Watkins Trophies, Inc., produces thousands of medallions made of bronze, silver, and gold. The medallions are identical except for the materials used in their manufacture. What costing system would you advise the company to use?

Watkins Trophies, Inc., produces thousands of medallions made of bronze, silver, and gold. The medallions are identical except for the materials used in their manufacture. What costing system would you advise the company to use?

Name: Watkins Trophies, Inc., produces thousands of medallions made of bronz
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Description: Watkins Trophies, Inc., produces thousands of medallions made of bronze, silver, and gold. The medallions are identical except for the materials used in their manufacture. What costing system would you advise the company to use?

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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BlendIn, Inc. manufactures covers for blenders and toaster ovens. Because its product lines are similar, BlendIn can produce most styles in any of its four factories with minimal setup time. In one of its factories, it has incurred indirect labor cost of $125,000, depreciation of $40,000 for corporate computers, and factory rent and utilities of $143,000. BlendIn uses GAAP-based costing. Based on the amounts above, how much should BlendIn allocate to product cost for blender covers? Assume that blender covers account for 55% of production.
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?
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?
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?
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.
Quincy Farms is a producer of items made from farm products that are distributed to supermarkets. For many years, Quincys products have had strong regional sales on the basis of brand recognition. However, other companies have been marketing similar products in the area, and price competition has become increasingly important. Doug Gilbert, the companys controller, is planning to implement a standard costing system for Quincy and has gathered considerable information from his coworkers on production and direct materials requirements for Quincys products. Doug believes that the use of standard costing will allow Quincy to improve cost control and make better operating decisions. Quincys most popular product is strawberry jam. The jam is produced in 10-gallon batches, and each batch requires six quarts of good strawberries. The fresh strawberries are sorted by hand before entering the production process. Because of imperfections in the strawberries and spoilage, one quart of strawberries is discarded for every four quarts of acceptable berries. Three minutes is the standard direct labor time required for sorting strawberries in order to obtain one quart of strawberries. The acceptable strawberries are then processed with the other ingredients: processing requires 12 minutes of direct labor time per batch. After processing, the jam is packaged in quart containers. Doug has gathered the following information from Joe Adams, Quincys cost accountant, relative to processing the strawberry jam. a. Quincy purchases strawberries at a cost of 0.80 per quart. All other ingredients cost a total of 0.45 per gallon. b. Direct labor is paid at the rate of 9.00 per hour. c. The total cost of direct material and direct labor required to package the jam is 0.38 per quart. Joe has a friend who owns a strawberry farm that has been losing money in recent years. Because of good crops, there has been an oversupply of strawberries, and prices have dropped to 0.50 per quart. Joe has arranged for Quincy to purchase strawberries from his friends farm in hopes that the 0.80 per quart will put his friends farm in the black. Required: 1. Discuss which coworkers Doug probably consulted to set standards. What factors should Doug consider in establishing the standards for direct materials and direct labor? 2. Develop the standard cost sheet for the prime costs of a 10-gallon batch of strawberry jam. 3. Citing the specific standards of the IMA Statement of Ethical Professional Practice described in Chapter 1, explain why Joes behavior regarding the cost information provided to Doug is unethical. (CMA adapted)
Brees, Inc., a manufacturer of golf carts, has just received an offer from a supplier to provide 2,600 units of a component used in its main product. The component is a track assembly that is currently produced internally. The supplier has offered to sell the track assembly for 66 per unit. Brees is currently using a traditional, unit-based costing system that assigns overhead to jobs on the basis of direct labor hours. The estimated traditional full cost of producing the track assembly is as follows: Prior to making a decision, the companys CEO commissioned a special study to see whether there would be any decrease in the fixed overhead costs. The results of the study revealed the following: 3 setups1,160 each (The setups would be avoided, and total spending could be reduced by 1,160 per setup.) One half-time inspector is needed. The company already uses part-time inspectors hired through a temporary employment agency. The yearly cost of the part-time inspectors for the track assembly operation is 12,300 and could be totally avoided if the part were purchased. Engineering work: 470 hours, 45/hour. (Although the work decreases by 470 hours, the engineer assigned to the track assembly line also spends time on other products, and there would be no reduction in his salary.) 75 fewer material moves at 30 per move. Required: 1. Ignore the special study, and determine whether the track assembly should be produced internally or purchased from the supplier. 2. Now, using the special study data, repeat the analysis. 3. Discuss the qualitative factors that would affect the decision, including strategic implications. 4. After reviewing the special study, the controller made the following remark: This study ignores the additional activity demands that purchasing would cause. For example, although the demand for inspecting the part on the production floor decreases, we may need to inspect the incoming parts in the receiving area. Will we actually save any inspection costs? Is the controller right?
alland Manufacturing Company makes two different products, M and N. The company's two departments are named after the products; for example, Product M is made in Department M. Yalland's accountant has identified the following annual costs associated with these two products: Financial data Salary of vice president of production division ................. $160,000 Salary of supervisor Department M .............................. 80,000 Salary Yalland Manufacturing Company makes two different products, M and N. The company's two departments are named after the products; for example, Product M is made in Department M. Yalland's accountant has identified the following annual costs associated with these two products:Financial dataSalary of vice president of production division ................. $160,000Salary of supervisor Department M .............................. 80,000Salary of supervisor Department N ................................. 60,000Direct materials cost Department M…
Mariah Enterprises makes a variety of consumer electronic products. Its camera manufacturing plant is considering choosing between two different processes, named Alpha and Beta, which can be used to make two component parts A and B. To make the correct decision, the managers would like to compare the labor and multifactor productivity of process Alpha with that of process Beta. The value of process output for component A and B are $175 and $140 per unit, respectively. The corresponding overhead costs are $6,000 and $5,000, respectively. Process Alpha Process Beta Product A B C D Output (units) 50 60 30 80 Labor ($) $1,200 $1,400 $1,000 $2,000 Material ($) $2,500 $3,000 $1,400 $3,500 a. Which process, Alpha or Beta, is more productive? b. What conclusions can you draw from your analysis?
Sensor Systems manufactures an optical switch that it uses in its final product. The switch has the following manufacturing costs per unit: LOADING... (Click the icon to view the costs.) Direct materials $7.00 Direct labor 2.00 Variable overhead 8.00 Fixed overhead 6.50____________________________ Manufacturing product cost $23.50__________________________ _________________________________ LOADING... (Click the icon to view additional information.) Another company has offered to sell Sensor Systems the switch for $19.00 per unit. If Sensor Systems buys the switch from the outside supplier, the idle manufacturing facilities cannot be used for any other purpose, yet none of the fixed costs are avoidable. Prepare an outsourcing analysis to determine whether Sensor Systems should make or buy the switch. (For the Difference column, use a minus sign or parentheses only when the cost of outsourcing…
The Bangor Manufacturing Company makes mechanical toy robots that are typically produced in batches of 250 units. Prior to the current year, the company’s accountants used a standard cost system with a simplified method of assigning manufacturing support (i.e., overhead) costs to products: All such costs were allocated to outputs based on the standard machine hours allowed for output produced. You have recently joined the accounting team and are developing a proposal that the company adopt an ABC system for both product-costing and control purposes. To illustrate the benefit of such a system in terms of the latter, you decide to put together an analysis of batch-related overhead costs. You chose these costs because a previous investigation indicated that there is both a variable component to these costs (materials plus power) plus a fixed component (depreciation and salaries). Last year’s budget indicated that the variable overhead cost per setup hour was $20.00 and that the fixed…
Classify the following costs of this new product as direct materials, direct labor, manufacturing overhead, selling, or administrative 1. President's salary. 2. Packages used to hold the skin wipes. 3. Cleaning materials used to clean the skin wipe packages. 4. Wages of workers who package the product. 5. Cost of advertising the product. 6. The salary of the supervisor of the workers who package the product. 7. Cost accountant's salary (the accountant works in the factory). 8. Cost of a market research survey. 9. Sales commissions paid as a percent of sales. 10. Depreciation of administrative office building. Problem B Classify the costs listed in the previous problem as either product costs or period costs.