Test Bank For Horngrens Financial Managerial Accounting 4e by Nobles 0133359840

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Horngren's Financial & Managerial Accounting, The Managerial Chapters, 4e (Nobles)
Chapter 19 Cost Management Systems: Activity-Based, Just-In-Time, and Quality
Management Systems
Learning Objective 19-1
1) Direct material costs and direct labor costs cannot be easily traced to products. Therefore, they are
allocated to products.
Answer: FALSE
Diff: 1
LO: 19-1
AACSB: Concept
AICPA Functional: Measurement
2) Manufacturing overhead costs, which are also known as indirect costs, cannot be cost-effectively traced
to products.
Answer: TRUE
Diff: 1
LO: 19-1
AACSB: Concept
3) Predetermined overhead allocation rate is an estimated overhead cost per unit of the allocation base
and is calculated at the beginning of the accounting period.
Answer: TRUE
Diff: 1
LO: 19-1
AACSB: Concept
4) Companies calculate the predetermined overhead rate at the beginning of an accounting period using
the actual values of overhead costs.
Answer: FALSE
Diff: 1
LO: 19-1
AACSB: Concept
1
Copyright © 2014 Pearson Education, Inc.
5) A radial tire manufacturer produces products in two departments—Division A and B. The company
uses separate allocation rates for each department to allocate its overhead. Division A and B have
estimated manufacturing overhead costs of $150,000 and $ 350,000, respectively. Division A uses machine
hours as the allocation base, and Division B uses direct labor hours as the allocation base. The total
estimated machine hours were 30,000 and direct labor hours were 20,000 for the year. Calculate the
departmental overhead allocation rates.
A) Division A—$5, Division B—$17.5
B) Division A—$17.5, Division B—$6
C) Division A—$6, Division B—$18.2
D) Division A—$4, Division B—$14.6
Answer: A
Explanation: A) Calculation of departmental wide allocation rates:
Division A Division B
Estimated overhead cost $150,000 $350,000
Estimated machine hours 30,000 -
Estimated direct labor hours - 20,000
Allocation rate ($150,000 ÷ 30,000),
($350,000 ÷ 20,000) $5 $17.5
Diff: 2
LO: 19-1
AACSB: Application
6) Modiste Inc. manufactures two kinds of bags—totes and satchels. The company allocates
manufacturing overhead using a single plantwide rate with direct labor cost as the allocation base.
Estimated overhead costs for the year are $24,250. Additional information is given below.
Totes Satchels
Direct materials cost per unit $35 $40
Direct labor cost per unit $55 $60
Number of units 500 350
Calculate the predetermined overhead allocation rate.

A) 45%
B) 50%
C) 60%
D) 30%
Answer: B
Explanation: B) Direct labor Number Total direct
cost per unit of units labor cost
Totes $55 500 $27,500
Satchels $60 350 $21,000
Total $48,500
Predetermined overhead allocation rate = $24,250 (Total estimated overhead costs) ÷ $48,500 (Total
estimated quantity of the overhead allocation base) = 50% of direct labor cost.
Diff: 1
LO: 19-1
AACSB: Application
2
Totes Satchels
Calculate the amount of overhead to be allocated to Totes.

A) $36,000
B) $25,740
C) $10,500
D) $13,750
Answer: D
Explanation: D) Direct labor Number Total direct
Totes $55 500 $27,500
Satchels $60 350 $21,000
Total $48,500
Predetermined overhead allocation rate = $24,250 (Total estimated overhead costs) ÷ $48,500 (Total
Overhead allocated to Totes = $27,500 × 50% = $13,750
Diff: 2
LO: 19-1
AACSB: Application
3
Totes Satchels
Calculate the amount of overhead to be allocated to Satchels.

A) $36,000
B) $12,740
C) $10,500
D) $11,750
Answer: C
Explanation: C) Direct labor Number Total direct
Totes $55 500 $27,500
Satchels $60 350 $21,000
Total $48,500
Predetermined overhead allocation rate = $24,250 (Total estimated overhead costs) ÷$48,500 (Total
Overhead allocated to Totes = $21,000 × 50% = $10,500
Diff: 1
LO: 19-1
AACSB: Application
9) Moonrays Inc. manufactures both normal and premium tube lights. The company allocates
manufacturing overhead using a single plantwide rate with machine hours as the allocation base.
Normal Premium
Machine hours (MHr) 25,000 30,000
Direct material $50,000 $400,000
Calculate the predetermined overhead allocation rate.

A) $3 per direct labor hour
B) $2 per machine hour
C) $5 per machine hour
D) $2.2 per direct labor hour
Answer: B
Explanation: B) Predetermined overhead allocation rate = $110,000 (Total estimated overhead costs) ÷
55,000 (Total estimated quantity of the overhead allocation base) = $2 per machine hour
Diff: 2
LO: 19-1
AACSB: Application
4
10) Archid Inc., a manufacturer of spare parts, has two production departments—Assembling and
Packaging. The Assembling department is mechanized, while the Packaging department is labor-
oriented. Estimated manufacturing overheads for the year 2015 were $15,000,000 for Assembling and
$10,000,000 for Packaging. Calculate the department-wide allocation rates if the total estimated machine
hours were 30,000 and labor hours were 20,000 for the year.
A) $250, $300
B) $500, $500
C) $300, $300
D) $450, $540
Answer: B
Explanation: B) Calculation of departmental wide allocation rates:
Assembling Packaging
Estimated overhead cost $15,000,000 $10,000,000
Estimated machine hours 30,000 -
Estimated labor hours - 20,000
Allocation rate ($15,000,000 ÷ 30,000),
($10,000,000 ÷ 20,000) $500 $500
Diff: 2
LO: 19-1
AACSB: Application
11) Which of the following statements is true of costing systems?

A) Many traditional costing systems can distort product costs and profitability.
B) Traditional costing systems tend to be more costly than activity-based costing systems.
C) Activity-based costing systems tend to combine various costs into a single cost pool.
D) Activity-based costing systems tend to use fewer cost pools than does a traditional costing system.
Answer: A
Diff: 2
LO: 19-1
AACSB: Concept
5
12) A furniture corporation manufactures two models of furniture—Standard and Deluxe. The total
manufacturing overhead is $64,350.
Standard Deluxe
The company uses direct labor costs as the base to allocate manufacturing overhead. Calculate the
predetermined overhead rate.
A) 28%
B) 35%
C) 63%
D) 60%
Answer: D
Explanation: D) Total direct labor cost = ($120 × 500 units) + ($135 × 350 units) = $107,250
Predetermined overhead rate = $64,350 ÷ $107,250 = 60% of direct labor costs
Diff: 1
LO: 19-1
AACSB: Application
6
13) Cardec Inc., a leading manufacturer of car spare parts, divided its manufacturing process into two
departments—Production and Packing. The estimated overhead cost for the Production and Packing
departments amounted to $25,000,000 and $20,000,000, respectively. The company produces two types of
parts—Part-1 and Part-2. The total estimated labor hours for the year 2015 were 40,000 and estimated
machine hours were 50,000. The Production department is mechanized whereas the Packing department
is labor-oriented. Calculate departmental overhead allocation rates.
Production Packing
Machine hours Labor hours
Part-1 15,000 25,000
Part- 2 35,000 15,000
50,000 40,000
Answer: Calculation of departmental allocation rates:

Production Packing
Estimated overhead cost $25,000,000 $20,000,000
Estimated machine hours 50,000
Estimated labor hours 40,000
Departmental overhead cost $500 $500
Diff: 3
LO: 19-1
AACSB: Application
1) Activity-based costing focuses on a single predetermined overhead rate for cost analysis.
Answer: FALSE
Diff: 1
LO: 19-2
AACSB: Concept
2) Traditional costing provides more detailed information on costs of activities and the drivers of these
costs than activity-based costing.
Answer: FALSE
Diff: 1
LO: 19-2
AACSB: Concept
3) Traditional costing systems employ multiple allocation rates, but an activity-based costing system uses
only one rate for allocating manufacturing overhead.
Answer: FALSE
Diff: 1
LO: 19-2
AACSB: Concept
7
4) The main difference between activity-based costing and traditional costing systems is that activity-
based costing uses a separate allocation base for each activity.
Answer: TRUE
Diff: 1
LO: 19-2
AACSB: Concept
5) Activity-based costing refines the cost allocation process even more than the traditional allocation
costing.
Answer: TRUE
Diff: 1
LO: 19-2
AACSB: Concept
6) The first step in developing an activity-based costing system is to identify the activities that will be
used to assign the manufacturing overhead.
Answer: TRUE
Diff: 1
LO: 19-2
AACSB: Concept
7) Activity-based management focuses on making decisions that improve customers' satisfaction while
also increasing profits.
Answer: TRUE
Diff: 1
LO: 19-2
AACSB: Concept
8) Activity-based costing uses a common allocation base for all activities.

Answer: FALSE
Diff: 1
LO: 19-2
AACSB: Concept
9) Indirect costs allocated to products using activity-based costing are more accurate than traditional
allocation systems.
Answer: TRUE
Diff: 1
LO: 19-2
AACSB: Concept
8
10) Companies with diverse products can obtain better costing information by using a single plantwide
rate.
Answer: FALSE
Diff: 1
LO: 19-2
AACSB: Concept
11) An activity-based costing system is developed in four steps.

a. Compute the allocation rate for each activity.
b. Identify activities and estimate their total costs.
c. Identify the cost driver for each activity and then estimate the quantity of each driver's allocation base.
d. Allocate the indirect costs to the cost object.
Which of the following is the correct order of performing these steps?
A) a, b, c, d
B) c, a, b, d
C) b, c, a, d
D) b, a, c, d
Answer: C
Diff: 1
LO: 19-2
AACSB: Concept
12) For a pharmaceutical company, the most suitable base for allocating research and development costs
to the finished products would be the ________.
A) direct labor hours
B) cost of raw materials purchased
C) number of new patents filed
D) number of set ups
Answer: C
Diff: 2
LO: 19-2
AACSB: Concept
13) Which of the following is the most appropriate cost driver for allocating the cost of warranty services?
A) number of employees
B) number of materials purchased
C) number of machine hours
D) number of service calls
Answer: D
Diff: 2
LO: 19-2
AACSB: Concept
9
14) Which of the following statements is true of an activity-based costing system?
A) It uses separate indirect cost allocation rates for each activity.
B) It is not as accurate or precise as traditional costing systems.
C) It accumulates overhead costs by processing departments.
D) It is not as complex or as costly as traditional systems.
Answer: A
Diff: 1
LO: 19-2
AACSB: Concept
15) Which of the following is the last step in developing an activity-based costing system?
A) estimating the total quantity of the cost driver
B) estimating the total indirect costs of each activity
C) identifying the activities
D) allocating costs to the cost object
Answer: D
Diff: 1
LO: 19-2
AACSB: Concept
16) Brannon Company manufactures ceiling fans and uses an activity-based costing system. Each ceiling
fan has twenty separate parts. The direct material cost is $95 and each ceiling fan requires 2.5 hours of
machine time to manufacture. Additional information is as follows:
Activity Allocation Base Cost Allocation Rate $

Materials handling Number of parts 0.08
Machining Machine hours 7.20
Assembling Number of parts 0.35
Packaging Number of finished units 2.70
What is the cost of materials handling per ceiling fan?

A) $1.60
B) $7.20
C) $6.00
D) $5.00
Answer: A
Explanation: A)
Calculation of material handling cost per unit:
Number of parts used 20.00
Material handling cost per part $0.08
Material handling cost per unit ($0.08 × 20) $1.60
Diff: 1
LO: 19-2
AACSB: Application
10
fan consists of twenty separate parts. The direct material cost is $95 and each ceiling fan requires 2.5
hours of machine time to manufacture. Additional information is as follows:

What is the cost of machining per ceiling fan?

A) $18
B) $180
C) $30
D) $144
Answer: A
Explanation: A)
Calculation of machining cost per unit:
Number of machine hours per fan 2.50
Machining cost per hour $7.20
Machining cost per unit ($7.20 × 2.5) $18.00
Diff: 1
LO: 19-2
AACSB: Application
11
hours of machine time to manufacture. Additional information is as follows:

What is the cost of assembling per ceiling fan?

A) $87.50
B) $7.00
C) $7.50
D) $35.00
Answer: B
Explanation: B)
Calculation of assembling cost per unit:
Number of parts assembled 20.00
Cost per assembling $0.35
Cost of assembling per fan ($0.35 × 20) $7.00
Diff: 2
LO: 19-2
AACSB: Application
12
hours of machine time to manufacture. There is no direct labor cost. Additional information is as follows:

What is the total manufacturing cost per ceiling fan?

A) $125.75
B) $121.13
C) $115.32
D) $124.30
Answer: D
Explanation: D)
Calculation of total manufacturing cost per ceiling fan:
Direct material $95.00
Material handling cost per unit 1.60
Machining cost per unit 18.00
Cost of assembling per fan 7.00
Packaging 2.70
Total manufacturing cost per ceiling fan $124.30
Diff: 2
LO: 19-2
AACSB: Application
20) Oscar Inc., a manufacturer of gift articles, uses a single plantwide rate to allocate indirect costs. The
company allocates manufacturing overhead using a single plantwide rate with machine hours as the
allocation base. Estimated overhead cost for the year is $5,000,000. And estimated machine hours are
25,000. During the year, the actual machine hours used was 30,000. Calculate the predetermined
overhead allocation rate.
A) $166
B) $250
C) $200
D) $150
Answer: C
Explanation: C)
Calculation of single plantwide allocation rate:
Estimated overhead cost for the year $5,000,000
Estimated machine hours for the year 25,000
Single plantwide rate ($5,000,000 ÷ 25,000) $200
Diff: 2
LO: 19-2
AACSB: Application
13
21) Alpha Company manufactures breadboxes and uses an activity-based costing system. The following
information is provided for the month of May:
Estimated Indirect Estimated Quantity

Activity Activity Costs Allocation Base of Allocation Base
Materials handling $3,500 Number of parts 5,000 parts
Assembling $12,000 Number of parts 5,000 parts
Number of bread
Packaging $5,750 boxes 1,250 bread boxes
Each breadbox consists of four parts, and the direct materials cost per breadbox is $7.00. There is no direct
labor. What is the total manufacturing cost per breadbox?
A) $17.40
B) $24.00
C) $12.40
D) $26.00
Answer: B
Explanation: B)
Calculation of total manufacturing cost per bread box:
Materials handling [($3,500 ÷ 5,000 parts) × 4 parts] 2.80
Assembling [($12,000 ÷ 5,000 parts) × 4 parts] 9.60
Packaging [$5,750 ÷ 1,250 boxes) × 1 box] 4.60
Total manufacturing cost $24.00
Diff: 2
LO: 19-2
AACSB: Application
14
22) Pitt Jones Company, a manufacturer of small appliances, had the following activities, allocated costs,
and allocation bases:
Activities Allocated Costs Allocation Base

Account inquiry (hours) $60,000 2,000 hours
Account billing (lines) $30,000 20,000 lines
Account verification (accounts) $15,000 20,000 accounts
Correspondence (letters) $10,000 1,000 letters
The above activities are carried out at two of its regional offices.
Northeast Office Midwest Office

Account inquiry (hours) 100 hours 200 hours
Account billing (lines) 10,000 lines 7,000 lines
Account verification (accounts) 1,000 accounts 600 accounts
Correspondence (letters) 50 letters 100 letters
What is the cost per hour for the account inquiry activity?
A) $0.75
B) $30.00
C) $10.00
D) $1.50
Answer: B
Explanation: B)
Total cost of account inquiry $60,000
Quantity of allocation base 2,000
Cost of account inquiry per hour ($60,000 ÷ 2,000) $30
Diff: 1
LO: 19-2
AACSB: Application
15


What is the cost per line for the account billing activity?
A) $1.50
B) $30.00
C) $1.60
D) $1.43
Answer: A
Explanation: A)
Cost of account billing:
Total cost of billing $30,000
Cost of account billing per line ($30,000 ÷ 20,000) $1.50
Diff: 1
LO: 19-2
AACSB: Application
16


What is the cost per account for the account verification activity?
A) $30.00
B) $0.50
C) $2.25
D) $0.75
Answer: D
Explanation: D)
Cost of account verification:
Total cost of account verification $15,000
Cost of account verification per account ($15,000 ÷ 20,000) $0.75
Diff: 1
LO: 19-2
AACSB: Application
17


What is the cost per letter for the correspondence activity?

A) $10.00
B) $30.50
C) $25.00
D) $0.75
Answer: A
Explanation: A)
Cost of correspondence:
Total cost of correspondence: $10,000
Quantity of allocation base (letters) 1,000
Cost of correspondence per letter ($10,000 ÷ 1,000) $10
Diff: 2
LO: 19-2
AACSB: Application
18


How much of the account inquiry cost will be assigned to the Midwest Office?
A) $2,000
B) $6,500
C) $3,000
D) $6,000
Answer: D
Explanation: D)
Cost per unit for the account inquiry activity: Midwest Office
Number of account inquiry hours utilized 200

Cost per hour ($60,000 ÷ 2,000 hours) $30
Cost of account inquiry ($30 × 200) $6,000
Diff: 2
LO: 19-2
AACSB: Application
19


How much of the correspondence cost will be assigned to the Northeast Office?
A) $500
B) $1,200
C) $2,500
D) $800
Answer: A
Explanation: A)
Cost of correspondence: Northeast Office
Number of letters 50
Cost of correspondence per letter ($10,000 -÷ 1,000 letters) $10
Cost of correspondence ($10 × 50) $500
Diff: 2
LO: 19-2
AACSB: Application
20


How much of the account verification costs will be assigned to the Northeast Office?
A) $800
B) $2,500
C) $750
D) $1,500
Answer: C
Explanation: C)
Cost of account verification: Northeast Office
Number of accounts verified 1,000
Cost per account verified ($15,000 ÷ 20,000) $0.75
Cost of account verification ($0.75 × 1,000) $750.00
Diff: 2
LO: 19-2
AACSB: Application
21
29) Quality Stereo Company has provided the following information regarding its activity-based costing
system:
∙ Purchasing department costs are allocated based on purchase orders and the cost allocation rate is
$75 per purchase order.
∙ Assembly department costs are allocated based on the number of parts used and the cost allocation
rate is $1.00 per part.
∙ Packaging department costs are allocated based on the number of units produced and the allocation
rate is $2.00 per unit produced.
Each stereo produced has fifty parts, and the direct materials cost per unit is $70. There are no direct labor
costs. Quality Stereo has an order for 1,000 stereos which will require 50 purchase orders in all. What is
the total cost for the 1,000 stereos?
A) $125,750
B) $55,750
C) $123,750
D) $122,000
Answer: A
Explanation: A)
Computation of total cost of 1,000 stereos:
Direct material $70,000
Purchasing department costs 3,750
Assembly department costs 50,000
Packaging department costs 2,000
Total cost $125,750
Diff: 3
LO: 19-2
AACSB: Application
22
30) 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:
Model A $28
Model B $32
Model C $40
Orlando has three activities—assembly, materials management, and testing. The cost driver for assembly
is machine hours. The cost driver for materials management is the number of parts, and the cost driver
for testing is the number of units of product. Total costs and production volumes for the year 2015 were
estimated as follows:
Total cost Allocation Base Cost Driver

Assembly $780,000 120,000 Machine hours
Materials management $120,000 80,000 Parts
Testing $22,500 5,000 Units
The Model A radio requires twelve parts to construct, and requires 16 machine hours of processing. What
is the manufacturing cost to make one unit of Model A?
A) $150.00
B) $132.00
C) $126.50
D) $154.50
Answer: D
Explanation: D) Calculation of manufacturing cost per unit of Model A:
Assembly 104.00
Materials management 18.00
Testing 4.50
Total manufacturing cost $154.50
Diff: 2
LO: 19-2
AACSB: Application
31) The activity-based costing system improves the allocation of ________.

A) indirect manufacturing costs
B) direct labor
C) direct materials
D) sales commissions
Answer: A
Diff: 1
LO: 19-2
AACSB: Concept
23
32) Which of the following would most likely be treated as an activity in an activity-based costing
system?
A) direct labor cost
B) machine processing
C) direct materials cost
D) sales revenues
Answer: B
Diff: 1
LO: 19-2
AACSB: Concept
33) Ace Plastics produces different kinds of products, all in one manufacturing facility. They have
identified four activities for their costing system:
Materials management—allocated by number of purchase orders
Chemical processing—allocated on metric tons
Molding—allocated on direct labor hours
Packaging—allocated by number of units produced
The activity rates are as follows:
Materials management $12.00 Per purchase order

Chemical processing $7.50 Per metric ton
Molding $24.00 Per direct labor hour
Packaging $0.10 Per unit
Engineering design shows that the order will require direct material worth $540, direct labor cost being
$90. The order will also require four purchase orders to be placed, use 2 metric tons of chemical base, and
need 8 direct labor hours. The size of the order is to produce 3,000 units of product. Calculate total cost of
production of the order.
Answer: Calculation of total cost of the order:
Direct labor 90.00
Overhead cost* 555.00
Total production cost $1,185.00
Computation of overhead cost of the order:*

Level of
utilization Cost Cost
Activity Cost driver of activity driver rate allocated
Materials management Purchase order 4 $12.00 $48.00
Chemical processing Metric ton 2 $7.50 $15.00
Molding Direct labor hour 8 $24.00 $192.00
Packaging Number of units 3,000 $0.10 $300.00
Total overhead cost $555.00
Diff: 2
LO: 19-2
AACSB: Application
24
34) 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 was as follows:
Per unit Standard Heavy

Direct material cost $200.00 $245.00
Manufacturing overhead cost 124.00 93.00
Total manufacturing cost $324.00 $338.00
Price per unit 350.00 370.00

Gross profit per unit $26.00 $32.00
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 below:
Activities: Estimated Cost

Metal fabrication $420,000
Machine processing $152,000
Packaging $17,000
Total overhead cost $589,000
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 was as given below:
Standard Heavy
Kilos per unit 2.00 4.00
Machine hours per unit 80.00 60.00
Using the data above, calculate activity rates. Then, following the ABC methodology, calculate the
production cost and gross profit for one unit of standard bearings. (Round your intermediate calculations
to two decimal places.)
25
Answer: Calculation of cost driver rates:
Quantity of Cost
Cost of allocation driver
Activity Activity Cost driver base rate
Metal fabrication $420,000 kilos 12,000 $35.00
Machine processing $152,000 machine hours 380,000 $0.40
Packaging $17,000 number of units 5,000 $3.40
Calculation of production cost of Standard Bearings (per unit):

Cost per unit
Metal fabrication 70.00
Machine processing 32.00
Packaging 3.40
Total production cost: $305.40
Calculation of gross profit:

Price per unit $350.00
Total production cost per unit $305.40
Gross profit per unit $44.60
Diff: 3
LO: 19-2
AACSB: Application
1) Activity-based management uses activity-based costs to make decisions that increase profits while
meeting customer needs.
Answer: TRUE
Diff: 1
LO: 19-3
AACSB: Concept
2) Activity-based management (ABM) can be used to make pricing and product mix decisions.
Answer: TRUE
Diff: 1
LO: 19-3
AACSB: Concept
26
3) A product mix decision focuses on generating maximum profit but does not consider limited
production capabilities.
Answer: FALSE
Diff: 1
LO: 19-3
AACSB: Concept
4) Target cost is calculated by deducting desired gross profit from target sales price.
Answer: FALSE
Diff: 1
LO: 19-3
AACSB: Concept
5) Value engineering means reevaluating activities to reduce costs while still meeting customer needs.
Answer: TRUE
Diff: 1
LO: 19-3
AACSB: Concept
6) Target pricing starts with the full product cost and it then adds the desired profit to arrive at the sales
price.
Answer: FALSE
Diff: 1
LO: 19-3
AACSB: Concept
7) Which of the following decisions will most likely involve the use of activity-based management?
A) decisions related to the funding of an investment using equity or debt fund
B) decisions related to the expansion operations in a particular geographic location
C) decisions related to the pricing of a product
D) decisions related to the payment of dividends
Answer: C
Diff: 1
LO: 19-3
AACSB: Concept
8) A company is most likely to use value engineering ________.

A) to allocate manufacturing overhead to departments
B) to reduce costs in order to achieve target costs
C) to determine accurate product costs for pricing
D) to make product mix decisions
Answer: B
Diff: 2
LO: 19-3
AACSB: Concept
27
9) Which of the following statements is true of target pricing?
A) It starts with the price that customers are willing to pay.
B) It uses the full product cost that a company estimates to arrive at the sales price.
C) It does not consider the nonmanufacturing costs while calculating the target cost.
D) It is the same as cost-based pricing.
Answer: A
Diff: 2
LO: 19-3
AACSB: Concept
10) Which of the following is the correct formula to calculate the target cost?
A) Target Cost = Target Sales Price + Desired Profit
B) Target Cost = Target Sales Price - Desired Profit
C) Target Cost = Target Sales Price
D) Target Cost = Desired Profit + Research and Development Expenses
Answer: B
Diff: 1
LO: 19-3
AACSB: Concept
11) In target pricing, the target price is the ________.

A) total product cost incurred in producing a product
B) net profit desired by the company
C) amount customers are willing to pay for a product or service
D) price calculated by deducting the desired profit from the total production cost
Answer: C
Diff: 1
LO: 19-3
AACSB: Concept
12) ________ is the maximum cost to develop, produce, and deliver a product or service and earn the
desired profit.
A) Marginal cost
B) Target cost
C) Variable cost
D) Sunk cost
Answer: B
Diff: 2
LO: 19-3
AACSB: Concept
28
13) Which of the following is a nonmanufacturing cost?
A) direct labor
B) direct materials
C) administrative expenses
D) indirect labor
Answer: C
Diff: 2
LO: 19-3
AACSB: Concept
14) Phoenix Inc. manufactures widgets. The target sales price is $400 per unit. The company desires a 30%
net profit margin on its products. What is the company's target full-product cost per unit using target
pricing?
A) $120.00
B) $307.69
C) $235.29
D) $280.00
Answer: D
Explanation: D)
Target sales price per unit $400
Less: Desired net profit ($400 × 30%) 120
Target cost per unit $280
Diff: 1
LO: 19-3
AACSB: Application
15) Webster Inc. has received a bid for 12,000 units. The costing estimates show that the average cost per
unit for this bid will be $600. The company uses cost-based pricing and adds 25% markup to total costs.
What total price will Webster ask for the entire order?
A) $9,000,000
B) $7,200,000
C) $1,800,000
D) $2,250,000
Answer: A
Explanation: A)
Total cost of order = $600 × 12,000 units = $7,200,000
Bid price = $7,200,000 × 125% = $9,000,000
Diff: 2
LO: 19-3
AACSB: Application
29
16) J-Time Inc. is planning to launch a new brand of watches for kids. Similar watches are available in the
market for $50. In order to penetrate the market, the company plans to use target pricing and desires a
20% net profit markup on total cost. Calculate the target cost.
A) $60.00
B) $30.75
C) $41.67
D) $40.20
Answer: C
Explanation: C)
Let target cost be x
Target cost = Target price - Desired profit
x = $50 ÷ 0.20x
1.20x = $50
x = $50 - 1.20
x = $41.67
Diff: 2
LO: 19-3
AACSB: Application
17) Jetz Inc. manufactures water bottles for children. Similar water bottles are available in the market for
$5. Jetz desires a 20% net profit margin. Jetz's target cost is ________.
A) $4
B) $3.75
C) $4.17
D) $4.20
Answer: A
Explanation: A)
Target price $5
Less: Profit margin ($5 × 20%) 1
Target Cost $4
Diff: 1
LO: 19-3
AACSB: Application
30
18) Cilia Corp. specializes in the production of finials which is mostly sold within the territory. The
selling price for each finial is $15. Using the traditional allocation method to allocate manufacturing
overhead, the full-product cost is determined to be $10. The company recently introduced activity-based
costing method to allocate its overhead. The refinement of costs shows that the full-product cost is less by
$2.50 from the traditional estimate.
Requirement:
1. Calculate and analyze the change in net profit percentage as a result of introduction of activity-based
costing.
2. The desired net profit margin of the company is 60%. If the production costs cannot be reduced, by
how much should the selling price be increased in order to achieve the desired profit? (Use the cost
estimates under activity-based costing.)
Answer: 1.
Traditional allocation ABC Allocation
Sales Revenue $15.00 $15.00
Full-product costs 10.00 7.50
Net Profit $5.00 $7.50
Net Profit Percentage 33.33% 50.00%
2.
Desired profit = 60%. Therefore, target price = $7.50 ÷ (1 - 0.60)
Target price = $18.75
The company will have to increase its selling price by $3.75 ($18.75 - $15.00) in order to achieve the
desired profit.
Diff: 3
LO: 19-3
AACSB: Application
31
19) Ferrero Corp. manufactures gourmet dips along with potato chips flavored with Cajun spices. The
market price for similar chips is $7. The management of the company desires a 30% net profit margin.
The current costing data relating to this product are as follows.
Direct materials $1.00

Direct labor 1.50
Manufacturing overhead 2.75
Nonmanufacturing costs 0.75
Determine if Ferrero's current full-product costs meet its target cost.

Answer:
Direct materials $1.00
Direct labor 1.50
Manufacturing overhead 2.75
Current total manufacturing cost $5.25
Add: nonmanufacturing overhead 0.75
Current full-product cost $6.00
Target price $ 7.00

Less: Profit margin ($7 × 30%) (2.10)
Target Cost $ 4.90
The target cost is $4.90 and the current full-product cost is $6.00. Therefore, Ferrero does not currently
meet its target cost.
Diff: 3
LO: 19-3
AACSB: Application
32
1) Activity-based management is not suitable for service companies as it deals with the proper allocation
of manufacturing overhead.
Answer: FALSE
Diff: 1
LO: 19-4
AACSB: Concept
2) While using an activity-based costing in service companies, the allocation of indirect costs to the cost
object is the last step of the process.
Answer: TRUE
Diff: 2
LO: 19-4
AACSB: Concept
3) Activity-based costing can be used in determining the cost of services as well as products.
Answer: TRUE
Diff: 1
LO: 19-4
AACSB: Concept
4) The steps of an activity-based costing for a service firm are significantly different from that used for a
manufacturing firm.
Answer: FALSE
Diff: 1
LO: 19-4
AACSB: Concept
5) Dunby Inc. is a consulting firm that offers optimal legal solutions. It allocates indirect costs using a
single plantwide rate with direct labor hours as the allocation base. The estimated indirect costs for this
year amount to $150,000. The company is expected to work for 5,000 direct labor hours during the year.
The direct labor rate is $250 per hour. Clients are billed at 140% of direct labor cost. Last month, Dunby's
consultants spent 175 hours on Xyme Inc. What is the predetermined overhead allocation rate per direct
labor hour?
A) $250 per hour
B) $30 per hour
C) $280 per hour
D) $350 per hour
Answer: B
Explanation: B) Predetermined overhead rate = $150,000 (estimated indirect costs) ÷ 5,000 direct labor
hours = $30 per hour
Diff: 2
LO: 19-4
AACSB: Application
33
consultants spent 175 hours on Xyme Inc. Calculate the total cost assigned to Xyme.
A) $49,000
B) $43,750
C) $38,500
D) $61,250
Answer: A
Explanation: A) Predetermined overhead rate = $150,000 (estimated indirect costs) ÷ 5,000 direct labor
Direct labor (175 hours × $250) $ 43,750

Indirect costs (175 hours × $30) 5,250
Total costs $ 49,000
Diff: 2
LO: 19-4
AACSB: Application
consultants spent 175 hours on Xyme Inc. Calculate the operating income from Xyme.
A) $49,000
B) $43,750
C) $38,500
D) $12,250
Answer: D
Explanation: D) Predetermined overhead rate = $150,000 (estimated indirect costs) ÷ 5,000 direct labor
Revenue ($250 × 175 hours × 140%) $61,250

Direct labor (175 hours × $250) -43,750
Indirect costs (175 hours × $30) -5,250
Total costs $ 12,250
Diff: 2
LO: 19-4
AACSB: Application
34
8) Dunby Inc., a law consulting firm, has been using a single plantwide rate with direct labor hours as the
allocation base to allocate overhead costs. The direct labor rate is $250 per hour. Clients are billed at 140%
of direct labor cost. Chandler Massey, the president of Dunby, decided to develop an ABC system to
accurately allocate the indirect costs. He identified two activities that amount to the total indirect costs—
travel and information technology support. The other relevant details are given below:
Estimated Quantity
Activity Allocation Base Estimated costs of Allocation Base
Travel Miles driven $ 95,000 2,500 miles
IT Support Direct labor hours 55,000 1,350 DLH
Total $150,000
The predetermined overhead allocation rate for travel will be ________.

A) $40.74 per mile
B) $38.00 per mile
C) $78.74 per mile
D) $250 per mile
Answer: B
Explanation: B) Predetermined overhead allocation rate for travel = $95,000 (estimated costs) ÷ 2,500
miles (estimated quantity of allocation base) = $38 per mile
Diff: 1
LO: 19-4
AACSB: Application
35
9) Dunby Inc., a law consulting firm, has been using a single plantwide rate with direct labor hours as the
allocation base to allocate overhead costs. The direct labor rate is $250 per hour. Chandler Massey, the
president of Dunby, decided to develop an ABC system to accurately allocate the indirect costs. He
identified two activities that amount to the total indirect costs— travel and information technology
support. The other relevant details are given below:
Estimated Quantity
Activity Allocation Base Estimated costs of Allocation Base
Travel Miles driven $ 95,000 2,500 miles
IT Support Direct labor hours 55,000 1,350 DLH
Total $150,000
During the current month, Dunby's consultants spent 175 labor hours for Xyme Inc. The job required the
professionals to travel 30 miles in total. Determine the total cost of the consulting job using the ABC
system.
A) $43,750
B) $8,270
C) $7,130
D) $52,020
Answer: D
Explanation: D) Travel:
Predetermined overhead allocation rate = $95,000 (estimated costs) ÷ 2,500 miles (estimated quantity of
allocation base) = $38 per mile
Total cost for travel = $38 per mile × 30 miles = $1,140
IT Support:
Predetermined overhead allocation rate = $55,000 (estimated costs) ÷ 1,350 DLH (estimated quantity of
allocation base) = $40.74 per DLH
Total cost for travel = $40.74 per DLH × 175 hours = $7,130
Direct labor cost = $250 × 175 hours = $43,750
Diff: 1
LO: 19-4
AACSB: Application
36
10) Vincent Jardine, a CPA, has a firm in the state of New York. Vincent uses ABC to allocate overhead
costs and has computed the following predetermined overhead allocation rates:
Activity Allocation Base Allocation Rate

Photocopy expenses Number of pages $0.75 per page
Cost of Maintenance Number of labor hours $10.00 per hour
Vincent has important contacts in the northeastern parts of New York. During the past month, Vincent
completed a job for Nurix Inc. The job required 135 labor hours and 4,000 photocopies. Determine the
amount of indirect costs to be allocated to the job.
Answer: Activity Allocation Base Allocation Rate Allocated Overhead
Photocopy expenses Number of pages $ 0.75 $3,000
Cost of Maintenance Number of labor hours 10.00 1,350
Total $4,350
Diff: 2
LO: 19-4
AACSB: Application
37
11) Florian Plant Services completed a special landscaping job for Pierre Designs Company. Florian uses
ABC and has the following predetermined overhead allocation rates:
Predetermined Overhead
Activity Allocation Base Allocation Rate
Designing Number of designs $275 per design
Planting Number of plants $15 per plant
The Pierre Designs project required $1,200 in landscape materials; $700 in direct labor; one design; and 35
plants.
Requirements:
1. What is the total cost of the work done for Pierre Designs?
2. If Pierre Designs paid $3,900 for the job, what is the operating income or loss?
3. If Florian desires an operating income of 50% of cost, how much should the company charge for the
Pierre Designs project?
Answer: 1)
Direct Materials $1,200
Direct Labor 700
Planting 525
Designing 275
Total Cost $2,700
2)
Revenue 3,900
Less: Total Cost 2,700
Operating Income $1,200
3)
Total Cost $2,700
Add: Operating Income 1,350
Price to be Charged $4,050
Diff: 2
LO: 19-4
AACSB: Application
38
1) An inventory management system in which a company produces just in time to satisfy customer needs
is known as just-in-time management.
Answer: TRUE
Diff: 1
LO: 19-5
AACSB: Concept
2) Just-in-time management systems typically help reduce direct labor costs of a company.
Answer: TRUE
Diff: 1
LO: 19-5
AACSB: Concept
3) The just-in-time management system results in an increase in the inventory carrying costs of a
company.
Answer: FALSE
Diff: 2
LO: 19-5
AACSB: Concept
4) The just-in-time costing system waits until the units are completed to record the cost of production.
Answer: TRUE
Diff: 2
LO: 19-5
AACSB: Concept
5) Just-in-time costing does not track the cost of products from Raw Materials Inventory to Work-in-
Process Inventory to Finished Goods Inventory.
Answer: TRUE
Diff: 1
LO: 19-5
AACSB: Concept
6) Under just-in-time costing, the purchase of raw materials is recorded by debiting the Raw Materials
Inventory account.
Answer: FALSE
Diff: 1
LO: 19-5
AACSB: Concept
39
7) A just-in-time costing system does not use the Finished Goods Inventory account; instead, it combines
the Finished Goods Inventory account with the Work-in-Process Inventory account.
Answer: FALSE
Diff: 2
LO: 19-5
AACSB: Concept
8) Under the just-in-time costing system, underallocated and overallocated conversion costs are treated
just like underallocated and overallocated manufacturing overhead.
Answer: TRUE
Diff: 1
LO: 19-5
AACSB: Concept
9) Just-in-time costing is also known as ________.

A) job costing
B) batch costing
C) backflush costing
D) process costing
Answer: C
Diff: 1
LO: 19-5
AACSB: Concept
10) ________ in just-in-time management systems is completed in self-contained work cells.

A) Selling
B) Production
C) Administration
D) Purchasing
Answer: B
Diff: 1
LO: 19-5
AACSB: Concept
11) The just-in-time management system is a(n) ________.

A) labor management system
B) overhead management system
C) inventory management system
D) debt management system
Answer: C
Diff: 1
LO: 19-5
AACSB: Concept
40
12) Which of the following statements is true of the just-in-time costing system?
A) It increases the need for suppliers to deliver raw materials on time.
B) It records summary journal entries before the units are purchased.
C) It results in increased inventory storage costs.
D) It increases the risk of the inventory becoming obsolete or unsalable.
Answer: A
Diff: 2
LO: 19-5
AACSB: Concept
13) Which of the following statements is true of just-in-time management systems?

A) It involves ordering raw materials in large quantities to obtain volume discounts.
B) It triggers production after the customer places an order.
C) Its successful implementation is independent of vendor relationships.
D) It contracts with suppliers to deliver large quantities of goods once a year.
Answer: B
Diff: 2
LO: 19-5
AACSB: Concept
14) Under the just-in-time management system, ________.

A) a company's storage costs increase
B) a company's inventory insurance costs increase
C) the floor space available for production increases
D) the risk of the inventory becoming obsolete increases
Answer: C
Diff: 2
LO: 19-5
AACSB: Concept
15) Which of the following triggers manufacturing under the just-in-time management system?
A) increased purchase
B) consumer demand
C) government pressure
D) budgeted profit
Answer: B
Diff: 2
LO: 19-5
AACSB: Concept
41
16) The ________ system attracts materials, labor, and overhead into production under a just-in-time
management system.
A) purchase-push
B) demand-push
C) purchase-pull
D) demand-pull
Answer: D
Diff: 1
LO: 19-5
AACSB: Concept
17) Which of the following is a disadvantage of just-in-time management system?

A) It results in a decrease in production space.
B) It increases the inventory cost.
C) The risk of the inventory becoming obsolete is very high.
D) The users of this system often lose sales because of little or no inventory buffers.
Answer: D
Diff: 2
LO: 19-5
AACSB: Concept
18) ________ is a costing system that starts with output that has been completed and then assigns
manufacturing costs to units sold and to inventories.
A) Job costing
B) Batch costing
C) Backflush costing
D) Process costing
Answer: C
Diff: 1
LO: 19-5
AACSB: Concept
19) Just-in-time management systems use a combined account for Raw Materials Inventory and Work-in-
Process Inventory known as the ________.
A) Raw Materials Inventory account
B) Work-in-Process Inventory account
C) Raw and In-Process Inventory account
D) Process account
Answer: C
Diff: 1
LO: 19-5
AACSB: Concept
42
20) Which of the following temporary accounts is typically used in just-in-time management systems to
accumulate direct labor and manufacturing overhead costs?
A) Adjustments account
B) Conversion Costs account
C) Manufacturing Overhead account
D) Work-in-Process account
Answer: B
Diff: 1
LO: 19-5
AACSB: Concept
21) Which of the following is an attribute of traditional costing systems?

A) raw materials are ordered in large quantities
B) production is completed in self-contained work cells
C) suppliers make frequent deliveries of small quantities of raw materials
D) management works with suppliers to ensure defect-free raw materials
Answer: A
Diff: 1
LO: 19-5
AACSB: Concept
22) Under the just-in-time costing system, a credit purchase of raw materials is recorded by ________.
A) debiting the Raw Materials Inventory account
B) crediting the Conversion Costs account
C) debiting the Raw and In-Process Inventory account
D) crediting the Cash account
Answer: C
Diff: 1
LO: 19-5
AACSB: Concept
43
23) Agostino Inc. uses a just-in-time costing system. During the month, Agostino Inc. incurred $300,000 as
direct labor and $9,000 as overhead. Which of the following is the correct journal entry to record the
conversion costs?
A)
Conversion Costs 309,000
Wages Payable, Accumulated Depreciation, etc. 309,000
B)
Wages Payable 309,000
C)
Manufacturing Overhead 309,000
D)
Accounts payable 309,000
Answer: A
Diff: 1
LO: 19-5
AACSB: Application
44
24) Under a just-in-time costing system, the journal entry that is recorded when the goods are completed
and moved to Finished Goods Inventory is ________.
A)
Finished Goods Inventory
Raw and In-Process Inventory
B)
Conversion Costs
C)
Conversion Costs
D)
Conversion Costs
Answer: B
Diff: 2
LO: 19-5
AACSB: Concept
25) Adriano Corp. sold 2,500 cell phones on account for $700 each. The standard direct material and
conversion costs of each unit are $173.85 and $57.95, respectively. Record the journal entries for this
transaction under the just-in-time costing system.
Answer:
Accounts Receivable 1,750,000
Sales Revenue 1,750,000
Cost of Goods Sold (2,500 units × ($173.85 + $57.95)) 579,500

Finished Goods Inventory. 579,500
Diff: 2
LO: 19-5
AACSB: Application
45
26) Musings Inc. completed the production of 500 units with standard costs of $520 for direct materials
and $75 for conversion costs. During the current year, it incurred $260,000 for direct materials and $31,000
for conversion costs. Record the adjusting entry for the amount of underallocated or overallocated
overhead.
Answer:
Cost of Goods Sold
($31,000 - ($75 × 500 units)) 6,500
Diff: 1
LO: 19-5
AACSB: Application
46
27) Musings Inc. completed the production of 500 units with standard costs of $520 for direct materials
and $75 for conversion costs. During the current year, it incurred $260,000 for direct materials and $44,000
for conversion costs. Record the adjusting entry for the amount of underallocated or overallocated
overhead.
Answer:
Cost of Goods Sold
($44,000 - ($75 × 500 units)) 6,500
Diff: 1
LO: 19-5
AACSB: Application
28) Caprice Inc. has adopted a JIT management system and has the following transactions in December:
Dec 3 Purchased raw materials on account, $80,000
Dec 8 Incurred labor and overhead costs, $105,000
Dec 15 Completed 750 units with standard costs of $106 for direct materials and $165 for conversion
costs
Dec 23 Sold 650 units for $395 each
Record the journal entries for Caprice Inc. for December.

Answer: Date Accounts and Explanation Debit Credit
Dec 3 Raw and In-Process Inventory 80,000
Accounts Payable 80,000
Dec 8 Conversion Costs 105,000

Wages Payable, Accumulated Depreciation, etc. 105,000
Dec 15 Finished Goods Inventory 203,250

Raw and In-Process Inventory (750 units × $106) 79,500
Conversion Costs (750 units × $165) 123,750
Dec 23 Accounts Receivable (650 units × $395) 256,750

Service Revenue 256,750
Dec 23 Cost of Goods Sold (650 units × ($106 + $165)) 176,150

Finished Goods Inventory 176,150
Diff: 3
LO: 19-5
AACSB: Application
47
29) Alfeo Corp. has adopted a JIT management system and has the following transactions in February:
Feb 2 Incurred labor and overhead costs, $89,000
Feb 18 Completed 750 units with standard costs of $93 for direct materials and $146 for conversion costs
Open a T-account for Conversion Costs. Post appropriate entries to determine the amount of
underallocated or overallocated overhead. Record the adjusting entry.
Answer: T-account
Date Accounts and Explanation Debit Credit

Adj. Conversion Costs 20,500
Cost of Goods Sold 20,500
Diff: 2
LO: 19-5
AACSB: Application
30) Alfeo Corp. has adopted a JIT management system and has the following transactions in March:
Mar 5 Incurred labor and overhead costs, $95,000

Mar 31 Completed 650 units with standard costs of $94 for direct materials and $128 for conversion costs
Open a T-account for Conversion Costs. Post appropriate entries to determine the amount of
underallocated or overallocated overhead. Record the adjusting entry.
Answer: T-account
Date Accounts and Explanation Debit Credit

Mar 31 Cost of Goods Sold 11,800
Diff: 2
LO: 19-5
AACSB: Application
48
1) Quality management systems (QMS) are systems that help managers improve the business's
performance by providing quality products and services.
Answer: TRUE
Diff: 1
LO: 19-6
AACSB: Concept
2) Companies which use a just-in-time management system do not benefit from a quality management
system.
Answer: FALSE
Diff: 2
LO: 19-6
AACSB: Concept
3) Companies using just-in-time management systems are far more vulnerable to production shutdowns
if they receive poor-quality or defective raw materials.
Answer: TRUE
Diff: 1
LO: 19-6
AACSB: Concept
4) The common factor in all quality management systems is the desire to improve the business's
performance by providing quality products or services.
Answer: TRUE
Diff: 2
LO: 19-6
AACSB: Concept
5) Businesses should invest up front in internal and external failure costs to reduce prevention and
appraisal costs.
Answer: FALSE
Diff: 1
LO: 19-6
AACSB: Concept
6) Quality management systems emphasize external failure costs.

Answer: FALSE
Diff: 1
LO: 19-6
AACSB: Concept
49
7) ________ are costs incurred to avoid poor-quality goods or services.
A) Prevention costs
B) Appraisal costs
C) Internal failure costs
D) External failure costs
Answer: A
Diff: 1
LO: 19-6
AACSB: Concept
8) ________ are costs incurred after the company delivers poor-quality goods or services to customers and
then has to make things right with the customer.
A) Prevention costs
B) Appraisal costs
C) Internal failure costs
D) External failure costs
Answer: D
Diff: 1
LO: 19-6
AACSB: Concept
9) Appraisal costs are costs incurred ________.

A) to avoid poor-quality goods or services
B) to detect poor-quality materials, goods, or services
C) when the company detects and corrects poor-quality goods or services before delivery to customers
D) after the company delivers poor-quality goods or services to customers and then has to make things
right with the customer
Answer: B
Diff: 2
LO: 19-6
AACSB: Concept
10) Internal failure costs are costs incurred ________.

A) to detect poor-quality materials, goods, or services
B) when the company detects and corrects poor-quality goods or services before delivery to customers
C) after the company delivers poor-quality goods or services to customers and then has to make things
right with the customer
D) to avoid poor-quality goods or services
Answer: B
Diff: 2
LO: 19-6
AACSB: Concept
50
11) Costs incurred in customer service are categorized as ________.
A) prevention costs
B) appraisal costs
C) internal failure costs
D) external failure costs
Answer: D
Diff: 2
LO: 19-6
AACSB: Concept
12) Which of the following is most likely to be categorized as an external failure cost?
A) the cost of testing a product before shipment
B) the cost of machinery maintenance to avoid breakdowns during production
C) the cost of lost future sales after a customer finds a defect in a product
D) the cost of inspection of materials to be used in production
Answer: C
Diff: 1
LO: 19-6
AACSB: Concept
13) Cost incurred in training employees is an example of a(n) ________.

A) external failure cost
B) internal failure cost
C) prevention cost
D) appraisal cost
Answer: C
Diff: 1
LO: 19-6
AACSB: Concept
14) Cost incurred in the inspection of final products or services is an example of a(n) ________.
A) prevention cost
B) appraisal cost
C) internal failure cost
D) external failure cost
Answer: B
Diff: 2
LO: 19-6
AACSB: Concept
51
15) Which of the following is an example of internal failure costs?
A) costs incurred for the evaluation of the quality of suppliers' processes
B) costs incurred in the inspection at various stages of production
C) cost incurred for the reworking of substandard products
D) cost incurred as warranty expenses
Answer: C
Diff: 2
LO: 19-6
AACSB: Concept
16) Which of the following is an example of appraisal costs?

A) employee training cost
B) product testing cost
C) warranty costs
D) equipment maintenance costs
Answer: B
Diff: 2
LO: 19-6
AACSB: Concept
52
17) A company is considering spending the following on a new quality improvement program:
Inspect raw materials $123,000

Reengineer to improve product quality 760,000
Inspect finished goods 150,000
Preventive maintenance of equipment 140,000
The company expects this quality program to reduce costs by the following amounts:
Avoid lost profits due to unhappy customers $910,000

Fewer sales returns 65,000
Decrease the cost of rework 155,000
Lower warranty costs 54,000
Group each cost under the four categories of quality management systems. Comment whether the
company should undertake the quality improvement program.
Answer: Undertake the Quality Improvement Program
Prevention
Reengineer to improve product quality $760,000
Preventive maintenance of equipment 140,000
Total prevention costs $900,000
Appraisal
Inspect raw materials $123,000
Inspect finished goods 150,000
Total appraisal costs 273,000
Total costs of undertaking the quality improvement program $1,173,000
Do Not Undertake the Quality Improvement Program

Internal Failure
Cost of rework $ 155,000
Total internal failure costs $155,000
External Failure
Lost profits due to unhappy customers $910,000
Sales returns 65,000
Warranty costs 54,000
Total external failure costs 1,029,000
Total costs of not undertaking the quality improvement program $1,184,000
These estimates suggest that the company would save $11,000 ($1,184,000 - $1,173,000) by undertaking
the quality improvement program.
Diff: 3
LO: 19-6
AACSB: Application
53
Test bank for Horngrenâ€™s Financial & Managerial Accounting 4e by Nobles 0133359840
18) Distinguish the following costs as prevention, appraisal, internal failure, or external failure:
a) Rework labor and overhead
b) Technical support provided to suppliers
c) Warranty repairs and replacements
d) Depreciation of test equipment
e) Liability arising from defective products
f) Field testing and appraisal at customer site
g) Disposal of defective products
Answer: a) Rework labor and overhead Internal failure costs
b) Technical support provided to suppliers Preventive costs
c) Warranty repairs and replacements External failure costs
d) Depreciation of test equipment Appraisal costs
e) Liability arising from defective products External failure costs
f) Field testing and appraisal at customer site Appraisal costs
g) Disposal of defective products Internal failure costs
Diff: 2
LO: 19-6
AACSB: Application
54
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Learning Objective 19-1

Calculate the predetermined overhead allocation rate.

Calculate the amount of overhead to be allocated to Totes.

Calculate the amount of overhead to be allocated to Satchels.

Calculate the predetermined overhead allocation rate.

11) Which of the following statements is true of costing systems?

Answer: Calculation of departmental allocation rates:

Learning Objective 19-2

8) Activity-based costing uses a common allocation base for all activities.

11) An activity-based costing system is developed in four steps.

Activity Allocation Base Cost Allocation Rate $

What is the cost of materials handling per ceiling fan?

Activity Allocation Base Cost Allocation Rate $

What is the cost of machining per ceiling fan?

Activity Allocation Base Cost Allocation Rate $

What is the cost of assembling per ceiling fan?

Activity Allocation Base Cost Allocation Rate $

What is the total manufacturing cost per ceiling fan?

Estimated Indirect Estimated Quantity

Activities Allocated Costs Allocation Base

Northeast Office Midwest Office

Activities Allocated Costs Allocation Base

Northeast Office Midwest Office

Activities Allocated Costs Allocation Base

Northeast Office Midwest Office

Activities Allocated Costs Allocation Base

Northeast Office Midwest Office

What is the cost per letter for the correspondence activity?

Activities Allocated Costs Allocation Base

Northeast Office Midwest Office

Number of account inquiry hours utilized 200

Activities Allocated Costs Allocation Base

Northeast Office Midwest Office

Activities Allocated Costs Allocation Base

Northeast Office Midwest Office

Total cost Allocation Base Cost Driver

31) The activity-based costing system improves the allocation of ________.

The activity rates are as follows:

Materials management $12.00 Per purchase order

Computation of overhead cost of the order:*

Per unit Standard Heavy

Price per unit 350.00 370.00

Activities: Estimated Cost

Calculation of production cost of Standard Bearings (per unit):

Calculation of gross profit:

Learning Objective 19-3

8) A company is most likely to use value engineering ________.

11) In target pricing, the target price is the ________.

Direct materials $1.00

Determine if Ferrero's current full-product costs meet its target cost.

Target price $ 7.00

Direct labor (175 hours × $250) $ 43,750

Revenue ($250 × 175 hours × 140%) $61,250

The predetermined overhead allocation rate for travel will be ________.

Activity Allocation Base Allocation Rate

9) Just-in-time costing is also known as ________.

10) ________ in just-in-time management systems is completed in self-contained work cells.

11) The just-in-time management system is a(n) ________.

13) Which of the following statements is true of just-in-time management systems?

Test bank for Horngrenâ€™s Financial & Managerial Accounting 4e by Nobles 0133359840