Managerial Accounting Creating Value in a Dynamic Business Environment 10th edition - Test Bank Instant Download - Complete Test Bank With Answers Sample Questions Are Posted Below Chapter 05 Activity-Based Costing and Management True / False Questions 1. In an activity-based costing system, direct materials used would typically be classified …
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Managerial Accounting Creating Value in a Dynamic Business Environment 10th edition – Test Bank
Instant Download – Complete Test Bank With Answers
Sample Questions Are Posted Below
Chapter 05
Activity-Based Costing and Management
True / False Questions
| 1. | In an activity-based costing system, direct materials used would typically be classified as a unit-level cost.
True False |
| 2. | Activity-based costing systems have a tendency to distort product costs.
True False |
| 3. | Consumption ratios are useful in determining the existence of product-line diversity.
True False |
| 4. | An example of a customer-value-added activity is final painting and polishing of the product.
True False |
| 5. | Generally speaking, companies prefer doing business with customers who order small quantities rather than large quantities.
True False |
Multiple Choice Questions
| 6. | Consider the following statements regarding traditional costing systems:
I. Overhead costs are applied to products on the basis of volume-related measures. Which of the above statements is (are) true?
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| 7. | Many traditional costing systems:
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| 8. | The following tasks are associated with an activity-based costing system:
1— Assignment of cost to products Which of the following choices correctly expresses the proper order of the preceding tasks?
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| 9. | Which of the following is the proper sequence of events in an activity-based costing system?
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| 10. | Which of the following tasks is not normally associated with an activity-based costing system?
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| 11. | Which of the following is not a broad, cost classification category typically used in activity-based costing?
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| 12. | In an activity-based costing system, direct materials used would typically be classified as a:
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| 13. | Which of the following is least likely to be classified as a batch-level activity in an activity-based costing system?
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| 14. | In an activity-based costing system, materials receiving would typically be classified as a:
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| 15. | Feinstein, Inc., an appliance manufacturer, is developing a new line of ovens that uses controlled-laser technology. The research and testing costs associated with the new ovens is said to arise from a:
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| 16. | Consider the following statements regarding product-sustaining activities:
I. They must be performed for each batch of product that is made. Which of the above statements is (are) true?
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| 17. | Which of the following is least likely to be classified as a facility-level activity in an activity-based costing system?
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| 18. | The salaries of a manufacturing plant’s management are said to arise from:
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| 19. | Which of the following choices correctly depicts a cost that arises from a batch-level activity and one that arises from a facility-level activity?
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| 20. | Which of the following choices correctly depicts the proper classification of direct materials used and management salaries?
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| 21. | The division of activities into unit-level, batch-level, product-sustaining level, and facility-level categories is commonly known as a cost:
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| 22. | Alamo’s customer service department follows up on customer complaints by telephone inquiry. During a recent period, the department initiated 7,000 calls and incurred costs of $203,000. If 2,940 of these calls were for the company’s wholesale operation (the remainder were for the retail division), costs allocated to the retail division should amount to:
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| 23. | Aladdin’s customer service department follows up on customer complaints by telephone inquiry. During a recent period, the department initiated 7,000 calls and incurred costs of $203,000. If 2,940 of these calls were for the company’s wholesale operation (the remainder were for the retail division), costs allocated to the wholesale operation should amount to:
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| 24. | Alaina’s customer service department follows up on customer complaints by telephone inquiry. During a recent period, the department initiated 10,000 calls and incurred costs of $312,000. Of these calls, 3,800 were for the company’s wholesale operation; the remainder was for the retail division. Costs allocated to the wholesale operation are:
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| 25. | Astro’s customer service department follows up on customer complaints by telephone inquiry. During a recent period, the department initiated 10,000 calls and incurred costs of $312,000. Of these calls, 3,800 were for the company’s wholesale operation; the remainder was for the retail division. Costs allocated to the retail division are:
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| 26. | Riverside Florists uses an activity-based costing system to compute the cost of making floral bouquets and delivering the bouquets to its commercial customers. Company personnel who earn $180,000 typically perform both tasks; other firm-wide overhead is expected to total $70,000. These costs are allocated as follows:
Riverside anticipates making 20,000 bouquets and 4,000 deliveries in the upcoming year. The cost of wages and salaries and other overhead that would be charged to each bouquet made is:
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| 27. | Riverside Florists uses an activity-based costing system to compute the cost of making floral bouquets and delivering the bouquets to its commercial customers. Company personnel who earn $180,000 typically perform both tasks; other firm-wide overhead is expected to total $70,000. These costs are allocated as follows:
Riverside anticipates making 20,000 bouquets and 4,000 deliveries in the upcoming year. The cost of wages and salaries and other overhead that would be charged to each delivery is closest to:
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| 28. | HiTech Products manufactures three types of remote-control devices: Economy, Standard, and Deluxe. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below.
The following information pertains to the three product lines for next year: What is HiTech’s pool rate for the material-handling activity?
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| 29. | HiTech Products manufactures three types of remote-control devices: Economy, Standard, and Deluxe. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below.
The following information pertains to the three product lines for next year: What is HiTech’s pool rate for the automated machinery activity?
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| 30. | HiTech Products manufactures three types of remote-control devices: Economy, Standard, and Deluxe. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below.
The following information pertains to the three product lines for next year: What is HiTech’s pool rate for the finishing activity?
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| 31. | HiTech Products manufactures three types of remote-control devices: Economy, Standard, and Deluxe. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below.
The following information pertains to the three product lines for next year: What is HiTech’s pool rate for the packaging activity?
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| 32. | Under an activity-based costing system, what is the per-unit overhead cost of Economy?
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| 33. | Under an activity-based costing system, what is the per-unit overhead cost of Standard?
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| 34. | Under an activity-based costing system, what is the per-unit overhead cost of Deluxe?
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| 35. | Assume that HiTech is using a volume-based costing system, and the preceding overhead costs are applied to all products on the basis of direct labor hours. The overhead cost that would be assigned to the Deluxe product line is closest to:
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| 36. | Assume that HiTech is using a volume-based costing system, and the preceding overhead costs are applied to all products on the basis of direct labor hours. The overhead cost that would be assigned to the Standard product line is closest to:
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| 37. | St. James, Inc., currently uses traditional costing procedures, applying $800,000 of overhead to products Beta and Zeta on the basis of direct labor hours. The company is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labor hours (DLH), production setups (SU), and number of parts components (PC) as cost drivers. Data on the cost pools and respective driver volumes follow.
The overhead cost allocated to Beta by using traditional costing procedures would be:
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| 38. | St. James, Inc., currently uses traditional costing procedures, applying $800,000 of overhead to products Beta and Zeta on the basis of direct labor hours. The company is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labor hours (DLH), production setups (SU), and number of parts components (PC) as cost drivers. Data on the cost pools and respective driver volumes follow.
The overhead cost allocated to Zeta by using traditional costing procedures would be:
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| 39. | St. James, Inc., currently uses traditional costing procedures, applying $800,000 of overhead to products Beta and Zeta on the basis of direct labor hours. The company is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labor hours (DLH), production setups (SU), and number of parts components (PC) as cost drivers. Data on the cost pools and respective driver volumes follow.
The overhead cost allocated to Beta by using activity-based costing procedures would be:
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| 40. | St. James, Inc., currently uses traditional costing procedures, applying $800,000 of overhead to products Beta and Zeta on the basis of direct labor hours. The company is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labor hours (DLH), production setups (SU), and number of parts components (PC) as cost drivers. Data on the cost pools and respective driver volumes follow.
The overhead cost allocated to Zeta by using activity-based costing procedures would be:
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| 41. | Martin and Beasley, an accounting firm, provides consulting and tax planning services. For many years, the firm’s total administrative cost (currently $270,000) has been allocated to services on this basis of billable hours to clients. A recent analysis found that 55% of the firm’s billable hours to clients resulted from tax planning services, while 45% resulted from consulting services. The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows: A recent analysis of staff support found a strong correlation with the number of clients served. In contrast, in-house computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively. Consulting clients served totaled 35% of the total client base, consumed 30% of the firm’s computer hours, and accounted for 20% of the total client transactions.
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| 42. | Kelly and Logan, an accounting firm, provides consulting and tax planning services. For many years, the firm’s total administrative cost (currently $250,000) has been allocated to services on the basis of billable hours to clients. A recent analysis found that 65% of the firm’s billable hours to clients resulted from tax planning services, while 35% resulted from consulting services. The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows: A recent analysis of staff support found a strong correlation between the number of staff personnel and the number of clients served (consulting, 20; tax planning, 60). In contrast, in-house computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively. Consulting consumed 30% of the firm’s computer hours and had 20% of the total client transactions. Assuming the use of activity-based costing, the proper percentage to use in allocating staff support costs to tax planning services is:
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| 43. | Kelly and Logan, an accounting firm, provides consulting and tax planning services. For many years, the firm’s total administrative cost (currently $250,000) has been allocated to services on the basis of billable hours to clients. A recent analysis found that 65% of the firm’s billable hours to clients resulted from tax planning services, while 35% resulted from consulting services. The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows: A recent analysis of staff support found a strong correlation between the number of staff personnel and the number of clients served (consulting, 20; tax planning, 60). In contrast, in-house computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively. Consulting consumed 30% of the firm’s computer hours and had 20% of the total client transactions. If Kelly and Logan switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to consulting services would:
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| 44. | Activity-based costing systems:
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| 45. | Dreyson Manufacturing sells a number of goods whose selling price is heavily influenced by cost. A recent study of product no. 519 revealed a traditionally-derived total cost of $1,019, a selling price of $1,850 based on that figure, and a newly computed activity-based total cost of $1,215. Which of the following statements is true?
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| 46. | Drake Manufacturing sells a number of goods whose selling price is heavily influenced by cost. A recent study of product no. 520 revealed a traditionally-derived total cost of $1,623 and a selling price of $1,850 based on that figure. A newly computed activity-based total cost is $1,215. Which of the following statements is true?
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| 47. | Vanguilder combines all manufacturing overhead into a single cost pool and allocates this overhead to products by using machine hours. Activity-based costing would likely show that with Vanguard’s current procedures that:
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| 48. | Jackson manufactures products X and Y, applying overhead on the basis of labor hours. X, a low-volume product, requires a variety of complex manufacturing procedures. Y, on the other hand, is both a high-volume product and relatively simplistic in nature. What would an activity-based costing system likely disclose about products X and Y as a result of Jackson’s current accounting procedures?
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| 49. | Johnson manufactures products X and Y, applying overhead on the basis of labor hours. X is a high-volume product and relatively simplistic in nature. Y is both a low-volume product and requires a variety of complex manufacturing procedures. What would an activity-based costing system likely disclose about products X and Y as a result of Johnson’s current accounting procedures?
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| 50. | Koski manufactures products J and K, applying overhead on the basis of labor hours. J, a low-volume product, requires a variety of complex manufacturing procedures. K, on the other hand, is both a high-volume product and relatively simplistic in nature. What would an activity-based costing system likely disclose about products J and K as a result of Koski’s current accounting procedures?
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| 51. | Consider the following statements:
I. Product diversity creates costing problems because diverse products tend to utilize manufacturing activities in different ways. Which of the above statements is (are) true?
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| 52. | Consumption ratios are useful in determining:
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| 53. | Widely varying consumption ratios:
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| 54. | In comparison with a system that uses a single, volume-based cost driver, an activity-based costing system is preferred when a company has:
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| 55. | Consider the following factors:
I. The degree of correlation between consumption of an activity and consumption of a particular cost driver. Which of these factors should be considered in the selection of a cost driver?
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| 56. | Which of the following activity cost pools and activity measures likely has the lowest degree of correlation?
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| 57. | Grist Enterprises is converting to an activity-based costing system It wishes to depict the various activities in its manufacturing process along with the activities’ relationships. Which of the following is a tool that the company can use to accomplish this task?
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| 58. | Successful adoptions of activity-based costing typically occur when companies rely heavily on:
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| 59. | Which of the following statements is (are) true about non-value-added activities?
I. Non-value-added activities are often unnecessary and dispensable.
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| 60. | During a recent accounting period, Marty’s shipping department processed 26 orders. Each order typically takes four hours to complete. However, the average time increased to five hours because of various departmental inefficiencies. If shipping labor is paid $14 per hour, the company’s non-value-added cost would be:
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| 61. | Storch Corporation takes eight hours to complete the setup process for a certain electrical component, with the setup cost averaging $150 per hour. If the company’s competitor can accomplish the same process in six hours, Stanley’s non-value-added cost would be:
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| 62. | Factory Oak produces various wooden bookcases, tables, storage units, and chairs. Which of the following would be included in a listing of the company’s non-value-added activities?
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| 63. | Airstream builds recreational motor homes. All of the following activities add value to the finished product except:
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| 64. | An example of a customer-value-added activity is:
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| 65. | Which of the following is not an example of a business-value-added activity?
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| 66. | The adoption of a 24/7 customer service help line is an example of a:
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| 67. | The adoption of a 24/7 employee hotline for workplace complaints is an example of a:
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| 68. | Customer profitability analysis is tied closely to:
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| 69. | When determining customer profitability, activity-based costing can be used to analyze:
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| 70. | Generally speaking, companies prefer doing business with customers who:
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| 71. | Which of the following can have a negative impact on a particular sale’s profitability?
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| 72. | Hilton Corporation’s customers differ greatly with respect to number of required sales contacts (e.g., phone calls and sales visits), account payment patterns, and design/engineering change orders. Which of the following choices likely denotes an ideal customer from Hilton’s perspective?
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| 73. | Of the following organizations, activity-based costing (ABC) cannot be used by:
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| 74. | A hospital administrator is in the process of implementing an activity-based-costing system. Which of the following tasks would not be part of this process?
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Essay Questions
| 75. | St. Helena Cellars produces wine in northern California. Consider the following selected costs that arose during the current year:
1. Safety costs at winery Required: A. Briefly distinguish between unit-level and product-sustaining activities.
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| 76. | Consider the following costs that relate to a bank and a manufacturer of software:
Bank Software manufacturer Required: A. Classify the eight costs listed as arising from either a unit-level, batch-level, product-sustaining, or facility-level activity.
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| 77. | Alexander Corporation produces flat-screen computer monitors. Consider the following selected costs that arose during the current year:
1. Direct materials used: $3,640,000 Required: A. Briefly distinguish between batch-level and facility-level activities.
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| 78. | The controller for Wofford Machining has established the following overhead cost pools and cost drivers:
Order no. 715 has the following production requirements: Machine setups: 7 Required: A. Compute the total overhead that should be assigned to order no. 715 by using activity-based costing.
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| 79. | Weston Enterprises uses a traditional-costing system to estimate quality-control costs for its DEX product line. Costs are estimated at 32% of direct-labor cost, and direct labor totaled $860,000 for the quarter just ended. Management is contemplating a change to activity-based costing, and has established three cost pools: incoming material inspection, in-process inspection, and final product certification. Number of parts, number of units, and number of orders have been selected as the respective cost drivers.
The following data show the pool rates that have been calculated by the company along with the quantity of driver units for the DEXs: Required: A. Calculate the quarterly quality-control cost that is allocated to the DEX product line under Weston’s traditional-costing system.
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| 80. | Star Manufacturing, contemplating the adoption of an activity-based costing system, has established three activity-cost pools: machine setup, quality assurance, and engineering. These cost pools, the appropriate cost driver, and the percentage of each cost driver consumed by the company’s products (H15, H16, and H17) follow.
Estimated costs for these three activities, which account for 80% of the firm’s total overhead, are $400,000, $500,000, and $120,000, respectively. Star currently applies manufacturing overhead to products on the basis of machine hours. Required: A. Will activity-based costing systems require more or fewer cost pools than traditional costing systems? No explanation is necessary. 1. Is Star emphasizing unit-level activities, batch-level activities, product-sustaining activities, or facility-level activities? Explain.
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| 81. | Kenyon Company produces two products (F56 and F57), applying manufacturing overhead on the basis of direct labor hours. Anticipated unit production costs (material, labor, and overhead) and manufacturing volumes are:
F56: 2,000 units, $234 Kenyon’s overhead arises because of various activities, one of which is purchase-order processing. Budgeted cost for this activity is expected to be $70,000. The firm believes that the number of purchase orders processed is a key cost driver and expects the following activity for its products: F56, 10 purchase orders; F57, 40 purchase orders. Kenyon’s selling prices are based heavily on cost. Required: A. Activity-based costing (ABC) is said to result in improved costing accuracy when compared with traditional costing procedures. Briefly explain how this improved accuracy is attained. 1. the pool rate for purchase-order processing. C. Assume that Kenyon switched to activity-based costing and calculated total unit production costs as follows: F56, $285; F57, $220. 1. Which of the two products, F56 or F57, was overcosted prior to the change to ABC? No explanation is necessary.
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| 82. | Lennox Industries manufactures two products: A and B. A review of the company’s accounting records revealed the following per-unit costs and production volumes:
Manufacturing overhead is currently computed by spreading overhead of $1,860,000 over 20,000 direct labor hours. Management is considering a shift to activity-based costing in an effort to improve the firm’s accounting procedures, and the following data are available: Lennox determines selling prices by adding 40% to a product’s total cost. Required: A. Compute the per-unit cost and selling price of product B by using Lennox’s current costing procedures.
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| 83. | Scott, Inc., manufactures two products, Regular and Deluxe, and applies overhead on the basis of direct labor hours. Anticipated overhead and direct labor time for the upcoming accounting period are $1,600,000 and 25,000 hours, respectively. Information about the company’s products follows.
Regular— Estimated production volume: 3,000 units Deluxe— Estimated production volume: 4,000 units Scott’s overhead of $1,600,000 can be identified with three major activities: order processing ($250,000), machine processing ($1,200,000), and product inspection ($150,000). These activities are driven by number of orders processed, machine hours worked, and inspection hours, respectively. Data relevant to these activities follow. Required: A. Compute the pool rates that would be used for order processing, machine processing, and product inspection in an activity-based costing system.
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| 84. | Pink Corporation manufactures two types of transponders—no. 156 and no. 157—and applies manufacturing overhead to all units at the rate of $76.50 per machine hour. Production information follows.
The controller, who is studying the use of activity-based costing, has determined that the firm’s overhead can be identified with three activities: manufacturing setups, machine processing, and product shipping. Data on the number of setups, machine hours worked, and outgoing shipments, the activities’ three respective cost drivers, follow. The firm’s total overhead of $3,060,000 is subdivided as follows: manufacturing setups, $260,000; machine processing, $2,400,000; and product shipping, $400,000. Required: A. Compute the pool rates that would be used for manufacturing setups, machine processing, and product shipping in an activity-based costing system. |
| 85. | Heartfelt Bank & Trust operates in a very competitive marketplace, using a traditional labor-hour-based system to determine the cost of processing its mortgage loans. Recently, the firm explored a switch to activity-based costing to determine the wisdom of its previous ways. The following information is available:
Two loan applications, among many others, were originated and closed during the year. No. 7439 consumed 3.5 hours in loan underwriting and 1.5 hours in loan closure, for a total of 5.0 hours. No. 7809 also required 5.0 hours of time, subdivided as follows: 2.0 hours in loan underwriting and 3.0 hours in loan closure. Required: A. Use an activity-based-costing system and determine the cost of processing, underwriting, and closing the two loan applications.
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| 86. | Consider the nine activities that follow.
1. Microsoft: Developing computer coding for a new spreadsheet package. Required: Categorize each of the activities as either value-added or non-value-added for the companies noted.
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| 87. | Switzer, Inc., which sells books to college bookstores and individuals, uses activity-based costing and activity-based management. The following information is available for the company’s three cost pools:
Bookstore sales totaled $8,400,000, and sales to individuals amounted to $2,400,000. Costs for the three activities were: Incoming receipts, $450,000; warehousing, $520,000; and outgoing shipments, $630,000. A review of the company’s activities found various inefficiencies with respect to the warehousing of textbooks (acquired for eventual sale to bookstores) and outgoing shipments to individuals. These inefficiencies resulted in an extra 500 moves and 400 shipments, respectively. Required: A. What is a non-value-added activity?
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| 88. | Filipe’s Fresh Meats and Produce is a wholesale distributor that operates in central California. An analysis of two of the company’s customers, Atriums Retirement Home and Sigma Sigma Sigma Fraternity, revealed the data that follow for a recent 12-month period.
Filipe’s uses activity-based costing to determine the cost of servicing its customers. The company had total delivery costs during the year of $576,000 and 8,000 deliveries, along with cost of $765,000 for the administrative processing of 90,000 invoices. Required: A. Compute the pool rates for deliveries and invoice processing.
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| 89. | Clark Corporation manufactures cooling system components. The company has gathered the following information about two of its customers: Engle Equipment and Midwest Refrigeration.
Cost-driver data used by the firm and traceable to Engle and Midwest are: Required: A. Perform a customer profitability analysis for Clark. Compute the gross margin and operating income on transactions related to Engle Equipment and Midwest Refrigeration.
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| 90. | Homestead Corporation sells a line of power tools to home improvement chains, generating a cost of goods sold equal to 70% of net sales. The selected data that follow relate to the period just ended for the company’s three largest customers: Weekend Project, Tool Mart, and Fix-It City.
Homestead’s management recently attended a seminar and learned that customers with excessive requests and demands can have a significant, negative impact on corporate profitability. Required: A. For each of the three chains, compute: 1. Total customer-related costs as a percentage of gross margin. B. Prepare a brief summary of your findings. Should Homestead work with any of the chains in an effort to improve results? Explain.
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| 91. | Bravo Manufacturing is a relatively new customer of Haxton Enterprises. In the short period that the two companies have done business with each other, Haxton has found Bravo to be, in management’s words, “an expensive proposition.” Numerous sales visits are typically required to “close a deal,” with selling prices and discounts offered being among the most attractive in the industry. Complicating matters, Bravo is slow to settle its account, orders in small quantities, and often has numerous specialized shipping and handling needs. A recent customer profitability analysis has painted a very negative picture of Bravo Manufacturing, and Haxton’s managers are questioning whether an on-going relationship with the firm is warranted. Required: A. Briefly explain why the customer profitability analysis painted a negative picture of Bravo Manufacturing.
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| 92. | Falcon Enterprises, which manufactures lawn mowers, recently installed a just-in-time purchasing system and an activity-based management program.
Required: A. Determine whether the following items would be apt to increase or decrease as a result of the just-in-time system: 1. Inventory storage costs. B. Identify the following items as value-added activities, non-value-added activities, or both. 1. Attaching the engine to the mower’s body.
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| 93. | Templeton Industries currently assigns overhead to products by using a predetermined rate based on direct labor hours. The company is considering the adoption of an activity-based costing (ABC) system, and management desires a brief overview of this system before it makes a final decision. Compare ABC with the company’s current system, focusing on the number of cost pools and cost drivers, costing accuracy, and cost distortion.
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| 94. | At a recent professional meeting, two controllers discussed product-costing problems in their respective companies. Both controllers are familiar with ABC systems, but neither of their firms utilizes such a system.
Controller D reported that part of the problem in his firm results from major differences among product lines with respect to unit volume, utilization of activities, quality assurance requirements established by customers, and product size. Controller M noted that in her company, which manufactures consumer goods, all items undergo the same basic production processes in the same sequence. Lately, however, there has been a significant increase in the number of item colors. Required: Which controller should be more concerned about the potential distortion? Explain.
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| 95. | Define the term “cost driver” and discuss the factors that are important in the selection of appropriate cost drivers.
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| 96. | Non-value-added costs occur in nonmanufacturing organizations as well as in manufacturing firms.
Required: A. Explain what is meant by a non-value-added cost.
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Chapter 05 Activity-Based Costing and Management Answer Key
True / False Questions
| 1. | In an activity-based costing system, direct materials used would typically be classified as a unit-level cost.
TRUE |
| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making AICPA FN: Research Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-03 Explain the concept of cost levels; including unit-level; batch-level; product-sustaining-level; and facility-level costs. |
| 2. | Activity-based costing systems have a tendency to distort product costs.
FALSE |
| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Research Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-05 Explain why traditional; volume-based costing systems tend to distort product costs. |
| 3. | Consumption ratios are useful in determining the existence of product-line diversity.
TRUE |
| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Research Blooms: Remember Difficulty: 2 Medium Learning Objective: 05-05 Explain why traditional; volume-based costing systems tend to distort product costs. |
| 4. | An example of a customer-value-added activity is final painting and polishing of the product.
TRUE |
| AACSB: Reflective Thinking AICPA BB: Resource Management AICPA FN: Measurement Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-08 Explain the concepts of activity-based management and two-dimensional ABC. |
| 5. | Generally speaking, companies prefer doing business with customers who order small quantities rather than large quantities.
FALSE |
| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement AICPA FN: Research Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-09 Explain and execute a customer-profitability analysis. |
Multiple Choice Questions
| 6. | Consider the following statements regarding traditional costing systems:
I. Overhead costs are applied to products on the basis of volume-related measures. Which of the above statements is (are) true?
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| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Research Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-01 Compute product costs under a traditional; volume-based product-costing system. |
| 7. | Many traditional costing systems:
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| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Research Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-01 Compute product costs under a traditional; volume-based product-costing system. |
| 8. | The following tasks are associated with an activity-based costing system:
1— Assignment of cost to products Which of the following choices correctly expresses the proper order of the preceding tasks?
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| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Research Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-02 Explain how an activity-based costing system operates; including the use of a two-stage procedure for cost assignment; the identification of activity cost pools; and the selection of cost drivers. Learning Objective: 05-04 Compute product costs under an activity-based costing system. |
| 9. | Which of the following is the proper sequence of events in an activity-based costing system?
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| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Research Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-02 Explain how an activity-based costing system operates; including the use of a two-stage procedure for cost assignment; the identification of activity cost pools; and the selection of cost drivers. Learning Objective: 05-04 Compute product costs under an activity-based costing system. |
| 10. | Which of the following tasks is not normally associated with an activity-based costing system?
|
| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Research Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-02 Explain how an activity-based costing system operates; including the use of a two-stage procedure for cost assignment; the identification of activity cost pools; and the selection of cost drivers. Learning Objective: 05-04 Compute product costs under an activity-based costing system. |
| 11. | Which of the following is not a broad, cost classification category typically used in activity-based costing?
|
| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Research Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-03 Explain the concept of cost levels; including unit-level; batch-level; product-sustaining-level; and facility-level costs. |
| 12. | In an activity-based costing system, direct materials used would typically be classified as a:
|
| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Research Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-03 Explain the concept of cost levels; including unit-level; batch-level; product-sustaining-level; and facility-level costs. |
| 13. | Which of the following is least likely to be classified as a batch-level activity in an activity-based costing system?
|
| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Research Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-03 Explain the concept of cost levels; including unit-level; batch-level; product-sustaining-level; and facility-level costs. |
| 14. | In an activity-based costing system, materials receiving would typically be classified as a:
|
| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Research Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-03 Explain the concept of cost levels; including unit-level; batch-level; product-sustaining-level; and facility-level costs. |
| 15. | Feinstein, Inc., an appliance manufacturer, is developing a new line of ovens that uses controlled-laser technology. The research and testing costs associated with the new ovens is said to arise from a:
|
| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Research Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-03 Explain the concept of cost levels; including unit-level; batch-level; product-sustaining-level; and facility-level costs. |
| 16. | Consider the following statements regarding product-sustaining activities:
I. They must be performed for each batch of product that is made. Which of the above statements is (are) true?
|
| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Research Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-03 Explain the concept of cost levels; including unit-level; batch-level; product-sustaining-level; and facility-level costs. |
| 17. | Which of the following is least likely to be classified as a facility-level activity in an activity-based costing system?
|
| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Research Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-03 Explain the concept of cost levels; including unit-level; batch-level; product-sustaining-level; and facility-level costs. |
| 18. | The salaries of a manufacturing plant’s management are said to arise from:
|
| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Research Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-03 Explain the concept of cost levels; including unit-level; batch-level; product-sustaining-level; and facility-level costs. |
| 19. | Which of the following choices correctly depicts a cost that arises from a batch-level activity and one that arises from a facility-level activity?
|
| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Research Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-03 Explain the concept of cost levels; including unit-level; batch-level; product-sustaining-level; and facility-level costs. |
| 20. | Which of the following choices correctly depicts the proper classification of direct materials used and management salaries?
|
| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Research Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-03 Explain the concept of cost levels; including unit-level; batch-level; product-sustaining-level; and facility-level costs. |
| 21. | The division of activities into unit-level, batch-level, product-sustaining level, and facility-level categories is commonly known as a cost:
|
| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Research Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-03 Explain the concept of cost levels; including unit-level; batch-level; product-sustaining-level; and facility-level costs. |
| 22. | Alamo’s customer service department follows up on customer complaints by telephone inquiry. During a recent period, the department initiated 7,000 calls and incurred costs of $203,000. If 2,940 of these calls were for the company’s wholesale operation (the remainder were for the retail division), costs allocated to the retail division should amount to:
|
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-04 Compute product costs under an activity-based costing system. |
| 23. | Aladdin’s customer service department follows up on customer complaints by telephone inquiry. During a recent period, the department initiated 7,000 calls and incurred costs of $203,000. If 2,940 of these calls were for the company’s wholesale operation (the remainder were for the retail division), costs allocated to the wholesale operation should amount to:
|
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-04 Compute product costs under an activity-based costing system. |
| 24. | Alaina’s customer service department follows up on customer complaints by telephone inquiry. During a recent period, the department initiated 10,000 calls and incurred costs of $312,000. Of these calls, 3,800 were for the company’s wholesale operation; the remainder was for the retail division. Costs allocated to the wholesale operation are:
|
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-04 Compute product costs under an activity-based costing system. |
| 25. | Astro’s customer service department follows up on customer complaints by telephone inquiry. During a recent period, the department initiated 10,000 calls and incurred costs of $312,000. Of these calls, 3,800 were for the company’s wholesale operation; the remainder was for the retail division. Costs allocated to the retail division are:
|
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-04 Compute product costs under an activity-based costing system. |
| 26. | Riverside Florists uses an activity-based costing system to compute the cost of making floral bouquets and delivering the bouquets to its commercial customers. Company personnel who earn $180,000 typically perform both tasks; other firm-wide overhead is expected to total $70,000. These costs are allocated as follows:
Riverside anticipates making 20,000 bouquets and 4,000 deliveries in the upcoming year. The cost of wages and salaries and other overhead that would be charged to each bouquet made is:
|
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-04 Compute product costs under an activity-based costing system. |
| 27. | Riverside Florists uses an activity-based costing system to compute the cost of making floral bouquets and delivering the bouquets to its commercial customers. Company personnel who earn $180,000 typically perform both tasks; other firm-wide overhead is expected to total $70,000. These costs are allocated as follows:
Riverside anticipates making 20,000 bouquets and 4,000 deliveries in the upcoming year. The cost of wages and salaries and other overhead that would be charged to each delivery is closest to:
|
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-04 Compute product costs under an activity-based costing system. |
| 28. | HiTech Products manufactures three types of remote-control devices: Economy, Standard, and Deluxe. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below.
The following information pertains to the three product lines for next year: What is HiTech’s pool rate for the material-handling activity?
|
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-04 Compute product costs under an activity-based costing system. |
| 29. | HiTech Products manufactures three types of remote-control devices: Economy, Standard, and Deluxe. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below.
The following information pertains to the three product lines for next year: What is HiTech’s pool rate for the automated machinery activity?
|
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-04 Compute product costs under an activity-based costing system. |
| 30. | HiTech Products manufactures three types of remote-control devices: Economy, Standard, and Deluxe. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below.
The following information pertains to the three product lines for next year: What is HiTech’s pool rate for the finishing activity?
|
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-04 Compute product costs under an activity-based costing system. |
| 31. | HiTech Products manufactures three types of remote-control devices: Economy, Standard, and Deluxe. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below.
The following information pertains to the three product lines for next year: What is HiTech’s pool rate for the packaging activity?
|
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-04 Compute product costs under an activity-based costing system. |
| 32. | Under an activity-based costing system, what is the per-unit overhead cost of Economy?
|
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-04 Compute product costs under an activity-based costing system. |
| 33. | Under an activity-based costing system, what is the per-unit overhead cost of Standard?
|
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-04 Compute product costs under an activity-based costing system. |
| 34. | Under an activity-based costing system, what is the per-unit overhead cost of Deluxe?
|
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-04 Compute product costs under an activity-based costing system. |
| 35. | Assume that HiTech is using a volume-based costing system, and the preceding overhead costs are applied to all products on the basis of direct labor hours. The overhead cost that would be assigned to the Deluxe product line is closest to:
|
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-01 Compute product costs under a traditional; volume-based product-costing system. |
| 36. | Assume that HiTech is using a volume-based costing system, and the preceding overhead costs are applied to all products on the basis of direct labor hours. The overhead cost that would be assigned to the Standard product line is closest to:
|
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-01 Compute product costs under a traditional; volume-based product-costing system. |
| 37. | St. James, Inc., currently uses traditional costing procedures, applying $800,000 of overhead to products Beta and Zeta on the basis of direct labor hours. The company is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labor hours (DLH), production setups (SU), and number of parts components (PC) as cost drivers. Data on the cost pools and respective driver volumes follow.
The overhead cost allocated to Beta by using traditional costing procedures would be:
|
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-01 Compute product costs under a traditional; volume-based product-costing system. |
| 38. | St. James, Inc., currently uses traditional costing procedures, applying $800,000 of overhead to products Beta and Zeta on the basis of direct labor hours. The company is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labor hours (DLH), production setups (SU), and number of parts components (PC) as cost drivers. Data on the cost pools and respective driver volumes follow.
The overhead cost allocated to Zeta by using traditional costing procedures would be:
|
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-01 Compute product costs under a traditional; volume-based product-costing system. |
| 39. | St. James, Inc., currently uses traditional costing procedures, applying $800,000 of overhead to products Beta and Zeta on the basis of direct labor hours. The company is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labor hours (DLH), production setups (SU), and number of parts components (PC) as cost drivers. Data on the cost pools and respective driver volumes follow.
The overhead cost allocated to Beta by using activity-based costing procedures would be:
|
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-04 Compute product costs under an activity-based costing system. |
| 40. | St. James, Inc., currently uses traditional costing procedures, applying $800,000 of overhead to products Beta and Zeta on the basis of direct labor hours. The company is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labor hours (DLH), production setups (SU), and number of parts components (PC) as cost drivers. Data on the cost pools and respective driver volumes follow.
The overhead cost allocated to Zeta by using activity-based costing procedures would be:
|
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-04 Compute product costs under an activity-based costing system. |
| 41. | Martin and Beasley, an accounting firm, provides consulting and tax planning services. For many years, the firm’s total administrative cost (currently $270,000) has been allocated to services on this basis of billable hours to clients. A recent analysis found that 55% of the firm’s billable hours to clients resulted from tax planning services, while 45% resulted from consulting services. The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows: A recent analysis of staff support found a strong correlation with the number of clients served. In contrast, in-house computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively. Consulting clients served totaled 35% of the total client base, consumed 30% of the firm’s computer hours, and accounted for 20% of the total client transactions.
|
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-01 Compute product costs under a traditional; volume-based product-costing system. Learning Objective: 05-04 Compute product costs under an activity-based costing system. Learning Objective: 05-10 Understand and discuss how activity-based costing is used in service-industry organizations. |
| 42. | Kelly and Logan, an accounting firm, provides consulting and tax planning services. For many years, the firm’s total administrative cost (currently $250,000) has been allocated to services on the basis of billable hours to clients. A recent analysis found that 65% of the firm’s billable hours to clients resulted from tax planning services, while 35% resulted from consulting services. The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows: A recent analysis of staff support found a strong correlation between the number of staff personnel and the number of clients served (consulting, 20; tax planning, 60). In contrast, in-house computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively. Consulting consumed 30% of the firm’s computer hours and had 20% of the total client transactions. Assuming the use of activity-based costing, the proper percentage to use in allocating staff support costs to tax planning services is:
|
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-04 Compute product costs under an activity-based costing system. Learning Objective: 05-10 Understand and discuss how activity-based costing is used in service-industry organizations. |
| 43. | Kelly and Logan, an accounting firm, provides consulting and tax planning services. For many years, the firm’s total administrative cost (currently $250,000) has been allocated to services on the basis of billable hours to clients. A recent analysis found that 65% of the firm’s billable hours to clients resulted from tax planning services, while 35% resulted from consulting services. The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows: A recent analysis of staff support found a strong correlation between the number of staff personnel and the number of clients served (consulting, 20; tax planning, 60). In contrast, in-house computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively. Consulting consumed 30% of the firm’s computer hours and had 20% of the total client transactions. If Kelly and Logan switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to consulting services would:
|
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-01 Compute product costs under a traditional; volume-based product-costing system. Learning Objective: 05-04 Compute product costs under an activity-based costing system. Learning Objective: 05-10 Understand and discuss how activity-based costing is used in service-industry organizations. |
| 44. | Activity-based costing systems:
|
| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Research Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-05 Explain why traditional; volume-based costing systems tend to distort product costs. |
| 45. | Dreyson Manufacturing sells a number of goods whose selling price is heavily influenced by cost. A recent study of product no. 519 revealed a traditionally-derived total cost of $1,019, a selling price of $1,850 based on that figure, and a newly computed activity-based total cost of $1,215. Which of the following statements is true?
|
| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-05 Explain why traditional; volume-based costing systems tend to distort product costs. |
| 46. | Drake Manufacturing sells a number of goods whose selling price is heavily influenced by cost. A recent study of product no. 520 revealed a traditionally-derived total cost of $1,623 and a selling price of $1,850 based on that figure. A newly computed activity-based total cost is $1,215. Which of the following statements is true?
|
| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-05 Explain why traditional; volume-based costing systems tend to distort product costs. |
| 47. | Vanguilder combines all manufacturing overhead into a single cost pool and allocates this overhead to products by using machine hours. Activity-based costing would likely show that with Vanguard’s current procedures that:
|
| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Research Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-05 Explain why traditional; volume-based costing systems tend to distort product costs. |
| 48. | Jackson manufactures products X and Y, applying overhead on the basis of labor hours. X, a low-volume product, requires a variety of complex manufacturing procedures. Y, on the other hand, is both a high-volume product and relatively simplistic in nature. What would an activity-based costing system likely disclose about products X and Y as a result of Jackson’s current accounting procedures?
|
| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Research Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-05 Explain why traditional; volume-based costing systems tend to distort product costs. |
| 49. | Johnson manufactures products X and Y, applying overhead on the basis of labor hours. X is a high-volume product and relatively simplistic in nature. Y is both a low-volume product and requires a variety of complex manufacturing procedures. What would an activity-based costing system likely disclose about products X and Y as a result of Johnson’s current accounting procedures?
|
| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Research Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-05 Explain why traditional; volume-based costing systems tend to distort product costs. |
| 50. | Koski manufactures products J and K, applying overhead on the basis of labor hours. J, a low-volume product, requires a variety of complex manufacturing procedures. K, on the other hand, is both a high-volume product and relatively simplistic in nature. What would an activity-based costing system likely disclose about products J and K as a result of Koski’s current accounting procedures?
|
| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Research Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-05 Explain why traditional; volume-based costing systems tend to distort product costs. |
| 51. | Consider the following statements:
I. Product diversity creates costing problems because diverse products tend to utilize manufacturing activities in different ways. Which of the above statements is (are) true?
|
| AACSB: Reflective Thinking AICPA BB: Industry AICPA FN: Research Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-05 Explain why traditional; volume-based costing systems tend to distort product costs. |
| 52. | Consumption ratios are useful in determining:
|
| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Research Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-05 Explain why traditional; volume-based costing systems tend to distort product costs. |
| 53. | Widely varying consumption ratios:
|
| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Research Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-05 Explain why traditional; volume-based costing systems tend to distort product costs. |
| 54. | In comparison with a system that uses a single, volume-based cost driver, an activity-based costing system is preferred when a company has:
|
| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Research Blooms: Remember Difficulty: 2 Medium Learning Objective: 05-05 Explain why traditional; volume-based costing systems tend to distort product costs. |
| 55. | Consider the following factors:
I. The degree of correlation between consumption of an activity and consumption of a particular cost driver. Which of these factors should be considered in the selection of a cost driver?
|
| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Research Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-06 Explain three criteria for selecting cost drivers. |
| 56. | Which of the following activity cost pools and activity measures likely has the lowest degree of correlation?
|
| AACSB: Reflective Thinking AICPA BB: Industry AICPA FN: Research Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-06 Explain three criteria for selecting cost drivers. |
| 57. | Grist Enterprises is converting to an activity-based costing system It wishes to depict the various activities in its manufacturing process along with the activities’ relationships. Which of the following is a tool that the company can use to accomplish this task?
|
| AACSB: Reflective Thinking AICPA BB: Industry AICPA FN: Research Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-07 Discuss several key issues in activity-based costing; including data collection and storyboarding. |
| 58. | Successful adoptions of activity-based costing typically occur when companies rely heavily on:
|
| AACSB: Reflective Thinking AICPA BB: Industry AICPA FN: Research Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-07 Discuss several key issues in activity-based costing; including data collection and storyboarding. |
| 59. | Which of the following statements is (are) true about non-value-added activities?
I. Non-value-added activities are often unnecessary and dispensable.
|
| AACSB: Reflective Thinking AICPA BB: Resource Management AICPA FN: Research Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-08 Explain the concepts of activity-based management and two-dimensional ABC. |
| 60. | During a recent accounting period, Marty’s shipping department processed 26 orders. Each order typically takes four hours to complete. However, the average time increased to five hours because of various departmental inefficiencies. If shipping labor is paid $14 per hour, the company’s non-value-added cost would be:
|
| AACSB: Analytic AICPA BB: Resource Management AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-08 Explain the concepts of activity-based management and two-dimensional ABC. |
| 61. | Storch Corporation takes eight hours to complete the setup process for a certain electrical component, with the setup cost averaging $150 per hour. If the company’s competitor can accomplish the same process in six hours, Stanley’s non-value-added cost would be:
|
| AACSB: Analytic AICPA BB: Resource Management AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-08 Explain the concepts of activity-based management and two-dimensional ABC. |
| 62. | Factory Oak produces various wooden bookcases, tables, storage units, and chairs. Which of the following would be included in a listing of the company’s non-value-added activities?
|
| AACSB: Reflective Thinking AICPA BB: Resource Management AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-08 Explain the concepts of activity-based management and two-dimensional ABC. |
| 63. | Airstream builds recreational motor homes. All of the following activities add value to the finished product except:
|
| AACSB: Reflective Thinking AICPA BB: Resource Management AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-08 Explain the concepts of activity-based management and two-dimensional ABC. |
| 64. | An example of a customer-value-added activity is:
|
| AACSB: Reflective Thinking AICPA BB: Resource Management AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-08 Explain the concepts of activity-based management and two-dimensional ABC. |
| 65. | Which of the following is not an example of a business-value-added activity?
|
| AACSB: Reflective Thinking AICPA BB: Resource Management AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-08 Explain the concepts of activity-based management and two-dimensional ABC. |
| 66. | The adoption of a 24/7 customer service help line is an example of a:
|
| AACSB: Reflective Thinking AICPA BB: Resource Management AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-08 Explain the concepts of activity-based management and two-dimensional ABC. |
| 67. | The adoption of a 24/7 employee hotline for workplace complaints is an example of a:
|
| AACSB: Reflective Thinking AICPA BB: Resource Management AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-08 Explain the concepts of activity-based management and two-dimensional ABC. |
| 68. | Customer profitability analysis is tied closely to:
|
| AACSB: Reflective Thinking AICPA BB: Resource Management AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-09 Explain and execute a customer-profitability analysis. |
| 69. | When determining customer profitability, activity-based costing can be used to analyze:
|
| AACSB: Reflective Thinking AICPA BB: Resource Management AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-09 Explain and execute a customer-profitability analysis. |
| 70. | Generally speaking, companies prefer doing business with customers who:
|
| AACSB: Reflective Thinking AICPA BB: Resource Management AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-09 Explain and execute a customer-profitability analysis. |
| 71. | Which of the following can have a negative impact on a particular sale’s profitability?
|
| AACSB: Reflective Thinking AICPA BB: Resource Management AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-09 Explain and execute a customer-profitability analysis. |
| 72. | Hilton Corporation’s customers differ greatly with respect to number of required sales contacts (e.g., phone calls and sales visits), account payment patterns, and design/engineering change orders. Which of the following choices likely denotes an ideal customer from Hilton’s perspective?
|
| AACSB: Reflective Thinking AICPA BB: Marketing AICPA FN: Research Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-09 Explain and execute a customer-profitability analysis. |
| 73. | Of the following organizations, activity-based costing (ABC) cannot be used by:
|
| AACSB: Reflective Thinking AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-10 Understand and discuss how activity-based costing is used in service-industry organizations. |
| 74. | A hospital administrator is in the process of implementing an activity-based-costing system. Which of the following tasks would not be part of this process?
|
| AACSB: Reflective Thinking AICPA BB: Industry AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-10 Understand and discuss how activity-based costing is used in service-industry organizations. |
Essay Questions
| 75. | St. Helena Cellars produces wine in northern California. Consider the following selected costs that arose during the current year:
1. Safety costs at winery Required: A. Briefly distinguish between unit-level and product-sustaining activities. A. A unit-level activity is performed for each unit of production. In contrast, a product-sustaining activity is needed to support an entire product line. The latter is not necessarily performed each time a new unit or batch of products is manufactured. |
| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Research Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-03 Explain the concept of cost levels; including unit-level; batch-level; product-sustaining-level; and facility-level costs. |
| 76. | Consider the following costs that relate to a bank and a manufacturer of software:
Bank Software manufacturer Required: A. Classify the eight costs listed as arising from either a unit-level, batch-level, product-sustaining, or facility-level activity. A. B. The number of loan applications would be more appropriate because it has a higher correlation with the amount of review costs incurred. Applications create review costs; customers, on the other hand, may not. |
| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-03 Explain the concept of cost levels; including unit-level; batch-level; product-sustaining-level; and facility-level costs. Learning Objective: 05-06 Explain three criteria for selecting cost drivers. |
| 77. | Alexander Corporation produces flat-screen computer monitors. Consider the following selected costs that arose during the current year:
1. Direct materials used: $3,640,000 Required: A. Briefly distinguish between batch-level and facility-level activities. A. A batch-level activity is performed for each batch of products rather than for each unit. In contrast, a facility-level activity is required for an entire process to occur. Examples of the latter, which support the organization as a whole, include plant maintenance and property taxes. |
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-03 Explain the concept of cost levels; including unit-level; batch-level; product-sustaining-level; and facility-level costs. |
| 78. | The controller for Wofford Machining has established the following overhead cost pools and cost drivers:
Order no. 715 has the following production requirements: Machine setups: 7 Required: A. Compute the total overhead that should be assigned to order no. 715 by using activity-based costing. A. B. $538,000 ÷ 20,000 machine hours = $26.90 per hour; |
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-01 Compute product costs under a traditional; volume-based product-costing system. Learning Objective: 05-04 Compute product costs under an activity-based costing system. Learning Objective: 05-05 Explain why traditional; volume-based costing systems tend to distort product costs. |
| 79. | Weston Enterprises uses a traditional-costing system to estimate quality-control costs for its DEX product line. Costs are estimated at 32% of direct-labor cost, and direct labor totaled $860,000 for the quarter just ended. Management is contemplating a change to activity-based costing, and has established three cost pools: incoming material inspection, in-process inspection, and final product certification. Number of parts, number of units, and number of orders have been selected as the respective cost drivers.
The following data show the pool rates that have been calculated by the company along with the quantity of driver units for the DEXs: Required: A. Calculate the quarterly quality-control cost that is allocated to the DEX product line under Weston’s traditional-costing system. A. $860,000 × 32% = $275,200 |
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-01 Compute product costs under a traditional; volume-based product-costing system. Learning Objective: 05-04 Compute product costs under an activity-based costing system. Learning Objective: 05-05 Explain why traditional; volume-based costing systems tend to distort product costs. |
| 80. | Star Manufacturing, contemplating the adoption of an activity-based costing system, has established three activity-cost pools: machine setup, quality assurance, and engineering. These cost pools, the appropriate cost driver, and the percentage of each cost driver consumed by the company’s products (H15, H16, and H17) follow.
Estimated costs for these three activities, which account for 80% of the firm’s total overhead, are $400,000, $500,000, and $120,000, respectively. Star currently applies manufacturing overhead to products on the basis of machine hours. Required: A. Will activity-based costing systems require more or fewer cost pools than traditional costing systems? No explanation is necessary. 1. Is Star emphasizing unit-level activities, batch-level activities, product-sustaining activities, or facility-level activities? Explain. A. More B. Machine setup: $400,000 × 30% = $120,000 C. 1. The company currently applies overhead on the basis of machine hours, therefore emphasizing unit-level activities. Machine hours are consumed for each unit produced. |
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-01 Compute product costs under a traditional; volume-based product-costing system. Learning Objective: 05-03 Explain the concept of cost levels; including unit-level; batch-level; product-sustaining-level; and facility-level costs. Learning Objective: 05-04 Compute product costs under an activity-based costing system. Learning Objective: 05-05 Explain why traditional; volume-based costing systems tend to distort product costs. |
| 81. | Kenyon Company produces two products (F56 and F57), applying manufacturing overhead on the basis of direct labor hours. Anticipated unit production costs (material, labor, and overhead) and manufacturing volumes are:
F56: 2,000 units, $234 Kenyon’s overhead arises because of various activities, one of which is purchase-order processing. Budgeted cost for this activity is expected to be $70,000. The firm believes that the number of purchase orders processed is a key cost driver and expects the following activity for its products: F56, 10 purchase orders; F57, 40 purchase orders. Kenyon’s selling prices are based heavily on cost. Required: A. Activity-based costing (ABC) is said to result in improved costing accuracy when compared with traditional costing procedures. Briefly explain how this improved accuracy is attained. 1. the pool rate for purchase-order processing. C. Assume that Kenyon switched to activity-based costing and calculated total unit production costs as follows: F56, $285; F57, $220. 1. Which of the two products, F56 or F57, was overcosted prior to the change to ABC? No explanation is necessary. A. Activity-based costing (ABC) uses multiple cost drivers, more closely aligning individual costs with the factors that are creating them. Traditional systems, in contrast, use fewer drivers and therefore result in “lumping” unlike activities (unit-level, batch-level, and so forth) together. The end result is that ABC tends to eliminate the cost distortion that sometimes arises with traditional systems, more specifically, the under- or overcosting of products. Additionally, the use of multiple cost drivers allows users to better consider variations in consumption ratios that may exist among product lines. |
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-01 Compute product costs under a traditional; volume-based product-costing system. Learning Objective: 05-04 Compute product costs under an activity-based costing system. Learning Objective: 05-05 Explain why traditional; volume-based costing systems tend to distort product costs. |
| 82. | Lennox Industries manufactures two products: A and B. A review of the company’s accounting records revealed the following per-unit costs and production volumes:
Manufacturing overhead is currently computed by spreading overhead of $1,860,000 over 20,000 direct labor hours. Management is considering a shift to activity-based costing in an effort to improve the firm’s accounting procedures, and the following data are available: Lennox determines selling prices by adding 40% to a product’s total cost. Required: A. Compute the per-unit cost and selling price of product B by using Lennox’s current costing procedures. A. B. Setups: $240,000 ÷ 120 setups = $2,000 per setup C. D. Yes. The switch to activity-based costing results in a lower cost being assigned to product B ($335.40 vs. $375) and thus a lower selling price. |
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-01 Compute product costs under a traditional; volume-based product-costing system. Learning Objective: 05-04 Compute product costs under an activity-based costing system. Learning Objective: 05-05 Explain why traditional; volume-based costing systems tend to distort product costs. |
| 83. | Scott, Inc., manufactures two products, Regular and Deluxe, and applies overhead on the basis of direct labor hours. Anticipated overhead and direct labor time for the upcoming accounting period are $1,600,000 and 25,000 hours, respectively. Information about the company’s products follows.
Regular— Estimated production volume: 3,000 units Deluxe— Estimated production volume: 4,000 units Scott’s overhead of $1,600,000 can be identified with three major activities: order processing ($250,000), machine processing ($1,200,000), and product inspection ($150,000). These activities are driven by number of orders processed, machine hours worked, and inspection hours, respectively. Data relevant to these activities follow. Required: A. Compute the pool rates that would be used for order processing, machine processing, and product inspection in an activity-based costing system. A. Order processing: $250,000 ÷ 500 orders processed (OP) = $500 per OP B. The cost of a Regular unit is $306.33, and the cost of a Deluxe unit is $327.00: C. Overhead rate: $1,600,000 ÷ 25,000 direct labor hours (DLH) = $64 per DLH Regular is undercosted by this procedure, as the more “accurate” ABC figure is $233.33. In contrast, Deluxe is overcosted because the ABC figure for overhead amounts to only $225. |
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-01 Compute product costs under a traditional; volume-based product-costing system. Learning Objective: 05-04 Compute product costs under an activity-based costing system. Learning Objective: 05-05 Explain why traditional; volume-based costing systems tend to distort product costs. |
| 84. | Pink Corporation manufactures two types of transponders—no. 156 and no. 157—and applies manufacturing overhead to all units at the rate of $76.50 per machine hour. Production information follows.
The controller, who is studying the use of activity-based costing, has determined that the firm’s overhead can be identified with three activities: manufacturing setups, machine processing, and product shipping. Data on the number of setups, machine hours worked, and outgoing shipments, the activities’ three respective cost drivers, follow. The firm’s total overhead of $3,060,000 is subdivided as follows: manufacturing setups, $260,000; machine processing, $2,400,000; and product shipping, $400,000. Required: A. Compute the pool rates that would be used for manufacturing setups, machine processing, and product shipping in an activity-based costing system. A. Manufacturing setups: $260,000 ÷ 100 setups (SU) = $2,600 per SU B. C. Direct material ($40) + direct labor ($25) + overhead ($216) = $281 |
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-01 Compute product costs under a traditional; volume-based product-costing system. Learning Objective: 05-04 Compute product costs under an activity-based costing system. Learning Objective: 05-05 Explain why traditional; volume-based costing systems tend to distort product costs. |
| 85. | Heartfelt Bank & Trust operates in a very competitive marketplace, using a traditional labor-hour-based system to determine the cost of processing its mortgage loans. Recently, the firm explored a switch to activity-based costing to determine the wisdom of its previous ways. The following information is available:
Two loan applications, among many others, were originated and closed during the year. No. 7439 consumed 3.5 hours in loan underwriting and 1.5 hours in loan closure, for a total of 5.0 hours. No. 7809 also required 5.0 hours of time, subdivided as follows: 2.0 hours in loan underwriting and 3.0 hours in loan closure. Required: A. Use an activity-based-costing system and determine the cost of processing, underwriting, and closing the two loan applications. A. Pool rates: B. Total labor hours: Application processing (4,000 × 9 = 36,000) + underwriting (16,000) + closure (8,000) = 60,000 C. Yes. The traditional system results in an average cost per hour of $43; yet, Heartfelt’s hourly charges vary greatly based on the function being performed. Rates range from $25 per hour ($225 ÷ 9) for application processing, to $50 per hour for underwriting, to $110 for legal services. ABC produces an improved determination of cost because three separate drivers are used rather than just one. |
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-05 Explain why traditional; volume-based costing systems tend to distort product costs. Learning Objective: 05-10 Understand and discuss how activity-based costing is used in service-industry organizations. |
| 86. | Consider the nine activities that follow.
1. Microsoft: Developing computer coding for a new spreadsheet package. Required: Categorize each of the activities as either value-added or non-value-added for the companies noted.
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| AACSB: Reflective Thinking AICPA BB: Industry AICPA FN: Decision Making Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-08 Explain the concepts of activity-based management and two-dimensional ABC. |
| 87. | Switzer, Inc., which sells books to college bookstores and individuals, uses activity-based costing and activity-based management. The following information is available for the company’s three cost pools:
Bookstore sales totaled $8,400,000, and sales to individuals amounted to $2,400,000. Costs for the three activities were: Incoming receipts, $450,000; warehousing, $520,000; and outgoing shipments, $630,000. A review of the company’s activities found various inefficiencies with respect to the warehousing of textbooks (acquired for eventual sale to bookstores) and outgoing shipments to individuals. These inefficiencies resulted in an extra 500 moves and 400 shipments, respectively. Required: A. What is a non-value-added activity? A. Non-value-added activities can be defined as activities that are either (1) unnecessary and dispensable or (2) necessary but inefficient and improvable. Put simply, such activities can be eliminated without harming overall quality, performance, or perceived value. C. Sales to bookstores produced lower overall costs in both absolute dollars and as a percentage of sales. A possible explanation lies in the fact that sales to individuals resulted in the sale of one or two copies per shipment and order. In contrast, bookstore sales likely produced greater revenues and efficiencies because of the large number of texts sold per transaction. |
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-08 Explain the concepts of activity-based management and two-dimensional ABC. Learning Objective: 05-09 Explain and execute a customer-profitability analysis. |
| 88. | Filipe’s Fresh Meats and Produce is a wholesale distributor that operates in central California. An analysis of two of the company’s customers, Atriums Retirement Home and Sigma Sigma Sigma Fraternity, revealed the data that follow for a recent 12-month period.
Filipe’s uses activity-based costing to determine the cost of servicing its customers. The company had total delivery costs during the year of $576,000 and 8,000 deliveries, along with cost of $765,000 for the administrative processing of 90,000 invoices. Required: A. Compute the pool rates for deliveries and invoice processing. A. Deliveries: $576,000 ÷ 8,000 deliveries = $72 per delivery B. C. Atriums Retirement Home: $8,220 ÷ $68,000 = 12.1% These percentages differ, in part, because of sizable differences in delivery size and invoice size for the two organizations. The average delivery for the Atriums generates $6,800 in sales revenue ($680,000 ÷ 100 deliveries) whereas those for the fraternity produce only $2,000 ($270,000 ÷ 135 deliveries). A similar difference is found in invoice size (Atriums, $680,000 ÷ 120 invoices = $5,667; Sigma Sigma Sigma, $270,000 ÷ 180 invoices = $1,500). It is interesting to note that because of the larger gross margin generated on the fraternity’s sales (20% vs. 10%), the fraternity is still a more attractive customer than the Atriums when operating income is analyzed as a percentage of sales revenues (Atriums, $59,780 ÷ $680,000 = 8.8%; Sigma Sigma Sigma, $42,750 ÷ $270,000 = 15.8%). |
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-09 Explain and execute a customer-profitability analysis. |
| 89. | Clark Corporation manufactures cooling system components. The company has gathered the following information about two of its customers: Engle Equipment and Midwest Refrigeration.
Cost-driver data used by the firm and traceable to Engle and Midwest are: Required: A. Perform a customer profitability analysis for Clark. Compute the gross margin and operating income on transactions related to Engle Equipment and Midwest Refrigeration. A. In dollar terms, Engle’s gross margin and operating income are greater than those of Midwest Refrigeration. B. Gross margin as a % of sales revenue: Engle: $120,000 ÷ $215,000 = 55.81% General selling and administrative costs as a % of gross margin: Engle: ($30,000 + $21,000) ÷ $120,000 = 42.5% Customer-related costs as a % of gross margin: Engle: ($7,200 + $4,250 + $18,000 + $11,400) ÷ $120,000 = 34.0% C. Both customers produce approximately the same rate of gross margin on sales and are charged with the same percentage of general selling and administrative costs. The difference lies in the area of customer-related costs. Midwest’s costs make the firm a more expensive client to deal with than Engle. Given the dollar volume of sales revenue that is generated, Midwest’s special handling and shipping needs (especially the latter) are an expensive proposition for Clark Corporation. |
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-09 Explain and execute a customer-profitability analysis. |
| 90. | Homestead Corporation sells a line of power tools to home improvement chains, generating a cost of goods sold equal to 70% of net sales. The selected data that follow relate to the period just ended for the company’s three largest customers: Weekend Project, Tool Mart, and Fix-It City.
Homestead’s management recently attended a seminar and learned that customers with excessive requests and demands can have a significant, negative impact on corporate profitability. Required: A. For each of the three chains, compute: 1. Total customer-related costs as a percentage of gross margin. B. Prepare a brief summary of your findings. Should Homestead work with any of the chains in an effort to improve results? Explain. A. 1. Customer-related costs as a percentage of gross margin: Weekend Project: $245,100 ÷ [($2,000,000 – $100,000) × 30%] = 43% 2. Average order size: Weekend Project: $2,000,000 ÷ 50 orders = $40,000 3. Ratio of regular orders to rush orders: Weekend Project: 40:10 = 4:1 4. Number of sales returns as a percentage of total orders: Weekend Project: 3 ÷ 50 = 6% B. Customer-related costs are driven by events (and costs) directly traceable to clients. In this case, Tool Mart’s costs as a percentage of gross margin are much higher (68%) than those of Weekend Project and Fix-It City. This result is not surprising given that the firm creates a large number of small orders ($28,000 vs. $36,800 and $40,000) for Homestead to process. In addition, relative to the other two firms, Tool Mart depends more heavily on rush orders, which likely creates additional cost. Finally, a number of Tool Mart’s orders (11.4%) eventually result in sales returns, again creating additional processing expense for Homestead. In summary, Tool Mart seems to be an outlier in relation to Weekend Project and Fix-It City, and management should approach Tool Mart to see if the company can change its ways of doing business. |
| AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-09 Explain and execute a customer-profitability analysis. |
| 91. | Bravo Manufacturing is a relatively new customer of Haxton Enterprises. In the short period that the two companies have done business with each other, Haxton has found Bravo to be, in management’s words, “an expensive proposition.” Numerous sales visits are typically required to “close a deal,” with selling prices and discounts offered being among the most attractive in the industry. Complicating matters, Bravo is slow to settle its account, orders in small quantities, and often has numerous specialized shipping and handling needs. A recent customer profitability analysis has painted a very negative picture of Bravo Manufacturing, and Haxton’s managers are questioning whether an on-going relationship with the firm is warranted. Required: A. Briefly explain why the customer profitability analysis painted a negative picture of Bravo Manufacturing. A. Profit is a function of two basic factors—revenues and expenses—and Haxton is being squeezed on both elements. Prices are low, discounts are high, and order sizes are small. Furthermore, the costs of working with Bravo are high, courtesy of numerous sales calls being required to produce a sale, a slow-paying customer, and specialized handling and shipping needs. |
| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-09 Explain and execute a customer-profitability analysis. |
| 92. | Falcon Enterprises, which manufactures lawn mowers, recently installed a just-in-time purchasing system and an activity-based management program.
Required: A. Determine whether the following items would be apt to increase or decrease as a result of the just-in-time system: 1. Inventory storage costs. B. Identify the following items as value-added activities, non-value-added activities, or both. 1. Attaching the engine to the mower’s body.
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| AACSB: Reflective Thinking AICPA BB: Resource Management AICPA FN: Decision Making Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-08 Explain the concepts of activity-based management and two-dimensional ABC. |
| 93. | Templeton Industries currently assigns overhead to products by using a predetermined rate based on direct labor hours. The company is considering the adoption of an activity-based costing (ABC) system, and management desires a brief overview of this system before it makes a final decision. Compare ABC with the company’s current system, focusing on the number of cost pools and cost drivers, costing accuracy, and cost distortion. Templeton is currently combining all overhead into a single cost pool, to be applied to products by using a single cost driver (direct labor hours). Such a practice results in the calculation of an “average” cost because various cost relationships are being commingled. With ABC, cost pools are created for a company’s individual activities, and a cost driver is then selected for each activity—a driver that has a high degree of correlation with the activity’s consumption. The result is an increase in the number of cost pools and cost drivers when compared with current accounting procedures. |
| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-01 Compute product costs under a traditional; volume-based product-costing system. Learning Objective: 05-02 Explain how an activity-based costing system operates; including the use of a two-stage procedure for cost assignment; the identification of activity cost pools; and the selection of cost drivers. |
| 94. | At a recent professional meeting, two controllers discussed product-costing problems in their respective companies. Both controllers are familiar with ABC systems, but neither of their firms utilizes such a system.
Controller D reported that part of the problem in his firm results from major differences among product lines with respect to unit volume, utilization of activities, quality assurance requirements established by customers, and product size. Controller M noted that in her company, which manufactures consumer goods, all items undergo the same basic production processes in the same sequence. Lately, however, there has been a significant increase in the number of item colors. Required: Which controller should be more concerned about the potential distortion? Explain. Controller D should be more concerned. The variety of product lines made in his company’s facility reflects diversity at the product-line and cost levels. In Controller M’s firm, there still is only one product line, with an increasing number of models differentiated only by color. (In many applications, there is no or very little cost difference among color choices.) Thus, D’s firm may be the victim of cost distortion and a prime candidate for activity-based costing. |
| AACSB: Reflective Thinking AICPA BB: Industry AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-05 Explain why traditional; volume-based costing systems tend to distort product costs. |
| 95. | Define the term “cost driver” and discuss the factors that are important in the selection of appropriate cost drivers.
A cost driver is an event or activity that results in the incurrence of costs. For example, many of the costs in an automated environment are created by the operation of machines, and machine hours may be a suitable cost driver for overhead application. |
| AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Research Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-06 Explain three criteria for selecting cost drivers. |
| 96. | Non-value-added costs occur in nonmanufacturing organizations as well as in manufacturing firms.
Required: A. Explain what is meant by a non-value-added cost. A. Non-value-added costs are the costs of activities that can be eliminated with no deterioration of product quality, performance, or perceived value. These activities should be eliminated to save time and money. General examples include the costs of inspection, moving, waiting, and storing. B. Airlines: • Vouchers for future flights that are given to passengers as a result of poor customer service. Banks: • The cost of correcting bank errors in customer accounts. Hotels: • Broken dishes and glassware, loss of or damage to linens and towels. |
| AACSB: Reflective Thinking AICPA BB: Industry AICPA FN: Research Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-08 Explain the concepts of activity-based management and two-dimensional ABC. Learning Objective: 05-10 Understand and discuss how activity-based costing is used in service-industry organizations. |
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
