analytical
 Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down method and the reciprocal services
method
 
78. Dual rate versus single rate
(p. 297) Firm F has many support departments and the majority of their costs are fixed. Firm V also has many support departments
and the majority of their costs are variable. Determine which situation would be better suited for dual rate cost allocation and
explain why. 
 

Firm F would be better suited for the dual rate cost allocation method. The dual rate method is useful to minimise the effects
of short-term changes in the level of one operating department on the fixed costs assigned from a support department to other
operating departments. The variable costs of support departments will change with such changes in the level of activity, but
the fixed costs will not. By using another basis for allocation that reflects long-term utilisation, the fixed cost allocation
remains stable during periods of variation in operating department activities.

 
AACSB: Communication
AACSB: Reflective
Difficulty: Medium
Graduate Attribute: Communication
Graduate Attribute: Problem Solving
Graduate Attribute: Problem Solving
Learning Objective: 07-07 Explain the relevant issues in estimating overhead rates, including identifying cost drivers, choosing volume-based and non-volume-based
cost drivers and deciding between budgeted and actual overhead rates
 
79. Conceptual advantage of reciprocal method
(p. 304) Describe why the reciprocal method of allocating support department costs is conceptually superior to the direct and step-
down methods. 
 

The reciprocal method can fully recognise all services provided by support departments to other support departments. The
direct method completely ignores all such services. The step-down method in certain situations can recognise all such intra-
support department cost flows, but in complex situations, will recognise only one half of such flows.

 
AACSB: Communication
AACSB: Reflective
Difficulty: Easy
Graduate Attribute: Communication
Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down method and the reciprocal services
method
 
80. The reciprocal approach to allocating support department costs recognises that only large support departments provide
(p. 304) services to other support departments. 
 
FALSE
 
AACSB: Reflective
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down method and the reciprocal services
method
 
81. The estimation of the quantity of a cost driver is called the denominator volume. 
(p. 286)  
TRUE
 
Difficulty: Easy
Learning Objective: 07-01 Explain the nature of overhead costs and other indirect costs
 
82. When estimating the costs of a cost object, direct costs are allocated and indirect costs are traced to the object. 
(p. 286)  
FALSE
 
Difficulty: Easy
Learning Objective: 07-01 Explain the nature of overhead costs and other indirect costs
 
83. Prior to allocating overheads to a product, it is necessary to allocate the costs of all support departments to the production
(p. 304) departments. 
 
TRUE
 
Difficulty: Easy
Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down method and the reciprocal services
method
 
84. A plantwide overhead rate is used to allocate overheads when it is assumed that overheads are all driven by the same cost
(p. 291) driver. 
 
TRUE
 
Difficulty: Easy
Learning Objective: 07-03 Allocate overhead costs to products, using a plantwide rate
 
85. Before any costing process can occur, it is necessary to identify the cost object. 
(p. 286)  
TRUE
 
Difficulty: Easy
Learning Objective: 07-01 Explain the nature of overhead costs and other indirect costs
 
86. Based on the following figures, the predetermined manufacturing overhead rate is $20 per machine hour.
(p. 287) Budgeted manufacturing overheads $240 000
Actual manufacturing overheads $250 000
Budgeted machine hours 10 000
Actual machine hours 12 000 
 
FALSE
 
AACSB: Analytical
Difficulty: Easy
Graduate Attribute: Problem Solving
Learning Objective: 07-02 Describe the general principles for allocating indirect costs to cost objects
 
87. When management elect to calculate the overhead rate using a relatively long period of time, the overhead rate is called a
(p. 297) normalised overhead rate. 
 
TRUE
 
Difficulty: Easy
Learning Objective: 07-07 Explain the relevant issues in estimating overhead rates, including identifying cost drivers, choosing volume-based and non-volume-based
cost drivers and deciding between budgeted and actual overhead rates
 
 Chapter 07 Testbank Summary
 
Category #  of  Questions
AACSB: Analytical 30
AACSB: Communication 2
AACSB: Reflective 39
Difficulty: Difficult 5
Difficulty: Easy 45
Difficulty: Medium 37
Graduate Attribute: Communication 2
Graduate Attribute: Problem Solving 61
Graduate Attribute: Problem Solving 1
Learning Objective: 07-01 Explain the nature of overhead costs and other indirect costs 5
Learning Objective: 07-02 Describe the general principles for allocating indirect costs to cost objects 4
Learning Objective: 07-03 Allocate overhead costs to products, using a plantwide rate 3
Learning Objective: 07-04 Use the two-stage allocation process to estimate departmental overhead rates and allocate overhead c 5
osts to products
Learning Objective: 07-05 Use activity-based costing principles to assign overheads to products 1
Learning Objective: 07-07 Explain the relevant issues in estimating overhead rates, including identifying cost drivers, choosing  12
volume-based and non-volume-based cost drivers and deciding between budgeted and actual overhead rates
Learning Objective: 07-08 Explain the effect of alternative capacity measures on overhead rates 4
Learning Objective: 07-09 Discuss the general principles and reasons for allocating indirect costs to responsibility centres 3
Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down  31
method and the reciprocal services method
Learning Objective: 07-11 Understand and evaluate variable and absorption costing and prepare income statements using both a 19
pproaches.