Question

1. Most firms have found that it is cost-effective to achieve a "zero defects" condition among their products and services.

True or False

2. Implementation of an activity-based costing system requires a company to generate more detailed accounting information than would be required by a traditional product cost system.

True or False

3. Farber Company produces its product in three departments, Prepping, Machining, and Finishing. A customer recently returned a defective product that had not been machined properly. The company's accountant would classify the repair cost as an internal failure cost.

True or False

4. Upstream costs are relevant for deciding whether to discontinue a product line.

True or False

Answer 1

1. False

Explanation:

In most cases, achieving a "zero defects" condition in unrealistic and counterproductive since, when possible, the costs incurred in order to achieve this condition outweigh the savings from not having defects. Therefore, most companies tend to try to achieve a low and acceptable margin of defects but not necessarily "zero".

2. True

explanation:

ABC costing requires detailed information about the system for e.g. no. of setups, no. of quality checks, etc which would not otherwise be required in the traditional costing system.

3. False

Explanation:

The company's accountant should have classify the repair cost as an external failure.

Internal failure costs are costs incurred to remove defects found before the customer receives the product or service. External failure costs are costs incurred to remove defects found after the customer receives the product or service.

As the defect was found/reported by customer so repair expense will be classify as external failure.

4. False

explanation:

They incurr before a product is manufactured and hence not relevant.