ACC 312 Lecture Notes - Lecture 8: Cost Driver, Abc Comedy, Facility Management
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Resource and Activity-Based CostDriversâEyeGuard Equipment Inc. (EEI) manufacturesprotective eyewear for use in commercial and home applications. Theproduct is also used by hunters, home woodworking hobbyists, and inother applications. The firm has two main product linesâthehighest-quality product is called Safe-T, and a low-cost, valueversion is called Safe-V. Information on the factory conversioncosts for EEI is as follows:
FactoryCosts | |
---|---|
Salaries | $ â 850,000 |
Supplies | 150,000 |
Factory expense | â 550,000 |
$1,550,000 |
EEI uses ABC costing to determine the unit costs of itsproducts. The firm uses resource consumption cost drivers based onrough estimates of the amount that each activity consumes, as shownbelow. EEI has four activities: job setup, assembly, inspecting andfinishing, and packaging.
Setup | Assembly | Inspecting & Finishing | Packaging | Total | |
---|---|---|---|---|---|
Salaries | 15% | 55% | 20% | 10% | 100% |
Supplies | 20 | 60â | 20â | 100 | |
Factory expense | 80â | 20â | 100 |
The activity cost drivers for the two products are summarizedbelow.
Activities | ActivityDriver |
---|---|
Setup | Batch |
Assembly | Units |
Inspect and finishing | Hours |
Packaging | Hours |
Safe-V | Safe-T | |
---|---|---|
Batches | 250 | 600 |
Units | 60,000 | 72,000 |
Finishing hours, per unit | 0.2 | 0.3 |
Packaging hours, per unit | 0.1 | 0.15 |
Materials per unit | $ 3.50 | $ 6.00 |
Required
Determine the amount of the cost pool for each of the fouractivities.
Determine the activity-based rates for assigning factory coststo the two products.
Determine the activity-based unit cost for each of theproducts.
What is the strategic role of the information obtained inrequirement 3?
The quantities of resource consumption cost drivers used werebased on rough estimates. Under what conditions would you recommendthat more accurate cost driver data be collected?
Section IV: Alternative Costing Method
Hampshire has always produced stick umbrellas. However, it isconsidering expanding its production to include collapsibleumbrellas. This consideration has been spurred by Tours Today, atouring company that is interested in providing its customers withcollapsible umbrellas imprinted with its logo. The management atHampshire is currently working out a deal with the touring companyto produce 3,000 collapsible umbrellas and believes it can sellthose umbrellas for $14.00 each. Here are the costs that can bedirectly 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 therate of $24.60 per labor hour. This expansion in production willadd additional overhead costs. The total overhead costs (assumingproduction of the stick and collapsible umbrellas) to include thecost pools and cost drivers are provided in Table 2.
An alternative costing method that might benefit Hampshire isthe implementation of activity-based costing (ABC).Hampshire would like to implement an ABC approach to analyze theproduction of this special order of collapsible umbrellas. Thecontroller 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 istime-driven activity-based costing (TDABC). You will need todetermine which of these three methods would be the best approachfor the Hampshire Company. The following article may assist you inyour analysis: Time-Driven Activity-Based Costing. Additionally,you may want to use the Shapiro Library to conduct further researchon the three methods. You will need to defend your position whenanswering the prompts for the written portion of this section.
Using the information provided above, complete the following inthe Hampshire Company Spreadsheet in order to assist you inresponding to all components of Section IV:
1.Calculate the allocation rates foreach cost driver using ABC.
2.Use the traditional costing approachto calculate the total cost and the unit cost of the stick andcollapsible umbrellas.
3.Use ABC to compute the total costsand the unit cost for the stick and collapsible umbrellas.
4.Compute the difference between theproduct cost per stick and collapsible umbrellas using the unitcost that you computed with the traditional approach and the onethat you computed using ABC.