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Short Quiz (Based on Lecture 4 – Target Costing and Activity-Based Management)

1. Customer profitability analysis helps management see the overall financial picture
for each customer and how management can use this information to help establish a
strategic plan for the coming periods.
True False

2. Which of the following is an example of a value-added-activity?


(a) Storing excess inventory for future sales
(b) Manual data entry
(c) Making customer contacts and sales
(d) Reworking faulty products

3. Chelsea Toy Manufacturing has recently performed an activity-based costing analysis


of one of its best-selling toys, the Main Man Robot. The analysis shows the following
estimated monthly cost per 1,000 unit production run:

Chelsea's management has targeted a required return of 20% of monthly revenues.


To achieve its objective, Chelsea's monthly cost reduction target is:
(a) £60,000
(b) £10,000
(c) £50,000
(d) £0 – the company has already achieved its required rate of return of 20%

Required rate of return 20%: £300,000 x 20% = £60,000


Target Cost: £300,000-£60,000 = £240,000
Current feasible cost – target cost: £250,000-£240,000 = £10,000
4. To achieve a required return of 30% of monthly revenues, the percent cost reduction
target is:
(a) 36%
(b) 13.3%
(c) 16%
(d) 2%

£300,000 x 0.3 = £90,000

£300,000-£90,000 = £210,000

£250,000-£210,000 = £40,000

£40,000/£250,000 x 100 = 16%

5. Assume that, due to excess demand, Chelsea is able to raise the selling price on Main
Man Robot 10%. To achieve a return of 30% of total revenues, Chelsea's monthly
cost reduction in pounds will need to be:
(a) £0 - the increased sales eliminate the need for cost reduction
(b) £19,000
(c) £25,000
(d) £33,000

£300,000 x 1.1 = £330,000

£330,000 x 0.3 = £99,000

£330,000 - £99,000 = £231,000

£250,000-£231,000 = £19,000

6. Which of the following statements in FALSE?


(a) Activity-based management has a goal of elimination all non-value added
activities
(b) An activity is value added if an external customer would encourage the
organisation to do more of that activity
(c) An organisation will be more likely to reach its goal by performing value-added
activities
(d) Some activities lie between the extremes of values added and non-value-added
7. Which of the following is NOT a step in Activity-based management?
(a) Score each activity as high or low value-added as perceived by the customer
(b) Calculate a cost-driver rate for each activity
(c) Identify the opportunities to enhance value-added activities
(d) Identify activities as value-added or non-value added

8. Activity-Based Costing evaluates the costs and values of process activities to identify
opportunities for improved efficiency.
True False

It is Activity Based Management

9. Target cost is the selling price assigned to a product or service that allows the
company to achieve a desired gross profit level.
True False

Target cost is the highest cost of good or service that meets both customer needs
and company profit goals.

10. Simply eliminating non-value-added activities without redesigning processes is


unlikely to result in long-term benefits.
True False

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