Exam 10: Fundamentals of Cost Management

Which of the following is an internal failure activity?

Categorize each of the following quality activities by placing an X in the appropriate column. Required:

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)

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 prevention costs on the August quality control report for Glory Enterprises?

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: Total Per unit Materials \ 300,000 \ 15.00 Labor 400,000 20.00 Special equipment 36,000 1.80 Quality inspection 24,000 1.20 Other manufacturing costs 350,000 17.50 Total costs \1 ,110,000 \5 5.50 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?

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: Five Small Large Customer Customers Units purchased 200,000 300,000 Orders placed 10 350 Number of sales calls 20 230 Manufacturing cost \6 00,000 \9 00,000 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.

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: Customer A Customer B ATM uses 300 50 Branch visits 5 20 Number of transactions 60 1,200 Average deposit \ 450 \ 10,000 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.

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:

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?

Gruber Industries provides the following information about resources: Cost Driver Rate Cost Driver Volume Resources used Materials \ 12 15,000 pounds Energy 48 675 machine hours Setups 300 150 setups Purchasing 240 16 purchase orders Customer service 160 175 returns Long-term labor 80 640 labor hours Administrative 60 840 administrative hours Resources supplied Materials \ 192,000 Energy 36,480 Setups 50,400 Purchasing 44,000 Customer service 35,200 Long-term labor 53,000 Administrative 54,000 In addition, sales for the period totaled $600,000. Required: Compute the unused resource capacity for each preceding item.

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

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: Cost driver Customer C Customer D Number of orders 18 8 Number of deliveries 10 10 Total number of items 2,000 4,000 Annual order value \ 120,000 \ 80,000 - What are the total delivery costs charged to Customer D during the year?

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

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

Which of the following is a value-added activity?

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: No Frills Stardard Options Super Selling price \ 35.00 \ 45.00 \ 65.00 Direct materials 10.00 12.00 14.00 Direct labor (\ 15) 7.50 12.00 21.00 Variable Overhead 4.00 6.40 11.20 Fixed Overhead 3.00 5.00 5.00 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?

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

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 B, assuming Benton uses units purchased to compute activity-based costs?

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.

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