ch05sol - 5-17(25 min.) ABC, cost hierarchy, service.1....

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Unformatted text preview: 5-17(25 min.) ABC, cost hierarchy, service.1. Output unit-level costsa. Direct-labor costs, $240,000b. Equipment-related costs (rent, maintenance, energy, and so on), $400,000These costs are output unit-level costs because they are incurred on each unit of materialstested, that is, for every hour of testing.Batch-level costsc. Setup costs, $350,000These costs are batch-level costs because they are incurred each time a batch of materialsis set up for either HT or ST, regardless of the number of hours for which the tests aresubsequently run.Service-sustaining costsd. Costs of designing tests, $210,000.These costs are service-sustaining costs because they are incurred to design the HT andST tests, regardless of the number of batches tested or the number of hours of test time.2.Heat Testing (HT)Stress Testing (ST)Total(1)Per Hour(2) = (1) 50,000Total(3)Per Hour(4) = (3) 30,000Direct labor costs (given)$180,000$ 3.60$ 60,000$ 2.00Equipment-related costs$5 per hour* 50,000 hours$5 per hour* 30,000 hours250,0005.00150,0005.00Setup costs$20 per setup-hour13,500 setup-hours$20 per setup-hour4,000 setup-hours270,0005.4080,0002.67Costs of designing tests$50 per hour** 2,800 hours$50 per hour** 1,400 hours140,0002.8070,0002.33Total costs$840,000$16.80$360,000$12.00*$400,000 (50,000 + 30,000) hours = $5 per test-hour$350,000 (13,500 + 4,000) setup hours = $20 per setup-hour**$210,000 (2,800 + 1,400) hours = $50 per hourAt a cost per test-hour of $15, the simple costing system undercosts heat testing ($16.80) andovercosts stress testing ($12.00). The reason is that heat testing uses direct labor, setup, anddesign resources per hour more intensively than stress testing. Heat tests are more complex, takelonger to set up, and are more difficult to design. The simple costing system assumes that testingcosts per hour are the same for heat testing and stress testing.5-13.The ABC system better captures the resources needed for heat testing and stress testingbecause it identifies all the various activities undertaken when performing the tests andrecognizes the levels of the cost hierarchy at which costs vary. Hence, the ABC system generatesmore accurate product costs.Plymouths management can use the information from the ABC system to make betterpricing and product mix decisions. For example, it might decide to increase the prices chargedfor the more costly heat testing and consider reducing prices on the less costly stress testing.Plymouth should watch if competitors are underbidding Plymouth in stress testing, and causing itto lose business. Plymouth can also use ABC information to reduce costs by eliminatingprocesses and activities that do not add value, identifying and evaluating new methods to dotesting that reduce the activities needed to do the tests, reducing the costs of doing variousactivities, and planning and managing activities....
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This note was uploaded on 05/18/2010 for the course BUSS 210 taught by Professor Paejinhan during the Spring '09 term at Korea University.

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ch05sol - 5-17(25 min.) ABC, cost hierarchy, service.1....

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