ACCA PM · Chapter 2
Activity-based costing MCQs with Answers
9 multiple-choice questions on Activity-based costing for ACCA PM Performance Management. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Delta Co makes two products, X and Y. Budgeted overheads are: machine set-ups $120,000; materials handling $80,000; machining $200,000. Product X: 4,000 units, 2 machine hours per unit, 30 set-ups, 50 material movements. Product Y: 1,000 units, 4 machine hours per unit, 50 set-ups, 110 material movements. What is the cost driver rate for machine set-ups?
- A) $4,000 per set-up
- B) $1,500 per set-up
- C) $2,400 per set-up
- D) $10.00 per machine hour
Show answer & explanation
Answer: B) $1,500 per set-up
Total set-ups = 30 + 50 = 80. Cost driver rate = $120,000 / 80 = $1,500 per set-up. Dividing by only one product's set-ups, or by machine hours, would not reflect the activity that causes set-up costs.
Question 2
Delta Co makes two products, X and Y. Budgeted overheads are: machine set-ups $120,000; materials handling $80,000; machining $200,000. Product X: 4,000 units, 2 machine hours per unit, 30 set-ups, 50 material movements. Product Y: 1,000 units, 4 machine hours per unit, 50 set-ups, 110 material movements. Using activity-based costing, what is the overhead cost per unit of product Y (to the nearest cent)?
- A) $196.67
- B) $133.33
- C) $130.00
- D) $50.83
Show answer & explanation
Answer: A) $196.67
Set-up rate = $120,000 / 80 = $1,500; handling rate = $80,000 / 160 = $500; machining rate = $200,000 / 12,000 hours = $16.6667 per hour. Y overheads = (50 x $1,500) + (110 x $500) + (4,000 hours x $16.6667) = $75,000 + $55,000 + $66,667 = $196,667. Per unit = $196,667 / 1,000 = $196.67.
Question 3
Delta Co makes two products, X and Y. Budgeted overheads are: machine set-ups $120,000; materials handling $80,000; machining $200,000. Product X: 4,000 units, 2 machine hours per unit, 30 set-ups, 50 material movements. Product Y: 1,000 units, 4 machine hours per unit, 50 set-ups, 110 material movements. If Delta Co instead absorbed all overheads using a single factory-wide machine-hour rate, what would be the overhead cost per unit of product Y (to the nearest cent)?
- A) $33.33
- B) $133.33
- C) $196.67
- D) $80.00
Show answer & explanation
Answer: B) $133.33
Total machine hours = (4,000 x 2) + (1,000 x 4) = 12,000. Overhead absorption rate = $400,000 / 12,000 = $33.3333 per machine hour. Overhead per unit of Y = 4 x $33.3333 = $133.33.
Question 4
Delta Co makes two products, X and Y. Budgeted overheads are: machine set-ups $120,000; materials handling $80,000; machining $200,000. Product X: 4,000 units, 2 machine hours per unit, 30 set-ups, 50 material movements. Product Y: 1,000 units, 4 machine hours per unit, 50 set-ups, 110 material movements. By how much does the overhead charged to each unit of product X under ABC differ from the overhead charged using a single factory-wide machine-hour rate (to the nearest cent)?
- A) $15.83 higher under ABC
- B) $63.33 lower under ABC
- C) $63.33 higher under ABC
- D) $15.83 lower under ABC
Show answer & explanation
Answer: D) $15.83 lower under ABC
ABC overhead for X = (30 x $1,500) + (50 x $500) + (8,000 x $16.6667) = $45,000 + $25,000 + $133,333 = $203,333, or $50.83 per unit. Machine-hour basis = 2 x $33.3333 = $66.67 per unit. ABC therefore charges $15.83 less per unit to the high-volume product X, because the low-volume product Y causes most of the set-ups and handling.
Question 5
In activity-based costing, what is a cost driver?
- A) A cost that is directly attributable to a single unit of product
- B) The factor that causes the cost of an activity to change
- C) The cost centre to which an overhead is first allocated
- D) The budgeted overhead divided by budgeted labour hours
Show answer & explanation
Answer: B) The factor that causes the cost of an activity to change
A cost driver is any factor whose change causes a change in the total cost of an activity, such as the number of set-ups driving set-up costs. It is not the same as a direct cost or a cost centre, and ABC deliberately avoids relying on a single labour-hour based rate.
Question 6
In which of the following situations is activity-based costing most likely to give significantly different product costs from traditional absorption costing?
- A) Overheads are small and all products are made in similar batch sizes
- B) The business makes a single standard product in long production runs
- C) Overheads are a large proportion of total cost and products differ widely in batch sizes and complexity
- D) Most overheads vary directly with the number of labour hours worked
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Answer: C) Overheads are a large proportion of total cost and products differ widely in batch sizes and complexity
ABC adds most value when overheads are significant and are driven by factors other than volume, such as the number of batches, orders or design changes. If products are similar or overheads vary with labour hours, a traditional volume-based rate gives broadly similar results.
Question 7
Which of the following costs is most likely to be driven by the number of production batches rather than the number of units produced?
- A) Direct materials
- B) Power consumed while machines run
- C) Machine set-up costs
- D) Royalties paid per unit sold
Show answer & explanation
Answer: C) Machine set-up costs
Set-up costs are incurred each time a new batch is started, regardless of how many units the batch contains, so they are batch-level costs. Direct materials, machine running power and per-unit royalties all vary with the number of units.
Question 8
Quality inspection costs are budgeted at $90,000 for the year, with 600 inspections expected. Product Z will be produced in a run of 2,500 units requiring 45 inspections. What is the inspection cost per unit of Z under ABC?
- A) $2.70
- B) $150.00
- C) $36.00
- D) $6.00
Show answer & explanation
Answer: A) $2.70
Cost per inspection = $90,000 / 600 = $150.00. Cost charged to Z = 45 x $150.00 = $6,750. Per unit = $6,750 / 2,500 = $2.70.
Question 9
Which of the following is a recognised limitation of activity-based costing?
- A) Some overheads, such as factory rent, have no clear activity driver and must still be apportioned arbitrarily
- B) It ignores support activities and focuses only on direct labour
- C) It can only be used in service organisations
- D) It always produces lower product costs than absorption costing
Show answer & explanation
Answer: A) Some overheads, such as factory rent, have no clear activity driver and must still be apportioned arbitrarily
Facility-sustaining costs such as rent or the factory manager's salary are not caused by any particular product, so ABC must still spread them on an arbitrary basis. ABC also costs more to implement and maintain. It is used in both manufacturing and service organisations, and it reallocates rather than reduces total overheads.