978-0134475585 Chapter 5 Solution 5

SOLUTION

(40 min.) ABC, health care.

1a. Medical supplies rate =

years-patient ofnumber Total

costs supplies Medical

=

$242,000

110

=

space offeet square ofamount Total

costs maint. clinic andRent

=

$138,600

21,000

= $6.60 per square foot

=

years-patient ofnumber Total

laundry food, charts,

patient manage tocosts Admin.

=

$484,000

110

Laboratory services rate =

testslaboratory ofnumber Total

costs services Laboratory

=

$92,400

2,100

These cost drivers are chosen as the ones that best match the descriptions of why the costs arise.

Other answers are acceptable, provided that clear explanations are given.

1b. Activity-based costs for each program and cost per patient-year of the alcohol and drug

program follow:

Drug After-Care Total

Direct labor

Rent and clinic maintenance2

5-1

Administrative costs to manage

patient charts, food, and laundry3

Laboratory services4

Cost per patient-year

$1,531,000 $30,620

50 =

1Allocated using patient-years

1c. The ABC system more accurately allocates costs because it identifies better cost drivers.

The ABC system chooses cost drivers for overhead costs that have a cause-and-effect

relationship between the cost drivers and the costs. Of course, Yu should continue to evaluate if

better cost drivers can be found than the ones they have identified so far.

2. The concern with using costs per patient-year as the rule to allocate resources among its

programs is that it emphasizes “input” to the exclusion of “outputs” or effectiveness of the

programs. After-all, Yu’s goal is to cure patients while controlling costs, not minimize costs

per-patient year. The problem, of course, is measuring outputs.

5-2

5-40 Unused capacity, activity-based costing, activity-based management. Zarson’s Netballs

is a manufacturer of high-quality basketballs and volleyballs. Setup costs are driven by the

number of setups. Equipment and maintenance costs increase with the number of machine-hours,

and lease rent is paid per square foot. Capacity of the facility is 14,000 square feet, and Zarson is

using only 80% of this capacity. Zarson records the cost of unused capacity as a separate line

item and not as a product cost. The following is the budgeted information for Zarson:

Other budget information follows:

Required

1. Calculate the budgeted cost per unit of cost driver for each indirect cost pool.

2. What is the budgeted cost of unused capacity?

3. What is the budgeted total cost and the cost per unit of resources used to produce

(a) basketballs and (b) volleyballs?

4. Why might excess capacity be beneficial for Zarson? What are some of the issues Zarson

should consider before increasing production to use the space?

SOLUTION

(25 min.) Unused capacity, activity-based costing, activity-based management.

1.

Basketballs Volleyballs Total

Number of batches 450 300 750

Machine-hours 13,500 10,500 24,000

Capacity used for Capacity used for

2. Unused capacity Total capacity = –

basketball production volleyball production

–

14,000 3, 200 8,000 2,800 sq. ft.= – – =

Cost of unused capacity = $15 per sq. ft × 2,800 sq. ft. = $42,000

3.

Basketballs Volleyballs Total

Direct materials $168,100 $303,280 $ 471,380

Direct manufacturing labor 111,800 100,820 212,620

Setup

3. Currently, Zarson’s only utilizes 80% of its available capacity. The excess capacity is

currently costing Zarson’s $42,000 annually, so Zarson’s would need to consider using the

5-41 Unused capacity, activity-based costing, activity-based management. Archer Pro

manufactures two models of sport bows, Basic and Deluxe, using a combination of machining

and hand finishing. Machine setup costs are driven by the number of setups. Indirect

manufacturing labor costs increase with direct manufacturing labor costs. Equipment and

maintenance costs increase with the number of machine-hours, and facility rent is paid per

square foot. Capacity of the facility is 10,000 square feet, and Archer Pro is using only 75% of

this capacity. Archer Pro records the cost of unused capacity as a separate line item and not as a

product cost. For the current year, Archer Pro has budgeted the following:

5-4

Other budget information follows:

Required

1. Calculate the cost per unit of each cost-allocation base.

2. What is the budgeted cost of unused capacity?

3. Calculate the budgeted total cost and the cost per unit for each model.

4. Why might excess capacity be beneficial for Archer Pro? What are some of the issues Archer

Pro should consider before increasing production to use the space?

SOLUTION

(30 min.) Unused capacity, activity-based costing, activity-based management.

1.

Cost Allocation Base Allocation Rate

Indirect manufacturing

labor costs

$105,000 $350,000 direct

labor cost

30% of direct

labor cost

2. Budgeted cost of unused capacity = $25 per sq. ft. (10,000 – 4,000 – 3,500) sq. ft.

5-5

3.

Basic Deluxe

Direct materials $450,000 $320,000

Direct manufacturing labor 155,000 195,000

4. Currently, Archer Pro only utilizes 75% of its available capacity. The excess capacity is

currently costing Archer Pro $62,500 annually, so Archer Pro would need to consider using the

5-42 ABC, implementation, ethics. (CMA, adapted) Plum Electronics, a division of Berry

Corporation, manufactures two large-screen television models: the Mammoth, which has been

produced since 2013 and sells for $990, and the Maximum, a newer model introduced in early

2015 that sells for $1,254. Based on the following income statement for the year ended

November 30, 2017, senior management at Berry have decided to concentrate Plum’s marketing

resources on the Maximum model and to begin to phase out the Mammoth model because

Maximum generates a much bigger operating income per unit.

Details for cost of goods sold for Mammoth and Maximum are as follows:

5-6

Plum’s controller, Steve Jacobs, is advocating the use of activity-based costing and

activity-based management and has gathered the following information about the company’s

manufacturing overhead costs for the year ended November 30, 2017.

After completing his analysis, Jacobs shows the results to Charles Clark, the Plum division

president. Clark does not like what he sees. “If you show headquarters this analysis, they are

going to ask us to phase out the Maximum line, which we have just introduced. This whole

costing stuff has been a major problem for us. First Mammoth was not profitable and now

Maximum.

“Looking at the ABC analysis, I see two problems. First, we do many more activities than the

ones you have listed. If you had included all activities, maybe your conclusions would be

different. Second, you used number of setups and number of inspections as allocation bases. The

numbers would be different had you used setup-hours and inspection-hours instead. I know that

measurement problems precluded you from using these other cost-allocation bases, but I believe

you ought to make some adjustments to our current numbers to compensate for these issues. I

know you can do better. We can’t afford to phase out either product.”

Jacobs knows that his numbers are fairly accurate. As a quick check, he calculates the

profitability of Maximum and Mammoth using more and different allocation bases. The set of

activities and activity rates he had used results in numbers that closely approximate those based

on more detailed analyses. He is confident that headquarters, knowing that Maximum was

introduced only recently, will not ask Plum to phase it out. He is also aware that a sizable portion

of Clark’s bonus is based on division revenues. Phasing out either product would adversely affect

his bonus. Still, he feels some pressure from Clark to do something.

Required

5-7

1. Using activity-based costing, calculate the gross margin per unit of the Maximum and

Mammoth models.

2. Explain briefly why these numbers differ from the gross margin per unit of the Maximum