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

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

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: 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. In order to achieve their profit objective for this product, they need to reduce the indirect cost per unit from $6.42 down to what amount?

Just-in-time production systems have a great deal of flexibility, and can easily tolerate small interruptions of supplies, and occasional defective materials.

Percival Company wishes to sell wooden beams to home builders. The current market price of the beams is $950, and Percival knows it must accept the market price. The company wishes to make a profit equal to 16% of the price. Using target costing, the company will have to design the production process to meet this requirement. What is the desired target cost per beam?

Pitt Jones Company had the following activities, allocated costs, and allocation bases: The above activities are carried out at two of their regional offices. How much of the account inquiry cost will be assigned to the Midwest Office?

Pitt Jones Company had the following activities, allocated costs, and allocation bases: The above activities are carried out at two of their regional offices. What is the cost per unit for the correspondence activity?

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

Activity-based management can be used to make business decisions about cost cutting.

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: 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.)

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.)

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: Use the T-accounts shown above to record the transactions, and then answer the following question: How much was the cost of goods sold?

Leon Production produces steel rivets for the shipbuilding business. Leon uses the target pricing approach. The company's objective is to achieve gross profit equal to 25% of selling price. Other data are shown below: What must the company do to achieve their profit goal? (Please round all amounts to the nearest cent.)

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

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?

In a just-in-time costing system, the entry to record the standard cost of finished goods completed would include which of the following?

The cost of product liability claims comes under which category of costs?

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: 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 material handling activity?

Pitt Jones Company had the following activities, allocated costs, and allocation bases: The above activities are carried out at two of their regional offices. What is the cost per unit for the account verification activity?

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: 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: 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: 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:

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