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

Which of the following is NOT an internal failure cost?

AAA Metal Bearings produces two sizes of metal bearings (sold by the crate)-standard and heavy. The standard bearings require $200 of direct materials per unit (per crate) and the heavy bearings require $245 of direct materials per unit. The operation is mechanized and there is no direct labor. Previously AAA used a single plant-wide allocation rate for manufacturing overhead, which was $1.55 per machine hour. Based on the single rate, gross profit data were as follows: Per unit Standard Heavy Direct materials cost \ 200.00 \ 245.00 Direct labor cost \ 0.00 \ 0.00 Manuf overhead cost \ 124.00 \ 93.00 Total manuf cost \ 324.00 \ 338.00 Price per unit \ 350.00 \ 370.00 Gross profit per unit \ 26.00 \ 32.00 Although the data showed that the heavy bearings were more profitable than the standard bearings, the plant manager knew that the heavy bearings required much more processing in the metal fabrication phase than the standard bearings, and that this factor was not adequately reflected in the single allocation rate. He suspected that it was distorting the profit data. He suggested adopting an activity-based costing approach. Working together, the engineers and accountants identified the following three manufacturing activities, and broke down the annual overhead costs as shown: Activities: Estimated Cost Metal fabrication \ 420,000 Machine processing \ 152,000 Packaging \ 17,000 \ 589,000 Engineers believed that metal fabrication costs should be allocated by weight, and estimated that the plant processed 12,000 kilos of metal per year. Machine processing costs were correlated to machine hours, and the engineers estimated a total of 380,000 machine hours for the year. Packaging costs were the same for both types of products, and so they could be allocated simply by the number of units produced. The production plan provided for 4,000 units of standard and 1,000 units of heavy bearings to be produced during the year. Additional data on a per unit basis are as follows: Standard Heavy Kilos per unit 2.00 4.00 Machine hours per unit 80.00 60.00 Using the data above, please calculate activity rates. Then, following the ABC methodology, calculate the production cost and gross profit for one unit of standard bearings, using the format below: Standard Bearings Per Unit Activity rate Amountper unit Direct materials Metal fabrication Machine processing Packaging Total mfg cost Price Gross profit

AAA Metal Bearings produces two sizes of metal bearings (sold by the crate)-standard and heavy. The standard bearings require $200 of direct materials per unit (per crate) and the heavy bearings require $245 of direct materials per unit. The operation is mechanized and there is no direct labor. Previously AAA used a single plantwide allocation rate for manufacturing overhead, which was $1.55 per machine hour. Based on the single rate, gross profit data were as follows: Per unit Standard Heavy Direct materials cost \ 200.00 \ 245.00 Direct labor cost \ 0.00 \ 0.00 Manuf overhead cost \ 124.00 \ 93.00 Total manuf cost \ 324.00 \ 338.00 Price per unit \ 350.00 \ 370.00 Gross profit per unit \ 26.00 \ 32.00 Although the data showed that the heavy bearings were more profitable than the standard bearings, the plant manager knew that the heavy bearings required much more processing in the metal fabrication phase than the standard bearings, and that this factor was not adequately reflected in the single allocation rate. He suspected that it was distorting the profit data. He suggested adopting an activity based costing approach. Working together, the engineers and accountants identified the following three manufacturing activities, and broke down the annual overhead costs as shown: Activities: Estimated Cost Metal fabrication \ 420,000 Machine processing \ 152,000 Packaging \ 17,000 \ 589,000 Engineers believed that metal fabrication costs should be allocated by weight, and estimated that the plant processed 12,000 kilos of metal per year. Machine processing costs were correlated to machine hours, and the engineers estimated a total of 380,000 machine hours for the year. Packaging costs were the same for both types of products, and so they could be allocated simply by the number of units produced. The production plan provided for 4,000 units of standard and 1,000 units of heavy bearings to be produced during the year. Additional data on a per unit basis are as follows: Standard Heavy Silos per unit 2.00 4.00 Nechine hours per urit 80.00 60.00 Using the data above, please calculate activity rates. Then, following the ABC methodology, calculate the production cost and gross profit for one unit of heavy bearings, using the format below: Standard Bearings Per Unit Activity rate Amountper unit Direct materials Metal fabrication Machine processing Packaging Total mfg cost Price Gross profit

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 - What is the cost per unit for the correspondence activity?

An activity-based costing system improves the allocation of which of the following manufacturing costs?

Which of the following is MOST likely to be the cost driver for the packaging and shipping activity?

Johnson Production Company uses just-in-time production and accounting methods. On June 1, Johnson sold 200 units of product for $12.00 per unit. Each unit included $8.00 of direct materials cost and $2.00 of conversion costs. Johnson recorded the revenues of $2,400 in one entry, and then recorded the cost of goods sold in a second entry. Please provide the journal entry to record the cost of goods sold.

Which of the following categories includes costs incurred in detecting poor quality goods or services?

What do you call the costs incurred to avoid production of poor quality goods or services?

For just-in-time systems, it is essential that manufacturers develop relationships with suppliers that are very reliable, and that can guarantee quick deliveries of materials in small quantities.

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 machining per ceiling fan?

Equival Company wishes to sell truck axles to car manufacturers. The current market price of the axles is $400, and Equival knows it must accept the market price. Currently, it costs the company $330 to produce each axle. The company wishes to make a profit equal to 20% of the price. Which of the following strategies should Equival adopt to achieve its objective?

Clark Manufacturing makes blank CDs; it is a very competitive market and the company follows a target pricing strategy. Currently the market price for a unit of product (one unit equals a package of 100 CDs) is $18.00. Clark's production costs are shown below: Direct materials $5.00 per unit Direct labor $2.90 per unit Indirect production costs $6.42 per unit Non-manufacturing costs $3.20 per unit Clark uses activity-based costing for its indirect production costs and provides the following information about this particular product: - The company's objective is to earn 5% profit on the sales price of the product. Clark carried out a value engineering study and decided that they could make the processing activity more efficient and save costs. If they reduce the total processing activity cost down to $210,000, what will their profit percentage be? (Please round to the nearest tenth of a percent.)

Which of the following statements is FALSE?

Bakersfield Manufacturing produces agricultural tools including a hand tiller. Their current full-product cost for a hand tiller is $20. Bakersfield wishes to make a 15% profit on the selling price. Bakersfield uses a target pricing strategy. The current competitive market price for this product is $22.00. What would be the most appropriate response to this situation?

AAA Metal Bearings produces two sizes of metal bearings (sold by the crate)-standard and heavy. The standard bearings require $200 of direct materials per unit (per crate) and the heavy bearings require $245 of direct materials per unit. The operation is mechanized and there is no direct labor. Previously AAA used a single plantwide allocation rate for manufacturing overhead, which was $1.55 per machine hour. Based on the single rate, gross profit data were as follows: Per unit Standard Heavy Direct materials cost \ 200.00 \ 245.00 Direct labor cost \ 0.00 \ 0.00 Manuf overhead cost \ 124.00 \ 93.00 Total manuf cost \ 324.00 \ 338.00 Price per unit \ 350.00 \ 370.00 Gross profit per unit \2 6.00 \3 2.00 Although the data showed that the heavy bearings were more profitable than the standard bearings, the plant manager knew that the heavy bearings required much more processing in the metal fabrication phase than the standard bearings, and that this factor was not adequately reflected in the single allocation rate. He suspected that it was distorting the profit data. He suggested adopting an activity-based costing approach. Working together, the engineers and accountants identified the following three manufacturing activities, and broke down the annual overhead costs as shown: Activities: Estimated Cost Metal fab \ 420,000 Machine processing \ 152,000 Packaging \ 17,000 \ 589,000 Engineers believed that metal fabrication costs should be allocated by weight, and estimated that the plant processed 12,000 kilos of metal per year. Machine processing costs were correlated to machine hours, and the engineers estimated a total of 380,000 machine hours for the year. Packaging costs were the same for both types of products, and so they could be allocated simply by the number of units produced. The production plan provided for 4,000 units of standard and 1,000 units of heavy bearings to be produced during the year. Additional data on a per unit basis are as follows: Standard Heavy Kilos per unit 2.00 4.00 Machine hours per unit 80.00 60.00 Using the data above, please calculate activity rates. Then, following the ABC methodology, calculate the production cost and gross profit for both product types, using the format below: Per Unit Standard Heavy Direct materials Metal fabrication Machine processing Packaging Total mfg cost Price Gross profit

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 full-product cost? (Please round all amounts to the nearest whole dollar.)

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 the above, what is the amount of internal failure costs, if any, included here?

Costs incurred when the company corrects for poor-quality goods before they are delivered to the customer are considered internal failure costs.

Equival Company wishes to sell truck axles to car manufacturers. The current market price of the axles is $400, and Equival knows it must accept the market price. The company wishes to make a profit equal to 20% of the price. Using target costing, Equival will have to design the production process to meet this requirement. What is the desired target cost per axle?