Question 1

Pitney Corporation manufactures two types of transponders-no. 156 and no. 157-and applies manufacturing overhead to all units at the rate of $76.50 per machine hour. Production information follows.
 $\begin{array}{lll}
 & \underline{\text { No. } 156}   & \underline{\text { No. } 157}  \
\text { Anticipated volume (units) } & \underline{\underline{6.000}} & \underline{14.000} \
\text { Direct material cost } & \$ 40 & \$ 65 \
\text { Direct labour cost } & 25 & 25
\end{array}$ The controller, who is studying the use of activity-based costing, has determined that the firm's overhead can be identified with three activities: manufacturing setups, machine processing, and product shipping. Data on the number of setups, machine hours worked, and outgoing shipments, the activities' three respective cost drivers, follow. $\begin{array}{lccc}
 & \underline{\text { No. } 156}   & \underline{\text { No. } 157} &\underline {\text { Total } }   \
\text { Setups } & 60 & 40 & 100 \
\text { Machine hours worked } & 15,000 & 25,000 & 40,000 \
\text { Outgoing shipments } & 120 & 80 & 200
\end{array}$ The firm's total overhead of $3,060,000 is subdivided as follows: manufacturing setups, $260,000; machine processing, $2,400,000; and product shipping, $400,000.
Required:
A. Compute the pool rates that would be used for manufacturing setups, machine processing, and product shipping in an activity-based costing system.
B. Assuming use of activity-based costing, compute the unit overhead costs of product nos. 156 and 157 if the expected manufacturing volume is attained.
C. Assuming use of activity-based costing, compute the total cost per unit of product no. 156.
D. If the company's selling price is based heavily on cost, would a switch to activity-based costing from the current traditional system result in a price increase or decrease for product no. 156? Show computations.

Accepted Answer

The answer of Pitney Corporation manufactures two types of transponders-no....

Question 2

Kenyon Company produces two products (F56 and F57), applying manufacturing overhead on the basis of direct labour hours. Anticipated unit production costs (material, labour, and overhead) and manufacturing volumes are:
F56: 2,000 units, $234
F57: 3,500 units, $271
Kenyon's overhead arises because of various activities, one of which is purchase-order processing. Budgeted cost for this activity is expected to be $70,000. The firm believes that the number of purchase orders processed is a key cost driver and expects the following activity for its products: F56, 10 purchase orders; F57, 40 purchase orders. Kenyon's selling prices are based heavily on cost.
Required:
A. Activity-based costing (ABC) is said to result in improved costing accuracy when compared with traditional costing procedures. Briefly explain how this improved accuracy is attained.
B. Compute:
1. the pool rate for purchase-order processing.2. the purchase-order processing cost to be charged to one unit of F56.3. Assume that Kenyon switched to activity-based costing and calculated total unit production costs as follows: F56, $285; F57, $220.1. Which of the two products, F56 or F57, was overcosted prior to the change to ABC? No explanation is necessary.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.

Accepted Answer

The answer of Kenyon Company produces two products (F56 and...

Question 3

Scott, Inc., manufactures two products, Regular and Deluxe, and applies overhead on the basis of direct labour hours. Anticipated overhead and direct labour time for 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 units
Direct materials cost: $28 per unit
Direct labour per unit: 3 hours at $15 per hour
Deluxe-
Estimated production volume: 4,000 units
Direct materials cost: $42 per unit
Direct labour per unit: 4 hours at $15 per hour
Scott's overhead of $1,600,000 can be identified with three major activities: order processing ($250,000), machine processing ($1,200,000), and product inspection ($150,000). These activities are driven by number of orders processed, machine hours worked, and inspection hours, respectively. Data relevant to these activities follow. $\begin{array} { l l l l } 
&&\text { Machine } \
& \text { Orders }&\text { Hours }&\text { Inspection } \
& \underline { \text { Processed } } & \underline { \text { Worked } } & \underline { \text { Hours } } \
\text { Regular } & 320 &16,000 &  4,000\
\text { Deluxe } & \underline { 180 } & \underline { 24,000 } & \underline { 6,000 } \
\text { Total } & \underline { \underline { 500 } } & \underline { \underline { 40.000 } } & \underline { \underline { 10,000 } }
\end{array}$ Required:
A. Compute the pool rates that would be used for order processing, machine processing, and product inspection in an activity-based costing system.
B. Assuming use of activity-based costing, compute the unit 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 traditional costing and applied overhead solely on the basis of direct labour hours? Which of the two products would be undercosted by this procedure? Overcosted?

Accepted Answer

The answer of Scott, Inc., manufactures two products, Regular and...

Question 4

Heartland Bank & Trust operates in a very competitive marketplace, using a traditional labour-hour-based system to determine the cost of processing its mortgage loans. Recently, the firm explored a switch to activity-based costing to determine the wisdom of its previous ways. The following information is available: $\begin{array}{ll}
\underline {\text {Activity}}&\underline {\text {Cost}}&\underline {\text {Driver}}&\underline {\text {Driver Units}}\
 \text { Application}&\$ 900,000 & \text { Applications } &4,000\
 \text { processing}&\
 \text { Loan underwriting}&800,000 & \text { Underwriting }&16,000 \
 & \text { hours } \
 \text { Loan closure}& \underline {800,000}& \text { Legal hours } &8,000\
 \text { Total}&\underline {\$ 2.580 .000 }
\end{array}$ Two loan applications, among many others, were originated and closed during the year. No. 7439 consumed 3.5 hours in loan underwriting and 1.5 hours in loan closure, for a total of 5.0 hours. No. 7809 also required 5.0 hours of time, subdivided as follows: 2.0 hours in loan underwriting and 3.0 hours in loan closure. Conversations with management found that, on average, each application took nine labour hours of processing time, excluding underwriting and closure.
Required:
A. Use an activity-based-costing system and determine the cost of processing, underwriting, and closing the two loan applications.
B. Determine the cost of processing the two loans if Heartland uses the traditional labour-hour-based system.
C. Is Heartland making a mistake by continuing to use a traditional system that is based on an average labour cost per hour? Why?

Accepted Answer

The answer of Heartland Bank & Trust operates in a...

Question 5

Define the term "cost driver" and discuss the factors that are important in the selection of appropriate cost drivers.

Accepted Answer

The answer of Define the term "cost driver" and discuss...

Question 6

You have recently been hired by a manufacturing company. Two days ago, you met with the top management of the company to discuss future strategies for the firm. During the meeting, the president of the company expressed concern about the profitability of the company and the company's ability to compete effectively in the future. You responded to the president's concerns by mentioning some articles you had read in professional accounting journals regarding JIT. The president responded to your comments by saying that although the JIT concept sounded interesting, no one in the company was knowledgeable about JIT. The president then requested that you prepare a brief summary of JIT for the next strategic planning meeting.
Required:
A. List five major requirements for implementing a successful JIT system.
B. List at least five benefits cited of a JIT system.

Accepted Answer

The answer of You have recently been hired by a...

Question 7

Goldstar Corporation manufactures two types of portable air conditioners: Model A, a 4,000 BTU unit and Model B, a 6,000 BTU unit. A review of the company's accounting records revealed the following per-unit costs and production volumes:
 $\begin{array}{lccc}
&\underline{\text { Model }} & \text { Model } \
&\underline{\mathrm{A}}&\underline{\mathrm{B}}\
\text { Production volume (units)} &  \underline {3,000 }  & \underline {6,000 }  \
\text { Direct material} & \$50  &  \$ 29\
\text { Direct labour:} &   &  \
\text { 2 hours at \$ 14} & 28  &  \
\text { 3 hours at \$ 14}  &   & 42  \
\text { Manufacturing overhead:} &   &  \
\text { 2 hours at  \$ 93} &  186 &  \
\text { 3 hours at \$ 93 } &   & 279 \
\end{array}$
 Manufacturing overhead is currently computed by spreading overhead of $2,060,000 over 40,000 direct labour hours. Management is considering a shift to activity-based costing in an effort to improve the firm's accounting procedures, and the following data are available. 
 $ \quad$ $ \quad$ $ \quad$ $ \quad$ $ \quad$ $ \quad$ $ \quad$ $ \quad$ $ \quad$ $ \quad$ $ \quad$ $ \quad$ $ \quad$ $ \quad$ $ \quad$ $ \quad$ $ \quad$ $ \quad$ $ \quad$ $ \quad$ $ \quad$ $ \quad$ $ \quad$ $ \quad$$\text { Cost Driver Volume }$
$\begin{array}{l}
\begin{array}{|l|l|}
\hline{\text { Cost Pool }} &{\text { Cost }} \
\hline \text { Setups } & \$ 260,000 \
\hline \text { General Factory } & 1,600,000 \
\hline \text { Machine Processing } & 130,000 \
\hline &\$ 1,990,000\
\hline
\end{array}
\begin{array}{l|l|l|l|}
\hline\text { Cost Driver } & \text { Model A } & \text { Model B } & {\text { Total }} \
\hline \text { Number of setups } & 100 & 30 & 130 \
\hline\text { Direct labour hours } & 25,000 & 15,000 & 40,000 \
\hline\text { Machine hours } & 2,200 & 1,050 & 3,250 \
\hline\
\hline
\end{array}
\end{array}$ Goldstar determines selling prices by adding 60% to a product's total cost.
Required:
A. Compute the per-unit cost and selling price of Model B by using Goldstar's current costing procedures.
B. Compute the per-unit overhead cost of Model B if the company switches to activity-based costing.
C. Compute Model B's total per-unit cost and selling price under activity-based costing.
D. Goldstar has recently encountered significant international competition for Model B, with considerable business being lost to very aggressive suppliers. Will activity-based costing allow the company to be more competitive with Model B from a price perspective? Briefly explain.
E. Will the cost and selling price of Model A likely increase or decrease if Goldstar changes to activity-based costing? Why? Hint: No calculations are necessary.

Accepted Answer

The answer of Goldstar Corporation manufactures two types of portable...

Question 8

Ippilito's Fresh Meats and Produce is a wholesale distributor that operates in central California. An analysis of two of the company's customers, Atriums Retirement Home and Sigma Sigma Fraternity, revealed the data that follow for a recent 12-month period. $\begin{array}{lll}
&\text { Atriums}\
&\text { Retirement}&\text { Sigma Sigma}\
&\underline {\text { Home }}\
\text { Sales revenue } & \$ 680,000 & \$ 270,000 \
\text { Cost of goods sold } & 90 \% \text { of sales } & 80 \% \text { of sales } \
\text { Number of deliveries } & 100 & 135 \
\text { Number of invoices } & 120 & 180
\end{array}$ Ippilito's uses activity-based costing to determine the cost of servicing its customers. The company had total delivery costs during the year of $576,000 and 8,000 deliveries, along with cost of $765,000 for the administrative processing of 90,000 invoices.
Required:
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-related costs (deliveries and invoice processing) for each customer as a percentage of gross margin, and analyze the results for management. Explain any significant differences that you find.

Accepted Answer

The answer of Ippilito's Fresh Meats and Produce is a...

Question 9

Clark Corporation manufactures cooling system components. The company has gathered the following information about two of its customers: Engle Equipment and Midwest Refrigeration.
 $\begin{array}{lcc}
&\text { Engle }& \text { Midwest }  \
&\underline {\text { Equipment }}& \underline {\text { Refrigeration }} \
\text { Sales revenue } & \$ 215,000 & \$ 154,000 \
\text { Cost of goods sold } & 95,000 & 68,000 \
\text { General selling costs } & 30,000 & 21,500 \
\text { General administrative costs } & 21,000 & 15,050
\end{array}$

$\text { Cost-driver data used by the firm and traceable to Engle and Midwest are. }$

$\begin{array}{llc}
\underline {\text { Customer }  } & \underline { \text { Cost Driver }  } & \underline { \text { Pool Rat } } \
\underline { \text { Activity }} \
\text { Sales activity } & \text { Sales visits } & \$ 900 \
\text { Order taking } & \text { Sales orders } & 250 \
\text { Special handling } & \text { Units handled } & 30 \
\text { Special shipping } & \text { Shipments } & 600
\end{array}$ $\begin{array}{lll}
\underline {\text { Customer } }&\text { Engle }& \text { Midwest }  \
\underline { \text { Activity }}&\underline {\text { Equipment }}& \underline {\text { Refrigeration }} \
\text { Sales activity } & 8 \text { visits } & 5 \text { visits } \
\text { Order taking } & 17 \text { orders } & 22 \text { orders } \
\text { Special handling } & 600 \text { units } & 550 \text { units } \
\text { Special shipping } & 19 \text { shipments } & 30 \text { shipments }
\end{array}$ Required:
A. Perform a customer profitability analysis for Clark. Compute the gross margin and operating income on transactions related to Engle Equipment and Midwest Refrigeration.
B. Compute gross margin as a percentage of sales revenue. Then compute (1) general selling and administrative costs as a percentage of gross margin and (2) total customer-related costs (i.e., costs that arise from sales visits, order taking, and special handling and shipping) as a percentage of gross margin.
C. On the basis of your calculations, which of the two customers is "more costly" to deal with? Briefly explain.

Accepted Answer

The answer of Clark Corporation manufactures cooling system components. The...

Question 10

Non-value-added costs occur in non-manufacturing organizations as well as in manufacturing firms.
Required:
A. Explain what is meant by a non-value-added cost.
B. Identify two potential non-value-added costs for each of the following service providers: airlines, banks, and hotels.

Accepted Answer

The answer of Non-value-added costs occur in non-manufacturing organizations as...

Question 11

Indiglow Chapstars which sells books to college bookstores and individuals uses activity-based costing and activity-based management. The following information is available for the company's three cost pools.
 \(\begin{array} { | l | l | l | l | l | } 
\hline \underline {\text { Activity }} & \begin{array} { l } 
\underline {\text { Cost }} \
\underline {\text { Driver }}
\end{array} & \begin{array} { l } 
\text { Cost- } \
\text { Driver } \
\underline {\text { Quantity }}
\end{array} & \begin{array} { l } 
\text { Percent of Cost- } \
\text { Driver Activity } \
\text { for } \
\text { Bookstore } \
\underline {\text { Transactions }}
\end{array} & \begin{array} { l } 
\text { Percent of Cost- } \
\text { Driver Activity } \
\text { for Transactions } \
\underline {\text { to Individuals }}
\end{array} \
\hline \begin{array} { l } 
\text { Incoming } \
\text { receipts }
\end{array} & \begin{array} { l } 
\text { Number } \
\text { of } \
\text { purchase } \
\text { orders }
\end{array} & 5,000 & 50 \% & \
\hline \text { Warehousing } & \begin{array} { l } 
\text { Number } \
\text { of } \
\text { inventory } \
\text { moves }
\end{array} & 8,500 & 80 & 90 \% \
\hline \begin{array} { l } 
\text { Outgoing } \
\text { shipments }
\end{array} & \begin{array} { l } 
\text { Number } \
\text { of } \
\text { shipments }
\end{array} & 20,000 & 40 & 30 \
\hline
\end{array}\) Bookstore sales totaled $9,000,000, and sales to individuals amounted to $3,400,000. Costs for the three activities were: Incoming receipts, $500,000; warehousing, $620,000; and outgoing shipments, $620,000. A review of the company's activities found various inefficiencies with respect to the warehousing of textbooks (acquired for eventual sale to bookstores) and outgoing shipments to individuals. These inefficiencies resulted in an extra 600 moves and 800 shipments, respectively.
Required:
A. What is a non-value-added activity?
B. How much did non-value-added activities cost Indiglow Chapstars this past year?
C. Which of the two markets-sales to bookstores or sales to individuals-resulted in lower overall costs for incoming receipts, warehousing, and outgoing shipments? Evaluate these costs in both absolute dollars and as a percentage of sales. In addition, present a possible explanation for your results. Note: Exclude costs that arose from inefficient operations.

Accepted Answer

The answer of Indiglow Chapstars which sells books to college...

Question 12

Consider the nine activities that follow.
1. Microsoft: Developing computer coding for a new spreadsheet package
2. General Mills: Painting the office of a maintenance supervisor at a plant that produces cereal
3. Mayo Clinic: Examining a new patient
4. American Airlines: The 90 minutes that a Boeing 757 sits idle on the ground between flights
5. Office Depot: Moving cases of paper from one location to another in the same warehouse
6. Rolex: Attaching a watch band to the watch's face
7. United States Postal Service: Reprocessing mail that had been sorted incorrectly on a malfunctioning sorting machine.
8. Fidelity Investments: Correcting errors made by company personnel in customer accounts
9. Marriott: Upgrading the quality of bedding used at hotels in very competitive marketplaces
10. Dell Computer: Re-working defective units found during quality control inspection
Required:
Categorize each of the activities as either value-added or non-value-added for the companies noted.

Accepted Answer

The answer of Consider the nine activities that follow.
1. Microsoft:...

Quiz 5: Activity-Based Costing and Management

Define the term "cost driver" and discuss the factors that are important in the selection of appropriate cost drivers.

Non-value-added costs occur in non-manufacturing organizations as well as in manufacturing firms. Required: A. Explain what is meant by a non-value-added cost. B. Identify two potential non-value-added costs for each of the following service providers: airlines, banks, and hotels.