AB Costing

pdf

School

Kaplan Business School *

*We aren’t endorsed by this school

Course

305

Subject

Accounting

Date

Feb 20, 2024

Type

pdf

Pages

Uploaded by BrigadierResolveNarwhal27

@ PART TWO COSTS AND COSTING SYSTEMS activity 355 facility level (or facility-sustaining) activity centre 376 activities activity driver 354 non-volume-driven overheaq Costs 369 activity-based costing (ABC) 353 product diversity 343 batch level activities 360 product level (or product-sustaining) 349 bill of activities 358 activities committed resources 367 resource driver 360 cost driver 354 root cause cost drivers 354 cost per unit of activity driver 378 traditional product costing system 254 cost pool rate 358 unit level activities 48 Review Questions 8.1 8.2 8.3 8.4 8.5 8.8 8.9 8.10 8.11 8.12 8.13 8.14 How does a traditional, volume-based costing system operate? LO 8.1 What problems can arise with using a volume-based costing system in a modern manufacturing environment? LO 84 Why would line managers suggesting that an apparently profitable product be dropped be a potential indicatores an outdated product costing system? LO 8.2 Describe the two dimensions of the activity-based costing model shown in Exhibit 8.3. Using the terms resolifces activity and resource driver, explain how costs are assigned to activities. LO 8.3 Referring to Exhibit 8.3, explain the concept of two dimensional activity-based costing. Are the activities in a Sifipi activity-based product costing system likely to be useful for activity management? Explain your answer. LO 88 You and your boss have just attended a presentation by the consulting firm, Always Better Costing, which explailigs how every organisation can benefit from adopting activity-based costing. Your boss is very keen to proceedui® activity-based product costing. How would you advise her? LO 8.4, 8.7, 8.8 There is not just one approach to activity-based costing; there are many. Describe some of the major differeiees between various approaches to activity-based costing. LO 8.4 Should facility level costs be included when estimating product costs for: LO 8.5 (a) reporting inventory balances (b) evaluating product profitability? Explain your answer. f List three factors that are important in selecting activity drivers. Explain why they are important, using exampIESs activity drivers for a bank. LO 8.5 Why would a product costing system based on a single, volume-based cost driver tend to overcost high-VOlls products in comparison to an activity-based costing system? LO 8.6 3 o Describe the circumstances in which the benefits from ABC will be greatest. Using the ‘Real life’ titled ‘ActlvaY'?a.fieS costing in the NSW public sector’ in the section ‘Step two: assigning the costs of manufacturing overhead actiey to products’, provide some examples of the benefits of activity-based costing in the public sector. LO 8.7 REASSS What factors may impede the introduction of ABC? LO 8.7 Why might organisations choose to implement a one-off ABC project rather than an ongoing system? LO 8‘88 9 What factors should be considered when deciding how many cost pools to use in activity-based costing? Lo CHAPTER EIGHT ACTIVITY-BASED COSTING @ C g16 net;»: system’ Discuss. LO 8.10 - ife’ in ‘When should ABC be used?’ suggests that the adoption of activity-based costing in Australia i Llfj hlas not been as high as one might expect. What limitations and other challenges to implementing 87 Bnd New zeacliacnostmg may be impacting the adoption of activity-based costing? LO 8.7, 8.11 REALLIFE aCﬂVity—baée’ itled ‘Activity-based costing in the NSW public sector’ in the section ‘Step two: assigning the costs of The‘Real “f-e mleerhead activities to products’ explains how activities were identified in the NSW public sector. manUfaCturlngeZ\:‘ the difficulties that might arise in estimating the cost of these activities. LO 8.12 REALLIFE Describ? -Som ed costing systems be used in service organisations? If so, are there any particular issues that ’ aCtlvzfi-ngVide an example to illustrate your answer. LO 8.12 i .C mpare the simple activity-based product costing system described in the chapter with the (appendlx) sivoe ABC system at Mason & Cox described in the appendix. Which approach would you have :::;F,:iennded to Mason & Cox? Explain your answer. LO 8.13 fhe fir - e 8. might aris 8.20 Distortion of product costs: manufacturer . Spinning Wheels Pty Ltd (SW) manufactures car and truck wheels. The company produces four t?a5|c, hlgh- L08.1 volume wheels used by manufacturers of large cars and trucks. SW also has two speciality wheel lines, which 8.2 are designed for use on expensive sports cars. SW costs all its products using a conventional volume-based costing system. . : . : Lately, SW’s profits have been declining. Foreign competitors have been undercutting SW’s prices in thre’e of its four major product lines, and its sales and market share have fallen significantly. In contrast, SWs speciality wheels have been selling steadily, although in relatively small numbers, in spite of three recent price increases. . ' At a recent staff meeting, SW’s managing director spoke about the issues faced by the company: Our profits are going down the tube. It costs us $30 to manufacture our X25 wheel. Thqt’s our bes.t seller, with a volume last year of 20000 units. But our chief competitor, based overseas, is selling e§sentlally the same wheel for $28. They can’t be making a profit. This is just another example of a foreign company dumping product on our shores. It's outrageous! I'm going to write to my local MP. The government needs to do something about this! On a bright note, thank goodness for our speciality wheels. Our salespeople have to push these Wheel:s more and more. Take the Z50 model, for example. It's a complicated thing to make and we don’t sell many, but look at the profit margin. Those wheels cost us $50 to make, and we’re selling them for $110 each! Required: 1. Do you think the managing director’s remarks are valid? What do you think is contributing to the problems faced by sw? . : 2. Do you think the managing director’s suggestion to push the sale of speciality wheels is a good one? Justify your response. . 3. What would you recommend that SW do to help address its situation? Justify your recommendations.

@ PART TWO COSTS AND COSTING SYSTEMS E8.22 LO8.3 8.4 8.5 8.6 E8.23 LO8.5 8.6 E8.24 LO8.5 Key features of activity-based costing: manufacturer Refer to the Spinning Wheels case in Exercise E8.21. Suppose the firm’s managing director has implement an activity-based costing system. decideg to Required: 1. List and briefly describe the key features that SW’s new product costing system should include 2. What impact will the new system be likely to have on the company’s situation? ' 3. What strategic options are likely to be considered once the results of the new costin ) S examined? 9 System arg Activity-based costing: service firm Brian Jones, the manager of Walkabout Tours, uses activity-based costing to calculate the cq company’s adventure walking trips. The company offers two basic trips: a two-day walk along the E chl)lrge and a five-day trip to the Flinders Ranges. The activities and costs relevant to the walking tri ollows: St of the I QUES'(ro Ps arg as Activity Activity driver Cost per unit of activity driver Advertise trips No. of trips $75 per trip Obtain national park permit Destination $150 per group permit issued Use equipment No. of person-days $30 per person per day Insure participants No. of people $7.50 per person Cook meals No. of person-days $37.50 per person per day Guide walkers $10.50 per kilometre Distance walked The El Questro Gorge trip caters for 8 people, does not enter national parks and covers a walking distance of 50 kilometres. The Flinders Ranges trip caters for 15 people, is based in the Mt Remarkable National Park and covers 100 kilometres. Required: 1. Calculate the total cost of each trip, the cost per person for each trip, and the cost per day for each trip; using the activity-based costing system. Before introducing activity-based costing, Brian had estimated the average cost of all trips at $97.50 per person per day. (This was based on the previous year’s costs, adjusted for any expected changes.) Explaifi how the activity-based system results in more accurate service cost estimates. N Classification of activities: winery Wallaby Gully Wines is a small, family-run operation in the Yarra Valley. The winery produces two varieties of wine, riesling and chardonnay. Among the winery’s activities are the following: 1. Pruning: At the end of a growing season the vines are pruned, which helps prepare them for the next harvest. 2. Tying: The vines are tied onto wires to help protect them from the cold. (This also occurs at the end of te season.) 3. Hilling: Dirt is piled up around the roots to help protect them from frost. 4. Conditioning: In the spring, dirt is levelled back from the roots. 5. Untying: The vines are untied from the wires to allow them freedom to grow during the spring and summef months. 6. Spraying: The vines are sprayed in the spring to protect them from disease and insects. 7. Harvesting: All of the grapes of both varieties are picked by hand to minimise damage. 8. Stemming and crushing: Batches of grapes are hand-loaded into a machine that gently removes the stems and crushes the grapes. E8.25 L08.5 E8.2¢ Log.5 E8.27 Log 5 Sk 10. K17 CHAPTER EIGHT ACTIVITY-BASED COSTING @ Pressing: After removal from the stemmer/crusher, the juice runs freely from the grapes. Filtering: The grapes are crushed mechanically to obtain more juice from them. Fermentation: The riesling grape juice is placed in steel tanks for fermentation. The chardonnay grape juice undergoes a two-stage fermentation process in oak barrels. 12. Ageing: The riesling wines are aged in the steel tanks for about one year. The chardonnays are aged in the oak barrels for about two years. 13. Bottling: A machine bottles the wine and corks the bottles. 14. Labelling: Each bottle is manually labelled with the name of the vintner, vintage and variety. 15. Packing: The bottles are manually packed in 12-bottle cases. 16. Case labelling: The cases are hand-stamped with the same information given on the bottle labels. 17. Shipping: The wine is shipped to wine distributors and retailers, mainly in Sydney and Melbourne. Generally, about 100 cases are shipped at a time. 18. Maintenance on buildings: This is done during the slow winter months. 19. Maintenance on equipment: This is done when needed, and on a routine basis for preventative maintenance. Required: Classify each of the activities listed as a unit, batch, product-sustaining or facility leyel activity. Activity costs and activity drivers: manufacturer . Puresound Ltd manufactures MP3 players in its Brisbane plant. The following costs are budgeted for March. Raw materials and components $4 425000 Insurance, plant 900000 Electricity, machinery 180000 Electricity, light 90000 Engineering design 915000 Depreciation, plant 1050000 Depreciation, machinery 2100000 Security wages, plant 60000 Equipment maintenance, wages 225000 Equipment maintenance, parts 45000 Setup wages 60000 Inspection of finished goods 45000 Property taxes 180000 45000 Natural gas, heating Required: 1. Assign the costs to the materials-related, machinery-related, setup, inspection, engineering and facility- sustaining activities and calculate the total cost of each activity. 2. ldentify an activity driver suitable for assigning each activity’s costs to products. Activity costs and activity drivers: manufacturer Refer to the information provided in Exercise E8.25. For each of the activities identified, indicate whether it represents a unit level, batch level, product level, or facility level activity. Explain your choice. Assigning activity costs to products: manufacturer Blusteel Ltd manufactures Blu-ray players and uses an activity-based product costing syste assigns labour and overhead costs. Below is an incomplete bill of activities for the high-volume product BluStandard. m that

388 E8.29 LO8.1 8.5 8.6 8.7 PART TWO COSTS AND COSTING SYSTEMS Blusteel Ltd bill of activities: BluStandard Annual quantity of activity driy e Activity Cost per unit of activity driver used by the product Process payables $90 per purchase order 400 purchase orders Program production $337.50 per production schedule 100 schedules Process sales order $112.50 per sales order 300 sales orders Issue materials $180 per issue 100 issues Set up solder machine $237 per setup 100 setups Solder circuit boards $22.50 per solder joint 40000 solder joints Insert motor $45 per player 5000 players Assemble player $27 per player 5000 players Design player Directly assigned cost of $18 000 for model BluStandard Required: 1. Complete the bill of activities and estimate the total activity cost of the BluStandard player, calculateq on an annual and per unit basis, assuming the annual production is 5000 units. 2. If the direct material cost of a BluStandard player is $67.50 per unit, what is the total unit cost of tha product? 3. Explain the treatment of the costs of the activity ‘design player’. Activity-based costing; quality control costs: manufacturer Stylish Manchester Ltd has used a traditional cost accounting system to apply quality control costs uniformly to all products at a rate of 16 per cent of direct labour cost. Monthly direct labour cost for the satin sheet range is $147000. In an attempt to distribute quality control costs more equitably, Stylish Manchester is considering activity-based costing. The following data relates to monthly quality control costs for its satin sheet range: Activity Activity driver Cost per unit of activity driver Quantity of activity driver Incoming material inspection Type of material $34.50 per type 24 types In-process inspection Number of units $0.42 per unit 35000 units Product certification Number of orders $216 per order 50 orders Required: 1. Calculate the monthly quality control cost to be assigned to the satin sheet product line under each of the following approaches: (a) traditional system that assigns overhead on the basis of direct labour costs (b) activity-based costing. 2. Does the traditional product costing system overcost or undercost the satin sheet product line with respect to quality control costs? By what amount and why? Problems with traditional costing systems; activity-based costing principles: manufacturer Peninsula Manufacturing has just completed a major change in its quality control (QC) process. Previouslys products were reviewed by QC inspectors at the end of each major process, and the company’s 10 Qc inspectors were charged as direct labour to the operation or job. In an effort to improve efficiency and qualitys a computerised video QC system was purchased for $500000. The system consists of a computer, 15 video cameras, other peripheral hardware, and software. The new system uses cameras stationed by QC engineefs at key points in the production process. Each time an operation changes or there is a new operatiomn CHAPTER EIGHT ACTIVITY-BASED COSTING @ the cameras are moved, and a new master picture is loaded into the computer by a QC engineer. The camera takes pictures of the units in process, and the computer compares them with a picture of a good unit. Any differences are sent to a QC engineer who removes the bad units and discusses the flaws with the production supervisors. The new system has replaced the 10 QC inspectors with two QC engineers. The operating costs of the new QC system, including the salaries of the QC engineers, have been included as factory overhead in calculating the company’s plantwide manufacturing overhead rate, which is based on direct labour dollars. The company’s managing director is confused. His production manager has told him how efficient the new system is, yet there is a large increase in the overhead rate. The calculation of the overhead rate before and after automation is as follows: Before After Budgeted manufacturing overhead $3800000 $4200000 Budgeted direct labour cost $2000000 $1400000 Budgeted overhead rate (as % of direct labour cost) 190% 300% ‘Three hundred per cent’, lamented the managing director. ‘How can We‘_compete with such a high overhead rate?’ Z Required: 1. Define manufacturing overhead and cite three examples of typical costs that would be included in manufacturing overhead. e : 2. Explain why the increase in the overhead rate should not have a negative financial impact on Peninsula Manufacturing. 3. Discuss how an activity-based costing system might benefit Peninsula Manufacturing. Comparison of activity-based and traditional product costs: manufacturer . Paris Fashions Ltd has switched from a traditional product costing system to an activity-based product costing system to assign manufacturing overhead costs to products. The table below shows the cost per unit of two products from its winter range under the two costing systems: Costing system Sweater Overcoat Traditional $39 $28 ABC $33 $50 Required: - 1. Describe the most likely features of Paris Fashions’ sweater and overcoat products by replacing the question marks in the following table with “Yes’ or ‘No". Product feature Sweater Overcoat High-volume product line ? Low-volume product line ? Produced in small batches ? Produced in large batches ? Simple to produce Complex to produce 2. Explain your answers to requirement 1.

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

@ PART TWO COSTS AND COSTING SYSTEMS v CHAPTER EIGHT ACTIVITY-BASED COSTING @ ES.31 (appendix) Assigning activity centre costs to activities: manufacturer Required: Bottle Brush Paints Ltd manufactures paint and uses an activity-based product costing system. Thg folloun 1. Calculate the costs assigned to the assembly centre given its usage of resource drivers during the year, as LO8.13 table lists the labour and overhead costs of the mixing centre for the current year, and their resource 4 Wlng follows: ; lva ’ Bottle Brush Paints Ltd mixing centre costs and resource drivers Number of employees 20 Amount of resouree 3 Floor area 1000 square metres 1] Total cost Resource driver consumed by the cent‘r’er Power used 10000 kilowatt hours e Wages $220000 Headcount 5 people ; E 176000 Wicwarhome 10000 kil 2. The costs listed above are not individual costs but a series of costs grouped together into cost categories Ner; W T orgs & gy. | 0 .a 0\'>vatt hourg such as wages, building costs and so on. Explain why Top Tech combined the costs from its general ledger Depreciation 44000 Machine hours 5000 machine hoygg into cost categories. Under what conditions is it appropriate to combine costs into cost categories? Give Other 22000 Headcount 5 people three examples of the types of costs likely to be included in each category. Total labour and overhead costs $462 000 . What is meant by the term resource driver? Can you suggest a better basis for assigning ‘Wages’ to activity centres? Required: 1. Complete the following table to calculate the cost of the activity ‘load mixer’ for the current year. This activity is performed in the mixing centre. Bottle Brush Paints Ltd activity: load mixer Amount of resource driver used to Cost category Mixing centre cost load mixer Cost of activity ‘load mixer’ Wages $220000 5% of total labour time in mixing centre ? Traditional and activity-based product costing: manufacturer Energy 176000 500 kilowatt hours ? The accountant for Snappy Photographic Supply Ltd has estimated the following activity cost pools and Depreciation 44000 100 machine hours ? activity drivers for the coming year: Other 22000 5% of total labour time in mixing centre ? Total cost $462000 - Budgeted Budgeted level for Cost per unit of ———— Activity overhead cost Activity driver activity driver activity driver 2. Why would Bottle Brush Paints use an activity-based product costing system that assigns labour as well as Machine setups $300000 No. of setups 100 $3000 per setup overhead costs to activities? Material handling 150000 Weight of raw material 50000 kilograms $3 per kilogram 3. How would the management accountant obtain details of the activities performed and the quantities of Hazardous waste control 75000 Weight of hazardous 10000 kilograms $7.50 per kilogram resource drivers used by the activities in the mixing centre? chemicals used E8.32 (appendix) Assigning costs to activity centres: manufacturer ' Quality control 112500 No. of inspections 1000 $112.50 per inspection Top Tech Ltd manufactures sophisticated six-tuner personal video recorders and has decided to develop ai Other overhead costs 300000 Machine hours 20000 $15 per machine hour LO8.13 activity-based product costing system to assign labour and overhead costs to products. The table below lists Total $937500 Top Tech'’s costs during the current year and the resource drivers to be used to assign these costs to activity ——— centres. : . An order for 1000 boxes of film development chemicals has the following production requirements: Top Tech Ltd Machine setups 4 setups Labour and overhead costs : . Raw material 10000 kilograms Total cost Resource driver Total amount of resource driver Hazardous materials 2000 kilograms Wages $ 720000 Headcount 100 employees Inspections 10 inspections Building costs 240000 Floor area 10000 square metres Machine hours 500 machine hours Energy 360000 Kilowatt hours 250000 kilowatt hours Other 60000 Headcount 100 employees Required: Total labour and overhead costs $1380000 1. Calculate the total overhead that should be assigned to the order for development chemicals. 2. What is the overhead cost per box of chemicals?

@ PART TWO COSTS AND COSTING SYSTEMS 3. If Snappy Photographic Supply were to use a plantwide predetermined overhead rate baseq on hours, calculate the rate per hour. rnachine 4. Underthe approach in requirement 3, how much overhead would be assigned to the order forg chemicals: evelOD’“enr (a) in total (b) per box of chemicals? 5. Explain why these two product costing systems result in such widely differing costs. Which syst recommend? Why? M do oy 6. Calculate the unit cost of a production order for 100 specially coated plates used in film g 2 i 1 I evelg addition to direct material costing $180 per plate and direct labour costing $60 per plat tl;ment. In requires the following: * '€ Orge Machine setups 2 setups Raw material 800 kilograms Hazardous materials 300 kilograms Inspections 3 inspections Machine hours 50 machine hours Traditional and activity-based product costing: manufacturer Tas Machinery manufactures two products, basic and superior, and applies overhead on the basis of direct labour hours. Anticipated overhead and direct labour time for the upcoming accounting period are $960008 and 25000 hours, respectively. Information about the company’s products follows: Basic: Estimated product volume 3000 units Direct material cost $25 per unit Direct labour per unit 3 hours at $12 per hour Superior: Estimated product volume 4000 units Direct material cost $40 per unit Direct labour per unit 4 hours at $12 per hour Tas Machinery’s overhead of $960000 can be identified with three major activities: order processii ($180000), machine processing ($672 000) and product inspection ($108 000). These activities are drivenibg number of orders processed, machine hours worked and inspection hours, respectively. Data relevantis these activities follow: Order processed Machine hours worked Inspection houfs Basic 330 19800 2200 Superior 220 24200 8800 Total 550 44000 11000 Top management is very concerned about declining profitability despite a healthy increase in sales VO'“m:' The decrease in profit is especially puzzling because the company recently undertook a massivé plato renovation during which new, highly automated machinery was installed—machinery that was eXPeCted produce significant operating efficiencies. p8.35 108.5 8.6 P8.3g 103 5 8.6 CHAPTER EIGHT ACTIVITY-BASED COSTING @ Required: 1. Assuming use of direct labour hours to apply overhead to production, calculate the unit manufacturing costs of the basic and superior products if the expected manufacturing volume is attained. 2. Assuming use of activity-based costing, calculate the unit manufacturing costs of the basic and superior if the expected manufacturing volume is attained. 3. Tas Machinery’s selling prices are based heavily on cost. (a) Using direct labour hours as an application base, which product is overcosted and which product is undercosted? Calculate the amount of the cost distortion for each product. (b) Is it possible that overcosting and undercosting (i.e. cost distortion) and the subsequent determination of selling prices are contributing to the company’s profit woes? Explain. 4. Construct an Excel spreadsheet to solve requirements 1, 2 and 3(a) above. Then show how the solution will change if the total overhead costs increase to $1242000 as a result of order processing costs increasing to $300000 and product inspection costs increasing to $270000. Traditional and activity-based product costing: manufacturer Pristine Ltd manufactures two types of storage cabinets, deluxe and executive, and applies manufacturing overhead to all units at the rate of $120 per machine hour. Production information follows, W Deluxe & Executive Direct material cost $52.50 $90.00 Direct labour cost 30.00 30.00 Budgeted volume (units) - 8000 15000 The management accountant has determined that the firm’s overhead can be identified with three activities: manufacturing setups, machine processing and product shipping. Data on the number of setups, machine hours and outgoing shipments, which are the activities’ three respective cost drivers, follow: Deluxe Executive Total Setups 50 30 80 Machine hours 16000 22500 38500 Outgoing shipments 100 75 175 The firm’s total overhead of $4620000 is subdivided as follows: manufacturing setups, $1008000; machine processing, $2772000; and product shipping, $840 000. Required: 1. Calculate the unit manufacturing cost of deluxe and executive cabinets by using the company’s current overhead costing procedures. 2. Calculate the unit manufacturing cost of deluxe and executive cabinets by using activity-based costing. 3. Calculate the aggregate amount by which the deluxe cabinet line is undercosted/overcosted by the company’s current traditional overhead costing procedures. Then calculate the aggregate amount by which the traditional system undercosts/overcosts the executive cabinet line. 4. Assume that the current selling price of a deluxe cabinet is $390 and the marketing manager is contemplating a $45 discount to stimulate sales. Is this discount advisable? Briefly discuss. Traditional and activity-based product costing, cost distortions: manufacturer Kitchen King’s Singapore plant manufactures three product lines, all multi-burner ceramic cooktops. The Plant’s three product models are the regular (REG), the advanced (ADV) and the gourmet (GMT). Until recently, the plant used a job costing system, with manufacturing overhead applied on the basis of

@ PART TWO COSTS AND COSTING SYSTEMS direct labour hours. The following table displays the basic data upon which the conventional costj was based. ng SyStem Planned annual production REG ADV GMT Volume in units 5000 4000 1000 Production runs 40 runs of 125 units 40 runs of 100 units 20 runs of 50 unitg Direct material $129 $151 $203 Direct labour (not including $171 (9 hr @ $19 per hr) $209 (11 hr @ $19 per hr) $247 (13 hr @ $19 setup) Pern Machine hours (MH) per 10 MH 12 MH 17MH product unit Total machine hours consumed 50000 (10 MH x 5000) 48000 (12 MH x 4000) 17000 (17 MH x 1000) by product line in a year $‘Iél'he ar.mual budgeted overhead is $1224000 and the company’s predetermined overhead rata is I|:?er direct .Iabour hour. The product costs for the three product models, as reported under the plant's traditional costing system, are shown in the following table: REG ADV ' GMT Direct material $129 $151 $203 Direct labour (not including $171 $209 $247 setup time) Manufacturing overhead $108 Ohr @ $12perhr) $132 (11 hr @ $12perhr) $156 (13 hr @ $12 perh) Total $408 $492 $606 Kitchen King’s pricing policy is to set a target price for each product equal to 130 per cent of the full prodiies co‘st. Due to price competition from other appliance manufacturers, REG units were selling at $525 and ADV units were selling for $628. These prices were somewhat below the firm’s target prices. However, these results,' were partially offset by greater than expected profits on the GMT product line. Management had raised the price .on the GMT model to $800, which was higher than the original target price. Even at this preel Kitchen King’s customers did not seem to hesitate to place orders. Moreover, the company’s competitors dié not mount a challenge in the market for the GMT product line. Nevertheless, concern continued to moufiti Singapore about the difficulty in the REG and ADV markets. After all, these were the plant’s bread-and-butte prod}Jcts, with projected annual sales of 5000 REG units and 4 000 ADV units. Kitchen King’s director of cost management, Angela Hui, had been thinking for some time about @ refinement in the Singapore plant’s product costing system. Hui wondered if the conventional volume-based system was providing management with accurate data about product costs. She had read about activitys based c?osting and wondered if ABC would be an improvement to the plant’s product costing system: Aftet some discussion, an ABC proposal was made to the company’s top management and approval was obtained: The data collected for the new ABC system is displayed in the following table. Ativity Activity cost Activity driver Product line Quantity of activity drivef Machine-related $310500 Machine hours REG 50000 ADV 48000 GMT 17000 Total ﬂ P8.37 log 5 CHAPTER EIGHT ACTIVITY-BASED COSTING @ Activity Activity cost Activity driver Product line Quantity of activity driver Material handling 52500 Production runs REG 40 ADV 40 GMT 20 Total 100 Purchasing 75000 Purchase orders REG 100 ADV 96 GMT 104 Total 300 Setup 85000 Production runs REG 40 ADV 40 GMT 20 Total 100 Inspection 27500 Inspection hours REG 400 ADV - 400 GMT & 300 Total 1100 Shipping 66000 Shipments REG 500 ADV 400 GMT 200 Total _ 1100 Engineering 32500 Engineering hours REG 250 ADV 200 GMT 200 Total 650 Facility 575000 Machine hours REG W ADV 48000 GMT 17000 Total 115000 Required: 1. Show how the company’s overhead rate of $12 per direct labour hour was calculated. 2. Complete an activity-based costing analysis for Kitchen King’s three product lines. 3. Prepare a table similar to Exhibits 8.7 and 8.8 that estimates the new product cost for each product line under ABC. 4. Prepare a table similar to Exhibit 8.9 that compares the overhead cost and total product cost for each product line under the two alternative costing systems. 5. Was each of Kitchen King’s three product lines overcosted or undercosted? By how much per unit? 6. Construct an Excel spreadsheet to solve requirement 2 above. Show how the solution would change if the machine-related cost was $621000 and the facility cost was $1 150 000. Activity-based costing: service firm Mel Snow is the manager of a firm, Taxation Matters, which specialises in the preparation of income tax returns. The firm offers two basic products: the preparation of income tax returns for wage and salary

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

@ PART TWO COSTS AND COSTING SYSTEMS P8.38 LO8.5 8.6 earners, and the preparation of income tax returns for small complex services are referred to Snow’s brother Roger, who i accountants. businesses. Any clients requirin S a partner in a large firm of Chartmme Ered The processing of wage and salary tax returns is quite straightforward, and the firm uses g gq package to process data and print the return. A software package is also used to pre W, pare returng forg Arg businesses, although more information is required, particularly about business expenses. Maj Snow has only recently joined Taxation Matters and he is concerned about the firm’s sets flat fees of $60 per return for wage and salary clients and $300 for small businesse activity-based costing to estimate the costs of providing each of these services. At the end of the year, Snow reviewed the firm’s t Pricing policy, o » Wi s. He decides o ulgh & otal costs and activities, resulting in the following list: Activity Activity cost Activity driver Quantity of activity drivey Interview salaried client $ 60000 No. of wage and salary clients 8000 Interview business client 75000 No. of business clients 2000 Obtain missing data 600000 No. of follow-up calls 8000 Input data 120000 No. of data entries 400000 Print return 90000 No. of returns 10000 Verify return with client 180000 No. of hours 6000 Rectify errors 90000 No. of errors 6000 Submit return 30000 No. of returns 10000 Total costs $1245000 In identifying the activities required for each type of return, Snow noted the following: (a) Clients are interviewed only once per return. (b) All follow-up calls to obtain missing data relate to b return requires four follow-up calls. (c) Processing a wage and salary tax return re 120 data entries. (d) On average, it takes 22.5 minutes to veri hours to verify a business return. (e) All errors relate to business returns; on average, there are 3 errors per business return. Required: usiness returns; on average, each business tax quires 20 data entries, whereas a business return requires fy a wage and salary tax return, whereas it takes one and a half 1. Use activity-based costing to estimate the cost of preparing: (a) a wage and salary tax return (b) a business tax return. 2. Inthe light of your answers to requirement 1, evaluate the firm’s pricing policy. Activity-based costing; analysis of operations: service firm Brown and Whincup perform consultin The firm, which bills $187.50 per hour for services performed, is in a very tight local labour market and is having difficulty finding quality staff. The labour cost per hour paid by Brown and Whincup for professional staff time is $67.50. Selected information follows: (a) Billable hours to clients for the year totalled 5000, c €-commerce, 1900. (b) Administrative costs of $513000 was (and continues to be) allocated to both consulting services based on billable hours. These costs consist of staff support, $270000: in-house computing, $204600; and miscellaneous office charges, $38400. A recent analysis of staff support costs fo computing and miscellaneous office charges onsisting of: information systems services, 3100; und a correlation with the number of clients served. In-housé varied directly with the number of computer hours logged and P8.39 L08.3 8.5 8.6 CHAPTER EIGHT ACTIVITY-BASED COSTING @ i i urs f client transactions, respectively. The following table shows the number of clients, computer ho ro i i ; ; e nun’\bfia nt transactions for the e-commerce and information systems consulting services: and clie e-commerce consulting Information systems consulting Total 200 250 Number of clients 50 I = Number of computer hours 1800 o 0 Number of client transactions 600 Required: i ith traditional Activity-based costing (ABC) is said to result in improved costing accuracy when compared w C § . . . . ; 3 costing procedures. Briefly explain how this improved accuracy is z‘mlttalne:[dl RN 2. Assume that the firm uses traditional costing procedures, allocating tot.a @ S . ili 'S e- d information sys , i lity of the firm’s e-commerce an hours. Determine the profitabi fo . expressing your answer both in dollars and as a percentage of activity revenue i i ivity- ting. Py requirement 2, using activity-based cos . ' o b 3 Repe\?\;hin(lup one of the firm’s partners, doesn’t care where his professionals sp;nd th?'rt:lljn;iness e 4 Sa:e notes ‘I\’/Iany clients have come to expect both services and we need both t tst<":1yslrr:0md Whir.lcup’s, 'as;‘ormation,systems and e-commerce professionals are paid the same hourly rate’. in attitude change? Explain. . ; . . ' | 5. Is an aggressive expansion of either consulting service desirable? Briefly discuss . - . for | ACti'Vity-baSEd C'OStCI?Ilii P;:; rTcg(g:;sr:‘:;i:ctT:: ’:Jv:zclzlrlge—screen television models, the Novelle, whlchdha: E EIeCtro?ICS1 0 eaprs and sells for $910, and the Zodiac, a new model which sells for $1 160. Baset cie beef‘ prOduci:teon:entx:‘or the year just ended, presented below, a decision has been madeI to concentra fFhIEeCI’:Crrc:ar:qr‘;:e‘?cing resources on the Zodiac model and to begin to phase out the Novelle model. Territory Electronics Company Income statement Zodiac Novelle Total $4 640000 $20020000 $24 660000 - 16256000 Cost of goods sold 3232000 13024 000 e ost o G . gin $1408000 $ 6996000 g TOSS margi v inistrati 980000 57000 i t enses Selling and administrative exp o T e Net profit = Units produced and sold 4002 o o Net profit per unit sold $ 107.0 * Rounded The unit costs for the Zodiac and Novelle models are as follows: Zodiac Novelle odia $363 Direct material 3G Direct labour: . Zodiac (3.5 hr x $14) 21 Novelle (1.5 hr x $14) - _208 Manufacturing overhead* $—82)§ $592 Cost per unit i i rate of $26 per hour. * Manufacturing overhead was applied on the basis of machine hours at a predetermined

P8.40 LO8.3 8.5 8.6 @ PART TWO COSTS AND COSTING SYSTEMS Territory Electronics Company’s financial controller is advocating the use of activity-baseq Costi gathered the following information about the company’s manufacturing overhead costs fq; thn and 8 € Yo ended: ar Jugy Quantity of activity driver consym ed Activity (activity driver) Activity costs Zodiac Novelle Toul Soldering (number of solder joints) $ 880000 400000 1200000 1 50000y Shipments (number of shipments) 836000 3800 15200 19009 Quality control (number of inspections) 1170000 21060 56940 78008 Purchase orders (number of orders) 1110000 105450 79550 185008 Machine power (machine hours) 47500 15200 174800 19000g Machine setups (number of setups) 948500 4500 4985 9488 Total activity costs $4992000 Required: 1. Briefly explain how an activity-based costing system operates. 2. Using activity-based costing, determine whether TEC should continue to emphasise the Zodiac modgl and phase out the Novelle model. Overhead application; activity-based costing: manufacturer John Patrick has recently been hired as controller of Valdosta Vinyl Company (VVC), a manufacturer of vinyl siding used in residential construction. VVC has been in the vinyl siding business for many yearsiaig currently investigating ways to modernise its manufacturing process. At the first staff meeting Patrick attengis Jack Kielshesky, chief engineer, presented a proposal for automating the moulding department. KielSASsE recommended that the company purchase two robots that would have the capability of replacing thelsis direct labour employees in the department. The cost savings outlined in the proposal include the elimifSies of direct labour costs in the moulding department plus a reduction of manufacturing overhead COSHINNES department to zero because VVC charges manufacturing overhead on the basis of direct labour dollarsEsis a plantwide rate. The president of VVC was puzzled by Kielshesky’s explanation: “This just doesn’t makes sense. How can a department’s overhead rate drop to zero by adding expensive, high-tech manufaciiis equipment? If anything, it seems like the rate ought to go up’. Kielshesky responded by saying: ‘I'm an engineer, not an accountant. But if we're charging overheatios the basis of direct labour, and we eliminate the labour, then we eliminate the overhead’. Patrick agreed with the president. He explained that as firms become more automated, they their product costing systems. The president then asked Patrick to look into the matter and prep for the next staff meeting. Patrick gathered the following data on the manufacturing over experienced by VVC over the years. Patrick also wanted to have some departmental data to presefl meeting and, by using VVC’s accounting records, he was able to estimate the following annual ave each manufacturing department over the five decades since VVC’s formation. should rethiss head [ais t at the Historical plantwide data Average manufacturlng Average annual direct il overhead applicatlon Average annual manufacturing Decade overhead cost labour cost st $2200000 $2000000 110% 2nd 6240000 2400000 260 3rd 13600000 4000000 340 4th 24600000 6000000 410 5th 38710000 7900000 454 are a repos pa.41 L08.5 8.13 CHAPTER EIGHT ACTIVITY-BASED COSTING @ Annual average during recent years Cutting department Finishing department Moulding department M anufacturing overhead $22000000 $14000000 $4.000000 Direct labour 4000000 3500000 500000 Required: 1. Disregarding the proposed use of robots in the moulding department, describe the shortcomings of th system for applying overhead that is currently used by VVC. e 2. Explain thfe misconceptions underlying Kielshesky’s statement that the manufacturing overhead cost in the moulding department will be reduced to zero if the automation proposal is implemented 3. Recommend ways to improve VVC’s method for applying overhead, by describi g , ing h s product costing system: ¥ g how it should revise its (a) for the cutting and finishing departments (b) to accommodate automation in the moulding department. Overhead application; activity-based costing: manufacturer ol World Gourmet Coffee Company (WGCC) is a distributor and processor of different blends of coffee. Th company buys coffee beans from around the world and roasts, blends and packages them for resale WGCE currently has 15 different coffees, which it offers to gourmet shops in 1-kilogram bags. The major co;t lies i raw materials, but there is also a substantial amount of manufacturing overhead in the automated roasti e packing processes. The company uses relatively little direct labour. " Some of the coffees are very popular and sell in large volumes, while a few of the newer blends have low volumes. WGCC prices its coffee at full product cost, including allocated overhead, plus a mark Veﬂ; jo per ce;t. I;’:his method leads to prices that are significantly higher than market price tr;e price is adjLJsFiceod O . . . . . ’ Co,fiifiirs.s € company competes primarily on the quality of its products, but customers are also price Daté for next year’s budget include manufacturing overhead of $3000000, which has been allocated the basis of each product’s direct labour cost. The budgeted direct labour cost 'for next year totals $600 OO(Z)n Baseq on the sales budget and raw material budget, purchases and use of raw materials : beans) will total $6 000 000. e The expected prime costs for 1-kilogram bags of two of the company’s products are as follows: Di y Kand Malaysian Irect material | $3.20 $4.20 Direct labour 03 ’ 30 0.30 WG ) . _— CC’s controller believes the traditional product costing system may be providing misleading cost Information. She has d i : evel . Bllows. oped an analysis of the budgeted manufacturing overhead costs for next year, as :::c';::ng Il)\ctivity driver Quantity of activity driver Budgeted cost ot S s - Ro:lls]i;z; i Batches 720 144000 Blending P 96100 961000 Packaging Blend”.‘g S 33600 336000 Tota] Manufacturin Pockaging hous 26000 20 g overhead cost 3000000

@ PART TWO COSTS AND COSTING SYSTEMS f CHAPTER EIGHT ACTIVITY-BASED COSTING @ Although the needs of the individual clients vary tremendously, the project team identifies three major Data for next year’s production of Kona and Malaysian coffees are shown in the following tabje The ‘ be no raw material inventory for either of these products at the beginning of next year. re v cervice types: high-dependency support, low-dependency support and outpatient support. High-dependency I and low-dependency clients live at Greenfields, while outpatients attend thg centre on a daily basis. The Kona Malayg average number of activities required to support each of the three types of clients each day is estimated as Budgeted sales 2000 kg 10000g :n follows: Batch size 500 kg 1000 kgg Setups 3 per batch 3 per batgh Greenfields activities consumed per client per day el modml K kg 25000 kg Activity High-dependency Low-dependency Outpatient Roasting time (per 100 kg) 1 hr 1 h b ; Cook meals 3 3 1 Blending time (per 100 kg) 30 mins 30 ming B oot 4 0 0 Packaging time (per 100 kg) 0.1 hr 0.1 hr I;‘Xtemal - ; 5 i Required: Clean room 2 1 0 1. Using WGCC'’s current traditional product costing system: Bath client ! ¢ g (a) determine the company’s predetermined overhead rate using direct labour cost as the sing|a cogt Dress client o l 0 _ 0 driver Administer medication 4 1 & 1 (b) determine the product costs and selling prices of 1 kilogram of Kona coffee and 1 kilogram of Malaysiag Provide occupational therapy* 1 2 z 2 coffee. Provide physiotherapy 4 2 1 2. Develop new product costs, using activity-based costing, for 1 kilogram of Kona coffee and 1 kilogramgg Run workshop' 0 1 1 Malaysian coffee. * Occupational therapy classes are attended by an average of 10 clients. 3. (a) Compare the costs of the products calculated in requirements 1and 2. Provide an explanation as to i The workshop is used by an average of 20 clients per day. the product costs using the traditional costing system are different from those using the ABC system, \ (b) Make a recommendation for the pricing of the two products based on your analysis. i Required: ! P8.42 Activity-based costing: service organisation 1. Construct an Excel spreadsheet to: The Intellectually Disabled Council has responsibility for distributing government grants to fund suppo (a) calculate the cost per unit of activity driver for each of the activities identified by the project team LO8.5 services for intellectually disabled people. The director is concerned that grants be distributed on an equitablé (b) calculate the daily cost of supporting: 8.13 basis, and asks Sue Jolley, the council’s management accountant, to estimate the cost of providing institutional (i) a high-dependency client (i) a low-dependency client (iif) an outpatient. care to clients with intellectual disabilities. Jolley decides to use activity-based costing in one of the states 2 Review the list of activities and suggest some major activities that may have been overlooked by the larger institutions, Greenfields, to obtain an initial estimate of the costs of the services provided. _ project team. Working with a project team at Greenfields, she identifies the following major activities and costs for nes 3. Do you think activity-based costing is useful in this situation? Explain your answer. e P43 (appendix) Calculating activity costs: winery The management of Mutherglen Wines Pty Ltd is contemplating the introduction of an activity-based costing Greenfields activities performed 808.13 sysiem and has just conducted an activity-based costing exercise in its bottling plant. The costs of the plant, ‘ Activity Cost (in $°000s) Annual volume of activity driver summarised into cost categories for the year, are as follows: Cook meals $500 100000 meals Transport clients (internal) 200 4000 hours of assistance Bottling plant costs :l Transport clients (external) wa 6000 hours of assistance Total cost Resource driver Total amount of resource driver 10! d Clean rooms 2 20000 rooms cleane Wages $2000000 No. of employees 40 employees i 14 i Bath clients . 16000 btk given ; Building costs 200000 Floor area 50000 square metres D li 3 1 ient: . i ol SRRty doess i Machinery costs 900000 Machine hours 90000 machine hours - o 12 - _ Adm.lmster medfcatlon 0 75000 doses administere B oo 1200000 Kilowatt hours 600000 kilowatt hours Provide occupational therapy 90 600 classes Dther 45000 Nkt o 90000 machine hours Provide physiotherapy 250 5000 hours of physiotherapy % 3‘45 000 ‘! Run workshop 150 200 days of operation

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

@ PART TWO COSTS AND COSTING SYSTEMS patterns: “ Four activity centres have been identified in the plant, with the following resource driver consumptigy Bottling plant activity centres Resource drivers Activity centre No. of employees Floor area (m?) Machine hours Kilowatt hoyrg Filling 20 15000 40000 250000 Corking 10 5000 15000 100000 Labelling 4 10000 10000 50000 Packing 5 20000 25000 200000 Total 40 50000 90000 600000 The work in the labelling centre has been broken down into the following five activities. Their use of resource drivers is also shown. I Labelling centre activities Resource drivers | Activity No. of employees Floor area (m?) Machine hours Kilowatt hours Set up front label machines 0.5 - - - Operate front label machines 1.0 3000 7000 30000 Set up back label machines 05 - - - Operate back label machines 1.0 2000 3000 20000 Inspect labelled bottles 1.0 5000 - - T Total 4.0 10000 10000 50000 | Required: 1. Calculate the cost of each activity centre. ’ 2. Calculate the cost of the activities performed in the labelling centre. 3. Why would Mutherglen contemplate using an activity-based product costing system? 4. What are the limitations of activity-based product costing? B c8.44 Traditional versus simple activity-based product costing; strategic cost analysis: manufacturer Gigabyte Ltd manufactures three products for the computer industry: B gismos (product G): annual sales, 8 000 units 8.5 m thingamajigs (product T): annual sales, 15000 units 8.6 ® whatchamacallits (product W): annual sales, 4 000 units. CHAPTER EIGHT ACTIVITY-BASED COSTING @ The company uses a traditional, volume-based product costing system with manufacturing overhead applied on the basis of direct labour dollars. The product costs have been calculated as follows: Product G Product T Product W Raw material $ 35.00 $ 52.50 $17.50 Direct labour 16.00 (0.8 hr x $20) 12.00 (0.6 hr x $20) 8.00 (0.4 hr x $20) Manufacturing overhead* 140.00 ($16 x 875%) 105.00 ($12 x 875%) _70.00 ($8 x 875%) Total product cost $191.00 $169.50 $95.50 * Calculation of predetermined overhead rate: Manufacturing overhead budget: Machinery $1225000 Machine setup 5250 Inspection 525000 Material handling 875000 Engineering 344750 Total $2975000 & Direct labour budget (based on budgeted annual sales): Z Product G: (8000 x $16.00) $128000 Product T: (15000 x $12.00) 180000 Product W: (4000 x $8.00) 32000 Total $340000 Budgeted overhead Predetermined overhead rate = =875% Budgeted direct labour Gigabyte’s pricing method has been to set a budgeted selling price equal to 150 per cent of full product cost. However, only the thingamajigs have been selling at their budgeted price. The budgeted and actual current prices for all three products are the following: Product G Product T Product W Product cost $191.00 $169.50 $ 95.50 Budgeted price 286.50 254.25 143.25 Actual current selling price 213.00 254.25 200.00 Gigabyte has been forced to lower the price of gismos in order to get orders. In contrast, Gigabyte has raised the price of whatchamacallits several times, but there has been no apparent loss of sales. Gigabyte has been under increasing pressure to reduce the price even further on gismos. In contrast, Gigabyte’s competitors do not seem to be interested in the market for whatchamacallits. Gigabyte apparently has this market to itself. Required: 1. Is product G the company’s least profitable product? Explain your answer. 2. Is product W a profitable product for Gigabyte Ltd? Explain your answer. 3. Comment on the reactions of Gigabyte’s competitors to the firm’s pricing strategy. What dangers does Gigabyte face? 4. Gigabyte’s financial controller, Nan O’Second, recently attended a conference at which activity-based costing systems were discussed. She became convinced that such a system would help Gigabyte’s R ——

AB Costing

Related Documents