Activity-based pricing: A) Is used to provide prices per service options B) uses activity-based costing techniques to determine indirect cost associated with the various service options C) May reduce cost to suppliers, since customers are selecting services a la carte D) All of the above
Activity-based pricing: A) Is used to provide prices per service options B) uses activity-based costing techniques to determine indirect cost associated with the various service options C) May reduce cost to suppliers, since customers are selecting services a la carte D) All of the above
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Division Alpha can purchase a required part from an outside supplier at $35. Division Beta will supply the part at a transfer price of $38.50. Division Alpha's manager should
a. | tell his immediate supervisor that Division Beta is being unreasonable. | |
b. | negotiate an appropriate transfer price with the manager of Division Beta. | |
c. | pay the $38.50 price to Division Beta. | |
d. | buy from the outside supplier. |
The state of Illinois has passed a law requiring that every automobile be inspected at least once a year for pollution control. Anfang Enterprises is considering entering into this type of business. After extensive studies, Joseph Anfang has developed the following set of projected annual data on which to make his decision:
Direct service labor | $363,000.00 |
Variable service overhead costs | 270,000.00 |
Fixed service overhead costs | 280,000.00 |
Marketing expenses | 120,000.00 |
General and administrative expenses | 170,000.00 |
Minimum profit | 90,000.00 |
Cost of assets employed | 500,000.00 |
Anfang believes that his company will inspect 100,000 automobiles per year. The company earns an average of 18.75 percent return on its assets.
The price to be charged for inspecting each automobile using the time and materials pricing method would be calculated as follows:
a. | ($913,000.00 ÷ 100,000) + {($913,000.00 ÷ 100,000) ´ [($90,000 + $290,000) ÷ $913,000.00]} | |
b. | ($1,203,000.00 ÷ 100,000) + [($1,203,000.00 ÷ 100,000) ´ ($90,000 ÷ $1,203,000.00)] | |
c. | ($1,203,000.00 ÷ 100,000) + [($500,000 ÷ 100,000) ´ 0.1875] | |
d. | None of these |
An example of a pricing objective is to
a. | maintain a minimum rate of return. | |
b. | increase market share irrespective of the cost of a product. | |
c. | ignore long-term pricing strategies in favor of short-term profits. | |
d. | maintain a price that is always under that of the competition. |
Development of a transfer price involves
a. | direct upper management intervention if different transfer prices are determined by the selling division and the buying division. | |
b. | including only costs allocated from corporate levels when determining semi-finished product line costs. | |
c. | heavy reliance on industry averages. | |
d. | applying a target profit rate to the unit cost for the semi-finished product. |
Which of the following is not one of the three commonly used methods for determining transfer prices?
a. | Negotiated | |
b. | Cost-plus | |
c. | Market-based | |
d. | Dictated |
The primary difference between a cost-based transfer price and a market-based transfer price is
a. | the influence of an external source for the raw material or part. | |
b. | that the cost-based price will always be more advantageous to the company's overall profit. | |
c. | that the market-based price is usually lower. | |
d. | the appropriate profit factor. |
A pricing method based on product cost is
a. | cost of goods sold pricing. | |
b. | gross margin pricing. | |
c. | inventory pricing. | |
d. | net income pricing. |
The state of Illinois has passed a law requiring that every automobile be inspected at least once a year for pollution control. Anfang Enterprises is considering entering into this type of business. After extensive studies, Joseph Anfang has developed the following set of projected annual data on which to make his decision:
Direct service labor | $363,000.00 |
Variable service overhead costs | 270,000.00 |
Fixed service overhead costs | 280,000.00 |
Marketing expenses | 120,000.00 |
General and administrative expenses | 170,000.00 |
Minimum profit | 90,000.00 |
Cost of assets employed | 500,000.00 |
Anfang believes that his company will inspect 100,000 automobiles per year. The company earns an average of 18.75 percent return on its assets.
The price to be charged for inspecting each automobile using the gross margin pricing method would be calculated as follows:
a. | ($1,203,000.00 ÷ 100,000) + [($1,203,000.00 ÷ 100,000) ´ ($90,000 ÷ $1,203,000.00)] | |
b. | ($1,203,000.00 ÷ 100,000) + [($500,000 ÷ 100,000) ´ 0.1875] | |
c. | ($913,000.00 ÷ 100,000) + {($913,000.00 ÷ 100,000) ´ [($90,000 + $290,000) ÷ $913,000.00]} | |
d. | None of these |
The state of Illinois has passed a law requiring that every automobile be inspected at least once a year for pollution control. Anfang Enterprises is considering entering into this type of business. After extensive studies, Joseph Anfang has developed the following set of projected annual data on which to make his decision:
Direct service labor | $363,000.00 |
Variable service overhead costs | 270,000.00 |
Fixed service overhead costs | 280,000.00 |
Marketing expenses | 120,000.00 |
General and administrative expenses | 170,000.00 |
Minimum profit | 90,000.00 |
Cost of assets employed | 500,000.00 |
Anfang believes that his company will inspect 100,000 automobiles per year. The company earns an average of 18.75 percent return on its assets.
The price to be charged for inspecting each automobile using the return on assets pricing method would be calculated as follows:
a. | ($913,000.00 ÷ 100,000) + {($913,000.00 ÷ 100,000) ´ [($90,000 + $290,000) ÷ $913,000.00]} | |
b. | ($1,203,000.00 ÷ 100,000) + [($1,203,000.00 ÷ 100,000) ´ ($90,000 ÷ $1,203,000.00)] | |
c. | ($1,203,000.00 ÷ 100,000) + [($500,000 ÷ 100,000) ´ 0.1875] | |
d. | None of these |
A common problem associated with transfer pricing occurs when
a. | managers do not agree with the transfer prices of the inputs provided to them or of the outputs of their own division. | |
b. | the gross margin pricing method is used to compute the price. | |
c. | a division sells its excess output to an external customer. | |
d. | a division purchases inputs for processing from an outside source at a price higher than the internal transfer price. |
Transfer pricing
a. | incorporates procedures that allow for ease in determining the amount of profit associated with each division of a decentralized company. | |
b. | is a concept readily accepted by managers of divisions, because it relies on concepts used in cost-based pricing methods. | |
c. | involves determining the cost and profit if the output of one division is transferred to another division of the same company. | |
d. | is not used by many companies because it is difficult to eliminate intercompany profits. |
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 | |||