Managerial Accounting Creating Value in a Dynamic Business Environment 10th edition - Test Bank

True    False

True    False

True    False

True    False

True    False

I. Overhead costs are applied to products on the basis of volume-related measures.
II. All manufacturing costs are easily traceable to the goods produced.
III. Traditional costing systems tend to distort unit manufacturing costs when numerous goods are made that have widely varying production requirements.

Which of the above statements is (are) true?

1— Assignment of cost to products
2— Calculation of pool rates
3— Identification of cost drivers
4— Identification of cost pools

Which of the following choices correctly expresses the proper order of the preceding tasks?

I. They must be performed for each batch of product that is made.
II. They must be performed for each unit of product that is made.
III. They are needed to support an entire product line.

Which of the above statements is (are) true?

Riverside anticipates making 20,000 bouquets and 4,000 deliveries in the upcoming year.

The cost of wages and salaries and other overhead that would be charged to each bouquet made is:

Riverside anticipates making 20,000 bouquets and 4,000 deliveries in the upcoming year.

The cost of wages and salaries and other overhead that would be charged to each delivery is closest to:

The following information pertains to the three product lines for next year:

What is HiTech’s pool rate for the material-handling activity?

The following information pertains to the three product lines for next year:

What is HiTech’s pool rate for the automated machinery activity?

The following information pertains to the three product lines for next year:

What is HiTech’s pool rate for the finishing activity?

The following information pertains to the three product lines for next year:

What is HiTech’s pool rate for the packaging activity?

The overhead cost allocated to Beta by using traditional costing procedures would be:

The overhead cost allocated to Zeta by using traditional costing procedures would be:

The overhead cost allocated to Beta by using activity-based costing procedures would be:

The overhead cost allocated to Zeta by using activity-based costing procedures would be:

A recent analysis of staff support found a strong correlation with the number of clients served. In contrast, in-house computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively. Consulting clients served totaled 35% of the total client base, consumed 30% of the firm’s computer hours, and accounted for 20% of the total client transactions.
If Martin and Beasley switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to consulting services would:

A recent analysis of staff support found a strong correlation between the number of staff personnel and the number of clients served (consulting, 20; tax planning, 60). In contrast, in-house computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively. Consulting consumed 30% of the firm’s computer hours and had 20% of the total client transactions.

Assuming the use of activity-based costing, the proper percentage to use in allocating staff support costs to tax planning services is:

A recent analysis of staff support found a strong correlation between the number of staff personnel and the number of clients served (consulting, 20; tax planning, 60). In contrast, in-house computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively. Consulting consumed 30% of the firm’s computer hours and had 20% of the total client transactions.

If Kelly and Logan switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to consulting services would:

I. Product diversity creates costing problems because diverse products tend to utilize manufacturing activities in different ways.
II. Overhead costs that are not incurred at the unit level create costing problems because such costs do not vary with traditional application bases such as direct labor hours or machine hours.
III. Product diversity typically exists when a single product (e.g., a ballpoint pen) is made in different colors.

Which of the above statements is (are) true?

I. The degree of correlation between consumption of an activity and consumption of a particular cost driver.
II. The likelihood that a particular cost driver will induce a desired behavioral effect.
III. The likelihood that a particular cost driver will cause an increase in the cost of measurement.

Which of these factors should be considered in the selection of a cost driver?

I. Non-value-added activities are often unnecessary and dispensable.
II. Non-value-added activities may be necessary but are being performed in an inefficient and improvable manner.
III. Non-value-added activities can be eliminated without deterioration of product quality, performance, or perceived value.

1. Safety costs at winery
2. Truckload shipping costs
3. Building maintenance costs
4. Bottle and cork cost
5. Development cost of new, after-dinner wine
6. Tasting and testing costs

Required:

A. Briefly distinguish between unit-level and product-sustaining activities.
B. Classify the six costs listed as arising from a unit-level, batch-level, product-sustaining, or facility-level activity.

Bank

1. Review costs of commercial loan applications
2. Operating costs of human resources department
3. Immediate processing costs of a specific customer’s cash deposit
4. Bank membership costs of joining local Chamber of Commerce

Software manufacturer

5. Label and packaging charges from a commercial printer for a new software release
6. Air conditioning/heating costs of the firm’s production plant
7. Transport costs of moving the finished products from production run no. 1 to the company’s warehouse
8. Design and development costs of new spreadsheet software

Required:

A. Classify the eight costs listed as arising from either a unit-level, batch-level, product-sustaining, or facility-level activity.
B. Would number of loan applications or number of customers be a more appropriate cost-driver base for #1 above? Briefly explain.

1. Direct materials used: $3,640,000
2. Plant rent, utilities, and taxes: $1,229,000
3. New technology design engineering: $2,040,000
4. Materials receiving: $318,000
5. Manufacturing-run/set-up charges: $115,000
6. Equipment depreciation: $92,000
7. General management salaries: $1,564,000

Required:

A. Briefly distinguish between batch-level and facility-level activities.
B. Determine the cost of the firm’s unit-level, batch-level, product-sustaining, and facility-level activities.

Order no. 715 has the following production requirements:

Machine setups: 7
Raw material: 11,200 units
Inspections: 16
Machine hours: 850

Required:

A. Compute the total overhead that should be assigned to order no. 715 by using activity-based costing.
B. Suppose that Wofford were to use a single, predetermined overhead rate based on machine hours. Compute the rate per hour and the total overhead assigned to order no. 715.
C. Discuss the merits of an activity-based costing system in comparison with a traditional costing system.

The following data show the pool rates that have been calculated by the company along with the quantity of driver units for the DEXs:

Required:

A. Calculate the quarterly quality-control cost that is allocated to the DEX product line under Weston’s traditional-costing system.
B. Calculate the quarterly quality-control cost that is allocated to the DEXs if activity-based costing is used.
C. Does the traditional approach under- or overcost the product line? By what amount?

Estimated costs for these three activities, which account for 80% of the firm’s total overhead, are $400,000, $500,000, and $120,000, respectively. Star currently applies manufacturing overhead to products on the basis of machine hours.

Required:

A. Will activity-based costing systems require more or fewer cost pools than traditional costing systems? No explanation is necessary.
B. Calculate the cost of machine setup, quality assurance, and engineering to be charged to product H17.
C. Consider the company’s current overhead application procedure.

1. Is Star emphasizing unit-level activities, batch-level activities, product-sustaining activities, or facility-level activities? Explain.
2. How accurate will the current costing procedure be given the nature of most of the company’s activities? Briefly discuss.
3. How accurate will the current costing procedure be given the consumption ratios of the firm? Briefly discuss.

F56: 2,000 units, $234
F57: 3,500 units, $271

Kenyon’s overhead arises because of various activities, one of which is purchase-order processing. Budgeted cost for this activity is expected to be $70,000. The firm believes that the number of purchase orders processed is a key cost driver and expects the following activity for its products: F56, 10 purchase orders; F57, 40 purchase orders. Kenyon’s selling prices are based heavily on cost.

Required:

A. Activity-based costing (ABC) is said to result in improved costing accuracy when compared with traditional costing procedures. Briefly explain how this improved accuracy is attained.
B. Compute:

1. the pool rate for purchase-order processing.
2. the purchase-order processing cost to be charged to one unit of F56.

C. Assume that Kenyon switched to activity-based costing and calculated total unit production costs as follows: F56, $285; F57, $220.

1. Which of the two products, F56 or F57, was overcosted prior to the change to ABC? No explanation is necessary.
2. Which of the two products, F56 or F57, may have been less competitive in the marketplace prior to the change to ABC? Briefly explain.

Manufacturing overhead is currently computed by spreading overhead of $1,860,000 over 20,000 direct labor hours. Management is considering a shift to activity-based costing in an effort to improve the firm’s accounting procedures, and the following data are available:

Lennox determines selling prices by adding 40% to a product’s total cost.

Required:

A. Compute the per-unit cost and selling price of product B by using Lennox’s current costing procedures.
B. Compute the per-unit overhead cost of product B if the company switches to activity-based costing.
C. Compute B’s total per-unit cost and selling price under activity-based costing.
D. Lennox has recently encountered significant international competition for product B, with considerable business being lost to very aggressive suppliers. Will activity-based costing allow the company to be more competitive with product B from a price perspective? Briefly explain.
E. Will the cost and selling price of product A likely increase or decrease if Lennox changes to activity-based costing? Why? Hint: No calculations are necessary.

Regular—

Estimated production volume: 3,000 units
Direct materials cost: $28 per unit
Direct labor per unit: 3 hours at $15 per hour

Deluxe—

Estimated production volume: 4,000 units
Direct materials cost: $42 per unit
Direct labor per unit: 4 hours at $15 per hour

Scott’s overhead of $1,600,000 can be identified with three major activities: order processing ($250,000), machine processing ($1,200,000), and product inspection ($150,000). These activities are driven by number of orders processed, machine hours worked, and inspection hours, respectively. Data relevant to these activities follow.

Required:

A. Compute the pool rates that would be used for order processing, machine processing, and product inspection in an activity-based costing system.
B. Assuming use of activity-based costing, compute the unit manufacturing costs of Regular and Deluxe if the expected manufacturing volume is attained.
C. How much overhead would be applied to a unit of Regular and Deluxe if the company used traditional costing and applied overhead solely on the basis of direct labor hours? Which of the two products would be undercosted by this procedure? Overcosted?

The controller, who is studying the use of activity-based costing, has determined that the firm’s overhead can be identified with three activities: manufacturing setups, machine processing, and product shipping. Data on the number of setups, machine hours worked, and outgoing shipments, the activities’ three respective cost drivers, follow.

The firm’s total overhead of $3,060,000 is subdivided as follows: manufacturing setups, $260,000; machine processing, $2,400,000; and product shipping, $400,000.

Required:

A. Compute the pool rates that would be used for manufacturing setups, machine processing, and product shipping in an activity-based costing system.
B. Assuming use of activity-based costing, compute the unit overhead costs of product nos. 156 and 157 if the expected manufacturing volume is attained.
C. Assuming use of activity-based costing, compute the total cost per unit of product no. 156.
D. If the company’s selling price is based heavily on cost, would a switch to activity-based costing from the current traditional system result in a price increase or decrease for product no. 156? Show computations.

Two loan applications, among many others, were originated and closed during the year. No. 7439 consumed 3.5 hours in loan underwriting and 1.5 hours in loan closure, for a total of 5.0 hours. No. 7809 also required 5.0 hours of time, subdivided as follows: 2.0 hours in loan underwriting and 3.0 hours in loan closure.

Required:

A. Use an activity-based-costing system and determine the cost of processing, underwriting, and closing the two loan applications.
B. Determine the cost of processing the two loans if Heartfelt uses the traditional labor-hour-based system. Conversations with management found that, on average, each application took nine labor hours of processing time, excluding underwriting and closure.
C. Is Heartfelt making a mistake by continuing to use a traditional system that is based on an average labor cost per hour? Why?

1. Microsoft: Developing computer coding for a new spreadsheet package.
2. General Mills: Painting the office of a maintenance supervisor at a plant that produces cereal.
3. Mayo Clinic: Examining a new patient.
4. American Airlines: The 90 minutes that a Boeing 757 sits idle on the ground between flights.
5. Office Depot: Moving cases of paper from one location to another in the same warehouse.
6. Rolex: Attaching a watch band to the watch’s face.
7. United States Postal Service: Reprocessing mail that had been sorted incorrectly on a malfunctioning sorting machine.
8. Fidelity Investments: Correcting errors made by company personnel in customer accounts.
9. Marriott: Upgrading the quality of bedding used at hotels in very competitive marketplaces.

Required:

Categorize each of the activities as either value-added or non-value-added for the companies noted.

Bookstore sales totaled $8,400,000, and sales to individuals amounted to $2,400,000. Costs for the three activities were: Incoming receipts, $450,000; warehousing, $520,000; and outgoing shipments, $630,000. A review of the company’s activities found various inefficiencies with respect to the warehousing of textbooks (acquired for eventual sale to bookstores) and outgoing shipments to individuals. These inefficiencies resulted in an extra 500 moves and 400 shipments, respectively.

Required:

A. What is a non-value-added activity?
B. How much did non-value-added activities cost Switzer this past year?
C. Which of the two markets—sales to bookstores or sales to individuals—resulted in lower overall costs for incoming receipts, warehousing, and outgoing shipments? Evaluate these costs in both absolute dollars and as a percentage of sales. In addition, present a possible explanation for your results. Note: Exclude costs that arose from inefficient operations.

Filipe’s uses activity-based costing to determine the cost of servicing its customers. The company had total delivery costs during the year of $576,000 and 8,000 deliveries, along with cost of $765,000 for the administrative processing of 90,000 invoices.

Required:

A. Compute the pool rates for deliveries and invoice processing.
B. Compute the operating income that Ippilito’s earned from these two customers.
C. Compute the total of customer-related costs (deliveries and invoice processing) for each customer as a percentage of gross margin, and analyze the results for management. Explain any significant differences that you find.

Cost-driver data used by the firm and traceable to Engle and Midwest are:

Required:

A. Perform a customer profitability analysis for Clark. Compute the gross margin and operating income on transactions related to Engle Equipment and Midwest Refrigeration.
B. Compute gross margin as a percentage of sales revenue. Then compute (1) general selling and administrative costs as a percentage of gross margin and (2) total customer-related costs (i.e., costs that arise from sales visits, order taking, and special handling and shipping) as a percentage of gross margin.
C. On the basis of your calculations, which of the two customers is “more costly” to deal with? Briefly explain.

Homestead’s management recently attended a seminar and learned that customers with excessive requests and demands can have a significant, negative impact on corporate profitability.

Required:

A. For each of the three chains, compute:

1. Total customer-related costs as a percentage of gross margin.
2. The average order size (ignoring sales returns).
3. The ratio of regular orders to rush orders.
4. The number of sales returns as a percentage of the number of total orders.

B. Prepare a brief summary of your findings. Should Homestead work with any of the chains in an effort to improve results? Explain.

Required:

A. Briefly explain why the customer profitability analysis painted a negative picture of Bravo Manufacturing.
B. What actions are available to Haxton Enterprises to improve Bravo profitability?

Required:

A. Determine whether the following items would be apt to increase or decrease as a result of the just-in-time system:

1. Inventory storage costs.
2. Number of suppliers used.
3. Number of raw material shipments handled.
4. Dollars available for alternative investment opportunities.
5. Quality of raw materials purchased.

B. Identify the following items as value-added activities, non-value-added activities, or both.

1. Attaching the engine to the mower’s body.
2. Installing a new air-conditioning system in the executive offices.
3. Replacing a defective wheel with a new wheel.
4. Designing and printing an owner’s instruction manual for a new model.
5. Moving completed mowers to the finished-goods warehouse.
6. Attaching the handle to the mower’s body. The process took longer than normal because of a worker slowdown caused by disgruntled employees.

Controller D reported that part of the problem in his firm results from major differences among product lines with respect to unit volume, utilization of activities, quality assurance requirements established by customers, and product size. Controller M noted that in her company, which manufactures consumer goods, all items undergo the same basic production processes in the same sequence. Lately, however, there has been a significant increase in the number of item colors.
Both controllers are worried about the potential distortion of product costs under their traditional product-costing systems.

Required:

Which controller should be more concerned about the potential distortion? Explain.

Required:

A. Explain what is meant by a non-value-added cost.
B. Identify two potential non-value-added costs for each of the following service providers: airlines, banks, and hotels.

TRUE

FALSE

TRUE

TRUE

FALSE

I. Overhead costs are applied to products on the basis of volume-related measures.
II. All manufacturing costs are easily traceable to the goods produced.
III. Traditional costing systems tend to distort unit manufacturing costs when numerous goods are made that have widely varying production requirements.

Which of the above statements is (are) true?

1— Assignment of cost to products
2— Calculation of pool rates
3— Identification of cost drivers
4— Identification of cost pools

Which of the following choices correctly expresses the proper order of the preceding tasks?

I. They must be performed for each batch of product that is made.
II. They must be performed for each unit of product that is made.
III. They are needed to support an entire product line.

Which of the above statements is (are) true?

Riverside anticipates making 20,000 bouquets and 4,000 deliveries in the upcoming year.

The cost of wages and salaries and other overhead that would be charged to each bouquet made is:

Riverside anticipates making 20,000 bouquets and 4,000 deliveries in the upcoming year.

The cost of wages and salaries and other overhead that would be charged to each delivery is closest to:

The following information pertains to the three product lines for next year:

What is HiTech’s pool rate for the material-handling activity?

The following information pertains to the three product lines for next year:

What is HiTech’s pool rate for the automated machinery activity?

The following information pertains to the three product lines for next year:

What is HiTech’s pool rate for the finishing activity?

The following information pertains to the three product lines for next year:

What is HiTech’s pool rate for the packaging activity?

The overhead cost allocated to Beta by using traditional costing procedures would be:

The overhead cost allocated to Zeta by using traditional costing procedures would be:

The overhead cost allocated to Beta by using activity-based costing procedures would be:

The overhead cost allocated to Zeta by using activity-based costing procedures would be:

A recent analysis of staff support found a strong correlation with the number of clients served. In contrast, in-house computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively. Consulting clients served totaled 35% of the total client base, consumed 30% of the firm’s computer hours, and accounted for 20% of the total client transactions.
If Martin and Beasley switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to consulting services would:

A recent analysis of staff support found a strong correlation between the number of staff personnel and the number of clients served (consulting, 20; tax planning, 60). In contrast, in-house computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively. Consulting consumed 30% of the firm’s computer hours and had 20% of the total client transactions.

Assuming the use of activity-based costing, the proper percentage to use in allocating staff support costs to tax planning services is:

A recent analysis of staff support found a strong correlation between the number of staff personnel and the number of clients served (consulting, 20; tax planning, 60). In contrast, in-house computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively. Consulting consumed 30% of the firm’s computer hours and had 20% of the total client transactions.

If Kelly and Logan switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to consulting services would:

I. Product diversity creates costing problems because diverse products tend to utilize manufacturing activities in different ways.
II. Overhead costs that are not incurred at the unit level create costing problems because such costs do not vary with traditional application bases such as direct labor hours or machine hours.
III. Product diversity typically exists when a single product (e.g., a ballpoint pen) is made in different colors.

Which of the above statements is (are) true?

I. The degree of correlation between consumption of an activity and consumption of a particular cost driver.
II. The likelihood that a particular cost driver will induce a desired behavioral effect.
III. The likelihood that a particular cost driver will cause an increase in the cost of measurement.

Which of these factors should be considered in the selection of a cost driver?

I. Non-value-added activities are often unnecessary and dispensable.
II. Non-value-added activities may be necessary but are being performed in an inefficient and improvable manner.
III. Non-value-added activities can be eliminated without deterioration of product quality, performance, or perceived value.

1. Safety costs at winery
2. Truckload shipping costs
3. Building maintenance costs
4. Bottle and cork cost
5. Development cost of new, after-dinner wine
6. Tasting and testing costs

Required:

A. Briefly distinguish between unit-level and product-sustaining activities.
B. Classify the six costs listed as arising from a unit-level, batch-level, product-sustaining, or facility-level activity.

A. A unit-level activity is performed for each unit of production. In contrast, a product-sustaining activity is needed to support an entire product line. The latter is not necessarily performed each time a new unit or batch of products is manufactured.
B. 1. Facility-level
2. Batch-level
3. Facility-level
4. Unit-level
5. Product-sustaining
6. Batch-level

Bank

1. Review costs of commercial loan applications
2. Operating costs of human resources department
3. Immediate processing costs of a specific customer’s cash deposit
4. Bank membership costs of joining local Chamber of Commerce

Software manufacturer

5. Label and packaging charges from a commercial printer for a new software release
6. Air conditioning/heating costs of the firm’s production plant
7. Transport costs of moving the finished products from production run no. 1 to the company’s warehouse
8. Design and development costs of new spreadsheet software

Required:

A. Classify the eight costs listed as arising from either a unit-level, batch-level, product-sustaining, or facility-level activity.
B. Would number of loan applications or number of customers be a more appropriate cost-driver base for #1 above? Briefly explain.

A.

B. The number of loan applications would be more appropriate because it has a higher correlation with the amount of review costs incurred. Applications create review costs; customers, on the other hand, may not.

1. Direct materials used: $3,640,000
2. Plant rent, utilities, and taxes: $1,229,000
3. New technology design engineering: $2,040,000
4. Materials receiving: $318,000
5. Manufacturing-run/set-up charges: $115,000
6. Equipment depreciation: $92,000
7. General management salaries: $1,564,000

Required:

A. Briefly distinguish between batch-level and facility-level activities.
B. Determine the cost of the firm’s unit-level, batch-level, product-sustaining, and facility-level activities.

A. A batch-level activity is performed for each batch of products rather than for each unit. In contrast, a facility-level activity is required for an entire process to occur. Examples of the latter, which support the organization as a whole, include plant maintenance and property taxes.
B. Unit-level: $3,640,000 (1)
Batch-level: $318,000 (4) + $115,000 (5) = $433,000
Product-sustaining: $2,040,000 (3)
Facility-level: $1,229,000 (2) + $92,000 (6) + $1,564,000 (7) = $2,885,000

Order no. 715 has the following production requirements:

Machine setups: 7
Raw material: 11,200 units
Inspections: 16
Machine hours: 850

Required:

A. Compute the total overhead that should be assigned to order no. 715 by using activity-based costing.
B. Suppose that Wofford were to use a single, predetermined overhead rate based on machine hours. Compute the rate per hour and the total overhead assigned to order no. 715.
C. Discuss the merits of an activity-based costing system in comparison with a traditional costing system.

A.

B. $538,000 ÷ 20,000 machine hours = $26.90 per hour;
$26.90 per hour × 850 hours = $22,865
C. Activity-based costing (ABC) uses multiple cost drivers, more closely aligning individual costs with the factors that are creating them. Traditional systems, in contrast, use fewer drivers and therefore result in “lumping” unlike activities (unit-level, batch-level, and so forth) together. The end result is that ABC tends to eliminate the cost distortion that sometimes arises with traditional systems, more specifically, the under- or overcosting of products.

The following data show the pool rates that have been calculated by the company along with the quantity of driver units for the DEXs:

Required:

A. Calculate the quarterly quality-control cost that is allocated to the DEX product line under Weston’s traditional-costing system.
B. Calculate the quarterly quality-control cost that is allocated to the DEXs if activity-based costing is used.
C. Does the traditional approach under- or overcost the product line? By what amount?

A. $860,000 × 32% = $275,200
B. Incoming inspection (560,000 × $0.50 = $280,000) + in-process inspection (28,000 × $0.12 = $3,360) + final certification (90 × $115 = $10,350), which totals $293,710.
C. Traditional costing undercosts the DEXs by $18,510 ($293,710 – $275,200).