Bob Randall, cost accounting manager for Hemple Products, was asked to determine the costs of the activities performed within the company’s Manufacturing Engineering Department. The department has the following activities: creating bills of materials (BOMs), studying manufacturing capabilities, improving manufacturing process, training, employees, and designing tools. The general ledger accounts reveal the following expenditures for Manufacturing Engineering: Salaries $ 500,000 Equipment 100,000 Supplies 30,000 Total $630,000 The equipment is used for two activities: improving process and designing tools. The equipment’s time is divided by two activities: 40 percent for improving process and 60 percent for designing tools. The salaries are for nine engineers, one who earns $100,000 and eight who earn $50,000 each. The $100,000 engineer spends 40 percent of her time training employees in new process and 60 percent of her time on improving processes. One engineer spends 100 percent of her time on designing tools, and another engineer spends 100 percent of his time on improving processes. The remaining six engineers spend equal time on all activities. Supplies are consumed in the following proportions: Creating BOMs 10% Studying capabilities 5 Improving processes 35 Training employees 20 Designing tools 30 After determining the costs of the engineering activities, Bob was then asked to describe how these costs would be assigned to jobs produces within the factory. (The company manufactures machine parts on a job-order basis). Bob responded by indicating that creating BOMs, and designing tools were the only primary activities. The remaining were secondary activities. After some analysis, Bob concluded that studying manufacturing capabilities was an activity that enabled the other four activities to be realized. He also noted that all of the employees being trained are manufacturing workers-employees who work directly on the products. The major manufacturing activities are cutting, drilling, lathing, welding, and assembly. The costs of these activities are assigned to the various products using hours of usage (grinding hours, drilling hours, etc.) Furthermore, tools were designed to enable the production of specific jobs. Finally, the process improvement activity focused only on the five major manufacturing activities. Required: What is meant by unbundling general ledger costs? Why is it necessary? What is the difference between a general ledger database system and an activity-based database system? Using the resource drivers and direct tracing, calculate the costs of each manufacturing engineering activity. What are the resources drivers? Describe in detail how the costs of the engineering activities would be assigned to jobs using activity-based costing. Include a description of the activity drivers that might be used. Where appropriate, identify both a possible transaction driver and a possible duration driver.
Bob Randall, cost
Salaries $ 500,000
Equipment 100,000
Supplies 30,000
Total $630,000
The equipment is used for two activities: improving process and designing tools. The equipment’s time is divided by two activities: 40 percent for improving process and 60 percent for designing tools. The salaries are for nine engineers, one who earns $100,000 and eight who earn $50,000 each. The $100,000 engineer spends 40 percent of her time training employees in new process and 60 percent of her time on improving processes. One engineer spends 100 percent of her time on designing tools, and another engineer spends 100 percent of his time on improving processes. The remaining six engineers spend equal time on all activities. Supplies are consumed in the following proportions:
Creating BOMs 10%
Studying capabilities 5
Improving processes 35
Training employees 20
Designing tools 30
After determining the costs of the engineering activities, Bob was then asked to describe how these costs would be assigned to jobs produces within the factory. (The company manufactures machine parts on a job-order basis). Bob responded by indicating that creating BOMs, and designing tools were the only primary activities. The remaining were secondary activities. After some analysis, Bob concluded that studying manufacturing capabilities was an activity that enabled the other four activities to be realized. He also noted that all of the employees being trained are manufacturing workers-employees who work directly on the products. The major manufacturing activities are cutting, drilling, lathing, welding, and assembly. The costs of these activities are assigned to the various products using hours of usage (grinding hours, drilling hours, etc.) Furthermore, tools were designed to enable the production of specific jobs. Finally, the process improvement activity focused only on the five major manufacturing activities.
Required:
- What is meant by unbundling general ledger costs? Why is it necessary?
- What is the difference between a general ledger database system and an activity-based database system?
- Using the resource drivers and direct tracing, calculate the costs of each manufacturing engineering activity. What are the resources drivers?
- Describe in detail how the costs of the engineering activities would be assigned to jobs using activity-based costing. Include a description of the activity drivers that might be used. Where appropriate, identify both a possible transaction driver and a possible duration driver.
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