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Exam 4: Activity-Based Costing and Cost Management

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Question 1

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When target costing is used,the target cost is determined by:

A) finding the difference between the market price and the amount of profit needed to satisfy stakeholders.
B) adding the cost of direct materials,direct labor,and activity costs of a product.
C) subtracting all nonvalue-added costs from total manufacturing costs of a product.
D) adding the manufacturing and nonmanufacturing costs of the product.

E) A) and D)
F) B) and D)

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A

Question 2

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Carter,Inc.uses a traditional volume-based costing system in which direct labor hours are the allocation base.Carter produces two different products: Product A,which uses 100,000 direct labor hours,and Product B,which uses 300,000 direct labor hours.Carter is considering switching to an ABC system by splitting its manufacturing overhead cost of $1,000,000 across three activities: Design,Production,and Inspection.Under the traditional volume-based costing system,the predetermined overhead rate is $2.50/direct labor hour.Under the ABC system,the cost of each activity and proportion of the activity drivers used by each product are as follows: Required: a.Calculate the indirect manufacturing costs assigned to Product A under the traditional costing system. b.Calculate the indirect manufacturing costs assigned to Product B under the traditional costing system. c.Calculate the indirect manufacturing costs assigned to Product A under the ABC system. d.Calculate the indirect manufacturing costs assigned to Product B under the ABC system. e.Which product is under-costed and which is over-costed under the volume-based cost system compared to ABC?

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a.$250,000 = $2.50 × 100,000
b.$750,000 ...

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Question 3

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When is a volume-based cost system appropriate for a service company?

The purpose of Stage 1 allocations is to:

Pima,Inc.manufactures calculators that sell for $40 each.Each calculator uses $15 in direct materials and $5 in direct labor per unit.Pima has two activities: Machining,which is applied at the rate of $4 per machine hour,and Finishing,which is applied at the rate of $20 per batch.This month,Pima made 400 calculators,using 1,000 machine hours in 40 batches.What is the gross profit for one calculator?

Hayden,Inc.produces two different products,Product A and Product B.Hayden uses a traditional volume-based costing system in which direct labor hours are the allocation base.Hayden is considering switching to an ABC system by splitting its manufacturing overhead cost of $1,600,000 across three activities: Engineering,Manufacturing,and Inspection.Under the traditional volume-based costing system,the predetermined overhead rate is $2.00/direct labor hour.Under the ABC system,the rate for each activity and usage of the activity drivers are as follows: Required: a.Calculate the indirect manufacturing costs assigned to Product A under the traditional costing system. b.Calculate the indirect manufacturing costs assigned to Product B under the traditional costing system. c.Calculate the indirect manufacturing costs assigned to Product A under the ABC system. d.Calculate the indirect manufacturing costs assigned to Product B under the ABC system. e.Which product is under-costed and which is over-costed under the volume-based cost system compared to ABC?

Activity-based management is a method of assigning indirect costs to products or services based on the activities they require.

Target costing involves determining what the product price must be in order to meet the target cost and still provide a profit for the company's shareholders.

How is activity-based management related to activity-based costing?

Fremont Systems produces two different products,Product A,which sells for $1,000 per unit,and Product B,which sells for $2,000 per unit,using three different activities: Design,which uses Engineering Hours as an activity driver;Machining,which uses machine hours as an activity driver;and Inspection,which uses number of batches as an activity driver.The cost of each activity and usage of the activity drivers are as follows: Fremont manufactures 10,000 units of Product A and 7,500 units of Product B per month.Each unit of Product A uses $500 of direct materials and $200 of direct labor,while each unit of Product B uses $750 of direct materials and $350 of direct labor. Required: a.Calculate the Design activity proportions for Products A and B. b.Calculate the Machining activity proportions for Products A and B. c.Calculate the Inspection activity proportions for Products A and B. d.Determine the indirect costs assigned to Product A. e.Determine the indirect costs assigned to Product B. f.Determine the manufacturing cost per unit for Product A. g.Determine the manufacturing cost per unit for Product B. h.Determine the gross profit per unit for Product A. i.Determine the gross profit per unit for Product B.

The gross margin is calculated by subtracting total nonmanufacturing cost per unit from the unit sales price.

Which of the following best defines a batch-level activity?

Hayden,Inc.produces two different products,Product A and Product B.Hayden uses a traditional volume-based costing system in which direct labor hours are the allocation base.Hayden is considering switching to an ABC system by splitting its manufacturing overhead cost across three activities: Engineering,Manufacturing,and Inspection.The cost of each activity and usage of the activity drivers are as follows: Hayden manufactures 10,000 units of Product A and 5,000 units of Product B per month. Required: a.Calculate the predetermined overhead rate under the traditional costing system. b.Calculate the activity rate for Engineering. c.Calculate the activity rate for Manufacturing. d.Calculate the activity rate for Inspection. e.Calculate the indirect manufacturing costs assigned to each unit of Product A under the traditional costing system. f.Calculate the indirect manufacturing costs assigned to each unit of Product B under the traditional costing system. g.Calculate the indirect manufacturing costs assigned to each unit of Product A under the ABC system. h.Calculate the indirect manufacturing costs assigned to each unit of Product B under the ABC system. i.Which product is under-costed and which is over-costed under the volume-based cost system compared to ABC?

Jackson,Inc.produces two different products (Product 5 and Product Z) using two different activities: Machining,which uses machine hours as an activity driver,and Inspection,which uses number of batches as an activity driver.The cost of Machining is $500,000,while the cost of Inspection is $30,000.Product 5 uses 20% of total machine hours and 75% of total batches.What is the total Machining cost assigned to Product Z?

Activity-based costing is not appropriate for service providers since they do not have manufacturing overhead that needs to be assigned to products.

Sherman,Inc.manufactures chainsaws that sell for $58.Each chainsaw uses $10 in direct materials and $3 in direct labor per unit.Sherman has two activities: Machining,which is applied at the rate of $2 per machine hour,and Finishing,which is applied at the rate of $20 per batch.This month,Sherman made 200 chainsaws,using 1,000 machine hours in 40 batches.What is the gross profit for one chainsaw?

Jefferson,Inc.produces two different products (Product 5 and Product Z) using two different activities: Machining,which uses machine hours as an activity driver,and Inspection,which uses number of batches as an activity driver.The cost of Machining is $500,000,while the cost of Inspection is $30,000.The activity drivers are used as follows: What proportion of Inspection activity is used by Product 5?

When forming activity cost pools,the goal is to create as few cost pools as possible,while still capturing major activities.

The cost of quality training is an example of what type of quality cost?

Pima,Inc.manufactures calculators that sell for $40 each.Each calculator uses $15 in direct materials and $5 in direct labor per unit.Pima has two activities: Machining,which is applied at the rate of $4 per machine hour,and Finishing,which is applied at the rate of $20 per batch.This month,Pima made 400 calculators,using 1,000 machine hours in 40 batches.What is the total manufacturing cost for one calculator?