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48 Managerial Accounting for Managers, 4th Edition
Exercise 6A-4 (continued)
2. The activity rates are computed by dividing the costs in the cells of the
first-stage allocation above by the total activity from the top of the
column.
Direct Labor
Support
Order
Processing
Customer
Support
Total activity ..............
20,000 DLHs
400 orders
200 customers
Wages and salaries ....
$6.00
$225.00
$300.00
Other overhead costs .
1.50
25.00
100.00
Total cost ..................
$7.50
$250.00
$400.00
Direct labor support wages and salaries from the first-stage allocation
above.
3. The overhead cost for the order is computed as follows:
Direct
Labor
Support
Order
Processing
Customer
Support
Total
Activity .............................
20
DLHs
1
order
1
customer
Wages and salaries ...........
$120.00
$225.00
$300.00
$645.00
Other overhead costs ........
30.00
25.00
100.00
155.00
Total cost .........................
$150.00
$250.00
$400.00
$800.00
above.
Solutions Manual, Appendix 6A 49
Exercise 6A-4 (continued)
Customer Margin—ABC Analysis
Sales (10 units × $300 per unit) .....................
$3,000
Costs:
Direct materials ($180 per unit × 10 units) ...
$1,800
Direct labor (10 units × $50 per unit) ...........
500
Direct labor support overhead (see part 3
above) .....................................................
150
Order processing overhead (see part 3
above) .....................................................
250
Customer support overhead (see part 3
above) .....................................................
400
3,100
Customer margin ...........................................
$ (100)
codes:
Sales ($300 per unit × 10 units) .......................
$3,000
Green costs:
Direct materials ($180 per unit × 10 units) .....
$1,800
1,800
Green margin ..................................................
1,200
Yellow costs:
Direct labor (10 units × $50 per unit) ............
500
Wages and salaries (see part 3 above) ...........
645
1,145
Yellow margin .................................................
55
Red costs:
Other overhead costs (see part 3 above) ........
155
155
Red margin .....................................................
$ (100)
50 Managerial Accounting for Managers, 4th Edition
Exercise 6A-4 (continued)
6. While the company appears to have incurred a loss on its business with
Shenzhen Enterprises, caution must be exercised. The green margin on
the “Other overhead” category. If these costs are committed fixed costs
that cannot be avoided in the short run, then the company would been
short term, may be avoided in the long term through the budgeting
process or in some other manner. However, if the Shenzhen Enterprises
accepting than rejecting business from the Shenzhen Enterprises in the
future.
Solutions Manual, Appendix 6A 51
Problem 6A-5 (30 minutes)
1. The detailed cost analysis of local commercials appears below:
Activity Rates
Animation
Concept
Animation
Production
Contract
Administration
Technical staff salaries...................
$4,000
$6,000
$1,600
Animation equipment depreciation .
360
1,125
0
Administrative wages and salaries ..
1,440
150
4,800
Supplies costs ...............................
120
300
160
Facility costs .................................
120
150
240
Total ............................................
$6,040
$7,725
$6,800
Animation
Concept
Animation
Production
Contract
Administration
Total
Activity level ..................................
25 proposals
5 minutes
10 contracts
Technical staff salaries ....................
$100,000
$30,000
$16,000
$146,000
Animation equipment depreciation ..
9,000
5,625
0
14,625
Administrative wages and salaries ...
36,000
750
48,000
84,750
Supplies costs ................................
3,000
1,500
1,600
6,100
Facility costs ..................................
3,000
750
2,400
6,150
Total cost ......................................
$151,000
$38,625
$68,000
$257,625
52 Managerial Accounting for Managers, 4th Edition
Problem 6A-5 (continued)
2. The action analysis report is constructed by using the row totals from
the cost report in part (1) above:
Sales ................................................
$180,000
Green costs:
Supplies costs ................................
$ 6,100
6,100
Green margin ....................................
173,900
Yellow costs:
Administrative wages and salaries ...
84,750
84,750
Yellow margin ...................................
89,150
Red costs:
Technical staff salaries ....................
146,000
Animation equipment depreciation ...
14,625
Facility costs ..................................
6,150
166,775
Red margin .......................................
$(77,625)
Solutions Manual, Appendix 6A 53
Problem 6A-5 (continued)
3. At first glance, it appears that the company is losing money on local
commercials. However, the action analysis report indicates that if this
market segment were dropped, most of the costs are likely to continue
being incurred. The nature of the technical staff salaries is clearly critical
future spending and therefore would reduce the company’s costs.
staff time to other, presumably more profitable work. However, if this is
Finally, the cost of the animation concept at the proposal stage is a
project proposals require the same effort. This may not be the case.
management
has
been putting about the same amount of effort into
every proposal, the above activity-based costing analysis suggests that
this may be a mistake. Management may want to consider cutting back
