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

An activity-based costing system can be a significant competitive advantage for a business which does bidding for manufacturing work.

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 full manufacturing cost for one metric ton of steel reinforcement rods? (Please round to the nearest whole dollar.)

Just-in-time systems allow manufacturers to save money on storing, insuring, and financing inventories, by maintaining lower levels of inventory.

Which of the following pertains to a just-in-time production system?

Johnson Production Company uses just-in-time production and accounting methods. On June 1, Johnson paid $6,000 for factory repair and maintenance costs in cash. Which of the following journal entries correctly records this transaction?

Brannon Company manufactures ceiling fans and uses an activity-based costing system. Each ceiling fan consists of 20 separate parts totaling $95 in direct materials and requires 2.5 hours of machine time to produce. Additional information follows: Activity Allocation Base Cost Allocation Rate Materials handling Number of parts \ .08 Machining Machine hours \ 7.20 Assembling Number of parts \ .35 Packaging Number of finished units \ 2.70 - What is the cost of materials handling per ceiling fan?

Pollenti Company has just merged with another industrial firm whose business had been failing. Pollenti immediately conducted a thorough study of the new company's work processes, and produced a report including the data shown below: • A new inspection process is recommended to minimize defective raw materials. It would cost $12,000 to implement. • Shoddy business practices are resulting in excessive warranty costs $15,000 more than normal due mainly to material failure. • Reengineering of the assembly line will increase productivity. It would cost $18,000 to implement. • Inefficient workplace design is costing $5,000 in unnecessary rework costs. • Estimated amount of lost profits due to dissatisfied customers who turn to the competition is $80,000. Based on an analysis of costs and benefits, a quality improvement plan would not be recommended.

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. - How much is the desired cost reduction? (Please round all amounts to the nearest whole dollar.)

Which of the following statements is CORRECT regarding activity-based costing systems?

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 testing activity? (Please round to the nearest cent.)

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 Finished goods inventory account?

Ace Plastics produces many different kinds of products all in one manufacturing facility. They have identified four activities for their costing system: Materials management - allocated by number of purchase orders Chemical processing - allocated on metric tons Molding - allocated on direct labor hours Packaging - allocated by number of units produced The activity rates are as follows: terials management \ 12.00 Per purchase order Chemical processing \ 7.50 Per metric ton Molding \ 24.00 Per direct labor hour Packaging \ 0.10 Per unit Ace received an order for 3,000 plastic toys. The engineering design shows that the order will require $540 of direct material cost in total, $90 of direct labor cost, will require 4 purchase orders, will use 2 metric tons of chemical base, will need 8 direct labor hours, and will produce 3.000 units of product. How much is the manufacturing cost for one unit of product? (Please round to the nearest tenth of a cent.)

The main difference between activity-based costing and traditional costing systems is that activity-based costing uses a separate allocation rate for each activity.

Appalachee Company produces gaskets for the automotive industry. Current production cost is $3.50 per gross. There is a highly competitive market for the product, and Appalachee currently uses a target pricing approach. Currently, equivalent products are selling for $4.75 per gross. Apalachee wishes to earn a minimum of a 40% markup over cost. What would be their most appropriate response? (Please round all amounts to the nearest cent.)

Which of the following is CORRECT about a just-in-time production system?

A traditional costing system employs multiple allocation rates, but an activity-based costing system uses only one single allocation rate.

Value engineering requires the collaboration of marketing, engineering and accounting personnel to achieve the optimum results.

Madrid Manufacturing is considering the manufacture of a new product. Madrid was hoping to sell the product for $504 per unit and estimated the total cost per unit to be $360. Madrid conducted market research and found out that the market is only willing to pay $462 for the new product. Using the target costing approach, how much will Madrid have to reduce the production cost in order to achieve the same amount of gross profit as originally planned?

The cost to improve equipment and processes comes under which of the following cost categories?

The cost of reengineering the production process to reduce defect rate is an example of which of the following?