Cost Management A Strategic Emphasis Edward Blocher 8e - Test Bank

Cost Management A Strategic Emphasis Edward Blocher 8e – Test Bank

 

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Sample Questions Are Posted Below

 

Cost Management: A Strategic Emphasis, 8e (Blocher)

Chapter 5   Activity-Based Costing and Customer Profitability Analysis

 

1) The major limitation of volume-based costing systems is the use of volume-based:

1. A) Criteria.
2. B) Standards.
3. C) Rates.
4. D) Variances.
5. E) Restrictions.

 

Answer:  C

Difficulty: 1 Easy

Topic:  Role of Volume-Based Costing

Learning Objective:  05-01 Explain the strategic role of activity-based costing (ABC).

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

2) Volume-based rates produce inaccurate product cost when:

1. A) A large portion of factory overhead cost is not volume-based.
2. B) Firms produce a diverse mix of products.
3. C) Large volumes of a product are manufactured.
4. D) Both a lack of volume-based overhead and there is a large range of products.
5. E) None of these answer choices are correct.

 

Answer:  D

Difficulty: 3 Hard

Topic:  Role of Volume-Based Costing

Learning Objective:  05-01 Explain the strategic role of activity-based costing (ABC).

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

3) If the usage of project activities is not proportional to the number of units produced, then some managers will be overcharged and others undercharged under:

1. A) Activity-based costing
2. B) Volume-based costing
3. C) Overhead costing
4. D) Process costing

 

Answer:  B

Difficulty: 2 Medium

Topic:  A Comparison of Volume-Based and Activity-Based Costing

Learning Objective:  05-01 Explain the strategic role of activity-based costing (ABC).

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

4) Volume-based overhead rates may cause undesirable strategic effects such as:

1. A) Incorrect decisions.
2. B) Unprofitable cross-subsidization of products.
3. C) Ineffective management of operations for process improvement.
4. D) All of these answer choices are correct.

 

Answer:  D

Difficulty: 2 Medium

Topic:  Role of Volume-Based Costing

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.; 05-01 Explain the strategic role of activity-based costing (ABC).

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

5) Activity-based costing (ABC) differs from other costing approaches in that it more accurately measures the cost of activities that are:

1. A) Not proportional to the volume of outputs produced.
2. B) Directly proportional to the volume of outputs produced.
3. C) Inversely proportional to the volume of outputs produced.
4. D) Non-value adding.

 

Answer:  A

Difficulty: 2 Medium

Topic:  A Comparison of Volume-Based and Activity-Based Costing

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

6) In performing activity analysis during the design of an activity-based costing (ABC) system, the management accountant studies:

1. A) The cost drivers and managers in the plant.
2. B) The advice of operation-level managers.
3. C) The resources, activities, and cost drivers in the operation.
4. D) The cost allocation methods applicable to the firm.
5. E) The implementation problems for an ABC system.

 

Answer:  C

Difficulty: 1 Easy

Topic:  Identify Cost Drivers

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Risk Analysis

7) Effective implementation of activity-based costing (ABC) requires:

1. A) Normally the assistance of a consultant.
2. B) A sophisticated and expensive computer system.
3. C) Support of top management and key employees.
4. D) Capturing properly the complexity of the data.
5. E) ABC has no significant implementation issues.

 

Answer:  C

Difficulty: 1 Easy

Topic:  ABC/M-Implementation and Enhancement

Learning Objective:  05-07 Identify key factors for successful ABC/M implementation.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

8) Elimination of low-value-added activities in a firm should:

1. A) Be discouraged because of potential harmful effects.
2. B) Not affect customer value.
3. C) Not have priority because low-value-added activities have little effect on a firm’s performance.
4. D) Have priority only when a firm is operating at a loss.
5. E) Happen naturally if the firm is well-managed.

 

Answer:  B

Difficulty: 1 Easy

Topic:  Value-Added Analysis

Learning Objective:  05-04 Explain activity-based management (ABM).

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

9) When gathering activity data, which of the following would not be a question that ABC project team members typically ask employees or managers?

1. A) Time spent performing the activity
2. B) Resources required for the activity
3. C) Where the activity takes place
4. D) Value the activity has for the customer

 

Answer:  C

Difficulty: 2 Medium

Topic:  Identify Cost Drivers

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  FN Risk Analysis; BB Resource Management

10) Successful activity-based costing (ABC) implementation depends upon the firm:

1. A) Having support of consultants with needed expertise.
2. B) Having a thorough activity analysis.
3. C) Starting with a relatively simple system.
4. D) Having well-trained managers.
5. E) Having adequate computer resources.

 

Answer:  C

Difficulty: 2 Medium

Topic:  ABC/M-Implementation and Enhancement

Learning Objective:  05-07 Identify key factors for successful ABC/M implementation.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

11) A measure of the quantity of resources consumed by an activity is:

1. A) A quantity driver.
2. B) A resource consumption cost driver.
3. C) Not a cost driver.
4. D) An activity consumption cost driver.
5. E) A consumption cost driver.

 

Answer:  B

Difficulty: 1 Easy

Topic:  Identify Cost Drivers

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

12) A measure of frequency and intensity of demands placed on activities by cost objects is:

1. A) A quantity driver.
2. B) A resource consumption cost driver.
3. C) Not a cost driver.
4. D) An activity consumption cost driver.
5. E) A consumption cost driver.

 

Answer:  D

Difficulty: 1 Easy

Topic:  Identify Cost Drivers

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

13) An activity that is performed for each unit of production is a(n):

1. A) Product-level activity.
2. B) Facility-level activity.
3. C) Unit-level activity.
4. D) Performance-level activity.
5. E) Batch-level activity.

 

Answer:  C

Difficulty: 1 Easy

Topic:  Identify Cost Drivers

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

14) An activity that is performed to support the production of a new custom-order product is a:

1. A) Product-level activity.
2. B) Facility-level activity.
3. C) Unit-level activity.
4. D) Customer-support activity.
5. E) Batch-level activity.

 

Answer:  A

Difficulty: 1 Easy

Topic:  Identify Cost Drivers

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

15) Which one of the following is not a unit-level cost driver?

1. A) Direct labor hours.
2. B) Direct material dollars.
3. C) Machine hours.
4. D) Production orders.

 

Answer:  D

Difficulty: 2 Medium

Topic:  Identify Cost Drivers

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

16) The management of activities to improve the value received by the customer and the competitiveness of the organization is:

1. A) Cost driver analysis.
2. B) Customer profitability analysis.
3. C) Activity-based management.
4. D) Performance measurement.
5. E) Activity analysis.

 

Answer:  C

Difficulty: 1 Easy

Topic:  Activity-Based Costing

Learning Objective:  05-04 Explain activity-based management (ABM).

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

17) The examination of the efficiency of each of a firm’s activities is:

1. A) Activity analysis.
2. B) Pareto analysis.
3. C) Activity-based management.
4. D) Performance measurement.
5. E) Attribute-based management.

 

Answer:  A

Difficulty: 1 Easy

Topic:  Activity-Based Costing

Learning Objective:  05-04 Explain activity-based management (ABM).

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  FN Risk Analysis; BB Resource Management

 

18) Which one of the following is a high value-added activity?

1. A) Set-up.
2. B) Rework.
3. C) Repair.
4. D) Storage.
5. E) Processing.

 

Answer:  E

Difficulty: 1 Easy

Topic:  Value-Added Analysis

Learning Objective:  05-04 Explain activity-based management (ABM).

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

19) In regard to selling activities, which one of the following would not be a cost driver for selling expense?

1. A) Number of invoices.
2. B) Number of sales calls.
3. C) Number of production runs.
4. D) Number of shipments.

 

Answer:  C

Difficulty: 1 Easy

Topic:  Customer Cost Analysis

Learning Objective:  05-06 Use an activity-based approach to analyze customer profitability.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

20) Which one of the following is not a recommendation for a successful implementation of ABC/M?

1. A) Obtain support of management and personnel.
2. B) Complete an activity analysis.
3. C) Start with a relatively simple system.
4. D) Use ABC/M on a job that will succeed.
5. E) All of these answer choices are features of successful ABC/M implementations.

 

Answer:  E

Difficulty: 2 Medium

Topic:  ABC/M-Implementation and Enhancement

Learning Objective:  05-07 Identify key factors for successful ABC/M implementation.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Risk Analysis

 

21) Which of the following activities is a facility-level activity?

1. A) Plant management salaries.
2. B) Depreciation on a highly specialized piece of production equipment.
3. C) Direct labor.
4. D) Product design.
5. E) Materials handling.

 

Answer:  A

Difficulty: 1 Easy

Topic:  Identify Cost Drivers

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

22) A company using a volume-based overhead assignment (allocation) method will tend to:

1. A) Overstate the cost of low volume products.
2. B) Understate the cost of low volume products.
3. C) Understate the cost of high volume products.
4. D) Understate the cost of all products.
5. E) Either understate or overstate the cost of high volume products depending on the specific manufacturing factors involved.

 

Answer:  B

Difficulty: 1 Easy

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

23) Which of the following is a batch-level cost driver?

1. A) Output units.
2. B) Number of engineering change orders.
3. C) Number of materials handling transactions.
4. D) Square feet of plant area occupied.
5. E) Number of employees.

 

Answer:  C

Difficulty: 2 Medium

Topic:  Identify Cost Drivers

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

24) Which of the following activities is a facility-level activity?

1. A) Materials handling.
2. B) Plant maintenance.
3. C) Product inspection.
4. D) Design engineering.
5. E) Purchase orders.

 

Answer:  B

Difficulty: 1 Easy

Topic:  Identify Cost Drivers

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

25) In an organization that makes furniture, which of the following is a high value-added activity?

1. A) Using direct materials in production.
2. B) Inspecting production.
3. C) Storing finished goods inventory.
4. D) Moving work-in-process inventory between work stations.
5. E) Reworking the product to repair defects.

 

Answer:  A

Difficulty: 1 Easy

Topic:  Value-Added Analysis

Learning Objective:  05-04 Explain activity-based management (ABM).

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

26) Overhead costs are allocated to cost objects in an activity-based costing system in the following manner:

1. A) Overhead costs are traced to departments, then costs are traced to products.
2. B) Overhead costs are traced to activities, then costs are traced to products.
3. C) Overhead costs are traced to activities, then costs are traced to departments and then allocated to products.
4. D) Overhead costs are traced from resources to cost objects.

 

Answer:  B

Difficulty: 2 Medium

Topic:  Activity-Based Costing

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

27) Which of the following is a batch-level cost driver?

1. A) Output units.
2. B) Number of employees.
3. C) Number of orders.
4. D) Number of parts.
5. E) Machine hours.

 

Answer:  C

Difficulty: 2 Medium

Topic:  Identify Cost Drivers

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

28) Which of the following has the weakest linkage between activity and cost driver?

 

	Model	Cost Driver
A)	Machine setup	Number of setups
B)	Machine maintenance	Machine hours
C)	Lighting on shop floor	Number of kilowatt-hours
D)	Quality control	Square feet of floor space
E)	Materials Handling	Weight of materials in process

1. A) Option A
2. B) Option B
3. C) Option C
4. D) Option D
5. E) Option E

 

Answer:  D

Difficulty: 2 Medium

Topic:  Identify Cost Drivers

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

29) A volume-based rate is an appropriate overhead application base when:

1. A) Several well-differentiated products are manufactured.
2. B) Direct labor costs are large.
3. C) Direct material costs are large relative to direct labor costs incurred.
4. D) Only one product is manufactured.
5. E) Manufacturing is process-based.

 

Answer:  D

Difficulty: 2 Medium

Topic:  Role of Volume-Based Costing

Learning Objective:  05-01 Explain the strategic role of activity-based costing (ABC).

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

30) Which of the following would likely be the most appropriate cost driver of electric power used by machines?

1. A) Number of units.
2. B) Machine size.
3. C) Number of machine hours.
4. D) Number of production runs.
5. E) Purchase cost of machines.

 

Answer:  C

Difficulty: 2 Medium

Topic:  Identify Cost Drivers

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

31) Using a volume-based overhead rate based on machine hours to assign manufacturing overhead to a product line that uses relatively few machine hours is likely to:

1. A) Overapply overhead to the product line.
2. B) Underapply overhead to the product line.
3. C) Understate direct labor costs.
4. D) Overstate direct labor costs.
5. E) Either over- or under-apply overhead to the product line depending on many other factors.

 

Answer:  B

Difficulty: 2 Medium

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

32) Which of the following is an example of a high-value-added activity?

1. A) Shipping the customer’s order.
2. B) Scheduling the customer order for production.
3. C) Inspecting goods to ensure the right quantity is being shipped.
4. D) E-mailing a customer to assure that a complaint will be resolved expeditiously.
5. E) More than one of these answer choices is a high-value-added activity.

 

Answer:  A

Difficulty: 2 Medium

Topic:  Value-Added Analysis

Learning Objective:  05-04 Explain activity-based management (ABM).

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

33) Engineering change orders, maintenance of equipment used in manufacturing, and product design costs are examples of:

1. A) Unit costs.
2. B) Batch costs.
3. C) Product-level costs.
4. D) Facility-level costs.
5. E) Unit, batch, and customer-sustaining costs, respectively.

 

Answer:  C

Difficulty: 1 Easy

Topic:  Identify Cost Drivers

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

34) In an activity-based costing system, overhead costs are divided into separate:

1. A) Cost objects.
2. B) Activity cost pools.
3. C) Resource consumption and activity consumption cost drivers.
4. D) Product-line cost pools.
5. E) Plantwide or departmental cost pools.

 

Answer:  B

Difficulty: 2 Medium

Topic:  Activity-Based Costing

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

35) Which of the following would likely be the most appropriate cost driver to allocate machine set-up costs to products?

1. A) Machine hours.
2. B) Direct labor hours.
3. C) Number of production runs.
4. D) Number of products.
5. E) Number of purchase orders.

 

Answer:  C

Difficulty: 3 Hard

Topic:  Identify Cost Drivers

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

36) A firm has many products, some produced in an automated production process and some produced in a manual production process. Using direct labor hours to assign manufacturing overhead to a product manufactured with a highly automated process is likely to:

1. A) Overstate overhead of the product.
2. B) Understate overhead of the product.
3. C) Overapply overhead to the period.
4. D) Underapply overhead to the period.
5. E) Have no effect on overhead of the product.

 

Answer:  B

Difficulty: 2 Medium

Topic:  A Comparison of Volume-Based and Activity-Based Costing; Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

37) Activity-based costing for manufacturing operations is used to assign:

1. A) Direct material and direct labor costs to products.
2. B) Direct labor and manufacturing overhead costs to products.
3. C) Manufacturing overhead costs to products.
4. D) Selling and general administrative overhead costs to products.
5. E) Selling and general administrative overhead and manufacturing overhead costs to products.

 

Answer:  C

Difficulty: 1 Easy

Topic:  Activity-Based Costing

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

38) The use of activity-based costing is most appropriate for:

1. A) Firms that manufacture multiple product lines.
2. B) Firms that have very low manufacturing overhead costs relative to other costs of production.
3. C) Firms with high levels of production activity.
4. D) Firms that are labor intensive.
5. E) Firms that manufacture a small number of product lines.

 

Answer:  A

Difficulty: 1 Easy

Topic:  The Strategic Role of Activity-Based Costing

Learning Objective:  05-01 Explain the strategic role of activity-based costing (ABC).

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Risk Analysis

39) Which of the following is a benefit of activity-based costing?

1. A) Reduced overhead costs.
2. B) More accurate measures of production volume.
3. C) Facilitate better product pricing decisions.
4. D) Having fewer cost drivers than volume-based costing systems.
5. E) More streamlined manufacturing processes.

 

Answer:  C

Difficulty: 2 Medium

Topic:  A Comparison of Volume-Based and Activity-Based Costing

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

40) Which of the following is not normally associated with activity-based costing?

1. A) Activity cost pools.
2. B) Multiple cost drivers.
3. C) Reduction of non-value-adding costs.
4. D) High direct labor costs relative to manufacturing overhead costs.
5. E) Improved decision-making and pricing.

 

Answer:  D

Difficulty: 1 Easy

Topic:  A Comparison of Volume-Based and Activity-Based Costing

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

41) Which of the following is not considered a benefit of activity-based costing?

1. A) Decreased production activity levels.
2. B) Improved understanding of cost of capacity.
3. C) A better understanding of processes.
4. D) Improved planning.
5. E) Improved strategic decisions.

 

Answer:  A

Difficulty: 1 Easy

Topic:  A Comparison of Volume-Based and Activity-Based Costing

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.; 05-01 Explain the strategic role of activity-based costing (ABC).

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  FN Risk Analysis; BB Resource Management

 

 

42) Which of the following would be the most appropriate cost driver to allocate factory electricity costs to products?

1. A) Machinery depreciation expense.
2. B) Machinery maintenance work orders.
3. C) Machinery down-time.
4. D) Machine hours.
5. E) Machine productivity.

 

Answer:  D

Difficulty: 1 Easy

Topic:  Identify Cost Drivers

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

43) Which of the following activity cost pools would most likely be allocated based on the number of production runs?

1. A) Machinery set-up costs.
2. B) Raw materials warehousing costs.
3. C) Factory heating costs.
4. D) Factory janitorial costs.
5. E) Indirect labor costs.

 

Answer:  A

Difficulty: 1 Easy

Topic:  Identify Cost Drivers

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

44) Which of the following is most likely to be the cost driver for the packaging and shipping activity?

1. A) Number of setups.
2. B) Number of components.
3. C) Number of orders.
4. D) Hours of testing.
5. E) Number of production runs.

 

Answer:  C

Difficulty: 2 Medium

Topic:  Identify Cost Drivers

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

45) Activity-based costing systems:

1. A) Accumulate overhead costs by departments.
2. B) Are less complex and therefore less costly than volume-based systems.
3. C) Can be used in manufacturing firms only.
4. D) Have separate overhead rates for each activity.
5. E) Eliminate multiple-stage cost allocation.

 

Answer:  D

Difficulty: 1 Easy

Topic:  Activity-Based Costing

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

46) Which of the following is not true regarding activity-based costing (ABC) systems?

1. A) ABC can provide more accurate product costs.
2. B) ABC identifies more costs as indirect costs than do traditional volume-based systems.
3. C) ABC is likely to be more time-consuming than volume-based systems.
4. D) ABC is used in both manufacturing and non-manufacturing companies.
5. E) ABC is likely to have more overhead rates than volume-based systems.

 

Answer:  B

Difficulty: 1 Easy

Topic:  A Comparison of Volume-Based and Activity-Based Costing

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

47) All of the following are low-value-added activities except:

1. A) Processing.
2. B) Reworking.
3. C) Moving.
4. D) Inspection.
5. E) Warranty service.

 

Answer:  A

Difficulty: 1 Easy

Topic:  Value-Added Analysis

Learning Objective:  05-04 Explain activity-based management (ABM).

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

48) Which of the following cost pools are used to classify costs under activity-based costing?

 

	Unit	Batch	Product	Facility
A)	Yes	Yes	Yes	No
B)	Yes	Yes	Yes	Yes
C)	No	Yes	Yes	No
D)	Yes	No	Yes	Yes
E)	Yes	Yes	No	No

1. A) Option A
2. B) Option B
3. C) Option C
4. D) Option D
5. E) Option E

 

Answer:  B

Difficulty: 1 Easy

Topic:  Identify Cost Drivers

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

49) Purchase order, set-up, and inspection costs are examples of:

1. A) Unit-level costs.
2. B) Batch-level costs.
3. C) Product-level costs.
4. D) Facility-level costs.
5. E) Department-level costs.

 

Answer:  B

Difficulty: 2 Medium

Topic:  Identify Cost Drivers

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

50) Which of the following would not be considered a facility-level activity?

1. A) Providing security for the plant.
2. B) Factory property taxes and insurance.
3. C) Closing the books each month.
4. D) Placing purchase orders.

 

Answer:  D

Difficulty: 2 Medium

Topic:  Identify Cost Drivers

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

51) Costs at the unit-level of activity should be allocated to products using cost drivers that are:

1. A) Customer-oriented.
2. B) Design-related.
3. C) Volume-related.
4. D) Product-related.
5. E) Order-related.

 

Answer:  C

Difficulty: 2 Medium

Topic:  Identify Cost Drivers

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

52) If a costing system uses a single base to allocate overhead costs that are results of several production activities:

1. A) Products that use relatively more of this base tend to be undercosted.
2. B) Products that use relatively less of this base tend to be overcosted.
3. C) Products that use relatively more of this base tend to be overcosted.
4. D) Products may be over- or under-costed, depending on the activity level.
5. E) Products may be over- or under-costed, depending on the overhead rate.

 

Answer:  C

Difficulty: 2 Medium

Topic:  A Comparison of Volume-Based and Activity-Based Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

53) Procurement costs such as costs of placing orders for materials and paying suppliers are usually classified as:

1. A) Output-unit-level costs.
2. B) Batch-level costs.
3. C) Product-level costs.
4. D) Facility-level costs.
5. E) Vendor costs.

 

Answer:  B

Difficulty: 2 Medium

Topic:  Identify Cost Drivers

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

54) The cost of sales visits is a:

1. A) Customer unit-level cost.
2. B) Customer batch-level cost.
3. C) Customer-sustaining cost.
4. D) Distribution-channel cost.
5. E) Sales-sustaining cost.

 

Answer:  C

Difficulty: 1 Easy

Topic:  Customer Cost Analysis

Learning Objective:  05-06 Use an activity-based approach to analyze customer profitability.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

55) Freight charges based on number of units shipped to customers is a:

1. A) Customer unit-level cost.
2. B) Customer batch-level cost.
3. C) Customer-sustaining cost.
4. D) Distribution-channel cost.
5. E) Sales-level cost.

 

Answer:  A

Difficulty: 1 Easy

Topic:  Customer Cost Analysis

Learning Objective:  05-06 Use an activity-based approach to analyze customer profitability.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

56) Processing sales returns and allowances is usually classified as a:

1. A) Customer unit-level cost.
2. B) Customer batch-level cost.
3. C) Customer-sustaining cost.
4. D) Distribution-channel cost.
5. E) Sales-level cost.

 

Answer:  B

Difficulty: 2 Medium

Topic:  Customer Cost Analysis

Learning Objective:  05-06 Use an activity-based approach to analyze customer profitability.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

57) Invoicing cost is an example of a:

1. A) Customer unit-level cost.
2. B) Customer batch-level cost.
3. C) Customer-sustaining cost.
4. D) Distribution-channel cost.
5. E) Sales-level cost.

 

Answer:  B

Difficulty: 2 Medium

Topic:  Customer Cost Analysis

Learning Objective:  05-06 Use an activity-based approach to analyze customer profitability.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

58) The cost to process monthly statements is an example of a:

1. A) Customer unit-level cost.
2. B) Customer batch-level cost.
3. C) Customer-sustaining cost.
4. D) Distribution-channel cost.
5. E) Sales-level cost.

 

Answer:  C

Difficulty: 1 Easy

Topic:  Customer Cost Analysis

Learning Objective:  05-06 Use an activity-based approach to analyze customer profitability.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

59) The costs of operating a regional warehouse is an example of a:

1. A) Customer unit-level cost.
2. B) Customer batch-level cost.
3. C) Customer-sustaining cost.
4. D) Distribution-channel cost.
5. E) Sales-level cost.

 

Answer:  D

Difficulty: 1 Easy

Topic:  Customer Profitability

Learning Objective:  05-06 Use an activity-based approach to analyze customer profitability.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

60) General corporate sales expenditures are:

1. A) Customer unit-level costs.
2. B) Customer batch-level costs.
3. C) Customer-sustaining costs.
4. D) Distribution-channel costs.
5. E) Sales-sustaining costs.

 

Answer:  E

Difficulty: 1 Easy

Topic:  Customer Cost Analysis

Learning Objective:  05-06 Use an activity-based approach to analyze customer profitability.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

61) The general sales manager’s salary is an example of a:

1. A) Customer unit-level cost.
2. B) Customer batch-level cost.
3. C) Customer-sustaining cost.
4. D) Distribution-channel cost.
5. E) Sales-sustaining cost.

 

Answer:  E

Difficulty: 1 Easy

Topic:  Customer Cost Analysis

Learning Objective:  05-06 Use an activity-based approach to analyze customer profitability.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

62) Which of the following is a description of categorizing related customer costs into cost pools on the basis of cost drivers?

1. A) Customer revenue analysis.
2. B) Customer cost analysis.
3. C) Customer profitability analysis.
4. D) Customer value assessment.
5. E) Customer equity analysis.

 

Answer:  B

Difficulty: 1 Easy

Topic:  Customer Cost Analysis

Learning Objective:  05-06 Use an activity-based approach to analyze customer profitability.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

63) Wings Co. budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours, and had the following manufacturing overhead:

 

Overhead Cost Pool	Budgeted Overhead Cost			Budgeted Level for Cost Driver		Overhead Cost Driver
Materials handling	$	160,000		3,200	pounds	Weight of materials
Machine setup		13,260		390	setups	Number of setups
Machine repair		1,380		30,000	machine hours	Machine hours
Inspections		10,560		160	inspections	Number of inspections

 

Requirements for Job #971 which manufactured 4 units of product:

Direct labor	20	hours
Direct materials	130	pounds
Machine setup	30	setups
Machine hours	15,000	machine hours
Inspections	15	inspections

 

If Wings uses a volume-based overhead rate based on direct labor hours, the manufacturing overhead for Job #971 is:

990. A) $990.
991. B) $1,020.
992. C) $1,600.
993. D) $3,460.
994. E) $6,400.

 

Answer:  C

Explanation:  1. ($160,000 + $13,260 + $1,380 + $10,560) / 2,315 budgeted hours = $80 per direct labor hour

2. $80 × 20 Direct labor hours = $1,600 = Manufacturing overhead for Job #971

Difficulty: 1 Easy

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

64) Wings Co. budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours, and had the following manufacturing overhead:

 

Overhead Cost Pool	Budgeted Overhead Cost			Budgeted Level for Cost Driver		Overhead Cost Driver
Materials handling	$	160,000		3,200	pounds	Weight of materials
Machine setup		13,260		390	setups	Number of setups
Machine repair		1,380		30,000	machine hours	Machine hours
Inspections		10,560		160	inspections	Number of inspections

 

Requirements for Job #971 which manufactured 4 units of product:

Direct labor	20	hours
Direct materials	130	pounds
Machine setup	30	setups
Machine hours	15,000	machine hours
Inspections	15	inspections

 

Using ABC, the materials handling overhead cost assigned to Job #971 is:

300. A) $2,300.
301. B) $990.
302. C) $6,500.
303. D) $690.
304. E) $1,020.

 

Answer:  C

Explanation:  1. $160,000 / 3,200 pounds = $50 per pound of direct materials

2. $50 × 130 pounds = $6,500

Difficulty: 1 Easy

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

65) Wings Co. budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours, and had the following manufacturing overhead:

 

Overhead Cost Pool	Budgeted Overhead Cost			Budgeted Level for Cost Driver		Overhead Cost Driver
Materials handling	$	160,000		3,200	pounds	Weight of materials
Machine setup		13,260		390	setups	Number of setups
Machine repair		1,380		30,000	machine hours	Machine hours
Inspections		10,560		160	inspections	Number of inspections

 

Requirements for Job #971 which manufactured 4 units of product:

Direct labor	20	hours
Direct materials	130	pounds
Machine setup	30	setups
Machine hours	15,000	machine hours
Inspections	15	inspections

 

Using ABC, overhead cost assigned to Job #971 for machine setup is:

300. A) $2,300.
301. B) $990.
302. C) $6,500.
303. D) $690.
304. E) $1,020.

 

Answer:  E

Explanation:  1. $13,260 / 390 setups = $34 per setup

2. $34 × 30 setups = $1,020

Difficulty: 1 Easy

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

66) Wings Co. budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours, and had the following manufacturing overhead:

 

Overhead Cost Pool	Budgeted Overhead Cost			Budgeted Level for Cost Driver		Overhead Cost Driver
Materials handling	$	160,000		3,200	pounds	Weight of materials
Machine setup		13,260		390	setups	Number of setups
Machine repair		1,380		30,000	machine hours	Machine hours
Inspections		10,560		160	inspections	Number of inspections

 

Requirements for Job #971 which manufactured 4 units of product:

Direct labor	20	hours
Direct materials	130	pounds
Machine setup	30	setups
Machine hours	15,000	machine hours
Inspections	15	inspections

 

Using ABC, overhead cost assigned to Job #971 for machine repair is:

300. A) $2,300.
301. B) $990.
302. C) $6,500.
303. D) $690.
304. E) $1,020.

 

Answer:  D

Explanation:  1. $1,380 / 30,000 machine hours = $0.046 per machine hour

2. $0.046 × 15,000 machine hours = $690

Difficulty: 1 Easy

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

67) Wings Co. budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours, and had the following manufacturing overhead:

 

Overhead Cost Pool	Budgeted Overhead Cost			Budgeted Level for Cost Driver		Overhead Cost Driver
Materials handling	$	160,000		3,200	pounds	Weight of materials
Machine setup		13,260		390	setups	Number of setups
Machine repair		1,380		30,000	machine hours	Machine hours
Inspections		10,560		160	inspections	Number of inspections

 

Requirements for Job #971 which manufactured 4 units of product:

Direct labor	20	hours
Direct materials	130	pounds
Machine setup	30	setups
Machine hours	15,000	machine hours
Inspections	15	inspections

 

Using ABC, overhead cost assigned to Job #971 for inspections is:

300. A) $2,300.
301. B) $990.
302. C) $6,500.
303. D) $690.
304. E) $1,020.

 

Answer:  B

Explanation:  1. $10,560 / 160 inspections = $66 per inspection

2. $66 × 15 inspections = $990

Difficulty: 1 Easy

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

68) Wings Co. budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours, and had the following manufacturing overhead:

 

Overhead Cost Pool	Budgeted Overhead Cost			Budgeted Level for Cost Driver		Overhead Cost Driver
Materials handling	$	160,000		3,200	pounds	Weight of materials
Machine setup		13,260		390	setups	Number of setups
Machine repair		1,380		30,000	machine hours	Machine hours
Inspections		10,560		160	inspections	Number of inspections

 

Requirements for Job #971 which manufactured 4 units of product:

 

Direct labor	20	hours
Direct materials	130	pounds
Machine setup	30	setups
Machine hours	15,000	machine hours
Inspections	15	inspections

 

The total overhead of Job #971 under the ABC costing is:

95. A) $95.
96. B) $380.
97. C) $1,520.
98. D) $2,300.
99. E) $9,200.

 

Answer:  E

Explanation:  (($160,000 / 3,200) × 130) + (($13,260 / 390) × 30) + (($1,380 / 30,000) × 15,000) + (($10,560 / 160) × 15) = $6,500 + $1,020 + $690 + $990 = $9,200

Difficulty: 2 Medium

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

69) National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and digital camcorders.

 

Model	Annual Sales in Units
High F	10,000
Great P	16,000

 

National uses a volume-based costing system to apply factory overhead based on direct labor dollars. The unit prime costs of each product were as follows:

 

	High F			Great P
Direct materials	$	38.00		$	25.40
Direct labor	$	17.52		$	13.14

 

Budget factory overhead:
Engineering and Design	2,409	engineering hours	$	404,712
Quality Control	12,848	inspection hours		269,808
Machinery	33,726	machine hours		539,616
Miscellaneous Overhead	26,400	direct labor hours		134,904
Total			$	1,349,040

 

National’s controller had been researching activity-based costing and decided to switch to it. A special study determined National’s two products have the following budgeted activities:

 

	High F	Great P
Engineering and design hours	969	1,440
Quality control inspection hours	5,648	7,200
Machine hours	20,286	13,440
Labor hours	12,000	14,400

What is the overhead application rate using the firm’s volume-based costing system? (Rounded to the nearest percent or cents.)

1. A) 350 percent of direct labor cost.
2. B) $51.89 per direct labor-hour.
3. C) 68 percent of direct labor cost.
4. D) 5,189 percent of direct labor cost.
5. E) 5,110 percent of direct labor cost.

 

Answer:  A

Explanation:  $1,349,040 / [(10,000 × $17.52) + (16,000 × $13.14)] = 3.5

Difficulty: 2 Medium

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

70) National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and digital camcorders.

 

Model	Annual Sales in Units
High F	10,000
Great P	16,000

 

National uses a volume-based costing system to apply factory overhead based on direct labor dollars. The unit prime costs of each product were as follows:

 

	High F			Great P
Direct materials	$	38.00		$	25.40
Direct labor	$	17.52		$	13.14

 

Budget factory overhead:
Engineering and Design	2,409	engineering hours	$	404,712
Quality Control	12,848	inspection hours		269,808
Machinery	33,726	machine hours		539,616
Miscellaneous Overhead	26,400	direct labor hours		134,904
Total			$	1,349,040

 

National’s controller had been researching activity-based costing and decided to switch to it. A special study determined National’s two products have the following budgeted activities:

 

	High F	Great P
Engineering and design hours	969	1,440
Quality control inspection hours	5,648	7,200
Machine hours	20,286	13,440
Labor hours	12,000	14,400

 

Using the firm’s volume-based costing, applied factory overhead per unit for the High F model is: (Rounded to the nearest cent.)

61. A) $61.32.
62. B) $65.43.
63. C) $43.42.
64. D) $45.99.
65. E) $54.04.

 

 

Answer:  A

Explanation:  $1,349,040 / ((10,000 units × $17.52) + (16,000 units × $13.14)) × 100 = 350%

$17.52 × 350% = $61.32

Difficulty: 2 Medium

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

71) National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and digital camcorders.

 

Model	Annual Sales in Units
High F	10,000
Great P	16,000

 

National uses a volume-based costing system to apply factory overhead based on direct labor dollars. The unit prime costs of each product were as follows:

 

	High F			Great P
Direct materials	$	38.00		$	25.40
Direct labor	$	17.52		$	13.14

 

Budget factory overhead:
Engineering and Design	2,409	engineering hours	$	404,712
Quality Control	12,848	inspection hours		269,808
Machinery	33,726	machine hours		539,616
Miscellaneous Overhead	26,400	direct labor hours		134,904
Total			$	1,349,040

 

National’s controller had been researching activity-based costing and decided to switch to it. A special study determined National’s two products have the following budgeted activities:

 

	High F	Great P
Engineering and design hours	969	1,440
Quality control inspection hours	5,648	7,200
Machine hours	20,286	13,440
Labor hours	12,000	14,400

 

Using the firm’s volume- based costing, applied factory overhead per unit for the Great P model is: (Rounded to the nearest cent.)

61. A) $61.32.
62. B) $65.43.
63. C) $43.42.
64. D) $45.99.
65. E) $54.04.

 

 

 

Answer:  D

Explanation:  $1,349,040 / ((10,000 units × $17.52) + (16,000 units × $13.14)) × 100 = 350%

$13.14 × 350% = $45.99

Difficulty: 2 Medium

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

72) National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and digital camcorders.

 

Model	Annual Sales in Units
High F	10,000
Great P	16,000

 

National uses a volume-based costing system to apply factory overhead based on direct labor dollars. The unit prime costs of each product were as follows:

 

	High F			Great P
Direct materials	$	38.00		$	25.40
Direct labor	$	17.52		$	13.14

 

Budget factory overhead:
Engineering and Design	2,409	engineering hours	$	404,712
Quality Control	12,848	inspection hours		269,808
Machinery	33,726	machine hours		539,616
Miscellaneous Overhead	26,400	direct labor hours		134,904
Total			$	1,349,040

 

National’s controller had been researching activity-based costing and decided to switch to it. A special study determined National’s two products have the following budgeted activities:

 

	High F	Great P
Engineering and design hours	969	1,440
Quality control inspection hours	5,648	7,200
Machine hours	20,286	13,440
Labor hours	12,000	14,400

 

Using activity-based costing, applied engineering and design factory overhead for the High F model per unit is: (Rounded to the nearest cent.)

6. A) $6.13.
7. B) $11.86.
8. C) $16.28.
9. D) $32.46.
10. E) $66.73.

 

 

 

Answer:  C

Explanation:  1. $404,712 / 2,409 hours = $168 per engineering & design hour

2. $168 × 969 hours = $162,792
3. $162, 792 / 10,000 High F units = $16.28

Difficulty: 2 Medium

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

73) National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and digital camcorders.

 

Model	Annual Sales in Units
High F	10,000
Great P	16,000

 

National uses a volume-based costing system to apply factory overhead based on direct labor dollars. The unit prime costs of each product were as follows:

 

	High F			Great P
Direct materials	$	38.00		$	25.40
Direct labor	$	17.52		$	13.14

 

Budget factory overhead:
Engineering and Design	2,409	engineering hours	$	404,712
Quality Control	12,848	inspection hours		269,808
Machinery	33,726	machine hours		539,616
Miscellaneous Overhead	26,400	direct labor hours		134,904
Total			$	1,349,040

 

National’s controller had been researching activity-based costing and decided to switch to it. A special study determined National’s two products have the following budgeted activities:

 

	High F	Great P
Engineering and design hours	969	1,440
Quality control inspection hours	5,648	7,200
Machine hours	20,286	13,440
Labor hours	12,000	14,400

 

Using activity-based costing, applied quality control factory overhead for the High F model per unit is: (Rounded to the nearest cent.)

6. A) $6.13.
7. B) $11.86.
8. C) $16.28.
9. D) $32.46.
10. E) $66.73.

 

 

 

Answer:  B

Explanation:  1. $269,808 / 12,848 inspection hours = $21 per inspection hour

2. $21 × 5,648 = $118,608
3. $118,608 / 10,000 High F units = $11.86

Difficulty: 2 Medium

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

74) National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and digital camcorders.

 

Model	Annual Sales in Units
High F	10,000
Great P	16,000

 

National uses a volume-based costing system to apply factory overhead based on direct labor dollars. The unit prime costs of each product were as follows:

 

	High F			Great P
Direct materials	$	38.00		$	25.40
Direct labor	$	17.52		$	13.14

 

Budget factory overhead:
Engineering and Design	2,409	engineering hours	$	404,712
Quality Control	12,848	inspection hours		269,808
Machinery	33,726	machine hours		539,616
Miscellaneous Overhead	26,400	direct labor hours		134,904
Total			$	1,349,040

 

National’s controller had been researching activity-based costing and decided to switch to it. A special study determined National’s two products have the following budgeted activities:

 

	High F	Great P
Engineering and design hours	969	1,440
Quality control inspection hours	5,648	7,200
Machine hours	20,286	13,440
Labor hours	12,000	14,400

 

Using activity-based costing, applied machinery overhead for the High F model per unit is: (Rounded to the nearest cent.)

6. A) $6.13.
7. B) $11.86.
8. C) $16.28.
9. D) $32.46.
10. E) $66.73.

 

 

 

Answer:  D

Explanation:  1. $539,616 / 33,726 machine hours = $16 per machine hour

2. $16 × 20,286 = $324,576
3. $324,576 / 10,000 High F units = $32.46

Difficulty: 2 Medium

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

75) National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and digital camcorders.

 

Model	Annual Sales in Units
High F	10,000
Great P	16,000

 

National uses a volume-based costing system to apply factory overhead based on direct labor dollars. The unit prime costs of each product were as follows:

 

	High F			Great P
Direct materials	$	38.00		$	25.40
Direct labor	$	17.52		$	13.14

 

Budget factory overhead:
Engineering and Design	2,409	engineering hours	$	404,712
Quality Control	12,848	inspection hours		269,808
Machinery	33,726	machine hours		539,616
Miscellaneous Overhead	26,400	direct labor hours		134,904
Total			$	1,349,040

 

National’s controller had been researching activity-based costing and decided to switch to it. A special study determined National’s two products have the following budgeted activities:

 

	High F	Great P
Engineering and design hours	969	1,440
Quality control inspection hours	5,648	7,200
Machine hours	20,286	13,440
Labor hours	12,000	14,400

 

Using activity-based costing, applied miscellaneous overhead for the High F model per unit is: (Rounded to the nearest cent.)

6. A) $6.13.
7. B) $11.86.
8. C) $16.28.
9. D) $32.36.
10. E) $66.73.

 

 

 

Answer:  A

Explanation:  1. $134,904 / 26,400 = $5.11

2. ($5.11 × 12,000) / 10,000 = $6.13

Difficulty: 2 Medium

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

76) National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and digital camcorders.

 

Model	Annual Sales in Units
High F	10,000
Great P	16,000

 

National uses a volume-based costing system to apply factory overhead based on direct labor dollars. The unit prime costs of each product were as follows:

 

	High F			Great P
Direct materials	$	38.00		$	25.40
Direct labor	$	17.52		$	13.14

 

Budget factory overhead:
Engineering and Design	2,409	engineering hours	$	404,712
Quality Control	12,848	inspection hours		269,808
Machinery	33,726	machine hours		539,616
Miscellaneous Overhead	26,400	direct labor hours		134,904
Total			$	1,349,040

 

National’s controller had been researching activity-based costing and decided to switch to it. A special study determined National’s two products have the following budgeted activities:

 

	High F	Great P
Engineering and design hours	969	1,440
Quality control inspection hours	5,648	7,200
Machine hours	20,286	13,440
Labor hours	12,000	14,400

 

Using activity-based costing, total overhead per unit of the High F model is: (Rounded to the nearest cent.)

42. A) $42.61.
43. B) $45.99.
44. C) $61.32.
45. D) $66.73.
46. E) $168.00.

 

 

 

Answer:  D

Explanation:  ((404,712/2,409) × 969)/10,000 + ((269,808/12,848) × 5,648/10,000 + ((539,616/33,726) × 20,286)/10,000 + ((134,904/26,400) × 12,000)/10,000 = $16.28 + $11.86 + $32.46 + $6.13 = $66.73

Difficulty: 3 Hard

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

77) National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and digital camcorders.

 

Model	Annual Sales in Units
High F	10,000
Great P	16,000

 

National uses a volume-based costing system to apply factory overhead based on direct labor dollars. The unit prime costs of each product were as follows:

 

	High F			Great P
Direct materials	$	38.00		$	25.40
Direct labor	$	17.52		$	13.14

 

Budget factory overhead:
Engineering and Design	2,409	engineering hours	$	404,712
Quality Control	12,848	inspection hours		269,808
Machinery	33,726	machine hours		539,616
Miscellaneous Overhead	26,400	direct labor hours		134,904
Total			$	1,349,040

 

National’s controller had been researching activity-based costing and decided to switch to it. A special study determined National’s two products have the following budgeted activities:

 

	High F	Great P
Engineering and design hours	969	1,440
Quality control inspection hours	5,648	7,200
Machine hours	20,286	13,440
Labor hours	12,000	14,400

 

Using activity-based costing, applied engineering and design factory overhead for the Great P model per unit is: (Rounded to the nearest cent.)

4. A) $4.60.
5. B) $9.45.
6. C) $13.44.
7. D) $15.12.
8. E) $42.61.

 

 

 

Answer:  D

Explanation:  1. $404,712 / 2,409 hours = $168 per engineering & design hour

2. $168 × 1,440 hours = $241,920
3. $241,920 / 16,000 Great P units = $15.12

Difficulty: 2 Medium

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

78) National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and digital camcorders.

 

Model	Annual Sales in Units
High F	10,000
Great P	16,000

 

National uses a volume-based costing system to apply factory overhead based on direct labor dollars. The unit prime costs of each product were as follows:

 

	High F			Great P
Direct materials	$	38.00		$	25.40
Direct labor	$	17.52		$	13.14

 

Budget factory overhead:
Engineering and Design	2,409	engineering hours	$	404,712
Quality Control	12,848	inspection hours		269,808
Machinery	33,726	machine hours		539,616
Miscellaneous Overhead	26,400	direct labor hours		134,904
Total			$	1,349,040

 

National’s controller had been researching activity-based costing and decided to switch to it. A special study determined National’s two products have the following budgeted activities:

 

	High F	Great P
Engineering and design hours	969	1,440
Quality control inspection hours	5,648	7,200
Machine hours	20,286	13,440
Labor hours	12,000	14,400

 

Using activity-based costing, applied quality control factory overhead for the Great P model per unit is: (Rounded to the nearest cent.)

4. A) $4.60.
5. B) $9.45.
6. C) $13.44.
7. D) $15.12.
8. E) $42.61.

 

 

 

Answer:  B

Explanation:  1. $269,808 / 12,848 inspection hours = $21 per inspection hour

2. $21 × 7,200 = $151,200
3. $151,200 / 16,000 Great P units = $9.45

Difficulty: 2 Medium

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

79) National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and digital camcorders.

 

Model	Annual Sales in Units
High F	10,000
Great P	16,000

 

National uses a volume-based costing system to apply factory overhead based on direct labor dollars. The unit prime costs of each product were as follows:

 

	High F			Great P
Direct materials	$	38.00		$	25.40
Direct labor	$	17.52		$	13.14

 

Budget factory overhead:
Engineering and Design	2,409	engineering hours	$	404,712
Quality Control	12,848	inspection hours		269,808
Machinery	33,726	machine hours		539,616
Miscellaneous Overhead	26,400	direct labor hours		134,904
Total			$	1,349,040

 

National’s controller had been researching activity-based costing and decided to switch to it. A special study determined National’s two products have the following budgeted activities:

 

	High F	Great P
Engineering and design hours	969	1,440
Quality control inspection hours	5,648	7,200
Machine hours	20,286	13,440
Labor hours	12,000	14,400

 

Using activity-based costing, applied machinery overhead for the Great P model per unit is: (Rounded to the nearest cent.)

4. A) $4.60.
5. B) $9.45.
6. C) $13.44.
7. D) $15.12.
8. E) $42.61.

 

 

 

Answer:  C

Explanation:  1. $539,616 / 33,726 machine hours = $16 per machine hour

2. $16 × 13,440 = $215,040
3. $215,040 / 16,000 Great P units = $13.44

Difficulty: 2 Medium

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

80) National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and digital camcorders.

 

Model	Annual Sales in Units
High F	10,000
Great P	16,000

 

National uses a volume-based costing system to apply factory overhead based on direct labor dollars. The unit prime costs of each product were as follows:

 

	High F			Great P
Direct materials	$	38.00		$	25.40
Direct labor	$	17.52		$	13.14

 

Budget factory overhead:
Engineering and Design	2,409	engineering hours	$	404,712
Quality Control	12,848	inspection hours		269,808
Machinery	33,726	machine hours		539,616
Miscellaneous Overhead	26,400	direct labor hours		134,904
Total			$	1,349,040

 

National’s controller had been researching activity-based costing and decided to switch to it. A special study determined National’s two products have the following budgeted activities:

 

	High F	Great P
Engineering and design hours	969	1,440
Quality control inspection hours	5,648	7,200
Machine hours	20,286	13,440
Labor hours	12,000	14,400

 

Using activity-based costing, applied miscellaneous overhead for the Great P model per unit is: (Rounded to the nearest cent.)

4. A) $4.60.
5. B) $9.45.
6. C) $13.44.
7. D) $15.12.
8. E) $42.61.

 

 

 

Answer:  A

Explanation:  1. $134,904 / 26,400 = $5.11

2. ($5.11 × 14,400) / 16,000 = $4.60

Difficulty: 3 Hard

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

81) National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and digital camcorders.

 

Model	Annual Sales in Units
High F	10,000
Great P	16,000

 

National uses a volume-based costing system to apply factory overhead based on direct labor dollars. The unit prime costs of each product were as follows:

 

	High F			Great P
Direct materials	$	38.00		$	25.40
Direct labor	$	17.52		$	13.14

 

Budget factory overhead:
Engineering and Design	2,409	engineering hours	$	404,712
Quality Control	12,848	inspection hours		269,808
Machinery	33,726	machine hours		539,616
Miscellaneous Overhead	26,400	direct labor hours		134,904
Total			$	1,349,040

 

National’s controller had been researching activity-based costing and decided to switch to it. A special study determined National’s two products have the following budgeted activities:

 

	High F	Great P
Engineering and design hours	969	1,440
Quality control inspection hours	5,648	7,200
Machine hours	20,286	13,440
Labor hours	12,000	14,400

 

Using activity-based costing, total overhead per unit of Great P model is: (Rounded to the nearest cent.)

42. A) $42.61.
43. B) $45.99.
44. C) $61.32.
45. D) $66.73.
46. E) $168.00.

 

 

 

Answer:  A

Explanation:  (($404,712 / 2,409) × (1,440 / 16,000)) + (($269,808 / 12,848) × (7,200 / 16,000)) + (($539,616 / 33,726) × (13,440 / 16,000)) + (($134,904 / 26,400) × (14,440 / 16,000)) = $15.12 + $9.45 + $13.44 + $4.60 = $42.61

Difficulty: 3 Hard

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

82) Sheen Co. manufacturers laser printers. It has outlined the following overhead cost drivers:

 

Overhead Costs Pool	Cost Driver	Overhead Cost				Budgeted Level for Cost Driver
Quality control	Number of inspections	$	64,800					1,080
Machine operation	Machine hours		132,000					1,100
Materials handling	Number of batches		900					30
Miscellaneous overhead cost	Direct labor hours		48,000					4,000

 

Sheen Co. has an order for 1,000 laser printers that has the following production requirements:

Number of inspections	175
Machine hours	180
Number of batches	5
Direct labor hours	650

 

Using activity-based costing, applied quality control factory overhead for the 1,000 laser printers order is:

800. A) $7,800.
801. B) $10,000.
802. C) $10,500.
803. D) $150.
804. E) $21,600.

 

Answer:  C

Explanation:  1. $64,800 / 1,080 = $60 per inspection

2. $60 × 175 = $10,500

Difficulty: 1 Easy

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

83) Sheen Co. manufacturers laser printers. It has outlined the following overhead cost drivers:

 

Overhead Costs Pool	Cost Driver	Overhead Cost				Budgeted Level for Cost Driver
Quality control	Number of inspections	$	64,800					1,080
Machine operation	Machine hours		132,000					1,100
Materials handling	Number of batches		900					30
Miscellaneous overhead cost	Direct labor hours		48,000					4,000

 

Sheen Co. has an order for 1,000 laser printers that has the following production requirements:

Number of inspections	175
Machine hours	180
Number of batches	5
Direct labor hours	650

 

Using activity-based costing, applied machine operation overhead for the 1,000 laser printers order is:

800. A) $7,800.
801. B) $10,000.
802. C) $10,500.
803. D) $150.
804. E) $21,600.

 

Answer:  E

Explanation:  1. $132,000 / 1,100 = $120 per machine hour

2. $120 × 180 = $21,600

Difficulty: 1 Easy

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

84) Sheen Co. manufacturers laser printers. It has outlined the following overhead cost drivers:

 

Overhead Costs Pool	Cost Driver	Overhead Cost				Budgeted Level for Cost Driver
Quality control	Number of inspections	$	64,800					1,080
Machine operation	Machine hours		132,000					1,100
Materials handling	Number of batches		900					30
Miscellaneous overhead cost	Direct labor hours		48,000					4,000

 

Sheen Co. has an order for 1,000 laser printers that has the following production requirements:

Number of inspections	175
Machine hours	180
Number of batches	5
Direct labor hours	650

 

Using activity-based costing, applied materials handling factory overhead for the 1,000 laser printers order is:

800. A) $7,800.
801. B) $10,000.
802. C) $10,500.
803. D) $150.
804. E) $21,600.

 

Answer:  D

Explanation:  1. $900 / 30 = $30 per batch

2. $30 × 5 batches = $150

Difficulty: 1 Easy

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

85) Sheen Co. manufacturers laser printers. It has outlined the following overhead cost drivers:

 

Overhead Costs Pool	Cost Driver	Overhead Cost				Budgeted Level for Cost Driver
Quality control	Number of inspections	$	64,800					1,080
Machine operation	Machine hours		132,000					1,100
Materials handling	Number of batches		900					30
Miscellaneous overhead cost	Direct labor hours		48,000					4,000

 

Sheen Co. has an order for 1,000 laser printers that has the following production requirements:

Number of inspections	175
Machine hours	180
Number of batches	5
Direct labor hours	650

 

Using activity-based costing, applied miscellaneous factory overhead for the 1,000 laser printers order based on direct labor hours is:

800. A) $7,800.
801. B) $10,000.
802. C) $10,500.
803. D) $150.
804. E) $21,600.

 

Answer:  A

Explanation:  1. $48,000 / 4,000 direct labor hours = $12 per labor hour

2. $12 × 650 labor hours = $7,800

Difficulty: 1 Easy

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

86) Sheen Co. manufacturers laser printers. It has outlined the following overhead cost drivers:

 

Overhead Costs Pool	Cost Driver	Overhead Cost				Budgeted Level for Cost Driver
Quality control	Number of inspections	$	64,800					1,080
Machine operation	Machine hours		132,000					1,100
Materials handling	Number of batches		900					30
Miscellaneous overhead cost	Direct labor hours		48,000					4,000

 

Sheen Co. has an order for 1,000 laser printers that has the following production requirements:

Number of inspections	175
Machine hours	180
Number of batches	5
Direct labor hours	650

 

What is the total overhead cost per unit of the laser printers order using activity-based costing? (Rounded to the nearest cent.)

39. A) $39.55.
40. B) $40.05.
41. C) $42.25.
42. D) $50.65.
43. E) $58.30.

 

Answer:  B

Explanation:  (((64,800 / 1,080) × 175) + ((132,000 / 1,100) × 180) + ((900 / 30) × 5) + ((48,000 / 4,000) × 650)) / 1,000 ($10,500 + $21,600 + $150 + $7,800) / 1,000 = $40.05

Difficulty: 2 Medium

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

87) Diamond Cleats Co. manufactures cleats for baseball shoes. It has outlined the following overhead cost drivers:

 

Overhead Cost Pool	Cost Driver	Overhead Cost Budgeted Level for Cost Driver				Budgeted
Quality Control	# of inspections	$	78,000				1,200
Machine Time	Machine hours		188,000				800
Materials Handling	# of Batches		1,200				50
Miscellaneous Overhead Cost	Direct labor hours		59,000				5,000

 

Diamond Cleats Co. has an order for cleats that has the following production requirements:

Number of Inspections	375
Number of Machine hours	220
Number of Batches	8
Direct Labor Hours	840

 

Using activity-based costing, applied quality control factory overhead for the baseball cleat order is:

450. A) $28,450.
451. B) $30,220.
452. C) $24,375.
453. D) $21,150.
454. E) $19,600.

 

Answer:  C

Explanation:  1. $78,000 / 1,200 = $65 per inspection

2. $65 × 375 = $24,375

Difficulty: 1 Easy

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

88) Diamond Cleats Co. manufactures cleats for baseball shoes. It has outlined the following overhead cost drivers:

Overhead Cost Pool	Cost Driver	Overhead Cost Budgeted Level for Cost Driver				Budgeted
Quality Control	# of inspections	$	78,000				1,200
Machine Time	Machine hours		188,000				800
Materials Handling	# of Batches		1,200				50
Miscellaneous Overhead Cost	Direct labor hours		59,000				5,000

 

Diamond Cleats Co. has an order for cleats that has the following production requirements:

Number of Inspections	375
Number of Machine hours	220
Number of Batches	8
Direct Labor Hours	840

 

Using activity-based costing, applied machine overhead for the baseball cleat order is:

800. A) $47,800.
801. B) $55,300.
802. C) $40,500.
803. D) $59,150.
804. E) $51,700.

 

Answer:  E

Explanation:  1. $188,000 / 800 = $235 per machine hour

2. $235 × 220 = $51,700

Difficulty: 1 Easy

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

89) Diamond Cleats Co. manufactures cleats for baseball shoes. It has outlined the following overhead cost drivers:

 

Overhead Cost Pool	Cost Driver	Overhead Cost Budgeted Level for Cost Driver				Budgeted
Quality Control	# of inspections	$	78,000				1,200
Machine Time	Machine hours		188,000				800
Materials Handling	# of Batches		1,200				50
Miscellaneous Overhead Cost	Direct labor hours		59,000				5,000

 

Diamond Cleats Co. has an order for cleats that has the following production requirements:

Number of Inspections	375
Number of Machine hours	220
Number of Batches	8
Direct Labor Hours	840

 

Using activity-based costing, applied materials handling factory overhead for the baseball cleat order is:

338. A) $338.
339. B) $584.
340. C) $192.
341. D) $353.
342. E) $686.

 

Answer:  C

Explanation:  1. $1200 / 50 = $24 per batch

2. $24 × 8 batches = $192

Difficulty: 1 Easy

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

90) Diamond Cleats Co. manufactures cleats for baseball shoes. It has outlined the following overhead cost drivers:

 

Overhead Cost Pool	Cost Driver	Overhead Cost Budgeted Level for Cost Driver				Budgeted
Quality Control	# of inspections	$	78,000				1,200
Machine Time	Machine hours		188,000				800
Materials Handling	# of Batches		1,200				50
Miscellaneous Overhead Cost	Direct labor hours		59,000				5,000

 

Diamond Cleats Co. has an order for cleats that has the following production requirements:

Number of Inspections	375
Number of Machine hours	220
Number of Batches	8
Direct Labor Hours	840

 

Using activity-based costing, applied miscellaneous factory overhead for the baseball cleat order based on direct labor hours is:

745. A) $8,745.
746. B) $10,312.
747. C) $10,489.
748. D) $9,912.
749. E) $8,456.

 

Answer:  D

Explanation:  1. $59,000 / 5,000 direct labor hours = $11.80 per labor hour

2. $11.80 × 840 labor hours = $9,912

Difficulty: 1 Easy

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

91) Diamond Cleats Co. manufactures cleats for baseball shoes. It has outlined the following overhead cost drivers:

 

Overhead Cost Pool	Cost Driver	Overhead Cost Budgeted Level for Cost Driver				Budgeted
Quality Control	# of inspections	$	78,000				1,200
Machine Time	Machine hours		188,000				800
Materials Handling	# of Batches		1,200				50
Miscellaneous Overhead Cost	Direct labor hours		59,000				5,000

 

Diamond Cleats Co. has an order for cleats that has the following production requirements:

Number of Inspections	375
Number of Machine hours	220
Number of Batches	8
Direct Labor Hours	840

 

ABC costing helps an organization implement its strategy through all of the following means except:

1. A) Providing accurate cost information.
2. B) Identifying the most profitable products and customers.
3. C) Helping improve cycle time.
4. D) Identifying value added and non-value added activities.
5. E) Providing a basis for effective utilization of capacity.

 

Answer:  C

Difficulty: 1 Easy

Topic:  The Strategic Role of Activity-Based Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.; 05-01 Explain the strategic role of activity-based costing (ABC).

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

92) If Activity X had a budgeted cost of $125,000 and a budgeted activity consumption of 10,000 engineering hours, what would the activity consumption rate be?

1. A) $10 per hour.
2. B) $12.50 per hour.
3. C) $0.08 per hour.
4. D) 0.10 per hour.

 

Answer:  B

Explanation:  $1,25,000 / 10,000 hours = $12.50 per hour.

Difficulty: 1 Easy

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

93) Customer lifetime value is a type of analysis used to:

1. A) Assess the ethical practices of each salesperson-customer relationship.
2. B) Assess the current profit potential of a customer.
3. C) Assess the long term profit potential of a customer.
4. D) Assess the current profit potential of all the firm’s customers.
5. E) Assess the long term profit potential of all the firm’s customers.

 

Answer:  C

Difficulty: 1 Easy

Topic:  Activity-Based Costing

Learning Objective:  05-07 Identify key factors for successful ABC/M implementation.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Risk Analysis

 

94) The cost of unused capacity can be determined using ABC costing for the purpose of:

1. A) Determining more accurately the ABC costs.
2. B) Helping managers plan the short and longer-term use of the operating resources.
3. C) Determining product profitability.
4. D) Completing an effective activity analysis.
5. E) All of these answer choices are correct.

 

Answer:  B

Difficulty: 1 Easy

Topic:  The Strategic Role of Activity-Based Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  FN Risk Analysis; BB Resource Management

95) Multistage ABC is used when:

1. A) There are many departments in the organization.
2. B) Management wants a higher level of accuracy from the ABC calculations.
3. C) There are complex relationships among the activities.
4. D) To simplify the ABC calculations.
5. E) There is no such thing as Multistage ABC.

 

Answer:  C

Difficulty: 2 Medium

Topic:  Activity-Based Costing

Learning Objective:  05-07 Identify key factors for successful ABC/M implementation.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

96) An adaptation of ABC costing that simplifies ABC by assigning resource costs directly to cost objects is called:

1. A) Activity analysis.
2. B) Multistage ABC.
3. C) Time-Driven ABC.
4. D) Resource Consumption Accounting.
5. E) Customer profitability analysis.

 

Answer:  C

Difficulty: 1 Easy

Topic:  Activity-Based Costing

Learning Objective:  05-07 Identify key factors for successful ABC/M implementation.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

97) The Time Equation is used in ABC to:

1. A) Track the implementation of the ABC system.
2. B) Assess the amount of time required for each activity, in determining the application rate.
3. C) Incorporate complexities in the application of ABC.
4. D) Plan for the implementation of an ABC system.
5. E) None of these answer choices are correct.

 

Answer:  C

Difficulty: 1 Easy

Topic:  Activity-Based Costing

Learning Objective:  05-07 Identify key factors for successful ABC/M implementation.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

98) In the context of ABC, cross-subsidization refers to:

1. A) Production departments subsidizing each other.
2. B) Costing inaccuracies which affect the relative profitability of products.
3. C) Cross-selling products lines, which affect customer profitability.
4. D) Efforts to increased coordination among department heads.
5. E) None of these answer choices are correct.

 

Answer:  B

Difficulty: 2 Medium

Topic:  The Strategic Role of Activity-Based Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Risk Analysis

 

99) Important concepts in resource consumption accounting include all of the following except:

1. A) Variable costing.
2. B) Resource interrelationships.
3. C) Activity interrelationships.
4. D) Detail level cost information.
5. E) Treatment of idle capacity.

 

Answer:  C

Difficulty: 3 Hard

Topic:  Activity-Based Costing

Learning Objective:  05-07 Identify key factors for successful ABC/M implementation.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Resource Management

 

100) Time-driven ABC provides a direct way to measure:

1. A) Production efficiency.
2. B) Unused capacity.
3. C) Product line profitability.
4. D) Value-adding activities.
5. E) Customer value.

 

Answer:  B

Difficulty: 1 Easy

Topic:  Activity-Based Costing

Learning Objective:  05-07 Identify key factors for successful ABC/M implementation.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  FN Risk Analysis; BB Resource Management

 

 

 

101) Everlast Co. manufactures a variety of drill bits. The company’s plant is partially automated. The budget for the year includes $432,000 payroll for 4,800 direct labor-hours. Listed below is cost driver information used in the product-costing system:

 

Overhead Cost Pool	Budgeted Overhead			Cost Driver		Estimated Cost Driver Level
Machine setups	$	120,000		# of setups		120	setups
Materials handling		104,400		# of barrels		8,700	barrels
Quality control		264,000		# of inspections		1,100	inspections
Other overhead cost		144,000		# of machine hours		12,000	machine hours
Total overhead	$	632,400

 

A current product order has the following requirements:

Machine setups	8	setups
Materials handling	606	barrels
Quality inspections	80	inspections
Machine hours	830	machine hours
Direct labor hour	336	hours

 

What is the total manufacturing overhead for the current product order if the firm uses a plantwide rate based on direct labor-hours?

960. A) $9,960.
961. B) $30,240.
962. C) $43,741.
963. D) $44,268.
964. E) $109,352.

 

Answer:  D

Explanation:  1. $632,400 / 4,800 direct labor hours = $131.75 per direct labor hour

2. $131.75 × 336 hours = $44,268

Difficulty: 1 Easy

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

102) Everlast Co. manufactures a variety of drill bits. The company’s plant is partially automated. The budget for the year includes $432,000 payroll for 4,800 direct labor-hours. Listed below is cost driver information used in the product-costing system:

 

Overhead Cost Pool	Budgeted Overhead				Cost Driver			Estimated Cost Driver Level
Machine setups	$	120,000		# of setups			120		setups
Materials handling		104,400		# of barrels			8,700		barrels
Quality control		264,000		# of inspections			1,100		inspections
Other overhead cost		144,000		# of machine hours			12,000		machine hours
Total overhead	$	632,400

 

A current product order has the following requirements:

Machine setups	8	setups
Materials handling	606	barrels
Quality inspections	80	inspections
Machine hours	830	machine hours
Direct labor hour	336	hours

 

What is the total manufacturing overhead for the current product order if the firm assigns overhead costs based on machine hours?

960. A) $9,960.
961. B) $30,240.
962. C) $43,741.
963. D) $44,268.
964. E) $109,352.

 

Answer:  C

Explanation:  1. $632,400 / 12,000 = $52.70 per machine hour

2. $52.70 × 830 machine hours = $43,741

Difficulty: 1 Easy

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

103) Everlast Co. manufactures a variety of drill bits. The company’s plant is partially automated. The budget for the year includes $432,000 payroll for 4,800 direct labor-hours. Listed below is cost driver information used in the product-costing system:

 

Overhead Cost Pool	Budgeted Overhead				Cost Driver			Estimated Cost Driver Level
Machine setups	$	120,000		# of setups			120		setups
Materials handling		104,400		# of barrels			8,700		barrels
Quality control		264,000		# of inspections			1,100		inspections
Other overhead cost		144,000		# of machine hours			12,000		machine hours
Total overhead	$	632,400

 

A current product order has the following requirements:

Machine setups	8	setups
Materials handling	606	barrels
Quality inspections	80	inspections
Machine hours	830	machine hours
Direct labor hour	336	hours

 

Using ABC, how much machine setup overhead is assigned to the order?

200. A) $19,200.
201. B) $8,000.
202. C) $11,108.
203. D) $9,960.
204. E) $7,272.

 

Answer:  B

Explanation:  ($120,000 / 120) × 8 set-ups = $8,000

Difficulty: 1 Easy

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

104) Everlast Co. manufactures a variety of drill bits. The company’s plant is partially automated. The budget for the year includes $432,000 payroll for 4,800 direct labor-hours. Listed below is cost driver information used in the product-costing system:

 

Overhead Cost Pool	Budgeted Overhead				Cost Driver			Estimated Cost Driver Level
Machine setups	$	120,000		# of setups			120		setups
Materials handling		104,400		# of barrels			8,700		barrels
Quality control		264,000		# of inspections			1,100		inspections
Other overhead cost		144,000		# of machine hours			12,000		machine hours
Total overhead	$	632,400

 

A current product order has the following requirements:

Machine setups	8	setups
Materials handling	606	barrels
Quality inspections	80	inspections
Machine hours	830	machine hours
Direct labor hour	336	hours

 

Using ABC, how much material handling overhead is assigned to the order?

200. A) $19,200.
201. B) $8,000.
202. C) $11,108.
203. D) $9,960.
204. E) $7,272.

 

Answer:  E

Explanation:  ($104,400 / 8,700) × 606 barrels = $7,272

Difficulty: 1 Easy

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

105) Everlast Co. manufactures a variety of drill bits. The company’s plant is partially automated. The budget for the year includes $432,000 payroll for 4,800 direct labor-hours. Listed below is cost driver information used in the product-costing system:

 

Overhead Cost Pool	Budgeted Overhead				Cost Driver			Estimated Cost Driver Level
Machine setups	$	120,000		# of setups			120		setups
Materials handling		104,400		# of barrels			8,700		barrels
Quality control		264,000		# of inspections			1,100		inspections
Other overhead cost		144,000		# of machine hours			12,000		machine hours
Total overhead	$	632,400

 

A current product order has the following requirements:

Machine setups	8	setups
Materials handling	606	barrels
Quality inspections	80	inspections
Machine hours	830	machine hours
Direct labor hour	336	hours

 

Using ABC, how much quality control overhead is assigned to the order?

1. A) $8,000.
2. B) $9,960.
3. C) $11,108.
4. D) $19,200.
5. E) $45,933.

 

Answer:  D

Explanation:  ($264,000 / 1,100) × 80 inspections = $19,200

Difficulty: 1 Easy

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

106) Everlast Co. manufactures a variety of drill bits. The company’s plant is partially automated. The budget for the year includes $432,000 payroll for 4,800 direct labor-hours. Listed below is cost driver information used in the product-costing system:

 

Overhead Cost Pool	Budgeted Overhead				Cost Driver			Estimated Cost Driver Level
Machine setups	$	120,000		# of setups			120		setups
Materials handling		104,400		# of barrels			8,700		barrels
Quality control		264,000		# of inspections			1,100		inspections
Other overhead cost		144,000		# of machine hours			12,000		machine hours
Total overhead	$	632,400

 

A current product order has the following requirements:

Machine setups	8	setups
Materials handling	606	barrels
Quality inspections	80	inspections
Machine hours	830	machine hours
Direct labor hour	336	hours

 

Using ABC, how much other overhead is assigned to the order?

1. A) $8,000.
2. B) $9,960.
3. C) $11,108.
4. D) $19,200.
5. E) $45,992.

 

Answer:  B

Explanation:  ($144,000 / 12,000) × 830 = $9,960

Difficulty: 1 Easy

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

107) Everlast Co. manufactures a variety of drill bits. The company’s plant is partially automated. The budget for the year includes $432,000 payroll for 4,800 direct labor-hours. Listed below is cost driver information used in the product-costing system:

 

Overhead Cost Pool	Budgeted Overhead				Cost Driver			Estimated Cost Driver Level
Machine setups	$	120,000		# of setups			120		setups
Materials handling		104,400		# of barrels			8,700		barrels
Quality control		264,000		# of inspections			1,100		inspections
Other overhead cost		144,000		# of machine hours			12,000		machine hours
Total overhead	$	632,400

 

A current product order has the following requirements:

Machine setups	8	setups
Materials handling	606	barrels
Quality inspections	80	inspections
Machine hours	830	machine hours
Direct labor hour	336	hours

 

Using ABC, how much total overhead is assigned to the order?

160. A) $42,160.
161. B) $43,740.
162. C) $44,268.
163. D) $44,432.
164. E) $45,993.

 

Answer:  D

Explanation:  (($120,000 / 120) × 8) + (($104,400 / 8,700) × 606) + (($264,000 / 1,100) × 80) + (($144,000 / 12,000) × 830) = $8,000 + $7,272 + $19,200 + $9,960 = $44,432

Difficulty: 2 Medium

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

108) Shaver Co. manufactures a variety of electric razors for men and women. The company’s plant is partially automated. Listed below is cost driver information used in the product-costing system:

Overhead Cost Pool	Budgeted Overhead Cost			Budgeted Cost Driver Level			Cost Driver
Machinery depreciation/maintenance	$	168,640			27,200		Machine hours
Factory depreciation/utilities/insurance		127,840			27,200		Machine hours
Product design		554,400			38,500		Hours in design
Material handling		1,078,000			134,750		Pounds of raw materials

 

In addition, Shaver expects to spend $514,368 for 8,037 direct labor-hours. Two current product orders had the following requirements:

 

	Men’s Razors				Women’s Razors
Units produced and sold		20,000				26,000
Direct labor hours		30				40
Pounds of raw materials		860				750
Hours in design		20				23
Machine hours		65				50

 

What is the total manufacturing overhead assigned to the current order for Men’s Razors if the firm uses a volume-based plant wide overhead rate based on direct labor dollars?

112. A) $112.50.
113. B) $150.00.
114. C) $243.75.
115. D) $7,200.00.
116. E) $15,600.00.

 

Answer:  D

Explanation:  1. ($168,640 + $127,840 + $554,400 + $1,078,000) / $514,368 = $3.75 per direct-labor dollar

2. $514,368 / 8,037 hours = $64 per hour for labor
3. $64 per hour × 30 direct labor hours × $3.75 overhead per labor dollar = $7,200

Difficulty: 2 Medium

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

109) Shaver Co. manufactures a variety of electric razors for men and women. The company’s plant is partially automated. Listed below is cost driver information used in the product-costing system:

Overhead Cost Pool	Budgeted Overhead Cost			Budgeted Cost Driver Level			Cost Driver
Machinery depreciation/maintenance	$	168,640			27,200		Machine hours
Factory depreciation/utilities/insurance		127,840			27,200		Machine hours
Product design		554,400			38,500		Hours in design
Material handling		1,078,000			134,750		Pounds of raw materials

 

In addition, Shaver expects to spend $514,368 for 8,037 direct labor-hours. Two current product orders had the following requirements:

 

	Men’s Razors				Women’s Razors
Units produced and sold		20,000				26,000
Direct labor hours		30				40
Pounds of raw materials		860				750
Hours in design		20				23
Machine hours		65				50

 

What is the total manufacturing overhead assigned to the current order for Women’s Razors if the firm uses a volume-based plant wide overhead rate based on direct labor hours?

112. A) $112.50.
113. B) $150.00.
114. C) $187.50.
115. D) $9,600.00.
116. E) $12,000.00.

 

Answer:  D

Explanation:  1. ($168,640 + $127,840 + $554,400 + $1,078,000) / 8,037 = $240 per direct-labor hour

2. $240 × 40 direct labor hours = $9,600

Difficulty: 2 Medium

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

110) Shaver Co. manufactures a variety of electric razors for men and women. The company’s plant is partially automated. Listed below is cost driver information used in the product-costing system:

 

Overhead Cost Pool	Budgeted Overhead Cost			Budgeted Cost Driver Level			Cost Driver
Machinery depreciation/maintenance	$	168,640			27,200		Machine hours
Factory depreciation/utilities/insurance		127,840			27,200		Machine hours
Product design		554,400			38,500		Hours in design
Material handling		1,078,000			134,750		Pounds of raw materials

 

In addition, Shaver expects to spend $514,368 for 8,037 direct labor-hours. Two current product orders had the following requirements:

 

	Men’s Razors				Women’s Razors
Units produced and sold		20,000				26,000
Direct labor hours		30				40
Pounds of raw materials		860				750
Hours in design		20				23
Machine hours		65				50

 

Using ABC, how much facility-level overhead is assigned to the current order for Men’s Razors?

403. A) $403.00.
404. B) $310.00.
405. C) $708.50.
406. D) $545.00.
407. E) $936.00.

 

Answer:  C

Explanation:  [($168,640 + $127,840) / 27,200)] × 65 = $708.50

Difficulty: 2 Medium

Topic:  Identify Cost Drivers

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

111) Shaver Co. manufactures a variety of electric razors for men and women. The company’s plant is partially automated. Listed below is cost driver information used in the product-costing system:

 

Overhead Cost Pool	Budgeted Overhead Cost			Budgeted Cost Driver Level			Cost Driver
Machinery depreciation/maintenance	$	168,640			27,200		Machine hours
Factory depreciation/utilities/insurance		127,840			27,200		Machine hours
Product design		554,400			38,500		Hours in design
Material handling		1,078,000			134,750		Pounds of raw materials

 

In addition, Shaver expects to spend $514,368 for 8,037 direct labor-hours. Two current product orders had the following requirements:

 

	Men’s Razors				Women’s Razors
Units produced and sold		20,000				26,000
Direct labor hours		30				40
Pounds of raw materials		860				750
Hours in design		20				23
Machine hours		65				50

 

Using ABC, how much product-level overhead is assigned to the current order for Men’s Razors?

218. A) $218.00.
219. B) $250.70.
220. C) $331.20.
221. D) $284.00.
222. E) $288.00.

 

Answer:  E

Explanation:  ($554,400 / 38,500) × 20 = $288.00

Difficulty: 2 Medium

Topic:  Identify Cost Drivers

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

112) Shaver Co. manufactures a variety of electric razors for men and women. The company’s plant is partially automated. Listed below is cost driver information used in the product-costing system:

 

Overhead Cost Pool	Budgeted Overhead Cost			Budgeted Cost Driver Level			Cost Driver
Machinery depreciation/maintenance	$	168,640			27,200		Machine hours
Factory depreciation/utilities/insurance		127,840			27,200		Machine hours
Product design		554,400			38,500		Hours in design
Material handling		1,078,000			134,750		Pounds of raw materials

 

In addition, Shaver expects to spend $514,368 for 8,037 direct labor-hours. Two current product orders had the following requirements:

 

	Men’s Razors				Women’s Razors
Units produced and sold		20,000				26,000
Direct labor hours		30				40
Pounds of raw materials		860				750
Hours in design		20				23
Machine hours		65				50

 

Using ABC, how much product-level overhead is assigned to the current order for Women’s Razors?

218. A) $218.00.
219. B) $250.70.
220. C) $331.20.
221. D) $284.00.
222. E) $288.00.

 

Answer:  C

Explanation:  ($554,400 / $38,500) × 23 = $331.20

Difficulty: 2 Medium

Topic:  Identify Cost Drivers

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

113) Shaver Co. manufactures a variety of electric razors for men and women. The company’s plant is partially automated. Listed below is cost driver information used in the product-costing system:

 

Overhead Cost Pool	Budgeted Overhead Cost			Budgeted Cost Driver Level			Cost Driver
Machinery depreciation/maintenance	$	168,640			27,200		Machine hours
Factory depreciation/utilities/insurance		127,840			27,200		Machine hours
Product design		554,400			38,500		Hours in design
Material handling		1,078,000			134,750		Pounds of raw materials

 

In addition, Shaver expects to spend $514,368 for 8,037 direct labor-hours. Two current product orders had the following requirements:

 

	Men’s Razors				Women’s Razors
Units produced and sold		20,000				26,000
Direct labor hours		30				40
Pounds of raw materials		860				750
Hours in design		20				23
Machine hours		65				50

 

Using ABC, how much batch-level overhead is assigned to the current order for Women’s Razors based on pounds of raw materials?

1. A) $6,000.
2. B) $6,880.
3. C) $5,332.
4. D) $8,175.
5. E) $9,374.

 

Answer:  A

Explanation:  ($1,078,000 / 134,750) × 750 = $6,000

Difficulty: 2 Medium

Topic:  Identify Cost Drivers

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

114) Wang Company has established the following overhead cost pools and cost drivers for the month of May:

Cost Pool	Overhead Costs			Cost Driver Levels
Purchase orders	$	30,000				50	orders
Machine setups		50,000				100	setups
Electricity		10,000				10,000	kilowatt hours

 

The following information pertains to the actual consumption of activity resources for two sample jobs completed during May.

	Job M1		Job M2
Number of units produced	500		1,000
Number of purchase orders	15		10
Number of setups	20		10
Number of kilowatt hours	500		1,000

 

What is the activity-based overhead rate per purchase order?

615. A) $615.
616. B) $600.
617. C) $575.
618. D) $550.
619. E) $500.

 

Answer:  B

Explanation:  ($30,000 / 50 orders) = $600

Difficulty: 1 Easy

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

115) Wang Company has established the following overhead cost pools and cost drivers for the month of May:

Cost Pool	Overhead Costs			Cost Driver Levels
Purchase orders	$	30,000				50	orders
Machine setups		50,000				100	setups
Electricity		10,000				10,000	kilowatt hours

 

The following information pertains to the actual consumption of activity resources for two sample jobs completed during May.

	Job M1		Job M2
Number of units produced	500		1,000
Number of purchase orders	15		10
Number of setups	20		10
Number of kilowatt hours	500		1,000

 

Using ABC, what is the overhead cost per unit produced for Job M2?

39. A) $39.
40. B) $25.
41. C) $20.
42. D) $12.
43. E) $10.

 

Answer:  D

Explanation:  1. ($30,000 / 50) × 10 + ($50,000 / 100) × 10 + ($10,000 / 10,000) × 1,000 = $12,000

2. $12,000 / 1,000 = $12

Difficulty: 1 Easy

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

116) Orange, Inc. has identified the following cost drivers for its expected overhead costs for the year:

Cost Pools	Budgeted Cost			Cost Driver	Cost Driver Level
Setup	$	40,000		Number of setups	200
Ordering		20,000		Number of orders	1,000
Maintenance		50,000		Machine hours	5,000
Power		10,000		Kilowatt hours	10,000

 

Total direct labor hours budgeted = 2,000 hours.

 

The following data applies to Product X, one of the products completed during the year.

 

Direct materials	$	1,000
Direct labor	$	1,200
Units completed		100
Direct labor hours		40
Number of setups		4
Number of orders		8
Machine hours		50
Kilowatt hours		100

 

If a volume-based costing system based on direct labor hours to assign overhead is used, the total overhead cost for Product X will be:

500. A) $1,500.
501. B) $1,560.
502. C) $2,000.
503. D) $2,400.
504. E) $2,560.

 

Answer:  D

Explanation:  1. ($40,000 + $20,000 + $50,000 + $10,000) / 2,000 hours = $60 per direct labor hour

2. $60 × 40 direct labor hours = $2,400

Difficulty: 1 Easy

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

117) Orange, Inc. has identified the following cost drivers for its expected overhead costs for the year:

Cost Pools	Budgeted Cost			Cost Driver	Cost Driver Level
Setup	$	40,000		Number of setups	200
Ordering		20,000		Number of orders	1,000
Maintenance		50,000		Machine hours	5,000
Power		10,000		Kilowatt hours	10,000

 

Total direct labor hours budgeted = 2,000 hours.

 

The following data applies to Product X, one of the products completed during the year.

 

Direct materials	$	1,000
Direct labor	$	1,200
Units completed		100
Direct labor hours		40
Number of setups		4
Number of orders		8
Machine hours		50
Kilowatt hours		100

 

If the activity-based cost drivers are used to allocate overhead cost, the total overhead cost of Product X will be:

500. A) $1,500.
501. B) $1,560.
502. C) $2,000.
503. D) $2,400.
504. E) $2,560.

 

Answer:  B

Explanation:  [($40,000 / 200) × 4] + [($20,000 / 1,000) × 8] + [($50,000 / 5,000) × 50] + [($10,000 / 10,000) × 100] = $1,560

Difficulty: 1 Easy

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

118) Zeta Company is preparing its annual profit plan. As part of its analysis of the profitability of individual products, the controller estimates the amount of manufacturing overhead that should be assigned to each of the two product lines from the information given below.

 

	Wall Mirrors		Specialty Windows
Total units produced	25		25
Total number of material moves	5		15
Direct labor hours per unit	200		200

 

Budgeted material-handling costs are $50,000.

 

Under a costing system that allocates manufacturing overhead on the basis of direct labor hours, the material-handling cost per wall mirror is:

1. A) $0.
2. B) $500.
3. C) $1,000.
4. D) $2,000.
5. E) $5,000.

 

Answer:  C

Explanation:  1. $50,000 budgeted material-handling costs / 400 total direct labor hours = $125 per direct labor hour

2. $125 × 200 direct labor hours for wall mirrors = $25,000
3. $25,000 / 25 units = $1,000 = material-handling cost per wall mirror.

Difficulty: 2 Medium

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

119) Zeta Company is preparing its annual profit plan. As part of its analysis of the profitability of individual products, the controller estimates the amount of manufacturing overhead that should be assigned to each of the two product lines from the information given below.

 

	Wall Mirrors		Specialty Windows
Total units produced	25		25
Total number of material moves	5		15
Direct labor hours per unit	200		200

 

Budgeted material-handling costs are $50,000.

 

The material-handling cost per wall mirror under ABC is:

1. A) $0.
2. B) $500.
3. C) $1,000.
4. D) $2,000.
5. E) $5,000.

 

Answer:  B

Explanation:  1. $50,000 / 20 material moves = $2,500 per material move

2. $2,500 per material move × 5 material moves = $12,500
3. $12,500 / 25 wall mirror units produced = material-handling cost per wall mirror = $500

Difficulty: 2 Medium

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

120) Pasternik Company produces and sells two products, Alpha and Zeta. The following information is available relating to its setup activities:

	Alpha			Zeta
Units produced		250			20,000
Batch size (units)		10			500
Total direct labor hours		1,000			39,000
Cost per setup	$	2,000		$	2,000

 

With a volume-based costing system that applies overhead based on direct labor hours, the setup cost portion of overhead for each unit is: (Rounded to the nearest cent.)

 

	Alpha			Zeta
A)	$	3.25		$	3.25
B)	$	13.00		$	6.34
C)	$	8.00		$	0.10
D)	$	25.50		$	25.50
E)	$	102.00		$	49.73

1. A) Option A
2. B) Option B
3. C) Option C
4. D) Option D
5. E) Option E

 

Answer:  B

Explanation:

1. General Calculations:
2. # of Alpha batches = 250 / 10 = 25
3. # of Zeta batches = 20,000 / 500 = 40
4. Total number of batches = 65 = 25 + 40
5. Total Set-up Cost = $2,000 × 65 batches = $130,000
6. Set-up cost per direct labor hour = $130,000 / 40,000 total direct labor hours = $3.25 per direct labor hour
7. Alpha:
8. Set-up cost for Alpha = $3.25 × 1,000 Alpha direct labor hours = $3,250
9. Total Alpha Units Produced = 250 units
10. Alpha overhead cost per unit = $3,250 / 250 units = $13.00
11. Zeta:
12. Set-up cost for Zeta = $3.25 × 39,000 Zeta direct labor hours = $126,750
13. Total Zeta Units Produced = 20,000 units
14. Zeta overhead cost per unit = $126,750 / 20,000 = $6.3375 = $6.34 (rounded)

Difficulty: 3 Hard

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

121) Pasternik Company produces and sells two products, Alpha and Zeta. The following information is available relating to its setup activities:

 

	Alpha			Zeta
Units produced		250			20,000
Batch size (units)		10			500
Total direct labor hours		1,000			39,000
Cost per setup	$	2,000		$	2,000

 

Use of activity-based costing would allocate the following amounts of setup cost to each unit: (Rounded to the nearest cent.)

 

	Alpha			Zeta
A)	$	200.00		$	4.00
B)	$	500.00		$	1,025.64
C)	$	6.42		$	6.50
D)	$	80.00		$	50.00
E)	$	8.00		$	0.10

1. A) Option A
2. B) Option B
3. C) Option C
4. D) Option D
5. E) Option E

 

Answer:  A

Explanation:

1. General Calculations:
2. # of Alpha batches = 250 / 10 = 25
3. # of Zeta batches = 20,000 / 500 = 40

iii. Total batches = 65 = 40 + 25

2. Alpha:
3. Total Set-up Cost = 25 × $2,000 = $50,000
4. $50,000 / 250 units = $200 per unit
5. Zeta:
6. Total Set-up Cost = 40 × $2,000 = $80,000
7. $80,000 / 20,000 = $4 per unit

Difficulty: 2 Medium

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

122) Pasternik Company produces and sells two products, Alpha and Zeta. The following information is available relating to its setup activities:

	Alpha			Zeta
Units produced		250			20,000
Batch size (units)		10			500
Total direct labor hours		1,000			39,000
Cost per setup	$	2,000		$	2,000

 

Assume the cost per setup remains at $2,000 but that the batch size for product Alpha is changed from 10 to 25 units per batch. Using activity-based and a volume-based overhead costing that uses direct labor-hours to assign overhead, the amount of setup cost applied to each unit of product Alpha would be: (Rounded to the nearest cent.)

 

	Activity Based Costing			Volume Based Costing
A)	$	400.00		$	9.00
B)	$	500.00		$	8.00
C)	$	80.00		$	10.00
D)	$	2.25		$	4.50
E)	None of these answer choices is correct.

1. A) Option A
2. B) Option B
3. C) Option C
4. D) Option D
5. E) Option E

 

Answer:  C

Explanation:  1. General Calculations:

1. # of Alpha batches = 250 / 25 = 10
2. # of Zeta batches = 20,000 / 500 = 40

iii. Total number of batches = 50 = 10 + 40

1. Total Set-up Cost = $2,000 × 50 batches = $100,000
2. Set-up cost per direct labor hour = $100,000 / 40,000 total direct labor hours = $2.50 per direct labor hour
3. Alpha Activity-Based:
4. Total Set-up Cost = 10 × $2,000 = $20,000
5. $20,000 / 250 units = $80 per unit
6. Alpha Volume-Based:
7. Set-up cost for Alpha = $2.50 × 1,000 Alpha direct labor hours = $2,500
8. Total Alpha Units Produced = 250 units

iii. Alpha overhead cost per unit = $2,500 / 250 units = $10

Difficulty: 3 Hard

Topic:  A Comparison of Volume-Based and Activity-Based Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

123) Nerrod Company sells its products at $500 per unit, net 30. The firm’s gross margin ratio is 40 percent. The firm has estimated the following operating costs:

 

Activity	Cost Driver and Rate
Sales calls	$	400	per visit
Order processing	$	100	per order
Deliveries	$	50	per order + $0.50 per mile
Sales returns	$	60	per return and $3 restocking per unit returned

 

Nerrod Company has gathered the following data pertaining to activities it performed for two of its customers:

 

	XBT		NINTO
Number of orders	10		2
Number of parts per order	500		2,000
Sales returns:
Number of returns	4		10
Number of units returned	40		50
Number of sales calls	6		10
Miles per delivery	10		20
Shipping terms	FOB, Factory		FOB, Destination

 

What is Nerrod’s total customer-sustaining cost applicable to Ninto?

400. A) $400.
401. B) $600.
402. C) $4,000.
403. D) $6,300.
404. E) $6,420.

 

Answer:  C

Explanation:  10 sales calls × $400 per sales call = $4,000

Difficulty: 1 Easy

Topic:  Customer Cost Analysis

Learning Objective:  05-06 Use an activity-based approach to analyze customer profitability.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

124) Nerrod Company sells its products at $500 per unit, net 30. The firm’s gross margin ratio is 40 percent. The firm has estimated the following operating costs:

 

Activity	Cost Driver and Rate
Sales calls	$	400	per visit
Order processing	$	100	per order
Deliveries	$	50	per order + $0.50 per mile
Sales returns	$	60	per return and $3 restocking per unit returned

 

Nerrod Company has gathered the following data pertaining to activities it performed for two of its customers:

 

	XBT		NINTO
Number of orders	10		2
Number of parts per order	500		2,000
Sales returns:
Number of returns	4		10
Number of units returned	40		50
Number of sales calls	6		10
Miles per delivery	10		20
Shipping terms	FOB, Factory		FOB, Destination

 

What is Nerrod’s total customer batch-level cost applicable to Ninto?

800. A) $800.
801. B) $920.
802. C) $2,300.
803. D) $2,420.
804. E) $6,300.

 

Answer:  B

Explanation:  Order Processing and Number of sales returns  ($100 × 2) + [($50  × 2) + ($0.50 × 2 × 20)] + ($60 × 10) = $920

Difficulty: 3 Hard

Topic:  Customer Cost Analysis

Learning Objective:  05-06 Use an activity-based approach to analyze customer profitability.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

125) Nerrod Company sells its products at $500 per unit, net 30. The firm’s gross margin ratio is 40 percent. The firm has estimated the following operating costs:

 

Activity	Cost Driver and Rate
Sales calls	$	400	per visit
Order processing	$	100	per order
Deliveries	$	50	per order + $0.50 per mile
Sales returns	$	60	per return and $3 restocking per unit returned

 

Nerrod Company has gathered the following data pertaining to activities it performed for two of its customers:

 

	XBT		NINTO
Number of orders	10		2
Number of parts per order	500		2,000
Sales returns:
Number of returns	4		10
Number of units returned	40		50
Number of sales calls	6		10
Miles per delivery	10		20
Shipping terms	FOB, Factory		FOB, Destination

 

What is Nerrod’s total sales-sustaining cost applicable to XBT as a customer?

1. A) $0.
2. B) $920.
3. C) $4,120.
4. D) $6,300.
5. E) $6,420.

 

Answer:  A

Explanation:  0 since no sales-sustaining costs are listed above

Difficulty: 2 Medium

Topic:  Customer Cost Analysis

Learning Objective:  05-06 Use an activity-based approach to analyze customer profitability.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

126) Nerrod Company sells its products at $500 per unit, net 30. The firm’s gross margin ratio is 40 percent. The firm has estimated the following operating costs:

 

Activity	Cost Driver and Rate
Sales calls	$	400	per visit
Order processing	$	100	per order
Deliveries	$	50	per order + $0.50 per mile
Sales returns	$	60	per return and $3 restocking per unit returned

 

Nerrod Company has gathered the following data pertaining to activities it performed for two of its customers:

 

	XBT		NINTO
Number of orders	10		2
Number of parts per order	500		2,000
Sales returns:
Number of returns	4		10
Number of units returned	40		50
Number of sales calls	6		10
Miles per delivery	10		20
Shipping terms	FOB, Factory		FOB, Destination

 

What is Nerrod’s total customer unit-level cost applicable to XBT as a customer?

50. A) $50.
51. B) $480.
52. C) $4,120.
53. D) $4,125.
54. E) $6,300.

 

Answer:  B

Explanation:  Restocking sales returns, 4 × 40 × $3 = $480

Difficulty: 2 Medium

Topic:  Customer Cost Analysis

Learning Objective:  05-06 Use an activity-based approach to analyze customer profitability.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

127) Service and not-for-profit organizations often:

1. A) Have ABC systems which are similar to those of manufacturing firms.
2. B) Do not have changeable outputs.
3. C) Are unable to benefit from ABC costing.
4. D) Do not have ABC systems which are similar to those of manufacturing firms.
5. E) None of these answer choices are correct.

 

Answer:  D

Difficulty: 1 Easy

Topic:  The Strategic Role of Activity-Based Costing

Learning Objective:  05-05 Describe how ABC/M is used in organizations.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

128) Customer profitability analysis:

1. A) Always shows that the company with the highest total sales generates the highest net customer profit.
2. B) Always shows that the company with the lowest total sales generates the lowest net customer profit.
3. C) Produces the same results as a Pareto analysis.
4. D) Helps identify actions that affect customer profitability.
5. E) None of these answer choices are correct.

 

Answer:  D

Difficulty: 1 Easy

Topic:  Customer Profitability Analysis

Learning Objective:  05-06 Use an activity-based approach to analyze customer profitability.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

129) Scott Cameras produces digital cameras and have decided to switch from a volume-based system to an activity-based system. Scott produced 100,000 digital cameras in the most recent quarter and has determined that their total activity costs were: $3,000,000 of materials cost, $500,000 of labor costs, $50,000 of inspection costs, and $500,000 of packaging costs. It takes 30 minutes of labor to produce each camera, inspections are done for 20% of all cameras produced, and cameras are packaged individually.

 

Required:

What are the driver rates for each activity?

 

Answer:  Materials Cost = $3,000,000 / 100,000 = $30 per camera

Labor Cost = $500,000 / (100,000 × 0.5) = $10 per camera

Inspection Cost = $50,000 / (100,000 × 0.2) = $2.50 per camera inspected

Packaging Cost = $500,000 / 100,000 = $5 per camera

Difficulty: 1 Easy

Topic:  Identify Cost Drivers

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

130) Plant overhead for ABC Corp in $150 million per year, a portion of which (20%) is attributable to inspection costs which are charged to products on the basis the number of parts in the products. The plant produces 500,000 units per year, and on the average, each product has 20 parts.

 

Required:

What is the average inspection cost in a product? What is the inspection cost for a product with 50 parts?

 

Answer:  $150 million × 0.2 = $30 million

500,000 × 20 = 10 million parts

$30 million / 10 million = $3 per part

 

Total inspection cost:

$3 × 20 = $60 for 20 parts

$3 × 50 = $150 for 50 parts

Difficulty: 1 Easy

Topic:  Identify Cost Drivers

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

131) Johnson Associates is a catering firm in Tucson, Arizona, with revenue of $4 million. The business began ten years ago as a one-owner bakery, but has dramatically changed in size and function during the past five years. The four partners foresee the business doubling in sales revenue within two years, and expect the firm to expand into other services including flowers, furnishings, decorations, and music. Johnson Associates employs six full-time and ten part-time employees. The four partners also work full-time, each partner managing a separate business function. The firm currently uses a volume-based costing system installed seven years ago and modified three years later.

 

Required:

(1) With just the above information, comment on Johnson Associates changing and future costing system needs.

(2) Is Johnson Associates a probable candidate for an activity-based costing system (ABC)? Why or why not?

 

Answer:  (1) Johnson Associates has experienced rapid growth, and expects the same rapid growth in the near future. However, growth by itself would not necessarily create a need for a new cost accounting system. More significant is Johnson’s expanding line of service. A costing system like ABC gives a firm more precise cost information on specific products and services, which would allow Johnson to better control product and service development, manufacture and marketing. Whatever strategies Johnson Associates choose, they should have a costing system that reports costs and their causal relationships.

(2) An ABC system can work for most firms, including service type firms like Johnson Associates. Future growth needs a precise cost basis for direction and control. Many, if not most, of Johnson Associates’ costs are activity driven, and the variety of service is noticeably expanding. The major potential limitations of ABC for Johnson would be the high resource cost and time commitment to develop and install an appropriate ABC system.

Difficulty: 1 Easy

Topic:  The Strategic Role of Activity-Based Costing

Learning Objective:  05-01 Explain the strategic role of activity-based costing (ABC).

Bloom’s:  Evaluate

AACSB:  Analytical Thinking; Communication

AICPA:  BB Critical Thinking; FN Decision Making

 

 

132) Two students in a cost accounting class were arguing about the need to gather good unit cost information for manufacturing. One student, Travis, maintained that a firm producing and selling large quantities of relatively few products would have no need for an ABC system, since an ABC system is usually more expensive to implement than a volume-based system. Alicia countered that even firms with high-volume homogeneous products could benefit from a cost management technique like activity-based costing (ABC).

 

Required:

Choose sides in this discussion and present justifications for your choice.

 

Answer:  ABC is most useful in firms making a wide variety of products, because ABC tracks costs to their causes, and generates more precise cost bases for individual products and services than a volume-based costing system usually does. This precision facilitates strategic analyses. Alicia would have to agree with Travis on the higher cost in resources and time to use ABC, but could argue for a favorable benefit/cost ratio that most firms experience when ABC is correctly designed and implemented.

Difficulty: 1 Easy

Topic:  A Comparison of Volume-Based and Activity-Based Costing

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Evaluate

AACSB:  Analytical Thinking; Communication

AICPA:  BB Critical Thinking; FN Decision Making

 

 

 

133) The controller for Alabama Cooking Oil Co. established the following overhead cost pools and cost drivers:

Overhead Cost Pool	Budgeted Overhead	Cost Driver	Estimated Cost Driver Level
Machine setups	$186,000	# of setups	120 setups
Material handling	124,800	# of barrels	7,800 barrels
Quality control	316,200	# of inspections	1,020 inspections
Other overhead cost	172,500	# of machine hrs	11,500 machine hrs

 

An order of 800 barrels of cooking oil used:

# of setups	14
# of barrels	800
# of inspections	22
# of machine hours	1,100

 

Required:

(1) What is the overhead rate per machine hour if the number of machine hours is used as a single cost driver under traditional costing system? (Round your intermediate calculation to the nearest cent and final answer to the nearest whole dollar.)

(2) Using volume-based costing, how much overhead is assigned to the order based on machine hours as a single cost driver?

(3) Using ABC costing, how much total overhead is assigned to the order?

 

 

Answer:

(1)

Machine Setup	$	186,000
Materials Handling		124,800
Quality Control		316,200
Other Overhead		172,500
	$	799,500
		÷11,500
Volume-Based Rate =	$	69.52

 

(2) 1,100 machine hours × $69.52 per machine hour = $76,472

 

(3)

Cost Pools	Activity Costs				Cost Driver Units				Overhead Rate
Machine Setup	$	186,000					120			$	1,550.00
Materials Handling	$	124,800					7,800			$	16.00
Quality Control	$	316,200					1,020			$	310.00
Other Overhead	$	172,500					11,500			$	15.00
Cost Assignment:
Machine Setup	$	1,550	×	14		$	21,700
Materials Handling	$	16	×	800			12,800
Quality Control	$	310	×	22			6,820
Other Overhead	$	15	×	1,100		$	16,500
Total Product Cost						$	57,820
Barrels Produced							800
Cost per barrel						$	72.28

 

Difficulty: 2 Medium

Topic:  A Comparison of Volume-Based and Activity-Based Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

134) Blackwelder Co. manufactures a variety of razors used by both men and women. The company’s plant is partially automated. The company uses an activity-based cost system. Listed below is cost driver information used in the product-costing system:

 

Overhead Cost pool	Budgeted Overhead Cost	Budgeted Cost Driver Level			Cost Driver
Machine depreciation/	$227,500		25,000			Machine hours
Maintenance Factory depreciation/ Utilities/insurance	154,940		25,400			Machine hours
Product design	665,720		35,600			Hours in design
Material purchasing/storing	1,293,760		124,400			Raw materials

 

Two current product orders had the following requirements:

 

	Men’s Razors	Women’s Razor
Units produced and sold	26,000	30,000
Direct labor hours	50	40
Pounds of raw materials	980	1,120
Hours in design	32	38
Machine hours	85	60

 

Required:

1. Using ABC costing, how much overhead is assigned to the order for men’s razors?
2. Using ABC costing, how much overhead is assigned to the order for women’s razors?

 

 

Answer:  1. $12,083. 2. $13,271

Machine depreciation/maintenance	$	227,500		machine Hours							25,000
Factory depreciation/utilities insurance	$	154,940		machine Hours							25,400
Product design	$	665,720		hours in design							35,600
Materials purchasing/storage	$	1,293,760		raw materials							124,400
Product	Men’s Razors				Women’s Razors
No. of units produced		26,000					30,000
DM Cost ($)
DL Cost ($)
Machine Hours		85					60
Hours in Design		32					38
Pounds of Raw Materials		980					1,120
Cost Pools	Activity Costs				Cost Driver Units			Overhead Rate
Machine depreciation/maintenance	$	227,500					25,000		$		9.10
Factory depreciation/utilities insurance	$	154,940					25,400		$		6.10
Product design	$	665,720					35,600		$		18.70
Materials purchasing/storage	$	1,293,760					124,400		$		10.40
Cost Assignment						Men’s Razors			Women’s Razors
Machine depreciation/maintenance						$	774		$		546
Factory depreciation/utilities insurance							519				366
Product design							598				711
Materials purchasing/storage							10,192				11,648
Total Overhead						$	12,083		$		13,271

Difficulty: 2 Medium

Topic:  Product Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  FN Measurement

 

 

135) Classify each of the following costs as unit-level (U), batch-level (B), product-level (P), or facility-level (F) costs and identify an appropriate example of a possible cost driver for each item:

 

(1) Parts administration

(2) Production scheduling

(3) Materials handling

(4) Machine operations

(5) Personnel administration and training

(6) Plant security

(7) Machine setups

(8) Engineering changes

(9) Product design

(10) Rent for factory plant

 

Answer:

(1) Parts administration: (P); number of parts

(2) Production scheduling: (B); number of production runs or schedules

(3) Materials handling: (B); number of units or weight of materials handled

(4) Machine operations: (U); machine hours

(5) Personnel administration and training: (F); number of employees trained, number of new employees

(6) Plant security: (F); number of square feet

(7) Machine setups: (B); number of setups or setup hours

(8) Engineering changes: (P); number of change orders issued, number of products

(9) Product design: (P); design hours or number of products

(10) Rent for factory plant: (F); number of square feet

Difficulty: 2 Medium

Topic:  Identify Cost Drivers

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

136) Pairing Company has the following cost drivers identified as A through F for determining product manufacturing overhead costs.

 

(A) Number of pieces of equipment

(B) Number of direct material purchase orders

(C) Number of production runs

(D) Square feet of warehouse space

(E) Number of machine hours

(F) Square feet of factory space

 

For each of the following activity cost pools, choose the letter of the most appropriate cost driver for each cost pool.

 

Heating costs

Machinery power costs

Machinery set-up costs

Equipment maintenance costs for the various types of equipment

Materials storage costs

Purchasing department costs

 

Answer:

F	Heating costs
E	Machinery power costs
C	Machinery set-up costs
E	Equipment maintenance costs
D	Materials storage costs
B	Purchasing department costs

Difficulty: 1 Easy

Topic:  Identify Cost Drivers

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

137) Altima Company uses an overhead costing system based on direct labor hours for its two products X and Y. The company is considering adopting an activity-based costing system, and collects the following information for the month of October.

 

	Product X			Product Y
Production units		20,000			2,000
Direct materials cost per unit	$	50.00		$	40.00
Direct labor cost per hour	$	10.00		$	10.00
Direct labor hours		34,000			6,000

 

Overhead	Overhead	Total	Activity Consumption
Cost pool	cost	activity	Product X			Product Y
Machine setup	$60,000	1,000 setups		300			700
Engineering change order	40,000	100 orders		20			80
Facility rent	90,000	1,000 sq. feet		300			700

 

Required:

(1) Compute the unit manufacturing cost of each product under a volume-based costing system based on direct labor hours.

(2) Compute the unit manufacturing cost of each product under the activity-based costing system.

Answer:

1.

Volume-Based Method	(calculations)							Total
Direct Materials	$50 × 20,000; $40 × 2,000	$	1,000,000		$	80,000			$	1,080,000
Direct Labor	$10 × 34,000; $10 × 6,000	$	340,000		$	60,000			$	400,000
Overhead	$4.75 × 34,000; $4.75 × 6,000	$	161,500		$	28,500			$	190,000
Total Cost		$	1,501,500		$	168,500			$	1,670,000
Unit Produced			20,000			2,000
Cost per Unit		$	75.08		$	84.25
OH Rate = $190,000 ÷ (34,000 + 6,000) = $4.75/hr

 

 

 

2.

Product	Product X			Product Y
No. of units produced		20,000			2,000
DM Cost ($)	$	50		$	40
Direct labor rate	$	10		$	10
Direct labor hours		34,000			6,000
Direct labor hours per unit		1.70			3.00
Direct labor costs per unit	$	17.00		$	30.00
Machine Setup		300			700
Engineering Change Order		20			80
Facility Rent		300			700
Cost Pools	Activity Costs			Cost Driver Units			Activity Rate
Machine Setup	$	60,000			1,000			$	60.00
Engineering Change Order	$	40,000			100			$	400.00
Facility Rent	$	90,000			1,000			$	90.00
Cost Assignment
	(calculations)			Product X			Product Y
Direct Materials				$	1,000,000			$	80,000
Direct Labor					340,000				60,000
Machine Setup	$60 × 300;$60 × 700				18,000				42,000
Engineering Change Order	$400 × 20;$400 × 80				8,000				32,000
Facility Rent	$90 × 300;$90 × 700				27,000				63,000
Total Product Cost				$	1,393,000			$	277,000
Units Produced					20,000				2,000
Cost per Unit				$	69.65			$	138.50

 

Note that the direct labor based costing system overcosted the high volume product X and undercosted the low volume product Y.

Difficulty: 2 Medium

Topic:  A Comparison of Volume-Based and Activity-Based Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

138) Castenet Company uses a volume-based costing system that applies overhead cost based on direct labor hours at $250 per direct labor hour.

 

The company is considering adopting an activity-based costing system with the following data:

 

Activity Area	Cost Driver	Cost Driver Rate
Materials handling	Number of parts	$1.20
Lathe work	Number of turns	0.30
Milling	Number of machine hours	16.00
Grinding	Number of parts	1.25
Testing	Number of units tested	12.00

 

The two jobs processed in the month of June had the following characteristics:

 

	Job A			Job B
Direct materials costs	$	10,000			$	50,000
Direct labor costs	$	1,000			$	10,000
Number of direct labor hours		40				400
Number of parts		500				2,000
Number of turns		25,000				50,000
Number of machine hours		140				1,000
Number of units in each job (all tested)		15				200

 

Required:

1. Compute the unit manufacturing cost of each job under the firm’s current volume-based costing system.
2. Compute the unit manufacturing cost of each job under the activity-based costing system.
3. Compare the unit manufacturing cost for Jobs A and B computed in requirements 1 and 2.

(a) Why do the two cost systems differ in their total cost for each job?

(b) Why might these differences be important to the Company?

Answer:

1. Per unit manufacturing costs under the volume-based costing system. $1,400 for Job A and $800 for Job B.

 

Using Volume-Based Method		Job A				Job B				Total
Direct Materials			$	10,000			$	50,000			$	60,000
Direct Labor				1,000				10,000				11,000
Overhead ($per DLH)	$250 × 40; $250 × 400			10,000				100,000				110,000
Total Cost			$	21,000			$	160,000			$	181,000
Unit cost			$	1,400			$	800

 

 

 

2. Per unit manufacturing costs under the ABC costing system.

 

		Job A			Job B
Direct Materials		$	10,000			$	50,000
Direct Labor			1,000				10,000
Materials Handling	$1.20 × 500; $1.20 × 2,000		600				2,400
Lathe Work	$0.30 × 25,000; $0.30 × 50,000		7,500				15,000
Milling	$16 × 140; $16 × 1,000		2,240				16,000
Grinding	$1.25 × 500; $1.25 × 2,000		625				2,500
Testing	$12 × 15; $12 × 200		180				2,400
Total Product Cost		$	22,145			$	98,300
Unit Cost		$	1,476.33			$	491.50

 

3.

1. a) The volume-based cost system ignores these differences while the ABC costing system assigns overhead costs based on usages of each of the activity areas. The two cost systems differ in their job costs because the jobs differ in the way they use each of five activity areas and activity areas differs in their factory overhead cost drivers.
2. b) These differences will affect the accuracy of job costs for A and B. Therefore, it will affect the company’s pricing, product mix, and product design decisions.

Difficulty: 2 Medium

Topic:  A Comparison of Volume-Based and Activity-Based Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Analyze; Apply

AACSB:  Analytical Thinking; Knowledge Application; Communication

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

139) Demski Company has used a two-stage cost allocation system for many years. In the first stage, plant overhead costs are allocated to two production departments, P1 and P2, based on machine hours. In the second stage, Demski uses direct labor hours to assign overhead costs from the production departments to individual products A and B.

 

Budgeted factory overhead costs for the year are $300,000. Both the budgeted and actual machine hours in P1 and P2 are 12,000 and 28,000 hours, respectively.

 

After attending a seminar to learn the potential benefits of adopting an activity-based costing system (ABC), Ted Demski, the president of Demski Company, is considering implementing an ABC system. Upon his request, the controller at Demski Company has compiled the following information for analysis:

 

Cost Pool	Factory overhead costs			Activity cost driver		Expected activity level
Machine setup	$	100,000			Setup hours		1,000
Inspection		50,000			Inspection hours		2,500
Power		50,000			Kilowatt hours		25,000
Supervision		100,000			Direct labor hours		10,000
Total overhead cost	$	300,000

 

Demski manufactures two types of product, A and B, for which the following information is available:

 

	A			B
Units produced and sold		5,000				10,000
Direct materials	$	200,000			$	250,000
Direct labor costs	$	80,000				150,000
Direct labor hours in P1		1,500				3,000
Direct labor hours in P2		1,500				4,000
Setup hours		700				300
Inspection hours		1,500				1,000
Power (kilowatt hours)		12,500				12,500

 

Required:

1. Determine the unit cost for each of the two products using the traditional two-stage allocation method. (Round calculations to 2 decimal places.)
2. Determine the unit cost for each of the two products using the proposed ABC system.
3. Compare the unit manufacturing costs for product A and product B computed in requirements 1 and 2.

(a) Why do two the cost systems differ in their total cost for each product?

(b) Why might these differences be important to the Demski Company?

 

 

Answer:

1. Unit cost for each of two products using the traditional two-stage allocation method:

 

Stage 1:	Dept. 1 (P1)			Dept. 2 (P2)
Overhead assignment:
$300,000 × 12,000 ÷ 40,000	$	90,000
$300,000 × 28,000 ÷ 40,000					$	210,000
Divided by direct labor hours:
1,500 + 3,000 =		4,500
1,500 + 4,000 =						5,500
Department overhead rate per DLH	$	20.00			$	38.18

 

Stage 1:	Product A			Product B
Overhead assignment:
P1: $20 × 1,500 =	$	30,000
$20 × 3,000 =				$	60,000
P2: $38.18 × 1,500 =		57,270
$38.18 × 4,000 =					152,720
Overhead		87,270			212,720
Direct materials		200,000			250,000
Direct Labor		80,000			150,000
Total manufacturing	$	367,270		$	612,720
Divided by production units		5,000			10,000
Unit cost	$	73.45		$	61.27

 

2. Unit cost for each product using the ABC system.

		A			B
Direct Materials		$	200,000		$	250,000
Direct Labor			80,000			150,000
Machine setup	$100 × 700; $100 × 300		70,000			30,000
Inspection	$20 × 1,500; $20 × 1,000		30,000			20,000
Power	$2 × 12,500; $2 × 12,500		25,000			25,000
Supervision	$10 × 3,000; $10 × 7,000		30,000			70,000
Total Product Cost		$	435,000		$	545,000
Units Produced			5,000			10,000
Cost per Unit		$	87.00		$	54.50

 

 

 

3.

1. a) Under the volume based costing, low-volume product A was undercosted because the products differ in the way they use each of four activity areas and activity areas differ in their factory overhead cost drivers.
2. b) These differences will affect the accuracy of product costs for A and B. Therefore, it will affect Demski Company’s pricing, product mix, and product design decisions.

Difficulty: 2 Medium

Topic:  A Comparison of Volume-Based and Activity-Based Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Analyze; Apply

AACSB:  Analytical Thinking; Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

140) Swenson Company manufactures 4,000 units of Deluxe Product and 20,000 units of Regular Product each year. The company currently uses direct labor-hours to assign overhead cost to products. The pre-determined overhead rate is:

 

Manufacturing overhead cost	= $20/DLH
Direct labor hours

 

	Deluxe				Regular
Direct materials	$	40.00		$		30.00
Direct labor		20.00				15.00
Factory overhead:
2.5 DLH × $20/DLH		50.00
2.0 DLH × $20/DLH						40.00
Total cost per unit	$	110.00		$		85.00

 

Suppose, however, that factory overhead costs are actually caused by the five activities listed below:

 

Activity	Costs
Machine setups	$	300,000
Quality Inspections		200,000
Production orders		90,000
Machine-hours worked		330,000
Material receipts		80,000
Total	$	1,000,000

 

Also suppose the following transaction data has been collected:

 

	Number of Transactions
Activity	Total			Deluxe			Regular
Machine setups		5,000			3,000			2,000
Quality inspections		8,000			5,000			3,000
Production orders		600			200			400
Machine-hours worked		33,000			10,000			23,000
Material receipts		800			200			600

 

Required:

Using the activity-based costing method to calculate unit costs of Deluxe and Regular products, and compare them with the current direct labor hours-based costing system.

 

 

 

Answer:  Overhead rates for each of the five activities:

 

Activity	Costs			Transactions				Rate per Transaction
Machine setups	$	300,000				5,000			$60/setup
Quality inspections		200,000				8,000			$25/inspection
Production orders		90,000				600			$150/order
Machine-hours worked		330,000				33,000			$10/hour
Material receipts		80,000				800			$100/receipt

 

Assign overhead costs to products:

 

Deluxe Product
Activity	Rates			Transactions				Amount
Machine setups	$	60.00				3,000			$	180,000
Quality inspections		25.00				5,000				125,000
Production orders		150.00				200				30,000
Machine-hours worked		10.00				10,000				100,000
Material receipts		100.00				200				20,000
Total overhead (a)									$	455,000
Number of units (b)										4,000
Overhead per unit (a)÷(b)									$	113.75

 

Regular Product
Activity	Rates			Transactions				Amount
Machine setups	$	60.00				2,000			$	120,000
Quality inspections		25.00				3,000				75,000
Production orders		150.00				400				60,000
Machine-hours worked		10.00				23,000				230,000
Material receipts		100.00				600				60,000
Total overhead (a)									$	545,000
Number of units (b)										20,000
Overhead per unit (a)÷(b)									$	27.25

 

Product costs computed using the direct labor hours-based different methods can now be contrasted:

 

Product costs using activity-based costing:

 

	Deluxe			Regular
Direct Materials	$	40.00		$	30.00
Direct labor		20.00			15.00
Manufacturing  overhead		113.75			27.25
Total cost per unit	$	173.75		$	72.25

 

 

 

Product costs using the direct labor hours-based costing system:

 

	Deluxe			Regular
Direct Materials	$	40.00		$	30.00
Direct labor		20.00			15.00
Manufacturing  overhead		50.00			40.00
Total cost per unit	$	110.00		$	85.00

 

Note that the adoption of activity-based costing usually results in a shift of overhead costs from high volume to low volume products.

 

• The per unit costs of the low volume products increase and the per unit costs of the high volume products decrease.
• The effects are not symmetrical – there is a bigger dollar effect on the per unit costs of the low volume products.

Difficulty: 2 Medium

Topic:  A Comparison of Volume-Based and Activity-Based Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Analyze; Apply

AACSB:  Analytical Thinking; Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

141) Moss Manufacturing has just completed a major change in its quality control (QC) process. Previously, products had been reviewed by QC inspectors at the end of each major process, and the company’s ten QC inspectors were charged as direct labor to the operation or job. In an effort to improve efficiency and quality, a computerized video QC system was purchased for $250,000. The system consists of a minicomputer, 15 video cameras, other peripheral hardware, and software.

 

The new system used cameras stationed by QC engineers at key points in the production process. Each time an operation changes or there is a new operation, the cameras are moved, and a new master picture is loaded into the computer by a QC engineer. The camera takes pictures of the units in process, and the computer compares them to the picture of a “good” unit. Any differences are sent to a QC engineer who removes the bad units and discusses the flaws with the production supervisors. The new system has replaced the ten QC inspectors with two QC engineers.

 

The operating costs of the new QC system, including the salaries of the QC engineers, have been included as factory overhead in calculating the company’s volume-based factory overhead rate which is based on direct labor dollars.

 

The company’s president is confused. His vice president of production has told him how efficient the new system is, yet there is a large increase in the factory overhead rate. The computation of the rate before and after automation is shown below.

 

	Before			After
Budgeted overhead	$	1,900,000		$	2,100,000
Budgeted direct labor		1,000,000			700,000
Budgeted overhead rate		190	%		300	%

 

“Three hundred percent,” lamented the president, “How can we compete with such a high factory overhead rate?”

 

Required:

1. a. Define factory overhead, and cite three examples of typical costs that would be included in factory overhead.
2. Explain why companies develop factory overhead rates.
3. Explain why the increase in the overhead rate should not have a negative financial impact on Moss Manufacturing.
4. Explain, in the greatest detail possible, how Moss Manufacturing could change its overhead accounting system to eliminate confusion over product costs.

 

 

 

Answer:

1. a. Factory overhead costs include all indirect costs (all production costs except direct material and direct labor). These costs cannot be practically or economically traced to end products and, therefore, must be assigned by some allocation method. Typical factory overhead costs include

• indirect labor, i.e., lift-truck driver’s wages, maintenance and inspection labor, engineering labor, and supervisors.
• other indirect factory costs, i.e., building maintenance, machine and tool maintenance, property taxes, property insurance, pension costs, depreciation on plant and equipment, rent expense, and utility expense.

1. Companies develop factory overhead rates to facilitate the costing of products as they are completed and shipped, rather than waiting until actual costs are accumulated for the period of production.

 

2. The overhead rate increase should not have a negative impact on Moss Manufacturing because the increase in indirect costs was offset by a decrease in direct labor.

 

3. Rather than using a universal volume-based overhead rate, Moss Manufacturing could implement separate overhead pools and allocate the overheads to the activities using the appropriate pools. Examples are as follows.

 

• Separate costs into departmental overhead accounts (or other relevant pools), with one account for each production and service department. Each department would allocate its overhead to products on the basis that best reflects the use of these overhead services.
• Individual machines (or other more relevant allocations bases) could be treated as separate cost centers with the machine costs collected and charged to the products using the machine(s).

Difficulty: 2 Medium

Topic:  Activity-Based Costing

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Understand

AACSB:  Reflective Thinking; Communication

AICPA:  BB Critical Thinking; FN Measurement

 

 

142) The controller for Ocean Sailboats Inc., a company which uses an automated process to make sailboats, established the following overhead cost pools and cost drivers:

 

Overhead Cost  Pool	Budgeted Overhead			Cost Driver		Estimated Cost Driver Level
Machine setups		$250,500			# of setups	500 setups
Quality control		419,500			# of inspections	2,500 inspections
Other overhead cost		180,000			# of machine hrs	20,000 machine hrs

 

A recent order for sailboats used:

Machine setups	50 setups
Quality inspections	305 inspections
Machine hours	2,024 machine hours

 

Required:

1. What is the overhead rate per machine hour if the number of machine hours is used as a single cost driver under traditional costing system?
2. Utilizing traditional costing, how much overhead is assigned to the order based on machine hours as a single cost driver?
3. Utilizing ABC, how much total overhead is assigned to the order?

 

 

 

Answer:

1.

Overhead Cost  Pool	Budgeted Overhead
Machine setups	$	250,500
Quality control		419,500
Other overhead cost		180,000
Total estimated overhead	$	850,000
Estimated machine hours		÷20,000
Overhead rate per machine hour	$	42.50

 

2. 2,024 machine hours × $42.50 per machine hour = $86,020

 

3.

Overhead Cost pool	Budgeted Overhead			Cost Driver Level				Overhead Rate				Actual Cost Drivers				Actual Overhead for Order
Machine setups	$	250,500				500			$	501.00				50			$	25,050
Quality control		419,500				2,500				167.80				305				51,179
Other overhead cost		180,000				20,000				9.00				2,024				18,216
Totals	$	850,000															$	94,445

Difficulty: 1 Easy

Topic:  A Comparison of Volume-Based and Activity-Based Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

143) Skateline Inc. designs and manufactures roller skates. The following data pertain to two of its major customers: FantasticSkates and SkateToday.

 

	FantasticSkates	SkateToday
Total sales	$1,500,000	$1,450,000
Sales discount	4%	3%
Sales terms	2/10, n/30	2/10, n/30
Sales returns	5%	2%
Assume sales discounts are taken on total invoice amount and that returns occur within 10 days of the sale.

 

Required:

Compare the net proceeds from each customer to Skateline Inc. 30 days after sale. (Rounded to nearest dollar for each step where applicable.)

 

Answer:

	Fantastic			Skate Today
Total Sales	$	1,500,000			$	1,450,000
Less Sales Discounts (4%, 3%)		60,000				43,500
Net Sales after discounts		1,440,000				1,406,500
Less Sales returns (5%, 2%)		72,000				28,130
Net Sales	$	1,368,000			$	1,378,370

 

Difficulty: 1 Easy

Topic:  Customer Profitability Analysis

Learning Objective:  05-06 Use an activity-based approach to analyze customer profitability.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

144) Certo Health Products was formed two years ago to produce and distribute a newly-patented protein supplement. Two variations of the original supplement have since been developed and introduced for general sale. The three products are processed in essentially the same way, but Ann Marshall, the owner of Certo, anticipates that a half-dozen new products will be developed for sale in the next two years. These products will not be variations of the patented supplement, and will require a different production process other than the one currently used. Ann has asked you to review the current use of a single volume-based rate and explain the arguments for using departmental rates with activity-based drivers.

 

Answer:  A single volume-based rate is appropriate in situations where product are processed in similar ways and departments, and where little variation exists in the “causes” of costs. Once multiple variations of production processes are required, departmental rates probably will provide more accurate cost reporting. Different processes (departments) cause different costs to happen for different reasons. A simple example is the manufacture of writing instruments. Pencils require one set of processes, ballpoint pens a different set, and highlighting pens another set. Within the production processes of each type of writing instrument, different departments have costs “caused” by different factors, e.g., labor-intensive vs. machine-intensive departments. By using activity as a basis for allocation of overhead, a clearer distinction is made between volume-related costs and capacity-related costs. This distinction provides the basis for selection of correct cost drivers for different products in different departments, which results in more accurate cost data for product pricing and strategic operational decisions.

Difficulty: 1 Easy

Topic:  Role of Volume-Based Costing; A Comparison of Volume-Based and Activity-Based Costing; The Strategic Role of Activity-Based Costing

Learning Objective:  05-01 Explain the strategic role of activity-based costing (ABC).

Bloom’s:  Analyze

AACSB:  Analytical Thinking; Communication

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

145) Cost Pools and Cost Drivers: Based on a recent study of its manufacturing operations Johnston Manufacturing Corporation has identified six resource consumption cost drivers. These cost drivers and their budgeted activity levels for the coming year are:

 

Cost Driver	Activity Level
Number of purchase orders		6
Number of production runs (2,500 units per production run)		40
Machine-hours		100,000
Factory space (square feet)		24,000
Units of production		100,000
Engineering hours		20,000

 

The firm has budgeted the following costs for the year:

Engineering design	$600,000
Depreciation—building	50,000
Depreciation—machine	40,000
Electrical power (for factory building)	6,000
Electrical power (for machining)	30,000
Insurance	20,000
Property taxes	15,000
Machine maintenance—labor	11,000
Machine maintenance—materials	9,000
Natural gas (for heating)	8,000
Inspection of finished goods	7,000
Setup wages	20,000
Receiving	10,000
Inspection of direct materials on receiving	3,000
Purchasing	20,000
Custodial labor	51,000

 

With the exception of the factory space cost pool, which uses machine-hours as the activity consumption cost driver, other cost pools have identical resource and activity consumption cost drivers.

 

Required:

1. Identify the most appropriate activity cost pool for each of the cost items and cost driver for each activity cost pool you identified.
2. Johnston has received a request to quote the price for 4,000 units of a new product. The production will require 100 engineering-hours and 4,250 machine-hours. What is the manufacturing overhead per unit the firm should use in determining the price?

 

 

Answer:

Cost pool 1: Cost driver: Number of purchase orders
Receiving	$	10,000
Inspection of direct materials		3,000
Purchasing		20,000
Total	$	33,000
Cost pool 2: Cost driver: Number of production runs
Setup wages	$	20,000
Cost pool 3: Cost driver: Machine hours
Depreciation, machine	$	40,000
Electrical power (machining)		30,000
Machine maintenance – labor		11,000
Machine maintenance – materials		9,000
Total	$	90,000
Cost pool 4: Cost driver: Factory space
Depreciation, building	$	50,000
Electrical power (factory building)		6,000
Insurance		20,000
Property taxes		15,000
Natural gas (for heating)		8,000
Custodial labor		51,000
Total	$	150,000

 

Note: However, the problem indicated that the firm uses machine hours as the base for assigning facility-level costs. An alternative solution is to combine cost pools 3 and 4.

Cost pool 5: Cost driver: production (in units)
Inspection of finished goods	$	7,000
Cost pool 6: Cost driver: engineering hours
Engineering design	$	600,000

 

 

 

2. Overhead Rates:

Cost pool 1:	Total cost	$	33,000
	Number of purchase orders		6
	Cost per purchase order	$	5,500
Cost pool 2:	Total cost	$	20,000
	Number of production runs		40
	Cost per production run	$	500
Cost pool 3:	Total cost	$	90,000
	Number of machine hours		100,000
	Cost per machine hour	$	0.90
Cost pool 4:	Total cost	$	150,000
	Number of machine hours		100,000
	Cost per machine hour	$	1.50
Cost pool 5:	Total cost	$	7,000
	Number of units		100,000
	Cost per unit	$	0.07
Cost pool 6:	Total cost	$	600,000
	Total engineering hours		20,000
	Cost per engineering hour	$	30.00

 

Manufacturing overhead:

 

Unit level:

Cost pool 3 –	Cost per machine hour	$	0.90
	Number of machine hours		× 4,250			$	3,825
Cost pool 5 –	Cost per unit	$	0.07
	Number of units		× 4,000				280

 

Batch level:

Cost pool 2 –	Cost per production run	$	500
	Number of production runs (4,000 units ÷ 2,500 = 1.6)		×  1.6				800

 

Product-level level:

Cost pool 1 –	Cost per purchase order	$	5,500
Cost pool 6 –	Number of purchase orders		× 1				5,500
	Cost per engineering hour	$	30
	Number of engineering hours		× 100				3,000

 

Facility-level level*:

Cost pool 4 –	Cost per machine hour	$	1.50
	Number of machine hours		× 4,250				6,375
Total manufacturing overhead						$	19,980
Number of units							÷ 4,000
Manufacturing overhead per unit						$	4.995

 

* There are at least one alternative activity consumption drivers for assigning facility-level cost besides number of machine hours (shown below):

 

Based on machine hours:

Total facility-level cost (Cost pool 4)	$	150,000
Number of machine hours		100,000
Cost per machine hour	$	1.50

 

Alternatively, the firm may use number of units to assign facility-level cost.

 

Based on number of units:

Total facility-level cost (Cost pool 4)	$	150,000
Units of production		100,000
Cost per unit	$	1.50

 

Unit level:

Cost pool 3	$	3,825
Cost pool 5		280

 

Batch level:

Cost pool 2		800

 

Product-level level:

Cost pool 1		5,500
Cost pool 6		3,000

 

 

 

Facility-level level:

Cost pool 4 – Cost per unit	$	1.50
Number of units		× 4,000			6,000
Total manufacturing overhead				$	19,405
Number of units					÷ 4,000
Manufacturing overhead per unit				$	4.85125

Difficulty: 3 Hard

Topic:  Identify Cost Drivers

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.

Bloom’s:  Apply

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

146) Volume-Based Costing Versus ABC: Gorden Company produces a variety of electronic products. One of its plants produces two laser printers, Speedy and Deluxe. At the beginning of 2019, the following data were prepared for this plant:

 

	Deluxe			Speedy
Quantity		50,000			400,000
Selling price	$	475.00		$	300.00
Unit prime cost		180.00			110.00
Unit overhead cost		20.00			153.60

 

The unit overhead cost is calculated using the predetermined overhead application rate based on direct labor-hours.

 

Upon examining the data, the marketing manager was particularly impressed with the per-unit profitability of the Deluxe printer and suggested that more emphasis be placed on producing and selling this product. The plant supervisor objected to this strategy, arguing that the Deluxe model required a very delicate manufacturing process. The supervisor believed that the cost of the Deluxe printer was likely to be much higher than reported.

 

The controller suggests an activity-based costing system and provides the following budget data pertaining to the period:

 

		Activity Consumption
Overhead Activity	Cost Driver	Pool Rate*			Deluxe			Speedy
Setups	Number of setups	$	2,800			200				100
Machine costs	Machine-hours		100			100,000				400,000
Engineering	Engineering-hours		40			45,000				120,000
Packing	Packing orders		20			50,000				200,000

 

* Cost per unit of cost driver

 

Required:

1. Using the projected data based on the firm’s current costing system, calculate gross profit per unit and gross profit percentage for each product. (Round calculations to 2 decimal places.)
2. Using the suggested multiple cost drivers’ overhead rates, calculate the overhead cost per unit for each product and determine gross profit per unit and gross profit percentage for each product.
3. Based on your results, evaluate the suggestion of the marketing manager to emphasize the Deluxe model.
4. How does ABC contribute to Gorden’s competitive advantage?

 

 

Answer:

1. Current costing system (direct-labor hour)

 

	Deluxe			%			Speedy				%
Price	$	475			100			$	300.00				100
Prime Cost		180			38				110.00				37
Overhead		20			4				153.60				51
Unit gross profit	$	275						$	36.40				12

 

2. Multiple drivers costing system

Calculation of unit overhead costs – Deluxe:							Deluxe
Setups	$	2,800 ×			200 =			$	560,000
Machine costs	$	100 ×			100,000 =				10,000,000
Engineering	$	40 ×			45,000 =				1,800,000
Packing	$	20 ×			50,000 =				1,000,000
Total overhead								$	13,360,000
Number of Units									÷ 50,000
Overhead per unit								$	267.20

 

Calculation of unit overhead costs – Speedy:							Speedy
Setups	$	2,800 ×			100 =			$	280,000
Machine costs	$	100 ×			400,000 =				40,000,000
Engineering	$	40 ×			120,000 =				4,800,000
Packing	$	20 ×			200,000 =				4,000,000
Total overhead								$	49,080,000
Number of Units									÷ 400,000
Overhead per unit								$	122.70

 

				Deluxe				%								Speedy				%
Price					$	475.00				100							$	300.00				100
Cost
Prime cost	$	180.00											$	110.00
Overhead		267.20				447.20				94				122.70				232.70				78
Unit gross profit					$	27.80				6							$	67.30				22

 

 

 

3. Using the activity-based costing, a much different picture on profitability of the Deluxe and Speedy models emerges. The Speedy model is actually more profitable than the Deluxe model. The revised cost data suggests that shifting the emphasis to the Deluxe model may very well be a mistake. The Deluxe printer is a much heavier user of overhead resources as can be seen in the table below that compares uses of overhead.

 

Overhead Activity	Activity Consumption
	Deluxe	Speedy
Setups	250 units per setup	4000 units per setup
Machine costs	2 MH per unit	1 MH per unit
Engineering	0.9 Engr. Hr. per unit	0.3 Engr. Hr. per unit
Packing	1 unit per packing order	2 unit per packing order

 

Supporting calculations

	Activity Consumption
	Deluxe		Speedy
	Total	Per Activity Measure	Total	Per Activity Measure
Units	50,000		400,000
Setups	200	250 units per setup	100	4,000 units per setup
Machine Costs	100,000	2 MH per unit	400,000	1 MH per unit
Engineering	45,000	0.9 Engineering Hours per unit	120,000	0.3 Engineering hours per unit
Packing	50,000	1 unit per packing order	200,000	2 unit per packing order

 

4. The ABC method is likely to provide Gorden Company a more accurate product cost picture. It also directs the management’s attention to the high volume, more profitable Speedy printers.

 

Given the low profit margin of the Deluxe, the firm may want to investigate the feasibility of raising the price, the possibility of reducing product cost, or both.

Difficulty: 2 Medium

Topic:  A Comparison of Volume-Based and Activity-Based Costing; The Strategic Role of Activity-Based Costing

Learning Objective:  05-02 Describe activity-based costing, the steps in developing an ABC system, and the benefits of an ABC system.; 05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Analyze; Apply

AACSB:  Analytical Thinking; Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

147) Customer Profitability Analysis: Boston Depot sells office supplies to area corporations and organizations. Tom Delayne, founder and CEO, has been disappointed with the operating results and the profit margin for the last two years. Business forms are mostly a “commodity” business with low profit margins. To increase profit margins and gain competitive advantages, Delayne introduced “Desk-Top Delivery” service. The business seems to be as busy as ever. Yet, the operating income has been declining. To help identify the root cause of declining profits, he decided to analyze the profitability of two of the firm’s major customers: Omega International (OI) and City of Albion (CA).

 

According to the customer profitability analysis that Boston Depot conducts regularly, Boston Depot has the same amount of total sales with both OI and CA. However, the firm earns a higher gross margin and gross margin ratio from CA than those from the sales to OI, as demonstrated here:

	Customer Profitability Analysis
	Omega International			City of Albion
Sales	$	80,000			$	80,000
Product cost		(50,000	)			(48,000	)
Service fees (17.5% of sales)		(14,000	)			(14,000	)
Gross margin	$	16,000			$	18,000
Gross margin percent		20	%			22.5	%

 

Boston Depot adds a flat 17.5 percent to all sales for expenses incurred in such activities as handling customers’ requests, pick-packing, order delivery, warehousing, and data entry. However, not all customers require the same level of services. Operation Manager, Jamie Steel, points out that CA has been a much heavier service user than OI. She shows the following data to support her belief:

 

Distribution Services Activities for OI and CA
	OI			CA
Number of requisitions		300			700
Requisition line (all pick-packing)		900			2,100
Average number of cartons in warehouse		50			500
Number of miles per delivery		5			6

 

Controller Rod Jay has been investigating ways to determine the costs of performing various activities. He summarized his findings:

 

Total Estimated		Estimated Annual
Activity	Annual Expense		Cost Driver	Activity Level
Requisitions handling	$3,000,000		Requisitions	300,000
Warehouse	1,050,000		Number of cartons	70,000
Pick-packing	900,000		Pick-pack lines	600,000
Data entry	600,000		Pick-pack lines	600,000
Delivery charge	$10 per requisition (delivery) plus $0.30 per mile

 

Steel points out that activities cost money. Two customers who request different service activities most likely are not costing the firm the same.

 

Required:

1. Using activity-based costing, compute the charges per unit of service activities.
2. Using activity-based costing, compute the total distribution costs for each of the customers.
3. Is the City of Albion a more profitable customer?
4. Is Omega International a better customer for Boston Depot?

Answer:

1. Service cost rate per unit of activity

Activities	Estimated Annual Expense			Cost Driver		Estimated Annual Cost Driver Units		Service Cost Per Unit
Requisition Handling	$	3,000,000			Requisitions		300,000		$	10.00
Warehouse	$	1,050,000			Cartons		70,000		$	15.00
Pick Packing	$	900,000			(PP) Lines		600,000		$	1.50
Data Entry		600,000			(PP) Lines		600,000		$	1.00
Delivery charge	$10 per delivery (requisition) + $0.30 per mile

 

2. Service Costs

Omega International				City of Albion
Requisition Handling (300 requisitions × $10/requisition)	$	3,000			(700 requisitions × $10/requisition)	$	7,000
Warehouse Activity (50 cartons × $15.00 per carton)		750			(500 cartons × $15.00 per carton)		7,500
Pick-Packing (900 pick-pack lines × $1.50)		1,350			(2,100 pick-pack lines × $1.50)		3,150
Data Entry (900 lines × $1.00/line)		900			(2,100 lines × $1.00/line)		2,100
Freight Out ($10 × 300) + ($0.30 × 5 × 300)		3,450			($10 × 700) + ($0.30 × 6 × 700)		8,260
Total Service Costs	$	9,450				$	28,010

 

 

 

3. Customer Profitability Analysis-Activity Based

	Omega International			City of Albion
Sales	$	80,000			$	80,000
Product Cost		(50,000	)			(48,000	)
Service costs		(9,450	)			(28,010	)
Gross Margin	$	20,550			$	3,990
Gross Margin %		25.69	%			4.99	%

 

The above profitability analysis indicates that, under activity-based costing, Omega International, not City of Albion, is more profitable to Boston Depot. The apparent higher gross margin percentage of the City of Albion relative to the Omega International was the result of not recognizing differences in the service activities requested by different customers under the firm’s existing costing system.

 

City of Albion is a much heavier user of services provided by Boston Depot. Although both customers had the same total sales, City of Albion made more desktop delivery requests in smaller quantities and maintained more inventory by Boston Depot.

 

4. The answer depends on the competitive strategy of the firm. The gross profit margin ratios show that Omega is the better customer of the two. Omega does not use much of the desktop delivery service Boston offers. Most likely Omega is a buyer of “commodity” items and does not need the convenience of desktop delivery. However, Boston’s pricing is likely to have incorporated the average cost of desktop deliveries. If Omega realizes that it is paying for services not used, it may buy the commodity it needs elsewhere, unless Boston lowers the price to Omega.

 

All custom-printed business forms by different suppliers are likely to be the same. Delayne wanted to “differentiate” its forms from those of competitors’ by offering desktop delivery services. In the long-run, Omega is not likely to be a customer staying with Boston Depot. Boston Depot needs to be prepared to lower the price to Omega.

 

If the firm desires to compete on a differentiation strategy it needs to price accordingly. Boston Depot needs to raise prices to City of Albion. If City of Albion is willing to pay a higher price for the convenience of desktop delivery, it is the kind of customer that Delayne wants.

Difficulty: 3 Hard

Topic:  Customer Cost Analysis; Customer Profitability Analysis

Learning Objective:  05-06 Use an activity-based approach to analyze customer profitability.

Bloom’s:  Apply; Evaluate

AACSB:  Analytical Thinking; Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement; FN Decision Making

 

 

 

148) Customer Profitability Analysis: Spring Company collected the following data pertaining to its activities with selected customers.

 

	HS Inc.	Adventix	Baldwin
Total sales	$600,000	$750,000	$900,000
Sales discounta	2%	3%	2%
Sales termsb	2/10, n/30	1/15, n/60	2/10, n/eom
Shipping terms	FOB Shipping point	FOB Destination	FOB Destination
Sales returns ratec	2%	1%	3%
Number of ordersd	10	5	50
Units per order	100	250	30
Expedited order	0	2	5
Sales visits	1	1	2
Number of sales returns	3	4	10
aSales discounts are incentives offered on the full invoice price   bSales terms are an incentive in the form of a reduction of the net invoice amount to customers that pay an invoice early   cSales returns are all completed within the first 10 days of this billing month   dEach order is filled in a single delivery

 

Spring Company mails monthly statements on or before the first day of each month. HS pays all of its account payables within the payment discount periods. Adventix does not take the early payment discounts. In fact, the company pays half of its accounts on the date that these accounts are due and pays the remainder at the end of the following month. Baldwin also does not take advantage of discounts for early payments. However, it pays its accounts on the specified due date. Cost of goods sold is sixty percent of gross sales price. Joan Lieberman, the controller of Spring Company, has estimated that the cost of working capital is approximately 2 percent per month.

 

Lieberman also gathered the following cost data:

Activity	Cost Driver and Rate
Order taking	$50 per order
Order processing	$75 per order
Delivery	$300 per delivery
Expedited orders	$500 per order
Restocking	$10 per unit plus $200 per return
Sales visits	$800 per visit

 

Required:

Prepare and interpret a customer profitability analysis for Spring Company. How does it help Spring Company become more competitive and profitable?

 

Answer:

	HS Inc.			Adventix					Baldwin
Customer revenue analysis
Total sales	$	600,000			$	750,000				$	900,000
Less: Sales discount		12,000				22,500					18,000
Net invoice	$	588,000			$	727,500				$	882,000
Less: Sales returns		11,760				7,275					26,460
Net sales	$	576,240			$	720,225				$	855,540
Less: Early payment discounts		11,525
Finance charge: working capital		3,7651				36,0112					17,1113
Net proceeds	$	560,950			$	684,214				$	838,429
Cost of goods sold		360,000				450,000					540,000
Gross margin	$	200,950			$	234,214				$	298,429
Customer cost analysis
Customer unit-level cost:
Sales return (restocking) 4	$	200			$	125				$	450
Customer batch-level costs:
Order taking $50 × 10; 5; 50		500				250					2,500
Order processing $75 × 10; 5; 50		750				375					3,750
Sales return $200 × 3; 4; 10		600				800					2,000
Delivery $300 × 10; 5; 50		3,000				1,500					15,000
Expediting order $500 × 0; 2; 5						1,000					2,500
Customer sustaining costs:
Sales visits $800 × 1; 1; 2		800				800					1,600
Total customer cost	$	5,850			$	4,850				$	27,800
Net customer profit	$	195,100			$	229,364				$	270,629

 

1Net proceeds: $576,240 − (2% × 576,240) = 576,240 − $11,525 = $564,715

Finance charge for working capital: $564,715 × 2% × (10 / 30) = $3,765

 

2 The net amount is carried for 60 days, when Adventix pays half of its amount due. The remainder of the balance is paid on the 90th day:

 

Finance charge for 60 days working capital	$720,225 × 2% × (60 ÷ 30) =	$	28,809
Payment received on the 90th day:	$720,225 ÷ 2 = $360,112.50
Finance charge for 30 days working capital	$360,112.50 × 2% × (30 ÷ 30) =		7,202
Net finance charge		$	36,011

 

3 The net amount is carried for 30 days when Baldwin pays its balance due.

Finance charge for 30 days working capital $855,540 × 2% × (30 / 30) = $17,111

 

4 Restocking cost:

HS Inc:	10 × 100 × 2% × $10 =	$	200
Adventix:	5 × 250 × 1% × $10 =	$	125
Baldwin:	50 ×  30 × 3% × $10 =	$	450

 

There are many possible ways to interpret the information contained in the customer profitability analysis, and a few suggestions are offered her. Certainly, Spring should consider a some type of billing policy for delivery charges. While some customers have only a few deliveries, a customer like Baldwin costs $15,000 with so many deliveries. Maybe there should be a set number of deliveries that would be free and then have a delivery charge for all deliveries in excess of that level. Another possibility is that the delivery charge would be on a sliding scale. Spring should also reevaluate the early payment discounts and trade discounts offered to each customer. Looking at HS, the early payment discount taken by this customer is saving $3,765 for 20 days of working capital charge; perhaps Spring should consider lowering its trade discount for Adventix and offer a larger early payment discount. Aside from working with its customers, Spring needs to look at its internal cost structure. For example, the cost of a return is $200 and this needs to be reviewed for its components. How many hours is this taking? It is a fixed cost – are there employees handling it who should be doing more advanced work?

 

Customer profitability analysis helps the company become more competitive by identifying the most profitable and least profitable customers. This information can then be used by management to adjust pricing policies, identify ways to reduce the cost to serve customers, and change the customer mix for a more profitable group of customers.

Difficulty: 3 Hard

Topic:  Customer Cost Analysis; Customer Profitability Analysis

Learning Objective:  05-06 Use an activity-based approach to analyze customer profitability.

Bloom’s:  Analyze; Apply

AACSB:  Analytical Thinking; Knowledge Application; Communication

AICPA:  BB Critical Thinking; FN Measurement; FN Decision Making

 

 

149) Volume-based Versus ABC Overhead Rate: Medical Arts Hospital (MAH) uses a hospital-wide overhead rate based on nurse-hours. The intensive care unit (ICU), which has 30 beds, applies overhead using patient-days. Its budgeted cost and operating data for the year follow:

 

Hospital Budget Information
Hospital total overhead	$57,600,000
Hospital total nurse-hours	1,152,000

 

Budget Cost Driver Information for ICU for the Month of June
Cost Pool	Budget Cost	Cost Driver	Budget Cost Driver Activity
Facilities and equipment	$2,400,000	Number of patient-days	7,500
Nursing care	3,000,000	Number of nurse-hours	80,000

 

In June, MAH’s intensive care unit had the following operating data:

 

81,000 nurse-hours

7,250 patient-days

 

Required:

1. Calculate the ICU’s overhead costs for the month of June using
2. The hospital-wide rate
3. The ICU department-wide rate
4. The cost driver rates for the ICU department
5. Explain the differences and determine which overhead assignment method is more appropriate.

 

Answer:

MAH’s ICU overhead costs for the month of June using:
a. Hospital-Wide Rate Based on Nurse-Hours
Per nurse-hour:	$57,600,000 ÷ 1,152,000 =	$	50
Total ICU applied overhead costs:	$50 × 81,000 =	$	4,050,000
b. The ICU Department-Wide Rate Based on Patient-Days
Total budgeted ICU overhead:	$2,400,000 + $3,000,000 =	$	5,400,000
Overhead rate per budgeted patient-day:	$5,400,000 ÷ 7,500 =	$	720
Total ICU applied overhead costs:	$720 × 7,250 =	$	5,220,000

 

1. Activity Cost Driver Rates

Budgeted Cost Pool	Budgeted Cost	Budgeted Activity	Budgeted OH Rate	Total Activity		Applied Overhead
Facilities	$2,400,000	7,500	$320.00	7,250		$	2,320,000
Nurse care	3,000,000	80,000	37.50	81,000			3,037,500
Total applied overhead costs					$		5,357,500

 

2. The first method uses a hospital-wide overhead rate, which likely bears no relationship with the overhead activities performed in the intensive care unit (ICU). In particular, it is likely to be too low a rate because the equipment used in the ICU is more complex and expensive than in the other units of the hospital. The second method uses the patient-day overhead rate for the ICU department. This is an improvement over the first method because it uses the overhead and usage information in the ICU. But a single patient-day cost driver may not have direct relationships with some of the activities performed in the ICU department. The third method is the preferred method because it uses a cost driver for each of the cost pools that reflects the resources consumed by activities of the cost pool. Notice however that there is little difference in the costs for the second and third methods because there is a high correlation between the number patient days and nursing hours in the ICU.

Difficulty: 2 Medium

Topic:  A Comparison of Volume-Based and Activity-Based Costing

Learning Objective:  05-03 Determine product costs under both the volume-based method and the activity-based method and contrast the two.

Bloom’s:  Apply; Evaluate

AACSB:  Knowledge Application

AICPA:  BB Critical Thinking; FN Measurement; FN Decision Making