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Unformatted text preview: CHAPTER 5 ACTIVITY-BASED COSTING AND ACTIVITY-BASED MANAGEMENT Selected Problem Solutions 5-16 (20 min.) Cost hierarchy. 1. a. Indirect manufacturing labor costs of $1,200,000 support direct manufacturing labor and are output unit-level costs. Direct manufacturing labor generally increases with output units, and so will the indirect costs to support it. b. Batch-level costs are costs of activities that are related to a group of units of a product rather than each individual unit of a product. Purchase order-related costs (including costs of receiving materials and paying suppliers) of $600,000 relate to a group of units of product and are batch-level costs. c. Cost of indirect materials of $350,000 generally changes with labor hours or machine hours which are unit-level costs. Therefore, indirect material costs are output unit- level costs. d. Setup costs of $700,000 are batch-level costs because they relate to a group of units of product produced after the machines are set up. e. Costs of designing processes, drawing process charts, and making engineering changes for individual products, $900,000, are product-sustaining because they relate to the costs of activities undertaken to support individual products regardless of the number of units or batches in which the product is produced. f. Machine-related overhead costs (depreciation and maintenance) of $1,200,000 are output unit-level costs because they change with the number of units produced. g. Plant management, plant rent, and insurance costs of $950,000 are facility-sustaining costs because the costs of these activities cannot be traced to individual products or services but support the organization as a whole. 5- 1 2. The complex boom box made in many batches will use significantly more batch-level overhead resources compared to the simple boom box that is made in a few batches. In addition, the complex boom box will use more product-sustaining overhead resources because it is complex. Because each boom box requires the same amount of machine-hours, both the simple and the complex boom box will be allocated the same amount of overhead costs per boom box if Teledor uses only machine-hours to allocate overhead costs to boom boxes. As a result, the complex boom box will be undercosted (it consumes a relatively high level of resources but is reported to have a relatively low cost) and the simple boom box will be overcosted (it consumes a relatively low level of resources but is reported to have a relatively high cost). 3. Using the cost hierarchy to calculate activity-based costs can help Teledor to identify both the costs of individual activities and the cost of activities demanded by individual products....
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- Spring '08