A Fm 102

AFM 102 MIDTERM 2Tutor: Yunjun Yang

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Chapter 4Activity-based Cost Systems

Question 1

Activity-based cost systems use cost centers to accumulate & distribute costs

a.True

b.False

Question 1

Activity-based cost systems use cost centers to accumulate & distribute costs

a.True

b.False

Question 1

Why? Because traditional cost systems use cost centers while activity-based cost systems use activities instead!

Understand the difference in cost center & activities

Question 2

Machine set-up would be classified as

a.Unit-level activity

b.Batch-level activity

c. Product-level activity

d.Facility-level activity

Question 2

Machine set-up would be classified as

a.Unit-level activity

b.Batch-level activity

c. Product-level activity

d.Facility-level activity

Question 2

Why? Because usually only one setup is required to produce a batch of products.

Typical 5 levels of activity

Unit-level: e.g. electricity

Batch-level: e.g. transportation to the next process

Product-level (product sustaining): e.g. marketing

Customer-level: e.g. customer service

Organization-level: done regardless of production

Question 3

List proper order of these stepsA. Identify the primary activities and a estimate total cost pool

for eachB. Allocate the costs to cost object using the activity cost

allocation rateC. Select an allocation base for each activityD. Calculate an activity cost allocation rate for each activity

a. A->C->D->Bb. A->D->C->Bc. B->A->C->Dd. C->A->B->D

Question 3

List proper order of these stepsA. Identify the primary activities and a estimate total cost pool

for eachB. Allocate the costs to cost object using the activity cost

allocation rateC. Select an allocation base for each activityD. Calculate an activity cost allocation rate for each activity

a. A->C->D->Bb. A->D->C->Bc. B->A->C->Dd. C->A->B->D

Question 3

Why? Because these are the 4 steps1. Identify the primary activities and a estimate

total cost pool for each (same thing as develop activity dictionary)

2. Select an allocation base for each activity (same thing as assign resource expense to each activity in the activity dictionary)

3. Calculate an activity cost allocation rate for each activity

4. Allocate the costs to cost object using the activity cost allocation rate

Question 4

Which of the following is NOT advantages of a time-driven ABC system:

a.Data used are more easily obtained.

b. Can be easily updated as conditions change

c. Less time-consuming & less expensive

d.Requires many parameters to be estimated.

Question 4

Which of the following is NOT advantages of a time-driven ABC system:

a.Data used are more easily obtained.

b. Can be easily updated as conditions change

c. Less time-consuming & less expensive

d.Requires many parameters to be estimated.

Question 4

Why? Time-driven ABC has homogeneity assumption: all events (activities) consume same amount of resources, thus requires few parameters

Question 5

Products A and B are assigned $100.00 in support costs by a traditional costing system. An activity analysis revealed that although production requirements are identical, A requires 40% more setup time than B.

Question 5 A

According to an ABC system, product A is

a. Under-costed

b. Over-costed

c. Fairly costed

d. Accurately costed

Question 5 A

According to an ABC system, product A is

a. Under-costed

b. Over-costed

c. Fairly costed

d. Accurately costed

Question 5 B

According to an ABC system, B uses a disproportionately:

a. smaller amount of unit-level costs

b. larger amount of unit-level costs

c. smaller amount of batch-level costs

d. larger amount of batch-level costs

Question 5 B

According to an ABC system, B uses a disproportionately:

a. smaller amount of unit-level costs

b. larger amount of unit-level costs

c. smaller amount of batch-level costs

d. larger amount of batch-level costs

Question 5 C

What is the allocation according to an ABC system based on set-up time

a. $117 for A, $83 for B

b. $125 for A, $75 for B

c. $90 for A, $110 for B

d. $140 for A, $100 for B

Question 5 C

What is the allocation according to an ABC system based on set-up time

a. $117 for A, $83 for B

b. $125 for A, $75 for B

c. $90 for A, $110 for B

d. $140 for A, $100 for B

Question 6

Company XYZ has two products:• A B• Sales units #5,000 #40,000• Sales price per unit $6,500.00 $4,750.00• Direct costs $1,800.00 $1,300.00• Support costs per unit $1000.00 $1,000.00

• Use ABC analysis to help evaluate a product mix with the following ABC information for support costs:

• Activity Cost Driver Cost Total A B• Setups # setups $10M 500 400 100• Machine # of machine hours $30M 600,000 300,000 300,000• Packing # shipments $5M 250,000 50,000 200,000

Question 6

A. Find cost/profit for product A & B using traditional approach on a per-unit basis. Which one is more profitable?

B. Find cost/profit for product A & B using ABC approach on a per-unit basis

Question 6

C. What conclusion can you draw?

Product A is not as profitable as originally thought. Firm should consider raising the price for product A to make profit or cut the product line entirely to make room for the more profitable business of product B

Question 7

• Summary of XYZ operationJune July

# of calls for information 1,000 4,000Avg call length for information 5 minutes 6 minutes# of calls for support 300 1,200Avg call length for support 8 minutes 6 minutesSales revenue $8M $12MXYZ currently allocates $200k to call center support costs

by using a rate of 1% of sales revenue.An estimate of costs associated with call center is also

$200K

Question 7

A. Compute current cost allocation

B. Compute ABC allocation to June/July based on call length

C. Compute ABC allocation based on # of calls

Question 7

D. Which one would you use? Why?

Due to a change in average call time, allocation based on call length will be able to reflect that change

However # of calls are also high correlated with costs, and the two difference allocations yield very similar costs.

Both could be used, but in reality, must understand the true cost driver

Chapter 5Management Accounting Information

for activity and process decisions

Question 1

Relevant costs for investing in a new system include:

a. original cost of the old system

b. accumulated depreciation

c. the current salvage value of the existing system

d. the salvage value in 5 years

e. Both c & d

Question 1

Relevant costs for investing in a new system include:

a. original cost of the old system

b. accumulated depreciation

c. the current salvage value of the existing system

d. the salvage value in 5 years

e. Both c & d

Question 1

Why? Relevant costs – expected future costs and revenues that differ across the decision alternatives

Note: depreciation cost is relevant, while accumulated depreciation is not

Question 2

Sunk costs for investing in a new system include:

a. the original cost of the old system

b. the original cost of the new system

c. The salvage value of the existing system

d. The operating cost of the new system

Question 2

Sunk costs for investing in a new system include:

a. the original cost of the old system

b. the original cost of the new system

c. The salvage value of the existing system

d. The operating cost of the new system

Question 2

• Sunk costs

– Costs of resources that already have been committed and no current action or decision can change

– Not relevant to the evaluation of alternatives because they cannot be influenced by any alternative the manager chooses

Question 3

Cellular manufacturing is:

a. a layout that looks like a cell

b. increasing the employees needed to produce a product

c. Individual work area for employees so they can work independently

d. a flexible layout that can be easily adjusted to make a different product

Question 3

Cellular manufacturing is:

a. a layout that looks like a cell

b. increasing the employees needed to produce a product

c. Individual work area for employees so they can work independently

d. a flexible layout that can be easily adjusted to make a different product

Question 3

Process layouts: similar equipment and functions are grouped together, typically for production is done in small batches of products. Might have long production path, high work-in-process inventories.

Product layouts: equipment is organized to accommodate the production of a specific product, for companies producing high-volume products. The placement of equipment is is made to reduce the distance.

Cellular manufacturing involves the organization of a plant into a number of cells. Within each cell, machines that are needed to manufacture a group of similar products are arranged close to one another

Question 4

Company has 2 products with the following financialsTotal A B

Revenue 450k 300k 150kVariable expenses 350k 230k 120kContribution margin 100k 70k 30kFixed expenses 80k 40k 40kOperating Income 20k 30k -10k

If 20k of fixed costs will be eliminated by dropping product B, how will operating income change?

a. Increase by 10kb. Decrease by 10kc. Decrease by 20kd. unchanged

Question 4

Company has 2 products with the following financialsTotal A B

Revenue 450k 300k 150kVariable expenses 350k 230k 120kContribution margin 100k 70k 30kFixed expenses 80k 40k 40kOperating Income 20k 30k -10k

If 20k of fixed costs will be eliminated by dropping product B, how will operating income change?

a. Increase by 10kb. Decrease by 10kc. Decrease by 20kd. unchanged

Question 5

Old Layout New Layout

Total annual sales $500,000 $600,000

Costs as percentage of sales:

Direct materials 20% 17%

Direct labor 8% 7%

Manufacturing Support costs 12% 6%

Work-in-process inventory $100,000 $ 200,000

Inventory carrying cost is 10% of inventory value

Question 5

A. What are the operating income for both the old and new layouts

B. What are the annual benefits of the new layout

C. If the firm invested $110k for the new layout, how many years would it take to for the benefit to exceed the investment.

Chapter 6Cost Information for Pricing and

Product Planning

Question 1

True or False

a. Walmart is a price-taker

b. A small firm is never a price-setter.

c. Markup is equal to the profit margin

d. More elastic demand means lower markup

e. Eliminating unprofitable products will raise profit

f. Technology products often use skimming price strategy

Question 1

a. Walmart is a price-taker false

b. A small firm is never a price-setter. false

c. Markup is equal to the profit margin false

d. More elastic demand means lower markup true

e. Eliminating unprofitable products will raise profit false

f. Technology products often use skimming price strategy true

Question 2

Company XYZ produces two products: Regular and Premium. Weekly demand is estimated to be 100 Regular and 50 units Premium. Only 220 machine hours are available per week.

Regular Premium

Contribution margin per unit $9 $10

# of machine hours required 1.5 2

Question 2

The contribution margin per machine hour is:

a. $9 for Regular and $10 for Premium

b. $13.50 for Regular and $20 for Premium

c. $15 for Regular and $16 for Premium

d. $6 for Regular and $5 for Premium

To maximize weekly profits, how many units would you recommend of each model?

a. 100 units of Regular and 35 units of Premium

b. 100 units of Regular and 50 units of Premium

c. 147 units of Regular and 0 units of Premium

d. 85 units of Regular and 60 units of Premium

Question 2

The contribution margin per machine hour is:

a. $9 for Regular and $10 for Premium

b. $13.50 for Regular and $20 for Premium

c. $15 for Regular and $16 for Premium

d. $6 for Regular and $5 for Premium

To maximize weekly profits, how many units would you recommend of each model?

a. 100 units of Regular and 35 units of Premium

b. 100 units of Regular and 50 units of Premium

c. 147 units of Regular and 0 units of Premium

d. 85 units of Regular and 60 units of Premium

Question 3

XYZ s sells 50,000 units each year with the following cost structure

Variable production $10/unit

Fixed production $8/unit

Variable Selling $3/unit

Fixed S&A $4/unit

Prices are normally marked up 40%, but currently there is surplus capacity of 15,000 units. New customer offers to purchase 10,000 units at $30/unit. This results in additional $3 in shipping.

What’s effect on operating income if the order is taken

Question 4 (based on appendix)

Given demand function given by Q = 540– (3 x P)

and a total cost function given by C = $8,000 + (20 x Q)

where P is the price, and Q is the quantity produced and sold.

Determine the optimal price, the demand quantity, and product cost.

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