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AFM102 Lecture 3: AFM 102 Week 3 Chapter 3

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azurebee57
15 Jan 2017
School
University of Waterloo
Department
Accounting & Financial Management
Course
AFM102
Professor
Jie Joyce Tian

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Document Summary

Week 3 chapter 3: cost behaviour: analysis and use. Measure of whatever causes a variable cost to be incurred. Example: total cost of direct materials in a bicycle manufacturing company will increase as the number of bicycles produced increases. Therefore, the number of bicycles produced is an activity base for explaining the total cost of direct materials. Direct materials is a true or proportionately variable cost because the amount used during a period varies in direct proportion to the level of production activity. Any amounts purchased but not used can be stored and carried forward to the next period as inventory. Obtainable only in large amounts and that increases and decreases only in response to fairly wide changes in the activity level. The linearity assumption and the relevant range. Costs that show a curved relationship between cost and activity rather than a straight-line relationship.

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Related Questions

CASE 2-27 Scattergraph Analysis: Selection of an Activity Base [LO2-5] Angora Wraps of Pendleton, Oregon, makes fine sweaters out of pure angora wool. The business is seasonal, with the largest demand during the fall, the winter, and Christmas holidays. The company must increase production each summer to meet estimated demand. The company has been analyzing its costs to determine which costs are fixed and variable for planning purposes. Below are data for the company's activity and direct labor costs over the last year. Thousands of Units Produced Number of Paid Days Direct Labor Cost Month January February .. March 75 April ..... May ..... $14,162 $12,994 $15,184 $15,038 $15,768 $15,330 $13,724 $14,162 $15,476 $15,476 June ..... 102 July ....... August ... September October ............. 136 138 132 November .... December ... Na $12,972 $14,074 o The number of workdays varies from month to month due to the number of weekdays, holi- days, and days of vacation in the month. The paid days include paid vacations in July) and paid holidays (in November and December). The number of units produced in a month varies depend- ing on demand and the number of workdays in the month. The company has eight workers who are classified as direct labor. Required: 1. Plot the direct labor cost and units produced on a scattergraph. (Place cost on the vertical axis and units produced on the horizontal axis.) 2. Plot the direct labor cost and number of paid days on a scattergraph. (Place cost on the vertical axis and the number of paid days on the horizontal axis.) 3. Which measure of activity-number of units produced or paid days—should be used as the activity base for explaining direct labor cost? Explain.

Hampshire has always produced stick umbrellas. However, it is considering expanding its production to include collapsible umbrellas. This consideration has been spurred by Tours Today, a touring company that is interested in providing its customers with collapsible umbrellas imprinted with its logo. The management at Hampshire is currently working out a deal with the touring company to produce 3,000 collapsible umbrellas and believes it can sell those umbrellas for $14.00 each. Here are the costs that can be directly traced to this special order:

Direct Materials: $9,300

Direct Labor Hours: 600

Hourly Rate of Direct labor: $8.00

In the traditional costing approach, overhead is applied at the rate of $24.60 per labor hour. This expansion in production will add additional overhead costs. The total overhead costs (assuming production of the stick and collapsible umbrellas) to include the cost pools and cost drivers are provided in Table 2.

An alternative costing method that might benefit Hampshire is the implementation of activity-based costing (ABC). Hampshire would like to implement an ABC approach to analyze the production of this special order of collapsible umbrellas. The controller has assembled the following information:

Stick

Collapsible

Units Sold

60,000

3,000

Selling Price

$12.50

$14.00

Direct Material Cost per Unit

$3

$3.10

Direct Labor Cost per Hour

$7.50

$8.00

Variable Manufacturing Overhead

$0.40

$0.40

Variable Selling Costs

$1.10

$1.10

Labor Hours per Unit

0.2

0.2

Sales Orders

120

1

Purchase Orders

50

3

Production Runs

45

6

Material Moves

86

10

Machine Setups

130

6

Machine Hours

525

32

Inspections

200

10

Shipments

60

3

Table 1: Direct Cost Information and Activities

Activity

Activity Cost

Activity Cost Driver

Order Processing

$35,000

Number of Sales Orders

Purchasing

$36,000

Number of Purchase Orders

Material Handing

$28,000

Material Moves

Machine Setup

$14,000

Machine Setups

Production

$99,000

Production Runs

Assembly

$80,000

Machine Hours

Inspecting

$11,000

Number of Inspections

Shipping

$7,500

Number of Shipments

Table 2: Activity Cost Pools and Cost Drivers

Another alternative to traditional costing and ABC is time-driven activity-based costing (TDABC). You will need to determine which of these three methods would be the best approach for the Hampshire Company. The following article may assist you in your analysis: Time-Driven Activity-Based Costing. Additionally, you may want to use the Shapiro Library to conduct further research on the three methods. You will need to defend your position when answering the prompts for the written portion of this section.

Using the information provided above, complete the following in the Hampshire Company Spreadsheet in order to assist you in responding to all components of Section IV:

1.Calculate the allocation rates for each cost driver using ABC.

2.Use the traditional costing approach to calculate the total cost and the unit cost of the stick and collapsible umbrellas.

3.Use ABC to compute the total costs and the unit cost for the stick and collapsible umbrellas.

4.Compute the difference between the product cost per stick and collapsible umbrellas using the unit cost that you computed with the traditional approach and the one that you computed using ABC.

Requirement 1
Activity Total Costs Quantity of Cost Allocation Base Overhead Allocation Rate
Order Processing $ X $
Purchasing $ X $
Material Handing $ X $
Machine Setup $ X $
Production $ X $
Assembly $ X $
Inspecting $ X $
Shipping $ X $
Requirement 2
Traditional Costing
Stick Umbrella Collapsible Umbrella Total
Revenues $ $ $
Direct Materials $ $ $
Direct Labor $ $ $
Variable Overhead $ $ $
Variable Selling Costs $ $ $
Allocated Fixed Overhead $ $ $
Total Costs $ $ $
Operating Income $ $ $
Operating Income % % %
Per Unit Operating Income $ $
Requirement 3
Activity-Based Costing
Stick Umbrella Collapsible Umbrella Total
Revenues $ $ $
Direct Materials $ $ $
Direct Labor $ $ $
Variable Overhead $ $ $
Variable Selling Costs $ $ $
Order Processing Costs $ $ $
Purchasing Costs $ $ $
Material Handing Costs $ $ $
Machine Setup Costs $ $ $
Production Costs $ $ $
Assembly Costs $ $ $
Inspecting Costs $ $ $
Shipping Costs $ $ $
Total Costs $ $ $
Operating Income $ $ $
Operating Income % % %
Per Unit Operating Income $ $
Requirement 4
Costs per Unit Stick Umbrella Collapsible Umbrella
Traditional $ $
ABC $ $
Difference $ $
Requirement 5

Hampshire has always produced stick umbrellas. However, it is considering expanding its production to include collapsible umbrellas. This consideration has been spurred by Tours Today, a touring company that is interested in providing its customers with collapsible umbrellas imprinted with its logo. The management at Hampshire is currently working out a deal with the touring company to produce 3,000 collapsible umbrellas and believes it can sell those umbrellas for $14.00 each. Here are the costs that can be directly traced to this special order:

Direct Materials: $9,300

Direct Labor Hours: 600

Hourly Rate of Direct labor: $8.00

In the traditional costing approach, overhead is applied at the rate of $24.60 per labor hour. This expansion in production will add additional overhead costs. The total overhead costs (assuming production of the stick and collapsible umbrellas) to include the cost pools and cost drivers are provided in Table 2.

An alternative costing method that might benefit Hampshire is the implementation of activity-based costing (ABC). Hampshire would like to implement an ABC approach to analyze the production of this special order of collapsible umbrellas. The controller has assembled the following information:

Stick

Collapsible

Units Sold

60,000

3,000

Selling Price

$12.50

$14.00

Direct Material Cost per Unit

$3

$3.10

Direct Labor Cost per Hour

$7.50

$8.00

Variable Manufacturing Overhead

$0.40

$0.40

Variable Selling Costs

$1.10

$1.10

Labor Hours per Unit

0.2

0.2

Sales Orders

120

1

Purchase Orders

50

3

Production Runs

45

6

Material Moves

86

10

Machine Setups

130

6

Machine Hours

525

32

Inspections

200

10

Shipments

60

3

Table 1: Direct Cost Information and Activities

Activity

Activity Cost

Activity Cost Driver

Order Processing

$35,000

Number of Sales Orders

Purchasing

$36,000

Number of Purchase Orders

Material Handing

$28,000

Material Moves

Machine Setup

$14,000

Machine Setups

Production

$99,000

Production Runs

Assembly

$80,000

Machine Hours

Inspecting

$11,000

Number of Inspections

Shipping

$7,500

Number of Shipments

Table 2: Activity Cost Pools and Cost Drivers

Another alternative to traditional costing and ABC is time-driven activity-based costing (TDABC). You will need to determine which of these three methods would be the best approach for the Hampshire Company. The following article may assist you in your analysis: Time-Driven Activity-Based Costing. Additionally, you may want to use the Shapiro Library to conduct further research on the three methods. You will need to defend your position when answering the prompts for the written portion of this section.

Using the information provided above, complete the following in the Hampshire Company Spreadsheet in order to assist you in responding to all components of Section IV:

1.Calculate the allocation rates for each cost driver using ABC.

2.Use the traditional costing approach to calculate the total cost and the unit cost of the stick and collapsible umbrellas.

3.Use ABC to compute the total costs and the unit cost for the stick and collapsible umbrellas.

4.Compute the difference between the product cost per stick and collapsible umbrellas using the unit cost that you computed with the traditional approach and the one that you computed using ABC.

Requirement 1
Activity Total Costs Quantity of Cost Allocation Base Overhead Allocation Rate
Order Processing $ X $
Purchasing $ X $
Material Handing $ X $
Machine Setup $ X $
Production $ X $
Assembly $ X $
Inspecting $ X $
Shipping $ X $
Requirement 2
Traditional Costing
Stick Umbrella Collapsible Umbrella Total
Revenues $ $ $
Direct Materials $ $ $
Direct Labor $ $ $
Variable Overhead $ $ $
Variable Selling Costs $ $ $
Allocated Fixed Overhead $ $ $
Total Costs $ $ $
Operating Income $ $ $
Operating Income % % %
Per Unit Operating Income $ $
Requirement 3
Activity-Based Costing
Stick Umbrella Collapsible Umbrella Total
Revenues $ $ $
Direct Materials $ $ $
Direct Labor $ $ $
Variable Overhead $ $ $
Variable Selling Costs $ $ $
Order Processing Costs $ $ $
Purchasing Costs $ $ $
Material Handing Costs $ $ $
Machine Setup Costs $ $ $
Production Costs $ $ $
Assembly Costs $ $ $
Inspecting Costs $ $ $
Shipping Costs $ $ $
Total Costs $ $ $
Operating Income $ $ $
Operating Income % % %
Per Unit Operating Income $ $
Requirement 4
Costs per Unit Stick Umbrella Collapsible Umbrella
Traditional $ $
ABC $ $
Difference $ $