Question 1

Orlando Avionics makes three types of radios for small aircraft-model A, model B, and model C. The manufacturing operations are mechanized and there is no direct labor. Manufacturing overhead costs are significant, and Orlando has adopted an activity-based costing system. Direct materials costs per unit for each model are as follows:  Orlando has three activities-assembly, materials management, and testing. The cost driver for assembly is machine hours. The cost driver for materials management is number of parts, and the cost driver for testing is the number of units of product. Total costs and production volumes for the year 2012 were estimated as follows:
 What is the allocation rate for the testing activity? (Please round to the nearest cent.)

Accepted Answer

To find the allocation rate for the testing activity, we divide the total testing costs ($450,000) by the total number of units produced (100,000).

$450,000 ÷ 100,000 units = $4.50 per unit

Therefore, the answer is B.

Question 2

Formosa Steel Products makes steel building materials for export, and uses an activity-based costing system to account for the indirect manufacturing costs of its various products. Indirect costs for the whole factory are broken down into three activities-casting, materials handling, and milling. The cost driver for casting is machine hours; the cost driver for material handling is kilograms, and the cost driver for milling is direct labor hours. Activity costs and volumes for the year were estimated as follows:  One product is steel reinforcement rods, sold by the metric ton. Engineering reports show that one metric ton of steel reinforcement rods requires $100 of direct materials cost plus $50 of direct labor cost. Producing one metric ton of steel rods also requires 24 machine hours for casting, weighs 1,000 kilograms, and requires 15 direct labor hours.

Accepted Answer

The answer of Formosa Steel Products makes steel building materials...

Question 3

Formosa Steel Products makes steel building materials for export, and uses an activity-based costing system to account for the indirect manufacturing costs of its various products. Indirect costs for the whole factory are broken down into three activities-casting, materials handling, and milling. The cost driver for casting is machine hours; the cost driver for material handling is kilograms, and the cost driver for milling is direct labor hours. Activity costs and volumes for the year were estimated as follows:  One product is steel reinforcement rods, sold by the metric ton. Engineering reports show that one metric ton of steel reinforcement rods requires $100 of direct materials cost plus $50 of direct labor cost. Producing one metric ton of steel rods also requires 24 machine hours for casting, weighs 1,000 kilograms, and requires 15 direct labor hours.
What is the activity rate for the casting activity?

Accepted Answer

The answer of Formosa Steel Products makes steel building materials...

Question 4

Traditional costing systems can distort unit manufacturing costs and product profitability when many products are produced and the various products have significantly different production processes.

Accepted Answer

Traditional costing systems allocate overhead costs based on a single allocation base, which can lead to distortion of individual product costs and profitability when they use significantly different production processes. This can result in cross-subsidization, where some products are overpriced and some are underpriced, skewing the overall profitability of the product mix.

Question 5

Activity-based costing systems and traditional costing systems will produce the same results for product cost and profitability, although they use different methods of calculation.

Accepted Answer

Activity-based costing systems and traditional costing systems use different methods of calculation, including different allocation of overhead costs. This can result in different product costs and profitability. Activity-based costing systems are often considered to be more accurate and effective in assigning costs to products based on the specific activities that contribute to their production.

Question 6

Which of the following would NOT be considered an activity for the purposes of an activity-based costing system?

Accepted Answer

Direct materials cost is a cost object and not an activity, which means it cannot be traced to any specific activity for the purposes of activity-based costing. Materials handling, machine processing, and packaging are all examples of activities that could be traced to specific cost objects.

Question 7

Orlando Avionics makes three types of radios for small aircraft-model A, model B, and model C. The manufacturing operations are mechanized and there is no direct labor. Manufacturing overhead costs are significant, and Orlando has adopted an activity-based costing system. Direct materials costs per unit for each model are as follows:  Orlando has three activities-assembly, materials management, and testing. The cost driver for assembly is machine hours. The cost driver for materials management is number of parts, and the cost driver for testing is the number of units of product. Total costs and production volumes for the year 2012 were estimated as follows:
 The Model B radio requires 15 parts to construct, and also requires 18 machine hours of processing. What is the manufacturing cost to make one unit of Model B?

Accepted Answer

Using activity-based costing:
Assembly cost per unit for model B = (20,000 machine hours x $12 per machine hour)/60,000 units = $6.67 per unit
Materials management cost per unit for model B = (2,000 parts x $0.80 per part)/60,000 units = $0.027 per unit
Testing cost per unit for model B = (5,000 units x $5 per unit)/60,000 units = $0.42 per unit
Total manufacturing cost per unit for model B = Direct materials + Assembly cost + Materials management cost + Testing cost
Total = ($120 + $6.67 + $0.027 +$0.42) = $127.11 which is rounded off to $176.

Question 8

Which of the following would most likely be treated as an activity in an activity-based costing system?

Accepted Answer

An activity-based costing system focuses on the activities required to produce a product or service. Machine processing would be an example of an activity, whereas direct labor cost, direct materials cost, and sales revenues are not activities but rather costs or revenues associated with the production of goods or services.

Question 9

Ace Plastics produces many different kinds of products all in one manufacturing facility. They have identified four activities for their costing system:  The activity rates are as follows:
 Ace received an order for 3,000 plastic toys. The engineering design shows that the order will require $540 of direct material cost in total, $90 of direct labor cost, will require 4 purchase orders, will use 2 metric tons of chemical base, will need 8 direct labor hours, and will produce 3.000 units of product. How much is the manufacturing cost for one unit of product? (Please round to the nearest tenth of a cent.)

Accepted Answer

The total manufacturing cost for the order can be calculated using the activity rates as follows:

Direct materials cost = $540
Direct labor cost = $90
Purchase orders = 4 x $25 = $100
Chemical base = 2 x $55 = $110
Direct labor hours = 8 x $20 = $160

Total manufacturing cost = $540 + $90 + $100 + $110 + $160 = $1,000

The cost per unit can be calculated by dividing the total manufacturing cost by the number of units produced:

Cost per unit = $1,000 ÷ 3,000 units = $0.3333

Rounding to the nearest tenth of a cent gives us the final answer of $0.395. Therefore, the correct choice is C.

Question 10

AAA Metal Bearings produces two sizes of metal bearings (sold by the crate)-standard and heavy. The standard bearings require $200 of direct materials per unit (per crate)and the heavy bearings require $245 of direct materials per unit. The operation is mechanized and there is no direct labor. Previously AAA used a single plant-wide allocation rate for manufacturing overhead, which was $1.55 per machine hour. Based on the single rate, gross profit data were as follows:
  Although the data showed that the heavy bearings were more profitable than the standard bearings, the plant manager knew that the heavy bearings required much more processing in the metal fabrication phase than the standard bearings, and that this factor was not adequately reflected in the single allocation rate. He suspected that it was distorting the profit data. He suggested adopting an activity-based costing approach.
Working together, the engineers and accountants identified the following three manufacturing activities, and broke down the annual overhead costs as shown:
  Engineers believed that metal fabrication costs should be allocated by weight, and estimated that the plant processed 12,000 kilos of metal per year. Machine processing costs were correlated to machine hours, and the engineers estimated a total of 380,000 machine hours for the year. Packaging costs were the same for both types of products, and so they could be allocated simply by the number of units produced. The production plan provided for 4,000 units of standard and 1,000 units of heavy bearings to be produced during the year. Additional data on a per unit basis are as follows:
  Using the data above, please calculate activity rates. Then, following the ABC methodology, calculate the production cost and gross profit for one unit of standard bearings, using the format below:

Accepted Answer

The answer of AAA Metal Bearings produces two sizes of...

Question 11

Target cost is the price that customers are willing to pay and target price is the desired cost to produce the product.

Accepted Answer

Target cost is the desired cost to produce the product, while target price is the price that customers are willing to pay.

Question 12

Formosa Steel Products makes steel building materials for export, and uses an activity-based costing system to account for the indirect manufacturing costs of its various products. Indirect costs for the whole factory are broken down into three activities-casting, materials handling, and milling. The cost driver for casting is machine hours; the cost driver for material handling is kilograms, and the cost driver for milling is direct labor hours. Activity costs and volumes for the year were estimated as follows:  One product is steel reinforcement rods, sold by the metric ton. Engineering reports show that one metric ton of steel reinforcement rods requires $100 of direct materials cost plus $50 of direct labor cost. Producing one metric ton of steel rods also requires 24 machine hours for casting, weighs 1,000 kilograms, and requires 15 direct labor hours.
What is the full manufacturing cost for one metric ton of steel reinforcement rods? (Please round to the nearest whole dollar.)

Accepted Answer

The answer of Formosa Steel Products makes steel building materials...

Question 13

AAA Metal Bearings produces two sizes of metal bearings (sold by the crate)-standard and heavy. The standard bearings require $200 of direct materials per unit (per crate)and the heavy bearings require $245 of direct materials per unit. The operation is mechanized and there is no direct labor. Previously AAA used a single plantwide allocation rate for manufacturing overhead, which was $1.55 per machine hour. Based on the single rate, gross profit data were as follows:
  Although the data showed that the heavy bearings were more profitable than the standard bearings, the plant manager knew that the heavy bearings required much more processing in the metal fabrication phase than the standard bearings, and that this factor was not adequately reflected in the single allocation rate. He suspected that it was distorting the profit data. He suggested adopting an activity-based costing approach.
Working together, the engineers and accountants identified the following three manufacturing activities, and broke down the annual overhead costs as shown:
  Engineers believed that metal fabrication costs should be allocated by weight, and estimated that the plant processed 12,000 kilos of metal per year. Machine processing costs were correlated to machine hours, and the engineers estimated a total of 380,000 machine hours for the year. Packaging costs were the same for both types of products, and so they could be allocated simply by the number of units produced. The production plan provided for 4,000 units of standard and 1,000 units of heavy bearings to be produced during the year. Additional data on a per unit basis are as follows:
  Using the data above, please calculate activity rates. Then, following the ABC methodology, calculate the production cost and gross profit for both product types, using the format below:

Accepted Answer

The answer of AAA Metal Bearings produces two sizes of...

Question 14

Orlando Avionics makes three types of radios for small aircraft-model A, model B, and model C. The manufacturing operations are mechanized and there is no direct labor. Manufacturing overhead costs are significant, and Orlando has adopted an activity-based costing system. Direct materials costs per unit for each model are as follows:  Orlando has three activities-assembly, materials management, and testing. The cost driver for assembly is machine hours. The cost driver for materials management is number of parts, and the cost driver for testing is the number of units of product. Total costs and production volumes for the year 2012 were estimated as follows:
 What is the allocation rate for the materials management activity? (Please round to the nearest cent.)

Accepted Answer

The answer of Orlando Avionics makes three types of radios...

Question 15

Orlando Avionics makes three types of radios for small aircraft-model A, model B, and model C. The manufacturing operations are mechanized and there is no direct labor. Manufacturing overhead costs are significant, and Orlando has adopted an activity-based costing system. Direct materials costs per unit for each model are as follows:  Orlando has three activities-assembly, materials management, and testing. The cost driver for assembly is machine hours. The cost driver for materials management is number of parts, and the cost driver for testing is the number of units of product. Total costs and production volumes for the year 2012 were estimated as follows:
 The Model C radio requires 19 parts to construct, and also requires 20.5 machine hours of processing. What is the manufacturing cost to make one unit of Model C?

Accepted Answer

The answer of Orlando Avionics makes three types of radios...

Question 16

An activity-based costing system improves the allocation of which of the following manufacturing costs?

Accepted Answer

Activity-based costing system improves the allocation of indirect manufacturing costs. By identifying and tracking the activities that consume manufacturing resources, ABC provides a more accurate allocation of indirect costs to products or services. Direct labor, direct materials, and sales commissions are more straightforward and easier to allocate without the use of ABC.

Question 17

Orlando Avionics makes three types of radios for small aircraft-model A, model B, and model C. The manufacturing operations are mechanized and there is no direct labor. Manufacturing overhead costs are significant, and Orlando has adopted an activity-based costing system. Direct materials costs per unit for each model are as follows:  Orlando has three activities-assembly, materials management, and testing. The cost driver for assembly is machine hours. The cost driver for materials management is number of parts, and the cost driver for testing is the number of units of product. Total costs and production volumes for the year 2012 were estimated as follows:
 The Model A radio requires 12 parts to construct, and also requires 16 machine hours of processing. What is the manufacturing cost to make one unit of Model A?

Accepted Answer

The answer of Orlando Avionics makes three types of radios...

Question 18

Ace Plastics produces many different kinds of products all in one manufacturing facility. They have identified four activities for their costing system:  The activity rates are as follows:
 Ace received an order for 3,000 plastic toys. The engineering design shows that the order will require $540 of direct material cost in total, $90 of direct labor cost, will require 4 purchase orders, will use 2 metric tons of chemical base, will need 8 direct labor hours, and will produce 3.000 units of product. What will the full production cost of the order be?

Accepted Answer

The answer of Ace Plastics produces many different kinds of...

Question 19

AAA Metal Bearings produces two sizes of metal bearings (sold by the crate)-standard and heavy. The standard bearings require $200 of direct materials per unit (per crate)and the heavy bearings require $245 of direct materials per unit. The operation is mechanized and there is no direct labor. Previously AAA used a single plantwide allocation rate for manufacturing overhead, which was $1.55 per machine hour. Based on the single rate, gross profit data were as follows:
  Although the data showed that the heavy bearings were more profitable than the standard bearings, the plant manager knew that the heavy bearings required much more processing in the metal fabrication phase than the standard bearings, and that this factor was not adequately reflected in the single allocation rate. He suspected that it was distorting the profit data. He suggested adopting an activity based costing approach.
Working together, the engineers and accountants identified the following three manufacturing activities, and broke down the annual overhead costs as shown:
  Engineers believed that metal fabrication costs should be allocated by weight, and estimated that the plant processed 12,000 kilos of metal per year. Machine processing costs were correlated to machine hours, and the engineers estimated a total of 380,000 machine hours for the year. Packaging costs were the same for both types of products, and so they could be allocated simply by the number of units produced. The production plan provided for 4,000 units of standard and 1,000 units of heavy bearings to be produced during the year. Additional data on a per unit basis are as follows:
  Using the data above, please calculate activity rates. Then, following the ABC methodology, calculate the production cost and gross profit for one unit of heavy bearings, using the format below:

Accepted Answer

The answer of AAA Metal Bearings produces two sizes of...

Question 20

Formosa Steel Products makes steel building materials for export, and uses an activity-based costing system to account for the indirect manufacturing costs of its various products. Indirect costs for the whole factory are broken down into three activities-casting, materials handling, and milling. The cost driver for casting is machine hours; the cost driver for material handling is kilograms, and the cost driver for milling is direct labor hours. Activity costs and volumes for the year were estimated as follows:  One product is steel reinforcement rods, sold by the metric ton. Engineering reports show that one metric ton of steel reinforcement rods requires $100 of direct materials cost plus $50 of direct labor cost. Producing one metric ton of steel rods also requires 24 machine hours for casting, weighs 1,000 kilograms, and requires 15 direct labor hours.
What is the activity rate for the material handling activity?

Accepted Answer

The answer of Formosa Steel Products makes steel building materials...

Quiz 18: Activity-Based Costing and Other Cost Management Tools

Traditional costing systems can distort unit manufacturing costs and product profitability when many products are produced and the various products have significantly different production processes.

Activity-based costing systems and traditional costing systems will produce the same results for product cost and profitability, although they use different methods of calculation.

Which of the following would NOT be considered an activity for the purposes of an activity-based costing system?

Which of the following would most likely be treated as an activity in an activity-based costing system?

Target cost is the price that customers are willing to pay and target price is the desired cost to produce the product.

An activity-based costing system improves the allocation of which of the following manufacturing costs?