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Activity-Based Costing and Traditional Costing

Question 16. When a budget is being created and is based on the amount of activity performed to support production, what type of budget is this?
Cash-based budget
Production budget
Management budget
Activity-based budget

Question 17. A uniform company notices it is losing out on bids to provide uniforms to a restaurant chain. The chain's bid was barely above the cost of manufacturing the uniforms. The managers implement activity-based costing to find out where their untraceable costs are. Where will they determine the untraceable costs are coming from?
Manufacturing overhead
Direct labor
Direct materials
Job order costs

Question 18. Under an activity-based costing system, is an allocation base required?
Yes; activity-based costing systems use more than one allocation base
No; activity-based costing systems rely on cost drivers
Yes; activity-based costing systems use only one allocation base
No; activity-based costing systems rely both on batches and allocation bases

Question 19. What is a cost driver?
A cost driver increases only the fixed cost of an activity
A cost driver decreases only the fixed cost of an activity
A cost driver increases or decreases the variable cost of an activity
A cost driver increases or decreases the fixed cost of an activity

Question 20. Harrington Co. would like to apply the activity-based costing (ABC) method to its existing production. Why would Harrington Co. want to use this method over the traditional costing method?
To assess the cost allocation base
To use a single allocation rate
To eliminate the cost drivers for specific products
To determine which products are most profitable

Solution Preview

Question 16. When a budget is being created and is based on the amount of activity performed to support production, what type of budget is this?

Answer: Activity-based budget. This is the definition of an activity-based budget. A cash-based budget is based upon cash flows, an activity-based budget is a type of production budget, and all budgets are management budgets.

Question 17. A uniform company notices it is losing out on bids to provide uniforms to a restaurant chain. The chain's bid was barely above the cost of manufacturing ...

Solution Summary

In responding to several multiple-choice questions, this solution discusses activity-based costing and how it is superior to traditional costing.

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