Ch010.Lam2e TB

Chapter 10
Fundamentals of Cost Management
True/False Questions
T F 1. Activity-based cost management (ABM) uses the information provided by activity-based

costing (ABC) to identify ways to improve operations.
Answer: True Difficulty: Simple Learning Objective: 1

AACSB: Analytic
T F 2. Activity-based costing (ABC) can be used to provide information for managerial

decision-making in service, merchandising, and manufacturing companies.
Answer: True Difficulty: Moderate Learning Objective: 1

AACSB: Analytic
T F 3. The full implementation of an activity-based costing (ABC) system must meet the cost-
benefit principle.

AACSB: Analytic
T F 4. One lesson learned from companies that have implemented an activity-based costing
(ABC) system is it has always provided more benefits than its cost.
Answer: False Difficulty: Simple Learning Objective: 1

AACSB: Analytic
T F 5. The first step in implementing an activity-based cost management system is to conduct a

detailed activity analysis.

AACSB: Analytic
T F 6. It is not necessary in the activity analysis phase of implementing activity-based costing to

separate value-added activities from nonvalue-added activities.

AACSB: Analytic
T F 7. Storing materials, work-in-process items, and finished goods in inventory is an essential,

value-added activity in most companies.
Test Bank, Chapter 10 235

AACSB: Analytic
T F 8. In general, decreasing (or eliminating) the resources committed to nonvalue-added

activities will decrease customer response time.

AACSB: Analytic
T F 9. In general, the unit-level costs in an activity-based costing (ABC) system are variable
costs.

AACSB: Analytic
T F 10. In general, the capacity-level costs in an activity-based costing (ABC) system are
variable costs.
Answer: False Difficulty: Moderate Learning Objective: 2

AACSB: Analytic
T F 11. Managerial decisions based on activity-based costing (ABC) information affect only
volume-level, batch-level, and product-level costs.

AACSB: Analytic
T F 12. The basic concepts involved in activity-based costing (ABC) can be used to determine
either product costs or customer profitability.

AACSB: Analytic
T F 13. When developing an activity-based costing (ABC) system, the identification of

appropriate cost drivers follows a detailed analysis of the activities involved in producing
a product or providing a service.

AACSB: Analytic
T F 14. The cost driver rate is computed by dividing the total cost per activity by the estimated
number of units produced.
236 Lanen, Anderson, Maher Fundamentals of Cost Accounting, 2e

AACSB: Analytic
T F 15. Activity-based costing (ABC) techniques used to evaluate customer profitability can also
be applied to evaluating suppliers.

AACSB: Analytic
T F 16. In essence, activity-based cost driver rates are used in a similar manner as predetermined
overhead rates.

AACSB: Analytic
T F 17. Applied manufacturing overhead in traditional product systems is analogous to resources

used in activity-based cost management (ABM) systems.
Answer: True Difficulty: Complex Learning Objective: 5

AACSB: Analytic
T F 18. The amount debited to Manufacturing Overhead-Control is analogous to resources

supplied in activity-based cost management (ABM) systems.

AACSB: Analytic
T F 19. The difference between the resources used and the resources supplied is called unused
resource capacity in a typical activity-based cost management (ABM) system.

AACSB: Analytic
T F 20. An Activity-Based Income Statement categorizes costs as materials, labor, and overhead
(i.e., indirect product costs).

AACSB: Analytic
T F 21. Unused resource capacity plus the amount of the resources used is equal to the amount of
resources supplied.

AACSB: Analytic
T F 22. Theoretical capacity is the amount of production possible assuming expected downtime
for scheduled maintenance and normal breaks and vacations.

AACSB: Analytic
T F 23. Theoretical capacity is the long-run expected volume based on reasonably attainable
working conditions.

AACSB: Analytic
T F 24. The cost of excess capacity is allocated to individual cost objects using cost driver rates.

AACSB: Analytic
T F 25. Companies with extreme seasonal demands for their products will have more excess
capacity than companies with relatively stable demands.

AACSB: Analytic
T F 26. Assigning unused capacity costs is acceptable when the excess capacity is for the benefit
of a company's customers.

AACSB: Analytic
T F 27. Unused capacity costs incurred for the benefit of a company's customers (e.g., meet
seasonal demands) should be assigned to the customers that require (use) the excess
capacity.

AACSB: Analytic
T F 28. In general, managerial decisions affecting capacity-level costs and activities also affect
volume-level, batch-level, and product-level cost and activities.

AACSB: Analytic
T F 29. The benefits associated with Total Quality Management (TQM) systems are generally
intangible, indirect, and difficult to measure.

AACSB: Analytic
T F 30. Total Quality Management (TQM) systems require information quicker than traditional
costing systems.

AACSB: Analytic
T F 31. Tangible customer expectations include how the product's salespeople treat customers
and the time required to deliver the product to the customer.

AACSB: Analytic
T F 32. Quality can be defined as the degree to which a product or service performs as it was
designed to.

AACSB: Analytic
T F 33. A cost of quality system is based on the trade-off between incurring costs to meet product
(or service) specifications and the costs of failing to meet those specifications.

AACSB: Analytic
T F 34. In a cost of quality system, internal and external failure costs are called conformance
costs.
AACSB: Analytic
T F 35. Prevention costs are costs incurred to detect individual units of product that do not
conform to its specifications.

AACSB: Analytic
T F 36. Internal failure costs include materials wasted in the production process and correcting

products before they are sold.

AACSB: Analytic
T F 37. Lost sales from poor-quality products (or services) represent an example of an internal
failure cost.

AACSB: Analytic
T F 38. In general, an increase in a specific conformance cost will decrease total nonconformance
costs.

AACSB: Analytic
T F 39. Costs of quality are often expressed in relative terms (i.e., percentages) to facilitate
comparisons between different time periods.

AACSB: Analytic
T F 40. According to Ittner's "Exploratory Evidence on the Behavior of Quality Costs," virtually
all the companies in the survey included quality-related down time in their cost of quality
reports.

AACSB: Analytic
Multiple Choice Questions
Part A: Conceptual Questions
41. Activity analysis is an important approach to operations control and the successful
implementation of an activity-based costing (ABC) system. Which of the procedures is not part of
activity analysis?
A) Chart, from start to finish, the activities used to complete the product or service.
B) Classify all activities as either value-added or nonvalue-added activities.
C) Identify the process objectives as defined by what the customer desires from the process
D) Compute the predetermined rate per activity by dividing the total cost pool by the total cost
drivers.

Answer: D Difficulty: Simple Learning Objective: 1
AACSB: Analytic
42. Which of the following activities is most likely to be classified as value-added for a
manufacturing company?
A) storing
B) ordering
C) inspecting
D) assembling

AACSB: Analytic
43. Which of the following activities is most likely to be classified as value-added for a merchandise
company?
A) purchasing
B) waiting
C) receiving
D) setting up
Answer: A Difficulty: Moderate Learning Objective: 1

AACSB: Analytic
44. Activity-based cost management (ABM) can best be defined as

A) a cost system using multiple departmental overhead rates.
B) the use of cost information gathered using activity-based costing (ABC).
C) a quality-control system focusing on eliminating errors and mistakes.
D) an incentive system for a company's key decision-makers.
Answer: B Difficulty: Simple Learning Objective: 1

AACSB: Analytic
45. Which of the following items would be classified as a volume-level cost in an activity-based cost
management (ABM) system?
A) indirect materials
B) production supervisor's salary
C) depreciation on factory building
D) research and development

AACSB: Analytic
46. Which of the following items would be classified as a batch-level cost in an activity-based cost
A) indirect labor

B) production supervisor's salary
C) depreciation on factory building
D) machinery set-up costs
Answer: D Difficulty: Moderate Learning Objective: 2

AACSB: Analytic
47. Which of the following items would be classified as a product-level cost in an activity-based cost
A) change order to meet new a new customer's specification
B) movement of materials for products in production
C) long-term lease payments for factory equipment
D) insurance and property taxes on faculty building

AACSB: Analytic
48. Which of the following items would not be used as the cost driver for a volume-level cost in an
activity-based cost management (ABM) system?
A) direct labor hours
B) machine hours
C) units produced
D) square footage

AACSB: Analytic
49. In an activity-based cost management (ABM) system, facility-level costs are those that are
incurred to:
A) sustain the company's marketing program.
B) maintain the plant's production capacity.
C) support the research and development process.
D) caused by a change in the engineering plans for a product.
Answer: B Difficulty: Moderate Learning Objective: 2

AACSB: Analytic
50. Activity-based costing (ABC) information cannot be used by managerial decision-makers to

evaluate the
A) profitability of a customer.
B) market potential of a product.
C) cost of using a particular supplier.
D) whether to continue providing a service.

AACSB: Analytic

51. Green Lumber Supply noticed a recent decline in the amount of purchases from a key customer.
Worried that other customers might also reduce their purchases, Green's management decided to
evaluate the cost of its delivery service. Which of the following cost drivers should be used for
general administrative costs of the Delivery Department?
A) number of orders entered
B) value of each order
C) number of items in each order
D) number of deliveries made
Answer: D Difficulty: Complex Learning Objective: 4

AACSB: Analytic
52. The unused resource capacity is the difference between the resources supplied and the resources
A) purchased.
B) wasted.
C) used.
D) on hand.
Answer: C Difficulty: Simple Learning Objective: 5

AACSB: Analytic
53. The amount of resources used in an activity-based costing (ABC) system for a specific activity is
computed by multiplying the:
A) cost driver rate and the actual cost driver volume.
B) cost driver rate and the planned cost driver volume.
C) overhead rate and the actual cost driver volume.
D) overhead rate and the planned cost driver volume.
Answer: A Difficulty: Simple Learning Objective: 5

AACSB: Analytic
54. The amount of production possible under normal working conditions, including planned
downtime and scheduled vacations, is called
A) actual capacity.
B) normal capacity.
C) practical capacity.
D) theoretical capacity.

AACSB: Analytic
55. Which of the following statements is (are) true regarding the cost of unused capacity?
(A) Theoretical capacity is the long-run expected volume based on reasonably attainable working

conditions.
(B) The cost of excess capacity is allocated to individual cost objects using the cost driver rate.
A) Only A is true
B) Only B is true.
C) Both A and B are true.
D) Neither A nor B is true.
Answer: B Difficulty: Complex Learning Objective: 6

AACSB: Analytic
56. Which of the following statement is (are) true regarding the cost of unused capacity?
(A) Unused capacity costs incurred for the benefit of a company's customers (e.g., meet seasonal
demands) should be assigned to the customers that require (use) the excess capacity.
(B) In general, managerial decisions affecting capacity-level costs and activities also affect
volume-level, batch-level, and product-level cost and activities.
A) Only A is true
B) Only B is true.
C) Both A and B are true.
D) Neither A nor B is true.
Answer: C Difficulty: Complex Learning Objective: 6

AACSB: Analytic
57. A company has high winter demand and low summer demand for its services. The cost of the
unused summer capacity should be allocated
A) to an account called Idle Capacity.
B) evenly to all customers.
C) only to the winter customers.
D) only to the summer customers.
Answer: C Difficulty: Moderate Learning Objective: 6

AACSB: Analytic
58. Which of the following statements regarding quality costs is(are) false?
(A) In a cost of quality system, internal and external failure costs are called conformance costs.
(B) Prevention costs are costs incurred to detect individual units of product that do not conform
to its specifications.
A) Only A is false.
B) Only B is false.
C) Both A and B are false.
D) Neither A nor B is false.

AACSB: Analytic
59. The degree to which a good or service meets customer expectations is called:
A) conformance to specifications.
B) customer quality demands.
C) a conformance cost.
D) a compliance cost.

AACSB: Analytic
60. Which of the following is not an example of a prevention cost?

A) Training employees to improve quality
B) Designing products to reduce production problems
C) Correcting product defects before they are sold
D) Inspecting the production process as it occurs.

AACSB: Analytic
61. Which of the following is an example of a prevention cost?

A) Machine inspection
B) Warranty repairs
C) Field testing
D) Marketing costs.
AACSB: Analytic
62. Which of the following is an example of an internal failure cost?

A) Training employees to improve quality
B) Designing products to reduce production problems
C) Correcting product defects before they are sold
D) Inspecting the production process as it occurs.

AACSB: Analytic
63. Which of the following is not an example of an external failure cost?

A) Accepting company liability resulting from product failure
B) Experiencing decreasing sales as a result of poor-quality products
C) Repairing or replacing defective products after they've been sold
D) Testing products in use at the customer's site

AACSB: Analytic

64. Which of the following statements regarding the trade-off between conformance and
nonconformance costs is (are) false?
(A) The optimal level for a company's quality control program occurs when its conformance
costs equal its nonconformance costs.
(B) There is an inverse relationship between the costs spent on nonconformance costs and the
level of quality achieved.
A) Only A is false.
B) Only B is false.
C) Both A and B are false.
D) Neither A nor B is false.
Answer: D Difficulty: Complex Learning Objective: 8

AACSB: Analytic
65. Which of the following items is included in almost all quality control systems?
A) Quality-related waiting time
B) Quality planning and analysis
C) Excess or obsolete inventory
D) Quality-related overtime

AACSB: Analytic
Part B: Computational Questions
66. Beta Company is preparing its annual profit plan. As part of its analysis of the profitability of its
customers, management estimates that the $12,000 for sales support should be assigned to the
individual customers from the information given as follows:
Customer A Customer B
Units purchased 100,000 200,000
Purchase orders (annual) 5 20
What is the amount of the sales support costs that should be allocated to Customer A assuming
Beta uses activity-based costing (ABC)?
A) $2,400
B) $4,000
C) $8,000
D) $9,600
E) some other answer _______________
Response: 5/(5 + 20) x $12,000 = $2,400

AACSB: Analytic
67. Yellow Industries decides to price delivery service according to the results of a recent activity-
based costing (ABC) study. The study indicates Yellow should charge $8 per order, 2% of the
order's value for general delivery costs, $1.25 per item, and $30 for delivery.
A year later, Yellow collected the following information for two of its best customers:
Cost Driver Customer C Customer D

Number of orders 18 8
Number of deliveries 10 10
Number of items 2,000 4,000
Order value $120,000 $ 80,000
What are the total delivery costs charged to Customer D during the year?
A) $5,344
B) $5,364
C) $6,900
D) $6,964
Response: $8(8) + .02($80,000) + $1.25(4,000) + $30(10) = $6,964

AACSB: Analytic
Use the following to answer questions 68 & 69.
Gundy Press reports the following information about resources. At the beginning of the year,
Gundy estimated it would spend $42,000 for setups and $21,000 for clerical.
Cost Driver Rate Cost Driver Volume

Resources used
Setups $250 175 runs
Clerical 30 500 pages typed
Resources supplied
Setups $45,000
Clerical 20,000
68. Compute unused resource capacity for setups for Gundy Press.
A) $1,250
B) $3,000
C) $1,750
D) $5,000

Response: $45,000 - [$250(175)] = $1,250

AACSB: Analytic
69. Compute unused resource capacity for clerical for Gundy Press.
A) $5,000
B) $1,000
C) $6,000
D) $1,260
Response: $20,000 - [$30(500)] = $5,000

AACSB: Analytic
Use the following to answer questions 70-75:
BC Enterprises' quality control report for August 2008 contains the following items.
Gathering, analysis, and reporting quality data $1,000

Inspecting raw materials received from vendors $2,000
Testing and inspecting finished products $3,000
Visiting customer sites and addressing complaints $4,000
Designing product to reduce production problems $5,000
Repairing and/or replacing products under warranty $6,000
Maintaining the equipment used to gather quality data $7,000
Cost (net) of materials wasted during production $8,000
70. What would be the total of the prevention costs on the August 2008 quality control report for BC
Enterprises?
A) $ 5,000
B) $ 7,000
C) $11,000
D) $12,000
Response: $2,000 + $5,000 = $7,000

AACSB: Analytic
71. What would be the total of the appraisal costs on the August 2008 quality control report for BC
Enterprises?

A) $ 8,000
B) $11,000
C) $12,000
D) $15,000
Response: $1,000 + $3,000 + $4,000 + $7,000 = $15,000

AACSB: Analytic
72. What would be the total of the internal failure costs on the August 2008 quality control report for
BC Enterprises?
A) $ 8,000
B) $13,000
C) $14,000
D) $16,000
Response: $8,000
AACSB: Analytic
73. What would be the total of the external failure costs on the August 2008 quality control report for
BC Enterprises?
A) $ 4,000
B) $ 6,000
C) $ 7,000
D) $14,000
Response: $6,000
AACSB: Analytic
74. What would be the total of the conformance costs on the August 2008 quality control report for
BC Enterprises?
A) $22,000
B) $20,000
C) $15,000
D) $13,000

Response: $7,000 + $15,000 = $22,000
AACSB: Analytic
75. What would be the total of the nonconformance costs on the August 2008 quality control report
for BC Enterprises?
A) $22,000
B) $21,000
C) $14,000
D) $13,000
Response: $8,000 + $6,000 = $14,000

AACSB: Analytic
Use the following to answer questions 76-81:
QC Enterprises quality control report for August 2008 contains the following items.
Liability costs associated with defective products $10,000

Disposal costs of defective products failing inspection $20,000
Disposal costs of raw materials failing inspection $30,000
Technical (computer) support provided to vendors $40,000
Lost sales due to poor quality and defective products $50,000
Advertising costs to offset perception of poor product quality $60,000
Raw materials used to correct defects before product was sold $70,000
Testing and inspecting a sample of finished goods $80,000
76. What would be the total of the conformance costs on the August 2008 quality control report for
QC Enterprises?
A) $200,000
B) $170,000
C) $150,000
D) $ 90,000
Response: $30,000 + 40,000 + 80,000 = $150,000

AACSB: Analytic
77. What would be the total of the nonconformance costs on the August 2008 quality control report
for QC Enterprises?
A) $120,000
B) $150,000

C) $180,000
D) $210,000
Response: $10,000 + 20,000 + 50,000 + 60,000 + 70,000 = $210,000

AACSB: Analytic
78. What would be the total of the prevention costs on the August 2008 quality control report for QC
Enterprises?
A) $180,000
B) $120,000
C) $ 90,000
D) $ 70,000
Response: $30,000 + $40,000 = $70,000

AACSB: Analytic
79. What would be the total of the appraisal costs on the August 2008 quality control report for QC
Enterprises?
A) $ 30,000
B) $ 70,000
C) $ 80,000
D) $ 90,000
Response: $80,000
AACSB: Analytic
80. What would be the total of the internal failure costs on the August 2008 quality control report for
QC Enterprises?
A) $ 60,000
B) $ 90,000
C) $100,000
D) $120,000
Response: $20,000 + 70,000 = $90,000

AACSB: Analytic

81. What would be the total of the external failure costs on the August 2008 quality control report for
QC Enterprises?
A) $ 70,000
B) $110,000
C) $120,000
D) $140,000
Response: $10,000 + 50,000 + 60,000 = $120,000

AACSB: Analytic
Part C: Professional Examination Questions
82. Which of the following statements about activity-based costing (ABC) is not true? (CIA adapted)
A) In ABC, cost drivers are what cause costs to be linked to products.
B) ABC is useful for assigning marketing and distribution costs.
C) ABC differs from traditional costing systems in that products are not cross-subsidized.
D) ABC is more likely to result in major differences from traditional costing systems if the firm
manufactures only one product rather than multiple products.

AACSB: Analytic
83. In an activity-based costing (ABC) system, cost reduction is accomplished by identifying and
eliminating (CPA adapted)
All Cost Drivers Nonvalue-added Activities

A) No No
B) Yes Yes
C) No Yes
D) Yes No

AACSB: Analytic
84. Black Company's cost management and product costing procedures follow activity-based costing
(ABC) principles. Activities have been identified and classified as being either value-added or
nonvalue-added for each product. Which of the following activities, used in Black's production
process, is nonvalue-added? (CPA adapted)
A) Drill press activity
B) Heat treatment activity
C) Design engineering activity
D) Raw materials storage activity

AACSB: Analytic
Essay Questions
85. Marvin's Kitchen Supply delivers restaurant supplies throughout the city. Marvin's adds 4% to the
order cost to cover the delivery cost. The delivery fee is meant to just cover the cost of delivery.
A consultant has analyzed the delivery service using activity-based costing methods and
identified four activities. Data on these activities are:
Cost
Activity Cost Driver Cost Driver Volume
Process order Number of orders $ 25,000 4,000 orders
Load truck Number of items 50,000 80,000 items
Delivery of merchandise Number of orders 30,000 4,000 orders
Process invoice Number of invoices 24,000 6,000 invoices
Total overhead $129,000
Two of Marvin's customers are City Diner and Le Chien Chaud. Below are data on orders and
deliveries to these two customers:
City Diner Le Chien Chaud

Order value $24,000 $32,000
Number of orders 50 100
Number of items 550 1,600
Number of invoices 12 120
Required:
(a) What would be the delivery charge for each customer under the current policy of 4% of order
value?
(b) What would the activity-based costing system estimate as the cost of delivering to each
customer?
(c) How could Marvin use the information in the new cost to manage costs?
Answer:
(a) Delivery cost based on order value:
Customer Order Value Delivery Charge (@4%)

City Diner $24,000 $ 960
Le Chien Chaud $32,000 1,280
(b) Delivery cost based on activity-based costing:

Cost driver rates:
Activity Cost Driver Cost ÷ Driver Volume = Rate

Process order Number of orders $25,000 ÷ 4,000 orders = $6.25/order
Load truck Number of items 50,000 ÷ 80,000 items = $0.625/item
Delivery merchandise Number of orders 30,000 ÷ 4,000 orders = $7.50/order
Process invoice Number of invoices 24,000 ÷ 6,000 invoices = $4.00/invoice
AACSB: Analytic
Cost of delivery:
City Diner Le Chien Chaud

Units of Units of Cost
Activity Cost Driver Cost Driver Cost
Process order 50 orders $ 312.50a 100 orders $ 625.00
Load truck 550 items 343.75b 1,600 items 1,000.00
Delivery merchandise 50 orders 375.00c 100 orders 750.00
Process invoice 12 invoices 48.00d 120 invoices 480.00
Total cost $1,079.25 $2,855.00
a. $312.50 = 50 orders x $6.25 per order. e $625 = 100 orders x $6.25

b. $343.75 = 550 items x $0.625 per item. f. $1,000 = 1,600 items x $.625
c. $375.00 = 50 orders x $7.50 per order. g. $750 = 100 orders x $7.50
d. $48.00 = 12 invoices x $4.00 per invoice. h. $480 = 120 invoices x $4
(C) Marvin can use this information to change the way he prices delivery service. He can also
use the information to work with customers to change the way the order is processed to reduce
the costs of order and delivery. With better information about costs he can improve his profits and
those of his customers.
AACSB: Analytic
86.Rock Solid Bank and Trust (RSB&T) only offers checking accounts. Customers can write checks and
use a network of automated teller machines. RSB&T earns revenue by investing the money
deposited (subject to reserve requirements). Currently RSB&T averages 6% return annually on its
investments. In order to compete with larger banks, RSB&T pays depositors 1% on all deposits.
A recent study classified the operating costs of the bank into four activities. Data on these
activities are:
Activity Cost Driver Cost Driver Volume

Use ATM Number of uses $ 2,000,000 10,000,000 uses
Visit branch Number of visits 6,000,000 750,000 visits
Process transaction Number of transactions 4,000,000 40,000,000 transactions
General bank overhead Total deposits 8,000,000 $450,000,000
Total overhead 20,000,000
Data on two representative customers are shown below:
ATM uses 300 50

Branch visits 5 20
Number of transactions 60 1,200
Average deposit $450 $10,000
Required:
(a) Compute the operating profits of the RSB&T.
(b) Compute the profit of Customer A and Customer B assuming that customer costs are based
only on deposits.
(c) Compute the profit of Customer A and Customer B assuming that customer costs are
computed using the information in the activity-based costing analysis.
Answer:
a. Revenues $450,000,000 x 6% $27,000,000
Costs:
Interest on deposits $450,000,000 x 1% 4,500,000
Operating costs (Given) 20,000,000
Total costs 24,500,000
Operating profit $ 2,500,00
b.
Deposit $ 450 $10,000
Revenue $27.00a $600.00
Interest on deposits 4.50b 100.00
Operating costs 20.00c 444.44
Customer profit $ 2.50 $55.56
a. $27.00 = $450 deposit x 6%

b. $4.50 = $450 deposit x 1%
c. $20.00 = $450 deposit x operating cost to deposit ratio ($20,000,000/$450,000,000)
c.
Activity Cost Driver Cost Driver Volume Rate
Use ATM Nbr of uses $2,000,000 ÷ 10,000,000 uses = $0.20/use
Visit branch Nbr of visits 6,000,000 ÷ 750,000 visits = $8/visit
Process transaction Nbr of transactions 4,000,000 ÷ 40,000,000 transactions = $0.10/transaction
General bank overhead Total deposits 8,000,000 ÷ $450,000,000 = 1.78%
Units of Cost Units of Cost Driver
Activity Driver
Revenue $ 27.00 $600.00
Interest on deposit 4.50 100.00
Operating costs:
Use ATM 300 uses $ 60.00a 50 uses $10.00
Visit branch 5 visits 40.00b 20 visits 160.00
Process transaction 60 transactions 6.00c 1,200 transactions 120.00
General bank overhead $450 deposit 8.01d $10,000 deposit 178.00
Total cost 118.51 568.00

Customer profit (loss) $(91.51) $32.00
a. $60 = 300 uses x $0.20 per use.

b. $40 = 5 visits x $8 per visit.
c. $6 = 60 transactions x $0.10 per transaction.
d. $5.33 = $450 x 1.78% per invoice.
AACSB: Analytic
87. Gunnison Supply provides the following information about resources:
Cost Driver Rate Cost Driver Volume

Resources used
Materials $12 15,000 pounds
Energy 48 675 machine-hours
Setups 300 150 setups
Purchasing 240 160 purchase orders
Customer service 160 175 returns
Long-term labor 80 640 labor-hours
Administrative 60 840 labor-hours
Resources supplied
Materials $192,000
Energy 36,480
Setups 50,400
Purchasing 44,000
Customer service 35,200
Long-term labor 53,000
Administrative 54,000
In addition, sales for the period totaled $600,000.

Required: Compute the unused resource capacity for each preceding item.
Answer:
Resources Used Resources Supplied Unused Resource Capacity
Materials $180,000 ($12  15,000) $192,000 given) $12,000
Energy $ 32,400 ($48  675) $ 36,480 (given) $ 4,080
Setups $ 45,000 ($300  150) $ 50,400 (given) $ 5,400
Purchasing $ 38,400 ($240  160) $ 44,000 (given) $ 5,600
Customer service $ 28,000 ($160  175) $ 35,200 (given) $ 7,200
Long-term labor $ 51,200 ($80  640) $ 53,000 (given) $ 1,800
Administrative $ 50,400 ($60  840) $ 54,000 (given) $ 3,600
AACSB: Analytic
88. The following represents the financial information of Trovatore Corporation, a manufacturer of
electronic components, for two months:
March April
Sales $539,000 $495,000
Costs

Process inspection 3,300 3,760
Scrap 3,700 3,860
Quality training 37,600 26,000
Warranty repairs 8,600 9,600
Testing equipment 14,000 14,000
Customer complaints 5,600 6,800
Rework 34,000 37,000
Preventive maintenance 27,000 19,000
Materials inspection 13,000 9,600
Field testing 18,800 24,800
Required
Classify these items into prevention, appraisal, internal failure, or external failure costs.
Calculate the ratio of the prevention, appraisal, internal failure, and external failure costs to sales
for March and April.
Answer:
(A) Prevention: Preventive maintenance, materials inspection, process inspection, quality
training.
Appraisal: Field testing, testing equipment.
Internal failure: Scrap, rework.
External failure: Customer complaints, warranty repairs.
b. March April
Prevention
$80,900/$539,000 15.0%
$58,360/$495,000 11.8%
Appraisal
$32,800/$539,000 6.1%
$38,800/$495,000 7.8%
Internal failure
$37,700/$539,000 7.0%
$40,860/$495,000 8.3%
External failure
$14,200/$539,000 2.6%
$16,400/$495,000 3.3%
AACSB: Analytic
89. Leidenheimer Corporation manufactures small airplane propellers. Sales for Year 2 totaled
$850,000. Information regarding resources for the month follows:
Resources Used Resources Supplied

Parts management $30,000 $35,000
Energy 50,000 50,000
Quality inspections 45,000 50,000
Long-term labor 25,000 35,000
Short-term labor 20,000 24,000
Setups 70,000 100,000
Materials 150,000 150,000

Depreciation 60,000 100,000
Marketing 70,000 75,000
Customer service 10,000 20,000
Administrative 50,000 70,000
In addition, Leidenheimer spent $25,000 on 50 engineering changes with a cost driver rate of
$500 and $30,000 on eight outside contracts with a cost driver rate of $3,750.
Required
(a) Prepare a traditional income statement.
(b) Prepare an activity-based income statement.
Answer:
(a.)
Sales $850,000
Parts management 35,000
Energy 50,000
Quality inspections 50,000
Long-term labor 35,000
Short-term labor 24,000
Setups 100,000
Materials 150,000
Depreciation 100,000
Marketing 75,000
Customer service 20,000
Administrative 70,000
Engineering changes 25,000
Outside contracts 30,000
Total costs 764,000
Operating profit $ 86,000
(b.)
Sales $850,000
Unused
Resources Resource Resources
Used Capacity Supplied
Sales
Costs
Unit
Parts management $ 30,000 $ 5,000 $ 35,000
Energy 50,000 0 50,000
Short-term labor 20,000 4,000 24,000
Materials 150,000 0 150,000
Outside contracts 30,000 0 30,000
280,000 9,000 289,000
Batch
Quality inspections 45,000 5,000 50,000
Setups 70,000 30,000 100,000
115,000 35,000 150,000

Product and customer
sustaining
Marketing 70,000 5,000 75,000
Customer service 10,000 10,000 20,000
Engineering changes 25,000 0 25,000
105,000 15,000 120,000
Capacity sustaining
Long-term labor 25,000 10,000 35,000
Depreciation 60,000 40,000 100,000
Administrative 50,000 20,000 70,000
135,000 70,000 205,000
Total costs $635,000 $129,000 $764,000 764,000
Operating profit $ 86,000
AACSB: Analytic

Ch010.Lam2e TB

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Ch010.Lam2e TB

Uploaded by

Copyright:

Available Formats

Chapter 10

Fundamentals of Cost Management

T F 1. Activity-based cost management (ABM) uses the information provided by activity-based

Answer: True Difficulty: Simple Learning Objective: 1

T F 2. Activity-based costing (ABC) can be used to provide information for managerial

Answer: True Difficulty: Moderate Learning Objective: 1

Answer: True Difficulty: Simple Learning Objective: 1

Answer: False Difficulty: Simple Learning Objective: 1

T F 5. The first step in implementing an activity-based cost management system is to conduct a

Answer: True Difficulty: Simple Learning Objective: 1

T F 6. It is not necessary in the activity analysis phase of implementing activity-based costing to

Answer: False Difficulty: Simple Learning Objective: 1

T F 7. Storing materials, work-in-process items, and finished goods in inventory is an essential,

Test Bank, Chapter 10 235

T F 8. In general, decreasing (or eliminating) the resources committed to nonvalue-added

Answer: True Difficulty: Moderate Learning Objective: 1

Answer: True Difficulty: Simple Learning Objective: 2

Answer: False Difficulty: Moderate Learning Objective: 2

Answer: False Difficulty: Moderate Learning Objective: 2

Answer: True Difficulty: Simple Learning Objective: 3

T F 13. When developing an activity-based costing (ABC) system, the identification of

Answer: True Difficulty: Simple Learning Objective: 4

236 Lanen, Anderson, Maher Fundamentals of Cost Accounting, 2e

Answer: True Difficulty: Simple Learning Objective: 4

Answer: True Difficulty: Moderate Learning Objective: 5

T F 17. Applied manufacturing overhead in traditional product systems is analogous to resources

Answer: True Difficulty: Complex Learning Objective: 5

T F 18. The amount debited to Manufacturing Overhead-Control is analogous to resources

Answer: True Difficulty: Complex Learning Objective: 5

Answer: True Difficulty: Simple Learning Objective: 5

Answer: True Difficulty: Simple Learning Objective: 5

Test Bank, Chapter 10 237

Answer: False Difficulty: Simple Learning Objective: 6

Answer: False Difficulty: Moderate Learning Objective: 6

Answer: True Difficulty: Complex Learning Objective: 6

Answer: True Difficulty: Moderate Learning Objective: 6

Answer: False Difficulty: Moderate Learning Objective: 6

Answer: True Difficulty: Simple Learning Objective: 6

Answer: True Difficulty: Simple Learning Objective: 6

238 Lanen, Anderson, Maher Fundamentals of Cost Accounting, 2e

Answer: True Difficulty: Simple Learning Objective: 7

Answer: True Difficulty: Moderate Learning Objective: 7

Answer: False Difficulty: Simple Learning Objective: 7

Answer: True Difficulty: Simple Learning Objective: 7

Answer: True Difficulty: Simple Learning Objective: 7

Answer: False Difficulty: Simple Learning Objective: 7

Test Bank, Chapter 10 239

Answer: True Difficulty: Simple Learning Objective: 7

Answer: False Difficulty: Moderate Learning Objective: 7

Answer: True Difficulty: Moderate Learning Objective: 7

Answer: True Difficulty: Moderate Learning Objective: 7

Answer: False Difficulty: Moderate Learning Objective: 7

Multiple Choice Questions

Part A: Conceptual Questions

240 Lanen, Anderson, Maher Fundamentals of Cost Accounting, 2e

Answer: D Difficulty: Simple Learning Objective: 1

Answer: A Difficulty: Moderate Learning Objective: 1

44. Activity-based cost management (ABM) can best be defined as

Answer: B Difficulty: Simple Learning Objective: 1

Answer: A Difficulty: Moderate Learning Objective: 2

Test Bank, Chapter 10 241

Answer: D Difficulty: Moderate Learning Objective: 2