Jawapan MA 12th ed- Chapter 5

CHAPTER 5
ACTIVITY-BASED COSTING AND ACTIVITY-BASED MANAGEMENT

5-1

Cost smoothing or peanut-butter costing describes a costing approach that uses broad averages for assigning the cost of resources uniformly to cost objects when the individual products or services, in fact, use those resources in a nonuniform way.

One way of determining if peanut-butter costing is occurring is to separately examine how individual products (services, customers, etc.) use the resources of the organization and to compare the results with the way the accounting system represents that usage.


5-2

Overcosting may result in competitors entering a market and taking market share for products that a company erroneously believes are low-margin or even unprofitable.

Undercosting may result in companies selling products on which they are in fact losing money, when they erroneously believe them to be profitable.


5-3

Costing system refinement means making changes to an existing costing system that reduces the use of broad averages for assigning the cost of resources to cost objects and provides better measurement of the costs of overhead resources used by different cost objects.

Three guidelines for refinement are:
1. Classify as many of the total costs as direct costs as is economically feasible.
2. Expand the number of indirect cost pools until each of these pools is more homogenous.
3. Use the cause-and-effect criterion, when possible, to identify the cost-allocation base for each indirect-cost pool.


5-4

An activity-based approach refines a costing system by focusing on individual activities as the fundamental cost objects. It uses the cost of these activities as the basis for assigning costs to other cost objects such as products or services.


5-5

Four levels of a manufacturing cost hierarchy are:
(i) Output unit-level costs, costs of activities performed on each individual unit of a product or service.

(ii) Batch-level costs, costs of activities related to a group of units of products or services rather than to each individual unit of product or service.

(iii) Product-sustaining costs, or service-sustaining costs are the costs of activities undertaken, to support individual products or services regardless of the number of units or batches in which the units are produced.

(iv) Facility-sustaining costs are the cost of activities that cannot be traced to individual products or services but support the organization as a whole.


5-6

The purpose for computing a product cost will determine whether unit costs should be based on total manufacturing costs in all or only some levels of the cost hierarchy. Inventory valuation for financial reporting requires total manufacturing costs (all levels of the hierarchy) to be expressed on a per output-unit basis. In contrast, for cost management purposes, the cost hierarchy need not be unitized, as the units of output is not the cost driver at each level in the hierarchy.


5-7

An ABC approach focuses on activities as the fundamental cost objects. The costs of these activities are built up to compute the costs of products, and services, and so on. The traditional approach seeks to have one or a few indirect cost pools, irrespective of the heterogeneity in the facility. An ABC approach attempts to use cost drivers as the allocation base for indirect costs, whereas the traditional approach is less clear on this issue. The ABC approach classifies as many indirect costs as direct costs as possible. The traditional approach has more indirect costs.


5-8

Four decisions for which ABC information is useful are:
1. Pricing and product mix decisions,
2. Cost reduction and process improvement decisions,
3. Product design decisions, and
4. Planning and managing activities.


5-9

No. Department indirect-cost rates are similar to activity-cost rates if
(1) a single activity accounts for a sizable fraction of the department’s costs, or

(2) significant costs are incurred on different activities within a department but each activity has the same cost-allocation base, or

(3) significant costs are incurred on different activities with different cost-allocation bases within a department but different products use resources from the different activity areas in the same proportions.


5-10

“Tell-tale” signs that indicate when ABC systems are likely to provide the most benefits are:

1. Significant amounts of indirect costs are allocated using only one or two cost pools.

2. All or most indirect costs are identified as output-unit-level costs (i.e., few indirect costs are described as batch-level, product-sustaining, or facility-sustaining costs).

3. Products make diverse demands on resources because of differences in volume, process steps, batch size, or complexity.

4. Products that a company is well suited to make and sell show small profits, whereas products that a company is less suited to produce and sell show large profits.

5. Operations staff have significant disagreements with the accounting staff about the costs of manufacturing and marketing products and services.


5-11

The main costs and limitations of ABC are the measurements necessary to implement the systems. Even basic ABC systems require many calculations to determine costs of products and services. Activity-cost rates often need to be updated regularly. Very detailed ABC systems are costly to operate and difficult to understand. Sometimes the allocations necessary to calculate activity costs often result in activity-cost pools and quantities of cost-allocation bases being measured with error. When measurement errors are large, activity-cost information can be misleading.


5-12

No, ABC systems apply equally well to service companies such as banks, railroads, hospitals, and accounting firms, as well merchandising companies such as retailers and distributors.


5-13

No. An activity-based approach should be adopted only if its expected benefits exceed its expected costs. It is not always a wise investment. Simpler systems may suffice. If the jobs, products or services are alike in the way they consume indirect costs of a company, then a simple costing system will suffice.


5-14

Increasing the number of indirect-cost pools does NOT guarantee increased accuracy of product or service costs. If the existing cost pool is already homogeneous, increasing the number of cost pools will not increase accuracy. If the existing cost pool is not homogeneous, accuracy will increase only if the increased cost pools themselves increase in homogeneity vis-a-vis the single cost pool.


5-15

The controller faces a difficult challenge. The benefits of a better accounting system show up in improved decisions by managers. It is important that the controller have the support of these managers when seeking increased investments in accounting systems. Statements by these managers showing how their decisions will be improved by a better accounting system are the controller's best arguments when seeking increased funding. For example, the new system will result in more accurate product costs which will influence pricing and product mix decisions. The new system can also be used to reduce product costs which will lower selling prices. As a result, the customer will benefit from the new system.


5-16 ABC, cost hierarchy, service.

1.
Output unit-level costs
Direct-labor costs, $240,000
Equipment-related costs (rent, maintenance, energy, and so on), $400,000
These costs are output unit-level costs because they are incurred on each unit of materials tested, that is, for every hour of testing.

Batch-level costs
Setup costs, $350,000
These costs are batch-level costs because they are incurred each time a batch of materials is set up for either HT or ST, regardless of the number of hours for which the tests are subsequently run.

Service-sustaining costs
Costs of designing tests, $210,000.
These costs are service-sustaining costs because they are incurred to design the HT and ST tests, regardless of the number of batches tested or the number of hours of test time.

2.

*$400,000 ÷ (50,000 + 30,000) hours = $5 per test-hour
**$350,000 ÷ (13,500 + 4,000) setup hours = $20 per setup-hour
***$210,000 ÷ (2,800 + 1,400) hours = $50 per hour

At a cost per test-hour of $15, the existing costing system undercosts heat testing ($16.80) and overcosts stress testing ($12.00). The reason is that heat testing uses direct labor, setup, and design resources per hour more intensively than stress testing. Heat tests are more complex, take longer to set up, and are more difficult to design. The existing costing system assumes that testing costs per hour are the same for heat testing and stress testing.

3.
The ABC system better captures the resources needed for heat testing and stress testing because it identifies all the various activities undertaken when performing the tests and recognizes the levels of the cost hierarchy at which costs vary.

Plymouth’s management can use the information from the ABC system to make better pricing and product mix decisions. For example, it might decide to increase the prices charged for the more costly heat testing and consider reducing prices on the less costly stress testing. Plymouth should watch if competitors are underbidding Plymouth in stress testing, and causing it to lose business. Plymouth can also use ABC information to reduce costs by eliminating processes and activities that do not add value, identifying and evaluating new methods to do testing that reduce the activities needed to do the tests, reducing the costs of doing various activities, and planning and managing activities.


5-17 Alternative allocation bases for a professional services firm.

1.


2.



Both clients use 40 hours of professional labor time. However, Seattle Dominion uses a higher proportion of Wolfson's time (15 hours), which is more costly. This attracts the highest support-services charge when allocated on the basis of direct professional labor costs.

3.
Assume that the Wolfson Group uses a cause-and-effect criterion when choosing the allocation base for support services. You could use several pieces of evidence to determine whether professional labor costs or hours is the driver of support-service costs:

a. Interviews with personnel.
For example, staff in the major cost categories in support services could be interviewed to determine whether Wolfson requires more support per hour than, say, Anderson. The professional labor costs allocation base implies that an hour of Wolfson's time requires 6.25 ($500 ÷ $80) times more support-service dollars than does an hour of Anderson's time.

b. Analysis of tasks undertaken for selected clients.
For example, if computer-related costs are a sizable part of support costs, you could determine if there was a systematic relationship between the percentage involvement of professionals with high billing rates on cases and the computer resources consumed for those cases.


5-18 Plantwide, department, and ABC indirect-cost rates.

1.
Actual plantwide, variable MOH rate
= Variable manufacturing overhead ÷ Total Machine Hour
= $308,600 ÷ 4,000
= $77.15 per machine-hour

2.


3.
The conditions that would enable machine-hours to provide an accurate estimate of variable manufacturing overhead cost incurred on each individual contract are:

a. machine-hours is the sole cost driver, and there is a linear relation between variable manufacturing overhead cost and machine-hours, and

b. machine-hours used per contract can be accurately measured.

c. each automobile assembly company under contract is alike in the way they consume variable manufacturing overhead.


5-18 Department indirect-cost rates as activity rates. (continuation of 5-18).

1.


2.


3.


The three contracts differ sizably in the way they use the resources of the three departments. The percentage of total driver units in each department used by the contract companies is:


The United Motors contract uses only 3% of total machines-hours in 2004, yet uses 28% of CAD design-hours and 19% of engineering hours. The result is that the plantwide rate, based on machine-hours, will greatly underestimate the cost of resources used on the United Motors contract. Hence, the 257% increase in indirect costs assigned to the United Motors contract when department rates are used.

In contrast, the Holden Motors contract uses less of design (51%) and engineering (16%) than of machine-hours (70%). Hence, the use of department rates will report lower indirect costs for Holden Motors than does a plantwide rate.


5-19 ABC, process costing.

Rates per unit cost driver.


1.
Overhead cost per unit:


2.



5-21 ABC, retail product-line profitability.

1.
The previous costing system (Panel A of Solution Exhibit 5-24) reports the following:


2.
The ABC system (Panel B of Solution Exhibit 5-24) reports the following:


These activity costs are based on the following:


The rankings of products in terms of relative profitability are:


The percentage revenue, COGS, and activity costs for each product line are:


3.
The baked goods line drops sizably in profitability when ABC is used. Although it constitutes 31.67% of COGS, it uses a higher percentage of total resources in each activity area, especially the high cost delivery activity area. In contrast, frozen products draws a much lower percentage of total resources used in each activity area than its percentage of total COGS. Hence, under ABC, frozen products is much more profitable.

Family Supermarkets may want to explore ways to increase sales of frozen products. It may also want to explore price increases on baked goods.

Solution Exhibit 5-21
Product-Costing Overviews of Family Supermarkets
PANEL A: PREVIOUS COSTING SYSTEM


PANEL B: ABC COSTING SYSTEM



5-22 ABC, activity area cost-driver rates, product cross-subsidization.

1.

Cost per pound of potato cuts
= $1,133,000 ÷ 1,000,000
= $1.133

2.

*(900,000 ÷ 250) + (100,000 ÷ 400) = 3,600 + 250 = 3,850
**(900,000 ÷ 25) + (100,000 ÷ 100) = 36,000 + 1,000 = 37,000

3.

Note: The total costs of $1,133,000 ($1,071,000 + $62,000) are the same as those in Requirement 1.

4.
There is much evidence of product-cost cross-subsidization.


Assuming the ABC numbers are more accurate, potato cuts sold to the retail market are undercosted while potato cuts sold to the institutional market are overcosted.

The current system assumes each product uses all the activity areas in a homogeneous way. This is not the case. Institutional sales use sizably less resources in the cutting area and the packaging area. The percentage of total costs for each cost category are:


Idaho can use the revised cost information for a variety of purposes:

a. Pricing/product emphasis decisions.
The sizable drop in the reported cost of potatoes sold in the institutional market makes it possible that Idaho was overpricing potato products in this market. It lost the bid for a large institutional contract with a bid 30% above the winning bid. With its revised product cost dropping from $1.133 to $0.620, Idaho could have bid much lower and still made a profit. An increased emphasis on the institutional market appears warranted.

b. Product design decisions.
ABC provides a road map as to how to reduce the costs of individual products. The relative components of costs are:


Packaging-related costs constitute 57.1% (16.8% + 40.3%) of total costs of the retail product line. Design efforts that reduce packaging costs can have a big impact on reducing total unit costs for retail.

c. Process improvements.
Each activity area is now highlighted as a separate cost. The three indirect cost areas comprise over 60% of total costs for each product, indicating the upside from improvements in the efficiency of processes in these activity areas.


5-23 Activity-based costing, job-costing system.

1.
An overview of the activity-based job-costing system is:


2.



3.
The manufacturing manager likely would find the ABC job-costing system useful in cost management. Unlike direct manufacturing labor costs, the seven indirect cost pools are systematically linked to the activity areas at the plant. The result is more accurate product costing. Productivity measures can be developed that directly link to the management accounting system.

Marketing managers can use ABC information to price jobs as well as to advise customers about how selecting different product features will affect price.


5-24 ABC, product-costing at banks, cross-subsidization.

1.



The assumption that the Robinson and Farrel accounts exceed $1,000 every month and the Skerrett account is less than $1,000 each month means the monthly charges apply only to Skerrett.

One student with a banking background noted that in this solution 100% of the spread is attributed to the "depositor side of the bank." He noted that often the spread is divided between the "depositor side" and the "lending side" of the bank.

2.
Cross-subsidization across individual Premier Accounts occurs when profits made on some accounts are offset by losses on other accounts. The aggregate profitability on the three customers is $437.20. The Farrel account is highly profitable ($593.20), while the Robinson account is sizably unprofitable. The Skerrett account shows a small profit but only because of the $240 monthly fees. It is unlikely that Skerrett will keep paying these high fees and that FIB would want Skerret to pay such high fees from a customer relationship standpoint.

The facts also suggest that the customers do not use the bank services uniformly. For example, Robinson and Skerret have a lot of transactions with the teller or ATM, and also inquire about their account balances more often than Farrell. This suggests cross-subsidization. FIB should be very concerned about the cross-subsidization. Competition likely would "understand" that high-balance low-activity type accounts (such as Farrel) are highly profitable. Offering free services to these customers is not likely to retain these accounts if other banks offer higher interest rates. Competition likely will reduce the interest rate spread FIB can earn on the high-balance low-activity accounts they are able to retain.

3.
Possible changes FIB could make are:

a. Offer higher interest rates on high-balance accounts to increase FIB's competitiveness in attracting and retaining these accounts.

b. Introduce charges for individual services. The ABC study reports the cost of each service. FIB has to decide if it wants to price each service at cost, below cost, or above cost. If it prices above cost, it may use advertising and other means to encourage additional use of those services by customers. Of course, in determining its pricing strategy, FIB would need to consider how other competing banks are pricing their products and services.


5-25 Job costing with single direct-cost category, single indirect-cost pool, law firm.

1.
Pricing decisions at Wigan Associates are heavily influenced by reported cost numbers. Suppose Wigan is bidding against another firm for a client with a job similar to that of Widnes Coal. If the costing system overstates the costs of these jobs, Wigan may bid too high and fail to land the client. If the costing system understates the costs of these jobs, Wigan may bid low, land the client, and then lose money in handling the case.

2.



5-26 Job costing with multiple direct-cost categories, single indirect-cost pool, law firm (continuation of 5-25).

1.
Indirect costs = $7,000

Total professional labor-hours
= 104 hours on Widnes Coal + 96 hours on St. Helen’s Glass
= 200 hours

Indirect cost allocated per professional labor-hour
= $7,000 ÷ 200
= $35 per hour

2.


3.


The Problem 5-26 approach directly traces to the individual jobs $14,000 that is allocated in the Problem 5-25 approach on the basis of direct professional labor-hours. The averaging assumption implicit in the Problem 5-25 approach appears incorrect—for example, the St. Helen’s Glass job has travel costs over seven times higher than the Widnes Coal case despite having lower direct professional labor-hours.


5-27 Job costing with multiple direct-cost categories, multiple indirect-cost pools, law firm (continuation of 5-25 and 5-26).

1.



The higher the percentage of costs directly traced to each case, the more accurate the product cost of each individual case.

The Widnes and St. Helen’s cases differ in how they use “resource areas” of Wigan Associates:


The Widnes Coal case makes relatively low use of the higher-cost partners but relatively higher use of the lower-cost associates than does St. Helen’s Glass. The Widnes Coal case also makes relatively lower use of the support labor, computer time, travel, phones/faxes, and photocopying resource areas than does the St. Helen’s Glass case.

2.
The specific areas where the multiple direct/multiple indirect (MD/MI) approach can provide better information for decisions at Wigan Associates include:

Pricing and product (case) emphasis decisions.
In a bidding situation using single direct/single indirect (SD/SI) data, Wigan may win bids for legal cases on which it will subsequently lose money. It may also not win bids on which it would make money with a lower-priced bid.

From a strategic viewpoint, SD/SI exposes Wigan Associates to cherry-picking by competitors. Other law firms may focus exclusively on Widnes Coal-type cases and take sizable amounts of “profitable” business from Wigan Associates. MD/MI reduces the likelihood of Wigan Associates losing cases on which it would have made money.

Client relationships.
MD/MI provides a better “road map” for clients to understand how costs are accumulated at Wigan Associates. Wigan can use this road map when meeting with clients to plan the work to be done on a case before it commences. Clients can negotiate ways to get a lower-cost case from Wigan, given the information in MD/MI—for example,
(a) use a higher proportion of associate labor time and a lower proportion of a partner time, and (b) use fax machines more and air travel less. If clients are informed in advance how costs will be accumulated, there is less likelihood of disputes about bills submitted to them after the work is done.

Cost control.
The MD/MI approach better highlights the individual cost areas at Wigan Associates than does the SD/SI approach:


MD/MI is more likely to promote better cost-control practices than SD/SI (as the nine cost categories in MD/MI may differ in terms of how to effectively manage costs in each cost category).


5-28 Plantwide, department, and activity-cost rates.

1.
Budgeted manufacturing overhead rates:

i. Plantwide rate:
= $340,000 ÷ 20,000
= $17.00 per direct manufacturing labor-hour

ii. Departmental rates:
Department 1:
= $240,000 ÷ 10,000
= $24.00 per direct manufacturing labor-hour
Department 2:
= $100,000 ÷ 10,000
= $10.00 per direct manufacturing labor-hour

Manufacturing overhead portion of ending inventories:

i. Using plantwide overhead rate:
= 800 units x 5 hours x $17.00
= $68,000

ii. Using department overhead rates:
Product A:
= 200 x [(4 x $24.00) + (1 x $10.00)]
= $21,200
Product B:
= 600 x [(1 x $24.00) + (4 x $10.00)]
= $38,400
Total
= $21,000 + $38,400
=$59,600

The difference in inventory costs due to the different methods of allocating manufacturing overhead is $8,400 ($68,000 – $59,600).

2.


Product B


3.
Sayther Company should use budgeted department manufacturing overhead rates because:

a. The two manufacturing departments differ sizably in their overhead cost structures, despite having the same budgeted direct manufacturing labor-hours. Department 1 has $240,000 budgeted overhead, and Department 2 has $100,000 budgeted overhead.

b. The two products use resources in the two manufacturing departments quite differently. The direct manufacturing labor-hours used in each department are:


Differences a. and b. mean that more refined product costs will be calculated with budgeted department manufacturing overhead rates.

4.
Sayther should further subdivide the department cost pools into activity-cost pools if
(a) significant costs are incurred on different activities within the department,
(b) the different activities have different cost-allocation bases, and
(c) different products use the different activities in different proportions.


5-29 Plantwide versus department overhead cost rates.

1.


Plantwide overhead rate
= Budgeted plantwide overhead ÷ Budgeted DMLH
= $82,200 ÷ 4,000
= $20.55 per DMLH

2.
The department overhead cost rates are shown in Solution Exhibit 5-33

3.
MumsDay Corporation should use department rates to allocate plant overhead because:
(1) the cost drivers of resources used in each department differ and
(2) the departments do not use resources from the support departments in the same proportion.
Hence, department rates better capture cause-and-effect relationships at MumsDay than does a plantwide rate.

4.
MumsDay should further subdivide the department cost pools into activity-cost pools if
(a) significant costs are incurred on different activities within the department,
(b) the different activities have different cost drivers, and
(c) different products use different activities in different proportions.



5-31 Activity-based costing, merchandising.

1.

a($30,900 x 120); ($10,500 x 300); ($1,980 x 1,000)
b($30,000 x 120); ($10,000 x 300); ($1,800 x 1,000)

The gross margin of Pharmacare Inc. was 4.96% ($438,000 ÷ $8,838,000). The operating income margin of Pharmacare Inc. was 1.55% ($136,920 ÷ $8,838,000).

2.
The per-unit cost driver rates are:

1. Customer purchase order processing
= $80,000 ÷ 2,000 orders
= $40 per order

2. Line item ordering
= $63,840 ÷ 21,280 line items
= $ 3 per line item

3. Store delivery
= $71,000 ÷ 1,420 deliveries
= $50 per delivery

4. Cartons shipped
= $76,000 ÷ 76,000 cartons
= $ 1 per carton

5. Shelf-stocking
= $10,240 ÷ 640 hours
= $16 per hour

3.
The activity-based costing of each distribution market for August 2002 is:


The revised operating income statement is:


The ranking of the three markets are:


The activity-based analysis of costs highlights how the Mom-and-Pop Single Stores use a larger amount of Pharmacare resources per revenue dollar than do the other two markets. The ratio of the operating costs to revenues across the three markets is:

General Supermarket Chains
= $59,240 ÷ $3,708,000
= 1.60%

Drugstore Chains
= $69,240 ÷ $3,150,000
= 2.20%

Mom-and-Pop Single Stores
= $172,600 ÷ $1,980,000
= 8.72%

This is a classic illustration of the maxim that "all revenue dollars are not created equal." The analysis indicates that the Mom-and-Pop Single Stores are the least profitable market. Pharmacare should work to increase profits in this market through:
(1) a possible surcharge,
(2) decreasing the number of orders,
(3) offering discounts for quantity purchases etc.

4a.
Choosing the appropriate cost drivers for each area. The problem gives a cost driver for each chosen activity area. However, it is likely that over time further refinements in cost drivers would occur. For example, not all store deliveries are equally easy to make, depending on parking availability, accessibility of the storage/shelf space to the delivery point, etc. Similarly, not all cartons are equally easy to deliver––their weight, size, or likely breakage component are factors that can vary across carton types.

4b.
Developing a reliable data base on the chosen cost drivers. For some items, such as the number of orders and the number of line items, this information likely would be available in machine readable form at a high level of accuracy. Unless the delivery personnel have hand-held computers that they use in a systematic way, estimates of shelf-stocking time are likely to be unreliable. Advances in information technology likely will reduce problems in this area over time.

4c.
Deciding how to handle costs that may be common across several activities. For example, (3) store delivery and (4) cartons shipped to stores have the common cost of the same trip. Some organizations may treat (3) as the primary activity and attribute only incremental costs to (4). Similarly, (1) order processing and (2) line item ordering may have common costs.

4d.
Choice of the time period to compute cost rates per cost driver. Flair calculates driver rates on a monthly basis (August 2005). He may want to consider using longer time periods that may be less affected by seasonal or random variations in demand.

4e.
Behavioral factors are likely to be a challenge to Flair. He must now tell those salespeople who specialize in Mom-and-Pop Single Stores accounts that they have been less profitable than previously thought.


5-32 Activity-based costing, product-cost cross-subsidization.

The motivation for Problem 5-32 came from "ABC Minicase: Let them Eat Cake," Cost Management Update (Issue No. 31).

1.
Budgeted MOH rate in 2007
= 210,800 ÷ 200,000
= $1.054 per one-pound unit of cake


2.
ABC costs for 120,000 one-pound units of raisin cake and 80,000 one-pound units of layered carrot cake in 2004 follow:


Note that the significant shift in product mix will cause absorbed costs (based on budgeted rates and actual quantities of the cost-allocation base) to be different from the budgeted manufacturing overhead costs.

3.
The unit product costs in requirements 1 and 2 differ only in the assignment of indirect costs to individual products.

The ABC system recognizes that indirect resources used per pound of layered carrot cake is 2.76 ($2.15 ÷ $0.78) times the indirect resources used per pound of raisin cake. The existing costing system erroneously assumes equal usage of activity areas by a pound of raisin cake and a pound of layered carrot cake.

4. Uses of activity-based cost numbers include:

a. Pricing decisions.
BD can use the ABC data to decide preliminary prices for negotiating with its customers. Raisin cake is currently overcosted, while layered carrot cake is undercosted. Actual production of layered carrot cake is 100% more than budgeted. One explanation could be the underpricing of the layered carrot cake.

b. Product emphasis.
BD has more accurate information about the profitability of the products with ABC. BD can use this information for deciding which products to push (especially if there are production constraints).

c. Product design.
ABC provides a road map on how a change in product design can reduce costs. The percentage breakdown of total indirect costs for each product is:


BD can reduce the cost of either cake by reducing its usage of each activity area. For example, BD can reduce raisin cake's cost by sizably reducing its cooking time or packaging time. Similarly, a sizable reduction in creaming/icing will have a marked reduction in the costs of the layered carrot cake. Of course, BD must seek efficiency improvements without compromising quality.

d. Process improvements.
Improvements in how activity areas are configured will cause a reduction in the costs of products that use those activity areas.

e. Cost planning and flexible budgeting.
ABC provides a more refined model to forecast costs of BD and to explain why actual costs differ from budgeted costs.


5-33 ABC, health care.

1a.
Medical supplies rate
= Medical supplies costs ÷ Total no. of patient-year
= $300,000 ÷ 150
= $2,000/patient-year

Rent & clinic, maintenance rate
= Rent & clinic, maint. costs ÷ Total amount of square feet of space
= $180,000 ÷ 30,000
= $6 per square foot

Admin. cost rate for patient-charts,food&laundry
= Admin. costs to manage patient-charts, food& laundry
...÷ Total no. of patient-year
= $600,000 ÷ 150
= $4,000/patient-year

Laboratory services rate
= Laboratory services ÷ Total no. of lab. tests
= $100,000 ÷ 2,500
= $40 per test

These cost drivers are chosen as the ones that best match the descriptions of why the costs arise. Other answers are acceptable, provided clear explanations are given.

1b.
Activity-based costs for each program and cost per patient-year of the alcohol and drug program follow:

1Allocated using patient-years
2Allocated using square feet of space
3Allocated using patient-years
4Allocated using number of laboratory tests

1c.
The ABC system more accurately allocates costs because it identifies better cost drivers. The ABC system chooses cost drivers for overhead costs that have a cause-and-effect relationship between the cost drivers and the costs. Of course, Clayton should continue to evaluate if better cost drivers can be found than the ones they have identified so far.

By implementing the ABC system, Clayton can gain a more detailed understanding of costs and cost drivers. This is valuable information from a cost management perspective. The system can yield insight into the efficiencies with which various activities are performed. Clayton can then examine if redundant activities can be eliminated. Clayton can study trends and work toward improving the efficiency of the activities.

In addition, the ABC system will help Clayton determine which programs are the most costly to operate. This will be useful in making long-run decisions as to which programs to offer or emphasize. The ABC system will also assist Clayton in setting prices for the programs that more accurately reflect the costs of each program.

2.
The concern with using costs per patient-year as the rule to allocate resources among its programs is that it emphasizes “input” to the exclusion of “outputs” or effectiveness of the programs. After-all, Clayton’s goal is to cure patients while controlling costs, not minimize costs per-patient year. The problem, of course, is measuring outputs.

Unlike many manufacturing companies, where the outputs are obvious because they are tangible and measurable, the outputs of service organizations are more difficult to measure. Examples are “cured” patients as distinguished from “processed” or “discharged” patients, “educated” as distinguished from “partially educated” students, and so on.


5-34 Activity-based job costing, unit-cost comparisons.

An overview of the product-costing system is:


1.


2.


3.


Job order 410 has an increase in reported unit cost of 36.6% [($1,820 – $1,332.50) ÷ $1,332.50], while job order 411 has a decrease in reported unit cost of 4.1% [($547.75 – $571.375) ÷ $571.375].

A common finding when activity-based costing is implemented is that low-volume products have increases in their reported costs while high-volume products have decreases in their reported cost. This result is also found in requirements 1 and 2 of this problem. Costs such as materials-handling costs vary with the number of parts handled (a function of batches and complexity of products) rather than with direct manufacturing labor-hours, an output-unit level cost driver, which was the only cost driver in the previous job-costing system.

The product cost figures computed in requirements 1 and 2 differ because:
a. the job orders differ in the way they use each of five activity areas, and
b. the activity areas differ in their indirect cost allocation bases (specifically, each area does not use the direct manufacturing labor-hours indirect cost allocation base).

The following table documents how the two job orders differ in the way they use each of the five activity areas included in indirect manufacturing costs:


The differences in product cost figures might be important to Tracy Corporation for product pricing and product emphasis decisions. The activity-based accounting approach indicates that job order 410 is being undercosted while job order 411 is being overcosted. Tracy Corporation may erroneously push job order 410 and deemphasize job order 411. Moreover, by its actions, Tracy Corporation may encourage a competitor to enter the market for job order 411 and take market share away from it.

4.
Information from the ABC system can also help Tracy manage its business better in several ways.

a. Product design.
Product designers at Tracy Corporation likely will find the numbers in the activity-based costing approach more believable and credible than those in the existing system. In a machine-paced manufacturing environment, it is unlikely that direct labor-hours would be the major cost driver. Activity-based costing provides more credible signals to product designers about the ways the costs of a product can be reduced––for example, use fewer parts, require fewer turns on the lathe, and reduce the number of machine-hours in the milling area.

b. Cost management.
Tracy can reduce the cost of jobs both by making process improvements that reduce the activities that need to be done to complete jobs and by reducing the costs of doing the activities.

c. Cost planning.
ABC provides a more refined model to forecast costs and to explain why actual costs differ from budgeted costs.


5-35 ABC, implementation, ethics.

1.
Applewood Electronics should not emphasize the Regal model and phase out the Monarch model. Under activity-based costing, the Regal model has an operating income percentage of less than 3%, while the Monarch model has an operating income percentage of nearly 43%.

Cost driver rates for the various activities identified in the activity-based costing (ABC) system are as follows:

Soldering $ 942,000 ÷ 1,570,000 = $ 0.60 per solder point
Shipments 860,000 ÷ 20,000 = 43.00 per shipment
Quality control 1,240,000 ÷ 77,500 = 16.00 per inspection
Purchase orders 950,400 ÷ 190,080 = 5.00 per order
Machine power 57,600 ÷ 192,000 = 0.30 per machine-hour
Machine setups 750,000 ÷ 30,000 = 25.00 per setup




2.
Applewood’s existing costing system allocates all manufacturing overhead other than machine costs on the basis of machine-hours, an output unit-level cost driver. Consequently, the more machine-hours per unit that a product needs, the greater the manufacturing overhead allocated to it. Because Monarch uses twice the number of machine-hours per unit compared to Regal, a large amount of manufacturing overhead is allocated to Monarch.

The ABC analysis recognizes several batch-level cost drivers such as purchase orders, shipments, and setups. Regal uses these resources much more intensively than Monarch. The ABC system recognizes Regal’s use of these overhead resources. Consider, for example, purchase order costs. The existing system allocates these costs on the basis of machine-hours. As a result, each unit of Monarch is allocated twice the purchase order costs of each unit of Regal. The ABC system allocates $400,500 of purchase order costs to Monarch (equal to $18.20 ($400,500 ÷ 22,000) per unit) and $549,900 of purchase order costs to Regal (equal to $137.48 ($549,900 ÷ 4,000) per unit). Each unit of Regal uses 7.55 ($137.48 ÷ $18.20) times the purchases order costs of each unit of Monarch.

Recognizing Regal’s more intensive use of manufacturing overhead results in Regal showing a much lower profitability under the ABC system. By the same token, the ABC analysis shows that Monarch is quite profitable. The existing costing system overcosted Monarch, and so made it appear less profitable.

3.
Duvals comments about ABC implementation are valid. When designing and implementing ABC systems, managers and management accountants need to trade off the costs of the system against its benefits. Adding more activities makes the system harder to understand and more costly to implement but would probably improve the accuracy of cost information, which, in turn, would help Applewood make better decisions. Similarly, using inspection-hours and setup-hours as allocation bases would also probably lead to more accurate cost information but would increase measurement costs.

4.
Activity-based management (ABM) is the use of information from activity-based costing to make improvements in a firm. For example, a firm could revise product prices on the basis of revised cost information. For the long term, activity-based costing can assist management in making decisions regarding the viability of product lines, distribution channels, marketing strategies, etc. ABM highlights possible improvements, including reduction or elimination of non-value-added activities, selecting lower cost activities, sharing activities with other products, and eliminating waste. ABM is an integrated approach that focuses management’s attention on activities with the ultimate aim of continuous improvement. As a whole-company philosophy, ABM focuses on strategic, as well as tactical and operational activities of the company.

5.
Incorrect reporting of ABC costs with the goal of retaining both the Monarch and Regal product lines is unethical. In assessing the situation, the specific “Standards of Ethical Conduct for Management Accountants” (described in Exhibit 1-7) that the management accountant should consider are listed below.

Competence
Clear reports using relevant and reliable information should be prepared. Preparing reports on the basis of incorrect costs in order to retain product lines violates competence standards. It is unethical for Benzo to change the ABC system with the specific goal of reporting different product cost numbers that Duval favors.

Integrity
The management accountant has a responsibility to avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict. Benzo may be tempted to change the product cost numbers to please Duval, the Division President. This action, however, would violate the responsibility for integrity. The Standards of Ethical Conduct require the management accountant to communicate favorable as well as unfavorable information.

Objectivity
The management accountant’s standards of ethical conduct require that information should be fairly and objectively communicated and that all relevant information should be disclosed. From a management accountant’s standpoint, adjusting the product cost numbers to make both the Monarch and Regal lines look profitable would violate the standard of objectivity.
Benzo should indicate to Duval that the product cost calculations are, indeed, appropriate. If Duval still insists on modifying the product cost numbers, Benzo should raise the matter with one of Duval’s superiors. If, after taking all these steps, there is continued pressure to modify product cost numbers, Benzo should consider resigning from the company, rather than engage in unethical behavior.


5-36 Activity-based costing, cost hierarchy.

This solution is adapted from the CMA suggested solution.

1a.
Budgeted manufacturing overhead rate
= Budgeted manufacturing overhead ÷ Budgeted direct labor cost
= $3,000,000 ÷ $600,000
= $5 per direct labor-dollar

1b.


Budgeted selling prices per pound:
Mauna Loa ($6.00 × 1.30) = $7.80
Malaysian ($5.00 × 1.30) = $6.50

2.
The total budgeted unit costs per pound are:


The comparative cost numbers are:


The ABC system in requirement 2 reports a decreased cost for the high-volume Mauna Loa and an increased cost for the low-volume Malaysian.

3.
The traditional costing approach leads to cross-subsidization between the two products.
With the traditional approach, the high-volume Mauna Loa is overcosted, while the low-volume Malaysian is undercosted. The ABC system indicates that Mauna Loa is profitable and should be emphasized.

Pricing of Mauna Loa can be reduced to make it more competitive. In contrast, Malaysian should be priced at a much higher level if the strategy is to cover the current period’s cost. Coffee Bean may wish to have lower margins with its low-volume products in an attempt to build up volume.



Soalan yang tak ada jawapan:
5-18 (combination 2 soalan – kene tgk balik)
5-20
5-30