Cost Management Measuring, Monitoring and Motivating Performance 2nd Edition By Susan K. Wolcott – Test Bank A+

$35.00

Cost Management Measuring, Monitoring and Motivating Performance 2nd Edition By Susan K. Wolcott – Test Bank A+

Name: Cost Management Measuring, Monitoring and Motivating Performance 2nd Edition By Susan K. Wolcott – Test Bank A+
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$35.00

SKU: Cost Management Measuring, Monitoring and Motivating Performance 2nd Edition By Susan K. Wolcott – Test Bank A+

Description

Learning Questions	True / False	Multiple Choice	Matching	Exercises	Short Answer	Problems
1. How are costs assigned to mass-produced products?	1	1, 31, 32 S: 83 W: 103, 104, 111, 113, 115			3	1
2. What are equivalent units, and how do they relate to the production process?	2-4, 8	15, 33 S: 73-75 W: 102, 105-107		4		2
3. How is the weighted average method used in process costing?	5-7	3, 4, 6, 11-14, 16, 36 S: 77, 79, 82, 84, 86 W: 109		2-8, 10	1	1
4. How is the FIFO method used in process costing?	9-11	2, 5, 7-10, 17, 18, 34, 35, 37, 48, 49 S: 76, 78, 85 W: 114, 116-120		1, 4, 7, 9	1, 4	3, 4, 5
5. What alternative methods are used for mass production?	13-15, 21, 22	43-47	1		4, 8
6. How is process costing performed for multiple production departments?	12, 16	19-30, 38 S: 80, 81, 87, 88, 99, 100 W: 112		3, 6, 9, 10	14	1
7. How are spoilage costs handled in process costing?	17	39-42, 50-71 S: 89-98 W: 110		3	5-7, 9-11, 14	3
8. How does process costing information affect managers’ incentives and decisions?	20	S: 72 W: 101, 108			2, 4, 12, 13	1, 2, 5

S: Questions from the study guide

W: Questions from web quizzes on the student web site

Level of Complexity*	True / False	Multiple Choice	Matching	Exercises	Short Answer	Problems
Foundation: Repeat or paraphrase information; Reason to single correct solution; Perform computations; etc.	All	All	All	All	1, 5, 6, 14	1, 3, 4, 5
Step 1: Identify the problem, relevant information, and uncertainties					2, 3, 4, 10, 12, 13	1, 2, 3
Step 2: Explore interpretations and connections					7, 8, 9, 11	1, 2
Step 3: Prioritize alternatives and implement conclusions						3
Step 4: Envision and direct strategic innovation

*Based on level in Steps for Better Thinking (Exhibit 1.10, textbook p. 16):

Note: Step 1, 2, 3, and 4 questions in this test bank are intentionally open-ended and subjective, giving students the opportunity to demonstrate skills such as judgment, reasoning, identification of uncertainties, identification or analysis of pros and cons, and so on. Therefore, student answers may not exactly match those shown in the solutions.

True / False

Conversion costs refer to the cost of direct labor and production overhead.
Equivalent units measure the resources used in partially completed units relative to the resources needed to complete the units.
Equivalent units are calculated for work in process and finished goods inventory.
Conversion costs must be incurred uniformly throughout the production process to calculate equivalent units.
When using the weighted average method to calculate cost per equivalent unit, the cost is calculated as current period costs / equivalent units for total work.
In the weighted average method, costs from beginning work in process are averaged with costs incurred during the current period and then allocated to units completed and ending work in process.
In the weighted average method, cost per equivalent unit is often calculated separately for materials costs and conversion costs.
Managers can calculate costs per equivalent unit using the weighted average or the FIFO method.
In FIFO costing, the costs of units in beginning work in process are merged with current period costs to calculate the cost per equivalent unit.
Managers can only use FIFO process costing if it is reflected in the physical flow of units.
In calculating the cost per equivalent unit using FIFO costing, the appropriate formula is current period costs / equivalent units for work performed this period.
In a process costing system, direct materials are added during every production process.
Conversion costs may be separated into direct labor and overhead when it is relatively easy to track direct labor and the use of labor occurs in a different pattern than the use of overhead resources.
Process costing is simplified when a company uses just-in-time inventory methods.
When an organization uses a long-term procurement contract, direct labor costs are normally stable over long periods of time.
In a process costing system with multiple production departments, costs from the first department’s ending work in process are transferred to the second department’s finished goods before going into the second department’s work in process.
In a process costing system, normal spoilage is allocated to good units produced.
All spoilage in a process costing system is considered abnormal spoilage.
Spoilage costs from an unusual natural disaster would be allocated to good units produced in a process costing system.
Process costing information is useful for measuring and monitoring production processes.
Standard cost equivalent units are calculated the same way as FIFO equivalent units.
When standard costs are used as benchmarks, they are compared to actual costs using either weighted average or FIFO costs.

Multiple Choice

Perry Company started 6,000 units during the month of March. 600 units were in the beginning work in process inventory and 400 units in the ending work in process inventory. Units completed and transferred out during March will be
6,000
6,400
6,200
5,400

Use the following information for the next 3 questions.

Salmon Manufacturing Company uses a process costing system. Direct materials are added at the beginning of the process. During January, Department Q had a beginning inventory of 2,000 units, 25% complete for conversion costs. During the month 14,000 units were started and there were 1,000 units in ending inventory, 60% complete for conversion costs.

Using FIFO process costing, the equivalent units for direct materials for the month were
13,600
14,000
16,000
15,600
Using weighted average process costing, the equivalent units for direct material for the month were
13,600
14,000
16,000
15,600
Using weighted average process costing, the equivalent units for conversion costs for the month were
14,100
14,000
16,000
15,600

Use the following information for the next 2 questions.

Gholson, Inc. employs a process costing system in which direct materials are added at the beginning of the process. Direct material costs from the prior period for beginning work in process are $1,250. The current period’s direct material costs total $31,500. The company began the period with 500 units, 70% complete, started 10,500 units, and finished the period with 1,000 units, 40% complete.

Using a FIFO system, the direct material cost per equivalent unit is
$3.00
$2.98
$3.20
$2.55
Using the weighted average method, the direct material cost per equivalent unit for the period is
$3.00
$2.98
$3.20
$2.55

Use the following information for the next 8 questions.

Hendrix, Inc. employs a process costing system. Direct materials are added at the beginning of the process. Here is information about July’s activities:

On July 1: Beginning inventories = 750 units, 60% complete

Direct materials cost = $5,925

Conversion costs = $4,095

During July: 15,000 units started

Direct materials added = $150,000

Conversion costs added = $83,520

On July 31: Ending inventories = 1,500 units, 40% complete

Using the FIFO method, the number of units started and completed in July was
14,250
15,000
13,500
15,750
Using the FIFO method, the number of equivalent units of conversion costs was
14,400
14,550
14,850
14,700
Using the FIFO method, the cost per equivalent unit for materials used during July was
$9.90
$9.80
$11.11
$10.00
Using the FIFO method, the cost of goods completed and transferred out during July was
$225,150
$225,060
$213,300
$213,000
Using the weighted average method, the number of equivalent units of material was
15,750
14,250
15,000
13,500
Using the weighted average method, the cost per equivalent unit for conversion costs was
$5.80
$5.90
$6.00
$6.10
Using the weighted average method, the cost of the goods completed and transferred out was
$225,150
$225,060
$213,300
$213,000

Using the weighted average method, the cost of the ending work in process inventory for July was
$18,480
$18,540
$18,330
$18,390
On September 1, Kelita Company had 20,000 units in process, which were 30% completed. Materials are added at the beginning of the process. During the month 160,000 units were started and 170,000 completed. Ending work in process was 50% complete. By what amount would the equivalent units of materials differ if weighted average were used instead of FIFO?
20,000 more
-0-
6,000 more
14,000 less
Assume that ending work in process is 8,000 units, 20% complete, and that 20,000 units were started during the month. The beginning work in process was 75% complete. Materials are added at the beginning of the process, and the cost of materials are added during the month was $61,500. Using the weighted average method, materials are allocated at $4.00 per equivalent unit. The cost of material included in the beginning work in process from last month was
$18,500
$20,000
$34,500
None of the above

Use the following information for the next 2 questions.

Assume there were 6,000 units in beginning work in process, 60% complete. 20,000 units were completed during the month. Ending work in process is 40% complete, which is equivalent to 3,200 units for conversion costs. Materials are added at the beginning of the process. The FIFO method is used.

The number of equivalent units of conversion costs is
23,200
17,680
19,600
21,280
The number of units started this month is
20,000 units
22,000 units
28,000 units
15,280 units

Use the following information for the next 10 questions.

Zuniga, Inc. uses a process costing system. During May, 1,200 units were transferred into Department 2 at a cost of $38,040. Direct materials are added at the beginning of the process. Additionally:

On May 1: Beginning inventories = 250 units, 40% complete

Direct materials costs = $1,250

Conversion costs = $1,356

Transferred-in costs = $2,560

During May: Direct materials costs incurred = $6,000

Conversion costs incurred = $17,013

On May 31: Ending Inventories = 350 units, 20% complete

Using the FIFO method, units transferred in and completed were
1,200
1,100
850
1,450
Using the FIFO method, the equivalent units of material were
1,200
1,100
850
1,450
Using the FIFO method, the cost per equivalent unit for transferred-in units was
$28.00
$31.70
$26.23
$33.87
Using the FIFO method, the cost of the beginning work in process units transferred out was
$2,385
$15,476
$7,551
$6,756
Using the FIFO method, the cost of the ending work in process was:
$2,863
$7,113
$12,649
$13,958
Using the weighted average method, the number of equivalent units for conversion costs was
1,070
1,020
1,170
1,380
Using the weighted average method, the total transferred-in costs for the month were
$38,040
$40,600
$30,800
$33,360
Using the weighted average method, the cost per equivalent unit for materials was
$5.00
$4.14
$6.04
$4.44
Using the weighted average method, the cost of the units transferred out was
$53,570
$44,710
$52,261
$66,219

Using the weighted average method, the cost of the ending work in process inventory was
$13,958
$13,944
$12,663
$12,649

Use the following information for the next 2 questions.

Assume a company’s beginning work in process consists of 20,000 units, 40% complete. Materials are added at the beginning of the process. During the month, 90,000 units are transferred in. The ending work in process consists of 10,000 units, 50% complete.

Using the weighted average method, the equivalent units of production for the month are

Transferred In Materials Conversion Costs

110,000 100,000 65,000
90,000 100,000 97,000
110,000 110,000 105,000
105,000 60,000 100,000
Using the FIFO method, the equivalent units of production are

Transferred In Materials Conversion Costs

90,000 90,000 97,000
110,000 100,000 105,000
110,000 92,000 105,000
90,000 100,000 105,000
A costing system that determines an average cost for all units of product in a particular time period is a
Job costing system
Batch costing system
Process costing system
Direct costing system
Which type of company would most likely use a process costing system?
Chemical producer
Custom furniture maker
Printer
Ship builder
Equivalent whole units of production
Are the number of whole units produced in a batch
Include the number of units started and completed during the period
Compares the number of units that should have been completed with that actually produced
Consists of all units completed this period
Materials are added at the beginning of the process. The beginning work in process is 30% complete. The total equivalent units for direct materials for the period using FIFO is equal to
The units in beginning work in process
The units started this period
The units started plus 70% of the units in beginning work in process
The units started and completed plus the beginning work in process
Production costs during the current period are kept separate from that of the previous period in the
FIFO method
Job costing method
Just-in-time method
Weighted average method
When using weighted average process costing
The costs attached to beginning work in process are kept separate from all other costs
The current period costs will be added to the beginning work in process costs.
Units in the ending inventory are not considered in making equivalent unit computations.
Completed units are transferred out in two separate blocks.
Because the weighted average and FIFO methods treat beginning inventory differently, if a firm has beginning inventory in a process costing system and the FIFO method is used, it will
Always have a higher number of equivalent units of production for conversion costs than weighted the average method
Always have a lower number of equivalent units of production for conversion costs than the weighted average method
Always have a higher cost per equivalent unit than the weighted average method for materials
Always have a lower cost per equivalent unit than the weighted average method for conversion costs
In a process costing system, transferred-in costs
Are computed for all production but not reported in the cost of process costing report
Usually do not include any indirect costs
Are the costs recorded in preceding departments
Are the costs of the completed units

Use the following information for the next 4 questions.

Tong, Inc. is a manufacturing company that uses a process costing system. All direct material is added at the start of the process, and spoilage is discovered at the end. During the first period of operations 15,000 units of material were placed into production at a cost of $20 each (ignore conversion costs for this process). Ending work in process was 2,000 units, good units completed totaled 11,000 units, and normal spoilage is 15% of the units surviving inspection. Inspection takes place after the units are completed.

The unit cost assigned to the abnormal spoilage is
$-0-
$22.61
$20.00
$24.00
The unit cost assigned to the normal spoilage is
$-0-
$22.61
$20.00
$24.00
The unit cost assigned to the ending work in process inventory is
$-0-
$22.61
$20.00
$24.00
The unit cost assigned to the good units completed is
$-0-
$20.00
$24.00
$23.00

Assume a company’s beginning work in process consists of 20,000 units, 40% complete. Materials are added at the beginning of the process. During the month, 90,000 units are transferred in. The ending work in process consists of 10,000 units, 50% complete. Under the standard cost method, the equivalent units of production are

Transferred In Materials Conversion Costs

90,000 90,000 97,000
110,000 100,000 105,000
110,000 92,000 105,000
90,000 100,000 105,000

Use the following information for the next 2 questions.

The number of equivalent units of conversion costs is
23,200
17,680
19,600
21,280
The number of units started this month is
20,000 units
22,000 units
28,000 units
15,280 units

More Difficult Multiple Choice

These multiple choice questions require more complex computations or present information differently than in the textbook.

Use the following information for the next 2 questions.

Assume that conversion costs are $122,100 for the month, and the equivalent unit cost for conversion is $5.50. The ending work in process is 80% complete, and the beginning work in process consisted of 2,000 units, 40% complete. The company completed 17,000 units. What is the number of whole units in the ending work in process under the FIFO method?
6,000 units
6,500 units
7,500 units
5,200 units
Assume the total conversion costs allocated to the completed units was $91,650. What amount of conversion costs are attached to the beginning work in process at the beginning of the month?
$1,850
$2,550
$4,400

d None of the above

Use the following information for the next 2 questions.

Xeno, Inc. operates a process costing system and uses the FIFO method. Beginning work in process consists of 1,000 units, 30% complete. Ending work in process is 15% complete, and direct materials are added at the 20% point. The equivalent units of production for materials are 14,000 and for conversion costs are 18,000.

The number of units in ending work in process was
37,000
14,000
18,000
22,000
The number of units started this month was
15,000
18,000
36,000
37,000

Use the following information for the next 6 questions.

Miramar, Inc. uses a weighted-average process costing system which recognizes normal spoilage as 5% of good output. During the current period, 14,000 units were started and 10,000 units completed. Materials are added at the beginning of the process, conversion costs occur uniformly, and the inspection point is at the 70% point. Beginning work in process was 6,000 units, 40% complete, and ending work in process 9,000 units, 80% complete. The cost per equivalent unit for material was $1.00 and for conversion costs $3.00.

The number of units in abnormal spoilage was
500
50
–0-
550
The number of equivalent units of conversion costs was
17,200
19,700
20,000
17,900
The cost of abnormal spoilage was
$200
$1,550
$155
$2,000
The cost of goods completed was
$41,550
$40,000
$40,816
$41,053
The cost of ending work in process was
$31,995
$30,600
$31,334
$31,547

The total costs in work in process during the period were
$31,995
$70,600
$73,700
Cannot be determined

Use the following information for the next 5 questions.

Macey Company uses a weighted-average process costing system. Beginning inventory consists of 6,000 units, 40% complete. Units started are 14,000, completed are 10,000, and ending inventories are 9,000 units, 70% complete. Normal spoilage is 5% of the units inspected. Direct material is added at the 75% point and spoilage inspection occurs at the 80% point. The cost per equivalent unit for materials was $1.00 and $3.00 for conversion costs.

The number of equivalent units of material was
a. 20,000
18,000
18,200
11,000
The loss from abnormal spoilage was
$1,530
$1,800
$1,440
$1,080
The cost of the units completed was
$40,000
$42,200
$41,760
$41,870
The cost of the ending work in process was
$30,600
$18,900
$28,800
$36,000
Assume actual spoilage was 500 units and ending work in process was 9,500 units. The equivalent units of conversion costs would be
17,130
17,150
17,050
17,200

Use the following information for the next 4 questions.

Beginning work in process consists of 7,000 units, 55% complete. 50,000 units were started and ending work in process is 5,000 units, 25% complete. Normal spoilage is equal to 10% of the units inspected. The inspection point occurs at the 20% point and 7,000 units were rejected. Direct materials are added at the 50% point, direct labor at 30% and overhead is applied uniformly. The costs per equivalent unit are: direct material $1.00; direct labor $1.50; overhead $2.00.

The equivalent units of labor are
48,000
45,000
46,000
46,500
The cost of abnormal spoilage is
$800
$1,400
$1,800
$4,000
The cost of the ending work in process is
$2,500
$2,850
$2,700
$4,000
The number of units completed is
45,000
47,000
50,000
57,000

Use the following information for the next 4 questions.

Kelly, Inc. uses a weighted-average process costing system that calculates normal rework as 2% of the units passing inspection. The inspection point is at the 75% point and units failing inspection are returned to the 40% point. During the current period, 50,000 units were started; 62,000 units inspected; and 52,000 units completed. Direct material is added at the 50% point and conversion costs occur uniformly. Beginning work in process was 10,000 units, 55% complete and ending work in process was 8,000 units, 85% complete. Costs per equivalent unit for material were $1.00 and $3.00 for conversion costs.

The number of units reworked was
3,000
2,000
8,000
10,000
The loss from abnormal rework was
$3,200
$1,640
$1,120
$4,018
The cost of the goods completed was
$210,132
$208,000
$210,460
$208,328
The cost of the ending work in process was
$28,400
$30,532
$32,328
$28,728
Normal spoilage is
Considered to be a cost of the good units produced
Recorded to a special loss account
Treated as a current period expense
Allocated to beginning work in process when it comes after the inspection point

Normal spoilage can be defined as
Controllable spoilage
Spoilage that results from inefficient operations
A percentage of the units surviving inspection
A loss in the period in which it occurred
Abnormal spoilage is
The units that exceed the predetermined normal spoilage
A cost of production allocated to the units surviving inspection
Uncontrollable spoilage
Spoilage attributable to efficient operations

Multiple Choice from Study Guide

^s72. Process costing is most likely to be used by which of the following companies?

Construction company that builds custom homes
Shipyard
Manufacturer of metal folding chairs
Producer of special order furniture

^s73. Equivalent units of production are the

Number of units a company produced during a specified time period
Number of units a company worked on during a specified time period
Same as the number of units started and completed during a specified time period
Number of whole units a company could have produced during a specified time period if it would have produced only whole units

^s74. The difference between the weighted average and FIFO methods of computing equivalent units of production is the manner in which the

Equivalent units for beginning inventory is computed
Number of units started and completed is computed
Equivalent units for ending inventory is computed
Number of units completed and transferred out is computed

^s75. Which of the following statements about the weighted average and FIFO methods is true?

Equivalent units of production cannot be the same under the two methods.
Equivalent units of production under FIFO are always greater than or equal to equivalent units of production under the weighted average method.
Equivalent units of production under FIFO will equal equivalent units of production under the weighted average method only when there are no units in ending inventory.
Equivalent units of production for ending inventory units are the same under the two methods.

^s76. Suppose that a company adds material at the beginning of production and that conversion costs are incurred evenly throughout production. In May, the beginning work in process inventory was 20% complete and the ending work in process inventory was 30% complete. Under the FIFO method, the number of equivalent units of production for direct materials for May is equal to the number of units

Started in May
Started and completed in May plus 30% times the number of units in ending inventory for May
Started and completed in May plus 20% times the number of units in beginning inventory plus 30% times the number of units in ending inventory for May
Started and completed in May plus 80% times the number of units in beginning inventory plus 30% times the number of units in ending inventory for May

^s77. Suppose that a company adds material at the beginning of production and that conversion costs are incurred evenly throughout production. In May, the beginning work in process inventory was 20% complete and the ending work in process inventory was 30% complete. Under the weighted average method, the number of equivalent units of production for direct materials for May is equal to the number of units

Started in May plus the number of units in beginning inventory for May
Started and completed in May plus 30% times the number of units in ending inventory for May
Started and completed in May plus 20% times the number of units in beginning inventory plus 30% times the number of units in ending inventory for May
Started and completed in May plus 80% times the number of units in beginning inventory plus 30% times the number of units in ending inventory for May

^s78. Suppose that a company adds material at the beginning of production and that conversion costs are incurred evenly throughout production. In May, the beginning work in process inventory was 20% complete and the ending work in process inventory was 30% complete. Under the FIFO method, the number of equivalent units of production for conversion costs for May is equal to the number of units

Started in May
Started and completed in May plus 30% times the number of units in ending inventory for May
Started and completed in May plus 20% times the number of units in beginning inventory plus 30% times the number of units in ending inventory for May
Started and completed in May plus 80% times the number of units in beginning inventory plus 30% times the number of units in ending inventory for May

^s79. Suppose that a company adds material at the beginning of production and that conversion costs are incurred evenly throughout production. In May, the beginning work in process inventory was 20% complete and the ending work in process inventory was 30% complete. Under the weighted average method, the number of equivalent units of production for conversion costs for May is equal to the number of units

Completed in May plus 30% times the number of units in ending inventory for May
Started and completed in May plus 30% times the number of units in ending inventory for May
Started and completed in May plus 20% times the number of units in beginning inventory plus 30% times the number of units in ending inventory for May
Started and completed in May plus 80% times the number of units in beginning inventory plus 30% times the number of units in ending inventory for May

^s80. When will the weighted average and FIFO methods compute the same dollar amount for the costs to be transferred to the next department?

When there are no units in ending inventory
When there are no units in beginning inventory
When the number of units in beginning inventory equals the number of units in ending inventory
When beginning and ending inventory were at the same stage of completion

^s81. Which of the following is the correct journal entry to transfer costs out of the Finishing Department, which is the last processing department?

Debit Work in Process Inventory – Finishing Department and credit Finished Goods Inventory
Debit Cost of Goods Sold and credit Finished Goods Inventory
Debit Cost of Goods Sold and credit Work in Process Inventory – Finishing Department
Debit Finished Goods Inventory and credit Work in Process Inventory – Finishing Department

^s82. Under the weighted average method of process costing, the costs attached to the units in beginning work in process inventory are

Not included in the computation of cost per equivalent unit
Handled the same way as they are in FIFO process costing
Included with the current costs when cost per equivalent unit is calculated
Included with the costs attached to the units in ending work in process inventory

^s83. Which of the following statements is false?

Under the FIFO method, beginning inventory costs are kept separate from the current period’s costs
Under the weighted average method, beginning inventory costs are combined with the current period’s costs
The weighted average and FIFO methods will assign the same amount of costs to the ending inventory units under a standard costing system
The weighted average method is superior to the FIFO method for the purposes of controlling costs

^s84. Sundae’s Sundries uses the weighted average method of process costing. The company’s ending work in process inventory consisted of 8,000 units that were 80% complete. Materials are added at the beginning of processing. The direct materials cost per equivalent unit was $3.20, and the conversion cost per equivalent unit was $1.80. What is the amount of cost Sundae would assign to ending work in process inventory?

$28,480
$37,120
$32,000
$40,000

^s85. Mikey’s Mugs uses the FIFO method of process costing. The company’s ending work in process inventory consisted of 12,000 units that were 40% complete and had incurred 80% of the materials costs. The direct materials cost per equivalent unit was $2.40, and the conversion cost per equivalent unit was $3.30. What is the amount of cost Mikey would assign to ending work in process inventory?

$27,360
$38,880
$46,800
$68,400

^s86. Schachte Corporation uses the weighted average method of process costing. The company had 7,000 units in ending work in process inventory, and it started 70,000 units this month. There were 12,000 units in beginning work in process inventory. If the total processing cost per equivalent unit is $3, what is the amount of cost transferred out of work in process this month?

$189,000
$210,000
$225,000
$231,000

^s87. Which of the following statements is true?

Transferred-in costs are the materials costs from the prior department.
Transferred-in costs are the costs from all prior departments.
Transferred-in costs are the costs from the prior period.
All transferred-in costs will be assigned to the units completed and transferred out during the period.

^s88. Maka Manufacturing uses the weighted average method of process costing. You are given the following information for Department 2 for February:

Units Percent Complete

Beginning work in process inventory 2,200 30%

Transferred in from the prior

department during February 70,000 –

Ending work in process inventory 4,500 20%

Suppose the conversion cost per equivalent unit is $2.10. How much conversion costs were transferred to the next department during February?

$137,550
$142,170
$147,000
$151,620

^s89. Normal spoilage is

Unacceptable units of production that occur because of an unexpected event
Spoilage that exceeds expectations
Unacceptable units of production that occur because of poor quality inputs
Unacceptable units of production that are considered part of normal manufacturing operations

^s90. Abnormal spoilage is

Debited to Cost of Goods Sold
Spoilage that exceeds expectations
Considered a product cost
Unacceptable units of production that are considered part of normal manufacturing operations

^s91. The costs of normal spoilage

Are debited to a loss account
Are included with the costs of the good units transferred out
Decrease the per unit processing cost for the good units transferred out
Do not affect the per unit processing cost for the good units transferred out

^s92. The costs of abnormal spoilage

Are debited to a Finished Goods Inventory
Are included with the costs of the good units transferred out
Decrease the per unit processing cost for the good units transferred out
Do not affect the per unit processing cost for the good units transferred out

^s93. You are given the following information for Joseph Manufacturing:

Beginning inventory units 1,000

Ending inventory units 5,000

Units started 24,000

Good units completed 17,000

Suppose that a 4% defect rate (based on the number of good units completed) is considered normal. Compute the number of units of normal spoilage and the number of units of abnormal spoilage, respectively, assuming that the inspection for spoiled units occurs at the end of processing.

960 and 2,040
800 and 2,200
1,160and 1,840
680 and 2,320

Use the following information for the next 5 questions.

You are given the following information for the SJK Company for January:

Beginning inventory units 2,000

Ending inventory units 1,000

Units started 28,000

Good units completed 27,000

The total processing cost per equivalent unit was $15 in January. SJK considers spoilage equal to 5% of the good units transferred out to finished goods to be normal. SJK uses the weighted average method of process costing for its sole production department, and inspection for spoiled units occurs at the end of processing.

^s94. The costs attached to normal spoilage total

$35,250
$30,000
$20,250
$9,750

^s95. The costs attached to abnormal spoilage total

$35,250
$30,000
$20,250
$9,750

^s96. The costs attached to good units completed and transferred out total

$375,000
$405,000
$425,250
$435,000

^s97. The per unit cost of the good units transferred out equals

$13.89
$15.00
$15.75
$16.11

^s98. The entry to transfer costs out of work in process and into finished goods and a loss from abnormal spoilage account includes a credit to Work in Process Inventory for

$384,750
$414,750
$425,250
$435,000

^s99. In April, the beginning work in process inventory for Department 2 was 40% complete and the ending work in process inventory was 90% complete. Under the FIFO method, the number of equivalent units of production for transferred-in costs for April is equal to the number of units

Started and completed in April plus 90% times the number of units in ending inventory for April
Started and completed in April plus 40% times the number of units in beginning inventory plus 90% times the number of units in ending inventory for April
Started and completed in April plus 40% times the number of units in beginning inventory plus 90% times the number of units in ending inventory for April
Started in April

^s100. In April, the beginning work in process inventory for Department 2 was 40% complete and the ending work in process inventory was 90% complete. Under the weighted average method, the number of equivalent units of production for transferred-in costs for April is equal to the number of units

Started and completed in April plus 90% times the number of units in ending inventory for April
Started and completed in April plus 40% times the number of units in beginning inventory plus 90% times the number of units in ending inventory for April
Started and completed in April plus 40% times the number of units in beginning inventory plus 90% times the number of units in ending inventory for April
Started in April plus the number of units in beginning inventory for April

Multiple Choice from Web Quizzes (Available on Student Web Site)

^w101. Process costing is used to account for costs in

Custom manufacturing
Services such as health care
Mass production
None of the above

^w102. Equivalent units reflect

All of the units produced in a period
The amount of work that could have been completed if all effort had gone to complete whole units instead of partially completed units
Only the units that are partially complete at the end of the period
Only the units that are partially complete at the beginning of the period

^w103. Direct materials are allocated

Very often at the beginning of the manufacturing process
Uniformly throughout the manufacturing process

III. At a different rate than conversion costs and, therefore, need to be valued separately for ending inventories

I only
I and III only
I, II, and III
I and II only

^w104. Conversion costs

Are not used in process costing
Are often incurred unevenly, but are allocated evenly throughout the production process
Include the cost of direct materials
Are usually incurred and allocated evenly throughout the production process

^w105. Direct materials are added at the beginning of the process. There are 10,000 units in ending WIP inventory that are 75% complete with regard to conversion costs. The equivalent units in ending WIP are:

Direct Materials Conversion Costs

10,000 7,500
7,500 7,500
10,000 10,000
7,500 10,000

^w106. Under mass production, at the end of the period

The production line is stopped so that all units are completed to reduce accounting problems
Some units will be partially complete, and conversion costs and direct material costs need to be assigned to them
The books cannot be closed because the production never stops
All of the units that are not complete are counted as 100% complete to reduce bookkeeping problems

^w107. Direct materials are added at the beginning of the process. This period began with 5,000 units in beginning inventory that are 25% complete. What are the equivalent units for beginning work in process under the FIFO method?

Direct Materials Conversion Costs

5,000 1,250
5,000 3,750
0 1,250
0 3,750

^w108. Process costing

Is used for assigning costs in mass production
Can only be used in manufacturing

III. Can be used in some service industries

I only
I and II only
I and III only
I, II, and III

^w109. The weighted average method

Considers only this period’s costs and work
Includes beginning WIP costs in the equivalent unit cost calculations
Uses standard costs to allocate cost to units
Excludes ending WIP units and costs

^w110. Normal spoilage includes

Spoilage that arises because operations are out of control
Spoilage that arises as a regular part of ordinary production
Spoilage that arises when external events cause a lot of units to be spoiled
Reworked units

^w111. Once the physical units have been summarized

Costs are allocated to all of the work done this period
The cost report is complete
Equivalent units need to be summarized
Costs are allocated only to ending WIP inventories

^w112. The cost of transferred-in units is accounted for by

Ignoring it
Adding it to beginning WIP and work performed this period as an additional cost with a separate category
Adding it to direct materials and allocating it with the direct materials
Adding it to conversion costs and allocating it with conversion costs

^w113. Once equivalent unit costs have been developed

Information is gathered about production
Costs are allocated to all units transferred out and in ending WIP
The equivalent units and equivalent unit costs are calculated
The physical units and total costs are summarized

^w114. The following method(s) best reflects current period costs

Weighted average method
FIFO method

III. Standard cost method

I only
II only
I and III only
II and III only

^w115. Beginning WIP units were 8,000, and 40,000 units were transferred out this period. Ending WIP is 4,000 units. What is the number of units started and completed this period?

48,000
40,000
32,000
28,000

Use the following information for the next 5 questions.

(CMA) The accountant for Whirly Manufacturing Inc. gathered the following information for the month of November.

Beginning WIP 16,000 units

Started in production 100,000

Completed production 92,000

Ending WIP 24,000

The beginning inventory was 60% complete for materials and 20% complete for conversion costs. The ending inventory was 90% complete for materials and 40% complete for conversion costs.

Costs pertaining to the month of November are as follows:

Beginning inventory costs are:

Materials $54,560

Direct labor 20,320

Factory overhead 15,240

Costs incurred during November include:

Materials $468,000

Direct labor 182,880

Factory overhead 391,160

^w116. Using the first-in, first-out (FIFO) method, the equivalent units of production for materials are

97,600 units
104,000 units
107,200 units
113,600 units

^w117. Using the FIFO method, the equivalent units of production for conversion costs are

85,600 units
95,200 units
98,400 units
101,600 units

^w118. Using the FIFO method, the equivalent unit cost of materials for November is

$4.12
$4.50
$4.60
$4.80

^w119. Using the FIFO method, the equivalent unit conversion cost for November is

$5.65
$5.83
$6.00
$6.20

^w120. Using the FIFO method, the total cost of units in the ending work in process inventory on November 30 is

$153,168
$154,800
$155,328
$156,960

Matching

Several terms related to alternative systems for mass production are listed below on the right, and definitions are listed on the left. Match each term with the definition that best describes it. Each numbered item has only one correct answer. Each lettered item may be used once, more than once, or not at all.

____ 1. Units in each batch are identical and each batch goes through the same production process

____ 2. Track costs using work orders for batches of products

____ 3. Simplifies process costing because inventories are minimized

____ 4. Provide a comparison benchmark for actual costs

____ 5. Production costs managers expect to incur under operating plan assumptions

____ 6. Process costing is used to the point of customization

____ 7. Inventory units are received and delivered just as needed, so there is very little beginning or ending inventory

____ 8. Direct costs are traced to each job as the job is customized

____ 9. Can lead to long-term price stability for direct materials

____ 10. Allocated to units in a manner similar to FIFO process costing

A. Hybrid costing

B. Just In Time

C. Operation costing

D. Procurement contracts

E. Standard costs

F. None of the above

Exercises

Following are production data for a process costing system.

Beginning work in process, 30% complete 12,000 units

Started 90,000 units

Ending work in process, 70% complete 8,000 units

Costs:

Beginning work in process:

Direct Materials $ 28,800

Conversion costs 5,220

Materials used during the period 216,000

Conversion costs incurred during the period 139,200

Using the FIFO basis, prepare a process costing report.
Write out the journal entries for the costs incurred and the work performed this period under the FIFO method.
Following are production data for a process costing system.

Beginning work in process, 30% complete 12,000 units

Started 90,000 units

Ending work in process, 70% complete 8,000 units

Costs:

Beginning work in process:

Direct Materials $ 28,800

Conversion costs 5,220

Materials used during the period 216,000

Conversion costs incurred during the period 139,200

Using the weighted average, prepare a process costing report.
Write out the journal entries for the costs incurred and the work performed this period under the weighted average method.
Mojdehi Manufacturing Co. uses a weighted average process costing system. During the current period 4,800 units were transferred in (cost $150,000) to Department Q. In Department Q materials were added costing $20,000 and conversion costs of $55,000 were incurred. A total of 4,400 good units were transferred to finished goods. Normal spoilage is 2% of the units inspected, and the inspection occurs at the end of the process. Direct materials are added at the beginning of the process. Additionally:

Beginning WIP: 1,000 units, 40% complete

Direct materials costs = $4,070

Conversion costs = $6,008

Transferred-in costs = $10,080

Ending WIP: 1,200 units, 30% complete

Prepare a complete process costing report for the current period.

At the beginning of August 20×1, CHN Corporation had 100 units in beginning work in process, which were 100% complete with respect to materials and 20% complete with respect to conversion. CHN started 500 units during August. Ending work in process consisted of 50 units, which were 100% complete with respect to materials and 60% complete with respect to conversion.

Calculate CHN’s equivalent units for August using the FIFO method.
Calculate CHN’s equivalent units for August using the weighted average method.
Felix and Sons produce a small plastic toy called the Monster Car. Materials are added at the beginning of the process in the plastic forming process. Conversion was 75% complete for the 8,000 units in work in process on February 1 and 50% complete for the 6,000 units in work in process on February 29. During February 12,000 Monster Cars were started and completed with respect to the forming department and transferred to the next department. There was no spoilage over the period. Here is an analysis of the costs for the period:

Direct Materials Conversion Costs

Work in process, July 1 $ 9,900 $ 3,600

Costs added in July 15,600 10,800

$25,500 $14,400

Using the weighted average method, prepare a schedule to show the calculation of the total cost per equivalent unit for February. That is, calculate the equivalent unit cost for direct materials and for conversion costs and then sum them.

DPH Corporation is in the chemical manufacturing business. Products go through two production departments (A first, then B). Data from those departments for November 20×1 are presented below.

	Department A
	Beginning work in process	Ending work in process
Number of units	500	300
% complete for materials	100%	100%
% complete for conversion	60%	30%
Total materials cost	$12,000
Total conversion cost	$15,000
	Department B
	Beginning work in process	Ending work in process
Number of units	100	150
% complete for materials	100%	100%
% complete for conversion	30%	40%
Total materials cost	-0-
Total conversion cost	$20,000
Total transferred-in costs	7,500

DPH started 1,300 units of product during the month in Department A. Costs incurred in Department A for November 20×1 totaled $32,000 for material and $66,000 for conversion. Additionally, Department B incurred conversion costs in November 20×1 of $300,000. Department B adds no materials to the product.

Prepare a production cost report for Department B for November 20×1. DPH accounts for its costs using the weighted-average method.
Write out the journal entry for the transfer of goods from Department A to Department B.

Sunflower Seed Producers manufactures cooking oil and other products made from sunflower seeds. All direct materials are added at the beginning of the production process. Data for the direct materials used in the manufacture of cooking oil for the month of December is listed below.

Production data:

Beginning work in process 25,000 units

Units started during the period 50,000 units

Completed and transferred out 67,500 units

Manufacturing costs:

Beginning work in process (direct materials) $35,000

Direct material used $75,000

Under the FIFO method, how many units were started and completed with respect to direct materials during the month?
Under the FIFO method, what is the cost of the direct materials in ending work in process at the end of the month?
Under the FIFO method, what is the amount of direct materials cost transferred out this period?
Calculate the direct materials cost per equivalent unit under the weighted average method.
Did the purchase price of direct materials increase or decrease this period compared to last period? Explain.

More Difficult Exercises

These exercises require more complex computations or present information differently than in the textbook.

WLS Corporation uses weighted-average process costing. Equivalent units of production for September 20×2 were 640 for materials and 615 for conversion. Other information for September follows:

Beginning work in process totaled 200 units, 100% complete for direct materials and 80% complete for conversion costs
500 units were started during the month.
Ending work in process consisted of 100 units.

Calculate the number of units completed and transferred out for September 20×2.
Calculate the percentage of completion for ending work in process.
Indy, Inc. uses a process costing system. At the beginning of the month there were 7,000 units in process, 30% complete. During the month 90,000 units were transferred in and 86,000 were completed and transferred to finished goods. The ending work in process was 11,000 units, 60% complete.

Materials are added at the beginning of the process, and labor at the 50% point. Overhead costs are incurred uniformly. The cost of beginning work in process was $14,080 for materials, $3,272 for overhead, and $28,700 for transferred-in costs. Current costs are $193,500 for materials, $131,920 for labor, $220,820 for overhead, and $369,000 for transferred-in costs. Indy uses the FIFO method.

Determine the cost of the goods completed and transferred out.
Write out the journal entry to record the units transferred to finished goods.
Determine the cost of the ending work in process.
Indy, Inc. uses a process costing system. At the beginning of the month there were 7,000 units in process, 30% complete. During the month 90,000 units were transferred in and 86,000 were completed and transferred to finished goods. The ending work in process was 11,000 units, 60% complete.

Materials are added at the beginning of the process, and labor at the 50% point. Overhead costs are incurred uniformly. The cost of the beginning work in process was $14,080 for materials, $3,272 for overhead, and $28,700 for transferred-in costs. Current costs are $193,500 for materials, $131,920 for labor, $220,820 for overhead, and $369,000 for transferred-in costs. Indy uses the weighted average method.

Determine the cost of the goods completed and transferred out.
Write out the journal entry to record the units transferred to finished goods.
Determine the cost of the ending work in process.

Short Answer

Explain the differences between the weighted average and FIFO process costing methods.
The manager in a plant that mass-produces computer components would like information about the most current costs because the cost of direct materials frequently changes. Provide a recommendation for a process costing method and give one reason for your recommendation.
List three products that are mass produced and for which process costing would be appropriate.
Explain why an organization might use both FIFO and standard costs in a process costing system.
Describe normal spoilage in your own words and explain how it is recorded in a process costing system.
Describe abnormal spoilage in your own words and explain how it is recorded in a process costing system.
When normal spoilage levels are high, any excess spoilage is classified as abnormal spoilage and recorded as a loss for the period. Managers are likely to be held responsible for these losses. Explain why a manager might prefer to send more units to be reworked when spoilage levels increase.
The accountant at DPL Company is thinking about dividing the process costing conversion costs into three separate cost pools: direct labor, variable overhead, and fixed overhead. Each cost pool would be allocated separately to equivalent units. Discuss whether this approach would improve the accuracy of costs assigned to each unit.
List one cost and one benefit from moving inspection to an earlier position in the manufacturing process.
List a potential business risk that occurs when spoilage rates increase dramatically.
List one pro and one con that managers should identify when they consider the trade-offs between investing in quality improvements and incurring the costs of undetected spoiled units.
Describe one factor that would affect an accountant’s choice of process costing method.
List two reasons why actual costs are likely to be different from standard costs in a given period.
Explain how normal spoilage costs are treated when goods are transferred to another department in a process costing system.

Problems

OVT Corporation manufactures picture frames. Production takes place in three departments, described below:

Cutting: Machines cut 6-foot boards into 3-, 6- and 12-inch lengths.

Assembly: Individual pieces of wood are glued together in square and rectangular shapes.

Finishing: The picture frames are painted, lacquered, and dried. They are then packed into boxes of 100 frames each and shipped to retailers.

Inventory levels and costs at OVT are fairly constant, at the amounts shown in the following table:

Ending WIP Stage of Completion Department Cost

Inventory Direct Conversion Per Equivalent

(units) Materials Costs Unit

Cutting 150 100% 40% $1.15

Assembly 250 100% 30% 0.75

Finishing 200 100% 70% 2.10

Total cost per equivalent unit $4.00

Finished goods inventory (i.e., boxes of completed frames awaiting shipment) is typically around 300; each box of 100 frames has an approximate total cost of $450.

Identify and describe two risks that OVT faces as a result of keeping 300 boxes of finished goods inventory on hand.
Should Joanne expect the cost per equivalent unit in each department to be the same from month to month? If so, explain why. If not, identify two reasons why the cost of a picture frame might vary over time.
Notice that the department cost per equivalent unit (excluding transferred-in costs) is lowest in the Assembly Department and highest in the Finishing Department. Recalling that the cost per equivalent unit is made up of direct material, direct labor, and overhead, suggest two reasons why the Assembly Department’s cost is lowest.
OVT is considering implementing more automation in its production operation. For example, frames are currently painted and lacquered by hand in the Finishing Department. OVT’s president, Max Kinley, wants to replace most of the direct labor workers in the Finishing Department with painting and lacquering machines. Explain how the use of machines in place of direct labor workers would affect the direct labor cost and overhead cost per equivalent unit.
OVT currently calculates the cost of picture frames using the weighted-average method. However, it could use the FIFO method. Explain the similarities and differences between the two methods. Discuss one pro and one con of using the weighted average method.
Spoilage costs in OVT Corporation are normally minimal and are treated in the accounting information system as abnormal costs. How would OVT’s accountant record the cost of spoiled units? Explain the process. Describe why there is no single, correct way to account for the cost of spoiled units in a process costing system.
Like most information in cost accounting, OVT’s costs are subject to some uncertainties. For example, estimating the percentage of completion for ending work in process involves some estimation and uncertainty. Identify and explain two additional uncertainties associated with using process costing to calculate the cost of a picture frame.
Falcon Fabricating Company uses a process costing system. One of the employees is responsible for estimating the percentage completion; however, he has never had any formal training in making these estimates. He is wondering whether the accuracy of his estimates could be improved. A colleague in another department suggested that he consider using techniques such as timing one unit through each department and identifying points in the production process where units appear to be 25% complete, 50% complete, and so on.
Discuss why the percent completion is not generally known with absolute accuracy.
Comment on whether the suggested method is likely to provide an accurate estimate of work in process.
List one advantage of improving the accuracy of the estimate. What might be a disadvantage?
Mountain Meadow Grains produces trail mix. Materials are added at the beginning of the process, and the company uses the FIFO process costing method. Inspection takes place when the product is 100% complete. Normal spoilage is 4% of good units completed. Here is the production information for the latest period.

Beginning WIP (75% complete) 20,000 units

Good units completed and transferred out 80,000 units

Ending WIP inventory (90% complete) 24,000 units

Total spoilage 4,800 units

FIFO cost per equivalent unit:

Materials $1.00

Conversion costs 1.50

Total unit cost $2.50

Cost of Beginning WIP $50,000

Calculate the cost of abnormal spoilage.
Calculate the cost of good units completed and transferred, including an allocation of normal spoilage costs.
The costs recorded in the accounting system for spoilage include direct materials and conversion costs up to the point of completion. However, these recorded costs are only part of the costs incurred when spoilage occurs. Write a brief paragraph that discusses other costs of spoilage that are not recorded in the accounting system and explain why they might be more important to an organization than the costs in the accounting system.
Discuss why uncertainties exist about how much spoilage is normal versus abnormal.

Johnson and Heffner make janitorial supplies and has a department that produces cleaning brushes. All direct materials are added at the beginning of production, and conversion costs are incurred evenly throughout production. The 2,000 units in Beginning WIP on December 1 were 80% complete, and the 4,000 units in Ending WIP on December 31 were 25% complete. During the month, 16,000 units of cleaning brushes were completed and transferred out as finished goods.

Using this information and the cost information provided below, fill in the blanks in the following FIFO process costing report by calculating the amounts for items A-X. Round total costs to the nearest dollar and per-unit costs to the nearest cent.

1. Summarize Total Costs to Account For
	Direct Materials	Conversion Costs	Total Costs
Beginning WIP	$ 4,000	A	$ 8,800
Current period costs	B	46,200	82,200
Total costs to account for	C	D	E

2. Summarize Physical and Equivalent Units
	Beginning WIP 80%	Work Performed This Period				Total Units to Account for
	Beginning WIP 80%	Complete Beg. WIP 20%	Start and Complete	Start Ending WIP 25%	Total Work Performed This Period	Total Units to Account for
Physical Units	2,000	0	F	4,000	18,000	G

Equivalent Units:
Direct Materials	2,000	H	14,000	J	18,000	L
Conversion Costs	1,600	I	14,000	K	15,400	M

3. Calculate Cost Per Equivalent Unit
Direct Materials	N
Conversion Costs	O
Total Cost Per Equivalent Unit	$5.0000

(continued on next page)

4. FIFO Process Cost Report
	Units	Total
Beginning WIP	2,000	$8,800
Costs to complete beginning WIP		P

Total cost of beginning WIP transferred out	2,000	Q

Units started, completed, and transferred out	R	S

Total units completed and transferred out	T	U

Ending WIP:	4,000
Direct materials		V
Conversion costs		W
Total ending WIP cost		X

Total Units Accounted For	20,000
Total Costs Accounted For		$91,000

Kovacik Products uses a FIFO process costing system to accumulate product costs. The Fabricating Process center is the first center, where production of bronze lamps begins. Direct materials are used in the beginning of the process. November’s information follows:

Beginning work in process (75% complete) 16,000 units

Started in November 117,500 units

Ending work in process (40% complete) 17,500 units

Costs for November were:

Beginning inventory $24,000 Direct materials

6,000 Direct labor

12,000 Overhead

Current costs added: $204,800 Direct materials

72,150 Direct labor

127,650 Allocated overhead

Calculate the equivalent units and cost per unit of direct material and conversion using the FIFO method.
The manager estimating completion believes that she may have underestimated the percentage of completion for ending inventory. Explain how this will affect the cost per equivalent unit this period and next period.
Next period volumes of production are expected to increase and because of volume discounts, direct materials costs are expected to decrease. At the end of next period, would weighted average or FIFO show a lower cost per unit? Explain.

Answers

True / False

Multiple Choice

C; 600 + 6,000 – 400
B; 13,000 + 1,000
C; 15,000 + 1,000
D; 15,000 + 1,000(0.6)
A; equiv unit cost = $31,500/10,500
B; TC = $1,250 + $31,500 = $32,750; units = 500 + 10,500 = 11,000
C; 15,000 – 1,500 = 13,500
A; 750(0.4) + 13,500 + 1,500(0.4)
D; $150,000 / 15,000
B; # units completed = 14,250 = 750 in beg WIP + 13,500 start & compl; cost per equiv unit = $83,520 / {750(0.4) + 13,500 + 1,500(0.4)} = $5.80; beg WIP = $5,925 + $4,095 + $5.80(750)(0.4) = $184,020; start & compl cost = 13,500 * $15.80 = $213,300
A; 750 + 15,000
B; units = 750 + 13,000 + 1,500(0.4) = 14,850; cost = $83,520 + $4,095 = $87,615
A; units = 15,750 – 1,500 = 14,250; CC per equiv unit = $5.90; DM per equiv unit = ($5,925 + $150,000) / 15,750 = $9.90
D; (1,500 * $9.90) + (1,500 * 0.4 * $5.90)
A; 20 + 160 = 170 + end WIP à end WIP = 10; wtd avg = 170 + 10 = 180; FIFO = 150 + 10 = 160
A; 20,000 * $4.00 – $61,500
C; 6,000(0.4) + 14,000 + 3,200
B; 20,000 – 6,000 + 3,200 / 0.4
C; 1,200 – 350
A; 850 + 350
B; $38,040 / 1,200
C; $17,013 / {250(0.6) + 350(0.2) + 850) = $15.90; $1,250 + $1,356 + $2,560 + 250(0.6)($15.90) = $7,551
D; 350 * ($6,000 / 1,200 + $38,040 / 1,200) = $12,845; 350 * 20% * $15.90 = $1,113; $12,845 + $1,113 = $13,958
C; 1,200 + 250 – 350 = 1,100; 350 * 20% = 70; 1,100 + 70 = 1,170
B; $38,040 + $2,560
A; ($1,250 + $6,000) / (1,100 + 350)
A; ($1,356 + $17,013) / 1,170 = $15.70; ($38,040 + $2,560) / (1,200 + 250) = $28.00; 1,100 * ($5.00 + $15.70 + $28.00) = $53,570
D; (350 * $33) + (350 * 20% * $15.70) = $12,649
C; materials: 20 + 90 = 110; trans = 20 + 90 = 110; conv = 100 + 10(0.5) = 105
A; trans = 90; materials = 90; conv = 80 + 10(0.5) + 20(0.6) = 97
C
A
B
B
A
B
B
C
A
C
C
D; {(11,000)($20) + (11,000 * .15 * $20)} / 11,000
A; trans = 90; materials = 90; conv = 80 + 10(0.5) + 20(0.6) = 97
C; 6000(0.4) + 14,000 + 3,200
B; 20,000 – 6,000 + 3,200 / 0.4
C; $122,100 / $5.50 = 22,200 equiv units; 22,200 = 2,000(0.6) + 15,000 + 0.8(n)
B; $91,650 – {(15,000 + 2,000(0.6)) ($5.50)}
D; DM equiv units = 14,000 = -0- from beg WIP + 14,000 start & compl + -0- from end WIP; CC equiv units = 18,000 = 1,000(0.7) from beg WIP + 14,000 start & compl + n(0.15) from end WIP
C; 14,000 + 22,000
B; total spoilage = 14,000 + 6,000 – 10,000 – 9,000 = 1,000; normal = 19,000 * 5% = 950; abnormal = 1,000 – 950 = 50
D; 10,000 + 9,000(0.8) + 1,000(0.7)
C; (50 * 1.00) + (50 * 70% * $3.00)
A; (10,000 * $4.00) + 10 / 19 {(950 * $1.00) + (950 * 70% * $3.00)}
A; (9,000 * $1.00) + (9,000 * 80% * $3.00) + 9 / 19 {(950 * $1.00) + (950 * 70% * $3.00)}
C; (10,000 * $4) + (9,000 * 80% * $3) + (9,000 * $1) + (1,000 * $1) + (1,000 * 70% * $3)
D; total spoilage = 6,000 + 14,000 – 10,000 – 9,000 = 1,000; 10,000 + 1,000 = 11,000
A; units inspected = 10,000 + 1,000 = 11,000; normal spoilage = 5% * 11,000 = 550; abnormal = 1,000 – 550 = 450 units; (450 * $1.00) + (450 * 80% * $3.00) = $1,530
D; 10,000 * $4 + 550 * $1 + 550 * 80% * $3
B; 9,000 * $3 * 70%
C; 9,500 * 70% + 10,000 + 500 * 80%
B; spoilage is removed before labor is added, so only good units incur labor costs.

Good units start & compl = 7,000 + 50,000 – 7,000 – 5,000 = 45,000

A; units inspected = 50,000; normal spoilage = 5,000; abnormal spoilage = 2,000; cost = 2,000 * 20% * $2
C; (5,000 * 25% * $2) + (5,000 / 50,000 * 5,000 * 20% * $2)
A; 52,000 – 7,000
B; # passing inspection = 52,000 + 8,000 = 60,000; # inspected = 62,000; # reworked = 2,000
B; normal rework = 60,000 * 2% = 1,200 units; abnormal = 2,000 – 1,200 = 800; cost of abnormal rework = (800 * $1) + (800 * 35% * $3)
A; 52,000 * $4 + 52 / 60 {(1,200 * $1) + (1,200 * 35% * $3)}
D; 8,000 * $1 = $8,000; 8,000 * 85% * $3 = $20,400; 8 / 60 {(1,200 * $1) + (1,200 * 35% * $3)} = $328; $8,000 + $20,400 + $328 = $28,728
A
B
A

^s72. C

^s73. D

^s74. A

^s75. D

^s76. A

^s77. A

^s78. D

^s79. A

^s80. B

^s81. D

^s82. C

^s83. D

^s84. B; DM = 8,000 x $3.20 = $25,600; CC = 6,400 x $1.80 = $11,520; $25,600 + $11,520 = $37,120

^s85. B; DM: (80% x 12,000) x $2.40 = $23,040; CC: (40% x 12,000) x $3.30 = $15,840; $23,040 + $15,840 = $38,880

^s86. C; Using t-account # units trans out = 75,000 units; 75,000 x $3 = $225,000

^s87. B

^s88. B; Using t-account # units trans out = 67,700 units; 67,700 x $2.10 = $142,170

^s89. D

^s90. B

^s91. B

^s92. D

^s93. D; Using t-account # spoiled units = 3,000; Normal=17,000×4%=680; Abnormal=3,000-680=2,320

^s94. C; using 5-account # spoiled units = 2,000; Normal=27,000×5%=1,350; Abnormal=3,000-1,350=650; $15 x 1,350 = $20,250

^s95. D; $15 x 650 = $9,750

^s96. C; $15 x 27,000 + $20,250 = $425,250.

^s97. C; $425,250/27,000 = $15.75

^s98. D; Debit FG Inventory $425,250; Debit Loss from Ab. Spoilage $9,750; Credit WIP $435,000

^s99. D

^s100. D

^w101. C

^w102. B

^w103. D

^w104. B

^w105. A

^w106. B

^w107. D

^w108. C

^w109. B

^w110. B

^w111. C

^w112. B

^w113. B

^w114. B

^w115. C

^w116. B

^w117. C

^w118. B

^w119. B

^w120. A

Matching

Exercises

1 and 2 share the following computations:

Journal entries:

Work in process inventory $216,000

Raw material inventory $216,000

Work in process inventory $139,200

A/P, Wages Payable, etc. $139,200

Finished goods inventory $368,500

Work in process inventory $368,500

Journal entries:

Work in process inventory $216,000

Raw material inventory $216,000

Work in process inventory $139,200

A/P, Wages Payable, etc. $139,200

Finished goods inventory $367,336

Work in process inventory $367,336

a. Equivalent units for materials = 0 + 500 = 500

Equivalent units for conversion = (100 * 80%) + 450 + (50 * 60%) = 560

Equivalent units for materials = 100 + 500 = 600

Equivalent units for conversion = 550 + (50 * 60%) = 580

Equivalent units for direct materials = 8,000 + 12,000 + 8,000 = 26,000

Equivalent unit cost = ($25,500)/4,000 = $25,500/26,000 = $0.981

Equivalent units for conversion = 8,000 + (6,000 x 0.50) + 12,000 = 23,000

Equivalent unit cost = ($3,600 + $10,800)/23,000 = $0.626

Total equivalent unit cost = $1.607.

b. Journal entry:

Work in process inventory – Dept. B $113,082

Work in process inventory – Dept. A $113,082

a. Units in ending WIP = 7,500 (25,000 + 50,000 – 67,500)

Units started and completed = 50,000 – 7,500 = 42,500

FIFO equivalent unit cost = $75,000/50,000 = $1.50, ending WIP = 7,500 x $1.50 = $11,250
Cost of units transferred out = $35,000 + (42,500 * $1.50) = $98,750
Equivalent unit cost under weighted average = $110,000/75,000 = $1.47
Costs increased from last period compared to this period because FIFO costs are current period costs and the equivalent unit cost was $1.50, whereas the weighted average costs include last period’s costs and the equivalent unit cost was $1.47, which is lower than the FIFO cost. Therefore costs increased.
a. 200 + 500 – 100 = 600
Materials: 640 = 600 started & completed + 100 (% complete) à % complete = 40

Conversion: 615 = 600 started & completed + 100 (% complete) à % complete = 15

Journal entry:

Finished goods inventory $861,478

Work in process inventory $861,478

a. 86,000 * $10.02 = $861,720
Journal entry:

Finished goods inventory $861,720

Work in process inventory $861,720

11,000*($10.02-$2.42) + 11,000*0.6*$2.42 = $99,572

Short Answer

The weighted average method combines work and costs from the prior period by adding beginning WIP to its calculations. FIFO ignores work and costs from last period in developing this period’s cost per unit, and then adds last period’s work in the process cost report to reflect the cost of beginning inventories transferred out.
The FIFO method tracks the most current costs, so it would be the best method under this circumstance.
Three products that would use process costing include many types of food such as soda or breakfast cereals, containers such as soda cans or plastic bottles, pharmaceuticals, toys, etc. Students may have a variety of answers.
Standard costs are used as benchmarks for current period results. FIFO most accurately reflects the current period costs, so it is the best measure for comparing to a standard cost benchmark. This allows managers to determine whether costs are in control so that they can take action if needed.
Normal spoilage arises as part of regular operations and is considered unavoidable. It is recorded as part of the cost of units produced and transferred out.
Abnormal spoilage arises from out-of-control operations or some event that is unusual that spoils units, such as a natural disaster – flood, earthquake, and so on. It is recorded as a loss for the period.
Managers may not want to be held responsible for high levels of spoilage, and so they will send spoiled units to be reworked. Abnormal spoilage is recorded in a separate loss account and visible to higher levels of management. As abnormal spoilage amounts increase, managers may begin to worry about their reputation with upper levels of management. By sending units for rework, the manager avoids any attention being drawn to operations that are not in control.
Whether the proposed approach would improve the accuracy of costs assigned to each unit depends on how the various types of conversion costs are incurred in the production process. Combining all conversion costs into a single cost pool makes the assumption that direct labor, variable overhead, and fixed overhead are all incurred at about the same time during production. However, these costs may be incurred at different points in the process. For example, in a computerized manufacturing environment, labor might be required at only the beginning and end of the process. Similarly, indirect supplies used in preparing equipment for a new batch of product might be required only at the end of each batch. In these situations, the accuracy of cost assignment might be improved if separate cost pools are used to accumulate and allocate different types of conversion costs.
If inspection is moved to an earlier position in the manufacturing process, spoiled units have less work and less cost added before they are removed from production, thus saving costs. However, if this is done, another inspection may need to be added at a later point if units can be spoiled after the earlier point of inspection. This adds cost.
A risk that arises when spoilage increases dramatically is the risk that more spoiled units will escape detection and be sold, which increases the risk of loss of market share due to deteriorating reputation when spoiled goods are detected by customers.
Some pros for investing in quality improvements are increased reputation for quality, decreased warranty and replacement costs, and less liability for problems caused by defective units. Cons are the costs to improve quality, which may not outweigh the benefits, particularly if there is currently little spoilage.
The volatility of input prices affects accountants’ choices of process costing methods. The more simple method is weighted average, but it combines last period’s costs with this period’s. If costs do not change quickly, this method is appropriate. If costs change often, and managers want to know current costs for cost control, the FIFO method is better because it measures current period work and current period costs only.
Input prices such as direct materials or direct labor can change, the efficiency of the operation might change, if there is a large volume change, discounts might be given, or overtime could be paid. There are many other reasons that can cause actual costs to vary from the standard costs.
When normal spoilage costs are transferred to another department, they are added to the cost of good units completed and transferred out that period.

Problems

a. Risks of maintaining 300 boxes of frames as ending inventory include (but are not limited to):
The possibility that demand for wooden picture frames will decrease, leaving OVT with worthless inventory.
The boxes of inventory could be stolen.
The boxes could be damaged by heat or cold or water if the storage facility has any problems.
Joanne should probably not expect the cost per equivalent unit in each department to be the same from month to month, although the costs may vary within only a small range. The cost per equivalent unit might vary because of differences in production levels, fluctuations in worker efficiency, variations in raw material or overhead costs, changes in cost flow assumptions, or changes in the costs of raw materials.
The cost per equivalent unit in Assembly could be the lowest of the three departments because it involves relatively unskilled labor compared to cutting and finishing. Additionally, the cost could be lowest because the Assembly Dept. uses less machinery, leading to less depreciation charges.
Replacing direct labor workers with machines would likely decrease the direct labor cost per unit. But, because of the depreciation associated with new machinery, overhead cost per unit would likely increase.
In both the weighted average and FIFO methods of process cost accounting, managers must account for the same total cost; in addition, both methods require the calculation of equivalent units. However, in FIFO costing, the units in beginning WIP are treated separately as they flow through the AIS. In the weighted average method, units started and completed in the current period are “lumped together” with beginning work in process. Using the weighted-average method offers the advantage of simpler computations and recordkeeping. However, if costs incurred in prior periods are significantly different from those incurred in the current period, costs may be distorted by using the weighted-average method.
Abnormal spoilage is accounted for in a separate account in the accounting information system, such as “Loss from Abnormal Spoilage.” There is no single, correct way to account for spoilage because it requires judgment on a number of points: What constitutes normal vs. abnormal spoilage? How do managers view spoilage in the production system?
Additional uncertainties associated with using process costing to calculate the cost of a picture frame include (but are not limited to):

* Determining the pattern in which conversion costs are added to production

* Determining the pattern in which direct materials are added to production , if they are added other than at the beginning

* Distinguishing between normal and abnormal spoilage

a. Depending on the production process, all of the units in work in process inventories might be at different stages of completion. When work is at many different stages of completion, estimating the average percentage of completion for ending inventories involves some guesswork. However, estimation is often required even if all units are at the same stage of production. It may not be possible to determine exactly what proportion of costs has been incurred at each point in the production process. Direct materials are usually easiest to measure; labor and overhead (i.e., conversion costs) may be quite difficult.
The suggested method seems to be logical, and it may improve the employee’s judgment, but it is impossible to calculate or estimate an amount of completion that is completely accurate because we do not know exactly what will be required to complete them. Prices and processes could change even a little bit, or some units might become spoiled. Because we cannot foresee the exact resources needed to complete the units, we can only provide estimates of the percentage completed.
Managers will have more accurate information about current costs, and that might be important for cost control. In addition, managers would have a better idea of throughput time (i.e., how long it takes units to move through production). A disadvantage might be the amount time it takes to develop a more accurate estimate. This investment may not be worth the benefit, particularly if there is very little work in process at the end of the period.
a. Normal spoilage = 3,200 units (0.04 x 80,000)

Abnormal spoilage = 4,800 – 3,200 = 1,600 units at $2.50 each = $4,000

Good units produced cost = $200,000 (80,000 x $2.50)

Normal spoilage cost = 3,200 x $2.50 = $8,000

Total cost of good units transferred out = $208,000.

Other costs incurred because of spoilage include loss of reputation and market share because of the poor quality goods. Spoilage also results in an opportunity costs because normal profits are foregone on the spoiled units. In addition, warranty and replacement costs are incurred, as well as any liability costs for problems caused by defective units. These costs could cause loss of profits, and if severe enough, could cause the business to close.
Normal spoilage consists of defective units that arise as part of regular operations, while all other spoilage is considered abnormal. Therefore, this question requires students to discuss uncertainties about how to identify which part of spoilage arises from regular operations. Here are some uncertainties; students may think of others:
Random fluctuations in the quality of materials, worker performance, or other aspects of operations
Inability to determine whether operations are in control
Lack of experience with a particular product or process (for example, when producing a new product or a job order)
Inability to fully anticipate results when changing the quality of materials, adopting new production processes, installing new equipment, etc.

1. Summarize Total Costs to Account For
	Direct Materials	Conversion Costs	Total Costs
Beginning WIP	$ 4,000	A $ 4,800	$ 8,800
Current period costs	B 36,000	46,200	82,200
Total costs to account for	C $40,000	D $51,000	E $91,000

2. Summarize Physical and Equivalent Units
	Beginning WIP 80%	Work Performed This Period				Total Units to Account for
	Beginning WIP 80%	Complete Beg. WIP 20%	Start and Complete	Start Ending WIP 25%	Total Work Performed This Period	Total Units to Account for
Physical Units	2,000	0	F 14,000	4,000	18,000	G 20,000

Equivalent Units:
Direct Materials	2,000	H 0	14,000	J 4,000	18,000	L 20,000
Conversion Costs	1,600	I 400	14,000	K 1,000	15,400	M 17,000

3. Calculate Cost Per Equivalent Unit
Direct Materials	N $2.0000
Conversion Costs	O $3.0000
Total Cost Per Equivalent Unit	$5.0000

4. FIFO Process Cost Report
	Units	Total
Beginning WIP	2,000	$8,800
Costs to complete beginning WIP		P $1,200

Total cost of beginning WIP transferred out	2,000	Q $10,000

Units started, completed, and transferred out	R 14,000	S $70,000

Total units completed and transferred out	T 16,000	U $80,000

Ending WIP:	4,000
Direct materials		V $8,000
Conversion costs		W $3,000
Total ending WIP cost		X $11,000

Total Units Accounted For	20,000
Total Costs Accounted For		$91,000

a. Equivalent units: DM = 117,500 cost per equivalent unit DM = $204,800/117,500 = $1.74

Equivalent units: CC = 16,000 x 25% + 100,000 + 17,500 x 40% = 111,000, cost per equivalent unit CC =( $72,150 + $127,650)/111,000 = $199,800/111,000 = $1.8.

If the percentage completion is underestimated, then too few units were used in the denominator and equivalent unit cost is too high this period. Income will be understated this period and overstated next period, as will balance sheet accounts.
Next period FIFO would show lower costs per unit because that method uses the most current costs.

Chapter 7: Activity-Based Costing and Management

Learning Questions	True / False	Multiple Choice	Matching	Exercises	Short Answer	Problems
1. What is activity-based costing (ABC)?	1-5	1-8, 81 S: 84, 86, 87, 94, 95 W: 109, 111	1	1	8	1, 2
2. What are activities, and how are they identified?	6-8	9-17, 29 W: 99, 104-107	2	2	1, 2, 9	3
3. What process is used to assign costs in an ABC system?	9-17	18-28, 30, 31-46, 77-80, 82, 83 S: 88-91, 96 W: 100, 101, 112, 113 S: 85, 92 W: 110	3, 4, 5, 7	3, 4	11	1, 2, 3
4. What is activity-based management (ABM)?	18-24	47-58 W: 98, 102, 103	4, 6, 7		3, 4, 5, 7	1, 2, 3, 4
5. What are GPK and RCA?	28-29				12
6. How does information from ABC, GPK, and RCA affect managers’ incentives and decisions?	25-27	59-76 S: 93 W: 97, 108		4	6, 10	2, 3, 4

S: Questions from the study guide

W: Questions from web quizzes on the student web site

Level of Complexity*	True / False	Multiple Choice	Matching	Exercises	Short Answer	Problems
Foundation: Repeat or paraphrase information; Reason to single correct solution; Perform computations; etc.	All	All	All	All	1, 2, 4, 7	1, 2, 3, 4
Step 1: Identify the problem, relevant information, and uncertainties				3, 4	5, 9	2, 3, 4
Step 2: Explore interpretations and connections					3, 6, 8, 10, 11	1, 3, 4
Step 3: Prioritize alternatives and implement conclusions
Step 4: Envision and direct strategic innovation

*Based on level in Steps for Better Thinking (Exhibit 1.10, textbook p. 16):

True / False

Both activity-based costing and traditional costing allocate overhead costs to cost objects.
Activity-based costing increases the accuracy of cost measurement by using arbitrary cost allocation bases for overhead.
Unlike activity-based costing, traditional costing systems never use multiple cost pools for overhead allocation.
Generally speaking, activity-based costing traces direct costs more accurately than traditional costing.
An activity is a type of task or function performed in an organization.
In an activity-based costing system, both organization-sustaining and facility-sustaining activities are assumed to be unaffected by the number of customers.
Product advertising for a new product is an example of a customer-sustaining cost in an ABC system.
Administrative salaries are an example of an organization-sustaining cost in an ABC system.
When applying ABC concepts to the determination of product costs, the first step is to identify activities.
In an ABC system costs are first assigned to cost pools, then always to units of product.
Each cost pool in an ABC system has at least one cost driver.
Each cost pool in an ABC system has its own cost allocation rate.
In an ABC system, a “cost object” could be a unit of product, a product line, or a customer.
Ideally, activity costs in an ABC system are allocated to cost objects using a driver that explains changes in activity costs.
The terms “cost driver” and “allocation base” are interchangeable.
Accountants normally can determine cost drivers for all cost pools on their own, without consulting other employees in the organization.
Information about potential cost drivers may be requested from employees directly involved in activities.
Activity-based management and activity-based costing are two ways of describing the same thing.
Organizations interested in using activity-based management must first implement an activity-based costing system.
All organizations that use activity-based costing also use activity-based management.
Activity-based management can be used to manage both quality and constrained resources.
Managers can use activity-based management to control environmental costs.
ABC systems allow managers to focus on measurement at the activity level.
ABC systems measure resource flows in an organization.
The costs of designing and implementing an ABC system include employee time and training.
The availability of activity costs is inversely related to the cost of implementing an ABC system.
One of the uncertainties associated with ABC and ABM systems is employee response to design and implementation.
Under GPK a cost center is a department or larger cost object.
GPK uses proportional costs, not variable costs.Multiple Choice
Cost accounting systems were originally developed to
Assign costs to products for financial reporting purposes
Assign costs to products for tax reporting purposes
Give managers better information for making decisions
Allocate direct costs to cost objects
Which method(s) do traditional accounting systems use to assign the following costs to cost objects (departments or units)?

Direct Costs Overhead Costs

Allocate Trace
Trace Allocate
Allocate Allocate
Trace Trace
Which of the following statements about costing systems is true?
Both traditional and activity-based costing systems use a two-stage allocation process
Traditional costing systems use a two-stage allocation process, but ABC systems require three stages
ABC systems typically use a two-stage allocation process, whereas traditional systems use a single stage
Both traditional and activity-based costing systems use a three-stage allocation process
ABC systems are similar to traditional costing systems in the way they
Allocate direct costs to cost objects
Define cost allocation bases
Trace direct costs to cost objects
Trace indirect costs to activities
ABC systems differ from traditional systems in that ABC systems
Trace direct costs to cost objects
Use multiple cost pools and cost drivers to allocate direct costs
Use multiple cost pools and cost drivers to allocate overhead costs
Assign costs only to units of product
APL Corporation allocates overhead to cost objects using a two-stage process. From this information, we can infer that APL
Uses a traditional costing system
Uses an activity-based costing system
May be using either a traditional or an activity-based costing system
Is reporting its product costs accurately
Compared to a traditional costing system, an activity-based costing system usually involves
Fewer cost pools
More cost pools
The same number of cost pools
Bigger cost pools
ABC systems differ from traditional costing systems because ABC systems use
Multiple activity cost pools and cost drivers to allocate overhead costs
Multiple activity cost pools and cost drivers to allocate direct costs
More automation and information technology to allocate overhead costs
Less automation and information technology to allocate overhead costs

Use the following information for the next 5 questions.

Le Pavilion is an historic hotel just outside the French Quarter in New Orleans. It is owned by Refined Hotels, which operates additional properties in Chicago, Cincinnati, and San Antonio. Le Pavilion has 9 floors, with approximately 20 rooms per floor. Facilities also include a workout room, restaurant, and pool. The hotel is organized in 5 departments: front desk, engineering, housekeeping, food & beverage, and customer relations. As part of its operation, Le Pavilion regularly incurs the following costs:

General manager’s salary

Housekeeping supplies

Utility costs

Depreciation on workout room equipment

Advertising

Food and beverage costs

Depreciation on restaurant equipment

If Le Pavilion is the cost object, which of the following best describes the general manager’s salary?
Batch-level cost
Customer-sustaining cost
Facility-sustaining cost
Organization-sustaining cost
From the perspective of Refined Hotels, advertising specifically for Le Pavilion is best described as a(n)
Unit-level cost
Customer-sustaining cost
Product-sustaining cost
Batch-level cost
Advertising for the Refined Hotels chain is best described as a(n)
Facility-sustaining cost
Organization-sustaining cost
Product-sustaining cost
Batch-level cost
Which cost listed above is most likely to be a customer-sustaining cost?
Depreciation on workout room equipment
Utility costs
Housekeeping supplies
General manager’s salary
Le Pavilion could define its cost objects as
Customers only
Departments only

III. Number of employees

I only
I and II only
II only
I, II, and III
Which of the following activities involves managing a plant, area, or location within an organization?
Organization-sustaining
Facility-sustaining
Customer-sustaining
Product-sustaining

In an ABC system, an activity is best defined as a
Type of task performed in an organization
Collection of activities in a particular department
Collection of cost drivers associated with a particular cost pool
Group of cost pools associated with a particular department
Which category of the ABC hierarchy has costs that are primarily fixed and activities with little or no cause-and-effect relationship with costs?
Unit-level
Batch-level
Organization-sustaining
Product-sustaining
Managers are most likely to identify activities in an ABC system by
Examining the financial statements
Forecasting market demand using the high-low method
Consulting employees
Tracking general ledger account balances
Which of the steps listed below normally occurs first when assigning costs in an ABC system?
Assign costs to activity-based pools
Allocate activity costs to each cost object
Identify activities
Identify the relevant cost object
Which of the following is not part of the process used to assign costs in an ABC system?
Identify activities
Differentiate value-adding and non-value-adding activities
Identify the relevant cost object
Assign costs to activity-based pools
In an ABC system, a cost driver must be chosen for each
Activity
Cost pool
Cost object
Unit-level activity

Use the following information for the next 6 questions.

Tutors-R-Us provides academic enrichment and review activities for high school students in 4 subject areas: English, mathematics, science, and history. In November 20×1, the firm’s information system produced the following data:

Number of Number of Percent of Direct

Tutors Students Faculty Costs

English 4 20 10% $ 6,000

Mathematics 3 24 25 8,000

Science 5 15 50 12,000

History 2 8 15 3,000

Regardless of subject area, clients pay $50 per hour for tutoring services. Costs associated with the Tutors-R-Us operations for November 20×1 included:

Facility rent $2,500

Custodial services 1,800

Utilities 600

Computer equipment depreciation 800

Advertising 400

Which of the following could be a cost object for Tutors-R-Us?
A student
A subject area

III. A cost pool

I and II only
II and III only
I and III only
I, II, and III
The number of students in each area is most likely to be a cost driver for
Utility costs
Advertising costs
Cost for tutors
Price charged for tutoring
Which of the following is the most logical allocation base for facility rent if the relevant cost object is a subject area (product line)?
Number of tutors
Direct costs
Percentage of square feet occupied
Direct labor hours
If the number of tutors in each area is the cost driver for custodial services, the total custodial services cost allocated to history would be:
$450
$270
$257
None of the above
Which of the following groups of costs are most likely to have a common cost driver?
Advertising & computer equipment depreciation
Computer equipment depreciation & utilities
Utilities & custodial services
Utilities & advertising
Assume Tutors-R-Us allocates facility rent, custodial services, and utilities on the basis of square feet occupied and computer equipment depreciation on the basis of number of students. Advertising is not allocated. If students received 200 hours of mathematics tutoring in November 20×1, what will the total profit from mathematics tutoring be for the same period?
$10,000
$8,775
$8,488

d.. $488

Use the following information for the next 5 questions.

The FSOJ Company undertakes the following activities in its production operation and incurred the following costs during the first half of 20×2:

Harvest oranges $25,000

Prepare oranges for processing 20,000

Extract juice from oranges 18,000

Process juice into orange juice concentrate,
orange juice or orange popsicles 30,000

Package completed products 9,000

(continued on the next page)

Processing the juice into 3 final products involves the use of 2 machines, each of which incurred depreciation costs of $15,000 for the first half of 20×2. Each product requires a different set up on the processing machines, so FSOJ normally sets up the machines to produce concentrate for the first week of each month. The machine is then set up to produce orange juice for the next 2 weeks. Finally, workers set up the same machines to produce orange popsicles during the last week of each month.

During the first half of 20×2, 20% of the oranges harvested were turned into orange juice concentrate, 50% were processed into orange juice, and 30% became orange popsicles. The relative sales values of each product were: 75% for orange juice, 20% for orange juice concentrate, and 5% for popsicles. The orange juice concentrate operation takes up 40% of FSOJ’s total factory space. Regular orange juice and orange popsicles occupy 35% and 25%, respectively.

Which of the preceding costs would most likely have “number of setups” as its cost driver?
Harvest oranges
Package completed products
Process juice
Extract juice
Preparing oranges for processing involves peeling and removing seeds. The best cost driver for the cost of preparing oranges for processing would be
Square feet occupied by the preparation equipment
Percent of oranges harvested for each product line
Direct labor hours
Total direct costs
Which of the following activities is likely to be classified as product-level?
Packaging
Harvesting
Extracting
Prepare oranges for processing
Assume processing costs are allocated on the basis of number of machine setups. How much processing cost will be allocated to each product line?
$5,000 to each product line
$7,500 each to orange juice concentrate and orange popsicles, and $15,000 to orange juice
$10,000 to each product line
None of the above
If juice extraction costs are allocated to product lines based on relative sales values, that is, each product line’s portion of total sales, the amount allocated to popsicles will be
$900
$5,400
$4,500
None of the above
At least one cost driver is required for each ABC cost
Activity
Pool
Object
Product line
Ideally, activity costs are allocated to cost objects using a ___ that explains changes in activity ___.
Pool, Cost
Pool, Driver
Driver, Cost
Driver, Pools
A cost driver is
A measure of activity that causes costs to fluctuate
Only used in ABC systems
Seldom related to cost changes in an ABC system
Usually related to cost changes in a traditional costing system
An allocation base is
Normally related to cost changes in a traditional costing system
A measure of activity that causes costs to fluctuate
Seldom related to cost changes in an ABC system
Often used incorrectly as a synonym for “cost driver”
Which of the following statements is true?
Cost drivers are a special kind of allocation base
Allocation bases are a special kind of cost driver
Cost drivers and allocation bases are two names for the same thing
Allocation bases are seldom used in traditional costing systems
The best allocation base choice for an ABC cost pool is a(n)
Cost driver
Activity dictionary
Allocation rate
Financial measure

Use the following information for the next 4 questions.

Suppose the Issaquah Blood Bank has identified an individual blood drive as its cost object. It has established the following cost pools in developing an activity-based costing system:

Non-medical personnel costs. Salaries and wages of the office staff who organize blood drives and keep donor records.

Medical personnel costs. Salaries and wages of doctors and nurses who staff a blood drive.

Medical supplies. Cost of needles, bandages, and containers for donated blood.

Non-medical supplies. Costs of refreshments for blood donors and recordkeeping supplies.

Blood drives typically require 5 to 7 beds for blood donors. Each donation requires one container (in the medical supplies cost pool), one needle, and one set of bandages. The American Red Cross normally receives donated space from a community organization (such as a university or company) for each blood drive.

The most likely cost driver for the medical personnel cost pool is
Number of blood donors
Number of beds
Percentage of square feet occupied by the blood drive
Dollar value of blood donated
The most likely cost driver for non-medical supplies is:
Number of blood donors
Number of beds
Hours available for blood donations
Percentage of square feet occupied by the blood drive
The most likely cost driver for the medical supplies cost pool is
Number of beds
Hours available for blood donations
Percentage of square feet occupied by the blood drive
Number of blood donors

Non-medical personnel costs would be most appropriately allocated using
Number of blood drives organized
Number of blood donors
Hours available for blood donations
Dollar value of blood donated
Cost drivers are most likely to be identified using information
From the financial statements
Elicited from customers
Elicited from employees involved in related activities
From textbooks
The managers of HRY Corporation are analyzing some of their corporate costs to determine the costs of each department’s use of administrative services. The accountant wants to allocate the costs of payroll processing using an activity-based costing system. The most appropriate cost driver for the payroll processing cost pool is the
Number of pay periods per month
Number of employees
Average hourly wage for all employees
Maximum number of deductions from an individual employee’s paycheck
FNG Corporation employs 4 purchasing agents. Rick processes purchase orders for vendors starting with the letters A through H, while Merrill does the same task for vendors from I through N. Esteban deals with vendors in the O through R range, and Kathy handles the rest of the alphabet. The most likely cost driver for the purchasing agents’ salaries is the
Number of vendors within each alphabetical segment
Number of purchase orders processed each month
Average dollar amount of each purchase order
Number of product lines FNG produces
MNK Corporation is a large public company that employs numerous accounts receivable clerks. Their jobs involve processing invoices and keeping the accounting records updated. Which of the following is the most likely cost driver for the accounts receivable activity cost pool?
Number of journal entries
Number of product lines produced by MNK
Number of invoices
Average dollar amount for each credit sale
Lookin’ for a Home is an animal shelter in Omaha, Nebraska. The shelter relies on government grants and private donations for funding. It takes in homeless dogs and cats and keeps them until they are adopted by qualified individuals. One of the shelter’s cost pools is animal recordkeeping, which involves maintaining a database with details about each animal in the shelter. Which of the following is the most appropriate cost driver for the animal recordkeeping cost pool?
Number of government grants sought
Number of employees who work in the shelter
Number of animal intake and adoption transactions
Square feet allocated to the recordkeeping operation
The process of using ABC information to evaluate the costs and benefits of production and internal support activities is called
Activity-based management
Activity-based budgeting
Activity-based costing
Activity-based consulting

Activity-based management relies on
Accurate ABC information
Objective financial reporting
Outside consultants
Participative management techniques
Activity-based costing information can be used to identify the relative cost of maintaining different customers. Managers can use that information, coupled with activity-based management techniques, to manage
Customer quality
Customer profitability
Inventory levels
Staffing levels in the marketing department.
Managers can use ABM information to manage customer profitability. The most valuable groups of customers are those having the following characteristics

Types of Service

Products Ordered Requirements

High-margin Extensive
High-priced Low
Low-margin Low
High-margin Low
Phuong is a customer of PVL Corporation. She consistently orders low-margin products, but requires costly services from PVL. In employing ABM techniques to manage customer profitability, PVL’s staff should
Make no changes in service to Phuong
Develop creative approaches to managing Phuong as a customer
Require Phuong to pay for all orders in cash
Classify Phuong as a value-added customer and increase the amount of services provided to her
Value-added activities
Increase revenues
Increase the worth of an organization’s goods and services to customers
Increase the worth of an organization’s goods and services to stockholders
Increase costs that are unrelated to customers
BVH Corporation manufactures and sells cellular phones. Which of the following activities is least likely to be considered a value-added activity for BVH?
Repairing phones
Offering phones for sale in designer colors
Making phones smaller
Creating several ring-tone options for cellular phones
ABC can be used to determine the costs of quality and to help refine quality strategies. Quality activities are commonly classified as
Internal or external
Value-added or non-value-added
Prevention, appraisal, production, or post-sales
Process-oriented or job-oriented
Activities performed to insure defect-free production are called
Post-sales activities
Production activities
Prevention activities
Appraisal activities
Product inspections are an example of
Appraisal activities
Production activities
Prevention activities
Post-sales activities
NRL Corporation’s accounting information system reported warranty repair and product replacement costs totaling $12,000 in a recent accounting period. These costs are an example of which of the following quality costs?
Period costs
Post-sales activity costs
Activity-based costs
Prevention activity costs
How can ABC information be used to manage constrained resources?
ABC information cannot be used to manage constrained resources
ABC information can help managers identify the best way to relax constraints
ABC information can help managers decrease the rate at which products get through the manufacturing process
ABC information can help managers justify price increases due to constrained resources
Which of the following is not a benefit of an ABC system?
Helping managers focus on measurement at the activity level
Increasing profits
Improving accuracy in cost measurement
Motivating employees to find ways to improve performance
Costs associated with developing an ABC system most likely include
Reduced profits
Loss of market share
Employee time and consulting fees
Increased overhead costs
When implementing an ABC system, the accounting information system may require modifications to
Include fewer ledger accounts
Include only costs from the most recent periods
Gather and report activity and cost driver information
Include more ledger accounts
The cost of implementing an ABC system is likely to be lower if the number of times an activity is performed
Is low
Is high
Does not fluctuate seasonally
Can easily be tracked
For small manufacturing firms, ABC systems are best with

Number of Number of

Activities Cost Drivers

Few Few
Many Few
Many Many
Few Many

ABC systems are typically associated with
Higher quality and improved cycle time
Manufacturing firms, but not service firms
Service firms, but not manufacturing firms
Higher profitability for all firms that implement them
Which of the following factors are associated with successful ABC implementations?
Top management support and high market share
Performance evaluations and low market share
Top management support and performance evaluations
Middle management support and high market share
Which of the following do managers use in choosing activities and cost drivers to include in an ABC system?
Linear programming
Simple regression
Judgment
Activity-based management
As the number of activities in an ABC system increases, measurement error tends to
Increase
Decrease
Stay the same
Focus more on top management
In general, the risk of measurement error in an ABC system increases when
Costs are traced rather than allocated
Managers are uncertain about the relationship between costs and cost pools
The number of cost pools decreases
A company uses a team approach to systems design
Similar to other costing systems that include allocation, ABC cost information may be misleading for decision making purposes. To combat this problem, costs within an activity can be classified as
Flexible or committed
Flexible or variable
Fixed or committed
Product or period
In an ABC system, flexible costs
Vary with activity levels
Remain fixed regardless of activity levels
Should not be included in ABC cost pools
Are related to capacity
In an ABC system, committed costs
Vary with capacity levels
Vary with activity levels
Should not be included in ABC cost pools
Are related to capacity

To provide better decision making information about products, ABC systems can be set up with separate activity pools and cost rates for
Different levels of the ABC cost hierarchy
Committed and flexible costs within each cost pool

III. Different customers based on profitability levels

I and III only
II and III only
I and II only
I, II, and III
Uncertainties associated with ABC and ABM include
The appropriate choice of activities
The appropriate choice of cost drivers

III. Employee response to the system

I, II, and III
I and III only
I and II only
II and III only
Caring Change Medical Practice specializes in plastic surgery. Which of the following costs is most likely to be a committed cost in its operations?
Medical supplies
Office supplies
Hourly wages paid to bookkeeper
Facility rental
Caring Change Medical Practice specializes in plastic surgery. Which of the following is least likely to be a committed cost in its operations?
Facility rental
Hourly wages of custodial staff
CEO’s salary
Electricity for heat and lights
When managers use ABC cost allocation rates for decision making without distinguishing between flexible and committed costs, their estimates of incremental costs are biased upward or downward. If activity levels are steadily increasing over time, this bias would provide
Information that overstates costs
Information that understates costs
Accurate information
Reliable information

Use the following information for the next 4 questions.

Quick Start Engines has two departments, Assembly and Testing. You are given the following information about the costs of 5 activities that occur at the manufacturing plant monthly:

Activity Total Costs Volume of Cost Driver

Material handling $100,000 200,000 parts
Supervision of direct labor 105,000 70 employees
Janitorial and cleaning 150,000 3,000 hours
Machining 240,000 6,000 machine hours
Total costs $595,000

(continued on the next page)

The above activities are used by the two departments as follows:

Assembly Testing
Material handling 150,000 parts 50,000 parts
Supervision of direct labor 30 employees 40 employees
Time spent cleaning 2,000 hours 1,000 hours
Number of machine hours 4,000 machine hours 2,000 machine hours

How much of the material handling cost will be allocated to Assembly?
$75,000
$25,000
$66,667
$33,333
What is the ABC allocation rate for supervision of direct labor?
$3,500 per employee
$1,500 per employee
$0.50 per part
$50 per hour spent in supervision
How much of the janitorial costs will be allocated to Testing?
$25,000
$75,000
$100,000
$50,000
How much of the total activity costs will be allocated to Assembly?
$300,000
$275,000
$380,000
$350,000

Use the following information for the next 2 questions.

Flowing Wells Corporation is preparing its annual budget. As part of its analysis of the contribution of individual products to overall profitability, the controller estimates the amount of overhead that should be assigned to the individual product lines. Budgeted inspection costs are $4,800. Additional information is as follows:

Small Pumps Large Pumps

Units inspected 120 120

Hours spent inspecting 2.5 17.5

Direct labor hours per unit 2 2

Under a traditional costing system that assigns overhead on the basis of direct labor hours, the inspection costs allocated to one small pump would be
$10
$15
$20
$24
Under activity-based costing (ABC), the inspection cost assigned to one small pump would be

a $2.50

$5.00
$12.50
$10.00

Costs assigned to an activity pool for teaching children to swim at the county park are $2,700 per month. Number of students is chosen as the cost driver. On average, 300 students take swim lessons monthly. What is the ABC allocation rate for this activity?
Not enough information given
$27.00
$9.00
$0.90

Multiple Choice from Study Guide

^s84. A cost system will be improved if

As many costs as possible are classified as direct costs
Indirect cost pools include costs that have the same cost driver
Each indirect cost pool uses the same cost driver
Both (a) and (b)

^s85. Which of the following is the best cost driver for the activity “distributing products” if the final cost object is the product?

Number of trucks in the fleet of delivery vehicles
Total pounds of product delivered
Direct labor hours used in producing the products
The number of people who work in the distribution activity

^s86. ABC provides more accurate product costs than traditional costing because

Traditional costing uses fewer cost pools for indirect costs
Traditional costing is less likely to have indirect cost pools with similar cost behavior
Activities are measurable events, and activity counts often make good cost drivers in ABC because there is a better cause-and-effect relationship with costs
All of the above

^s87. Product costs under traditional costing will be the most different than product costs under ABC when the

Products consume different amounts of direct materials
Products consume different amounts of direct labor
Products are made at different times of the year
Products require differing amounts of special services during production

Use the following information for the next 4 questions.

Iowa Industries has two divisions, North and South. You are given the following information about the costs of 5 activities that occur at corporate headquarters:

Activity Total Costs Activity-cost drivers
Managing accounts payable $100,000 4,000 hours
Managing human resources 200,000 700 employees
Managing accounts receivable 150,000 3,000 hours
Managing computer network 250,000 500 computers
Total costs $700,000

The above activities are used by the two divisions as follows:

North Division South Division
Accounts payable hours 1,500 hours 2,500 hours
Number of employees 300 employees 400 employees
Accounts receivable hours 2,000 hours 1,000 hours
Number of computers 200 computers 300 computers

^s88. How much of the accounts payable cost will be allocated to North Division?

$262,500
$37,500
$62,500
$100,000

^s89. How much of the human resource cost will be allocated to South Division?

$28,571
$150,000
$85,714
$114,286

^s90. How much of the total activity costs will be allocated to South Division?

$323,214
$376,786
$341,463
$358,537

^s91. How much of the total activity costs will be allocated to North Division?

$323,214
$376,786
$341,463
$358,537

^s92. For which of the following is it more likely to be difficult to find a good cost driver?

Unit-level costs
Batch-level costs
Customer-sustaining costs
Organization-sustaining costs

^s93. Regarding the use of ABC product cost information for short-term decision making, which of the following is likely to be true?

Flexible costs should be excluded from the computation of product cost
Committed costs should be excluded from the computation of product cost
ABC product cost information should not be used for most short-term decisions
ABC product cost information cannot be used for decision making when there are constrained resources

^s94. In traditional costing, the cost allocation base used for overhead is most likely a

Unit-level cost driver
Batch-level cost driver
Customer-sustaining cost level driver
Facility-sustaining cost level driver

^s95. Ted’s Manufacturing makes two products, B and C. They each take 2 direct labor hours and 2 machine hours to produce. A batch of Product B, however, uses twice the number of machine set-ups and requires 3 times as many materials requisitions as does Product C. Which of the following is most likely true?

The product cost of Product C will be higher under ABC than under traditional costing
Traditional costing assigns a product cost that is too low to Product B
Traditional costing assigns a product cost that is too low to Product C
The product cost of Product B will be higher under ABC than under traditional costing

^s96. What is the correct order for the steps in the process to implement an ABC system?

Assign costs to the activity cost pools
Choose a cost driver for each activity cost pool
Calculate an allocation rate for each activity cost pool
Allocate activity costs to the final cost object
Identify activities
Identify the relevant cost object
6, 2, 1, 3, 4, 5
5, 6, 2, 1, 3, 4
5, 6, 1, 2, 3, 4
6, 5, 1, 2, 3, 4

Multiple Choice from Web Quizzes (Available on Student Web Site)

^w97. Activity Based Costing can be used for

Allocating manufacturing overhead
Allocating nonmanufacturing department costs

III. Determining customer related costs

I and II only
II and III only
I, II, and III
II only

^w98. All of the following are uses of Activity Based Management except

Determining costs for the general ledger
Determining quality costs
Determining customer profitability
Determining non-value-added activities

^w99. Which costs are least likely to be allocated to units under ABC?

Facility-sustaining costs
Batch-level costs
Product-sustaining costs
Unit-level costs

^w100. Costs assigned to an activity pool for vaccinating children at a well child clinic are $2,700 per month. Number of vaccinations is chosen as cost driver. On average, 300 vaccinations are given monthly. What is the ABC allocation rate for this activity?

Not enough information given
$27.00
$9.00
$0.90

^w101. Which of the following is performed first in setting up an ABC system?

Identify relevant cost objects
Assign costs to the costs pools
Identify activities that are part of the manufacturing or service delivery process
Allocate activity costs to the cost objects

^w102. All of the following are quality-related activities except

Prevention activities
Production activities (spoilage and rework)
Activities undertaken to advertise high quality
Post-sales activities

^w103. Operating efficiency improves with ABM through the use of ABC information to better manage

Customer profitability
Direct material costs
Advertising costs
Budgets

^w104. The cost hierarchy for an ABC system includes

Unit-level activities
Marketing activities

III. Product-sustaining activities

Administrative activities
I and III only
II and IV only
I and II only
III and IV only

^w105. Unit-level costs in ABC

Are the same as variable costs
Include the cost of advertising a product
Include the costs of setups for new batches of units
Include indirect materials for each unit

^w106. Product-sustaining costs include

Raw materials
The cost of advertising a product
Depreciation of the manufacturing plant
Tooling for a custom job

^w107. Batch-level costs include

Raw materials
The cost of advertising a product
Depreciation of the manufacturing plant
Tooling for a custom job

^w108. Which is an advantage of an ABC system?

ABC results in true product costs
ABC has little measurement error
ABC systems allow accountants to identify non-value adding activities
ABC is inexpensive to implement

^w109. One difference between a traditional costing system and an ABC system is

An ABC system allocates overhead to units of goods or services
An ABC system has more cost pools and more cost drivers
An ABC system traces direct materials to units and considers them to vary with volume
Information from an ABC system can be used for GAAP

^w110. (CMA) Cost drivers are

Activities that cause costs to increase as the activity increases
Accounting techniques used to control costs
Accounting measurements used to evaluate whether or not performance is proceeding according to plan
A mechanical basis, such as machine hours, computer time, size of equipment, or square feet of factory, used to assign costs to activities

^w111. What is the normal effect on the numbers of cost pools and allocation bases when an ABC system replaces a traditional cost system?

Cost Pools Allocation Bases

Decrease Decrease
Decrease No effect
No effect Increase
Increase Increase

Use the following information for the next 2 questions.

(CMA) Flagler Corporation is preparing its annual profit plan. As part of its analysis of the profitability of individual products, the controller estimates the amount of overhead that should be assigned to the individual product lines from the information given as follows:

Wall Mirrors Specialty Windows

Units produced 25 25

Material moves per product line 5 15

Direct labor hours per unit 200 200

Budgeted materials handling costs are $50,000.

^w112. Under a costing system that assigns overhead on the basis of direct labor hours, the materials handling costs allocated to one unit of wall mirrors would be

$1,000
$500
$2,000
$5,000

^w113. Under activity-based costing (ABC), the materials handling costs assigned to one unit of wall mirrors would be

$1,000
$500
$1,500
$2,500

Matching

Traditional costing and activity-based costing share some similarities, but are also different in significant ways. For each statement below, indicate whether it is a characteristic of: (A) activity-based costing only, (T) traditional costing only, (B) both traditional and activity-based costing, or (X) neither traditional nor activity-based costing.

____ 1. Allocates direct costs to cost of goods sold

____ 2. Assign manufacturing production costs to individual units in inventory

____ 3. Attempts to trace costs more accurately to products, product lines or departments

____ 4. Can employ multiple cost pools

____ 5. Commonly uses labor or machine hours as a cost allocation base

____ 6. Costs are assigned to units in the first stage; units to inventory in the second

____ 7. Requires judgment to develop allocation rates

____ 8. Multiple cost pools and drivers are used in the allocation process

____ 9. Originally developed primarily to assign costs to products for financial reporting

____ 10. Overhead costs are first assigned to pools, then allocated to individual units

Quality Limousines maintains a fleet of ten limousines: 5 extended sedans used for airport transportation, 3 stretch limousines used for transportation to and from local events, and 2 ultra-stretch limousines used for all-night parties. Quality considers its “units” as individual vehicle bookings. Product lines are associated with the 3 types of vehicles. A “batch” of units constitutes all of the bookings for a particular date.

Various costs associated with Quality’s operations are listed below. Indicate whether each cost most likely relates to a(n): (A) organization- or facility-sustaining activity, (B) customer-sustaining activity, (C) product-sustaining activity, (D) batch-level activity, or (E) unit-level activity.

____ 1. Cost of consultants who perform customer-satisfaction surveys for arriving airport passengers

____ 2. Driver salaries for January 20×2

____ 3. Fuel costs for extended sedans during December 20×1

____ 4. General advertising campaign promoting all three product lines

____ 5. Supplies for an ultra-stretch limousine booked on February 14, 20×2

____ 6. Maintenance costs for ultra-stretch limousines

____ 7. Market research conducted in local high schools

____ 8. Salary of Quality’s chief operating officer

____ 9. Special advertising promotion in connection with a local football championship

____ 10. Consultant’s salary for designing Quality’s web page

The steps to assign costs in an ABC system are listed below in random order. Number the steps in the correct order (1 through 6).

____ Assign costs to activity-based cost pools

____ Calculate an allocation rate for each cost pool

____ Choose a cost driver for each cost pool

____ For each ABC cost pool, allocate activity costs to the cost object

____ Identify activities

____ Identify the relevant cost object

Reliable Reminders Inc. is a personal service firm located in Claremont, California. The firm collects lists of birthdays, anniversaries and other memorable dates from its clients, and offers 3 levels of service. Level One clients receive an e-mail reminder of their important dates at least a week in advance. Level Two clients receive both an e-mail reminder and an appropriate greeting card. Level Three clients receive an e-mail reminder, an appropriate greeting card, and a recommended gift. Level One clients arrange their services through 3 customer service representatives. Reliable also employs 4 customer service representatives for Level Two clients, and 2 representatives for Level Three clients.

Reliable Reminders incurs the following costs as part of its operations, and it uses the following cost drivers. Management wants to calculate the cost of each level of service.

Activity Total Cost Cost Driver

Facility rent $3,500 Square feet

Utilities 1,200 Number of customer service representatives

Office supplies 800 Number of clients

You may find the following information helpful:

Level One Level Two Level Three

Square feet 1,000 1,500 1,000

Number of clients 8 20 12

Average weekly hours for each
customer service representative 15 18 20

Average number of reminders per client 5 6 10

Direct costs $2,500 $4,200 $5,000

Based on the preceding information, match each item on the left below with the most appropriate item on the right. Each numbered item has only one correct answer. Each lettered item may be used once, more than once, or not at all. Round all unit and total costs to the nearest dollar.

____ 1. Total costs to be allocated

____ 2. Total indirect costs allocated to Level One

____ 3. Total costs for Level Three

____ 4. Level with the lowest total cost per client

____ 5. Total cost per client for Level One

____ 6. Level with the highest total cost

____ 7. Level Three’s indirect cost per client

____ 8. Level with the highest direct cost per client

____ 9. Level One’s total direct costs per client

____ 10. Level with the lowest indirect cost per client

A. $17,200

B. $11,700

C. $5,500

D. $313

E. $126

F. Between $6,500 and $6,600

G. Between $2,400 and $2,500

H. Between $1,500 and $1,600

I. Level One

J. Level Two

K. Level Three

L. Some other amount

Several activities commonly performed in manufacturing organizations are listed below on the left. The right column contains potential cost drivers and / or allocation bases for those activities. Match the most suitable cost driver with the best activity. Each numbered item has only one correct answer. Each lettered item may be used once, more than once, or not at all.

____ 1. Administrative salaries

____ 2. Customer market research conducted in groups of 10 customers

____ 3. Customer sales representative salaries

____ 4. Departmental janitorial services

____ 5. General technical support salaries

____ 6. Headquarters housekeeping

____ 7. Material handling wages

____ 8. Salaries of product designers

____ 9. Shipping costs

____ 10. Single product line equipment depreciation

A. Typically not allocated

B. Square feet

C. Product weight

D. Number of engineering change orders

E. Number of customer phone calls

F. Number of customers

G. Number of questions

H. Machine hours

I. No suitable cost driver or allocation base listed

Activity-based management information can be used in several ways, including managing quality costs. Various quality-related costs are listed below. Indicate whether each cost most likely relates to a(n): (A) prevention activities, (B) appraisal activities, (C) production activities, or (D) post-sales activities.

____ 1. Routine equipment maintenance

____ 2. Finished product testing before shipment

____ 3. Customer satisfaction surveys

____ 4. Costs of spoilage and rework

____ 5. Warranty repairs

____ 6. Incoming raw materials testing

____ 7. Costs incurred to establish supplier qualifications

____ 8. Extra shipping costs incurred to meet customer deadlines

____ 9. Machinery repair costs

____ 10. Salaries of quality control inspectors

Several terms associated with activity-based costing and activity-based management are listed in the right-hand column below; definitions are listed on the left. Match each definition with the term it best describes. Each numbered item has only one correct answer. Each lettered item may be used only once or not at all.

____ 1. The process of using ABC information to evaluate the costs and benefits of internal support activities

____ 2. Tasks undertaken to manage a location

____ 3. Related in a logical manner and consume similar resources

____ 4. Managing customer profitability

____ 5. Increase the worth of an organization’s services to customers

____ 6. Functions undertaken to oversee the entire entity

____ 7. Assumes some downtime is unavoidable for maintenance and holidays

____ 8. An activity that causes costs to fluctuate

____ 9. A system for assigning overhead costs

____ 10. A function performed in an organization

A. A use of activity-based management

B. Activity

C. Activity-based costing

D. Activity-based management

E. Cost driver

F. Customer-sustaining activities

G. Facility-sustaining activities

H. Homogeneous activities

I. Organization-sustaining activities

J. Value-added activities

K. None of the above

Exercises

BCH Corporation produces and sells two types of sofa pillows: plain and fancy. Currently, BCH uses a traditional costing system with direct labor hours as the allocation base. Actual hours for 20×3 were 20,000. In anticipation of developing an activity-based costing system, BCH has identified the following cost pools and activities associated with pillow production:

Estimated Costs Actual Costs

Activity Driver for 20×4 for 20×3

Material cutting Number of cuts $16,000 $13,665

Sewing machine setups Number of setups 27,000 24,800

Factory maintenance Number of direct labor hours 15,000 17,000

$58,000 $55,465

Direct costs for a plain sofa pillow are $1.25 for material and $2.00 for direct labor (15 minutes @ $8.00 per hour). Direct costs for a fancy sofa pillow are $1.50 for material and $4.00 (30 minutes @ $8.00 per hour). In 20×4, BCH expects to make 8,000 fancy pillows and 10,000 plain pillows. Those output levels will require 5 setups for fancy pillows and 10 setups for plain pillows. For the material cutting activity, the number of cuts is estimated at 10,000 for each type of pillow.

Calculate the cost per unit for each type of pillow under traditional costing
Calculate the cost per unit for each type of pillow under ABC
Under traditional costing, which type of pillow cross-subsidizes the other pillow? Explain.
International Rental Cars incurred the following costs in a recent fiscal period:

Re-fueling cost for reservation #081859 $ 200

Custodial services for branch office in St. Louis 250

Painting costs for luxury sports cars 320

Salaries for corporate accountants 395

Generalized advertising for the firm 460

Depreciation on home office computer equipment 665

Office equipment depreciation for Pasadena branch 775

Market research with business travelers 860

Total $3,925

Calculate the total cost in each of the following categories:

Organization-sustaining activities
Facility-sustaining activities
Customer-sustaining activities
Product-sustaining activities
Batch-level activities
Unit-level activities
Fun for All is an amusement park located in Yucaipa, California. It is organized into 6 departments: arcades and shows, food and beverage, rides, communications, human resources, and maintenance. Fun for All is implementing an ABC system to allocate the costs of the service activities (communications, human resources, and maintenance) to product-line departments (arcades and shows, food and beverage, and rides). Thus, the product-line departments are the cost objects. The total costs and cost drivers for each service activity are:

Activity Total Cost Cost Driver

Communication $16,000 Number of department-specific memos prepared and distributed

Human resources 21,000 Number of employees

Maintenance 18,000 Square feet

Information regarding cost drivers and allocation bases is as follows:

Number of Department-

Number Square Specific Memos

of Employees Feet Prepared & Distributed

Arcades & shows 20 5,000 6

Food & beverage 50 7,000 4

Rides 30 6,000 6

Communications 10 1,000 4

Human resources 10 1,000 3

Maintenance 30 1,000 1

Direct costs and revenues for each product-line department are as follows:

Revenues Direct Costs

Arcades & shows $50,000 $8,000

Food & beverage 125,000 6,000

Rides 150,000 4,000

Calculate the allocation rate for each service activity
Interpret the allocation rate for each service activity (i.e., explain what it means).
Calculate the total service activity costs allocated to each product-line department
Calculate the operating profit (revenues – direct costs – allocated costs) for each product-line department

[Note to Professors: The data in exercise #4 is the same as the data in multiple choice questions #27-31. However, the exercise questions differ from the multiple choice questions.]

The FSOJ Company undertakes the following activities in its production operation and incurred the following costs during the first half of 20×2:

Harvest oranges $25,000

Prepare oranges for processing 20,000

Extract juice from oranges 18,000

Process juice into orange juice concentrate, orange
juice, or orange popsicles 30,000

Package completed products 9,000

In addition to the costs listed above, processing the juice into 3 final products involves the use of 2 machines, each of which incurred depreciation costs of $10,000 for the first half of 20×2. Each product requires a different set up on the processing machines, so FSOJ normally sets up the machines to produce concentrate for the first week of each month using 80 machine hours. The machine is then set up to produce orange juice for the next 2 weeks using 160 machine hours. Finally, workers set up the same machines to produce orange popsicles during the last week of each month, using 80 machine hours.

During the first half of 20×2, 20% of the oranges harvested were turned into orange juice concentrate, 50% were processed into orange juice, and 30% became orange popsicles. The orange juice concentrate operation takes up 40% of FSOJ’s total factory space. Regular orange juice and orange popsicles occupy 35% and 25%, respectively.

Calculate the total costs included in the processing activity cost pool.
Choose a cost driver for the processing activity and explain your choice. Calculate the ABC allocation rate for this activity.
Allocate processing costs to each product line using the ABC allocation rate developed in part (b).

Short Answer

Describe customer-sustaining activities and give one example.
List the six ABC cost hierarchies and provide an example of one activity for each hierarchy.
Explain why ABM might be helpful in determining environmental costs.
List the four types of quality-related activities and give one example of each.
Why might an organization want to track customer-related costs?
List two benefits and two costs companies incur when they implement an ABC costing system.
Describe activity based management.
List two advantages and two disadvantages of implementing an ABC system compared to traditional costing.
Describe two uncertainties that arise when managers are developing cost pools under an ABC system.
Explain why measurement error could increase as the number of cost pools increase in an ABC system.
Discuss the pros and cons of using a team of individuals to develop an ABC / ABM system.
Discuss the similarities and differences between ABC, GPK, and RCA.

Problems

Tubac Savings and Loan collects fees for 3 service activities: credit risk assessment, loan processing, and other services. During March, the overhead costs related to these three service activities totaled $500,000. Activity information and direct costs for the month were as follows:

Service Events Employee Time Direct Costs

Credit risk assessment 60,000 150 hours $300,000

Loan processing 1,000 260 hours 130,000

Miscellaneous services 9,000 90 hours 70,000

Tubac allocates overhead using one office-wide rate based on employee time. Determine the rate and the amount allocated to each department.
One of the commercial clients, Desert Dune Buggies, had 1,000 credit risk assessments, 50 loans processed, and 80 miscellaneous services performed this month. The total employee time used for Desert Dune Buggies was estimated to be about 11 hours, of which 8 hours were for processing loans. How much overhead would be allocated to this client using the office-wide rate?
The overhead costs can be separated by service activity, so that all costs are traced to the service department where possible, and then costs that cannot be traced are allocated. Using this method, check processing overhead costs were $120,000, loan processing costs were $200,000, and other activities were $180,000. Number of credit risk assessments is used as the allocation base for credit checks, number of events (services) is used for miscellaneous services, and employee hours are used to allocate the costs of servicing loans. How much overhead would be allocated to Desert Dune Buggies under this system?
Why are the amounts allocated in parts (b) and (c) different? Be specific in your answer.
Suppose Tubac’s managers would like to compare the profitability from Desert Dune Buggies with the profitability from other commercial clients. Discuss whether the costs you calculated in part (c) represent the incremental cost of overhead for the Desert Dune Buggies account.

Franklin Fireplace Inserts manufactures two premium models of fireplace inserts that provide more BTUs of heat per cord of wood than any other wood burning fireplace insert or stove. One model, the Heatilator, sells for $1,800, and the Heat Queen, a new model that sells for $1,200. Franklin’s marketing department suggested that the company should concentrate on the new Heat Queen model and begin to phase out the Heatilator model.

Franklin currently uses a traditional costing system. The following cost information has been used as a basis for pricing decisions over the past year.

Per-Unit Data Heatilator Heat Queen

Direct materials $200 $280

Direct labor hours 1.5 1.5

Machine hours 5.0 4.0

Units produced 11,000 4,000

Direct labor cost is $20 per hour, and the machine usage cost is $18 per hour. Manufacturing overhead costs were estimated at $4,800,000 and were allocated on the basis of machine hours.

Gwen Freely, the new company controller, suggested that an activity-based costing analysis first be performed to obtain a better picture of the true manufacturing cost. The following data were collected:

Activity Center Cost Driver Traceable Costs

Soldering Number of solder joints $ 942,000

Shipments Number of shipments 860,000

Quality control Number of inspections 1,240,000

Purchase orders Number of orders 950,400

Machining Machine hours 57,600

Machine setups Number of setups 750,000

Total traceable costs $4,800,000

Number of Events during the year:

Activity Heatilator Heat Queen Total

Soldering 296,250 96,250 392,500

Shipments 4,050 950 5,000

Quality control 14,050 5,325 19,375

Purchase orders 20,025 27,495 47,520

Machining 44,000 4,000 48,000

Machine setups 4,000 3,500 7,500

Selling, general, and administrative costs per unit sold are $175.00 for Heatilator and $125 for Heat Queen.

Calculate the manufacturing cost per unit for Heatilator and Heat Queen under:
A traditional costing system
The ABC system
Explain the differences in manufacturing cost per unit calculated in part (A).
Which system would most likely do a better job of measuring costs for this product emphasis/keep or drop decision? Explain.
Franklin’s controller points out that the ABC information could also be used to identify and eliminate non-value added activities. Explain how ABC and ABM can be used for this purpose.

Offices-On-The-Go rents temporary office space to business travelers; provides copying and fax services; and sells small amounts of office supplies, such as paper, pens and notebooks. It maintains 6 facilities in the Phoenix, Arizona area, all of which report to a single corporate office. You have been hired by Priscilla Solara, the manager of Store #2, to analyze costs and make recommendations regarding quality improvements. You decide to analyze Store #2’s activities and develop an activity-based costing and activity-based management system to achieve those objectives. After reviewing documents, interviewing employees, and observing daily operations, you have compiled the following list of activities:

* Purchase office supplies. Two purchasing agents process approximately 50 purchase orders per month from 5 vendors. Their salaries total $5,000 each month. Each purchasing agent uses a computer and other office equipment, and monthly depreciation charges total $300. The purchasing operation occupies 1,200 square feet of the store’s 8,500 square-foot facility. Monthly purchases average $2,000, and about 60% of the supplies purchased are sold to customers. The remaining 40% are used in the store’s operations.

* Provide office space to customers. The store’s main source of revenue is renting office cubicles to customers. Each cubicle is 200 square feet and contains a desk, chair, filing cabinet, computer with Internet access, printer, and telephone. Each Offices on the Go site maintains 15 such cubicles, and the monthly depreciation on cubicle furniture and equipment totals $500.

* Copy and fax documents for customers. The copy and fax center contains 5 self-service copiers and 3 fax machines. Monthly depreciation on those items totals $250. The copy and fax center occupies 1,500 square feet.

* Maintain company operations. Store #2 employs one bookkeeper at a salary of $3,000 per month and one human resource manager at a salary of $2,800 per month. Their offices contain the same equipment as the purchasing agents with the same depreciation charges; both the bookkeeper and the human resource manager occupy 500 square-foot offices.

* Sell office supplies to customers. Office supply displays occupy 1,000 square feet. The display racks were replaced at a cost of $1,500 last month and were expensed at that time.

* Ring up sales and collect payments. Priscilla employs 10 part-time customer service representatives. Each representative works between 25 and 30 hours per month at $12 per hour. The customer service counter and related equipment (such as cash registers) occupy the remaining 500 square feet.

In addition to costs for the above activities, Store #2 incurs the following costs every month: rent, $1500; utilities, $600; and maintenance, $800. Each month, 25% of profits are sent to the corporate office to help cover corporate expenses.

Store #2 currently uses a traditional costing system, allocating indirect costs to its three product lines (office space rental, copy and fax services, and office supplies sales) based on direct labor hours. Analyze the strengths and weaknesses of the current system from the perspective of the store manager. Explain why an activity-based costing system will or will not provide better information for making decisions.
Store #2 currently uses a traditional costing system, allocating indirect costs to its three product lines (office space rental, copy and fax services, and office supplies sales) based on the number of customers in each area. If an individual customer purchases goods or services from more than one area, they are counted with the area in which they provide the most revenue. Explain how the current system is both similar to and different from an activity-based costing system.
Activities in an ABC system often are classified as one of six types: organization-sustaining, facility-sustaining, customer-sustaining, product-sustaining, batch-level, or unit-level. Using the list above and your own creativity, suggest one example of each activity type for Offices on the Go. Your organization-sustaining activity should focus on the corporate office; all the others should be focused on Store #2.
List and discuss the steps you would use to assign costs in Store #2’s ABC system.
One of the steps in designing an ABC system is assigning costs to ABC cost pools. Another step is selecting a cost driver for each pool. Based on the preceding narrative, suggest two cost pools for Priscilla’s store. For each cost pool, suggest two potential cost drivers. Explain your choices of cost pools and cost drivers.
As you are completing the project for Priscilla, her bookkeeper shows some resistance to the ABC system. He comments: “We’ve always done just fine allocating costs using direct labor hours. Now you’re complicating matters by talking about cost pools, cost drivers, and allocation bases. I don’t understand why we can’t just continue doing things the old way!” Explain the similarities and differences between cost drivers and allocation bases, and respond to the bookkeeper’s concerns.
You have completed the first part of your task, designing the ABC system. Priscilla also wants you to begin working with her on an activity-based management system for Store #2. In your own words, define activity-based management. If you and Priscilla work together to improve operations using the ABC information, explain why it is impossible to be certain that Store #2 will achieve any benefits.

The Copy-Mart is a copy center located next to a university. The store provides a wide range of services for faculty and students, including copying, digital photo printing, providing computer time and technical support for word processing, and other miscellaneous services. The store manager has been concerned about quality problems that have recently increased. Customers have been returning copies because pages are missing or unreadable, and new copies must be made. Complaints have also been received about the quality of technical support, and the computer systems have been subject to frequent viruses and crashes.

ABC information can be used in an ABM system to manage quality. In such cases, quality costs are often classified as related to prevention activities, appraisal activities, production activities, or postsales activities.

Define each type of quality-related activity in your own words.
Based on the information above and your own creative thinking, give one example of each activity type for Copy-Mart.
Suppose the managers of Copy-Mart implement an ABC system to measure the costs of quality. How could they use information from this system to improve operations?

Answers

True / False

Multiple Choice

A
B
A
C
C
C
B
A
C
C
B
A
B
B
A
C
C
D
B
B
A
C
C
C; $1,800 * 2 / 14
C
C; Revenue = 200 * $50; Rent = $2,500 * 25%; Custodial = $1,800 * 25%; Utilities = $600 * 25%; Depreciation = 800 * 24 / 67
C
B
A
C
A
B
C
A
D
A
A
B
A
D
A
C
B
B
C
C
A
A
B
D
B
B
A
C
C
A
B
B
B
C
C
D
A
A
C
C
A
B
A
A
D
C
A
D
B
A
A
B
D
C
C
B
C

^s84. D

^s85. B

^s86. D

^s87. D

^s88. B; (1500/4000) x $100,000 = $37,500

^s89. D; (400/700) x $200,000 = $114,286

^s90. B; A/P $62,500 + HR $114,286 + A/R $50,000 + Comp network $150,000 = $376,786

^s91. A; A/P $37,500 + HR $85,714 + A/R $100,000 + Comp network $100,000 = $323,214

^s92. D

^s93. B

^s94. A

^s95. D

^s96. D

^w97. C

^w98. A

^w99. A

^w100. C

^w101. A

^w102. C

^w103. A

^w104. A

^w105. D

^w106. B

^w107. D

^w108. C

^w109. B

^w110. A

^w111. D

^w112. A

^w113. B

Matching

Traditional Versus Activity-Based Costing

Cost Hierarchy

Assigning Costs in ABC System

3 Assign costs to activity-based cost pools

5 Calculate an allocation rate for each cost pool

4 Choose a cost driver for each cost pool

6 For each ABC cost pool, allocate activity costs to the cost object

2 Identify activities

1 Identify the relevant cost object

ABC Cost Allocations

Computations are shown in the Excel spreadsheet below:

Cost Drivers

Quality Activities

ABC and ABM

Exercises

a. Traditional allocation:

Total overhead = $58,000

Direct labor hours for plain pillows = 8,000 x 0.25 = 2,000

Direct labor hours for fancy pillows = 10,000 x 0.50 = 5,000

Total direct labor hours = 7,000

Traditional allocation rate = $58,000 / 7,000 = $8.29

Total cost plain = $1.25 + $2.00 + $8.29 (1/4) = $5.32

Total cost fancy = $1.50 + $4.00 + $8.29 (1/2) = $9.65

Activity-based allocation

Cutting overhead = $16,000

Total cuts for plain pillows = 10,000

Total cuts for fancy pillows = 10,000

Cutting cost allocated to plain pillows = $8,000; cost per unit = $8,000 / 8,000 = $1.00

Cutting cost allocated to fancy pillows = $8,000; cost per unit = $8,000 / 10,000 = $0.80

Machine setup overhead = $27,000

Total setups for plain pillows = 10

Total setups for fancy pillows = 5

Setup cost allocated to plain = $18,000; cost per unit = $18,000 / 10,000 = $1.80

Setup cost allocated to fancy = $9,000; cost per unit = $9,000 / 8,000 = $1.13

Maintenance overhead = $15,000

Total DLH for plain = 2,000

Total DLH for fancy = 5,000

Maintenance cost allocated to plain = $4,286; cost per unit = $4,286 / 10,000 = $0.43

Maintenance cost allocated to fancy = $10,714; cost per unit = $10,714 / 8,000 = $1.34

Total cost plain = $1.25 + $2.00 + $1.00 + $1.80 + $0.43 = $6.48

Total cost fancy = $1.50 + $4.00 + $0.80 + $1.13 + $1.34 = $8.77

Under traditional costing, the plain pillows allocation ($5.32) was a little less than half of the allocation for fancy pillows ($9.65). The difference between the two is $4.33. Under ABC the difference was only $2.29 ($8.77 – $6.48). Therefore, fancy was cross-subsidizing plain, that is, plain was not assigned as much overhead cost as it should have been.

Organization-sustaining = $395 + $460 + $665 = $1,520

Facility-sustaining = $250 + $775 = $1,025

Customer-sustaining = $860

Product-sustaining = $320

Batch-level = $0

Unit-level = $200

a. Communications = $16,000 / (6 + 4 + 6) = $1,000 per memo

Human resources = $21,000 / (20 + 50 + 30) = $210 per employee

Maintenance = $18,000 / (5 + 7 + 6) = $1 per square foot

The allocation rate for communications indicates that the average cost of producing a memo is $1,000. The allocation rate for human resources indicates that it costs on average $210 per employee to perform human resource services. The allocation rate for maintenance indicates that it costs on average $1 to maintain each square foot.
Arcades Food and

and Shows Beverage Rides Total

Communication $ 6,000 $ 4,000 $ 6,000 $16,000

Human resources 4,200 10,500 6,300 21,000

Maintenance 5,000 7,000 6,000 18,000

Total $15,200 $21,500 $18,300 $55,000

Arcades Food and

and Shows Beverage Rides Total

Revenues $50,000 $125,000 $150,000 $325,000

Direct costs 8,000 6,000 4,000 18,000

Allocated costs 15,200 21,500 18,300 55,000

Profit $26,800 $ 97,500 $127,700 $252,000

a. Total costs in the processing pool are $30,000 + $20,000 = $50,000
Students could provide logical arguments for using machine hours or percentage of oranges harvested, but machine hours would most accurately reflect the machine related costs of processing. Following is a typical answer.

The best cost driver for the processing activity is machine hours because it reflects use of the machines for processing and most of the costs in the cost pool are probably related to machines. As the machines run longer, costs are likely to increase. The allocation rate is then $50,000/320 = $156.25/machine hour

Total processing costs are $156.25 x 80 = $12,500 for concentrate and popsicles, and $156.25 x 160 = $25,000 for orange juice.

Short Answer

Customer-sustaining activities are the activities that organizations undertake for their customers. These activities are not driven by sales or production volumes or mix. An example would be the post-sales costs that Dell Computer incurs for technical support.
The activities and one example each are shown below (see Exhibit 7.3 for additional examples); student examples are likely to vary.

Organization-sustaining costs, CEO salary

Facility-sustaining costs, property taxes for the plant

Customer-sustaining costs, customer market research

Product-sustaining costs, product line supervisor’s salary

Batch-level costs, set-up costs

Unit-level costs, material handling wages

ABM could be used to identify and minimize any costs related to the environment. For example, disposal costs for hazard waste could be compared to the cost of redesigning the product to eliminate waste. Without ABC and ABM, managers may not have the information about costs and processes they need to identify the cost consequences of their decisions with regard to environmental practices.
Prevention activities – designing defect-free products, appraisal activities – inspection of units or direct materials used in units, production activities – cost of spoilage and rework, postsales activities – repair work done for product warranties. (See exhibit 7.6 for more examples.)
Some organizations incur a wide range of costs to service customers. If some customers use relatively more resources, the organization may want to minimize costs for these customers or charge them extra for some services. To do this, costs must be tracked on a per-customer level.
ABC helps organizations better understand the underlying patterns of resource use and better map costs to the use of these resources. This can help identify and eliminate non-value added activities. However, ABC can be costly and time consuming to implement. Further, employees may be resistant to using the information once it has been developed. Students will have thought of other answers as well.
Activity based management is the process of using ABC information to evaluate costs and benefits of production and internal support activities. ABM can be used to identify non-value added activities and to improve processes and activities for organizations.
Students are asked to provide 2 advantages and 2 disadvantages of implementing an ABC system. Below are several advantages and disadvantages; students may think of others.

Advantages:

Increase awareness of cause-and-effect relationships

Promote performance improvements

Identify non-value-added activities

Motivate cost reduction

Reduce arbitrariness in cost measurement

Optimize use of constrained resources

Disadvantages:

May require accounting system modifications

ABC may be more difficult to implement and use; need employee training

Can results in higher costs, particularly when activities and the system are complex

ABC costs may be inappropriately viewed as variable costs

Here are some uncertainties that arise when managers are developing cost pools under an ABC system; students may think of others. Cost pools are related to an organization’s activities, and it is not possible to know whether all relevant/important activities have been identified. Some activities may be overlooked, or the set of activities may include ones that rarely occur and would be an immaterial part of operations. In addition, uncertainties exist about whether the system would be more or less accurate when potentially separate activities are grouped together. Uncertainties also exist about whether multiple cost pools should be developed for a single activity. Managers may wish to create separate cost pools for committed and flexible costs, but it is not always clear whether the benefit of separating these costs exceeds the cost. Another uncertainty about cost pools relates to the availability of appropriate cost drivers. The benefits of developing additional cost pools depend on the ability to identify and measure a cost driver for each pool.
Each cost pool could have errors in the measurement of costs assigned to the pool. Further measurement error could arise in tracking the number of events for each cost driver. When the number of cost pools (and cost drivers) increases, the effects of these errors tend to magnify, and measurement error can quickly increase.
Students are asked to discuss the pros and cons of using a team of individuals to develop an ABC/ABM system. Examples of pros and cons that may be discussed are listed below; students may think of others.

Pros:

Team members bring different types of knowledge and perceptions about the company to the team meetings

Diversity increases creativity

Diversity increases the likelihood that appropriate issues will be considered as choices are made about activities and cost drivers

A system developed by a team may obtain greater support throughout the organization

Cons:

Working within a team can slow down the process of developing and implementing a system

Sometimes only a few members of a team are actively involved even though all team members are present, and this could be a poor use of time for those who are uninvolved.

Students are asked to discuss the similarities and differences between ABC, GPK, and RCA

Similarities:

Multiple allocation bases

Refined costing system

Differences:

Treatment of idle/excess capacity

GPK/RCA focus on encouraging managers to use resources effectively

GPK focuses on marginal costs for short term decision making

Problems

a. Allocation rate = $500,000/500 hours = $1,000 per employee hour

Check processing gets (150/500 x $500,000) = $150,000

Loan processing gets 260/500 x $500,000 = $260,000

Other services are allocated the remaining $90,000

Cost for Buggies using office-wide rate = 11 x $1,000 = $11,000
Allocation rates:

Credit risk assessment = $120,000/60,000 = $2 per assessment

Loan processing = $200,000/260 = $769/employee hour

Miscellaneous services = $180,000/9,000 = $20 per event.

Total costs for Desert Dune Buggies:

Credit risk assessment ($2 x 1,000) $2,000

Loan processing ($796 x 8) 6,368

Misc. Services ($20 x 80) 1,600

Total $9,968

Under the office-wide rate system, the overhead costs were combined into a single cost pool and then allocated based on employee time. Employee time may or may not be related to costs in the overhead pool. However, under ABC the overhead costs are divided into three cost pools that relate to specific types of services performed. The cost pools are then allocated using cost drivers that are more likely to reflect the use of resources. The cost driver for loan processing (employee time) is the same as under the office-wide rate. However, the cost drivers for the credit risk assessment and miscellaneous services differ from the allocation based used under the office-wide rate. Therefore, the ABC allocations more closely match the use of resources.
The information provided in the problem does not indicate how much of the overhead costs are fixed versus variable. If a high proportion of the overhead costs are variable, then the ABC allocations would probably provide a reasonable estimate of the incremental overhead cost for the Desert Dune Buggies account. However, overhead often includes a large proportion of fixed costs. In that case, the ABC allocation would not provide a reasonable estimate of incremental overhead cost.

a. 1. Under a traditional costing system, the allocated overhead costs would be as follows:

DL hours = (11,000 + 4,000) x 1.5 = 22,500

Overhead allocation rate = $4,800,000/22,500 = $213.33 per DL hour

Heatilator overhead allocation = 1.5 x $213.33 = $320

Heat Queen allocation = $320

Allocations under an ABC system:

ABC Allocation Rate Heatilator Heat Queen

Soldering $ 2.40 $ 711,000 $ 231,000

Shipments 172.00 696,600 163,400

Quality Control 64.00 899,200 340,800

Purchase Orders 20.00 400,500 549,900

Machining 1.20 52,800 4,800

Machine set-ups 100.00 400,000 350,000

Total cost $3,160,100 $1,639,900

Cost of allocations per unit $287.28 $409.98

Direct materials 200.00 280.00

Direct Labor (1.5*$20) 30.00 30.00

In general, ABC systems do a better job than traditional costing systems of measuring the cost of resources used. However, neither system in this problem measures fixed and variable overhead costs separately. Therefore, neither system measures the relevant (i.e., incremental) cost associated with the two products.
To eliminate non-value-added activities, it helps to develop an ABC system because the activities performed will be carefully analyzed and costs assigned to them. This process helps in identifying those activities that do not provide customer value. Examples include warranty costs or spoilage. Once these activities are identified, using ABM they can be eliminated or minimized. For example spoilage, rates could be reduced through analyzing the processes that result in spoiled units.

a. From the store manager’s perspective, the current traditional system is straightforward and easy to implement. It does not take a lot of time to calculate costs, leaving the manager free to concentrate on other duties. On the other hand, the manager may be making less-than-optimal decisions, as she is not receiving the most accurate and relevant information about costs from the accounting information system. The inaccurate accounting information likely translates into inappropriate pricing for customers as well. An activity-based costing system will probably provide better information for decision making. An ABC system will focus on the activities that actually create costs, and will allow the store manager to determine which product lines are most profitable.
The current system is similar to an ABC system in that it allocates overhead to cost objects. But, the similarities end there. The current system does not establish cause-and-effect relationships between allocation bases and costs. Additionally, we do not know how many cost pools the company uses in its current system. However, the number of cost pools is likely to be fewer than would be established in an ABC system.
Examples of activities for each level in the hierarchy are provided below; students will think of other examples.

Organization-sustaining: corporate accounting services

Facility-sustaining: purchasing office supplies

Customer-sustaining: advertising in local business-oriented hotels

Product-sustaining: arranging office supplies for display

Batch-level: reporting weekly revenues to the corporate office

Unit-level: preparing a bill for an individual customer

Assigning costs in an ABC system involves six steps, as noted in the chapter:

Identify the relevant cost object.

Identify activities.

Assign costs to ABC pools.

Choose a cost driver for each pool.

Calculate an allocation rate for each cost pool.

Allocate each pool’s cost to the cost object.

Priscilla could establish any number of cost pools based on the narrative. One pool could be purchasing costs. Purchasing costs could be allocated based on # of purchase orders processed or # of vendors. Another pool could include facility-level costs, such as rent, utilities and maintenance. Those costs could be allocated based on square feet occupied or number of employees and customers per area.
A cost driver is a special type of allocation base. A cost driver is an activity that actually creates a cost; an allocation base may or may not be a cost driver. Although cost drivers make the best allocation bases (denominator in the allocation rate), some costs may not have clear cost drivers. While the bookkeeper’s concerns are certainly valid, Priscilla should probably point out that the ABC information will allow for better decision making.
Activity-based management refers to using activity-based costing information to improve a company’s operations. ABM can focus on a number of applications, including customer profitability, quality costs, and process improvements. Even if Priscilla and the consultant work together to improve operations, they are not assured of achieving any benefits. Employee resistance may work against the improvements; also, as a branch of a corporate office, Priscilla may be constrained by corporate rules and regulations.

a and b:

Prevention activities are related to preventing or eliminating defective units or services by designing manufacturing and service delivery processes to produce only good units or services. Examples of prevention activities include establishing minimum qualifications for suppliers of ink cartridges, paper, copy machines, and inspecting incoming supplies to make sure they meet quality standards.

Appraisal activities examine units in an effort to identify defects. Defective units are then discarded or reworked. For example, a company may employ quality inspectors to look at a sample of finished units before they leave the company. At Copy-Mart, one or more employee may check large orders to be certain they are correctly prepared and that all copies are high quality. Any orders that have quality problems can be redone before customers pick them up.

Production activities focus on reworking units that fail to meet quality standards. Examples here include costs of scrap and rework. At Copy-Mart, copies that are unclear, poorly finished, or smudged need to be redone and the poor quality copies scrapped.

Post sales activities occur after the product is already in the customer’s hands, and can result in both financial costs (loss of repeat customers, for example) and psychological costs (poor employee morale because customers complain loudly and often). Warranty repairs and product replacements are examples of postsales activities. At Copy-Mart, postsales activities would be recopying an order that had quality problems or did not conform to customer instructions.

The ABC system would help the managers improve operations in several ways. The system would help managers recognize quality-related costs, which would encourage them to seek ways to reduce those costs. The process of developing the ABC system would also help the managers better understand the various aspects of quality in their business, which in turn would improve their ability to identify opportunities for cost reduction and/or improvement in customer service. In addition, the managers could use the ABC system to establish goals for improvement, and the goals could be used to monitor and motivate improved employee performance.