ACYMAG2

Exercise Set #1
Term 2, AY2023-2024
Source: Hansen, D.R. and Mowen, M.M. (2015). Cornerstones of Cost Management, 3 rd edition. Mason,
OH: South Western Cengage Learning.

EXERCISE 1. Multiple Choice. Choose the CAPITAL LETTER of the best answer.
1. Lean manufacturing is characterized by ALL but ONE of the following:
A. Employee empowerment
B. Total quality management
C. Inventories of goods awaiting further processing or consumption
D. Elimination of waste

2. Lean manufacturing uses value streams to produce a family of products that require the
same manufacturing sequence. Value-stream costing is an approach often used to
determine the unit product costs in a lean manufacturing environment. Which of the
following BEST describes how unit costs are calculated using value-stream costing?
A. Value stream costs divided by units shipped
B. Value stream costs divided by units produced
C. (Total prime costs + overhead costs assigned to the value stream using a plantwide
rate) divided by units produced
D. Activity-based costing assignments within the value stream

3. A manufacturing cell within a value stream is structured with four processes and associated
processing times (for one unit):
• Molding: 6 minutes
• Grinding: 5 minutes
• Polishing: 5 minutes
• Finishing: 4 minutes

How many units can the cell produce per hour (on a continuous running basis)?
A. 3 units per hour
B. 12 units per hour
C. 15 units per hour
D. 10 units per hour

4. The following information is given for a manufacturing firm:

Year 1 Year 2
Units produced 1,000 2,000
Materials used (lbs.) 200 500
Labor used (hours) 2,000 2,500

Which CORRECTLY describes the change in productive efficiency from Year 1 to Year 2?
A. Material and labor productivity both increased.
B. Material and labor productivity both decreased.
C. Material productivity decreased and labor productivity increased.
D. Material productivity increased and labor productivity decreased.
5. Total productive efficiency is achieved when both technical efficiency and allocative
efficiency are achieved. For a given mix of inputs that produce a given output, which of the
following is consistent with improving technical efficiency (using the given input-output mix
as the benchmark)?
A. More output is produced using more inputs.
B. More output is produced with the same inputs.
C. More inputs are used to produce the same output.
D. The least costly technically efficient input combination is chosen.

6. For the theory of constraints, which determines the production rate of the plant?
A. Local efficiency measures that encourage production of excess inventory just in case
demand is greater than expected
B. The economic order quantity
C. Market demand
D. The drummer constraint’s production rate

7. A dedicated pharmaceutical plant uses the theory of constraints and has three processes:
Mixing, Encapsulating, and Packaging. For Mixing, sufficient materials are released to
produce 4,000 packages of product per day. Encapsulating has a buffer inventory of 8,000
units (work in process from Mixing). Packaging produces 4,000 units per day. Which of the
three processes sets the production rate of 4,000 units per day?
A. The Mixing Department
B. The Encapsulating Department
C. The Packaging Department
D. Cannot be determined

EXERCISE 2. Prior to installing a JIT system, Barker Company, a producer of automobile parts,
used maintenance hours to assign maintenance costs to its three products (wheels, brake pads,
and ball bearings). The maintenance costs totaled ₱5,880,000 per year. The maintenance
hours used by each product and the quantity of each product produced are as follows:
Maintenance Hours Quantity Produced
Wheels 180,000 157,500
Pads 180,000 157,500
Bearings 240,000 210,000

After installing JIT, three manufacturing cells were created, and cell workers were trained to
perform preventive maintenance and minor repairs. A full-time maintenance person was also
assigned to each cell. Maintenance costs for the three cells still totaled ₱5,880,000; however,
these costs are now traceable to each cell as follows:
Cell, wheels: ₱1,596,000
Cell, pads: 1,764,000
Cell, bearings: 2,520,000

1. Compute the pre-JIT maintenance cost per unit for each product.
2. Compute the maintenance cost per unit for each product after installing JIT.
3. Explain why the JIT maintenance cost per unit is more accurate than the pre-JIT cost.
EXERCISE 3. Classify the following quality costs as prevention costs, appraisal costs, internal
failure costs, or external failure costs:
1. Inspection of reworked units
2. Retesting a reworked product
3. Repairing a computer still under warranty
4. Discount allowed to customers because products failed to meet customer specifications
5. Goods returned because they failed to meet specifications
6. The cost of evaluating and certifying suppliers
7. Stopping work to correct process malfunction (discovered using statistical process
control procedures)
8. Testing products in the field
9. Discarding products that cannot be reworked
10. Lost sales because of recalled products
11. Replacing a defective product
12. Repairing products in the field
13. Correcting a design error discovered during product development
14. Engineering resources used to help selected suppliers improve their product quality
15. Packaging inspection
16. Processing and responding to consumer complaints
17. Training production line workers in new quality procedures
18. Sampling a batch of goods to determine if the batch has an acceptable defect rate

EXERCISE 4. Evans Company had total sales of ₱3,000,000 for the year. The costs of quality-
related activities are given below.
• Returns/allowances: ₱150,000
• Design changes: 180,000
• Prototype inspection: 39,000
• Downtime: 120,000
• Quality circles: 6,000
• Packaging inspection: 42,000
• Field testing: 18,000
• Complaint adjustment: 195,000

1. Prepare a quality cost report, classifying costs by category and expressing each category
as a percentage of sales. What message does the cost report provide?
2. What if, five years from now, quality costs are 7.5 percent of sales, with control costs
being 65 percent of the total quality costs? What would your conclusion be?
EXERCISE 5. Bienestar Inc., has the following departmental structure for producing a well-
known multivitamin:

A consultant designed the following cellular manufacturing structure for the same product:

The times above the processes represent the time required to process one unit of product.

1. Calculate the time required to produce a batch of 15 bottles using a batch-processing

departmental structure.
2. Calculate the time to process 15 units using cellular manufacturing.
3. How much manufacturing time will the cellular manufacturing structure save for a batch
of 15 units?

EXERCISE 6. Listed below are several possible input combinations for producing 7,500 units of
a pocket PC. Two of the input combinations are technically efficient.
Materials Labor Energy
Unit input prices ₱100 ₱ 60 ₱ 25
Input combinations:
A 100 192 720
B 110 180 540
C 150 200 600
D 92 190 570

1. Identify the technically efficient input combinations. Explain your choices.

2. Which of the two technically efficient input combinations should be used? Explain.
EXERCISE 7. Holbrook Company gathered the following data for the past two years:
Base Year Current Year
Output 900,000 1,080,000
Output prices ₱15 ₱15
Input quantities:
Materials (lbs.) 1,200,000 1,080,000
Labor (hrs.) 300,000 540,000
Input prices:
Materials ₱5 ₱6
Labor ₱8 ₱8

1. Prepare a productivity profile for each year.

2. Prepare partial income statements for each year. Calculate the total change in income.
3. Calculate the change in profits attributable to productivity changes.
4. Calculate the price-recovery component. Explain its meaning.

EXERCISE 8. Duckstein, Inc., manufactures two types of aspirin: plain and buffered. It sells
all it produces. Recently, Duckstein implemented a TOC approach for its Fort Smith plant. One
binding constraint was identified, and the optimal product mix was determined. The following
diagram reflects the TOC outcome:

1. What is the daily production rate? Which process sets this rate?
2. How many days of buffer inventory is Duckstein carrying? How is this time buffer
determined?