Deck 6: Service and Operations Costing

Question 1

Which of the following costs is most likely not applicable in a service costing environment?

A) Indirect materials
B) Rent expenses
C) Direct materials
D) Direct labour

Answer 1

C

Question 2

Companies that produce large numbers of standardised products within a particular batch would most likely use which type of costing?

A) Process costing
B) Job costing
C) Operations costing
D) Normal costing

Answer 2

C

Question 3

Which of the following would probably not be a cost driver in a service environment?

A) Machine hours
B) Units produced
C) Floor space
D) Inspection hours

Answer 3

B

Question 4

Which of the following characteristics does not explain a service shop organisation?

A) Medium customisation
B) Medium contact time
C) Medium discretion
D) Dominantly people focused

Question 5

A mass services firm is characterised by:

A) low contact time.
B) medium contact time.
C) high contact time.
D) high customisation.

Question 6

Maria's Custom Tailoring is very labour intensive.Therefore,Maria has decided to use direct labour hours as the cost driver for assigning service overhead costs to specific jobs.During the month of February,the company incurred overhead costs of $6000.Some 600 direct labour hours were expected to be used during the month.Total actual direct labour hours during the month totalled 800.What is the predetermined overhead rate per month,if based on direct labour hours?

A) $ 10.00
B) $ 7.50
C) $ 0.75
D) $ 0.101

Question 7

Presley Products Inc.is a manufacturer of limited edition dolls.They use operations costing to measure and track the costs incurred for specific product lines.While most of the products do require some machine time,Presley has determined that direct labour hours drive its manufacturing overhead costs.During the month of April,the following data were available for a particular line of dolls:
$\begin{array}{llcc} \text { Direct labour } & \text { 3000 hours at \( \$ 10 \) per hour } \\ \text {Direct materials } & \text { 4000 kilos at \( \$ 2 \) per kilo } \\\end{array}$

If total overhead costs during the month totalled $25 000 when a total of 50 000 direct labour hours were worked,what will be the total manufacturing cost for this line of dolls?

A) $40 500
B) $44 000
C) $63 000
D) $39 500

Question 8

Which of the following statements regarding service costing is true?

A) Service costing is used by manufacturing firms only.
B) Service costing is less relevant in a high uncertainty environment.
C) Mass services firms are a type of service organisation.
D) Mass shops are a type of service organisation.

Question 9

If I was interested in receiving a high quality,prestigious service where care is taken to ensure my every concern is addressed,I might contact a:

A) mass services organisation.
B) service shop organisation.
C) professional services organisation.
D) retail organisation.

Question 10

Which of the following statements is correct?

A) Overhead consists of only indirect labour in service costing.
B) Direct material costs are the dominant cost type in service costing.
C) Overheads are less important for service costing than production costing.
D) Indirect materials can arise in service organisations.

Question 11

What should determine whether an allocation base is a good cost driver in a service organisation?

A) Whether or not it satisfactorily links to the service cost object
B) Whether or not it links the service cost to the service cost object
C) Whether or not the base can be measured with absolute accuracy
D) Whether or not the service cost being allocated is large

Question 12

A professional service firm is characterised by:

A) low contact time.
B) medium contact time.
C) high contact time.
D) low customisation.

Question 13

Professional services most closely relates to which of the following cost systems?

A) Mass services costing system
B) Job costing system
C) Process costing system
D) Hybrid costing system

Question 14

Lewis and Partners is a legal firm that measures and tracks costs for individual clients separately.While most client work requires some automation time,management has determined that direct labour cost drives its service overhead costs.During the month of September,the following data were available for Client #234:
Direct labour $\quad$ $\quad$ $\quad$ 200 hours at $\$ 15$ per hour
If total overhead costs during the month totalled $5000 when a total of $20 000 in direct labour costs were incurred,what will be the overhead allocated to Client #234?

A) $1000
B) $3000
C) $750
D) $250

Question 15

A service shop is characterised by:

A) low contact time.
B) medium contact time.
C) high contact time.
D) low customisation.

Question 16

Compared to manufacturing firms,cost allocation in service firms:

A) always requires greater sophistication in order to make work.
B) usually places a greater emphasis on direct labour costs.
C) emphasises direct material costs.
D) only requires the consideration of overhead costs.

Question 17

Which of the following statements is most incorrect regarding the service profit value chain?

A) It explains how services result in profit in organisations.
B) It does not consider customer loyalty.
C) It is difficult to definitively measure many of its categories.
D) It cannot guarantee service organisation profitability.

Question 18

The key to allocating overhead costs in service organisations is the determination of the ______.

A) overhead
B) cost driver
C) direct labour
D) total service cost

Question 19

Which of the following costs is the most likely to be traced to a customer in a service costing environment?

A) Indirect labour costs
B) Direct labour costs
C) Manufacturing overhead costs
D) Selling and administrative costs

Question 20

Which of the following managers stands to most benefit from a service profit value chain analysis?

A) Utilities manager
B) Property manager
C) Quality manager
D) Security manager

Question 21

Aronson & Associates LLP
Aronson & Associates LLP, an accounting firm, assigns overhead to clients based on direct labour hours. The following information is available for the month of March:
$\begin{array}{ll}\text { Estimated direct labour hours } & 4000 \text { hours } \\\text { Estimated overhead costs } & \$ 8000 \\\text { Actual direct labour hours } & 4200 \text { hours } \\\text { Actual overhead costs } & \$ 8190\end{array}$


-The predetermined overhead rate for the month of March is:

A) $2.00 per direct labour hour
B) $ .50 per direct labour hour
C) $1.95 per direct labour hour
D) $1.90 per direct labour hour

Question 22

Stacey Clothing
Stacey Clothing assigns overhead to clients based on total labour hours. The following information is available for the month of June:
$\begin{array}{ll}\text { Estimated direct labour hours } & 4000 \text { hours } \\\text { Estimated indirect labour hours } & 2000 \text { hours } \\\text { Estimated overhead costs } & \$ 18000 \\\text { Actual total labour hours } & 6400 \text { hours } \\\text { Actual overhead costs } & \$ 17500\end{array}$


-The amount of applied overhead for June will be:

A) $18 900
B) $17 500
C) $18 000
D) $19 200

Question 23

Which of the following costs is the most likely to be traced to a customer in a service costing environment?

A) Rent costs
B) Labour costs
C) Administrative costs
D) Equipment depreciation costs

Question 24

A high level of customisation relates to which of the following cost systems?

A) Mass services costing system
B) Job costing system
C) Process costing system
D) Hybrid costing system

Question 25

Stacey Clothing
Stacey Clothing assigns overhead to clients based on total labour hours. The following information is available for the month of June:
$\begin{array}{ll}\text { Estimated direct labour hours } & 4000 \text { hours } \\\text { Estimated indirect labour hours } & 2000 \text { hours } \\\text { Estimated overhead costs } & \$ 18000 \\\text { Actual total labour hours } & 6400 \text { hours } \\\text { Actual overhead costs } & \$ 17500\end{array}$


-By how much was overhead over- or underapplied for the month of June?

A) $1700 overapplied
B) $500 overapplied
C) $500 underapplied
D) $1700 underapplied

Question 26

Lewis and Partners tracks costs for individual tax return clients separately.Direct labour cost drives its service overhead costs.During the month of September,the following data were available for Client #156:
Direct labour $\quad$ $\quad$ 400 hours at $\$ 15$ per hour
If total overhead costs during the month totalled $10 000 when a total of $30 000 in direct labour costs were incurred,what will be the overhead allocated to Client #156?

A) $1000
B) $3000
C) $750
D) $2000

Question 27

Stacey Clothing
Stacey Clothing assigns overhead to clients based on total labour hours. The following information is available for the month of June:
$\begin{array}{ll}\text { Estimated direct labour hours } & 4000 \text { hours } \\\text { Estimated indirect labour hours } & 2000 \text { hours } \\\text { Estimated overhead costs } & \$ 18000 \\\text { Actual total labour hours } & 6400 \text { hours } \\\text { Actual overhead costs } & \$ 17500\end{array}$



-The predetermined overhead rate for the month of June is:

A) $4.50 per labour hour
B) $9.00 per labour hour
C) $3.00 per labour hour
D) $1.90 per labour hour

Question 28

Which of the following costs is most likely not applicable in a service costing environment?

A) Rent
B) Direct materials
C) Utilities expenses
D) Direct labour

Question 29

Mass services most closely relates to which of the following cost systems?

A) Shop services costing system
B) Job costing system
C) Process costing system
D) Hybrid costing system

Question 30

Brynne Graham owns a law practice.She wishes to earn an income of $350 000 from the business (ignore tax).She expects to work 3500 hours on clients in the year,if client work develops as expected.The firm incurs the following costs - rent of $2000 per month and secretarial costs of $4000 per month.
How much must Brynne charge per hour,in order to earn her target profit?

A) $81.50
B) $79.43
C) $121.68
D) $100.00

Question 31

A medium level of contact time most closely relates to which of the following cost systems?

A) Mass services costing system
B) Job costing system
C) Process costing system
D) Hybrid costing system

Question 32

Rachel Thomas owns a law practice.She wishes to earn an income of $400 000 from the business (ignore tax).She expects to work 800 hours on clients in the year,if client work develops as expected.The firm incurs the following costs - leases of $1000 per month and salaries of $2000 per month.
How much must Rachel charge per hour,in order to earn her target profit?

A) $455
B) $648.50
C) $211
D) $549.67

Question 33

Aronson & Associates LLP
Aronson & Associates LLP, an accounting firm, assigns overhead to clients based on direct labour hours. The following information is available for the month of March:
$\begin{array}{ll}\text { Estimated direct labour hours } & 4000 \text { hours } \\\text { Estimated overhead costs } & \$ 8000 \\\text { Actual direct labour hours } & 4200 \text { hours } \\\text { Actual overhead costs } & \$ 8190\end{array}$


-By how much was overhead over- or underapplied for the month of March?

A) $210 overapplied
B) $400 overapplied
C) $190 underapplied
D) $390 underapplied

Question 34

By how much does the actual overhead change,if the applied overhead rate increases by $2 per hour?

A) $12 000
B) $$6000
C) $18 000
D) No change

Question 35

Aronson & Associates LLP
Aronson & Associates LLP, an accounting firm, assigns overhead to clients based on direct labour hours. The following information is available for the month of March:
$\begin{array}{ll}\text { Estimated direct labour hours } & 4000 \text { hours } \\\text { Estimated overhead costs } & \$ 8000 \\\text { Actual direct labour hours } & 4200 \text { hours } \\\text { Actual overhead costs } & \$ 8190\end{array}$


-The amount of applied overhead for March will be:

A) $7800
B) $8400
C) $8610
D) $8000

Question 36

Audrey Cleaners is a large cleaning business.They use operations costing to measure and track the costs incurred for specific product lines.While most of the products do require some machine time,managers have determined that total labour hours drive its manufacturing overhead costs.Traditionally,indirect labour hours are one fifth of total direct labour hours.During the month of June,the following data is provided for the time worked on a large job:
Direct labaur $\quad$ $\quad$ 3000 hours at $\$ 10$ per hour
If total overhead costs during the month was $16 000 when a total of 20 000 total labour hours were worked,what is the overhead allocated to the large job?

A) $3600
B) $3000
C) $2880
D) $2560

Question 37

What is the overhead applied rate if the driver is direct labour hours (please assume 4000 estimated direct labour hours)?

A) $3.50
B) $3.00
C) $4.50
D) $4.00

Question 38

Stacey Clothing
Stacey Clothing assigns overhead to clients based on total labour hours. The following information is available for the month of June:
$\begin{array}{ll}\text { Estimated direct labour hours } & 4000 \text { hours } \\\text { Estimated indirect labour hours } & 2000 \text { hours } \\\text { Estimated overhead costs } & \$ 18000 \\\text { Actual total labour hours } & 6400 \text { hours } \\\text { Actual overhead costs } & \$ 17500\end{array}$


-If direct labour hours were 3000,the predetermined overhead rate for the month of June would be:

A) $4.50 per labour hour
B) $9.00 per labour hour
C) $3.00 per labour hour
D) $3.60 per labour hour

Question 39

Service shops most closely relates to which of the following cost systems?

A) Mass services costing system
B) Job costing system
C) Process costing system
D) Hybrid costing system

Question 40

A low level of contact time most closely relates to which of the following cost systems?

A) Mass services costing system
B) Job costing system
C) Process costing system
D) Hybrid costing system

Question 41

You are considering setting up an accounting firm specialising in preparing budgets for clients.Identify five overhead costs you regard as being important to manage.Please explain why you consider these costs are important.

Question 42

How might retail organisations utilise service costing principles?

Question 43

What are service shop organisations? Please provide examples of such organisations.

Question 44

Jenny Lane is considering how best to charge her clients for her accounting services.She incurs costs of $12 000 in staff costs per month,and expects her business to bill 500 hours per month.She also pays rent of $48 000 per year,and her administrative fixed costs total $8000 per month.Jenny desires a profit of $240 000 per year (not including taxes).
Required:
A.What is the minimum rate Jenny must bill her clients per hour to avoid making a loss?
B.What must Jenny bill her clients per hour in order to earn her target profit?

Question 45

How is internal service quality related to external service value,as per the service profit value chain?

Question 46

Party Organiser Ltd.allocates overheads to individual parties based on labour hours.At the beginning of the current year,estimated overhead costs were $3 000 000 and estimated labour hours were 1 200 000.By the end of the year,actual overhead costs were calculated to be $2 600 000 and actual labour hours were 1 050 000.
Required:
A Calculate the predetermined qverhead rate.
B. How much averhead wadd be applied to a particular job that required 200 labour hours?
C. How much total averhead was agplied during the year?
D. By how much was averhead aver- ar underapplied far the year? Be sure to indicate whether it was aver- or underagglied.

Question 47

How is service costing different to traditional product costing?

Question 48

Mighty Mac Mobile phone services uses operational costing.One of their customers has requested 2000 units of an identical mobile phone.Mighty Mac estimates the following will be incurred to fulfil the customer order:
$\begin{array}{ll} \text { Total direct materials } &\$100000\\ \text { Total direct labour hours } & \text {40 hours } \\ \text { Direct labour cost per hour } & \text { \$ 25 per hour }\\\end{array}$

In addition,Mighty Mac allocates overhead based on direct labour cost.At the beginning of this year,they estimated overhead costs would total $900 000 and direct labour would cost a total of $2 400 000.
Required:
A. What will be the predetermined cverhead rate used during the year?
B. What will be the tatal manufacturing casts for the above customer's arder?

Question 49

What is the purpose of a service profit value chain?

Question 50

Evaluate the following statement - direct labour is the main cost in service organisations.

Question 51

J & J Products uses operational costing.One of their customers has requested 1000 units of an identical product.J & J estimates the following will be incurred to fulfil the customer order:
$\begin{array}{llcc} \text {Total direct materials } &\$2000\\ \text { Total direct labour hours } & \text { 50 hours}\\ \text {Direct lahnur cost mor hours } & \text { \$ 20 per hous } \\\end{array}$

In addition,J & J allocates overhead based on direct labour cost.At the beginning of this year,they estimated overhead costs would total $800 000 and direct labour would cost a total of $3 200 000.
Required:
A. What will be the predetermined cverhead rate used during the year?
B. What will be the tatal manufacturing casts for the above customer's arder?

Question 52

What is the volume-variety framework? How does it help us to better understand service organisation types?

Question 53

Sandy Retailers uses operational costing.A customer has requested 2000 units of a product.Sandy Retailers estimates the following will be incurred to fulfil the customer order:
$\begin{array}{ll} \text { Total direct labour hours } &\text { 75 hours }\\ \text { Direct labour cost per hour } & \text { \( \$ 25 \) per hour } \\\end{array}$

In addition,they allocate overhead based on direct labour hours.At the beginning of this year,they estimated overhead costs would total $1 000 000 and direct labour hours would be 200 000.
Required:
A. What will be the predetermined cverhead rate used during the year?
B. What will be the tatal manufacturing casts for the above customer's arder?

Question 54

Minimus Cleaning allocates costs to client catering assignments based on cleaning machine hours.Estimated overhead costs were $900 000 and estimated direct labour hours were 50 000 for the upcoming year.At year's end,it was noted that actual overhead costs were $800 000 and actual direct labour hours were 40 000.
Required:
A. Calculate the predetermined wverhead rate.
B. How much dverhead wauld be applied to a catering as5igmnent that req?uired 23 direct labour hours?
C. How much total cverhead was applied during the year?
D. By how much was averhead aver- or underagplied for the year? Be sure to indicate whether it was over- or underagplied.

Question 55

Sherrell Inc.runs an IT consulting firm.Sharon Sherrell,the lead partner,insists that the accountants apply overhead using machine hours.The following data are available for the year:
$\begin{array}{lr}\text { Estimated machine hours } & 210000 \\\text { Actual machine hours } & 160000 \\\text { Actual overhead } & \$ 790000\end{array}$

At the end of the year,it was determined that overhead was overapplied by $50 000.
Required:
A. What was the total appled cverhead for the year?
B. What was the predetermined cverhead rate?

Question 56

Mike Lowry runs a highly successful Internet cafe.He incurs costs of $10 000 per week for salaries,and expects his business to bill 5000 hours per month.He also pays rent of $30 000 per year,and incurs other fixed costs totalling $2000 per month.Mike desires a profit of $300 000 per year (not including taxes).
Required:
A.What is the minimum rate Mike must bill his clients per hour to avoid making a loss?
B.What must Mike bill his clients per hour in order to earn his target profit?

Question 57

Explain how professional services,mass services and service shops relate to other costing systems existing in product organisations.

Question 58

Maximus Catering allocates costs to client catering assignments based on direct labour hours.Estimated overhead costs were $750 000 and estimated direct labour hours were 60 000 for the upcoming year.At year's end,it was noted that actual overhead costs were $700 000 and actual direct labour hours were 55 000.
Required:
A. Calculate the predetermined wverhead rate.
B. How much dverhead wauld be applied to a catering as5igmnent that req?uired 12 direct labour hours?
C. How much total cverhead was applied during the year?
D. By how much was averhead aver- or underagplied for the year? Be sure to indicate whether it was cver- or underagplied.

Question 59

Jameson Inc.applies overhead using machine hours.The following data are available for the year:
$\begin{array}{lr} \text {Estimated direct labour hours } &2000000\\ \text {Actual direct labour hours } &1850000\\ \text { Overhead applied } &\$3700000\\ \text { Actual overhead } &\$3200000\\\end{array}$

Required:
What predetermined overhead rate did Jameson Inc.use?

Question 60

How are professional service firms different to mass service firms?