Chapter 11 Strategic Cost Management

CHAPTER 11: STRATEGIC COST MANAGEMENT 1. Strategic cost management is the identification of strategies to develop a competitive advantage. a. True b. False ANSWER: True 2. Strategic decision making is important to achieve good inventory control. a. True b. False ANSWER: False 3. The objective of strategic cost management is to reduce costs while strengthening strategic positions. a. True b. False ANSWER: True 4. There are two general cost management strategies: cost leadership and focusing. a. True b. False ANSWER: False 5. Value-chain analysis is identifying and exploiting internal and external linkages to achieve strong strategic positions. a. True b. False ANSWER: True 6. Exploiting internal linkages involves the assessment of management reliability. a. True b. False ANSWER: False 7. Exploiting supplier linkages is the exploitation of a firm’s internal activities. a. True b. False ANSWER: False 8. Exploiting customer linkages is not important since customers do not affect profitability. a. True b. False ANSWER: False 9. Strategic cost management emphasizes the importance of an external focus and the need to recognize and exploit internal and external linkages. a. True b. False ANSWER: True 10. Life-cycle cost management involves two types of life-cycle viewpoints: the marketing viewpoint and the production viewpoint. a. True b. False ANSWER: True 11. Target costing provides a method for reducing costs by exploiting customer and supplier linkages. a. True b. False ANSWER: True 12. Life-cycle costs are all costs associated with a product during the production viewpoint. a. True b. False ANSWER: False 13. JIT manufacturing eliminates waste by producing products only when, and in the quantities needed. a. True b. False ANSWER: True 14. In JIT purchasing, materials are usually at warehouse long before they are needed. a. True b. False ANSWER: False 15. A major difference between traditional and JIT environments is the degree of responsibility given to workers in the organization. a. True b. False ANSWER: True 16. Acceptable quality level (AQL) allows defects to occur within predetermined parameters. a. True b. False ANSWER: True 17. In a JIT environment, many overhead costs are directly traceable to products. a. True b. False ANSWER: True 18. The structure for a JIT environment is a vastly complicated process costing system. a. True b. False ANSWER: False 19. Accounting is simplified in the JIT system by the use of backflush costing. a. True b. False ANSWER: True 20. In a job-order setting using JIT, repetitive business is separated from unique orders. a. True b. False ANSWER: True 21. Choosing alternative strategies that provide long-term growth involves decision making. ANSWER: strategic 22. The creation of customer value for same or lower cost than competitors is called advantage. ANSWER: competitive 23. the difference between what the customer receives and gives up is the . ANSWER: customer value 24. analysis relies on identifying and exploiting internal and external linkages. ANSWER: Value-chain 25. The assignments to suppliers and customers that provide the best cost information needed are called assignments. ANSWER: activity-based 26. The length of time a product serves the needs of customers is called the life. ANSWER: consumable 27. The stage during which a product loses market acceptance is called the ANSWER: decline stage. 28. The manufacturing system focused on reducing inventory levels and waste is called manufacturing. ANSWER: just-in-time/JIT 29. In traditional and JIT environments using direct tracing, the manufacturing costs assigned to products are the direct materials costs and the costs. ANSWER: direct labor 30. Accounting for the cost accounting cycle in a JIT environment is simplified by using costing. ANSWER: backflush 31. The strategy which involves choosing among alternative strategies with the goal of selecting a strategy or strategies that provides a company with reasonable assurance of long-term growth and survival is called: a. Competitive advantage b. Strategic cost management c. Strategic decision making d. Customer value ANSWER: c 32. The strategy to create better customer value for the same or lower cost than competitors or creating equivalent value for lower cost than offered by competitors is called: a. Strategic decision making b. Competitive advantage c. Strategic cost management d. Total product ANSWER: b 33. A competitive advantage has been established when a. customers see the variation as important and the value added to the customer exceeds the cost of providing differentiation. b. a high-cost strategy increases customer value by minimizing customer sacrifices. c. a low-profit item is dropped from the product line. d. both a and b. ANSWER: a 34. The difference between what a customer receives and what the customer gives up is called: a. Customer value b. Strategic cost management c. Competitive advantage d. Strategic decision making ANSWER: a 35. The total product, the complete range of benefits that a customer receives from a purchased product include(s): a. intangible benefits b. activity c. tangible benefits d. both a and c ANSWER: d 36. The use of cost data to develop and identify superior strategies that will produce a sustainable competitive advantage is called: a. Strategic decision making b. Competitive advantage c. Strategic cost management d. Customer value ANSWER: c 37. When a computer company maintains the internal storage space for a lower price, it is following a a. focusing strategy. b. cost leadership strategy. c. differentiation strategy. d. strategic positioning strategy. ANSWER: b 38. When a computer company increases the internal storage space for the same price, it is following a a. focusing strategy. b. low-cost strategy. c. differentiation strategy. d. strategic positioning strategy. ANSWER: c 39. When a computer company targets customers in the South, it is following a a. focusing strategy. b. low-cost strategy. c. differentiation strategy. d. strategic allocation strategy. ANSWER: a 40. When a computer company selects a mix of strategies in order to create sustainable competitive advantage, it is following a a. focusing strategy. b. low-cost strategy. c. differentiation strategy. d. strategic positioning strategy. ANSWER: d 41. The relationships among activities that are performed with a firm's portion of the value chain is(are) called: a. Internal linkages b. External linkages c. Industrial value chain d. Both a and b ANSWER: a 42. The industrial value-chain analysis a. recognizes only complex linkages within the firm. b. is not compatible with differentiation strategies. c. determines a linked set of value-creating activities. d. requires a firm to operate across the entire value chain. ANSWER: c 43. The factor(s) that describe the relationships of a firm's value chain activities that are performed with its suppliers and customers is(are) called: a. Internal linkages b. External linkages c. Industrial value chain d. Both a and b ANSWER: b 44. When a computer manufacturing company addresses supplier production problems, it is focusing on a. external linkages. b. internal linkages. c. a differentiation strategy. d. a cost leadership strategy. ANSWER: a 45. The structural and executional factors that determine the long-term cost structure of an organization are called: a. Organizational activities b. Operational cost drivers c. Operational activities d. Organizational cost drivers ANSWER: d 46. Structural and executional activities are types of a. organizational activities. b. operating activities. c. JIT. d. both a and b. ANSWER: a 47. Building plants, management structuring, and grouping employees are examples of a. executional activities. b. structural activities. c. operational activities. d. both a and b. ANSWER: b 48. The factors that drive the cost of day-to-day activities performed as a result of the structure and processes selected by the organization are called: a. Organizational activities b. Organizational cost drivers c. Operational cost drivers d. Operational activities ANSWER: c 49. Plant layout, quality management systems, and providing capacity are examples of a. executional activities. b. structural activities. c. operational activities. d. both a and b. ANSWER: a 50. The operational activity of moving inventory is classified as a a. unit-level activity. b. batch-level activity. c. product-level activity. d. facility-level activity. ANSWER: b 51. The operational activity of setting up equipment is classified as a a. unit-level activity. b. batch-level activity. c. product-level activity. d. facility-level activity. ANSWER: b 52. The operational activity of assembling parts is an example of a a. unit-level activity. b. batch-level activity. c. product-level activity. d. facility-level activity. ANSWER: a 53. The operational activity of redesigning products is classified as a a. unit-level activity. b. batch-level activity. c. product-level activity. d. facility-level activity. ANSWER: c 54. The operational activity of inspecting is classified as a a. unit-level activity. b. batch-level activity. c. product-level activity. d. facility-level activity. ANSWER: b 55. Activities required to design, develop, produce, market, distribute, and service a product are known as a. whole life activities. b. value-chain activities. c. target activities. d. overhead. ANSWER: b 56. The first link of the internal value chain is a. design. b. develop. c. market. d. distribute. ANSWER: a 57. The last link of the internal value chain is a. design. b. service. c. market. d. distribute. ANSWER: b 58. Analyzing how costs and other financial factors vary as different bundles of activities are considered to strengthen a firm's strategic position is the process of a. exploiting linkages. b. design. c. cost driver analysis. d. distribution. ANSWER: a 59. The industry value chain includes a. shareholder value chain activities as well as firm activities. b. buyer and supplier value chain activities as well as firm activities. c. only firm activities. d. only firm production activities. ANSWER: b 60. Identifying profitable and unprofitable customers is an example of exploiting a. supplier linkages. b. the product life cycle. c. consumable life. d. Customer linkages. ANSWER: d Figure 11-1 Ambrosia Corp. is a manufacturer of equipment used in manufacturing. It currently produces a product with 30 parts but through redesign has reduced the number of parts to 9. Then current activity capacity and demand for the 30 unit configuration and expected activity demand for the 9 part configuration are provided below: Activities Materials usage Assembly Purchasing parts Activity Driver number of parts direct labor hours number of orders Activity Capacity Current Activity Demand 300,000 300,000 90,000 20,000 20,000 6,000 20,000 16,000 8,000 Expected Activity Demand Materials usage has a rate of $6 per part and no fixed costs. Assembly has a rate of $20 per labor hour with no fixed component. Purchasing requires clerks that can process 5,000 purchase orders. Each clerk earns $40,000 per year. There is also a $1 per order processing cost. 61. Refer to Figure 11-1. What is the savings in materials usage cost with the new design changes? a. $252,000 b. $480,000 c. $1,260,000 d. $1,800,000 ANSWER: c RATIONALE: (300,000 - 90,000)$6 = $1,260,000 62. Refer to Figure 11-1. What is the cost savings from purchasing parts? a. $80,000 b. $88,000 c. $48,000 d. $40,000 ANSWER: b RATIONALE: $80,000 + $1(16,000 - 8,000) = $88,000 63. Refer to Figure 11-1. What is the total cost reduction of the new design? a. $2,208,000 b. $2,194,000 c. $1,628,000 d. $1,624,000 ANSWER: c RATIONALE: M (300,000 - 90,000) $6 = A (20,000 - 6,000) $20 = P 80,000 + $1(16,000 - 8,000) = $1,260,000 $ 280,000 $ 88,000 total $1,628,000 64. Refer to Figure 11-1. If 10,000 units are being produced and the sales price is $500, what is the new sales price if the cost savings are passed on to the consumer? a. $129.80 b. $317.40 c. $237.00 d. $337.20 ANSWER: d RATIONALE: $500 - $1,628,000/10,000 = $337.20 65. In activity-based costing, supplier costs a. must be narrower, including only the purchase price. b. are allocated to products arbitrarily. c. include costs of quality, reliability and timeliness and are assigned to products on a causal basis. d. all of these statements are true. ANSWER: c Figure 11-2 Blue Vibrance Company sells a product used in many manufacturing processes. The sales activity involves three activity areas: Activity Area Order taking Sales visits Delivery vehicles Cost Driver and Rate $100 per purchase order $50 per visit $1 per delivery mile The following customer information is given: Units sold List price Actual sales price Number of purchase orders Number of sales visits Number of delivery miles AX 100,000 $50 $45 30 6 100 BY 80,000 $50 $48 20 5 80 66. Refer to Figure 11-2. Which customer is most profitable? a. AX b. BY c. DZ d. They are equally profitable. ANSWER: a RATIONALE: SUPPORTING CALCULATIONS: AX = (100,000 × $45) - (30 × $100) - (6 × $50) - (100 × $1) = $4,496,600 BY = (80,000 × $48) - (20 × $100) - (5 × $50) - (80 × $1) = $3,837,670 DZ = (60,000 × $50) - (10 × $100) - (3 × $50) - (60 × $1) = $2,998,790 67. Refer to Figure 11-2. Which customer has the least activity costs? a. AX b. BY c. DZ d. They are the same. ANSWER: c RATIONALE: SUPPORTING CALCULATIONS: AX = (30 × $100) + (6 × $50) + (100 × $1) = $3,400 BY = (20 × $100) + (5 × $50) + (80 × $1) = $2,330 DZ = (10 × $100) + (3 × $50) + (60 × $1) = $1,210 DZ 60,000 $50 $50 10 3 60 68. Refer to Figure 11-2. What is the profitability of customer BY? a. $4,000,000 b. $3,840,000 c. $3,837,670 d. $2,330,000 ANSWER: c RATIONALE: SUPPORTING CALCULATIONS: BY = (80,000 × $48) - (20 × $100) - (5 × $50) - (80 × $1) = $3,837,670 69. Which of the following are true about total quality control? a. Total quality control is an approach to differentiate and reduce overall quality costs. b. Total quality control demands production of defect-free products. c. Total quality control links suppliers closely with the firm. d. All of these statements are true about total quality control. ANSWER: d Figure 11-3 Awesome Products Company manufactures a product sold to retailers. It is considering suppliers for its process. The supplier quality involves four activity areas: Activity Area Order cost Defective units Delivery trips Carrying cost Cost Driver and Rate $120 per purchase order $200 per unit internal failure costs $5 per delivery mile $1 per order The following supplier information is given: Materials units needed Actual purchase price Number of purchase orders Number of defects Number of deliveries X3 100,000 $5 20 6 20 Y2 100,000 $4.99 30 12 30 Z1 100,000 $5.01 18 0 18 70. Refer to Figure 11-3. Which supplier is least costly? a. X3 b. Y2 c. Z1 d. They are equally costly. ANSWER: c RATIONALE: SUPPORTING CALCULATIONS: X3 = (100,000 × $5) + (20 × $120) + (6 × $200) + (20 × $5) + (20 × $1) = $503,720 Y2 = (100,000 × $4.99) + (30 × $120) + (12 × $200) + (30 × $5) + (30 × $1) = $505,180 Z1 = (100,000 × $5.01) + (18 × $120) + (0 × $200) + (18 × $5) + (18 × $1) = $503,268 71. Refer to Figure 11-3. Which supplier has the most defective units? a. X3 b. Y2 c. Z1 d. They are equal. ANSWER: b RATIONALE: SUPPORTING CALCULATIONS: X3 = 6 Y2 = 12 Z1 = 0 72. Refer to Figure 11-3. What is the cost of supplier Z1? a. $503,358 b. $503,268 c. $501,000 d. $499,000 ANSWER: b RATIONALE: SUPPORTING CALCULATIONS: Z1 = (100,000 × $5.01) + (18 × $120) + (0 × $200) + (18 × $5) + (18 × $1) = $503,268 73. The length of time that a product serves the needs of customers is called the: a. Product life cycle b. Revenue producing life c. Introduction stage d. Consumable life ANSWER: d 74. The time a product exists—from conception to abandonment is called the: a. Revenue producing life b. Product life cycle c. Consumable life d. Introduction stage ANSWER: b 75. The stage during which the product loses market acceptance is called the: a. decline stage b. growth stage c. maturity stage d. introduction stage ANSWER: a 76. The period of time when sales increase at a decreasing rate is called the: a. introduction stage b. growth stage c. decline stage d. maturity stage ANSWER: d 77. The stage characterized by preproduction and startup activities is called the: a. maturity stage b. growth stage c. introduction stage d. decline stage ANSWER: c 78. The period of time when sales increase at an increasing rate is called the: a. introduction stage b. maturity stage c. growth stage d. decline stage ANSWER: c 79. The viewpoint that describes the general sales pattern of a product as it passes through the introduction, growth, maturity, and decline stages is called the: a. Marketing viewpoint b. Customer viewpoint c. Production viewpoint d. Accounting viewpoint ANSWER: a 80. The viewpoint which defines stages of the life cycle by changes in the type of activities performed is called the: a. Accounting viewpoint b. Production viewpoint c. Customer viewpoint d. Marketing viewpoint ANSWER: b 81. Which stage in the marketing viewpoint is characterized by preproduction and startup activities? a. decline b. introduction c. growth d. maturity ANSWER: b 82. Which of the following is NOT a stage of the marketing viewpoint of the product life cycle? a. decline b. growth c. maturity d. production ANSWER: d 83. Which of the following is NOT a stage of the consumable life-cycle viewpoint? a. disposal b. maintaining c. logistics d. purchasing ANSWER: c 84. Life-cycle cost management consists of a. actions taken to enable a product to be designed, developed, produced, marketed, distributed, operated, maintained, serviced, and disposed of in order to maximize profits. b. actions to extend the life of a product through design, development, production, and maintenance. c. actions that focus on minimizing the cost of developing, designing, producing, distributing, operating, servicing, and disposal of a product. d. actions taken to design, develop, test, market, distribute, maintain, service, and dispose of a product to maximize revenues. ANSWER: a 85. Which of the following is NOT a stage of the production life-cycle viewpoint? a. design b. introduction c. research d. testing ANSWER: b 86. Which of the life-cycle viewpoints is the revenue-oriented viewpoint? a. consumable life-cycle viewpoint b. production viewpoint c. marketing viewpoint d. planning viewpoint ANSWER: c 87. Which of the following is NOT a stage of the production life-cycle viewpoint? a. planning b. production c. purchasing d. logistics ANSWER: c 88. Which of the life-cycle viewpoints is the cost-oriented viewpoint? a. product life-cycle b. consumable life-cycle c. production life-cycle d. planning life-cycle ANSWER: c 89. Which viewpoint of the product life-cycle is customer-value oriented? a. production life-cycle b. marketing life-cycle c. consumable life-cycle d. planning life-cycle ANSWER: c 90. Which stage of the marketing life-cycle has slow sales growth with peak sales? a. introduction b. growth c. maturity d. decline ANSWER: c 91. At which stage of the consumable life-cycle is price sensitivity low? a. introduction b. growth c. maturity d. decline ANSWER: a 92. According to the authors, 90 percent or more of a product's life-cycle costs are determined during a. growth stage. b. development stage. c. decline stage. d. maturity stage. ANSWER: b 93. Information for life-cycle cost management is supported by a(n) a. functional-based costing system. b. activity-based costing system. c. normal costing system. d. all of these. ANSWER: b 94. Life-cycle cost management emphasizes a. cost control. b. cost reduction. c. normal costing. d. process costing. ANSWER: b 95. The difference between the sales price needed to capture a predetermined market share and the desired profit per unit is called: a. Gross profit b. Target market c. Target price d. Target cost ANSWER: d Figure 11-4 The Algonquin Company developed the following budgeted life-cycle income statement for two proposed products. Each product's life cycle is expected to be two years. Sales Cost of goods sold Gross profit Period expenses: Research and development Marketing Life-cycle income Product A $280,000 Product B $200,000 Total $480,000 200,000 $ 80,000 130,000 $ 70,000 330,000 $150,000 (70,000) (50,000) $ 30,000 A 10 percent return on sales is required for new products. Because the proposed products did not have a 10 percent return on sales, the products were going to be dropped. Relative to Product B, Product A requires more research and development costs but fewer resources to market the product. Sixty percent of the research and development costs are traceable to Product A, and 30 percent of the marketing costs are traceable to Product A. 96. Refer to Figure 11-4. If research and development costs and marketing costs are traced to each product, life-cycle income for Product A would be a. $15,000. b. $23,000. c. $27,000. d. $38,000. ANSWER: b RATIONALE: SUPPORTING CALCULATIONS: Sales Cost of goods sold Gross profit Traceable expenses: Research and development (60% × $70,000) Marketing expenses (30% × $50,000) Life-cycle income $ 280,000 (200,000) $ 80,000 (42,000) (15,000) $23,000 97. Refer to figure 11-4. If research and development costs and marketing costs are traced to each product, life-cycle income for Product B would be a. $35,000. b. $7,000. c. $12,000. d. $20,000. ANSWER: b RATIONALE: SUPPORTING CALCULATIONS: Sales Cost of goods sold Gross profit Traceable expenses: Research and development (40% × $70,000) Marketing expenses (70% × $50,000) Life-cycle income $200,000 130,000 $ 70,000 (28,000) (35,000) $ 7,000 98. Refer to Figure 11-4. Return on sales for Product A would be a. 40.0%. b. 25.0%. c. 8.2%. d. 2.5%. ANSWER: c RATIONALE: SUPPORTING CALCULATIONS: Sales Cost of goods sold Gross profit Traceable expenses: Research and development (60% × $70,000) Marketing expenses (30% × $50,000) Life-cycle income $23,000/$280,000 = 8.2% $280,000 (200,000) $ 80,000 (42,000) (15,000) $ 23,000 99. Lavalier Company developed the following budgeted life-cycle income statement for two proposed products. Each product's life cycle is expected to be two years. Sales Cost of goods sold Gross profit Period expenses: Research and development Marketing Life-cycle income Product AA $400,000 300,000 $100,000 Product BB $350,000 200,000 $150,000 Total $750,000 500,000 $250,000 (100,000) (75,000) $ 75,000 A 12 percent return on sales is required for new products. Because the proposed products did not have a 12 percent return on sales, the products were going to be dropped. Relative to Product BB, Product AA requires more research and development costs but fewer resources to market the product. Sixty-five percent of the research and development costs are traceable to Product AA, and 40 percent of the marketing costs are traceable to Product AA. If research and development costs and marketing costs are traced to each product, life-cycle income for Product AA would be a. $3,000. b. $100,000. c. $35,000. d. $5,000. ANSWER: d RATIONALE: SUPPORTING CALCULATIONS: Sales Cost of goods sold Gross profit Traceable expenses: Research and development (65% × $100,000) Marketing expenses (40% × $75,000) Life-cycle income $400,000 (300,000) $100,000 (65,000) (30,000) $ 5,000 100. Lavalier Company developed the following budgeted life-cycle income statement for two proposed products. Each product's life cycle is expected to be two years. Sales Cost of goods sold Gross profit Period expenses: Research and development Marketing Life-cycle income Product AA $400,000 300,000 $100,000 Product BB $350,000 200,000 $150,000 Total $750,000 500,000 $250,000 (100,000) (75,000) $ 75,000 A 12 percent return on sales is required for new products. Because the proposed products did not have a 12 percent return on sales, the products were going to be dropped. Relative to Product BB, Product AA requires more research and development costs but fewer resources to market the product. Sixty-five percent of the research and development costs are traceable to Product AA, and 40 percent of the marketing costs are traceable to Product AA. If research and development costs and marketing costs are traced to each product, life-cycle income for Product BB would be a. $70,000. b. $90,000. c. $105,000. d. $150,000. ANSWER: a RATIONALE: SUPPORTING CALCULATIONS: Sales Cost of goods sold Gross profit Traceable expenses: Research and development (35% × $100,000) Marketing expenses (60% × $75,000) Life-cycle income $350,000 200,000 $150,000 (35,000) (45,000) $ 70,000 101. Luminous Company sells a product for $450 per unit. Its market share is 25 percent. The marketing manager feels that the market share can be increased to 33 percent with a reduction in price to $390. The product is currently earning a profit of $72 per unit. The president of Luminous Company feels that the $72 profit per unit must be maintained. What is the target price per unit? a. $378 b. $450 c. $318 d. $390 ANSWER: d RATIONALE: SUPPORTING CALCULATIONS: $390 is given. 102. Luminous Company sells a product for $450 per unit. Its market share is 25 percent. The marketing manager feels that the market share can be increased to 33 percent with a reduction in price to $390. The product is currently earning a profit of $72 per unit. The president of Luminous Company feels that the $72 profit per unit must be maintained. What is the original cost per unit? a. $390 b. $450 c. $378 d. $318 ANSWER: c RATIONALE: SUPPORTING CALCULATIONS: $450 - $72 = $378 103. Dot Company sells a product for $225 per unit. Its market share is 20 percent. The marketing manager feels that the market share can be increased to 30 percent with a reduction in price to $195. The product is currently earning a profit of $36 per unit. The president of Dot Company feels that the $36 profit per unit must be maintained. What is the target price per unit? a. $195 b. $225 c. $189 d. $159 ANSWER: a RATIONALE: SUPPORTING CALCULATIONS: $195 is given. 104. Dot Company sells a product for $225 per unit. Its market share is 20 percent. The marketing manager feels that the market share can be increased to 30 percent with a reduction in price to $195. The product is currently earning a profit of $36 per unit. The president of Dot Company feels that the $36 profit per unit must be maintained. What is the original cost per unit? a. $225 b. $195 c. $159 d. $189 ANSWER: d RATIONALE: SUPPORTING CALCULATIONS: $225 - $36 = $189 105. Dot Company sells a product for $225 per unit. Its market share is 20 percent. The marketing manager feels that the market share can be increased to 30 percent with a reduction in price to $195. The product is currently earning a profit of $36 per unit. The president of Dot Company feels that the $36 profit per unit must be maintained. What is the target cost per unit? a. $159 b. $195 c. $189 d. $225 ANSWER: a RATIONALE: SUPPORTING CALCULATIONS: $195 - $36 = $159 106. The manufacturing which reduces inventory levels because production is geared to demand is called: a. Traditional b. Conventional c. Extraordinary d. JIT ANSWER: d 107. Traditional manufacturing uses which of the following philosophies of quality control? a. zero defects b. total quality control c. acceptable quality level d. both a and b ANSWER: c 108. Which of the following is a trait of a traditional manufacturing system? a. push-through system b. value-chain focus c. total quality control d. high employee involvement ANSWER: a 109. Which of the following is NOT a trait of a traditional manufacturing system? a. push-through system b. short-term supplier contracts c. value-added focus d. total quality control ANSWER: d 110. Which of the following is a trait of a JIT system? a. push-through system b. significant inventory c. buyers' market d. large supplier base ANSWER: c 111. JIT manufacturing differs from traditional manufacturing in all of the following ways EXCEPT a. the treatment of direct materials and direct labor for product costing. b. the level of inventories. c. the approach to quality control. d. the physical layout of the manufacturing process. ANSWER: a 112. JIT manufacturing uses which of the following philosophies of quality control? a. just-in-case (JIC) b. acceptable quality level (AQL) c. total quality control (TQC) d. both a and c ANSWER: c 113. Which of the following is NOT a trait of a JIT system? a. acceptable quality level b. long-term contracts c. multi-skilled labor d. high employee involvement ANSWER: a 114. The goal of total quality control is a. to have less defective material than good material. b. to permit defects as long as they do not exceed a certain level. c. to have zero defects. d. both b and c. ANSWER: c 115. The approach to quality control which attempts to achieve zero defects is called: a. traditional b. acceptable quality level c. total quality control d. marginal control ANSWER: c 116. the traditional approach of permitting defects to occur as long as they do NOT exceed a certain level is called a. Total quality control b. Zero defects c. Acceptable quality level d. Both a and c ANSWER: c 117. If traditional manufacturing is used, which of the following is considered direct costs? a. setup costs b. direct labor c. maintenance of machinery d. inspection costs ANSWER: b 118. In a JIT manufacturing environment, product-costing information is used mainly for all of the following EXCEPT a. product costing of inventory for financial reporting purposes. b. pricing decisions. c. product profitability analysis. d. make-or-buy decisions. ANSWER: a 119. Which of the following manufacturing costs is assigned to products in a traditional environment using direct tracing? a. supervision b. materials c. repairs and maintenance d. energy ANSWER: b 120. Which of the following manufacturing costs is assigned to products in a traditional and JIT environment using direct tracing? a. direct materials b. direct labor c. operating supplies d. both a and b ANSWER: d 121. If JIT manufacturing is used and each manufacturing cell produces a single product, which of the following is considered a direct product cost? a. inspection costs b. materials c. setup costs d. all of these ANSWER: d 122. If JIT manufacturing is used and each manufacturing cell produces a single product, all of the following are considered direct product costs EXCEPT a. overtime wages for cell workers. b. the salary of the plant supervisor. c. the salary of the cell supervisor. d. all of these. ANSWER: b 123. Which of the following manufacturing costs is assigned to products in a traditional and JIT environment using allocation? a. insurance and taxes b. direct labor c. supervision (department) d. custodial services ANSWER: a 124. Which of the following manufacturing costs is assigned to products in JIT environment using direct tracing? a. material handling b. repairs and maintenance c. custodial services d. all of these ANSWER: d 125. Which of the following manufacturing costs is assigned to products in a traditional environment using driver tracing? a. direct labor b. direct materials c. energy d. insurance ANSWER: c 126. Which of the following manufacturing costs is assigned to products in a JIT environment using allocation? a. cafeteria services b. equipment depreciation c. insurance and taxes d. operating supplies ANSWER: c 127. Prior to installing a JIT system, Grindstone Company used machine hours to assign maintenance costs to its three products of 4-inch, 6-inch, and 9-inch insulation. The maintenance costs totaled $432,000 per year. The machine hours used by each product and the quantity produced of each product are as follows: 4-inch 6-inch 9-inch Machine Hours 5,000 12,000 7,000 Quantity Produced 15,000 rolls 12,500 rolls 11,200 rolls After installing JIT, three manufacturing cells were created and the cell workers were trained to perform maintenance. Maintenance costs for the three cells still totaled $432,000; however, these costs are now traceable to each cell. Cell, 4-inch Cell, 6-inch Cell, 9-inch $125,000 175,000 165,000 The maintenance cost per roll of 4-inch insulation before JIT is installed would be a. $11.25. b. $6.00. c. $7.75. d. $3.00. ANSWER: b RATIONALE: SUPPORTING CALCULATIONS: $432,000/24,000 = $18.00 per machine hour $18.00 × 5,000 machine hours = $90,000 $90,000/15,000 rolls = $6 per roll 128. Prior to installing a JIT system, Grindstone Company used machine hours to assign maintenance costs to its three products of 4-inch, 6-inch, and 9-inch insulation. The maintenance costs totaled $432,000 per year. The machine hours used by each product and the quantity produced of each product are as follows: 4-inch 6-inch 9-inch Machine Hours 5,000 12,000 7,000 Quantity Produced 15,000 rolls 12,500 rolls 11,200 rolls After installing JIT, three manufacturing cells were created and the cell workers were trained to perform maintenance. Maintenance costs for the three cells still totaled $432,000; however, these costs are now traceable to each cell. Cell, 4-inch Cell, 6-inch Cell, 9-inch $125,000 175,000 165,000 The maintenance cost per roll of 9-inch insulation before JIT is installed would be a. $7.75. b. $11.25. c. $14.00. d. $30.00. ANSWER: b RATIONALE: SUPPORTING CALCULATIONS: $432,000/24,000 = $18.00 per machine hour $18.00 × 7,000 machine hours = $126,000 $126,000/11,200 rolls = $11.25 per roll 129. Prior to installing a JIT system, Grindstone Company used machine hours to assign maintenance costs to its three products of 4-inch, 6-inch, and 9-inch insulation. The maintenance costs totaled $432,000 per year. The machine hours used by each product and the quantity produced of each product are as follows: Machine Hours 5,000 12,000 7,000 4-inch 6-inch 9-inch Quantity Produced 15,000 rolls 12,500 rolls 11,200 rolls After installing JIT, three manufacturing cells were created and the cell workers were trained to performmaintenance. Maintenance costs for the three cells still totaled $432,000; however, these costs are now traceable to each cell. Cell, 4-inch Cell, 6-inch Cell, 9-inch $125,000 175,000 165,000 After installing JIT, the maintenance cost per roll of 6-inch insulation is a. $8.67. b. $12.85. c. $14.00. d. $17.00. ANSWER: a RATIONALE: SUPPORTING CALCULATIONS: $175,000/12,500 rolls = $14 per roll 130. A firm that has implemented JIT had the following transactions: 1. Materials were purchased on account for $40,000. 2. Materials were placed into production. 3. Actual direct labor costs were $6,000. 4. Actual overhead costs were $40,000. 5. Conversion costs applied were $42,000. 6. All work was completed for the month. 7. All completed work was sold. 8. The variance is recognized. What will be the entry to record material purchases using the traditional approach? a. Materials and In Process Inventory Accounts Payable 40,000 b. Materials Inventory Accounts Payable 40,000 c. Accounts Payable Materials and In Process Inventory 40,000 d. Accounts Payable Materials Inventory 40,000 ANSWER: b 40,000 40,000 40,000 40,000 131. A firm that has implemented JIT had the following transactions: 1. Materials were purchased on account for $40,000. 2. Materials were placed into production. 3. Actual direct labor costs were $6,000. 4. Actual overhead costs were $40,000. 5. Conversion costs applied were $42,000. 6. All work was completed for the month. 7. All completed work was sold. 8. The variance is recognized. What will be the entry to record material purchases using the backflush approach? a. Materials and In Process Inventory 40,000 Accounts Payable 40,000 40,000 b. Materials Inventory Accounts Payable 40,000 40,000 c. Accounts Payable Materials and In Process Inventory 40,000 40,000 d. Accounts Payable Materials Inventory 40,000 ANSWER: a 132. A firm that has implemented JIT had the following transactions: 1. Materials were purchased on account for $40,000. 2. Materials were placed into production. 3. Actual direct labor costs were $6,000. 4. Actual overhead costs were $40,000. 5. Conversion costs applied were $42,000. 6. All work was completed for the month. 7. All completed work was sold. 8. The variance is recognized. What will be the entry to record material placed into production using the traditional approach? a. Materials and In Process Inventory 40,000 Work-in-process Inventory 40,000 b. Materials Inventory 40,000 Accounts Payable 40,000 c. Work-in-Process Inventory 40,000 Materials and In Process Inventory 40,000 d. Work-in-Process Inventory 40,000 Materials Inventory 40,000 ANSWER: d 133. A firm that has implemented JIT had the following transactions: 1. Materials were purchased on account for $40,000. 2. Materials were placed into production. 3. Actual direct labor costs were $6,000. 4. Actual overhead costs were $40,000. 5. Conversion costs applied were $42,000. 6. All work was completed for the month. 7. All completed work was sold. 8. The variance is recognized. What will be the entry to record materials placed into production using the backflush approach? a. Materials and In Process Inventory 40,000 Work-in-process Inventory 40,000 b. Materials Inventory 40,000 Accounts Payable 40,000 c. Work-in-Process Inventory 40,000 Materials and In Process Inventory 40,000 d. No entry is required ANSWER: d 134. A firm that has implemented JIT had the following transactions: 1. Materials were purchased on account for $40,000. 2. Materials were placed into production. 3. Actual direct labor costs were $6,000. 4. Actual overhead costs were $40,000. 5. Conversion costs applied were $42,000. 6. All work was completed for the month. 7. All completed work was sold. 8. The variance is recognized. Which of the following would NOT be an entry under the backflush system, assuming the second trigger point is the completion of goods? a. Materials and In Process Inventory 40,000 Accounts Payable 40,000 b. Work-in-Process Inventory 40,000 Materials Inventory 40,000 c. Conversion Cost Control 46,000 Wages Payable 6,000 Accounts Payable 40,000 d. Cost of Goods Sold 82,000 Finished Goods Inventory 82,000 ANSWER: b 135. Prior to installing a JIT system, Clarendon Company used machine hours to assign maintenance costs to its three products of 6-inch, 8-inch, and 11-inch insulation. The maintenance costs totaled $400,000 per year. The machine hours used by each product and the quantity produced of each product are as follows: Machine Hours 12,000 20,000 18,000 6-inch 8-inch 11-inch Quantity Produced 31,250 rolls 25,000 rolls 12,000 rolls After installing JIT, three manufacturing cells were created and the cell workers were trained to perform maintenance. Maintenance costs for the three cells still totaled $400,000; however, these costs are now traceable to each cell. Cell, 6-inch Cell, 8-inch Cell, 11-inch $100,000 120,000 180,000 The maintenance cost per roll of 8-inch insulation before JIT is installed would be a. $20.00. b. $16.00. c. $9.33. d. $6.40. ANSWER: d RATIONALE: SUPPORTING CALCULATIONS: $400,000/50,000 = $8 per machine hour $8 × 20,000 = $160,000 $160,000/25,000 rolls = $6.40 136. Prior to installing a JIT system, Clarendon Company used machine hours to assign maintenance costs to its three products of 6-inch, 8-inch, and 11-inch insulation. The maintenance costs totaled $400,000 per year. The machine hours used by each product and the quantity produced of each product are as follows: Machine Hours 12,000 20,000 18,000 6-inch 8-inch 11-inch Quantity Produced 31,250 rolls 25,000 rolls 12,000 rolls After installing JIT, three manufacturing cells were created and the cell workers were trained to perform maintenance. Maintenance costs for the three cells still totaled $400,000; however, these costs are now traceable to each cell. Cell, 6-inch Cell, 8-inch Cell, 11-inch $100,000 120,000 180,000 After installing JIT, the maintenance cost per roll of 6-inch insulation would be a. $1.28. b. $3.20. c. $2.84. d. $2.56. ANSWER: b RATIONALE: SUPPORTING CALCULATIONS: $100,000/31,250 = $3.20 137. Prior to installing a JIT system, Clarendon Company used machine hours to assign maintenance costs to its three products of 6-inch, 8-inch, and 11-inch insulation. The maintenance costs totaled $400,000 per year. The machine hours used by each product and the quantity produced of each product are as follows: Machine Hours 12,000 20,000 18,000 6-inch 8-inch 11-inch Quantity Produced 31,250 rolls 25,000 rolls 12,000 rolls After installing JIT, three manufacturing cells were created and the cell workers were trained to perform maintenance. Maintenance costs for the three cells still totaled $400,000; however, these costs are now traceable to each cell. Cell, 6-inch Cell, 8-inch Cell, 11-inch $100,000 120,000 180,000 After installing JIT, the maintenance cost per roll of 11-inch insulation would be a. $12.50. b. $12.86. c. $15.00. d. $5.86. ANSWER: c RATIONALE: SUPPORTING CALCULATIONS: $180,000/12,000 = $15.00 138. The following transactions take place after the implementation of JIT: 1. Materials were purchased on account for $75,000. 2. Materials were placed into production. 3. Actual direct labor costs were $16,000. 4. Actual overhead costs were $30,000. 5. Conversion costs applied were $52,000. 6. All work was completed for the month. 7. All completed work was sold. 8. The variance is recognized. What will be the entry to record material placed into production using the traditional approach? a. Materials and In Process Inventory 75,000 Work-in-Process Inventory 75,000 b. Materials Inventory 75,000 Accounts Payable 75,000 c. Work-n-Process Inventory 75,000 Materials and In Process Inventory 75,000 d. Work-in-Process Inventory 75,000 Materials Inventory 75,000 ANSWER: d 139. The following transactions take place after the implementation of JIT: 1. Materials were purchased on account for $75,000. 2. Materials were placed into production. 3. Actual direct labor costs were $16,000. 4. Actual overhead costs were $30,000. 5. Conversion costs applied were $52,000. 6. All work was completed for the month. 7. All completed work was sold. 8. The variance is recognized. What will be the entry to record materials placed into production using the backflush approach? a. Materials and in Process Inventory 75,000 Work-in-Process Inventory 75,000 b. Materials Inventory 75,000 Accounts Payable 75,000 c. Work-in-Process Inventory 75,000 Materials and in Process Inventory 75,000 d. No entry is required ANSWER: d 140. The following transactions take place after the implementation of JIT: 1. Materials were purchased on account for $75,000. 2. Materials were placed into production. 3. Actual direct labor costs were $16,000. 4. Actual overhead costs were $30,000. 5. Conversion costs applied were $52,000. 6. All work was completed for the month. 7. All completed work was sold. 8. The variance is recognized. Which of the following would NOT be an entry under the backflush system, assuming the second trigger point is the completion of goods? 75,000 a. Materials and In Process Inventory Accounts Payable 75,000 75,000 b. Work-in-Process Inventory Materials Inventory 75,000 46,000 c. Conversion Cost Control Wages Payable 16,000 Accounts Payable 30,000 102,000 d. Cost of Goods Sold Finished Goods Inventory 102,000 ANSWER: b 141. Laramie Company has a traditional, unit-based cost system. The Kansas City plant of Laramie produces eight different electronic products. Each year, 100,000 units of all products are produced. The demand for each product is about the same; thus, the average output for each product is 12,500 units. Although the products differ in complexity, each product uses about the same labor time and materials. The plant has used direct labor hours for years to assign overhead to products. The cost accounting department developed the following cost equation to help design engineers understand the assumed cost relationships. (The equation describes the relationship between total manufacturing costs and direct labor hours. The equation is supported by a coefficient of determination of 63 percent): Y = $5,000,000 + $60X where X is the number of direct labor hours The variable rate of $60 is broken down as follows: Direct labor Variable overhead Direct materials $19 12 29 Because of competitive pressures, product engineering was asked to redesign products to reduce the total cost of manufacturing. Using the above cost relationships, product engineering adopted the strategy of redesigning to reduce direct labor content. As each design was completed, an engineering change order was cut, triggering a series of events such as design approval, vendor selection, bill of materials update, redrawing of schematic, test runs, changes in setup procedures, development of new inspection procedures, and so on. After one year of design change, the normal volume of direct labor was reduced from 125,000 hours to 100,000 hours, with the 100,000 units being built. Although each product differs in its labor content, the redesign efforts reduced the labor content for all products. On average, labor content per unit of product dropped from 1.25 hours per unit to 1 hour per unit. Fixed overhead, however, increased from $5,000,000 to $6,000,000. Required: a. Using normal volume, compute the manufacturing cost per labor hour before the design changes. What is the cost per unit of an "average" product? b. Using the normal volume after the one year of design changes, compute the manufacturing cost per hour. What is the cost per unit of an "average" product? ANSWER: a. b. Cost per labor hour = [$5,000,000 + ($60 × 125,000)]/125,000 = $100 per hour Cost per unit of average product = $100 × 1.25 = $125.00 Cost per hour = [$6,000,000 + ($60 × 125,000)]/100,000 = $135.00 per hour Cost per unit of average product = $135.00 × 1 = $135.00 142. Alana Rodriguez has decided to purchase a Multi-Function Printer. She has narrowed the choice to two: Brand A and Brand B. Both brands have the same features and transmitting speed and use the same type of paper. Both come from companies with good reputations. The selling price for each is identical. After some review, Alana discovers that the cost of operating and maintaining Brand A over a three-year period is estimated to be $300. For Brand B, the operating and maintenance cost is $150. The sales agent for Brand B emphasizes the lower operating and maintenance cost. She claims that it is lower than any other Printer. In addition, she provides Alana with a copy of an article appearing in a PC magazine that rates service performance of various Printers. Brand B is rated number one. Required: a. b. c. Which brand should Alana buy? Why? What is the total product purchased by Alana? What does it mean to obtain a competitive advantage? What role does the cost management system play in helping to achieve this goal? ANSWER: a. b. c. Alana should buy Brand B because she will acquire more total product for her money. She will receive better service and cheaper operating costs. The total product consists of all tangible and intangible benefits. This includes the Printer, its features, its operating capabilities, maintainability, product reputation, service, and service reputation. A competitive advantage is providing better customer value for the same or lower cost or equivalent value for lower cost. The cost management system must provide information that helps identify strategies that will create a cost leadership position. 143. Ethereal Company sells a product used in many manufacturing processes. The sales activity involves four activity areas: Activity Area Order taking Sales visits Delivery vehicles Special runs The following customer information is given: Units sold List price Actual sales price Number of purchase orders Number of sales visits Number of deliveries Miles traveled per delivery Number of special runs A 100,000 $50 $45 30 6 10 40 1 Cost Driver and Rate $100 per purchase order $50 per visit $1 per delivery mile $300 per run B 80,000 $50 $48 20 5 8 5 0 D 60,000 $50 $50 10 3 6 20 2 Required: What is the profitability of customer B? ANSWER: B = (80,000 × $48) - (20 × $100) - (5 × $50) - (8 × 5 × $1) - 0 = $3,837,710 144. Clinton Corp. is a manufacturer of equipment used in motorcycles production. It currently produces a product with 15 parts but through redesign has reduced the number of parts to 5. Then current activity capacity and demand for the 15 part configuration and expected activity demand for the 5 part configuration are provided below: Activities Materials usage Assembly Purchasing parts Activity Driver number of parts direct labor hours number of orders Activity Capacity 300,000 10,00 10,00 Current Activity Demand 300,000 10,00 8,000 Expected Activity Demand 100,000 4,000 6,000 Materials usage has a rate of $4 per part and no fixed costs. Assembly has a rate of $15 per labor hour with no fixed component. Purchasing requires clerks that can process 5000 purchase orders. Each clerk earns $35,000 per year. There is also a $2 per order processing cost. The product sells for $45 and 50,000 units will be produced. Required: 1. What is the total cost savings from the new design? 2. What is the new sales price if the cost savings are passed on to the customer? ANSWER: M (300,000 - 100,000) $4 A (10,000 - 4,000 ) $15 P (8,000 - 6,000) $2 Total savings = = = $800,000 $ 90,000 $ 4,000 $894,000 $45 - $894,000/50,000 = $45-17.88 = $27.12 145. Eva Rodriguez, chairwoman of Wiccan Industries, had just completed examining a projected profit summary for two components that would be used in LCD Screens. Both units were still in a very preliminary planning stage, and a decision had to be made regarding their continued viability. The components would be developed, produced, and sold at the same time. Each product's life cycle is 40 months. The projected profit performance of the two items promised a return on sales of 10 percent—less than the 14 percent rate set by company standards. From the statements below, it appeared to Eva that the culprit was Component 402 because its gross profit percentage was much lower than that of Component 401. Sales Cost of goods sold Gross profit Research and development Selling expenses Profit before taxes 401 $500,000 250,000 $250,000 402 $500,000 350,000 $150,000 Total $1,000,000 600,000 $ 400,000 (230,000) (70,000) $ 100,000 Required: a. Explain why Eva may be wrong in her assessment of the relative performances of the two products. What change in the company's life-cycle budgeting approach would you suggest? b. Suppose that 75 percent of the research and development and 75 percent of the selling expenses are traceable to Component 401. Prepare budgeted life-cycle income statements for each product and calculate the return on sales. What does this tell you about the importance of accurate life-cycle budgeting? ANSWER: a. Whether Component 402 is the culprit or not depends on its research & development and selling costs. If they are much lower than 401's, then 401 could be the source of the problem. The accounting system should trace the development and selling costs to each product, if at all possible. In this way, a clearer picture of the total life-cycle cost of each product is obtained. b. Sales Cost of goods sold Gross profit Traceable expenses: Research and development Selling expenses Profit before taxes 401 $ 500,000 250,000 $ 250,000 402 $500,000 350,000 $150,000 (172,500) (52,500) $ 25,000 (57,500) (17,500) $ 75,000 By tracing the life-cycle costs to each product, management obtains a different picture of the relative profitability of each product. Component 402 is still the source of the problem, but it delivers a higher profit for the same sales as Component 401. 146. Loganberry Corporation sells a product for $400 per unit. Its market share is 22 percent of the units sold. The marketing manager feels that the market share can be increased to 28 percent of the units sold with a reduction in price to $340. The product is currently earning a profit of $64 per unit. The president of Loganberry Corporation feels that his company needs to maintain the same profit level per unit. The market share consists of $4,000,000 (10,000 units). Required: a. b. c. d. How many units does Loganberry Corporation currently sell of the product? What is the target price per unit? What is the original cost per unit? What is the target cost per unit? ANSWER: a. b. c. d. 10,000 × 0.22 = 2,200 $340 $400 - $64 = $336 $340 - $64 = $276 147. Harmonious Manufacturing Company sells a product for $200 per unit. Its market share is 18 percent of the units sold. The marketing manager feels that the market share can be increased to 25 percent of the units sold with a reduction in price to $170. The product is currently earning a profit of $32 per unit. The president of Harmonious Manufacturing Company feels that his company needs to maintain the same profit level per unit. The market share consists of $2,000,000 (10,000 units). Required: a. Of the market share of $2,000,000, how much is attributable to Harmonious Manufacturing? b. What is the target price per unit? c. What is the original cost per unit? d. What is the target cost per unit? ANSWER: a. b. c. d. $2,000,000 × 0.18 = $360,000 $170 $200 - $32 = $168 $170 - $32 = $138 148. Explain the difference between acceptable quality level and total quality control. ANSWER: Acceptable quality level and total quality control are different approaches to quality in the manufacturing environment. Acceptable quality level permits defects to occur provided they do not exceed a predetermined level. Acceptable quality level is associated with the traditional manufacturing approach. Total quality control strives for a defect-free manufacturing process. The goal of total quality control is zero defects. Total quality control is associated with JIT manufacturing. 149. MaximumTec has implemented JIT had the following transactions: 1. Materials were purchased on account for $70,000. 2. Materials were placed into production. 3. Actual direct labor costs were $14,000. 4. Actual overhead costs were $50,000. 5. Conversion costs applied were $54,000. 6. All work was completed for the month. 7. All completed work was sold. 8. The variance is recognized. Required: a. Provide the journal entries for the above transactions assuming the traditional approach was used. b. Provide the journal entries for a backflush system assuming the second trigger point is the point when goods are sold. ANSWER: a. 1. Materials Inventory Accounts Payable 70,000 2. Work-in-Process Inventory Materials Inventory 70,000 3. Work-in-Process Inventory Wages Payable 14,000 4. Overhead Control Various accounts 50,000 5. Work-in-Process Inventory Overhead Control 54,000 6. Finished Goods Inventory Work-in-Process Inventory 138,000 7. Cost of Goods Sold Finished Goods Inventory 138,000 8. Overhead Control Cost of Goods Sold b. 1. Materials and In Process Inventory Accounts Payable 4,000 70,000 70,000 70,000 14,000 50,000 54,000 138,000 138,000 4,000 70,000 2. No entry 3. Combined with overhead: See next entry 4. Conversion Cost Control 68,000 Various accounts Wages Payable 54,000 14,000 5. No entry 6. See next entry 7. Cost of Goods Sold Materials and In Process Inventory Conversion Costs Control 8. Conversion Cost Control Cost of Goods Sold 138,000 70,000 68,000 4,000 4,000 150. A firm that has implemented JIT had the following transactions: 1. Materials were purchased on account for $50,000. 2. Materials were placed into production. 3. Actual direct labor costs were $10,000. 4. Actual overhead costs were $40,000. 5. Conversion costs applied were $34,000. 6. All work was completed for the month. 7. All completed work was sold. 8. The variance is recognized. Required: a. Provide the journal entries for the above transactions assuming the traditional approach was used. b. Provide the journal entries for a backflush system assuming the second trigger point is the point when goods are completed. ANSWER: a. 1. 2. 3. 4. 5. 6. 7. 8. b. 1. Materials Inventory Accounts Payable 50,000 Work-in-Process Inventory Materials Inventory 50,000 Work-in-Process Inventory Wages Payable 10,000 Overhead Control Various accounts 40,000 Work-in-Process Inventory Overhead Control 34,000 Finished Goods Inventory Work-in-Process Inventory 94,000 Cost of Goods Sold Finished Goods Inventory 94,000 Cost of Goods Sold Overhead Control Materials and in Process inventory Accounts Payable 2. No entry 3. Combined with overhead: see next entry 4. Conversion Cost Control Various accounts Wages Payable 50,000 50,000 10,000 40,000 34,000 94,000 94,000 6,000 6,000 50,000 50,000 50,000 40,000 10,000 5. No entry 6. Finished Goods Inventory Materials and in Process Inventory Conversion Cost Control 94,000 Cost of Goods Sold Finished Goods Inventory 94,000 Cost of Goods Sold Conversion Cost Control 6,000 7. 8. 50,000 44,000 94,000 6,000 151. Prior to installing a JIT system, Plasticize Company used machine hours to assign maintenance costs to its three products of 3-inch, 5-inch, and 7-inch plastic tubing. The maintenance costs totaled $120,000 per year. The machine hours used by each product and the quantity produced of each product are as follows: Machine Hours 1,000 1,500 2,500 3-inch 5-inch 7-inch Quantity Produced 400 rolls 450 rolls 1,250 rolls After installing JIT, three manufacturing cells were created and the cell workers were trained to perform maintenance. Maintenance costs for the three cells still totaled $120,000; however, these costs are now traceable to each cell. Cell, 3-inch Cell, 5-inch Cell, 7-inch $20,000 32,400 67,600 Required: a. Compute the maintenance cost per roll for each type of tubing before JIT is installed. b. Compute the maintenance cost per roll for each type of tubing after JIT is installed. c. Explain why the JIT maintenance cost per roll is more accurate than the cost per roll using the traditional approach. ANSWER: a. $120,000/(1,000 + 1,500 + 2,500) = $24/machine hour 3-inch pipe: ($24 × 1,000)/400 rolls = $60 per roll 5-inch pipe: ($24 × 1,500)/450 rolls = $80 per roll 7-inch pipe: ($24 × 2,500)/1,250 rolls = $48 per roll b. $50.00 $72.00 $54.08 c. $20,000/400 rolls $32,400/450 rolls $67,600/1,250 rolls When JIT is used, the maintenance costs are directly traceable to the particular cell and product, resulting in more accurate cost information. 152. Fast & Furious Company recently implemented a JIT system and is considering implementing a backflush costing system. Following are the transactions for the first quarter of the year. 1. purchased raw materials on account for $525,000 2. all materials were received and placed into production 3. actual labor costs of $75,000 were incurred 4. actual overhead costs of $425,000 were incurred 5. conversion costs of $480,000 were applied to production as conversion costs are recognized quarterly 6. all work was completed for the month 7. all completed work was sold 8. the difference between applied costs and actual costs was determined Required: 1. Prepare journal entries using variation 2 of backflush costing. 2. Prepare journal entries using variation 4 of backflush costing. ANSWER: 1. Transaction Raw materials purchase Overhead incurred Sale of goods Variance is recognized Transaction Overhead incurred Sale of goods Variance recognized Journal entries Raw materials in process inventory Account payable Conversion cost control Wages payable Account payable Cost of goods sold Raw materials in process Conversion cost control Cost of goods sold Conversion cost control Journal entries Conversion cost control Wages payable Account payable Cost of goods sold Account payable Conversion cost control Cost of goods sold Conversion cost control $ 525,000 $525,000 $ 500,000 $ 75,000 $425,000 $1,005,000 $525,000 $480,000 $ 20,000 $ 20,000 $ 500,000 $ 75,000 $425,000 $1,005,000 $525,000 $480,000 $ 20,000 $ 20,000 153. Prior to installing a JIT system, PVCTec Company used machine hours to assign maintenance costs to its three products of 9-inch, 11-inch, and 13-inch plastic pipe. The maintenance costs totaled $540,000 per year. The machine hours used by each product and the quantity produced of each product are as follows: Machine Hours 10,000 14,000 21,000 9-inch 11-inch 13-inch Quantity Produced 3,750 rolls 4,000 rolls 5,000 rolls After installing JIT, three manufacturing cells were created, and the cell workers were trained to perform maintenance. Maintenance costs for the three cells still totaled $540,000; however, these costs are now traceable to each cell. Cell, 9-inch Cell, 11-inch Cell, 13-inch $ 90,000 160,000 290,000 Required: a. Compute the maintenance cost per roll for each type of PVC pipe before JIT is installed. b. Compute the maintenance cost per roll for each type of PVC pipe after JIT is installed. c. Explain why the JIT maintenance cost per roll is more accurate than the cost per roll using the traditional approach. ANSWER: a. $540,000 /(10,000 + 14,000 + 21,000) = $12 per machine hour 9-inch pipe: ($12 × 10,000)/3,750 rolls = $32.00 per roll 11-inch pipe: ($12 × 14,000)/4,000 rolls = $42.00 per roll 13-inch pipe: ($12 × 21,000)/5,000 rolls = $50.40 per roll b. $24.00 $40.00 $58.00 $90,000/3,750 rolls $160,000/4,000 rolls $290,000/5,000 rolls c. When JIT is used, the maintenance costs are directly traceable to the particular cell and product resulting in more accurate cost information.