Exam 5: Activity-Based Costing and Management

Flagler Corporation takes eight hours to complete the setup process for a certain electrical component, with the setup cost averaging $150 per hour. If the company's competitor can accomplish the same process in six hours, Flagler's non-value-added cost would be:

Use the following information to answer the following Questions Skyline Florists uses an activity-based costing system to compute the cost of making floral bouquets and delivering the bouquets to its commercial customers. Company personnel who earn $180,000 typically perform both tasks; other firm-wide overhead is expected to total $70,000. These costs are allocated as follows: Skyline anticipates making 20,000 bouquets and 4,000 deliveries in the upcoming year. -The cost of wages and salaries and other overhead that would be charged to each delivery is closest to:

Flavorful Manufacturing sells a number of goods whose selling price is heavily influenced by cost. A recent study of product no. 519 revealed a traditionally-derived total cost of $1,019, a selling price of $1,850 based on that figure, and a newly computed activity-based total cost of $1,215. Which of the following statements is true?

The adoption of a 24/7 employee hotline for workplace complaints is an example of a:

Engineering design costs are typically known as batch-level activities.

The adoption of a 24/7 customer service help line is an example of a:

Pound Industries' customer service department follows up on customer complaints by telephone inquiry. During a recent period, the department initiated 10,000 calls and incurred costs of $312,000. Of these calls, 3,800 were for the company's wholesale operation; the remainder was for the retail division. Costs allocated to the wholesale operation are:

At a recent professional meeting, two controllers discussed product-costing problems in their respective companies. Both controllers are familiar with ABC systems, but neither of their firms utilizes such a system. Controller D reported that part of the problem in his firm results from major differences among product lines with respect to unit volume, utilization of activities, quality assurance requirements established by customers, and product size. Controller M noted that in her company, which manufactures consumer goods, all items undergo the same basic production processes in the same sequence. Lately, however, there has been a significant increase in the number of item colors. Both controllers are worried about the potential distortion of product costs under their traditional product-costing systems. Required: Which controller should be more concerned about the potential distortion? Explain.

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

Carlin and Marley, an accounting firm, provides consulting and tax planning services. For many years, the firm's total administrative cost (currently $270,000) has been allocated to services on this basis of billable hours to clients. A recent analysis found that 55% of the firm's billable hours to clients resulted from tax planning services, while 45% resulted from consulting services. The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows: A recent analysis of staff support found a strong correlation with the number of clients served. In contrast, in-house computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively. Consulting clients served totaled 35% of the total client base, consumed 30% of the firm's computer hours, and accounted for 20% of the total client transactions. If Carlin and Marley switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to consulting services would:

Consider the following statements regarding traditional costing systems: I. Overhead costs are applied to products on the basis of volume-related measures. II. All manufacturing costs are easily traceable to the goods produced. III. Traditional costing systems tend to distort unit manufacturing costs when numerous goods are made that have widely varying production requirements. Which of the above statements is (are) true?

Baxter customer service department follows up on customer complaints by telephone inquiry. During a recent period, the department initiated 10,000 calls and incurred costs of $312,000. Of these calls, 3,800 were for the company's wholesale operation; the remainder was for the retail division. Costs allocated to the retail division are:

During a recent accounting period, Falcon Express' shipping department processed 26 orders. Each order typically takes four hours to complete. However, the average time increased to five hours because of various departmental inefficiencies. If shipping labor is paid $14 per hour, the company's non-value-added cost would be:

Use the following information to answer the following Questions Barnett Products manufactures three types of remote-control devices: Economy, Standard, and Deluxe. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below. -What is Barnett's pool rate for the packaging activity?

Use the following information to answer the following Questions Barnett Products manufactures three types of remote-control devices: Economy, Standard, and Deluxe. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below. -What is Barnett's pool rate for the material-insertion activity?

Which of the following is not an example of a business-value-added activity?

Use this information to answer the following Questions Rocket Products manufactures three types of remote-control devices: Economy, Standard, and Deluxe. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below. -Assume that Rocket is using a volume-based costing system, and the preceding overhead costs are applied to all products on the basis of direct labor hours. The overhead cost that would be assigned to the Deluxe product line is closest to:

Define the term "cost driver" and discuss the factors that are important in the selection of appropriate cost drivers.

Use the following information to answer the following Questions St. Vincent’s, Inc., currently uses traditional costing procedures, applying $800,000 of overhead to products Beta and Zeta on the basis of direct labor hours. The company is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labor hours (DLH), production setups (SU), and number of parts components (PC) as cost drivers. Data on the cost pools and respective driver volumes follow. -The overhead cost allocated to Zeta by using activity-based costing procedures would be:

Marvel Bank & Trust operates in a very competitive marketplace, using a traditional labor-hour-based system to determine the cost of processing its mortgage loans. Recently, the firm explored a switch to activity-based costing to determine the wisdom of its previous ways. The following information is available: Two loan applications, among many others, were originated and closed during the year. No. 7439 consumed 3.5 hours in loan underwriting and 1.5 hours in loan closure, for a total of 5.0 hours. No. 7809 also required 5.0 hours of time, subdivided as follows: 2.0 hours in loan underwriting and 3.0 hours in loan closure. Required: A. Use an activity-based-costing system and determine the cost of processing, underwriting, and closing the two loan applications. B. Determine the cost of processing the two loans if Marvel uses the traditional labor-hour-based system. Conversations with management found that, on average, each application took nine labor hours of processing time, excluding underwriting and closure. C. Is Marvel making a mistake by continuing to use a traditional system that is based on an average labor cost per hour? Why?