Exam 10: Activity-Based Costing

Figure 10-2 Anderson Company manufactures a variety of toys and games. John Boone, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in 2011 when 30,000 were projected. Sales for 2008 look no better. At £100 per game, it is not a hot seller. Direct costs of the board game are £56 variable cost and £100,000 fixed. John is considering several options. Option One: Cut the price to £70 and perhaps sell 15,000 units. Option Two: Cut the price to £60, reduce material costs by £10, and cut advertising by £60,000. Anticipated volume for this option is 10,000 units. Option Three: Cut the price to £80 and include a £10 mail-in rebate offer. It is anticipated that 15,000 units could be sold and only 30 per cent of the rebate coupons would be redeemed. -Refer to Figure 10-2. What is the profit (loss) from Option One?

Figure 10-4 Jamie Ltd. had the following information: Revenues £250,000 Cost of goods sold: £50,000 Direct materials 37,500 Direct labour Overhead Gross profit Selling and administrative expenses £62,500 -Refer to Figure 10-4. What would be the price for something that has a cost of £500, assuming that the mark up is based on cost of goods sold?

Figure 10-5 Ander Company produces precision equipment for major buyers. Of the six customers, one accounts for 40 per cent of the sales, with the remaining five accounting for the rest of the sales. The five smaller customers purchase equipment in roughly equal quantities. Orders placed by the smaller customers are about the same size. Data concerning Ander's customer activity follow: Large Customer Five Smaller Customers Units purchased 400,000 600,000 Orders placed 10 350 Number of sales calls 20 230 Manufacturing cost £1,200,000 £1,800,000 Order-filling costs for Ander Company total £360,000, and sales-force costs are £375,000. -Refer to Figure 10-5 above, what amount of order-filling costs would be allocated to the five smaller customers if these costs are allocated using an activity-based costing approach?

Figure 10-2 Anderson Company manufactures a variety of toys and games. John Boone, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in 2011 when 30,000 were projected. Sales for 2008 look no better. At £100 per game, it is not a hot seller. Direct costs of the board game are £56 variable cost and £100,000 fixed. John is considering several options. Option One: Cut the price to £70 and perhaps sell 15,000 units. Option Two: Cut the price to £60, reduce material costs by £10, and cut advertising by £60,000. Anticipated volume for this option is 10,000 units. Option Three: Cut the price to £80 and include a £10 mail-in rebate offer. It is anticipated that 15,000 units could be sold and only 30 per cent of the rebate coupons would be redeemed. -Refer to Figure 10-2. Which option is preferred?

If activity-based costing is used, materials handling would be classified as a

____ is the pricing of a new product at a low initial price to build market share quickly.

Figure 10-1 Wheat Manufacturing has four categories of overhead. The four categories and the expected overhead costs for each category for next year are as follows: Maintenance £120,000 Materials handling 18,000 Setups 16,000 Inspection 60,000 Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labour hours. For next year, 20,000 direct labour hours are budgeted. The company has been asked to submit a bid for a proposed job. The plant manager feels that obtaining this job would result in new business in future years. Usually bids are based upon full manufacturing cost plus 15 per cent. Estimates for the proposed job are as follows: Direct materials £2,000 Direct labour (600 hours) £6,000 Number of materials moves 4 Number of inspections 6 Number of setups 8 Number of machine hours 80 In the past, full manufacturing cost has been calculated by allocating overhead using a volume-based cost driver--direct labour hours. The plant manager has heard of a new way of applying overhead that uses cost pools and cost drivers. Expected activity for the four activity-based cost drivers that would be used are as follows: Machine hours 5,000 Material moves 600 Setups 200 Quality inspections 1,000 -Refer to Figure 10-1. If Wheat Manufacturing used direct labour hours as the cost driver and the company's bid is full cost plus 15 per cent, the company's bid would be

Figure 10-5 Ander Company produces precision equipment for major buyers. Of the six customers, one accounts for 40 per cent of the sales, with the remaining five accounting for the rest of the sales. The five smaller customers purchase equipment in roughly equal quantities. Orders placed by the smaller customers are about the same size. Data concerning Ander's customer activity follow: Large Customer Five Smaller Customers Units purchased 400,000 600,000 Orders placed 10 350 Number of sales calls 20 230 Manufacturing cost £1,200,000 £1,800,000 Order-filling costs for Ander Company total £360,000, and sales-force costs are £375,000. -Refer to Figure 10-5 above, what amount of order-filling costs would be allocated to the large customer if these costs are allocated using an activity-based costing approach?

Figure 10-3 Farr Company had the following information: Revenues £400,000 Cost of goods sold: £100,000 Direct materials 50,000 Overhead 50,000 200,000 Gross profit £200,000 Selling and administrative expenses 75,000 Operating income £125,000 -Refer to Figure 10-3. What is the mark up based on prime costs?

Which of the following statements describes a legitimate disadvantage of cost-based pricing?

Which of the following stages is characterized by rapid increases in sales and production?

Figure 10-6 Multiple Products Co. has predicted the following costs for this year for 100,000 units: Selling and Manufacturing Administrative Variable £400,000 £100,000 Fixed 600,000 300,000 Total £1,000,000 £400,000 -Refer to Figure 10-6. What is the manufacturing cost mark up needed to obtain a target profit of £100,000?

World-class organizations operating in competitive markets are more likely to take which one of the following approaches toward pricing?

Figure 10-6 Multiple Products Co. has predicted the following costs for this year for 100,000 units: Selling and Manufacturing Administrative Variable £400,000 £100,000 Fixed 600,000 300,000 Total £1,000,000 £400,000 -Refer to Figure 10-6. What is the mark up on variable costs needed to achieve a target profit of £100,000?

Figure 10-2 Anderson Company manufactures a variety of toys and games. John Boone, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in 2011 when 30,000 were projected. Sales for 2008 look no better. At £100 per game, it is not a hot seller. Direct costs of the board game are £56 variable cost and £100,000 fixed. John is considering several options. Option One: Cut the price to £70 and perhaps sell 15,000 units. Option Two: Cut the price to £60, reduce material costs by £10, and cut advertising by £60,000. Anticipated volume for this option is 10,000 units. Option Three: Cut the price to £80 and include a £10 mail-in rebate offer. It is anticipated that 15,000 units could be sold and only 30 per cent of the rebate coupons would be redeemed. -Refer to Figure 10-2. What is the profit (loss) from Option Two?

Products might consume overhead in different proportions due to

Which of the following stages has revenues for the entire industry decreasing?

Figure 10-1 Wheat Manufacturing has four categories of overhead. The four categories and the expected overhead costs for each category for next year are as follows: Maintenance £120,000 Materials handling 18,000 Setups 16,000 Inspection 60,000 Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labour hours. For next year, 20,000 direct labour hours are budgeted. The company has been asked to submit a bid for a proposed job. The plant manager feels that obtaining this job would result in new business in future years. Usually bids are based upon full manufacturing cost plus 15 per cent. Estimates for the proposed job are as follows: Direct materials £2,000 Direct labour (600 hours) £6,000 Number of materials moves 4 Number of inspections 6 Number of setups 8 Number of machine hours 80 In the past, full manufacturing cost has been calculated by allocating overhead using a volume-based cost driver--direct labour hours. The plant manager has heard of a new way of applying overhead that uses cost pools and cost drivers. Expected activity for the four activity-based cost drivers that would be used are as follows: Machine hours 5,000 Material moves 600 Setups 200 Quality inspections 1,000 -Refer to Figure 10-1. If Wheat Manufacturing used activity-based cost drivers to assign overhead and the company's bid is full cost plus 15 per cent, the company's bid would be

Figure 10-2 Anderson Company manufactures a variety of toys and games. John Boone, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in 2011 when 30,000 were projected. Sales for 2008 look no better. At £100 per game, it is not a hot seller. Direct costs of the board game are £56 variable cost and £100,000 fixed. John is considering several options. Option One: Cut the price to £70 and perhaps sell 15,000 units. Option Two: Cut the price to £60, reduce material costs by £10, and cut advertising by £60,000. Anticipated volume for this option is 10,000 units. Option Three: Cut the price to £80 and include a £10 mail-in rebate offer. It is anticipated that 15,000 units could be sold and only 30 per cent of the rebate coupons would be redeemed. -Refer to Figure 10-2. What is the profit (loss) from Option Three?

Price skimming occurs in which of the following life-cycle stages?