Professional Documents
Culture Documents
A. Criteria.
B. Standards.
C. Rates.
D. Variances.
E. Restrictions.
Blocher - Chapter 05 #1
Difficulty: Easy
Learning Objective: 5-1
3. Volume-based overhead rates may cause undesirable strategic effects such as:
A. Management by objectives.
B. Cross-subsidization of products.
C. Ineffective management of operations for process improvement.
D. Proration of variances.
Blocher - Chapter 05 #3
Difficulty: Medium
Emerging Issues: Strategy
Learning Objective: 5-1
5. Activity-based costing (ABC) differs from other costing approaches in that it more accurately measures the cost of activities:
6. In performing activity analysis during the design of an activity-based costing system (ABC), the management accountant studies:
9. The relationship between activity-based costing (ABC) and strategic cost management could be described as:
A. Inconsistent.
B. Proportional.
C. Insignificant.
D. Linked.
E. Minimal.
Blocher - Chapter 05 #9
Difficulty: Easy
Learning Objective: 5-1
10. Successful activity-based costing (ABC) implementation depends upon the firm:
A. Quantity driver.
B. Resource consumption cost driver.
C. Not a cost driver.
D. Activity consumption cost driver.
E. Consumption cost driver.
Blocher - Chapter 05 #11
Difficulty: Easy
Learning Objective: 5-2
12. A measure of frequency and intensity of demands placed on activities by cost objects is:
A. Quantity driver.
B. Resource consumption cost driver.
C. Not a cost driver.
D. Activity consumption cost driver.
E. Consumption cost driver.
Blocher - Chapter 05 #12
Difficulty: Easy
Learning Objective: 5-2
A. Product-level activity.
B. Facility-level activity.
C. Unit-level activity.
D. Performance-level activity.
E. Batch-level activity.
Blocher - Chapter 05 #13
Difficulty: Easy
Learning Objective: 5-2
14. An activity that is performed to support the production of a new customer's order is a(n):
A. Product-level activity.
B. Facility-level activity.
C. Unit-level activity.
D. Customer-support activity.
E. Batch-level activity.
Blocher - Chapter 05 #14
Difficulty: Medium
Learning Objective: 5-2
16. The management of activities to improve the value received by the customer and the competitiveness of the organization is:
17. The examination of the efficiency and value of each of a firm's activities is:
A. Activity analysis.
B. Pareto analysis.
C. Activity-based management.
D. Performance measurement.
E. Attribute-based management.
Blocher - Chapter 05 #17
Difficulty: Easy
Learning Objective: 5-4
A. Set up.
B. Rework.
C. Repair.
D. Storage.
E. Processing.
Blocher - Chapter 05 #18
Difficulty: Easy
Learning Objective: 5-4
19. In regard to selling activities, which one of the following would be a cost driver for selling expense?
A. Number of invoices.
B. Number of sales calls.
C. Number of production runs.
D. Number of shipments.
Blocher - Chapter 05 #19
Difficulty: Easy
Learning Objective: 5-6
20. Which one of the following is not a recommendation for a successful implementation of ABC/M?
22. A company using a volume-based overhead assignment (allocation) method will tend to:
A. Output units.
B. Number of engineering change orders.
C. Number of materials handling transactions.
D. Square feet of plant area occupied.
E. Number of employees.
Blocher - Chapter 05 #23
Difficulty: Medium
Learning Objective: 5-2
A. Materials handling.
B. Plant maintenance.
C. Product inspection.
D. Design engineering.
E. Purchase orders.
Blocher - Chapter 05 #24
Difficulty: Easy
Learning Objective: 5-2
25. In an organization that makes furniture, which of the following is a high value-added activity?
26. Overhead costs are allocated to cost objects in an activity-based costing system in the following manner:
A. Overhead costs are traced to departments, then costs are traced to products.
B. Overhead costs are traced to activities, then costs are traced to products.
C. Overhead costs are traced to activities, then costs are traced to departments and then allocated to products.
D. Overhead costs are traced from resources to cost objects.
Blocher - Chapter 05 #26
Difficulty: Medium
Learning Objective: 5-2
A. Output units.
B. Number of employees.
C. Number of orders.
D. Number of parts.
E. Machine hours.
Blocher - Chapter 05 #27
Difficulty: Medium
Learning Objective: 5-2
28. Which of the following has the weakest linkage between activity and cost driver?
A. A
B. B
C. C
D. D
Blocher - Chapter 05 #28
Difficulty: Medium
Learning Objective: 5-2
30. Which of the following would likely be the most appropriate cost driver of electric power used by machines?
A. Number of units.
B. Machine size.
C. Number of machine hours.
D. Number of production runs.
E. Purchase cost of machines.
Blocher - Chapter 05 #30
Difficulty: Medium
Learning Objective: 5-2
31. Using a volume-based overhead rate based on machine hours to assign manufacturing overhead to a product line that uses relatively few
machine hours is likely to:
33. Engineering change orders, equipment maintenance, and product development costs are examples of:
A. Unit costs.
B. Batch costs.
C. Product-level costs.
D. Facility-level costs.
E. Unit, batch, and customer-sustaining costs, respectively.
Blocher - Chapter 05 #33
Difficulty: Easy
Learning Objective: 5-2
34. In an activity-based costing system, overhead costs are divided into separate:
A. Cost objects.
B. Activity cost pools.
C. Resource consumption and activity consumption cost pools.
D. Product-line cost pools.
E. Plantwide or departmental cost pools.
Blocher - Chapter 05 #34
Difficulty: Medium
Learning Objective: 5-2
35. Which of the following would likely be the most appropriate cost driver to allocate machine set-up costs to products?
A. Machine hours.
B. Direct labor hours.
C. Number of production runs.
D. Number of products.
E. Number of purchase orders.
Blocher - Chapter 05 #35
Difficulty: Hard
Learning Objective: 5-2
36. A firm has many products, some produced in an automated production process and some produced in a manual production process. Using
direct labor hours to assign manufacturing overhead to a product manufactured with a highly automated process is likely to:
40. Which of the following is not normally associated with activity-based costing?
42. Which of the following would be the most appropriate cost driver to allocate factory electricity costs to products?
43. Which of the following activity cost pools would most likely be allocated based on the number of production runs?
44. Which of the following is most likely to be the cost driver for the packaging and shipping activity?
A. Number of setups.
B. Number of components.
C. Number of orders.
D. Hours of testing.
E. Number of production runs.
Blocher - Chapter 05 #44
Difficulty: Medium
Learning Objective: 5-2
46. All of the following statements regarding activity-based costing systems are true except they:
48. Which of the following cost pools are used to classify costs under activity-based costing?
A. A
B. B
C. C
D. D
Blocher - Chapter 05 #48
Difficulty: Easy
Learning Objective: 5-2
49. Purchase order, setup, and inspection costs are examples of:
A. Unit-level costs.
B. Batch-level costs.
C. Product-level costs.
D. Facility-level costs.
E. Department-level costs.
Blocher - Chapter 05 #49
Difficulty: Medium
Learning Objective: 5-2
50. Engineering change orders, equipment maintenance, and product development costs are examples of:
A. Unit-level costs.
B. Batch-level costs.
C. Product-level costs.
D. Facility-level costs.
E. Department-level costs.
Blocher - Chapter 05 #50
Difficulty: Easy
Learning Objective: 5-2
51. Costs at the unit-level of activity should be allocated to products using cost drivers that are:
A. Customer-oriented.
B. Design-related.
C. Volume-related.
D. Product-related.
E. Order-related.
Blocher - Chapter 05 #51
Difficulty: Medium
Learning Objective: 5-2
52. If a costing system uses a single base to allocate overhead costs that are results of several production activities:
53. Procurement costs such as costs of placing orders for materials and paying suppliers are usually classified as:
A. Output-unit-level costs.
B. Batch-level costs.
C. Product-level costs.
D. Facility-level costs.
E. Vendor costs.
Blocher - Chapter 05 #53
Difficulty: Medium
Learning Objective: 5-2
62. Which of the following is a description of categorizing related customer costs into cost pools on the basis of cost drivers?
A. Customer revenue analysis.
B. Customer cost analysis.
C. Customer profitability analysis.
D. Customer value assessment.
E. Customer equity analysis.
Blocher - Chapter 05 #62
Difficulty: Easy
Learning Objective: 5-6
63. Wings Co. budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours and had the following manufacturing overhead:
If Wings uses a volume-based overhead rate based on direct labor hours, the manufacturing overhead for Job #971 is:
A. $990.
B. $1,020.
C. $1,600.
D. $3,460.
E. $6,400.
($160,000 + $13,260 + $1,380 + $10,560)/2,315 budgeted hours = $80 per dir labor hr
$80 x 20 Direct Labor hours = $1,600 = Manufacturing overhead for Job #971
Blocher - Chapter 05 #63
Difficulty: Easy
Learning Objective: 5-3
64. Wings Co. budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours and had the following manufacturing overhead:
Using ABC, the materials handling overhead cost assigned to Job #971 is:
A. $2,300.
B. $990.
C. $6,500.
D. $690.
E. $1,020.
65.
Wings Co. budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours and had the following manufacturing overhead:
Requirements for Job #971 which manufactured 4 units of product:
Using ABC, overhead cost assigned to Job #971 for machine setup is:
A. $2,300.
B. $990.
C. $6,500.
D. $690.
E. $1,020.
66. Wings Co. budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours and had the following manufacturing overhead:
Using ABC, overhead cost assigned to Job #971 for machine repair is:
A. $2,300.
B. $990.
C. $6,500.
D. $690.
E. $1,020.
67. Wings Co. budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours, and had the following manufacturing overhead:
Using ABC, overhead cost assigned to Job #971 for inspections is:
A. $2,300.
B. $990.
C. $6,500.
D. $690.
E. $1,020.
68. Wings Co. budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours, and had the following manufacturing overhead:
The total overhead of Job #971 under the ABC costing is:
A. $95.
B. $380.
C. $1,520.
D. $2,300.
E. $9,200.
69. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and digital camcorders.
National uses a volume-based costing system to apply factory overhead based on direct labor dollars. The unit prime costs of each product
were as follows:
National's controller had been researching activity-based costing and decided to switch to it. A special study determined National's two
products have the following budgeted activities:
What is the overhead application rate using the firm's volume-based costing system (rounded to the nearest percent or cents)?
70.
National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and digital camcorders.
National uses a volume-based costing system to apply factory overhead based on direct labor dollars. The unit prime costs of each product
were as follows:
National's controller had been researching activity-based costing and decided to switch to it. A special study determined National's two
products have the following budgeted activities:
Using the firm's volume-based costing, applied factory overhead per unit for the High F model is (rounded to the nearest cent):
A. $61.32.
B. $65.43.
C. $43.42.
D. $45.99.
E. $54.04.
71. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and digital camcorders.
National uses a volume-based costing system to apply factory overhead based on direct labor dollars. The unit prime costs of each product
were as follows:
National's controller had been researching activity-based costing and decided to switch to it. A special study determined National's two
products have the following budgeted activities:
Using the firm's volume-based costing, applied factory overhead per unit for the Great P model is (rounded to the nearest cent):
A. $61.32.
B. $65.43.
C. $43.42.
D. $45.99.
E. $54.04.
72. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and digital camcorders.
National uses a volume-based costing system to apply factory overhead based on direct labor dollars. The unit prime costs of each product
were as follows:
National's controller had been researching activity-based costing and decided to switch to it. A special study determined National's two
products have the following budgeted activities:
Using activity-based costing, applied engineering and design factory overhead for the High F model per unit is (rounded to the nearest
cent):
A. $6.13.
B. $11.86.
C. $16.28.
D. $32.46.
E. $66.73.
73. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and digital camcorders.
National uses a volume-based costing system to apply factory overhead based on direct labor dollars. The unit prime costs of each product
were as follows:
National's controller had been researching activity-based costing and decided to switch to it. A special study determined National's two
products have the following budgeted activities:
Using activity-based costing, applied quality control factory overhead for the High F model per unit is (rounded to the nearest cent):
A. $6.13.
B. $11.86.
C. $16.28.
D. $32.46.
E. $66.73.
74. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and digital camcorders.
National uses a volume-based costing system to apply factory overhead based on direct labor dollars. The unit prime costs of each product
were as follows:
National's controller had been researching activity-based costing and decided to switch to it. A special study determined National's two
products have the following budgeted activities:
Using activity-based costing, applied machinery overhead for the High F model per unit is (rounded to the nearest cent):
A. $6.13.
B. $11.86.
C. $16.28.
D. $32.46.
E. $66.73.
75.
National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and digital camcorders.
National uses a volume-based costing system to apply factory overhead based on direct labor dollars. The unit prime costs of each product
were as follows:
National's controller had been researching activity-based costing and decided to switch to it. A special study determined National's two
products have the following budgeted activities:
Using activity-based costing, applied miscellaneous overhead for the High F model per unit is (rounded to the nearest cent):
A. $6.13.
B. $11.86.
C. $16.28.
D. $32.36.
E. $66.73.
$134,904/26,400 = $5.11
($5.11 x 12,000)/10,000 = $6.13
Blocher - Chapter 05 #75
Difficulty: Medium
Learning Objective: 5-3
76. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and digital camcorders.
National uses a volume-based costing system to apply factory overhead based on direct labor dollars. The unit prime costs of each product
were as follows:
National's controller had been researching activity-based costing and decided to switch to it. A special study determined National's two
products have the following budgeted activities:
Using activity-based costing, total overhead per unit of the High F model is (rounded to the nearest cent):
A. $42.61.
B. $45.99.
C. $61.32.
D. $66.73.
E. $168.00.
77.
National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and digital camcorders.
National uses a volume-based costing system to apply factory overhead based on direct labor dollars. The unit prime costs of each product
were as follows:
National's controller had been researching activity-based costing and decided to switch to it. A special study determined National's two
products have the following budgeted activities:
Using activity-based costing, applied engineering and design factory overhead for the Great P model per unit is (rounded to the nearest
cent):
A. $4.60.
B. $9.45.
C. $13.44.
D. $15.12.
E. $42.61.
78. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and digital camcorders.
National uses a volume-based costing system to apply factory overhead based on direct labor dollars. The unit prime costs of each product
were as follows:
National's controller had been researching activity-based costing and decided to switch to it. A special study determined National's two
products have the following budgeted activities:
Using activity-based costing, applied quality control factory overhead for the Great P model per unit is (rounded to the nearest cent):
A. $4.60.
B. $9.45.
C. $13.44.
D. $15.12.
E. $42.61.
National uses a volume-based costing system to apply factory overhead based on direct labor dollars. The unit prime costs of each product
were as follows:
National's controller had been researching activity-based costing and decided to switch to it. A special study determined National's two
products have the following budgeted activities:
Using activity-based costing, applied machinery overhead for the Great P model per unit is (rounded to the nearest cent):
A. $4.60.
B. $9.45.
C. $13.44.
D. $15.12.
E. $42.61.
80. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and digital camcorders.
National uses a volume-based costing system to apply factory overhead based on direct labor dollars. The unit prime costs of each product
were as follows:
National's controller had been researching activity-based costing and decided to switch to it. A special study determined National's two
products have the following budgeted activities:
Using activity-based costing, applied miscellaneous overhead for the Great P model per unit is (rounded to the nearest cent):
A. $4.60.
B. $9.45.
C. $13.44.
D. $15.12.
E. $42.61.
$134,904/26,400 = $5.11
($5.11 x 14,400)/16,000 = $4.60
Blocher - Chapter 05 #80
Difficulty: Hard
Learning Objective: 5-3
81. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and digital camcorders.
National uses a volume-based costing system to apply factory overhead based on direct labor dollars. The unit prime costs of each product
were as follows:
National's controller had been researching activity-based costing and decided to switch to it. A special study determined National's two
products have the following budgeted activities:
Using activity-based costing, total overhead per unit of Great P model is (rounded to the nearest cent):
A. $42.61.
B. $45.99.
C. $61.32.
D. $66.73.
E. $168.00.
82. Sheen Co. manufacturers laser printers. It has outlined the following overhead cost drivers:
Sheen Co. has an order for 1,000 laser printers that has the following production requirements:
Using activity-based costing, applied quality control factory overhead for the 1000 laser printer order is:
A. $7,800.
B. $10,000.
C. $10,500.
D. $150.
E. $21,600.
83. Sheen Co. manufacturers laser printers. It has outlined the following overhead cost drivers:
Sheen Co. has an order for 1,000 laser printers that has the following production requirements:
Using activity-based costing, applied machine repetition overhead for the 1000 laser printer order is:
A. $7,800.
B. $10,000.
C. $10,500.
D. $150.
E. $21,600.
84. Sheen Co. manufacturers laser printers. It has outlined the following overhead cost drivers:
Sheen Co. has an order for 1,000 laser printers that has the following production requirements:
Using activity-based costing, applied materials handling factory overhead for the 1000 laser printer order is:
A. $7,800.
B. $10,000.
C. $10,500.
D. $150.
E. $21,600.
85. Sheen Co. manufacturers laser printers. It has outlined the following overhead cost drivers:
Sheen Co. has an order for 1,000 laser printers that has the following production requirements:
Using activity-based costing, applied miscellaneous factory overhead for the 1000 laser printer order based on direct labor hours is:
A. $7,800.
B. $10,000.
C. $10,500.
D. $150.
E. $21,600.
86. Sheen Co. manufacturers laser printers. It has outlined the following overhead cost drivers:
Sheen Co. has an order for 1,000 laser printers that has the following production requirements:
What is the total overhead cost per unit of the laser printer order using activity-based costing (rounded to the nearest cent)?
A. $39.55.
B. $40.05.
C. $42.25.
D. $50.65.
E. $58.30.
87. Diamond Cleats Co. manufactures cleats for baseball shoes. It has outlined the following overhead cost drivers:
Diamond Cleats Co. has an order for cleats that has the following production requirements:
Using activity-based costing, applied quality control factory overhead for the baseball cleat order is:
A. $28,450.
B. $30,220.
C. $24,375.
D. $21,150.
E. $19,600.
88.
Diamond Cleats Co. manufactures cleats for baseball shoes. It has outlined the following overhead cost drivers:
Diamond Cleats Co. has an order for cleats that has the following production requirements:
Using activity-based costing, applied machine overhead for the baseball cleat order is:
A. $47,800.
B. $55,300.
C. $40,500.
D. $59,150.
E. $51,700.
89. Diamond Cleats Co. manufactures cleats for baseball shoes. It has outlined the following overhead cost drivers:
Diamond Cleats Co. has an order for cleats that has the following production requirements:
Using activity-based costing, applied materials handling factory overhead for the baseball cleat order is:
A. $338.
B. $584.
C. $192.
D. $353.
E. $686.
90. Diamond Cleats Co. manufactures cleats for baseball shoes. It has outlined the following overhead cost drivers:
Diamond Cleats Co. has an order for cleats that has the following production requirements:
Using activity-based costing, applied miscellaneous factory overhead for the baseball cleat order based on direct labor hours is:
A. $8,745.
B. $10,312.
C. $10,489.
D. $9,912.
E. $8,456.
91. Diamond Cleats Co. manufactures cleats for baseball shoes. It has outlined the following overhead cost drivers:
Diamond Cleats Co. has an order for cleats that has the following production requirements:
ABC costing provides helps an organization implement its strategy through all of the following means except:
94. The cost of unused capacity can be determined using ABC costing for the purpose of:
96. An adaptation of ABC costing that emphasizes resource consumption cost pools is:
A. Activity analysis.
B. Multistage ABC.
C. Time-Driven ABC.
D. Resource Consumption Accounting.
E. Customer profitability analysis.
Blocher - Chapter 05 #96
Difficulty: Easy
Learning Objective: 5-7
97. An adaptation of ABC costing that simplifies ABC by assigning resource costs directly to cost objects is called:
A. Activity analysis
B. Multistage ABC
C. Time-Driven ABC
D. Resource Consumption Accounting
E. Customer profitability analysis
Blocher - Chapter 05 #97
Difficulty: Easy
Learning Objective: 5-7
100. The common element among the firms Nike, GM, and Lego Group is:
101. Important concepts in resource consumption accounting include all of the following except:
A. Variable costing
B. Resource interrelationships
C. Activity interrelationships
D. Detail level cost information
E. Treatment of idle capacity
Blocher - Chapter 05 #101
Difficulty: Easy
Learning Objective: 5-7
A. Production efficiency
B. Unused capacity
C. Product line profitability
D. Value adding activities
E. Customer value
Blocher - Chapter 05 #102
Difficulty: Easy
Learning Objective: 5-7
103. Everlast Co. manufactures a variety of drill bits. The company's plant is partially automated. The budget for the year includes $432,000
payroll for 4,800 direct labor-hours. Listed below is cost driver information used in the product-costing system:
A. $9,960.
B. $30,240.
C. $43,741.
D. $44,268.
E. $109,352.
104. Everlast Co. manufactures a variety of drill bits. The company's plant is partially automated. The budget for the year includes $432,000
payroll for 4,800 direct labor-hours. Listed below is cost driver information used in the product-costing system:
What is the total manufacturing overhead for the current product order if the firm assigns overhead costs based on machine hours?
A. $9,960.
B. $30,240.
C. $43,741.
D. $44,268.
E. $109,352.
105. Everlast Co. manufactures a variety of drill bits. The company's plant is partially automated. The budget for the year includes $432,000
payroll for 4,800 direct labor-hours. Listed below is cost driver information used in the product-costing system:
Using ABC, how much machine setup overhead is assigned to the order?
A. $19,200.
B. $8,000.
C. $11,108.
D. $9,960.
E. $7,272.
106. Everlast Co. manufactures a variety of drill bits. The company's plant is partially automated. The budget for the year includes $432,000
payroll for 4,800 direct labor-hours. Listed below is cost driver information used in the product-costing system:
Using ABC, how much material handling overhead is assigned to the order?
A. $19,200.
B. $8,000.
C. $11,108.
D. $9,960.
E. $7,272.
107. Everlast Co. manufactures a variety of drill bits. The company's plant is partially automated. The budget for the year includes $432,000
payroll for 4,800 direct labor-hours. Listed below is cost driver information used in the product-costing system:
Using ABC, how much quality control overhead is assigned to the order?
A. $8,000.
B. $9,960.
C. $11,108.
D. $19,200.
E. $45,933.
108.
Everlast Co. manufactures a variety of drill bits. The company's plant is partially automated. The budget for the year includes $432,000
payroll for 4,800 direct labor-hours. Listed below is cost driver information used in the product-costing system:
A current product order has the following requirements:
A. $8,000.
B. $9,960.
C. $11,108.
D. $19,200.
E. $45,992.
109. Everlast Co. manufactures a variety of drill bits. The company's plant is partially automated. The budget for the year includes $432,000
payroll for 4,800 direct labor-hours. Listed below is cost driver information used in the product-costing system:
A. $42,160.
B. $43,740.
C. $44,268.
D. $44,432.
E. $45,993.
110.
Shaver Co. manufactures a variety of electric razors for men and women. The company's plant is partially automated. Listed below is
cost driver information used in the product-costing system:
In addition, Shaver expects to spend $514,368 for 8,037 direct labor-hours. Two current product orders had the following requirements:
What is the total manufacturing overhead assigned to the current order for Men's Razors if the firm uses a volume-based plantwide
overhead rate based on the direct labor dollars?
A. $112.50.
B. $150.00.
C. $243.75.
D. $7,200.00.
E. $15,600.00.
111. Shaver Co. manufactures a variety of electric razors for men and women. The company's plant is partially automated. Listed below is
cost driver information used in the product-costing system:
In addition, Shaver expects to spend $514,368 for 8,037 direct labor-hours. Two current product orders had the following requirements:
What is the total manufacturing overhead assigned to the current order for Women's Razors if the firm uses a volume-based plantwide
overhead rate based on the direct labor dollars?
A. $112.50.
B. $150.00.
C. $187.50.
D. $9,600.00.
E. $12,000.00.
112. Shaver Co. manufactures a variety of electric razors for men and women. The company's plant is partially automated. Listed below is
cost driver information used in the product-costing system:
In addition, Shaver expects to spend $514,368 for 8,037 direct labor-hours. Two current product orders had the following requirements:
Using ABC, how much facility-level overhead is assigned to the current order for Men's Razors?
A. $403.00.
B. $310.00.
C. $708.50.
D. $545.00.
E. $936.00.
113. Shaver Co. manufactures a variety of electric razors for men and women. The company's plant is partially automated. Listed below is
cost driver information used in the product-costing system:
In addition, Shaver expects to spend $514,368 for 8,037 direct labor-hours. Two current product orders had the following requirements:
Using ABC, how much product-level overhead is assigned to the current order for Men's Razors?
A. $218.00.
B. $250.70.
C. $331.20.
D. $284.00.
E. $288.00.
($554,400/38,500) x 20 = $288.00
Blocher - Chapter 05 #113
Difficulty: Medium
Learning Objective: 5-3
114. Shaver Co. manufactures a variety of electric razors for men and women. The company's plant is partially automated. Listed below is
cost driver information used in the product-costing system:
In addition, Shaver expects to spend $514,368 for 8,037 direct labor-hours. Two current product orders had the following requirements:
Using ABC, how much product-level overhead is assigned to the current order for Women's Razors?
A. $218.00.
B. $250.70.
C. $331.20.
D. $284.00.
E. $288.00.
($554,400/$38,500) x 23 = $331.20
Blocher - Chapter 05 #114
Difficulty: Medium
Learning Objective: 5-3
115.
Shaver Co. manufactures a variety of electric razors for men and women. The company's plant is partially automated. Listed below is
cost driver information used in the product-costing system:
In addition, Shaver expects to spend $514,368 for 8,037 direct labor-hours. Two current product orders had the following requirements:
Using ABC, how much batch-level overhead is assigned to the current order for Women's Razors based on pounds of raw materials?
A. $6,000.
B. $6,880.
C. $5,332.
D. $8,175.
E. $9,374.
116. Wang Company has established the following overhead cost pools and cost drivers for the month of May:
The following information pertains to the actual consumption of activity resources for two sample jobs completed during May.
A. $615.
B. $600.
C. $575.
D. $550.
E. $500.
117. Wang Company has established the following overhead cost pools and cost drivers for the month of May:
The following information pertains to the actual consumption of activity resources for two sample jobs completed during May.
Using ABC, what is the overhead cost per unit produced for Job M2?
A. $39.
B. $25.
C. $20.
D. $12.
E. $10.
[($30,000/50) x 10] + [($50,000/100) x 10] + [($10,000/10,000) x 1,000] = $12,000
$12,000/1,000 = $12
Blocher - Chapter 05 #117
Difficulty: Medium
Learning Objective: 5-3
118. Orange, Inc. has identified the following cost drivers for its expected overhead costs for the year:
If a volume-based costing system based on direct labor hours to assign overhead is used, the total overhead cost for Product X will be:
A. $1,500.
B. $1,560.
C. $2,000.
D. $2,400.
E. $2,560.
($40,000 + $20,000 + $50,000 + $10,000)/2,000 hours = $60 per direct labor hour
$60 x 40 direct labor hours = $2,400
Blocher - Chapter 05 #118
Difficulty: Easy
Learning Objective: 5-3
119. Orange, Inc. has identified the following cost drivers for its expected overhead costs for the year:
If the activity-based cost drivers are used to allocate overhead cost, the total overhead cost of Product X will be:
A. $1,500.
B. $1,560.
C. $2,000.
D. $2,400.
E. $2,560.
120.
Zeta Company is preparing its annual profit plan. As part of its analysis of the profitability of individual products, the controller
estimates the amount of manufacturing overhead that should be assigned to the individual product lines from the information given
below.
Budgeted material-handling costs are $50,000.
Under a costing system that allocates manufacturing overhead on the basis of direct labor hours, the material-handling cost per wall
mirror is:
A. $0.
B. $500.
C. $1,000.
D. $2,000.
E. $5,000.
$50,000 budgeted material-handling costs/400 total direct labor hours = $125 per direct labor hour
$125 x 200 direct labor hours for wall mirrors = $25,000
$25,000/25 units = $1,000 = material-handling cost per wall mirror.
Blocher - Chapter 05 #120
Difficulty: Medium
Learning Objective: 5-3
121. Zeta Company is preparing its annual profit plan. As part of its analysis of the profitability of individual products, the controller
estimates the amount of manufacturing overhead that should be assigned to the individual product lines from the information given
below.
A. $0.
B. $500.
C. $1,000.
D. $2,000.
E. $5,000.
122. Pasternik Company produces and sells two products, Alpha and Zeta. The following information is available relating to its setup
activities:
With a volume-based costing system that applies overhead based on direct labor hours, the setup cost portion of overhead for each unit is
(rounded to the nearest cent):
A. Option A
B. Option B
C. Option C
D. Option D
E. Option E
General Calculations:
# of Alpha batches = 250/10 = 25
# of Zeta batches = 20,000/500 = 40
Total number of batches = 65 = 25 + 40
Total Set-up Cost = $2,000 x 65 batches = $130,000
Set-up cost per direct labor hour = $130,000/40,000 total direct labor hours = $3.25 per direct labor hour
Alpha:
Set-up cost for Alpha = $3.25 x 1,000 Alpha direct labor hours = $3,250
Total Alpha Units Produced = 250 units
Alpha overhead cost per unit = $3,250/250 units = $13.00
Zeta:
Set-up cost for Zeta = $3.25 x 39,000 Zeta direct labor hours = $126,750
Total Zeta Units Produced = 20,000 units
Zeta overhead cost per unit = $126,750/20,000 = $6.3375 = $6.34 rounded
Blocher - Chapter 05 #122
Difficulty: Hard
Learning Objective: 5-3
123. Pasternik Company produces and sells two products, Alpha and Zeta. The following information is available relating to its setup
activities:
Use of activity-based costing would allocate the following amounts of setup cost to each unit (rounded to the nearest cent):
A. A
B. B
C. C
D. D
General Calculations:
# of Alpha batches = 250/10 = 25
# of Zeta batches = 20,000/500 = 40
Total batches = 65 = 40 + 25
Alpha:
Total Set-up Cost = 25 x $2,000 = $50,000
$50,000/250 units = $200 per unit
Zeta:
Total Set-up Cost = 40 x $2,000 = $80,000
$80,000/20,000 = $4 per unit
Blocher - Chapter 05 #123
Difficulty: Medium
Learning Objective: 5-3
124. Pasternik Company produces and sells two products, Alpha and Zeta. The following information is available relating to its setup
activities:
Assume the cost per setup remains at $2,000 but that the batch size for product Alpha is changed from 10 to 25 units per batch. Using
activity-based costing and a volume-based overhead costing that uses direct labor-hours to assign overhead, the amount of setup cost
applied to each unit of product Alpha would be (rounded to the nearest cent):
A. A
B. B
C. C
D. D
General Calculations:
# of Alpha batches = 250/25 = 10
# of Zeta batches = 20,000/500 = 40
Total number of batches = 50 = 10 + 40
Total Set-up Cost = $2,000 x 50 batches = $100,000
Set-up cost per direct labor hour = $100,000/40,000 total direct labor hours = $2.50 per direct labor hour
Alpha Activity-Based:
Total Set-up Cost = 10 x $2,000 = $20,000
$20,000/250 units = $80 per unit
Alpha Volume-Based:
Set-up cost for Alpha = $2.50 x 1,000 Alpha direct labor hours = $2,500
Total Alpha Units Produced = 250 units
Alpha overhead cost per unit = $2,500/250 units = $10
Blocher - Chapter 05 #124
Difficulty: Hard
Learning Objective: 5-3
125.
Nerrod Company sells its products at $500 per unit, net 30. The firm's gross margin ratio is 40 percent. The firm has estimated the
following operating costs:
Nerrod Company has gathered the following data pertaining to activities it performed for two of its customers:
A. $400.
B. $600.
C. $4,000.
D. $6,300.
E. $6,420.
126. Nerrod Company sells its products at $500 per unit, net 30. The firm's gross margin ratio is 40 percent. The firm has estimated the
following operating costs:
Nerrod Company has gathered the following data pertaining to activities it performed for two of its customers:
A. $800.
B. $920.
C. $2,300.
D. $2,420.
E. $6,300.
127.
Nerrod Company sells its products at $500 per unit, net 30. The firm's gross margin ratio is 40 percent. The firm has estimated the
Nerrod Company has gathered the following data pertaining to activities it performed for two of its customers:
What is Nerrod's total sales-sustaining cost applicable to XBT as a customer?
A. $0.
B. $920.
C. $4,120.
D. $6,300.
E. $6,420.
128. Nerrod Company sells its products at $500 per unit, net 30. The firm's gross margin ratio is 40 percent. The firm has estimated the
following operating costs:
Nerrod Company has gathered the following data pertaining to activities it performed for two of its customers:
A. $50.
B. $480.
C. $4,120.
D. $4,125.
E. $6,300.
A. Always shows that the company with the highest total sales generates the highest net customer profit.
B. Always shows that the company with the lowest total sales generates the lowest net customer profit.
C. Produces the same results as a Pareto analysis.
D. Helps identify actions to improve customer profitability.
Blocher - Chapter 05 #130
Difficulty: Easy
Learning Objective: 5-6
131. Johnson Associates is a catering firm in Tucson, Arizona, with revenue of $4 million. The business began ten years ago as a one-owner
bakery, but has dramatically changed in size and function during the past five years. The four partners foresee the business doubling in
sales revenue within two years, and expect the firm to expand into other services including flowers, furnishings, decorations, and music.
Johnson Associates employs six full-time and ten part-time employees. The four partners also work full-time, each partner managing a
separate business function. The firm currently uses a volume-based costing system installed seven years ago and modified three years
later.
Required:
(1) With just the above information, comment on Johnson Associates changing and future costing system needs.
(2) Is Johnson Associates a probable candidate for an activity-based costing system (ABC)? Why or why not?
Feedback: (1) Johnson Associates has experienced rapid growth, and expects the same rapid growth in the near future. However, growth by
itself would not necessarily create a need for a new cost accounting system. More significant is Johnson's expanding line of service. A costing
system like ABC gives a firm more precise cost information on specific products and services, which would allow Johnson to better control
product and service development, manufacture and marketing. Whatever strategies Johnson Associates choose, they should have a costing
system that reports costs and their causal relationships.
(2) An ABC system can work for most firms, including service type firms like Johnson Associates. Future growth needs a precise cost basis
for direction and control. Many, if not most, of Johnson Associates' costs are activity driven, and the variety of service is noticeably
expanding. The major potential limitations of ABC for Johnson would be the high resource cost and time commitment to develop and install
an appropriate ABC system.
AACSB: Analytic
Blocher - Chapter 05 #131
Difficulty: Easy
Emerging Issues: Service
Emerging Issues: Strategy
Learning Objective: 5-1
132. Two students in a cost accounting class were arguing about the need to gather good unit cost information for manufacturing. One
student, Travis, maintained that a firm producing and selling large quantities of relatively few products would have no need for an ABC
system, since an ABC system is usually more expensive to implement than a volume-based system. Alicia countered that even firms with
high-volume homogeneous products could benefit from a cost management technique like activity-based costing (ABC).
Required: Choose sides in this discussion and present justifications for your choice.
Feedback: ABC is most useful in firms making a wide variety of products, because ABC tracks costs to their causes, and generates more
precise cost bases for individual products and services than a volume-based costing system usually does. This precision facilitates strategic
analyses. Alicia would have to agree with Travis on the higher cost in resources and time to use ABC, but could argue for a favorable
benefit/cost ratio that most firms experience when ABC is correctly designed and implemented.
AACSB: Analytic
Blocher - Chapter 05 #132
Difficulty: Easy
Emerging Issues: Strategy
Learning Objective: 5-2
133. The controller for Alabama Cooking Oil Co. established the following overhead cost pools and cost drivers:
Required:
(1) What is the overhead rate per machine hour if the number of machine hours is used as a single cost driver under traditional costing
system? (Round your intermediate calculation to the nearest cent and final answer to the nearest whole dollar.)
(2) Using volume-based costing, how much overhead is assigned to the order based on machine hours as a single cost driver? (3) Using
ABC costing, how much total overhead is assigned to the order?
Feedback: (1)
(3)
134. Blackwelder Co. manufactures a variety of electric razors used by both men and women. The company's plant is partially automated.
The company uses an activity-based cost system. Listed below is cost driver information used in the product-costing system:
Required:
(1) Using ABC costing, how much overhead is assigned to the order for men's razors?
(2) Using ABC costing, how much overhead is assigned to the order for women's razors?
Feedback:
135. Classify each of the following costs as unit-level (U), batch-level (B), product-level (P), or facility-level (F) costs and identify an
appropriate example of a possible cost driver for each item:
(1) Parts administration
(2) Production scheduling
(3) Materials handling
(4) Machine operations
(5) Personnel administration and training
(6) Plant security
(7) Machine setups
(8) Engineering changes
(9) Product design
(10) Rent for factory plant
136. Pairing Company has the following cost drivers identified as A through F for determining product manufacturing overhead costs.
(A) Number of pieces of equipment
(B) Number of direct material purchase orders
(C) Number of production runs
(D) Square feet of warehouse space
(E) Number of machine hours
(F) Square feet of factory space
In the space provided next to each of the following activity cost pool, indicate the most appropriate cost driver for the cost pools.
137. Altima Company uses an overhead costing system based on direct labor hours for its two products X and Y. The company is considering
adopting an activity-based costing system, and collects the following information for the month of October.
Required:
(1) Compute the unit manufacturing costs of each product under a volume-based costing system based on direct labor cost.
(2) Compute the unit manufacturing costs of each product under the activity-based costing system.
Feedback: 1.
2.
Note that the direct labor based costing system overcosted the high volume product X and undercosted the low volume product Y.
Blocher - Chapter 05 #137
Difficulty: Hard
Learning Objective: 5-3
138. Castenet Company uses a volume-based costing system that applies overhead cost based on direct labor hours at $250 per direct labor
hour.
The company is considering adopting an activity-based costing system with the following data:
The two jobs processed in the month of June had the following characteristics:
Required:
(1) Compute the unit manufacturing costs of each job under the firm's current volume-based costing system.
(2) Compute the unit manufacturing costs of each job under the activity-based costing system.
(3) (a) Compare the unit manufacturing costs for Jobs A and B computed in requirements 1 and 2.
Why do the two cost systems differ in their total cost for each job?
(b) Why might these differences be important to the Company?
Feedback: (1) Per unit manufacturing costs under the volume-based costing system: $1,400 for Job A and $800 for Job B.
(2) Per unit manufacturing costs under the ABC costing system.
(3) (a) The volume-based cost system ignores these differences while the ABC costing system assigns overhead costs based on usages of each
of the activity areas. The two cost systems differ in their job costs because the jobs differ in the way they use each of five activity areas and
activity areas differs in their factory overhead cost drivers.
(b)These differences will affect the accuracy of job costs for A and B. Therefore, it will affect the company's pricing, product mix, and
product design decisions.
Blocher - Chapter 05 #138
Difficulty: Medium
Learning Objective: 5-3
139. Demski Company has used a two-stage cost allocation system for many years. In the first stage, plant overhead costs are allocated to two
production departments, P1 and P2, based on machine hours. In the second stage, Demski uses direct labor hours to assign overhead
costs from the production departments to individual products A and B.
Budgeted factory overhead costs for the year are $300,000. Both the budgeted and actual machine hours in P1 and P2 are 12,000 and
28,000 hours, respectively.
After attending a seminar to learn the potential benefits of adopting an activity-based costing system (ABC), Ted Demski, the president
of Demski Company, is considering implementing an ABC system. Upon his request, the controller at Demski Company has compiled
the following information for analysis:
Demski manufactures two types of product, A and B, for which the following information is available:
Required:
(1) Determine the unit cost for each of the two products using the traditional two-stage allocation method. Round calculations to 2
decimal places.
(2) Determine the unit cost for each of the two products using the proposed ABC system.
(3) (a)Compare the unit manufacturing costs for product A and product B computed in requirements 1 and 2. Why do two the cost
systems differ in their total cost for each product?
(b) Why might these differences be important to the Demski Company?
Feedback: (1) Unit cost for each of two products using the traditional two-stage allocation method:
(2) Unit cost for each product using the ABC system.
(3) (a) Under the volume based costing, low-volume product A was undercosted because the products differ in the way they use each of four
activity areas and activity areas differ in their factory overhead cost drivers. (b) These differences will affect the accuracy of product costs for
A and B. Therefore, it will affect Demski Company's pricing, product mix, and product design decisions.
Blocher - Chapter 05 #139
Difficulty: Medium
Learning Objective: 5-3
140. Swenson Company manufactures 4,000 units of Deluxe Product and 20,000 units of Regular Product each year. The company currently
uses direct labor-hours to assign overhead cost to products. The pre-determined overhead rate is:
Suppose, however, that factory overhead costs are actually caused by the five activities listed below:
Required: Using the activity-based costing method to calculate unit costs of Deluxe and Regular products, and compare them with the
current direct labor hours-based costing system.
Note that the adoption of activity-based costing usually results in a shift of overhead costs from high volume to low volume products. The per
unit costs of the low volume products increase and the per unit costs of the high volume products decrease. The effects are not symmetrical --
there is a bigger dollar effect on the per unit costs of the low volume products.
Blocher - Chapter 05 #140
Difficulty: Medium
Learning Objective: 5-3
141. Moss Manufacturing has just completed a major change in its quality control (QC) process. Previously, products had been reviewed by
QC inspectors at the end of each major process, and the company's ten QC inspectors were charged as direct labor to the operation or
job. In an effort to improve efficiency and quality, a computerized video QC system was purchased for $250,000. The system consists of
a minicomputer, 15 video cameras, other peripheral hardware, and software.
The new system used cameras stationed by QC engineers at key points in the production process. Each time an operation changes or
there is a new operation, the cameras are moved, and a new master picture is loaded into the computer by a QC engineer. The camera
takes pictures of the units in process, and the computer compares them to the picture of a "good" unit. Any differences are sent to a QC
engineer who removes the bad units and discusses the flaws with the production supervisors. The new system has replaced the ten QC
inspectors with two QC engineers.
The operating costs of the new QC system, including the salaries of the QC engineers, have been included as factory overhead in
calculating the company's volume-based factory overhead rate which is based on direct labor dollars.
The company's president is confused. His vice president of production has told him how efficient the new system is, yet there is a large
increase in the factory overhead rate. The computation of the rate before and after automation is shown below.
"Three hundred percent, "lamented the president, "How can we compete with such a high factory overhead rate?"
Required:
(1) (a) Define factory overhead, and cite three examples of typical costs that would be included in factory overhead.
(b) Explain why companies develop factory overhead rates.
(2) Explain why the increase in the overhead rate should not have a negative financial impact on Moss Manufacturing.
(3) Explain, in the greatest detail possible, how Moss Manufacturing could change its overhead accounting system to eliminate confusion
over product costs.
(4) Discuss how an activity-based costing system might benefit Moss Manufacturing.
Feedback: (1) (a) Factory overhead costs include all indirect costs (all production costs except direct material and direct labor). These costs
cannot be practically or economically traced to end products and, therefore, must be assigned by some allocation method. Typical factory
overhead costs include indirect labor, i.e., lift-truck driver's wages, maintenance and inspection labor, engineering labor, and supervisors;
other indirect factory costs, i.e., building maintenance, machine and tool maintenance, property taxes, property insurance, pension costs,
depreciation on plant and equipment, rent expense, and utility expense.
(b) Companies develop factory overhead rates to facilitate the costing of products as they are completed and shipped, rather than waiting until
actual costs are accumulated for the period of production.
(2) The overhead rate increase should not have a negative impact on Moss Manufacturing because the increase in indirect costs was offset by
a decrease in direct labor.
(3) Rather than using a universal volume-based overhead rate, Moss Manufacturing could implement separate overhead pools and allocate the
overheads to the activities using the appropriate pools. Examples are as follows: Separate costs into departmental overhead accounts (or other
relevant pools), with one account for each production and service department. Each department would allocate its overhead to products on the
basis that best reflects the use of these overhead services. Individual machines (or other more relevant allocations bases) could be treated as
separate cost centers with the machine costs collected and charged to the products using the machine(s).
(4) An activity-based costing system might benefit Moss Manufacturing because it differentiates costs between value adding and non-value
adding activities; costs products according to the activities involved in the production process; considers all organizational expenses as
variable.
Blocher - Chapter 05 #141
Difficulty: Medium
Learning Objective: 5-2
142. The controller for Ocean Sailboats Inc., a company which uses an automated process to make sailboats, established the following
overhead cost pools and cost drivers:
Required:
(1) What is the overhead rate per machine hour if the number of machine hours is used as a single cost driver under traditional costing
system? (2) Utilizing traditional costing, how much overhead is assigned to the order based on machine hours as a single cost driver? (3)
Utilizing ABC, how much total overhead is assigned to the order?
Feedback:
143. Skateline Inc. designs and manufactures roller skates. The following data pertain to two of its major customers: FantasticSkates and
SkateToday.
Required: Compare the net proceeds to Skateline Inc. 30 days after sale (rounded to nearest dollar for each step where applicable).
Feedback:
144. Certo Health Products was formed two years ago to produce and distribute a newly-patented protein supplement. Two variations of the
original supplement have since been developed and introduced for general sale. The three products are processed in essentially the same
way, but Ann Marshall, the owner of Certo, anticipates that a half-dozen new products will be developed for sale in the next two years.
These products will not be variations of the patented supplement, and will require a different production process other than the one
currently used. Ann has asked you to review the current use of a single volume-based rate and explain the arguments for using
departmental rates with activity-based drivers.
A single volume-based rate is appropriate in situations where product are processed in similar ways and departments, and where little
variation exists in the "causes" of costs. Once multiple variations of production processes are required, departmental rates probably will
provide more accurate cost reporting. Different processes (departments) cause different costs to happen for different reasons. A simple
example is the manufacture of writing instruments. Pencils require one set of processes, ballpoint pens a different set, and highlighting pens
another set. Within the production processes of each type of writing instrument, different departments have costs "caused" by different
factors, e.g., labor-intensive vs. machine-intensive departments. By using activity as a basis for allocation of overhead, a clearer distinction is
made between volume-related costs and capacity-related costs. This distinction provides the basis for selection of correct cost drivers for
different products in different departments, which results in more accurate cost data for product pricing and strategic operational decisions.
Blocher - Chapter 05 #144
Difficulty: Easy
Learning Objective: 5-1
145. Cost Pools and Cost Drivers Based on a recent study of its manufacturing operations Johnston Manufacturing Corporation has
identified six resource consumption cost drivers. These cost drivers and their budgeted activity levels for the coming year are:
The firm has budgeted the following costs for the year:
With the exception of the factory space cost pool, which uses machine-hours as the activity consumption cost driver, other cost pools
have identical resource and activity consumption cost drivers.
Required:
(1) Identify the most appropriate activity cost pool for each of the cost items and cost driver for each activity cost pool you identified.
(2) Johnston has received a request to quote the price for 4,000 units of a new product. The production will require 100 engineering-
hours and 4,250 machine-hours. What is the manufacturing overhead per unit the firm should use in determining the price?
Feedback:
Blocher - Chapter 05 #145
Difficulty: Hard
Learning Objective: 5-2
146. Volume-Based Costing Versus ABC: Gorden Company produces a variety of electronic products. One of its plants produces two laser
printers, Speedy and Deluxe. At the beginning of 2010, the following data were prepared for this plant:
The unit overhead cost is calculated using the predetermined overhead application rate based on direct labor-hours.
Upon examining the data, the marketing manager was particularly impressed with the per-unit profitability of the Deluxe printer and
suggested that more emphasis be placed on producing and selling this product. The plant supervisor objected to this strategy, arguing that
the Deluxe model required a very delicate manufacturing process. The supervisor believed that the cost of the Deluxe printer was likely
to be much higher than reported.
The controller suggests an activity-based costing system and provides the following budget data pertaining to the period:
Feedback:
(3) Using the activity-based costing, a much different picture on profitability of the Deluxe and Speedy models emerges. The Speedy model is
actually more profitable than the Deluxe model. The revised cost data suggests that shifting the emphasis to the Deluxe model may very well
be a mistake. The Deluxe printer is a much heavier user of overhead resources as can be seen in the table below that compares uses of
overhead.
(4) The ABC method is likely to provide Gordon Company a more accurate product cost picture. It also directs the management's attention to
the high volume, more profitable Speedy printers. Given the low profit margin of the Deluxe, the firm may want to investigate the feasibility
of raising the price, the possibility of reducing product cost, or both.
AACSB: Analytic
Blocher - Chapter 05 #146
Difficulty: Medium
Emerging Issues: Strategy
Learning Objective: 5-3
147. Customer Profitability Analysis: Boston Depot sells office supplies to area corporations and organizations. Tom Delayne, founder and
CEO, has been disappointed with the operating results and the profit margin for the last two years. Business forms are mostly a
"commodity" business with low profit margins. To increase profit margins and gain competitive advantages, Delayne introduced "Desk-
Top Delivery" service. The business seems to be as busy as ever. Yet, the operating income has been declining. To help identify the root
cause of declining profits, he decided to analyze the profitability of two of the firm's major customers: Omega International (OI) and City
of Albion (CA).
According to the customer profitability analysis that Boston Depot conducts regularly, Boston Depot has the same amount of total sales
with both OI and CA. However, the firm earns a higher gross margin and gross margin ratio from CA than those from the sales to OI, as
demonstrated here:
Boston Depot adds a flat l7.5 percent to all sales for expenses incurred in such activities as handling customers' requests, pick-packing,
order delivery, warehousing, and data entry. However, not all customers require the same level of services. Operation Manager, Jamie
Steel, points out that CA has been a much heavier service user than OI. She shows the following data to support her belief:
Controller Rod Jay has been investigating ways to determine the costs of performing various activities. He summarized his findings:
Steel points out that activities cost money. Two customers who request different service activities most likely are not costing the firm the
same.
Required:
(1) Using activity-based costing, compute the charges per unit of service activities.
(2) Using activity-based costing, compute the total distribution costs for each of the customers.
(3) Is the City of Albion a more profitable customer?
(4) Is Omega International a better customer for Boston Depot?
The above profitability analysis indicates that, under activity-based costing, Omega International, not City of Albion, is more profitable to
Boston Depot. The apparent higher gross margin percentage of the City of Albion relative to the Omega International was the result of not
recognizing differences in the service activities requested by different customers under the firm's existing costing system.
City of Albion is a much heavier user of services provided by Boston Depot. Although both customers had the same total sales, City of
Albion made more desktop delivery requests in smaller quantities and maintained more inventory by Boston Depot.
(4) The answer depends on the competitive strategy of the firm. The gross profit margin ratios show that Omega is the better customer of the
two. Omega does not use much of the desktop delivery service Boston offers. Most likely Omega is a buyer of "commodity" items and does
not need the convenience of desktop delivery. However, Boston's pricing is likely to have incorporated the average cost of desktop deliveries.
If Omega realizes that it is paying for services not used, it may buy the commodity it needs elsewhere, unless Boston lowers the price to
Omega.
All custom-printed business forms by different suppliers are likely to be the same. Delayne wanted to "differentiate" its forms from those of
competitors' by offering desktop delivery services. In the long-run, Omega is not likely to be a customer staying with Boston Depot. Boston
Depot needs to be prepared to lower the price to Omega.
If the firm desires to compete on a differentiation strategy it needs to price accordingly. Boston Depot needs to raise prices to City of Albion.
If City of Albion is willing to pay a higher price for the convenience of desktop delivery, it is the kind of customer that Delayne wants.
Blocher - Chapter 05 #147
Difficulty: Hard
Emerging Issues: Strategy
Learning Objective: 5-6
148.
Customer Profitability Analysis Spring Company collected the following data pertaining to its activities with selected customers.
Spring Company mails monthly statements on or before the first day of each month. HS pays all of its account payables within the cash
discount periods. Baldwin does not take advantage of cash discounts. However, it pays its accounts on the specified due dates. Adventix
pays half of its accounts on the date that these accounts are due and pays the remainder at the end of the following month. Joan
Lieberman, the controller of Spring Company, has estimated that the cost of working capital is approximately 2 percent per month.
Lieberman also gathered the following cost data:
Required: Prepare and interpret a customer profitability analysis for Spring Company. How does it help Spring Company become more
competitive and profitable?