BEC-B3-M3

Lankip Company produces two main products and a byproduct out of a joint process. The ratio of output quantities to input quantities of direct material used in the joint process remains consistent from month to month. Lankip has employed the physical-volume method to allocate joint production costs to the two main products. The net realizable value of the byproduct is used to reduce the joint production costs before the joint costs are allocated to the main products. Data regarding Lankip's operations for the current month are presented in the chart below. During the month, Lankip incurred joint production costs of $2,520,000. The main products are not marketable at the split-off point and, thus, have to be processed further. The amount of joint production cost that Lankip would allocate to the Second Main Product by using the physical-volume method to allocate joint production costs would be:

$1,500,000

Boyle, Inc. makes two products, X and Y that require allocation of indirect manufacturing costs. The following data was compiled by the accountant before making any allocations: The total cost of setting up manufacturing processes and equipment is $400,000. The company uses a job-costing system with a single indirect cost rate. Under this system, allocated costs were $300,000 and $100,000 for X and Y, respectively. If an activity-based system is used, what would be the allocated costs for each product?

$100,000; $300,000

LM Enterprises produces two products in a common production process, each of which is processed further after the split-off point. Joint costs incurred for the current month are $36,000. The following information for the current month was also gathered: Assuming that LM Enterprises uses the estimated net realizable value method to allocate costs, what amount would be the joint cost allocated to product M?

$18,000

Feline Fabrications produces two products, Me and Ow, with joint production costs of $60,000. The company elects to use the net realizable value method of allocating costs between the 15,000 units of Me and 30,000 units of Ow produced during the year ended December 31, Year 1. Me has a selling price after split-off of $4.00 and separable costs of $30,000 while Ow has a selling price after split-off of $3.00 and separable costs after split-off of $20,000. What joint production costs will be allocated to each product?

$18,000; $42,000

Sonimad Sawmill manufactures two lumber products from a joint milling process. The two products developed are mine support braces (MSB) and unseasoned commercial building lumber (CBL). A standard production run incurs joint costs of $300,000 and results in 60,000 units of MSB and 90,000 units of CBL. Each MSB sells for $2 per unit, each CBL sells for $4 per unit. Assuming no further processing work is done after the split-off point, the amount of joint cost allocated to commercial building lumber (CBL) on a physical quantity allocation basis would be:

$180,000

A company has two departments and allocates all overhead costs based on department revenues. The following information applies: What amount is the company's total overhead cost for Department 2?

$255,000

A company manufactures two products, X and Y, through a joint process. The joint (common) costs incurred are $500,000 for a standard production run that generates 240,000 gallons of X and 160,000 gallons of Y. X sells for $4.00 per gallon, while Y sells for $6.50 per gallon. If there are no additional processing costs incurred after the split-off point, what is the amount of joint cost for each production run allocated to X on a physical-quantity basis?

$300,000

A processing department produces joint products Ajac and Bjac, each of which incurs separable production costs after split-off. The following details pertain to a batch produced at a $60,000 joint cost before split-off: What is the joint cost assigned to Ajac if costs are assigned using the relative net realizable value?

$48,000

Mighty, Inc. processes chickens for distribution to major grocery chains. The two major products resulting from the production process are white breast meat and legs. Joint costs of $600,000 are incurred during standard production runs each month, which produce a total of 100,000 pounds of white breast meat and 50,000 pounds of legs. Each pound of white breast meat sells for $2 and each pound of legs sells for $1. If there are no further processing costs incurred after the split-off point, what amount of the joint costs would be allocated to the white breast meat on a relative sales value basis?

$480,000

Zeta Company is preparing its annual profit plan. As part of its analysis of the profitability of individual products, the controller estimates the amount of overhead that should be allocated to the individual product lines from the information given below. Under activity-based costing (ABC), the materials handling costs allocated to one unit of wall mirrors would be:

$500

Sonimad Sawmill manufactures two lumber products from a joint milling process. The two products developed are mine support braces (MSB) and unseasoned commercial building lumber (CBL). A standard production run incurs joint costs of $300,000 and results in 60,000 units of MSB and 90,000 units of CBL. Each MSB sells for $2 per unit, each CBL sells for $4 per unit. If there are no further processing costs incurred after the split-off point, the amount of joint cost allocated to the mine support braces (MSB) on a relative sales value basis would be:

$75,000

Sonimad Sawmill manufactures two lumber products from a joint milling process. The two products developed are mine support braces (MSB) and unseasoned commercial building lumber (CBL). A standard production run incurs joint costs of $300,000 and results in 60,000 units of MSB and 90,000 units of CBL. Each MSB sells for $2 per unit, each CBL sells for $4 per unit. Assume the commercial building lumber is not marketable at split-off but must be further planed and sized at a cost of $200,000 per production run. During this process, 10,000 units are unavoidably lost; these spoiled units have no discernable value. The remaining units of commercial building lumber are saleable at $10.00 per unit. The mine support braces, although saleable immediately at the split-off point, are coated with a tar-like preservative that costs $100,000 per production run. The braces are then sold for $5 each. If Sonimad Sawmill chose not to process the mine support braces beyond the split-off point, the contribution from the joint milling process would be:

$80,000 lower.

The New Wave Co. is considering a new method for allocating overhead to its two products, regular and premium coffee beans. Currently New Wave is using the traditional method to allocate overhead, in which the cost driver is direct labor costs. However, it is interested in using two different drivers: machine hours (MH) for separating and roasting beans, and pounds of coffee for packing and shipping. Machine hours for the current month are 700 hours, direct labor cost per pound of coffee is $1.25, and direct materials cost per pound of coffee is $1.50. There are 1,000 pounds of coffee packed and shipped for the current month. The following data are also available: What is the total cost per pound for the premium coffee using the new activity-based costing method?

$9.75

What is the normal effect on the numbers of cost pools and allocation bases when an activity-based cost (ABC) system replaces a traditional cost system?

Activity-based costing (ABC) tends to increase both the number of cost pools and the number of allocation bases. ABC breaks down a production process into many activities. It then accumulates costs by activity (i.e., cost pools) using an appropriate allocation base for each activity. A traditional cost system would use one cost and one allocation base (i.e., for factory overhead). On the other hand, ABC would designate many activities within the process and allocate costs by activity using a different allocation base for each activity.

The costing method that is properly classified for both external and internal reporting purposes is:

Activity-based costing uses cause and effect relationships to capitalize costs to inventory. This is not acceptable for external reporting and useful for internal reporting to management.

An accounting system that collects financial and operating data on the basis of the underlying nature and extent of the cost drivers is:

Activity-based costing. Activity-based costing is an accounting system that collects financial and operating data on the basis of the underlying nature and extent of the cost drivers.

In an activity-based costing system, cost reduction is accomplished by identifying and eliminating:

Eliminating all cost drivers would eliminate all activity. Eliminating nonvalue-adding activities would reduce costs, which is one of the objectives of activity-based costing systems.

Activity based costing refines product cost information because the cost system:

Emphasizes long-term product analysis (when fixed costs become variable costs). Activity-based costing refines product cost information because the cost system emphasizes long-term product analysis (when fixed costs become variable costs).

A manufacturing company has several product lines. Traditionally, it has allocated manufacturing overhead costs between product lines based on total machine hours for each product line. Under a new activity-based costing system, which of the following overhead costs would be most likely to have a new cost driver assigned to it?

Employee benefits expense Activity-based costing seeks to assign overhead costs in a manner that identifies consumption of resources. Employee salaries or even head count are more appropriate cost drivers than machine hours for employee benefits expense. Machine hours would be more likely identified as cost drivers for electric, repairs and maintenance, and depreciation expense.

A cost that bears an observable and known relationship to a quantifiable activity base is a(n):

Engineered cost. An engineered cost bears an observable and known relationship to a quantifiable activity base.

Which of the following is not a basic approach to allocating costs for costing inventory in joint-cost situations?

Flexible budget amounts. Joint costs will most likely be allocated based upon relative unit volume, relative sales value at split off, or net realizable value. Flexible budget amounts are not used to allocate joint costs

Kode Co. manufactures a major product that gives rise to a by-product called May. May's only separable cost is a $1 selling cost when a unit is sold for $4. Kode accounts for May's sales by deducting the $3 net amount from the cost of goods sold of the major product. There are no inventories. If Kode were to change its method of accounting for May from a by-product to a joint product, what would be the effect on Kode's overall gross margin?

Gross margin increases by $1 for each unit of May sold. Changing the accounting from by-product to joint product changes the computation of gross margin because the $1 selling cost is treated differently under each method. Using the by-product method, the $1 selling expense is netted against the $4 selling price to arrive at a $3 deduction from cost of goods sold. Since gross margin is calculated as sales less cost of goods sold, the $1 does flow into the gross margin amount using this method. Using the joint product method, the $1 cost would be a selling expense, which is not included in the calculation of gross margin. Instead, selling expenses are deducted from gross margin (after it is computed) to arrive at net income. Although the total net income is the same under both methods, the joint product method results in an increased gross margin of $1 per unit of May sold.

Which of the following is true about activity-based costing?

It can be used with either process or job costing. Activity-based costing (ABC) assumes that the resource-consuming activities of an enterprise that generate costs are activities and not outputs. ABC is appropriate for all types of cost accumulation systems, including both job order and process costing.

In an activity-based costing system, what should be used to assign a department's manufacturing overhead costs to products produced in varying lot sizes?

Multiple cause and effect relationships.

For purposes of allocating joint costs to joint products, the sales price at point of sale, reduced by cost to complete after split-off, is assumed to be equal to the:

Net sales value at split-off. Sales price less the cost to complete is defined as the net sales value at split-off. In other words, this is the additional contribution to income generated by completing the product.

Because of changes that are occurring in the basic operations of many firms, all of the following represent trends in the way indirect costs are allocated, except:

Preferring plant-wide application rates that are applied to machine hours rather than incurring the cost of detailed allocations. Plant-wide application rates applied to machine hours is a traditional costing approach. More detailed cost allocations are now preferred.

A basic assumption of activity-based costing (ABC) is that:

Products or services require the performance of activities, and activities consume resources. Activity-based costing divides the production process into activities where costs are accumulated. The production process assumes activities consume resources (direct materials, direct labor, and manufacturing overhead), and that the outcome of the production process requires performance of the activities.

For purposes of allocating joint costs to joint products, the sales price at point of sale, reduced by cost to complete after split-off, is assumed to be equal to the:

Relative sales value at split-off. Sales price less the cost to complete is defined as the relative sales value at split-off. In other words, this is the additional contribution to income generated by completing the product.

The use of activity-based costing normally results in:

Substantially greater unit costs for low-volume products than is reported by traditional product costing. The use of activity-based costing normally results in substantially greater unit costs for low-volume products than is reported by traditional product costing.

A CPA would recommend implementing an activity-based costing system under which of the following circumstances?

The client produced products that heterogeneously consume resources. ABC costing is recommended when more than one product is produced and those products do not uniformly consume indirect resources (heterogeneous consumption).

Which of the following nonvalue-added costs associated with manufactured work in process inventory is most significant?

The cost of moving, handling, and storing any individual product. Value added costs are those resource uses that provide value to the consumer. The cost of inventorying products, generally moving, handling and storing them, does not add value to the product and is generally considered one of the most significant non-value activities/costs that a manufacturer should reduce because it can be controlled.

Limitations of an activity-based costing system include which of the following?

The expense of obtaining cost data is relatively high. Activity based costs anticipates increased cost pools and increased allocation bases. The determination of the amounts that go in these pools and their related cost drivers will likely be more costly than traditional systems. Increased costs of ABC represent a limitation of the system.

Generally, individual departmental rates rather than a plant-wide rate for applying overhead would be used if:

The manufactured products differ in the resources consumed from the individual departments in the plant. Generally, individual departmental rates (rather than a plant-wide rate for applying overhead) would be used if the manufactured products differ in the resources consumed from the individual departments in the plant.

In allocating factory service department costs to producing departments, which one of the following items would most likely be used as an activity base?

Units of electrical power consumed. Units of electrical power consumed would be a good indication of producing departments' demand on the service department.

The benefit that management can expect from traditional costing includes which of the following:

Uses a common departmental or factory wide measure of activity, such as direct labor hours or dollars to distribute manufacturing overhead to products. The benefit that management can expect from traditional costing includes using a common departmental or factory wide measure of activity, such as direct labor hours or dollars, to distribute manufacturing overhead to products.

Multiple or departmental overhead rates are considered preferable to a single or plant-wide overhead rate when:

Various products are manufactured that do not pass through the same departments or use the same manufacturing techniques. When various products are manufactured, multiple overhead rates are preferable to a single overhead rate. Activity-based costing would be better still.

Each of the following should be considered in the selection of appropriate cost drivers for an activity based costing system, except:

Volume-based production. Volume-based production (and the associated usage of each cost driver activity) will determine HOW you allocate costs once cost drivers have already been established; it will not be considered as a means for determining WHAT the appropriate cost drivers are for specific activities. Also, volume-based production is a hallmark of traditional costing where the volume alone is the essential driver of how costs are allocated. Behavioral effects, costs of measurement, and degree of correlation are all factors that should be considered when selecting appropriate cost drivers to apply for activity based costing.

A company would most benefit from using an activity-based costing (ABC) system as opposed to a traditional costing system under which of the following conditions?

When indirect costs are a high percentage of total costs. Activity-based costing (ABC) is very beneficial for allocating indirect costs when there are multiple activities. Each activity is evaluated independently and assigned a cost driver, which results in an allocation rate unique to that activity. The greater the percentage of total costs that are considered "indirect," the greater the need for appropriate cost allocations for each activity.