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

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?

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?

Internal failure costs occur when poor-quality goods or services are not detected until after delivery to customers.

Full-product cost includes all manufacturing costs plus selling expenses, but does not include administrative expenses.

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.)

Traditional costing systems can distort unit manufacturing costs and product profitability when many products are produced and the various products have significantly different production processes.

Lisbon Manufacturing is considering the manufacture of a new product. Lisbon was hoping to sell the product for $588 per unit and estimated the total cost per unit to be $420. Lisbon conducted market research and found out that the market is only willing to pay $539 for the new product. Using the target costing approach, what does the total per unit cost of the new product have to be if Lisbon wants to achieve a 40% markup on total cost?

The cost of warranty work comes under which of the following cost categories?

Sleep Tight Company manufactures pillows using an activity-based costing system. The following information is provided for the month of June: Each pillow consists of 4 parts, and the total direct materials cost per pillow is $3.50. What is the total cost of materials handling and assembling for each pillow?

Nemesis Company manufactures water skis. Nemesis pursues a target pricing strategy. Please review the data below: Which of the following would be the desired cost reduction? (Please round all amounts to nearest cent.)

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 materials management activity? (Please round to the nearest cent.)

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 verification costs will be assigned to the Northeast Office?

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 casting 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.

Costs spent to avoid poor quality goods are considered internal failure costs.

Torreya Company produces gaskets for the automotive industry. Current production cost is $4.50 per carton of 100. There is a highly competitive market for the product, and Torreya currently uses a target pricing approach. Currently, equivalent products are selling for $5.90 per carton. Torreya wishes to earn a minimum of a 30% markup over cost. What would be their most appropriate response?

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: 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. They have determined that if they can reduce the activity rate for the processing activity down low enough, they can hit their profit objective. What activity rate would be needed to achieve the 5% objective they seek? (Please round to nearest cent.)

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?

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.

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: 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 by $20,000, what will their profit percentage be? (Please round to the nearest tenth of a percent.)