Exam 10: Fundamentals of Cost Management

Hidden Valley Company produces precision components.Hidden Valley has six customers,one accounts for 40 percent of the sales,with the remaining five accounting for the rest of the sales.The five smaller customers purchase components in roughly equal quantities.Orders placed by the smaller customers are about the same size.Data concerning Hidden Valley 's customer activity follow: Large Customer Five Small Customers Units purchased 200,000 300,000 Orders placed 10 360 Number of sales calls 20 230 Manutacturing cost \ 600,000 \ 900,000 Order-filling costs for Hidden Valley Company total $180,000,and sales-force costs are $275,000.Required: a.Allocate the order-filling and sales force costs to the customers based on sales volume.b.Allocate the order-filling and sales force costs to the customers using an activity-based costing approach.

Which of the following is an example of an internal failure cost?

In general,the unit-level costs in an activity-based costing (ABC)system are variable costs.

Scallon Products reports the following information about resources.At the beginning of the year,Scallon estimated it would spend $8,000 for energy and $12,000 for repairs.Compute unused resource capacity for repairs for Scallon Products.

Scallon Products reports the following information about resources.At the beginning of the year,Scallon estimated it would spend $8,000 for energy and $12,000 for repairs.Compute unused resource capacity for energy for Scallon Products.

Lyon Toys,Inc.(LTI)manufactures a variety of electronic toys for children aged 3 to 14 years.The company started as a Ma & Pa basement operation,and grew steadily over the last nine years.It now employs over 100 people and has sales revenue of over $250 million.Katie Burger,the CEO of LTI also recognizes that competition has increased during this period;therefore,future growth will not be easy.Burger recognizes that one of the areas of weakness is the accounting and costing system.Burger's maternal uncle,Martin,had maintained the accounts for the company.He meticulously kept track of all the invoices that were received,payments made,and painstakingly prepared crude annual reports.With Martin passing away at the age of 85,Burger decided to hire a professional cost management expert to keep track of the company's costs.She hired Molly Wright,who had just completed her CMA.After acquainting Wright with the company and its people,Burger decided to get down to business.She called Wright to her office to have a serious conversation about accounting and costing,in particular.Burger: Molly,I would like you to pay particular attention to developing an official costing system.Currently,we don't have one.I believe this should be your first priority because competition is rising and if we do not understand our costs,we might start losing business to our rivals.Wright: I understand your point very well,Ms.Burger.Burger: Call me Katie.Wright: Very well,Katie.I have a few ideas that I picked up from my CMA courses that I think are worth implementing.However,it looks like we need to start with the basics.Required: Assume the role of Molly Wright.Write a brief report outlining the basics of a cost management information system.Include in your report the following: • Resources and costs • Supply of resources vs.the use of resources • Classification of costs (three dimensions of resources) • Alternative costing systems

South Beach Industries reports the following information about resources.At the beginning of the year,South Beach estimated it would spend $180,000 for materials,$42,000 for purchasing,$35,000 for setups,and $36,000 for repairs.Compute unused resource capacity for repairs for South Beach.

Which of the following activities is most likely to be classified as value-added for a manufacturing company?

Theoretical capacity is the amount of production possible assuming expected downtime for scheduled maintenance and normal breaks and vacations.

Jessica Long,the production manager of Maxim Corporation is frustrated by the company's policy of not scrapping defective units but reworking them.She has pointed out several times to senior management that some units are beyond rework and should be scrapped.According to her,in most cases,it would be cheaper to scrap and build a new unit from scratch rather than trying to rework a defective unit.However,Peter Crouch,the CEO,is not convinced.He wants his controller,Melinda Gates,to gather some information.After researching the problem,Gates provides the following information: Selling price: \ 132 per unit Manutacturing costs: Direct materials 27 Direct labor 32 Variable overhead 24 Variable marketing costs 10 Fixed overhead 32 Reworking costs: Materials: \ 25 Labor: 48 Direct machining costs: 36 Gates also observes that reworking a defective product consumes more labor time than making a unit from scratch.As a result,for every three units reworked,Maxim forgoes the production and sale of two units.Required: (a)Do you agree with Jessica Long that it is cheaper to scrap than rework a defective unit? Show your computations.(b)How can the cost information generated by Gates be useful in reducing the number of defectives?

In general,decreasing (or eliminating)the resources committed to nonvalue-added activities will decrease customer response time.

In an activity-based costing (ABC)system,cost reduction is accomplished by identifying and eliminating: (CPA adapted) All Cost Drivers Non walue-adoled Acturities A. No No B. Yes Yes C. No Yes D. Yes No

Stonehouse Corporation developed the following information regarding quality for the first quarter of the year 2016: Sales \ 6,800,000 Wasted time \ 286,600 Training \ 102,000 Inspecting materials \ 340,000 Pertormance reviews \ 85,000 Resolving customer complaints \ 38,760 Certifying suppliers \ 170,000 Total Required: Prepare a cost of quality report sorting costs by quality activity and expressing in relevant percentage terms.

Gruber Industries provides the following information about resources: Resources supplied Materials \ 192,000 Energy 36,480 Setups 50,400 Purchasing 44,000 Customer senice 35,200 Long-term labor 53,000 Administrative 54,000 In addition,sales for the period totaled $600,000.Required: Compute the unused resource capacity for each preceding item.

Glory Enterprises quality control report for August contains the following items.What would be the total of the nonconformance costs on the August quality control report for Glory Enterprises? Liability costs as sociated with defective products \ 10,000 Disposal costs of defective products failing inspection 20,000 Disposal costs of raw materials failing inspec tion 30,000 Quality training provided to workers 40,000 Lost sales due to poor quality and detective products 50,000 Advertising costs to offset perception of poor product quality 60,000 Raw materials used to correct detects before product was sold 70,000 Testing and inspecting a sample of finished goods 80,000

Which of the following is an internal failure activity?

Glory Enterprises quality control report for August contains the following items.What would be the total of the conformance costs on the August quality control report for Glory Enterprises? Liability costs as sociated with defective products \ 10,000 Disposal costs of defective products failing inspection 20,000 Disposal costs of raw materials failing inspec tion 30,000 Quality training provided to workers 40,000 Lost sales due to poor quality and detective products 50,000 Advertising costs to offset perception of poor product quality 60,000 Raw materials used to correct detects before product was sold 70,000 Testing and inspecting a sample of finished goods 80,000

Which of the following statements regarding quality costs is(are)false? (A)In a cost of quality system,internal and external failure costs are called conformance costs.(B)Prevention costs are costs incurred to detect individual units of product that do not conform to its specifications.

South Beach Industries reports the following information about resources.At the beginning of the year,South Beach estimated it would spend $180,000 for materials,$42,000 for purchasing,$35,000 for setups,and $36,000 for repairs. Compute unused resource capacity for materials for South Beach.

In an activity-based cost management (ABM)system,facility-level costs are those that are incurred to: