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Exam 4: Activity-Based Costing, lean Production, and the Costs of Quality

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Question 41

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The cost of maintaining testing equipment would be classified as a(n) :

A) prevention cost.
B) appraisal cost.
C) internal failure cost.
D) external failure cost.

E) A) and B)
F) All of the above

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Question 42

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The goal of value-engineering is to eliminate all waste in the system by making the company's processes as effective and efficient as possible.

A) True
B) False

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Question 43

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The cost allocation rate for each activity is equal to the estimated total manufacturing overhead costs of the activity multiplied by the estimated total quantity of the cost allocation base.

Vittoria Corporation manufactures two products-Carts and Wheelbarrows.The annual production and sales of Carts is 2,000 units,while 1,800 units of Wheelbarrows are produced and sold.The company has traditionally used direct labor hours to allocate its overhead to products.Carts require 1.0 direct labor hours per unit,while Wheelbarrows require 0.5 direct labor hours per unit.The total estimated overhead for the period is $117,500.The company is looking at the possibility of changing to an activity-based costing system for its products.If the company used an activity-based costing system,it would have the following three activity cost pools: - The overhead cost per Wheelbarrow using an activity-based costing system would be closest to:

The use of which of the following costing systems is most likely to reduce cost distortion to a minimum?

Sparrow Manufacturing manufactures small parts and uses an activity-based costing system. $\begin{array}{|l|r|l|l|}\hline \text { Activity } & \begin{array}{l}\text { Est. Indirect Activity } \\\text { Costs }\end{array} & \text { Allocation base } & \text { Cost allocation rate } \\\hline \text { Materials } & \$ 70,000 & \text { Material moves } & \$ 2.00 / \text { move } \\\hline \text { Assembling } & \$ 240,000 & \text { Direct labor hours } & \$ 8.00 / \text { dir. labor hour } \\\hline \text { Packaging } & \$ 80,000 & \text { \# of finished units } & \$ 0.80 / \text { finished unit } \\\hline\end{array}$ The following parts were produced in October with the following information: $\begin{array} { | l | r | r | r | r | } \hline \text { Part } & \text { \# Produced } & \text { Materials Costs } & \text { \# Moves } & \text { Dir. Labor Hrs. } \\\hline \text { A } & 2,500 & \$ 2,500 & 800 & 200 \\\hline \text { B } & 3,500 & \$ 7,000 & 1,500 & 300 \\\hline \text { C } & 4,500 & \$ 11,250 & 2,200 & 1,000 \\\hline\end{array}$ - Total manufacturing costs for part A is:

A system in which companies purchase raw materials only when needed is called:

Managers often reap benefits by using ABC data in ABM to pinpoint opportunities to cut costs.

The use of departmental overhead rates will generally result in the use of a:

Which of the following is TRUE about a lean production system?

Vittoria Corporation manufactures two products-Carts and Wheelbarrows.The annual production and sales of Carts is 2,000 units,while 1,800 units of Wheelbarrows are produced and sold.The company has traditionally used direct labor hours to allocate its overhead to products.Carts require 1.0 direct labor hours per unit,while Wheelbarrows require 0.5 direct labor hours per unit.The total estimated overhead for the period is $117,500.The company is looking at the possibility of changing to an activity-based costing system for its products.If the company used an activity-based costing system,it would have the following three activity cost pools: - The overhead cost per Wheelbarrow using the traditional costing system would be closest to:

If a company's plantwide overhead rate is allocated based on direct labor hours,then each job will be allocated manufacturing overhead based on the total direct labor hours incurred on the job,regardless of the manufacturing department in which those hours were incurred.

Traditions Home Accessories Company manufactures pillows using an activity-based costing system to allocate all manufacturing conversion costs.The following information is provided for the month of June: $\begin{array} { | l | r | l | r | } \hline \text { Activity } & \begin{array} { l } \text { Estimated Indirect } \\\text { Activity Costs }\end{array} & \text { Allocation Base } & \begin{array} { l } \text { Estimated Quantity of } \\\text { Allocation Buse }\end{array} \\\hline \text { Materials handling } & \$ 3,000 & \text { Number of parts } & \text { 6,000 parts } \\\hline \text { Assembling } & \$ 7,200 & \text { Number of parts } & 6,000 \text { parts } \\\hline \text { Packaging } & \$ 4,000 & \text { Number of pillows } & 2,000 \text { pillows } \\\hline\end{array}$ Each pillow consists of 3 parts; the total direct materials cost per pillow is $8.00. - What is the total cost of packaging per pillow?

To determine the amount of overhead allocated,the overhead rate is divided by the cost driver.

Hinckley & Granger Company had the following activities,estimated indirect activity costs,and allocation bases: $\begin{array} { | l | r | r | } \hline \text { Activities } & \text { Indirect Activity Costs } & \text { Allocation Base } \\\hline \text { Account inquiry (hours) } & \$ 75,000 & 2,500 \\\hline \text { Account billing (lines) } & \$ 45,000 & 30,000 \\\hline \text { Account verification (accounts) } & \$ 18,000 & 24,000 \\\hline \text { Correspondence (letters) } & \$ 40,000 & 4,000 \\\hline\end{array}$ Hinckley & Granger uses activity based costing. The above activities are used by Departments P and Q as follows: $\begin{array} { | l | r | r | } \hline & \text { Department P } & \text { Department Q } \\\hline \text { Account inquiry (hours) } & 300 & 600 \\\hline \text { Account billing (lines) } & 8,000 & 6,000 \\\hline \text { Account verification (accounts) } & 5,000 & 4,500 \\\hline \text { Correspondence (letters) } & 500 & 600 \\\hline\end{array}$ - How much of the correspondence cost will be assigned to Department P?

Franklin Corporation manufactures a wide variety of products and uses an activity-based costing system.Data from its activity-based costing system for all products follows: $\begin{array}{|l|r|r|l|}\hline \text { Activity cost pool } & \text { Total cost } & \text { Total activity }\\\hline \text { Engineering costs } & \$ 149,500 & 6,500 & \text { engineering hours } \\\hline \text { Setup costs } & \$ 34,000 & 2,000 & \text { number of batches } \\\hline \text { Assembling products } & \$ 667,000 & 7,250 & \text { direct labor hours } \\\hline\end{array}$ What is the engineering cost pool rate per engineering hour?

Traditional single-allocation-base cost systems tend to over-cost high-volume products and under-cost low-volume products.

Molding and sanding each unit of product would most likely be classified as a

Value-engineering is accomplished by eliminating,reducing,or simplifying all non-value added activities,and examining whether value-added activities could be improved.

Using departmental overhead rates is generally more accurate than using a single plantwide overhead rate.