Chapter 21 – Cost Management
MULTIPLE CHOICE
1. The major source of information for the activity cost management system is
a.
cost driver analysis.
b.
an activity- based costing system.
c.
a performance measurement system.
d.
product information.
2. Which of the following process dimensions of the activity-based management model deals with
“why”?
a.
resources
b.
cost driver analysis
c.
activities
d.
performance measures
3. Which of the following process dimensions of the activity-based management model deals with
“what”?
a.
resources
b.
cost driver analysis
c.
activities
d.
performance measures
4. Which of the following process dimensions of the activity-based management model deals with “how
well”?
a.
resources
b.
cost driver analysis
c.
activities
d.
performance measures
5. ____ is the process of identifying, describing, and evaluating the activities an organization performs.
a.
Activity inputs
b.
Activity analysis
c.
Cost driver analysis
d.
Value-added activities
6. Which of the following is NOT an expected outcome of activity analysis?
a.
What activities are performed?
b.
How many people perform the activities?
c.
The time and resources required to perform the activities.
d.
All of the above are expected outcomes.
7. ____ are those activities necessary to remain in business.
a.
Activity inputs
b.
Activity outputs
c.
Activity drivers
d.
Value-added activities
8. Which of the following is NOT a necessary condition for classification as a value-added activity?
a.
the activity produces no change of state
b.
the change of state was not achievable by preceding activities
c.
activity enables other activities to be performed
d.
All of the above are necessary conditions.
9. Which of the following is an example of a value-added activity?
a.
supervision of production workers
b.
inspection of products
c.
scheduling of production
d.
All are value-added activities.
10. Which of the following is a reason for managerial activity to be considered a value-added activity?
a.
It is an enabling resource for operational activities that bring about a change of state.
b.
Managing activities brings order by changing the state from uncoordinated activities to
coordinated activities.
c.
Both are reasons for classifying managerial activities as value-added activity.
d.
Neither is a reason for classifying managerial activities as value-added activity.
11. Which of the following is an example of a nonvalue-added manufacturing activity?
a.
assembly
b.
scheduling
c.
finishing
d.
All are value-added activities.
12. Which of the following is a value-added activity?
a.
moving
b.
inspection
c.
processing
d.
waiting
13. ____ is an effort to reduce costs of existing products and processes.
a.
Kaizen costing
b.
Activity elimination
c.
Activity selection
d.
Activity reduction
14. ____ focuses on nonvalue-added activities.
a.
Activity sharing
b.
Activity elimination
c.
Activity selection
d.
Activity reduction
15. Which of the following focuses on the relationship of activity inputs to activity outputs?
a.
activity reduction
b.
quality
c.
time
d.
efficiency
16. A time-and-motion study revealed that it should take 2 hours to produce a product that currently takes
6 hours to produce. Labour is £8 per hour.
The nonvalue-added costs are
a.
£16.
b.
£32.
c.
£48.
d.
£-0-.
Figure 21-1
A company keeps 20 days of materials inventory on hand to avoid shutdowns due to materials
shortages. Carrying costs average £4,000 per day. A competitor keeps 10 days of inventory on hand,
and the competitor’s carrying costs average £2,000 per day.
17. Refer to Figure 21-1. The value-added costs are
a.
£80,000.
b.
£40,000.
c.
£20,000.
d.
£-0-.
18. Refer to Figure 21-1. The nonvalue-added costs for the company are
a.
£80,000.
b.
£40,000.
c.
£20,000.
d.
£-0-.
19. Refer to Figure 21-2. The value-added costs would be
a.
£100,000.
b.
£10,000.
c.
£5,000.
d.
£-0-.
Figure 21-2
A company has 20 days of finished goods inventory on hand to avoid stockouts. The carrying costs of
the inventory average £5,000 per day.
20. Refer to Figure 21-2. The nonvalue-added costs are
a.
£100,000.
b.
£10,000.
c.
£5,000.
d.
£250.
Figure 21-3
A firm’s warranty costs are £125,000 per year. A competitor’s warranty costs are £25,000 per year.
21. Refer to Figure 21-3. The value-added costs are
a.
£125,000.
b.
£100,000.
c.
£25,000.
d.
£-0-.
22. Refer to Figure 21-3. The nonvalue-added costs are
a.
£125,000.
b.
£100,000.
c.
£25,000.
d.
£0.
23. A technique for improving performance of activities and processes that searches for best practices is
called
a.
value-added reporting.
b.
kaizen costing.
c.
trend reporting.
d.
benchmarking.
Figure 21-4
Rollo Company has developed cost formulas for the drivers of the following production activities:
Driver
Activity
Fixed
Labour hours
Materials
-0-
Labour hours
Labour
-0-
Machine hours
Maintenance
10,000
Machine hours
Machining
50,000
Number of setups
Inspections
30,000
Number of setups
Setups
-0-
Number of purchase orders
Purchasing
75,000
24. Refer to Figure 21-4. The budgeted inspection cost for 20 setups is
a.
£175,860.
b.
£40,000.
c.
£34,000.
d.
£30,000.
25. Which of the following is not an objective of activity-based management?
a.
to improve decision making through better cost information
b.
to increase the activity it takes to perform processes
c.
to encourage cost reduction through continuous improvement
d.
to increase profitability
26. Reengineering is another name for
a.
product innovation.
b.
process innovation.
c.
process improvement.
d.
product improvement.
27. Activity-based management attempts to
a.
identify and eliminate all unnecessary activities.
b.
increase the efficiency of necessary activities.
c.
add new activities that increase value.
d.
do all of the above.
28. An activity analysis is used to determine
a.
the activities an organization performs.
b.
how many people perform activities.
c.
the time and resources required to perform activities.
d.
all of the above.
29. Inspecting the components and the finished product is
a.
necessary to assure TQM.
b.
a nonvalue-added activity.
c.
a value-added activity.
d.
none of the above.
30. In a continuous improvement environment, waste includes
a.
inventories.
b.
rework.
c.
setup time.
d.
all of the above.
31. Kaizen costing is
a.
continuous improvement with the objective of cost reduction.
b.
characterized by constant improvements to existing processes and products.
c.
characterized by incremental improvement to existing processes and products.
d.
all of the above.
32. Which of the following describes a kaizen cost reduction process?
a.
It has two process cycles, namely, continuous improvement and maintenance.
b.
It includes a kaizen standard, which is an ideal standard.
c.
A maximum standard is set for future performance based on the current kaizen standard
attained.
d.
both a and c
33. Benchmarking
a.
is an approach to standard setting that is used to identify opportunities for activity
improvement.
b.
uses best practices as the standard for evaluating activity performance.
c.
Both a and b are correct.
d.
Neither a nor b is correct.
34. Product life-cycle costs do NOT include which of the following?
a.
development costs
b.
production costs
c.
costs of logistics support
d.
All of the above are life-cycle costs.
35. Life-cycle cost management is particularly important for firms that have
a.
short life cycles because those firms have less opportunity to take advantage of the time
value of money.
b.
long life cycles because those firms have more opportunity to take advantage of the time
value of money.
c.
long life cycles because those firms have more opportunity to enhance profit performance
through product redesign or cost reduction.
d.
short life cycles because those firms have less opportunity to enhance profit performance
through product redesign or cost reduction.
36. A target cost is
a.
the standard cost.
b.
the difference between the sales price needed to capture a predetermined market share and
the desired per-unit profit.
c.
the long-run average cost over the life cycle of the product.
d.
none of the above.
Figure 21-5
At the beginning of this year, Sammie Company installed a JIT purchasing and manufacturing system.
The following information has been gathered about one of the company’s products:
Current Year
Theoretical annual capacity
2,000
Actual production
1,800
Production hours available
1,000
Scrap (kgs)
200
Materials used (kgs)
6,400
Actual cost per unit
14
Days of inventory
3
Number of defective units
30
37. Refer to Figure 21-5. Sammie’s actual cycle time for this year would be
a.
1.8 hours per unit.
b.
0.90 hours per unit.
c.
0.56 hours per unit.
d.
0.50 hours per unit.
38. Refer to Figure 21-5. Sammie’s theoretical cycle time for this year would be
a.
2.00 hours per unit.
b.
1.80 hours per unit.
c.
0.56 hours per unit.
d.
0.50 hours per unit.
39. Refer to Figure 21-5. Sammie’s defective units as a percentage of total units produced would be
a.
3.16%.
b.
3.00%.
c.
1.67%.
d.
1.50%.
40. Refer to Figure 21-5. Sammie’s goal for defective units as a percentage of total units produced would
be
a.
3.0%.
b.
2.5%.
c.
1.5%.
d.
0%.
41. Which of the following stages comes first?
a.
Introduction
b.
Growth
c.
Development
d.
Decline
42. The majority of the product cost is “locked in” during which of the following life-cycle stages?
a.
Introduction
b.
Growth
c.
Development
d.
Decline
43. The demand-pull system requires goods to be manufactured based on the
a.
current demand.
b.
anticipated demand.
c.
previous year’s demand.
d.
average of the next five years’ demand.
44. Which of the following is TRUE about a manufacturing cell?
a.
There is increased movement of work in process.
b.
It usually produces a particular product or product family.
c.
Workers are highly specialized.
d.
Supervision is important.
45. Cell workers have responsibility over
a.
multiple tasks within the cell.
b.
providing input for continuous improvement.
c.
support activities within the cell.
d.
all of the above.
46. In comparison to a traditional environment, a JIT environment has more overhead assigned by
a.
direct tracing.
b.
driver tracing.
c.
allocation.
d.
Overhead assignment is the same between traditional and JIT.
47. The just-in-time (JIT) approach to inventory management
a.
allows greater flexibility as to when products can be manufactured.
b.
results in higher inventory levels but reduces ordering and setup costs.
c.
results in lower inventory carrying costs.
d.
None of the above are correct.
48. JIT reduces lead times to meet delivery dates by
a.
reducing setup times.
b.
expediting delivery to customers.
c.
having more inventory available.
d.
working overtime to fill orders.
49. JIT avoids shutdowns due to materials shortages in all of the following ways EXCEPT
a.
using total preventive maintenance.
b.
holding inventory.
c.
using total quality control to reduce defective materials.
d.
working with suppliers to ensure the availability of materials.
50. With JIT manufacturing, the major variable cost remaining is
a.
direct materials.
b.
overhead.
c.
inventory.
d.
direct labour.
51. Under JIT, the number and magnitude of direct fixed costs
a.
decreases.
b.
increases.
c.
stays the same.
d.
are eliminated.
52. How can JIT avoid shutdowns?
a.
increase in defective inventory
b.
increase in the number of workers
c.
preventive maintenance
d.
short-term contracts with suppliers
53. A withdrawal Kanban specifies
a.
how much should be produced to replace inventory.
b.
the quantity that a subsequent process should withdraw from the preceding process.
c.
when customers should be notified to pick up orders.
d.
when suppliers should be notified to deliver more parts.
54. The Kanban system is used to
a.
ensure parts or materials are available when needed.
b.
signal when preventive maintenance is needed.
c.
signal when a defective unit has been produced.
d.
ensure idle time of workers is not wasted.
55. The Kanban system controls inventory through the use of
a.
electronic data interchange.
b.
markers or cards.
c.
rigid control of safety stock.
d.
reengineering the production process.
56. ____ are the costs of activities executed to determine if products, processes, and other activities within
the firm are in compliance with appropriate environmental standards.
a.
Environmental prevention costs
b.
Environmental detection costs
c.
Environmental internal failure costs
d.
Environmental external costs
57. ____ are costs of activities performed because contaminants and waste have been produced but not
discharged into the environment.
a.
Environmental prevention costs
b.
Environmental detection costs
c.
Environmental internal failure costs
d.
Environmental external costs
58. ____ are the costs of activities performed after discharging contaminants and waste into the
environment.
a.
Environmental prevention costs
b.
Environmental detection costs
c.
Environmental internal failure costs
d.
Environmental external failure costs
59. Which of the following is NOT a prevention activity?
a.
evaluating and selecting supplies
b.
evaluating and selecting pollution control equipment
c.
auditing environmental activities
d.
designing processes
60. Which of the following is NOT a detection activity?
a.
inspecting products and processes
b.
developing environmental performance measures
c.
testing for contamination
d.
operating pollution control equipment
61. Which of the following is NOT an internal failure activity?
a.
treating and disposing of toxic waste
b.
maintaining pollution equipment
c.
licensing facilities for producing contaminants
d.
cleaning up a polluted lake
62. Which of the following is NOT an external failure activity?
a.
obtaining ISO 14001 certification
b.
cleaning up oil spills
c.
cleaning up contaminated soil
d.
settling personal injury claims (environmentally related)
Figure 21-6
Brad Company developed the following budgeted life-cycle income statement for two proposed
products. Each product’s life cycle is expected to be two years.
Product A
Product B
Sales
£200,000
£200,000
Cost of goods sold
_120,000
_130,000
Gross profit
£ 80,000
£ 70,000
Period expenses:
Research and development
Marketing
Life-cycle income
A 10 per cent return on sales is required for new products. Because the proposed products did not have
a 10 per cent return on sales, the products were going to be dropped.
Relative to Product B, Product A requires more research and development costs but fewer resources to
market the product. Sixty per cent of the research and development costs are traceable to Product A,
and 30 per cent of the marketing costs are traceable to Product A.
63. Refer to Figure 21-6. If research and development costs and marketing costs are traced to each
product, life-cycle income for Product A would be
a.
£38,000.
b.
£27,000.
c.
£23,000.
d.
£15,000.
64. Refer to Figure 21-6. If research and development costs and marketing costs are traced to each
product, life-cycle income for Product B would be
a.
£35,000.
b.
£20,000.
c.
£12,000.
d.
£7,000.
Sales
Cost of goods sold
(120,000)
Gross profit
Traceable expenses:
Research and development
(60% £70,000)
Marketing expenses
(30% £50,000)
Life-cycle income
65. Costs incurred because products or services fail to meet requirements after delivery to customers are
called
a.
external failure costs.
b.
internal failure costs.
c.
appraisal costs.
d.
prevention costs.
66. Over the LONG-TERM, prevention costs are expected to
a.
decrease as failure costs decrease.
b.
increase as failure costs increase.
c.
increase as failure costs decrease.
d.
decrease as failure costs increase.
67. Costs incurred to determine whether products and services are conforming to requirements are called
a.
external failure costs.
b.
internal failure costs.
c.
appraisal costs.
d.
prevention costs.
68. Warranty work is a(n)
a.
prevention cost.
b.
appraisal cost.
c.
internal failure cost.
d.
external failure cost.
69. Labour and overhead incurred for rework of defective products is a(n)
a.
prevention cost.
b.
appraisal cost.
c.
internal failure cost.
d.
external failure cost.
70. Quality training programs are
a.
prevention costs.
b.
appraisal costs.
c.
internal failure costs.
d.
external failure costs.
71. The costs of a consumer complaint department are
a.
prevention costs.
b.
appraisal costs.
c.
internal failure costs.
d.
external failure costs.
72. Inspection labour costs are
a.
prevention costs.
b.
appraisal costs.
c.
internal failure costs.
d.
external failure costs.
73. In the zero-defects view of quality,
a.
control costs do not increase without limit.
b.
control costs initially increase and then decrease as the firm approaches the robust start.
c.
failure costs can be driven to zero.
d.
all of the above are true.
74. Costs incurred because products or services fail to meet requirements after delivery to customers are
called
a.
external failure costs.
b.
internal failure costs.
c.
appraisal costs.
d.
prevention costs.
75. Lower sales due to poor product performance is an example of
a.
external failure costs.
b.
an internal failure cost.
c.
an appraisal cost.
d.
a prevention cost.
76. Downtime attributed to quality problems is a(n)
a.
external failure cost.
b.
internal failure cost.
c.
appraisal cost.
d.
prevention cost.
77. Product recalls are
a.
external failure costs.
b.
internal failure costs.
c.
appraisal costs.
d.
prevention costs.
Figure 21-7
At the beginning of the year, Andrew Company initiated a quality improvement program. The program
was successful in reducing scrap and rework costs. To help assess the impact of the quality
improvement program, the following data were collected for the current and preceding years:
Preceding Year
Current Year
Sales
£2,400,000
£2,400,000
Quality training
30,000
48,000
Material inspections
7,000
8,000
Scrap
48,000
30,000
Rework
60,000
48,000
Product inspection
10,000
12,000
Product warranty
36,000
24,000
78. Refer to Figure 21-7. For the current year, prevention costs are what percentage of sales?
a.
9.00%
b.
8.25%
c.
7.00%
d.
2.00%
79. Refer to Figure 21-7. For the current year, external failure costs are what percentage of sales?
a.
1.5350%
b.
1.1875%
c.
1.0000%
d.
0.8350%
80. Refer to Figure 21-7. If quality costs had been reduced to 2.5 per cent of sales in the current year,
profits would have increased by
a.
£110,000.
b.
£108,400.
c.
£103,200.
d.
£100,200.
Figure 21-8
At the beginning of the year, Grant Company initiated a quality improvement program. The program
was successful in reducing scrap and rework costs. To help assess the impact of the quality
improvement program, the following data were collected for the current and preceding years:
Preceding Year
Current Year
Sales
£3,000,000
£3,000,000
Quality training
3,000
4,500
Material inspections
7,500
12,000
Scrap
60,000
45,000
Rework
120,000
75,000
Product inspection
15,000
30,000
Product warranty
105,000
82,500
81. Refer to Figure 21-8. For the current year, prevention costs are what percentage of sales?
a.
1.50%
b.
0.65%
c.
0.15%
d.
0.05%
82. Refer to Figure 21-8. For the current year, appraisal costs are what percentage of sales?
a.
1.40%
b.
1.00%
c.
0.14%
d.
0.40%
83. Refer to Figure 21-8. As a result of quality improvements, profits have increased by
a.
£97,500.
b.
£61,500.
c.
£22,500.
d.
£15,000.
84. As preventive and appraisal costs increase, internal and external failure costs are expected to
a.
decrease.
b.
increase.
c.
remain the same.
d.
vary with no relation to preventive and appraisal costs.
85. The strategic objectives of JIT are
a.
to increase profits.
b.
to improve a firm’s competitive position.
c.
both a and b.
d.
neither a nor b.
86. Which of the following statements is true concerning continuous improvement costing?
a.
It is also referred to as Kanban costing.
b.
It is a prerequisite for target pricing.
c.
It calls for the establishment of cost reduction targets for products or services.
d.
All of the above statements are true.
87. The word “Kaizen” is Japanese for:
a.
materials pull.
b.
materials push.
c.
continuous improvement.
d.
little car.
88. ____ calls for establishing cost reduction targets for products or services that an organization is
currently providing to customers.
a.
Target costing
b.
Kaizen costing
c.
Process reengineering
d.
Activity-based costing
SHORT ANSWER
1. What is a materials pull (Kanban) system? What is required to make this system work? What are some
of the system’s advantages?
2. Discuss cycle time (and its components) and its importance in JIT.
3. Define value chain. What is the relationship among a value chain, processes, and activities?
PROBLEM
1. Describe how activity-based management and activity-based costing systems differ.