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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
and Mammoth models calculated using Plum’s existing simple costing system.
3. Comment on Clark’s concerns about the accuracy and limitations of ABC.
4. How might Plum find the ABC information helpful in managing its business?
5. What should Steve Jacobs do in response to Clark’s comments?
5-8
