Question: When activity-based costing is used, why

> The Manguino Oil Company incurred exploration costs in 2018 searching and drilling for oil as follows: Well 101 ………………………………….. $ 50,000 Well 102 ……………………………………. 60,000 Well 103 ……………………………………. 80,000 Wells 104–108 ………………………… 260,000 Total ……………………………………

> Freitas Corporation was organized early in 2018. The following expenditures were made during the first few months of the year: Attorneys’ fees in connection with the organization of the corporation …………….. $ 12,000 State filing fees and other incorporati

> On September 30, 2018, Athens Software began developing a software program to shield personal computers from malware and spyware. Technological feasibility was established on February 28, 2019, and the program was available for release on April 30, 2019.

> Early in 2018, the Excalibur Company began developing a new software package to be marketed. The project was completed in December 2018 at a cost of $6 million. Of this amount, $4 million was spent before technological feasibility was established. Excali

> Listed below are several terms and phrases associated with property, plant, and equipment and intangible assets. Pair each item from List A with the item from List B (by letter) that is most appropriately associated with it. List A List B 1. Propert

> Walgreens Boots Alliance, Inc. reported inventories of $8,678 million and $6,076 million in its August 31, 2015, and August 31, 2014, balance sheets, respectively. Cost of goods sold for the year ended August 31, 2015, was $76,520 million. The company us

> NXS Semiconductor prepares its financial statements according to International Financial Reporting Standards. The company incurred the following expenditures during 2018 related to the development of a chip to be used in mobile devices: Salaries and wage

> On January 1, 2018, the Brunswick Hat Company adopted the dollar-value LIFO retail method. The following data are available for 2018: Required: Calculate the estimated ending inventory and cost of goods sold for 2018. Cost Retail $ 71,280 $ 132,000

> Janson Pharmaceuticals incurred the following costs in 2018 related to a new cancer drug: Research for new formulas …………………………………………………. $2,425,000 Development of a new formula …………………………………………….. 1,600,000 Legal and filing fees for a patent for the new

> Delaware Company incurred the following research and development costs during 2018: Salaries and wages for lab research …………………………………………………………………. $ 400,000 Materials used in R&D projects ………………………………………………………………….………. 200,000 Purchase of equipment ……………

> In 2018, Space Technology Company modified its model Z2 satellite to incorporate a new communication device. The company made the following expenditures: Basic research to develop the technology …………………………………………………………… $2,000,000 Engineering design work

> Thornton Industries began construction of a warehouse on July 1, 2018. The project was completed on March 31, 2019. No new loans were required to fund construction. Thornton does have the following two interest-bearing liabilities that were outstanding t

> On January 1, 2018, the Highlands Company began construction on a new manufacturing facility for its own use. The building was completed in 2019. The company borrowed $1,500,000 at 8% on January 1 to help finance the construction. In addition to the cons

> On January 1, 2018, the Shagri Company began construction on a new manufacturing facility for its own use. The building was completed in 2019. The only interest-bearing debt the company had outstanding during 2018 was long-term bonds with a book value of

> On January 1, 2018, the Marjlee Company began construction of an office building to be used as its corporate headquarters. The building was completed early in 2019. Construction expenditures for 2018, which were incurred evenly throughout the year, total

> Access the FASB Accounting Standards Codification at the FASB website (www.fasb.org). Determine the specific citation for each of the following items: 1. The disclosure requirements in the notes to the financial statements for depreciation on property, p

> The FASB Accounting Standards Codification represents the single source of authoritative U.S. generally accepted accounting principles. Required: 1. Obtain the relevant authoritative literature on nonmonetary exchanges using the FASB Accounting Standard

> Refer to the situation described in BE 8–8. Assuming an income tax rate of 40%, what is LIFO liquidation profit or loss that the company would report in a disclosure note accompanying its financial statements? In BE 8–8 Esquire Inc. uses the LIFO method

> Adams Corporation uses a periodic inventory system and the retail inventory method to estimate ending inventory and cost of goods sold. The following data are available for the month of September 2018: The company used the average cost flow method and e

> Connors Corporation acquired manufacturing equipment for use in its assembly line. Below are four independent situations relating to the acquisition of the equipment. 1. The equipment was purchased on account for $25,000. Credit terms were 2/10, n/30. Pa

> The Tinsley Company exchanged land that it had been holding for future plant expansion for a more suitable parcel located farther from residential areas. Tinsley carried the land at its original cost of $30,000. According to an independent appraisal, the

> [This is a variation of the previous exercise.] Previous Exercise The Bronco Corporation exchanged land for equipment. The land had a book value of $120,000 and a fair value of $150,000. Bronco paid the owner of the equipment $10,000 to complete the exc

> The Bronco Corporation exchanged land for equipment. The land had a book value of $120,000 and a fair value of $150,000. Bronco paid the owner of the equipment $10,000 to complete the exchange which has commercial substance. Required: 1. What is the fai

> [This is a variation of the previous exercise.] Previous Exercise Cedric Company recently traded in an older model computer for a new model. The old model’s book value was $180,000 (original cost of $400,000 less $220,000 in accumulated depreciation) an

> Cedric Company recently traded in an older model computer for a new model. The old model’s book value was $180,000 (original cost of $400,000 less $220,000 in accumulated depreciation) and its fair value was $200,000. Cedric paid $60,000 to complete the

> Nvidia Corporation, a global technology company located in Santa Clara, California, reported the following information in its 2016 financial statements ($ in millions): Required: 1. Calculate the company’s 2016 fixed-asset turnover ra

> Cranston LTD. prepares its financial statements according to International Financial Reporting Standards. In October 2018, the company received a $2 million government grant. The grant represents 20% of the total cost of equipment that will be used to im

> On February 1, 2018, the Xilon Corporation issued 50,000 shares of its nopar common stock in exchange for five acres of land located in the city of Monrovia. On the date of the acquisition, Xilon’s common stock had a fair value of $18 per share. An offic

> On June 30, 2018, Kimberly Farms purchased custom-made harvesting equipment from a local producer. In payment, Kimberly signed a noninterest-bearing note requiring the payment of $60,000 in two years. The fair value of the equipment is not known, but an

> LeMay Department Store uses the retail inventory method to estimate ending inventory for its monthly financial statements. The following data pertain to one of its largest departments for the month of March 2018: Sales are recorded net of employee disc

> Esquire Inc. uses the LIFO method to value its inventory. Inventory at January 1, 2018, was $500,000 (20,000 units at $25 each). During 2018, 80,000 units were purchased, all at the same price of $30 per unit. 85,000 units were sold during 2018. Esquire

> What is the main difference between a perpetual inventory system and a periodic inventory system?

> Pro-tech Software acquired all of the outstanding stock of Reliable Software for $14 million. The book value of Reliable’s net assets (assets minus liabilities) was $8.3 million. The fair values of Reliable’s assets and liabilities equaled their book val

> Refer to the situation described in BE 10–4. What is the book value of the asset retirement liability at the end of one year? Assuming that the actual restoration costs incurred after extraction is completed are $596,000, what amount of gain or loss will

> Smithson Mining operates a silver mine in Nevada. Acquisition, exploration, and development costs totaled $5.6 million. After the silver is extracted in approximately five years, Smithson is obligated to restore the land to its original condition, includ

> Refer to the situation described in BE 10–2. Assume that Fullerton decides to use the warehouse rather than demolish it. An independent appraisal estimates the fair values of the land and warehouse at $420,000 and $280,000, respectively. Determine the am

> Fullerton Waste Management purchased land and a warehouse for $600,000. In addition to the purchase price, Fullerton made the following expenditures related to the acquisition: broker’s commission, $30,000; title insurance, $3,000; miscellaneous closing

> Beaverton Lumber purchased a milling machine for $35,000. In addition to the purchase price, Beaverton made the following expenditures: freight, $1,500; installation, $3,000; testing, $2,000; personal property tax on the machine for the first year, $500.

> In the current year, Big Burgers, Inc., expanded its fast food operations by opening several new stores in Texas. The company incurred the following costs in the current year: market appraisal ($50,000), consulting fees ($72,000), advertising ($47,000),

> Maltese Laboratories incurred the following research and developments costs related to its pharmaceutical business: Internal projects (salaries, supplies, overhead for R&D facilities) ……………………………..…………… $620,000 Payment to acquire R&D from a third party

> On February 26 a hurricane destroyed the entire inventory stored in a warehouse owned by the Rockford Corporation. The following information is available from the records of the company’s periodic inventory system: beginning inventory, $220,000; purchase

> This exercise is a continuation of BE 9–11. During 2019, purchases at cost and retail were $168,000 and $301,000, respectively. Net markups, net markdowns, and net sales for the year were $3,000, $4,000, and $280,000, respectively. The

> On January 1, 2018, Sanderson Variety Store adopted the dollar-value LIFO retail inventory method. Accounting records provided the following information: Estimate ending inventory using the dollar-value LIFO retail method. Cost Retail $ 40,800 $ 68

> Roberson Corporation uses a periodic inventory system and the retail inventory method. Accounting records provided the following information for the 2018 fiscal year: The company records sales to employees net of discounts. These discounts totaled $15,

> Explain why proponents of LIFO argue that it provides a better match of revenue and expenses. In what situation would it not provide a better match?

> Describe the three types of inventory of a manufacturing company.

> Why is the activity-based costing described in this chapter unacceptable for external financial reports?

> How can the activity rates (i.e., cost per activity) for the various activities be used to target process improvements?

> Mercer Asbestos Removal Company removes potentially toxic asbestos insulation and related products from buildings. There has been a long-simmering dispute between the company’s estimator and the work supervisors. The on-site supervisors

> Pixel Studio, Inc., is a small company that creates computer-generated animations for films and television. Much of the company’s work consists of short commercials for television, but the company also does realistic computer animations

> The operations vice president of Security Home Bank has been interested in investigating the efficiency of the bank’s operations. She has been particularly concerned about the costs of handling routine transactions at the bank and would

> Durban Metal Products, Ltd., of the Republic of South Africa makes specialty metal parts used in applications ranging from the cutting edges of bulldozer blades to replacement parts for Land Rovers. The company uses an activity-based costing system for i

> Various activities at Ming Corporation, a manufacturing company, are listed below. Each activity has been classified as a unit-level, batch-level, product-level, or customer-level activity. Required: Complete the table by providing an example of an acti

> Fogerty Company makes two products, titanium Hubs and Sprockets. Data regarding the two products follow: Additional information about the company follows: a. Hubs require $32 in direct materials per unit, and Sprockets require $18. b. The direct labor w

> Stillicum Corporation makes ultra-light-weight backpacking tents. Data concerning the company’s two product lines appear below: The company has a traditional costing system in which manufacturing overhead is applied to units based on d

> Ellix Company manufactures two models of ultra-high fi delity speakers, the X200 model and the X99 model. Data regarding the two products follow: Additional information about the company follows: a. Model X200 requires $72 in direct materials per unit,

> What is an activity variance and what does it mean?

> Hiram’s Lakeside is a popular restaurant located on Lake Washington in Seattle. The owner of the restaurant has been trying to better understand costs at the restaurant and has hired a student intern to conduct an activity-based costing

> Why is it difficult to interpret a difference between how much expense was budgeted and how much was actually spent?

> Why is the first stage of the allocation process in activity-based costing often based on interviews?

> What assumption is implicitly made about cost behavior when all of the items in a budget are adjusted in proportion to a change in activity? Why is this assumption questionable?

> Java Source, Inc. (JSI), is a processor and distributor of a variety of blends of coffee. The company buys coffee beans from around the world and roasts, blends, and packages them for resale. JSI offers a large variety of different coffees that it sells

> What assumption is implicitly made about cost behaviour when a budget is directly compared to actual results? Why is this assumption questionable?

> How does a flexible budget based on two cost drivers differ from a flexible budget based on a single cost driver?

> Thermal Rising, Inc., makes paragliders for sale through specialty sporting goods stores. The company has a standard paraglider model, but also makes custom-designed paragliders. Management has designed an activity-based costing system with the following

> What does a flexible budget performance report do that a simple comparison of budgeted to actual results does not do?

> What is a spending variance and what does it mean?

> What is a revenue variance and what does it mean?

> TipTop Flight School offers flying lessons at a small municipal airport. The school’s owner and manager has been attempting to evaluate performance and control costs using a variance report that compares the planning budget to actual re

> Exchange Corp. is a company that acts as a facilitator in tax-favored real estate swaps. Such swaps, know as 1031 exchanges, permit participants to avoid some or all of the capital gains taxes that would otherwise be due. The bookkeeper for the company h

> Refer to the data for Foam Products, Inc., in Exercise 8–12 and the following additional details concerning the activity rates in the activity-based costing system: Management has provided their ease of adjustment codes for the purpose

> Advanced Products Corporation has supplied the following data from its activity-based costing system: During the year, Advanced Products completed one order for a new customer, Shenzhen Enterprises. This customer did not order any other products durin

> Frank Weston, supervisor of the Freemont Corporation’s Machining Department, was visibly upset after being reprimanded for his department’s poor performance over the prior month. The department’s cost

> Milano Pizza is a small neighborhood pizzeria that has a small area for in-store dining as well as offering take-out and free home delivery services. The pizzeria’s owner has determined that the shop has two major cost driversâ&#1

> Several years ago, Westmont Corporation developed a comprehensive budgeting system for profit planning and control purposes. While departmental supervisors have been happy with the system, the factory manager has expressed considerable dissatisfaction wi

> Harrison Company makes two products and uses a traditional costing system in which a single plantwide predetermined overhead rate is computed based on direct labor-hours. Data for the two products for the upcoming year follow: These products are customi

> Klumper Corporation is a diversified manufacturer of industrial goods. The company’s activity based costing system contains the following six activity cost pools and activity rates: Activity data have been supplied for the following tw

> The St. Lucia Blood Bank, a private charity partly supported by government grants, is located on the Caribbean island of St. Lucia. The blood bank has just finished its operations for September, which was a particularly busy month due to a powerful hurri

> Alyeski Tours operates day tours of coastal glaciers in Alaska on its tour boat the Blue Glacier. Management has identified two cost drivers—the number of cruises and the number of passengers—that it uses in its budget

> Vulcan Flyovers offers scenic overflights of Mount St. Helens, the volcano in Washington State that explosively erupted in 1982. Data concerning the company’s operations in July appear below: The company measures its activity in terms

> Quilcene Oysteria farms and sells oysters in the Pacific Northwest. The company harvested and sold 8,000 pounds of oysters in August. The company’s flexible budget for August appears below: The actual results for August appear below:

> What are unit-level, batch-level, product-level, customer-level, and organization-sustaining activities?

> Flight Café is a company that prepares in-flight meals for airlines in its kitchen located next to the local airport. The company’s planning budget for July appears below: In July, 17,800 meals were actually served. The co

> Puget Sound Divers is a company that provides diving services such as underwater ship repairs to clients in the Puget Sound area. The company’s planning budget for May appears below: Required: During May, the company’

> Model X100 sells for $120 per unit whereas Model X200 offers advanced features and sells for $500 per unit. Management expects to sell 50,000 units of Model X100 and 5,000 units of Model X200 next year. The direct material cost per unit is $50 for Model

> Packaging Solutions Corporation manufactures and sells a wide variety of packaging products. Performance reports are prepared monthly for each department. The planning budget and flexible budget for the Production Department are based on the following fo

> The Gourmand Cooking School runs short cooking courses at its small campus. Management has identified two cost drivers that it uses in its budgeting and performance reports—the number of courses and the total number of students. For exa

> AirQual Test Corporation provides on-site air quality testing services. The company has provided the following data concerning its operations: The company uses the number of jobs as its measure of activity. For example, mobile lab operating expenses sho

> Green Thumb Gardening is a small gardening service that uses activity-based costing to estimate costs for pricing and other purposes. The proprietor of the company believes that costs are driven primarily by the size of customer lawns, the size of custom

> Via Gelato is a popular neighborhood gelato shop. The company has provided the following data concerning its operations: While gelato is sold by the cone or cup, the shop measures its activity in terms of the total number of liters of gelato sold. For e

> Refer to the data for Pixel Studio, Inc., in Problem 8–18. In addition, the company has provided the following details concerning its activity rates: Management has provided the following ease of adjustment codes for the various costs:

> Jake’s Roof Repair has provided the following data concerning its costs: For example, wages and salaries should be $23,200 plus $16.30 per repair-hour. The company expected to work 2,800 repair-hours in May, but actually worked 2,900 r

> Gallatin Carpet Cleaning is a small, family-owned business operating out of Bozeman, Montana. For its services, the company has always charged a flat fee per hundred square feet of carpet cleaned. The current fee is $28 per hundred square feet. However,

> Wyckam Manufacturing Inc. has provided the following information concerning its manufacturing costs: For example, utilities should be $1,400 per month plus $0.05 per machine-hour. The company expects to work 5,000 machine-hours in June. Note that the co

> Refer to the data for Lavage Rapide in Exercises 10–8 and 10–10. Data from Exercises 10–8 and 10–10. Required: Prepare a flexible budget performance report that shows the company&aci

> Refer to the data for Lavage Rapide in Exercises 10–8 and 10–10. Data from Exercises 10–8 and 10–10. Required: Prepare a report showing the company’s revenue and s

> Refer to the data for Lavage Rapide in Exercise 10–8. The actual operating results for August appear on the following page. Data from Exercise 10–8 Required: Prepare a report showing the company’s ac

> Foam Products, Inc., makes foam seat cushions for the automotive and aerospace industries. The company’s activity-based costing system has four activity cost pools, which are listed below along with their activity measures and activity

> Refer to the data for Lavage Rapide in Exercise 10–8. The company actually washed 8,800 cars in August. / For example, electricity costs are $1,200 per month plus $0.15 per car washed. The company expects to wash 9,000 cars in August and to col

> Lavage Rapide is a Canadian company that owns and operates a large automatic carwash facility near Montreal. The following table provides data concerning the company’s costs: For example, electricity costs are $1,200 per month plus $0.