Professional Documents
Culture Documents
Catalogsb
(Unit cost: $295,400/590,800
= $.50 per catalog)................................................
127,150 105,650 62,600 295,400
catalog)....................................................................
a
Retail sales in boxesunit cost:
Small, 2,000$3
Medium, 45,000$3
Large, 178,000$3
b
Catalogs distributedunit cost
c
Catalog salesunit cost
2. The analysis of selling costs shows that small orders cost more than large orders.
This fact could persuade management to market large orders more aggressively
and/or offer discounts for them.
Several restaurant activities are listed in the following table, along with the required
characteristics for each activity. Many other possibilities could be listed, depending on the
level of detail.
Value-Added
or Non-Value-
Activity Description Added Activity Trigger Root Cause
There are many key activities that can be suggested for each business. Some possibilities
are listed below. After each activity, a suggested cost driver is given in parentheses.
1. Activity-based costing results in improved costing accuracy for two reasons. First,
companies that use ABC are not limited to a single driver when allocating costs to
products and activities. Not all costs vary with units, and ABC allows users to select
a host of nonunit-level cost drivers. Second, consumption ratios often differ greatly
among activities. No single cost driver will accurately assign costs for all activities
in this situation.
Information
E-Commerce Systems
Consulting Services
Billings:
3,600 hours x $140 $504,000
2,400 hours x $140 $336,000
Less: Professional staff cost:
3,600 hours x $50 (180,000)
2,400 hours x $50 (120,000)
Administrative cost. (152,704) ( 229,056)
Income $ 63,296 $ 94,944
Activity Application
Activity Cost Driver Rate
Information
E-Commerce Systems
Activity Consulting Services
Staff support:
240 clients x $690... $165,600
60 clients x $690. $ 41,400
In-house computing:
2,900 CH x $29. 84,100
2,100 CH x $29. 60,900
Miscellaneous office charges:
480 CT x $24.80... 11,904
720 CT x $24.80... 17,856
Total . $120,156 $261,604
Information
E-Commerce Systems
Consulting Services
Billings:
3,600 hours x $140.. $504,000
2,400 hours x $140.. $336,000
Less: Professional staff cost:
3,600 hours x $50 (180,000)
2,400 hours x $50 (120,000)
Administrative cost. (120,156) ( 261,604)
Income.. $ 95,844 $ 62,396
Income billings... 28.53% 12.38%
4. Yes, his attitude should change. Even though both services are needed and
professionals are paid the same rate, the income percentages show that e-commerce
consulting provides a higher return per sales dollar than information systems
services (28.53% vs. 12.38%). Thus, all other things being equal, professionals
should spend more time with e-commerce.
5. Probably not. Although both services produce an attractive return for Clark and
Shiffer, the firm is experiencing a very tight labor market and will likely have trouble
finding qualified help. In addition, the professional staff is currently overworked,
which would probably limit the services available to new clients.
2. Activity-based-costing analysis:
Cost
Driver
Quantity Activity Product Activity
Cost for Cost for Line Cost per
Activity Cost Driver Pool Product Product Product Prod. Unit of
Activity Cost Pool Driver Quantity Rate Line Line Line Volume Product
$ $27.00
Machine $310,500 Machine 115,000 2.70 REG 50,000 $135,000 5,000
Related Hours ADV 48,000 129,600 4,000 32.40
GMT 17,000 45,900 1,000 45.90
Total 115,000 $310,500
Material 52,500 Prod. 100 525.00 REG 40 $ 21,000 5,000 4.20
Hand. Runs ADV 40 21,000 4,000 5.25
GMT 20 10,500 1,000 10.50
Total 100 $ 52,500
Purch. 75,000 Purch. 300 250.00 REG 100 $ 25,000 5,000 5.00
Orders ADV 96 24,000 4,000 6.00
GMT 104 26,000 1,000 26.00
Total 300 $ 75,000
Setup 85,000 Prod. 100 850.00 REG 40 $ 34,000 5,000 6.80
Runs ADV 40 34,000 4,000 8.50
GMT 20 17,000 1,000 17.00
Total 100 $ 85,000
Inspect. 27,500 Inspect. 1,100 25.00 REG 400 $ 10,000 5,000 2.00
Hours ADV 400 10,000 4,000 2.50
GMT 300 7,500 1,000 7.50
Total 1,100 $ 27,500
Ship. 66,000 Ship. 1,100 60.00 REG 500 $ 30,000 5,000 6.00
ADV 400 24,000 4,000 6.00
GMT 200 12,000 1,000 12.00
Total 1,100 $ 66,000
Eng. 32,500 Eng. 650 50.00 REG 250 $ 12,500 5,000 2.50
Hours ADV 200 10,000 4,000 2.50
GMT 200 10,000 1,000 10.00
Total 650 $ 32,500
Fac. 575,000 Machine 115,000 5.00 REG 50,000 $250,000 5,000 50.00
Hours ADV 48,000 240,000 4,000 60.00
GMT 17,000 85,000 1,000 85.00
Total 115,000 $575,000
Grand Grand
Total $1,224,000 Total $1,224,000
5. The REG and ADV products were overcosted by the traditional system, and the
GMT product was undercosted by the traditional system
Deluxe Executive
Direct material. $ 40 $ 65
Direct labor.. 25 25
Manufacturing overhead. 160 120
Unit cost $225 $210
Activity Application
Activity Cost Driver Rate
Manufacturing setups:
100 SU x $8,400.. $ 840,000
60 SU x $8,400.. $ 504,000
Machine processing:
32,000 MH x $48... 1,536,000
45,000 MH x $48... 2,160,000
Product shipping:
200 OS x $3,200 640,000
150 OS x $3,200.. 480,000
Total . $3,016,000 $3,144,000
The manufactured cost of a Deluxe cabinet is $253.50, and the manufactured cost
of an Executive cabinet is $194.80. The calculations follow:
Deluxe Executive
3. The Deluxe storage cabinet is undercosted. The use of machine hours produced
a unit cost of $225; in contrast, the more accurate activity-based-costing
approach shows a unit cost of $253.50. The difference between these two
amounts is $28.50.
4. Cost distortion:
The Deluxe cabinet product line is undercosted by $456,000, and the Executive
cabinet product line is overcosted by $456,000. Supporting calculations follow:
Deluxe Executive
*$253.50 $225.00
$194.80 $210.00
5. No, the discount is not advisable. The regular selling price of $270, when
compared against the more accurate ABC cost figure, shows that each sale
provides a profit to the firm of $16.50 ($270.00 - $253.50). However, a $30 discount
will actually produce a loss of $13.50 ($253.50 - $240.00), and the more units that
are sold, the larger the loss. Notice that with the less-accurate, machine-hour-
based figure ($225), the marketing manager will be misled, believing that each
discounted unit sold would boost income by $15 ($240 - $225).
Indirect material.
2. The increase in the overhead rate should not have a negative impact on the
company, because the increase in indirect costs was offset by a decrease in direct
labor.
3. Rather than using a plantwide overhead rate, Digital Light could implement
separate activity cost pools. Examples are as follows:
Separate costs into departmental overhead accounts (or other relevant pools),
with one account for each production and service department. Each
department would allocate its overhead to products on the basis that best
reflects the use of these overhead services.
Treat individual machines as separate cost centers, with the machine costs
collected and charged to the products using machine hours.
Medform Procel
Order processing:
350 OP x $200........................ $ 70,000
250 OP x $200........................ $ 50,000
Machine processing:
23,000 MH x $10.................... 230,000
27,000 MH x $10.................... 270,000
Product inspection:
4,000 IH x $6........................ 24,000
11,000 IH x $6........................ 66,000
Total $324,000 $386,000
The manufactured cost of a Medform unit is $204.60, and the manufactured cost
of a Procel unit is $228.52:
Medform Procel
The traditional costing system overcosts the Procel product line by a total
of $57,750 ($18.48 x 3,125 units), and it undercosts the Medform product
line by the same amount, $57,750 ($23.10 x 2,500 units).
b. Yes, especially since Meditechs selling prices are based heavily on cost.
An overcosted product will result in an inflated selling price, which could
prove detrimental in a highly competitive marketplace. Customers will be
turned off and will go elsewhere, which hurts profitability. With
undercosted products, selling prices may be too low to adequately cover a
products more accurate (higher) cost. This situation is also troublesome
and will result in lower income reported for the company.
1. Valdosta Vinyl Company (VVC) is currently using a plantwide overhead rate that is
applied on the basis of direct-labor dollars. In general, a plantwide manufacturing-
overhead rate is acceptable only if a similar relationship between overhead and direct
labor exists in all departments or the company manufactures products that receive the
same proportional services from each department
2. Because the company uses a plantwide overhead rate applied on the basis of direct-
labor dollars, the elimination of direct labor in the Molding Department through the
introduction of robots may appear to reduce the overhead cost of the Molding
Department to zero. However, this change will not reduce fixed manufacturing costs
such as depreciation and plant supervision. In reality, the use of robots is likely to
increase fixed costs because of increased depreciation. Under the current method of
allocating overhead costs, these costs merely will be absorbed by the remaining
departments.
3. a. In order to improve the allocation of overhead costs in the Cutting and Finishing
departments, management should move toward an activity-based costing system.
The firm should:
Select a cost driver for each activity that best reflects the relationship of the
activity to the overhead costs incurred.
Establish a separate overhead pool and rate for the Molding Department.
Identify fixed and variable overhead costs and establish fixed and variable
overhead rates.
Assigned
Activity Cost Pool Level of Overhead
Pool Rate Cost Driver Cost
Machine setups $4,000 per setup 6 setups $24,000
Material handling $4 per pound 9,000 pounds 36,000
Hazardous waste control $10 per pound 2,100 pounds 21,000
Quality control $150 per inspection 8 inspections 1,200
Other overhead costs $20 per machine 550 machine hours 11,000
hour
Total $93,200
a. Total overhead assigned = $62.50 per machine hr. 550 machine hr.
= $34,375
Assigned
Activity Cost Pool Level of Overhead
Pool Rate Cost Driver Cost
Machine setups $4,000 per setup 4 setups $16,000
Material handling $4 per pound 800 pounds 3,200
Hazardous waste control $10 per pound 400 pounds 4,000
Quality control $150 per inspection 4 inspections 600
Other overhead costs $20 per machine hour 60 machine hours 1,200
Total $25,000
$25,000
Overhead cost per unit $250
100 plates
I: Machine-related costs:
$1,800,000
18,000 machine hrs. = $100 per machine hr.
III. Engineering:
$360,000
200 change orders = $1,800 per change order
I: Machine-related costs:
Odds: $100 per machine hr.8 machine hr. per unit = $800 per unit
Ends: $100 per machine hr.2 machine hr. per unit = $200 per unit
III: Engineering:
$1,800 per change order 200 change orders 75%
Odds:
1,000 units
$270,000
= 1,000 units
= $270 per unit
$1,800 per change order 200 change orders 25%
Ends:
5,000 units
$90,000
= 5,000 units
= $18 per unit
Odds Ends
Direct material......................................................................
$ 160.00 $240.00
Direct labor...........................................................................
120.00 180.00
Manufacturing overhead:
Machine-related.............................................................
800.00 200.00
Setup and inspection.................................................... 360.00 72.00
Engineering...................................................................
270.00 18.00
Plant-related..................................................................
307.20 15.36
Total cost per unit................................................................
$2,017.20 $725.36
Odds Ends
New product cost (ABC)......................................................
$2,017.20 $725.36
120%
Pricing policy........................................................................ 120%
New target price...................................................................
$2,420.64 $870.43 (rounded)
Odds Ends
Manufacturing overhead costs:
Machine-related.............................................................
$ 800.00 $ 200.00
Setup and inspection....................................................360.00 72.00
Engineering....................................................................
270.00 18.00
Plant-related...................................................................
307.20 15.36
Total overhead cost per unit................................................
$1,737.20 $ 305.36
Production volume...........................................................
1,000 5,000
Total overhead assigned......................................................
$1,737,200 $1,526,800
Total = $3,264,000
7. Cost distortion:
Odds Ends
Traditional volume-based costing system:
reported product cost................................................... $ 664.00 $996.00
Activity-based costing system:
reported product cost................................................... 2,017.20 725.36
Amount of cost distortion per unit...................................... $(1,353.20) $270.64
Traditional Traditional
system system
undercosts overcosts
odds by ends by
$1,353.20 $270.64
per unit per unit
2. Again, based on the product costs reported by the firm's traditional, volume-based
product-costing system, product W appears to be very profitable. As in requirement
(1), however, the validity of this assessment depends on the accuracy of the reported
product costs.
3. Gigabyte's competitors have moved aggressively into the market for gismos (product
G), but they have abandoned the whatchamacallit (product W) market to Gigabyte.
These competing firms apparently believe they can sell gismos at a much
lower price than Gigabyte's management feels is feasible. This evidence suggests that
Gigabyte's competitors may believe their product cost for gismos is below Gigabyte's
reported product cost. In contrast, Gigabyte's competitors apparently believe that
they cannot afford to sell whatchamacallits at Gigabyte's current price of $600.
Perhaps the competing firms' reported production costs for product W are higher than
the cost reported by Gigabyte's product-costing system.
The danger to Gigabyte is that the company will be forced out of the market for
its second largest selling product. This could be disastrous to Gigabyte, Inc.
Percentage
Annual of Total
Raw-Material Annual Raw-Material Raw-Material
Product Cost per Unit Volume Cost Cost*
G $105.00 8,000 $ 840,000 25%
T 157.50 15,000 2,362,500 69%
W 52.50 4,000 210,000 6%
Total $3,412,500 100%
a
Machinery:
Product G: ($3,675,000 24%) 8,000 units = $110.25
Product T: ($3,675,000 50%) 15,000 units = $122.50
Product W: ($3,675,000 26%) 4,000 units = $238.88
b
Machine setup:
Product G: ($15,750 22%) 8,000 units = $.43
Product T: ($15,750 30%) 15,000 units = $.32
Product W: ($15,750 48%) 4,000 units = $1.89
c
Inspection:
Product G: ($1,575,000 16%) 8,000 units = $ 31.50
Product T: ($1,575,000 44%) 15,000 units = $ 46.20
Product W: ($1,575,000 40%) 4,000 units = $157.50
d
Material handling:
Product G: ($2,625,000 25%) 8,000 units = $ 82.03
Product T: ($2,625,000 69%) 15,000 units = $120.75
Product W: ($2,625,000 6%) 4,000 units = $ 39.38
e
Engineering:
Product G: ($1,034,250 35%) 8,000 units = $ 45.25
Product T: ($1,034,250 10%) 15,000 units = $ 6.90
Product W: ($1,034,250 55%) 4,000 units = $142.21
RESOURCE COSTS
Assignment of resource costs
to activity cost pools
associated with
Process View significant activities
Activity analysis
1 2 3 4 5 6
7 8 9 10 Activity evaluation
11 12
13 14 15 PERFORMANCE
16
MEASURES
ROOT ACTIVITIES
ACTIVITY (see req. (4) for examples)
CAUSES TRIGGERS
(see req. (3) for (see req. (2) for examples)
examples)
Assignment of activity
costs to cost objects
using second-stage
cost drivers
COST OBJECTS
(Product lines: cooking
utensils, tableware,
flatware)
Activity
Number Trigger
(2) Realization by purchasing personnel that they do not fully understand the
part specifications
(9) Realization by purchasing personnel that the ordered part will be (or may
be) late in arriving
Activity
Number Possible Root Causes*
(2) Unclear specifications
Incomplete specifications
Clear, but apparently wrong, specifications
Undertrained purchasing personnel
(9) Vendor delay
Delay in placing order
Failure by purchasing personnel to make deadline clear
(11) Use of vendor that has not been fully certified as a reliable supplier
Critical importance of parts
(12) Misspecification of parts
Error by purchasing personnel in placing order
Vendor error
Inspector error
(13) Misspecification of parts
Incomplete specifications
Poor product design
Error by purchasing personnel in placing order
Vendor error
*This list is not necessarily complete. Other root causes may exist.
Activity Performance
Number Measures
(5) Average price paid
1. Customer-profitability analysis:
Caltex Trace
Computer Telecom
Customers*
Cumulative
Operating
Income as a
Percentage of
Cumulative Total
Customer Operating Operating Operating
Numbera Customer Income Income Income
2. Memorandum
Date: Today
From: I. M. Student
The attached customer-profitability profile shows that two of our customer relationships
are unprofitable (Tele-Install, Inc. and Trace Telecom). As the profile shows, over half of
our operating income is generated by our two most profitable customer relationships,
and 94 percent of our operating profit is generated by our three most profitable
customers.
An activity-based costing analysis of customer-related costs provided the data for the
customer-profitability analysis portrayed in the profile.
1. Activity-based costing (ABC) differs from traditional costing in that it focuses on activities
that consume resources as the fundamental cost drivers. ABC is a two-stage cost
assignment process focused on causality and the determination of cost drivers. It usually
uses several different activities to assign costs to products or services. Therefore, it is
more detailed and more accurate than traditional costing. It also helps managers
distinguish between value added and non-value added activities.
Material handling...... ($113,208 1.06) [(5 parts 5,000 units) + (10 parts 5,000
units)]
= $120,000* (25,000 parts + 50,000 parts)
= $120,000 75,000 parts = $1.60 per part
*Rounded
*Rounded
Machining................. ($849,056 1.06) (15,000 hours + 30,000 hours)
= $900,000* 45,000 hours = $20 per machine hour
*Rounded
*Rounded
3.
JY-63 JY-63 RX-67 RX-67
Estimated Estimated
20x4 20x5 20x4 20x5
Cost Product Cost Product
Data Cost Data Cost
Direct material:
No cost increase......................... $2,000,000 $3,500,000
Direct labor:
Direct labor $370,370 $185,186
1.08 cost increase*............... 400,000 200,000
Material handling:
Number of parts 5 10
units produced.....................
5,000 5,000
25,000 50,000
$1.60 per unit........................ 40,000 80,000
Inspection:
Inspection hours 5,000 7,500
$20 per hour......................... 100,000 150,000
Machining:
Machining activity in 15,000 30,000
hours
$20 per hour......................... 300,000 600,000
Assembly:
Assembly activity in 6,000 5,500
hours
$40 per hour......................... 240,000 220,000
1.
Regular Advanced Deluxe
Model Model Model
Product costs based on traditional, volume-
based costing system............................... $210.00 $430.00 $464.00
110%.............................................................. 110% 110% 110%
Target price...................................................... $231.00 $473.00 $510.40
a
Pool I:
Depreciation, machinery............................................................... $2,960,000
Maintenance, machinery............................................................... 240,000
Total................................................................................................ $3,200,000
c
Pool III:
Purchasing, receiving, and shipping........................................... $ 500,000
Material handling........................................................................... 800,000
Total................................................................................................ $1,300,000
d
Pool IV:
Depreciation, taxes, and insurance for factory........................... $ 600,000
Miscellaneous manufacturing overhead..................................... 590,000
Total................................................................................................ $1,190,000
3.
Regular Advanced Deluxe
Model Model Model
Product costs based on activity-based
costing system.................................................. $192.02 $875.50 $455.42
110%........................................................................ 110% 110% 110%
New target price........................................................ $211.22 $963.05 $500.96
The new target price of the regular model, $211.22, is lower than the current actual
selling price, $220.
4. MEMORANDUM
Date: Today
Based on the cost data from our traditional, volume-based product-costing system,
our regular model is not very profitable. Its reported actual contribution margin is only
$10 ($220 $210). However, the validity of this conclusion depends on the accuracy of
the product costs reported by our product-costing system. Our competitors are
selling motors like our standard model for $212. This price suggests that their product
cost is substantially below our previously reported cost of $210.
In contrast, our new product-costing system reveals that the advanced model's
product cost is $875.50 instead of the previously reported cost of $430. The new
product cost suggests a target price of $963.05 for the advanced model, rather than
$473, which was our previous target price for the advanced model.
5. The company should adopt and maintain the activity-based costing system. The price
of the regular model should be lowered to the $212. Lowering the price should enable
the firm to regain its competitive position in the market for the regular model. Further
price cuts should be considered if marketing studies indicate such a move will
increase demand.
The price of the advanced model should be set near the target price of $963.05.
If the advanced model does not sell at this price, management should consider
discontinuing the product line. Input from the marketing staff should be sought before
such an action is taken. An important consideration is the extent to which sales in the
regular model and deluxe model markets depend on the firm's offering a complete
product line.
A slight price reduction should be considered for the deluxe model (from
$510.40 down to $500.96). However, the product cost distortion from the old costing
system did not affect this model as seriously as it did the other two.