Over the past few decades, the cost structure of manufacturing companies has shifted. In the early 1900s, direct material costs were substantial while fixed costs represented a small fraction of total manufacturing costs. However, the cost structure has reversed and now fixed costs make up the majority of total manufacturing costs.

What caused this to happen?

What would explain the drastic change in cost structure?

Which industries would be most affected by this change?

Gino’s Restaurant is a popular restaurant in Boston, Massachusetts. The owner of the restaurant has been trying to better understand costs at the restaurant and has hired a student intern to conduct an activity-based costing study. The intern, in consultation with the owner, identified the following major activities:

A group of diners who ask to sit at the same table is counted as a party. Some costs, such as the costs of cleaning linen, are the same whether one person is at a table or the table is full. Other costs, such as washing dishes, depend on the number of diners served.

Data concerning these activities are shown below:

Prior to the activity-based costing study, the owner knew very little about the costs of the restaurant. She knew that the total cost for the month was $223,600 and that 20,000 diners had been served. Therefore, the average cost per diner was $11.18 ($223,600 ÷ 20,000 diners = $11.18 per diner).

Compute the activity rates for each of the three activities. (Round your answers to 2 decimal places.)

REQUIRED 1

According to the activity-based costing system, what is the total cost of serving each of the following parties of diners? (Round your intermediate calculations and final answers to 2 decimal places.)

• Required 1
• Required 2
• Required 3

Convert the total costs you computed in part (2) above to costs per diner. In other words, what is the average cost per diner for serving each of the following parties? (Round your intermediate calculations and final answers to 2 decimal places.)

Match the definition to the proper term.

Group of answer choices

The sales level at which operating income is zero: Total revenues = Total expenses.

      [ Choose ]            unit contribution margin            contribution margin ratio            operating leverage            sensitivity analysis            net income            breakeven point            margin of safety            contribution margin income statement            gross margin            total contribution margin            cost-volume-profit (CVP) analysis      

Sales revenue minus variable expenses.

      [ Choose ]            unit contribution margin            contribution margin ratio            operating leverage            sensitivity analysis            net income            breakeven point            margin of safety            contribution margin income statement            gross margin            total contribution margin            cost-volume-profit (CVP) analysis      

An income statement that groups costs by behavior rather than function; it can be used only by internal management.

      [ Choose ]            unit contribution margin            contribution margin ratio            operating leverage            sensitivity analysis            net income            breakeven point            margin of safety            contribution margin income statement            gross margin            total contribution margin            cost-volume-profit (CVP) analysis      

Expresses the relationships among costs, volume, and profit or loss

      [ Choose ]            unit contribution margin            contribution margin ratio            operating leverage            sensitivity analysis            net income            breakeven point            margin of safety            contribution margin income statement            gross margin            total contribution margin            cost-volume-profit (CVP) analysis      

A “what-if” technique that asks what results will be if actual prices or costs change or if an underlying assumption changes.

      [ Choose ]            unit contribution margin            contribution margin ratio            operating leverage            sensitivity analysis            net income            breakeven point            margin of safety            contribution margin income statement            gross margin            total contribution margin            cost-volume-profit (CVP) analysis      

The excess of the unit sales price over the variable cost per unit

      [ Choose ]            unit contribution margin            contribution margin ratio            operating leverage            sensitivity analysis            net income            breakeven point            margin of safety            contribution margin income statement            gross margin            total contribution margin            cost-volume-profit (CVP) analysis      

Ratio of contribution margin to sales revenue.

      [ Choose ]            unit contribution margin            contribution margin ratio            operating leverage            sensitivity analysis            net income            breakeven point            margin of safety            contribution margin income statement            gross margin            total contribution margin            cost-volume-profit (CVP) analysis      

Excess of expected sales over breakeven sales

At the end of February, after the second month of operations of Able Baker Charlie Company, Charles shows you the data he’s collected, but he was unable to figure out some of the amounts. Review the following data and fill in the missing amounts on the chart for Able Baker Charlie Company. Note: It may be helpful to use T accounts to map the flow of the amounts through the manufacturing accounts and solve for the missing dollar values. It may also be helpful to review the steps for determining the cost of materials used, total manufacturing cost incurred, and cost of goods manufactured.

At the end of February, after the second month of operations of Able Baker Charlie Company, Charles shows you the data he’s collected, but he was unable to figure out some of the amounts. Review the following data and fill in the missing amounts on the chart for Able Baker Charlie Company. Note: It may be helpful to use T accounts to map the flow of the amounts through the manufacturing accounts and solve for the missing dollar values. It may also be helpful to review the steps for determining the cost of materials used, total manufacturing cost incurred, and cost of goods manufactured.

Perfectly competitive industries are:

Group of answer choices

A. difficult to enter because there are already so many producers in the industry.

B. not particularly appealing or attractive to enter because there tend to be so many buyers that it is difficult to deal with them.

C. relatively easy to enter but not so easy to exit from.

D. none of the above

A perfectly competitive firm should increase its level of production as long as

Group of answer choices

A. total revenue is less than total cost.

B. the total revenue curve is rising.

C. marginal revenue is greater than marginal cost.

D. the marginal revenue curve is rising.

If firms are earning zero economic profits, they must be producing at an output level at which:

Group of answer choices

A. price equals marginal cost.

B. price equals average total cost.

C. price equals average variable cost.

D. marginal revenue equals marginal cost.

Which of the following is a characteristic of perfect competition?

Group of answer choices

A. many sellers and few buyers

B. many buyers and few sellers

C. a homogeneous product

D. high barriers to entry and exit

In a perfectly competitive market, the market demand curve is perfectly elastic.

Group of answer choices

A. True

B. False

After reading an article about activity-based costing in a trade journal for the furniture industry, Santana Rey wondered if it was time to critically analyze overhead costs at Business Solutions. In a recent month, Santana found that setup costs, inspection costs, and utility costs made up most of its overhead. Additional information about overhead follows.

Overhead has been applied to output at a rate of 50% of direct labor costs. The following data pertain to Job 615.

Required:
1. Classify each of its three overhead activities as unit level, batch level, product level, or facility level.
  

2. What is the total cost of Job 615 if Business Solutions applies overhead at 50% of direct labor cost?
  

3. What is the total cost of Job 615 if Business Solutions uses activity-based costing?

At the end of February, after the second month of operations of Able Baker Charlie Company, Charles shows you the data he’s collected, but he was unable to figure out some of the amounts. Review the following data and fill in the missing amounts on the chart for Able Baker Charlie Company. Note: It may be helpful to use T accounts to map the flow of the amounts through the manufacturing accounts and solve for the missing dollar values. It may also be helpful to review the steps for determining the cost of materials used, total manufacturing cost incurred, and cost of goods manufactured.

Cain Components manufactures and distributes various plumbing products used in homes and other buildings. Over time, the production staff has noticed that products they considered easy to make were difficult to sell at margins considered reasonable, while products that seemed to take a lot of staff time were selling well despite recent price increases. A summer intern has suggested that the cost system might be providing misleading information.

The controller decided that a good summer project for the intern would be to develop, in one self-contained area of the plant, an alternative cost system with which to compare the current system. The intern identified the following cost pools and, after discussion with some plant personnel, appropriate cost drivers for each pool. There were:

In this particular area, Cain produces two of its many products: Standard and Deluxe. The following are data for production for the latest full year of operations.

Required:

a. The current cost accounting system charges overhead to products based on machine-hours. What unit product costs will be reported for the two products if the current cost system continues to be used?

Direct Costs: Standard? Deluxe?

Overhead: Standard? Deluxe?

Number of Units: Standard? Deluxe?

b. The intern suggests an ABC system using the cost drivers identified above. What unit product costs will be reported for the two products if the ABC system is used?

Direct Costs: Standard? Deluxe?

Receiving: Standard? Deluxe?

Manufacturing: Standard? Deluxe?

Machine Set Up: Standard? Deluxe?

Shipping: Standard? Deluxe?

Number of Units: Standard? Deluxe?

Fanning Electronics produces video games in three market categories: commercial, home, and miniature. Fanning has traditionally allocated overhead costs to the three products using the companywide allocation base of direct labor hours. The company recently implemented an ABC system when it installed computer-controlled assembly stations that rendered the traditional costing system ineffective. In implementing the ABC system, the company identified the following activity cost pools and cost drivers:

     
Additional data for each of the product lines follow:     

    
Required

1. Determine the total cost and cost per unit for each product line, assuming that overhead costs are allocated to each product line using direct labor hours as a companywide allocation base. Also determine the combined cost of all three product lines.

2. Determine the total cost and cost per unit for each product line, assuming that an ABC system is used to allocate overhead costs. Determine the combined cost of all three product lines.

(For all requirements, round intermediate calculations for allocation rates to 2 decimal places and all other calculations to the nearest whole dollar. Round "Cost per Unit" to 2 decimal places. Round your answers for "Total Cost" to the nearest whole dollar amount.)