Exam 5: Activity-Based Costing and Management

Rodeo Corporation recently abandoned its traditional production and inventory system in favor of a just-in-time system.The company typically dealt with 50 suppliers and placed 450 orders throughout the year.All other things being equal,which of the following choices denotes a likely scenario under the just-in-time system?

Airstream builds recreational motor homes.All of the following activities add value to the finished product except:

Non-value-added costs occur in nonmanufacturing organizations as well as in manufacturing firms. Required: A.Explain what is meant by a non-value-added cost. A.Non-value-added costs are the costs of activities that can be eliminated with no deterioration of product quality,performance,or perceived value.These activities should be eliminated to save time and money.General examples include the costs of inspection,moving,waiting,and storing. B.Airlines: · Vouchers for future flights that are given to passengers as a result of poor customer service. · The cost of tracing,returning,repairing,or replacing lost or mishandled luggage. · Additional compensation paid to flight crews attributable to cancellations or delays from problems that should have been prevented by routine maintenance. Banks: · The cost of correcting bank errors in customer accounts. · The cost of performing manual banking procedures necessitated by computer system downtime. · Losses caused by employee embezzlement and petty thefts. · Defaulted loans made to borrowers who should have been classified as poor risks by existing credit-granting procedures. Hotels: · Broken dishes and glassware,loss of or damage to linens and towels. · The cost of replacing lost room keys/entry cards. · The cost of overstaffing the front desk during nonpeak hours. · Excess food costs,including preparation. B.Identify two potential non-value-added costs for each of the following service providers: airlines,banks,and hotels.

Which of the following is not a broad,cost classification category typically used in activity-based costing?

The overhead cost allocated to Beta by using activity-based costing procedures would be:

What is HiTech's pool rate for the finishing activity?

Which of the following is not an example of a business-value-added activity?

Activity-based costing systems have a tendency to distort product costs.

Drake Manufacturing sells a number of goods whose selling price is heavily influenced by cost.A recent study of product no.520 revealed a traditionally-derived total cost of $1,623 and a selling price of $1,850 based on that figure.A newly computed activity-based total cost is $1,215.Which of the following statements is true?

Activity-based costing systems:

The wholesale division of Navigator Enterprises is considering the installation of a just-in-time purchasing system.The company's accountant has provided the following figures if the system is adopted: · Sales lost because of out-of-stock situations will total 5,500 units,with each unit producing an average profit for the firm of $23. · The overall inventory will drop by $700,000.Navigator can invest these funds elsewhere and produce a return of 13%. · A leased warehouse (monthly rent of $3,000)will no longer be needed. · Two warehouse employees (total annual salary cost of $43,000)will be transferred elsewhere in the firm. · Annual property taxes and insurance are expected to fall by $18,900. · In order to keep valued customers,Navigator will occasionally have to use air freight when an out-of-stock situation arises,resulting in added cost for the company of $2,300. Required: A. The just-in-time system is financially advantageous to the firm,saving $17,100.Note: The cost of the warehouse employees is ignored because regardless of whether the system is adopted,Navigator will incur the cost. A.Determine whether it is financially advantageous over a 12-month period for Navigator to adopt the just-in-time system. B.How would Navigator describe the "ideal supplier" if the company adopts the just-in-time system. B.The "ideal supplier" is one that delivers top quality goods precisely when needeD.Thus,reliability is a key with respect to quality and delivery,as is close proximity to the wholesale division.Most JIT suppliers are willing to sign long-term contracts and accept "batched" payments for deliveries.

In an activity-based costing system,direct materials used would typically be classified as a:

Of the following organizations,activity-based costing (ABC)cannot be used by:

Aladin's customer service department follows up on customer complaints by telephone inquiry.During a recent period,the department initiated 7,000 calls and incurred costs of $203,000.If 2,940 of these calls were for the company's wholesale operation (the remainder were for the retail division),costs allocated to the wholesale operation should amount to:

The division of activities into unit-level,batch-level,product-sustaining level,and facility-level categories is commonly known as a cost:

St.Helena Cellars produces wine in northern California.Consider the following selected costs that arose during the current year: 1.Safety costs at winery 2.Truckload shipping costs 3.Building maintenance costs 4.Bottle and cork cost 5.Development cost of new,after-dinner wine 6.Tasting and testing costs Required: A.A unit-level activity is performed for each unit of production.In contrast,a product-sustaining activity is needed to support an entire product line.The latter is not necessarily performed each time a new unit or batch of products is manufactured. A.Briefly distinguish between unit-level and product-sustaining activities. B.1.Facility-level 2.Batch-level 3.Facility-level 4.Unit-level 5.Product-sustaining 6.Batch-level B.Classify the six costs listed as arising from a unit-level,batch-level,product-sustaining,or facility-level activity.

The cost of wages and salaries and other overhead that would be charged to each delivery is closest to:

Marion Corporation,which produces unique office furniture,recently installed a just-in-time production system.The various steps in the company's manufacturing process are coordinated by using a philosophy known as:

Consumption ratios are useful in determining:

Homestead Corporation sells a line of power tools to home improvement chains,generating a cost of goods sold equal to 70% of net sales.The selected data that follow relate to the period just ended for the company's three largest customers: Weekend Project,Tool Mart,and Fix-It City. A.1.Customer-related costs as a percentage of gross margin: Weekend Project: $245,100 /[($2,000,000 - $100,000)*30%] = 43% Tool Mart: $918,000 / [($4,900,000 - $400,000)*30%] = 68% Fix-It City: $457,800 /[($4,600,000 - $240,000)*30%] = 35% 2.Average order size: Weekend Project: $2,000,000 / 50 orders = $40,000 Tool Mart: $4,900,000 / 175 orders = $28,000 Fix-It City: $4,600,000 / 125 orders = $36,800 3.Ratio of regular orders to rush orders: Weekend Project: 40:10 = 4:1 Tool Mart: 135:40 = 3.375:1 Fix-It City: 110:15 = 7.33:1 4.Number of sales returns as a percentage of total orders: Weekend Project: 3 / 50 = 6% Tool Mart: 20/ 175 = 11.4% Fix-It City: 8 / 125 = 6.4% A.For each of the three chains,compute: 1.Total customer-related costs as a percentage of gross margin. 2.The average order size (ignoring sales returns). 3.The ratio of regular orders to rush orders. 4.The number of sales returns as a percentage of the number of total orders. B.Customer-related costs are driven by events (and costs)directly traceable to clients.In this case,Tool Mart's costs as a percentage of gross margin are much higher (68%)than those of Weekend Project and Fix-It City.This result is not surprising given that the firm creates a large number of small orders ($28,000 vs.$36,800 and $40,000)for Homestead to process.In addition,relative to the other two firms,Tool Mart relies more heavily on rush orders,which likely creates additional cost.Finally,a number of Tool Mart's orders (11.4%)eventually result in sales returns,again creating additional processing expense for Homestead.In summary,Tool Mart seems to be an outlier in relation to Weekend Project and Fix-It City,and management should approach Tool Mart to see if the company can change its ways of doing business. B.Prepare a brief summary of your findings.Should Homestead work with any of the chains in an effort to improve results? Explain.