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Apply Activity-Based Costing - CPA Bar

  1. Design cost $80,000 supports 5 products equally. X has 40% of sales. ABC assigns how much less to X than sales-based?
    Answer: $16,000 The design cost is split equally under ABC: 80,000 / 5 = 16,000 per product. Sales-based gives X 40% of 80,000 = 32,000. So ABC assigns 32,000 - 16,000 = 16,000 less. The 32,000 is only the sales-based amount, not the difference.
  2. A professional services firm uses ABC with three pools: client intake ($45,000, 300 new clients), case management ($210,000, 700 case hours), and administrative support ($75,000, 500 admin hours). Client A required 1 intake event, 12 case hours, and 8 admin hours. What is the total ABC cost assigned to Client A?
    Answer: $4,950 Rates: Intake = $45,000 / 300 = $150; Case management = $210,000 / 700 = $300 per hour; Admin = $75,000 / 500 = $150 per hour. Client A cost = (1 x $150) + (12 x $300) + (8 x $150) = $150 + $3,600 + $1,200 = $4,950. Option A omits the case management component. Option B applies incorrect rates across all pools. Option C is the total for Client B (see next question), not Client A.
  3. Sunrise Products' traditional costing assigns $240 per unit to Product X and $120 per unit to Product Y. ABC analysis produces $180 per unit for Product X and $160 per unit for Product Y. Which conclusion is best supported by this comparison?
    Answer: Traditional costing over-costs Product X and under-costs Product Y, a pattern consistent with a high-volume product subsidizing a low-volume, higher-overhead-consuming product Under traditional direct-labor-hour allocation, Product X (3 DLH) absorbs more overhead per unit than Product Y (1.5 DLH) simply because of labor hour consumption. ABC reveals that Product X actually consumes less overhead per unit ($180) than the traditional rate implies ($240) - traditional over-costs X. Conversely, Product Y is significantly under-costed under traditional costing ($120 traditional vs. $160 ABC) - its complex batch and product-level activity consumption is not captured by a labor-hour driver. This classic pattern occurs when a volume-based driver over-allocates to high-labor-intensity products and under-allocates to products that drive disproportionate batch and product-level activity. Option A accepts inaccuracy as accuracy. Option C is incorrect; ABC produces higher costs for some products and lower for others depending on actual activity consumption. Option D assumes a fixed ordering that ABC specifically aims to challenge.
  4. Clearwater Manufacturing's ABC rates are: machine setups $300 per setup, quality inspections $300 per inspection, materials handling $300 per move. Product Alpha requires 5 setups, 8 inspections, and 4 material moves. Direct materials cost $1,200 and direct labor costs $800. What is the total ABC manufacturing cost for one batch of Product Alpha?
    Answer: $7,100 ABC overhead = (5 x $300) + (8 x $300) + (4 x $300) = $1,500 + $2,400 + $1,200 = $5,100. Total cost = Direct materials + Direct labor + Overhead = $1,200 + $800 + $5,100 = $7,100. Option B reports only the overhead component without adding direct materials and labor. Option C omits some overhead pools from the calculation. Option D applies incorrect driver quantities.
  5. Ridgemont Co. uses ABC with two pools: machine setups ($360,000 total, 600 setups) and engineering support ($180,000 total, 600 engineering hours). The Standard product uses 200 setups and 400 engineering hours. What is the total ABC overhead allocated to the Standard product?
    Answer: $240,000 Setup rate = $360,000 / 600 = $600 per setup. Engineering rate = $180,000 / 600 = $300 per hour. Standard overhead = (200 x $600) + (400 x $300) = $120,000 + $120,000 = $240,000. Option A is the full setup pool cost, not Standard's share. Option B is the overhead allocated to the Deluxe product. Option D is the full engineering pool cost.
  6. Setup $40,000 (4,000 hrs); inspection $60,000 (10,000 hrs). Job uses 800 setup and 600 inspection hrs. ABC cost?
    Answer: $11,600 Setup costs $10 per setup hour (40,000 / 4,000) and inspection costs $6 per inspection hour (60,000 / 10,000). The job's ABC cost is 800 $10 + 600 $6 = $11,600. A tempting error is combining both cost pools into one rate and using total hours, giving $10,000; separate rates are required because the activities use different cost drivers.
  7. A company switches from traditional to ABC overhead allocation. Total overhead remains $600,000. Under traditional costing, Product M is unprofitable and Product N is highly profitable. Under ABC, Product M becomes profitable and Product N becomes unprofitable. Which statement best explains this reversal?
    Answer: Under traditional costing, Product N was likely receiving a cost subsidy from Product M through an activity-unrelated volume driver; ABC corrects this by tracing costs to actual activity consumption This reversal is a classic sign of cross-subsidization under traditional costing. Product N was allocated disproportionately low overhead under the volume-based driver - likely because it uses fewer direct labor hours or machine hours despite driving significant batch and product-level activities. Product M, on the other hand, was over-burdened with overhead it did not actually cause. ABC corrects the allocation by tracing costs to actual activity drivers, revealing Product M's true profitability and Product N's true cost burden. Option A is incorrect; total overhead is the same under both methods. Option B assumes traditional costing is the standard rather than recognizing its known systematic biases. Option D treats inconsistency as a defect rather than recognizing it as the purpose of the ABC analysis.
  8. Sunrise Products has total manufacturing overhead of $480,000 and budgeted direct labor hours of 6,000. What is the predetermined overhead rate under traditional costing?
    Answer: $80 per DLH Predetermined overhead rate = Total overhead / Total cost driver = $480,000 / 6,000 DLH = $80 per DLH. Option A divides by 8,000 DLH. Option C divides by 4,800 DLH. Option D divides by 10,000 DLH.
  9. Sunrise Products' ABC analysis determines that Product X consumes $360,000 of the $480,000 total overhead. Product X production is 2,000 units. What is the ABC overhead cost per unit for Product X?
    Answer: $180 per unit ABC overhead per unit for Product X = $360,000 / 2,000 units = $180 per unit. Option A is the traditional costing overhead per unit for Product X ($80 x 3 DLH). Option B is the ABC overhead per unit for Product Y ($120,000 / 1,000 = $120). Option C applies an incorrect denominator.
  10. A manufacturer uses ABC with three pools: machine maintenance ($180,000, 9,000 machine hours), product design ($120,000, 400 design changes), and packaging ($60,000, 500 shipments). Product Omega uses 600 machine hours, 20 design changes, and 30 shipments. What is the total ABC overhead assigned to Product Omega?
    Answer: $21,600 Rates: Maintenance = $180,000 / 9,000 = $20 per machine hour; Design = $120,000 / 400 = $300 per change; Packaging = $60,000 / 500 = $120 per shipment. Product Omega overhead = (600 x $20) + (20 x $300) + (30 x $120) = $12,000 + $6,000 + $3,600 = $21,600. Option A uses only the maintenance pool. Option B applies incorrect rates to the driver quantities. Option D omits the design cost pool from the calculation.
  11. In activity-based costing, which of the following best describes a product-sustaining activity?
    Answer: An activity performed to support the existence of a specific product, such as product design, engineering change orders, or product-specific testing A product-sustaining activity is performed to enable a specific product to exist in the product line. Its cost does not vary with the number of units produced or batches run, but it would be eliminated if the product were discontinued. Examples include product engineering, specialized tooling, and product-specific regulatory compliance. Option B describes a unit-level activity. Option C describes a batch-level activity. Option D describes a facility-sustaining activity.
  12. Overhead $90,000; 15,000 MH. A uses 600 MH and 10 batches. ABC rates: $4/MH and $300/batch. ABC exceeds plantwide by?
    Answer: $1,800 Plantwide overhead rate is 90,000 / 15,000 = $6 per MH, so A gets 600 x 6 = $3,600. ABC gives 600 x 4 = $2,400 plus 10 x 300 = $3,000, total $5,400. The excess is 5,400 - 3,600 = $1,800. The tempting $5,400 is the full ABC cost, not the amount by which ABC exceeds plantwide.
  13. A company allocates $900,000 of overhead using direct labor hours. Product P is high-volume and simple; Product Q is low-volume, complex, and requires many setups and inspections. Under traditional costing, Product P shows an 8% profit margin and Product Q shows a 22% margin. Which outcome is most likely after implementing ABC?
    Answer: Product P's margin would increase and Product Q's margin would decrease as ABC more accurately traces batch and product-level costs to each product Under traditional direct-labor-hour allocation, high-volume Product P absorbs a large share of overhead simply because it uses many total labor hours. ABC reveals that P's actual batch and product-level overhead consumption is proportionally lower than its labor hours suggest, raising its margin. Conversely, low-volume Product Q's complex profile drives disproportionate setups and inspections that ABC assigns back to it, reducing its margin. Options A and B mischaracterize how ABC redistributes existing overhead. Option C is technically true about total overhead but ignores the redistribution between products.
  14. Using the same firm's ABC rates (client intake $150, case management $300 per hour, admin support $150 per hour), Client B required 1 intake event, 6 case hours, and 15 admin hours. What is the total ABC cost assigned to Client B?
    Answer: $4,200 Client B cost = (1 x $150) + (6 x $300) + (15 x $150) = $150 + $1,800 + $2,250 = $4,200. Option B omits the intake cost and applies only case management and admin. Option C applies an incorrect case hour rate. Option D omits the admin support component entirely.
  15. ABC product costs are least decision-useful when which condition holds?
    Answer: Mostly facility-level overhead ABC is most useful when overhead is driven by activities that differ across products, like batch-level or volume-driven activities. Facility-level costs support the whole plant and can't be traced to products, so any allocation is arbitrary and not decision-useful. The tempting wrong answer is products differing in batch size, but that variety is exactly what ABC captures well.
  16. Ridgemont Co. produces 1,000 units of Standard (ABC overhead $240,000) and 500 units of Deluxe (ABC overhead $300,000). What is the ABC overhead cost per unit for each product?
    Answer: Standard $240 per unit; Deluxe $600 per unit Standard overhead per unit = $240,000 / 1,000 = $240. Deluxe overhead per unit = $300,000 / 500 = $600. Option B divides total overhead equally across units regardless of product. Option C reverses the division logic for Standard. Option D uses incorrect denominator amounts.
  17. Sunrise Products' ABC analysis assigns $120,000 of overhead to Product Y, which has 4,000 units of production. What is the ABC overhead cost per unit for Product Y?
    Answer: $30 per unit ABC overhead per unit for Product Y = $120,000 / 4,000 units = $30 per unit. This is significantly lower than Product Y's traditional overhead per unit ($80 x 1.5 DLH = $120), indicating Product Y was over-costed under traditional allocation. Option B confuses the pool amount with a per-unit rate. Option C uses 2,000 units as the denominator. Option D uses an incorrect denominator.
  18. An ABC analysis reveals that a particular product consumes a disproportionately large share of batch-level and product-sustaining overhead relative to its revenue contribution. Which response is most appropriate?
    Answer: Investigate whether the product's selling price adequately covers its true resource consumption before making a retention or repricing decision When ABC reveals that a product consumes disproportionate overhead, the analytically correct response is to determine whether the product's price compensates for its full cost of resources consumed. The product may be viable at a higher price or may warrant discontinuation if repricing is not feasible. Option A jumps to discontinuation without evaluating profitability at the correct cost basis. Option B treats the information as a problem rather than a management tool. Option D reduces the cost pool mechanically without addressing the underlying resource consumption issue.
  19. Ridgemont Co.'s ABC rates are $600 per setup and $300 per engineering hour. The Deluxe product uses 400 setups and 200 engineering hours. What is the total ABC overhead allocated to the Deluxe product?
    Answer: $300,000 Deluxe overhead = (400 setups x $600) + (200 engineering hours x $300) = $240,000 + $60,000 = $300,000. Option A applies the Standard product's allocation, not Deluxe's. Option B is the full engineering pool, not Deluxe's allocation. Option C is the full setup pool cost.
  20. Sunrise Products uses a traditional overhead rate of $80 per direct labor hour. Product X requires 3 DLH per unit. What is the traditional overhead cost per unit for Product X?
    Answer: $240 per unit Traditional overhead per unit = Rate x DLH per unit = $80 x 3 = $240. Option A applies the rate to 1.5 DLH instead of 3. Option B applies the rate to 1 DLH. Option D applies the rate to 2 DLH.

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