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1.
Direct materials
Forming
Assembly
Total
Direct manufacturing labor
Forming
Assembly
Total
Total direct costs
Budgeted
overhead rate
Trophies
Plaques
$26,000
5,200
31,200
$22,500
18,750
41,250
31,200
15,600
46,800
$78,000
18,000
21,000
39,000
$80,250
Total
$158,250
$158, 250
$158, 250
=
Direct materials
Direct labor
Total direct cost
Allocated overhead*
Total costs
Trophies
Plaques
Total
$ 31,200
46,800
78,000
55,544
$133,544
$ 41,250
39,000
80,250
57,148
$137,398
$ 72,450
85,800
158,250
112,692
$270,942
$0.712114
per dollar of direct cost
2.
Budgeted
overhead rate
Forming Dept.
=
Budgeted
overhead rate
Assembly Dept.
$49, 200
$60,550
Direct materials
Direct labor
Total direct cost
Allocated overhead
Forming Dept.a
Assembly Dept.b
Total costs
Trophies
$ 31,200
46,800
78,000
Plaques
$ 41,250
39,000
80,250
Total
$ 72,450
85,800
158,250
28,392
23,332
$129,724
16,380
44,588
$141,218
44,772
67,920
$270,942
Trophies
Plaques
Total
$31,200
$18,000
$49,200
$28,392
$16,380
$44,772
$20,800
$39,750
$60,550
$11,666
$22,294
$33,960
Forming Dept.
Direct manufacturing labor costs
Allocated overhead
(0.91 $31,200; $18,000)
b
Assembly Dept.
Total direct costs
($5,200 + $15,600; $18,750 + $21,000)
Allocated overhead
(1.121718 $20,800; $39,750)
3.
Forming Department
Budgeted setup rate
$24, 000
156 batches
Assembly Department
$20, 772
$49, 200
$46, 000
146 batches
$21,920
$36, 600
Plaques
Total
$ 31,200
46,800
78,000
$ 41,250
39,000
80,250
$ 72,450
85,800
158,250
6,154
17,846
24,000
13,172
7,600
20,772
13,548
32,452
46,000
9,343
12,577
21,920
$120,217
$150,725
$270,942
4.
As Triumph uses more refined cost pools, the costs of trophies decreases, and costs of
plaques increases. This is because plaques use a higher proportion of cost drivers (batches of
set ups and direct manufacturing labor costs) than trophies, whereas the direct costs (the
allocation base used in the simple costing system) are slightly smaller for plaques compared
to trophies. This results in plaques being undercosted and trophies overcosted in the simple
costing system.
Department costing systems increase the costs of plaques relative to trophies because
the forming department costs are allocated based on direct manufacturing labor costs in the
forming department and plaques use more direct manufacturing labor in this department
compared to trophies.
Disaggregated information can improve decisions by allowing managers to see the
details that help them understand how different aspects of cost influence total cost per unit.
Managers can also understand the drivers of different cost categories and use this information
for pricing and product-mix decisions, cost reduction and process-improvement decisions,
design decisions, and to plan and manage activities. However, too much detail can overload
managers who dont understand the data or what it means. Also, managers looking at perunit data may be misled when considering costs that arent unit-level costs.
5-24
Interior
$192,000
153,600
Exterior
$162,000
129,600
281,380
230,220
Total costs
$626,980
$521,820
$ 195.93
$ 289.90
2.
Activity
(1)
Product scheduling
Material handling
Machine setup
Assembly
Inspection
Marketing
c
40 + 85 = 125;
Cost Driver
Quantity
(4)
production runs
125c
material moves
240d
machine setups
200e
machine hours
10,000
inspections
400f
Percentage of
revenues
72 + 168 = 240; e 45 + 155 = 200; f 250 + 150 = 400
$190,000
$ 90,000
$ 50,000
$120,000
$ 16,000
Cost Driver
(3)
Allocation Rate
(5) = (2) (4)
$1,520.00
$ 375.00
$ 250.00
$ 12.00
$ 40.00
$
0.03
ABC System
Direct materials
Direct manufacturing labor
Indirect costs allocated:
Product scheduling ($1,520 per run
40; 85)
$250
3,200; 0.03
$400
1,800)
Interior
$192,000
153,600
Exterior
$162,000
129,600
60,800
129,200
27,000
63,000
11,250
66,000
10,000
38,750
54,000
6,000
24,000
$544,650
21,600
$604,150
$ 170.20
$ 335.64
3.
Cost per unit
Simple Costing System
Activity-based Costing System
Difference (Simple ABC)
Interior
$195.93
$170.20
$ 25.73
Exterior
$289.90
$335.64
$ (45.74)
Relative to the ABC system, the simple costing system overcosts interior doors and undercosts
exterior doors. Interior doors require 1.72 machine-hours per unit while exterior doors require
2.5 machine-hours per unit. In the simple-costing system, overhead costs are allocated to the
interior and exterior doors on the basis of the machine-hours used by each type of door. The ABC
study reveals that the ratio of the cost of production runs, material moves, and setups for each
exterior door versus each interior door is even higher than the ratio of 2.5 to 1.72 machine-hours
for each exterior relative to each interior door. This higher ratio results in higher indirect costs
allocated to exterior doors relative to interior doors in the ABC system.
4.
Fancy Doors, Inc. can use the information revealed by the ABC system to change its
pricing based on the ABC costs. Under the simple system, Fancy Doors was making an operating
operating margin of about 32% ([$250 $170.20] $250) on each interior door and about 16%
([$400 $335.64] $400) on each exterior door. Fancy Doors, Inc., should consider decreasing
the price of its interior doors to be more competitive. Fancy Doors should also consider
increasing the price of its exterior doors, depending on the competition it faces in this market.
Fancy Doors can also use the ABC information to improve its own operations. It could
examine each of the indirect cost categories and analyze whether it would be possible to deliver
the same level of service, but consume fewer indirect resources, or find a way to reduce the perunit-cost-driver cost of some of those indirect resources. Making these operational improvements
can help Fancy Doors to reduce costs, become more competitive, and reduce prices to gain
further market share while increasing its profits.
5-33
1.
Wages and salaries
Depreciation
Rent
Other overhead
Total
Direct Manuf.
Labor Support
$192,000
15,000
36,000
48,000
$291,000
Order
Processing
$120,000
6,000
30,000
72,000
$228,000
Cost
$291,000
$228,000
$249,000
$132,000
Design
Support
$144,000
9,000
12,000
84,000
$249,000
Other
$ 24,000
30,000
42,000
36,000
$132,000
Allocation Base
30,000 DMLHs
500 orders
100 custom designs
30,000 DMLHs
2.
Direct materials
Direct manuf. labor (80 hrs. $20/hr.)
Direct manuf. labor support (80 dir. manuf. lbr-hrs. $9.70/hr.)
Order processing (1 order $456/order)
Design support (1 custom design $2,490/custom design)
Other overhead (80 dir. manuf. lbr-hrs. $4.40/hr.)
Total overhead costs
Total
$480,000
60,000
120,000
240,000
$900,000
Allocation Rate
$9.70/DMLH
$456/order
$2,490/custom design
$4.40/DMLH
$ 4,550
1,600
776
456
2,490
352
$10,224
3. Because only about 20% of the orders that Thurgood receives require custom designs, it is
important that the costs generated by custom designs are not allocated to non-custom orders.
Activity-based costing allows Thurgood to only assign resources used by orders to the orders.
Similarly, order processing costs of $456/order are assigned to each order, regardless of the size
of the order. Activity-based costing leads to more accurate costing of orders. This, in turn, leads
to more competitive pricing. If Thurgood allocated all overhead costs to orders on the basis of
direct manufacturing labor hours, they would tend to overprice larger, non-custom orders and
underprice smaller, custom orders. They would likely lose bids on the overpriced orders and win
the underpriced orders, but then lose money on the bids they won because the actual costs would
be much greater than the estimated costs. The underpriced bids have small direct manufacturing
labor hours relative to the resources needed to support custom designs and order processing costs
for small orders.