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Unformatted text preview: -lall pics. HGA any 3 and Iefits. adopt uracy :sys- van a expe- send— Juno? 3, and 'COlTl- 00,000 to the 0,000 00,000 ering, i E l i l r ssify each of the preceding costs as output unit-level, batch-level, product-sustaining, or facility— Required taining. Explain each answer. sider two types of boom boxes made by Teleclor, Inc. One boom box is complex to make and is pro- 'ed in many batches. The other boom box is simple to make and is produced in few batches. pose that Teledor needs the same number of machine-hours to make each type of boom box and tTeledor allocates all overhead costs using machine-hours as the only allocation base. How, if at would the boom boxes be miscosted? Briefly explain why. w is the cost hierarchy helpful to Teledor in managing its business? ABC, cost hierarchy, service. (CMA, adapted} Plymouth Test Laboratories does heat testing _ pd stress testing lSTl on materials. Under its current simple costing system, Plymouth aggregates ‘rating costs of $1,200,000 into a single overhead cost pool. Plymouth calculates a rate per test- $15 ($1,200,000 + 80,000 total test-hours). HT uses 50,000 test-hours, and ST uses 30,000 test- Gary Celeste, Plymouth's controller, believes that there is enough variation in test procedures at structures to establish separate costing and billing rates for HT and ST. The market for test ces is becoming competitive. Without this information, any miscosting and mispricing of its ser— Pil Grade Assisi rect—labor costs $240, 000 These costs can be directly traced to HT, $180, 000, and ST, $50, 000. Equipment-related costs (rent, maintenance, energy, and so on), $400, 000. These costs are allocated to HT and ST on the basis of test— hours. Setup costs, $350,000. These costs are allocated to HT and ST on the basis of the number of setup hours required. HT requires 13,500 setup—hours, and ST requires 4,000 setup-hours. Costs of designing tests, $210,000. These costs are allocated to HT and STon the basis of the time required to design the tests. HT requires 2,800 hours, and ST requires l ,400 hours. Classify each activity cost as output unit-level, batch- level, product- or service- sustaining, or facility- Required Sustaining Explain each answer. / _- Calculate the cost per test- hour for HT and ST. Explain briefly the reasons why these numbers differ from the $15 per test—hour that Plymouth calculated using its simple costing system. '_ Explain the accuracy of the product costs calculated using the simple costing system and the ABC sys- tem. How might Plymouth's management Use the cost hierarchy and ABC information to better manage its business? ;-18 Alternative allocation bases for a professional services firm. The Wolfson Group (WGJ provides ax advice to multinational firms. WG charges clients for (a} direct professional time (at an hourly rate) and ill support services l at 30% of the direct professional costs billed}. The three professionals In W6 and their ates per professional hour are: Professional ' Billing Rate per Hour Myron Wolfson ' $500 Ann Brown 120 John Anderson - 80 G has just prepared the May 2005 bills for Mo clients. The hours of professional time spent on each client In as follows: Hours per Client Professional . Seattle Dominion Tokyo Enterprises Wolfson 15 . 2 Brown ' 3 8 Anderson 2 Q Total g 530 . What amounts did WG bill to Seattle Dominion and Tokyo Enterprises for May 2005? Required 2. Suppose support services were billed at $50 per professional'labor—hour (instead of 30% of profes- sional labor costs]. How would this change affect the amounts WG billed to the two clients for May 2005? Comment on the differences between the amounts billed in requirements 1 and 2. . How would you determine whether professional labor costs or professional labor-hours is the more appropriate allocation base for WG's support services? 5-1 9 Plantwide, department, and ABC indirect cost rates. Automotive Products (AP) designs and pro- duces automotive parts. In 2007, actual variable manufacturing overhead is $308,600. AP's simple costing system allocates variable-manufacturing overhead to its three customers based on machine-hours and , prices its contracts based on full costs. One of its customers has regularly complained of being charged mymllmmfim noncompetitive prices, so AP's controller Devon Smith realizes that it is time to examine the consumption of overhead resources more closely. He knows that there are three main departments that consume overhead 165:: {nemefinuow Pas‘nfi-MQAHDV pure Buysog pasng-Mgngpv a resources: design, production, and engineering. Interviews with the department personnel and examinatior of time records yield the following detailed information: If you want to use Excel to solve this exercise, go to the Excel Lab at www.prenhall.comlhorngrenlcosflZe and dowuload the template for Exercise 5-19. Required 1. Compute the variable manufacturing overhead allocated to each customer in 2007 using the simple costing system that has machine-hours as the allocation base. 2. Compute the variable manufacturing overhead allocated to each customer in 2007 using department based variable manufacturing overhead rates. - 3. Comment on your answers in requirements 1 and 2. Which customer do you think was complaining about being overcharged in the simple system? lfthe new department-based rates are used to price contracts, which customerlslwill be unhappy? How would you respond to these concerns? . 4. How else might AP use the information available from its department-by-department analysis of vari— able manufacturing overhead costs? . 5. AP's managers are wondering if they should further refine the department-by-department costing sys- tem into an ABC system by identifying different activities within each department. Under what condi— tions would it not be worthwhile to further refine the department costing system into an ABC system? 5-20 ABC, process costing. Parker Company produces mathematical and financial calculators. Data related to the two products are presented here. ' ' ”1.1;“, Ms, Mathematical Financial Annual production in units 50,000 100,000 Direct material costs $150,000 $300,000 Direct manufacturing labor costs $ 50,000 $100,000 Direct manufacturing labor—hours 2,500 5,000 Machine-hours 25,000 50,000 Number of production runs 50 50 inspection hours 1,000 500 Total manufacturing overhead costs are: Total Machining costs $375,000 ' Setup costs 120,000 inspection costs 105,000 Required 1. Compute the manufacturing overhead cost per unit for each product: ‘ 2. Compute the manufacturing cost per unit for each product. 5-2'1 Activity-based costing, service company. Quikprint Corporation owns a small printing press that _ prints leaflets, brochures, and advertising materials. Ouikprint classifies its various printing jobs as standard ' Em: jobs or special jobs. Ouikprint's simple job-costing system has two direct-cost categories (direct materials mndallmllmgndodta and direct iaborl and a single indirect-cost pool. [lulkprint allocates all indirect costs using printing _ machine-hours as the allocation base. Ouikprint is concerned about the accuracy of the costs assigned to standard and special jobs and _ therefore is planning to implement an activity-based costing system. Quickprint’s ABC system would have the same direct-cost categories as its simple costing system. However, instead of a-single indirect—cost pool there would now be six categories for assigning indirect costs: design, purchasing, setup, printing machine operations, marketing, and administration. To see how activity—based costing would affect the costs of standard and special iohs, (luikprint collects the following information for the fiscal year 2007 that - l66 just ended. I CHAPTER 5 ‘Cause-anfl- Effidct Relettomhrp between Allocation Base and. rtetiui Cost is; uneww_ E 480 200 W mmmmmwmwm i PH“ ‘31 9E3 WWWEM_.-§L3§EWJW§;EQQQHW4memmwmmfi hhhhh E WWWWWW m , Castoialeuieeflmwdwtgggm $ 255 mmlphmmmmmwmmywmj Direct martuf. labor cost per 10 $j§flwi5m $ 200 - 5 “55mm” 5 Print'- -_machinehours_1a_mr rob 10 10 i E i , Indirect costs of operating printing machines 5 1.3% Cost of printing machine operations 5 5 $150, 000 55155515855555 55515555 rmt' machine hours 5 as to. hours WW‘M‘ ‘E‘WW‘E‘ 5 ‘E‘M‘E‘E‘m‘i‘m mm? EIndirEct purchase order costs increase with number o__purchase orders _5 Design costs are alienated to standardand “ $32,000 $ 40, 000 lspecialjohs based on a special shady of the ' 5 deslgt department 5% ,l ofsales yrice $ 39,000 55 5 $ 4,55, I300 5Demanri for administrative resources increases 5 i 5w'ith direct manufacturing labor costs " E E E :3 a g Ea" .LnWW... It you want to use Excel to solve this exercise, go to the Excel Lab atwww. prenhall. com/horngrenlcosttZe and download the template for Exercise 5- 21. 5 ,. _/ . Calculate the cost of a standard job and a special job under the simple costing system. Required . Calculate the cost of a standard iob and a special iob under the activity-based costing system. . Compare the costs of a standard iob and a special job in requirements 1 and 2. Why do the simple and activity-based costing systems differ in the cost of a standard job and a special job? . How might fluikprint use the new cost information from its activity-based costing system to better man- age its business? 5-22 Allocation of costs to activities. unused capacity. Harmon Academy, a private school for boys, serves 500 students: 200 in the middle school (grades 6—8) and 300 in the high school (grades 9—12}. Each school has its own assistant principal, and there is one principal, Brian Smith, for all of Harmon Academy. Ex I _ For any single student, almost all of Harmon’s costs are indirect. Harmon currently has five indirect cost cat- mmitmmwmm egories, which are listed in column A of the following table. Smith wants to develop an activity—based cost- ing system for the school. He identifies four activities—academic instruction, administration, sports train- ing, and community relationships—related to the educational enterprise, which are shown in columns B, C, D, and E of the following table. 5 Smith and his team identify number of students as the cost driver of academic instruction and adminis- ration costs, and the number of team sports offered by the school as the cost driver of'sports training costs. :3 The cost of maintaining community relationships—dealing with the town board and participating in local " activities—is a facility-sustaining cost that the school has to incur each year. This table shows the per- centage of costs in each line item used by each activity. 20% 60% ’4EU:CIEIU 5 5___5 5n. 5 escapee 5 i if you want to use Excel to solve this exercise, go to the Excel Lab at www.prenhaileomlhorngrenlcosfl2e and download the template for Exercise 5-22. - 1. What is the overall cost of educating each student? (if this cost, what percentage is the cost of acad- Required emic instruction? 0? administration? i6? tuamafiouow pesog-Mgngrov pun Bugisog PBSDE-MEAEPV !" and: Assist Required CHAPTER 5 “18 PM Grade Assist 2. Smith is dismayed at the high cost of sports training. Further examination reveals that $300,000 of thee costs are for ice hockey, a sport pursued by a total of 40 students. What would the overall cost of odd cating each student be if the ice hockey program is eliminated and its cost saved? 3. For the 2007 school year, Harmon charges an annual fee of $1,000 for any student who wants to pla ice hockey. As a result, 10 of the less-motivated students drop the sport. Assuming the costs of :11 school in 2007 are the same as in 2006, what is the overall cost of educating each student in 2007‘? 4. Considerthe costs of the academic instruction activity and assume they are fixed in the short run. Atthes costs, Harmon could serve 600 students. What is the cost of the academic instruction resources used is Harmon's current 500 students? What is the cost of unused academic instruction capacity? What action can Smith take to reduce the cost of academic instruction per student in the short run? In the long run? 5-23 ABC, retail product-line profitability. Family Supermarkets (FSl decides to apply ABC analysist three product lines: baked goods, milk and fruit juice, and frozen foods. It identifies tour activities and thei activity cost rates as: Ordering Delivery and receipt of merchandise Shelf-stocking $20 per hour _ Customer support and assistance $0.20 per item sold The revenues, cost of goods sold, store support costs, and activity-area usage of the three product lines are $100 per purchase order $80 per delivery Baked Milk and Frozen Goods Fruit Juice Products Financial data Revenues $57,000 $63,000 $52,000 Cost of goods 'sold $30,000 $47,000 $35,000 Store support $11,400 $14,100 $10,500 Activity-area usage (cost-allocation base) Ordering (purchase orders} 30 25 13 Delivery (deliveriesl 7 98 3B 28 Shelf-stocking (hours) 183 106 24 Customer support (items sold} 15,500 20,500 7,900 Under its simple costing system, FS allocated support costs to products at the rate of 30% of cost of goods sold. 1. Use the simple costing system to prepare a product-line profitability report for F5. 2. Use the ABC system to prepare a product-line profitability report for F8. 3. What new insights does the ABC system in requirement 2 provide to F5 managers? 5-24 ABC, wholesale, customer profitability. Villeagas Wholesalers sells furniture items to four depart- ment-store chains (customers). Mr. Villeagas commented, "We apply ABC to determine product-line prof- itability. The same ideas apply to customer profitability, and we should find out our customer profitability as well." Villeagas Wholesalers sends catalogs to corporate purchasing departments on a monthly basis. The customers are entitled to return unsold merchandise within a six—month period from the purchase date and receive a full purchase price refund. The following data were collected from last year's operations: Chain 1 2 3 4 Gross sales $50,000 $30,000 $i00,000 $70,000 Sales returns: ‘ . Number of items 100 25 60 40 Amount $10,000 $ 5,000 $ 7,000 $ 6,000 Number of orders: .. Regular 40 150 . 50 70 Rush '10 50 10 30 \filleagas has calculated the following activity rates. Activity Cost-Driver Rate $20 per regular order $100 per rush order Regular order processing Rush order processing Returned items processing $10 per item Catalogs and customer support $1,000 per customer Customers pay the transportation costs. The cost of goods sold averages 80% of sales. Determine the contribution to profit from each chain last year. Comment on your solution. 5-25 ABC, activity area cost-driver rates. product cross-subsidization. Idaho Potatoes (lPl processes potatoes into potato cuts at its highly automated Pocatello plant. It sells potatoes to the retail consumer market and to the institutional market, which includes hospitals, cafeterias, and university dormitories. .- "’31? my std-1r ,e h“ c" :- ‘5 simple costing system has a single direct-costcategory (direct materials,which are the raw potatoes) single indirect-cost pool [production support). Support costs are allocated on the basis of pounds of o cuts processed. Support costs include packaging materials. The 2008 total actual costs for producing I,000 pounds of potato cuts (900,000 for the retail market and 100,000 for the institutional market) are: Direct materials used $150,000 Production support $983,000 mple costing system does not distinguish between potato cuts produced for the retail and the institu- markets. {lt the end of 2006, IP unsuccessfully bid for a large institutionai contract. Its bid was reported to be 30% ya the winning bid. This feedback came as a shock because lP included only a minimum profit-margin ts bid. Moreover, the Pocatello plant was acknowledged as the most efficient in the industry. As a result of its review process of the lost contract bid, IP decided to explore ways to refine its cost- system. First, it identified that $188,000 of the $983,000 pertaining to packaging materials could be traced dividuai iobs ($180,000 for retail and $8,000 for institutional). These costs will now be classified as direct erials. The $150,000 of direct materials used were classified as $135,000 for retail and $15,000 for insti~ ,ional. Second, it used ABC to examine how the two products lretail potato cuts and institutional potato l used indirect support resources. The finding was that three activity areas could be distinguished. 2‘ Cleaning Activity Area—IP uses 1,200,000 pounds of raw potatoes to yield 1,000,000 pounds of potato ' cuts. The cost—allocation base is pounds of raw potatoes cleaned. Costs in the cleaning activity area are $120,000. Cutting Activity Area—IF processes raw potatoes for the retail market independently of those processed for the institutional market. The production line produces (al 250 pounds of retaii potato cuts per cutting-hour and lb) 400 pounds of institutional potato cuts per cutting-hour. The cost- allocation base is cutting-hours on the production line. Costs in the cutting activityarea are $231,000. Packaging Activity AreawlP packages potato cuts for the retail market independently of those pack- aged for the institutional-market. The packaging line packages la) 25, poUnds of retail potato cuts per packaging-hour and lb} 100 .pounds of institutional potato cuts per/packaging-hour. The cost-allocation base is packaging-hours on the production line. Costs in the packaging activity area are $444,000. . Using the simple costing system, what is the cost per pound of potato cuts produced by IP? Required Calculate the cost rate per unit of the cost driver in the la) cleaning, lb} cutting, and (cl packaging activity areas. . . Suppose IP uses information from its activity cost rates to calculate costs incurred on retail potato cuts and institutional potato cuts. Using the ABC system, what is the cost per pound of {at} retail potato cuts and [hi institutional potato cuts? _ . Comment on the cost differences between the two costing systems in 1 and 3. How might IP use the information in 3 to make better decisions? 26 Activity-based costing, iota-costing system. The Hewlett-Packard [HP] plant in Boseville, California, resembles andtests printed-circuit lPCl boards. The job-costing system at this plant has two direct-cost cat- gories (direct materials and direct manufacturing labor) and seven indirect-cost pools. These indirect-cost ools represent the seven activity areas that operating personnel at the plant determined are sufficiently dif- orent (in terms. of cost-behavior patterns or individual products being assembled} to warrant separate cost ools. The cost-allocation base chosen for each activity area is the cost driver at that activity area. Debbie Berlant, a newly appointed marketing manager at HP, is attending a training session that describes ow an activity-based costing approach was used to design the Boseville plant's job-costing system. Berlant 5 provided with the following incomplete information for a specific job (an orderfor a single PC board, No. A82): Direct materials $75.00 Direct manufacturing labor ' 15.00 $90.00 Manufacturing overhead (see below} ? Total manufacturing cost it Units of Cost- Manufacturing Manufacturing ' Cost- Allocation Overhead Overhead Cost-Allocation Allocation Base Used on Allocated to Cost Pool Base Rate Job No. A82 Job 1. Axial insertion Axial insertions 0.08 45 ? 2. Dip insertion Dip insertions ' 0.25 ? 6.00 3. Manual insertion Manual insertions - ? 11 5.50 4. Wave solder Boards soldered 3.50 1’ 3.50 5. Backload Backload insertions ‘? 8 4.20 5. Test Budgeted time board is 90.00 0.25 ? in test activity 1. Defect analysis Budgeted time for defect . ? 0.10 8.00 analysis and repair 169 ‘iuawasounw pasng-Airnipv pup Bugs-03 pesog—Aungav CHAPTER 5 I... 4:: Required Required 3.: Required 1. Prepare an overview diagram of the activity-based job-costing system at the Rosevi...
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