Deck 5: Cost Management in an Automated Business Environment: ABC, ABM, and TQM

Question 1

Hazel Company allocates overhead based on direct labor hours.It allocates overhead costs of $8,000 to two different jobs as follows: Job 1: (10 hours)= $4,000; Job 2: (10 hours)= $4,000
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 $12,000.Select the incorrect statement from the following.

A) While the actual processing of Job 1 was not affected by automation, it received an increase of $6,000 in its overhead allocation.
B) The use of machine hours as the allocation base would significantly improve the overhead cost allocations.
C) Automation and the costing system used by the company cause the cost of Job 1 to be significantly overstated.
D) The increased overhead costs associated with automation should be allocated to both jobs.

Answer 1

D

Question 2

Actions or units of work undertaken by an organization to accomplish its mission are referred to as:

A) costs.
B) work in process.
C) activities.
D) cost objects.

Answer 2

C

Question 3

A modern cost allocation process that employs multiple cost drivers is:

A) activity-based costing.
B) contribution costing.
C) process costing.
D) job order costing.

Answer 3

A

Question 4

The number of activity cost centers used by a company should:

A) equal the number of activities required to produce the product.
B) equal the number of departments it has.
C) equal the number of products it has.
D) be determined on a cost/benefit basis.

Question 5

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

A) Automation
B) Workers are not as productive as they were in the past
C) Movement from full-time to part-time workers
D) Changes in generally accepted accounting principles

Question 6

Performance Bicycle Company makes steel and titanium handlebars for bicycles.It requires approximately one hour of labor to make one handlebar of either type.During the most recent accounting period,Barr Company made 7,000 steel bars and 3,000 titanium bars.Setup costs amounted to $84,000.One batch of each type of bar was run each month.If a single companywide overhead rate based on direct labor hours is used to allocate overhead costs to the two products,the amount of setup cost assigned to the steel bars will be:

A) $8,400.
B) $84,000.
C) $49,000.
D) $58,800.

Question 7

Which of the following is an activity-based cost driver?

A) Number of machine setups
B) Material cost
C) Machine hours
D) All of these answers are correct.

Question 8

Select the incorrect statement from the following.

A) If overhead costs are allocated based on activities, the amount of overhead allocated to a particular product can be reduced by increasing the number of activities required by the product, thereby spreading the overhead costs over more units.
B) Activity costs are considered relevant for decision-making because the cost of an activity will be avoided if the activity is eliminated.
C) In highly automated environments where companies produce many different products with varying levels of production, activity-based cost drivers are superior to volume-based drivers.
D) Activity-based cost drivers produce a better cost allocation than volume-based drivers because they distribute only relevant costs to the appropriate products.

Question 9

Which of the following is a volume-based cost driver?

A) Machine hours
B) Material cost
C) Direct labor hours
D) All of these answers are correct

Question 10

All of the following are hierarchical categories in which a firm's overhead support costs can be classified except:

A) product-level activities.
B) industry-level activities.
C) batch-level activities.
D) facility-level activities.

Question 11

Which of the following activity costs would not likely be included in a unit-level activity cost pool?

A) Indirect material
B) Packaging costs
C) Machine setup costs
D) Machine-related utilities

Question 12

Which type of cost driver is most appropriate for automated processes?

A) Volume-based drivers
B) Activity-based drivers
C) Direct labor-based drivers
D) All of these answers are correct

Question 13

Morris Company allocates overhead based on 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:

A) each product will increase.
B) Job 1 will decrease.
C) each product will decrease.
D) Job 1 will increase.

Question 14

Which of the following allocation bases for automation costs would be an improvement over direct labor hours?

A) Number of units sold
B) Direct labor costs
C) Machine hours
D) Direct material cost

Question 15

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

A) ABC does not use cost drivers.
B) ABC uses a single activity center but multiple cost drivers.
C) ABC uses multiple activity cost centers and multiple cost drivers.
D) ABC uses multiple activity cost centers but a single cost driver.

Question 16

Traditionally,the most popular companywide base for allocating overhead to products was:

A) machine hours.
B) direct labor hours or costs.
C) number of units produced.
D) number of units sold.

Question 17

Keene Company allocates overhead based on direct labor hours.It allocates overhead costs of $8,000 to two different jobs as follows: Job 1: (10 hours)= $4,000; Job 2: (10 hours)= $4,000
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 increased to $12,000.How much overhead cost will be assigned to Job 1 after automation?

A) $10,000
B) $6,000
C) $4,000
D) $2,000

Question 18

Which of the following is not a cost resulting from a unit-level activity?

A) The cost of electricity to power manufacturing equipment
B) The cost of sending monthly statements to customers
C) The indirect cost of glue used on each product
D) The per unit cost of packaging goods

Question 19

In the early days of the industrial revolution,indirect manufacturing costs:

A) were a significant cost of producing most products.
B) were relatively large compared to the direct costs of producing a product.
C) were highly correlated with the use of labor.
D) were largely fixed.

Question 20

Which of the following costs is likely to be driven by machine usage?

A) Factory insurance
B) Depreciation on factory building
C) Factory utilities
D) Factory rent

Question 21

Which of the following activity costs should usually be ignored when making a decision regarding whether to eliminate a product?

A) Product-level costs
B) Batch-level costs
C) Unit-level costs
D) Facility-level costs

Question 22

All of the following are downstream costs except:

A) advertising costs.
B) distribution costs.
C) patent filing legal costs.
D) warehousing costs.

Question 23

Miller Company makes two types of chairs.One of the chairs is a rocking chair.The other is a straight-back chair.Both chairs are made by hand.Miller Company uses a companywide overhead rate that is based on direct labor hours to assign overhead costs to the two products.If Miller automates the production of straight-back chairs and continues to use direct labor hours as a companywide allocation basis:

A) rocking chairs will be overcosted.
B) straight-back chairs will be overcosted.
C) rocking chairs will be undercosted.
D) there should be no impact on unit cost.

Question 24

Costs incurred to avoid nonconforming products are:

A) prevention costs.
B) appraisal costs.
C) failure costs.
D) voluntary costs.

Question 25

When making a long-term cost plus pricing decision,a company should consider:

A) The upstream research and development cost.
B) The allocated portion of facility-level cost.
C) The direct manufacturing cost.
D) All of these answers are correct.

Question 26

Bates Company makes two products.Product X requires 6,000 hours of labor,and Product Y requires 4,000 hours of labor.Bates undertook an automation program that reduced the consumption of labor required by Product X to only 2,000 hours of labor.Product Y was not affected by the automation process.Overhead cost prior to the automation totaled $10,000.After automation,overhead cost amounted to $24,000.Assuming Bates uses direct labor hours as a companywide allocation base before and after the automation,the amount of overhead cost allocated to:

A) Product X would be $4,000 prior to automation and $16,000 after automation.
B) Product X would be $6,000 prior to automation and $16,000 after automation.
C) Product Y would be $8,000 prior to automation and $8,000 after automation.
D) Product Y would be $4,000 prior to automation and $16,000 after automation.

Question 27

Identify the obstacle(s)in implementing a successful activity-based costing system.

A) Gaining the cooperation and support of employees.
B) Obtaining accurate cost driver data.
C) Condensing a large number of activities down into a manageable number of activity cost pools.
D) All of these answers are correct.

Question 28

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: $\begin{array}{lrr}&&&\text { Product }\\\text { Activities: } & \text { Unit Level } &\text { Batch Level } & \text { Level } &\text { Facility Level }\\\text { Total cost } & \$ 30,000 & \$ 12,000&\$6,000&\$36,000 \\\text { Total cost } & & \\\text { driver } & 5,000 \text { labor }& 240 \text { set }&\% \text { of use }&36,000 \text { units } \\\text { volume } & \text { hours }& \text { ups } \\\end{array}$

Production of 10,000 units of a handheld tiller required 1,000 labor hours and 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?

A) $84,000
B) $26,000
C) $21,500
D) $11,500

Question 29

Which of the following is an upstream cost?

A) Research and development costs
B) Shipping costs to ship completed goods
C) Sales commissions
D) Sales promotion and advertising costs

Question 30

Mason Company is planning to introduce an activity-based costing system.Which of the following actions by employees could lower the success of the new system?

A) Employees may purposely report on their time cards different amounts of time than they actually worked.
B) Employees may decrease their productivity to demonstrate their dissatisfaction with the new system.
C) Employees may resist having to maintain additional records (such as the number of setups).
D) All of these answers are correct.

Question 31

Select the incorrect statement regarding the use of cost drivers in activity-based costing systems.

A) ABC uses volume-based and activity-based cost drivers.
B) Volume-based drivers are most appropriate for costs that are affected by the number of units produced.
C) ABC's use of multiple cost drivers will produce less accurate unit costs when a company produces many different products that require different types and levels of overhead costs.
D) An arbitrary cost driver must be selected when allocating facility-level activity costs.

Question 32

Chastain Company recently implemented an activity-based costing system.As a result of the ABC allocations,the cost of one of the company's products was determined to be above its current selling price.Due to competition,the company is unable to raise the price of this product.Which of the following options is most reasonable,assuming Chastain employs a target pricing strategy?

A) Use less expensive materials to make the product.
B) Raise prices under the assumption that the company's competitors will follow suit.
C) Target advertising to high-income customers.
D) Return to the old allocation method, which produces a lower amount of estimated cost.

Question 33

A product-level activity center would likely include all of the following costs except:

A) engineering development costs.
B) legal fees to obtain and protect patents.
C) packaging design costs.
D) materials handling costs.

Question 34

Sanford Tools produces a variety of scissors and other cutting instruments at its Birmingham manufacturing plant.The plant is highly automated and uses an activity-based costing system to allocate overhead costs to its various product lines.The company expects to produce 24,000 total units during the current period.The costs and cost drivers associated with four activity cost pools are given below: $\begin{array}{lcccc}\text { ACTIVITIES: } & \text { UNIT } & \text { BATCH } & \text { PRODUCT } & \text { FACILITY } \\& \text { LEVEL } & \text { LEVEL } & \text { LEVEL } & \text { LEVEL } \\\hline\text { Cost } & \$ 50,000 & ? & \$ 10,000 & \$ 120,000 \\ \text { Cost Driver } & \text { 4,000 labor hrs } & 100 \text { set ups } & \% \text { of use } & 24,000 \text { units } \\\end{array}$
Production of 1,000 units of a pipe-cutting tool required 400 labor hours and 10 setups,consumed 30% of the product sustaining activities,and resulted in an overhead allocation of $15,400.What amount of batch-level overhead cost was expected during the period?

A) $24,000
B) $2,400
C) $12,500
D) None of these answers is correct.

Question 35

Which of the following activity costs would likely be included in a batch-level activity cost pool?

A) Per unit inspection costs.
B) Machine set-up costs.
C) Quality control costs.
D) All of these answers are correct.

Question 36

Compared to a traditional two-stage cost allocation system,activity-based costing systems:

A) Use fewer cost centers.
B) Use more cost drivers.
C) Are less expensive to maintain.
D) All of these answers are correct.

Question 37

The Tangier Company is considering eliminating the following product line: $\begin{array}{lr}&\underline{\text { Product AXP}}\\\text { Sales}&\$80,000\\\text { Less variable costs: }\\\text { Raw materials } & 50,000 \\\text { Direct labor } & \underline{10,000}\\\text { Contribution margin } & \$ 20,000 \\\text { Less fixed costs: } & \\\text { Production costs allocated to products } &\underline{30,000} \\\text { Profit (Loss) } & \$(10,000) \\\end{array}$ What amount of cost is avoidable if Tangier outsources production of this product?

A) $60,000
B) $50,000
C) $90,000
D) $20,000

Question 38

Pro Tool Company expects to produce 24,000 total units during the current period.The costs and cost drivers associated with four activity cost pools are given below: $\begin{array}{lcccc}\text { ACTIVITIES: } & \text { UNIT } & \text { BATCH } & \text { PRODUCT } & \text { FACILITY } \\& \text { LEVEL } & \text { LEVEL } & \text { LEVEL } & \text { LEVEL } \\\hline\text { Cost } & \$ 50,000 & ? & \$ 10,000 & \$ 120,000 \\ \text { Cost Driver } & \text { 4,000 labor hrs} & 100 \text { set ups } & \% \text { of use } & 24,000 \text { units } \\\end{array}$
Production of 1,000 units of an auto towing tool required 800 labor hours and 12 setups and consumed 30% of the product sustaining activities.How much total overhead cost will be allocated to this product if the company allocates overhead using a single overhead allocation rate based on direct labor hours?

A) $18,400
B) $10,000
C) $100,000
D) $40,000

Question 39

Benitez Company makes wicker and wooden slat picnic baskets.It requires approximately one hour of labor to make one basket of either type.Wicker baskets are produced in batches of 100 units and require 0.5 machine hours per basket.Wooden slat baskets are produced in batches of 50 units and require 0.75 machine hours per basket.Setup is required for each batch.During the most recent accounting period,the company made 8,000 wicker baskets and 2,000 wooden slat baskets.Setup costs amounted to $24,000 for the baskets produced during the period.If activity-based costing is used to allocate overhead costs to the two products,the amount of setup cost assigned to the wicker baskets will be:

A) $17,455.
B) $19,200.
C) $12,000.
D) $16,000.

Question 40

Valpar Company produces several lines of laundry hampers.The factory is highly automated and uses an activity-based costing system to allocate overhead costs to its various products.During the upcoming period,the company expects to produce 72,000 units.The costs and cost drivers associated with four activity cost pools are given below: $\begin{array}{lcccc}&\text { UNIT}&\text { BATCH}&\text { PRODUCT}&\text { FACILIT }\\\text { ACTTVTIES: } & \text { LEVEL } & \text { LEVEL } & \text { LEVEL } & \text { LEVEL } \\\hline \text { Cost } & \$ 30,000 & \$ 8,000 & \$ 15,000 & \$ 36,000 \\\text { Cost driver } & \begin{array}{l}12,000 \\\text { labor hrs }\end{array} & \begin{array}{c}200 \text { set } \\\text { ups }\end{array} & \% \text { of use } & 72,000\text{units} \\\end{array}$ Production of 20,000 units of its popular foldable hamper required 3,000 labor hours and 75 setups and consumed one-third of the product sustaining activities.What amount of unit-level costs will be allocated to the product?

A) $2,500
B) $7,500
C) $5,000
D) $6,000

Question 41

Which of the following is an internal failure cost?

A) Costs to rework defective units
B) Warranty replacement costs
C) Engineering and design costs
D) Depreciation on testing equipment

Question 42

Concerning the prevention of defects,which of the following statements is true?

A) Zero defects is a cost-effective strategy.
B) When the product falls to the right of the cost minimization point on the total quality cost curve, then incurring failure costs is wise.
C) It is always wiser to spend money on correcting failures than on preventing defects.
D) When the product falls to the right of the cost minimization point on the total quality cost curve, then incurring prevention costs is wise.

Question 43

All of the following are examples of volume-based drivers except:

A) machine hours.
B) number of product design changes.
C) direct labor hours.
D) number of units.

Question 44

Which of the following is an appropriate cost driver for electricity used for production equipment in a factory?

A) Machine hours
B) Number of inspections
C) Setup hours
D) Number of units

Question 45

Which of the following is an appropriate cost driver for setting up production equipment for a production run?

A) Machine hours
B) Number of setups
C) Setup hours
D) Either number of setups or setup hours would be appropriate

Question 46

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

A) Number of units
B) Number of purchase orders
C) Number of setups
D) Either number of units or number of purchase orders would be appropriate

Question 47

All of the following are internal failure costs except:

A) inventory inspection costs.
B) rework costs.
C) downtime costs.
D) scrap costs.

Question 48

The amounts of voluntary costs and failure costs:

A) Are equal by definition.
B) Tend to move in opposite directions (as one increases the other decreases).
C) Tend to move in the same direction (as one increases the other increases).
D) None of these answers are correct.

Question 49

The voluntary costs of quality include:

A) Internal failure costs.
B) External failure costs.
C) Appraisal costs.
D) All of these answers are correct.

Question 50

For most businesses,quality means:

A) the degree to which products or services exceed customer expectations.
B) absolutely no defects.
C) the degree to which products or services conform to design specifications.
D) none of these answers are correct.

Question 51

The Farber Company recorded the following costs of quality during the current period: $$\begin{array} { l r } \text { Downtinne } & \$ 1,500 \\\text { Inspection } & 1,000 \\\text { Product desipn } & 4,000 \\\text { Reliability testing upon completion of production } & 2,500 \\\text { Restocking and packaging } & 1,500 \\\text { Training } & 3,000 \\\text { Warranty repairs ard replacernents } & \underline{2,500} \\\text { Total Costs of Quality } & \underline{ \$ 16,000} \\\end{array}$$ Which choice below represents the correct amount of prevention and appraisal costs?
$\begin{array} { l l l l } & \text { Prevention } & \text { Appraisal } \\\end{array}$
A. $\begin{array} { l l l l } & \$ 4,000 & & \$ 1,000 \\\end{array}$
B. $\begin{array} { l l l l } & \$ 3,000 & & \$ 1,000 \\\end{array}$
C. $\begin{array} { l l l l } & \$ 7,000 & & \$ 3,500 \\\end{array}$
D. $\begin{array} { l l l l } & \$ 3,000 & & \$ 2,500\end{array}$

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 52

The first step in developing an ABC system is to:

A) allocate costs to activity cost pools.
B) identify the cost driver that has the best "cause-and-effect relationship" to the cost pool.
C) identify essential activities and the cost of performing those activities.
D) calculate activity rates.

Question 53

Managing quality costs to achieve the highest level of customer satisfaction is known as:

A) activity-based management.
B) total quality management.
C) strategic management.
D) quality costs.

Question 54

The insurance cost for a large factory would be considered a:

A) unit-level cost.
B) batch-level cost.
C) product-level cost.
D) facility-level cost.

Question 55

Which of the following is an appraisal cost?

A) Depreciation of testing equipment
B) Customer service costs
C) Engineering and design costs
D) Costs to repair defective units

Question 56

All of the following are prevention costs except:

A) training costs.
B) inspection costs.
C) regularly scheduled maintenance.
D) engineering and design costs.

Question 57

The minimum amount of total quality costs is achieved when the:

A) marginal voluntary expenditures exceed marginal failure costs.
B) marginal voluntary expenditures equal the marginal savings on failure costs.
C) marginal voluntary expenditures are less than the marginal savings on failure costs.
D) none of the other answers are correct.

Question 58

Invoice processing costs would be considered a:

A) unit-level cost.
B) batch-level cost.
C) product-level cost.
D) facility-level cost.

Question 59

Electricity to run sanding machines in a furniture-making department is an example of a(n):

A) unit-level cost.
B) batch-level cost.
C) product-level cost.
D) facility-level cost.

Question 60

Legal costs to file design patents are an example of a(n):

A) unit-level cost.
B) batch-level cost.
C) product-level cost.
D) facility-level cost.

Question 61

Which of the following costs is the result of a facility-level activity?

A) Utility costs related to heating and lighting a manufacturing facility
B) The cost of landscaping the grounds for the manufacturing unit
C) Costs associated with trademarks
D) Both utility costs related to heating and lighting a manufacturing facility and the cost of landscaping the grounds for the manufacturing unit are correct

Question 62

Which of the following statements regarding unit-level activities is (are)true? I.Unit-level activities occur each time a batch of units is produced.
II)Unit-level costs follow a variable cost behavior pattern.
III)Unit-level activities benefit the production as a whole and are not related to any specific product.

A) I only
B) I and II
C) II and III
D) II only

Question 63

In the below graph,which shows the relationship among components of quality cost,Line "B" depicts:

A) total quality costs.
B) external failure quality cost.
C) voluntary quality costs.
D) internal failure quality costs.

Question 64

Increasing automation in a manufacturing facility will likely:

A) Increase the number of direct labor hours and decrease overhead costs.
B) Decrease the number of direct labor hours and increase overhead costs.
C) Decrease the number of direct labor hours and decrease overhead costs.
D) None of these answers is correct.

Question 65

Sales commissions are an example of:

A) unit-level activities.
B) batch-level activities.
C) facility-level activities.
D) product-level activities.

Question 66

All of the following are external failure costs except:

A) warranty repairs and replacement.
B) reliability testing
C) customer relations.
D) restocking and packaging.

Question 67

Which activity is likely to be involved in the acquisition of raw materials?

A) Identifying potential suppliers
B) Getting price quotations
C) Preparing purchase orders
D) All of the other answers are correct.

Question 68

Hough Company manufactures a wide variety of products.A high proportion of its indirect costs are batch-level costs,such as acquiring materials,moving materials within the factory,and setting up machines.Hough uses direct labor hours to assign indirect costs to all of its products.How is this use of a traditional product costing system likely to affect the costs of Hough's high-volume and low-volume products?

A) All of its products are undercosted.
B) Its low-volume products are overcosted.
C) All of its products are overcosted.
D) Its high-volume products are overcosted.

Question 69

All of the following are categories of quality costs except:

A) prevention costs.
B) design costs.
C) internal failure costs.
D) appraisal costs.

Question 70

Direct labor hours is an appropriate cost driver when:

A) production is labor-intensive.
B) overhead costs increase.
C) production is automated.
D) all of these answers are correct.

Question 71

Depreciation on a manufacturing facility is an example of a(n):

A) unit-level activity.
B) batch-level activity.
C) product-level activity.
D) facility-level activity.

Question 72

Which of the following statements is incorrect?

A) An activity-based costing system uses more cause-and-effect relationships in tracing costs than does a traditional cost allocation system.
B) An activity-based costing system first assigns or traces costs to the departments in which products are made.
C) The hierarchical categories into which activities are grouped are unit-level, batch-level, product-level, and facility-level activities.
D) The total amount of unit-level costs changes in proportion to the number of units of product made.

Question 73

Which of the following is the most appropriate cost driver for maintaining parts inventory?

A) Number of parts for a product
B) Direct labor hours
C) Sales dollars
D) Number of setups

Question 74

In the below graph,which shows the relationship among components of quality cost,Line "C" depicts:

A) failure costs.
B) internal quality cost.
C) voluntary quality failure costs.
D) prevention costs.

Question 75

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 relationships 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.

A) I and III
B) I and II
C) II and III
D) III only

Question 76

Which of the following statements regarding activity-based cost drivers is correct?

A) Activity-based cost drivers are measures of activity that are directly associated with production.
B) Activity-based cost drivers are directly related to the volume of production.
C) Activity-based cost drivers improve the accuracy of direct cost allocations.
D) None of these answers are correct.

Question 77

Voluntary costs refer to:

A) prevention and appraisal costs.
B) prevention and internal failure costs.
C) appraisal and external failure costs.
D) internal failure costs and external failure costs.

Question 78

Which of the following would be classified as a batch-level activity?

A) Depreciation on production equipment
B) Inspection of a product, where each unit must be individually inspected
C) Changing machine configuration before starting a production run
D) Sales commissions

Question 79

Which of the following is an example of a prevention cost?

A) Downtime
B) Inventory inspection
C) Product design
D) Repair and rework

Question 80

Which of the following costs would be most fairly allocated using a volume-based cost driver?

A) Inventory holding costs
B) Property taxes
C) Setup costs for product batches
D) Indirect labor costs