5-61
PROBLEM 5-59 (CONTINUED)
3.
The unit costs of the products using activity-based costing are calculated as follows:
Fabricating:
Total cost ……………………………………………………………………………………
$2,951,820
Less: Direct material ……………………………………………………….
480,000
Less: Direct labor ……………………………………………………………………………………
Pool overhead cost …………………………………………………………………………………
$ 695,820
Total machine hours ………………………………………………………
hours
Assembly:
Total cost ……………………………………………………………………………………
$978,180
Less: Direct labor ……………………………………………………………………………………
624,000
Pool overhead cost …………………………………………………………………………………
$354,180
Setups: Tuff Stuff ……………………………………………………….
Ruff Stuff ……………………………………………………….
Total setups ……………………………………………………….
Pool rate per setup ($354,180/1,272) ……………………………………………………….
$278.44 per setup (rounded)
Tuff Stuff: $278.44 per setup x (1,000 setups / 20,000 units) ………………..
$13.92 per unit (rounded)
Ruff Stuff: $278.44 per setup x (272 setups / 20,000 units) ………………….
$3.79 per unit (rounded)
Tuff Stuff unit cost:
Direct material ……………………………………………………………………………………
$15.00
Fabrication overhead ……………………………………………………….
5-62
PROBLEM 5-59 (CONTINUED)
Ruff Stuff unit cost:
Direct material ……………………………………………………………………………………
$ 9.00
Fabrication overhead ……………………………………………………….
Assembly overhead ……………………………………………………….
Ruff Stuff unit cost ……………………………………………………….
4.
Ruff Stuff unit costs:
Cost with overhead assigned on direct-labor hours …………………………..
$112.50
Cost using activity-based costing ……………………………………………………….
$104.89
Chapter 05 – Activity-Based Costing and Management
5-63
PROBLEM 5-60 (60 MINUTES)
1.
Based on the cost data from Gigabyte’s traditional, volume-based product-costing
system, product G is the firm’s least profitable product. Its reported actual gross
2.
Again, based on the product costs reported by the firm’s traditional, volume-based
product-costing system, product W appears to be very profitable. As in requirement
3.
Gigabyte’s competitors have moved aggressively into the market for gismos (product
G), but they have abandoned the whatchamacallit (product W) market to Gigabyte.
The danger to Gigabyte is that the company will be forced out of the market for
its second largest selling product. This could be disastrous to Gigabyte, Inc.
These competing firms apparently believe they can sell gismos at a much
lower price than Gigabyte’s management feels is feasible. This evidence suggests that
4.
Percentages for raw-material costs:
Percentage
Annual
of Total
Raw-Material
Annual
Raw-Material
Raw-Material
Product
Cost per Unit
Volume
Cost
Cost*
G
$105.00
8,000
$ 840,000
25%
69%
W
4,000
Chapter 05 – Activity-Based Costing and Management
5-64
PROBLEM 5-60 (CONTINUED)
5.
Product costs based on an activity-based costing system:
Product
G
Product
T
Product
W
Direct material…………………………………………
$105.00
$157.50
$ 52.50
Direct labor …………………………………………….
48.00
36.00
24.00
Machine setupb ……………………………………….
31.50
46.20
Material handlingd ……………………………………
82.03
39.38
aMachinery:
Product G:
($3,675,000 24%)
8,000 units
=
$110.25
Product T:
($3,675,000 50%)
15,000 units
=
$122.50
Product W:
($3,675,000 26%)
4,000 units
=
bMachine setup:
Product G:
($15,750 22%)
8,000 units
=
$ .43
($15,750 30%)
Product W:
($15,750 48%)
4,000 units
=
Product G:
($1,575,000 16%)
8,000 units
=
$ 31.50
($1,575,000 44%)
Product W:
($1,575,000 40%)
4,000 units
=
$157.50
dMaterial handling:
Product G:
($2,625,000 25%)
8,000 units
=
$ 82.03
Product T:
($2,625,000 69%)
15,000 units
=
$120.75
Product W:
($2,625,000 6%)
4,000 units
=
$ 39.38
Product G:
($1,034,250 35%)
8,000 units
=
$ 45.25
Product T:
($1,034,250 10%)
15,000 units
=
($1,034,250 55%)
Chapter 05 – Activity-Based Costing and Management
PROBLEM 5-60 (CONTINUED)
6.
Comparison of reported product costs, new target prices, and actual selling prices:
Product
G
Product
T
Product
W
Reported product costs:
Traditional, volume-based costing system
$573.00
$508.50
$286.50
Activity-based costing system
Target price based on new product costs
Current actual selling price
5-66
PROBLEM 5-61 (20 MINUTES)
MEMORANDUM
Date:
Today
To:
President, Gigabyte, Inc.
From:
I.M. Student
Subject:
Gigabyte’s competitive position
Gigabyte’s product-costing system has been providing misleading product cost
information. Our traditional, volume-based costing system overcosted gismos and
I recommend the following courses of action:
Implement the new activity-based costing system and revise its database frequently.
Chapter 05 – Activity-Based Costing and Management
5-67
PROBLEM 5-62 (20 MINUTES)
Product
G
Product
T
Product
W
Traditional, volume-based costing system:
Traditional
Traditonal
Traditional
system
system
system
overcosts
overcosts
undercosts
product
product
$150.54
per unit
per unit
Total amount of cost distortion for entire
$1,204,320
PROBLEM 5-63 (25 MINUTES)
1.
Process time: steps 3, 5, 6, 7, 8, 10, 11
Inspection time: steps 1, 9
Move time: steps 2, 5, 6, 7, 10, 11
Waiting time: steps 4, 5, 7
Chapter 05 – Activity-Based Costing and Management
5-68
EXERCISE 5-63 (CONTINUED)
2.
Candidates for non-value-added activities
follow. (Note that elimination of some of
these activities would require reconfiguring
the production process.)
(a)
Step 1:
Storing ingredients (Could move toward JIT system.)
(b)
Step 2:
Carrying ingredients on hand carts.
(d)
Step 5:
Carrying board of dough into bagel room.
(f)
Step 6:
Carrying uncooked bagels to adjoining room.
(g)
Step 7:
Carrying bagels to oven room.
(h)
Step 7:
Holding bagels until oven rack is free.
(i)
Step 7:
Continual opening and closing of oven door.
(k)
Step 10:
Carrying wire baskets to the packaging room.
(l)
Step 11:
Driving forklift to freezer.
(m)
Step 11:
Storing frozen bagels.
Chapter 05 – Activity-Based Costing and Management
5-69
PROBLEM 5-64 (40 MINUTES)
(1)
Redesigned bagel production process:
(a)
Ingredients, such as flour and raisins, are received and inspected in the morning
(b)
Dough is mixed in 40-pound batches in four heavy-duty mixers. The dough is
(e)
transports them to the oven room.
Bagels are removed from the vats with a long-handled strainer and placed on a
Chapter 05 – Activity-Based Costing and Management
5-70
PROBLEM 5-64 (CONTINUED)
(i)
After the bagels are cool, the wire baskets are placed on the conveyor and
(2 )
New equipment:
Bodacious Bagels, Inc. would need to purchase a new conveyor system that would
5-71
PROBLEM 5-65 (45 MINUTES)
1.
Two dimensional ABC:
Cost Assignment View
RESOURCE COSTS
Assignment of resource costs
to activity cost pools
associated with
significant activities
Process View
Activity analysis
5-72
PROBLEM 5-65 (CONTINUED)
2.
Triggers for selected activities:
Activity
Number
Trigger
(2)
(13)
Discovery that parts do not satisfy intended purpose
Realization by purchasing personnel that they do not fully understand the
3.
Possible root causes:
Activity
Number
Possible Root Causes*
(2)
Unclear specifications
Incomplete specifications
Clear, but apparently wrong, specifications
Undertrained purchasing personnel
(9)
Vendor delay
Delay in placing order
Failure by purchasing personnel to make deadline clear
(11)
Use of vendor that has not been fully certified as a reliable supplier
Critical importance of parts
(12)
Misspecification of parts
Error by purchasing personnel in placing order
Vendor error
Inspector error
(13)
Misspecification of parts
Incomplete specifications
Poor product design
Error by purchasing personnel in placing order
Vendor error
*This list is not necessarily complete. Other root causes may exist.
5-73
PROBLEM 5-65 (CONTINUED)
4.
Suggested performance measures:
Activity
Number
Performance
Measures
(5)
Average price paid
(6)
Number of vendors
Number of vendors that are precertified as dependable
Percentage of orders received on time
Average delay for delinquent orders
Number of orders returned
Percentage of orders returned
Average dollar value tied up in parts inventory
PROBLEM 5-66 (40 MINUTES)
1. Customer-profitability analysis:
Caltex
Computer
Trace
Telecom
Sales revenue …………………………………………………………….
$380,000
$247,600
Cost of goods sold …………………………………………………….
Gross margin …………………………………………………………….
$220,000
$123,600
Selling and administrative costs:
General selling costs …………………………………………….
$ 48,000
General administrative costs …………………………………
Customer-related costs:
18,000
20,000
Total selling and administrative costs …………………………
$168,000
Operating income ………………………………………………………
$ 14,000