Deck 19: Costing and the Value Chain

Question 1

Internal failure costs happen when an unsatisfactory good or service is delivered to a customer.

Answer 1

False

Question 2

Rather than aiming to produce inventory, just-in-time costing attempts to pull production according to customer demand.

Answer 2

True

Question 3

Activities related to internal failure such as rework, scrap, and engineering change orders are value-added activities since they cannot be eliminated without increasing costs elsewhere in the value chain.

Answer 3

False

Question 4

To arrive at a target cost, the target selling price and a satisfactory profit margin are added together.

Question 5

Total quality management centers on new product and service development as opposed to managing the value chain for existing products.

Question 6

Activity-based management is a subset of activity-based costing.

Question 7

Cycle time is the length of time required for a product to pass completely though inspection.

Question 8

In a just-in-time manufacturing system, reliable vendor relationships are essential only if the prices they charge are the lowest possible prices.

Question 9

Non-value-added activities are those that add to a product's desirability.

Question 10

Non-value-added activities do not add to a product's desirability from the customer's perspective.

Question 11

The process of using ABC to help reduce and eliminate non-value-added activities is activity-based management.

Question 12

In the target costing process, target price is computed by adding the desired profit margin to the target product cost.

Question 13

The basic approach of just-in-time costing is to try to eliminate inefficiency and to improve product quality.

Question 14

The target costing process begins with finding a low cost supplier to reduce the overall cost of production.

Question 15

Activity-based costing systems refer to acquiring materials and manufacturing goods only as needed to fill customers' orders.

Question 16

Just-in-time costing considers all potential resources used by the product over its entire life.

Question 17

Non-value-added activities do not directly increase the worth of a product to a customer.

Question 18

Target cost equals target price plus profit margin.

Question 19

"ISO 9000" certification requires a detailed audit and documentation of the processes and procedures a company has implemented for quality conformance.

Question 20

The development of activity-based cost information is a necessary prerequisite to activity-based management.

Question 21

Just-in-time inventory systems are characterized by extremely large inventories of materials, work in process, and finished goods.

Question 22

Productivity is often measured by comparing inputs and outputs.

Question 23

Examples of value-added activities include all of the following except:

A) Product design.
B) Assembly activities.
C) Machinery set-up activities.
D) Establishing efficient distribution channels.

Question 24

A quality cost report would be comprised of prevention costs only.

Question 25

A primary objective of target costing is to reduce development time.

Question 26

Which of the following is not commonly used to measure product quality in a just-in-time system?

A) Defects per million.
B) Merchandise returns.
C) Manufacturing efficiency ratio.
D) Warranty claims.

Question 27

Which of the following is not a prevention cost?

A) Training costs.
B) Warranty costs.
C) Maintenance costs.
D) Quality planning costs.

Question 28

The identification of a target price for a newly designed product or service is focused on:

A) The expected costs of production.
B) The required profit margin.
C) The prices charged by existing and potential competitors.
D) Customers and their functional requirements.

Question 29

Which of the following activities performed by a manufacturer of roller blades is not a value-added activity?

A) Inspection of direct materials upon receipt from suppliers.
B) Storage of direct materials until needed for production.
C) Transfer of direct materials to appropriate points on the assembly line.
D) Estimated lost sales due to poor quality.

Question 30

The primary objective of activity-based management is:

A) To develop more accurate product costs.
B) To reduce and eliminate non-value added activities.
C) To increase product quality.
D) To identify instances of internal failure.

Question 31

Which one of the following is not one of the basic procedures related to activity-based costing?

A) Identify the activity.
B) Create an associated activity cost pool.
C) Compute internal failure costs.
D) Calculate the cost per unit of activity.

Question 32

During which element of manufacturing cycle time is value added to products?

A) Storage and waiting time.
B) Processing time.
C) Movement time.
D) Inspection time.

Question 33

Target costing is directed toward:

A) Increasing the activity costs associated with existing products.
B) Identifying the amount by which the costs of existing products must be reduced to achieve a target profit margin.
C) The creation and design of products that will provide adequate profits.
D) The improvement of existing production processes by eliminating non-value adding activities.

Question 34

Four categories of costs associated with product quality are:

A) External failure, internal failure, prevention, and carrying.
B) External failure, internal failure, prevention, and appraisal.
C) External failure, internal failure, training, and appraisal.
D) Warranty, product liability, prevention, and training.

Question 35

Just-in-time manufacturing systems are also known as:

A) Supply push systems.
B) Supply pull systems.
C) Demand push systems.
D) Demand pull systems.

Question 36

Which of the following is an example of the cost of quality?

A) Prevention costs.
B) Internal failure costs.
C) External failure costs.
D) All three are components of the cost of quality.

Question 37

The manufacturing efficiency ratio equals:

A) Value-added time divided by cycle time.
B) Value-added time multiplied by cycle time.
C) Cycle time divided by value-added time.
D) (Cycle time divided by value-added time) divided by 2.

Question 38

The just-in-time manufacturing system:

A) Contrasts with the supply push system.
B) Complements the supply push systems.
C) Neither complements nor contrasts with the supply push system.
D) Contrasts the demand pull system.

Question 39

A just-in-time manufacturing system is also known as a supply push system.

Question 40

The suppliers and production component of the value chain would include all of the following costs except:

A) Direct production labor.
B) Production set-up.
C) Salaries for sales personnel.
D) Receipt of direct materials from suppliers.

Question 41

At a price of $80, Summit's market research indicates that it can sell 60,000 units per year. Assuming Summit can reach its new target cost, how will Summit's profit at the $80 price compare to what it would have earned in the absence of the competitor's product?

A) Profit will be $75,000 higher.
B) Profit will be $75,000 lower.
C) Profit will be unaffected if Summit can reach the revised target cost.
D) None of the above.

Question 42

All of the following are components of the value chain except:

A) Research and design activities.
B) Obtaining raw materials.
C) Supporting the product after it is sold.
D) Maintaining large inventories so that orders can be filled promptly.

Question 43

Value-added activities include:

A) Setting up machinery.
B) Storing direct materials.
C) Employees' idle time.
D) Product design.

Question 44

What are the total internal failure costs for the Abrams Corporation?

A) $38,300.
B) $34,500.
C) $19,700.
D) $35,250.

Question 45

As a percentage of total costs, which quality cost category is the highest?

A) Prevention.
B) Internal failure.
C) Appraisal.
D) External failure.

Question 46

Cycle time includes:

A) Processing time, storage and waiting time, movement time, and inspection time.
B) Processing time, inspection time, and inventory time.
C) Processing time, storage and waiting time, finishing time, and selling time.
D) Processing time, storage and waiting time, movement time, and finishing time.

Question 47

External failure costs include:

A) Inspections of materials.
B) Training.
C) Rework.
D) Warranty costs.

Question 48

Summit has learned that a competitor plans to introduce a similar widget at a price of $80. In response, Summit may reduce its selling price to $80. If Summit requires a 25% return on sales, what is the target cost for the new widget?

A) $80.
B) $60.
C) $23.75.
D) $20.

Question 49

During cycle time, value is added only during:

A) Processing time.
B) Storage and waiting time.
C) Movement time.
D) Inspection time.

Question 50

Quality costs do not include:

A) Costs to prevent poor quality from occurring.
B) Costs of appraising and inspecting the product.
C) Costs to correct problems before the customer receives the goods.
D) Advertising costs.

Question 51

What are the total prevention costs for the Abrams Corporation?

A) $38,300.
B) $34,500.
C) $19,700.
D) $35,250.

Question 52

Identifying value-added activities
Pomme Farms operates an apple cider press. The production of cider involves the following activities:
(1.) Inspect incoming shipments of apples.
(2.) Store apples in adjacent barn until needed.
(3.) Transport apples from storage barn to the press building.
(4.) Load apples onto the conveyor leading to the press.
(5.) Run press.
(6.) Fill bottles with completed cider.
(7.) Dispose of waste from press.
(8.) Store filled bottles until sale.
Requirements:
(a.) Identify Pomme's value-added activities.
(b.) Identify any non-value added activities performed by Pomme.

Question 53

What are the total appraisal costs for the Abrams Corporation?

A) $38,300.
B) $34,500.
C) $19,700.
D) $35,250.

Question 54

Which of the following is a value-added activity by a manufacturer of chocolate candies?

A) The addition of chocolate syrup into the candy mix.
B) Hiring production workers.
C) Storing the candy bars until they are distributed to stores.
D) Managing the cost of electricity by the production department.

Question 55

Accounting terminology
Listed below are eight technical accounting terms introduced or emphasized in this chapter:
Each of the following statements may (or may not) describe one of these technical terms. In the space provided below each statement, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms.
_______ (a) The process of using activity-based costs to help reduce or eliminate non-value-added activities.
_______ (b) Can be eliminated without affecting the desirability of the product from the perspective of the customer.
_______ (c) The length of time for a product to pass completely through a specific manufacturing process.
_______ (d) If eliminated, the desirability of the product to consumers is decreased.
______ (e) Consideration of all potential resources that will be consumed by a product from development through disposal.
______ (f) A method in which a product's cost is determined by subtracting a fixed profit margin from its selling price.
______ (g) An approach that explicitly monitors quality costs and rewards quality enhancing behavior.

Question 56

Techniques to manage costs in the value chain include all of the following except:

A) Activity based management.
B) Target costing.
C) Process costing.
D) Total quality management.

Question 57

The following are all characteristics of target costing except:

A) Understanding the pricing process in order to increase selling prices.
B) Driving costs down while satisfying customer needs.
C) Emphasizing the product's functional characteristics and their importance to the customer.
D) Reducing development time.

Question 58

An effective just-in-time system will include:

A) Specialized employees.
B) An efficient plant layout.
C) Sizable inventories of raw materials.
D) Many suppliers.

Question 59

If Summit Products requires a 25% return on sales to undertake production, what is the target cost for the new widget?

A) $65.00.
B) $67.50.
C) $80.
D) Some other amount.

Question 60

What are the total external failure costs for the Abrams Corporation?

A) $38,300.
B) $34,500.
C) $19,700.
D) $35,250.

Question 61

Cost of quality
Name four components of the cost of quality and list three examples of each.

Question 62

Consideration of all potential resources that will be consumed by a product from development through disposal. _______________________________

Question 63

Of the following processes, which is chiefly concerned with products and services that have not yet been developed?

A) Just-in-time manufacturing.
B) Activity-based management.
C) Target costing.
D) Total quality management.

Question 64

Just-in-time manufacturing
Candycane Co. is trying to determine how long it takes for one of its products to pass through the production process. The following information was assembled regarding how many days the product spends in various production activities:
(a) Which of the above activities are value-added activities?
(b) What is Candycane's total cycle time?
(c) Determine Candycane's manufacturing efficiency ratio.

Question 65

The cost borne by the customer of disposing of nickel-cadmium batteries is a component of the batteries':

A) Life-cycle cost.
B) Overhead cost.
C) Cost of quality.
D) Direct production cost.

Question 66

Components of the total cost of quality
Explain how it is possible to reduce the total cost of quality by increasing the amount spent on prevention and appraisal activities.

Question 67

A method in which a product's selling price is determined by adding a fixed profit margin to its production cost. _______________________________

Question 68

Examples of value-added activities include all of the following except:

A) Product design.
B) Material movement.
C) Assembly activities.
D) Establish an effective distribution network.

Question 69

An approach that explicitly monitors quality costs and rewards quality enhancing behavior. ________________________________

Question 70

JIT manufacturing
Briefly explain the nature and goals of a JIT manufacturing system.

Question 71

Pool-Glow, Inc. has developed a new light for lighting swimming pools. After doing market research, it has determined that customers would be willing to pay $140 for this light. Pool-Glow seeks to earn 25% profit on the light. At present, Pool-Glow makes an old style light for $101.25, which sells for $130.
(1.) What must the target cost be in order to earn the 25% profit that the company demands?
(2.) If Pool-Glow can adjust its costs to the target cost, the company estimates that it can sell 50,000 lights. What would Pool-Glow's profit be at this point?
(3.) How many of the old style lights would have to be sold to reach the same profit?

Question 72

For a furniture manufacturer, which of the following activities could not be eliminated without changing the customer's perception of the product's desirability?

A) Inspection of incoming shipments of wood and fabrics.
B) Movement of work-in-process from one work station to another.
C) Set-up of machinery to produce different pieces of furniture.
D) Reducing the product's distribution network.

Question 73

JIT systems' manufacturing efficiency ratio
Methodical Corporation is considering the implementation of a JIT inventory system. The company recently analyzed its cycle time to determine the average number of days spent in each activity of its production process. A summary of the analysis is shown below:
(a) Methodical 's value-added production activities include: ________________________.
(b) Methodical 's total cycle time is __________ days.
(c) Methodical's manufacturing efficiency ratio is ___________%.
(d) Which activities might be reduced or eliminated should Methodical implement a JIT system?

Question 74

Of the following components of total quality cost, which is most damaging to a company attempting to achieve a reputation as a world-class manufacturer?

A) Prevention costs.
B) Appraisal costs.
C) Internal failure costs.
D) External failure costs.

Question 75

Target costing
Ray-Dee, Inc. is considering the introduction of a new deluxe quality stereo tabletop radio. This radio will produce exceptional sound quality through new speaker technology. Market research indicates that customers would be willing to pay $400 for a radio of the quality considered. Ray-Dee requires a 30% return on sales for all its products.
Required: Compute Ray-Dee's target cost for the radio under consideration.

Question 76

The process of using activity-based costs to help reduce or eliminate non-value-added activities. _______________________________

Question 77

Can be eliminated without affecting the desirability of the product from the perspective of the customer. _______________________________

Question 78

If eliminated, the desirability of the product to consumers is decreased. ________________________________

Question 79

Value-added and non-value-added activities
Explain the distinction between value-added and non-value added activities. Provide an example of each.

Question 80

The length of time for a product to pass completely through a specific manufacturing process. ________________________________