Accounting For Decision Making And Control 10th Edition By Zimmerman – Test Bank

Chapter 11 Test Bank – Static Key

Multiple Choice Questions

1. When traditional absorption costing is employed, which of the following is false?

A. In a multi-product organization, product costs are properly reported for financial reporting purposes

B. In a single product organization, product costs are properly reported for financial reporting purposes

C. In a multi-product organization, product costs are accurately reported for decision-making purposes

D. In a single product organization, product costs are accurately reported for decision-making purposes

E. None of the choices are correct

Where a company makes multiple products or offers a variety of services, simple full costing, which accumulates overheads in one cost pool and then allocates them to products utilizing one cost base (such as direct labor hours, or sometimes machine hours), rarely matches accurately costs generated to the products that caused them.

In a single product or single service organization, overhead allocation is irrelevant.

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Difficulty: 1 Easy

Topic: Inaccurate Product Costs

2. Which of the following is a correct matching of terms?

A. Depreciation of equipment is a batch-level cost

B. Cutting a table leg is a unit-level cost

C. Insurance is a product-level cost

D. Package design is a capacity-sustaining cost

E. None of the choices are correct

This activity can be traced directly to a unit of product, whether the activity is performed manually (i.e., direct labor) or by machine.

The correct matching of the other terms appears below:

Depreciation of equipment is a product-level cost. Depreciation of air-conditioning plant or buildings would be a capacity-sustaining cost. Insurance is capacity-sustaining. Package design is a product-level cost.

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Topic: Choosing Cost Drivers

3. This is a comprehensive problem comparing absorption costing and ABC. It is suggested that as you progress through the problem, keep track of the correct solutions, because these values will be used again later in the problem set.

Dehli Inkstone specializes in inkstone creation. Each finished inkstone needs 1½ pounds of special materials which cost $20 a pound. (One pound contains 16 ounces.) Drilling requires 1 direct labor hour, for which workers are paid $10 per hour, and 40 minutes of machine time. The preliminary product (a ‘basic’) is inspected to ensure that it is sound. Fifteen percent of the basics are rejected. It is not possible to rework these, and they have no salvage value. Each approved stone is handed to a master craftsperson who spends two hours making a ‘Standard’ product or three hours creating a ‘Masterpiece’. Standards use half an hour of machine time and Masterpieces one hour. Finished inkstones are inspected again before packing. Four percent of finished products fail the final quality control assessment and are destroyed. Crafts persons are paid $18 per hour. It takes a ‘basic’ worker six minutes to package each inkstone in bubble wrap and a shipping carton, which cost 50 cents in materials and weigh 6 ounces in total.

Total overheads are estimated to be $587,400 per year and 97,900 direct labor hours are budgeted. Production plans for the year call for 60% of output to be Standard inkstones and the balance Masterpieces.

For a Standard inkstone, which is true of the materials input needed (to 3 significant figures)?

A. Total weight is 2.279 pounds

B. Total weight is 2.213 pounds

C. Total weight is 2.140 pounds

D. Total weight is 1.875 pounds

E. None of the choices are correct

‘Standard’ Quantities Materials
Bubble wrap, carton, lbs. 0.375
Materials, gross lbs. 1.838
Total inputs 2.213

When there is waste in the process, work backwards to find the inputs needed.

Gross up the last stage items first to find the needed input.

Packing is performed on 100% good units.

Package materials do not need adjustment.

Materials are wasted at both stages in the process, so they must be grossed up twice.

To get one good preliminary unit, 1.17647 units must be started (1 ÷ 0.85). To get a good standard you need to start with 1.2255 preliminary units (1.17647 ÷ 0.96). So the total materials used to get one good standard is 1.838 lbs. (1.2255 × 1 ½ lbs.).

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Topic: Inaccurate Product Costs

4. This is a comprehensive problem comparing absorption costing and ABC. It is suggested that as you progress through the problem, keep track of the correct solutions, because these values will be used again later in the problem set.

Dehli Inkstone specializes in inkstone creation. Each finished inkstone needs 1½ pounds of special materials which cost $20 a pound. (One pound contains 16 ounces.) Drilling requires 1 direct labor hour, for which workers are paid $10 per hour, and 40 minutes of machine time. The preliminary product (a ‘basic’) is inspected to ensure that it is sound. Fifteen percent of the basics are rejected. It is not possible to rework these, and they have no salvage value. Each approved stone is handed to a master craftsperson who spends two hours making a ‘Standard’ product or three hours creating a ‘Masterpiece’. Standards use half an hour of machine time and Masterpieces one hour. Finished inkstones are inspected again before packing. Four percent of finished products fail the final quality control assessment and are destroyed. Crafts persons are paid $18 per hour. It takes a ‘basic’ worker six minutes to package each inkstone in bubble wrap and a shipping carton, which cost 50 cents in materials and weigh 6 ounces in total.

Total overheads are estimated to be $587,400 per year and 97,900 direct labor hours are budgeted. Production plans for the year call for 60% of output to be Standard inkstones and the balance Masterpieces.

For a Masterpiece inkstone, which is true of the direct labor hours (DLH) needed (to 3 decimal places)?

A. Total DLH are 4.100

B. Total DLH are 4.401

C. Total DLH are 4.406

D. Total DLH are 4.450

E. None of the choices are correct

‘Masterpiece’ Quantities DLH
Packaging labor 0.100
Crafts person labor, gross DLH 3.125
Drilling, gross DLH 1.225
Total inputs 4.450

Using the same logic as in Q11-3, to get one good standard, you must drill 1.225 units, which each requires 1 DL hour per unit. Each master craftsman wastes 4% of the units, so to get 1 good unit, they must start 1.0417 preliminary units (1.0417 × 0.96 = 1.00 units). Since each Masterpiece inkstone requires 3 hours, to produce one acceptable masterpiece requires 3.125 DLH (1.0417 × 3).

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Topic: Inaccurate Product Costs

5. This is a comprehensive problem comparing absorption costing and ABC. It is suggested that as you progress through the problem, keep track of the correct solutions, because these values will be used again later in the problem set.

Dehli Inkstone specializes in inkstone creation. Each finished inkstone needs 1½ pounds of special materials which cost $20 a pound. (One pound contains 16 ounces.) Drilling requires 1 direct labor hour, for which workers are paid $10 per hour, and 40 minutes of machine time. The preliminary product (a ‘basic’) is inspected to ensure that it is sound. Fifteen percent of the basics are rejected. It is not possible to rework these, and they have no salvage value. Each approved stone is handed to a master craftsperson who spends two hours making a ‘Standard’ product or three hours creating a ‘Masterpiece’. Standards use half an hour of machine time and Masterpieces one hour. Finished inkstones are inspected again before packing. Four percent of finished products fail the final quality control assessment and are destroyed. Crafts persons are paid $18 per hour. It takes a ‘basic’ worker six minutes to package each inkstone in bubble wrap and a shipping carton, which cost 50 cents in materials and weigh 6 ounces in total.

Total overheads are estimated to be $587,400 per year and 97,900 direct labor hours are budgeted. Production plans for the year call for 60% of output to be Standard inkstones and the balance Masterpieces.

For a Standard inkstone, which is true of the machine hours (MH) needed (to 3 decimal places)?

A. Total MH are 1.188

B. Total MH are 1.305

C. Total MH are 1.338

D. Total MH are 1.397

E. None of the choices are correct

Standard Quantities MH
Crafts person labor, gross MH 0.521
Drilling, gross MH 0.817
Total inputs 1.338

To get one good standard unit, you must drill 1.225 units, which requires 2/3 machine hours per unit (2/3 × 1.225 = 0.817). Also, to finish a standard requires another half hour of machine time. Before waste of 4%, 1.0417 basic units must be finished which requires 0.521 MH (1.0417 × 0.5 MH).

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Topic: Inaccurate Product Costs

6. This is a comprehensive problem comparing absorption costing and ABC. It is suggested that as you progress through the problem, keep track of the correct solutions, because these values will be used again later in the problem set.

Dehli Inkstone specializes in inkstone creation. Each finished inkstone needs 1½ pounds of special materials which cost $20 a pound. (One pound contains 16 ounces.) Drilling requires 1 direct labor hour, for which workers are paid $10 per hour, and 40 minutes of machine time. The preliminary product (a ‘basic’) is inspected to ensure that it is sound. Fifteen percent of the basics are rejected. It is not possible to rework these, and they have no salvage value. Each approved stone is handed to a master craftsperson who spends two hours making a ‘Standard’ product or three hours creating a ‘Masterpiece’. Standards use half an hour of machine time and Masterpieces one hour. Finished inkstones are inspected again before packing. Four percent of finished products fail the final quality control assessment and are destroyed. Crafts persons are paid $18 per hour. It takes a ‘basic’ worker six minutes to package each inkstone in bubble wrap and a shipping carton, which cost 50 cents in materials and weigh 6 ounces in total.

Total overheads are estimated to be $587,400 per year and 97,900 direct labor hours are budgeted. Production plans for the year call for 60% of output to be Standard inkstones and the balance Masterpieces.

Which is the full (absorption) cost of a Masterpiece inkstone, if direct labor hours are used as the cost driver? (Allow a little for rounding errors).

A. $133.46

B. $106.47

C. $102.55

D. $96.10

E. None of the choices are correct

Qty Cost Masterpiece
Materials, gross lb. 1.838 $ 20 $ 36.76
Bubble wrap, carton 1 $ 0.50 $ 0.50
Drilling, gross DLH 1.225 $ 10 $ 12.25
Craftsperson labor 3.125 $ 18 $ 56.25
Packaging time 1/10 $ 10 $ 1.00
Total DLH 4.450
Direct cost $ 106.76
Overheads applied, per DLH $ 6.00 $ 26.70
Full cost $ 133.46

OH Rate = Est. Overheads $587,400 = $6.00 per DLH
Est. DLH 97,900

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7. This is a comprehensive problem comparing absorption costing and ABC. It is suggested that as you progress through the problem, keep track of the correct solutions, because these values will be used again later in the problem set.

Dehli Inkstone specializes in inkstone creation. Each finished inkstone needs 1½ pounds of special materials which cost $20 a pound. (One pound contains 16 ounces.) Drilling requires 1 direct labor hour for which workers are paid $10 per hour, and 40 minutes of machine time. The preliminary product (a ‘basic’) is inspected to ensure that it is sound. Fifteen percent of the basics are rejected. It is not possible to rework these, and they have no salvage value. Each approved stone is handed to a master craftsperson who spends two hours making a ‘Standard’ product or three hours creating a ‘Masterpiece’. Standards use half an hour of machine time and Masterpieces one hour. Finished inkstones are inspected again before packing. Four percent of finished products fail the final quality control assessment and are destroyed. Crafts persons are paid $18 per hour. It takes a ‘basic’ worker six minutes to package each inkstone in bubble wrap and a shipping carton, which cost 50 cents in materials and weigh 6 ounces in total.

Total overheads are estimated to be $587,400 per year and 97,900 direct labor hours are budgeted. Production plans for the year call for 60% of output to be Standard inkstones and the balance Masterpieces.

Which is the full (absorption) cost of a Standard inkstone, if machine hours are used as the cost driver? (Allow a little for rounding errors).

A. $94.81

B. $101.89

C. $107.25

D. $107.88

E. None of the choices are correct

The problem data did not provide the number of machine hours available, only budgeted labor hours and budgeted product output mix. The first step is to compute the units of product that can be made with the labor hours, split into the product mix and finally compute the total machine hours needed.

COMPUTATIONS
1. Standard craftsperson MH
Input = Output 0.521 1/2 MH
(1 − waste 4%) 96.00 %
2. Masterpiece craftsperson MH
Input = Output 1.042 1 MH
(1 − waste 4%) 96.00 %
3. Basic MH
Input = Output 0.817 2/3 MH
(1 − waste 15%) (1 − waste 4%) 85.00 % 96.00 %

Standard Masterpiece
Output% 60 % 40 %
DLH 3.409 4.450
Product Weighted DLH 2.045 1.780 3.825
Available DLH 97,900 25,595 units of good output
Product Weighted DLH 3.825
Units of output (rounded up) 15,357 10,238 25,595
Standard, gross MH 0.521
Masterpiece, gross MH 1.042
Drilling, gross MH 0.817 0.817
Total MH input 1.338 1.859
Total MH needed 20,547.67 19,032.44 39,580.11

Once budgeted total machine hours are known, it is then possible to derive the overhead rate per machine hour ($14.841), which is multiplied by planned product machine hours to determine overheads applied.

Qty Cost Standard
Materials, gross lb. 1.838 $ 20 $ 36.76
Bubble wrap, carton 0.375 $ 0.50 $ 0.50
Drilling, gross DLH 1.225 $ 10 $ 12.25
Crafts person labor, gross DLH 2.083 $ 18 $ 37.50
Packaging time 1/10 $ 10 $ 1.00
Total DLH 3.409
Direct cost $ 88.02
Gross MH 1.338
Overheads applied, per DLH $ 14.84 $ 19.86
Full cost $ 107.88

OH Rate = Est. Overheads $587,400 = $14.841 per MH
Est. MH 39,580

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Difficulty: 3 Hard

Topic: Inaccurate Product Costs