Accountants want not to assign costs to the wrong jobs.

What problem(s) does ass

wrong job cause?

If accountants assign costs to wrong jobs, the information about cost of a specific job could b
management and in that situation the managers in charge could make a wrong decision due
information about certain jobs. The potential problem could be inappropriate pricing, poor job
misleading job profit calculation.

Compare and contrast the problem of providing quality service in a service compan
quality goods in a manufacturing company.

In my opinion the main problem in providing quality service compared to a quality good is tha
for that reason, the company has no way of checking the actual quality of a service as oppos
company that can check the quality of a good.

Why must rms have reliable suppliers when using just-in-time methods?

Obviously, if a company uses just-in-time method that mean thay do not carry any invento
that means that if any supplier fails to deliver materials the production in the company wi
be losing money.

Completing missing data (Appendix 2.2) . After a dispute

concerning wages, John Lyon destroyed all information systems les
and tossed an incendiary device into the Smiley Companys record
vault. Within moments, only a few readable, charred fragments
remained from the companys hard-copy backup of the computer
les, as follows:

purchases of direct ma

Manufacturing ove
a)

cost of goods manufactured (fin

Overhead overappl

cost of goods sol

Bal. 4/1
urchases of direct materials in April

Direct materials inventory

12,000
42,000 b)
42,100 Direct Materials used

Bal. 4/30

Bal. 4/1
Direct materials used
Direct labor
Manufacturing overhaed applied

11,900 g)
Work-in-process inventory
4,500
42,100 f)
31,200
15,600 c)

89,000 cost of goods manufact

Bal. 4/30

Bal. 4/1
ods manufactured (finished) in April

4,400
Finish good inventory
11,000
89,000

84,000 cost of goods sold durin

Bal. 4/30
Actual costs for April
Overhead overapplied (to COGS)

16,000
Manufacturing overhead
14,800
15,600 Manufacturing overhae
800 e)

Accounts payable

6,000 Bal. 4/1

42,000 purchases of direct mat
payments to suppliers

40,000
8,000 Bal. 4/30

cost of goods sold during April

Cost of good sold

84,000

800 Overhead overapplied f

COGS balance 4/30

83,200 d)

Answers:
a)
b)
c)
d)
e)
f)
g)

4,400
42,000
15,600
83,200
800
42,100
11,900

Estimated manufacturing overhead

Estimated direct labor hours
Predetermined overhead rate

180,000
30,000
6

ct Materials used

of goods manufactured (finished) in April and transferred to Finished Goods

of goods sold during April

ufacturing overhaed applied

hases of direct materials in April

head overapplied from manufacturing overhead

Why is an organization that has a long-run focus more likely to implement ABC tha
one that has a short-term focus?

This is because ABC in order to be implemented right demands longer periods, and in the lon
run ABC brings better results. The reality is that in order to have solid ABC, an organization w
have to invest time into it. In addition, company implementing ABC must put focus on this ta
as ABC asks for a company wide participation. In any other case, ABC will not be implemente
well and will not bring wanted results.

What is a cost driver? Give three examples.

The cost driver is an activity that causes cost. Three examples of cost drivers:
1. Labor hours
2. Raw material moves
3. Kilowatt hours

Martha Clark, the vice-president of marketing, wonders how products can cost less
under one cost system than under another: Arent costs cut-and-dried? How wou
you respond?

No method can measure cost 100% accurately because there are some costs that cannot be
directly added to a product (overhead costs). For this reason, different methods have differen
approaches to overhead cost allocation, and those different methods come up with different
total cost numbers and this is the reason why a product can cost less under one cost system
than under another.

Activity-based costing. Jake Miille has just joined the Ciudad Juarez factory (tex
Miille believes he can reduce production costs if he reduces the number of mach
arrivals and the anticipated demand for the companys products. In March, he p
scheduling he can reduce the number of setups for both mountain and racing bi

a. Refer to Exhibit 3.5. Compute the amount of overhead allocated to each prod
Assume the number of machine setups in March is seven setups for mountain bi
with the reduction in the number of setups; thus, the setup rate remains at $2,0

b. What information did activity-based costing provide that enabled Jake Miille
traditional volume-based allocation methods? What are the disadvantages?

a.

Mountain bikes
Activity

Purchasing materials
Machine setups
Inspections
Running machines
Total cost allocated to each product
Total overhead

Cost driver
rate

Actual cost
driver units

20
2,000
100
30

1,000
7
200
1,500

b.
Using ABC Jake found out that machine setups are very costly and that these setups bump
machine setups he managed to save 42,000 compared to the original scenario.

dad Juarez factory (text exam-ple) as the new production manager. He was pleased to se
es the number of machine setups. He has spent the past month working with purchasing
oducts. In March, he plans to produce 1,000 mountain bikes and 200 racing bikes. Miille
mountain and racing bikes by about 50 percent.

allocated to each product line mountain bikes and racing bikes assuming annual setups
setups for mountain bikes and 15 setups for racing bikes. Assume the overhead costs of
up rate remains at $2,000 per setup. All other overhead costs will remain the same.

hat enabled Jake Miille to pursue reducing overhead costs? In general, what are the adva
he disadvantages?

ntain bikes
Costs allocated to
mountain bikes
20,000
14,000
20,000
45,000
99,000

Racing bikes
Costs
Actual cost
allocated to
driver units
racing bikes
200
4,000
15
30,000
200
20,000
500
15,000
69,000
168,000

d that these setups bump up total costs when making bikes. Jake saw that by simply reducing
ginal scenario.

He was pleased to see the company uses activity-based costing.

rking with purchasing and sales to better coordinate raw material
00 racing bikes. Miille believes that with his efcient production

suming annual setups are reduced by approximately 50 percent.

he overhead costs of setting up machines decrease proportionately
emain the same.

ral, what are the advantages of activity-based costing over the

by simply reducing

ABC versus traditional costing. DuraDisc Corporation produces two types of compact dis
in computer drives and are designed for data storage rather than accurate sound reprodu
quality, high-grade model to enter the lucrative music-recording market. Since the new pr
Management expected a significant profit increase related to rapidly growing sales of the
may not be accurately allocating costs to products.Management has asked you to investig
overhead is currently assigned to products based on the direct labor costs in the products.
production of 320,000 standard CDs and 120,000 high-grade CDs. Selling prices last year
Direct labor and direct materials costs for last year were as follows:

a.
Rate
Direct materials
Direct labor
Number of production runs
Quality tests performed
Shipping orders processed
Overhead
Total costs
Per unit

10,000
12,000
1,467

Standard
125,000
160,000
200,000
144,000
146,667
490,667
775,667
2.42

High grade
114,000
80,000
100,000
216,000
73,333
389,333
583,333
4.86

Standard
125,000
160,000
586,667
871,667
2.72

High grade
114,000
80,000
293,333
487,333
4.06

b.

Direct materials
Direct labor
Overhead
Total costs
Per unit
c.
Selling price
Cost to produce
Profit

ABC
Standard
High grade
3.6
5.8
2.42
4.86
1.18
0.94

Labor based
Standard
3.6
2.72
0.88

It seems that under the labor based overhead allocation method the company understate

es two types of compact discs: standard and high-grade. The standard CDs are used primarily
han accurate sound reproduction. The company only recently began producing the higherng market. Since the new product was introduced, profits have seen only a modest increase.
apidly growing sales of the high-grade discs. Management believes the accounting system
nt has asked you to investigate the cost allocation problem. You find that manufacturing
labor costs in the products. Last years manufacturing overhead was $880,000, based on
CDs. Selling prices last year averaged $3.60 per standard disc and $5.80 per high-grade disc.
lows:

Total
239,000
240,000
300,000
360,000
220,000
880,000
1,359,000

Cost assigned

300,000
360,000
220,000

Standard
125,000
160,000
20
12
100

Total
239,000
240,000
880,000
1,359,000

Labor based
High grade
5.8
4.06
1.74

od the company understated the cost to produce high grade discs.

High grade
114,000
80,000
10
18
50

CDs are used primarily

ducing the highery a modest increase.
accounting system
at manufacturing
880,000, based on
per high-grade disc.

Units produced
Standard
High grade
320,000
120,000