ACCT 223 Lecture Notes - Lecture 4: Total Quality Management, Continual Improvement Process, Lean Thinking
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AirComp Corporation produces component parts for the aircraftindustry. In prior years, they maintained a job-costing systemconsisting of direct materials and direct labor cost andmanufacturing overhead. Manufacturing overhead was allocated toproduction jobs using a single-indirect cost allocation rate, whichwas $115 per direct labor hour.
For 20x1, the Company decided to change the method of allocatingmanufacturing overhead to production jobs from the single-indirectcost allocation approach to the activity-based costing (âABCâ)indirect cost allocation approach. For purposes of developing theABC allocation rates, AirCompâs cost accounting team prepared thefollowing analysis:
Activity | Cost Driver | Allocation Rate |
Material handling | Parts handled | $0.40 |
Lathe work | No. of lathe turns | $0.20 |
Milling | Machine hours | $20.00 |
Grinding | No. of parts ground | $0.80 |
Testing | No. of units tested | $15.00 |
For 20x1, AirCompâs cost accountant team prepared the followinganalysis of the direct costs and indirect cost activities for Job100 and Job 200, the only production jobs in process for theperiod:
Job 100 | Job 200 | |
Direct materials cost | $9,700 | $59,900 |
Direct labor cost | $750 | $11,250 |
No. of direct manufacturing labor hours | 25 | 375 |
No. of parts ground | 500 | 2,000 |
No. of lathe turns | 20,000 | 60,000 |
Machine hours | 150 | 1,050 |
No. of units produced during period (all are tested) | 10 | 200 |
Required
1.For each job, determine total per unit cost using direct laborhours to allocate manufacturing overhead to each job.
2.For each job, determine total per unit cost using anactivity-based costing approach to allocate manufacturing overheadcost to job.
3.Compare the per unit cost figures for each job computed instep a. and step b., above. Why do the new ABC approach differ fromthe single-indirect cost allocation systems differ in the amount ofthe per unit indirect cost allocated to each job (i.e. what was theimplications of the cost allocation method change on the amount ofper unit cost allocated to each job and what factors caused theobserved changes).
4.How might AirComp Corporation use the information from ABCallocation approach to better manage its business, i.e. what arethe advantages of using an activity-based costing approach?
Hi-Tek Manufacturing Inc. makes two types of industrial component partsâthe B300 and the T500. An absorption costing income statement for the most recent period is shown below:
Hi-Tek Manufacturing Inc. Income Statement | |||
Sales | $ | 1,761,600 | |
Cost of goods sold | 1,249,034 | ||
Gross margin | 512,566 | ||
Selling and administrative expenses | 580,000 | ||
Net operating loss | $ | (67,434) | |
Hi-Tek produced and sold 60,300 units of B300 at a price of $21 per unit and 12,700 units of T500 at a price of $39 per unit. The companyâs traditional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the companyâs two product lines is shown below:
B300 | T500 | Total | ||||||||||
Direct materials | $ | 400,500 | $ | 162,200 | $ | 562,700 | ||||||
Direct labor | $ | 120,000 | $ | 42,700 | 162,700 | |||||||
Manufacturing overhead | 523,634 | |||||||||||
Cost of goods sold | $ | 1,249,034 | ||||||||||
The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tekâs ABC implementation team concluded that $55,000 and $101,000 of the companyâs advertising expenses could be directly traced to B300 and T500, respectively. The remainder of the selling and administrative expenses was organization-sustaining in nature. The ABC team also distributed the companyâs manufacturing overhead to four activities as shown below:
Manufacturing | Activity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Activity Cost Pool (and Activity Measure) | Overhead | B300 | T500 | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Machining (machine-hours) | $ | 209,884 | 90,600 | 62,600 | 153,200 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Setups (setup hours) | 152,650 | 75 | 280 | 355 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Product-sustaining (number of products) | 100,600 | 1 | 1 | 2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other (organization-sustaining costs) | 60,500 | NA | NA | NA | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total manufacturing overhead cost | $ | 523,634 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Please answer only the Discussion Questions
Giant Bicycles (GB) produces 2 different grades of bikes.
1st â is a Multi-Purpose Bike produced in highvolumes that uses relatively few components.
2nd - is a Custom Bike, produced in lower volumes anduses more unique components.
Company strategy: Produce the multi-purpose bike in high volumesto effectively utilize capacity and the lower volume custom bike toearn higher profit margins.
Multi-purpose Bike | Custom Bike | Total | |
Units Produced | 10000 | 1000 | 11000 |
Direct Materials | $200/bike | $400/bike | |
Direct labor hours @ $20/hour | 1.6 hours/bike | 4.0 hours/bike |
Part A
Assuming the company's cost accounting system allocates totaloverhead costs based on total direct labor hours: (a) Calculate anoverhead rate per direct labor hour. (b) Calculate the full unitcost per bike for the multi-purpose bike and custom bike,respectively.
Part B
Upon further inspection, a feature of the manufacturing processis the use of state-of-the-art fabrication equipment that enablesthe company to produce bike frames. GBâs manufacturing overheadis:
Frame Fabrication Overhead | $360,000 |
Bike Assembly Overhead | 350,000 |
Total | $710,000 |
Assume the company's cost accounting system allocates framefabrication related overhead costs based on machine hours and bikeassembly overhead costs based on direct labor hours. The followingvolume mix and other data are relevant:
Multi-purpose Bike | Custom Bike | Total | |
Units Produced | 10000 | 1000 | 11000 |
Direct Materials | $200/bike | $400/bike | |
Direct labor hours @ $20/hour | 1.6 hours/bike | 4.0 hours/bike | |
Machine Hours | 0.3 hours/bike | 1.5 hours/bike |
Assuming the company's cost accounting system allocates overheadcosts based on total machine hours for fabrication overhead andtotal direct labor hours for assembly overhead: (a) Calculateoverhead rates per direct labor hour and machine hour. (b)Calculate full unit cost per bike for the multi-purpose bike andcustom bike, respectively. Comment on the difference between partsA. and B.
Part C
Subsequent analysis suggested that additional data could be usedto "activity cost" the overhead allocation. The research shows thatfabrication set-up is a required activity to configure the machine,at the beginning of a production run for each particular type ofbike. It is also noted that component handling is an identifiableactivity within bike assembly. Therefore, GBâs manufacturingoverhead is now detailed as:
Frame Fabrication Overhead: | |
Fabrication Set-up | $150000 |
Fabrication | 210000 |
Total Frame Fabrication Overhead | 360000 |
Bike Assembly Overhead: | |
Component Handling | $75000 |
Assembly | 275000 |
Total Bike Assembly Overhead | 350000 |
Total | $710000 |
The new additional activity data by biketype:
Activity Pool
Activity Volume | |||
Multi-Purpose Bike | Custom Bike | Total | |
Fabrication Set-ups | 150 | 150 | 600 |
Components handled | 120000 | 30000 | 150000 |
The remaining frame fabrication overhead costs not applicable toset-ups can be allocated, as before in Part B, using machine hours.Likewise, the bike assembly overhead costs not applicable tocomponent handling can be allocated, as before in Part B, directlabor hours.
Company's cost accounting system allocates overhead costs basedon total machine hours for fabrication overhead & total directlabor hours for assembly overhead:
a. Calculate the four activity overhead rates required fromabove.
b. Calculate full unit cost per bike for the multi-purpose bikeand custom bike, respectively.
DISCUSSION QUESTIONS
Discuss the following concepts concerning the company:
1. What are the mechanics and conceptual basis for activitybased product/service costing? and
2. How do they apply to the case? Including the Overhead CostBehavior and Activity.
3. How was Activity Costing utilized to determine product costsin this problem.