Chapter 16 Testbank Solution Manual Management Accounting

Chapter 16 Testbank
Student: ___________________________________________________________________________
1. Which statement is incorrect?
A. Total quality management (TQM) relates only to the manufacturing processes.
B. TQM is customer-driven.
C. TQM focuses on the flow of activity across the organisation.
D. Continuous improvement is a key element of TQM.
2. Which of the following is not a type of cost of quality?
A. External failure cost
B. Productive inefficiency cost
C. Prevention cost
D. Appraisal cost
3. Internal failure costs refer to costs incurred:
A. in determining whether defects exist.
B. because defective products or services are delivered to customers.
C. in determining customer demand.
D. when defective products or services are detected before leaving the business.
4. External failure costs refer to costs incurred:
A. in preventing defects.
B. in determining whether defects exist.
C. because defective products or services are delivered to customers.
5. Appraisal costs refer to costs incurred:
D. in determining customer demand.
6. Prevention costs refer to costs incurred:

7. Quality of conformance refers to:
A. the degree to which the product meets its design specifications.
B. the extent to which the actual product is designed for its intended use.
C. an ideal that can never be attained.
D. a cost control that is achievable.
8.
In order to have a high-quality finished product:

A. appraisal costs must exceed external failure costs.
B. the product's design specifications must meet customers' expectations.
C. the product must meet the standards of its design.
D.
the product's design specifications must meet customers' expectations AND the product must meet the standards of its design.
9. Which of the following statements is/are correct?
A. Quality of design and quality of conformance are both important concepts in the measurement of excellence.
B. Quality of design is the degree to which a product meets design specifications.
C. Quality of conformance is the degree to which a product conforms to customer expectations.
D. All of the given answers
10. Which of the following statements is/are false?
A. Cost of quality reports analyse quality costs as a percentage of total sales.
B. An increase in quality costs indicates deterioration in quality performance.
C. There can be interactions between the quality costs.
D. The traditional view of quality costs is that total quality costs can be minimised by driving the defect rate down to the
acceptable quality level.
11. A series of pictures that shows the flow of activities that make up a process is called:
A. Pareto analysis.
B. a process flow chart.
C. a fishbone diagram.
D. an Ishikawa diagram.
12. Appraisal costs in quality programs are incurred:
A. to value the fixed assets of the firm.
B. to detect which production units do not conform to specifications.
C. to value ending work in process.
D. by external appraisers to value the costs of external failures.

13. Which of the following is not a characteristic of total quality management?
A. A focus primarily on internal customers
B. All members of the organisation are responsible for quality measures.
C. Statistical process control
D. Continuous improvement measures
14.
The following are the expected quality costs for a firm for a selected period.

A. $32 000
B. $29 000
C. $31 000
D. $33 000

15.

A. $10 500
B. $9000
C. $11 000
D. $8500

16.

A. $5000
B. $7500
C. $8500
D. $9500

17.

A. $33 000
B. $37 500
C. $42 000
D. $37 000

18. Consider a situation where an activity-based costing system is in use rather than a traditional volume-based costing
system. Which of the following statements is/are true?
A. The use of activity-based costing eliminates the need to consider qualitative factors.
B. When an activity-based costing system is used, facility level costs will have to be analysed differently to the way they
would be under a traditional volume-based costing system.
C. When an activity-based costing system is used, unit level costs will have to be analysed differently to the way they
D. None of the given answers
19. Which of the following are modern approaches to managing costs?
A. Life cycle costing
B. Target costing
C. Both life cycle costing and target costing
D. Neither life cycle costing nor target costing
20. Which of the following statements is/are true in relation to activity-based management (ABM)?
i. ABM is primarily concerned with customer value.
ii. Activity-based costing is the primary source of data for ABM.
iii. ABM is primarily concerned with the control of inputs.
A. i and ii
B. i and iii
C. ii and iii

21. Which of the following activities are non-value-added activities?
i. Inspect work in process
ii. Process sales orders
iii. Repair drilling machine
iv. Move raw material to the work station
A. i, iii and iv
B. i, ii and iv
C. i, ii and iii
D. ii, iii and iv
22. Which of the following activities are value-added activities?
i. Preventive maintenance
ii. Repairs to machinery
iii. Move work-in-process inventory between machines
iv. Process receivables
A. i and ii
B. iii and iv
C. i and iv
D. ii and iv
i. Determining the cause of non-value-added activities requires cost driver analysis.
ii. Building activities into processes will quickly identify the causes of non-value-added activities.
iii. Identifying root cause cost drivers is sufficient to enable non-value-added activities to be eliminated.
A. i and ii
B. ii and iii
C. i and iii
24. Which of the following are possible root-cause cost drivers?
i. Complexity
ii. Defects produced
iii. Plant layout
iv. Inadequate employee training
A. i, ii and iii
B. ii, iii and iv
C. i, iii and iv
25. Which of the following is a possible cause of a firm's reluctance to implement activity-based management (ABM)?
i Employee resistance to change.
ii. Lack of understanding of the benefits of ABM.
iii. Significant resources required.
iv. Focus is on value-added activities.
A. i, ii and iii
B. i, ii and iv
C. ii, iii and iv
D. i, iii and iv

26. Which of the following statements about re-engineering is/are true?
i. Re-engineering is the complete redesign of a process in an attempt to find new creative ways to accomplish objectivity.
ii. Re-engineering involves more of a 'giant leap' than the concept of activity-based management.
iii. Re-engineering may entail high risks.
A. i and ii
B. i and iii
C. ii and iii
27. The following steps are required to implement business process re-engineering.
i. Establish goals
ii. Reorganise work flow
iii. Prepare a business process map
iv. Implementation
What is the correct order for these steps?
A. i, ii, iii and iv
B. i, iii, ii and iv
C. iii, i, ii and iv
D. ii, iii, i and iv
28. Which of the following do traditional costing systems ignore?
i. Production costs
ii. Design costs
iii. Development costs
iv. Marketing and customer service costs
A. i, ii and iii
B. i, ii and iv
C. ii, iii and iv
D. i, iii and iv
29. If the target selling price is $120 and the target profit margin is a 40 per cent mark-up on cost, what is the target cost?
A. $48
B. $72
C. $85.70
D. $34.30
30. Carwell has introduced a new product with a target price of $150 and a target cost of $90. What is the target
percentage margin on sales?
A. 20%
B. 33.3%
C. 40%
D. 50%
31. Orwell is about to introduce a new product and has established a target cost of $144 and a target margin on sales of
40 per cent. What is the target price?
A. $200
B. $225
C. $240
D. $280

32. Cartel Ltd has introduced a new product with a target price of $240 and a profit requirement of 33.3 per cent on sales.
What is the target cost?
A. $120
B. $160
C. $180
D. $200
33. Beaufort Ltd is introducing a new range of products. It has established that the target selling prices of the three
products are $120, $150 and $210. Beaufort requires a profit mark-up on cost of 33.3 per cent for all its products. What
percentage of the target prices is the target cost in each case?
A. 50%
B. 60%
C. 66.7%
D. 75%
34. In the process of target costing, where is the concentration of effort required to have the greatest impact on cost
savings?
i. Product design
ii. Process design
iii. Production costs
iv. After sales costs
A. i and ii
B. ii and iii
C. i and iii
D. ii and iv
35. The following four tasks take place in the concept known as target costing.
i. Value engineering
ii. Establish a target price
iii. Establish a target cost
iv. Establish a target profit
Which of the following correctly depicts the sequence of these tasks?
A. iii, i, iv and ii
B. ii, iv, iii and i
C. ii, iii, i and iv
D. iii, ii, i and iv
36. When we consider the life cycle sequence of a product, the majority of costs for a typical product have been
committed by the end of:
A. product planning.
B. design and development.
C. customer support.
D. production.

37. Which of the following are considerations in determining a target selling price?
i. Customer expectations
ii. Competitors' actions
iii. Product cost
iv. Strategic objectives
A. i, ii and iii
B. ii, iii and iv
C. i, iii and iv
D. i, ii and iv
38. Given the current design and resources, the cost that a new product could be manufactured for, including upstream
and downstream costs, is known as:
A. target cost.
B. allowable cost.
C. current cost.
D. strategic cost.
39. A systematic approach in analysing the product and process design, with the aim of eliminating any non-value-added
elements, to achieve the target cost is known as:
A. component level target costs.
B. value engineering.
C. strategic cost reduction.
D. cost reduction objective.
40. Which of the following are key features of target costing?
i. Cross functionality
ii. Market price driven
iii. Focus on customer value
iv. Based on life cycle management
A. i, ii and iii
B. i, iii and iv
C. i, ii and iv
41. Which of the following time drivers contribute to non-value-added activities?
i. Poor quality
ii. Efficient inventory management
iii. Bottlenecks in production
iv. Poorly structured delivery processes
A. i, ii and iii
B. i, iii and iv
C. i, ii and iv

42. What management approaches might be used to overcome the problem of poorly structured production processes?
i. Value analysis to identify and remove non-value-added activities.
ii. Implement continuous improvement processes.
iii. Process re-engineering.
A. i
B. i and iii
C. iii
43. The modern management tool that focuses on restrictions that limit a firm's ability to maximise long-run profit is
commonly known as:
A. linear progression.
B. constraint manipulation.
C. theory of constraints.
D. game theory.
44. The theory of constraints focuses on:
A. idle time.
B. poor quality.
C. cost reduction.
D. bottlenecks.
45. Which of the following methods may be used to overcome bottlenecks?
i. Increase staff training
ii. Increase overtime
iii. Reduce work in process
iv. Acquire additional plant and equipment
A. i, ii and iii
B. ii, iii and iv
C. i, iii and iv
D. i, ii and iv
46. Throughput accounting uses which of the following measures of the effects of bottlenecks?
i. Financial measures of inventory
ii. Financial measures of throughput
iii. Non-financial measures of throughput
iv. Operating expenses
A. i, ii and iii
B. ii, iii and iv
C. i, iii and iv
D. i, ii and iv
47. When throughput increases with no change in operating expenses or inventory levels, then:
A. profit and return on investment will increase and cash flow will decrease.
B. profit will increase and return on investment and cash flow will decrease.
C. profit, return on investment and cash flow will increase.
D. profit and cash flow will increase and return on investment will decrease.

48. When inventory decreases with no change in throughput or operating expenses, then:
A. profit will increase and return on investment and cash flow will decrease.
B. profit, return on investment and cash flow will increase.
C. profit and cash flow will increase and return on investment will decrease.
D. profit, return on investment and cash flow will decrease.
49. The removal of bottlenecks has which of the following benefits?
i. Increased customer value
ii. Reduced costs
iii. Improved quality
iv. Increased profitability
A. ii, iii and iv
B. i, iii and iv
C. i, ii and iv
50. Which of the following statements is consistent with target costing?
A. It does not consider market share or sales volume.
B. Market prices are used to determine product costs.
C. Product design has little or no regard for the long-run manufacturing costs.
D. It is described as a reactive costing strategy, rather than a proactive costing strategy.
51. Which of the following statements is not specifically related to product life cycle costing?
A. It considers that costs in areas such as design, marketing and customer service should be included in the true cost of
the product.
B. Costs are accumulated in responsibility centres, with managers of each centre being accountable for costs, revenues
or return on investment.
C. Cost is more effectively managed by more attention to the design of the process rather than effort spent on correcting
an out-of-control process.
D. The amount of cash generated depends in part on the stage of the product life cycle.
52. From a customer perspective, a value-added cost is one:
A. which increases the value of the product to the customer.
B. which the firm has determined is essential in the production of the product.
C. on which the firm must focus.
D. which increases the value of the product to the customer and the customer is prepared to pay for the added value.

53.
From the following list of costs for a kitchen manufacturer, determine the amount of value-added cost.

A. $57 000
B. $54 000
C. $58 000
D. $59 000

54.
From the following list of costs, determine the amount of non-value-added cost.

A. $17 000
B. $18 000
C. $16 000
D. $8000

55. There are certain features of traditional management accounting. Which of the following is/are not a focus of life cycle
costing?
A. Annual profit calculations
B. Focus on production costs only
C. Calculation of cost variances
D. Annual profit calculations AND focus on production costs only

56. Which of the following statements best describes performance measurement in line with continuous improvement?
A. Firms select relevant performance measures.
B. The measure will keep changing over time.
C. The measure will keep improving over time.
D. The firm targets an area to improve, moving the target until the desired outcome is achieved. The firm is then likely to
target another area for improvement.
57.
Assume a production process that typically moves the following number of products through its five processes:

Assuming there is room for improvement in all processes, in what order of processes would the firm apply the theory of constraints to
remove the bottlenecks?

A. 4 first, and then any order
B. 2, 1, 3, 5, 4
C. Work must be carried out in order of the physical flow of activities, i.e. 1, 2, 3, 4, 5
D. 4, 5, 3, 1, 2

58.
Which of the following stages are considered in a product's life cycle?
i. Preliminary design
ii. Product pricing
iii. Product decline

A. i and ii
B. i and iii
C. ii and iii
D. i

59. Assuming one answer only can be chosen, which of the following is a non-value-added activity for a manufacturing
firm?
A. Machining a metal plate in the factory.
B. Packing finished product into cartons for delivery.
C. Moving partly finished production to storage.
D. Inserting a warranty-card and instruction booklet into the boxed product.
60. Six sigma refers to:
A. business improvement methodology that involves rigours data analysis.
B. the amount of quality deviation that is considered acceptable in total quality management.
C. the formal quality accreditation relating to a series of standards recognised by an international quality setting agency.
D. the six key features of total quality management.

61. Lazy Linda Kitchen Appliances has just begun the development of a new energy-saving, voice-activated toaster. The
accountant, Linda Rest, is preparing a life cycle budget. Which of the following costs should be included?
i. The salaries of the designers dedicated to the design of the new toaster.
ii. The committed costs associated with the acquisition of a new machine that manufacturers the voice recognition
component of the toaster.
iii. The cost of producing the new toasters.
iv. The costs associated with establishing a distribution network for the new product.
A. i, ii and iii
B. i, iii and iv
C. ii and iii
D. All of these costs should be included.
62.
Lazy Linda Kitchen Appliances manufactures small kitchen appliances such as toasters and blenders. Last month Lazy Linda recorded
the following quality costs:

Lazy Linda's total external failure cost was:

A. $6000.
B. $9000.
C. $12 000.
D. $15 000.

63.
Lazy Linda's total appraisal cost was:

A. $5000.
B. $9500.
C. $12 000.
D. $18 000.

64.

Lazy Linda's total prevention cost was:

A. $5000.
B. $11 000.
C. $14 000.
D. $15 500.

65.

Lazy Linda's total internal failure cost was:

A. $9500.
B. $7500.
C. $5000.
D. $2000.

66. Lazy Linda Ltd manufactures small kitchen appliances. One of the non-value added activities identified by the
production manager is 'reworking the electrical component in a toaster'. Which of the following is a likely root cause cost
driver?
A. The number of products requiring rework.
B. The quality of the completed toaster.
C. The quality of the electrical wiring purchased from suppliers.
D. Idle labour hours.
67. Three processes are involved in the manufacturing of Product X. First, the components go through the Machining
Process, then the Assembling Process, and finally the Packaging Process. The hourly production capacity of the three
processes is 500 units, 600 units and 800 units respectively. How many units of Product X can be produced in one hour?
A. 500 units
B. 600 units
C. 800 units
D. 633 units

68. Three processes are involved in the manufacturing of Chemical Z. First, the raw mixture goes through the Mixing
Process, then the Heating Process, and finally the Bottling Process. The hourly production capacity of the three processes
is 400 units, 600 units and 400 units respectively. Assume that a recent process improvement has resulted in a 20 per
cent increase in the capacity of the Bottling Process. This process improvement will:
A. increase the production of Chemical Z by 80 units per hour.
B. increase the production of Chemical Z by 120 units per hour.
C. increase the production of Chemical Z by 200 units.
D. have no effect on the production level per hour.
69. Which of the following statements about throughput accounting is false?
A. Throughput accounting is criticised for having a short-term focus.
B. Under throughput accounting, operating expenses are not relevant.
C. Throughput accounting measures the financial effects of bottlenecks.
D. Under throughput accounting, inventory is considered undesirable..
70. When monitored, activity-based performance measures can provide managers with feedback on their:
A. budgets.
B. targets.
C. performance.
D. initiatives.
71. A value-added activity provides essential value to:
A. customers and management.
B. management and employees.
C. customers and the functioning of the business.
D. management and the functioning of the business.
72. The underlying factors that trigger costs to be incurred when an activity is performed are known as:
A. activity trigger costs.
B. root cause.
C. cost driver analysis.
D. root cause cost driver.
73. The cost reduction objective is the difference between:
A. the target cost and the current cost.
B. the target profit and the target cost.
C. the target selling price and the current cost.
D. the current cost and the target profit.
74. When management uses financial measures to determine the effect of bottlenecks and operational decisions, they are
likely to be using:
A. activity-based costing.
B. throughput accounting.
C. total quality management.
D. financial evaluation.

75. When a manufacturer incurs costs to determine whether defects exist in their products, these costs are known as:
A. internal failure costs.
B. external failure costs.
C. appraisal costs.
D. prevention costs.
76. Identify and describe the major differences between the traditional approach to cost control and modern cost
management.

77. Business Process Re-engineering (BPR) focuses on the processes that are essential to achieving the company's
business objectives and strategies. As each process is identified the four major steps used in BPR are applied. Describe
these four major steps.

78. Describe how target costing assists management in determining the life cycle cost of a product and the approach
management would take if the planned level of sales could not be achieved at the cost-plus price.

79. Define the term 'bottleneck' and describe how the application of the 'theory of constraints' can assist management in
production.

80. Discuss how life cycle budgeting can provide useful information for managing and reducing costs. Provide and explain
a graph to support your discussion.

81. Business process re-engineering is a radical approach to managing costs that involves a complete rethink of the
processes undertaken, to achieve major improvements in cost and quality.
True False
82. When a company uses an activity-based management system to reduce costs, the first step in the process is to
determine the real causes of the costs.
True False
83. Quality costs―failure, prevention and appraisal―can be graphed to determine the acceptable quality level of a firm.
True False
84. One way to manage throughput efficiently is to use a theory of constraints approach in an attempt to identify and
remove bottlenecks in the system of production.
True False
85. If a company has quality accreditation (e.g. ISO 9000), the company is then known to practice total quality
management.
True False
86. One approach to cost reduction is to undertake value engineering where an analysis of design and production takes
place with an aim to identify and eliminate non-value-adding activities.
True False
87. Cost drivers and a process perspective, are two of the main differences between modern and traditional approaches
to cost management.
True False
88. A target selling price can be calculated by deducting the target margin from the target cost.
True False

89. If a firm needs to identify the root cause cost drivers of activities, the firm needs to undertake a thorough cost driver
analysis.
True False
90. Activity-based management uses information from process costing to analyse activities, cost drivers and performance
that lead to improved customer value and profitability.
True False
91. Customer value is measured by the customer and the value the customer places on particular aspects of a product.
True False
92. To reduce cost and improve quality in the service industry it is important to have a quality culture.
True False

Chapter 16 Testbank Key

1. Which statement is incorrect?
A. Total quality management (TQM) relates only to the manufacturing processes.
B. TQM is customer-driven.
C. TQM focuses on the flow of activity across the organisation.
D. Continuous improvement is a key element of TQM.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 16.09 Describe how quality can be managed through total quality management (TQM), Six Sigma methodologies and quality
accreditation
2. Which of the following is not a type of cost of quality?
A. External failure cost
B. Productive inefficiency cost
C. Prevention cost
D. Appraisal cost
AACSB: Reflective
Difficulty: Easy
Learning Objective: 16.08 Describe the four types of quality costs, and prepare and interpret cost of quality reports
3. Internal failure costs refer to costs incurred:
A. in determining whether defects exist.
AACSB: Reflective
Difficulty: Easy
4. External failure costs refer to costs incurred:
AACSB: Reflective
Difficulty: Easy
5. Appraisal costs refer to costs incurred:
D. in determining customer demand.
AACSB: Reflective
Difficulty: Easy
6. Prevention costs refer to costs incurred:
AACSB: Reflective
Difficulty: Easy
7. Quality of conformance refers to:
A. the degree to which the product meets its design specifications.
B. the extent to which the actual product is designed for its intended use.
C. an ideal that can never be attained.
D. a cost control that is achievable.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 16.07 Explain the meaning of 'quality' and describe the different approaches that can be used to manage quality
8.
In order to have a high-quality finished product:

A. appraisal costs must exceed external failure costs.
B. the product's design specifications must meet customers' expectations.
C. the product must meet the standards of its design.
D.
the product's design specifications must meet customers' expectations AND the product must meet the standards of its design.
AACSB: Reflective
Difficulty: Easy
9. Which of the following statements is/are correct?
A. Quality of design and quality of conformance are both important concepts in the measurement of excellence.
B. Quality of design is the degree to which a product meets design specifications.
C. Quality of conformance is the degree to which a product conforms to customer expectations.
AACSB: Reflective
Difficulty: Easy
A. Cost of quality reports analyse quality costs as a percentage of total sales.
B. An increase in quality costs indicates deterioration in quality performance.
C. There can be interactions between the quality costs.
D. The traditional view of quality costs is that total quality costs can be minimised by driving the defect rate down to the
acceptable quality level.
AACSB: Reflective
Difficulty: Medium
11. A series of pictures that shows the flow of activities that make up a process is called:
A. Pareto analysis.
B. a process flow chart.
C. a fishbone diagram.
D. an Ishikawa diagram.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 16.03 Describe how business process re-engineering can be used to manage costs and other sources of value
12. Appraisal costs in quality programs are incurred:
A. to value the fixed assets of the firm.
B. to detect which production units do not conform to specifications.
C. to value ending work in process.
D. by external appraisers to value the costs of external failures.
AACSB: Reflective
Difficulty: Easy
13. Which of the following is not a characteristic of total quality management?
A. A focus primarily on internal customers
B. All members of the organisation are responsible for quality measures.
C. Statistical process control
D. Continuous improvement measures
AACSB: Reflective
Difficulty: Easy
accreditation
14.

A. $32 000
B. $29 000
C. $31 000
D. $33 000

AACSB: Analytical
Difficulty: Medium
15.

A. $10 500
B. $9000
C. $11 000
D. $8500

AACSB: Analytical
Difficulty: Medium
16.

A. $5000
B. $7500
C. $8500
D. $9500

AACSB: Analytical
Difficulty: Medium
17.

A. $33 000
B. $37 500
C. $42 000
D. $37 000

AACSB: Analytical
Difficulty: Medium
18. Consider a situation where an activity-based costing system is in use rather than a traditional volume-based costing
system. Which of the following statements is/are true?
A. The use of activity-based costing eliminates the need to consider qualitative factors.
B. When an activity-based costing system is used, facility level costs will have to be analysed differently to the way they
C. When an activity-based costing system is used, unit level costs will have to be analysed differently to the way they
D. None of the given answers
AACSB: Reflective
Difficulty: Medium
Learning Objective: 16.01 Define cost management and explain how it differs from traditional approaches to cost control
19. Which of the following are modern approaches to managing costs?
A. Life cycle costing
B. Target costing
C. Both life cycle costing and target costing
D. Neither life cycle costing nor target costing
AACSB: Reflective
Difficulty: Easy
20. Which of the following statements is/are true in relation to activity-based management (ABM)?
i. ABM is primarily concerned with customer value.
ii. Activity-based costing is the primary source of data for ABM.
iii. ABM is primarily concerned with the control of inputs.
A. i and ii
B. i and iii
C. ii and iii
AACSB: Reflective
Difficulty: Medium
21. Which of the following activities are non-value-added activities?
i. Inspect work in process
ii. Process sales orders
iii. Repair drilling machine
iv. Move raw material to the work station
A. i, iii and iv
B. i, ii and iv
C. i, ii and iii
D. ii, iii and iv
AACSB: Reflective
Difficulty: Medium
Learning Objective: 16.02 Use the four steps of activity-based management to determine the real cause of costs, eliminate costs and manage cost, time
and other sources of customer value
22. Which of the following activities are value-added activities?
i. Preventive maintenance
ii. Repairs to machinery
iii. Move work-in-process inventory between machines
iv. Process receivables
A. i and ii
B. iii and iv
C. i and iv
D. ii and iv
AACSB: Reflective
Difficulty: Medium
i. Determining the cause of non-value-added activities requires cost driver analysis.
ii. Building activities into processes will quickly identify the causes of non-value-added activities.
iii. Identifying root cause cost drivers is sufficient to enable non-value-added activities to be eliminated.
A. i and ii
B. ii and iii
C. i and iii
AACSB: Reflective
Difficulty: Easy
24. Which of the following are possible root-cause cost drivers?
i. Complexity
ii. Defects produced
iii. Plant layout
iv. Inadequate employee training
A. i, ii and iii
B. ii, iii and iv
C. i, iii and iv
AACSB: Reflective
Difficulty: Medium
25. Which of the following is a possible cause of a firm's reluctance to implement activity-based management (ABM)?
i Employee resistance to change.
ii. Lack of understanding of the benefits of ABM.
iii. Significant resources required.
iv. Focus is on value-added activities.
A. i, ii and iii
B. i, ii and iv
C. ii, iii and iv
D. i, iii and iv
AACSB: Reflective
Difficulty: Medium
26. Which of the following statements about re-engineering is/are true?
i. Re-engineering is the complete redesign of a process in an attempt to find new creative ways to accomplish objectivity.
ii. Re-engineering involves more of a 'giant leap' than the concept of activity-based management.
iii. Re-engineering may entail high risks.
A. i and ii
B. i and iii
C. ii and iii
AACSB: Reflective
Difficulty: Easy
27. The following steps are required to implement business process re-engineering.
i. Establish goals
ii. Reorganise work flow
iii. Prepare a business process map
iv. Implementation
What is the correct order for these steps?
A. i, ii, iii and iv
B. i, iii, ii and iv
C. iii, i, ii and iv
D. ii, iii, i and iv
AACSB: Reflective
Difficulty: Medium
28. Which of the following do traditional costing systems ignore?
i. Production costs
ii. Design costs
iii. Development costs
iv. Marketing and customer service costs
A. i, ii and iii
B. i, ii and iv
C. ii, iii and iv
D. i, iii and iv
AACSB: Reflective
Difficulty: Easy
Learning Objective: 16.04 Analyse life cycle costs and revenues and understand how to use life cycle management to reduce costs
29. If the target selling price is $120 and the target profit margin is a 40 per cent mark-up on cost, what is the target cost?
A. $48
B. $72
C. $85.70
D. $34.30
AACSB: Analytical
Difficulty: Easy
Learning Objective: 16.05 Estimate target costs and describe the processes of target costing that lead to cost reduction and enhanced customer value
30. Carwell has introduced a new product with a target price of $150 and a target cost of $90. What is the target
percentage margin on sales?
A. 20%
B. 33.3%
C. 40%
D. 50%
AACSB: Analytical
Difficulty: Easy
31. Orwell is about to introduce a new product and has established a target cost of $144 and a target margin on sales of
40 per cent. What is the target price?
A. $200
B. $225
C. $240
D. $280
AACSB: Analytical
Difficulty: Easy
32. Cartel Ltd has introduced a new product with a target price of $240 and a profit requirement of 33.3 per cent on sales.
What is the target cost?
A. $120
B. $160
C. $180
D. $200
AACSB: Analytical
Difficulty: Easy
33. Beaufort Ltd is introducing a new range of products. It has established that the target selling prices of the three
products are $120, $150 and $210. Beaufort requires a profit mark-up on cost of 33.3 per cent for all its products. What
percentage of the target prices is the target cost in each case?
A. 50%
B. 60%
C. 66.7%
D. 75%
AACSB: Analytical
Difficulty: Easy
34. In the process of target costing, where is the concentration of effort required to have the greatest impact on cost
savings?
i. Product design
ii. Process design
iii. Production costs
iv. After sales costs
A. i and ii
B. ii and iii
C. i and iii
D. ii and iv
AACSB: Reflective
Difficulty: Medium
35. The following four tasks take place in the concept known as target costing.
i. Value engineering
ii. Establish a target price
iii. Establish a target cost
iv. Establish a target profit
Which of the following correctly depicts the sequence of these tasks?
A. iii, i, iv and ii
B. ii, iv, iii and i
C. ii, iii, i and iv
D. iii, ii, i and iv
AACSB: Reflective
Difficulty: Easy
36. When we consider the life cycle sequence of a product, the majority of costs for a typical product have been
committed by the end of:
A. product planning.
B. design and development.
C. customer support.
D. production.
AACSB: Reflective
Difficulty: Easy
37. Which of the following are considerations in determining a target selling price?
i. Customer expectations
ii. Competitors' actions
iii. Product cost
iv. Strategic objectives
A. i, ii and iii
B. ii, iii and iv
C. i, iii and iv
D. i, ii and iv
AACSB: Reflective
Difficulty: Medium
38. Given the current design and resources, the cost that a new product could be manufactured for, including upstream
and downstream costs, is known as:
A. target cost.
B. allowable cost.
C. current cost.
D. strategic cost.
AACSB: Reflective
Difficulty: Easy
39. A systematic approach in analysing the product and process design, with the aim of eliminating any non-value-added
elements, to achieve the target cost is known as:
A. component level target costs.
B. value engineering.
C. strategic cost reduction.
D. cost reduction objective.
AACSB: Reflective
Difficulty: Easy
40. Which of the following are key features of target costing?
i. Cross functionality
ii. Market price driven
iii. Focus on customer value
iv. Based on life cycle management
A. i, ii and iii
B. i, iii and iv
C. i, ii and iv
AACSB: Reflective
Difficulty: Easy
41. Which of the following time drivers contribute to non-value-added activities?
i. Poor quality
ii. Efficient inventory management
iii. Bottlenecks in production
iv. Poorly structured delivery processes
A. i, ii and iii
B. i, iii and iv
C. i, ii and iv
AACSB: Reflective
Difficulty: Easy
42. What management approaches might be used to overcome the problem of poorly structured production processes?
i. Value analysis to identify and remove non-value-added activities.
ii. Implement continuous improvement processes.
iii. Process re-engineering.
A. i
B. i and iii
C. iii
AACSB: Reflective
Difficulty: Easy
43. The modern management tool that focuses on restrictions that limit a firm's ability to maximise long-run profit is
commonly known as:
A. linear progression.
B. constraint manipulation.
C. theory of constraints.
D. game theory.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 16.06 Undertake analyses, using the theory of constraints, to manage costs and time
44. The theory of constraints focuses on:
A. idle time.
B. poor quality.
C. cost reduction.
D. bottlenecks.
AACSB: Reflective
Difficulty: Easy
45. Which of the following methods may be used to overcome bottlenecks?
i. Increase staff training
ii. Increase overtime
iii. Reduce work in process
iv. Acquire additional plant and equipment
A. i, ii and iii
B. ii, iii and iv
C. i, iii and iv
D. i, ii and iv
AACSB: Reflective
Difficulty: Medium
46. Throughput accounting uses which of the following measures of the effects of bottlenecks?
i. Financial measures of inventory
ii. Financial measures of throughput
iii. Non-financial measures of throughput
iv. Operating expenses
A. i, ii and iii
B. ii, iii and iv
C. i, iii and iv
D. i, ii and iv
AACSB: Reflective
Difficulty: Easy
47. When throughput increases with no change in operating expenses or inventory levels, then:
A. profit and return on investment will increase and cash flow will decrease.
B. profit will increase and return on investment and cash flow will decrease.
C. profit, return on investment and cash flow will increase.
D. profit and cash flow will increase and return on investment will decrease.
AACSB: Reflective
Difficulty: Easy
48. When inventory decreases with no change in throughput or operating expenses, then:
A. profit will increase and return on investment and cash flow will decrease.
B. profit, return on investment and cash flow will increase.
C. profit and cash flow will increase and return on investment will decrease.
D. profit, return on investment and cash flow will decrease.
AACSB: Reflective
Difficulty: Easy
49. The removal of bottlenecks has which of the following benefits?
i. Increased customer value
ii. Reduced costs
iii. Improved quality
iv. Increased profitability
A. ii, iii and iv
B. i, iii and iv
C. i, ii and iv
AACSB: Reflective
Difficulty: Easy
50. Which of the following statements is consistent with target costing?
A. It does not consider market share or sales volume.
B. Market prices are used to determine product costs.
C. Product design has little or no regard for the long-run manufacturing costs.
D. It is described as a reactive costing strategy, rather than a proactive costing strategy.
AACSB: Reflective
Difficulty: Easy
51. Which of the following statements is not specifically related to product life cycle costing?
A. It considers that costs in areas such as design, marketing and customer service should be included in the true cost of
the product.
B. Costs are accumulated in responsibility centres, with managers of each centre being accountable for costs, revenues
or return on investment.
C. Cost is more effectively managed by more attention to the design of the process rather than effort spent on correcting
an out-of-control process.
D. The amount of cash generated depends in part on the stage of the product life cycle.
AACSB: Reflective
Difficulty: Medium
52. From a customer perspective, a value-added cost is one:
A. which increases the value of the product to the customer.
B. which the firm has determined is essential in the production of the product.
C. on which the firm must focus.
D. which increases the value of the product to the customer and the customer is prepared to pay for the added value.
AACSB: Reflective
Difficulty: Easy
53.
From the following list of costs for a kitchen manufacturer, determine the amount of value-added cost.

A. $57 000
B. $54 000
C. $58 000
D. $59 000

AACSB: Analytical
Difficulty: Medium
54.
From the following list of costs, determine the amount of non-value-added cost.

A. $17 000
B. $18 000
C. $16 000
D. $8000

AACSB: Analytical
Difficulty: Medium
55. There are certain features of traditional management accounting. Which of the following is/are not a focus of life cycle
costing?
A. Annual profit calculations
B. Focus on production costs only
C. Calculation of cost variances
D. Annual profit calculations AND focus on production costs only
AACSB: Reflective
Difficulty: Easy
56. Which of the following statements best describes performance measurement in line with continuous improvement?
A. Firms select relevant performance measures.
B. The measure will keep changing over time.
C. The measure will keep improving over time.
D. The firm targets an area to improve, moving the target until the desired outcome is achieved. The firm is then likely to
target another area for improvement.
AACSB: Reflective
Difficulty: Medium
57.
Assume a production process that typically moves the following number of products through its five processes:

Assuming there is room for improvement in all processes, in what order of processes would the firm apply the theory of constraints to
remove the bottlenecks?

A. 4 first, and then any order
B. 2, 1, 3, 5, 4
C. Work must be carried out in order of the physical flow of activities, i.e. 1, 2, 3, 4, 5
D. 4, 5, 3, 1, 2

AACSB: Reflective
Difficulty: Easy
58.
Which of the following stages are considered in a product's life cycle?
i. Preliminary design
ii. Product pricing
iii. Product decline

A. i and ii
B. i and iii
C. ii and iii
D. i

AACSB: Reflective
Difficulty: Easy
59. Assuming one answer only can be chosen, which of the following is a non-value-added activity for a manufacturing
firm?
A. Machining a metal plate in the factory.
B. Packing finished product into cartons for delivery.
C. Moving partly finished production to storage.
D. Inserting a warranty-card and instruction booklet into the boxed product.
AACSB: Reflective
Difficulty: Medium
60. Six sigma refers to:
A. business improvement methodology that involves rigours data analysis.
B. the amount of quality deviation that is considered acceptable in total quality management.
C. the formal quality accreditation relating to a series of standards recognised by an international quality setting agency.
D. the six key features of total quality management.
AACSB: Reflective
Difficulty: Easy
accreditation
61. Lazy Linda Kitchen Appliances has just begun the development of a new energy-saving, voice-activated toaster. The
accountant, Linda Rest, is preparing a life cycle budget. Which of the following costs should be included?
i. The salaries of the designers dedicated to the design of the new toaster.
ii. The committed costs associated with the acquisition of a new machine that manufacturers the voice recognition
component of the toaster.
iii. The cost of producing the new toasters.
iv. The costs associated with establishing a distribution network for the new product.
A. i, ii and iii
B. i, iii and iv
C. ii and iii
D. All of these costs should be included.
AACSB: Reflective
Difficulty: Medium
62.

Lazy Linda's total external failure cost was:

A. $6000.
B. $9000.
C. $12 000.
D. $15 000.

AACSB: Analytical
Difficulty: Medium
63.
Lazy Linda's total appraisal cost was:

A. $5000.
B. $9500.
C. $12 000.
D. $18 000.

AACSB: Analytical
Difficulty: Medium
64.

Lazy Linda's total prevention cost was:

A. $5000.
B. $11 000.
C. $14 000.
D. $15 500.

AACSB: Analytical
Difficulty: Medium
65.

Lazy Linda's total internal failure cost was:

A. $9500.
B. $7500.
C. $5000.
D. $2000.

AACSB: Analytical
Difficulty: Medium
66. Lazy Linda Ltd manufactures small kitchen appliances. One of the non-value added activities identified by the
production manager is 'reworking the electrical component in a toaster'. Which of the following is a likely root cause cost
driver?
A. The number of products requiring rework.
B. The quality of the completed toaster.
C. The quality of the electrical wiring purchased from suppliers.
D. Idle labour hours.
AACSB: Reflective
Difficulty: Medium
67. Three processes are involved in the manufacturing of Product X. First, the components go through the Machining
Process, then the Assembling Process, and finally the Packaging Process. The hourly production capacity of the three
processes is 500 units, 600 units and 800 units respectively. How many units of Product X can be produced in one hour?
A. 500 units
B. 600 units
C. 800 units
D. 633 units
AACSB: Reflective
Difficulty: Easy
68. Three processes are involved in the manufacturing of Chemical Z. First, the raw mixture goes through the Mixing
Process, then the Heating Process, and finally the Bottling Process. The hourly production capacity of the three processes
is 400 units, 600 units and 400 units respectively. Assume that a recent process improvement has resulted in a 20 per
cent increase in the capacity of the Bottling Process. This process improvement will:
A. increase the production of Chemical Z by 80 units per hour.
B. increase the production of Chemical Z by 120 units per hour.
C. increase the production of Chemical Z by 200 units.
D. have no effect on the production level per hour.
AACSB: Reflective
Difficulty: Medium
69. Which of the following statements about throughput accounting is false?
A. Throughput accounting is criticised for having a short-term focus.
B. Under throughput accounting, operating expenses are not relevant.
C. Throughput accounting measures the financial effects of bottlenecks.
D. Under throughput accounting, inventory is considered undesirable..
AACSB: Reflective
Difficulty: Easy
70. When monitored, activity-based performance measures can provide managers with feedback on their:
A. budgets.
B. targets.
C. performance.
D. initiatives.
AACSB: Reflective
Difficulty: Easy
71. A value-added activity provides essential value to:
A. customers and management.
B. management and employees.
C. customers and the functioning of the business.
D. management and the functioning of the business.
AACSB: Reflective
Difficulty: Medium
72. The underlying factors that trigger costs to be incurred when an activity is performed are known as:
A. activity trigger costs.
B. root cause.
C. cost driver analysis.
D. root cause cost driver.
AACSB: Reflective
Difficulty: Easy
73. The cost reduction objective is the difference between:
A. the target cost and the current cost.
B. the target profit and the target cost.
C. the target selling price and the current cost.
D. the current cost and the target profit.
AACSB: Reflective
Difficulty: Easy
74. When management uses financial measures to determine the effect of bottlenecks and operational decisions, they are
likely to be using:
A. activity-based costing.
B. throughput accounting.
C. total quality management.
D. financial evaluation.
AACSB: Reflective
Difficulty: Medium
75. When a manufacturer incurs costs to determine whether defects exist in their products, these costs are known as:
A. internal failure costs.
B. external failure costs.
C. appraisal costs.
D. prevention costs.
AACSB: Reflective
Difficulty: Medium
76. Identify and describe the major differences between the traditional approach to cost control and modern cost
management.
The major differences between traditional approaches to cost control and modern cost management are:
Drivers of costs. Under the traditional approach, managers control costs by bringing them into line with some predetermined goal, such
as budgeted or standard costs. The focus is on cost outcomes. Cost management reduces costs by identifying wasted resources and
eliminating this waste through identifying the factors that really drive costs.
Strategic perspective. The primary focus of traditional approaches is on controlling costs within the organisation—an internal
perspective. Modern cost management is also concerned with achieving value for the customer—a strategic perspective.
Process perspective. Traditional systems tend to control costs by reporting results for responsibility centres based on functional areas
of the business, such as production, marketing and administration. Modern cost management recognises that customers' needs are
met by processes, which flow across the business and may cross functional areas.
AACSB: Communication
AACSB: Reflective
Difficulty: Easy
77. Business Process Re-engineering (BPR) focuses on the processes that are essential to achieving the company's
business objectives and strategies. As each process is identified the four major steps used in BPR are applied. Describe
these four major steps.
Once a process has been identified for re-engineering, BPR involves four major steps:
1 Prepare a business process map. A flowchart of the activities that make up the business process, called a business process map,
is prepared.
2 Establish goals. Clear goals for the re-engineered process are established, based on the sources of customer value. These may
include quality and delivery performance, as well as cost. Depending on the strategies of the business, they may also include
innovation, flexibility and so on.
3 Reorganise work flow. The flow of work is reorganised to enable the goals to be achieved. These changes can lead to spare
capacity, which needs to be reduced in order to achieve cost reductions.
4 Implementation. The final step is implementation of the changed workflows. Business process re-engineering involves substantial
change and, like any change, may meet resistance from employees. Such resistance may be managed through forming re-engineering
project teams that involve employees from all functional areas affected by the proposed change. In such situations, employees may feel
a stronger sense of ownership of the changes.
AACSB: Reflective
Difficulty: Medium
78. Describe how target costing assists management in determining the life cycle cost of a product and the approach
management would take if the planned level of sales could not be achieved at the cost-plus price.
The key features of target costing are that it is price led (it begins with the expected market price and works backwards to
set the target cost); focuses on the customer (the product features and quality required to meet customers' expectations
are established and taken as given when setting the target cost and then to achieve the target cost); is based on the
principles of life cycle management, placing primary emphasis on managing production and downstream costs by
focusing on the design and development phase; and is cross-functional, involving managers from across the value chain.
If, in its initial life cycle budget, an organisation has used a cost-plus approach to pricing and the target costing study
indicates that the planned level of sales would not be achievable at this price, then target costing would encourage the
organisation to set a market-driven selling price and determine the target cost, and then plan how to manage costs in
order to achieve the target cost.
Like life cycle costing, target costing has a major role to play in developing and managing new products, although it can
also be used to manage the costs of existing products, especially product upgrades.
AACSB: Reflective
Difficulty: Medium
79. Define the term 'bottleneck' and describe how the application of the 'theory of constraints' can assist management in
production.
A 'bottleneck' is a point in a process that blocks or slows progress.
The 'theory of constraints' is an approach management can use for managing costs and improving quality and delivery
performance, by focusing on identifying and removing bottlenecks.
According to the theory of constraints, the rate of production is limited to the capacity of the constraints (or bottlenecks)
that exist in the organisation. Production cannot flow through the plant faster than it can move through the bottlenecks. In
the short term, therefore, the rate of production through all areas should be limited to the rate at which products can pass
through the bottleneck. Any attempt to improve efficiency in non-bottleneck areas will not improve performance; it will only
cause inventory to build up at the bottleneck. While this inventory build-up ensures that activities at the bottleneck do not
cease, it also implies increased holding and handling costs.
In the longer term, management efforts should focus on removing bottlenecks. Inadequate labour or machinery can cause
bottlenecks. Labour resources can be improved with overtime, hiring and training, but constraints involving plant and
equipment are more difficult to rectify. Applying the theory of constraints enables a business to increase revenue, reduce
costs and improve customer response time. Removing bottlenecks may also improve quality, as defective units, hidden in
the inventory stockpile at the bottleneck, will now be detected more quickly during further processing.
AACSB: Reflective
Difficulty: Medium
80. Discuss how life cycle budgeting can provide useful information for managing and reducing costs. Provide and explain
a graph to support your discussion.
The life cycle budget provides useful information for managing and reducing costs. For example, it can be used to
carefully plan capacity requirements. More importantly, major cost savings can be achieved by recognising the trade-off
between costs incurred prior to production and costs incurred once production begins.
Exhibit 16.7 shows that nearly all of a product's costs are actually committed during the pre-production stages of its life
cycle when the product and its production processes are designed.
The design of the product, and of the processes that will be used to produce it, is a major determinant of subsequent
production costs (and customer support costs). Spending more on the design phase can lead to significant savings during
the production phase. Target costing is based on this principle and evaluates alternative product and process designs to
identify the most cost-effective design.
Traditional cost control systems, such as standard costing, focus on controlling production costs when they are incurred.
However, far greater cost reductions can be achieved by designing efficient and effective production processes than by
trying to control the costs of the processes after the processes are in place. Cost controls applied once production has
begun can be expected to have only a relatively minor impact. Moreover, most conventional costing systems tend to treat
pre-production (upstream) and post-production (downstream) costs as period costs, rather than recognising and
managing them as product-related costs.
Difficulty: Hard
81. Business process re-engineering is a radical approach to managing costs that involves a complete rethink of the
processes undertaken, to achieve major improvements in cost and quality.
TRUE
AACSB: Reflective
Difficulty: Easy
82. When a company uses an activity-based management system to reduce costs, the first step in the process is to
determine the real causes of the costs.
FALSE
AACSB: Reflective
Difficulty: Easy
83. Quality costs―failure, prevention and appraisal―can be graphed to determine the acceptable quality level of a firm.
TRUE
AACSB: Reflective
Difficulty: Easy
84. One way to manage throughput efficiently is to use a theory of constraints approach in an attempt to identify and
remove bottlenecks in the system of production.
TRUE
AACSB: Reflective
Difficulty: Easy
85. If a company has quality accreditation (e.g. ISO 9000), the company is then known to practice total quality
management.
FALSE
AACSB: Reflective
Difficulty: Medium
accreditation
86. One approach to cost reduction is to undertake value engineering where an analysis of design and production takes
place with an aim to identify and eliminate non-value-adding activities.
TRUE
AACSB: Reflective
Difficulty: Easy
87. Cost drivers and a process perspective, are two of the main differences between modern and traditional approaches
to cost management.
TRUE
AACSB: Reflective
Difficulty: Easy
88. A target selling price can be calculated by deducting the target margin from the target cost.
FALSE
AACSB: Reflective
Difficulty: Easy
89. If a firm needs to identify the root cause cost drivers of activities, the firm needs to undertake a thorough cost driver
analysis.
TRUE
AACSB: Reflective
Difficulty: Easy
90. Activity-based management uses information from process costing to analyse activities, cost drivers and performance
that lead to improved customer value and profitability.
FALSE
AACSB: Reflective
Difficulty: Easy
91. Customer value is measured by the customer and the value the customer places on particular aspects of a product.
TRUE
AACSB: Reflective
Difficulty: Easy
92. To reduce cost and improve quality in the service industry it is important to have a quality culture.
TRUE
AACSB: Reflective
Difficulty: Easy
accreditation
Chapter 16 Testbank Summary
Category # of Que
stions
AACSB: Analytical 15
AACSB: Communication 5
AACSB: Reflective 76
Difficulty: Easy 57
Difficulty: Hard 1
Difficulty: Medium 34
Learning Objective: 16.01 Define cost management and explain how it differs from traditional approaches to cost control 5
Learning Objective: 16.02 Use the four steps of activity-based management to determine the real cause of costs, elimina 19
te costs and manage cost, time and other sources of customer value
Learning Objective: 16.03 Describe how business process re-engineering can be used to manage costs and other sourc 5
es of value
Learning Objective: 16.04 Analyse life cycle costs and revenues and understand how to use life cycle management to re 8
duce costs
Learning Objective: 16.05 Estimate target costs and describe the processes of target costing that lead to cost reduction a 16
nd enhanced customer value
Learning Objective: 16.06 Undertake analyses, using the theory of constraints, to manage costs and time 14
Learning Objective: 16.07 Explain the meaning of 'quality' and describe the different approaches that can be used to man 4
age quality
Learning Objective: 16.08 Describe the four types of quality costs, and prepare and interpret cost of quality reports 17
Learning Objective: 16.09 Describe how quality can be managed through total quality management (TQM), Six Sigma m 5
ethodologies and quality accreditation

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