Exam 7: Activity-Based Costing and Management

The Tilman Corporation has seen a significant increase in the amount spent on such items as warranty and recall repairs. They would like to be able to reduce these costs and have asked you, the cost accountant, for some advice. What would be your recommendation?

Assume that a company takes 3,500 hours to produce 10,000 units of a product. What is the cycle time?

Environmental internal failure costs are the costs of activities performed after discharging contaminants and waste into the environment.

A costing system that first assigns costs to activities and then to products is

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 7-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Measurement | IMA: Cost Management | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 5 min. -Assume that the accounts payable department of a company has 10 clerks; each one is paid $25,000 per year ($250,000 total clerical salaries). Six of the clerks spend the following percentages of time on the three activities: 20% of their time on processing payments30% of their time matching invoices, receiving documents, and billing statement 50% of their time correcting errors in the various documents One clerk, the head clerk, spends 50% of her time on administrative duties, and the remainder on error correction. The remaining three clerks spend 30% of their time on processing payments and the remaining 70% of their time on matching documents. Long distance telephone costs of $1,700 are directly traced to the activity "correcting errors."

Russell Company uses Beltran Company and Southern Express Inc. to buy the electronic chip used in the manufacturing of its GPS device. Russell Co. has been using these two companies for several years and would like to cut down to only one supplier to purchase the 1,200,000 chips needed per year. In order to determine which supplier is the most cost effective Russell Co. compiled the following data: Required: A. Calculate the activity rate for each activity. Round your answer to two decimal places. B. Calculate the cost per chip for each supplier. C. Which supplier should Russell Company choose?

____ can help a company become more competitive by providing more accurate cost data.

Match each item with the correct statement below. -System that emphasizes direct tracing and driver tracing.

____ costs in many firms represent a much higher percentage of product costs than direct labor.

One way to improve efficiency is to produce higher activity output with higher cost.

Cost assignment method used for a cost of a resource that is exclusively used by an activity.

Last year, Stevita Inc. shipped 3,000,000 kilograms of goods to customers at a cost of $2,400,000. If an individual customer orders 20,000 kilograms and produces $400,000 of revenue (total revenue is $40 million), the amount of shipping cost assigned to the customer using activity-based costing would be

Interviews and surveys are used to identify

Reinspection and design changes are examples of _____________________ costs.

Figure 7-3.Hamilton Company manufactures engines. Hamilton produces all the parts necessary for its engines except for one electronic component, which is purchased from two local suppliers: Traynor Inc. and Bello Company. Both suppliers are reliable and rarely deliver late; however, Traynor sells the component for $10.00 per unit and Bello sells the same component for $8.95. Hamilton purchases 70% of its components from Bello, because of the lower price. The total annual demand is 75,000 units. -Refer to Figure 7-3. Suppose that Hamilton loses $2,500,000 in sales per year because of its reputation for defective units attributable to failed components. Using warranty hours, assign the proportional cost of lost sales to Traynor Inc. Then determine what effect this would have on the cost per component.

The time required to produce one unit of a product is the

Figure 7-3.Hamilton Company manufactures engines. Hamilton produces all the parts necessary for its engines except for one electronic component, which is purchased from two local suppliers: Traynor Inc. and Bello Company. Both suppliers are reliable and rarely deliver late; however, Traynor sells the component for $10.00 per unit and Bello sells the same component for $8.95. Hamilton purchases 70% of its components from Bello, because of the lower price. The total annual demand is 75,000 units. -Refer to Figure 7-3. Calculate the activity rate for warranty work based on warranty hours. Round to the nearest whole dollar.

Control activities are performed by an organization or its customers in response to poor quality.

Figure 7-1.The receiving department of Owen has three activities: unloading, counting goods, and inspecting. Unloading requires a forklift that is leased for $15,000 per year. The forklift is used only for unloading. The fuel for the forklift is $2,000 per year. Inspection requires special testing equipment that has a depreciation of $500 per year and an operating cost of $1,000 per year. Receiving has four employees who each have an average salary of $35,000 per year. The work distribution matrix for the receiving personnel is as follows: -Refer to Figure 7-1. Calculate the cost of counting.

A plant produces 75 different electronic products. Each product requires an average of six components that are purchased externally. By redesigning the products, it is possible to produce the 75 products so that they all have three components in common. This will reduce the demand for purchasing, receiving, and paying bills. Estimated savings from the reduced demand are $1,200,000 per year. Calculate the nonvalue-added cost of purchasing, receiving and paying bills.