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Exam 5: Cost Management in an Automated Business Environment: ABC, ABM, and TQM

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Question 51

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Franklin Manufacturing manufactures two models of windows,bay windows and casement windows.Franklin uses an activity-based costing system.The following information about the activities used to produce the company's products has been provided. $\begin{array} { l c c c c } \text { Category } & \text { Estimated Cost } & \text { Cost Driver } & \text { Bay Windows } & \text { Casement } \\\text { Unit-level } & \$ 125,000 & \text { Labor hours } & 750 & 500 \\\text { Batch-level } & \$ 75,000 & \text { Inspections } & 30 & 20 \\\text { Product-level } & \$ 35,000 & \text { Storage Space } & 3 , 5 0 0 \text { sq feet } & 2,100 \text { sq feet } \\\text { Facility-level } & \$ 165,000 & \text { Machine hours } & 9,000 & 6 , 0 0 0 \end{array}$ The amount of batch-level cost that should be allocated to the bay windows equals:

A) $30,000.
B) $45,000.
C) $75,000.
D) $7,500.

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Question 52

True/False

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Bennett Company pays its salespeople a sales commission on each sale they make.This commission is an example of an upstream cost.

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Question 53

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The insurance cost for a large factory would be considered a:

Many automated processes generate costs that have no cause-and-effect relationship with volume-based cost drivers.

Activities that support specific products or product lines are known as:

Indicate whether each of the following statements is true or false. In an automated environment,use of a volume-based cost driver may undercost high-volume products._____ In an automated environment,an activity-based cost driver would provide for more accurate allocation of setup costs than would a volume-based cost driver._____ Activity-based costing is probably not cost beneficial for a company that makes very similar products._____ In an automated manufacturing environment,use of a volume-based cost driver could lead managers to make poor decisions._____ Activity-based costing always delivers significantly more accurate cost allocation than does volume-based costing._____

All of the following are examples of volume-based drivers except:

Select the incorrect statement from the following.

Sweetheart Brands packages single-sized servings of sugar and sugar substitute for fast-food restaurants.The activities required to package sugar are fewer and less complex than for the sugar substitute.The direct costs of producing the two products are as follows: $\begin{array}{lrr} &\underline{\text { Sugar } }& \underline{\text { Sugar Substitute }}\\ \text { Direct materials} &\$0.02&\$0.04\\ \text { Direct lahor } &0.04&0.08\\\end{array}$ Overhead is currently assigned to the two products based on machine hours.The following information is provided regarding overhead costs: Required: 1)Compute the predetermined overhead rate under the current method of overhead cost allocation.How much total overhead cost will be assigned to each product under the current system? 2)Compute the three activity rates that would be used in an activity-based system.How much total overhead cost will be assigned to each product under an ABC system? 3)Assuming an ABC system to be more precise,by how much does the company's current costing system over- or undercost the products? Be specific.

Increasing automation in a manufacturing facility will likely:

The first step in developing an ABC system is to:

All of the following quality costs are directly controllable by management except:

Indicate whether each of the following statements is true or false. An activity-based costing system uses more cause-and-effect relationships in assigning costs than does a traditional cost allocation system._____ An activity-based costing system first assigns or traces costs to the departments in which products are made._____ The hierarchical categories into which activities are grouped are unit-level,batch-level,department-level,and facility-level activities._____ An activity-based costing system traces the costs of performing activities to the products that cause the activities._____ The total amount of unit-level costs changes in proportion to the number of batches of product made._____

An activity center:

Which of the following is an appropriate cost driver for electricity used for production equipment in a factory?

Select from the list provided the term that best matches each of the following descriptions.

Discuss how automation has affected the selection of cost drivers employed in product costing systems.

Supply Depot produces a variety of office products including two models (standard and deluxe)of a handheld stapler.A number of the company's activity-related costs are described in the following table: Required: Classify each of the above costs into unit-,batch-,product-,or facility-level cost pools.

The Tangier Company is considering eliminating the following product line: $\begin{array}{lr}&\underline{\text { Product AXP}}\\\text { Sales}&\$80,000\\\text { Less variable costs: }\\\text { Raw materials } & 50,000 \\\text { Direct labor } & \underline{10,000}\\\text { Contribution margin } & \$ 20,000 \\\text { Less fixed costs: } & \\\text { Production costs allocated to products } &\underline{30,000} \\\text { Profit (Loss) } & \$(10,000) \\\end{array}$ What amount of cost is avoidable if Tangier outsources production of this product?

ABX Company produces two types of computer speakers.The Prestige line is made to provide excellent sound for the most demanding applications.The Standard line is geared toward workplace use and delivers average performance.During its most recent accounting period,the company incurred $50,000 of inspection costs.Its production activities were classified into four cost centers,unit-level,batch-level,product-level,and facility-level.The following cost and cost driver information is provided for the unit-level and batch-level cost centers: $\begin{array} { | l | r |r | } \hline \text { Cost-Center: } & \text { Unit-Level } & \text { Batch-Level } \\\hline \text { Cost Driver: } & \text { Number of direct labor hours } & \text { Number of batches } \\\hline \text { Prestige Product } & 4,000 & 15 \\\hline \text { Standard Product } & \underline { 6,000 } & \underline { 5 } \\\hline{ \text { Totals } } & \underline { 10,000 } & \underline { 20 } \\\hline & & \\\hline\end{array}$ Required: 1)Allocate the inspection cost between the two products,assuming the inspection cost is driven by a)only unit-level activities; b)only batch-level activities. 2)How should managers of the company determine which allocation is more appropriate?