Pat James, the purchasing agent for a local plant of the Oakden Electronics Division, was considering the possible purchase of a component from a new supplier. The component’s purchase price, $0.90, compared favorably with the standard price of $1.10. Given the quantity that would be purchased, Pat knew that the favorable price variance would help to offset an unfavorable variance for another component. By offsetting the unfavorable variance, his overall performance report would be impressive and good enough to help him qualify for the annual bonus. More importantly, a good performance rating this year would help him to secure a position at division headquarters at a significant salary increase. Purchase of the part, however, presented Pat with a dilemma. Consistent with his past behavior, Pat made inquiries regarding the reliability of the new supplier and the part’s quality. Reports were basically negative. The supplier had a reputation for making the first two or three deliveries on schedule but being unreliable from then on. Worse, the part itself was of questionable quality. The number of defective units was only slightly higher than that for other suppliers, but the life of the component was 25% less than what normal sources provided. If the part were purchased, no problems with deliveries would surface for several months. The problem of shorter life would cause eventual customer dissatisfaction and perhaps some loss of sales, but the part would last at least 18 months after the final product began to be used. If all went well, Pat expected to be at headquarters within six months. He saw little personal risk associated with a decision to purchase the part from the new supplier. By the time any problems surfaced, they would belong to his successor. With this rationalization, Pat decided to purchase the component from the new supplier. Required: 1. Do you agree with Pat’s decision? Why or why not? How important was Pat’s assessment of his personal risk in the decision? Should it be a factor? 2. Do you think that the use of standards and the practice of holding individuals accountable for their achievement played major roles in Pat’s decision? 3. Review the discussion on corporate ethical standards in Chapter 1. Identify the standards that might apply to Pat’s situation. Should every company adopt a set of ethical standards that apply to its employees, regardless of their specialty? 4. The usefulness of standard costing has been challenged in recent years. Some claim that its use is an impediment to the objective of continuous improvement (an objective that many feel is vital in today’s competitive environment). Write a short paper (individually or in a small group with two or three other students) that analyzes the role and value of standard costing in today’s manufacturing environment. Address the following questions: a. What are the major criticisms of standard costing? b. Will standard costing disappear, or is there still a role for it in the new manufacturing environment? If so, what is the role? c. Given the criticisms, can you explain why its use continues to be so prevalent? Will this use eventually change? In preparing your paper, the following references may be useful; however, do not restrict your literature search to these references. They are simply to help you get started. . Robin Cooper and Robert S. Kaplan, ‘‘Activity-Based Systems: Measuring the Costs of Resource Usage,’’ Accounting Horizons (September 1992): 1–13. . Forrest B. Green and Felix E. Amenkhienan, ‘‘Accounting Innovations: A Cross-Sectional Survey of Manufacturing Firms,’’ Journal of Cost Management (Spring 1992): 59–64. . Bruce R. Gaumnitz and Felix P. Kollaritsch, ‘‘Manufacturing Variances: Current Practice and Trends,’’ Journal of Cost Management (Spring 1991): 59–64. . Chris Guilding, Dane Lamminmaki, and Colin Drury, ‘‘Budgeting and Standard Costing Practices in New Zealand and the United Kingdom,’’ Journal of International Accounting, Vol. 33, No. 5 (1998): 569–588.
> Explain why the fixed overhead spending variance is usually very small.
> Why would an activity-based performance report be more accurate than a report based on a traditional flexible budget?
> What is the cause of an unfavorable volume variance?
> What is target costing? Describe how costs are reduced so that the target cost can be met.
> All budgets depend on the sales budget. Is this true? Explain.
> What is the role of top management in participative budgeting?
> What is participative budgeting? Discuss some of its advantages.
> Discuss the roles of monetary and nonmonetary incentives. Do you believe that nonmonetary incentives are needed? Why?
> Explain the difference between the direct method and the sequential method.
> Identify and define four different ways to manage activities so that costs can be reduced.
> What are value-added activities? Value-added costs?
> Assume that a company has decided not to allocate any support department costs to producing departments. Describe the likely behavior of the managers of the producing departments. Would this be good or bad? Explain why allocation would correct this type
> Under what conditions will the weighted average and FIFO methods give the same results?
> How can a departmental overhead system be converted to a plant wide overhead system?
> Is the cost of a job related to the price charged? Explain.
> Jarend Company produced 40,000 units last year. The information on the actual costs and budgeted costs at actual production of four activities is provided below. Required: Prepare an activity-based performance report for the four activities for the pas
> Jarend Company provided information on the following four overhead activities. Jarend has found that the following driver levels are associated with two different levels of production. Required: Prepare an activity-based flexible budget for 40,000 un
> Marvelettes Company provided the following information: Standard fixed overhead rate (SFOR) per direct labor hour …………. $5.00 Actual fixed overhead rate (AFOR) per direct labor hour …………….. $5.03 Actual direct labor hours worked (AH) ……………………………………….. 5
> Ross Company provided the following data: Standard fixed overhead rate (SFOR) …………….….. $5 per direct labor hour Actual fixed overhead costs ………………………………..…………………. $281,680 Standard hours allowed per unit ………………………………………………. 4 hours Actual production ……
> Gladys Company provided the following information: Standard variable overhead rate (SVOR) per direct labor hour …..…………. $3.70 Actual variable overhead rate (AVOR) per direct labor hour ………………….. $3.68 Actual direct labor hours worked (AH) …………………………………
> Aretha Company showed the following information for the year: Standard variable overhead rate (SVOR) per direct labor hour …..………………. $3.70 Standard hours (SH) allowed per unit …………………………………………………………… 4 Actual production ………………………………………………………………………………….
> Bowling Company budgeted the following amounts: Variable costs of production: Direct materials …… 3 pounds @ $0.60 per pound Direct labor ………………. 0.5 hr. @ $16.00 per hour VOH ………………………………………… 0.5 hr. @ $2.20 FOH: Materials handling ………….…………………….. $6,2
> Frasco Inc. produces plastic bottles. Each bottle has a standard labor requirement of 0.025 hours. During the month of April, 750,000 bottles were produced using 21,000 labor hours @ $10.00. The standard wage rate is $9.50 per hour. Required: Calculate
> Lata Inc. produces aluminum cans. Production of 12-ounce cans has a standard unit quantity of 4.5 ounces of aluminum per can. During the month of April, 300,000 cans were produced using 1,250,000 ounces of aluminum. The actual cost of aluminum was $0.09
> La Famiglia Pizzeria provided the following information for the month of October: a. Sales are budgeted to be $157,000. About 85% of sales are cash; the remainder are on account. b. La Famiglia expects that, on average, 70% of credit sales will be paid i
> Oliver Company provided the following information for the coming year: Units produced and sold ……………………………………………………………. 160,000 Cost of goods sold per unit …………………………………………………………… $ 6.30 Selling price ………………………………………………………………………………. $ 10.80 Variable sel
> Andrews Company manufactures a line of office chairs. Each chair takes $14 of direct materials and uses 1.9 direct labor hours at $16 per direct labor hour. The variable overhead rate is $1.20 per direct labor hour and the fixed overhead rate is $1.60 pe
> Patrick Inc. makes industrial solvents. Planned production in units for the first three months of the coming year is: January …………………………….. 43,800 February ……………………………. 41,000 March ……………………………….. 50,250 Each drum of industrial solvent takes 0.3 direct
> Patrick Inc. makes industrial solvents. In the first four months of the coming year, Patrick expects the following unit sales: January …………………………….. 41,000 February …………………………… 38,000 March ………………………………. 50,000 April ………………………………….. 51,000 Patrick’s po
> Perry National Bank has collected the following information for four activities and two types of credit cards: There are 5,000 holders of Classic cards and 20,000 holders of the Gold cards. Required: Calculate the unit cost (rounded to the nearest cen
> Botas Company produces two types of boots: vaquero and vaquera. There are four activities associated with the two products. Drivers for the four activities are as follows: Required: 1. Calculate the consumption ratios for the four drivers. 2. Is there
> Lissen Phones uses Alpha Electronics and La Paz Company to buy two electronic components used in the manufacture of its cell phones: Component 125X and Component 30Y. Consider two activities: testing and reordering components. After the two components ar
> Dormirbien Company produces mattresses for 20 retail outlets. Of the 20 retail outlets, 19 are small, separately owned furniture stores and one is a retail chain. The retail chain buys 60% of the mattresses produced. The 19 smaller customers purchase mat
> Integer Inc. had the following production and cost information for its fabrication department during April (materials are added at the beginning of the fabrication process): Production: Units in process, April 1, 50% complete with respect to conversion
> Murray Inc. manufactures bicycle frames in two departments: Cutting and Welding. Murray uses the weighted average method. Manufacturing costs are added uniformly throughout the process. The following are cost and production data for the cutting departmen
> Inca Inc. produces soft drinks. Mixing is the first department and its output is measured in gallons. Inca uses the FIFO method. All manufacturing costs are added uniformly. For July, the mixing department provided the following information: Production:
> Harry Johnson, the chief financial officer of Ur Thrift Inc, a large retailer, had just finished a meeting with the Roger Swasey, the chief financial officer of the large retailer, and Connie Baker, its environmental officer. Over the years, Harry had ov
> Inca Inc. produces soft drinks. Mixing is the first department and its output is measured in gallons. Inca uses the FIFO method. All manufacturing costs are added uniformly. For July, the mixing department provided the following information: Production:
> Lorale Company, a producer of recreational vehicles, recently decided to begin producing a major subassembly for jet skis. The subassembly would be used by Lorale’s jet ski plants and also would be sold to other producers. The decision was made to lease
> Consider the following conversation between Leonard Bryner, president and manager of a firm engaged in job manufacturing, and Chuck Davis, certified management accountant, the firm’s controller. Leonard: Chuck, as you know, our firm has been losing marke
> Sharp Paper Inc. has three paper mills, one of which is located in Memphis, Tennessee. The Memphis mill produces 300 different types of coated and uncoated specialty printing papers. Management was convinced that the value of the large variety of product
> AKL Foundry manufactures metal components for different kinds of equipment used by the aerospace, commercial aircraft, medical equipment, and electronic industries. The company uses investment casting to produce the required components. Investment castin
> Golding Manufacturing, a division of Farnsworth Sporting Inc., produces two different models of bows and eight models of knives. The bow-manufacturing process involves the production of two major subassemblies: the limbs and the handles. The limbs pass t
> Consider the following conversation between Gary Means, manager of a division that produces industrial machinery, and his controller, Donna Simpson, a certified management accountant and certified public accountant: Gary: Donna, we have a real problem. O
> Tonya Martin, CMA and controller of the Parts Division of Gunderson Inc., was meeting with Doug Adams, manager of the division. The topic of discussion was the assignment of overhead costs to jobs and their impact on the division’s pricing decisions. The
> Reynolds Printing Company specializes in wedding announcements. Reynolds uses an actual job-order costing system. An actual overhead rate is calculated at the end of each month using actual direct labor hours and overhead for the month. Once the actual c
> Linda Ellis, division manager, is evaluated and rewarded on the basis of budgetary performance. Linda, her assistants, and the plant managers are all eligible to receive a bonus if actual divisional profits are between budgeted profits and 120% of budget
> Dr. Roger Jones is a successful dentist but is experiencing recurring financial difficulties. For example, Jones owns his office building, which he leased to the professional corporation that housed his dental practice (he owns all shares in the corporat
> Fuerza Inc. produces a protein drink. The product is sold by the gallon. The company has two departments: Mixing and Bottling. For August, the bottling department had 60,000 gallons in beginning inventory (with transferred-in costs of $213,000) and compl
> Paul Golding and his wife, Nancy, established Crunchy Chips in 1938. Over the past 60 years, the company has established distribution channels in 11 western states, with production facilities in Utah, New Mexico, and Colorado. In 1980, Paul’s son, Edward
> Mac Ericson and Tammy Ferguson met at an IMA conference two months ago and began dating. Mac is the controller for Longley Enterprises, and Tammy is a marketing manager for Sharp Products. Longley is a major supplier for Piura Products, a competitor of S
> An example of a societal cost is a. medical care due to polluted air. b. recycling scrap. c. disposing of toxic materials. d. maintaining pollution equipment. e. All of these.
> An example of an environmental internal failure cost is a. cleaning up oil spills. b. damaging ecosystems from solid waste disposal. c. cost of operating scrubbers. d. measuring levels of contamination. e. None of these.
> Which of the following represents environmental detection costs? a. Depreciation on scrubbers b. Recycling products c. Disposing of toxic materials d. Carrying out contamination tests e. None of these.
> Which of the following is an external failure cost (quality)? a. Design reviews b. Retesting c. Rework d. Lost sales e. All of these.
> Which of the following is an internal failure cost (quality)? a. Supplier evaluation and selection b. Packaging inspection c. Retesting d. Product liability e. Complaint adjustment
> Which of the following is an appraisal cost (quality)? a. Manager of an inspection team b. Quality reporting c. Design reviews d. Warranties e. Retesting
> Which of the following is a quality prevention cost? a. Quality planning b. Supplier evaluation and selection c. Quality audits d. Field trials e. All of these.
> Quillen Company manufactures a product in a factory that has two producing departments, Cutting and Sewing, and two support departments, S1 and S2. The activity driver for S1 is number of employees, and the activity driver for S2 is number of maintenance
> Striving to produce the same activity output with lower costs for the input used is concerned with which of the following dimensions of activity performance? a. Quality b. Time c. Activity sharing d. Effectiveness e. Efficiency
> Which of the following is a nonunit-level driver? a. Direct labor hours b. Machine hours c. Direct materials d. Setup hours e. Assembly hours
> Thom Company produces 60 units in 10 hours. The velocity for Thom a. is 6 units per hour. b. is 10 hours per unit. c. is 10 minutes per unit. d. 6 minutes per unit. e. cannot be calculated.
> The job-order cost sheet is a subsidiary account to a. Raw Materials. b. Work in Process. c. Finished Goods. d. Cost of Goods Sold. e. Jobs Started.
> Thom Company produces 60 units in 10 hours. The cycle time for Thom a. is 6 units per hour. b. is 10 hours per unit. c. is 10 minutes per unit. d. is 6 minutes per unit. e. cannot be calculated.
> The cost of inspecting incoming parts is most likely to be reduced by a. activity sharing. b. activity elimination. c. activity reduction. d. activity selection. e. None of these.
> Suppose that a company is spending $60,000 per year for inspecting, $30,000 for purchasing, and $40,000 for reworking products. A good estimate of nonvalue-added costs would be a. $70,000. b. $130,000. c. $40,000. d. $90,000. e. $100,000.
> Which of the following are nonvalue-added activities? a. Moving goods b. Storing goods c. Inspecting finished goods d. Reworking a defective product e. All of these.
> A forklift and its driver used for moving materials are examples of a. activity inputs. b. activity output measures. c. resource drivers. d. activity outputs. e. root causes.
> Lambert Company has two suppliers: Deming and Leming. The cost of warranty work due to defective components is $2,000,000. The total units repaired under warranty average 100,000, of which 90,000 have components from Deming and 10,000 have components fro
> At the beginning of June, Rhone Company had two jobs in process, Job 44 and Job 45, with the following accumulated cost information: During June, two more jobs (46 and 47) were started. The following direct materials and direct labor costs were added t
> This year, Lambert Company will ship 1,500,000 pounds of goods to customers at a cost of $1,200,000. If a customer orders 10,000 pounds and produces $200,000 of revenue (total revenue is $20 million), the amount of shipping cost assigned to the customer
> Which of the following is a true statement about activity-based supplier costing? a. The cost of a supplier is the purchase price of the components or materials acquired. b. It encourages managers to increase the number of suppliers. c. It encourages ma
> Which of the following is a true statement about activity-based customer costing? a. Customer diversity requires multiple drivers to trace costs accurately to customers. b. Customers consume customer-driven activities in the same proportions. c. It seld
> A batch-level driver is consumed by a product each and every time that a. a batch of products is produced. b. a unit is produced. c. a purchase order is issued. d. a customer complains. e. None of these.
> The predetermined overhead rate equals a. actual overhead divided by actual activity level for a period. b. estimated overhead divided by estimated activity level for a period. c. actual overhead minus estimated overhead. d. actual overhead multiplied b
> The mixing department incurred $46,000 of manufacturing costs during the month of September. The department transferred out 2,300 units and had 500 units in EWIP, 40% complete. There was no BWIP. The cost of EWIP is a. $9,200. b. $10,000. c. $3,680. d.
> The mixing department incurred $46,000 of manufacturing costs during the month of September. The department transferred out 2,300 units and had 500 units in EWIP, 40% complete. There was no BWIP. The cost of goods transferred out is a. $42,320. b. $46,
> The mixing department incurred $46,000 of manufacturing costs during the month of September. The department transferred out 2,300 units and had 500 units in EWIP, 40% complete. There was no BWIP. The unit cost for the month of September is a. $20. b. $
> During the month of May, the grinding department produced and transferred out 2,300 units. EWIP had 500 units, 40% complete. There was no BWIP. The equivalent units of output for May are a. 2,000. b. 2,500. c. 2,300. d. 2,800. e. none of these.
> The costs transferred from a prior process to a subsequent process are a. treated as another type of materials cost for the receiving department. b. referred to as transferred-in costs (for the receiving department). c. referred to as the cost of goods
> Patrick Inc. makes industrial solvents. Budgeted direct labor hours for the first three months of the coming year are: January ……………………………………….. 13,140 February ……………………………………… 12,300 March ………………………………………….. 15,075 The variable overhead rate is $0.70
> To record the transfer of costs from a prior process to a subsequent process, the following entry would be made: a. debit Finished Goods and credit Work in Process. b. debit Work in Process (subsequent department) and credit Transferred-In Materials. c.
> Sequential processing is characterized by a. a pattern where partially completed units are worked on simultaneously. b. a pattern where partially completed units must pass through one process before they can be worked on in later processes. c. a pattern
> Transferred-in goods are treated by the receiving department as a. units started for the period. b. a material added at the beginning of the process. c. a category of materials separate from conversion costs. d. all of these. e. none of these.
> Job-order costing works well whenever a. homogeneous products pass through a series of processes and receive similar doses of conversion inputs and different doses of material inputs. b. homogeneous products pass through a series of processes and receiv
> With no uniform inputs, the cost of EWIP is calculated by a. adding the materials cost to the conversion cost. b. subtracting the cost of goods transferred out from the total cost of materials. c. multiplying the unit cost in each input category by the
> In a normal costing system, the cost of a job includes a. actual direct materials, actual direct labor, and estimated (applied) overhead. b. estimated direct materials, estimated direct labor, and estimated overhead. c. actual direct materials, actual d
> When materials are added either at the beginning or the end of the process, a unit cost should be calculated for the a. materials and conversion categories. b. materials category only. c. materials and labor categories. d. conversion category only. e. l
> For August, Lanny Company had 25,000 units in BWIP, 40% complete, with costs equal to $36,000. During August, the cost incurred was $450,000. Using the FIFO method, Lanny had 125,000 equivalent units for August. There were 100,000 units transferred out d
> Assume for August that Faust Manufacturing has manufacturing costs in BWIP equal to $80,000. During August, the cost incurred was $720,000. Using the FIFO method, Faust had 120,000 equivalent units for August. The cost per equivalent unit for August is
> During July, Faust Manufacturing started and completed 80,000 units. In BWIP, there were 25,000 units, 20% complete. In EWIP, there were 25,000 units, 80% complete. Using FIFO, the equivalent units are a. 80,000 units. b. 120,000 units. c. 65,000 units.
> At the beginning of the year, Hallett Company estimated the following: Hallett uses departmental overhead rates. In the cutting department, overhead is applied on the basis of machine hours. In the sewing department, overhead is applied on the basis of
> For August, Kimbrell Manufacturing has costs in BWIP equal to $112,500. During August, the cost incurred was $450,000. Using the weighted average method, Kimbrell had 125,000 equivalent units for August. There were 100,000 units transferred out during th
> During June, Kimbrell Manufacturing completed and transferred out 100,000 units. In EWIP, there were 25,000 units, 80% complete. Using the weighted average method, the equivalent units are a. 100,000 units. b. 125,000 units. c. 105,000 units. d. 110,000
> During May, Kimbrell Manufacturing completed and transferred out 100,000 units. In EWIP, there were 25,000 units, 40% complete. Using the weighted average method, the equivalent units are a. 100,000 units. b. 125,000 units. c. 105,000 units. d. 110,000
> Process costing works well whenever a. heterogeneous products pass through a series of processes and receive different doses of materials, labor, and overhead. b. material cost is accumulated by process and conversion cost is accumulated by process. c.
> The method that assigns support department costs by giving full recognition to support department interactions is known as a. the sequential method. b. the proportional method. c. the reciprocal method. d. the direct method. e. None of these.
> The method that assigns support department costs by giving partial recognition to support department interactions is known as a. the sequential method. b. the proportional method. c. the reciprocal method. d. the direct method. e. None of these.
> The ending balance of which of the following accounts is calculated by summing the totals of the open (unfinished) job-order cost sheets? a. Raw Materials b. Overhead Control c. Work in Process d. Finished Goods e. Cost of Goods Sold
> The method that assigns support department costs only to producing departments in proportion to each department’s usage of the service is known as a. the sequential method. b. the proportional method. c. the reciprocal method. d. the direct method. e. N
