CHAPTER 4: ACTIVITY-BASED COSTING AND MANAGEMENT Multiple Choice a Activity-based costing a requires the identification of cost drivers b is used only in JIT operations c applies only to discretionary fixed costs d does not help to identify activities as value-adding or non-valueadding a A company using activity-based costing a tries to identify cost drivers b allocates all costs to individual products c looks for the activity with which total costs are most closely associated d is probably using the JIT philosophy a Machine setups is an example of a(n) activity a Batch b Facility-sustaining c Product-sustaining d Unit d Machine hours is an example of a(n) activity a Batch b Facility-sustaining c Product-sustaining d Unit b Landscaping is an example of a(n) _ activity a Batch b Facility-sustaining c Product-sustaining d Unit d Material cost is an example of a(n) _ activity a Batch b Facility-sustaining c Product-sustaining d Unit c The activities that drive resource requirements are called the a activity drivers b cost objects c resource drivers d sustaining activities 34 b The resource utilized by a given product divided by the total amount of the resource available is called the a activity driver b consumption ratio c cost object d sustaining activity c The segment for which you are estimating the cost is called the a activity driver b consumption ratio c cost object d sustaining activity a 10 A tool that focuses on manufacturing processes and seeks to reduce or optimize the activities performed within the process is a process value analysis b re-engineering c caveat analysis d benchmarking d 11 A tool that compares how tasks are performed internally with the best practices of industry leaders is a process value analysis b re-engineering c caveat analysis d benchmarking b 12 An approach to developing new ways to perform existing activities is called a process value analysis b re-engineering c caveat analysis d benchmarking c 13 Which of the following statements is true? a The traditional approach to costing uses many different cost drivers b Costs that are indirect to products are by definition traceable to directly to products c Costs that are indirect to products are traceable to some activity d All of the above statements are true a 14 Which of the following is NOT a sign of poor cost data? a Competitors' prices for high-volume products appear much too high b The company seems to have a highly profitable niche all to itself c Customers don't balk at price increases for low-volume products d Competitors' prices for low-volume products appear much too high d 15 Which of the following is a sign of poor cost data? a Competitors' prices for high-volume products appear much too high b The company seems to have a highly profitable niche all to itself c Customers don't balk at price increases for low-volume products d All of the statements are true 35 a 16 Number of purchase orders is an example of a(n) activity a Batch b Facility-sustaining c Product-sustaining d Unit d 17 Direct labor hours is an example of a(n) activity a Batch b Facility-sustaining c Product-sustaining d Unit b 18 Property taxes on the plant is an example of a(n) _ activity a Batch b Facility-sustaining c Product-sustaining d Unit d 19 Production volume is an example of a(n) _ activity a Batch b Facility-sustaining c Product-sustaining d Unit d 20 are those performed each time a unit is produced or sold a Batch-level activities b Facility-sustaining activities c Sustaining activities d Unit-level activities a 21 are those that a company performs when it makes a group of units a Batch-level activities b Facility-sustaining activities c Sustaining activities d Unit-level activities b 22 relate to an entire plant as a whole a Batch-level activities b Facility-sustaining activities c Sustaining activities d Unit-level activities c 23 arise because a company maintains a particular product or service a Batch-level activities b Facility-sustaining activities c Sustaining activities d Unit-level activities d 24 Which of the following is not a type of sustaining activity? a Capacity-sustaining b Customer-sustaining 36 c Distribution-channel sustaining d Unit-sustaining a 25 Which of the following is true regarding activity-based management? a ABM is using information about activities to manage portions of the organization other than costs b ABM is applying ABC to external financial reporting c ABM requires the use of re-engineering principles d All of the above are true a 26 The quality costs that are incurred to determine whether particular units of product meet quality standards are a appraisal costs b external failure costs c internal failure costs d prevention costs c 27 The cost of downtime on machines while rework is being performed is a(n) a appraisal cost b external failure cost c internal failure cost d prevention cost b 28 The cost of processing customer complaints is a(n) a appraisal cost b external failure cost c internal failure cost d prevention cost d 29 Worker training is a(n) a appraisal cost b external failure cost c internal failure cost d prevention cost b 30 The cost to repair a unit of product that fails after it is sold is a(n) a appraisal cost b external failure cost c internal failure cost d prevention cost b 31 Genco manufactures two versions of a product Production and cost information show the following: Model A Units produced 200 Material moves (total) 20 Direct labor hours per unit Model B 400 80 Material handling costs total $200,000 Under ABC, the material handling costs allocated to each unit of Model A would be: a $10 b $200 c $333 37 d Some other number 38 c 32 Genco manufactures two versions of a product Production and cost information show the following: Model A Units produced 200 Material moves (total) 20 Direct labor hours per unit Model B 400 80 Material handling costs total $200,000 Under ABC, the material handling costs allocated to each unit of Model B would be: a $200 b $333 c $400 d Some other number a 33 Genco manufactures two versions of a product Production and cost information show the following: Model A Units produced 200 Material moves (total) 20 Direct labor hours per unit Model B 400 80 Material handling costs total $200,000 Direct labor hours are used to allocate overhead costs The material handling costs allocated to each unit of Model A would be: a $143 b $200 c $333 d Some other number b 34 Cadott Manufacturing produces three products Production and cost information show the following: Units produced Direct labor hours Number of inspections Model X 1,000 2,000 20 Model Y 3,000 1,000 30 Model Z 6,000 2,000 50 Inspection costs totaled $100,000 Using ABC, inspections costs allocated to each unit of Model X would be a $10.00 b $20.00 c $40.00 d Some other number 39 b 35 Cadott Manufacturing produces three products Production and cost information show the following: Units produced Direct labor hours Number of inspections Model X 1,000 2,000 20 Model Y 3,000 1,000 30 Model Z 6,000 2,000 50 Inspection costs totaled $100,000 Using ABC, inspections costs allocated to each unit of Model Y would be a $ 6.67 b $10.00 c $20.00 d Some other number b 36 Cadott Manufacturing produces three products Production and cost information show the following: Units produced Direct labor hours Number of inspections Model X 1,000 2,000 20 Model Y 3,000 1,000 30 Model Z 6,000 2,000 50 Inspection costs totaled $100,000 Using ABC, inspections costs allocated to each unit of Model Z would be a $ 6.67 b $ 8.33 c $10.00 d Some other number c 37 Cadott Manufacturing produces three products Production and cost information show the following: Units produced Direct labor hours Number of inspections Model X 1,000 2,000 20 Model Y 3,000 1,000 30 Model Z 6,000 2,000 50 Inspection costs totaled $100,000 Using direct labor hours as the allocation base, inspections costs allocated to each unit of Model X would be a $10.00 b $20.00 c $40.00 d Some other number 40 a 38 Cadott Manufacturing produces three products Production and cost information show the following: Units produced Direct labor hours Number of inspections Model X 1,000 2,000 20 Model Y 3,000 1,000 30 Model Z 6,000 2,000 50 Inspection costs totaled $100,000 Using direct labor hours as the allocation base, inspections costs allocated to each unit of Model Y would be a $6.67 b $10.00 c $20.00 d Some other number a 39 Cadott Manufacturing produces three products Production and cost information show the following: Units produced Direct labor hours Number of inspections Model X 1,000 2,000 20 Model Y 3,000 1,000 30 Model Z 6,000 2,000 50 Inspection costs totaled $100,000 Using direct labor hours as the allocation base, inspections costs allocated to each unit of Model Z would be a $6.67 b $8.33 c $10.00 d Some other number b 40 Superior Inc produces three products Production and cost information is as follows: Units produced Direct labor hours Number of setups Model Q 2,000 4,000 100 Model R 6,000 2,000 150 The consumption ratios for number of setups would be: Q R S a 40%-20%-40% b 20%-30%-50% c 10%-30%-60% d Some other numbers 41 Model S 12,000 4,000 250 c 41 Superior Inc produces three products Production and cost information is as follows: Units produced Direct labor hours Number of setups Model Q 2,000 4,000 100 Model R 6,000 2,000 150 Model S 12,000 4,000 250 The consumption ratios based on units produced would be: Q R S a 40%-20%-40% b 20%-30%-50% c 10%-30%-60% d Some other numbers a 42 Superior Inc produces three products Production and cost information is as follows: Units produced Direct labor hours Number of setups Model Q 2,000 4,000 100 Model R 6,000 2,000 150 Model S 12,000 4,000 250 The consumption ratios for direct labor hours would be: Q R S a 40%-20%-40% b 20%-30%-50% c 10%-30%-60% d Some other numbers c 43 Waupaca Company produces three products with the following production and cost information: Units produced Direct labor hours (total) Number of setups Number of shipments Engineering change orders Model A 2,000 4,000 100 200 15 Model B 6,000 2,000 150 225 10 Model C 12,000 4,000 250 275 Overhead costs include setups $90,000; shipping costs $140,000; and engineering costs $180,000 What would be the per unit overhead cost for Model A if direct labor hours were the allocation base? a $20.50 b $41.00 c $82.00 d Some other number 42 b 44 Waupaca Company produces three products with the following production and cost information: Units produced Direct labor hours (total) Number of setups Number of shipments Engineering change orders Model A 2,000 4,000 100 200 15 Model B 6,000 2,000 150 225 10 Model C 12,000 4,000 250 275 Overhead costs include setups $90,000; shipping costs $140,000; and engineering costs $180,000 What would be the per unit overhead cost for Model A if activity-based costing were used? a $20.50 b $74.00 c $82.00 d Some other number a 45 Waupaca Company produces three products with the following production and cost information: Units produced Direct labor hours (total) Number of setups Number of shipments Engineering change orders Model A 2,000 4,000 100 200 15 Model B 6,000 2,000 150 225 10 Model C 12,000 4,000 250 275 Overhead costs include setups $90,000; shipping costs $140,000; and engineering costs $180,000 What would be the per unit overhead cost for Model B if activity-based costing were used? a $22.00 b $66.00 c $123.00 d Some other number a 46 Waupaca Company produces three products with the following production and cost information: Units produced Direct labor hours (total) Number of setups Number of shipments Engineering change orders Model A 2,000 4,000 100 200 15 Model B 6,000 2,000 150 225 10 Model C 12,000 4,000 250 275 Overhead costs include setups $90,000; shipping costs $140,000; and engineering costs $180,000 What would be the per unit overhead cost for Model C if activity-based costing were used? a $10.83 b $32.50 c $245.28 d Some other number 43 c 47 Kimball Company produces two products in a single factory The following production and cost information has been determined: Model Units produced 1,000 Material moves (total) 100 Testing time (total) 250 Direct labor hours per unit Model 200 40 125 The controller has determined total overhead to be $480,000 $120,000 relates to material moves; $150,000 relates to testing; the remainder is related to labor time If Kimball uses direct labor hours to allocate overhead to each model, what would overhead per unit be for Model 1? a $10.00 b $120.00 c $240.00 d $400.00 b 48 Kimball Company produces two products in a single factory The following production and cost information has been determined: Model Units produced 1,000 Material moves (total) 100 Testing time (total) 250 Direct labor hours per unit Model 200 40 125 The controller has determined total overhead to be $480,000 $140,000 relates to material moves; $150,000 relates to testing; the remainder is related to labor time If Kimball uses activity-based costing to allocate overhead to each model, what would overhead per unit be for Model 1? a $400.00 b $295.00 c $240.00 d $120.00 44 d 49 Kimball Company produces two products in a single factory The following production and cost information has been determined: Model Units produced 1,000 Material moves (total) 100 Testing time (total) 250 Direct labor hours per unit Model 200 40 125 The controller has determined total overhead to be $480,000 $140,000 relates to material moves; $150,000 relates to testing; the remainder is related to labor time If Kimball uses direct labor hours to allocate overhead to each model, what would overhead per unit be for Model 2? a $158.33 b $400.00 c $950.00 d $1,200.00 c 50 Kimball Company produces two products in a single factory The following production and cost information has been determined: Model Units produced 1,000 Material moves (total) 100 Testing time (total) 250 Direct labor hours per unit Model 200 40 125 The controller has determined total overhead to be $480,000 $140,000 relates to material moves; $150,000 relates to testing; the remainder is related to labor time If Kimball uses activity-based costing to allocate overhead to each model, what would overhead per unit be for Model 2? a $158.33 b $415.93 c $925.00 d Some other number True-False F ABC can only be used in a company that produces a single product F A company that uses only volume-based measures will overcost its lowvolume products T ABC will be most useful in estimating fixed costs T Two major influences on costs are complexity and diversity T Volume-based measures will tend to overcost high volume products 45 F Activities that drive resource requirements are known as activity drivers F ABC is required for GAAP financial reporting F ABC will benefit a JIT operation more than a non-JIT operation F External failure costs are made up solely of opportunity costs F 10 The acceptable quality level is the point where internal failure costs are minimized Problems Scottso Enterprises incurs $300,000 in manufacturing overhead costs each month The company has been allocating overhead to individual product lines based on direct labor hours Amount In Pool -$100,000 150,000 50,000 -$300,000 ======== Cost driver Direct labor hours Number of batches Design changes Total overhead costs Amount of Activity 15,000 200 125 Two products have the following characteristics: Product X 1,000 10 Direct labor hours Number of batches Design changes Product Y 400 20 15 a Determine the overhead to be allocated to each product using direct labor hours as the only cost driver b Determine the overhead to be allocated to each product using the three drivers identified SOLUTION: a Product X: $12,000 Product Y: $ 4,800 [1,000 x ($300,000/15,000)] [400 x ($300,000/15,000)] 46 b Product X: $11,900; Product Y: $22,600 Cost driver Direct labor hours Number of batches Design changes Direct labor hours, Number of batches Design changes Amount In Pool -$100,000 150,000 50,000 Amount of Activity 25,000 200 125 Product X $4,000 7,500 400 -$11,900 Product Y $1,600 15,000 6,000 -$22,600 Rate -$ 4.00 750.00 400.00 Lewis Company has two major segments with the following information: Upstate $200,000 $30,000 50 80,000 Annual revenue Annual salesperson salaries Number of customers Miles driven Downstate $600,000 $45,000 75 40,000 Total_ $800,000 $75,000 125 The business also has overhead costs as follows: Cost pool Travel Entertainment Administrative Total a b c d Cost in pool $ 36,000 144,000 150,000 -$330,000 Cost driver miles driven number of customers salaries Allocate the overhead costs to the segments based on sales revenue Determine the income of each segment Allocate the overhead costs to the segments using ABC Determine the income of each segment under ABC SOLUTION: a Upstate: $82,500 [$330,000 x ($200,000/$800,000)] Downstate: $247,500 [$330,000 x ($600,000/$800,000)] b Upstate: $87,500 [$200,000 - $30,000 - $82,500] Downstate: $307,500 [$600,000 - $45,000 - $247,500] 47 c & d Upstate $200,000 30,000 24,000 57,600 60,000 $ 28,400 Annual revenue Annual salesperson salaries Travel Entertainment Administrative Income Downstate $600,000 45,000 12,000 86,400 90,000 $366,600 Total_ $800,000 75,000 36,000 144,000 150,000 $395,000 Johnson & Mathey is an architectural and landscape services firm The firm operates in three major segments The following information has been obtained, Annual revenues Number of jobs Chargeable hours New Design $500,000 50 6,000 Remodel $1,200,000 150 10,000 Landscape $300,000 200 14,000 Total $2,000,000 400 30,000 Salaries for the year were $800,000; overhead for the year was $1,000,000 a Determine the profits for each segment, assuming costs are allocated based on annual revenues b Determine the profits for each segment, assuming costs are allocated based on the number of jobs c Determine the profits for each segment, assuming costs are allocated based on chargeable hours SOLUTION: a New Design: $50,000 [$500,000 - ($1,800,000 x $500,000/$2,000,000)] Remodel: $120,000 [$1,200,000 - ($1,800,000 x $1,200,000/$2,000,000)] Landscape $30,000 [$300,000 - ($1,800,000 x $300,000/$2,000,000)] b New Design: $275,000 [$500,000 - ($1,800,000 x 50/400)] Remodel: $525,000 [$1,200,000 - ($1,800,000 x 150/400)] Landscape $(600,000) [$300,000 - ($1,800,000 x 200/400)] c New Design: $140,000 [$500,000 - ($1,800,000 x 6,000/30,000)] Remodel: $600,000 [$1,200,000 - ($1,800,000 x 10,000/30,000)] Landscape $(540,000) [$300,000 - ($1,800,000 x 14,000/30,000)] 48 Coleman Company produces three products, X, Y, & Z The income statement for the firm as a whole is: Sales Less variable costs Contribution margin Less fixed costs Selling 330,000 Administrative 180,000 - $1,850,000 1,310,000 -$ 540,000 510,000 -$ 30,000 Net income The sales, variable costs, and line-sustaining fixed costs for the four products are: Sales Variable costs Line-sustaining costs Q _ $250,000 60% $90,000 R _ $400,000 65% $130,000 S_ $1,200,000 75% $ 230,000 a Prepare an income statement segmented by product line, including a column for the entire firm Be sure to show segment income as well as total enterprise income SOLUTION: Q _ $250,000 150,000 Contribution margin $100,000 Line-sustaining costs 90,000 Segment income $ 10,000 Company-sustaining Sales Variable costs R _ $400,000 260,000 $140,000 130,000 $ 10,000 Enterprise income 49 S _ $1,200,000 900,000 $ 300,000 230,000 $ 70,000 Total _ $1,850,000 1,310,000 $ 540,000 450,000 $ 90,000 60,000 $ 30,000 Ellington & Hodges is a public relations firm The firm operates in three major segments The following information has been obtained, Political $750,000 50 6,000 Annual revenues Number of clients Chargeable hours Corporate $800,000 150 10,000 Celebrity $1,450,000 200 14,000 Total $3,000,000 400 30,000 Total salaries for the year were $900,000; overhead was $600,000 a Determine the profits for each segment, assuming costs are allocated based on annual revenues b Determine the profits for each segment, assuming overhead costs are allocated based on the number of clients and salaries are allocated based on chargeable hours SOLUTION: a Political: $375,000 Corporate: $400,000 Celebrity: $725,000 [$750,000 - ($1,500,000 x $750,000/$3,000,000)] [$800,000 - ($1,500,000 x $800,000/$3,000,000)] [$1,450,000 - ($1,500,000 x $1,450,000/$3,000,000)] b Annual revenues Salaries Chargeable hours Profits Political $750,000 180,000 120,000 -$450,000 Corporate $800,000 300,000 200,000 -$300,000 Celebrity $1,450,000 420,000 280,000 $ 750,000 Total $3,000,000 900,000 600,000 $1,500,000 Danner Company incurs $1,600,000 in manufacturing overhead costs each month The company has been allocating overhead to individual product lines based on direct labor hours Cost driver Direct labor hours Number of setups Number of tests Total overhead costs Amount In Pool -$500,000 700,000 400,000 -$1,600,000 ========== Amount of Activity 40,000 1,000 500 Two products have the following characteristics: Product S 2,000 20 Direct labor hours Number of setups Number of tests Product T 1,000 100 150 a Determine the overhead to be allocated to each product using direct 50 labor hours as the only cost driver b Determine the overhead to be allocated to each product using the three drivers identified SOLUTION: a Product S: $80,000 Product T: $40,000 [2,000 x ($1,600,000/40,000)] [1,000 x ($1,600,000/40,000)] b Product S: $40,600; Product T: $202,500 Cost driver Direct labor hours Number of setups Number of tests Direct labor hours, Number of setups Number of tests Amount In Pool -$500,000 700,000 400,000 Amount of Activity 40,000 1,000 500 Product S $25,000 14,000 1,600 -$40,600 Product T $12,500 70,000 120,000 $202,500 Rate -$ 12.50 700.00 800.00 Seneca Company has two products with the following information: Annual revenue Material costs Labor costs Number of receipts Number of batches Engine Rebuilds $1,200,000 400,000 250,000 8,000 425 Race Cars $1,400,000 $600,000 150,000 2,000 75 Total $2,600,000 $1,000,000 $400,000 The business also has overhead costs as follows: Cost pool Receiving Material moves Administrative Total a b c d Cost in pool $300,000 275,000 225,000 -$800,000 Cost driver number of receipts number of batches labor cost Allocate the overhead costs to the segments based on material costs Determine the income of each segment Allocate the overhead costs to the segments using ABC Determine the income of each segment under ABC SOLUTION: 51 a Engines: $320,000 [$800,000 x ($400,000/$1,000,000)] Race Cars: $480,000 [$800,000 x ($600,000/$1,000,000)] b Engines: $230,000 [$1,200,000 - $400,000 - $250.000 - $320,000] Race Cars: $170,000 [$1,400,000 - $600,000 - $150,000 - $480,000] c & d Engine Rebuilds $1,200,000 400,000 250,000 240,000 233,750 140,625 $(64,375) Annual revenue Material costs Labor costs Receiving Material moves Administrative Income Race Cars $1,400,000 600,000 150,000 60,000 41,250 84,375 $464,375 Total $2,600,000 1,000,000 400,000 300,000 275,000 225,000 -$ 400,000 Ventura Company produces four products, Q, R, S & T The income statement for the firm as a whole is: Sales Less variable costs Contribution margin Less fixed costs Manufacturing $320,000 Selling 290,000 Administrative 168,000 - $3,000,000 1,870,000 $1,130,000 778,000 $ 352,000 Net income The sales, contribution margin ratios, and line-sustaining fixed costs for the four products are: Sales Contribution margin Line-sustaining costs Q _ $200,000 35% $60,000 R _ $400,000 40% $80,000 S _ $1,000,000 20% $168,000 T_ $1,400,000 50% $270,000 b Prepare an income statement segmented by product line, including a column for the entire firm Be sure to show segment income as well as total enterprise income SOLUTION: Sales Variable costs Q _ $200,000 130,000 - R _ $400,000 240,000 52 S_ $1,000,000 800,000 - T_ $1,400,000 700,000 - Total $3,000,000 1,870,000 - Contribution margin $ 70,000 Line-sustaining costs 60,000 Segment income $ 10,000 Company-sustaining $160,000 80,000 $ 80,000 Enterprise income 53 $ 200,000 168,000 $ 32,000 $ 700,000 270,000 $ 430,000 $1,130,000 578,000 $ 552,000 200,000 $ 352,000 DJH Corp has identified the following costs Costs to improve the production process Incoming inspection costs Design engineer salaries Rework of defective units Salaries for service repair workers Warranty costs Finished goods inspection Scrap $175,000 110,000 325,000 122,000 265,000 335,000 165,000 118,000 Categorize each of the costs into the appropriate quality cost category and prepare a total for each SOLUTION: Prevention costs: Costs to improve the production process Design engineer salaries Total prevention costs $175,000 325,000 Appraisal costs: Incoming inspection costs Finished goods inspection Total appraisal costs $110,000 165,000 Internal failure costs: Rework of defective units Scrap Total internal failure costs $122,000 118,000 External failure costs: Salaries for service repair workers Warranty costs Total external failure costs $265,000 335,000 $500,000 275,000 240,000 600,000 10 Following is a list of activities that pertains to quality Classify each as either external failure, internal failure, appraisal, or prevention External Failure In-process inspection Warranty expenses Worker training Downtime on machinery due to rework Product returns Product design Preventive maintenance Wages for field repair workers Quality laboratory 54 Internal Failure Appraisal Prevention 10 Customer complaints SOLUTION: External Failure In-process inspection Warranty expenses Worker training Downtime on machinery due to rework Product returns Product design Preventive maintenance Wages for field repair Workers Quality laboratory 10 Customer complaints Internal Failure Appraisal X Prevention X X X X X X X X X 55 ...b The resource utilized by a given product divided by the total amount of the resource available is called the a activity driver b consumption... 100 Testing time (total) 250 Direct labor hours per unit Model 200 40 125 The controller has determined total overhead to be $480,000 $120,000 relates to material moves; $150,000 relates to testing;... 100 Testing time (total) 250 Direct labor hours per unit Model 200 40 125 The controller has determined total overhead to be $480,000 $140,000 relates to material moves; $150,000 relates to testing;