Chapter 6—Activity-Based Costing and Management Key
1. Unit-level activities are performed each time a unit is produced.
2. Factors that measure the consumption of activities by products and other cost objects are value-added costs.
3. Activity drivers should be classified as either internal or external.
4. Product diversity means that products consume overhead activities in systematically different proportions.
5. The consumption ratio is the amount of each activity consumed by a product.
6. An activity-based costing system first traces costs to products and then to activities.
7. A volume-based costing system tends to be allocation-intensive.
8. A production dictionary lists the activities in an organization along with some critical activity attributes.
9. Activity attributes are financial and nonfinancial information items that describe individual activities.
10. A work distribution matrix is derived from an interview or a written survey.
11. Resource drivers are factors that measure the consumption of resources by activities.
12. To calculate an activity rate, the practical capacity of each activity must be determined.
13. Activity input measure is the result or product of an activity.
14. Activity analysis is the effort expended to identify those factors that are the root causes of activity costs.
15. One of the questions answered by activity analysis should be “What activities are done?”
16. Activities necessary to remain in business are called valuable activities.
17. Discretionary activities are necessary to comply with legal mandates.
18. Costs that are caused by the inefficient performance of value-added activities are non-value added costs.
19. The value-added standard is the waste-free component of the value-added activity.
20. One of the three major dimensions of measuring activity performance is quality.
21. One way to improve efficiency is to produce higher activity output with higher cost.
22. Velocity is the reciprocal of cycle time.
23. ____ 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.
24. The identification and elimination of activities that fail to add value refers to:
25. The process of choosing among different sets of activities caused by competing strategies refers to:
26. The process of decreasing the time and resources required by an activity is known as:
27. Increasing the efficiency of necessary activities by using economies of scale is known as:
28. Setups, material handling, and inspection are all possible examples of:
29. ____ is present whenever products have different consumption ratios for different overhead activities.
30. A ____ ratio measures the proportion of an activity consumed by a product.
31. A costing system that first assigns costs to activities and then to products is:
32. A list of activities accompanied by information that describes each activity is an activity ____.
33. ____ are assigned using direct tracing and resource drivers.
34. ____ is concerned with identifying the root causes of activity costs.
35. Which of the following is not one of the three conditions necessary to be classified as a discretionary
activity?
36. ____ activities are unnecessary activities.
37. Using only unit-based activity drivers to assign non-unit-related overhead costs can cause:
38. Activity drivers can be classified as either ____ or ____.
39. In an activity dictionary, types of resources consumed is an example of a(n)
40. A ____ is derived from the interview process (or written survey).
41. To calculate an activity rate, the ____ of each activity must be determined.
42. Which of the following is not a possible source of customer diversity?
43. All of the following are supplier-driven activities except:
44. Which is NOT a component of process value analysis?
45. Complying with the filing requirements of the IRS is an example of a:
46. Which of the following is NOT an example of a nonvalue-added activity?
47. ____ focuses on the relationship of activity inputs to activity outputs.
48. ____ is concerned with doing the activity right the first time it is performed.
49. The time required to produce one unit of a product is the:
50. Interviews and surveys are used to identify:
51. ____ costs typically represent a much higher percentage of product costs than direct labor.
52. ____ can help a company become more competitive by providing more accurate cost data.
53. The activity driver for the shipping activity is the number of orders shipped. Product A uses 20 orders, and
Product B uses 60 orders. Calculate the consumption ratios for each product.
54. Receiving provides 2,000 receiving hours and costs $40,000 per year. What is the activity rate for
receiving?
55. Producing 10,000 units of a cell phone requires $300,000 of prime costs, uses 2,000 machine hours, and
takes 1,200 setup hours. The activity rates are $40 per machine hour and $100 per setup hour. What is the unit
cost of a cell phone?
56. A company has two inspectors, each earning a salary of $75,000. One inspector works exclusively on
inspecting parts received from outside suppliers, while the other spends 30 percent of her time inspecting parts
and 70 percent of her time inspecting final products. How much labor cost should be assigned to the activity,
inspecting parts?
57. Assume that a company takes 5,000 hours to produce 10,000 units of a product. What is the cycle time?
58. A company takes 7,500 hours to produce 15,000 units of a product. What is the velocity?
59. The moving activity has an expected cost of $160,000. Expected direct labor hours are 40,000, and the
expected number of moves is 80,000. The best activity rate for moving is:
60. Last year, Stevita Inc. shipped 3,000,000 kilograms of goods to customers at a cost of $2,400,000. If an
individual customer orders 20,000 kilograms and produces $400,000 of revenue (total revenue is $40 million),
the amount of shipping cost assigned to the customer using activity-based costing would be:
61. 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 nonvalue-added cost?
62. A company spends $25,000 a year for inspecting, $20,000 for purchasing, and $30,000 for reworking
products. A good estimate of nonvalue-added costs would be:
63. Figure 6-1.
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:
Activity
Percentage of Time on Each Activity
Unloading
25%
Counting
40%
Inspecting
35%
Refer to Figure 6-1. Calculate the cost of unloading.
64. Figure 6-1.
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:
Activity
Percentage of Time on Each Activity
Unloading
25%
Counting
40%
Inspecting
35%
Refer to Figure 6-1. Calculate the cost of counting.
65. Figure 6-1.
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:
Activity
Percentage of Time on Each Activity
Unloading
25%
Counting
40%
Inspecting
35%
Refer to Figure 6-1. Calculate the cost for inspection.
66. Figure 6-2.
Mustaine 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:
JIT
Non-JIT
Sales Orders
300
20
Sales Calls
25
25
Service Calls
150
75
Average Order Size
100
1,000
Manufacturing cost/unit
$50
$50
Customer Costs:
Processing Sales Orders
$200,000
Selling Goods
$120,000
Servicing Goods
$150,000
Total
$470,000
Refer to Figure 6-2. Calculate the activity rate for processing sales orders.
67. Figure 6-2.
Mustaine 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:
JIT
Non-JIT
Sales Orders
300
20
Sales Calls
25
25
Service Calls
150
75
Average Order Size
100
1,000
Manufacturing cost/unit
$50
$50
Customer Costs:
Processing Sales Orders
$200,000
Selling Goods
$120,000
Servicing Goods
$150,000
Total
$470,000
Refer to Figure 6-2. Calculate the activity rate for selling goods.
68. Figure 6-2.
Mustaine 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:
JIT
Non-JIT
Sales Orders
300
20
Sales Calls
25
25
Service Calls
150
75
Average Order Size
100
1,000
Manufacturing cost/unit
$50
$50
Customer Costs:
Processing Sales Orders
$200,000
Selling Goods
$120,000
Servicing Goods
$150,000
Total
$470,000
Refer to Figure 6-2. Calculate the activity rate for servicing goods.
69. Figure 6-2.
Mustaine 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:
JIT
Non-JIT
Sales Orders
300
20
Sales Calls
25
25
Service Calls
150
75
Average Order Size
100
1,000
Manufacturing cost/unit
$50
$50
Customer Costs:
Processing Sales Orders
$200,000
Selling Goods
$120,000
Servicing Goods
$150,000
Total
$470,000
Refer to Figure 6-2. Calculate the total customer cost for the JIT distributor.
70. Figure 6-2.
Mustaine 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:
JIT
Non-JIT
Sales Orders
300
20
Sales Calls
25
25
Service Calls
150
75
Average Order Size
100
1,000
Manufacturing cost/unit
$50
$50
Customer Costs:
Processing Sales Orders
$200,000
Selling Goods
$120,000
Servicing Goods
$150,000
Total
$470,000
Refer to Figure 6.2. Calculate the total customer cost for the non-JIT distributor.
71. Figure 6-3.
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 percent of its components from Bello,
because of the lower price. The total annual demand is 75,000 units.
I. Activity Data
Inspecting components (sampling only)
Reworking products (due to failed component)
Warranty work (due to failed component)
II. Supplier Data
Traynor, Inc.
Bello Company
Units 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
Refer to Figure 6.3. Calculate the activity rate for inspecting components based on sampling hours.
72. Figure 6-3.
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 percent of its components from Bello,
because of the lower price. The total annual demand is 75,000 units.
I. Activity Data
Inspecting components (sampling only)
Reworking products (due to failed component)
Warranty work (due to failed component)
II. Supplier Data
Traynor, Inc.
Bello Company
Units 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
Refer to Figure 6.3. Calculate the activity rate for reworking products based on rework hours.
73. Figure 6-3.
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 percent of its components from Bello,
because of the lower price. The total annual demand is 75,000 units.
I. Activity Data
Inspecting components (sampling only)
Reworking products (due to failed component)
Warranty work (due to failed component)
II. Supplier Data
Traynor, Inc.
Bello Company
Units 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
Refer to Figure 6.3. Calculate the activity rate for warranty work based on warranty hours.
74. Figure 6-3.
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 percent of its components from Bello,
because of the lower price. The total annual demand is 75,000 units.
I. Activity Data
Inspecting components (sampling only)
Reworking products (due to failed component)
Warranty work (due to failed component)
II. Supplier Data
Traynor, Inc.
Bello Company
Units 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
Refer to Figure 6.3. Calculate the total activity cost per component associated with using Traynor, Inc., as the supplier.
75. Figure 6-3.
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 percent of its components from Bello,
because of the lower price. The total annual demand is 75,000 units.
I. Activity Data
Inspecting components (sampling only)
Reworking products (due to failed component)
Warranty work (due to failed component)
II. Supplier Data
Traynor, Inc.
Bello Company
Units 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
Refer to Figure 6.3. Calculate the total cost per component associated with using Bello Company as the supplier.
76. Figure 6-3.
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 percent of its components from Bello,
because of the lower price. The total annual demand is 75,000 units.
I. Activity Data
Inspecting components (sampling only)
Reworking products (due to failed component)
Warranty work (due to failed component)
II. Supplier Data
Traynor, Inc.
Bello Company
Units 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
Refer to Figure 6.3. 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.