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Exam 5: Activity-Based Costing and Management

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Question 21

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Which of the following statements is (are) true about non-value-added activities? I. Non-value-added activities are often unnecessary and dispensable. II. Non-value-added activities may be necessary but are being performed in an inefficient and improvable manner. III. Non-value-added activities can be eliminated without deterioration of product quality, performance, or perceived value.

A) I only
B) II only
C) III only
D) I and II
E) I, II, and III

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Question 22

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Successful adoptions of activity-based costing typically occur when companies rely heavily on:

A) finance personnel.
B) accounting personnel.
C) manufacturing personnel.
D) office personnel.
E) multidisciplinary project teams.

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Question 23

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Jackson manufactures products X and Y, applying overhead on the basis of labor hours. X, a low-volume product, requires a variety of complex manufacturing procedures. Y, on the other hand, is both a high-volume product and relatively simplistic in nature. What would an activity-based costing system likely disclose about products X and Y as a result of Jackson's current accounting procedures?

St. James, Inc., currently uses traditional costing procedures, applying $800,000 of overhead to products Beta and Zeta on the basis of direct labor hours. The company is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labor hours (DLH) , production setups (SU) , and number of parts components (PC) as cost drivers. Data on the cost pools and respective driver volumes follow. $\begin{array}{cccc}& \text { Pool No. 1 } & \text { Pool No. 2 } & \text { Pool No. 3 } \\\text { Product } & \text { (Driver: DLH) } & \text { (Driver: SU) } & \text { (Driver: PC) }\\\hline\text { Beta } & 1,200 & 45 & 2,250 \\\text { Zeta } & 2,800 & 55 & 750 \\& & & \\\text { Pool Cost } & \$ 160,000 & \$ 280,000 & \$ 360,000\end{array}$ The overhead cost allocated to Beta by using activity-based costing procedures would be:

Alexander Corporation produces flat-screen computer monitors. Consider the following selected costs that arose during the current year: 1. Direct materials used: $3,640,000 2. Plant rent, utilities, and taxes: $1,229,000 3. New technology design engineering: $2,040,000 4. Materials receiving: $318,000 5. Manufacturing-run/set-up charges: $115,000 6. Equipment depreciation: $92,000 7. General management salaries: $1,564,000 Required: A. A batch-level activity is performed for each batch of products rather than for each unit. In contrast, a facility-level activity is required for an entire process to occur. Examples of the latter, which support the organization as a whole, include plant maintenance and property taxes. A. Briefly distinguish between batch-level and facility-level activities. B. Determine the cost of the firm's unit-level, batch-level, product-sustaining, and facility-level activities. B. Unit-level: $3,640,000 (1) Batch-level: $318,000 (4) + $115,000 (5) = $433,000 Product-sustaining: $2,040,000 (3) Facility-level: $1,229,000 (2) + $92,000 (6) + $1,564,000 (7) = $2,885,000

In an activity-based costing system, direct materials used would typically be classified as a unit-level cost.

Airstream builds recreational motor homes. All of the following activities add value to the finished product except:

Consider the following statements regarding product-sustaining activities: I. They must be performed for each batch of product that is made. II. They must be performed for each unit of product that is made. III. They are needed to support an entire product line. Which of the above statements is (are) true?

In comparison with a system that uses a single, volume-based cost driver, an activity-based costing system is preferred when a company has:

St. James, Inc., currently uses traditional costing procedures, applying $800,000 of overhead to products Beta and Zeta on the basis of direct labor hours. The company is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labor hours (DLH) , production setups (SU) , and number of parts components (PC) as cost drivers. Data on the cost pools and respective driver volumes follow. $\begin{array}{cccc}& \text { Pool No. 1 } & \text { Pool No. 2 } & \text { Pool No. 3 } \\\text { Product } & \text { (Driver: DLH) } & \text { (Driver: SU) } & \text { (Driver: PC) }\\\hline\text { Beta } & 1,200 & 45 & 2,250 \\\text { Zeta } & 2,800 & 55 & 750 \\& & & \\\text { Pool Cost } & \$ 160,000 & \$ 280,000 & \$ 360,000\end{array}$ The overhead cost allocated to Zeta by using activity-based costing procedures would be:

Riverside Florists uses an activity-based costing system to compute the cost of making floral bouquets and delivering the bouquets to its commercial customers. Company personnel who earn $180,000 typically perform both tasks; other firm-wide overhead is expected to total $70,000. These costs are allocated as follows: Riverside anticipates making 20,000 bouquets and 4,000 deliveries in the upcoming year. The cost of wages and salaries and other overhead that would be charged to each bouquet made is:

Consumption ratios are useful in determining:

Customer profitability analysis is tied closely to:

Of the following organizations, activity-based costing (ABC) cannot be used by:

Assume that HiTech is using a volume-based costing system, and the preceding overhead costs are applied to all products on the basis of direct labor hours. The overhead cost that would be assigned to the Deluxe product line is closest to:

Factory Oak produces various wooden bookcases, tables, storage units, and chairs. Which of the following would be included in a listing of the company's non-value-added activities?

Many traditional costing systems:

Martin and Beasley, an accounting firm, provides consulting and tax planning services. For many years, the firm's total administrative cost (currently $270,000) has been allocated to services on this basis of billable hours to clients. A recent analysis found that 55% of the firm's billable hours to clients resulted from tax planning services, while 45% resulted from consulting services. The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows: $\begin{array}{lr}\text { Staff support } & \$ 200,000 \\\text { In-house computing charges } & 50,000 \\\text { Miscellaneous office costs } & 20,000 \\\text { Total }&\$270,000\end{array}$ A recent analysis of staff support found a strong correlation with the number of clients served. In contrast, in-house computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively. Consulting clients served totaled 35% of the total client base, consumed 30% of the firm's computer hours, and accounted for 20% of the total client transactions. If Martin and Beasley switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to consulting services would:

Non-value-added costs occur in nonmanufacturing organizations as well as in manufacturing firms. Required: A. Explain what is meant by a non-value-added cost. A. Non-value-added costs are the costs of activities that can be eliminated with no deterioration of product quality, performance, or perceived value. These activities should be eliminated to save time and money. General examples include the costs of inspection, moving, waiting, and storing. B. Airlines: • Vouchers for future flights that are given to passengers as a result of poor customer service. • The cost of tracing, returning, repairing, or replacing lost or mishandled luggage. • Additional compensation paid to flight crews attributable to cancellations or delays from problems that should have been prevented by routine maintenance. Banks: • The cost of correcting bank errors in customer accounts. • The cost of performing manual banking procedures necessitated by computer system downtime. • Losses caused by employee embezzlement and petty thefts. • Defaulted loans made to borrowers who should have been classified as poor risks by existing credit-granting procedures. Hotels: • Broken dishes and glassware, loss of or damage to linens and towels. • The cost of replacing lost room keys/entry cards. • The cost of overstaffing the front desk during nonpeak hours. • Excess food costs, including preparation. B. Identify two potential non-value-added costs for each of the following service providers: airlines, banks, and hotels.

Which of the following choices correctly depicts a cost that arises from a batch-level activity and one that arises from a facility-level activity?