Hi Tech Products manufactures three (3) types of CD players: Cheap, Econo and Deluxe. Hi Tech uses an activity-based product costing system. The company has identified five (5) activities. Each activity, its cost and related activity driver are identified below: Under an activity-based product costing system, what is the cost per unit of Cheap?

Hi Tech Products manufactures three (3) types of CD players: Cheap, Econo and Deluxe. Hi Tech uses an activity-based product costing system. The company has identified five (5) activities. Each activity, its cost and related activity driver are identified below: Under an activity-based product costing system, what is the cost per unit of Cheap?

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter4: Activity-based Costing

Section: Chapter Questions

Problem 4CE: Larsen, Inc., produces two types of electronic parts and has provided the following data: There are...

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Larsen, Inc., produces two types of electronic parts and has provided the following data: There are four activities: machining, setting up, testing, and purchasing. Required: 1. Calculate the activity consumption ratios for each product. 2. Calculate the consumption ratios for the plantwide rate (direct labor hours). When compared with the activity ratios, what can you say about the relative accuracy of a plantwide rate? Which product is undercosted? 3. What if the machine hours were used for the plantwide rate? Would this remove the cost distortion of a plantwide rate?
Electan Company produces two types of printers. The company uses ABC, and all activity drivers are duration drivers. Electan Company is considering using DBC and has gathered the following data to help with its decision. A. Activities with duration drivers: B. Activities with consumption ratios and costs: C. Products with cycle time and practical capacity: Required: 1. Using cycle time and practical capacity for each product, calculate the total time for all primary activities. Comment on the relationship to ABC. 2. Calculate the overhead rate that DBC uses to assign costs. Comment on the relationship to a unit-based plantwide overhead rate. 3. Use the overhead rate calculated in Requirement 2 to calculate (a) the overhead cost per unit for each product, and (b) the total overhead assigned to each product. How does this compare to the ABC assignments shown in Part B of the Information set? 4. What if the units actually produced were 10,000 for Printer A and 18,000 for Printer B. Using DBC, calculate the cost of unused capacity.
Cicleta Manufacturing has four activities: receiving materials, assembly, expediting products, and storing goods. Receiving and assembly are necessary activities; expediting and storing goods are unnecessary. The following data pertain to the four activities for the year ending 20x1 (actual price per unit of the activity driver is assumed to be equal to the standard price): Required: 1. Prepare a cost report for the year ending 20x1 that shows value-added costs, non-value-added costs, and total costs for each activity. 2. Explain why expediting products and storing goods are non-value-added activities. 3. What if receiving cost is a step-fixed cost with each step being 1,500 orders whereas assembly cost is a variable cost? What is the implication for reducing the cost of waste for each activity?
Evans, Inc., has a unit-based costing system. Evanss Miami plant produces 10 different electronic products. The demand for each product is about the same. Although they differ in complexity, each product uses about the same labor time and materials. The plant has used direct labor hours for years to assign overhead to products. To help design engineers understand the assumed cost relationships, the Cost Accounting Department developed the following cost equation. (The equation describes the relationship between total manufacturing costs and direct labor hours; the equation is supported by a coefficient of determination of 60 percent.) Y=5,000,000+30X,whereX=directlaborhours The variable rate of 30 is broken down as follows: Because of competitive pressures, product engineering was given the charge to redesign products to reduce the total cost of manufacturing. Using the above cost relationships, product engineering adopted the strategy of redesigning to reduce direct labor content. As each design was completed, an engineering change order was cut, triggering a series of events such as design approval, vendor selection, bill of materials update, redrawing of schematic, test runs, changes in setup procedures, development of new inspection procedures, and so on. After one year of design changes, the normal volume of direct labor was reduced from 250,000 hours to 200,000 hours, with the same number of products being produced. Although each product differs in its labor content, the redesign efforts reduced the labor content for all products. On average, the labor content per unit of product dropped from 1.25 hours per unit to one hour per unit. Fixed overhead, however, increased from 5,000,000 to 6,600,000 per year. Suppose that a consultant was hired to explain the increase in fixed overhead costs. The consultants study revealed that the 30 per hour rate captured the unit-level variable costs; however, the cost behavior of other activities was quite different. For example, setting up equipment is a step-fixed cost, where each step is 2,000 setup hours, costing 90,000. The study also revealed that the cost of receiving goods is a function of the number of different components. This activity has a variable cost of 2,000 per component type and a fixed cost that follows a step-cost pattern. The step is defined by 20 components with a cost of 50,000 per step. Assume also that the consultant indicated that the design adopted by the engineers increased the demand for setups from 20,000 setup hours to 40,000 setup hours and the number of different components from 100 to 250. The demand for other non-unit-level activities remained unchanged. The consultant also recommended that management take a look at a rejected design for its products. This rejected design increased direct labor content from 250,000 hours to 260,000 hours, decreased the demand for setups from 20,000 hours to 10,000 hours, and decreased the demand for purchasing from 100 component types to 75 component types, while the demand for all other activities remained unchanged. Required: 1. Using normal volume, compute the manufacturing cost per labor hour before the year of design changes. What is the cost per unit of an average product? 2. Using normal volume after the one year of design changes, compute the manufacturing cost per hour. What is the cost per unit of an average product? 3. Before considering the consultants study, what do you think is the most likely explanation for the failure of the design changes to reduce manufacturing costs? Now use the information from the consultants study to explain the increase in the average cost per unit of product. What changes would you suggest to improve Evanss efforts to reduce costs? 4. Explain why the consultant recommended a second look at a rejected design. Provide computational support. What does this tell you about the strategic importance of cost management?
Moss Manufacturing produces several types of bolts. The products are produced in batches according to customer order. Although there are a variety of bolts, they can be grouped into three product families. The number of units sold is the same for each family. The selling prices for the three families range from 0.50 to 0.80 per unit. Because the product families are used in different kinds of products, customers also can be grouped into three categories, corresponding to the product family they purchase. Historically, the costs of order entry, processing, and handling were expensed and not traced to individual products. These costs are not trivial and totaled 6,300,000 for the most recent year. Furthermore, these costs had been increasing over time. Recently, the company had begun to emphasize a cost reduction strategy; however, any cost reduction decisions had to contribute to the creation of a competitive advantage. Because of the magnitude and growth of order-filling costs, management decided to explore the causes of these costs. They discovered that order-filling costs were driven by the number of customer orders processed. Further investigation revealed the following cost behavior: Step-fixed cost component: 70,000 per step; 2,000 orders define a step Variable cost component: 28 per order Moss currently has sufficient steps to process 100,000 orders. The expected customer orders for the year total 140,000. The expected usage of the order-filling activity and the average size of an order by product family are as follows: As a result of the cost behavior analysis, the marketing manager recommended the imposition of a charge per customer order. The president of the company concurred. The charge was implemented by adding the cost per order to the price of each order (computed using the projected ordering costs and expected orders). This ordering cost was then reduced as the size of the order increased and eliminated as the order size reached 2,000 units. (The marketing manager indicated that any penalties imposed for orders greater than this size would lose sales from some of the smaller customers.) Within a short period of communicating this new price information to customers, the average order size for all three product families increased to 2,000 units. Required: 1. Moss traditionally has expensed order-filling costs (following GAAP guidelines). Under this approach, how much cost is assigned to customers? Do you agree with this practice? Explain. 2. Consider the following claim: by expensing the order-filling costs, all products were undercosted; furthermore, products ordered in small batches are significantly undercosted. Explain, with supporting computations where possible. Explain how this analysis also reveals the costs of various customer categories. 3. Calculate the reduction in order-filling costs produced by the change in pricing strategy. (Assume that resource spending is reduced as much as possible and that the total units sold remain unchanged.) Explain how exploiting customer linkages produced this cost reduction. Moss also noticed that other activity costs, such as those for setups, scheduling, and materials handling costs, were reduced significantly as a result of this new policy. Explain this outcome, and discuss its implications. 4. Suppose that one of the customers complains about the new pricing policy. This buyer is a lean, JIT firm that relies on small, frequent orders. In fact, this customer accounted for 30 percent of the Family A orders. How should Moss deal with this customer? 5. One of Mosss goals is to reduce costs so that a competitive advantage might be created. Describe how the management of Moss might use this outcome to help create a competitive advantage.
Grundvig Manufacturing produces several types of bolts used in aircraft. The bolts are produced in batches and grouped into three product families. Because the product families are used in different kinds of aircraft, customers also can be grouped into three categories, corresponding to the product family that they purchase. The number of units sold to each customer class is the same. The selling prices for the three product families range from 0.50 to 0.80 per unit. Historically, the costs of order entry, processing, and handling were expensed and not traced to individual customer groups. These costs are not trivial and totaled 9,000,000 for the most recent year. Recently, the company started emphasizing a cost reduction strategy with an emphasis on creating a competitive advantage. Upon investigation, management discovered that order-filling costs were driven by the number of customer orders processed with the following cost behavior: Step-fixed cost component: 50,000 per step (2,000 orders define a step) Variable cost component: 20 per order Grundvig currently has sufficient steps to process 200,000 orders. The expected customer orders for the year total 200,000. The expected usage of the order-filling activity and the average size of an order by customer category follow: As a result of cost behavior analysis, the marketing manager recommended the imposition of a charge per customer order. The charge was implemented by adding the cost per order to the price of each order (computed by using the projected ordering costs and expected orders). This ordering cost was then reduced as the size of the order increased and was eliminated as the order size reached 2,000 units. Within a short period of communicating this new price information to customers, the average order size for all three product families increased to 2,000 units. Required: 1. CONCEPTUAL CONNECTION Grundvig traditionally has expensed order-filling costs. What is the most likely reason for this practice? 2. Calculate the cost per order for each customer category. (Note: Round to two decimal places.) 3. CONCEPTUAL CONNECTION Calculate the reduction in order-filling costs produced by the change in pricing strategy (assuming that resource spending is reduced as much as possible and that the total units sold remain unchanged). Explain how exploiting customer activity information produced this cost reduction. Would any other internal activities benefit from this pricing strategy?
Good Scent, Inc., produces two colognes: Rose and Violet. Of the two, Rose is more popular. Data concerning the two products follow: The company uses a conventional costing system and assigns overhead costs to products using direct labor hours. Annual overhead costs follow. They are classified as fixed or variable with respect to direct labor hours. Required: 1. Using the conventional approach, compute the number of cases of Rose and the number of cases of Violet that must be sold for the company to break even. 2. Using an activity-based approach, compute the number of cases of each product that must be sold for the company to break even.
Abernathy, Inc., produces two different generators and is concerned about their quality. The company has identified the following quality activities and costs associated with the two products: Required: 1. Calculate the quality cost per unit for each product, and break this unit cost into quality cost categories. Which of the two seems to have the lowest quality? 2. How might a manager use the unit quality cost information?
Barnett Products manufactures three types of remote-control devices: Economy, Standard, and Deluxe. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below. First picture The following information pertains to the three product lines for next year: Second picture Under Barnett's activity-based costing system, what is the per-unit overhead cost of Deluxe? a.$277. b.$267. c.None of the answers is correct. d.$419.
HiTech Products manufactures three types of remote-control devices: Economy, Standard, and Deluxe. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below.
Hi Tech Products manufactures three (3) types of CD players: Cheap, Econo and Deluxe. Hi Tech uses an activity-based product costing system. The company has identified five (5) activities. Each activity, its cost and related activity driver are identified below:ActivityMaterial handling Material insertion Automated machinery FinishingPackagingTotal manufacturing costActivity Cost$225 000 $2 475 000 $840 000 $170 000 $170 000 $3 880 000Activity DriverNumber of parts Number of parts Machine hours Labour hours Orders shippedThe following information pertains to each product line of CD players:Units to be produced Orders to be shipped Number of parts per unit Machine hours per unit Labour hours per unitCheap10 000 1000 101Econo Deluxe5000 2000 500 200 15 253 52Under an activity-based product costing system, what is the cost per unit of Cheap?
Privott, Inc., manufactures and sells two products: Product Z9 and Product N0. The company is considering adopting an activity-based costing system with the following activity cost pools, activity measures, and expected activity: Estimated Expected Activity Activity Cost Pools Activity Measures Overhead Cost Product Z9 Product N0 Total Labor-related DLHs $ 327,018 6,700 3,300 10,000 Product testing tests 47,247 550 650 1,200 Order size MHs 472,608 4,300 4,600 8,900 $ 846,873 The activity rate for the Labor-Related activity cost pool under activity-based costing is closest to: Multiple Choice A. $72.69 per DLH B. $705.73 per DLH C. $85.90 per DLH D. $32.70 per DLH