Chapter 10 – Fundamentals of Cost Management
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• If a cost of quality system is not comprehensive, there is a danger that decisions will be
distorted as managers focus on the costs the system includes but ignore unreported
quality costs.
• Because most accounting systems do not collect the cost of lost business and other
opportunity costs, a cost of quality system is likely to underestimate external failure costs
and lead managers to underinvest in prevention and appraisal activities.
Matching
A.
Activity-based cost management
G.
Normal activity
B.
Appraisal costs
H.
Practical capacity
C.
Conformance to specifications
I.
Prevention costs
D.
Customer expectations of quality
J.
Resources supplied
E.
External failure costs
K.
Theoretical capacity
F.
Internal failure costs
L.
Unused resource capacity
_____ 1. Incurred when nonconforming products and services are detected after being
delivered to customers.
_____ 2. The expenditures or the amounts spent on the activity.
_____ 3. Uses activity analysis to help management make decisions and manage costs.
_____ 4. The degree to which a product or service performs as it is designed (or specified) to
do.
_____ 5. Incurred to prevent defects in the products or services from being produced.
_____ 6. The customer’s anticipated level of product or service.
_____ 7. Incurred to detect individual units of products that do not conform to specifications.
_____ 8. The amount of production possible under ideal conditions with no time for
maintenance, breakdowns, or absenteeism.
_____ 9. The long-run expected volume produced.
_____ 10. The amount of production possible assuming only the expected downtime for
scheduled maintenance and normal breaks and vacations.
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_____ 11. Incurred when nonconforming products and services are detected before being
delivered to customers.
_____ 12. The difference between resources used and resources supplied.
Answers
Chapter 10 – Fundamentals of Cost Management
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Multiple Choice
1. Activity-based management
a. Is an extension of activity-based costing.
b. Requires information about product cost and costs of activities and processes.
c. Distinguishes between value-added and nonvalue-added activities.
d. All of the above.
2. Interest cost associated with a bond issue to support capital expansion is an example of
a. Unit-level costs.
b. Batch-level costs.
c. Product-sustaining costs.
d. Facility-sustaining costs.
3. Customer profitability analysis
a. Tracks revenues only.
b. Relies on activity-based costing.
c. Looks at customers’ buying patterns closely.
d. Both b and c.
4. The cost of suppliers
a. Is the price charged.
b. Takes into account on-time deliveries and quality.
c. Is closely related to the effective price of buying.
d. Both b and c.
The following information is for questions 5 – 6.
An appliance manufacturer can produce 500 washers per day at full capacity. Scheduled
maintenance, downtime, and breaks reduce capacity to 400 washers per day. In May, the
manufacturer only operated 26 days.
5. The theoretical capacity for the month of May was
a. 15,500 units.
b. 15,000 units.
c. 13,000 units.
d. 10,400 units.
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6. The practical capacity for the month of May was
a. 15,500 units.
b. 15,000 units.
c. 13,000 units.
d. 10,400 units.
7. Unused capacity
a. May be used against unexpected demand fluctuations.
b. May be reserved for future expansion.
c. Should be allocated based on theoretical capacity.
d. Both a and b.
8. Practical capacity allows for
a. Unexpected downtime.
b. Scheduled maintenance.
c. Interruptions due to random power failure.
d. Sick leaves.
9. Which of the following statements is correct?
a. Customer expectations represent the external view of quality.
b. Conformance to specifications represents the internal view of quality.
c. There must be a link between both the internal and the external views of quality to be
successful.
d. All of the above.
10. Which of the following is not usually available in the cost of quality report?
a. Prevention costs.
b. Cost of lost business.
c. Appraisal costs.
d. Costs of scrap, rework, and reinspection.
11. What are the steps of activity analysis?
a. Identify the process objectives as defined by customers.
b. Chart the activities used to complete the product.
c. Continuously improve the efficiency of all value-added activities..
d. All of the above.
12. Activity-based income statement
a. Is less informative than the traditional income statement.
b. Classifies costs based on cost hierarchies.
c. Shows only resources supplied.
d. Demonstrates that unit-level costs usually have unused resources.
Chapter 10 – Fundamentals of Cost Management
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Answers