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Given:
Classify each of the following activities as either a unit-level, a batch-level, a product-level, or an
organization-sustaining activity. These activities occur at Greenwich Corporation, a company that
manufactures a variety of products.
Unit-level activities:
Batch-level activities:
Activities that are performed each time a batch of goods is handled or processed,
regardless of how many units are in the batch. The amount of resource consumed
depends on the number of batches run rather than on the number of units in the
batch.
Product-level activities: Activities that relate to specific products that must be carried out regardless of how
many units are produced and sold or batches run.
Customer-level activities: Activities that are carried out to support customers but that are not related to
any specific product.
Organization-sustaining activities: Activities that are carried out regardless of which customers are served,
which products are produced, how many batches are run, or how many
units are made.
a. Various individuals manage the parts inventory.
Product-level
Batch-level
Organization-sustaining
d. The factory's general manager meets with other department heads such as
marketing to coordinate plans.
Organization-sustaining
Unit-level
f.
Product-level
Batch-level
Organization-sustaining
r processed,
ource consumed
of units in the
ardless of how
ion-sustaining
ion-sustaining
ion-sustaining
Batch-level activities:
Activities that are performed each time a batch of goods is handled or processed,
regardless of how many units are in the batch. The amount of resource consumed
depends on the number of batches run rather than on the number of units in the
batch.
Product-level activities: Activities that relate to specific products that must be carried out regardless of how
many units are produced and sold or batches run.
Customer-level activities: Activities that are carried out to support customers but that are not related to
any specific product.
Organization-sustaining activities: Activities that are carried out regardless of which customers are served,
which products are produced, how many batches are run, or how many units are
made.
Classify each of the costs or activities below as unit-level, batch-level, product-level, customer-level, or
organization-sustaining. In this case, customers are golf courses, products are models of the golf cart,
a batch is a specific order from a customer, and units are individual golf carts.
a. The purchasing department orders the specific color of paint
specified by the customer from the company's supplier.
batch-level
unit-level
organization-sustaining
batch-level
customer-level
f.
batch-level
? Or
completed order.
g. Electricity is used to heat and light the factory and the
administrative offices.
organization-sustaining
unit-level
i.
product-level
j.
customer-level
unit-level
l.
product-level
consumed
olf cart,
Silicon Optics has supplied the following data for use in its ABC system:
Overhead Costs
Wages & salaries
Other overhead costs
Total overhead costs
Activity Cost Pool
DL support
Order processing
Customer support
Other
$350,000
200,000
$550,000
Activity Measure (Driver)
Number of DL Hours
Number of orders
Number of customers
These costs are not allocated
to products or customers
These are organization-sustaining activities.
Total Activity
10,000 DLHs
500 Orders
100 Customers
During the year, Silicon Optics completed an order for a special optical switch for a new customer, Indus
Telecom. This customer did not order any other products during the year. Data concerning that order
follow:
Data Concerning the Indus Telecom Order
Selling price
$295 per unit
Units ordered
100 units
Direct materials
$264 per unit
Direct labor-hours
0.50 DLH per unit
Direct labor rate
$25 per DLH
Required:
1. Prepare a report showing the first-stage allocations of overhead costs to the activity cost pools.
(See Exhibit 7-5)
DL
Order
Customer
Overhead Costs
Totals
Support
Processing
Support
Other
Wages & salaries
$350,000
$105,000
$122,500
$87,500
$35,000
Other overhead costs
200,000
50,000
30,000
40,000
80,000
Total overhead costs
$550,000
$155,000
$152,500
$127,500
$115,000
2. Compute the activity rates for the activity cost pools.
(See Exhibit 7-6)
DL
Order
Overhead Costs
Totals
Support
Processing
Total overhead costs
$550,000
$155,000
$152,500
Total activity measures
10,000
500
Customer
Support
$127,500
100
Other
$115,000
N/A
$15.50
DLHs
$305.00
Orders
$1,275.00
Customers
3. Prepare a report showing the overhead costs for the order from Indus Telecom, including
customer support costs.
Indus Telecom
Cost
Pool
Driver
ABC Costs
Activity Cost Pool
Driver
Rate
Usage
Assigned
DL support
DLHs
$15.50
50
$775.00
Order processing
Orders
$305.00
1
305.00
Customer support
Customers
$1,275.00
1
1,275.00
Total support costs assigned to Indus Telecom
$2,355.00
4. Prepare a report showing the customer margin for Indus Telecom. (See Exhibit 7-11.)
ABC Analysis Customer Margin Report for Indus Telecom
Sales (100 units X $295)
Costs:
Direct Costs Traced
Direct materials ($264 per unit X 100 units)
Direct labor ($25 per DLH X .5 DLH X 100 units)
Indirect Support Costs Allocated Using ABC
DL support
Order processing
Customer support
Total Assigned Costs
Customer Margin
$29,500
$26,400
$1,250
$775
$305
$1,275
$30,005
($505)
Pool
Order
Rate
Processing
$10.50
$122,500
$5.00
30,000
$15.50
$152,500
DLHs
Pool
Customer
Rate
Support
$245
$87,500
$60
40,000
$305 $127,500
Orders
3. Prepare a report showing the overhead costs for the order from Ides Telecom including customer support.
DL
Order
Customer
Total
Activity
Support
Processing
Support
Support
50
1
$525
$250
$775
1
$245
$60
$305
$875
$400
$1,275
$1,645
$710
$2,355
$29,500
$26,400
$1,250
$775
$305
$1,275
$30,005
($505)
5. Prepare an action analysis report showing the customer margin for Indus Telecom. Direct materials should
be coded as a Green cost, direct labor and wages and salaries as Yellow costs, and other overhead costs as
Red costs.
Definition of an Action analysis report:
A report showing what costs have been assigned to a cost object, such as a
product or customer, and how difficult it would be to adjust the cost if there is
a change in activity.
"Green" costs are those costs that would adjust more or less automatically
to changes in activity without any action by managers.
"Yellow" costs are those costs that could be adjusted in response to changes
in activity, but such adjustments require management action; the adjustment
is not automatic.
"Red" costs are costs that could be adjusted to changes in activity only with
a great deal of difficulty and the adjustment would require management action
$29,500
26,400
$3,100
$1,250
1,645
2,895
$205
Q6 No Indus Telcom Bu
0
0
0
Red costs:
Other overhead costs
Red margins:
710
($505)
Fixed
(710)
($710)
$205
Pool
Rate
$875
$400
$1,275
Customers
Other
$35,000
80,000
$115,000
Pool
Rate
N/A
N/A
N/A
ect, such as a
cost if there is
utomatically
se to changes
e adjustment
26,400 Saved
$1,250 Saved
1,645 Saved
$2,895
Less than $3,100 of
CM given up
0
($205) Net Decrease
Adv. of IT business
off if the
ted or the
ed, then
Exercise 7B-1:
Given:
Pryad Corporation makes ultra-lightweight backpacking tents. Data concerning the company's two
product lines appear below:
Deluxe
Standard
DM per unit
$60.00
$45.00
DL per unit
$9.60
$7.20
DL-hours per unit
0.80
0.60
Estimated annual production
10,000
70,000
The company has a traditional costing system in which MOH is applied to units based on DL-hours.
Data concerning MOH and DL-hours for the upcoming year appear below:
Estimated total MOH
Estimated total DL-Hours
$290,000
50,000
Required:
1. Determine the unit product costs of Deluxe and Standard products under the company's
traditional costing system
Deluxe
Standard
Direct Materials
$60.00
$45.00
Direct Labor
$9.60
$7.20
Applied MOH
Predetermined MOH
$5.80
DL-hours per unit
0.80
$4.64
Predetermined MOH
DL-hours per unit
Traditional Unit Cost
$5.80
0.60
$74.24
$3.48
$55.68
2. The company is considering replacing its traditional costing system for determining unit
product costs for external reports with an ABC system. The ABC system would have the
following three activity cost pools:
Estimated
Cost per
Overhead
Expected Activity
Activities
Driver
Driver
Costs
Deluxe
Standard
Supporting DL
DLHs
$3
$150,000
8,000
42,000
Batch setups
Setups
$240
60,000
200
50
Safety testing
Tests
$800
80,000
80
20
Total MOH Costs
$290,000
Determine the unit product costs of the Deluxe and Standard products under the ABC
system.
Units
Direct Materials
Direct Labor
10,000
Deluxe
$60.00
9.60
$69.60
Assigned MOH Costs
Deluxe
Standard
Total
$24,000
$126,000
$150,000
48,000
12,000
60,000
64,000
16,000
80,000
$136,000
$154,000
$290,000
$2.40
4.80
6.40
$13.60
$83.20
cted Activity
Total
50,000
250
100
Units
70,000
Standard
$45.00
7.20
$52.20
$1.80
0.17
0.23
$2.20
$54.40
Problem 7B-4:
Given:
Erte, Inc., manufactures two models of high-pressure steam valves, the XR7 model and the ZD5
model. Data regarding the two products follow:
Product
XR7
ZD5
DLHs
Annual
Per Unit Production
0.2
20,000
0.4
40,000
Total
DLHs
4,000
16,000
DM per unit
DL per unit
DL-hours per unit
Total direct labor hours
Estimated annual production
XR7
$35.00
$4.00
0.20
4,000
20,000
ZD5
$25.00
$8.00
0.40
16,000
40,000
Required:
1. Assume that the company continues to use DLHs as the base for applying overhead cost to
products.
a. Compute the predetermined overhead rate.
Estimated total MOH Costs / Total DLHs = ($1,480,000 / (4,000 + 16,000) =
b. Determine the unit product cost of each product.
Direct Materials
Direct Labor
Applied MOH
XR7
$35.00
4.00
ZD5
$25.00
8.00
$74.00
Predetermined MOH
DL-hours per unit
$74.00
0.20
Predetermined MOH
DL-hours per unit
Traditional Unit Cost
$74.00
0.40
14.80
$53.80
29.60
$62.60
2. Assume that the company decides to use ABC to apply overhead costs to products.
a. Compute the activity rate for each activity cost pool. Also compute the amount of
overhead cost that would be applied to each product. (See 2.b. below)
Activity Pool
Driver
Mach. Setups
Special Milling
Setups
MHRs
General Factory
Total MOH Costs
DLHs
Cost per
Driver
$720
$300
$50
Estimated
MOH
Costs
$180,000
300,000
1,000,000
$1,480,000
Direct Materials
Direct Labor
Total Direct Costs per Unit
Applied MOH
Driver
Mach. Setups
Special Milling
General Factory
Total MOH Costs
Setups
MHRs
DLHs
Cost/Driver
$720
$300
$50
$5.40
15.00
10.00
$30.40
$69.40
$53.80
3. Explain why overhead cost shifted from the high-volume product to the low-volume product
under ABC.
Note that even under the ABC system 68% of the company's overhead costs continue to be applied to
products on the basis of DLHs. ($1,000,000/$1,480,000)
68%
Thus, the shift in overhead cost from the high-volume product ZD5 to the low-volume product XR7
occurred as a result of reassigning only 32% of the company's overhead costs.
The increase in unit product cost for XR7 can be explained as follows:
1. Special milling costs, which are traceable to XR7, have all been assigned to XR7.
XR7
$300,000
20,000
$15.00
ZD5
$0
40,000
$0.00
ZD5
$72,000
40,000
$1.80
XR7
$720
20,000
150
133.33
$5.40
ZD5
$720
40,000
100
400
$1.80
Traditional
Overhead Costs
Driver
DLHs
XR7
4,000
Consumption
Ratio
20%
ZD5
16,000
Consumption
Ratio
80%
Overhead cost are allocated 20% to XR7 and 80% to ZD5 under the traditional costing system.
Activity-Based
Mach. Setups
Special Milling
General Factory
Driver
Setups
MHRs
DLHs
XR7
150
1,000
4,000
Consumption
Ratio
60%
100%
20%
20,000
XR7
$35.00
4.00
15.00
11.80
40,000
ZD5
$25.00
8.00
ZD5
100
0
16,000
Consumption
Ratio
40%
0%
80%
Predetermined MOH
DL-hours per unit
Total Unit Cost
$59.00
0.40
$65.80
23.60
$56.60
$53.80
$65.80
$69.40
$62.60
$56.60
$54.80
per DLH
ed Total Activity
Total
250
1,000
20,000
Units
40,000
ZD5
$25.00
8.00
$33.00
$1.80
0.00
20.00
$21.80
$54.80
$62.60
be applied to
me product XR7
Total
20,000
Total
250
1,000
20,000