28. Rollo Company has developed cost formulas for the drivers of the following production activities:
Driver
Activity
Fixed
Variable
Labor hours
Materials
-0-
20
Labor hours
Labor
-0-
10
Machine hours
Maintenance
10,000
8
Machine hours
Machining
50,000
2
Number of setups
Inspections
30,000
200
Number of setups
Setups
-0-
300
Number of purchase orders
Purchasing
75,000
3
The budgeted inspection cost for 20 setups is
a.
$175,860.
b.
$40,000.
c.
$34,000.
d.
$30,000.
Figure 7-1.
The receiving department of Owen has three activities: unloading, counting goods, and inspecting.
Unloading requires a forklift that is leased for $15,000 per year. The forklift is used only for
unloading. The fuel for the forklift is $2,000 per year. Inspection requires special testing equipment
that has a depreciation of $500 per year and an operating cost of $1,000 per year. Receiving has four
employees who each have an average salary of $35,000 per year. The work distribution matrix for the
receiving personnel is as follows:
Percentage of Time
Activity
on Each Activity
Unloading
25%
Counting
40%
Inspecting
35%
29. Refer to Figure 7-1. Calculate the cost of unloading.
a.
$50,500
b.
$56,000
c.
$52,000
d.
$54,000
Resource
30. Refer to Figure 7-1. Calculate the cost of counting.
a.
$54,000
b.
$56,000
c.
$52,000
d.
$50,500
31. Refer to Figure 7-1. Calculate the cost for inspection.
a.
$56,000
b.
$54,000
c.
$50,500
d.
$52,000
32. Which of the following is not a possible source of customer diversity?
a.
sales support
b.
order frequency
c.
delivery frequency
d.
geographic distance
e.
Pricing
Figure 7-2.
Steller Manufacturing has two classes of distributors: JIT distributors and non-JIT distributors. The JIT
distributor places small, frequent orders and the non-JIT distributor tends to place larger, less frequent
orders. Both types of distributors purchase the same product. The customer activities and costs for the
previous quarter are found below:
Activity
JIT distributors
Non-JIT distributors
Sales Orders
400
25
Sales Calls
20
20
Service Calls
180
80
Average Order Size
75
1,200
Manufacturing cost/unit
$40
$40
Customer Costs:
Processing Sales Orders
$150,000
Selling Goods
$145,000
Servicing Goods
$185,000
Total
$480,000
33. Refer to Figure 7-2. Calculate the activity rate for processing sales orders.
a.
$330.09 per order
b.
$525 per order
c.
$275.76 per order
d.
$352.94 per order
e.
$342.43 per order
34. Refer to Figure 7-2. Calculate the activity rate for selling goods.
a.
$3,625 per sales call
b.
$3,550 per sales call
c.
$2,200 per sales call
d.
$4,800 per sales call
e.
$9,400 per sales call
35. Refer to Figure 7-2. Calculate the activity rate for servicing goods.
a.
$1,089 per service call
b.
$750.10 per service call
c.
$675.50 per service call
d.
$1,000 per service call
e.
$711.54 per service call
36. Refer to Figure 7-2. Calculate the total customer cost for the JIT distributor.
a.
$487,500
b.
$341,753
c.
$600,000
d.
$250,050
e.
$448,791
37. Refer to Figure 7-2. Calculate the total customer cost for the non-JIT distributor.
a.
$150,025
b.
$122,500
c.
$175,200
d.
$138,247
e.
$178,791
Figure 7-3.
Hamilton Company manufactures engines. Hamilton produces all the parts necessary for its engines
except for one electronic component, which is purchased from two local suppliers: Traynor Inc. and
Bello Company. Both suppliers are reliable and rarely deliver late; however, Traynor sells the
component for $10.00 per unit and Bello sells the same component for $8.95. Hamilton purchases 70%
of its components from Bello, because of the lower price. The total annual demand is 75,000 units.
I. Activity Data
Activity Cost
Inspecting components (sampling only)
$ 190,000
Reworking products (due to failed component)
$2,254,000
Warranty work (due to failed component)
$1,723,000
II. Supplier Data
Traynor
Bello
Inc.
Company
Unit Purchase Price
$10.00
$8.95
Units Purchased
22,500
52,500
Sampling Hours
50
2,450
Rework hours
135
3,625
Warranty hours
475
6,000
38. Refer to Figure 7-3. Calculate the activity rate for inspecting components based on sampling hours.
a.
$78 per hour
b.
$72 per hour
c.
$77.25 per hour
d.
$80 per hour
e.
$76 per hour
39. Refer to Figure 7-3. Calculate the activity rate for reworking products based on rework hours. Round
to the nearest whole dollar.
a.
$599 per hour
b.
$595 per hour
c.
$602 per hour
d.
$605 per hour
e.
$622 per hour
40. Refer to Figure 7-3. Calculate the activity rate for warranty work based on warranty hours. Round to
the nearest whole dollar.
a.
$268 per hour
b.
$266 per hour
c.
$264 per hour
d.
$262 per hour
e.
$287 per hour
41. Refer to Figure 7-3. Calculate the total activity cost per component associated with using Traynor Inc.,
as the supplier.
a.
$15.75
b.
$10.00
c.
$19.38
d.
$20.00
e.
$22.80
42. Refer to Figure 7-3. Calculate the total cost per component associated with using Bello Company as
the supplier.
a.
$12.00
b.
$8.95
c.
$84.26
d.
$15.74
e.
$86.25
43. Refer to Figure 7-3. Suppose that Hamilton loses $2,500,000 in sales per year because of its reputation
for defective units attributable to failed components. Using warranty hours, assign the proportional
cost of lost sales to Traynor Inc. Then determine what effect this would have on the cost per
component.
a.
$4.00 per unit
b.
$25.00 per unit
c.
$8.95 per unit
d.
$8.15 per unit
44. Refer to Figure 7-3. Suppose that Hamilton loses $2,500,000 in sales per year because of its reputation
for defective units attributable to failed components. Using warranty hours, assign the proportional
cost of lost sales to Bello Company. Then determine what effect this would have on the cost per
component.
a.
$20.00 per unit
b.
$11.34 per unit
c.
$55.00 per unit
d.
$44.11 per unit
45. ____ is the length of time required to produce one product; ____ is the number of units that can be
produced in a given period of time.
a.
Cycle time; velocity
b.
Velocity; cycle time
c.
Activity time; cycle production
d.
Cycle time; activity output
e.
Velocity; cycle production
46. The identification and elimination of activities that fail to add value refers to
a.
external failures.
b.
activity reduction.
c.
internal failures.
d.
activity elimination.
47. The process of choosing among different sets of activities caused by competing strategies refers to
a.
activity drivers.
b.
activity inputs.
c.
activity outputs.
d.
activity selection.
48. The process of decreasing the time and resources required by an activity is known as
a.
activity reduction.
b.
activity output measure.
c.
activity attributes.
d.
activity analysis.
49. Increasing the efficiency of necessary activities by using economies of scale is known as
a.
activity inputs.
b.
activity sharing.
c.
control activities.
d.
cycle time.
50. ____ is concerned with identifying the root causes of activity costs.
a.
Direct analysis
b.
Activity analysis
c.
Driver analysis
d.
Causal analysis
e.
None of these.
51. Which of the following is not one of the three conditions necessary to be classified as a discretionary
activity?
a.
the activity produces a change of state
b.
the change of state was not achievable by preceding activities
c.
the activity enables other activities to be performed
d.
the activity increases efficiency
52. ____ activities are unnecessary activities.
a.
Frivolous
b.
Nonvalue-added
c.
Expensive
d.
Under-performing
e.
None of these.
53. All of the following are supplier-driven activities except
a.
receiving.
b.
purchasing.
c.
efficiency.
d.
inspection of incoming components.
54. 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 these.
55. Which is not a component of process value analysis?
a.
driver analysis
b.
velocity
c.
activity analysis
d.
performance measurement
e.
None of these.
56. Complying with the filing requirements of the IRS is an example of a
a.
recreational activity.
b.
discretionary activity.
c.
recommended activity.
d.
required activity.
57. Which of the following is not an example of a nonvalue-added activity?
a.
inspecting
b.
scheduling
c.
moving
d.
waiting
e.
supervising
58. ____ focuses on the relationship of activity inputs to activity outputs.
a.
Activity output measure
b.
Efficiency
c.
Velocity
d.
Activity drivers
e.
None of these.
59. ____ is concerned with doing the activity right the first time it is performed.
a.
Time
b.
Efficiency
c.
Quality
d.
Velocity
e.
None of these.
60. ____ activities are performed in response to poor quality.
a.
Failure
b.
Environmental
c.
Value-added
d.
Control
e.
Prevention
61. Packaging inspection and process acceptance are examples of ____.
a.
external failure costs
b.
prevention costs
c.
internal failure costs
d.
value costs
e.
appraisal costs
62. Field trials and quality engineering are examples of ____.
a.
prevention costs
b.
appraisal costs
c.
failure costs
d.
quality costs
e.
value costs
63. Scrap and retesting are examples of ____ failure costs.
a.
detection
b.
external
c.
internal
d.
appraisal
e.
prevention
64. Environmental costs which the firm is not financially responsible are called ____ costs.
a.
prevention
b.
detection
c.
external
d.
appraisal
e.
societal
65. Assume that a company takes 3,500 hours to produce 10,000 units of a product. What is the cycle
time?
a.
0.45 hour
b.
1 hour
c.
0.5 hour
d.
3 hours
e.
0.35 hour
66. A company takes 8,000 hours to produce 24,000 units of a product. What is the velocity?
a.
1 units per hour
b.
3.5 units per hour
c.
2 units per hour
d.
3 unit per hour
e.
2.5 units per hour
67. Consider the following two activities: (1) performing warranty work, cost: $60,000. The warranty cost
of the most efficient competitor is $10,000. (2) Purchasing components, cost: $100,000 (5,000
purchase orders). A study reveals that the most efficient level would use 2,500 purchase orders and
entail a cost of $55,000.
What is the total nonvalue-added cost?
a.
$55,000
b.
$60,000
c.
$105,000
d.
$100,000
68. A company spends $12,000 a year for inspecting, $41,000 for purchasing, and $22,000 for reworking
products. A good estimate of nonvalue-added costs would be:
a.
$22,000
b.
$34,000
c.
$41,000
d.
$33,000
e.
$55,000
69. A manual process takes 18 minutes of direct labor time and 6 pounds of material to produce a product.
Automating the process requires 12 minutes of machine time and 5 pounds of material. The cost per
labor hour is $9, the cost per machine hour is $7, and the cost per pound of materials is $11.
Find the nonvalue-added cost for the above situation.
a.
$2.40 per unit
b.
$9.00 per unit
c.
$12.30 per unit
d.
$1.70 per unit
70. Using the original design, a machine requires 12 hours of setup time. By redesigning the machine, the
setup time is reduced by 25%. The cost per setup hour is $225. Calculate the reduction in
nonvalue-added cost per setup.
a.
$675 per setup
b.
$225 per setup
c.
$450 per setup
d.
$800 per setup
e.
$2,025
71. A product currently requires 5 moves. By changing the plant layout, the number of moves can be
reduced to 1. The cost per move is $30. Calculate the reduction in nonvalue-added cost of the moving
activity.
a.
$7.50
b.
$30
c.
$0
d.
$120
e.
$150
72. Inspection time for a plant is 10,000 hours per year. The cost of inspection consists of salaries of four
inspectors, totaling $60,000. Inspection also used supplies costing $3 per inspection hour. The
company has a close to zero defect state and has eliminated the need for any inspection activity.
Calculate the nonvalue-added cost of inspection per year.
a.
$30,000
b.
$60,000
c.
$90,000
d.
$120,000
73. Each unit of a product requires four components. The average number of components is 4.25 due to
component failure. Purchasing higher quality components can reduce the average number of
components to four per unit. The cost per component is $350. Calculate the reduction in failure costs
per unit due to purchasing higher quality components.
a.
$43.75
b.
$350
c.
$175
d.
$87.50
e.
$372
74. A plant produces 75 different electronic products. Each product requires an average of six components
that are purchased externally. By redesigning the products, it is possible to produce the 75 products so
that they all have three components in common. This will reduce the demand for purchasing,
receiving, and paying bills. Estimated savings from the reduced demand are $1,200,000 per year.
Calculate the nonvalue-added cost of purchasing, receiving and paying bills.
a.
$1,200,000
b.
$1,000,000
c.
$900,000
d.
$600,000
75. A factory produces 124,000 televisions per quarter. A total of 8,000 production hours are used within
the factory per quarter. Calculate the cycle time in minutes.
a.
3.92
b.
3.87
c.
3.75
d.
3.83
76. A factory produces 124,000 televisions per quarter. A total of 8,000 production hours are used within
the factory per quarter. Compute the velocity in units per hour.
a.
16 units per hour
b.
15 units per hour
c.
15.5 units per hour
d.
18 units per hour
77. Which is not defined as a category of quality-related costs?
a.
prevention
b.
appraisal
c.
internal failure
d.
external failure costs
e.
all of these are categories of quality-related costs
78. Which is defined as a category of quality-related costs?
a.
invention
b.
controller
c.
internal control
d.
external failure
e.
None of these.
79. Costs incurred to determine whether products and services are conforming to their requirements or
customer needs are
a.
prevention costs.
b.
appraisal costs.
c.
internal failure costs.
d.
external failure costs.
e.
a different category of quality related costs.
80. Costs incurred to prevent poor quality in the products or services being produced are
a.
prevention costs.
b.
appraisal costs.
c.
internal failure costs.
d.
external failure costs.
e.
a different category of quality-related costs.
81. Costs incurred when products and services fail to conform to requirements or satisfy customer needs
after being delivered to customers are
a.
prevention costs.
b.
appraisal costs.
c.
internal failure costs.
d.
external failure costs.
e.
a different category of quality-related costs.
82. Costs incurred when products and services prior to being delivered do not conform to specifications or
customer needs are
a.
prevention costs.
b.
appraisal costs.
c.
a different category of quality-related costs.
d.
external failure costs.
e.
internal failure costs.
83. Nonvalue-added activities
a.
are unnecessary inputs.
b.
are valued outputs to internal users.
c.
are valued outputs to external users.
d.
help meet the organization’s needs, not the product needs.
84. Which of the following is a value-added activity?
a.
moving
b.
inspection
c.
processing
d.
waiting
85. The time required to produce one unit of a product is the
a.
efficiency.
b.
velocity.
c.
speed.
d.
cycle time.
PROBLEM
1. Randy Company produces candy sticks (hooked and straight). Both products pass through two
producing departments. The hooked stick’s production is much more labor-intensive than the straight
stick. The straight stick is also more popular. The following data have been gathered for the two
products:
Product Data
Hooked
Straight
Units produced per year
200,000
2,000,000
Direct labor hours
10,000
40,000
Machine hours
10,000
70,000
Total overhead costs equal $400,000. Randy applies overhead based on direct labor hours.
A.
Calculate the plantwide overhead rate based on direct labor hours.
B.
Using the plantwide overhead rate, calculate the overhead cost per unit for hooked
sticks.
C.
Using the plantwide overhead rate, calculate the overhead cost per unit for straight
sticks.
D.
Recalculate the plantwide overhead rate assuming Randy Company applies overhead
based on machine hours.
E.
Assuming the prime costs for hooked sticks $0.47, what is the total cost using the
overhead rate developed in part A?
F.
Assuming the prime costs for hooked sticks $0.47, what is the total cost using the
overhead rate developed in part D?
A.
Plant-wide overhead rate = $400,000/50,000 = $8 per direct labor hour.
Overhead cost per unit hooked sticks = ($8 10,000)/200,000 = $0.40 per unit.
Overhead cost per unit straight sticks = ($8 40,000)/2,000,000 = $0.16 per unit.
D.
Plant-wide overhead rate = $400,000/80,000 = $5 per machine hour.
$0.47 + $0.40 = 0$.87.
Overhead cost per unit hooked sticks = ($5 10,000)/200,000 = $0.25
$0.47 + $.25 = 0.72.
Figure 7-6.
Xander Company produces televisions. One of its plants produces two versions of televisions: a basic
model and a premium model. At the beginning of the year, the following data were prepared for the
plant:
Basic
Premium
Model
Model
Expected Quantity
20,000
10,000
Selling Cost
$90
$200
Prime Costs
$40
$ 80
Machine Hours
2,500
2,500
Number of requisitions
500
1,500
Maintenance hours
2,000
6,000
Number of setups
8
32
Additionally, the following overhead activity costs are reported:
Maintaining equipment
$220,000
Setting up equipment
$112,000
Purchasing materials
$ 87,000
Total
$419,000
Xander uses activity-based costing to calculate product cost.
2. Refer to Figure 7-6.
A.
What is the activity rate for maintaining equipment based on maintenance hours?
B.
What is the activity rate for setting up equipment based on number of setups?
C.
What is the activity rate for purchasing materials based on number of requisitions?
D.
What is the unit cost of the basic model (rounded to the nearest cent)?
E.
What is the unit cost of the premium model (rounded to the nearest cent)?
Basic
Premium