Question : ESSAY. Write your answer in the space provided or a separate : 1196243

 

ESSAY.

Write your answer in the space provided or on a separate sheet of paper. 86) Hans Sorensen, controller of Franklin Production, has the choice of allocating indirect manufacturing cost using either direct manufacturing labour hours or manufacturing machine hours. If he uses labour hours for the month of January, Product A receives $312,000 in manufacturing overhead charges and Product B receives $448,000. When machine hours are used Product A receives $352,000 in manufacturing overhead charges while Product B receives only $408,000.

Required:

You are the department manager in charge of Product A and are strongly in favour of using labour hours. Of course, your co-manager, who is in charge of Product B, is strongly in favour of machine hours. What are some arguments you may be able to give for the allocation base that favours your department’s product?

87) How are cost drivers selected in activity-based costing systems?

 

88) In the monthly management meeting, each manager was asked to come up with suggestions for controlling costs.

Some managers favoured a simple across-the-board cut in expenditures, with every department accepting the same percentage reduction in their budget.

This was supported by several managers as the fairest means to save costs.

Your assistant attended the meeting in your absence and suggested that the company consider switching to activity-based costing.

Unfortunately, the more he explained, the less support he received, particularly when he mentioned that more information would have to be collected, there would be implementation costs, and that what really mattered were nonfinancial variables, called activities.

The meeting ended with everyone wondering how such an idea could lead to cost savings.

Required:

Explain how an ABC system should be able to save money, even though it focuses on activities, rather than just costs.

Compare your assistant’s suggestion to an across-the-board cut as a means to save money.

89) Explain how a top-selling product may actually result in losses for the company.

 

 

90) The new manager of the insurance division does not understand how the company can have so many overhead rates for assigning costs to the activities of the company’s life insurance underwriters. There is one rate schedule for average assignable costs when agents write standard policies. There is another rate schedule which the agents must complete when they write special policies, and these policies are costed out differently from those that are categorized as standard policies.

 

Required:

 

a.Why might the company have different costing systems with different overhead rates for the standard and specialized policies?

b.Which rate (standard or specialized) would cross subsidize the other if the company used only one set of overhead rates for costing its policies?

91) How are cost drivers selected in activity-based costing systems?

1) FALSE 2) TRUE 3) TRUE 4) TRUE 5) FALSE 6) FALSE 7) FALSE 8) TRUE 9) FALSE 10) TRUE 11) FALSE 12) FALSE 13) TRUE 14) FALSE 15) FALSE 16) TRUE 17) TRUE 18) TRUE 19) TRUE 20) FALSE 21) E 22) D 23) A 24) B 25) B 26) E 27) C 28) A 29) A 30) A 31) A 32) A 33) C 34) A 35) E 36) B 37) B 38) A 39) E 40) B 41) B 42) A 43) D 44) E 45) C 46) A 47) B 48) C 49) B 50) D 51) C 52) C 53) D 54) A 55) C 56) D 57) A 58) B 59) B 60) A 61) B 62) D 63) A 64) A 65) A 66) D 67) E 68) D 69) A 70) A 71) a.              Total rate basis:

Critical careSpecial care

Sr RN1,600 x $150 = $ 240,0001,000 x $150 =$150,000

RN4,000 x 135 = 540,0002,600 x 135 = 351,000

Sr PN 2,000 x 120 = 240,0001,400 x 120 = 168,000

PN400 x 100 =40,0001,000 x 100 = 100,000

Aid0 x 80 =00 x 80 = 0

Totals $1,060,000$769,000

 

Weighted avg. $1,060,000/8,000$769,000/6,000

= $132.50= $128.17

Overhead other 110.00

100.00

Total rate

$242.50$228.17

 

General care

Sr. RN1,600 x $150 =$ 240,000

RN 2,000 x 135 =270,000

Sr PN 5,200 x 120 =624,000

PN 4,400 x 100 =440,000

Aid 1,800 x 80 =144,000

Total$1,718,000

 

Weighted avg. $1,718,000/15,000 = $114.53

Overhead other 90.00

Total rate$204.53

 

Hazel Jones:

Critical care $242.50 x 5 days = $1,212.50

Special care $228.17 x 4 days =912.68

General care $204.53 x 21 days = 4,295.13

Total charges$6,420.31

 

b.Hazel Jones:

Critical care $110 x 5 days = $ 550

Special care $100 x 4 days =400

General care $ 90 x 21 days = 1,890

Sr. RN

 

$150 x 2 day =300

RN

$135 x 6 days =810

PN

$100 x 10 days = 1,000

Nurse’s aid $ 80 x 12 days =960

Total

charges$

5,910 72) Average direct costs = ($320 + $40 + $88 + $32)/4 = $120 per client

Average indirect costs = $224/4 = $56 per client

Average total costs = $120 + $56 = $176 per client 73) a.Output unit-level: material handling, material purchase costs, energy costs

Batch-level: none

Product-sustaining: new product development

Facility-sustaining: plant supervision and safety costs

 

b.Material handling $ 433,500

Material purchase costs 2,213,000

Energy costs171,500

Total output-level costs $2,818,000

$2,818,000/10,000,000 = $0.2818

ii. Output unit-level costs$2,818,000

Product sustaining costs614,000

Faculty sustaining costs623,000

Total costs$4,055,000

$4,055,000/10,000,000 = $0.4055 74) a.Output unit-level: material handling, material purchase costs, energy costs

Batch-level: none

Product-sustaining: new product development

Facility-sustaining: plant supervision and safety costs

 

b.

i. Material handling$ 216,750

Material purchase costs1,106,500

Energy costs85,750

Total output-level costs$1,409,000

$1,409,000/5,000,000 =$0.2818

 

ii. Output-level costs$1,409,000

Product sustaining costs

 

307,000

Faculty sustaining costs

 

 311,500

Total costs

 

 

$2,027,500

$2,027,500/5,000,000 = $0.4055 75) You cannot choose an allocation base until you have collected sufficient information.

It is possible that the training costs should just be split evenly between the three shift manager’s budgets, but some analysis is required to determine if a cause-and-effect relationship can be identified, or if the costs may be treated as facility-sustaining cost and simply deducted from income. 76) (a) 77) (a) 78) a.              Traditional method:             

46 hours x $28 = $1,288 per batch

or $1,288/200 = 6.44 per unit

 

b.Activity base method:

Material handling ($2.60 x 220)$572

Machine stamping ($60 x 8)

480

Finishing ($4 x 52)

208

Batch total$1,260

 

Unit costs $1,260/200 = $6.30 per unit 79)               Trinkets              Widgets

Direct manufacturing costs:

Direct labour$12,000$12,000

Direct materials

5,200

2,600

Total direct costs17,20014,600

 

Indirect manufacturing costs:

 

Material handling ($1.00 x 2,000) =2,000($1.00 x 1,300) =1,300

Machining($15.00 x 205) =3,075($15.00 x 300) =4,500

Assembly ($1.60 x 1,000) =1,600($1.60 x 1,300) =2,080

Inspection ($2.00 x 100) =200($2.00 x 1,200) =2,400

Total indirect costs6,87510,280

Total manufacturing costs $24,075$24,880

Unit manufacturing costs

 

 $24,075$24,880

÷ 1,000

÷ 1,300

= $24.075= 19.138 80) a.[$80,000 / (650 + 150)] x 650 = $65,000

 

b.[$80,000 / (650 + 150)] x 150 = $15,000

 

c.Setups: $20,000 / (3 + 7) = $2,000

Components: $60,000 / (30 + 50) = $750

($2,000 x 3) + ($750 x 30) = $28,500

 

d.($2,000 x 7) + ($750 x 50) = $51,500

 

e.Because the products do not all require the same proportionate shares of the overhead resources of setup hours and components, the ABC system provides different results than the traditional system which allocates overhead costs on the basis of direct labor hours.

The ABC system considers some important differences in overhead resource requirements and thus provides a better picture of the costs from each grooming table style, provided that the activity measures are fairly estimated.

 81) System A has the indications of a refined cost system using activity-based costing.

Indications are; greater number of direct cost categories (direct-cost tracing), greater number of indirect-cost pools (homogeneous cost pools with allocation bases having a strong cause-and-effect relationship are easier to establish when the number of pools increases).

The fact that more of the costs are categorized as direct also suggests that the cost system has been refined. 82) a.              Traditional system:

 

Operating profit per unit for Brass faucets is $5 = $40 — ($8 + 15 + 12).

 

b.The activity-cost-driver rate for setup costs is $4,900 per setup hour = $465,500/95,

and for inspection costs is $150 per inspection hour = $405,000/2700.

 

c.ABC system:

Overhead costs per unit for Brass faucets are $9.40 per unit.

30,000 units in projected sales / 1000 units per batch = 30 batches;

30 batches x 1 setup hour per batch = 30 setup hours;

30 batches x 30 inspection hours per batch = 900 inspection hours.

 

30 setup hours x $4,900 = $147,000/30,000 units = $4.90/unit

900 inspection hours x $150 = $135,000/30,000 units = $4.50/unit

Overhead costs for Brass faucets ($4.90 + $4.50) = $9.40 per unit.

 

Operating profit per unit for Brass faucets is $7.60 = $40 — ($8 + 15 +9.40).

 

d.Traditional system:Operating profit per unit for Brass faucets is $5.00.

ABC system:Operating profit per unit for Brass faucets is $7.60.

 

Because the products do not all require the same proportionate shares of the support resources of setup hours and inspection hours, the ABC system provides different results than the traditional system which allocates overhead costs on the basis of direct labor hours.

The ABC system considers some important differences in overhead resource requirements and thus provides a better picture of the profitability from each faucet style provided that the activity measures are fairly estimated.

 

 83) :

Any one of the listed cost drivers is correct.

 

Activity

 

 

 

A.

Machine

 

 

 

Maintenance

# of machines

Machine hours

Actual times for various maintenances of various machines

B.

Machine Setup

# of setups

Setup hours

Actual times for various

setups for various machines

C.

Quality Control

# of inspections

Inspection hours

Actual times for various inspections for various controls

D.

Material

 

 

 

Ordering

# of orders

Ordering hours

Actual times for various

orders for various materials

E.

Production

 

 

Scheduling

# of runs

Scheduling hours

Actual times for various

runs for various schedules

F.

Warehousing

# of bins, aisles

Picking hours

Actual times for various

parts for various

warehousing activities

G.

Engineering

 

 

 

Design

# of engineers

 

 

 

 

# of designs

Engineering hours

Actual times for various engineering designs

 84) a.Traditional system:

Operating profit per unit for Brass faucets is$5 = $40 — ($8 + $15 + $12)

Operating profit per unit for Chrome faucets is$10 = $20 — ($4 + $3 + $3)

Operating profit per unit for White faucets is$4 = $30 — ($8 + $9 + $9)

 

b.The activity-cost-driver rate for setup costs is $4,900 per setup hour = $465,500/95,

and for inspection costs is $150 per inspection hour = $405,000/2,700.

 

c.ABC system:

Overhead costs per unit for Brass faucets are $9.40 per unit.

30,000 units in projected sales / 1,000 units per batch = 30 batches;

30 batches x 1 setup hour per batch = 30 setup hours;

30 batches x 30 inspection hours per batch = 900 inspection hours

 

30 setup hours x $4,900 = $147,000/30,000 units = $4.90/unit

900 inspection hours x $150 = $135,000/30,000 units = $4.50/unit

Overhead costs for Brass faucets ($4.90 + $4.50) = $9.40 per unit

 

Operating profit per unit for Brass faucets is $7.60 = $40 — ($8 + $15 + $9.40).

 

Overhead costs per unit for Chrome faucets are $5.45 per unit.

50,000 units in projected sales / 1,000 units per batch = 50 batches;

50 batches x .5 setup hour per batch = 25 setup hours;

50 batches x 20 inspection hours per batch = 1,000 inspection hours

 

25 setup hours x $4,900 = $122,500/50,000 units = $2.45/unit

1,000 inspection hours x $150 = $150,000/50,000 units = $3.00/unit

Overhead costs for Chrome faucets ($2.45 + $3.00) = $5.45 per unit

 

Operating profit per unit for Chrome faucets is $7.55 = $20 — ($4 + $3 + $5.45).

 

Overhead costs per unit for White faucets are $7.90 per unit.

40,000 units in projected sales/ 1,000 units per batch = 40 batches;

40 batches x 1 setup hour per batch = 40 setup hours;

40 batches x 20 inspection hours per batch = 800 inspection hours

 

40 setup hours x $4,900 = $196,000/40,000 units = $4.90/unit

800 inspection hours x $150 = $120,000/40,000 units = $3.00/unit

Overhead costs for white faucets ($4.90 + $3.00) = $7.90 per unit.

 

Operating profit per unit for White faucets is $5.10 = $30 — ($8 + $9 + $7.90).

 

85) a.Currently estimated deluxe-entry door total cost per unit is $260 = $180 + $80.

Currently estimated standard-entry door total cost per unit is $250 = $130 + $120.

 

Currently estimated deluxe-entry door profit per unit is $390 = $650 — $260.

Currently estimated standard-entry door profit per unit is $225 = $475 — $250.

 

b.Support manufacturing costs are currently allocated based on direct labor dollars. Because the deluxe doors are manufactured using the new robotics system, it appears that less direct labor is needed to manufacture each unit in the deluxe product line.

 

c.The high machine-related costs are probably a result of purchasing the new robotics equipment for the deluxe product line. Yes, the total number of machine hours is the same for each product line, but the deluxe line uses 6 machine hours per unit (300,000 mh / 50,000 units), while the standard product line only uses 0.75 machine hours per unit (300,000 mh / 400,000 units). By evaluating machine hours per unit rather than total machine hours, these numbers make more sense.

 

d1.Manufacturing overhead cost driver rates:

Setup activity is $1,000/setup = $500,000/500 setups.

Machine-related activity is $73.33/machine hour = $44,000,000/600,000 machine hours.

Packing activity is $20/shipment = $5,000,000/250,000 shipments.

 

d2.Revised overhead costs per unit:

Deluxe-entry door is $468 per unit = [($1,000 x 400) + ($73.33 x 300,000) + ($20 x 50,000)] / 50,000 units.

Standard-entry door is $65.25 per unit = [($1,000 x 100) + ($73.33 x 300,000) + ($20 x 200,000)] / 400,000 units.

 

d3.Revised total cost per unit for the deluxe-entry door is $648.00 = $180.00 + $468.00.

Revised total cost per unit for the standard-entry door is $195.25 = $130.00 + $65.25.

 

e.No, the deluxe door is not as profitable as originally estimated because the deluxe door requires a disproportionate share of the overhead activities (the robotics system) and thus, more of the overhead costs are assigned to the deluxe door when using an ABC system.

Revised profit per unit for the deluxe-entry door is $2.00 = $650.00 — $648.00.

Revised profit per unit for the standard-entry door is $279.75 = $475.00 —$195.25.

Currently estimated deluxe-entry door profit per unit is $390 = $650 — $260.

Currently estimated standard-entry door profit per unit is $225 = $475 — $250.

86) Arguments that may be favourable to your department include:

 

1.Direct manufacturing labour is a better measure of indirect manufacturing costs than is manufacturing machine hours. The machines often run when no products are being processed through them.

2.Labour hours reflect a stronger cause and effect relationship to what is being done to the products than do machine hours. The manufacturing process is labour intensive rather than machine-processing intensive.

3.Labour hours are easier to collect than machine hours because the information can be taken directly from the payroll information.

4.Most of the manufacturing overhead items relate to the labourers rather than to the machines; for example, lighting is for people?machines can work in the dark. 87)               First, indirect costs are divided into homogeneous cost pools and classified as output unit-level, batch-level, product-sustaining (service sustaining), or facility-sustaining costs. The cost pools correspond to activities. Costs are allocated to products, services, or customers using activity drivers or cost-allocation bases that have a cause-and-effect relationship with each cost pool.

Choices about how to economize on the number of activity-cost drivers, how to isolate events (because activities triggered by the same event often can use the same activity cost driver), and which cost drivers to select are influenced by the fact that the benefit of obtaining cost driver information needs to exceed implementation costs.

88) An across the board cut is a temporary savings at best, and does nothing to address any costs that may be excessive.

It provides neither information nor analysis as to the root causes of costs, which is the best means of cost reduction.

Simply cutting all costs will very likely have a negative impact on all of the functional areas of the company, purchasing, administration, production, marketing and so on.

An ABC system will enable the company to identify activities which can be controlled, and areas where miscosting has occurred due to a lack of information.

An ABC system should accomplish more than just reducing costs.

Identifying activities provides more flexibility in that the company can control costs by controlling activities than simply limiting expenditures without any reasoning, and support activity-based management, which uses activity-based costing information to improve operations, provide better customer service, and generate profits.

Lastly, while there are costs to implementing an ABC system, it should only be done on a cost and benefit basis. 89)               If indirect costs are not properly allocated to the products, a product may appear to cost less than it actually does cost to produce. If the selling price is based on these lower costs, the selling price may actually be lower than the costs needed to produce the product resulting in losses for the company.

90) a.Because the standard policies are written the same way each time, the company knows how long it takes to complete such a policy and the average effort expended by the agents in doing standard policy work. Special policies, on the other hand, are different and the amount of effort and time to complete such a policy is difficult to standardize. The agents are thus required to keep track of their time and expenses in completing such policies.

 

b.The standard policy rates would probably cross-subsidize the special policy rates because the average assignable costs would probably be greater than the real cost of the standard policies. For example, if the actual cost to write a standard policy was $100 and the assignable rate was $125, the standard policies would be subsidizing the special policies by $25 every time a standard policy was written. 91)               The four parts of the cost hierarchy are output unit-level costs, batch-level costs, product (or service) sustaining costs, and facility sustaining costs.

Output unit-level costs are costs of activities performed on each individual unit of a product or service.

Batch-level costs are the costs of activities related to a group of units of products or services rather than to each individual unit of product or service.

Product (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 products are produced.

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

When compared to the fixed-variable dichotomy, which considers only units of output as a cost driver, the four part cost hierarchy provides opportunity to model many different cost drivers.

For example, batch-level costs and product (or service) sustaining costs are driven by the number of batches of a product and the number of different products.

Neither of these class of cost drivers are able to be considered in a simple fixed-variable dichotomy.