Activity-based costing

CASE 5-69 (60 minutes) 1. Standard Model Deluxe Model Heavy-Duty Model Product costs based on traditional, volume- based costing system $105.00 $215.00 $232.00   × 110% × 110% × 110% × 110%   Target price $115.50 $236.50 $255.20   2. Product costs based on activity-based costing system: Regular Model Standard Model Deluxe Model Direct material $10.00 $ 25.00 $ 42.00 Direct labor 10.00 20.00 20.00 Machinery depreciation

Health Products of Ranier Falls, Georgia, is organized functionally into three divisions: Operations, Sales, and Administrative. Purchasing, receiving, materials and production control, manufacturing, factory personnel, inventory stores, and shipping activities are under the control of the

they are able to make optimal decisions about product mix and set appropriate prices. The true cost to produce a product can be exposed and any possible reduction in the cost to produce this good can be identified. Additionally, non-value adding activities may be identified and eliminated. This will prevent underpricing for a good where the company mistakenly believes profits are possible when true costs and profitability are hidden under inadequate analysis. However, when deciding to obtain additional

Conventional Absorption Costing Systems or Traditional Costing System It is a remarkable reality that the traditional costing systems use a solitary, volume-based cost driver. This is the motivation behind why the traditional product costing system misshapes the expense of items or products. By and large, this kind of costing system appoints the overhead expenses to items on the premise of their relative use of direct work. Thus, traditional cost systems frequently report incorrect product costs

organizational budget. The budgeting process should be flexible and based upon degree of goal accomplishment during the period and budgets for the next planning period can be adjusted to help the management meet organizational goals. If the goals are changed then the budgets should also be changed. Traditional Budget Traditional budgeting is the process of budgeting which is in use for the past many years in the organizations. It is based upon single basis; mostly indirect costs are distributed to all

traditional costing system is inadequate for Dakota Office Products because it is incapable of accounting for all of the known costs associated with its products and services. 3. Problem Causal Analysis Since Dakota uses a traditional method of cost accounting they cannot identify areas of weakness or inefficiency in their pricing and how those inefficiencies translate to lower bottom line profits. 4. Management Theory, Process, or Approach In implementing an activity-based costing program

American largest manufacturer of stainless steel residential sinks which extended its scope into various kinds of products with only a few competitors. Its Plumbing Products Division produced different level and priced sinks in three plants separately based on different process requirements and characters of products and further invented itself to become the industry’s innovator. Elkay’s main market included North America and selected international markets. In 2007, Elkay’s main outlet market begun to

000 pounds x $2 = $20,000 Machine hours 500 machine hours x $10 = 5,000 Budgeted overhead 500 machine hours x $31.25 = 15,625 $40,625 (b) Per box of chemicals $40,625/1,000 = $40.63 (5) These two product costing systems result in such widely differing costs

CHAPTER 4 ACTIVITY-BASED COST SYSTEMS TRUE/FALSE 1. Traditional cost systems use actual departments or cost centers for defining cost pools to accumulate and redistribute costs. a. True b. False 2. Activity-based cost systems use cost centers to accumulate costs. a. True b. False 3. Traditional cost systems are likely to undercost complex products with lower production volume. a. True b. False 4. The first step in designing an activity-based cost system

evaluating and classifying costs in order to implement an activity-based costing system. As stated in the case, these costs will be used for planning and control decisions rather than inventory valuation. The activity-based costing system will provide better allocation of Glaser’s overhead costs rather than a system to look at the cost drivers or the activities that their overhead costs comprise. Glaser’s general structure of an activity-based costing model should consist of cost