Multiple Choice Questions
1. When managers of subunits throughout an
organization strive to achieve the goals set by top management, the result is:
A. goal congruence.
B. planning and control.
C. responsibility accounting.
D. delegation of decision making.
E. strategic control.
Answer:
A LO: 1 Type: RC
2. Which of the following is not an
example of a responsibility center?
A. Cost center.
B. Revenue center.
C. Profit center.
D. Investment center.
E. Contribution center.
Answer:
E LO: 2 Type: RC
3. A manufacturer's raw-material purchasing
department would likely be classified as a:
A. cost center.
B. revenue center.
C. profit center.
D. investment center.
E. contribution center.
Answer:
A LO: 2 Type: N
4. Hitchcock Corporation is in the process of
overhauling the performance evaluation system for its Los Angeles manufacturing
division, which produces and sells parts that are popular in the aerospace
industry. Which of the following is least
likely to be chosen to evaluate the overall operations of the Los Angeles
division?
A. Cost center.
B. Responsibility center.
C. Profit center.
D. Investment center.
E. The profit center and investment center are
equally unlikely to be chosen.
Answer:
A LO: 2 Type: N
5. A cost center manager:
A. does not have the ability to produce revenue.
B. may be involved with the sale of new
marketing programs to clients.
C. would normally be held accountable for
producing an adequate return on invested capital.
D. often oversees divisional operations.
E. may be the manager who oversees the
operations of a retail store.
Answer:
A LO: 2 Type: N
6. The Telemarketing Department of a residential
remodeling company would most likely be evaluated as a:
A. cost center.
B. revenue center.
C. profit center.
D. investment center.
E. contribution center.
Answer:
B LO: 2 Type: RC
7. If the head of a hotel's food and beverage
operation is held accountable for revenues and costs, the food and beverage
operation would be considered a(n):
A. cost center.
B. revenue center.
C. profit center.
D. investment center.
E. contribution center.
Answer:
C LO: 2 Type: RC
8. Which of the following would have a low likelihood
of being organized as a profit center?
A. A movie theater of a company that operates a
chain of theaters.
B. A maintenance department that charges users
for its services.
C. The billing department of an Internet
Services Provider (ISP).
D. The mayor's office in a large city.
E. Both "C" and "D" above.
Answer:
E LO: 2 Type: N
9. Easy-to-Use Software operates stores within
five regions. Regional managers are held
accountable for marketing, advertising, and sales decisions, and all costs
incurred within their region. In
addition, regional managers decide whether new stores will open, where the
stores will be located, and whether the stores will lease or purchase the
facilities. Store managers, in contrast,
are accountable for marketing, advertising, and sales decisions, and costs
incurred within their stores. Ideally,
on the basis of this information, what type of responsibility center should the
software company use to evaluate its regions and stores?
|
Regions
|
|
Stores
|
|
A.
|
Profit center
|
Profit center
|
||
B.
|
Profit center
|
Cost center
|
||
C.
|
Profit center
|
Revenue
center
|
||
D.
|
Investment
center
|
Profit center
|
||
E.
|
Investment
center
|
Cost center
|
Answer:
D LO: 2 Type: N
10. Decentralized firms can delegate authority by
structuring an organization into responsibility centers. Which of the following organizational
segments is most like a totally independent, standalone business where managers
are expected to "make it on their own"?
A. Cost center.
B. Revenue center.
C. Profit center.
D. Investment center.
E. Contribution center.
Answer:
D LO: 2 Type: N
11. A responsibility center in which the manager
is held accountable for the profitable use of assets and capital is commonly
known as a(n):
A. cost center.
B. revenue center.
C. profit center.
D. investment center.
E. contribution center.
Answer:
D LO: 2 Type: RC
12. The Asian Division of a multinational
manufacturing organization would likely be classified as a:
A. cost center.
B. revenue center.
C. profit center.
D. investment center.
E. contribution center.
Answer:
D LO: 2 Type: N
13. Performance reports help managers:
A. use management by exception and effectively
control operations.
B. decide whether a cost, profit, or investment
center framework is appropriate.
C. design their organizational hierarchy.
D. pinpoint trouble spots.
E. by assisting with functions "A" and
"D."
Answer:
E LO: 3 Type: RC
14. Consider the following statements about
performance reports:
I.
Performance
reports provide feedback to managers and allow them to better control
operations.
II.
Many
performance reports have budget, actual, and variance data.
III.
Performance
reports are often structured around a firm's organizational hierarchy—that is,
data relating to lower-level units (e.g., departments) are combined and flow
into higher-level units (e.g., stores).
Which
of the above statements is (are) true?
A. I only.
B. I and II.
C. I and III.
D. II and III.
E. I, II, and III.
Answer:
E LO: 3 Type: RC
15. Aloha Hotels owns numerous hotels on each of
the Hawaiian Islands. The company's
performance reporting system is structured around the firm's organizational
structure, with information flowing from operating departments at a particular
property and later respectively grouped by individual hotel, island operation
(i.e., division), and the company as a whole.
Which of the following best depicts the detail level of the information
given to a department manager versus that reported to a company vice-president?
|
Department
Manager
|
Company
Vice-President
|
|
A.
|
Somewhat
detailed
|
Somewhat
detailed
|
|
B.
|
Somewhat
detailed
|
Somewhat
summarized
|
|
C.
|
Somewhat
summarized
|
Somewhat
detailed
|
|
D.
|
Somewhat
summarized
|
Somewhat
summarized
|
|
E.
|
None of the
above because department managers do not receive performance reports.
|
Answer:
B LO: 3 Type: N
16.
Leisure Time owns
six hotels in Hawaii, collectively known as the Hawaiian Division. The various hotels, including the Surf &
Sun, have operating departments (such as Maintenance, Housekeeping, and Food
and Beverage) that are evaluated as either cost centers or profit centers. The Food and Beverage Department, for
example, is a profit center, with activities divided into three segments:
Banquets and Catering, Restaurants, and Kitchen. If Leisure Time uses a performance-reporting
system that is based on responsibility accounting, which of the following
disclosures is likely to occur?
A. The detailed
operating costs of the Surf & Sun's Kitchen Department will appear on the
Hawaiian Division's performance report.
B.
The Food and
Beverage Department's profit will appear on Kitchen's performance report.
C.
The profit of the
Surf & Sun hotel will appear on the Hawaiian Division's performance report.
D.
The Food and
Beverage profit at the Surf & Sun will appear on Leisure Time's performance
report.
E.
The profit of the
Surf & Sun hotel will appear on Food and Beverage's performance report.
Answer: C LO:
3 Type: N
17. A cost pool is:
A. a collection of homogeneous costs to be
assigned.
B. the combined result of decisions made by
different responsibility center managers.
C. the primary function of a responsibility
accounting system.
D. the amount of cost that has been allocated,
say, 10%, to a user department.
E. the tool used to allocate cost dollars to
user departments.
Answer:
A LO: 4 Type: RC
18. A cost object is:
A. a collection of costs to be assigned.
B. a responsibility center, product, or service
to which cost is to be assigned.
C. the tool used to charge cost dollars to user
departments.
D. the primary function of a responsibility
accounting system.
E. a common cost.
Answer:
B LO: 4 Type: RC
19. Kelly Corporation, with operations throughout
the country, will soon allocate corporate overhead to the firm's various
responsibility centers. Which of the
following is definitely not a cost object in this situation?
A. The maintenance department.
B. Product no. 675.
C. Kelly Corporation.
D. The Midwest division.
E. The telemarketing center.
Answer:
C LO: 4 Type: N
20. An allocation base for a cost pool should
ideally be:
A. machine hours.
B. a cost object.
C. a common cost.
D. a cost driver.
E. direct labor, either cost or hours.
Answer:
D LO: 4 Type: RC
21. Which of the following is an appropriate base
to distribute the cost of building depreciation to responsibility centers?
A. Number of employees in the responsibility
centers.
B. Budgeted sales dollars of the responsibility
centers.
C. Square feet occupied by the responsibility
centers.
D. Budgeted net income of the responsibility
centers.
E. Total budgeted direct operating costs of the
responsibility centers.
Answer:
C LO: 4 Type: N
22. David Corporation is in the process of
selecting allocation bases so that selected costs can be charged to
responsibility centers. Would the number
of employees likely be a good base to use to allocate the costs of Human
Resources, Building and Grounds, and Repairs and Maintenance to user centers?
|
Human Resources
|
Buildings and Grounds
|
Repairs and Maintenance
|
A.
|
Yes
|
Yes
|
Yes
|
B.
|
Yes
|
No
|
Yes
|
C.
|
Yes
|
No
|
No
|
D.
|
No
|
Yes
|
Yes
|
E.
|
No
|
Yes
|
No
|
Answer:
C LO: 4 Type: N
23. Cost pools should be charged to responsibility
centers by using:
A. budgeted amounts of allocation bases because
the cost allocation to one responsibility center should influence the
allocations to others.
B. budgeted amounts of allocation bases because
the cost allocation to one responsibility center should not influence
the allocations to others.
C. actual amounts of allocation bases because
the cost allocation to one responsibility center should influence the
allocations to others.
D. actual amounts of allocation bases because
the cost allocation to one responsibility center should not influence
the allocations to others.
E. some other approach.
Answer:
B LO: 4 Type: RC
Use the
following to answer questions 24-25:
Management of
Children Are Precious (CAP), an operator of day-care facilities, wants the
firm's profit to be subdivided by center.
The firm's accountant has provided the following data:
|
|
|
Actual
|
Budgeted
|
|
Actual
|
Budgeted
|
Direct
|
Direct
|
Center
|
Revenue
|
Revenue
|
Costs
|
Costs
|
Downtown
|
$ 340,200
|
$ 320,000
|
$ 300,000
|
$
300,000
|
Irvine
|
534,600
|
560,000
|
440,000
|
510,000
|
H Beach
|
745,200
|
720,000
|
740,000
|
690,000
|
Totals
|
$1,620,000
|
$1,600,000
|
$1,480,000
|
$1,500,000
|
CAP's
advertising, which is handled by the home office, is not reflected in the preceding
figures and amounted to $60,000.
24. If advertising expense were allocated to
centers based on actual center profitability, how much advertising would be
allocated to Irvine?
A. $19,800.
B. $21,000.
C. $30,000.
D. $40,543.
E. Some other amount.
Answer: D LO: 4
Type: A
25. Assume that management used the allocation
base that is most influenced by advertising effort and consistent with sound
managerial accounting practices. How much advertising would be allocated to Irvine?
A. $17,838.
B. $19,800.
C. $20,000.
D. $20,400.
E. $21,000.
Answer: E LO: 4
Type: A, N
26. Responsibility accounting systems strive to:
A. place blame on guilty individuals.
B. provide information to managers.
C. hold managers accountable for both
controllable and noncontrollable costs.
D. identify unfavorable variances.
E. provide information so that managers can make
decisions that are in the best interest of their individual centers rather than
in the best interests of the firm as a whole.
Answer:
B LO: 4 Type: RC
27. Controllable costs, as used in a
responsibility accounting system, consist of:
A. only fixed costs.
B. only direct materials and direct labor.
C. those costs that a manager can influence in
the time period under review.
D. those costs about which a manager has some
knowledge.
E. those costs that are influenced by parties
external to the organization.
Answer:
C LO: 4 Type: RC
28. For a company that uses responsibility
accounting, which of the following costs is least likely to appear on a
performance report of an assembly-line supervisor?
A. Direct materials used.
B. Departmental supplies.
C. Assembly-line labor.
D. Repairs and maintenance.
E. Assembly-line facilities depreciation.
Answer:
E LO: 4 Type: N
29. Common costs:
A. are not easily related to a segment's
activities.
B. are easily related to a segment's activities.
C. are charged to the operating segments of a
company.
D. are not charged to the operating segments of
a company.
E. are best described by characteristics
"A" and "D" above.
Answer: E LO: 5
Type: RC
30. Harris Company is preparing a segmented
income statement, subdivided into departments (billing, purchasing, and
telemarketing). Which of the following
choices correctly describes the accounting treatment of the firm's compensation
cost for key executives (president and vice-presidents)?
A. The cost is charged to the departments.
B. The cost is not charged to the departments because,
although easily traceable to the departments, it is not controllable at the
departmental level.
C. The cost is not charged to the departments
because, although controllable at the departmental level, it is not easily
traceable to the departments.
D. The cost is not charged to the departments
because it is both easily traceable to the departments and controllable by the
departments.
E. The cost is not charged to the departments
because it is neither easily traceable to the departments nor controllable by
the departments.
Answer:
E LO: 5 Type: N
31. West Coast Electronics (WCE) operates 87 stores and
has three divisions: California, Oregon, and Washington. Which of the following costs would not
appear on Oregon's portion of WCE's segmented income statement?
A.
Costs related to
statewide advertising contracts, negotiated by Oregon's divisional manager.
B.
Variable sales
commissions paid to Oregon's salespeople.
C.
Compensation paid
to Oregon's chief operating officer, as determined by WCE's management.
D.
Oregon's
allocated share of general WCE corporate overhead.
E.
Items "C"
and "D" above.
Answer:
D LO: 5 Type: N
32. The difference between the profit margin
controllable by a segment manager and the segment profit margin is caused by:
A. variable operating expenses.
B. allocated common expenses.
C. fixed expenses controllable by the segment
manager.
D. fixed expenses traceable to the segment but
controllable by others.
E. other revenue.
Answer:
D LO: 5 Type: RC
33. The profit margin controllable by the segment
manager would not include:
A. variable operating expenses.
B. fixed expenses controllable by the segment
manager.
C. a share of the company's common fixed
expenses.
D. income tax expense.
E. items "C" and "D" above.
Answer:
E LO: 5 Type: RC
34. A segment contribution margin would reflect
the impact of:
A. variable operating expenses.
B. fixed expenses controllable by the segment
manager.
C. fixed expenses traceable to the segment but
controllable by others.
D. common fixed expenses.
E. items "A," "B," and
"C" above.
Answer:
A LO: 5 Type: RC
35. Gathersburg Retail has three stores in
Maryland. Which of the following costs
would likely be excluded when computing the profit margin controllable by store
no. 3's manager?
A. Hourly labor costs incurred by personnel at
store no. 3.
B. Property taxes attributable to store no. 3.
C. The salary of Gathersburg's president.
D. The salary of store no. 3's manager.
E. Items "B," "C," and
"D" above.
Answer:
E LO: 5 Type: N
36. Which of the following measures would reflect
the variable costs incurred by a business segment?
|
Segment Contribution Margin
|
|
Profit Margin Controllable by Segment
Manager
|
|
Segment Profit Margin
|
A.
|
Yes
|
|
No
|
|
No
|
B.
|
Yes
|
|
No
|
|
Yes
|
C.
|
Yes
|
|
Yes
|
|
No
|
D.
|
Yes
|
|
Yes
|
|
Yes
|
E.
|
No
|
|
Yes
|
|
Yes
|
Answer:
D LO: 5 Type: RC
37. Which of the following measures would reflect
the fixed costs controllable by a segment manager?
|
Segment Contribution Margin
|
|
Profit Margin Controllable by Segment
Manager
|
|
Segment Profit Margin
|
A.
|
Yes
|
|
No
|
|
No
|
B.
|
Yes
|
|
No
|
|
Yes
|
C.
|
Yes
|
|
Yes
|
|
No
|
D.
|
Yes
|
|
Yes
|
|
Yes
|
E.
|
No
|
|
Yes
|
|
Yes
|
Answer:
E LO: 5 Type: RC
38. Which of the following would be the best
measure on which to base a segment manager's performance evaluation for
purposes of granting a bonus?
A. Segment sales revenue.
B. Segment contribution margin.
C. Profit margin controllable by the segment
manager.
D. Segment profit margin.
E. Segment net income.
Answer:
C LO: 5 Type: N
39. Sands Corporation operates two stores: J and
K. The following information relates to
store J:
Sales revenue
|
$1,300,000
|
Variable operating expenses
|
600,000
|
Fixed expenses:
|
|
Traceable
to J and controllable by J
|
275,000
|
Traceable
to J and controllable by others
|
80,000
|
J's
segment contribution margin is:
A. $345,000.
B. $425,000.
C. $620,000.
D. $700,000.
E. $745,000.
Answer:
D LO: 5 Type: A
40. Thompson Corporation operates two stores: A
and B. The following information relates
to store A:
Sales revenue
|
$900,000
|
Variable operating expenses
|
400,000
|
Fixed expenses:
|
|
Traceable
to A and controllable by A
|
275,000
|
Traceable
to A and controllable by others
|
120,000
|
A's
segment profit margin is:
A. $105,000.
B. $225,000.
C. $380,000.
D. $500,000.
E. $505,000.
Answer:
A LO: 5 Type: A
41. The following data relate to Department no. 3
of Tsay Corporation:
Segment contribution margin
|
$540,000
|
Profit margin controllable
by the segment manager
|
310,000
|
Segment profit margin
|
150,000
|
On
the basis of this information, Department no. 3's variable operating expenses
are:
A. $80,000.
B. $160,000.
C. $230,000.
D. $390,000.
E. not determinable.
Answer:
E LO: 5 Type: A
42. The following data relate to Department no. 2
of Young Corporation:
Segment contribution margin
|
$480,000
|
Profit margin controllable
by the segment manager
|
230,000
|
Segment profit margin
|
110,000
|
On
the basis of this information, fixed costs traceable to Department no. 2 but
controllable by others are:
A. $120,000.
B. $140,000.
C. $250,000.
D. $370,000.
E. not determinable.
Answer: A LO: 5
Type: A
Use the
following to answer questions 43-47:
The following
information was taken from the segmented income statement of Restin, Inc., and
the company's three divisions:
|
|
Los
|
Bay
|
Central
|
|
Restin,
|
Angeles
|
Area
|
Valley
|
|
Inc.
|
Division
|
Division
|
Division
|
Revenues
|
$750,000
|
$200,000
|
$235,000
|
$325,000
|
Variable
operating expenses
|
410,000
|
110,000
|
120,000
|
180,000
|
Controllable
fixed expenses
|
210,000
|
65,000
|
75,000
|
70,000
|
Noncontrollable
fixed expenses
|
60,000
|
15,000
|
20,000
|
25,000
|
In addition,
the company incurred common fixed costs of $18,000.
43. Bay Area's segment profit margin is:
A. $14,000.
B. $18,000.
C. $20,000.
D. $40,000.
E. $115,000.
Answer:
C LO: 5 Type: A
44. The profit margin controllable by the Central
Valley segment manager is:
A. $32,000.
B. $44,000.
C. $50,000.
D. $75,000.
E. $145,000.
Answer:
D LO: 5 Type: A
45. Assuming use of a responsibility accounting
system, which of the following amounts should be used to evaluate the
performance of the Los Angeles division manager?
A. $4,000.
B. $8,000.
C. $10,000.
D. $25,000.
E. $90,000.
Answer:
D LO: 5 Type: A, N
46. Which of the following amounts should be used
to evaluate whether Restin, Inc., should continue to invest company resources
in the Los Angeles division?
A. $4,000.
B. $8,000.
C. $10,000.
D. $25,000.
E. $90,000.
Answer:
C LO: 5 Type: A, N
47. Assume that the Los Angeles division
increases its promotion expense, a controllable fixed cost, by $10,000. As a result, revenues increase by
$50,000. If variable expenses are tied
directly to revenues, the new Los Angeles segment profit margin is:
A. $12,500.
B. $22,500.
C. $32,500.
D. $50,000.
E. $60,000.
Answer:
B LO: 5 Type: A
48. Quality of conformance refers to:
A. the extent to which a product meets the
specifications of its design.
B. the extent to which a product adds value to a
firm's product line.
C. the extent to which a product is designed for
its intended use.
D. the extent to which a product maximizes
non-value-added activities in the production process.
E. a cost control that is achievable.
Answer:
A LO: 6 Type: RC
49. Which of the following is not a cost
of quality?
A. External failure cost.
B. Internal failure cost.
C. Production inefficiency cost.
D. Prevention cost.
E. Appraisal cost.
Answer:
C LO: 6 Type: RC
50. Which of the following costs is often
considered the hardest to measure?
A. Prevention costs.
B. Appraisal costs.
C. Internal failure costs.
D. External failure costs.
E. The cost of lost sales.
Answer:
E LO: 6 Type: RC
51. Which of the following costs would be
classified as a prevention cost on a quality report?
A. Reliability engineering.
B. Materials inspection.
C. Rework.
D. Warranty repairs.
E. Out-of-court liability settlements.
Answer:
A LO: 6 Type: RC
52. Which of the following costs would be
classified as an appraisal cost on a quality report?
A. Reliability engineering.
B. Materials inspection.
C. Rework.
D. Warranty repairs.
E. Out-of-court liability settlements.
Answer:
B LO: 6 Type: RC
53. If goods are inspected and found to be
defective, any rework costs related to these units before the units are
transferred to the finished-goods warehouse would be classified as a(n):
A. external failure cost.
B. internal failure cost.
C. production inefficiency cost.
D. prevention cost.
E. appraisal cost.
Answer:
B LO: 6 Type: RC
54. Which of the following costs would be
classified as an internal failure cost on a quality report?
A. Reliability engineering.
B. Materials inspection.
C. Rework.
D. Warranty repairs.
E. Out-of-court liability settlements.
Answer:
C LO: 6 Type: RC
55. The cost of servicing a unit under a warranty
agreement is known as a(n):
A. external failure cost.
B. internal failure cost.
C. production inefficiency cost.
D. prevention cost.
E. appraisal cost.
Answer:
A LO: 6 Type: RC
56. Which of the following costs would be
classified as an external failure cost on a quality report?
A. Reliability engineering.
B. Materials inspection.
C. Rework.
D. Warranty repairs.
E. Pilot studies/focus-group sessions.
Answer:
D LO: 6 Type: RC
57. Which of the following choices correctly depicts a
prevention cost and an external failure cost?
|
Prevention Cost
|
External Failure Cost
|
A.
|
Inspection
of work in process
|
Warranty
costs
|
B.
|
Quality
training
|
Product
liability lawsuits
|
C.
|
In-house
rework of defective units
|
Transportation
costs to customer sites
|
D.
|
Customer
complaints
|
Reliability
engineering
|
E.
|
Choices
"A" and "B" above.
|
Answer:
B LO: 6 Type: RC
58. Elizabeth, Inc., was having significant
quality problems in its manufacturing plant.
To remedy the situation, management implemented various up-front
procedures and programs that were expected to reduce the production of bad
units to acceptable (normal) levels and benefit the firm financially. If the procedures and programs functioned as
intended, what is likely true about the amounts the company incurred for
prevention cost, internal failure cost, and external failure cost?
|
Prevention Cost
|
|
Internal Failure Cost
|
|
External Failure Cost
|
A.
|
Increase
|
|
Increase
|
|
Increase
|
B.
|
Increase
|
|
Increase
|
|
Decrease
|
C.
|
Increase
|
|
Decrease
|
|
Increase
|
D.
|
Increase
|
|
Decrease
|
|
Decrease
|
E.
|
Decrease
|
|
Decrease
|
|
Decrease
|
Answer:
D LO: 6 Type: N
59. The costs that follow appeared on Omaha's
quality cost report:
Warranty
costs
|
$15,000
|
Raw-materials
inspection
|
10,000
|
Quality
training
|
31,000
|
Customer
complaints
|
5,500
|
Rework of
defective units
|
12,800
|
The
sum of Omaha's appraisal and internal failure costs is:
A. $10,000.
B. $12,800.
C. $22,800.
D. $68,800.
E. some other amount.
Answer:
C LO: 6 Type: A
60. The costs that follow appeared on Lexington’s
quality cost report:
Warranty
costs
|
$19,000
|
Raw-materials
inspection
|
9,000
|
Quality
training
|
40,000
|
Customer
complaints
|
4,100
|
Production
stoppages from machine breakdowns
|
7,800
|
The
sum of Lexington’s prevention and external failure costs is:
A. $40,000.
B. $49,000.
C. $59,000.
D. $63,100.
E. some other amount.
Answer:
D LO: 6 Type: A
61. Under the contemporary view of product
quality, companies should strive to:
A. balance failure costs with the sum of
prevention and appraisal costs.
B. increase total quality costs.
C. achieve zero defects in manufacturing.
D. inspect after-the-fact rather than install a
series of preventative manufacturing controls.
E. operate at the top of the total quality cost
curve.
Answer:
C LO: 7 Type: RC
62. Which of the following is a helpful tool in
identifying the frequency of quality-control problems?
A. Decision trees.
B. Scatter diagrams.
C. Pareto diagrams.
D. Flowcharts.
E. Decision tables.
Answer:
C LO: 7 Type: RC
63. Many companies (especially those in Europe)
now require their suppliers to meet specified quality guidelines issued by the:
A. International Standards Organization (ISO).
B. Quality Assurance Institute (QAI).
C. Taguchi Standards Association (TSA).
D. Pareto Standards Institute (PSI).
E. an organization other than those mentioned
above.
Answer:
A LO: 7 Type: RC
64. All of the following concepts are related to
environmental management (cost and otherwise) except:
A. dynamic programming efforts.
B. sustainable development.
C. monitoring costs.
D. abatement costs.
E. remediation costs.
Answer:
A LO: 8 Type: RC
65. Costs incurred to reduce or eliminate
pollution are commonly known as:
A. monitoring costs.
B. abatement costs.
C. on-site remediation costs.
D. off-site remediation costs.
E. hidden costs.
Answer:
B LO: 8 Type: RC
66. Clean-up costs are commonly classified as:
A. monitoring costs.
B. abatement costs.
C. remediation costs.
D. internal failure costs.
E. external failure costs.
Answer: C LO: 8
Type: N
67. Which of the following fail to be captured
and reported by a company's accounting system as an environmental cost?
A. Monitoring costs.
B. Abatement costs.
C. Hidden costs.
D. On-site remediation costs.
E. Off-site remediation costs.
Answer:
C LO: 8 Type: RC
68. A company that strives to maximize the value
of its pollution-related activities would follow a(n):
A. process improvement strategy.
B. prevention strategy.
C. end-of-pipe strategy.
D. visible cost strategy.
E. matrix strategy.
Answer:
B LO: 8 Type: RC
EXERCISES
Cost Centers
vs. Profit Centers: Analysis of Operations, Manager Behavior
69. Wireless, Inc., provides a variety of
telecommunications services to residential and commercial customers from its
massive campus-like headquarters in suburban Orlando. For a number of years the firm's maintenance
group has been organized as a cost center, rendering services free of charge to
the company's user departments (sales, billing, accounting, marketing,
research, and so forth).
Requests
for maintenance have grown considerably, and demand is approaching the point
where quality and timeliness of services provided is becoming an issue. As a result, management is studying whether
the maintenance operation should be converted from a cost center to a profit
center, with users to be billed for services performed.
Required:
A.
Differentiate
between a cost center and a profit center.
How is each of these centers evaluated?
B.
What
will likely happen to the number of user service requests if the company makes
the switch to a profit-center form of organization? Why?
C.
Assume
that a user department has requested a particular service, one that is time
consuming and costly to perform. The
maintenance group's actual cost incurred in providing this service is $17,800,
and the user has agreed to pay $20,800 if the switch to a profit center is
made. If this case is fairly typical
within the firm, which of the two forms of organization (cost center or profit
center) will result in a more responsive, service-oriented maintenance group
for Wireless? Why?
LO: 2 Type: RC, N
Answer:
A.
Cost
centers and profit centers are different types of responsibility units within
an organization. With a cost center, a
manager is held accountable for the amount of cost incurred; in contrast, with
a profit center, managers are evaluated on the amount of profit generated,
namely, revenues minus expenses.
B.
The
number of service requests is likely to drop because users will now be charged
for services provided. In cases where
services are free, users sometimes use and abuse the privilege.
C.
The
profit center form of organization will probably result in a more
service-oriented maintenance group. The
profit-center manager would be willing to perform services as long as capacity
is available and revenues exceed expenses.
Naturally, the added profit is viewed favorably, and the quality of
services may actually increase. On the
other hand, if organized as a cost center, providing additional service will
likely result in higher costs, which could be viewed unfavorably in performance
evaluations.
Responsibility
Accounting: Controllability and Centers
70. Branson Corporation manufactures decorative,
sculpted accessories that are sold by interior decorators and home furnishing
stores. The following situation concerns two Branson employees: Deborah Philbun,
head of the company's Billing Department, and Gary Bitner, the firm's general
manager.
Philbun's
Billing Department makes heavy use of hourly employees and is evaluated as a
cost center. Understanding the need for
prompt collection of receivables, Philbun strives to run a first-class
operation. Philbun also understands the
need to contribute in a big way to Branson's financial performance so she
continually strives to minimize Billing Department expenses.
Unfortunately,
Philbun experienced a heated discussion with Bitner several weeks ago, the
subject being the shoddy operation that she is running. Bitner complained loudly about the lack of
timely billings to customers and the general lack of attention to detail, as
many complaints have surfaced about erroneous invoices and customer statements.
Required:
A.
What
is meant by the term "responsibility accounting?"
B.
What
measure(s) of performance would companies normally use to evaluate a
cost-center manager?
C.
Does
Bitner have a valid reason to be upset with Philbun? Given the nature of the Billing Department,
did Deborah err in her quest to minimize expenses? Explain.
D.
Is it
likely that the Billing Department could be evaluated as a profit center? Why?
LO: 1, 2,
3 Type: RC, N
Answer:
A.
Responsibility
accounting refers to the various concepts and tools that are used within an
organization to evaluate the performance of people and various sub-units (such
as divisions and departments). Managers
are appointed to oversee these sub-units and held accountable for items under
their control.
B.
The
manager of a cost center is typically evaluated on the amount of cost
incurred. The costs should be under the
manager's control, and the service provided by the center should be high.
C.
Yes. Although Philbun understands the need to run
a first-class operation and contribute to Branson's overall financial
performance, she may have taken things a bit too far. A cost-center manager should strive to run an
operation that provides high-quality service at the lowest possible cost. This does not necessarily mean cost
minimization, which often results in the elimination of key tasks (i.e., the
"fine points") needed to achieve quality. It is possible that the department's late
billings and errors in invoices and customer statements may have been caused by
such eliminations.
D.
No. A profit-center manager is evaluated on the
basis of revenues generated and costs incurred.
The Billing Department does not produce any revenues for Branson—it
merely handles customer invoices and statements. Sales of company products are likely the
responsibility of a separate Sales Department.
Fixing
Responsibility
71. Consider the following situation:
The
marketing manager of Gilroy, Inc., accepted a rush order for a nonstock item
from a valued customer. The manager
filed the necessary paperwork with the production department, and a production
manager did the same with purchasing for needed raw materials. Unfortunately, a purchasing clerk temporarily
lost the paperwork; by the time it was found, it was too late to order from
Gilroy's regular supplier. A new
supplier was located that quoted a very attractive price.
The
materials soon arrived and were found to be of poor quality, thus giving rise
to a favorable materials price variance, an unfavorable materials quantity
variance, and an unfavorable labor efficiency variance. These latter two variances, as was the usual
case, appeared on the production manager's performance report for the period
just ended.
Required:
A.
Given
that the company uses a responsibility accounting system, should the production
manager be penalized for poor performance?
Briefly discuss, keeping in mind that a production manager is generally
in a very good position to control material usage and labor efficiency.
B.
Should
anything be done to correct the situation?
If "yes," briefly explain.
LO: 3 Type: N
Answer:
A.
No. Although the variances appear on the
production manager's performance report and are often under his or her control,
an adjustment is needed in this case.
The problem appears to be the fault of the purchasing clerk who
misplaced the paperwork. Another
explanation may be that the fault lies with the marketing department for
accepting a rush order and possibly putting a strain on the entire
manufacturing system.
B.
Yes. These variances should be discussed to
determine who's to blame and then cross-charged against that individual's
department.
Segmented
Income Statement: Incomplete Data
72. County Cable Services Inc., is organized in
three segments: Metro, Suburban, and Outlying.
Data for the company and for these segments follow.
|
Cable
|
|
|
|
|||||
|
Services
|
Segments of Company
|
|||||||
|
Inc.
|
Metro
|
Suburban
|
Outlying
|
|||||
Service
revenue
|
$
|
$500
|
$400
|
$200
|
|||||
Less:
Variable costs
|
225
|
|
|
|
|||||
Segment
contribution margin
|
$
|
$
|
$
|
$
|
|||||
Less:
Controllable fixed costs
|
|
200
|
160
|
75
|
|||||
Controllable
profit margin
|
$
440
|
$200
|
$
|
$ 75
|
|||||
Less:
Noncontrollable fixed costs
|
|
|
100
|
|
|||||
Segment
profit margin
|
$
180
|
$ 85
|
$
|
$ 30
|
|||||
Less: Common
fixed costs
|
|
|
|
|
|||||
Income before
taxes
|
$
|
|
|
|
|||||
Less: Income
tax expense
|
75
|
|
|
|
|||||
Net income
|
$ 55
|
|
|
|
|||||
Variable
costs as a percentage of service revenue are: Metro, 20%; Suburban, 18.75%; and
Outlying, 25%.
Required:
A. Complete the
segmented income statement for County Cable.
B.
Evaluate
the three segment managers for consideration of a pay raise. Base the managers' performance on an appropriate
measure, and rank their performance with respect to absolute dollars and as a
percentage of service revenue. What
causes any difference in rankings between the two approaches?
LO: 5 Type: A, N
Answer:
A.
|
|
Cable
|
|
|
|
||
|
|
Services
|
Segments of Company
|
||||
|
|
Inc.
|
Metro
|
Suburban
|
Outlying
|
||
|
Service
revenue
|
$1,100
|
$500
|
$400
|
$200
|
||
|
Less:
Variable costs
|
225
|
100
|
75
|
50
|
||
|
Segment
contribution margin
|
$ 875
|
$400
|
$325
|
$150
|
||
|
Less:
Controllable fixed costs
|
435
|
200
|
160
|
75
|
||
|
Controllable
profit margin
|
$ 440
|
$200
|
$165
|
$ 75
|
||
|
Less:
Noncontrollable fixed costs
|
260
|
115
|
100
|
45
|
||
|
Segment
profit margin
|
$ 180
|
$ 85
|
$ 65
|
$ 30
|
||
|
Less: Common
fixed costs
|
50
|
|
|
|
||
|
Income before
taxes
|
$ 130
|
|
|
|
||
|
Less: Income
tax expense
|
75
|
|
|
|
||
|
Net
income
|
$ 55
|
|
|
|
||
B.
|
The most
appropriate performance measure is controllable profit margin, which is
consistent with responsibility accounting. The rankings are:
|
||||||
|
Dollars:
|
Percentage of service
revenue:
|
|||||
|
Metro: $200 (1)
|
Metro: $200 ¸ $500 = 40% (2)
|
|||||
|
Suburban: $165 (2)
|
Suburban: $165 ¸ $400 = 41.25% (1)
|
|||||
|
Outlying: $75 (3)
|
Outlying: $75 ¸ $200 = 37.5% (3)
|
|||||
|
The
difference in rankings between the two approaches is caused by the fact that
Suburban has a slightly lower rate of variable cost incurrence than Metro
(18.75% vs. 20%). Notice that
controllable fixed costs expressed as a percentage of sales are the same for
both segments (40%).
|
||||||
Straightforward
(Partial) Segmented Income Statement
73.
Fog City Retail
operates a retail store in Phoenix, Las Vegas, and Portland. The following information relates to the
Phoenix facility:
·
The store sold
65,000 units at $18.00 each, after having purchased the units from various
suppliers for $12.50. Phoenix
salespeople are paid a 5% commission based on gross sales dollars.
·
Phoenix’s sales
manager oversees the placement of local advertising contracts, which totaled
$54,000 for the year. Local property
taxes amounted to $14,500.
·
The sales
manager’s $65,000 salary is set by Phoenix’s store manager. In contrast, the store manager’s $134,000
salary is determined by Fog City’s vice president.
·
Phoenix incurred
$6,800 of other noncontrollable costs along with $10,000 of income tax expense.
·
Nontraceable
(common) corporate overhead totaled $68,000.
Fog City’s corporate headquarters is located in
Portland, and the company uses responsibility accounting to evaluate
performance.
Required:
Prepare a segmented income statement for the Phoenix
store, being sure to disclose the segment contribution margin, the segment
profit margin, and net income.
LO: 5 Type: A
Answer:
Sales revenue (65,000 units x $18.00)
|
|
$1,170,000
|
Less variable costs:
|
|
|
Cost of goods sold (65,000 units x
$12.50)
|
$812,500
|
|
Sales commissions ($1,170,000 x
5%)
|
58,500
|
871,000
|
Segment contribution margin
|
|
$ 299,000
|
Less traceable, controllable fixed costs:
|
|
|
Local advertising
|
$ 54,000
|
|
Sales manager’s salary
|
65,000
|
119,000
|
Segment profit margin
|
|
$ 180,000
|
Less traceable, uncontrollable fixed costs:
|
|
|
Local property taxes
|
$ 14,500
|
|
Store manager’s salary
|
134,000
|
|
Other
|
6,800
|
155,300
|
Income before taxes
|
|
$ 24,700
|
Less: Income tax expense
|
|
10,000
|
Net income
|
|
$ 14,700
|
|
|
|
Note: The nontraceable costs are ignored.
|
|
|
Segmented Income Statement
74. The following selected data relate to the
Idaho Division of Far West Enterprises (FWE):
Sales revenue
|
$4,580,000
|
Uncontrollable
fixed costs traceable to the division
|
1,360,000
|
Allocated
corporate overhead
|
590,000
|
Controllable
fixed costs traceable to the division
|
1,120,000
|
Variable
costs
|
40% of revenue
|
Required:
A.
Compute
the following for the Idaho Division:
1.
Segment
contribution margin.
2.
Controllable
profit margin.
3.
Segment
profit margin.
B.
Which
of the three preceding measures should be used when evaluating the Idaho
Division as an investment of FWE's resources?
Why?
C.
Assume
that management made the decision to prepare a segmented income statement that
reflected Idaho's five operating departments.
Would all $1,120,000 of the controllable fixed costs be easily traced to
the departments? Briefly explain.
D.
Which
of the five-dollar amounts presented in the body of the problem would be used
in computing the income before taxes of Far West Enterprises?
LO: 5 Type: RC, A, N
Answer:
A.
|
1.
|
Segment
contribution margin: $4,580,000 - ($4,580,000 x 40%) = $2,748,000
|
|
2.
|
Controllable
profit margin: $2,748,000 - $1,120,000 = $1,628,000
|
|
3.
|
Segment
profit margin: $1,628,000 - $1,360,000 = $268,000
|
B.
|
Segment
profit margin—This measure considers all costs of the division whether
controllable or not. The company will
have to judge whether the segment profit margin, even though it is not
totally controllable by the division's management, is an adequate return on
the assets (and effort) employed.
|
|
C.
|
The
$1,120,000 amount is easily traceable to the Idaho Division but not
necessarily to the division's individual, smaller departments. Some of the costs might be traceable to
these smaller units; some not. Costs
that are not traceable are not allocated in an effort to avoid arbitrary
results.
|
|
D.
|
All five
amounts.
|
Segment
Reporting Measures
75.
Kasten,
Inc., operates a chain of 80 retail stores throughout the Northwest that
specializes in the sale of sports equipment.
The following costs relate to store no. 19 in Seattle, Washington:
1.
Salary
of store manager: $58,000
2.
Allocated
corporate overhead: $55,000
3.
Cost
of goods sold: $2,560,000
4.
Landscaping
and grounds costs (yearly contract): $6,800
5.
Hourly
wages of sales clerks: $343,000
6.
Local
advertising (negotiated by store manager): $76,000
7.
Property
taxes: $25,800
8.
Sales
commissions: $221,000
Required:
Which of the preceding costs would be used in computing:
A. Store no. 19's segment contribution
margin?
B. Store no. 19's controllable profit margin?
C. Store no. 19's segment profit margin?
D. The net income of Kasten, Inc.?
LO: 5 Type: N
Answer:
A.
3, 5,
8
B.
3, 4,
5, 6, 8
C.
1,
3-8
D.
1-8
Segmented
Income Statement Relationships, Cost Allocation, Responsibility Accounting
76. Pretty Lady is an upscale boutique that
operates various stores throughout Florida.
The company, which has three divisions (Miami, Naples, and Tampa),
reported the following information for the year just ended (in thousands):
|
Miami
|
Naples
|
Tampa
|
|||
Sales revenue
|
$9,000
|
|
$6,000
|
|
$5,000
|
|
Divisional
contribution margin
|
6,400
|
|
4,400
|
|
3,500
|
|
Profit margin
controllable by division manager
|
1,500
|
|
1,900
|
|
1,000
|
|
Divisional profit
margin
|
1,000
|
|
700
|
|
200
|
|
Pretty
Lady also reported $600 of common fixed expenses that top management wants to
allocate to the divisions on the basis of sales revenue. As the company's chief executive office
notes, "Each division helped to incur a portion of these costs and, as a
result, should absorb its fair share."
The firm has adopted various responsibility accounting procedures to
evaluate division personnel.
Required:
A.
Compute
the company's total sales revenue.
B.
Calculate
the amount of variable operating expense incurred by the Naples Division.
C.
Calculate
the fixed costs controllable by Miami's management.
D.
Calculate
the fixed costs traceable to the Tampa Division but controllable by others.
E.
Pretty
Lady desires to promote a division manager to the corporate office to oversee
selected operations. In determining
which individual to promote, should Pretty Lady's top management focus on the
profit margin controllable by the division manager or the overall divisional
profit margin? Briefly explain.
F.
If
the company follows the desires of top management, how much of the common fixed
expenses would be allocated to the Tampa Division?
G.
Do
cost allocations such as those in part "F" typically appear on a
segmented income statement?
LO: 4,
5 Type: A, N
Answer:
A.
$9,000 + $6,000 + $5,000 = $20,000
B.
$6,000
- $4,400 = $1,600
C.
$6,400
- $1,500 = $4,900
D.
$1,000
- $200 = $800
E.
Top
management should focus on the profit margin controllable by the division
manager. The company has adopted various
responsibility accounting procedures, which are based on the idea of holding
personnel accountable for items under their control.
F.
Tampa
has 25% of the sales revenue ($5,000 ÷ $20,000) and, accordingly, should absorb
25% of the common fixed expenses, or $150 ($600 x 25%).
G.
No
Segmented
Reporting
77. Segmented income statements are used to show
revenues, expenses, and income for major parts of an organization.
Required:
A.
Consider
a regional chain of department stores that has two or three stores in each of
several cities. One way to segment this
business is geographically. Describe
another way of segmenting the firm.
B.
Segmented
income statements often distinguish between "fixed expenses controllable
by the segment manager" and "fixed expenses traceable to the segment,
but controllable by others." Assume
that the Cleveland district has three retail stores. Give two examples of each type of fixed cost.
C.
Common
costs create difficulties when preparing segmented income statements. Define "common costs," give an
example for the regional chain of department stores, and explain in general
terms why such costs create a problem.
LO: 5 Type: RC, N
Answer:
A.
Other
possible segments:
·
product
lines (women's clothing, men's clothing, housewares, etc.)
·
demographic
characteristics of customer (gender, use of cash or credit card, approximate
age, etc.)
B.
Fixed
expenses controllable by the Cleveland regional manager include:
·
regional
advertising
·
contracts
for maintenance of local facilities such as snowplowing, landscaping, routine
building maintenance
·
utilities
(controllable to some extent at the individual store level)
·
salaries
(within limits set by upper management)
Fixed
expenses traceable to the segment, but controllable by others include:
·
salary
of the regional manager
·
building
depreciation (assuming the regional manager does not have authority to close or
open stores)
·
corporate
charges for services such as legal and accounting, MIS, central purchasing,
etc.
·
debt-service
costs on funds used to acquire (build) the stores
C.
Common
costs are costs incurred to benefit more than one segment. Frequently, there is no cause/effect
relationship regarding the size of these costs and the segments nor are such
costs easily traceable to the segments.
Examples include salaries of top corporate officials and costs of the
corporate headquarters.
Quality
Costs
78.
Salido
Enterprises has identified the following as having an impact on the company's
quality costs:
1.
Inspection
of manufactured goods on assembly line
2.
Warranty
repairs
3.
Employee
training
4.
Quality
engineering/design
5.
Units
repaired at customers' site
6.
Product
testing
7.
Customer
complaints
8.
Product
liability
9.
Rework
of defective goods before transfer to finished goods
10.
Preventive
maintenance for equipment
11.
Evaluation
of suppliers
Required:
A.
Classify
the eleven costs as prevention, appraisal, internal failure, or external
failure.
B.
Briefly
contrast the objective of traditional quality control and contemporary quality
control.
LO: 6,
7 Type: RC, N
Answer:
A.
|
1.
|
Appraisal
|
7.
|
External
failure
|
|
|
2.
|
External
failure
|
8.
|
External
failure
|
|
|
3.
|
Prevention
|
9.
|
Internal
failure
|
|
|
4.
|
Prevention
|
10.
|
Prevention
|
|
|
5.
|
External
failure
|
11.
|
Prevention
|
|
|
6.
|
Appraisal
|
|
|
|
|
|
|
|
|
|
B.
|
The
traditional view holds that the optimal level of product quality is a
balancing act between failure costs and the costs of prevention and
appraisal. The goal is to minimize
total quality costs by operating at the point where failure costs equal the
sum of prevention and appraisal costs.
In contrast, the contemporary perspective holds that any deviations
from a product's target specifications result in higher costs, with the
optimal situation arising at the zero defect level.
|
Quality
Costs
79. Chase, Inc., has identified the following
selected quality costs:
·
Warranty
costs: $72,000
·
Employee
training: $28,000
·
Repair
of units prior to shipment to customers: $14,000
·
Quality
engineering: $61,000
·
Product
inspection during manufacturing: $35,000
·
Travel
to customer sites to perform repairs: $6,200
Required:
A.
Compute
the company's prevention, appraisal, internal failure, and external failure
costs.
B.
Does
a "hidden" quality cost sometimes occur when bad units enter the
marketplace? Briefly explain.
C.
Which
of the following could have greater negative ramifications for Chase: $50,000
of internal failure costs or $50,000 of external failure costs? Why?
LO: 6 Type: RC, N
Answer:
A.
Prevention:
Training ($28,000) + quality engineering ($61,000) = $89,000
Appraisal:
Inspection ($35,000)
Internal
failure: Repairs prior to shipment ($14,000)
External
failure: Warranty ($72,000) + travel ($6,200) = $78,200
B.
Yes. When bad units enter the marketplace, the
result can be lost sales of the units in question, lost sales of other products
courtesy of a tarnished reputation, and a reduced market share. These events give rise to an opportunity cost
that is difficult to measure and report (unlike most quality costs, which are
observable and measurable).
C.
External
failure costs of $50,000: These costs are incurred after the product is in the
marketplace, meaning that customers may be unhappy from a bad experience. This could lead to lost sales, lost
customers, and a damaged reputation. In
contrast, although the same $50,000 cost is involved, the expenditures are
directed toward fixing defects prior to the units' entry into the
marketplace. Thus, the extended impact
of bad units (lost sales, lost customers, and so forth) can be avoided.
Quality
Cost Composition and Analysis
80.
Baker Enterprises
implemented a total quality management (TQM) program at the beginning of 20x1,
closely monitoring amounts spent on prevention cost, appraisal cost, internal
failure cost, and external failure cost.
By the end of 20x3, Baker noted a significant improvement in the quality
of its finished-goods production, with management sensing that the firm was close
to "optimum results from both a quality and expenditure perspective." The quality improvement, coupled with
favorable ratings in Consumer Reports, has led to a sizable boost in
sales volume.
Required:
A.
Present two
examples of prevention costs, appraisal costs, internal failure costs, and
external failure costs.
B.
Baker's TQM
program is functioning as expected from an operational perspective. If the program is functioning as anticipated
from a financial perspective, what has likely happened (increase, decrease, or
no effect) to:
1.
The amount spent
on total quality costs from 20x1 through 20x3.
2.
The hidden costs
incurred by the company from 20x1 through 20x3.
3.
The percentage of
quality expenditures on prevention and appraisal costs relative to the sum of
internal and external failure costs.
4.
The amount of
effort expended on appraisal efforts if the company has gone somewhat overboard
in its prevention programs.
LO: 6, 7
Type: RC, N
Answer:
A.
Prevention: Quality
training, reliability engineering, pilot studies, machine maintenance,
purchase of top quality materials
Appraisal: Inspection, reliability testing
Internal
failure: Scrap, repair, rework, downtime
External
failure: Warranty costs, customer complaints, lawsuits, transportation costs to
customer
sites, product returns, price allowances
B. 1. Decrease: the company is close to the optimum
point from an expenditure perspective.
2. Decrease: increased sales from quality
improvements and favorable ratings likely
translate
into fewer lost sales and a better reputation.
3. Increase: more money spent upfront on
prevention and appraisal costs will drive down
failure
costs, resulting in decreased total quality costs for the firm.
4. Decrease: highly effective prevention
programs often result in a reduced need for
inspection.
Quality Costs:
Identification and Analysis
81. Los Angeles Technologies (LAT) produces two
synthesizers that are popular in the music/entertainment industry: A678 and
B443. The company is very concerned
about quality and has provided the following information about A678:
Warranty repair costs
|
$100,000
|
Reliability engineering
|
340,000
|
Rework at LAT’s manufacturing plant
|
80,000
|
Manufacturing inspection
|
30,000
|
Transportation costs to customer sites to fix problems
|
20,000
|
Quality training for employees
|
60,000
|
Quality
cost reports revealed the following about B443:
Prevention costs
|
80.3%
|
Appraisal costs
|
3.9%
|
Internal failure costs
|
9.1%
|
External failure costs
|
6.7%
|
Total quality costs
|
100.0%
|
Finally,
the company's accounting department reported that the percentage of sales
revenues consumed by quality costs is lower for B443 than for A678.
Required
A.
Classify
the costs that relate to A678 as prevention, appraisal, internal failure, or
external failure.
B.
Using
your answer in requirement "A," compute prevention, appraisal,
internal failure, and external failure costs as a percentage of A678's total
quality costs.
C.
Comment
on your findings, noting whether the company is "investing" its
quality expenditures differently for the two synthesizers.
LO: 6,
7 Type: A, N
Answer:
A.
|
Warranty
repair costs: External failure
|
|||||
|
Reliability
engineering: Prevention
|
|||||
|
Rework at
LAT's manufacturing plant: Internal failure
|
|||||
|
Manufacturing
inspection: Appraisal
|
|||||
|
Transportation
costs to customer sites: External failure
|
|||||
|
Quality
training for employees: Prevention
|
|||||
B.
|
Individual
quality costs as a percentage of total quality costs:
|
|||||
|
|
|
% of Total
|
|||
|
Prevention ($340,000 + $60,000)
|
$400,000
|
63.5%
|
|||
|
Appraisal
|
30,000
|
4.8%
|
|||
|
Internal failure
|
80,000
|
12.7%
|
|||
|
External failure ($100,000 + $20,000)
|
120,000
|
19.0%
|
|||
|
Total
|
$630,000
|
100.0%
|
|||
C.
|
Yes, the
company is "investing" its quality expenditures differently for the
two synthesizers. Los Angeles is
spending more up-front on B443 with respect to prevention and appraisal—over
84% of the total quality expenditures.
(This figure is approximately 68% for A678.) The net result is significantly lower
internal- and external-failure cost percentages and, perhaps more important,
lower total quality costs as a percentage of sales.
|
|||||
DISCUSSION QUESTIONS
Performance Reports
82. The performance reports generated by a
responsibility accounting system often form a "hierarchy of performance
reports." Explain what is meant by
this term.
LO: 3 Type: RC
Answer:
The
performance evaluations are tied to the organizational chart. The performance report at each level reflects
results of the units that report to the manager at that particular level, with
the results being combined and "delivered" to the next higher level
in the firm. Thus, each manager receives
feedback that reflects his or her areas of responsibility, and the whole
process parallels a pyramiding of accountability throughout the organization.
Cost
Allocation Terms
83. The allocation of costs gives rise to several
unique terms. Briefly discuss the
following: cost object, cost allocation base, and cost allocation.
LO: 4 Type: RC
Answer:
Cost
object—the responsibility centers, products, or services to which costs are to
be assigned.
Cost
allocation base—a measure of activity, physical characteristic, or economic
characteristic that is used as the basis for cost allocation. Commonly known as cost drivers, examples may
include machine hours, labor cost, number of setups, and a host of other items.
Cost
allocation—the process of assigning costs to the cost object by using the cost
allocation base.
Quality
Costs
84. Companies are devoting an increased amount of
attention to quality costs. Briefly
explain the difference between internal failure costs and external failure
costs. Which of these two costs will
likely be more troublesome for an organization that desires to succeed in an
extremely competitive marketplace?
Briefly discuss.
LO: 6 Type: RC, N
Answer:
Internal
failure costs arise from the act of repairing defects prior to sale. In contrast, external failure costs are
incurred after a product has been sold.
Examples of the latter include lawsuits, warranty repairs, the cost of
on-site customer visits, and so forth.
In
an extremely competitive marketplace, external failure costs can be more
troublesome. Once it becomes known in
the marketplace that a company is having quality problems, its reputation may
suffer and customers may turn elsewhere for goods and services. The result is
lost sales, lost profits, and a possible erosion of the firm's customer base.
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