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# ch05sol - 5-17 1(25 min ABC cost hierarchy service Output...

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5-17 (25 min.) ABC, cost hierarchy, service. 1. Output unit-level costs a. Direct-labor costs, \$240,000 b. Equipment-related costs (rent, maintenance, energy, and so on), \$400,000 These costs are output unit-level costs because they are incurred on each unit of materials tested, that is, for every hour of testing. Batch-level costs c. Setup costs, \$350,000 These costs are batch-level costs because they are incurred each time a batch of materials is set up for either HT or ST, regardless of the number of hours for which the tests are subsequently run. Service-sustaining costs d. Costs of designing tests, \$210,000. These costs are service-sustaining costs because they are incurred to design the HT and ST 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) 50,000 Total (3) Per Hour (4) = (3) 30,000 Direct labor costs (given) \$180,000 \$ 3.60 \$ 60,000 \$ 2.00 Equipment-related costs \$5 per hour* 50,000 hours \$5 per hour* 30,000 hours 250,000 5.00 150,000 5.00 Setup costs \$20 per setup-hour 13,500 setup-hours \$20 per setup-hour 4,000 setup-hours 270,000 5.40 80,000 2.67 Costs of designing tests \$50 per hour** 2,800 hours \$50 per hour** 1,400 hours 140,000 2.80 70,000 2 .33 Total 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 hour At a cost per test-hour of \$15, the simple costing system undercosts heat testing (\$16.80) and overcosts stress testing (\$12.00). The reason is that heat testing uses direct labor, setup, and design resources per hour more intensively than stress testing. Heat tests are more complex, take longer to set up, and are more difficult to design. The simple costing system assumes that testing costs per hour are the same for heat testing and stress testing. 5-1

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3. The ABC system better captures the resources needed for heat testing and stress testing because it identifies all the various activities undertaken when performing the tests and recognizes the levels of the cost hierarchy at which costs vary. Hence, the ABC system generates more accurate product costs. Plymouth’s management can use the information from the ABC system to make better pricing and product mix decisions. For example, it might decide to increase the prices charged for 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 it to lose business. Plymouth can also use ABC information to reduce costs by eliminating processes and activities that do not add value, identifying and evaluating new methods to do testing that reduce the activities needed to do the tests, reducing the costs of doing various activities, and planning and managing activities. 5 - 2
5-23 (30 min.) ABC, retail product-line profitability.

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