Exam 18: Activity-Based Costing and Other Cost Management Tools

Just-in-time methodology depends on maintaining higher inventory levels to ensure that the manufacturing process isn't interrupted by supply shortages.

Orlando Avionics makes three types of radios for small aircraft-model A, model B, and model C. The manufacturing operations are mechanized and there is no direct labor. Manufacturing overhead costs are significant, and Orlando has adopted an activity-based costing system. Direct materials costs per unit for each model are as follows: Model A $28 Model B $32 Model C $40 Orlando has three activities-assembly, materials management, and testing. The cost driver for assembly is machine hours. The cost driver for materials management is number of parts, and the cost driver for testing is the number of units of product. Total costs and production volumes for the year 2012 were estimated as follows: Total cost Total units Assembly \ 780,000 120,000 Machine hours Materials management \ 120,000 80,000 Parts Testing \ 22,500 5,000 Units - The Model B radio requires 15 parts to construct, and also requires 18 machine hours of processing. What is the manufacturing cost to make one unit of Model B?

Companies that use activity-based costing do NOT need to trace direct materials and direct labor to products as is done in traditional costing systems.

Nirvana Products Company has just gone through a rigorous evaluation due to sliding profits in the past year. The engineers strongly recommend implementing an aggressive preventative maintenance program, but the accountants say it will cost $50,000. The lawyers insist on a zero-defect product inspection as the units are being packaged, but the accountants say it will cost $40,000. The vice president for production said he just thought it was too expensive of a gamble to take, but the factory manager pointed out that if they did not look ahead at the consequences, they could easily lose $100,000 of sales to their competitors because of shoddy goods, and a costly production shutdown that would cost them another $100,000 if the machinery gives out unexpectedly. In this situation, the company should not invest in the quality programs being recommended because they are not justified on a cost/benefit basis.

Target cost is the price that customers are willing to pay and target price is the desired cost to produce the product.

The first step in the activity-based costing system is to identify each activity and its total indirect cost.

All of the following accounts would be used in a backflush costing system EXCEPT:

A-1 Sports Vehicles Manufacturing produces a specialty racing bicycle. There is stiff foreign competition, and the company is forced to pursue target pricing. The competitive market price of the bicycle is $2,000. Currently the manufacturing cost for this product at A-1 is $1,550 and the associated non-manufacturing costs are $270. A-1's owners insist on achieving a profit of 12% of sales price. - What amount is the target cost? (Please round all amounts to the nearest whole dollar.)

Inspection of incoming materials and production loss caused by downtime are examples of prevention costs.

Archetype Fabrication makes pre-stressed concrete forms for the building industry. They use just-in-time production and accounting methodology. At the beginning of January, selected account balances are shown in the T-accounts below. During January, the following 5 transactions take place: 1) Purchase $40,000 of materials on account. 2) Pay out $25,000 of direct labor costs. 3) Incur $9,000 of manufacturing overhead costs. 4) Complete 12 units. Each unit includes $1,500 of materials, $300 of direct labor, and $150 of manufacturing overhead costs. 5) Sell 10 of the 12 completed units at a price of $2,200. - Use the T-accounts shown above to record the transactions, and then answer the following question: After transaction number 3, what was the balance in the Conversion costs account?

Johnson Production Company uses just-in-time production and accounting methods. On June 1, Johnson paid direct labor costs of $5,000 in cash. Which of the following journal entries correctly records this transaction?

Pitt Jones Company had the following activities, allocated costs, and allocation bases: Artivitias Allocated Casts Allocation Bare Accaunt inquiry (hours) \ 60,000 2,000 hours Account billing (lines) \ 30,000 20,000 lines Afcaunt verification (accounts) \ 15,000 20,000 accounts Correspandence (letters) \ 10,000 1,000 letters The above activities are carried out at two of their regional offices. Northeast Office Midwest Office Account inquiry (hours) 100 hours 200 hours Account billing (lines) 10,000 lines 7,000 lines Account verification (accounts) 1,000 accounts 600 accounts Correspondence (letters) 50 letters 100 letters - How much of the correspondence cost will be assigned to the Northeast Office?

Ganges Company makes bulk burlap by the ton. Currently, their manufacturing cost is $215 per unit, and their non-manufacturing cost is $40 per unit. The going market price of the product is $300. Ganges uses The target price and target cost methodology. If they desire to make a profit of 20% on the price, what must they do?

Nemesis Company manufactures water skis. Nemesis pursues a target pricing strategy. Please review the data below: Current market price \ 180 per pair Current manufacturing cost \ 110 per pair Current non-manufacturing cost \ 25 per pair Desired profit 30\% of price - Which of the following would be the desired cost reduction? (Please round all amounts to nearest cent.)

Internal failure costs occur when the company detects and corrects poor-quality goods or services before delivery to customers.

Archetype Fabrication makes pre-stressed concrete forms for the building industry. They use just-in-time production and accounting methodology. At the beginning of January, selected account balances are shown in the T-accounts below. During January, the following 5 transactions take place: 1) Purchase $40,000 of materials on account. 2) Pay out $25,000 of direct labor costs. 3) Incur $9,000 of manufacturing overhead costs. 4) Complete 12 units. Each unit includes $1,500 of materials, $300 of direct labor, and $150 of manufacturing overhead costs. 5) Sell 10 of the 12 completed units at a price of $2,200. - Use the T-accounts shown above to record the transactions, and then answer the following question: After transaction number 4, what was the balance in the Conversion costs account?

Losses caused by downtime in the production process are considered a(n):

Orlando Avionics makes three types of radios for small aircraft-model A, model B, and model C. The manufacturing operations are mechanized and there is no direct labor. Manufacturing overhead costs are significant, and Orlando has adopted an activity-based costing system. Direct materials costs per unit for each model are as follows: Model A $28 Model B $32 Model C $40 Orlando has three activities-assembly, materials management, and testing. The cost driver for assembly is machine hours. The cost driver for materials management is number of parts, and the cost driver for testing is the number of units of product. Total costs and production volumes for the year 2012 were estimated as follows: Total cost Total units Assembly \ 780,000 120,000 Machine hours Materials management \ 120,000 80,000 Parts Testing \ 22,500 5,000 Units - The Model C radio requires 19 parts to construct, and also requires 20.5 machine hours of processing. What is the manufacturing cost to make one unit of Model C?

Formosa Steel Products makes steel building materials for export, and uses an activity-based costing system to account for the indirect manufacturing costs of its various products. Indirect costs for the whole factory are broken down into three activities-casting, materials handling, and milling. The cost driver for casting is machine hours; the cost driver for material handling is kilograms, and the cost driver for milling is direct labor hours. Activity costs and volumes for the year were estimated as follows: Activity Cost Volume Casting \ 2,000,000 800,000.00 Machine hours Material Handling \ 400,000 500,000.00 Kilograms Milling \ 1,120,000 140,000.00 Direct labor hours One product is steel reinforcement rods, sold by the metric ton. Engineering reports show that one metric ton of steel reinforcement rods requires $100 of direct materials cost plus $50 of direct labor cost. Producing one metric ton of steel rods also requires 24 machine hours for casting, weighs 1,000 kilograms, and requires 15 direct labor hours. - What is the activity rate for the casting activity?

Orlando Avionics makes three types of radios for small aircraft-model A, model B, and model C. The manufacturing operations are mechanized and there is no direct labor. Manufacturing overhead costs are significant, and Orlando has adopted an activity-based costing system. Direct materials costs per unit for each model are as follows: Model A $28 Model B $32 Model C $40 Orlando has three activities-assembly, materials management, and testing. The cost driver for assembly is machine hours. The cost driver for materials management is number of parts, and the cost driver for testing is the number of units of product. Total costs and production volumes for the year 2012 were estimated as follows: Total cost Total units Assembly \ 780,000 120,000 Machine hours Materials management \ 120,000 80,000 Parts Testing \ 22,500 5,000 Units - What is the allocation rate for the Assembly activity? (Please round to the nearest cent.)