Exam 11: Criticisms of Absorption Cost Systems: Inaccurate Product Costs

When traditional absorption costing is employed,which of the following is false?

This is a comprehensive problem comparing absorption costing and ABC.It is suggested that as you progress through the problem,keep track of the correct solutions,because these values will be used again later in the problem set. Dehli Inkstone specializes in inkstone creation.Each finished inkstone needs 1½ pounds of special materials which cost $20 a pound.(One pound contains 16 ounces. )Drilling requires 1 direct labor hour for which workers are paid $10 per hour,and 40 minutes of machine time.The preliminary product (a 'basic')is inspected to ensure that it is sound.Fifteen percent of the basics are rejected.It is not possible to rework these,and they have no salvage value.Each approved stone is handed to a master craftsperson who spends two hours making a 'Standard' product or three hours creating a 'Masterpiece'.Standards use half an hour of machine time and Masterpieces one hour.Finished inkstones are inspected again before packing.Four percent of finished products fail the final quality control assessment and are destroyed.Crafts persons are paid $18 per hour.It takes a 'basic' worker six minutes to package each inkstone in bubble wrap and a shipping carton,which cost 50 cents in materials and weigh 6 ounces in total. Total overheads are estimated to be $587,400 per year and 97,900 direct labor hours are budgeted.Production plans for the year call for 60% of output to be Standard inkstones and the balance Masterpieces. Dehli Inkstone recently employed a cost analyst,who recommended the adoption of an ABC system to obtain a more accurate understanding of the costs of the Standard and Masterpiece products.She has classified the overheads into the following four cost pools and identified the appropriate cost drivers: Cost Pool Dollars Cost Driver Materials handling \ 121,000 Pounds of raw material Inspection \ 48,400 Inspections Machine operation \& maint. \ 163,350 Machine hours Labor-related costs Direct Labor dollars What is true when ABC is used in Dehli Inkstone?

Boulder Mountain manufactures two products,Standard and Deluxe.Boulder Mountain's overhead consists of $5,000,000 for machining and $2,500,000 for assembly.The following information has been complied about the two products: Standard Deluxe Direct ghar hours 10,000 15,000 Number af parts 90,000 160,000 Nechine hours 10,000 30,000 Overhead allocated to Standard using a single overhead rate based on the number of parts and using activity-based costing,respectively,are:

Which of the following is a correct matching of terms?

For Dehli Inkstone,is it worth implementing a full-fledged ABC system,based upon the findings for these two products?

This is a comprehensive problem comparing absorption costing and ABC.It is suggested that as you progress through the problem,keep track of the correct solutions,because these values will be used again later in the problem set. Dehli Inkstone specializes in inkstone creation.Each finished inkstone needs 1½ pounds of special materials which cost $20 a pound.(One pound contains 16 ounces. )Drilling requires 1 direct labor hour,for which workers are paid $10 per hour,and 40 minutes of machine time.The preliminary product (a 'basic')is inspected to ensure that it is sound.Fifteen percent of the basics are rejected.It is not possible to rework these,and they have no salvage value.Each approved stone is handed to a master craftsperson who spends two hours making a 'Standard' product or three hours creating a 'Masterpiece'.Standards use half an hour of machine time and Masterpieces one hour.Finished inkstones are inspected again before packing.Four percent of finished products fail the final quality control assessment and are destroyed.Crafts persons are paid $18 per hour.It takes a 'basic' worker six minutes to package each inkstone in bubble wrap and a shipping carton,which cost 50 cents in materials and weigh 6 ounces in total. Total overheads are estimated to be $587,400 per year and 97,900 direct labor hours are budgeted.Production plans for the year call for 60% of output to be Standard inkstones and the balance Masterpieces. For a Masterpiece inkstone,which is true of the direct labor hours (DLH)needed (to 3 decimal places)?

This is a comprehensive problem comparing absorption costing and ABC.It is suggested that as you progress through the problem,keep track of the correct solutions,because these values will be used again later in the problem set. Dehli Inkstone specializes in inkstone creation.Each finished inkstone needs 1½ pounds of special materials which cost $20 a pound.(One pound contains 16 ounces. )Drilling requires 1 direct labor hour for which workers are paid $10 per hour,and 40 minutes of machine time.The preliminary product (a 'basic')is inspected to ensure that it is sound.Fifteen percent of the basics are rejected.It is not possible to rework these,and they have no salvage value.Each approved stone is handed to a master craftsperson who spends two hours making a 'Standard' product or three hours creating a 'Masterpiece'.Standards use half an hour of machine time and Masterpieces one hour.Finished inkstones are inspected again before packing.Four percent of finished products fail the final quality control assessment and are destroyed.Crafts persons are paid $18 per hour.It takes a 'basic' worker six minutes to package each inkstone in bubble wrap and a shipping carton,which cost 50 cents in materials and weigh 6 ounces in total. Total overheads are estimated to be $587,400 per year and 97,900 direct labor hours are budgeted.Production plans for the year call for 60% of output to be Standard inkstones and the balance Masterpieces. Which is the full (absorption)cost of a Standard inkstone,if machine hours are used as the cost driver? (Allow a little for rounding errors).

This is a comprehensive problem comparing absorption costing and ABC.It is suggested that as you progress through the problem,keep track of the correct solutions,because these values will be used again later in the problem set. Dehli Inkstone specializes in inkstone creation.Each finished inkstone needs 1½ pounds of special materials which cost $20 a pound.(One pound contains 16 ounces. )Drilling requires 1 direct labor hour for which workers are paid $10 per hour,and 40 minutes of machine time.The preliminary product (a 'basic')is inspected to ensure that it is sound.Fifteen percent of the basics are rejected.It is not possible to rework these,and they have no salvage value.Each approved stone is handed to a master craftsperson who spends two hours making a 'Standard' product or three hours creating a 'Masterpiece'.Standards use half an hour of machine time and Masterpieces one hour.Finished inkstones are inspected again before packing.Four percent of finished products fail the final quality control assessment and are destroyed.Crafts persons are paid $18 per hour.It takes a 'basic' worker six minutes to package each inkstone in bubble wrap and a shipping carton,which cost 50 cents in materials and weigh 6 ounces in total. Total overheads are estimated to be $587,400 per year and 97,900 direct labor hours are budgeted.Production plans for the year call for 60% of output to be Standard inkstones and the balance Masterpieces. Dehli Inkstone recently employed a cost analyst,who recommended the adoption of an ABC system to obtain a more accurate understanding of the costs of the Standard and Masterpiece products.She has classified the overheads into the following four cost pools and identified the appropriate cost drivers: Cost Pool Dollars Cost Driver Materials handling \ 121,000 Pounds of raw material Inspection \ 48,400 Inspections Machine operation \& maint. \ 163,350 Machine hours Labor-related costs Direct Labor dollars Independent of your answers above,assume total planned output is 25,595 units.What is the correct materials handling cost rate?

Sedona Hats manufactures two different types of hat: Narrow Brim and Wide Brim.The company's overhead costs include $72,000 for machining,$48,000 for machine set-ups,and $36,000 for inspections.Sedona produced 15,000 Narrow Brim hats and 60,000 Wide Brim hats.Sedona's new cost accountant has compiled the following information: Narrow Wide Brim Brim Direct labor hours 24,000 36,000 Machine set-ups 40 80 Machine hours 6,000 18,000 Inspections 60 90 If Sedona Hats uses activity-based costing,which of the following is not true?

This is a comprehensive problem comparing absorption costing and ABC.It is suggested that as you progress through the problem,keep track of the correct solutions,because these values will be used again later in the problem set. Dehli Inkstone specializes in inkstone creation.Each finished inkstone needs 1½ pounds of special materials which cost $20 a pound.(One pound contains 16 ounces. )Drilling requires 1 direct labor hour,for which workers are paid $10 per hour,and 40 minutes of machine time.The preliminary product (a 'basic')is inspected to ensure that it is sound.Fifteen percent of the basics are rejected.It is not possible to rework these,and they have no salvage value.Each approved stone is handed to a master craftsperson who spends two hours making a 'Standard' product or three hours creating a 'Masterpiece'.Standards use half an hour of machine time and Masterpieces one hour.Finished inkstones are inspected again before packing.Four percent of finished products fail the final quality control assessment and are destroyed.Crafts persons are paid $18 per hour.It takes a 'basic' worker six minutes to package each inkstone in bubble wrap and a shipping carton,which cost 50 cents in materials and weigh 6 ounces in total. Total overheads are estimated to be $587,400 per year and 97,900 direct labor hours are budgeted.Production plans for the year call for 60% of output to be Standard inkstones and the balance Masterpieces. Which is the full (absorption)cost of a Masterpiece inkstone,if direct labor hours are used as the cost driver? (Allow a little for rounding errors).

This is a comprehensive problem comparing absorption costing and ABC.It is suggested that as you progress through the problem,keep track of the correct solutions,because these values will be used again later in the problem set. Dehli Inkstone specializes in inkstone creation.Each finished inkstone needs 1½ pounds of special materials which cost $20 a pound.(One pound contains 16 ounces. )Drilling requires 1 direct labor hour,for which workers are paid $10 per hour,and 40 minutes of machine time.The preliminary product (a 'basic')is inspected to ensure that it is sound.Fifteen percent of the basics are rejected.It is not possible to rework these,and they have no salvage value.Each approved stone is handed to a master craftsperson who spends two hours making a 'Standard' product or three hours creating a 'Masterpiece'.Standards use half an hour of machine time and Masterpieces one hour.Finished inkstones are inspected again before packing.Four percent of finished products fail the final quality control assessment and are destroyed.Crafts persons are paid $18 per hour.It takes a 'basic' worker six minutes to package each inkstone in bubble wrap and a shipping carton,which cost 50 cents in materials and weigh 6 ounces in total. Total overheads are estimated to be $587,400 per year and 97,900 direct labor hours are budgeted.Production plans for the year call for 60% of output to be Standard inkstones and the balance Masterpieces. For a Standard inkstone,which is true of the machine hours (MH)needed (to 3 decimal places)?

This is a comprehensive problem comparing absorption costing and ABC.It is suggested that as you progress through the problem,keep track of the correct solutions,because these values will be used again later in the problem set. Dehli Inkstone specializes in inkstone creation.Each finished inkstone needs 1½ pounds of special materials which cost $20 a pound.(One pound contains 16 ounces. )Drilling requires 1 direct labor hour for which workers are paid $10 per hour,and 40 minutes of machine time.The preliminary product (a 'basic')is inspected to ensure that it is sound.Fifteen percent of the basics are rejected.It is not possible to rework these,and they have no salvage value.Each approved stone is handed to a master craftsperson who spends two hours making a 'Standard' product or three hours creating a 'Masterpiece'.Standards use half an hour of machine time and Masterpieces one hour.Finished inkstones are inspected again before packing.Four percent of finished products fail the final quality control assessment and are destroyed.Crafts persons are paid $18 per hour.It takes a 'basic' worker six minutes to package each inkstone in bubble wrap and a shipping carton,which cost 50 cents in materials and weigh 6 ounces in total. Total overheads are estimated to be $587,400 per year and 97,900 direct labor hours are budgeted.Production plans for the year call for 60% of output to be Standard inkstones and the balance Masterpieces. Dehli Inkstone recently employed a cost analyst,who recommended the adoption of an ABC system to obtain a more accurate understanding of the costs of the Standard and Masterpiece products.She has classified the overheads into the following four cost pools and identified the appropriate cost drivers: Cost Pool Dollars Cost Driver Materials handling \ 121,000 Pounds of raw material Inspection \ 48,400 Inspections Machine operation \& maint. \ 163,350 Machine hours Labor-related costs Direct Labor dollars What is true when ABC is used?

This is a comprehensive problem comparing absorption costing and ABC.It is suggested that as you progress through the problem,keep track of the correct solutions,because these values will be used again later in the problem set. Dehli Inkstone specializes in inkstone creation.Each finished inkstone needs 1½ pounds of special materials which cost $20 a pound.(One pound contains 16 ounces. )Drilling requires 1 direct labor hour,for which workers are paid $10 per hour,and 40 minutes of machine time.The preliminary product (a 'basic')is inspected to ensure that it is sound.Fifteen percent of the basics are rejected.It is not possible to rework these,and they have no salvage value.Each approved stone is handed to a master craftsperson who spends two hours making a 'Standard' product or three hours creating a 'Masterpiece'.Standards use half an hour of machine time and Masterpieces one hour.Finished inkstones are inspected again before packing.Four percent of finished products fail the final quality control assessment and are destroyed.Crafts persons are paid $18 per hour.It takes a 'basic' worker six minutes to package each inkstone in bubble wrap and a shipping carton,which cost 50 cents in materials and weigh 6 ounces in total. Total overheads are estimated to be $587,400 per year and 97,900 direct labor hours are budgeted.Production plans for the year call for 60% of output to be Standard inkstones and the balance Masterpieces. For a Standard inkstone,which is true of the materials input needed (to 3 significant figures)?

This is a comprehensive problem comparing absorption costing and ABC.It is suggested that as you progress through the problem,keep track of the correct solutions,because these values will be used again later in the problem set. Dehli Inkstone specializes in inkstone creation.Each finished inkstone needs 1½ pounds of special materials which cost $20 a pound.(One pound contains 16 ounces. )Drilling requires 1 direct labor hour for which workers are paid $10 per hour,and 40 minutes of machine time.The preliminary product (a 'basic')is inspected to ensure that it is sound.Fifteen percent of the basics are rejected.It is not possible to rework these,and they have no salvage value.Each approved stone is handed to a master craftsperson who spends two hours making a 'Standard' product or three hours creating a 'Masterpiece'.Standards use half an hour of machine time and Masterpieces one hour.Finished inkstones are inspected again before packing.Four percent of finished products fail the final quality control assessment and are destroyed.Crafts persons are paid $18 per hour.It takes a 'basic' worker six minutes to package each inkstone in bubble wrap and a shipping carton,which cost 50 cents in materials and weigh 6 ounces in total. Total overheads are estimated to be $587,400 per year and 97,900 direct labor hours are budgeted.Production plans for the year call for 60% of output to be Standard inkstones and the balance Masterpieces. Which is the full (absorption)cost of a Masterpiece inkstone,if direct labor dollars are used as the cost driver? (Round overhead absorption rate to 3 decimal places).