Professional Documents
Culture Documents
10-1
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Balakrishnan/Managerial Accounting, 2e
MULTIPLE CHOICE
21.Which of the following is not a step in designing a product costing system?
A. Determine how to form cost pools.
B. Identify which cost pools to allocate.
C. Identify the cost driver to use for allocating each cost pool.
D. Determine the appropriate denominator volume of each cost driver to
calculate allocation rates.
E. All of the above are steps in designing a product costing system.
LO1 E
22.The costs associated with a companys security department would be considered
what type of activity?
A. Unit level
B. Batch level
C. Customer level
D. Facility level
LO1-Self test-D
23.Which of the following would be considered a product-level activity?
A.
The accounting departments development of a new payroll system
B.
Human resource managements development of new company policies
C.
Design work necessary to create a new product
D.
Adjusting a piece of machinery to run a new batch
LO1-Self test-C
24.Paulson Company has two products: Y and Z. The company uses activity-based
costing. Estimated costs for the activity cost polls are as follows:
Cost Pool
Estimated
Expected Activity
Cost
Y
Z
Activity 1
$12,000
100
150
Activity 2
$24,800
200
125
Activity 3
$42,000
300
125
The estimated cost for activity 3 per unit is closest to:
A. $98.82
B. $185.41
C. $78.80
D. $166.74
LO1-Self test-A
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Balakrishnan/Managerial Accounting, 2e
28.Research Associates Corporation uses activity-based costing. They have two
activity cost pools and three office locations. Administrative costs are allocated
based on the percent of time used by the various locations. Research costs are
allocated based on computer time used. Information is as follows:
Cost Pool
Estimated Overhead Costs
Administrative
$160,000
Research
$210,000
Estimated department data is as follows:
Administrative
Computer
Percent
Time
Dayton
15%
62,000 minutes
Pikesville
45%
40,000 minutes
Parkersburg
40%
18,000 minutes
The administrative and research costs that the Pikesville office should expect to
receive total:
A. $142,000
B. $132,500
C. $166,500
D. $95,500
LO1-Self test-A
29.Research Associates Corporation uses activity-based costing. They have two
activity cost pools and three office locations. Administrative costs are allocated
based on the percent of time used by the various locations. Research costs are
allocated based on computer time used. Information is as follows:
Cost Pool
Estimated Overhead Costs
Administrative
$160,000
Research
$210,000
Estimated department data is as follows:
Administrative
Computer
Percent
Time
Dayton
15%
62,000 minutes
Pikesville
45%
40,000 minutes
Parkersburg
40%
18,000 minutes
The administrative and research costs that the Dayton office should expect to
receive total:
A. $166,500
B. $132,500
C. $55,500
D. $114,167
LO1-Self test-B
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Balakrishnan/Managerial Accounting, 2e
The total overhead cost per delivery according to the activity-based costing
system would be closest to?
A.
$6.47
B.
$.56
C.
$1.66
D.
$3.24
LO1-self test-C
32.One member of the maintenance crew who earns a salary of $22,000 per year
tells you that he spends 70% of his time in the plant, 20% in the administrative
offices, and his remaining 10% he cant specify. Another member of the crew
who earns a salary of $19,000 per year tells you that she spends 20% of her
time in the plant, 60% in the administrative offices and her remaining 20% cant
be specified. How much of these workers salary expense will be charged to the
administrative cost pool?
A.
$15,800
B.
$32,800
C.
$17,000
D.
$21,800
LO1-self test-A
33.Which of the following would probably be the most accurate cost driver to use
for allocating the costs associated with a companys engineering department?
A.
Number of customers
B.
Number of designs developed
C.
Machine hours
D.
Direct labor dollars
LO1-Self test-B
34.Fargo Corporation uses an activity-based costing system with three activity cost
pools. The company has provided the following data concerning its costs:
Wages and salaries....
$260,000
Depreciation...............
120,000
Utilities.......................
80,000
Total...........................
$460,000
The distribution of resource consumption across the three activity cost pools is
given below:
Assembly
35%
40%
30%
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Total Activity
29,500 machine-hours
1,200 orders
748 shipments
$189.50
$41.59
$38.21
280
405
62
7
According to the activity-based costing system, the annual product margin for
this product is:
A. $21,898
B. $30,716
C. $30,609
D. $24,155
LO1 A
36.Which of the steps in designing a product costing system is not common to all
cost allocations?
A. Determine how to form cost pools.
B. Identify which cost pools to allocate.
C. Identify the cost driver to use for allocating each cost pool.
D. Determine the appropriate denominator volume of each cost driver to
calculate allocation rates.
LO1-Pretest-B
37. Which of the following cost would most likely be selected as a cost driver to
allocate a cost pool of purchasing department costs?
A. Number of employees in the company
B. Total costs incurred in the purchasing department
C. Total labor costs in the purchasing department
D. Number of purchase orders issued by the purchasing department
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Balakrishnan/Managerial Accounting, 2e
LO1-Pretest-D
38.Which of the following lists best describes activities which would likely be
considered to be facility-level cost for a McDonalds restaurant?
A. Ordering inventory before the products are depleted
B. Activities related to cooking a basket of fries
C. Activities pertaining to filling an order for a customer
D. Activities pertaining to television advertising of a new product
LO1-Pretest-A
39.A product manager is calculating the customer order cost for the candy bar
product line. He has the following information:
Customer order cost pool: $50,000
Total volume of all orders: 4,000 customer orders
Number of customer orders for candy bars: 150
What is the allocated cost to the candy bar product line?
A. $333.33
B. $1,875
C. $12.00
D. $26.66
LO1-Pretest-B
40.The CFO of Ward Enterprises is setting up a new activity-based costing system.
He has currently finished identifying the cost pools and has determined which
cost pools should be allocated. What is the next step for him to take in the
process?
A.
B.
C.
D.
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Balakrishnan/Managerial Accounting, 2e
48.An
A.
B.
C.
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Balakrishnan/Managerial Accounting, 2e
Little Rock
Memphis
Tulsa
Activity Measure
Time spent for
office (%)
Time used by office
(hrs)
Time spent
(%)
35%
40%
25%
10-14
Time used
(hrs)
624
1,560
936
Estimated
Costs
$70,000
$25,000
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Balakrishnan/Managerial Accounting, 2e
c. Identify value- and non-value adding activities; Seek ways to improve valueadding activities; Develop a process map for each activity/process.
d. Seek ways to improve value-adding activities; Identify value- and non-value
adding activities; Develop a process map for each activity/process chosen.
e. Develop a process map for each activity/process chosen; Seek ways to
improve value-adding activities; Identify value- and non-value adding
activities.
LO3 B
65.Which of the following is not a correct way to deal with excess capacity?
a. If the unused capacity is attributed to a temporary lull in demand, the firm
should rid itself of the excess capacity.
b. If the unused capacity has no gainful purpose, the firm should rid itself of the
excess capacity.
c. If the unused capacity results from a temporary lull in demand, the cost of
having to carry excess capacity during lean months is attributed to
production in peak months.
d. If the excess capacity serves a strategic role, the cost of unused capacity is
attributed to management strategy.
e. All of the above are correct ways to deal with excess capacity.
Appendix A
66.By isolating the cost of unused capacity, ABC helps management :
a. Investigate the underlying reason for the unused capacity.
b. Charge the cost of the unused capacity to its cause.
c. Find ways to dispose of the unused capacity.
d. Both A and B.
e. A, B, and C.
Appendix D
67.If a firm responds to higher reported costs by raising prices:
a. It will reduce fixed costs accordingly.
b. It risks setting off a dangerous trend by lowering demand.
c. It will lower allocation rates in response to the report.
d. Both A and B.
e. A, B, and C.
Appendix B
68.Under GAAP, the cost of unused capacity:
a. Is moved to the Balance Sheet as a prepaid asset.
b. Is moved to the Balance Sheet as unearned revenue.
c. Would appear as under-applied overhead.
d. Would appear as over-applied overhead.
e. None of the above.
Appendix C
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Activity
Activity-based costing
Activity-based
management
Batch-level activities
Business process
F
G
H
Facility-level activities
Practical capacity
Product-/customer-level activities
I
J
Product planning
Profit margin
a.____
_
b.____
_
c.____
_
d.____
_
e.____
_
f._____
g.____
_
h.____
_
i._____
J_____
The set of decisions about which products to offer and their prices.
The basic element of any business process.
A realistic estimate of the maximum possible activity level.
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Balakrishnan/Managerial Accounting, 2e
2. Modern Accessories has two products: Economy and Super. Production and
sales for the current year is 8,000 Economy and 2,000 Super. There are three
activity cost pools with the following estimated total cost and expected activity:
Estimated
Cost
Activity 1
Activity 2
Activity 3
$36,000
$12,000
$16,000
Expected Activity
Econom
Super
Total
y
2,000
1,000
3,000
750
250
1,000
400
100
500
Required:
a. What is the activity rate under the ABC system for Activity 1?
b. What is the cost per unit of Super under ABC costing (round to the nearest
dollar)?
High-Profit
Characteristic
a. _____
_____
Rigid requirements.
b._____
_____
c._____
_____
d._____
_____
Planned deliveries.
e_____
_____
F_____
_____
g._____
_____
h_____
_____
I_____
_____
J____
_____
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b. C
c. E
d. I
e. A
f. G
g. D
h. H
i. B
J. J
($36,000 3,000) x
1,000
($12,000 1,000) x
250
($16,000 500) x 100
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$12,00
0
$3,000
$
3,200
$18,20
0
Balakrishnan/Managerial Accounting, 2e
3. Activity-based management (LO3)
LowProfit
High-Profit
Characteristic
a.
Rigid requirements.
b.
c.
d.
Planned deliveries.
e.
f.
g.
h.
X
X
I
J.
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Balakrishnan/Managerial Accounting, 2e
Solutions to Short Answer
1. (LO1)
Unit profit margin equals a products unit contribution margin less the
controllable cost of capacity resources.
2. (LO1)
(1) Determine how to form cost pools, (2) identify which cost pools to
allocate, (3) identify the cost driver to use for allocating each cost pool, and (4)
determine the appropriate denominator volume of each cost driver to calculate
allocation rates.
3. (LO1)
A business process converts organizational inputs into a measurable
output. Each business process is a collection of activities.
4. (LO1)
process.
5. (LO1)
An appropriate cost driver is one that has the strongest causal relation
with the costs in the cost pool.
6. (LO2)
Practical capacity is an estimate of the maximum possible activity
level. The advantage of a practical-capacity based allocation rate is that it does
not change across periods. Practical capacity is higher than both actual- and
budgeted capacity, which reflect realized and planned activity usage.
7. (LO2)
Because, ultimately, ABC is just another allocation system. Changing
the method for allocating costs does not change total cost.
8. (LO2)
Allocating lower amounts to some products and higher amounts to
other products. In such instances, products receiving higher allocations are said
to cross-subsidize products receiving lower allocations.
9. (LO2)
10.(LO3)
Decisions related to individual customers and market segments,
including decisions regarding who to sell to and the prices to charge.
11.(LO3)
Product-level profit analysis groups revenues, variable costs, and
capacity costs by product whereas customer-level profit analysis does so by
customer.
12.(LO3)
High cost to serve customers (1) place small order sizes, (2) have
rigid requirements, (2) dont pay on time, (4) require more customization, and
(5) make frequent order change requests. Low cost to serve customers (1)
have larger order sizes, (2) pay on time, (3) have minimal order change
requests, (4) require less pre-sales support, and (5) require less after-sales
support. Please see exhibit 10.13 for 11 characteristics of each type of customer.
10-22
13.(LO3)
A whale curve plots customer profitability, after ranking customers in
order of their profitability. It has the appearance of a whale because for many
firms, the top 20% of customers account for the bulk of the profit, whereas the
remaining customers actually are unprofitable.
14.(LO3)
To improve the efficiency and effectiveness of organizational
processes.
15.(LO3)
Non-value adding activities are those that cost money but do not
provide commensurate benefits. Firms can identify non-value adding activities by
asking, If we eliminate this activity, would the customer notice?
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Balakrishnan/Managerial Accounting, 2e
Short Essay
1. Some might argue that the costs of developing a product are sunk at the time
the product goes into production. Thus, these costs are not controllable for any
decisions. Should we allocate these costs to products to determine their profit
margin?
2. Suppose we are choosing between two drivers to allocate the costs in the
perform setup cost pool: the number of setups or the number of setup hours.
When will the choice not matter (i.e., will result in the same amount costs being
allocated to the various products from this pool?) What factors do we need to
consider when making this choice?
3. What are some of the problems that we are likely to encounter in measuring
practical capacity? For concreteness, consider measuring the practical capacity
of a purchasing department that has five persons, and whose primary activity is
issuing purchase orders.
4. Surveys show that over 40% of all firms do not employ ABC systems. What might
be the underlying reasons for this finding?
5. Suppose your firm is currently employing a traditional volume-based product
costing system. Further, suppose that you begin to improve this system by
incrementally modifying one cost pool at a time by refining its drivers and so on.
Would such actions always increase the accuracy of reported product costs?
Justify your response.
6. Is the activity inspect incoming materials for requisite quality a value-adding
activity? Justify.
7. Suppose a firm increased the efficiency of all of its processes. The firm needs
fewer resources to produce the same volume and mix of goods and services.
However, the firm does not cut spending on the resources freed up as a result.
What is the effect of these actions on the firms reported profit? What is the key
additional step required to translate efficiency improvements into profit gains?
8. Iguana Insurance allows its customers to pay their premiums in full, in four
quarterly payments, or as twelve monthly payments. Iguana adds a surcharge of
$3 per payment if the customers choose a mode other than annual payment. It
offers a rebate of $1 per payment if the customers set up an automatic
withdrawal plan with their bank. How might Iguana justify these surcharges and
discounts?
9. Airlines have sought to reduce long lines by introducing self-service kiosks and
on-line services for passenger check in. What might be the reasoning that
underlies the introduction of such initiatives?
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Balakrishnan/Managerial Accounting, 2e
5. (LO2)
Intuition would suggest that as we improve the cost system one cost
pool at a time, accuracy should also improve incrementally. But this is not always
the case because errors that traditional volume-based systems cause in
allocating costs from multiple cost pools can often be offsetting. As we improve
the cost system by modifying one cost pool at a time, errors from allocations of
other cost pools surface because of the removal of the offsetting nature of the
errors. Consequently, in such settings, all errors must be removed before we can
be confident about the accuracy of product costs.
6. (LO3)
Many embrace the concept of total quality control and argue that
inspection is a non-value adding activity because the supplier of materials
should provide complete quality assurance. In practice, however, it is
unreasonable to expect that suppliers would be able to give such quality
assurance. Often there are inherent process variations that are impossible or
prohibitively costly to get rid of, and therefore quality issues cannot be
completely overcome. Consequently, some amount of inspection is value adding
in such environments.
7. (LO3)
If the firm does not cut spending on the resources freed up, and
revenues stay the same, then the reported profits will not change because the
company is not translating improved efficiencies into cash flow savings. The key
additional step required is to either cut spending on freed up resources or
gainfully utilize freed up resources by producing and selling more goods and
services
8. (LO3)
These charges essentially reflect the opportunity cost of capital for
Iguana insurance. If the customer makes one full annual payment, the company
has to raise less money to finance its working capital and therefore save on
interest. By adding a surcharge for quarterly or monthly payments, the company
is essentially recovering the cost of raising working capital. In addition, the firm
has to process only one receiving transaction rather than four. Similarly,
automatic withdrawals reduce the transactions costs for the company by
facilitating timely withdrawals -- saving of these costs is justification for the
discount
9. (LO3)
Simply put, self-service kiosks and on-line services are less costly,
more efficient ways of dealing with check-ins. Moreover, even passengers are
happier because they do not have to patiently wait in long lines, and plan their
arrival at airports better. All in all, this is one area in which technology has
resulted in a convenient and cost effective way of organizing an important airline
activity!
10-26
Tellers
Assistant
Manager
Managers
The average branch
transactions
each year.
Process
Deposits
Process
Checks
Balance
Inquirie
s
Other
Activiti
es
Total Cost
30%
10%
40%
10%
10%
5%
20%
75%
$150,000
$75,000
X
X
X
X
2%
3%
5%
90%
$90,000
processes 600,000 deposits and 1,250,000 check
Required:
Compute the cost per deposit and the cost to process a check.
2. The QwikFill Corporation recently hired David Oxley to figure out ways to
improve profit. David notes that, like virtually all gas stations, QwikFills stations
also had an air pump that customers could use to fill air in their tires. As per
Davids detailed cost report, an air pumps fully allocated cost is around $1,200
per year. Variable costs are negligible. David offers two solutions. One is to
eliminate the pump and save $1,200 each year. The second is to charge a
quarter (25 cents) for each minute of operation. Currently, about 20 customers
use the pump each day in any given gas station. The average customer takes
about 3 minutes to check and inflate all tires.
Required:
a. At the current volume of operations, identify the increase in profit if
Davids first proposal were to be implemented at all 243 of
QwikFills stations. What is the profit with the second proposal?
b. Do you recommend following either of Davids proposals? Why or
why not?
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Balakrishnan/Managerial Accounting, 2e
Solutions to Exercises
1. (LO2)
We first calculate the total cost of each activity by allocating the cost
of individual accounts to the various activities (stage 1). We do this by employing
the percentage allocations provided.
Tellers
Assistant
manager
Managers
Total
Process
deposits
Process
checks
$45,000*
7,500
1,800
$54,300
Cost
$60,00
0
7,500
Balance Other
enquiri activitie
es
s
$15,00 $30,00
0
0
3,750 56,250
2,700
$70,20
0
4,500
$23,25
0
90,000
$315,00
0
81,000
$167,2
50
$150,00
0
75,000
The next step is to divide the total cost in the cost pool by the denominator
volume to get the overhead rate per unit driver. We have:
Cost per deposit = $54,300/ 600,000 deposits = $0.0905 per deposit
Cost per check = $70,200 / 1,250,000 checks= $0.05616 per check
2. (LO3)
A. The first proposal to eliminate the air pump. That will save QwikFill $1,200
annually per gas station. The total saving for all 243 gas stations will be
$291,600. Of course, we are assuming that there will be no loss in
customer volume if the air pumps are eliminated.
B. Under the second proposal, each gas station will make an additional
amount of $5,475 ($0.25 per minute 3 minutes 20 customers per day
365 days). Thus, for each gas station, QwikFill makes a profit of $4,275
(=$5,475 less the annual cost $1,200 to operate the pump), for a total of
$1,038,825.
10-28