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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

Chapter 05
Activity-Based Costing and Customer Profitability Analysis
Multiple Choice Questions

1. The major limitation of volume-based costing systems is the use of volume-based:


A. Criteria.
B. Standards.
C. Rates.
D. Variances.
E. Restrictions.

2. Volume-based rates produce inaccurate product cost when:


A. A large share of factory overhead cost is volume-based.
B. Firms produce a diverse mix of products.
C. Large volumes of a product are manufactured.
D. Firms have a small number of homogeneous products.

3. Volume-based overhead rates may cause undesirable strategic effects such as:
A. Management by objectives.
B. Cross-subsidization of products.
C. Ineffective management of operations for process improvement.
D. Proration of variances.

4. Activity-based costing (ABC) differs from other costing approaches in its:


A. Incorporating customer needs.
B. Complexity in implementation.
C. Focus on operational excellence.
D. Use of cost objects.
E. Recognition of the causal relationship.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

5. Activity-based costing (ABC) differs from other costing approaches in that it more
accurately measures the cost of activities:
A. Not proportional to the volume of outputs produced.
B. Directly proportional to the volume of outputs produced.
C. Inversely proportional to the volume of outputs produced.
D. That are non-value adding.
E. At a significantly lower cost in time and money.

6. In performing activity analysis during the design of an activity-based costing system (ABC),
the management accountant studies:
A. The cost drivers and managers in the plant.
B. The advice of operation-level mangers.
C. The resources, activities and cost drivers in the operation.
D. The cost allocation methods applicable to the firm.
E. The implementation problems for an ABC system.

7. Effective implementation of activity-based costing (ABC) requires:


A. Normally the assistance of a consultant.
B. A sophisticated and expensive computer system.
C. Support of top management and key employees.
D. Capturing properly the complexity of the data.
E. ABC has no significant implementation issues.

8. Elimination of low-value-added activities in a firm should:


A. Be discouraged because of potential harmful effects.
B. Not affect customer value.
C. Not have priority because low-value-added activities have little effect on a firm's
performance.
D. Have priority only when a firm is operating at a loss.
E. Happen naturally if the firm is well-managed.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

9. The relationship between activity-based costing (ABC) and strategic cost management could
be described as:
A. Inconsistent.
B. Proportional.
C. Insignificant.
D. Linked.
E. Minimal.

10. Successful activity-based costing (ABC) implementation depends upon the firm:
A. Having support of consultants with appropriate expertise.
B. Having a thorough activity analysis.
C. Starting with a relatively simple system.
D. Having well-trained managers.
E. Having adequate computer resources.

11. A measure of the quantity of resources consumed by an activity is:


A. Quantity driver.
B. Resource consumption cost driver.
C. Not a cost driver.
D. Activity consumption cost driver.
E. Consumption cost driver.

12. A measure of frequency and intensity of demands placed on activities by cost objects is:
A. Quantity driver.
B. Resource consumption cost driver.
C. Not a cost driver.
D. Activity consumption cost driver.
E. Consumption cost driver.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

13. An activity that is performed for each unit of production is a(n):


A. Product-level activity.
B. Facility-level activity.
C. Unit-level activity.
D. Performance-level activity.
E. Batch-level activity.

14. An activity that is performed to support the production of a new customer's order is a(n):
A. Product-level activity.
B. Facility-level activity.
C. Unit-level activity.
D. Customer-support activity.
E. Batch-level activity.

15. Which one of the following is not a unit-level cost driver?


A. Direct labor hours.
B. Direct material dollars.
C. Machine hours.
D. Production orders.

16. The management of activities to improve the value received by the customer and the
competitiveness of the organization is:
A. Cost driver analysis.
B. Customer profitability analysis.
C. Activity-based management.
D. Performance measurement.
E. Activity analysis.

17. The examination of the efficiency and value of each of a firm's activities is:
A. Activity analysis.
B. Pareto analysis.
C. Activity-based management.
D. Performance measurement.
E. Attribute-based management.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

18. Which one of the following is a high value-added activity?


A. Set up.
B. Rework.
C. Repair.
D. Storage.
E. Processing.

19. In regard to selling activities, which one of the following would be a cost driver for selling
expense?
A. Number of invoices.
B. Number of sales calls.
C. Number of production runs.
D. Number of shipments.

20. Which one of the following is not a recommendation for a successful implementation of
ABC/M?
A. Obtain support of management and personnel.
B. Complete an activity analysis.
C. Start with a relatively simple system.
D. Use ABC/M on a job that will succeed.

21. Which of the following activities is a facility-level activity?


A. Plant management salaries.
B. Production scheduling.
C. Direct labor.
D. Product design.
E. Materials handling.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

22. A company using a volume-based overhead assignment (allocation) method will tend to:
A. Overstate the cost of low volume products.
B. Understate the cost of low volume products.
C. Understate the cost of high volume products.
D. Understate the cost of all products.
E. Either understate or overstate the cost of high volume products depending on the specific
manufacturing factors involved.

23. Which of the following is a batch-level cost driver?


A. Output units.
B. Number of engineering change orders.
C. Number of materials handling transactions.
D. Square feet of plant area occupied.
E. Number of employees.

24. Which of the following activities is a facility-level activity?


A. Materials handling.
B. Plant maintenance.
C. Product inspection.
D. Design engineering.
E. Purchase orders.

25. In an organization that makes furniture, which of the following is a high value-added
activity?
A. Using direct materials in production.
B. Inspecting production.
C. Storing finished goods inventory.
D. Moving work-in-process inventory between work stations.
E. Reworking the product to repair defects.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

26. Overhead costs are allocated to cost objects in an activity-based costing system in the
following manner:
A. Overhead costs are traced to departments, then costs are traced to products.
B. Overhead costs are traced to activities, then costs are traced to products.
C. Overhead costs are traced to activities, then costs are traced to departments and then
allocated to products.
D. Overhead costs are traced from resources to cost objects.

27. Which of the following is a batch-level cost driver?


A. Output units.
B. Number of employees.
C. Number of orders.
D. Number of parts.
E. Machine hours.

28. Which of the following has the weakest linkage between activity and cost driver?

A. A
B. B
C. C
D. D

29. A volume-based rate is an appropriate overhead application base when:


A. Several well-differentiated products are manufactured.
B. Direct labor costs are large.
C. Direct material costs are large relative to direct labor costs incurred.
D. Only one product is manufactured.
E. Manufacturing is process-based.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

30. Which of the following would likely be the most appropriate cost driver of electric power
used by machines?
A. Number of units.
B. Machine size.
C. Number of machine hours.
D. Number of production runs.
E. Purchase cost of machines.

31. Using a volume-based overhead rate based on machine hours to assign manufacturing
overhead to a product line that uses relatively few machine hours is likely to:
A. Overapply overhead to the product line.
B. Underapply overhead to the product line.
C. Understate direct labor costs.
D. Overstate direct labor costs.
E. Either over- or under-apply overhead to the product line depending on many other factors.

32. Which of the following is an example of a high-value-added activity?


A. Shipping the customer's order.
B. Scheduling the customer order for production.
C. Inspecting goods to ensure the right quantity is being shipped.
D. E-mailing a customer to assure that a complaint will be resolved expeditiously.

33. Engineering change orders, equipment maintenance, and product development costs are
examples of:
A. Unit costs.
B. Batch costs.
C. Product-level costs.
D. Facility-level costs.
E. Unit, batch, and customer-sustaining costs, respectively.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

34. In an activity-based costing system, overhead costs are divided into separate:
A. Cost objects.
B. Activity cost pools.
C. Resource consumption and activity consumption cost pools.
D. Product-line cost pools.
E. Plantwide or departmental cost pools.

35. Which of the following would likely be the most appropriate cost driver to allocate machine
set-up costs to products?
A. Machine hours.
B. Direct labor hours.
C. Number of production runs.
D. Number of products.
E. Number of purchase orders.

36. A firm has many products, some produced in an automated production process and some
produced in a manual production process. Using direct labor hours to assign manufacturing
overhead to a product manufactured with a highly automated process is likely to:
A. Overstate overhead of the product.
B. Understate overhead of the product.
C. Overapply overhead to the period.
D. Underapply overhead to the period.
E. Have no effect on overhead of the product.

37. Activity-based costing for manufacturing operations is used to assign:


A. Direct material and direct labor costs to products.
B. Direct labor and manufacturing overhead costs to products.
C. Manufacturing overhead costs to products.
D. Selling and general administrative overhead costs to products.
E. Selling and general administrative overhead and manufacturing overhead costs to products.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

38. The use of activity-based costing is most appropriate for:


A. Firms that manufacture multiple product lines.
B. Firms that have very low manufacturing overhead costs relative to other costs of production.
C. Firms with high levels of production activity.
D. Firms that are labor intensive.
E. Firms that manufacture a small number of different products.

39. Which of the following is a benefit of activity-based costing?


A. Reduced overhead costs.
B. More accurate measures of production volume.
C. Facilitate better product pricing decisions.
D. Having fewer cost drivers than volume-based costing systems.
E. More streamlined manufacturing processes.

40. Which of the following is not normally associated with activity-based costing?
A. Activity cost pools.
B. Multiple cost drivers.
C. Reduction of non-value-adding costs.
D. High direct labor costs relative to manufacturing overhead costs.
E. Improved decision making and pricing.

41. Which of the following is not considered a benefit of activity-based costing?


A. Decreased production activity levels.
B. Improved product pricing decisions.
C. A better understanding of manufacturing overhead.
D. More accurate unit cost information.
E. Improved strategic decisions.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

42. Which of the following would be the most appropriate cost driver to allocate factory
electricity costs to products?
A. Machinery depreciation expense.
B. Machinery maintenance work orders.
C. Machinery down-time.
D. Machine hours.
E. Machine productivity.

43. Which of the following activity cost pools would most likely be allocated based on the
number of production runs?
A. Machinery set-up costs.
B. Raw materials warehousing costs.
C. Factory heating costs.
D. Factory janitorial costs.
E. Indirect labor costs.

44. Which of the following is most likely to be the cost driver for the packaging and shipping
activity?
A. Number of setups.
B. Number of components.
C. Number of orders.
D. Hours of testing.
E. Number of production runs.

45. Activity-based costing systems:


A. Accumulate overhead costs by departments.
B. Are less complex and therefore less costly than volume-based systems.
C. Can be used in manufacturing firms only.
D. Have separate overhead rates for each activity.
E. Eliminate multiple-stage cost allocation.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

46. All of the following statements regarding activity-based costing systems are true except
they:
A. Can provide more accurate product costs.
B. Identify more costs as indirect costs than do traditional volume-based systems.
C. Are likely to be more time-consuming than volume-based systems.
D. Are used in both manufacturing and non-manufacturing companies.
E. Are likely to have more overhead rates than volume-based systems.

47. All of the following are low-value-added activities except:


A. Processing.
B. Reworking.
C. Moving.
D. Inspection.
E. Warranty service.

48. Which of the following cost pools are used to classify costs under activity-based costing?

A. A
B. B
C. C
D. D

49. Purchase order, setup, and inspection costs are examples of:
A. Unit-level costs.
B. Batch-level costs.
C. Product-level costs.
D. Facility-level costs.
E. Department-level costs.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

50. Engineering change orders, equipment maintenance, and product development costs are
examples of:
A. Unit-level costs.
B. Batch-level costs.
C. Product-level costs.
D. Facility-level costs.
E. Department-level costs.

51. Costs at the unit-level of activity should be allocated to products using cost drivers that are:
A. Customer-oriented.
B. Design-related.
C. Volume-related.
D. Product-related.
E. Order-related.

52. If a costing system uses a single base to allocate overhead costs that are results of several
production activities:
A. Products that use relatively more of this base tend to be undercosted.
B. Products that use relatively less of this base tend to be overcosted.
C. Products that use relatively more of this base tend to be overcosted.
D. Products may be over- or under-costed, depending on the activity level.
E. Products may be over- or under-costed, depending on the overhead rate.

53. Procurement costs such as costs of placing orders for materials and paying suppliers are
usually classified as:
A. Output-unit-level costs.
B. Batch-level costs.
C. Product-level costs.
D. Facility-level costs.
E. Vendor costs.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

54. The cost of sales visits is a:


A. Customer unit-level cost.
B. Customer batch-level cost.
C. Customer-sustaining cost.
D. Distribution-channel cost.
E. Sales-sustaining cost.

55. Freight charges based on number of units shipped to customers is a:


A. Customer unit-level cost.
B. Customer batch-level cost.
C. Customer-sustaining cost.
D. Distribution-channel cost.
E. Sales-level cost.

56. Processing sales returns and allowances is usually classified as a:


A. Customer unit-level cost.
B. Customer batch-level cost.
C. Customer-sustaining cost.
D. Distribution-channel cost.
E. Sales-level cost.

57. Invoicing cost is an example of a:


A. Customer unit-level cost.
B. Customer batch-level cost.
C. Customer-sustaining cost.
D. Distribution-channel cost.
E. Sales-level cost.

58. Cost to process monthly statements is an example of a:


A. Customer unit-level cost.
B. Customer batch-level cost.
C. Customer-sustaining cost.
D. Distribution-channel cost.
E. Sales-level cost.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

59. The costs of operating a regional warehouse is an example of a:


A. Customer unit-level cost.
B. Customer batch-level cost.
C. Customer-sustaining cost.
D. Distribution-channel cost.
E. Sales-level cost.

60. General corporate sales expenditures are:


A. Customer unit-level costs.
B. Customer batch-level costs.
C. Customer-sustaining costs.
D. Distribution-channel costs.
E. Sales-sustaining costs.

61. The general sales manager's salary is an example of a:


A. Customer unit-level cost.
B. Customer batch-level cost.
C. Customer-sustaining cost.
D. Distribution-channel cost.
E. Sales-level cost.

62. Which of the following is a description of categorizing related customer costs into cost
pools on the basis of cost drivers?
A. Customer revenue analysis.
B. Customer cost analysis.
C. Customer profitability analysis.
D. Customer value assessment.
E. Customer equity analysis.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

63. Wings Co. budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours and
had the following manufacturing overhead:

Requirements for Job #971 which manufactured 4 units of product:

If Wings uses a volume-based overhead rate based on direct labor hours, the manufacturing
overhead for Job #971 is:
A. $990.
B. $1,020.
C. $1,600.
D. $3,460.
E. $6,400.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

64. Wings Co. budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours and
had the following manufacturing overhead:

Requirements for Job #971 which manufactured 4 units of product:

Using ABC, the materials handling overhead cost assigned to Job #971 is:
A. $2,300.
B. $990.
C. $6,500.
D. $690.
E. $1,020.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

65. Wings Co. budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours and
had the following manufacturing overhead:

Requirements for Job #971 which manufactured 4 units of product:

Using ABC, overhead cost assigned to Job #971 for machine setup is:
A. $2,300.
B. $990.
C. $6,500.
D. $690.
E. $1,020.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

66. Wings Co. budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours and
had the following manufacturing overhead:

Requirements for Job #971 which manufactured 4 units of product:

Using ABC, overhead cost assigned to Job #971 for machine repair is:
A. $2,300.
B. $990.
C. $6,500.
D. $690.
E. $1,020.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

67. Wings Co. budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours, and
had the following manufacturing overhead:

Requirements for Job #971 which manufactured 4 units of product:

Using ABC, overhead cost assigned to Job #971 for inspections is:
A. $2,300.
B. $990.
C. $6,500.
D. $690.
E. $1,020.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

68. Wings Co. budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours, and
had the following manufacturing overhead:

Requirements for Job #971 which manufactured 4 units of product:

The total overhead of Job #971 under the ABC costing is:
A. $95.
B. $380.
C. $1,520.
D. $2,300.
E. $9,200.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

69. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and
digital camcorders.

National uses a volume-based costing system to apply factory overhead based on direct labor
dollars. The unit prime costs of each product were as follows:

National's controller had been researching activity-based costing and decided to switch to it. A
special study determined National's two products have the following budgeted activities:

What is the overhead application rate using the firm's volume-based costing system (rounded to
the nearest percent or cents)?
A. 350 percent of direct labor cost.
B. $51.89 per direct labor-hour.
C. 68 per cent of direct labor cost.
D. 5,189 percent of direct labor cost.
E. 5,110 percent of direct labor cost.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

70. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and
digital camcorders.

National uses a volume-based costing system to apply factory overhead based on direct labor
dollars. The unit prime costs of each product were as follows:

National's controller had been researching activity-based costing and decided to switch to it. A
special study determined National's two products have the following budgeted activities:

Using the firm's volume-based costing, applied factory overhead per unit for the High F model
is (rounded to the nearest cent):
A. $61.32.
B. $65.43.
C. $43.42.
D. $45.99.
E. $54.04.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

71. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and
digital camcorders.

National uses a volume-based costing system to apply factory overhead based on direct labor
dollars. The unit prime costs of each product were as follows:

National's controller had been researching activity-based costing and decided to switch to it. A
special study determined National's two products have the following budgeted activities:

Using the firm's volume-based costing, applied factory overhead per unit for the Great P model
is (rounded to the nearest cent):
A. $61.32.
B. $65.43.
C. $43.42.
D. $45.99.
E. $54.04.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

72. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and
digital camcorders.

National uses a volume-based costing system to apply factory overhead based on direct labor
dollars. The unit prime costs of each product were as follows:

National's controller had been researching activity-based costing and decided to switch to it. A
special study determined National's two products have the following budgeted activities:

Using activity-based costing, applied engineering and design factory overhead for the High F
model per unit is (rounded to the nearest cent):
A. $6.13.
B. $11.86.
C. $16.28.
D. $32.46.
E. $66.73.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

73. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and
digital camcorders.

National uses a volume-based costing system to apply factory overhead based on direct labor
dollars. The unit prime costs of each product were as follows:

National's controller had been researching activity-based costing and decided to switch to it. A
special study determined National's two products have the following budgeted activities:

Using activity-based costing, applied quality control factory overhead for the High F model per
unit is (rounded to the nearest cent):
A. $6.13.
B. $11.86.
C. $16.28.
D. $32.46.
E. $66.73.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

74. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and
digital camcorders.

National uses a volume-based costing system to apply factory overhead based on direct labor
dollars. The unit prime costs of each product were as follows:

National's controller had been researching activity-based costing and decided to switch to it. A
special study determined National's two products have the following budgeted activities:

Using activity-based costing, applied machinery overhead for the High F model per unit is
(rounded to the nearest cent):
A. $6.13.
B. $11.86.
C. $16.28.
D. $32.46.
E. $66.73.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

75. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and
digital camcorders.

National uses a volume-based costing system to apply factory overhead based on direct labor
dollars. The unit prime costs of each product were as follows:

National's controller had been researching activity-based costing and decided to switch to it. A
special study determined National's two products have the following budgeted activities:

Using activity-based costing, applied miscellaneous overhead for the High F model per unit is
(rounded to the nearest cent):
A. $6.13.
B. $11.86.
C. $16.28.
D. $32.36.
E. $66.73.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

76. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and
digital camcorders.

National uses a volume-based costing system to apply factory overhead based on direct labor
dollars. The unit prime costs of each product were as follows:

National's controller had been researching activity-based costing and decided to switch to it. A
special study determined National's two products have the following budgeted activities:

Using activity-based costing, total overhead per unit of the High F model is (rounded to the
nearest cent):
A. $42.61.
B. $45.99.
C. $61.32.
D. $66.73.
E. $168.00.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

77. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and
digital camcorders.

National uses a volume-based costing system to apply factory overhead based on direct labor
dollars. The unit prime costs of each product were as follows:

National's controller had been researching activity-based costing and decided to switch to it. A
special study determined National's two products have the following budgeted activities:

Using activity-based costing, applied engineering and design factory overhead for the Great P
model per unit is (rounded to the nearest cent):
A. $4.60.
B. $9.45.
C. $13.44.
D. $15.12.
E. $42.61.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

78. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and
digital camcorders.

National uses a volume-based costing system to apply factory overhead based on direct labor
dollars. The unit prime costs of each product were as follows:

National's controller had been researching activity-based costing and decided to switch to it. A
special study determined National's two products have the following budgeted activities:

Using activity-based costing, applied quality control factory overhead for the Great P model per
unit is (rounded to the nearest cent):
A. $4.60.
B. $9.45.
C. $13.44.
D. $15.12.
E. $42.61.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

79. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and
digital camcorders.

National uses a volume-based costing system to apply factory overhead based on direct labor
dollars. The unit prime costs of each product were as follows:

National's controller had been researching activity-based costing and decided to switch to it. A
special study determined National's two products have the following budgeted activities:

Using activity-based costing, applied machinery overhead for the Great P model per unit is
(rounded to the nearest cent):
A. $4.60.
B. $9.45.
C. $13.44.
D. $15.12.
E. $42.61.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

80. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and
digital camcorders.

National uses a volume-based costing system to apply factory overhead based on direct labor
dollars. The unit prime costs of each product were as follows:

National's controller had been researching activity-based costing and decided to switch to it. A
special study determined National's two products have the following budgeted activities:

Using activity-based costing, applied miscellaneous overhead for the Great P model per unit is
(rounded to the nearest cent):
A. $4.60.
B. $9.45.
C. $13.44.
D. $15.12.
E. $42.61.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

81. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and
digital camcorders.

National uses a volume-based costing system to apply factory overhead based on direct labor
dollars. The unit prime costs of each product were as follows:

National's controller had been researching activity-based costing and decided to switch to it. A
special study determined National's two products have the following budgeted activities:

Using activity-based costing, total overhead per unit of Great P model is (rounded to the nearest
cent):
A. $42.61.
B. $45.99.
C. $61.32.
D. $66.73.
E. $168.00.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

82. Sheen Co. manufacturers laser printers. It has outlined the following overhead cost drivers:

Sheen Co. has an order for 1,000 laser printers that has the following production requirements:

Using activity-based costing, applied quality control factory overhead for the 1000 laser printer
order is:
A. $7,800.
B. $10,000.
C. $10,500.
D. $150.
E. $21,600.

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83. Sheen Co. manufacturers laser printers. It has outlined the following overhead cost drivers:

Sheen Co. has an order for 1,000 laser printers that has the following production requirements:

Using activity-based costing, applied machine repetition overhead for the 1000 laser printer
order is:
A. $7,800.
B. $10,000.
C. $10,500.
D. $150.
E. $21,600.

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84. Sheen Co. manufacturers laser printers. It has outlined the following overhead cost drivers:

Sheen Co. has an order for 1,000 laser printers that has the following production requirements:

Using activity-based costing, applied materials handling factory overhead for the 1000 laser
printer order is:
A. $7,800.
B. $10,000.
C. $10,500.
D. $150.
E. $21,600.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

85. Sheen Co. manufacturers laser printers. It has outlined the following overhead cost drivers:

Sheen Co. has an order for 1,000 laser printers that has the following production requirements:

Using activity-based costing, applied miscellaneous factory overhead for the 1000 laser printer
order based on direct labor hours is:
A. $7,800.
B. $10,000.
C. $10,500.
D. $150.
E. $21,600.

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86. Sheen Co. manufacturers laser printers. It has outlined the following overhead cost drivers:

Sheen Co. has an order for 1,000 laser printers that has the following production requirements:

What is the total overhead cost per unit of the laser printer order using activity-based costing
(rounded to the nearest cent)?
A. $39.55.
B. $40.05.
C. $42.25.
D. $50.65.
E. $58.30.

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87. Diamond Cleats Co. manufactures cleats for baseball shoes. It has outlined the following
overhead cost drivers:

Diamond Cleats Co. has an order for cleats that has the following production requirements:

Using activity-based costing, applied quality control factory overhead for the baseball cleat
order is:
A. $28,450.
B. $30,220.
C. $24,375.
D. $21,150.
E. $19,600.

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88. Diamond Cleats Co. manufactures cleats for baseball shoes. It has outlined the following
overhead cost drivers:

Diamond Cleats Co. has an order for cleats that has the following production requirements:

Using activity-based costing, applied machine overhead for the baseball cleat order is:
A. $47,800.
B. $55,300.
C. $40,500.
D. $59,150.
E. $51,700.

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89. Diamond Cleats Co. manufactures cleats for baseball shoes. It has outlined the following
overhead cost drivers:

Diamond Cleats Co. has an order for cleats that has the following production requirements:

Using activity-based costing, applied materials handling factory overhead for the baseball cleat
order is:
A. $338.
B. $584.
C. $192.
D. $353.
E. $686.

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90. Diamond Cleats Co. manufactures cleats for baseball shoes. It has outlined the following
overhead cost drivers:

Diamond Cleats Co. has an order for cleats that has the following production requirements:

Using activity-based costing, applied miscellaneous factory overhead for the baseball cleat
order based on direct labor hours is:
A. $8,745.
B. $10,312.
C. $10,489.
D. $9,912.
E. $8,456.

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91. Diamond Cleats Co. manufactures cleats for baseball shoes. It has outlined the following
overhead cost drivers:

Diamond Cleats Co. has an order for cleats that has the following production requirements:

ABC costing provides helps an organization implement its strategy through all of the following
means except:
A. Providing accurate cost information.
B. Identifying the most profitable products and customers.
C. Helping improve cycle time.
D. Identifying value added and non-value added activities.
E. Providing a basis for effective utilization of capacity.

92. Customer equity is a type of analysis used to:


A. Assess the ethical practices of each salesperson-customer relationship.
B. Assess the current profit potential of a customer.
C. Assess the long term profit potential of a customer.
D. Assess the current profit potential of all the firm's customers.
E. Assess the long term profit potential of all the firm's customers.

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93. Customer lifetime value is a type of analysis used to:


A. Assess the ethical practices of each salesperson-customer relationship.
B. Assess the current profit potential of a customer.
C. Assess the long term profit potential of a customer.
D. Assess the current profit potential of all the firm's customers.
E. Assess the long term profit potential of all the firm's customers.

94. The cost of unused capacity can be determined using ABC costing for the purpose of:
A. Determining more accurately the ABC costs.
B. Helping managers plan the short and longer-term use of the operating resources.
C. Determining product profitability.
D. Completing an effective activity analysis.

95. Multistage ABC is used when:


A. There are many departments in the organization.
B. Management wants a higher level of accuracy from the ABC calculations.
C. There are complex relationships among the activities.
D. To simplify the ABC calculations.
E. There is no such thing as Multistage ABC.

96. An adaptation of ABC costing that emphasizes resource consumption cost pools is:
A. Activity analysis.
B. Multistage ABC.
C. Time-Driven ABC.
D. Resource Consumption Accounting.
E. Customer profitability analysis.

97. An adaptation of ABC costing that simplifies ABC by assigning resource costs directly to
cost objects is called:
A. Activity analysis
B. Multistage ABC
C. Time-Driven ABC
D. Resource Consumption Accounting
E. Customer profitability analysis

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98. The Time Equation is used in ABC to:


A. Track the implementation of the ABC system
B. Assess the amount of time required for each activity, in determining the application rate
C. Incorporate complexities in the application of ABC
D. Plan for the implementation of an ABC system

99. In the context of ABC, cross-subsidization refers to:


A. Productions department subsidizing each other
B. Costing inaccuracies which affect the relative profitability of products
C. Cross-selling products lines, which affect customer profitability
D. Efforts to increased coordination among department heads

100. The common element among the firms Nike, GM, and Lego Group is:
A. All these firms use ABC.
B. Each of the firms has addressed critical problems regarding complexity in its product
offerings.
C. Each of the firms has used a consultant and an ERP to implement ABC.
D. All of these firms, once users of ABC, have now chosen not to use ABC costing.
E. Each of the firms has addressed critical problems involving the cost and use of capacity.

101. Important concepts in resource consumption accounting include all of the following
except:
A. Variable costing
B. Resource interrelationships
C. Activity interrelationships
D. Detail level cost information
E. Treatment of idle capacity

102. Time-driven ABC provides a direct way to measure:


A. Production efficiency
B. Unused capacity
C. Product line profitability
D. Value adding activities
E. Customer value

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103. Everlast Co. manufactures a variety of drill bits. The company's plant is partially
automated. The budget for the year includes $432,000 payroll for 4,800 direct labor-hours.
Listed below is cost driver information used in the product-costing system:

A current product order has the following requirements:

What is the total manufacturing overhead for the current product order if the firm uses a
plantwide rate based on direct labor-hours?
A. $9,960.
B. $30,240.
C. $43,741.
D. $44,268.
E. $109,352.

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104. Everlast Co. manufactures a variety of drill bits. The company's plant is partially
automated. The budget for the year includes $432,000 payroll for 4,800 direct labor-hours.
Listed below is cost driver information used in the product-costing system:

A current product order has the following requirements:

What is the total manufacturing overhead for the current product order if the firm assigns
overhead costs based on machine hours?
A. $9,960.
B. $30,240.
C. $43,741.
D. $44,268.
E. $109,352.

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105. Everlast Co. manufactures a variety of drill bits. The company's plant is partially
automated. The budget for the year includes $432,000 payroll for 4,800 direct labor-hours.
Listed below is cost driver information used in the product-costing system:

A current product order has the following requirements:

Using ABC, how much machine setup overhead is assigned to the order?
A. $19,200.
B. $8,000.
C. $11,108.
D. $9,960.
E. $7,272.

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106. Everlast Co. manufactures a variety of drill bits. The company's plant is partially
automated. The budget for the year includes $432,000 payroll for 4,800 direct labor-hours.
Listed below is cost driver information used in the product-costing system:

A current product order has the following requirements:

Using ABC, how much material handling overhead is assigned to the order?
A. $19,200.
B. $8,000.
C. $11,108.
D. $9,960.
E. $7,272.

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107. Everlast Co. manufactures a variety of drill bits. The company's plant is partially
automated. The budget for the year includes $432,000 payroll for 4,800 direct labor-hours.
Listed below is cost driver information used in the product-costing system:

A current product order has the following requirements:

Using ABC, how much quality control overhead is assigned to the order?
A. $8,000.
B. $9,960.
C. $11,108.
D. $19,200.
E. $45,933.

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108. Everlast Co. manufactures a variety of drill bits. The company's plant is partially
automated. The budget for the year includes $432,000 payroll for 4,800 direct labor-hours.
Listed below is cost driver information used in the product-costing system:

A current product order has the following requirements:

Using ABC, how much other overhead is assigned to the order?


A. $8,000.
B. $9,960.
C. $11,108.
D. $19,200.
E. $45,992.

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109. Everlast Co. manufactures a variety of drill bits. The company's plant is partially
automated. The budget for the year includes $432,000 payroll for 4,800 direct labor-hours.
Listed below is cost driver information used in the product-costing system:

A current product order has the following requirements:

Using ABC, how much total overhead is assigned to the order?


A. $42,160.
B. $43,740.
C. $44,268.
D. $44,432.
E. $45,993.

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110. Shaver Co. manufactures a variety of electric razors for men and women. The company's
plant is partially automated. Listed below is cost driver information used in the product-costing
system:

In addition, Shaver expects to spend $514,368 for 8,037 direct labor-hours. Two current
product orders had the following requirements:

What is the total manufacturing overhead assigned to the current order for Men's Razors if the
firm uses a volume-based plantwide overhead rate based on the direct labor dollars?
A. $112.50.
B. $150.00.
C. $243.75.
D. $7,200.00.
E. $15,600.00.

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111. Shaver Co. manufactures a variety of electric razors for men and women. The company's
plant is partially automated. Listed below is cost driver information used in the product-costing
system:

In addition, Shaver expects to spend $514,368 for 8,037 direct labor-hours. Two current
product orders had the following requirements:

What is the total manufacturing overhead assigned to the current order for Women's Razors if
the firm uses a volume-based plantwide overhead rate based on the direct labor dollars?
A. $112.50.
B. $150.00.
C. $187.50.
D. $9,600.00.
E. $12,000.00.

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112. Shaver Co. manufactures a variety of electric razors for men and women. The company's
plant is partially automated. Listed below is cost driver information used in the product-costing
system:

In addition, Shaver expects to spend $514,368 for 8,037 direct labor-hours. Two current
product orders had the following requirements:

Using ABC, how much facility-level overhead is assigned to the current order for Men's
Razors?
A. $403.00.
B. $310.00.
C. $708.50.
D. $545.00.
E. $936.00.

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113. Shaver Co. manufactures a variety of electric razors for men and women. The company's
plant is partially automated. Listed below is cost driver information used in the product-costing
system:

In addition, Shaver expects to spend $514,368 for 8,037 direct labor-hours. Two current
product orders had the following requirements:

Using ABC, how much product-level overhead is assigned to the current order for Men's
Razors?
A. $218.00.
B. $250.70.
C. $331.20.
D. $284.00.
E. $288.00.

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114. Shaver Co. manufactures a variety of electric razors for men and women. The company's
plant is partially automated. Listed below is cost driver information used in the product-costing
system:

In addition, Shaver expects to spend $514,368 for 8,037 direct labor-hours. Two current
product orders had the following requirements:

Using ABC, how much product-level overhead is assigned to the current order for Women's
Razors?
A. $218.00.
B. $250.70.
C. $331.20.
D. $284.00.
E. $288.00.

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115. Shaver Co. manufactures a variety of electric razors for men and women. The company's
plant is partially automated. Listed below is cost driver information used in the product-costing
system:

In addition, Shaver expects to spend $514,368 for 8,037 direct labor-hours. Two current
product orders had the following requirements:

Using ABC, how much batch-level overhead is assigned to the current order for Women's
Razors based on pounds of raw materials?
A. $6,000.
B. $6,880.
C. $5,332.
D. $8,175.
E. $9,374.

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116. Wang Company has established the following overhead cost pools and cost drivers for the
month of May:

The following information pertains to the actual consumption of activity resources for two
sample jobs completed during May.

What is the activity-based overhead rate per purchase order?


A. $615.
B. $600.
C. $575.
D. $550.
E. $500.

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117. Wang Company has established the following overhead cost pools and cost drivers for the
month of May:

The following information pertains to the actual consumption of activity resources for two
sample jobs completed during May.

Using ABC, what is the overhead cost per unit produced for Job M2?
A. $39.
B. $25.
C. $20.
D. $12.
E. $10.

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118. Orange, Inc. has identified the following cost drivers for its expected overhead costs for
the year:

Total direct labor hours budgeted = 2,000 hours.


The following data applies to Product X, one of the products completed during the year

If a volume-based costing system based on direct labor hours to assign overhead is used, the
total overhead cost for Product X will be:
A. $1,500.
B. $1,560.
C. $2,000.
D. $2,400.
E. $2,560.

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119. Orange, Inc. has identified the following cost drivers for its expected overhead costs for
the year:

Total direct labor hours budgeted = 2,000 hours.


The following data applies to Product X, one of the products completed during the year

If the activity-based cost drivers are used to allocate overhead cost, the total overhead cost of
Product X will be:
A. $1,500.
B. $1,560.
C. $2,000.
D. $2,400.
E. $2,560.

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120. Zeta Company is preparing its annual profit plan. As part of its analysis of the profitability
of individual products, the controller estimates the amount of manufacturing overhead that
should be assigned to the individual product lines from the information given below.

Budgeted material-handling costs are $50,000.


Under a costing system that allocates manufacturing overhead on the basis of direct labor hours,
the material-handling cost per wall mirror is:
A. $0.
B. $500.
C. $1,000.
D. $2,000.
E. $5,000.

121. Zeta Company is preparing its annual profit plan. As part of its analysis of the profitability
of individual products, the controller estimates the amount of manufacturing overhead that
should be assigned to the individual product lines from the information given below.

Budgeted material-handling costs are $50,000.


The material-handling cost per wall mirror under ABC is:
A. $0.
B. $500.
C. $1,000.
D. $2,000.
E. $5,000.

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122. Pasternik Company produces and sells two products, Alpha and Zeta. The following
information is available relating to its setup activities:

With a volume-based costing system that applies overhead based on direct labor hours, the
setup cost portion of overhead for each unit is (rounded to the nearest cent):

A. Option A
B. Option B
C. Option C
D. Option D
E. Option E

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123. Pasternik Company produces and sells two products, Alpha and Zeta. The following
information is available relating to its setup activities:

Use of activity-based costing would allocate the following amounts of setup cost to each unit
(rounded to the nearest cent):

A. A
B. B
C. C
D. D

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124. Pasternik Company produces and sells two products, Alpha and Zeta. The following
information is available relating to its setup activities:

Assume the cost per setup remains at $2,000 but that the batch size for product Alpha is
changed from 10 to 25 units per batch. Using activity-based costing and a volume-based
overhead costing that uses direct labor-hours to assign overhead, the amount of setup cost
applied to each unit of product Alpha would be (rounded to the nearest cent):

A. A
B. B
C. C
D. D

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125. Nerrod Company sells its products at $500 per unit, net 30. The firm's gross margin ratio is
40 percent. The firm has estimated the following operating costs:

Nerrod Company has gathered the following data pertaining to activities it performed for two of
its customers:

What is Nerrod's total customer-sustaining cost applicable to Ninto?


A. $400.
B. $600.
C. $4,000.
D. $6,300.
E. $6,420.

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126. Nerrod Company sells its products at $500 per unit, net 30. The firm's gross margin ratio is
40 percent. The firm has estimated the following operating costs:

Nerrod Company has gathered the following data pertaining to activities it performed for two of
its customers:

What is Nerrod's total customer batch-level cost applicable to Ninto?


A. $800.
B. $920.
C. $2,300.
D. $2,420.
E. $6,300.

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127. Nerrod Company sells its products at $500 per unit, net 30. The firm's gross margin ratio is
40 percent. The firm has estimated the following operating

costs:
Nerrod Company has gathered the following data pertaining to activities it performed for two of
its customers:

What is Nerrod's total sales-sustaining cost applicable to XBT as a customer?


A. $0.
B. $920.
C. $4,120.
D. $6,300.
E. $6,420.

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128. Nerrod Company sells its products at $500 per unit, net 30. The firm's gross margin ratio is
40 percent. The firm has estimated the following operating costs:

Nerrod Company has gathered the following data pertaining to activities it performed for two of
its customers:

What is Nerrod's total customer unit-level cost applicable to XBT as a customer?


A. $50.
B. $480.
C. $4,120.
D. $4,125.
E. $6,300.

129. Service and not-for-profit organizations often:


A. Have ABC systems which are similar to those of manufacturing firms.
B. Do not have changeable outputs.
C. Are unable to benefit from ABC costing.
D. Do not have ABC systems which are similar to those of manufacturing firms.

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130. Customer profitability analysis:


A. Always shows that the company with the highest total sales generates the highest net
customer profit.
B. Always shows that the company with the lowest total sales generates the lowest net customer
profit.
C. Produces the same results as a Pareto analysis.
D. Helps identify actions to improve customer profitability.

Essay Questions

131. Johnson Associates is a catering firm in Tucson, Arizona, with revenue of $4 million. The
business began ten years ago as a one-owner bakery, but has dramatically changed in size and
function during the past five years. The four partners foresee the business doubling in sales
revenue within two years, and expect the firm to expand into other services including flowers,
furnishings, decorations, and music. Johnson Associates employs six full-time and ten
part-time employees. The four partners also work full-time, each partner managing a separate
business function. The firm currently uses a volume-based costing system installed seven years
ago and modified three years later.
Required:
(1) With just the above information, comment on Johnson Associates changing and future
costing system needs.
(2) Is Johnson Associates a probable candidate for an activity-based costing system (ABC)?
Why or why not?

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132. Two students in a cost accounting class were arguing about the need to gather good unit
cost information for manufacturing. One student, Travis, maintained that a firm producing and
selling large quantities of relatively few products would have no need for an ABC system, since
an ABC system is usually more expensive to implement than a volume-based system. Alicia
countered that even firms with high-volume homogeneous products could benefit from a cost
management technique like activity-based costing (ABC).
Required: Choose sides in this discussion and present justifications for your choice.

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133. The controller for Alabama Cooking Oil Co. established the following overhead cost pools
and cost drivers:

An order of 800 barrels of cooking oil used:

Required:
(1) What is the overhead rate per machine hour if the number of machine hours is used as a
single cost driver under traditional costing system? (Round your intermediate calculation to the
nearest cent and final answer to the nearest whole dollar.)
(2) Using volume-based costing, how much overhead is assigned to the order based on machine
hours as a single cost driver? (3) Using ABC costing, how much total overhead is assigned to
the order?

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134. Blackwelder Co. manufactures a variety of electric razors used by both men and women.
The company's plant is partially automated. The company uses an activity-based cost system.
Listed below is cost driver information used in the product-costing system:

Two current product orders had the following requirements:

Required:
(1) Using ABC costing, how much overhead is assigned to the order for men's razors?
(2) Using ABC costing, how much overhead is assigned to the order for women's razors?

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135. Classify each of the following costs as unit-level (U), batch-level (B), product-level (P), or
facility-level (F) costs and identify an appropriate example of a possible cost driver for each
item:
(1) Parts administration
(2) Production scheduling
(3) Materials handling
(4) Machine operations
(5) Personnel administration and training
(6) Plant security
(7) Machine setups
(8) Engineering changes
(9) Product design
(10) Rent for factory plant

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136. Pairing Company has the following cost drivers identified as A through F for determining
product manufacturing overhead costs.
(A) Number of pieces of equipment
(B) Number of direct material purchase orders
(C) Number of production runs
(D) Square feet of warehouse space
(E) Number of machine hours
(F) Square feet of factory space
In the space provided next to each of the following activity cost pool, indicate the most
appropriate cost driver for the cost pools.

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137. Altima Company uses an overhead costing system based on direct labor hours for its two
products X and Y. The company is considering adopting an activity-based costing system, and
collects the following information for the month of October.

Required:
(1) Compute the unit manufacturing costs of each product under a volume-based costing system
based on direct labor cost.
(2) Compute the unit manufacturing costs of each product under the activity-based costing
system.

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138. Castenet Company uses a volume-based costing system that applies overhead cost based
on direct labor hours at $250 per direct labor hour.
The company is considering adopting an activity-based costing system with the following data:

The two jobs processed in the month of June had the following characteristics:

Required:
(1) Compute the unit manufacturing costs of each job under the firm's current volume-based
costing system.
(2) Compute the unit manufacturing costs of each job under the activity-based costing system.
(3) (a) Compare the unit manufacturing costs for Jobs A and B computed in requirements 1 and
2.
Why do the two cost systems differ in their total cost for each job?
(b) Why might these differences be important to the Company?

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139. Demski Company has used a two-stage cost allocation system for many years. In the first
stage, plant overhead costs are allocated to two production departments, P1 and P2, based on
machine hours. In the second stage, Demski uses direct labor hours to assign overhead costs
from the production departments to individual products A and B.
Budgeted factory overhead costs for the year are $300,000. Both the budgeted and actual
machine hours in P1 and P2 are 12,000 and 28,000 hours, respectively.
After attending a seminar to learn the potential benefits of adopting an activity-based costing
system (ABC), Ted Demski, the president of Demski Company, is considering implementing
an ABC system. Upon his request, the controller at Demski Company has compiled the
following information for analysis:

Demski manufactures two types of product, A and B, for which the following information is
available:

Required:
(1) Determine the unit cost for each of the two products using the traditional two-stage
allocation method. Round calculations to 2 decimal places.
(2) Determine the unit cost for each of the two products using the proposed ABC system.
(3) (a)Compare the unit manufacturing costs for product A and product B computed in
requirements 1 and 2. Why do two the cost systems differ in their total cost for each product?
(b) Why might these differences be important to the Demski Company?

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140. Swenson Company manufactures 4,000 units of Deluxe Product and 20,000 units of
Regular Product each year. The company currently uses direct labor-hours to assign overhead
cost to products. The pre-determined overhead rate is:

Suppose, however, that factory overhead costs are actually caused by the five activities listed
below:

Also suppose the following transaction data has been collected:

Required: Using the activity-based costing method to calculate unit costs of Deluxe and
Regular products, and compare them with the current direct labor hours-based costing system.

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141. Moss Manufacturing has just completed a major change in its quality control (QC) process.
Previously, products had been reviewed by QC inspectors at the end of each major process, and
the company's ten QC inspectors were charged as direct labor to the operation or job. In an
effort to improve efficiency and quality, a computerized video QC system was purchased for
$250,000. The system consists of a minicomputer, 15 video cameras, other peripheral hardware,
and software.
The new system used cameras stationed by QC engineers at key points in the production
process. Each time an operation changes or there is a new operation, the cameras are moved,
and a new master picture is loaded into the computer by a QC engineer. The camera takes
pictures of the units in process, and the computer compares them to the picture of a "good" unit.
Any differences are sent to a QC engineer who removes the bad units and discusses the flaws
with the production supervisors. The new system has replaced the ten QC inspectors with two
QC engineers.
The operating costs of the new QC system, including the salaries of the QC engineers, have
been included as factory overhead in calculating the company's volume-based factory overhead
rate which is based on direct labor dollars.
The company's president is confused. His vice president of production has told him how
efficient the new system is, yet there is a large increase in the factory overhead rate. The
computation of the rate before and after automation is shown below.

"Three hundred percent, "lamented the president, "How can we compete with such a high
factory overhead rate?"
Required:
(1) (a) Define factory overhead, and cite three examples of typical costs that would be included
in factory overhead.
(b) Explain why companies develop factory overhead rates.
(2) Explain why the increase in the overhead rate should not have a negative financial impact on
Moss Manufacturing.
(3) Explain, in the greatest detail possible, how Moss Manufacturing could change its overhead
accounting system to eliminate confusion over product costs.
(4) Discuss how an activity-based costing system might benefit Moss Manufacturing.

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142. The controller for Ocean Sailboats Inc., a company which uses an automated process to
make sailboats, established the following overhead cost pools and cost drivers:

A recent order for sailboats used:

Required:
(1) What is the overhead rate per machine hour if the number of machine hours is used as a
single cost driver under traditional costing system? (2) Utilizing traditional costing, how much
overhead is assigned to the order based on machine hours as a single cost driver? (3) Utilizing
ABC, how much total overhead is assigned to the order?

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143. Skateline Inc. designs and manufactures roller skates. The following data pertain to two of
its major customers: FantasticSkates and SkateToday.

Required: Compare the net proceeds to Skateline Inc. 30 days after sale (rounded to nearest
dollar for each step where applicable).

144. Certo Health Products was formed two years ago to produce and distribute a
newly-patented protein supplement. Two variations of the original supplement have since been
developed and introduced for general sale. The three products are processed in essentially the
same way, but Ann Marshall, the owner of Certo, anticipates that a half-dozen new products
will be developed for sale in the next two years. These products will not be variations of the
patented supplement, and will require a different production process other than the one
currently used. Ann has asked you to review the current use of a single volume-based rate and
explain the arguments for using departmental rates with activity-based drivers.

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145. Cost Pools and Cost Drivers Based on a recent study of its manufacturing operations
Johnston Manufacturing Corporation has identified six resource consumption cost drivers.
These cost drivers and their budgeted activity levels for the coming year are:

The firm has budgeted the following costs for the year:

With the exception of the factory space cost pool, which uses machine-hours as the activity
consumption cost driver, other cost pools have identical resource and activity consumption cost
drivers.
Required:
(1) Identify the most appropriate activity cost pool for each of the cost items and cost driver for
each activity cost pool you identified.
(2) Johnston has received a request to quote the price for 4,000 units of a new product. The
production will require 100 engineering-hours and 4,250 machine-hours. What is the
manufacturing overhead per unit the firm should use in determining the price?

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146. Volume-Based Costing Versus ABC: Gorden Company produces a variety of electronic
products. One of its plants produces two laser printers, Speedy and Deluxe. At the beginning of
2010, the following data were prepared for this plant:

The unit overhead cost is calculated using the predetermined overhead application rate based on
direct labor-hours.
Upon examining the data, the marketing manager was particularly impressed with the per-unit
profitability of the Deluxe printer and suggested that more emphasis be placed on producing
and selling this product. The plant supervisor objected to this strategy, arguing that the Deluxe
model required a very delicate manufacturing process. The supervisor believed that the cost of
the Deluxe printer was likely to be much higher than reported.
The controller suggests an activity-based costing system and provides the following budget
data pertaining to the period:

* Cost per unit of cost driver


Required:
(1) Using the projected data based on the firm's current costing system, calculate gross profit
per unit and gross profit percentage for each product. Round calculations to 2 decimal places.
(2)Using the suggested multiple cost drivers' overhead rates, calculate the overhead cost per
unit for each product and determine gross profit per unit and gross profit percentage for each
product.
(3) Based on your results, evaluate the suggestion of the marketing manager to emphasize the
Deluxe model.
(4) How does ABC contribute to Gorden's competitive advantage?

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147. Customer Profitability Analysis: Boston Depot sells office supplies to area corporations
and organizations. Tom Delayne, founder and CEO, has been disappointed with the operating
results and the profit margin for the last two years. Business forms are mostly a "commodity"
business with low profit margins. To increase profit margins and gain competitive advantages,
Delayne introduced "Desk-Top Delivery" service. The business seems to be as busy as ever.
Yet, the operating income has been declining. To help identify the root cause of declining
profits, he decided to analyze the profitability of two of the firm's major customers: Omega
International (OI) and City of Albion (CA).
According to the customer profitability analysis that Boston Depot conducts regularly, Boston
Depot has the same amount of total sales with both OI and CA. However, the firm earns a
higher gross margin and gross margin ratio from CA than those from the sales to OI, as
demonstrated here:

Boston Depot adds a flat l7.5 percent to all sales for expenses incurred in such activities as
handling customers' requests, pick-packing, order delivery, warehousing, and data entry.
However, not all customers require the same level of services. Operation Manager, Jamie Steel,
points out that CA has been a much heavier service user than OI. She shows the following data
to support her belief:

Controller Rod Jay has been investigating ways to determine the costs of performing various
activities. He summarized his findings:

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Steel points out that activities cost money. Two customers who request different service
activities most likely are not costing the firm the same.
Required:
(1) Using activity-based costing, compute the charges per unit of service activities.
(2) Using activity-based costing, compute the total distribution costs for each of the customers.
(3) Is the City of Albion a more profitable customer?
(4) Is Omega International a better customer for Boston Depot?

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148. Customer Profitability Analysis Spring Company collected the following data
pertaining to its activities with selected customers.

Spring Company mails monthly statements on or before the first day of each month. HS pays all
of its account payables within the cash discount periods. Baldwin does not take advantage of
cash discounts. However, it pays its accounts on the specified due dates. Adventix pays half of
its accounts on the date that these accounts are due and pays the remainder at the end of the
following month. Joan Lieberman, the controller of Spring Company, has estimated that the
cost of working capital is approximately 2 percent per month.
Lieberman also gathered the following cost data:

Required: Prepare and interpret a customer profitability analysis for Spring Company. How
does it help Spring Company become more competitive and profitable?

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Chapter 05 Activity-Based Costing and Customer Profitability Analysis Answer


Key

Multiple Choice Questions

1. The major limitation of volume-based costing systems is the use of volume-based:


A. Criteria.
B. Standards.
C. Rates.
D. Variances.
E. Restrictions.

Difficulty: Easy
Learning Objective: 5-1

2. Volume-based rates produce inaccurate product cost when:


A. A large share of factory overhead cost is volume-based.
B. Firms produce a diverse mix of products.
C. Large volumes of a product are manufactured.
D. Firms have a small number of homogeneous products.

Difficulty: Medium
Learning Objective: 5-2

3. Volume-based overhead rates may cause undesirable strategic effects such as:
A. Management by objectives.
B. Cross-subsidization of products.
C. Ineffective management of operations for process improvement.
D. Proration of variances.

Difficulty: Medium
Emerging Issues: Strategy
Learning Objective: 5-1

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4. Activity-based costing (ABC) differs from other costing approaches in its:


A. Incorporating customer needs.
B. Complexity in implementation.
C. Focus on operational excellence.
D. Use of cost objects.
E. Recognition of the causal relationship.

Difficulty: Medium
Learning Objective: 5-2

5. Activity-based costing (ABC) differs from other costing approaches in that it more
accurately measures the cost of activities:
A. Not proportional to the volume of outputs produced.
B. Directly proportional to the volume of outputs produced.
C. Inversely proportional to the volume of outputs produced.
D. That are non-value adding.
E. At a significantly lower cost in time and money.

Difficulty: Easy
Learning Objective: 5-1

6. In performing activity analysis during the design of an activity-based costing system (ABC),
the management accountant studies:
A. The cost drivers and managers in the plant.
B. The advice of operation-level mangers.
C. The resources, activities and cost drivers in the operation.
D. The cost allocation methods applicable to the firm.
E. The implementation problems for an ABC system.

Difficulty: Easy
Learning Objective: 5-2

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7. Effective implementation of activity-based costing (ABC) requires:


A. Normally the assistance of a consultant.
B. A sophisticated and expensive computer system.
C. Support of top management and key employees.
D. Capturing properly the complexity of the data.
E. ABC has no significant implementation issues.

Difficulty: Easy
Learning Objective: 5-7

8. Elimination of low-value-added activities in a firm should:


A. Be discouraged because of potential harmful effects.
B. Not affect customer value.
C. Not have priority because low-value-added activities have little effect on a firm's
performance.
D. Have priority only when a firm is operating at a loss.
E. Happen naturally if the firm is well-managed.

Difficulty: Easy
Learning Objective: 5-4

9. The relationship between activity-based costing (ABC) and strategic cost management could
be described as:
A. Inconsistent.
B. Proportional.
C. Insignificant.
D. Linked.
E. Minimal.

Difficulty: Easy
Learning Objective: 5-1

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10. Successful activity-based costing (ABC) implementation depends upon the firm:
A. Having support of consultants with appropriate expertise.
B. Having a thorough activity analysis.
C. Starting with a relatively simple system.
D. Having well-trained managers.
E. Having adequate computer resources.

Difficulty: Medium
Learning Objective: 5-7

11. A measure of the quantity of resources consumed by an activity is:


A. Quantity driver.
B. Resource consumption cost driver.
C. Not a cost driver.
D. Activity consumption cost driver.
E. Consumption cost driver.

Difficulty: Easy
Learning Objective: 5-2

12. A measure of frequency and intensity of demands placed on activities by cost objects is:
A. Quantity driver.
B. Resource consumption cost driver.
C. Not a cost driver.
D. Activity consumption cost driver.
E. Consumption cost driver.

Difficulty: Easy
Learning Objective: 5-2

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13. An activity that is performed for each unit of production is a(n):


A. Product-level activity.
B. Facility-level activity.
C. Unit-level activity.
D. Performance-level activity.
E. Batch-level activity.

Difficulty: Easy
Learning Objective: 5-2

14. An activity that is performed to support the production of a new customer's order is a(n):
A. Product-level activity.
B. Facility-level activity.
C. Unit-level activity.
D. Customer-support activity.
E. Batch-level activity.

Difficulty: Medium
Learning Objective: 5-2

15. Which one of the following is not a unit-level cost driver?


A. Direct labor hours.
B. Direct material dollars.
C. Machine hours.
D. Production orders.

Difficulty: Medium
Learning Objective: 5-2

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16. The management of activities to improve the value received by the customer and the
competitiveness of the organization is:
A. Cost driver analysis.
B. Customer profitability analysis.
C. Activity-based management.
D. Performance measurement.
E. Activity analysis.

Difficulty: Easy
Learning Objective: 5-4

17. The examination of the efficiency and value of each of a firm's activities is:
A. Activity analysis.
B. Pareto analysis.
C. Activity-based management.
D. Performance measurement.
E. Attribute-based management.

Difficulty: Easy
Learning Objective: 5-4

18. Which one of the following is a high value-added activity?


A. Set up.
B. Rework.
C. Repair.
D. Storage.
E. Processing.

Difficulty: Easy
Learning Objective: 5-4

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19. In regard to selling activities, which one of the following would be a cost driver for selling
expense?
A. Number of invoices.
B. Number of sales calls.
C. Number of production runs.
D. Number of shipments.

Difficulty: Easy
Learning Objective: 5-6

20. Which one of the following is not a recommendation for a successful implementation of
ABC/M?
A. Obtain support of management and personnel.
B. Complete an activity analysis.
C. Start with a relatively simple system.
D. Use ABC/M on a job that will succeed.

Difficulty: Medium
Learning Objective: 5-7

21. Which of the following activities is a facility-level activity?


A. Plant management salaries.
B. Production scheduling.
C. Direct labor.
D. Product design.
E. Materials handling.

Difficulty: Easy
Learning Objective: 5-2

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22. A company using a volume-based overhead assignment (allocation) method will tend to:
A. Overstate the cost of low volume products.
B. Understate the cost of low volume products.
C. Understate the cost of high volume products.
D. Understate the cost of all products.
E. Either understate or overstate the cost of high volume products depending on the specific
manufacturing factors involved.

Difficulty: Easy
Learning Objective: 5-3

23. Which of the following is a batch-level cost driver?


A. Output units.
B. Number of engineering change orders.
C. Number of materials handling transactions.
D. Square feet of plant area occupied.
E. Number of employees.

Difficulty: Medium
Learning Objective: 5-2

24. Which of the following activities is a facility-level activity?


A. Materials handling.
B. Plant maintenance.
C. Product inspection.
D. Design engineering.
E. Purchase orders.

Difficulty: Easy
Learning Objective: 5-2

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25. In an organization that makes furniture, which of the following is a high value-added
activity?
A. Using direct materials in production.
B. Inspecting production.
C. Storing finished goods inventory.
D. Moving work-in-process inventory between work stations.
E. Reworking the product to repair defects.

Difficulty: Easy
Learning Objective: 5-4

26. Overhead costs are allocated to cost objects in an activity-based costing system in the
following manner:
A. Overhead costs are traced to departments, then costs are traced to products.
B. Overhead costs are traced to activities, then costs are traced to products.
C. Overhead costs are traced to activities, then costs are traced to departments and then
allocated to products.
D. Overhead costs are traced from resources to cost objects.

Difficulty: Medium
Learning Objective: 5-2

27. Which of the following is a batch-level cost driver?


A. Output units.
B. Number of employees.
C. Number of orders.
D. Number of parts.
E. Machine hours.

Difficulty: Medium
Learning Objective: 5-2

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28. Which of the following has the weakest linkage between activity and cost driver?

A. A
B. B
C. C
D. D

Difficulty: Medium
Learning Objective: 5-2

29. A volume-based rate is an appropriate overhead application base when:


A. Several well-differentiated products are manufactured.
B. Direct labor costs are large.
C. Direct material costs are large relative to direct labor costs incurred.
D. Only one product is manufactured.
E. Manufacturing is process-based.

Difficulty: Easy
Learning Objective: 5-1

30. Which of the following would likely be the most appropriate cost driver of electric power
used by machines?
A. Number of units.
B. Machine size.
C. Number of machine hours.
D. Number of production runs.
E. Purchase cost of machines.

Difficulty: Medium
Learning Objective: 5-2

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31. Using a volume-based overhead rate based on machine hours to assign manufacturing
overhead to a product line that uses relatively few machine hours is likely to:
A. Overapply overhead to the product line.
B. Underapply overhead to the product line.
C. Understate direct labor costs.
D. Overstate direct labor costs.
E. Either over- or under-apply overhead to the product line depending on many other factors.

Difficulty: Medium
Learning Objective: 5-3

32. Which of the following is an example of a high-value-added activity?


A. Shipping the customer's order.
B. Scheduling the customer order for production.
C. Inspecting goods to ensure the right quantity is being shipped.
D. E-mailing a customer to assure that a complaint will be resolved expeditiously.

Difficulty: Medium
Learning Objective: 5-4

33. Engineering change orders, equipment maintenance, and product development costs are
examples of:
A. Unit costs.
B. Batch costs.
C. Product-level costs.
D. Facility-level costs.
E. Unit, batch, and customer-sustaining costs, respectively.

Difficulty: Easy
Learning Objective: 5-2

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34. In an activity-based costing system, overhead costs are divided into separate:
A. Cost objects.
B. Activity cost pools.
C. Resource consumption and activity consumption cost pools.
D. Product-line cost pools.
E. Plantwide or departmental cost pools.

Difficulty: Medium
Learning Objective: 5-2

35. Which of the following would likely be the most appropriate cost driver to allocate machine
set-up costs to products?
A. Machine hours.
B. Direct labor hours.
C. Number of production runs.
D. Number of products.
E. Number of purchase orders.

Difficulty: Hard
Learning Objective: 5-2

36. A firm has many products, some produced in an automated production process and some
produced in a manual production process. Using direct labor hours to assign manufacturing
overhead to a product manufactured with a highly automated process is likely to:
A. Overstate overhead of the product.
B. Understate overhead of the product.
C. Overapply overhead to the period.
D. Underapply overhead to the period.
E. Have no effect on overhead of the product.

Difficulty: Medium
Learning Objective: 5-3

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37. Activity-based costing for manufacturing operations is used to assign:


A. Direct material and direct labor costs to products.
B. Direct labor and manufacturing overhead costs to products.
C. Manufacturing overhead costs to products.
D. Selling and general administrative overhead costs to products.
E. Selling and general administrative overhead and manufacturing overhead costs to products.

Difficulty: Easy
Learning Objective: 5-2

38. The use of activity-based costing is most appropriate for:


A. Firms that manufacture multiple product lines.
B. Firms that have very low manufacturing overhead costs relative to other costs of production.
C. Firms with high levels of production activity.
D. Firms that are labor intensive.
E. Firms that manufacture a small number of different products.

Difficulty: Easy
Learning Objective: 5-2

39. Which of the following is a benefit of activity-based costing?


A. Reduced overhead costs.
B. More accurate measures of production volume.
C. Facilitate better product pricing decisions.
D. Having fewer cost drivers than volume-based costing systems.
E. More streamlined manufacturing processes.

Difficulty: Medium
Learning Objective: 5-2

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40. Which of the following is not normally associated with activity-based costing?
A. Activity cost pools.
B. Multiple cost drivers.
C. Reduction of non-value-adding costs.
D. High direct labor costs relative to manufacturing overhead costs.
E. Improved decision making and pricing.

Difficulty: Easy
Learning Objective: 5-2

41. Which of the following is not considered a benefit of activity-based costing?


A. Decreased production activity levels.
B. Improved product pricing decisions.
C. A better understanding of manufacturing overhead.
D. More accurate unit cost information.
E. Improved strategic decisions.

Difficulty: Easy
Learning Objective: 5-2

42. Which of the following would be the most appropriate cost driver to allocate factory
electricity costs to products?
A. Machinery depreciation expense.
B. Machinery maintenance work orders.
C. Machinery down-time.
D. Machine hours.
E. Machine productivity.

Difficulty: Easy
Learning Objective: 5-2

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43. Which of the following activity cost pools would most likely be allocated based on the
number of production runs?
A. Machinery set-up costs.
B. Raw materials warehousing costs.
C. Factory heating costs.
D. Factory janitorial costs.
E. Indirect labor costs.

Difficulty: Easy
Learning Objective: 5-2

44. Which of the following is most likely to be the cost driver for the packaging and shipping
activity?
A. Number of setups.
B. Number of components.
C. Number of orders.
D. Hours of testing.
E. Number of production runs.

Difficulty: Medium
Learning Objective: 5-2

45. Activity-based costing systems:


A. Accumulate overhead costs by departments.
B. Are less complex and therefore less costly than volume-based systems.
C. Can be used in manufacturing firms only.
D. Have separate overhead rates for each activity.
E. Eliminate multiple-stage cost allocation.

Difficulty: Easy
Learning Objective: 5-2

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46. All of the following statements regarding activity-based costing systems are true except
they:
A. Can provide more accurate product costs.
B. Identify more costs as indirect costs than do traditional volume-based systems.
C. Are likely to be more time-consuming than volume-based systems.
D. Are used in both manufacturing and non-manufacturing companies.
E. Are likely to have more overhead rates than volume-based systems.

Difficulty: Easy
Learning Objective: 5-2

47. All of the following are low-value-added activities except:


A. Processing.
B. Reworking.
C. Moving.
D. Inspection.
E. Warranty service.

Difficulty: Easy
Learning Objective: 5-4

48. Which of the following cost pools are used to classify costs under activity-based costing?

A. A
B. B
C. C
D. D

Difficulty: Easy
Learning Objective: 5-2

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49. Purchase order, setup, and inspection costs are examples of:
A. Unit-level costs.
B. Batch-level costs.
C. Product-level costs.
D. Facility-level costs.
E. Department-level costs.

Difficulty: Medium
Learning Objective: 5-2

50. Engineering change orders, equipment maintenance, and product development costs are
examples of:
A. Unit-level costs.
B. Batch-level costs.
C. Product-level costs.
D. Facility-level costs.
E. Department-level costs.

Difficulty: Easy
Learning Objective: 5-2

51. Costs at the unit-level of activity should be allocated to products using cost drivers that are:
A. Customer-oriented.
B. Design-related.
C. Volume-related.
D. Product-related.
E. Order-related.

Difficulty: Medium
Learning Objective: 5-2

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52. If a costing system uses a single base to allocate overhead costs that are results of several
production activities:
A. Products that use relatively more of this base tend to be undercosted.
B. Products that use relatively less of this base tend to be overcosted.
C. Products that use relatively more of this base tend to be overcosted.
D. Products may be over- or under-costed, depending on the activity level.
E. Products may be over- or under-costed, depending on the overhead rate.

Difficulty: Medium
Learning Objective: 5-3

53. Procurement costs such as costs of placing orders for materials and paying suppliers are
usually classified as:
A. Output-unit-level costs.
B. Batch-level costs.
C. Product-level costs.
D. Facility-level costs.
E. Vendor costs.

Difficulty: Medium
Learning Objective: 5-2

54. The cost of sales visits is a:


A. Customer unit-level cost.
B. Customer batch-level cost.
C. Customer-sustaining cost.
D. Distribution-channel cost.
E. Sales-sustaining cost.

Difficulty: Easy
Emerging Issues: Service
Emerging Issues: Strategy
Learning Objective: 5-6

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55. Freight charges based on number of units shipped to customers is a:


A. Customer unit-level cost.
B. Customer batch-level cost.
C. Customer-sustaining cost.
D. Distribution-channel cost.
E. Sales-level cost.

Difficulty: Easy
Learning Objective: 5-6

56. Processing sales returns and allowances is usually classified as a:


A. Customer unit-level cost.
B. Customer batch-level cost.
C. Customer-sustaining cost.
D. Distribution-channel cost.
E. Sales-level cost.

Difficulty: Easy
Learning Objective: 5-6

57. Invoicing cost is an example of a:


A. Customer unit-level cost.
B. Customer batch-level cost.
C. Customer-sustaining cost.
D. Distribution-channel cost.
E. Sales-level cost.

Difficulty: Medium
Learning Objective: 5-6

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58. Cost to process monthly statements is an example of a:


A. Customer unit-level cost.
B. Customer batch-level cost.
C. Customer-sustaining cost.
D. Distribution-channel cost.
E. Sales-level cost.

Difficulty: Easy
Learning Objective: 5-6

59. The costs of operating a regional warehouse is an example of a:


A. Customer unit-level cost.
B. Customer batch-level cost.
C. Customer-sustaining cost.
D. Distribution-channel cost.
E. Sales-level cost.

Difficulty: Easy
Learning Objective: 5-6

60. General corporate sales expenditures are:


A. Customer unit-level costs.
B. Customer batch-level costs.
C. Customer-sustaining costs.
D. Distribution-channel costs.
E. Sales-sustaining costs.

Difficulty: Easy
Learning Objective: 5-6

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61. The general sales manager's salary is an example of a:


A. Customer unit-level cost.
B. Customer batch-level cost.
C. Customer-sustaining cost.
D. Distribution-channel cost.
E. Sales-level cost.

Difficulty: Easy
Learning Objective: 5-6

62. Which of the following is a description of categorizing related customer costs into cost
pools on the basis of cost drivers?
A. Customer revenue analysis.
B. Customer cost analysis.
C. Customer profitability analysis.
D. Customer value assessment.
E. Customer equity analysis.

Difficulty: Easy
Learning Objective: 5-6

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63. Wings Co. budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours and
had the following manufacturing overhead:

Requirements for Job #971 which manufactured 4 units of product:

If Wings uses a volume-based overhead rate based on direct labor hours, the manufacturing
overhead for Job #971 is:
A. $990.
B. $1,020.
C. $1,600.
D. $3,460.
E. $6,400.
($160,000 + $13,260 + $1,380 + $10,560)/2,315 budgeted hours = $80 per dir labor hr
$80 x 20 Direct Labor hours = $1,600 = Manufacturing overhead for Job #971

Difficulty: Easy
Learning Objective: 5-3

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64. Wings Co. budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours and
had the following manufacturing overhead:

Requirements for Job #971 which manufactured 4 units of product:

Using ABC, the materials handling overhead cost assigned to Job #971 is:
A. $2,300.
B. $990.
C. $6,500.
D. $690.
E. $1,020.
$160,000/3,200 pounds = $50 per pound of direct materials
$50 x 130 pounds = $6,500

Difficulty: Easy
Learning Objective: 5-3

5-112

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65. Wings Co. budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours and
had the following manufacturing overhead:

Requirements for Job #971 which manufactured 4 units of product:

Using ABC, overhead cost assigned to Job #971 for machine setup is:
A. $2,300.
B. $990.
C. $6,500.
D. $690.
E. $1,020.
$13,260/390 set-ups = $34
$34 x 30 setups = $1,020

Difficulty: Easy
Learning Objective: 5-3

5-113

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66. Wings Co. budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours and
had the following manufacturing overhead:

Requirements for Job #971 which manufactured 4 units of product:

Using ABC, overhead cost assigned to Job #971 for machine repair is:
A. $2,300.
B. $990.
C. $6,500.
D. $690.
E. $1,020.
$1,380/30,000 machine hours = $.046 per machine hour
$.046 x 15,000 machine hours = $690

Difficulty: Easy
Learning Objective: 5-3

5-114

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67. Wings Co. budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours, and
had the following manufacturing overhead:

Requirements for Job #971 which manufactured 4 units of product:

Using ABC, overhead cost assigned to Job #971 for inspections is:
A. $2,300.
B. $990.
C. $6,500.
D. $690.
E. $1,020.
$10, 560/160 inspections = $66 per inspection
$66 x 15 inspections = $990

Difficulty: Easy
Learning Objective: 5-3

5-115

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68. Wings Co. budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours, and
had the following manufacturing overhead:

Requirements for Job #971 which manufactured 4 units of product:

The total overhead of Job #971 under the ABC costing is:
A. $95.
B. $380.
C. $1,520.
D. $2,300.
E. $9,200.
$6,500 + $1,020 + $690 + $990 = $9,200

Difficulty: Medium
Learning Objective: 5-3

5-116

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69. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and
digital camcorders.

National uses a volume-based costing system to apply factory overhead based on direct labor
dollars. The unit prime costs of each product were as follows:

National's controller had been researching activity-based costing and decided to switch to it. A
special study determined National's two products have the following budgeted activities:

What is the overhead application rate using the firm's volume-based costing system (rounded to
the nearest percent or cents)?
A. 350 percent of direct labor cost.
B. $51.89 per direct labor-hour.
C. 68 per cent of direct labor cost.
D. 5,189 percent of direct labor cost.
E. 5,110 percent of direct labor cost.
$1,349,040/[(10,000 x $17.52) + (16,000 x $13.14)] = 3.5

Difficulty: Medium
Learning Objective: 5-3

5-117

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70. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and
digital camcorders.

National uses a volume-based costing system to apply factory overhead based on direct labor
dollars. The unit prime costs of each product were as follows:

National's controller had been researching activity-based costing and decided to switch to it. A
special study determined National's two products have the following budgeted activities:

Using the firm's volume-based costing, applied factory overhead per unit for the High F model
is (rounded to the nearest cent):
A. $61.32.
B. $65.43.
C. $43.42.
D. $45.99.
E. $54.04.
$17.52 x 350% = $61.32
Difficulty: Medium
Learning Objective: 5-3

5-118

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71. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and
digital camcorders.

National uses a volume-based costing system to apply factory overhead based on direct labor
dollars. The unit prime costs of each product were as follows:

National's controller had been researching activity-based costing and decided to switch to it. A
special study determined National's two products have the following budgeted activities:

Using the firm's volume-based costing, applied factory overhead per unit for the Great P model
is (rounded to the nearest cent):
A. $61.32.
B. $65.43.
C. $43.42.
D. $45.99.
E. $54.04.
$13.14 x 350% = $45.99
Difficulty: Medium
Learning Objective: 5-3

5-119

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72. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and
digital camcorders.

National uses a volume-based costing system to apply factory overhead based on direct labor
dollars. The unit prime costs of each product were as follows:

National's controller had been researching activity-based costing and decided to switch to it. A
special study determined National's two products have the following budgeted activities:

Using activity-based costing, applied engineering and design factory overhead for the High F
model per unit is (rounded to the nearest cent):
A. $6.13.
B. $11.86.
C. $16.28.
D. $32.46.
E. $66.73.
$404,712/2,409 hours = $168 per engineering & design hour
$168 x 969 hours = $162,792
$162, 792/10,000 High F units = $16.28
Difficulty: Medium
Learning Objective: 5-3

5-120

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73. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and
digital camcorders.

National uses a volume-based costing system to apply factory overhead based on direct labor
dollars. The unit prime costs of each product were as follows:

National's controller had been researching activity-based costing and decided to switch to it. A
special study determined National's two products have the following budgeted activities:

Using activity-based costing, applied quality control factory overhead for the High F model per
unit is (rounded to the nearest cent):
A. $6.13.
B. $11.86.
C. $16.28.
D. $32.46.
E. $66.73.
$269,808/12,848 inspection hours = $21 per inspection hour
$21 x 5,648 = $118,608
$118,608/10,000 High F units = $11.86

Difficulty: Medium
Learning Objective: 5-3

5-121

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74. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and
digital camcorders.

National uses a volume-based costing system to apply factory overhead based on direct labor
dollars. The unit prime costs of each product were as follows:

National's controller had been researching activity-based costing and decided to switch to it. A
special study determined National's two products have the following budgeted activities:

Using activity-based costing, applied machinery overhead for the High F model per unit is
(rounded to the nearest cent):
A. $6.13.
B. $11.86.
C. $16.28.
D. $32.46.
E. $66.73.
$539,616/33,726 machine hours = $16 per machine hour
$16 x 20,286 = $324,576
$324,576/10,000 High F units = $32.46
Difficulty: Medium
Learning Objective: 5-3

5-122

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75. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and
digital camcorders.

National uses a volume-based costing system to apply factory overhead based on direct labor
dollars. The unit prime costs of each product were as follows:

National's controller had been researching activity-based costing and decided to switch to it. A
special study determined National's two products have the following budgeted activities:

Using activity-based costing, applied miscellaneous overhead for the High F model per unit is
(rounded to the nearest cent):
A. $6.13.
B. $11.86.
C. $16.28.
D. $32.36.
E. $66.73.
$134,904/26,400 = $5.11
($5.11 x 12,000)/10,000 = $6.13

Difficulty: Medium
Learning Objective: 5-3

5-123

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76. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and
digital camcorders.

National uses a volume-based costing system to apply factory overhead based on direct labor
dollars. The unit prime costs of each product were as follows:

5-124

Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

National's controller had been researching activity-based costing and decided to switch to it. A
special study determined National's two products have the following budgeted activities:

Using activity-based costing, total overhead per unit of the High F model is (rounded to the
nearest cent):
A. $42.61.
B. $45.99.
C. $61.32.
D. $66.73.
E. $168.00.
$16.28 + $11.86 + $32.46 + $6.13 = $66.73

Difficulty: Hard
Learning Objective: 5-3

5-125

Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

77. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and
digital camcorders.

National uses a volume-based costing system to apply factory overhead based on direct labor
dollars. The unit prime costs of each product were as follows:

5-126

Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

National's controller had been researching activity-based costing and decided to switch to it. A
special study determined National's two products have the following budgeted activities:

Using activity-based costing, applied engineering and design factory overhead for the Great P
model per unit is (rounded to the nearest cent):
A. $4.60.
B. $9.45.
C. $13.44.
D. $15.12.
E. $42.61.
$404,712/2,409 hours = $168 per engineering & design hour
$168 x 1,440 hours = $241,920
$241,920/16,000 Great P units = $15.12

Difficulty: Medium
Learning Objective: 5-3

5-127

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78. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and
digital camcorders.

National uses a volume-based costing system to apply factory overhead based on direct labor
dollars. The unit prime costs of each product were as follows:

5-128

Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

National's controller had been researching activity-based costing and decided to switch to it. A
special study determined National's two products have the following budgeted activities:

Using activity-based costing, applied quality control factory overhead for the Great P model per
unit is (rounded to the nearest cent):
A. $4.60.
B. $9.45.
C. $13.44.
D. $15.12.
E. $42.61.
$269,808/12,848 inspection hours = $21 per inspection hour
$21 x 7,200 = $151,200
$151,200/16,000 Great P units = $9.45

Difficulty: Medium
Learning Objective: 5-3

5-129

Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

79. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and
digital camcorders.

National uses a volume-based costing system to apply factory overhead based on direct labor
dollars. The unit prime costs of each product were as follows:

5-130

Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

National's controller had been researching activity-based costing and decided to switch to it. A
special study determined National's two products have the following budgeted activities:

Using activity-based costing, applied machinery overhead for the Great P model per unit is
(rounded to the nearest cent):
A. $4.60.
B. $9.45.
C. $13.44.
D. $15.12.
E. $42.61.
$539,616/33,726 machine hours = $16 per machine hour
$16 x 13,440 = $215,040
$215,040/16,000 Great P units = $13.44

Difficulty: Medium
Learning Objective: 5-3

5-131

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80. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and
digital camcorders.

National uses a volume-based costing system to apply factory overhead based on direct labor
dollars. The unit prime costs of each product were as follows:

5-132

Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

National's controller had been researching activity-based costing and decided to switch to it. A
special study determined National's two products have the following budgeted activities:

Using activity-based costing, applied miscellaneous overhead for the Great P model per unit is
(rounded to the nearest cent):
A. $4.60.
B. $9.45.
C. $13.44.
D. $15.12.
E. $42.61.
$134,904/26,400 = $5.11
($5.11 x 14,400)/16,000 = $4.60

Difficulty: Hard
Learning Objective: 5-3

5-133

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81. National Inc. manufactures two models of CMD that can be used as cell phones, MPX, and
digital camcorders.

National uses a volume-based costing system to apply factory overhead based on direct labor
dollars. The unit prime costs of each product were as follows:

5-134

Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

National's controller had been researching activity-based costing and decided to switch to it. A
special study determined National's two products have the following budgeted activities:

Using activity-based costing, total overhead per unit of Great P model is (rounded to the nearest
cent):
A. $42.61.
B. $45.99.
C. $61.32.
D. $66.73.
E. $168.00.
$15.12 + $9.45 + $13.44 + $4.60 = $42.61

Difficulty: Hard
Learning Objective: 5-3

5-135

Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

82. Sheen Co. manufacturers laser printers. It has outlined the following overhead cost drivers:

Sheen Co. has an order for 1,000 laser printers that has the following production requirements:

Using activity-based costing, applied quality control factory overhead for the 1000 laser printer
order is:
A. $7,800.
B. $10,000.
C. $10,500.
D. $150.
E. $21,600.
$64,800/1,080 = $60 per inspection
$60 x 175 = $10,500

Difficulty: Easy
Learning Objective: 5-3

5-136

Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

83. Sheen Co. manufacturers laser printers. It has outlined the following overhead cost drivers:

Sheen Co. has an order for 1,000 laser printers that has the following production requirements:

Using activity-based costing, applied machine repetition overhead for the 1000 laser printer
order is:
A. $7,800.
B. $10,000.
C. $10,500.
D. $150.
E. $21,600.
$132,000/1,100 = $120 per machine hour
$120 x 180 = $21,600

Difficulty: Easy
Learning Objective: 5-3

5-137

Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

84. Sheen Co. manufacturers laser printers. It has outlined the following overhead cost drivers:

Sheen Co. has an order for 1,000 laser printers that has the following production requirements:

Using activity-based costing, applied materials handling factory overhead for the 1000 laser
printer order is:
A. $7,800.
B. $10,000.
C. $10,500.
D. $150.
E. $21,600.
$900/30 = $30 per batch
$30 x 5 batches = $150

Difficulty: Easy
Learning Objective: 5-3

5-138

Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

85. Sheen Co. manufacturers laser printers. It has outlined the following overhead cost drivers:

Sheen Co. has an order for 1,000 laser printers that has the following production requirements:

Using activity-based costing, applied miscellaneous factory overhead for the 1000 laser printer
order based on direct labor hours is:
A. $7,800.
B. $10,000.
C. $10,500.
D. $150.
E. $21,600.
$48,000/4,000 direct labor hours = $12 per labor hour
$12 x 650 labor hours = $7,800

Difficulty: Easy
Learning Objective: 5-3

5-139

Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

86. Sheen Co. manufacturers laser printers. It has outlined the following overhead cost drivers:

Sheen Co. has an order for 1,000 laser printers that has the following production requirements:

What is the total overhead cost per unit of the laser printer order using activity-based costing
(rounded to the nearest cent)?
A. $39.55.
B. $40.05.
C. $42.25.
D. $50.65.
E. $58.30.
($10,500 + $21,600 + $150 + $7,800)/1,000 = $40.05

Difficulty: Medium
Learning Objective: 5-3

5-140

Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

87. Diamond Cleats Co. manufactures cleats for baseball shoes. It has outlined the following
overhead cost drivers:

Diamond Cleats Co. has an order for cleats that has the following production requirements:

Using activity-based costing, applied quality control factory overhead for the baseball cleat
order is:
A. $28,450.
B. $30,220.
C. $24,375.
D. $21,150.
E. $19,600.
$78,000/1,200 = $65 per inspection
$65 x 375 = $24,375

Difficulty: Easy
Learning Objective: 5-3

5-141

Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

88. Diamond Cleats Co. manufactures cleats for baseball shoes. It has outlined the following
overhead cost drivers:

Diamond Cleats Co. has an order for cleats that has the following production requirements:

Using activity-based costing, applied machine overhead for the baseball cleat order is:
A. $47,800.
B. $55,300.
C. $40,500.
D. $59,150.
E. $51,700.
$188,000/800 = $235 per machine hour
$235 x 220 = $51,700

Difficulty: Easy
Learning Objective: 5-3

5-142

Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

89. Diamond Cleats Co. manufactures cleats for baseball shoes. It has outlined the following
overhead cost drivers:

Diamond Cleats Co. has an order for cleats that has the following production requirements:

Using activity-based costing, applied materials handling factory overhead for the baseball cleat
order is:
A. $338.
B. $584.
C. $192.
D. $353.
E. $686.
$1200/50 = $24 per batch
$24 x 8 batches = $192

Difficulty: Easy
Learning Objective: 5-3

5-143

Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

90. Diamond Cleats Co. manufactures cleats for baseball shoes. It has outlined the following
overhead cost drivers:

Diamond Cleats Co. has an order for cleats that has the following production requirements:

Using activity-based costing, applied miscellaneous factory overhead for the baseball cleat
order based on direct labor hours is:
A. $8,745.
B. $10,312.
C. $10,489.
D. $9,912.
E. $8,456.
$59,000/5,000 direct labor hours = $11.80 per labor hour
$11.80 x 840 labor hours = $9,912

Difficulty: Easy
Learning Objective: 5-3

5-144

Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

91. Diamond Cleats Co. manufactures cleats for baseball shoes. It has outlined the following
overhead cost drivers:

Diamond Cleats Co. has an order for cleats that has the following production requirements:

ABC costing provides helps an organization implement its strategy through all of the following
means except:
A. Providing accurate cost information.
B. Identifying the most profitable products and customers.
C. Helping improve cycle time.
D. Identifying value added and non-value added activities.
E. Providing a basis for effective utilization of capacity.

AACSB: Analytic
Difficulty: Easy
Emerging Issues: Strategy
Learning Objective: 5-3

5-145

Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

92. Customer equity is a type of analysis used to:


A. Assess the ethical practices of each salesperson-customer relationship.
B. Assess the current profit potential of a customer.
C. Assess the long term profit potential of a customer.
D. Assess the current profit potential of all the firm's customers.
E. Assess the long term profit potential of all the firm's customers.

Difficulty: Easy
Learning Objective: 5-6

93. Customer lifetime value is a type of analysis used to:


A. Assess the ethical practices of each salesperson-customer relationship.
B. Assess the current profit potential of a customer.
C. Assess the long term profit potential of a customer.
D. Assess the current profit potential of all the firm's customers.
E. Assess the long term profit potential of all the firm's customers.

Difficulty: Easy
Learning Objective: 5-6

94. The cost of unused capacity can be determined using ABC costing for the purpose of:
A. Determining more accurately the ABC costs.
B. Helping managers plan the short and longer-term use of the operating resources.
C. Determining product profitability.
D. Completing an effective activity analysis.

Difficulty: Easy
Learning Objective: 5-3

5-146

Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

95. Multistage ABC is used when:


A. There are many departments in the organization.
B. Management wants a higher level of accuracy from the ABC calculations.
C. There are complex relationships among the activities.
D. To simplify the ABC calculations.
E. There is no such thing as Multistage ABC.

Difficulty: Medium
Learning Objective: 5-7

96. An adaptation of ABC costing that emphasizes resource consumption cost pools is:
A. Activity analysis.
B. Multistage ABC.
C. Time-Driven ABC.
D. Resource Consumption Accounting.
E. Customer profitability analysis.

Difficulty: Easy
Learning Objective: 5-7

97. An adaptation of ABC costing that simplifies ABC by assigning resource costs directly to
cost objects is called:
A. Activity analysis
B. Multistage ABC
C. Time-Driven ABC
D. Resource Consumption Accounting
E. Customer profitability analysis

Difficulty: Easy
Learning Objective: 5-7

5-147

Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

98. The Time Equation is used in ABC to:


A. Track the implementation of the ABC system
B. Assess the amount of time required for each activity, in determining the application rate
C. Incorporate complexities in the application of ABC
D. Plan for the implementation of an ABC system

Difficulty: Easy
Learning Objective: 5-7

99. In the context of ABC, cross-subsidization refers to:


A. Productions department subsidizing each other
B. Costing inaccuracies which affect the relative profitability of products
C. Cross-selling products lines, which affect customer profitability
D. Efforts to increased coordination among department heads

Difficulty: Medium
Learning Objective: 5-3

100. The common element among the firms Nike, GM, and Lego Group is:
A. All these firms use ABC.
B. Each of the firms has addressed critical problems regarding complexity in its product
offerings.
C. Each of the firms has used a consultant and an ERP to implement ABC.
D. All of these firms, once users of ABC, have now chosen not to use ABC costing.
E. Each of the firms has addressed critical problems involving the cost and use of capacity.

Difficulty: Hard
Learning Objective: 5-5

5-148

Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

101. Important concepts in resource consumption accounting include all of the following
except:
A. Variable costing
B. Resource interrelationships
C. Activity interrelationships
D. Detail level cost information
E. Treatment of idle capacity

Difficulty: Easy
Learning Objective: 5-7

102. Time-driven ABC provides a direct way to measure:


A. Production efficiency
B. Unused capacity
C. Product line profitability
D. Value adding activities
E. Customer value

Difficulty: Easy
Learning Objective: 5-7

5-149

Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

103. Everlast Co. manufactures a variety of drill bits. The company's plant is partially
automated. The budget for the year includes $432,000 payroll for 4,800 direct labor-hours.
Listed below is cost driver information used in the product-costing system:

A current product order has the following requirements:

What is the total manufacturing overhead for the current product order if the firm uses a
plantwide rate based on direct labor-hours?
A. $9,960.
B. $30,240.
C. $43,741.
D. $44,268.
E. $109,352.
$632,400/4,800 direct labor hours = $131.75 per direct labor hour
$131.75 x 336 hours = $44,268

Difficulty: Easy
Learning Objective: 5-3

5-150

Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

104. Everlast Co. manufactures a variety of drill bits. The company's plant is partially
automated. The budget for the year includes $432,000 payroll for 4,800 direct labor-hours.
Listed below is cost driver information used in the product-costing system:

A current product order has the following requirements:

What is the total manufacturing overhead for the current product order if the firm assigns
overhead costs based on machine hours?
A. $9,960.
B. $30,240.
C. $43,741.
D. $44,268.
E. $109,352.
$632,400/12,000 = $52.70 per machine hour
$52.70 x 830 machine hours = $43,741

Difficulty: Easy
Learning Objective: 5-3

5-151

Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

105. Everlast Co. manufactures a variety of drill bits. The company's plant is partially
automated. The budget for the year includes $432,000 payroll for 4,800 direct labor-hours.
Listed below is cost driver information used in the product-costing system:

A current product order has the following requirements:

Using ABC, how much machine setup overhead is assigned to the order?
A. $19,200.
B. $8,000.
C. $11,108.
D. $9,960.
E. $7,272.
($120,000/120) x 8 set-ups = $8,000

Difficulty: Easy
Learning Objective: 5-3

5-152

Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

106. Everlast Co. manufactures a variety of drill bits. The company's plant is partially
automated. The budget for the year includes $432,000 payroll for 4,800 direct labor-hours.
Listed below is cost driver information used in the product-costing system:

A current product order has the following requirements:

Using ABC, how much material handling overhead is assigned to the order?
A. $19,200.
B. $8,000.
C. $11,108.
D. $9,960.
E. $7,272.
($104,400)/8,700) x 606 barrels = $7,272

Difficulty: Easy
Learning Objective: 5-3

5-153

Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

107. Everlast Co. manufactures a variety of drill bits. The company's plant is partially
automated. The budget for the year includes $432,000 payroll for 4,800 direct labor-hours.
Listed below is cost driver information used in the product-costing system:

A current product order has the following requirements:

Using ABC, how much quality control overhead is assigned to the order?
A. $8,000.
B. $9,960.
C. $11,108.
D. $19,200.
E. $45,933.
($264,000)/1,100) x 80 inspections = $19,200

Difficulty: Easy
Learning Objective: 5-3

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108. Everlast Co. manufactures a variety of drill bits. The company's plant is partially
automated. The budget for the year includes $432,000 payroll for 4,800 direct labor-hours.
Listed below is cost driver information used in the product-costing system:

A current product order has the following requirements:

Using ABC, how much other overhead is assigned to the order?


A. $8,000.
B. $9,960.
C. $11,108.
D. $19,200.
E. $45,992.
($144,000/12,000) x 830 = $9,960

Difficulty: Easy
Learning Objective: 5-3

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109. Everlast Co. manufactures a variety of drill bits. The company's plant is partially
automated. The budget for the year includes $432,000 payroll for 4,800 direct labor-hours.
Listed below is cost driver information used in the product-costing system:

A current product order has the following requirements:

Using ABC, how much total overhead is assigned to the order?


A. $42,160.
B. $43,740.
C. $44,268.
D. $44,432.
E. $45,993.
$8,000 + $7,272 + $19,200 + $9,960 = $44,432

Difficulty: Medium
Learning Objective: 5-3

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110. Shaver Co. manufactures a variety of electric razors for men and women. The company's
plant is partially automated. Listed below is cost driver information used in the product-costing
system:

In addition, Shaver expects to spend $514,368 for 8,037 direct labor-hours. Two current
product orders had the following requirements:

What is the total manufacturing overhead assigned to the current order for Men's Razors if the
firm uses a volume-based plantwide overhead rate based on the direct labor dollars?
A. $112.50.
B. $150.00.
C. $243.75.
D. $7,200.00.
E. $15,600.00.
($168,640 + $127,840 + $554,400 + $1,078,000)/$514,368 = 375% per direct-labor dollar.
$514,368/8,037 = $64 = $64 per DL hour.
$64 x 30 direct labor hours = $1,920.
$1,920 x 375% = $7,200.
Difficulty: Medium
Learning Objective: 5-3

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111. Shaver Co. manufactures a variety of electric razors for men and women. The company's
plant is partially automated. Listed below is cost driver information used in the product-costing
system:

In addition, Shaver expects to spend $514,368 for 8,037 direct labor-hours. Two current
product orders had the following requirements:

What is the total manufacturing overhead assigned to the current order for Women's Razors if
the firm uses a volume-based plantwide overhead rate based on the direct labor dollars?
A. $112.50.
B. $150.00.
C. $187.50.
D. $9,600.00.
E. $12,000.00.
($168,640 + $127,840 + $554,400 + $1,078,000)/$514,368 = 375% per direct-labor dollar.
$514,368/8,037 = $64 per DL hour.
$64 x 40 direct labor hours = $2,560.
2,560 x 375% = $9,600
Difficulty: Medium
Learning Objective: 5-3

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112. Shaver Co. manufactures a variety of electric razors for men and women. The company's
plant is partially automated. Listed below is cost driver information used in the product-costing
system:

In addition, Shaver expects to spend $514,368 for 8,037 direct labor-hours. Two current
product orders had the following requirements:

Using ABC, how much facility-level overhead is assigned to the current order for Men's
Razors?
A. $403.00.
B. $310.00.
C. $708.50.
D. $545.00.
E. $936.00.
[($168,640 + $127,840)/27,200)] x 65 = $708.50

Difficulty: Medium
Learning Objective: 5-3

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113. Shaver Co. manufactures a variety of electric razors for men and women. The company's
plant is partially automated. Listed below is cost driver information used in the product-costing
system:

In addition, Shaver expects to spend $514,368 for 8,037 direct labor-hours. Two current
product orders had the following requirements:

Using ABC, how much product-level overhead is assigned to the current order for Men's
Razors?
A. $218.00.
B. $250.70.
C. $331.20.
D. $284.00.
E. $288.00.
($554,400/38,500) x 20 = $288.00

Difficulty: Medium
Learning Objective: 5-3

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114. Shaver Co. manufactures a variety of electric razors for men and women. The company's
plant is partially automated. Listed below is cost driver information used in the product-costing
system:

In addition, Shaver expects to spend $514,368 for 8,037 direct labor-hours. Two current
product orders had the following requirements:

Using ABC, how much product-level overhead is assigned to the current order for Women's
Razors?
A. $218.00.
B. $250.70.
C. $331.20.
D. $284.00.
E. $288.00.
($554,400/$38,500) x 23 = $331.20

Difficulty: Medium
Learning Objective: 5-3

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115. Shaver Co. manufactures a variety of electric razors for men and women. The company's
plant is partially automated. Listed below is cost driver information used in the product-costing
system:

In addition, Shaver expects to spend $514,368 for 8,037 direct labor-hours. Two current
product orders had the following requirements:

Using ABC, how much batch-level overhead is assigned to the current order for Women's
Razors based on pounds of raw materials?
A. $6,000.
B. $6,880.
C. $5,332.
D. $8,175.
E. $9,374.
($1,078,000/134,750) x 750 = $6,000

Difficulty: Medium
Learning Objective: 5-3

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116. Wang Company has established the following overhead cost pools and cost drivers for the
month of May:

The following information pertains to the actual consumption of activity resources for two
sample jobs completed during May.

What is the activity-based overhead rate per purchase order?


A. $615.
B. $600.
C. $575.
D. $550.
E. $500.
($30,000/50 orders) = $600

Difficulty: Easy
Learning Objective: 5-3

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117. Wang Company has established the following overhead cost pools and cost drivers for the
month of May:

The following information pertains to the actual consumption of activity resources for two
sample jobs completed during May.

Using ABC, what is the overhead cost per unit produced for Job M2?
A. $39.
B. $25.
C. $20.
D. $12.
E. $10.
[($30,000/50) x 10] + [($50,000/100) x 10] + [($10,000/10,000) x 1,000] = $12,000
$12,000/1,000 = $12

Difficulty: Medium
Learning Objective: 5-3

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118. Orange, Inc. has identified the following cost drivers for its expected overhead costs for
the year:

Total direct labor hours budgeted = 2,000 hours.


The following data applies to Product X, one of the products completed during the year

If a volume-based costing system based on direct labor hours to assign overhead is used, the
total overhead cost for Product X will be:
A. $1,500.
B. $1,560.
C. $2,000.
D. $2,400.
E. $2,560.
($40,000 + $20,000 + $50,000 + $10,000)/2,000 hours = $60 per direct labor hour
$60 x 40 direct labor hours = $2,400

Difficulty: Easy
Learning Objective: 5-3

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119. Orange, Inc. has identified the following cost drivers for its expected overhead costs for
the year:

Total direct labor hours budgeted = 2,000 hours.


The following data applies to Product X, one of the products completed during the year

If the activity-based cost drivers are used to allocate overhead cost, the total overhead cost of
Product X will be:
A. $1,500.
B. $1,560.
C. $2,000.
D. $2,400.
E. $2,560.
[($40,000/200) x 4] + [($20,000/1,000) x 8] + [($50,000/5,000) x 50] + [($10,000/10,000) x
100] = $1,560

Difficulty: Easy
Learning Objective: 5-3

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120. Zeta Company is preparing its annual profit plan. As part of its analysis of the profitability
of individual products, the controller estimates the amount of manufacturing overhead that
should be assigned to the individual product lines from the information given below.

Budgeted material-handling costs are $50,000.


Under a costing system that allocates manufacturing overhead on the basis of direct labor hours,
the material-handling cost per wall mirror is:
A. $0.
B. $500.
C. $1,000.
D. $2,000.
E. $5,000.
$50,000 budgeted material-handling costs/400 total direct labor hours = $125 per direct labor
hour
$125 x 200 direct labor hours for wall mirrors = $25,000
$25,000/25 units = $1,000 = material-handling cost per wall mirror.

Difficulty: Medium
Learning Objective: 5-3

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121. Zeta Company is preparing its annual profit plan. As part of its analysis of the profitability
of individual products, the controller estimates the amount of manufacturing overhead that
should be assigned to the individual product lines from the information given below.

Budgeted material-handling costs are $50,000.


The material-handling cost per wall mirror under ABC is:
A. $0.
B. $500.
C. $1,000.
D. $2,000.
E. $5,000.
$50,000/20 material moves = $2,500 per material move
$2,500 per material move x 5 material moves = $12,500
$12,500/25 wall mirror units produced = material-handling cost per wall mirror = $500

Difficulty: Medium
Learning Objective: 5-3

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122. Pasternik Company produces and sells two products, Alpha and Zeta. The following
information is available relating to its setup activities:

With a volume-based costing system that applies overhead based on direct labor hours, the
setup cost portion of overhead for each unit is (rounded to the nearest cent):

A. Option A
B. Option B
C. Option C
D. Option D
E. Option E
General Calculations:
# of Alpha batches = 250/10 = 25
# of Zeta batches = 20,000/500 = 40
Total number of batches = 65 = 25 + 40
Total Set-up Cost = $2,000 x 65 batches = $130,000
Set-up cost per direct labor hour = $130,000/40,000 total direct labor hours = $3.25 per direct
labor hour
Alpha:
Set-up cost for Alpha = $3.25 x 1,000 Alpha direct labor hours = $3,250
Total Alpha Units Produced = 250 units
Alpha overhead cost per unit = $3,250/250 units = $13.00
Zeta:
Set-up cost for Zeta = $3.25 x 39,000 Zeta direct labor hours = $126,750
Total Zeta Units Produced = 20,000 units
Zeta overhead cost per unit = $126,750/20,000 = $6.3375 = $6.34 rounded

Difficulty: Hard
Learning Objective: 5-3

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123. Pasternik Company produces and sells two products, Alpha and Zeta. The following
information is available relating to its setup activities:

Use of activity-based costing would allocate the following amounts of setup cost to each unit
(rounded to the nearest cent):

A. A
B. B
C. C
D. D
General Calculations:
# of Alpha batches = 250/10 = 25
# of Zeta batches = 20,000/500 = 40
Total batches = 65 = 40 + 25
Alpha:
Total Set-up Cost = 25 x $2,000 = $50,000
$50,000/250 units = $200 per unit
Zeta:
Total Set-up Cost = 40 x $2,000 = $80,000
$80,000/20,000 = $4 per unit

Difficulty: Medium
Learning Objective: 5-3

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124. Pasternik Company produces and sells two products, Alpha and Zeta. The following
information is available relating to its setup activities:

Assume the cost per setup remains at $2,000 but that the batch size for product Alpha is
changed from 10 to 25 units per batch. Using activity-based costing and a volume-based
overhead costing that uses direct labor-hours to assign overhead, the amount of setup cost
applied to each unit of product Alpha would be (rounded to the nearest cent):

A. A
B. B
C. C
D. D
General Calculations:
# of Alpha batches = 250/25 = 10
# of Zeta batches = 20,000/500 = 40
Total number of batches = 50 = 10 + 40
Total Set-up Cost = $2,000 x 50 batches = $100,000
Set-up cost per direct labor hour = $100,000/40,000 total direct labor hours = $2.50 per direct
labor hour
Alpha Activity-Based:
Total Set-up Cost = 10 x $2,000 = $20,000
$20,000/250 units = $80 per unit
Alpha Volume-Based:
Set-up cost for Alpha = $2.50 x 1,000 Alpha direct labor hours = $2,500
Total Alpha Units Produced = 250 units
Alpha overhead cost per unit = $2,500/250 units = $10

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Difficulty: Hard
Learning Objective: 5-3

125. Nerrod Company sells its products at $500 per unit, net 30. The firm's gross margin ratio is
40 percent. The firm has estimated the following operating costs:

Nerrod Company has gathered the following data pertaining to activities it performed for two of
its customers:

What is Nerrod's total customer-sustaining cost applicable to Ninto?


A. $400.
B. $600.
C. $4,000.
D. $6,300.
E. $6,420.
10 sales calls x $400 per sales call = $4,000

Difficulty: Easy
Learning Objective: 5-6

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126. Nerrod Company sells its products at $500 per unit, net 30. The firm's gross margin ratio is
40 percent. The firm has estimated the following operating costs:

Nerrod Company has gathered the following data pertaining to activities it performed for two of
its customers:

What is Nerrod's total customer batch-level cost applicable to Ninto?


A. $800.
B. $920.
C. $2,300.
D. $2,420.
E. $6,300.
Order Processing and Number of sales returns $100 x 2 + $60 x 10 = $800

Difficulty: Hard
Learning Objective: 5-6

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127. Nerrod Company sells its products at $500 per unit, net 30. The firm's gross margin ratio is
40 percent. The firm has estimated the following operating

costs:
Nerrod Company has gathered the following data pertaining to activities it performed for two of
its customers:

What is Nerrod's total sales-sustaining cost applicable to XBT as a customer?


A. $0.
B. $920.
C. $4,120.
D. $6,300.
E. $6,420.
0 since no sales-sustaining costs are listed above

Difficulty: Medium
Learning Objective: 5-6

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128. Nerrod Company sells its products at $500 per unit, net 30. The firm's gross margin ratio is
40 percent. The firm has estimated the following operating costs:

Nerrod Company has gathered the following data pertaining to activities it performed for two of
its customers:

What is Nerrod's total customer unit-level cost applicable to XBT as a customer?


A. $50.
B. $480.
C. $4,120.
D. $4,125.
E. $6,300.
Restocking sales returns, 4 x 40 x $3 = $480

Difficulty: Medium
Learning Objective: 5-6

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129. Service and not-for-profit organizations often:


A. Have ABC systems which are similar to those of manufacturing firms.
B. Do not have changeable outputs.
C. Are unable to benefit from ABC costing.
D. Do not have ABC systems which are similar to those of manufacturing firms.

Difficulty: Easy
Learning Objective: 5-5

130. Customer profitability analysis:


A. Always shows that the company with the highest total sales generates the highest net
customer profit.
B. Always shows that the company with the lowest total sales generates the lowest net customer
profit.
C. Produces the same results as a Pareto analysis.
D. Helps identify actions to improve customer profitability.

Difficulty: Easy
Learning Objective: 5-6

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Essay Questions

131. Johnson Associates is a catering firm in Tucson, Arizona, with revenue of $4 million. The
business began ten years ago as a one-owner bakery, but has dramatically changed in size and
function during the past five years. The four partners foresee the business doubling in sales
revenue within two years, and expect the firm to expand into other services including flowers,
furnishings, decorations, and music. Johnson Associates employs six full-time and ten
part-time employees. The four partners also work full-time, each partner managing a separate
business function. The firm currently uses a volume-based costing system installed seven years
ago and modified three years later.
Required:
(1) With just the above information, comment on Johnson Associates changing and future
costing system needs.
(2) Is Johnson Associates a probable candidate for an activity-based costing system (ABC)?
Why or why not?
Please see Feedback for answers.
Feedback: (1) Johnson Associates has experienced rapid growth, and expects the same rapid
growth in the near future. However, growth by itself would not necessarily create a need for a
new cost accounting system. More significant is Johnson's expanding line of service. A costing
system like ABC gives a firm more precise cost information on specific products and services,
which would allow Johnson to better control product and service development, manufacture
and marketing. Whatever strategies Johnson Associates choose, they should have a costing
system that reports costs and their causal relationships.
(2) An ABC system can work for most firms, including service type firms like Johnson
Associates. Future growth needs a precise cost basis for direction and control. Many, if not
most, of Johnson Associates' costs are activity driven, and the variety of service is noticeably
expanding. The major potential limitations of ABC for Johnson would be the high resource cost
and time commitment to develop and install an appropriate ABC system.

AACSB: Analytic
Difficulty: Easy
Emerging Issues: Service
Emerging Issues: Strategy
Learning Objective: 5-1

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132. Two students in a cost accounting class were arguing about the need to gather good unit
cost information for manufacturing. One student, Travis, maintained that a firm producing and
selling large quantities of relatively few products would have no need for an ABC system, since
an ABC system is usually more expensive to implement than a volume-based system. Alicia
countered that even firms with high-volume homogeneous products could benefit from a cost
management technique like activity-based costing (ABC).
Required: Choose sides in this discussion and present justifications for your choice.
Please see Feedback for answers.
Feedback: ABC is most useful in firms making a wide variety of products, because ABC tracks
costs to their causes, and generates more precise cost bases for individual products and services
than a volume-based costing system usually does. This precision facilitates strategic analyses.
Alicia would have to agree with Travis on the higher cost in resources and time to use ABC, but
could argue for a favorable benefit/cost ratio that most firms experience when ABC is correctly
designed and implemented.

AACSB: Analytic
Difficulty: Easy
Emerging Issues: Strategy
Learning Objective: 5-2

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133. The controller for Alabama Cooking Oil Co. established the following overhead cost pools
and cost drivers:

An order of 800 barrels of cooking oil used:

Required:
(1) What is the overhead rate per machine hour if the number of machine hours is used as a
single cost driver under traditional costing system? (Round your intermediate calculation to the
nearest cent and final answer to the nearest whole dollar.)
(2) Using volume-based costing, how much overhead is assigned to the order based on machine
hours as a single cost driver? (3) Using ABC costing, how much total overhead is assigned to
the order?

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Please see Feedback for answers.

Feedback: (1)
(2) 1,100 machine hours x $69.52 per machine hour = $76,472
(3)

Difficulty: Medium
Learning Objective: 5-3

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134. Blackwelder Co. manufactures a variety of electric razors used by both men and women.
The company's plant is partially automated. The company uses an activity-based cost system.
Listed below is cost driver information used in the product-costing system:

Two current product orders had the following requirements:

Required:
(1) Using ABC costing, how much overhead is assigned to the order for men's razors?
(2) Using ABC costing, how much overhead is assigned to the order for women's razors?

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(1) $12,082. (2) $13,271


Feedback:

Difficulty: Medium
Learning Objective: 5-3

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135. Classify each of the following costs as unit-level (U), batch-level (B), product-level (P), or
facility-level (F) costs and identify an appropriate example of a possible cost driver for each
item:
(1) Parts administration
(2) Production scheduling
(3) Materials handling
(4) Machine operations
(5) Personnel administration and training
(6) Plant security
(7) Machine setups
(8) Engineering changes
(9) Product design
(10) Rent for factory plant
(1) Parts administration: (P); number of parts
(2) Production scheduling: (B); number of production runs or schedules
(3) Materials handling: (B); number of units or weight of materials handled
(4) Machine operations: (U); machine hours
(5) Personnel administration and training: (F); number of employees trained, number of new
employees
(6) Plant security: (F); number of square feet
(7) Machine setups: (B); number of setups or setup hours
(8) Engineering changes: (P); number of change orders issued, number of products
(9) Product design: (P); design hours or number of products
(10) Rent for factory plant: (F); number of square feet

Difficulty: Easy
Learning Objective: 5-2

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136. Pairing Company has the following cost drivers identified as A through F for determining
product manufacturing overhead costs.
(A) Number of pieces of equipment
(B) Number of direct material purchase orders
(C) Number of production runs
(D) Square feet of warehouse space
(E) Number of machine hours
(F) Square feet of factory space
In the space provided next to each of the following activity cost pool, indicate the most
appropriate cost driver for the cost pools.

Difficulty: Easy
Learning Objective: 5-2

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137. Altima Company uses an overhead costing system based on direct labor hours for its two
products X and Y. The company is considering adopting an activity-based costing system, and
collects the following information for the month of October.

Required:
(1) Compute the unit manufacturing costs of each product under a volume-based costing system
based on direct labor cost.
(2) Compute the unit manufacturing costs of each product under the activity-based costing
system.

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Please see Feedback for answers.


Feedback:
1.

2.

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Note that the direct labor based costing system overcosted the high volume product X and
undercosted the low volume product Y.

Difficulty: Hard
Learning Objective: 5-3

138. Castenet Company uses a volume-based costing system that applies overhead cost based
on direct labor hours at $250 per direct labor hour.
The company is considering adopting an activity-based costing system with the following data:

The two jobs processed in the month of June had the following characteristics:

Required:
(1) Compute the unit manufacturing costs of each job under the firm's current volume-based
costing system.
(2) Compute the unit manufacturing costs of each job under the activity-based costing system.
(3) (a) Compare the unit manufacturing costs for Jobs A and B computed in requirements 1 and
2.
Why do the two cost systems differ in their total cost for each job?
(b) Why might these differences be important to the Company?

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Please see Feedback for answers.


Feedback: (1) Per unit manufacturing costs under the volume-based costing system: $1,400 for
Job A and $800 for Job B.

(2) Per unit manufacturing costs under the ABC costing system.

(3) (a) The volume-based cost system ignores these differences while the ABC costing system
assigns overhead costs based on usages of each of the activity areas. The two cost systems differ
in their job costs because the jobs differ in the way they use each of five activity areas and
activity areas differs in their factory overhead cost drivers.
(b)These differences will affect the accuracy of job costs for A and B. Therefore, it will affect
the company's pricing, product mix, and product design decisions.

Difficulty: Medium
Learning Objective: 5-3

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139. Demski Company has used a two-stage cost allocation system for many years. In the first
stage, plant overhead costs are allocated to two production departments, P1 and P2, based on
machine hours. In the second stage, Demski uses direct labor hours to assign overhead costs
from the production departments to individual products A and B.
Budgeted factory overhead costs for the year are $300,000. Both the budgeted and actual
machine hours in P1 and P2 are 12,000 and 28,000 hours, respectively.
After attending a seminar to learn the potential benefits of adopting an activity-based costing
system (ABC), Ted Demski, the president of Demski Company, is considering implementing
an ABC system. Upon his request, the controller at Demski Company has compiled the
following information for analysis:

Demski manufactures two types of product, A and B, for which the following information is
available:

Required:
(1) Determine the unit cost for each of the two products using the traditional two-stage
allocation method. Round calculations to 2 decimal places.
(2) Determine the unit cost for each of the two products using the proposed ABC system.
(3) (a)Compare the unit manufacturing costs for product A and product B computed in
requirements 1 and 2. Why do two the cost systems differ in their total cost for each product?
(b) Why might these differences be important to the Demski Company?

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Please see Feedback for answers.


Feedback: (1) Unit cost for each of two products using the traditional two-stage allocation
method:

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(2) Unit cost for each product using the ABC system.

(3) (a) Under the volume based costing, low-volume product A was undercosted because the
products differ in the way they use each of four activity areas and activity areas differ in their
factory overhead cost drivers. (b) These differences will affect the accuracy of product costs for
A and B. Therefore, it will affect Demski Company's pricing, product mix, and product design
decisions.

Difficulty: Medium
Learning Objective: 5-3

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140. Swenson Company manufactures 4,000 units of Deluxe Product and 20,000 units of
Regular Product each year. The company currently uses direct labor-hours to assign overhead
cost to products. The pre-determined overhead rate is:

Suppose, however, that factory overhead costs are actually caused by the five activities listed
below:

Also suppose the following transaction data has been collected:

Required: Using the activity-based costing method to calculate unit costs of Deluxe and
Regular products, and compare them with the current direct labor hours-based costing system.

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Please see Feedback for answers.


Feedback: Overhead rates for each of the five activities:

Assign overhead costs to products:

Product costs computed using the direct labor hours-based different methods can now be
contrasted:
Product costs using activity-based costing:

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Product costs using the direct labor hours-based costing system:

Note that the adoption of activity-based costing usually results in a shift of overhead costs from
high volume to low volume products. The per unit costs of the low volume products increase
and the per unit costs of the high volume products decrease. The effects are not symmetrical -there is a bigger dollar effect on the per unit costs of the low volume products.

Difficulty: Medium
Learning Objective: 5-3

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141. Moss Manufacturing has just completed a major change in its quality control (QC) process.
Previously, products had been reviewed by QC inspectors at the end of each major process, and
the company's ten QC inspectors were charged as direct labor to the operation or job. In an
effort to improve efficiency and quality, a computerized video QC system was purchased for
$250,000. The system consists of a minicomputer, 15 video cameras, other peripheral hardware,
and software.
The new system used cameras stationed by QC engineers at key points in the production
process. Each time an operation changes or there is a new operation, the cameras are moved,
and a new master picture is loaded into the computer by a QC engineer. The camera takes
pictures of the units in process, and the computer compares them to the picture of a "good" unit.
Any differences are sent to a QC engineer who removes the bad units and discusses the flaws
with the production supervisors. The new system has replaced the ten QC inspectors with two
QC engineers.
The operating costs of the new QC system, including the salaries of the QC engineers, have
been included as factory overhead in calculating the company's volume-based factory overhead
rate which is based on direct labor dollars.
The company's president is confused. His vice president of production has told him how
efficient the new system is, yet there is a large increase in the factory overhead rate. The
computation of the rate before and after automation is shown below.

"Three hundred percent, "lamented the president, "How can we compete with such a high
factory overhead rate?"
Required:
(1) (a) Define factory overhead, and cite three examples of typical costs that would be included
in factory overhead.
(b) Explain why companies develop factory overhead rates.
(2) Explain why the increase in the overhead rate should not have a negative financial impact on
Moss Manufacturing.
(3) Explain, in the greatest detail possible, how Moss Manufacturing could change its overhead
accounting system to eliminate confusion over product costs.
(4) Discuss how an activity-based costing system might benefit Moss Manufacturing.

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Please see Feedback for answers.


Feedback: (1) (a) Factory overhead costs include all indirect costs (all production costs except
direct material and direct labor). These costs cannot be practically or economically traced to
end products and, therefore, must be assigned by some allocation method. Typical factory
overhead costs include indirect labor, i.e., lift-truck driver's wages, maintenance and inspection
labor, engineering labor, and supervisors; other indirect factory costs, i.e., building
maintenance, machine and tool maintenance, property taxes, property insurance, pension costs,
depreciation on plant and equipment, rent expense, and utility expense.
(b) Companies develop factory overhead rates to facilitate the costing of products as they are
completed and shipped, rather than waiting until actual costs are accumulated for the period of
production.
(2) The overhead rate increase should not have a negative impact on Moss Manufacturing
because the increase in indirect costs was offset by a decrease in direct labor.
(3) Rather than using a universal volume-based overhead rate, Moss Manufacturing could
implement separate overhead pools and allocate the overheads to the activities using the
appropriate pools. Examples are as follows: Separate costs into departmental overhead
accounts (or other relevant pools), with one account for each production and service department.
Each department would allocate its overhead to products on the basis that best reflects the use
of these overhead services. Individual machines (or other more relevant allocations bases)
could be treated as separate cost centers with the machine costs collected and charged to the
products using the machine(s).
(4) An activity-based costing system might benefit Moss Manufacturing because it
differentiates costs between value adding and non-value adding activities; costs products
according to the activities involved in the production process; considers all organizational
expenses as variable.

Difficulty: Medium
Learning Objective: 5-2

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142. The controller for Ocean Sailboats Inc., a company which uses an automated process to
make sailboats, established the following overhead cost pools and cost drivers:

A recent order for sailboats used:

Required:
(1) What is the overhead rate per machine hour if the number of machine hours is used as a
single cost driver under traditional costing system? (2) Utilizing traditional costing, how much
overhead is assigned to the order based on machine hours as a single cost driver? (3) Utilizing
ABC, how much total overhead is assigned to the order?

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Please see Feedback for answers.

Feedback:
(2) 2,024 machine hours x $42.50 per machine hour = $86,020

Difficulty: Easy
Learning Objective: 5-3

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143. Skateline Inc. designs and manufactures roller skates. The following data pertain to two of
its major customers: FantasticSkates and SkateToday.

Required: Compare the net proceeds to Skateline Inc. 30 days after sale (rounded to nearest
dollar for each step where applicable).
Please see Feedback for answers.

Feedback:

Difficulty: Easy
Learning Objective: 5-6

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144. Certo Health Products was formed two years ago to produce and distribute a
newly-patented protein supplement. Two variations of the original supplement have since been
developed and introduced for general sale. The three products are processed in essentially the
same way, but Ann Marshall, the owner of Certo, anticipates that a half-dozen new products
will be developed for sale in the next two years. These products will not be variations of the
patented supplement, and will require a different production process other than the one
currently used. Ann has asked you to review the current use of a single volume-based rate and
explain the arguments for using departmental rates with activity-based drivers.
A single volume-based rate is appropriate in situations where product are processed in similar
ways and departments, and where little variation exists in the "causes" of costs. Once multiple
variations of production processes are required, departmental rates probably will provide more
accurate cost reporting. Different processes (departments) cause different costs to happen for
different reasons. A simple example is the manufacture of writing instruments. Pencils require
one set of processes, ballpoint pens a different set, and highlighting pens another set. Within the
production processes of each type of writing instrument, different departments have costs
"caused" by different factors, e.g., labor-intensive vs. machine-intensive departments. By using
activity as a basis for allocation of overhead, a clearer distinction is made between
volume-related costs and capacity-related costs. This distinction provides the basis for selection
of correct cost drivers for different products in different departments, which results in more
accurate cost data for product pricing and strategic operational decisions.

Difficulty: Easy
Learning Objective: 5-1

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145. Cost Pools and Cost Drivers Based on a recent study of its manufacturing operations
Johnston Manufacturing Corporation has identified six resource consumption cost drivers.
These cost drivers and their budgeted activity levels for the coming year are:

The firm has budgeted the following costs for the year:

With the exception of the factory space cost pool, which uses machine-hours as the activity
consumption cost driver, other cost pools have identical resource and activity consumption cost
drivers.
Required:
(1) Identify the most appropriate activity cost pool for each of the cost items and cost driver for
each activity cost pool you identified.
(2) Johnston has received a request to quote the price for 4,000 units of a new product. The
production will require 100 engineering-hours and 4,250 machine-hours. What is the
manufacturing overhead per unit the firm should use in determining the price?

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Please see Feedback for answers.


Feedback:

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Difficulty: Hard
Learning Objective: 5-2

146. Volume-Based Costing Versus ABC: Gorden Company produces a variety of electronic
products. One of its plants produces two laser printers, Speedy and Deluxe. At the beginning of
2010, the following data were prepared for this plant:

The unit overhead cost is calculated using the predetermined overhead application rate based on
direct labor-hours.
Upon examining the data, the marketing manager was particularly impressed with the per-unit
profitability of the Deluxe printer and suggested that more emphasis be placed on producing
and selling this product. The plant supervisor objected to this strategy, arguing that the Deluxe
model required a very delicate manufacturing process. The supervisor believed that the cost of
the Deluxe printer was likely to be much higher than reported.
The controller suggests an activity-based costing system and provides the following budget
data pertaining to the period:

* Cost per unit of cost driver


Required:
(1) Using the projected data based on the firm's current costing system, calculate gross profit
per unit and gross profit percentage for each product. Round calculations to 2 decimal places.
(2)Using the suggested multiple cost drivers' overhead rates, calculate the overhead cost per
unit for each product and determine gross profit per unit and gross profit percentage for each
product.
(3) Based on your results, evaluate the suggestion of the marketing manager to emphasize the
Deluxe model.
(4) How does ABC contribute to Gorden's competitive advantage?

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Please see Feedback for answers.

Feedback:

(3) Using the activity-based costing, a much different picture on profitability of the Deluxe and
Speedy models emerges. The Speedy model is actually more profitable than the Deluxe model.
The revised cost data suggests that shifting the emphasis to the Deluxe model may very well be
a mistake. The Deluxe printer is a much heavier user of overhead resources as can be seen in the

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table below that compares uses of overhead.

(4) The ABC method is likely to provide Gordon Company a more accurate product cost picture.
It also directs the management's attention to the high volume, more profitable Speedy printers.
Given the low profit margin of the Deluxe, the firm may want to investigate the feasibility of
raising the price, the possibility of reducing product cost, or both.

AACSB: Analytic
Difficulty: Medium
Emerging Issues: Strategy
Learning Objective: 5-3

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147. Customer Profitability Analysis: Boston Depot sells office supplies to area corporations
and organizations. Tom Delayne, founder and CEO, has been disappointed with the operating
results and the profit margin for the last two years. Business forms are mostly a "commodity"
business with low profit margins. To increase profit margins and gain competitive advantages,
Delayne introduced "Desk-Top Delivery" service. The business seems to be as busy as ever.
Yet, the operating income has been declining. To help identify the root cause of declining
profits, he decided to analyze the profitability of two of the firm's major customers: Omega
International (OI) and City of Albion (CA).
According to the customer profitability analysis that Boston Depot conducts regularly, Boston
Depot has the same amount of total sales with both OI and CA. However, the firm earns a
higher gross margin and gross margin ratio from CA than those from the sales to OI, as
demonstrated here:

Boston Depot adds a flat l7.5 percent to all sales for expenses incurred in such activities as
handling customers' requests, pick-packing, order delivery, warehousing, and data entry.
However, not all customers require the same level of services. Operation Manager, Jamie Steel,
points out that CA has been a much heavier service user than OI. She shows the following data
to support her belief:

Controller Rod Jay has been investigating ways to determine the costs of performing various
activities. He summarized his findings:

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Steel points out that activities cost money. Two customers who request different service
activities most likely are not costing the firm the same.
Required:
(1) Using activity-based costing, compute the charges per unit of service activities.
(2) Using activity-based costing, compute the total distribution costs for each of the customers.
(3) Is the City of Albion a more profitable customer?
(4) Is Omega International a better customer for Boston Depot?

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Please see Feedback for answers.


Feedback: (1) Service cost rate per unit of activity

(2) Service Costs

(3) Customer Profitability Analysis-Activity Based

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The above profitability analysis indicates that, under activity-based costing, Omega
International, not City of Albion, is more profitable to Boston Depot. The apparent higher gross
margin percentage of the City of Albion relative to the Omega International was the result of
not recognizing differences in the service activities requested by different customers under the
firm's existing costing system.
City of Albion is a much heavier user of services provided by Boston Depot. Although both
customers had the same total sales, City of Albion made more desktop delivery requests in
smaller quantities and maintained more inventory by Boston Depot.
(4) The answer depends on the competitive strategy of the firm. The gross profit margin ratios
show that Omega is the better customer of the two. Omega does not use much of the desktop
delivery service Boston offers. Most likely Omega is a buyer of "commodity" items and does
not need the convenience of desktop delivery. However, Boston's pricing is likely to have
incorporated the average cost of desktop deliveries. If Omega realizes that it is paying for
services not used, it may buy the commodity it needs elsewhere, unless Boston lowers the price
to Omega.
All custom-printed business forms by different suppliers are likely to be the same. Delayne
wanted to "differentiate" its forms from those of competitors' by offering desktop delivery
services. In the long-run, Omega is not likely to be a customer staying with Boston Depot.
Boston Depot needs to be prepared to lower the price to Omega.
If the firm desires to compete on a differentiation strategy it needs to price accordingly. Boston
Depot needs to raise prices to City of Albion. If City of Albion is willing to pay a higher price
for the convenience of desktop delivery, it is the kind of customer that Delayne wants.

Difficulty: Hard
Emerging Issues: Strategy
Learning Objective: 5-6

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148. Customer Profitability Analysis Spring Company collected the following data
pertaining to its activities with selected customers.

Spring Company mails monthly statements on or before the first day of each month. HS pays all
of its account payables within the cash discount periods. Baldwin does not take advantage of
cash discounts. However, it pays its accounts on the specified due dates. Adventix pays half of
its accounts on the date that these accounts are due and pays the remainder at the end of the
following month. Joan Lieberman, the controller of Spring Company, has estimated that the
cost of working capital is approximately 2 percent per month.
Lieberman also gathered the following cost data:

Required: Prepare and interpret a customer profitability analysis for Spring Company. How
does it help Spring Company become more competitive and profitable?

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Please see Feedback for answers.


Feedback: HS Inc. Adventix Baldwin

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Customer profitability analysis helps the company become more competitive by identifying the
most profitable and least profitable customers. This information can then be used by
management to adjust pricing policies, identify ways to reduce the cost to serve customers, and
change the customer mix for a more profitable group of customers.

Difficulty: Hard
Learning Objective: 5-6

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