Which would be an appropriate cost driver for the machining activity cost pool

TRUE-FALSE STATEMENTS

1. Traditional costing systems use multiple predetermined overhead rates.

   Inhaltsverzeichnis Show

   • TRUE-FALSE STATEMENTS
   • 6 COMPLETION STATEMENTS
   • Which would be an appropriate cost driver for the machine activity cost pool?
   • What is the cost driver for machining activity?
   • What is the most appropriate cost driver?
   • What is an example of an activity cost pool?

2. Traditionally, overhead is allocated based on direct labor cost or direct labor hours.

3. Current trends in manufacturing include less direct labor and more overhead.

4. Activity-based costing allocates overhead to multiple cost pools and assigns the cost pools to products using cost drivers.

5. A cost driver does not generally have a direct cause-effect relationship with the resources consumed.

6. The first step in activity-based costing is to assign overhead costs to products, using cost drivers.

7. To achieve accurate costing, a high degree of correlation must exist between the cost driver and the actual consumption of the activity cost pool.

8. Low-volume products often require more special handling than high-volume products.

9. When overhead is properly assigned in ABC, it will usually decrease the unit cost of high- volume products.

10. ABC leads to enhanced control over overhead costs.

11. ABC usually results in less appropriate management decisions.

12. ABC is generally more costly to implement than traditional costing.

13. ABC eliminates all arbitrary cost allocations.

14. ABC is particularly useful when product lines differ greatly in volume and manufacturing complexity.

15. ABC is particularly useful when overhead costs are an insignificant portion of total costs.

16. Activity-based management focuses on reducing costs and improving processes.

17. Any activity that increases the cost of producing a product is a value-added activity.

18. Engineering design is a value-added activity.

19. Nonvalue-added activities increase the cost of a product but not its market value.

20. Machining is a nonvalue-added activity.

21. Not all activities labeled nonvalue-added are totally wasteful, nor can they be totally

4- Test Bank for Managerial Accounting, Second Edition 2 eliminated.

1. The overall objective of installing ABC in service firms is no different than it is in a manufacturing company.

2. What sometimes makes implementation of activity-based costing difficult in service industries is that a smaller proportion of overhead costs are company-wide costs.

3. The general approach to identifying activities, activity cost pools, and cost drivers is used by a service company in the same manner as a manufacturing company.

4. Inventory storage costs are reduced in just-in-time processing.

5. Rework costs typically increase in just-in-time processing.

6. Just-in-time strives to eliminate inventories by using a pull approach.

7. Quality control is less important in just-in-time than in traditional manufacturing philosophies.

*29. Plant management is a batch-level activity.

*30. Painting is a product-level activity.

Answers to True-False Statements

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. 1. F 6. F 11. F 16. T 21. T 26. F 2. T 7. T 12. T 17. F 22. T 27. T 3. T 8. T 13. F 18. T 23. F 28. F 4. T 9. F 14. T 19. T 24. T *29. F 5. F 10. T 15. F 20. F 25. T *30. F

4- Test Bank for Managerial Accounting, Second Edition 4

1. As compared to a high-volume product, a low-volume product a. usually requires less special handling. b. is usually responsible for more overhead costs per unit. c. requires relatively fewer machine setups. d. requires use of direct labor hours as the primary cost driver to ensure proper allocation of overhead.

2. In Japan, a. activity-based costing is used more than in the U. b. companies prefer volume measures such as direct labor hours to assign overhead

costs. c. labor cost reduction is less of a priority. d more accurate product costs is more of a priority.

Use the following information to answer questions 41–44.

Robot Toy Company manufactures two products, X-O-Tron and Mechoman. Robot's overhead costs consist of setting up machines, $400,000; machining, $900,000; and inspecting, $300,000. Information on the two products is: X-O-Tron Mechoman Direct labor hours 15,000 25, Machine setups 600 400 Machine hours 24,000 26, Inspections 800 700

1. Overhead applied to X-O-Tron using traditional costing is

a. $600,000. b. $768,000.

c. $832,000. d. $960,000.

1. Overhead applied to Mechoman using traditional costing is

a. $640,000. b. $768,000.

c. $832,000. d. $1,000,000.

1. Overhead applied to X-O-Tron using activity-based costing is

a. $600,000. b. $768,000.

c. $832,000. d. $960,000.

1. Overhead applied to Mechoman using activity-based costing is

a. $640,000. b. $768,000.

c. $832,000. d. $1,000,000.

1. Which of the following is a limitation of activity-based costing?

a. More cost pools b. Less control over overhead costs

c. Poorer management decisions d. Some arbitrary allocations continue

Activity-Based Costing 4- 5 46. Which of the following factors would suggest a switch to activity-based costing? a. Product lines similar in volume and manufacturing complexity. b. Overhead costs constitute a significant portion of total costs. c. The manufacturing process has been stable. d. Production managers use data provided by the existing system.

1. Which of the following is true of activity-based costing? a. More cost pools

b. Same base as traditional costing c. Less costly to use d. Eliminates arbitrary allocations

1. The primary benefit of ABC is it provides a. better management decisions.

b. enhanced control over overhead costs. c. more cost pools. d. more accurate product costing.

1. Which of the following is not a benefit of activity-based costing? a. More accurate product costing

b. Enhanced control over overhead costs c. Better management decisions d. Less costly to use

1. Each of the following is a limitation of activity-based costing except that a. it can be expensive to use.

b. it is more complex than traditional costing. c. more cost pools are used. d. some arbitrary allocations continue.

1. The presence of any of the following factors would suggest a switch to ABC except when a. product lines differ greatly in volume.

b. overhead costs constitute a minor portion of total costs. c. the manufacturing process has changed significantly. d. production managers are ignoring data provided by the existing system.

1. Which of the following is a value-added activity? a. Engineering design

b. Machinery repair c. Inventory storage d. Inspections

1. Which of the following is a nonvalue-added activity? a. Engineering design

b. Machining c. Inspection d. Packaging

1. A nonvalue-added activity in a service enterprise is a. taking appointments.

b. traveling. c. advertising. d. all of these.

Activity-Based Costing 4- 7

1. Which of the following is not a benefit of just-in-time processing? a. Control of significant inventory balances b. Enhanced product quality c. Reduction of rework costs d. Production cost savings

2. Which account is used in just-in-time processing? a. Raw materials inventory

b. Work-in-process inventory c. Merchandise inventory d. Raw and In-Process inventory

1. Under just-in-time processing, all of the following are received or completed “just in time” except

a. finished goods. b. raw materials.

c. subassembly parts. d. supplies.

*66. Which of the following is not a facility-level activity?

a. Plant management b. Product design

c. Personnel administration d. Training

*67. Which of the following is not a product-level activity?

a. Product design b. Engineering changes c. Inventory management d. Equipment setups

*68. Which of the following is not a batch-level activity?

a. Engineering changes b. Equipment setups

c. Inspection d. Materials handling

*69. Which of the following is not a unit-level activity?

a. Purchase ordering b. Assembling

c. Painting d. Sewing

*70. Which of the following is a batch-level activity?

a. Plant management b. Product design

c. Equipment setups d. Assembling

4- Test Bank for Managerial Accounting, Second Edition 8

Answers to Multiple Choice Questions

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.

1. d 37. b 43. c 49. d 55. b 61. c *67. d
2. a 38. b 44. b 50. c 56. b 62. d *68. a
3. a 39. b 45. d 51. b 57. d 63. a *69. a
4. c 40. b 46. b 52. a 58. c 64. d *70. c
5. c 41. a 47. a 53. c 59. b 65. d

36. d 42. d 48. d 54. d 60. d *66. b

EXERCISES

Ex. 71

Reese Corporation manufactures easy chairs and recliners. The following infor mation is

available: Easy Chairs Recliners Total Cost Machine setups 200 600 $16, Inspections 250 500 $27,

Labor hours 2,600 2,

Reese is considering switching from one overhead rate based on labor hours to activity-based

costing.

Instructions Perform the following analyses for these two components of overhead:

1. Compute total machine setups and inspection costs assigned to each product, using a single overhead rate.
2. Compute total machine setups and inspection costs assigned to each product, using activity- based costing.
3. Comment on your findings.

Solution 71 (8–12 min.)

1. Single overhead rate ($16,000 + $27,000) ÷ 5,000 = $8 per labor hour

Easy chairs: 2,600 × $8 = $22, Recliners: 2,400 x $8 = 20,

$43,

1. Activity-based costing

Machine setups: $16,000 ÷ 800 = $20 per setup

Inspections: $27,000 ÷ 750 = $36 per inspection

Easy chairs: (200 × $20) + (250 × $36) = $13, Recliners: (600 × $20) + (500 × $36) = 30,

$43,

4- Test Bank for Managerial Accounting, Second Edition 1 0 Ex. 73

Ms. Bentley owns a small department store in a metropolitan area. For twenty years, the accountant has applied overhead to the various departments—Women's Apparel, Men's Apparel, Cosmetics, Housewares, Shoes, and Electronics—based on the basis of employee hours worked. Ms. Bentley's daughter, who is an accounting student at a local university, has suggested her mother should consider using activity-based costing (ABC). In an attempt to implement ABC, Ms. Bentley and her daughter have identified the following activities.

Instructions Determine a cost driver for each of the activities listed below.

Cost Pool Cost Driver

a. Placing orders ______________________________

b. Stocking merchandise ______________________________

c. Waiting on customers ______________________________

d. Janitorial and Maintenance ______________________________

e. Training employees ______________________________

f. Administrative ______________________________

g. Advertising and Marketing ______________________________

h. Accounting and Legal Services ______________________________

i. Wrapping packages ______________________________

Solution 73 (6–9 min.)

Cost Pool Cost Driver

a. Placing orders number of orders; volume of individual orders

b. Stocking merchandise number of orders; dollar volume of orders

c. Waiting on customers number of customers; dollar volume of sales

d. Janitorial and Maintenance square feet occupied; traffic through area

e. Training employees total number of employees; number of new employees

f. Administrative number of employees; dollar volume of business

g. Advertising and Marketing number of ad campaigns

h. Accounting and Legal Services dollar volume of sales

i. Wrapping packages number of packages

Activity-Based Costing 4- 1

Ex. 74 1

A list of possible cost drivers is presented below:

Code Code

A Engineering hours D Number of subassemblies B Setups E Boxes C Machine hours F Orders

Instructions For each of the following activity cost pools, select the most appropriate cost driver:

Code Cost Pool

_____ 1. Machine setup

_____ 2. Ordering and receiving

_____ 3. Packaging and shipping

_____ 4. Engineering design

_____ 5. Machining

_____ 6. Assembly

Solution 74 (4–6 min.)

1. B 4. A

2. F 5. C

3. E 6. D

Ex. 75

Identify appropriate cost drivers for the following activity cost pools:

1. Human resources
2. Security
3. Receiving
4. Data processing

Solution 75 (3–5 min.)

1. Number of employees, number of hires
2. Square footage
3. Shipments received
4. Lines printed, CPU minutes, storage units

Activity-Based Costing 4- 1

Solution 78 (3–5 min.) 3

Cutting and stitching ($5,100,000 ÷ 150,000) = $

Trimming and packing ($1,050,000 ÷ 42,000) = $

Designing ($930,000 ÷ 62,000) = $

Ex. 79

Cool Designs manufactures metal trim used for a variety of projects. Cool Designs' activity-based

costing overhead rates are:

Purchasing $170 per order Storing $1 per square foot/days Machining $50 per machine hour Supervision $2 per direct labor hour

Job 319 involved three purchase orders, 4,000 square feet/days, 60 machine hours, and 30 direct labor hours. The cost of direct materials on the job was $8,500 and the direct labor rate is $15 per hour.

Instructions Determine the total cost of Job 319.

Solution 79 (5–7 min.)

Direct materials $ 8,

Direct labor (30 × $15) 450 Factory overhead Purchasing (3 × $170) $ 510 Storing (4,000 × $1) 4, Machining (60 × $50) 3, Supervision (30 × $2) 60 7,

Total cost $16,

Ex. 80

Label the following costs as value-adding (VA) or nonvalue-adding (NVA):

____ 1. Engineering design ____ 2. Machine repair ____ 3. Inventory storage ____ 4. Machining ____ 5. Assembly ____ 6. Painting ____ 7. Inspections ____ 8. Packaging

4- Test Bank for Managerial Accounting, Second Edition 1

4 Solution 80 (3–5 min.)

1. VA 5. VA

2. NVA 6. VA

3. NVA 7. NVA

4. VA 8. VA

Ex. 81

Borke and Falvery is a law firm that uses activity-based costing. Classify these activities as value-

added or nonvalue-added:

_______________ 1. Taking appointments

_______________ 2. Reception

_______________ 3. Meeting with clients

_______________ 4. Bookkeeping

_______________ 5. Court time

_______________ 6. Meeting with opposing attorneys

_______________ 7. Billing

_______________ 8. Advertising

Solution 81 (3–5 min.)

1. Nonvalue-added 5. Value-added
2. Nonvalue-added 6. Value-added
3. Value-added 7. Nonvalue-added
4. Nonvalue-added 8. Nonvalue-added

Ex. 82

Brewer & Carr, PSC is an architectural firm that uses activity-based costing. The three activity cost pools used by Brewer & Carr are: Salaries and Wages, Travel Expense, and Plan Reproduction Expense. The firm has provided the following information concerning activity and costs:

Salaries and wages $360, Travel expense 80, Plan reproduction expense 120,

Total $560,

Activity Cost Pools

Project Business Assignment Development Other Salaries and wages 60% 30% 10% Travel expense 40% 40% 20%

Plan reproduction expense 30% 40% 30%

4- Test Bank for Managerial Accounting, Second Edition 1

6 COMPLETION STATEMENTS

1. In traditional costing systems, direct labor cost is often used for the assignment of all ____________________.

2. A __________________ is any activity that has a direct cause-effect relationship with the resources consumed.

3. In activity-based costing, overhead costs are allocated to ____________________, then assigned to products.

4. The number of ___________________ is an appropriate cost driver for the ordering and receiving activity cost pool.

5. The primary benefit of activity-based costing is ___________________ product costing.

6. When product lines differ greatly in volume and manufacturing complexity, a switch from traditional costing to ___________________ is indicated.

7. ______________________ increase the worth of a product or service to customers.

8. A primary objective of __________________ processing is to eliminate all manufacturing inventories.

9. Dependable suppliers, a multi-skilled workforce, and a __________________________ are necessary elements of just-in-time processing.

*93. In the hierarchy of activity levels, the four levels are __________, ___________, ____________, and _____________.

*94. Equipment setups are a ______________-level activity.

Answers to Completion Statements

1. overhead costs

   1. cost driver

2. activity cost pools

   1. purchase orders

3. more accurate

   1. activity-based costing

4. value-added activities

   1. just-in-time
   2. total quality control system *93. unit, batch, product, facility *94. batch

MATCHING

Activity-Based Costing 4- 1

7

1. Match the items in the two columns below by entering the appropriate code letter in the space provided.

A. Pull approach F. Just-in-time processing B. Cost driver G. Batch-level activity C. Facility-level activity H. Product-level activity D. Unit-level activity I. Nonvalue-added activity E. Activity-based costing J. Value-added activity

_____ 1. Allocates overhead to multiple activity cost pools, then assigns the activity cost pools to products.

_____ 2. An activity that has a direct cause-effect relationship with the resources consumed.

_____ 3. Increases the worth of a product or service to customers.

_____ 4. Should be eliminated or reduced.

_____ 5. Plant management.

_____ 6. Engineering changes.

_____ 7. Equipment setups.

_____ 8. Assembling.

_____ 9. Primary objective is to eliminate all manufacturing inventories.

_____ 10. Used to initiate manufacturing under JIT processing.

Answers to Matching

1. E 6. H

2. B 7. G

3. J 8. D

4. I 9. F

5. C 10. A

Which would be an appropriate cost driver for the machine activity cost pool?

What is the cost driver for machining activity?

What is the most appropriate cost driver?

What is an example of an activity cost pool?