DecisionMaking
SolutionstoQuestions
81 Chapter8
ActivityBasedCosting:ATooltoAid Activitybasedcostingdiffersfrom traditionalcostingsystemsinanumberofways. Inactivitybasedcosting,nonmanufacturingas wellasmanufacturingcostsmaybeassignedto products.And,somemanufacturingcostsmaybe excludedfromproductcosts.Anactivitybased costingsystemtypicallyincludesanumberof activitycostpools,eachofwhichhasitsunique measureofactivity.Thesemeasuresofactivity oftendifferfromtheallocationbasesusedin traditionalcostingsystems.Finally,theactivity ratesdifferfromtypicalpredeterminedoverhead ratesinthattheyshouldbebasedonactivityat capacityratherthanonthebudgetedlevelof activity. 82 Whendirectlaborisusedasanallocation baseforoverhead,itisimplicitlyassumedthat overheadcostisdirectlyproportionaltodirect labor.Whencostsystemswereoriginally developedinthe1800s,thisassumptionmay havebeenreasonablyaccurate.However,direct laborhasdeclinedinimportanceoverthelast hundredyearswhileoverheadhasbeen increasing.Thissuggeststhatthereisnolongera directlinkbetweenthelevelofdirectlaborand overhead.Indeed,whenacompanyautomates, directlaborisreplacedbymachines;adecrease indirectlaborisaccompaniedbyanincreasein overhead.Thisviolatestheassumptionthat overheadcostisdirectlyproportionaltodirect labor.Overheadcostappearstobedrivenby factorssuchasproductdiversityandcomplexity aswellasbyvolume,forwhichdirectlaborhas servedasaconvenientmeasure. 83 Whenanoverheadrateisbasedonthe budgetedlevelofactivity,productsareimplicitly chargedforthecostsofthecapacitytheydont useaswellasforthecostsofcapacitythatthey douse.Thisisbecauseallofthecostsof capacitywhetherutilizedornotarespread acrossthebudgetedproduction.Sincethecosts ofcapacityarelargelyfixed,thisresultsinhigher unitproductcostswhenthelevelofactivity declines. Ifanoverheadrateisbasedonthelevel ofactivityatcapacity,aproductischargedonly forthecostsofcapacitythatitactuallyuses.The costsofunusedcapacityarenotchargedto productsandareinsteadchargedtothecurrent periodasexpensesoftheperiod(seeAppendix 3A).Asaresult,unitproductcostsaremore stableandcostsdonotappeartoincreaseasthe levelofbudgetedactivitydecreases. 84 Activitybasedcostingmayberesisted becauseitchangestherulesofthegame.It changessomeofthekeymeasuressuchas productcostsusedinmakingdecisionsandmay affecthowindividualsareevaluated.Withouttop managementsupport,theremaybelittleinterest inmakingthesechanges.Inaddition,iftop managerscontinuetomakedecisionsbasedon thenumbersgeneratedbythetraditionalcosting system,subordinateswillquicklyconcludethat theactivitybasedcostingsystemcanbeignored. 85 Unitlevelactivitiesareperformedfor eachunitthatisproduced.Batchlevelactivities areperformedforeachbatchregardlessofhow manyunitsareinthebatch.Productlevel activitiesmustbecarriedouttosupportaproduct regardlessofhowmanybatchesarerunorunits produced.Customerlevelactivitiesmustbe carriedouttosupportcustomersregardlessof
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whatproductsorservicestheybuy.Organization sustainingactivitiesarecarriedoutregardlessof thecompanyspreciseproductmixormixof customers. 86 Organizationsustainingcostsandthe costsofidlecapacityshouldnotbeassignedto products.Thesecostsrepresentresourcesthat arenotconsumedbytheproducts. 87 Inactivitybasedcosting,costsmustfirst beallocatedtoactivitycostpoolsandthenare allocatedfromtheactivitycostpoolstoproducts, customers,andothercostobjects. 88 Sincepeopleareofteninvolvedinmore thanoneactivity,somewaymustbefoundto estimatehowmuchtimetheyspendoneach.The mostpracticalapproachisoftentoaskemployees whatpercentageoftimetheyspendoneach activity.Itisalsopossibletoaskpeopletokeep recordsofhowtheyspendtheirtimeorobserve themastheyperformtheirtasks,butbothof thesealternativesarecostlyanditisnotobvious thatthedatawouldbeanybetter.Peoplewho knowtheyarebeingobservedmaychangehow theybehave. 89 Intraditionalcostsystems,productlevel costsareindiscriminatelyspreadacrossall productsusingdirectlaborhoursorsomeother allocationbasethatistiedtovolume.Asa consequence,highvolumeproductsareassigned thebulkofsuchcosts.Ifaproductisresponsible for40%ofthedirectlaborinafactory,itwillbe assigned40%ofthemanufacturingoverhead costinthefactoryincluding40%oftheproduct levelcostsoflowvolumeproducts.Inanactivity basedcostingsystem,batchlevelandproduct levelcostsareassignedmoreappropriately.This resultsinshiftingproductlevelcostsbacktothe productsthatcausethemandawayfromthe highvolumeproducts.(Asimilareffectwillbe
observedwithbatchlevelcostsifhighvolume productsareproducedinlargerbatchesthanlow volumeproducts.) 810 Activityratestellmanagerstheaverage costofresourcesconsumedincarryingouta particularactivitysuchasprocessingpurchase orders.Anactivitywhoseaveragecostishigh maybeagoodcandidateforprocess improvements.Benchmarkingcanbeusedto identifywhichactivitieshaveunusuallylarge costs.Ifsomeotherorganizationisabletocarry outtheactivityatasignificantlylowercost,itis reasonabletosupposethatimprovementmaybe possible. 811 Theactivitybasedcostingapproach describedinthechapterisprobablyunacceptable forexternalfinancialreportsfortworeasons. First,activitybasedproductcosts,asdescribedin thischapter,excludesomemanufacturingcosts andincludesomenonmanufacturingcosts. Second,thefirststageallocationsarebasedon interviewsratherthanverifiable,objectivedata. 812 Whileanactivityanalysissuchasin Exhibit89canyieldinsights,itshouldnotbe usedfordecisionmaking.Theconventional activityanalysiscontainsnoindicationofwhat costscanactuallybeadjustednoristhereany indicationofwhowouldberesponsiblefor adjustingthecostsafteradecisionhasbeen made.Itwouldbedangerous,forexample,to dropaproductbasedsolelyontheactivity analysis.Mostofthecostsdonotautomatically disappearifaproductisdropped;managersmust takeexplicitactionstoeliminateresourcesorto transferresourcestootheruses.Managersmay bereluctanttotaketheseactionsparticularlyifit involvesfiringortransferringpeople.Theaction analysishastheadvantageofmakingitclearer wheresavingshavetocomefromandhence whichmanagerswillhavetotakeaction.
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Exercise83(10minutes) a. Receiverawmaterialsfromsuppliers:Batchlevel b. Managepartsinventories:Productlevel c. Doroughmillingworkonproducts:Unitlevel d. Interviewandprocessnewemployeesinthepersonneldepartment: Organizationsustaining e. Designnewproducts:Productlevel f. Performperiodicpreventativemaintenanceongeneraluseequipment: Organizationsustaining g. Usethegeneralfactorybuilding:Organizationsustaining h. Issuepurchaseordersforajob:Batchlevel Someoftheseclassificationsaredebatableanddependonthespecific circumstancesfoundinparticularcompanies.
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Exercise87(15minutes) Pickup and Delivery $252,00 0 14,000 18,000 0 6,000 16,000 $306,00 0 Custom er Service $72,000 0 0 144,000 9,000 192,000 $417,00 0
Driverandguardwages......................... Vehicleoperatingexpense.................... Vehicledepreciation.............................. Customerrepresentativesalariesand expenses............................................. Officeexpenses..................................... Administrativeexpenses........................ Totalcost...............................................
Travel $360,00 0 196,000 72,000 0 0 0 $628,00 0
Other $36,000 70,000 30,000 16,000 15,000 112,000 $279,00 0
Totals $720,000 280,000 120,000 160,000 30,000 320,000 $1,630,00 0
Eachentryinthetableisderivedbymultiplyingthetotalcostforthecostcategorybythepercentage takenfromthetablebelowthatshowsthedistributionofresourceconsumption: Pickup and Delivery 35% 5% 15% 0% 20% 5% Custom er Service 10% 0% 0% 90% 30% 60%
Driverandguardwages......................... Vehicleoperatingexpense..................... Vehicledepreciation............................... Customerrepresentativesalariesand expenses............................................. Officeexpenses..................................... Administrativeexpenses........................
SolutionsManual,Chapter8
Travel 50% 70% 60% 0% 0% 0%
Other 5% 25% 25% 10% 50% 35%
Totals 100% 100% 100% 100% 100% 100%
147
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Exercise88(10minutes) Estimate d Overhea dCost $72,000 $26,400 $41,400 $3,250 $8,750
ActivityCostPool Caringforlawn Caringforgardenbeds lowmaintenance Caringforgardenbedshigh maintenance Traveltojobs Customerbillingandservice
ExpectedActivity 150,000 squarefeetoflawn 20,000 squarefeetoflow maintenancebeds 15,000 squarefeetofhigh maintenancebeds 12,500 miles 25 customers
$0.48 $1.32 $2.76 $0.26 $350
ActivityRate persquarefootoflawn persquarefootoflow maintenancebeds persquarefootofhigh maintenancebeds permile percustomer
Theactivityrateforeachactivitycostpooliscomputedbydividingitsestimatedoverheadcostbyits expectedactivity.
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Exercise84(10minutes) K425 ActivityCostPool $6 $4 $50 $90 $14 $84 0 ActivityRate perdirectlaborhour permachinehour persetup perorder pershipment perproduct 80 100 1 1 1 1 Activity directlaborhours machinehours setups order shipment product ABC Cost $480 400 50 90 14 840 $1,874 ActivityRate $6 $4 $50 $90 $14 $84 0 perdirectlaborhour permachinehour persetup perorder pershipment perproduct 500 1,50 0 4 4 10 1 Activity directlaborhours machinehours setups orders shipments product ABC Cost $3,000 6,000 200 360 140 840 $10,540 K425 $1,87 M67 $10,54
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Laborrelated......................... Machinerelated..................... Machinesetups..................... Productionorders.................. Shipments.............................. Productsustaining................. Total....................................... M67 ActivityCostPool
Laborrelated......................... Machinerelated..................... Machinesetups..................... Productionorders.................. Shipments.............................. Productsustaining................. Total.......................................
Totalcost(a)....................................
150
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Numberofunitsproduced(b).......... Averagecostperunit(a)(b).........
4 200 $9.37
0 2,000 $5.27
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Exercise816(30minutes) Thefirststepistocomputetheoverheadcostforeachoftheproductsorderedbythecustomer: StandardModel ActivityCostPool Manufacturingvolume........... Orderprocessing................... Customdesignprocessing.... Customerservice................... CustomDesign ActivityCostPool Manufacturingvolume........... Orderprocessing................... Customdesignprocessing.... Customerservice................... $26 $28 4 $18 6 $37 9 $26 $28 4 $18 6 $37 9 ActivityRate perdirectlaborhour perorder percustomdesign percustomer 52 7 1 0 ABC Cost directlaborhours $13,702 order customdesigns Notapplicable $284 $0 Activity
ActivityRate perdirectlaborhour perorder percustomdesign percustomer 84 3 3
Activity directlaborhours order customdesigns Notapplicable
ABC Cost $2,184 $852 $558
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Exercise816(continued) Thesecondstepistocomputetheproductmarginsforthetwoproducts: ProductProfitabilityAnalysis Sales..................................... Costs: Directmaterials.................. Directlabor......................... Manufacturingvolume........ Orderprocessing............... Customdesignprocessing. Productmargin..................... StandardModel $37,00 0 $11,28 0 10,277 13,702 284 0 CustomDesign $7,20 0 $1,90 2 1,638 2,184 852 558
35,543 $ 1,457
7,134 $ 66
Thefinalstepistocomputetheprofitabilityofthecustomer: CustomerProfitabilityAnalysis Productmarginofordersplacedbycustomer: Standardmodel.............................................. Customdesign................................................ Totalproductmargins........................................ Customerserviceoverhead............................... Customermargin............................................... $1,45 7 66 1,523 379 $1,14 4
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Exercise817(30minutes) 1. Underthetraditionaldirectlaborhourbasedcostingsystem, manufacturingoverheadisappliedtoproductsusingthepredetermined overheadratecomputedasfollows: Predetermined=Estimatedtotalmanufacturingoverheadcost overheadrate Estimatedtotaldirectlabor hours $1,920,000 = =$160perDLH 12,000DLHs* *50,000unitsofModelX100@0.2DLHperunit+5,000unitsofModel X200@0.4DLHperunit=10,000DLHs+2,000DLHs=12,000DLHs Consequently,manufacturingoverheadwouldbeappliedtotheproducts asfollows: Unitsales.............................. Directlaborhoursperunit.... Totaldirectlaborhours........ Totalmanufacturingover headapplied@$160per directlaborhour................ Manufacturingoverheadper unit..................................... Model X100 50,000 0.2 10,000 $1,600,00 0 $32 ModelX200 5,000 0.4 2,000 $320,000 $64 Total 12,000 $1,920,00 0
Notethatallofthemanufacturingoverheadcostisappliedtothe productsunderthecompanystraditionalcostingsystem.
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Exercise86(continued) 2. Undertheactivitybasedcostingsystem,overheadcosts(both nonmanufacturingandmanufacturing)wouldbeappliedtoproductsas follows: Unitsales......................... Manufacturingoverhead applied.......................... Nonmanufacturingover headapplied................. Totaloverheadapplied.... Manufacturingoverhead perunit.......................... Model X100 50,000 $1,340,00 0 160,000 $1,500,00 0 $30 ModelX200 5,000 $390,000 110,000 $500,000 $100 Total $1,730,00 0 270,000 $2,000,00 0
3. Underactivitybasedcosting,atotalof$1,500,000isassignedtoModel X100andatotalof$500,000isassignedtoModelX200.Thisisin contrastto$1,600,000forModelX100and$320,000forModelX200 underthetraditionalcostingmethod.Alsonotethatthetotalamountof overheadappliedtobothproductsis$2,000,000underactivitybased costingand$1,920,000underthetraditionalcostingmethod.Anumber ofreasonsexistforthesedifferences.First,notallmanufacturing overheadcostsareassignedtoproductsunderactivitybasedcosting. Apparently$190,000(=$1,920,000$1,730,000)ofmanufacturing overheadconsistsofthecostsofidlecapacityandorganization sustainingcoststhatarenotassignedtoproductsunderactivitybased costing.Counterbalancingthis,atotalof$270,000innonmanufacturing costsareassignedtoproductsunderactivitybasedcosting,butnot underthetraditionalmethod.Additionally,manufacturingoverheadcosts havebeenshiftedfromModelX100,thehighvolumeproduct,toModel X200,thelowvolumeproductunderactivitybasedcosting.Thisis probablyduetotheexistenceofbatchlevelorproductlevelcoststhat aremoreappropriatelyassignedunderactivitybasedcosting. Perunitcostshavechangedunderactivitybasedcosting.Thisis partlyduetotheexclusionofsomemanufacturingoverheadfrom productcostsandtheinclusionofnonmanufacturingoverheadcosts. Butitisalsoduetoshiftingcostsfromthehighvolumetothelow volumeproduct.Thishasthepredictableeffectofincreasingtheperunit
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costofthelowvolumeproductmorethantheperunitcostofthehigh volumeproductisdecreased.
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Exercise87(20minutes) Sales(120clubs$49perclub)............................. Greencosts: Directmaterials(120clubs$27.65perclub)...... Greenmargin.......................................................... Yellowcosts: Directlabor(120clubs0.4hourperclub$22 perhour)............................................................. Indirectlabor......................................................... Marketingexpenses.............................................. Yellowmargin.......................................................... Redcosts: Factoryequipmentdepreciation............................ Factoryadministration........................................... Sellingandadministrativewagesandsalaries..... Sellingandadministrativedepreciation................. Redmargin.............................................................. $5,880.00 $3,318.00 3,318.00 2,562.00
1,056.00 113.40 709.80 216.60 291.70 387.60 28.00
1,879.20 682.80
923.90 ( $ 241.10)
Whilenotrequiredintheproblem,theconventionalABCanalysiswouldbe presentedasfollows: Sales(120clubs$49perclub)............................. Productcosts: Directmaterials.................................................... Directlabor........................................................... Volumerelatedoverhead..................................... Batchprocessingoverhead.................................. Orderprocessingoverhead.................................. Productmargin........................................................ Customerserviceoverhead.................................... Customermargin..................................................... $5,880.00 $3,318.00 1,056.00 595.20 53.50 132.40
5,155.10 724.90 966.00 ( $ 241.10)
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Exercise81(10minutes) Activity Salesrepresentativesperiodicvisitsto customerstokeeptheminformedabout theservicesprovidedbyCDExpress...... Orderinglabelsfromtheprinterfora particularCD*........................................... SettinguptheCDduplicatingmachineto makecopiesfromaparticularmasterCD Loadingtheautomaticlabelingmachine withlabelsforaparticularCD*................. VisuallyinspectingCDsandplacingthem byhandintoprotectiveplasticcasespri ortoshipping........................................... Preparationoftheshippingdocumentsfor theorder................................................... Periodicmaintenanceofequipment............ Lightingandheatingthecompanys productionfacility..................................... Preparationofquarterlyfinancialreports.... ActivityLevel Customerlevel Productlevel Batchlevel Batchlevel Unitlevel Productlevel Organizationsustaining Organizationsustaining Organizationsustaining
a. b. c. d. e.
g. h.
*Thecostofthelabelsthemselveswouldbepartofdirectmaterials.
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Exercise84(10minutes) Tellerwages Assistantbranchmanagersalary Branchmanagersalary $160,000 $75,000 $80,000 DistributionofResourceConsumptionAcrossActivities Processing Processing Other Opening Depositsand Customer Accounts Withdrawals Transactions 5% 65% 20% 15% 5% 30% 5% 0% 10%
Tellerwages Assistantbranchmanagersalary Branchmanagersalary
Other Activities 10% 50% 85%
Totals 100% 100% 100%
Tellerwages Assistantbranchmanagersalary Branchmanagersalary
SolutionsManual,Chapter8
Processing Processing Other Opening Depositsand Customer Accounts Withdrawals Transactions $8,000 $104,000 $32,000 11,250 4,000 3,750 0 22,500 8,000
Other Activities $16,000 37,500 68,000
Totals $160,000 75,000 80,000
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Totalcost
$23,250
$107,750
$62,500
$121,500
$315,000
Tellerwagesare$160,000and65%ofthetellerstimeisspentprocessingdepositsandwithdrawals: $160,00065%=$104,000 Otherentriesinthetablearedeterminedsimilarly.
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Exercise85(20minutes) 1. Computationofactivityrates: (b) (a)(b) ActivityCostPools TotalActivity ActivityRate Openingaccounts 500 newaccounts $46.50 pernewaccount opened opened Processingdepositsandwithdrawals $107,75 100,000 depositsand $1.08 perdepositorwith 0 withdrawals drawal processed processed Processingothercustomertransactions $62,500 5,000 othercustomer $12.50 perothercustomer transactions transaction processed processed (a) Total Cost $23,250
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Exercise810(continued) 2. ThecostofopeninganaccountattheWestfieldbranchisapparently muchhigherthanatthelowestcostbranch($46.50versus$26.75).On theotherhand,thecostofprocessingdepositsandwithdrawalsislower thanatthelowestcostbranch($1.08versus$1.24).Andthecostof processingothercustomertransactionsissomewhathigheratthe Westfieldbranch($12.50versus$11.86).Thissuggeststhattheother branchesmayhavesomethingtolearnfromWestfieldconcerning processingdepositsandwithdrawalsandWestfieldmaybenefitfrom learningabouthowsomeoftheotherbranchesopenaccountsand processothertransactions.Itmaybeparticularlyinstructivetocompare thedetailsoftheactivityrates.Forexample,isthecostofopening accountsatWestfieldapparentlyhighbecauseoftheinvolvementofthe assistantbranchmanagerinthisactivity? Itshouldbementionedthattheapparentdifferencesinthecostsofthe activitiesatthevariousbranchescouldbeduetoinaccuraciesin employeesreportsoftheamountoftimetheydevotetotheactivities. Thedifferencesincostsmayalsoreflectdifferentstrategies.For example,theWestfieldbranchmaypurposelyspendmoretimewithnew customersinordertowintheirloyalty.Thehighercostofopeningnew accountsattheWestfieldbranchmaybejustifiedbyfuturebenefitsof havingmoresatisfiedcustomers.Nevertheless,comparativestudiesof thecostsofactivitiesmayprovideausefulstartingpointforidentifying bestpracticeswithinacompanyandwhereimprovementscanbemade.
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Exercise811(10minutes) ActivityCost Pool Ordersize Customerorders Producttesting Selling Total (a) ActivityRate R16.85 perdirectlaborhour R320.00 percustomerorder R89.00 perproducttestinghour R1,090.00 persalescall (b) Activity 200 directlaborhours 1 customerorder 4 producttestinghours 2 salescalls (a)(b) ABCCost R3,370 R320 R356 R2,180 R6,226
Accordingtothesecalculations,thetotaloverheadcostoftheorderwasR6,226.
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Exercise812(30minutes) 1. Activitylevel OrderSize 200 direct labor hours R1,650 1,600 20 0 100 0 0 0 R3,370 Customer Orders 1 customer order R180 0 0 48 80 12 0 0 R320 Product Testing 4 product testing hours R120 160 4 72 0 0 0 0 R356 Selling 2 salescalls Total
Manufacturing: Indirectlabor Factorydepreciation Factoryutilities Factoryadministration Generalselling&adminis trative: Wagesandsalaries Depreciation Taxesandinsurance Sellingexpenses Totaloverheadcost
R0 0 0 60 1,600 80 40 400 R2,180
R1,950 1,760 24 180 1,780 92 40 400 R6,226
Example:R8.25perdirectlaborhourfromtheproblemstatement200directlaborhours=R1,650 Accordingtothesecalculations,theoverheadcostoftheorderwasR6,226.
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Exercise812(continued) 2. Thetablepreparedinpart(1)aboveallowstwodifferentperspectiveson theoverheadcostoftheorder.Thecolumntotalsthatappearinthelast rowofthetabletellusthecostoftheorderintermsoftheactivitiesit required.Therowtotalsthatappearinthelastcolumnofthetabletellus howmuchtheordercostintermsoftheoverheadaccountsinthe underlyingaccountingsystem.Anotherwayofsayingthisisthatthe columntotalstelluswhatthecostswereincurredfor.Therowtotalstell uswhatthecostswereincurredon.Forexample,youmayspend moneyonachocolatebarinordertosatisfyyourcravingforchocolate. Bothperspectivesareimportant.Tocontrolcosts,itisnecessaryto knowbothwhatthecostswereincurredforandwhatactualcostswould havetobeadjusted(i.e.,whatthecostswereincurredon). Thetwodifferentperspectivescanbeexplicitlyshownasfollows: Whattheoverheadcostswereincurredon: Manufacturing: Indirectlabor R1,950 Factorydepreciation 1,760 Factoryutilities 24 Factoryadministration 180 Generalselling&administrative: Wagesandsalaries 1,780 Depreciation 92 Taxesandinsurance 40 Sellingexpenses 400 Totaloverheadcost R6,226 Whattheoverheadcostswereincurredfor: Ordersize R3,370 Customerorders 320 Producttesting 356 Selling 2,180 Totaloverheadcost R6,226
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Exercise82(10minutes) a. b. c. d. e. Activity Directlaborworkersassemblea product. Productsaredesignedbyengin eers. Equipmentissetup. Machinesareusedtoshapeandcut materials. Monthlybillsaresentouttoregular customers. Materialsaremovedfromthere ceivingdocktoproductionlines. Allcompletedunitsareinspectedfor defects. LevelofActivity Unit Product Batch Unit Customer Batch Unit ExamplesofActivityMeasures Directlaborhours Hoursofdesigntime;Numberof newproductsdesigned Hoursofsetuptime;Numberof setups Machinehours;Numberofunits processed Numberofbillssent Numberofloadstransferred Hoursofinspectiontime;Number ofunitsinspected
g.
Note:Someoftheseactivitymeasuresaredebatable.
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Exercise814(20minutes) 1. Activityratesarecomputedasfollows: (a) Estimated (b) Overhead Expected Cost Activity $72,000 400 setups $200,000 5,000 MHs $816,000 24,000 DLHs (a)(b) Activity Rate $180 persetup $40 perMH $34 perDLH
ActivityCostPool Machinesetups Specialprocessing Generalfactory
2. Theunitcostscanbecomputedasfollows,startingwiththecomputation ofthemanufacturingoverhead: Machinesetups: 100setups$180persetup.............. 300setups$180persetup............. Specialprocessing: 5,000MHs$40perMH................... 0MH$40perMH............................ Generalfactory: 8,000DLHs$34perDLH................ 16,000DLHs$34perDLH.............. Totaloverheadcost(a)......................... Numberofunitsproduced(b)............... Overheadcostperunit(a)(b)............ Directmaterials..................................... Directlabor: 0.80DLHs$15perDLH.................. 0.40DLHs$15perDLH.................. Manufacturingoverhead(seeabove). . . Unitcost................................................ Hubs $18,000 200,000 272,000 Sprockets $54,000
544,000 $490,000 $598,000 10,000 40,000 $49.00 $14.95 Hubs $32.00 12.00 49.00 $93.00 Sprockets $18.00 6.00 14.95 $38.95
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Exercise815(15minutes) 1.and2. a. b. c. d. e. Activity ActivityLevel PossibleActivityMeasures Machinesettingsarechangedbetween Batchlevel Numberofbatches;timeto batchesofdifferentproducts. changesettings Partsinventoriesaremaintainedinthe Productlevel Numberofparttypesmaintained storeroom. instock Productsaremilledonamillingmachine Unitlevel Machinehours;laborhours Newemployeesarehiredbytheperson Organizationsus Notapplicable* neloffice. taining Newproductsaredesigned. Productlevel Hoursofdesigntime Periodicmaintenanceisperformedon Organizationsus Notapplicable* generalpurposeproductionequip taining ment. Abillissenttoacustomerwhoislatein Customerlevel Numberofbills makingpayments. Yearlytaxesarepaidonthecompanys Organizationsus Notapplicable* facilities. taining Purchaseordersareissuedformaterials Batchlevel Numberofpurchaseorders tobeusedinproduction.
g. h.
*Organizationsustainingcostsshouldnotbeallocatedtoproductsorcustomers. Note:Someoftheseclassificationsandactivitymeasuresaredebatable.
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Exercise816(30minutes) 1. Thefirststepistodeterminetheactivityrates: ActivityCost Pools Servingparties Servingdiners Servingdrinks (a) (b) TotalCost TotalActivity $33,000 6,000 parties $138,000 15,000 diners $24,000 10,000 drinks (a)(b) ActivityRate $5.50 perparty $9.20 perdiner $2.40 perdrink
Accordingtotheactivitybasedcostingsystem,thecostofservingeach ofthepartiescanbecomputedasfollows: a. Partyof4personswhoorderatotalof3drinks: (a) (b) ActivityCostPool ActivityRate Activity Servingparties $5.50 perparty 1 party Servingdiners $9.20 perdiner 4 diners Servingdrinks $2.40 perdrink 3 drinks Total b. Partyof2personswhoordernodrinks: (a) ActivityCostPool ActivityRate Servingparties $5.50 perparty Servingdiners $9.20 perdiner Servingdrinks $2.40 perdrink Total c. Partyof1personwhoorders2drinks: (a) ActivityCostPool ActivityRate Servingparties $5.50 perparty Servingdiners $9.20 perdiner Servingdrinks $2.40 perdrink Total (b) Activity 1 party 2 diners 0 drinks (a)(b) ABCCost $5.50 36.80 7.20 $49.50 (a)(b) ABCCost $5.50 18.40 0 $23.90 (a)(b) ABCCost $5.50 9.20 4.80 $19.50
(b) Activity 1 party 1 diner 2 drinks
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Exercise816(continued) 2. Theaveragecostperdinerforeachpartycanbecomputedbydividing thetotalcostofthepartybythenumberofdinersinthepartyasfollows: a. $49.504diners=$12.375perdiner b. $23.902diners=$11.95perdiner c. $19.501diner=$19.50perdiner 3. Theaveragecostperdinerdiffersfrompartytopartyundertheactivity basedcostingsystemfortworeasons.First,thecostofservingaparty ($5.50)doesnotdependonthenumberofdinersintheparty.Therefore, theaveragecostperdinerofthisactivitydecreasesasthenumberof dinersinthepartyincreases.Withonlyonediner,thecostis$5.50.With twodiners,theaveragecostperdineriscutinhalfto$2.75.Withfive diners,theaveragecostperdinerwouldbeonly$1.10.Andsoon. Second,theaveragecostperdinerdiffersalsobecauseofthe differencesinthenumberofdrinksorderedbythediners.Ifapartydoes notorderanydrinks,aswasthecasewiththepartyoftwo,nocostsof servingdrinksareassignedtotheparty. Theaveragecostperdinerdiffersfromtheoverallaveragecostof$16 perdinerforseveralreasons.First,theaveragecostof$16perdiner includesorganizationsustainingcoststhatareexcludedfromthe computationsintheactivitybasedcostingsystem.Second,the$16per dinerfiguredoesnotrecognizedifferencesinthedinersdemandson resources.Itdoesnotrecognizethatsomedinersordermoredrinks thanothersnordoesitrecognizetheeconomiesofscaleinserving largerparties.(Thebatchlevelcostsofservingapartycanbespread overmoredinersifthepartyislarger.) Weshouldnotethattheactivitybasedcostingsystemitselfdoesnot recognizeallofthedifferencesindinersdemandsonresources.For example,thereareundoubtedlydifferencesinthecostsofpreparingthe variousmealsonthemenu.Itmayormaynotbeworththeefforttobuild amoredetailedactivitybasedcostingsystemthatwouldtakesuch nuancesintoaccount.
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Exercise817(45minutes) 1. Theunitproductcostsunderthecompany'sconventionalcosting systemwouldbecomputedasfollows: Rascon Parcel Numberofunitsproduced(a)....................... 20,000 80,000 Directlaborhoursperunit(b)...................... 0.40 0.20 Totaldirectlaborhours(a)(b).................. 8,000 16,000 Totalmanufacturingoverhead(a)................ Totaldirectlaborhours(b)........................... Predeterminedoverheadrate(a)(b)......... $576,000 24,000 DLHs $ 24.00 perDLH Total 24,000
Rascon Parcel Directmaterials............................................ $13.00 $22.00 Directlabor................................................... 6.00 3.00 Manufacturingoverheadapplied: 0.40DLHperunit$24.00perDLH......... 9.60 0.20DLHperunit$24.00perDLH......... 4.80 Unitproductcost.......................................... $28.60 $29.80
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Exercise817(continued) 2. TheunitproductcostswiththeproposedABCsystemcanbecomputedasfollows: Estim ated Over head Cost* $288,000 $288,000
ActivityCostPool Laborrelated............. Engineeringdesign...
(b) ExpectedActivity 24,000 directlaborhours engineering 6,000 hours
(a)(b) ActivityRate $12.00 perdirectlaborhour perengineeringhour $48.00 Rascon Parcel Expected Activity Amount 16,000 $192,000 3,000 144,000 $336,000 80,000 $4.20
*Thetotaloverheadcostissplitevenlybetweenthetwoactivitycostpools. Expected Activity 8,000 3,000
Laborrelatedat$12.00perdirectlaborhour............. Engineeringdesignat$48.00perengineeringhour... Totaloverheadcostassigned(a)................................ Numberofunitsproduced(b)..................................... Overheadcostperunit(a)(b...................................
Amount $96,000 144,000 $240,000 20,000 $12.00
Theunitproductcostscombinedirectmaterials,directlabor,andoverheadcosts: Directmaterials Directlabor
172
Rascon Parcel $13.00 $22.00 6.00 3.00
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Manufacturingoverhead(seeabove) Unitproductcost
12.00 4.20 $31.00 $29.20
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Exercise817(continued) 3. Theunitproductcostofthehighvolumeproduct,Parcel,declinesunder theactivitybasedcostingsystem,whereastheunitproductcostofthe lowvolumeproduct,Rascon,increases.Thisoccursbecausehalfofthe overheadisappliedonthebasisofengineeringdesignhoursinsteadof directlaborhours.Whentheoverheadwasappliedonthebasisofdirect laborhours,mostoftheoverheadwasappliedtothehighvolume product.However,whentheoverheadisappliedonthebasisof engineeringhours,moreoftheoverheadcostisshiftedovertothelow volumeproduct.Engineeringhoursisaproductlevelactivity,sothe higherthevolume,thelowertheunitcostandthelowerthevolume,the highertheunitcost.
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Exercise818(15minutes) 1. Theorderrequires250directlaborhours(1,000units@0.25DLHperunit)andisrunintwo batches.Therefore,theoverheadcostoftheorderaccordingtotheactivitybasedcostingsystem wouldbecomputedasfollows: ActivityCost Pool Volume............... Batchprocessing Orderprocessing Total................... (a) ActivityRate $5.55 perdirectlaborhour $107.00 perbatch $275.00 perorder (b) Activity 250 directlaborhours 2 batches 1 order (a)(b) ABCCost $1,387.50 $214.00 $275.00 $1,876.50
Theproductmarginontheordercanbecomputedasfollows: Sales(1,000units$20perunit)........................ Costs: Directmaterials(1,000units$8.50perunit). . Directlabor(1,000units$6.00perunit)......... Volume.............................................................. Batchprocessing............................................... Orderprocessing............................................... Productmargin..................................................... Productmargin(above)....................................... Less:Customerserviceoverhead (1customer$2,463percustomer)................. Customermargin.................................................
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$20,000.00 $8,500.00 6,000.00 1,387.50 214.00 275.00
16,376.50 $ 3,623.50
2. ThecustomermarginforsalestoInterstateTruckingiscomputedasfollows: $3,623.50 2,463.00 $1,160.50
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Exercise819(45minutes) 1. TheorderfromInterstateTruckingrequires250directlaborhours(1,000units@0.25DLHperunit) andisrunintwobatches.Therefore,theoverheadcostoftheorderaccordingtotheactivitybased costingsystemwouldbecomputedasfollows: BatchPro OrderPro Volume cessing cessing 250DLHs 2batches 1order $150.00 1,000.00 25.00 100.00 0.00 112.50 $1,387.50 $120.00 34.00 14.00 40.00 6.00 0.00 $214.00 $20.00 0.00 25.00 160.00 10.00 60.00 $275.00 Total $290.00 1,034.00 64.00 300.00 16.00 172.50 $1,876.50
Activity.................................................. Productionoverhead: Indirectlabor....................................... Factoryequipmentdepreciation......... Factoryadministration........................ Generalsellingandadministrative overhead: Wagesandsalaries............................ Depreciation....................................... Marketingexpenses........................... Totalcost...............................................
Example:250DLHs$0.60perDLHfromtheproblemstatement=$150.00
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Exercise819(continued) Theactionanalysisreportfortheordercanbeconstructedusingtherow totalsfromtheactivityratetable,organizedaccordingtotheeaseofadjust mentcodes: Sales(1,000units$20perunit)........................ Greencosts: Directmaterials(1,000units$8.50perunit)... Greenmargin....................................................... Yellowcosts: Directlabor(1,000units$6.00perunit)......... Indirectlabor...................................................... Marketingexpenses.......................................... Yellowmargin....................................................... Redcosts: Factoryequipmentdepreciation........................ Factoryadministration....................................... Sellingandadministrativewagesandsalaries. . Sellingandadministrativedepreciation............. Redmargin........................................................... $20,000.00 $8,500.00 6,000.00 290.00 172.50 1,034.00 64.00 300.00 16.00 8,500.00 11,500.00
6,462.50 5,037.50
1,414.00 $ 3,623.50
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Exercise819(continued) 2. Anactionanalysisreportforthecustomercanbepreparedbyincludingthecustomerservicecostsin theoverheadanalysis. BatchPro OrderPro Customer Volume cessing cessing Service 250DLHs 2batches 1order 1customer $150.00 1,000.00 25.00 100.00 0.00 112.50 $1,387.50 $120.00 34.00 14.00 40.00 6.00 0.00 $214.00 $20.00 0.00 25.00 160.00 10.00 60.00 $275.00 Total
Activity Productionoverhead: Indirectlabor Factoryequipmentdepreciation Factoryadministration Generalsellingandadministrative overhead: Wagesandsalaries Depreciation Marketingexpenses Totalcost
$0.00 $290.00 0.00 1,034.00 150.00 214.00 1,600.00 1,900.00 38.00 54.00 675.00 847.50 $2,463.00 $4,339.50
Example:250DLHs$0.60perDLHfromtheproblemstatement=$150.00
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Exercise819(continued) Theactionanalysisreportforthecustomercanbeconstructedusingthe rowtotalsfromtheactivityratetable,organizedaccordingtotheeaseof adjustmentcodes: Sales(1,000units$20perunit)........................ Greencosts: Directmaterials(1,000units$8.50perunit)... Greenmargin....................................................... Yellowcosts: Directlabor(1,000units$6.00perunit)......... Indirectlabor...................................................... Marketingexpenses.......................................... Yellowmargin....................................................... Redcosts: Factoryequipmentdepreciation........................ Factoryadministration....................................... Sellingandadministrativewagesandsalaries. . Sellingandadministrativedepreciation............. Redmargin........................................................... $20,000.00 $8,500.00 6,000.00 290.00 847.50 8,500.00 11,500.00
7,137.50 4,362.50
1,034.00 214.00 1,900.00 54.00 3,202.00 $ 1,160.50
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Exercise820(30minutes) 1. Thefirststageallocationisshownbelow: Volume Related $120,000 30,000 $150,000 Order Customer Related Support $90,000 $60,000 10,000 20,000 $100,000 $80,000 Other Totals $30,000 $300,000 40,000 100,000 $70,000 $400,000
Wagesandsalaries Otheroverheadcosts Totaloverheadcost
Example:Accordingtothedistributionofresourcesacrossactivities,40%ofthe$300,000wagesand salariescostisattributabletovolumerelatedactivities. $300,00040%=$120,000 Otherentriesinthetablearedeterminedinasimilarmanner. 2. Computationofactivityrates: ActivityCostPools Volume Orderrelated Customersupport (a) (b) TotalCost TotalActivity $150,000 20,000 DLHs $100,000 400 orders $80,000 200 customers (a)(b) ActivityRate $7.50 perDLH $250 perorder $400 percustomer
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Exercise820(continued) 3. ComputationoftheoverheadcostsfortheShenzhenEnterprisesorder: ActivityCost Pool Volume................. Orderrelated........ Total................... (a) ActivityRate $7.50 perDLH $250 perorder (b) Activity 20 DLHs* 1 order (a)(b) ABCCost $150 250 $400
*2DLHsperunit10units=20DLHs 4. Themarginsfortheorderandforthecustomerfollow: ProductProfitabilityAnalysis Sales(10units$300perunit)...................... Costs: Directmaterials(10units$180perunit).... Directlabor(10units$50perunit)............ Volumeoverhead......................................... Orderrelatedoverhead................................ Productmargin................................................ $3,000 $1,800 500 150 250 2,700 $ 300 $300 400 ) $ (100
CustomerProfitabilityAnalysis Productmargin(above)............................................... Less:Customersupportoverhead (1customer@$400percustomer).......................... Customermargin.........................................................
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Exercise821(60minutes) 1. Thefirststageallocationisshownbelow: DistributionofResourceConsumption AcrossActivityCostPools Volume 40% 30% Volume related $120,000 30,000 $150,000 Order Related 30% 10% Customer Support 20% 20% Other 10% 40% Totals 100% 100%
Wagesandsalaries Otheroverheadcosts
Wagesandsalaries Otheroverheadcosts Totaloverheadcost
Order Customer Related Support $90,000 $60,000 10,000 20,000 $100,000 $80,000
Other Totals $30,000 $300,000 40,000 100,000 $70,000 $400,000
Example:40%$300,000=$120,000 Otherentriesinthetablearedeterminedinasimilarmanner.
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Exercise821(continued) 2. Theactivityratesarecomputedbydividingthecostsinthecellsofthe firststageallocationabovebythetotalactivityfromthetopofthe column. Volume OrderRe Customer Related lated Support Totalactivity.................... 20,000DLHs 400orders 200customers Wagesandsalaries......... Otheroverheadcosts...... Totalcost......................... $6.00 1.50 $7.50 $225.00 25.00 $250.00 $300.00 100.00 $400.00
Example:$120,00020,000DLHs=$6.00perDLH Volumerelatedwagesandsalariesfromthefirststageallocationabove. 3. Theoverheadcostfortheorderiscomputedasfollows: Volume Related 20DLHs $120.00 30.00 $150.00 Order Related Total 1order $225.00 $345.00 25.00 55.00 $250.00 $400.00
Activity............................... Wagesandsalaries........... Otheroverheadcosts........ Totalcost...........................
Example:20DLHs$6.00perDLH=$120.00 Activityrateforvolumerelatedwagesandsalariesfrompart(2)above.
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Exercise821(continued) 4. Theactivityviewreportcanbeconstructedusingthecolumntotalsat thebottomoftheoverheadcostanalysisinpart(3)above. ProductProfitabilityAnalysis Sales(10units$300perunit)...................... Costs: Directmaterials(10units$180perunit).... Directlabor(10units$50perunit)............ Volumerelatedoverhead............................. Orderrelatedoverhead................................ ProductMargin................................................ CustomerProfitabilityAnalysis Productmarginoforder(above)..................... Less:Customersupportoverhead (1customer$400percustomer)............... Customermargin............................................ $3,000 $1,800 500 150 250 $300 400 ) $ (100
2,700 $ 300
5. Theactionanalysisreportcanbeconstructedusingtherowtotalsfrom theactivityratetable,organizedaccordingtotheeaseofadjustment codes: Sales(10units$300perunit)..................... Greencosts: Directmaterials(10units$180perunit). . Greenmargin................................................. Yellowcosts: Directlabor(10units$50perunit)........... Wagesandsalaries(seepart(3)above).... Yellowmargin................................................ Redcosts: Otheroverheadcosts(seepart(3)above). ................................................................. Redmargin.................................................... $3,000 $1,800 1,800 1,200 500 345 845 355
55 55 $ 300
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Exercise821(continued) 6. Thefirststepistoincludethecustomersupportcostsintheoverhead costanalysisasfollows: Volume Related 20DLHs $120.00 30.00 $150.00 Order Customer Related Support Total 1order 1customer $225.00 $300.00 $645.00 25.00 100.00 155.00 $250.00 $400.00 $800.00 $3,000 $1,800 500 645 155 1,800 1,200 1,145 55 155 ) $ (100
Activity........................... Wagesandsalaries....... Otheroverheadcosts..... Totalcost.......................
Theactionanalysisreportcanthenbeeasilyconstructedasfollows: Sales(10units$300perunit)...................... Greencosts: Directmaterials(10units$180perunit).... Greenmargin.................................................. Yellowcosts: Directlabor(10units$50perunit)............ Wagesandsalaries(seeabove).................. Yellowmargin.................................................. Redcosts: Otheroverheadcosts(seeabove)............... Redmargin......................................................
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Exercise821(continued) 7. Whilethecompanyapparentlyincurredalossonitsbusinesswith ShenzenEnterprises,cautionmustbeexercised.Thegreenmarginon thebusinesswas$1,200.AdvancedProductsCorporationreally incurredalossonthisbusinessonlyifatleast$1,200oftheyellowand redcostswouldhavebeenavoidediftheShenzenEnterprisesorder hadbeenrejected.Forexample,wedontknowwhatspecificcostsare includedintheOtheroverheadcategory.Ifthesecostsarecommitted fixedcoststhatcannotbeavoidedintheshortrun,thenthecompany wouldbeenworseoffiftheShenzenEnterprisesorderhadnotbeen accepted. SupposethatShenzenEnterpriseswillbesubmittingasimilarorder everyyear.Asageneralpolicy,thecompanymightconsiderturning downthisbusinessinthefuture.Coststhatcannotbeavoidedinthe shortrun,maybeavoidedinthelongrunthroughthebudgetingprocess orinsomeothermanner.However,iftheShenzenEnterprisesbusiness isturneddown,managementmustmakesurethatatleast$1,200ofthe yellowandredcostsarereallyeliminatedortheresourcesrepresented bythosecostsarereallyredeployedtotheconstraint.Ifthesecosts remainunchanged,thenthecompanywouldbebetteroffacceptingthe ShenzenEnterprisesbusinessinthefuture.
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Problem822(60minutes) 1. Thecompanysestimateddirectlaborhourscanbecomputedas follows: Deluxemodel:5,000units2DLHsperunit.... Regularmodel:40,000units1DLHperunit. . Total................................................................... 10,000DLHs 40,000DLHs 50,000DLHs
Usingjustdirectlaborhoursasthebase,thepredeterminedoverhead ratewouldbe: Predetermined = Estimatedmanufacturingoverheadcost overheadrate Estimateddirectlaborhours = $900,000 = $18perDLH 50,000DLHs
Usingthispredeterminedmanufacturingoverheadrate,theunitproduct costofeachmodelcanbecomputedasfollows: Directmaterials........................ Directlabor............................... Manufacturingoverhead: $18perDLH2DLHs.......... $18perDLH1DLH............ Totalunitproductcost.............. Deluxe $40 14 36 $90 Regular $25 7 18 $50
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Problem822(continued) 2. Overheadratesbyactivityarecomputedbelow: (a) Estimated Overhead Cost $204,000 $182,000 $379,000 $135,000 (a)(b) Predetermined OverheadRate $340 perpurchaseorder $5.20 permachinehour $189.50 perorder $150 pershipment
ActivityCostPool Purchasing......... Processing......... Scrap/rework...... Shipping.............
(b) ExpectedActivity 600 purchaseorders 35,000 machinehours 2,000 orders 900 shipments
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Problem822(continued) 3. a. Theoverheadappliedtoeachproductcanbedeterminedasfollows: TheDeluxeModel (a) (a)(b) Predetermined (b) Overhead OverheadRate Activity Applied $340 perpurchaseorder 200 purchaseorders $68,000 $5.20 permachinehour 20,000 machinehours 104,000 $189.50 perorder 1,000 orders 189,500 $150 pershipment 250 shipments 37,500 $399,000
ActivityCostPool Purchasing.................... Processing..................... Scrap/rework................. Shipping........................ Totaloverheadcost....... TheRegularModel
Manufacturingoverheadcostperunit=$399,0005,000units=$79.80perunit (a) Predetermined OverheadRate $340 perpurchaseorder $5.20 permachinehour $189.50 perorder $150 pershipment (a)(b) (b) Overhead Activity Applied 400 purchaseorders $136,000 15,000 machinehours 78,000 1,000 orders 189,500 650 shipments 97,500 $501,000
ActivityCostPool Purchasing.................... Processing..................... Scrap/rework................. Shipping........................ Totaloverheadcost.......
Manufacturingoverheadcostperunit=$501,00040,000units=$12.53perunit
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Problem822(continued) b. Theunitproductcostofeachmodelunderanactivitycosting approachwouldbe: Directmaterials............................ Directlabor................................... Manufacturingoverhead(above). Totalunitproductcost.................. Deluxe $40.00 14.00 79.80 $133.80 Regular $25.00 7.00 12.53 $44.53
4. Itisriskytodrawanydefiniteconclusionsbasedontheaboveanalysis. Theactivitybasedcostingsystemusedinthiscompanyisnot completelysuitableformakingdecisions.Productcostsprobablyinclude costsofidlecapacityandorganizationsustainingcosts.Theyalso excludenonmanufacturingcoststhatmaybecausedbytheproducts. Nevertheless,theaboveanalysisissuggestive. Unitcostsappeartobedistortedasaresultofusingdirectlaborhours asthebaseforassigningoverheadcosttoproducts.Althoughthe deluxemodelrequirestwiceasmuchlabortimeastheregularmodel,it stillisnotbeingassignedenoughoverheadcost,asshowninthe analysisinpart3(a). Whenthecompanysoverheadcostsareanalyzedonanactivities basis,itappearsthatthedeluxemodelismoreexpensiveto manufacturethanthecompanyrealizes.Notethatthedeluxemodel accountsforamajorityofthemachinehoursworked,eventhoughit accountsforonly20%ofthecompanysdirectlaborhours.Also,it requiresjustasmanyscrap/reworkordersastheregularmodel,and scrap/reworkordersareverycostlytothecompany. Whenactivitybasedcostingisusedandthecompanystransactionsare analyzedbyproduct,theoverheadcostjumpsforthedeluxemodelfrom $36.00perunitto$79.80perunit.Thissuggeststhatlessthanhalfthe overheadcostisbeingassignedtothedeluxemodelthatoughttobe assigned,andunitcostsforthedeluxemodelarebadlyunderstated.If thesecostsarebeingusedasabasisforpricing,thenthesellingprice forthedeluxemodelmaybetoolow.Thismaybethereasonwhyprofits havebeensteadilydecliningoverthelastseveralyears.Itmayalsobe thereasonwhysalesofthedeluxemodelhavebeenincreasingrapidly.
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Problem823(45minutes) 1. ThefirststageallocationofcoststoactivitycostpoolsfortheCDGoperationappearsbelow.All figuresbelowareineuros. Meal Flight Customer Preparation Related Service Other 1,800,000 480,000 0 120,000 30,000 0 0 0 54,000 36,000 72,000 18,000 36,000 0 0 24,000 0 30,000 90,000 30,000 0 0 120,000 0 1,920,000 546,000 162,000 312,000 Totals 2,400,000 30,000 180,000 60,000 150,000 120,000 2,940,000
Cooksanddeliverypersonnelwages. Kitchensupplies................................. Chefsalaries...................................... Equipmentdepreciation...................... Administrativewagesandsalaries..... Buildingcosts..................................... Totalcost............................................
Accordingtothedataintheproblem,75%ofthecooksanddeliverypersonnelwagesareattributable tomealpreparationactivities. 75%of2,400,000=1,800,000 Otherentriesinthetablearedeterminedinasimilarmanner.
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Problem823(continued) 2. TheactivityratesattheCDGoperationare: MealPreparation FlightRelated 1,000,000meals 5,000flights 1.800 0.030 0.054 0.036 1.920 96.00 7.20 6.00 109.20 7,200 9,000 16,200 Customer Service 10airlines
ActivityatCDG Cooksanddeliverypersonnelwages... Kitchensupplies.................................... Chefsalaries......................................... Equipmentdepreciation........................ Buildingcosts........................................ Administrativewagesandsalaries....... Totalcost..............................................
Example:1,800,0001,000,000meals=1.80permeal Cooksanddeliverypersonnelwagesattributabletomealpreparationfromthefirststageallocation.
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Problem823(continued) 3. Managersshouldbecautiouswhencomparingoperationsusingactivitybasedcostingdata particularlywhentheactivitybasedcostingdatarelyoninterviews.Nevertheless,comparisonsofthe datacanprovideinsightsandmaysuggestwhereitwouldbefruitfultoinvestigatefurther.Inthis case,sidebysidecomparisonoftheOrlyandCDGactivityratesrevealsthatthecostpermealand costperflightislessatCDGthanatOrly,butthecostperairlineforcustomerserviceactivitiesis higheratCDGthanatOrly.ThissuggeststhatOrlymighthavesomethingtolearnfromCDG concerningmealpreparationandflightrelatedactivities,butCDGmaybeabletolearnfromOrly concerningcustomerserviceactivities. Overall,CDGseemstobemoreefficientthanOrlybyabout26,000asshowninthetablebelow. Differ ence Activityat CDG 60,000 32,000 ( 66,000) 26,000
Mealpreparation(permeal)......... Flightrelated(perflight)................ Customerservice(perairline)....... Total..............................................
CDG 1.92 109.20 16,200
Orly 1.98 115.60 9,600
Differ ence ActivityatCDG 0.06 1,000,000meals 6.40 5,000flights (6,600) 10airlines
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Problem824(45minutes) 1. Thefirststageallocationofcoststoactivitycostpoolsappearsbelow: DistributionofResourceConsumption AcrossActivityCostPools Clean ingCar pets 70% 100% 80% 0% 0% 0% Travel toJobs 20% 0% 0% 60% 0% 0% Job Support 0% 0% 0% 0% 45% 40% Job Support $ 0 0 0 0 27,000 32,000
Wages Cleaningsupplies Cleaningequipmentdepreciation Vehicleexpenses Officeexpenses Presidentscompensation
Other 10% 0% 20% 40% 55% 60%
Total 100% 100% 100% 100% 100% 100%
Wages Cleaningsupplies Cleaningequipmentdepreciation Vehicleexpenses Officeexpenses Presidentscompensation
194
Cleaning Travel Carpets toJobs $105,000 $30,000 40,000 0 16,000 0 0 0 0 48,000 0 0
Other $15,000 0 4,000 32,000 33,000 48,000
Total $150,000 40,000 20,000 80,000 60,000 80,000
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Totalcost
$161,000
$78,000
$59,000
$132,000
$430,000
Example:70%of$150,000=$105,000 Otherentriesinthetablearedeterminedinasimilarmanner.
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Problem824(continued) 2. Theactivityratesarecomputedasfollows: ActivityCost Pool Cleaningcarpets Traveltojobs...... Jobsupport......... (a) Total (b) (a)(b) Cost TotalActivity ActivityRate $161,000 20,000 hundred $8.05 perhundred squarefeet squarefeet $78,000 60,000 miles $1.30 permile $59,000 2,000 jobs $29.50 perjob
3. ThecostfortheFlyingNRanchjobiscomputedasfollows: ActivityCost Pool Cleaningcarpets (a) ActivityRate $8.05 perhundred squarefeet (b) Activity 5 hundred squarefeet 75 miles 1 job (a)(b) ABCCost $40.25 97.50 29.50 $167.25
Traveltojobs..... $1.30 permile Jobsupport........ $29.50 perjob Total...................
4. Theproductmargincanbeeasilycomputedbyusingthecosts calculatedinpart(3)above. Sales........................ Costs: Cleaningcarpets... Traveltojobs........ Jobsupport........... Productmargin........ $140.00 $40.25 97.50 29.50 167.25 ($ 27.25)
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Problem824(continued) 5. GallatinCarpetCleaningappearstobelosingmoneyontheFlyingN Ranchjob.However,cautionisadvised.Someofthecostsmaynotbe avoidableandhencewouldhavebeenincurredeveniftheFlyingN Ranchjobhadnotbeenaccepted.Anactionanalysis(discussedin Appendix8A)isamoreappropriatestartingpointforanalysisthanthe simplereportinpart(4)above. Nevertheless,thereisapointatwhichtravelcostseatupalloftheprofit fromajob.Withthecompanyscurrentpolicyofchargingaflatfeefor carpetcleaningirrespectiveofhowfarawaytheclientisfromtheoffice, thereclearlyissomepointatwhichjobsshouldbeturneddown.(Whatif apotentialcustomerislocatedinFlorida?) 6. Thecompanyshouldconsiderchargingafeefortraveltooutlying customersbasedonthedistancetraveledandaflatfeeperjob.At present,closeincustomersareinessencesubsidizingserviceto outlyingcustomersandlargevolumecustomersaresubsidizingservice tolowvolumecustomers.Withfeesfortravelandforjobsupport,the feeperhundredsquarefeetcanbedroppedsubstantially.Thismay resultinlosingsomelowvolumejobsinoutlyingareas,butthelowerfee perhundredsquarefeetmayresultinsubstantiallymorebusinessclose toBozeman.(Ifthefeeislowenough,theaddedbusinessmaynoteven havetocomeattheexpenseofcompetitors.Somecustomersmay choosetocleantheircarpetsmorefrequentlyifthepriceweremore attractive.)
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Problem825(75minutes) 1. Thefirststageallocationofcoststoactivitycostpoolsappearsbelow: DistributionofResourceConsumption AcrossActivityCostPools Clean ingCar pets 70% 100% 80% 0% 0% 0% Travel toJobs 20% 0% 0% 60% 0% 0% Job Support 0% 0% 0% 0% 45% 40% Job Support $ 0 0 0 0 27,000 32,000
Wages Cleaningsupplies Cleaningequipmentdepreciation Vehicleexpenses Officeexpenses Presidentscompensation
Other 10% 0% 20% 40% 55% 60%
Total 100% 100% 100% 100% 100% 100%
Wages Cleaningsupplies Cleaningequipmentdepreciation Vehicleexpenses Officeexpenses Presidentscompensation
198
Cleaning Travel Carpets toJobs $105,000 $30,000 40,000 0 16,000 0 0 0 0 48,000 0 0
Other $15,000 0 4,000 32,000 33,000 48,000
Total $150,000 40,000 20,000 80,000 60,000 80,000
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Totalcost
$161,000
$78,000
$59,000
$132,000
$430,000
Example:70%of$150,000=$105,000 Otherentriesinthetablearedeterminedinasimilarmanner.
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Problem825(continued) 2. Theactivityratesarecomputedasfollows: CleaningCarpets 20,000hundred squarefeet $5.25 2.00 0.80 0.00 $8.05 TraveltoJobs 60,000miles driven $0.50 0.80 0.00 $1.30 JobSupport 2,000jobs
Totalactivity Wages Cleaningsupplies Cleaningequipmentdepreciation Vehicleexpenses Officeexpenses Presidentscompensation Totalcost
$13.50 16.00 $29.50
Example:$105,00020,000hundredsquarefeet=$5.25perhundredsquarefeet Wagesattributabletocleaningcarpetsfromthefirststageallocationabove.
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Problem825(continued) 3. ThecostfortheFlyingNRanchjobiscomputedasfollows: Cleaning Travelto JobSup Carpets Jobs port 5hundred 75miles squarefeet driven 1job $26.25 10.00 4.00 0.00 $40.25 $37.50 60.00 0.00 $97.50 Total $63.75 10.00 4.00 60.00 13.50 16.00 $167.25
ActivityfortheFlyingNjob Wages Cleaningsupplies Cleaningequipmentdepreciation Vehicleexpenses Officeexpenses Presidentscompensation Totalcost
$13.50 16.00 $29.50
Example:$5.25perhundredsquarefeet5hundredsquarefeet=$26.25 Activityrateforwagesandcleaningcarpets.
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Problem825(continued) 4. Theproductmargincanbeeasilycomputedusingthecostsalongthe rightmostcolumnofthecosttablepreparedinpart(3). Sales.............................................. Greencosts: Wages......................................... Cleaningsupplies........................ Cleaningequipmentdepreciation Vehicleexpenses........................ Greenmargin................................. Yellowcosts: Officeexpenses.......................... Yellowmargin................................ Redcosts: President'scompensation........... Redmargin.................................... $140.00 $63.75 10.00 4.00 60.00 13.50 16.00
137.75 2.25 13.50 (11.25) 16.00 ( $ 27.25)
5. Atmost,GallatinCarpetCleaningismakingonly$2.25ontheFlyingN Ranchjob.Ifmorethan$2.25ofthe$13.50inOfficeExpensesare actuallyavoidableifthejobwerenotaccepted,thenthejobisactually losingmoney. Thereisapointatwhichtravelcostseatupalloftheprofitfromajob. Withthecompanyscurrentpolicyofchargingaflatfeeforcarpet cleaningirrespectiveofhowfarawaytheclientisfromtheoffice,there clearlyissomepointatwhichjobsshouldbeturneddown.(Whatifa potentialcustomerislocatedinFlorida?)
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Problem825(continued) 6. Thecompanyshouldconsiderchargingafeefortraveltooutlying customersbasedonthedistancetraveledandaflatfeeperjob.At present,closeincustomersareinessencesubsidizingserviceto outlyingcustomersandlargevolumecustomersaresubsidizingservice tolowvolumecustomers.Withfeesfortravelandforjobsupport,the feeperhundredsquarefeetcanbedroppedsubstantially.Thismay resultinlosingsomelowvolumejobsinoutlyingareas,butthelower feesperhundredsquarefeetmayresultinsubstantiallymorebusiness closetoBozeman.(Ifthefeesarelowenough,theaddedbusinessmay notevenhavetocomeattheexpenseofcompetitors.Somecustomers maychoosetocleantheircarpetsmorefrequentlyifthepriceweremore attractive.) Beforemakingsucharadicalchange,thedatashouldbecarefully reviewed.Forexample,thewagecostof$37.50fora75miletripseems ratherhigh.Aretwopeoplesentoutonjobs?Cantheremotejobsbe donewithoneperson?
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Problem826(60minutes) 1. a. Whendirectlaborhoursareusedtoapplyoverheadcosttoproducts, thecompanyspredeterminedoverheadratewouldbe: Predetermined = Manufacturingoverheadcost overheadrate Directlaborhours = b. Directmaterials........................................... Directlabor: $10perhour1.8hoursand0.9hours... Manufacturingoverhead: $50perhour1.8hoursand0.9hours... Totalunitproductcost................................. $1,800,000 = $50perDLH 36,000DLHs Model X200 X99 $72 $50 18 9
90 45 $180 $104
2. a. Predeterminedoverheadratesfortheactivitycostpools: ActivityCostPool Machinesetups Specialpro cessing Generalfactory (1) TotalCost $360,000 (2) TotalActivity 150 setups (1)(2) ActivityRate $2,400 per setup $15 perMH $35 perDLH
180,000 12,000 MHs 1,260,000 36,000 DLHs
Themanufacturingoverheadcostthatwouldbeappliedtoeach model: Model Machinesetups: $2,400persetup50setups,100setups. . Specialprocessing: $15perMH12,000MHs.......................... Generalfactory: $35perDLH9,000DLH,27,000DLH......
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X200
X99
$120,000 $240,000 180,000
315,000 945,000
Totalmanufacturingoverheadcostapplied. . .
$615,000 $1,185,000
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Problem826(continued) b. Beforewecandeterminetheunitproductcostunderactivitybased costing,wemustfirsttaketheoverheadcostsappliedtoeachmodel inpart2(a)aboveandexpressthemonaperunitbasis: Model X200 X99 Totaloverheadcostapplied(a).......................... $615,000 $1,185,000 Numberofunitsproduced(b)............................. 5,000 30,000 Manufacturingoverheadcostperunit(a)(b). . $123 $39.50 Withthisinformation,theunitproductcostofeachmodelunder activitybasedcostingwouldbecomputedasfollows: Model Directmaterials.................................................... Directlabor: $10perDLH1.8DLHs,0.9DLHs.................. Manufacturingoverhead(above)......................... Totalunitproductcost.......................................... X200 X99 $72.00 $50.00 18.00 9.00 123.00 39.50 $213.00 $98.50
ComparingtheseunitcostfigureswiththeunitcostsinPart1(b),we findthattheunitproductcostforModelX200hasincreasedfrom $180to$213,andtheunitproductcostforModelX99hasdecreased from$104to$98.50. 3. Itisespeciallyimportanttonotethat,evenunderactivitybasedcosting, 70%ofthecompanysoverheadcostscontinuetobeappliedto productsonthebasisofdirectlaborhours: Machinesetups(numberofsetups). . Specialprocessing(machinehours). Generalfactory(directlaborhours)... Totaloverheadcost........................... $360,000 180,000 1,260,000 $1,800,000 20% 10 70 100%
Thus,theshiftinoverheadcostfromthehighvolumeproduct(Model X99)tothelowvolumeproduct(ModelX200)occurredasaresultof reassigningonly30%ofthecompanysoverheadcosts.
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Problem826(continued) TheincreaseinunitproductcostforModelX200canbeexplainedas follows:First,wherepossible,overheadcostshavebeentracedtothe productsratherthanbeinglumpedtogetherandspreaduniformlyover production.Therefore,thespecialprocessingcosts,whicharetraceable toModelX200,haveallbeenassignedtoModelX200andnone assignedtoModelX99undertheactivitybasedcostingapproach.Itis commoninindustrytohavesomeproductsthatrequirespecialhandling orspecialprocessingofsometype.Thisisespeciallytrueinmodern factoriesthatproduceavarietyofproducts.Activitybasedcosting providesavehicleforassigningthesecoststotheappropriateproducts. Second,thecostsassociatedwiththebatchlevelactivity(machine setups)havealsobeenassignedtothespecificproductstowhichthey relate.Thesecostshavebeenassignedaccordingtothenumberof setupscompletedforeachproduct.However,sinceabatchlevelactivity isinvolved,anotherfactoraffectingunitcostscomesintoplay.That factorisbatchsize.Someproductsareproducedinlargebatchesand someareproducedinsmallbatches.Thesmallerthebatch,thehigher theperunitcostofthebatchactivity.Inthecaseathand,thedatacan beanalyzedasfollows: ModelX200: Costtocompleteonesetup[see2(a)].......................... Numberofunitsprocessedpersetup (5,000unitspersetup50setups=100units)......... Setupcostperunit(a)(b).......................................... ModelX99: Costtocompleteonesetup(above)............................. Numberofunitsprocessedpersetup (30,000unitspersetup100setups=300units)..... Setupcostperunit(a)(b).......................................... $2,400 (a) 100units (b) $24 $2,400 (a) 300units (b) $8
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Problem826(continued) Thus,thecostperunitforsetupsisthreetimesasgreatforModelX200, thelowvolumeproduct,asitisforModelX99,thehighvolumeproduct. Suchdifferencesincostareobscuredwhendirectlaborhours(orany othervolumemeasure)isusedasabasisforapplyingoverheadcostto products. Insum,overheadcosthasshiftedfromthehighvolumeproducttothe lowvolumeproductasaresultofmoreappropriatelyassigningsome coststotheproductsonthebasisoftheactivitiesinvolved,ratherthan onthebasisofdirectlaborhours.
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Problem827(45minutes) 1. Theresultsofthefirststageallocationappearbelow: Estimating Workingon andJob Nonroutine Setup Jobs Other $30,000 $90,000 $30,000 0 280,000 0 4,500 18,000 31,500 15,000 5,000 0 70,000 50,000 60,000 0 200,000 80,000 $119,500 $643,000 $201,500
Wagesandsalaries Disposalfees Equipmentdepreciation Onsitesupplies Officeexpenses Licensingandinsurance Totalcost
JobSize $150,000 420,000 36,000 30,000 20,000 120,000 $776,000
Totals $300,000 700,000 90,000 50,000 200,000 400,000 $1,740,000
Accordingtothedataintheproblem,50%ofthewagesandsalariescostof$300,000isattributable toactivitiesrelatedtojobsize. $300,00050%=$150,000 Otherentriesinthetablearedeterminedinasimilarmanner. 2. ActivityCostPool Jobsize Estimatingandjob setup Workingonnon routinejobs (a) (b) TotalCost TotalActivity $776,000 800 thousandsquarefeet $119,500 500 jobs $643,000 100 nonroutinejobs (a)(b) ActivityRate $970 perthousandsquarefeet $239 perjob $6,430 pernonroutinejob
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Problem827(continued) 3. Thecostsofeachofthejobscanbecomputedasfollowsusingtheactivityratescomputedabove: a. Routineonethousandsquarefeetjob: Jobsize(1thousandsquarefeet@$970perthousandsquarefeet)..... Estimatingandjobsetup(1job@$239perjob)..................................... Nonroutinejob(notapplicable)................................................................ Totalcostofthejob................................................................................. Costperthousandsquarefeet($1,2091thousandsquarefeet)......... Routinetwothousandsquarefeetjob: Jobsize(2thousandsquarefeet@$970perthousandsquarefeet)..... Estimatingandjobsetup(1job@$239perjob)..................................... Nonroutinejob(notapplicable)................................................................ Totalcostofthejob................................................................................. Costperthousandsquarefeet($2,1792thousandsquarefeet)......... Nonroutinetwothousandsquarefeetjob: Jobsize(2thousandsquarefeet@$970perthousandsquarefeet)..... Estimatingandjobsetup(1job@$239perjob)..................................... Nonroutinejob......................................................................................... Totalcostofthejob................................................................................. Costperthousandsquarefeet($8,6092thousandsquarefeet)......... $970.00 239.00 0 $1,209.00 $1,209.00 $1,940.00 239.00 0 $2,179.00 $1,089.50 $1,940.00 239.00 6,430.00 $8,609.00 $4,304.50
b.
c.
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Problem827(continued) 4. Theobjectivityoftheinterviewdatacanbequestionedsincetheonsite worksupervisorswereundoubtedlytryingtoprovetheircaseaboutthe costofnonroutinejobs.Nevertheless,theactivitybasedcostingdata certainlysuggestthatdramaticdifferencesexistinthecostsofjobs. Whilesomeofthecostsmaybedifficulttoadjustinresponseto changesinactivity,itdoesappearthatthestandardbidof$2,500per thousandsquarefeetmaybesubstantiallyunderthecompanyscostfor nonroutinejobs.Eventhoughitmaybedifficulttodetectnonroutine situationsbeforeworkbegins,theaverageadditionalcostof$6,430for nonroutineworksuggeststhattheestimatorshouldtry.Andifa nonroutinesituationisspotted,thisshouldbereflectedinthebidprice. Savvycompetitorsarelikelytobidlessthan$2,500perthousand squarefeetonroutineworkandsubstantiallymorethan$2,500per thousandsquarefeetonnonroutinework.Consequently,Mercer AsbestosRemovalmayfindthatitsproductmixshiftstowardnonroutine workandawayfromroutineworkascustomersacceptbidson nonroutineworkfromthecompanyandgotocompetitorsforroutine work.Thismayhaveadisastrouseffectonthecompanysprofits.
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Problem828(20minutes) 1. ThecostofservingthelocalcommercialmarketaccordingtotheABCmodelcanbedeterminedas follows: ActivityCostPool Animationconcept Animationproduction Contractadministration (a) ActivityRate $6,040 perproposal $7,725 perminuteofanimation $6,800 percontract (b) Activity 25 proposals 5 minutes 10 contracts (a)(b) ABCCost $151,000 38,625 68,000 $257,625
2. Theproductmarginofthelocalcommercialmarketisnegative,asshownbelow: ProductProfitabilityAnalysis Sales $180,000 Costs: Animationconcept............................... $151,000 Animationproduction........................... 38,625 Contractadministration........................ 68,000 257,625 Productmargin ($77,625) 3. Itappearsthatthelocalcommercialmarketislosingmoneyandthecompanywouldbebetteroff droppingthismarketsegment.However,asdiscussedinProblem829,notallofthecostsincluded abovemaybeavoidable.Ifmorethan$77,625ofthetotalcostsof$257,625isnotavoidable,then thecompanyreallyisntlosingmoneyonthelocalcommercialmarketandthesegmentshouldnotbe dropped.TheseissueswillbediscussedinmoredepthinChapters12and13.
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Problem829(30minutes) 1. Thedetailedcostanalysisoflocalcommercialsappearsbelow: ActivityRates Animation Concept $4,000 360 1,440 120 120 $6,040 Animation Concept 25proposals $100,000 9,000 36,000 3,000 3,000 $151,000 Animation Production $6,000 1,125 150 300 150 $7,725 Animation Production 5minutes $30,000 5,625 750 1,500 750 $38,625 ContractAd ministration $1,600 0 4,800 160 240 $6,800 ContractAd ministration 10contracts $16,000 0 48,000 1,600 2,400 $68,000
Technicalstaffsalaries Animationequipmentdepreciation Administrativewagesandsalaries Suppliescosts Facilitycosts Total
Activitylevel Technicalstaffsalaries Animationequipmentdepreciation Administrativewagesandsalaries Suppliescosts Facilitycosts Totalcost
SolutionsManual,Chapter8
Total $146,000 14,625 84,750 6,100 6,150 $257,625
213
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Example:$4,000perproposal25proposals=$100,000
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Problem829(continued) 2. Theactionanalysisreportisconstructedbyusingtherowtotalsfromthe costreportinpart(1)above: Sales................................................... Greencosts: Suppliescosts.................................. Greenmargin...................................... Yellowcosts: Administrativewagesandsalaries... Yellowmargin..................................... Redcosts: Technicalstaffsalaries.................... Animationequipmentdepreciation... Facilitycosts.................................... Redmargin......................................... $180,000 $ 6,100 84,750 146,000 14,625 6,150 6,100 173,900 84,750 89,150
166,775 ($77,625)
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Problem829(continued) 3. Atfirstglance,itappearsthatthecompanyislosingmoneyonlocal commercials.However,theactionanalysisreportindicatesthatifthis marketsegmentweredropped,mostofthecostsarelikelytocontinue beingincurred.Thenatureofthetechnicalstaffsalariesisclearlycritical sinceitmakesupthebulkofthecosts.Managementhassuggestedthat thetechnicalstaffarethecompanysmostvaluableassetandthatthey wouldbethelasttogoincaseoffinancialdifficulties.Nevertheless, thereareatleasttwosituationsinwhichthesecostswouldberelevant. First,droppingthelocalcommercialmarketsegmentmayreducefuture hiringofnewtechnicalstaff.Thiswouldhavetheeffectofreducing futurespendingandthereforewouldreducethecompanyscosts. Second,iftechnicalstafftimeisaconstraint,droppingthelocal commercialmarketsegmentwouldallowmanagerstoshifttechnical stafftimetoother,presumablymoreprofitable,work.However,ifthisis thecase,therearebetterwaystodeterminewhichprojectsshouldget technicalstaffattention.ThissubjectwillbecoveredinChapter13inthe sectiononutilizationofscarceresources. Finally,thecostoftheanimationconceptattheproposalstageisa majordragontheprofitabilityofthelocalcommercialmarket.The activitybasedcostingsystem,ascurrentlydesigned,assumesthatall projectproposalsrequirethesameeffort.Thismaynotbethecase. Proposalsforlocalcommercialsmaybefarlesselaboratethan proposalsformajorspecialeffectsanimationsequencesformotion pictures.Ifmanagementhasbeenputtingaboutthesameamountof effortintoeveryproposal,theaboveactivitybasedcostinganalysis suggeststhatthismaybeamistake.Managementmaywanttoconsider cuttingbackontheeffortgoingintoanimationconceptsforlocal commercialsattheprojectproposalstage.Ofcourse,thismayleadto anevenlowersuccessrateonbidsforlocalcommercials.
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Problem830(45minutes) 1. Thecompanyexpectstowork40,000directlaborhours,computedas follows: Monorelay:40,000units0.75DLHperunit..... Birelay:10,000units1.0DLHperunit............. Total..................................................................... 30,000DLHs 10,000DLHs 40,000DLHs
Usingdirectlaborhoursasthebase,thepredeterminedmanufacturing overheadratewouldbe: Predetermined = Estimatedmanufacturingoverheadcost overheadrate Estimateddirectlaborhours = $1,000,000 = $25perDLH 40,000DLHs Birelay $48.00 12.00 25.00 $85.00
Theunitproductcostofeachproductwouldbe: Monorelay Directmaterials(given)....................... $35.00 Directlabor(given)............................. 9.00 Manufacturingoverhead: $25perDLH0.75DLH,1.0DLH. . 18.75 Totalunitproductcost........................ $62.75
2. Thepredeterminedoverheadrateswouldbecomputedasfollows: (a) Estimated Overhead (b) Costs ExpectedActivity $180,000 (a)(b) Predetermined OverheadRate
Activity Maintainingparts inventory............. Processingpur chaseorders....... Qualitycontrol....... Machinerelated.....
225 parttypes $800 perparttype $90 perorder $40 pertest $50 perMH
$90,000 1,000 orders $230,000 5,750 tests $500,000 10,000 MHs
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Problem830(continued) 3. a. Maintainingpartsinvent ory,at$800perparttype 10perorder Processingpurchaseor ders,at$90perorder Qualitycontrol,at$40per test Machinerelated,at$50 permachinehour Totalmanufacturingover headcost Mono relay: Birelay: Monorelay Activity Amount Birelay Activity Amount
75 $60,000 800 2,500 72,000 100,000
150 $120,000 200 3,250 18,000 130,000
4,000 200,000 $432,000
6,000 300,000 $568,000
Manufacturingoverheadcostperunitofeachproduct: $432,00040,000units=$10.80perunit $568,00010,000units=$56.80perunit
b. Usingactivitybasedcosting,theunitproductcostofeachproduct wouldbe: Monorelay Birelay Directmaterials $35.00 $48.00 Directlabor 9.00 12.00 Manufacturingoverhead(above) 10.80 56.80 Totalunitproductcost $54.80 $116.80
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Problem830(continued) 4. Althoughthebirelayaccountsforonly20%ofthecompanystotal production,itisresponsiblefortwothirdsoftheparttypescarriedin inventoryand60%ofthemachinehoursworked.Itisalsoresponsible forwelloverhalfofthetestsneededforqualitycontrol.Thesefactors havebeenconcealedasaresultofusingdirectlaborhoursasthebase forassigningoverheadcosttoproducts.Sincethebirelayisresponsible foramajorityoftheactivity,underactivitybasedcostingitisassigneda largeramountofoverheadcost. Managersshouldbecautiousaboutdrawingfirmconclusionsaboutthe profitabilityofproductsfromtheaboveactivitybasedcostanalysis.The ABCsystemusedinthiscompanyisnotcompletelysuitableformaking decisions.Productcostsprobablyincludecostsofidlecapacityand organizationsustainingcosts.Theyalsoexcludenonmanufacturing coststhatmaybecausedbytheproducts.Nevertheless,theabove analysisissuggestive.Thebirelaymaynotbeasprofitableas managementbelieves,andthismaybethereasonforthecompanys decliningprofits.Notethatfrompart(1),theunitproductcostofthebi relayis$85.Inpart(3),however,theactivitybasedcostingsystemsets theunitproductcostofthebirelayat$116.80.Thisisadifferenceof $31.80perunit.Ifthe$85costfigureisbeingusedasthebasefor determiningasellingpriceforthebirelay,thecompanymaybelosing moneyonthisproduct.
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Case831(90minutes) 1. a. Thepredeterminedoverheadratewouldbecomputedasfollows: Expectedmanufacturingoverheadcost $2,200,000 = Estimateddirectlaborhours 50,000DLHs = $44perDLH b. Theunitproductcostperpound,usingthecompanyspresentcosting system,wouldbe: Kenya Dark $4.50 0.24 0.88 $5.62 Viet Select $2.90 0.24 0.88 $4.02
Directmaterials(given)............ Directlabor(given)................... Manufacturingoverhead: 0.02DLH$44perDLH...... Totalunitproductcost.............. 2. a. Overheadratesbyactivitycenter:
ActivityCenter Purchasing.......... Materialhandling. Qualitycontrol..... Roasting.............. Blending.............. Packaging............
(a) Estimated (b) Overhead Expected Costs Activity $560,000 2,000 orders $193,000 1,000 setups $90,000 500 batches $1,045,000 95,000 roasting hours $192,000 32,000 blending hours $120,000 24,000 packaging hours
(a)(b) Predetermined OverheadRate $280 perorder $193 persetup $180 perbatch $11 per roasting hour $6 per blending hour $5 per packaging hour
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Case831(continued) Beforewecandeterminetheamountofoverheadcosttoassignto theproductswemustfirstdeterminetheactivityforeachofthe productsinthesixactivitycenters.Thenecessarycomputations follow: Numberofpurchaseorders: KenyaDark:80,000pounds20,000poundsperorder=4orders VietSelect:4,000pounds500poundsperorder=8orders Numberofbatches: KenyaDark:80,000pounds5,000poundsperbatch=16batches VietSelect:4,000pounds500poundsperbatch=8batches Numberofsetups: KenyaDark:16batches2setupsperbatch=32setups VietSelect:8batches2setupsperbatch=16setups Roastinghours: KenyaDark:80,000pounds1.5roastinghoursper100pounds= 1,200roastinghours VietSelect:4,000pounds1.5roastinghoursper100pounds= 60roastinghours Blendinghours: KenyaDark:80,000pounds0.5blendinghoursper100pounds= 400blendinghours VietSelect:4,000pounds0.5blendinghoursper100pounds= 20blendinghours Packaginghours: KenyaDark:80,000pounds0.3packaginghoursper100pounds= 240packaginghours VietSelect:4,000pounds0.3packaginghoursper100pounds= 12packaginghours
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Case831(continued) Usingtheactivityfigures,manufacturingoverheadcostscanbeassignedtothetwoproductsas follows: KenyaDark Purchasing................ Materialhandling....... Qualitycontrol........... Roasting.................... Blending.................... Packaging................. Totaloverheadcost... VietSelect Purchasing................ Materialhandling....... Qualitycontrol........... Roasting.................... Blending.................... Packaging................. Totaloverheadcost... ActivityRate ExpectedActivity Amount $280 perorder 4 orders $1,120 $193 persetup 32 setups 6,176 $180 perbatch 16 batches 2,880 $11 perroastinghour 1,200 roastinghours 13,200 $6 perblendinghour 400 blendinghours 2,400 $5 perpackaginghour 240 packaginghours 1,200 $26,976 ActivityRate $280 perorder $193 persetup $180 perbatch $11 perroastinghour $6 perblendinghour $5 perpackaginghour ExpectedActivity Amount 8 orders $2,240 16 setups 3,088 8 batches 1,440 60 roastinghours 660 20 blendinghours 120 12 packaginghours 60 $7,608
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Case831(continued) b. Accordingtotheactivitybasedcostingsystem,themanufacturing overheadcostperpoundis: Kenya Dark $26,976 80,000 $0.34 Viet Select $7,608 4,000 $1.90
Totaloverheadcostassigned(above)(a)... Numberofpoundsmanufactured(b).......... Costperpound(a)(b)..............................
c. Theunitproductcostsaccordingtotheactivitybasedcostingsystem are: Kenya Viet Dark Select Directmaterials(given) $4.50 $2.90 Directlabor(given) 0.24 0.24 Manufacturingoverhead 0.34 1.90 Totalunitproductcost $5.08 $5.04 3. MEMOTOTHEPRESIDENT:AnalysisofJSIsdatashowsthatseveral activitiesotherthandirectlabordrivethecompanysmanufacturing overheadcosts.Theseactivitiesincludepurchaseordersissued, numberofsetupsformaterialprocessing,andnumberofbatches processed.Thecompanyspresentcostingsystem,whichrelieson directlabortimeasthesolebasisforassigningoverheadcostto products,significantlyundercostslowvolumeproducts,suchastheViet Selectcoffee,andsignificantlyovercostshighvolumeproducts,suchas ourKenyaDarkcoffee. Animplicationoftheactivitybasedcostinganalysisisthatourlow volumeproductsmaynotbecoveringthecostsofthemanufacturing resourcestheyuse.Forexample,VietSelectcoffeeiscurrentlypricedat $5.03perpound($4.02plus25%markup),butthispriceisbelowits activitybasedcostof$5.08perpound.Underourpresentcostingand pricingsystem,ourhighvolumeproducts,suchasourKenyaDark coffee,maybesubsidizingourlowvolumeproducts.Someadjustments inpricesmayberequired.However,beforetakingsuchanaction,an actionanalysisreport(discussedinAppendix8A)shouldbeprepared.
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Case831(continued) ALTERNATIVESOLUTION: Moststudentswillcomputethemanufacturingoverheadcostperpound ofthetwocoffeesasshownabove.However,theperpoundcostcan alsobecomputedasshownbelow.Thisalternativeapproachprovides additionalinsightintothedataandfacilitatesemphasisofsomepoints madeinthechapter. KenyaDark Total $1,120 6,176 2,880 13,200 2,400 1,200 $26,976 PerPound (80,000) $0.014 0.077 0.036 0.165 0.030 0.015 $0.337 VietSelect Total $2,240 3,088 1,440 660 120 60 $7,608 PerPound (4,000) $0.560 0.772 0.360 0.165 0.030 0.015 $1.902
Purchasing Materialhandling Qualitycontrol Roasting Blending Packaging Total
Noteparticularlyhowbatchsizeimpactsunitcostdata.Forexample,the costtothecompanytoprocessapurchaseorderis$280,regardlessof howmanypoundsofcoffeearecontainedintheorder.Twentythousand poundsoftheKenyaDarkcoffeearepurchasedperorder(withfour ordersperyear),andjust500poundsoftheVietSelectcoffeeare purchasedperorder(witheightordersperyear).Thus,thepurchase ordercostperpoundfortheKenyaDarkcoffeeisjust1.4cents, whereasthepurchaseordercostperpoundfortheVietSelectcoffeeis 40timesasmuch,or56cents.Asstatedinthetext,thisisonereason whyunitcostsoflowvolumeproducts,suchastheVietSelectcoffee, increasesodramaticallywhenactivitybasedcostingisused.
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Case832(90minutes) 1. Thetotaldirectlaborhoursworkedfortheyearwouldbe: X20: 30,000units2DLHsperunit.......... Y30: 5,000units3DLHsperunit............ TotalDLHs........................................ Manufacturingoverheadcost $1,800,000 = Directlaborhours 75,000DLHs = $24perDLH 2. Theunitproductcostswouldbe: Directmaterials(given).............................................. Directlabor(given).................................................... Manufacturingoverhead: $24perDLH2DLHsperunit,3DLHsperunit.... Totalunitproductcost............................................... X20 Y30 $50 $80 24 36 48 72 $122 $188 60,000 15,000 75,000
Thepredeterminedoverheadratefortheyearwouldthereforebe:
3. Thispartofthecaseisopenended,butstudentsshouldprovidedata suchasgivenbelow. Overheadratesfortheactivitiesare: (a) Estimated (a)(b) Overhead (b) Predetermined Costs ExpectedActivity OverheadRate $208,000 1,600 setups $130.00 persetup $360,000 9,000 inspections $40.00 perinspection $90,000 1,200 orders $75.00 perorder $450,000 200,000 joints $2.25 perjoint $132,000 600 shipments $220.00 pershipment $560,000 70,000 MHs $8.00 perMH
Activity Machinesetups.. Qualitycontrol.... Purchaseorders. Soldering............ Shipments.......... Machinerelated.
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Case832(continued) Overheadcostassignedtoeachproduct: X20 Machinesetups............................ Qualityinspections....................... Purchaseorders.......................... Soldering...................................... Shipments.................................... Machinerelated........................... Totaloverheadcost(a)................ Numberofunitsproduced(b)...... Overheadcostperunit(a)(b)... Y30 Machinesetups............................ Qualityinspections....................... Purchaseorders.......................... Soldering...................................... Shipments.................................... Machinerelated........................... Totaloverheadcost(a)................ Numberofunitsproduced(b)...... Overheadcostperunit(a)(b)... ActivityRate $130.00 persetup $40.00 perinspection $75.00 perorder $2.25 perjoint $220.00 pershipment $8.00 perMH ExpectedActivity 1,000 setups 4,000 inspections 840 orders 60,000 joints 400 shipments 30,000 MHs Amount $130,000 160,000 63,000 135,000 88,000 240,000 $816,000 30,000 $27.20 Amount $78,000 200,000 27,000 315,000 44,000 320,000 $984,000 5,000 $196.80
ActivityRate ExpectedActivity $130.00 persetup 600 setups $40.00 perinspection 5,000 inspections $75.00 perorder 360 orders $2.25 perjoint 140,000 joints $220.00 pershipment 200 shipments $8.00 perMH 40,000 MHs
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Case832(continued) Theunitproductcostofeachproductunderactivitybasedcostingis givenbelow.Forcomparison,thecostscomputedinpart2aboveare alsoprovided. ActivityBased DirectLaborHour Costing Base Directmaterials Directlabor Manufacturingoverhead Totalunitproductcost X20 Y30 $50.00 $80.00 24.00 36.00 27.20 196.80 $101.20 $312.80 X20 Y30 $50.00 $80.00 24.00 36.00 48.00 72.00 $122.00 $188.00
Asshownbytheaboveanalysis,unitproductcostsmayhavebeen distortedasaresultofusingdirectlaborhoursasthebaseforassigning overheadcoststoproducts.Thesedistortedcostsmayhavehada majorimpactonmanagementspricingpoliciesandonmanagements perceptionofthemarginbeingrealizedoneachproduct.Accordingto theactivitybasedcostingapproach,ModelY30isbeingsoldataloss: ActivityBased Costing Sellingpriceperunit* Lessunitproductcost (above) Grossmargin(loss) X20 $200.00 101.20 $ 98.80 Y30 $250.00 312.80 ($62.80) DirectLabor HourBase X20 Y30 $200.00 $250.00 122.00 188.00 $ 78.00 $ 62.00
*Totalsalesthenumberofunitssold. 4. ItisnotsurprisingthattheY30sellsitselfsincethecompanyisselling itatanapparentlossof$62.80.ThisprobablyexplainswhyBranson CompanycouldntmeetCutlerProductsprice. Inaddition,CutlerProductsdistortedunitcostsexplainwhyBranson CompanyisabletoundercutCutlerspriceontheX20units.Cutlers managementthinksthattheX20costsmoretomanufacturethanit reallydoesaccordingtotheactivitybasedcostingsystem.
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Case832(continued) 5. Studentsmaysuggestmanypossiblestrategiesthereisnosingle rightanswer.Twopossiblestrategiesare:(a)raisethesellingpriceof theY30enoughtoprovideasatisfactorymargin;and(b)discontinue theY30andfocusallavailableresourcesontheX20.Thepriceofthe X20mightevenbedecreasedtoincreasethevolumeofsales,ifthe companyhasadequatecapacitytodoso.Beforetakinganyaction,an actionanalysisreportshouldbepreparedasdiscussedinAppendix8A.
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Case833(120minutes) 1. a. Thepredeterminedoverheadrateiscomputedasfollows: Predetermined = Estimatedmanufacturingoverheadcost overheadrate Estimateddirectlaborhours = $780,000 = $7.80perDLH 100,000DLHs
b. Themarginsforthewindowsorderedbythetwocustomersarecomputedasfollowsunderthe traditionalcostingsystem: Sales.................................................................. Costs: Directmaterials............................................... Directlabor..................................................... Manufacturingoverhead(@$7.80perDLH).. Margin................................................................ KuszikBuilders $12,500 $4,200 5,400 2,340 11,940 $ 560 $18,500 36,000 15,600 WesternHomes $68,000
70,100 ( $ 2,100)
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Case833(continued) 2. a. Thefirststageallocationofcoststoactivitycostpoolsappearsbelow: Making Windows $120,000 270,000 24,000 0 0 0 $414,000 Pro cessing Orders $160,000 0 0 60,000 12,000 0 $232,000 Customer Relations Other $40,000 $80,000 0 30,000 0 56,000 90,000 150,000 4,000 24,000 150,000 100,000 $284,000 $440,000
Indirectfactorywages Productionequipmentdepreciation Otherfactorycosts Administrativewagesandsalaries Officeexpenses Marketingexpenses Totalcost
Totals $400,000 300,000 80,000 300,000 40,000 250,000 $1,370,000
Accordingtothedataintheproblem,30%oftheindirectfactorywagesareattributabletoactivities associatedwithmakingwindows. 30%of$400,000=$120,000 Theotherentriesinthetablearedeterminedinasimilarmanner.
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Case833(continued) 2. b. Theactivityratesarecomputedasfollows: Making Processing Customer Windows Orders Relations Totalactivity..................................... 100,000DLHs 2,000orders 100customers Indirectfactorywages...................... Productionequipmentdepreciation.. Otherfactorycosts........................... Administrativewagesandsalaries... Officeexpenses............................... Marketingexpenses......................... Totalcost.......................................... $1.20 2.70 0.24 0.00 $4.14 $80.00 30.00 6.00 0.00 $116.00 $400.00 900.00 40.00 1,500.00 $2,840.00
Example:$120,000100,000DLHs=$1.20perDLH Indirectfactorywagesattributabletotheactivitymakingwindowsfromthefirststageallocation above.
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Case833(continued) 2. c. TheoverheadcostofservingKuszikBuildersiscomputedasfollows: Processing Making Windows ActivityforKuszikBuilders................ 300DLHs Indirectfactorywages........................ $360 Productionequipmentdepreciation... 810 Otherfactorycosts............................ 72 Administrativewagesandsalaries.... Officeexpenses................................. Marketingexpenses.......................... 0 Totalcost........................................... $1,242 Example:$1.20perDLH300DLHs=$360 Activityrateforindirectwagesfortheactivitymakingwindows. Orders 2orders $160 60 12 0 $232 Customer Relations 1customer $400 900 40 1,500 $2,840 Total $920 810 72 960 52 1,500 $4,314
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Case833(continued) TheoverheadcostofservingWesternHomesiscomputedasfollows: Making Processing Customer Windows Orders Relations 2,000DLHs 3orders 1customer $2,400 5,400 480 0 $8,280 $240 90 18 0 $348 $400 900 40 1,500 $2,840 Total $3,040 5,400 480 990 58 1,500 $11,468
ActivityforWesternHomes Indirectfactorywages Productionequipmentdepreciation Otherfactorycosts Administrativewagesandsalaries Officeexpenses Marketingexpenses Totalcost
Example:$1.20perDLH2,000DLHs=$2,400 Activityrateforindirectwagesfortheactivitymakingwindows.
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Case833(continued) 2. d. Theactionanalysescanbeconstructedusingtherowtotalsfromthe overheadcostanalysisinpart(2c)above. KuszikBuilders Sales................................................. Greencosts:...................................... Directmaterials............................... Greenmargin..................................... Yellowcosts: Directlabor..................................... Indirectfactorywages..................... Productionequipmentdepreciation Otherfactorycosts.......................... Officeexpenses.............................. Marketingexpenses........................ Yellowmargin.................................... Redcosts: Administrativewagesandsalaries. Redmargin........................................ $12,500 $4,200 5,400 920 810 72 52 1,500 960 4,200 8,300
8,754 (454) 960 ($ 1,414)
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Case833(continued) WesternHomes Sales................................................. Greencosts:...................................... Directmaterials............................... Greenmargin..................................... Yellowcosts: Directlabor..................................... Indirectfactorywages..................... Productionequipmentdepreciation Otherfactorycosts.......................... Officeexpenses.............................. Marketingexpenses........................ Yellowmargin.................................... Redcosts: Administrativewagesandsalaries. Redmargin........................................ $68,000 $18,500 36,000 3,040 5,400 480 58 1,500 990 18,500 49,500
46,478 3,022 990 $ 2,032
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Case833(continued) 3. Accordingtotheactivitybasedcostinganalysis,ClassicWindowsmay belosingmoneydealingwithKuszikBuilders.Boththeredandyellow marginsarenegative.ThismeansthatifClassicWindowscouldactually avoidtheyellowcosts(orredeploytheseresourcestomoreprofitable uses)bydroppingKuszikBuildersasacustomer,thecompanywould bebetteroffwithoutthiscustomer. Theactivitybasedcostingandtraditionalcostingsystemsdonotagree concerningtheprofitabilityofthesetwocustomers.Thetraditional costingsystemregardsKuszikBuildersasaprofitablecustomerand WesternHomesasamoneylosingcustomer.Theactivitybasedcosting systemcomestoexactlytheoppositeconclusion.Theactivitybased costingsystemprovidesmoreusefuldatafordecisionmakingfor severalreasons.First,thetraditionalcostingsystemassignsall manufacturingcoststoproductsevencoststhatarenotactually causedbytheproductssuchascostsofidlecapacityandorganization sustainingcosts.Second,thetraditionalcostingsystemexcludesall nonmanufacturingcostsfromproductcostseventhosethatare causedbytheproductsuchassomeofficeexpenses.Third,the traditionalcostingsystemspreadsmanufacturingoverheaduniformly amongproductsbasedondirectlaborhours.Thispenalizeshigh volumeproductswithlargeamountsofdirectlaborhours.Lowvolume productswithrelativelysmallamountsofdirectlaborhoursbenefitsince thecostsofbatchlevelactivitieslikeprocessingordersarepushedonto thehighvolumeproducts.
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Case834(90minutes) 1. Overheadrates: (a) Estimated Overhead Costs $12,000 $15,000
Purchasing................... Materialhandling......... Productionordersand equipmentsetup....... Inspection.................... Frameassembly.......... Machinerelated...........
(b)ExpectedActivity 1 200 orders 2 300 receipts
3
(a) (b) PredeterminedOverhead Rate $60 perorder $50 perreceipt
$20,250 250 setuphours $81 persetuphour 4 $16,000 800 inspectionhours $20 perinspectionhour $8,000 1,600 assemblyhours $5 perassemblyhour 5 $30,000 10,000 machinehours $3 permachinehour 50hours 200hours 250hours 5,000hours 5,000hours 10,000hours
40+60+100=200orders. 2 60+80+160=300receipts. 3 Standard:50setups1hourpersetup.......... Specialty:100setups2hourspersetup....... Totalsetuphours............................................. 4 300+500=800hours. 5 Standard:10,000units0.5hoursperunit.... Specialty:2,500units2hoursperunit.......... Totalmachinehours........................................
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Case834(continued) Overheadcostchargedtoeachproduct: Standard Purchasing@$60perorder: Leather............................................. 34 Fabric............................................... 48 Synthetic.......................................... 0 Materialhandling@$50perreceipt: Leather............................................. 52 Fabric............................................... 64 Synthetic.......................................... 0 Productionordersandequipment setup@$81perhour...................... 50 Inspection@$20perhour................. 300 Frameassembly@$5perhour......... 800 Machinerelated@$3perhour.......... 5,000 Totaloverheadcost............................ Activity Amount $2,040 2,880 0 2,600 3,200 0 4,050 6,000 4,000 15,000 $39,770 Specialty Activity Amount 6 12 100 8 16 160 200 500 800 5,000 $360 720 6,000 400 800 8,000 16,200 10,000 4,000 15,000 $61,480
Manufacturingoverheadcostperunitofproduct: Standard:$39,77010,000units=$3.98perunit(rounded) Specialty:$61,4802,500units=$24.59perunit(rounded)
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Case834(continued) 2. Theunitproductcostofeachproductlineunderactivitybasedcostingis givenbelow.Forcomparison,thecostscomputedbythecompanys accountingdepartmentusingconventionalcostingarealsoprovided. ActivityBased Costing Directmaterials............... Directlabor...................... Manufacturingoverhead.. Totalunitproductcost..... Standard Specialty $20.00 $17.50 6.00 3.00 3.98 24.59 $29.98 $45.09 DirectLabor HourBase Standard Specialty $20.00 $17.50 6.00 3.00 9.00 4.50 $35.00 $25.00
3. Thepresidentwasprobablycorrectinbeingconcernedaboutthe profitabilityoftheproducts,buttheproblemisapparentlywiththe specialtyproductlineratherthanthestandardproductline.Traditional overheadcostassignmentusingavolumebasedmeasurehasresulted inthehighvolumeproductsubsidizingthelowvolumeproduct.Thus, unitcostsforbothproductsarebadlydistorted.Thesedistortedcosts havehadamajorimpactonmanagementspricingpoliciesandon managementsperceptionofthemarginbeingrealizedoneachproduct. Thespecialtybriefcasesareapparentlybeingsoldatalossevenwithout consideringnonmanufacturingcosts: Standard Briefcases $36.00 29.98 $ 6.02 Specialty Briefcases $40.00 45.09 ( ) $ 5.09
Sellingpriceperunit............ Unitproductcost.................. Grossmargin(loss)perunit
Basedonthesedata,thecompanyshouldnotshiftitsresourcesentirely totheproductionofspecialtybriefcases.Whetherornotthespecialty briefcasescanbemadeprofitabledependsonanumberoffactors includingthesensitivityofthemarkettoanincreaseinthesellingprice ofthespecialtyline.
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Case834(continued) NotetotheInstructor:Youmaywanttomentiontoyourclassthatbefore anydecisioncanbemaderegardingdroppingaproduct,acareful analysiswillhavetobemadeofthepotentialavoidablecosts.Someof thecostsincludedintheunitproductcostsareprobablycostsofidle capacityandorganizationsustainingcoststhatarenotrelevant. 4. PerhapsthecompetitionhasntbeenabletotouchCarryAllsprice becauseCarryAllhasbeensellingitsspecialtybriefcasesatapricethat maybebelowitscost.Thus,ratherthangougingitscustomers, CarryAllscompetitorisprobablyjustpricingitsspecialtyitemsata normalmarkupovertheircost.Indeed,accordingtotheactivitybased costingsystem,ifCarryAllistorealizeaprofitonitsspecialtyitemsit mayneedtochargeapricemoreinlinewithitscompetitorsprice. Whenacompanysellsaproductatapricesubstantiallybelowthatofits competitors,thecompanysmanagementshouldtakeacarefullookat thecostingsystemtobesurethattheproductisbeingassignedallthe costsforwhichitisresponsible.
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GroupExercise835 Themostequitablewaytodividethedinnerbillamongagroupoffriendsis probablytofigureoutthecostofwhateachindividualconsumedanddivide upthebillaccordingly.However,itwouldbeeasiertosimplydividethetotal billbythenumberofindividuals.Everyonewouldthenpayexactlythe sameamount.Thisissuerelatestomaterialinthechapterbecausethe formermethodofchargingindividualsforthecostsofwhattheyconsumeis similartoactivitybasedcostingandthemethodofjustdividingthebill equallyissimilartotraditionalcostingmethods.Figuringoutthecostof whateachindividualconsumesisthemostaccuratemethod,butitmay taketoomuchtimeandenergytobeworththebother.
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GroupExercise836 Anactivitybasedcostingsystemtypicallyreducestheamountofoverhead costthatisallocatedbasedondirectlaborhoursshiftingtheoverheadto othercostpools.Underanactivitybasedcostingsystem,someoftheover headwillbeallocatedbasedonthenumberofbatchesrun,thenumberof productsinthecompanysactivelist,andsoon.Thisshiftscostsfromhigh volumeproductsproducedinlargebatchestolowvolumeproductspro ducedinsmallbatches.Oncethisisunderstood,theanswerstotheques tionsposedinthegroupexercisecanbeeasilyanswered. 1. Theunitproductcostofalowvolumeproductmadeinsmallbatcheswill typicallyincreaseinanactivitybasedcostingsystem.Thebatchlevel andproductlevelcostsarespreadacrossasmallnumberofunits, increasingtheaverageunitcost. 2. Theunitproductcostofahighvolumeproductmadeinlargebatches withautomatedequipmentandfewdirectlaborhourswilltypicallygoup underactivitybasedcosting.Becauseofthelowdirectlaborhour requirementfortheproduct,theunitproductcostunderatraditional directlaborbasedcostingsystemwouldbeartificiallylow.Underan activitybasedcostingsystem,theproductwouldbechargedforitsuse ofautomatedequipmentandforbatchlevelandproductlevelcosts. 3. Theunitproductcostofahighvolumeproductthatrequireslittle machineworkbutalotofdirectlabortypicallywilldecreaseunder activitybasedcosting.Becauseofthehighdirectlaborhourrequirement fortheproduct,theunitproductcostunderatraditionaldirectlabor basedcostingsystemwouldbeartificiallyhigh.Theactivitybased costingsystemwouldshiftsomeoftheoverheadcoststhathadbeen assignedtothisproducttootherproductsthataremadeinsmaller volumes.
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