Catalogs b
(Unit cost: $295,400/590,800
127,150 105,650 62,600 295,400
= $.50 per catalog).......................................
catalog)..........................................................
a
Retail sales in boxesunit cost:
Small, 2,000$3
Medium, 45,000$3
Large, 178,000$3
2. The analysis of selling costs shows that small orders cost more than large orders.
This fact could persuade management to market large orders more aggressively
and/or offer discounts for them.
Several restaurant activities are listed in the following table, along with the required
characteristics for each activity. Many other possibilities could be listed, depending on
the level of detail.
Value-Added
or Non-
Activity Description Value- Activity Trigger Root Cause
Added
There are many key activities that can be suggested for each business. Some
possibilities are listed below. After each activity, a suggested cost driver is given in
parentheses.
1. Activity-based costing results in improved costing accuracy for two reasons. First,
companies that use ABC are not limited to a single driver when allocating costs to
products and activities. Not all costs vary with units, and ABC allows users to
select a host of nonunit-level cost drivers. Second, consumption ratios often
differ greatly among activities. No single cost driver will accurately assign costs
for all activities in this situation.
Information
E-Commerce Systems
Consulting Services
Billings:
3,600 hours x $140………… $504,000
2,400 hours x $140………… $336,000
Less: Professional staff cost:
3,600 hours x $50 (180,000)
2,400 hours x $50 (120,000)
Administrative cost……. (152,704) ( 229,056)
Income…………………………… $ 63,296 $ 94,944
Activity Application
Activity Cost Driver Rate
Information
E-Commerce Systems
Activity Consulting Services
Staff support:
240 clients x $165,600
$690…………...
60 clients x $ 41,400
$690…………….
In-house computing:
2,900 CH x 84,100
$29……………….
2,100 CH x 60,900
$29……………….
Miscellaneous office charges:
480 CT x 11,904
$24.80……………...
720 CT x 17,856
$24.80……………...
Total $120,156 $261,604
……………………………….
Information
E-Commerce Systems
Consulting Services
Billings:
3,600 hours x $140……….. $504,000
2,400 hours x $140……….. $336,000
Less: Professional staff cost:
3,600 hours x $50 (180,000)
2,400 hours x $50 (120,000)
Administrative cost……. (120,156) ( 261,604)
Income………………………….. $ 95,844 $ 62,396
Income ÷ billings……………... 28.53% 12.38%
4. Yes, his attitude should change. Even though both services are needed and
professionals are paid the same rate, the income percentages show that e-
commerce consulting provides a higher return per sales dollar than information
systems services (28.53% vs. 12.38%). Thus, all other things being equal,
professionals should spend more time with e-commerce.
5. Probably not. Although both services produce an attractive return for Clark and
Shiffer, the firm is experiencing a very tight labor market and will likely have
trouble finding qualified help. In addition, the professional staff is currently
overworked, which would probably limit the services available to new clients.
2. Activity-based-costing analysis:
Cost
Driver
Quantity Activity Product Activity
Cost for Cost for Line Cost per
Activity Cost Driver Pool Product Product Product Prod. Unit of
Activity Cost Pool Driver Quantity Rate Line Line Line Volume Product
Machin $ $27.00
Machine $310,500 e 115,000 2.70 REG 50,000 $135,000 5,000
32.40
Related Hours ADV 48,000 129,600 4,000
GMT 17,000 45,900 1,000 45.90
Total 115,000 $310,500
Material 52,500 Prod. 100 525.00 REG 40 $ 21,000 5,000 4.20
Hand. Runs ADV 40 21,000 4,000 5.25
GMT 20 10,500 1,000 10.50
Total 100 $ 52,500
Purch. 75,000 Purch. 300 250.00 REG 100 $ 25,000 5,000 5.00
Orders ADV 96 24,000 4,000 6.00
GMT 104 26,000 1,000 26.00
Total 300 $ 75,000
Setup 85,000 Prod. 100 850.00 REG 40 $ 34,000 5,000 6.80
Runs ADV 40 34,000 4,000 8.50
GMT 20 17,000 1,000 17.00
Total 100 $ 85,000
Inspect. 27,500 Inspect. 1,100 25.00 REG 400 $ 10,000 5,000 2.00
Hours ADV 400 10,000 4,000 2.50
GMT 300 7,500 1,000 7.50
Total 1,100 $ 27,500
Ship. 66,000 Ship. 1,100 60.00 REG 500 $ 30,000 5,000 6.00
ADV 400 24,000 4,000 6.00
GMT 200 12,000 1,000 12.00
Total 1,100 $ 66,000
Eng. 32,500 Eng. 650 50.00 REG 250 $ 12,500 5,000 2.50
Hours ADV 200 10,000 4,000 2.50
GMT 200 10,000 1,000 10.00
Total 650 $ 32,500
Machin 50.00
Fac. 575,000 e 115,000 5.00 REG 50,000 $250,000 5,000
Hours ADV 48,000 240,000 4,000 60.00
GMT 17,000 85,000 1,000 85.00
Total 115,000 $575,000
Grand Grand $1,224,00
Total $1,224,000 Total 0
5. The REG and ADV products were overcosted by the traditional system, and the
GMT product was undercosted by the traditional system
Deluxe Executive
Direct $ 40 $ 65
material……………….
Direct 25 25
labor…………………..
Manufacturing overhead…. 160 120
Unit cost………………… $225 $210
Activity Application
Activity Cost Driver Rate
Manufacturing setups:
100 SU x $8,400…………….. $
840,000
60 SU x $8,400…………….. $
504,000
Machine processing:
32,000 MH x $48…………... 1,536,00
0
45,000 MH x $48…………... 2,160,00
0
Product shipping:
200 OS x $3,200…………… 640,00
0
150 OS x $3,200…………….. 480,00
0
Total ……………………………. $3,016,00 $3,144,00
0 0
Deluxe Executive
4. Cost distortion:
The Deluxe cabinet product line is undercosted by $456,000, and the Executive
cabinet product line is overcosted by $456,000. Supporting calculations follow:
Deluxe Executive
*$253.50 $225.00 †
$194.80 $210.00
5. No, the discount is not advisable. The regular selling price of $270, when
compared against the more accurate ABC cost figure, shows that each sale
provides a profit to the firm of $16.50 ($270.00 - $253.50). However, a $30
discount will actually produce a loss of $13.50 ($253.50 - $240.00), and the
more units that are sold, the larger the loss. Notice that with the less-accurate,
machine-hour-based figure ($225), the marketing manager will be misled,
believing that each discounted unit sold would boost income by $15 ($240 -
$225).
Indirect material.
2. The increase in the overhead rate should not have a negative impact on the
company, because the increase in indirect costs was offset by a decrease in
direct labor.
3. Rather than using a plantwide overhead rate, Digital Light could implement
separate activity cost pools. Examples are as follows:
Treat individual machines as separate cost centers, with the machine costs
collected and charged to the products using machine hours.
Medform Procel
Order processing:
350 OP x $200.................. $ 70,000
250 OP x $200.................. $ 50,000
Machine processing:
23,000 MH x $10............... 230,000
27,000 MH x $10............... 270,000
Product inspection:
4,000 IH x $6................... 24,000
11,000 IH x $6................... 66,000
Total $324,000 $386,000
Medform Procel
1. Valdosta Vinyl Company (VVC) is currently using a plantwide overhead rate that is
applied on the basis of direct-labor dollars. In general, a plantwide manufacturing-
overhead rate is acceptable only if a similar relationship between overhead and
direct labor exists in all departments or the company manufactures products that
receive the same proportional services from each department
2. Because the company uses a plantwide overhead rate applied on the basis of direct-
labor dollars, the elimination of direct labor in the Molding Department through the
introduction of robots may appear to reduce the overhead cost of the Molding
Department to zero. However, this change will not reduce fixed manufacturing costs
such as depreciation and plant supervision. In reality, the use of robots is likely to
increase fixed costs because of increased depreciation. Under the current method of
allocating overhead costs, these costs merely will be absorbed by the remaining
departments.
Select a cost driver for each activity that best reflects the relationship of the
activity to the overhead costs incurred.
Establish a separate overhead pool and rate for the Molding Department.
Identify fixed and variable overhead costs and establish fixed and variable
overhead rates.
Assigned
Activity Cost Pool Level of Overhead
Pool Rate Cost Driver Cost
Machine setups $4,000 per setup 6 setups $24,000
Material handling $4 per pound 9,000 pounds 36,000
Hazardous waste $10 per pound 2,100 pounds 21,000
control
Quality control $150 per inspection 8 inspections 1,200
Other overhead costs $20 per machine 550 machine hours 11,000
hour
Total $93,200
a. Total overhead assigned = $62.50 per machine hr. 550 machine hr.
= $34,375
Assigned
Activity Cost Pool Level of Overhead
Pool Rate Cost Driver Cost
Machine setups $4,000 per setup 4 setups $16,000
Material handling $4 per pound 800 pounds 3,200
Hazardous waste $10 per pound 400 pounds 4,000
control
Quality control $150 per inspection 4 inspections 600
Other overhead costs $20 per machine 60 machine hours 1,200
hour
Total $25,000
$25,000
Overheadcost per unit $250
100plates
I: Machine-related costs:
$1,800,000
18,000machine hrs. = $100 per machine hr.
III. Engineering:
$360,000
200 change orders = $1,800 per change order
I: Machine-related costs:
Odds: $100 per machine hr.8 machine hr. per unit = $800 per unit
Ends: $100 per machine hr.2 machine hr. per unit = $200 per unit
III: Engineering:
$1,800per change order 200 change orders 75%
Odds:
1,000units
$270,000
= 1,000units
= $270 per unit
$1,800per change order 200 change orders 25%
Ends:
5,000units
$90,000
= 5,000units
= $18 per unit
Odds Ends
Direct material...........................................................
$ 160.00 $240.00
Direct labor................................................................
120.00 180.00
Manufacturing overhead:
Machine-related...................................................
800.00 200.00
Setup and inspection............................................ 360.00 72.00
Engineering.........................................................
270.00 18.00
Plant-related........................................................
307.20 15.36
Total cost per unit......................................................
$2,017.20 $725.36
Odds Ends
New product cost (ABC).............................................
$2,017.20 $725.36
120%
Pricing policy............................................................. 120%
New target price.........................................................
$2,420.64 $870.43 (rounded)
Odds Ends
Manufacturing overhead costs:
Machine-related...................................................
$ 800.00 $
200.00
Setup and inspection............................................
360.00 72.00
Engineering.........................................................
270.00 18.00
Plant-related........................................................
307.20 15.3
6
Total overhead cost per unit........................................
$1,737.20 $
305.36
Production volume..................................................
1,000
5,000
Total overhead assigned.............................................
$1,737,200 $1,526,80
0
Total = $3,264,000
7. Cost distortion:
Odds Ends
Traditional volume-based costing system:
reported product cost........................................... $ 664.00 $996.00
Activity-based costing system:
reported product cost........................................... 2,017.20 725.36
Amount of cost distortion per unit................................ $(1,353.20) $270.64
Traditional Traditional
system system
undercosts overcosts
odds by ends by
$1,353.20 $270.64
per unit per unit
2. Again, based on the product costs reported by the firm's traditional, volume-based
product-costing system, product W appears to be very profitable. As in requirement
(1), however, the validity of this assessment depends on the accuracy of the
reported product costs.
3. Gigabyte's competitors have moved aggressively into the market for gismos
(product G), but they have abandoned the whatchamacallit (product W) market to
Gigabyte.
These competing firms apparently believe they can sell gismos at a much
lower price than Gigabyte's management feels is feasible. This evidence suggests
that Gigabyte's competitors may believe their product cost for gismos is below
Gigabyte's reported product cost. In contrast, Gigabyte's competitors apparently
believe that they cannot afford to sell whatchamacallits at Gigabyte's current price
of $600. Perhaps the competing firms' reported production costs for product W are
higher than the cost reported by Gigabyte's product-costing system.
The danger to Gigabyte is that the company will be forced out of the market
for its second largest selling product. This could be disastrous to Gigabyte, Inc.
Percentage
Annual of Total
Raw-Material Annual Raw-Material Raw-Material
Product Cost per Unit Volume Cost Cost*
G $105.00 8,000 $ 840,000 25%
T 157.50 15,000 2,362,500 69%
W 52.50 4,000 210,000 6%
Total $3,412,500 100%
a
Machinery:
Product G: ($3,675,000 24%) 8,000 units = $110.25
Product T: ($3,675,000 50%) 15,000 units = $122.50
Product W: ($3,675,000 26%) 4,000 units = $238.88
b
Machine setup:
Product G: ($15,750 22%) 8,000 units = $ .43
Product T: ($15,750 30%) 15,000 units = $ .32
Product W: ($15,750 48%) 4,000 units = $ 1.89
c
Inspection:
Product G: ($1,575,000 16%) 8,000 units = $ 31.50
Product T: ($1,575,000 44%) 15,000 units = $ 46.20
Product W: ($1,575,000 40%) 4,000 units = $157.50
d
Material handling:
Product G: ($2,625,000 25%) 8,000 units = $ 82.03
Product T: ($2,625,000 69%) 15,000 units = $120.75
Product W: ($2,625,000 6%) 4,000 units = $ 39.38
e
Engineering:
Product G: ($1,034,250 35%) 8,000 units = $ 45.25
Product T: ($1,034,250 10%) 15,000 units = $ 6.90
Product W: ($1,034,250 55%) 4,000 units = $142.21
RESOURCE COSTS
Assignment of resource costs
to activity cost pools
associated with
Process View significant activities
Activity analysis
1 2 3 4 5 6
7 8 9 10 Activity evaluation
11 12
13 14 15 PERFORMANCE
16
MEASURES
ROOT ACTIVITY ACTIVITIES (see req. (4) for examples)
CAUSES TRIGGERS
(see req. (3) for (see req. (2) for
examples) examples)
Assignment of activity
costs to cost objects
using second-stage
cost drivers
COST OBJECTS
(Product lines: cooking
utensils, tableware,
flatware)
Activity
Number Trigger
(2) Realization by purchasing personnel that they do not fully understand the
part specifications
(9) Realization by purchasing personnel that the ordered part will be (or may
be) late in arriving
Activity
Number Possible Root Causes*
(2) Unclear specifications
Incomplete specifications
Clear, but apparently wrong, specifications
Undertrained purchasing personnel
(9) Vendor delay
Delay in placing order
Failure by purchasing personnel to make deadline clear
(11) Use of vendor that has not been fully certified as a reliable supplier
Critical importance of parts
(12) Misspecification of parts
Error by purchasing personnel in placing order
Vendor error
Inspector error
(13) Misspecification of parts
Incomplete specifications
Poor product design
Error by purchasing personnel in placing order
Vendor error
*This list is not necessarily complete. Other root causes may exist.
Activity Performance
Number Measures
(5) Average price paid
1. Customer-profitability analysis:
Caltex Trace
Computer Telecom
Customers*
Cumulative
Operating
Income as a
Percentage of
Cumulative Total
Customer Operating Operating Operating
Number a Customer Income Income Income
2. Memorandum
Date: Today
From: I. M. Student
An activity-based costing analysis of customer-related costs provided the data for the
customer-profitability analysis portrayed in the profile.
Material handling.... ($113,208 1.06) [(5 parts 5,000 units) + (10 parts 5,000
units)]
= $120,000* (25,000 parts + 50,000 parts)
= $120,000 75,000 parts = $1.60 per part
*Rounded
*Rounded
Machining............... ($849,056 1.06) (15,000 hours + 30,000 hours)
= $900,000* 45,000 hours = $20 per machine hour
*Rounded
*Rounded
3.
JY-63 JY-63 RX-67 RX-67
Estimated Estimated
20x4 20x5 20x4 20x5
Cost Product Cost Product
Data Cost Data Cost
Direct material:
No cost increase.................... $2,000,000 $3,500,000
Direct labor:
Direct labor $370,37 $185,18
0 6
1.08 cost increase*........... 400,000 200,000
Material handling:
Number of parts 5 10
units produced.................. 5,000
5,000
25,000 50,000
$1.60 per unit................... 40,000 80,000
Inspection:
Inspection hours 5,000 7,500
$20 per hour..................... 100,000 150,000
Machining:
Machining activity in 15,000 30,000
hours
$20 per hour..................... 300,000 600,000
Assembly:
Assembly activity in 6,000 5,500
hours
$40 per hour..................... 240,000 220,000
1.
Regular Advanced Deluxe
Model Model Model
Product costs based on traditional,
volume-
based costing system.......................... $210.00 $430.00 $464.00
× 110%.................................................... 110% 110% 110%
Target price.............................................. $231.00 $473.00 $510.40
a
Pool I:
Depreciation, machinery..................................................... $2,960,000
Maintenance, machinery..................................................... 240,000
Total.................................................................................. $3,200,000
3.
Regular Advanced Deluxe
Model Model Model
Product costs based on activity-based
costing system........................................... $192.02 $875.50 $455.42
× 110%............................................................ 110% 110% 110%
New target price............................................... $211.22 $963.05 $500.96
4. MEMORANDUM
Date: Today
Based on the cost data from our traditional, volume-based product-costing system,
our regular model is not very profitable. Its reported actual contribution margin is
only $10 ($220 – $210). However, the validity of this conclusion depends on the
accuracy of the product costs reported by our product-costing system. Our
competitors are selling motors like our standard model for $212. This price
suggests that their product cost is substantially below our previously reported cost
of $210.
5. The company should adopt and maintain the activity-based costing system. The
price of the regular model should be lowered to the $212. Lowering the price
should enable the firm to regain its competitive position in the market for the
regular model. Further price cuts should be considered if marketing studies
indicate such a move will increase demand.
The price of the advanced model should be set near the target price of
$963.05. If the advanced model does not sell at this price, management should
consider discontinuing the product line. Input from the marketing staff should be
sought before such an action is taken. An important consideration is the extent to
which sales in the regular model and deluxe model markets depend on the firm's
offering a complete product line.
A slight price reduction should be considered for the deluxe model (from
$510.40 down to $500.96). However, the product cost distortion from the old
costing system did not affect this model as seriously as it did the other two.