1. The target cost of a product
a. includes product costs but not period costs.
b. is determined before the target price is established.
c. is the difference between the target price and the desired profit.
d. is determined by the target audience.
2. In the cost-plus pricing approach, the markup percentage is computed by dividing the
a. desired ROI/unit by variable cost/unit.
b. desired ROI/unit by total unit cost.
c. total unit cost by desired ROI/unit.
d. selling price/unit by desired ROI/unit.
3. All of the following are steps in the time-and-material pricing approach except calculating the
a. labor charge.
b. material loading charge.
c. manufacturing overhead charge.
d. charges for a particular job.
4. The total contribution margin to a company in the market-based transfer price approach is
a. greater than in the cost-based approach.
b. less than in the cost-based approach.
c. the same as in the cost-based approach.
d. either greater than or less than in the cost-based approach.
5. Absorption-cost pricing
a. includes all variable costs in the cost base.
b. excludes fixed manufacturing overhead from the cost base.
c. provides the data needed for pricing special orders.
d. uses a markup percentage that covers the desired ROI and the selling and administrative expenses.
1. The target cost of a product
a. includes product costs but not period costs.
b. is determined before the target price is established.
c. is the difference between the target price and the desired profit.
d. is determined by the target audience.
2. In the cost-plus pricing approach, the markup percentage is computed by dividing the
a. desired ROI/unit by variable cost/unit.
b. desired ROI/unit by total unit cost.
c. total unit cost by desired ROI/unit.
d. selling price/unit by desired ROI/unit.
3. All of the following are steps in the time-and-material pricing approach except calculating the
a. labor charge.
b. material loading charge.
c. manufacturing overhead charge.
d. charges for a particular job.
4. The total contribution margin to a company in the market-based transfer price approach is
a. greater than in the cost-based approach.
b. less than in the cost-based approach.
c. the same as in the cost-based approach.
d. either greater than or less than in the cost-based approach.
5. Absorption-cost pricing
a. includes all variable costs in the cost base.
b. excludes fixed manufacturing overhead from the cost base.
c. provides the data needed for pricing special orders.
d. uses a markup percentage that covers the desired ROI and the selling and administrative expenses.
Related questions
Hampshire has always produced stick umbrellas. However, it is considering expanding its production to include collapsible umbrellas. This consideration has been spurred by Tours Today, a touring company that is interested in providing its customers with collapsible umbrellas imprinted with its logo. The management at Hampshire is currently working out a deal with the touring company to produce 3,000 collapsible umbrellas and believes it can sell those umbrellas for $14.00 each. Here are the costs that can be directly traced to this special order:
Direct Materials: $9,300
Direct Labor Hours: 600
Hourly Rate of Direct labor: $8.00
In the traditional costing approach, overhead is applied at the rate of $24.60 per labor hour. This expansion in production will add additional overhead costs. The total overhead costs (assuming production of the stick and collapsible umbrellas) to include the cost pools and cost drivers are provided in Table 2.
An alternative costing method that might benefit Hampshire is the implementation of activity-based costing (ABC). Hampshire would like to implement an ABC approach to analyze the production of this special order of collapsible umbrellas. The controller has assembled the following information:
| Stick | Collapsible | |
| Units Sold | 60,000 | 3,000 |
| Selling Price | $12.50 | $14.00 |
| Direct Material Cost per Unit | $3 | $3.10 |
| Direct Labor Cost per Hour | $7.50 | $8.00 |
| Variable Manufacturing Overhead | $0.40 | $0.40 |
| Variable Selling Costs | $1.10 | $1.10 |
| Labor Hours per Unit | 0.2 | 0.2 |
| Sales Orders | 120 | 1 |
| Purchase Orders | 50 | 3 |
| Production Runs | 45 | 6 |
| Material Moves | 86 | 10 |
| Machine Setups | 130 | 6 |
| Machine Hours | 525 | 32 |
| Inspections | 200 | 10 |
| Shipments | 60 | 3 |
Table 1: Direct Cost Information and Activities
| Activity | Activity Cost | Activity Cost Driver |
| Order Processing | $35,000 | Number of Sales Orders |
| Purchasing | $36,000 | Number of Purchase Orders |
| Material Handing | $28,000 | Material Moves |
| Machine Setup | $14,000 | Machine Setups |
| Production | $99,000 | Production Runs |
| Assembly | $80,000 | Machine Hours |
| Inspecting | $11,000 | Number of Inspections |
| Shipping | $7,500 | Number of Shipments |
Table 2: Activity Cost Pools and Cost Drivers
Another alternative to traditional costing and ABC is time-driven activity-based costing (TDABC). You will need to determine which of these three methods would be the best approach for the Hampshire Company. The following article may assist you in your analysis: Time-Driven Activity-Based Costing. Additionally, you may want to use the Shapiro Library to conduct further research on the three methods. You will need to defend your position when answering the prompts for the written portion of this section.
Using the information provided above, complete the following in the Hampshire Company Spreadsheet in order to assist you in responding to all components of Section IV:
1.Calculate the allocation rates for each cost driver using ABC.
2.Use the traditional costing approach to calculate the total cost and the unit cost of the stick and collapsible umbrellas.
3.Use ABC to compute the total costs and the unit cost for the stick and collapsible umbrellas.
4.Compute the difference between the product cost per stick and collapsible umbrellas using the unit cost that you computed with the traditional approach and the one that you computed using ABC.
| Requirement 1 | |||
| Activity | Total Costs | Quantity of Cost Allocation Base | Overhead Allocation Rate |
| Order Processing | $ | X | $ |
| Purchasing | $ | X | $ |
| Material Handing | $ | X | $ |
| Machine Setup | $ | X | $ |
| Production | $ | X | $ |
| Assembly | $ | X | $ |
| Inspecting | $ | X | $ |
| Shipping | $ | X | $ |
| Requirement 2 | |||
| Traditional Costing | |||
| Stick Umbrella | Collapsible Umbrella | Total | |
| Revenues | $ | $ | $ |
| Direct Materials | $ | $ | $ |
| Direct Labor | $ | $ | $ |
| Variable Overhead | $ | $ | $ |
| Variable Selling Costs | $ | $ | $ |
| Allocated Fixed Overhead | $ | $ | $ |
| Total Costs | $ | $ | $ |
| Operating Income | $ | $ | $ |
| Operating Income % | % | % | |
| Per Unit Operating Income | $ | $ | |
| Requirement 3 | |||
| Activity-Based Costing | |||
| Stick Umbrella | Collapsible Umbrella | Total | |
| Revenues | $ | $ | $ |
| Direct Materials | $ | $ | $ |
| Direct Labor | $ | $ | $ |
| Variable Overhead | $ | $ | $ |
| Variable Selling Costs | $ | $ | $ |
| Order Processing Costs | $ | $ | $ |
| Purchasing Costs | $ | $ | $ |
| Material Handing Costs | $ | $ | $ |
| Machine Setup Costs | $ | $ | $ |
| Production Costs | $ | $ | $ |
| Assembly Costs | $ | $ | $ |
| Inspecting Costs | $ | $ | $ |
| Shipping Costs | $ | $ | $ |
| Total Costs | $ | $ | $ |
| Operating Income | $ | $ | $ |
| Operating Income % | % | % | |
| Per Unit Operating Income | $ | $ | |
| Requirement 4 | |||
| Costs per Unit | Stick Umbrella | Collapsible Umbrella | |
| Traditional | $ | $ | |
| ABC | $ | $ | |
| Difference | $ | $ | |
| Requirement 5 | |||
Hampshire has always produced stick umbrellas. However, it is considering expanding its production to include collapsible umbrellas. This consideration has been spurred by Tours Today, a touring company that is interested in providing its customers with collapsible umbrellas imprinted with its logo. The management at Hampshire is currently working out a deal with the touring company to produce 3,000 collapsible umbrellas and believes it can sell those umbrellas for $14.00 each. Here are the costs that can be directly traced to this special order:
Direct Materials: $9,300
Direct Labor Hours: 600
Hourly Rate of Direct labor: $8.00
In the traditional costing approach, overhead is applied at the rate of $24.60 per labor hour. This expansion in production will add additional overhead costs. The total overhead costs (assuming production of the stick and collapsible umbrellas) to include the cost pools and cost drivers are provided in Table 2.
An alternative costing method that might benefit Hampshire is the implementation of activity-based costing (ABC). Hampshire would like to implement an ABC approach to analyze the production of this special order of collapsible umbrellas. The controller has assembled the following information:
| Stick | Collapsible | |
| Units Sold | 60,000 | 3,000 |
| Selling Price | $12.50 | $14.00 |
| Direct Material Cost per Unit | $3 | $3.10 |
| Direct Labor Cost per Hour | $7.50 | $8.00 |
| Variable Manufacturing Overhead | $0.40 | $0.40 |
| Variable Selling Costs | $1.10 | $1.10 |
| Labor Hours per Unit | 0.2 | 0.2 |
| Sales Orders | 120 | 1 |
| Purchase Orders | 50 | 3 |
| Production Runs | 45 | 6 |
| Material Moves | 86 | 10 |
| Machine Setups | 130 | 6 |
| Machine Hours | 525 | 32 |
| Inspections | 200 | 10 |
| Shipments | 60 | 3 |
Table 1: Direct Cost Information and Activities
| Activity | Activity Cost | Activity Cost Driver |
| Order Processing | $35,000 | Number of Sales Orders |
| Purchasing | $36,000 | Number of Purchase Orders |
| Material Handing | $28,000 | Material Moves |
| Machine Setup | $14,000 | Machine Setups |
| Production | $99,000 | Production Runs |
| Assembly | $80,000 | Machine Hours |
| Inspecting | $11,000 | Number of Inspections |
| Shipping | $7,500 | Number of Shipments |
Table 2: Activity Cost Pools and Cost Drivers
Another alternative to traditional costing and ABC is time-driven activity-based costing (TDABC). You will need to determine which of these three methods would be the best approach for the Hampshire Company. The following article may assist you in your analysis: Time-Driven Activity-Based Costing. Additionally, you may want to use the Shapiro Library to conduct further research on the three methods. You will need to defend your position when answering the prompts for the written portion of this section.
Using the information provided above, complete the following in the Hampshire Company Spreadsheet in order to assist you in responding to all components of Section IV:
1.Calculate the allocation rates for each cost driver using ABC.
2.Use the traditional costing approach to calculate the total cost and the unit cost of the stick and collapsible umbrellas.
3.Use ABC to compute the total costs and the unit cost for the stick and collapsible umbrellas.
4.Compute the difference between the product cost per stick and collapsible umbrellas using the unit cost that you computed with the traditional approach and the one that you computed using ABC.
| Requirement 1 | |||
| Activity | Total Costs | Quantity of Cost Allocation Base | Overhead Allocation Rate |
| Order Processing | $ | X | $ |
| Purchasing | $ | X | $ |
| Material Handing | $ | X | $ |
| Machine Setup | $ | X | $ |
| Production | $ | X | $ |
| Assembly | $ | X | $ |
| Inspecting | $ | X | $ |
| Shipping | $ | X | $ |
| Requirement 2 | |||
| Traditional Costing | |||
| Stick Umbrella | Collapsible Umbrella | Total | |
| Revenues | $ | $ | $ |
| Direct Materials | $ | $ | $ |
| Direct Labor | $ | $ | $ |
| Variable Overhead | $ | $ | $ |
| Variable Selling Costs | $ | $ | $ |
| Allocated Fixed Overhead | $ | $ | $ |
| Total Costs | $ | $ | $ |
| Operating Income | $ | $ | $ |
| Operating Income % | % | % | |
| Per Unit Operating Income | $ | $ | |
| Requirement 3 | |||
| Activity-Based Costing | |||
| Stick Umbrella | Collapsible Umbrella | Total | |
| Revenues | $ | $ | $ |
| Direct Materials | $ | $ | $ |
| Direct Labor | $ | $ | $ |
| Variable Overhead | $ | $ | $ |
| Variable Selling Costs | $ | $ | $ |
| Order Processing Costs | $ | $ | $ |
| Purchasing Costs | $ | $ | $ |
| Material Handing Costs | $ | $ | $ |
| Machine Setup Costs | $ | $ | $ |
| Production Costs | $ | $ | $ |
| Assembly Costs | $ | $ | $ |
| Inspecting Costs | $ | $ | $ |
| Shipping Costs | $ | $ | $ |
| Total Costs | $ | $ | $ |
| Operating Income | $ | $ | $ |
| Operating Income % | % | % | |
| Per Unit Operating Income | $ | $ | |
| Requirement 4 | |||
| Costs per Unit | Stick Umbrella | Collapsible Umbrella | |
| Traditional | $ | $ | |
| ABC | $ | $ | |
| Difference | $ | $ |
