Traditional Costing Accounting

28. An accounting system that focuses on transactions is

A. an activity-based accounting system. C. a traditional accounting system.
B. a product life cycle costing system. D. all of the above.

29. Traditionally, managers have focused cost reduction efforts on

A. activities. C. departments.
B. processes. D. costs.

33. Which of the following is a trait of a traditional cost management system?

A. unit-based drivers C. tracing is intensive
B. detailed activity information D. focus on managing activities

23. Which of the following is typically regarded as a cost driver in traditional accounting practices?
A. number of purchase orders processed C. number of transactions processed
B. number of customers served D. number of direct labor hours worked

21. Which of the following is not a trait of a traditional cost management system?
A. unit-based drivers C. focus on managing activities
B. allocating intensive D. narrow and rigid product costing

24. Which of the following is not typical of traditional costing systems?

A. Use of a single predetermined overhead rate.
B. Use of direct labor hours or direct labor cost to assign overhead.
C. Assumption of correlation between direct labor an incurrence of overhead cost.
D. Use of multiple cost drivers to allocate overhead.

Overhead allocation
35. Conventional product costing uses which of the following procedures?
A. Overhead costs are traced to departments, then costs are traced to products.
B. Overhead costs are traced to activities, then costs are traced to products.
C. Overhead costs are traced directly to product.
D. All overhead costs are expensed as incurred.

36. The overhead rates of the traditional approach to product costing use
A. nonunit-based cost drivers C. unit-based cost drivers
B. process costing D. job-order costing

Effect of Traditional overhead allocation

22. The use of unit-based activity drivers to assign costs tends to
A. overcost low-volume products. C. overcost all products.
B. overcost high-volume products. D. undercost all products.

30. Traditional overhead allocations result in which of the following situations?

A. Overhead costs are assigned as period costs to manufacturing operations.
B. High-volume products are assigned too much overhead, and low-volume products are assigned too little
overhead.
C. Low-volume products are assigned too much, and high-volume products are assigned too little overhead.
D. The resulting allocations cannot be used for financial reports.

32. Product costs can be distorted if a unit-based cost driver is used and
 A. nonunit-based overhead costs are a significant proportion of total overhead
B. the consumption ratios differ between unit-based and nonunit-based input categories
C. both a and b
D. neither a nor b

Activity-based management
1. Which system focuses on the management of activities with the objective of improving the value received by the
customer and the profit received by providing this value?
A. activity-based management C. contemporary cost control
B. traditional cost management system D. standard cost system

28. Activity-based management (ABM) is

A. a costing system in which multiple overhead cost pools are allocated using bases that include one or more
nonvolume related factors
B. a base used to allocate the cost of a resource to the different activities using it
C. the use of information obtained from ABC to make improvements in the firm
D. a base used to allocate the cost of an activity to products and customers

17. An objective of activity-based management is to

A. eliminate the majority of centralized activities in an organization.
B. reduce or eliminate non-value-added activities incurred to make a product or provide a service.
C. institute responsibility accounting systems in decentralized organizations.
D. all of the above

5. Primary concepts under activity-based management include all of the following except:
A. activity analysis C. activity-based costing
B. total quality management D. cost driver analysis

18. Which of the following falls under the Activity-Based Management umbrella?
Continuous Business process Activity-based
improvement reengineering costing
A. NO NO YES
B. YES NO NO
C. YES YES YES
D. NO YES NO

29. All of the following are ways that activities can be managed to achieve improvements in a process, except
A. activity induction C. activity elimination
B. activity selection D. activity sharing

Traditional Costing vs. ABC system

27. Which of the following is not a distinction between the traditional and ABC costing systems
A. the number of overhead cost pools tends to be higher in ABC systems
B. the number allocation bases tend to be higher in ABC system
C. costs within an ABC cost pool tend to be more homogeneous than the costs within a traditional system’s
cost pool
D. all ABC systems are one-stage costing systems, while traditional systems may be one- or two-stage

32. In contrast to a company that uses a single overhead rate, one that uses activity-based costing
A. will have higher product costs than one using a single overhead rate.
 B. cannot compute budget variances.
C. will incur additional costs for recordkeeping.
D. must have a preponderance of fixed overhead costs.

Activity-based costing
Reason

21. Of the following, which is the best reason for using activity-based costing?

A. to keep better track of overhead costs

B. to more accurately assign overhead costs to cost pools so that these costs are better controlled
C. to better assign overhead costs to products
D. to assign indirect service overhead costs to direct overhead cost pools

Benefits
2. The primary benefit of using ABC is that it provides
A. better management decisions.
B. enhanced control over overhead costs.
C. more cost pools.
D. more accurate product costing.

10. Which of the following is not a benefit of activity-based costing?

A. More accurate product costing.
B. Enhanced control over overhead costs.
C. Less costly to use.
D. Better management decisions.

Factors suggesting need to switch to ABC

4. Which of the following factors would suggest a need to switch to activity-based costing?
A. Product lines similar in volume and manufacturing complexity.
B. Overhead costs constitute a significant portion of total costs.
C. The manufacturing process has been stable.
D. Production managers use data provided by the existing system.

7. A least likely reason to use activity-based overhead rates is that

A. some departments are labor-intensive, some are machine-intensive.
B. significant amounts of overhead are driven by different factors.
C. rates calculated for some departments are much higher than for other departments.
D. all jobs require about the same amounts of cost-driving activities.

8. The presence of any of the following factors would suggest a switch to ABC except when
A. product line differ greatly in volume.
B. overhead costs constitute a minor portion of total costs.
C. the manufacturing process has changed significantly.
D. production managers are ignoring data provided by the existing system.

Characteristics
6. Which of the following is typical of activity-based costing systems?
A. Use of a single predetermined overhead rate.
B. Use of direct labor hours or direct labor cost to assign overhead.
 C. Assumption of correlation between direct labor and incurrence of overhead cost.
D. Use of multiple cost drivers to allocate overhead.

14. All of the following statements are correct except that

A. activity-based costing has been widely adopted in service industries.
B. the objective of installing ABC in service firms is different than it is in a manufacturing firm.
C. a larger proportion of overhead costs are company-wide costs in service industries.
D. the general approach to identifying activities and activity cost pools is the same in a service company as in a
manufacturing company.

Application
22. ABC should be used in which of the following situations?

A. single-product firms with multiple steps

B. multiple-product firms with only a single process
C. multiple-product firms with multiple processing steps
D. in all manufacturing firms

Limitation
9. Which of the following is a limitation of activity-based costing?
A. More cost pools C. Poorer management decisions
B. Less control over overhead costs D. Some arbitrary allocations continue

12. Each of the following is a limitation of activity-based costing system except that:
A. it can be expensive to use.
B. it is more complex than the traditional costing.
C. more cost pools are used.
D. some arbitrary allocations still continue.

Cost behavior of high-volume & low-volume product

11. As compared to a high-volume product, a low-volume product
A. usually requires less special handling.
B. is usually responsible for more overhead costs per unit.
C. requires relatively fewer machine setups.
D. requires use of direct labor hours as the primary cost driver to ensure proper allocation of overhead.

Cost assignment
15. Which of the following lists the most to least accurate method of cost assignment?
A. direct tracing, driver tracing, allocation C. driver tracing, direct tracing, allocation
B. allocation, direct tracing, driver tracing D. allocation, driver tracing, direct tracing

30. An activity-based costing system uses which of the following procedures?

A. Overhead costs are traced to departments, then costs are traced to products.
B. Overhead costs are traced to activities, then costs are traced to products.
C. Overhead costs are traced directly to products.
D. All overhead costs are expensed as incurred.

Steps
16. A well-designed activity-based costing system starts with
A. identifying the activity-cost pools.
 B. computing the activity-based overhead rate.
C. assigning manufacturing overhead costs for each activity cost pool to products.
D. analyzing the activities performed to manufacture a product.

25. The first step in activity-based costing is to

A. assign manufacturing overhead costs for each activity cost pool to products.
B. compute the activity-based overhead rate per cost driver.
C. identify and classify the major activities involved in the manufacture of specific products.
D. identify the cost driver that has a strong correlation to the activity cost pool.

26. The last step in activity-based costing is to

A. identify the major activities that pertain to the manufacture of specific products.
B. allocate manufacturing overhead costs to activity cost pools.
C. identify the cost drivers that accurately measure each activity’s contribution to the finished product.
D. assign manufacturing overhead costs for each activity cost pool to products.

65. Successful activity-based costing (ABC) implementation depends upon the firm having:
A. top management support
B. ABC linked to its competitive strategy
C. adequate resources
D. all of the above

Cost driver, activity driver & resource driver

23. Any activity that causes resources to be consumed is called a
A. just-in-time activity C. facility-level activity
B. cost driver D. nonvalue-added activity

24. A base used to allocate the cost of a resource to the different activities using that resource is
A. resource driver C. activity driver
B. final cost object D. driver

42. A base used to allocate the cost of products, customers, or other final cost objects is a(n)
A. resource driver C. activity driver
B. final cost object D. driver

38. Activity drivers differ from resource drivers in that activity drivers
A. are used to assign indirect costs while resource drivers are used to assign direct costs
B. assign the cost of activities to cost objects while resource drivers assign the cost of resources to activities
C. assign the cost of activities to resources and resource drivers assign the cost of resources to cost objects
D. are used to assign direct costs while resource drivers are used to assign indirect costs

55. An appropriate cost driver base should

A. have a cause-and-effect relationship with the activity and the use of resources
B. predict or explain activities' use of resources with reasonable accuracy
C. be based on the practical capacity of the resource to support activities
D. all of the above

Cost pool
31. A cost pool is
A. all of the costs of a particular department.
B. all costs in a group such as variable costs or discretionary fixed costs.
 C. all costs related to a product or product line.
D. all costs that have the same driver.

Cost pool rate

34. More accurate product costing information is produced by assigning costs using
A. a volume-based, plant-wide rate.
B. volume-based, departmental rates.
C. activity-based pool rates.
D. all of the above

Cost allocation
33. Activity-based overhead rates are more useful than a single plant-wide rate if
A. overhead costs are driven by several activities.
B. direct labor cost varies significantly from department to department.
C. all products require about the same amounts of all activities.
D. manufacturing overhead costs are nearly all fixed.

20. In activity-based costing, preliminary cost allocations assign costs to

A. departments. C. products.
B. processes. D. activities.

19. In activity-based costing, final cost allocations assign costs to

A. departments. C. products.
B. processes. D. activities.

35. Which of the following best describes the flow of overhead costs in an activity-based costing system?
A. Overhead costs => direct labor cost or hours => products
B. Overhead costs => products
C. Overhead costs => activity cost pools => cost drivers => products
D. Overhead costs => machine hours => products

36. Finding a single cost driver that changes in the same proportion as all the variable factory overhead costs is:
A. simplified by breaking out the fixed portion of overhead cost
B. the first step in variable overhead cost management
C. difficult, but manageable
D. impossible

37. Total activity cost is the sum of

A. resource driver assigned costs and activity driver assigned costs
B. direct and indirect costs
C. directly traceable resource costs and resource driver assigned costs
D. opportunity costs and realized costs

Activity levels
Unit level
46. Unit-level costs are costs that
A. inevitably increase whenever a unit is produced
B. are caused by the number of batches produced and sold
C. are incurred to support the number of different products produced
 D. are incurred to sustain capacity at a production site

44. Examples of unit-level costs are

A. portions of electricity and indirect materials
B. salaries of schedulers and setup personnel
C. salaries of designers and programmers
D. depreciation and insurance of building

58. Examples of unit level activities are

A. scheduling, setting up, and receiving C. heating, lighting, and security
B. designing, changing, and advertising D. cutting, painting, and packaging

41. All of the following are unit-based cost drivers except

A. machine hours C. number of setups
B. number of units D. direct labor hours

62. An example of a nonvolume-related overhead base would be:

A. Direct materials cost C. Direct Labor cost
B. Machine hours D. Number of setups

Batch level
54. Batch-level resources are acquired
A. for individual units of product or service
B. for making a group of similar products
C. to produce and sell a specific product
D. to provide a general capacity to produce products and services.

45. Examples of batch-level activity drivers include

A. units of output and direct labor hours
B. number of batches and material moves
C. number of products and design changes
D. square footage occupied

63. Which of the following is not a batch-level activity?

A. Engineering changes. C. Inspection.
B. Equipment setups. D. Material handling.

Product-sustaining level
43. Examples of activities at the product level of costs include
A. cutting, painting, and packaging
B. scheduling, setting up, and moving
C. designing, changing, and advertising
D. heating, lighting and security

40. Which of the following activities is directly traceable to a product?

A. batch-level activities C. facility-level activities
B. unit-level activities D. product-sustaining activities

57. Designing and redesigning are activities that are classified as

A. Facility level C. Unit level
B. Batch level D. Product level
 60. Which of the following is the best way to consider a product-level cost?.

A. A product-level cost can be avoided when a product line is discontinued.

B. A product-level cost can be avoided when a there is change in the production schedule so the product is
not produced this week.
C. A product level cost can be avoided when a business segment is discontinued.
D. A product level cost can be avoided when the corporation is dissolved.

61. Examples of activities at the batch level of costs include

A. scheduling, setting up, and moving
B. designing, changing, and advertising
C. heating, lighting, and security
D. cutting, painting, and packaging

Facilities sustaining level

39. Which of the following activities may support all the organization's processes and are the highest level of
activities?
A. batch-level activities C. facility-level activities
B. product-sustaining activities D. unit-level activities

56. In a pure activity-based cost system which of the following might be treated as period costs?
A. facility-level costs C. batch-level costs
B. product-level costs D. unit-level costs

47. Plant-level costs are costs that

A. inevitably increase whenever a unit is produced
B. are caused by the number of batches produced and sold
C. are incurred to support the number of different products produced
D. are incurred to sustain capacity at a production site

59. Which of the following is not considered to be a facility-level cost?

A. Cost of Property Insurance.
B. Cost of personnel administration.
C. Cost of Liability Insurance for only one of the product lines.
D. Cost of building security.

Value adding & Non-value adding activity

49. The following activity is value-added:
A. Storage of raw materials C. Moving parts from machine to machine
B. Turning a piece of metal on a lathe D. All of these

48. An activity that adds cost to the product but does not increase it market value is a
A. value-added activity C. cost driver
B. cost-benefit activity D. nonvalue-added activity

50. When a firm redesigns a product to reduce the number of component parts, the firm is

A. increasing consumer value.

B. increasing the value added to the product.
 C. decreasing product variety.
D. decreasing non-value-added costs.

52. Under activity-based costing, benchmarks for product cost should contain an allowance for

A. idle time. C. spoilage.

B. idle time and scrap materials. D. none of the above.

64. Elimination of non-value-added activities in a firm should:

A. be discouraged because of potential harmful effects
B. not affect customer value
C. not have priority because non-value-added activities do not affect a firm's performance
D. have priority only when a firm is operating at a loss

66. Page Company’s cost allocation and product costing procedures follow activity-based costing principles. The
following activities have been identified and classified as being either value-adding or non-value adding as to
each product.
1. Raw materials storage activity
2. Design engineering activity
3. Drill press activity
4. Heat treatment activity
5. Quality control inspection activity
6. Issuance of purchase order activity
How are the foregoing activities classified?
Value-adding Non-value adding
A. 1, 2, 5, 6 3, 4
B. 1, 2, 4 3, 5, 6
C. 2, 4, 5 1, 3, 6
D. 2, 3, 4 1, 5, 6

Productivity Measures
51. Manufacturing cycle efficiency is a measure of
A. bottlenecks. C. efficiency.
B. effectiveness. D. quality.

53. The amount of time between the development and the production of a product is

A. the product life cycle. C. production time.

B. lead time. D. value-added time.

Traditional Costing
Overhead cost per unit
i
. Mary Manufacturing Company manufactures two products (X and Y). The overhead costs of P29,000 have
been divided into three cost pools that use the following activity drivers:
Product No. of Orders No. of Labor Transactions No. of Labor Hours
X 30 100 1,000
Y 20 300 4,000
Cost per pool P5,000 P4,000 P20,000
Using traditional costing, what is the amount of overhead cost to be assigned to Product Y using labor hours
 as the allocation base?
A. P21,750 C. P16,000
B. P 5,800 D. P23,200
. Answer: D
Total overhead (5,000 + 4,000 + 20,000) 29,000
Allocated OH to Product Y based on labor hours: 4 ÷ 20 x 29,000 P23,200

Unit cost
ii
. Arid Company produces products BH and XP. The direct cost of BH is P250 per unit and XP is P350 per unit.
Fifty units of BH and 150 units of XP were produced. Overhead amounting to P130,000 is allocated to products
using direct costs as the relevant cost driver.
The cost of XP per unit amounts to
A. P750 C. P1,050
B. P1,000 D. P1,250
. Answer: D
BH: (50 x P250) P 12,500
XP: (150 x P350) 52,500
Total direct costs P 65,000

Allocated OH to XP based on direct costs: (52,500 ÷ 65,000 x P130,000) P105,000

Unit cost – Product XP:
Direct cost P 350
overhead (P105,000 ÷ 150) 700
Total P1,050

Activity-based Costing
Batch-level costs
Allocated overhead
iii
. One of Alien Company’s activity cost pools is machine setups, with estimated overhead of P300,000. Alien
produces slacks (400 setups) and shirts (600 setups). How much of the machine setup cost pool should be
assigned to slacks?
A. P 0 C. P150,000
B. P120,000 D. P180,000
. Answer: B
Setup cost per setup (P300,000 ÷ 1,000) P300
Setup costs assigned to slacks (400 x P300) P120,000

iv
. The overhead rate for Machine Setups is P100 per setup. Products A and B have 80 and 60 setups,
respectively. The overhead assigned to each product is
A. Product A P8,000, Product B P8,000 C. Product A P8,000, Product B P6,000
B. Product A, P6,000, Product B P6,000 D. Product A, P6,000, Product B P8,000
. Answer: C
Overhead allocated to:
Product A: (80 x P100) P8,000
Product B: (60 x P100) 6,000
v
. Sylvia Company has identified an activity cost pool to which it has allocated estimated overhead of P1,920,000
and determined the expected use of cost drivers per that activity to by 160,000 inspections. Widgets require
40,000 inspections, Gadgets 30,000 inspections, and Targets, 90,000 inspections.
 The overhead assigned to each product is
A. Widgets P40,000, Gadgets P30,000, Targets P90,000
B. Widgets P480,000, Gadgets P360,000, Targets P1,080,000
C. Widgets P360,000, Gadgets P480,000, Targets P1,080,000
D. Widgets P480,000, Gadgets P360,000, Targets P1,080,000
. Answer: D
Overhead rate per inspection: (P1,920,000 ÷ 160,000) P12
Overhead assigned to:
Widgets: (40,000 x P12) P 480,000
Gadgets (30,000 x P12) 360,000
Targets (90,000 x P12) 1,080,000

Overhead cost per unit

vi
. EMPIRE Company makes two products, E and M. E is being introduced this period, whereas M has been in
production for 2 years. For the period about to begin, 1,000 units of each product are to be manufactured. The
only relevant overhead item is the cost of engineering change orders. E and M are expected to require eight and
two change orders, respectively. E and M are expected to require 2 and 3 machine hours, respectively. The
cost of a change order is P600.
If EMPIRE applies engineering change order cost on the basis of machine hours, the overhead cost per unit
to be assigned to E and M, respectively, are
A. P2.40 and P3.60, respectively C. P4.80 and P3.60, respectively
B. P3.60 and P2.40, respectively D. P3.60 and P4.80, respectively
. Answer: A
Cost of change orders 10 x 600 P6,000
Cost of change order per hour P6,000/5,000 hours P1.20/MH
Cost of change order per unit:
E: 2 hours x P1.20 P2.40
M: 3 hours x P1.20 P3.60
vii
. Beltran Company produces products X and Y. The direct cost of X is P250 per unit (P100 materials and P150
labor) and Y is P350 (P230 material and P120 labor) per unit. Fifty units of X and 150 units of Y were produced.
Overhead amounts to P130,000 and is composed of material handling P12,000, labor support P60,000, machine
operation P48,000, and general administration P10,000. Material handling cost driver is material cost, labor
support cost driver is labor cost. Machine operation cost resulted from running the machines a total of 480 hours
(three-fourth of which was for product X). General administration effort related equally to product X and Y.
Material handling chargeable per unit of X (rounded) amounts to
A. P30; P 70 C. P60; P140
B. P40; P 80 D. P70; P 30
. Answer: A
Materials cost:
Product X: (50 x P100) P 5,000
Product Y: (150 x P230) 34,500
Total P39,500
Material handling cost based on direct materials cost: (P12,000 ÷ P39,500) P0.3038
Material handling cost per unit chargeable to:
Product X: (50,000 x P0.3038 ÷ 50) P 30.38
Product Y: (34,500 x P0.3038 ÷ 150) P 69.87
viii
. Genco manufactures two versions of a product. Production and cost information show the following:
 Model A Model B
Units produced 200 400
Material moves (total) 20 80
Direct labor hours per unit 1 2
Material handling costs total P200,000. Under ABC, the material handling costs allocated to each unit of Model A
and Model B would be:
A. B. C. D.
Model A P100 P200 P333 P130
Model B P333 P400 P200 P100
. Answer: B
Handling cost per move (P200,000 ÷ 100 moves) P2,000
Model A: 20 x P2,000 ÷ 200 P 200
Model B: 80 x P2,000 ÷ 400 P 400
ix
. EMPIRE Company makes two products, E and M. E is being introduced this period, whereas M has been in
production for 2 years. For the period about to begin, 1,000 units of each product are to be manufactured.
The only relevant overhead item is the cost of engineering change orders. E and M are expected to require
eight and two change orders, respectively. E and M are expected to require 2 and 3 machine hours,
respectively. The cost of a change order is P600.
If EMPIRE is using direct tracing, the amount of overhead per unit that will be assigned to E and M, respectively,
are
A. P2.40 and P3.60, respectively C. P4.80 and P1.20, respectively
B. P3.60 and P2.40, respectively D. P1.20 and P4.80, respectively
Answer: C
Cost of change orders based on ABC
E: 8 x P600 ÷ 1,000 P4.80
M: 2 x P600 ÷ 1,000 P1.20

Total allocated overhead

x
. Germie, Inc., has identified the following overhead costs and activity drivers for next year:
Overhead Item Expected Cost Activity Driver Expected Quantity
Setup costs P100,000 Number of setups 500
Ordering costs 40,000 Number of orders 3,200
Maintenance 200,000 Machine hours 4,000
Power 20,000 Kilowatt hours 80,000
The following are two of the jobs completed during the year:
Job 500 Job 501
Direct materials P1,500 P2,000
Direct labor P1,400 P2,400
Units completed 100 160
Direct labor hours 100 160
Number of setups 2 8
Number of orders 8 10
Machine hours 40 50
Kilowatt hours 60 100
The company’s normal activity is 4,000 direct labor hours.
If the four activity drivers are used to allocate overhead costs, total overhead allocated to Job 500 would be
A. P2,766.50. C. P2,515.00.
B. P2,415.00. D. P2,815.00
Answer: C
Activity Rates:
Setup (P100,000 ÷ 500) P200.00
Ordering (P40,000 ÷ 3,200) 12.50
Maintenance (P200,000 ÷ 4,000) 50.00
Power (P20,000 ÷ 80,000) 0.25
Overhead costs assigned to Job 500:
Setup (2 x P200) P 400
Ordering (8 x P12.50) 100
Maintenance (40 x P50) 2,000
Power (60 x P025) 15
Total P2,515

Unit cost
xi
. Wesleyan University Hospital plans to use activity-based costing to assign hospital indirect costs to the care
of patients. The hospital has identified the following activities and activity rates for the hospital’s indirect
costs:
Activity Activity Rate
Room and meals P150 per day
Radiology P 95 per image
Pharmacy P 20 per physician order
Chemistry lab P 85 per test
Operating room P550 per operating room hour
The records of two representative patients were analyzed, using the activity rates. The activity information
associated with the two patients is as follows:
Patient Flor Patient Laura
Number of days 7.0 3
Number of images 4.0 2
Number of physician orders 5.0 1
Number of tests 6.0 2
Number operating room hours 4.5 1
Determine the activity cost associated with Patient Flor:
A. P4,500 C. P4,495
B. P4,550 D. P4,515
. Answer: D
Room and meals (7 days x P150) P1,050
Radiology (4 images x P95) 380
Pharmacy (5 orders x P20) 100
Chemistry lab (6 tests x P85) 510
Operating room (4.5 hours x P550) 2,475
Total P4,515

Total cost
xii
. Food Factory, Inc., has identified the following cost drivers for its expected overhead costs for the year:
Budgeted Cost Cost Driver
Cost Pools Cost Driver Level
Setup P 80,000 Number of setups 100
Ordering 40,000 Number of orders 500
Maintenance 100,000 Machine hours 2,500
 Power 20,000 Kilowatt hours 5,000
Total direct labor hours budgeted = 1,000 hours.
The following data applies to one of the products completed during the year:
Cost Product X Activity Driver Driver Consumption
Direct materials P2,000 Number of setups 2
Direct labor P2,400 Number of orders 5
Units completed 200 Machine hours 25
Direct labor hours 80 Kilowatt hours 50
If the activity-based cost drivers are used to allocate overhead cost, the total cost of Product X will be:
A. P7,400 C. P4,400
B. P7,800 D. P7,600
Answer: D
Setup P 80,000 ÷ 100 x 2 P1,600
Ordering P 40,000 ÷ 500 x 5 400
Maintenance P100,000 ÷ 2,500 x 25 1,000
Power P 20,000 ÷ 5,000 x 50 200
Total overhead assigned P3,200
Direct materials 2,000
Direct labor 2,400
Total costs assigned P7,600

xiii
. Ray Manufacturing has four categories of overhead. The four categories and expected overhead costs for
each category for next year are listed as follows:
Maintenance P510,000
Material handling 250,000
Setups 60,000
Inspection 210,000
Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labor hours.
100,000 direct labor hours are budgeted for next year.
The company has been asked to submit a bid for a proposed job. The plant manager feels that obtaining this
job would result in a new business in future years. Usually bids are based upon full manufacturing costs plus
10 percent.
Estimates for the proposed job are as follows:
Direct materials P30,000
Direct labor (8,000 hours) P24,000
Number of material moves 100
Number of inspections 120
Number of setups 24
Number of machine hours 4,000
The plant manager has heard of a new way of applying overhead that uses cost pools and activity drivers.
Expected activity for the four activity drivers that would be used are:
Machine hours 60,000
Material moves 20,000
Setups 3,000
Quality inspections 12,000
What is the total cost of the proposed job if Ray Manufacturing uses direct labor hours as its only activity
driver?
A. P144,000 C. P112,400
B. P136,400 D. P106,400
 Answer: B
Direct materials P 30,000
Direct labor 24,000
Overhead 82,400
Total cost of the job P136,400
OH rate per DLH:
(P510,000 + P250,000 + P60,000 + P210,000) ÷ 100,000 P10.30 per DLH
Overhead allocated to proposed job: 8,000 x 10.30 82,400

Traditional Costing & Activity-based Costing

Questions 15 & 16 are based on the following information.
Gilmore Company produces two products in a single factory. The following production and cost information has been
determined:
Model 1 Model 2
Units produced 1,000 200
Material moves (total) 100 40
Testing time (total) 250 125
Direct labor hours per unit 1 5
The controller has determined total overhead to be P480,000. P140,000 relates to material moves; P150,000 relates
to testing; the remainder is related to labor time.
xiv
. If Gilmore uses direct labor hours to allocate overhead to each model, what would overhead per unit be for
Model 2?
A. P 158.33 C. P 950.00
B. P 400.00 D. P1,200.00
Answer: D
Total DLH used (1,000 x 1) + (20 x 5) 2,000
Overhead allocated to Model 2 (0.5 x P480,000) P240,000
Overhead per unit of Model 2: (P240,000 ÷ 200) P1,200
xv
. If Gilmore uses activity-based costing to allocate overhead to each model, what would overhead per unit be for
Model 2?
A. P158.33 C. P925.00
B. P415.93 D. P815.00
Answer: C
Overhead allocated to Model 2:
Handling (P140,000 ÷ 140 x 40 moves) P 40,000
Testing (P150,000 ÷ 375 x 125) 50,000
Labor-related (P190,000 ÷ 2) 95,000
Total P185,000
Overhead per unit, Model 2 (P185,000 ÷ 200) P925

Questions 17 & 18 are based on the following information.

Hughes Company produces three products with the following production and cost information:
Model A Model B Model C
Units produced 2,000 6,000 12,000
Direct labor hours (total) 4,000 2,000 4,000
Number of setups 100 150 250
Number of shipments 200 225 275
 Engineering change orders 15 10 5
Overhead costs include setups P90,000; shipping costs P140,000; and engineering costs P180,000.
xvi
. What would be the per unit overhead cost for Model A if direct labor hours were the allocation base?
A. P20.50 C. P82.00
B. P41.00 D. P76.00
Answer: B
Overhead rate per DLH (P410,000 ÷ 10,000) P41
Overhead applied to Model A: (4,000 x P41) P164,000
Overhead applied to Model A per unit: (P164,000 ÷ 2,000) P82

xvii
. What would be the per unit overhead cost for Model A if activity-based costing were used?
A. P20.50 C. P82.00
B. P74.00 D. P76.00
Answer: B
Activity rates;
Setups: (P90,000 ÷ 500 setups) P 180
Shipping: (P140,000 ÷ 700 shipments) 200
Engineering (P180,000 ÷ 30 change orders) 6,000

Overhead assigned to Model A

Setups (100 x P180) P 18,000
Shipping (200 x P200) 40,000
Engineering (15 x P6,000) 90,000
Total P148,000
Overhead per unit of Model A (P148,000 ÷ 2,000) P 74

Question Nos. 19 and 20 are based on the following:

Toylandia Company manufactures two products, X-MAN and Machman. Toylandia's overhead costs consist of
setting up machines, P400,000; machining, P900,000; and inspecting, P300,000.
Information on the two products is:
X-MAN Machman
Direct labor hours 15,000 25,000
Machine setups 600 400
Machine hours 24,000 26,000
Inspections 800 700
xviii
. Overhead applied to X-MAN using traditional costing is
A. P600,000. C. P832,000.
B. P768,000. D. P960,000.
Answer: A
Total overhead costs: (P400,000 + P900,000 + P300,000) P1,600,000
Overhead applied to X-MAN using direct labor hours
(15,000/40,0000) x P1,600,000 P600,000
xix
. Overhead applied to Machman using activity-based costing is
A. P 640,000. C. P 832,000.
B. P 768,000. D. P1,000,000.
Answer: B
 Activity Rates:
Setups (400,000/1,000 setups) P400 per set up
Machining (900,000/50,000 MH) P 18 per MH
Inspection (300,000/1,500 Inspection) P200 per inspection
Overhead assigned to Machman using ABC:
(400xP400) + (26,000xP18) + (700xP200) P768,000

Questions 21 & 22 are based on the following information.

The Oilfield plant has two categories of overhead: maintenance and inspection. Costs expected for these categories
for the coming year are as follows:
Maintenance P100,000
Inspection 150,000
The plant currently applies overhead using direct labor hours and expected capacity of 50,000 direct labor hours.
The following data have been assembled for use in developing a bid for a proposed job:
Direct materials P1,000
Direct labor P4,000
Machine hours 500
Number of inspections 4
Direct labor hours 800
The total number of expected machine hours for all jobs during the year is 25,000, and the total expected number of
inspections is 1,500.
xx
. Using activity-based costing system and the appropriate activity drivers, the total cost of the potential job would
be
A, P2,400 C. P7,400
B. P3,600 D. P7,750
Answer: C
Direct materials P1,000
Direct labor 4,000
Maintenance 500 x 4 2,000
Inspection 4 x 100 400
Total P7,400
Activity Rate:
Inspection (P150,000 ÷ 1,500) P100/inspection
Maintenance (P100,000 ÷ 25,000) P4/MH
xxi
. Using direct labor hours to assign overhead, the total cost of the potential job would be
A. P 5,000 C. P 8,000
B. P11,000 D. P 9,000
Answer: D
OH rate per DLH: (P250,000 ÷ 50,000 DLH) = P5.00
Cost of the proposed job:
Direct materials P1,000
Direct labor 4,000
Overhead (800 hours x P5 4,000
Total P9,000

Question Nos. 23 through 25 are based on the following:

Special Products recently installed an activity-based relational data base. Using the information contained in the
activity relational table, the following pool rates were computed:
 P200 per purchase order
P12 per machine hour, process A
P15 per machine hours, process B
P40 per engineering hour

Two products are produced by Special Products: A and B. Each product has an area in the plant that is dedicated to
its production. The plant has two manufacturing processes, process A and process B. Other processes include
engineering, product handling, and procurement. The product relational table for Special is as follows:
Activity Usage
Activity Driver # and Name Product A: Product B:
1 Units 200,000 25,000
2 Purchase orders 250 125
3 Machine hours 80,000 10,000
4 Engineering hours 1,250 1,500

xxii
. How much overhead cost will be assigned to product B using process B?
A. P1,200,000 C. P120,000
B. P960,000 D. P150,000
Answer: D
OH assigned to Product B: 6,000 MH x P15 per MH = P150,000
xxiii
. What is the unit cost of Product A?
A. P4.71 C. P4.80
B. P252.00 D. P5.30
Answer: D
Purchasing cost (250 x P200) P 50,000
Processing costs (80,000 x P12) 960,000
Engineering cost (1,250 x P40) 50,000
Total costs assigned to Product A P1,060,000
Unit cost: (P1,060,000 ÷ 200,000) P 5.30
xxiv
. Dagger Corporation has the following activities: creating bills of materials (BOM), studying manufacturing
capabilities, improving manufacturing processes, training employees, and designing tooling. The general ledger
accounts reveal the following expenditures for manufacturing engineering:
Salaries P150,000
Equipment 80,000
Supplies 20,000
Total P250,000
The equipment is used for two activities: improving processes and designing tooling. Thirty-five percent of the
equipment’s time is used for improving processes and sixty-five percent is used for designing tools. The salaries
are for two engineers. One is paid P100,000, while the other earns P50,000. The P100,000 engineer spends
40% of his time training employees in new processes and 60% of his time on improving processes. The
remaining engineer spends equal time on all activities. Supplies are consumed in the following proportions:
Creating BOMs 25%
Studying capabilities 10%
Improving processes 20%
Training employees 25%
Designing tooling 20%
What is the cost assigned to the designing tooling activity?
 A. P162,500 C. P50,000
B. P 66,000 D. P250,000
Answer: B
Cost of use of equipment (0.65 x P80,000) P 52,000
Supplies (0.2 x P20,000) 4,000
Salary of second engineer (0.2 x P50,000) 10,000
Total cost assigned to designing tool activity P 66,000

Use the following data to respond to questions 26 through 29

Consider the following facts for NM Company which produces product N and M
Activity Cost Driver N’s share M’s share Unused Cost
Setups # of set ups 10 40 5 P 5,500
Ordering # of orders 5 10 5 3,200
Receiving # of receipts 22 12 6 2,400
Product Dev. # of parts 180 120 100 2,800
Gen Mgt #, labor hrs 2,900 4,100 1,000 7,200
Security Area covered 3,200 5,400 400 9,000
Materials # of units produced 400 800 120,000
Labor # of DLH 1,700 3,100 1,200 56,000

xxv
. Set up cost chargeable per unit of M accounting for unused capacity amounts to
A. 2.50 C. 5.00
B. 2.75 D. 5.50
Answer: C
Setup cost chargeable to Product M: (40/55 x P5,50 P4,000
Setup cost per unit, Product M: (P4,000 ÷ 800) P 5.00
xxvi
. Ordering cost chargeable per unit of N ignoring unused capacity amounts to
A. 2.00 C. 3.00
B. 2.67 D. 4.00
Answer: B
Ordering costs chargeable to Product M: 5/15 x P3,200) P1,066.67
Ordering cost per unit, Product M: (P1,066.67 ÷ 400) P 2.67
xxvii
. The cost of unused capacity excluding labor costs amounts to
A. 11,260 C. 11,856
B. 11,460 D. 14,856

Answer: D
Activity rate:
Setup cost: (5,500 ÷ 55) P100 per setup
Ordering: (P3,200 ÷ 20) P160 per order
Receiving cost: (P2,400 ÷ 40) P60 per receipt
Product development: (P2,800 ÷ 400) P 7 per part
General management: (P7,200 ÷ 8,000) P 0.90 per hour
Security: (P9,000 ÷ 9,000) P1.00 per sq. m.
Labor cost: (P56,000 ÷ 6,000) P9.33 per DLH

Cost of unused capacity:

(5 x P100) + (5 x P160) + (6 x P60) + (100 x P7) + (1,000 x P0.90)
+ (400 x P1) + (1,200 x P9.33) P14,856
i
.Answer: D
Total overhead (5,000 + 4,000 + 20,000) 29,000
Allocated OH to Product Y based on labor hours: 4 ÷ 20 x 29,000 P23,200

ii
.Answer: D
BH: (50 x P250) P 12,500
XP: (150 x P350) 52,500
Total direct costs P 65,000

Allocated OH to XP based on direct costs: (52,500 ÷ 65,000 x P130,000) P105,000

Unit cost – Product XP:
Direct cost P 350
overhead (P105,000 ÷ 150) 700
Total P1,050

iii
.Answer: B
Setup cost per setup (P300,000 ÷ 1,000) P300
Setup costs assigned to slacks (400 x P300) P120,000

iv
.Answer: C
Overhead allocated to:
Product A: (80 x P100) P8,000
Product B: (60 x P100) 6,000

v
.Answer: D
Overhead rate per inspection: (P1,920,000 ÷ 160,000) P12
Overhead assigned to:
Widgets: (40,000 x P12) P 480,000
Gadgets (30,000 x P12) 360,000
Targets (90,000 x P12) 1,080,000

vi
.Answer: A
Cost of change orders 10 x 600 P6,000
Cost of change order per hour P6,000/5,000 hours P1.20/MH
Cost of change order per unit:
E: 2 hours x P1.20 P2.40
M: 3 hours x P1.20 P3.60

vii
.Answer: A
Materials cost:
Product X: (50 x P100) P 5,000
Product Y: (150 x P230) 34,500
Total P39,500
Material handling cost based on direct materials cost: (P12,000 ÷ P39,500) P0.3038
Material handling cost per unit chargeable to:
Product X: (50,000 x P0.3038 ÷ 50) P 30.38
Product Y: (34,500 x P0.3038 ÷ 150) P 69.87

viii
.Answer: B
Handling cost per move (P200,000 ÷ 100 moves) P2,000
Model A: 20 x P2,000 ÷ 200 P 200
Model B: 80 x P2,000 ÷ 400 P 400
ix
.Answer: C
Cost of change orders based on ABC
E: 8 x P600 ÷ 1,000 P4.80
M: 2 x P600 ÷ 1,000 P1.20

x
.Answer: C
Activity Rates:
Setup (P100,000 ÷ 500) P200.00
Ordering (P40,000 ÷ 3,200) 12.50
Maintenance (P200,000 ÷ 4,000) 50.00
Power (P20,000 ÷ 80,000) 0.25
Overhead costs assigned to Job 500:
Setup (2 x P200) P 400
Ordering (8 x P12.50) 100
Maintenance (40 x P50) 2,000
Power (60 x P025) 15
Total P2,515

xi
.Answer: D
Room and meals (7 days x P150) P1,050
Radiology (4 images x P95) 380
Pharmacy (5 orders x P20) 100
Chemistry lab (6 tests x P85) 510
Operating room (4.5 hours x P550) 2,475
Total P4,515

xii
.Answer: D
Setup P 80,000 ÷ 100 x 2 P1,600
Ordering P 40,000 ÷ 500 x 5 400
Maintenance P100,000 ÷ 2,500 x 25 1,000
Power P 20,000 ÷ 5,000 x 50 200
Total overhead assigned P3,200
Direct materials 2,000
Direct labor 2,400
Total costs assigned P7,600

xiii
.Answer: B
Direct materials P 30,000
Direct labor 24,000
Overhead 82,400
Total cost of the job P136,400
OH rate per DLH:
(P510,000 + P250,000 + P60,000 + P210,000) ÷ 100,000 P10.30 per DLH
Overhead allocated to proposed job: 8,000 x 10.30 82,400

xiv
.Answer: D
Total DLH used (1,000 x 1) + (20 x 5) 2,000
Overhead allocated to Model 2 (0.5 x P480,000) P240,000
Overhead per unit of Model 2: (P240,000 ÷ 200) P1,200

xv
.Answer: C
 Overhead allocated to Model 2:
Handling (P140,000 ÷ 140 x 40 moves) P 40,000
Testing (P150,000 ÷ 375 x 125) 50,000
Labor-related (P190,000 ÷ 2) 95,000
Total P185,000
Overhead per unit, Model 2 (P185,000 ÷ 200) P925

xvi
.Answer: B
Overhead rate per DLH (P410,000 ÷ 10,000) P41
Overhead applied to Model A: (4,000 x P41) P164,000
Overhead applied to Model A per unit: (P164,000 ÷ 2,000) P82

xvii
.Answer: B
Activity rates;
Setups: (P90,000 ÷ 500 setups) P 180
Shipping: (P140,000 ÷ 700 shipments) 200
Engineering (P180,000 ÷ 30 change orders) 6,000

Overhead assigned to Model A

Setups (100 x P180) P 18,000
Shipping (200 x P200) 40,000
Engineering (15 x P6,000) 90,000
Total P148,000
Overhead per unit of Model A (P148,000 ÷ 2,000) P 74

xviii
.Answer: A
Total overhead costs: (P400,000 + P900,000 + P300,000) P1,600,000
Overhead applied to X-MAN using direct labor hours
(15,000/40,0000) x P1,600,000 P600,000

xix
.Answer: B
Activity Rates:
Setups (400,000/1,000 setups) P400 per set up
Machining (900,000/50,000 MH) P 18 per MH
Inspection (300,000/1,500 Inspection) P200 per inspection
Overhead assigned to Machman using ABC:
(400xP400) + (26,000xP18) + (700xP200) P768,000

xx
.Answer: C
Direct materials P1,000
Direct labor 4,000
Maintenance 500 x 4 2,000
Inspection 4 x 100 400
Total P7,400
Activity Rate:
Inspection (P150,000 ÷ 1,500) P100/inspection
Maintenance (P100,000 ÷ 25,000) P4/MH

xxi
.Answer: D
OH rate per DLH: (P250,000 ÷ 50,000 DLH) = P5.00
Cost of the proposed job:
Direct materials P1,000
 Direct labor 4,000
Overhead (800 hours x P5 4,000
Total P9,000

xxii
.Answer: D
OH assigned to Product B: 6,000 MH x P15 per MH = P150,000

xxiii
.Answer: D
Purchasing cost (250 x P200) P 50,000
Processing costs (80,000 x P12) 960,000
Engineering cost (1,250 x P40) 50,000
Total costs assigned to Product A P1,060,000
Unit cost: (P1,060,000 ÷ 200,000) P 5.30

xxiv
.Answer: B
Cost of use of equipment (0.65 x P80,000) P 52,000
Supplies (0.2 x P20,000) 4,000
Salary of second engineer (0.2 x P50,000) 10,000
Total cost assigned to designing tool activity P 66,000

xxv
.Answer: C
Setup cost chargeable to Product M: (40/55 x P5,50 P4,000
Setup cost per unit, Product M: (P4,000 ÷ 800) P 5.00

xxvi
.Answer: B
Ordering costs chargeable to Product M: 5/15 x P3,200) P1,066.67
Ordering cost per unit, Product M: (P1,066.67 ÷ 400) P 2.67

xxvii
.Answer: D
Activity rate:
Setup cost: (5,500 ÷ 55) P100 per setup
Ordering: (P3,200 ÷ 20) P160 per order
Receiving cost: (P2,400 ÷ 40) P60 per receipt
Product development: (P2,800 ÷ 400) P 7 per part
General management: (P7,200 ÷ 8,000) P 0.90 per hour
Security: (P9,000 ÷ 9,000) P1.00 per sq. m.
Labor cost: (P56,000 ÷ 6,000) P9.33 per DLH

Cost of unused capacity:

(5 x P100) + (5 x P160) + (6 x P60) + (100 x P7) + (1,000 x P0.90)
+ (400 x P1) + (1,200 x P9.33) P14,856

Activity-based Costing
7. The last step in activity-based costing is to
A. identity the major activities that pertain to the manufacture of specific products
B. allocate manufacturing overhead costs to activity cost pools
C. Identify the cost drivers that accurately measure each activity’s contribution to the finished product
D. Assign manufacturing overhead costs for each activity cost pool to products

8. Designing and redesigning are activities that are classified as

A. Facility level C. Unit level
 B. Batch level D. Product level

9. The examples of activities at the product level include

A. scheduling, setting up, and moving C. heating, lighting, and security
B. designing, changing, and advertising D. cutting, painting, and packaging

1. Examples of activities at the batch level of costs include

A. scheduling, setting up, and moving C. heating, lighting, and security
B. designing, changing, and advertising D. cutting, painting, and packaging

2. Scheduling, setting up, and moving are examples of activities that are classified as

A. Batch level C. Unit level

B. Product level D. Facility level

10. Examples of unit level activities are

A. scheduling, setting up, and receiving C. heating, lighting, and security
B. designing, changing, and advertising D. cutting, painting, and packaging

3. An example of a nonvolume-related overhead base would be:

A. Direct materials cost C. Direct Labor cost
B. Machine hours D. Number of inspections

11. Classify the following as volume (unit) base or non-volume (activity) base:
1. Number of purchase orders issued
2. Direct labor hours
3. Number of machine hours
4. Number of set ups
5. Number of receiving reports issued
6. Direct material cost
A. B. C. D.
Volume (Unit) Base 1, 4, 5, 6 1, 4, 5 1, 2, 3, 4, 5 2, 3, 6
Non-volume (Activity) 2, 3 2, 3, 6 6 1, 4, 5
Base

12. McMd's standard cost card indicates that it takes three hours of direct labor to produce one unit of product. A recently
conducted time and motion study revealed that it should take one hour to produce the same unit. Labor cost is P150 per
hour.
McMd's value-added, and non value-added costs would be
A. P150 and P0 C. P150 and P300
B. P0 and P150 D. P450 and P0

13. Moon Company makes two products, Alpha and Beta. Alpha is being introduced this period, whereas Beta has been in
production for 2 years. For the period about to begin, 1,000 units of each product are to be manufactured. The only
relevant overhead item is the cost of engineering change orders. Alpha and Beta are expected to require eight and two
change orders, respectively. Alpha and Beta are expected to require 2 and 3 machine hours, respectively. The cost of
a change order is P600.
If Moon is using direct tracing, the amount of overhead per unit that will be assigned to Alpha and Beta, respectively,
are
A. P2.40 and P3.60, respectively C. P4.80 and P1.20, respectively
B. P3.60 and P2.40, respectively D. P1.20 and P4.80, respectively
Absorption Costing & Variable Costing
Variable Costing
47. Which of the following statements is true for a firm that uses variable (direct) costing?
A. The cost of a unit of product changes because of changes in the number of units manufactured
B. Profits fluctuate with sales
C. An idle facility variation is calculated
D. Product costs include “direct” (variable) administrative costs

48. Which of the following is not true of variable costing?

A. Profits may increase though sales decrease
B. Profits fluctuate with sales
C. The cost of the product consists of all variable production costs
D. The income statement under variable costing does not include overhead volume variance.

21. The following information was extracted from the first year of absorption-based accounting records of NOLI Co.
Total fixed costs incurred .P100,000
Total variable costs incurred 50,000
Total period costs incurred .70,000
Total variable period costs incurred 30,000
Units produced 20,000
Units sold 12,000
Unit sales Price P 12
Based on variable costing, if NOLI Company had sold 12,001 units instead of 12,000, its income before taxes would
have been
A. P 9.50 higher C. P8.50 higher
B. P11.00 higher D. P8.33 higher

49. Coo Company manufactures a single product using standard costing. Variable production costs; are P12 and fixed
production costs are P125,000. Coo uses a normal activity of 12,500 units to set its standard costs. Coo began the year
with 1,000 unite in inventory, produced 11,000 units, and sold 11,500 units.
The standard cost of goods sold under variable costing would be
A. P115,000 C. P242,000
B. P138,000 D. P253,000

Absorption Costing
15. When a firm prepares financial reports by using absorption costing
A. profits will always increase with increase in sales
B. profits will always decrease with decreases in sales
C. profits may decrease with increased sales even if there is no change in selling prices and costs
D. decreased output and constant sales result in increased profits

18. West Co.’s 2000 manufacturing costs were as follows:

Direct materials and direct labor P 700,000
Other variable manufacturing costs 100,000
Depreciation of factory building and manufacturing equipment 80,000
Other fixed and manufacturing overhead 18,000
What amount should be considered product cost for external reporting purposes?
A. P 700,000 C. P880,000
B. P800,000 D. P898,000

16. Toshiba Company incurred the following costs in manufacturing desk calculators:
Direct materials . P70
Indirect materials (variable) 20
Direct labor 40
 Indirect labor (variable) 30
Other variable factory overhead 50
Fixed factory overhead 140
Variable selling expenses 100
Fixed selling expenses 70
During the period, the company produced and sold 1,000 units.
What is the inventory cost per unit using absorption costing?
A. P520 C. P420
B. P350 D. P310

50. Colger Company manufacture a single product using standard costing. Variable production costs are P12 and fixed
production costs are P125,000. Colger uses a normal activity of 12,500 units to set its standard costs. Colger began the
year with 1,000 units in inventory, produced 11,000 units, and sold 11,500 units. The standard costs of goods sold under
absorption costing would be
A. P115,000 C. P242,000
B. P132,000 D. P253,000

51. The Trinkets Company estimated the following data for the coming year:
Fixed manufacturing costs P565,000
Variable production costs per peso of sales
Materials P0.125
Direct labor 0.150
Variable overhead 0.075
Variable selling costs per peso of sales 0.150
Trinkets estimates its sales for the coming year to be P2,000,000.
The expected costs of goods sold for the coming year is
A. P1,265,000 C. P1,115,000
B. P1,565,000 D. P700,000

52. Alma Company budgeted that factory overhead for 2004 and 2005 would be P60,000 for each year. The predicted and
actual activity for 2004 and 2005 were 30,000 and 20,000 direct labor hours, respectively.
2004 2005
Sales in units 25,000 25,000
Selling price per unit P10 P10
Direct materials and direct labor per unit P5 P5
The company assumes that the long-run production level is 20,000 direct labor hours per year. The actual factory
overhead cost for the end of 2004 and 2005 was P60,000. Assume that it takes one direct labor hour to make one
finished unit.
When the annual estimated factory overhead rate is used, the gross profits for 2004 and 2005, respectively, are
A. P75,000 and P75,000 C. 75,000 and P55,000
B. P125,000 and P125,000 D. P75,000 and P50,000

14. Apo Company’s variable costing income statement for August appears below:
Sales (P15 per unit) P600,000
Less variable costs:
Variable cost of goods sold:
Beginning inventory P 72,000
Add variable cost of goods manufactured 315,000
Goods available for sale 387,000
Less ending inventory 27,000
Variable cost of goods sold 360,000
Variable selling expenses 80,000
 Total variable costs 440,000
Contribution margin 160,000
Fixed costs:
Fixed manufacturing P 105,000
Fixed selling and administrative 35,000
Total fixed costs 140,000
Net income P 20,000
The company produces 35,000 units each month. Variable production costs per unit and total fixed

costs have remained constant over the past several months.

Using the absorption costing method, the peso value of the company’s inventory on August 31 and

the absorption income, respectively, would be

A. B. C. D.
Inventory Value P27,000 P27,000 P36,000 P36,000
Absorption Income P35,000 P 5,000 P 5,000 P35,000

54. Nirvana Co. employs a normal (nonstandard) absorption cost system. The information below is from the financial
records of the company for the year.
 Total manufacturing costs were P2,500,000
 Costs of goods of manufactured was P2,425,000
 Applied factory overhead was 30 percent of total manufacturing costs
 Factory overhead was applied to production at a rate of 80% of direct labor cost
 Work-in-process inventory at January 1 was 75% of work-in-process inventory at December 31
What are the amounts/value of the following cost elements and inventory?
Direct labor Direct materials Work-in-process inventory
A. P750,000 P750,000 P225,000
B. P937,500 P812,500 P225,000
C P937,500 P812,500 P300,000
.
D P750,000 P750,000 P300,000
.

Variable & Absorption Costing

55. Lord Industries manufactures a single product. Variable production costs are P10 and fixed production costs are
P75,000. Lord uses a normal activity of 10,000 units to set its standard costs. Lord began the year with no inventory,
produced 11,000 units and sold 10,500 units. The volume variance under each product costing are:
A. B. C. D.
Under Absorption Costing P3,750 P3,750 P7,500 P7,500
Under Variable Costing 0 7,500 3,750 0

56. Southseas Corp. uses a standard cost system. The standard cost per unit of one of its products are as follows:
Direct Materials P4.00
Direct labor 6.00
Factory overhead
Variable 3.00
Fixed (based on a normal capacity of 10,000 units) 2.00
Total 15.00
 Beginning inventory 2,000 units
Production 8,000 units
Units sold (selling price P50) 7,000 units

Actual costs:
Direct materials P35,000
Direct labor 50,000
Variable overhead 23,000
Fixed 18,000
Variable selling and adm. 60,000
Fixed selling and adm. 35,000
Variances are closed to cost of sales monthly
How much are the net income under absorption costing and variable costing methods?
A. B. C. D.
Absorption P144,000 P143,000 P144,000 P142,000
Variable P143,000 P144,000 P142,000 P144,000

Variable vs. Absorption Costing

8. Absorption costing differs from variable costing in that (M)
A. standards can be used with absorption costing/ but not with variable costing.
B. absorption costing inventories are more correctly valued,
C. production influences income under absorption costing, but not under variable costing.
D. companies using absorption costing have lower fixed costs.

12. A manufacturing firm presently has total sales of P1,000,000. If its sales rise, its
A. net income based on variable costing will go up more than its net income based on absorption costing.
B. net income based on absorption costing will go up more than its net income based on variable costing.
C. fixed costs will also rise.
D. per unit variable costs will rise.

9. Which of the following is(are) closely related to variable costing than to absorption costing? (M)
1. Predetermined fixed overhead 5. Gross margin
2. Unit sales 6. Volume variance
3. Production units 7. Cost behavior
4. Contribution margin 8. Management accounting
A. 1, 2, 4, 6, 7, 8 C. 1, 3, 4, 7, 8
B. 2, 4, 7, 8 D. 1, 3, 5, 6

57. The level of production affects income; under which of the following methods?
A. Absorption costing C. both absorption and variable costing
B. variable costing D. neither absorption nor variable costing

10. Under which inventory costing method could increases or decreases in income from operations be misinterpreted to be
the result of operating efficiencies or inefficiencies? (M)
A. Variable costing C. Incremental costing
B. Absorption costing D. Differential costing

Reconciliation of Variable & Absorption Costing Income

11. York Company had P200,000 income using absorption costing. York has no variable manufacturing costs. Beginning
inventory was P15,000 and ending inventory was P22,000. Income under variable costing would have been (M)
A. P178,000 C. P193,000
B. P200,000 D. P207,000
58. Simple Corp. produces a single product. The following cost structure applied to their first year of operations, 2000:
Variable costs:
SG&A P2.00 per unit
Production 4.00 per unit
Fixed Costs (total cost incurred for the year)
SG&A P14,000
Production P20,000
Assume that during 2000 Simple Corp. manufactured 5,000 units and sold 3,800 There was no beginning or ending work-in-process inventory. How
much larger or smaller would Simple Corp.'s income be if it uses absorption rather than variable costing?

A. The absorption costing income would be P6,000 larger

B. The absorption costing income would be P6,000 smaller
C. The absorption costing income would be P4,800 larger
D. The absorption costing income would be P4,000 smaller

59. The following information has been extracted from P Co.’s financial records for its first year of operations:
Units produced 10,000
Units sold 7,000
Variable cost per unit:
Direct materials P8
Direct labor 9
Factory overhead 3
SG&A 4
Fixed costs:
Manufacturing overhead P70,000
SG&A 30,000
Based on absorption costing, P Co.’s income in its first year of operations will be
A. P21,000 higher than it would be under variable costing
B. P70,000 higher than it would be under variable costing
C. P30,000 higher than it would be under variable costing
D. Higher than it would be under variable costing, but the exact difference cannot be determinable from this
information

60. Valyn Corporation employs an absorption costing system for internal reporting purposes;

however, the company is considering using variable costing. Data regarding Valyn's planned and

actual operations for the 2001 calendar year are presented below.

Planned activity Actual activity

Beginning finished goods inventory in units 35,000 35,000
Sales in units 140,000 125,000
Production in units 140,000 130,000
The planned per unit cost figures shown in the next schedule were based on the estimated production and sale of
140,000 units in 2001. Valyn uses a predetermined manufacturing overhead rate for applying manufacturing overhead to
its product; thus, a combined manufacturing overhead rate of P9.00 per unit was employed for absorption costing
purposes in 2001. Any over-or under applied manufacturing overhead is closed to the cost of goods sold account at the
end of the repotting year.
Planned costs Incurred
Per unit Total Costs
Direct materials P12.00 P1,680,000 P1,560,000
Direct labor 9.00 1,260,000 1,170,000
 The 2001 beginning finished goods inventory for absorption costing purposes was valued at the 1998 planned unit manufacturing cost, which was the
same as the 2001 planned unit manufacturing cost. There are no work-in-process inventories at either the beginning or the end of the year. The
planned and actual unit selling price for 2001 was P70.00 per unit
The difference between Valyn Corporations 2001 operating income calculated on the absorption costing basis and calculated on the variable costing
basis was

A. P65,000 C. P40,000
B. P25,000 D. P90,000
Activity-based Costing
25. An activity that has a direct cause-effect relationship with the resources consumed is a(n)
A. cost driver. C. cost pool.
B. overhead rate. D. product activity.

27. The term cost driver refer to:

A. any activity that can be used to predict cost changes.
B. the attempt to control expenditures at a reasonable level.
C. the person who gathers and transfers cost data to the management accountant.
D. any activity that causes costs to be incurred.

26. Each group of overhead costs should be applied based on

A. direct labor hours or cost.
B. units produced.
C. whatever activity drives those specific overhead costs.
D. machine time.

31. Which of the following statements is true?

A. The traditional approach to costing uses many different cost drivers.
B. Costs that are indirect to products are by definition traceable to directly to products.
C. Costs that are indirect to products are traceable to some activity.
D. All of the above statements are true.

41. Why is it better to use separate overhead rates?

A. Some departments are labor-intensive, some are machine-intensive.
B. Labor rates vary considerably among departments.
C. The resulting overhead rates are all about the same.
D. All jobs require about the same percentage of time in all departments.
Absorption costing
8. Absorption costing of inventories, as required by GAAP, has been criticized for encouraging managers to increase
year-end inventories in order to boost reported profits. Which of the following techniques is the most effective at
resolving this problem?
A. Senior management control of inventory levels
B. Adoption of just-in-time (JIT) production system
C. Reward managers based upon the residual income approach
D. Use variable costing to determine income for bonus purposes

11. When absorption costing is used, all of the following costs are considered product costs except
A. direct labor C. variable selling and administrative costs
B. variable overhead D. fixed overhead

21. Unabsorbed fixed overhead costs in an absorption costing system are

A. Fixed factory costs not allocated to units produced.
B. Variable overhead costs not allocated to units produced.
C. Excess variable overhead costs.
D. Costs that should be controlled.
Variable costing vs. Absorption costing
6. What is the primary difference between variable and absorption costing?
A. inclusion of fixed selling expenses in product costs
B. inclusion of variable factory overhead in period costs
C. inclusion of variable selling expenses in product costs
D. inclusion of fixed factory overhead in product costs

7. Which of the following statements is true?

A. Absorption costing net income exceeds variable costing net income when units produced and sold are equal.
B. Variable costing net income exceeds absorption costing net income when units produced exceed units sold.
C. Variable costing net income exceeds absorption costing net income when units produced equal units sold.
D. Absorption costing net income exceeds variable costing net income when units produced are greater than units
sold.

22. Net earnings determined using full absorption costing can be reconciled to net earnings determined using direct costing
by computing the difference between
A. Inventoried fixed costs in the beginning and ending inventories and any deferred over- or underapplied fixed factory
overhead.
B. Inventoried discretionary costs in the beginning and ending inventories.
C. Gross margin (absorption costing method) and contribution margin (direct costing method).
D. Sales as recorded under the direct costing method and sales as recorded under the absorption costing method.

23. Net profit under absorption costing may differ from net profit determined under direct costing. How is this difference
calculated?
A. Change in the quantity of all units in inventory times the relevant fixed costs per unit.
B. Change in the quantity of all units produced times the relevant fixed costs per unit.
C. Change in the quantity of all units in inventory times the relevant variable cost per unit.
D. Change in the quantity of all units produced times the relevant variable cost per unit.

Sensitivity analysis
20. The level of production affects income under which of the following methods?
A. absorption costing C. variable costing
B. both absorption and variable costing D. neither absorption nor variable costing

18. Variable-costing income will usually exceed absorption costing income when
A. sales exceed production C. production exceeds sales
B. production and sales are equal D. none of these

19. Variable costing net income is

A. higher than absorption net income when more units are sold than produced
B. lower than absorption net income when more units are produced than sold
C. the same as absorption net income when all units produced are sold
D. all of the above

9. A manufacturing company prepares income statements using both absorption and variable costing methods.
At the end of a period actual sales revenues, total gross profit, and total contribution margin approximated
budgeted figures, whereas net income was substantially greater than the budgeted amount. There were no
beginning or ending inventories. There most likely explanation of the net income increase is that, compared to
budget, actual
A. Manufacturing fixed costs had increased.
 B. Selling and administrative fixed expenses had decreased.
C. Sales prices and variable costs had increased proportionately.
D. Sales prices had declined proportionately less than variable costs.

14. When variable costing is used, fixed manufacturing overhead is recognized as an expense when the
A. cost is incurred C. product is sold
B. product is completed D. product is inventoried

Variable costing
Ending inventory
. The following information pertains to Sharapova Corporation:
Beginning inventory 0 units
Ending inventory 5,000 units
Direct labor per unit P10
Direct materials per unit 8
Variable overhead per unit 2
Fixed overhead per unit 5
Variable selling costs per unit 6
Fixed selling costs per unit 8
What is the value of ending inventory using the variable costing method?
A. P155,000 C. P100,000
B. P125,000 D. P195,000

Absorption costing
Gross margin
. A company manufactures a single product for its customers by contracting in advance of production. Therefore, the
company only produces units that will be sold by the end of each period. During the last period, the following sales were
made and costs incurred:
Sales P40,000
Direct materials 9,050
Direct labor 6,000
Rent (9/10 factory, 1/10 office) 3,000
Depreciation on factory equipment 2,000
Supervision (2/3 factory, 1/3 office) 1,500
Salespeople’s salaries 1,300
Insurance (2/3 factory, 1/3 office) 1,200
Office supplies 750
Advertising 700
Depreciation on office equipment 500
Interest on loan 300
Based on the above data, the gross margin percentage for the last period (rounded to nearest percent) wasA. 41%
C. 46%
B. 44% D. 49%

Variable costing vs. Absorption costing

Unit costs
. During May, Roy Co. produced 10,000 units of Product X. Costs incurred by Roy during May were as follows
Direct materials P10,000
Direct labor 20,000
Variable manufacturing overhead 5,000
Variable selling and general 3,000
 Fixed manufacturing overhead 9,000
Fixed selling and general 4,000
Total P51,000
What are the unit costs under absorption and variable costing methods, respectively?
A. P5.10; P3.80 C. P4.40; P3.50
B. P3.80 P5.10 D. P3.50: P4.40

Difference in income
. Consider the following:
Sales price, per unit P18 per unit
Standard absorption cost rate P12 per unit
Standard variable cost rate P8 per unit
Variable selling expense rate P2 per unit
Fixed selling and administrative expenses P40,000
Fixed manufacturing overhead P60,000
Last period, 13,000 units were produced. In the current period, 15,000 units were produced. In each period, 13,000
units were sold. What is the difference in reported income under absorption and variable costing for the current
period?
A. The variable-costing income exceeded absorption-costing income by P4,000.
B. The absorption-costing income exceeded variable-costing income by P8,000.
C. The variable-costing income exceeded absorption-costing income by P6,000.
D. Net income will not be different between the two methods.

. The Blue Company has failed to reach its planned activity level during its first two years of operation. The following
table shows the relationship between units produced, sales, and normal activity for these years and the projected
relationship for Year 3. All prices and costs have remained the same for the last two years and are expected to do so in
Year 3. Income has been positive in both Year 1 and Year 2.
Units Produced Sales Planned Activity
Year 1 90,000 90,000 100,000
Year 2 95,000 95,000 100,000
Year 3 90,000 90,000 100,000
Because Blue Company uses an absorption costing system, one would predict gross margin for Year 3 to beA. Greater
than Year 1. C. Equal to Year 1.
B. Greater than Year 2. D. Equal to Year 2.

Reconciliation
Income under absorption costing
. A company had income of P50,000 using direct costing for a given period. Beginning and ending inventories for that
period were 13,000 units and 18,000 units, respectively. Ignoring income taxes, if the fixed overhead application rate
were P2.00 per unit, what would the income have been using absorption costing?
A. P40,000
B. P50,000
C. P60,000
D. Cannot be determined from the information given.

Income under variable costing

. Luna Company had income of P65,000 using absorption costing for a given period. Beginning and ending inventories
for that period were 13,000 units and 18,000 respectively.
Ignoring income taxes, if the fixed overhead application rate were P2.50 per unit, what would the income have been
using variable costing?
A. P 77,500 C. P 52,500
B. P 60,000 D. P 20,000
Unit contribution margin
. The following information was extracted from the first year of absorption-based accounting records of Soulmate Co.
Total fixed costs incurred P100,000
Total variable costs incurred 50,000
Total period costs incurred 70,000
Total variable period costs incurred 30,000
Units produced 20,000
Units sold 12,000
Unit sales Price P 12
Based on variable costing, if Soulmate Co. had sold 12,001 units instead of 12,000, its income before taxes would
have been
A. P 9.50 higher C. P11.00 higher
B. P 8.50 higher D. P 8.33 higher

. At its present level of operations, a small manufacturing firm has total variable costs equal to 75% of sales and total
fixed costs equal to 15% of sales. Based on variable costing, if sales change by P1.00, income will change by
A. P 0.25 C. P 0.75
B. P 0.12 D. P 0.10

. Answer: C
Direct materials P 8
Direct labor 10
Variable overhead 2
Total unit cost- variable costing P20
Value of ending inventory (5,000 x P20) P100,000

. Answer: C
Sales P40,000
Cost of goods sold
Direct materials P9,050
Direct labor 6,050
Rent (0.9 x P3,000) 2,700
Depreciation 2,000
Supervision (2/3 x P1,500) 1,000
Insurance (2/3 x P1,200) 800 (21,600)
Gross margin P18,400
Gross margin percentage (P18,400 ÷ P40,000) 46%

. Answer: C
Direct materials P10,000
Direct labor 20,000
Variable overhead 5,000
Total variable product cost P35,00
Variable unit cost (P35,000 ÷ 10,000) P3.50
Add Fixed overhead per unit (P9,000 ÷ 10,000) 0.90
Absorption unit cost P4.40

. Answer: B
Fixed overhead rate per unit: P12 – P8 P4
Difference in income: 2,000 x P4 P8,000
During the current year, the company’s production equaled the budgeted. The inventory increased. Therefore,
absorption costing income is higher than the variable costing income.
. Answer: C
The production and unit sales during year 3 matched with year 1.

. Answer: C
The income under absorption costing is higher by P10,000 because the amount of fixed overhead that related to unsold
units was deferred and was included as cost of finished goods inventory. The variable costing income statement
immediately wrote the entire fixed overhead that was incurred during the year as period cost.
Fixed overhead deferred as product cost: 5,000 x P2 P10,000
Absorption income (P50,000 + P10,000) P60,000

. Answer: C
Absorption income 65,000
Less Fixed Overhead in decrease in inventory (18,000 – 15,000) x 2.50 12,500
Income, Variable costing 52,500

. Answer: B
CMR per unit = Selling Price – Unit variable cost
P8.50 = P12.00 – P3.50
Variable Cost Per unit
Product: (50,000 – 30,000) / 20,000 = P1.00
Selling & Adm. (variable period costs) 30,000/12,000 2.50
Total variable cost/unit P3.50
* Total variable costs – variable period cost
(selling & adm.) = variable product cost.

. Answer: A
1.00 - (1.00 x .75) = P0.25