Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN: 9781305970663
Author: Don R. Hansen, Maryanne M. Mowen
Publisher: Cengage Learning
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Chapter 11, Problem 9E
To determine
State some the strategic changes in the organizational activities and drivers which may decrease the cost of performing the indicated operational activity. Provide the reasoning for the same.
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The general manager over the Mid-Size D wants to get a good idea of what factors are driving the costs of the support departments in order to make accurate cost allocations, so finding accurate support department cost drivers is important. Support department costs include Janitorial ($163,100) and Security ($285,400). The Janitorial costs vary depending on the number of vehicles produced, increasing with larger production volumes. Security costs are fixed based on the size of the lot, and do not change with respect to how many vehicles are in the…
Chapter 11 Solutions
Cornerstones of Cost Management (Cornerstones Series)
Ch. 11 - What does it mean to obtain a competitive...Ch. 11 - What is customer value? How is customer value...Ch. 11 - Prob. 3DQCh. 11 - What are organizational and operational...Ch. 11 - What is the difference between a structural cost...Ch. 11 - What is value-chain analysis? What role does it...Ch. 11 - Prob. 7DQCh. 11 - What are the three viewpoints of product life...Ch. 11 - What are the four stages of the marketing life...Ch. 11 - Prob. 10DQ
Ch. 11 - What are the four stages of the consumption life...Ch. 11 - Life-cycle cost reduction is best achieved during...Ch. 11 - Prob. 13DQCh. 11 - Prob. 14DQCh. 11 - Prob. 15DQCh. 11 - Woodruff Company is currently producing a...Ch. 11 - Ventana Company is a car window repair and...Ch. 11 - Deeds Company sells custom-made machine parts to...Ch. 11 - Kagle design engineers are in the process of...Ch. 11 - Hepworth Company has implemented a JIT system and...Ch. 11 - Keith Golding has decided to purchase a personal...Ch. 11 - Prob. 7ECh. 11 - Classify the following cost drivers as structural,...Ch. 11 - Prob. 9ECh. 11 - Prob. 10ECh. 11 - Assign the customer-related activity costs to each...Ch. 11 - The following series of statements or phrases are...Ch. 11 - Assume that a company has recently switched to JIT...Ch. 11 - Prob. 14ECh. 11 - Potter Company has installed a JIT purchasing and...Ch. 11 - Potter Company has installed a JIT purchasing and...Ch. 11 - Potter Company has installed a JIT purchasing and...Ch. 11 - Prob. 18ECh. 11 - Which of the following is a true statement about...Ch. 11 - Prob. 20ECh. 11 - This year, Hassell Company will ship 4,000,000...Ch. 11 - Prob. 22ECh. 11 - The second stage of customer-based activity-based...Ch. 11 - Evans, Inc., has a unit-based costing system....Ch. 11 - Cortalo, Inc., manufactures riding lawn mowers....Ch. 11 - Moss Manufacturing produces several types of...Ch. 11 - Maxwell Company produces a variety of kitchen...Ch. 11 - Prob. 28PCh. 11 - Nico Parts, Inc., produces electronic products...Ch. 11 - Jolene Askew, manager of Feagan Company, has...Ch. 11 - Homer Manufacturing produces different models of...Ch. 11 - Mott Company recently implemented a JIT...Ch. 11 - Southward Company has implemented a JIT flexible...Ch. 11 - Prob. 34P
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- Coulson and Company is a large retail business that has a firm-wide balanced scorecard. Recently, management has discussed the need for the balanced scorecard to be more relevant to each individual department of the company. Specifically, management wants to come up with unique scorecards for its Public Relations and Inventory Management departments. For both departments, management recognizes that properly and efficiently training employees is important. For these purposes, management gathers data on the median training hours per employee and new employee performance review ratings. For the Inventory Management Department, management is focused on reducing stockouts (running out of certain inventory items) and keeping accurate inventory counts. For these purposes, the company tracks the number of back orders and discrepancies between the physical and record counts of inventory, respectively. For the Public Relations Department, management is focused on improving the publics CSR image of the company and attracting new customers. Management measures these objectives using Forbes CSR Rating of Coulson and Company and the number of new customers, respectively. a. Identify the term for Coulson and Companys plan to create unique balanced scorecards for its individual departments. b. Draw the unique balanced scorecards of each department. Identify the departments common and unique measures, and include all the elements of the balanced scorecard that you can in your drawings, given the information provided.arrow_forwardJolene Askew, manager of Feagan Company, has committed her company to a strategically sound cost reduction program. Emphasizing life-cycle cost management is a major part of this effort. Jolene is convinced that production costs can be reduced by paying more attention to the relationships between design and manufacturing. Design engineers need to know what causes manufacturing costs. She instructed her controller to develop a manufacturing cost formula for a newly proposed product. Marketing had already projected sales of 25,000 units for the new product. (The life cycle was estimated to be 18 months. The company expected to have 50 percent of the market and priced its product to achieve this goal.) The projected selling price was 20 per unit. The following cost formula was developed: Y=200,000+10X1 where X1=Machinehours(Theproductisexpectedtouseonemachinehourforeveryunitproduced.) Upon seeing the cost formula, Jolene quickly calculated the projected gross profit to be 50,000. This produced a gross profit of 2 per unit, well below the targeted gross profit of 4 per unit. Jolene then sent a memo to the Engineering Department, instructing them to search for a new design that would lower the costs of production by at least 50,000 so that the target profit could be met. Within two days, the Engineering Department proposed a new design that would reduce unit-variable cost from 10 per machine hour to 8 per machine hour (Design Z). The chief engineer, upon reviewing the design, questioned the validity of the controllers cost formula. He suggested a more careful assessment of the proposed designs effect on activities other than machining. Based on this suggestion, the following revised cost formula was developed. This cost formula reflected the cost relationships of the most recent design (Design Z). Y=140,000+8X1+5,000X2+2,000X3 where X1=MachinehoursX2=NumberofbatchesX3=Numberofengineeringchangeorders Based on scheduling and inventory considerations, the product would be produced in batches of 1,000; thus, 25 batches would be needed over the products life cycle. Furthermore, based on past experience, the product would likely generate about 20 engineering change orders. This new insight into the linkage of the product with its underlying activities led to a different design (Design W). This second design also lowered the unit-level cost by 2 per unit but decreased the number of design support requirements from 20 orders to 10 orders. Attention was also given to the setup activity, and the design engineer assigned to the product created a design that reduced setup time and lowered variable setup costs from 5,000 to 3,000 per setup. Furthermore, Design W also creates excess activity capacity for the setup activity, and resource spending for setup activity capacity can be decreased by 40,000, reducing the fixed cost component in the equation by this amount. Design W was recommended and accepted. As prototypes of the design were tested, an additional benefit emerged. Based on test results, the post-purchase costs dropped from an estimated 0.70 per unit sold to 0.40 per unit sold. Using this information, the Marketing Department revised the projected market share upward from 50 percent to 60 percent (with no price decrease). Required: 1. Calculate the expected gross profit per unit for Design Z using the controllers original cost formula. According to this outcome, does Design Z reach the targeted unit profit? Repeat, using the engineers revised cost formula. Explain why Design Z failed to meet the targeted profit. What does this say about the use of unit-based costing for life-cycle cost management? 2. Calculate the expected profit per unit using Design W. Comment on the value of activity information for life-cycle cost management. 3. The benefit of the post-purchase cost reduction of Design W was discovered in testing. What direct benefit did it create for Feagan Company (in dollars)? Reducing post-purchase costs was not a specific design objective. Should it have been? Are there any other design objectives that should have been considered?arrow_forwardTwo departments within Cougar Gear Inc. are Production and Sales. Each department has a unique scorecard, as follows: The Production Department scorecard focuses on the learning and growth and internal processes perspectives. The Sales Department scorecard focuses on the learning and growth and customer perspectives. Both scorecards have the learning and growth performance metrics of median training hours per employee and average employee tenure. The Production scorecard has the unique metrics of production time per unit and number of production shutdowns. The Sales scorecard has the unique metrics of percentage of customers who shop again and online customer satisfaction rating. The performance targets for each metric are shown in the tan boxes just under the performance metrics. The actual achieved metrics are shown in the red boxes just below the tan boxes. When evaluating both departments, Cougar Gears management looks at the median training hours per employee and average employee tenure metrics and subsequently decides to give the Sales Department a large bonus while giving the Production Department a minimal bonus. a. Determine and define the type of cognitive bias Cougar Gears management has exhibited in this instance. b. Determine which department would have received the larger bonus had the companys management not been biased in the evaluation. c. Discuss one advantage and one disadvantage of using unique balanced scorecards for different departments or divisions of a company.arrow_forward
- Morrisons Plastics Division, a profit center, sells its products to external customers as well as to other internal profit centers. Which one of the following circumstances would justify the Plastics Division selling a product internally to another profit center at a price that is below the market-based transfer price? a. The buying unit has excess capacity. b. The selling unit is operating at full capacity. c. Routine sales commissions and collection costs would be avoided. d. The profit centers managers are evaluated on the basis of unit operating income.arrow_forwardThe following strategic objectives have been derived from a strategy that seeks to improve asset utilization by more careful development and use of its human assets and internal processes: a. Increase revenue from new products. b. Increase implementation of employee suggestions. c. Decrease operating expenses. d. Decrease cycle time for the development of new products. e. Decrease rework. f. Increase employee morale. g. Increase customer satisfaction. h. Increase access of key employees to customer and product information. i. Increase customer acquisition. j. Increase return on investment (ROI). k. Increase employee productivity. l. Decrease the collection period for accounts receivable. m. Increase employee skills. The heart of the strategy is developing the companys human resources. Management is convinced that empowering employees will lead to an increase in economic returns. Studies have shown that there is a positive relationship between employee morale and customer satisfaction. Furthermore, the more satisfied customers pay their bills more quickly. It was hypothesized that as employees became more involved and more productive, their morale would improve. Thus, the strategy incorporated key objectives that would lead to an increase in productivity and involvement. Required: 1. Classify the objectives by perspective, and suggest a measure for each objective. 2. Prepare a strategy map that illustrates the likely causal relationships among the strategic objectives.arrow_forwardAnalyze Horsepower Hookup, Inc. Horsepower Hookup, Inc., is a large automobile company that specializes in the production of high-powered trucks. The company is determining cost allocations for purposes of performance evaluation. A portion of company bonuses depends on divisions achieving cost management goals. This necessitates highly accurate support department cost allocation. Management has also stated that it has the means to implement as complex a method as necessary. The general manager over the Mid-Size D wants to get a good idea of what factors are driving the costs of the support departments in order to make accurate cost allocations, so finding accurate support department cost drivers is important. Support department costs include Janitorial (163,100) and Security (285,400). The Janitorial costs vary depending on the number of vehicles produced, increasing with larger production volumes. Security costs are fixed based on the size of the lot, and do not change with respect to how many vehicles are in the lot or warehouse. Joint costs involved in producing the trucks before the split-off point where the various makes, models, and colors are produced are 946,000 for the period. All makes, models, and colors sell at relatively similar margins, but the sports models and metallic colors are normally more difficult to produce during the joint production process. a. Which support department cost allocation method (direct, sequential, or reciprocal services) should be used to allocate support department cost? b. What driver would be best for allocating Janitorial costs? c. What driver would be best for allocating Security costs? d. If Janitorial costs were to be allocated based on square footage, and Security costs based on asset value, what percentage of each support departments costs would be allocated to each production department using the sequential method (allocating Security costs first) given the following: e. Should Janitorial and Security costs be considered when evaluating the performance of cost management employees? f. What joint cost allocation method should be used for performance evaluation purposes?arrow_forward
- 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)arrow_forwardAs manager of department B in MarIeys Manufacturing, based on the costs you identified in the previous exercise for further research, how does this impact the financial performance of your department, and what might be some questions you want to ask or solutions you might propose to Marleys management?arrow_forwardGrate Care Company specializes in producing products for personal grooming. The company operates six divisions, including the Hair Products Division. Each division is treated as an investment center. Managers are evaluated and rewarded on the basis of ROI performance. Only those managers who produce the best ROIs are selected to receive bonuses and to fill higher-level managerial positions. Fred Olsen, manager of the Hair Products Division, has always been one of the top performers. For the past two years, Freds division has produced the largest ROI; last year, the division earned an operating income of 2.56 million and employed average operating assets valued at 16 million. Fred is pleased with his divisions performance and has been told that if the division does well this year, he will be in line for a headquarters position. For the coming year, Freds division has been promised new capital totaling 1.5 million. Any of the capital not invested by the division will be invested to earn the companys required rate of return (9 percent). After some careful investigation, the marketing and engineering staff recommended that the division invest in equipment that could be used to produce a crimping and waving iron, a product currently not produced by the division. The cost of the equipment was estimated at 1.2 million. The divisions marketing manager estimated operating earnings from the new line to be 156,000 per year. After receiving the proposal and reviewing the potential effects, Fred turned it down. He then wrote a memo to corporate headquarters, indicating that his division would not be able to employ the capital in any new projects within the next eight to 10 months. He did note, however, that he was confident that his marketing and engineering staff would have a project ready by the end of the year. At that time, he would like to have access to the capital. Required: 1. Explain why Fred Olsen turned down the proposal to add the capability of producing a crimping and waving iron. Provide computations to support your reasoning. 2. Compute the effect that the new product line would have on the profitability of the firm as a whole. Should the division have produced the crimping and waving iron? 3. Suppose that the firm used residual income as a measure of divisional performance. Do you think Freds decision might have been different? Why? 4. Explain why a firm like Grate Care might decide to use both residual income and return on investment as measures of performance. 5. Did Fred display ethical behavior when he turned down the investment? In discussing this issue, consider why he refused to allow the investment.arrow_forward
- Horsepower Hookup, Inc., is a large automobile company that specializes in the production of high-powered trucks. The company is determining cost allocations for purposes of performance evaluation. A portion of company bonuses depends on divisions achieving cost management goals. This necessitates highly accurate support department cost allocation. Management has also stated that it has the means to implement as complex a method as necessary. The general manager over the Mid-Size D wants to get a good idea of what factors are driving the costs of the support departments in order to make accurate cost allocations, so finding accurate support department cost drivers is important. Support department costs include Janitorial ($163,100) and Security ($285,400). The Janitorial costs vary depending on the number of vehicles produced, increasing with larger production volumes. Security costs are fixed based on the size of the lot, and do not change with respect to how many vehicles are in the…arrow_forwardHorsepower Hookup, Inc., is a large automobile company that specializes in the production of high-powered trucks. The company is determining cost allocations for purposes of performance evaluation. A portion of company bonuses depends on divisions achieving cost management goals. This necessitates highly accurate support department cost allocation. Management has also stated that it has the means to implement as complex a method as necessary. The general manager over the Mid-Size D wants to get a good idea of what factors are driving the costs of the support departments in order to make accurate cost allocations, so finding accurate support department cost drivers is important. Support department costs include Janitorial ($163,100) and Security ($285,400). The Janitorial costs vary depending on the number of vehicles produced, increasing with larger production volumes. Security costs are fixed based on the size of the lot, and do not change with respect to how many vehicles are in the…arrow_forwardAs a result of increasing global competition, companies have become increasingly focused on reducing costs. To reduce costs and remain competitive, many companies are turning to outsourcing. Outsourcing means hiring an outside supplier to provide elements of a product or service rather than producing them internally.arrow_forward
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