Questions

Q: Quality Stereo Company has provided the following information regarding its activity-based costing system: Purchasing department costs are allocated based on purchase orders and the cost allocation rate is $75 per purchase order. Assembly department costs are allocated based on the number of parts used and the cost allocation rate is $1.00 per part. Packaging department costs are allocated based on the number of units produced and the allocation rate is $2.00 per unit produced. Each stereo produced has 50 parts, and the direct materials cost per unit is $70. There are no direct labor costs. Quality Stereo has an order for 1,000 stereos which will require 50 purchase orders in all. What is the total cost of the 1,000 stereos? A) $125,750 B) $55,750 C) $123,750 D) $122,000

Q: Which of the following statements is FALSE? A) Many traditional costing systems can distort product costs and profitability. B) Activity-based costing systems tend to be more costly than traditional costing systems. C) Many traditional costing systems tend to combine various costs into a single cost pool. D) Activity-based costing systems tend to use fewer cost pools than does a traditional costing system.

Q: What is the last step in developing an activity-based costing system? A) Estimate the total quantity of the cost driver. B) Estimate the total indirect costs of each activity. C) Identify the activities. D) Allocate costs to the cost object.

Q: Which of the following statements is CORRECT regarding activity-based costing systems? A) They have separate indirect cost allocation rates for each activity. B) They are not as accurate or precise as traditional costing systems. C) They accumulate overhead costs by processing departments. D) They are less complex and, therefore, less costly than traditional systems.

Q: Which of the following is MOST likely to be the cost driver for the packaging and shipping activity? A) Number of components B) Number of orders C) Hours of testing D) Number of setups

Q: JC Manufacturing produces products that use a variety of components. Which of the following cost drivers would be the MOST applicable for assigning material handling costs to the finished products? A) Direct labor hours B) Direct labor cost C) Number of units produced D) Number of components used

Q: The following four steps are necessary in order to use an activity-based costing system: 1. Compute the allocation rate for each activity. 2. Identify activities and estimate their total costs. 3. Identify the cost driver for each activity and then estimate the quantity of each driver's allocation base. 4. Allocate the indirect costs to the cost object. In what order are these steps performed? A) 1,2,3,4 B) 3,1,2,4 C) 2,3,1,4 D) 2,1,3,4

Q: An activity-based costing system can be a significant competitive advantage for a business which does bidding for manufacturing work.

Q: A traditional costing system employs multiple allocation rates, but an activity-based costing system uses only one single allocation rate.

Q: An activity-based costing system would be of less value to a business making a single product than it would be for a company with multiple products.

Q: Activity-based costing creates more precise matching of indirect costs with products.

Q: Activity-based costing systems combine many various elements of overhead into a single cost pool.

Q: Activity-based management refers to using activity-based cost information to make decisions that increase profits while satisfying customers' needs.

Q: The first step in the activity-based costing system is to identify each activity and its total indirect cost.

Q: Two main benefits of activity-based costing are more accurate product cost information and more detailed information on costs of activities and the drivers of these costs.

Q: Companies that use activity-based costing do NOT need to trace direct materials and direct labor to products as is done in traditional costing systems.

Q: The main difference between activity-based costing and traditional costing systems is that activity-based costing uses a separate allocation rate for each activity.

Q: Activity-based costing focuses on a single predetermined overhead rate for cost analysis.

Q: With increased competition, managers need more accurate estimates of product costs to set prices and to identify the most profitable products.

Q: Pollenti Company has just merged with another industrial firm whose business had been failing. Pollenti immediately conducted a thorough study of the new company's work processes, and produced a report including the data shown below: A new inspection process is recommended to minimize defective raw materials. It would cost $12,000 to implement. Shoddy business practices are resulting in excessive warranty costsue004$15,000 more than normal due mainly to material failure. Reengineering of the assembly line will increase productivity. It would cost $18,000 to implement. Inefficient workplace design is costing $5,000 in unnecessary rework costs. Estimated amount of lost profits due to dissatisfied customers who turn to the competition is $80,000. Based on the above, what is the amount of external failure costs, if any, included here? A) $5,000 B) $12,000 C) $95,000 D) Zero

Q: Pollenti Company has just merged with another industrial firm whose business had been failing. Pollenti immediately conducted a thorough study of the new company's work processes, and produced a report including the data shown below: A new inspection process is recommended to minimize defective raw materials. It would cost $12,000 to implement. Shoddy business practices are resulting in excessive warranty costsue004$15,000 more than normal due mainly to material failure. Reengineering of the assembly line will increase productivity. It would cost $18,000 to implement. Inefficient workplace design is costing $5,000 in unnecessary rework costs. Estimated amount of lost profits due to dissatisfied customers who turn to the competition is $80,000. Based on the above, what is the amount of internal failure costs, if any, included here? A) $5,000 B) $12,000 C) $15,000 D) Zero

Q: Pollenti Company has just merged with another industrial firm whose business had been failing. Pollenti immediately conducted a thorough study of the new company's work processes, and produced a report including the data shown below: A new inspection process is recommended to minimize defective raw materials. It would cost $12,000 to implement. Shoddy business practices are resulting in excessive warranty costsue004$15,000 more than normal due mainly to material failure. Reengineering of the assembly line will increase productivity. It would cost $18,000 to implement. Inefficient workplace design is costing $5,000 in unnecessary rework costs. Estimated amount of lost profits due to dissatisfied customers who turn to the competition is $80,000. Based on the above, what is the amount of appraisal costs, if any, included here? A) $18,000 B) $12,000 C) $15,000 D) Zero

Q: Pollenti Company has just merged with another industrial firm whose business had been failing. Pollenti immediately conducted a thorough study of the new company's work processes, and produced a report including the data shown below: A new inspection process is recommended to minimize defective raw materials. It would cost $12,000 to implement. Shoddy business practices are resulting in excessive warranty costsue004$15,000 more than normal due mainly to material failure. Reengineering of the assembly line will increase productivity. It would cost $18,000 to implement. Inefficient workplace design is costing $5,000 in unnecessary rework costs. Estimated amount of lost profits due to dissatisfied customers who turn to the competition is $80,000. Based on the above, what is the amount of prevention costs, if any, included here? A) $18,000 B) $12,000 C) $15,000 D) Zero

Q: Perkins Company has been experiencing lost sales and high returns recently, so they decided to undertake a comprehensive quality program. Here are factors being considered: Finished products need to be inspected before shipping Estimated cost: $45,000 Production equipment needs upgrading Estimated cost: $400,000 Perkins knows that if it undertakes this program, it will be able to reduce warranty repair costs by $25,000. They also know they will be able to avoid lost profits by retaining customers, but they cannot quantify that benefit with any degree of precision. Should Perkins go ahead with the quality program? A) Yes, they should, regardless of any other considerations. B) No, they should not. C) They should, only if the benefit of avoiding lost profits is estimated to be over $420,000. D) They should, only if the benefit of avoiding lost profits is estimated to be over $445,000.

Q: Losses caused by downtime in the production process are considered a(n): A) external failure cost. B) prevention cost. C) appraisal cost. D) internal failure cost.

Q: The cost of training personnel is an example of an: A) appraisal cost. B) prevention cost. C) internal failure cost. D) external failure cost.

Q: The lost profits from losing customers would come under which of the following categories? A) Prevention cost B) Appraisal cost C) External failure cost D) Internal failure cost

Q: The cost of product liability claims comes under which category of costs? A) Appraisal cost B) Prevention cost C) Internal failure cost D) External failure cost

Q: The cost to improve equipment and processes comes under which of the following cost categories? A) Prevention cost B) External failure cost C) Appraisal cost D) Internal failure cost

Q: The cost of warranty work comes under which of the following cost categories? A) Appraisal cost B) Internal failure cost C) External failure cost D) Prevention cost

Q: What do you call the costs incurred to avoid production of poor quality goods or services? A) External failure costs B) Internal failure costs C) Appraisal costs D) Prevention costs

Q: The cost of reengineering the production process to reduce defect rate is an example of which of the following? A) Internal failure cost B) Appraisal cost C) External failure cost D) Prevention cost

Q: The cost of inspection at various stages of production is an example of what type of cost? A) Appraisal cost B) External failure cost C) Prevention cost D) Internal failure cost

Q: Which of the following categories includes costs incurred when poor quality goods or services are detected before delivery to customers? A) Appraisal costs B) Internal failure costs C) Prevention costs D) External failure costs

Q: Which of the following categories includes costs incurred in detecting poor quality goods or services? A) External failure costs B) Prevention costs C) Appraisal costs D) Internal failure costs

Q: Which of the following is NOT an internal failure cost? A) Production losses caused by downtime B) Warranty costs C) Rework costs D) Rejected product units

Q: Pollenti Company has just merged with another industrial firm whose business had been failing. Pollenti immediately conducted a thorough study of the new company's work processes, and produced a report including the data shown below: A new inspection process is recommended to minimize defective raw materials. It would cost $12,000 to implement. Shoddy business practices are resulting in excessive warranty costsue004$15,000 more than normal due mainly to material failure. Reengineering of the assembly line will increase productivity. It would cost $18,000 to implement. Inefficient workplace design is costing $5,000 in unnecessary rework costs. Estimated amount of lost profits due to dissatisfied customers who turn to the competition is $80,000. Based on an analysis of costs and benefits, a quality improvement plan would not be recommended.

Q: Nirvana Products Company has just gone through a rigorous evaluation due to sliding profits in the past year. The engineers strongly recommend implementing an aggressive preventative maintenance program, but the accountants say it will cost $50,000. The lawyers insist on a zero-defect product inspection as the units are being packaged, but the accountants say it will cost $40,000. The vice president for production said he just thought it was too expensive of a gamble to take, but the factory manager pointed out that if they did not look ahead at the consequences, they could easily lose $100,000 of sales to their competitors because of shoddy goods, and a costly production shutdown that would cost them another $100,000 if the machinery gives out unexpectedly. In this situation, the company should not invest in the quality programs being recommended because they are not justified on a cost/benefit basis.

Q: Alonzo Company has been experiencing lost sales and high returns recently, so they decided to undertake a comprehensive quality program. Here are factors being considered: Estimated lost profits due to poor quality products $200,000 Excessive warranty repair costs $60,000 Costs of correcting for defective goods on the assembly line $10,000 If the cost of implementing the quality program is under $270,000, the company should go forward with it.

Q: Costs incurred after the company sells poor-quality goods to the customer are considered external failure costs.

Q: Costs incurred when the company corrects for poor-quality goods before they are delivered to the customer are considered internal failure costs.

Q: Costs spent to detect poor-quality goods are considered appraisal costs.

Q: Internal failure costs occur when the company detects and corrects poor-quality goods or services before delivery to customers.

Q: Costs spent to avoid poor quality goods are considered internal failure costs.

Q: Internal failure costs occur when poor-quality goods or services are not detected until after delivery to customers.

Q: Inspection of incoming materials and production loss caused by downtime are examples of prevention costs.

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