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

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

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

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

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

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.