Hilton7e SM CH5

8/14/2019 Hilton7e SM CH5

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CHAPTER 5

Activity-Based Costing

ANSWERS TO REVIEW QUESTIONS

5-1 In a traditional, volume-based product-costing system, only a single predeterminedoverhead rate is used. All manufacturing-overhead costs are combined into one costpool, and they are applied to products on the basis of a single cost driver that isclosely related to production volume. The most frequently used cost drivers intraditional product-costing systems are direct-labor hours, direct-labor dollars,machine hours, and units of production.

5-2 anagement !as being misled by the traditional product-costing system, because

the high-volume product lines !ere being overcosted and the lo!-volume productline !as being undercosted. The high-volume products essentially !ere subsidi"ingthe lo!-volume line. The traditional product-costing system failed to sho! that thelo!-volume products !ere driving more than their share of overhead costs. As aresult of these misleading costs, the company#s management !as mispricing itsproducts.

5-$ An activity-based costing system is a t!o-stage process of assigning costs toproducts. In stage one, activity-cost pools are established. In stage t!o a cost driveris identified for each activity-cost pool. Then the costs in each pool are assigned toeach product line in proportion to the amount of the cost driver consumed by eachproduct line.

5-% A cost driver is a characteristic of an event or activity that results in the incurrenceof costs by that event or activity. In activity-based costing systems, the mostsignificant cost drivers are identified. Then a database is created that sho!s ho!these cost drivers are distributed across products. This database is used to assigncosts to the various products depending on the e&tent to !hich they use each costdriver.

5-5 The four broad categories of activities identified in an activity-based costing system

are as follo!s'

(a) *nit-level activities' ust be done for each unit of production.

(b) +atch-level activities' ust be performed for each batch of products.

(c) roduct-sustaining activities' eeded to support an entire product line.

McGraw-Hill/Irwin 2008 The McGraw-Hill Companies, Inc.

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(d) acility-level (or general-operations-level) activities' /equired for the entireproduction process to occur.

5-0 An activity-based costing system alleviated the problems management !as havingunder its traditional, volume-based product-costing system by more accurately

assigning costs to products. roducts !ere assigned costs based on the e&tent to!hich they used various cost drivers that !ere determined to be closely related tothe incurrence of a variety of overhead costs.

5- roduct-costing systems based on a single, volume-based cost driver tend toovercost high-volume products, because all overhead costs are combined into onepool and distributed across all products on the basis of only one cost driver. Thissimple averaging process fails to recogni"e the fact that a disproportionate amountof costs often is associated !ith lo!-volume or comple& products. The result is thatlo!-volume products are assigned less than their share of manufacturing costs, andhigh-volume products are assigned more than their share of the costs.

5- In traditional, volume-based costing systems, only direct material and direct laborare considered direct costs. In contrast, under an activity-based costing system, aneffort is made to account for as many costs as possible as direct costs ofproduction. Any cost that can possibly be traced to a particular product line istreated as a direct cost of that product.

5-3 The pool rate is calculated by dividing the budgeted amount of an activity cost poolby the budgeted total quantity of the associated cost driver. The pool rate is the costof a particular activity that is e&pected per unit of the associated cost driver.

5-14 T!o factors that tend to result in product cost distortion under traditional, volume-based product-costing systems are as follo!s'

(a) on-unit level overhead costs' any overhead costs vary !ith cost drivers thatare not unit-level activities. *se of a unit-level cost driver to assign such coststends to result in cost distortion.

(b) roduct diversity' hen a manufacturer produces a diverse set of products,!hich e&hibit different consumption ratios for overhead activities, use of a singlecost driver to assign costs results in cost distortion.

5-11 Three important factors in selecting cost drivers for an A+6 system are as follo!s'

(a) Degree of correlation bet!een consumption of an activity and consumption ofthe cost driver.

(b)Cost of measurementof the cost driver.


5-2 Soltions !anal


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(c) Behavioral effects, that is, ho! the cost driver selected !ill affect the behavior ofthe individuals involved in the activity related to the cost driver.

5-12 An activity dictionary lists all of the activities identified and used in an activity-basedcosting analysis. The activity dictionary provides for consistency in the terminology

and level of comple&ity in the A+6 analysis in the organi"ation7s various subunits.

5-1$ 8esigning and implementing an A+6 system requires a large amount of data from allfacets of an organi"ation#s operations. A multidisciplinary team !ill be more effectivein obtaining access to this data, and the result !ill be a better A+6 system.oreover, a multidisciplinary team typically helps in gaining acceptance of the ne!product-costing system.

5-1% Indicators that a ne! product-costing system may be needed include the follo!ing(eight required)'

(a) 9ine managers do not believe the product costs reported by the accountingdepartment.

(b) ar:eting personnel are un!illing to use reported product costs in ma:ingpricing decisions.

(c) 6omple& products that are difficult to manufacture are reported to be veryprofitable although they are not priced at a premium.

(d) roduct-line profit margins are difficult to e&plain.

(e) ;ales are increasing, but profits are declining.

(f) 9ine managers suggest that apparently profitable products be dropped.

(g) ar:eting or production managers are using verhead rates are very high, and increasing over time.

(:) roduct lines are diverse.

(l) 8irect labor is a small percentage of total costs.

(m) The results of bids are difficult to e&plain.


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(n) 6ompetitors# high-volume products seem to be priced unrealistically lo!.

(o) The accounting department spends significant amounts of time on specialcosting pro=ects to support bids or pricing decisions.

5-15 9ine managers are close to the production process and may reali"e that a comple&product, !hich is difficult to manufacture, is undercosted by a traditional, volume-based costing system. +ecause of the cost distortion that is common in suchsystems, the undercosted product may appear to be profitable !hen it is reallylosing money. 9ine managers may have a


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analyst !ould include only the relevant activity costs in the cost of a patientappointment.


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SO%UTIONS TO E&ERCISES

BCB/6I;B 5-21 (15 I*TB;)

1. aterial-handling cost per lens'

D1,444244E(25)(244)FG(25)(244)

D54,444=

+

EThe total number of direct-labor hours.

An alternative calculation, since both types of product use the same amount of thecost driver, is the follo!ing'

D1,444

E54

D54,444=

EThe total number of units (of both types) produced.

2. aterial-handling cost per mirror H D1,444. The analysis is identical to that given forrequirement (1).

$. aterial-handling cost per lens'

D54425

I5

E15)(5

D54,444

=

+

EThe total number of material moves.The number of material moves for the lens product line.

%. aterial-handling cost per mirror'

D1,54425

E1515)(5

D54,444

=

+

EThe number of material moves for the mirror product line.


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BCB/6I;B 5-22 (15 I*TB;)

1. a. Juality-control costs assigned to the ;atin ;heen line under the traditional system'

Juality-control costs H 1%.5K direct-labor cost

Juality-controlcosts assigned to

;atin ;heen line H 1%.5K D2,544

H D$,3 (rounded)

b. Juality-control costs assigned to the ;atin ;heen line under activity-based costing'

Juantity for Assigned

Activity ool /ate ;atin ;heen 6ostIncoming material inspection....... D11.54 per type... .. 12 types......... D 1$In-process inspection................... .1% per unit...... 1,544 units... 2,%54roduct certification................ ... .. .44 per order... . 25 orders..... .. 1,325Total quality-control costs assigned.......................................................... D%,51$

2. The traditional product-costing system undercosts the ;atin ;heen product line, !ithrespect to quality-control costs, by D525 (D%,51$ L D$,3).

BCB/6I;B 5-2$ (24 I*TB;)

There is no single correct ans!er to this e&ercise. There are many reasonable solutions.

6ost pool 1'

/a! materials and components................................................................... 2,354,444yenInspection of finished goods........................................................................ $4,444yenTotal................................................................................................................ 2,34,444yen

6ost driver' ra!-material cost


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BCB/6I;B 5-2$ (6>TI*B8)

6ost pool 2'

8epreciation, machinery............................................................................... 1,%44,444yen

Blectricity, machinery.................................................................................... 124,444yenBquipment maintenance, !ages.................................................................. 154,444yenBquipment maintenance, parts..................................................................... $4,444yenTotal................................................................................................................ 1,44,444yen

6ost driver' number of units produced.

6ost pool $'

;etup !ages................................................................................................... %4,444yen

Total................................................................................................................ %4,444yen

6ost driver' number of production runs.

6ost pool %'

Bngineering design....................................................................................... 014,444yenTotal................................................................................................................ 014,444yen

6ost driver' number of parts in a product.

6ost pool 5'

8epreciation, plant........................................................................................ 44,444yenInsurance, plant............................................................................................. 044,444yenBlectricity, light.............................................................................................. 04,444yen6ustodial !ages, plant.................................................................................. %4,444yenroperty ta&es................................................................................................ 124,444yenatural gas, heating...................................................................................... $4,444yenTotal................................................................................................................ 1,554,444yen

6ost driver' for costs allocated to support departments, square footage? for costsassigned to products, number of units produced.


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BCB/6I;B 5-2% (5 I*TB;)

6ost pool 1' unit-level6ost pool 2' unit-level6ost pool $' batch-level

6ost pool %' product-sustaining-level6ost pool 5' facility-level

BCB/6I;B 5-25 ($4 I*TB;)

Ans!ers !ill vary !idely, depending on the !eb site chosen. In general, though, activity-based costing could be a useful tool in helping any governmental unit understand !hat itscost drivers are for the various activities in !hich it engages.

BCB/6I;B 5-20 (24 I*TB;)

heelco#s product-costing system probably is providing misleading cost information tomanagement. A common problem in a traditional, volume-based costing system is thathigh-volume products are overcosted and lo!-volume products are undercosted. There isevidence of this in the e&ercise, since heelco#s competitors are selling the high-volumeA22 !heel at a price lo!er than heelco#s reported manufacturing cost. In contrast,heelco is selling its specialty 852 !heel at a huge mar:up above the product#s reportedcost. An activity-based costing system probably !ould report a lo!er product cost for

!heel A22 and a substantially higher cost for !heel 852.

The president#s strategy of pushing the firm#s specialty products probably !illaggravate heelco#s problem even further. These products probably are not as profitableas the firm#s traditional product-costing system ma:es them appear.

/ecommendation' Install an activity-based costing system. If the ne! reportedproduct costs shift as suggested in the preceding comments, then lo!er the price on thehigh-volume products, such as !heel A22. The prices of the specialty !heels probably !illneed to be raised. It is possible that heelco should discontinue lo!-volume products.


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BCB/6I;B 5-2 (15 I*TB;)

1. Mey features of an activity-based costing system'

(a) T!o-stage procedure for cost assignment.

(b) ;tage one' Bstablish activity cost pools.

(c) ;tage t!o' ;elect cost drivers for each activity-cost pool. Then assign the costsin each cost pool to the company#s product lines in proportion to the amount ofthe related cost driver used by each product line.

2. As described in the ans!er to the preceding e&ercise, the ne! system probably !illreveal distortion in the firm#s reported product costs. In all li:elihood, the high-volumeproducts are overcosted and the lo!-volume specialty products are undercosted.

$. ;trategic options'

(a) 9o!er the prices on the firm#s high-volume products to compete more effectively.

(b) Increase the prices on lo!-volume specialty products.

(c) 6onsider eliminating the specialty product lines. This option may not be desirableif there is a mar:eting need to produce a full product line. Also, the specialty

!heels may give heelco prestige.


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BCB/6I;B 5-2 (24 I*TB;)

The activity of the inger 9a:es inery may be classified as follo!s'

*' *nit-level

+' +atch-level

' roduct-sustaining-level

' acility-level

Activity 6lassification Activity 6lassification(1) (11) +(2) (12) +

($) (1$) *(%) (1%) *(5) (15) *(0) (10) *() (1) +() + (1) (3) + (13) (14) +

BCB/6I;B 5-23 (24 I*TB;)

The definitions used by 6arrier 6orporation for each of the activity levels are as follo!s'E

*nit' This activity or cost occurs every time a unit is produced. An e&ample is the

utility cost for production equipment. This level of activity usually relates directly toproduction volume.

NNNNNNNNNNNNNNNN

E/obert Adams and /ay 6arter,


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BCB/6I;B 5-23 (6>TI*B8)

+atch' This activity is performed for each batch produced or acquired. B&amples

include moving ra! material bet!een the stoc: room and production line or settingup a machine for a run.

roduct-sustaining' This activity is performed to maintain product designs,

processes, models, and parts. B&amples include e&pediting parts, maintaining thebill of materials, or issuing orders for product changes. ;ustaining activities arerequired for supporting a :ey manufacturing capability or process.

acility' These activities are performed to enable production. They are fundamental

to supporting the business entity at the most basic level. B&amples are managing orcleaning the building.

These definitions are consistent !ith those given in the chapter. An argument for the

A+6 pro=ect team#s classification !ould be that the activity or account in question !ascharacteri"ed by the definition of the activity-level classification given above. An argumentagainst the team#s classification !ould be that the particular activity or account did notsatisfy the definition.

or e&ample, moving materials is a batch-level activity because a ra! material must bemoved to the product area !hen a production run or batch is started. 8epreciation is afacility-level account because depreciation on plant and equipment represents the cost ofproviding production facilities in !hich manufacturing can ta:e place.


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BCB/6I;B 5-$4 ($4 I*TB;)

1. RE,WOO,CO!AN.CO!UTATIONO/SE%%IN0COSTS

B.OR,ERSIEAN,ERSEINWIT3INEAC3OR,ERSIE

>rder ;i"e;mall edium 9arge Total

;ales commissionsa

(*nit cost' D05,444P225,444H D$.44 per bo&)....................

bo&)...........................................D 0,444 D1$5,444 D5$%,444 D 05,444

6atalogsb

(*nit cost' D235,%44P534,44H D.54 per catalog)................

catalog).....................................12,154 145,054 02,044 235,%44

6osts of catalog salesc

(*nit cost' D145,444P15,444H D.04 per s:ein)...................

s:ein)........................................%,%44 $1,244 20,%44 145,444

6redit and collectiond

(*nit cost' D04,444P0,444

H D14.44 per order)................order)........................................

%,54 2%,154 $1,444 04,444Total cost for all orders of agiven si"e si"e.............................. D15,%44 D230,444 D05%,444 D1,1$5,%44

*nits (s:eins) solde...................... 14$,444 532,444 2,14,444

*nit cost per order of a givensi"ef............................................... D1.4 D.54 D.$4

a/etail sales in bo&es unit cost';mall, 2,444 D$edium, %5,444 D$9arge, 1,444 D$

b6atalogs distributed unit costc6atalog sales unit cost


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dumber of retail orders unit coste;mall' (2,444 12) Q 3,444 H 14$,444edium' (%5,444 12) Q 52,444 H 532,4449arge' (1,444 12) Q %%,444 H 2,14,444f

Total cost for all orders of a given si"e R units sold

BCB/6I;B 5-$4 (6>TI*B8)

2. The analysis of selling costs sho!s that small orders cost more than large orders.This fact could persuade management to mar:et large orders more aggressivelyandPor offer discounts for them.


5-1# Soltions !anal


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SO%UTIONS TO ROB%E!S

/>+9B 5-$1 (25 I*TB;)

1. a. anufacturing overhead costs include all indirect manufacturing costs (all

production costs e&cept direct material and direct labor). Typical overhead costsinclude'

Indirect labor (e.g., a lift-truc: driver, maintenance and inspection labor,

engineering labor, and supervisors).

Indirect material.

>ther indirect manufacturing costs (e.g., building maintenance, machine and

tool maintenance, property ta&es, insurance, depreciation on plant and

equipment, rent, and utilities).

b. 6ompanies develop overhead rates before production to facilitate the costing ofproducts as they are completed and shipped, rather than !aiting until actualcosts are accumulated for the period of production.

2. The increase in the overhead rate should not have a negative impact on thecompany, because the increase in indirect costs !as offset by a decrease indirect labor.

$. /ather than using a plant!ide overhead rate, +orealis anufacturing could

implement separate activity cost pools. B&amples are as follo!s'

;eparate costs into departmental overhead accounts (or other relevant pools),

!ith one account for each production and service department. Bachdepartment !ould allocate its overhead to products on the basis that bestreflects the use of these overhead services.

Treat individual machines as separate cost centers, !ith the machine costs

collected and charged to the products using machine hours.

%. An activity-based costing system might benefit +orealis anufacturing because itassigns costs to products according to their usage of activities in the productionprocess. ore accurate product costs are the result.


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/>+9B 5-$2 ($4 I*TB;)

1. redetermined overhead rate H budgeted overhead R budgeted direct-labor hours H D44,444 R 25,444E H D$2 per direct labor hour

E25,444 budgeted direct-labor hours H ($,444 units of ;tandard)($ hrs.Punit) Q(%,444 units of Bnhanced)(% hrs.Punit)

;tandard Bnhanced

8irect materialSSSSS. D 25 D %48irect labor'

$ hours & D12SSSS $0% hours & D12SSSS %

anufacturing overhead'

$ hours & D$2SSSS 30% hours & D$2SSSS 12Total costSSSSSSS. D15 D210

2. Activity-based overhead application rates'

Activity 6ostActivity 6ost

8riverApplication

/ate

>rderprocessing

D154,444 R 544 ordersprocessed (>)

H D$44 per >

achineprocessing

504,444 R %4,444 machinehrs. ()

H D1% per

roductinspection

34,444 R 14,444 inspectionhrs. (I)

H D3 per I


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/>+9B 5-$2 (6>TI*B8)

>rder processing, machine processing, and product inspection costs of a ;tandardunit and an Bnhanced unit'

Activity ;tandard Bnhanced

>rder processing'$44 > & D$44SSSSS... D 34,444244 > & D$44SSSSS... D 04,444

achine processing'1,444 & D1%SSSS... 252,44422,444 & D1%SSSS... $4,444

roduct inspection'2,444 I & D3SSSSSS.. 1,444,444 I & D3SSSSSS. 2,444

Total D$04,444 D%%4,444roduction volume (units) $,444 %,4446ost per unit D124E D114EE

E D$04,444 R $,444 units H D124EE D%%4,444 R %,444 units H D114

The manufactured cost of a ;tandard unit is D11, and the manufactured cost of anBnhanced unit is D13'

;tandard Bnhanced

8irect materialSSSSSSSSSSSS. D 25 D %48irect labor'

$ hours & D12SSSSSSSSSSS $0% hours & D12SSSSSSSSSSS %

>rder processing, machine processing,and product inspectionSSSSSS.. 124 114

Total costSSSSSSSSSSSSSS. D11 D13

$. a. The Bnhanced product is overcosted by the traditional product-costingsystem. The labor-hour application base resulted in a D210 unit cost? incontrast, the more accurate A+6 approach yielded a lo!er unit cost of D13.The opposite situation occurs !ith the ;tandard product, !hich isundercosted by the traditional approach (D15 vs. D11 under A+6).


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/>+9B 5-$2 (6>TI*B8)

b. Ues, especially since the company7s selling prices are based heavily on cost.An overcosted product !ill result in an inflated selling price, !hich couldprove detrimental in a highly competitive mar:etplace. 6ustomers !ill be

turned off and !ill go else!here, !hich hurts profitability. ith undercostedproducts, selling prices may be too lo! to adequately cover a product7s moreaccurate (higher) cost. This situation is also troublesome and !ill result in alo!er income being reported for the company.

%. ;preadsheet is sho!n on this chapter7s solutions manual opening screen.

/>+9B 5-$$ (04 I*TB;)

1. The predetermined overhead rate is calculated as follo!s'

redetermined overhead rate H +udgeted manufacturing overheadPbudgeted direct-labor hours H D1,22%,444P142,444E H D12 per hour

E8irect labor, budgeted hours'

/B' 5,444 units 3 hours..................................... %5,444 hours

A8V' %,444 units 11 hours................................... %%,444 hours

;B' 1,444 units 1$ hours.................................... 1$,444 hours

Total direct-labor hours........................................................ 142,444 hours


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/>+9B 5-$$ (6>TI*B8)

2. Activity-based-costing analysis'

ActivityActivity

6ost ool6ost

8river

6ost8river

Juantityool/ate

roduct9ine

6ost8river

Juantityfor

roduct9ine

Activity6ost forroduct

9ine

roduct9inerod.

Volume

Activity6ost per*nit ofroduct

achine D$14,544 achine 115,444D2.4 /B 54,444 D1$5,444 5,444

D2.44

/elated ours A8V %,444 123,044 %,444 $2.%4T 1,444 %5,344 1,444 %5.34 Total 115,444 D$14,544

aterial 52,544 rod. 144 525.44 /B %4 D 21,444 5,444 %.24and. /uns A8V %4 21,444 %,444 5.25

T 24 14,544 1,444 14.54

Total 144 D 52,544urch. 5,444 urch. $44 254.44 /B 144 D 25,444 5,444 5.44

>rders A8V 30 2%,444 %,444 0.44T 14% 20,444 1,444 20.44 Total $44 D 5,444

;etup 5,444 rod. 144 54.44 /B %4 D $%,444 5,444 0.4/uns A8V %4 $%,444 %,444 .54

T 24 1,444 1,444 1.44 Total 144 D 5,444

Inspect. 2,544 Inspect. 1,144 25.44 /B %44 D 14,444 5,444 2.44ours A8V %44 14,444 %,444 2.54

T $44 ,544 1,444 .54 Total 1,144 D 2,544

;hip. 00,444 ;hip. 1,144 04.44 /B 544 D $4,444 5,444 0.44A8V %44 2%,444 %,444 0.44T 244 12,444 1,444 12.44 Total 1,144 D 00,444

Bng. $2,544 Bng. 054 54.44 /B 254 D 12,544 5,444 2.54ours A8V 244 14,444 %,444 2.54

T 244 14,444 1,444 14.44 Total 054 D $2,544

ac. 55,444 achine 115,444 5.44 /B 54,444 D254,444 5,444 54.44ours A8V %,444 2%4,444 %,444 04.44

T 1,444 5,444 1,444 5.44 Total 115,444 D55,444

rand Total D1,22%,444

randTotal D1,22%,444


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/>+9B 5-$$ (6>TI*B8)

$. 6alculation of ne! product costs under A+6.

/B A8V T

8irect material................................. D123.44 D151.44 D24$.448irect labor (not including

set-up time)................................. 11 .44 (3 hr. W D13) 243 .44 (11 hr. W D13) 2% .44 (1$ hr. W D13)Total direct costs per unit.............. D$44 .44 D$04 .44 D%54 .44

anufacturing overhead (based on A+6)'achine-related.......................... D 2.44 D $2.%4 D %5.34;etup........................................... %.24 5.25 14.54urchasing.................................. 5.44 0.44 20.44aterial handling....................... 0.4 .54 1.44Juality assurance...................... 2.44 2.54 .54ac:ingPshipping....................... 0.44 0.44 12.44

Bngineering design.................... 2.54 2.54 14.44acility......................................... 54 .44 04 .44 5 .44

Total A+6 overheadcost per unit................................ D14$ .54 D12$ .15 D21$ .34

Total product cost per unit............. D%4$ .54 D%$ .15 D00$ .34

McGraw-Hill/Irwin 2008 The McGraw-Hill Companies,

Inc.

5-2+ Solutions Manual


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/>+9B 5-$$ (6>TI*B8)

%. 6omparison of costs and target prices under t!o alternative product-costingsystems'

/B A8V T/eported unit overheadcost'

Traditional, volume-based costing system...................................................................................

D14.44 D1$2.44 D150.44

Activity-based costing system...................................................................................

14$.54 12$.15 21$.34

/eported unitproductcost (direct material, directlabor and overhead)'

Traditional, volume-based costing system...................................................................................

%4.44 %32.44 040.44


%4$.54 %$.15 00$.34

;ales price data'>riginal target price (1$4K of product cost basedon traditional, volume-based costing system)...................................................................................

5$4.%4 0$3.04 .4

e! target price (1$4K of product cost basedactivity-based costing system)...................................................................................

52%.55 02.14 0$.4

Actual current selling price.......................................... 525.44 02.44 44.44

5. The /B and A8V products !ere overcosted by the traditional system, and the Tproduct !as undercosted by the traditional system

/eported unitproductcost'Traditional, volume-based costing system...................................................................................

D%4.44 D%32.44 D040.44


%4$ .54 %$ .15 00$ .34

6ost distortion'/B and A8V overcosted by traditional system...................................................................................

D % .54 D .5

T undercosted by traditional system................ (D 5 .34)

0. ;preadsheet is sho!n on this chapter7s solutions manual opening screen.


Inc.

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/>+9B 5-$% (25 I*TB;)

The information supplied by the A+6 pro=ect team is in columns A, +, 6, 8, , , and I.

Activity

Activity6ostool

6ost8river

6ost8river

Juantityool/ate

roduct9ine

6ost8river

Juantityfor

roduct9ine

Activity6ost forroduct

9ine

roduct9ine

roductionVolume

Activity

6ostper *nitof

roduct

aterial D52,544 roduction 144 D525.44 /B %4 D21,444 5,444 D %.24andling /uns A8V %4 21,444 %,444 5.25

T 24 14,544 1,444 14.54 Total 144 D52,544

The results of the A+6 calculations are in columns B, and @. The A+6 calculations are asfollo!s'

(1) 6ompute pool rate for material-handling activity'

Activity cost pool R cost driver quantity H pool rate

D52,544 R 144 H D525.44

(2) 6ompute total activity cost for each product line'

roduct9ine ool /ate &

6ost 8river

Juantity forroduct 9ine H

Activity 6ost for

Bach roduct 9ine

/B D525.44 & %4 H D21,444 A8V 525.44 & %4 H 21,444 T 525.44 & 24 H 14,544

($) 6ompute product cost per unit for each product line'

roduct9ine

Activity 6ost

for Bachroduct

9ine roduct 9ine

roduction Volume

Activity 6ost per *nit

H of roduct

/B D21,444 5,444 H D %.24 A8V 21,444 %,444 H 5.25 T 14,544 1,444 H 14.54


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1. Type A manufacturing overhead cost'10,444 machine hours & D4 H D1,24,444D1,24,444 R ,444 units H D104 per unit

Type + manufacturing overhead cost'22,544 machine hours & D4 H D1,44,444D1,44,444 R 15,444 units H D124 per unit

Type A Type +

8irect materialSSSSSS. D $5 D 048irect laborSSSSSSS.. 24 24anufacturing overheadS. 104 124

*nit costSSSSSSS D215 D244

2. Activity-based application rates'

Activity 6ostActivity8river

Application/ate

anufacturingsetups

D 02,444 R 4 setups (;*) H D,%44 per ;*

achineprocessing

1,%,444 R $,544 machinehours ()

H D% per

roductshipping

504,444 R 15 outgoingshipments (>;)

H D$,244 per >;


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anufacturing setup, machine processing, and product shipping costs of a Type Aunit and a Type + unit'

Activity Type A Type +

anufacturing setups'54 ;* & D,%44SSSSS.. D %24,444$4 ;* & D,%44SSSSS.. D 252,444

achine processing'10,444 & D%SSSS... 0,44422,544 & D%SSSS... 1,44,444

roduct shipping'144 >; & D$,244SSSSS $24,444

5 >; & D$,244SSSSS.. 2%4,444Total SSSSSSSSSSS. D1,54,444 D1,52,444

roduction volume (units)S. ,444 15,444

6ost per unitSSSSSSS.. D1.54E D14%.4EE

E D1,54,444 R ,444 units H D1.54EE D1,52,444 R 15,444 units H D14%.4

The manufactured cost of a Type A cabinet is D2%$.54, and the manufactured cost ofa Type + cabinet is D1%.4. The calculations follo!'

Type A Type +

8irect materialSSSSSSSSSSSSS D $5.44 D 04.448irect laborSSSSSSSSSSSSSS. 24.44 24.44anufacturing setup, machine

processing, and outgoing shipments.. 1.54 14%.4Total costSSSSSSSSSSSSSSS. D2%$.54 D1%.4

$. Ues, the Type A storage cabinet is undercosted. The use of machine hoursproduced a unit cost of D215? in contrast, the more accurate activity-based-costingapproach sho!s a unit cost of D2%$.54. The difference bet!een these t!o amountsis D2.54.


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%. o, the discount is not advisable. The regular selling price of D204, !hen comparedagainst the more accurate A+6 cost figure, sho!s that each sale provides a profit tothe firm of D10.54 (D204.44 - D2%$.54). o!ever, a D$4 discount !ill actually produce

a loss of D1$.54 (D2%$.54 - D2$4.44), and the more units that are sold, the larger theloss. otice that !ith the less-accurate, machine-hour-based figure (D215), themar:eting manager !ill be misled, believing that each discounted unit sold !ouldboost income by D15 (D2$4 - D215).

/>+9B 5-$0 ($5 I*TB;)

1. Activity-based costing results in improved costing accuracy for t!o reasons. irst,companies that use A+6 are not limited to a single driver !hen allocating costs toproducts and activities. ot all costs vary !ith units, and A+6 allo!s users to selecta host of nonunit-level cost drivers. ;econd, consumption ratios often differ greatlyamong activities. o single cost driver !ill accurately assign costs for all activitiesin this situation.

2. Allocation of administrative cost based on billable hours'

Information systems' $,144 R 5,444 H 02K? D$%2,444 & 02K H D212,4%4B-commerce consulting' 1,344 R 5,444 H $K? D$%2,444 & $K H D123,304

Information

;ystems;ervices

B-6ommerce6onsulting

+illings'$,144 hours & D125SSSS D$,5441,344 hours & D125SSSS D2$,544

9ess' rofessional staff cost' $,144 hours & D%5SS. (1$3,544) 1,344 hours & D%5SS. (5,544) Administrative costSS. (212,4%4) (123,304)IncomeSSSSSSSSSSS D $5,304 D 22,4%4

Income R billingsSSSSSS. 3.2K 3.2K


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$. Activity-based application rates'

Activity 6ost

Activity

8river

Application

/ate

;taff support D14,444 R 254 clients H D24 per client

In-housecomputing

1$0,%44 R %,%44 computerhours (6)

H D$1 per 6

iscellaneousoffice charges

25,044 R 1,444 clienttransactions (6T)

H D25.04 per 6T

;taff support, in-house computing, and miscellaneous office charges of informationsystems services and e-commerce consulting'

Activity

Information;ystems;ervices


;taff support'244 clients & D24SSSS... D1%%,44454 clients & D24SSSSS. D $0,444

In-house computing'2,044 6 & D$1SSSSSS. 4,0441,44 6 & D$1SSSSSS. 55,44

iscellaneous office charges'%44 6T & D25.04SSSSS... 14,2%4044 6T & D25.04SSSSS... 15,$04

Total SSSSSSSSSSSS. D2$%,%4 D14,104


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rofitability of information systems services and e-commerce consulting'

Information

;ystems;ervices


+illings'$,144 hours & D125SSS.. D$,5441,344 hours & D125SSS.. D2$,544

9ess' rofessional staff cost' $,144 hours & D%5SS (1$3,544) 1,344 hours & D%5SS (5,544) Administrative costSS. (2$%,%4) (14,104)IncomeSSSSSSSSSS.. D 1$,104 D %%,%4

Income R billingsSSSSS... $.%4K 1.K

%. Ues, his attitude should change. Bven though both services are needed andprofessionals are paid the same rate, the income percentages sho! that e-commerceconsulting provides a higher return per sales dollar than information systemsservices (1.K vs. $.%4K). Thus, all other things being equal, professionals shouldspend more time !ith e-commerce.

5. robably not. Although both services produce an attractive return, the firm ise&periencing a very tight labor mar:et and !ill li:ely have trouble finding qualifiedhelp. In addition, the professional staff is currently over!or:ed, !hich !ouldprobably limit the services available to ne! clients.


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1. >verhead to be assigned to film development chemical order'

Activity 6ostool

ool/ate

9evel of6ost 8river

Assigned

>verhead6ost

achine setups D2,444 per setup 5 setups D14,444aterial handling D2 per pound 14,444 pounds 24,444a"ardous !aste control D5 per pound 2,444 pounds 14,444Juality control D5 per inspection 14 inspections 54>ther overhead costs D14 per machine

hour 544 machine hours 5,444

Total D%5,54

2. >verhead cost perbo& of chemicals

H bo&perD%5.5bo&es1,444

%5,54=

$. redeterminedoverhead rate

H24,444

D025,444

hoursmachinebudgetedtotal

costoverheadbudgetedtotal=

H D$1.25 per machine hr.

%. >verhead to be assigned to film development chemical order, given a single

predetermined overhead rate'

a. Total overhead assigned H D$1.25 per machine hr. 544 machine hr.

H D15,025

b. >verhead cost perbo& of chemicals

H bo&perD15.025bo&es1,444

D15,025=

5. The film development chemicals entail a relatively large number of machine setups, alarge amount of ha"ardous materials, and several inspections. Thus, they are quite

costly in terms of driving overhead costs. *se of a single predetermined overhead rateobscures this characteristic of the production =ob. *nderestimating the overhead costper bo& could have adverse consequences for the company. or e&ample, it couldlead to poor decisions about product pricing. The activity-based costing system !illserve management much better than the system based on a single, predeterminedoverhead rate.


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1. *nit cost calculation'

(a) >verhead assigned to photographic plates'

Activity 6ostool

ool/ate

9evel of6ost 8river

Assigned>verhead

6ostachine setups D2,444 per setup $ setups D 0,444aterial handling D2 per pound 344 pounds 1,44

a"ardous !aste control D5 per pound $44 pounds 1,544Juality control D5 per inspection $ inspections 225>ther overhead costs D14 per machine hour 54 machine hours 544Total D14,425

D144.25plates144

D14,425unitpercost>verhead ==

(b) *nit cost per plate'

8irect material................................ D124.448irect labor.................................... %4.44anufacturing overhead............... 144.25Total cost per plate........................ D204.25


/>+9B 5-$3 (%5 I*TB;)

1. An A+6 system is a t!o-stage process of assigning costs to products. In stage one,activity-cost pools are established. In stage t!o a cost driver is identified for eachactivity-cost pool. Then the costs in each pool are assigned to each product line inproportion to the amount of the cost driver consumed by each product line.


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2. ontreal Blectronics should not continue !ith its plans to emphasi"e the /oyal modeland phase out the ova model. As sho!n in the follo!ing activity-based costing

analysis, the /oyal model has a contribution margin of less than $ percent, !hile theova model generates a contribution margin of nearly %$ percent.

6ost per event for each cost driver'

;oldering............... .. ... D 3%2,444 1,54,444 H D .04 per solder =oint;hipments................... 04,444 24,444 H %$.44 per shipmentJuality control............ 1,2%4,444 ,544 H 10.44 per inspectionurchase orders......... 354,%44 134,44 H 5.44 per orderachine po!er........... 5,044 132,444 H .$4 per hourachine setups.......... 54,444 $4,444 H 25.44 per setup6osts per model'

/oyal ova 8irect costs'

ateriala................................................................... D2,$$0,444 D %,50,4448irect laborb............................................................. 10,444 $30,444achine hoursc....................................................... 2,444 $,10,444

Total direct costs........................................................... D2,32,444 D ,1%4,444

Assigned costs';olderingd................................................................ D 2$1,444 D 11,444;hipmentse.............................................................. 10$,%44 030,044Juality controlf........................................................ $%4,44 33,244urchase ordersg.................................................... 5%3,344 %44,544achine po!erh....................................................... %,44 52,44achine setupsi...................................................... $54,444 %44,444

Total assigned costs...................................................... D1,0$3,344 D $,104,144Total cost........................................................................ D%,%$1,344 D11,$44,144

6alculations follo!.


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6alculations'

/oyal ova

aaterial......................................... %,444 D5% 22,444 D24b8irect labor................................... %,444 D%2 22,444 D1cachine hours.............................. %,444 D2 22,444 D1%%d;oldering...................................... $5,444 D.04 1,15,444 D.04e;hipments..................................... $,44 D%$ 10,244 D%$fJuality control.............................. 21,$44 D10 50,244 D10gurchase orders........................... 143,34 D5 4,144 D5h

achine po!er............................. 10,444 D.$4 10,444 D.$4iachine setups............................. 1%,444 D25 10,444 D25

rofitability analysis'

/oyal ova Total;ales............................................................. D%,504,444 D13,44,444 D2%,$04,4449ess' 6ost of goods sold............................ %,%$1,344 11,$44,144 15,$2,444ross margin................................................ D 12,144 D ,%33,344 D ,02,444*nits sold..................................................... %,444 22,444

er-unit calculations';elling price.......................................... D1,1%4.44 D344.449ess' 6ost of goods sold..................... 1,14.3 51$.0%6ontribution margin............................. D $2.42 D$0.$06ontribution margin percentage......... 2.Ka %2.3Kb

aD$2.42PD1,1%4.44 H 2.Kb

D$0.$0PD344.44 H %2.3K


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1. eneral advantages associated !ith activity-based costing include the follo!ing'

rovides management !ith a more thorough understanding of comple& product

costs and product profitability for improved resource management and pricingdecisions.

Allo!s management to focus on value-added and non-value-added activities, so

that non-value-added activities can be controlled or eliminated, thus streamliningproduction processes.

ighlights the relationship bet!een activities and identifies opportunities to

reduce costs (i.e., designing products !ith fe!er parts in order to reduce the costof the manufacturing process).

rovides a more appropriate means of charging overhead costs to products.


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2. *sing anchester Technology7s unit cost data, the total contribution margin e&pectedfrom the 6 board is D2,$04,444, calculated as follo!s'

er *nit

Total for%4,444*nits

/evenue................................................................................ D$44 D12,444,4448irect material...................................................................... D1%4 D 5,044,444aterial-handling charge (14K of material)....................... 1% 504,444

8irect labor (D1% per hr. % hr.)......................................... 50 2,2%4,444Variable overhead (D% per hr. % hr.)E............................... 10 0%4,444achine time (D14 per hr. 1.5 hr.).................................... 15 044,444

Total cost....................................................................... D2%1 D 3,0%4,444*nit contribution margin..................................................... D 53Total contribution margin (%4,444 D53)........................... D 2,$04,444

EVariable overhead rate' D1,124,444 R 24,444 hr. H D% per hr.

The total contribution margin e&pected from the TV board is D1,354,444, calculated asfollo!s'

er *nit

Total for

05,444*nits/evenue................................................................................ D154 D3,54,4448irect material...................................................................... D 4 D5,244,444aterial-handling charge (14K of material)....................... 524,444

8irect labor (D1% per hr. 1.5 hr.)...................................... 21 1,$05,444Variable overhead (D% per hr. 1.5 hr.)E............................ 0 $34,444achine time (D14 per hr. .5 hr.)..................................... 5 $25,444

Total cost....................................................................... D124 D,44,444*nit contribution margin..................................................... D $4

Total contribution margin (05,444 D$4)........................... D1,354,444

EVariable-overhead rate' D1,124,444 R 24,444 hr. H D% per hr.


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$. The pool rates, !hich apply to both the 6 board and the TV board, are calculated asfollo!s'

rocurement............................ D%44,444P%,444,444 H D.14 per partroduction scheduling... .. .. .. .. D224,444P114,444 H D2.44 per boardac:aging and shipping... .. .. .. D%%4,444P114,444 H D%.44 per boardachine setup......................... D%%0,444P2,54 H D1.04 per setupa"ardous !aste disposal. .. .. D%,444P10,444 H D$.44 per lb.Juality control......................... D504,444P104,444 H D$.54 per inspectioneneral supplies.................. ... D00,444P114,444 H D.04 per boardachine insertion.................... D1,244,444P$,444,444 H D.%4 per partanual insertion...................... D%,444,444P1,444,444 H D%.44 per partave soldering........................ D1$2,444P114,444 H D1.24 per board

*sing activity-based costing, the total contribution margin e&pected from the 6board is D1,53%,444, calculated as follo!s'

er *nit

Total for%4,444*nits

/evenue.................................................................................. D$44.44 D12,444,4448irect material........................................................................ D1%4.44 D 5,044,444

rocurement (D.14 per part 55 parts)............................... 5.54 224,444

roduction scheduling.......................................................... 2.44 4,444ac:aging and shipping........................................................ %.44 104,444

achine setup (D1.04 per setup $ setups)....................... %.4 132,444a"ardous !aste disposal (D$ per lb. .$5 lb.).................. 1.45 %2,444Juality control

(D$.54 per inspection 2 inspections)......................... .44 24,444eneral supplies.................................................................... .04 2%,444

achine insertion (D.%4 per part $5 parts)....................... 1%.44 504,444anual insertion (D% per part 24 parts)............................ 4.44 $,244,444ave soldering...................................................................... 1.24 %,444

Total cost D 204.15 D14,%40,444*nit contribution margin D $3.5Total contribution margin D 1,53%,444


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*sing activity-based costing, the total contribution margin e&pected from the TV boardis D2,55,144, calculated as follo!s'

er *nit

Total for05,444*nits

/evenue................................................................................ D 154.44 D3,54,4448irect material...................................................................... D 4.44 D5,244,444rocurement (D.14 per part 25 parts).............................. 2.54 102,544roduction scheduling........................................................ 2.44 1$4,444ac:aging and shipping...................................................... %.44 204,444

achine setups (D1.04 per setup 2 setups).................... $.24 24,444a"ardous !aste disposal (D$ per lb. .42 lb.)................ .40 $,344Juality control...................................................................... $.54 22,544eneral supplies.................................................................. .04 $3,444

achine insertion (D.%4 per part 2% parts)..................... 3.04 02%,444anual insertion................................................................... %.44 204,444ave soldering..................................................................... 1.24 ,444

Total cost......................................................................... D 114.00 D,132,344*nit contribution margin..................................................... D $3.$%Total contribution margin.................................................... D2,55,144

%. The analysis using the previously reported costs sho!s that the unit contribution ofthe 6 board is almost double that of the TV board. >n this basis, management isli:ely to accept the suggestion of the production manager and concentratepromotional efforts on e&panding the mar:et for the 6 boards.

o!ever, the analysis using activity-based costing does not support this decision.This analysis sho!s that the unit dollar contribution from each of the boards is almostequal, and the total contribution from the TV board e&ceeds that of the 6 board byalmost D1,444,444. As a percentage of selling price, the contribution from the TV boardis double that of the 6 board (20 percent versus 1$ percent).


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1. a. 66#s predetermined overhead rate, using direct-labor cost as the single costdriver, is D5 per direct labor dollar, calculated as follo!s'

>verhead rate H costlabor-directbudgetedcostoverhead-ingmanufacturtotal

H D$,444,444PD044,444

H D5 per direct-labor dollar

b. The full product costs and selling prices of one pound of Mona and one pound ofalaysian coffee are calculated as follo!s'

Mona alaysian

8irect material........................................ D$.24 D%.248irect labor............................................. .$4 .$4

>verhead (.$4 D5)............................... 1.54 1.54ull product cost................................... D5.44 D0.44ar:up ($4K)......................................... 1.54 1.4;elling price........................................... D0.54 D.4

2. A ne! product cost, under an activity-based costing approach, is D.%0 per pound ofMona and D%.2 per pound of alaysian coffee, calculated as follo!s'

Activity 6ost 8river+udgetedActivity

+udgeted6ost *nit 6ost

urchasing urchase orders 1,15 D53,444 D544aterial handling ;etups 1,44 24,444 %44Juality control +atches 24 1%%,444 244/oasting /oasting hours 30,144 301,444 14+lending +lending hours $$,044 $$0,444 14ac:aging ac:aging hours 20,444 204,444 14


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Mona 6offee

;tandard cost per pound'

8irect material....................................................................................... D$.248irect labor............................................................................................ .$4

urchasing (% orders D544P2,444 lb.)................................................ 1.44

aterial handling (12 setups D%44P2,444 lb.)................................... 2.%4

Juality control (% batches D244P2,444 lb.)....................................... .%4

/oasting (24 hours D14P2,444 lb.)..................................................... .14

+lending (14 hours D14P2,444 lb.)..................................................... .45

ac:aging (2 hours D14P2,444 lb.).................................................... .41Total cost............................................................................................... D.%0

alaysian 6offee

;tandard cost per pound'

8irect material....................................................................................... D%.248irect labor............................................................................................ .$4

urchasing (%E orders D544P144,444 lb.).......................................... .42

aterial handling ($4 setups D%44P144,444 lb.)............................... .12

Juality control (14 batches D244P144,444 lb.)................................. .42/oasting (1,444 hours D14P144,444 lb.)............................................ .14

+lending (544 hours D14P144,444 lb.)............................................... .45

ac:aging (144 hours D14P144,444 lb.)............................................ .41Total cost............................................................................................... D%.2

E+udgeted sales R purchase order si"e 144,444 lbs. R 25,444 lbs. H % orders


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a. The A+6 analysis indicates that several activities other than direct labor driveoverhead. The cost computations sho! that the current system significantlyundercosted Mona coffee, the lo!-volume product, and overcosted the high-

volume product, alaysian coffee.

b. The implication of the A+6 analysis is that the lo!-volume products are usingresources but are not covering their share of the cost of those resources. TheMona blend is currently priced at D0.54 Gsee requirement 1(b)F, !hich issignificantly belo! its activity-based cost of D.%0. The company should set long-run prices above cost. If there is e&cess capacity and many of the costs are fi&ed,it may be acceptable to price some products belo! full activity-based costtemporarily in order to build demand for the product. >ther!ise, the high-volume,high-margin products are subsidi"ing the lo!-volume, lo!-margin products.

/>+9B 5-%2 (54 I*TB;)

1. Activity 6ost ool Type of ActivityI' achine-related costs *nit-levelII' ;etup and inspection +atch-levelIII' Bngineering roduct-sustaining-levelIV' lant-related costs acility-level


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2. 6alculation of pool rates'

I' achine-related costs'

hrs.machine3,444

D%54,444H D54 per machine hr.

II. ;etup and inspection'

runs%4

D14,444H D%,544 per run

III. Bngineering'

orderschange144

D34,444H D344 per change order

IV. lant-related costs'

ft.sq.1,324

D30,444H D54 per sq. ft.

$. *nit costs for odds and ends'

I' achine-related costs'

>dds' D54 per machine hr. % machine hr. per unit H D244 per unit

Bnds' D54 per machine hr. 1 machine hr. per unit H D54 per unit

II' ;etup and inspection'

>dds' D%,544 per run R 54 units per run H D34 per unit

Bnds' D%,544 per run R 254 units per run H D1 per unit


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III' Bngineering'

>dds'units1,444

5Korderschange144orderchangeperD344

Hunit1,444

D0,544H D0.54 per unit

Bnds'units5,444

25Korderschange144orderchangeperD344

Hunit5,444

D22,544H D%.54 per unit

IV. lant-related costs'

>dds' units1,444

4Kft.sq.1,324ft.sq.perD54

Hunit1,444

D0,44H D0.4 per unit

Bnds'units5,444

24Kft.sq.1,324ft.sq.perD54

Hunit5,444

D13,244H D$.% per unit


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%. e! product cost per unit using the A+6 system'

>dds Bnds

8irect material............................................... D %4.44 D 04.448irect labor.................................................... $4.44 %5.44anufacturing overhead'

achine-related...................................... 244.44 54.44;etup and inspection............................. 34.44 1.44Bngineering............................................. 0.54 %.54lant-related............................................ 0.4 $.%

Total cost per unit......................................... D54%.$4 D11.$%

5. e! target prices'

>dds Bndse! product cost (A+6)............................... D54%.$4 D11.$%ricing policy................................................. 124K 124Ke! target price............................................ D045.10 D21.01 (rounded)

0. ull assignment of overhead costs'

>dds Bnds

anufacturing overhead costs'achine-related...................................... D244.44 D54.44;etup and inspection............................. 34.44 1.44Bngineering............................................. 0.54 %.54lant-related............................................ 0.4 $.%

Total overhead cost per unit......................... D%$%.$4 D0.$%

roduction volume.................................... 1,444 5,444Total overhead assigned.............................. D%$%,$44 D$1,44

Total H D10,444


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. 6ost distortion'

>dds Bnds

Traditional volume-based costing system'reported product cost................................................ D 100.44 D2%3.44

Activity-based costing system'reported product cost................................................ 54%.$4 11.$%

Amount of cost distortion per unit.................................. D($$.$4) D 0.00

Traditionalsystem

undercostsodds by

D$$.$4per unit

Traditionalsystem

overcostsends by

D0.00per unit

roduction volume.......................................................... 1,444 5,444Total amount of cost distortion for entire

product line............................................................... D($$,$44) D$$,$44

;um of these t!oamounts is "ero.


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1. Mara 9indley#s predecessor at orth!est Aircraft Industries (AI) !ould have used a14 percent material-handling rate, calculated as follo!s'

ayroll................................................................................... D14,444Bmployee benefits................................................................ $0,444Telephone............................................................................. $,444>ther utilities........................................................................ 22,444aterials and supplies......................................................... 0,4448epreciation.......................................................................... 0,444Total aterial-andling 8epartment costs......................... D2,444

aterial-handling rate Hcostsmaterial-directtotal

costs8epartmentTandling-aterialtotal

H D%,444D2,440,444D2,444

+

H 14K

2. a. The revised material-handling costs to be allocated on a per-purchase-orderbasis is D1.44, calculated as follo!s'

Total aterial-andling 8epartment costs......................................... D2,4448educt' 8irect costs'

8irect government payroll.................................... D$0,444

ringe benefits (24K D$0,444)...........................,244

8irect phone line.................................................... 2,44 %0,444aterial-handling costs applicable to purchase orders.................... D2%2,444

Total number of purchase orders 2%2,444aterial-handling cost per purchase order D 1.44

b. urchase orders might be a more reliable cost driver than is the dollar amount ofdirect material, because resources are consumed in processing a purchaseorder. The si"e of the order does not necessarily have an impact on theconsumption of resources.


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$. There is a D%,044 reduction in material-handling costs allocated to governmentcontracts by AI as a result of the ne! allocation method, calculated as follo!s'

revious method'

overnment material........................................................... D2,440,444

aterial-handling rate...................................................... 14KTotal (previous method)...................................................... D 244,044

e! method'

8irectly traceable material-handling costs

GD$0,444 Q (24K D$0,444) Q D2,44F........................... D %0,444

urchase orders (4,444 D1.44)....................................... 4,444Total (ne! method).............................................................. D120,444

et reduction........................................................................ D %,044


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%. A forecast of the cumulative dollar impact over a three-year period from 24&1 through24&$ of Mara 9indley#s recommended change for allocating aterial-andling8epartment costs to the overnment 6ontracts *nit is D2$%,$%0, calculated as

follo!s'

24&2 24&$

6alculation of forecasted variable material-handling costs'

8irect-material cost'

24&2 (D2,4,444 1.425)................................. D2,352,444

24&$ (D2,352,444 1.425)................................. NNNNNNNNN D $,425,44aterial-handling rate (14K)................................... D 235,244 D $42,54

8educt' 8irect traceable costsE.............................. %0,444 %0,444Variable material-handling costs............................ D 2%3,244 D 250,54

6alculation of forecasted purchase orders'

24&2 (2%2,444 1.45)............................................... 25%,144

24&$ (25%,144 1.45)............................................... NNNNNNNNN 200,45overnment purchase orders ($$K of total).......... $,5$ ,4%0 (rounded)

6alculation of material-handling costs allocated to government contracts'

Variable material-handling costs............................ D 2%3,244 D 250,54urchase orders....................................................... 25%,144 200,45Variable material-handling costs per purchase

order (rounded)................................................. D .3 D .30overnment purchase orders................................. $,5$ ,4%0ro=ected variable material-handling

costs (rounded)................................................. D 2,10 D %,52%i&ed material-handling costsE................................ %0,444 %0,444

Total material-handling costs allocated togovernment contracts...................................... D 12,10 D 1$4,52%

ED$0,444 Q (24K D$0,444) Q D2,44 H D%0,444


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6alculation of cumulative dollar impact'

overnment material at 4K....................................... D2,400,%44b D2,11,404c

aterial-handling at 14K (previous method)............. D 240,0%4d D 211,40e8educt' aterial-handling costs allocated to

government contracts (ne! method)................... 12,10 1$4,52%et reduction in government contract

material-handling costs........................................ D ,%0% D 1,22

b4K D2,352,444 H D2,400,%44c4K D$,425,44 H D2,11,404d14K D2,400,%44 H D240,0%4e

14K D2,11,404 H D211,40

In summary, the cumulative dollar impact of the recommended change in allocatingaterial-andling 8epartment costs is D2$%,$%0, calculated as follo!s'

24&1 Gfrom requirement ($)F................ D %,04424&2....................................................... ,%0%24&$....................................................... 1,22Total...................................................... D2$%,$%0

5. a. /eferring to the standards of ethical conduct for management accountants, Mara9indley faces the follo!ing ethical issues'

Competence:

rovide decision support information and recommendations that are

accurate, clear, concise, and timely.

Integrity:

/efrain from engaging in any conduct that !ould pre=udice 9indley#s abilityto carry out her duties ethically.

Abstain from engaging in or supporting any activity that !ould discredit

9indley#s profession.


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Credibility:

8isclose all relevant information that could reasonably be e&pected to

influence an intended user7s understanding of the reports, analyses, orrecommendations. 9indley has information that @ay reston should see if heis going to ma:e a reliable =udgment about the results of the overnment6ontracts *nit.

b. The steps Mara 9indley could ta:e to resolve this ethical conflict are as follo!s'

9indley should first follo! the established policies at AI.

If this approach does not resolve the conflict or if such policies do not e&ist,

she should discuss the problem !ith her immediate superior, e&cept !hen itappears that the superior is involved. If the overnment 6ontracts *nitmanager, aul Anderson, is her superior, then she obviously cannot discussthe problem !ith him. In this case she should go to the ne&t-highermanagerial level and continue, up to the audit committee of the board ofdirectors, until the conflict is resolved.

;he should also discuss the situation !ith an ob=ective advisor to clarify the

issues involved and obtain an understanding of possible courses of action.

If the ethical conflict still e&ists after e&hausting all levels of internal revie!,

then she may have no other course of action than to resign from thecompany and submit an informative memorandum to an appropriaterepresentative of the company.


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1. a. The calculation of total budgeted costs for the anufacturing 8epartment atarconi anufacturing is as follo!s'

8irect material'Tuff ;tuff (D5.44 per unit 24,444 units)............. D144,444/uff ;tuff (D$.44 per unit 24,444 units)............. 04,444

Total direct material.................................................... D 104,4448irect labor.................................................................. 44,444>verhead'

Indirect labor.......................................................... D 2%,444ringe benefits....................................................... 5,444Indirect material..................................................... $1,444o!er...................................................................... 14,444

;etup....................................................................... 5,444Juality assurance.................................................. 14,444>ther utilities.......................................................... 14,4448epreciation........................................................... 15,444

Total overhead............................................................ $54,444Total anufacturing 8epartment budgeted cost..... D1,$14,444

b. The unit costs of Tuff ;tuff and /uff ;tuff, !ith overhead assigned on the basisof direct-labor hours, are calculated as follo!s'

Tuff ;tuff'8irect material........................................................ D 5.44

8irect labor (D.44 per hour 2 hours)E.............. 10.44>verhead (D$.54 per hour 2 hours)E................. .44

Tuff ;tuff unit cost........................................... D2.44

E+udgeted direct labor hours'

Tuff ;tuff (24,444 units 2 hours)............................ %4,444

/uff ;tuff (24,444 units $ hours)............................ 04,444Total budgeted direct-labor hours............................ 144,444

8irect-labor rate' D44,444 per 144,444 hours H D.44 per hour>verhead rate' D$54,444 per 144,444 hours H D$.54 per hour


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/uff ;tuff'8irect material........................................................ D $.44

8irect labor (D.44 per hour $ hours)E.............. 2%.44>verhead (D$.54 per hour $ hours)E................. 14.54

/uff ;tuff unit cost........................................... D$.54

E+udgeted direct labor hours

Tuff ;tuff (24,444 units 2 hours)............................ %4,444

/uff ;tuff (24,444 units $ hours)............................ 04,444Total budgeted direct-labor hours............................ 144,444

8irect-labor rate' D44,444 per 144,444 hours H D.44 per hour>verhead rate' D$54,444 per 144,444 hours H D$.54 per hour

2. The total budgeted cost of the abricating and Assembly 8epartments, afterseparation of overhead into the activity cost pools, is calculated as follo!s'

Total abricating Assemblyercent 8ollars ercent 8ollars

8irect material........... D 104,444 144K D104,4448irect labor.............. . 44,444 5K 044,444 25K D244,444>verhead'

Indirect labor D 2%,444 5K D 1,444 25K D 0,444ringe benefits 5,444 4K %,444 24K 1,444Indirect material $1,444 24,444 11,444o!er 14,444 104,444 24,444;etup 5,444 5,444 4,444Juality assurance 14,444 4K ,444 24K 2,444>ther utilities 14,444 54K 5,444 54K 5,4448epreciation

15,444 4K 12,444 24K $,444Total overhead D $54,444 D2$2,444 D11,444Total cost D1,$14,444 D332,444 D$1,444


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$. The unit costs of the products using activity-based costing are calculated as follo!s'

abricating'

Total cost................................................................................. D332,4449ess' 8irect material............................................................... 104,4449ess' 8irect labor.................................................................... 044,444ool overhead cost................................................................. D2$2,444

ours' Tuff ;tuff (%.% hours 24,444 units)..................... ,444 hours

/uff ;tuff (0.4 hours 24,444 units).................... 124,444 hours

Total machine hours................................... 24,444 hoursool rate per machine hour (D2$2,444P24,444).................... D1.12 per hour (rounded)

abricating cost per unit' Tuff ;tuff (D1.12 %.% hours).... D%.3$ per unit (rounded)

/uff ;tuff (D1.12 0.4 hours).. . D0.2 per unit (rounded)

Assembly'Total cost................................................................................. D$1,4449ess' 8irect labor.................................................................... 244,444ool overhead cost................................................................. D11,444

;etups' Tuff ;tuff.............................................................. 1,444/uff ;tuff............................................................. 22

Total setups................................................ 1,22ool rate per setup (D11,444P1,22)...................................... D32. per setup (rounded)

;etup cost per unit'

Tuff ;tuff (D32. per setup 1,444 set-ups) R 24,444 units D%.0% per unit (rounded)

/uff ;tuff (D32. per setup 22 set-ups) R 24,444 units... D1.20 per unit (rounded)

Tuff ;tuff unit cost'

8irect material......................................................................... D 5.448irect labor (2 hours D per hour)...................................... 10.44

abrication overhead.............................................................. %.3$Assembly overhead................................................................ %.0%

Tuff ;tuff unit cost.......................................................... D$4.5


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/uff ;tuff unit cost'

8irect material....................................................................... D $.44

8irect labor ($ hours D per hour).................................... 2%.44abrication overhead............................................................ 0.2Assembly overhead............................................................... 1.20

/uff ;tuff unit cost........................................................ D$%.3

%. /uff ;tuff unit costs'

6ost !ith overhead assigned on basis of direct-labor hours...... D$.546ost using activity-based costing.................................................. D$%.3

The activity-based costing unit costs may lead the company to decide to lo!er itsprice for /uff ;tuff in order to be more competitive in the mar:et and continueproduction of the product. It no! appears that /uff ;tuff has lo!er unit costs and canafford lo!er prices. *sing A+6 for assigning overhead costs generally leads to amore accurate estimate of the costs incurred to produce a product. anagementshould be able to ma:e better informed decisions regarding pricing and production ofthe company7s products.

/>+9B 5-%5 (04 I*TB;)

1.;tandard

odel8elu&eodel

eavy-8utyodel

roduct costs based on traditional, volume-based costing system............................... D145.44 D215.44 D2$2.44

X 114K.............................................................. 114K 114K 114KTarget price...................................................... D115.54 D2$0.54 D255.24


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2. roduct costs based on activity-based costing system'

/egular

odel

;tandard

odel

8elu&e

odel

8irect material.................................................. D14.44 D 25.44 D %2.448irect labor...................................................... 14.44 24.44 24.44achinery depreciation and maintenancea. . . $2.44 24.44 5.24Bngineering, inspection and

repair of defectsb........................................ 1.4% %$.54 $%.4urchasing, receiving, shipping, and

material handlingc...................................... 15.2 52.44 23.25actory depreciation, ta&es, insurance,

and miscellaneous overhead costsd

........ 12.54 3.25 25.53Total.................................................................. D30.2 D%$.5 D220.12aool I'

8epreciation, machinery............................................................... D1,%4,444aintenance, machinery............................................................... 124,444Total................................................................................................ D1,044,444

;tandard' (D1,044,444 %4K) 24,444 H D$2.448elu&e' (D1,044,444 1$K) 1,444 H D24.44eavy-8uty' (D1,044,444 %K) 14,444 H D5.24

bool II'Bngineering.................................................................................... D$54,444Inspection and repair of defects.................................................. $5,444Total................................................................................................ D25,444

;tandard' (D25,444 %K) 24,444 H D1.4%8elu&e' (D25,444 0K) 1,444 H D%$.54eavy-8uty' (D25,444 %K) 14,444 H D$%.4


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cool III'urchasing, receiving, and shipping........................................... D254,444aterial handling........................................................................... %44,444Total................................................................................................ D054,444

;tandard' (D054,444 %K) 24,444 H D15.28elu&e' (D054,444 K) 1,444 H D52.44eavy-8uty' (D054,444 %5K) 14,444 H D23.25

dool IV'8epreciation, ta&es, and insurance for factory........................... D$44,444iscellaneous manufacturing overhead..................................... 235,444Total................................................................................................ D535,444

;tandard' (D535,444 %2K) 24,444 H D12.548elu&e' (D535,444 15K) 1,444 H D3.25eavy-8uty' (D535,444 %$K) 14,444 H D25.53

$.;tandard

odel8elu&eodel

eavy 8utyodel

roduct costs based on activity-basedcosting system.................................................. D 30.2 D%$.5 D220.12

X 114K....................................................................... 114K 114K 114Ke! target price........................................................ D140.54 D%1.5$ D2%.$

The ne! target price of the standard model, D140.54, is lo!er than the current actualselling price, D114.


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%. !E!ORAN,U!

8ate' Today

To' resident orelli Blectric otor 6orporation

rom' I.. ;tudent

;ub=ect' roduct costing

+ased on the cost data from our traditional, volume-based product-costing system,our standard model is not very profitable. Its reported actual contribution margin isonly D5 (D114 L D145). o!ever, the validity of this conclusion depends on the

accuracy of the product costs reported by our product-costing system. >urcompetitors are selling motors li:e our standard model for D140. This price suggeststhat their product cost is substantially belo! our previously reported cost of D145.

>ur ne! activity-based-costing system reveals serious product costdistortions stemming from our old costing system. The ne! costing system sho!sthat the standard model costs only D30.2, !hich implies a target price of D140.54.This price is lo!er than our current actual selling price and consistent !ith the priceour competitors are charging.

In contrast, our ne! product-costing system reveals that the delu&e model#sproduct cost is D%$.5 instead of the previously reported cost of D215. The ne!product cost suggests a target price of D%1.5$ for the delu&e model, rather thanD2$0.54, !hich !as our previous target price for the delu&e model.


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5. The company should adopt and maintain the activity-based costing system. The priceof the standard model should be lo!ered to the D140. 9o!ering the price shouldenable the firm to regain its competitive position in the mar:et for the standard model.

urther price cuts should be considered if mar:eting studies indicate such a move!ill increase demand.

The price of the delu&e model should be set near the target price of D%1.5$. Ifthe delu&e model does not sell at this price, management should considerdiscontinuing the product line. Input from the mar:eting staff should be sought beforesuch an action is ta:en. An important consideration is the e&tent to !hich sales in thestandard model and heavy-duty model mar:ets depend on the firm#s offering acomplete product line.

A slight price reduction should be considered for the heavy-duty model (fromD255.24 do!n to D2%.$). o!ever, the product cost distortion from the old costingsystem did not affect this model as seriously as it did the other t!o.


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;tandardodel

8elu&eodel

eavy-8utyodel

Traditional, volume-based costing system'

reported product cost....................................... D145.44 D215.44 D2$2.44Activity-based costing system'

reported product cost....................................... 30.2 %$.5 220.12Amount of cost distortion per unit.......................... D .1 D(222.5) D 5.

Traditional Traditonal Traditionalsystem system system

overcosts undercosts overcostsstandard delu&e heavy-dutymodel by model by model by

D.1 D222.5 D5.per unit per unit per unit

roduct volume...................................................... 24,444 1,444 14,444Total amount of cost distortion for entire

product line........................................................ D10$,044 D(222,54) D5,44;um of these three

amounts is D($54). It!ould be "ero e&cept for

the slight rounding errorsin the calculation of the

ne! product costs to thenearest cent.


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1. The controller, Brin @ac:son, has acted ethically up to this point. ;he correctlypointed out to the president that the firm#s traditional, volume-based product-costingsystem !as distorting the reported product cost for the company#s three products.

;he designed an activity-based costing system to provide more accurate product-costing data.

2. The production manager, Alan Tyler, is not acting ethically. Although !e cansympathi"e !ith his plight, !e cannot condone his pressuring the controller tosuppress or alter the ne! product-costing data she has compiled.

hat can Tyler do that is ethical and has the potential for positive resultsYirst, he could ta:e a hard loo: at the delu&e model#s production process. Are therenon-value-added activities that could be reduced or eliminatedY ;econd, he could

argue to the president that the company should carry a full product line, if he hasreason to believe that is the firm#s best strategy.

$. @ac:son has an ethical obligation to the president, to the company, to her profession,and to herself to report accurate product-costing data to the president. There isnothing !rong !ith her offer to her friend to go over her analysis again to verify itsaccuracy. o!ever, she must report !hat she finds !ith no suppressi

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