Exam 5: Activity-Based Costing and Management

X-Ray Machines Ltd. manufactures three product lines: Standard, Deluxe, and Superior. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below. The following information pertains to the three product lines for next year: Standard Deluxe Supe rior Units to be produced 15,000 10,000 7,000 Orders to be shipped 1,000 500 500 Number of parts per unit 10 15 25 Machine hours per unit 3 5 7 Labour hours per unit 2 2 2 Assume that X-Ray is using a volume-based costing system, and the preceding manufacturing costs are applied to all products based on direct labour hours. How much of the preceding cost, rounded to the nearest dollar, would be assigned to Superior?

Which of the following choices correctly depicts the proper classification of direct materials used and management salaries? Direct Materials Used Management Salaries 1. Batch level Facility level 2. Batch level Batch level 3. Unit level Product-sustaining level 4. Unit level Facility level 5. Product-sustaining level Batch level

Goldstar Corporation manufactures two types of portable air conditioners: Model A, a 4,000 BTU unit and Model B, a 6,000 BTU unit. A review of the company's accounting records revealed the following per-unit costs and production volumes: Model Production volume (units) Direct material \5 0 \ 29 Direct labour: 2 hours at \ 14 28 3 hours at \ 14 42 Manufacturing overhead: 2 hours at \ 93 186 3 hours at \ 93 279 Manufacturing overhead is currently computed by spreading overhead of $2,060,000 over 40,000 direct labour hours. Management is considering a shift to activity-based costing in an effort to improve the firm's accounting procedures, and the following data are available. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Cost Driver Volume }$ Cost Pool Cost Setups \ 260,000 General Factory 1,600,000 Machine Processing 130,000 \ 1,990,000 Cost Driver Model A Model B Total Number of setups 100 30 130 Direct labour hours 25,000 15,000 40,000 Machine hours 2,200 1,050 3,250 Goldstar determines selling prices by adding 60% to a product's total cost. Required: A. Compute the per-unit cost and selling price of Model B by using Goldstar's current costing procedures. B. Compute the per-unit overhead cost of Model B if the company switches to activity-based costing. C. Compute Model B's total per-unit cost and selling price under activity-based costing. D. Goldstar has recently encountered significant international competition for Model B, with considerable business being lost to very aggressive suppliers. Will activity-based costing allow the company to be more competitive with Model B from a price perspective? Briefly explain. E. Will the cost and selling price of Model A likely increase or decrease if Goldstar changes to activity-based costing? Why? Hint: No calculations are necessary.

X-Ray Machines Ltd. manufactures three product lines: Standard, Deluxe, and Superior. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below. The following information pertains to the three product lines for next year: Standard Deluxe Supe rior Units to be produced 15,000 10,000 7,000 Orders to be shipped 1,000 500 500 Number of parts per unit 10 15 25 Machine hours per unit 3 5 7 Labour hours per unit 2 2 2 What is X-Ray's pool rate for the material-handling activity?

X-Ray Machines Ltd. manufactures three product lines: Standard, Deluxe, and Superior. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below. The following information pertains to the three product lines for next year: Standard Deluxe Supe rior Units to be produced 15,000 10,000 7,000 Orders to be shipped 1,000 500 500 Number of parts per unit 10 15 25 Machine hours per unit 3 5 7 Labour hours per unit 2 2 2 What is X-Ray's pool rate for the automated machinery activity?

Non-value-added costs occur in non-manufacturing organizations as well as in manufacturing firms. Required: A. Explain what is meant by a non-value-added cost. B. Identify two potential non-value-added costs for each of the following service providers: airlines, banks, and hotels.

Customer profitability analysis is tied closely to:

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

In comparison with a system that uses a single volume-based cost driver, an activity-based costing system is preferred when a company has:

Which of the following tasks is not normally associated with an activity-based costing system?

Grossman Enterprises is converting to an activity-based costing system and needs to depict the various activities in its manufacturing process along with the activities' relationships. Which of the following is a possible tool that the company can use to accomplish this task?

Clark Corporation manufactures cooling system components. The company has gathered the following information about two of its customers: Engle Equipment and Midwest Refrigeration. Engle Midwest Sales revenue \ 215,000 \ 154,000 Cost of goods sold 95,000 68,000 General selling costs 30,000 21,500 General administrative costs 21,000 15,050 $\text { Cost-driver data used by the firm and traceable to Engle and Midwest are. }$ Sales activity Sales visits \ 900 Order taking Sales orders 250 Special handling Units handled 30 Special shipping Shipments 600 Engle Midwest Sales activity 8 visits 5 visits Order taking 17 orders 22 orders Special handling 600 units 550 units Special shipping 19 shipments 30 shipments Required: A. Perform a customer profitability analysis for Clark. Compute the gross margin and operating income on transactions related to Engle Equipment and Midwest Refrigeration. B. Compute gross margin as a percentage of sales revenue. Then compute (1) general selling and administrative costs as a percentage of gross margin and (2) total customer-related costs (i.e., costs that arise from sales visits, order taking, and special handling and shipping) as a percentage of gross margin. C. On the basis of your calculations, which of the two customers is "more costly" to deal with? Briefly explain.

Which of the following is not a key feature of a JIT system?

Consumption ratios are useful in determining:

Jackson Company manufactures products X and Y, applying overhead on the basis of labour hours. X, a low-volume product, requires a variety of complex manufacturing procedures. Y, on the other hand, is both a high-volume product and relatively simplistic in nature. What would an activity-based costing system likely disclose about products X and Y as a result of Jackson's current accounting procedures? 1 Undercosted Undercosted 2 Undercosted Overcosted 3 Overcosted Undercosied 4 Overcosted Overcosted 5 Costed correctly Costed correctly

Kenyon Company produces two products (F56 and F57), applying manufacturing overhead on the basis of direct labour hours. Anticipated unit production costs (material, labour, and overhead) and manufacturing volumes are: F56: 2,000 units, $234 F57: 3,500 units, $271 Kenyon's overhead arises because of various activities, one of which is purchase-order processing. Budgeted cost for this activity is expected to be $70,000. The firm believes that the number of purchase orders processed is a key cost driver and expects the following activity for its products: F56, 10 purchase orders; F57, 40 purchase orders. Kenyon's selling prices are based heavily on cost. Required: A. Activity-based costing (ABC) is said to result in improved costing accuracy when compared with traditional costing procedures. Briefly explain how this improved accuracy is attained. B. Compute: 1. the pool rate for purchase-order processing.2. the purchase-order processing cost to be charged to one unit of F56.3. Assume that Kenyon switched to activity-based costing and calculated total unit production costs as follows: F56, $285; F57, $220.1. Which of the two products, F56 or F57, was overcosted prior to the change to ABC? No explanation is necessary.2. Which of the two products, F56 or F57, may have been less competitive in the marketplace prior to the change to ABC? Briefly explain.

Which of the following can have a positive impact on a sale's profitability?

In an activity-based costing system, plant depreciation would typically be classified as a:

Dreyfus Manufacturing sells a number of goods whose selling price is heavily influenced by cost. A recent study of product no. 519 revealed a traditionally-derived total cost of $1,019, a selling price of $1,850 based on that figure, and a newly computed activity-based total cost of $1,215. Which of the following statements is true?

Brown's customer service department follows up on customer complaints by telephone inquiry. During a recent period, the department initiated 9,000 calls and incurred costs of $303,000. If 3,780 of these calls were for the company's wholesale operation (the remainder were for the retail division), costs allocated to the retail division should amount to: