Test Bank Docx Ch10 Fundamentals of Cost Management

Fundamentals of Cost Accounting, 6e (Lanen)

Chapter 10 Fundamentals of Cost Management

1) Activity-based cost management (ABCM) uses the information provided by activity-based costing (ABC) to identify ways to improve operations.

2) Activity-based cost management (ABCM) can be used for managerial decision-making in service, merchandising, and manufacturing companies.

3) Storing materials, work-in-process items, and finished goods in inventory are essential, value-added activities in most companies.

4) In general, decreasing (or eliminating) the resources committed to nonvalue-added activities will decrease customer response time.

5) In general, the unit-level (or volume-related) costs in an activity-based costing (ABC) system are variable costs.

6) In general, the capacity-related costs in an activity-based costing (ABC) system are variable costs.

7) Managerial decisions based on activity-based costing (ABC) information affect only volume-related, batch-related, and product-related costs.

8) The basic concepts involved in activity-based costing (ABC) can be used to determine customer profitability as well as product costs.

9) In activity-based costing, the cost driver rate is computed by dividing the total cost per activity by the estimated number of units produced.

10) Activity-based costing (ABC) techniques used to evaluate customer profitability can also be applied to evaluating suppliers.

11) The difference between the resources used and the resources supplied is called unused resource capacity in a typical activity-based cost management (ABCM) system.

12) Unused resource capacity plus the amount of the resources used is equal to the amount of resources supplied.

13) Theoretical capacity is the amount of production possible assuming expected downtime for scheduled maintenance, normal breaks, and vacations.

14) Theoretical capacity is the long-run expected volume based on reasonably attainable working conditions.

15) Unused capacity costs incurred for the benefit of a company's customers (e.g., meet seasonal demands) should be assigned to the customers that require (use) the excess capacity.

16) In general, managerial decisions affecting capacity-related costs and activities also affect volume-level, batch-level, and product-level cost and activities. 

17) Tangible customer expectations include how the product's salespeople treat customers and the time required to deliver the product to the customer.

18) Quality can be defined as the degree to which a product or service performs as it was designed to do.

19) A cost of quality system is based on the trade-off between incurring costs to meet product (or service) specifications and the costs of failing to meet those specifications.

20) Internal failure costs include materials wasted in the production process and correcting products before they are sold.

21) Which of the following statements about activity-based costing (ABC) is not true? (CIA adapted)

A) In ABC, cost drivers are used to link costs to products.

B) ABC is useful for assigning marketing and distribution costs.

C) ABC differs from traditional costing systems in that products are not cross-subsidized.

D) ABC is more likely to result in major differences from traditional costing systems if the firm manufactures only one product rather than multiple products.

22) In an activity-based costing (ABC) system, cost reduction is accomplished by identifying and eliminating: (CPA adapted)

A) Option A.

B) Option B.

C) Option C.

D) Option D.

23) Barter Company's cost management and product costing procedures follow activity-based costing (ABC) principles. Activities have been identified and classified as being either value-added or nonvalue-added for each product. Which of the following activities, used in Barter's production process, is nonvalue-added? (CPA adapted)

A) Drill press activity.

B) Heat treatment activity.

C) Design engineering activity.

D) Raw materials storage activity.

24) Activity analysis is one of the first stages in implementing activity-based cost management (ABCM). Which of the following steps in activity analysis is usually performed first? 

A) Classify all activities as value-added or nonvalue-added.

B) Chart, from start to finish, the activities used to complete the product or service.

C) Identify the process objectives that are defined by what the customer wants or expects from the process.

D) Continuously improve the efficiency of all value-added activities and develop plans to eliminate or reduce nonvalue-added ones.

25) Activity analysis is an important approach to operations control and the successful implementation of activity-based cost management (ABCM). Which of the following procedures is not part of activity analysis? 

A) Chart, from start to finish, the activities used to complete the product or service.

B) Classify all activities as either value-added or nonvalue-added activities.

C) Identify the process objectives as defined by what the customer desires from the process.

D) Compute the predetermined rate per activity by dividing the total cost pool by the total cost drivers.

26) Which of the following is not true of process reengineering? 

A) It is the changing of operational processes to improve performance.

B) It often takes place after examining ABC data to determine opportunities for improvement.

C) It involves identifying what the customer wants or expects from the firm's products or services.

D) It is the sixth, and final, step of ABCM activity analysis.

27) Which of the following is a value-added activity? 

A) Storing items.

B) Moving items.

C) Waiting for work.

D) Assembling items.

28) Which of the following activities is most likely to be classified as value-added for a manufacturing company?

A) Storing.

B) Ordering.

C) Inspecting.

D) Assembling.

29) Which of the following activities is most likely to be classified as value-added for a merchandise company?

A) Purchasing.

B) Waiting.

C) Receiving.

D) Setting up.

30) Activity-based cost management (ABCM) can best be defined as: 

A) a cost system using multiple departmental overhead rates.

B) the use of cost information gathered using activity-based costing (ABC).

C) a quality-control system focusing on eliminating errors and mistakes.

D) an incentive system for a company's key decision-makers.

31) Which of the following items would be classified as a volume-related cost in an activity-based cost management (ABCM) system? 

A) Indirect materials.

B) Production supervisor's salary.

C) Depreciation on factory building.

D) Research and development.

32) Which of the following items would be classified as a batch-related cost in an activity-based cost management (ABCM) system? 

A) Indirect labor.

B) Production supervisor's salary.

C) Depreciation on factory building.

D) Machinery set-up costs.

33) Which of the following items would be classified as a product-related cost in an activity-based cost management (ABCM) system? 

A) Change order to meet a new customer's specification.

B) Movement of materials for products in production.

C) Long-term lease payments for factory equipment.

D) Insurance and property taxes on factory building.

34) Which of the following items would not be used as the cost driver for a volume-related cost in an activity-based cost management (ABCM) system? 

A) Direct labor hours.

B) Machine hours.

C) Units produced.

D) Square footage.

35) In an activity-based cost management (ABCM) system, facility-related costs are those that are incurred to: 

A) sustain the company's marketing program.

B) maintain the plant's production capacity.

C) support the research and development process.

D) cause a change in the engineering plans for a product.

36) McArthur Company has gathered the following data related to its production process of two of its products for the week ended April 30:

The costs above that appear to be allocated rather than traced are:

A) Unit-related material costs.

B) Variable conversion costs.

C) Indirect manufacturing costs only.

D) All indirect costs.

37) Fence Industries is preparing its annual profit plan. As part of its analysis of the profitability of its customers, management estimates that the $12,000 for sales support should be assigned to the individual customers from the information given as follows:

What is the amount of the sales support costs that should be allocated to Customer A assuming Fence uses units purchased to compute activity-based costs?  

A) $2,400.

B) $4,000.

C) $8,000.

D) $9,600.

38) Fence Industries is preparing its annual profit plan. As part of its analysis of the profitability of its customers, management estimates that the $12,000 for sales support should be assigned to the individual customers from the information given as follows:

What is the amount of the sales support costs that should be allocated to Customer B, assuming Fence uses units purchased to compute activity-based costs?

A) $2,400.

B) $4,000.

C) $8,000.

D) $9,600.

39) Fence Industries is preparing its annual profit plan. As part of its analysis of the profitability of its customers, management estimates that the $12,000 for sales support should be assigned to the individual customers from the information given as follows:

What is the amount of the sales support costs that should be allocated to Customer A, assuming Fence uses purchases orders to compute activity-based costs?

A) $2,400.

B) $4,000.

C) $8,000.

D) $9,600.

40) Fence Industries is preparing its annual profit plan. As part of its analysis of the profitability of its customers, management estimates that the $12,000 for sales support should be assigned to the individual customers from the information given as follows:

What is the amount of the sales support costs that should be allocated to Customer B, assuming Fence uses purchases orders to compute activity-based costs?

A) $2,400.

B) $4,000.

C) $8,000.

D) $9,600.

41) Republic Industries decides to price delivery services according to the results of a recent activity-based costing (ABC) study. The study indicates Republic should charge $8 per order, 2% of annual order value for general delivery costs, $1.25 per item, and $30 for delivery.

A year later, Republic collected the following information for two of its best customers:

What are the total delivery costs charged to Customer D during the year?

A) $5,344.

B) $5,364.

C) $6,900.

D) $6,964.

42) Republic Industries decides to price delivery services according to the results of a recent activity-based costing (ABC) study. The study indicates Republic should charge $8 per order, 2% of annual order value for general delivery costs, $1.25 per item, and $30 for delivery.

A year later, Republic collected the following information for two of its best customers:

What are the total delivery costs charged to Customer C during the year?

A) $5,344.

B) $5,364.

C) $6,900.

D) $6,964.

43) Benton Company is preparing its annual profit plan. As part of its analysis of the cost of its purchasing activity, management estimates that the $48,000 for purchasing support should be assigned to the individual vendors from the information given as follows:

What is the amount of the purchasing costs that should be allocated to Vendor A, assuming Benton uses units purchased to compute activity-based costs?

A) $9,600.

B) $16,000.

C) $32,000.

D) $38,400.

44) Benton Company is preparing its annual profit plan. As part of its analysis of the cost of its purchasing activity, management estimates that the $48,000 for purchasing support should be assigned to the individual vendors from the information given as follows:

What is the amount of the purchasing costs that should be allocated to Vendor B, assuming Benton uses units purchased to compute activity-based costs?

A) $9,600.

B) $16,000.

C) $32,000.

D) $38,400.

45) Benton Company is preparing its annual profit plan. As part of its analysis of the cost of its purchasing activity, management estimates that the $48,000 for purchasing support should be assigned to the individual vendors from the information given as follows:

What is the amount of the purchasing costs that should be allocated to Vendor A, assuming Benton uses purchases orders to compute activity-based costs?

A) $9,600.

B) $16,000.

C) $32,000.

D) $38,400.

46) Benton Company is preparing its annual profit plan. As part of its analysis of the cost of its purchasing activity, management estimates that the $48,000 for purchasing support should be assigned to the individual vendors from the information given as follows:

What is the amount of the purchasing costs that should be allocated to Vendor B, assuming Benton uses purchases orders to compute activity-based costs?

A) $9,600.

B) $16,000.

C) $32,000.

D) $38,400.

47) Benton Company is preparing its annual profit plan. As part of its analysis of the cost of its purchasing activity, management estimates that the $48,000 for purchasing support should be assigned to the individual vendors from the information given as follows:

What is the amount of the purchasing costs that should be allocated to Vendor A, assuming Benton uses number of shipments received to compute activity-based costs?

A) $9,000.

B) $16,000.

C) $32,000.

D) $39,000.

48) Benton Company is preparing its annual profit plan. As part of its analysis of the cost of its purchasing activity, management estimates that the $48,000 for purchasing support should be assigned to the individual vendors from the information given as follows:

What is the amount of the purchasing costs that should be allocated to Vendor B, assuming Benton uses number of shipments received to compute activity-based costs?

A) $9,000.

B) $16,000.

C) $32,000.

D) $39,000.

49) Express Travel decides to price delivery services according to the results of a recent activity-based costing (ABC) study. The study indicates Express Travel should charge $16 per order, 1% of annual order value for general delivery costs, $2.50 per item, and $45 for delivery.

A year later, Express Travel collected the following information for three of its customers:

What are the total delivery costs charged to Customer A during the year?

A) $5,738.

B) $6,650.

C) $6,938.

D) $20,235.

50) Express Travel decides to price delivery services according to the results of a recent activity-based costing (ABC) study. The study indicates Express Travel should charge $16 per order, 1% of annual order value for general delivery costs, $2.50 per item, and $45 for delivery.

A year later, Express Travel collected the following information for three of its customers:

What are the total delivery costs charged to Customer B during the year?

A) $13,490.

B) $11,378.

C) $10,800.

D) $10,578.

51) Express Travel decides to price delivery service according to the results of a recent activity-based costing (ABC) study. The study indicates Express Travel should charge $16 per order, 1% of annual order value for general delivery costs, $2.50 per item, and $45 for delivery.

A year later, Express Travel collected the following information for three of its customers:

What are the total delivery costs charged to Customer C during the year?

A) $16,863.

B) $20,000.

C) $31,272.

D) $32,272.

52) Activity-based costing (ABC) information cannot be used by managerial decision-makers to evaluate the:

A) profitability of a customer.

B) market potential of a product.

C) cost of using a particular supplier.

D) whether to continue providing a service.

53) Crafter Lumber Supply noticed a recent decline in the amount of purchases from a key customer. Worried that other customers might also reduce their purchases, Crafter's management decided to evaluate the cost of its delivery service. Which of the following cost drivers is more appropriate for general administrative costs of the Delivery Department?

A) Number of different items ordered.

B) Value of each order.

C) Total number of items in each order.

D) Number of deliveries made.

54) The unused resource capacity is the difference between the resources supplied and the resources:

A) purchased.

B) wasted.

C) used.

D) on hand.

55) The amount of resources used in an activity-based costing (ABC) system for a specific activity is computed by multiplying the:

A) cost driver rate by the actual cost driver volume.

B) cost driver rate by the planned cost driver volume.

C) overhead rate by the actual cost driver volume.

D) overhead rate by the planned cost driver volume.

56) South Beach Industries reports the following information about resources. At the beginning of the year, South Beach estimated it would spend $180,000 for materials, $42,000 for purchasing, $35,000 for setups, and $36,000 for repairs.

The unused resource capacity for materials for South Beach is:  

A) $12,700.

B) $3,500.

C) $19,270.

D) $9,200.

57) South Beach Industries reports the following information about resources. At the beginning of the year, South Beach estimated it would spend $180,000 for materials, $42,000 for purchasing, $35,000 for setups, and $36,000 for repairs.

The unused resource capacity for purchasing for South Beach is:  

A) $5,538.

B) $2,000.

C) $4,300.

D) $2,300.

58) South Beach Industries reports the following information about resources. At the beginning of the year, South Beach estimated it would spend $180,000 for materials, $42,000 for purchasing, $35,000 for setups, and $36,000 for repairs.

The unused resource capacity for setups for South Beach is:  

A) $2,500.

B) $1,080.

C) $1,500.

D) $1,000.

59) South Beach Industries reports the following information about resources. At the beginning of the year, South Beach estimated it would spend $180,000 for materials, $42,000 for purchasing, $35,000 for setups, and $36,000 for repairs.

The unused resource capacity for repairs for South Beach is:  

A) $4,800.

B) $10,800.

C) $6,000.

D) $3,600.

60) Macon Publishing reports the following information about resources. At the beginning of the year, Macon estimated it would spend $42,000 for setups and $21,000 for clerical.

The unused resource capacity for setups for Macon Publishing is:  

A) $1,250.

B) $3,000.

C) $1,750.

D) $5,000.

61) Macon Publishing reports the following information about resources. At the beginning of the year, Macon estimated it would spend $42,000 for setups and $21,000 for clerical.

The unused resource capacity for clerical for Macon Publishing is:  

A) $5,000.

B) $1,000.

C) $6,000.

D) $1,260.

62) Denim Products reports the following information about resources. At the beginning of the year, Denim estimated it would spend $84,000 for setups and $41,000 for quality testing.

The unused resource capacity for setups for Denim Products is:  

A) $6,000.

B) $2,500.

C) $1,000.

D) $3,500.

63) Denim Products reports the following information about resources. At the beginning of the year, Denim estimated it would spend $84,000 for setups and $41,000 for quality testing.

The unused resource capacity for quality testing for Denim Products is:  

A) $4,000.

B) $2,000.

C) $1,000.

D) $5,000.

64) Scallon Products reports the following information about resources. At the beginning of the year, Scallon estimated it would spend $8,000 for energy and $12,000 for repairs.

The unused resource capacity for energy for Scallon Products is:  

A) $8,000.

B) $1,080.

C) $1,420.

D) $2,500.

65) Scallon Products reports the following information about resources. At the beginning of the year, Scallon estimated it would spend $8,000 for energy and $12,000 for repairs.

The unused resource capacity for repairs for Scallon Products is:  

A) $2,400.

B) $12,000.

C) $6,000.

D) $3,600.

66) The amount of production possible under normal working conditions, including planned downtime and scheduled vacations, is called:

A) actual capacity.

B) normal capacity.

C) practical capacity.

D) theoretical capacity.

67) Which of the following statements is(are) true?

(A) Theoretical capacity is the long-run expected volume based on reasonably attainable working conditions.

(B) The cost of excess capacity is allocated to individual cost objects using the cost driver rate.

A) Only A is true.

B) Only B is true.

C) Both of these are true.

D) Neither of these is true.

68) Which of the following statement is(are) true? 

(A) Unused capacity costs incurred for the benefit of a company's customers (e.g., meet seasonal demands) should be assigned to the customers that require (use) the excess capacity.

(B) In general, managerial decisions affecting capacity-related costs and activities also affect volume-related, batch-related, and product-related cost and activities.

A) Only A is true.

B) Only B is true.

C) Both of these are true.

D) Neither of these is true.

69) A company has high winter demand and low summer demand for its services. The cost of the unused summer capacity should be allocated:

A) to an account called Idle Capacity.

B) evenly to all customers.

C) only to the winter customers.

D) only to the summer customers.

70) Which of the following is not an explanation of why a company would operate at less than theoretical capacity?

A) Scheduled maintenance of equipment.

B) Breakdowns in equipment.

C) Customer demand is less than anticipated.

D) Customer demand is more than anticipated.

71) The degree to which a good or service meets specifications is called:

A) conformance to specifications.

B) customer quality demands.

C) a conformance cost.

D) a compliance cost.

72) Which of the following statements regarding quality costs is(are) false?

(A) In a cost of quality system, internal and external failure costs are called conformance costs.

(B) Prevention costs are costs incurred to detect individual units of product that do not conform to its specifications.

A) Only A is false.

B) Only B is false.

C) Both of these are false.

D) Neither of these is false.

73) Which of the following is not an example of a prevention cost?

A) Training employees to improve quality.

B) Designing products to reduce production problems.

C) Correcting product defects before they are sold.

D) Inspecting the production process as it occurs.

74) Which of the following is an example of a prevention cost?

A) Machine inspection.

B) Warranty repairs.

C) Field testing.

D) Marketing costs.

75) Which of the following is an example of an internal failure cost?

A) Training employees to improve quality.

B) Designing products to reduce production problems.

C) Correcting product defects before they are sold.

D) Inspecting the production process as it occurs.

76) Which of the following is not an example of an external failure cost?

A) Accepting company liability resulting from product failure.

B) Experiencing decreasing sales as a result of poor-quality products.

C) Repairing or replacing defective products after they've been sold.

D) Testing products in use at the customer's site.

77) Which of the following statements regarding the trade-off between conformance and nonconformance costs is(are) false?

(A) The optimal level for a company's quality control program occurs when its conformance costs equal its nonconformance costs.

(B) There is an inverse relationship between the costs spent on nonconformance costs and the level of quality achieved.

A) Only A is false.

B) Only B is false.

C) Both of these are false. 

D) Neither of these is false.

78) Which of the following items is included in almost all quality control systems?

A) Quality-related waiting time.

B) Quality planning and analysis.

C) Excess or obsolete inventory.

D) Quality-related overtime.

79) Water Industries' quality control report for August contains the following items:

What would be the total of the prevention costs on the August quality control report for Water Industries?

A) $5,000.

B) $7,000.

C) $11,000.

D) $15,000.

80) Water Industries' quality control report for August contains the following items:

What would be the total of the appraisal costs on the August quality control report for Water Industries?

A) $7,000.

B) $11,000.

C) $12,000.

D) $15,000.

81) Water Industries' quality control report for August contains the following items:

What would be the total of the internal failure costs on the August quality control report for Water Industries?

A) $8,000.

B) $13,000.

C) $14,000.

D) $16,000.

82) Water Industries' quality control report for August contains the following items:

What would be the total of the external failure costs on the August quality control report for Water Industries?

A) $4,000.

B) $6,000.

C) $7,000.

D) $14,000.

83) Water Industries' quality control report for August contains the following items:

What would be the total of the conformance costs on the August quality control report for Water Industries?

A) $22,000.

B) $20,000.

C) $15,000.

D) $13,000.

84) Water Industries' quality control report for August contains the following items:

What would be the total of the nonconformance costs on the August quality control report for Water Industries?

A) $22,000.

B) $21,000.

C) $14,000.

D) $13,000.

85) Glory Enterprises quality control report for August contains the following items:

What would be the total of the conformance costs on the August quality control report for Glory Enterprises?

A) $200,000.

B) $170,000.

C) $150,000.

D) $90,000.

86) Glory Enterprises quality control report for August contains the following items:

What would be the total of the nonconformance costs on the August quality control report for Glory Enterprises?

A) $120,000.

B) $150,000.

C) $180,000.

D) $210,000.

87) Glory Enterprises quality control report for August contains the following items:

What would be the total of the prevention costs on the August quality control report for Glory Enterprises?

A) $180,000.

B) $120,000.

C) $90,000.

D) $70,000.

88) Glory Enterprises quality control report for August contains the following items:

What would be the total of the appraisal costs on the August quality control report for Glory Enterprises?

A) $30,000.

B) $70,000.

C) $80,000.

D) $90,000.

89) Glory Enterprises quality control report for August contains the following items:

What would be the total of the internal failure costs on the August quality control report for Glory Enterprises?

A) $60,000.

B) $90,000.

C) $100,000.

D) $120,000.

90) Glory Enterprises quality control report for August contains the following items:

What would be the total of the external failure costs on the August quality control report for Glory Enterprises?  

A) $70,000.

B) $110,000.

C) $120,000.

D) $140,000.

91) Which of the following is not a prevention activity in controlling quality?

A) Certifying suppliers.

B) Field testing.

C) Quality training.

D) Process improvement.

92) Which of the following is a prevention activity in controlling quality?

A) Designing products for manufacturability.

B) Inspecting machines.

C) Statistical process control.

D) Field testing.

93) Which of the following is an appraisal activity?

A) Quality evaluations.

B) Statistical process control.

C) Warranty repairs.

D) Field replacements.

94) Which of the following is a prevention activity?

A) Field replacements.

B) Warranty repairs.

C) Supplier certification.

D) Statistical process control.

95) Which of the following is an internal failure activity?

A) Quality evaluations.

B) Inspecting materials.

C) Inspecting machines.

D) Delaying processes.

96) Internal failure activities:

A) seek to prevent defects in the products or services being produced.

B) inspect inputs and attributes of individual units of products or services to detect whether they conform to specifications or customer expectations.

C) correct defective processes or products and services before they are delivered to customers.

D) are activities required after defective products or services are delivered to customers.

97) External failure activities:

A) seek to prevent defects in the products or services being produced.

B) inspect inputs and attributes of individual units of products or services to detect whether they conform to specifications or customer expectations.

C) correct defective processes or products and services before they are delivered to customers.

D) are activities required after defective products or services are delivered to customers.

98) Prevention activities:

A) seek to prevent defects in the products or services being produced.

B) inspect inputs and attributes of individual units of products or services to detect whether they conform to specifications or customer expectations.

C) correct defective processes or products and services before they are delivered to customers.

D) are activities required after defective products or services are delivered to customers.

99) Appraisal activities:

A) seek to prevent defects in the products or services being produced.

B) inspect inputs and attributes of individual units of products or services to detect whether they conform to specifications or customer expectations.

C) correct defective processes or products and services before they are delivered to customers.

D) are activities required after defective products or services are delivered to customers.

100) Forensic Specialists compiled the following information for its first quarter cost of quality report:

The total cost of prevention activities for Forensic Specialists is:

A) $294,000.

B) $224,000.

C) $459,200.

D) $504,000.

101) Forensic Specialists compiled the following information for its first quarter cost of quality report:

The relevant percentage to be used to express internal failure activities at Forensic Specialists is:

A) 27.9%.

B) 4.77%.

C) 4.2%.

D) 15.02%.

102) Forensic Specialists compiled the following information for its first quarter cost of quality report:

The total cost of external failure activities at Forensic Specialists is:

A) $420,560.

B) $31,920.

C) $117,600.

D) $175,000.

103) Forensic Specialists compiled the following information for its first quarter cost of quality report:

The relevant percentage to be used to express appraisal activities at Forensic Specialists is:

A) 5.7%.

B) 33.2%.

C) 2.75%.

D) 1.25%.

104) Tabor Detective Services is evaluating its system. The company gathered the information below:

Practical capacity is 75% for each process.

Which process is most likely to be a current bottleneck?

A) Interviews.

B) Research.

C) Pursuit.

D) Travel.

105) Windom Corporation manufactures small airplane propellers. Sales for April totaled $850,000. Information regarding resources for the month follows:

In addition, Windom spent $25,000 on 50 engineering changes with a cost driver rate of $500 and $30,000 on eight outside contracts with a cost driver rate of $3,750.

Required:

a. Prepare a traditional income statement.

b. Prepare an activity-based income statement.

106) Rock Island Manufacturing makes motor brackets. Information regarding resources for the month follows:

In addition, Rock Island spent $25,000 on 40 engineering changes with a cost driver rate of $600. 

Required:

a. Prepare an analysis of the unused resource capacity for the month.

107) Mirror Industries manufactures electric trolling motors. Sales for the month totaled $1,700,000. Information regarding resources for the month follows:

Required:

a. Prepare a traditional income statement.

b. Prepare an activity-based income statement.

108) Miracle Mile Corporation manufactures electric scooters. Information regarding resources for the month follows:

Required:

a. Prepare an analysis of the unused resource capacity for the month.

109) Taylor's Cafe Supply Company delivers restaurant supplies throughout the city. Taylor's adds 4% to the order cost to cover the delivery cost. The delivery fee is meant to just cover the cost of delivery. A consultant has analyzed the delivery service using activity-based costing methods and identified four activities. Data on these activities are:

Two of Taylor's customers are City Diner and Le Chien Chaud. Below are data on orders and deliveries to these two customers:

Required:

(a) What would be the delivery charge for each customer under the current policy of 4% of order value?

(b) What would the activity-based costing system estimate as the cost of delivering to each customer?

110) Vargas Financial (VF) only offers checking accounts. Customers can write checks and use a network of automated teller machines. VF earns revenue by investing the money deposited (subject to reserve requirements). Currently VF averages 6% return annually on its investments. In order to compete with larger banks, VF pays depositors 1% on all deposits. A recent study classified the operating costs of the bank into four activities. Data on these activities are:

Data on two representative customers are shown below:

Required:

(a) Compute the operating profit for Vargas Financial.

(b) Compute the profit of Customer A and Customer B, assuming that customer costs are based only on deposits.

(c) Compute the profit of Customer A and Customer B, assuming that customer costs are computed using the information in the activity-based costing analysis.

111) Mobile Repair Company is preparing its annual profit plan. As part of its analysis of the cost of its purchasing activity, management estimates that the $125,000 for purchasing support should be assigned to the individual vendors from the information given as follows:

Required:

a. Allocate the purchasing costs to the three vendors, assuming Mobile Repair uses units purchased to compute activity-based costs.

b. Allocate the purchasing costs to the three vendors, assuming Mobile Repair uses purchases orders to compute activity-based costs.

c. Allocate the purchasing costs to the three vendors, assuming Mobile Repair uses number of shipments to compute activity-based costs.  

112) Bison Creek Company is preparing its annual profit plan. As part of its analysis of the cost of its purchasing activity, management estimates that the $250,000 for purchasing support should be assigned to the individual vendors from the information given as follows:

Required:

a. Allocate the purchasing costs to the three vendors, assuming Bison Creek uses units purchased to compute activity-based costs.

b. Allocate the purchasing costs to the three vendors, assuming Bison Creek uses purchases orders to compute activity-based costs.

c. Allocate the purchasing costs to the three vendors, assuming Bison Creek uses number of shipments to compute activity-based costs.  

113) Hidden Valley Company produces precision components. Hidden Valley has six customers, one of which accounts for 40 percent of the sales, with the remaining five accounting for the rest of the sales. The five smaller customers purchase components in roughly equal quantities. Orders placed by the smaller customers are about the same size. Data concerning Hidden Valley 's customer activity follow:

Order-filling costs for Hidden Valley Company total $180,000, and sales-force costs are $275,000.

Required:

a. Allocate the order-filling and sales force costs to the customers based on sales volume.

b. Allocate the order-filling and sales force costs to the customers using an activity-based costing approach.

114) Kingston Company produces precision components. Kingston has 11 customers, one of which accounts for 60 percent of the sales, with the remaining ten accounting for the rest of the sales. The ten smaller customers purchase components in roughly equal quantities. Orders placed by the smaller customers are about the same size. Data concerning Kingston's customer activity follow:

Order-filling costs for Kingston Company total $360,000, and sales-force costs are $300,000. 

Required:

a. Allocate the order-filling and sales force costs to the customers based on sales volume.

b. Allocate the order-filling and sales force costs to the customers using an activity-based costing approach.

115) Kingston Company produces precision components. Kingston has 11 customers, one of which accounts for 60 percent of the sales, with the remaining ten accounting for the rest of the sales. The ten smaller customers purchase components in roughly equal quantities. Orders placed by the smaller customers are about the same size. Data concerning Kingston's customer activity follow:

Order-filling costs for Kingston Company total $360,000, and sales-force costs are $300,000. 

Required:

a. Determine the profitability of each of the two classes of customers (large and small). Allocate the order-filling and sales force costs to the customers based on sales volume.

b. Determine the profitability of each of the two classes of customers (large and small). Allocate the order-filling and sales force costs to the customers using an activity-based costing approach.

116) Bountiful Harvest Distribution delivers supplies to small grocers throughout the region. Bountiful currently adds 5% to the order cost to cover the delivery cost. The delivery fee is meant to just cover the cost of delivery. A consultant has analyzed the delivery service using activity-based costing methods and identified four activities. Data on these activities are:

Three of Bountiful's customers are Rosy's Corner Market, Katy's Fine Foods, and Amy's City Market. Below are data on orders and deliveries to these three customers:

Required:

(a) What would be the delivery charge for each customer under the current policy of 5% of order value?

(b) What would the activity-based costing system estimate for the cost of delivering to each customer?  

117) Gruber Industries provides the following information about resources:

In addition, sales for the period totaled $600,000.

Required:

Compute the unused resource capacity for each preceding item.

118) Jones Industries provides the following information about resources:

Required:

Compute the unused resource capacity for each preceding item.

119) Morrison Supply provides the following information about resources:

Required:

Compute the unused resource capacity for each preceding item.

120) The following represents the financial information of Fabriz Corporation, a manufacturer of electronic components, for two months:

Required:

a. Classify these items into prevention, appraisal, internal failure, or external failure costs.

b. Calculate the ratio of the prevention, appraisal, internal failure, and external failure costs to sales for March and April.

121) Categorize each of the following quality activities by placing an X in the appropriate column.

Required:

122) Categorize each of the following quality activities by placing an X in the appropriate column.

Required:

123) The following represents the financial information of Madison Tool Corporation, a manufacturer of testing equipment:

Required:

a. Classify these items into prevention, appraisal, internal failure, or external failure costs and determine the total cost of each category.  

124) The following represents quality cost data for Monnett Corporation:

Required:

a. Classify these items into prevention, appraisal, internal failure, or external failure costs and determine the total cost of each category.  

125) Fine Grape produces premium wine. Its success in the industry is due to its quality, although all of its customers, wine shops and specialty grocery stores, are very cost conscious and negotiate for price cuts on all large orders. Noting that the wine industry is becoming increasingly competitive, Fine Grape is looking for a way to meet the challenge. It is negotiating with Culinary Delights, a regional specialty grocery store, to purchase a large order of wine. Fine Grape is currently producing under-capacity and would like to keep its production facilities, gaining better economies of scale by increasing production. Culinary Delights has agreed to a large order but only at a price of $39 per bottle. The special order can be produced in one batch with available capacity. Fine Grape has prepared the following data related to next month's operations (per unit, for 10,000 bottles, made in 10 batches of 1,000 each)

No variable marketing costs are associated with this order, but Fine Grape has spent $2,500 during the past two months trying to get Culinary Delights to place the special order.

Required:

(1) How much will the special order change Fine Grape's total operating income?

(2) How much would the special order change Fine Grape's total operating income if fine Grape is operating at full capacity and would lose the sale of the 2,000 bottles to regular customers?

(3) How might the special order fit into Fine Grape's competitive strategy?

126) Joseph Hutton Enterprises has met all production requirements for the current month and has an opportunity to produce additional units of product with its excess capacity. Unit selling prices and costs for three models of one of its product lines are as follows:

Variable overhead is charged to products on the basis of direct labor dollars, and fixed overhead is charged to products on the basis of machine hours.

Required:

(1) If Joseph Hutton Enterprises has excess machine capacity and can add more labor as needed (neither machine capacity nor labor is a constraint), the excess production capacity should be devoted to producing which product or products?

(2) If Joseph Hutton Enterprises has excess machine capacity but a limited amount of labor time, the production capacity should be devoted to producing which product or products?

127) Smooth, Inc. manufactures bath and beauty products such as soaps, skin creams, lotions, and other products primarily for people with dry and sensitive skin. It has just introduced a new line of product that removes the spotting and wrinkling in skin associated with aging. It sells these products in pharmacies and department stores at prices slightly higher than those of other brands because of Smooth's excellent reputation for quality and effectiveness. 

Smooth currently has very low utilization of plant capacity. Two years ago, in anticipation of rapid growth, the company opened a new large manufacturing plant, which has yet to be utilized more than 50 percent. Partly for this reason, Smooth has sought new partners and was able, with the help of financial analysts, to locate suitable business partners. The first potential partner identified in this search was a large supermarket chain, Price-Mart, which is interested in the partnership because it wants Smooth to manufacture an age cream to sell in its stores. The product would be essentially the same as the Smooth product but would be packaged in the Price-Mart brand name. The agreement would pay Smooth $2.00 per unit and would allow Price-Mart a limited right to advertise the product as manufactured for Price-Mart by Smooth. Smooth's CFO has made some calculations and has determined that the direct materials, direct labor, and other variable costs needed for the Price-Mart order would be about $1.00 per unit as compared to the full cost of $2.50 (materials, labor, and overhead) for the equivalent Smooth product.

Required:

Should Smooth Inc. accept the proposal from Price-Mart? Why or why not? (Include strategic considerations)

128) Stonehouse Corporation developed the following information regarding quality for the first quarter of the year 2020:

Required:

Prepare a cost of quality report sorting costs by quality activity and expressing in relevant percentage terms.

129) Identify each of the following as Prevention Activities (P), Appraisal Activities (A), Internal Failure Activities (I) or External Failure Activities (E):

(1) Field Testing

(2) Statistical process control

(3) Sampling at the end of process

(4) Disposing of scrap

(5) Quality evaluations

(6) Retesting

(7) Settling product liability

(8) Resolving customer complaints

(9) Lost sales

(10) Restoring reputation

130) For each of the following products or services, indicate the most important customer quality attributes and the most important customer quality tradeoffs. 

(a) Personal computer

(b) Legal representation in divorce court

(c) New home purchase

(d) Meals in a fast food restaurant

(e) Airline travel

(f) Prom dress

(g) Cruise ship vacation

(h) Auto repair

131) Describe the six steps that are taken in an activity analysis. 

132) Companies are continuously seeking ways to improve the quality of production and reduce costs. One of the areas is to work with suppliers to improve the quality and reliability of parts and products shipped. In an article entitled "In Defense of Activity-Based Cost Management," Robert S. Kaplan says:

An ABC model can play a major role in improving supplier relationships as well. These relationships must be a vital part of any quality and cycle-time improvement program. A key insight is to use ABC to distinguish between low-price and low-cost suppliers. Traditional cost accounting, with its emphasis on purchase price variances, encourages purchasing people to continually scan the population of potential suppliers to obtain low price quotations. Most companies have learned, the hard way, that many of their low-price suppliers are actually extremely high-cost suppliers. (Source: Management Accounting: November, 1992) 

Required:

(a) Explain what Kaplan means by "many of their low-price suppliers are actually extremely high-cost suppliers."

(b) What general prevention and appraisal activities can be used to improve the quality and reliability of parts and products shipped from suppliers?

133) What is the relationship between customer profitability analysis and ABC?

134) Cost allocation bases are factors that cost management analysts use to assign indirect costs to cost objects. Ideally, cost-allocation bases should reflect a cause-and-effect relationship between resource spending and use. Ideally, an Activity-Based Costing (ABC) approach will provide a more accurate and useful accounting for an organization's resources. Recent studies have found that, in spite of increasing costs and diminishing resources, very few Higher Education Institutions use the tools and techniques of an ABC cost allocation system to assign costs to academic departments. While direct costs, such as faculty salaries, are traceable to individual academic departments or courses, many indirect costs, such as facility use, computer use, and student support services, are more difficult to assign. In a traditional approach, many higher education institutions assign such costs based on a single factor, such as the number of courses taught in the university. (Source: Activity-Based Costing for Higher Education Institutions, Management Accounting Quarterly, Winter, 2001)

Required:

(a) Explain why the use of a single-cost driver such as the number of courses may result in inaccurate management information as to the cost of offering courses in individual academic departments.

(b) For each of the indirect costs listed below, identify an appropriate cost-driver that might be used to allocate costs to determine the cost of offering a single course in an academic department if an Activity-Based-Costing model were used. 

∙ Computer use

∙ Facility use

∙ Student services

∙ Course design

∙ Lecturing/class meeting time

∙ Assignment grading

135) Explain the differences between resources used, resources supplied, and unused resource capacity.

136) Franklin Industrial Equipment Corporation manufactures lawn mowers and snow blowers. It also manufactures engines that are used by the Lawn Mower Assembly Division (LMAD). The Engine Division (ED) also sells about 40% of its output to the outside market (these are multipurpose engines). Its annual capacity is 150,000 units and annual output is 135,000 units. All engines sold internally to the LMAD are priced at cost plus 20% markup.

In January 2020, the Snow Blower Assembly Division (SBAD) approached the ED to 'buy' 20,000 engines. Jean Wyse, the controller of ED, computed the costs of manufacturing these engines as follows:

Wyse quoted a price of $66.60 for each engine transferred to the SBAD. Jeb Hart, the manager of SBAD, was furious to note that the ED was "trying to make money off a sister division." He argued that the price must include only the cost of materials, as all other costs will be incurred irrespective of whether or not SBAD places the order for 20,000 engines. Mark Matley, the production manager of ED, pointed out that the special equipment will be purchased only for fulfilling this internal order. Moreover, he argued that inspection must also be done just like on all other engines; therefore, the inspection costs must also be included. Labor is paid a flat monthly salary. Other manufacturing costs include both variable and fixed components (in roughly equal proportion).

Required:

(a) Given that excess capacity exists, what is the minimum price that the ED should charge to the SBAD?

(b) What are the pros and cons of internal sourcing?  

137) Quality costs can be divided into two categories: conformance and nonconformance. Explain the difference between the two and give two examples of each.

138) Describe the four types of quality costs and give an example of each.

139) Explain the difference between actual activity, theoretical capacity, practical capacity, and normal activity.

140) Jessica Long, the production manager of Maxim Corporation is frustrated by the company's policy of not scrapping defective units but reworking them. She has pointed out several times to senior management that some units are beyond rework and should be scrapped. According to her, in most cases, it would be cheaper to scrap and build a new unit from scratch rather than trying to rework a defective unit. However, Peter Crouch, the CEO, is not convinced. He wants his controller, Melinda Gates, to gather some information.

After researching the problem, Gates provides the following information:

Gates also observes that reworking a defective product consumes more labor time than making a unit from scratch. As a result, for every three units reworked, Maxim forgoes the production and sale of two units.

Required:

(a) Do you agree with Jessica Long that it is cheaper to scrap than rework a defective unit? Show your computations.

(b) How can the cost information generated by Gates be useful in reducing the number of defectives?

141) Stella McDonald is a purchasing agent for a motorcycle manufacturer. Stella is evaluating two potential suppliers of seats for the company's motorcycles. One supplier (A) quotes a price of $165 per seat and assures 100% quality and delivery standards. The second supplier (B) quotes a price of $135 per seat but does not give any written assurances on quality or delivery. McDonald is not sure which supplier should be awarded the contract.

Assume you are the management accountant for the motorcycle manufacturer. McDonald asks you to prepare an estimate of the related costs of buying the seats from supplier B. She tells you that the estimate is needed because unless dollar estimates are attached to nonfinancial factors, such as lost production costs, her supervisor will not give it full attention. McDonald provides you with the following information:

∙ Production output is 2,000 motorcycles per year based on 250 production days a year.

∙ Production time per day is 8 hours at a cost of $4,000 per hour to run the production line.

∙ Lost production time due to poor quality is 1%.

∙ Satisfied customers purchase, on average, three motorcycles during a lifetime.

∙ Satisfied customers recommend the product, on average, to 5 other people.

∙ Marketing estimates that using the seat from supplier B will result in 5 lost customers per year from repeat business and referrals.

∙ Average contribution margin per motorcycle is $5,000.

Required:

Estimate the costs of buying motorcycle seats from supplier B. (Note: This problem requires you to think creatively and make reasonable estimates; therefore, there is more than one correct answer.)

142) Thompson Metal Corporation (TMC) supplies various types of machine tools to manufacturing companies. TMC has always paid a lot of attention to the quality of its products. Recently, an outside supplier has approached TMC to supply an important and intricate component of one of its more advanced tools that TMC has been manufacturing in-house. Sam Weiss, a junior accountant at TMC, has collected the following information regarding this proposal.

The cost of manufacturing one unit of this component internally are as follows:

The outside supplier has quoted a price of $90 per unit for supplying this component. The following is a conversation that took place among the manufacturing manager (Dana Rice), buyer (Emily Scanlon), and Sam Weiss.

Weiss: I think that we should continue to manufacture internally because we can save $1.90 per unit on this component.

Rice: According to your report, we would save $1.90 per unit, but I do not agree with those numbers.

Weiss: What do you mean? I have followed the same costing guidelines this company has used for years. I have even cross-checked my numbers with historical data and know for sure that the overhead rates which I have used are correct.

Rice: I am sure you have done your job thoroughly, but I think that our costing system is archaic. This component is complex and difficult to manufacture. I believe that our overhead allocation method does not accurately capture the production difficulties and the additional resources that are devoted to the manufacture of this component. For example, a significant portion of our quality problems are due to this component. We spend close to a third of our quality inspection time on just this component alone, but that is not reflected. These quality problems cause delays in getting this component to the assembly department, and that causes a delay in getting the final product to the customers. Many of our customers are expecting just-in-time deliveries, and they get upset when we're late.

Scanlon: I know that the supplier that has approached us has a strong reputation for quality. Therefore, we can rest assured that we will have negligible quality problems.

Rice: Sam, your report does not consider this additional benefit from buying outside. I would appreciate if you can rework your numbers to better reflect the true costs associated with manufacturing this component internally.

Required:

(a) Assume the role of Sam Weiss. What are the different elements of costs that are likely to be associated with the manufacture of the component? Does the current costing system capture these costs?

(b) Recommend improvements in the costing system.

(c) How can Weiss quantify "qualitative" benefits such as quality and on-time delivery?

143) Mulvey Corporation manufactures large kitchen appliances. The following represents financial information for two years:

Required:

(a) Classify these cost items as prevention (P), appraisal (A), internal failure (I) or external failure (E) activities.

(b) Calculate the ratio of prevention, appraisal, internal failure, and external failure costs to sales for 2020 and 2021.

(c) Prepare a cost of quality report for 2020.  

144) Scranton Extruded Plastics is a company involved in the injection molding process of plastic extruders. The company had a process of inspection, checking line work, and handling returns from customers to identify and correct quality problems. Scrapped extruders are ground into powder and fed back to the extruders as raw material; thus, all scrapped extruders are reused at some point. The company's cost accounting system indicates that the cost of scrap is "zero," a view also held by Scranton's management. (Source: "Activity Based management" by Peter B. B. Turney published in Management Accounting)

Required:

a) Comment on the view that scrap costs is zero at Scranton Extruded Plastics.

b) Identify internal and external failure activities that were required by Scranton.

c) Identify prevention and appraisal activities that could have been employed.