Multiple Choice Questions
1. Which of the following statements is (are)
true about non-value-added activities?
I.
Non-value-added
activities are often unnecessary and dispensable.
II.
Non-value-added
activities may be necessary but are being performed in an inefficient and
improvable manner.
III.
Non-value-added
activities can be eliminated without deterioration of product quality,
performance, or perceived value.
A. I only
B. II only.
C. III only.
D. I and II.
E. I, II, and III.
Answer:
E LO: 3 Type: RC
2. During a recent accounting period, Marty's
shipping department processed 26 orders.
Each order typically takes four hours to complete; however, the average
time increased to five hours because of various departmental
inefficiencies. If shipping labor is
paid $14 per hour, the company's non-value-added cost would be:
A. $0.
B. $56.
C. $364.
D. $1,456.
E. $1,820.
Answer: C LO: 3 Type: A
3. Stanley Corporation takes eight hours to
complete the setup process for a certain electrical component, with the setup
cost averaging $150 per hour. If the
company's competitor can accomplish the same process in six hours, Stanley's
non-value-added cost would be:
A. $0.
B. $150.
C. $300.
D. $900.
E. $1,200.
Answer: C LO: 3 Type: A
4. Factory Oak produces various wooden
bookcases, tables, storage units, and chairs.
Which of the following would be included in a listing of the company's
non-value-added activities?
A. Assembly of
tables.
B. Staining of storage
units.
C. Transfer of
chairs from the assembly line to the staining facility.
D. Storage of
completed bookcases in inventory.
E. Both
"C" and "D."
Answer: E LO:
3 Type: N
5. Airstream builds
recreational motor homes. All of the
following activities add value to the finished product except:
A. installation of
carpet.
B. assembly of the
frame to the chassis.
C. storage of the
vehicle in the sales area.
D. addition of
exterior lights.
E. final painting
and polishing.
Answer: C LO:
3 Type: N
6. In an attempt to cut non-value-added costs, companies may:
A. reduce the scope of selected activities.
B. eliminate selected activities.
C. combine selected activities.
D. do "A" and "B" above.
E. do "A," "B," and
"C" above.
Answer:
E LO: 3 Type: RC
7. Customer profitability analysis is tied
closely to:
A. just-in-time systems.
B. activity-based costing.
C. job costing.
D. process costing.
E. operation costing.
Answer:
B LO: 4 Type: RC
8. Generally speaking, companies prefer doing
business with customers who:
A. order small quantities rather than large
quantities.
B. often change their orders.
C. require special packaging or handling.
D. request normal delivery times.
E. need specialized engineering design changes.
Answer:
D LO: 4 Type: RC
9. Which of the following can have a negative
impact on a sale's profitability?
A. Number of required sales contacts (phone
calls, visits, etc.).
B. Special shipping instructions.
C. Accounts receivable collection time.
D. Purchase-order changes.
E. All of the above.
Answer:
E LO: 4 Type: N
10. Horton Corporation's customers differ greatly
with respect to number of required sales contacts (e.g., phone calls and sales
visits), account payment patterns, and design/engineering change orders. Which of the following choices likely denotes
an ideal customer from Horton's perspective?
Required
Sales Contacts
|
Account
Payment Patterns
|
Design/Engineering
Change Orders
|
|
A.
|
Many
|
Slow
|
Many
|
B.
|
Many
|
Rapid
|
Many
|
C.
|
Few
|
Slow
|
Many
|
D.
|
Few
|
Rapid
|
Few
|
E.
|
Many
|
Rapid
|
Few
|
Answer:
D LO: 4 Type: N
11. Which of the following is an appropriate way
to analyze customer profitability?
A. The cost of servicing a customer computed as
a percentage of the customer's gross margin.
B. The cost of servicing a customer computed as
a percentage of the customer's gross margin, compared against company or
industry norms.
C. The cost of servicing a customer computed as
a percentage of the customer's gross margin, examined over several years.
D. Choices "A" and "B."
E. Choices "A," "B," and
"C."
Answer:
E LO: 4 Type: RC
12. The costing technique that produces a
stipulated profit when a product is sold at its estimated market-driven price
is termed:
A. kaizen costing.
B. product costing.
C. target costing.
D. full costing.
E. strategic costing.
Answer:
C LO: 5 Type: RC
13. The four tasks that follow take place in the
concept known as target costing:
1—Value
engineering.
2—Establish
a target selling price.
3—Establish
a target cost.
4—Establish
a target profit.
Which
of the following choices correctly depicts the sequence of these tasks?
A. 1, 3, 4, 2.
B. 3, 1, 4, 2.
C. 2, 4, 3, 1.
D. 2, 3, 1, 4.
E. Some other sequence not listed above.
Answer:
C LO: 5 Type: RC
14.
Of the five tasks
that follow, which one is typically performed second when using the concept
known as target costing?
A.
Compute a target
cost.
B.
Determine a target
selling price.
C.
Calculate a
target profit.
D.
Select a cost
driver.
E.
Undertake value
engineering.
Answer:
C LO: 5 Type: RC
15. Robertson, Inc., uses target costing and
sells a product for $36 per unit. The
company seeks a profit margin equal to 25% of sales. If the current manufacturing cost is $29 per
unit, the firm will need to implement a cost reduction of:
A. $0.
B. $2.
C. $9.
D. $20.
E. $27.
Answer:
B LO: 5 Type: A
16. Collins Corporation uses target costing and
sells a product for $50 per unit. The
company seeks a profit margin equal to 40% of sales. If target-costing calculations revealed a
need for a $5 cost reduction, the firm's current manufacturing cost must be:
A. $20.
B. $25.
C. $30.
D. $35.
E. some other amount.
Answer:
D LO: 5 Type: A
17. The process of continual cost reduction
during the manufacturing phase of an existing product is termed:
A. kaizen costing.
B. product costing.
C. target costing.
D. market costing.
E. strategic costing.
Answer:
A LO: 6 Type: RC
18. Kaizen costing refers to:
A. radical cost reductions during the design
phase of a product.
B. radical cost reductions during the
manufacturing phase of a product.
C. small, continual cost reductions during the
design phase of a product.
D. small, continual cost reductions during the
manufacturing phase of a product.
E. the use of operational costing in
out-of-control manufacturing situations.
Answer:
D LO: 6 Type: RC
19. Which of the following would least
likely be a feature or goal that is associated with a kaizen-costing program?
A. Elimination of waste.
B. Use of overhead application rates.
C. Implementation of employee suggestions.
D. Improvements in production time.
E. Reduction of non-value-added activities and
costs.
Answer:
B LO: 6 Type: RC
20. The comparison of a company's practices and
performance levels against those of other organizations is most commonly known
as:
A. benchmarking.
B. continuous improvement.
C. re-engineering.
D. comparative analysis.
E. kaizen business analysis (KBA).
Answer:
A LO: 7 Type: RC
21. Which of the following techniques does not
logically belong with the others?
A. Product costing.
B. Value engineering.
C. Kaizen costing
D. Continuous improvement.
E. Benchmarking.
Answer:
A LO: 5, 6, 7 Type: N
22. Which of the following statements about
re-engineering is (are) true?
I.
Re-engineering
is the complete redesign of a process in an attempt to find creative new ways
to accomplish an objective.
II.
Re-engineering
involves more of a "giant leap" than the concept of kaizen.
III.
Re-engineering
may entail high risks.
A. I only.
B. I and II.
C. I and III.
D. II and III.
E. I, II, and III.
Answer: E LO: 7
Type: RC
23. The contemporary management tool that focuses
on restrictions that limit a company's ability to maximize long-run profit is
commonly known as:
A. simulation.
B. linear regression.
C. constraint manipulation.
D. the theory of constraints.
E. game theory.
Answer:
D LO: 7 Type: RC
24. A company that adopts a just-in-time
production system would attempt to reduce and/or eliminate:
A. raw-material inventory.
B. raw-material inventory and work-in-process
inventory.
C. raw-material inventory, work-in-process
inventory, and finished-goods inventory.
D. work-in-process inventory.
E. finished-goods inventory.
Answer:
C LO: 8 Type: RC
25. Which of the following inventories would a
company try to reduce and/or eliminate under a just-in-time system?
Raw-Material Inventory
|
Work-in-Process Inventory
|
Finished-Goods Inventory
|
|
A.
|
No
|
No
|
Yes
|
B.
|
No
|
Yes
|
No
|
C.
|
Yes
|
No
|
No
|
D.
|
Yes
|
No
|
Yes
|
E.
|
Yes
|
Yes
|
Yes
|
Answer:
E LO: 8 Type: RC
26. Marion Corporation, which produces unique
office furniture, recently installed a just-in-time production system. The various steps in the company's
manufacturing process are coordinated by using a philosophy known as:
A. supply pull.
B. demand pull.
C. supply push.
D. demand push.
E. none of the above.
Answer:
B LO: 8 Type: N
27. Which of the following statements regarding
the pull method is (are) true?
I.
Goods
are produced in each manufacturing stage only as they are needed at the next
stage.
II.
The
pull method greatly reduces work-in-process inventory.
III.
The
pull method reduces waiting time and the associated non-value-added cost.
A. II only.
B. I and II.
C. I and III.
D. II and III.
E. I, II, and III.
Answer:
E LO: 8 Type: RC
28. In the pull method of coordinating a
production process:
A. departments early in the production process
continually make components in order to ensure that later departments do not
run out.
B. nothing is manufactured at a work center
until a need is signaled from a subsequent process.
C. work-in-process inventories are increased
throughout the plant.
D. production employees never have idle time,
resulting in increased efficiency.
E. defective products are "pulled" off
the line and sent to a special department for rework.
Answer:
B LO: 8 Type: RC
29. A Kanban:
A. is used in conjunction with activity-based
costing.
B. facilitates quick and inexpensive setups of
machines.
C. helps train workers to do a variety of
assignments.
D. initiates production in a particular work
center.
E. measures the correlation between a cost
driver and a cost pool.
Answer:
D LO: 8 Type: RC
30. Which of the following is not a key
feature of a JIT system?
A. Purchases of materials in relatively large
amounts (i.e., lot sizes).
B. A smooth, uniform production rate.
C. Total quality control.
D. Multiskilled workers and flexible production
facilities.
E. A pull approach to coordinating steps in the
production process.
Answer:
A LO: 8 Type: RC
31. Which of the following statements regarding a
JIT system is (are) true?
I.
Materials
are purchased and goods are produced only as required.
II.
Employees
are highly skilled at single tasks in an effort to maintain quality control.
III.
A JIT
system is characterized by many small purchases of raw materials.
A. I only.
B. I and II.
C. I and III.
D. II and III.
E. I, II, and III.
Answer:
C LO: 8 Type: RC
32. Which of the following statements regarding
quality is (are) true for a company that has implemented a JIT system?
I.
JIT
requires quality production facilities, methods, and employees.
II.
JIT
requires the acquisition of quality raw materials.
III.
JIT
requires that long-term contracts be negotiated with quality suppliers.
A. II only.
B. I and II.
C. I and III.
D. II and III.
E. I, II, and III.
Answer:
E LO: 8 Type: RC
33. A firm that uses a JIT purchasing philosophy
probably:
A. has many suppliers.
B. has extensive inspection of purchased items
at the receiving point.
C. has relatively few suppliers.
D. has deliveries of purchased items made in
small lot sizes immediately before the goods are needed in production.
E. has relatively few suppliers and has
deliveries of purchased items made in small lot sizes immediately before the
goods are needed in production.
Answer:
E LO: 8 Type: RC
34. Which of the following statements is (are)
true about JIT purchasing as compared with conventional purchasing systems?
I.
Quality
control by the supplier is more crucial.
II.
Adherence
to delivery schedules by vendors is more crucial.
III.
Long-term
supplier contracts are common.
A. I only
B. II only.
C. III only.
D. I and II.
E. I, II, and III.
Answer:
E LO: 8 Type: N
35. Which of the following statements about a
just-in-time (JIT) purchasing system is false?
A. Since there is minimal backup, companies must
acquire quality raw materials.
B. Raw materials are stockpiled to avoid
production disruptions.
C. In comparison with experiences under
traditional systems, manufacturers normally deal with a reduced number of
suppliers.
D. Supplier reliability tends to be more
important under a JIT system than under a traditional purchasing system.
E. The average purchase size is smaller with a
JIT system than under a traditional purchasing system.
Answer:
B LO: 8 Type: RC
36. Hudson, Inc., is considering a change from a
traditional purchasing system to a just-in-time purchasing system. What has probably happened to Hudson's cost per
purchase order and inventory unit storage cost to prompt the company to
consider such a change?
A. Purchase-order cost is increasing and unit
storage cost is increasing.
B. Purchase-order cost is increasing and unit
storage cost is decreasing.
C. Purchase-order cost is decreasing and unit
storage cost is increasing.
D. Purchase-order cost is decreasing and unit
storage cost is decreasing.
E. Both of these costs are relatively stable in
amount.
Answer:
C LO: 8 Type: N
37. When a company adopts a just-in-time
inventory system, it would expect:
A. higher inventories and less frequent
purchases.
B. higher inventories and more frequent
purchases.
C. lower inventories and less frequent
purchases.
D. lower inventories and more frequent
purchases.
E. lower inventories and more units purchased on
a given order.
Answer:
D LO: 8 Type: N
38. When a company adopts a just-in-time
inventory system, it would expect:
A. higher inventories and fewer units purchased
on a given order.
B. higher inventories and more units purchased
on a given order.
C. lower inventories and fewer units purchased
on a given order.
D. lower inventories and more units purchased on
a given order.
E. lower inventories and less frequent
purchases.
Answer:
C LO: 8 Type: RC
39. Roger Corporation recently abandoned its
traditional production and inventory system in favor of a just-in-time
system. The company typically dealt with
50 suppliers and placed 450 orders throughout the year. All other things being equal, which of the
following choices denotes a likely scenario under the just-in-time system?
Number
of Suppliers
|
Number of Orders
|
|
A.
|
35
|
200
|
B.
|
35
|
750
|
C.
|
50
|
450
|
D.
|
60
|
200
|
E.
|
60
|
750
|
Answer: B LO: 8
Type: N
40. Harold Corporation recently abandoned its
traditional production and inventory system in favor of a just-in-time
system. The company typically ordered
700 units of raw material at a time and purchased units that scored a 7 on a
10-point quality scale, with 10 being very close to perfection. All other things being equal, which of the
following choices denotes a likely scenario under the just-in-time system?
Order Size
|
Quality Purchased
|
|
A.
|
300
|
7
|
B.
|
300
|
9
|
C.
|
700
|
9
|
D.
|
950
|
7
|
E.
|
950
|
9
|
Answer: B LO: 8
Type: N
41. When a company switches from a traditional
system to a just-in-time production and inventory system, what often happens to
the quality of raw material purchased and the number of vendors that supply the
firm?
Quality of Purchases
|
Number of
Suppliers
|
||
A.
|
Increase
|
Increase
|
|
B.
|
Increase
|
Decrease
|
|
C.
|
Decrease
|
Increase
|
|
D.
|
Decrease
|
Decrease
|
|
E.
|
Increase
|
Remain the same
|
Answer:
B LO: 8 Type: RC
42.
Which of the
following would not typically be used or encountered by a firm that is
in the service industry?
A.
Customer
profitability analysis.
B.
Activity-based
management.
C.
Non-value-added
activities.
D.
Value-added
activities.
E.
None of the
above, as all would typically be used or encountered by a service provider.
Answer:
E LO: 9 Type: RC
EXERCISES
Value-Added
and Non-Value-Added Activities
43.
Consider the nine
activities that follow.
1. Microsoft:
Developing computer coding for a new spreadsheet package
2. General
Mills: Painting the office of a maintenance supervisor at a plant that produces
cereal
3. Mayo Clinic:
Examining a new patient
4. American
Airlines: The 90 minutes that a Boeing 757 sits idle on the ground between
flights
5. Office
Depot: Moving cases of paper from one location to another in the same warehouse
6. Rolex:
Attaching a watch band to the watch’s face
7. United
States Postal Service: Reprocessing mail that had been sorted incorrectly on a
malfunctioning sorting machine.
8. Fidelity
Investments: Correcting errors made by company personnel in customer accounts
9. Marriott:
Upgrading the quality of bedding used at hotels in very competitive
marketplaces
Required:
Categorize each of the activities as either
value-added or non-value-added for the companies noted.
LO: 3 Type: N
Answer:
1.
|
Value-added
|
6.
|
Value-added
|
2.
|
Non-value added
|
7.
|
Non-value-added
|
3.
|
Value-added
|
8.
|
Non-value-added
|
4.
|
Non-value-added
|
9.
|
Value-added
|
5.
|
Non-value-added
|
Non-Value-Added Activities; Customer
Profitability
44. Switzer, Inc., which sells books to college
bookstores and individuals, uses activity-based costing and activity-based
management. The following information
is available for the company's three cost pools:
Activity
|
Cost
Driver
|
Cost-Driver Quantity
|
Percent of Cost-
Driver Activity for
Bookstore Transactions
|
Percent of Cost- Driver Activity for Transactions to
Individuals
|
Incoming receipts
|
Number of
purchase orders
|
3,000
|
20%
|
80%
|
Warehousing
|
Number of inventory moves
|
8,000
|
60
|
40
|
Outgoing shipments
|
Number of shipments
|
18,000
|
30
|
70
|
Bookstore
sales totaled $8,400,000, and sales to individuals amounted to $2,400,000. Costs for the three activities were: Incoming
receipts, $450,000; warehousing, $520,000; and outgoing shipments, $630,000. A review of the company's activities found
various inefficiencies with respect to the warehousing of textbooks (acquired
for eventual sale to bookstores) and outgoing shipments to individuals. These inefficiencies resulted in an extra 500
moves and 400 shipments, respectively.
Required:
A.
What
is a non-value-added activity?
B.
How
much did non-value-added activities cost Switzer this past year?
C.
Which
of the two markets—sales to bookstores or sales to individuals—resulted in
lower overall costs for incoming receipts, warehousing, and outgoing
shipments? Evaluate these costs in both
absolute dollars and as a percentage of sales.
In addition, present a possible explanation for your results. Note: Exclude costs that arose from
inefficient operations.
LO: 3, 4 Type: A, N
Answer:
A.
|
Non-value-added
activities can be defined as activities that are either (1) unnecessary and
dispensable or (2) necessary but inefficient and improvable. Put simply, such activities can be
eliminated without harming overall quality, performance, or perceived
value.
|
||||||||||||
B.
|
Cost of
non-value-added activities:
Incoming receipts: $450,000 ¸ 3,000
purchase orders = $150 per purchase order
Warehousing: $520,000 ¸ 8,000
inventory moves = $65 per move
Outgoing shipments: $630,000 ¸ 18,000
shipments = $35 per shipment
|
||||||||||||
Warehousing:
500 moves x $65
|
$32,500
|
||||||||||||
Outgoing
shipments: 400 shipments x $35
|
14,000
|
||||||||||||
Total
|
$46,500
|
||||||||||||
C.
|
Sales to bookstores
produced lower overall costs in both absolute dollars and as a percentage of
sales. A possible explanation lies in
the fact that sales to individuals resulted in the sale of one or two copies
per shipment and order. In contrast,
bookstore sales likely produced greater revenues and efficiencies because of
the large number of texts sold per transaction.
|
||||||||||||
Activity
|
Cost-Driver
Quantity
|
% Bookstores
|
% Individuals
|
Driver-Quantity: Bookstores
|
Driver-Quantity: Individuals
|
||||||||
Incoming receipts
|
3,000
|
20%
|
80%
|
600
|
2,400
|
||||||||
Warehousing
|
8,000
|
60%
|
40%
|
4,300*
|
3,200
|
||||||||
Outgoing shipments
|
18,000
|
30%
|
70%
|
5,400
|
12,200**
|
||||||||
* (8,000 moves x 60%) - 500
|
|||||||||||||
**(18,000 shipments x
70%) - 400
|
|||||||||||||
Bookstores
|
Individuals
|
||||||||||||
Incoming receipts:
|
|||||||||||||
600
purchase orders x $150
|
$ 90,000
|
||||||||||||
2,400
purchase orders x $150
|
$360,000
|
||||||||||||
Warehousing:
|
|||||||||||||
4,300
moves x $65
|
279,500
|
||||||||||||
3,200
moves x $65
|
208,000
|
||||||||||||
Outgoing shipments:
|
|||||||||||||
5,400
shipments x $35
|
189,000
|
||||||||||||
12,200
shipments x $35
|
427,000
|
||||||||||||
Total cost
|
$558,500
|
$995,000
|
|||||||||||
Cost as a percentage of
sales:
|
|||||||||||||
$558,500
¸ $8,400,000
|
6.65%
|
||||||||||||
$995,000
¸ $2,400,000
|
41.46%
|
||||||||||||
Customer Profitability Analysis
45. Clark Corporation manufactures cooling system
components. The company has gathered the
following information about two of its customers: Engle Equipment and Midwest
Refrigeration.
Engle Equipment
|
Midwest Refrigeration
|
|||||||
Sales revenue
|
$215,000
|
$154,000
|
||||||
Cost of goods sold
|
95,000
|
68,000
|
||||||
General selling costs
|
30,000
|
21,500
|
||||||
General administrative
costs
|
21,000
|
15,050
|
||||||
Cost-driver data used by the firm and traceable to Engle
and Midwest are:
|
||||||||
Customer Activity
|
Cost Driver
|
Rate per Unit
of Cost Driver
|
||||||
Sales activity
|
Sales visits
|
$900
|
||||||
Order taking
|
Sales orders
|
250
|
||||||
Special handling
|
Units handled
|
30
|
||||||
Special shipping
|
Shipments
|
600
|
||||||
Customer Activity
|
Engle
Equipment
|
Midwest
Refrigeration
|
||||
Sales activity
|
8 visits
|
5 visits
|
||||
Order taking
|
17 orders
|
22 orders
|
||||
Special handling
|
600 units
|
550 units
|
||||
Special shipping
|
19 shipments
|
30 shipments
|
||||
Required:
A.
Perform
a customer profitability analysis for Clark.
Compute the gross margin and operating income on transactions related to
Engle Equipment and Midwest Refrigeration.
B.
Compute
gross margin as a percentage of sales revenue.
Then compute (1) general selling and administrative costs as a
percentage of gross margin and (2) total customer-related costs (i.e., costs
that arise from sales visits, order taking, and special handling and shipping)
as a percentage of gross margin.
C.
On
the basis of your calculations, which of the two customers is "more
costly" to deal with? Briefly
explain.
LO: 4 Type: A, N
Answer:
A.
|
In dollar
terms, Engle's gross margin and operating income are greater than those of
Midwest Refrigeration.
|
||||||
Engle
Equipment
|
Midwest
Refrigeration
|
||||||
Sales revenue
|
$215,000
|
$154,000
|
|||||
Cost of goods sold
|
95,000
|
68,000
|
|||||
Gross margin
|
$120,000
|
$ 86,000
|
|||||
Selling and administrative
costs:
|
|||||||
General
selling costs
|
$ 30,000
|
$ 21,500
|
|||||
General
administrative costs
|
21,000
|
15,050
|
|||||
Customer-related
costs:
|
|||||||
Sales
visits (8, 5 x $900)
|
7,200
|
4,500
|
|||||
Order
taking (17, 22 x $250)
|
4,250
|
5,500
|
|||||
Special
handling (600, 550 x $30)
|
18,000
|
16,500
|
|||||
Special
shipping (19, 30 x $600)
|
11,400
|
18,000
|
|||||
Total
|
$ 91,850
|
$ 81,050
|
|||||
Operating income
|
$ 28,150
|
$
4,950
|
|||||
B.
|
Gross margin as a % of sales
revenue:
Engle: $120,000 ÷ $215,000 = 55.81%
Midwest: $86,000 ÷ $154,000 = 55.84%
General selling and administrative costs as a % of gross margin:
Engle:
($30,000 + $21,000) ÷ $120,000 = 42.5%
Midwest:
($21,500 + $15,050) ÷ $86,000 = 42.5%
Customer-related costs as a % of gross margin:
Engle:
($7,200 + $4,250 + $18,000 + $11,400) ÷ $120,000 = 34.0%
Midwest:
($4,500 + $5,500 + $16,500 + $18,000) ÷ $86,000 = 51.7%
|
||||||
C.
|
Both
customers produce approximately the same rate of gross margin on sales and
are charged with the same percentage of general selling and administrative
costs. The difference lies in the area
of customer-related costs. Midwest's
costs make the firm a more expensive client to deal with than Engle. Given the dollar volume of sales revenue
that is generated, Midwest's special handling and shipping needs (especially
the latter) are an expensive proposition for Clark Corporation.
|
||||||
Customer
Profitability Data: Computation and Analysis
46. Homestead Corporation sells a line of power
tools to home improvement chains, generating a cost of goods sold equal to 70%
of net sales. The selected data that
follow relate to the period just ended for the company's three largest
customers: Weekend Project, Tool Mart, and Fix-It City.
Weekend Project
|
Tool Mart
|
Fix-It City
|
||
Gross sales volume:
|
||||
Dollars
|
$2,000,000
|
$4,900,000
|
$4,600,000
|
|
Number
of orders
|
50
|
175
|
125
|
|
Type of order:
|
||||
Regular
|
40
|
135
|
110
|
|
Rush
|
10
|
40
|
15
|
|
Sales returns:
|
||||
Dollars
|
$100,000
|
$400,000
|
$240,000
|
|
Number
of returns
|
3
|
20
|
8
|
|
Total customer-related
costs
|
$245,100
|
$918,000
|
$457,800
|
|
Homestead's
management recently attended a seminar and learned that customers with
excessive requests and demands can have a significant, negative impact on
corporate profitability.
Required:
A.
For
each of the three chains, compute:
1.
Total
customer-related costs as a percentage of gross margin.
2.
The
average order size (ignoring sales returns).
3.
The
ratio of regular orders to rush orders.
4.
The
number of sales returns as a percentage of the number of total orders.
B.
Prepare
a brief summary of your findings. Should
Homestead work with any of the chains in an effort to improve results? Explain.
LO: 4 Type: A, N
Answer:
A.
|
1.
|
Customer-related costs as a
percentage of gross margin:
|
Weekend
Project: $245,100 ÷ [($2,000,000 - $100,000) x 30%] = 43%
|
||
Tool
Mart: $918,000 ÷ [($4,900,000 - $400,000) x 30%] = 68%
|
||
Fix-It
City: $457,800 ÷ [$4,600,000 - $240,000) x 30%] = 35%
|
||
2.
|
Average order size:
|
|
Weekend
Project: $2,000,000 ÷ 50 orders = $40,000
|
||
Tool
Mart: $4,900,000 ÷ 175 orders = $28,000
|
||
Fix-It
City: $4,600,000 ÷ 125 orders = $36,800
|
||
3.
|
Ratio of regular orders to
rush orders:
|
|
Weekend
Project: 40:10 = 4:1
|
||
Tool
Mart: 135:40 = 3.375:1
|
||
Fix-It
City: 110:15 = 7.33:1
|
||
4.
|
Number of sales returns as
a percentage of total orders:
|
|
Weekend
Project: 3 ÷ 50 = 6%
|
||
Tool
Mart: 20 ÷ 175 = 11.4%
|
||
Fix-It
City: 8 ÷ 125 = 6.4%
|
||
B.
|
Customer-related costs are
driven by events (and costs) directly traceable to clients. In this case, Tool Mart's costs as a
percentage of gross margin are much higher (68%) than those of Weekend
Project and Fix-It City. This result
is not surprising given that the firm creates a large number of small orders
($28,000 vs. $36,800 and $40,000) for Homestead to process. In addition, relative to the other two
firms, Tool Mart relies more heavily on rush orders, which likely creates
additional cost. Finally, a number of
Tool Mart's orders (11.4%) eventually result in sales returns, again creating
additional processing expense for Homestead.
In summary, Tool Mart seems to be an outlier in relation to Weekend
Project and Fix-It City, and management should approach Tool Mart to see if
the firm can change its ways of doing business.
|
|
Customer
Analysis
47. Beaverton Manufacturing is a relatively new
customer of Haxton Enterprises. In the
short period that the two companies have done business with each other, Haxton
has found Beaverton to be, in management's words, "an expensive
proposition." Numerous sales visits
are typically required to "close a deal," with selling prices and
discounts offered being among the most attractive in the industry. Complicating matters, Beaverton is slow to
settle its account, orders in small quantities, and often has numerous
specialized shipping and handling needs.
A
recent customer profitability analysis has painted a very negative picture of
Beaverton Manufacturing, and Haxton's managers are questioning whether an
on-going relationship with the firm is warranted.
Required:
A.
Briefly
explain why the customer profitability analysis painted a negative picture of
Beaverton Manufacturing.
B.
What
actions are available to Haxton Enterprises to improve Beaverton profitability?
LO: 4 Type: N
Answer:
A.
Profit
is a function of two basic factors—revenues and expenses—and Haxton is being
squeezed on both elements. Prices are
low, discounts are high, and order sizes are small. Furthermore, the costs of working with
Beaverton are high, courtesy of numerous sales calls being required to produce
a sale, a slow-paying customer, and specialized handling and shipping needs.
B.
Haxton
should attempt to work with Beaverton in a cost-cutting drive, explaining that
favorable terms can only be extended for a short period of time. Acceleration of amounts due, increases in
order size, and reductions in sales visits and specialized handling and
shipping needs are possible topics for discussion/improvement. If Haxton is unsuccessful in its efforts,
price hikes and/or elimination of discounts may be in order.
Target Costing
48. In the not-too-distant future, Victor
Enterprises will introduce a new printer for desktop computers. This printer is expected to compete
successfully with other models that are anticipated to sell for $250. Victor's printer has several unique features,
and management believes that a slightly higher selling price (10%) is
justified. The company's normal profit
margin is 30% of selling price.
Required:
A.
What
is the printer's target price, target profit, and target cost?
B.
Suppose
that Victor's engineers and cost accountants conclude that the present design
of the printer will result in a unit cost of $210. Explain the concept of "value engineering" and be sure to
note how it can assist Victor Enterprises in achieving its goals.
LO: 5 Type: A, N
Answer:
A.
Target
price: $250 + ($250 x 10%) = $275
Target
profit: $275 x 30% = $82.50
Target
cost: $275 - $82.50 = $192.50
B.
Victor's
present cost is too high to achieve the desired profit margin, meaning that
some form of cost reduction is needed.
Value engineering is a cost-reduction and process-improvement technique
that may allow the company to produce the printer at its targeted cost of
$192.50. Engineers will examine the unit
in terms of parts and process complexity, putting forth recommendations of
where changes can be made.
Target
Costing
49.
Hudson Valley
sells barbeque grills in an increasingly competitive environment. For a number of years, management has
followed a successful policy of marking up goods by 20% of cost, the company’s
desired gross margin.
One of the firm’s products, grill no. 56, has
direct-material charges of $80, direct-labor cost of $50, and manufacturing
overhead of $70. This grill is designed
to compete against others in the marketplace that wholesale for an average of
$220. In the last year or so, management
has observed a decline in unit sales volume despite a very favorable write-up
in both Grillmaster magazine and Consumer Watchdog.
Required:
A.
Explain a
probable cause of the decline in unit sales volume.
B.
What would be the
likely selling price if the firm uses target costing?
C.
What must happen
to the current manufacturing cost if Hudson Valley were to achieve its 20%
gross margin, now computed on the basis of sales? By how much?
LO:
5 Type: A, N
Answer:
A.
The problem does
not seem to be quality-related because of the grill’s favorable reviews. Rather, Hudson Valley is in a very
competitive marketplace and appears to be over-pricing the grill somewhat for
the intended market segment. That is,
the costs of grill no. 56 total $200 ($80 + $50 + $70). With a 20% markup added, the selling price
becomes $240 [$200 + ($200 x 20%)] when the average selling price is $220.
B.
$220
C.
If the selling
price is $220 and the company has a 20% gross margin on sales of $44 ($220 x
20%), the grill’s costs must total $176 ($220 - $44). Thus, current costs must drop by $24 ($200 -
$176).
Just-in-Time Purchasing System
50. The wholesale division of Navigator
Enterprises is considering the installation of a just-in-time purchasing
system. The company's accountant has
provided the following figures if the system is adopted:
·
Sales
lost because of out-of-stock situations will total 5,500 units, with each unit
producing an average profit for the firm of $23.
·
The
overall inventory will drop by $700,000.
Navigator can invest these funds elsewhere and produce a return of 13%.
·
A
leased warehouse (monthly rent of $3,000) will no longer be needed.
·
Two
warehouse employees (total annual salary cost of $43,000) will be transferred
elsewhere in the firm.
·
Annual
property taxes and insurance are expected to fall by $18,900.
·
In
order to keep valued customers, Navigator will occasionally have to use air
freight when an out-of-stock situation arises, resulting in added cost for the
company of $2,300.
Required:
A. Determine whether it is financially
advantageous over a 12-month period for Navigator to adopt the just-in-time
system.
B. How would Navigator describe the
"ideal supplier" if the company adopts the just-in-time system.
LO: 8 Type: A, N
Answer:
A.
|
Lost
profits (5,500 units x $23)
|
$(126,500)
|
|
Return
on funds ($700,000 x 13%)
|
91,000
|
||
Lease
savings ($3,000 x 12)
|
36,000
|
||
Savings
in taxes and insurance
|
18,900
|
||
Air
freight costs
|
(2,300)
|
||
Total
|
$ 17,100
|
||
The
just-in-time system is financially advantageous to the firm, saving $17,100. Note: The cost of the warehouse employees
is ignored because regardless of whether the system is adopted, Navigator
will incur the cost.
|
|||
B.
|
The
"ideal supplier" is one that delivers top quality goods precisely
when needed. Thus, reliability is a
key with respect to quality and delivery, as is close proximity to the
wholesale division. Most JIT suppliers
are willing to sign long-term contracts and accept "batched"
payments for deliveries.
|
||
Just-in-Time
Purchasing System
51. Management of Laredo Enterprises recently
decided to adopt a just-in-time inventory policy to curb steadily rising costs
and free-up cash for purposes of investment.
The company anticipates that inventory will decrease by $4,450,000, with
the released funds to be invested at a 10% return for the firm. Additional data follow.
1.
Reduced
inventories should produce savings in insurance and property taxes of $46,000.
2.
Reduced
raw-material inventory levels and accompanying stockouts will cost Laredo
$85,000.
3.
Laredo
will lease 80% of an existing warehouse to another firm for $2.50 per square
foot. The warehouse has 40,000 square
feet.
4.
Four
employees who currently earn $35,000 each will be directly affected by the
just-in-time adoption decision. Three
employees will be transferred to other positions with Laredo; one will be
terminated.
5.
A
shift in suppliers is expected to result in the purchase and use of more
expensive raw materials. However, these
materials should give rise to fewer warranty and repair problems after Laredo's
finished product is sold, resulting in a net savings for the firm of $38,000.
6.
Because
of the need to handle an increased number of small shipments from suppliers,
Laredo will remodel production and receiving-dock facilities at a cost of
$750,000. The construction costs will be
depreciated over a 10-year life.
Required:
A. Compute the annual financial impact of
Laredo's decision to adopt a just-in-time inventory system.
B. In comparison with those of a traditional
purchasing system, why would the number and size of incoming supplier shipments
change under a just-in-time system?
LO: 8 Type: A, N
Answer:
A.
|
Return on released funds
($4,450,000 x 10%)
|
$445,000
|
|
Savings in insurance and
property taxes
|
46,000
|
||
Added stockout costs
|
(85,000)
|
||
Lease revenue (40,000
square feet x 80% x $2.50)
|
80,000
|
||
Salary savings*
|
35,000
|
||
Net savings in materials,
warranty, and repair costs
|
38,000
|
||
Depreciation on remodeled
facilities
|
|||
($750,000
÷ 10 years)
|
(75,000)
|
||
Savings from JIT system
|
$484,000
|
||
*Note:
The cost of the three transferred employees is excluded because Laredo will
continue to have these individuals on the payroll.
|
|||
B.
|
Under
a traditional purchasing system, goods are purchased (frequently in large
lots) and then placed in inventory until used. In contrast, with JIT, costly inventories
are avoided by having the materials arrive "just in time" to be
issued to production. Materials are
therefore purchased only when needed, which often translates into numerous
small acquisitions throughout the period.
|
Analysis
of Just-in-Time Purchasing System
52. Putnam Enterprises currently purchases a
total of 50,000 sensors annually from Utah Electronics at $80 per unit. The firm places 25 purchase orders during the
year at an average cost of $10 per order.
Putnam's management is contemplating a switch to a just-in-time
purchasing system that would require an increase in orders to 200.
Required:
A.
Compute
the average order size under both the current system and the proposed
just-in-time system. Also, calculate the
change in annual purchase-order processing cost.
B.
Explain
why the number of orders will increase under a just-in-time system.
C.
What
benefits might Putnam experience to help offset the increase in purchase-order
processing cost?
D.
What
might Utah do to the $80 price, given the company's need to process an
additional 175 orders?
LO: 8 Type: A, N
Answer:
A.
|
Current system: 50,000
sensors ÷ 25 orders = 2,000 units
Just-in-time system: 50,000
sensors ÷ 200 orders = 250 units
|
|||
Just-in-time system: 200
orders x $10
|
$2,000
|
|||
Current system: 25 orders x
$10
|
250
|
|||
Increase in purchase-order
processing cost
|
$1,750
|
|||
B.
|
Under a traditional system,
orders are large so that adequate inventories can be maintained. By increasing the number of orders,
companies anticipate that units will arrive on an as-needed basis, thus
reducing the need to carry sizable on-hand stocks.
|
|||
C.
|
A reduction in inventories
will typically decrease associated costs such as warehousing, insurance,
obsolescence, and property taxes. In
addition, monies currently invested in inventories will be released for other
profitable uses by management. Putnam
may also negotiate that a higher quality sensor be acquired, which would both
reduce the need for inspections and increase the overall quality of the
firm's finished product.
|
|||
D.
|
Utah's cost will likely
increase, given that overall volume is constant at 50,000 sensors. As a result, the firm might be forced to
raise the sensor's selling price.
|
|||
Just-in-Time
Purchasing, Non-Value-Added Activities
53. Fargo Enterprises, which manufactures lawn
mowers, recently installed a just-in-time purchasing system and an
activity-based management program.
Required:
A.
Determine
whether the following items would be apt to increase or decrease as a result of
the just-in-time system:
1. Inventory storage costs.
2.
Number
of suppliers used.
3.
Number
of raw material shipments handled.
4.
Dollars
available for alternative investment opportunities.
5.
Quality
of raw materials purchased.
B.
Identify
the following items as value-added activities, non-value-added activities, or
both.
1.
Attaching
the engine to the mower's body.
2.
Installing
a new air-conditioning system in the executive offices.
3.
Replacing
a defective wheel with a new wheel.
4.
Designing
and printing an owner's instruction manual for a new model.
5.
Moving
completed mowers to the finished-goods warehouse.
6.
Attaching
the handle to the mower's body. The
process took longer than normal because of a worker slowdown caused by
disgruntled employees.
LO: 3, 8 Type: N
Answer:
A.
|
1.
|
Decrease
|
B.
|
1.
|
Value-added
|
2.
|
Decrease
|
2.
|
Non-value-added
|
||
3.
|
Increase
|
3.
|
Non-value-added
|
||
4.
|
Increase
|
4.
|
Value-added
|
||
5.
|
Increase
|
5.
|
Non-value-added
|
||
6.
|
Both
|
DISCUSSION QUESTIONS
Non-Value-Added
Costs
54. Non-value-added costs occur in
nonmanufacturing organizations as well as in manufacturing firms.
Required:
A.
Explain
what is meant by a non-value-added cost.
B.
Identify
two potential non-value-added costs for each of the following service
providers: airlines, banks, and hotels.
LO: 3, 9 Type: RC, N
Answer:
A.
Non-value-added
costs are the costs of activities that can be eliminated with no deterioration
of product quality, performance, or perceived value. These activities should be eliminated to save
time and money. General examples include
the costs of inspection, moving, waiting, and storing.
B. Airlines:
·
The
cost of preparing excess food because of forecasting errors in passenger loads.
·
The
cost of tracing, returning, repairing, or replacing lost or mishandled luggage.
·
Additional
compensation paid to flight crews attributable to cancellations or delays from
problems that should have been prevented by routine maintenance.
Banks:
·
The
cost of correcting bank errors in customer accounts.
·
The
cost of performing manual banking procedures necessitated by computer system
downtime.
·
Losses
caused by employee embezzlement and petty thefts.
·
Defaulted
loans made to borrowers who should have been classified as poor risks by
existing credit-granting procedures.
Hotels:
·
Broken
dishes and glassware, loss of or damage to linens and towels.
·
The
cost of replacing lost room keys.
·
The
cost of overstaffing the front desk during nonpeak hours.
·
Excess
food costs, including preparation.
Non-Value-Added Activities
55. What are non-value-added activities? What should companies do with these
activities and, in general terms, how should this be done?
LO: 3 Type: RC
Answer:
Non-value-added
activities are operations that are either (1) unnecessary and dispensable or
(2) necessary, but inefficient and improvable.
These activities give rise to non-value-added costs, which cut into
company profitability. Non-value-added
activities should be reduced and/or eliminated through various process
improvement techniques. Activities may
also be shared in some cases, with selected functions being combined and
performed in a more efficient manner.
Kaizen Versus Re-engineering
56. Briefly distinguish between kaizen and
re-engineering.
LO: 6, 7 Type: RC
Answer:
Kaizen refers to the
process of cost reduction during the manufacturing phase of an existing
product. This process takes place
gradually, or through small continual improvements rather than through radical
change. Re-engineering, on the other hand,
is a bit more drastic, often involving the complete redesign of a process in
hopes of finding a creative new way to accomplish an objective. Generally speaking, re-engineering often
prescribes radical, quick, and significant change.
Just-in-Time Production
57. A just-in-time production system uses a
"pull method" to coordinate steps in the manufacturing process. Explain what is meant by the term "pull
method."
LO: 8 Type: RC
Answer:
Under the
pull method, goods are produced in each manufacturing stage only as they are
needed at the next stage. When materials
and parts are required for final assembly, for example, a message is sent to
the preceding work center to send items that will satisfy the work to be
performed over the next few hours. This
approach drastically cuts work-in-process inventory along with waiting time (a
non-value-added cost). The "pull
approach" is repeated all the way through the manufacturing process, back
toward the beginning.
No comments:
Post a Comment