AE23 – Strategic Cost Management

Chapter 6

1. Implementation of total quality management (TQM) in a firm:

a. must follow a rigid, predetermined process to be successful.
b. involves some lower-level managers and all senior executives
c. takes from 3-5 years.
d. is a bottom up process, with senior management involved only in the final phase.

2. Goalpost quality conformance differs from absolute quality conformance like:

a. “generally” differs from “always.”
b. “range” differs from “point.”
c. “probable” differs from “certain.”
d. “many” differs from “one.”

3. The quality cost of prevention is:

a. exampled by the cost of servicing warranties.
b. refers only to zero-defect programs
c. an upstream cost
d. a downstream cost.

4. Typically, as prevention costs increase, other costs of quality:

a. are not affected
b. change, but the direction cannot be predicted.
c. increase, but at a slower pace.
d. decrease.

5. Examples of the quality cost of prevention include all of the following, except:
a. tuition for external training
b. additional tolerance controls for machinery.
c. depreciation of a training room.
d. an annual award for lowest rework rate.

6. Appraisal costs are incurred to measure and analyze data to test product or service in
conformity to specifications, but not to:
a. reduce error or prevent recurrence of error.
b. change procedures
c. change policy
d. check on quality standards.

7. The key difference(s) between internal failure cost and external failure cost is (are):
a. when the cost happens.
b. where the cost happens.
c. both when and where the cost happens
 d. whether the cost happens.

8. Which one of the following is not listed as a practice that successful TQM firms use to
ensure having quality suppliers?
a. forming long-term relationships with suppliers as working partners.
b. setting measures that truly reflect the needs and expectations of suppliers.
c. reducing the supplier base
d. selecting suppliers based on price and their capability and willingness to improve
quality, cost, delivery, flexibility, and for their dedication to continuous
improvement.

9. Conformance to a quality specification expressed as a specified range around a target is

a. endzone conformance
b. target conformance
c. goalpost conformance
d. absolute quality conformance

10. Conformance that requires all products or services to meet exactly the target value with
no variation allowed is
a. endzone conformance
b. target conformance
c. goalpost conformance
d. absolute quality conformance

11. Just-in-time purchasing requires

a. larger and less frequent purchase orders
b. smaller and less frequent purchase orders
c. smaller and more frequent purchase orders.
d. larger and more frequent purchase orders

12. A demand-pull system in which each component in a production line is produced

immediately as needed by the next step in the production line is referred to as
a. just-in-time purchasing
b. materials requirements planning
c. relevant total cost
d. economic order quantity

13. All of the following are potential financial benefits of just-in-time except
a. just-in-time purchasing
b. materials requirements planning
c. relevant total cost
d. economic order quantity

14. Cost quality reports usually do not consider

a. external failure costs.
b. opportunity costs.
 c. internal failure costs.
d. appraisal costs.

15. Changing to an activity-based costing/management system will not

a. change the way that resource are allocated.
b. change the way that costs are allocated
c. change all the people’s jobs.
d. change the way that performance is evaluated.

16. Resistance to changing a management accounting and control system (MACS) can occur
for the reason listed below, except
a. employees are set in their ways and will act defensively.
b. an employee’s compensation and rewards may be altered
c. the balance of power may shift unfavorably for the employee.
d. employees have to wait for a vote of shareholders before a MACS can be
changed.

17. One common mistake that managers make when changing to a new cost management
system is
a. They involve too many in making the change.
b. They take too long to implement the change.
c. They over-budget for the cost of the change.
d. They try to change too many things simultaneously.

18. The just-in-time manufacturing (JIT) system is also called the

a. Job in training system
b. Job in transit system
c. Zero cost system
d. Zero inventories system

19. The traditional focus in management accounting has been to develop

a. Only quantitative performance measures.
b. Only qualitative performance measures
c. Both quantitative and qualitative performance measures.
d. Neither quantitative nor qualitative measures

20. A well-designed MACS develops and uses

a. Both quantitative and qualitative information for control, motivation and
performance evaluation.
b. Only quantitative information for control, motivation and performance evaluation
c. Only qualitative information for control, motivation and performance evaluation.
d. Neither quantitative nor qualitative information for control, motivation, and
performance evaluation.

21. Product quality and profitability are:

a. Closely related
 b. Inversely related
c. Loosely related
d. Indirectly linked

22. A product that meets or exceeds customer expectation is:

a. The norm in today’s marketplace.
b. a quality product.
c. a result of planning for quality
d. All of the above answers are correct

23. Core principles of total quality management include:

a. Focusing on customer satisfaction
b. Striving on continuous improvement.
c. Involvement of the entire work force.
d. Answer a, b and c are all core principles.

24. Continuous improvement (Kaizen) in today’s global economy:

a. is desirable if a firm promotes quality
b. is necessary if a firm is to remain competitive
c. Speaks only to the control of defects
d. Is practically impossible

25. Implementation of total quality management (TQM) in a firm:

a. Must follow a rigid, predetermined process to be successful
b. takes from 5-0 years
c. involves all lower-level managers and as well as senior executives
d. is a bottom up process, with senior management involved only in the final phase

26. Goalpost quality conformance differs from absolute quality conformance like:
a. “generally” differs from “always”.
b. “range” differs from “point”.
c. “probable” differs from “certain”.
d. “many” differs from “one”.

27. The Taguchi Quality Loss Function demonstrate that as the quality measure of a product
declines, the loss due to quality defects:
a. Increases as a quadratic function
b. Increases in direct proportion
c. Increases in an inverse proportion
d. Decrease as a quadratic function

28. The quality cost of prevention is:

a. Exampled by the cost of servicing warranties
b. Refers only to zero-defect programs
c. An upstream cost
d. A downstream cost
29. Typically, as a prevention costs increase, other costs of quality:
a. Are not affected
b. Change, but the direction cannot be predicted
c. Increase, but at a slower pace
d. Decrease

30. Examples of the quality cost of prevention include all of the following, except:
a. Tuition for external training
b. Additional tolerance controls for machinery
c. Depreciation of a training room
d. An annual award for lowest rework rate

31. Appraisal costs are incurred to measure and analyze data to test product or service
conformity to specifications, but not to:
a. Reduce error or prevent recurrence of error
b. Change procedures
c. Change policy
d. Check on quality standards

32. The key difference(s) between internal failure cost and external failure cost is (are):
a. When the cost happens
b. Where the cost happens
c. Both when and where the cost happens
d. Whether the cost happens

33. If quality cost are viewed as conformance versus non-conformance, quality expert Philip
Crosby would argue that there is no such thing as a quality problem, but only a problem
of:
a. Design
b. Materials
c. Labor
d. All of the above

34. If one were to classify quality costs as prevention, appraisal, internal failure and external
failure, the lowest and highest costs would tend to be respectively:
a. Appraisal and external failure.
b. Appraisal and internal failure
c. Prevention and internal failure
d. Prevention and external failure

35. Regardless of the differences in form and control, a common feature that should be
present in any Cost of Quality is that the report:
a. Promotes total quality management (TQM)
b. Stratifies costs by product line
c. Stratifies costs by department
 d. Stratifies costs by plant

36. Whichever of the many helpful tools a firm chooses for identifying significant quality
problems, the tool(s) will be most effective if:
a. Management accountants are not involved in their selection
b. Management accountants take a pro-active role throughout the process
c. The firm hires technical experts to choose the tool(s)
d. The firm leaves selection of the tool(s) to the supervisors.

37. Which one of the following is not a category of costs of quality?

a. Promotion
b. External failure
c. Internal failure
d. Appraisal

38. Costs incurred to keep quality defects from occurring are

a. External failure costs
b. Appraisal costs
c. Internal failure costs
d. Prevention costs

39. Costs incurred in measurement and analysis of data to ascertain conformity of products
and services to the specifications are
a. External failure costs
b. Appraisal costs
c. Internal failure costs
d. Prevention costs

40. Costs incurred as a result of poor quality found through appraisal prior to delivery to
customers are
a. External failure costs
b. Appraisal costs
c. Internal failure costs
d. Prevention costs

41. Warranty costs would be classified as

a. Prevention costs
b. Retention costs
c. Appraisal costs
d. External failure costs

42. Rework costs would be classified as

a. Prevention costs
b. Retention costs
c. Appraisal costs
d. external failure costs
43. Test acquisition costs would be classified as
a. Prevention costs
b. Retention costs
c. Appraisal costs
d. Internal failure costs

44. Reinspection costs would be classified as

a. Prevention costs
b. Retention costs
c. Appraisal costs
d. Internal failure costs

45. Costs of meetings would be classified as

a. Prevention costs
b. Retention costs
c. Appraisal costs
d. Internal failure costs

46. Finished goods inspection costs would be classified as

a. Prevention costs
b. Retention costs
c. Appraisal costs
d. Internal failure costs

47. Cost conformance includes

a. Prevention costs and appraisal costs
b. Internal failure costs and external failure costs
c. Prevention costs and internal failure cost
d. Appraisal costs and external failure costs

Chapter 7
1. Which of the following represents value-added time in the manufacturing cycle?
a. Inspection time
b. Queue time
c. Move time
d. Process time

2. Throughput time consist of:

a. Process time
b. Inspection time and move time
c. Process time, inspection time, and move time.
d. Process time, inspection time, move time, and queue time.
3. Manufacturing Cycle Efficiency (MCE) is computed as:
a. Throughput Time + Delivery Cycle Time
b. Process Time + Delivery Cycle Time
c. Value-Added Time + Throughput Time
d. Value-Added Time + Delivery Cycle Time

4. Lorenzo Corporation has provided the following data for one of its products:

Process time …………………….. 3 days

Queue time ……………………… 4 days
Inspection time …………………. 0.7 days
Move time ………………………. 0.3 days
Wait time ………………………... 9 days

The manufacturing cycle efficiency for this operation would be closest to:
a. 0.375
b. 0.45
c. 0.18
d. 0.33

Use the following information to answer question 5 through 8.

Rainee Manufacturing Corporation has the following information:

Moving time 8 days

Inspection time 2 days
Processing time 10 days
Storage time 30 days

5. What is the total amount of value-added time?

a. 10 days
b. 30 days
c. 40 days
d. 50 days

6. What is the total amount of nonvalue-added time?

a. 10 days
b. 30 days
c. 40 days
d. 50 days

7. What is the product’s cycle time?

a. 10 days
b. 30 days
c. 40 days
d. 50 days
 8. What is the manufacturing cycle efficiency?
a. 25.0%
b. 80.0%
c. 20.0%
d. 60.0%

Use the following information to answer questions 9 and 10.

Nicole corporation has the following information:

Moving time 10 days

Inspection time 5 days
Processing time 15 days
Storage time 20 days

9. What is the product’s cycle time?

a. 10 days
b. 15 days
c. 35 days
d. 50 days

10. What is the manufacturing cycle efficiency?

a. 30.0%
b. 20.0%
c. 50.0%
d. 70.0%

Chapter 8
1. The critical success factors for a business today are all:
a. Planning-oriented
b. Production-oriented
c. Sales-oriented
d. Customer-oriented

2. The Theory of Constraints (TOC) focuses on improving cycle time, the rate at which raw
materials are converted to finished product. This strategic management technique is
primarily concerned with the critical success factor of:
a. Energy c. Originality
b. Quality d. speed

3. The key concept in TOC is:

a. Benchmarking c. the bottleneck
b. Throughout d. reengineering
 4. Which of the following determines the desired cost for a product based upon a given
competitive price?
a. Benchmarking c. reengineering
b. Target costing d. life-cycle costing

5. Target costing forces the firm to become more competitive, like:

a. Reengineering c. activity-based costing
b. Life-cycle costing d. benchmarking

6. Which of the following is not one of the steps in the life cycle of a product?
a. Manufacturing, inspecting, packaging and warehousing
b. Research and development
c. Purchasing and receiving
d. Marketing, promotion and distribution

7. In comparison to the Coat Life Cycle of a product , the Sales Life Cycle of a product is:
a. Much shorter
b. Much longer
c. Exactly parallel, except that it is expressed in sales terms
d. Different because it represent a sequence of phases relating to sales, not
production.

8. In each of the phases of a product’s sales life cycle, management’s focus will be:
a. Parallel
b. On the next phase as well as the current one
c. Different
d. Undifferentiated

9. Generally, firms will price a product more competitively at which stage of the products
sales life cycle?
a. Product Introduction c. Maturity
b. Growth d. Decline

10. Because of the four stages of a product’s sales life cycle has a different emphasis, the cost
management system will be expected to provide data that is:
a. Different at each stage
b. Common to all stages
c. Lesser in amount in the later stages
d. Lesser in amount in the early stages

11. The sequence of activities within the firm which begins with research and development,
followed by design, and manufacturing, marketing/distribution, and customer service is
the:
a. Sales life cycle
b. Target life cycle
 c. Market life cycle
d. Critical life cycle

12. The sequence of phases in the product or service’s life in the market – from the
introduction of the product or service to the growth in sales and finally maturity, decline,
and withdrawal from the market is the:
a. Sales life cycle
b. Target life cycle
c. Market life cycle
d. Cost life cycle

13. When a firm determines the desired cost for a product or service, given a competitive
market price, in order to earn a desired profit, the firm is exercising:
a. Target costing
b. Life cycle costing
c. Variable costing
d. Absorption costing

14. Which one of the following is used in target costing to reduce product cost by analyzing
the tradeoffs between (1) different types and levels of product functionality and (2) total
product cost?
a. Benchmarking
b. Functional analysis
c. Productivity analysis
d. Value engineering

15. Which one of the following is a common type of value engineering in which each major
function or feature of the product is examined in terms of its performance and cost?
a. Benchmarking
b. Functional analysis
c. Productivity analysis
d. Functional engineering

16. Which one of the following is a common form of value engineering in which the
designing team prepares several possible design of the product?
a. Benchmarking
b. Functional analysis
c. Productivity analysis
d. Design analysis

17. Which one of the following is not one of the five steps in TOC analysis?
a. Identify the binding constrain(s).
b. Determine the most efficient utilization for each binding constraint.
c. Manage the flow through the binding constraint.
d. Deduct capacity from the constraint.
18. Which one of the following is true concerning TOC?
Short-Term Focus Long-Term Focus Cost Drivers
a. No No Yes
b. No Yes No
c. Yes No No
d. No Yes Yes

19. Which one of the following is a downstream cost?

a. Research and development
b. Packaging
c. Purchasing
d. Prototyping

20. Which one of the following industries has high upstream costs?
a. Retail c. cosmetics
b. Perfumes d. computer software

21. Which of the following is not a critical success factor at the design stage?
a. Improved ease-of-manufacture
b. Reduced time-to-market
c. Reduced expected service costs
d. Enhance quality

22. Which one of the following is not a common design method?

a. Concurrent engineering
b. Design engineering
c. Templating
d. Prototyping

23. Sales begin to grow rapidly and product variety increases in:
a. Phase three c. phase five
b. Phase two d. phase four

24. Sales continue to increase but at a decreasing rate is:

a. Phase three c. phase five
b. Phase two d. phase four

25. Sales begin to decline, as does the number of competitors, in:

a. Phase three c. phase five
b. Phase two d. phase four

Chapter 9

1. A good example A good example of a common cost which normally could not be
assigned to products on a segmented income statement except on an arbitrary basis would be:
a. product advertising outlays
 b. salary of a corporation president
c. direct materials
d. the product manager’s salary

2. All other things being equal, if a division’s traceable fixed expenses increase:
a. the division’s contribution margin ratio will decrease.
b. The division’s segment margin ratio will remain the same
c. The division’s segment margin will decrease.
d. The overall company profit will remain the same

3. Devlin Company has two divisions, C and D. The overall company contribution margin
ratio is 30% , with sales in the two divisions totaling P500,000. If variable expenses are
P300,000 in Division C, and if division C’s contribution margin ratio is 25%, then sales
in Division D must be:
a. P 50,000
b. P 100,000
c. P 150,000
d. P 200,000

4. Walsh Company has three stores: X, Y, and Z. During August, the variable expenses in
Store X were P90,000 and the contribution margin ratio was 25%. Store Y had a
contribution margin of P27,000 and a contribution margin ratio of 20%. Store Z had
variable expenses of P120,000 and a variable expense ratio of 60% of sales. For August,
Walsh Company’s sales were:
a. P 318,000
b. P 455,000
c. P 485,000
d. P 555,000

5. Channing Company has two divisions, S and T. The company’s overall contribution
margin ratio is 30% when sales in the two divisions total P750,000. If variable expenses
are P405,000 in Division s, and if Division S’s contribution margin ratio is 25%, then
sales in Division T must be:
a. P 75,000
b. P 150,000
c. P 225,000
d. P 300,000

Questions 6 and 7 are based on the following information.

JTC Company has two sales areas: East and West. During last year, the contribution margin in
the East area was P50,000, or 20% of sales. The segment margin in the West area was P15,000,
or 8% of sales. Traceable fixed costs are P15,000 in the East and P10,000 in the West. During
last year, the company reported total net income of P26,000.

6. The total fixed costs (traceable and common) for JTC Company for the year were:
 a. P49,000 c. P24,000
b. P25,000 d. P50,000

7. The variable costs for the West Area for the year were:
a. P230,000 c. P162,500
b. P185,000 d. P 65,000

Questions 8 through 11 are based on the following information.

Okinawa Company has two stores: D and S. During November , Okinawa Company reported a
net income of P30,000 and sales of P450,000. The contribution margin in Store D was P100,000,
or 40% of sales. The segment margin in Store S was P30,000, or 15% of sales. Traceable fixed
expenses are P60,000 in Store D, and P40,000 in Store S.

8. Sales in Store D totaled:

a. P400,000 c. P150,000
b. P250,000 d. P100,000

9. Variable expenses in Store S totaled:

a. P 70,000 c. P200,000
b. P110,000 d. P130,000

10. Okinawa Company’s total fixed expenses for the year were:
a. P 40,000 c. P140,000
b. P 100,000 d. P170,000

11. The segment margin ratio in Store D was:

a. 16% c. 40%
b. 24% d. 60%

12. Mamee Company has two divisions, 1 and 2. During July, the contribution margin in
Division 1 was P60,000. The contribution margin ratio in Division 2 was 40% and its
sales were P250,000. Division 2’s segment margin was P60,000. The common fixed
expenses were P50,000 and the company net income was P20,000. The segment margin
for Division 1 was:
a. P0 c. P50,000
b. P 10,000 d. P60,000

Chapter 10

1. Under variable costing, fixed manufacturing overhead is :

a. Carried in a liability account
b. Carried in an asset account
c. Ignored
 d. Immediately charged against sales as a period cost

2. Which one of the following statements is true for a firm that uses variable costing?
a. The unit product cost changes because of changes in the number of units
manufactured
b. Profit fluctuates with sales
c. Any underapplied overhead is calculated into the product cost
d. Product cost include variable administration costs.

3. A principal difference between variable costing and absorption costing centers on:
a. Whether variable manufacturing costs should be included as a product costs.
b. Whether fixed manufacturing costs should be included as a product costs
c. Whether fixed manufacturing costs and fixed selling and administrative costs
should be included as product costs
d. None of these.

4. Under variable costing:

a. Net income will tend to move upward and downward in response to changes in
levels of production
b. Inventory costs will always be lower than under absorption costing
c. Net income will tend to vary inversely with production changes
d. Net income will always be higher than under absorption costing

5. When sales are constant, but the production level fluctuates, net income determined by
the variable costing method will:
a. Fluctuate in direct proportion to changes in production
b. Remain constant
c. Fluctuate inversely with changes in production
d. Be greater than net income under absorption costing

6. The costing method that treats all fixed costs as period costs is:
a. Absorption costing
b. Job-order costing
c. Variable costing
d. Process costing

7. Under absorption costing, fixed factory overhead costs:

a. Are deferred in inventory when production exceeds sales
b. Are always treated as period costs
c. Are released from inventory when production exceeds sales
d. None of these

8. WB Company computes net income under both the absorption costing approach and the
variable costing approach. For a given year, the absorption costing net income was
greater than the variable costing net income. This fact suggest that:
a. Variable manufacturing costs were less than fixed manufacturing costs.
 b. More units were produced during the year than were sold
c. More units were sold during the year than were produced
d. Common costs were greater than variable costs for the year

9. Net income computed using variable costing would exceed net income computed using
absorption costing if:
a. Units sold exceed units produced
b. Units sold are less than units produced
c. Units sold equal units produced
d. The unit fixed cost is zero

10. When sales are constant, but the production level fluctuates, net income determined by
the absorption costing method will:
a. Tend to fluctuate in the same direction as fluctuations in the level of production
b. Tend to remain constant
c. Tent to fluctuate inversely with fluctuations in the level of production
d. None of these

11. Manga, Inc. manufactured 700 units last year. The ending inventory consisted of 100
units. There was no beginning inventory. Variable manufacturing costs were P6.00 per
unit and fixed manufacturing costs were P2.00 per unit. What would be the change in the
peso amount of ending inventory if variable costing was used instead of absorption
costing?
a. P800 decrease c. P0
b. P200 decrease d. P200 increase

12. Variable production cost are P12 per unit and variable selling and administrative
expenses are P3 per unit. Fixed manufacturing overhead totals P36,000 and fixed selling
and administration expenses total P40,000. Assuming a beginning inventory of zero,
production of 4,000 units and sales of 3,600 units, the peso value of the ending inventory
under variable costing would be :
a. P4,800 c. P6,000
b. P8,400 d. P3,600

13. The following data pertain to last year’s operations at HP Corp.:

Units in The following data pertain to last year’s operations at HP Corp.:

Units in beginning inventory 0

Units produced 20,000
Units sold 19,000

Selling price per unit P100,000

Variable costs per unit:

Direct materials P12,000
 Direct labor 25,000
Variable manufacturing overhead 3.00
Variable selling and administrative 2.00

Fixed costs per year:

Fixed manufacturing overhead P500,000
Fixed selling and administrative 600,000

What was the variable costing net income last year?

a. P12,000 c. P2,000
b. P57,000 d. P27,000

14. Last year, Mayumi Company had income of P40,000 using variable costing. Beginning
and ending inventories were 22,000 and 27,000 units, respectively. If the fixed
manufacturing overhead cost was P3.00 per unit, what was the income using absorption
costing?
a. P15,000 c. P40,000
b. P25,000 d. P55,000

15. The following data pertain to last year’s operations at Lois, Incorporated:

Units in beginning inventory 0

Units producted 100,000
Units sold 98,000
Selling price per unit 10.00
Variable costs per unit
Direct materials 1.50
Direct labor 2.50
Variable Manufacturing overhead 1.00
Variable selling and administrative 2.00
Fixed costs per year:
Fixed manufacturing overhead 200,000
Fixed selling and administrative 50,000

What was the absorption costing net income last year?

a. 44,000 c.50,000
b. 48,000 d.49,000

Questions 16 through 19 refer to the following:

Magic Company manufacturing a single product. The following data pertain to the company’s
operations last year:

Selling price per unit 24.00

 Variable costs per unit:
Production 8.00
Selling and administrative 2.00
Fixed costs in total:
Production 48,000
Selling and administrative 36,000

At the beginning of the year there was no units in inventory. A total of 12,000 units were
producted during the year, and 10,000 units were sold.

16. Under variable costing, the unit product cost is:

a. 8.00 c. 12.00
b. 10.00 d. 14.00

17. Under absorption costing, the unit product cost is:

a. 8.00 c. 12.00
b. 10.00 d. 15.00

18. The net income under variable costing would be:

a. 64,000 c. 56,000
b. 60,000 d. 52,000

19. The net income under absorption costing would be:

a. the same as the income under variable costing
b. 8,000 greater than the income under variable costing
c. 12,000 greater than the income under variable costing
d. 8,000 less than the income under variable costing

20. A company had a net income of 85,500 using variable costing and a net income of 90,000
using absorption costing. Total fixed manufacturing overhead was 150,000, and
production was 100,000 units. Between the beginning and the end of the year, the
inventory level:
a. increased by 4,000 units. c. increased by 3,000 units
b. decreased by 4,500 units. d. decreased by 3,000 units.