V. Operations Management Flashcards
In the cost of quality, which of the following is an example of a prevention cost?
.Cost of inspecting products on the production line by quality inspectors.
.Labor cost of product designers whose task is to design components that will not break under extreme temperature conditions.
.Cost of reworking defective parts detected by the quality assurance group.
.Cost of parts returned by customers.
Labor cost of product designers whose task is to design components that will not break under extreme temperature conditions.
This is an example of a quality activity designed to do the job right the first time.
Happy’s Nutty Clownery ordered 82 bags of balloons from a supplier but received only 28. Which of the following controls is most likely to have caught this error?
.Separation of duties in cash receipts
.Formalizing the process for authorizing the purchase of goods
.Requiring purchasing agents to disclose relationships with vendors and purchasers
.An automated receiving system that includes multiple points of scanning of received goods
.An automated receiving system that includes multiple points of scanning of received goods
An automated receiving system that includes multiple scans of received goods is likely to have caught this error.
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?
$9.
$12.
$14.
$24.
$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).
Which of the following costs includes all the product costs?
.Direct material and conversion costs.
.Direct labor and conversion costs.
.Manufacturing overhead and conversion costs.
.Direct labor and prime costs.
.Direct material and conversion costs.
The three factors of production are direct materials, direct labor, and overhead. In addition, since conversion costs include both direct labor and overhead, all of the factors of production are inclusive as product costs.
A company wants to determine its marketing costs for budgeting purposes. Activity measures and costs incurred for four months of the current year are presented in the table below. Advertising is considered to be a discretionary cost. Salespersons are paid monthly salaries plus commissions. The sales force was increased from 20 to 21 individuals during the month of May.
Activity measures March April May June
Sales orders 2,000 1,800 2,400 2,300
Units sold 55,000 60,000 70,000 65,000
$ sales $1,150,000, $1,200,000, $1,330,000,$1,275,000
Marketing costs -
Advertising$ 190,000,$ 200,000 ,$ 190,000,$ 190,000
Sales salaries 20,000 20,000 21,000 21,000
Commissions 23,000 24,000 26,600 25,500
Shipping costs 93,000 100,000 114,000 107,000
Total costs,$ 326,000,$ 344,000,$ 351,600,$ 343,500
In relation to the dollar amount of sales, which of the following cost classifications is appropriate for advertising and sales salaries costs?
Advertising Sales salaries
_________________________________________
.Mixed cost Fixed cost
.Fixed cost Variable cost
.Mixed cost Mixed cost
.Fixed cost Fixed cost
.Fixed cost Fixed cost
The classification of the costs is appropriate in this alternative. The advertising is the same for three of the four months and would be considered a fixed cost in terms of dollar sales. (The April amount of $200,000 would be considered a discretionary increase.) Sales salaries appear to vary by $1,000 per salesperson, but in terms of dollar sales, this would be considered a fixed cost.
In calculating the breakeven point for a multiproduct company, which of the following assumptions are commonly made?
I. Sales volume equals production volume.
II. Variable costs are constant per unit.
III. A given sales mix is maintained for all volume changes.
_______________________________________
.I and II.
.I and III.
.II and III.
.I, II, and III.
.I, II, and III.
Breakeven analysis is based upon several simplified assumptions. Included in these assumptions is that variable costs are constant per unit and, for a multiproduct company, that a given sales mix is maintained for all volume changes. When absorption costing is used, operating income is a function of both production volume and sales volume. This is because an increase in inventory levels causes fixed costs to be held in inventory while a decrease in inventory levels causes fixed costs to be charged to cost of goods sold. These fluctuations can dramatically affect income and the breakeven point. On the other hand, when variable costing is used the same amount of fixed costs will be deducted from income whether or not inventory levels fluctuate. As a result, the breakeven point will be the same even if production does not equal sales. Hence, operating income under variable costing is a function only of sales. Generally speaking, however, statements I., II., and III. are all accurate.
When using a flexible budget, a decrease in production levels within a relevant range.
.Decreases variable cost per unit.
.Decreases total costs.
.Increases total fixed costs.
.Increases variable cost per unit.
.Decreases total costs.
Total costs decrease when production decreases. The decrease equals the decline in total variable costs resulting from the production of fewer units. Fixed costs are assumed to be constant.
Mat Co. estimated its material handling costs at two activity levels as follows:
Kilos handled Cost
80,000 $160,000
60,000 132,000
What is Mat’s estimated cost for handling 75,000 kilos?
$150,000.
$153,000.
$157,500.
$165,000.
$153,000.
Fixed costs and variable cost per unit must be estimated from the data using the high-low method. Total costs can then be estimated using the following equation: y = a + b(x), where y = total costs, a = fixed costs, b = variable cost per unit, and x = number of kilos.
The variable cost per unit (slope of the line) is the change in cost divided by the change in kilos:
b = ($160,000 - $132,000)/(80,000 - 60,000) = $1.40. The fixed cost (y intercept point) can be derived from either data point by entering the variable cost per unit and one of the data points into the equation:
$160,000 = a + 1.40(80,000)
$48,000 = a. Therefore, at 75,000 kilos, an activity within the range of the data, we can expect the following amount of cost: Cost = $48,000 + $1.40(75,000) = $153,000
Which of the following production processes best describes lean manufacturing?
- Making a small number of a high variety of unique products with relatively low-skilled labor.
- Making a large number of standardized products with highly skilled labor.
- Making small batches of a high variety of unique products with cross-trained labor.
- Making a large number of standardized products with relatively low-skilled labor.
-Making small batches of a high variety of unique products with cross-trained labor.
Lean manufacturing is accurately described as using small batches of a high variety of unique products with highly skilled, cross-trained labor.
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?
- If production is increased to 12,000 units, profits will increase by $50,000.
- If production is increased to 12,000 units, profits will increase by $100,000.
- If production remains at 10,000 units, profits will decrease by $50,000.
- If production remains at 10,000 units, profits will decrease by $100,000.
-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 $300,000 total, resulting in an operating loss of $50,000. Thus, profits would decrease by $100,000.
Robert the Grievous is reading an online summary production cost report and wants to know why the cost of sprockets, used in constructing orbital sanders, is so high. Robert most likely needs to:
- Data mine.
- Drill down.
- Slice and dice.
- Use the OLAP system.
-Drill down.
He needs to move from summary to detailed information to determine its cause.
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/Year 1 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
-$105,000 $25,000
- $115,000 $0
- $108,000 $37,000
- $100,000 $0
-$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
Systematic evaluation of the trade-offs between product functionality and product cost while still satisfying customer needs is the definition of
- Activity-based management.
- Theory of constraints.
- Total quality management.
- Value engineering.
-Value engineering.
This process is defined as value engineering.
Which of the following may be used to estimate how inventory warehouse costs are affected by both the number of shipments and the weight of materials handled?
- Economic order quantity analysis.
- Probability analysis.
- Correlation analysis.
- Multiple regression analysis.
-Multiple regression analysis.
Regression analysis determines the functional relationship between variables and provides a measure of probable error. Multiple regression analysis involves the use of two or more independent variables (such as the number of shipments and the weight of materials handled) to predict one dependent variable (inventory warehouse costs).
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 in Department 2
(90% complete with respect to conversion costs) 14,000
Transferred in from Department 1 76,000
Completed and transferred to finished goods 80,000
Spoiled units—all normal 1,500
Ending work in process in Department 2
(60% complete with respect to conversion costs) 8,500
If the manufacturing company uses the weighted-average method, the equivalent units for direct materials in Department 2 for the current month would be
- 67,500
- 80,000
- 81,500
- 90,000
-81,500
Supporting Calculations Physical schedule Units to account for: Beginning WIP 14,000 Trans-in Dept. 1 76,000 Total units to account for 90,000
Units accounted for: Units completed (80,000) From beginning WIP (90%) 14,000 From current production 66,000 (80,000 – 14,000)
Total units completed 80,000 80,000
Spoiled 1,500 1,500
Ending WIP (60%) 8,500
Total units accounted for 90,000 81,500
