Cost Accumulation Systems Paper 5


Which one of the following is not a benefit of activity-based management?


Fact Pattern:
"Louis Diamonds manufactures diamond earrings and pendants. The company uses activitybased budgeting and has established diamond inspection as one of its cost pools with number of diamonds used as its cost driver. Inspection supplies for each diamond inspected are $0.35. For the upcoming year, the company originally believed it would produce and sell 10,000 pendants containing one diamond and 5,000 sets of earrings containing two diamonds, resulting in the following inspection cost per diamond."
Salary of inspector $60,000
Equipment costs 3000
Inspection supplies 7000
Total $70,000
Cost per diamond $3.50
"If the company now believes it will only be able to produce and sell 8,000 pendants (in addition to the earrings), the inspection cost per set of earrings would be"


A company manufactures a line of products that vary with complexity: a basic model, a standard model, and a deluxe model. The company uses 25 different activity cost drivers to assign overhead costs to its products. The deluxe model typically uses more cost drivers than the simpler models. The company encourages managers to focus on activities performed for each product and to control the cost of those activities. Which budget methodology would best meet this company’s needs?


Traditional budgeting methods look at historical data and current resources and then project forward. Activity-based budgeting is different in that
I. It looks at desired outcomes and works back from there to determine resources needed.
II. It uses current levels of activity to determine future levels without regard to resources currently available.
III. Being under budget in one year would not necessarily indicate that an operating unit would have its budget cut the following year.
IV. The focus is on planning department by department based on resources available.


Electronics, Inc., manufactures an increasing variety of consumer communications devices. The company has always used a traditional cost allocation system, but now the accounting staff has proposed a change to an activity-based costing system. The vice president of operations argues, “Costs are costs, rearranging them won’t save any money and those systems are complicated and expensive.” The most logical response to this argument is that activity-based costing systems


Life-cycle costing


Target pricing


In target costing,


"A company’s product has an expected 4-year life cycle from research, development, and design through its withdrawal from the market. Budgeted costs are"
Upstream costs (R&D, design) $2,000,000
Manufacturing costs 3,000,000
Downstream costs (marketing, distribution, customer service) 1,200,000
After-purchase costs 1,000,000
"The company plans to produce 200,000 units and price the product at 125% of the wholelife unit cost. Thus, the budgeted unit selling price is"


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