Ch.

5 ABC & MGMT

Problems

Question 1

What is activity-based costing, and how can it improve an organization’s costing system?

Source: Blocher, E., Chen, K., Cokins, G., Lin, T. (2005). Cost Management: a strategic
emphasis. New York: McGraw-Hill Irwin [5-4]
Answer:

Activity-based costing recognizes that resources are spent on activities and the cost of a
product or service is the sum of the costs of activities performed in manufacturing the
product or providing the service.
Activity-based costing system traces costs to the activity that consume resources. Costs are
determined based on the activities performed for cost objects and their underlying cost drivers
that consume resources. Product or service costs determined using an activity-based costing
reflect costs of resources consumed for activities performed in manufacturing products or
providing services. In contrast, a volume-based costing system uses cost allocations to channel
indirect costs to products or services. As a result, the cost of a product or service often bears little
or no relationship to activities performed in the manufacturing of the product or service.
Question 2

What type of company needs an activity-based costing system?

Source: Blocher, E., Chen, K., Cokins, G., Lin, T. (2005). Cost Management: a strategic
emphasis. New York: McGraw-Hill Irwin [5-7]
Answer:

All firms should use ABC system when the benefits of such a system exceed the costs of
implementing it. It is especially beneficial to firms with product diversity and/or process
complexity
Question 3

What are batch-level activities? Give two examples of batch-level activities.

Source: Blocher, E., Chen, K., Cokins, G., Lin, T. (2005). Cost Management: a strategic
emphasis. New York: McGraw-Hill Irwin [5-7]
Answer:

Batch-level activities are activities performed for a group of units of products or services
rather than for each individual unit of product or service. The frequency of batch-level
activity is determined by both the size of the group and the total number of units to be
manufactured or provided.
Examples of batch-level activities are setting up machine, processing and placing of
purchase orders, scheduling production runs, inspecting products by batch, and handling
materials.
Question 4

What is activity-based management?

Source: Blocher, E., Chen, K., Cokins, G., Lin, T. (2005). Cost Management: a strategic
emphasis. New York: McGraw-Hill Irwin [5-13]
Answer:

Activity-based management is the uses of an activity-based costing database to improve

operations, increase customer values, and enhance profitability.
Question 5

How can activity-based costing and management be used in service organizations?

Source: Blocher, E., Chen, K., Cokins, G., Lin, T. (2005). Cost Management: a strategic
emphasis. New York: McGraw-Hill Irwin [5-16]
Answer:

Service organizations such as banks, hospitals, transportation companies, law firms, and trading
companies can use activity-based costing and management in all phases of their operations as
manufacturing firms do. For example, a bank can use ABC to calculate the cost to process check,
a hospital can use ABC to determine costs per patient day for different kinds of patients and the
cost to admit a patient, etc.
Question 6

List important factors in conducting customer revenue analysis.

Source: Blocher, E., Chen, K., Cokins, G., Lin, T. (2005). Cost Management: a strategic
emphasis. New York: McGraw-Hill Irwin [5-18]
Answer:

Important factors in conducting customer revenues analyses include:

 price discounting,
 sales terms,
 sales returns and allowances, and
 time-lengths customer accounts remain outstanding.

Question 7

Al’s Speedy Gourmet, a small hamburger shop, has identified the following resources used in its
operations:

a. Bread f. Advertising for Triple-Burger special

b. Hourly help g. Salary for the store managers
c. Store rent h. Utilities
 d. Ground beef j. $1-off-coupon for the second order
e. Catsup k. Bags
Required

1. Classify its cost as unit-level, batch-level, product-sustaining, or facility-sustaining costs.

2. Suggest a proper driver for each of the above items

Source: Blocher, E., Chen, K., Cokins, G., Lin, T. (2005). Cost Management: a strategic
emphasis. New York: McGraw-Hill Irwin [5-20]
Answer:

1. Cost Hierarchy
a. Unit-level
b. Unit-level
c. Facility-sustaining
d. Unit-level
e. Unit-level
f. Product-sustaining
g. Facility-sustaining
h. Facility-sustaining
i. Batch-level
j. Batch-level (one bag per customer).
2. Cost Driver
a. Number of hamburgers
b. Number of hours
c. Square feet
d. Number of hamburgers; Size of hamburgers
e. Number of hamburgers
f. Number of time the advertising is run
g. Number of hours store is open
h. Square feet
i. Number of coupon redeemed; Number of multiple orders; Number of hamburgers
j. Number of customer

Question 8

Why do product costing systems using a single volume based cost driver tend to over-cost high
volume products? Provide at least two reasons. How may activity based costing provide a
remedy to correct the situation? Explain.

Source: John Molson School of Business Acco 330: Cost Management Midterm Exam, Sample
Midterm Exam #2, Question 6

Product costing systems using a single, volume-based cost driver tend to over-cost high-volume
products:
Product costs are distorted because high volume products do not consume resources in
proportion to their production volume.

Batch related and product sustaining costs should not be assigned in proportion to the number of
production units.

ABC systems correct the distortion by employing the appropriate cost drivers for different
activities to assign cost to products

Ch. 12 Cost Allocation – Joint Product Cost

Multiple Choice Questions

The following information pertains to questions 1 & 2.

SMT Ltd. manufactures three products. Production begins with a joint process and the three
outputs of the joint process are processed further to produce products L, M and N. The outputs at
split-off have no market value. Last year, the joint costs amounted to $600,000. Other data for
last year are as follows:
Product L Product M Product N
Selling price per unit $160 $300 $400
Costs per unit after split-off to complete and sell $100 $200 $350
Total output at split-off used in production 16,400 kg 10,000 kg 8,400 kg
Production in units 20,000 10,000 7,000
Sales in units 18,000 8,000 7,000
1. Using the physical quantities method (also called the physical measure method or the average
method) of joint costing, the total joint costs allocated to the production of product L last year
was

A) $200,000
B) $327,273
C) $282,759
D) $324,324
E) $282,353

2. Using the estimated (approximate) net realizable value method of joint costing, the inventory
cost per unit of product M is

A) $226.91
B) $223.53
C) $221.52
D) $220.00
E) $217.24

Source: Canada CMA Entrance Exam, Part 1, June 2002, MCQ 11&12
Answer: C & B, respectively
1. Answer: c.
$600,000 x [16,400 ÷ (16,400 + 10,000 + 8,400)] = $282,759

2. Answer: b.
Joint costs are allocated on the basis of the relative estimated net realizable value (i.e.
expected final sales value minus expected separable costs to complete and sell the total
production).

Total net realizable value of all products = ($160 - $100) x 20,000 units of L produced +
($300 - $200) x 10,000 units of M produced + ($400 - $350) x 7,000 units of N produced
= $1,200,000 + $1,000,000 + $250,000 = $2,550,000

Inventory cost per unit of Product M = $200 + [$600,000 x ($1,000,000/$2,550,000) ÷

10,000] = $200 separable costs + $23.53 joint costs = $223.53

a.

The following information pertains to questions 3 and 4

3. SMT Ltd. manufactures three products. Production begins with a joint process and the three
outputs of the joint process are processed further to produce products L, M and N. The outputs at
split-off have no market value. Last year, the joint costs amounted to $600,000. Other data for
last year are as follows:

Product L Product M Product N

Selling price per unit $160 $300 $400
Costs per unit after split-off to complete and sell $100 $200 $350
Total output at split-off used in production 16,400 10,000 kg 8,400 kg
kg
Production in units 20,000 10,000 7,000
Sales in units 18,000 8,000 7,000

Using the physical quantities method (also called the physical measure method or the average
method) of joint costing, the total joint costs allocated to the production of product L last year
was

A) $200,000
B) $327,273
C) $282,759
D) $324,324
E) $282,353

Source: Canada CMA Entrance Exam, Part 1, June 2002, MCQ 11

ANSWER: C

4. (+) Using the estimated (approximate) net realizable value method of joint costing, the
inventory cost per unit of product M is
a) $226.91.
b) $223.53.
c) $221.52.
d) $220.00.
e) $217.24.

Source: Canada CMA Entrance Exam, Part 1, June 2005, MCQ 7

ANSWER : B

The following information pertains to questions 5 and 6.

Green Wood Ltd. produces two lumber products from a joint milling process. A standard
production run incurs joint costs of $300,000 and results in 60,000 units of product A and
90,000 units of product B. Product A sells for $2 per unit and product B sells for $4 per unit.

5. Assuming no further processing work is done after the split-off point, the amount of joint cost
allocated to product A using the relative sales value method would be

A) $75,000
B) $180,000
C) $100,000
D) $225,000
E) $120,000

Source: Canada CMA Entrance Exam, Part 1, Sample #2, June 2005, MCQ 5
ANSWER : A

6. Assume that product B must be further processed at a cost of $200,000 per production run.
During the process, 10,000 units are lost. These spoiled units have no discernible value. The
remaining units of product B are saleable at $10 per unit. Assume also that product A must be
further processed at a cost of $100,000 per production run and then sold for $5 per unit. No units
of product A are lost in this process. Using the net realizable value method, the completed cost
assigned to each unit of product B would be

A) $2.92
B) $5.63
C) $5.00
D) $5.31
E) $4.75

Source: Canada CMA Entrance Exam, Part 1, Sample #2, June 2005, MCQ 6
ANSWER : D

7. Products A, B, and C are produced from a single raw material input. The raw material costs
are $90,000, from which 5,000 units of A, 10,000 units of B, and 15,000 units of C can be
produced each period. Product A can be sold at the split-off point for $2 per unit, or it can be
processed further at a cost of $12,500 and then sold for $5 per unit. What is the correct course of
action regarding Product A?

A) It should be sold at the split-off point, since further processing would result in a loss of $0.50
per unit.
B) It should be processed further, since this will increase profits by $2,500 each period.
C) It should be sold at the split-off point, since further processing will result in a loss of $2,500
each period.
D) It should be processed further, since this will increase profits by $12,500 each period.

Source: John Molson School of Business COMM 305: Managerial Accounting Final Exam, Fall
2003, MCQ 11
Answer : B

8. Omega Company manufactures three chemicals in a joint process. The manufacturing

costs of the joint process include $25,000 of direct materials and $35,000 of conversion
costs. All three chemicals are then processed further before they are sold. Other pertinent
data are as follows:

Chemical Sales Value at Split- Seperable Costs Final Sales Value

Off
A $50,000 $28,000 $100,000
B 40,000 10,000 60,000
C 30,000 12,000 40,000

Using the estimated net realizable value method, the joint costs allocated to Chemical A would
be

A) $16,800
B) $25,000
C) $28,800
D) $30,000
E) $33,600

Source: Canada CMA Entrance Exam, Part 1, October 2000, MCQ 4

ANSWER: C

The following information pertains to Questions 9 and 10.

Omega Company manufactures three chemicals in a joint process. The manufacturing costs of
the joint process include $25,000 of direct materials and $35,000 of conversion costs. All three
chemicals can be sold in their unrefined form immediately after the split-off point or they can be
further refined before they are sold. During May, all three chemicals were further refined. The
following is data regarding production for the month of May:
 Chemical
A B C
Sales price per litre before $20 $25 $10
refining

Sales price per litre after $35 $40 $18

refining
Cost of refining $28,000 $10,000 $12,000
Total output of chemical at 2,500 lts 1,600 lts 3,000 lts
split-off
Total output of chemical after 2,300 lts 1,500 lts 2,700 lts
refining

10. Using the sales value at split-off method, the total joint costs allocated to Chemical A in May
(rounded to the nearest hundred dollars) is

A) $21,100
B) $25,000
C) $22,600
D) $25,500
E) $33,600

Source: Canada CMA Entrance Exam, Part 1, June 2004, MCQ 10

ANSWER: B

11. Now assume that Omega Company uses the physical measures method, that the refining
process for Chemical C also produces a hazardous by-product that must be disposed of at a cost
of $5 per litre, and that refining 1,000 litres of Chemical C results in 100 litres of this by-product.
For the month of May, what effect would refining
Chemical C have on Omega Company’s profits as compared with its profits if
Chemical C was sold at split-off without being further refined (rounded to the nearest hundred
dollars)?

A) $17,100 more profits by refining

B) $20,300 less profits by refining
C) $8,100 more profits by refining
D) $5,100 more profits by refining
E) $8,400 less profits by refining

Source: Canada CMA Entrance Exam, Part 1, June 2004, MCQ 11

ANSWER: D

12. The main purpose of allocating joint costs to products is to

A) determine prices for the products

B) make decisions about dropping the products
C) rationalize economic decisions concerning the products
D) determine the cost of the products
E) determine budgets for the production of the products

Source: Canada CMA Entrance Exam, Part 1, June 2001, MCQ 9

ANSWER: D
The following information pertains to questions 12 and 13

Agricultural Products manufactures two products, A and B, in a joint process. The products incur
$60,000 in joint costs and produce 10,000 pounds of A and 30,000 pound of B in each batch.
Once the batch is completed, A and B can be sold for $4 and $2 per pound respectively at split-
off. Otherwise, A can incur an additional $10,000 to finish the product. In order to finish B an
additional $20,000 will need to be added. A and B can be sold when finished for $8 and $4 per
pound, respectively.

12. What will be A's total costs assuming that the physical units method is used to allocate joint
costs?

A) $15,000
B) $20,000
C) $25,000
D) $24,706

Source : Cost Management: A Strategic Emphasis, 3e by Blocher/Chen/Cokins/Lin, Online Quiz,

Chapter 12, MCQ 9
Answer: C

13. What will be B's total costs assuming that the sales value at split-off method is used to
allocate joint costs?

A) $45,000
B) $36,000
C) $56,000
D) $60,000

Source : Cost Management: A Strategic Emphasis, 3e by Blocher/Chen/Cokins/Lin, Online Quiz,

Chapter 12, MCQ 10
Answer: C
Problems

Question 1

Humboldt Lumber company incurs to process logs into lumber for a month. Raw materials cost
$250,000 and processing cost $110,000, resulting in total costs of $360,000. As Humboldt
processesthe logs, two joint products emerge at the splitoff point-standard lumber abd specialty
lumber.

Required

Compute using Splitoff method, Net realizable value method and Physical units method

Source: Folk, J. M., Garrison, R. H., Norseen, E. (2002). Introduction to managerial

accounting. McGraw Hill _________
Answer:

a. Sales Value at Splitoffs

(No Additional Processing Costs)

Specialty Standard
Lumber Lumber Total

Sales value at splitoffs $504,000 $756,000 $1,260,000

Less: Additional processing cost - - -
Net Realized Value at Splitoffs Point $504,000 $756,000 $1,260,000

Proportionate Share
$504,000/$1,260,000 40%
$756,000/$1,260,000 60%
Allocated Joint-Process Costs
$360,000 X 40% $144,000
$360,000 X 60% $216,000

b .Net Realizable Value at Splitoffs

(With Additional Processing Costs)

Final Sales Value $504,000 $756,000 $126,000
Less: Additional Processing costs (97,000) - (97,000)
Net Realization Value at Splitoff Point $407,000 $756,000 $1,163,000
Proportional Share
$504,000/$1,260,000 35%
 $756,000/$1,260,000 65%
Allocated Joint-Process Costs
$360,000 X 35% $126,000
$360,000X 65% $234.000

c. Physical Units Method

Board Feet of Lumber Produced 2,800 3,920 6,720

Proportional Share
2,800/6,720 42%
3,920/6,720 58%
Allocated Joint-Process Costs
$360,000 X 42% $150,000
$360,000 x 68% $210,000

Question 2

Choi Company manufactures two skin care lotions, Smooth Skin and Silken Skin, from a joint
process. The joint costs incurred are $420,000 for a standard production run that generates
180,000 gallons of Smooth Skin and 120,000 gallons of Silken Skin. Smooth skin sells for $2.40
per gallon, while Silken Skin sells for $3.90 per gallon.

Required

1. Assuming that both products are sold at the split-off point, how much of the joint cost of each
production run is allocated to Smooth Skin on a net realizable value basis?

2. If no additional costs are incurred after the split-off point, how much of the joint cost of each
production run is allocated to Silken Skin on the physical measure method basis?

Source: Blocher, E., Chen, K., Cokins, G., Lin, T. (2005). Cost Management: a strategic
emphasis. New York: McGraw-Hill Irwin [12-22]
Answer:

1. Sold at the Split-Off Point Net Realizable Value Method

Smooth Silken Total
Sales Value of Production $432,000 $468,000 $900,000
Less: Separable Costs 0 0 0
New Realizable Value 432,000 468,000 900,000

Percentage of Total NRV 48.00% 52.00%

Allocated Joint Cost $201,600 $218,400 $420,000

Smooth Skin’s amount of joint cost of each production run allocated on the basis of NRV is
$201,600.
 2. Physical Unit Method
Smooth Silken Total

Units of Production 180,000 120,000

300,000
Percentage of Total 60.00% 40.00%

Joint Cost Allocation $252,000 $168,000 $420,000

Silken Skin’s amount of joint cost of each production run allocated on a physical quantity
basis is $168,000.

Question 3

Sonimad Sawmill manufactures two lumber products from a joint milling process: mine support
(MSB) and unseasoned commercial building lumber (CBL). A standard production run incurs
joint costs of $300,000 and results in 60,000 units of MSB and 90,000 units of CBL. Each MSB
sells for $2 per unit, and each CBL sells for $4 per unit.

REQUIRED

a. Assume that the CBL is not marketable at split-off but must be planed and sized at a cost of
$200,000 per production run. During this process, 10,000 units are unavoidably lost and have no
value. The remaining units of CBL are salable at $10 per unit. The MSB, although salable
immediately at the split-off point, are coated with a tarlike preservative that costs $100,000 per
production run. The braces are then sold for $5 each. Using the net realizable value basis, how
much of the completed cost should be assigned to each unit of CBL?

b. Should Sonimad Sawmill choose to process the MSB beyond split-off? What would be the
contribution if it did so?

Source: Blocher, E., Chen, K., Cokins, G., Lin, T. (2005). Cost Management: a strategic
emphasis. New York: McGraw-Hill Irwin [12-23]
Answer:

a. $5.3125

Net Realizable Value Method

MSB CBL Total
Sales Value of Production $300,000 $800,000 $1,100,000
Less: Separable Costs 100,000 200,000 300,000
Net Realizable Value 200,000 600,000 800,000
Percentage of Total NRV 25% 75%
 Allocated Joint Cost $ 75,000 $225,000 $300,000
Plus: Separable Costs 100,000 200,000
Total Costs $175,000 $ 425,000

Units Produced 60,000 80,000

Cost per Unit $2.917 $ 5.3125

b. Yes; Sonimad should process MSB further.

Increase in sales revenue: 60,000 ($5 - $2) = $180,000

Increase in cost 100,000
Increase in Contribution $ 80,000

Question 4

ABC Inc. Manufactured 2 products, A1 and B2. A standard production run incurs joint costs of
$600,000 and results in 120,000 of A1 and 180,000 units of B2. Each unit of A1 sells for $4 per
unit while each unit B2 sells for $8.

Required

a. Assuming that no further processing occurs after the split-off point, how much of the joint
costs are allocated to B2 on a physical measure basis?

b. If no further processing occurs after the split off point, how much of the joint cost is allocated
to product A1 on a sales value bases?

c. Assume that B2 is not marketable at split-off but must be processed further at a cost of
$400,000 per production run. During this process, 20,000 units are lost and have no value. The
remaining units of B2 have a sales value of $20 per unit. A1 although saleable at the split of
point, is further refined at a cost of $200,000 per production run. The product is then sold for
$10 per unit. Using the net realizable value basis, how much of the completed cost should be
assigned to B2?

d. Should ABC process A1 beyond the split-off point? What would be the contribution if it did
so?

Source: John Molson School of Business Acco 330: Cost Management Final Exam, Sample Final
Exam #1, Question 5

a. $360,000
Physical unit method

A1 B2 Total
Unit of production 120,000 180,000 300,000
Percentage of total 40.00% 60.00%

Joint cost allocation $240,000 $360,000 $600,000

b. $150,000

Net Realizable value Mathod

Total A1 B2
Sales value of production $480,000 $1,440,000 $1,920,000
Less: Separable Costs -0- -0- -0-
Net realizable value $480,000 $1,440,000 $1,920,000

Percentage of total NRV 25.00% 75.00%

Allocated joint cost $150,000 $450,000 $600,000

c. $5.263

Net Realizable Value Method

A B Total
Sales value of production $1,200,000 $3,200,000 $4,400,000
Less: Separable Costs 200,000 400,000 600,000
Net realizable value 1,000,000 2,800,000 3,800,000

Allocated Joint cost $157,920 $442,080 $600,000

Plus: Separable Costs 200,000 400,000
Total costs $357,920 $842,080
Units Produced 120,000 160,000
Cost per unit $2.983 $5.263

d.Yes: ABC should process A1 further

Increase in sales revenue 120,000*($10-$4)=$720,000

Increase in cost $200,000
Increase in contribution $520,000

Question 5

A 1,002 square metre commercial building was purchased for $325,000. An additional $50,000
was spent to split the space into two separate rental units and to get it ready to rent. Unit A,
which has the desirable location on the corner and contains 334 square metres, will be rented out
for $10.00 per square metre. Unit B contains 668 square metres and will be rented out for $7.50
per square metre. How much of the joint cost should be assigned to Unit B?
Source: Fundamental Accounting Principles, 9th Canadian edtion, by
Larson/Wild/Chiappetta/Nelson/Carroll/Zin, Online Learning Center, Quiz 1, Chapter 24, MCQ
5
Answer:

Joint cost = $325,000 + $50,000 = $375,000

Unit A market value (334 x $3,340

$10.00)

Unit B market value (668 x $7.50) 5,010

Total market value $8,350

Unit B joint cost = $375,000 x ($5,010/$8,350) = $225,000