Exam 5: Cost Management in an Automated Business Environment: Abc, Abm, and Tqm

Morris Company allocates overhead on the basis of direct labor hours. It allocates overhead costs of $12,800 to two different jobs as follows: Job 1: (10 hours) = $6,400; Job 2: (10 hours) = $6,400 The production process for Job 2 was then automated. Now Job 2 requires only two hours of direct labor but four hours of mechanical processing. As a result, total overhead increases to $17,000. With the change in the production process for Job 2, the amount of overhead assigned to:

An increase in prevention costs may result in decreases in appraisal, internal failure, and external failure costs and a decrease in total quality costs.

Which of the following statement(s) regarding activity-based costing is (are) true? I. Use of activity-based costing improves cost tracing by using more cause-and-effect relationship to assign indirect costs to activity centers.II. An activity-based system is characterized by multiple cost pools and multiple volume and activity cost drivers.III. Activity-based costing can cause distortion of cost, assigning too much cost to some products and too little to others.

Indicate whether each of the following statements is true or false.Use of an activity-based costing system may identify products that are overcosted or undercosted by a traditional system. ____ Use of an activity-based costing system may prove to company managers that it is incurring losses on some products they believed to be profitable. ____ The starting point for target pricing is to determine the costs that are incurred in making the product. ____ Use of a traditional product costing system may put a company at a competitive advantage by overcosting some products. ____ Activity-based costing results could lead managers of a company to decide to eliminate some products. ____

Décor Carpets incurs a variety of costs in producing several grades of carpet for the residential and commercial housing industries. The different grades and styles are manufactured in batches or production runs. The company uses activity-based costing to assign overhead costs to its different product lines. Selected costs are provided in the following table: Required: Complete the table provided. In the Cost Hierarchy column, insert a (U) if the cost described is a unit-level cost, a (B) if a batch-level cost, a (P) if a product-level cost, or (F) if a facility-level cost. In the Cost Driver column enter a cost driver (for example, direct labor hours) that you believe might be appropriate for allocating that particular cost to units of products. Cost Description Cost Hierarchy (,,, or ) Cost Driver a Set up costs for each production run b Inventory storage costs c Batch inspection costs d Indirect materials e Factory insurance costs Material handling costs Legal costs of protecting various patents Utilities cost incurred to operate machinery Depreciation of factory building

The successful implementation of an activity-based costing system depends on employees' attitudes and cooperation.

All of the following are categories of quality costs except:

Indicate whether each of the following statements is true or false.In an activity-based costing system, the same amount of facility-level costs should be assigned to all products. ____ Raw materials inventory holding costs are usually classified as unit-level costs. ____ Costs associated with obtaining and defending a patent generally would be classified as product-level costs. ____ Activities that benefit the production process as a whole are product-level activities. ____ Manufacturing equipment depreciation is classified as a facility-level activity. ____

What is the principal reason that direct labor hours is no longer an effective base for allocating indirect costs in many modern manufacturing companies?

Sweetheart Brands packages single-sized servings of sugar and sugar substitute for fast food restaurants. The activities required to package sugar are fewer and less complex than for sugar substitute. The direct costs of producing the two products are as follows: Overhead is currently assigned to the two products on the basis of machine hours. The following information is provided regarding overhead costs: Required: 1) Compute the predetermined overhead rate under the current method of overhead cost allocation. How much total overhead cost will be assigned to each product under the current system? 2) Compute the three activity rates that would be used in an activity-based system. How much total overhead cost will be assigned to each product under an ABC system? 3) Assuming an ABC system to be more precise, by how much does the company's current costing system over- or undercost the products? Be specific. Sugar Sugar Substitute Direct materials \ 0.02 \ 0.04 Direct labor 0.04 0.08 Activity Traceable Costs Cost Driver Sugar Line Sugar Sub. Line Total Setup \ 50,000 No. of setups 125 125 250 Packing 120,000 No. of machine hrs. 10,000 40,000 50,000 Inspection 30,000 No. of batches 250 350 600 \ 200,000

Supply Depot produces a variety of office products including two models (standard and deluxe) of a hand-held stapler. A number of the company's activity-related costs are described in the following table: Required: Classify each of the above costs into unit, batch, product, or facility-level cost pools. Description of Cost Lnit-Level Bateh-Level Product-Level Facillty-Level Factory rent Costs associated with setting up the machinery to produce a run of the deluxe stapler model Direct materials Factory depreciation Costs of supplies used in production Costs of ordering materials for the standard stapler product Direct labor Inventory holding costs Salary of the company CEO Engineering support costs

Which of the following is an appropriate cost driver for issuance of purchase orders?

For most businesses, quality means:

A number of quality-related costs are provided in the following table: Required: Classify the above costs by cost of quality category. That is, for each item in the table, place a check mark in the appropriate column. Description of Quality Costs Prevention Apprakal Internal Fallure External Fallure 1 Scrap costs 2 Warranty repairs and replacements 3 Promotion and awards costs for quality efforts of employees 4 Supplies used in testing products 5 Downtime costs 6 Inventory inspection costs 7 Training costs 8 Customer relations costs 9 Reliability testing costs 10 Re-inspection costs 11 Repair and rework costs incurred before sale 12 Equipment maintenance 13 Product design costs 14 Depreciaton on testing equipment

Roadmaster Tires produces a variety of auto and truck tires at its Indianapolis manufacturing plant. The plant is highly automated and uses an activity-based costing system to allocate overhead costs to its various product lines. The costs and cost drivers associated with four activity cost pools are given below: Production of 1,000 units of a small tractor tire required 200 labor hours, 2 setups, and consumed 10% of the product sustaining activities.Required: 1) Instead of using ABC, suppose the company had used labor hours as a company-wide allocation base. How much total overhead would have been allocated to the tractor tire? 2) How much total overhead costs will be allocated to the tire under activity-based costing? 3) What price will be quoted if the product is priced at 25% above cost? Compute the price under both the direct labor hours approach and under activity-based costing. The direct manufacturing costs consist of direct material of $20 and direct labor of $30.4) What implications does ABC have on a company that bids on contracts using the costing approach described in requirement 3? Activities: Unit-Level Batch-Level Product-Level Facility-Level Cost \ 80,000 \ 40,000 \ 20,000 \ 100,000 Cost Driver 4,000 labor hrs 100 set ups \% of use 50,000 units This terminology not used in this chapter. However, requirements 3 and 4 can stay without the wording.Agree with change made. JMF ? Perhaps, using a traditional costing system versus the ABC? Agree with change made. JMF

Select the correct statement regarding activity-based costing (ABC).

Rocoe Company produces a variety of garden tools in a highly automated manufacturing facility. The costs and cost drivers associated with four activity cost pools are given below: Production of 10,000 units of a hand-held tiller required 1,000 labor hours, 80 setups, and consumed 25% of the product sustaining activities. Assuming the company uses activity-based costing, how much total overhead will be allocated to this tool? Activities: Unit Level Batch Level Product Level Facility Level Total cost \ 30,000 \1 2,000 \ 6,000 \3 6,000 Total cost driver volume 5,000 labor hours 240 set ups \% of use 36,000 units

Inspection of products may sometimes be considered a batch-level activity.

All of the following are prevention costs except:

Which of the following best describes the impact of undercosting in the allocation of production costs? I don't think this info is necessary for the question. Perhaps add to the question something like: impact of undercosting in the allocation of production costs.Agree. Change made. JMF