CHAPTER 5 Activity-Based Costing and Management
P 5-53 make changes here, please →
1. Cost before addition of duffel bags: Patterns Finishing Total
$60,000*/100,000 = $0.60 per unit
60,000 /100,000 = 0.60 accounting cost 30,000 90,000 120,000
*$120,000/2 (costs doubled with the addition of new product) 120,000 / 2 = 60,000 transactions proc. 32,000 48,000 80,000
The assignment is accurate because all costs belong to the one product. total DL hours 15,000 30,000 30,000
2. Activity-based cost assignment:
Stage 1:
3. Product cost assignment:
Overhead rates:
Patterns: $30,000/15,000 direct labor hours = $2.00 per direct labor hour
30,000 /15,000 = 2.00
Finishing: $90,000/30,000 direct labor hours = $3.00 per direct labor hour
90,000 /30,000 = 3.00
Unit cost computation: Backpacks Duffel Bags
Patterns:
$2.00 × 0.10…………………………………….………………………….………………………….………………………….…………….………
$0.20 2.00 × 0.10 = 0.20
$2.00 × 0.20…………………………………….………………………….………………………….………………………….…………….………
Finishing:
$3.00 × 0.20…………………………………….………………………….………………………….………………………….…………….………
$3.00 × 0.40…………………………………….………………………….………………………….………………………….…………….………
PROBLEMS
CHAPTER 5 Activity-Based Costing and Management
P 5-53 (Concluded)
4. This problem allows us to see what the accounting cost per unit should
be by providing the ability to calculate the cost with and without the duffel
bags. With this perspective, it becomes easy to see the benefits of the
accounting costs to each producing department, and this allocation probably
reflects quite well the consumption of accounting costs by each producing
department. The problem is the second-stage allocation. Direct labor hours
do not capture the consumption pattern of the individual products as they
pass through the departments. The distortion occurs, not in using transactions
to assign accounting costs to departments, but in using direct labor hours to
assign these costs to the two products.
CHAPTER 5 Activity-Based Costing and Management
please change here →
P 5-54 Model A Model B
1. Plantwide Rate = $990,000/440,000 DLHs = $2.25 per DLH 990,000 / 140,000 + 300,000 = 2.25 units produced 10,000 100,000
Overhead cost per unit: prime costs 150,000 1,500,000
Model A: ($2.25 × 140,000)/10,000 units = $31.50
2.25 × 140,000 / 10,000 = 31.50 direct labor hrs 140,000 300,000
Model B: ($2.25 × 300,000)/100,000 units = $6.75
2.25 × 300,000 / 100,000 = 6.75 machine hrs 20,000 200,000
2. Overhead assignment: Model A Model B setup costs 270,000
Setups: inspection costs 210,000
$2,700 × 40………………………………...…………………………………...…………………………………………………………….
$108,000 2,700 × 40 = 108,000 machining 240,000
$2,700 × 60………………………………...…………………………………...…………………………………………………………….
$162,000 2,700 × 60 = 162,000 maintenance 270,000
Inspections:
990,000
$105 × 800……………...……………………………………………………...…………………………………...……………………….
84,000 105 × 800 = 84,000
$105 × 1,200………………………………...…………………………………...…………………………………………………………….
Machining:
$1.09 × 20,000…...…………………………...……………………………………………………...………………………………………….
$1.09 × 200,000…...…………………………...……………………………………………………...………………………………………….
Maintenance:
$2.70 × 10,000…...…………………………...……………………………………………………...………………………………………….
$2.70 × 90,000…...…………………………...……………………………………………………...………………………………………….
Overhead per unit……………………………………………………………………………………………………………………….
$ 24.08 $ 7.49
3. Departmental rates:
Overhead cost per unit:
Model A: ($3.50 × 10,000 machine hours) + ($0.90 × 130,000 direct labor hours) 3.50 × 10,000 + 0.90 × 130,000 / 10,000
=
15.20
/10,000 units = $15.20
Model B: ($3.50 × 170,000 machine hours) + ($0.90 × 270,000 direct labor hours) 3.50 × 170,000 + 0.90 × 270,000 / 100,000
=
8.38
/100,000 units = $8.38
4. A common justification is to use machine hours for machine-intensive departments
and labor hours for labor-intensive departments. Using activity-based costs as the
CHAPTER 5 Activity-Based Costing and Management
P 5-54 (Concluded)
Costing by method:
A B A/B Diff
ABC ###### ##### #### 3.2
Department ##### #### #### 1.8 –1.4
Plantwide ##### #### #### 4.7 +1.5
P 5-55 please change here →
1. Labor and gasoline are driver tracing. Basic Deluxe
Labor (0.75 × $120,000)………………………………………………………………………………………………………………………..
$ 90,000 Time = Resource Driver 75% × 120,000 = 90,000 Expected quantity 40,000 20,000
Gasoline ($3 × 6,000 moves)……………………………………………………………………………………………………………………
18,000 Moves = Resource Driver 3 × 6,000 = 18,000 Selling price 180 360
Depreciation (0.75 × $16,000)……………………………………………………………………………………………………………………
12,000 Time = Resource Driver 0.75 × 16,000 = 12,000 Prime costs 80 160
Total cost……………………………………………………………………………………………………………………
$120,000 Machine hours 5,000 5,000
Unit cost: Basic Deluxe Receiving (orders processed) 250 500
Prime costs
Overhead:
3. Activity rates:
Maintenance:
$114,000/4,000 = $28.50 per maintenance hour 114,000 / 4,000 = 28.50 Maintaining equipment 114,000 salary 40,000
Engineering:
$120,000/6,000 = $20 per engineering hour 120,000 / 6,000 = 20 Engineering support 120,000 receiving time 25%
Materials handling:
$120,000/6,000 = $20 per move 120,000 / 6,000 = 20 Setting up equipment 96,000 moving time 75%
Setting up:
$96,000/80 = $1,200 per setup 96,000 / 80 = 1,200 Purchasing materials 60,000
Purchasing:
$60,000/300 = $200 per requisition 60,000 / 300 = 200 Receiving goods 40,000 Gas costs/move 3
Receiving:
$40,000/750 = $53.33 per order processed 40,000 / 750 = 53.33 Paying suppliers 30,000 Depreciation py 6,000
Paying suppliers:
$30,000/750 = $40 per invoice processed 30,000 / 750 = 40 Providing space 20,000
Providing space:
$20,000/10,000 = $2 per machine hour 20,000 / 10,000 = 2 total 480,000
Unit cost: Basic Deluxe
Prime costs ($80 × 40,000; $160 × 20,000)…………………………………...……………………………………..…..
$3,200,000 $3,200,000 Basic: 40,000 × 80 =
Overhead: Deluxe: 20,000 × 160 =
3,200,000
3,200,000
CHAPTER 5 Activity-Based Costing and Management
P 5-55 (Continued)
Setting up:
(links to previous)
$1,200 × 16……….…………….………………….………………….………………….………………….………………….……………………
19,200 1,200 × 16 = 19,200 Setting up: 96,000 ÷ 80 = 1,200
$1,200 × 64……….…………….………………….………………….………………….………………….………………….……………………
$200 × 100……….…………….………………….………………….………………….………………….………………….……………………
$200 × 200……….…………….………………….………………….………………….………………….………………….……………………
$53.33 × 250……….…………….………………….………………….………………….………………….………………….……………………
$53.33 × 500……….…………….………………….………………….………………….………………….………………….……………………
Paying suppliers: Selling price 180 360
$40 × 250……….…………….………………….………………….………………….………………….………………….……………………
10,000 40 × 250 = 10,000 Prime costs 80 160
$40 × 500……….…………….………………….………………….………………….………………….………………….……………………
20,000 40 × 500 = 20,000 Machine hours 5,000 5,000
Providing space: Direct labor hours 10,000 10,000
$2 × 5,000……….…………….………………….………………….………………….………………….………………….……………………
10,000 2 × 5,000 = 10,000 Engineering (hrs) 1,500 4,500
$2 × 5,000……….…………….………………….………………….………………….………………….………………….……………………
Total………………………….…………….………………….………………….………………….………………….………………….……………….
Unit cost (ABC)…………….…………….………………….………………….………………….………………….………………….……………….
The ABC costs are more accurate (better tracing—closer representation of actual setups 16 64
resource consumption). This shows that the basic model was overcosted and the
deluxe model undercosted when the plantwide overhead rate was used.
4. Consumption ratios: Basic Deluxe
Maintenance……………….…………….………………….………………….………………….………………….………………….…………………………….
0.25 0.75
Engineering………………….…………….………………….………………….………………….………………….………………….…………………………..
0.25 0.75
Materials handling………….…………….………………….………………….………………….………………….………………….…………………………..
0.20 0.80
Setups……………………….…………….………………….………………….………………….………………….………………….……………………………
0.20 0.80
Purchasing………………….…………….………………….………………….………………….………………….………………….……………………………
0.33 0.67
Receiving…………………….…………….………………….………………….………………….………………….………………….…………………………..
0.33 0.67
Paying suppliers………….…………….………………….………………….………………….………………….………………….…………………………….
0.33 0.67
Providing space…………….…………….………………….………………….………………….………………….………………….…………………………..
0.50 0.50
CHAPTER 5 Activity-Based Costing and Management
P 5-55 (Concluded)
Pool 1: (links to previous) (links to previous) Basic Deluxe
Maintenance…………………………………………………………………………………………………………………
$114,000 Maintaining equipment 114,000 Expected quantity 40,000 20,000
Engineering……………………………………………………………………………………………………………
120,000 Engineering support 120,000 Selling price 180 360
Total……………………………………………………………………………………………………………
$234,000 Setting up equipment 96,000 Prime costs 80 160
÷ Maintenance hours……………………………………………………………………………………………………………
4,000 Purchasing materials 60,000 Machine hours 5,000 5,000
Pool rate……………………………………………………………………………………………………………
$ 58.50 Receiving goods 40,000 Direct labor hours 10,000 10,000
Note: Engineering hours could also be used as a driver. The activities are Paying suppliers 30,000 Engineering (hrs) 1,500 4,500
grouped together because they have the same consumption ratios: Providing space 20,000 Rec. (orders proc.) 250 500
(0.25, 0.75). total 480,000 moves 1,200 4,800
Materials handling………………………………………………………………………………………………………
Setting up………………………………………………………………………………………………………
Total……………………………………………………………………………………………………………
÷ Number of moves………………………………………………………………………………………………………
Pool rate……………………………………………………………………………………………………………
$ 36
Note: Materials handling and setups have the same consumption ratios:
Pool 3:
Purchasing………………………………………………………………………………………………………
$ 60,000 20,000 + 40,000 = 60,000
Receiving………………………………………………………………………………………………………
40,000 13,333 + 26,665 = 39,998
Paying suppliers………………………………………………………………………………………………………
30,000 10,000 + 20,000 = 30,000
Total……………………………………………………………………………………………………………
$130,000
÷ Orders processed………………………………………………………………………………………………………
750 250 + 500 = 750
Pool rate……………………………………………………………………………………………………………
$ 173.33
Note: The three activities are all product-level activities and have the same
consumption ratios: (0.33, 0.67).
Providing space………………………………………………………………………………………………………
÷ Machine hours………………………………………………………………………………………………………
Pool rate……………………………………………………………………………………………………………
$ 2
Note: This is the only facility-level activity.
CHAPTER 5 Activity-Based Costing and Management
please change here →
P 5-56 Patient Nursing
1. The cost of supervision is computed as follows: Days DD Hrs DD
Salary of supervisor (direct)………………………………………………………………………………………………………………
$ 80,000 normal 7,000 17,500
Salary of secretary (direct)………………………………………………………………………………………………………………
35,000 cesarean 2,000 12,500
Other costs (direct)………………………………………………………………………………………………………………
170,000 complications 1,000 20,000
Assistants (3 × 0.75 × $60,000)………………………………………………………………………………………………………………
135,000 3 × 75% × 60,000 occupancy and feeding 1,500,000
2,770,000
2. First, the cost of the secondary activity (supervision) must be assigned to laundry py 1,200,000
the primary activities (various nursing care activities) that consume it
laundry activity py 600,000
(the driver is the number of nurses): maternity prdn py 240,000
Maternity nursing care assignment: 25 /150 × 420,000 other cost 170,000
25/150 × $420,000 = $70,000 = 70,000 maternity nurses 25
Thus, the total cost of nursing care is $1,200,000 + $70,000 = $1,270,000. 1,200,000 + 70,000 = assistants 3
Next, calculate the activity rates for the two primary activities: supervising 75%
Finally, the cost per patient day type can be computed: nursing super. salary 80,000
Patient Daily Rate secretarys salary 35,000
Normal……………………………………………………………………………………………………………
$213.50
Cesarean……………………………………………………………………………………………………………
$308.75
Complications……………………………………………………………………………………………………………
1,270,000
a
b
c
CHAPTER 5 Activity-Based Costing and Management
P 5-56 (Concluded)
3. The laundry department cost would increase the total cost of the maternity
department by $115,200 (240,000/1,250,000 × $600,000). This would 240,000 / 1,250,000 × 600,000 = 115,200
increase the cost per patient day by $11.52 ($115,200/10,000). The activity 115,200 / 10,000 = 11.52
approach would need more detailed information—specifically, the amount
CHAPTER 5 Activity-Based Costing and Management
P 5-57
please change here →
1. Cost per Account = $6,105,000/75,000 accounts = $81.40 6,105,000 / 75,000 = 81.40
Average Fee per Month = $81.40/12 months = $6.78 81.40 / 12 = 6.78
2. Activity rates: Opening and closing accounts 300,000
Opening and closing accounts: Issuing statements 450,000
$300,000/30,000 accounts = $10 per account
300,000 / 30,000 = 10.00 processing transactions 3,075,000
Issuing monthly statements:
customer inquiries 600,000
Processing transactions:
$3,075,000/30,750,000 transactions = $0.10 per transaction
3,075,000 / 30,750,000 = 0.10
Customer inquiries:
$600,000/3,000,000 minutes = $0.20 per minute
Providing ATM services:
$1,680,000/2,400,000 transactions = $0.70 per transaction
1,680,000 / 2,400,000 = 0.70
Costs assigned: Low Medium High Low Medium High
Opening and closing: accounts opened/closed 22,500 4,500 3,000
$10 × 22,500…………………………………………………………………………………………………………………………………………………
$ 225,000 10 × 22,500 = 225,000 statements issued 675,000 150,000 75,000
$10 × 4,500…………………………………………………………………………………………………………………………………………………
$ 45,000 10 × 4,500 = 45,000 processing transactions 27,000,000 3,000,000 750,000
$10 × 3,000…………………………………………………………………………………………………………………………………………………
$ 30,000 10 × 3,000 = 30,000 telephone minutes 1,500,000 900,000 600,000
Issuing monthly statements: ATM transactions 2,025,000 300,000 75,000
$0.50 × 675,000…………………………………………………………………………………………………………………………………………………
337,500 0.50 × 675,000 = 337,500 checking accounts 57,000 12,000 6,000
$0.50 × 150,000…………………………………………………………………………………………………………………………………………………
75,000 0.50 × 150,000 = 75,000 Interest revenue per a/c 80 100 165
$0.50 × 75,000…………………………………………………………………………………………………………………………………………………
37,500 0.50 × 75,000 = 37,500
Processing transactions:
$0.10 × 27,000,000…………………………………………………………………………………………………………………………………………………
2,700,000 0.10 × 27,000,000 = 2,700,000
$0.10 × 3,000,000…………………………………………………………………………………………………………………………………………………
300,000 0.10 × 3,000,000 = 300,000
$0.10 × 750,000…………………………………………………………………………………………………………………………………………………
75,000 0.10 × 750,000 = 75,000
Customer inquiries:
$0.20 × 1,500,000…………………………………………………………………………………………………………………………………………………
300,000 0.20 × 1,500,000 = 300,000
$0.20 × 900,000…………………………………………………………………………………………………………………………………………………
180,000 0.20 × 900,000 = 180,000
$0.20 × 600,000…………………………………………………………………………………………………………………………………………………
120,000 0.20 × 600,000 = 120,000
Providing ATM services:
$0.70 × 2,025,000…………………………………………………………………………………………………………………………………………………
1,417,500 0.70 × 2,025,000 = 1,417,500
$0.70 × 300,000…………………………………………………………………………………………………………………………………………………
$0.70 × 75,000…………………………………………………………………………………………………………………………………………………
52,500 0.70 × 75,000 = 52,500
Total cost………………………………………………………
$4,980,000 $810,000 $315,000
Number of accounts………………………………………………………
57,000 12,000 6,000
CHAPTER 5 Activity-Based Costing and Management
P 5-57 (Concluded)
3. Average profit per account: $90.00 – $81.40 = $8.60 90.00 – 81.40 = 8.60
ABC profit measure: interest revenue per a/c 90
Low-balance customers………………………………………………………………………………………………………..
$80.00 – $87.37 = $(7.37) 80.00 – 87.37 = (7.37) % of customers switching 50%
Medium-balance customers………………………………………………………………………………………………..
$100.00 – $67.50 = $32.50 100.00 – 67.50 = 32.50
High-balance customers………………………………………………………………………………………………..
$165.00 – $52.50 = $112.50 165.00 – 52.50 = 112.50
4. First, calculate the profits from loans, credit cards, and other products by
customer category (using ABC data). Next, compare 50% of the cross-sales
profits from low-balance customers with the total loss from the low-balance
president’s argument has merit.
P 5-58
1. GAAP mandates that all nonmanufacturing costs be expensed during the
period in which they are incurred. GAAP is the most likely cause of the practice.
The limitations of GAAP-produced information for cost management should be
The total product consists of all benefits, both tangible and intangible, that a
information given, there are more small orders than large (100,000 orders
average 600 units); thus, these small orders consume more of the order-filling
CHAPTER 5 Activity-Based Costing and Management
P 5-58 (Continued) please change here →
2. The average order-filling cost per unit produced is computed as follows:
$9,000,000/180,000,000* units = $0.05 per unit
9,000,000 / 180,000,000 = 0.05
*(600 × 100,000) + (1,000 × 60,000) + (1,500 × 40,000) = 180,000,000 *600 × 100,000 + 1,000 × 60,000 Selling price range 0.50 0.80
Thus, order-filling costs are about 6 to 10% of the selling price, clearly not a + 1,500 × 40,000 =
trivial amount. total costs 9,000,000
Furthermore, the per-unit cost for individual product families can be computed Step-fixed component: 50,000
using the number of orders as the activity driver: step-variable component: 2,000
Activity Rate = $9,000,000/200,000 orders = $45 per order
9,000,000 / 200,000 = 45.00 orders: 20
The per-unit ordering cost for each product family can now be calculated: expected customer orders 200,000
Category I, which has the smallest batches, is the most undercosted of the
three categories. Furthermore, the unit ordering cost is quite high relative to Inc. in order size (units) 2,000 45
Category I’s selling price (10 to 16% of the selling price). This suggests that
something should be done to reduce the order-filling costs.
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
processed can be calculated as follows:
Orders
= [(600 × 100,000) + (1,000 × 60,000) + (1,500 × 40,000)]/2,000 600 × 100,000 + 1,000 × 60,000 +
= 90,000 1,500 × 40,000 / 2,000 =
Reduction in Orders = 200,000 – 90,000 = 110,000 200,000 – 90,000 = 110,000
Steps That Can Be Reduced = 110,000/2,000 = 55 110,000 / 2,000 = 55 200,000 / 2,000 = 100
Reduction in resource spending:
180,000,000
90,000
CHAPTER 5 Activity-Based Costing and Management
P 5-58 (Concluded)
Customers were placing smaller and more frequent orders than necessary.
They were receiving a benefit without being charged for it. By charging for
the benefit and allowing customers to decide whether the benefit is worth
the cost of providing it, Grundvig was able to reduce its costs (potentially
by shifting the cost of the service to the customers). The customers,
however, apparently did not feel that the benefit was worth paying for and
so increased order size. By increasing order size, the number of orders
decreased, decreasing the demand for the order-filling activity, allowing
Grundvig to reduce its order-filling costs. Other benefits may also be
realized. The order size affects activities such as scheduling, setups, and
materials handling. Larger orders should also decrease the demand for
these activities, and costs can be reduced even more.
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, Grundvig can increase customer value by providing a lower price
(decreasing customer sacrifice) or by providing some extra product
features without increasing the price (increasing customer realization,
holding customer sacrifice constant). This is made possible by the
decreased cost of producing and selling the bolts.
It may also be of value to note that we are discussing airplane bolt packages
that are priced at $0.50 to $0.80 each. For Category I, that means the range of
placing so many orders. It is likely the customers will also realize some
savings by placing fewer orders as the bolts are small and the carrying
cost should not be significant relative to ordering and receiving costs.
CHAPTER 5 Activity-Based Costing and Management
P 5-59
1. Supplier cost:
First, calculate the activity rates for assigning costs to suppliers: please change here →
Replacing engines:
Replacing engines 800,000
$800,000/2,000 engines = $400 per engine
800,000 / 2,000 = 400
Expediting orders:
Repairing engines:
$1,800,000/2,500 engines = $720 per engine
Next, calculate the cost per engine by supplier:
Supplier cost: Watson Johnson
Watson Johnson Engines replaced 1,980 20
Purchase cost: Late shipments 198 2
$900 × 18,000………………………….……………….……………….……………….……………….……………….……………….………..…
$16,200,000 900 × 18,000 = 16,200,000 Warranty repairs 2,440 60
$1,000 × 4,000………………………….……………….……………….……………….……………….……………….……………….………..…
$4,000,000 1,000 × 4,000 = 4,000,000 Price 900 1,000
Replacing engines:
Engines purch 18,000 4,000
$400 × 1,980………………………….……………….……………….……………….……………….……………….……………….………..…
792,000 400 × 1,980 = 792,000 Produces & sells 22,000
$400 × 20………………………….……………….……………….……………….……………….……………….……………….………..…
8,000 400 × 20 = 8,000 Johnson can only supply 20,000
Expediting orders:
990,000 5,000 × 198 = 990,000
10,000 5,000 × 2 = 10,000
Repairing engines:
1,756,800 720 × 2,440 = 1,756,800
43,200 720 × 60 = 43,200
$19,738,800 $4,061,200
18,000 4,000
The Johnson engine costs less when the full supplier effects are considered.
This is a better assessment of cost because it considers the costs that are
caused by the supplier due to poor quality, poor reliability, and poor delivery
performance.
2. In the short run, buy 20,000 from Johnson and 2,000 from Watson. In the
long run, one possibility is to encourage Watson to increase its quality
and maintain purchases from both sources (lowers source risk by having
two suppliers).
CHAPTER 5 Activity-Based Costing and Management
P 5-60 (make changes here, please)
1. Activity-based management is a system-wide, integrated approach that focuses Setting up equipment 125,000
management’s attention on activities. It involves two dimensions: a cost dimension Materials handling 180,000
and a process dimension. Key elements in activity management are identifying Inspecting products 122,000
activities, assessing their value, and retaining only value-adding activities. The Engineering support 120,000
consultant identified the activities but did not formally classify the activities as Handling customer complaints 100,000
2.
Setting up equipment………………………………………………………………………………………………………….
$125,000 Manual insertion labor 250,000 Reduct’n in price could be 7
Materials handling…………………………………………………………………………………………………….
180,000 Other direct labor 150,000 New price after further reduction 12
Inspecting products…………………………………………………………………………………………………….
122,000 SP 18 Inc. in sales volume 50%
Handling customer complaints…………………………………………………………………………………………………….
100,000 Customary profit 2 Redn. In engineering support 60,000
Filling warranties…………………………………………………………………………………………………….
Storing goods…………………………………………………………………………………………………….
Expediting goods…………………………………………………………………………………………………….
CHAPTER 5 Activity-Based Costing and Management
P 5-60 (Continued)
Units produced and sold……………………………………………………………………………………………………….
120,000 * (links)
Potential unit cost reduction……………………………………………………………………………………………………….
$7.10 ** Setting up equipment 125,000
*$1,920,000/$16 (Total Cost/Unit Cost) 1,920,000 / 16 = 120,000 Materials handling 180,000
** $852,000/120,000 = $7.10 852,000 / 120,000 = 7.10 Inspecting products 122,000
**
The consultant’s estimate of cost reduction was on target. Per-unit costs Engineering support 120,000
can be reduced by at least $7, and further reductions may be possible if Handling customer complaints 100,000
improvements in value-added activities are possible. Filling warranties 170,000
We have identified $7.10 per unit of potential cost reduction. We don’t know
for sure that costs can actually be reduced that much, and, if they can, what
the cost of doing that would be. For example, eliminating materials handling
more profit than they are making currently.
3. Unit cost to maintain sales = $14 – $4 = $10 14 – 4 = 10 Storing goods 80,000
Unit cost to expand sales = $12 – $4 = $8 12 – 4 = 8 Expediting goods 75,000
Current cost
=
$16 16 Using materials 500,000
Cost reduction to maintain = $16 – $10 = $6 16 – 10 = 6 Using power 48,000
Cost reduction to expand = $16 – $8 = $8 16 – 8 = 8 Manual insertion labora 250,000
4. Total potential reduction: Other direct labor 150,000
$ 852,000 (from Requirement 2) Total Cost 1,920,000
150,000 (by automating)
$1,002,000
÷ Units………………………………………………………………………………………………….
120,000 SP 18
Unit savings………………………………………………………………………………………….
$ 8.35 Customary profit 2
Costs can be reduced by at least $7, enabling the company to maintain Profit 4
current market share. Further, if all the nonvalue-added costs are eliminated, New price after reduction 14
then the cost reduction needed to increase market share is also possible. Redn in price 4
See also the discussion of profitability provided in Requirement 2. Activity Redn in price could be 7
selection is the form of activity management used here.
CHAPTER 5 Activity-Based Costing and Management
P 5-60 (Concluded)
5. Current: New price after further reduction 12
Sales………………………………………………………………………………………….
$ 2,160,000 ($18 × 120,000 units) 18 × 120,000 = 2,160,000 Inc. in sales volume 50%
Costs………………………………………………………………………………………….
(1,920,000) Redn. In engineering support 60,000
Income………………………………………………………………………………………….
$ 240,000 Redn. In DL 90,000
$14 price: (assumes that current market share is maintained):
Sales………………………………………………………………………………………….
$1,680,000 ($14 × 120,000 units)
Costs………………………………………………………………………………………….
(918,000) ($7.65 × 120,000 units) 7.65 × 120,000
Income………………………………………………………………………………………….
$12 price:
Sales………………………………………………………………………………………….
$ 2,160,000 ($12 × 180,000 units)
Costs………………………………………………………………………………………….
(1,377,000) ($7.65 × 180,000 units) 7.65 × 180,000
Income………………………………………………………………………………………….
The $12 price produces the greatest benefit.
P 5-61
1. Nonvalue-added usage and costs, 20X1: Per person hours 2,000
Nonvalue Usage Nonvalue Cost Salary 60,000
AQ* VAQ** AQ – VAQ (AQ – VAQ)SP Nonvalue Cost Units produced 80,000
Materials…………………………………………………………………………………………..
600,000 480,000 120,000 # ####### 120,000 × 5 = 600,000 Materials used 584,800
Engineering……………………………………………………………………………………..
48,000 27,840 20,160 604,800 20,160 × 30 = 604,800 Engineering hours 35,400
########## #
*1.25 × 6 × 80,000 = 600,000 125% × 6 × 80,000 = 600,000 Std. price of materials 5
** (4 × 6,000) + (10 × 2,400) = 48,000 4 × 6,000 + 10 × 2,400 = 48,000 Value added std calls for 6
(AQ for engineering represents the actual practical capacity acquired.)
*** 6 × 80,000 = 480,000 6 × 80,000 = 480,000 Std. 4 sustaining engineering 58%
**** (0.58 × 24,000) + (0.58 × 24,000) = 27,840 58% × 24,000 + 58% × 24,000 = 27,840
Note: VAQ = Value-Added Quantity; SP = Price of Activity Quantity; SP for materials Complaints to do with design 42%
is $5; SP for engineering is $30 (24 × $60,000)/48,000. 1,440,000 / 48,000 = 30 (see A below) No. of engineers 24
Materials…………………………………………………………………………………………..
Engineering……………………………………………………………………………………..
1,440,000 / 48,000 = 30
please change here
***
**
****
*
CHAPTER 5 Activity-Based Costing and Management
P 5-61 (Concluded)
The company failed to meet the materials standard but beat the engineering
standard. The engineering outcome is of particular interest. The actual usage Engineering Hrs 35,400
of the engineering resource is 35,400 hours, and activity availability is 48,000. Availability 48,000
Thus, the company has created 12,600 hours of unused engineering capacity. Unused capacity 12,600
Each engineer brings a capacity of 2,000 hours. Since engineers come in Per Person hrs 2,000
P 5-62
1. Theoretical Velocity = 90,000/12,000 hours = 7.5 telescopes per hour 90,000 / 12,000 = 7.5
Theoretical Cycle Time = 60/7.5 telescopes = 8 minutes per telescope 60 / 7.5 = 8.0 please change here →
2. Actual Velocity = 75,000/12,000 hours = 6.25 telescopes per hour 75,000 / 12,000 = 6.25 9,000,000 Raw materials
Actual Cycle Time = 60/6.25 telescopes = 9.6 minutes 60 / 6.25 = 9.60
3. Budgeted Conversion Costs = $7,500,000/(12,000 × 60) 7,500,000 / 12,000 × 60 = 10.42 7,500,000 Conv. Costs
= $10.42 per minute 7,800,000 Actual
CHAPTER 5 Activity-Based Costing and Management
Case 5-63
1. Shipping and warehousing costs are currently assigned using tons of paper
produced, a unit-based measure. Many of these costs, however, are not driven by
quantity produced. Many products have special handling and shipping requirements
2. The new method proposes assigning the costs of shipping and warehousing
separately for the low-volume products. To do so requires three cost assignments:
receiving, shipping, and carrying. The cost drivers for each cost are tons processed,
items shipped, and tons sold.
Pool rate, shipping costs:
Shipping Cost per Shipping Item
= $2,300,000/190,000 shipping items 2,300,000 / 190,000 = 12.11
= $12.11 per shipping item
Pool rate, carrying cost (an opportunity cost):
Carrying Cost per Year (LLHC) = 25 × $1,665 × 0.16 25 × 1,665 × 16% = 6,660
$6,660/10 = $666
CASES
CHAPTER 5 Activity-Based Costing and Management
Case 5-63 (Concluded)
3. Profit analysis:
Revised profit per ton (LLHC):
Selling price………………………………………………………………………………………………………………...
$2,400.00 SP per ton 2,400
Less manufacturing cost…………………………………………………………………………………………………………………
1,665.00 Tons sold 10
Gross profit…………………………………………………………………………………………………………………
$ 735.00 Average shipments per ton 7
Less shipping and warehousing…………………………………………………………………………………………………………………
770.41
Loss…………………………………………………………………………………………………………………
$ (35.41)
Selling price…………………………………………………………………………………………………………………
Less manufacturing cost…………………………………………………………………………………………………………………
Gross profit…………………………………………………………………………………………………………………
Less shipping and warehousing…………………………………………………………………………………………………………………
Profit…………………………………………………………………………………………………………………
$ 705.00
The revised profit, reflecting a more accurate assignment of shipping and
warehousing costs, presents a much different picture of LLHC. The product is,
in reality, losing money for the company. Its earlier apparent profitability was
attributable to a subsidy being received from the high-volume products (by
spreading the special shipping and handling costs over all products, using
tons produced as the cost driver). The same effect is also true for the other
low-volume products. Essentially, the system is understating the handling
costs for low-volume products and overstating the cost for high-volume
products.
4. The decision to drop some high-volume products and emphasize low-volume
products could clearly be erroneous. As LLHC has demonstrated, its apparent
profitability is attributable to distorted cost assignments. A significant change in
responsibility of providing reliable information.
5. Ryan’s strategy changed because his information concerning the individual
products changed. Apparently, the accounting system was undercosting the
conditions.
CHAPTER 5 Activity-Based Costing and Management
Case 5-64
1. Disagree. Chuck is expressing an uninformed opinion. He has not spent the
2. and 3.
At first glance, it may seem strange to even ask if Chuck’s behavior is unethical.
After all, what is unethical about expressing an opinion, albeit uninformed? While
offering uninformed opinions or recommendations may be of little consequence
in many settings, a serious issue arises when a person’s expertise is relied upon
by others to make decisions or take actions that could be wrong or harmful to
themselves or their organizations. This very well may be the case for Chuck’s
setting, and his behavior may be labeled professionally unethical.