Which costing system is most likely to produce the least cost distortion? a. Departmental overhead allocation rates b. Plantwide overhead rate c. Activity-based costing d. Traditional costing system 2. The cost of reworking defective products before shipping to customers would be classified as which type of quality costs? a. External failure cost b. Internal failure cost c. Prevention cost d. Appraisal cost 3. A window manufacturer has a commitment to lean production. What is not a benefit from adopting a lean production philosophy? a. Ability to respond more quickly to changes in customer demand b. More space available for production c. Ability to continue production despite disruptions in deliveries of raw materials d. Lower inventory carrying costs 4. A computer manufacturer’s spending on testing its computers before shipping them to customers helps reduce which of the following costs? a. Prevention costs b. Appraisal costs c. Internal failure costs d. External failure costs 5. Which of the following is not a good reason for a paint manufacturer to use activity-based costing? a. The paint manufacturer has the technology in place to capture the required information to implement activity-based costing. b. The paint industry is highly competitive. c. Most costs are direct; indirect costs are a small proportion of total costs. d. The paint manufacturer produces a variety of paint types, with some types much more difficult to produce than other types. 6. Cost distortion is likely to cause: a. Overcosting of all products. b. Undercosting of all products. c. Overcosting some products and undercosting other products. d. Accurate costing of all products
The Correct Answer and Explanation is:
1. Which costing system is most likely to produce the least cost distortion?
Correct answer: c. Activity-based costing
2. The cost of reworking defective products before shipping to customers would be classified as which type of quality costs?
Correct answer: b. Internal failure cost
3. A window manufacturer has a commitment to lean production. What is not a benefit from adopting a lean production philosophy?
Correct answer: c. Ability to continue production despite disruptions in deliveries of raw materials
4. A computer manufacturer’s spending on testing its computers before shipping them to customers helps reduce which of the following costs?
Correct answer: d. External failure costs
5. Which of the following is not a good reason for a paint manufacturer to use activity-based costing?
Correct answer: c. Most costs are direct; indirect costs are a small proportion of total costs
6. Cost distortion is likely to cause:
Correct answer: c. Overcosting some products and undercosting other products
Explanation
Activity-based costing (ABC) is the most accurate method for assigning overhead because it traces costs based on activities that drive overhead consumption. Unlike plantwide or departmental overhead allocation methods, ABC captures the complexity and variation in resource usage across different products, making it the least likely to distort product costs.
Internal failure costs arise when defects are found and corrected before the product reaches the customer. Reworking defective products before shipment falls into this category. It reflects poor quality discovered internally, not yet exposed to customers.
Lean production focuses on minimizing waste and maximizing efficiency. Benefits include quicker response to customer demand, lower inventory costs, and more efficient use of space. However, lean systems rely heavily on timely deliveries. Disruptions in supply can halt production since lean systems keep minimal inventory, which makes option C the correct answer.
Testing products before shipping is an appraisal activity. However, it helps prevent faulty products from reaching customers, which in turn reduces external failure costs. These external costs are higher and include returns, repairs, warranty claims, and customer dissatisfaction.
Activity-based costing is most useful when overhead is significant and not uniform across products. If most costs are direct and overhead is minimal, ABC may not be necessary. Thus, when indirect costs are a small portion of total costs, ABC provides little benefit.
Cost distortion happens when overhead is allocated unevenly. Some products get too much overhead (overcosted), and others get too little (undercosted). This misrepresents profitability and can lead to poor pricing and product mix decisions. Accurate cost assignment is essential for competitive strategy and resource optimization.
