Question 1

Consider the nine activities that follow.
1. Microsoft: Developing computer coding for a new spreadsheet package
2. General Mills: Painting the office of a maintenance supervisor at a plant that produces cereal
3. Mayo Clinic: Examining a new patient
4. American Airlines: The 90 minutes that a Boeing 757 sits idle on the ground between flights
5. Office Depot: Moving cases of paper from one location to another in the same warehouse
6. Rolex: Attaching a watch band to the watch's face
7. United States Postal Service: Reprocessing mail that had been sorted incorrectly on a malfunctioning sorting machine.
8. Fidelity Investments: Correcting errors made by company personnel in customer accounts
9. Marriott: Upgrading the quality of bedding used at hotels in very competitive marketplaces
10. Dell Computer: Re-working defective units found during quality control inspection
Required:
Categorize each of the activities as either value-added or non-value-added for the companies noted.

Accepted Answer

The answer of Consider the nine activities that follow.
1. Microsoft:...

Question 2

Kelly and Logan, an accounting firm, provides consulting and tax planning services. A recent analysis found that 65% of the firm's billable hours to clients resulted from tax planning and for many years, the firm's total administrative cost (currently $250,000) has been allocated to services on the basis of billable hours to clients. The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows: $\begin{array} { | l | r | } 
\hline \text { Staff support } & \$ 180,000 \
\hline \text { In-house computing charges } & 50,000 \
\hline \text { Miscellaneous office costs } & 20.000 \
\hline \text { Total } & \$ 250.000 \
\hline
\end{array}$ A recent analysis of staff support found a strong correlation with the number of clients served (consulting, 20 clients; tax planning, 60 clients). In contrast, in-house computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively. Consulting consumed 30% of the firm's computer hours and had 20% of the total client transactions.
If Kelly and Logan switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to consulting services would:

Accepted Answer

A) decrease by $23,500. 
B) increase by $23,500. 
C) decrease by $32,500. 
D) increase by $32,500. 
E) decrease by $64,000.

Question 3

Many traditional product costing systems:

Accepted Answer

A) trace manufacturing overhead to individual activities and require the development of numerous activity-costing rates. 
B) write off manufacturing overhead as an expense of the current period. 
C) combine widely varying elements of overhead into a single cost pool. 
D) use a host of different cost drivers (e.g., number of production setups, inspection hours, orders processed) to improve the accuracy of product costing. 
E) produce results far superior to those achieved with activity-based costing.

Question 4

St. Helena Cellars produces wine in southwestern Ontario. Consider the following selected costs that arose during the current year:
1. Safety costs at winery
2. Truckload shipping costs
3. Building maintenance costs
4. Bottle and cork cost
5. Development cost of new, after-dinner wine
6. Tasting and testing costs
Required:
A. Briefly distinguish between unit-level and product-sustaining activities.
B. Classify the six costs listed as arising from a unit-level, batch-level, product-sustaining, or facility-level activity.

Accepted Answer

The answer of St. Helena Cellars produces wine in southwestern...

Question 5

When a company adopts a just-in-time inventory system, it would expect:

Accepted Answer

A) higher inventories and less frequent purchases. 
B) higher inventories and more frequent purchases. 
C) lower inventories and less frequent purchases. 
D) lower inventories and more frequent purchases. 
E) lower inventories and more units purchased on a given order.

Question 6

Vanguard combines all manufacturing overhead into a single cost pool and allocates this overhead to products by using machine hours. Activity-based costing would likely show that with Vanguard's current procedures:

Accepted Answer

A) all of the company's products are undercosted. 
B) the company's high-volume products are undercosted. 
C) all of the company's products are overcosted. 
D) the company's high-volume products are overcosted. 
E) the company's low-volume products are overcosted.

Question 7

X-Ray Machines Ltd. manufactures three product lines: Standard, Deluxe, and Superior. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below. The following information pertains to the three product lines for next year: $\begin{array}{|l|r|r|r|}
\hline & \text { Standard } & \text { Deluxe } & \text { Supe rior } \
\hline \text { Units to be produced } & 15,000 & 10,000 & 7,000 \
\hline \text { Orders to be shipped } & 1,000 & 500 & 500 \
\hline \text { Number of parts per unit } & 10 & 15 & 25 \
\hline \text { Machine hours per unit } & 3 & 5 & 7 \
\hline \text { Labour hours per unit } & 2 & 2 & 2 \
\hline
\end{array}$ What is X-Ray's pool rate for the packaging activity?

Accepted Answer

A) $100.00 per order shipped. 
B) $100.00 per labour hour. 
C) $100.00 per unit. 
D) $100.00 per machine hour. 
E) $200.00 per order shipped.

Question 8

The division of activities into unit-level, batch-level, product-sustaining level, and facility-level categories is commonly known as a cost:

Accepted Answer

A) object. 
B) application method. 
C) hierarchy. 
D) estimation method. 
E) classification scheme that is useful in traditional, volume-based systems.

Question 9

Star Manufacturing, contemplating the adoption of an activity-based costing system, has established three activity-cost pools: machine setup, quality assurance, and engineering. These cost pools, the appropriate cost driver, and the percentage of each cost driver consumed by the company's products (H15, H16, and H17) follow:
 $\begin{array}{l}
\begin{array}{lll}
\underline { \text { Cost Pool } }&\underline {  \text { Cost Driver } }\
\text { Machine setup } & \text { Number of setups } \
\text { Quatity } & \text { Number of inspections } \
\text { assurance }\
\text { Engineering } & \text { Number of change } \
& \text { orders }
\end{array}
\begin{array}{lll}

\underline{ \text {  H15}}& \underline{ \text {  H16}}& \underline{ \text {  H17}}& \
50 \% & 20 \% & 30 \% \
70 \% & 15 \% & 15 \% \
\
15 \% & 10 \% & 75 \%\
\
\end{array}
\end{array}$

Estimated costs for these three activities, which account for 80% of the firm's total overhead, are $400,000, $500,000, and $120,000, respectively. Star currently applies manufacturing overhead to products on the basis of machine hours.
Required:
A. Will activity-based costing systems require more or fewer cost pools than traditional costing systems? No explanation is necessary.
B. Calculate the cost of machine setup, quality assurance, and engineering to be charged to products H15, H16, and H17 respectively.
C. Consider the company's current overhead application procedure.
1. Is Star emphasizing unit-level activities, batch-level activities, product-sustaining activities, or facility-level activities? Explain.
2. How accurate will the current costing procedure be given the nature of most of the company's activities? Briefly discuss.
3. How accurate will the current costing procedure be given the consumption ratios of the firm? Briefly discuss.

Accepted Answer

The answer of Star Manufacturing, contemplating the adoption of an...

Question 10

Define the term "cost driver" and discuss the factors that are important in the selection of appropriate cost drivers.

Accepted Answer

The answer of Define the term "cost driver" and discuss...

Question 11

Mainville Corporation recently abandoned its traditional production and inventory system in favor of a just-in-time system. The company typically dealt with 50 suppliers and placed 450 orders throughout the year. All other things being equal, which of the following choices denotes a likely scenario under the just-in-time system? $\begin{array} { | r | r | r | } 
\hline & \begin{array} { c } 
\text { Number of } \
\text { Suppliers }
\end{array} & \begin{array} { c } 
\text { Number of } \
\text { Orders }
\end{array} \
\hline \mathbf { 1 } & 50 & 300 \
\mathbf { 2 } & 50 & 800 \
\mathbf { 3 } & 100 & 510 \
\mathbf { 4 } & 120 & 300 \
\mathbf { 5 } & 120 & 800 \
\hline
\end{array}$

Accepted Answer

A) 1. 
B) 2 
C) 3. 
D) 4. 
E) 5.

Question 12

X-Ray Machines Ltd. manufactures three product lines: Standard, Deluxe, and Superior. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below. The following information pertains to the three product lines for next year: $\begin{array}{|l|r|r|r|}
\hline & \text { Standard } & \text { Deluxe } & \text { Supe rior } \
\hline \text { Units to be produced } & 15,000 & 10,000 & 7,000 \
\hline \text { Orders to be shipped } & 1,000 & 500 & 500 \
\hline \text { Number of parts per unit } & 10 & 15 & 25 \
\hline \text { Machine hours per unit } & 3 & 5 & 7 \
\hline \text { Labour hours per unit } & 2 & 2 & 2 \
\hline
\end{array}$ Under an activity-based costing system, what is the per-unit cost of Superior?

Accepted Answer

A) $50.15. 
B) $52.15. 
C) $60.15. 
D) $100.15. 
E) $220.15.

Exam 5: Activity-Based Costing and Management

Many traditional product costing systems:

When a company adopts a just-in-time inventory system, it would expect:

Vanguard combines all manufacturing overhead into a single cost pool and allocates this overhead to products by using machine hours. Activity-based costing would likely show that with Vanguard's current procedures:

The division of activities into unit-level, batch-level, product-sustaining level, and facility-level categories is commonly known as a cost:

Define the term "cost driver" and discuss the factors that are important in the selection of appropriate cost drivers.