Mapa Institute of Technology - IE 112

Chapter 19 Costing and the Value Chain

1)The value chain includes customer service, marketing, and suppliers.

1. 1. True
   2. False  

2. International Financial Reporting Standards (IFRS) require companies to expense costs associated with R&D activities.
   1. True
   2. False  

3. Non-value-added activities are those that add to a product's desirability.
   1. True
   2. False  

4. Activities related to internal failure such as rework, scrap, and engineering change orders are value-added activities since they cannot be eliminated without increasing costs elsewhere in the value chain.
   1. True
   2. False  

5. Non-value-added activities do not directly increase the worth of a product to a customer.
   1. True

1. 2. False  

6. Value-added activities add to a product's desirability from the manufacturer's perspective.
   1. True
   2. False  

7. The process of using activity-based costing to help reduce and eliminate non-value-added activities is activity-based management.
   1. True
   2. False  

8. The development of activity-based cost information is a necessary prerequisite to activity-based management.
   1. True
   2. False  

9. Activity-based costing systems refer to acquiring materials and manufacturing goods only as needed to fill customers' orders.
   1. True
   2. False  

10. Activity-based management is a subset of activity-based costing.
    1. True
    2. False  

11. In the target costing process, target price is computed by adding the desired profit margin to the target product cost.
    1. True
    2. False  

12. Target cost equals target price plus profit margin.
    1. True
    2. False  

13. The target costing process begins with finding a low cost supplier to reduce the overall cost of production.
    1. True
    2. False  

14. To arrive at a target cost, the target selling price and a satisfactory profit margin are added together.
    1. True
    2. False  

15. A primary objective of target costing is to reduce development time.
    1. True
    2. False  

16. A just-in-time manufacturing system is also known as a supply push system.
    1. True
    2. False  

17. Just-in-time inventory systems are characterized by extremely large inventories of materials, works in process, and finished goods.
    1. True
    2. False  

18. In a just-in-time manufacturing system, reliable vendor relationships are essential only if the prices they charge are the lowest possible prices.
    1. True
    2. False

19. A just-in-time inventory system is dependent on reliability of equipment and production workers are often trained in how to make routine repairs.
    1. True
    2. False  

20. Cycle time is the length of time required for a product to pass completely through a manufacturing process.
    1. True
    2. False  

21. The basic approach of just-in-time inventory systems is to try to eliminate inefficiency and to improve product quality.
    1. True
    2. False  

22. Rather than aiming to produce inventory, just-in-time inventory systems attempt to pull production according to customer demand.
    1. True
    2. False  

23. Internal failure costs happen when an unsatisfactory good or service is delivered to a customer.
    1. True
    2. False  

24. Total quality management centers on new product and service development as opposed to managing the value chain for existing products.
    1. True
    2. False  

25. "Six Sigma" describes the length of time it takes a product to pass through the six stages of manufacturing, from processing through inspection.
    1. True
    2. False  

26. A quality cost report would be comprised of prevention costs only.
    1. True
    2. False  

27. Activities that increase scrap and rework tend to increase productivity.
    1. True
    2. False  

28. The suppliers and production component of the value chain would include all of the following costs

except:

1. 1. Direct production labor.    B) Production set-up.

C) Salaries for sales personnel.          D) Receipt of direct materials from suppliers.  

29. All of the following are components of the value chain except:
    1. Research and design activities.
    2. Obtaining raw materials.
    3. Supporting the product after it is sold.
    4. Maintaining large inventories so that orders can be filled promptly.

30. Examples of value-added activities include all of the following except:
    1. Product design.      B) Assembly activities.

C) Machinery set-up activities.           D) Establishing efficient distribution channels.

31. Which of the following activities performed by a manufacturer of roller blades is a value-added activity?
    1. Designs that meet engineering specifications, but not customer needs
    2. Poor quality supplier deliveries
    3. Delayed distribution to a customer
    4. Clear and truthful marketing

32. Value-added activities include:
    1. Setting up machinery.       B) Storing direct materials.

C) Employee idle time.           D) Product design.

33. Which of the following is a value-added activity by a manufacturer of chocolate candies?
    1. The addition of chocolate syrup into the candy mix.
    2. Hiring production workers.
    3. Storing the candy bars until they are distributed to stores.
    4. Managing the cost of electricity by the production department.

34. Which of the following is not one of the basic procedures related to activity-based costing?
    1. Identify the activity            B) Create an associated activity cost pool

C) Compute internal failure costs      D) Calculate the cost per unit of activity

35. The primary objective of activity-based management is:
    1. To develop more accurate product costs.
    2. To reduce and eliminate non-value added activities.
    3. To increase product quality.
    4. To identify instances of internal failure.

36. Techniques to manage costs in the value chain include all of the following except:
    1. Activity based management.         B) Target costing.

C) Process costing.      D) Total quality management.

37. Target costing is directed toward:
    1. Increasing the activity costs associated with existing products.
    2. Identifying the amount by which the costs of existing products must be reduced to achieve a target profit margin.
    3. The creation and design of products that will provide adequate profits.

1. 4. The improvement of existing production processes by eliminating non-value adding activities.

38. The identification of a target price for a newly designed product or service is focused on:
    1. The expected costs of production.
    2. The required profit margin.
    3. The prices charged by existing and potential competitors.
    4. Customers and their functional requirements.

39. The following are all characteristics of target costing except:
    1. Understanding the pricing process in order to increase selling prices.
    2. Driving costs down while satisfying customer needs.
    3. Emphasizing the product's functional characteristics and their importance to the customer.
    4. Reducing development time.

[The following information applies to the questions displayed below.]

Summit Products, Inc. is interested in producing and selling an improved widget. Market research indicates that customers would be willing to pay $90 for such a widget and that 50,000 units could be sold each year at this price. The current cost to produce the widget is estimated to be $65.

40. If Summit Products requires a 25% return on sales to undertake production, what is the target cost for

the new widget?

A) $65.00         B) $67.50         C) $80.00         D) $81.25

41. Summit has learned that a competitor plans to introduce a similar widget at a price of $80. In response, Summit may reduce its selling price to $80. If Summit requires a 25% return on sales, what is the target cost for the new widget?

A) $80.00         B) $60.00         C) $23.75         D) $20.00

42. At a price of $80, Summit's market research indicates that it can sell 60,000 units per year. Assuming Summit can reach its new target cost, how will Summit's profit at the $80 price compare to what it would have earned in the absence of the competitor's product?
    1. Profit will be $75,000 higher.
    2. Profit will be $75,000 lower.
    3. Profit will be unaffected if Summit can reach the revised target cost.
    4. Profit will be $37,500 higher.

43. The just-in-time manufacturing system:
    1. Contrasts with the supply push systems.
    2. Complements the supply push systems.
    3. Neither complements nor contrasts with the supply push systems.
    4. Contrasts the demand pull system.

44. Just-in-time manufacturing systems are also known as:
    1. Supply push systems.         B) Supply pull systems.

C) Demand push systems.       D) Demand pull systems.

45. The manufacturing efficiency ratio equals:
    1. Value-added time divided by cycle time.
    2. Value-added time multiplied by cycle time.
    3. Cycle time divided by value-added time.
    4. The average of cycle time divided by value-added time.

46. Which of the following is not commonly used to measure product quality in a just-in-time system?
    1. Defects per million            B) Merchandise returns

C) Manufacturing efficiency ratio      D) Warranty claims

47. An effective just-in-time system will include:
    1. Specialized employees.     B) An efficient plant layout.

C) Sizable inventories of raw materials.        D) Many suppliers.

48. Cycle time includes:
    1. Processing time, storage and waiting time, movement time, and inspection time.
    2. Processing time, inspection time, and inventory time.
    3. Processing time, storage and waiting time, finishing time, and selling time.
    4. Processing time, storage and waiting time, movement time, and finishing time.

49. During cycle time, value is added only during:
    1. Processing time.    B) Storage and waiting time.

C) Movement time.    D) Inspection time.

50. Which of the following elements in a product's cycle time should be maximized?
    1. Storage and waiting time. B) Processing time.

C) Movement time.    D) Inspection time.

51. Four categories of costs associated with product quality are:
    1. External failure, internal failure, prevention, and carrying.
    2. External failure, internal failure, prevention, and appraisal.
    3. External failure, internal failure, training, and appraisal.
    4. Warranty, product liability, prevention, and training.

52. Which of the following is not an example of the cost of quality?
    1. Prevention costs    B) Internal failure costs

C) Target costs            D) Appraisal costs

53. Which of the following is not a prevention cost?
    1. Training costs         B) Warranty costs

C) Maintenance costs D) Quality planning costs

54. Quality costs do not include:
    1. Costs to prevent poor quality from occurring.
    2. Costs of appraising and inspecting the product.
    3. Costs to correct problems before the customer receives the goods.
    4. Advertising costs.   

55. External failure costs include:
    1. Inspections of materials.   B) Training.

C) Rework.      D) Repairs.

56. What are the total prevention costs for the Abrams Corporation? A) $38,300         B) $34,500       C) $19,700    D) $35,250

57. What are the total appraisal costs for the Abrams Corporation? A) $38,300         B) $34,500       C) $19,700    D) $35,250

58. What are the total internal failure costs for the Abrams Corporation? A) $38,300         B) $34,500       C) $19,700    D) $35,250

59. What are the total external failure costs for the Abrams Corporation? A) $38,300         B) $34,500       C) $19,700    D) $35,250

60. As a percentage of total costs, which quality cost category is the highest?
    1. Prevention B) Internal failure       C) Appraisal     D) External failure

61. Accounting terminology

Listed below are eight technical accounting terms introduced or emphasized in this chapter:

Each of the following statements may (or may not) describe one of these technical terms. In the space provided below each statement, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms.

                 (a) The process of using activity-based costs to help reduce or eliminate non-value-added activities.

                 (b) Can be eliminated without affecting the desirability of the product from the perspective of the customer

                 (c) The length of time for a product to pass completely through a specific manufacturing process.

                 (d) If eliminated, the desirability of the product to consumers is decreased.

                 (e) Consideration of all potential resources that will be consumed by a product from development through disposal.

                 (f) A method in which a product's cost is determined by subtracting a fixed profit margin from its selling price.

                 (g) An approach that explicitly monitors quality costs and rewards quality enhancing behavior.

62. Identifying value-added activities

Pomme Farms operates an apple cider press. The production of cider involves the following activities: (1.) Inspect incoming shipments of apples.

(2.) Store apples in adjacent barn until needed.

(3.) Transport apples from storage barn to the press building. (4.) Load apples onto the conveyor leading to the press.

(5.) Run press.

(6.) Fill bottles with completed cider. (7.) Dispose of waste from press. (8.) Store filled bottles until sale.

Requirements:

(a.) Identify Pomme's value-added activities.

(b.) Identify any non-value added activities performed by Pomme.

63. Value-added and non-value-added activities

Explain the distinction between value-added and non-value added activities. Provide an example of each.

64. Target costing

Ray-Dee, Inc. is considering the introduction of a new deluxe quality stereo tabletop radio. This radio will produce exceptional sound quality through new speaker technology. Market research indicates that customers would be willing to pay $400 for a radio of the quality considered. Ray-Dee requires a 30% return on sales for all its products.

Required: Compute Ray-Dee's target cost for the radio under consideration.

65. Pool-Glow, Inc. has developed a new light for lighting swimming pools. After doing market research, it has determined that customers would be willing to pay $140 for this light. Pool-Glow seeks to earn 25% profit on the light. At present, Pool-Glow makes an old style light for $101.25, which sells for $130.

(1.) What must the target cost be in order to earn the 25% profit that the company demands?

(2.) If Pool-Glow can adjust its costs to the target cost, the company estimates that it can sell 50,000 lights. What would Pool-Glow's profit be at this point?

(3.) How many of the old style lights would have to be sold to reach the same profit?

66. Just-in-time manufacturing

Candycane Co. is trying to determine how long it takes for one of its products to pass through the production process. The following information was assembled regarding how many days the product spends in various production activities:

1. Which of the above activities are value-added activities?
2. What is Candycane's total cycle time?

3. Determine Candycane's manufacturing efficiency ratio.

67. JIT systems' manufacturing efficiency ratio

Methodical Corporation is considering the implementation of a JIT inventory system. The company recently analyzed its cycle time to determine the average number of days spent in each activity of its production process. A summary of the analysis is shown below:

1. Methodical's value-added production activities include:                
2. Methodical's total cycle time is                 days.
3. Methodical's manufacturing efficiency ratio is                %.
4. Which activities might be reduced or eliminated should Methodical implement a JIT system?

68. JIT manufacturing

Briefly explain the nature and goals of a JIT manufacturing system.