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Flashcards in Planning/Measurement - Hard Qs Deck (36):

The following information pertains to a by-product called Moy:

Sales in Year 2 5,000 units
Selling price per unit $6
Selling costs per unit 2
Processing costs 0

The inventory of Moy was recorded at net realizable value when produced in Year 1 and net proceeds from the sale were used to reduce joint costs. No units of Moy were produced in Year 2. What amount should be recognized as profit on Moy's Year 2 sales?
A. $0.
B. $10,000.
C. $20,000.
D. $30,000.

A. $0.

Where the net proceeds from the sale are used to reduce joint costs, no profit is recognized on sales of by-products.


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?
A. $200,000.
B. $240,000.
C. $260,000.
D. $300,000.

D. $300,000.

The total physical quantity produced is 400,000 gallons (240,000 + 160,000). Sixty percent of this quantity is attributable to Product X (240,000 gallons / 400,000 gallons); therefore, 60% of the joint costs should be allocated to Product X ($500,000 * 60% = $300,000).


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 net realizable value basis?
A. $120,000.
B. $200,000.
C. $400,000.
D. $480,000.

D. $480,000.

The calculation is Value of breast meat / Value of both meats * Joint costs = (100,000 lbs. * $2) / ((100,000 lbs * $2) + (50,000 lbs. * $1)) * $600,000 = $480,000.


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

A. Sales value at split-off.
B. Flexible budget amounts.
C. Physical measures, such as weights or volume.
D. Constant gross margin percentage net realizable value method.

B. Flexible budget amounts.

Acceptable joint cost allocation methods include sales value at split-off, physical measures, and constant gross margin. Flexible budget amounts are not used for joint cost allocation.


Mig Co., which began operations in Year 1, produces gasoline and a gasoline by-product. The following information is available pertaining to Year 1 sales and production:

Total production costs to split-off point $120,000
Gasoline sales 270,000
By-product sales 30,000
Gasoline inventory, 12/31/03 15,000
Additional by-product costs:
Marketing 10,000
Production 15,000

Mig accounts for the by-product at the time of production. What are Mig's Year 1 cost of sales for gasoline and the by-product?
Gasoline By-Product
A. $105,000 $25,000
B. $115,000 $0
C. $108,000 $37,000
D. $100,000 $0

D. $100,000 $0

The value of the by-product, being insignificant in relation to the cost of the primary product, is treated as a reduction in the cost of the primary product at production. The separable costs associated with the by-product reduce the amount by which the cost of sales of gasoline is decreased.

In this question, the value of the by-products is recognized at production (not sale). In this case, the net realizable value of the by-product at production is subtracted from the cost of the primary product (gasoline). None of the joint production cost is allocated to the by-product. Thus, the cost of sales for the by-product is zero. The $25,000 of costs associated with the by-product ($10,000 + $15,000) reduces the net realizable value of the by-product. For the primary product:

Net Realizable Value of the By-product:
+Sales value $30,000
-Less separable by-product costs (25,000)
=Equals net realizable value $5,000

Cost of Goods Sold for Main Product:
+Joint production cost $120,000
-Less net realizable value of by-product (5,000)
=Adjusted production cost for main product $115,000
-Less ending inventory of gasoline (15,000)
=Equals cost of goods sold for gasoline $100,000


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

Product Units produced Units sold Separable costs Selling price per unit
L 10,000 9,500 $20,000 $ 8
M 5,000 4,000 40,000 20

What amount would be the joint cost allocated to product M, assuming that LM Enterprises uses the estimated net realizable value method to allocate costs?
A. $20,000
B. $12,000
C. $15,000
D. $18,000

D. $18,000

Using NRV, the final revenue for L is $8 (10,000 units produced) = $80,000; the final revenue for M is $20 (5,000 units produced) = $100,000; Sales less separable costs is $80,000 - $20,000 = $60,000 for L, while sales less separable costs for M is $100,000 - $40,000 = $60,000 for M also. Accordingly, both products have the same net realizable value, so the $36,000 in joint costs would be split 50/50 providing each with an allocation of $18,000.


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?
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.

The current method of accounting for May is to reduce the cost of goods sold of the major product by net sales of $3 per unit of May. The effect of this method of accounting is to increase gross margin by $3 per unit of May sold.

If the method of accounting were changed to joint product accounting, then sales would increase to $4 per unit of May sold, without any addition to variable cost. The $1 cost associated with each unit of May would be classified as a sales expense, which is subtracted below gross margin. The $1 expense would no longer affect gross margin. Therefore, by changing the method of accounting, the gross margin increases by $1, while expenses below gross margin in the income statement increase by $1. Gross margin would reflect the full $4 gross sales of May, rather than only the net reduction in the cost of goods sold of $3.


The regression analysis results for ABC Co. are shown as y = 90x + 45. The standard error (Sb) is 30 and the coefficient of determination (r2 ) is 0.81. The budget calls for the production of 100 units. What is ABC's estimate of total costs?
A. $3,090.
B. $4,590.
C. $9,030.
D. $9,045.

D. $9,045.

Total cost (y) is expressed as $90 of variable cost per unit + $45 of fixed cost. Given that x represents units, we solve for y = $90(100) + $45 = $9,045.


Dough Distributors has decided to increase its daily muffin purchases by 100 boxes. A box of muffins costs $2 and sells for $3 through regular stores. Any boxes not sold through regular stores are sold through Dough's thrift store for $1. Dough assigns the following probabilities to selling additional boxes:

Additional sales Probability
60 .6
100 .4
What is the expected value of Dough's decision to buy 100 additional boxes of muffins?
A. $28.
B. $40.
C. $52.
D. $68.

C. $52.

Income or net cash inflow is expected to increase:

$52 = .6[60($3-$2) + 40($1-$2)] + .4[100($3-$2)].

The .6[ ] term reflects the expected sales of 60 units at regular price less their cost, and 40 at the reduced price less their cost. The .4[ ] term reflects the expected sales all at regular prices less their cost.


Under frost-free conditions, Cal Cultivators expects its strawberry crop to have a $60,000 market value.
An unprotected crop subject to frost has an expected market value of $40,000.
If Cal protects the strawberries against frost, then the market value of the crop is still expected to be $60,000 under frost-free conditions and $90,000 if there is a frost.

What must be the probability of a frost for Cal to be indifferent to spending $10,000 for frost protection?
A. .167.
B. .200.
C. .250.
D. .333.

B. .200.

There are two states of nature that can affect the firm's earnings: frost and no frost. There are also two actions under consideration: provide frost protection for $10,000, or do not. The expected income under each action will depend on the probability of frost. Let p = the probability of frost. Expected net income if frost protection is provided = $90,000(p) + $60,000(1-p) - $10,000. Expected net income if frost protection is not provided = $40,000(p) + $60,000(1-p). The firm is indifferent between the two actions when the expected net income is the same for both. Setting the two expressions equal to each other and solving for p determines at what probability of frost the two actions provide the same income.
$90,000(p) + $60,000(1-p) - $10,000 = $40,000(p) + $60,000(1-p)
$50,000(p) = $10,000
p = .20
When the probability of frost exceeds .20, the expected income from providing frost protection exceeds that of not providing frost protection. This can be verified by entering a probability higher than .20 into both income expressions and determining the income. This is the expected result. As the probability of frost increases, the expected benefits of providing frost protection also increase.
The opposite is true for probabilities lower than .20.


Wren Co. manufactures and sells two products with selling prices and variable costs as follows:

Selling price $18.00 $22.00
Variable costs 12.00 14.00

Wren's total annual fixed costs are $38,400. Wren sells four units of A for every unit of B. If the operating income last year was $28,800, what was the number of units Wren sold?
A. 5,486.
B. 6,000.
C. 9,600.
D. 10,500.

D. 10,500.

Adding an operating income of $28,800 to fixed costs of $38,400 = contribution margin (CM) of $67,200. Total CM for A = $6, while CM for B = $8. Since the ratio of units in the sales mix is 4 parts A to 1 part B, the proper equation would be 6(4/5)Q + 8(1/5)Q = $67,200; thus, Q = 10,500.


In Year 1, Thor Lab supplied hospitals with a comprehensive diagnostic kit for $120. At a volume of 80,000 kits, Thor had fixed costs of $1,000,000 and a profit before income taxes of $200,000. Due to an adverse legal decision, Thor's Year 2 liability insurance increased by $1,200,000 over Year 1.

Assuming the volume and other costs are unchanged, what should the Year 2 price be if Thor is to make the same $200,000 profit before income taxes?
A. $120.00.
B. $135.00.
C. $150.00.
D. $240.00.

B. $135.00.

The problem first requires that the variable cost per unit (V) be computed so that the price can then be made a variable. V does not change in the question.

80,000($120 - V) - $1,000,000 = $200,000
V = $105

Now to solve for the new selling price S

80,000(S - $105) - $2,200,000 = $200,000
S = $135


A ceramics manufacturer sold cups last year for $7.50 each. Variable costs of manufacturing were $2.25 per unit. The company needed to sell 20,000 cups to break even. Net income was $5,040. This year, the company expects the following changes: sales price per cup to be $9.00; variable manufacturing costs to increase 33.3%; fixed costs to increase 10%; and the income tax rate to remain at 40%. Sales in the coming year are expected to exceed last year's sales by 1,000 units. How many units does the company expect to sell this year?
A. 21,000
B. 21,600
C. 21,960
D. 22,600

D. 22,600

This is a detailed problem that requires working backwards through a contribution margin (CM) formatted income statement to determine total CM of $113,400. CM per unit ($5.25) is given by subtracting variable cost ($2.25) from price ($7.50). Year one units sold of 21,600 is calculated by dividing total CM ($113,400) by CM per unit ($5.25). Year two units sold (22,600 units) is equal to year one units plus 1,000 units.


A company that produces 10,000 units has fixed costs of $300,000, variable costs of $50 per unit, and a sales price of $85 per unit. After learning that its variable costs will increase by 20%, the company is considering an increase in production to 12,000 units. Which of the following statements is correct regarding the company's next steps?
A. If production is increased to 12,000 units, profits will increase by $50,000.
B. If production is increased to 12,000 units, profits will increase by $100,000.
C. If production remains at 10,000 units, profits will decrease by $50,000.
D. If production remains at 10,000 units, profits will decrease by $100,000.

D. If production remains at 10,000 units, profits will decrease by $100,000.

At the current level of 10,000 units, a contribution margin per unit of $35 = $85 - $50, and fixed costs of $300,000, the contribution margin is $350,000 and the operating income is $50,000. If variable costs increase by 20%, the contribution margin per unit decreases to $25 = $35 - $60, or $250,000 total, resulting in an operating loss of $50,000. Thus, profits would decrease by $100,000.


Trendy Co. produced and sold 30,000 backpacks during the last year at an average price of $25 per unit. Unit variable costs were the following:

Variable manufacturing costs $9
Variable selling and administrative costs 6
Total $15

Total fixed costs were $250,000. There was no year-end work-in-process inventory. If Trendy had spent an additional $15,000 on advertising, then sales would have increased by $30,000. If Trendy had made this investment, what change would have occurred in Trendy's pretax profit?
A. $3,000 increase.
B. $4,200 increase.
C. $3,000 decrease.
D. $4,200 decrease.

C. $3,000 decrease.

This problem compares the increase in revenue due to the possible increased spending on advertising. The $15,000 for advertising is just another fixed cost. The contribution margin ratio is used to determine 40% of the new revenue of $780,000 = $312,000 resulting in only $12,000 more in contribution margin as compared to a new fixed advertising cost $15,000. The difference between the $15,000 and the $12,000 is a $3,000 decrease in income.


The sales and cost information for Gamore Company are as follows:

Sales (250,000 units) $5,000,000
Direct materials and direct labor 1,500,000
Factory overhead:
Variable 200,000
Fixed 350,000
Selling and general expenses:
Variable 50,000
Fixed 300,000

Gamore's breakeven point in the number of units is
A. 49,240.
B. 50,000.
C. 62,500.
D. 92,860.

B. 50,000.

Given sales of $5,000,000 and total variable costs of 1,750,000, the contribution margin (CM) is the difference of $3,250,000. Then the CM is divided by the units: $3,250,000 / 250,000 units = $13 CM per unit. From here, the BE point in units is equal to the total fixed costs divided by the CM per unit: $650,000 / $13 = 50,000 units.


Del Co. has fixed costs of $100,000 and breakeven sales of $800,000.
What is its projected profit at $1,200,000 sales?
A. $50,000.
B. $150,000.
C. $200,000.
D. $400,000.

A. $50,000.

The objective is to determine the contribution margin ratio and apply it to the sales figure. This results in the total contribution margin because the contribution margin ratio is (sales - variable costs)/sales. Then subtract fixed cost to find the projected profit.

Breakeven sales = fixed cost/contribution margin ratio
$800,000 = $100,000/cmr
.125 = cmr
Projected profit = .125($1,200,000) - $100,000 = $50,000


A ceramics manufacturer sold cups last year for $7.50 each. The variable cost of manufacturing was $2.25 per unit. The company needed to sell 20,000 cups to break even. Its net income was $5,040. This year, the company expects the price per cup to be $9.00; the variable manufacturing cost to increase by 33.3%; and the fixed costs to increase by 10%. How many cups (rounded) does the company need to sell this year to break even?
A. 17,111.
B. 17,500.
C. 19,250.
D. 25,667.

C. 19,250.

To calculate the breakeven point, we must first find the fixed cost of the prior year. Fixed costs (FC) / contribution margin (CM) = breakeven point in units. Thus, using prior year data, FC / ($7.50 - $2.25) = 20,000 units. Solving for FC = $105,000. Current year FC = 1.1(prior year FC) = $115,500; thus, breakeven units for the current year = $115,500 / ($9 - $3) = $19,250.


The following direct labor information pertains to the manufacture of product Glu:

Time required to make one unit 2 direct labor hours
Number of direct workers 50
Number of productive hours per week, per worker 40
Weekly wages per worker $500
Workers' benefits treated as direct labor costs 20% of wages

What is the standard direct labor cost per unit of product Glu?
A. $30.
B. $24.
C. $15.
D. $12.

A. $30.

The standard direct labor cost per unit is the product of the standard wage rate per hour used for direct labor computations, and the standard quantity of hours per unit. This firm includes benefits in the wage rate used for direct labor application:

Standard direct labor cost per unit = [($500)(1.2)/40 hours)](2) = $30
The 1.2 factor above is the effect of including the employee benefits (at 20% of wages) in direct labor.


Virgil Corp. uses a standard cost system. In May, Virgil purchased and used 17,500 pounds of materials at a cost of $70,000. The materials usage variance was $2,500 unfavorable, and the standard materials allowed for May production was 17,000 pounds. What was the materials price variance for May?
A. $17,500 favorable.
B. $17,500 unfavorable.
C. $15,000 favorable.
D. $15,000 unfavorable.

A. $17,500 favorable.

This answer is correct. Using the model suggested in the study text to perform the calculations:

Units Price/Unit Total
Standard Costs 17,000 lbs. x Std. Price = ???
Actual Costs 17,500 lbs. x $4.00* = $70,000
Differences (500) lbs. ??? ???
*Actual Price = $70,000/17,500 lbs. = $4.00

Usage variance = ($2,500) = Difference in Units x Std. Price
= (500) x Std. Price
Std. Price = ($2,500) / (500) = $5.00 per unit

Substituting the standard price into the previous calculation, we now have:

Units Price/Unit Total
Standard Costs 17,000 lbs. x $5.00 = $85,000
Actual Costs 17,500 lbs. x $4.00* = $70,000
Differences (500) lbs. $1.00 $15,000

Price variance = Difference in Price x Actual Quantity Used =
$1.00 x 17,500 = 17,500 favorable various
Check: Usage Variance + Price Variance = Total Difference in Costs
($2,500) + $17,500 = $15,000


A manufacturing company that produces trivets has established the following standards for the current year:

Standard price per pound $3.00
Standard material usage per trivet 2.00

During April, the company purchased 10,000 pounds of material for $33,000 and used 9,400 pounds to produce 4,500 trivets. Four thousand trivets were sold during April. What amount should be reported as the materials' quantity (usage) variance?
A. $1,200 unfavorable.
B. $1,320 unfavorable.
C. $3,000 unfavorable.
D. $4,200 unfavorable.

A. $1,200 unfavorable.

Since this is a usage variance and we are given the standard price of $3, we only need to multiply that sp = $3 by the difference between the quantities. Actual quantity used of 9,400 lbs. is given. Std quantity allowed is found by multiplying the 2 lb. std quantity by the actual outputs of 4,500 lbs. = 9,000 lbs. By using the formula (SQ - AQ) SP we have (9,000 - 9,400) $3 = $1,200.


Central Winery manufactured two products, A and B. The estimated demand for product A was 10,000 bottles, and for product B, 30,000 bottles. The estimated sales price per bottle for A was $6.00, and for B, $8.00. The actual demand for product A was 8,000 bottles, and for product B, 33,000 bottles. The actual price per bottle for A was $6.20, and for B, $7.70.

What amount would be the total selling price variance for Central Winery?
A. $3,700 unfavorable.
B. $8,300 unfavorable.
C. $3,700 favorable.
D. $14,100 favorable.

B. $8,300 unfavorable.


Tennis rackets can be purchased for $60 each from an outside vendor. It costs the manufacturer $80 a piece to produce them, of which 30% is unavoidable fixed overhead cost. What are the relevant costs for this decision? Based only on these costs, which option should the company choose?
Relevant Costs Buy and Make Decision:
$60 and $56 Make
$60 and $56 Buy
$56 and $24 Buy
$56 and $24 Make

$60 and $56 Make

Relevant costs to make and buy are correct, but without considering any additional information, since the cost to make is cheaper than the cost to buy, the prudent decision would be to make the rackets.


Rodder, Inc. manufactures a component in a router assembly. The selling price and unit cost data for the component are as follows:

Selling price $15
Direct materials cost 3
Direct labor cost 3
Variable overhead cost 3
Fixed manufacturing overhead cost 2
Fixed selling and administration cost 1

The company received a special one-time order for 1,000 components. Rodder has an alternative use for production capacity for the 1,000 components that would produce a contribution margin of $5,000. What amount is the lowest unit price Rodder should accept for the component?
A. $9.
B. $12.
C. $14.
D. $24.

C. $14.

This price covers the total variable cost of $9 and provides a contribution margin equal to that of the alternative use ($14-$9 = $5 CM per unit; $5,000/1,000 units = $5 CM per unit).


A company receives an offer to purchase a special order of units of a product that normally sells for $10 each to regular customers. The cost of manufacturing the units is shown here. If all other conditions are favorable, what is the absolute lowest price that the company would be able to feasibly accept for the order if it has enough idle capacity to handle the order?
Cost per unit
Direct materials $2
Direct labor $1
Avoidable fixed costs $2
Unavoidable fixed costs $3
A. $5.
B. $8.
C. $3.
D. $10.

A. $5.

With idle capacity, only the avoidable costs need to be covered. These include direct materials, direct labor, and avoidable fixed costs. These total $5.


A company is considering outsourcing one of the component parts for its product. The company currently makes 10,000 parts per month. Current costs are as follows:

Per unit Total
Direct materials $4 $40,000
Direct labor 3 30,000
Fixed plant facility cost 2 20,000

The company decides to purchase the part for $8 per unit from another supplier and rents its idle capacity for $5,000/month. How will the company's monthly costs change?
A. Decrease $15,000.
B. Decrease $10,000.
C. Increase $5,000.
D. Increase $10,000.

C. Increase $5,000.

Variable costs are presumed to be avoidable and fixed costs are presumed to be unavoidable to start with. Then $5,000 for rent was avoidable when they decided to buy. Thus, the cost to buy is $95,000 = $80,000 + $15,000 in fixed cost that are presumed unavoidable versus a cost to make of $90,000.


Spring Co. had two divisions, A and B. Division A created Product X, which could be sold on the outside market for $25, and used variable costs of $15. Division B could take Product X and apply additional variable costs of $40 to create Product Y, which could be sold for $100. Division B received a special order for a large amount of Product Y.

If Division A were operating at full capacity, which of the following prices should Division A charge Division B for the Product X needed to fill the special order?
A. $15.
B. $20.
C. $25.
D. $40.

C. $25.

The price of $25 per unit leaves Division A no worse off by selling to Division B than it would be if it sold the units on the outside market.


In the GPK Coffee Company, the Strudel Division has strudel that can be sold either to outside customers or to the Bean Division that also sells coffee. Information about these divisions is given below:
Case 1 Case 2
Strudel Division:
Capacity in units of strudel 1,000 1,000
Number of units sold or demanded externally 600 1,000
Market selling price $2.00 $1.50
Avoidable outlay costs per unit $1.50 $1.30
Unavoidable costs per unit based on capacity $0.20 $0.20
Bean Division:
Number of units of strudel needed 400 400
Budgeted price per unit $1.95 $1.45

Given the facts in case 1, what are the minimum and maximum transfer prices?
Minimum Maximum
$1.95 $2.00
$1.50 $2.00
$1.30 $1.95
$1.50 $1.95

$1.50 $2.00

Following the general rule, the minimum transfer price (floor) is equal to the avoidable outlay costs, while the maximum transfer price (ceiling) is equal to the market price. These values are $1.50 and $2.00, respectively.


JIT - Just in Time Inventory definition

Just-in-time (JIT) is an inventory strategy companies employ to increase efficiency and decrease waste by receiving goods only as they are needed in the production process, thereby reducing inventory costs. This method requires producers to forecast demand accurately.

This inventory supply system represents a shift away from the older just-in-case strategy, in which producers carried large inventories in case higher demand had to be met.


To evaluate its performance, the Blankie Co. is comparing its costs of quality from one year to the next. The relevant costs are as follows:

First Year Second Year
Prevention $45,000 $60,000
Appraisal 25,000 35,000
Internal failure 80,000 50,000
External failure 75,000 65,000

Which of the following conclusions can Blankie draw about its quality program?
A. It has been a failure, because conformance costs decreased by $40,000 while nonconformance costs increased by $25,000.
B. It has been a success, because conformance costs decreased by $40,000 and nonconformance costs increased by $25,000.
C. It has been a failure, because conformance costs increased by $25,000 while nonconformance costs decreased by $40,000.
D. It has been a success, because conformance costs increased by $25,000 while nonconformance costs decreased by $40,000.

D. It has been a success, because conformance costs increased by $25,000 while nonconformance costs decreased by $40,000.

This answer is based on two parts: (1) the determination of success or failure, and (2) the amount of conformance costs v. non-conformance costs. Success is defined by minimizing total costs (costs decreased by $15,000). Conformance costs are prevention and appraisal, and non-conformance costs are internal and external failure.


Which changes in costs are most conducive to switching from a traditional inventory ordering system to a just-in-time ordering system?
Cost per purchase order Inventory unit carrying costs
A. Increasing Increasing
B. Decreasing Increasing
C. Decreasing Decreasing
D. Increasing Decreasing

B. Decreasing Increasing

A JIT system is designed to reduce inventory carrying costs by ordering more frequently, but in lower quantities, so that inventories are kept to a minimum. When inventory holding costs (lost interest, security costs, warehousing costs) are rising, there is an incentive to reduce inventories and instead order inventories only when they are needed (and so they arrive just in time for use). In addition, declines in the cost of purchasing make the JIT system even more appropriate. A JIT system orders smaller numbers of units per order, but orders more frequently to avoid inventory build up. Thus, JIT increases total order costs. With decreasing order costs, the total ordering costs is kept to a reasonable level. Furthermore, the decrease in holding costs from holding less inventory more than covers the increased cost of ordering more frequently.


The benefits of a just-in-time system for raw materials usually include
A. Elimination of nonvalue-adding operations.
B. Increase in the number of suppliers, thereby ensuring competitive bidding.
C. Maximization of the standard delivery quantity, thereby lessening the paperwork for each delivery.
D. Decrease in the number of deliveries required to maintain production.

A. Elimination of nonvalue-adding operations.

A JIT system seeks to reduce those activities that do not increase the value of the product to the customer. For example, the time required to move materials between departments is reduced and paperwork is minimized. Operations are streamlined and simplified. JIT is much more than the minimization of inventories.


Key Co. changed from a traditional manufacturing operation with a job order costing system to a just-in-time operation with a back-flush costing system.

What is (are) the expected effect(s) of these changes on Key's inspection costs and recording detail of costs tracked to jobs in process?
Inspection costs Detail of costs tracked to jobs
Decrease Decrease
Decrease Increase
Increase Decrease
Increase Increase

Inspection costs Detail of costs tracked to jobs
A. Decrease Decrease

A backflush costing system is used in just-in-time inventory systems. Part of the philosophy of JIT is to reduce nonvalue-added activities, and reduce defects. Part of the aim is to reduce accounting costs that are nonvalue-added. Backflush costing systems simplify product costing by costing production at the completion of an order. Minimal inventories are maintained, and cellular production facilities are used.

Thus, there is much less need to maintain detailed records of cost by job. The job is simply costed at completion. There is no need to know the cost until that time. Inspection costs are reduced because zero defects is a goal. Production stops until the cause of the defect can be identified and fixed.


Nonfinancial performance measures are important to engineering and operations managers in assessing the quality levels of their products. Which of the following indicators can be used to measure product quality?

I. Returns and allowances.

II. Number and types of customer complaints.

III. Production cycle time.
A. I and II only.
B. I and III only.
C. II and III only.
D. I, II, and III.

A. I and II only.

Only returns and allowances and customer complaints are measures of product quality. Returns and allowances are direct measures of the quality of the product; a high frequency of returns and allowances indicates lower product quality. Customer complaints about product quality are an important input to firms about the quality of their product. However, production cycle time, also called manufacturing lead time, is the time from setup to the finished good. Cycle time is relevant to determining the optimal production system, but is not directly concerned with product quality. Longer waiting times in the manufacturing setting may indicate the need to increase the number of machines, but again, there is no direct tie-in to quality.


Which of the following techniques effectively measures improvements in product quality as a result of internal failure costs?
A. Inspection of in-process goods.
B. Recording the number of products returned over time.
C. Tracking the number of products reworked.
D. Tracking warranty expenses over time.

C. Tracking the number of products reworked.

The item "Tracking the number of products reworked" is the only choice given that reflects an internal failure.


Lon Co.'s budget committee is preparing its master budget on the basis of the following projections:

Sales $2,800,000
Decrease in inventories 70,000
Decrease in accounts payable 150,000
Gross margin 40%

What are Lon's estimated cash disbursements for inventories?
A. $1,040,000.
B. $1,200,000.
C. $1,600,000.
D. $1,760,000.

D. $1,760,000.

First, purchases must be computed, and then the estimated payments to be made on accounts payable. With inventory declining, purchases must equal cost of sales less the decline in inventory. In other words, purchases are less than cost of sales if inventory declines. If the gross margin is 40% of sales, then cost of sales is 60% of sales.
Purchases = cost of sales - inventory decline
= (.60)($2,800,000) - $70,000
= $1,610,000

If accounts payable (AP) is to decrease, payments on AP must exceed purchases. Estimated payments on AP = $1,610,000 + $150,000 decrease in AP = $1,760,000.