Exam 10: Fundamentals of Cost Management

The basic concepts involved in activity-based costing (ABC)can be used to determine customer profitability as well as product costs.

Companies are continuously seeking ways to improve the quality of production and reduce costs.One of the areas is to work with suppliers to improve the quality and reliability of parts and products shipped.In an article entitled "In Defense of Activity-Based Cost Management," Robert S.Kaplan says: An ABC model can play a major role in improving supplier relationships as well.These relationships must be a vital part of any quality and cycle-time improvement program.A key insight is to use ABC to distinguish between low-price and low-cost suppliers.Traditional cost accounting,with its emphasis on purchase price variances,encourages purchasing people to continually scan the population of potential suppliers to obtain low price quotations.Most companies have learned,the hard way,that many of their low-price suppliers are actually extremely high-cost suppliers.(Source: Management Accounting: November,1992) Required: (a)Explain what Kaplan means by "many of their low-price suppliers are actually extremely high-cost suppliers." (b)What general prevention and appraisal activities can be used to improve the quality and reliability of parts and products shipped from suppliers?

Glory Enterprises quality control report for August contains the following items.What would be the total of the external failure 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

Storing materials,work-in-process items,and finished goods in inventory are essential,value-added activities in most companies.

Denim Products reports the following information about resources.At the beginning of the year,Denim estimated it would spend $84,000 for setups and $41,000 for quality testing.Compute unused resource capacity for setups for Denim Products.

Which of the following is not an explanation of why a company would operate at less than theoretical capacity?

Kingston Company produces precision components.Kingston has 11 customers,one accounts for 60 percent of the sales,with the remaining ten accounting for the rest of the sales.The ten smaller customers purchase components in roughly equal quantities.Orders placed by the smaller customers are about the same size.Data concerning Kingston's customer activity follow: Order-filling costs for Kingston Company total $360,000,and sales-force costs are $300,000. 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 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 activities is most likely to be classified as value-added for a merchandise company?

Water Industries' quality control report for August contains the following items.What would be the total of the internal failure costs on the August quality control report for Water Industries? Gathering, anabsis, and reporting quality data \ 1,000 Inspecting raw materials received fromvendors 2,000 Testing and inspecting finished products 3,000 Visiting customer sites to test product 4,000 Designing product to reduce production problems 5,000 Repairing andior replacing products under warranty 6,000 Maintaining the equipment used to gather quality data 7,000 Cost (net) of materials wasted during production 8,000

Water Industries' quality control report for August contains the following items.What would be the total of the prevention costs on the August quality control report for Water Industries? Gathering, anabsis, and reporting quality data \ 1,000 Inspecting raw materials received fromvendors 2,000 Testing and inspecting finished products 3,000 Visiting customer sites to test product 4,000 Designing product to reduce production problems 5,000 Repairing andior replacing products under warranty 6,000 Maintaining the equipment used to gather quality data 7,000 Cost (net) of materials wasted during production 8,000

Express Travel decides to price delivery service according to the results of a recent activity-based costing (ABC)study.The study indicates Express Travel should charge $16 per order,1% of the order's value for general delivery costs,$2.50 per item,and $45 for delivery.A year later,Express Travel collected the following information for three of its customers: Cost driver Customer Customer Customer A B C Number of orders 18 8 12 Number of deliveries 10 10 24 Number of items 2,000 4,000 12,000 Ordervalue \ 120,000 \ 80,000 \ 100,000 What are the total delivery costs charged to Customer C during the year?

Water Industries' quality control report for August contains the following items.What would be the total of the external failure costs on the August quality control report for Water Industries? Gathering, anabsis, and reporting quality data \ 1,000 Inspecting raw materials received fromvendors 2,000 Testing and inspecting finished products 3,000 Visiting customer sites to test product 4,000 Designing product to reduce production problems 5,000 Repairing andior replacing products under warranty 6,000 Maintaining the equipment used to gather quality data 7,000 Cost (net) of materials wasted during production 8,000

Which of the following statements is(are)true? (A)Theoretical capacity is the long-run expected volume based on reasonably attainable working conditions.(B)The cost of excess capacity is allocated to individual cost objects using the cost driver rate.

Quality costs can be divided into two categories: conformance and nonconformance.Explain the difference between the two and give two examples of each.

Benton Company is preparing its annual profit plan.As part of its analysis of the cost of its purchasing activity,management estimates that the $48,000 for purchasing support should be assigned to the individual vendors from the information given as follows: Vendor A Vendor B Units purchased 100,000 200,000 Purchase orders (annual) 6 24 Number of shipments received 12 52 What is the amount of the purchasing costs that should be allocated to Vendor A,assuming Benton uses number of shipments received to compute activity-based costs?

Activity analysis is an important approach to operations control and the successful implementation of an activity-based costing (ABC)system.Which of the following procedures is not part of activity analysis?

Activity-based cost management (ABM)can best be defined as:

Activity analysis is one of the first stages in implementing an activity-based costing system.Which of the following steps in "activity analysis" is usually performed first?

Glory Enterprises quality control report for August contains the following items.What would be the total of the appraisal 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 items would be classified as a batch-level cost in an activity-based cost management (ABM)system?