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AFM481 Chapter Notes -Resource Consumption Accounting, Kaizen, Grenzplankostenrechnung

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orangecoyote929
6 Nov 2013
School
University of Waterloo
Department
Accounting & Financial Management
Course
AFM481
Professor
Grant Russell

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Document Summary

Chapter 7 activity-based costing (abc) and management. Ex: job costing, process costing mfg production cost is assigned to individual products in inventory and cogs, but non-mfg costs are recognized as period costs on the i/s. Non-mfg costs are allocated for some types of contractual reporting. Trace direct costs and allocate overhead costs to each indiv. product. Two-stage process: group overhead costs to cost pool(s); then allocate using allocation base (dl cost/hrs; machine hrs, # of units) Allocation base rarely reflects the flow of resources to products of diff. complexity. Fixed overhead costs are distributed equally regardless of actual time by robotic machines. Costs of complex computers (requires more assembly time/machine setups) are understated. Assign overhead costs to specific activities performed in a mfg or service delivery process. Try to trace costs more accurately to products or other cost objects. Activity is a type of task/function performed: material handling, engineering, customer support.

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Related Questions

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 $ $

1- Which of the following costs is the most likely to be allocated to a product in a traditional job costing environment?

A. Direct materials

B. Direct labor

C. Manufacturing overhead

D. Selling and administrative

2. An allocation base that causes overhead costs to be incurred is called a:

A. revenue drives.

B. predetermined driver.

C. cost driver.

D. applied driver.

3. Which of the following statements is true regarding cross-subsidies

A. they occur when factory workers are trained to work on many different machines,

B. they occur when high-volume products are assigned more than their fair share of overhead costs,

C. they occur when high-volume products have more direct material and direct labor costs than overhead costs.

D. They occur when more than one cost driver cat he determined for a particular overhead cost item.

4. Which of the following is true regarding activity-based costing (ABC)?

A. The benefits of using ABC always outweigh its limitations.

B. the lower the proportion of Overhead costs as compared to direct materials and direct labor costs, the more likely a company, will benefit by using ABC.

C. Companies with a high-proportion of non-unit -level costs should rarely use ABC.

D. High measurement costs associated with ABC may deter some companies from its use.