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

Target pricing is based on the cost to produce a product, plus a profit mark-up.

Ace Plastics produces many different kinds of products all in one manufacturing facility. They have identified four activities for their costing system: The activity rates are as follows: 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.)

Arnold Company produces handheld calculators, and their manufacturing cost is currently $5.80 per unit. The company also has non-manufacturing costs of $1.20 per unit. Arnold employs target pricing strategy, and the current market price is $8.00 per unit. If Arnold wishes to price their product at a 25% markup over full-product cost, what must they do?

What is the last step in developing an activity-based costing system?

Which of the following would NOT be considered an activity for the purposes of an activity-based costing system?

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: 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: What is the allocation rate for the testing activity? (Please round to the nearest cent.)

Perkins Company has been experiencing lost sales and high returns recently, so they decided to undertake a comprehensive quality program. Here are factors being considered: Perkins knows that if it undertakes this program, it will be able to reduce warranty repair costs by $25,000. They also know they will be able to avoid lost profits by retaining customers, but they cannot quantify that benefit with any degree of precision. Should Perkins go ahead with the quality program?

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 of inspection at various stages of production is an example of what type of cost?

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. There are no direct labor costs. Additional information follows: What is the total manufacturing cost per ceiling fan?

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.

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

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?

The traditional manufacturing process focuses on small batches of production, whereas the just-in-time methodology focuses on large batches of products being produced in a sequence of departments or activities.

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

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

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: 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 one unit of standard bearings, using the format below:

What is value engineering?

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