Page 819 - Accounting Principles (A Business Perspective)

20. Using accounting for quality and cost management

The formula for computing an indirect cost rate has the cost in the numerator and the volume of the cost driver
or allocation base in the denominator.
Multiple-choice

Select the best answer for each of the following questions.
The new production environment refers to an environment in which company managers are concerned with:
a. Improving customer service and product quality.
b. Reducing costs.
c. Increasing government regulation.
d. a and b above.
e. All of the above.

Just-in-time production and purchasing methods:
a. Must be used in conjunction with activity- based costing.
b. Require government regulation.
c. Eliminate the need for inventories in theory because production does not take place until it is known the item
will be sold.
d. Require the use of Pareto charts.
e. All of the above.
UR Company has two products, U and R. Overhead costs are presently allocated to the two products based on
the labor-hours used to produce each product. It takes one labor-hour to make one unit of each product. The chief

financial officer has suggested converting to activity-based costing. She collected the data shown below for three
cost drivers and activities to be used under activity-based costing:
Cost Volume
driver
Activity Cost driver Amount U R
Production Number of setups $82,000 8 12
Quality control Number of inspections 48,000 56 24
Packaging costs Number of units 130,000 80,000 50,000
produced
Total overhead $260,000
What is the total overhead allocated to Product U using the current method of allocating overhead based on
labor-hours (80,000 labor-hours for U and 50,000 labor-hours for R)?

a. USD 113,600.
b. USD 130,000.
c. USD 146,400.
d. USD 160,000.
e. None of the above.
Refer to the facts for in the above question. What is the overhead per unit assigned to Product R using activity-
based costing? (Round to the nearest cent.)
a. USD 2.60.
b. USD 2.27.

c. USD 2.00.
d. USD 1.83.
e. None of the above.

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