Chapter 7 – Activity-Based Costing and Management
c.
internal
d.
appraisal
e.
prevention
c
117. Environmental costs for which the firm is not financially responsible are called ____ costs.
a.
prevention
b.
detection
c.
external
d.
appraisal
e.
societal
e
118. 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
Cycle time: 3,500 / 10,000 = 0.35 hour
119. 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
Velocity: 24,000 / 8,000 = 3 units per hour
120. 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
Chapter 7 – Activity-Based Costing and Management
121. 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
Inspecting and reworking are generally nonvalue-added. Thus: $12,000 + $22,000 = $34,000
122. 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
123. 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
124. 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
Chapter 7 – Activity-Based Costing and Management
125. 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
$60,000 + ($3 × 10,000) = $90,000
126. 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
(4.25 − 4.00) × $350 = $87.50
127. 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
The problem states that “Estimated savings from the reduced demand are $1,200,000 per year.”
128. 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
129. 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.
Chapter 7 – Activity-Based Costing and Management
a.
16 units per hour
b.
15 units per hour
c.
15.5 units per hour
d.
18 units per hour
124,000 / 8,000 = 15.5 units per hour
130. 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
e
131. Which is defined as a category of quality-related costs?
a.
invention
b.
controller
c.
internal control
d.
external failure
e.
None of these.
132. 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.
133. 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.
a
134. 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.
Chapter 7 – Activity-Based Costing and Management
d.
external failure costs.
e.
a different category of quality-related costs.
135. 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.
e
136. 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.
a
137. Which of the following is a value-added activity?
a.
moving
b.
inspection
c.
processing
d.
waiting
c
138. The time required to produce one unit of a product is the
a.
efficiency.
b.
velocity.
c.
speed.
d.
cycle time.
139. 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.
Chapter 7 – Activity-Based Costing and Management
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.
B.
Overhead cost per unit hooked sticks = ($8 × 10,000) / 200,000 = $0.40 per unit.
C.
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.
E.
$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.
140. 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)?
A.
Equipment maintenance rate = $220,000 / 8,000 = $27.50 per
B.
Setting up equipment rate = $112,000 / 40 = $2,800 per setup.
C.
Purchasing rate = $87,000 / 2,000 = $43.50 per requisition.
Chapter 7 – Activity-Based Costing and Management
D.
Unit cost of basic model:
Prime Costs
Maintenance
($27.50 × 2,000) / 20,000
Setups
($2,800 × 8) / 20,000
Purchasing
($43.50 × 500) / 20,000
Unit cost of basic
Unit cost of premium model:
Prime Costs
Maintenance
($27.50 × 6,000) / 10,000
Setups
($2,800 × 32) / 10,000
Purchasing
($43.50 × 1,500) / 10,000
Unit cost of basic
141. Refer to Figure 7-6.
A.
What is the plantwide overhead rate based on machine hours?
B.
Assuming a plantwide overhead rate, what is the unit cost of the basic model?
C.
Assuming a plantwide overhead rate, what is the unit cost of the premium model?
B.
Unit cost of basic model:
Prime cost
Applied overhead
($83.80 × 2,500) / 20,000
Total unit cost
C.
Unit cost of premium model:
Prime cost
Applied overhead
($83.80 × 2,500) / 10,000
Total unit cost
142. Taylor Corporation produces two models of their leather brief cases: deluxe and standard. The four activities and
four drivers are as follows:
Hours
Activities:
Cost
Driver
Deluxe
Standard
Total
Cutting
$ 96,000
Cutting hours
2,200
1,300
3,500
Assembling
42,000
Assembly hours
1,150
980
2,130
Inspecting
15,000
Inspection hours
800
500
1,300
Reworking
8,000
Rework hours
20
35
55
Required:
A. Calculate the consumption ratios for the four drivers, rounding to 2 decimal places.
Chapter 7 – Activity-Based Costing and Management
B. Calculate the activity rates that would be used to assign costs to each product. Round your answer to two decimal
places.
C. Calculate the unit cost assuming that 500 deluxe models were produced and 700 standard models were produced,
rounded to the nearest cent.
Cutting hours
Assembly hours
Inspection hours
Rework hours
Cutting
Assembling
42,000
Inspecting
15,000
Reworking
145.45
Deluxe
Standard
Figure 7-7.
Armstrong Company produces a variety of bicycles. One of its plants produces two bicycles: a mountain model and a
racing model. At the beginning of the year, the following data were prepared for this plant:
Mountain
Racing
Quantity
250,000
125,000
Selling Price
$1,200
$1,000
Unit Prime Cost
$ 400
$ 500
In addition, the following information was provided so that overhead costs could be assigned to each product:
Activity Name
Activity Driver
Activity Cost
Racing
Mountain
Machining
Machine hours
$20,000,000
250,000
250,000
Engineering
Engineering hours
$ 8,000,000
75,000
50,000
Packing
Packing orders
$ 3,500,000
50,000
125,000
143. Refer to Figure 7-7.
A.
Calculate the activity rate for machining.
B.
Calculate the activity rate for engineering.
C.
Calculate the activity rate for packing.
A.
Machining rate= $20,000,000 / 500,000 = $40 per machine hour.
B.
Engineering rate = $8,000,000 / 125,000 = $64 per engineering hour.
C.
Packing rate = $3,500,000 / 175,000 = $20 per packing order.
Chapter 7 – Activity-Based Costing and Management
144. Refer to Figure 7-7. Armstrong Company uses activity-based costing to calculate product costs.
A.
Calculate the per unit product cost for a mountain bike.
B.
Calculate the per unit product cost for a racing bike.
C.
Assume Armstrong Company adds 40% to the cost of a mountain bike and 35% to the
cost of a racing bike obtain the selling prices. Calculate the selling prices for a mountain
bike and a racing bike.
A.
Mountain bike product cost per unit = $463.20.
B.
Racing bike product cost per unit = $625.60.
Packing rate = $3,500,000 / (50,000 + 125,000) = $20 per packing order.
Calculation of unit product costs:
Machining:
Engineering:
Packing:
Total Overhead
Units
Overhead per unit
Prime cost per unit
Unit Cost
C.
Mountain bike product cost per unit = $463.20 × 1.4 = $648.48
Racing bike product cost per unit = $625.60 × 1.35 = $844.56
145. Tires Unlimited Corp. produces two types of tires, regular and snow tires. The company uses activity-based costing
and has identified two activities and their budgeted costs:
Molding
$ 75,000
Assembly
$ 260,000
Molding is based on mixing hours and assembly is based on machine hours. Information regarding each product is as
follows:
Regular tire
Snow tire
Units produced
5,000
2,000
Mixing hours
525
275
Machine hours
1,000
460
Required:
Chapter 7 – Activity-Based Costing and Management
A. Calculate the activity rate for molding and assembly. Round your answer to two decimal places.
B. Calculate how much total overhead is assigned to each type of tire.
C. Calculate the unit overhead assigned to each type of tire.
D. Assume the company does not use ABC costing. Calculate the plantwide overhead rate, based on machine hours.
Round your answer to two decimal places.
E. Calculate the total overhead assigned to each type of tire using the plantwide overhead rate.
$75,000 / 800 =
$260,000 / 1,460 =
× 525 =
× 1,000 =
× 275 =
× 460 =
Unit cost
$227,298.75 / 5000 = $45.46
$107,699.06 / 2,000 = $53.85
Plantwide overhead rate
$335,000 / 1,460 =
$229.45 × 1,000 = $229,450
$229.45 × 460 = $105,547
146. Randy Company produces candy sticks (hooked and straight). Both products pass through two producing
departments. The hooked sticks’s production is much more labor-intensive than the straight sticks. 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
Machine hours
10,000
40,000
Packing orders
30,000
30,000
Randy has decided to use activity-based costing and has developed two types of activities, machine related (based on
machine hours), and other overhead (based on packing orders). Machine-related costs equal $160,000. Other overhead
costs equal $240,000.
A.
Calculate the activity rate for machine-related costs based on machine hours.
Chapter 7 – Activity-Based Costing and Management
B.
Calculate the activity rate for other overhead costs based on packing orders.
C.
Using the two activity rates, calculate the overhead cost per unit for hooked sticks. (Carry
out computations to three decimal places.)
D.
Using the two activity rates, calculate the overhead cost per unit for straight sticks. (Carry
out computations to three decimal places.)
A.
Machine-related rate = $160,000 / (10,000 + 40,000) = $3.20 per machine hour.
B.
Other overhead rate = $240,000 / (30,000 + 30,000) = $4.00 per packing order.
C.
Overhead cost per unit for Hooked
= [($3.20 × 10,000) + ($4 × 30,000)] / 200,000
= $0.76
D.
Overhead cost per unit for Straight
= [($3.20 × 40,000) + ($4 × 30,000)] / 2,000,000
= $0.124
147. The Thompson Company uses activity-based costing to determine product cost. Three activities and their rates have
been calculated as shown below.
Setting up equipment
= $500 per setup
Moving goods
= $20 per move
Machining
= $4 per machine hour
Thompson provided the following data from the job order cost sheet for Job #345
Direct materials
$2,000
Direct labor
1,800
Setups
1
Moves
30
Machine hours
900
A.
Calculate the overhead applied to Job #345.
B.
Calculate the total cost of Job #345.
C.
If price is calculated by applying a 30% markup on cost, what is the price for Job #345?
D.
Assume Job #345 required two setups, 15 moves, and 700 machine hours. Calculate the
overhead applied to Job #345.
E.
Assuming a 50% markup on cost, what is the price of Job #345 using the overhead rate
calculated in part D.
A.
Overhead applied = ($500 × 1) + ($20 × 30) + ($4 × 900) = $4,700
B.
Direct materials
$2,000
Direct labor
1,800
Applied overhead
4,700
Total cost
$8,500
C.
Price = $8,500 × 1.30 = $11,050
D.
Overhead applied = ($500 × 2) + ($20 × 15) + ($4 × 700) = $4,100
Price = ($2,000 + $1,800 + $4,100) × 1.50 = $11,850