D. Identification of cost drivers.

8. The following tasks are associated E. Assignment of cost to products.
with an activity-based costing  
system: 11. Which of the following is not a
1— Assignment of cost to products broad, cost classification category
2— Calculation of pool rates typically used in activity-based
3— Identification of cost drivers costing?
4— Identification of cost pools A. Unit-level.
Which of the following choices B. Batch-level.
correctly expresses the proper order C. Product-sustaining level.
of the preceding tasks? D. Facility-level.
A. 1, 2, 3, 4. E. Management-level.
B. 2, 4, 1, 3.  
C. 3, 4, 2, 1. 12. In an activity-based costing system,
D. 4, 2, 1, 3. direct materials used would typically
E. 4, 3, 2, 1. be classified as a:
  A. unit-level cost.
  B. batch-level cost.
9. Which of the following is the proper C. product-sustaining cost.
sequence of events in an activity- D. facility-level cost.
based costing system? E. matrix-level cost.
A. Identification of cost drivers,  
identification of cost pools,  
calculation of pool rates, assignment 13. Which of the following is least likely
of cost to products. to be classified as a batch-level
B. Identification of cost pools, activity in an activity-based costing
identification of cost drivers, system?
calculation of pool rates, assignment A. Shipping.
of cost to products. B. Receiving and inspection.
C. Assignment of cost to products, C. Production setup.
identification of cost pools, D. Property taxes.
identification of cost drivers, E. Quality assurance.
calculation of pool rates.  
D. Calculation of pool rates, 14. In an activity-based costing system,
identification of cost drivers, materials receiving would typically
identification of cost pools, be classified as a:
assignment of cost to products. A. unit-level activity.
E. Some other sequence of the four B. batch-level activity.
activities listed above. C. product-sustaining activity.
  D. facility-level activity.
10. Which of the following tasks is not E. period-level activity.
normally associated with an activity-  
based costing system? 15. Feinstein, Inc., an appliance
A. Calculation of pool rates. manufacturer, is developing a new
B. Identification of cost pools. line of ovens that uses controlled-
C. Preparation of allocation matrices. laser technology. The research and
 testing costs associated with the new C. $49.42 per unit.
ovens is said to arise from a: D. $50.00 per machine hour.
A. unit-level activity. E. A rate other than those listed
B. batch-level activity. above.
C. product-sustaining activity.  
 
30. What is HiTech’s pool rate for the
A. $7.15. finishing activity?
B. $8.75. A. $5.00 per labor hour.
C. $12.50. B. $5.00 per machine hour.
D. $13.75. C. $5.00 per unit.
E. some other amount. D. $7.50 per unit.
  E. A rate other than those listed
27. The cost of wages and salaries and above.
other overhead that would be  
charged to each delivery is closest to: 31. What is HiTech’s pool rate for the
A. $19.63. packaging activity?
B. $20.31. A. $4.86 per machine hour.
C. $26.75. B. $5.00 per labor hour.
D. $40.63. C. $10.00 per unit.
E. some other amount. D. $100.00 per order shipped.
  E. A rate other than those listed
  above.
HiTech Products manufactures three types  
of remote-control devices: Economy, 32. Under an activity-based costing
Standard, and Deluxe. The company, which system, what is the per-unit overhead
uses activity-based costing, has identified cost of Economy?
five activities (and related cost drivers). A. $141.
Each activity, its budgeted cost, and related B. $164.
cost driver is identified below. C. $225.
The following information pertains to the D. $228.
three product lines for next year: E. An amount other than those listed
  above.
28. What is HiTech’s pool rate for the  
material-handling activity? 33. Under an activity-based costing
A. $1.00 per part. system, what is the per-unit overhead
B. $2.25 per part. cost of Standard?
C. $6.62 per labor hour. A. $164.
D. $13.23 per part. B. $228.
E. A rate other than those listed C. $272.
above. D. $282.
  E. An amount other than those listed
29. What is HiTech’s pool rate for the above.
automated machinery activity?  
A. $24.00 per machine hour. 34. Under an activity-based costing
B. $24.50 per labor hour. system, what is the per-unit overhead
 cost of Deluxe? components (PC) as cost drivers. Data on
A. $272. the cost pools and
B. $282. 41. $270,000) has been allocated to
C. $320. services on this basis of billable
D. $440. hours to clients. A recent analysis
E. An amount other than those listed found that 55% of the firm’s billable
above. hours to clients resulted from tax
  planning services, while 45%
  resulted from consulting services.
35. Assume that HiTech is using a The firm, contemplating a change to
volume-based costing system, and activity-based costing, has identified
the preceding overhead costs are three components of administrative
applied to all products on the basis of cost, as follows:
direct labor hours. The overhead cost A recent analysis of staff support
that would be assigned to the Deluxe found a strong correlation with the
product line is closest to: number of clients served. In contrast,
A. $456,471. in-house computing and
B. $646,471. miscellaneous office cost varied
C. $961,176. directly with the number of computer
D. $1,141,176. hours logged and number of client
E. An amount other than those listed transactions, respectively. Consulting
above. clients served totaled 35% of the
  total client base, consumed 30% of
36. Assume that HiTech is using a the firm’s computer hours, and
volume-based costing system, and accounted for 20% of the total client
the preceding overhead costs are transactions.
applied to all products on the basis of If Martin and Beasley switched from
direct labor hours. The overhead cost its current accounting method to an
that would be assigned to the activity-based costing system, the
Standard product line is closest to: amount of administrative cost
A. $456,471. chargeable to consulting services
B. $646,471. would:
C. $961,176. A. decrease by $32,500.
D. $1,141,176. B. increase by $32,500.
E. An amount other than those listed C. decrease by $59,500.
above. D. change by an amount other than
  those listed above.
St. James, Inc., currently uses traditional E. change, but the amount cannot be
costing procedures, applying $800,000 of determined based on the information
overhead to products Beta and Zeta on the presented.
basis of direct labor hours. The company is  
considering a shift to activity-based costing  
and the creation of individual cost pools that Kelly and Logan, an accounting firm,
will use direct labor hours (DLH), provides consulting and tax planning
production setups (SU), and number of parts services. For many years, the firm’s total
administrative cost (currently $250,000) has
been allocated to services on the basis of  
billable hours to clients. A recent analysis 44. Activity-based costing systems:
found that 65% of the firm’s billable hours A. use a single, volume-based cost
to clients resulted from tax planning driver.
services, while 35% resulted from B. assign overhead to products based
consulting services. on the products’ relative usage of
The firm, contemplating a change to direct labor.
activity-based costing, has identified three C. often reveal products that were
components of administrative cost, as under- or over-costed by traditional
follows: costing systems.
A recent analysis of staff support found a D. typically use fewer cost drivers
strong correlation with the number of clients than more traditional costing
served (consulting, 20; tax planning, 60). In systems.
contrast, in-house computing and E. have a tendency to distort product
miscellaneous office cost varied directly costs.
with the number of computer hours logged  
and number of client transactions, 45. Dreyson
respectively. Consulting consumed 30% of 47. procedures
the firm’s computer hours and had 20% of A. all of the company’s products are
the total client transactions. undercosted.
  B. the company’s high-volume
42. Assuming the use of activity-based products are undercosted.
costing, the proper percentage to use C. all of the company’s products are
in allocating staff support costs to tax overcosted.
planning services is: D. the company’s high-volume
A. 20%. products are overcosted.
B. 60%. E. the company’s low-volume
C. 65%. products are overcosted.
D. 75%.  
E. 80%. 48. Jackson manufactures products X
  and Y, applying overhead on the
43. If Kelly and Logan switched from its basis of labor hours. X, a low-
current accounting method to an volume product, requires a variety of
activity-based costing system, the complex manufacturing procedures.
amount of administrative cost Y, on the other hand, is both a high-
chargeable to consulting services volume product and relatively
would: simplistic in nature. What would an
A. decrease by $23,500. activity-based costing system likely
B. increase by $23,500. disclose about products X and Y as a
C. decrease by $32,500. result of Jackson’s current
D. change by an amount other than accounting procedures?
those listed above. A. Choice A
E. change, but the amount cannot be B. Choice B
determined based on the information C. Choice C
presented. D. Choice D
  E. Choice E
  costing problems because such costs
  do not vary with traditional
49. Johnson manufactures products X application bases such as direct labor
and Y, applying overhead on the hours or machine hours.
basis of labor hours. X is a high- III. Product diversity typically exists
volume product and relatively when a single product (e.g., a
simplistic in nature. Y is both a low- ballpoint pen) is made in different
volume product and requires a colors.
variety of complex manufacturing Which of the above statements is
procedures. What would an activity- (are) true?
based costing system likely disclose A. 
about products X and Y as a result of 55. in the cost of measurement.
Johnson’s current accounting Which of these factors should be
procedures? considered in the selection of a cost
A. Choice A driver?
B. Choice B A. I only.
C. Choice C B. I and II.
D. Choice D C. I and III.
E. Choice E D. II and III.
  E. I, II, and III.
50. Koski manufactures products J and  
K, applying overhead on the basis of 56. Which of the following activity cost
labor hours. J, a low-volume product, pools and activity measures likely
requires a variety of complex has the lowest degree of correlation?
manufacturing procedures. K, on the A. Choice A
other hand, is both a high-volume B. Choice B
product and relatively simplistic in C. Choice C
nature. What would an activity-based D. Choice D
costing system likely disclose about E. Choice E
products J and K as a result of  
Koski’s current accounting  
procedures? 57. Grist Enterprises is converting to an
A. Choice A activity-based costing system and
B. Choice B needs to depict the various activities
C. Choice C in its manufacturing process along
D. Choice D with the activities’ relationships.
E. Choice E Which of the following is a possible
  tool that the company can use to
  accomplish this task?
51. Consider the following statements: A. Storyboards.
I. Product diversity creates costing B. Activity relationship charts
problems because diverse products (ARCs).
tend to utilize manufacturing C. Decision trees.
activities in different ways. D. Simulation games.
II. Overhead costs that are not E. Process organizers.
incurred at the unit level create  
 58. Successful adoptions of activity- 61. Storch Corporation takes eight hours
based costing typically occur when to complete the setup process for a
companies rely heavily on: certain electrical component, with
A. finance personnel. the setup cost averaging $150 per
B. accounting personnel. hour. If the company’s competitor
C. manufacturing personnel. can accomplish the same process in
D. office personnel. six hours, Stanley’s non-value-added
E. multidisciplinary project teams. cost would be:
  A. $0.
59. Which of the following statements is B. $150.
(are) true about non-value-added C. $300.
activities? D. $900.
I. Non-value-added activities are E. $1,200.
often unnecessary and dispensable.  
II. Non-value-added activities may 62. Factory Oak produces various
be necessary but are being performed wooden bookcases, tables, storage
in an inefficient and improvable units, and chairs. Which of the
manner. following would be included in a
III. Non-value-added activities can listing of the company’s non-value-
be eliminated without deterioration added activities?
of product quality, performance, or A. Assembly of tables.
perceived value. B. Staining of storage units.
A. I only C. Transfer of chairs from the
B. II only. assembly line to the staining facility.
C. III only. D. Storage of completed bookcases
D. I and II. in inventory.
E. I, II, and III. E. Both “C” and “D.”
   
  63. Airstream builds recreational motor
60. During a recent accounting period, homes. All of the following activities
Marty’s shipping department add value to the finished product
processed 26 orders. Each order except:
typically takes four hours to A. installation of carpet.
complete; however, the average time B. assembly of the frame to the
increased to five hours because of chassis.
various departmental inefficiencies. C. storage of the vehicle in the sales
If shipping labor is paid $14 per area.
hour, the company’s non-value- D. addition of exterior lights.
added cost would be: E. final painting and polishing.
A. $0.  
B. $56.  
C. $364. 64. An example of a customer-value-
D. $1,456. added activity is:
E. $1,820. A. final painting and polishing of the
  product.
B. installation of a computerized
 human resource management A. manufacturers.
module. B. financial-services firms.
C. shortening the customers’ billing C. book publishers.
cycle. D. hotels.
D. addition of an employee hotline E. None of these are correct, as all
for workplace complaints. these organizations can use ABC.
E. maintenance of an adequate safety  
stock. 74. A hospital administrator is in the
  process of implementing an activity-
65. Which of the following is not an based-costing system. Which of the
example of a business-value-added following tasks would not be part of
activity? this process?
A. Adopting bar-code technology in A. Identification of cost pools.
the receiving department. B. Calculation of pool rates.
B. Installation of a computerized C. Assignment of cost to services
human resource management provided.
module. D. Identification of cost drivers.
C. Shortening the customers’ billing E. None of these, as all these tasks
cycle. would be part of the process.
D. Addition of an employee hotline  
for workplace complaints. 75. A company that adopts a just-in-time
E. Final painting and polishing of the production system would attempt to
product. reduce and/or eliminate:
  A. raw-material inventory.
66. The adoption of a 24-7 customer B. raw-material inventory and work-
service help line is an example of a: in-process inventory.
A. business-value-added activity. C. raw-material inventory, work-in-
process inventory, and finished-
72. differ greatly with respect to number goods inventory.
of required sales contacts (e.g., D. work-in-process inventory.
phone calls and sales visits), account E. finished-goods inventory.
payment patterns, and  
design/engineering change orders.  
Which of the following choices 76. Which of the following inventories
likely denotes an ideal customer would a company try to reduce
from Hilton’s perspective? and/or eliminate under a just-in-time
A. Choice A system?
B. Choice B A. Choice A
C. Choice C B. Choice B
D. Choice D C. Choice C
E. Choice E D. Choice D
  E. Choice E
   
73. Of the following organizations, 77. Marion Corporation, which produces
activity-based costing (ABC) cannot unique office furniture, recently
be used by: installed a just-in-time production
 system. The various steps in the rate.
company’s manufacturing process C. Total quality control.
are coordinated by using a D. Multiskilled workers and flexible
philosophy known as: production facilities.
A. supply pull. E. A pull approach to coordinating
B. demand pull. steps in the production process.
C. supply push.  
D. demand push. 81. Which of the following statements
E. None of these. regarding quality is (are) true for a
  company that has implemented a JIT
78. Which of the following statements system?
regarding the pull method is (are) I. JIT requires quality production
true? facilities, methods, and employees.
I. Goods are produced in each II. JIT requires the acquisition of
manufacturing stage only as they are quality raw materials.
needed at the next stage. III. JIT requires that long-term
II. The pull method greatly reduces contracts be negotiated with quality
work-in-process inventory. suppliers.
III. The pull method reduces waiting A. II only.
time and the associated non-value- B. I and II.
added cost. C. I and III.
A. II only. D. II and III.
B. I and II. E. I, II, and III.
C. I and III.  
D. II and III. 82. A firm that uses a JIT purchasing
E. I, II, and III. philosophy probably:
  A. has many suppliers.
  B. has extensive inspection of
79. A Kanban: purchased items at the receiving
A. is used in conjunction with point.
activity-based costing. C. has relatively few suppliers.
B. facilitates quick and inexpensive D. has deliveries of purchased items
setups of machines. made in small lot sizes immediately
C. helps train workers to do a variety before the goods are needed in
of assignments. production.
D. initiates production in a particular E. Choices C and D.
work center.  
E. measures the correlation between  
a cost driver and a cost pool. 83. Which of the following statements
  about a just-in-time (JIT) purchasing
80. Which of the following is not a key system is false?
feature of a JIT system? A. Since there is minimal backup,
A. Purchases of materials in companies must acquire quality raw
relatively large amounts (i.e., lot materials.
sizes). B. Raw materials are stockpiled to
B. A smooth, uniform production avoid production disruptions.
 C. In comparison with experiences  
under traditional systems,  
manufacturers normally deal with a  
reduced number of suppliers.  
D. Supplier reliability tends to be  
more important under a JIT system 92. Alexander Corporation produces
than under a traditional purchasing flat-screen computer monitors.
system. Consider the following selected costs
E. The average purchase size is that arose during the current year:
smaller with a JIT system than under 1. Direct materials used: $3,640,000
a traditional purchasing system. 2. Plant rent, utilities, and taxes:
  $1,229,000
84. Hudson, Inc., is considering a change 3. New technology design
from a traditional purchasing system engineering: $2,040,000
to a just-in-time purchasing system. 4. Materials receiving: $318,000
What has probably happened to 5. Manufacturing-run/set-up charges:
Hudson’s cost per purchase order $115,000
and inventory unit storage cost to 6. Equipment depreciation: $92,000
prompt the company to consider 7. General management salaries:
such a change? $1,564,000
A. Purchase-order cost is increasing Required:
and unit storage cost is increasing. A. Briefly distinguish between
B. Purchase-order cost is increasing batch-level and facility-level
and unit storage cost is decreasing. activities.
C. Purchase-order cost is decreasing B. Determine the cost of the firm’s
and unit stora unit-level, batch-level, product-
91. packaging charges from a sustaining, and facility-level
commercial printer for a new activities.
software release  
6. Air conditioning/heating costs of  
the firm’s production plant  
7. Transport cost of moving the CD-  
output from production run no. 1 to  
the company’s warehouse 93. The controller for Wofford
8. Design, development, and coding Machining has established the
cost of new spreadsheet software following overhead cost pools and
Required: cost drivers:
A. Classify the eight costs listed as Order no. 715 has the following
arising from either a unit-level, production requirements:
batch-level, product-sustaining, or Machine setups: 7
facility-level activity. Raw material: 11,200 units
B. Would number of loan Inspections: 16
applications or number of customers Machine hours: 850
be a more appropriate cost-driver Required:
base for the review of loan A. Compute the total overhead that
applications? Briefly explain. should be assigned to order no. 715
 by using activity-based costing. under- or overcost the product line?
B. Suppose that Wofford were to use By how much?
a single, predetermined overhead  
rate based on machine hours.  
Compute the rate per hour and the  
total overhead assigned to order no.  
715.  
C. Discuss the merits of an activity- 95. Star Manufacturing, contemplating
based costing system in comparison the adoption of an activity-based
with a traditional costing system. costing system, has established three
  activity-cost pools: machine setup,
  quality assurance, and engineering.
  These cost pools, the appropriate
  cost driver, and the percentage of
  each cost driver consumed by the
94. Weston Enterprises uses a company’s products (H15, H16, and
traditional-costing system to estimate H17) follow.
quality-control costs for its PDA Estimated costs for these three
product line. Costs are estimated at activities, which account for 80% of
32% of direct-labor cost, and direct the firm’s total overhead, are
labor totaled $860,000 for the quarter $400,000, $500,000, and $120,000,
just ended. Management is respectively. Star currently applies
contemplating a change to activity- manufacturing overhead to products
based costing, and has established on the basis of machine hours.
three cost pools: incoming material Required:
inspection, in-process inspection, A. Will activity-based costing
and final product certification. systems require more or fewer cost
Number of parts, number of units, pools than traditional costing
and number of orders have been systems? No explanation is
selected as the respective cost necessary.
drivers. B. Calculate the cost of machine
The following data show the pool setup, quality assurance, and
rates that have been calculated by the engineering to be charged to product
company along with the quantity of H17.
driver units for the PDAs: C. Consider the company’s current
Required: overhead application procedure.
A. Calculate the quarterly quality- 1. Is Star emphasizing unit-level
control cost that is allocated to the activities, batch-level activities,
PDA product line under Weston’s product-sustaining activities, or
traditional-costing system. facility-level activities? Explain.
B. Calculate the quarterly quality- 2. How accurate will the current
control cost that is allocated to the costing procedure be given the
PDAs if activity-based costing is nature of most of the company’s
used. activities? Briefly discuss.
C. Does the traditional approach 3. How accurate will the current
costing procedure be given the
 consumption ratios of the firm? necessary.
Briefly discuss. 2. Which of the two products, F56 or
  F57, may have been less competitive
  in the marketplace prior to the
  change to ABC? Briefly explain.
   
   
96. Kenyon Company produces two  
products (F56 and F57), applying  
manufacturing overhead on the basis  
of direct labor hours. Anticipated 97. Lennox Industries manufactures two
unit production costs (material, products: A and B. A review of the
labor, and overhead) and company’s accounting records
manufacturing volumes are: revealed the following per-unit costs
F56: 2,000 units, $234 and production volumes:
F57: 3,500 units, $271 Manufacturing overhead is currently
Kenyon’s overhead arises because of computed by spreading overhead of
various activities, one of which is $1,860,000 over 20,000 direct labor
purchase-order processing. Budgeted hours. Management is considering a
cost for this activity is expected to be shift to activity-based costing in an
$70,000. The firm believes that the effort to improve the firm’s
number of purchase orders processed accounting procedures, and the
is a key cost driver and expects the following data are available:
following activity for its products: Lennox determines selling prices by
F56, 10 purchase orders; F57, 40 adding 40% to a product’s total cost.
purchase orders. Kenyon’s selling Required:
prices are based heavily on cost. A. Compute the per-unit cost and
Required: selling price of product B by using
A. Activity-based costing (ABC) is Lennox’s current costing procedures.
said to result in improved costing B. Compute the per-unit overhead
accuracy when compared with cost of product B if the company
traditional costing procedures. switches to activity-based costing.
Briefly explain how this improved C. Compute B’s total per-unit cost
accuracy is attained. and selling price under activity-based
B. Compute: costing.
1. the pool rate for purchase-order D. Lennox has recently encountered
processing. significant international competition
2. the purchase-order processing cost for product B, with considerable
to be charged to one unit of F56. business being lost to very
C. Assume that Kenyon switched to aggressive suppliers. Will activity-
activity-based costing and calculated based costing allow the company to
total unit production costs as be more competitive with product B
follows: F56, $285; F57, $220. from a price perspective? Briefly
1. Which of the two products, F56 or explain.
F57, was overcosted prior to the E. Will the cost and selling price of
change to ABC? No explanation is product A likely increase or decrease
 if Lennox changes to activity-based B. Assuming use of activity-based
costing? Why? Hint: No calculations costing, compute the unit
are necessary. manufacturing costs of Regular and
  Deluxe if the expected
  manufacturing volume is attained.
  C. How much overhead would be
  applied to a unit of Regular and
  Deluxe if the company used
98. Scott, Inc., manufactures two traditional costing and applied
products, Regular and Deluxe, and overhead solely on the basis of direct
applies overhead on the basis of labor hours? Which of the two
direct labor hours. Anticipated products would be undercosted by
overhead and direct labor time for this procedure? Overcosted?
the upcoming accounting period are  
$1,600,000 and 25,000 hours,  
respectively. Information about the  
company’s products follows.  
Regular—  
Estimated production volume: 3,000 99. Pink Corporation manufactures two
units types of transponders—no. 156 and
Direct materials cost: $28 per unit no. 157—and applies manufacturing
Direct labor per unit: 3 hours at $15 overhead to all units at the rate of
per hour $76.50 per machine hour. Production
Deluxe— information follows.
Estimated production volume: 4,000 The controller, who is studying the
units use of activity-based costing, has
Direct materials cost: $42 per unit determined that the firm’s overhead
Direct labor per unit: 4 hours at $15 can be identified with three
per hour activities: manufacturing setups,
Scott’s overhead of $1,600,000 can machine processing, and product
be identified with three major shipping. Data on the number of
activities: order processing setups, machine hours worked, and
($250,000), machine processing outgoing shipments, the activities’
($1,200,000), and product inspection three respective cost drivers, follow.
($150,000). These activities are The firm’s total overhead of
driven by number of orders $3,060,000 is subdivided as follows:
processed, machine hours worked, manufacturing setups, $260,000;
and inspection hours, respectively. machine processing, $2,400,000; and
Data relevant to these activities product shipping, $400,000.
follow. Required:
Required: A. Compute the pool ra
A. Compute the pool rates that  
would be used for order processing,  
machine processing, and product  
inspection in an activity-based  
costing system.
 101. Consider the nine activities Bookstore sales totaled $8,400,000,
that follow. and sales to individuals amounted to
1. Microsoft: Developing computer $2,400,000. Costs for the three
coding for a new spreadsheet activities were: Incoming receipts,
package. $450,000; warehousing, $520,000;
2. General Mills: Painting the office and outgoing shipments, $630,000.
of a maintenance supervisor at a A review of the company’s activities
plant that produces cereal. found various inefficiencies with
3. Mayo Clinic: Examining a new respect to the warehousing of
patient. textbooks (acquired for eventual sale
4. American Airlines: The 90 to bookstores) and outgoing
minutes that a Boeing 757 sits idle shipments to individuals. These
on the ground between flights. inefficiencies resulted in an extra
5. Office Depot: Moving cases of 500 moves and 400 shipments,
paper from one location to another in respectively.
the same warehouse. Required:
6. Rolex: Attaching a watch band to A. What is a non-value-added
the watch’s face. activity?
7. United States Postal Service: B. How much did non-value-added
Reprocessing mail that had been activities cost Switzer this past year?
sorted incorrectly on a C. Which of the two markets—sales
malfunctioning sorting machine. to bookstores or sales to individuals
8. Fidelity Investments: Correcting —resulted in lower overall costs for
errors made by company personnel incoming receipts, warehousing, and
in customer accounts. outgoing shipments? Evaluate these
9. Marriott: Upgrading the quality of costs in both absolute dollars and as
bedding used at hotels in very a percentage of sales. In addition,
competitive marketplaces. present a possible explanation for
Required: your results. Note: Exclude costs that
Categorize each of the activities as arose from inefficient operations.
either value-added or non-value-  
added for the  
companies noted.  
   
   
  103. Filipe’s Fresh Meats and
  Produce is a wholesale distributor
  that operates in central California.
102. Switzer, Inc., which sells An analysis of two of the company’s
books to college bookstores and customers, Atriums Retirement
individuals, uses activity-based Home and Sigma Sigma Sigma
costing and activity-based Fraternity, revealed the data that
management. The following follow for a recent 12-month period.
information is available for the Filipe’s uses activity-based costing
company’s three cost pools: to determine the cost of servicing its
customers. The company had total
 delivery costs during the year of taking, and special handling and
$576,000 and 8,000 deliveries, along shipping) as a percentage of gross
with cost of $765,000 for the margin.
administrative processing of 90,000 C. On the basis of your calculations,
invoices. which of the two customers is “more
Required: costly” to deal with? Briefly explain.
A. Compute the pool rates for  
deliveries and invoice processing.  
B. Compute the operating income  
that Ippilito’s earned from these two  
customers.  
C. Compute the total of customer- 105. Homestead Corporation sells
related costs (deliveries and invoice a line of power tools to home
processing) for each customer as a improvement chains, generating a
percentage of gross margin, and cost of goods sold equal to 70% of
analyze the results for management. net sales. The selected data that
Explain any significant differences follow relate to the period just ended
that you find. for the company’s three largest
  customers: Weekend Project, Tool
  Mart, and Fix-It City.
  Homestead’s management recently
  attended a seminar and learned that
  customers with excessive requests
104. Clark Corporation and demands can have a significant,
manufactures cooling system negative impact on corporate
components. The company has profitability.
gathered the following information Required:
about two of its customers: Engle A. For each of the three chains,
Equipment and Midwest compute:
Refrigeration. 1. Total customer-related costs as a
Cost-driver data used by the firm and percentage of gross margin.
traceable to Engle and Midwest are: 2. The average order size (ignoring
Required: sales returns).
A. Perform a customer profitability 3. The ratio of regular orders to rush
analysis for Clark. Compute the orders.
gross margin and operating income 4. The number of sales returns as a
on transactions related to Engle percentage of the number of total
Equipment and Midwest orders.
Refrigeration. B. Prepare a brief summary of your
B. Compute gross margin as a findings. Should Homestead work
percentage of sales revenue. Then with any of the chains in an effort to
compute (1) general selling and improve results? Explain.
administrative costs as a percentage  
of gross margin and (2) total  
customer-related costs (i.e., costs  
that arise from sales visits, order  
  for the firm of $23.
106. Bravo Manufacturing is a · The overall inventory will drop by
relatively new customer of Haxton $700,000. Navigator can invest these
Enterprises. In the short period that funds elsewhere and produce a return
the two companies have done of 13%.
business with each other, Haxton has · A leased warehouse (monthly rent
found Bravo to be, in management’s of $3,000) will no longer be needed.
words, “an expensive proposition.” · Two warehouse employees (total
Numerous sales visits are typically annual salary cost of $43,000) will
required to “close a deal,” with be transferred elsewhere in the firm.
selling prices and discounts offered · Annual property taxes and
being among the most attractive in insurance are expected to fall by
the industry. Complicating matters, $18,900.
Bravo is slow to settle its account, · In order to keep valued customers,
orders in small quantities, and often Navigator will occasionally have to
has numerous specialized shipping use air freight when an out-of-stock
and handling needs. situation arises, resulting in added
A recent customer profitability cost for the company of $2,300.
analysis has painted a very negative Required:
picture of Bravo Manufacturing, and A. Determine whether it is
Haxton’s managers are questioning financially advantageous over a 12-
whether an on-going relationship month period for Navigator to adopt
with the firm is warranted. the just-in-time system.
Required: B. How would Navigator describe
A. Briefly explain why the customer the “ideal supplier” if the company
profitability analysis painted a adopts the just-in-time system.
negative picture of Bravo  
Manufacturing.  
B. What actions are available to 109. currently purchases a total of
Haxton Enterprises to improve Bravo 50,000 sensors annually from Utah
profitability? Electronics at $80 per unit. The firm
  places 25 purchase orders during the
  year at an average cost of $10 per
  order. Putnam’s management is
  contemplating a switch to a just-in-
  time purchasing system that would
107. The wholesale division of require an increase in orders to 200.
Navigator Enterprises is considering Required:
the installation of a just-in-time A. Compute the average order size
purchasing system. The company’s under both the current system and
accountant has provided the the proposed just-in-time system.
following figures if the system is Also, calculate the change in annual
adopted: purchase-order processing cost.
· Sales lost because of out-of-stock B. Explain why the number of orders
situations will total 5,500 units, with will increase under a just-in-time
each unit producing an average profit system.
 C. What benefits might Putnam 113. Define the term “cost driver”
experience to help offset the increase and discuss the factors that are
in purchase-order processing cost? important in the selection of
D. What might Utah do to the $80 appropriate cost drivers.
price, given the company’s need to  
process an additional 175 orders?  
   
   
   
  114. Non-value-added costs occur
  in nonmanufacturing organizations
112. At a recent professional as well as in manufacturing firms.
meeting, two controllers discussed Required:
product-costing problems in their A. Explain what is meant by a non-
respective companies. Both value-added cost.
controllers are familiar with ABC B. Identify two potential non-value-
systems, but neither of their firms added costs for each of the following
utilizes such a system. service providers: airlines, banks,
Controller D reported that part of the and hotels.
problem in his firm results from  
major differences among product  
lines with respect to unit volume,  
utilization of activities, quality  
assurance requirements established 115. A just-in-time production
by customers, and product size. system uses a “pull method” to
Controller M noted that in her coordinate steps in the
company, which manufactures manufacturing process. Explain what
consumer goods, all items undergo is meant by the term “pull method.”
the same basic production processes  
in the same sequence. Lately,  
however, there has been a significant  
increase in the number of item  
colors.  
Both controllers are worried about Chapter 05 Activity-Based Costing and
the potential distortion of product Management Answer Key
costs under their traditional product-  
costing systems. True / False Questions
Required:  
Which controller should be more 1. In an activity-based costing system,
concerned about the potential direct materials used would typically
distortion? Explain. be classified as a unit-level cost.
  TRUE
   
  AACSB: Reflective Thinking
  AICPA BB: Critical Thinking
AICPA FN: Research
Bloom’s: N Learning Objective: 05-08 Explain the
Difficulty: Easy concepts of activity-based management and
Learning Objective: 05-03 Explain the two-dimensional ABC.
concept of cost levels 5. Generally speaking, companies
Learning Objective: and facility-level costs. prefer doing business with customers
Learning Objective: batch-level who order small quantities rather
Learning Objective: including unit-level than large quantities.
Learning Objective: productsustaining-level FALSE
2. Activity-based costing systems have  
a tendency to distort product costs. AACSB: Reflective Thinking
FALSE AICPA BB: Measurement
  AICPA FN: Research
AACSB: Reflective Thinking Bloom’s: RC
AICPA BB: Critical Thinking Difficulty: Easy
AICPA FN: Research Learning Objective: 05-09 Explain and
Bloom’s: RC execute a customer-profitability analysis.
Difficulty: Easy  
Learning Objective: 05-05 Explain why Multiple Choice Questions
traditional  
Learning Objective: volume-based costing 6. Consider the following statements
systems tend to distort product costs. regarding traditional costing
3. Consumption ratios are useful in systems:
determining the existence of product- I. Overhead costs are applied to
line diversity. products on the basis of volume-
TRUE related measures.
  II. All manufacturing costs are easily
AACSB: Reflective Thinking traceable to the goods produced.
AICPA BB: Critical Thinking III. Traditional costing systems tend
AICPA FN: Research to distort unit manufacturing costs
Bloom’s: RC when numerous goods are made that
Difficulty: Medium have widely varying production
Learning Objective: 05-05 Explain why requirements.
traditional Which of the above statements is
Learning Objective: volume-based costing (are) true?
systems tend to distort product costs. A.I only.
  B. II only.
4. An example of a customer-value- C. III only.
added activity is final painting and D. I and III.
polishing of the product. E. II and III.
TRUE  
  AACSB: Reflective Thinking
AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA BB: Resource Management AICPA FN: Research
AICPA FN: Measurement Bloom’s: N
Bloom’s: N Difficulty: Easy
Difficulty: Easy Learning Objective: 05-01 Compute product
costs under a traditional  
Learning Objective: volume-based product- AACSB: Reflective Thinking
costing system. AICPA BB: Critical Thinking
7. Many traditional costing systems: AICPA FN: Research
A.trace manufacturing overhead to Bloom’s: RC
individual activities and require the Difficulty: Easy
development of numerous activity- Learning Objective: 05-02 Explain how an
costing rates. activity-based costing system operates
B. write off manufacturing overhead Learning Objective: 05-04 Compute product
as an expense of the current period. costs under an activity-based costing
C. combine widely varying elements system.
of overhead into a single cost pool. Learning Objective: and the selection of
D. use a host of different cost drivers cost drivers.
(e.g., number of production setups, Learning Objective: including the use of a
inspection hours, orders processed) two-stage procedure for cost assignment
to improve the accuracy of product Learning Objective: the identification of
costing. activity cost pools
E. produce results far superior to 9. Which of the following is the proper
those achieved with activity-based sequence of events in an activity-
costing. based costing system?
  A.Identification of cost drivers,
AACSB: Reflective Thinking identification of cost pools,
AICPA BB: Critical Thinking calculation of pool rates, assignment
AICPA FN: Research of cost to products.
Bloom’s: N B. Identification of cost pools,
Difficulty: Easy identification of cost drivers,
Learning Objective: 05-01 Compute product calculation of pool rates, assignment
costs under a traditional of cost to products.
Learning Objective: volume-based product- C. Assignment of cost to products,
costing system. identification of cost pools,
  identification of cost drivers,
8. The following tasks are associated calculation of pool rates.
with an activity-based costing D. Calculation of pool rates,
system: identification of cost drivers,
1— Assignment of cost to products identification of cost pools,
2— Calculation of pool rates assignment of cost to products.
3— Identification of cost drivers E. Some other sequence of the four
4— Identification of cost pools activities listed above.
Which of the following choices  
correctly expresses the proper order AACSB: Reflective Thinking
of the preceding tasks? AICPA BB: Critical Thinking
A.1, 2, 3, 4. AICPA FN: Research
B. 2, 4, 1, 3. Bloom’s: RC
C. 3, 4, 2, 1. Difficulty: Easy
D. 4, 2, 1, 3. Learning Objective: 05-02 Explain how an
E. 4, 3, 2, 1. activity-based costing system operates
Learning Objective: 05-04 Compute product  
costs under an activity-based costing 22. Alamo’s customer service
system. department follows up on customer
Learning Objective: and the selection of complaints by telephone inquiry.
cost drivers. During a recent period, the
Learning Objective: including the use of a department initiated 7,000 calls and
two-stage procedure for cost assignment incurred costs of $203,000. If 2,940
Learning Objective: the identification of of these calls were for the company’s
activity cost pools wholesale operation (the remainder
  were for the retail division), costs
10. Which of the following tasks is not allocated to the retail division should
normally associated with an activity- amount to:
based costing system? A.$0.
A.Calculation of pool rates. B. $29.
B. Identification of cost pools. C. $85,260.
C. Preparation of allocation matrices. D. $117,740.
D. Identification of cost drivers. E. $203,000.
E. Assignment of cost to products.  
  AACSB: Analytic
AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA BB: Critical Thinking AICPA FN: Measurement
AICPA FN: Research Bloom’s: A
Bloom’s: RC Difficulty: Medium
Difficulty: Easy Learning Objective: 05-04 Compute product
Learning Objective: 05-02 Explain how an costs under an activity-based costing
system.
Learning Objective: productsustaining-level 23. Aladin’s customer service
17. Which of the following is least likely department follows up on customer
to be classified as a facility-level complaints by telephone inquiry.
activity in an activity-based costing During a recent period, the
system? department initiated 7,000 calls and
A.Plant maintenance. incurred costs of $203,000. If 2,940
B. Property taxes. of these calls were for the company’s
C. Machine processing cost. wholesale operation (the remainder
D. Plant were for the retail division), costs
Thinking allocated to the wholesale operation
AICPA BB: Critical Thinking should amount to:
AICPA FN: Research A.$0.
Bloom’s: RC B. $29.
Difficulty: Easy C. $85,260.
Learning Objective: 05-03 Explain the D. $117,740.
concept of cost levels E. $203,000.
Learning Objective: and facility-level costs.  
Learning Objective: batch-level AACSB: Analytic
Learning Objective: including unit-level AICPA BB: Critical Thinking
Learning Objective: productsustaining-level AICPA FN: Measurement
Bloom’s: A  
Difficulty: Medium AACSB: Analytic
Learning Objective: 05-04 Compute product AICPA BB: Critical Thinking
costs under an activity-based costing AICPA FN: Measurement
system. Bloom’s: A
  Difficulty: Medium
24. Alaina’s customer service Learning Objective: 05-04 Compute product
department follows up on customer costs under an activity-based costing
complaints by telephone inquiry. system.
During a recent period, the  
department initiated 10,000 calls and Riverside Florists uses an activity-based
incurred costs of $312,000. Of these costing system to compute the cost of
calls, 3,800 were for the company’s making floral bouquets and delivering the
wholesale operation; the remainder bouquets to its commercial customers.
were for the retail division. Costs Company personnel who earn $180,000
allocated to the wholesale operation typically perform both tasks; other firm-
are: wide overhead is expected to total $70,000.
A.$0. These costs are allocated as follows:
B. $31,200. Riverside anticipates making 20,000
C. $118,560. bouquets and 4,000 deliveries in the
D. $193,440. upcoming year.
E. $203,000.  
  26. The cost of wages and salaries and
AACSB: Analytic other overhead that would be
AICPA BB: Critical Thinking charged to each bouquet made is:
AICPA FN: Measurement A.$7.15.
Bloom’s: A B. $8.75.
Difficulty: Medium C. $12.50.
Learning Objective: 05-04 Compute product D. $13.75.
costs under an activity-based costing E. some other amount.
system.  
25. Astro’s customer service department AACSB: Analytic
follows up on customer complaints AICPA BB: Critical Thinking
by telephone inquiry. During a recent AICPA FN: Measurement
period, the department initiated Bloom’s: A
10,000 calls and incurred costs of Difficulty: Medium
$312,000. Of these calls, 3,800 were Learning Objective: 05-04 Compute product
for the company’s wholesale costs under an activity-based costing
operation; the remainder were for the system.
retail division. Costs allocated to the 27. The cost of wages and salaries and
retail division are: other overhead that would be
A.$0. charged to each delivery is closest to:
B. $31,200. A.$19.63.
C. $118,560. B. $20.31.
D. $193,440. C. $26.75.
E. $203,000.
 D. $40.63. E. A rate other than those listed
E. some other amount. above.
   
AACSB: Analytic AACSB: Analytic
AICPA BB: Critical Thinking AICPA BB: Critical Thinking
AICPA FN: Measurement AICPA FN: Measurement
Bloom’s: A Bloom’s: A
Difficulty: Medium Difficulty: Hard
Learning Objective: 05-04 Compute product Learning Objective: 05-04 Compute product
costs under an activity-based costing costs under an activity-based costing
system. system.
  30. What is HiTech’s pool rate for the
HiTech Products manufactures three types finishing activity?
of remote-control devices: Economy, A.$5.00 per labor hour.
Standard, and Deluxe. The company, which B. $5.00 per machine hour.
uses activity-based costing, has identified C. $5.00 per unit.
five activities (and related cost drivers). D. $7.50 per unit.
Each activity, its budgeted cost, and related E. A rate other than those listed
cost driver is identified below. above.
The following information pertains to the  
three product lines for next year: AACSB: Analytic
  AICPA BB: Critical Thinking
28. What is HiTech’s pool rate for the AICPA FN: Measurement
material-handling activity? Bloom’s: A
A.$1.00 per part. Difficulty: Hard
B. $2.25 per part. Learning Objective: 05-04 Compute product
C. $6.62 per labor hour. costs under an activity-based costing
D. $13.23 per part. system.
E. A rate other than those listed 31. What is HiTech’s pool rate for the
above. packaging activity?
  A.$4.86 per machine hour.
AACSB: Analytic B. $5.00 per labor hour.
AICPA BB: Critical Thinking C. $10.00 per unit.
AICPA FN: Measurement D. $100.00 per order shipped.
Bloom’s: A E. A rate other than those listed
Difficulty: Hard above.
Learning Objective: 05-04 Compute product  
costs under an activity-based costing AACSB: Analytic
system. AICPA BB: Critical Thinking
  AICPA FN: Measurement
29. What is HiTech’s pool rate for the Bloom’s: A
automated machinery activity? Difficulty: Hard
A.$24.00 per machine hour. Learning Objective: 05-04 Compute product
B. $24.50 per labor hour. costs under an activity-based costing
C. $49.42 per unit. system.
D. $50.00 per machine hour.  
 32. Under an activity-based costing AACSB: Analytic
system, what is the per-unit overhead AICPA BB: Critical Thinking
cost of Economy? AICPA FN: Measurement
A.$141. Bloom’s: A
B. $164. Difficulty: Hard
C. $225. Learning Objective: 05-04 Compute product
D. $228. costs under an activity-based costing
E. An amount other than those listed system.
above.  
  35. Assume that HiTech is using a
AACSB: Analytic volume-based costing system, and
AICPA BB: Critical Thinking the preceding overhead costs are
AICPA FN: Measurement applied to all products on the basis of
Bloom’s: A direct labor hours. The overhead cost
Difficulty: Hard that would be assigned to the Deluxe
Learning Objective: 05-04 Compute product product line is closest to:
costs under an activity-based costing A.$456,471.
system. B. $646,471.
33. Under an activity-based costing C. $961,176.
system, what is the per-unit overhead D. $1,141,176.
cost of Standard? E. An amount other than those listed
A.$164. above.
B. $228.  
C. $272. AACSB: Analytic
D. $282. AICPA BB: Critical Thinking
E. An amount other than those listed AICPA FN: Measurement
above. Bloom’s: A
  Difficulty: Hard
AACSB: Analytic Learning Objective: 05-01 Compute product
AICPA BB: Critical Thinking costs under a traditional
AICPA FN: Measurement Learning Objective: volume-based product-
Bloom’s: A costing system.
Difficulty: Hard 36. Assume that HiTech is using a
Learning Objective: 05-04 Compute product volume-based costing system, and
costs under an activity-based costing the preceding overhead costs are
system. applied to all products on the basis of
34. Under an activity-based costing direct labor hours. The overhead cost
system, what is the per-unit overhead that would be assigned to the
cost of Deluxe? Standard product line is closest to:
A.$272. A.$456,471.
B. $282. B. $646,471.
C. $320. C. $961,176.
D. $440. D. $1,141,176.
E. An amount other than those listed E. An amount other than those listed
above. above.
   
AACSB: Analytic D. $560,000.
AICPA BB: Critical Thinking E. some other amount.
AICPA FN: Measurement  
Bloom’s: A AACSB: Analytic
Difficulty: Hard AICPA BB: Critical Thinking
Learning Objective: 05-01 Compute product AICPA FN: Measurement
costs under a traditional Bloom’s: A
Learning Objective: volume-based product- Difficulty: Hard
costing system. Learning Objective: 05-01 Compute product
  costs under a traditional
St. James, Inc., currently uses traditional Learning Objective: volume-based product-
costing procedures, applying $800,000 of costing system.
overhead to products Beta and Zeta on the  
basis of direct labor hours. The company is 39. The overhead cost allocated to Beta
considering a shift to activity-based costing by using activity-based costing
and the creation of individual cost pools that procedures would be:
will use direct labor hours (DLH), A.$240,000.
production setups (SU), and number of parts B. $356,000.
components (PC) as cost drivers. Data on C. $444,000.
the cost pools and respective driver volumes D. $560,000.
follow. E. some other amount.
   
37. The overhead cost allocated to Beta AACSB: Analytic
by using traditional costing AICPA BB: Critical Thinking
procedures would be: AICPA FN: Measurement
A.$240,000. Bloom’s: A
B. $356,000. Difficulty: Hard
C. $444,000. Learning Objective: 05-04 Compute product
D. $560,000. costs under an activity-based costing
E. some other amount. system.
  40. The overhead cost allocated to Zeta
AACSB: Analytic by using activity-based costing
AICPA BB: Critical Thinking procedures would be:
AICPA FN: Measurement A.$240,000.
Bloom’s: A B. $356,000.
Difficulty: Hard C. $444,000.
Learning Objective: 05-01 Compute product D. $560,000.
costs under a traditional E. some other amount.
Learning Objective: volume-based product-  
costing system. AACSB: Analytic
38. The overhead cost allocated to Zeta AICPA BB: Critical Thinking
by using traditional costing AICPA FN: Measurement
procedures would be: Bloom’s: A
A.$240,000. Difficulty: Hard
B. $356,000. Learning Objective: 05-04 Compute product
C. $444,000.
costs under an activity-based costing AACSB: Analytic
system. AICPA BB: Critical Thinking
  AICPA FN: Measurement
41. Martin and Beasley, an accounting Bloom’s: A
firm, provides consulting and tax Difficulty: Hard
planning services. For many years, Learning Objective: 05-01 Compute product
the firm’s total administrative cost costs under a traditional volume-based
(currently $270,000) has been product-costing system.
allocated to services on this basis of Learning Objective: 05-10 Understand and
billable hours to clients. A recent discuss how activity-based costing is used in
analysis found that 55% of the firm’s service-industry organizations.
billable hours to clients resulted from Learning Objective: 05-04 Compute product
tax planning services, while 45% costs under an activity-based costing
resulted from consulting services. system.
The firm, contemplating a change to  
activity-based costing, has identified Kelly and Logan, an accounting firm,
three components of administrative provides consulting and tax planning
cost, as follows: services. For many years, the firm’s total
A recent analysis of staff support administrative cost (currently $250,000) has
found a strong correlation with the been allocated to services on the basis of
number of clients served. In contrast, billable hours to clients. A recent analysis
in-house computing and found that 65% of the firm’s billable hours
miscellaneous office cost varied to clients resulted from tax planning
directly with the number of computer services, while 35% resulted from
hours logged and number of client consulting services.
transactions, respectively. Consulting The firm, contemplating a change to
clients served totaled 35% of the activity-based costing, has identified three
total client base, consumed 30% of components of administrative cost, as
the firm’s computer hours, and follows:
accounted for 20% of the total client A recent analysis of staff support found a
transactions. strong correlation with the number of clients
If Martin and Beasley switched from served (consulting, 20; tax planning, 60). In
its current accounting method to an contrast, in-house computing and
activity-based costing system, the miscellaneous office cost varied directly
amount of administrative cost with the number of computer hours logged
chargeable to consulting services and number of client transactions,
would: respectively. Consulting consumed 30% of
A.decrease by $32,500. the firm’s computer hours and had 20% of
B. increase by $32,500. the total client transactions.
C. decrease by $59,500.  
D. change by an amount other than 42. Assuming the use of activity-based
those listed above. costing, the proper percentage to use
E. change, but the amount cannot be in allocating staff support costs to tax
determined based on the information planning services is:
presented. A.20%.
  B. 60%.
 C. 65%. 44. Activity-based costing systems:
D. 75%. A.use a single, volume-based cost
E. 80%. driver.
  B. assign overhead to products based
AACSB: Analytic on the products’ relative usage of
AICPA BB: Critical Thinking direct labor.
AICPA FN: Measurement C. often reveal products that were
Bloom’s: A under- or over-costed by traditional
Difficulty: Hard costing systems.
Learning Objective: 05-10 Understand and D. typically use fewer cost drivers
discuss how activity-based costing is used in than more traditional costing
service-industry organizations. systems.
Learning Objective: 05-04 Compute product E. have a tendency to distort product
costs under a traditional volume-based costs.
product-costing system  
  AACSB: Reflective Thinking
43. If Kelly and Logan switched from its AICPA BB: Critical Thinking
current accounting method to an AICPA FN: Research
activity-based costing system, the Bloom’s: RC
amount of administrative cost Difficulty: Easy
chargeable to consulting services Learning Objective: 05-05 Explain why
would: traditional
A.decrease by $23,500. Learning Objective: volume-based costing
B. increase by $23,500. systems tend to distort product costs.
C. decrease by $32,500.  
D. change by an amount other than 45. Dreyson Manufacturing sells a
those listed above. number of goods whose selling price
E. change, but the amount cannot be is heavily influenced by cost. A
determined based on the information recent study of product no. 519
presented. revealed a traditionally-derived total
  cost of $1,019, a selling price of
AACSB: Analytic $1,850 based on that figure, and a
AICPA BB: Critical Thinking newly computed activity-based total
AICPA FN: Measurement cost of $1,215. Which of the
Bloom’s: A following statements is true?
Difficulty: Hard A.All other things being equal, the
Learning Objective: 05-01 Compute product company should consider a drop in
costs under a traditional volume-based its sales price.
product-costing system. B. The company may have been
Learning Objective: 05-10 Understand and extremely competitive in the
discuss how activity-based costing is used in marketplace from a price
service-industry organizations. perspective.
Learning Objective: 05-04 Compute product C. Product no. 519 could be labeled
costs under an activity-based costing as being overcosted by the firm’s
system. traditional costing procedures.
D. If product no. 519 is undercosted
 by traditional accounting procedures, AACSB: Reflective Thinking
then all of the company’s other AICPA BB: Critical Thinking
products must be undercosted as AICPA FN: Measurement
well. Bloom’s: N
E. Generally speaking, the activity- Difficulty: Medium
based cost figure is “less accurate” Learning Objective: 05-05 Explain why
than the traditionally-derived cost traditional
figure. Learning Objective: volume-based costing
  systems tend to distort product costs.
AACSB: Reflective Thinking  
AICPA BB: Critical Thinking 47. Vanguilder combines all
AICPA FN: Measurement manufacturing overhead into a single
Bloom’s: N cost pool and allocates this overhead
Difficulty: Medium to products by using machine hours.
Learning Objective: 05-05 Explain why Activity-based costing would likely
traditional show that with Vanguard’s current
Learning Objective: volume-based costing procedures
systems tend to distort product costs. A.all of the company’s products are
46. Drake Manufacturing sells a number undercosted.
of goods whose selling price is B. the company’s high-volume
heavily influenced by cost. A recent products are undercosted.
study of product no. 520 revealed a C. all of the company’s products are
traditionally-derived total cost of overcosted.
$1,623 and a selling price of $1,850 D. the company’s high-volume
based on that figure. A newly products are overcosted.
computed activity-based total cost is E. the company’s low-volume
$1,215. Which of the following products are overcosted.
statements is true?  
A.All other things being equal, AACSB: Reflective Thinking
Drake should consider increasing its AICPA BB: Critical Thinking
sales price. AICPA FN: Research
B. Drake should increase the Bloom’s: N
product’s selling price to maintain Difficulty: Medium
the same markup percentage. Learning Objective: 05-05 Explain why
C. Product no. 520 could be labeled traditional
as being overcosted by Drake’s Learning Objective: volume-based costing
traditional costing procedures. systems tend to distort product costs.
D. If product no. 520 is undercosted 48. Jackson manufactures products X
by traditional accounting procedures, and Y, applying overhead on the
then all of Drake’s other products basis of labor hours. X, a low-
must be undercosted as well. volume product, requires a variety of
E. Generally speaking, the activity- complex manufacturing procedures.
based cost figure is “less accurate” Y, on the other hand, is both a high-
than the traditionally-derived cost volume product and relatively
figure. simplistic in nature. What would an
  activity-based costing system likely
 disclose about products X and Y as a  
result of Jackson’s current 50. Koski manufactures products J and
accounting procedures? K, applying overhead on the basis of
A.Choice A labor hours. J, a low-volume product,
B. Choice B requires a variety of complex
C. Choice C manufacturing procedures. K, on the
D. Choice D other hand, is both a high-volume
E. Choice E product and relatively simplistic in
  nature. What would an activity-based
AACSB: Reflective Thinking costing system likely disclose about
AICPA BB: Critical Thinking products J and K as a result of
AICPA FN: Research Koski’s current accounting
Bloom’s: RC procedures?
Difficulty: Medium A.Choice A
Learning Objective: 05-05 Explain why B. Choice B
traditional C. Choice C
Learning Objective: volume-based costing D. Choice D
systems tend to distort product costs. E. Choice E
   
49. Johnson manufactures products X AACSB: Reflective Thinking
and Y, applying overhead on the AICPA BB: Critical Thinking
basis of labor hours. X is a high- AICPA FN: Research
volume product and relatively Bloom’s: RC
simplistic in nature. Y is both a low- Difficulty: Medium
volume product and requires a Learning Objective: 05-05 Explain why
variety of complex manufacturing traditional
procedures. What would an activity- Learning Objective: volume-based costing
based costing system likely disclose systems tend to distort product costs.
about products X and Y as a result of  
Johnson’s current accounting 51. Consider the following statements:
procedures? I. Product diversity creates costing
A.Choice A problems because diverse products
B. Choice B tend to utilize manufacturing
C. Choice C activities in different ways.
D. Choice D II. Overhead costs that are not
E. Choice E incurred at the unit level create
  costing problems because such costs
AACSB: Reflective Thinking do not vary with traditional
AICPA BB: Critical Thinking application bases such as direct labor
AICPA FN: Research hours or machine hours.
Bloom’s: RC III. Product diversity typically exists
Difficulty: Medium when a single product (e.g., a
Learning Objective: 05-05 Explain why ballpoint pen) is made in different
traditional colors.
Learning Objective: volume-based costing Which of the above statements is
systems tend to distort product costs. (are) true?
 A.I only. of activity-based costing.
B. II only. E. create an unsolvable product-
C. I and II. costing problem.
D. I and III.  
E. II and III. AACSB: Reflective Thinking
  AICPA BB: Critical Thinking
AACSB: Reflective Thinking AICPA FN: Research
AICPA BB: Industry Bloom’s: RC
AICPA FN: Research Difficulty: Medium
Bloom’s: RC Learning Objective: 05-05 Explain why
Difficulty: Medium traditional
Learning Objective: 05-05 Explain why Learning Objective: volume-based costing
traditional systems tend to distort product costs.
Learning Objective: volume-based costing 54. In comparison with a system that
systems tend to distort product costs. uses a single, volume-based cost
52. Consumption ratios are useful in driver, an activity-based costing
determining: system is preferred when a company
A.the existence of product-line has:
diversity. A.a large proportion of nonunit-level
B. overhead that is incurred at the activities.
unit level. B. product-line diversity.
C. if overhead-producing activities C. minimal product-line diversity
are being utilized effectively. and a small proportion of nonunit-
D. if overhead costs are being level activities.
applied to products. D. existing variances from budgeted
E. if overhead-producing activities amounts.
are being utilized efficiently. E. Choices A and B.
   
AACSB: Reflective Thinking AACSB: Reflective Thinking
AICPA BB: Critical Thinking AICPA BB: Critical Thinking
AICPA FN: Research AICPA FN: Research
Bloom’s: RC Bloom’s: RC
Difficulty: Medium Difficulty: Medium
Learning Objective: 05-05 Explain why Learning Objective: 05-05 Explain why
traditional traditional
Learning Objective: volume-based costing Learning Objective: volume-based costing
systems tend to distort product costs. systems tend to distort product costs.
   
53. Widely varying consumption ratios: 55. Consider the following factors:
A.are reflective of product-line I. The degree of correlation between
diversity. consumption of an activity and
B. indicate an out-of-control consumption of a particular cost
production environment. driver.
C. dictate a need for traditional II. The likelihood that a particular
costing systems. cost driver will induce a desired
D. work against the implementation behavioral effect.
 III. The likelihood that a particular (ARCs).
cost driver will cause an increase in C. Decision trees.
the cost of measurement. D. Simulation games.
Which of these factors should be E. Process organizers.
considered in the selection of a cost  
driver? AACSB: Reflective Thinking
A.I only. AICPA BB: Industry
B. I and II. AICPA FN: Research
C. I and III. Bloom’s: RC
D. II and III. Difficulty: Easy
E. I, II, and III. Learning Objective: 05-07 Discuss several
  key issues in activity-based costing
AACSB: Reflective Thinking Learning Objective: including data
AICPA BB: Critical Thinking collection and storyboarding.
AICPA FN: Research  
Bloom’s: RC 58. Successful adoptions of activity-
Difficulty: Easy based costing typically occur when
Learning Objective: 05-06 Explain three companies rely heavily on:
criteria for selecting cost drivers. A.finance personnel.
  B. accounting personnel.
56. Which of the following activity cost C. manufacturing personnel.
pools and activity measures likely D. office personnel.
has the lowest degree of correlation? E. multidisciplinary project teams.
A.Choice A  
B. Choice B AACSB: Reflective Thinking
C. Choice C AICPA BB: Industry
D. Choice D AICPA FN: Research
E. Choice E Bloom’s: RC
  Difficulty: Medium
AACSB: Reflective Thinking Learning Objective: 05-07 Discuss several
AICPA BB: Industry key issues in activity-based costing
AICPA FN: Research Learning Objective: including data
Bloom’s: N collection and storyboarding.
Difficulty: Medium 59. Which of the following statements is
Learning Objective: 05-06 Explain three (are) true about non-value-added
criteria for selecting cost drivers. activities?
57. Grist Enterprises is converting to an I. Non-value-added activities are
activity-based costing system and often unnecessary and dispensable.
needs to depict the various activities II. Non-value-added activities may
in its manufacturing process along be necessary but are being performed
with the activities’ relationships. in an inefficient and improvable
Which of the following is a possible manner.
tool that the company can use to III. Non-value-added activities can
accomplish this task? be eliminated without deterioration
A.Storyboards. of product quality, performance, or
B. Activity relationship charts perceived value.
 A.I only cost would be:
B. II only. A.$0.
C. III only. B. $150.
D. I and II. C. $300.
E. I, II, and III. D. $900.
  E. $1,200.
AACSB: Reflective Thinking  
AICPA BB: Resource Management AACSB: Analytic
AICPA FN: Research AICPA BB: Resource Management
Bloom’s: RC AICPA FN: Measurement
Difficulty: Easy Bloom’s: A
Learning Objective: 05-08 Explain the Difficulty: Medium
concepts of activity-based management and Learning Objective: 05-08 Explain the
two-dimensional ABC. concepts of activity-based management and
  two-dimensional ABC.
60. During a recent accounting period,  
Marty’s shipping department 62. Factory Oak produces various
processed 26 orders. Each order wooden bookcases, tables, storage
typically takes four hours to units, and chairs. Which of the
complete; however, the average time following would be included in a
increased to five hours because of listing of the company’s non-value-
various departmental inefficiencies. added activities?
If shipping labor is paid $14 per A.Assembly of tables.
hour, the company’s non-value- B. Staining of storage units.
added cost would be: C. Transfer of chairs from the
A.$0. assembly line to the staining facility.
B. $56. D. Storage of completed bookcases
C. $364. in inventory.
D. $1,456. E. Both “C” and “D.”
E. $1,820.  
  AACSB: Reflective Thinking
AACSB: Analytic AICPA BB: Resource Management
AICPA BB: Resource Management AICPA FN: Measurement
AICPA FN: Measurement Bloom’s: N
Bloom’s: A Difficulty: Easy
Difficulty: Easy Learning Objective: 05-08 Explain the
Learning Objective: 05-08 Explain the concepts of activity-based management and
concepts of activity-based management and two-dimensional ABC.
two-dimensional ABC. 63. Airstream builds recreational motor
61. Storch Corporation takes eight hours homes. All of the following activities
to complete the setup process for a add value to the finished product
certain electrical component, with except:
the setup cost averaging $150 per A.installation of carpet.
hour. If the company’s competitor B. assembly of the frame to the
can accomplish the same process in chassis.
six hours, Stanley’s non-value-added C. storage of the vehicle in the sales
 area. for workplace complaints.
D. addition of exterior lights. E. Final painting and polishing of the
E. final painting and polishing. product.
   
AACSB: Reflective Thinking AACSB: Reflective Thinking
AICPA BB: Resource Management AICPA BB: Resource Management
AICPA FN: Measurement AICPA FN: Measurement
Bloom’s: N Bloom’s: N
Difficulty: Easy Difficulty: Easy
Learning Objective: 05-08 Explain the Learning Objective: 05-08 Explain the
concepts of activity-based management and concepts of activity-based management and
two-dimensional ABC. two-dimensional ABC.
64. An example of a customer-value- 66. The adoption of a 24-7 customer
added activity is: service help line is an example of a:
A.final painting and polishing of the A.business-value-added activity.
product. B. customer-value-added activity.
B. installation of a computerized C. nonvalue-added activity.
human resource management D. batch-related activity.
module. E. product-sustaining activity.
C. shortening the customers’ billing  
cycle. 69. processed.
D. addition of an employee hotline B. sales visits.
for workplace complaints. C. special packaging and handling.
E. maintenance of an adequate safety D. billing and collections.
stock. E. All of these.
   
AACSB: Reflective Thinking AACSB: Analytic
AICPA BB: Resource Management AICPA BB: Critical Thinking
AICPA FN: Measurement AICPA FN: Measurement
Bloom’s: N Bloom’s: RC
Difficulty: Easy Difficulty: Easy
Learning Objective: 05-08 Explain the Learning Objective: 05-09 Explain and
concepts of activity-based management and execute a customer-profitability analysis.
two-dimensional ABC. 70. Generally speaking, companies
  prefer doing business with customers
65. Which of the following is not an who:
example of a business-value-added A.order small quantities rather than
activity? large quantities.
A.Adopting bar-code technology in B. often change their orders.
the receiving department. C. require special packaging or
B. Installation of a computerized handling.
human resource management D. request normal delivery times.
module. E. need specialized engineering
C. Shortening the customers’ billing design changes.
cycle.  
D. Addition of an employee hotline
AACSB: Reflective Thinking Learning Objective: 05-09 Explain and
AICPA BB: Measurement execute a customer-profitability analysis.
AICPA FN: Research  
Bloom’s: RC 73. Of the following organizations,
Difficulty: Easy activity-based costing (ABC) cannot
Learning Objective: 05-09 Explain and be used by:
execute a customer-profitability analysis. A.manufacturers.
  B. financial-services firms.
71. Which of the following can have a C. book publishers.
negative impact on a sale’s D. hotels.
profitability? E. None of these are correct, as all
A.Number of required sales contacts these organizations can use ABC.
(phone calls, visits, etc.).  
B. Special shipping instructions. AACSB: Reflective Thinking
C. Accounts receivable collection AICPA BB: Industry
time. AICPA FN: Decision Making
D. Purchase-order changes. Bloom’s: RC
E. All of these. Difficulty: Medium
  Learning Objective: 05-10 Understand and
AACSB: Reflective Thinking discuss how activity-based costing is used in
AICPA BB: Marketing service-industry organizations.
AICPA FN: Research 74. A hospital administrator is in the
Bloom’s: N process of implementing an activity-
Difficulty: Easy based-costing system. Which of the
Learning Objective: 05-09 Explain and following tasks would not be part of
execute a customer-profitability analysis. this process?
72. Hilton Corporation’s customers A.Identification of cost pools.
differ greatly with respect to number B
of required sales contacts (e.g.,
phone calls and sales visits), account Learning Objective: 05-11 List and explain
payment patterns, and eight important features of just-in-time
design/engineering change orders. inventory and production management
Which of the following choices systems (Appendix).
likely denotes an ideal customer  
from Hilton’s perspective? 81. Which of the following statements
A.Choice A regarding quality is (are) true for a
B. Choice B company that has implemented a JIT
C. Choice C system?
D. Choice D I. JIT requires quality production
E. Choice E facilities, methods, and employees.
  II. JIT requires the acquisition of
AACSB: Reflective Thinking quality raw materials.
AICPA BB: Marketing III. JIT requires that long-term
AICPA FN: Research contracts be negotiated with quality
Bloom’s: N suppliers.
Difficulty: Medium A.II only.
 B. I and II. under traditional systems,
C. I and III. manufacturers normally deal with a
D. II and III. reduced number of suppliers.
E. I, II, and III. D. Supplier reliability tends to be
  more important under a JIT system
AACSB: Reflective Thinking than under a traditional purchasing
AICPA BB: Critical Thinking system.
AICPA FN: Research E. The average purchase size is
Bloom’s: RC smaller with a JIT system than under
Difficulty: Easy a traditional purchasing system.
Learning Objective: 05-11 List and explain  
eight important features of just-in-time AACSB: Reflective Thinking
inventory and production management AICPA BB: Critical Thinking
systems (Appendix). AICPA FN: Research
82. A firm that uses a JIT purchasing Bloom’s: RC
philosophy probably: Difficulty: Easy
A.has many suppliers. Learning Objective: 05-11 List and explain
B. has extensive inspection of eight important features of just-in-time
purchased items at the receiving inventory and production management
point. systems (Appendix).
C. has relatively few suppliers. 84. Hudson, Inc., is considering a change
D. has deliveries of purchased items from a traditional purchasing system
made in small lot sizes immediately to a just-in-time purchasing system.
before the goods are needed in What has probably happened to
production. Hudson’s cost per purchase order
E. Choices C and D. and inventory unit storage cost to
  prompt the company to consider
AACSB: Reflective Thinking such a change?
AICPA BB: Critical Thinking A.Purchase-order cost is increasing
AICPA FN: Research and unit storage cost is increasing.
Bloom’s: RC B. Purchase-order cost is increasing
Difficulty: Medium and unit storage cost is decreasing.
Learning Objective: 05-11 List and explain C. Purchase-order cost is decreasing
eight important features of just-in-time and unit storage cost is increasing.
inventory and production management D. Purchase-order cost is decreasing
systems (Appendix). and unit storage cost is decreasing.
  E. Both of these costs are relatively
83. Which of the following statements stable in amount.
about a just-in-time (JIT) purchasing  
system is false? AACSB: Reflective Thinking
A.Since there is minimal backup, AICPA BB: Critical Thinking
companies must acquire quality raw AICPA FN: Research
materials. Bloom’s: N
B. Raw materials are stockpiled to Difficulty: Medium
avoid production disruptions. Learning Objective: 05-11 List and explain
C. In comparison with experiences eight important features of just-in-time
inventory and production management eight important features of just-in-time
systems (Appendix). inventory and production management
  systems (Appendix).
85. When a company adopts a just-in-  
time inventory system, it would 87. Rodeo Corporation recently
expect: abandoned its traditional production
A.higher inventories and less and inventory system in favor of a
frequent purchases. just-in-time system. The company
B. higher inventories and more typically dealt with 50 suppliers and
frequent purchases. placed 450 orders throughout the
C. lower inventories and less year. All other things being equal,
frequent purchases. which of the following choices
D. lower inventories and more denotes a likely scenario under the
frequent purchases. just-in-time system?
E. lower inventories and more units A.Choice A
purchased on a given order. B. Choice B
  C. Choice C
AACSB: Reflective Thinking D. Choice D
AICPA BB: Critical Thinking E. Choice E
AICPA FN: Research  
Bloom’s: N AACSB: Reflective Thinking
Difficulty: Easy AICPA BB: Critical Thinking
Learning Objective: 05-11 List and explain AICPA FN: Decision Making
eight important features of just-in-time Bloom’s: N
inventory and production management Difficulty: Medium
systems (Appendix). Learning Objective: 05-11 List and explain
86. When a company adopts a just-in- eight important features of just-in-time
time inventory system, it would inventory and production management
expect: systems (Appendix).
A.higher inventories and fewer units  
purchased on a given order. 88. Harvest Corporation recently
B. higher inventories and more units abandoned its traditional production
purchased on a given order. and inventory system in favor of a
C. lower inventories and fewer units just-in-time system. The company
purchased on a given order. typically ordered 700 units of raw
D. lower inventories and more units material at a time and purchased
purchased on a given order. units that scored a 7 on a 10-point
E. lower inventories and less quality scale, with 10 being very
frequent purchases. close to perfection. All other things
  being equal, which of the following
AACSB: Reflective Thinking choices denotes a likely scenario
AICPA BB: Critical Thinking under the just-in-time system?
AICPA FN: Research A.Choice A
Bloom’s: RC B. Choice B
Difficulty: Easy C. Choice C
Learning Objective: 05-11 List and explain
 D. Choice D 5. Development cost of new, after-
E. Choice E dinner wine
  6. Tasting and testing costs
AACSB: Reflective Thinking Required:
AICPA BB: Critical Thinking A. Briefly distinguish between unit-
AICPA FN: Decision Making level and product-sustaining
Bloom’s: N activities.
Difficulty: Medium B. Classify the six costs listed as
Learning Objective: 05-11 List and explain arising from a unit-level, batch-level,
eight important features of just-in-time product-sustaining, or facility-level
inventory and production management activity.
systems (Appendix). 91. A unit-level activity is performed for
  each unit of production. In contrast, a
89. When a company switches from a product-sustaining activity is needed
traditional system to a just-in-time to support an entire product line. The
production and inventory system, latter is not necessarily performed
what often happens to the quality of each time a new unit or batch of
raw material purchased and the products is manufactured.
number of vendors that supply the B. 1. Facility-level
firm? 2. Batch-level
A.Choice A 3. Facility-level
B. Choice B 4. Unit-level
C. Choice C 5. Product-sustaining
D. Choice D 6. Batch-level
E. Choice E  
  AACSB: Reflective Thinking
AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA BB: Critical Thinking AICPA FN: Research
AICPA FN: Decision Making Bloom’s: RC, N
Bloom’s: RC Difficulty: Medium
Difficulty: Medium Learning Objective: 05-03 Explain the
Learning Objective: 05-11 List and explain concept of cost levels
eight important features of just-in-time Learning Objective: and facility-level costs.
inventory and production management Learning Objective: batch-level
systems (Appendix). Learning Objective: including unit-level
  Learning Objective: productsustaining-level
Essay Questions  
  91. Consider the following costs that
90. St. Helena Cellars produces wine in relate to a bank and a manufacturer
northern California. Consider the of software:
following selected costs that arose Bank
during the current year: 1. Review cost of commercial loan
1. Safety costs at winery applications
2. Truckload shipping costs 2. Operating cost of human resources
3. Building maintenance costs department
4. Bottle and cork cost 3. Immediate processing cost of a
 specific customer’s cash deposit 92. Alexander Corporation produces
4. Bank membership cost of joining flat-screen computer monitors.
local Chamber of Commerce Consider the following selected costs
Software manufacturer that arose during the current year:
5. Label and packaging charges from 1. Direct materials used: $3,640,000
a commercial printer for a new 2. Plant rent, utilities, and taxes:
software release $1,229,000
6. Air conditioning/heating costs of 3. New technology design
the firm’s production plant engineering: $2,040,000
7. Transport cost of moving the CD- 4. Materials receiving: $318,000
output from production run no. 1 to 5. Manufacturing-run/set-up charges:
the company’s warehouse $115,000
8. Design, development, and coding 6. Equipment depreciation: $92,000
cost of new spreadsheet software 7. General management salaries:
Required: $1,564,000
A. Classify the eight costs listed as Required:
arising from either a unit-level, A. Briefly distinguish between
batch-level, product-sustaining, or batch-level and facility-level
facility-level activity. activities.
B. Would number of loan B. Determine the cost of the firm’s
applications or number of customers unit-level, batch-level, product-
be a more appropriate cost-driver sustaining, and facility-level
base for the review of loan activities.
applications? Briefly explain. 93. A batch-level activity is performed
92. B. The number of loan applications for each batch of products rather than
would be more appropriate because for each unit. In contrast, a facility-
it has a higher correlation with the level activity is required for an entire
amount of review cost incurred. process to occur. Examples of the
Applications create review cost; latter, which support the organization
customers, on the other hand, may as a whole, include plant
not. maintenance and property taxes.
  B. Unit-level: $3,640,000 (1)
AACSB: Reflective Thinking Batch-level: $318,000 (4) +
AICPA BB: Critical Thinking $115,000 (5) = $433,000
AICPA FN: Decision Making Product-sustaining: $2,040,000 (3)
Bloom’s: RC, N Facility-level: $1,229,000 (2) +
Difficulty: Medium $92,000 (6) + $1,564,000 (7) =
Learning Objective: 05-03 Explain the $2,885,000
concept of cost levels  
Learning Objective: 05-06 Explain three AACSB: Analytic
criteria for selecting cost drivers. AICPA BB: Critical Thinking
Learning Objective: and facility-level costs. AICPA FN: Decision Making
Learning Objective: batch-level Bloom’s: RC, N, A
Learning Objective: including unit-level Difficulty: Hard
Learning Objective: productsustaining-level Learning Objective: 05-03 Explain the
  concept of cost levels
Learning Objective: and facility-level costs.  
Learning Objective: batch-level AACSB: Analytic
Learning Objective: including unit-level AICPA BB: Critical Thinking
Learning Objective: productsustaining-level AICPA FN: Measurement
  Bloom’s: A, N
93. The controller for Wofford Difficulty: Hard
Machining has established the Learning Objective: 05-01 Compute product
following overhead cost pools and costs under a traditional
cost drivers: Learning Objective: 05-04 Compute product
Order no. 715 has the following costs under an activity-based costing
production requirements: system.
Machine setups: 7 Learning Objective: 05-05 Explain why
Raw material: 11,200 units traditional
Inspections: 16 Learning Objective: volume-based costing
Machine hours: 850 systems tend to distort product costs.
Required: Learning Objective: volume-based product-
A. Compute the total overhead that costing system.
should be assigned to order no. 715  
by using activity-based costing. 94. Weston Enterprises uses a
B. Suppose that Wofford were to use traditional-costing system to estimate
a single, predetermined overhead quality-control costs for its PDA
rate based on machine hours. product line. Costs are estimated at
Compute the rate per hour and the 32% of direct-labor cost, and direct
total overhead assigned to order no. labor totaled $860,000 for the quarter
715. just ended. Management is
C. Discuss the merits of an activity- contemplating a change to activity-
based costing system in comparison based costing, and has established
with a traditional costing system. three cost pools: incoming material
  inspection, in-process inspection,
26. B $538,000 ¸ 20,000 machine hours and final product certification.
= $26.90 per hour; Number of parts, number of units,
$26.90 per hour ´ 850 hours = and number of orders have been
$22,865 selected as the respective cost
C. Activity-based costing (ABC) drivers.
uses multiple cost drivers, more The following data show the pool
closely aligning individual costs with rates that have been calculated by the
the factors that are creating them. company along with the quantity of
Traditional systems, in contrast, use driver units for the PDAs:
fewer drivers and therefore result in Required:
“lumping” unlike activities (unit- A. Calculate the quarterly quality-
level, batch-level, and so forth) control cost that is allocated to the
together. The end result is that ABC PDA product line under Weston’s
tends to eliminate the cost distortion traditional-costing system.
that sometimes arises with traditional B. Calculate the quarterly quality-
systems, more specifically, the control cost that is allocated to the
under- or overcosting of products. PDAs if activity-based costing is
 used. manufacturing overhead to products
C. Does the traditional approach on the basis of machine hours.
under- or overcost the product line? Required:
By how much? A. Will activity-based costing
95. $860,000 ´ 32% = $275,200 systems require more or fewer cost
B. Incoming inspection (560,000 ´ pools than traditional costing
$0.50 = $280,000) + in-process systems? No explanation is
inspection (28,000 ´ $0.12 = $3,360) necessary.
+ final certification (90 ´ $115 = B. Calculate the cost of machine
$10,350), which totals $293,710. setup, quality assurance, and
C. Traditional costing undercosts the engineering to be charged to product
PDAs by $18,510 ($293,710 – H17.
$275,200). C. Consider the company’s current
  overhead application procedure.
AACSB: Analytic 1. Is Star emphasizing unit-level
AICPA BB: Critical Thinking activities, batch-level activities,
AICPA FN: Measurement product-sustaining activities, or
Bloom’s: A, N facility-level activities? Explain.
Difficulty: Hard 2. How accurate will the current
Learning Objective: 05-01 Compute product costing procedure be given the
costs under a traditional nature of most of the company’s
Learning Objective: 05-04 Compute product activities? Briefly discuss.
costs under an activity-based costing 3. How accurate will the current
system. costing procedure be given the
Learning Objective: 05-05 Explain why consumption ratios of the firm?
traditional Briefly discuss.
Learning Objective: volume-based costing 96. More
systems tend to distort product costs. B. Machine setup: $400,000 ´ 30% =
Learning Objective: volume-based product- $120,000
costing system. Quality assurance: $500,000 ´ 15% =
  $75,000
95. Star Manufacturing, contemplating Engineering: $120,000 ´ 75% =
the adoption of an activity-based $90,000
costing system, has established three C. 1. The company currently applies
activity-cost pools: machine setup, overhead on the basis of machine
quality assurance, and engineering. hours, therefore emphasizing unit-
These cost pools, the appropriate level activities. Machine hours are
cost driver, and the percentage of consumed for each unit produced.
each cost driver consumed by the 2. The current procedure is probably
company’s products (H15, H16, and not very accurate. The majority of
H17) follow. Star’s overhead (80%) is created by
Estimated costs for these three setups, inspections, and engineering
activities, which account for 80% of change orders, not machine hours. In
the firm’s total overhead, are this case, for instance, setups and
$400,000, $500,000, and $120,000, (likely) inspection are really batch-
respectively. Star currently applies level activities whereas engineering
 costs are caused by product- cost for this activity is expected to be
sustaining activities. $70,000. The firm believes that the
3. The consumption ratios vary number of purchase orders processed
extensively from one product to the is a key cost driver and expects the
next, thus indicating product following activity for its products:
diversity. The use of a single driver F56, 10 purchase orders; F57, 40
(machine hours in this case) will not purchase orders. Kenyon’s selling
recognize this diversity and will give prices are based heavily on cost.
rise to cost distortion. Required:
  A. Activity-based costing (ABC) is
  said to result in improved costing
AACSB: Reflective Thinking accuracy when compared with
AICPA BB: Critical Thinking traditional costing procedures.
AICPA FN: Measurement Briefly explain how this improved
Bloom’s: A, N accuracy is attained.
Difficulty: Hard B. Compute:
Learning Objective: 05-01 Compute product 1. the pool rate for purchase-order
costs under a traditional processing.
Learning Objective: 05-03 Explain the 2. the purchase-order processing cost
concept of cost levels to be charged to one unit of F56.
Learning Objective: 05-04 Compute product C. Assume that Kenyon switched to
costs under an activity-based costing activity-based costing and calculated
system. total unit production costs as
Learning Objective: 05-05 Explain why follows: F56, $285; F57, $220.
traditional 1. Which of the two products, F56 or
Learning Objective: and facility-level costs. F57, was overcosted prior to the
Learning Objective: batch-level change to ABC? No explanation is
Learning Objective: including unit-level necessary.
Learning Objective: productsustaining-level 2. Which of the two products, F56 or
Learning Objective: volume-based costing F57, may have been less competitive
systems tend to distort product costs. in the marketplace prior to the
Learning Objective: volume-based product- change to ABC? Briefly explain.
costing system. 97. Activity-based costing (ABC) uses
  multiple cost drivers, more closely
96. Kenyon Company produces two aligning individual costs with the
products (F56 and F57), applying factors that are creating them.
manufacturing overhead on the basis Traditional systems, in contrast, use
of direct labor hours. Anticipated fewer drivers and therefore result in
unit production costs (material, “lumping” unlike activities (unit-
labor, and overhead) and level, batch-level, and so forth)
manufacturing volumes are: together. The end result is that ABC
F56: 2,000 units, $234 tends to eliminate the cost distortion
F57: 3,500 units, $271 that sometimes arises with traditional
Kenyon’s overhead arises because of systems, more specifically, the
various activities, one of which is under- or overcosting of products.
purchase-order processing. Budgeted Additionally, the use of multiple cost
 drivers allows users to better accounting procedures, and the
consider variations in consumption following data are available:
ratios that may exist among product Lennox determines selling prices by
lines. adding 40% to a product’s total cost.
B. 1. $70,000 ¸ (10 + 40) = $1,400 Required:
per order A. Compute the per-unit cost and
2. $1,400 ´ 10 = $14,000; $14,000 ¸ selling price of product B by using
2,000 units = $7 Lennox’s current costing procedures.
C. 1. F57 (traditional, $271 vs. ABC, B. Compute the per-unit overhead
$220) cost of product B if the company
2. F57. Kenyon’s selling prices are switches to activity-based costing.
based heavily on cost. An overcosted
product will result in a higher selling 98.
price, which may make the company Deluxe—
less competitive. Estimated production volume: 4,000
  units
  Direct materials cost: $42 per unit
AACSB: Reflective Thinking Direct labor per unit: 4 hours at $15
AICPA BB: Critical Thinking per hour
AICPA FN: Decision Making Scott’s overhead of $1,600,000 can
Bloom’s: A, N be identified with three major
Difficulty: Hard activities: order processing
Learning Objective: 05-01 Compute product ($250,000), machine processing
costs under a traditional ($1,200,000), and product inspection
Learning Objective: 05-04 Compute product ($150,000). These activities are
costs under an activity-based costing driven by number of orders
system. processed, machine hours worked,
Learning Objective: 05-05 Explain why and inspection hours, respectively.
traditional Data relevant to these activities
Learning Objective: volume-based costing follow.
systems tend to distort product costs. Required:
Learning Objective: volume-based product- A. Compute the pool rates that
costing system. would be used for order processing,
  machine processing, and product
97. Lennox Industries manufactures two inspection in an activity-based
products: A and B. A review of the costing system.
company’s accounting records B. Assuming use of activity-based
revealed the following per-unit costs costing, compute the unit
and production volumes: manufacturing costs of Regular and
Manufacturing overhead is currently Deluxe if the expected
computed by spreading overhead of manufacturing volume is attained.
$1,860,000 over 20,000 direct labor C. How much overhead would be
hours. Management is considering a applied to a unit of Regular and
shift to activity-based costing in an Deluxe if the company used
effort to improve the firm’s traditional costing and applied
overhead solely on the basis of direct
 labor hours? Which of the two  
products would be undercosted by 99. Pink Corporation manufactures two
this procedure? Overcosted? types of transponders—no. 156 and
  no. 157—and applies manufacturing
306. Order processing: $250,000 ¸ overhead to all units at the rate of
500 orders processed (OP) = $500 $76.50 per machine hour. Production
per OP information follows.
Machine processing: $1,200,000 ¸ The controller, who is studying the
40,000 machine hours (MH) = $30 use of activity-based costing, has
per MH determined that the firm’s overhead
Product inspection: $150,000 ¸ can be identified with three
10,000 inspection hours (IH) = $15 activities: manufacturing setups,
per IH machine processing, and product
B. shipping. Data on the number of
The cost of a Regular unit is setups, machine hours worked, and
$306.33, and the cost of a Deluxe outgoing shipments, the activities’
unit is $327.00: three respective cost drivers, follow.
C. Overhead rate: $1,600,000 ¸ The firm’s total overhead of
25,000 direct labor hours (DLH) = $3,060,000 is subdivided as follows:
$64 per DLH manufacturing setups, $260,000;
Regular: 3 hours ´ $64 = $192 machine processing, $2,400,000; and
Deluxe: 4 hours ´ $64 = $256 product shipping, $400,000.
Regular is undercosted by this Required:
procedure, as the more “accurate” A. Compute the pool rates that
ABC figure is $233.33. In contrast, would be used for manufacturing
Deluxe is overcosted because the setups, machine processing, and
ABC figure for overhead amounts to product shipping in an activity-based
only $225. costing system.
  B. Assuming use of activity-based
  costing, compute the unit overhead
AACSB: Analytic costs of product nos. 156 and 157 if
AICPA BB: Critical Thinking the expected manufacturing volume
AICPA FN: Measurement is attained.
Bloom’s: A, N C. Assuming use of activity-based
Difficulty: Hard costing, compute the total cost per
Learning Objective: 05-01 Compute product unit of product no. 156.
costs under a traditional D. If the company’s selling price is
Learning Objective: 05-04 Compute product based heavily on cost, would a
costs under an activity-based costing switch to activity-based costing from
system. the current traditional system result
Learning Objective: 05-05 Explain why in a price increase or decrease for
traditional product no. 156? Show
Learning Objective: volume-based costing computations.
systems tend to distort product costs.  
Learning Objective: volume-based product- 2. Manufacturing setups: $260,000 ¸
costing system. 100 setups (SU) = $2,600 per SU
 Machine processing: $2,400,000 ¸ explored a switch to activity-based
40,000 machine hours (MH) = $60 costing to determine the wisdom of
per MH its previous ways. The following
Product shipping: $400,000 ¸ 200 information is available:
outgoing shipments (OS) = $2,000 Two loan applications, among many
per OS others, were originated and closed
B. during the year. No. 7439 consumed
C. Direct material ($40) + direct 3.5 hours in loan underwriting and
labor ($25) + overhead ($216) = 1.5 hours in loan closure, for a total
$281 of 5.0 hours. No. 7809 also required
D. Machine hours (15,000) ¸ units 5.0 hours of time, subdivided as
produced (6,000) = 2.5 hours per follows: 2.0 hours in loan
unit; underwriting and 3.0 hours in loan
2.5 hours ´ $76.50 = $191.25 closure.
overhead applied Required:
Direct material ($40.00) + direct A. Use an activity-based-costing
labor ($25.00) + overhead ($191.25) system and determine the cost of
= $256.25 processing, underwriting, and
Product no. 156 is currently closing the two loan applications.
undercosted ($256.25 vs. $281.00), B. Determine the cost of processing
so a switch to activity-based costing the two loans if Heartfelt uses the
will likely result in a price hike. traditional labor-hour-based system.
  Conversations with management
AACSB: Analytic found that, on average, each
AICPA BB: Critical Thinking application took nine labor hours of
AICPA FN: Measurement processing time, excluding
Bloom’s: A, N underwriting and closure.
Difficulty: Hard C. Is Heartfelt making a mistake by
Learning Objective: 05-01 Compute product continuing to use a traditional system
costs under a traditional that is based on an average labor cost
Learning Objective: 05-04 Compute product per hour? Why?
costs under an activity-based costing 101. Pool rates:
system. Application processing: $900,000 ¸
Learning Objective: 05-05 Explain why 4,000 = $225 per application
traditional Loan underwriting: $800,000 ¸
Learning Objective: volume-based costing 16,000 = $50 per underwriting hour
systems tend to distort product costs. Loan closure: $880,000 ¸ 8,000 =
Learning Objective: volume-based product- $110 per legal hour
costing system. Application no. 7439: Application
  ($225) + underwriting (3.5 ´ $50 =
100. Heartfelt Bank & Trust $175) + closure (1.5 ´ $110 = $165)
operates in a very competitive = $565
marketplace, using a traditional Application no. 7809: Application
labor-hour-based system to ($225) + underwriting (2.0 ´ $50 =
determine the cost of processing its $100) + closure (3.0 ´ $110 = $330)
mortgage loans. Recently, the firm = $655
 B. Total labor hours: Application minutes that a Boeing 757 sits idle
processing (4,000 ´ 9 = 36,000) + on the ground between flights.
underwriting (16,000) + closure 5. Office Depot: Moving cases of
(8,000) = 60,000 paper from one location to another in
Average rate per hour: $2,580,000 ¸ the same warehouse.
60,000 = $43 per hour 6. Rolex: Attaching a watch band to
Application no. 7439: (9 + 5) ´ $43 = the watch’s face.
$602 7. United States Postal Service:
Application no. 7809: (9 + 5) ´ $43 = Reprocessing mail that had been
$602 sorted incorrectly on a
C. Yes. The traditional system malfunctioning sorting machine.
results in an average cost per hour of 8. Fidelity Investments: Correcting
$43; yet, Heartfelt’s hourly charges errors made by company personnel
vary greatly based on the function in customer accounts.
being performed. Rates range from 9. Marriott: Upgrading the quality of
$25 per hour ($225 ¸ 9) for bedding used at hotels in very
application processing, to $50 per competitive marketplaces.
hour for underwriting, to $110 for Required:
legal services. ABC produces an Categorize each of the activities as
improved determination of cost either value-added or non-value-
because three separate drivers are added for the
used rather than just one. companies noted.
   
   
AACSB: Analytic AACSB: Reflective Thinking
AICPA BB: Critical Thinking AICPA BB: Industry
AICPA FN: Measurement AICPA FN: Decision Making
Bloom’s: A, N Bloom’s: N
Difficulty: Hard Difficulty: Medium
Learning Objective: 05-10 Understand and Learning Objective: 05-08 Explain the
discuss how activity-based costing is used in concepts of activity-based management and
service-industry organizations. two-dimensional ABC.
Learning Objective: 05-05 Explain why  
traditional, volume-based costing systems 102. Switzer, Inc., which sells
tend to distort product costs. books to college bookstores and
101. Consider the nine activities individuals, uses activity-based
that follow. costing and activity-based
1. Microsoft: Developing computer management. The following
coding for a new spreadsheet information is available for the
package. company’s three cost pools:
2. General Mills: Painting the office Bookstore sales totaled $8,400,000,
of a maintenance supervisor at a and sales to individuals amounted to
plant that produces cereal. $2,400,000. Costs for the three
3. Mayo Clinic: Examining a new activities were: Incoming receipts,
patient. $450,000; warehousing, $520,000;
4. American Airlines: The 90 and outgoing shipments, $630,000.
 A review of the company’s activities A possible explanation lies in the
found various inefficiencies with fact that sales to individuals resulted
respect to the warehousing of in the sale of one or two copies per
textbooks (acquired for eventual sale shipment and order. In contrast,
to bookstores) and outgoing bookstore sales likely produced
shipments to individuals. These greater revenues and efficiencies
inefficiencies resulted in an extra because of the large number of texts
500 moves and 400 shipments, sold per transaction.
respectively.  
Required:  
A. What is a non-value-added AACSB: Analytic
activity? AICPA BB: Critical Thinking
B. How much did non-value-added AICPA FN: Measurement
activities cost Switzer this past year? Bloom’s: A, N
C. Which of the two markets—sales Difficulty: Hard
to bookstores or sales to individuals Learning Objective: 05-08 Explain the
—resulted in lower overall costs for concepts of activity-based management and
incoming receipts, warehousing, and two-dimensional ABC.
outgoing shipments? Evaluate these Learning Objective: 05-09 Explain and
costs in both absolute dollars and as execute a customer-profitability analysis.
a percentage of sales. In addition,  
present a possible explanation for 103. Filipe’s Fresh Meats and
your results. Note: Exclude costs that Produce is a wholesale distributor
arose from inefficient operations. that operates in central California.
  An analysis of two of the company’s
1. Non-value-added activities can be customers, Atriums Retirement
defined as activities that are either Home and Sigma Sigma Sigma
(1) unnecessary and dispensable or Fraternity, revealed the data that
(2) necessary but inefficient and follow for a recent 12-month period.
improvable. Put simply, such Filipe’s uses activity-based costing
activities can be eliminated without to determine the cost of servicing its
harming overall quality, customers. The company had total
performance, or perceived value. delivery costs during the year of
B. Cost of non-value-added $576,000 and 8,000 deliveries, along
activities: with cost of $765,000 for the
Incoming receipts: $450,000 ¸ 3,000 administrative processing of 90,000
purchase orders = $150 per purchase invoices.
order Required:
Warehousing: $520,000 ¸ 8,000 A. Compute the pool rates for
inventory moves = $65 per move deliveries and invoice processing.
Outgoing shipments: $630,000 ¸ B. Compute the operating income
18,000 shipments = $35 per that Ippilito’s earned from these two
shipment customers.
C. Sales to bookstores produced C. Compute the total of customer-
lower overall costs in both absolute related costs (deliveries and invoice
dollars and as a percentage of sales. processing) for each customer as a
 percentage of gross margin, and  
analyze the results for management. 104. Clark Corporation
Explain any significant differences manufactures cooling system
that you find. components. The company has
  gathered the following information
8. Deliveries: $576,000 ¸ 8,000 about two of its customers: Engle
deliveries = $72 per delivery Equipment and Midwest
Invoice processing: $765,000 ¸ Refrigeration.
90,000 invoices = $8.50 per invoice Cost-driver data used by the firm and
B. traceable to Engle and Midwest are:
C. Atriums Retirement Home: Required:
$8,220 ¸ $68,000 = 12.1% A. Perform a customer profitability
Sigma Sigma Sigma: $11,250 ¸ analysis for Clark. Compute the
$54,000 = 20.8% gross margin and operating income
These percentages differ, in part, on transactions related to Engle
because of sizable differences in Equipment and Midwest
delivery size and invoice size for the Refrigeration.
two organizations. The average B. Compute gross margin as a
delivery for the Atriums generates percentage of sales revenue. Then
$6,800 in sales revenue ($680,000 ¸ compute (1) general selling and
100 deliveries) whereas those for the administrative costs as a percentage
fraternity produce only $2,000 of gross margin and (2) total
($270,000 ¸ 135 deliveries). A customer-related costs (i.e., costs
similar difference is found in invoice that arise from sales visits, order
size (Atriums, $680,000 ¸ 120 taking, and special handling and
invoices = $5,667; Sigma Sigma shipping) as a percentage of gross
Sigma, $270,000 ¸ 180 invoices = margin.
$1,500). It is interesting to note that C. On the basis of your calculations,
because of the larger gross margin which of the two customers is “more
generated on the fraternity’s sales costly” to deal with? Briefly explain.
(20% vs. 10%), the fraternity is still  
a more attractive customer than the 55. In dollar terms, Engle’s gross margin
Atriums when operating income is and operating income are greater
analyzed as a percentage of sales than those of Midwest Refrigeration.
revenues (Atriums, $59,780 ¸ B. Gross margin as a % of sales
$680,000 = 8.8%; Sigma Sigma revenue:
Sigma, $42,750 ¸ $270,000 = Engle: $120,000 ¸ $215,000 =
15.8%). 55.81%
  Midwest: $86,000 ¸ $154,000 =
AACSB: Analytic 55.84%
AICPA BB: Critical Thinking General selling and administrative
AICPA FN: Measurement costs as a % of gross margin:
Bloom’s: A, N Engle: ($30,000 + $21,000) ¸
Difficulty: Hard $120,000 = 42.5%
Learning Objective: 05-09 Explain and Midwest: ($21,500 + $15,050) ¸
execute a customer-profitability analysis. $86,000 = 42.5%
 Customer-related costs as a % of Required:
gross margin: A. For each of the three chains,
Engle: ($7,200 + $4,250 + $18,000 + compute:
$11,400) ¸ $120,000 = 34.0% 1. Total customer-related costs as a
Midwest: ($4,500 + $5,500 + percentage of gross margin.
$16,500 + $18,000) ¸ $86,000 = 2. The average order size (ignoring
51.7% sales returns).
C. Both customers produce 3. The ratio of regular orders to rush
approximately the same rate of gross orders.
margin on sales and are charged with 4. The number of sales returns as a
the same percentage of general percentage of the number of total
selling and administrative costs. The orders.
difference lies in the area of B. Prepare a brief summary of your
customer-related costs. Midwest’s findings. Should Homestead work
costs make the firm a more with any of the chains in an effort to
expensive client to deal with than improve results? Explain.
Engle. Given the dollar volume of  
sales revenue that is generated, 1. 1. Customer-related costs as a
Midwest’s special handling and percentage of gross margin:
shipping needs (especially the latter) Weekend Project: $245,100 ¸
are an expensive proposition for [($2,000,000 – $100,000) ´ 30%] =
Clark Corporation. 43%
  Tool Mart: $918,000 ¸ [($4,900,000
AACSB: Analytic – $400,000) ´ 30%] = 68%
AICPA BB: Critical Thinking Fix-It City: $457,800 ¸ [($4,600,000
AICPA FN: Decision Making – $240,000) ´ 30%] = 35%
Bloom’s: A, N 2. Average order size:
Difficulty: Hard Weekend Project: $2,000,000 ¸ 50
Learning Objective: 05-09 Explain and orders = $40,000
execute a customer-profitability analysis. Tool Mart: $4,900,000 ¸ 175 orders
  = $28,000
105. Homestead Corporation sells Fix-It City: $4,600,000 ¸ 125 orders
a line of power tools to home = $36,800
improvement chains, generating a 3. Ratio of regular orders to rush
cost of goods sold equal to 70% of orders:
net sales. The selected data that Weekend Project: 40:10 = 4:1
follow relate to the period just ended Tool Mart: 135:40 = 3.375:1
for the company’s three largest Fix-It City: 110:15 = 7.33:1
customers: Weekend Project, Tool 4. Number of sales returns as a
Mart, and Fix-It City. percentage of total orders:
Homestead’s management recently Weekend Project: 3 ¸ 50 = 6%
attended a seminar and learned that Tool Mart: 20 ¸ 175 = 11.4%
customers with excessive requests Fix-It City: 8 ¸ 125 = 6.4%
and demands can have a significant, B. Customer-related costs are driven
negative impact on corporate by events (and costs) directly
profitability. traceable to clients. In this case, Tool
 Mart’s costs as a percentage of gross · Annual property taxes and insurance are
margin are much higher (68%) than expected to fall by $18,900.
those of Weekend Project and Fix-It · In order to keep valued customers,
City. This result is not surprising Navigator will occasionally have to use air
given that the firm creates a large freight when an out-of-stock situation arises,
number of small orders ($28,000 vs. resulting in added cost for the company of
$36,800 and $40,000) for Homestead $2,300.
to process. In addition, relative to the Required:
other two firms, Tool Mart relies A. Determine whether it is financially
more heavily on rush orders, which advantageous over a 12-month period for
likely creates additional cost. Finally, Navigator to adopt the just-in-time system.
a number of Tool Mart’s orders B. How would Navigator describe the “ideal
(11.4%) eventually result in sales supplier” if the company adopts the just-in-
returns, again creating additional time system.
processing expense for Homestead. 107. The just-in-time system is
In summary, Tool Mart seems to be financially advantageous to the firm,
an outlier in relation to Weekend saving $17,100. Note: The cost of
Project and Fix-It City, and the warehouse employees is ignored
management should approach Tool because regardless of whether the
Mart to see if the company can system is adopted, Navigator will
change its ways of doing business. incur the cost.
  B. The “ideal supplier” is one that
AACSB: Analytic delivers top quality goods precisely
AICPA BB: Critical Thinking when needed. Thus, reliability is a
AICPA FN: Measurement key with respect to quality and
Bloom’s: A, N delivery, as is close proximity to the
Difficulty: Hard wholesale division. Most JIT
Learning Objective: 05-09 Explain and suppliers are willing to sign long-
execute a customer-profitability analysis. term contracts and accept “batched”
 The wholesale division of Navigator payments for deliveries.
Enterprises is considering the installation of  
a just-in-time purchasing system. The AACSB: Analytic
company’s accountant has provided the AICPA BB: Critical Thinking
following figures if the system is adopted: AICPA FN: Decision Making
· Sales lost because of out-of-stock Bloom’s: A, N
situations will total 5,500 units, with each Difficulty: Hard
unit producing an average profit for the firm Learning Objective: 05-11 List and explain
of $23. eight important features of just-in-time
· The overall inventory will drop by inventory and production management
$700,000. Navigator can invest these funds systems (Appendix).
elsewhere and produce a return of 13%.  
· A leased warehouse (monthly rent of 108. Management of Laredo
$3,000) will no longer be needed. Enterprises recently decided to adopt
· Two warehouse employees (total annual a just-in-time inventory policy to
salary cost of $43,000) will be transferred curb steadily rising costs and free-up
elsewhere in the firm. cash for purposes of investment. The
company anticipates that inventory shipments under a just-in-time
will decrease by $4,450,000, with the system? Explain any differences.
released funds to be invested at a 109. *Note: The cost of the three
10% return for the firm. Additional transferred employees is excluded
data follow. because Laredo will continue to have
1. Reduced inventories should these individuals on the payroll.
produce savings in insurance and B. Under a traditional purchasing
property taxes of $46,000. system, goods are purchased in large
2. Reduced raw-material inventory quantities, and then placed in
levels and accompanying stockouts inventory until used. In contrast,
will cost Laredo $85,000. with JIT, costly inventories are
3. Laredo will lease 80% of an avoided by having the materials
existing warehouse to another firm arrive “just in time” to be issued to
for $2.50 per square foot. The production. Materials are therefore
warehouse has 40,000 square feet. purchased only when needed, which
4. Four employees who currently often translates into numerous small
earn $35,000 each will be directly acquisitions throughout the period.
affected by the just-in-time adoption  
decision. Three employees will be  
transferred to other positions with AACSB: Analytic
Laredo; one will be terminated. AICPA BB: Critical Thinking
5. A shift in suppliers is expected to AICPA FN: Decision Making
result in the purchase and use of Bloom’s: A, N
more expensive raw materials. Difficulty: Hard
However, these materials should Learning Objective: 05-11 List and explain
give rise to fewer warranty and eight important features of just-in-time
repair problems after Laredo’s inventory and production management
finished product is sold, resulting in systems (Appendix).
a net savings for the company of  
$38,000. 109. Putnam Enterprises currently
6. Because of the need to handle an purchases a total of 50,000 sensors
increased number of small shipments annually from Utah Electronics at
from suppliers, Laredo will remodel $80 per unit. The firm places 25
production and receiving-dock purchase orders during the year at an
facilities at a cost of $750,000. The average cost of $10 per order.
construction costs will be Putnam’s management is
depreciated over a 10-year life. contemplating a switch to a just-in-
Required: time purchasing system that would
A. Compute the annual financial require an increase in orders to 200.
impact of Laredo’s decision to adopt Required:
a just-in-time inventory system. A. Compute the average order size
B. How would the number and size under both the current system and
of incoming supplier shipments the proposed just-in-time system.
under a traditional purchasing system Also, calculate the change in annual
compare to the number and size of purchase-order processing cost.
B. Explain why the number of orders
 will increase under a just-in-time
system.
C. What benefits might Putnam
experience to help offset the increase
in purchase-order processing cost?
D. What might Utah do to the $80
price, given the company’s need to
process an additional 175 orders?
110. Current system: 50,000
sensors ¸ 25 orders = 2,000 units
Just-in-time system: 50,000 sensors ¸
200 orders = 250 units
B. Under a traditional system, orders
are large so that adequate inventories
can be maintained. Under a just-in-
time system, the number of orders
are increased as the company
anticipates that units will arrive on
an as-needed basis. This reduces the
need to carry sizable on-hand stocks.
C. A reduction in inventories will
typically decrease associated costs
such as warehousing, insurance,
obsolescence, and property taxes. In
addition, monies currently invested
in inventories will be released for
other profitable uses by
management. Putnam may also
negotiate that a higher quality sensor
be acquired, which would both
reduce the need for inspections and
increase the overall quality of the
firm’s finished product.
D. Utah’s cost will likely increase,
given that overall volume is constant
at 50,000 sensors. As a result, the
firm might be forced to raise the
sensor’s selling price.
 
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom’s: A, N
Difficulty: Hard

114.