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CHAPTER 4: ACTIVITY-BASED COSTING AND MANAGEMENT Multiple Choice a 1. Activity-based costing  a. requires the identification of cost drivers.  b. is used only in JIT operations.  c. applies only to discretionary fixed costs.  d. does not help to identify activities as value-adding or non-value-adding. a 2. A company using activity-based costing  a. tries to identify cost drivers.  b. allocates all costs to individual products.  c. looks for the activity with which total costs are most closely associated.  d. is probably using the JIT philosophy.  a 3. Machine setups is an example of a(n) ____________ activity. a. Batch b. Facility -sustain ing c. Product-sustaining d. Unit d 4. Machine hours is an example of a(n) ____________ activity. a. Batch b. Facility-sustain ing c. Product-sustaining d. Unit b 5. Landscaping is an example of a(n) _____________ activity. a. Batch b. Facility-sustaining c. Product-sustaining d. Unit d 6. Material cost is an example of a(n) _____________ activity. a. Batch b. Facility -sustain ing c. Product-sustaining d. Unit c 7. The activities that drive resource requirements are called the  a. activity drivers b. cost objects  c. resource drivers  d. sustaining activities b 8. The resource utilized by a given product divided by the total amount of the resource available is called the a. activity driver b. consumption ratio c. cost ob ject d. sustaining activity c 9. The segment for which you are estimating the cost is called the a. activity driver b. consumption ratio c. cost ob ject d. sustaining activity a 10. A tool that focuses on manufacturing processes and seeks to reduce or optimize the activities performed within the process is a. process v alue anal ysis b. re-engine ering c. caveat analysis d. benc hmarking d 11. A tool that compares how tasks are performed internally with the best practices of industry leaders is a. process value analysis b. re-engineering c. caveat analysis d. benchmarking b 12. An approach to developing new ways to perform existing activities is called a. process value analysis b. re-engineering c. caveat analysis d. benchmarking c 13. Which of the following statements is true? a. The tra ditional approach to cos ting u ses ma ny diff erent cost dr ivers. b. Costs that are indir ect to pr oducts are by definition traceable to directly to products. c. Costs that are indirect to produ cts are traceable to some activity. d. All of the above statements are true. a 14. Which of the following is NOT a sign of poor cost data? a. Competitor s' pri ces for high-volum e prod ucts ap pear m uch to o high.

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CHAPTER 4: ACTIVITY-BASED COSTING AND MANAGEMENT

Multiple Choice

a 1. Activity-based costing

  a. requires the identification of cost drivers.

  b. is used only in JIT operations.

  c. applies only to discretionary fixed costs.

  d. does not help to identify activities as value-adding or non-value-adding.

a 2. A company using activity-based costing

  a. tries to identify cost drivers.

  b. allocates all costs to individual products.

  c. looks for the activity with which total costs are most closely associated.

  d. is probably using the JIT philosophy.

 

a 3. Machine setups is an example of a(n) ____________ activity.

a. Batch

b. Facility-sustaining

c. Product-sustaining

d. Unit

d 4. Machine hours is an example of a(n) ____________ activity.

a. Batch

b. Facility-sustaining

c. Product-sustaining

d. Unit

b 5. Landscaping is an example of a(n) _____________ activity.

a. Batch

b. Facility-sustaining

c. Product-sustaining

d. Unit

d 6. Material cost is an example of a(n) _____________ activity.

a. Batch

b. Facility-sustaining

c. Product-sustaining

d. Unit

c 7. The activities that drive resource requirements are called the

  a. activity drivers

b. cost objects

  c. resource drivers

  d. sustaining activities

b 8. The resource utilized by a given product divided by the total amount of the resource available is called

the

a. activity driver

b. consumption ratio

c. cost object

d. sustaining activity

c 9. The segment for which you are estimating the cost is called the

a. activity driver

b. consumption ratio

c. cost object

d. sustaining activity

a 10. A tool that focuses on manufacturing processes and seeks to reduce or optimize the activities performed

within the process is

a. process value analysis

b. re-engineering

c. caveat analysis

d. benchmarking

d 11. A tool that compares how tasks are performed internally with the best practices of industry leaders is

a. process value analysis

b. re-engineering

c. caveat analysis

d. benchmarking

b 12. An approach to developing new ways to perform existing activities is called

a. process value analysis

b. re-engineeringc. caveat analysis

d. benchmarking

c 13. Which of the following statements is true?

a. The traditional approach to costing uses many different cost drivers.

b. Costs that are indirect to products are by definition traceable to directly to products.

c. Costs that are indirect to products are traceable to some activity.

d. All of the above statements are true.

a 14. Which of the following is NOT a sign of poor cost data?

a. Competitors' prices for high-volume products appear much too high.

b. The company seems to have a highly profitable niche all to itself.

c. Customers don't balk at price increases for low-volume products.

d. Competitors' prices for low-volume products appear much too high.

d 15. Which of the following is a sign of poor cost data?

a. Competitors' prices for high-volume products appear much too high.b. The company seems to have a highly profitable niche all to itself.

c. Customers don't balk at price increases for low-volume products.

d. All of the statements are true.

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a 16. Number of purchase orders is an example of a(n) ____________ activity.

a. Batch

b. Facility-sustaining

c. Product-sustaining

d. Unit

d 17. Direct labor hours is an example of a(n) ____________ activity.

a. Batch

b. Facility-sustaining

c. Product-sustaining

d. Unit

b 18. Property taxes on the plant is an example of a(n) _____________ activity.

a. Batch

b. Facility-sustaining

c. Product-sustaining

d. Unit

d 19. Production volume is an example of a(n) _____________ activity.

a. Batch

b. Facility-sustaining

c. Product-sustaining

d. Unit

d 20. ____________ are those performed each time a unit is produced or sold.

a. Batch-level activities

b. Facility-sustaining activities

c. Sustaining activities

d. Unit-level activities

a 21. ____________ are those that a company performs when it makes a group of units.

a. Batch-level activities

b. Facility-sustaining activities

c. Sustaining activities

d. Unit-level activities

b 22. ____________ relate to an entire plant as a whole.

a. Batch-level activities

b. Facility-sustaining activities

c. Sustaining activities

d. Unit-level activities

c 23. ____________ arise because a company maintains a particular product or service.

a. Batch-level activities

b. Facility-sustaining activities

c. Sustaining activities

d. Unit-level activities

d 24. Which of the following is not a type of sustaining activity?

a. Capacity-sustaining

b. Customer-sustaining

c. Distribution-channel sustaining

d. Unit-sustaining

a 25. Which of the following is true regarding activity-based management?

a. ABM is using information about activities to manage portions of the organization other than costs.

b. ABM is applying ABC to external financial reporting.

c. ABM requires the use of re-engineering principles.

d. All of the above are true.

a 26. The quality costs that are incurred to determine whether particular units of product meet quality

standards are

a. appraisal costs.

b. external failure costs.

c. internal failure costs.

d. prevention costs.

c 27. The cost of downtime on machines while rework is being performed is a(n)

a. appraisal cost.

b. external failure cost.

c. internal failure cost.

d. prevention cost.

b 28. The cost of processing customer complaints is a(n)

a. appraisal cost.b. external failure cost.

c. internal failure cost.

d. prevention cost.

d 29. Worker training is a(n)

a. appraisal cost.

b. external failure cost.

c. internal failure cost.

d. prevention cost.

b 30. The cost to repair a unit of product that fails after it is sold is a(n)

a. appraisal cost.

b. external failure cost.

c. internal failure cost.

d. prevention cost.

b 31. Genco manufactures two versions of a product. Production and cost information show the following:

  Model A Model B

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  Units produced 200 400

  Material moves (total) 20 80

  Direct labor hours per unit 1 2

  Material handling costs total $200,000. Under ABC, the material handling costs allocated to each unit of

Model A would be:

  a. $10

  b. $200

  c. $333

  d. Some other number

c 32. Genco manufactures two versions of a product. Production and cost information show the following:

  Model A Model B

  Units produced 200 400

  Material moves (total) 20 80

  Direct labor hours per unit 1 2

  Material handling costs total $200,000. Under ABC, the material handling costs allocated to each unit of

Model B would be:

  a. $200

  b. $333

  c. $400

  d. Some other number

a 33. Genco manufactures two versions of a product. Production and cost information show the following:

  Model A Model B

  Units produced 200 400

  Material moves (total) 20 80

  Direct labor hours per unit 1 3

  Material handling costs total $200,000. Direct labor hours are used to allocate overhead costs. The

material handling costs allocated to each unit of Model A would be:

  a. $143

  b. $200

  c. $333

  d. Some other number

b 34. Cadott Manufacturing produces three products. Production and cost information show the following:

  Model X Model Y Model Z

  Units produced 1,000 3,000 6,000

  Direct labor hours 2,000 1,000 2,000

  Number of inspections 20 30 50

  Inspection costs totaled $100,000. Using ABC, inspections costs allocated to each unit of Model X would be

  a. $10.00

  b. $20.00

  c. $40.00

  d. Some other number

b 35. Cadott Manufacturing produces three products. Production and cost information show the following:

  Model X Model Y Model Z

  Units produced 1,000 3,000 6,000

  Direct labor hours 2,000 1,000 2,000

  Number of inspections 20 30 50

  Inspection costs totaled $100,000. Using ABC, inspections costs allocated to each unit of Model Y would be

  a. $ 6.67

  b. $10.00

  c. $20.00

  d. Some other number

b 36. Cadott Manufacturing produces three products. Production and cost information show the following:

  Model X Model Y Model Z

  Units produced 1,000 3,000 6,000

  Direct labor hours 2,000 1,000 2,000

  Number of inspections 20 30 50

  Inspection costs totaled $100,000. Using ABC, inspections costs allocated to each unit of Model Z would be

  a. $ 6.67

  b. $ 8.33

  c. $10.00d. Some other number

c 37. Cadott Manufacturing produces three products. Production and cost information show the following:

  Model X Model Y Model Z

  Units produced 1,000 3,000 6,000

  Direct labor hours 2,000 1,000 2,000

  Number of inspections 20 30 50

  Inspection costs totaled $100,000. Using direct labor hours as the allocation base, inspections costs

allocated to each unit of Model X would be

  a. $10.00

  b. $20.00

  c. $40.00

  d. Some other number

a 38. Cadott Manufacturing produces three products. Production and cost information show the following:

  Model X Model Y Model Z

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  Units produced 1,000 3,000 6,000

  Direct labor hours 2,000 1,000 2,000

  Number of inspections 20 30 50

  Inspection costs totaled $100,000. . Using direct labor hours as the allocation base, inspections costs

allocated to each unit of Model Y would be

  a. $6.67

  b. $10.00

  c. $20.00

  d. Some other number

a 39. Cadott Manufacturing produces three products. Production and cost information show the following:

  Model X Model Y Model Z

  Units produced 1,000 3,000 6,000

  Direct labor hours 2,000 1,000 2,000

  Number of inspections 20 30 50

  Inspection costs totaled $100,000. Using direct labor hours as the allocation base, inspections costs

allocated to each unit of Model Z would be

  a. $6.67

  b. $8.33

  c. $10.00

  d. Some other number

b 40. Superior Inc. produces three products. Production and cost information is as follows:

  Model Q Model R Model S

  Units produced 2,000 6,000 12,000

  Direct labor hours 4,000 2,000 4,000

  Number of setups 100 150 250

  The consumption ratios for number of setups would be:

  Q R S

  a. 40%-20%-40%

  b. 20%-30%-50%

  c. 10%-30%-60%

  d. Some other numbers

c 41. Superior Inc. produces three products. Production and cost information is as follows:

  Model Q Model R Model S

  Units produced 2,000 6,000 12,000

  Direct labor hours 4,000 2,000 4,000

  Number of setups 100 150 250

  The consumption ratios based on units produced would be:

  Q R S

  a. 40%-20%-40%

  b. 20%-30%-50%

  c. 10%-30%-60%

  d. Some other numbers

a 42. Superior Inc. produces three products. Production and cost information is as follows:

  Model Q Model R Model S

  Units produced 2,000 6,000 12,000

  Direct labor hours 4,000 2,000 4,000

  Number of setups 100 150 250

  The consumption ratios for direct labor hours would be:

  Q R S

  a. 40%-20%-40%

  b. 20%-30%-50%

  c. 10%-30%-60%

  d. Some other numbers

c 43. Waupaca Company produces three products with the following production and cost information:

  Model A Model B Model C

  Units produced 2,000 6,000 12,000

  Direct labor hours (total) 4,000 2,000 4,000

  Number of setups 100 150 250

  Number of shipments 200 225 275

  Engineering change orders 15 10 5

  Overhead costs include setups $90,000; shipping costs $140,000; and engineering costs $180,000. What would

be the per unit overhead cost for Model A if direct labor hours were the allocation base?

  a. $20.50

  b. $41.00

  c. $82.00

  d. Some other number

b 44. Waupaca Company produces three products with the following production and cost information:

  Model A Model B Model C

  Units produced 2,000 6,000 12,000

  Direct labor hours (total) 4,000 2,000 4,000

  Number of setups 100 150 250

  Number of shipments 200 225 275

  Engineering change orders 15 10 5

  Overhead costs include setups $90,000; shipping costs $140,000; and engineering costs $180,000. What would

be the per unit overhead cost for Model A if activity-based costing were used?

  a. $20.50

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  b. $74.00

  c. $82.00

  d. Some other number

a 45. Waupaca Company produces three products with the following production and cost information:

  Model A Model B Model C

  Units produced 2,000 6,000 12,000

  Direct labor hours (total) 4,000 2,000 4,000

  Number of setups 100 150 250

  Number of shipments 200 225 275

  Engineering change orders 15 10 5

  Overhead costs include setups $90,000; shipping costs $140,000; and engineering costs $180,000. What would

be the per unit overhead cost for Model B if activity-based costing were used?

  a. $22.00

  b. $66.00

  c. $123.00

  d. Some other number

a 46. Waupaca Company produces three products with the following production and cost information:

  Model A Model B Model C

  Units produced 2,000 6,000 12,000

  Direct labor hours (total) 4,000 2,000 4,000

  Number of setups 100 150 250

  Number of shipments 200 225 275

  Engineering change orders 15 10 5

  Overhead costs include setups $90,000; shipping costs $140,000; and engineering costs $180,000. What would

be the per unit overhead cost for Model C if activity-based costing were used?

  a. $10.83

  b. $32.50

  c. $245.28

  d. Some other number

c 47. Kimball Company produces two products in a single factory. The following production and cost information

has been determined:

  Model 1 Model 2

  Units produced 1,000 200

  Material moves (total) 100 40

  Testing time (total) 250 125

  Direct labor hours per unit 1 5

  The controller has determined total overhead to be $480,000. $120,000 relates to material moves; $150,000

relates to testing; the remainder is related to labor time.

  If Kimball uses direct labor hours to allocate overhead to each model, what would overhead per unit be for

Model 1?

  a. $10.00

  b. $120.00

  c. $240.00

  d. $400.00

b 48. Kimball Company produces two products in a single factory. The following production and cost information

has been determined:

  Model 1 Model 2

  Units produced 1,000 200

  Material moves (total) 100 40

  Testing time (total) 250 125

  Direct labor hours per unit 1 5

  The controller has determined total overhead to be $480,000. $140,000 relates to material moves; $150,000

relates to testing; the remainder is related to labor time.

  If Kimball uses activity-based costing to allocate overhead to each model, what would overhead per unit be

for Model 1?

  a. $400.00

  b. $295.00

  c. $240.00

  d. $120.00

d 49. Kimball Company produces two products in a single factory. The following production and cost information

has been determined:

  Model 1 Model 2

  Units produced 1,000 200

  Material moves (total) 100 40

  Testing time (total) 250 125

  Direct labor hours per unit 1 5

  The controller has determined total overhead to be $480,000. $140,000 relates to material moves; $150,000

relates to testing; the remainder is related to labor time.

  If Kimball uses direct labor hours to allocate overhead to each model, what would overhead per unit be for

Model 2?

  a. $158.33

  b. $400.00

  c. $950.00

  d. $1,200.00

c 50. Kimball Company produces two products in a single factory. The following production and cost information

has been determined:

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  Model 1 Model 2

  Units produced 1,000 200

  Material moves (total) 100 40

  Testing time (total) 250 125

  Direct labor hours per unit 1 5

  The controller has determined total overhead to be $480,000. $140,000 relates to material moves; $150,000

relates to testing; the remainder is related to labor time.

  If Kimball uses activity-based costing to allocate overhead to each model, what would overhead per unit be

for Model 2?

  a. $158.33

  b. $415.93

  c. $925.00

  d. Some other number

True-False

F 1. ABC can only be used in a company that produces a single product.

 

F 2. A company that uses only volume-based measures will overcost its low-volume products.

 

T 3. ABC will be most useful in estimating fixed costs.

 

T 4. Two major influences on costs are complexity and diversity.

 

T 5. Volume-based measures will tend to overcost high volume products.

F 6. Activities that drive resource requirements are known as activity drivers.

F 7. ABC is required for GAAP financial reporting.

F 8. ABC will benefit a JIT operation more than a non-JIT operation.

F 9. External failure costs are made up solely of opportunity costs.

F 10. The acceptable quality level is the point where internal failure costs are minimized.

Problems

1. Scottso Enterprises incurs $300,000 in manufacturing overhead costs each month. The company has been

allocating overhead to individual product lines based on direct labor hours.

 

Amount Amount of

  Cost driver In Pool Activity

  ----------- -------- ---------

  Direct labor hours $100,000 25,000

  Number of batches 150,000 200

  Design changes 50,000 125

  --------

  Total overhead costs $300,000

  ========

Two products have the following characteristics:

  Product X Product Y

  --------- ---------

  Direct labor hours 1,000 400

  Number of batches 10 20

  Design changes 1 15

  a. Determine the overhead to be allocated to each product using direct labor hours as the only cost driver.

  b. Determine the overhead to be allocated to each product using the three drivers identified.

SOLUTION:

a. Product X: $12,000 [1,000 x ($300,000/15,000)]

Product Y: $ 4,800 [400 x ($300,000/15,000)]

 

b. Product X: $11,900; Product Y: $22,600

  Amount Amount of  Cost driver In Pool Activity Rate

  ----------- -------- --------- --------

  Direct labor hours $100,000 25,000 $ 4.00

  Number of batches 150,000 200 750.00

  Design changes 50,000 125 400.00

  Product X Product Y

  --------- ---------

  Direct labor hours, $4,000 $1,600

Number of batches 7,500 15,000

Design changes 400 6,000

------ ------

  $11,900 $22,600

2. Lewis Company has two major segments with the following information:

  Upstate Downstate Total_ 

  Annual revenue $200,000 $600,000 $800,000

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  Annual salesperson salaries $30,000 $45,000 $75,000

  Number of customers 50 75 125

  Miles driven 80,000 40,000

The business also has overhead costs as follows:

  Cost pool Cost in pool Cost driver

 __________ 

  Travel $ 36,000 miles driven

  Entertainment 144,000 number of customers

  Administrative 150,000 salaries

  --------

  Total $330,000

a. Allocate the overhead costs to the segments based on sales revenue.

b. Determine the income of each segment.

c. Allocate the overhead costs to the segments using ABC.

d. Determine the income of each segment under ABC.

SOLUTION:

a. Upstate: $82,500 [$330,000 x ($200,000/$800,000)]

Downstate: $247,500 [$330,000 x ($600,000/$800,000)]

b. Upstate: $87,500 [$200,000 - $30,000 - $82,500]

Downstate: $307,500 [$600,000 - $45,000 - $247,500]

c. & d.

Upstate Downstate Total_ 

  Annual revenue $200,000 $600,000 $800,000

  Annual salesperson salaries 30,000 45,000 75,000

  Travel 24,000 12,000 36,000

  Entertainment 57,600 86,400 144,000

  Administrative 60,000 90,000 150,000

  ------- ------- -------

  Income $ 28,400 $366,600 $395,000

3. Johnson & Mathew is an architectural and landscape services firm. The firm operates in three major segments.

The following information has been obtained,

  New Design Remodel Landscape Total__ 

  Annual revenues $500,000 $1,200,000 $300,000 $2,000,000

  Number of jobs 50 150 200 400

  Chargeable hours 6,000 10,000 14,000 30,000

Salaries for the year were $800,000; overhead for the year was $1,000,000.

a. Determine the profits for each segment, assuming costs are allocated based on annual revenues.

b. Determine the profits for each segment, assuming costs are allocated based on the number of jobs.

c. Determine the profits for each segment, assuming costs are allocated based on chargeable hours.

SOLUTION:

a. New Design: $50,000 [$500,000 - ($1,800,000 x $500,000/$2,000,000)]

Remodel: $120,000 [$1,200,000 - ($1,800,000 x $1,200,000/$2,000,000)]

Landscape $30,000 [$300,000 - ($1,800,000 x $300,000/$2,000,000)]

b. New Design: $275,000 [$500,000 - ($1,800,000 x 50/400)]

Remodel: $525,000 [$1,200,000 - ($1,800,000 x 150/400)]

Landscape $(600,000) [$300,000 - ($1,800,000 x 200/400)]

c. New Design: $140,000 [$500,000 - ($1,800,000 x 6,000/30,000)]

Remodel: $600,000 [$1,200,000 - ($1,800,000 x 10,000/30,000)]

Landscape $(540,000) [$300,000 - ($1,800,000 x 14,000/30,000)]

4. Coleman Company produces three products, X, Y, & Z. The income statement for the firm as a whole is:

  Sales $1,850,000

  Less variable costs 1,310,000

  ----------

  Contribution margin $ 540,000

  Less fixed costs

  Selling 330,000

  Administrative 180,000

  -------  510,000

  ----------

  Net income $ 30,000

  The sales, variable costs, and line-sustaining fixed costs for the four products are:

  Q___ R___ S_

 __ 

  Sales $250,000 $400,000 $1,200,000

  Variable costs 60% 65% 75%

Line-sustaining costs $90,000 $130,000 $ 230,000

a. Prepare an income statement segmented by product line, including a column for the entire firm. Be sure to

show segment income as well as total enterprise income.

SOLUTION:

  Q___ R___ S ___ Total _ 

  Sales $250,000 $400,000 $1,200,000 $1,850,000

  Variable costs 150,000 260,000 900,000 1,310,000

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  ------- ------- --------- ---------

  Contribution margin $100,000 $140,000 $ 300,000 $ 540,000

  Line-sustaining costs 90,000 130,000 230,000 450,000

  ------- ------- --------- ---------

  Segment income $ 10,000 $ 10,000 $ 70,000 $ 90,000

  Company-sustaining 60,000

  ---------

  Enterprise income $ 30,000

5. Ellington & Hodges is a public relations firm. The firm operates in three major segments. The following

information has been obtained,

  Political Corporate Celebrity Total__ 

  Annual revenues $750,000 $800,000 $1,450,000 $3,000,000

  Number of clients 50 150 200 400

  Chargeable hours 6,000 10,000 14,000 30,000

Total salaries for the year were $900,000; overhead was $600,000.

a. Determine the profits for each segment, assuming costs are allocated based on annual revenues.

b. Determine the profits for each segment, assuming overhead costs are allocated based on the number of

clients and salaries are allocated based on chargeable hours.

SOLUTION:

a. Political: $375,000 [$750,000 - ($1,500,000 x $750,000/$3,000,000)]

Corporate: $400,000 [$800,000 - ($1,500,000 x $800,000/$3,000,000)]

Celebrity: $725,000 [$1,450,000 - ($1,500,000 x $1,450,000/$3,000,000)]

b. Political Corporate Celebrity Total__ 

  Annual revenues $750,000 $800,000 $1,450,000 $3,000,000

  Salaries 180,000 300,000 420,000 900,000

  Chargeable hours 120,000 200,000 280,000 600,000

  -------- -------- --------- ---------

  Profits $450,000 $300,000 $ 750,000 $1,500,000

6. Danner Company incurs $1,600,000 in manufacturing overhead costs each month. The company has been allocating

overhead to individual product lines based on direct labor hours.

 

Amount Amount of

  Cost driver In Pool Activity

  ----------- -------- ---------

  Direct labor hours $500,000 40,000

  Number of setups 700,000 1,000

  Number of tests 400,000 500

  ----------

  Total overhead costs $1,600,000

  ==========

Two products have the following characteristics:

  Product S Product T

  --------- ---------

  Direct labor hours 2,000 1,000

  Number of setups 20 100

  Number of tests 2 150

  a. Determine the overhead to be allocated to each product using direct labor hours as the only cost driver.

  b. Determine the overhead to be allocated to each product using the three drivers identified.

SOLUTION:

a. Product S: $80,000 [2,000 x ($1,600,000/40,000)]

Product T: $40,000 [1,000 x ($1,600,000/40,000)]

 

b. Product S: $40,600; Product T: $202,500

  Amount Amount of

  Cost driver In Pool Activity Rate

  ----------- -------- --------- --------

  Direct labor hours $500,000 40,000 $ 12.50

  Number of setups 700,000 1,000 700.00

  Number of tests 400,000 500 800.00

  Product S Product T

  --------- ---------

  Direct labor hours, $25,000 $12,500Number of setups 14,000 70,000

Number of tests 1,600 120,000

------ -------

  $40,600 $202,500

7. Seneca Company has two products with the following information:

  Engine Race

  Rebuilds Cars Total__ 

  Annual revenue $1,200,000 $1,400,000 $2,600,000

  Material costs 400,000 $600,000 $1,000,000

  Labor costs 250,000 150,000 $400,000

  Number of receipts 8,000 2,000

  Number of batches 425 75

The business also has overhead costs as follows:

  Cost pool Cost in pool Cost driver

 __________ 

  Receiving $300,000 number of receipts

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  Material moves 275,000 number of batches

  Administrative 225,000 labor cost

  --------

  Total $800,000

a. Allocate the overhead costs to the segments based on material costs.

b. Determine the income of each segment.

c. Allocate the overhead costs to the segments using ABC.

d. Determine the income of each segment under ABC.

SOLUTION:

a. Engines: $320,000 [$800,000 x ($400,000/$1,000,000)]

Race Cars: $480,000 [$800,000 x ($600,000/$1,000,000)]

b. Engines: $230,000 [$1,200,000 - $400,000 - $250.000 - $320,000]

Race Cars: $170,000 [$1,400,000 - $600,000 - $150,000 - $480,000]

c. & d.

Engine Race

  Rebuilds Cars Total__ 

  Annual revenue $1,200,000 $1,400,000 $2,600,000

  Material costs 400,000 600,000 1,000,000

  Labor costs 250,000 150,000 400,000

  Receiving 240,000 60,000 300,000

  Material moves 233,750 41,250 275,000

  Administrative 140,625 84,375 225,000

  ------- ------- --------

  Income $(64,375) $464,375 $ 400,000

8. Ventura Company produces four products, Q, R, S & T. The income statement for the firm as a whole is:

  Sales $3,000,000

  Less variable costs 1,870,000

  ---------

  Contribution margin $1,130,000

  Less fixed costs

  Manufacturing $320,000

  Selling 290,000

  Administrative 168,000

  -------

  778,000

  ---------

  Net income $ 352,000

  The sales, contribution margin ratios, and line-sustaining fixed costs for the four products are:

  Q___ R___ S ___ T_ __ 

  Sales $200,000 $400,000 $1,000,000 $1,400,000

  Contribution margin 35% 40% 20% 50%

  Line-sustaining costs $60,000 $80,000 $168,000 $270,000

b. Prepare an income statement segmented by product line, including a column for the entire firm. Be sure to

show segment income as well as total enterprise income.

SOLUTION:

  Q___ R___ S_

 __ T_ __ Total__ 

 Sales $200,000 $400,000 $1,000,000 $1,400,000 $3,000,000

 Variable costs 130,000 240,000 800,000 700,000 1,870,000

  ------- ------- --------- --------- ---------

 Contribution margin $ 70,000 $160,000 $ 200,000 $ 700,000 $1,130,000

 Line-sustaining costs 60,000 80,000 168,000 270,000 578,000

  ------- ------- --------- --------- ---------

 Segment income $ 10,000 $ 80,000 $ 32,000 $ 430,000 $ 552,000

 Company-sustaining 200,000

  ---------

 Enterprise income $ 352,000

9. DJH Corp has identified the following costs.

Costs to improve the production process $175,000

Incoming inspection costs 110,000

Design engineer salaries 325,000

Rework of defective units 122,000Salaries for service repair workers 265,000

Warranty costs 335,000

Finished goods inspection 165,000

Scrap 118,000

Categorize each of the costs into the appropriate quality cost category and prepare a total for each.

SOLUTION:

Prevention costs:

Costs to improve the production process $175,000

Design engineer salaries 325,000

Total prevention costs $500,000

Appraisal costs:Incoming inspection costs $110,000

Finished goods inspection 165,000

Total appraisal costs 275,000

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Internal failure costs:

Rework of defective units $122,000

Scrap 118,000

Total internal failure costs 240,000

External failure costs:

Salaries for service repair workers $265,000

Warranty costs 335,000

Total external failure costs 600,000

10. Following is a list of activities that pertains to quality. Classify each as either external failure,

internal failure, appraisal, or prevention.

  External Internal

Failure Failure Appraisal Prevention

1. In-process inspection

2. Warranty expenses

3. Worker training

4. Downtime on machinery due

  to rework

5. Product returns

6. Product design

7. Preventive maintenance

8. Wages for field repair

  workers

9. Quality laboratory

10. Customer complaints

SOLUTION:

  External Internal

Failure Failure Appraisal Prevention

1. In-process inspection X

2. Warranty expenses X

3. Worker training X

4. Downtime on machinery due

  to rework X

5. Product returns X

6. Product design X

7. Preventive maintenance X

8. Wages for field repair

  Workers X

9. Quality laboratory X

10. Customer complaints X

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