Midterm Testbank

Chapter 16—Implementing Quality Concepts
LEARNING OBJECTIVES
LO 1 What is quality, and from whose viewpoint should it be evaluated?

LO 2 What is benchmarking, and why do companies engage in it?
LO 3 Why is total quality management a significant management philosophy, and what
conditions are necessary to yield its benefits?
LO 4 What types of quality costs exist, and how are those costs related?
LO 5 How is cost of quality measured?
LO 6 How can the balanced scorecard and cost management system be used to provide
information on quality in an organization?
LO 7 How can quality be instilled as part of an organization’s culture?
LO 8 (Appendix) What international quality standards exist?
QUESTION GRID
True/False
Difficulty Level Learning Objectives
Easy Moderate Difficult LO 1 LO 2 LO 3 LO 4 LO 5 LO 6 LO 7 LO 8
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TRUE/FALSE
1. Productivity is measured by the quantity of good output generated from a specific amount of input
during a time period.
ANS: T DIF: Easy OBJ: 16-1
2. Inspection of incoming inventory is a value-adding activity.
ANS: F DIF: Moderate OBJ: 16-1
3. Storage of unneeded inventory is a non-value added item.
ANS: T DIF: Moderate OBJ: 16-1
4. Quality control places the primary responsibility for product or service quality on the provider.
5. Grade refers to a product meeting the highest number of a customer’s needs at the lowest possible cost.
6. Grade refers to one of many quality levels that a product or service has relative to the inclusion or
exclusion of certain characteristics to satisfy customer needs.
7. Value refers to a product meeting the highest number of a customer’s needs at the lowest possible cost.
8. Strategic benchmarking is industry specific in its approach.
9. Process benchmarking is concerned with how top-ranked companies achieve their results.
10. Results benchmarking creates the risk for a company to become stagnant.
11. Process benchmarking creates the risk for a company to become stagnant.
12. A total quality system should place an emphasis on inspection.
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13. A total quality system should place an emphasis on prevention and continuous improvement.
14. Total quality management requires that an organization analyze the costs and benefits of each of its
customer segments.
15. When implementing TQM, an organization should establish long-term relationships with preferred
suppliers.
16. When implementing TQM, an organization should establish long-term relationships with as many
suppliers as possible.
17. Reworking a product is an appraisal cost.
18. Reworking a product is an internal failure cost.
19. Testing and adjusting manufacturing equipment is a prevention cost.
20. Testing and adjusting manufacturing equipment is an appraisal cost.
21. Replacing a product after it has been sold is an external failure cost.
22. Conducting a quality audit is an appraisal cost.
23. Conducting a quality audit is a prevention cost.
24. Pareto analysis is frequently used to aid management in deciding where to concentrate quality
prevention cost dollars.
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25. The balanced scorecard can be used to provide information on quality in an organization.
26. Total quality management (TQM) requires the commitment of all individuals within an organization.
27. ISO 9000 registration is required for regulated products sold in the United States.
28. ISO 9000 registration is required for regulated products sold in the European Union.
COMPLETION
1. The quantity of good output generated from a specific of output during a time period is referred to as
______________________.
ANS: productivity
DIF: Easy OBJ: 16-1
2. The process of investigating, comparing, and evaluating a company’s products or services against
those of other companies is referred to as ______________________.
ANS: benchmarking
DIF: Easy OBJ: 16-2
3. A process in which an end product or service is examined using reverse engineering is referred to as
___________________________________.
ANS: results benchmarking
DIF: Moderate OBJ: 16-2
4. A benchmarking process that is non-industry specific and focuses on how companies compete is
referred to as ___________________________________.
ANS: strategic benchmarking
5. A benchmarking process that focuses on how best-in-class companies achieve their results is referred
to as ___________________________________.
ANS: process benchmarking
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6. Costs that preclude product defects resulting from flaws in processing are referred to as
______________________________.
ANS: prevention costs
DIF: Easy OBJ: 16-4
7. Costs of monitoring and compensating for mistakes not eliminated through prevention activities are
referred to as _____________________________________.
ANS: appraisal costs
8. Costs incurred to correct defects in products prior to shipment are referred to as

________________________________.
ANS: internal failure costs
9. Costs incurred to correct defects in products after shipment are referred to as

________________________________.
ANS: external failure costs
10. The two costs of compliance are __________________________ and _______________________.
ANS: prevention costs; appraisal costs
11. The two costs of noncompliance are __________________________ and

_______________________.
ANS: internal failure costs; external failure costs
MULTIPLE CHOICE
1. An all-inclusive definition of quality views it as the ability of products/services to

a. only meet internal design specifications.
b. meet the customer's stated or implied needs.
c. be produced using all value-added production activities.
d. be produced with no rework costs.
ANS: B DIF: Easy OBJ: 16-1
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2. Which of the following is false as it relates to quality?
a. Quality is the total of all characteristics of a product or service that impacts on its ability to
meet the needs of a specific person.
b. Quality must always be viewed from the user's perspective.
c. Quality is never concerned with what the user thinks, feels, or deems important.
d. The definition of quality has evolved through time and is more currently comprehensive
than in the past.
ANS: C DIF: Easy OBJ: 16-1
3. Productivity is measured by the

a. total quantity of output generated from a limited amount of input during a time period.
b. quantity of good output generated from a specific amount of input during a time period.
c. quantity of good output generated from the quantity of good input used during a time
period.
d. total quantity of input used to generate total quantity of output for a time period.
ANS: B DIF: Moderate OBJ: 16-1
4. Which of the following can be used to indicate factors that slow down or cause unnecessary work in a
process?
a. activity analysis
b. total quality management
c. cost of quality
d. all of the above
ANS: A DIF: Easy OBJ: 16-1
5. Which of the following are undesirable from a consumer perspective but are frequently needed?
a. value-neutral activities
b. value-added activities
c. non-value-added activities
d. none of the above
6. Which of the following would typically be viewed as non-value-added activities?
Moving Inspecting Attaching product Storing

material raw material components finished goods
a. yes yes yes no

b. no no no yes
c. no yes no yes
d. yes yes no yes
ANS: D DIF: Easy OBJ: 16-1
7. __________ places the primary responsibility for quality on the maker or producer.
a. Pareto analysis
b. Quality control
c. Benchmarking
d. Activity analysis
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8. All attempts to reduce variability and defects in products reflect the implementation of
a. activity analysis.
b. statistical process control.
c. quality control.
d. control charts.
9. Control charts are appropriate devices in

a. total quality control.
b. statistical process control.
c. total quality management.
d. all of the above.
ANS: D DIF: Moderate OBJ: 16-1
10. A control chart graphs

a. actual process results relative to a range of acceptable variation.
b. expected process results relative to upper and lower control limits.
c. actual process results relative to value-added and non-value-added activities.
d. the cost of process malfunctions relative to the cost of reducing process variations.
11. The addition or removal of product or service characteristics to satisfy additional needs, especially
price, reflect the ________ of a product or service.
a. value
b. grade
c. quality
d. durability
12. Value reflects the ability of a product to

a. provide the best quality at any price.
b. have all possible product and service characteristics.
c. meet the majority of a customer's needs at the lowest possible price.
d. have the longest technical or service life and the best warranty.
ANS: C DIF: Moderate OBJ: 16-1
13. Comparing the way a "best-in-class" company performs a specific activity (such as distribution) is
called
a. process benchmarking.
b. results benchmarking.
c. total quality management benchmarking.
d. SPC benchmarking.
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14. Benchmarking allows a company to
a. identify its strengths and weaknesses.
b. imitate those ideas that are readily transferable.
c. improve on methods in use by others.
15. Benchmarking against direct competitors creates the risk of

a. creating products or services with identical specifications.
b. becoming stagnant relative to process improvements.
c. being taken over by the competitors to prevent a loss of ideas.
16. Reverse engineering is used in

a. statistical process control.
b. process benchmarking.
c. results benchmarking.
d. price fixing.
17. Benchmarking against noncompetitors is extremely important in

a. process benchmarking.
b. results benchmarking.
c. reverse engineering.
ANS: A DIF: Moderate OBJ: 16-2
18. Benchmarking
identifies "best-in-class" companies analyzes the "negative gap"
a. yes no
b. no yes
c. yes yes
d. no no
19. Benchmarking does which of the following activities relative to a "best-in-class" (BIC) company?
Compares BIC's Copies BIC's Improves on

products and products and BIC's products
processes processes and
with own directly processes
a. yes yes yes

b. yes no no
c. no no yes
d. yes no yes
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20. Which of the following is not a step in benchmarking procedures?
a. analyze the "positive gap"
b. engage in continuous improvement
c. analyze the "negative gap"
d. identify "best-in-class" companies
21. Which of the following is not a critical element in a total quality management system?
a. employee involvement
b. activity-based costing
c. continuous improvement
d. problem prevention emphasis
22. A total quality system should be designed to promote a reorientation of thinking from an emphasis on
a. internal quality improvements to an emphasis on external benchmarking.
b. the planning process to an emphasis on the performance evaluation process.
c. inspection to an emphasis on prevention.
d. process benchmarking to an emphasis on results benchmarking.
23. Which of the following is the first element of knowledge needed by a company wanting to pursue total
quality management?
a. what the company's customers want
b. who the company's customers are
c. how the company's processes are designed
d. what the components of the company's product are
24. Total quality management is inseparable from the concept of

a. ISO certification.
b. centralized organizational structure.
c. continuous improvement.
d. the product life cycle.
25. A company will not achieve world-class status unless a quality focus
a. allows that company to achieve one or more major quality awards.
b. becomes an integral part of the organization's culture.
c. emphasizes the elimination of all quality costs for compliance and noncompliance.
d. has been mandated by management for workers to pursue.
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26. Which of the following statements is true?
a. The more customers a company has, the better off the company is.
b. A company should spare no expense to provide customer satisfaction.
c. Most customers stop doing business with a company because of poor product or service
quality.
d. Cost-benefit analysis can help identify customers that cost more than they are worth to the
company.
27. The four categories of product quality costs are

a. external failure, internal failure, prevention, and carrying.
b. external failure, internal failure, prevention, and appraisal.
c. external failure, internal failure, training, and appraisal.
d. warranty, product liability, training, and appraisal.
28. The number of product defects discovered by consumers is what kind of performance indicator?
Qualitative Quantitative Financial Nonfinancial
a. yes no no yes
b. no yes no yes
c. no yes yes no
d. yes no no yes
29. Money spent on employee training is a

a. prevention cost.
b. appraisal cost.
c. empowerment cost.
d. Pareto cost.
30. Production quality is affected by

a. worker productivity.
b. the amount of failure costs incurred.
c. worker skill level.
d. just-in-time suppliers.
31. Mistakes not eliminated by prevention costs may cause
appraisal costs failure costs
a. no no
b. no yes
c. yes no
d. yes yes
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32. Product quality includes all of the following except
a. appeal.
b. performance.
c. durability.
d. price.
33. Recalls are fairly common events for automobile manufacturers. The costs of recalling and repairing a
car create
internal failure costs external failure costs prevention costs
a. yes yes no
b. yes yes yes
c. no yes no
d. yes no yes
34. An appraisal cost is created by

a. installing automated technology.
b. reworking products.
c. verifying procedures.
d. rescheduling and setup.
35. Compliance costs include
prevention costs appraisal costs internal failure costs
a. yes no no
b. no yes yes
c. yes yes no
d. yes yes yes
36. Management can decide where to concentrate its quality prevention dollars using
a. statistical process control charts.
b. just-in-time inventory systems.
c. a feedback loop.
d. Pareto analysis.
37. Historically, the cost of quality has been

a. included in account balances for items such as Work in Process Inventory and marketing
expenses.
b. detailed in various "cost of quality" account balances on the Income Statement.
c. immaterial because no accounts were developed to detail these amounts.
d. generally spent in the prevention rather than the appraisal category.
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38. A significant cost of quality that is not recorded in the accounting records is the
a. failure cost for a customer complaint center.
b. cost of reworking products to bring them up to specification.
c. opportunity costs of forgone future sales.
d. appraisal cost for product equipment.
39. A cost of quality report compares current period quality costs in specified categories to
a. last year's quality costs.
b. current period budgeted quality costs.
c. total quality costs for the period.
d. both a and b.
40. Which of the following is not one of the three objectives of a quality program?
a. Product quality should be consistent to always meet the purchaser's need(s).
b. A quality program should give management confidence that the quality is and will be at a
constant level.
c. A quality program should give customers confidence that the intended quality will be
achieved in products.
d. Product quality should always vary because customers change their wants and needs over
time.
41. The most visible embodiment of total quality management in the United States is
a. being awarded the Deming Prize.
b. achieving ISO 9000 certification.
c. meeting industry standards.
d. receiving the Baldrige Award.
42. Which of the following are categories judged for the Baldrige Award?
Business Use of SPC and Customer

Benchmarking results Pareto analysis focus Leadership
a. no yes no yes yes

b. yes yes yes yes yes
c. yes yes no yes no
d. no no no no no
43. The ISO 9000 series refers to

a. international guidelines for quality standards.
b. provisions regarding benchmarking activities in the European Union.
c. guidelines for appropriate expenditures on the various categories of quality costs.
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44. The ISO 9000 standards
a. indicate which companies' products are better than those of competitors.
b. allow management to decide how to meet the standards for quality assurance.
c. include specific directives about product design, material procurement, and environmental
responsibilities.
d. compose a program of quality assurance under which companies are registered by the
International Organizational for Standardization.
45. A quality audit involves a review of
manufacturing cost of quality

processes quality standards documentation
a. yes yes yes

b. no yes yes
c. no no no
d. yes no yes
46. Registration under ISO 9000 is

a. required for all companies doing business internationally.
b. required for all European companies doing business in Europe.
c. not required for U.S. companies unless they use European suppliers.
d. required for all companies producing regulated products to be sold in the European Union.
Variance Corporation
Variance Corporation is a manufacturer of a versatile statistical calculator. The following information

is a summary of defective and returned units for the previous year.
Total defective units 1,000

Number of units reworked 750
Number of customer units returned 150
Profit for a good unit $40
Profit for a defective unit $25
Cost to rework a defective unit $10
Cost of a returned unit $15
Total prevention cost $10,000
Total appraisal cost $5,000
47. Refer to Variance Corporation. The profit lost by selling defective units not reworked is
a. $25,000.
b. $15,000.
c. $18,750.
d. $3,750.
ANS: D
250 units not reworked * $15 incremental difference = $3,750
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48. Refer to Variance Corporation. The total rework cost is
a. $7,500.
b. $15,000.
c. $2,500.
d. $3,750.
ANS: A
750 units reworked * $10/unit rework cost = $7,500
49. Refer to Variance Corporation. The cost of processing customer returns is

a. $9,000.
b. $2,500.
c. $22,500.
d. $2,250.
ANS: D
150 returned units * $15/unit = $2,250
50. Refer to Variance Corporation. The total failure cost is

a. $15,000.
b. $13,500.
c. $11,250.
d. $8,250.
ANS: B
750 units reworked * $10/unit $ 7,500
150 units returned * $15/unit 2,250
250 units not reworked * $15/unit 3,750
Total $13,500
======
51. Refer to Variance Corporation. The total quality cost is

a. $15,000.
b. $15,750.
c. $28,500.
d. $11,250.
ANS: C
Total failure costs $13,500
Total prevention costs 10,000
Total appraisal costs 5,000
Total quality costs $28,500
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52. Refer to Variance Corporation. The profit lost by selling defective units to Greenstein Company totals
$1,440. The total rework cost for 700 units is $28,000. The difference between the profit earned on a
good unit and a defective unit is $12. How many total defective units did Variance Corporation
produce?
a. 120
b. 740
c. 736
d. 820
ANS: D
Defective units sold $1,440/$12 per unit 120 units
Units reworked 700 units
Total defective units 820 units
=======
53. Denison Company's cost of compliance is $58,000. Appraisal cost is $21,000 and failure cost is
$32,000. The company's total quality cost is
a. $53,000.
b. $79,000.
c. $90,000.
d. $111,000.
ANS: C
Cost of compliance $58,000
Failure cost 32,000
Total quality cost $90,000
======
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SHORT ANSWER
1. Discuss the four categories of quality costs.
ANS:
Prevention costs are incurred to prevent product or service defects and decrease the number of
nonconforming units produced. These costs include items such as quality training programs, quality
reporting, quality audits, and quality circles. Raw material vendors are selected with the understanding
that all delivered materials meet acceptable quality limits.
Appraisal costs arise from determining whether products are in agreement with their specifications.
These costs include inspection of raw material, supervising appraisal
activities, and product acceptance or sampling finished batches to see if they meet specifications.
Failure costs make up the other two types of quality costs. Internal failure costs result when the
products don't meet specifications and must be reworked or discarded. These costs include scrap,
rework, retesting, and design changes. High-quality prevention should eliminate internal failure costs.
External failure costs occur when buyers note defects after delivery. These costs can be very high and
include lost sales from poor performance of the product, returns due to poor quality, warranties, and
product liability.
2. What is the relationship between the incurrence of the various types of quality costs and the quantity of
output that meets specification?
ANS:
As the number of conforming units increases, both types of failure costs decrease rapidly. To decrease
failure costs, more prevention costs must be incurred. Identifying defective products before they leave
the factory can decrease the external failure costs immensely. Although, such identification may
increase internal failure costs. A greater emphasis on prevention will decrease appraisal costs and also
failure costs. Thus, over time, overall quality costs will decrease.
3. What is continuous improvement? How does it relate to total quality management?
ANS:
Continuous improvement is behavior that encourages employees, either production or service, to
perform their tasks better as time passes. Thus, because product or service quality levels improve,
continuous improvement is directly related to TQM. Employees are also encouraged to "group think"
and brainstorm in quality circles to recognize and correct problems in the business environment.
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4. Discuss the concept of total quality management.
ANS:
TQM is a company-wide quality system that emphasizes employee involvement in improving product
or service quality throughout the firm. It uses a continuous improvement process that is always striving
to update upon the existing system. It uses techniques that encourage employees to make suggestions
about how the product or production process can be improved. TQM necessitates an internal
managerial system of decision making, controlling, and planning. TQM involves continuous
improvement that exceeds customer/client expectations.
5. How do control charts mesh with the concept of total quality control (TQC)?
ANS:
Control charts are graphical, statistical presentations that identify occurrences of products or services
as to whether they fall within some measure of performance. Upper and lower limits of acceptability
are displayed on the chart. TQC expects all products to meet specifications. Thus, no measures of units
or services performed should exceed these limits.
6. Discuss the relationship between benchmarking and total quality management (TQM).
ANS:
TQM is a system of the organization that emphasizes continuous improvement processes that meet or
exceed customer quality expectations. It emphasizes quality principles throughout the firm.
Benchmarking is the process of investigating, comparing, and evaluating a company's processes,
products, and/or services against those of companies believed to be the "best in class." Benchmarking
stresses quality improvement by finding out how other firms are doing what you do better and
attempting to pattern your own processes after what these firms are doing and striving to improve
those processes. Benchmarking has been implemented by many firms that have adopted JIT and that
have insisted their suppliers do the same. These firms gain insight on how to follow JIT by
communicating with other firms.
7. Compare and contrast results benchmarking and process benchmarking.
ANS:
Results benchmarking is associated with quality but is concerned with whether the final product meets
product/service specifications. Process benchmarking focuses on practices of competitors or non-
competitors that are considered "best-in-class" and tries to adopt features with which the questioning
company has problems
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8. Discuss increased competition and improved problem solving skills as they relate to benchmarking.
ANS:
Increased competition and improved problem solving skills are two benefits of benchmarking.
Benchmarking helps companies become more competitive in their markets by examining what
competitors do in relation to organization practices. Once these differences are determined, the
organization will be in a better position to make changes that will help make the organization more
competitive. Benchmarking also increases problem-solving skills among employees in the
organization by providing a framework in which to operate more effectively. An increase in problem
solving ability should promote teamwork with the organization, which is critical to not only
benchmarking, but to total quality control.
9. What are the four tenets of total quality management (TQM)?
ANS:
1. To dictate continuous improvement for an internal managerial system of planning,
controlling, and decision making for continuous improvement.
2. To require participation by everyone in the organization.
3. To focus on improving goods and services from the customer’s point of view.
4. To value long-term partnerships with suppliers.
PROBLEM
Cokesbury Corporation
Cokesbury Corporation is a manufacturer of electronic blood pressure monitors for

home use. The following is a summary of quality costs for the first year of operations.
Total defective units 1,500

Number of units reworked 800
Number of customer units returned 200
Profit for a good unit $50
Profit for a defective unit $30
Cost to rework a defective unit $12
Cost of a returned unit $20
Total prevention cost $17,500
Total appraisal cost $9,500
1. Refer to Cokesbury Corporation. Compute the profit lost by selling defective units not reworked.
ANS:
Z = (D - Y) (P1 - P2 ) = (1,500 - 800)($50 - $30) = $14,000
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32. Product quality includes all of the following except
a. appeal.
b. performance.
c. durability.
d. price.
33. Recalls are fairly common events for automobile manufacturers. The costs of recalling and repairing a
car create
internal failure costs external failure costs prevention costs
a. yes yes no
b. yes yes yes
c. no yes no
d. yes no yes
34. An appraisal cost is created by

a. installing automated technology.
b. reworking products.
c. verifying procedures.
d. rescheduling and setup.
35. Compliance costs include 0 0
prevention costs appraisal costs internal failure costs

a. yes no no
b. no yes yes
c. yes yes no
d. yes yes yes
36. Management can decide where to concentrate its quality prevention dollars using
a. statistical process control charts.
b. just-in-time inventory systems.
c. a feedback loop.
d. Pareto analysis.
37. Historically, the cost of quality has been

a. included in account balances for items such as Work in Process Inventory and marketing
expenses.
b. detailed in various "cost of quality" account balances on the Income Statement.
c. immaterial because no accounts were developed to detail these amounts.
d. generally spent in the prevention rather than the appraisal category.
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0 0
Chapter 17 - Cost Accounting 6e by Raiborn and Kinney
Cost Accounting (ACCT 3130)
Chapter 17--Inventory and Production Management
LEARNING OBJECTIVES
LO 1 What are the most important relationships in the value chain?

LO 2 Why is management of inventory costs important to most firms?
LO 3 How do push and pull systems of production control work?
LO 4 Why do product life cycles affect profitability?
LO 5 What is target costing, and how does it influence production cost management?
LO 6 What is the just-in-time philosophy? What modifications does JIT require in
accounting systems?
LO 7 What are flexible manufacturing systems?
LO 8 How can the theory of constraints help in determining production flow?
LO 9 (Appendix) How are economic order quantity, reorder point, and safety stock
determined and used?
QUESTION GRID
True/False
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Short Answer

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Problem
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TRUE/FALSE
1. An investment in inventory yields a return when it is sold to a third party.
2. An organization’s value chain can aid in the reduction of non-value added activities.
3. Purchases of inventory create a continuous cash outflow each period.
4. Efficient inventory management relies largely on cost-minimization strategies.
5. Fixed factory overhead is typically the production cost least likely to be minimized in the short run.
6. In a push system of production control, inventory is produced in anticipation of customer or work

center demand
7. In a pull system of production control, inventory is produced in anticipation of customer or work

center demand
ANS: F DIF: Easy OBJ: 17-3
8. The product life cycle has a significant impact on costs and profits.
9. Virtual reality has been used increasingly in the product design stage.
10. Profit maximization is the major focus of value engineering.
11. Cost minimization is the major focus of value engineering.
12. Kaizen costing is most often applied to new products.
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13. Target costing is most frequently used in the development stage of a product.
14. In a just-in-time (JIT) environment, the optimal situation is to have only one vendor for any given
item.
15. In a just-in-time (JIT) environment, design changes may be made at any time during the production
process.
16. In a just-in-time (JIT) environment, design changes must be made early in the production process.
17. In a just-in-time (JIT) environment, quality is determined continually during the manufacturing
process.
18. In a just-in-time (JIT) environment, quality is determined at quality control checkpoints in the
manufacturing process.
19. In a just-in-time (JIT) environment, machines and workers are often rearranged into manufacturing
cells.
20. In a just-in-time (JIT) environment, end-of-period variance analysis and reporting does not occur.
21. Backflush costing requires fewer allocations than traditional accounting methods.
22. When a flexible manufacturing system (FMS) is used, worker tasks are more diverse than under a
traditional manufacturing system.
23. When a flexible manufacturing system (FMS) is used, response time to needs of the market is slower
than under a traditional manufacturing system.
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24. Lean manufacturing and just-in-time (JIT) systems are both concerned with reduction of inventory
levels.
25. Bottlenecks in a production process will cause other parts of the process to experience idle time.
26. Economic order quantity (EOQ) is compatible with just-in-time systems.
27. The EOQ formula can be modified to calculate the number of units that should be manufactured in a
production run.
COMPLETION
1. The interrelationships between an organization and its suppliers and customers are collectively referred
to as a(n)_____________________________.
ANS: value chain
DIF: Easy OBJ: 17-1
2. The quoted price for inventory minus discounts plus shipping charges is referred to as the
_______________________________.
ANS: purchasing cost
DIF: Easy OBJ: 17-2
3. A system of inventory production where goods are produced in anticipation of customer orders is
referred to as a _______________________________.
ANS: push system
DIF: Easy OBJ: 17-3
4. A system of producing inventory where goods are produced only when needed by a customer or work
center is referred to as a _______________________________.
ANS: pull system
DIF: Easy OBJ: 17-3
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5. A method of product costing that develops an allowable product cost by estimating what the market
will pay for a product with specific characteristics is referred to as ____________________________.
ANS: target costing
6. An artificial, computer-generated environment in which the user has the impression of being a part of
the environment is referred as ________________________.
ANS: virtual reality
DIF: Easy OBJ: 17-5
7. A search for various feasible combinations of resources and methods that will increase functionality
and reduce costs is referred to as _________________________.
ANS: value engineering
8. A costing method that involves ongoing efforts for continuous improvement to reduce product costs,
increase product quality and improve the production process after manufacturing activities have begun
is referred to as __________________________.
ANS: kaizen costing
9. The cooperative strategic planning, controlling, and problem solving activities conducted by a
company and its vendors and customers to generate efficient and effective transfers of goods and
services is referred to as ________________________________________.
ANS: supply chain management
10. Making only those items in demand by customers and making those items without waste is referred to
as ______________________________.
ANS: lean manufacturing
11. The theory that the flow of goods through a production process cannot be at a faster rate than the
slowest constraint in the process is known as _________________________________________.
ANS: theory of constraints (TOC)
DIF: Easy OBJ: 17-8
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12. A formula that indicates the optimal number of units to order is referred to as
______________________________________.
ANS: economic order quantity (EOQ)
MULTIPLE CHOICE
1. Which of the following is not an ordering cost?

a. cost of receiving inventory
b. cost of preparing the order
c. cost of the merchandise ordered
d. cost of storing the inventory
2. The cost of receiving inventory is regarded as

a. an ordering cost.
b. a carrying cost.
c. a purchasing cost.
d. a cost of not carrying goods in stock.
3. A _____________ system of production control is paced by product demand.

a. EOQ
b. ABC
c. push
d. pull
4. Which of the following statements is false concerning electronic data interchange?

a. Electronic data interchange (EDI) is essential in a pull system.
b. One of the benefits realized by EDI organizations is a faster processing of transactions.
c. Electronic data interchange is essential in a push system.
d. Electronic data interchange refers to computer-to-computer exchange of information.
5. _____________ is a "pull" system of production and inventory control.

a. EDI
b. EOQ
c. JIT
d. ABC
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6. In a JIT system, the quality of each product begins with
a. a company's vendors.
b. employees.
c. inspection of finished goods inventory.
d. a good product warranty.
7. Reducing setup time is a major aspect of

a. all push inventory systems.
b. the determination of safety stock quantities.
c. a JIT system.
d. an EOQ system.
8. Reducing inventory to the lowest possible levels is a major focus of

a. JIT.
b. push inventory systems.
c. EOQ.
d. ABC.
9. JIT is a philosophy concerned with

a. when to do something.
b. how to do something.
c. where to do something.
d. how much of something should be done.
10. When JIT is implemented, which of the following changes in the accounting system would not be
expected?
a. fewer cost allocations
b. elimination of standard costs
c. combining labor and overhead into one product cost category
d. combing raw material and materials in work-in-process into one product cost category
11. Striving for flexibility in the number of products that can be produced in a short period of time is
characteristic of
a. EOQ systems.
b. push systems in general.
c. JIT.
d. pull systems in general.
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12. Just-in-time (JIT) inventory systems
a. result in a greater number of suppliers for each production process.
b. focus on a "push" type of production system.
c. can only be used with automated production processes.
d. result in inventories being either greatly reduced or eliminated.
13. The JIT philosophy does not focus on

a. standardizing parts used in products.
b. eliminating waste in the production process.
c. finding the absolute lowest price for purchased parts.
d. improving quality of output.
14. In a JIT manufacturing environment, product costing information is least important for use in
a. work in process inventory valuation.
b. pricing decisions.
c. product profitability analysis.
d. make-or-buy decisions.
15. With JIT manufacturing, which of the following costs would be considered an indirect product cost?
a. cost of specific-purpose equipment
b. cost of equipment maintenance
c. property taxes on the plant
d. salary of a manufacturing cell worker
16. With JIT manufacturing, which of the following costs would be considered a direct product cost?
a. insurance on the plant
b. repair parts for machinery
c. janitors' salaries
d. salary of the plant supervisor
17. Which of the following statements is not true?

a. JIT manufacturing strives for zero inventories.
b. JIT manufacturing strives for zero defects.
c. JIT manufacturing uses manufacturing cells.
d. JIT manufacturing utilizes long lead time and few deliveries.
18. The JIT environment has caused a reassessment of product costing techniques. Which of the following
statements is true with respect to this reassessment?
a. Traditional cost allocations based on direct labor are being questioned and criticized.
b. The federal government, through the SEC, is responsible for the reassessment.
c. The reassessment is caused by the replacement of machine hours with labor hours.
d. None of the above is true.
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19. When a firm adopts the just-in-time method of management,
a. employees are retrained on different equipment, but the plant layout generally remains
unchanged.
b. new machinery and equipment must be purchased from franchised JIT dealers.
c. machinery and equipment are moved into small autonomous production lines called
islands or cells.
d. new, more efficient machinery and equipment are purchased and installed in the original
plant layout.
20. Which of the following describes the effect on direct labor when management adopts the JIT
philosophy?
a. Each direct labor person performs a single task, thereby allowing that person to reach his
or her theoretical potential.
b. Because each person runs a single machine in a JIT environment, there are more
employees classified as direct labor.
c. The environment becomes more labor-intensive.
d. Machine operators are expected to run several different types of machines, help set up for
production runs, and identify and repair machinery needing maintenance.
21. JIT concepts

a. can be effectively implemented in organizations that are only partially automated.
b. are only appropriate for use with CIM systems.
c. involve shifting from a capital-intensive to a labor-intensive process.
d. require full computerization of the JIT manufacturing process.
22. According to JIT philosophy,

a. inventories of finished goods always should be available to meet customer demand.
b. push-through manufacturing flows are the most efficient.
c. maintaining inventories wastes resources and frequently covers up poor work or other
problems.
d. long production runs and large production lot sizes take advantage of economies of scale.
23. Accounting for product costs in a JIT environment

a. uses a job order costing system.
b. classifies processing costs as raw (or direct) material, direct labor, and overhead.
c. is more complex than in other types of manufacturing environments.
d. follows process costing procedures whereby costs are accumulated by the process (cell)
and attached to units processed for the period.
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24. An implication of the demand-pull nature of the JIT production process is that
a. finished goods inventories must be available to meet customer demand, although raw
material is delivered on an as-needed basis.
b. more storage space for inventories is necessary.
c. finished products are packaged and shipped to customers immediately, thus requiring
minimal finished goods inventories.
d. problem areas become less visible as inventories are reduced.
25. In accounting for JIT operations, the Raw Material Inventory account
a. is closely monitored to ensure that materials are always on hand in time.
b. can be expected to have a larger balance than with traditional manufacturing methods.
c. is combined with the Work In Process Inventory account.
d. is combined with the Finished Goods Inventory account.
26. A kanban plays an important role in

a. JIT.
b. EOQ.
c. ABC.
d. CPM.
27. ____________________ may involve relocation or plant modernization by a vendor.

a. Focused factory arrangements
b. Economic order quantity
c. Multiprocess handling
d. Activity-based management
28. The term "cell" is used to describe

a. a grouping of one or more automated machines within a company.
b. a storage bin for "C" type inventory in an ABC inventory system.
c. files in a CAD/CAM system.
d. a factory's area of conversion activity.
29. In a production cell,

a. an individual worker may be expected to operate several different machines, do setups,
and perform preventive maintenance on the equipment.
b. each worker becomes an expert in the operation of a single piece of equipment.
c. machines are arranged so that similar machines are grouped together.
d. clear separation is maintained between those workers who operate the machinery and
those workers who set up and maintain the machinery.
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30. U-shaped groupings of workers and machines that improve materials handling and flow are known as
a. manufacturing cells.
b. efficiency stations.
c. multi-flow modules.
d. productivity islands.
31. For workers in a multiprocess handling situation, which of the following happens?
More flexibility Less process involvement
a. no no
b. no yes
c. yes yes
d. yes no
32. The process of _________ occurs when equipment is programmed to stop when a certain situation
arises.
a. throughput
b. automation
c. backflushing
d. information sharing
33. The connection of two or more flexible manufacturing systems via a host computer and a networking
information system is known as
computer integrated electronic data

manufacturing interchange
a. yes yes
b. yes no
c. no no
d. no yes
34. A key element of Japan's success in world markets is

a. the elimination of waste in all operations.
b. automation of the billing function.
c. inefficient labor forces in competing countries.
d. the verification procedures incorporated into computer programs.
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35. Backflush costing is concerned with which of the following?
Standard costs Minimal variances from standards
a. yes no
b. no no
c. yes yes
d. no yes
36. Which of the following areas offers an opportunity to eliminate waste?

a. raw material and labor
b. space and production time
c. recordkeeping and working capital
d. all of the above
37. Flexible manufacturing systems are

a. designed to provide more flexibility in a firm's manufacturing process by using computer-
aided machinery.
b. the same as computer-aided design systems.
c. commonly used by firms that need to make large quantities of one product.
d. are very complicated and cause increased defect rates in output.
38. Kaizen means

a. doing it the Japanese way.
b. continuous improvement.
c. employee empowerment.
d. implementation of a centralized organizational structure.
39. The process that determines an allowable product cost while setting market price and allowing for an
acceptable profit margin is known as
a. target costing.
b. product life cycle costing.
c. activity-based costing.
d. responsibility costing.
40. The peak level of unit sales will occur in which stage of the product life cycle?
a. growth
b. maturity
c. decline
d. introduction
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41. For product life cycle costing, R&D costs are
a. expensed as incurred.
b. capitalized and allocated over the life cycle.
c. deducted as period costs.
d. charged to specific departments as incurred.
42. An important focus in product life cycle costing is

a. the activity base.
b. the target cost.
c. the cost driver.
d. variable costs.
43. Projected sales price minus a reasonable profit equals

a. the standard cost.
b. contribution margin.
c. projected Cost of Goods Sold.
d. target cost.
44. Approximately what percentage of future product costs is determined in the development stage of the
product life cycle?
a. 30%
b. 50%
c. 70%
d. 90%
45. Which of the following fluctuate over the product life cycle?
a. sales price per unit
b. the types of costs that are incurred
c. product profitability
d. all of the above
46. In which of the following stages of the product life cycle would operating losses not be expected?
a. growth
b. development
c. introduction
d. decline
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47. During which stage of the product life cycle will a company witness the highest profit?
a. development
b. maturity
c. growth
d. decline
48. Cost tables are databases that provide information on which of the following?
a. design specifications
b. manufacturing processes
c. impact on product costs when different inputs resources are used
d. all of the above
49. Ongoing efforts to reduce costs, increase product quality, and/or improve production process once
manufacturing has begun is known as
a. cost management.
b. kaizen costing.
c. target costing.
d. life-cycle costing.
50. Kaizen costing is used for which of the following types of products?
New products Existing products
a. yes yes
b. no yes
c. no no
d. yes no
51. A mandate to reduce costs, increase product quality, and/or improve production processes through
continuous improvement is known as
a. kaizen costing.
b. activity-based costing.
c. the theory of constraints.
d. mass customization.
52. If life-cycle costs exceed the target cost of a product, managers will strive to reduce
a. the cost of special orders.
b. the level of activities that are non-value-added.
c. product variety.
d. period costs.
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53. The projected sales price for a new product (which is still in the development stage of the product life
cycle) is $50. The company has estimated the life-cycle cost to be $30 and the first-year cost to be $60.
On this type of product, the company requires a $12 per unit profit. What is the target cost of the new
product?
a. $60
b. $30
c. $38
d. $42
54. The theory of constraints can

a. identify what limitations exist with raw material suppliers.
b. follows a methodology similar to linear programming.
c. be ignored since it assumes too many estimates in the production cycle.
d. show where bottlenecks exist and sets the limit of output to these bottlenecks.
55. Placing quality inspection points ahead of bottlenecks will reduce

a. product flow.
b. the number of defective products.
c. the influence of constraints on production flow.
d. the critical path time.
56. Quality inspection points should

a. precede bottlenecks.
b. follow bottlenecks.
c. be placed at the end of all production processes.
d. be placed at random points in the manufacturing process.
57. The flow of goods through a production process cannot be at a faster rate than the slowest bottleneck is
the definition for
a. mass customization.
b. business process reengineering.
c. the theory of constraints.
d. the Pareto principle.
58. Bottlenecks are

a. machine constraints in the production line.
b. machine constraints that restrict the production cycle so idle time at other processes
occurs.
c. useful for identifying any production spot slowdown.
d. restrictions on raw material sources but not the quantity of output.
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59. In analyzing production flow, a bottleneck is
a. an intermediate inventory.
b. always off the critical path.
c. a capacity constraint.
d. related to a non-value-adding activity.
60. Product profit margins are typically judged on a
Period-by-period basis Life-cycle basis
a. yes yes
b. yes no
c. no yes
d. no no
61. Which approaches to costing should be associated with each of the following life-cycle stages?
Development Introduction Maturity
a. Kaizen Target Standard

b. Target Standard Kaizen
c. Target Kaizen Standard
d. Kaizen Standard Target
62. In the introduction stage of a product's life-cycle, which of the following type of costs typically may
create losses rather than profits?
a. advertising
b. assembly
c. design
d. overhead
63. Most studies have indicated that what percent of a product's total life-cycle costs are determined in the
development/design stage?
a. 60%-70%
b. 70%-80%
c. 80%-90%
d. 90%-95%
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64. Which of the following costing methods is the most effective in controlling a product's total life-cycle
cost?
a. kaizen costing
b. target costing
c. standard costing
d. process costing
65. Which of the following formulas is the best representation of the concept of target costing?
a. target cost + profit margin = selling price
b. selling price - target cost = profit margin
c. selling price - profit margin = target cost
d. target cost - standard cost = profit margin
66. Successful product development should include

a. kaizen costing.
b. value engineering.
c. kanban implementation.
67. Value engineering seeks to obtain increased

a. product life-cycle and reduced direct labor inputs.
b. planning team membership and reduced time-to-market.
c. product performance ratio and reduced substitute goods.
d. product functionality and reduced costs.
ANS: D DIF: Difficult OBJ: 17-5
68. Target costing

a. can be applied to services if they are sufficiently uniform.
b. can be applied to services only if they are automated.
c. can be applied to services that are performed in a manufacturing environment.
d. cannot be applied to services.
69. Kaizen costing helps to

a. reduce product costs of products in the design and development stage.
b. keep the target cost as the primary focus after a product enters production.
c. keep profit margin relatively stable as product price declines over the product life cycle.
d. reduce the cost of engineering change orders during each stage of the product life cycle.
ANS: C DIF: Difficult OBJ: 17-5
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70. In which life-cycle stage are product quality improvements and stable selling prices likely to occur?
a. introduction
b. growth
c. maturity
d. decline
71. From a cost management view, research and development cost represents
a. a life-cycle investment
b. a period expense.
c. an unearned revenue.
d. a risk reserve.
72. Life-cycle costing is especially important in which of the following types of companies?
Computers Furniture Textbooks Automobiles
a. yes yes yes yes

b. no yes yes no
c. yes no no yes
d. yes no yes yes
73. Kanban is the Japanese word for

a. production.
b. just-in-time.
c. card.
d. target costing.
74. JIT seeks to

a. reduce production cost while increasing quality.
b. radically redesign the production process for effectiveness.
c. modify all non-value-added activities.
ANS: A DIF: Difficult OBJ: 17-6
75. The JIT philosophy indicates that inventory, as well as which of the following, should be eliminated?
Business-Value-
Suppliers Storage Employees Added Activities
a. yes yes yes yes

b. yes yes no no
c. no no yes no
d. no yes no yes
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76. Companies have often produced significant amounts of unwanted inventory because of
a. variable overhead allocation methodologies.
b. fixed overhead allocation methodologies.
c. variable and fixed overhead allocation methodologies.
d. the financial accounting requirement to expense research and development as incurred.
77. Goods will flow through a production process at the rate of the
a. slowest part of the process.
b. fastest part of the process.
c. average of all the parts of the process.
d. time standards set using externally calibrated benchmarks.
78. A machine constraint creates

a. an autonomation.
b. a bottleneck.
c. a push inventory system.
d. the need for third-party logistics.
79. In a production process with a machine constraint, if a quality control point is to be established, it
should be set up
a. within the machine's processes.
b. directly after the machine has performed its functions.
c. immediately before the machine.
d. at the end of the production process.
80. Managing constraints is a process of

a. backflush costing.
b. design for manufacturability.
c. just-in-time redesign.
d. continuous improvement.
81. Precious Jewels Corporation produces quality jewelry items for various retailers. For the coming year,
it has estimated it will consume 500 ounces of gold. Its carrying costs for a year are $2 per ounce. No
safety stock is maintained. If the EOQ is 100 ounces, what is the cost per order?
a. $40
b. $20
c. $5
d. $25
ANS: B
EOQ = 100 =
10,000 = 500x
$20 = x
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82. Precious Jewels Corporation produces quality jewelry items for various retailers. For the coming year,
it has estimated it will consume 500 ounces of gold. Its carrying costs for a year are $2 per ounce. No
safety stock is maintained. If the EOQ is 100 ounces, what would be the estimate for Precious Jewels’
total carrying costs for the coming year?
a. $200
b. $250
c. $100
d. $1,000
ANS: C
500 oz/100 oz = 5 orders per year * $20 per order cost = $100
83. A firm estimates that its annual carrying cost for material X is $.30 per lb. If the firm requires 50,000
lbs. per year, and ordering costs are $100 per order, what is the EOQ (rounded to the nearest pound)?
a. 5,774 lbs.
b. 4,082 lbs.
c. 1,732 lbs.
d. 1,225 lbs.
ANS: A
EOQ =
EOQ = 5,774 lbs.
Zedlar Corporation
Zedlar Corporation's EOQ for Material A is 500 units. This EOQ is based on:
Annual demand 5,000 units

Ordering costs $12.50
84. Refer to Zedlar Corporation. What is the annual carrying cost per unit for Material A?
a. $0.50
b. $2.00
c. $2.50
d. $5.00
ANS: A
EOQ = 500 units =
CC = $0.50
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85. Refer to Zedlar Corporation. What are Zedlar’s Corp.'s total annual ordering costs for Material A?
a. $6,000
b. $600
c. $125
d. $1,000
ANS: C
# of orders per year = 5,000/500 = 10 orders per year
10 orders per year * $12.50 = $125.00
Clear Day Corporation
Clear Day Corporation manufactures various glass products including a car window. The setup cost to
produce the car window is $1,200. The cost to carry a window in inventory is $3 per year. Annual
demand for the car window is 12,000 units.
86. Refer to Clear Day Corporation. What is the most economical production run (rounded to the nearest
unit)?
a. 6,000 units
b. 3,000 units
c. 9,295 units
d. 3,098 units
ANS: D
EOQ =
EOQ = 3,098 units
87. Refer to Clear Day Corporation. If the annual demand for the car window was to increase to 15,000
units,
a. the number of setups would decrease.
b. the total carrying costs would increase.
c. the economic order quantity would decline.
d. all of the above would occur.
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88. A company has estimated its economic order quantity for Part A at 2,400 units for the coming year. If
ordering costs are $200 and carrying costs are $.50 per unit per year, what is the estimated total annual
usage?
a. 6,000 units
b. 28,800 units
c. 7,200 units
d. 2,400 units
ANS: C
EOQ = 2,400 units =
AU = 7,200 units
89. A company annually consumes 10,000 units of Part C. The carrying cost of this part is $2 per year and
the ordering costs are $100. The company uses an order quantity of 500 units. By how much could the
company reduce its total costs if it purchased the economic order quantity instead of 500 units?
a. $500
b. $2,000
c. $2,500
d. $0
ANS: A
EOQ =
EOQ = 1,000 units
At present, 20 orders are placed for a total annual cost of $2,000. If the EOQ is used, 10
orders will be placed at a cost of $1,000
Because an average of an additional 250 units will be on hand, carrying costs will increase by
$500. The net difference is a savings of $500.
90. A company annually consumes 10,000 units of Part C. The carrying cost of this part is $2 per year and
the ordering costs are $100. The company uses an order quantity of 500 units. If the company operates
200 days per year, and the lead time for ordering Part C is 5 days, what is the order point?
a. 250 units
b. 1,000 units
c. 500 units
d. 2,000 units
ANS: A
Order point = Daily use * Lead time
= (10,000/200) * 5
= 250 units
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91. Which of the following tells management "when" to order?
a. safety stock level
b. order point
c. the economic order quantity
d. the Pareto inventory analysis
92. Which of the following affects the order point?

a. daily usage
b. lead time
c. safety stock
d. all of the above
93. A decrease in the lead time would reduce the

a. order point.
b. safety stock.
c. economic order quantity.
d. ordering costs.
94. The size of the safety stock is directly affected by all of the following, except the
a. cost of a stockout.
b. probability of a stockout.
c. carrying cost of stock.
d. economic order quantity.
95. If no safety stock is carried, the average inventory is equal to the

a. order point/2.
b. order point x 2.
c. economic order quantity/2.
d. economic order quantity x 2.
96. The role of safety stock in an organization is to

a. reduce the lead time for an order to be received.
b. reduce the probability of a stockout.
c. reduce the order point.
d. decrease the economic order quantity.
97. The optimal size of the safety stock is defined by the point where the
a. costs of carrying the safety stock equal stockout costs.
b. setup costs equal stockout costs.
c. ordering costs equal stockout costs.
d. reorder point equals safety stock.
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98. If a company carries safety stock and its annual carrying costs per unit are $0.30, what formula yields
the total annual carrying costs?
a. $0.30 x [(EOQ/2) + Safety stock)]
b. $0.30 x (EOQ + Safety stock)
c. $0.30 x [(EOQ x 2) + Safety stock)]
d. $0.30 x (EOQ - Safety stock)
Douglas Corporation
Douglas Corporation operates its factory 300 days per year. Its annual consumption of Material Y is
1,200,000 gallons. It carries a 10,000 gallon safety stock of Material Y and its lead time is 12 business
days.
99. Refer to Douglas Corporation. What is the order point for Material Y?
a. 10,000 gallons
b. 38,000 gallons
c. 48,000 gallons
d. 58,000 gallons
ANS: D
Order point = (Daily use * Lead time) + Safety Stock
= (4,000 * 12) + 10,000
= 58,000 gallons
100. Refer to Douglas Corporation. If the EOQ for Material Y is 30,000 gallons, and the carrying cost per
gallon per year is $.25, what is the total annual carrying cost for Material Y?
a. $3,750
b. $7,500
c. $6,250
d. $10,000
ANS: C
Annual carrying cost = [(EOQ/2) + Safety stock] * per unit carrying cost
= (15,000 + 10,000) * $0.25
= $6,250
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101. Atkins Corporation consumes 1,200,000 gallons of Material Y per year. Its order quantity is 30,000
gallons. It maintains a safety stock of 10,000 gallons and its annual carrying costs are $0.25 per gallon
per year. If the ordering cost is $20 per order, what are the total annual ordering costs?
a. $600
b. $800
c. $8,300
d. $1,200
ANS: B
Annual ordering costs = (1,200,000/30,000) * $20
= 40 orders * $20
= $800
Rawson Corporation
Rawson Corporation’s order quantity for Material T is 5,000 lbs. If the company maintains a safety
stock of T at 500 lbs., and its order point is 1,500 lbs.
102. Refer to Rawson Corporation. What is the lead time assuming daily usage is 50 lbs.?
a. 30 days
b. 100 days
c. 10 days
d. 20 days
ANS: D
Order point = (Daily use * Lead time) + Safety Stock
1,500 = (50 * LT) + 500
1,000 = (50 * LT)
20 = LT
103. Refer to Rawson Corporation. What would be the total annual carrying costs assuming the carrying
cost per unit is $0.20?
a. $1,000
b. $600
c. $100
d. $1,100
ANS: B
(5,000units/2) + 500 units = 3,000 units *$0.20/unit = $600
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104. For Raw Material B, a company maintains a safety stock of 5,000 pounds. Its average inventory
(taking into account the safety stock) is 8,000 pounds. What is the apparent order quantity?
a. 16,000 lbs.
b. 6,000 lbs.
c. 10,000 lbs.
d. 21,000 lbs.
ANS: B
(8,000 - 5,000) lbs * 2 = 6,000 lbs.
105. In an Pareto inventory analysis, the items that are most likely to be controlled with a red-line system
are the
a. A items.
b. B items.
c. C items.
d. items on a perpetual inventory.
106. Which of the following might be appropriate for items in the "C" category of an Pareto inventory
analysis?
a. a red-line system
b. a two-bin system
c. a periodic inventory system
d. all of the above
107. The __________________ would not affect the economic order quantity.
a. company's weighted average cost of capital
b. cost of purchase requisition forms
c. cost of insuring inventory
d. cost of a stockout
108. All other factors equal, a decrease in the order quantity will
a. decrease the annual carrying costs.
b. decrease the annual ordering costs.
c. increase the lead time.
d. reduce the safety stock.
109. The economic order quantity is not affected by the

a. estimate of the annual material consumption.
b. cost of insuring a unit of inventory for a year.
c. cost of purchase-order forms.
d. safety stock level.
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110. A decrease in the price of a raw material could result in a(n)
a. increase in the lead time.
b. increase in the EOQ.
c. decrease in the order point.
d. increase in the setup costs.
111. The number of orders that will be submitted each year for raw material is given by which formula?
a. Economic order quantity x order point
b. Total annual material needs/economic order quantity
c. Order point/economic order quantity
d. Total annual material needs/safety stock
112. The economic production run quantity directly affects the

a. order point for raw material inventories.
b. safety stock for finished goods inventory.
c. level of finished goods inventory.
d. lead time for producing finished goods inventory.
SHORT ANSWER
1. Why may a JIT control system be useful in disclosing a firm's inefficiencies and problems?
ANS:
The JIT control system is based on a philosophy that inventory is undesirable. Subscribers to the JIT
philosophy believe inventory reductions expose organizational problems and inefficiencies. These
problems and inefficiencies may not be brought to management's attention if inventories are not
pushed to lower and lower levels. They would remain hidden and undetectable at higher levels of
inventory.
2. What is the purpose of the EOQ model?
ANS:
The purpose of the EOQ model is to identify the least cost quantity of a material to be purchased at
each order point. The model explicitly considers the carrying and ordering costs and identifies the
purchase quantity that minimizes the total of these costs.
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3. Why does a "push" based inventory control system generate larger inventory levels than a "pull"
system?
ANS:
Larger levels of inventory exist by design in push production control systems. The inventory buffers
permit lower levels of communication between business segments, permit longer production runs, and
protect the firm from environmental uncertainties and unforeseen interruptions in production or
supplies.
4. What does the term "pull" mean in the context of production control?
ANS:
Pull simply refers to the fact that the pace and level of production are geared to product demand. Each
work center sets the pace for the next upstream work center. Customer demand paces the final
downstream work center.
5. Identify and discuss how sales and costs are affected during the five stages of the product life cycle.
ANS:
The five stages of the product life cycle are (1) development, (2) introduction, (3) growth, (4) maturity,
and (5) decline. In the development stage, no production costs or sales exist, but R & D costs are
extremely high. During the introduction stage low unit sales exist while high advertising costs are
evident. The growth stage sees increasing unit sales and decreasing production costs per unit. The
maturity stage witnesses peak unit sales and a stabilization of production costs per unit. During the
decline stage unit sales decrease while production costs per unit increase.
6. Discuss differences in approach and potential usage between target and kaizen costing.
ANS:
Target costing is considered a procedural approach that is used to determine a maximum allowable
cost for a product, while kaizen costing is a mandate to reduce costs, increase product quality, and/or
improve production process through continuous improvement. Target costing has a large potential for
cost reduction in life-long product cost because these costs are embedded in the product during design
and development. Kaizen costing has limited potential in cost reduction of existing products, but may
be useful in target costing in the future.
7. How does adopting a JIT system affect the firm's relationship with suppliers and how must suppliers
change their way of doing business?
ANS:
The JIT manufacturer will limit the number of suppliers to a few. Long-term contracts are entered into
with suppliers. Suppliers' raw material must be top quality with no defects.
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Small quantities of raw material are delivered frequently and little or no raw material is maintained by
the buyer.
Suppliers must be located close enough to the JIT buyer to deliver small quantities very quickly. The
supplier must agree to providing a top-quality product to its JIT customer.
8. Why is it important for a company to be (geographically) close to its suppliers to implement a JIT
inventory control system?
ANS:
The geographical proximity is important to minimize shipping and handling costs of supplies and
materials. Geographical proximity also facilitates frequent communication and joint planning between
a supplier and customer.
9. Why might it be necessary to make adjustments to the accounting system in a firm that adopts JIT?
ANS:
JIT production control systems foster automation and reduced levels of inventory. Consequently, raw
material inventories and direct labor costs may be too small to warrant separate cost pools-they can be
combined with other cost pools.
Additional adjustments may be necessary to accommodate standard costs, which are constantly
adjusted to reflect the latest technological changes in production methods. Also, more costs could be
traced to specific products and fewer costs would have to be allocated.
10. What is the relationship between warehouse space and the length of production runs?
ANS:
Longer production runs increase the levels of specific inventories. To accommodate long production
runs, significant warehouse space needs to be available for storing intermediate and final products.
11. What are the three primary goals of the just-in-time (JIT) philosophy?
ANS:
1. Elimination of any production process or operation that does not add value to the product or
service.
2. Continuous improvement in production/performance efficiency.
3. Reduction in the total cost of production/performance while increasing quality.
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12. What are the principal characteristics of the Internet business model?
ANS:
This model refers to a business with few physical assets, little management hierarchy, and a direct
pipeline to customers.
13. Compare and contrast traditional manufacturing systems with flexible manufacturing systems on the
following factors:
Factor Traditional Manufacturing Flexible
Manufacturing System
Product Variety
Response time to market
needs
Worker tasks
Production runs
Lot sizes
Setups
Information requirements
Production activity
ANS:
Factor Traditional Manufacturing Flexible

Manufacturing System
Product Variety Limited Extensive
Response time to market Slow Rapid
needs
Worker tasks Specialized Diverse
Production runs Long Short
Lot sizes Large Small
Setups Slow and expensive Fast and inexpensive
Information requirements Batch-oriented On-line real time
Production activity Labor intensive Technology intensive
DIF: Difficult OBJ: 17-7
PROBLEM
1. Sprint Manufacturing Company estimates that it will consume 400,000 units of Part 101 in the coming
year. The ordering cost for this unit is $3.20. What would be the carrying costs per unit if the EOQ
model indicates that it is optimal to place exactly 50 orders for the upcoming year?
ANS:
If projected usage for the year is 400,000 units, the EOQ would be 8,000 units (400,000/50). To
determine the carrying costs per unit, the following equation is solved:
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2. Orange Corporation estimates that it will consume 400,000 units of Part 303 in the coming year. The
ordering cost for this unit is $3.20. Orange Corporation wants to maintain a safety stock of 1,000 units,
and its factory operates 200 days per year. What is the order point if the lead time is 2 days?
ANS:
The order point = (daily usage x lead time) + safety stock daily usage = 400,000/200 = 2,000; lead
time = 2 days, safety stock = 1,000
Order point = (2,000 x 2) + 1,000 = 5,000 units
3. Scrumptious Spices manufactures a special blend of beef marinade. The company buys one of the
spices used in the marinade in 10-pound bags that cost $5 each. The company uses 50,000 of the bags
per year, and usage occurs evenly throughout the year.
The average cost to carry a 10-pound bag in inventory per year is $1. The cost to place an order is
$12.
1. Determine the economic order quantity for the spice in terms of 10 pound bags.
2. If the company works 250 days per year, on average how many bags of spice are used
per working day?
3. If the lead time for an order is normally five working days, determine the reorder point.
4. If the company normally carries 50 bags as safety stock, determine the reorder point for the spice.
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ANS:
1. EOQ =
where EOQ = Economic order quantity
P = Cost of placing and receiving an order
D = Annual demand in units
C = annual cost of carrying one unit in stock for one year
EOQ =
= 1,095 bags
2. Bags used per day = 50,000/250 = 200 bags per working day.
3. Reorder point = Rate of usage x Lead time = 200 bags x 5 working days = 1,000 bags
4. Reorder point = (Average rate of usage x Lead time) + Safety stock

= (200 bags x 5 days) + 50 days = 1,050 bags
4. Benoit Corporation produces lawn chairs. In order to produce the frames for the furniture, special
equipment must be set up. The setup cost per frame is $50. The cost of carrying frames in inventory
is $4 per frame per year. The company produces 10,000 lawn chairs per year.
1. Compute the number of frames that should be produced per setup in order to minimize total
setup and carrying costs.
2. Compute the total setup and carrying costs associated with the economic order quantity?
ANS:
1. EOQ =
EOQ = 500 frames should be produced per setup.
2. Total setup costs = ($50)(10,000/500)

$1,000
Total carrying costs = ($4)(500/2)

= $1,000
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Chapter 15--Managing Costs and Uncertainty
LEARNING OBJECTIVES
LO 1 What are the functions of an effective cost control system?

LO 2 What are the generic approaches to cost control?
LO 3 What factors cause costs to change from period to period or to deviate from
expectations?
LO 4 What are the two primary types of fixed costs, and what are the characteristics of
each?
LO 5 What are the typical approaches to controlling discretionary fixed costs?
LO 6 What are the objectives managers strive to achieve in managing cash?
LO 7 How is technology reducing costs of supply chain transactions?
LO 8 Why is uncertainty greater in dealing with future events than past events?
LO 9 What are the four generic approaches to managing uncertainty?
QUESTION GRID
True/False
1 x x
2 x x
3 x x
4 x x
5 x x
6 x x
7 x x
8 x x
9 x x
10 x x
11 x x
12 x x
13 x x
14 x x
15 x x
16 x x
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18 x x
19 x x
20 x x
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Completion
1 x x
2 x x
3 x x
4 x x
5 x x
6 x x
7 x x
8 x x
9 x x
10 x x
Multiple
Choice
1 x x
2 x x
3 x x
4 x x
5 x x
6 x x
7 x x
8 x x
9 x x
10 x x
11 x x
12 x x
13 x x
14 x x
15 x x
16 x x
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18 x x
19 x x
20 x x
21 x x
22 x x
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25 x x
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31 x x
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34 x x
35 x x
36 x x
37 x x
38 x x
39 x x
40 x x
41 x x
42 x x
43 x x
44 x x
45 x x
46 x x
47 x x
48 x x
49 x x
50 x x
51 x x
52 x x
53 x x
54 x x
55 x x
Short-
Answer
1 x x
2 x x
3 x x
4 x x
5 x x
6 x x
7 x x
8 x x
9 x x
10 x x
Problem
1 x x
2 x x
3 x x
4 x x
5 x x
6 x x
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TRUE/FALSE
1. Effective cost control begins in the planning stage of the management cycle.
2. For cost control purposes, actual costs should be compared to prior period costs.
3. A flexible budget compares actual costs to budgeted costs at several activity levels
4. When a CPA firm uses taped lectures rather than live presentations for continuing education, it is
engaging in a cost reduction strategy.
5. Cost control should be viewed as a short-term process.
ANS: F DIF: Easy OBJ: 15-3
6. Property taxes on an organization’s plant building are considered as committed costs.
7. Depreciation of fixed assets is considered to be a discretionary cost.
8. The benefits of discretionary costs are usually measurable in monetary terms.
9. Research and development expenses are normally considered to be discretionary costs.
10. When budgeting for discretionary costs, less is always better.
11. The value of discretionary costs is often measured using non-monetary measures.
12. Engineered costs may be either variable or fixed.
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13. Maintaining excessive cash may reduce firm profitability because of low returns on cash investments.
14. An organization’s bond rating may cause the organization to hold larger levels of cash than are
necessary for operations.
15. Increasing the discount period on accounts receivable will increase an organization’s cash levels.
16. Accelerating inventory turnover will increase an organization’s levels of cash.
17. The higher an organization’s capital costs, the greater the opportunity cost of holding idle cash.
18. Supply chain management can reduce the processing time for an organization to obtain raw materials.
19. A coefficient of determination has a value between -1 and +1.
20. A coefficient of determination has a value between 0 and +1.
COMPLETION
1. Increases in per unit variable costs and total fixed costs should be minimized through the process of
________________________________.
ANS: cost containment
2. Finding acceptable alternatives to higher cost items or not spending money for goods and services is
referred to as ________________________________.
ANS: cost avoidance
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3. Lowering existing costs of producing a good or service is referred to as ___________________.
ANS: cost reduction
4. Costs that are necessary to sustain an organization’s operations are referred to as

____________________________.
ANS: committed costs
DIF: Easy OBJ: 15-4
5. A cost that must be reviewed periodically to determine if it is still appropriate and necessary is referred
to as a __________________________________________.
ANS: discretionary cost
6. Costs that have been found to bear observable and known relationships to a quantifiable activity base
are referred to as __________________________________.
ANS: engineered costs
7. Having sufficient cash to pay liabilities as they become due is referred to as an organization’s
________________________.
ANS: liquidity
DIF: Easy OBJ: 15-6
8. Current assets minus current liabilities equals ___________________________.
ANS: working capital
DIF: Easy OBJ: 15-6
9. The portion of variance in a dependent variable explained by an independent variable is referred to as

the _________________________________________.
ANS: coefficient of determination
10. The use of options and forward contracts to manage price risk is referred to as ___________________.
ANS: hedging
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MULTIPLE CHOICE
1. A logical structure of activities designed to analyze and evaluate management of expenditures is a cost
a. consciousness system.
b. understanding system.
c. avoidance system.
d. control system.
2. For cost control purposes, actual costs should be compared to

a. the original budget.
b. actual costs for the prior period.
c. a flexible budget.
d. a static budget.
3. When the organizational output is difficult to define, management may rely on ___________ for cost
control.
a. qualitative measures
b. program budgeting
c. surrogate measures of output
d. all of the above
4. Setting organizational goals and objectives and preparing a budget are aspects of control
a. during an event.
b. before an event.
c. after an event.
d. before, during, and after an event.
5. Which of the following does not create a specific price level change?
a. change in production technology
b. change in the rate of inflation
c. changes due to supply and demand
d. changes in the number of competing suppliers
6. As the economy becomes more and more depressed, a company's management decides to slash
spending on research and development. What is the likely effect of this action on net income? Net
income will be
a. higher this period and lower in future periods.
b. higher this period and higher in future periods.
c. lower this period and higher in future periods.
d. lower this period and lower in future periods.
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7. Spending levels in prior years are often the basis of
a. traditional budgets.
b. Zero-base budgets.
c. variance targets.
d. engineered cost analyses.
8. Minimizing period-by-period increases in unit variable costs and total fixed costs defines efforts of
cost
a. control.
b. avoidance.
c. containment.
d. reduction.
9. Cost containment practices by a firm would not be effective for cost increases caused by
a. inflation.
b. a reduction in the quantity of an input purchased.
c. normal seasonality.
d. a reduction in the number of suppliers.
10. All of the following are explanations of cost changes. Which of these influences can be substantially
affected by cost containment measures?
a. inflation/deflation
b. changes in quantities purchased
c. technological change
d. changes in supply chain costs
11. The greatest degree of control for committed fixed costs is exerted
a. in the post-investment audit.
b. during the life of the investment.
c. prior to acquisition.
d. by equipment operators.
12. Careful analysis of the capital budget is an important control activity for
a. variable costs.
b. discretionary costs.
c. committed costs.
d. period costs.
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13. An effective control system functions before, during, and after an event. However, little control is
possible during the event for most
a. variable manufacturing costs.
b. variable period costs.
c. discretionary fixed costs.
d. committed fixed costs.
14. The term "committed costs" refers to costs that

a. management decides to incur in the current period to enable the company to achieve
objectives other than the filling of orders placed by customers.
b. are likely to respond to the amount of attention devoted to them by a specified manager.
c. are governed mainly by past decisions that established the present levels of operating and
organizational capacity and that only change slowly in response to small changes in
capacity.
d. fluctuate in total in response to small changes in the rate of utilization of capacity.
15. A committed fixed cost can

a. never be eliminated.
b. be eliminated in the short term and in the long term.
c. be eliminated in the long term but not in the short term.
d. be eliminated in the short term but not in the long term.
16. Which of the following is an example of a committed fixed cost?

a. investment in production facilities
b. advertising
c. preventive maintenance
d. employee training programs
17. A company would be reducing its discretionary costs if it

a. fired a production supervisor.
b. closed its research and development department.
c. successfully negotiated a reduction in its factory rent.
d. reduced its direct labor costs by hiring temporary workers.
18. If a discretionary cost can be treated like an engineered cost, cost control may be achieved through the
use of
a. program budgeting.
b. zero-base budgeting.
c. capital budgeting.
d. flexible budgeting.
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19. Most discretionary costs relate to
a. plant and equipment acquisitions.
b. long-term investments.
c. basic personnel costs.
d. service activities.
20. If a cost can be reduced to zero in the short run without significantly harming the organization, the cost
is a
a. variable cost.
b. committed cost.
c. discretionary cost.
d. product cost.
21. Discretionary costs are often difficult to control because

a. it is difficult to measure the cost.
b. they cannot be changed in the short run.
c. they cannot be changed from period to period.
d. it is difficult to measure the benefits of discretionary activities.
22. Which of the following is likely to be a discretionary cost in most organizations?

a. managerial training programs
b. managerial labor costs
c. factory utilities
d. factory rent
23. The level of discretionary costs

a. are set by management for one period at a time.
b. cannot be changed in the short run.
c. are determined when capital investment is undertaken.
d. always varies with sales.
24. Which of the following is not a factor that directly affects the budget for a discretionary cost?
a. the importance of the activity to the achievement of the organization's goals
b. last period's budget
c. the expected level of operations
d. managerial negotiations in the budgeting process
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25. If an actual discretionary cost is exactly equal to the budgeted level of that cost, which of the following
statements is true?
a. Funds were appropriately spent.
b. The discretionary activity was efficient.
c. The discretionary activity was effective.
d. None of the above.
26. Discretionary activities in an organization are determined based on

a. organizational policies and managerial preferences.
b. the budgeted amount from the prior period.
c. the level of long-term investment.
d. an organization's internal control.
27. The term "discretionary costs" refers to

a. costs that management decides to incur in the current period to enable the company to
achieve objectives other than the filling of orders placed by customers.
b. costs that are likely to respond to the amount of attention devoted to them by a specified
manager.
c. costs that are governed mainly by past decisions that established the present levels of
operating and organizational capacity and that only change slowly in response to small
changes in capacity.
d. amortization of costs that were capitalized in previous periods.
28. Avoidable costs are usually

a. committed.
b. common.
c. discretionary.
d. joint.
29. Which of the following is least likely to be a discretionary cost?

a. salaries of salespeople
b. advertising
c. maintenance
d. insurance
30. For cost control purposes, fixed costs are classified as

a. product or period costs.
b. discretionary or committed.
c. direct or common.
d. sunk or avoidable.
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31. If economic activity slows down, total costs could easily decline in which of the following categories?
a. variable costs and committed fixed costs
b. variable costs and discretionary fixed costs
c. variable costs only
d. committed fixed costs only
32. Usually, with respect to a variable cost, optimal control is exerted when the cost
a. can be controlled prior to incurrence.
b. is compared to its budget amount.
c. increases steadily over time.
d. is closely monitored.
33. Which kind of costs could be eliminated by closing a sales office?
Direct Discretionary Committed
a. yes yes no
b. yes no yes
c. yes no no
d. no no yes
34. A major difference between committed and discretionary fixed costs is that
a. incurring committed fixed costs is less risky than using discretionary costs.
b. managers are usually responsible for committed fixed costs but not for discretionary fixed
costs.
c. incurring discretionary fixed costs rather than committed fixed costs gives a company
more flexibility in controlling costs.
d. companies are using more discretionary fixed costs because labor is easier to "remove"
than technology.
35. The distinction between avoidable and unavoidable costs is similar to the distinction between
a. variable costs and fixed costs.
b. variable costs and mixed costs.
c. step-variable costs and fixed costs.
d. discretionary costs and committed costs.
36. The maximum allowable expenditure is the

a. appropriation.
b. allowance.
c. allocation.
d. committed fixed cost.
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37. If a firm is successful in meeting its output goal for a period, the firm has been
a. efficient.
b. effective.
c. profitable.
d. exercising cost containment measures.
38. A reasonable measure of efficiency relies on

a. qualitative measures of inputs and outputs.
b. a match of inputs in one period with outputs in subsequent periods.
c. a causal relationship between inputs and outputs.
d. a ratio of planned output to actual output.
39. A ratio of outputs to inputs is a(n)

a. effectiveness measure.
b. efficiency measure.
c. qualitative measure.
d. cost reduction measure.
40. A small manufacturing company recently stated its sales goal for a period was $100,000. At this level
of activity, its budgeted expenses were $80,000. Its actual sales were $100,000, but its actual expenses
were $85,000. This company operated
a. effectively and efficiently.
b. neither effectively nor efficiently.
c. effectively but not efficiently.
d. efficiently but not effectively.
41. Proficient Corporation has a sales goal of $500,000 for the coming year. Based on this level of
activity, Proficient budgets its total expenses at $450,000. Actual sales are $480,000 and actual costs
are $460,000. Proficient Corporation’s operations were
a. both efficient and effective.
b. neither efficient nor effective.
c. efficient but not effective.
d. effective but not efficient.
42. The difference between actual sales and budgeted sales is

a. a flexible budget variance.
b. an efficiency measure.
c. required in program budgeting.
d. an effectiveness measure.
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43. A cost that is found to bear an observable and known relationship to a quantifiable activity base is a(n)
a. discretionary cost.
b. product cost.
c. period cost.
d. engineered cost.
44. Control of engineered costs is frequently achieved through the use of

a. zero-base budgeting.
b. program budgeting.
c. standards.
d. cash budgeting.
45. A variance represents the difference between a budgeted and an actual cost. Thus, the variance
measures
a. only controllable cost differences.
b. only uncontrollable cost differences.
c. both uncontrollable and controllable cost differences.
d. the effectiveness of management.
46. Assume actual output exceeds the level of output in the original budget. You would expect costs in
which of the following categories to exceed the original budget?
a. total variable costs
b. committed fixed costs
c. discretionary fixed costs
d. all of the above
47. An organization plans to produce and sell 50,000 units. It actually produces and sells 45,000 units.
Total costs would be expected to be below the planned level due to cost
a. consciousness.
b. control.
c. reductions.
d. behavior.
570
Edwards Company
The following information is provided for Edwards Company for the month of June
Actual Standard
1,800 units 5 DLHs per unit @ $10.00 per DLH
8,900 DLHs @ $10.50 per DLH VOH rate per DLH $ .75
Variable OH $6,400 FOH rate per DLH $1.90
Fixed OH $17,500 Budgeted FOH $16,910
48. Refer to Edwards Company. What is the price variance?

a. $4,450 F
b. $4,450 U
c. $1,000 F
d. $1,000 U
ANS: B
AQ*(AP - SP) = Price Variance

8,900 DLH * ($10.50/DLH - $10.00/DLH) = $4,450 U
49. Refer to Edwards Company. What is the efficiency variance?

a. $4,450 F
b. $4,450 U
c. $1,000 F
d. $1,000 U
ANS: C
SP*(AQ - SQ) = Price Variance
$10/DLH * (8,900 DLH - 9,000 DLH) = $1,000 F
50. Refer to Edwards Company. What is the spending variance?

a. $590 U
b. $590 F
c. $190 F
d. $190 U
ANS: A
Spending Variance = Actual Cost - Budgeted Fixed Cost
= $(17,500 - $16,910)
= $590 U
571
51. Refer to Edwards Company. What is the volume variance?
a. $590 U
b. $590 F
c. $190 F
d. $190 U
ANS: C
Volume Variance = Budgeted Fixed Cost - (Standard Fixed Rate * Standard Hours Allowed)
= $16,910 - ($1.90/DLH * 9,000 DLH)
= $(16,910 - 17,100)
= $190 F
52. Which of the following strategies is used to deal with uncertainty related to a specific event?
a. Statistical analysis
b. Cost restructuring
c. Hedging
d. Insurance
53. Which of the following strategies is used to deal with uncertainty related to price risk?
c. Hedging
d. Insurance
54. Which of the following strategies is used to deal with uncertainty related to estimating future costs?
c. Hedging
d. Insurance
55. In the least-squares equation, y = a + bX, a represents
a. the coefficient of determination.

b. the level of activity.
c. the fixed component of a cost.
d. the variable cost per unit.
572
SHORT ANSWER
1. What factors make discretionary costs difficult to control?
ANS:
Discretionary costs are difficult to control because it is difficult to identify the exact benefits of
discretionary activities and the relationship of these activities to the organization's output and goals.
Thus, it is difficult to decide at what level a discretionary activity should be funded or if it should be
funded at all based on the lack of a definite causal relationship between the discretionary activity and
the firm's output and goals.
2. What are the differences between committed fixed costs and discretionary fixed costs?
ANS:
Committed fixed costs are those costs that flow from the basic existence of the organization. These are
the direct costs of the organization's long-term investments (such as plant and equipment) and the costs
of essential personnel. These costs can only be changed in the long run without significantly affecting
the organization. Discretionary fixed costs are all fixed costs that do not fit into the committed
category. This includes the costs of auxiliary service activities including activities that could be
discontinued in the short run without adversely affecting the long-run viability of the organization.
3. When can a discretionary fixed cost be subjected to control methods that are used for engineered
costs?
ANS:
When a discretionary cost is repetitive and can be related to some fundamental activity measure (such
as machine hours or units of output), it may be treated like an engineered cost. With a repetitive cost
that can be related to an activity base, performance standards can be developed and flexible budget
variances can be computed and used as cost control tools.
4. What factors influence the total level of discretionary costs in an organization?
ANS:
Organizations tend to fund discretionary activities at different levels depending on the state of the
economy and the original profit level. When management anticipates unfavorable economic conditions
or downturns in profitability, discretionary costs may be reduced. Likewise, they may be increased as
economic conditions improve. Total discretionary expenditures will also vary as certain activities lose
their funding and new discretionary activities are initiated.
573
5. How does strategic staffing fit in with departmental staffing?
ANS:
Strategic staffing is based on a department's needs related to its long-range objectives and those of the
overall company. The department looks at its needs to see how a combination of temporary and
permanent personnel fills the bill. By using temporary personnel, flexible staffing is provided that
helps insulate the jobs of permanent personnel. Also, when temporary personnel are used by a
department, the overall cost of organizational fringe benefits is reduced, thereby saving funds for other
needs.
6. Discuss the various elements of the cost control process.
ANS:
Cost understanding is one element of a cost control system. An organization needs to understand that
costs may change from one period to the next or understand why costs differ from budgeted amounts.
Total variable costs will increase/decrease with different levels of activity. Costs can also change due
to inflation/deflation creating general price-level changes. Costs also change because of
supply/supplier cost adjustments. Lastly, costs may change because of quantity purchased by the
organization.
Cost containment is another element of the cost control process. Cost containment is defined as the
practice of minimizing, to the extent possible, period-to-period increases in per-unit variable and total
fixed costs. Cost containment is possible for costs that rise due to competition, seasonal variations, and
quantities purchased.
A third element of the cost control process is cost avoidance. Cost avoidance is defined as the practice
of finding acceptable alternatives to high-cost products and/or not spending money for unnecessary
goods/services.
A final element of the cost control process is cost reduction. Cost reduction means lowering current
costs especially for goods/services that may not be needed currently.
7. What are the five steps in implementing a system of cost control?
ANS:
1. Investigate and understand the types of costs incurred by the organization.
2. Communicate the need for cost consciousness to all employees.
3. Motivate employees through education and incentives.
4. Compare actual results to budgets and analyze for future methods of improvement.
5. View cost control as a long-run process not a short-term solution.
574
8. What are the usual sources for cash in an organization?
ANS:
1. Sale of equity or debt securities or other short-term instruments.
2. Sale of assets that are no longer necessary or productive.
3. Sale of goods for a profit in the normal production/sales cycle.
4. Loans from banks or other financial institutions.
DIF: Easy OBJ: 15-6
9. What are four generic strategies that may be used in cost management to deal with uncertainty?
ANS:
1. Explicitly considering uncertainty when estimating future costs by using statistical tools
such as least squares regression.
2. Structuring costs to adjust to uncertain outcomes.
3. Using options and forward contracts to mitigate price risk through hedging.
4. Insuring against occurrences of specific events.
10. What are the two main sources of uncertainty in cost management?
ANS:
1. Lack of identification or understanding of cost drivers. Some portion of a cost is not
predictable based on the cost driver.
2. Unforeseen events that cannot be fully planned for. It is not possible to fully eliminate
uncertainty; however management should make every effort to minimize its impact.
PROBLEM
1. Bertrand Company has made the following information available for the month of January:
Actual Standards
1,500 units produced 2 DLH per unit @ $10
2,400 DLH used @ $10.25 per DLH
Assume that Bertrand hires part-time employees for production of these units.
Compute the price and efficiency variances.
ANS:
2,400 × $10.25 $24,600

2,400 × $10.00 24,000
Price variance $ 600 U
2,400 × $10.00 $24,000

(1,500 × 2) × $10.00 30,000
Efficiency variance $ 6,000 F
575
2. Romano Company has provided the following information for the month of July:
Actual Standards
800 units produced 2 DLH per unit @ $5.00
Actual DL cost $6,750 $1 fixed overhead per DLH
Assume that Romano hires full-time employees who are paid a total of $6,500 per month.
Compute the spending and volume variances.
ANS:
Actual labor cost $6,750

Budgeted labor cost 6,500
Spending variance $ 250 U
Budgeted labor cost $6,500

(800 × 2) × $5 8,000
Volume variance $1,500 F
3. Roach and Associates provided the following information relative to the times and costs to prepare a
simple last will and testament:
Standards Actual
2 DLH @ $50 per DLH 500 simple wills were prepared during the year
1,100 DLHs utilized during the year @ $52 per DLH
Compute the price and efficiency variances.
ANS:
1,100 × $52 $57,200

1,100 × $50 55,000
Price variance $ 2,200 U
1,100 × $50 $55,000

(500 × 2) × $50 50,000
Efficiency variance $ 5,000 U
Hanks Corporation
Hanks Corporation manufactures and sells baseball bats. For a recent period, its production and sales
objectives were each set at 20,000 units. Also, for this period the firm had estimated costs as follows:
Variable production costs $3 per unit

Variable selling costs $2 per unit
Committed fixed costs $30,000 per period
576
Discretionary fixed costs $40,000 per period
4. Refer to Hanks Corporation. For this question only, assume that Hanks Corporation actually produced
and sold 18,000 bats. Hanks Corporation's operations for the period would (on an overall basis) be
regarded as efficient if total costs were below what amount?
ANS:
First, remember how fixed and variable costs change when volume changes. Fixed costs remain
constant in total and variable costs remain constant on a per-unit basis. To be regarded as efficient, the
company's costs would need to be at or below the flexible budget for 18,000 units. The flexible budget
for all costs would be:
[18,000 × ($3 + $2)] + $30,000 + $40,000 = $90,000 + $70,000 = $160,000
DIF: Moderate
5. Refer to Hanks Corporation. For this question only, assume Hanks Corporation actually produced and
sold 19,000 bats. At this level of operation, Hanks Corporation's total costs were $170,000. Evaluate
Hanks Corporation's success in terms of effectiveness and efficiency.
ANS:
Hanks Corporation was not entirely effective in reaching its goal because its objective was to produce
and sell 20,000 bats. It only produced and sold 19,000. Its operations would still be regarded as
efficient if it contained costs below the flexible budget for 19,000 units, which would be:
[19,000 × ($3 + $2)] + $30,000 + $40,000 = $95,000 + $70,000 = $165,000.
Since its actual costs were $170,000, the company was neither effective nor efficient in achieving its
operating objectives.
DIF: Moderate
6. Refer to Hanks Corporation. Note that the budget for discretionary fixed costs is $40,000. If actual
discretionary fixed costs were $50,000, could cost control have still been effective? Explain.
ANS:
Yes, cost control could have been effective. Company managers may have deliberately and
consciously overspent on certain items because of opportunities or challenges that emerged during the
period. For example, advertising expenses may have been increased because new competitors entered
the baseball bat market, or research and development expenditures may have been boosted because of
the discovery of a new metal alloy that could revolutionize the baseball bat market. Another
explanation would be that cost control was effective, but costs increased dramatically for
uncontrollable reasons (severe inflation).
DIF: Easy
577

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Chapter 16—Implementing Quality Concepts

LO 1 What is quality, and from whose viewpoint should it be evaluated?

ANS: T DIF: Easy OBJ: 16-1

2. Inspection of incoming inventory is a value-adding activity.

ANS: F DIF: Moderate OBJ: 16-1

3. Storage of unneeded inventory is a non-value added item.

ANS: T DIF: Moderate OBJ: 16-1

ANS: T DIF: Easy OBJ: 16-1

ANS: F DIF: Moderate OBJ: 16-1

ANS: T DIF: Moderate OBJ: 16-1

ANS: T DIF: Moderate OBJ: 16-1

8. Strategic benchmarking is industry specific in its approach.

ANS: F DIF: Moderate OBJ: 16-2

ANS: T DIF: Moderate OBJ: 16-2

ANS: T DIF: Moderate OBJ: 16-2

ANS: F DIF: Moderate OBJ: 16-2

12. A total quality system should place an emphasis on inspection.

ANS: F DIF: Moderate OBJ: 16-3

ANS: T DIF: Moderate OBJ: 16-3

ANS: T DIF: Moderate OBJ: 16-3

ANS: T DIF: Moderate OBJ: 16-3

ANS: F DIF: Moderate OBJ: 16-3

17. Reworking a product is an appraisal cost.

ANS: F DIF: Moderate OBJ: 16-4

18. Reworking a product is an internal failure cost.

ANS: T DIF: Moderate OBJ: 16-4

19. Testing and adjusting manufacturing equipment is a prevention cost.

ANS: T DIF: Moderate OBJ: 16-4

20. Testing and adjusting manufacturing equipment is an appraisal cost.

ANS: F DIF: Moderate OBJ: 16-4

ANS: T DIF: Moderate OBJ: 16-4

22. Conducting a quality audit is an appraisal cost.

ANS: T DIF: Moderate OBJ: 16-4

23. Conducting a quality audit is a prevention cost.

ANS: F DIF: Moderate OBJ: 16-4

ANS: T DIF: Moderate OBJ: 16-5

ANS: T DIF: Easy OBJ: 16-6

ANS: T DIF: Easy OBJ: 16-7

ANS: F DIF: Moderate OBJ: 16-8

ANS: T DIF: Moderate OBJ: 16-8

DIF: Easy OBJ: 16-1

DIF: Easy OBJ: 16-2

ANS: results benchmarking

DIF: Moderate OBJ: 16-2

ANS: strategic benchmarking

DIF: Moderate OBJ: 16-2

ANS: process benchmarking

DIF: Moderate OBJ: 16-2

ANS: prevention costs

DIF: Easy OBJ: 16-4

ANS: appraisal costs

DIF: Moderate OBJ: 16-4

8. Costs incurred to correct defects in products prior to shipment are referred to as

ANS: internal failure costs

DIF: Moderate OBJ: 16-4

9. Costs incurred to correct defects in products after shipment are referred to as

ANS: external failure costs

DIF: Moderate OBJ: 16-4

10. The two costs of compliance are __________________________ and _______________________.

ANS: prevention costs; appraisal costs

DIF: Moderate OBJ: 16-4

11. The two costs of noncompliance are __________________________ and

ANS: internal failure costs; external failure costs

DIF: Moderate OBJ: 16-4

10. The two costs of compliance are ____ and _.