Managerial Accounting Creating Value in a Dynamic Business Environment 11Th Ed By Hilton - Test Bank

Managerial Accounting Creating Value in a Dynamic Business Environment 11Th Ed By Hilton – Test Bank

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Sample Questions Are Posted Below

Chapter 5

Activity-Based Costing and Management

True / False Questions

Because labor hours are related closely to the volume of activity in the factory, these traditional product-costing systems often are said to be volume-based costing systems.

TRUE

AACSB: Reflective Thinking
AICPA: FN Decision Making
AICPA FN: Research
Blooms: Analyze
Difficulty: 1 Easy
Learning Objective: 05-01

Feedback True: Correct! It is true that traditional product-costing systems where labor hours are related closely to the volume of activity are called volume-based costing systems.

Feedback False: This is a true statement.

Traditional product-costing systems are structured on multiple, volume-based cost drivers.

FALSE

AACSB: Reflective Thinking
AICPA: FN Decision Making
AICPA FN: Research
Blooms: Analyze
Difficulty: 1 Easy
Learning Objective: 05-01

Feedback True: This statement is false.

Feedback False: Correct! Traditional product-costing systems are structured on single, volume-based cost drivers, such as direct labor or machine hours.

In the first stage of ABC, a cost driver is selected for each activity cost pool.

FALSE

AACSB: Reflective Thinking
AICPA: FN Decision Making
AICPA FN: Research
Blooms: Analyze
Difficulty: 1 Easy
Learning Objective: 05-02

Feedback True: This statement is false.

Feedback False: Correct! In the first stage of ABC, resource costs are identified and divided into activity cost pools.

When using ABC, overhead costs assigned to each activity comprise an activity cost pool.

TRUE

AACSB: Reflective Thinking
AICPA: FN Decision Making
AICPA FN: Research
Blooms: Analyze
Difficulty: 1 Easy
Learning Objective: 05-02

Feedback True: Correct! Overhead costs assigned to each activity in ABC are known as an activity cost pool.

Feedback False: This statement is true.

In an activity-based costing system, direct materials used would typically be classified as a unit-level cost.

TRUE

AACSB: Reflective Thinking
AICPA: FN Decision Making
AICPA FN: Research
Blooms: Analyze
Difficulty: 1 Easy
Learning Objective: 05-03

Feedback True: Correct! It is true that an activity based costing system typically classifies direct materials used as unit-level costs.

Feedback False: This is a true statement.

Engineering design costs are typically known as batch-level activities.

FALSE

AACSB: Reflective Thinking
AICPA: FN Decision Making
AICPA FN: Research
Blooms: Analyze
Difficulty: 1 Easy
Learning Objective: 05-03

Feedback True: This statement is false.

Feedback False: Correct! Engineering design costs are typically identified as product-sustaining-level activities.

The pool rate is defined as the cost per unit of the cost driver for a particular activity cost pool.

TRUE

AACSB: Reflective Thinking
AICPA: FN Decision Making
AICPA FN: Research
Blooms: Analyze
Difficulty: 1 Easy
Learning Objective: 05-04

Feedback True: Correct! It is true that the pool rate is the cost per unit of the cost driver for a particular activity cost pool.

Feedback False: This is a true statement.

A product’s cost is the sum of its direct-material cost, its direct-labor cost, and its overhead cost, which is the accumulation of all the resource costs driven to the product by the various cost drivers selected for the ABC system.

TRUE

AACSB: Reflective Thinking
AICPA: FN Decision Making
AICPA FN: Research
Blooms: Analyze
Difficulty: 1 Easy
Learning Objective: 05-04

Feedback True: Correct! This is the accurate definition for the cost of a product under the ABC system.

Feedback False: This is a true statement.

Activity-based costing systems have a tendency to distort product costs.

FALSE

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-05

Feedback True: This statement is false.

Feedback False: Correct! Activity-based systems do not distort product costs.

Consumption ratios are useful in determining the existence of product-line diversity.

TRUE

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 05-05

Feedback True: Correct! It is true that consumption ratios are useful to determine the existence of product-line diversity.

Feedback False: It is true that consumption ratios are useful to determine the existence of product-line diversity.

There are six important factors when selecting appropriate cost drivers.

FALSE

AACSB: Reflective Thinking
AICPA: FN Decision Making
AICPA FN: Research
Blooms: Analyze
Difficulty: 1 Easy
Learning Objective: 05-06

Feedback True: This statement is false.

Feedback False: Correct! There are three important factors when selecting appropriate cost drivers.

One of the important factors when selecting appropriate cost drivers is the ability to overcost related services.

FALSE

AACSB: Reflective Thinking
AICPA: FN Decision Making
AICPA FN: Research
Blooms: Analyze
Difficulty: 1 Easy
Learning Objective: 05-06

Feedback True: This statement is false.

Feedback False: Correct! The important factors to consider when selecting appropriate cost drivers are: the degree of correlation between activity and driver, the cost of measurement, and the behavioral effects.

Storyboarding may be used to develop a detailed process flowchart.

TRUE

AACSB: Reflective Thinking
AICPA: FN Decision Making
AICPA FN: Research
Blooms: Analyze
Difficulty: 1 Easy
Learning Objective: 05-07

Feedback True: Correct! Storyboarding helps with the visual representation of activities and relationships that can be used to develop process flowcharts.

Feedback False: This statement is true.

A bill of activities is a complete listing of the activities identified and used in the ABC analysis.

FALSE

AACSB: Reflective Thinking
AICPA: FN Decision Making
AICPA FN: Research
Blooms: Analyze
Difficulty: 1 Easy
Learning Objective: 05-07

Feedback True: This statement is false.

Feedback False: Correct! An activity dictionary is a complete listing of the activities identified and used in the ABC analysis.

An example of a customer-value-added activity is final painting and polishing of the product.

TRUE

AACSB: Reflective Thinking
AICPA BB: Resource Management
AICPA FN: Measurement
Blooms: Analyze
Difficulty: 1 Easy
Learning Objective: 05-08

Feedback True: Correct! It is true that final painting and polishing of a product is an example of a customer-value-added activity.

Feedback False: It is true that final painting and polishing of a product is an example of a customer-value-added activity.

Non-value-added activities are the events that trigger activities and linkages among activities.

FALSE

AACSB: Reflective Thinking
AICPA BB: Resource Management
AICPA FN: Measurement
Blooms: Analyze
Difficulty: 1 Easy
Learning Objective: 05-08

Feedback True: This statement is false.

Feedback False: Correct! This is not the definition of non-value-added activities, but instead it defines root causes.

Customer-profitability analysis uses activity-based costing to determine the activities, costs, and profit associated with serving particular customers.

TRUE

AACSB: Reflective Thinking
AICPA BB: Measurement
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-09

Feedback True: Correct! This is the correct definition for customer-profitability analysis.

Feedback False: This statement is true.

Generally speaking, companies prefer doing business with customers who order small quantities rather than large quantities.

FALSE

AACSB: Reflective Thinking
AICPA BB: Measurement
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-09

Feedback True: Most companies do not prefer doing business with customers who order small quantities rather than large quantities.

Feedback False: Correct! Most companies do not prefer doing business with customers who order small quantities rather than large quantities.

A version of ABC that has found wide acceptance in service-industry settings is called volume-based activity-costing.

FALSE

AACSB: Reflective Thinking
AICPA BB: Measurement
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-10

Feedback True: This statement is false.

Feedback False: Correct! A version of ABC that has found wide acceptance in service-industry settings is called time-driven activity-based costing.

Simplified forms of ABC use time-driven elements for service companies that are well aligned with the resources deployed in terms of units of time of labor.

TRUE

AACSB: Reflective Thinking
AICPA BB: Measurement
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-10

Feedback True: Correct! Time driven ABC is a simplified form that uses time driven elements for resources like labor, which are the primary resources deployed in the service industry.

Feedback False: This statement is true.

Multiple Choice Questions

Use this information to answer Questions 21-22:

Rocket Products manufactures three types of remote-control devices: Economy, Standard, and Deluxe. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below.

Activity	Cost	Cost Driver
Material handling	$225,000	Number of parts
Material insertion	2,475,000	Number of parts
Automated machinery	840,000	Machine hours
Finishing	170,000	Direct labor hours
Packaging	170,000	Orders shipped
Total	$3,880,000

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

	Economy	Standard	Deluxe
Units to be produced	10,000	5,000	2,000
Orders to be shipped	1,000	500	200
Number of parts per unit	10	15	25
Machine hours per unit	1	3	5
Labor hours per unit	2	2	2

Assume that Rocket is using a volume-based costing system, and the preceding overhead costs are applied to all products on the basis of direct labor hours. The overhead cost that would be assigned to the Deluxe product line is closest to:
A.$456,471.
B. $646,471.
C. $961,176.
D. $1,141,176.
E. None of the answers is correct.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-01

Feedback A: Correct! Total labor hours = Sum of Units from Economy, Standard, and Deluxe X Number of Labor hours = (10,000 + 5,000 + 2,000) x 2= 34,000; Ratio of Deluxe labor hours to total labor hours X Total overhead costs = (4,000 ÷ 34,000) x $3,880,000 = $456,471.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: This amount is incorrect.

Feedback E: This answer choice is wrong because there is a correct amount listed.

Assume that Rocket is using a volume-based costing system, and the preceding overhead costs are applied to all products on the basis of direct labor hours. The overhead cost that would be assigned to the Standard product line is closest to:
A.$456,471.
B. $646,471.
C. $961,176.
D. $1,141,176.
E. None of the answers is correct.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-01

Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: Correct! Total labor hours = Sum of Units from Economy, Standard, and Deluxe X Number of Labor hours = (10,000 + 5,000 + 2,000) x 2= 34,000; Ratio of Standard labor hours to total labor hours X Total overhead costs = (10,000 ÷ 34,000) x $3,880,000 = $1,141,176.

Feedback E: This answer choice is wrong because there is a correct amount listed.

Consider the following statements regarding traditional costing systems:
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?
A.I only.
B. II only.
C. III only.
D. I and III.
E. II and III.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Analyze
Difficulty: 1 Easy
Learning Objective: 05-01

Feedback A: While this statement is true, there is a better answer.

Feedback B: This statement is not true.

Feedback C: While this statement is true, there is a better answer.

Feedback D: Correct! It is true that overhead costs are applied to products on the basis of volume-related measures and traditional costing systems tend to distort unit manufacturing costs when numerous goods are made that have widely varying production requirements.

Feedback E: One of these statements is not true.

Many traditional costing systems:
A.trace manufacturing overhead to individual activities and require the development of numerous activity-costing rates.
B. write off manufacturing overhead as an expense of the current period.
C. combine widely varying elements of overhead into a single cost pool.
D. use a host of different cost drivers (e.g., number of production setups, inspection hours, orders processed) to improve the accuracy of product costing.
E. produce results far superior to those achieved with activity-based costing.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Analyze
Difficulty: 1 Easy
Learning Objective: 05-01

Feedback A: This statement is incorrect.

Feedback B: This statement is incorrect.

Feedback C: Correct! Many traditional costing systems combine widely varying elements of overhead into a single cost pool.

Feedback D: This statement is incorrect.

Feedback E: This statement is incorrect.

Use the following information to answer Questions 25 through 28.

St. Vincent’s, Inc., currently uses traditional costing procedures, applying $800,000 of overhead to products Beta and Zeta on the basis of direct labor hours. The company is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labor hours (DLH), production setups (SU), and number of parts components (PC) as cost drivers. Data on the cost pools and respective driver volumes follow.

Product	Pool No.1 (Driver: DLH)	Pool No. 2 (Driver: SU)	Pool No. 3 (Driver: PC)
Beta	1,200	45	2,250
Zeta	2,800	55	750

Pool Cost	$160,000	$280,000	$360,000

The overhead cost allocated to Beta by using traditional costing procedures would be:
A.$240,000.
B.$356,000.
C. $444,000.
D. $560,000.
E. None of the answers is correct.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-01

Feedback A: Correct! Total Pool Cost = Sum of No. 1, 2, and 3 = $160,000 + $280,000 + $360,000 = $800,000;

Overhead allocated to Beta = (Beta DLH ÷ Total DLH) x Total Pool Cost = (1,200 ÷ 4,000) x $800,000 = $240,000.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: This amount is incorrect.

Feedback E: This answer choice is wrong because there is a correct amount listed.

The overhead cost allocated to Zeta by using traditional costing procedures would be:
A.$240,000.
B.$356,000.
C. $444,000.
D. $560,000.
E. None of the answers is correct.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-01

Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: Correct! Total Pool Cost = Sum of No. 1, 2, and 3 = $160,000 + $280,000 + $360,000 = $800,000; Overhead allocated to Zeta = (Beta DLH ÷ Total DLH) x Total Pool Cost = (2,800 ÷ 4,000) x $800,000 = $560,000.

Feedback E: This answer choice is wrong because there is a correct amount listed.

The overhead cost allocated to Beta by using activity-based costing procedures would be:
A.$240,000.
B. $356,000.
C. $444,000.
D. $560,000.
E. None of the answers is correct.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-04

Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: Correct! (Total Pool Costs for No. 1 x Pool No. 1 Beta ratio to Total Pool Costs) + (Total Pool Costs for No. 2 x Pool No. 2 Beta ratio to Total Pool Costs) + (Total Pool Costs for No. 3 x Pool No. 3 Beta ratio to Total Pool Costs) = [($160,000 x 1,200/4,000) + ($280,000 x 45/100) + ($360,000 x 2,250/3,000)] = $48,000 + $126,000 + $270,000 = $444,000.

Feedback D: This amount is incorrect.

Feedback E: This answer choice is wrong because there is a correct amount listed.

The overhead cost allocated to Zeta by using activity-based costing procedures would be:
A.$240,000.
B. $356,000.
C. $444,000.
D. $560,000.
E. None of the answers is correct.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-04

Feedback A: Correct! This amount is incorrect.

Feedback B: Correct! (Total Pool Costs for No. 1 x Pool No. 1 Zeta ratio to Total Pool Costs) + (Total Pool Costs for No. 2 x Pool No. 2 Zeta ratio to Total Pool Costs) + (Total Pool Costs for No. 3 x Pool No. 3 Zeta ratio to Total Pool Costs) =

[($160,000 x 2,800/4,000) + ($280,000 x 55/100) + ($360,000 x 750/3,000)] = $112,000 + $154,000 + $90,000 = $356,000.

Feedback C: This amount is incorrect.

Feedback D: This amount is incorrect.

Feedback E: This answer choice is wrong because there is a correct amount listed.

Carlin and Marley, an accounting firm, provides consulting and tax planning services. For many years, the firm’s total administrative cost (currently $270,000) has been allocated to services on this basis of billable hours to clients. A recent analysis found that 55% of the firm’s billable hours to clients resulted from tax planning services, while 45% resulted from consulting services.
The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows:

Staff Support	$200,000
In-house computing charges	50,000
Miscellaneous office costs	20,000
Total	$270,000

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 Carlin and Marley switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to consulting services would:
A. decrease by $32,500.
B. increase by $32,500.
C. decrease by $59,500.
D. change by an amount other than those listed.
E. change, but the amount cannot be determined based on the information presented.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-01
Learning Objective: 05-10
Learning Objective: 05-04

Feedback A: Correct! Original: $270,000 x 45% = $121,500; New amount under ABC: [($200,000 x 35%) + ($50,000 x 30%) + ($20,000 x 20%)] = $70,000 + $15,000 + $4,000 = $89,000; $121,500 – $89,000 = $32,500 decrease.

Feedback B: This amount is incorrect because costs do not increase.

Feedback C: This amount is incorrect.

Feedback D: This answer is incorrect, because there is an accurate amount listed.

Feedback E: This answer is incorrect, because sufficient information is available for the calculation.

The following tasks are associated with an activity-based costing system:
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?
A.1, 2, 3, 4.
B. 2, 4, 1, 3.
C. 3, 4, 2, 1.
D. 4, 2, 1, 3.
E. 4, 3, 2, 1.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-02
Learning Objective: 05-04

Feedback A: This order is incorrect.

Feedback B: This order is incorrect.

Feedback C: This order is incorrect.

Feedback D: This order is incorrect.

Feedback E: Correct! The order of tasks in an activity-based costing system are: identification of cost pools, identification of cost drivers, calculation of pool rates, and assignment of cost to products.

Which of the following is the proper sequence of events in an activity-based costing system?
A.Identification of cost drivers, identification of cost pools, calculation of pool rates, assignment of cost to products.
B. Identification of cost pools, identification of cost drivers, calculation of pool rates, assignment of cost to products.
C. Assignment of cost to products, identification of cost pools, identification of cost drivers, calculation of pool rates.
D. Calculation of pool rates, identification of cost drivers, identification of cost pools, assignment of cost to products.
E. None of the answers is correct.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-02
Learning Objective: 05-04

Feedback A: This order is incorrect.

Feedback B: Correct! The proper sequence of tasks in an activity-based costing system is: identification of cost pools, identification of cost drivers, calculation of pool rates, and assignment of cost to products.

Feedback C: This order is incorrect.

Feedback D: This order is incorrect.

Feedback E: This answer choice is wrong because there is a correct sequence listed.

Which of the following tasks is not normally associated with an activity-based costing system?
A.Calculation of pool rates.
B. Identification of cost pools.
C. Preparation of allocation matrices.
D. Identification of cost drivers.
E. Assignment of cost to products.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-02
Learning Objective: 05-04

Feedback A: This task is associated with an activity-based costing system.

Feedback B: This task is associated with an activity-based costing system.

Feedback C: Correct! This is not normally a task associated with an activity-based costing system.

Feedback D: This task is associated with an activity-based costing system.

Feedback E: This task is associated with an activity-based costing system.

Which of the following is not a broad, cost classification category typically used in activity-based costing?
A.Unit-level.
B.Batch-level.
C. Product-sustaining level.
D. Facility-level.
E. Management-level.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-03

Feedback A: This cost classification category is associated with an activity-based costing system.

Feedback B: This cost classification category is associated with an activity-based costing system.

Feedback C: This cost classification category is associated with an activity-based costing system.

Feedback D: This cost classification category is associated with an activity-based costing system.

Feedback E: Correct! Management-level is not a broad cost classification category used in activity-based costing.

In an activity-based costing system, direct materials used would typically be classified as a:
A.unit-level cost.
B. batch-level cost.
C. product-sustaining cost.
D. facility-level cost.
E. matrix-level cost.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Analyze
Difficulty: 1 Easy
Learning Objective: 05-03

Feedback A: Correct! Direct materials used are typically classified as unit level costs in activity-based costing.

Feedback B: This is incorrect.

Feedback C: This is incorrect.

Feedback D: This is incorrect.

Feedback E: This is incorrect.

Which of the following is least likely to be classified as a batch-level activity in an activity-based costing system?
A.Shipping.
B. Receiving and inspection.
C. Production setup.
D. Property taxes.
E. Quality assurance.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-03

Feedback A: Shipping would likely be classified as a batch-level activity.

Feedback B: Receiving and inspection would likely be classified as a batch-level activity.

Feedback C: Production setup would likely be classified as a batch-level activity.

Feedback D: Correct! Property taxes are least likely to be classified as a batch-level activity in activity based costing.

Feedback E: Quality assurance would likely be classified as a batch-level activity.

In an activity-based costing system, materials receiving would typically be classified as a:
A.unit-level activity.
B. batch-level activity.
C. product-sustaining activity.
D. facility-level activity.
E. period-level activity.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-03

Feedback A: Materials receiving would probably not be classified as a unit-level activity.

Feedback B: Correct! Materials receiving would likely be classified as a batch-level activity.

Feedback C: Materials receiving would probably not be classified as a product-sustaining activity.

Feedback D: Materials receiving would probably not be classified as a facility-level activity.

Feedback E: Materials receiving would probably not be classified as a period-level activity.

Rosen, Inc., an appliance manufacturer, is developing a new line of ovens that uses controlled-laser technology. The research and testing costs associated with the new ovens is said to arise from a:
A.unit-level activity.
B. batch-level activity.
C. product-sustaining activity.
D. facility-level activity.
E. competitive-level activity.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-03

Feedback A: Research and testing costs would probably not be categorized as a unit-level activity.

Feedback B: Research and testing costs would probably not be categorized as a batch-level activity.

Feedback C: Correct! Research and testing costs would probably be categorized as a product-sustaining activity.

Feedback D: Research and testing costs would probably not be categorized as a facility-level activity.

Feedback E: Research and testing costs would probably not be categorized as a competitive-level activity.

Consider the following statements regarding product-sustaining activities:
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?
A. I only.
B. II only.
C. III only.
D. I and II.
E. II and III.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-03

Feedback A: This statement is incorrect.

Feedback B: This statement is incorrect.

Feedback C: Correct! Product-sustaining activities are needed to support an entire product line.

Feedback D: These statements are incorrect.

Feedback E: This answer is only partially correct.

Which of the following is least likely to be classified as a facility-level activity in an activity-based costing system?
A.Plant maintenance.
B. Property taxes.
C. Machine processing cost.
D. Plant depreciation.
E. Plant management salaries.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-03

Feedback A: Plant maintenance would probably be classified as a facility level activity.

Feedback B: Property taxes would probably be classified as a facility level activity.

Feedback C: Correct! Machine processing cost would be least likely classified as a facility level activity.

Feedback D: Plant depreciation would probably be classified as a facility level activity.

Feedback E: Plant management salaries would probably be classified as a facility level activity.

40.The salaries of a manufacturing plant’s management are said to arise from:
A. unit-level activities.
B. batch-level activities.
C. product-sustaining activities.
D. facility-level activities.
E. direct-cost activities.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-03

Feedback A: Salaries of a manufacturing plan’s management are not unit –level activities.

Feedback B: Salaries of a manufacturing plan’s management are not batch –level activities.

Feedback C: Salaries of a manufacturing plan’s management are not product sustaining activities.

Feedback D: Correct! Salaries of a manufacturing plan’s management are facility –level activities.

Feedback E: Salaries of a manufacturing plan’s management are not direct cost activities.

Which of the following choices correctly depicts a cost that arises from a batch-level activity and one that arises from a facility-level activity?

	Batch-Level Activity	Facility-Level Activity
A.	Direct materials	Plant depreciation
B.	Inspection	Property taxes
C.	Quality assurance	Shipping
D.	Plant maintenance	Insurance
E.	Management salaries	Material handling

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-03

Feedback A: This pair is incorrect.

Feedback B: Correct! This choice is the correct pair of examples.

Feedback C: This pair is incorrect.

Feedback D: This pair is incorrect.

Feedback E: This pair is incorrect.

Which of the following choices correctly depicts the proper classification of direct materials used and management salaries?

	Direct Materials Used	Management Salaries
A.	Batch level	Facility level
B.	Batch level	Batch level
C.	Unit level	Product-sustaining level
D.	Unit level	Facility level
E.	Product-sustaining level	Batch level

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-03

Feedback A: This choice is an incorrect pair of classifications.

Feedback B: This choice is an incorrect pair of classifications.

Feedback C: This choice is an incorrect pair of classifications.

Feedback D: Correct! This choice is the correct pair of classifications.

Feedback E: This choice is an incorrect pair of classifications.

The division of activities into unit-level, batch-level, product-sustaining level, and facility-level categories is commonly known as a cost:
A.object.
B. application method.
C. hierarchy.
D. estimation method.
E. classification scheme that is useful in traditional, volume-based systems.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-03

Feedback A: This term is incorrect.

Feedback B: This term is incorrect.

Feedback C: Correct! Cost hierarchy is the correct answer.

Feedback D: This term is incorrect.

Feedback E: This term is incorrect.

Pound Industries’ customer service department follows up on customer complaints by telephone inquiry. During a recent period, the department initiated 7,000 calls and incurred costs of $203,000. If 2,940 of these calls were for the company’s wholesale operation (the remainder were for the retail division), costs allocated to the retail division should amount to:
A.$0.
B. $29.
C. $85,260.
D. $117,740.
E. $203,000.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard

Learning Objective: 05-04

Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: Correct! Retail division Allocation = [(Total calls – Wholesale calls) ÷ Total calls] x Total costs = [(7,000 – 2,940) ÷ 7,000] x $203,000 = $117,740.

Feedback E: This amount is incorrect.

Pound Industries’ customer service department follows up on customer complaints by telephone inquiry. During a recent period, the department initiated 7,000 calls and incurred costs of $203,000. If 2,940 of these calls were for the company’s wholesale operation (the remainder were for the retail division), costs allocated to the wholesale operation should amount to:
A.$0.
B. $29.
C. $85,260.
D. $117,740.
E. $203,000.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-04

Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: Correct! Wholesale division Allocation = [Wholesale calls ÷ Total calls] x Total costs = [2,940 ÷ 7,000] x $203,000 = $85,260.

Feedback D: This amount is incorrect.

Feedback E: This amount is incorrect.

Pound Industries’ customer service department follows up on customer complaints by telephone inquiry. During a recent period, the department initiated 10,000 calls and incurred costs of $312,000. Of these calls, 3,800 were for the company’s wholesale operation; the remainder was for the retail division. Costs allocated to the wholesale operation are:
A.$0.
B.$31,200.
C. $118,560.
D. $193,440.
E. $203,000.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard

Learning Objective: 05-04

Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: Correct! Wholesale division Allocation = [Wholesale calls ÷ Total calls] x Total costs = (3,800 ÷ 10,000) x $312,000 = $118,560.

Feedback D: This amount is incorrect.

Feedback E: This amount is incorrect.

Baxter customer service department follows up on customer complaints by telephone inquiry. During a recent period, the department initiated 10,000 calls and incurred costs of $312,000. Of these calls, 3,800 were for the company’s wholesale operation; the remainder was for the retail division. Costs allocated to the retail division are:
A.$0.
B.$31,200.
C. $118,560.
D. $193,440.
E. $203,000.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard

Learning Objective: 05-04

Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: Correct! Retail division Allocation = [(Total calls – Wholesale calls) ÷ Total calls] x Total costs = [(10,000 – 3,800) ÷ 10,000)] x $312,000 = $193,440.

Feedback E: This amount is incorrect.

Use the following information to answer Questions 48 & 49.

Skyline Florists uses an activity-based costing system to compute the cost of making floral bouquets and delivering the bouquets to its commercial customers. Company personnel who earn $180,000 typically perform both tasks; other firm-wide overhead is expected to total $70,000. These costs are allocated as follows:

	Bouquet Production	Delivery	Other
Wages and salaries	60%	30%	10%
Other overhead	50%	35%	15%

Skyline 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:
A.$7.15.
B. $8.75.
C. $12.50.
D. $13.75.
E. None of the answers is correct.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard

Learning Objective: 05-04

Feedback A: Correct! Percentage of each type of labor that goes to bouquet production ÷ Number of Bouquets= [($180,000 x 60%) + ($70,000 x 50%)] ÷ 20,000 = $7.15

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: This amount is incorrect.

Feedback E: This answer choice is wrong because there is a correct amount listed.

The cost of wages and salaries and other overhead that would be charged to each delivery is closest to:
A.$19.63.
B. $20.31.
C. $26.75.
D. $40.63.
E. None of the answers is correct.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard

Learning Objective: 05-04

Feedback A: Correct! Percentage of each type of labor that goes toward delivery activity ÷ Number of deliveries = [($180,000 x 30%) + ($70,000 x 35%)] ÷ 4,000 = $19.63 (rounded).

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: This amount is incorrect.

Feedback E: This answer choice is wrong because there is a correct amount listed.

Use the following information to answer Questions 50-57.

Barnett Products manufactures three types of remote-control devices: Economy, Standard, and Deluxe. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below.

Activity	Cost	Cost Driver
Material handling	$225,000	Number of parts
Material insertion	2,475,000	Number of parts
Automated machinery	840,000	Machine hours
Finishing	170,000	Direct labor hours
Packaging	170,000	Orders shipped
Total	$3,880,000

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

	Economy	Standard	Deluxe
Units to be produced	10,000	5,000	2,000
Orders to be shipped	1,000	500	200
Number of parts per unit	10	15	25
Machine hours per unit	1	3	5
Labor hours per unit	2	2	2

What is Barnett’s pool rate for the material-handling activity?
A.$1.00 per part.
B. $2.25 per part.
C. $6.62 per labor hour.
D. $13.23 per part.
E. None of the answers is correct.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-04

Feedback A: Correct! Material handling activity costs ÷ sum parts for each category = $225,000 ÷ [(10,000 x 10) + (5,000 x 15) + (2,000 x 25)] = $1 per part

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: This amount is incorrect.

Feedback E: This answer choice is wrong because there is a correct amount listed.

What is Barnett’s pool rate for the material-insertion activity?
A.$11.00 per part.
B. $49.50 per part.
C. $16.18 per labor hour.
D. $1.00 per part.
E. None of the answers is correct.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-04

Feedback A: Correct! Material handling activity costs ÷ sum parts for each category = $2,475,000 ÷ [(10,000 x 10) + (5,000 x 15) + (2,000 x 25)] = $11 per part

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: This amount is incorrect.

Feedback E: This answer choice is wrong because there is a correct amount listed.

What is Barnett’s pool rate for the automated machinery activity?
A.$24.00 per machine hour.
B. $24.50 per labor hour.
C. $49.42 per unit.
D. $50.00 per machine hour.
E. None of the answers is correct.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-04

Feedback A: Correct! Automated machinery activity costs ÷ Sum of machine hours for each category = $840,000 ÷ [(10,000 x 1) + (5,000 x 3) + (2,000 x 5)] = $24 per machine hour.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: This amount is incorrect.

Feedback E: This answer choice is wrong because there is a correct amount listed.

What is Barnett’s pool rate for the finishing activity?
A.$5.00 per labor hour.
B. $5.00 per machine hour.
C. $5.00 per unit.
D. $7.50 per unit.
E. None of the answers is correct.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-04

Feedback A: Correct! Finishing activity costs ÷ Sum of labor hours for each category = $170,000 ÷ [(10,000 x 2) + (5,000 x 2) + (2,000 x 2)] =$5 per labor hour.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: This amount is incorrect.

Feedback E: This answer choice is wrong because there is a correct amount listed.

What is Barnett’s pool rate for the packaging activity?
A.$4.86 per machine hour.
B. $5.00 per labor hour.
C. $10.00 per part.
D. $100.00 per order shipped.
E. None of the answers is correct.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-04

Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: Correct! Packaging activity costs ÷ sum of order numbers = $170,000 ÷ [(1,000) + (500) + (200 )] =$100 per order shipped.

Feedback E: This answer choice is wrong because there is a correct amount listed.

Under Barnett’s activity-based costing system, what is the per-unit overhead cost of Economy?
A.$141.
B. $164.
C. $225.
D. $228.
E. None of the answers is correct.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-04

Feedback A: This amount is incorrect.

Feedback B: Correct!

Material handling activity costs ÷ sum parts for each category = $225,000 ÷ [(10,000 x 10) + (5,000 x 15) + (2,000 x 25)] = $1 per part

Material handling activity costs ÷ sum parts for each category = $2,475,000 ÷ [(10,000 x 10) + (5,000 x 15) + (2,000 x 25)] = $11 per part

Automated machinery activity costs ÷ Sum of machine hours for each category = $840,000 ÷ [(10,000 x 1) + (5,000 x 3) + (2,000 x 5)] = $24 per machine hour.

Finishing activity costs ÷ Sum of labor hours for each category = $170,000 ÷ [(10,000 x 2) + (5,000 x 2) + (2,000 x 2)] =$5 per labor hour.

Packaging activity costs ÷ sum of order numbers = $170,000 ÷ [(1,000) + (500) + (200 )] =$100 per order shipped ÷ 10 = $10 per unit

Economy Model: Per unit costs for all five activities x Driver numbers =[($1 x 10) +($11 x 10) + ($24 x 1) + ($5 x 2) + ($100 ÷ 10)]= $164

Feedback C: This amount is incorrect.

Feedback D: This amount is incorrect.

Feedback E: This answer choice is wrong because there is a correct amount listed.

Under Barnett’s activity-based costing system, what is the per-unit overhead cost of Standard?
A.$164.
B. $228.
C. $272.
D. $282.
E. None of the answers is correct.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-04

Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: Correct!

Material handling activity costs ÷ sum parts for each category = $225,000 ÷ [(10,000 x 10) + (5,000 x 15) + (2,000 x 25)] = $1 per part

Material handling activity costs ÷ sum parts for each category = $2,475,000 ÷ [(10,000 x 10) + (5,000 x 15) + (2,000 x 25)] = $11 per part

Automated machinery activity costs ÷ Sum of machine hours for each category = $840,000 ÷ [(10,000 x 1) + (5,000 x 3) + (2,000 x 5)] = $24 per machine hour.

Finishing activity costs ÷ Sum of labor hours for each category = $170,000 ÷ [(10,000 x 2) + (5,000 x 2) + (2,000 x 2)] = $5 per labor hour.

Packaging activity costs ÷ sum of order numbers = $170,000 ÷ [(1,000) + (500) + (200 )] = $100 per order shipped ÷10 = $10 per unit

Standard Model: Per unit costs for all five activities x Driver numbers =[($1 x15) +($11 x 15) + ($24 x 3) + ($5 x 2) + ($100 ÷ 10)]= $272

Feedback D: This amount is incorrect.

Feedback E: This answer choice is wrong because there is a correct amount listed.

Under Barnett’s activity-based costing system, what is the per-unit overhead cost of Deluxe?
A.$272.
B. $282.
C. $320.
D. $440.
E. None of the answers is correct.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-04

Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: Correct!

Material handling activity costs ÷ sum parts for each category = $225,000 ÷ [(10,000 x 10) + (5,000 x 15) + (2,000 x 25)] = $1 per part

Material handling activity costs ÷ sum parts for each category = $2,475,000 ÷ [(10,000 x 10) + (5,000 x 15) + (2,000 x 25)] = $11 per part

Automated machinery activity costs ÷ Sum of machine hours for each category = $840,000 ÷ [(10,000 x 1) + (5,000 x 3) + (2,000 x 5)] = $24 per machine hour.

Finishing activity costs ÷ Sum of labor hours for each category = $170,000 ÷ [(10,000 x 2) + (5,000 x 2) + (2,000 x 2)] =$5 per labor hour.

Packaging activity costs ÷ sum of order numbers = $170,000 ÷ [(1,000) + (500) + (200 )] = $100 per order shipped ÷ 10 = $10 per unit

Deluxe Model: Per unit costs for all five activities x Driver numbers =[($1 x 25) +($11 x 25) + ($24 x 5) + ($5 x 2) + ($100 ÷ 10)] = $440

Feedback E: This answer choice is wrong because there is a correct amount listed.

Use the following information to answer Questions 58 & 59.

Bridges and Lloyd, an accounting firm, provides consulting and tax planning services. For many years, the firm’s total administrative cost (currently $250,000) has been allocated to services on the basis of billable hours to clients. A recent analysis found that 65% of the firm’s billable hours to clients resulted from tax planning services, while 35% resulted from consulting services.
The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows:

Staff Support	$180,000
In-house computing charges	50,000
Miscellaneous office costs	20,000
Total	$250,000

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.20%.
B. 60%.
C. 65%.
D. 75%.
E. 80%.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-04
Learning Objective: 05-10

Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: Correct! Tax client to total clients Ratio = 60 ÷ (60 + 20) = 75%.

Feedback E: This amount is incorrect.

If Bridges and Lloyd switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to consulting services would:
A.decrease by $23,500.
B. increase by $23,500.
C. decrease by $32,500.
D. change by an amount other than those listed.
E. change, but the amount cannot be determined based on the information presented.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-01
Learning Objective: 05-10
Learning Objective: 05-04

Feedback A: Correct! Original: $250,000 x 35% = $87,500; New amount using ABC: [($180,000 x 25%) + ($50,000 x 30%) + ($20,000 x 20%)] = $45,000 + $15,000 + $4,000 = $64,000; $87,500 – $64,000 = $23,500 decrease.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: This statement is incorrect, because there is a correct amount listed.

Feedback E: This statement is incorrect, because there is sufficient information to calculate an amount.

Activity-based costing systems:
A.use a single, volume-based cost driver.
B. assign overhead to products based on the products’ relative usage of direct labor.
C. often reveal products that were under- or over-costed by traditional costing systems.
D. typically use fewer cost drivers than more traditional costing systems.
E. have a tendency to distort product costs.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-05

Feedback A: This statement is incorrect.

Feedback B: This statement is incorrect.

Feedback C: Correct! Activity-based costing systems often reveal products that were under-or over-costed by traditional costing systems.

Feedback D: This statement is incorrect.

Feedback E: This statement is incorrect.

Flavorful Manufacturing sells a number of goods whose selling price is heavily influenced by cost. A recent study of product no. 519 revealed a traditionally-derived total cost of $1,019, a selling price of $1,850 based on that figure, and a newly computed activity-based total cost of $1,215. Which of the following statements is true?
A.All other things being equal, the company should consider a drop in its sales price.
B. The company may have been extremely competitive in the marketplace from a price perspective.
C. Product no. 519 could be labeled as being overcosted by the firm’s traditional costing procedures.
D. If product no. 519 is undercosted by traditional accounting procedures, then all of the company’s other products must be undercosted as well.
E. Generally speaking, the activity-based cost figure is “less accurate” than the traditionally-derived cost figure.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 05-05

Feedback A: This statement is incorrect.

Feedback B: Correct! The company may have been extremely competitive in the marketplace from a price perspective, based on these facts.

Feedback C: This statement is incorrect.

Feedback D: This statement is incorrect.

Feedback E: This statement is incorrect.

Starwatch Manufacturing sells a number of goods whose selling price is heavily influenced by cost. A recent study of product no. 520 revealed a traditionally-derived total cost of $1,623 and a selling price of $1,850 based on that figure. A newly computed activity-based total cost is $1,215. Which of the following statements is true?
A.All other things being equal, Starwatch should consider increasing its sales price.
B. Dawn should increase the product’s selling price to maintain the same markup percentage.
C. Product no. 520 could be labeled as being overcosted by Starwatch’s traditional costing procedures.
D. If product no. 520 is undercosted by traditional accounting procedures, then all of Starwatch’s other products must be undercosted as well.
E. Generally speaking, the activity-based cost figure is “less accurate” than the traditionally-derived cost figure.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 05-05

Feedback A: This statement is incorrect.

Feedback B: This statement is incorrect.

Feedback C: Correct! Product no. 520 could be labeled as being overcosted by Dawn’s traditional costing procedures.

Feedback D: This statement is incorrect.

Feedback E: This statement is incorrect.

Magnolia Industries combines all manufacturing overhead into a single cost pool and allocates this overhead to products by using machine hours. Activity-based costing would likely show that with Magnolia’s current procedures that:
A.all of the company’s products are undercosted.
B. the company’s high-volume products are undercosted.
C. all of the company’s products are overcosted.
D. the company’s high-volume products are overcosted.
E. the company’s low-volume products are overcosted.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Analyze

Difficulty: 3 Hard
Learning Objective: 05-05

Feedback A: This statement is incorrect.

Feedback B: This statement is incorrect.

Feedback C: This statement is incorrect.

Feedback D: Correct! Activity-based costing would likely show that with Magnolia’s current procedures that the company’s high-volume products are overcosted.

Feedback E: This statement is incorrect.

Fortner Technologies manufactures products X and Y, applying overhead on the basis of labor hours. X, a low-volume product, requires a variety of complex manufacturing procedures. Y, on the other hand, is both a high-volume product and relatively simplistic in nature. What would an activity-based costing system likely disclose about products X and Y as a result of Fortner’s current accounting procedures?

	X	Y
A.	Undercosted	Undercosted
B.	Overcosted	Overcosted
C.	Overcosted	Undercosted
D.	Overcosted	Overcosted
E.	Costed correctly	Costed correctly

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium
Learning Objective: 05-05

Feedback A: This set of relationships is incorrect.

Feedback B: This set of relationships is incorrect.

Feedback C: This set of relationships is incorrect.

Feedback D: Correct! These are the correct relationships for products X and Y; both are overcosted.

Feedback E: This set of relationships is incorrect.

Miami Production manufactures products X and Y, applying overhead on the basis of labor hours. X is a high-volume product and relatively simplistic in nature. Y is both a low-volume product and requires a variety of complex manufacturing procedures. What would an activity-based costing system likely disclose about products X and Y as a result of Miami’s current accounting procedures?

	X	Y
A.	Undercosted	Undercosted
B.	Overcosted	Overcosted
C.	Overcosted	Undercosted
D.	Overcosted	Overcosted
E.	Costed correctly	Costed correctly

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium
Learning Objective: 05-05

Feedback A: This set of relationships is incorrect.

Feedback B: This set of relationships is incorrect.

Feedback C: Correct! These are the correct relationships for products X and Y; X is overcosted and Y is undercosted.

Feedback D: This set of relationships is incorrect.

Feedback E: This set of relationships is incorrect.

Towler Inc. manufactures products J and K, applying overhead on the basis of labor hours. J, a low-volume product, requires a variety of complex manufacturing procedures. K, on the other hand, is both a high-volume product and relatively simplistic in nature. What would an activity-based costing system likely disclose about products J and K as a result of Towler’s current accounting procedures?

Undercosted Overcosted
A. J, K

J, K
J K
K J
None of the answers is correct.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium
Learning Objective: 05-05

Feedback A: This set of relationships is incorrect.

Feedback B: This set of relationships is incorrect.

Feedback C: Correct! J is undercosted and K is overcosted.

Feedback D: This set of relationships is incorrect.

Feedback E: This answer choice is wrong because there is a correct choice listed.

Consider the following statements:
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?
A. I only.
B. II only.
C. I and II.
D. I and III.
E. II and III.

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium
Learning Objective: 05-05

Feedback A: This statement is true, but there is a better answer.

Feedback B: This statement is true, but there is a better answer.

Feedback C: Correct! The only statement that is not true is the last one: Product diversity typically exists when a single product (e.g., a ballpoint pen) is made in different colors.

Feedback D: Only part of this answer is true.

Feedback E: Only part of this answer is true.

Consumption ratios are useful in determining:
A.the existence of product-line diversity.
B. overhead that is incurred at the unit level.
C. if overhead-producing activities are being utilized effectively.
D. if overhead costs are being applied to products.
E. if overhead-producing activities are being utilized efficiently.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium
Learning Objective: 05-05

Feedback A: Correct! Consumption ratios are useful in determining the existence of product-line diversity.

Feedback B: This statement is incorrect.

Feedback C: This statement is incorrect.

Feedback D: This statement is incorrect.

Feedback E: This statement is incorrect.

Widely varying consumption ratios:
A.are reflective of product-line diversity.
B. indicate an out-of-control production environment.
C. dictate a need for traditional costing systems.
D. work against the implementation of activity-based costing.
E. create an unsolvable product-costing problem.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-05

Feedback A: Correct! Widely varying consumption ratios are reflective of product-line diversity.

Feedback B: This statement is incorrect.

Feedback C: This statement is incorrect.

Feedback D: This statement is incorrect.

Feedback E: This statement is incorrect.

In comparison with a system that uses a single, volume-based cost driver, an activity-based costing system is preferred when a company has:
A.a large proportion of non-unit-level activities.
B. product-line diversity.
C. minimal product-line diversity and a small proportion of non-unit-level activities.
D. existing variances from budgeted amounts.
E. product-line diversity and a large proportion of non-unit-level activities.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 05-05

Feedback A: This statement is incorrect.

Feedback B: This statement is incorrect.

Feedback C: This statement is incorrect.

Feedback D: This statement is incorrect.

Feedback E: Correct! An activity-based costing system is preferred when a company has product-line diversity and a large proportion of non-unit-level activities.

Consider the following factors:
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?
A. I only.
B. I and II.
C. I and III.
D. II and III.
E. I, II, and III.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-06

Feedback A: This factor should be considered, but there is a better answer.

Feedback B: These factors should be considered, but there is a better answer.

Feedback C: These factors should be considered, but there is a better answer.

Feedback D: These factors should be considered, but there is a better answer.

Feedback E: Correct! All of these factors should be considered in the selection of cost drivers.

Which of the following activity cost pools and activity measures likely has the lowest degree of correlation?

	Activity Cost Pool	Activity Measure
A.	Order department	Number of orders processed
B.	Sales management	Time spent by managers in each sales territory
C.	Accounts receivable processing	Number of customers
D.	Catering	Numbers of meals served
E.	Employee travel to job sites (sites are within 100-mile radius of company headquarters)	Number of employees

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 05-06

Feedback A: This pair is correlated.

Feedback B: This pair is correlated.

Feedback C: This pair is correlated.

Feedback D: This pair is correlated.

Feedback E: Correct! This pair has the lowest correlation between activity cost pools and activity measures.

Overton Enterprises is converting to an activity-based costing system It wishes to depict the various activities in its manufacturing process along with the activities’ relationships. Which of the following is a tool that the company can use to accomplish this task?
A.Storyboards.
B. Activity relationship charts (ARCs).
C. Decision trees.
D. Simulation games.
E. Process organizers.

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-07

Feedback A: Correct! Storyboards show various activities in a process along with the activity relationships.

Feedback B: This tool is incorrect.

Feedback C: This tool is incorrect.

Feedback D: This tool is incorrect.

Feedback E: This tool is incorrect.

Successful adoptions of activity-based costing typically occur when companies rely heavily on:
A.finance personnel.
B. accounting personnel.
C. manufacturing personnel.
D. office personnel.
E. multidisciplinary project teams.

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-07

Feedback A: Heavy reliance is not on the finance personnel.

Feedback B: Heavy reliance is not on the accounting personnel.

Feedback C: Heavy reliance is not on the manufacturing personnel.

Feedback D: Heavy reliance is not on the office personnel.

Feedback E: Correct! Successful adoptions of activity-based costing typically occur when companies rely heavily on multidisciplinary project teams.

Which of the following statements is (are) true about non-value-added activities?
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.
A.I only
B. II only.
C. III only.
D. I and II.
E. I, II, and III.

AACSB: Reflective Thinking
AICPA BB: Resource Management
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium
Learning Objective: 05-08

Feedback A: This is true about non-value-added activities, but there is a better answer.

Feedback B: This is true about non-value-added activities, but there is a better answer.

Feedback C: This is true about non-value-added activities, but there is a better answer.

Feedback D: These are true about non-value-added activities, but there is a better answer.

Feedback E: Correct! All of these are true about non-value-added activities.

During a recent accounting period, Falcon Express’ shipping department processed 26 orders. Each order typically takes four hours to complete. However, the average time increased to five hours because of various departmental inefficiencies. If shipping labor is paid $14 per hour, the company’s non-value-added cost would be:
A. $0.
B. $56.
C. $364.
D. $1,456.
E. $1,820.

AACSB: Analytic
AICPA BB: Resource Management
AICPA FN: Measurement
Blooms: Apply

Difficulty: 3 Hard
Learning Objective: 05-08

Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: Correct! One additional hour is: 26 orders x $14 per hour = $364.

Feedback D: This amount is incorrect.

Feedback E: This amount is incorrect.

Flagler Corporation takes eight hours to complete the setup process for a certain electrical component, with the setup cost averaging $150 per hour. If the company’s competitor can accomplish the same process in six hours, Flagler’s non-value-added cost would be:
A.$0.
B. $150.
C. $300.
D. $900.
E. $1,200.

AACSB: Analytic
AICPA BB: Resource Management
AICPA FN: Measurement
Blooms: Apply

Difficulty: 3 Hard
Learning Objective: 05-08

Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: Correct! Two hours x $150 = $300 non-value added cost.

Feedback D: This amount is incorrect.

Feedback E: This amount is incorrect.

Willow Springs produces various wooden bookcases, tables, storage units, and chairs. Which of the following would be included in a listing of the company’s non-value-added activities?
A.Assembly of tables.
B. Staining of storage units.
C. Transfer of chairs from the assembly line to the staining facility.
D. Storage of completed bookcases in inventory.
E. Transfer of chairs from the assembly line to the staining facility and storage of completed bookcases in inventory.

AACSB: Reflective Thinking
AICPA BB: Resource Management
AICPA FN: Measurement
Blooms: Understand

Difficulty: 2 Medium
Learning Objective: 05-08

Feedback A: This is incorrect, because it is a value-added activity.

Feedback B: This is incorrect, because it is a value-added activity.

Feedback C: This is incorrect, because it is a value-added activity.

Feedback D: This is incorrect, because it is a value-added activity.

Feedback E: Correct! The transfer of chairs would be a non-value-added activity.

Motor Mike builds recreational motor homes. All of the following activities add value to the finished product except:
A.installation of carpet.
B. assembly of the frame to the chassis.
C. storage of the vehicle in the sales area.
D. addition of exterior lights.
E. final painting and polishing.

AACSB: Reflective Thinking
AICPA BB: Resource Management
AICPA FN: Measurement
Blooms: Understand

Difficulty: 2 Medium
Learning Objective: 05-08

Feedback A: This is incorrect, because it is a value-added activity.

Feedback B: This is incorrect, because it is a value-added activity.

Feedback C: Correct! Storage of a vehicle in the sales are would be a non-value-added activity.

Feedback D: This is incorrect, because it is a value-added activity.

Feedback E: This is incorrect, because it is a value-added activity.

An example of a customer-value-added activity is:
A.final painting and polishing of the product.
B. installation of a computerized human resource management module.
C. shortening the customers’ billing cycle.
D. addition of an employee hotline for workplace complaints.
E. maintenance of an adequate safety stock.

AACSB: Reflective Thinking
AICPA BB: Resource Management
AICPA FN: Measurement
Blooms: Understand

Difficulty: 2 Medium
Learning Objective: 05-08

Feedback A: Correct! Final painting and polishing of the product is an example of a customer-value- added activity.

Feedback B: This is not a customer-value- added activity.

Feedback C: This is not a customer-value- added activity.

Feedback D: This is not a customer-value- added activity.

Feedback E: This is not a customer-value- added activity.

Which of the following is not an example of a business-value-added activity?
A.Adopting bar-code technology in the receiving department.
B. Installation of a computerized human resource management module.
C. Shortening the customers’ billing cycle.
D. Addition of an employee hotline for workplace complaints.
E. Final painting and polishing of the product.

AACSB: Reflective Thinking
AICPA BB: Resource Management
AICPA FN: Measurement
Blooms: Understand

Difficulty: 2 Medium
Learning Objective: 05-08

Feedback A: This is a business-value-added activity.

Feedback B: This is a business-value-added activity.

Feedback C: This is a business-value-added activity.

Feedback D: This is a business-value-added activity.

Feedback E: Correct! Final painting and polishing of the product is an example of a customer-value- added activity, rather than a business-value-added activity.

The adoption of a 24/7 customer service help line is an example of a:
A.business-value-added activity.
B. customer-value-added activity.
C. non-value-added activity.
D. batch-related activity.
E. product-sustaining activity.

AACSB: Reflective Thinking
AICPA BB: Resource Management
AICPA FN: Measurement
Blooms: Understand

Difficulty: 2 Medium
Learning Objective: 05-08

Feedback A: Adoption of a 24/7 customer service help line is not a business-value-added activity.

Feedback B: Correct! Adoption of a 24/7 customer service help line is a customer-value-added activity.

Feedback C: Adoption of a 24/7 customer service help line is not a non-value-added activity.

Feedback D: Adoption of a 24/7 customer service help line is not a batch-related activity.

Feedback E: Adoption of a 24/7 customer service help line is not a product-sustaining activity.

The adoption of a 24/7 employee hotline for workplace complaints is an example of a:
A.business-value-added activity.
B. customer-value-added activity.
C. non-value-added activity.
D. batch-related activity.
E. product-sustaining activity.

AACSB: Reflective Thinking
AICPA BB: Resource Management
AICPA FN: Measurement
Blooms: Understand

Difficulty: 2 Medium
Learning Objective: 05-08

Feedback A: Correct! Adoption of a 24/7 employee hotline for workplace complaints is a business-value-added activity.

Feedback B: This is not the correct classification of the adoption of an employee hotline.

Feedback C: This is not the correct classification of the adoption of an employee hotline.

Feedback D: This is not the correct classification of the adoption of an employee hotline.

Feedback E: This is not the correct classification of the adoption of an employee hotline.

Customer profitability analysis is tied closely to:
A.just-in-time systems.
B. activity-based costing.
C. job costing.
D. process costing.
E. operation costing.

AACSB: Reflective Thinking
AICPA BB: Resource Management
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-09

Feedback A: Just-in-time is incorrect.

Feedback B: ABC is incorrect.

Feedback C: Job costing is incorrect.

Feedback D: Process costing is incorrect.

Feedback E: Correct! Customer profitability analysis is tied closely to operation costing.

When determining customer profitability, activity-based costing can be used to analyze:
A.orders processed.
B. sales visits.
C. special packaging and handling.
D. billing and collections.
E. All of the answers are correct.

AACSB: Reflective Thinking
AICPA BB: Resource Management
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-09

Feedback A: It is true that activity-based costing can be used to analyze this, but there is a better answer.

Feedback B: It is true that activity-based costing can be used to analyze this, but there is a better answer.

Feedback C: It is true that activity-based costing can be used to analyze this, but there is a better answer.

Feedback D: It is true that activity-based costing can be used to analyze this, but there is a better answer.

Feedback E: Correct! Activity-based costing can be used to analyze orders processed, sales visits, special packaging and handling, and billing and collections.

Generally speaking, companies prefer doing business with customers who:
A.order small quantities rather than large quantities.
B. often change their orders.
C. require special packaging or handling.
D. request normal delivery times.
E. need specialized engineering design changes.

AACSB: Reflective Thinking
AICPA BB: Resource Management
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-09

Feedback A: This statement is incorrect.

Feedback B: This statement is incorrect.

Feedback C: This statement is incorrect.

Feedback D: Correct! Companies prefer doing business with customers who request normal delivery times.

Feedback E: This statement is incorrect.

Which of the following can have a negative impact on a particular sale’s profitability?
A.Number of required sales contacts (phone calls, visits, etc.).
B. Special shipping instructions.
C. Accounts receivable collection time.
D. Purchase-order changes.
E. All of the answers are correct.

AACSB: Reflective Thinking
AICPA BB: Resource Management
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-09

Feedback A: While this can have a negative impact on a particular sale’s profitability, there is a better answer.

Feedback B: While this can have a negative impact on a particular sale’s profitability, there is a better answer.

Feedback C: While this can have a negative impact on a particular sale’s profitability, there is a better answer.

Feedback D: While this can have a negative impact on a particular sale’s profitability, there is a better answer.

Feedback E: Correct! All of these can have a negative effect on profitability.

Arnold Corporation’s customers differ greatly with respect to number of required sales contacts (e.g., phone calls and sales visits), account payment patterns, and design/engineering change orders. Which of the following choices likely denotes an ideal customer from Arnold’s perspective?

	Required Sales Contacts	Account Payment Patterns	Design/Engineering Change Orders
A.	Many	Slow	Many
B.	Many	Rapid	Many
C.	Few	Slow	Many
D.	Few	Rapid	Few
E.	Many	Rapid	Few

AACSB: Reflective Thinking
AICPA BB: Marketing
AICPA FN: Research
Blooms: Analyze

Difficulty: 3 Hard
Learning Objective: 05-09

Feedback A: This is not the ideal customer.

Feedback B: This is not the ideal customer.

Feedback C: This is not the ideal customer.

Feedback D: Correct! The ideal customer requires few sales calls and change orders, but pays quickly.

Feedback E: This is not the ideal customer.

Of the following organizations, activity-based costing (ABC) cannot be used by:
A.manufacturers.
B. financial-services firms.
C. book publishers.
D. hotels.
E. None of these are correct, as all these organizations can use ABC.

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-10

Feedback A: Since the question is looking for organizations that cannot use ABC, this answer choice is incorrect.

Feedback B: Since the question is looking for organizations that cannot use ABC, this answer choice is incorrect.

Feedback C: Since the question is looking for organizations that cannot use ABC, this answer choice is incorrect.

Feedback D: Since the question is looking for organizations that cannot use ABC, this answer choice is incorrect.

Feedback E: Correct! The answer is none of these, since all of the organizations can use activity-based costing.

A hospital administrator is in the process of implementing an activity-based-costing system. Which of the following tasks would not be part of this process?
A.Identification of cost pools.
B. Calculation of pool rates.
C. Assignment of cost to services provided.
D. Identification of cost drivers.
E. None of the answers is correct.

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-10

Feedback A: This is part of implementing an activity-based costing system.

Feedback B: This is part of implementing an activity-based costing system.

Feedback C: This is part of implementing an activity-based costing system.

Feedback D: This is part of implementing an activity-based costing system.

Feedback E: Correct! The answer is none of these, since all of these tasks are part of the ABC process.

Which of the following cost drivers would best be associated with the activity of physician time in a medical clinic?
A.Number of new patient visits.
B. Number of continuing patient visits.
C. Physician minutes with a patient.
D. Number of line items on the clinic’s bill.
E. The number of accreditations held by the clinic.

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-10

Feedback A: This is not the best cost driver.

Feedback B: This is not the best cost driver.

Feedback C: Correct! The number of minutes a physician spends with a patient would be the best cost driver associated with physician time.

Feedback D: This is not the best cost driver.

Feedback E: This is not the best cost driver.

Which of the following best explains the main advantages of time-driven-activity-based costing for services over the use of conventional ABC?
A.The number of services can more easily be expanded than under conventional ABC, since costs are assigned to unused capacity.
B. Theoretical capacity, used in this type of costing, allows service companies a better method to assess quality control than does conventional ABC.
C. Time-based resource and activity data is easy to collect and practical capacity is used by time-driven-activity-based costing.
D. The number of line items on a service’s bill is minimized and practical capacity is used by time-driven-activity-based costing.
E. This type of costing allows service companies better information since their objectives when using ABC are different than those of manufacturing firms.

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-10

Feedback A: These are not the main advantages.

Feedback B: These are not the main advantages.

Feedback C: Correct! Time-based resource and activity data is easy to collect and practical capacity is used.

Feedback D: These are not the main advantages.

Feedback E: These are not the main advantages.

Essay Questions

Charger Industries currently assigns overhead to products by using a predetermined rate based on direct labor hours. The company is considering the adoption of an activity-based costing (ABC) system, and management desires a brief overview of this system before it makes a final decision.

Required: Compare ABC with the company’s current system, focusing on the number of cost pools and cost drivers, costing accuracy, and cost distortion.

Solution:

Charger is currently combining all overhead into a single cost pool, to be applied to products by using a single cost driver (direct labor hours). Such a practice results in the calculation of an “average” cost because various cost relationships are being commingled. With ABC, cost pools are created for a company’s individual activities, and a cost driver is then selected for each activity—a driver that has a high degree of correlation with the activity’s consumption. The result is an increase in the number of cost pools and cost drivers when compared with current accounting procedures. The abandonment of “average” costing leads to an improvement in cost determination and less cost distortion among a company’s products. More specifically, product diversity and use of non-unit-level activities are now taken into account.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Blooms: Understand

Difficulty: 2 Medium
Learning Objective: 05-01
Learning Objective: 05-02

Whitman Enterprises uses a traditional-costing system to estimate quality-control costs for its Dragon product line. Costs are estimated at 32% of direct-labor cost, and direct labor totaled $860,000 for the quarter just ended. Management is contemplating a change to activity-based costing, and has established three cost pools: incoming material inspection, in-process inspection, and final product certification. Number of parts, number of units, and number of orders have been selected as the respective cost drivers.
The following data show the pool rates that have been calculated by the company along with the quantity of driver units for the Dragon’s:

Pool Rate	Driver Quantities
$0.50 per part	20 parts
0.12 per unit	28,000 units
115.00 per order	90 orders

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

Solution:

$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 Dragon Product Line by $18,510 ($293,710 – $275,200).

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA: FN Measurement

Blooms: Apply

Difficulty: 3 Hard
Learning Objective: 05-01
Learning Objective: 05-04
Learning Objective: 05-05

Todd Manufacturing, contemplating the adoption of an activity-based costing system, has established three activity-cost pools: machine setup, quality assurance, and engineering. These cost pools, the appropriate cost driver, and the percentage of each cost driver consumed by the company’s products (H15, H16, and H17) follow.

Cost Pool	Cost Driver	H15	H16	H17
Machine setup	Number of setups	50%	20%	30%
Quality assurance	Number of inspections	70%	15%	15%
Engineering	Number of change orders	15%	10%	75%
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. Todd 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 Todd 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.

Solution:

More
B. Machine setup: $400,000 ´ 30% = $120,000
Quality assurance: $500,000 ´ 15% = $75,000
Engineering: $120,000 ´ 75% = $90,000
C. 1. The company currently applies overhead on the basis of machine hours, therefore emphasizing unit-level activities. Machine hours are consumed for each unit produced.
2. The current procedure is probably not very accurate. The majority of Todd’s overhead (80%) is created by setups, inspections, and engineering change orders, not machine hours. In this case, for instance, setups and (likely) inspection are really batch-level activities whereas engineering costs are caused by product-sustaining activities.
3. The consumption ratios vary extensively from one product to the next, thus indicating product diversity. The use of a single driver (machine hours in this case) will not recognize this diversity and will give rise to cost distortion.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA: FN Measurement

Blooms: Apply

Difficulty: 3 Hard
Learning Objective: 05-01
Learning Objective: 05-03
Learning Objective: 05-04
Learning Objective: 05-05

Kettle Company produces two products (F56 and F57), applying manufacturing overhead on the basis of direct labor hours. Anticipated unit production costs (material, labor, and overhead) and manufacturing volumes are:
F56: 2,000 units, $234
F57: 3,500 units, $271
Kettle’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. Kettle’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.

Solution:

Activity-based costing (ABC) uses multiple cost drivers, more closely aligning individual costs with the factors that are creating them. Traditional systems, in contrast, use fewer drivers and therefore result in “lumping” unlike activities (unit-level, batch-level, and so forth) together. The end result is that ABC tends to eliminate the cost distortion that sometimes arises with traditional systems, more specifically, the under- or overcosting of products. Additionally, the use of multiple cost drivers allows users to better consider variations in consumption ratios that may exist among product lines.
B. 1. $70,000 ¸ (10 + 40) = $1,400 per order
2. $1,400 ´ 10 = $14,000; $14,000 ¸ 2,000 units = $7
C. 1. F57 (traditional, $271 vs. ABC, $220)
2. F57. Kettle’s selling prices are based heavily on cost. An overcosted product will result in a higher selling price, which may make the company less competitive.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA: FN Measurement

Blooms: Apply

Difficulty: 3 Hard
Learning Objective: 05-01
Learning Objective: 05-04
Learning Objective: 05-05

Javier Industries manufactures two products: A and B. A review of the company’s accounting records revealed the following per-unit costs and production volumes:

	A	B
Production volume (units)	2,500	5,000
Direct material	$40	$60
Direct labor:		15
2 hours at $12	24
3 hours at $12		36
Manufacturing overhead
2 hours at $93	186
3 hours at $93		279

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:

			Cost Driver Volume
Cost Pool	Cost	Cost Driver	A	B	Total
Setups	$240,000	Number of setups	100	20	120
General factory	1,500,000	Direct labor hours	5,000	15,000	20,000
Machine processing	120,000	Machine Hours	2,200	800	3,000
	$1,860,000

Javier 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 Javier’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. Javier 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 Javier changes to activity-based costing? Why? Hint: No calculations are necessary.

Solution:

Direct material	$60
Direct labor	36
Manufacturing overhead	279
Per-unit cost	$375
Markup ($375 x 40%)	150
Selling price	$525

Setups: $240,000 ¸ 120 setups = $2,000 per setup
General factory: $1,500,000 ¸ 20,000 direct labor hours = $75 per direct labor hour
Machine processing: $120,000 ¸ 3,000 machine hours = $40 per machine hour

Overhead cost for Product B:
Setups: 20 setups x $2,000	$40,000
General factory: 15,000 labor hours x $75	1,125,000
Machine processing: 800 machine hours x $40	32,000
Total	$1,197,000
Overhead per unit $1,197,000 ÷ 5,000 units = $239.40

Direct material	$60.00
Direct labor	36.00
Manufacturing overhead	239.40
Per-unit cost	$335.40
Markup ($335.40 x 40%)	134.16
Selling price	$469.56

Yes. The switch to activity-based costing results in a lower cost being assigned to product B ($335.40 vs. $375) and thus, a lower selling price.
E. Because less overhead cost is assigned to product B under activity-based costing, more will be assigned to product A. A higher cost translates into a higher selling price.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA: FN Measurement

Blooms: Apply

Difficulty: 3 Hard
Learning Objective: 05-01
Learning Objective: 05-04
Learning Objective: 05-05

Fairchild, Inc., manufactures two products, Regular and Deluxe, and applies overhead on the basis of direct labor hours. Anticipated overhead and direct labor time for the upcoming accounting period are $1,600,000 and 25,000 hours, respectively. Information about the company’s products follows.
Regular—
Estimated production volume: 3,000 units
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
Fairchild’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.

	Orders Processed	Machine Hours Worked	Inspection Hours
Regular	320	16,000	4,000
Deluxe	180	24,000	6,000
Total	500	40,000	10,000

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?

Solution:

Order processing: $250,000 ¸ 500 orders processed (OP) = $500 per OP
Machine processing: $1,200,000 ¸ 40,000 machine hours (MH) = $30 per MH
Product inspection: $150,000 ¸ 10,000 inspection hours (IH) = $15 per IH

B.

Activity	Regular	Deluxe
Order processing:
320 OP x $500	$160,000
180 OP x $500		$90,000
Machine processing:
16,000 MH x $30	480,000
24,000 MH x $30		720,000
Product inspection:
4,000 IH x $15	60,000
6,000 IH x $15		90,000
Total	$700,000	$900,000
Production volume (units)	3,000	4,000
Cost per unit	$233.33*	$225.00**
* $700,000 ÷ 3,000 units = $233.33
** 900,000 ÷ 4,000 units = $225.00

The cost of a Regular unit is $306.33, and the cost of a Deluxe unit is $327.00:

	Regular	Deluxe
Direct materials	$28.00	$42,00
Direct labor:
3 hours x $15	45.00
4 hours x $15		60.00
Order processing, machine processing, and inspection	233.33	225.00
Total cost	$306.33	$327.00

Overhead rate: $1,600,000 ¸ 25,000 direct labor hours (DLH) = $64 per DLH
Regular: 3 hours ´ $64 = $192
Deluxe: 4 hours ´ $64 = $256
Regular is undercosted by this procedure, as the more “accurate” ABC figure is $233.33. In contrast, Deluxe is overcosted because the ABC figure for overhead amounts to only $225.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA: FN Measurement

Blooms: Apply

Difficulty: 3 Hard
Learning Objective: 05-01
Learning Objective: 05-04
Learning Objective: 05-05

Private Corporation manufactures two types of transponders—no. 156 and no. 157—and applies manufacturing overhead to all units at the rate of $76.50 per machine hour. Production information follows.

	No. 156	No. 157
Anticipated volume (units)	6,000	14,000
Direct material cost	$40	$65
Direct labor cost	25	25

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.

	No. 156	No. 157	Total
Setups	60	40	100
Machine hours worked	15,000	25,000	40,000
Outgoing shipments	120	80	200

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.

Solution:

Manufacturing setups: $260,000 ¸ 100 setups (SU) = $2,600 per SU
Machine processing: $2,400,000 ¸ 40,000 machine hours (MH) = $60 per MH
Product shipping: $400,000 ¸ 200 outgoing shipments (OS) = $2,000 per OS
B.

Activity	No. 156	No. 157
Manufacturing setup:
60 SU x $2,600	$156,000
40 SU x $2,600		$104,000
Machine processing:
15,000 MH x $60	900,000
25,000 MH x $60		1,500,000
Product Shipping:
120 OS x $2,000	240,000
80 OS x $2,000		160,000
Total	$1,296,000	$1,764,000
Production volume (units)	6,000	14,000
Cost per unit	$216*	$126**
* $1,296,000 ÷ 6,000 units = $216
** $1,764,000 ÷ 14,000 units = $126

Direct material ($40) + direct labor ($25) + overhead ($216) = $281
D. Machine hours (15,000) ¸ units produced (6,000) = 2.5 hours per unit;
2.5 hours ´ $76.50 = $191.25 overhead applied
Direct material ($40.00) + direct labor ($25.00) + overhead ($191.25) = $256.25
Product no. 156 is currently undercosted ($256.25 vs. $281.00), so a switch to activity-based costing will likely result in a price hike.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA: FN Measurement

Blooms: Apply

Difficulty: 3 Hard
Learning Objective: 05-01
Learning Objective: 05-04
Learning Objective: 05-05

The controller for Norton Machining has established the following overhead cost pools and cost drivers:

Overhead Cost Pool	Budgeted Overhead Cost	Cost Driver
Machine setups	$240,000	Number of setups
Material handling	90,000	Units of raw material
Quality control inspection	48,000	Number of Inspections
Other overhead costs	160,000	Machine hours
Total	$538,000
Overhead Cost Pool	Budgeted Level for Cost Driver	Pool Rate
Machine setups	200 setups	$1,200 per setup
Material handling	60,000 units	$1.50 per unit
Quality control	1,200 inspections	$40 per inspection
Other overhead	20,000 machine hours	$8 per machine hour

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 Norton 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.

Solution:

Overhead Cost Pool	Pool Rate	Level of Cost Driver	Cost
Machine setups	$1,200 per setup	7 setups	$8,400
Material handling	$1.50 per unit	11,200 units	16,800
Quality control	$40 per inspection	16 inspections	640
Other overhead costs	$8 per machine hour	850 machine hours	6,800
Total			$32,640

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.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA: FN Measurement

Blooms: Apply

Difficulty: 3 Hard
Learning Objective: 05-01
Learning Objective: 05-04
Learning Objective: 05-05

Element Cellars produces wine in northern Oregon. Consider the following selected costs that arose during the current year:
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.

Solution:

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.
1. Facility-level
2. Batch-level
3. Facility-level
4. Unit-level
5. Product-sustaining
6. Batch-level

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium
Learning Objective: 05-03

Consider the following costs that relate to a bank and a manufacturer of software:

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.

Solution:

A.	1.	Unit-level	5.	Product-sustaining
	2.	Facility-level	6.	Facility-level
	3.	Unit-level	7.	Batch-level
	4.	Facility-level	8.	Product-sustaining

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

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA: FN Measurement
Blooms: Analyze

Difficulty: 3 Hard
Learning Objective: 05-03
Learning Objective: 05-06

Washburn Corporation produces flat-screen computer monitors. Consider the following selected costs that arose during the current year:
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.

Solution:

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.
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

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA: FN Measurement

Blooms: Apply

Difficulty: 3 Hard
Learning Objective: 05-03

At a recent professional meeting, two controllers discussed product-costing problems in their respective companies. Both controllers are familiar with ABC systems, but neither of their firms utilizes such a system.
Controller D reported that part of the problem in his firm results from major differences among product lines with respect to unit volume, utilization of activities, quality assurance requirements established by customers, and product size. Controller M noted that in her company, which manufactures consumer goods, all items undergo the same basic production processes in the same sequence. Lately, however, there has been a significant increase in the number of item colors.
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.

Solution:

Controller D should be more concerned. The variety of product lines made in his company’s facility reflects diversity at the product-line and cost levels. In Controller M’s firm, there still is only one product line, with an increasing number of models differentiated only by color. (In many applications, there is no or very little cost difference among color choices.) Thus, D’s firm may be the victim of cost distortion and a prime candidate for activity-based costing.

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand

Difficulty: 2 Medium
Learning Objective: 05-05

Define the term “cost driver” and discuss the factors that are important in the selection of appropriate cost drivers.

Solution:

A cost driver is an event or activity that results in the incurrence of costs. For example, many of the costs in an automated environment are created by the operation of machines, and machine hours may be a suitable cost driver for overhead application.
The first factor important in the selection of cost drivers is the degree of correlation (i.e., relationship) among the driver, the activity, and the cost. This relationship is crucial to achieve credibility and accuracy. Another factor is the cost of measurement. Cost/benefit tradeoffs must be taken into account. The system should contain drivers that identify key costs but if too many drivers are used, the system will be burdensome and expensive. Behavioral effects must also be considered in identifying cost drivers. Such effects may influence the behavior of decision makers, which could be good or bad depending on the outcome.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium
Learning Objective: 05-06

Marvel Bank & Trust operates in a very competitive marketplace, using a traditional labor-hour-based system to determine the cost of processing its mortgage loans. Recently, the firm explored a switch to activity-based costing to determine the wisdom of its previous ways. The following information is available:

Activity	Cost	Drive	Driver Units
Application processing	$900,000	Applications	4,000
Loan underwriting	800,000	Underwriting hours	16,000
Loan closure	880,000	Legal hours	8,000
Total	$2,580,000

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 Marvel 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 Marvel making a mistake by continuing to use a traditional system that is based on an average labor cost per hour? Why?

Solution:

Pool rates:
Application processing: $900,000 ¸ 4,000 = $225 per application
Loan underwriting: $800,000 ¸ 16,000 = $50 per underwriting hour
Loan closure: $880,000 ¸ 8,000 = $110 per legal hour
Application no. 7439: Application ($225) + underwriting (3.5 ´ $50 = $175) + closure (1.5 ´ $110 = $165) = $565
Application no. 7809: Application ($225) + underwriting (2.0 ´ $50 = $100) + closure (3.0 ´ $110 = $330) = $655
Total labor hours: Application processing (4,000 ´ 9 = 36,000) + underwriting (16,000) + closure (8,000) = 60,000
Average rate per hour: $2,580,000 ¸ 60,000 = $43 per hour
Application no. 7439: (9 + 5) ´ $43 = $602
Application no. 7809: (9 + 5) ´ $43 = $602
Yes. The traditional system results in an average cost per hour of $43; yet, Marvel’s hourly charges vary greatly based on the function being performed. Rates range from $25 per hour ($225 ¸ 9) for application processing, to $50 per hour for underwriting, to $110 for legal services. ABC produces an improved determination of cost because three separate drivers are used rather than just one.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA: FN Measurement

Blooms: Apply

Difficulty: 3 Hard
Learning Objective: 05-05
Learning Objective: 05-10

Consider the nine activities that follow.
A software company: Developing computer coding for a new spreadsheet package.
2. A breakfast cereal company: Painting the office of a maintenance supervisor at a plant that produces cereal.
3. A major metropolitan hospital: Examining a new patient.
4. A regional airline carrier: The 90 minutes that a Boeing 757 sits idle on the ground between flights.
5. A retail office supply store: Moving cases of paper from one location to another in the same warehouse.
6. A company that makes watches: Attaching a watch band to the watch’s face.
7. A shipping company: Reprocessing cargo that had been sorted incorrectly on a malfunctioning sorting machine.
8. An investment company: Correcting errors made by company personnel in customer accounts.
9. A major hotel chain: 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.

Solution:

1.	Value-added	6.	Value-added
2.	Non-value-added	7.	Non-value-added
3.	Value-added	8.	Non-value-added
4.	Non-value-added	9.	Value-added
5.	Non-value-added

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Analyze

Difficulty: 3 Hard
Learning Objective: 05-08

Trayton Enterprises, which manufactures lawn mowers, recently installed a just-in-time purchasing system and an activity-based management program.

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

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.

Solution:

A.	1.	Decrease	B.	1.	Value-added
	2.	Decrease		2.	Non-value-added
	3.	Increase		3.	Non-value-added
	4.	Increase		4.	Value-added
	5.	Increase		5.	Non-value-added
				6.	Both

AACSB: Reflective Thinking
AICPA BB: Resource Management
AICPA FN: Decision Making
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-08

Sampler, Inc., which sells books to college bookstores and individuals, uses activity-based costing and activity-based management. The following information is available for the company’s three cost pools:

Activity	Cost Driver	Cost-Driver Quantity	Percent of Cost-Driver Activity for Bookstore transactions	Percent of Cost-Driver Activity for Transactions to Individuals
Incoming Receipts	Number of Purchase orders	3,000	20%	80%
Warehousing	Number of inventory moves	8,000	60	40
Outgoing shipments	Number of shipments	18,000	30	70

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 Sampler 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.

Solution:

Non-value-added activities can be defined as activities that are either (1) unnecessary and dispensable or (2) necessary but inefficient and improvable. Put simply, such activities can be eliminated without harming overall quality, performance, or perceived value.
Cost of non-value-added activities:
Incoming receipts: $450,000 ¸ 3,000 purchase orders = $150 per purchase order
Warehousing: $520,000 ¸ 8,000 inventory moves = $65 per move
Outgoing shipments: $630,000 ¸ 18,000 shipments = $35 per shipment

Warehousing: 500 moves x $65	$32,500
Outgoing shipments: 400 shipments x $35	14,000
Total	$46,500

Sales to bookstores produced lower overall costs in both absolute dollars and as a percentage of sales. A possible explanation lies in the fact that sales to individuals resulted in the sale of one or two copies per shipment and order. In contrast, bookstore sales likely produced greater revenues and efficiencies because of the large number of texts sold per transaction.

Activity	Quantity	Bookstores	Individuals	Bookstores	Individuals
Incoming receipts	3,000	20%	80%	600	2,400
Warehousing	8,000	60%	40%	4,300*	3,200
Outgoing shipments	18,000	30%	70%	5,400	12,200**
* (8,000 moves x 60%) – 500
** (18,000 shipments x 70%) – 400
	Bookstores	Individuals
Incoming receipts
600 purchase orders x $150	$90,000
2,400 purchase orders x $150		$360,000
Warehousing
4,300 moves x $65	279,500
3,200 moves x $65		208,000
Outgoing Shipments:
5,400 shipments x $35	189,000
12,200 shipments x $35		427,000
Total	$558,500	$995,000
Cost as a percentage of sales
* $558,500 ÷ $8,400,000 = 6.65%
** $995,000 ÷ $2,400,000 = 41.46%
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-08 Learning Objective: 05-09

Non-value-added costs occur in nonmanufacturing organizations as well as in manufacturing firms.
Required:
A. Explain what is meant by a non-value-added cost.
B. Identify two potential non-value-added costs for each of the following service providers: airlines, banks, and hotels.

Solution:

Non-value-added costs are the costs of activities that can be eliminated with no deterioration of product quality, performance, or perceived value. These activities should be eliminated to save time and money. General examples include the costs of inspection, moving, waiting, and storing.
B. Airlines:
· Vouchers for future flights that are given to passengers as a result of poor customer service.
· The cost of tracing, returning, repairing, or replacing lost or mishandled luggage.
· Additional compensation paid to flight crews attributable to cancellations or delays from problems that should have been prevented by routine maintenance.
Banks:
· The cost of correcting bank errors in customer accounts.
· The cost of performing manual banking procedures necessitated by computer system downtime.
· Losses caused by employee embezzlement and petty thefts.
· Defaulted loans made to borrowers who should have been classified as poor risks by existing credit-granting procedures.
Hotels:
· Broken dishes and glassware, loss of or damage to linens and towels.
· The cost of replacing lost room keys/entry cards.
· The cost of overstaffing the front desk during nonpeak hours.
· Excess food costs, including preparation.

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium
Learning Objective: 05-08
Learning Objective: 05-10

Anton’s Fresh Fish and Produce is a wholesale distributor that operates in central Florida. An analysis of two of the company’s customers, Seaside Spa and Sigma Assisted Living, reveals the data that follows the requirements for this problem for a recent 12-month period.

Anton’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 Anton’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.

	Seaside Spa	Sigma
Sales revenue	$680,000	$270,000
Cost of goods sold	90% of sales	80% of sales
Number of Deliveries	100	135
Number of Invoices	120	180

Solution:

Deliveries: $576,000 ¸ 8,000 deliveries = $72 per delivery
Invoice processing: $765,000 ¸ 90,000 invoices = $8.50 per invoice

B.

	Seaside Spa	Sigma Assisted Living
Sales revenue	$680,000	$270,000
Cost of goods sold ($680,000 x 90%, $270,000 x 80%)	612,000	216,000
Gross margin	$68,000	$54,000
Customer related costs:
Deliveries (100,135 x $72)	$7,200	$9,720
Invoice processing (120,180 x $8.50)	1,020	1,530
Total	$8,220	$11,250
Operating income	$59,780	$42,750

Seaside Spa: $8,220 ¸ $68,000 = 12.1%
Sigma Assisted Living: $11,250 ¸ $54,000 = 20.8%
These percentages differ, in part, because of sizable differences in delivery size and invoice size for the two organizations. The average delivery for the Seaside generates $6,800 in sales revenue ($680,000 ¸ 100 deliveries), whereas those for the assisted living center produce only $2,000 ($270,000 ¸ 135 deliveries). A similar difference is found in invoice size (Seaside, $680,000 ¸ 120 invoices = $5,667; Sigma Assisted Living, $270,000 ¸ 180 invoices = $1,500). It is interesting to note that because of the larger gross margin generated on the assisted living center sales (20% vs. 10%), the assisted living center is still a more attractive customer than the Seaside when operating income is analyzed as a percentage of sales revenues (Seaside, $59,780 ¸ $680,000 = 8.8%; Sigma Assisted Living, $42,750 ¸ $270,000 = 15.8%).

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-09

Tennair Corporation manufactures cooling system components. The company has gathered the following information about two of its customers: Evans Equipment and Rogers Refrigeration.

	Evans Equipment	Rogers Refrigeration
Sales revenue	$215,000	$154,000
Cost of goods sold	95,000	68,000
General selling costs	30,000	21,500
General administrative costs	21,000	15,050

Cost-driver data used by the firm and traceable to Evans and Rogers are:

Customer Activity	Cost Driver	Pool Rate
Sales activity	Sales visits	$900
Order taking	Sales orders	250
Special handling	Units handled	30
Special shipping	Shipments	600

Customer Activity	Evans Equipment	Rogers Refrigeration
Sales activity	8 visits	5 visits
Order taking	17 orders	22 orders
Special handling	600 units	550 units
Special shipping	19 shipments	30 shipments

Required: A. Perform a customer profitability analysis for Tennair. Compute the gross margin and operating income on transactions related to Evans Equipment and Rogers 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.

Solution:

In dollar terms, Evans’ gross margin and operating income are greater than those of Rogers Refrigeration.

	Evans Equipment	Rogers Refrigeration
Sales revenue	$215,000	$154,000
Cost of goods sold	95,000	68,000
Gross margin	$120,000	$86,000
Selling and administrative costs:
General selling costs	$30,000	$21,500
General administrative costs	21,000	15,050
Customer related costs:
Sales visits (8, 5 x $900)	7,200	4,500
Order taking (17, 22 x $250)	4,250	5,500
Special handling (600, 550 x $30)	18,000	16,500
Special (19, 30 x $600)	11,400	18,000
Total	$91,850	$81,050
Operating income	$28,150	$4,950

Gross margin as a % of sales revenue:
Evans: $120,000 ¸ $215,000 = 55.81%
Rogers: $86,000 ¸ $154,000 = 55.84%
General selling and administrative costs as a % of gross margin:
Evans: ($30,000 + $21,000) ¸ $120,000 = 42.5%
Rogers: ($21,500 + $15,050) ¸ $86,000 = 42.5%
Customer-related costs as a % of gross margin:
Evans: ($7,200 + $4,250 + $18,000 + $11,400) ¸ $120,000 = 34.0%
Rogers: ($4,500 + $5,500 + $16,500 + $18,000) ¸ $86,000 = 51.7%
Both customers produce approximately the same rate of gross margin on sales and are charged with the same percentage of general selling and administrative costs. The difference lies in the area of customer-related costs. Rogers’ costs make the firm a more expensive client to deal with than Evans. Given the dollar volume of sales revenue that is generated, Rogers’ special handling and shipping needs (especially the latter) are an expensive proposition for Tennair Corporation.

AACSB: Analytic
AICPA BB: Critical Thinking

AICPA: FN Measurement
Blooms: Analyze

Difficulty: 3 Hard
Learning Objective: 05-09

Power Corporation sells a line of power tools to home improvement chains, generating a cost of goods sold equal to 70% of net sales. The selected data that follow relate to the period just ended for the company’s three largest customers: Weekend Project, Tool Mart, and Fix-It City.

Power’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:

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

	Weekend Project	Tool Mart	Fix-It City
Gross sales volume:
Dollars	$2,000,000	$4,900,000	$4,600,000
Number of Orders	50	175	125
Type of order:
Regular	40	135	110
Rush	10	40	15
Sales returns:
Dollars	$100,000	$400,000	$240,000
Number of returns	3	20	8
Total customer-related costs	$245,100	$918,000	$457,800

Solution:

Customer-related costs as a percentage of gross margin:
Weekend Project: $245,100 ¸ [($2,000,000 – $100,000) ´ 30%] = 43%
Tool Mart: $918,000 ¸ [($4,900,000 – $400,000) ´ 30%] = 68%
Fix-It City: $457,800 ¸ [($4,600,000 – $240,000) ´ 30%] = 35%
Average order size:
Weekend Project: $2,000,000 ¸ 50 orders = $40,000
Tool Mart: $4,900,000 ¸ 175 orders = $28,000
Fix-It City: $4,600,000 ¸ 125 orders = $36,800
Ratio of regular orders to rush orders:
Weekend Project: 40:10 = 4:1
Tool Mart: 135:40 = 3.375:1
Fix-It City: 110:15 = 7.33:1
Number of sales returns as a percentage of total orders:
Weekend Project: 3 ¸ 50 = 6%
Tool Mart: 20 ¸ 175 = 11.4%
Fix-It City: 8 ¸ 125 = 6.4%
Customer-related costs are driven by events (and costs) directly traceable to clients. In this case, Tool Mart’s costs as a percentage of gross margin are much higher (68%) than those of Weekend Project and Fix-It City. This result is not surprising given that the firm creates a large number of small orders ($28,000 vs. $36,800 and $40,000) for Power to process. In addition, relative to the other two firms, Tool Mart depends more heavily on rush orders, which likely creates additional cost. Finally, a number of Tool Mart’s orders (11.4%) eventually result in sales returns, again creating additional processing expense for Power. In summary, Tool Mart seems to be an outlier in relation to Weekend Project and Fix-It City, and management should approach Tool Mart to see if the company can change its ways of doing business.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-09

Sailing Manufacturing is a relatively new customer of Hammer Enterprises. In the short period that the two companies have done business with each other, Hammer has found Sailing to be, in management’s words, “an expensive proposition.” Numerous sales visits are typically required to “close a deal,” with selling prices and discounts offered being among the most attractive in the industry. Complicating matters, Sailing is slow to settle its account, orders in small quantities, and often has numerous specialized shipping and handling needs.
A recent customer profitability analysis has painted a very negative picture of Sailing Manufacturing, and Hammer’s managers are questioning whether an on-going relationship with the firm is warranted.

Required:

Briefly explain why the customer profitability analysis painted a negative picture of Sailing Manufacturing.
B. What actions are available to Hammer Enterprises to improve Sailing’s profitability?

Solution:

Profit is a function of two basic factors—revenues and expenses—and Hammer is being squeezed on both elements. Prices are low, discounts are high, and order sizes are small. Furthermore, the costs of working with Sailing are high, courtesy of numerous sales calls being required to produce a sale, a slow-paying customer, and specialized handling and shipping needs.
Hammer should attempt to work with Sailing in a cost-cutting drive, explaining that favorable terms can only be extended for a short period of time. Acceleration of amounts due, increases in order size, and reductions in sales visits and specialized handling and shipping needs are possible topics for discussion/improvement. If Hammer is unsuccessful in its efforts, price hikes and/or elimination of discounts may be in order.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-09

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