Test bank managerial accounting by lauderbach 10e ch04

CHAPTER 4:

ACTIVITY-BASED COSTING AND MANAGEMENT

Multiple Choice
a

1. Activity-based costing
a. requires the identification of cost drivers.
b. is used only in JIT operations.
c. applies only to discretionary fixed costs.
d. does not help to identify activities as value-adding or non-valueadding.

a

2. A company using activity-based costing
a. tries to identify cost drivers.
b. allocates all costs to individual products.
c. looks for the activity with which total costs are most closely
associated.
d. is probably using the JIT philosophy.

a

3. Machine setups is an example of a(n) ____________ activity.
a. Batch
b. Facility-sustaining
c. Product-sustaining
d. Unit

d

4. Machine hours is an example of a(n) ____________ activity.
a. Batch
b. Facility-sustaining
c. Product-sustaining
d. Unit

b

5. Landscaping is an example of a(n) _____________ activity.
a. Batch
b. Facility-sustaining
c. Product-sustaining
d. Unit

d

6. Material cost is an example of a(n) _____________ activity.
a. Batch
b. Facility-sustaining
c. Product-sustaining
d. Unit

c

7. The activities that drive resource requirements are called the
a. activity drivers
b. cost objects
c. resource drivers
d. sustaining activities

34


b

8. The resource utilized by a given product divided by the total amount of
the resource available is called the
a. activity driver
b. consumption ratio
c. cost object
d. sustaining activity

c

9. The segment for which you are estimating the cost is called the
a. activity driver
b. consumption ratio
c. cost object
d. sustaining activity

a 10. A tool that focuses on manufacturing processes and seeks to reduce or
optimize the activities performed within the process is
a. process value analysis
b. re-engineering
c. caveat analysis
d. benchmarking
d 11. A tool that compares how tasks are performed internally with the best
practices of industry leaders is
a. process value analysis

b. re-engineering
c. caveat analysis
d. benchmarking
b 12. An approach to developing new ways to perform existing activities is
called
a. process value analysis
b. re-engineering
c. caveat analysis
d. benchmarking
c 13. Which of the following statements is true?
a. The traditional approach to costing uses many different cost drivers.
b. Costs that are indirect to products are by definition traceable to
directly to products.
c. Costs that are indirect to products are traceable to some activity.
d. All of the above statements are true.
a 14. Which of the following is NOT a sign of poor cost data?
a. Competitors' prices for high-volume products appear much too high.
b. The company seems to have a highly profitable niche all to itself.
c. Customers don't balk at price increases for low-volume products.
d. Competitors' prices for low-volume products appear much too high.
d 15. Which of the following is a sign of poor cost data?
a. Competitors' prices for high-volume products appear much too high.
b. The company seems to have a highly profitable niche all to itself.
c. Customers don't balk at price increases for low-volume products.
d. All of the statements are true.

35


a 16. Number of purchase orders is an example of a(n) ____________ activity.

a. Batch
b. Facility-sustaining
c. Product-sustaining
d. Unit
d 17. Direct labor hours is an example of a(n) ____________ activity.
a. Batch
b. Facility-sustaining
c. Product-sustaining
d. Unit
b 18. Property taxes on the plant is an example of a(n) _____________
activity.
a. Batch
b. Facility-sustaining
c. Product-sustaining
d. Unit
d 19. Production volume is an example of a(n) _____________ activity.
a. Batch
b. Facility-sustaining
c. Product-sustaining
d. Unit
d 20. ____________ are those performed each time a unit is produced or sold.
a. Batch-level activities
b. Facility-sustaining activities
c. Sustaining activities
d. Unit-level activities
a 21. ____________ are those that a company performs when it makes a group of
units.
a. Batch-level activities
b. Facility-sustaining activities
c. Sustaining activities

d. Unit-level activities
b 22. ____________ relate to an entire plant as a whole.
a. Batch-level activities
b. Facility-sustaining activities
c. Sustaining activities
d. Unit-level activities
c 23. ____________ arise because a company maintains a particular product or
service.
a. Batch-level activities
b. Facility-sustaining activities
c. Sustaining activities
d. Unit-level activities
d 24. Which of the following is not a type of sustaining activity?
a. Capacity-sustaining
b. Customer-sustaining
36


c. Distribution-channel sustaining
d. Unit-sustaining
a 25. Which of the following is true regarding activity-based management?
a. ABM is using information about activities to manage portions of the
organization other than costs.
b. ABM is applying ABC to external financial reporting.
c. ABM requires the use of re-engineering principles.
d. All of the above are true.
a 26. The quality costs that are incurred to determine whether particular
units of product meet quality standards are
a. appraisal costs.
b. external failure costs.

c. internal failure costs.
d. prevention costs.
c 27. The cost of downtime on machines while rework is being performed is a(n)
a. appraisal cost.
b. external failure cost.
c. internal failure cost.
d. prevention cost.
b 28. The cost of processing customer complaints is a(n)
a. appraisal cost.
b. external failure cost.
c. internal failure cost.
d. prevention cost.
d 29. Worker training is a(n)
a. appraisal cost.
b. external failure cost.
c. internal failure cost.
d. prevention cost.
b 30. The cost to repair a unit of product that fails after it is sold is a(n)
a. appraisal cost.
b. external failure cost.
c. internal failure cost.
d. prevention cost.
b 31. Genco manufactures two versions of a product. Production and cost
information show the following:
Model A
Units produced
200
Material moves (total)
20
Direct labor hours per unit 1

Model B
400
80
2

Material handling costs total $200,000. Under ABC, the material handling
costs allocated to each unit of Model A would be:
a. $10
b. $200
c. $333
37


d. Some other number

38


c 32. Genco manufactures two versions of a product. Production and cost
information show the following:
Model A
Units produced
200
Material moves (total)
20
Direct labor hours per unit 1

Model B
400

80
2

Material handling costs total $200,000. Under ABC, the material handling
costs allocated to each unit of Model B would be:
a. $200
b. $333
c. $400
d. Some other number
a 33. Genco manufactures two versions of a product. Production and cost
information show the following:
Model A
Units produced
200
Material moves (total)
20
Direct labor hours per unit 1

Model B
400
80
3

Material handling costs total $200,000. Direct labor hours are used to
allocate overhead costs. The material handling costs allocated to each
unit of Model A would be:
a. $143
b. $200
c. $333
d. Some other number

b 34. Cadott Manufacturing produces three products. Production and cost
information show the following:

Units produced
Direct labor hours
Number of inspections

Model X
1,000
2,000
20

Model Y
3,000
1,000
30

Model Z
6,000
2,000
50

Inspection costs totaled $100,000. Using ABC, inspections costs
allocated to each unit of Model X would be
a. $10.00
b. $20.00
c. $40.00
d. Some other number

39

b 35. Cadott Manufacturing produces three products. Production and cost
information show the following:

Units produced
Direct labor hours
Number of inspections

Model X
1,000
2,000
20

Model Y
3,000
1,000
30

Model Z
6,000
2,000
50

Inspection costs totaled $100,000. Using ABC, inspections costs
allocated to each unit of Model Y would be
a. $ 6.67
b. $10.00
c. $20.00
d. Some other number

b 36. Cadott Manufacturing produces three products. Production and cost
information show the following:

Units produced
Direct labor hours
Number of inspections

Model X
1,000
2,000
20

Model Y
3,000
1,000
30

Model Z
6,000
2,000
50

Inspection costs totaled $100,000. Using ABC, inspections costs
allocated to each unit of Model Z would be
a. $ 6.67
b. $ 8.33
c. $10.00
d. Some other number
c 37. Cadott Manufacturing produces three products. Production and cost
information show the following:

Units produced
Direct labor hours
Number of inspections

Model X
1,000
2,000
20

Model Y
3,000
1,000
30

Model Z
6,000
2,000
50

Inspection costs totaled $100,000. Using direct labor hours as the
allocation base, inspections costs allocated to each unit of Model X
would be
a. $10.00
b. $20.00
c. $40.00
d. Some other number

40

a 38. Cadott Manufacturing produces three products. Production and cost
information show the following:

Units produced
Direct labor hours
Number of inspections

Model X
1,000
2,000
20

Model Y
3,000
1,000
30

Model Z
6,000
2,000
50

Inspection costs totaled $100,000. . Using direct labor hours as the
allocation base, inspections costs allocated to each unit of Model Y
would be
a. $6.67
b. $10.00
c. $20.00
d. Some other number

a 39. Cadott Manufacturing produces three products. Production and cost
information show the following:

Units produced
Direct labor hours
Number of inspections

Model X
1,000
2,000
20

Model Y
3,000
1,000
30

Model Z
6,000
2,000
50

Inspection costs totaled $100,000. Using direct labor hours as the
allocation base, inspections costs allocated to each unit of Model Z
would be
a. $6.67
b. $8.33
c. $10.00
d. Some other number
b 40. Superior Inc. produces three products. Production and cost information

is as follows:

Units produced
Direct labor hours
Number of setups

Model Q
2,000
4,000
100

Model R
6,000
2,000
150

The consumption ratios for number of setups would be:
Q
R
S
a. 40%-20%-40%
b. 20%-30%-50%
c. 10%-30%-60%
d. Some other numbers

41

Model S
12,000
4,000

250


c 41. Superior Inc. produces three products. Production and cost information
is as follows:

Units produced
Direct labor hours
Number of setups

Model Q
2,000
4,000
100

Model R
6,000
2,000
150

Model S
12,000
4,000
250

The consumption ratios based on units produced would be:
Q
R
S
a. 40%-20%-40%

b. 20%-30%-50%
c. 10%-30%-60%
d. Some other numbers
a 42. Superior Inc. produces three products. Production and cost information
is as follows:

Units produced
Direct labor hours
Number of setups

Model Q
2,000
4,000
100

Model R
6,000
2,000
150

Model S
12,000
4,000
250

The consumption ratios for direct labor hours would be:
Q
R
S
a. 40%-20%-40%

b. 20%-30%-50%
c. 10%-30%-60%
d. Some other numbers
c 43. Waupaca Company produces three products with the following production
and cost information:

Units produced
Direct labor hours (total)
Number of setups
Number of shipments
Engineering change orders

Model A
2,000
4,000
100
200
15

Model B
6,000
2,000
150
225
10

Model C
12,000
4,000
250

275
5

Overhead costs include setups $90,000; shipping costs $140,000; and
engineering costs $180,000. What would be the per unit overhead cost for
Model A if direct labor hours were the allocation base?
a. $20.50
b. $41.00
c. $82.00
d. Some other number

42


b 44. Waupaca Company produces three products with the following production
and cost information:

Units produced
Direct labor hours (total)
Number of setups
Number of shipments
Engineering change orders

Model A
2,000
4,000
100
200
15

Model B
6,000
2,000
150
225
10

Model C
12,000
4,000
250
275
5

Overhead costs include setups $90,000; shipping costs $140,000; and
engineering costs $180,000. What would be the per unit overhead cost for
Model A if activity-based costing were used?
a. $20.50
b. $74.00
c. $82.00
d. Some other number
a 45. Waupaca Company produces three products with the following production
and cost information:

Units produced
Direct labor hours (total)
Number of setups
Number of shipments
Engineering change orders

Model A
2,000
4,000
100
200
15

Model B
6,000
2,000
150
225
10

Model C
12,000
4,000
250
275
5

Overhead costs include setups $90,000; shipping costs $140,000; and
engineering costs $180,000. What would be the per unit overhead cost for
Model B if activity-based costing were used?
a. $22.00
b. $66.00
c. $123.00
d. Some other number
a 46. Waupaca Company produces three products with the following production
and cost information:

Units produced
Direct labor hours (total)
Number of setups
Number of shipments
Engineering change orders

Model A
2,000
4,000
100
200
15

Model B
6,000
2,000
150
225
10

Model C
12,000
4,000
250
275
5

Overhead costs include setups $90,000; shipping costs $140,000; and
engineering costs $180,000. What would be the per unit overhead cost for

Model C if activity-based costing were used?
a. $10.83
b. $32.50
c. $245.28
d. Some other number

43


c 47. Kimball Company produces two products in a single factory. The following
production and cost information has been determined:
Model 1
Units produced
1,000
Material moves (total)
100
Testing time (total)
250
Direct labor hours per unit
1

Model 2
200
40
125
5

The controller has determined total overhead to be $480,000. $120,000
relates to material moves; $150,000 relates to testing; the remainder is
related to labor time.

If Kimball uses direct labor hours to allocate overhead to each model,
what would overhead per unit be for Model 1?
a. $10.00
b. $120.00
c. $240.00
d. $400.00
b 48. Kimball Company produces two products in a single factory. The following
production and cost information has been determined:
Model 1
Units produced
1,000
Material moves (total)
100
Testing time (total)
250
Direct labor hours per unit
1

Model 2
200
40
125
5

The controller has determined total overhead to be $480,000. $140,000
relates to material moves; $150,000 relates to testing; the remainder is
related to labor time.
If Kimball uses activity-based costing to allocate overhead to each
model, what would overhead per unit be for Model 1?
a. $400.00

b. $295.00
c. $240.00
d. $120.00

44


d 49. Kimball Company produces two products in a single factory. The following
production and cost information has been determined:
Model 1
Units produced
1,000
Material moves (total)
100
Testing time (total)
250
Direct labor hours per unit
1

Model 2
200
40
125
5

The controller has determined total overhead to be $480,000. $140,000
relates to material moves; $150,000 relates to testing; the remainder is
related to labor time.
If Kimball uses direct labor hours to allocate overhead to each model,
what would overhead per unit be for Model 2?

a. $158.33
b. $400.00
c. $950.00
d. $1,200.00
c 50. Kimball Company produces two products in a single factory. The following
production and cost information has been determined:
Model 1
Units produced
1,000
Material moves (total)
100
Testing time (total)
250
Direct labor hours per unit
1

Model 2
200
40
125
5

The controller has determined total overhead to be $480,000. $140,000
relates to material moves; $150,000 relates to testing; the remainder is
related to labor time.
If Kimball uses activity-based costing to allocate overhead to each
model, what would overhead per unit be for Model 2?
a. $158.33
b. $415.93
c. $925.00

d. Some other number

True-False
F

1. ABC can only be used in a company that produces a single product.

F

2. A company that uses only volume-based measures will overcost its lowvolume products.

T

3. ABC will be most useful in estimating fixed costs.

T

4. Two major influences on costs are complexity and diversity.

T

5. Volume-based measures will tend to overcost high volume products.

45


F

6. Activities that drive resource requirements are known as activity
drivers.

F

7. ABC is required for GAAP financial reporting.

F

8. ABC will benefit a JIT operation more than a non-JIT operation.

F

9. External failure costs are made up solely of opportunity costs.

F 10. The acceptable quality level is the point where internal failure costs
are minimized.

Problems
1. Scottso Enterprises incurs $300,000 in manufacturing overhead costs each
month. The company has been allocating overhead to individual product lines
based on direct labor hours.
Amount
In Pool
-------$100,000
150,000
50,000
-------$300,000
========

Cost driver
----------Direct labor hours

Number of batches
Design changes
Total overhead costs

Amount of
Activity
--------15,000
200
125

Two products have the following characteristics:
Product X
--------1,000
10
1

Direct labor hours
Number of batches
Design changes

Product Y
--------400
20
15

a. Determine the overhead to be allocated to each product using direct
labor hours as the only cost driver.
b. Determine the overhead to be allocated to each product using the three
drivers identified.

SOLUTION:
a. Product X: $12,000
Product Y: $ 4,800

[1,000 x ($300,000/15,000)]
[400 x ($300,000/15,000)]

46


b. Product X: $11,900; Product Y: $22,600

Cost driver
----------Direct labor hours
Number of batches
Design changes

Direct labor hours,
Number of batches
Design changes

Amount
In Pool
-------$100,000
150,000
50,000

Amount of
Activity
--------25,000

200
125

Product X
--------$4,000
7,500
400
-----$11,900

Product Y
--------$1,600
15,000
6,000
-----$22,600

Rate
-------$ 4.00
750.00
400.00

2. Lewis Company has two major segments with the following information:
Upstate
$200,000
$30,000
50
80,000

Annual revenue
Annual salesperson salaries
Number of customers

Miles driven

Downstate
$600,000
$45,000
75
40,000

Total_
$800,000
$75,000
125

The business also has overhead costs as follows:
Cost pool
Travel
Entertainment
Administrative
Total
a.
b.
c.
d.

Cost in pool
$ 36,000
144,000
150,000
-------$330,000

Cost driver__________
miles driven
number of customers
salaries

Allocate the overhead costs to the segments based on sales revenue.
Determine the income of each segment.
Allocate the overhead costs to the segments using ABC.
Determine the income of each segment under ABC.

SOLUTION:
a. Upstate: $82,500 [$330,000 x ($200,000/$800,000)]
Downstate: $247,500 [$330,000 x ($600,000/$800,000)]
b. Upstate: $87,500 [$200,000 - $30,000 - $82,500]
Downstate: $307,500 [$600,000 - $45,000 - $247,500]

47


c. & d.
Upstate
$200,000
30,000
24,000
57,600
60,000
------$ 28,400

Annual revenue
Annual salesperson salaries

Travel
Entertainment
Administrative
Income

Downstate
$600,000
45,000
12,000
86,400
90,000
------$366,600

Total_
$800,000
75,000
36,000
144,000
150,000
------$395,000

3. Johnson & Mathey is an architectural and landscape services firm. The firm
operates in three major segments. The following information has been
obtained,

Annual revenues
Number of jobs
Chargeable hours

New Design

$500,000
50
6,000

Remodel
$1,200,000
150
10,000

Landscape
$300,000
200
14,000

Total__
$2,000,000
400
30,000

Salaries for the year were $800,000; overhead for the year was $1,000,000.
a. Determine the profits for each segment, assuming costs are allocated
based on annual revenues.
b. Determine the profits for each segment, assuming costs are allocated
based on the number of jobs.
c. Determine the profits for each segment, assuming costs are allocated
based on chargeable hours.

SOLUTION:
a. New Design: $50,000 [$500,000 - ($1,800,000 x $500,000/$2,000,000)]
Remodel: $120,000 [$1,200,000 - ($1,800,000 x $1,200,000/$2,000,000)]

Landscape $30,000 [$300,000 - ($1,800,000 x $300,000/$2,000,000)]
b. New Design: $275,000 [$500,000 - ($1,800,000 x 50/400)]
Remodel: $525,000 [$1,200,000 - ($1,800,000 x 150/400)]
Landscape $(600,000) [$300,000 - ($1,800,000 x 200/400)]
c. New Design: $140,000 [$500,000 - ($1,800,000 x 6,000/30,000)]
Remodel: $600,000 [$1,200,000 - ($1,800,000 x 10,000/30,000)]
Landscape $(540,000) [$300,000 - ($1,800,000 x 14,000/30,000)]

48


4. Coleman Company produces three products, X, Y, & Z. The income statement
for the firm as a whole is:
Sales
Less variable costs
Contribution margin
Less fixed costs
Selling
330,000
Administrative
180,000
-------

$1,850,000
1,310,000
---------$ 540,000

510,000
---------$
30,000

Net income

The sales, variable costs, and line-sustaining fixed costs for the four
products are:

Sales
Variable costs
Line-sustaining costs

Q___
$250,000
60%
$90,000

R___
$400,000
65%
$130,000

S_ __
$1,200,000
75%
$ 230,000

a. Prepare an income statement segmented by product line, including a
column for the entire firm. Be sure to show segment income as well as
total enterprise income.

SOLUTION:

Q___
$250,000
150,000
------Contribution margin
$100,000
Line-sustaining costs
90,000
------Segment income
$ 10,000
Company-sustaining
Sales
Variable costs

R___
$400,000
260,000
------$140,000
130,000
------$ 10,000

Enterprise income

49

S ___
$1,200,000
900,000
--------$ 300,000
230,000
--------$

70,000

Total _
$1,850,000
1,310,000
--------$ 540,000
450,000
--------$
90,000
60,000
--------$
30,000


5. Ellington & Hodges is a public relations firm. The firm operates in three
major segments. The following information has been obtained,
Political
$750,000
50
6,000

Annual revenues
Number of clients
Chargeable hours

Corporate
$800,000
150
10,000

Celebrity
$1,450,000
200
14,000

Total__
$3,000,000
400
30,000

Total salaries for the year were $900,000; overhead was $600,000.
a. Determine the profits for each segment, assuming costs are allocated
based on annual revenues.
b. Determine the profits for each segment, assuming overhead costs are
allocated based on the number of clients and salaries are allocated
based on chargeable hours.

SOLUTION:
a. Political: $375,000
Corporate: $400,000
Celebrity: $725,000

[$750,000 - ($1,500,000 x $750,000/$3,000,000)]
[$800,000 - ($1,500,000 x $800,000/$3,000,000)]
[$1,450,000 - ($1,500,000 x $1,450,000/$3,000,000)]

b.
Annual revenues
Salaries
Chargeable hours

Profits

Political
$750,000
180,000
120,000
-------$450,000

Corporate
$800,000
300,000
200,000
-------$300,000

Celebrity
$1,450,000
420,000
280,000
--------$ 750,000

Total__
$3,000,000
900,000
600,000
--------$1,500,000

6. Danner Company incurs $1,600,000 in manufacturing overhead costs each
month. The company has been allocating overhead to individual product lines
based on direct labor hours.

Cost driver
----------Direct labor hours
Number of setups
Number of tests
Total overhead costs

Amount
In Pool
-------$500,000
700,000
400,000
---------$1,600,000
==========

Amount of
Activity
--------40,000
1,000
500

Two products have the following characteristics:
Product S
--------2,000
20
2

Direct labor hours
Number of setups
Number of tests

Product T
--------1,000
100
150

a. Determine the overhead to be allocated to each product using direct
50


labor hours as the only cost driver.
b. Determine the overhead to be allocated to each product using the three
drivers identified.

SOLUTION:
a. Product S: $80,000
Product T: $40,000

[2,000 x ($1,600,000/40,000)]
[1,000 x ($1,600,000/40,000)]

b. Product S: $40,600; Product T: $202,500

Cost driver
----------Direct labor hours
Number of setups
Number of tests

Direct labor hours,
Number of setups
Number of tests

Amount
In Pool
-------$500,000
700,000
400,000

Amount of
Activity
--------40,000
1,000
500

Product S
--------$25,000
14,000
1,600
-----$40,600

Product T
--------$12,500
70,000
120,000
------$202,500

Rate
-------$ 12.50
700.00
800.00

7. Seneca Company has two products with the following information:

Annual revenue
Material costs
Labor costs
Number of receipts
Number of batches

Engine
Rebuilds
$1,200,000
400,000
250,000
8,000
425

Race
Cars
$1,400,000
$600,000
150,000
2,000
75

Total__
$2,600,000
$1,000,000
$400,000

The business also has overhead costs as follows:

Cost pool
Receiving
Material moves
Administrative
Total
a.
b.
c.
d.

Cost in pool
$300,000
275,000
225,000
-------$800,000

Cost driver__________
number of receipts
number of batches
labor cost

Allocate the overhead costs to the segments based on material costs.
Determine the income of each segment.
Allocate the overhead costs to the segments using ABC.
Determine the income of each segment under ABC.

SOLUTION:

51

a. Engines: $320,000 [$800,000 x ($400,000/$1,000,000)]
Race Cars: $480,000 [$800,000 x ($600,000/$1,000,000)]
b. Engines: $230,000 [$1,200,000 - $400,000 - $250.000 - $320,000]
Race Cars: $170,000 [$1,400,000 - $600,000 - $150,000 - $480,000]
c. & d.
Engine
Rebuilds
$1,200,000
400,000
250,000
240,000
233,750
140,625
------$(64,375)

Annual revenue
Material costs
Labor costs
Receiving
Material moves
Administrative
Income

Race
Cars
$1,400,000
600,000
150,000
60,000

41,250
84,375
------$464,375

Total__
$2,600,000
1,000,000
400,000
300,000
275,000
225,000
-------$ 400,000

8. Ventura Company produces four products, Q, R, S & T. The income statement
for the firm as a whole is:
Sales
Less variable costs
Contribution margin
Less fixed costs
Manufacturing
$320,000
Selling
290,000
Administrative
168,000
-------

$3,000,000
1,870,000
--------$1,130,000

778,000
--------$ 352,000

Net income

The sales, contribution margin ratios, and line-sustaining fixed costs for
the four products are:

Sales
Contribution margin
Line-sustaining costs

Q___
$200,000
35%
$60,000

R___
$400,000
40%
$80,000

S ___
$1,000,000
20%
$168,000

T_ __
$1,400,000

50%
$270,000

b. Prepare an income statement segmented by product line, including a
column for the entire firm. Be sure to show segment income as well as
total enterprise income.

SOLUTION:

Sales
Variable costs

Q___
$200,000
130,000
-------

R___
$400,000
240,000
------52

S_ __
$1,000,000
800,000
---------

T_ __
$1,400,000
700,000

---------

Total__
$3,000,000
1,870,000
---------


Contribution margin
$ 70,000
Line-sustaining costs
60,000
------Segment income
$ 10,000
Company-sustaining

$160,000
80,000
------$ 80,000

Enterprise income

53

$

200,000
168,000
--------$
32,000

$

700,000
270,000
--------$ 430,000

$1,130,000
578,000
--------$ 552,000
200,000
--------$ 352,000


9. DJH Corp has identified the following costs.
Costs to improve the production process
Incoming inspection costs
Design engineer salaries
Rework of defective units
Salaries for service repair workers
Warranty costs
Finished goods inspection
Scrap

$175,000
110,000
325,000
122,000
265,000
335,000

165,000
118,000

Categorize each of the costs into the appropriate quality cost category and
prepare a total for each.

SOLUTION:
Prevention costs:
Costs to improve the production process
Design engineer salaries
Total prevention costs

$175,000
325,000

Appraisal costs:
Incoming inspection costs
Finished goods inspection
Total appraisal costs

$110,000
165,000

Internal failure costs:
Rework of defective units
Scrap
Total internal failure costs

$122,000
118,000

External failure costs:
Salaries for service repair workers
Warranty costs
Total external failure costs

$265,000
335,000

$500,000

275,000

240,000

600,000

10. Following is a list of activities that pertains to quality. Classify each
as either external failure, internal failure, appraisal, or prevention.
External
Failure
1.
2.
3.
4.
5.
6.
7.
8.
9.

In-process inspection
Warranty expenses
Worker training
Downtime on machinery due
to rework
Product returns
Product design
Preventive maintenance
Wages for field repair
workers
Quality laboratory
54

Internal
Failure

Appraisal

Prevention


10. Customer complaints

SOLUTION:
External
Failure
1.
2.
3.

4.

In-process inspection
Warranty expenses
Worker training
Downtime on machinery due
to rework
5. Product returns
6. Product design
7. Preventive maintenance
8. Wages for field repair
Workers
9. Quality laboratory
10. Customer complaints

Internal
Failure

Appraisal
X

Prevention

X
X
X
X
X
X
X

X
X

55