Question 1

Practical capacity:

Accepted Answer

A) cannot be altered unless there is a major plant expansion. 
B) may increase over time due to improvements in plant layout. 
C) may decrease over time due to efficiencies offered by new technologies. 
D) Both A and B are correct.

Question 2

When actual production is below practical capacity,there is unused capacity in the distribution function as well as in the production function.

Accepted Answer

A) True 
 B)False

Question 3

Value engineering has the objective of reducing costs while still satisfying customer needs.

Accepted Answer

A) True 
 B)False

Question 4

Life-cycle budgeting and life-cycle costing help highlight:

Accepted Answer

A) large ordering costs due to the great number of component parts used. 
B) an increase in customer-service costs due to using inferior materials. 
C) an increase in annual operating profit resulting from the new product. 
D) high production costs caused by a complex design.

Question 5

When managers measure capacity on the assumption that the entity is capable of producing at 100% efficiency all the time,that is,24 hours a day,seven days a week,this represents theoretical capacity.

Accepted Answer

A) True 
 B)False

Question 6

It is most difficult to estimate ________ because of the need to predict demand for the next few years.

Accepted Answer

A) normal capacity utilisation 
B) practical capacity 
C) budgeted capacity utilisation 
D) theoretical capacity

Question 7

Match between columns
                        Premises: Reduces theoretical capacity by considering unavoidable operating interruptions
Producing at full efficiency all the time
Measures capacity levels in terms of demand
Level of capacity utilisation that satisfies average customer demand over a period
Does not allow for plant maintenance
Engineering and human resource factors are important when estimating capacity
Level of capacity utilisation that managers expect for the current budget period
Ideal goal of capacity utilisation
Takes into account seasonal, cyclical, and trend factors
Measures capacity levels in terms of what a plant can supply

Accepted Answer

The Answer of Theoretical capacity and Practical capacity and Normal is...

Question 8

Which of the following is not a value engineering method of reducing costs?

Accepted Answer

A) Simplifying the design and thereby decreasing the number of component parts 
B) Building efficiencies into value-added costs 
C) Reducing the number of features offered 
D) Redesigning alternative options over and over until the wishes of all cross-functional team members are accommodated

Question 9

Answer the following questions using the information below:
Elliott Manufacturing has decided to produce a new interior door to complement its exterior door line.The new door is expected to sell for $60 each,and the annual target sales volume for the doors is 20 000.Elliott has target operating profit of 20% of sales.
-The product strategy in which companies first determine the price at which they can sell a new product and then design a product that can be produced at a low enough cost to provide adequate operating profit is referred to as:

Accepted Answer

A) full costing. 
B) cost-plus pricing. 
C) target costing. 
D) Kaizen costing.

Question 10

By selecting the practical capacity concept,management recognises that the cost of capacity is represented by the cost of supplying the capacity,regardless of the demand for it.

Accepted Answer

A) True 
 B)False

Question 11

Using 'practical capacity' is best for evaluating the marketing manager's performance for a particular year.

Accepted Answer

A) True 
 B)False

Question 12

________ capacity utilisation is the level of capacity that managers expect to be used for the current budget period,which is typically one year.

Accepted Answer

A) Budgeted 
B) Actual 
C) Master 
D) Theoretical

Question 13

Answer the following questions using the information below:
Elliott Manufacturing has decided to produce a new interior door to complement its exterior door line.The new door is expected to sell for $60 each,and the annual target sales volume for the doors is 20 000.Elliott has target operating profit of 20% of sales.
-What are target sales revenues?

Accepted Answer

A) $960 000 
B) $2 000 000 
C) $1 200 000 
D) None of these answers are correct.

Question 14

'Unused capacity' is considered wasted resources and the result of poor planning.

Accepted Answer

A) True 
 B)False

Question 15

Theoretical capacity:

Accepted Answer

A) when used for product costing,results in the lowest cost estimate of the four capacity options. 
B) represents real capacity available to the company. 
C) provides the best perspective of actual long-run costs. 
D) replicates the cost of capacity in a competitor's cost structure.

Question 16

Target pricing:

Accepted Answer

A) estimates are based on customers' perceived value of the product. 
B) is used for short-term pricing decisions. 
C) is one form of cost-based pricing. 
D) refers to the fact that relevant costs are all variable costs.

Question 17

Although an average of demand and production over the previous ______ years is a reasonably objective starting point for estimating normal capacity utilisation,answers to the question as to what is 'normal' can be influenced by subjectivity.

Accepted Answer

A) 1-2 
B) 5-10 
C) 8-12 
D) 3-5

Question 18

Answer the following questions using the information below:
Waugh,Chapple,Border and Associates is in the process of evaluating its new client services for the business consulting division.
∙ Estate planning,a new service,incurred $600 000 in development costs and employee training.
∙ The direct costs of providing this service,which is all labour,averages $100 per hour.
∙ Other costs for this service are estimated at $2 000 000 per year.
∙ The current program for estate planning is expected to last for two years.At that time,a new law will be in place that will require new operating guidelines for the tax consulting.
∙ Customer service expenses average $400 per client,with each job lasting an average of 400 hours.The current staff expects to bill 40 000 hours for each of the two years the program is in effect.Billing averages $140 per hour.
-What is the estimated life-cycle operating profit for the first year?

Accepted Answer

A) $(1 040 000) 
B) $6 640 000 
C) $(1 400 000) 
D) $5 600 000

Question 19

Answer the following questions using the information below:
Ace Books Company currently sells eBook readers for $270.It has costs of $210.A competitor is bringing a new eBook reader to market that will sell for $225.Management believes it must lower the price to $225 to compete in the market for eBook readers.Marketing believes that the new price will cause sales to increase by 10%,even with a new competitor in the market.Ace's sales are currently 10 000 eBook readers per year.
-What is the target cost if the company wants to maintain its same profit level,and Marketing is correct (rounded to the nearest cent)?

Accepted Answer

A) $168.75 
B) $170.46 
C) $210.00 
D) $185.00

Question 20

Activity analysis is a fundamental tool in value engineering,the systematic evaluation of all aspects of the value chain with the objective of reducing costs and achieving a quality level that satisfies customers.

Accepted Answer

A) True 
 B)False

Exam 7: Target Costing, Managing Activities and Managing Capacity

Practical capacity:

When actual production is below practical capacity,there is unused capacity in the distribution function as well as in the production function.

Value engineering has the objective of reducing costs while still satisfying customer needs.

Life-cycle budgeting and life-cycle costing help highlight:

When managers measure capacity on the assumption that the entity is capable of producing at 100% efficiency all the time,that is,24 hours a day,seven days a week,this represents theoretical capacity.

It is most difficult to estimate ________ because of the need to predict demand for the next few years.

Match each of the following descriptor items to denominator-level capacity concepts

Which of the following is not a value engineering method of reducing costs?

By selecting the practical capacity concept,management recognises that the cost of capacity is represented by the cost of supplying the capacity,regardless of the demand for it.

Using 'practical capacity' is best for evaluating the marketing manager's performance for a particular year.

________ capacity utilisation is the level of capacity that managers expect to be used for the current budget period,which is typically one year.

'Unused capacity' is considered wasted resources and the result of poor planning.

Theoretical capacity:

Target pricing:

Although an average of demand and production over the previous ______ years is a reasonably objective starting point for estimating normal capacity utilisation,answers to the question as to what is 'normal' can be influenced by subjectivity.

Activity analysis is a fundamental tool in value engineering,the systematic evaluation of all aspects of the value chain with the objective of reducing costs and achieving a quality level that satisfies customers.