Accounting Chapter 11 Homework Moss Jit Supplier Then Should Enjoy Some

Exercise 11.18 (Concluded)

2. Basic: $228,000/45,000 = $5.07* per unit

Advanced: $720,000/24,000 = $30 per unit

3. JIT manufacturing should result in more efficient production, and thus, costs

would be reduced. For example, the multidisciplinary nature of cells would

CPA-TYPE EXERCISES

Exercise 11.19

b. As with products, whenever there is customer diversity, activities will not be

Exercise 11.20

b. A low-price supplier is not necessarily the low-cost supplier. Suppliers can

Exercise 11.21

c. The key is selecting a driver that is the best measure of consumption. Order

Exercise 11.22

a. The cost per defective component is $20 ($3,000,000/150,000). Thus, the cost

Exercise 11.23

d. The second stage assigns activity costs to cost objects. Since customers are

the cost object, the only correct answer is d.

PROBLEMS

Problem 11.24

1. Cost per labor hour = ($5,000,000 + $7,500,000*)/250,000

2. Cost per hour = ($6,600,000 + $6,000,000*)/200,000 = $63.00 per hour

3. The design changes increased non-unit-based overhead activities, while de-

creasing unit-based costs. This is suggested by the fact that engineering

change orders triggered a number of overhead-related activities such as

changes in setup, inspection, and purchasing activities. Thus, so-called fixed

overhead increased by $1,600,000. Reduction in labor content may have come

Problem 11.24 (Concluded)

4. The cost of producing decreases by $250,000 for the rejected design:

Unit-level activities:

Setups:

Receiving:

Purchasing demand change = (75 – 100) = (25)

Decrease in steps = 25/20 = 1 (rounded down to nearest whole unit)

Decrease in variable activity cost = $2,000 × (25) = $(50,000)

Problem 11.25

1. Supplier cost:

First, calculate the activity rates for assigning costs to suppliers:

Testing engines: $264,000/1,100 = $240 per engine

Next, calculate the cost per engine by supplier:

Supplier cost:

Villa Verity

Purchase cost:

$297 × 10,800 …………………….. $ 3,207,600

$330 × 2,400 ………………………. $792,000

Testing engines:

$240 × 1,089 ………………………. 261,360

$240 × 11 …………………………... 2,640

*Rounded to the nearest cent.

The Verity engine costs less when the full supplier effects are considered.

2. Given that Cortalo needs both suppliers, it seems sensible to first shift more

business to the true low-cost supplier and then take actions to help improve

behavior of Villa engines. Cortalo could share the ABC analysis with Villa and

Problem 11.26

1. Following GAAP is fine for external financial reporting; however, for internal

reporting it may not be a good practice. By expensing order-filling costs,

2. The total product consists of all benefits—both tangible and intangible—that

a customer receives. One of the benefits is the order-filling service provided

by Moss. Thus, it can be argued that these costs should be product costs,

and not assigning them to products undercosts all products. There are more

small orders than large (70,000 orders average 600 units), and these small or-

ders consume more of the order-filling resources. They should, therefore,

receive more of the order-filling costs. Furthermore, since segmenting prod-

ucts is equivalent to segmenting customers, we obtain insight as to how

much it is costing to service different customer categories.

The average order-filling cost per unit produced is:

$6,300,000/126,000,000 units = $0.05/unit

Note: Each product has 42 million units (e.g., 600 × 70,000 for A); thus, there

are 126,000,000 units in total.

Problem 11.26 (Concluded)

3. With the pricing incentive feature, the average order size has been increased

to 2,000 units for all three product families. The number of orders now pro–

cessed can be calculated as follows:

Orders = [(600 × 70,000) + (1,000 × 42,000) + (1,500 × 28,000)]/2,000

= 63,000

Customers placed smaller, more frequent orders than necessary. They

received a benefit without being charged for it. By charging for the benefit

and allowing customers to decide whether it was worth the cost, Moss was

able to reduce its costs (potentially by shifting the cost of the service to the

4. If Moss is to be a JIT supplier, then it should enjoy some of the benefits. One

possibility is to seek help from the buyer so that Moss can become more of a

5. Competitive advantage is created by providing the same customer value for

less cost or better value for the same or less cost. By reducing the cost, Moss

Problem 11.27

1. Savings:

Purchasing [($30 × 1,500 part types) + ($45,000 × 15 clerks)] ……… $ 720,000

2. The redesign reduces the number of different parts by creating products that

use interchangeable parts. This reduces the demand for purchasing activity

and, at the same time, makes it easier to implement quality-related improve-

3. The operational activities include designing, evaluating suppliers, inspecting,

purchasing, rework, and warranty. Related organizational activities include

complexity, providing quality, and designing and producing quality. Organiza-

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Problem 11.28

1. Pawnee Works is losing money because it is unaware of the activities gener-

ated by each customer. The large customer places small, specialized orders,

requiring high-precision machined parts. The frequent orders and specialized

nature of the parts increase activities and activity-caused costs. The plant-

2. Traditional pricing:

Small Customer Large Customer

Prime costs …………………………... $ 14,000 $ 1,600

Overhead:

$14.30 × 2,000 …………………… 28,600

$14.30 × 200 ……………………… 2,860

Total cost ……………………………… $ 42,600 $ 4,460

3. Pool rates:

Setups: $209,000/1,045 hours = $200 per setup hour

Engineering: $151,200/630 hours = $240 per engineering hour

Problem 11.28 (Continued)

Setups: (3 × 15) + (10 × 100) ………………………………. 1,045

Small Customer Large Customer

Prime costs ……………………………. $ 14,000 $1,600

Overhead:

Setups:

$200 × 3 ……………………….. 600

$200 × 10 ……………………… 2,000

Engineering:

$240 × 2 ……………………….. 480

$240 × 6 ……………………….. 1,440

NC programming:

$160 × 1 ……………………….. 160

$160 × 8 ……………………….. 1,280

Machining:

Problem 11.28 (Continued)

If the sales support is traced to individual products, Pawnee will discover that

the major share of this cost is being caused by the large customer. The activi-

ty driver is the number of orders, yielding the following rate:

4. Current profit:

Sales [($53.25 × 15,000) + ($55.75 × 10,000)] …………. $1,356,250

COGS [($42.60 × 15,000) + ($44.60 × 10,000)]………… 1,085,000

Problem 11.28 (Continued)

Small Customer

Prime costs ………………………………. $ 14,000

Overhead:

Setups:

$200 × 3 ………………………….. 600

Engineering:

$240 × 2a …………………………. 480

NC programming:

Problem 11.28 (Concluded)

Income statement, small customer strategy:

Sales ($26.25 × 25,000) ………………………………… $ 656,250

Less: COGS ($21 × 25,000) …………………………... 525,000

5. Pawnee Works operates in a small segment of the industrial value chain. Fur-

thermore, it has very little seller power—especially relative to the Fortune 500

company. The president expressed concern about raising prices because he

was afraid that he would lose the large customer’s business—but even so,

the company cannot afford to continue selling at the same price. It is only a