SMChap007

Chapter 7 Activity-Based Costing: A Tool to Aid Decision Making Solutions to Questions

© The McGraw-Hill Companies, Inc., 2015. All rights resere!. "ol#tions Man#al, Chapter $

1

7-1 Actiit%-&ase! costing !i'ers (rom tra!itional costing s%stems in a n#m&er o( wa%s. In actiit%-&ase! costing, nonman#(act#ring nonman#(act#ring as well as man#(act#ring costs ma% &e assigne! to pro!#cts. An!, some man#(act#ring costs)incl#!ing the costs o( i!le capacit%)ma% &e e*cl#!e! (rom pro!#ct costs. An actiit%-&ase! costing s%stem t%picall% incl#!es a n#m&er o( actiit% cost pools, each o( which has its #ni+#e meas#re o( actiit%. These meas#res o( actiit% o(ten !i'er (rom the allocation &ases #se! in tra!itional costing s%stems. 7- hen !irect la&or is #se! as an allocation &ase (or oerhea!, it is implicitl% ass#me! that oerhea! cost is !irectl% proportional to !irect la&or. hen cost s%stems were originall% !eelope! in the 100s, this ass#mption ma% hae &een reasona&l% acc#rate. Howeer, !irect la&or has !ecline! in importance oer the %ears while oerhea! has &een increasing. This s#ggests that there is no longer a !irect lin &etween the leel o( !irect la&or an! oerhea!. In!ee!, when a compan% a#tomates, !irect la&or is replace! &% machines/ a !ecrease in !irect la&or is accompanie! &% an increase in oerhea!. This iolates iolates the ass#mption ass#mption that oerhea! oerhea! cost is !irectl% proportional to !irect la&or. erhea! cost appears to &e !rien &% (actors s#ch as pro!#ct !iersit% an! comple*it% as well as &% ol#me, (or which !irect la&or has sere! as a conenient meas#re. 7-! Top Top managers proi!e lea!ership that is nee!e! to properl% motiate all emplo%ees to em&race the nee! to implement AC. Top managers also hae the a#thorit% to lin AC !ata to the emplo%ee eal#ation an! rewar! s%stem. Cross-(#nctional emplo%ees are also important &eca#se the% possess intimate nowle!ge o( operations that is nee!e! to !esign an e'ectie AC s%stem. Tapping the nowle!ge o( cross-(#nctional cross-(#nctional emplo%ees also lessens their resistance to AC &eca#se the% (eel incl#!e! in the implementation process.

7-" Unit-level actiities Unit-level actiities are per(orme! (or each #nit that is pro!#ce!. Batch-level actiities are per(orme! (or each &atch regar!less o( how man% #nits are in the &atch. Product-level actiities Product-level actiities m#st &e carrie! o#t to s#pport a pro!#ct regar!less o( how man% &atches are r#n or #nits pro!#ce!. Customer-level actiities Customer-level actiities m#st &e carrie! o#t to s#pport c#stomers regar!less o( what pro!#cts or serices the% &#%. Organization-sustaining actiities Organization-sustaining actiities are carrie! o#t regar!less o( the compan%s precise precise pro!#ct mi* or mi* o( c#stomers. 7-# rgani3ation-s#stainin rgani3ation-s#staining g costs, c#stomer-leel costs, an! the costs o( i!le capacit% sho#l! not &e assigne! to pro!#cts. These costs represent reso#rces that are not cons#me! &% the pro!#cts. 7-$ In actiit%-&ase! costing, costs m#st 4rst &e allocate! to actiit% cost pools an! then the% are allocate! (rom the actiit% cost pools to pro!#cts, c#stomers, an! other cost o&ects. 7-7 eca#se people are o(ten inole! in more than one actiit%, some wa% m#st &e (o#n! to estimate how m#ch time the% spen! in each actiit%. The most practical approach is o(ten to as emplo%ees how the% spen! their time. It is also possi&le to as people to eep recor!s o( how the% spen! their time or o&sere them as the% per(orm their tass, &#t &oth o( these alternaties are costl% an! it is not o&io#s that the !ata wo#l! &e an% &etter. 6eople who now the% are &eing o&sere! ma% change how the% &ehae. 7-% In tra!itional cost s%stems, pro!#ctleel costs are in!iscriminatel% sprea! across all pro!#cts #sing !irect la&or-ho#rs or some other allocation &ase relate! to ol#me. As a conse+#ence, high-ol#me high-ol#me pro!#cts are assigne! the &#l o( s#ch costs. I( a pro!#ct is responsi&le (or 708 o( the !irect la&or in a (actor%, it will &e assigne! 708 o( the man#(act#ring oerhea! cost in the (actor%)incl#!ing 708 o( the pro!#ct-leel costs o( lowol#me pro!#cts. In an actiit%-&ase! costing s%stem, &atch-leel an! pro!#ct-


2

leel costs are assigne! more appropriatel%. This res#lts res#lts in shi(ting shi(ting pro!#ct-leel pro!#ct-leel costs &ac to the pro!#cts that ca#se them an! awa% (rom the high-ol#me pro!#cts. 9A similar e'ect will &e o&sere! with &atchleel costs i( high-ol#me pro!#cts are pro!#ce! in larger &atches than low-ol#me pro!#cts.: 7-& Actiit% rates tell managers the aerage cost o( reso#rces cons#me! to carr% o#t a partic#lar actiit% s#ch as processing p#rchase or!ers. An actiit% whose aerage cost is high ma% &e a goo! can!i!ate (or process improements. enchmaring can &e #se! to i!enti(%

which actiities hae #n#s#all% large costs. I( some other organi3ation is a&le to carr% o#t the actiit% at a signi4cantl% lower cost, it is reasona&le to s#ppose that improement ma% &e possi&le. 7-1' The actiit%-&ase! actiit%-&ase! costing approach !escri&e! in the chapter is pro&a&l% #naccepta&le (or e*ternal 4nancial reports (or two reasons. ;irst, actiit%-&ase! pro!#ct costs, as !escri&e! in this chapter, e*cl#!e some man#(act#ring costs an! incl#!e some nonman#(act#ring costs. "econ!, the 4rst-stage allocations are &ase! on interiews rather than eri4a&le, o&ectie !ata.


<

The (oundational 1# 1. The plantwi!e plantwi!e oerhea! oerhea! rate is comp#te! comp#te! as (ollows= (ollows= Total Total estimate! oerhea! cost 9a:...... 9a:... ...

>?7,000

Total Total e*pecte! !irect la&or la&or-ho#rs -ho#rs 9&:.. 9&:. .

12,000 @Hs

6re!etermine! 6re!etermine! oerhea! rate 9a: B 9&:........ 9&:................................... ........................................... ................

>5$.00 per @H

2. The oerhea! oerhea! cost assignments assignments to 6ro!#c 6ro!#cts ts  an! D are as (ollows= Product Y

Product Z

Total Total !irect la&or ho#rs 9a:......... 9a:..... ....... ...... ..... ..

,000

7,000

6lantwi!e oerhea! rate per @H 9&:.

>5$.00

>5$.00

Man#(act#ring oerhea! assigne! 9a: E 9&:

>75?,000

>22,000

<-?. The actiit% rates are comp#te! as (ollows= (a) Estimate d

Activity Cost Pool

Overhea d

()

(a) # ()

E!"ected

Activity

Cost

Activity

$ate

>200,000 10,00 Machining............ 0 MH

>20 per MH

Machine set#ps.... >100,000 >7,000 6ro!#ct !esign.....

200 set#ps

>500 per set#p

>72,00 per 2 pro!#cts 0 pro!#ct

><00,000 12,00 General (actor%.... 0 @Hs

>25 6er @H

$. Machine set#ps is a &atch-leel actiit%. A set#p is per(orme! to r#n a &atch o( #nits. The cost o( the set#p is !etermine! &% the reso#rces cons#me! per(orming the set#p an! it is not inF#ence! &% the n#m&er o( #nits processe! once the set#p is complete. . The pro!#ct !esign actiit% is a pro!#ct-leel actiit%. The pro!#ct !esign cost is !etermine! &% the n#m&er o( pro!#cts s#pporte! an! it is not inF#ence! &% the n#m&er o( &atches or #nits processe!.

The (oundational 1# 9contin#e!:

-10. sing the AC s%stem, the total oerhea! assigne! to 6ro!#cts  an! D is comp#te! as (ollows= Product Y E!"ecte d

Product Z E!"ected

Activity

Amount

Activity

$,000

>170,00 0

<,000

> ?0,00 0

Machine set#ps, at >500.00 per set#p.........

50

25,000

150

$5,000

6ro!#ct !esign, at >72,000 per pro!#ct.......

1

72,000

1

72,000

,000

200,000

7,000

100,000

Machining, at >20.00 per machine-ho#r.......

General (actor%, at >25.00 per !irect la&orho#r........................................................... Total oerhea! cost assigne!.......................

>70$,00 0

Amount

>2$$,00 0

The (oundational 1# 9contin#e!: 11-15. The percentages o( oerhea! assigne! #sing the plantwi!e an! AC approaches are comp#te! as (ollows= Product Y 9a: Plant&ide A""roach

Amo#nt

9a: B 9c:

Product Z 9&: Amo#nt

8 Man#(act#ring oerhea!...

9&: B 9c:

%otal 9c: Amo#nt

8

>75?,00 0

??.$8 >22,00 0

<<.<8

>?7,000

Machining.........................

>170,00 0

$0.08

> ?0,00 0

<0.08

>200,000

Machine set#ps.................

25,000

25.08

$5,000

$5.08

100,000

6ro!#ct !esign..................

72,000

50.08

72,000

50.08

7,000

General ( actor%.................

200,000

??.$8 100,000

<<.<8

<00,000

>70$,00 0

>2$$,00 0

Activity-Based Costing 'ystem

Total cost assigne! to pro!#cts

>?7,000

The Machining allocation percentages #se! in the AC s%stem are similar to the plantwi!e allocation percentages &eca#se the Machining cost pool #ses a #nit-leel actiit% meas#re 9machine-ho#rs:. "ince the plantwi!e cost pool also #ses a #nit-leel allocation &ase 9!irect la&or-ho#rs:, it is reasona&le to e*pect these cost allocations percentages to &e compara&le. n!er the AC s%stem, 258 an! $58 o( the Machine "et#ps cost is allocate! to 6ro!#cts  an! D, respectiel%, whereas the plantwi!e approach allocates ?$8 an! <<8 o( all oerhea! costs to the two pro!#cts. These allocation percentages are !i'erent &eca#se Machine "et#ps is a &atch-leel cost pool. Altho#gh 6ro!#ct  is the high-ol#me pro!#ct 917,000 #nits: an! 6ro!#ct D is the low-ol#me pro!#ct 9?,000 #nits:, 6ro!#ct  onl% cons#mes 258 o( the total machine set#ps an! 6ro!#ct D cons#mes $58 o( the total machine set#ps. The conentional s%stem is allocating too m#ch o( the machine set#p costs to 6ro!#ct  an! too little o( these costs to 6ro!#ct D.

The (oundational 1# 9contin#e!: n!er the AC s%stem, 508 o( the 6ro!#ct @esign cost is allocate! to each pro!#ct, whereas the plantwi!e approach allocates ?$8 an! <<8 o( all oerhea! costs to 6ro!#cts  an! D, respectiel%. These percentages are !i'erent &eca#se 6ro!#ct @esign is a pro!#ct-leel cost pool. Altho#gh 6ro!#ct  is the high ol#me pro!#ct 917,000 #nits: an! 6ro!#ct D is the low-ol#me pro!#ct 9?,000 #nits:, &oth pro!#cts cons#me 508 o( the pro!#ct !esign reso#rces. The conentional s%stem is allocating too m#ch o( the pro!#ct !esign costs to 6ro!#ct  an! too little o( these costs to 6ro!#ct D. n!er the AC s%stem, the General ;actor% allocation percentages are the same as the plantwi!e allocation percentages &eca#se the General ;actor% cost pool is allocate! to pro!#cts #sing the same #nit-leel actiit% meas#re 9!irect la&orho#rs: as the plantwi!e approach.

)*ercise 7-1 910 min#tes: a.

eceie raw materials (rom s#ppliers.

atch-leel

Manage parts inentories.

6ro!#ctleel

c.

@o ro#gh milling wor on pro!#cts.

nit-leel

!.

Interiew an! process new emplo%ees in the personnel !epartment.

rgani3atio ns#staining

@esign new pro!#cts.

6ro!#ctleel

6er(orm perio!ic preentie maintenance on general- #se e+#ipment.


&.

e.

(.

g.

se the general (actor% &#il!ing.


h.

Iss#e p#rchase or!ers (or a o&.

atch-leel

"ome o( these classi4cations are !e&ata&le an! !epen! on the speci4c circ#mstances (o#n! in partic#lar companies.

© The McGraw-Hill Companies, Inc., 2015. All rights resere!. 10

Managerial Acco#nting, 15th J!ition

)*ercise 7- 915 min#tes: Picu" and eliver y

Custom er 'ervice

Other

%otals

@rier an! g#ar! wages.................. >
>252,0 00

> $2,00 0

>
> $20,00 0

Kehicle operating e*pense............... 1?,00 0

17,000

0

$0,000

20,000

Kehicle !epreciation........................ $2,000

1,000

0

<0,000

120,000

1?,000

1?0,000

%ravel

C#stomer representatie salaries an! e*penses................................

0

0

177,00 0

Lce e*penses...............................

0

?,000

,000

15,000

<0,000

0

1?,00 0

12,00 0

112,00 0

<20,00 0

Total cost......................................... >?2,0 00

><0?,0 00

>71$,0 00

>2$,0 00

>1,?<0,0 00

A!ministratie e*penses..................

Jach entr% in the ta&le is !erie! &% m#ltipl%ing the total cost (or the cost categor% &% the percentage taen (rom the ta&le &elow that shows the !istri&#tion o( reso#rce cons#mption= © The McGraw-Hill Companies, Inc., 2015. All rights resere!. "ol#tions Man#al, Chapter $

11

%ravel

Picu" and eliver y

Custom er 'ervice

@rier an! g#ar! wages..................

508

<58

108

58

1008

Kehicle operating e*pense...............

$08

58

08

258

1008

Kehicle !epreciation........................

?08

158

08

258

1008

C#stomer representatie salaries an! e*penses................................

08

08

08

108

1008

Lce e*penses...............................

08

208

<08

508

1008

A!ministratie e*penses..................

08

58

?08

<58

1008



Other

%otals

)*ercise 7-! 910 min#tes:

Activity Cost Pool

Estimat ed Overhe ad Cost

Caring (or lawn.................

>$2,00 0

150,00 s+#are (eet o( 0 lawn

>0.7 per s+#are (oot o(  lawn

>2?,70 0

20,000 s+#are (eet o( low maintenance &e!s

>1.< 2 per s+#are (oot o( low maintenance &e!s

>71,70 0

15,000 s+#are (eet o( high maintenance &e!s

>2.$ ? per s+#are (oot o( high maintenance &e!s

><,250

12,500

>0.2 ? per mile

Caring (or gar!en &e!s low maintenance...........

Caring (or gar!en &e!s high maintenance..........

E!"ected Activity

Trael to o&s.................... C#stomer &illing an! serice...........................

miles >,$50

Activity $ate

25

><5 0 per c#stomer

c#stomers

The actiit% rate (or each actiit% cost pool is comp#te! &% !ii!ing its estimate! oerhea! cost &% its e*pecte! actiit%. © The McGraw-Hill Companies, Inc., 2015. All rights resere!. "ol#tions Man#al, Chapter $

1<

)*ercise 7-" 910 min#tes: *+, Activity Cost Pool

Activity $ate

Activity 0 !irect la&orho#rs

ABC Cost

"#pporting !irect la&or. . . .

>?

per !irect la&orho#r

Machine processing..........

>7

per machine-ho#r

Machine set#ps................

>50

per set#p

1

set#ps

50

6ro!#ction or!ers.............

>0

per or!er

1

or!er

0

"hipments........................

>17

per shipment

1

shipment

17

6ro!#ct s#staining............

>7 0

per pro!#ct

1

pro!#ct

100

machine-ho#rs

Total.................................

> 70 700

70 >1,$7

./0 Activity Cost Pool

Activity $ate

"#pporting !irect la&or. . . .

>?

per !irect la&orho#r

Machine processing..........

>7

per machine-ho#r

Activity 500 1,50

!irect la&orho#rs machine-ho#rs



ABC Cost > <,000 ?,000

0 Machine set#ps................

>50

per set#p

7

set#ps

200

6ro!#ction or!ers.............

>0

per or!er

7

or!ers

"hipments........................

>17

per shipment

shipments

170


>7 0

per pro!#ct

pro!#ct

70

10 1

Total.................................

>10,57 0


15

)*ercise 7-# 915 min#tes: "ales 9>1,50 per stan!ar! mo!el gli!er E 20 stan!ar! mo!el gli!ers N >2,700 per c#stom !esigne! gli!er E < c#stom !esigne! gli!ers:...........................................

>77,20 0

Costs= @irect materials 9>5?7 per stan!ar! mo!el gli!er E 20 stan!ar! mo!el gli!ers N >?<7 per c#stom !esigne! gli!er E < c#stom !esigne! gli!ers:........................................................

>1<,1 2

@irect la&or 9>1.50 per !irect la&or-ho#r E 2?.<5 !irect la&or-ho#rs per stan!ar! mo!el gli!er E 20 stan!ar! mo!el gli!ers N >1.50 per !irect la&or-ho#r E 2 !irect la&or-ho#rs per c#stom !esigne! gli!er E < c#stom !esigne! gli!ers:......................... 11,15 "#pporting !irect la&or 9>2? per !irect la&or-ho#r E 2?.<5 !irect la&or-ho#rs per stan!ar! mo!el gli!er E 20 stan!ar! mo!el gli!ers N >2? per !irect la&or-ho#r E 2 !irect la&or-ho#rs per c#stom !esigne! gli!er E < c#stom !esigne! gli!ers:........................................................ 15,? r!er processing 9>27 per or!er E 7 or!ers:........................................................

1,1
C#stom !esigning 9>1? per c#stom !esign E < c#stom !esigns:...................................

55

C#stomer serice 9><$ per c#stomer E 1 c#stomer:................................................. C#stomer margin.............................................

<$

7<,05 ? > 1,17 7


1?

)*ercise 7-$ 910 min#tes:

Activity "ales representaties perio!ic isits to c#stomers to eep them a. in(orme! a&o#t the serices proi!e! &% C@ J*press. &.

r!ering la&els (rom the printer (or a partic#lar C@O.

1evel

C#stomer-leel

6ro!#ct-leel

"etting #p the C@ !#plicating c. machine to mae copies (rom a partic#lar master C@.

atch-leel

oa!ing the a#tomatic la&eling !. machine with la&els (or a partic#lar C@O.

atch-leel

Kis#all% inspecting C@s an! placing e. them &% han! into protectie plastic cases prior to shipping.

nit-leel

(.

6reparation o( the shipping !oc#ments (or the or!er.

6ro!#ct-leel

6erio!ic maintenance o( e+#ipment.

rgani3ations#staining

h.

ighting an! heating the compan%s pro!#ction (acilit%.


i.

6reparation o( +#arterl% 4nancial reports.


g.

OThe cost o( the la&els themseles wo#l! &e part o( !irect materials.


1$

)*ercise 7-7 910 min#tes: Teller wages............................ >1?0,000 Assistant &ranch manager salar%...................................

>$5,000

ranch manager salar%...........

>0,000

istriution o2 $esource Consum"tion Across Activities Processing e"osits O"ening and Account 3ithdra&al s s

Processing Other Customer %ransaction Other s Activities

%otals

Teller wages............................

58

?58

208

108

1008

Assistant &ranch manager salar%...................................

158

58

<08

508

1008


58

08

108

58

1008

© The McGraw-Hill Companies, Inc., 2015. All rights resere!. 1


Processing e"osits O"ening and Account 3ithdra&al s s Teller wages............................ > ,000

Processing Other Customer %ransaction Other s Activities

>107,000

><2,000

> 1?,00 0

%otals >1?0,00 0

Assistant &ranch manager salar%....................................

11,250

<,$50

22,500

<$,500

$5,000


7,000

0

,000

?,00 0

0,00 0

Total cost................................. >2<,250

>10$,$50

>?2,500

>121,50 0

><15,00 0

Teller wages are >1?0,000 an! ?58 o( the tellers time is spent processing !eposits an! with!rawals= >1?0,000 E ?58 P >107,000. ther entries in the ta&le are !etermine! similarl%.


1

)*ercise 7-% 920 min#tes: 1. Comp#tation o( actiit% rates=

Activity Cost Pools

(a) %otal Cost

pening acco#nts..........................

>2<,250

() %otal Activity

(a) # () Activity $ate

500 acco#nts opene!

>7?.5 per acco#nt 0 opene!

6rocessing !eposits an! >10$,$50 100,00 !eposits an! >1.0 per !eposit or with!rawals................................. 0 with!rawals with!rawal 6rocessing other c#stomer transactions................................

>?2,500

5,000 other >12.5 per other c#stomer 0 c#stomer transactions transaction

2. The cost o( opening an acco#nt at the est4el! &ranch is m#ch higher than at the lowest cost &ranch 9>7?.50 ers#s >2?.$5:. n the other han!, the cost o( processing !eposits an! with!rawals is lower than at the lowest cost &ranch 9>1.0 ers#s >1.27:. An! the cost o( processing other c#stomer transactions is higher at the est4el! &ranch 9>12.50 ers#s >11.?:. The other &ranches ma% hae something to learn (rom est4el! concerning processing !eposits an! with!rawals an! est4el! ma% &ene4t (rom learning a&o#t how some o( the other &ranches open acco#nts an! process other transactions. It ma% &e partic#larl% instr#ctie to compare the !etails o( the actiit% rates. ;or e*ample, is the cost o( opening acco#nts at est4el! high &eca#se o( the inolement o( the assistant &ranch manager in this actiit%Q 6erhaps tellers open new acco#nts at other &ranches. © The McGraw-Hill Companies, Inc., 2015. All rights resere!. "ol#tions Man#al, Chapter $

20

The apparent !i'erences in the costs o( the actiities at the ario#s &ranches ma% &e !#e to inacc#racies in emplo%ees reports o( the amo#nt o( time the% !eote to the actiities. The !i'erences in costs ma% also reFect !i'erent strategies. ;or e*ample, the est4el! &ranch ma% p#rposel% spen! more time with new c#stomers in or!er to win their lo%alt%. The higher cost o( opening new acco#nts at the est4el! &ranch ma% &e #sti4e! &% (#t#re &ene4ts o( haing more satis4e! c#stomers. Reertheless, comparatie st#!ies o( the costs o( actiities ma% proi!e a #se(#l starting point (or i!enti(%ing &est practices within a compan% an! where improements can &e ma!e. )*ercise 7-& 910 min#tes: Activity Cost Pool

(a) Activity $ate

r!er si3e........

>1?.5 per !irect la&or-ho#r

() Activity

(a) 4 () ABC Cost

200 !irect la&or-ho#rs

><,<$0

C#stomer or!ers...........

><20.00 per c#stomer or!er

1 c#stomer or!er

<20

6ro!#ct testing

per pro!#ct testing >.00 ho#r

pro!#ct testing 7 ho#rs

<5?

"elling.............

>1,00.00 per sales call

2 sales calls

Total................

>?,22?


2,10

21

Accor!ing to these calc#lations, the total oerhea! cost o( the or!er was >?,22?.


22

)*ercise 7-1' 9<0 min#tes: 1. Total reen#e receie!=

University Cost o( goo!s sol! to the hospital 9a: Mar#p percentage Mar#p in !ollars 9&: een#e receie! (rom hospitals 9a: N 9&:

.emorial

><0,000

><0,000

E 58

E 58

>1,500

>1,500

><1,500

><1,500

2. Actiit% ates=

(a) Estimated Overhead Activity Cost Pool

Cost

()

(a) # ()

E!"ected

Activity

Activity

rate


2<

C#stomer !elieries

>500,000

5,000 !elierie s

Man#al or!er processing

>27,000

7,000 or!ers

Jlectronic or!er processing

>200,000

12,500 or!ers

ine item picing

>750,000

750,00 line 0 items

>100.00 per !elier% >?2.00 per man#al or!er >1?.00 per electronic or!er >1.00 per line item pice!


27

)*ercise 7-1' 9contin#e!:

<. Actiit% costs are assigne! to the two hospitals as (ollows= University5

Activity Cost Cost Pool

(a) Activity $ate $ate

C#stomer !elieries.... !elieries. ...... ..... ....>100.0 >100.0 per 0 !elier%

() Activity 10 !elieries

(a) 4 () ABC Cost >1,000

Man#al or!er >?2.00 per or!er processing......................

0 or or!ers

0

Jlectronic or!er >1?.00 pe per or!er processing......................

15 or!ers

270

ine item picing.. picing...... ........... ......... .. >1.00 >1.00 per line line item

12 line items 0

120

Total Total actiit% costs............. costs.............

>1,
.emorial5 © The McGraw-Hill Companies, Inc., 2015. All rights resere!. "ol#tions Man#al, Chapter $

25

Activity Cost Cost Pool

(a) Activity $ate $ate

() Activity


C#stomer !elieries.... !elieries. ...... ..... ....>100.0 >100.0 per 0 !elier%

25 !eli !elie eri rie e s > 2,500

Man#al or!er >?2.00 per or!er processing......................

<0 or!ers

Jlectronic or!er >1?.00 per or!er processing......................

0 or!ers

ine item picing.. picing...... ........... ......... .. >1.00 >1.00 per line line item Total Total actiit% costs............. costs.............

1,?0 0 250 25 0 line line items

250 >7,?10


2?

)*ercise 7-1' 9contin#e!:

7. C#stomer margins (or the two hospitals=

University

.emorial

"ales................................................

><1,500

><1,500

Cost o( goo!s sol!............................

<0,000

<0,000

Gross margin....................................

1,500

1,500

C#stomer !elieries.........................

1,000

2,500

Man#al or!er processing..................

0

1,?0

Jlectronic or!er processing............ ..

27 0

0

ine item picing..............................

12 0

250

Total Total actiit% costs............................ costs........................ ....

1,
7,?10

C#stomer margin.............................

>

1 70

>9<,110:

5. Hospitals that re+#ire (re+#ent !elieries, place a high ol#me o( man#al or!ers, an! or!er man% line items are liel% to &e #npro4ta&le.


2$

)*ercise 7-11 915 min#tes: Customer .argin6ABC Analysis "ales 91,000 seats E >20 per #nit:.............

>20,000.00

Costs= @irect materials 9>.50 per #nit E 1,000 #nits:...... #nits:............ ............ ................................ .................................... .......... >,500.00 >,500.00 @irect la&or 9>?.00 per #nit E 1,000 #nits: #nits:... ...... ...... ...... ...... ...... ....... ......... .......... .......... ........... ........... .......... .......

?,000. ?,000.00 00

"#pporting !irect la&or 9>5.55 per @H E 0.25 0. 25 @H @H per per #ni #nitt E 1,0 1,000 00 #nit #nits:. s:........ ........... ....

1,< 1, <$. $.50 50

atch processing 9>10$ per &atch E 2 &atc &atches hes:.. :.... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... .....

217. 21 7.00 00

r!er processing 9>2$5 per or!er E 1 or!e or!er: r:.. .... .... .... .... .... ..... ..... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... ..... ..

2$5. 2$ 5.00 00

C#stomer serice oerhea! 9>2,7?< per c#stom c#stomer er E 1 c#stom c#stomer:.. er:....... .......... ........... ............ ........ C#stomer C#stomer margin.......................... margin........................................ ..............

2,7?<. 2,7?<.00 00

1,<.5 0 > 1,1? 1, 1?0. 0.5 5 0


2

)*ercise 7-1 910 min#tes: Activity Activity a.

@irect la&or worers assem&le a pro!#ct.

6ro!#cts are !esigne! &. &% engineers. c. J+#ipment is set #p. Machines are #se! to !. shape an! c#t materials. Monthl% &ills are sent e. o#t to reg#lar c#stomers.

(.

Materials are moe! (rom the receiing !oc to pro!#ction lines.

All complete! #nits are g. inspecte! (or !e(ects.

E!am"les o2 Activity

Classi7cati on nit

.easures @irect la&or-ho#rs

6ro!#ct

R#m&er o( new pro!#cts !esigne!/ ho#rs o( !esign time

atch

R#m&er o( set#ps/ set#p ho#rs

nit

R#m&er o( #nits processe!/ machineho#rs

R#m&er o( &ills sent/ C#stomer time spent preparing &ills

atch

nit

R#m&er o( loa!s trans(erre!/ time spent moing materials R#m&er o( #nits inspecte!/ Inspection ho#rs

Rotes= 1. In all cases e*cept (or !irect la&or in part 9a:, two actiit% meas#res are liste!. The 4rst is a Stransaction !rier an! the secon! is a S!#ration !rier. Transaction !riers are simple co#nts o( the n#m&er o( times an actiit% occ#rs s#ch as the n#m&er o( times materials are moe!. @#ration !riers are meas#res o( the amo#nt o( time re+#ire! to per(orm an actiit% © The McGraw-Hill Companies, Inc., 2015. All rights resere!. "ol#tions Man#al, Chapter $

2

s#ch as the time spent moing materials. In general, !#ration !riers are more acc#rate meas#res o( the cons#mption o( reso#rces than transaction !riers, &#t the% tae more e'ort to recor!.


<0

)*ercise 7-1! 9<0 min#tes: 1. Actiit% rates are comp#te! as (ollows= (a) Estimate d

Activity Cost Pool Machine set#ps...

Overhea d

()

(a) # ()

E!"ected

Activity

Cost

Activity

$ate

>$2,000

set#p 700 s >10 per set#p

"pecial processing........ >200,000 5,000 MHs

>70 per MH

There is no actiit% rate (or the General ;actor% actiit% &eca#se it is an organi3ations#staining actiit%. rgani3ation-s#staining costs sho#l! not &e allocate! to pro!#cts.

2. erhea! is assigne! to the two pro!#cts as (ollows= 8us5 © The McGraw-Hill Companies, Inc., 2015. All rights resere!. "ol#tions Man#al, Chapter $

<1

Activity Cost Pool Machine set#ps................. "pecial processing............

(a) Activity $ate

() Activity

>10 per set#p

100 set#ps > 1,000

>70 per MH

5,000 MHs

Total..................................


200,000 >21,000

'"rocets5 Activity Cost Pool Machine set#ps................. "pecial processing............ Total..................................

(a) Activity $ate

() Activity

>10 per set#p

<00 set#ps

>70 per MH

(a) 4 () ABC Cost >57,000

0 MHs

0 >57,000

)*ercise 7-1! 9contin#e!: 8us @irect materials............................. ><2.00

'"rocet s >1.00

@irect la&or= >15 per @H E 0.0 @Hs per #nit...........................................

12.00

>15 per @H E 0.70 @Hs per #nit...........................................

?.00

erhea!= >21,000 B 10,000 #nits.............

21.0

>57,000 B 70,000 #nits............... nit cost........................................ >?5.0

1.<5 >25.<5


<<

)*ercise 7-1" 9<0 min#tes: 1. The 4rst step is to !etermine the actiit% rates= (a) %otal Cost

Activity Cost Pools "ering parties....

() (a) # () %otal Activity Activity $ate

><<,000 ?,000 parties >5.50 per part%

"ering !iners..... >1<,000 15,00 !iners 0

>.20 per !iner

"ering !rins.....

>2.70 per !rin

>27,000 10,00 !rins 0

Accor!ing to the actiit%-&ase! costing s%stem, the cost o( sering each o( the parties can &e comp#te! as (ollows=

a. 6art% o( 7 persons who or!er a total o( < !rins= Activity Cost Pool

(a) Activity $ate

() Activity

"ering parties.... >5.5 per part% 0 1 part%

(a) 4 () ABC Cost > 5.50

"ering !iners..... >.2 per !iner 0

7 !iners

"ering !rins..... >2.7 per !rin 0

< !rins

$.20

Total....................

>7.50

&. 6art% o( 2 persons who or!er no !rins=


<7

Activity Cost Pool

(a) Activity $ate

() Activity


(a) 4 () ABC Cost > 5.50


2 !iners

1.70


0 !rins

0

Total....................

>2<.0

c. 6art% o( 1 person who or!ers 2 !rins= Activity Cost Pool

(a) Activity $ate

() Activity


(a) 4 () ABC Cost > 5.50


1 !iner

.20


2 !rins

7.0

Total....................

>1.50


<5

)*ercise 7-1" 9contin#e!: 2. The aerage cost per !iner (or each part% can &e comp#te! &% !ii!ing the total cost o( the part% &% the n#m&er o( !iners in the part% as (ollows= a. >7.50 B 7 !iners P >12.<$5 per !iner &. >2<.0 B 2 !iners P >11.5 per !iner c. >1.50 B 1 !iner P >1.50 per !iner

<. The aerage cost per !iner !i'ers (rom part% to part% #n!er the actiit%-&ase! costing s%stem (or two reasons. ;irst, the cost o( sering a part% 9>5.50: !oes not !epen! on the n#m&er o( !iners in the part%. There(ore, the aerage cost per !iner o( this actiit% !ecreases as the n#m&er o( !iners in the part% increases. ith onl% one !iner, the cost is >5.50. ith two !iners, the aerage cost per !iner is c#t in hal( to >2.$5. ith 4e !iners, the aerage cost per !iner wo#l! &e onl% >1.10, an! so on. "econ!, the aerage cost per !iner !i'ers also &eca#se o( the !i'erences in the n#m&er o( !rins or!ere! &% the !iners. I( a part% !oes not or!er an% !rins, as was the case with the part% o( two, no costs o( sering !rins are assigne! to the part%. The aerage cost per !iner !i'ers (rom the oerall aerage cost o( >1? per !iner (or seeral reasons. ;irst, the aerage cost o( >1? per !iner incl#!es organi3ation-s#staining costs that are e*cl#!e! (rom the comp#tations in the actiit%-&ase! costing s%stem. "econ!, the >1? per !iner 4g#re !oes not recogni3e !i'erences in the !iners !eman!s on reso#rces. It !oes not recogni3e that some !iners or!er more !rins than others nor !oes it recogni3e the economies o( scale in sering larger parties. 9The &atch-leel costs o( sering a part% can &e sprea! oer more !iners i( the part% is larger.: e sho#l! note that the actiit%-&ase! costing s%stem itsel( !oes not recogni3e all o( the !i'erences in !iners !eman!s on © The McGraw-Hill Companies, Inc., 2015. All rights resere!. "ol#tions Man#al, Chapter $

reso#rces. ;or e*ample, there are #n!o#&te!l% !i'erences in the costs o( preparing the ario#s meals on the men#. It ma% or ma% not &e worth the e'ort to &#il! a more !etaile! actiit%&ase! costing s%stem that wo#l! tae s#ch n#ances into acco#nt.


<$

)*ercise 7-1# 9<0 min#tes: 1. ;irst-stage allocations o( oerhea! costs to the actiit% cost pools= istriution o2 $esource Consum"tion Across Activity Cost Pools 'u""orting Order irect Processin Custome 1aor g r 'u""ort

Other

%otals

ages an! salaries.....

708

<08

208

108

1008

ther oerhea! costs..

<08

108

208

708

1008

Other

%otals

irect 1aor 'u""ort

Order Processin Custome g r 'u""ort

ages an! salaries.....

>120,000

> 0,000

ther oerhea! costs. .

<0,000

10,000

Total cost.....................

>150,000 >100,000

> ?0,000 > <0,000 ><00,000 20,000

70,000

> 0,000 > $0,000 >700,000

J*ample= 708 o( ><00,000 is >120,000.

© The McGraw-Hill Companies, Inc., 2010. All rights resere!. <

100,000

Managerial Acco#nting, 1
2. Comp#tation o( actiit% rates=

Activity Cost Pools "#pporting !irect la&or...................

(a) %otal Cost


>150,000 20,00 @Hs 0


>$.5 per @H 0

r!er processing... >100,000

700 or!ers

>25 per or!er 0

C#stomer s#pport.

200 c#stomers

>70 per c#stomer 0

>0,000

© The McGraw-Hill Companies, Inc., 2015. All rights resere!. "ol#tions Man#al, Chapter$

<

)*ercise 7-1# 9contin#e!: <. Comp#tation o( the oerhea! costs (or the "hen3hen Jnterprises or!er= Activity Cost Pool "#pporting !irect la&or....

(a) Activity $ate

>$.50 per @H

() Activity


20 @HsO

>150

r!er processing >250 per or!er

1 or!er

250

C#stomer s#pport

c#stom 1 er

700

per >700 c#stomer

Total..................

>00

O2 @Hs per #nit E 10 #nits P 20 @Hs.

7. The c#stomer margin (or "hen3hen Jnterprises is comp#te! as (ollows= Customer .argin6ABC Analysis "ales 910 #nits E ><00 per #nit:.............

><,000

Costs= @irect materials 9>10 per #nit E 10 #nits:..................................................

>1,00

@irect la&or 9>50 per #nit E 10 #nits:....

500

"#pport !irect la&or oerhea! 9see part < a&oe:.............................................

150

r!er processing oerhea! 9see part < a&oe:................................................

250



C#stomer s#pport oerhea! 9see part < a&oe:................................................ C#stomer margin....................................

700

<,100 > 9100:


71

+ro,le 7-1$ 975 min#tes: 1. n!er the tra!itional !irect la&or-!ollar &ase! costing s%stem, man#(act#ring oerhea! is applie! to pro!#cts #sing the pre!etermine! oerhea! rate comp#te! as (ollows=

6re!etermine! Jstimate! total man#(act#ring oerhea! cost P oerhea! rate Jstimate! total !irect la&or !ollars P

>?0,000 P >2.00 per @A> ><07,000

The pro!#ct margins #sing the tra!itional approach wo#l! &e comp#te! as (ollows= B9::

%::

%otal

"ales................................

>1,700,0 00

>$00,000

>2,100,00 0

@irect materials...............

7
251,$00

?,000

@irect la&or......................

200,000

107,000

<07,000

Man#(act#ring oerhea! applie! U >2.00 per !irect la&or-!ollar..........

700,000

20,000

?0,000

1,0
5?<,$00

1,?00,000

>
>1
> 500,000

Total man#(act#ring cost. . 6ro!#ct margin.................

Rote that all o( the man#(act#ring oerhea! cost is applie! to the pro!#cts #n!er the compan%s tra!itional costing s%stem.



+ro,le 7-1$ 9contin#e!: 2. The 4rst step is to !etermine the actiit% rates=

Activity Cost Pools

(a) %otal Cost


Machining........... >21<,5 152,50 MH 00 0 "et#ps................ >15$,5 00 6ro!#ct >120,0 s#staining....... 00

(a) # () Activity $ate >1.70 per MH

<$5 set#p hrs.

>720 per set#p hr.

2 pro!#cts >?0,000 per pro!#ct

OThe ther actiit% cost pool is not shown a&oe &eca#se it incl#!es organi3ation-s#staining an! i!le capacit% costs that sho#l! not &e assigne! to pro!#cts.

n!er the actiit%-&ase! costing s%stem, the pro!#ct margins wo#l! &e comp#te! as (ollows= B9:: "ales................................ >1,700,000

%::

%otal

>$00,000

>2,100,00 0


7
251,$00

?,000

@irect la&or......................

200,000

107,000

<07,000

A!ertising e*pense.........

50,000

100,000

150,000

Machining........................

12?,000

$,500

21<,500

"et#ps..............................

<1,500

12?,000

15$,500


?0,000

?0,000

120,000


7<

Total cost..........................

0<,00

6ro!#ct margin................. > 7?,200

$2,200

1,?<<,000

>92,200:

> 7?$,000



+ro,le 7-1$ 9contin#e!:

<. The +#antitatie comparison is as (ollows=

<00 %raditional Cost 'ystem

T500

9a:

9a: B 9c:

9&:

Amo#nt

8

Amo#nt

Total 9&: B 9c:

9c: Amo#nt

8 @irect materials

>7
?<.78

>251,$0 0

> ?,000

@irect la&or

200,000

?5.8

107,000

<7.28

<07,000

Man#(act#ring oerhea!

700,000

?5.8

20,00 0

<7.28

?0,00 0


>1,0
>5?<,$00

>1,?00,000

"elling an! a!ministratie

550,000

Total cost

>2,150,000


75

Activity-Based Costing 'ystem @irect costs= @irect materials

>7
?<.78

>251,$0 0

> ?,00 0

200,000

?5.8

107,000

<7.28

<07,000

50,000

<<.<8

100,000

??.$8

150,000

12?,000

5.08

$,500

71.08

21<,500

"et#ps

<1,500

20.08

12?,000

0.08

15$,500

6ro!#ct s#staining

?0,000

50.08

?0,000

50.08

120,000

@irect la&or A!ertising e*pense In!irect costs= Machining


>0<,00

>$2,200

1,?<<,000

Costs not assigne! to pro!#cts= "elling an! a!ministratie

700,000

ther

11$,000

Total cost

>2,150,000


7?

+ro,le 7-1$ 9contin#e!:

The tra!itional an! actiit%-&ase! cost assignments !i'er (or three reasons. ;irst, the tra!itional s%stem assigns all >?0,000 o( man#(act#ring oerhea! to pro!#cts. The AC s%stem assigns onl% >71,000 o( man#(act#ring oerhea! to pro!#cts. The AC s%stem !oes not assign the >11$,000 o( ther actiit% costs to pro!#cts &eca#se the% represent organi3ations#staining costs. "econ!, the tra!itional s%stem #ses one #nitleel actiit% meas#re, !irect la&or !ollars, to assign ?5.8 o( all oerhea! to the <00 pro!#ct line an! <7.28 o( all oerhea! to the T500 pro!#ct line. The AC s%stem assigns 5.08 o( Machining costs to the <00 pro!#ct line an! 71.08 to the T500 pro!#ct line. The AC s%stem assigns 20.08 o( "et#p costs 9a &atch-leel actiit%: to the <00 pro!#ct line an! 0.08 to the T500 pro!#ct line. The AC s%stem assigns 508 o( 6ro!#ct s#staining costs 9a pro!#ct-leel actiit%: to each pro!#ct line. Thir!, the tra!itional s%stem !oes not trace an% a!ertising e*penses to the two pro!#cts. The AC s%stem traces >50,000 o( a!ertising to the <00 an! >100,000 o( a!ertising to the T500 pro!#ct line.


7$

+ro,le 7-17 975 min#tes: 1. n!er the tra!itional !irect la&or-ho#r &ase! costing s%stem, man#(act#ring oerhea! is applie! to pro!#cts #sing the pre!etermine! oerhea! rate comp#te! as (ollows=

6re!etermine! P Jstimate! total man#(act#ring oerhea! cost oerhea! rate Jstimate! total !irect la&or-ho#rs P

>1,G0,000 P >1?.50 per @AH 120,000 @AHsO

O20,000 #nits o( Vtreme U 2.00 @H per #nit N 0,000 #nits o( the 6ath4n!erU 1.0 @H per #nit P 70,000 @Hs N 0,000 @Hs P 120,000 @Hs. Conse+#entl%, the pro!#ct margins #sing the tra!itional approach wo#l! &e comp#te! as (ollows= ;treme

Path7nder

%otal

"ales................................

>2,00,0 00

>$,20,00 0

>10,$20,0 00


1,770,00 0

7,270,000

5,?0,000

@irect la&or......................

70,000

?0,000

1,770,000

Man#(act#ring oerhea! applie! U >1?.50 per !irect la&or-ho#r............

??0,00 0

1,<20,00 0

1,0,00 0

Total man#(act#ring cost. .

2,50,00 0

?,520,00 0

,100,00 0

6ro!#ct margin.................

> 220,00 0

>1,700,00 0

> 1,?20,00 0



Rote that all o( the man#(act#ring oerhea! cost is applie! to the pro!#cts #n!er the compan%s tra!itional costing s%stem.


7

+ro,le 7-17 9contin#e!: 2. The 4rst step is to !etermine the actiit% rates=

Activity Cost Pools "#pporting !irect la&or...............

(a) %otal Cost


>$<,?0 120,00 @H 0 0

atch set#ps.......>75,00 0 6ro!#ct >?02,70 s#staining....... 0


>?.5< per @H

<00 set#ps

>1,?50 per set#p

2 pro!#cts ><01,20 per 0 pro!#ct

OThe ther actiit% cost pool is not shown a&oe &eca#se it incl#!es organi3ation-s#staining an! i!le capacit% costs that sho#l! not &e assigne! to pro!#cts.

n!er the actiit%-&ase! costing s%stem, the pro!#ct margins wo#l! &e comp#te! as (ollows= ;treme

Path7nder

%otal

"ales..............................

>2,00,00 0

>$,20,00 0

>10,$20,0 00

@irect materials.............

1,770,000

7,270,000

5,?0,000

@irect la&or....................

70,000

?0,000

1,770,000

"#pporting !irect la&or. .

2?1,200

522,700

$<,?00

atch set#ps..................

<<0,000

1?5,000

75,000

6ro!#ct s#staining.........

<01,200

<01,20

?02,70



0

0

2,12,700

?,1,?0 0

,001,00 0

> 912,700:

>1,$<1,70 0

> 1,$1,00 0

Total cost....................... 6ro!#ct margin..............


51

+ro,le 7-17 9contin#e!:

<. The +#antitatie comparison is as (ollows=

Vtreme %raditional Cost 'ystem

9a:

6ath4n!er

9a: B 9c:

Amo#nt

9&: Amo#nt

8

9&: B 9c:

9c: Amo#nt

8

@irect materials...................

>1,770,0 00

25.78

>7,270,0 00

$7.?8

>5,?0,0 00

@irect la&or.........................

70,000

<<.<8

?0,000

??.$8

1,770,00 0

Man#(act#ring oerhea!......

??0,00 0

<<.<8

1,<20,0 00

??.$8

1,0,00 0

Total cost assigne! to pro!#cts..............................

>2,50,0 00

>?,520,0 00

Activity-Based Costing 'ystem @irect costs= © The McGraw-Hill Companies, Inc., 2015. All rights resere!. 52

Total


>,100,0 00

@irect materials...................

>1,770,0 00

25.78

>7,270,0 00

$7.?8

>5,?0,0 00

@irect la&or.........................

70,000

<<.<8

?0,000

??.$8

1,770,00 0

"#pporting !irect la&or........

2?1,200

<<.<8

522,700

??.$8

$<,?00

atch set#ps.......................

<<0,000

??.$8

1?5,000

<<.<8

75,000

6ro!#ct s#staining...............

<01,20 0

50.08

<01,20 0

50.08

?02,70 0

Total cost assigne! to pro!#cts..............................

>2,12,7 00

In!irect costs=

>?,1,? 00

,001,00 0

Costs not assigne! to pro!#cts= ther...................................

,00 0

Total cost.............................

>,100,0 00

+ro,le 7-17 9contin#e!:

The tra!itional an! actiit%-&ase! cost assignments !i'er (or two reasons. ;irst, the tra!itional s%stem assigns all >1,0,000 o( man#(act#ring oerhea! to pro!#cts. The AC s%stem assigns onl% >1,1,000 o( man#(act#ring oerhea! to pro!#cts. The AC s%stem !oes not assign the >,000 o( ther actiit% costs to pro!#cts &eca#se the% represent organi3ation-s#staining an! i!le capacit% costs. "econ!, the tra!itional s%stem #ses one #nit-leel actiit% meas#re, !irect la&or ho#rs, to assign <<.<8 o( all oerhea! to the Vtreme pro!#ct line an! ??.$8 o( all oerhea! to the 6ath4n!er pro!#ct line. The AC s%stem assigns ??.$8 o( atch set#p costs 9a &atch-leel actiit%: to the Vtreme pro!#ct line an! <<.<8 to the 6ath4n!er pro!#ct line. The AC s%stem assigns 508 o( 6ro!#ct s#staining costs 9a pro!#ct-leel actiit%: to each pro!#ct line.

+ro,le 7-1% 975 min#tes: 1. The res#lts o( the 4rst-stage allocation appear &elow=

3oring on =onroutin e
Other

%otals

> 0,000

> <0,000

> <00,00 0

0

20,000

0

$00,000

Estimatin g and
>150,00 0 > <0,000

@isposal (ees............... 720,000 J+#ipment !epreciation.............

7,500

1,000

<1,500

0,000

n-site s#pplies..........

<0,000

15,000

5,000

0

50,000

Lce e*penses..........

20,000

$0,000

50,000

?0,000

200,000

icensing an! 120,00 ins#rance.................. 0

0

200,000

0,000

700,000

>?7<,000

>201,50 0

>1,$70,00 0

>$$?,00 Total cost..................... 0 >11,500

Accor!ing to the !ata in the pro&lem, 508 o( the wages an! salaries cost o( ><00,000 is attri&#ta&le to actiities relate! to o& si3e. © The McGraw-Hill Companies, Inc., 2015. All rights resere!. "ol#tions Man#al, Chapter $

55

><00,000 E 508 P >150,000. ther entries in the ta&le are !etermine! in a similar manner.

2.

Activity Cost Pool Wo& si3e...............

(a) %otal Cost


tho#san! s+#are >$$?,000 00 (eet

Jstimating an! o& set#p...... .... >11,500 500 o&s oring on nonro#tine o&s.................. >?7<,000 100 nonro#tine o&s

(a) # () Activity $ate per tho#san! s+#are >$0 (eet >2< per o&

>?,7<0 per nonro#tine o&

© The McGraw-Hill Companies, Inc., 2015. All rights resere!. 5?


+ro,le 7-1% 9contin#e!: <. The costs o( each o( the o&s can &e comp#te! as (ollows #sing the actiit% rates comp#te! a&oe=

a.

$outine one thousand s>uare 2oot ?o5 Wo& si3e 91 tho#san! s+#are (eet U >$0 per tho#san! s+#are (eet:........................................................................................

&.

> $0.00

Jstimating an! o& set#p 91 o& U >2< per o&:......................

2<.00

Ronro#tine o& 9not applica&le:.................................................

0

Total cost o( the o&...................................................................

>1,20.00

Cost per tho#san! s+#are (eet 9>1,20 B 1 tho#san! s+#are (eet:........................................................................................

>1,20.00

$outine t&o thousand s>uare 2oot ?o5 Wo& si3e 92 tho#san! s+#are (eet U >$0 per tho#san! s+#are (eet:........................................................................................

>1,70.00

Jstimating an! o& set#p 91 o& U >2< per o&:......................

2<.00

Ronro#tine o& 9not applica&le:.................................................

0

Total cost o( the o&...................................................................

>2,1$.00


5$

Cost per tho#san! s+#are (eet 9>2,1$ B 2 tho#san! s+#are (eet:........................................................................................

c.

=onroutine t&o thousand s>uare 2oot ?o5 Wo& si3e 92 tho#san! s+#are (eet U >$0 per tho#san! s+#are (eet:........................................................................................ Jstimating an! o& set#p 91 o& U >2< per o&:......................

>1,70.00 2<.00

Ronro#tine o&..........................................................................

?,7<0.00

Total cost o( the o&...................................................................

>,?0.00

Cost per tho#san! s+#are (eet 9>,?0 B 2 tho#san! s+#are (eet:........................................................................................

>7,<07.50


>1,0.50


+ro,le 7-1% 9contin#e!: 7. The o&ectiit% o( the interiew !ata can &e +#estione! &eca#se the on-site wor s#perisors were #n!o#&te!l% tr%ing to proe their case a&o#t the cost o( nonro#tine o&s. Reertheless, the actiit%-&ase! costing !ata certainl% s#ggest that !ramatic !i'erences e*ist in the costs o( o&s. hile some o( the costs ma% &e !iLc#lt to a!#st in response to changes in actiit%, it !oes appear that the stan!ar! &i! o( >2,500 per tho#san! s+#are (eet ma% &e s#&stantiall% #n!er the compan%s cost (or nonro#tine o&s. Jen tho#gh it ma% &e !iLc#lt to !etect nonro#tine sit#ations &e(ore wor &egins, the aerage a!!itional cost o( >?,7<0 (or nonro#tine wor s#ggests that the estimator sho#l! tr%. An! i( a nonro#tine sit#ation is spotte!, this sho#l! &e reFecte! in the &i! price. "a% competitors are liel% to &i! less than >2,500 per tho#san! s+#are (eet on ro#tine wor an! s#&stantiall% more than >2,500 per tho#san! s+#are (eet on nonro#tine wor. Conse+#entl%, Mercer As&estos emoal ma% 4n! that its pro!#ct mi* shi(ts towar! nonro#tine wor an! awa% (rom ro#tine wor as c#stomers accept &i!s on nonro#tine wor (rom the compan% an! go to competitors (or ro#tine wor. This ma% hae a negatie e'ect on the compan%s pro4ts.


5

+ro,le 7-1& 920 min#tes: 1. The cost o( sering the local commercial maret accor!ing to the AC mo!el can &e !etermine! as (ollows=

Activity Cost Pool

(a) Activity $ate

() Activity


Animation concept....

>?,07 per proposal 0

25 proposals

Animation pro!#ction

>$,$2 per min#te o( 5 animation

5 min#tes

<,?25

Contract a!ministration........

>?,0 per contract 0

10 contracts

?,000

>151,000

>25$,?25

2. The margin earne! sering the local commercial maret is negatie, as shown &elow= Pro7taility Analysis "ales...............................................

>10,00 0

Costs= © The McGraw-Hill Companies, Inc., 2015. All rights resere!. ?0


>151,00 Animation concept........................ 0 Animation pro!#ction....................

<,?25

Contract a!ministration.................

?,00 0

Margin.............................................

25$,?2 5 >9$$,?2 5:

<. It appears that the local commercial maret is losing mone% an! the compan% wo#l! &e &etter o' !ropping this maret segment. Howeer, as !isc#sse! in the preio#s pro&lem, not all o( the costs incl#!e! a&oe ma% &e aoi!a&le. I( more than >$$,?25 o( the total costs o( >25$,?25 is not aoi!a&le, then the compan% reall% isnt losing mone% on the local commercial maret an! the segment sho#l! not &e !roppe!. These iss#es will &e !isc#sse! in more !epth in Chapters 12 an! 1<.


?1

+ro,le 7-' 975 min#tes: 1. The 4rst-stage allocation o( costs to actiit% cost pools appears &elow=

istriution o2 $esource Consum"tion Across Activity Cost Pools Cleanin g Car"et s

%ravel to
ages....................................

$08

208

Cleaning s#pplies...................

1008

Cleaning e+#ipment !epreciation........................

Other

%otal

08

108

1008

08

08

08

1008

08

08

08

208

1008

Kehicle e*penses...................

08

?08

08

708

1008

Lce e*penses......................

08

08

758

558

1008

6resi!ents compensation......

08

08

708

?08

1008

Cleaning Car"ets

%ravel to

© The McGraw-Hill Companies, Inc., 2015. All rights resere!. ?2


Other

%otal

>105,00 ages..................................... 0

><0,00 0

>

0 > 15,000 >150,000

Cleaning s#pplies....................

70,000

0

0

0

70,000

Cleaning e+#ipment !epreciation.........................

1?,000

0

0

7,000

20,000

Kehicle e*penses....................

0

7,000

0

<2,000

0,000

Lce e*penses......................

0

0

2$,000

<<,000

?0,000

6resi!ents compensation.......

0

0

<2,000

7,000

0,000

Total cost.................................

>1?1,00 0

>$,00 0 >5,000

>1<2,00 0 >7<0,000

J*ample= $08 o( >150,000 P >105,000 ther entries in the ta&le are !etermine! in a similar manner.


?<

+ro,le 7-' 9contin#e!: 2. The actiit% rates are comp#te! as (ollows=

Activity Cost Pool

(a) %otal Cost


Cleaning >1?1,000 20,00 h#n!re! carpets........... 0 s+#are (eet Trael to o&s..... >$,000 ?0,00 miles 0 Wo& s#pport........ >5,000 2,000 o&s

(a) # () Activity $ate >.05 per h#n!re! s+#are (eet >1.<0 per mile >2.50 per o&

<. The cost (or the ;l%ing R anch o& is comp#te! as (ollows= Activity Cost Pool

(a) Activity $ate

Cleaning >.05 per carpets........... h#n!re! s+#are (eet Trael to o&s.. . . >1.<0 per mile Wo& s#pport.... .. . >2.5 per o& 0 Total..................

() Activity 5 h#n!re! s+#are (eet

(a) 4 () ABC Cost > 70.25

$5 miles

$.50

1 o&

2.50 >1?$.25

7. The margin earne! on the o& can &e easil% comp#te! &% #sing the costs calc#late! in part 9<: a&oe. "ales......................

>170.0

0 Costs= Cleaning carpets.. . >70.25 Trael to o&s......... $.50 Wo& s#pport............ 2.50 1?$.25 Margin...................

>92$.25:


?5

+ro,le 7-' 9contin#e!: 5. Gallatin Carpet Cleaning appears to &e losing mone% on the ;l%ing R anch o&. Howeer, ca#tion is a!ise!. "ome o( the costs ma% not &e aoi!a&le an! hence wo#l! hae &een inc#rre! een i( the ;l%ing R anch o& ha! not &een accepte!. An action anal%sis 9!isc#sse! in Appen!i* $A: is a more appropriate starting point (or anal%sis than the simple report in part 97: a&oe. Reertheless, there is a point at which trael costs eat #p all o( the pro4t (rom a o&. ith the compan%s c#rrent polic% o( charging a Fat (ee (or carpet cleaning irrespectie o( how (ar awa% the client is (rom the oLce, there clearl% is some point at which o&s sho#l! &e t#rne! !own. 9hat i( a potential c#stomer is locate! in ;lori!aQ:

?. The compan% sho#l! consi!er charging a (ee (or trael to o#tl%ing c#stomers &ase! on the !istance traele! an! a Fat (ee per o&. At present, close-in c#stomers are in essence s#&si!i3ing serice to o#tl%ing c#stomers an! large-ol#me c#stomers are s#&si!i3ing serice to low-ol#me c#stomers. ith (ees (or trael an! (or o& s#pport, the (ee per h#n!re! s+#are (eet can &e !roppe! s#&stantiall%. This ma% res#lt in losing some low-ol#me o&s in o#tl%ing areas, &#t the lower (ee per h#n!re! s+#are (eet ma% res#lt in s#&stantiall% more &#siness close to o3eman. 9I( the (ee is low eno#gh, the a!!e! &#siness ma% not een hae to come at the e*pense o( competitors. "ome c#stomers ma% choose to clean their carpets more (re+#entl% i( the price were more attractie.:

© The McGraw-Hill Companies, Inc., 2015. All rights resere!. ??


Appendi* 7A ABC Action Analysis )*ercise 7A-1 920 min#tes: >5,000.0 0

"ales 9100 cl#&s E >50 per cl#&:................... Green costs= @irect materials 9100 cl#&s E >2.50 per cl#&:..........................................................

>2,50.0 0

Green margin................................................

2,50.0 0 2,050.00

ellow costs= @irect la&or 9100 cl#&s E 0.< ho#r per cl#& E >20.50 per ho#r:...................................

?15.00

In!irect la&or...............................................

5.0

Mareting e*penses....................................

570.$0

ellow margin................................................

1,251.? 0 $.70

e! costs= ;actor% e+#ipment !epreciation..................

10<.$0

;actor% a!ministration.................................

25.00

"elling an! a!ministratie wages an! salaries.....................................................

72.00

"elling an! a!ministratie !epreciation....... e! margin....................................................

<0.00

21.$ 0 > 92<.<0:

hile not re+#ire! in the pro&lem, the conentional AC anal%sis wo#l! &e= >5,000.0 0

"ales 9100 cl#&s E >50 per cl#&:................... Costs= @irect materials............................................

>2,50.0 0

@irect la&or..................................................

?15.00

"#pporting !irect la&or ................................

25.70

atch processing .........................................

55.10

r!er processing .........................................

117.0

C#stomer serice ........................................ C#stomer margin..........................................

1,00<.00 5,02<.<0 > 92<.<0:

© The McGraw-Hill Companies, Inc., 2015. All rights resere!. ?


)*ercise 7A- 9<0 min#tes: 1. Order 'ize Actiit% leel...............

Customer Orders

Product %esting

'elling

200

1

7

2

!irect la&orho#rs

c#stome r or!er

pro!#ct testin g ho#rs

sales calls

In!irect la&or..............

>1,?50

>10

>120

;actor% !epreciation...

1,?00

0

;actor% #tilities...........

20

;actor% a!ministration

%otal

Man#(act#ring oerhea!= >

0

>1,50

1?0

0

1,$?0

0

7

0

27

0

7

$2

?0

10

ages an! salaries... .

100

0

0

1,?00

1,$0

@epreciation...............

0

12

0

0

2

Ta*es an! ins#rance...

0

0

0

70

70

"elling e*penses........

0

0

0

700

700

General selling X a!ministratie=

© The McGraw-Hill Companies, Inc., 2015. All rights resere!. "ol#tions Man#al, Appen!i* $A

?

Total oerhea! cost.....

><,<$0

><20

><5?

>2,10

>?,22?

J*ample= >.25 per !irect la&or-ho#r (rom the pro&lem statement E 200 !irect la&or-ho#rs P >1,?50 Accor!ing to these calc#lations, the oerhea! cost o( the or!er was >?,22?.

© The McGraw-Hill Companies, Inc., 2010. All rights resere!. $0

)*ercise 7A- 9contin#e!: 2. The ta&le prepare! in part 91: a&oe allows two !i'erent perspecties on the oerhea! cost o( the or!er. The col#mn totals that appear in the last row o( the ta&le tell #s the cost o( the or!er in terms o( the actiities it re+#ire!. The row totals that appear in the last col#mn o( the ta&le tell #s how m#ch the or!er cost in terms o( the oerhea! acco#nts in the #n!erl%ing acco#nting s%stem. Another wa% o( sa%ing this is that the col#mn totals tell #s what the costs were inc#rre! 2or . The row totals tell #s what the costs were inc#rre! on. ;or e*ample, %o# ma% spen! mone% on a chocolate &ar in or!er to satis(% %o#r craing 2or chocolate. oth perspecties are important. To control costs, it is necessar% to now &oth what the costs were inc#rre! (or an! what act#al costs wo#l! hae to &e a!#ste! 9i.e., what the costs were inc#rre! on:. The two !i'erent perspecties can &e e*plicitl% shown as (ollows= hat the oerhea! costs were inc#rre! on= Man#(act#ring oerhea!= In!irect la&or............................

>1,50

;actor% !epreciation.................

1,$?0

;actor% #tilities.........................

27

;actor% a!ministration..............

10

General selling X a!ministratie= ages an! salaries...................

1,$0

@epreciation.............................

2

Ta*es an! ins#rance.................

70

"elling e*penses.......................

700

© The McGraw-Hill Companies, Inc., 2010. All rights resere!. "ol#tions Man#al, Appen!i* A

$1

Total oerhea! cost.....................

>?,22?

hat the oerhea! costs were inc#rre! 2or = r!er si3e...................................

><,<$0

C#stomer or!ers.........................

<20

6ro!#ct testing............................

<5?

"elling.........................................

2,10

Total oerhea! cost.....................

>?,22?



)*ercise 7A-! 9<0 min#tes:

'u""ortin Order g irect Batch Processin Customer 1aor Processing g 'ervice Total actiit% (or the or!er.................

250

2

1

1

@irect la&orho#rsO

atches

r!er

C#stomer

%otal

Man#(act#ring oerhea!= > 150.0 In!irect la&or.................................... 0

>120.00

> 20.0 0

0

> 20.0 0

;actor% e+#ipment !epreciation....... 1,000.00

<7.00

0

0

1,0<7.00

;actor% a!ministration......................

25.00

17.00

25.00

150.00

217.00

ages an! salaries..........................

100.00

70.00

1?0.00

1,?00.00

1,00.00

@epreciation.....................................

0.00

?.00

10.00

<.00

57.00

Mareting e*penses.........................

112.5 0

0.00

?0.0 0

?$5.00

7$.50

>

"elling an! a!ministratie=


$<

>1,<$.5 Total oerhea! cost........................... 0

>217.00

>2$5.0 0

>2,7?<.0 0

>7,<<.5 0

J*ample= >0.?0 per !irect la&or-ho#r E 250 !irect la&or-ho#rs P >150.00.

O250 !irect la&or-ho#rs P 0.25 !irect la&or-ho#r per seat E 1,000 seats.


)*ercise 7A-! 9contin#e!: The action anal%sis report (or the or!er can &e constr#cte! #sing the row totals (rom the actiit% rate ta&le, organi3e! accor!ing to the ease o( a!#stment co!es= "ales 91,000 #nits E >20 per #nit:...............

>20,000.00

Green costs= @irect materials 91,000 #nits E >.50 per >,500.0 #nit:....................................................... 0 Green margin..............................................

,500.00 11,500.00

ellow costs= @irect la&or 91,000 #nits E >?.00 per #nit:. ?,000.00 In!irect la&or..............................................

20.00

Mareting e*penses...................................

7$.50

ellow margin..............................................

$,1<$.50 7,
e! costs= ;actor% e+#ipment !epreciation................. 1,0<7.00 ;actor% a!ministration................................

217.00

"elling an! a!ministratie wages an! salaries................................................... 1,00.00 "elling an! a!ministratie !epreciation...... e! margin..................................................

57.00

<,202.00 > 1,1?0.50

© The McGraw-Hill Companies, Inc., 2010. All rights resere!. "ol#tions Man#al, Appen!i* A

$5

)*ercise 7A-" 9?0 min#tes: 1. ;irst-stage allocations o( oerhea! costs to the actiit% cost pools=

istriution o2 $esource Consum"tion Across Activity Cost Pools irect 1aor 'u""ort


Other

%otals

ages an! salaries. . .

708

<08

208

108

1008

ther oerhea! costs

<08

108

208

708

1008

Other

%otals

irect 1aor 'u""ort


ages an! salaries. . .

>120,000

> 0,000

ther oerhea! costs

<0,000

10,000

20,000

>150,000 >100,000

>0,000

Total cost...................

>?0,000 ><0,000 ><00,000 70,000

100,000

>$0,000 >700,000

J*ample= 708 o( ><00,000 is >120,000. © The McGraw-Hill Companies, Inc., 2010. All rights resere!. $?

ther entries in the ta&le are !etermine! in a similar manner.


$$

)*ercise 7A-" 9contin#e!: 2. The actiit% rates are comp#te! &% !ii!ing the costs in the cells o( the 4rst-stage allocation a&oe &% the total actiit% (rom the top o( the col#mn. irect 1aor Order 'u""ort Processing

Customer 'u""ort

Total actiit%............ 20,000 @Hs 700 or!ers 200 c#stomers ages an! salaries.................

>?.00

>225.00

><00.00

ther oerhea! costs.....................

1.50

25.00

100.00

Total cost.................

>$.50

>250.00

>700.00

J*ample= >120,000 B 20,000 @Hs P >?.00 per @H. @irect la&or s#pport wages an! salaries (rom the 4rst-stage allocation a&oe.

<. The oerhea! cost (or the or!er is comp#te! as (ollows= irect Order 1aor Processi 'u""ort ng 20 @Hs

1 or!er

>120.0 ages an! salaries....... 0

>225.0 0

Actiit%..........................

Custom er 'u""ort

%otal

1 c#stome r ><00.0 0

>?75.0 0

© The McGraw-Hill Companies, Inc., 2015. All rights resere!. $


<0.0 ther oerhea! costs.... 0 >150.0 Total cost....................... 0

25.00

100.0 0

155.00

>250.0 0

>700.0 0

>00.0 0

J*ample= 20 @Hs E >?.00 per @H P >120. Actiit% rate (or !irect la&or s#pport wages an! salaries (rom part 92: a&oe.


$

)*ercise 7A-" 9contin#e!: 7. The report can &e constr#cte! #sing the col#mn totals at the &ottom o( the oerhea! cost anal%sis in part 9<: a&oe. Customer .argin6ABC Analysis "ales 910 #nits E ><00 per #nit:.............

><,000

Costs= @irect materials 9>10 per #nit E 10 #nits:..................................................

>1,00

@irect la&or 910 #nits E >50 per #nit:....

500

@irect la&or s#pport oerhea! 9see part < a&oe:.............................................

150

r!er processing oerhea! 9see part < a&oe:................................................

250

C#stomer s#pport oerhea! 9see part < a&oe:................................................

700

C#stomer margin....................................

<,100 > 9100:

5. The action anal%sis report can &e constr#cte! #sing the row totals (rom the actiit% rate ta&le, organi3e! accor!ing to the ease o( a!#stment co!es= "ales 9><00 per #nit E 10 #nits:...............

><,000

Green costs= @irect materials 9>10 per #nit E 10 #nits:.................................................... Green margin............................................

>1,00

1,00 1,200

ellow costs= © The McGraw-Hill Companies, Inc., 2015. All rights resere!. 0


@irect la&or 910 #nits E >50 per #nit:.....

500

ages an! salaries 9see part < a&oe:...

?75

ellow margin............................................

1,175 55

e! costs= ther oerhea! costs 9see part < a&oe:.................................................. e! margin...............................................

155

155 > 9100:


1

)*ercise 7A-" 9contin#e!: ?. hile the compan% appears to hae inc#rre! a loss on its &#siness with "hen3hen Jnterprises, ca#tion m#st &e e*ercise!. The green margin on the &#siness was >1,200. A!ance! 6ro!#cts Corporation reall% inc#rre! a loss on this &#siness onl% i( at least >1,200 o( the %ellow an! re! costs wo#l! hae &een aoi!e! i( the "hen3hen Jnterprises or!er ha! &een reecte!. ;or e*ample, we !ont now what speci4c costs are incl#!e! in the Sther oerhea! categor%. I( these costs are committe! 4*e! costs that cannot &e aoi!e! in the short r#n, then the compan% wo#l! &een worse o' i( the "hen3hen Jnterprises or!er ha! not &een accepte!. "#ppose that "hen3hen Jnterprises will &e s#&mitting a similar or!er eer% %ear. As a general polic%, the compan% might consi!er t#rning !own this &#siness in the (#t#re. Costs that cannot &e aoi!e! in the short term, ma% &e aoi!e! in the long term thro#gh the &#!geting process or in some other manner. Howeer, i( the "hen3hen Jnterprises &#siness is t#rne! !own, management m#st mae s#re that at least >1,200 o( the %ellow an! re! costs are reall% eliminate! or the reso#rces represente! &% those costs are reall% re!eplo%e! to the constraint. I( these costs remain #nchange!, then the compan% wo#l! &e &etter o' accepting than reecting &#siness (rom the "hen3hen Jnterprises in the (#t#re.

© The McGraw-Hill Companies, Inc., 2015. All rights resere!. 2


+ro,le 7A-# 9<0 min#tes: 1. The !etaile! cost anal%sis o( local commercials appears &elow=

Activity $ates Animatio n Conce"t

Animatio n Productio n

Technical sta' salaries..............

>7,000

>?,000

>1,?00

Animation e+#ipment !epreciation...........................

1,125

0

A!ministratie wages an! salaries...................................

1,770

150

7,00

"#pplies costs...........................

120

<00

1?0

;acilit% costs.............................

120

150

270

Total..........................................

>?,070

>$,$25

>?,00

Animation

Animation

Contract Administrati on

Contract Administratio


<

%otal

Actiit% leel.............................

Conce"t

Production

n

25 proposals

5 min#tes

10 contracts

Technical sta' salaries..............

>100,000

><0,000

>1?,000

>17?,00 0

Animation e+#ipment !epreciation...........................

,000

5,?25

0

17,?25

A!ministratie wages an! salaries...................................

$50

7,000

7,$50

"#pplies costs...........................

<,000

1,500

1,?00

?,100

;acilit% costs.............................

<,000

$50

2,700

?,150

>?,000

>25$,?2 5

Total cost...................................

>151,000

><,?25

J*ample= >7,000 per proposal E 25 proposals P >100,000.

© The McGraw-Hill Companies, Inc., 2015. All rights resere!. 7


+ro,le 7A-# 9contin#e!: 2. The action anal%sis report is constr#cte! &% #sing the row totals (rom the cost report in part 91: a&oe= "ales............................................

>10,000

Green costs= "#pplies costs............................. > ?,100 Green margin...............................

?,100 1$<,00

ellow costs= A!ministratie wages an! salaries...................................

7,$50

ellow margin...............................

7,$50 ,150

e! costs= Technical sta' salaries................ 17?,000 Animation e+#ipment !epreciation............................ ;acilit% costs................................

17,?25 ?,150 1??,$$5

e! margin..................................

>9$$,?25:


5

SMChap007

Recommend Documents