Exam 10: Fundamentals of Cost Management

Activity-based costing (ABC)techniques used to evaluate customer profitability can also be applied to evaluating suppliers.

Barter Company's cost management and product costing procedures follow activity-based costing (ABC)principles.Activities have been identified and classified as being either value-added or nonvalue-added for each product.Which of the following activities,used in Barter's production process,is nonvalue-added? (CPA adapted)

Which of the following is not a prevention activity in controlling quality?

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 units purchased to compute activity-based costs?

Republic Industries decides to price delivery service according to the results of a recent activity-based costing (ABC)study.The study indicates Republic should charge $8 per order,2% of the order's value for general delivery costs,$1.25 per item,and $30 for delivery.A year later,Republic collected the following information for two of its best customers: Cost driver Customer C Customer D Number of orders 18 8 Number of deliveries 10 10 Number of items 2,000 4,000 Ordervalue \ 120,000 \ 80,000 What are the total delivery costs charged to Customer D during the year?

Forensic Specialists developed the following information for its first quarter cost of quality report: Sales \ 5,600,000 Cost of goods sold \ 3,360,000 Disposing of scrap \ 235,200 Quality training \ 84,000 Inspecting materials on delivery \ 280,000 Performance reviews \ 70,000 Resolving customer complaints \ 31,920 Certifying suppliers \ 140,000 The relevant percentage to be used to express appraisal activities at Forensic Specialists is:

Activity-based costing (ABC)information cannot be used by managerial decision-makers to evaluate the:

Vargas Financial (VF)only offers checking accounts.Customers can write checks and use a network of automated teller machines.VF earns revenue by investing the money deposited (subject to reserve requirements).Currently VF averages 6% return annually on its investments.In order to compete with larger banks,VF pays depositors 1% on all deposits.A recent study classified the operating costs of the bank into four activities.Data on these activities are: Acturity Cost Driver Cost Driver Volume Use ATM number of uses \ 2,00,000 10,000,000 uses Visit branch number of visits 6,000,000 750,000 visits Process number of transaction 4,000,000 40,000,000 transactions transactions overhead bank total deposits 8,000,000 \ 450,000,000 Total overhead Data on two representative customers are shown Customer A Customer B ATM uses 300 50 Branch visits 5 20 Number of transactions 60 1,200 Average deposit \ 450 \ 10,000 Required: (a)Compute the operating profits of the Vargas Financial.(b)Compute the profit of Customer A and Customer B,assuming that customer costs are based only on deposits.(c)Compute the profit of Customer A and Customer B,assuming that customer costs are computed using the information in the activity-based costing analysis.

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.C ompute unused resource capacity for purchasing for South Beach.

Forensic Specialists developed the following information for its first quarter cost of quality report: Sales \ 5,600,000 Cost of goods sold \ 3,360,000 Disposing of scrap \ 235,200 Quality training \ 84,000 Inspecting materials on delivery \ 280,000 Performance reviews \ 70,000 Resolving customer complaints \ 31,920 Certifying suppliers \ 140,000 The total cost of external failure activities at Forensic Specialists is:

What is the relationship between customer profitability analysis and ABC?

Explain the differences between resources used,resources supplied,and unused resource capacity.

Internal failure costs include materials wasted in the production process and correcting products before they are sold.

Which of the following statement is(are)true? (A)Unused capacity costs incurred for the benefit of a company's customers (e.g. ,meet seasonal demands)should be assigned to the customers that require (use)the excess capacity.(B)In general,managerial decisions affecting capacity-level costs and activities also affect volume-level,batch-level,and product-level cost and activities.

Cost allocation bases are factors that cost management analysts use to assign indirect costs to cost objects.Ideally,cost-allocation bases should reflect a cause-and-effect relationship between resource spending and use.Ideally,an Activity-Based-Costing (ABC)approach will provide a more accurate and useful accounting for an organization's resources.Recent studies have found that,in spite of increasing costs and diminishing resources,very few Higher Education Institutions use the tools and techniques of an ABC cost allocation system to assign costs to academic departments.While direct costs,such as faculty salaries,are traceable to individual academic departments or courses,many indirect costs,such as facility use,computer use,and student support services,are more difficult to assign.In a traditional approach,many higher education institutions assign such costs based on a single factor,such as the number of courses taught in the university.(Source: Activity-Based Costing for Higher Education Institutions,Management Accounting Quarterly,Winter,2001) Required: (a)Explain why the use of a single-cost driver such as the number of courses may result in inaccurate management information as to the cost of running courses in individual academic departments.(b)For each of the indirect costs listed below,identify an appropriate cost-driver that might be used to allocate costs to determine the cost of offering a single course in an academic department if an Activity-Based-Costing model were used.• Computer use • Facility use • Student services • Course design • Lecturing/class meeting time • Assignment grading

For each of the following products or services,indicate the most important customer quality attributes and the most important customer quality tradeoffs.(a)Personal computer (b)Legal representation in divorce court (c)New home purchase (d)Meals in a fast food restaurant (e)Airline travel (f)Prom dress (g)Cruise ship vacation (h)Auto repair

Jones Industries provides the following information about resources: Cost Diver Rate Cost Driver Volume Resources used Materials \ 24 25,000 gallons Energy 90 870 machine hours Setups 450 130 setups Purchasing 350 170 purchase orders Customer 210 85 returns service 80 1,600 labor hours Long-term labor 75 2,200 administrative Aours Resources supplied Materials \ 625,000 Energy 86,480 Setups 60,400 Purchasing 74,000 Customer senice 35,200 Long-term labor 153,000 Administrative 188,000 Required: Compute the unused resource capacity for each preceding item.

Mulvey Corporation manufactures large kitchen appliances.The following represents financial information for two years: Sales \ 7,840,000 \ 7,040,000 Costs: Process Inspection 52,800 60,000 Scrap 57,600 60,200 Quality Training 610,000 440,000 Warranty Repairs 140,000 150,000 Testing Equipment 230,000 230,000 Resolving Customer Complaints 89,000 108,400 Rework 544,000 390,000 Preventative Maintenance 440,000 304,000 Material Inspection 210,000 150,000 Field Testing 300,000 400,000 Total costs Required: (a)Classify these items into costs of prevention (P),appraisal (A),internal failure (I)or external failure (E)activities.(b)Calculate the ratio of prevention,appraisal,internal failure,and external failure costs to sales for 2016 and 2017.(c)Prepare a cost of quality report for 2016.

Managerial decisions based on activity-based costing (ABC)information affect only volume-level,batch-level,and product-level costs.

Prevention activities: