Cost Accounting foundations & Evolutions 6th Edition By Michael R. Kinney - Test Bank

Cost Accounting foundations & Evolutions 6th Edition By Michael R. Kinney – Test Bank

 

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Sample Questions Are Posted Below

 

 

 

Chapter 5—Activity-Based Management and Activity-Based Costing

 

LEARNING OBJECTIVES

 

LO 1     On what items does activity-based management focus?

 

LO 2     Why do non-value-added activities cause costs to increase unnecessarily?

LO 3     Why must cost drivers be designated in an activity-based costing system?

LO 4     How does activity-based costing differ from a traditional cost accounting system?

LO 5     What new types of information does an activity-based costing/management system offer management?

LO 6     When is activity-based costing appropriate in an organization?

 

QUESTION GRID

 

True/False

 

Difficulty Level

Learning Objectives

Easy

Moderate

Difficult

LO 1

LO 2

LO 3

LO 4

LO 5

LO 6

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Completion

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Multiple Choice

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LO 5

LO 6

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150

 

 

 

		Difficulty Level				Learning Objectives
	Easy	Moderate		Difficult	LO 1	LO 2	LO 3	LO 4	LO 5	LO 6
37		x						x
38	x								x
39	x								x
40		x							x
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42	x									x
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151

 

 

 

Difficulty Level

Learning Objectives

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LO 1

LO 2

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86

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Short-Answer

Difficulty Level

Learning Objectives

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Problems

Difficulty Level

Learning Objectives

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152

 

 

 

 

 

TRUE/FALSE

 

1. Business value-added activities add value to a product.

 

ANS: F                            DIF:    Easy                   OBJ:   5-1

 

2. Management should strive to reduce or eliminate non-value added activities from a production process.

 

	ANS: T	DIF:	Easy	OBJ:	5-1
3.	Business value-added activities increase the value of a product without increasing production time.
	ANS: F	DIF:	Moderate	OBJ:	5-1
4.	The first step in performing activity analysis is to prepare a process map.
	ANS: T	DIF:	Easy	OBJ:	5-1
5.	Preparation of a value chart is the first step in activity analysis
	ANS: F	DIF:	Moderate	OBJ:	5-1
6.	Lead time in a production process includes both value and non-value added time.
	ANS: T	DIF:	Moderate	OBJ:	5-2
7.	A company should strive to reduce all non-value added activities to a minimum.
	ANS: T	DIF:	Moderate	OBJ:	5-2
8.	When non-value added time is greater, manufacturing cycle efficiency is higher.
	ANS: F	DIF:	Moderate	OBJ:	5-2
9.	When non-value added time is greater, manufacturing cycle efficiency is lower.
	ANS: T	DIF:	Moderate	OBJ:	5-2
10.	Direct materials are normally considered as unit-level costs.
	ANS: T	DIF:	Easy	OBJ:	5-3
11.	Direct materials are normally considered as batch-level costs.
	ANS: F	DIF:	Easy	OBJ:	5-3
12.	Unit level costs occur once for each unit produced.
	ANS: T	DIF:	Moderate	OBJ:	5-3

 

 

 

 

 

153

 

 

 

13.	Batch level costs occur once for each unit produced.
	ANS: F	DIF:	Moderate	OBJ:	5-3
14.	Machine setup is normally considered a batch-level cost
	ANS: T	DIF:	Moderate	OBJ:	5-3
15.	Machine setup is normally considered a unit-level cost
	ANS: F	DIF:	Moderate	OBJ:	5-3
16.	Building depreciation is generally considered an organizational or facility cost.
	ANS: T	DIF:	Moderate	OBJ:	5-3
17.	Building depreciation is generally considered an product or process level cost.
	ANS: F	DIF:	Moderate	OBJ:	5-3
18.	Activity-based costing is appropriate for a company that manufactures a wide variety of products
	ANS: T	DIF:	Easy	OBJ:	5-4
19.	Activity-based costing is appropriate for a company that manufactures a single product.
	ANS: F	DIF:	Easy	OBJ:	5-4

 

20. Activity-based costing is appropriate for a company that has low overhead costs that are proportional to the unit volumes of products.

 

ANS: F                            DIF:    Moderate          OBJ:   5-4

 

21. Activity-based costing is appropriate for a company that has high overhead costs that are not proportional to unit volumes of individual products.

 

	ANS: T	DIF:	Moderate	OBJ:	5-4
22.	There is a direct relationship between the complexity of a production process and overhead costs.
	ANS: T	DIF:	Moderate	OBJ:	5-5
23.	Activity-based costing conforms to GAAP with regard to which costs should be expensed.
	ANS: F	DIF:	Moderate	OBJ:	5-6

 

24. An activity-based costing system should be evaluated with regard to the benefits it can provide an organization versus the costs of implementing it.

 

ANS: T                           DIF:    Moderate          OBJ:   5-6\

 

 

 

 

 

 

 

 

154

 

 

 

COMPLETION

 

1. An activity that a customer is willing to pay for and increases the worth of a product is referred to as a

 

_______________________ activity.

 

ANS: value-added

 

DIF:   Easy                   OBJ:   5-1

 

2. An activity that does not increase the value of a product for a customer is referred to as a

 

_______________________ activity.

 

ANS: non-value added

 

DIF:   Easy                   OBJ:   5-1

 

3. An activity that is essential for business operations but does not add value to a product is referred to as a __________________________ activity.

 

ANS: business value-added

 

DIF:   Easy                   OBJ:   5-1

 

4. A chart that indicates each step in a production process is referred to as a ____________________.

 

ANS: process map

 

DIF:   Easy                   OBJ:   5-1

 

5. A series of activities that when performed together satisfy a specific objective is referred to as a

 

_____________.

 

ANS: process

 

DIF:   Easy                   OBJ:   5-1

 

6. The actual time taken to perform all necessary manufacturing functions in a process is referred to as

 

______________________.

 

ANS: processing or service time

 

DIF:   Easy                   OBJ:   5-2

 

7. The sum of value-added processing time plus non-value added time equals

 

__________________________. ANS: cycle (lead) time

 

DIF:   Moderate          OBJ:   5-2

 

 

 

 

 

 

 

 

 

155

 

 

 

 

8. The proportion of value added processing time to total cycle time equals

 

________________________________. ANS: manufacturing cycle efficiency (MCE).

 

DIF:   Easy                   OBJ:   5-2

 

9. Costs that are associated with the production of a single unit of a product are referred to as

 

________________________. ANS: unit-level costs

 

DIF:   Easy                   OBJ:   5-3

 

10. Costs that are associated with the production of a group of similar products at the same time are referred to as ________________________.

 

ANS: batch-level costs

 

DIF:   Easy                   OBJ:   5-3

 

11. Costs that support a product type or process are referred to as ________________________. ANS: product/process level costs

 

DIF:   Easy                   OBJ:   5-3

 

12. Costs that support an overall production or service process are referred to as

 

________________________. ANS: organizational or facility costs

 

DIF:   Easy                   OBJ:   5-3

 

13. A segment of a production or service process for which management wants a separate report is referred to as a(n) ______________________________.

 

ANS: activity center

 

DIF:   Moderate          OBJ:   5-4

 

14. A(n) __________________________ measures the resources consumed by a manufacturing process. ANS: activity driver

 

DIF:   Moderate          OBJ:   5-4

 

 

 

 

 

 

 

 

 

 

 

156

 

 

 

 

15. _____________________________ refers to the number of different processes through which a product flows.

 

ANS: Process complexity

 

DIF:   Easy                   OBJ:   5-5

 

 

MULTIPLE CHOICE

 

1. An objective of activity-based management is to

 

1. eliminate the majority of centralized activities in an organization.
2. reduce or eliminate non-value-added activities incurred to make a product or provide a service.
3. institute responsibility accounting systems in decentralized organizations.
4. all of the above

 

ANS: B                           DIF:    Easy                   OBJ:   5-1

 

2. Which of the following is/are part of activity-based management?

 

Activity analysis				Cost driver analysis
a.	yes			yes
b.	no			yes
c.	no			no
d.	yes			no
ANS: A			DIF:  Easy			OBJ:  5-3

 

3. Which of the following falls under the Activity-Based Management umbrella?

 

	Continuous	Business process			Activity-based
	improvement		reengineering			costing
a.	no		no		yes
b.	yes		no		no
c.	yes		yes		yes
d.	no		yes		no
ANS: C		DIF:  Easy			OBJ:  5-5

 

4. The sum of the non-value-added time and the value-added time equals

 

1. inspection time.
2. production time.
3. the product life cycle.
4. cycle time.

 

ANS: D                           DIF:    Easy                   OBJ:   5-2

 

 

 

 

 

 

 

 

 

 

157

 

 

 

 

5. Which of the following add customer value?

 

1. setup time
2. storage time
3. idle time
4. processing time

 

ANS: D                           DIF:    Easy                   OBJ:   5-2

 

6. Lead time minus production time is equal to

 

1. idle time.
2. storage time.
3. non-value-added time.
4. value-added time.

 

ANS: C                           DIF:    Easy                   OBJ:   5-2

 

7. When a firm redesigns a product to reduce the number of component parts, the firm is

 

1. increasing consumer value.
2. increasing the value added to the product.
3. decreasing product variety.
4. decreasing non-value-added costs.

 

ANS: D                           DIF:    Moderate          OBJ:   5-1

 

8. Non-value-added activities that are necessary to businesses, but not costs that customers are willing to pay for are known as

 

1. business-value-added activities.
2. long-term variable activities.
3. short-term variable activities.
4. superior business activities.

 

ANS: A                           DIF:    Moderate          OBJ:   5-1

 

9. Which of the following would not be considered a value-added activity in the preparation of a tax return?

 

1. printing a copy of the return for the client
2. printing a copy of the return for the IRS
3. installing tax software
4. checking for accuracy

 

ANS: C                           DIF:    Easy                   OBJ:   5-1

 

10. Which of the following is considered a value-added activity?

 

	Idle time		Inspection time		Transfer time
a.	yes		yes		no
b.	no		no		no
c.	yes		no		yes
d.	no		yes		yes
ANS: B			DIF:  Easy		OBJ:  5-2

 

 

 

 

 

 

 

158

 

 

 

 

11. A process map

 

1. should indicate only value-added activities.
2. is also known as a detailed flowchart.
3. should indicate only those steps/processes that are obvious in the production of goods/services.
4. is also known as a value chart.

 

ANS: B                           DIF:    Easy                   OBJ:   5-2

 

12. A value chart should include which of the following?

 

Service time			Inspection time		Transfer time
a.	yes		no		yes
b.	no		no		yes
c.	yes		yes		no
d.	yes		yes		yes
ANS: D			DIF:  Easy		OBJ:  5-2

 

13. The actual time it takes to perform a specific task is called

 

1. inspection time.
2. service time.
3. transfer time.
4. quality time.

 

ANS: B                           DIF:    Easy                   OBJ:   5-2

 

14. Manufacturing cycle efficiency is a measure of

 

 

ANS: C                           DIF:    Easy                   OBJ:   5-2

 

15. Which of the following is typically regarded as a cost driver in traditional accounting practices?

 

1. number of purchase orders processed
2. number of customers served
3. number of transactions processed
4. number of direct labor hours worked

 

ANS: D                           DIF:    Easy                   OBJ:   5-3

 

16. When a company is labor-intensive, the cost driver that is probably least significant would be

 

1. direct labor hours.
2. direct labor dollars.
3. machine hours.
4. cost of materials used.

 

ANS: C                           DIF:    Easy                   OBJ:   5-3

 

 

 

 

 

 

 

 

159

 

 

 

 

17. An activity driver is used for which of the following reasons?

 

To measure demands			To measure resources consumed
a.	yes			yes
b.	yes			no
c.	no			yes
d.	no			no
ANS: A		DIF:  Easy		OBJ:  5-3

 

18. The term cost driver refers to

 

1. any activity that can be used to predict cost changes.
2. the attempt to control expenditures at a reasonable level.
3. the person who gathers and transfers cost data to the management accountant.
4. any activity that causes costs to be incurred.

 

ANS: D                           DIF:    Moderate          OBJ:   5-3

 

19. Cost allocation bases in activity-based costing should be

 

1. cost drivers.
2. value-added activities.
3. activity centers.

 

ANS: A                           DIF:    Easy                   OBJ:   5-3

 

20. Costs that are common to many different activities within an organization are known as ____________

 

costs.

1. product- or process-level
2. organizational-level
3. batch-level
4. unit-level

 

ANS: B                           DIF:    Easy                   OBJ:   5-3

 

21. In activity-based costing, cost reduction efforts are directed at specific

 

1. cost categories.
2. cost pools.
4. cost drivers.

 

ANS: D                           DIF:    Easy                   OBJ:   5-3

 

22.  Setup time is
	A batch cost			A value-added cost		A production cost
	a.	no		no		yes
	b.	yes		yes		no
	c.	yes		no		yes
	d.	no		yes		yes
	ANS: C			DIF:  Easy	OBJ:  5-3

 

 

 

 

160

 

 

 

23. Which of the following have an impact on long-term variable costs?

 

Product variety			Product complexity		Process complexity
a.	no		no		no
b.	no		yes		yes
c.	yes		no		yes
d.	yes		yes		yes
ANS: D			DIF:  Moderate	OBJ:  5-4

 

24. In allocating variable costs to products,

 

1. a volume-based cost driver should be used.
2. direct labor hours should always be used as the allocation base.
3. a company should use the same allocation base that it uses for fixed costs.
4. a company should never use more than one cost driver.

 

ANS: A                           DIF:    Easy                   OBJ:   5-4

 

25. Which of the following is not a drawback of mass customization?

 

1. The choices are too numerous.
2. The potential for errors is great.
3. Only a small percentage of available choices is normally selected.
4. All of the above are drawbacks.

 

ANS: D                           DIF:    Moderate          OBJ:   5-5

 

26. Simultaneous engineering helps companies accomplish which of the following?

 

Reduces product				Reduces process
		complexity			complexity
a.	no				no
b.	yes				yes
c.	yes				no
d.	no				yes
ANS: B				DIF:  Easy			OBJ:  5-5

 

27. For traditional costing purposes, R&D costs are

 

1. capitalized and allocated over the product life cycle.
2. expensed as incurred.
3. capitalized and amortized over three years.
4. charged to the future accounting periods that receive the benefit of the R&D expenditures.

 

ANS: B                           DIF:    Easy                   OBJ:   5-6

 

28. Traditionally, managers have focused cost reduction efforts on

 

 

ANS: D                           DIF:    Easy                   OBJ:   5-5

 

 

 

 

 

 

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29. Today, traditional accounting methods are

 

1. still appropriate for financial reporting.
2. still appropriate for providing useful cost information to internal managers.
3. still appropriate for both internal and external financial reporting.
4. outdated for all purposes.

 

ANS: A                           DIF:    Easy                   OBJ:   5-6

 

30. Product costing systems in use over the last 40 years

 

1. concentrated on using multiple cost pools and cost drivers.
2. were often technologically incapable of handling activity-based costing information.
3. have generally been responsive to changes in the manufacturing environment.
4. have been appropriate for managerial decision purposes as long as they met the requirements of generally accepted accounting principles.

 

ANS: B                           DIF:    Moderate          OBJ:   5-5

 

31. Traditional overhead allocations result in which of the following situations?

 

1. Overhead costs are assigned as period costs to manufacturing operations.
2. High-volume products are assigned too much overhead, and low-volume products are assigned too little overhead.
3. Low-volume products are assigned too much, and high-volume products are assigned too little overhead.
4. The resulting allocations cannot be used for financial reports.

 

ANS: B                           DIF:    Easy                   OBJ:   5-5

 

32. Traditionally, overhead has been assigned based on direct labor hours or machine hours. What effect does this have on the cost of a high-volume item?
    1. over-costs the product
    2. under-costs the product
    3. has no effect the product cost
    4. cost per unit is unaffected by product volume

 

ANS: A                           DIF:    Easy                   OBJ:   5-5

 

33. Relative to traditional product costing, activity-based costing differs in the way costs are

 

 

ANS: B                           DIF:    Easy                   OBJ:   5-5

 

34. Under activity-based costing, benchmarks for product cost should contain an allowance for

 

1. idle time.
2. idle time and scrap materials.
4. None of the responses are correct.

 

ANS: D                           DIF:    Moderate          OBJ:   5-4

 

 

 

 

 

 

 

 

162

 

 

 

 

35. In activity-based costing, final cost allocations assign costs to

 

 

ANS: C                           DIF:    Easy                   OBJ:   5-4

 

36. In activity-based costing, preliminary cost allocations assign costs to

 

 

ANS: D                           DIF:    Easy                   OBJ:   5-4

 

37. In allocating fixed costs to products in activity-based costing,

 

1. direct labor hours should always be used as the allocation base.
2. a company should use the same allocation base that it uses for variable costs.
3. a cost driver that is not volume-related should be used.
4. machine hours should always be used.

 

ANS: C                           DIF:    Moderate          OBJ:   5-4

 

38. Of the following, which is the best reason for using activity-based costing?

 

1. to keep better track of overhead costs
2. to more accurately assign overhead costs to cost pools so that these costs are better controlled
3. to better assign overhead costs to products
4. to assign indirect service overhead costs to direct overhead cost pools

 

ANS: C                           DIF:    Easy                   OBJ:   5-5

 

39. ABC should be used in which of the following situations?

 

1. single-product firms with multiple steps
2. multiple-product firms with only a single process
3. multiple-product firms with multiple processing steps
4. in all manufacturing firms

 

ANS: C                           DIF:    Easy                   OBJ:   5-5

 

40. Activity-based costing and activity-based management are effective in helping managers do all of the following except

 

1. trace technology costs to products.
2. promote excellence standards.
3. identify only value-added activities.
4. analyze performance problems.

 

ANS: C                           DIF:    Moderate          OBJ:   5-5

 

41. Global competition has forced American industry to

 

1. seek increased governmental regulation.
2. improve product quality and customer service.
3. narrow product lines.
4. decrease its social responsibility.

 

 

 

163

 

 

 

ANS: B                           DIF:    Easy                   OBJ:   5-1

 

42. The costs of non-quality work do not include

 

1. the cost of handling complaints.
2. the cost of scrap.
3. warranty costs.
4. original design costs.

 

ANS: D                           DIF:    Easy                   OBJ:   5-6

 

43. In the “new era” of manufacturing, good performance indicators are

 

1. production-based.
2. sales-based.
3. cost-based.
4. consumer-based.

 

ANS: D                           DIF:    Easy                   OBJ:   5-6

 

44. Traditional standard costs are inappropriate measures for performance evaluation in the “new era” of manufacturing because they

 

1. build in allowances for non-value-adding activities.
2. are based on historical information.
3. don’t reflect current costs.
4. are ideal goals.

 

ANS: A                           DIF:    Moderate          OBJ:   5-6

 

45. The amount of time between the development and the production of a product is

 

1. the product life cycle.
2. lead time.
3. production time.
4. value-added time.

 

ANS: B                           DIF:    Easy                   OBJ:   5-1

 

46. For one product that a firm produces, the manufacturing cycle efficiency is 20 percent. If the total production time is 12 hours, what is the total manufacturing time?

 

15. 0 hours
16. 0 hours
17. 0 hours
18. 4 hours

 

ANS: B                           DIF:    Easy                   OBJ:   5-2

 

47. Activity analysis allows managers to

 

1. classify activities so that processes can be eliminated.
2. devise ways to minimize or eliminate non-value-added activities.
3. evaluate process performance to gain competitive advantages.
4. all of the above.

 

ANS: B                           DIF:    Easy                   OBJ:   5-3

 

 

 

 

 

 

 

 

 

164

 

 

 

 

48. Which of the following statements about business-value-added activities (BVAs) is true?

 

1. BVAs reflect the same processes in all organizations.
2. A process map will not reflect BVAs because such activities are not essential to process performance.
3. BVAs are actually value-added activities of an organization that relate to administrative processes.
4. It is impossible to eliminate all BVAs in an organization.

 

ANS: D                           DIF:    Easy                   OBJ:   5-1

 

49. A value chart indicates

 

1. all steps in a process and the time it takes for them to be completed.
2. the value-added steps in a process and the time it takes for them to be completed.
3. the time and cost of all value-added steps in a process.
4. the time and costs of all value-added and non-value-added steps in a process.

 

ANS: A                           DIF:    Moderate          OBJ:   5-1

 

50. In the pharmaceutical or food industries, quality control inspections would most likely be viewed as

 

1. non-value-added activities.
2. business-value-added activities.
3. value-added-activities.
4. process-efficiency activities.

 

ANS: C                           DIF:    Difficult            OBJ:   5-1

 

51. A just-in-time manufacturing process should have substantially less of which of the following than a traditional manufacturing process?

 

	Idle time		Transfer time		Value-added time			Cycle time
a.	yes		yes			yes		yes
b.	yes		no			no		yes
c.	yes		yes			no		yes
d.	no		yes			yes		no
ANS: C			DIF:	Difficult		OBJ:  5-6

 

52. Manufacturing cycle efficiency should be increased by employing which of the following techniques?

 

	JIT		Flexible		Batch
	Inventory		Manufacturing Systems		Manufacturing
a.	yes		yes		yes
b.	yes		yes		no
c.	no		no		no
d.	yes		no		yes
ANS: B			DIF:  Moderate	OBJ:  5-2

 

 

 

 

 

 

 

 

 

 

165

 

 

 

 

53. A key concept underlying cost driver analysis is that

 

1. all cost drivers identified should be used for cost accumulation.
2. the cost of measuring a driver does not exceed the benefits of using it.
3. only costs occurring at the unit-level should be assigned to products or services.
4. organizational/facility costs are non-value-added and should never be assigned to products or services.

 

ANS: B                           DIF:    Moderate          OBJ:   5-3

 

54. When cost driver analysis is used, organizational profit or loss can be determined by subtracting

 

1. organizational costs from total margin provided by products.
2. organizational costs from total product revenue.
3. total product costs from total product revenue.
4. total unit, batch, product/process, and organizational level costs incurred for a period from total product revenue.

 

ANS: A                           DIF:    Moderate          OBJ:   5-3

 

55. An activity center is an organizational unit

 

1. that makes a single product or performs a single service.
2. in which only value-added activities are performed.
3. that incurs only unit, batch, or product/process level costs.
4. for which management wants separate activity information.

 

ANS: D                           DIF:    Easy                   OBJ:   5-4

 

56. The following items are used in tracing costs in an ABC system. In which order are they used?

 

• cost object

 

• cost driver
• activity driver
• cost pool

 

1. 1, 2, 3, 4

 

1. 2, 3, 4, 1
2. 2, 4, 3, 1
3. 4, 3, 1, 2

 

ANS: C                           DIF:    Difficult            OBJ:   5-4

 

57. The “Rule of One” underlies the premise that all costs are

 

3. unit-based.
4. short-term.

 

ANS: A                           DIF:    Easy                   OBJ:   5-4

 

 

 

 

 

 

 

 

 

 

 

 

 

166

 

 

 

 

58. Crawford Company makes ten different styles of inexpensive feather masks. Which of the following is this company most likely to have?
    1. Product complexity
    2. Process complexity
    3. Product variety
    4. Process customization

 

ANS: C                           DIF:    Easy                   OBJ:   5-5

 

59. Mass customization can be achieved through the use of

 

1. activity-based costing.
2. just-in-time inventory.
3. flexible manufacturing systems.
4. all of the above.

 

ANS: C                           DIF:    Easy                   OBJ:   5-5

 

60. Mass customization is closely associated with

 

	Product			Product	Process				Pareto
		variety		complexity		errors			principle
a.	yes			no		no			yes
b.	yes			yes		yes			no
c.	no			yes		no			no
d.	yes			no		yes			yes
ANS: D				DIF:	Difficult			OBJ:  5-5

 

61. The Pareto principle is important to consider when an organization is

 

1. assessing whether to employ activity-based costing versus attribute-based costing.
2. evaluating the number of activities that are value-added versus those that are non-value-added.
3. deciding whether to offer a product in one color versus in ten colors.
4. determining whether simultaneous engineering activities will be impacted by the “Rule of One.”

 

ANS: C                           DIF:    Moderate          OBJ:   5-5

 

62. Simultaneous engineering can be used to

 

1. reduce both product and process complexity.
2. integrate activity-based costing with value chain analysis.
3. reduce the time-to-market of new products through elimination of batch-level activities.
4. reduce manufacturing cycle efficiency by reducing process waste.

 

ANS: A                           DIF:    Easy                   OBJ:   5-5

 

63. If only one or two overhead cost pools are used,

 

1. it will be easy to determine which products or services are creating the most costs.
2. overhead created by a specific product will be assigned to all products.
3. the reduction in cost accumulation and allocation time will raise company profits.
4. allocations should be made using only unit-based cost drivers.

 

ANS: B                           DIF:    Easy                   OBJ:   5-4

 

 

 

 

167

 

 

 

64. A cost accumulation system should most likely be reevaluated when a company has

 

1. automated one or more production processes.
2. introduced new products to its customers.
3. had its industry deregulated.
4. all of the above.

 

ANS: D                           DIF:    Easy                   OBJ:   5-5

 

65. Engaging in which of the following will result in radical changes being made to an organization’s processes?
    1. Continuous improvement
    2. Benchmarking
    3. Reengineering
    4. Mass customization

 

ANS: C                           DIF:    Moderate          OBJ:   5-5

 

66. Use of activity-based costing and activity-based management requires

 

1. the creation of an environment for change in an organization.
2. elimination of all non-value-added activities in an organization.
3. that company processes be automated and the use of direct labor be minimal.
4. each process be fully mapped and all activities be identified as value-added or non-value-added.

 

ANS: A                           DIF:    Easy                   OBJ:   5-5

 

67. Which of the following is most likely to make the implementation of ABC/ABM slow and difficult?

 

1. The inability of all employees to understand the computations involved in ABC.
2. A lack of involvement by or support from upper management.
3. The need for dual costing systems.
4. An inability to eliminate all business-value-added activities.

 

ANS: B                           DIF:    Moderate          OBJ:   5-6

 

68. Activity-based costing and generally accepted accounting principles differ in that ABC

 

1. does not define product costs in the same manner as GAAP.
2. cannot be used to compute an income statement, but GAAP can.
3. is concerned only with costs generated from automated processes, but GAAP is concerned with costs generated from both manual and automated processes.
4. information is useful only to managers, while GAAP information is useful to all organizational stakeholders.

 

ANS: A                           DIF:    Moderate          OBJ:   5-6

 

69. If activity-based costing is implemented in an organization without any other changes being implemented, total overhead costs will

 

1. be reduced because of the elimination of non-value-added activities.
2. be reduced because organizational costs will not be assigned to products or services.
3. be increased because of the need for additional people to gather information on cost drivers and cost pools.
4. remain constant and simply be spread over products differently.

 

ANS: D                           DIF:    Difficult            OBJ:   5-5

 

 

 

 

 

 

 

168

 

 

 

 

Smithson Company

 

Smithson Company produces two products (A and B). Direct material and labor costs for Product A total $35 (which reflects 4 direct labor hours); direct material and labor costs for Product B total $22 (which reflects 1.5 direct labor hours). Three overhead functions are needed for each product. Product A uses 2 hours of Function 1 at $10 per hour, 1 hour of Function 2 at $7 per hour, and 6 hours of Function 3 at $18 per hour. Product B uses 1, 8, and 1 hours of Functions 1, 2, and 3, respectively. Smithson produces 800 units of A and 8,000 units of B each period.

 

70. Refer to Smithson Company If total overhead is assigned to A and B on the basis of units produced, Product A will have an overhead cost per unit of
    88. $ 88.64.
    89. $123.64.
    90. $135.00.
    91. None of the responses are correct.

 

ANS: A

 

Total Overhead

 

Product A			Function	Hourly		Hours				Total
					Rate
			1	$	10	2			$		20
			2	$	7	1			$		7
			3	$	18		6			$	108
					Totals	9			$		135
Product B			Function	Hourly		Hours				Total
					Rate
			1	$	10	1			$		10
			2	$	7	8			$		56
			3	$	18		1			$	18
					Totals	10			$		84
OH/Unit		Units		Total
		Produced
$	135		800	$	108,000
$	84		8000	$	672,000
				$	780,000
Total OH		Proportion		Allocated		Units			OH per
				OH		Produced			Unit
$ 780,000			0.090909091	$	70,909.09	800			$		88.64
		(800/8800)
DIF:	Moderate		OBJ:	5-3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

169

 

 

 

 

71. Refer to Smithson Company If total overhead is assigned to A and B on the basis of units produced, Product B will have an overhead cost per unit of
    84. $84.00.
    85. $88.64.
    86. $110.64.
    87. None of the responses are correct.

 

ANS: B

 

See #70 for Total Overhead Computations

 

Total OH	Proportion		Allocated	Units	OH per
			OH	Produced	Unit
$ 780,000		0.909090909	$  709,090.91	8000	$	88.64
	(8000/8800)
DIF:  Moderate		OBJ:	5-3

 

72. Refer to Smithson Company If total overhead is assigned to A and B on the basis of direct labor hours, Product A will have an overhead cost per unit of

 

51. $51.32.
52. $205.28.
53. $461.88.
54. None of the responses are correct.

 

ANS: B

 

Product	DL Hrs/Unit		Units Produced		Total DL
					Hours
A		4		800	3200
B		1.5		8000	12000
					15200
Total OH	Proportion		Allocated		Units	OH per
			OH		Produced	Unit
$   780,000	0.210526316		$	164,210.53	800	$  205.28
	(3,200/15,200)
DIF:  Moderate		OBJ:  5-3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

170

 

 

 

 

73. Refer to Smithson Company If total overhead is assigned to A and B on the basis of direct labor hours, Product B will have an overhead cost per unit of
    51. $51.32.
    52. $76.98.
    53. $510.32.
    54. None of the responses are correct.

 

ANS: B

 

See #72 for Direct Labor Computations

 

Total OH		Proportion		Allocated		Units	OH per
				OH		Produced	Unit
$	780,000		0.789473684	$	615,789.47	8000	$  76.98
		(12,000/15,200)
DIF:	Moderate		OBJ:	5-3

 

74. Refer to Smithson Company If total overhead is assigned to A and B on the basis of overhead activity hours used, the total product cost per unit assigned to Product A will be

 

86. $86.32.
87. $95.00.
88. $115.50.
89. None of the responses are correct.

 

ANS: C

 

Total OH		Proportion			Allocated	Units	OH per		DM and	Total
					OH	Produced	Unit		DL/Unit
$	780,000	0.082568807		$	64,403.67	800	$   80.50	$	35.00	$ 115.50
		(7,200/87,200)
DIF:	Moderate		OBJ:	5-3

 

75. Refer to Smithson Company If total overhead is assigned to A and B on the basis of overhead activity hours used, the total product cost per unit assigned to Product B will be
    115. $115.50.
    116. $73.32.
    117. $34.60.
    118. None of the responses are correct.

 

ANS: D

 

 

Total OH		Proportion			Allocated	Units	OH per		DM and	Total
					OH	Produced	Unit		DL/Unit
$	780,000	0.917431193		$	715,596.33	8000	$   89.44	$	22.00	$  111.44
		(80,000/87,200)
DIF:	Moderate		OBJ:	5-3

 

 

 

 

 

 

 

171

 

 

 

 

Phelps Company

 

Phelps Company produces 50,000 units of Product Q and 6,000 units of Product Z during a period. In that period, four set-ups were required for color changes. All units of Product Q are black, which is the color in the process at the beginning of the period. A set-up was made for 1,000 blue units of Product Z; a set- up was made for 4,500 red units of Product Z; a set-up was made for 500 green units of Product Z. A set-up was then made to return the process to its standard black coloration and the units of Product Q were run. Each set-up costs $500.

 

76. Refer to Phelps Company. If set-up cost is assigned on a volume basis for the department, what is the approximate per-unit set-up cost for Product Z?
    10. $.010.
    11. $.036.
    12. $.040.
    13. None of the responses are correct.

 

ANS: B

 

Total setup cost: $500 x 4 = $2,000

 

$2,000/56,000 = $0.0357

 

DIF:   Moderate          OBJ:   5-3

 

77. Refer to Phelps Company. If set-up cost is assigned on a volume basis for the department, what is the approximate per-unit set-up cost for the red units of Product Z?

 

36. $.036.
37. $.111.
38. $.250.
39. None of the responses are correct.

 

ANS: A

 

Total setup cost: $500 x 4 = $2,000

 

$2,000/56,000 = $0.0357

 

DIF:   Moderate          OBJ:   5-3

 

78. Refer to Phelps Company. Assume that Phelps Company has decided to allocate overhead costs using levels of cost drivers. What would be the approximate per-unit set-up cost for the blue units of Product Z?

 

4. $.04.
5. $.25.
6. $.50.
7. None of the responses are correct.

 

ANS: C

 

Setup cost for blue units = $500.00

 

Number of blue units produced = 1,000

 

$500/1,000 = $.50

 

DIF:   Moderate          OBJ:   5-3

 

 

 

172

 

 

 

 

79. Refer to Phelps Company. Assume that Phelps Company has decided to allocate overhead costs using levels of cost drivers. What would be the approximate per-unit set-up cost for the green units of Product Z?

 

1. $1.00.
2. $0.25.
3. $0.04.
4. None of the responses are correct.

 

ANS: A

 

Setup cost = $500.00

 

Units produced = 500

 

$500.00/500 = $1.00/unit

 

DIF:   Moderate          OBJ:   5-3

 

Lafayette Savings and Loan

 

Lafayette Savings and Loan had the following activities, traceable costs, and physical flow of driver units:

 

Activities		Traceable			Physical flow of
			Costs			Driver Units
Open new accounts		$50,000			1,000 accounts
Process deposits		36,000			400,000 deposits
Process withdrawals		15,000			200,000 withdrawals
Process loan applications		27,000				900 applications

 

The above activities are used by the Jennings branch and the Crowley branch:

 

	Jennings		Crowley
New accounts	200		400
Deposits	40,000		20,000
Withdrawals	15,000		18,000
Loan applications	100		160

 

80. Refer to Lafayette Savings and Loan. What is the cost per driver unit for new account activity?

a.	$0.09		c.	$30.00
b.	$0.075		d.	$50.00
ANS: D
$50,000 / 1,000 = $50.00 per account
DIF:  Easy		OBJ:  5-4

 

 

 

 

 

 

 

 

 

 

 

173

 

 

 

 

81. Refer to Lafayette Savings and Loan. What is the cost per driver unit for the deposit activity?

 

a.	$0.09		c.	$30.00
b.	$0.075		d.	$50.00
ANS: A
$36,000/400,000 = $0.09
DIF:  Easy		OBJ:	5-4

 

82. Refer to Lafayette Savings and Loan. What is the cost per driver unit for the withdrawal activity?

 

a.	$0.09		c.	$30.00
b.	$0.075		d.	$50.00
ANS: B
$15,000/200,000 = $0.075
DIF:  Easy		OBJ:	5-4

 

83. Refer to Lafayette Savings and Loan. What is the cost per driver unit for the loan application activity?

 

a.	$0.09		c.	$30.00
b.	$0.075		d.	$50.00
ANS: C
$27,000/900 = $30.00
DIF:  Easy		OBJ:  5-4

 

84. Refer to Lafayette Savings and Loan. How much of the loan application cost will be assigned to the Jennings branch?

a.	$3,000			c.	$ 7,800
b.	$4,800			d.	$27,000
ANS: A
$30.00 x 100 = $3,000
DIF:  Easy		OBJ:		5-4

 

85. Refer to Lafayette Savings and Loan. How much of the deposit cost will be assigned to the Crowley branch?

a.	$1,800		c.	$	5,400
b.	$3,600		d.	$	36,000
ANS: A
$0.09 * 20,000 = $1,800
DIF:  Easy		OBJ:	5-4

 

 

 

 

 

 

 

 

 

174

 

 

 

 

86. Refer to Lafayette Savings and Loan. How much of the new account cost will be assigned to the Crowley branch?

a.	$10,000		c.	$30,000
b.	$20,000		d.	$50,000
ANS: B
400 * $50 = $20,000
DIF:  Easy		OBJ:  5-4

 

Hazel Company uses activity-based costing. The company produces two products: coats and hats. The annual production and sales volume of coats is 8,000 units and of hats is 6,000 units. There are three activity cost pools with the following expected activities and estimated total costs:

 

	Activity	Estimated	Expected	Expected
	Cost Pool	Cost	Activity	Activity
			Coats	Hats	Total
	Activity 1	$20,000	100	400	500
	Activity 2	$37,000	800	200	1,000
	Activity 3	$91,200	800	3,000	3,800

 

87. Refer to Hazel Company. Using ABC, the cost per unit of coats is approximately:

 

	a.	$2.40		c.	$ 6.60
	b.	$3.90		d.	$10.59
	ANS: C
	Activity		Cost Allocation		Cost per Unit
	1		$20,000	* 100/500 =  $ 4,000 / 8,000	$0.50
	2		$37,000	* 800/1,000 = $29,600 / 8,000	3.70
	3		$91,200	* 800/3,800 = $19,200 / 8,000	2.40
			Total Cost per Unit			6.60
	DIF:  Difficult			OBJ:  5-4

 

88. Refer to Hazel Company. Using ABC, the cost per unit of hats is approximately:

 

	a.	$2.40		c.	$12.00
	b.	$3.90		d.	$15.90
	ANS: D
	Activity		Cost Allocation			Cost per Unit
	1		$20,000	* 400/500 =  $ 16,000 / 6,000		$2.67
	2		$37,000	* 200/1,000 = $ 7,400/ 6,000		1.23
	3		$91,200	* 3,000/3,800 = $72,000 / 6,000		12.00
			Total Cost per Unit				15.90
	DIF:  Difficult			OBJ:  5-4

 

 

 

 

 

 

 

 

175

 

 

 

 

 

SHORT ANSWER

 

1. How has the increase in product variety affected the costs of American business?

 

ANS:

 

The increase in product variety has increased the overhead costs of American firms. These costs include significant setup costs to switch from the production of one product to another, costs of additional technology, inventory carrying costs, purchasing costs, and scheduling costs.

 

DIF:   Moderate          OBJ:   5-1

 

2. What are the three classes of activities defined by activity-based management. What is customer response to each of these activities? What is management’s reaction to each of these activities?

 

ANS:

 

Value added activities–increase the worth of a product or service to a customer and are activities for which the customer is willing to pay. Management is willing to keep performing these activities. Non-value added activities–increase the time spent on a product or service but does not increase its worth. Such activities are unnecessary from the customer’s point of view; therefore management will strive to reduce or eliminate such activities.

 

Business value-added activities–are essential to business operations; however, the customer is not willing to pay for them. Management must decide which of these activities are truly essential and reduce those which are not in order to achieve a higher profit margin.

 

DIF:   Moderate          OBJ:   5-1

 

3. In activity-based costing, how are cost drivers selected?

 

ANS:

 

Cost drivers are selected based on their underlying relationship to organizational costs. Ideally, a causal relationship exists between the cost driver and a cost pool. Once identified, cost drivers are used to allocate organizational costs to activities and products and are the focus of cost control efforts.

 

DIF:   Moderate          OBJ:   5-3

 

4. Discuss the characteristics of a company for which ABC would be appropriate.

 

ANS:

 

Companies having the following characteristics find ABC useful: (1) hard-to-make products that show large profits and easy-to-make products that show losses; (2) profit margins that are difficult to explain; (3) considerable automation that makes it difficult to assign overhead to products that use machine hours or direct labor as bases; (4) substantial overhead costs that are not in proportion to the number of products; and (5) a wide variety of services or products.

 

DIF:   Moderate          OBJ:   5-6

 

 

 

 

 

 

 

 

 

 

 

 

176

 

 

 

 

5. Discuss the four different levels of costs identified by activity based costing (ABC). How should these types of costs be treated in the determination of product cost?

 

ANS:

 

The four different levels are unit-level costs, batch-level costs, product- or process-level costs, and organizational or facility costs. Unit-level costs include direct material, direct labor, and some traceable machine costs. These are incurred once for each item produced and are considered part of total product cost. Batch-level costs include machine setup, material handling, and purchasing or ordering costs. These are incurred once for each batch of items produced and are allocated over the total number of units in the batch. These are also considered part of total product cost. Product- or process-level costs include engineering changes, design, and development costs. These are allocated to the total number of units produced in the product line and are considered part of total product cost. Organizational or facility costs include building depreciation, administrative salaries, and organizational advertising. These costs are not product-related and should be deducted from net product revenue.

 

DIF:   Moderate          OBJ:   5-3

 

6. ABC has been criticized for a variety of reasons. Discuss these criticisms.

 

ANS:

 

One criticism is that ABC does not promote total quality management and continuous improvement. Another criticism of ABC is that ABC does not adhere to generally accepted accounting principles. An ABC system might allocate nonproduct costs (research and development) to products, while not allocating some traditional product costs (factory depreciation on machines) to products. A third criticism of ABC relates to the cost of implementation. An ABC system takes considerable time to implement, and therefore, it is very costly.

 

DIF:   Moderate          OBJ:   5-6

 

 

PROBLEM

 

1. Heirloom Company. manufactures hand-made pine storage boxes for a variety of clients. As production manager, you have developed the following value chart:

 

Operation		Average Number of Days
Receiving	materials	1
Storing materials		2
Handling materials		3
Cutting/measuring materials		6
Assembling materials		4
Building boxes		7
Attaching hinges		2
Inspection		1

 

1. Determine the value-added activities and their total time.

 

1. Determine the non-value-added activities and their total time.
2. Calculate the manufacturing cycle efficiency.

 

 

 

 

 

 

 

 

177

 

 

 

 

ANS:
a.	Value-added activities			Time
	Cutting/measuring materials			6
	Assembling materials			4
	Building boxes			7
	Attaching hinges			2
	Total production time (days)				19
b.	Non-value-added activities
				Time
	Receiving			1
	Storing			2
	Handling			3
	Inspection			1
	Total nonproduction time (days)						7

 

73. Total lead time = 19 + 7 = 26 days MCE = 19/26 = 73.1%

 

DIF:   Easy                   OBJ:   5-2

 

2. McMahon Company would like to institute an activity-based costing system to price products. The company’s Purchasing Department incurs costs of $550,000 per year and has six employees. Purchasing has determined the three major activities that occur during the year.

 

Activity		Allocation			# of		Total
			Measure		People			Cost
	purchase orders
Issuing		# of purchase orders			1		$150,000
Reviewing receiving reports		# of receiving reports			2		$175,000
Making phone calls		# of phone calls			3		$225,000

 

During the year, 50,000 phone calls were made in the department; 15,000 purchase orders were issued; and 10,000 shipments were received. Product A required 200 phone calls, 150 receiving reports, and 50 purchase orders. Product B required 350 phone calls, 400 receiving reports, and 100 purchase orders.

 

1. Determine the amount of purchasing department cost that should be assigned to each of these products.
2. Determine purchasing department cost per unit if 1,500 units of Product A and 3,000 units of Product B were manufactured during the year.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

178

 

 

 

 

ANS:

 

1. $150,000/15,000 = $10 per purchase order

 

$175,000/10,000 = $17.50 per receiving report $225,000/50,000 = $4.50 per phone call

 

50 purchase orders × $10	Product A					Product B
	$		500			$1,000
100 purchase orders × $10			2,625
150 receiving reports × $17.50						7,000
400 receiving reports × $17.50			900
200 phone calls × $4.50						1,575
350 phone calls × $4.50	$4,025
Total cost							$9,575

 

2. Product A= $4,025/1,500 = $2.68 per unit Product B= $9,575/3,000 = $3.19 per unit

 

DIF:   Moderate          OBJ:   5-4