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Chapter 7 - Activity-Based Costing and Management
148. Assume that the accounts payable department of a company has 5 clerks; each one is paid $25,000 per year
($125,000 total clerical salaries). On average, the clerks spend:
20% of their time on processing payments
30% of their time matching invoices, receiving documents, and billing statement
50% of their time correcting errors in the various documents
In addition, long distance telephone costs of $1,700 are directly traced to the activity "correcting errors."
A.
Assign the clerical salary cost to each of the three activities.
B.
What is the total cost of the "correcting errors" activity?
149. Assume that the accounts payable department of a company has 10 clerks; each one is paid $25,000 per year
($250,000 total clerical salaries). Six of the clerks spend the following percentages of time on the three activities:
20% of their time on processing payments
30% of their time matching invoices, receiving documents, and billing statement
50% of their time correcting errors in the various documents
One clerk, the head clerk, spends 50% of her time on administrative duties, and the remainder on error correction. The
remaining three clerks spend 30% of their time on processing payments and the remaining 70% of their time on matching
documents.
Long distance telephone costs of $1,700 are directly traced to the activity "correcting errors."
A.
Assign the clerical salary cost to each of the three activities, and to administration.
B.
What is the total cost of the "correcting errors" activity?
Figure 7-8.
Sallisaw Savings & Loan has requested an analysis of checking account profitability by customer type. Customers are
categorized according to size of their account: low balances, medium balances, and high balances. The activities
associated with the three different customer categories and their associated annual costs are as follows:
Opening and closing statements
$ 100,000
Issuing monthly statements
$ 150,000
Processing transactions
$1,025,000
Customer inquiries
$ 200,000
Chapter 7 - Activity-Based Costing and Management
Providing ATM services
$ 560,000
Total cost
$2,035,000
Additional data concerning the usage of the activities by the various customers are also provided:
Account Balance
Low
Medium
High
Number of accounts opened/closed
7,500
1,500
1,000
Number of statements issued
225,000
50,000
25,000
Processing transactions
9,000,000
1,000,000
250,000
Number of telephone minutes
500,000
300,000
200,000
Number of ATM transactions
675,000
100,000
25,000
Number of checking accounts
19,000
4,000
2,000
150. Refer to Figure 7-8.
A.
Calculate the total number of checking accounts.
B.
Calculate the yearly overall cost per checking account.
C.
Calculate the monthly overall cost per checking account.
151. Refer to Figure 7-8. Sallisaw uses an activity-based costing system. The activity rate for opening and closing
statements is based on the number of accounts opened and closed. The activity rate for issuing monthly statements is
based on the number of statements issued. The activity rate for processing transactions is based on the number of
transactions processed. The activity rate for customer inquiries is based on the number of telephone minutes. The rate for
ATM services is based on the number of ATM transactions.
A.
Calculate the activity rate for opening and closing accounts.
B.
Calculate the activity rate for issuing monthly statements.
C.
Calculate the activity rate for processing transactions.
D.
Calculate the activity rate for customer inquiries.
E.
Calculate the activity rate for providing ATM services.
F.
Calculate the cost per account by customer category using the five activity rates.
G.
Sallisaw Savings & Loan offers free checking to all its customers. Overall, the interest
revenues average $105 per account; however, the interest revenues earned per account by
category are $95, $115, and $180 from the low, medium and high balance accounts,
respectively. Calculate the overall average profit per account. Then calculate the average
profit per account for each of the three customer categories. Refer to part F for the cost
per account by customer category.
Chapter 7 - Activity-Based Costing and Management
152. Heedy Company makes a product using two departments − Department 1 and Department 2. Information on these
departments is as follows:
Department 1
Department 2
Direct labor hours
10,000
90,000
Machine hours
40,000
10,000
Overhead cost
$240,000
$180,000
A.
Calculate the department overhead rate for each department. Use machine hours as the
base in Department 1 and direct labor hours as the base in Department 2.
B.
A job has prime cost of $270. It uses 10 machine hours in Department 1 and 15 direct
labor hours in Department 2. Calculate the total product cost for the job.
C.
Recalculate the department overhead rate for each department. Use direct labor hours as
the base in Department 1 and machine hours as the base in Department 2.
Chapter 7 - Activity-Based Costing and Management
D.
A job has prime cost of $270. It uses 10 direct labor hours in Department 1 and 15
machine hours in Department 2. Using the rates calculated in part C, calculate the total
product cost for the job.
153. Russell Company uses Beltran Company and Southern Express Inc. to buy the electronic chip used in the
manufacturing of its GPS device. Russell Co. has been using these two companies for several years and would like to cut
down to only one supplier to purchase the 1,200,000 chips needed per year. In order to determine which supplier is the
most cost effective Russell Co. compiled the following data:
Activity
Activity Cost
Testing
800,000
Warranty work
3,600,000
Beltran Co.
Southern Express Inc.
Unit price
$ 60
$ 63
Units purchased
865,000
335,000
Testing hours
1,200
550
Warranty hours
5,000
1,400
Required:
A. Calculate the activity rate for each activity. Round your answer to two decimal places.
B. Calculate the cost per chip for each supplier.
C. Which supplier should Russell Company choose?
Chapter 7 - Activity-Based Costing and Management
154. Stinler Corporation manufactures curtains for retail stores and for individual customers. The retail chain buys 70% of
the curtains produced. The individual customers purchase curtains in approximately equal quantities, where the orders are
about the same size. Data concerning Stinler's customer activity are as follows:
Retail Stores
Individual Customers
Units sold
56,000
24,000
Orders placed
8
492
Number of sales calls
4
156
Manufacturing costs
8,000,000
3,500,000
Order filling costs allocated
375,000
225,000
Sales force costs allocated
265,000
135,000
Currently customer-driven costs are assigned to customers based on units sold, a unit-level driver.
Required:
A. Assign costs to customers by using an ABC approach.
B. Determine the selling (order filling and sales force) cost per unit sold for each type of customer.
155. Flynn Company has a JIT system in place. Each manufacturing cell is dedicated to the production of a single product
or major subassembly. One cell, dedicated to the production of guitar pickups, has four operations: machining, finishing,
assembly, and testing.
For the coming year, the pickup cell has the following budgeted costs and cell time (both at theoretical capacity):
Cell time:
8,000 hours
Chapter 7 - Activity-Based Costing and Management
Theoretical output:
60,000 pickups
During the year, the following actual results were obtained:
Actual cell time:
8,000 hours
Actual output:
50,000 pickups
A.
Compute the theoretical velocity for the cell per hour.
B.
Compute the theoretical cycle time in minutes.
C.
Compute the actual velocity for the cell per hour.
D.
Compute the actual cycle time in minutes.
156. Lorimer Company had sales of $2,500,000 for last year. Data on quality-related costs for last year are as follows:
Inspection
$ 80,000
Scrap
10,000
Rework
45,000
Quality training
20,000
Warranty work
100,000
Customer complaints
30,000
A.
Classify each of the quality-related costs as control (prevention and appraisal), internal
failure, or external failure.
B.
What percentage of sales is accounted for by quality-related costs?
C.
If quality-related costs could be reduced to 2% of sales, by how much would Lorimer's
profit increase?
157. Consider the following information on activities:
Amount of
Actual
Driver That
Amount
Cost per unit
Activity (driver)
Should be Used
Used
of driver
Purchasing (purchase orders)
48,000
53,000
$40
Inspection (inspection hours)
0
22,000
$30
Rework (labor hours)
0
13,000
$20
Chapter 7 - Activity-Based Costing and Management
A.
Which of the three activities, if any, is value-added?
B.
What is the nonvalue-added cost of each activity?
C.
What is the total value-added cost of the activities?
158. A company was evaluating the activity-based environmental cost of two different products − Product X and Product
Y. Information on two environmental activities is as follows:
Activity
Driver
Cost
Maintaining pollution equipment
Maintenance hours
$120,000
Toxic waste disposal
Pounds of waste
80,000
Data on Product X and Product Y follows:
Product X
Product Y
Production costs (nonenvironmental)
$400,000
$500,000
Units produced
100,000
200,000
Maintenance hours for pollution equipment
1,000
4,000
Pounds of toxic waste
10,000
30,000
A.
Assign the environmental activity costs to Product X and to Product Y.
B.
Calculate the unit environmental cost of Product X.
C.
Calculate the unit environmental cost of Product Y.
D.
Calculate the overall unit cost of Product X.
E.
Calculate the overall unit cost of Product Y.
Chapter 7 - Activity-Based Costing and Management
159. Browning Manufacturing Company uses activity-based costing. The overhead budget for the coming period is
$1,053,000, consisting of the following:
Budgeted
Cost Pool
Amount
Supervision
$ 320,000
Machine usage
420,000
Machine setups
187,000
Design changes
126,000
Totals
$1,053,000
The potential allocation bases and their estimated amounts were as follows:
Allocation
Budgeted
Base
Amount
Number of design changes
35
Number of setups
110
Machine hours
6,000
Direct labor hours
10,000
A.
Determine the overhead rate for each cost pool, using the most appropriate allocation
base for each pool.
B.
Job 80130 required $45,000 for direct materials, $20,000 for direct labor, 2,000 direct
labor hours, 800 machine hours, five setups, and four design changes. Determine the cost
of Job 80130.
160. Charlotte Company produces folding chairs. It takes the company 18,000 hours to produce 90,000 chairs.
Required:
A. What is the velocity in hours?
B. What is the cycle time in hours?
161. Develop a set of at least five interview questions that could be used in the construction of an activity dictionary. Also
explain why you would ask each question, i.e., what information you hope to acquire and how it would apply to the
activity dictionary.
Chapter 7 - Activity-Based Costing and Management
162. A company has developed a list of quality-related costs as follows:
Year 1
Year 2
Supplier evaluation
$ 0
$ 70,000
Quality training
10,000
50,000
Inspection of finished product
75,000
60,000
Rework
50,000
40,000
Warranty work
120,000
80,000
Sales
$2,000,000
$2,000,000
The company's controller is pleased with the Year 2 results and commented that the company is now on its way toward
total quality. Is the controller right? Explain.
163. The Tilman Corporation has seen a significant increase in the amount spent on such items as warranty and recall
repairs. They would like to be able to reduce these costs and have asked you, the cost accountant, for some advice. What
would be your recommendation?
Chapter 7 - Activity-Based Costing and Management
Match each item with the correct statement below.
a.
activity drivers
b.
activity-based costing system
c.
consumption ratio
d.
unit-level activities
e.
activity attributes
f.
resource drivers
164. Activities that are performed each time a unit is produced.
165. Factors that measure the consumption of activities by products and other cost objects.
166. Financial and nonfinancial information items that describe individual activities.
167. System that emphasizes direct tracing and driver tracing.
168. Factors that measure the consumption of resources by activities.
Match each item with the correct statement below.
a.
activity analysis
b.
value-added costs
c.
velocity
d.
activity inputs
e.
activity output measure
f.
activity output
169. Resources consumed by the activity in producing its output.
170. Result or product of an activity.
171. The number of times an activity is performed.
172. Process that answers the question "How many people perform the activities?"
Chapter 7 - Activity-Based Costing and Management
173. Costs necessary to perform value-added activities with perfect efficiency.
Match each item with the correct statement below.
a.
cycle time
b.
direct tracing
c.
activity sharing
d.
driver tracing
e.
value-added activities
f.
activity selection
174. Involves choosing among different sets of activities that are caused by competing strategies.
175. Increases the efficiency of necessary activities by using economies of scale.
176. The length of time it takes to produce a unit of output from the time raw materials are received until the good is
delivered to finished goods inventory.
177. Activities necessary to remain in business
178. Cost assignment method used for a cost of a resource that is exclusively used by an activity.
