SME 2001 MANAGERIAL ACCOUNTING (MAC) – QUIZ #3

Question 1: (1 point); (See Page 3)

Question 2: (1 point)

(Not a repeat question.) A company has identified the following overhead costs and cost drivers for the coming year:

Overhead Item Cost Driver Budgeted Cost Budgeted Activity Level

Machine setup Number of setups $ 20,000 100
Inspection Number of inspections $130,000 13,000
Material handling Number of material moves $80,000 4,000
Engineering Engineering hours $50,000 2,000
$280,000

The following information was collected on three jobs that were completed during the year:

Job 101 Job 102 Job 103

Direct materials $5,000 $12,000 $8,000
Direct labor $2,000 $ 2,000 $4,000
Units completed 100 50 200
Number of setups 1 2 4
Number of inspections 20 10 30
Number of material moves 30 10 50
Engineering hours 10 50 10

Budgeted direct labor cost was $100,000, and budgeted direct material cost was $280,000.

If the company uses activity-based costing, the cost of each unit of Job 102 would be:

o $39.00
o $319.00
o $159.50
o $299.00
 SME 2001 MANAGERIAL ACCOUNTING (MAC) – QUIZ #3

Question 3: (1 point)

(Not a repeat question.) Chuck's Guitar makes Traditional acoustic guitars and Concert Quality guitars. Both use essentially the same
manufacturing processes:

1. A guitar neck is cut to shape from a wooden blank using an automated milling machine and enters the assembly area.
(Not the focus of this problem.)
2. Plywood is cut in shapes that will ultimately form the figure-8-shaped box. Both guitar types use the same amount of plywood and are cut in the
same way in this activity, but the Concert Quality guitar uses much higher quality plywood that is purchased in smaller quantities.
3. The cut plywood is shaped and glued into the traditional figure-8-shaped box, and the neck is added. The assembled guitar is finish-sanded.
4. Assembled guitars are moved to another area for finishing.
5. After assembly processes are complete, the assembly area is set-up (cleaned) for the next batch to start production.
6. All laborers earn $10 per hour and do not work when guitars are not being made.

The assembly activities typically take the same amount of labor time per guitar for both types of guitar (about one labor hour per guitar.)

Expected annual indirect costs for assembly activities. Assembly Activities include cutting the plywood for the box, shaping, gluing, attaching the
milled neck, and sanding.

Activities
Plywood purchasing $2,400
Plywood cutting $6,000
Shape, Glue and Sand Guitar $18,000
Setup of assembly area $2,100
Total $28,500

Other information expected for the year

Traditional Concert Quality
Annual Production 400 guitars 200 guitars
Quantity of Wooden Blanks Milled 408 blanks 206 blanks
Milling Machine Hours 204 hours 154.5 hours
Batch size for production 40 guitars 20 guitars
Total Number of Plywood Purchase Orders 15 orders 25 orders
Total Direct Labor Hours @ 10/hr. (activities do not include Direct labor costs) 400 hours 200 hours
Total Direct Materials/guitar $56 each $80 each
 SME 2001 MANAGERIAL ACCOUNTING (MAC) – QUIZ #3

Using the given cost drivers, calculate the application rate for each of the following costs using ABC:

Activity Cost Driver Cost Driver Rate

Plywood purchasing $2,400 # of Purchase Orders
Plywood cutting $6,000 # of Guitars
Shape, Glue and Sand Guitar $18,000 # of Guitars
Setup of Production area $2,100 # of Setups

Calculate the cost of a Concert Guitar that completes the assembly activity using ABC. Assume that the direct materials cost includes all costs of
a neck passed from the milling operation.

o $52.75
o $71.38
o $142.75
o $90.00

Question 1: (1 point)

Factory Company makes two products, X and Z. X is being introduced this period, whereas Z has been in production for 2 years. For the period
about to begin, 1,000 units of each product are to be manufactured. Assume that the only relevant overhead item is the cost of engineering
change orders; that X and Z are expected to require four and two change orders, respectively; that X and Z are expected to require 2 and 3
machine hours, respectively; and that the cost of a change order is $800.

If Factory applies engineering change order costs on the basis of machine hours, the cross-subsidy arising from this plant-wide rate (peanut-
butter) costing approach is:

o $960.
o $4,800.
o $1,280
o $1,600
 SME 2001 MANAGERIAL ACCOUNTING (MAC) – QUIZ #3

Question 4: (1 point)

New-Rage Cosmetics has used a traditional cost accounting system to apply quality control costs uniformly to all products at a rate of 20% of
direct labor cost. Monthly direct labor cost for Satin Sheen makeup is $27,500. In an attempt to more equitably distribute quality control costs,
New-Rage is considering activity-based costing. The monthly data shown in the chart below have been gathered for Satin Sheen makeup.

Activity Cost Driver Cost Rates Quantity for Satin Sheen

Incoming material inspection Type of material $11.50 per type 12 types
In-Process Units Inspection Number of Units $0.14 per Unit 17,500 units
Product Certification Per order $77 per Order 25 orders

The monthly quality control cost assigned to Satin Sheen makeup using activity-based costing is:

o $220 per order

o $987 lower than the cost using the traditional system
o $987 higher than the cost using the traditional system
o $5,500

Question 5: (1 point)

Caroline’s Candles makes a wide variety and size of candles which they sell to Yankee Candle. The company currently uses a job order costing
system where raw materials and direct labor are traced directly to each job while overhead is applied using a plant wide rate based on pounds of
wax used in each job. For the current year, Caroline, the owner and CFO, estimates overhead cost will be $450,000 and 750,000 pounds of wax
will be used in production.

Job HS875 is a 300-unit batch of a large candle designed for emergency use during power failures. Job HS875 uses 2.4 pounds of wax per unit at
a cost of $.80 per pound plus one wick at a cost of $.30 per wick; direct labor workers spend 3 minutes per unit at $10 per hour plus 30% for fringe
benefits. Caroline prices her candles to achieve 40% gross margin.

The price of one unit of Job HS875 using the current job order costing system is:

o $6.68
o $4.78
o $6.03
o $7.18

Question 6: (1 point)

A basic assumption of activity-based costing (ABC) is that:

o All manufacturing costs vary directly with units of production

o Products or services require the performance of activities, and activities consume resources
o Only costs that respond to unit-level drivers are product costs.
o Only variable costs are included in activity cost pools.
 SME 2001 MANAGERIAL ACCOUNTING (MAC) – QUIZ #3

Question 7: (1 point)

(Not a repeat question.) ProtekEye manufactures protective eyewear sold by major sporting goods stores. It has a variety of products with
different specifications that make them suitable for activities such as hunting, woodworking, and football. The factory conversion costs include:

ABC (in thousands)

Conversion Cost Budgeted Amounts
Production Salaries $150
Inspection & Finish Salaries $75
Supervisor Salaries $180
Production Scheduling Salaries $150
Occupancy costs $500
Equipment Depreciation $750
Software Amortization $500
$2,305

As orders arrive electronically from customers, a production scheduler assigns a job number for each type of eyewear ordered and separates
large orders for the same eyewear into multiple jobs (maximum 2,500 items/job). One order could have three jobs for example, one job for a low
volume order of hunting eyewear and two for a large order of diving eyewear; this prevents jobs from varying greatly in size. The scheduler
assigns the production of each job to a worker, making sure that the jobs will be completed at approximately the same time so they can be
shipped as one order to the customer.

Production workers receive job’s specifications electronically from the scheduler and the job’s materials arrive on a conveyor system. To produce
the job, the worker programs the equipment and loads the correct frame and strapping system (materials). The equipment creates the proper lens
and inserts it into the frame and strapping system. Production workers have up to 4 jobs in production at one time; the number of items being
produced in the job isn’t as important to their workload as the number of jobs they manage at one time. Workers are responsible for identifying
defective items during production, stopping the line, correcting the problem and the proceeding.

Once a job is completed, the production worker either sends the job to the inspection & finishing area, where items are inspected and/or protective
coating applied to each item, or directly to shipping if neither inspection nor protective coating is required on the job. To understand the costs of
activities, management decided to implement an ABC system. They decided to cost three activities—scheduling, production and inspecting &
finishing. Supervisors estimate that they spend an equal amount of time on each of the three activities. The production area has 8,000 square feet
while the inspection & finishing area occupies 1,500 square feet; 500 square feet is attributed to scheduling. Equipment is dedicated to activities,
of the depreciation; $300 belongs to production; $250 to scheduling and the remainder is for inspecting and finishing. Software is heavily used in
the scheduling activity; management estimates that 70% of it is for scheduling and the remainder is split evenly between the two other activities.
 SME 2001 MANAGERIAL ACCOUNTING (MAC) – QUIZ #3

Cost/Activity Budgeted Amount Scheduling Production Inspect & Finish

Production Salaries $150
Inspect & Finish Salaries $75
Supervisor Salaries $180
Production Scheduling Salaries $150
Occupancy Cost $500
Depreciation $750
Software Amortization $500
Total Cost $2,305

What resource driver would you use to allocate occupancy cost to activities, and how much would you allocate to Inspect & Finish?

o Square feet occupied, $25

o Square feet occupied, $400
o Square feet occupied, $75
o Fairness, equal amounts to activities, $167
 SME 2001 MANAGERIAL ACCOUNTING (MAC) – QUIZ #3

Question 8: (1 point)

Not a repeat question.) Guess Klein produces designer clothing such as T-shirts and jeans from fabric purchased from several nearby factories.
The company's factory has two departments, Cutting and Sewing. The Cutting department, which cuts the garments from patterns, is a machine-
intensive operation. It takes three times longer to cut and sew jeans compared to T-shirts. The Sewing department stitches the cut fabric, sews
zippers and buttons and does quality checking. While stitching is highly automated, sewing zippers and buttons and performing quality checks is
manual.

The company has decided to redo their accounting system and move to an activity-based cost system. Table 1 shows the five activity cost pools
which include all of the company's direct labor and manufacturing overhead costs. It also shows the cost drivers for each pool. Table 2 shows the
cost drivers consumed by the two products. Table 3 shows budgeted product data for Jeans and T-shirts.

Table 1: Guess Klein Activity Cost Pools

Activity Cost Cost Driver
Maintain Equipment $56,000 Machine hours
Cut 276,000 Number of cuts
Sew 212,000 Number of sides
Button/Zipper 95,500 Labor hours
Check/Move Goods 45,500 Number of moves
Total $685,000

Table 2: Guess Klein Activity Cost Drivers

Jeans T-shirts Total
Total Machine Hours 3,000 1,000 4,000
Number of cuts per garment 4 1 5
Number of sides per garment 3 1 4
Total Labor Hours 3,600 0 3,600
Total Number of Moves 200 200 400

Table 3: Budgeted Product Data for Guess Klein Garments

Product Jeans T-shirts Total
Direct Materials $125,000 $75,000 $200,000
Direct Labor (Allocated on garments produced) $65,000 $130,000 $195,000
Machine Hours 3,000 1,000 4,000
Garments Produced 50,000 100,000 150,000
 SME 2001 MANAGERIAL ACCOUNTING (MAC) – QUIZ #3

Assume total overhead allocated to Jeans and T-shirts using ABC is $471,450 and $213,550 respectively. The total cost per unit for Jeans using
ABC is (answer rounded to 2 decimals):

o $11.93
o $2.89
o $9.43
o $2.50

Question 9: (1 point)

(Not a repeat question.) The Parts Department of Reliable Plumbing Supplies provides parts to professional plumbers. The Department is open 40
hours per week, 50 weeks a year to handle customer requests. The Department has 10 employees who are all cross-trained; all work 2,000 hours
per year. They perform three activities:

• Maintain parts inventory, which involves forecasting demand for parts, reviewing part quantities each day, ordering additional parts as inventory
diminishes, and keeping the storage area clean so parts can be accessed by busy clerks. Four employees maintain parts inventory.
• Fill over-the-counter orders, which requires answering questions about parts needed, providing advice and information about parts, filling orders,
and maintaining records on part requests. During the year, employees filled 20,000 over-the-counter customer orders with an average of 2.5 parts
per order. Three employees fill over-the-counter orders.
• Fill and Ship phone/mail orders, which require selecting proper parts, packaging, and maintaining records of requests. During the year, these
employees fulfill 10,000 customer phone/mail orders with an average of 5.0 parts per order. Three employees fill and ship phone/mail orders.
The following cost data is available for the department:

Item Information Amount

Salaries and benefits Average salary and benefits is $40,000 in the department $400,000
60% of the space is used for inventory & inventory maintenance;
Rent and occupancy cost 300,000
10% is for counter service and the remained is for filling mail orders
Equipment Depreciation Used by employees to perform their tasks; necessary for all activities 50,000
Parts Average cost is $25 per part requested 1,750,000
Total $2,500,000

Refer to the original data table above but assume that the activity cost is $5.00 per part requested to "maintain parts inventory" and the activity " fill
over-the-counter orders" costs $17.50 per order. Assume the average selling price per part is $40.00, refer to the table for the cost per part. The
profit or loss on an over-the-counter order with 6 parts is:

o $42.50
o $(45.00)
o $72.50
o $192.50
 SME 2001 MANAGERIAL ACCOUNTING (MAC) – QUIZ #3

Question 10: (1 point)

Caroline’s Candles makes a wide variety and size of candles which they sell to Yankee Candle. Caroline recently learned of a new approach to job
costing – Activity Based Costing (ABC). She asked her cost accountant, Yvonne, to develop an ABC analysis. After observing operations and
talking to supervisors and line workers, Yvonne identified three activities, their cost, cost driver and cost driver quantities:

• Producing candles which included melting wax, pouring melted wax into molds, inserting the wick, and emptying the mold when the
candles have hardened. The annual activity cost is estimated at $180,000; its cost driver is pounds of wax; 750,000 pounds are expected
to be used during the year.
• Scheduling production and setting up the production line which included calibrating equipment and inspecting the first production units.
The annual activity cost is estimated at $150,000; its cost driver is number of setups; 750 setups are expected during the year.
• Inspecting and packaging completed candles into boxes for shipment to Yankee Candle. The annual activity cost is estimated at
$120,000; its cost driver number of packing boxes; 15,000 boxes are expected to be used during the year.
HS875 uses 2.4 pounds of wax per unit at a cost of $.80 per pound plus one wick at a cost of $.30 per wick; direct labor workers spend 3
minutes per unit at $10 per hour plus 30% for fringe benefits. The 300 candles being produced in Job HS875 require one setup and will be
packed 10 to a box. Caroline prices her candles to achieve 40% gross margin.

The cost of one unit of Job HS875 using the ABC costing system is:

o $2.04
o $4.91
o $12.11
o $4.26