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session4_part2_student (1-slide per pg)

# session4_part2_student (1-slide per pg) - method use in...

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Case: High Case: High - - Tech, Inc. Tech, Inc. Choice of a Product Manager

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Product Name: Special Regular High High-Tech provides the following product & cost information Tech provides the following product & cost information Special Regular Production volume 5,000 15,000 Selling price \$395 \$195 Unit DM & labour costs \$200 \$80 Direct labor-hours (est.=actual) 25,000 75,000 Additional Overhead Information: Activities Budgeted Cost Activities (unit) Special Regular Total Engineering Additional Overhead Information: Engineering 125,000 \$ Engineering hours 5,000 7,500 12,500 Setups 300,000 Number of setups 200 100 300 Machine running 1,500,000 Machine-hours 50,000 100,000 150,000 Number of Packing 75,000 packing orders 5,000 10,000 15,000 Total: 2,000,000 \$ If manager performance (&bonus) is based on product profitability, would you like to be the manager making product “special” or “regular”?
Traditional Way: If DL is the cost driver If DL hour is the cost driver: POHR=2,000,000/100,000 =\$20/DLH Special Regular OH applied /Unit = 20*25,000/5,000 OH applied /Unit = 20*75,000/15,000 = \$100/ Unit = \$100/Unit

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Traditional Way: If DL is the Cost Driver 8 4 4 Product Profitability Special Regular Unit selling price 395 \$ 195 \$ Unit production costs: Direct material and labor 200 80 Factory overhead 100 100 Cost per unit 300 180 Product margin 95 \$ 15 \$ Which one is more profitable?
Traditional Way: Other Cost Driver? If machine hour is the cost driver: POHR=2,000,000/150,000 =\$13. 3/MH Special OH applied /Unit Regular OH applied /Unit =50,000/5,000* \$13.3 = \$133 = 100,000/15,000*13.3 = \$89 Special Regular Unit selling price 395 \$ 195 \$ Unit production costs: Direct material and labor 200 80 Factory overhead 133 89 Cost per unit 333 169 P d t i 62 \$ 26 \$ Product margin \$ \$ Special: \$310,000; Regular: \$390,000

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Which product? So ??
Activity-Based Costing-Two Stage Procedure Direct M t i l Direct L b Shipping C t Overhead Costs Materials Labour Costs First-Stage Allocation Customer Orders Order Size Customer Relations Other Product Design Second Second-Stage Allocations Stage Allocations \$/Order \$/Design \$/MH \$/Customer Cost Objects: Products, Customer Orders, Customers Unallocated

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Steps in designing ABC systems n Identify activities that consume resources. o Assign resource costs to activity cost pools. p Identify cost drivers for each cost pool Identify cost drivers for each cost pool.
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