CHAPTER 4:
ACTIVITY-BASED COSTING AND MANAGEMENT
Multiple Choice
a
1. Activity-based costing
a. requires the identification of cost drivers.
b. is used only in JIT operations.
c. applies only to discretionary fixed costs.
d. does not help to identify activities as value-adding or non-value-adding.
a
2. A company using activity-based costing
a. tries to identify cost drivers.
b. allocates all costs to individual products.
c. looks for the activity with which total costs are most closely associated.
d. is probably using the JIT philosophy.
a
3. Machine setups is an example of a(n) ____________ activity.
a. Batch
b. Facility-sustaining
c. Product-sustaining
d. Unit
d
4. Machine hours is an example of a(n) ____________ activity.
a. Batch
b. Facility-sustaining
c. Product-sustaining
d. Unit
b
5. Landscaping is an example of a(n) _____________ activity.
a. Batch
b. Facility-sustaining
c. Product-sustaining
d. Unit
d
6. Material cost is an example of a(n) _____________ activity.
a. Batch
b. Facility-sustaining
c. Product-sustaining
d. Unit
c
7. The activities that drive resource requirements are called the
a. activity drivers
b. cost objects
c. resource drivers
d. sustaining activities
b
8. The resource utilized by a given product divided by the total amount of the resource available is called
the
a. activity driver
b. consumption ratio
c. cost object
d. sustaining activity
c
9. The segment for which you are estimating the cost is called the
a. activity driver
b. consumption ratio
c. cost object
d. sustaining activity
a 10. A tool that focuses on manufacturing processes and seeks to reduce or optimize the activities performed
within the process is
a. process value analysis
b. re-engineering
c. caveat analysis
d. benchmarking
d 11. A tool that compares how tasks are performed internally with the best practices of industry leaders is
a. process value analysis
b. re-engineering
c. caveat analysis
d. benchmarking
b 12. An approach to developing new ways to perform existing activities is called
a. process value analysis
b. re-engineering
c. caveat analysis
d. benchmarking
c 13. Which of the following statements is true?
a. The traditional approach to costing uses many different cost drivers.
b. Costs that are indirect to products are by definition traceable to directly to products.
c. Costs that are indirect to products are traceable to some activity.
d. All of the above statements are true.
a 14. Which of the following is NOT a sign of poor cost data?
a. Competitors' prices for high-volume products appear much too high.
b. The company seems to have a highly profitable niche all to itself.
c. Customers don't balk at price increases for low-volume products.
d. Competitors' prices for low-volume products appear much too high.
d 15. Which of the following is a sign of poor cost data?
a. Competitors' prices for high-volume products appear much too high.
b. The company seems to have a highly profitable niche all to itself.
c. Customers don't balk at price increases for low-volume products.
d. All of the statements are true.
a 16. Number of purchase orders is an example of a(n) ____________ activity.
a. Batch
b. Facility-sustaining
c. Product-sustaining
d. Unit
15
d 17. Direct labor hours is an example of a(n) ____________ activity.
a. Batch
b. Facility-sustaining
c. Product-sustaining
d. Unit
b 18. Property taxes on the plant is an example of a(n) _____________ activity.
a. Batch
b. Facility-sustaining
c. Product-sustaining
d. Unit
d 19. Production volume is an example of a(n) _____________ activity.
a. Batch
b. Facility-sustaining
c. Product-sustaining
d. Unit
d 20. ____________ 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
a 21. ____________ 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
b 22. ____________ relate to an entire plant as a whole.
a. Batch-level activities
b. Facility-sustaining activities
c. Sustaining activities
d. Unit-level activities
c 23. ____________ 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
d 24. Which of the following is not a type of sustaining activity?
a. Capacity-sustaining
b. Customer-sustaining
c. Distribution-channel sustaining
d. Unit-sustaining
a 25. Which of
a. ABM
b. ABM
c. ABM
d. All
the following is true regarding activity-based management?
is using information about activities to manage portions of the organization other than costs.
is applying ABC to external financial reporting.
requires the use of re-engineering principles.
of the above are true.
a 26.
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.
c 27.
The cost of downtime on machines while rework is being performed is a(n)
a. appraisal cost.
b. external failure cost.
c. internal failure cost.
d. prevention cost.
b 28.
The cost of processing customer complaints is a(n)
a. appraisal cost.
b. external failure cost.
c. internal failure cost.
d. prevention cost.
d 29.
Worker training is a(n)
a. appraisal cost.
b. external failure cost.
c. internal failure cost.
d. prevention cost.
b 30.
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 31. Genco manufactures two versions of a product. Production and cost information show the following:
Model A
Units produced
200
Material moves (total)
20
Direct labor hours per unit 1
Model B
400
80
2
Material handling costs total $200,000. Under ABC, the material handling costs allocated to each unit of
Model A would be:
a. $10
b. $200
c. $333
d. Some other number
c 32. Genco manufactures two versions of a product. Production and cost information show the following:
16
Model A
Units produced
200
Material moves (total)
20
Direct labor hours per unit 1
Model B
400
80
2
Material handling costs total $200,000. Under ABC, the material handling costs allocated to each unit of
Model B would be:
a. $200
b. $333
c. $400
d. Some other number
a 33. Genco manufactures two versions of a product. Production and cost information show the following:
Model A
Units produced
200
Material moves (total)
20
Direct labor hours per unit 1
Model B
400
80
3
Material handling costs total $200,000. Direct labor hours are used to allocate overhead costs. The
material handling costs allocated to each unit of Model A would be:
a. $143
b. $200
c. $333
d. Some other number
b 34. Cadott Manufacturing produces three products. Production and cost information show the following:
Units produced
Direct labor hours
Number of inspections
Model X
1,000
2,000
20
Model Y
3,000
1,000
30
Model Z
6,000
2,000
50
Inspection costs totaled $100,000. Using ABC, inspections costs allocated to each unit of Model X would be
a. $10.00
b. $20.00
c. $40.00
d. Some other number
b 35. Cadott Manufacturing produces three products. Production and cost information show the following:
Units produced
Direct labor hours
Number of inspections
Model X
1,000
2,000
20
Model Y
3,000
1,000
30
Model Z
6,000
2,000
50
Inspection costs totaled $100,000. Using ABC, inspections costs allocated to each unit of Model Y would be
a. $ 6.67
b. $10.00
c. $20.00
d. Some other number
b 36. Cadott Manufacturing produces three products. Production and cost information show the following:
Units produced
Direct labor hours
Number of inspections
Model X
1,000
2,000
20
Model Y
3,000
1,000
30
Model Z
6,000
2,000
50
Inspection costs totaled $100,000. Using ABC, inspections costs allocated to each unit of Model Z would be
a. $ 6.67
b. $ 8.33
c. $10.00
d. Some other number
c 37. Cadott Manufacturing produces three products. Production and cost information show the following:
Units produced
Direct labor hours
Number of inspections
Model X
1,000
2,000
20
Model Y
3,000
1,000
30
Model Z
6,000
2,000
50
Inspection costs totaled $100,000. Using direct labor hours as the allocation base, inspections costs
allocated to each unit of Model X would be
a. $10.00
b. $20.00
c. $40.00
d. Some other number
a 38. Cadott Manufacturing produces three products. Production and cost information show the following:
Units produced
Direct labor hours
Number of inspections
Model X
1,000
2,000
20
Model Y
3,000
1,000
30
Model Z
6,000
2,000
50
Inspection costs totaled $100,000. . Using direct labor hours as the allocation base, inspections costs
allocated to each unit of Model Y would be
a. $6.67
b. $10.00
c. $20.00
d. Some other number
a 39. Cadott Manufacturing produces three products. Production and cost information show the following:
Units produced
Direct labor hours
Number of inspections
Model X
1,000
2,000
20
Model Y
3,000
1,000
30
Model Z
6,000
2,000
50
17
Inspection costs totaled $100,000. Using direct labor hours as the allocation base, inspections costs
allocated to each unit of Model Z would be
a. $6.67
b. $8.33
c. $10.00
d. Some other number
b 40. Superior Inc. produces three products. Production and cost information is as follows:
Units produced
Direct labor hours
Number of setups
Model Q
2,000
4,000
100
Model R
6,000
2,000
150
Model S
12,000
4,000
250
The consumption ratios for number of setups would be:
Q
R
S
a. 40%-20%-40%
b. 20%-30%-50%
c. 10%-30%-60%
d. Some other numbers
c 41. Superior Inc. produces three products. Production and cost information is as follows:
Units produced
Direct labor hours
Number of setups
Model Q
2,000
4,000
100
Model R
6,000
2,000
150
Model S
12,000
4,000
250
The consumption ratios based on units produced would be:
Q
R
S
a. 40%-20%-40%
b. 20%-30%-50%
c. 10%-30%-60%
d. Some other numbers
a 42. Superior Inc. produces three products. Production and cost information is as follows:
Units produced
Direct labor hours
Number of setups
Model Q
2,000
4,000
100
Model R
6,000
2,000
150
Model S
12,000
4,000
250
The consumption ratios for direct labor hours would be:
Q
R
S
a. 40%-20%-40%
b. 20%-30%-50%
c. 10%-30%-60%
d. Some other numbers
c 43. Waupaca Company produces three products with the following production and cost information:
Units produced
Direct labor hours (total)
Number of setups
Number of shipments
Engineering change orders
Model A
2,000
4,000
100
200
15
Model B
6,000
2,000
150
225
10
Model C
12,000
4,000
250
275
5
Overhead costs include setups $90,000; shipping costs $140,000; and engineering costs $180,000. What would
be the per unit overhead cost for Model A if direct labor hours were the allocation base?
a. $20.50
b. $41.00
c. $82.00
d. Some other number
b 44. Waupaca Company produces three products with the following production and cost information:
Units produced
Direct labor hours (total)
Number of setups
Number of shipments
Engineering change orders
Model A
2,000
4,000
100
200
15
Model B
6,000
2,000
150
225
10
Model C
12,000
4,000
250
275
5
Overhead costs include setups $90,000; shipping costs $140,000; and engineering costs $180,000. What would
be the per unit overhead cost for Model A if activity-based costing were used?
a. $20.50
b. $74.00
c. $82.00
d. Some other number
a 45. Waupaca Company produces three products with the following production and cost information:
Units produced
Direct labor hours (total)
Number of setups
Number of shipments
Engineering change orders
Model A
2,000
4,000
100
200
15
Model B
6,000
2,000
150
225
10
Model C
12,000
4,000
250
275
5
Overhead costs include setups $90,000; shipping costs $140,000; and engineering costs $180,000. What would
be the per unit overhead cost for Model B if activity-based costing were used?
a. $22.00
b. $66.00
c. $123.00
d. Some other number
a 46. Waupaca Company produces three products with the following production and cost information:
Units produced
Model A
2,000
Model B
6,000
Model C
12,000
18
Direct labor hours (total)
Number of setups
Number of shipments
Engineering change orders
4,000
100
200
15
2,000
150
225
10
4,000
250
275
5
Overhead costs include setups $90,000; shipping costs $140,000; and engineering costs $180,000. What would
be the per unit overhead cost for Model C if activity-based costing were used?
a. $10.83
b. $32.50
c. $245.28
d. Some other number
c 47. Kimball Company produces two products in a single factory. The following production and cost information
has been determined:
Model 1
Units produced
1,000
Material moves (total)
100
Testing time (total)
250
Direct labor hours per unit
1
Model 2
200
40
125
5
The controller has determined total overhead to be $480,000. $120,000 relates to material moves; $150,000
relates to testing; the remainder is related to labor time.
If Kimball uses direct labor hours to allocate overhead to each model, what would overhead per unit be for
Model 1?
a. $10.00
b. $120.00
c. $240.00
d. $400.00
b 48. Kimball Company produces two products in a single factory. The following production and cost information
has been determined:
Model 1
Units produced
1,000
Material moves (total)
100
Testing time (total)
250
Direct labor hours per unit
1
Model 2
200
40
125
5
The controller has determined total overhead to be $480,000. $140,000 relates to material moves; $150,000
relates to testing; the remainder is related to labor time.
If Kimball uses activity-based costing to allocate overhead to each model, what would overhead per unit be
for Model 1?
a. $400.00
b. $295.00
c. $240.00
d. $120.00
d 49. Kimball Company produces two products in a single factory. The following production and cost information
has been determined:
Model 1
Units produced
1,000
Material moves (total)
100
Testing time (total)
250
Direct labor hours per unit
1
Model 2
200
40
125
5
The controller has determined total overhead to be $480,000. $140,000 relates to material moves; $150,000
relates to testing; the remainder is related to labor time.
If Kimball uses direct labor hours to allocate overhead to each model, what would overhead per unit be for
Model 2?
a. $158.33
b. $400.00
c. $950.00
d. $1,200.00
c 50. Kimball Company produces two products in a single factory. The following production and cost information
has been determined:
Model 1
Units produced
1,000
Material moves (total)
100
Testing time (total)
250
Direct labor hours per unit
1
Model 2
200
40
125
5
The controller has determined total overhead to be $480,000. $140,000 relates to material moves; $150,000
relates to testing; the remainder is related to labor time.
If Kimball uses activity-based costing to allocate overhead to each model, what would overhead per unit be
for Model 2?
a. $158.33
b. $415.93
c. $925.00
d. Some other number
True-False
F
1. ABC can only be used in a company that produces a single product.
F
2. A company that uses only volume-based measures will overcost its low-volume products.
T
3. ABC will be most useful in estimating fixed costs.
T
4. Two major influences on costs are complexity and diversity.
T
5. Volume-based measures will tend to overcost high volume products.
19
F
6. Activities that drive resource requirements are known as activity drivers.
F
7. ABC is required for GAAP financial reporting.
F
8. ABC will benefit a JIT operation more than a non-JIT operation.
F
9. External failure costs are made up solely of opportunity costs.
F 10. The acceptable quality level is the point where internal failure costs are minimized.
Problems
1. Scottso Enterprises incurs $300,000 in manufacturing overhead costs each month. The company has been
allocating overhead to individual product lines based on direct labor hours.
Amount
In Pool
-------$100,000
150,000
50,000
-------Total overhead costs
$300,000
========
Two products have the following characteristics:
Cost driver
----------Direct labor hours
Number of batches
Design changes
Product X
--------1,000
10
1
Direct labor hours
Number of batches
Design changes
Amount of
Activity
--------25,000
200
125
Product Y
--------400
20
15
a. Determine the overhead to be allocated to each product using direct labor hours as the only cost driver.
b. Determine the overhead to be allocated to each product using the three drivers identified.
SOLUTION:
a.
Product X: $12,000
Product Y: $ 4,800
[1,000 x ($300,000/15,000)]
[400 x ($300,000/15,000)]
b.
Product X: $11,900; Product Y: $22,600
Cost driver
----------Direct labor hours
Number of batches
Design changes
Direct labor hours,
Number of batches
Design changes
Amount
In Pool
-------$100,000
150,000
50,000
Amount of
Activity
--------25,000
200
125
Product X
--------$4,000
7,500
400
-----$11,900
Product Y
--------$1,600
15,000
6,000
-----$22,600
Rate
-------$ 4.00
750.00
400.00
2. Lewis Company has two major segments with the following information:
Annual revenue
Annual salesperson salaries
Number of customers
Miles driven
Upstate
$200,000
$30,000
50
80,000
Downstate
$600,000
$45,000
75
40,000
Total_
$800,000
$75,000
125
The business also has overhead costs as follows:
Cost pool
Travel
Entertainment
Administrative
Total
a.
b.
c.
d.
Cost in pool
$ 36,000
144,000
150,000
-------$330,000
Cost driver__________
miles driven
number of customers
salaries
Allocate the overhead costs to the segments based on sales revenue.
Determine the income of each segment.
Allocate the overhead costs to the segments using ABC.
Determine the income of each segment under ABC.
SOLUTION:
a.
Upstate: $82,500 [$330,000 x ($200,000/$800,000)]
Downstate: $247,500 [$330,000 x ($600,000/$800,000)]
b.
Upstate: $87,500 [$200,000 - $30,000 - $82,500]
Downstate: $307,500 [$600,000 - $45,000 - $247,500]
c. & d.
Annual revenue
Annual salesperson salaries
Travel
Entertainment
Administrative
Income
Upstate
$200,000
30,000
24,000
57,600
60,000
------$ 28,400
Downstate
$600,000
45,000
12,000
86,400
90,000
------$366,600
20
Total_
$800,000
75,000
36,000
144,000
150,000
------$395,000
3. Johnson & Mathew is an architectural and landscape services firm. The firm operates in three major segments.
The following information has been obtained,
New Design
$500,000
50
6,000
Annual revenues
Number of jobs
Chargeable hours
Remodel
$1,200,000
150
10,000
Landscape
$300,000
200
14,000
Total__
$2,000,000
400
30,000
Salaries for the year were $800,000; overhead for the year was $1,000,000.
a.
b.
c.
Determine the profits for each segment, assuming costs are allocated based on annual revenues.
Determine the profits for each segment, assuming costs are allocated based on the number of jobs.
Determine the profits for each segment, assuming costs are allocated based on chargeable hours.
SOLUTION:
a.
New Design: $50,000 [$500,000 - ($1,800,000 x $500,000/$2,000,000)]
Remodel: $120,000 [$1,200,000 - ($1,800,000 x $1,200,000/$2,000,000)]
Landscape $30,000 [$300,000 - ($1,800,000 x $300,000/$2,000,000)]
b.
New Design: $275,000 [$500,000 - ($1,800,000 x 50/400)]
Remodel: $525,000 [$1,200,000 - ($1,800,000 x 150/400)]
Landscape $(600,000) [$300,000 - ($1,800,000 x 200/400)]
c.
New Design: $140,000 [$500,000 - ($1,800,000 x 6,000/30,000)]
Remodel: $600,000 [$1,200,000 - ($1,800,000 x 10,000/30,000)]
Landscape $(540,000) [$300,000 - ($1,800,000 x 14,000/30,000)]
4. Coleman Company produces three products, X, Y, & Z. The income statement for the firm as a whole is:
Sales
Less variable costs
$1,850,000
1,310,000
---------$ 540,000
Contribution margin
Less fixed costs
Selling
330,000
Administrative
180,000
-------
510,000
---------$
30,000
Net income
The sales, variable costs, and line-sustaining fixed costs for the four products are:
Sales
Variable costs
Line-sustaining costs
a.
Q___
$250,000
60%
$90,000
R___
$400,000
65%
$130,000
S_ __
$1,200,000
75%
$ 230,000
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___
$250,000
150,000
------Contribution margin
$100,000
Line-sustaining costs
90,000
------Segment income
$ 10,000
Company-sustaining
Sales
Variable costs
R___
$400,000
260,000
------$140,000
130,000
------$ 10,000
S ___
$1,200,000
900,000
--------$ 300,000
230,000
--------$
70,000
Enterprise income
Total _
$1,850,000
1,310,000
--------$ 540,000
450,000
--------$
90,000
60,000
--------$
30,000
5. 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
$750,000
$800,000
$1,450,000
$3,000,000
Number of clients
50
150
200
400
Chargeable hours
6,000
10,000
14,000
30,000
Total salaries for the year were $900,000; overhead was $600,000.
a.
b.
Determine the profits for each segment, assuming costs are allocated based on annual revenues.
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: $375,000
Corporate: $400,000
Celebrity: $725,000
b.
Annual revenues
Salaries
Chargeable hours
Profits
[$750,000 - ($1,500,000 x $750,000/$3,000,000)]
[$800,000 - ($1,500,000 x $800,000/$3,000,000)]
[$1,450,000 - ($1,500,000 x $1,450,000/$3,000,000)]
Political
$750,000
180,000
120,000
-------$450,000
Corporate
$800,000
300,000
200,000
-------$300,000
Celebrity
$1,450,000
420,000
280,000
--------$ 750,000
Total__
$3,000,000
900,000
600,000
--------$1,500,000
6. Danner Company incurs $1,600,000 in manufacturing overhead costs each month. The company has been allocating
overhead to individual product lines based on direct labor hours.
Cost driver
----------Direct labor hours
Number of setups
Amount
In Pool
-------$500,000
700,000
Amount of
Activity
--------40,000
1,000
21
Number of tests
400,000
---------$1,600,000
==========
Total overhead costs
500
Two products have the following characteristics:
Product S
--------2,000
20
2
Direct labor hours
Number of setups
Number of tests
Product T
--------1,000
100
150
a. Determine the overhead to be allocated to each product using direct labor hours as the only cost driver.
b. Determine the overhead to be allocated to each product using the three drivers identified.
SOLUTION:
a.
Product S: $80,000
Product T: $40,000
[2,000 x ($1,600,000/40,000)]
[1,000 x ($1,600,000/40,000)]
b.
Product S: $40,600; Product T: $202,500
Cost driver
----------Direct labor hours
Number of setups
Number of tests
Direct labor hours,
Number of setups
Number of tests
Amount
In Pool
-------$500,000
700,000
400,000
Amount of
Activity
--------40,000
1,000
500
Product S
--------$25,000
14,000
1,600
-----$40,600
Product T
--------$12,500
70,000
120,000
------$202,500
Rate
-------$ 12.50
700.00
800.00
7. Seneca Company has two products with the following information:
Engine
Rebuilds
$1,200,000
400,000
250,000
8,000
425
Annual revenue
Material costs
Labor costs
Number of receipts
Number of batches
Race
Cars
$1,400,000
$600,000
150,000
2,000
75
Total__
$2,600,000
$1,000,000
$400,000
The business also has overhead costs as follows:
Cost pool
Receiving
Material moves
Administrative
Cost in pool
$300,000
275,000
225,000
-------$800,000
Total
a.
b.
c.
d.
Cost driver__________
number of receipts
number of batches
labor cost
Allocate the overhead costs to the segments based on material costs.
Determine the income of each segment.
Allocate the overhead costs to the segments using ABC.
Determine the income of each segment under ABC.
SOLUTION:
a.
Engines: $320,000 [$800,000 x ($400,000/$1,000,000)]
Race Cars: $480,000 [$800,000 x ($600,000/$1,000,000)]
b.
Engines: $230,000 [$1,200,000 - $400,000 - $250.000 - $320,000]
Race Cars: $170,000 [$1,400,000 - $600,000 - $150,000 - $480,000]
c. & d.
Engine
Rebuilds
$1,200,000
400,000
250,000
240,000
233,750
140,625
------$(64,375)
Annual revenue
Material costs
Labor costs
Receiving
Material moves
Administrative
Income
Race
Cars
$1,400,000
600,000
150,000
60,000
41,250
84,375
------$464,375
Total__
$2,600,000
1,000,000
400,000
300,000
275,000
225,000
-------$ 400,000
8. Ventura Company produces four products, Q, R, S & T. The income statement for the firm as a whole is:
Sales
Less variable costs
Contribution margin
Less fixed costs
Manufacturing
$320,000
Selling
290,000
Administrative
168,000
-------
$3,000,000
1,870,000
--------$1,130,000
778,000
--------$ 352,000
Net income
The sales, contribution margin ratios, and line-sustaining fixed costs for the four products are:
Q___
R___
S ___
22
T_ __
Sales
Contribution margin
Line-sustaining costs
b.
$200,000
35%
$60,000
$400,000
40%
$80,000
$1,000,000
20%
$168,000
$1,400,000
50%
$270,000
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___
$200,000
130,000
------Contribution margin
$ 70,000
Line-sustaining costs
60,000
------Segment income
$ 10,000
Company-sustaining
Sales
Variable costs
R___
$400,000
240,000
------$160,000
80,000
------$ 80,000
S_ __
$1,000,000
800,000
--------$ 200,000
168,000
--------$
32,000
T_ __
$1,400,000
700,000
--------$ 700,000
270,000
--------$ 430,000
Enterprise income
9.
Total__
$3,000,000
1,870,000
--------$1,130,000
578,000
--------$ 552,000
200,000
--------$ 352,000
DJH Corp has identified the following costs.
Costs to improve the production process
Incoming inspection costs
Design engineer salaries
Rework of defective units
Salaries for service repair workers
Warranty costs
Finished goods inspection
Scrap
$175,000
110,000
325,000
122,000
265,000
335,000
165,000
118,000
Categorize each of the costs into the appropriate quality cost category and prepare a total for each.
SOLUTION:
Prevention costs:
Costs to improve the production process
Design engineer salaries
Total prevention costs
$175,000
325,000
Appraisal costs:
Incoming inspection costs
Finished goods inspection
Total appraisal costs
$110,000
165,000
Internal failure costs:
Rework of defective units
Scrap
Total internal failure costs
$122,000
118,000
External failure costs:
Salaries for service repair workers
Warranty costs
Total external failure costs
$265,000
335,000
$500,000
275,000
240,000
600,000
10. Following is a list of activities that pertains to quality. Classify each as either external failure,
internal failure, appraisal, or prevention.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
External
Failure
Internal
Failure
External
Failure
Internal
Failure
Appraisal
Prevention
Appraisal
X
Prevention
In-process inspection
Warranty expenses
Worker training
Downtime on machinery due
to rework
Product returns
Product design
Preventive maintenance
Wages for field repair
workers
Quality laboratory
Customer complaints
SOLUTION:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
In-process inspection
Warranty expenses
Worker training
Downtime on machinery due
to rework
Product returns
Product design
Preventive maintenance
Wages for field repair
Workers
Quality laboratory
Customer complaints
X
X
X
X
X
X
X
X
X
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