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AFM481 Study Guide - Final Guide: Resource Consumption Accounting, Cost Driver, Maximum Capacity

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ochrekangaroo272
30 May 2013
School
University of Waterloo
Department
Accounting & Financial Management
Course
AFM481
Professor
Grant Russell

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Document Summary

Activity-based costing (abc) is a system that assigns overhead costs to the specific activities performed in a manufacturing or service delivery process. It attempts to trace costs more accurately to products or cost objects. It helps identify activities that contribute the most and least value to the organization. Under abc, multiple cost pools are used to reflect the various activities performed in manufacturing a good or providing a service. Costs of overhead resources are first assigned to activity cost pools, then allocated to individual products or services, using cost drivers. An activity is a type of task/function performed in an organization. Organization-sustaining activities: related to the overall organization and unaffected by number or types of facilities and customers or by volumes of products, batches or units: administrative salaries, housekeeping, accountant salaries. Facility-sustaining activities: related to the overall operations of a facility and unaffected: facility janitorial service, building insurance and heating, plant manager"s salary, amortization.

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Related Questions

Direct labor or machine hours may not be the appropriate costdriver for overhead

in all areas of manufacturing due to the complexities of manymanufacturing

processes. Many companies use activity-based costing (ABC) whichuses multiple drivers

(items that consume resources) rather than just one driver toapply overhead to their

activities. With ABC, a company can use a cost driver that has adirect cause/effect relationship

in its applied overhead costs.

Evian looked into ABC as a method of costing because of thevariety of items it

produces and the many different activities in which it isinvolved. The activities listed

below are a sample of possible cost pools for Evian.

Assembling

Payroll

Billing

Plant supervision

Digging trenches

Purchasing materials

Machine maintenance

Selling

Machine setups

Testing

Molding

Welding

Packaging

Instructions for part 4

(a) For each of these cost pools, what would be thelikely activity cost driver?

(b) Using the following information, determine theoverhead rates and the actual cost assigned for each of theactivity cost pools in a possible ABC system forEvian.

EVIAN CORPORATION

Expected

Use of Actual

Estimated CostDrivers Use of

Activity CostPools Cost Drivers Overhead per Activity Drivers

Irrigationinstallation Labor cost $1,999,500 12,900 12,941

Machining (all machine use) Machine hours 1,670,400 33,408,000 33,409,000

Customer orders # of orders 30,636 2,553 2,520

Shipping none(direct) N/A traced directly

Design Cost per design 820 10 7

Selling Number of calls 372,300 21,900 22,100

(d) (1) The results of ABC can provide a more accuratepicture of costs. Discuss the value of Evian using this system todetermine overhead costs.

(2) How might using ABC affect decision making atEvian?

Smoky Mountain Corporation makes two types of hiking boots—the Xtreme and the Pathfinder. Data concerning these two product lines appear below:

Xtreme Pathfinder
Selling price per unit $ 120.00 $ 92.00
Direct materials per unit $ 63.50 $ 54.00
Direct labor per unit $ 13.50 $ 9.00
Direct labor-hours per unit 1.5 DLHs 1.0 DLHs
Estimated annual production and sales 24,000 units 71,000 units

The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for the upcoming year appear below:

Estimated total manufacturing overhead $ 2,033,000
Estimated total direct labor-hours 107,000 DLHs

Required:

1. Compute the product margins for the Xtreme and the Pathfinder products under the company’s traditional costing system.

2. The company is considering replacing its traditional costing system with an activity-based costing system that would assign its manufacturing overhead to the following four activity cost pools (the Other cost pool includes organization-sustaining costs and idle capacity costs):

Estimated
Overhead Cost		 Expected Activity
Activities and Activity Measures Xtreme Pathfinder Total
Supporting direct labor (direct labor-hours) $ 663,400 36,000 71,000 107,000
Batch setups (setups) 572,000 240 200 440
Product sustaining (number of products) 750,000 1 1 2
Other 47,600 NA NA NA
Total manufacturing overhead cost $ 2,033,000

Compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system.

3. Prepare a quantitative comparison of the traditional and activity-based cost assignments.

Hi-Tek Manufacturing Inc. makes two types of industrial component parts—the B300 and the T500. An absorption costing income statement for the most recent period is shown below: Hi-Tek Manufacturing Inc. Income Statement Sales $ 1,780,400 Cost of goods sold 1,234,191 Gross margin 546,209 Selling and administrative expenses 560,000 Net operating loss $ (13,791) Hi-Tek produced and sold 60,400 units of B300 at a price of $21 per unit and 12,800 units of T500 at a price of $40 per unit. The company’s traditional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the company’s two product lines is shown below: B300 T500 Total Direct materials $ 400,400 $ 162,400 $ 562,800 Direct labor $ 120,600 $ 42,800 163,400 Manufacturing overhead 507,991 Cost of goods sold $ 1,234,191 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $55,000 and $104,000 of the company’s advertising expenses could be directly traced to B300 and T500, respectively. The remainder of the selling and administrative expenses was organization-sustaining in nature. The ABC team also distributed the company’s manufacturing overhead to four activities as shown below: Manufacturing Activity Activity Cost Pool (and Activity Measure) Overhead B300 T500 Total Machining (machine-hours) $ 203,091 90,500 62,200 152,700 Setups (setup hours) 143,500 70 280 350 Product-sustaining (number of products) 100,600 1 1 2 Other (organization-sustaining costs) 60,800 NA NA NA Total manufacturing overhead cost $ 507,991 1. Compute the product margins for the B300 and T500 under the company’s traditional costing system. 1b. Compute the product margins for the B300 and T500 under the company’s traditional costing system. 1c. 3. Prepare a quantitative comparison of the traditional and activity-based cost assignments.