英文成本管理会计chapter04

CHAPTER 4

ACTIVITY-BASED COSTING

QUESTIONS FOR WRITING AND DISCUSSION

1. Unit costs provide essential information needed for inventory valuation and preparation of

income statements. Knowing unit costs is also critical for many decisions such as bidding decisions and accept-or-reject special order decisions.

2. Cost measurement is determining the dollar amounts associated with resources used in

production. Cost assignment is associating the dollar amounts, once measured, with units produced.

3. An actual overhead rate is rarely used because of problems with accuracy and timeliness.

Waiting until the end of the year to ensure accuracy is rejected because of the need to have timely information. Timeliness of information based on actual overhead costs runs into diffi-culty (accuracy problems) because overhead is incurred nonuniformly and because produc-tion also may be nonuniform.

4. For plantwide rates, overhead is first collected in a plantwide pool, using direct tracing. Next,

an overhead rate is computed and used to assign overhead to products.

5. First stage: Overhead is assigned to production department pools using direct tracing, driver

tracing, and allocation. Second stage: Individual departmental rates are used to assign overhead to products as they pass through the departments.

6. Departmental rates would be chosen over plantwide rates whenever some departments are

more overhead intensive than others and if certain products spend more time in some de-partments than they do in others.

7. Plantwide overhead rates assign overhead to products in proportion to the amount of the

unit-level cost driver used. If the products consume some overhead activities in different proportions than those assigned by the unit-level cost driver, then cost distortions can oc-cur (the product diversity factor). These distortions can be significant if the nonunit-level overhead costs represent a significant proportion of total overhead costs.

8. Low-volume products may consume nonunit-level overhead activities in much greater pro-

portions than indicated by a unit-level cost driver and vice versa for high-volume products. If so, then the low-volume products will receive too little overhead and the high-volume prod-ucts too much.

9. If some products are undercosted and others are overcosted, a firm can make a number of

competitively bad decisions. For example, the firm might select the wrong product mix or submit distorted bids.

10. Nonunit-level overhead activities are those overhead activities that are not highly correlated

with production volume measures. Examples include setups, material handling, and inspec-tion. Nonunit-level cost drivers are causal factors—factors that explain the consumption of nonunit-level overhead. Examples include setup hours, number of moves, and hours of in-spection.

11. Product diversity is present whenever products have different consumption ratios for differ-

ent overhead activities.

12. An overhead consumption ratio measures the proportion of an overhead activity consumed

by a product.

13. Departmental rates typically use unit-level cost drivers. If products consume nonunit-level

overhead activities in different proportions than those of unit-level measures, then it is poss-ible for departmental rates to move even further away from the true consumption ratios, since the departmental unit-level ratios usually differ from the one used at the plant level. 14. Agree. Prime costs can be assigned using direct tracing and so do not cause cost distor-

tions. Overhead costs, however, are not directly attributable and can cause distortions. For example, using unit-level activity drivers to trace nonunit-level overhead costs would cause distortions.

15. Activity-based product costing is an overhead costing approach that first assigns costs to

activities and then to products. The assignment is made possible through the identification of activities, their costs, and the use of cost drivers.

16. An activity dictionary is a list of activities accompanied by information that describes each

activity (called attributes)

17. A primary activity is consumed by the final cost objects such as products and customers,

whereas secondary activities are consumed by other activities (ultimately consumed by pri-mary activities).

18. Costs are assigned using direct tracing and resource drivers.

19. Homogeneous sets of activities are produced by associating activities that have the same

level and that can use the same driver to assign costs to products. Homogeneous sets of activities reduce the number of overhead rates to a reasonable level.

20. A homogeneous cost pool is a collection of overhead costs that are logically related to the

tasks being performed and for which cost variations can be explained by a single activity driver. Thus, a homogeneous pool is made up of activities with the same process, the same activity level, and the same driver.

21. Unit-level activities are those that occur each time a product is produced. Batch-level activities

are those that are performed each time a batch of products is produced. Product-level or sus-taining activities are those that are performed as needed to support the various products produced by a company. Facility-level activities are those that sustain a factory’s general manufacturing process.

22. ABC improves costing accuracy whenever there is diversity of cost objects. There are vari-

ous kinds of cost objects, with products being only one type. Thus, ABC can be useful for improving cost assignments to cost objects like customers and suppliers. Customer and supplier diversity can occur for a single product firm or for a JIT manufacturing firm.

23. Activity-based customer costing can identify what it is costing to service different customers.

Once known, a firm can then devise a strategy to increase its profitability by focusing more on profitable customers, converting unprofitable customers to profitable ones where possi-ble, and ―firing‖ customers that cannot be made profitable.

24. Activity-based supplier costing traces all supplier-caused activity costs to suppliers. This

new total cost may prove to be lower than what is signaled simply by purchase price.

EXERCISES

4–1

1.

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total Units produced 400,000 160,000 80,000 560,000 1,200,000 Prime costs $8,000,000 $3,200,000 $1,600,000 $11,200,000 $24,000,000 Overhead costs $3,200,000 $2,400,000 $3,600,000 $2,800,000 $12,000,000 Unit cost:

Prime $20 $20 $20 $20 $20

Overhead 8 15 45 5 10

Total $28 $35 $65 $25 $30 2. Actual costing can produce wide swings in the overhead cost per unit. The cause

appears to be nonuniform incurrence of overhead and nonuniform production (sea-sonal production is a possibility).

3. First, calculate a predetermined rate:

OH rate = $11,640,000/1,200,000

= $9.70 per unit

This rate is used to assign overhead to the product throughout the year. Since the driver is units produced, $9.70 would be assigned to each unit. Adding this to the actual prime costs produces a unit cost under normal costing:

Unit cost = $9.70 + $20.00 = $29.70

This cost is close to the actual annual cost of $30.00.

4–2

1. Predetermined rates:

Drilling Department: Rate = $600,000/280,000 = $2.14* per MHr

Assembly Department: Rate = $392,000/200,000

= $1.96 per DLH

*Rounded

2. Applied overhead:

Drilling Department: $2.14 ? 288,000 = $616,320

Assembly Department: $1.96 ? 196,000 = $384,160

Overhead variances:

Drilling Assembly Total Actual overhead $602,000 $ 412,000 $ 1,014,000

Applied overhead 616,320 384,160 1,000,480

Overhead variance $ (14,320) over $ 27,840 under $ 13,520

3. Unit overhead cost = [($2.14 ? 4,000) + ($1.96 ? 1,600)]/8,000

= $11,696/8,000

= $1.46*

*Rounded

4–3

1. Yes. Since direct materials and direct labor are directly traceable to each product,

their cost assignment should be accurate.

2. Elegant: (1.75 ? $9,000)/3,000 = $5.25 per briefcase

Fina: (1.75 ? $3,000)/3,000 = $1.75 per briefcase

Note: Overhead rate = $21,000/$12,000 = $1.75 per direct labor dollar (or 175 per-cent of direct labor cost).

There are more machine and setup costs assigned to Elegant than Fina. This is clearly a distortion because the production of Fina is automated and uses the ma-chine resources much more than the handcrafted Elegant. In fact, the consumption ratio for machining is 0.10 and 0.90 (using machine hours as the measure of usage). Thus, Fina uses nine times the machining resources as Elegant. Setup costs are similarly distorted. The products use an equal number of setups hours.

Yet, if direct labor dollars are used, then the Elegant briefcase receives three times more machining costs than the Fina briefcase.

3. Overhead rate = $21,000/5,000

= $4.20 per MHr

Elegant: ($4.20 ? 500)/3,000 = $0.70 per briefcase

Fina: ($4.20 ? 4,500)/3,000 = $6.30 per briefcase

This cost assignment appears more reasonable given the relative demands each product places on machine resources. However, once a firm moves to a multipro-duct setting, using only one activity driver to assign costs will likely produce product cost distortions. Products tend to make different demands on overhead activities, and this should be reflected in overhead cost assignments. Usually, this means the use of both unit- and nonunit-level activity drivers. In this example, there is a unit-level activity (machining) and a nonunit-level activity (setting up equipment). The consumption ratios for each (using machine hours and setup hours as the activity drivers) are as follows:

Elegant Fina

Machining 0.10 0.90 (500/5,000 and 4,500/5,000)

Setups 0.50 0.50 (100/200 and 100/200)

Setup costs are not assigned accurately. Two activity rates are needed—one based on machine hours and the other on setup hours:

Machine rate: $18,000/5,000 = $3.60 per MHr

Setup rate: $3,000/200 = $15 per setup hour

Costs assigned to each product:

Machining: Elegant Fina

$3.60 ? 500 $ 1,800

$3.60 ? 4,500 $ 16,200

Setups:

$15 ? 100 1,500 1,500

Total $ 3,300 $ 17,700

Units ÷3,000 ÷3,000

Unit overhead cost $ 1.10 $ 5.90

4–4

Activity dictionary:

Activity Activity Primary/ Activity

Name Description Secondary Driver Providing nursing Satisfying patient Primary Nursing hours care needs

Supervising Coordinating Secondary Number of nurses nurses nursing activities

Feeding patients Providing meals Primary Number of meals

to patients

Laundering Cleaning and Primary Pounds of laundry bedding and delivering clothes

clothes and bedding

Providing Therapy treatments Primary Hours of therapy physical directed by

therapy physician

Monitoring Using equipment to Primary Monitoring hours patients monitor patient

conditions

4–5

1. Deluxe Percent Regular Percent

Price $900 100% $750 100% Cost 576 64 600 80

Unit gross profit $324 36% $150 20% Total gross profit:

($324 ? 100,000) $32,400,000

($150 ? 800,000) $120,000,000

2. Calculation of unit overhead costs:

Deluxe Regular Unit-level:

Machining:

$200 ? 100,000 $20,000,000

$200 ? 300,000 $60,000,000 Batch-level:

Setups:

$3,000 ? 300 900,000

$3,000 ? 200 600,000 Packing:

$20 ? 100,000 2,000,000

$20 ? 400,000 8,000,000 Product-level:

Engineering:

$40 ? 50,000 2,000,000

$40 ? 100,000 4,000,000 Facility-level:

Providing space:

$1 ? 200,000 200,000

$1 ? 800,000 800,000 Total overhead $ 25,100,000 $ 73,400,000 Units ÷100,000 ÷800,000 Overhead per unit $ 251 $ 91.75

Deluxe Percent Regular Percent Price $900 100% $750.00 100% Cost 780* 87*** 574.50** 77*** Unit gross profit $120 13%*** $175.50 23%*** Total gross profit:

($120 ? 100,000) $12,000,000

($175.50 ? 800,000) $140,400,000

*$529 + $251 **$482.75 + $91.75 ***Rounded

3. Using activity-based costing, a much different picture of the deluxe and regular

products emerges. The regular model appears to be more profitable. Perhaps it should be emphasized.

4–6

1. JIT Non-JIT

Sales a$12,500,000 $12,500,000

Allocation b750,000 750,000

a$125 ? 100,000, where $125 = $100 + ($100 ? 0.25), and 100,000 is the average order size times the number of orders

b0.50 ? $1,500,000

2. Activity rates:

Ordering rate = $880,000/220 = $4,000 per sales order

Selling rate = $320,000/40 = $8,000 per sales call

Service rate = $300,000/150 = $2,000 per service call

JIT Non-JIT

Ordering costs:

$4,000 ? 200 $ 800,000

$4,000 ? 20 $ 80,000

Selling costs:

$8,000 ? 20 160,000

$8,000 ? 20 160,000

Service costs:

$2,000 ? 100 200,000

$2,000 ? 50 100,000

T otal $ 1,160,000 $ 340,000

For the non-JIT customers, the customer costs amount to $750,000/20 = $37,500 per order under the original allocation. Using activity assignments, this drops to $340,000/20 = $17,000 per order, a difference of $20,500 per order. For an order of 5,000 units, the order price can be decreased by $4.10 per unit without affecting customer profitability. Overall profitability will decrease, however, unless the price for orders is increased to JIT customers.

3. It sounds like the JIT buyers are switching their inventory carrying costs to Emery

without any significant benefit to Emery. Emery needs to increase prices to reflect the additional demands on customer-support activities. Furthermore, additional

price increases may be needed to reflect the increased number of setups, pur-chases, and so on, that are likely occurring inside the plant. Emery should also im-mediately initiate discussions with its JIT customers to begin negotiations for achieving some of the benefits that a JIT supplier should have, such as long-term contracts. The benefits of long-term contracting may offset most or all of the in-creased costs from the additional demands made on other activities.

4–7

1. Supplier cost:

First, calculate the activity rates for assigning costs to suppliers:

Inspecting components: $240,000/2,000 = $120 per sampling hour

Reworking products: $760,500/1,500 = $507 per rework hour

Warranty work: $4,800/8,000 = $600 per warranty hour

Next, calculate the cost per component by supplier:

Supplier cost:

Vance Foy Purchase cost:

$23.50 ? 400,000 $ 9,400,000

$21.50 ? 1,600,000 $ 34,400,000 Inspecting components:

$120 ? 40 4,800

$120 ? 1,960 235,200 Reworking products:

$507 ? 90 45,630

$507 ? 1,410 714,870 Warranty work:

$600 ? 400 240,000

$600 ? 7,600 4,560,000 Total supplier cost $ 9,690,430 $ 39,910,070

Units supplied ÷400,000 ÷1,600,000

Unit cost $ 24.23* $ 24.94*

*Rounded

The difference is in favor of Vance; however, when the price concession is consi-dered, the cost of Vance is $23.23, which is less than Foy’s componen t. Lumus should accept the contractual offer made by Vance.

2. Warranty hours would act as the best driver of the three choices. Using this driver,

the rate is $1,000,000/8,000 = $125 per warranty hour. The cost assigned to each component would be:

Vance Foy Lost sales:

$125 ? 400 $ 50,000

$125 ? 7,600 $ 950,000

$ 50,000 $ 950,000 U nits supplied ÷ 400,000 ÷1,600,000

I ncrease in unit cost $ 0.13* $ 0.59*

*Rounded

PROBLEMS

4–8

1. Product cost assignment:

Overhead rates:

Patterns: $30,000/15,000 = $2.00 per DLH

Finishing: $90,000/30,000 = $3.00 per DLH

Unit cost computation:

Backpacks Duffel Bags Patterns:

$2.00 ? 0.1 $0.20

$2.00 ? 0.2 $0.40

Finishing:

$3.00 ? 0.2 0.60

$3.00 ? 0.4 1.20

Total per unit $0.80 $1.60

2. Cost before addition of duffel bags:

$60,000/100,000 = $0.60 per unit

The assignment is accurate because all costs belong to the one product.

3. Activity-based cost assignment:

Stage 1: Pool rate = $120,000/80,000 = $1.50 per transaction

Stage 2:

Overhead applied:

Backpacks: $1.50 ? 40,000* = $60,000

Duffel bags: $1.50 ? 40,000 = $60,000

*80,000 transactions/2 = 40,000 (number of transactions had doubled)

Unit cost:

Backpacks: $60,000/100,000 = $0.60 per unit

Duffel bags: $60,000/25,000 = $2.40 per unit

4. This problem allows the student to see what the accounting cost per unit should be

by providing the ability to calculate the cost with and without the duffel bags. With this perspective, it becomes easy to see the benefits of the activity-based approach over those of the functional-based approach. The activity-based approach provides the same cost per unit as the single-product set-ting. The functional-based approach used transactions to allocate accounting costs to each producing department, and this allocation probably reflects quite well the consumption of accounting costs by each producing department. The problem is the second-stage allocation. Direct labor hours do not capture the consumption pat-tern of the individual products as they pass through the departments. The distortion occurs, not in using transactions to assign accounting costs to departments, but in using direct labor hours to assign these costs to the two products.

In a single-product environment, ABC offers no improvement in product costing ac-curacy. However, even in a single-product environment, it may be possible to in-crease the accuracy of cost assignments to other cost objects such as customers.

4–9

1. Unit-level costs ($120 ? 20,000) $ 2,400,000

Batch-level costs ($80,000 ? 20) 1,600,000

Product-level costs ($80,000 ? 10) 800,000

Facility-level ($20 ? 20,000) 400,000

Total cost $ 5,200,000

2. Unit-level costs ($120 ? 30,000) $ 3,600,000

Batch-level costs ($80,000 ? 20) 1,600,000

Product-level costs ($80,000 ? 10) 800,000

Facility-level costs 400,000

Total cost $ 6,400,000

The unit-based costs increase because these costs vary with the number of units produced. Because the batches and engineering orders did not change, the batch-level costs and product-level costs remain the same, behaving as fixed costs with respect to the unit-based driver. The facility-level costs are fixed costs and do not vary with any driver.

3. Unit-level costs ($120 ? 30,000) $ 3,600,000

Batch-level costs ($80,000 ? 30) 2,400,000

Product-level costs ($80,000 ? 12) 960,000

Facility-level costs 400,000

Total cost $ 7,360,000

Batch-level costs increase as the number of batches changes, and the costs of en-gineering support change as the number of orders change. Thus, batches and or-ders increased, increasing the total cost of the model.

4. Classifying costs by category allows their behavior to be better understood. This, in

turn, creates the ability to better manage costs and make decisions.

4–10

1. Overhead rate = $6,990,000/272,500 = $25.65 per DLH*

Overhead assignment:

X-12: $25.65 ? 250,000/1,000,000 = $6.41*

S-15: $25.65 ? 22,500/200,000 = $2.89*

*Rounded numbers used throughout

Unit gross margin:

X-12 S-15

Price $ 15.93 $ 12.00

Cost 10.68* 6.02**

Gross margin $ 5.25 $ 5.98

*Prime costs + Overhead = ($4.27 + $6.41)

**Prime costs + Overhead = ($3.13 + $2.89)

2. Pools Driver Pool Rate

Setup Runs $240,000/300 = $800 per run

Machine Machine hrs. $1,750,000/185,000 = $9.46/per MHr

Receiving Orders $2,100,000/1,400 = $1,500/per order

Engineering Engineering hrs. $2,000,000/10,000 = $200/per eng. hour Material handling Moves $900,000/900 = $1,000/per move

Overhead assignment:

X-12 S-15 Setup costs:

$800 ? 100 $ 80,000

$800 ? 200 $ 160,000 Machine costs:

$9.46 ? 125,000 1,182,500

$9.46 ? 60,000 567,600

Receiving costs:

$1,500 ? 400 600,000

$1,500 ? 1,000 1,500,000 Engineering costs:

$200 ? 5,000 1,000,000

$200 ? 5,000 1,000,000 Material-handling costs:

$1,000 ? 500 500,000

$1,000 ? 400 400,000 Total overhead costs $ 3,362,500 $ 3,627,600

Units produced ÷ 1,000,000 ÷200,000

Overhead cost per kg $ 3.36 $ 18.14

Prime cost per kg 4.27 3.13

Unit cost $ 7.63 $ 21.27

Selling price $ 15.93 $ 12.00

Less unit cost 7.63 21.27

Unit gross margin $ 8.30 $ (9.27)

3. No. The cost of making X-12 is $7.63, much less than the amount indicated by

functional-based costing. The company can compete by lowering its price on the high-volume product. The $10 price offered by competitors is not out of line. The concern about selling below cost is unfounded.

4. The $12 price of compound S-15 is well below its cost of production. This explains

why Pearson has no competition and why customers are willing to pay $15, a price that is probably still way below competitors’ quotes.

5. The price of X-12 should be lowered to a competitive level and the price of

S-15 increased so that a reasonable return is being earned.

4–11

1. GAAP mandate that all nonmanufacturing costs be expensed during the period in

which they are incurred. GAAP are the most likely cause of the practice. The limita-tions of GAAP-produced information for cost management should be emphasized.

2. The total product consists of all benefits, both tangible and intangible, that a cus-

tomer receives. One of the benefits is the order-filling service provided by Soren-sen. Thus, it can be argued that these costs should be product costs and not as-signing them to products undercosts all products. From the information given, there are more small orders than large (50,000 orders averaging 600 units per order);

thus, these small orders consume more of the order-filling resources. They should, therefore, receive more of the order-filling costs.

The average order-filling cost per unit produced is computed as follows: $4,500,000/90,000,000 units = $0.05 per unit

Thus, order-filling costs are about 6 to 10 percent of the selling price, clearly not a trivial amount.

Furthermore, the per-unit cost for individual product families can be computed us-ing the number of orders as the activity driver:

Activity rate = $4,500,000/100,000 orders

= $45 per order

The per-unit ordering cost for each product family can now be calculated: Category I: $45/600 = $0.075 per unit

Category II: $45/1,000 = $0.045 per unit

Category III: $45/1,500 = $0.03 per unit

Category I, which has the smallest batches, is the most undercosted of the three categories. Furthermore, the unit ordering cost is quite high relative to Category I’s selling price (9 to 15 percent of the selling price). This suggests that something should be done to reduce the order-filling costs.

3. With the pricing incentive feature, the average order size has been increased to

2,000 units for all three product families. The number of orders now processed can be calculated as follows:

Orders = [(600 ? 50,000) + (1,000 ? 30,000) + (1,500 ? 20,000)]/2,000

= 45,000

Reduction in orders = 100,000 – 45,000 = 55,000

Steps that can be reduced = 55,000/2,000 = 27 (rounding down to nearest whole number)

There were initially 50 steps: 100,000/2,000

Reduction in resource spending:

Step-fixed costs: $50,000 ? 27 = $1,350,000

Variable activity costs: $20 ? 55,000 = 1,100,000

$2,450,000

Customers were placing smaller and more frequent orders than necessary. They were receiving a benefit without being charged for it. By charging for the benefit and allowing customers to decide whether the benefit is worth the cost of providing it, Sorensen was able to reduce its costs (potentially by shifting the cost of the service to the customers). The customers, however, apparently did not feel that the benefit

was worth paying for and so increased order size. By increasing order size, the number of orders decreased, decreasing the demand for the order-filling activity, al-lowing Sorensen to reduce its order-filling costs. Other benefits may also be rea-lized. The order size affects activities such as scheduling, setups, and material handling. Larger orders should also decrease the demand for these activities, and costs can be reduced even more.

Competitive advantage is created by providing the same customer value for less cost or better value for the same or less cost. By reducing the cost, Sorensen can increase customer value by providing a lower price (decreasing customer sacrifice) or by providing some extra product features without increasing the price (increasing customer realization, holding customer sacrifice constant). This is made possible by the decreased cost of producing and selling the bolts.

4–12

1. Supplier cost:

First, calculate the activity rates for assigning costs to suppliers:

Replacing engines: $3,200,000/4,000 = $800 per engine

Expediting orders: $4,000,000/400 = $10,000 per late shipment

Repairing engines: $7,200,000/5,000 = $1,440 per engine

Next, calculate the cost per engine by supplier:

Supplier cost:

Watson Johnson Purchase cost:

$900 ? 72,000 $64,800,000

$1,000 ? 16,000 $16,000,000

Replacing engines:

$800 ? 3,960 3,168,000

$800 ? 40 32,000

E xpediting orders:

$10,000 ? 396 3,960,000

$10,000 ? 4 40,000

Repairing engines:

$1,440 ? 4,880 7,027,200

$1,440 ? 120 172,800

Total supplier cost $ 78,955,200 $16,244,800

Units supplied ÷72,000 ÷ 16,000

Unit cost $ 1,096.60 $ 1,015.30

The Johnson engine costs less when the full supplier effects are considered. This is

a better assessment of cost because it considers the costs that are caused by the

supplier due to poor quality, poor reliability, and poor delivery performance.

2. In the short run, buy 40,000 from Johnson and 48,000 from Watson. In the long

run, one possibility is to encourage Johnson to expand its capacity; another possi-bility is to encourage Watson to increase its quality and maintain purchases from both sources.

Managerial Decision Cases

4–13

1. Disagree. Chuck is expressing an uninformed opinion. He has not spent the effort

to find out exactly what activity-based management and costing are attempting to do; therefore, he has no real ability to offer any constructive criticism of the possible benefits of these two approaches.

2. and

3.

A t first glance, it may seem strange to even ask if Chuck’s behavior is unethical.

After all, what is unethical about expressing an opinion, albeit uninformed? While offering uninformed opinions or recommendations may be of little consequence in many settings, a serious issue arises when a person’s expertise is relied upon by others to make decisions or take actions that could be wrong or harmful to them-selves or their organizations. This very well may be the case for Chuck’s setting, and his behavior may be labeled professionally unethical.

Chuck’s lack of knowledge about activity-based systems is a signal of his failure to maintain his professional competence. Standard I-1 of the IMA ethical standards indicates that management accountants have a responsibility to continually develop their knowledge and skills. Failure to do so is unethical.