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Material-handling cost per mirror = $1,000. The analysis is identical to that given for
requirement (1).
3.
$50,000
5
(5 15) *
$500
25
*The total number of material moves.
5-1
40,000 yen
40,000 yen
610,000 yen
610,000 yen
5-2
700,000 yen
600,000 yen
Electricity, light..................................................................................................
60,000 yen
Custodial wages, plant.....................................................................................
40,000 yen
Property taxes...................................................................................................
120,000 yen
Natural gas, heating.......................................................................................... 30,000 yen
Total................................................................................................................... 1,550,000 yen
Cost driver: for costs allocated to support departments, square footage; for costs
assigned to products, number of units produced.
5-3
5-4
(b)
(c)
Stage two: Select cost drivers for each activity-cost pool. Then assign the costs
in each cost pool to the company's product lines in proportion to the amount of
the related cost driver used by each product line.
2.
As described in the answer to the preceding exercise, the new system probably will
reveal distortion in the firm's reported product costs. In all likelihood, the high-volume
products are overcosted and the low-volume specialty products are undercosted.
3.
Strategic options:
(a)
Lower the prices on the firm's high-volume products to compete more effectively.
(b)
(c)
Consider eliminating the specialty product lines. This option may not be desirable
if there is a marketing need to produce a full product line. Also, the specialty
wheels may give Wheelco prestige.
5-5
Activity-based costing results in improved costing accuracy for two reasons. First,
companies that use ABC are not limited to a single driver when allocating costs to
products and activities. Not all costs vary with units, and ABC allows users to select
a host of nonunit-level cost drivers. Second, consumption ratios often differ greatly
among activities. No single cost driver will accurately assign costs for all activities
in this situation.
2.
E-Commerce
Consulting
$387,500
$237,500
(139,500)
Income billings.
5-6
(212,040)
$ 35,960
(85,500)
(129,960)
$ 22,040
9.28%
9.28%
Activity
Driver
Cost
Staff support
In-house
computing
$180,000
136,400
Miscellaneous
office charges
25,600
Application
Rate
250 clients
4,400 computer
hours (CH)
$31 per CH
1,000 client
transactions (CT)
$25.60 per CT
Activity
Staff support:
200 clients x $720...
50 clients x $720.
In-house computing:
2,600 CH x $31.
1,800 CH x $31.
Miscellaneous office charges:
400 CT x $25.60...
600 CT x $25.60...
Total .
5-7
E-Commerce
Consulting
$144,000
$ 36,000
80,600
55,800
10,240
$234,840
15,360
$107,160
E-Commerce
Consulting
$387,500
$237,500
(139,500)
Income billings...
(234,840)
$ 13,160
(85,500)
(107,160)
$ 44,840
3.40%
18.88%
4.
Yes, his attitude should change. Even though both services are needed and
professionals are paid the same rate, the income percentages show that e-commerce
consulting provides a higher return per sales dollar than information systems
services (18.88% vs. 3.40%). Thus, all other things being equal, professionals should
spend more time with e-commerce.
5.
Probably not. Although both services produce an attractive return, the firm is
experiencing a very tight labor market and will likely have trouble finding qualified
help. In addition, the professional staff is currently overworked, which would
probably limit the services available to new clients.
5-8
a.
b.
$100,000
60,000
$ 160,000
800,000
$ 24,000
5,000
31,000
180,000
75,000
10,000
10,000
15,000
350,000
$1,310,000
The unit costs of Tuff Stuff and Ruff Stuff, with overhead assigned on the basis
of direct-labor hours, are calculated as follows:
Tuff Stuff:
Direct material........................................................
Direct labor ($8.00 per hour2 hours)*..............
Overhead ($3.50 per hour2 hours)*.................
Tuff Stuff unit cost...........................................
$5.00
16.00
7.00
$28.00
40,000
60,000
100,000
5-9
=
=
$ 3.00
24.00
10.50
$37.50
40,000
60,000
100,000
The total budgeted cost of the Fabricating and Assembly Departments, after
separation of overhead into the activity cost pools, is calculated as follows:
Total
Direct material...........
Direct labor...............
Overhead:
Indirect labor
Fringe benefits
Indirect material
Power
Setup
Quality assurance
Other utilities
Depreciation
Total overhead
Total cost
$160,000
800,000
$ 24,000
5,000
31,000
180,000
75,000
10,000
10,000
15,000
$ 350,000
$1,310,000
Fabricating
Percent
Dollars
100%
$160,000
75%
600,000
75%
80%
80%
50%
80%
$18,000
4,000
20,000
160,000
5,000
8,000
5,000
12,000
$232,000
$992,000
5-10
Assembly
Percent
Dollars
25%
$200,000
25%
20%
$ 6,000
1,000
11,000
20,000
70,000
2,000
5,000
3,000
20%
50%
20%
$118,000
$318,000
The unit costs of the products using activity-based costing are calculated as follows:
Fabricating:
Total cost..............................................................................................................
$992,000
Less: Direct material............................................................................................
160,000
Less: Direct labor................................................................................................
600,000
Pool overhead cost..............................................................................................
$232,000
88,000 hours
Tuff Stuff (4.4 hours 20,000 units).................................................
120,000 hours
Ruff Stuff (6.0 hours 20,000 units).................................................
Total machine hours................................................................
208,000 hours
Pool rate per machine hour ($232,000/208,000)................................................
$1.12 per hour (rounded)
Hours:
Tuff Stuff..........................................................................................
1,000
Ruff Stuff..........................................................................................
272
Total setups............................................................................
1,272
Pool rate per setup ($118,000/1,272)..................................................................
$92.77 per setup (rounded)
Setup cost per unit:
Tuff Stuff ($92.77 per setup 1,000 set-ups) 20,000 units
Ruff Stuff ($92.77 per setup 272 set-ups) 20,000 units
5-11
5-12