For Accountsguru only

1. Describe a difference between traditional cost systems and ABC cost systems.

2. Match the activities to the appropriate level they are grouped in:

1. processing purchase orders

2. design new products

3. hire a new employee

4. process a unit in the manufacturing process

a. organization sustaining

b. unit level

c. product level

d. batch level

3. Apex’s ABC activity information is as follows:

	total cost	total activity	activity rate
customer orders	315,000	1000 orders
product design	257,000	200 designs
order size	380,000	20000 machine hours
customer relations	367,500	100 customers
other	490,500	n/a

Compute the activity rate for all applicable activities above.

4. Apex manufactures 2 models of sailboats, the standard and the deluxe.

standard boat	activity rate	activity	ABC cost allocation
customer order		2 orders
product design		0 designs
order size		200 machine hours
customer relations		n/a
deluxe boat		activity
customer order		1 orders
product design		1 designs
order size		100 machine hours
customer relations		n/a

Use the activity rate from above in #4 in the activity rate column. Compute the ABC cost allocation above.

5. What are 2 advantages of budgeting?

6. Why is self-imposed budgeting better than budgets that are just imposed from top management down?

7. The _________________ budget should always be prepared first.

8. List 3 different types of budgets.

9. True or False – managers should be punished for missing a budget target.

10. Why is it important to identify only the relevant costs when making decisions?

11. Sherri is going to Chicago to see her friend Ryan. She is trying to decide which is cheaper, driving or riding the train. Following is a list of costs that Sherri has compiled in relation to the trip.

Identify which costs are relevant (R).

· _________ Annual straight line depreciation on the car

· _________ Cost of gasoline

· _________ Annual cost of auto insurance and license fee

· _________ Maintenance and repairs

· _________ Parking fees at home

· _________ Cost of train ticket

· _________ Reduction in resale value of car due to mileage used and wear and tear

· _________ Cost of putting dog in kennel while she is gone

· _________ Cost of parking car in Chicago

12. The financial information for Jamison drug store by business line is as follows:

	total	drugs	cosmetics	housewares
sales	$250,000	$125,000	$75,000	$50,000
variable expenses	$105,000	$50,000	$25,000	$30,000
contribution margin	$145,000	$75,000	$50,000	$20,000
fixed expenses
salaries	$50,000	$29,500	$12,500	$8,000
advertising	$15,000	$1,000	$7,500	$6,500
utilities	$2,000	$500	$500	$1,000
depreciation	$5,000	$1,000	$2,000	$2,000
rent	$20,000	$10,000	$6,000	$4,000
insurance	$3,000	$2,000	$500	$500
general administrative	$30,000	$15,000	$9,000	$6,000
total	$125,000	$59,000	$38,000	$28,000
net income/ loss	$20,000	$16,000	$12,000	-$8,000

It was determined that the associated salaries, advertising and insurance would all be eliminated if Jamison drops the housewares segment. The utilities, depreciation, rent and general and administrative fees are all allocations.

Jamison is currently deciding whether the company would benefit overall if the housewares business line was dropped completely, since it is losing money consistently each month. Using what you know about avoidable and unavoidable costs, advise Jamison as their outside consultant as to which is the better business decision. (Support your work with numbers.)

13. Austin LTD. Manufactures a component that is used in the fans it produces. A supplier has offered to supply the component for $25 per part. The annual requirements of Austin are 20,000 components. Austin’s cost detail of manufacturing the component is as follows:

per unit
direct materials	$9
direct labor	$5
variable overhead	$1
depreciation of equipment	$3
supervisor's salary	$2
general factory overhead	$10
total	$30

It was determined that the special equipment has no resale value and cannot be used for another process. The factory overhead is an allocation and would be unaffected by the decision. The costs above are based on the same 20,000 units that the supplier would supply.

Should Austin continue to manufacture the component or purchase it from the outside supplier?

14. Mountain Goat Cycles has just received a request from the Seattle Police Department to produce 100 specially modified mountain bikes at $179 each. Mountain Goat Cycles can easily modify its City Cruiser model to fit the specifications of the Seattle Police Department. The normal selling price of the City Cruiser bike is $249 and its unit product cost is $182 as shown below:

Direct Materials	$86
Direct Labor	$45
Manufacturing Overhead	$51
Total Unit Product Cost	$182

The variable portion of the above manufacturing overhead is $6 per unit. The order would have no effect on the company’s total fixed manufacturing overhead costs. The special modifications requested by the Seattle Police Department would require $17 per unit incremental variable costs. In addition, the company would have to pay a graphics design studio $1,200 to design and cut stencils that would be used for painting the Police Department’s logo on the bikes. Currently, Mountain Goat Cycles is not operating at capacity.

a. Should Mountain Goat Cycles accept the special order?

b. Show your calculations to show what effect the order will have on net income.

c. Would it make a difference if Mountain Goat Cycles was operating at capacity? Why or why not?

15. Mountain Goat Cycles also makes saddle bags for its bicycles. There are two types, the Mountain bag and the Touring bag.

	Mountain	Touring
Selling price per unit	$25	$30
Variable cost per unit	$10	$18
Contribution Margin per unit	$15	$12
Contribution Margin ratio	60%	40%

At Mountain Goat, the stitching machine is the constrained resource (or bottleneck). Additional information is as follows:

· The stitching machine has a capacity of 2400 minutes per week.

· The Mountain bag requires 1 minute of stitching time

· The Touring bag requires ½ minute of stitching time

· Current demand for the Mountain bag is 2000 units per week

· Current demand for the Touring bag is 2400 units per week.

Based on the above information, how many units of each bag should be produced to utilize the constrained resource to its fullest and get the most money for the company?

16. Why can allocation of common costs cause inaccurate decisions to be made?

17. John Boy Lumber cuts logs to create 2 immediate joint products, lumber and sawdust. Unfinished lumber can be sold as is for $140 or processed further at a sales price of $270. Sawdust can be sold as is for $40 or processed further for a sales price of $50. There are joint product costs (costs up to the split off point) allocated to each of the products – $176 for lumber and $24 for sawdust. The cost of further processing is $40 for lumber and $20 for sawdust.

a. Should John Boy Lumber process lumber further or sell the unfinished lumber as is?

b. Should John Boy Lumber process the sawdust further or sell it as is?

18. There are 2 types of capital budgeting decisions, screening decisions and preference decisions. What is the difference between the two?

19. What is the concept of the time value of money?

20. Why do companies have hurdle rates (or required rates of return)?

21. What is the cost of capital and why is it used as the hurdle rate for companies?

22. How are flexible budgets more helpful vs. static or planning budgets?

23. Warrior Company needs a new processing machine. The company is considering 2 different machines: machine 0178 and machine 2216. Machine 0178 costs $20,000 and will reduce operating costs by $5,000 per year. Machine 2216 costs $15,000 and reduces operating costs by $3,000 per year. Compute the payback for each machine and determine which should be selected using the payback method.

24. Why are NPV and IRR more preferable methods than the payback method and simple rate of return when making capital budgeting decisions?

25. Westerville Services Company, a division of a golf holding company, provides various services to operators of golf courses in Columbus, Ohio. Select financial information concerning the most recent year appears below:

Sales	$10,000,000
Net income	$3,000,000
Average operating assets	$20,000,000

Ignore the impact of income taxes on your calculation.

Compute the return on investment (ROI) for Westerville Services Company.

26. Ohio Golf Inc. specializes in managing and developing golf course communities in Ohio and surrounding states.

In the most recent year, the company had a net operating income of $2,000,000 on sales of $10,000,000. The company’s average operating assets for the year were $12,000,000 and its minimum required rate of return is 15% based on the company’s cost of capital.

Ignore the impact of income taxes on your calculation.

Compute the company’s residual income for the year.

27. Why is it helpful to evaluate residual income when determining performance and not just focus on ROI?

28. What is the difference between prevention and appraisal costs? Give an example of each.

29. What are the 2 costs of quality failure? Which is the most damaging to a company?

30. Why is it helpful for management to compile all costs of quality together in an overall quality report?

31. What is Just in time production? Can we use this model 100%? Why or why not?

32. What is target costing? How does it differ from cost plus pricing?

33. What is decentralization? Describe 2 benefits of decentralizing.

34. What are the 4 perspectives of the balanced scorecard?

35. Why is it important to focus on lead indicators as well as lag indicators?