Managerial Accounting Creating Value in a Dynamic Business Environment 9Th Ed By Hilton - Test Bank

Managerial Accounting Creating Value in a Dynamic Business Environment 9Th Ed By Hilton – Test Bank

Instant Download – Complete Test Bank With Answers

Sample Questions Are Posted Below

Chapter 05

Activity-Based Costing and Management

True / False Questions

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

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

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

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

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

Multiple Choice Questions

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.

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.

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.

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. Some other sequence of the four activities listed above.

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.

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.

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.

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.

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.

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

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.

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.

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?
A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

Which of the following choices correctly depicts the proper classification of direct materials used and management salaries?
A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

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.

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

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

Alaina’s customer service department follows up on customer complaints by telephone inquiry. During a recent period, the department initiated 10,000 calls and incurred costs of $312,000. Of these calls, 3,800 were for the company’s wholesale operation; the remainder were 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.

Astro’s customer service department follows up on customer complaints by telephone inquiry. During a recent period, the department initiated 10,000 calls and incurred costs of $312,000. Of these calls, 3,800 were for the company’s wholesale operation; the remainder were 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.

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

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

The cost of wages and salaries and other overhead that would be charged to each bouquet made is:
A. $7.15.
B. $8.75.
C. $12.50.
D. $13.75.
E. some other amount.

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. some other amount.

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

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

What is HiTech’s pool rate for the material-handling activity?
A. $1.00 per part.
B. $2.25 per part.
C. $6.62 per labor hour.
D. $13.23 per part.
E. A rate other than those listed above.

What is HiTech’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. A rate other than those listed above.

What is HiTech’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. A rate other than those listed above.

What is HiTech’s pool rate for the packaging activity?
A. $4.86 per machine hour.
B. $5.00 per labor hour.
C. $10.00 per unit.
D. $100.00 per order shipped.
E. A rate other than those listed above.

Under an activity-based costing system, what is the per-unit overhead cost of Economy?
A. $141.
B. $164.
C. $225.
D. $228.
E. An amount other than those listed above.

Under an activity-based costing system, what is the per-unit overhead cost of Standard?
A. $164.
B. $228.
C. $272.
D. $282.
E. An amount other than those listed above.

Under an activity-based costing system, what is the per-unit overhead cost of Deluxe?
A. $272.
B. $282.
C. $320.
D. $440.
E. An amount other than those listed above.

Assume that HiTech is using a volume-based costing system, and the preceding overhead costs are applied to all products on the basis of direct labor hours. The overhead cost that would be assigned to the Deluxe product line is closest to:
A. $456,471.
B. $646,471.
C. $961,176.
D. $1,141,176.
E. An amount other than those listed above.

Assume that HiTech is using a volume-based costing system, and the preceding overhead costs are applied to all products on the basis of direct labor hours. The overhead cost that would be assigned to the Standard product line is closest to:
A. $456,471.
B. $646,471.
C. $961,176.
D. $1,141,176.
E. An amount other than those listed above.

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

The overhead cost allocated to Beta by using traditional costing procedures would be:
A. $240,000.
B. $356,000.
C. $444,000.
D. $560,000.
E. some other amount.

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. some other amount.

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. some other amount.

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. some other amount.

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

A recent analysis of staff support found a strong correlation with the number of clients served. In contrast, in-house computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively. Consulting clients served totaled 35% of the total client base, consumed 30% of the firm’s computer hours, and accounted for 20% of the total client transactions.
If Martin and Beasley switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to consulting services would:
A. decrease by $32,500.
B. increase by $32,500.
C. decrease by $59,500.
D. change by an amount other than those listed above.
E. change, but the amount cannot be determined based on the information presented.

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

A recent analysis of staff support found a strong correlation with 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%.

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

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.

Dreyson Manufacturing sells a number of goods whose selling price is heavily influenced by cost. A recent study of product no. 519 revealed a traditionally-derived total cost of $1,019, a selling price of $1,850 based on that figure, and a newly computed activity-based total cost of $1,215. Which of the following statements is true?
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.

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

Vanguilder combines all manufacturing overhead into a single cost pool and allocates this overhead to products by using machine hours. Activity-based costing would likely show that with Vanguard’s current procedures
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.

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

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

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

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.

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.

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.

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 nonunit-level activities.
B. product-line diversity.
C. minimal product-line diversity and a small proportion of nonunit-level activities.
D. existing variances from budgeted amounts.
E. Choices A and B.

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.

Which of the following activity cost pools and activity measures likely has the lowest degree of correlation?
A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

Grist Enterprises is converting to an activity-based costing system and needs to depict the various activities in its manufacturing process along with the activities’ relationships. Which of the following is a possible 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.

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.

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.

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

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

Factory Oak produces various wooden bookcases, tables, storage units, and chairs. Which of the following would be included in a listing of the company’s non-value-added activities?
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. Both “C” and “D.”

Airstream 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.

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.

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.

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. nonvalue-added activity.
D. batch-related activity.
E. 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. nonvalue-added activity.
D. batch-related activity.
E. product-sustaining activity.

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.

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 these.

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.

Which of the following can have a negative impact on a 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 these.

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

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.

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 these, as all these tasks would be part of the process.

A company that adopts a just-in-time production system would attempt to reduce and/or eliminate:
A. raw-material inventory.
B. raw-material inventory and work-in-process inventory.
C. raw-material inventory, work-in-process inventory, and finished-goods inventory.
D. work-in-process inventory.
E. finished-goods inventory.

Which of the following inventories would a company try to reduce and/or eliminate under a just-in-time system?
A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

Marion Corporation, which produces unique office furniture, recently installed a just-in-time production system. The various steps in the company’s manufacturing process are coordinated by using a philosophy known as:
A. supply pull.
B. demand pull.
C. supply push.
D. demand push.
E. None of these.

Which of the following statements regarding the pull method is (are) true?
I. Goods are produced in each manufacturing stage only as they are needed at the next stage.
II. The pull method greatly reduces work-in-process inventory.
III. The pull method reduces waiting time and the associated non-value-added cost.
A. II only.
B. I and II.
C. I and III.
D. II and III.
E. I, II, and III.

A Kanban:
A. is used in conjunction with activity-based costing.
B. facilitates quick and inexpensive setups of machines.
C. helps train workers to do a variety of assignments.
D. initiates production in a particular work center.
E. measures the correlation between a cost driver and a cost pool.

Which of the following is not a key feature of a JIT system?
A. Purchases of materials in relatively large amounts (i.e., lot sizes).
B. A smooth, uniform production rate.
C. Total quality control.
D. Multiskilled workers and flexible production facilities.
E. A pull approach to coordinating steps in the production process.

Which of the following statements regarding quality is (are) true for a company that has implemented a JIT system?
I. JIT requires quality production facilities, methods, and employees.
II. JIT requires the acquisition of quality raw materials.
III. JIT requires that long-term contracts be negotiated with quality suppliers.
A. II only.
B. I and II.
C. I and III.
D. II and III.
E. I, II, and III.

A firm that uses a JIT purchasing philosophy probably:
A. has many suppliers.
B. has extensive inspection of purchased items at the receiving point.
C. has relatively few suppliers.
D. has deliveries of purchased items made in small lot sizes immediately before the goods are needed in production.
E. Choices C and D.

Which of the following statements about a just-in-time (JIT) purchasing system is false?
A. Since there is minimal backup, companies must acquire quality raw materials.
B. Raw materials are stockpiled to avoid production disruptions.
C. In comparison with experiences under traditional systems, manufacturers normally deal with a reduced number of suppliers.
D. Supplier reliability tends to be more important under a JIT system than under a traditional purchasing system.
E. The average purchase size is smaller with a JIT system than under a traditional purchasing system.

Hudson, Inc., is considering a change from a traditional purchasing system to a just-in-time purchasing system. What has probably happened to Hudson’s cost per purchase order and inventory unit storage cost to prompt the company to consider such a change?
A. Purchase-order cost is increasing and unit storage cost is increasing.
B. Purchase-order cost is increasing and unit storage cost is decreasing.
C. Purchase-order cost is decreasing and unit storage cost is increasing.
D. Purchase-order cost is decreasing and unit storage cost is decreasing.
E. Both of these costs are relatively stable in amount.

When a company adopts a just-in-time inventory system, it would expect:
A. higher inventories and less frequent purchases.
B. higher inventories and more frequent purchases.
C. lower inventories and less frequent purchases.
D. lower inventories and more frequent purchases.
E. lower inventories and more units purchased on a given order.

When a company adopts a just-in-time inventory system, it would expect:
A. higher inventories and fewer units purchased on a given order.
B. higher inventories and more units purchased on a given order.
C. lower inventories and fewer units purchased on a given order.
D. lower inventories and more units purchased on a given order.
E. lower inventories and less frequent purchases.

Rodeo Corporation recently abandoned its traditional production and inventory system in favor of a just-in-time system. The company typically dealt with 50 suppliers and placed 450 orders throughout the year. All other things being equal, which of the following choices denotes a likely scenario under the just-in-time system?
A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

Harvest Corporation recently abandoned its traditional production and inventory system in favor of a just-in-time system. The company typically ordered 700 units of raw material at a time and purchased units that scored a 7 on a 10-point quality scale, with 10 being very close to perfection. All other things being equal, which of the following choices denotes a likely scenario under the just-in-time system?
A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

When a company switches from a traditional system to a just-in-time production and inventory system, what often happens to the quality of raw material purchased and the number of vendors that supply the firm?
A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

Essay Questions

St. Helena Cellars produces wine in northern California. 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.

Consider the following costs that relate to a bank and a manufacturer of software:
Bank
1. Review cost of commercial loan applications
2. Operating cost of human resources department
3. Immediate processing cost of a specific customer’s cash deposit
4. Bank membership cost 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 cost of moving the CD-output from production run no. 1 to the company’s warehouse
8. Design, development, and coding cost 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 the review of loan applications? Briefly explain.

Alexander Corporation produces flat-screen computer monitors. Consider the following selected costs that arose during the current year:
1. Direct materials used: $3,640,000
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.

The controller for Wofford Machining has established the following overhead cost pools and cost drivers:
Order no. 715 has the following production requirements:
Machine setups: 7
Raw material: 11,200 units
Inspections: 16
Machine hours: 850
Required:
A. Compute the total overhead that should be assigned to order no. 715 by using activity-based costing.
B. Suppose that Wofford were to use a single, predetermined overhead rate based on machine hours. Compute the rate per hour and the total overhead assigned to order no. 715.
C. Discuss the merits of an activity-based costing system in comparison with a traditional costing system.

Weston Enterprises uses a traditional-costing system to estimate quality-control costs for its PDA 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 PDAs:

Required:
A. Calculate the quarterly quality-control cost that is allocated to the PDA product line under Weston’s traditional-costing system.
B. Calculate the quarterly quality-control cost that is allocated to the PDAs if activity-based costing is used.
C. Does the traditional approach under- or overcost the product line? By how much?

Star Manufacturing, contemplating the adoption of an activity-based costing system, has established three activity-cost pools: machine setup, quality assurance, and engineering. These cost pools, the appropriate cost driver, and the percentage of each cost driver consumed by the company’s products (H15, H16, and H17) follow.
Estimated costs for these three activities, which account for 80% of the firm’s total overhead, are $400,000, $500,000, and $120,000, respectively. Star currently applies manufacturing overhead to products on the basis of machine hours.
Required:
A. Will activity-based costing systems require more or fewer cost pools than traditional costing systems? No explanation is necessary.
B. Calculate the cost of machine setup, quality assurance, and engineering to be charged to product H17.
C. Consider the company’s current overhead application procedure.
1. Is Star emphasizing unit-level activities, batch-level activities, product-sustaining activities, or facility-level activities? Explain.
2. How accurate will the current costing procedure be given the nature of most of the company’s activities? Briefly discuss.
3. How accurate will the current costing procedure be given the consumption ratios of the firm? Briefly discuss.

Kenyon Company produces two products (F56 and F57), applying manufacturing overhead on the basis of direct labor hours. Anticipated unit production costs (material, labor, and overhead) and manufacturing volumes are:
F56: 2,000 units, $234
F57: 3,500 units, $271
Kenyon’s overhead arises because of various activities, one of which is purchase-order processing. Budgeted cost for this activity is expected to be $70,000. The firm believes that the number of purchase orders processed is a key cost driver and expects the following activity for its products: F56, 10 purchase orders; F57, 40 purchase orders. Kenyon’s selling prices are based heavily on cost.
Required:
A. Activity-based costing (ABC) is said to result in improved costing accuracy when compared with traditional costing procedures. Briefly explain how this improved accuracy is attained.
B. Compute:
1. the pool rate for purchase-order processing.
2. the purchase-order processing cost to be charged to one unit of F56.
C. Assume that Kenyon switched to activity-based costing and calculated total unit production costs as follows: F56, $285; F57, $220.
1. Which of the two products, F56 or F57, was overcosted prior to the change to ABC? No explanation is necessary.
2. Which of the two products, F56 or F57, may have been less competitive in the marketplace prior to the change to ABC? Briefly explain.

Lennox Industries manufactures two products: A and B. A review of the company’s accounting records revealed the following per-unit costs and production volumes:
Manufacturing overhead is currently computed by spreading overhead of $1,860,000 over 20,000 direct labor hours. Management is considering a shift to activity-based costing in an effort to improve the firm’s accounting procedures, and the following data are available:

Lennox determines selling prices by adding 40% to a product’s total cost.
Required:
A. Compute the per-unit cost and selling price of product B by using Lennox’s current costing procedures.
B. Compute the per-unit overhead cost of product B if the company switches to activity-based costing.
C. Compute B’s total per-unit cost and selling price under activity-based costing.
D. Lennox has recently encountered significant international competition for product B, with considerable business being lost to very aggressive suppliers. Will activity-based costing allow the company to be more competitive with product B from a price perspective? Briefly explain.
E. Will the cost and selling price of product A likely increase or decrease if Lennox changes to activity-based costing? Why? Hint: No calculations are necessary.

Scott, Inc., manufactures two products, Regular and Deluxe, and applies overhead on the basis of direct labor hours. Anticipated overhead and direct labor time for the upcoming accounting period are $1,600,000 and 25,000 hours, respectively. Information about the company’s products follows.
Regular—
Estimated production volume: 3,000 units
Direct materials cost: $28 per unit
Direct labor per unit: 3 hours at $15 per hour
Deluxe—
Estimated production volume: 4,000 units
Direct materials cost: $42 per unit
Direct labor per unit: 4 hours at $15 per hour
Scott’s overhead of $1,600,000 can be identified with three major activities: order processing ($250,000), machine processing ($1,200,000), and product inspection ($150,000). These activities are driven by number of orders processed, machine hours worked, and inspection hours, respectively. Data relevant to these activities follow.

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

Pink Corporation manufactures two types of transponders—no. 156 and no. 157—and applies manufacturing overhead to all units at the rate of $76.50 per machine hour. Production information follows.
The controller, who is studying the use of activity-based costing, has determined that the firm’s overhead can be identified with three activities: manufacturing setups, machine processing, and product shipping. Data on the number of setups, machine hours worked, and outgoing shipments, the activities’ three respective cost drivers, follow.

The firm’s total overhead of $3,060,000 is subdivided as follows: manufacturing setups, $260,000; machine processing, $2,400,000; and product shipping, $400,000.
Required:
A. Compute the pool rates that would be used for manufacturing setups, machine processing, and product shipping in an activity-based costing system.
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.

Heartfelt Bank & Trust operates in a very competitive marketplace, using a traditional labor-hour-based system to determine the cost of processing its mortgage loans. Recently, the firm explored a switch to activity-based costing to determine the wisdom of its previous ways. The following information is available:
Two loan applications, among many others, were originated and closed during the year. No. 7439 consumed 3.5 hours in loan underwriting and 1.5 hours in loan closure, for a total of 5.0 hours. No. 7809 also required 5.0 hours of time, subdivided as follows: 2.0 hours in loan underwriting and 3.0 hours in loan closure.
Required:
A. Use an activity-based-costing system and determine the cost of processing, underwriting, and closing the two loan applications.
B. Determine the cost of processing the two loans if Heartfelt uses the traditional labor-hour-based system. Conversations with management found that, on average, each application took nine labor hours of processing time, excluding underwriting and closure.
C. Is Heartfelt making a mistake by continuing to use a traditional system that is based on an average labor cost per hour? Why?

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

Switzer, Inc., which sells books to college bookstores and individuals, uses activity-based costing and activity-based management. The following information is available for the company’s three cost pools:
Bookstore sales totaled $8,400,000, and sales to individuals amounted to $2,400,000. Costs for the three activities were: Incoming receipts, $450,000; warehousing, $520,000; and outgoing shipments, $630,000. A review of the company’s activities found various inefficiencies with respect to the warehousing of textbooks (acquired for eventual sale to bookstores) and outgoing shipments to individuals. These inefficiencies resulted in an extra 500 moves and 400 shipments, respectively.
Required:
A. What is a non-value-added activity?
B. How much did non-value-added activities cost Switzer this past year?
C. Which of the two markets—sales to bookstores or sales to individuals—resulted in lower overall costs for incoming receipts, warehousing, and outgoing shipments? Evaluate these costs in both absolute dollars and as a percentage of sales. In addition, present a possible explanation for your results. Note: Exclude costs that arose from inefficient operations.

Filipe’s Fresh Meats and Produce is a wholesale distributor that operates in central California. An analysis of two of the company’s customers, Atriums Retirement Home and Sigma Sigma Sigma Fraternity, revealed the data that follow for a recent 12-month period.
Filipe’s uses activity-based costing to determine the cost of servicing its customers. The company had total delivery costs during the year of $576,000 and 8,000 deliveries, along with cost of $765,000 for the administrative processing of 90,000 invoices.
Required:
A. Compute the pool rates for deliveries and invoice processing.
B. Compute the operating income that Ippilito’s earned from these two customers.
C. Compute the total of customer-related costs (deliveries and invoice processing) for each customer as a percentage of gross margin, and analyze the results for management. Explain any significant differences that you find.

Clark Corporation manufactures cooling system components. The company has gathered the following information about two of its customers: Engle Equipment and Midwest Refrigeration.
Cost-driver data used by the firm and traceable to Engle and Midwest are:

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

Homestead Corporation sells a line of power tools to home improvement chains, generating a cost of goods sold equal to 70% of net sales. The selected data that follow relate to the period just ended for the company’s three largest customers: Weekend Project, Tool Mart, and Fix-It City.
Homestead’s management recently attended a seminar and learned that customers with excessive requests and demands can have a significant, negative impact on corporate profitability.
Required:
A. For each of the three chains, compute:
1. Total customer-related costs as a percentage of gross margin.
2. The average order size (ignoring sales returns).
3. The ratio of regular orders to rush orders.
4. The number of sales returns as a percentage of the number of total orders.
B. Prepare a brief summary of your findings. Should Homestead work with any of the chains in an effort to improve results? Explain.

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

The wholesale division of Navigator Enterprises is considering the installation of a just-in-time purchasing system. The company’s accountant has provided the following figures if the system is adopted:
· Sales lost because of out-of-stock situations will total 5,500 units, with each unit producing an average profit for the firm of $23.
· The overall inventory will drop by $700,000. Navigator can invest these funds elsewhere and produce a return of 13%.
· A leased warehouse (monthly rent of $3,000) will no longer be needed.
· Two warehouse employees (total annual salary cost of $43,000) will be transferred elsewhere in the firm.
· Annual property taxes and insurance are expected to fall by $18,900.
· In order to keep valued customers, Navigator will occasionally have to use air freight when an out-of-stock situation arises, resulting in added cost for the company of $2,300.
Required:
A. Determine whether it is financially advantageous over a 12-month period for Navigator to adopt the just-in-time system.
B. How would Navigator describe the “ideal supplier” if the company adopts the just-in-time system.

Management of Laredo Enterprises recently decided to adopt a just-in-time inventory policy to curb steadily rising costs and free-up cash for purposes of investment. The company anticipates that inventory will decrease by $4,450,000, with the released funds to be invested at a 10% return for the firm. Additional data follow.
1. Reduced inventories should produce savings in insurance and property taxes of $46,000.
2. Reduced raw-material inventory levels and accompanying stockouts will cost Laredo $85,000.
3. Laredo will lease 80% of an existing warehouse to another firm for $2.50 per square foot. The warehouse has 40,000 square feet.
4. Four employees who currently earn $35,000 each will be directly affected by the just-in-time adoption decision. Three employees will be transferred to other positions with Laredo; one will be terminated.
5. A shift in suppliers is expected to result in the purchase and use of more expensive raw materials. However, these materials should give rise to fewer warranty and repair problems after Laredo’s finished product is sold, resulting in a net savings for the company of $38,000.
6. Because of the need to handle an increased number of small shipments from suppliers, Laredo will remodel production and receiving-dock facilities at a cost of $750,000. The construction costs will be depreciated over a 10-year life.
Required:
A. Compute the annual financial impact of Laredo’s decision to adopt a just-in-time inventory system.
B. How would the number and size of incoming supplier shipments under a traditional purchasing system compare to the number and size of shipments under a just-in-time system? Explain any differences.

Putnam Enterprises currently purchases a total of 50,000 sensors annually from Utah Electronics at $80 per unit. The firm places 25 purchase orders during the year at an average cost of $10 per order. Putnam’s management is contemplating a switch to a just-in-time purchasing system that would require an increase in orders to 200.
Required:
A. Compute the average order size under both the current system and the proposed just-in-time system. Also, calculate the change in annual purchase-order processing cost.
B. Explain why the number of orders will increase under a just-in-time system.
C. What benefits might Putnam experience to help offset the increase in purchase-order processing cost?
D. What might Utah do to the $80 price, given the company’s need to process an additional 175 orders?

Falcon Enterprises, which manufactures lawn mowers, recently installed a just-in-time purchasing system and an activity-based management program.
Required:
A. Determine whether the following items would be apt to increase or decrease as a result of the just-in-time system:
1. Inventory storage costs.
2. Number of suppliers used.
3. Number of raw material shipments handled.
4. Dollars available for alternative investment opportunities.
5. Quality of raw materials purchased.
B. Identify the following items as value-added activities, non-value-added activities, or both.
1. Attaching the engine to the mower’s body.
2. Installing a new air-conditioning system in the executive offices.
3. Replacing a defective wheel with a new wheel.
4. Designing and printing an owner’s instruction manual for a new model.
5. Moving completed mowers to the finished-goods warehouse.
6. Attaching the handle to the mower’s body. The process took longer than normal because of a worker slowdown caused by disgruntled employees.

Templeton Industries currently assigns overhead to products by using a predetermined rate based on direct labor hours. The company is considering the adoption of an activity-based costing (ABC) system, and management desires a brief overview of this system before it makes a final decision.
Compare ABC with the company’s current system, focusing on the number of cost pools and cost drivers, costing accuracy, and cost distortion.

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.

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

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.

A just-in-time production system uses a “pull method” to coordinate steps in the manufacturing process. Explain what is meant by the term “pull method.”

Chapter 05 Activity-Based Costing and Management Answer Key

True / False Questions

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

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Bloom’s: N
Difficulty: Easy
Learning Objective: 05-03 Explain the concept of cost levels
Learning Objective: and facility-level costs.
Learning Objective: batch-level
Learning Objective: including unit-level
Learning Objective: productsustaining-level

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

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Bloom’s: RC
Difficulty: Easy
Learning Objective: 05-05 Explain why traditional
Learning Objective: volume-based costing systems tend to 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
Bloom’s: RC
Difficulty: Medium
Learning Objective: 05-05 Explain why traditional
Learning Objective: volume-based costing systems tend to distort product costs.

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
Bloom’s: N
Difficulty: Easy
Learning Objective: 05-08 Explain the concepts of activity-based management and two-dimensional ABC.

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
Bloom’s: RC
Difficulty: Easy
Learning Objective: 05-09 Explain and execute a customer-profitability analysis.

Multiple Choice Questions

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
Bloom’s: N
Difficulty: Easy
Learning Objective: 05-01 Compute product costs under a traditional
Learning Objective: volume-based product-costing system.

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.

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
Bloom’s: RC
Difficulty: Easy
Learning Objective: 05-02 Explain how an activity-based costing system operates
Learning Objective: 05-04 Compute product costs under an activity-based costing system.
Learning Objective: and the selection of cost drivers.
Learning Objective: including the use of a two-stage procedure for cost assignment
Learning Objective: the identification of activity cost pools

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. Some other sequence of the four activities listed above.

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.

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
Bloom’s: RC
Difficulty: Easy
Learning Objective: 05-03 Explain the concept of cost levels
Learning Objective: and facility-level costs.
Learning Objective: batch-level
Learning Objective: including unit-level
Learning Objective: productsustaining-level

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.

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.

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.

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

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.

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.

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?
A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

Which of the following choices correctly depicts the proper classification of direct materials used and management salaries?
A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

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.

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

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: A
Difficulty: Medium
Learning Objective: 05-04 Compute product costs under an activity-based costing system.

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

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: A
Difficulty: Medium
Learning Objective: 05-04 Compute product costs under an activity-based costing system.

Alaina’s customer service department follows up on customer complaints by telephone inquiry. During a recent period, the department initiated 10,000 calls and incurred costs of $312,000. Of these calls, 3,800 were for the company’s wholesale operation; the remainder were 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
Bloom’s: A
Difficulty: Medium
Learning Objective: 05-04 Compute product costs under an activity-based costing system.

Astro’s customer service department follows up on customer complaints by telephone inquiry. During a recent period, the department initiated 10,000 calls and incurred costs of $312,000. Of these calls, 3,800 were for the company’s wholesale operation; the remainder were 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
Bloom’s: A
Difficulty: Medium
Learning Objective: 05-04 Compute product costs under an activity-based costing system.

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

The cost of wages and salaries and other overhead that would be charged to each bouquet made is:
A.$7.15.
B. $8.75.
C. $12.50.
D. $13.75.
E. some other amount.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: A
Difficulty: Medium
Learning Objective: 05-04 Compute product costs under an activity-based costing system.

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. some other amount.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: A
Difficulty: Medium
Learning Objective: 05-04 Compute product costs under an activity-based costing system.

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

What is HiTech’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. A rate other than those listed above.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: A
Difficulty: Hard
Learning Objective: 05-04 Compute product costs under an activity-based costing system.

What is HiTech’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. A rate other than those listed above.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: A
Difficulty: Hard
Learning Objective: 05-04 Compute product costs under an activity-based costing system.

What is HiTech’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. A rate other than those listed above.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: A
Difficulty: Hard
Learning Objective: 05-04 Compute product costs under an activity-based costing system.

What is HiTech’s pool rate for the packaging activity?
A.$4.86 per machine hour.
B. $5.00 per labor hour.
C. $10.00 per unit.
D. $100.00 per order shipped.
E. A rate other than those listed above.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: A
Difficulty: Hard
Learning Objective: 05-04 Compute product costs under an activity-based costing system.

Under an activity-based costing system, what is the per-unit overhead cost of Economy?
A.$141.
B. $164.
C. $225.
D. $228.
E. An amount other than those listed above.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: A
Difficulty: Hard
Learning Objective: 05-04 Compute product costs under an activity-based costing system.

Under an activity-based costing system, what is the per-unit overhead cost of Standard?
A.$164.
B. $228.
C. $272.
D. $282.
E. An amount other than those listed above.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: A
Difficulty: Hard
Learning Objective: 05-04 Compute product costs under an activity-based costing system.

Under an activity-based costing system, what is the per-unit overhead cost of Deluxe?
A.$272.
B. $282.
C. $320.
D. $440.
E. An amount other than those listed above.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: A
Difficulty: Hard
Learning Objective: 05-04 Compute product costs under an activity-based costing system.

Assume that HiTech is using a volume-based costing system, and the preceding overhead costs are applied to all products on the basis of direct labor hours. The overhead cost that would be assigned to the Deluxe product line is closest to:
A.$456,471.
B. $646,471.
C. $961,176.
D. $1,141,176.
E. An amount other than those listed above.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: A
Difficulty: Hard
Learning Objective: 05-01 Compute product costs under a traditional
Learning Objective: volume-based product-costing system.

Assume that HiTech is using a volume-based costing system, and the preceding overhead costs are applied to all products on the basis of direct labor hours. The overhead cost that would be assigned to the Standard product line is closest to:
A.$456,471.
B. $646,471.
C. $961,176.
D. $1,141,176.
E. An amount other than those listed above.

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. some other amount.

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. some other amount.

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. some other amount.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: A
Difficulty: Hard
Learning Objective: 05-04 Compute product costs under an activity-based costing system.

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. some other amount.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: A
Difficulty: Hard
Learning Objective: 05-04 Compute product costs under an activity-based costing system.

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

A recent analysis of staff support found a strong correlation with the number of clients served. In contrast, in-house computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively. Consulting clients served totaled 35% of the total client base, consumed 30% of the firm’s computer hours, and accounted for 20% of the total client transactions.
If Martin and Beasley switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to consulting services would:
A. decrease by $32,500.
B. increase by $32,500.
C. decrease by $59,500.
D. change by an amount other than those listed above.
E. change, but the amount cannot be determined based on the information presented.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: A
Difficulty: Hard
Learning Objective: 05-01 Compute product costs under a traditional volume-based product-costing system.
Learning Objective: 05-10 Understand and discuss how activity-based costing is used in service-industry organizations.
Learning Objective: 05-04 Compute product costs under an activity-based costing system.

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
Bloom’s: A
Difficulty: Hard
Learning Objective: 05-10 Understand and discuss how activity-based costing is used in service-industry organizations.
Learning Objective: 05-04 Compute product costs under a traditional volume-based product-costing system

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

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.

Dreyson Manufacturing sells a number of goods whose selling price is heavily influenced by cost. A recent study of product no. 519 revealed a traditionally-derived total cost of $1,019, a selling price of $1,850 based on that figure, and a newly computed activity-based total cost of $1,215. Which of the following statements is true?
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
Bloom’s: N
Difficulty: Medium
Learning Objective: 05-05 Explain why traditional
Learning Objective: volume-based costing systems tend to distort product costs.

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

Vanguilder combines all manufacturing overhead into a single cost pool and allocates this overhead to products by using machine hours. Activity-based costing would likely show that with Vanguard’s current procedures
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
Bloom’s: N
Difficulty: Medium
Learning Objective: 05-05 Explain why traditional
Learning Objective: volume-based costing systems tend to distort product costs.

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

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

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

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
Bloom’s: RC
Difficulty: Medium
Learning Objective: 05-05 Explain why traditional
Learning Objective: volume-based costing systems tend to distort product costs.

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.

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.

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 nonunit-level activities.
B. product-line diversity.
C. minimal product-line diversity and a small proportion of nonunit-level activities.
D. existing variances from budgeted amounts.
E. Choices A and B.

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
Bloom’s: RC
Difficulty: Easy
Learning Objective: 05-06 Explain three criteria for selecting cost drivers.

Which of the following activity cost pools and activity measures likely has the lowest degree of correlation?
A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Research
Bloom’s: N
Difficulty: Medium
Learning Objective: 05-06 Explain three criteria for selecting cost drivers.

Grist Enterprises is converting to an activity-based costing system and needs to depict the various activities in its manufacturing process along with the activities’ relationships. Which of the following is a possible 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
Bloom’s: RC
Difficulty: Easy
Learning Objective: 05-07 Discuss several key issues in activity-based costing
Learning Objective: including data collection and storyboarding.

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
Bloom’s: RC
Difficulty: Medium
Learning Objective: 05-07 Discuss several key issues in activity-based costing
Learning Objective: including data collection and storyboarding.

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
Bloom’s: RC
Difficulty: Easy
Learning Objective: 05-08 Explain the concepts of activity-based management and two-dimensional ABC.

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

AACSB: Analytic
AICPA BB: Resource Management
AICPA FN: Measurement
Bloom’s: A
Difficulty: Easy
Learning Objective: 05-08 Explain the concepts of activity-based management and two-dimensional ABC.

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

AACSB: Analytic
AICPA BB: Resource Management
AICPA FN: Measurement
Bloom’s: A
Difficulty: Medium
Learning Objective: 05-08 Explain the concepts of activity-based management and two-dimensional ABC.

Factory Oak produces various wooden bookcases, tables, storage units, and chairs. Which of the following would be included in a listing of the company’s non-value-added activities?
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. Both “C” and “D.”

Airstream 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.

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.

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.

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. nonvalue-added activity.
D. batch-related activity.
E. 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. nonvalue-added activity.
D. batch-related activity.
E. product-sustaining activity.

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: Critical Thinking
AICPA FN: Research
Bloom’s: RC
Difficulty: Easy
Learning Objective: 05-09 Explain and execute a customer-profitability analysis.

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 these.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: RC
Difficulty: Easy
Learning Objective: 05-09 Explain and execute a customer-profitability analysis.

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: Measurement
AICPA FN: Research
Bloom’s: RC
Difficulty: Easy
Learning Objective: 05-09 Explain and execute a customer-profitability analysis.

Which of the following can have a negative impact on a 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 these.

AACSB: Reflective Thinking
AICPA BB: Marketing
AICPA FN: Research
Bloom’s: N
Difficulty: Easy
Learning Objective: 05-09 Explain and execute a customer-profitability analysis.

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

AACSB: Reflective Thinking
AICPA BB: Marketing
AICPA FN: Research
Bloom’s: N
Difficulty: Medium
Learning Objective: 05-09 Explain and execute a customer-profitability analysis.

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
Bloom’s: RC
Difficulty: Medium
Learning Objective: 05-10 Understand and discuss how activity-based costing is used in service-industry organizations.

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 these, as all these tasks would be part of the process.

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Measurement
Bloom’s: RC
Difficulty: Medium
Learning Objective: 05-10 Understand and discuss how activity-based costing is used in service-industry organizations.

A company that adopts a just-in-time production system would attempt to reduce and/or eliminate:
A.raw-material inventory.
B. raw-material inventory and work-in-process inventory.
C. raw-material inventory, work-in-process inventory, and finished-goods inventory.
D. work-in-process inventory.
E. finished-goods inventory.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom’s: RC
Difficulty: Easy
Learning Objective: 05-11 List and explain eight important features of just-in-time inventory and production management systems (Appendix).

Which of the following inventories would a company try to reduce and/or eliminate under a just-in-time system?
A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

Marion Corporation, which produces unique office furniture, recently installed a just-in-time production system. The various steps in the company’s manufacturing process are coordinated by using a philosophy known as:
A.supply pull.
B. demand pull.
C. supply push.
D. demand push.
E. None of these.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Bloom’s: N
Difficulty: Medium
Learning Objective: 05-11 List and explain eight important features of just-in-time inventory and production management systems (Appendix).

Which of the following statements regarding the pull method is (are) true?
I. Goods are produced in each manufacturing stage only as they are needed at the next stage.
II. The pull method greatly reduces work-in-process inventory.
III. The pull method reduces waiting time and the associated non-value-added cost.
A.II 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
Bloom’s: RC
Difficulty: Easy
Learning Objective: 05-11 List and explain eight important features of just-in-time inventory and production management systems (Appendix).

A Kanban:
A.is used in conjunction with activity-based costing.
B. facilitates quick and inexpensive setups of machines.
C. helps train workers to do a variety of assignments.
D. initiates production in a particular work center.
E. measures the correlation between a cost driver and a cost pool.

Which of the following is not a key feature of a JIT system?
A.Purchases of materials in relatively large amounts (i.e., lot sizes).
B. A smooth, uniform production rate.
C. Total quality control.
D. Multiskilled workers and flexible production facilities.
E. A pull approach to coordinating steps in the production process.

Which of the following statements regarding quality is (are) true for a company that has implemented a JIT system?
I. JIT requires quality production facilities, methods, and employees.
II. JIT requires the acquisition of quality raw materials.
III. JIT requires that long-term contracts be negotiated with quality suppliers.
A.II only.
B. I and II.
C. I and III.
D. II and III.
E. I, II, and III.

A firm that uses a JIT purchasing philosophy probably:
A.has many suppliers.
B. has extensive inspection of purchased items at the receiving point.
C. has relatively few suppliers.
D. has deliveries of purchased items made in small lot sizes immediately before the goods are needed in production.
E. Choices C and D.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Bloom’s: RC
Difficulty: Medium
Learning Objective: 05-11 List and explain eight important features of just-in-time inventory and production management systems (Appendix).

Which of the following statements about a just-in-time (JIT) purchasing system is false?
A.Since there is minimal backup, companies must acquire quality raw materials.
B. Raw materials are stockpiled to avoid production disruptions.
C. In comparison with experiences under traditional systems, manufacturers normally deal with a reduced number of suppliers.
D. Supplier reliability tends to be more important under a JIT system than under a traditional purchasing system.
E. The average purchase size is smaller with a JIT system than under a traditional purchasing system.

Hudson, Inc., is considering a change from a traditional purchasing system to a just-in-time purchasing system. What has probably happened to Hudson’s cost per purchase order and inventory unit storage cost to prompt the company to consider such a change?
A.Purchase-order cost is increasing and unit storage cost is increasing.
B. Purchase-order cost is increasing and unit storage cost is decreasing.
C. Purchase-order cost is decreasing and unit storage cost is increasing.
D. Purchase-order cost is decreasing and unit storage cost is decreasing.
E. Both of these costs are relatively stable in amount.

When a company adopts a just-in-time inventory system, it would expect:
A.higher inventories and less frequent purchases.
B. higher inventories and more frequent purchases.
C. lower inventories and less frequent purchases.
D. lower inventories and more frequent purchases.
E. lower inventories and more units purchased on a given order.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Bloom’s: N
Difficulty: Easy
Learning Objective: 05-11 List and explain eight important features of just-in-time inventory and production management systems (Appendix).

When a company adopts a just-in-time inventory system, it would expect:
A.higher inventories and fewer units purchased on a given order.
B. higher inventories and more units purchased on a given order.
C. lower inventories and fewer units purchased on a given order.
D. lower inventories and more units purchased on a given order.
E. lower inventories and less frequent purchases.

Rodeo Corporation recently abandoned its traditional production and inventory system in favor of a just-in-time system. The company typically dealt with 50 suppliers and placed 450 orders throughout the year. All other things being equal, which of the following choices denotes a likely scenario under the just-in-time system?
A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom’s: N
Difficulty: Medium
Learning Objective: 05-11 List and explain eight important features of just-in-time inventory and production management systems (Appendix).

Harvest Corporation recently abandoned its traditional production and inventory system in favor of a just-in-time system. The company typically ordered 700 units of raw material at a time and purchased units that scored a 7 on a 10-point quality scale, with 10 being very close to perfection. All other things being equal, which of the following choices denotes a likely scenario under the just-in-time system?
A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

When a company switches from a traditional system to a just-in-time production and inventory system, what often happens to the quality of raw material purchased and the number of vendors that supply the firm?
A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom’s: RC
Difficulty: Medium
Learning Objective: 05-11 List and explain eight important features of just-in-time inventory and production management systems (Appendix).

Essay Questions

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

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Bloom’s: RC, N
Difficulty: Medium
Learning Objective: 05-03 Explain the concept of cost levels
Learning Objective: and facility-level costs.
Learning Objective: batch-level
Learning Objective: including unit-level
Learning Objective: productsustaining-level

Consider the following costs that relate to a bank and a manufacturer of software:
Bank
1. Review cost of commercial loan applications
2. Operating cost of human resources department
3. Immediate processing cost of a specific customer’s cash deposit
4. Bank membership cost 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 cost of moving the CD-output from production run no. 1 to the company’s warehouse
8. Design, development, and coding cost 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 the review of loan applications? Briefly explain.
B. The number of loan applications would be more appropriate because it has a higher correlation with the amount of review cost incurred. Applications create review cost; customers, on the other hand, may not.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom’s: RC, N
Difficulty: Medium
Learning Objective: 05-03 Explain the concept of cost levels
Learning Objective: 05-06 Explain three criteria for selecting cost drivers.
Learning Objective: and facility-level costs.
Learning Objective: batch-level
Learning Objective: including unit-level
Learning Objective: productsustaining-level

Alexander Corporation produces flat-screen computer monitors. Consider the following selected costs that arose during the current year:
1. Direct materials used: $3,640,000
2. Plant rent, utilities, and taxes: $1,229,000
3. New technology design engineering: $2,040,000
4. Materials receiving: $318,000
5. Manufacturing-run/set-up charges: $115,000
6. Equipment depreciation: $92,000
7. General management salaries: $1,564,000
Required:
A. Briefly distinguish between batch-level and facility-level activities.
B. Determine the cost of the firm’s unit-level, batch-level, product-sustaining, and facility-level activities.
A batch-level activity is performed for each batch of products rather than for each unit. In contrast, a facility-level activity is required for an entire process to occur. Examples of the latter, which support the organization as a whole, include plant maintenance and property taxes.
B. Unit-level: $3,640,000 (1)
Batch-level: $318,000 (4) + $115,000 (5) = $433,000
Product-sustaining: $2,040,000 (3)
Facility-level: $1,229,000 (2) + $92,000 (6) + $1,564,000 (7) = $2,885,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom’s: RC, N, A
Difficulty: Hard
Learning Objective: 05-03 Explain the concept of cost levels
Learning Objective: and facility-level costs.
Learning Objective: batch-level
Learning Objective: including unit-level
Learning Objective: productsustaining-level

The controller for Wofford Machining has established the following overhead cost pools and cost drivers:
Order no. 715 has the following production requirements:
Machine setups: 7
Raw material: 11,200 units
Inspections: 16
Machine hours: 850
Required:
A. Compute the total overhead that should be assigned to order no. 715 by using activity-based costing.
B. Suppose that Wofford were to use a single, predetermined overhead rate based on machine hours. Compute the rate per hour and the total overhead assigned to order no. 715.
C. Discuss the merits of an activity-based costing system in comparison with a traditional costing system.

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
Bloom’s: A, N
Difficulty: Hard
Learning Objective: 05-01 Compute product costs under a traditional
Learning Objective: 05-04 Compute product costs under an activity-based costing system.
Learning Objective: 05-05 Explain why traditional
Learning Objective: volume-based costing systems tend to distort product costs.
Learning Objective: volume-based product-costing system.

Weston Enterprises uses a traditional-costing system to estimate quality-control costs for its PDA 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 PDAs:

Required:
A. Calculate the quarterly quality-control cost that is allocated to the PDA product line under Weston’s traditional-costing system.
B. Calculate the quarterly quality-control cost that is allocated to the PDAs if activity-based costing is used.
C. Does the traditional approach under- or overcost the product line? By how much?
$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 PDAs by $18,510 ($293,710 – $275,200).

Star Manufacturing, contemplating the adoption of an activity-based costing system, has established three activity-cost pools: machine setup, quality assurance, and engineering. These cost pools, the appropriate cost driver, and the percentage of each cost driver consumed by the company’s products (H15, H16, and H17) follow.
Estimated costs for these three activities, which account for 80% of the firm’s total overhead, are $400,000, $500,000, and $120,000, respectively. Star currently applies manufacturing overhead to products on the basis of machine hours.
Required:
A. Will activity-based costing systems require more or fewer cost pools than traditional costing systems? No explanation is necessary.
B. Calculate the cost of machine setup, quality assurance, and engineering to be charged to product H17.
C. Consider the company’s current overhead application procedure.
1. Is Star emphasizing unit-level activities, batch-level activities, product-sustaining activities, or facility-level activities? Explain.
2. How accurate will the current costing procedure be given the nature of most of the company’s activities? Briefly discuss.
3. How accurate will the current costing procedure be given the consumption ratios of the firm? Briefly discuss.
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 Star’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: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: A, N
Difficulty: Hard
Learning Objective: 05-01 Compute product costs under a traditional
Learning Objective: 05-03 Explain the concept of cost levels
Learning Objective: 05-04 Compute product costs under an activity-based costing system.
Learning Objective: 05-05 Explain why traditional
Learning Objective: and facility-level costs.
Learning Objective: batch-level
Learning Objective: including unit-level
Learning Objective: productsustaining-level
Learning Objective: volume-based costing systems tend to distort product costs.
Learning Objective: volume-based product-costing system.

Kenyon Company produces two products (F56 and F57), applying manufacturing overhead on the basis of direct labor hours. Anticipated unit production costs (material, labor, and overhead) and manufacturing volumes are:
F56: 2,000 units, $234
F57: 3,500 units, $271
Kenyon’s overhead arises because of various activities, one of which is purchase-order processing. Budgeted cost for this activity is expected to be $70,000. The firm believes that the number of purchase orders processed is a key cost driver and expects the following activity for its products: F56, 10 purchase orders; F57, 40 purchase orders. Kenyon’s selling prices are based heavily on cost.
Required:
A. Activity-based costing (ABC) is said to result in improved costing accuracy when compared with traditional costing procedures. Briefly explain how this improved accuracy is attained.
B. Compute:
1. the pool rate for purchase-order processing.
2. the purchase-order processing cost to be charged to one unit of F56.
C. Assume that Kenyon switched to activity-based costing and calculated total unit production costs as follows: F56, $285; F57, $220.
1. Which of the two products, F56 or F57, was overcosted prior to the change to ABC? No explanation is necessary.
2. Which of the two products, F56 or F57, may have been less competitive in the marketplace prior to the change to ABC? Briefly explain.
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. Kenyon’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: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom’s: A, N
Difficulty: Hard
Learning Objective: 05-01 Compute product costs under a traditional
Learning Objective: 05-04 Compute product costs under an activity-based costing system.
Learning Objective: 05-05 Explain why traditional
Learning Objective: volume-based costing systems tend to distort product costs.
Learning Objective: volume-based product-costing system.

Lennox Industries manufactures two products: A and B. A review of the company’s accounting records revealed the following per-unit costs and production volumes:
Manufacturing overhead is currently computed by spreading overhead of $1,860,000 over 20,000 direct labor hours. Management is considering a shift to activity-based costing in an effort to improve the firm’s accounting procedures, and the following data are available:

Lennox determines selling prices by adding 40% to a product’s total cost.
Required:
A. Compute the per-unit cost and selling price of product B by using Lennox’s current costing procedures.
B. Compute the per-unit overhead cost of product B if the company switches to activity-based costing.
C. Compute B’s total per-unit cost and selling price under activity-based costing.
D. Lennox has recently encountered significant international competition for product B, with considerable business being lost to very aggressive suppliers. Will activity-based costing allow the company to be more competitive with product B from a price perspective? Briefly explain.
E. Will the cost and selling price of product A likely increase or decrease if Lennox changes to activity-based costing? Why? Hint: No calculations are necessary.

B. 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

C.

D. Yes. The switch to activity-based costing results in a lower cost being assigned to product B ($335.40 vs. $375) and thus a lower selling price.
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.

Scott, Inc., manufactures two products, Regular and Deluxe, and applies overhead on the basis of direct labor hours. Anticipated overhead and direct labor time for the upcoming accounting period are $1,600,000 and 25,000 hours, respectively. Information about the company’s products follows.
Regular—
Estimated production volume: 3,000 units
Direct materials cost: $28 per unit
Direct labor per unit: 3 hours at $15 per hour
Deluxe—
Estimated production volume: 4,000 units
Direct materials cost: $42 per unit
Direct labor per unit: 4 hours at $15 per hour
Scott’s overhead of $1,600,000 can be identified with three major activities: order processing ($250,000), machine processing ($1,200,000), and product inspection ($150,000). These activities are driven by number of orders processed, machine hours worked, and inspection hours, respectively. Data relevant to these activities follow.

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

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.

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

C. Overhead rate: $1,600,000 ¸ 25,000 direct labor hours (DLH) = $64 per DLH
Regular: 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.

Pink Corporation manufactures two types of transponders—no. 156 and no. 157—and applies manufacturing overhead to all units at the rate of $76.50 per machine hour. Production information follows.
The controller, who is studying the use of activity-based costing, has determined that the firm’s overhead can be identified with three activities: manufacturing setups, machine processing, and product shipping. Data on the number of setups, machine hours worked, and outgoing shipments, the activities’ three respective cost drivers, follow.

The firm’s total overhead of $3,060,000 is subdivided as follows: manufacturing setups, $260,000; machine processing, $2,400,000; and product shipping, $400,000.
Required:
A. Compute the pool rates that would be used for manufacturing setups, machine processing, and product shipping in an activity-based costing system.
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.

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.

C. 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.

Heartfelt Bank & Trust operates in a very competitive marketplace, using a traditional labor-hour-based system to determine the cost of processing its mortgage loans. Recently, the firm explored a switch to activity-based costing to determine the wisdom of its previous ways. The following information is available:
Two loan applications, among many others, were originated and closed during the year. No. 7439 consumed 3.5 hours in loan underwriting and 1.5 hours in loan closure, for a total of 5.0 hours. No. 7809 also required 5.0 hours of time, subdivided as follows: 2.0 hours in loan underwriting and 3.0 hours in loan closure.
Required:
A. Use an activity-based-costing system and determine the cost of processing, underwriting, and closing the two loan applications.
B. Determine the cost of processing the two loans if Heartfelt uses the traditional labor-hour-based system. Conversations with management found that, on average, each application took nine labor hours of processing time, excluding underwriting and closure.
C. Is Heartfelt making a mistake by continuing to use a traditional system that is based on an average labor cost per hour? Why?
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
B. 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
C. Yes. The traditional system results in an average cost per hour of $43; yet, Heartfelt’s hourly charges vary greatly based on the function being performed. Rates range from $25 per hour ($225 ¸ 9) for application processing, to $50 per hour for underwriting, to $110 for legal services. ABC produces an improved determination of cost because three separate drivers are used rather than just one.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: A, N
Difficulty: Hard
Learning Objective: 05-10 Understand and discuss how activity-based costing is used in service-industry organizations.
Learning Objective: 05-05 Explain why traditional, volume-based costing systems tend to distort product costs.

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

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Bloom’s: N
Difficulty: Medium
Learning Objective: 05-08 Explain the concepts of activity-based management and two-dimensional ABC.

Switzer, Inc., which sells books to college bookstores and individuals, uses activity-based costing and activity-based management. The following information is available for the company’s three cost pools:
Bookstore sales totaled $8,400,000, and sales to individuals amounted to $2,400,000. Costs for the three activities were: Incoming receipts, $450,000; warehousing, $520,000; and outgoing shipments, $630,000. A review of the company’s activities found various inefficiencies with respect to the warehousing of textbooks (acquired for eventual sale to bookstores) and outgoing shipments to individuals. These inefficiencies resulted in an extra 500 moves and 400 shipments, respectively.
Required:
A. What is a non-value-added activity?
B. How much did non-value-added activities cost Switzer this past year?
C. Which of the two markets—sales to bookstores or sales to individuals—resulted in lower overall costs for incoming receipts, warehousing, and outgoing shipments? Evaluate these costs in both absolute dollars and as a percentage of sales. In addition, present a possible explanation for your results. Note: Exclude costs that arose from inefficient operations.

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.
B. 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

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

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: A, N
Difficulty: Hard
Learning Objective: 05-08 Explain the concepts of activity-based management and two-dimensional ABC.
Learning Objective: 05-09 Explain and execute a customer-profitability analysis.

Filipe’s Fresh Meats and Produce is a wholesale distributor that operates in central California. An analysis of two of the company’s customers, Atriums Retirement Home and Sigma Sigma Sigma Fraternity, revealed the data that follow for a recent 12-month period.
Filipe’s uses activity-based costing to determine the cost of servicing its customers. The company had total delivery costs during the year of $576,000 and 8,000 deliveries, along with cost of $765,000 for the administrative processing of 90,000 invoices.
Required:
A. Compute the pool rates for deliveries and invoice processing.
B. Compute the operating income that Ippilito’s earned from these two customers.
C. Compute the total of customer-related costs (deliveries and invoice processing) for each customer as a percentage of gross margin, and analyze the results for management. Explain any significant differences that you find.

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

B.

C. Atriums Retirement Home: $8,220 ¸ $68,000 = 12.1%
Sigma Sigma Sigma: $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 Atriums generates $6,800 in sales revenue ($680,000 ¸ 100 deliveries) whereas those for the fraternity produce only $2,000 ($270,000 ¸ 135 deliveries). A similar difference is found in invoice size (Atriums, $680,000 ¸ 120 invoices = $5,667; Sigma Sigma Sigma, $270,000 ¸ 180 invoices = $1,500). It is interesting to note that because of the larger gross margin generated on the fraternity’s sales (20% vs. 10%), the fraternity is still a more attractive customer than the Atriums when operating income is analyzed as a percentage of sales revenues (Atriums, $59,780 ¸ $680,000 = 8.8%; Sigma Sigma Sigma, $42,750 ¸ $270,000 = 15.8%).

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: A, N
Difficulty: Hard
Learning Objective: 05-09 Explain and execute a customer-profitability analysis.

Clark Corporation manufactures cooling system components. The company has gathered the following information about two of its customers: Engle Equipment and Midwest Refrigeration.
Cost-driver data used by the firm and traceable to Engle and Midwest are:

Required:
A. Perform a customer profitability analysis for Clark. Compute the gross margin and operating income on transactions related to Engle Equipment and Midwest Refrigeration.
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.

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

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom’s: A, N
Difficulty: Hard
Learning Objective: 05-09 Explain and execute a customer-profitability analysis.

Homestead Corporation sells a line of power tools to home improvement chains, generating a cost of goods sold equal to 70% of net sales. The selected data that follow relate to the period just ended for the company’s three largest customers: Weekend Project, Tool Mart, and Fix-It City.
Homestead’s management recently attended a seminar and learned that customers with excessive requests and demands can have a significant, negative impact on corporate profitability.
Required:
A. For each of the three chains, compute:
1. Total customer-related costs as a percentage of gross margin.
2. The average order size (ignoring sales returns).
3. The ratio of regular orders to rush orders.
4. The number of sales returns as a percentage of the number of total orders.
B. Prepare a brief summary of your findings. Should Homestead work with any of the chains in an effort to improve results? Explain.

1. 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%
2. 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
3. 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
4. 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%
B. Customer-related costs are driven by events (and costs) directly traceable to clients. In this case, Tool Mart’s costs as a percentage of gross margin are much higher (68%) than those of Weekend Project and Fix-It City. This result is not surprising given that the firm creates a large number of small orders ($28,000 vs. $36,800 and $40,000) for Homestead to process. In addition, relative to the other two firms, Tool Mart relies more heavily on rush orders, which likely creates additional cost. Finally, a number of Tool Mart’s orders (11.4%) eventually result in sales returns, again creating additional processing expense for Homestead. In summary, Tool Mart seems to be an outlier in relation to Weekend Project and Fix-It City, and management should approach Tool Mart to see if the company can change its ways of doing business.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: A, N
Difficulty: Hard
Learning Objective: 05-09 Explain and execute a customer-profitability analysis.

Bravo Manufacturing is a relatively new customer of Haxton Enterprises. In the short period that the two companies have done business with each other, Haxton has found Bravo to be, in management’s words, “an expensive proposition.” Numerous sales visits are typically required to “close a deal,” with selling prices and discounts offered being among the most attractive in the industry. Complicating matters, Bravo is slow to settle its account, orders in small quantities, and often has numerous specialized shipping and handling needs.
A recent customer profitability analysis has painted a very negative picture of Bravo Manufacturing, and Haxton’s managers are questioning whether an on-going relationship with the firm is warranted.
Required:
A. Briefly explain why the customer profitability analysis painted a negative picture of Bravo Manufacturing.
B. What actions are available to Haxton Enterprises to improve Bravo profitability?
Profit is a function of two basic factors—revenues and expenses—and Haxton is being squeezed on both elements. Prices are low, discounts are high, and order sizes are small. Furthermore, the costs of working with Bravo are high, courtesy of numerous sales calls being required to produce a sale, a slow-paying customer, and specialized handling and shipping needs.
B. Haxton should attempt to work with Bravo 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 Haxton 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
Bloom’s: N
Difficulty: Hard
Learning Objective: 05-09 Explain and execute a customer-profitability analysis.

The wholesale division of Navigator Enterprises is considering the installation of a just-in-time purchasing system. The company’s accountant has provided the following figures if the system is adopted:
· Sales lost because of out-of-stock situations will total 5,500 units, with each unit producing an average profit for the firm of $23.
· The overall inventory will drop by $700,000. Navigator can invest these funds elsewhere and produce a return of 13%.
· A leased warehouse (monthly rent of $3,000) will no longer be needed.
· Two warehouse employees (total annual salary cost of $43,000) will be transferred elsewhere in the firm.
· Annual property taxes and insurance are expected to fall by $18,900.
· In order to keep valued customers, Navigator will occasionally have to use air freight when an out-of-stock situation arises, resulting in added cost for the company of $2,300.
Required:
A. Determine whether it is financially advantageous over a 12-month period for Navigator to adopt the just-in-time system.
B. How would Navigator describe the “ideal supplier” if the company adopts the just-in-time system.
The just-in-time system is financially advantageous to the firm, saving $17,100. Note: The cost of the warehouse employees is ignored because regardless of whether the system is adopted, Navigator will incur the cost.
B. The “ideal supplier” is one that delivers top quality goods precisely when needed. Thus, reliability is a key with respect to quality and delivery, as is close proximity to the wholesale division. Most JIT suppliers are willing to sign long-term contracts and accept “batched” payments for deliveries.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom’s: A, N
Difficulty: Hard
Learning Objective: 05-11 List and explain eight important features of just-in-time inventory and production management systems (Appendix).

Management of Laredo Enterprises recently decided to adopt a just-in-time inventory policy to curb steadily rising costs and free-up cash for purposes of investment. The company anticipates that inventory will decrease by $4,450,000, with the released funds to be invested at a 10% return for the firm. Additional data follow.
1. Reduced inventories should produce savings in insurance and property taxes of $46,000.
2. Reduced raw-material inventory levels and accompanying stockouts will cost Laredo $85,000.
3. Laredo will lease 80% of an existing warehouse to another firm for $2.50 per square foot. The warehouse has 40,000 square feet.
4. Four employees who currently earn $35,000 each will be directly affected by the just-in-time adoption decision. Three employees will be transferred to other positions with Laredo; one will be terminated.
5. A shift in suppliers is expected to result in the purchase and use of more expensive raw materials. However, these materials should give rise to fewer warranty and repair problems after Laredo’s finished product is sold, resulting in a net savings for the company of $38,000.
6. Because of the need to handle an increased number of small shipments from suppliers, Laredo will remodel production and receiving-dock facilities at a cost of $750,000. The construction costs will be depreciated over a 10-year life.
Required:
A. Compute the annual financial impact of Laredo’s decision to adopt a just-in-time inventory system.
B. How would the number and size of incoming supplier shipments under a traditional purchasing system compare to the number and size of shipments under a just-in-time system? Explain any differences.
*Note: The cost of the three transferred employees is excluded because Laredo will continue to have these individuals on the payroll.
B. Under a traditional purchasing system, goods are purchased in large quantities, and then placed in inventory until used. In contrast, with JIT, costly inventories are avoided by having the materials arrive “just in time” to be issued to production. Materials are therefore purchased only when needed, which often translates into numerous small acquisitions throughout the period.

Putnam Enterprises currently purchases a total of 50,000 sensors annually from Utah Electronics at $80 per unit. The firm places 25 purchase orders during the year at an average cost of $10 per order. Putnam’s management is contemplating a switch to a just-in-time purchasing system that would require an increase in orders to 200.
Required:
A. Compute the average order size under both the current system and the proposed just-in-time system. Also, calculate the change in annual purchase-order processing cost.
B. Explain why the number of orders will increase under a just-in-time system.
C. What benefits might Putnam experience to help offset the increase in purchase-order processing cost?
D. What might Utah do to the $80 price, given the company’s need to process an additional 175 orders?
Current system: 50,000 sensors ¸ 25 orders = 2,000 units
Just-in-time system: 50,000 sensors ¸ 200 orders = 250 units

B. Under a traditional system, orders are large so that adequate inventories can be maintained. Under a just-in-time system, the number of orders are increased as the company anticipates that units will arrive on an as-needed basis. This reduces the need to carry sizable on-hand stocks.
C. A reduction in inventories will typically decrease associated costs such as warehousing, insurance, obsolescence, and property taxes. In addition, monies currently invested in inventories will be released for other profitable uses by management. Putnam may also negotiate that a higher quality sensor be acquired, which would both reduce the need for inspections and increase the overall quality of the firm’s finished product.
D. Utah’s cost will likely increase, given that overall volume is constant at 50,000 sensors. As a result, the firm might be forced to raise the sensor’s selling price.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom’s: A, N
Difficulty: Hard
Learning Objective: 05-11 List and explain eight important features of just-in-time inventory and production management systems (Appendix).

Falcon Enterprises, which manufactures lawn mowers, recently installed a just-in-time purchasing system and an activity-based management program.
Required:
A. Determine whether the following items would be apt to increase or decrease as a result of the just-in-time system:
1. Inventory storage costs.
2. Number of suppliers used.
3. Number of raw material shipments handled.
4. Dollars available for alternative investment opportunities.
5. Quality of raw materials purchased.
B. Identify the following items as value-added activities, non-value-added activities, or both.
1. Attaching the engine to the mower’s body.
2. Installing a new air-conditioning system in the executive offices.
3. Replacing a defective wheel with a new wheel.
4. Designing and printing an owner’s instruction manual for a new model.
5. Moving completed mowers to the finished-goods warehouse.
6. Attaching the handle to the mower’s body. The process took longer than normal because of a worker slowdown caused by disgruntled employees.

AACSB: Reflective Thinking
AICPA BB: Resource Management
AICPA FN: Decision Making
Bloom’s: N
Difficulty: Hard
Learning Objective: 05-011 List and explain eight important features of just-in-time inventory and production management systems (Appendix).
Learning Objective: 05-08 Explain the concepts of activity-based management and two-dimensional ABC.

Templeton Industries currently assigns overhead to products by using a predetermined rate based on direct labor hours. The company is considering the adoption of an activity-based costing (ABC) system, and management desires a brief overview of this system before it makes a final decision.
Compare ABC with the company’s current system, focusing on the number of cost pools and cost drivers, costing accuracy, and cost distortion.

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

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom’s: RC
Difficulty: Hard
Learning Objective: 05-01 Compute product costs under a traditional
Learning Objective: 05-02 Explain how an activity-based costing system operates
Learning Objective: and the selection of cost drivers.
Learning Objective: including the use of a two-stage procedure for cost assignment
Learning Objective: the identification of activity cost pools
Learning Objective: volume-based product-costing system.

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.

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
Bloom’s: RC, N
Difficulty: Medium
Learning Objective: 05-05 Explain why traditional
Learning Objective: volume-based costing systems tend to distort product costs.

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

A cost driver is an event or activity that results in the incurrence of costs. For example, many of the costs in an automated environment are created by the operation of machines, and machine hours may be a suitable cost driver for overhead application.
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
Bloom’s: RC
Difficulty: Medium
Learning Objective: 05-06 Explain three criteria for selecting cost drivers.

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.
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
Bloom’s: RC, N
Difficulty: Medium
Learning Objective: 05-10 Understand and discuss how activity-based costing is used in service-industry organizations.
Learning Objective: 05-08 Explain the concepts of activity-based management and two-dimensional ABC.

A just-in-time production system uses a “pull method” to coordinate steps in the manufacturing process. Explain what is meant by the term “pull method.”

Under the pull method, goods are produced in each manufacturing stage only as they are needed at the next stage. When materials and parts are required for final assembly, for example, a message is sent to the preceding work center to send items that will satisfy the work to be performed over the next few hours. This approach drastically cuts work-in-process inventory along with waiting time (a non-value-added cost). The “pull approach” is repeated all the way through the manufacturing process, back toward the beginning.

Managerial Accounting Creating Value in a Dynamic Business Environment 9Th Ed By Hilton - Test Bank

Description

Additional Information

Reviews

Additional information

Add Review Cancel reply

Beckman And Ling's Obstetrics and Gynecology Nursing 8th Edition

Essentials of Psychiatric Nursing 2nd Edition By Boyd Luebbert

Pediatric Primary Care 6Th Ed By - Burns

Clinical Guidelines in Family Practice 5th Edition Uphold Graham

Nursing Health Assessment A Best Practice Approach 3rd Edition by Jensen

NEW Pediatric Primary Care 4th Edition by Richardson

Quick Links

Contact Information

Managerial Accounting Creating Value in a Dynamic Business Environment 9Th Ed By Hilton - Test Bank

Description

Additional Information

Reviews

Additional information

Add Review Cancel reply

Related Products

Beckman And Ling's Obstetrics and Gynecology Nursing 8th Edition

Essentials of Psychiatric Nursing 2nd Edition By Boyd Luebbert

Pediatric Primary Care 6Th Ed By - Burns

Clinical Guidelines in Family Practice 5th Edition Uphold Graham

Nursing Health Assessment A Best Practice Approach 3rd Edition by Jensen

NEW Pediatric Primary Care 4th Edition by Richardson

Quick Links

Contact Information