Professional Documents
Culture Documents
7-1
Activity-based costing differs from
traditional costing systems in a number of
ways. In activity-based costing,
nonmanufacturing as well as manufacturing
costs may be assigned to products. And,
some manufacturing costsincluding the
costs of idle capacitymay be excluded
from product costs. An activity-based
costing system typically includes a number
of activity cost pools, each of which has its
unique measure of activity. These measures
of activity often differ from the allocation
bases used in traditional costing systems.
7-4
Unit-level activities are performed
for each unit that is produced. Batch-level
activities are performed for each batch
regardless of how many units are in the
batch. Product-level activities must be
carried out to support a product regardless
of how many batches are run or units
produced. Customer-level activities must be
carried out to support customers regardless
of what products or services they buy.
Organization-sustaining activities are
carried out regardless of the companys
precise product mix or mix of customers.
7-2
When direct labor is used as an
allocation base for overhead, it is implicitly
assumed that overhead cost is directly
proportional to direct labor. When cost
systems were originally developed in the
1800s, this assumption may have been
reasonably accurate. However, direct labor
has declined in importance over the years
while overhead has been increasing. This
suggests that there is no longer a direct link
between the level of direct labor and
overhead. Indeed, when a company
automates, direct labor is replaced by
machines; a decrease in direct labor is
accompanied by an increase in overhead.
This violates the assumption that overhead
cost is directly proportional to direct labor.
Overhead cost appears to be driven by
factors such as product diversity and
complexity as well as by volume, for which
direct labor has served as a convenient
measure.
7-5
Organization-sustaining costs,
customer-level costs, and the costs of idle
capacity should not be assigned to
products. These costs represent resources
that are not consumed by the products.
7-3
Top managers provide leadership
that is needed to properly motivate all
employees to embrace the need to
implement ABC. Top managers also have
the authority to link ABC data to the
employee evaluation and reward system.
Cross-functional employees are also
important because they possess intimate
knowledge of operations that is needed to
design an effective ABC system. Tapping
the knowledge of cross-functional
employees also lessens their resistance to
ABC because they feel included in the
implementation process.
7-6
In activity-based costing, costs must
first be allocated to activity cost pools and
then they are allocated from the activity
cost pools to products, customers, and
other cost objects.
7-7
Because people are often involved in
more than one activity, some way must be
found to estimate how much time they
spend in each activity. The most practical
approach is often to ask employees how
they spend their time. It is also possible to
ask people to keep records of how they
spend their time or observe them as they
perform their tasks, but both of these
alternatives are costly and it is not obvious
that the data would be any better. People
who know they are being observed may
change how they behave.
7-8
In traditional cost systems, productlevel costs are indiscriminately spread
across all products using direct labor-hours
or some other allocation base related to
volume. As a consequence, high-volume
products are assigned the bulk of such
costs. If a product is responsible for 40% of
the direct labor in a factory, it will be
assigned 40% of the manufacturing
overhead cost in the factoryincluding
40% of the product-level costs of lowvolume products. In an activity-based
costing system, batch-level and product-
The Foundational 15
1. The plantwide overhead rate is computed as follows:
Total estimated overhead cost (a)......
$684,000
12,000 DLHs
$57.00
per DLH
Product Z
8,000
4,000
$57.00
$57.00
$456,000
$228,000
3-6.
The activity rates are computed as follows:
(a)
Estimate
d
Overhea
d
(b)
(a) (b)
Expected
Activity
Cost
Activity
Rate
$200,000 10,00
Machining............
0 MH
$20 per MH
$84,000
200 setups
$42,00 per
2 products
0 product
$300,000 12,00
General factory....
0 DLHs
Product Z
Expected
Activity
Amount
Activity
7,000
$140,00
0
3,000
$ 60,00
0
50
25,000
150
75,000
42,000
42,000
8,000
200,000
4,000
100,000
$407,00
0
Amount
$277,00
0
(a)
(c)
Product Z
(b)
(c)
Plantwide Approach
Amount
Manufacturing overhead...
$456,00
0
66.7% $228,00
0
33.3%
$684,000
Machining.........................
$140,00
0
70.0%
$ 60,00
0
30.0%
$200,000
Machine setups.................
25,000
25.0%
75,000
75.0%
100,000
Product design..................
42,000
50.0%
42,000
50.0%
84,000
General factory.................
200,000
66.7% 100,000
33.3%
300,000
$407,00
0
$277,00
0
Amount
(b)
(c)
Total
Amount
Activity-Based Costing
System
$684,000
The Machining allocation percentages used in the ABC system are similar to the
plantwide allocation percentages because the Machining cost pool uses a unit-level
activity measure (machine-hours). Since the plantwide cost pool also uses a unit-level
allocation base (direct labor-hours), it is reasonable to expect these cost allocations
percentages to be comparable.
Under the ABC system, 25% and 75% of the Machine Setups cost is allocated to Products
Y and Z, respectively, whereas the plantwide approach allocates 67% and 33% of all
overhead costs to the two products. These allocation percentages are different because
Machine Setups is a batch-level cost pool. Although Product Y is the high-volume product
(14,000 units) and Product Z is the low-volume product (6,000 units), Product Y only
consumes 25% of the total machine setups and Product Z consumes 75% of the total
machine setups. The conventional system is allocating too much of the machine setup
costs to Product Y and too little of these costs to Product Z.
Batch-level
Productlevel
c.
Unit-level
d.
Organizatio
nsustaining
Productlevel
Organizatio
nsustaining
b.
e.
f.
g.
Organizatio
nsustaining
h.
Batch-level
Custom
er
Service
Other
Totals
$252,0
00
$ 72,00
0
$ 36,00
0
$ 720,00
0
14,000
70,000
280,000
18,000
30,000
120,000
16,000
160,000
Travel
144,00
0
Office expenses...............................
6,000
9,000
15,000
30,000
16,00
0
192,00
0
112,00
0
320,00
0
$306,0
00
$417,0
00
$279,0
00
$1,630,0
00
Administrative expenses..................
Each entry in the table is derived by multiplying the total cost for the cost category by the
percentage taken from the table below that shows the distribution of resource
consumption:
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Solutions Manual, Chapter 7
11
Travel
Pickup
and
Deliver
y
Custom
er
Service
Other
Totals
50%
35%
10%
5%
100%
70%
5%
0%
25%
100%
Vehicle depreciation........................
60%
15%
0%
25%
100%
0%
0%
90%
10%
100%
Office expenses...............................
0%
20%
30%
50%
100%
Administrative expenses..................
0%
5%
60%
35%
100%
Estimat
ed
Overhe
ad Cost
$72,00
0
$26,40
0
$1.3
2 per square foot of
low maintenance
beds
$41,40
0
$2.7
6 per square foot of
high maintenance
beds
$3,250
12,500
$0.2
6 per mile
$8,750
25
Expected Activity
miles
Activity Rate
$35
0 per customer
customers
The activity rate for each activity cost pool is computed by dividing its estimated overhead
cost by its expected activity.
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Solutions Manual, Chapter 7
13
Activity Rate
Activity
80
$6
Machine processing..........
$4
per machine-hour
Machine setups................
$50
per setup
setups
50
Production orders.............
$90
per order
order
90
Shipments........................
$14
per shipment
shipment
14
Product sustaining............
$84
0
per product
product
100
direct laborhours
ABC
Cost
machine-hours
Total.................................
$ 480
400
840
$1,874
M67
Activity Cost Pool
Activity Rate
$6
Machine processing..........
$4
per machine-hour
Activity
500
1,50
direct laborhours
machine-hours
ABC
Cost
$ 3,000
6,000
0
Machine setups................
$50
per setup
setups
200
Production orders.............
$90
per order
orders
360
Shipments........................
$14
per shipment
shipments
140
Product sustaining............
$84
0
per product
product
840
10
1
Total.................................
$10,54
0
15
$44,20
0
Costs:
Direct materials ($564 per standard model
glider 20 standard model gliders +
$634 per custom
designed glider 3 custom designed
$13,18
gliders)........................................................
2
Direct labor ($19.50 per direct labor-hour
26.35 direct labor-hours per standard
model glider 20 standard model gliders
+ $19.50 per direct labor-hour 28 direct
labor-hours per custom designed glider
3 custom designed gliders)......................... 11,915
Supporting direct labor ($26 per direct
labor-hour 26.35 direct labor-hours per
standard model glider 20 standard
model gliders + $26 per direct labor-hour
28 direct labor-hours per custom
designed glider 3 custom designed
gliders)........................................................ 15,886
Order processing ($284 per order 4
orders)........................................................
1,136
558
379
43,05
6
$ 1,14
4
16
Activity
Sales representatives periodic visits
to customers to keep them
a.
informed about the services
provided by CD Express.
b.
Level
Customer-level
Product-level
Batch-level
Batch-level
Unit-level
f.
Product-level
Organizationsustaining
h.
Organizationsustaining
i.
Organizationsustaining
g.
17
$75,000
$80,000
Opening
Account
s
Processing
Deposits
and
Withdrawal
s
Processing
Other
Customer
Transaction
Other
s
Activities
Totals
Teller wages............................
5%
65%
20%
10%
100%
15%
5%
30%
50%
100%
5%
0%
10%
85%
100%
Processing Processing
Deposits
Other
Opening
and
Customer
Account Withdrawal Transaction
Other
s
s
s
Activities
Teller wages............................ $ 8,000
Assistant branch manager
salary....................................
Branch manager salary...........
$104,000
$32,000
$ 16,00
0
3,750
22,500
37,500
75,000
8,000
68,00
0
80,00
0
$62,500
$121,50
0
$315,00
0
11,250
4,000
Totals
0
$107,750
$160,00
0
Teller wages are $160,000 and 65% of the tellers time is spent processing deposits and
withdrawals:
$160,000 65% = $104,000.
Other entries in the table are determined similarly.
19
(a)
Total
Cost
Opening accounts..........................
$23,250
(b)
Total Activity
(a) (b)
Activity Rate
500 accounts
opened
$62,500
5,000 other
$12.5 per other
customer
0 customer
transactions
transaction
2. The cost of opening an account at the Westfield branch is much higher than at the lowest
cost branch ($46.50 versus $26.75). On the other hand, the cost of processing deposits
and withdrawals is lower than at the lowest cost branch ($1.08 versus $1.24). And the
cost of processing other customer transactions is higher at the Westfield branch ($12.50
versus $11.86). The other branches may have something to learn from Westfield
concerning processing deposits and withdrawals and Westfield may benefit from learning
about how some of the other branches open accounts and process other transactions. It
may be particularly instructive to compare the details of the activity rates. For example,
is the cost of opening accounts at Westfield high because of the involvement of the
assistant branch manager in this activity? Perhaps tellers open new accounts at other
branches.
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Solutions Manual, Chapter 7
20
The apparent differences in the costs of the activities at the various branches may be
due to inaccuracies in employees reports of the amount of time they devote to the
activities. The differences in costs may also reflect different strategies. For example, the
Westfield branch may purposely spend more time with new customers in order to win
their loyalty. The higher cost of opening new accounts at the Westfield branch may be
justified by future benefits of having more satisfied customers. Nevertheless,
comparative studies of the costs of activities may provide a useful starting point for
identifying best practices within a company and where improvements can be made.
Exercise 7-9 (10 minutes)
Activity Cost
Pool
(a)
Activity Rate
Order size........
(b)
Activity
(a) (b)
ABC
Cost
$3,370
Customer
orders...........
1 customer order
320
Product testing
product testing
4 hours
356
Selling.............
2 sales calls
Total................
$6,226
2,180
21
According to these calculations, the total overhead cost of the order was $6,226.
22
University
Cost of goods sold to the hospital (a)
$30,000
$30,000
5%
5%
$1,500
$1,500
$31,500
$31,500
Markup percentage
Markup in dollars (b)
Revenue received from hospitals (a)
+ (b)
Memorial
2. Activity Rates:
(a)
Estimated
Overhead
Activity Cost Pool
Cost
(b)
(a) (b)
Expected
Activity
Activity
rate
23
Customer deliveries
$500,000
5,000 deliverie
s
Manual order
processing
$248,000
4,000 orders
Electronic order
processing
24
(a)
Activity Rate
(b)
Activity
10 deliveries
(a)
(b)
ABC
Cost
$1,000
Manual order
$62.00 per order
processing......................
0 orders
Electronic order
$16.00 per order
processing......................
15 orders
240
12 line items
0
120
$1,360
Memorial:
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Solutions Manual, Chapter 7
25
(a)
Activity Rate
(b)
Activity
(a) (b)
ABC
Cost
25 deliverie
s
$ 2,500
Manual order
$62.00 per order
processing......................
30 orders
Electronic order
$16.00 per order
processing......................
0 orders
1,860
0
250 line
items
250
$4,610
26
University
Memorial
Sales................................................
$31,500
$31,500
30,000
30,000
Gross margin....................................
1,500
1,500
Customer deliveries.........................
1,000
2,500
1,860
240
120
250
1,360
4,610
Customer margin.............................
140
$(3,110)
27
$20,000.00
Costs:
Direct materials ($8.50 per unit 1,000
units)...................................................... $8,500.00
Direct labor ($6.00 per unit 1,000
units)......................................................
6,000.00
1,387.50
214.00
275.00
2,463.00
18,839.5
0
$ 1,160.5
0
28
Classificati
on
Unit
Examples of Activity
Measures
Direct labor-hours
Product
Batch
Unit
Number of units
processed; machinehours
Unit
Number of loads
transferred; time spent
moving materials
Number of units
inspected; Inspection
hours
Notes:
1. In all cases except for direct labor in part (a), two activity
measures are listed. The first is a transaction driver and the
second is a duration driver. Transaction drivers are simple
counts of the number of times an activity occurs such as the
number of times materials are moved. Duration drivers are
measures of the amount of time required to perform an activity
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Solutions Manual, Chapter 7
29
30
Overhea
d
(b)
(a) (b)
Expected
Activity
Cost
Activity
Rate
$72,000
setup
400 s
$180 per setup
Special
processing........ $200,000 5,000 MHs
$40 per MH
There is no activity rate for the General Factory activity because it is an organizationsustaining activity. Organization-sustaining costs should not be allocated to products.
31
(a)
Activity Rate
$180 per
setup
$40 per MH
(b)
Activity
(a) (b)
ABC Cost
Total..................................
200,000
$218,000
Sprockets:
Activity Cost Pool
Machine setups.................
Special processing............
Total..................................
(a)
Activity Rate
$180 per
setup
$40 per MH
(b)
Activity
300 setups
0 MHs
(a) (b)
ABC Cost
$54,000
0
$54,000
Sprocket
s
$18.00
Direct labor:
$15 per DLH 0.80 DLHs per
unit...........................................
12.00
6.00
Overhead:
$218,000 10,000 units.............
21.80
1.35
$25.35
33
Activity Cost
Pools
Serving parties....
(b)
Total Activity
(a) (b)
Activity Rate
Serving drinks.....
(a)
Activity Rate
(b)
Activity
(a) (b)
ABC Cost
$ 5.50
36.80
3 drinks
Total....................
7.20
$49.50
34
Activity Cost
Pool
(a)
Activity Rate
(b)
Activity
(a) (b)
ABC Cost
$ 5.50
18.40
0 drinks
Total....................
0
$23.90
(a)
Activity Rate
(b)
Activity
(a) (b)
ABC Cost
$ 5.50
9.20
4.80
2 drinks
Total....................
$19.50
35
3. The average cost per diner differs from party to party under the
activity-based costing system for two reasons. First, the cost of
serving a party ($5.50) does not depend on the number of
diners in the party. Therefore, the average cost per diner of this
activity decreases as the number of diners in the party
increases. With only one diner, the cost is $5.50. With two
diners, the average cost per diner is cut in half to $2.75. With
five diners, the average cost per diner would be only $1.10,
and so on. Second, the average cost per diner differs also
because of the differences in the number of drinks ordered by
the diners. If a party does not order any drinks, as was the case
with the party of two, no costs of serving drinks are assigned to
the party.
The average cost per diner differs from the overall average cost
of $16 per diner for several reasons. First, the average cost of
$16 per diner includes organization-sustaining costs that are
excluded from the computations in the activity-based costing
system. Second, the $16 per diner figure does not recognize
differences in the diners demands on resources. It does not
recognize that some diners order more drinks than others nor
does it recognize the economies of scale in serving larger
parties. (The batch-level costs of serving a party can be spread
over more diners if the party is larger.)
We should note that the activity-based costing system itself
does not recognize all of the differences in diners demands on
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Solutions Manual, Chapter 7
36
37
Other
Totals
40%
30%
20%
10%
100%
30%
10%
20%
40%
100%
Other
Totals
Direct
Labor
Support
Order
Processin Custome
g
r Support
$120,000
$ 90,000
30,000
10,000
Total cost.....................
$150,000 $100,000
40,000
100,000
Activity Cost
Pools
Supporting direct
labor...................
(a)
Total
Cost
(b)
Total Activity
(a) (b)
Activity Rate
400 orders
Customer support.
200 customers
$80,000
39
(a)
Activity Rate
(b)
Activity
(a) (b)
ABC Cost
20 DLHs*
$150
1 order
250
Customer
support
custom
1 er
400
per
$400 customer
Total..................
$800
$3,000
Costs:
Direct materials ($180 per unit 10
units)..................................................
$1,800
500
150
250
400
3,100
$ (100)
41
$608,000
= $2.00 per DL$
$304,000
T500
Total
Sales................................
$1,400,0
00
$700,000
$2,100,00
0
Direct materials...............
436,300
251,700
688,000
Direct labor......................
200,000
104,000
304,000
Manufacturing overhead
applied @ $2.00 per
direct labor-dollar..........
400,000
208,000
608,000
1,036,30
0
563,700
1,600,000
Product margin.................
$ 363,70
0
$136,300
$ 500,000
Activity Cost
Pools
(a)
Total
Cost
(b)
Total Activity
(a) (b)
Activity Rate
$1.40 per MHR
375 setup
hrs.
T500
Total
$700,000
$2,100,00
0
Direct materials...............
436,300
251,700
688,000
Direct labor......................
200,000
104,000
304,000
Advertising expense.........
50,000
100,000
150,000
Machining........................
126,000
87,500
213,500
Setups..............................
31,500
126,000
157,500
Product sustaining............
60,000
60,000
120,000
43
Total cost..........................
903,800
729,200
1,633,000
$(29,200)
$ 467,000
B300
Traditional Cost System
Direct materials
T500
(a)
(a) (c)
(b)
Amount
Amount
Total
(b)
(c)
%
(c)
Amount
$436,300
63.4%
$251,70
0
36.6%
$
688,000
Direct labor
200,000
65.8%
104,000
34.2%
304,000
Manufacturing overhead
400,000
65.8%
208,00
0
34.2%
608,00
0
$1,036,3
00
$563,700
$1,600,000
550,000
Total cost
$2,150,000
45
Activity-Based Costing
System
Direct costs:
Direct materials
$436,300
63.4%
$251,70
0
36.6%
$ 688,00
0
200,000
65.8%
104,000
34.2%
304,000
50,000
33.3%
100,000
66.7%
150,000
126,000
59.0%
87,500
41.0%
213,500
Setups
31,500
20.0%
126,000
80.0%
157,500
Product sustaining
60,000
50.0%
60,000
50.0%
120,000
Direct labor
Advertising expense
Indirect costs:
Machining
$903,800
$729,200
1,633,000
400,000
Other
117,000
Total cost
$2,150,000
46
47
$1,980,000
= $16.50 per DLH
120,000 DLHs*
Pathfinder
Total
Sales................................
$2,800,0
00
$7,920,00
0
$10,720,0
00
Direct materials...............
1,440,00
0
4,240,000
5,680,000
Direct labor......................
480,000
960,000
1,440,000
Manufacturing overhead
applied @ $16.50 per
direct labor-hour............
660,00
0
1,320,00
0
1,980,00
0
2,580,00
0
6,520,00
0
9,100,00
0
Product margin.................
$ 220,00
0
$1,400,00
0
$ 1,620,00
0
49
Activity Cost
Pools
Supporting direct
labor...............
(a)
Total
Cost
(b)
Total Activity
(a) (b)
Activity Rate
300 setups
Pathfinder
Total
Sales..............................
$2,800,00
0
$7,920,00
0
$10,720,0
00
Direct materials.............
1,440,000
4,240,000
5,680,000
Direct labor....................
480,000
960,000
1,440,000
261,200
522,400
783,600
Batch setups..................
330,000
165,000
495,000
Product sustaining.........
301,200
301,20
602,40
Total cost.......................
Product margin..............
6,188,60
0
9,001,00
0
$1,731,40
0
$ 1,719,00
0
2,812,400
$ (12,400)
51
Xtreme
Traditional Cost System
(a)
Pathfinder
(a)
(c)
Amount
(b)
Amount
(b)
(c)
%
(c)
Amount
Direct materials...................
$1,440,0
00
25.4%
$4,240,0
00
74.6%
$5,680,0
00
Direct labor.........................
480,000
33.3%
960,000
66.7%
1,440,00
0
Manufacturing overhead......
660,00
0
33.3%
1,320,0
00
66.7%
1,980,00
0
$2,580,0
00
$6,520,0
00
Activity-Based Costing
System
Direct costs:
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52
Total
$9,100,0
00
Direct materials...................
$1,440,0
00
25.4%
$4,240,0
00
74.6%
$5,680,0
00
Direct labor.........................
480,000
33.3%
960,000
66.7%
1,440,00
0
261,200
33.3%
522,400
66.7%
783,600
Batch setups.......................
330,000
66.7%
165,000
33.3%
495,000
Product sustaining...............
301,20
0
50.0%
301,20
0
50.0%
602,40
0
$2,812,4
00
Indirect costs:
$6,188,6
00
9,001,00
0
99,00
0
Total cost.............................
$9,100,0
00
Job Size
Estimatin
g and Job
Setup
Other
Totals
$ 90,000
$ 30,000
$ 300,00
0
280,000
700,000
$150,00
Wages and salaries.....
0 $ 30,000
Disposal fees............... 420,000
Working
on
Nonroutin
e Jobs
Equipment
depreciation.............
36,000
4,500
18,000
31,500
90,000
On-site supplies..........
30,000
15,000
5,000
50,000
Office expenses..........
20,000
70,000
50,000
60,000
200,000
Licensing and
insurance..................
120,00
0
200,000
80,000
400,000
$643,000
$201,50
0
$1,740,00
0
$776,00
Total cost.....................
0 $119,500
According to the data in the problem, 50% of the wages and salaries cost of $300,000 is
attributable to activities related to job size.
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Solutions Manual, Chapter 7
55
2.
Activity Cost
Pool
Job size...............
(a)
Total Cost
(b)
Total Activity
thousand square
$776,000 800 feet
Estimating and
job setup.......... $119,500 500 jobs
Working on
nonroutine
jobs.................. $643,000 100 nonroutine jobs
(a) (b)
Activity Rate
per thousand square
$970 feet
$239 per job
a.
b.
$ 970.00
239.00
$1,209.00
$1,209.00
$1,940.00
239.00
$2,179.00
57
c.
$1,940.00
239.00
Nonroutine job..........................................................................
6,430.00
$8,609.00
$4,304.50
$1,089.50
59
(a)
Activity Rate
(b)
Activity
(a) (b)
ABC Cost
Animation concept....
25 proposals
Animation production
5 minutes
38,625
Contract
administration........
10 contracts
68,000
$151,000
$257,625
2. The margin earned serving the local commercial market is negative, as shown below:
Profitability Analysis
Sales...............................................
$180,00
0
Costs:
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60
$151,00
Animation concept........................
0
Animation production....................
38,625
Contract administration.................
68,00
0
Margin.............................................
257,62
5
$(77,62
5)
3. It appears that the local commercial market is losing money and the company would be
better off dropping this market segment. However, as discussed in the previous problem,
not all of the costs included above may be avoidable. If more than $77,625 of the total
costs of $257,625 is not avoidable, then the company really isnt losing money on the
local commercial market and the segment should not be dropped. These issues will be
discussed in more depth in Chapters 12 and 13.
61
Distribution of Resource
Consumption Across Activity Cost
Pools
Cleanin
g
Carpet
s
Travel
to Jobs
Wages....................................
70%
20%
Cleaning supplies...................
100%
Cleaning equipment
depreciation........................
Job
Suppor
t
Other
Total
0%
10%
100%
0%
0%
0%
100%
80%
0%
0%
20%
100%
Vehicle expenses...................
0%
60%
0%
40%
100%
Office expenses......................
0%
0%
45%
55%
100%
Presidents compensation......
0%
0%
40%
60%
100%
Cleaning
Carpets
Travel
to Jobs
Job
Support
Other
Total
$105,00
Wages.....................................
0
$30,00
0
0 $ 15,000 $150,000
Cleaning supplies....................
40,000
40,000
Cleaning equipment
depreciation.........................
16,000
4,000
20,000
Vehicle expenses....................
48,000
32,000
80,000
Office expenses......................
27,000
33,000
60,000
Presidents compensation.......
32,000
48,000
80,000
$161,00
Total cost.................................
0
$78,00
0 $59,000
$132,00
0 $430,000
63
Activity Cost
Pool
(a)
Total
Cost
(b)
Total Activity
(a) (b)
Activity Rate
Cleaning
$161,000 20,00 hundred
carpets...........
0 square
feet
$8.05 per
hundred
square feet
(a)
Activity Rate
Cleaning
$8.05 per
carpets...........
hundred
square
feet
Travel to jobs. . . . $1.30 per mile
Job support....... $29.5 per job
0
Total..................
(b)
Activity
5 hundred
square feet
(a) (b)
ABC Cost
$ 40.25
75 miles
97.50
1 job
29.50
$167.25
$140.0
0
Costs:
Cleaning carpets... $40.25
Travel to jobs......... 97.50
Job support............ 29.50 167.25
Margin...................
$(27.25)
65
Appendix 7A
ABC Action Analysis
Exercise 7A-1 (20 minutes)
$5,000.0
0
$2,950.0
0
Green margin................................................
2,950.0
0
2,050.00
Yellow costs:
Direct labor (100 clubs 0.3 hour per club
$20.50 per hour)...................................
615.00
Indirect labor...............................................
95.90
Marketing expenses....................................
540.70
Yellow margin................................................
1,251.6
0
798.40
Red costs:
Factory equipment depreciation..................
103.70
Factory administration.................................
259.00
429.00
30.00
821.7
0
$ (23.30)
$2,950.0
0
Direct labor..................................................
615.00
285.40
55.10
114.80
1,003.00 5,023.30
$ (23.30)
Customer
Orders
Product
Testing
Selling
200
direct
laborhours
custome
r
order
product
testin
g
hours
sales
calls
Indirect labor..............
$1,650
$180
$120
Factory depreciation...
1,600
Factory utilities...........
20
Factory administration
Total
Manufacturing
overhead:
$
$1,950
160
1,760
24
48
72
60
180
100
80
1,600
1,780
Depreciation...............
12
80
92
40
40
Selling expenses........
400
400
69
$3,370
$320
$356
$2,180
$6,226
Example: $8.25 per direct labor-hour from the problem statement 200 direct labor-hours
= $1,650
According to these calculations, the overhead cost of the order was $6,226.
$1,950
Factory depreciation.................
1,760
Factory utilities.........................
24
Factory administration..............
180
1,780
Depreciation.............................
92
40
Selling expenses.......................
400
71
$6,226
$3,370
Customer orders.........................
320
Product testing............................
356
Selling.........................................
2,180
$6,226
Supportin
Order
g Direct
Batch
Processin Customer
Labor
Processing
g
Service
Total activity for the order.................
250
Direct
laborhours*
Batches
Order
Customer
Total
Manufacturing overhead:
$ 150.0
Indirect labor....................................
0
$120.00
$ 20.0
0
$ 290.0
0
34.00
1,034.00
Factory administration......................
25.00
14.00
25.00
150.00
214.00
100.00
40.00
160.00
1,600.00
1,900.00
Depreciation.....................................
0.00
6.00
10.00
38.00
54.00
Marketing expenses.........................
112.5
0
0.00
60.0
0
675.00
847.50
73
$1,387.5
Total overhead cost...........................
0
$214.00
$275.0
0
$2,463.0
0
$4,339.5
0
*250 direct labor-hours = 0.25 direct labor-hour per seat 1,000 seats.
$20,000.00
Green costs:
Direct materials (1,000 units $8.50 per
$8,500.0
unit).......................................................
0
Green margin..............................................
8,500.00
11,500.00
Yellow costs:
Direct labor (1,000 units $6.00 per unit). 6,000.00
Indirect labor..............................................
290.00
Marketing expenses...................................
847.50
Yellow margin..............................................
7,137.50
4,362.50
Red costs:
Factory equipment depreciation................. 1,034.00
Factory administration................................
214.00
54.00
3,202.00
$ 1,160.50
75
Order
Processin Custome
g
r Support
Other
Totals
40%
30%
20%
10%
100%
30%
10%
20%
40%
100%
Other
Totals
Direct
Labor
Support
Order
Processin Custome
g
r Support
$120,000
$ 90,000
30,000
10,000
20,000
$150,000 $100,000
$80,000
Total cost...................
100,000
$70,000 $400,000
77
Customer
Support
$6.00
$225.00
$300.00
Other overhead
costs.....................
1.50
25.00
100.00
Total cost.................
$7.50
$250.00
$400.00
1
order
$120.0
Wages and salaries.......
0
$225.0
0
Activity..........................
Custom
er
Support
Total
1
custome
r
$300.0
0
$645.0
0
30.0
0
$150.0
Total cost.......................
0
25.00
100.0
0
155.00
$250.0
0
$400.0
0
$800.0
0
79
$3,000
Costs:
Direct materials ($180 per unit 10
units)..................................................
$1,800
500
150
250
400
Customer margin....................................
3,100
$ (100)
$3,000
Green costs:
Direct materials ($180 per unit 10
units)....................................................
Green margin............................................
$1,800
1,800
1,200
Yellow costs:
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80
500
645
Yellow margin............................................
1,145
55
Red costs:
Other overhead costs (see part 3
above)..................................................
Red margin...............................................
155
155
$ (100)
81
Activity Rates
Animatio
n
Concept
Animatio
n
Productio
n
Contract
Administrati
on
$4,000
$6,000
$1,600
Animation equipment
depreciation...........................
360
1,125
1,440
150
4,800
Supplies costs...........................
120
300
160
Facility costs.............................
120
150
240
Total..........................................
$6,040
$7,725
$6,800
Animation
Animation
Contract
Administratio
83
Total
Activity level.............................
Concept
Production
25
proposals
5 minutes
10 contracts
$30,000
$16,000
$146,00
0
Animation equipment
depreciation...........................
9,000
5,625
14,625
36,000
750
48,000
84,750
Supplies costs...........................
3,000
1,500
1,600
6,100
Facility costs.............................
3,000
750
2,400
6,150
$68,000
$257,62
5
Total cost...................................
$151,000
$38,625
$180,000
Green costs:
Supplies costs............................. $ 6,100
Green margin...............................
6,100
173,900
Yellow costs:
Administrative wages and
salaries...................................
84,750
Yellow margin...............................
84,750
89,150
Red costs:
Technical staff salaries................ 146,000
Animation equipment
depreciation............................
Facility costs................................
14,625
6,150 166,775
Red margin..................................
$(77,625)
85
86