Question 1

Steubenville Corporation recently abandoned its traditional production and inventory system in favor of a just-in-time system. The company typically ordered 700 units of raw material at a time and purchased units that scored a 7 on a 10-point quality scale, with 10 being very close to perfection. All other things being equal, which of the following choices denotes a likely scenario under the just-in-time system? $\begin{array} { | l | c | c | } 
\hline & \begin{array} { c } 
\text { Order } \
\text { Size }
\end{array} & \begin{array} { c } 
\text { Quality } \
\text { Purchased }
\end{array} \
\hline 1 & 300 & 7 \
\hline 2 & 300 & 9 \
\hline 3 & 700 & 9 \
\hline 4 & 950 & 7 \
\hline 5 & 950 & 9 \
\hline
\end{array}$

Accepted Answer

The answer of Steubenville Corporation recently abandoned its traditional production...

Question 2

The pull method of coordinating steps in the production process would attempt to reduce or eliminate:

Accepted Answer

The pull method of coordinating steps in the production process would attempt to reduce or eliminate work-in-process inventory between production steps.

Question 3

Which of the following can have a positive impact on a sale's profitability?

Accepted Answer

Minimal contact with sales personnel can reduce costs associated with the sales process, thereby potentially increasing the profitability of a sale.

Question 4

Which of the following statements about a just-in-time (JIT) purchasing system is false?

Accepted Answer

The statement that raw materials are stockpiled to avoid production disruptions is false. In fact, JIT systems rely on minimal inventory and just-in-time delivery to reduce waste and improve efficiency. Raw materials are ordered and received only as needed for production.

Question 5

St. Helena Cellars produces wine in southwestern Ontario. Consider the following selected costs that arose during the current year:
1. Safety costs at winery
2. Truckload shipping costs
3. Building maintenance costs
4. Bottle and cork cost
5. Development cost of new, after-dinner wine
6. Tasting and testing costs
Required:
A. Briefly distinguish between unit-level and product-sustaining activities.
B. Classify the six costs listed as arising from a unit-level, batch-level, product-sustaining, or facility-level activity.

Accepted Answer

The answer of St. Helena Cellars produces wine in southwestern...

Question 6

Weston Enterprises uses a traditional-costing system to estimate quality-control costs for its PDA product line. Costs are estimated at 32% of direct-labour cost, and direct labour totalled $860,000 for the quarter just ended. Management is contemplating a change to activity-based costing, and has established three cost pools: incoming material inspection, in-process inspection, and final product certification. Number of parts, number of units, and number of orders have been selected as the respective cost drivers.
The following data show the pool rates that have been calculated by the company along with the quantity of driver units for the PDAs: $\begin{array}{ll}
&\underline { \text { Driver Quantities } }\
\underline {\text { Pool Rate }} \
\$ 0.50 \text { per part } & 20 \text { parts } \
0.12 \text { per unit } & 28,000 \text { units } \
115.00 \text { per order } & 90 \text { orders }
\end{array}$ Required:
A. Calculate the quarterly quality-control cost that is allocated to the PDA product line under Weston's traditional-costing system.
B. Calculate the quarterly quality-control cost that is allocated to the PDAs if activity-based costing is used.
C. Does the traditional approach undercost or overcost the product line? By how much?

Accepted Answer

The answer of Weston Enterprises uses a traditional-costing system to...

Question 7

The controller for Precise Manufacturing has established the following overhead cost pools and cost drivers: 
$\begin{array}{lll}
&\text { Budgeted }\
\underline{\text { Overhead Cost Pool }} & \underline{\text { Overhead Cost }} & \underline{\text { Cost Driver }} \
 \text { Machine setups } & \$ 300,000 & \text { Number of setups } \
\text { Material handling } & 80,000 & \text { Units of raw material } \
\text { Quality control } & 90,000 & \text { Number of }\
\text { inspection } &&  \text { inspections } \
\text { Other overhead costs } & \underline{150,000}& \text { Machine hours } \
\text { Total } &\underline{\$ 620,000} \
\end{array}$

$\begin{array}{lll}
&\text { Budgeted Level }\
\underline {\text { Overhead Cost Pool } }& \underline {\text { for Cost Driver }} & \underline {\text { Pool Rate } }\
\text { Machine setups } & 300 \text { setups } & \$ 1,400 \text { per setup } \
\text { Material handling } & 40,000 \text { units } & \$ 2.00 \text { per unit } \
\text { Quality control } & 800 \text { inspections } & \$ 60 \text { per inspection } \
\text { Other overhead } & 25,000 \text { machine } & \$ 10 \text { per machine hour }\
&\text { hours }\
\end{array}$

$\text { Order No. } 905 \text { has the following production requirements. }$

$\text { Machine setups: 10 }$
$\text { Raw material: 13,400 units }$
$\text { Inspections: 20 }$
$\text { Machine hours: 900 }$ Required:
A. Compute the total overhead that should be assigned to Order No. 905 by using activity-based costing.
B. Suppose that Precise were to use a single, predetermined overhead rate based on machine hours. Compute the rate per hour and the total overhead assigned to Order No. 905.
C. Discuss the merits of an activity-based costing system in comparison with a traditional costing system.

Accepted Answer

The answer of The controller for Precise Manufacturing has established...

Question 8

When determining customer profitability, activity-based costing is not a useful tool to analyze:

Accepted Answer

Activity-based costing is specifically designed to analyze cost drivers, making it a useful tool for understanding the costs associated with various activities.

Question 9

Star Manufacturing, contemplating the adoption of an activity-based 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 company's products (H15, H16, and H17) follow:
 $\begin{array}{l}
\begin{array}{lll}
\underline { \text { Cost Pool } }&\underline {  \text { Cost Driver } }\
\text { Machine setup } & \text { Number of setups } \
\text { Quatity } & \text { Number of inspections } \
\text { assurance }\
\text { Engineering } & \text { Number of change } \
& \text { orders }
\end{array}
\begin{array}{lll}

\underline{ \text {  H15}}& \underline{ \text {  H16}}& \underline{ \text {  H17}}& \
50 \% & 20 \% & 30 \% \
70 \% & 15 \% & 15 \% \
\
15 \% & 10 \% & 75 \%\
\
\end{array}
\end{array}$

Estimated costs for these three activities, which account for 80% of the firm's total overhead, are $400,000, $500,000, and $120,000, respectively. Star currently applies manufacturing overhead to products on the basis of machine hours.
Required:
A. Will activity-based costing systems require more or fewer cost pools than traditional costing systems? No explanation is necessary.
B. Calculate the cost of machine setup, quality assurance, and engineering to be charged to products H15, H16, and H17 respectively.
C. Consider the company's current overhead application procedure.
1. Is Star emphasizing unit-level activities, batch-level activities, product-sustaining activities, or facility-level activities? Explain.
2. How accurate will the current costing procedure be given the nature of most of the company's activities? Briefly discuss.
3. How accurate will the current costing procedure be given the consumption ratios of the firm? Briefly discuss.

Accepted Answer

The answer of Star Manufacturing, contemplating the adoption of an...

Question 10

Mainville Corporation recently abandoned its traditional production and inventory system in favor of a just-in-time system. The company typically dealt with 50 suppliers and placed 450 orders throughout the year. All other things being equal, which of the following choices denotes a likely scenario under the just-in-time system? $\begin{array} { | r | r | r | } 
\hline & \begin{array} { c } 
\text { Number of } \
\text { Suppliers }
\end{array} & \begin{array} { c } 
\text { Number of } \
\text { Orders }
\end{array} \
\hline \mathbf { 1 } & 50 & 300 \
\mathbf { 2 } & 50 & 800 \
\mathbf { 3 } & 100 & 510 \
\mathbf { 4 } & 120 & 300 \
\mathbf { 5 } & 120 & 800 \
\hline
\end{array}$

Accepted Answer

The answer of Mainville Corporation recently abandoned its traditional production...

Question 11

Marion Corporation, which produces unique office furniture, recently installed a just-in-time production system. The various steps in the company's manufacturing process are coordinated by using a philosophy known as:

Accepted Answer

The just-in-time production system is a pull production system, where production is triggered by demand from customers rather than being pushed by the supply of raw materials. Therefore, the philosophy used by Marion Corporation is the pull method.

Question 12

When a company adopts a just-in-time inventory system, it would expect:

Accepted Answer

Just-in-time inventory system aims to reduce inventory levels and increase the frequency of purchasing to minimize costs and increase efficiency. Therefore, the company would expect lower inventories (as goods are ordered as needed) and more frequent purchases (to maintain adequate inventory levels).

Question 13

A firm that uses a JIT purchasing philosophy probably:

Accepted Answer

A firm using a JIT (Just-In-Time) purchasing philosophy typically has relatively few suppliers to ensure quality and reliability, and it schedules deliveries in small lot sizes just before the items are needed in production to minimize inventory costs.

Question 14

Customer profitability analysis is tied closely to:

Accepted Answer

Customer profitability analysis involves determining the costs associated with serving a particular customer. Activity-based costing is a method that allocates costs based on the activities that drive them, which is often used in customer profitability analysis to accurately allocate costs to specific customers. Therefore, choice B (activity-based costing) is the best answer.

Question 15

Horton Corporation's customers differ greatly with respect to number of required sales contacts (e.g., phone calls and sales visits), account payment patterns, and design/engineering change orders. Which of the following choices likely denotes an ideal customer from Horton's perspective? $\begin{array} { | l | c | c | c | } 
\hline & \begin{array} { c } 
\text { Required } \
\text { Sales } \
\text { Contacts }
\end{array} & \begin{array} { c } 
\text { Account } \
\text { Payment Patterns }
\end{array} & \begin{array} { c } 
\text { Design Engineering } \
\text { Change Orders }
\end{array} \
\hline 1 & \text { Many } & \text { Slow } & \text { Many } \
\hline 2 & \text { Many } & \text { Rapid } & \text { Many } \
\hline 3 & \text { Few } & \text { Slow } & \text { Many } \
\hline 4 & \text { Few } & \text { Rapid } & \text { Few } \
\hline 5 & \text { Many } & \text { Rapid } & \text { Few } \
\hline
\end{array}$

Accepted Answer

From Horton's perspective, an ideal customer would require few sales contacts, have rapid payment patterns, and few design/engineering change orders. Choice 4 fits this criterion, as it has the fewest required sales contacts, rapid payment patterns, and few design/engineering change orders.

Question 16

Purdy Manufacturing produces flat-screen computer monitors. Consider the following selected costs that arose during the current year:
1. Direct materials used: $4,440,000
2. Plant rent, utilities, and taxes: $1,300,000
3. New technology design engineering: $2,030,000
4. Materials receiving: $418,000
5. Manufacturing-run/set-up charges: $215,000
6. Equipment depreciation: $92,000
7. General management salaries: $1,560,000
Required:
A. Briefly distinguish between batch-level and facility-level activities.
B. Determine the cost of the firm's unit-level, batch-level, product-sustaining, and facility-level activities.

Accepted Answer

The answer of Purdy Manufacturing produces flat-screen computer monitors. Consider...

Question 17

Generally speaking, companies prefer doing business with customers who:

Accepted Answer

Companies prefer doing business with customers who request normal delivery times because it allows for better planning and scheduling of production and delivery. Customers who require special packaging or handling or need specialized engineering design changes may add complexity and additional costs to the production and delivery process. Similarly, customers who frequently change their orders may cause inefficiencies in production and supply chain management. Ordering small quantities may not be as attractive as ordering large quantities, but it may still be preferable over customers who routinely change their orders.

Question 18

Consider the following costs that relate to a bank and a manufacturer of software:
Bank
1. Review cost of commercial loan applications
2. Operating cost of human resources department
3. Immediate processing cost of a specific customer's cash deposit
4. Bank membership cost of joining local Chamber of Commerce
Software manufacturer
5. Label and packaging charges from a commercial printer for a new 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
8. Design, development, and coding cost of new spreadsheet software
Required:
A. Classify the eight costs listed as arising from either a unit-level, batch-level, product-sustaining, or facility-level activity.
B. Would number of loan applications or number of customers be a more appropriate cost-driver base for the review of loan applications? Briefly explain.

Accepted Answer

The answer of Consider the following costs that relate to...

Question 19

Factory Oak produces various wooden bookcases, tables, storage units, and chairs. Which of the following would be included in a listing of the company's non-value-added activities?

Accepted Answer

The transfer of chairs from the assembly line to the gluing department is a non-value-added activity because it does not directly contribute to the final product's value from the customer's perspective. It is considered a necessary but non-value-adding logistical step.

Question 20

Which of the following is not a key feature of a JIT system?

Accepted Answer

JIT systems rely on purchasing materials in small amounts to reduce inventory carrying costs and waste. Therefore, large amounts of purchases (i.e., lot sizes) are not a key feature of this system.

Quiz 5: Activity-Based Costing and Management