Deck 11: Criticisms of Absorption Cost Systems: Inaccurate Product Costs

Question 1

This is a comprehensive problem comparing absorption costing and ABC.It is suggested that as you progress through the problem,keep track of the correct solutions,because these values will be used again later in the problem set. Dehli Inkstone specializes in inkstone creation.Each finished inkstone needs 1½ pounds of special materials which cost $20 a pound.(One pound contains 16 ounces. )Drilling requires 1 direct labor hour for which workers are paid $10 per hour,and 40 minutes of machine time.The preliminary product (a 'basic')is inspected to ensure that it is sound.Fifteen percent of the basics are rejected.It is not possible to rework these,and they have no salvage value.Each approved stone is handed to a master craftsperson who spends two hours making a 'Standard' product or three hours creating a 'Masterpiece'.Standards use half an hour of machine time and Masterpieces one hour.Finished inkstones are inspected again before packing.Four percent of finished products fail the final quality control assessment and are destroyed.Crafts persons are paid $18 per hour.It takes a 'basic' worker six minutes to package each inkstone in bubble wrap and a shipping carton,which cost 50 cents in materials and weigh 6 ounces in total.
Total overheads are estimated to be $587,400 per year and 97,900 direct labor hours are budgeted.Production plans for the year call for 60% of output to be Standard inkstones and the balance Masterpieces.
Which is the full (absorption)cost of a Standard inkstone,if machine hours are used as the cost driver? (Allow a little for rounding errors).

A)$94.81
B)$101.89
C)$107.25
D)$107.88
E)None of the choices are correct

Answer 1

D

Question 2

Sedona Hats manufactures two different types of hat: Narrow Brim and Wide Brim.The company's overhead costs include $72,000 for machining,$48,000 for machine set-ups,and $36,000 for inspections.Sedona produced 15,000 Narrow Brim hats and 60,000 Wide Brim hats.Sedona's new cost accountant has compiled the following information: If Sedona Hats uses activity-based costing,which of the following is not true?

A)In a traditional unit-based costing environment,Wide Brim hats (the large volume product)would bear a large fraction of costs that vary with the number of batches but do not vary with the number of units produced.
B)The amount of the machine set-up cost applied to Wide Brim hats is $32,000.
C)The amount of overhead applied to Narrow Brim hats is $48,400.
D)If Sedona Hats has an assembling cost pool,the number of parts would be an appropriate cost driver.
E)The $48,000 for machine set-ups is considered a product-level cost.

Answer 2

E

Question 3

Which of the following is a correct matching of terms?

A)Depreciation of equipment is a batch-level cost
B)Cutting a table leg is a unit-level cost
C)Insurance is a product-level cost
D)Package design is a capacity-sustaining cost
E)None of the choices are correct

Answer 3

B

Question 4

This is a comprehensive problem comparing absorption costing and ABC.It is suggested that as you progress through the problem,keep track of the correct solutions,because these values will be used again later in the problem set. Dehli Inkstone specializes in inkstone creation.Each finished inkstone needs 1½ pounds of special materials which cost $20 a pound.(One pound contains 16 ounces. )Drilling requires 1 direct labor hour for which workers are paid $10 per hour,and 40 minutes of machine time.The preliminary product (a 'basic')is inspected to ensure that it is sound.Fifteen percent of the basics are rejected.It is not possible to rework these,and they have no salvage value.Each approved stone is handed to a master craftsperson who spends two hours making a 'Standard' product or three hours creating a 'Masterpiece'.Standards use half an hour of machine time and Masterpieces one hour.Finished inkstones are inspected again before packing.Four percent of finished products fail the final quality control assessment and are destroyed.Crafts persons are paid $18 per hour.It takes a 'basic' worker six minutes to package each inkstone in bubble wrap and a shipping carton,which cost 50 cents in materials and weigh 6 ounces in total.
Total overheads are estimated to be $587,400 per year and 97,900 direct labor hours are budgeted.Production plans for the year call for 60% of output to be Standard inkstones and the balance Masterpieces.
Dehli Inkstone recently employed a cost analyst,who recommended the adoption of an ABC system to obtain a more accurate understanding of the costs of the Standard and Masterpiece products.She has classified the overheads into the following four cost pools and identified the appropriate cost drivers:
Independent of your answers above,assume total planned output is 25,595 units.What is the correct materials handling cost rate?

A)$2.209 per lb.
B)$2.521 per lb.
C)$2.136 per lb.
D)$2.572 per lb.
E)None of the choices are correct

Question 5

This is a comprehensive problem comparing absorption costing and ABC.It is suggested that as you progress through the problem,keep track of the correct solutions,because these values will be used again later in the problem set. Dehli Inkstone specializes in inkstone creation.Each finished inkstone needs 1½ pounds of special materials which cost $20 a pound.(One pound contains 16 ounces. )Drilling requires 1 direct labor hour,for which workers are paid $10 per hour,and 40 minutes of machine time.The preliminary product (a 'basic')is inspected to ensure that it is sound.Fifteen percent of the basics are rejected.It is not possible to rework these,and they have no salvage value.Each approved stone is handed to a master craftsperson who spends two hours making a 'Standard' product or three hours creating a 'Masterpiece'.Standards use half an hour of machine time and Masterpieces one hour.Finished inkstones are inspected again before packing.Four percent of finished products fail the final quality control assessment and are destroyed.Crafts persons are paid $18 per hour.It takes a 'basic' worker six minutes to package each inkstone in bubble wrap and a shipping carton,which cost 50 cents in materials and weigh 6 ounces in total.
Total overheads are estimated to be $587,400 per year and 97,900 direct labor hours are budgeted.Production plans for the year call for 60% of output to be Standard inkstones and the balance Masterpieces.
Which is the full (absorption)cost of a Masterpiece inkstone,if direct labor hours are used as the cost driver? (Allow a little for rounding errors).

A)$133.46
B)$106.47
C)$102.55
D)$96.10
E)None of the choices are correct

Question 6

When traditional absorption costing is employed,which of the following is false?

A)In a multi-product organization,product costs are properly reported for financial reporting purposes
B)In a single product organization,product costs are properly reported for financial reporting purposes
C)In a multi-product organization,product costs are accurately reported for decision-making purposes
D)In a single product organization,product costs are accurately reported for decision-making purposes
E)None of the choices are correct

Question 7

Boulder Mountain manufactures two products,Standard and Deluxe.Boulder Mountain's overhead consists of $5,000,000 for machining and $2,500,000 for assembly.The following information has been complied about the two products: Overhead allocated to Standard using a single overhead rate based on the number of parts and using activity-based costing,respectively,are:

A)$2,700,000 and $2,250,000.
B)$1,875,000 and $2,625,000.
C)$2,400,000 and $2,250,000.
D)$2,150,000 and $2,350,000.
E)$2,400,000 and $2,625,000.

Question 8

This is a comprehensive problem comparing absorption costing and ABC.It is suggested that as you progress through the problem,keep track of the correct solutions,because these values will be used again later in the problem set. Dehli Inkstone specializes in inkstone creation.Each finished inkstone needs 1½ pounds of special materials which cost $20 a pound.(One pound contains 16 ounces. )Drilling requires 1 direct labor hour,for which workers are paid $10 per hour,and 40 minutes of machine time.The preliminary product (a 'basic')is inspected to ensure that it is sound.Fifteen percent of the basics are rejected.It is not possible to rework these,and they have no salvage value.Each approved stone is handed to a master craftsperson who spends two hours making a 'Standard' product or three hours creating a 'Masterpiece'.Standards use half an hour of machine time and Masterpieces one hour.Finished inkstones are inspected again before packing.Four percent of finished products fail the final quality control assessment and are destroyed.Crafts persons are paid $18 per hour.It takes a 'basic' worker six minutes to package each inkstone in bubble wrap and a shipping carton,which cost 50 cents in materials and weigh 6 ounces in total.
Total overheads are estimated to be $587,400 per year and 97,900 direct labor hours are budgeted.Production plans for the year call for 60% of output to be Standard inkstones and the balance Masterpieces.
For a Standard inkstone,which is true of the materials input needed (to 3 significant figures)?

A)Total weight is 2.279 pounds
B)Total weight is 2.213 pounds
C)Total weight is 2.140 pounds
D)Total weight is 1.875 pounds
E)None of the choices are correct

Question 9

This is a comprehensive problem comparing absorption costing and ABC.It is suggested that as you progress through the problem,keep track of the correct solutions,because these values will be used again later in the problem set. Dehli Inkstone specializes in inkstone creation.Each finished inkstone needs 1½ pounds of special materials which cost $20 a pound.(One pound contains 16 ounces. )Drilling requires 1 direct labor hour for which workers are paid $10 per hour,and 40 minutes of machine time.The preliminary product (a 'basic')is inspected to ensure that it is sound.Fifteen percent of the basics are rejected.It is not possible to rework these,and they have no salvage value.Each approved stone is handed to a master craftsperson who spends two hours making a 'Standard' product or three hours creating a 'Masterpiece'.Standards use half an hour of machine time and Masterpieces one hour.Finished inkstones are inspected again before packing.Four percent of finished products fail the final quality control assessment and are destroyed.Crafts persons are paid $18 per hour.It takes a 'basic' worker six minutes to package each inkstone in bubble wrap and a shipping carton,which cost 50 cents in materials and weigh 6 ounces in total.
Total overheads are estimated to be $587,400 per year and 97,900 direct labor hours are budgeted.Production plans for the year call for 60% of output to be Standard inkstones and the balance Masterpieces.
Which is the full (absorption)cost of a Masterpiece inkstone,if direct labor dollars are used as the cost driver? (Round overhead absorption rate to 3 decimal places).

A)$131.01
B)$134.15
C)$121.11
D)$127.87
E)None of the choices are correct

Question 10

For Dehli Inkstone,is it worth implementing a full-fledged ABC system,based upon the findings for these two products?

A)No,for Standard the cost difference between using machine hours and ABC is less than 30 cents per unit,so adoption of the ABC system is not cost-beneficial
B)Yes,all of the single-base allocation systems over cost the Masterpiece
C)No,for Masterpiece the cost difference between using labor hours and ABC is less than 40 cents per unit,so adoption of the ABC system is not cost-beneficial
D)No,the ABC system has failed to reduce total overheads
E)No,the proportions of the different inputs consumed by each product are not sufficiently different to make ABC worthwhile

Question 11

This is a comprehensive problem comparing absorption costing and ABC.It is suggested that as you progress through the problem,keep track of the correct solutions,because these values will be used again later in the problem set. Dehli Inkstone specializes in inkstone creation.Each finished inkstone needs 1½ pounds of special materials which cost $20 a pound.(One pound contains 16 ounces. )Drilling requires 1 direct labor hour for which workers are paid $10 per hour,and 40 minutes of machine time.The preliminary product (a 'basic')is inspected to ensure that it is sound.Fifteen percent of the basics are rejected.It is not possible to rework these,and they have no salvage value.Each approved stone is handed to a master craftsperson who spends two hours making a 'Standard' product or three hours creating a 'Masterpiece'.Standards use half an hour of machine time and Masterpieces one hour.Finished inkstones are inspected again before packing.Four percent of finished products fail the final quality control assessment and are destroyed.Crafts persons are paid $18 per hour.It takes a 'basic' worker six minutes to package each inkstone in bubble wrap and a shipping carton,which cost 50 cents in materials and weigh 6 ounces in total.
Total overheads are estimated to be $587,400 per year and 97,900 direct labor hours are budgeted.Production plans for the year call for 60% of output to be Standard inkstones and the balance Masterpieces.
Dehli Inkstone recently employed a cost analyst,who recommended the adoption of an ABC system to obtain a more accurate understanding of the costs of the Standard and Masterpiece products.She has classified the overheads into the following four cost pools and identified the appropriate cost drivers:
What is true when ABC is used in Dehli Inkstone?

A)Machine operations costs run $5.025 per machine hour
B)Labor-related costs are $0.143 per direct labor dollar
C)Inspection costs are $1.891 per inspection
D)Labor-based overheads are 19.6% per direct labor dollar
E)None of the choices are correct

Question 12

This is a comprehensive problem comparing absorption costing and ABC.It is suggested that as you progress through the problem,keep track of the correct solutions,because these values will be used again later in the problem set. Dehli Inkstone specializes in inkstone creation.Each finished inkstone needs 1½ pounds of special materials which cost $20 a pound.(One pound contains 16 ounces. )Drilling requires 1 direct labor hour for which workers are paid $10 per hour,and 40 minutes of machine time.The preliminary product (a 'basic')is inspected to ensure that it is sound.Fifteen percent of the basics are rejected.It is not possible to rework these,and they have no salvage value.Each approved stone is handed to a master craftsperson who spends two hours making a 'Standard' product or three hours creating a 'Masterpiece'.Standards use half an hour of machine time and Masterpieces one hour.Finished inkstones are inspected again before packing.Four percent of finished products fail the final quality control assessment and are destroyed.Crafts persons are paid $18 per hour.It takes a 'basic' worker six minutes to package each inkstone in bubble wrap and a shipping carton,which cost 50 cents in materials and weigh 6 ounces in total.
Total overheads are estimated to be $587,400 per year and 97,900 direct labor hours are budgeted.Production plans for the year call for 60% of output to be Standard inkstones and the balance Masterpieces.
Dehli Inkstone recently employed a cost analyst,who recommended the adoption of an ABC system to obtain a more accurate understanding of the costs of the Standard and Masterpiece products.She has classified the overheads into the following four cost pools and identified the appropriate cost drivers:
What is true when ABC is used?

A)The full cost of the Masterpiece is $132.96
B)Prime cost of the Standard is $50.75
C)The full cost of the Standard is $107.43
D)ABC overheads allocated to Masterpiece total $25.52
E)None of the choices are correct

Question 13

This is a comprehensive problem comparing absorption costing and ABC.It is suggested that as you progress through the problem,keep track of the correct solutions,because these values will be used again later in the problem set. Dehli Inkstone specializes in inkstone creation.Each finished inkstone needs 1½ pounds of special materials which cost $20 a pound.(One pound contains 16 ounces. )Drilling requires 1 direct labor hour,for which workers are paid $10 per hour,and 40 minutes of machine time.The preliminary product (a 'basic')is inspected to ensure that it is sound.Fifteen percent of the basics are rejected.It is not possible to rework these,and they have no salvage value.Each approved stone is handed to a master craftsperson who spends two hours making a 'Standard' product or three hours creating a 'Masterpiece'.Standards use half an hour of machine time and Masterpieces one hour.Finished inkstones are inspected again before packing.Four percent of finished products fail the final quality control assessment and are destroyed.Crafts persons are paid $18 per hour.It takes a 'basic' worker six minutes to package each inkstone in bubble wrap and a shipping carton,which cost 50 cents in materials and weigh 6 ounces in total.
Total overheads are estimated to be $587,400 per year and 97,900 direct labor hours are budgeted.Production plans for the year call for 60% of output to be Standard inkstones and the balance Masterpieces.
For a Standard inkstone,which is true of the machine hours (MH)needed (to 3 decimal places)?

A)Total MH are 1.188
B)Total MH are 1.305
C)Total MH are 1.338
D)Total MH are 1.397
E)None of the choices are correct

Question 14

This is a comprehensive problem comparing absorption costing and ABC.It is suggested that as you progress through the problem,keep track of the correct solutions,because these values will be used again later in the problem set. Dehli Inkstone specializes in inkstone creation.Each finished inkstone needs 1½ pounds of special materials which cost $20 a pound.(One pound contains 16 ounces. )Drilling requires 1 direct labor hour,for which workers are paid $10 per hour,and 40 minutes of machine time.The preliminary product (a 'basic')is inspected to ensure that it is sound.Fifteen percent of the basics are rejected.It is not possible to rework these,and they have no salvage value.Each approved stone is handed to a master craftsperson who spends two hours making a 'Standard' product or three hours creating a 'Masterpiece'.Standards use half an hour of machine time and Masterpieces one hour.Finished inkstones are inspected again before packing.Four percent of finished products fail the final quality control assessment and are destroyed.Crafts persons are paid $18 per hour.It takes a 'basic' worker six minutes to package each inkstone in bubble wrap and a shipping carton,which cost 50 cents in materials and weigh 6 ounces in total.
Total overheads are estimated to be $587,400 per year and 97,900 direct labor hours are budgeted.Production plans for the year call for 60% of output to be Standard inkstones and the balance Masterpieces.
For a Masterpiece inkstone,which is true of the direct labor hours (DLH)needed (to 3 decimal places)?

A)Total DLH are 4.100
B)Total DLH are 4.401
C)Total DLH are 4.406
D)Total DLH are 4.450
E)None of the choices are correct