Cost Accounting Exam #3, Spring 2004
1.
2.
3.
The MOST likely example of a batch-level cost is
a.
utility costs.
b.
machine repairs.
c.
product-designing costs.
d.
setup costs.
Design costs are an example of
a.
unit-level costs
b.
batch-level costs
c.
product-sustaining costs.
d.
facility-sustaining costs.
__________ costs support the organization as a whole.
a.
Unit-level
b.
Batch-level
c.
Product-sustaining
d.
Facility-sustaining
4.
It is usually difficult to find good cause-and-effect relationships between __________ and a cost
allocation base.
a.
unit-level costs
b.
batch-level costs
c.
product-sustaining costs
d.
facility-sustaining costs
5.
With traditional costing systems, complex products manufactured in small batches and in small
annual volumes may be __________ because batch-related and product-sustaining costs are
assigned using unit-related drivers.
a.
overcosted
b.
fairly costed
c.
undercosted
d.
ignored
6.
With traditional costing systems, high-volume less complex products manufactured in large
batches may be __________ .
a.
overcosted
b.
fairly costed
c.
undercosted
d.
ignored
7.
Activity-based-costing information
a.
should be used when services place similar demands on resources.
b.
usually results in peanut-butter costing.
c.
will yield inaccurate cost numbers when products are similar.
d.
may assist in improving product design and efficiency.
8.
ABC systems
a.
reveal activities that can be eliminated.
b.
help control nonfinancial items such as number of setup hours.
c.
help identify new designs to reduce costs.
d.
all of the above.
9.
A well-designed, activity-based cost system helps managers make better decisions because
information derived from an ABC analysis
a.
can be used to eliminate nonvalue-added activities.
b.
is easy to analyze and interpret.
c.
takes the choices and judgment challenges away from the managers.
d.
emphasizes how managers can achieve higher sales.
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Cost Accounting Exam #3, Spring 2004
Problem 1
Flynn Truck manufactures part WB23 used in several of its truck models. 10,000 units are produced
each year with production costs as follows:
Direct materials
Direct manufacturing labor
Variable support costs
Fixed support costs
Total costs
$ 45,000
15,000
35,000
25,000
$120,000
Flynn Truck has the option of purchasing part WB23 from an outside supplier at $11.20 per unit. If
WB23 is outsourced, 40% of the fixed costs cannot be immediately converted to other uses.
Required:
a. What amount of the WB23 production costs is avoidable?
b. Should Flynn Truck outsource WB23? Why or why not?
c. Now suppose that if Flynn purchases WB23s from the outside supplier, its best alternative use of
the capacity currently used for WB23s is to make and sell heavy-weight motorcycles. Flynn
estimates the following incremental revenues and costs for heavy-weight motorcycles:
Total expected incremental future revenues
$2,052,000
Total expected incremental future costs
$2,000,000
On the basis of financial considerations alone, should Flynn make WB23s or buy them from the
outside supplier?
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Cost Accounting Exam #3, Spring 2004
Problem 2
The management accountant for the Galbraith Chocolate Company has prepared the following
income statement for the most current year.
Sales
Cost of goods sold
Contribution margin
Delivery and ordering costs
Depreciation of equipment
Allocated corporate costs
Corporate profit
Chocolate
$40,000
26,000
14,000
2,000
3,000
5,000
$4,000
Other Candy
$25,000
15,000
10,000
3,000
3,000
5,000
$(1,000)
Fudge
$35,000
19,000
16,000
2,000
2,000
5,000
$7,000
Total
$100,000
60,000
40,000
7,000
8,000
15,000
$10,000
All equipment has a zero disposal value and none of the corporate costs would be avoided with the
elimination of any of the product lines.
Required:
a.
Do you recommend discontinuing the Other Candy product line? Why or why not?
b.
If the Chocolate product line had been discontinued, corporate profits for the current year
would have decreased by what amount?
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Cost Accounting Exam #3, Spring 2004
Problem 3
Andrew, a Pizzeria manager, replaced the convection oven just six months ago. Today, Turbo Ovens
Manufacturing announced the availability of a new convection oven that cooks more quickly with
lower operating expenses. Andrew is considering the purchase of this faster, lower-operating cost
convection oven to replace the existing one they recently purchased. Selected information about the
two ovens is given below:
Existing
New Turbo Oven
Original cost
$60,000
$50,000
Accumulated depreciation
$ 5,000
--Current salvage value
$40,000
--Remaining life
5 years
5 years
Annual operating expenses
$10,000
$ 7,500
Disposal value in 5 years
$ 0
$ 0
Required:
a.
Should Andrew purchase the new Turbo Oven?
b.
Now suppose the capital expenditure needed to replace the existing oven is not known.
All other data are as given. What is the maximum price that Andrew would be willing to
pay for the new oven to prefer replacing the existing oven?
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Cost Accounting Exam #3, Spring 2004
Problem 4
Meredith Company has just finished its first year of operations and must decide which method to use
for adjusting cost of goods sold. Because the company used a budgeted indirect-cost rate for its
manufacturing operations, the amount that was allocated ($435,000) was different from the actual
amount incurred ($425,000).
Ending balances were:
Direct Materials
Work-in-Process
Finished Goods
Cost of Goods Sold
$ 100,000
40,000
80,000
680,000
Required:
a.
Prepare a journal entry to write off the difference between allocated and actual overhead
directly to Cost of Goods Sold. Be sure your journal entry closes the related overhead
accounts.
b.
Prepare a journal entry that prorates the write-off of the difference between allocated and
actual overhead using ending account balances. Be sure your journal entry closes the
related overhead accounts.
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Cost Accounting Exam #3, Spring 2004
Problem 5
Hershberger Manufacturing uses departmental cost driver rates to apply manufacturing overhead
costs to products. Manufacturing overhead costs are applied on the basis of machine-hours in the
Machining Department and on the basis of direct labor-hours in the Assembly Department. At the
beginning of 20x3, the following estimates were provided for the coming year:
Direct labor-hours
Machine-hours
Direct labor cost
Manufacturing overhead costs
Machining
10,000 DLH
100,000 MH
$ 80,000
$250,000
Assembly
90,000 DLH
5,000 MH
$720,000
$360,000
The accounting records of the company show the following data for Job #846:
Machining
Assembly
Direct labor-hours
50 DLH
120 DLH
Machine-hours
170 MH
10 MH
Direct material cost
$2,700
$1,600
Direct labor cost
$ 400
$ 900
Required:
a.
Compute the manufacturing overhead allocation rate for each department.
b.
Compute the total cost of Job #846.
c.
Provide possible reasons why Hershberger Manufacturing uses two different cost allocation
rates.
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Cost Accounting Exam #3, Spring 2004
Problem 6
Gudrun Pet Corporation manufactures two models of grooming stations, a standard and a deluxe
model. The following activity and cost information has been compiled.
Activity
Machine setup
Product design
complexity
Cost-Allocation
Base
Number of setups
Number of
components
Budgeted Cost
per Unit of CostAllocation Base
Quantity of Cost-Allocation Base
Standard
Deluxe
$2000
3
7
$750
30
50
The budgeted manufacturing overhead for the current year is $80,000 and the budgeted direct labor
hours is 650 for the standard model and 150 for the deluxe model (total budgeted direct labor hours is
800).
Assume a traditional costing system allocates the $80,000 of overhead costs based on direct labor
hours.
Required:
a.
Compute the total amount of overhead costs assigned to the standard and deluxe
models using the traditional costing system. Assume the actual overhead costs and the actual
direct labor hours are equal to the budgeted amounts.
b.
Compute the total amount of overhead costs assigned to the standard and deluxe
models using an activity-based costing system.
c.
Explain the difference between the costs obtained from the traditional costing
system and the ABC system. Which system provides a better estimate of costs?
Why?
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