MANAGEMENT ADVISORY SERVICES jjaurojrtcbic

14 Activity Based Management And Costing May 2014

1 Seneca Company has two products with the following information:

Engine Race
Rebuilds Cars Total__
Annual revenue P1,200,000 P1,400,000 P2,600,000
Material costs 400,000 P600,000 P1,000,000
Labor costs 250,000 150,000 P400,000
Number of receipts 8,000 2,000
Number of batches 425 75

The business also has overhead costs as follows:

Cost pool Cost in pool Cost driver__________

Receiving P300,000 number of receipts
Material moves 275,000 number of batches
Administrative 225,000 labor cost
--------
Total P800,000

a. Allocate the overhead costs to the segments based on material costs.

b. Determine the income of each segment.
c. Allocate the overhead costs to the segments using ABC.
d. Determine the income of each segment under ABC.

SOLUTION:

a. Engines: P320,000 [P800,000 x (P400,000/P1,000,000)]

Race Cars: P480,000 [P800,000 x (P600,000/P1,000,000)]

b.
Engine Race
Rebuilds Cars Total__
Annual revenue P1,200,000 P1,400,000 P2,600,000
Material costs 400,000 600,000 1,000,000
Labor costs 250,000 150,000 400,000
Overhead 400,1,000;600/1,000 320,000 480,000 800,000
------- ------- --------
Income P230,000 P 170,000 P 400,000
c. & d.
Engine Race
Rebuilds Cars Total__
Annual revenue P1,200,000 P1,400,000 P2,600,000
Material costs 400,000 600,000 1,000,000
Labor costs 250,000 150,000 400,000
Receiving 8,000/10,000;2,000/10,000 240,000 60,000 300,000
Material moves 425/500;75/500 233,750 41,250 275,000
Administrative250/400;150/400 140,625 84,375 225,000
------- ------- --------
Income P(64,375) P464,375 P 400,000

2 Ellington & Hodges is a public relations firm. The firm operates in three major segments. The following
information has been obtained,

Political Corporate Celebrity Total__

Annual revenues P750,000 P800,000 P1,450,000 P3,000,000
Number of clients 50 150 200 400
Chargeable hours 6,000 10,000 14,000 30,000

Total salaries for the year were P900,000; overhead was P600,000.

a. Determine the profits for each segment, assuming costs are allocated based on annual revenues.
b. Determine the profits for each segment, assuming overhead costs are allocated based on the number
of clients and salaries are allocated based on chargeable hours.

SOLUTION:

a. Political: P375,000 [P750,000 - (P1,500,000 x P750,000/P3,000,000)]

Corporate: P400,000 [P800,000 - (P1,500,000 x P800,000/P3,000,000)]
Celebrity: P725,000 [P1,450,000 - (P1,500,000 x P1,450,000/P3,000,000)]

b. Political Corporate Celebrity Total__

Annual revenues P750,000 P800,000 P1,450,000 P3,000,000
Salaries- Chargeable hours
6/30,10/30,14/30 180,000 300,000 420,000 900,000

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 Overhead- No. of Clients
50/400,150/400, 200/400 120,000 200,000 280,000 600,000
-------- -------- --------- ---------
Profits P450,000 P300,000 P 750,000 P1,500,000

An
3 Objective of activity-based management is to

a. eliminate the majority of centralized activities in an organization.

b. reduce or eliminate non-value-added activities incurred to make a product or provide a service.
c. institute responsibility accounting systems in decentralized organizations.
d. all of the above

ANS:B Activity-based management is a management approach that associates the activities executed by an
organization with the value customers derive from products. Efficiency and effectiveness are achieved by
reducing the level of activities that do not create value for the customer and by improving execution of
activities that do create customer value.
Specific tools beneath the ABM umbrella include activity analysis, cost driver analysis, activity-based costing,
continuous improvement, operational control, performance evaluation, and business process reengineering.

4 Which of the following falls under the Activity-Based Management umbrella?

Continuous Business process Activity-based

improvement reengineering costing

a. no no yes
b. yes no no
c. yes yes yes
d. no yes no

ANS:C

Continuous improvement is an ongoing process of enhancing employee task performance, level of product
quality, and level of company service through eliminating non-value-added activities to reduce lead time,
making products (performing services) with zero defects, reducing product costs on an ongoing basis, and
simplifying products and processes.

Activity-based costing is a cost accounting system that focuses on the various activities performed in an
organization and collects costs on the basis of the underlying nature and extent of those activities

5 The sum of the non-value-added time and the value-added time equals
a. inspection time.
b. production time.
c. the product life cycle.
d. cycle time.

ANS: D

There are four types of time that compose the entire processing time of an entity.

1. Processing (or service) time is the actual time it takes to perform the functions necessary to manufacture
a product or perform a service; this quantity of time is value-added.

2. Inspection time is the time taken to perform quality control activities. Such time is non-value-added time.

3. Transfer time is the time consumed moving products or components from one place to another. Such time
is non-value-added time.

4. Idle time is the amount of time spent in storing inventory or waiting at a production operation for
processing. Such time is non-value-added time.

Inspection time, idle time, and transfer time all add no value. Therefore, cycle (lead) time is equal to value-
added processing time plus non-value-added time.

6 Which of the following add customer value?

a. setup time
b. storage time
c. idle time
d. processing time

ANS: D

Activities may be designated as value-added and non-value-added

An activity is a repetitive action performed in fulfillment of business functions.

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 A value-added activity (VA) is an activity that increases the worth of a product or service to the consumer and
for which the customer is willing to pay.

A non-value-added activity (NVA) is an activity that increases the time spent on a product or service but does
not increase its worth.

A business-value-added activity is an activity that is necessary for the operation of a business but for which a
customer would not want to pay.

7 Lead time minus production time is equal to

a. idle time.
b. storage time.
c. non-value-added time.
d. value-added time.

ANS: C

8 A process map
a. should indicate only value-added activities.
b. is also known as a detailed flowchart.
c. should indicate only those steps/processes that are obvious in the production of goods/services.
d. is also known as a value chart.

ANS: B

A process is a series of activities that, when performed together, satisfy a specific objective. A process map is
a detailed flowchart that indicates every step that goes into making a product or providing a service.

9 The actual time it takes to perform a specific task is called

a. inspection time.
b. service time.
c. transfer time.
d. quality time.

ANS: B
10 Manufacturing cycle efficiency is a measure of
a. bottlenecks.
b. effectiveness.
c. efficiency.
d. quality.

ANS: C

Manufacturing cycle efficiency (MCE) is a ratio resulting from dividing the value-added processing time by total
cycle time. The longer the cycle time, the longer time the product has to “pull” costs to it.

b. A JIT manufacturing process may achieve higher efficiency, eliminating idle time for storage and thus
increasing MCE.

c. A service company would compute service cycle efficiency is a ratio resulting from dividing the actual
service time by total cycle time.

11 For one product that a firm produces, the manufacturing cycle efficiency is 20 percent. If the
total production time is 12 hours, what is the total manufacturing time?
a. 15.0 hours
b. 60.0 hours
c. 12.0 hours
d. 2.4 hours

ANS: B 12/20% = 60

12 DJH Corp has identified the following costs.

Costs to improve the production process P175,000

Incoming inspection costs 110,000
Design engineer salaries 325,000
Rework of defective units 122,000
Salaries for service repair workers 265,000
Warranty costs 335,000
Finished goods inspection 165,000
Scrap 118,000

Categorize each of the costs into the appropriate quality cost category and prepare a total for each.

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SOLUTION:

Prevention costs:
Costs to improve the production process P175,000
Design engineer salaries 325,000
Total prevention costs P500,000

Appraisal costs:
Incoming inspection costs P110,000
Finished goods inspection 165,000
Total appraisal costs 275,000

Internal failure costs:

Rework of defective units P122,000
Scrap 118,000
Total internal failure costs 240,000

External failure costs:

Salaries for service repair workers P265,000
Warranty costs 335,000
Total external failure costs 600,000

13 The quality costs that are incurred to determine whether particular units of product meet quality standards are
a. appraisal costs.
b. external failure costs.
c. internal failure costs.
d. prevention costs.

a. appraisal costs.

14 The cost to repair a unit of product that fails after it is sold is a(n)
a. appraisal cost.
b. external failure cost.
c. internal failure cost.
d. prevention cost.

b. external failure cost.

15 Chubby Co. is considering adding a new inspection point into its production process. The inspection will occur
immediately prior to packaging and will cost P10 per unit. The inspection has a 95% probability of detecting a
defective product. Past history have shown that 8% of the product produced are defective and require on-site
servicing. It costs Chubby P300 to repair a unit in the field. Correcting the defects would cost P50 if the repair
was made before the unit left the factory. Assume 1,000 units are produced and sold each month.
Requirements:
1. How should Chubby classify each of the costs?
2. Should Chubby institute the addiional inspection?

SOLUTION

1. If no inspection is made:
8% x 1,000 units x P300 = P24,000 external failure costs

If inspection is made:
1,000 units x P10 inspection cost = P10,000 appraisal cost
8% x 95% x 1,000 units x P50 repair cost = P3,800 internal failure cost
8% x 5% x 1,000 units x P300 = P1,200 external failure cost

2. No inspection: P24,000
Inspect: P10,000 + 3,800 + 1,200 = P15,000

Chubby should institute the additional inspection.

16 An approach to developing new ways to perform existing activities is called

a. process value analysis
b. re-engineering
c. caveat analysis
d. benchmarking

b re-engineering

Re-engineering describes the development of new ways to perform existing activities and ways to stop
performing non-value-adding activities.
Benchmarking is the practice of comparing your company with some of the industry leaders.
Process value analysis (PVA) uses activity analysis to manage costs. PVA focuses on manufacturing processes
and seeks to reduce or optimize the activities performed within a process.

17 Ventura Company produces four products, Q, R, S & T. The income statement for the firm as a whole is:

Sales P3,000,000
Less variable costs 1,870,000
---------

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 Contribution margin P1,130,000
Less fixed costs
Manufacturing P320,000
Selling 290,000
Administrative 168,000
-------
778,000
---------
Net income P 352,000

The sales, contribution margin ratios, and line-sustaining fixed costs for the four products are:

Q___ R___ S ___ T_ __

Sales P200,000 P400,000 P1,000,000 P1,400,000
Contribution margin 35% 40% 20% 50%
Line-sustaining costs P60,000 P80,000 P168,000 P270,000

a. Prepare an income statement segmented by product line, including a column for the entire firm. Be
sure to show segment income as well as total enterprise income.

SOLUTION:

Q___ R___ S_ __ T_ __ Total__

Sales P200,000 P400,000 P1,000,000 P1,400,000 P3,000,000
Variable costs 130,000 240,000 800,000 700,000 1,870,000
------- ------- --------- --------- ---------
Contribution margin P 70,000 P160,000 P 200,000 P 700,000 P1,130,000
Line-sustaining costs 60,000 80,000 168,000 270,000 578,000
------- ------- --------- --------- ---------
Segment income P 10,000 P 80,000 P 32,000 P 430,000 P 552,000
Company-sustaining 200,000
---------
Enterprise income P 352,000

18. ____________ are those performed each time a unit is produced or sold.
a. Batch-level activities
b. Facility-sustaining activities
c. Sustaining activities
d. Unit-level activities
d

19. ____________ are those that a company performs when it makes a group of units.
a. Batch-level activities
b. Facility-sustaining activities
c. Sustaining activities
d. Unit-level activities
a

20. ____________ relate to an entire plant as a whole.

a. Batch-level activities
b. Facility-sustaining activities
c. Sustaining activities
d. Unit-level activities
b

21. ____________ arise because a company maintains a particular product or service.

a. Batch-level activities
b. Facility-sustaining activities
c. Sustaining activities
d. Unit-level activities
c

Hazel Company uses activity-based costing. The company produces two products: coats and hats. The annual
production and sales volume of coats is 8,000 units and of hats is 6,000 units. There are three activity cost pools
with the following expected activities and estimated total costs:

Activity Estimated Expected Expected

Cost Pool Cost Activity Activity
Coats Hats Total
Activity 1 P20,000 100 400 500
Activity 2 P37,000 800 200 1,000
Activity 3 P91,200 800 3,000 3,800

87. 22. Refer to Hazel Company. Using ABC, the cost per unit of coats is approximately:

a. P2.40 c. P 6.60
b. P3.90 d. P10.59

ANS: C
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 Activity Cost Allocation Cost per Unit
1 P20,000 * 100/500 = P 4,000 / 8,000 P0.50
2 P37,000 * 800/1,000 = P29,600 / 8,000 3.70
3 P91,200 * 800/3,800 = P19,200 / 8,000 2.40
Total Cost per Unit 6.60

88. 23. Refer to Hazel Company. Using ABC, the cost per unit of hats is approximately:

a. P2.40 c. P12.00
b. P3.90 d. P15.90

ANS: D
Activity Cost Allocation Cost per Unit
1 P20,000 * 400/500 = P 16,000 / 6,000 P2.67
2 P37,000 * 200/1,000 = P 7,400/ 6,000 1.23
3 P91,200 * 3,000/3,800 = P72,000 / 6,000 12.00
Total Cost per Unit 15.90

Phelps Company

Phelps Company produces 50,000 units of Product Q and 6,000 units of Product Z during a period. In that period,
four set-ups were required for color changes. All units of Product Q are black, which is the color in the process at the
beginning of the period. A set-up was made for 1,000 blue units of Product Z; a set-up was made for 4,500 red units
of Product Z; a set-up was made for 500 green units of Product Z. A set-up was then made to return the process to
its standard black coloration and the units of Product Q were run. Each set-up costs P500.

76. Refer to Phelps Company. If set-up cost is assigned on a volume basis for the department,
24.
what is the approximate per-unit set-up cost for Product Z?
a. P.010.
b. P.036.
c. P.040.
d. None of the responses are correct.

ANS: B
Total setup cost: P500 x 4 = P2,000

P2,000/56,000 = P0.0357

77. Refer to Phelps Company. If set-up cost is assigned on a volume basis for the department,
25.
what is the approximate per-unit set-up cost for the red units of Product Z?
a. P.036.
b. P.111.
c. P.250.
d. None of the responses are correct.

ANS: A
Total setup cost: P500 x 4 = P2,000

P2,000/56,000 = P0.0357

78. 26.Refer to Phelps Company. Assume that Phelps Company has decided to allocate overhead
costs using levels of cost drivers. What would be the approximate per-unit set-up cost for the blue
units of Product Z?
a. P.04.
b. P.25.
c. P.50.
d. None of the responses are correct.

ANS: C
Setup cost for blue units = P500.00

Number of blue units produced = 1,000

P500/1,000 = P.50

79. 27.Refer to Phelps Company. Assume that Phelps Company has decided to allocate overhead
costs using levels of cost drivers. What would be the approximate per-unit set-up cost for the
green units of Product Z?
a. P1.00.
b. P0.25.
c. P0.04.
d. None of the responses are correct.

ANS: A

Setup cost = P500.00

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 Units produced = 500

P500.00/500 = P1.00/unit
Lafayette Savings and Loan

Lafayette Savings and Loan had the following activities, traceable costs, and
physical flow of driver units:

Traceable Physical flow of

Activities Costs Driver Units
Open new accounts P50,000 1,000 accounts
Process deposits 36,000 400,000 deposits
Process withdrawals 15,000 200,000 withdrawals
Process loan applications 27,000 900 applications

The above activities are used by the Jennings branch and the Crowley branch:

Jennings Crowley

New accounts 200 400

Deposits 40,000 20,000
Withdrawals 15,000 18,000
Loan applications 100 160

80. 28. Refer to Lafayette Savings and Loan. What is the cost per driver unit for new account
activity?
a. P0.09 c. P30.00
b. P0.075 d. P50.00

ANS: D
P50,000 / 1,000 = P50.00 per account

81. 29. Refer to Lafayette Savings and Loan. What is the cost per driver unit for the deposit activity?

a. P0.09 c. P30.00
b. P0.075 d. P50.00

ANS: A
P36,000/400,000 = P0.09

82. 30. Refer to Lafayette Savings and Loan. What is the cost per driver unit for the withdrawal activity?

a. P0.09 c. P30.00
b. P0.075 d. P50.00

ANS: B
P15,000/200,000 = P0.075

83. 31. Refer to Lafayette Savings and Loan. What is the cost per driver unit for the loan application activity?

a. P0.09 c. P30.00
b. P0.075 d. P50.00

ANS: C
P27,000/900 = P30.00

84. 32. Refer to Lafayette Savings and Loan. How much of the loan application cost will be assigned
to the Jennings branch?
a. P3,000 c. P 7,800
b. P4,800 d. P27,000

ANS: A
P30.00 x 100 = P3,000

85. 33.Refer to Lafayette Savings and Loan. How much of the deposit cost will be assigned to the
Crowley branch?
a. P1,800 c. P 5,400
b. P3,600 d. P36,000

ANS: A
P0.09 * 20,000 = P1,800

86. 34.Refer to Lafayette Savings and Loan. How much of the new account cost will be assigned to
the Crowley branch?
a. P10,000 c. P30,000
b. P20,000 d. P50,000

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 ANS: B
400 * P50 = P20,000
Smithson Company

Smithson Company produces two products (A and B). Direct material and labor costs for Product A total P35 (which
reflects 4 direct labor hours); direct material and labor costs for Product B total P22 (which reflects 1.5 direct labor
hours). Three overhead functions are needed for each product. Product A uses 2 hours of Function 1 at P10 per hour,
1 hour of Function 2 at P7 per hour, and 6 hours of Function 3 at P18 per hour. Product B uses 1, 8, and 1 hours of
Functions 1, 2, and 3, respectively. Smithson produces 800 units of A and 8,000 units of B each period.

70. 35.Refer to Smithson Company If total overhead is assigned to A and B on the basis of units
produced, Product A will have an overhead cost per unit of
a. P 88.64.
b. P123.64.
c. P135.00.
d. None of the responses are correct.

ANS: A
Total Overhead
Product A Function Hourly Hours Total
Rate
1 P 10 2 P 20
2 P 7 1 P 7
3 P 18 6 P 108
Totals 9 P 135

Product B Function Hourly Hours Total

Rate
1 P 10 1 P 10
2 P 7 8 P 56
3 P 18 1 P 18
Totals 10 P 84

OH/Unit Units Total

Produced
P 135 800 P 108,000
P 84 8000 P 672,000
P 780,000
Total OH Proportion Allocated Units OH per
OH Produced Unit
P 780,000 0.090909091 P 70,909.09 800 P 88.64
(800/8800)

71. 36.Refer to Smithson Company If total overhead is assigned to A and B on the basis of units
produced, Product B will have an overhead cost per unit of
a. P84.00.
b. P88.64.
c. P110.64.
d. None of the responses are correct.

ANS: B
See #70 for Total Overhead Computations
Total OH Proportion Allocated Units OH per
OH Produced Unit
P 780,000 0.909090909 P 709,090.91 8000 P 88.64
(8000/8800)

72. 37.Refer to Smithson Company If total overhead is assigned to A and B on the basis of direct
labor hours, Product A will have an overhead cost per unit of
a. P51.32.
b. P205.28.
c. P461.88.
d. None of the responses are correct.
ANS: B

Product DL Hrs/Unit Units Produced Total DL

Hours

8
 A 4 800 3200
B 1.5 8000 12000
15200

Total OH Proportion Allocated Units OH per

OH Produced Unit
P 780,000 0.210526316 P 164,210.53 800 P 205.28
(3,200/15,200)

73. 38.Refer to Smithson Company If total overhead is assigned to A and B on the basis of direct
labor hours, Product B will have an overhead cost per unit of
a. P51.32.
b. P76.98.
c. P510.32.
d. None of the responses are correct.

ANS: B
See #72 for Direct Labor Computations

Total OH Proportion Allocated Units OH per

OH Produced Unit
P 0.789473684 P 615,789.47 8000 P 76.98
780,000
(12,000/15,200)

74. 39. Refer to Smithson Company If total overhead is assigned to A and B on the basis of overhead
activity hours used, the total product cost per unit assigned to Product A will be
a. P86.32.
b. P95.00.
c. P115.50.
d. None of the responses are correct.

ANS: C
Total OH Proportion Allocated Units OH per DM and Total
OH Produced Unit DL/Unit
P 0.082568807 P 64,403.67 800 P P P 115.50
780,000 80.50 35.00
(7,200/87,200)

75. 40. Refer to Smithson Company If total overhead is assigned to A and B on the basis of overhead
activity hours used, the total product cost per unit assigned to Product B will be
a. P115.50.
b. P73.32.
c. P34.60.
d. None of the responses are correct.

ANS: D
Total OH Proportion Allocated Units OH per DM and Total
OH Produced Unit DL/Unit
P 0.917431193 P 8000 P P P 111.44
780,000 715,596.33 89.44 22.00
(80,000/87,200
)

Product A Function Hourly Hours

Rate
1 P 10 2
2 P 7 1
3 P 18 6
Totals 9

Product B Function Hourly Hours

Rate
1 P 10 1
2 P 7 8
3 P 18 1
Totals 10

Hours Units Total

Consumed Produced
9 800 7,200

9
10 8000 80,000
87,200

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