Deck 10: Activity-Based Costing

Question 1

Figure 10-2
Anderson Company manufactures a variety of toys and games. John Boone, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in 2011 when 30,000 were projected. Sales for 2008 look no better. At £100 per game, it is not a hot seller. Direct costs of the board game are £56 variable cost and £100,000 fixed. John is considering several options. Option One: Cut the price to £70 and perhaps sell 15,000 units. Option Two: Cut the price to £60, reduce material costs by £10, and cut advertising by £60,000. Anticipated volume for this option is 10,000 units. Option Three: Cut the price to £80 and include a £10 mail-in rebate offer. It is anticipated that 15,000 units could be sold and only 30 per cent of the rebate coupons would be redeemed.
Refer to Figure 10-2. What is the profit (loss) from Option One?

A)£1,050,000
B)£210,000
C)£950,000
D)£110,000

Answer 1

D

Question 2

Figure 10-4
Jamie Ltd. had the following information: $\begin{array}{lll}\text { Revenues } & & £ 250,000 \\\text { Cost of goods sold: } & £ 50,000 & \\\text { Direct materials } & 37,500 & \\\text { Direct labour } & \underline{62,500} & \underline{150,000} \\\quad \text { Overhead } & & \mathbb{£ 1 0 0 , 0 0 0} \\\text { Gross profit } & & \underline{37,500} \\\text { Selling and administrative expenses } & & £ 62,500\end{array}$


-Refer to Figure 10-4. What would be the price for something that has a cost of £500, assuming that the mark up is based on cost of goods sold?

A)£833
B)£625
C)£708
D)£2,000

Answer 2

£833

Question 3

Which of the following is a FALSE statement about target costing?

A)Target costing is a method of determining the cost of a product or service based on the price that customers are willing to pay.
B)The cost is calculated by subtracting the desired profit from the target price.
C)Target costing is an interactive process.
D)Target costing is cost driven.

Answer 3

D

Question 4

____ is where a higher price is charged at the beginning of a product's life cycle.

A)Penetration pricing
B)Predatory pricing
C)Price skimming
D)Target costing

Question 5

Figure 10-2
Anderson Company manufactures a variety of toys and games. John Boone, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in 2011 when 30,000 were projected. Sales for 2008 look no better. At £100 per game, it is not a hot seller. Direct costs of the board game are £56 variable cost and £100,000 fixed. John is considering several options. Option One: Cut the price to £70 and perhaps sell 15,000 units. Option Two: Cut the price to £60, reduce material costs by £10, and cut advertising by £60,000. Anticipated volume for this option is 10,000 units. Option Three: Cut the price to £80 and include a £10 mail-in rebate offer. It is anticipated that 15,000 units could be sold and only 30 per cent of the rebate coupons would be redeemed.
Refer to Figure 10-2. What is the profit (loss) from Option Three?

A)£215,000
B)£1,200,000
C)£110,000
D)(£60,000)

Question 6

Figure 10-1
Wheat Manufacturing has four categories of overhead. The four categories and the expected overhead costs for each category for next year are as follows: $\begin{array}{lr}\text { Maintenance } & £ 120,000 \\\text { Materials handling } & 18,000 \\\text { Setups } & 16,000 \\\text { Inspection } & 60,000\end{array}$ Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labour hours. For next year, 20,000 direct labour hours are budgeted.
The company has been asked to submit a bid for a proposed job. The plant manager feels that obtaining this job would result in new business in future years. Usually bids are based upon full manufacturing cost plus 15 per cent.
Estimates for the proposed job are as follows: $\begin{array}{lr}\text { Direct materials } & £ 2,000 \\\text { Direct labour (600 hours) } & £ 6,000 \\\text { Number of materials moves } & 4 \\\text { Number of inspections } & 6 \\\text { Number of setups } & 8 \\\text { Number of machine hours } & 80\end{array}$ In the past, full manufacturing cost has been calculated by allocating overhead using a volume-based cost driver--direct labour hours. The plant manager has heard of a new way of applying overhead that uses cost pools and cost drivers.
Expected activity for the four activity-based cost drivers that would be used are as follows: $\begin{array}{lr}\text { Machine hours } & 5,000 \\\text { Material moves } & 600 \\\text { Setups } & 200 \\\text { Quality inspections } & 1,000\end{array}$

-Refer to Figure 10-1. If Wheat Manufacturing used direct labour hours as the cost driver and the company's bid is full cost plus 15 per cent, the company's bid would be

A)£17,480.
B)£16,583.
C)£13,110.
D)£12,765.

Question 7

Figure 10-3
Farr Company had the following information: $\begin{array}{lcc}\text { Revenues } & & £ 400,000 \\\text { Cost of goods sold: } &£ 100,000 & \\\text { Direct materials } & 50,000\\ \text { Overhead } & 50,000 & 200,000 \\ \text { Gross profit } & & £ 200,000 \\\text { Selling and administrative expenses } & & 75,000 \\ \text { Operating income } & & £ 125,000 \\\end{array}$

-Refer to Figure 10-3. What is the mark up based on prime costs?

A)300.0%
B)133.3%
C)50.0%
D)166.7%

Question 8

Figure 10-5
Ander Company produces precision equipment for major buyers. Of the six customers, one accounts for 40 per cent of the sales, with the remaining five accounting for the rest of the sales. The five smaller customers purchase equipment in roughly equal quantities. Orders placed by the smaller customers are about the same size. Data concerning Ander's customer activity follow: $\begin{array}{lll}&\text { Large Customer }&\text { Five Smaller }\\&&\text { Customers }\\\text { Units purchased } & 400,000 & 600,000 \\\text { Orders placed } & 10 & 350 \\\text { Number of sales calls } & 20 & 230 \\\text { Manufacturing cost } & £ 1,200,000 & £ 1,800,000\end{array}$ Order-filling costs for Ander Company total £360,000, and sales-force costs are £375,000.

-Refer to Figure 10-5, what amount of order-filling costs would be allocated to the large customer if these costs are allocated based on sales volume?

A)£144,000
B)£216,000
C)£150,000
D)£225,000

Question 9

The activity-based resource usage model improves managerial control and decision making such as

A)the best way to use excess activity capacity in the system.
B)maximization of individual unit performance.
C)increasing the allocation of costs.
D)focusing on managing costs rather than activities.

Question 10

Figure 10-4
Jamie Ltd. had the following information: $\begin{array}{lll}\text { Revenues } & & £ 250,000 \\\text { Cost of goods sold: } & £ 50,000 & \\\text { Direct materials } & 37,500 & \\\text { Direct labour } & \underline{62,500} & \underline{150,000} \\\quad \text { Overhead } & & \mathbb{£ 1 0 0 , 0 0 0} \\\text { Gross profit } & & \underline{37,500} \\\text { Selling and administrative expenses } & & £ 62,500\end{array}$


-Refer to Figure 10-4. What is the mark up based on materials?

A)400.0%
B)185.7%
C)42.9%
D)71.4%

Question 11

Figure 10-3
Farr Company had the following information: $\begin{array}{lcc}\text { Revenues } & & £ 400,000 \\\text { Cost of goods sold: } &£ 100,000 & \\\text { Direct materials } & 50,000\\ \text { Overhead } & 50,000 & 200,000 \\ \text { Gross profit } & & £ 200,000 \\\text { Selling and administrative expenses } & & 75,000 \\ \text { Operating income } & & £ 125,000 \\\end{array}$

-Refer to Figure 10-3. What is the mark up based on cost of goods sold?

A)50.0%
B)100.0%
C)37.5%
D)62.5%

Question 12

Which of the following stages is characterized by rapid increases in sales and production?

A)Introduction
B)Growth
C)Maturity
D)Decline

Question 13

Which of the following stages has revenues for the entire industry decreasing?

A)Introduction
B)Growth
C)Maturity
D)Decline

Question 14

____ is the pricing of a new product at a low initial price to build market share quickly.

A)Penetration pricing
B)Predatory pricing
C)Price skimming
D)Target costing

Question 15

Figure 10-2
Anderson Company manufactures a variety of toys and games. John Boone, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in 2011 when 30,000 were projected. Sales for 2008 look no better. At £100 per game, it is not a hot seller. Direct costs of the board game are £56 variable cost and £100,000 fixed. John is considering several options. Option One: Cut the price to £70 and perhaps sell 15,000 units. Option Two: Cut the price to £60, reduce material costs by £10, and cut advertising by £60,000. Anticipated volume for this option is 10,000 units. Option Three: Cut the price to £80 and include a £10 mail-in rebate offer. It is anticipated that 15,000 units could be sold and only 30 per cent of the rebate coupons would be redeemed.
Refer to Figure 10-2. Which option is preferred?

A)Option One
B)Option Two
C)Option Three
D)Options One and Three are equally preferred.

Question 16

Figure 10-1
Wheat Manufacturing has four categories of overhead. The four categories and the expected overhead costs for each category for next year are as follows: $\begin{array}{lr}\text { Maintenance } & £ 120,000 \\\text { Materials handling } & 18,000 \\\text { Setups } & 16,000 \\\text { Inspection } & 60,000\end{array}$ Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labour hours. For next year, 20,000 direct labour hours are budgeted.
The company has been asked to submit a bid for a proposed job. The plant manager feels that obtaining this job would result in new business in future years. Usually bids are based upon full manufacturing cost plus 15 per cent.
Estimates for the proposed job are as follows: $\begin{array}{lr}\text { Direct materials } & £ 2,000 \\\text { Direct labour (600 hours) } & £ 6,000 \\\text { Number of materials moves } & 4 \\\text { Number of inspections } & 6 \\\text { Number of setups } & 8 \\\text { Number of machine hours } & 80\end{array}$ In the past, full manufacturing cost has been calculated by allocating overhead using a volume-based cost driver--direct labour hours. The plant manager has heard of a new way of applying overhead that uses cost pools and cost drivers.
Expected activity for the four activity-based cost drivers that would be used are as follows: $\begin{array}{lr}\text { Machine hours } & 5,000 \\\text { Material moves } & 600 \\\text { Setups } & 200 \\\text { Quality inspections } & 1,000\end{array}$

-Refer to Figure 10-1. If Wheat Manufacturing used activity-based cost drivers to assign overhead and the company's bid is full cost plus 15 per cent, the company's bid would be

A)£12,696.00
B)£13,965.60
C)£10,120.00
D)£9,936.00

Question 17

Which of the following statements is FALSE?

A)The mark up is a percentage applied to base cost.
B)The mark up is an absolute rule.
C)A major advantage of mark up pricing is that standard mark ups are easy to apply.
D)The mark up can be calculated using a variety of bases.

Question 18

Price skimming occurs in which of the following life-cycle stages?

A)Introduction
B)Growth
C)Maturity
D)Decline

Question 19

Figure 10-2
Anderson Company manufactures a variety of toys and games. John Boone, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in 2011 when 30,000 were projected. Sales for 2008 look no better. At £100 per game, it is not a hot seller. Direct costs of the board game are £56 variable cost and £100,000 fixed. John is considering several options. Option One: Cut the price to £70 and perhaps sell 15,000 units. Option Two: Cut the price to £60, reduce material costs by £10, and cut advertising by £60,000. Anticipated volume for this option is 10,000 units. Option Three: Cut the price to £80 and include a £10 mail-in rebate offer. It is anticipated that 15,000 units could be sold and only 30 per cent of the rebate coupons would be redeemed.
Refer to Figure 10-2. What is the profit (loss) from Option Two?

A)£600,000
B)£100,000
C)£40,000
D)(£100,000)

Question 20

Products might consume overhead in different proportions due to

A)differences in product size.
B)differences in setup times.
C)differences in product complexity.
D)all of the above.

Question 21

Which of the following statements concerning target costing is NOT true?

A)Implementing target costing requires detailed information on the cost of alternative activities.
B)Target costing can be applied to components of products as well as the new products as a whole.
C)A primary advantage of target costing is that it requires little or no coordination among processes.
D)Short product life cycles increase the importance of target costing.

Question 22

Figure 10-6
Multiple Products Co. has predicted the following costs for this year for 100,000 units: $\begin{array}{lcc}&&\text { Selling and }\\&\text { Manufacturing }&\text { Administrative }\\\hline\text { Variable } & £ 400,000 & £ 100,000 \\\text { Fixed } & 600,000 & 300,000 \\\text { Total } & £ 1,000,000 & £ 400,000\end{array}$

-Refer to Figure 10-6. What is the mark up on variable costs needed to achieve a target profit of £100,000?

A)375 per cent
B)275 per cent
C)250 per cent
D)200 per cent

Question 23

Which of the following quantities is an example of an activity cost driver in activity-based costing?

A)number of direct labour hours
B)number of labour transactions
C)number of machine hours
D)all of the above

Question 24

Bay Company produces boats for 11 major buyers. Of the 11 customers, one accounts for 45 per cent of the sales, with the remaining ten accounting for the rest of the sales. The ten smaller customers purchase boats in roughly equal quantities. Orders placed by the smaller customers are about the same size. Data concerning Bay's customer activity follow: $$\begin{array} { l l l } & \text { Large Customer } & \text { Ten Smaller Customers } \\\text { Units purchased } & 4,500 & 5,500 \\\text { Orders placed } & 5 & 545 \\\text { Number of sales calls } & 15 & 245 \\\text { Manufacturing cost } & £ 800,000 & £ 980,000\end{array}$$ Order-filling costs for Bay Company total £401,500, and sales-force costs are £260,000.
a.Determine the amount of selling costs (order-filling and sales-force costs) allocated to (1) the large customer and (2) the ten smaller customers if these costs are allocated based on sales volume.
b.
b.Determine the amount of selling costs (order-filling and sales-force costs) allocated to (1) the large customer and (2) the ten smaller customers if these costs are assigned using activity-based costing.
c.Comment on the differences in amounts attributed to the smaller customers in requirements a and

Question 25

Setting prices below cost for the purpose of injuring competitors and eliminating competition is

A)predatory pricing.
B)target pricing.
C)price discrimination.
D)price gouging.

Question 26

Johnson Company produces office equipment for 16 major buyers. Of the 16 customers, one accounts for 50 per cent of the sales, with the remaining 15 accounting for the rest of the sales. The 15 smaller customers purchase equipment in roughly equal quantities. Orders placed by the smaller customers are about the same size. Data concerning Johnson's customer activity follow: $$\begin{array} { l l l } & \text { Large Customer } & 15 \text { Smaller Customers } \\\text { Units purchased } & 50,000 & 50,000 \\\text { Orders placed } & 6 & 294 \\\text { Number of sales calls } & 26 & 224 \\\text { Manufacturing cost } & £ 750,000 & £ 750,000\end{array}$$ Order-filling costs for Johnson Company total £270,000, and sales-force costs are £300,000.
a.Determine the amount of selling costs (order-filling and sales-force costs) allocated to (1) the large customer and (2) the 15 smaller customers if these costs are allocated based on sales volume.
b.
b.Determine the amount of selling costs (order-filling and sales-force costs) allocated to (1) the large customer and (2) the 15 smaller customers if these costs are assigned using activity-based costing.
c.Comment on the differences in amounts attributed to the smaller customers in requirements a and

Question 27

A target cost is computed as

A)the cost to manufacture plus a desired mark up.
B)the cost to manufacture plus the designated selling expenses.
C)the market willingness to pay less the cost to manufacture.
D)the market willingness to pay less the desired profit.

Question 28

World-class organizations operating in competitive markets are more likely to take which one of the following approaches toward pricing?

A)Begin with cost data as given and determine price by adding a reasonable mark-up.
B)Determine price based on the amount management believes customers are willing to pay.
C)Employ a cost-based approach to pricing.
D)Determine the price that keeps the facilities fully utilized.

Question 29

Figure 10-5
Ander Company produces precision equipment for major buyers. Of the six customers, one accounts for 40 per cent of the sales, with the remaining five accounting for the rest of the sales. The five smaller customers purchase equipment in roughly equal quantities. Orders placed by the smaller customers are about the same size. Data concerning Ander's customer activity follow: $\begin{array}{lll}&\text { Large Customer }&\text { Five Smaller }\\&&\text { Customers }\\\text { Units purchased } & 400,000 & 600,000 \\\text { Orders placed } & 10 & 350 \\\text { Number of sales calls } & 20 & 230 \\\text { Manufacturing cost } & £ 1,200,000 & £ 1,800,000\end{array}$ Order-filling costs for Ander Company total £360,000, and sales-force costs are £375,000.

-Refer to Figure 10-5 above, what amount of order-filling costs would be allocated to the large customer if these costs are allocated using an activity-based costing approach?

A)£10,000
B)£350,000
C)£28,800
D)£331,200

Question 30

Which of the following statements describes a legitimate disadvantage of cost-based pricing?

A)Marginal costs and revenues are difficult to measure.
B)Determining the amount a customer is willing to pay may require sufficient estimation.
C)Customers may not be willing to pay the price determined by the procedure.
D)all of the above

Question 31

If activity-based costing is used, modifications made by engineering to the product design of several products would be classified as a

A)unit-level activity.
B)batch-level activity.
C)product-level activity.
D)facility-level activity.

Question 32

Figure 10-5
Ander Company produces precision equipment for major buyers. Of the six customers, one accounts for 40 per cent of the sales, with the remaining five accounting for the rest of the sales. The five smaller customers purchase equipment in roughly equal quantities. Orders placed by the smaller customers are about the same size. Data concerning Ander's customer activity follow: $\begin{array}{lll}&\text { Large Customer }&\text { Five Smaller }\\&&\text { Customers }\\\text { Units purchased } & 400,000 & 600,000 \\\text { Orders placed } & 10 & 350 \\\text { Number of sales calls } & 20 & 230 \\\text { Manufacturing cost } & £ 1,200,000 & £ 1,800,000\end{array}$ Order-filling costs for Ander Company total £360,000, and sales-force costs are £375,000.

-Refer to Figure 10-5 above, what amount of sales-force costs would be allocated to the five smaller customers if these costs are allocated based on sales volume?

A)£144,000
B)£216,000
C)£150,000
D)£225,000

Question 33

Baker Manufacturing has four categories of overhead. The four categories and the expected overhead costs for each category for next year are as follows: $\begin{array}{lr}\text { Maintenance } & £ 140,000 \\\text { Materials handling } & 60,000 \\\text { Setups } & 50,000 \\\text { Inspection } & 100,000\end{array}$ Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labour hours. For next year, 50,000 direct labour hours are budgeted.
The company has been asked to submit a bid for a proposed job. The plant manager feels that obtaining this job would result in new business in future years. Usually bids are based upon full manufacturing cost plus 30 per cent.
Estimates for the proposed job are as follows: $\begin{array}{lr}\text { Direct materials } & £ 5,000 \\\text { Direct labour (750 hours) } & £ 7,500 \\\text { Number of materials moves } & 8 \\\text { Number of inspections } & 5 \\\text { Number of setups } & 3 \\\text { Number of machine hours } & 300\end{array}$ In the past, full manufacturing cost has been calculated by allocating overhead using a traditional volume-based cost driver system--direct labour hours. The plant manager has heard of a new way of applying overhead that uses cost pools and cost drivers.
Expected activity for the four activity-based cost drivers that would be used are as follows: $\begin{array}{lr}\text { Machine hours } & 16,000 \\\text { Material moves } & 4,000 \\\text { Setups } & 2,000 \\\text { Quality inspections } & 8,000\end{array}$
a.Determine the amount of overhead that would be allocated to the proposed job if direct labour hours are used as the traditional volume-based cost driver.Determine the total cost of the proposed job.Determine the company's bid if the bid is based upon full manufacturing cost plus 30 per cent.
b.Determine the amount of overhead that would be applied to the proposed job if activity-based costing is used.Determine the total cost of the proposed job if activity-based costing is used.Determine the company's bid if activity-based costing is used and the bid is based upon full manufacturing cost plus 30 per cent.
c.Which product costing method produces the more competitive bid?

Question 34

Figure 10-6
Multiple Products Co. has predicted the following costs for this year for 100,000 units: $\begin{array}{lcc}&&\text { Selling and }\\&\text { Manufacturing }&\text { Administrative }\\\hline\text { Variable } & £ 400,000 & £ 100,000 \\\text { Fixed } & 600,000 & 300,000 \\\text { Total } & £ 1,000,000 & £ 400,000\end{array}$

-Refer to Figure 10-6. What is the manufacturing cost mark up needed to obtain a target profit of £100,000?

A)100 per cent
B)67 per cent
C)50 per cent
D)25 per cent

Question 35

Cost-based pricing has traditionally been important because:

A)cost data are available.
B)cost-based prices are defensible.
C)revenues must exceed costs if the firm is to remain in business.
D)of all of the above.

Question 36

Which of the following accurately describes the effect target costing has on the manufacturing design function?

A)Target costing allows the design engineer's job to end once the product is designed.
B)Target costing forces design engineers to explicitly consider the costs of manufacturing and other aspects of business that traditionally fall outside the engineering department.
C)Target costing defines clear lines of responsibility among departments allowing for design engineers to be evaluated purely on meeting the customer's functional requirements.
D)Target costing has no implications for design engineering.

Question 37

Figure 10-5
Ander Company produces precision equipment for major buyers. Of the six customers, one accounts for 40 per cent of the sales, with the remaining five accounting for the rest of the sales. The five smaller customers purchase equipment in roughly equal quantities. Orders placed by the smaller customers are about the same size. Data concerning Ander's customer activity follow: $\begin{array}{lll}&\text { Large Customer }&\text { Five Smaller }\\&&\text { Customers }\\\text { Units purchased } & 400,000 & 600,000 \\\text { Orders placed } & 10 & 350 \\\text { Number of sales calls } & 20 & 230 \\\text { Manufacturing cost } & £ 1,200,000 & £ 1,800,000\end{array}$ Order-filling costs for Ander Company total £360,000, and sales-force costs are £375,000.

-Refer to Figure 10-5 above, what amount of order-filling costs would be allocated to the five smaller customers if these costs are allocated using an activity-based costing approach?

A)£10,000
B)£350,000
C)£28,800
D)£331,200

Question 38

When cost-based pricing is employed and mark up is based on manufacturing costs, the mark up must be sufficiently large enough to:

A)cover selling expenses.
B)cover administrative expenses.
C)provide for the desired profit.
D)accomplish all of the above.

Question 39

Figure 10-6
Multiple Products Co. has predicted the following costs for this year for 100,000 units: $\begin{array}{lcc}&&\text { Selling and }\\&\text { Manufacturing }&\text { Administrative }\\\hline\text { Variable } & £ 400,000 & £ 100,000 \\\text { Fixed } & 600,000 & 300,000 \\\text { Total } & £ 1,000,000 & £ 400,000\end{array}$

-Refer to Figure 10-6. What is the mark up on variable costs needed to break even?

A)100 per cent
B)40 per cent
C)140 per cent
D)180 per cent

Question 40

If activity-based costing is used, materials handling would be classified as a

A)unit-level activity.
B)batch-level activity.
C)product-level activity.
D)facility-level activity.