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a. Indirect manufacturing labor costs of $1,450,000 support direct mfg labor and are output unit-level costs.
Direct manufacturing labor generally increases with output units, and so will the indirect costs that support it.
For eample, more production re!uires more maintenance"oriented indirect labor.
b. Batch-level costs are costs of acti#ities that are related to a group of units rather than each indi#idual unit of a
product. $rocurement and purchase"order related costs %including costs of recei#ing materials and paying
suppliers& of $'50,000 relate to a group of units of product and are batch"le#el costs.
c. (ost of indirect materials of $)*5,000 generally changes with labor hours or machine hours which are unit"
le#el costs. +herefore, indirect material costs are output unit-level costs.
d. ,etup costs of $-.0,000 are batch-level costs because they relate to a group of units produced after the
machines are set up. ,etup costs may consist of machinery cleaning, calibration, etc., and do not directly
correlate with actual unit"le#el production.
e. (osts of designing processes, drawing process charts, /0D, and ma1ing engineering changes for indi#idual
products, $**5,000, are product-sustaining because they relate to the costs of acti#ities underta1en to support
indi#idual products regardless of the number of units or batches of the product is produced.
f. 2achine"related o#erhead costs %depreciation and maintenance& of $1,500,000 are output unit-level costs
because they change with the number of units produced.
g. $lant management, plant rent, and insurance costs of $3)5,000 are facility-sustaining costs because the costs
of these acti#ities cannot be traced to indi#idual products or ser#ices but support the organi4ation as a whole.
). +he comple boom bo made in many batches will use significantly more batch"le#el o#erhead
resources compared to the simple boom bo that is made in a few batches. In addition, the comple boom
bo will use more product"sustaining o#erhead resources because it is comple. 5ecause each boom bo
re!uires the same amount of machine"hours, both the simple and the comple boom bo will be allocated
the same amount of o#erhead costs per boom bo if 6amilton uses only machine"hours to allocate
o#erhead costs to boom boes. 7s a result, the comple boom bo will be undercosted %it consumes a
relati#ely high le#el of resources but is reported to ha#e a relati#ely low cost& and the simple boom bo
will be o#ercosted %it consumes a relati#ely low le#el of resources but is reported to ha#e a relati#ely high
cost&.
.. 8sing the cost hierarchy to calculate acti#ity"based costs can help 6amilton to identify both the costs
of indi#idual acti#ities and the cost of acti#ities demanded by indi#idual products. 6amilton can use this
information to manage its business in se#eral ways9
a. $ricing and product mi decisions. :nowing the resources needed to manufacture and sell different
types of boom boes can help 6amilton to price the different boom boes and also identify which boom
boes are more profitable. It can then emphasi4e its more profitable products.
b. 6amilton can use information about the costs of different acti#ities to impro#e processes and reduce
costs of the different acti#ities. 6amilton could ha#e a target of reducing costs of acti#ities %setups, order
processing, etc.& by, say, .; and constantly see1 to eliminate acti#ities and costs %such as engineering
changes& that its customers percei#e as not adding #alue.
c. 6amilton management can identify and e#aluate new designs to impro#e performance by analy4ing
how product and process designs affect acti#ities and costs.
d. 6amilton can use its 75( systems and cost hierarchy information to plan and manage acti#ities. <hat
acti#ities should be performed in the period and at what cost=