ABC and JIT Backflush Costing Prac 2 2020N PDF
ABC and JIT Backflush Costing Prac 2 2020N PDF
ABC and JIT Backflush Costing Prac 2 2020N PDF
PROB. 1 (Adapted)
An accounting system that collects financial and operating data on the basis of the underlying b=nature
and extent of the cost drivers is
a. Activity-based costing
b. Target costing
c. Delivery cycle time costing
d. Variable costing
An activity-based costing system identifies the causal relationship between incurrence of costs and
activities, determines the driver for each activity, and applies cots to products or services on the basis of
resources (drivers) consumed.
PROB. 2 (Adapted)
Multiple or departmental manufacturing overhead rates are considered preferable to a single or plant-
wide overhead when
a. Manufacturing is limited to a single product flowing through identical departments in a fixed
sequence.
b. Various products are manufactured that do not pass through the same departments or use the
same manufacturing techniques.
c. Individual cost drivers cannot accurately be determined with respect to cause and effect
relationships.
d. The single or plant-wide rate is related to several identified cost drivers.
Multiple rates are appropriate when a process differs substantially among departments or when products
do not go through all departments or all processes. The trend in cost accounting is toward activity-based
costing which divides production into numerous activities and attempts to identify the driver/s most
relevant to each. A driver is a factor that causes changes in a cost. Thus, activity-based costing emphasizes
cost assignment based on a cost. Thus, activity-based costing emphasizes cost assignment based on
trading rather than allocation. The result is a more accurate assignment of costs.
PROB. 3 (Adapted)
A cost driver is a measure of activity, such as direct labor hours, machine hours, beds occupied, computer
time used, flight hours, etc. that is causal factors in the incurrence of cost to an entity. It is a basis used to
assign costs to cost objects.
PROB. 4 (Adapted)
A base used to allocate the cost of a resource to the different activities using that resource is called
a. Resource driver
b. Activity driver
c. Final cost object
d. Driver
The name resources drivers is new, but the idea is not. For example, most traditional accounting system
allocate some plant-wide costs to departments based on each department’s allocation bases like the
number of employees or square footage occupied. If an ABC system allocates the cost of a resource to
several activities based on the square footage or number of employees devoted to each activity, then
square footage and the number of employees are called resource drivers.
PROB. 5 (Adapted)
A base used to allocate the cost of products, customers, or other final cost objects is called
a. Resource driver
b. Activity driver
c. Final cost object
d. Driver
An activity is a base used to allocate the cost of an activity to products, customers, or other final cost
objects. The word final refers to the last step in cost allocation. The nature and variety of activity drivers
is what distinguishes ABC from traditional costing.
PROB. 6 (Adapted)
PROB. 6 Suggested answer (c) the use of information obtained from ABC to make improvements in the
firm.
Activity-based management is a detailed analysis of activities and expenses created by those activities
used as a basis for controlling and improving efficiency or the use of information obtained from activity-
based costing to make improvement in a firm.
PROB. 7 (AICPA)
What is the normal effect on the numbers of cost pools and cost assignment bases when an activity-based
cost system replaces a traditional cost system?
Cost pools Cost assignment bases
a. No effect No effect
b. Increase No effect
c. No effect Increase
d. Increase Increase
In an activity-based cost system, cost assignment is more precise than in traditional cost system, because
activities rather than functions or department functions or departments are defined as cost objects. This
structure permits assignment to more cost pools and the identification of a driver specifically related to
each. A driver is a factor that causes a change in a cost. Thus, an activity-based cost system uses more cost
pools and cost assignment bases than a traditional system.
PROB. 8 (Adapted)
Activities, their drivers, and their costs may be classified as unit level, product level, batch level, and plant
level. If activity-based costing information is prepared for internal purposes, which costs are most likely
to be treated as period costs?
a. Unit level
b. Batch level
c. Product level
d. Plant level
A difficulty in applying activity-based costing is that, whereas the first three levels of activities pertain to
specific product or services, plant level activities do not. Thus, plant level costs are not accurately
assignable to products. The theoretically sound solution may be to treat these costs as period costs, in
order to avoid distorting of costs.
PROB. 9 (AICPA)
Product TAC uses 200 hours of direct labor hours and has 2,000 machine steps. The company has been
considering using either direct labor hours or machine steps as the cost driver. The ratio of overhead cost
to direct labor hours is P60. The assignment of overhead cost to Product TAC using the direct labor hours
would result in a higher charge by P4,000 that if machine steps were used as the cost driver. What is the
ratio of overhead cost to machine steps?
a. 1.00 per step
b. 2.00 per step
c. 4.00 per step
d. 6.00 per step
Given the ratio of overhead to direct labor hours of P60, which is higher by P4,000 than machine steps at
the cost driver, the resulting difference of P8,000 is the overhead cost using machine steps. Therefore,
the ratio of overhead to machine steps is P4.00 per step.
PROB. 10 (AICPA)
An ABC system determines activities associated with the incurrence of costs and then accumulates a cost
pools for each activity. It identifies the driver/s used to trace those costs to such cost object as products
or services. A driver is a factor that causes a change in a cost. Activities that do not add value are identified
and eliminated to the extent possible. However, all drivers cannot be eliminated.
PROB. 11 (AICPA)
Uring co.’s cost assignment and product costing procedures follow activity-based costing principles.
Activities have been identified and classified as being either value-adding or nonvalue-adding as to each
product. Which of the following activities, used in Uring's production process, is nonvalue-adding?
a. Design engineering activity.
b. Heat treatment activity.
c. Drill press activity.
d. Raw materials storage activity.
ABC assign costs more precisely than traditional cost system because cost pools are accumulated for
activities rather than functions or departments. This structure permits assignment to more cost pools and
the identification of the driver/s used to reassign costs to cost objects. Analysis by activity also provides
for better cost control, because of identification of nonvalue activities. For example, raw materials storage
may be greatly reduced or eliminated in a JIT system without affecting customer value.
PROB. 12 (AICPA)
Doron Corp. has used a traditional cost accounting system to apply quality control costs uniformly to all
products at a rate of 14.5% of direct labor cost. Monthly direct labor cost for its Product Handi is P27,500.
In an attempt to distribute quality control costs more equitably, Doron is considering activity-based
costing. The monthly data shown below have been gathered for Product Excel.
What is the monthly quality control cost assigned to Product Handi using the activity-based costing?
a. P68.64 per order
b. P525.50 lower than the cost using the traditional cost system.
c. P8,500.50
d. P525,50 higher than the cost using the traditional cost system.
The traditional costing systems are characterized by their exclusive use of unit of level measures as bases
for allocating overhead to output. On the other hand, Activity-Based Costing system identifies the causal
relationship between the incurrence of cost and activities, determines the drivers of the activities,
establishes cost pool related to drivers and activities, and assigns costs to ultimate cost objects on the
basis of the resources or drivers on the activities.
PROB. 13 (AICPA)
Believing that its traditional cost system may be providing misleading information, an entity is considering
an activity-based costing approach. It now employs a full cost system and has been applying its
manufacturing overhead o the basis of machine hours. The organization plan on using 50,000 direct labor
hours and 30,000 machine hours in the coming year. The following date show the manufacturing overhead
that is budgeted:
Cost, sales, and production data for one of the organization’s product for the coming year are as follows:
Prime Costs:
Direct material cost per unit P4.40
Direct labor cost per unit 0.05 direct labor hour
@ P15.00/direct labor hour 0.75
Total prime cost P5.15
If the organization employs an activity-based costing system, the cost per unit for the product described
for the coming year will be
a. 6.00
b. 6.08
c. 6.21
d. 6.30
As compared to the traditional costing system, Activity-Based Costing system represents a more thorough
application of cost tracing. It recognizes that many other costs are in fact traceable, not to units of output,
but to the activities required to produce output. In addition, since, the question being asked is the cost
per unit of the product, thus we considered the three elements of costs (direct materials, direct labor, and
overhead)
PROB. 14 (AICPA)
In manufacturing pedal boards, Contact Co.’s plant used 400 direct labor hours, 500 machine hours, and
20 set ups. The following overhead costs were taken from the factory accounts:
The plant was using a factory-wide overhead rate based on direct labor hours. A new ABC system will use
machine hours in the Machining Department and number of set ups in the Set-up Department as cost
drivers. By what amount would overhead costs assigned to pedal boards differ between the prior system
and the ABC system?
a. 7,800
b. 7,000
c. 5,000
d. 4,800
Activity-based costing attempts to improve costing by assigning cost to activities rather than to an
organization unit. Accordingly, activity-based costing requires identification of the activities that consume
resources and that are subject to demands by ultimate cost objects.
PROB. 15 (AICPA)
Ditrio Corp. accumulated the following cost information for its two products, A and B:
A B Total
Production volume 2,000 1,000
Total direct labor hours 5,000 20,000 25,000
Setup cost per batch P 1,000 P 2,000
Batch size 100 50
Total setup cost incurred P20,000 P40,000 P60,000
Direct labor hour per unit 2 1
A traditional costing system would allocate setup costs on the basis of direct labor hours. An ABC system
would trace costs by spreading the cost per batch over the units in a batch. What is the setup cost per
unit of Product A under each costing system?
Traditional ABC
a. 4,80 10.00
b. 2.40 10.00
c. 40.00 200.00
d. 4.80 20.00
Again, the traditional costing systems are characterized by their exclusive use of unit of level measures as
bases for allocating overhead to output; while ABC recognizes cost traceable to the activities required to
produce output. In this case, the traditional costing system allocates setup costs based on direct labor
hours, where two direct labor hours are needed to produce one unit; while ABC traces costs by spreading
the costs per batch over the units in batch.
PROB. 16 (Adapted)
Supplies Co. produces two products, Product Side M and Produce Side S. Units produced for the period
totaled 13,625 for Side M and 11,100 for Side S. Total manufacturing overhead cost are P550,000. The
company uses the activity-based costing is allocating its manufacturing overhead cost. The following
additional information were gathered.
Product
Activity Cost Driver M S Total
Setups No. of setups 100 400 100,000
Machining Machine hours 3,000 2,000 400,000
Inspections No. of inspections 100 300 50,000
b. How would the total overhead cost of P550,000 be allocated between Products Side M and Side
S?
Side M Side S
a. 640,000 540,000
b. 586,656 494,991
c. 275,000 275,000
d. 272,500 277,500
c. What would be the overhead cost per unit for Products Side M and Side S?
Side M Side S
a. P46.97 P48.65
b. 43.06 44.59
c. 20.18 24.77
d. 20.00 25.00
PROB. 16
Side M Side S
Setups (200 x 100) P 20,000
(200 x 400) P 80,000
Machining (80 xx 3,000) 240,000
(80 x 2,000) 160,000
Inspections (125 x 100) 12,500
(125 x 300) 37,500
Total P272,500 P277,500
After determining the overhead rate, to compute the allocated overhead cost, overhead rate will be
multiplied by the number of activities for reach product.
Side M Side S
Overhead cost per unit
(P272,500/13,625 units) P20.00
(277,500/11,100 units) P25.00
PROB. 17 (Adapted)
Dream Color Co. is preparing its annual profit plan. As part of its analysis of the profitability of individual
products, the controller examines the amount of overhead that should be assigned to the individual lines
from the information given as follows:
a. Under a costing system that assigns overhead on the basis of direct labor hours, what is the
material handling cost allocated to one unit of thin glass?
a. 1,000
b. 500
c. 2,000
d. 5,000
b. Under activity-based costing system, what is the material handling cost assigned to one unit of
thin glass?
a. 1,000
b. 500
c. 1,500
d. 2,500
PROB. 17
Allocating overhead based on the direct labor hours is the traditional method of allocating overhead. This
method is characterized by their exclusive use of unit level measures as bases for allocating overhead to
output.
Activity-based costing attempts to improve costing by assigning cost to activities rather than to an
organization unit. Activities, such as production scheduling, supervising and setting up, must be identified
for cost accumulation. Cost driers, such as the number of production runs, and the number of set-ups or
moves, must be defined for allocating the accumulated overhead to products benefitting from the
activities. These pools are the cost centers, and the cost drivers from the bases of overhead recovery
rates.
PROB. 18 (Adapted)
Dura Co. makes two products, Q and T. Q is being introduced this period, whereas T has been in production
for 2 years. For the period about to begin, 1,000 units of each product are to be manufactured. Assume
that the only relevant overhead item is the cost of engineering change orders; that Q and T are expected
to require 8 and 2 change orders, respectively; that Q and T are expected to require 2 and 3 machine
hours, respectively; and that the cost of a change order is P600. If Dura Co. applies engineering change
order costs on the basis of machine hours, the cross-subsidy per unit arising from this peanut-butter
costing approach is
a. 1.20
b. 2.40
c. 3.60
d. 4.80
PROB. 18 Suggested answer (b) P2.40
Q T
Traditional cost system
(P1.20 x 2 machine hours) P2.40
(P1.20 x 3 machine hours) P3.60
Activity-based cost system
(P600 x 8/1,000 units) 4.80
(P600 x 2/1,000 units) 1.20
Cross-subsidy per unit (Under) Over cost (P2.40) P2.40
Peanut butter costing is an inaccurate averaging or spreading of costs over products or service
units that use different amounts of resources results in product cost cross subsidization. This term
describes the condition in which the miscosting of one product causes the miscosting of other
product. Thus, the unit amount by which machine hour-based assignment overcosts T and at the
same time undercosts Q (cross-subsidy) is P2.40.
PROB. 19 (Adapted)
PROB. 19 Suggested answer (d) high quality and balanced work loads
Just in time is a philosophy centered on the reduction of costs through elimination of inventory.
Elimination of inventories eliminates storage and carrying costs; however, it also eliminates the cushion
against production errors and imbalances that inventories provide. As a result, high quality and balanced
workloads are required in a JIT system to avoid costly shutdowns and customer ill will. Because of the
need for quality and balanced production, JIT has come to be closely identified with efforts to eliminate
waste in all its forms, and thus it is an important part of total quality management (TQM) efforts.
PROB. 20 (Adapted)
All of the following are terms used to describe the JIT effort to reduce inventories of work in process and
raw materials, except
a. Backflush production
b. Stockless production
c. Lean production
d. ZIP production
PROB. 20 Suggested answer (a) backflush production
The most visible aspect of JIT is the effort to reduce inventories of work in process and raw materials.
Most writing on JIT concentrate on this one aspect, which is called stockless production, lean production,
or zero inventory production. While backflush costing is an abbreviated approach to accounting for the
flow of manufacturing costs, which is applicable to mature JIT system in which velocity is too high that
traditional accounting is impractical.
PROB. 21 (AICPA)
A company has an annual carrying cost percentage of 30% and average work in process of P300,000. The
management plans to use Just-in-Time production system to double the velocity of work in process
without changing total annual output. What would be the savings in annual carrying costs?
a. 90,000
b. 45,000
c. 150,000
d. 180,000
Velocity is the speed in which units or tasks are processed in a system. A strategic benefit of increased
velocity is the reduced time needed to fill production orders. And because work in process is a costly asset
that must be financed and maintained just as any other asset producing savings in the carrying cost of
inventory. Where velocity is doubled, the annual carrying cost percentage is reduced by one-half.
PROB. 22 (AICPA)
A company has 500 units production per day and 2,000 units are in process at any time. What is the
throughput time?
a. ½ day
b. ¼ day
c. Two days
d. Four days
In production, there is an important and direct relationship between the size of work in process and the
speed of production. Throughput time is inversely related to velocity and may be computed by dividing
units in process by units produced per day.
PROB. 23 (AICPA)
In a company where Step #1 in a production line processes each unit and sends it to await Step #2, and
500 units are waiting between Steps #1 and #2, how many defective units might Step #1 produce before
the problem is detected in Step #2?
a. 500 units
b. Unlimited number
c. 250 units
d. 1,000 units
At individual workstations in a production line, the impact of work in process reduction is simple, fewer
units will be waiting at, or moving to, each station; and this can have an important impact on production
losses. In this case, where 500 units were waiting between Step #1 and Step #2, the defective units Step
#1 might produce before the problem is discovered or if the or if the defect enters only some of the units
produced. The worst outcome is 500 units, which is the seize of work in process at that workstation.
PROB. 24 (AICPA)
Kee Co. has 10 workstations where work in process is held, 100 average units in work in process per
station, an average cost of a unit in work in process of P75, and annual inventory carrying cost of 20%. If
Kee plans a 50% reduction in work in process levels, what would be the expected annual savings in carrying
costs?
a. 37,500
b. 15,000
c. 30,000
d. 7,500
Again, because work in process is a costly asset that must be financed and maintained just as any other
assets, the obvious benefit of a work in process reduction is that total investment is reduced, producing
savings in inventory carrying costs. In addition to the effect on inventory carrying costs, a more important
result of a work in process reduction is its effect on production losses.
PROB. 25 (AICPA)
Dy Co. has an average peso loss per defective unit of P25, a planned reduction in work in process levels of
50%, and an average number of units in work-in-process per station of 100. Assume that the total number
of instances in which some workstation goes out of control limits and produces defects is expected to be
500 annually and that in half those instances the one-of-control condition is not discovered immediately
and enters 10% of the units produced. What is the expected annual saving in cost of defective units?
a. 1,250
b. 31,250
c. 6,250
d. 125
Again, in additional to the effect on inventory carrying costs, a more important result of a work in process
reduction is its effect on production losses. At individual workstations in a production line, the worst
outcome on defective units is the seize of work in process in that work station; possibly less, if the problem
at a work station is discovered in some other way or if the defection enter only some of the units
produced.
PROB. 26 (AICPA)
Eco Co. has materials cost in the June 1 Raw and In Process (RIP) of P10,000 materials received during the
month of June P205,000 and materials cost in the June 30 Raw and In Process (RIP) of P12,500. What
would be the amount to be backflushed from RIP to Finished Goods at the end of June?
a. 215,000
b. 202,500
c. 207,500
d. 217,500
PROB. 27 (AICPA)
In backflush costing, if the conversion cost in the Raw and In Process was P500 on July 1 and P1,000 on
July 31, the account to be credited at the end of July for the P500 increase would be
a. Raw and In Process
b. Finished Goods
c. Raw Materials
d. Cost of Goods Sold
In backflush costing, direct labor and overhead costs are expensed to the cost of goods sold account. The
estimated conversion cost components of the RIP and finished goods inventory account balances are
adjusted at the end of each month, with the offsetting entry representing a correction of cost of goods
sold. If conversion cost increased during the month, cost of goods sold is credited; however, when
conversion cost decreased, cost of goods sold is debited.
PROB. 28 (Adapted)
The Footstar Manufacturing Corp. uses a Raw and In Process inventory account and expenses all
conversion costs to the goods sold account. At the end of each month, all inventories are accounted, their
conversion costs components are estimated, and inventory account balances are adjusted accordingly.
Raw materials cost is backflushed from RIP to finished goods. The following information is for the month
of May.
Since in backflush costing, materials and work in process are combined in a single account called RIP, for
direct materials used no journal entry is needed, and conversion costs are expenses to the cost of goods
sold. Thus, the conversion cost should be deducted from the amount of RIP to be backflushed to finished
goods.
PROB. 29 (Adapted)
The Fortune Manufacturing Corp. uses a Raw and In Process inventory account and expenses all
conversion costs to the cost of goods sold account. At the end of each month, all inventories are counted,
their conversion cost components are estimated, and inventory account balances are adjusted
accordingly. Raw material cost is backflushed from RIP to finished goods. The following information is for
the month of May:
PROB. 29
a. Suggested answer (b) P102,900
As shown earlier, backflushing is from RIP to finished goods, because there is no finished goods inventory,
but it should be pointed out that in this case, backflushing is made directly to cost of goods sold. Further,
if there is finished goods inventory account, the amount to be shown as backflushed is up to cost of goods
sold. Note in the above computations, the amount added to the finished goods inventory is the amount
backflushed from RIP to finished goods.
Again, the estimated conversion cost components of the RIP and finished goods inventory account
balances are adjusted at the end of each month with the offsetting entry representing a correction of
cost of goods sold. If conversion cost increased during the month, cost of goods sold is credited,
however, when conversion cost decreased, cost of goods sold is debited.
PROB. 30 (Adapted)
The Ecopak Manufacturing Corp. uses a Raw and In Process (RIP) inventory account and expensed all
conversion costs to the cost of goods sold account. At the end of each month, all inventories are counted,
their conversion cost components are estimated, and inventory account balances are adjusted
accordingly. Raw material cost is backflushed from RIP to finished goods. The following information is for
May:
Raw and In Process, May 1 38,700
Raw and In Process, May 31 41,900
Raw materials purchased 680,000
Conversion costs incurred 4,800
Conversion costs allocated 5,300
Finished goods, May 1 12,000
Finished goods, May 31 10,000
a. What is the calculated material cost to be backflushed from RIP to cost of goods sold?
a. 718,700
b. 688,800
c. 678,800
d. 676,800
PROB. 30
Backflush costing determines some or all elements of cost of output only after production is completed.
The cost of completed work is subtracted from the balance of the work in process account, or equivalent
combined account, in a step called post-deduction or post manufacturing deduction.
The backflush calculation uses end of period estimates of actual materials and conversion cost
components of all unfinished work. The cost estimates are made after a physical inventory count, which
is usually done monthly or weekly. Estimates of conversion cost amounts can be derived by first estimating
the conversion cost of a finished unit, and then assigning a part of that to the partly finished units on hand.
Thus, the conversion costs to be backflushed to cost of goods sold shall be the conversion allocated in the
amount of P5,300.