BEC NINJA OPERATIONS MANAGEMENT Flashcards Preview

BEC NINJA > BEC NINJA OPERATIONS MANAGEMENT > Flashcards

Flashcards in BEC NINJA OPERATIONS MANAGEMENT Deck (38):
1

Birk Co. uses a job order cost system. The following debits (credits) appeared in Birk's work-in-process account for the month of April:


April Description Amount
----- ------------------ --------
1 Balance $ 4,000
30 Direct materials 24,000
30 Direct labor 16,000
30 Factory overhead 12,800
30 To finished goods (48,000)
Birk applies overhead to production at a predetermined rate of 80% of direct labor cost. Job No. 5, the only job still in process on April 30, has been charged with direct labor of $2,000. What was the amount of direct materials charged to Job No. 5?

A. $3,000

B. $5,200

C. $8,800

D. $24,000

B. $5,200

April 30 balance
of work-in-process = BI + DM used + DL used + Factory OH applied
- Transferred to finished goods
= $4,000 + $24,000 + $16,000 + $12,800 - $48,000
= $8,800

Cost of direct materials
charged to Job No. 5 = WIP balance - Direct labor - Overhead
= $8,800 - $2,000 - .80($2,000)
= $8,800 - $2,000 - $1,600
= $5,200

2

Smart Co. uses a static budget. When actual sales are less than budget, Smart would report favorable variances on which of the following expense categories?

A. Sales commissions and building rent

B. Sales commissions only

C. Building rent only

D. Neither sales commissions nor building rent

B. Sales commissions only

A favorable variance means actual costs were less than the budget. Sales commissions are a variable cost since they are a percentage of sales revenue.

A static budget is not adjusted for changes in the sales level, so sales commissions would be expected to be less than the budgeted amount if sales were less than budgeted sales. Thus, actual sales commissions are less than budget.

Building rent is a fixed cost; it does not vary as sales increase or decrease. Having sales less than the budgeted amount would not change the budget for fixed costs. If building rent does not change for some other reason, there would be no building rent variance, either favorable or unfavorable; actual rent would equal the budgeted rent.

3

Which of the following is not a typical characteristic of a just-in-time (JIT) production environment?

A. Lot sizes equal to one

B. Insignificant setup times and costs

C. Push-through systems

D. Balanced and level workloads

C. Push-through systems

The just-in-time (JIT) production environment is characterized by production generated by need. This is a “demand-pull” system in which sales occur first and trigger the production of units. Typical features of a JIT system include small lot sizes, low setup times/costs, and balanced workloads.

Traditional production systems, on the other hand, produce products based on expected demand. They produce on a fixed schedule in a “push-through” mode.

4

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

A. all manufacturing costs vary directly with units of production.

B. products or services require the performance of activities, and activities consume resources.

C. only costs that respond to unit-level drivers are product costs.

D. only variable costs are included in activity-cost pools.

B. products or services require the performance of activities, and activities consume resources.

Activity-based costing (ABC) is a refinement of traditional overhead cost allocation. Traditional cost systems accumulate indirect costs and allocate them directly to products in a single step using a single allocation base. They are unit-based costing systems. Activity-based costing systems use a two-step process. First, a separate pool accumulates the costs associated with each activity and some distinct measure is found for that activity. For example, machinery setups can be counted and setup costs can be accumulated so that more setups lead to a higher total of setup costs. Costs from each activity pool are allocated to product lines on the basis of the activity measure. In a second step, the costs accumulated by product line are then allocated to the individual units in the product line.

Activity-based costing yields different results from traditional indirect cost allocation if products vary greatly in indirect support, such as machinery setups. The essence of activity-based costing is to attribute costs to products in a manner that reflects actual cost flows within the organization and to recognize that different products demand differing levels of indirect support.

Activity-based costing shares some characteristics with traditional costing systems. Like unit-based costing, ABC divides the organization's resources into cost pools and uses some mechanism (a rate) to attribute those costs. Traditional costing attributes the costs to products, while ABC attributes costs first to product lines and then to the products (or any other object the organization is interested in costing).

Activity-based costing (ABC) is an approach that attaches costs to products or services based on the consumption of those resources caused by the activities. A basic assumption of ABC is that manufacturing overhead is assigned to products and services by identifying the resources needed to produce the output or provide the service.

“All manufacturing costs vary directly with units of production” is incorrect because fixed manufacturing costs (such as rent, security, and depreciation) remain constant in total as production increases and decreases.
“Only costs that respond to unit-level drivers are product costs” is incorrect because costs that are batch-level (inspection of every batch), product-sustaining level (product design), and facility-sustaining level (plant depreciation) can be product costs.
“Only variable costs are included in activity-cost pools” is incorrect because fixed costs can be included in activity-cost pools.

5

Which one of the following statements relating to the drum-buffer-rope (DBR) theory developed by Dr. Eliyahu Goldratt is incorrect?

A. DBR assumes that within a manufacturing system, there is at least one (or a limited number) of constraints created by scarce resources.

B. In order to best protect the throughput of a manufacturing operation, the limiting factor of the manufacturing process must be protected.

C. It is important to focus on the queuing throughout the entire manufacturing system in order to provide for a smooth transition from one area to another.

D. It is important to protect against inflationary inventory levels (inventory build ups) that can occur at bottlenecks.

C. It is important to focus on the queuing throughout the entire manufacturing system in order to provide for a smooth transition from one area to another.

The drum-buffer-rope theory:

-assumes that within a manufacturing system there is at least one (or a limited number) of constraints created by scarce resources.
-states that in order to best protect the throughput of a manufacturing operation, the limiting factor of the manufacturing process must be protected.
-states that it is important to protect against inflationary inventory levels (inventory build ups) and the associated carrying costs which can occur at bottlenecks (constraints).
-focuses on only the queuing area within a manufacturing firm that is in front of the constraint (bottleneck).

6

Which of the following is the best way to identify and manage risk?

A. Know the impact on the project

B. Have experts on the team

C. Control costs

D. Know the risks

B. Have experts on the team

To help identify risks, the project manager may perform brainstorming sessions. One example of brainstorming is the Delphi method, a technique for decision making and problem solving. The Delphi method attempts to develop a forecast through a group consensus. Individual experts are asked to respond to an initial questionnaire followed by a second one prepared using the information and opinions gathered through the first questionnaire. In this process, each expert is asked to reconsider and revise his or her initial answers to the various questions. This process continues until some type (or range) of consensus is reached.

7

Brent Co. has intracompany service transfers from Division Core, a cost center, to Division Pro, a profit center. Under stable economic conditions, which of the following transfer prices is likely to be most conducive to evaluating whether both divisions have met their responsibilities?

A. Actual cost

B. Standard variable cost

C. Actual cost plus mark-up

D. Negotiated price

B. Standard variable cost

Responsibility accounting is segmented reporting useful in management and control that breaks the enterprise into organization subdivisions that are responsible for costs, profits, and investments according to the unit's ability to control these activities. Each center is judged on the basis of an evaluation of its performance relative to the activities over which it has control.

Variable costs include direct costs that can generally be controlled by the division to which they are allocated. "Actual cost" and "Actual cost plus mark-up" are incorrect because actual costs can be controlled by the cost center. It should not be allowed to pass the excess costs over standard costs on to the next division. "Negotiated price" is incorrect because a negotiated price usually would include some profit margin for the producing division, but that division only exercises control over costs rather than revenues or profit.

8

The opportunity cost of making a component part where there is no alternative use for the factory is:

A. the variable manufacturing cost of the component.

B. the total manufacturing cost of the component.

C. the fixed manufacturing cost of the component.

D. zero.

D. zero.

Opportunity cost is the net benefit lost or given up when a resource is used for one purpose rather than an alternative. However, if there is no alternative use, the opportunity cost is zero because there is no benefit to be lost if the factory is used in making a component part.

Opportunity cost is a central concept of economics. It is the cost of a foregone alternative, the result of scarcity and choice. Whenever a choice is made to use scarce resources in one way, other uses are “foregone”; opportunity cost is the benefit given up by not using resources in the alternative way. In a choice between “this” and “that,” the opportunity cost is the cost of giving up “this” to get another unit of “that.” Opportunity cost may be thought of as the commodities that could have been obtained instead of the ones actually chosen. It is a microeconomic concept.

Opportunity cost is the foregone return from alternative choices that are not selected. It is the maximum alternative contribution that might have been obtained if resources had been applied to an alternative use, but which was foregone by using limited resources in a particular different way. It is the foregone contribution from rejecting the next best alternative.

9

Three of the basic measurements used by the theory of constraints (TOC) are:

A. gross margin (or gross profit), return on assets, and total sales.

B. number of constraints (or subordinates), number of non-constraints, and operating leverage.

C. throughput (or throughput contribution), inventory (or investments), and operational expense.

D. fixed manufacturing overhead per unit, fixed general overhead per unit, and unit gross margin (or gross profit).

C. throughput (or throughput contribution), inventory (or investments), and operational expense.

The theory of constraints, or TOC, is an analytical tool that recognizes that an organization's goal is achieved by working through a complex system of linked activities. It is a method for identifying which activity is a constraint or “bottleneck.” Resources can then be applied to ease the constraint, resulting in more throughput through the entire complex system. As one constraint is released, typically others become apparent

10

Comel, Inc., has two major product lines: stoves and dryers. Comel's management wants to evaluate whether discontinuing dryers will increase profits. Which of the following is best for evaluating the discontinuance of the dryer product line?

A. Absorption cost

B. Variable cost

C. Relevant cost

D. Throughput cost

C. Relevant cost

Relevant cost is best for decision making because relevant cost includes only future costs that differ between alternatives being considered.

Absorption cost is product cost that includes direct material, direct labor and both variable and fixed overhead. Variable cost is product cost that includes direct material, direct labor, and variable overhead, but not fixed overhead. Throughput cost includes only direct production costs (direct material and direct labor) as product costs. Absorption, variable, and throughput costs may include some nonrelevant costs and/or exclude some relevant costs.

11

Which of the following balanced scorecard perspectives examines a company's success in targeted market segments?

A. Financial

B. Customer

C. Internal business process

D. Learning and growth

B. Customer

The balanced scorecard concept is a management tool detailed in the book of the same name by Robert Kaplan and David Norton. The back cover of Kaplan and Norton's book states: “The Balanced Scorecard is a management system that can channel the energies, abilities, and specific knowledge held by people throughout the organization toward achieving long-term strategic goals. Kaplan and Norton demonstrate how senior executives in industries such as banking, oil, insurance, and retailing are using the Balanced Scorecard both to guide current performance and to target future performance. They show how to use measures in four categories—financial performance, customer knowledge, internal business processes, and learning and growth—to align individual, organizational, and cross-departmental initiatives and to identify entirely new processes for meeting customer and shareholder objectives.”

Kaplan and Norton's book (p. 44) provides these general guidelines for the four perspectives of the balanced scorecard concept:

Perspective: Generic measures
Financial: Return on investment and economic value added
Customer: Satisfaction, retention, market, and account share
Internal: Quality, response time, cost, and new product introductions
Learning and Growth: Employee satisfaction and information system availability

The balanced scorecard concept is a management method used to help companies achieve the goals in their mission statements. There are four sections, or perspectives, to this method: financial performance, customer knowledge, internal business processes, and learning and growth.

Targeted market segments would be specific groups of customers to whom a company wishes to advertise and sell. The study or review of success in these markets would fall under the customer perspective.

Learning and growth encompasses the continued improvement of the major resource of companies—the training and mentoring of human resources, or employees.
The financial perspective is the more traditional way to manage a business. It is based on financial data such as overall profits and financial ratios.
Internal business processes allow managers to receive information that provides feedback regarding how well the products or services fulfill the overall mission of the business.

12

Madi and Molly, Inc., produces lumber, with an average pine tree having 61% of its trunk producing construction grade lumber. Of the remaining 39%, 22% is used for producing wood products for a local furniture manufacturer, and 17% goes to waste. Therefore, Madi and Molly's lumber usage rate is 83%. In 20X1 the local furniture manufacturer closed, leaving no viable prospects for Madi and Molly to sell the 22% of the wood allocated to the furniture manufacturer. What improvement initiative should Madi and Molly implement to have its lumber usage rate rise back above 80%? You can assume that an increase in the lumber usage rate will replace 100% of the revenue lost from the furniture manufacturer.

A. Lean production

B. Business excellence framework

C. Six Sigma

D. Business process re-engineering

A. Lean production

Lean manufacturing, which is often known simply as “lean,” is a production practice and methodology that focuses on reduction of the seven wastes (overproduction, waiting time, transportation, processing, inventory, motion, and scrap) in manufacturing products.

The decision path of selecting an improvement initiative starts from a company's key areas of concern and links it to the improvement initiative's primary objective. For example, if a company is feeling pressure to be more competitive in the market, it may look at ISO 900. If the company has significant waste in the production of its product(s), then it should examine lean production.

Upon the loss of sales to the furniture manufacturer, Madi and Molly were looking at waste of 39% (100% - 61% for lumber = 39%) as well as a loss in revenue. By implementing lean production tools to achieve 80% conversion of the raw materials (pine trees) into lumber, Madi and Molly would see its revenue stream remain even, while its waste was reduced from 39% to 20%. While it is true that waste was originally 17% before the loss of the furniture client, Madi and Molly's decision to implement lean production tools must be based upon the current production data, which showed a 39% waste factor.

13

What is the primary disadvantage of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of investment center managers?

A. ROI is a percentage, while RI is a dollar amount.

B. ROI may lead to rejecting projects that yield positive cash flows.

C. ROI does not necessarily reflect the company's cost of capital.

D. ROI does not reflect all economic gains.

B. ROI may lead to rejecting projects that yield positive cash flows.

Return on investment (ROI) is calculated by dividing the invested capital into the net income.

Residual income (RI) is the amount of net income in excess of a minimum desired rate of return on invested capital. This can be expressed in the equation: Reported net income - (Desired rate of return × Invested capital). Since ROI is calculated using accounting income, depreciation expense has been subtracted which might lead to rejections of projects with positive cash flow.

Although ROI is expressed as a percentage and residual income is a dollar amount,this fact is not a disadvantage. Neither ROI nor residual income necessarily reflect the company’s cost of capital. ROI can be compared with the cost of capital and RI can use the cost of capital as the desired rate of return, but it could also use some other desired rate. Neither ROI nor RI reflect economic income because the calculations are based on accounting numbers which do not reflect economic income.

Choices A, C, and D are all true statements, but they are not disadvantages.

14

The method for allocating service department costs that best recognizes the mutual services rendered to other service departments is the:

A. dual-rate allocation method.

B. direct allocation method.

C. step-down allocation method.

D. linear algebra (reciprocal) allocation method.

D. linear algebra (reciprocal) allocation method.

The linear algebra or reciprocal allocation method recognizes reciprocity among service department by explicitly including the mutual services rendered among support departments.

The dual-rate allocation method is really a refinement of either the direct or step-down methods, depending upon how it is applied. In the dual-rate method, variable and fixed costs are allocated to departments in a two-step process, variable costs on current use and fixed costs on a long-term, maximum capacity basis. This method may not recognize any reciprocity of services among service departments.
The direct allocation method allocates the cost of service departments directly to the production departments without any intermediate allocations to other service departments. Thus, this method does not recognize any reciprocity of services among service departments.
The step-down allocation method allocates service department costs to other service departments and production departments usually starting with the service department that provides the most service to other service departments. This method allows for partial recognition of reciprocity of services among service departments.

Step allocation is the allocation of the costs of each service department in sequence to all departments that receive the service, whether other service departments or production departments. In each step, costs are allocated only to remaining departments such that ultimately all service costs are allocated to production; this method recognizes some of the service rendered from one to another service department. Because the allocation is step-wise, a sequence of allocation must be chosen: costs from Service Dept 1 are allocated to all other receiving departments, then costs from Service Dept 2 (including its allocation of costs from Service Dept 1) are allocated to all other receiving departments except Service Dept 1, and so on until all service department costs have been allocated to production departments. Only standard costs should be allocated so that the originating department is responsible for variations from standard.


Direct allocation is allocation of the costs of each service department directly to production departments. This method ignores any service rendered to another service department. For example, Service Dept. 1 costs are directly allocated to Production Depts. 1 and 2, and Service Dept. 2 costs are directly allocated to Production Depts. 1 and 2.

Only standard costs should be allocated so that the originating department is responsible for variations from standard.

15

In process 2, material G is added when a batch is 60% complete. Ending work-in-process units, which are 50% complete, would be included in the computation of equivalent units for:

A. conversion costs.

B. material G.

C. both conversion costs and material G.

D. neither conversion costs nor material G.

A. conversion costs.

Once a batch has been started and partially completed, conversion costs would be included in the computation of equivalent units.

The 50% complete refers to conversion costs, and material is not added until the batch is 60% complete as to conversion cost. Since none of the material has been added at the 50% completion mark, no material G units would be included in ending work-in-process equivalent units.

It seems illogical for a product to be partially completed when no material has been added to the product. However, some raw material, such as water, air, or soil, has an insignificant cost and must be processed (for example, filtered to a high degree of purity) before the expensive materials are added. That may help to visualize partial completion when no material has yet been added to the process.

Conversion costs are manufacturing costs required to convert raw materials into a finished product:

Direct labor + Manufacturing overhead

16

The definition of economic cost is:

A. all the dollar costs employers pay for all inputs purchased.

B. the opportunity cost of all inputs minus the dollar cost of those inputs.

C. the difference between all implicit and explicit costs of the business firm.

D. the sum of all explicit and implicit costs of the business firm.

D. the sum of all explicit and implicit costs of the business firm.

Economic cost is the total cost of all resources used to produce a good or service. These costs include explicit, out-of-pocket costs, as well as implicit costs. Implicit costs are the opportunity costs of using one's own resources. For example, if a small business owner uses her own capital of $100,000 to start a business, she does not pay interest expense to herself for use of this capital. However, it is an implicit cost of doing business since she could have been earning interest on the money if she had loaned it to someone else. This implicit cost is part of the total economic cost of doing business. Economic cost includes the value of all of the resources used to produce something whether or not money actually changes hands.

ccounting (or explicit) cost is payments made to outsiders to acquire and use all necessary factors of production. It does not include such implicit costs as opportunity cost and normal profit (the return to the owner, investor, or entrepreneur for the use of capital and risk-taking). It is a narrower view than economic cost.

17

Under Pick Co.’s job order costing system, manufacturing overhead is applied to work in process using a predetermined annual overhead rate. During January, Pick’s transactions included the following:

Direct materials issued to production $ 90,000
Indirect materials issued to production 8,000
Manufacturing overhead incurred 125,000
Manufacturing overhead applied 113,000
Direct labor costs 107,000

Pick had neither beginning nor ending work-in-process inventory. What was the cost of jobs completed in January?

A. $302,000

B. $310,000

C. $322,000

D. $330,000

B. $310,000

Applied overhead is the amount of overhead cost that has been assigned, using estimates of overhead costs and production levels, to finished goods and included in inventory (which will be expensed as part of cost of goods sold). Overhead applied at the standard or estimated rate does not necessarily equal the actual overhead incurred.

The work-in-process inventory at the beginning and end of the month were both zero, so the costs added to work-in-process during the month equal the cost of jobs completed during the month. Those costs included only direct materials ($90,000), overhead applied ($113,000), and direct labor ($107,000), which total $310,000. The indirect materials ($8,000) are part of the overhead costs and should not be included a second time.

Applying overhead: In both normal and standard costing systems, a process must be developed for calculating and applying a budgeted overhead allocation rate.

18

Bell Co. changed from a traditional manufacturing philosophy to a just-in-time philosophy. What are the expected effects of this change on Bell’s inventory turnover and inventory as a percentage of total assets reported on Bell’s balance sheet?

A. Inventory turnover, decrease; inventory percentage, decrease

B. Inventory turnover, decrease; inventory percentage, increase

C. Inventory turnover, increase; inventory percentage, decrease

D. Inventory turnover, increase; inventory percentage, increase

C. Inventory turnover, increase; inventory percentage, decrease

Just-in-time (JIT) is a manufacturing philosophy intended to promote the simplest, least costly means of production. Under ideal conditions, the company would receive raw materials just in time to go into production, manufacture parts just in time to be assembled into products, and complete products just in time to be shipped to customers. It eliminates the storage of inventories at all stages of the production process. If this happened with no change in other assets, then the percentage of inventory to total assets would decrease.

Just-in-time would reduce or eliminate inventories. Inventory turnover is the average number of times that inventory “turns over” or was sold during the period, and is found by dividing cost of goods sold by average inventory. If cost of goods sold is unchanged, but inventory decreases, then inventory turnover would increase.

19

The relevance of a particular cost to a decision is determined by the:

A. riskiness of the decision.

B. number of decision variables.

C. amount of the cost.

D. potential effect on the decision.

D. potential effect on the decision.

Relevant costs are the only costs considered in decision making. Relevant costs are those costs that are affected by the decision being made. All other costs are considered constant and consequently have no effect on the decision. Therefore, the relevance of a particular cost to a decision is determined by the potential effect on the decision.

Relevant costs are expected future costs that are important or pertinent to the decision under consideration and will be affected by the decision. They are usually used in reference to long-run, nonrecurring decisions, such as capital budgeting decisions.

Relevant data for capital budgeting is cash-flow (future) oriented. Historical or past (sunk) costs are irrelevant to the actual decision because the past costs will not be changed (recovered) by future action. However, historical costs are usually the best (sometimes the only) basis for predicting future costs. Accrual accounting (i.e., depreciation) is not relevant; relevant data includes:

initial investment required,
future net cash inflows or net savings in cash outflows, and
disposal cost or salvage value of old equipment and the new equipment.

20

A manufacturing company employs a process cost system. The company's product passes through both Department 1 and Department 2 in order to be completed. Conversion costs are incurred uniformly throughout the process in Department 2. The direct material is added in Department 2 when conversion is 80% complete. This direct material is a preservative that does not change the volume. Spoiled units are discovered at the final inspection and are recognized then for costing purposes. The physical flow of units for the current month is presented below.


Beginning work-in-process 14,000
in Department 2 (90% complete
with respect to conversion costs)

Transferred in from Department 1 76,000

Completed and transferred to 80,000
finished goods

Spoiled units - all normal 1,500

Ending work-in-process in 8,500
Department 2 (60% complete
with respect to conversion costs)


If the manufacturing company uses the weighted-average method, the equivalent units for direct materials in Department 2 for the current month would be:

A. 67,500.

B. 80,000.

C. 81,500.

D. 90,000.

C. 81,500.

Under weighted-average process costing, equivalent units is equal to units completed (both good and spoiled) plus work done on ending work-in-process. Thus:

Equivalent units for direct materials = 80,000 + 1,500 + 0 = 81,500


67,500 is the result of incorrectly subtracting beginning work-in-process units (i.e., 80,000 + 1,500 - 14,000 = 67,500). Under weighted average, work on beginning work-in-process is counted in the current period.
The 80,000 unit average is only partially correct. The good units completed plus spoiled units completed should be included in equivalent units.
90,000 is the result of adding units transferred-in to beginning work-in-process (76,000 + 14,000 = 90,000). Neither of these is used in computing weighted-average equivalent units.
Hint: There is a reason why the ending work-in-process (WIP) is not included in the answer to this problem. The information that precedes the question says that direct material is added in Department 2 when conversion is 80% complete. The question then asks for the equivalent units for direct materials in Department 2. Since the ending WIP is only 60% complete with respect to conversion costs, direct materials have not yet been added to the ending WIP. Therefore, 60% of the 8,500 is not part of the equivalent units for direct materials.

The weighted-average method is the average cost flow assumption used with the periodic inventory system in which the unit cost is the average of beginning inventory and all purchases (sum of total cost of beginning inventory plus total cost of each purchase, divided by total units (beginning plus purchases)). It is applied to ending inventory and units sold and is used with the periodic inventory system because the average unit cost can only be determined at the end of the period. (See Moving-Average Method.)

21

As part of a benchmarking process, a company's costs of quality for the current month have been identified as follows:


Employee training $20,000
Product recalls 8,000
Scrap 4,500
Quality inspectors 48,000
Preventive maintenance 19,500
Supplier education expense 17,500
Materials inspection expense 60,000
Processing product returns 2,500
What amount is the company's prevention cost for the current month?

A. $39,500

B. $57,000

C. $165,000

D. $175,500

B. $57,000


Prevention costs are the costs of production process changes that reduce the rate at which product defects occur. This category includes employee training ($20,000), preventative maintenance ($19,500), and supplier education ($17,500).

The cost of quality inspectors is an inspection cost that identifies a defect but does not prevent it. Internal failure costs include reworking or scrapping defective products that are identified by the inspection process. External failure costs include warranty and repair expenses and product recalls.

Terms
Benchmarking
References

22

Performance measures for investments and business segments sometimes use imputed costs to calculate performance results. Imputed costs reflect what something should or would cost, but they are not recorded in accounts because they are not actual expenditures of cash or other resources.

Return on investment (ROI) and residual income (RI) are two commonly used performance measures. Imputed costs are used in:

A. ROI but not RI.

B. RI but not ROI.

C. both ROI and RI.

D. neither ROI nor RI.

B. RI but not ROI.

Return on investment (ROI) is equal to income (actual revenue minus actual expense) divided by investment cost of asset(s) used. It does not utilize any imputed costs.

Residual income (RI) is the result of subtracting the imputed cost of investment from operating income. Thus, it utilizes some imputed costs.

23

Residual income is a performance evaluation that is used in conjunction with return on investment (ROI) or instead of ROI. In many cases, residual income is preferred over ROI because:

A. residual income is a measure over time while ROI represents the results for a single time period.

B. residual income concentrates on maximizing absolute dollars of income rather than a percentage return as with ROI

C. the imputed interest rate used in calculating residual income is more easily derived than the target rate that is compared to the calculated ROI

D. average investment is employed with residual income while year-end investment is employed with ROI

B. residual income concentrates on maximizing absolute dollars of income rather than a percentage return as with ROI

Residual income is determined by subtracting imputed interest on assets used by a segment or project from the segment or project's calculated net income. Residual income seeks to maximize absolute dollars of income.

Both residual income and ROI measure results for a single time period and use average investment. The target rate is the same as the imputed interest rate.

Residual income is operating income less the “imputed” interest on the assets used to generate the income. It is often used as a measure of performance of an investment center in responsibility accounting, and rates performance in terms of dollars rather than a percentage (rate of return): “maximize the dollar return in excess of minimum desired ROI”—i.e., as long as the center earns a profit in excess of the charge for invested capital, it is successful.


Return on investment (ROI) is calculated by dividing invested capital into net income.

It can be divided into two elements:

Profit margin = Operating income ÷ Sales
Invested capital turnover = Sales ÷ Average invested capital
There are limitations on use of this ratio.

24

Given that demand exceeds capacity, that there is no spoilage or waste, and that there is full utilization of a constant number of assembly hours, the number of components needed for an assembly operation with an 80% learning curve should:

increase for successive periods.
decrease per unit of output.

A. I only

B. II only

C. Both I and II

D. Neither I nor II

A. I only

The learning curve is a graphical description of the learning process that shows the impacts of learning over a number of practice opportunities on work behaviors. The learning curve usually shows increases in work performance as an employee integrates learning experiences (classes, on-the-job training, etc.) into work practices. A basic assumption of the learning curve model is that the direct labor required for the n + 1st unit will always be less than the labor required for the n unit.

Since demand exceeds supply, the company will keep increasing production with a constant number of assembly hours. Increased production requires more units of raw material (components).

Assumptions

a. Increasing Efficiency: The direct labor required for the n + 1st unit will always be less than the labor required for the n unit.
b. Decrease Will Decline: Direct labor will decrease at a declining rate as cumulative production increases.
c. Exponential Curve: The reduction in time will follow an exponential curve. In other words, the production time per unit is reduced by a fixed percentage each time production is doubled.

The learning curve is a graphical description of the learning process that shows the impacts of learning over a number of practice opportunities on work behaviors. The learning curve usually shows increases in work performance as an employee integrates learning experiences (classes, on-the-job training, etc.) into work practices. The learning curve may also show learning plateaus.

25

Which of the following balanced scorecard perspectives examines a company's success in targeted market segments?

A. Financial

B. Customer

C. Internal business process

D. Learning and growth

B. Customer

The balanced scorecard concept is a management tool detailed in the book of the same name by Robert Kaplan and David Norton. The back cover of Kaplan and Norton's book states: “The Balanced Scorecard is a management system that can channel the energies, abilities, and specific knowledge held by people throughout the organization toward achieving long-term strategic goals. Kaplan and Norton demonstrate how senior executives in industries such as banking, oil, insurance, and retailing are using the Balanced Scorecard both to guide current performance and to target future performance. They show how to use measures in four categories—financial performance, customer knowledge, internal business processes, and learning and growth—to align individual, organizational, and cross-departmental initiatives and to identify entirely new processes for meeting customer and shareholder objectives.”

Kaplan and Norton's book (p. 44) provides these general guidelines for the four perspectives of the balanced scorecard concept:

Perspective: Generic measures
Financial: Return on investment and economic value added
Customer: Satisfaction, retention, market, and account share
Internal: Quality, response time, cost, and new product introductions
Learning and Growth: Employee satisfaction and information system availability

26

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

A. all cost drivers.

B. nonvalue-adding activities.

C. all cost drivers and nonvalue-adding activities.

D. neither all cost drivers nor nonvalue-adding activities.

B. nonvalue-adding activities.

Activity-based costing (ABC) is a refinement of traditional overhead cost allocation. Traditional cost systems accumulate indirect costs and allocate them directly to products in a single step using a single allocation base. They are unit-based costing systems. Activity-based costing systems use a two-step process. First, a separate pool accumulates the costs associated with each activity and some distinct measure is found for that activity. For example, machinery setups can be counted and setup costs can be accumulated so that more setups lead to a higher total of setup costs. Costs from each activity pool are allocated to product lines on the basis of the activity measure. In a second step, the costs accumulated by product line are then allocated to the individual units in the product line.

Activity-based costing yields different results from traditional indirect cost allocation if products vary greatly in indirect support, such as machinery setups. The essence of activity-based costing is to attribute costs to products in a manner that reflects actual cost flows within the organization and to recognize that different products demand differing levels of indirect support.

Activity-based costing shares some characteristics with traditional costing systems. Like unit-based costing, ABC divides the organization's resources into cost pools and uses some mechanism (a rate) to attribute those costs. Traditional costing attributes the costs to products, while ABC attributes costs first to product lines and then to the products (or any other object the organization is interested in costing).

Cost drivers are those factors that explain changes in cost for a particular activity. In activity-based costing models, cost drivers are not the same as activity drivers. Cost drivers can be either quantitative or qualitative in nature. They serve as indicators of change. They are used by management to both anticipate cost changes and to help control cost levels. In activity-based costing systems, each activity will have its own defined set of cost drivers to be used in managing that activity. Activity drivers, on the other hand, are used to assign costs of activities to products or other cost objects.

27

Following are Mill Co.'s production costs for October:

Direct materials $100,000
Direct labor 90,000
Factory overhead 4,000

What amount of costs should be traced to specific products in the production process?

A. $194,000

B. $190,000

C. $100,000

D. $90,000

B. $190,000

Direct materials and direct labor are direct costs of specific products, so the $190,000 cost should be traced to those products. Factory overhead cannot be traced to specific jobs. It is instead allocated based on an estimated overhead application rate.

28

Which of the following is not a business process modeling tool?

A. Use case diagrams

B. Activity diagrams

C. Unified modeling language

D. Activity modeling diagram

D. Activity modeling diagram

A few business process modeling tools follow:

a. Use case diagrams present an overview of functionality provided by system drivers, their goals, and any dependencies.
b. Activity diagrams represent the step-by-step workflow of a process.
c. Business process modeling notation is a graphical representation that identifies the business processes in business process modeling.
d. Extended business modeling language (xBML) answers the questions Who, What, When, Where, and Which.
e. Unified Modeling Language is a general-purpose, standardized modeling language.

29

Which of the following is not a business process modeling tool?

A. Use case diagrams

B. Activity diagrams

C. Unified modeling language

D. Activity modeling diagram

D. Activity modeling diagram

A few business process modeling tools follow:

a. Use case diagrams present an overview of functionality provided by system drivers, their goals, and any dependencies.
b. Activity diagrams represent the step-by-step workflow of a process.
c. Business process modeling notation is a graphical representation that identifies the business processes in business process modeling.
d. Extended business modeling language (xBML) answers the questions Who, What, When, Where, and Which.
e. Unified Modeling Language is a general-purpose, standardized modeling language.

30

As part of a benchmarking process, a company's costs of quality for the current month have been identified as follows:


Employee training $20,000
Product recalls 8,000
Scrap 4,500
Quality inspectors 48,000
Preventive maintenance 19,500
Supplier education expense 17,500
Materials inspection expense 60,000
Processing product returns 2,500
What amount is the company's prevention cost for the current month?

A. $39,500

B. $57,000

C. $165,000

D. $175,500

B. $57,000

Prevention costs are the costs of production process changes that reduce the rate at which product defects occur. This category includes employee training ($20,000), preventative maintenance ($19,500), and supplier education ($17,500).

The cost of quality inspectors is an inspection cost that identifies a defect but does not prevent it. Internal failure costs include reworking or scrapping defective products that are identified by the inspection process. External failure costs include warranty and repair expenses and product recalls.

Threats and Controls in Cost Accounting

1. Threat: Production activity data is not recorded or processed accurately, resulting in:
a. erroneous decisions about which products to produce and how to price products.
b. inaccurate inventory records that lead to overstocking or shortages of goods.
c. errors in financial statements and managerial reports that misrepresent performance and lead to poor decisions.
2. Controls
a. Automate data collection (barcode scanners, badge readers) to improve accuracy.
b. Use passwords, user IDs, and an access control matrix to restrict access to production data to authorized personnel.
c. Use check digits and closed-loop verification to make sure data about raw materials used, operations performed, and employee numbers is entered correctly.
d. Use validity checks to make sure that requested materials are on the bill of materials.
e. Count physical inventory and periodically compare the counts to recorded quantities.
3. Threat: Inefficiencies in production operations and quality control problems.
4. Controls
a. Monitor manufacturing activities closely and take prompt action to correct any deviations from standards.
b. Prepare appropriate performance reports.
c. Maintain and carefully review measures of throughput (number of good units produced in a given period of time).
d. Maintain quality control measures such as:
(1) Productive capacity (maximum number of units that can be produced with current technology). To increase productive capacity: improve labor or machine efficiency, rearrange the factory floor to expedite material movements, or simplify product design.
(2) Productive processing time (percentage of total production time used to manufacture a product). To improve productive processing time: improve maintenance to reduce machine downtime and schedule new material deliveries more efficiently to reduce wait time.
(3) Yield (percentage of nondefective units produced). To improve yield: use higher-quality raw materials and improve worker skills.
e. Develop information about the following quality control costs and use that information to minimize the costs.
(1) Prevention costs (production process changes that reduce product defect rates)
(2) Inspection costs (tests to make sure products meet quality standards)
(3) Internal failure costs (reworking or scrapping defective products)
(4) External failure costs (selling defective products, which results in product liability claims, warranty and repair expenses, loss of customer satisfaction, and damage to the company's reputation)

31

Kode Co. manufactures a major product that gives rise to a byproduct 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 byproduct to a joint product, what would be the effect on Kode's overall gross margin?

A. No effect

B. Gross margin increases by $1 for each unit of May sold

C. Gross margin increases by $3 for each unit of May sold

D. Gross margin increases by $4 for each unit of May sold

B. Gross margin increases by $1 for each unit of May sold

When May is treated as a byproduct, its $3 net realizable value (i.e., $4 - $1) is subtracted from the main product cost so only that $3 is included in the computation of gross profit for the main product.

However, when May is treated as a joint product the entire $4 selling price enters into the computation of gross margin. The $1 is not subtracted in computing gross margin. This $1 shows up in selling costs which appear after the computation of gross margin.

The effect of a change from byproduct to joint product status is a $1 increase in gross margin. It should be noted that bottom line net income does not change, however.

32

In a process cost system, the application of factory overhead usually would be recorded as an increase in:

A. finished goods inventory control.

B. factory overhead control.

C. cost of goods sold.

D. work-in-process inventory control.

D. work-in-process inventory control.

Process costing is a system of accounting for production in which costs are assigned to units of finished goods indistinguishable from each other and produced in a continuous process.

During the process, raw material cost, direct labor cost, and applied overhead increase the work-in-process inventory account. As units are finished, the cost of those units reduces work-in-process and increases the finished goods account.

"Finished goods inventory control" is incorrect because overhead is applied as work is performed, not when units are finished. "Factory overhead control" is incorrect because the application of overhead to work-in-process would increase work-in-process, not the factory overhead control account. "Cost of goods sold" is incorrect because the application of overhead does not affect cost of goods sold. The overhead applied will be included in work-in-process, which is transferred to finished goods, which is then transferred to cost of goods sold as the goods are sold, but cost of goods sold is not affected when overhead is applied to work-in-process.

33

A decision table indicates the:

A. sequence of logical operations in a program.

B. sequence of operations in a system.

C. alternative logic conditions and actions to be taken in a program.

D. flow of documents regarding a transaction.


C. alternative logic conditions and actions to be taken in a program.

34

Which of the following input controls is a numeric value computed to provide assurance that the original value has not been altered in construction or transmission?

A. Hash total

B. Parity check

C. Encryption

D. Check digit

D. Check digit

A check digit is a specific type of input control, consisting of a single digit at the end of an identification code that is computed from the other digits in a field. If the identification code is mis-keyed, a formula or algorithm will reveal that the check digit is not correct, and the field will not accept the entry.

Hash totals are nonsense totals; for example, the sum of the digits of an invoice number. A hash total is similar to a control total and is used to verify processing (or output) compared to input. It is not an input control.

A parity check (bit) is an extra bit added to a string of bits as a hardware control. It is a control over the accuracy of data transmission, but since it is a hardware control, it is not an input control.

In encryption, data is processed through a formula that substitutes other characters for the original characters. Data may be encrypted so that it can be transmitted between computers to prevent interception of the data or to store data so that others cannot read it. Since encryption does not attempt to show the original value has not been altered, this answer choice is incorrect.

35

An advantage of having a computer maintain an automated error log in conjunction with computer edit programs is that:

A. reports can be developed that summarize the errors by type, cause, and person responsible.

B. less manual work is required to determine how to correct errors.

C. better editing techniques will result.

D. the audit trail is maintained.

A. reports can be developed that summarize the errors by type, cause, and person responsible.

An advantage of having a computer maintain an automated error log in conjunction with computer edit programs is that reports can be developed that summarize the errors by type, cause, and person responsible.

Manual work may or may not be reduced depending on the system.
There is no assurance that better editing will result. Edits would have to be inserted into the processing.
An audit trail is maintained but reports would have to be developed to make it meaningful.

36

Which of the following audit tests should be performed by an internal auditor who is reviewing controls over user authentication procedures?

A. Verify password masking at data terminals.

B. Review how proper separation of duties is established using access control software.

C. Review procedures concerning revocation of inactive users.

D. Review password procedures.

A. Verify password masking at data terminals.

User authentication basically seeks to determine if the person seeking access is who they say they are. Password masking is a part of this process. Password masking is the technique of either hiding the password as it is typed or displaying other characters so that observers cannot see what characters the user is actually entering.

Separation of duties relates to access to certain application areas. Reviewing procedures concerning revocation is an identification issue designed to deny access to inactive users.

37

The online data entry control called preformatting is:

A. a program initiated prior to regular input to discover errors in data before entry so that the errors can be corrected.

B. a check to determine if all data items for a transaction have been entered by the terminal operator.

C. a series of requests for required input data that requires an acceptable response to each request before a subsequent request is made.

D. the display of a document with blanks for data items to be entered by the terminal operator.

D. the display of a document with blanks for data items to be entered by the terminal operator.

Just as preprinted source documents can be used to control the data collection and data recording processes in a manual system, the flashing of an outline of a document on a video monitor can be used to control the data transcription process in a computerized system that utilizes online data entry. This technique is referred to as preformatting screens.

38

A network of computers located throughout an organization's different facilities and linked to a centralized computer to fulfill information processing needs is called:

A. a local area network.

B. online processing.

C. distributed data processing.

D. interactive processing.

C. distributed data processing.

A network of computers located (“distributed”) throughout an organization's different facilities and linked to a centralized computer to fulfill information (“data”) processing needs is called distributed data processing.

A local area network is a communication network, “locally” distributed, i.e., within a single office, and linked by cables which allows each unit to communicate with the others.

Online processing is interactive real-time processing (compared to batch processing) in which the user is in direct communication with the computer, which processes transactions as soon as they are entered.