Exam 10: Fundamentals of Cost Management

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

Mulvey Corporation manufactures large kitchen appliances. The following represents financial information for two years: 2020 2021 Sales \7 ,840,000 \7 ,040,000 Costs: Process Inspection 52,800 60,000 Scrap 57,600 60,200 Quality Training 610,000 440,000 Warranty Repairs 140,000 150,000 Testing Equipment 230,000 230,000 Resolving Customer Complaints 89,000 108,400 Rework 544,000 390,000 Preventative Maintenance 440,000 304,000 Material Inspection 210,000 150,000 Field Testing 300,000 400,000 Total costs \ 2,673,400 \ 2,292,600 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.

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

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

Stonehouse Corporation developed the following information regarding quality for the first quarter of the year 2020: Sales \ 6,800,000 Wasted time 285,600 Training 102,000 Inspecting finished goods 340,000 Perfornance reviews 85,000 Resolving customer complaints 38,760 Certifying suppliers Total Required: Prepare a cost of quality report sorting costs by quality activity and expressing in relevant percentage terms.

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:

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

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

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

Water Industries' quality control report for August contains the following items: Gathering, analysis, and reporting quality data \1 ,000 Inspecting raw materials received from vendors 2,000 Testing and inspecting finished products 3,000 Visiting customer sites to test product 4,000 Designing product to reduce production problems 5,000 Repairing and/or replacing products under warranty 6,000 Maintaining the equipment used to gather quality data 7,000 Cost (net) of materials wasted during production 8,000 - What would be the total of the conformance costs on the August quality control report for Water Industries?

Appraisal activities:

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:

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?

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

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.

Glory Enterprises quality control report for August contains the following items: Liability costs associated with defective products \1 0,000 Disposal costs of defective products failing inspection 20,000 Disposal costs of raw materials failing inspection 30,000 Quality training provided to workers 40,000 Lost sales due to poor quality and defective products 50,000 Advertising costs to offset perception of poor product quality 60,000 Raw materials used to correct defects before product was sold 70,000 Testing and inspecting a sample of finished goods 80,000 - What would be the total of the conformance costs on the August quality control report for Glory Enterprises?

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.

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: Vendor A Vendor B Units purchased 100,000 200,000 Purchase orders (annual) 6 24 Number of shipments received 12 52 - 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?

The following represents the financial information of Madison Tool Corporation, a manufacturer of testing equipment: May Customer complaints \ 11,200 Field testing 37,600 Materials inspection 26,000 Preventive maintenance 54,000 Process inspection 6,600 Quality training 75,200 Rework 68,000 Scrap 7,400 Testing equipment 28,000 Warranty repairs 17,200 Required: a. Classify these items into prevention, appraisal, internal failure, or external failure costs and determine the total cost of each category.

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