AC2720 Wk2 Exercise 2 - Cost Hierachy Problem 1 Part 1...

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Unformatted text preview: Cost Hierachy Problem 1 Part 1: Classification a. Indirect manufacturing labor costs such as supervision that supports direct manufacturing labor, $825,000 b. Procurement costs of placing purchase orders, receiving materials, and paying suppliers related to the number of purchase orders placed, $ 525,000 c. Cost of indirect materials, $ 160,000 d. Costs incurred to set up machines each time a different product needs to be manufactured, $ 365,000 e. Designing processes, drawing process charts, and making engineering process changes for products, $ 287,500 f. Machine- related overhead costs such as depreciation, maintenance, and production engineering, $ 950,000 (These resources relate to the activity of running the machines.) g. Plant management, plant rent, and plant insurance, $ 512,000 1. Classify each of the preceding costs as output unit– level, batch- level, product- sustaining, or facility-sustaining. Explain each answer. Part 2 Type your answer to question 2 below The complex machine is produced in many batches, so it will use more overhead resources in the comparison of simple machine, which will produce in few batches. Similarly, product sustaining overheads would also be higher for complex machine than simple machines. But as both the machines would require the same amount of machine hours, the same amount of overheads would be allocated per unit. Although if Forrester uses machine hours to allocate the overheads. It would cause under cost allocation for complex machines, while over cost allocated to simple machines. Part 3 Type your answer to question3 below Use of cost hierarchy is helpful for Forrester to calculate activity-based costs and consequently the costs of individual activities. Forrester can also manage the business from cost hierarchy through making pricing individual activities. Forrester can also manage the business from cost hierarchy through making pricing and product mix decisions. Forrester would be able to know the resources needed to manufacture products from each machine and to identify the profitable machine. Cost hierarchy is also helpful to improve the processes and to reduce the cost of different activities, by eliminating the activities, which are not adding value to the firm. unit-level cost batch-level cost unit-level cost batch-level cost product sustaining cost unit-level cost facuility sustaining cost Problem 2 ABC, cost hierarchy, service Part 1: Output costs unit-level Direct-labor costs, These costs are output unit-level costs because $146,000 they are incurred on each unit of materials tested, that is, for every hour of testing. $350,000 Eqiupment-related costs (rent, maintenance, energy, etc.) Batch-level costs $430,000 Setup Costs. These costs are batch level as these are incurred each time a batch of materials is set up for either HT or regardless of the number of hours for which the tests are subsequently run. Service-sustaining costs $264,000 Costs of designing tests. These costs are service-sustaining costs as these are spent to design the HT and ST tests, reg of the number of batches tested or the number of hours of test time. Part 2: Direct labor costs (given) Equipment-related costs Heat Testing Stress Testing Setup costs HT Set Up ST Setup Costs of designing tests Heat Testing Stress Testing Total costs Heat Testing (HT) Stress Testing (ST) Per Hour Per Hour Total Total (2) = (1) 40,000 (4) = (3) 30,000 (1) (3) $ 100,000.00 $ 2.50 $ 46,000.00 $ 1.15 $ 200,000.00 $ 5.00 $ 150,000.00 $ 3.75 $ 340,000.00 $ 8.50 $ 90,000.00 $ 2.25 $ 180,000.00 $ 60.00 $ 84,000.00 $ 60.00 $ 820,000.00 $ 76.00 $ 370,000.00 $ 67.15 40,000 y, service Alternative allocation bases for a professional services firm Problem 3 Part 1 Client (1) Direct Professional Time Rate per Number Hour of Hours Total (2) (3) (4) = (2) (3) SAN ANTONIO DOMINION Walliston Boutin Abbington $640.00 $220.00 $100.00 26 5 39 $16,640 $1,100 $3,900 AMSTERDAM ENTERPRISES Walliston Boutin Abbington $640.00 $220.00 $100.00 4 14 52 $2,560 $3,080 $5,200 Part 2: Client (1) Direct Professional Time Number Rate per Hour of Hours Total (2) (3) (4) = (2) (3) SAN ANTONIO DOMINION Walliston Boutin Abbington $640.00 $220.00 $100.00 26 5 39 $16,640 $1,100 $3,900 AMSTERDAM ENTERPRISES Walliston Boutin Abbington $640.00 $220.00 $100.00 4 14 52 $2,560 $3,080 $5,200 Plantwide, department, and ABC i Problem 4 Part 1 Actual plantwide variable MOH rate based on machine hours Variable manufacturing overhead, allocated based on machine hours United Motors 9258 Part 2 Total Department MOH in 2014 $39,000 Driver Units 390 Rate $100 Production 29,600 370 $80 Engineering 240,000 4,000 $60 Design Design-related overhead, allocated on CAD-design hours Production-related overhead, allocated on engineering hours Engineering-related overhead, allocated on machine hours Total United Motors $11,000 5,600 7,200 $23,800 Part 3 United Motors Holden Motors Leland Auto a. Department rates (Requirement 2) $23,800 $192,800 $92,000 b. Plantwide rate (Requirement 1) 9258 216020 83322 Ratio of (a) ÷ (b) 2.57 0.89 1.10 The percentage of total driver units in each department used by the companies is: Department Design Engineering Production Cost United Driver Motors CAD Desgin 28% Hours Engineering 19% Hours Machine Hours 3% Holden Motors 51% 16% 70% Part 4 Type your answer to part 4 here Apart from the pricing to customers, AP might use this information to evaluate its own operational efficiency its operations to reduce overall costs and to increase the value from all indirect It can also set targets for each department for the use of indirect resources and unit cost of resources, whic based cost management and perform the departmental cost analysis effec Part 5 Type your answer to part 5 here Further refining of the department-by-department costing system into ABC system will not be worthw * If the single production activity consists of a large volume of departmenta ** Less variation between the consumption of activities among departments for depar *** Same cost driver for each activity antwide, department, and ABC indirect cost rates 77.15 Holden Motors 261020 Leland Auto 83322 Total 353600 Explaination per CAD-design hour per engineering hour per machine hour Holden Motors $20,000 4,800 168,000 $192,800 Leland Auto $8,000 19,200 64,800 $92,000 Total $39,000 $29,600 $240,000 $308,600 ment used by the companies is: Leland Auto 21% 65% 27% aluate its own operational efficiency and streamline its operations to reduce o increase the value from all indirect resources. rces and unit cost of resources, which would be effective to facilitate target the departmental cost analysis effectively. m into ABC system will not be worthwhile in the following conditions: sts of a large volume of departmental cost. vities among departments for departmental activities. iver for each activity Plantwide, department, Problem 5 Part 1: Trophies Plaques Total Direct materials Forming Assembly Total $26,000 $22,500 5,200 18,750 31,200 41,250 Direct manufacturing labor Forming Assembly Total Total direct costs 31,200 18,000 49,200 15,600 21,000 36,600 46,800 39,000 $78,000 $80,250 $158,250 Budgeted overhead rate 112692 158250 = Trophies Direct materials Direct labor Total direct cost Allocated overhead* Total costs $48,500 $23,950 Plaques Total 0 0 0 $0 $0 $0 Part 2: Budgeted overhead rate — Forming Dept. = Budgeted overhead rate — Forming Dept. = Trophies Direct materials Budgeted Forming Departme Budgeted Forming Department direct Plaques Total Direct labor Total direct cost Allocated overhead Forming Dept. Assembly Dept. Total costs 0 0 0 $0 $0 $0 Trophies Plaques Total Trophies Plaques Total Forming Dept. Direct manufacturing labor costs Allocated overhead a Assembly Dept. Total direct costs Allocated overhead b Part 3: Forming Department = Budgeted setup rate = = Budgeted supervision rate = Assembly Department = Budgeted setup rate = = Budgeted supervision rate = Direct material costs Direct labor costs Total direct costs Forming Dept. overhead Set up Supervision 0 0 0 Assembly Department overhead Set up Supervision Total costs Part 4 Type your answer to part 4 here $0 $0 $0 Plantwide, department, and ABC indirect cost rates = 0.712114 udgeted Forming Department overhead costs Forming Department direct manufacturing labor costs = #DIV/0! ...
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