Bus 630 week 2 assignment

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint-… 1/41

Learning Objectives

After studying Chapter 4, you will be able to:

Explain the interrelationships among cost drivers, activities, and products in an activity- based cost system, and describe the system’s key components and cost �lows.

Distinguish between the two stages of cost allocation in an activity-based cost system, and apply activity-based costing in a manufacturing setting.

Understand how activity-based costing is extended to nonmanufacturing settings.

Relate activity-based management to activity-based costing.

Describe the key elements of a just-in-time cost system.

4 Activity-Based Costing and Just-In-TimeCosting

houdre/iStock/Thinkstock

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint-… 2/41

Testing . . . Testing

Cortell Laboratories was formed in 1993 and began its operations in testing various electrical characteristics of integrated circuits sent to it by manufacturers on the west coast. Cortell focused on a strategy of providing quicker turnaround times than had been offered by manufacturers’ labs or other outside labs. The strategy was successful and was marketed well. Within 10 years, Cortell had annual revenues of over $30 million. Pro�it and cash �low, also highly positive, allowed Cortell to self-fund all expansion.

In 2010, Cortell began offering tests for transformers. Within one year, transformer testing was so successful that the lab was now running on three full shifts. In the midst of all this success, Harriet Cortell, the company president, is now faced with a dilemma. The marketing manager, Kitty Cohen, has come to her and argued that testing transformers is much more pro�itable than testing integrated circuits, and therefore, the lab should concentrate more of its resources on marketing and performing transformer tests. To support her argument, Cohen compiled costs and pro�it margins for each testing service. These �igures showed that transformer testing was over 40% more pro�itable than testing integrated circuits. Cortell looked at the overhead allocated to the two types of tests and could hardly believe that each test was assigned the same amount of overhead per test. She knew that testing transformers involved more job orders and required more setups than testing integrated circuits. “Our costing system is not re�lecting the complexity of these tests,” claimed Cortell.

Several months earlier, Cortell had heard about an activity-based cost approach for assigning overhead costs. She immediately contacted the controller, Charlie Kaplan, and asked him to do an activity-based cost analysis.

Two major forces have combined to put great pressure on managerial accountants like Charlie Kaplan to provide improved cost information about their �irms’ products and services. These are global competition and automation in the workplace.

1. Global competitiveness. Most companies in nearly every industry face increased competition from direct competitors, whether from across the street or halfway around the world. Whether the technology is old (making iron and steel) or new (making smart televisions), the needs for accurate and relevant product cost data have grown dramatically. Competitiveness also means knowing the costs of product quality, reliable delivery, and waste (unproductive effort). Cost control takes on new meaning if a competitor can sell an item at a price that is 10% lower than another company’s production cost and still make money on the sale. Increasingly, companies are realizing that traditional volume-based cost systems are not using the “right” variables or collecting cost data in enough detail.

2. Automation of the workplace. Dramatic changes in production have also taken place. Another “industrial revolution” is what some people have called it. Computer power has introduced concepts like computer-aided design (CAD), computer-aided manufacturing (CAM), �lexible

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint-… 3/41

manufacturing systems (FMS), and robotics. Computer power has allowed precise tasks to be programmed and machines to be designed to do those tasks. Likewise, computer power has enabled production managers to coordinate thousands of events, transactions, and possible courses of action. One outcome is a shift from heavy dependence on labor to technology. Direct labor costs were often a major product cost, and labor activity often re�lected general activity in the plant. Now, in many companies, direct labor is a minor portion of a product’s total cost. Other production costs have grown tremendously because of equipment costs and support personnel needed to coordinate production. New activity measures are needed to link resources used with production activities. The traditional approach of allocating overhead costs using direct labor hours or direct labor cost is no longer relevant in companies that are highly automated.

Competition and automation have focused attention on getting more accurate, timely, and relevant costs for products and services. The concepts are simple and have always been at the heart of cost accounting: Link the cost of resources used to the activity using the resources, and link the activity to the product being produced. Traditionally, the activity measure used most often has been a volume measure: direct labor hours (or dollars). In recent years, there has been a recognition that the complexity of production, rather than volume, is the most important determinant of overhead costs. Cost systems known as activity-based costing re�lect this new orientation.

Consider the following example of a company that manufactures ball-point pens in two different plants. In one plant, plant A, 30,000 identical pens are produced—all with black ink and black casings. In the other plant, plant B, 30,000 similar pens are also produced, but 10,000 have black ink, another 10,000 have blue ink, and the remaining 10,000 contain red ink. Likewise, those in plant B have a variety of casing colors: 8,000 are black, 12,000 are gold, and 10,000 are silver. Since each plant manufactures 30,000 pens, the amount of direct labor hours worked would be expected to be virtually the same in each plant. Therefore, using direct labor to allocate overhead costs to the two plants would result in the same amount of overhead costs assigned to each plant. Yet, plant B clearly consumes more overhead costs such as indirect labor costs relating to more machine changeovers, time spent on purchasing materials, and inventory management time. In other words, plant B manufactures more complex products (i.e., products that involve extra processes), but traditional costing that uses direct labor to allocate overhead costs ignores this complexity. Activity-based costing not only considers volume when assigning overhead costs, but does so in ways that re�lect the complexity of the various products.

This chapter presents the conceptual foundation for activity-based costing as a means of improving the accuracy of assigning costs to cost objectives—primarily to products and services. Many companies that have adopted activity-based cost systems have also instituted just-in-time inventory systems. Later in the chapter, we discuss how adoption of just-in-time inventory systems has affected product costing.

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint-… 4/41

4.1 Activity-Based Costing Activity-based costing focuses on �inding the cost of producing a product or service. In Chapter 1, we introduced cost of goods manufactured and the three traditional groups of costs: direct materials, direct labor, and factory overhead. In past years, direct materials and direct labor were linked with products because of their obvious direct relationships; all other manufacturing costs were traditionally grouped together in a cost pool as overhead. One activity measure, often direct labor, was used to attach all overhead costs to products. Many different overhead costs were combined and included:

1. Plant supervision and other indirect labor salaries 2. Materials handling costs 3. Plant engineering costs 4. Setup or changeover costs 5. Supplies and indirect materials 6. Depreciation, taxes, and insurance on equipment 7. Energy and other utility costs 8. Repair and maintenance costs

Ideally, every overhead cost item could be traced directly to speci�ic products. This is just not possible. If we produce a million units of different types and sizes of batteries in a factory, can the manager’s $100,000 salary be traced to the different batteries? No. Can we link the manager’s salary to certain factory activities, then link the activity costs to the different batteries? Yes, but only with careful analysis and application. Activity-based costing focuses on distributing costs that managers are unable to clearly identify with speci�ic jobs or products (i.e., indirect costs).

Issues In�luencing Cost Management Systems Design

Product costs are so critical to managerial decisions that greater precision and accuracy are needed today than were demanded in the past. Thus, a major effort is under way in many companies to upgrade their cost systems.

The level of detail that a cost system needs is based on the following considerations:

1. The competitive environment, which will impact the degree of accuracy needed and the toleration of costing errors

2. The homogeneity or heterogeneity of the products or services 3. The complexity of the production process 4. The volumes of each product or service produced 5. The costs of measuring and collecting activity and cost data 6. The impacts that more accurate and relevant data will have on managerial behavior

Detailed cost systems are expensive to design and to operate. Yet the value of better cost information can also be extremely high.

De�inition of Activity-Based Costing

Activity-based costing (ABC) is a system of accounting that focuses on activities performed to produce products or services. Activities become the fundamental cost accumulation points. This is because it is activities such as purchasing, moving materials, and machine setup that cause overhead costs to be

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint-… 5/41

incurred. Costs are traced to activities, and activities are traced to products based on each product’s use of the activities. We show these relationships for allocating costs in Figure 4.1.

Figure 4.1: An overall view of ABC cost linkage

Under activity-based costing, an effort is made to identify and account for as many costs as possible as direct costs of production. Any cost that can reasonably be traced to a particular product or service is treated as a direct cost. For example, under the traditional cost system, the cost of setup time (the factory downtime incurred in converting equipment from producing one product to another) is included in manufacturing overhead and applied to products on the basis of direct labor hours. Under ABC, setup time might be measured for each product line, and setup costs would be directly assigned to each part or product manufactured.

An ABC system identi�ies the major activities in a production process, aggregates those activities into activity centers, accumulates costs in activity centers, selects cost drivers that link activities to products, and assigns the costs of activities to products. We show this process in Figure 4.2. An activity center is a segment of the organization for which management wants the costs of a set of activities to be reported separately. A mechanism called a cost driver is used for linking a given activity’s pool of costs. A cost driver is an event, action, or activity that results in cost incurrence. It is any factor that causes costs to change. The basic concept is that cost drivers, such as number of purchase orders issued, measure the amount of resources a speci�ic product uses. A cost function is created from the activity’s planned costs and cost driver activity level.

Figure 4.2: An overall view of the ABC process

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint-… 6/41

Although not always obvious, several different cost drivers could link an activity’s costs and the cost objective. However, only one cost driver is chosen for each cost pool. In the materials handling case in Figure 4.2, four possible cost drivers are listed. Assume that pounds of materials moved is considered to be the most appropriate cost driver. We therefore divide the planned materials handling costs by the planned pounds to be moved. Cost per pound moved is the cost function. Then, the actual pounds handled in the production of a product times the cost per pound moved is the amount of materials handling costs assigned to that product. Again, the overall process is to identify the best cost driver that links costs and activities and then to use that cost driver to link activities with products (or other cost objectives).

Flow of Costs Under Activity-Based Costing

In applying ABC to a speci�ic organization, we follow �ive basic steps:

1. Assemble similar actions into activity centers. 2. Classify costs by activity center and by type of expense. 3. Select cost drivers. 4. Calculate a cost function to link costs and cost drivers with resource use. 5. Assign costs to the cost objective—often the product cost.

These steps are consistent with Figure 4.2.

Step 1: Assemble Similar Actions into Activity Centers. The number of actions performed in any organization can be quite numerous. Although the ideal is to relate the cost of every action to a cost driver and then to the product, the costs of doing this can far exceed the bene�its. Therefore, we combine actions into activity centers. For instance, the actions of placing a product in a box, sealing the box, and then labeling the box can be combined into a packaging activity. Treating collections of actions as activity centers eliminates the need to measure and track the performance of numerous individual actions and costs.

One meaningful way of grouping actions is to classify them with different levels of activities. A common outline is unit-level activities, batch-level activities, product-level activities, and facility-level activities. Figure 4.3 illustrates the four types. Unit-level activities are performed each time a unit is produced or handled. These are repetitive activities. Direct labor or machining activities are examples. Costs of these activities vary with the number of units produced. Batch-level activities are performed each time a batch of goods is produced or handled. Machine setups, order processing, and materials handling are related to batches rather than individual units. The costs of these activities vary according to the number of batches but are common or �ixed for all units in the batch. Product-level activities are those performed as needed to support the production of each different type of product or service. Maintaining bills of materials and routing information, processing engineering changes, and performing testing routines are examples of activities in this category. Facility-level activities are those which simply sustain a facility’s general production process. Examples would include plant supervision and building occupancy. These costs are common to a variety of products and are the most dif�icult to link to product- speci�ic activities. For this reason, many people question whether facility-level costs should be linked to products.

Figure 4.3: Levels of ABC activity groups

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint-… 7/41

Traditionally, we classify overhead costs as variable or �ixed. Relative to volume of outputs, costs of unit- level activities are predominately variable while costs of the other three levels are predominately �ixed. However, identifying batch-, product-, and facility-level activity centers helps in selecting cost drivers. Often, the cost perspective changes; many costs that are �ixed relative to units of output are now variable relative to the cost driver. This is particularly true for batch- and product-level activities. For instance, setup costs do not vary with the number of units produced, but they do vary with the number of setups performed. Costs of facility-level activities remain primarily in the �ixed category and are often apportioned or allocated to products in some arbitrary manner.

Step 2: Classify Costs by Activity Center and by Type of Expense. Once the actions are grouped into activities, the next step is identifying the costs with the activities. The classifying of cost data at this early point determines the level of detail and the breakdowns of cost data available to management for all cost analysis purposes later. A chart of accounts or a database classi�ication scheme will identify the type of cost by natural classi�ication: salary, postage, telephone, repair, supplies, etc. A second classi�ication will identify the activity center. Often, this is called a cost center. As an example, costs found in accounts such as utilities expense, custodial expense, and building security expense can be combined and assigned to a building operations cost center. An activity center and a cost center are both commonly de�ined as the smallest part of an organization for which costs are accumulated. In fact, in most carefully de�ined cost systems, the terms activity center and cost center can be used interchangeably.

Step 3: Select Cost Drivers. Direct costs can be traced immediately to a product without the need for a cost driver. All other costs need links between cost, activity, and product. Cost drivers are the links. A cost driver can link a pool of costs in an activity center to the product. Or a cost driver can link costs in one activity center to activities in another activity center. Multiple layers of activities can exist. One activity relates to another activity, which may relate to still another activity before relationships to products are identi�ied. Figure 4.4 gives an example of the variety of these relationships. The �irst box at the top is the total costs of manufacturing during a production period. The costs are classi�ied by activity center and by natural expense type. A manager is responsible for each activity center and the costs incurred in that center.

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint-… 8/41

Figure 4.4: Relationships of activity (cost) centers, cost drivers, cost functions, and product costs

A preliminary stage cost driver links costs of resources consumed (inputs) in one activity center to other activity centers. For instance, service center costs are usually assigned to overhead cost pools in a preliminary stage. A primary stage cost driver links costs in an activity center directly with products. Some costs, such as batch-level activity center costs in Figure 4.4, are initially assigned to a primary stage activity center and only need a single stage assignment process. These primary stage centers may collect reassigned costs from numerous preliminary stage activity centers—based on cost drivers that re�lect activities and resources used.

The activity centers are typically one of four types, as described above. Direct costs of unit-level activity centers are assumed in Figure 4.4 to be always traceable to speci�ic products. Batch-level activity center costs should also be traceable to speci�ic products but often use a cost driver. Product-level activity center costs may be related to a speci�ic product or may be grouped by activities before being assigned to products at the primary stage. Facility-level activity center costs may go through multiple preliminary stages before being assigned to products. For example, instead of assigning costs pertaining to the plant administration activity directly to products, these costs might be assigned in a preliminary stage to other activities such as machining, assembly, and �inishing.

ABC systems differ from traditional volume-based cost accounting systems in the number and variety of cost drivers used to trace costs. Traditional cost accounting systems use very few drivers—often only direct labor hours or dollars, which are related to volume of production. ABC systems, on the other hand, may use a multitude of cost drivers (for many different costs) that relate costs more closely to resources consumed and the activities occurring. In this way, ABC systems re�lect the complexity of

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint-… 9/41

production and not just volume. Although not comprehensive, Figure 4.5 gives examples of cost drivers that might be found in an ABC system.

Accountants must work with management to discover and identify activities and cost drivers. This is done through interviewing, process observation, simulation, diagramming, and analysis of current information systems.

Figure 4.5: Common cost drivers used in actual ABC systems

Step 4: Calculate a Cost Function. Managers choose a driver for each of the cost pools to determine a rate per cost driver unit, a percentage of other cost amounts, or an allocation percentage. This cost function could be based on either planned or actual costs and activity levels. In Chapter 2, we discussed the creation of predetermined overhead rates using planned costs and activity levels. Using planned activity levels and costs for an example, if costs of the setup activity center cost pool totaled $25,000, if setup hours were the cost driver, and if 500 hours were expected, the cost function would be $50 per setup hour ($25,000 / 500). Costs are then distributed to products as setup hours are incurred. This approach is the same as that discussed in Chapter 2, except for the use of a different type of cost driver.

Step 5: Assign Costs to the Cost Objective. The �inal step is distributing costs to the users of the resources. The cost pool, the cost driver, and the cost function now combine to determine how much cost is charged to each resource user. If this is at a preliminary stage, the users are predominately other activity centers. Thus, a group of costs are now reassigned to other cost pools based on use. If the activity center is at the primary stage, the users are the products themselves. In the setup example, if 60 hours of setup time were used for Product A’s production, $3,000 (60 × $50) would be charged to Product A. All costs entering the manufacturing process during a given time period are eventually assigned to products.

In�luence of Production Complexity

The primary goal of ABC for product costing is to generate accurate product costs. In general, this means the cost accounting system must handle the complexity of production while minimizing possible distortions caused by cost assignment processes. Production complexity plays a signi�icant role in determining whether the costs of two or more activities can be combined and traced to a product by means of a single cost driver and still be assigned accurately. If a company wants more accurate product costs, it must increase the number of activity centers, cost pools, and cost drivers. Since the introduction of a new cost driver in the system has a cost/bene�it value, most companies face a trade-off between more cost drivers, greater detail, and more expensive data processing versus more data aggregation and

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint… 10/41

less expensive data processing. Two important issues that affect cost driver selection are product diversity and batch-size diversity.

Product diversity refers to the degree to which each product differs in the number of activities (that is, resources or inputs) required. The greater the difference in how two products use resources or inputs, the greater the distortion a single cost driver will make in tracing costs to these products. For example, producing an ornate bathroom faucet �ixture may consume labor-intensive production resources, while producing a kitchen sink faucet may consume machine-intensive resources. Some products are simply larger than other products. A desktop model computer versus a laptop model computer is one example. The size of the product in�luences how the product is produced and which resources are required.

The complexity of a product is determined by the differences in how a product is manufactured and by the number of options a manufacturer has for its products. Deluxe models and products with many customer options, for example, increase the manufacturing dif�iculty. Each option adds an extension to the production process. However, supervision and other departmental costs are not necessarily in�luenced by these options. Materials inputs may differ by product. Some materials may require more handling from the receiving dock through the storeroom to the production �loor. In other cases, certain materials may require longer machining time or more time in trimming processes. Some products may have multiple stages of production, from raw materials to �inished products. Others are merely assembled from purchased parts.

Batch-size diversity occurs when products are manufactured in different-size batches. Batches refer not only to production orders but also to order quantities of raw materials and to shipping quantities of �inished goods. In an automotive stamping plant, a weekly run of hood stampings for a popular model may be 3,000 units, while a very similar but higher priced model hood may have a biweekly run of 500.

Although we normally think of differing batch sizes when we produce different products, batch-size diversity can also occur with the same product over time. For instance, this week the production order consists of 500 units. Due to an increase in demand, the production schedule for next week calls for 800 units. Just-in-time production encourages producing only what is needed immediately—often smaller batches and more frequently. Frequent batch runs may also require that more attention be given to minimizing setup time and cost. In traditional cost systems, setup costs are added to other overhead costs, losing the separate identity and cost detail of setup activities. In ABC systems, a separate cost pool for setup costs would typically be formed and would be assigned to products using cost drivers such as setup hours or number of setups. Both of these cost drivers re�lect batch-size diversity, with the former measure being more detailed and, thus, often more appropriate.

If computer resources were free and if managers had unlimited amounts of analysis time, more and more detail could be captured and evaluated. Since this is not the case, practical decisions must be made. In large ABC applications, the number of cost drivers (both preliminary and primary) used across an entire facility may be as low as 20 or as high as several hundred. Often, a high percentage of costs are assigned using a small number of drivers. The cost system’s design should allow judgments to be made about the number of cost pools and cost drivers and should allow for cost pools and cost drivers to be changed easily when the need arises.

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint-… 11/41

4.2 A Comprehensive Activity-Based Costing Example Guttman Cafeterias has just completed the installation of an activity-based cost system. The �irm operates cafeterias within of�ice buildings, factories, hospitals, and other institutions. These cafeterias produce and serve three standard meals: breakfast, lunch, and dinner. Activity centers consist of four support centers and two operating centers. The volume for October is as follows:

Breakfast Lunch Dinner

# of Meals 22,000 15,000 12,000

The activity centers’ traceable costs (i.e., direct costs) for October and cost drivers are as follows:

Activity Center Information

Code Activity Center Materials Labor Other Costs Cost Driver

Support Centers:

120 Occupancy $60,000 Square feet used

130 Data Processing 30,000 Transactions processed

140 Personnel Bene�its 9,000 Payroll cost

220 Materials Handling 16,000 Materials cost

Operating Centers:

410 Cooking $18,000 $10,000 20,000 Cooking hours

420 Serving 14,000 20,000 15,000 Serving hours

Total $32,000 $30,000 $150,000

Activities are grouped and activity centers are determined as a result of special studies. Each activity center has one cost driver. For example, the cost driver selected for Occupancy is square feet of space used by each activity.

The materials and labor costs are directly traceable to the three meals as follows:

Materials Labor

Breakfast:

Cooking $ 1,000 $ 2,000

Serving 4,000 2,000

Lunch:

Cooking 6,000 2,000

Serving 2,000 8,000

Dinner:

Cooking 11,000 6,000

Serving 8,000 10,000

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint… 12/41

Materials Labor

Total $32,000 $30,000

As for the other traceable costs, cost drivers are selected after analysis of past cost behavior and activity levels within each activity center (i.e., relationship with resource usage). First, the other costs of the support centers are assigned to the operating centers. This is the preliminary stage allocation.

Preliminary Stage Allocation

The cost driver data for the preliminary stage cost assignments, where costs are assigned from the four service centers to the two operating centers, are as follows:

Cost Driver Data—Preliminary Stage Allocation

Code Activity Center Cost Driver

Activity Centers Using Resources

410 420

120 Occupancy Square feet used 80,000 40,000

130 Data Processing Transactions processed 120,000 180,000

140 Personnel Bene�its Payroll cost $10,000 $20,000

220 Materials Handling Materials cost $18,000 $14,000

Cost functions for each of the support centers are developed as follows:

Activity Center Calculation Cost Function

Occupancy $60,000/(80,000 + 40,000) $0.50 per square foot

Data Processing $30,000/(120,000 + 180,000) $0.10 per transaction

Personnel Bene�its $9,000/($10,000 + $20,000) 30% of payroll cost

Materials Handling $16,000/(18,000 + $14,000) 50% of materials cost

Using these cost functions, the following costs are assigned to the two operating centers:

Cooking:

$0.50(80,000) + $0.10(120,000) + .30($10,000) + .50($18,000) = $64,000

Serving:

$0.50(40,000) + $0.10(180,000) + .30($20,000) + .50($14,000) = $51,000

Having made these preliminary cost assignments, the operating centers contain both direct costs and costs that have been assigned to them from the support centers. Both of these costs will be then assigned to meals using primary cost drivers.

Primary Stage Allocation

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint… 13/41

In the primary stage, costs are assigned from the Cooking and Serving centers to the three meals. The activities and cost drivers are as follows for each meal:

Cost Driver Data—Primary Stage Allocation

Code Activity Center Cost Driver

Cost Driver Activity Linked to Each Meal

Breakfast Lunch Dinner

410 Cooking Cooking hours 2,000 3,000 5,000

420 Serving Serving hours 2,500 1,500 1,000

As can be seen, different meals use different amounts of the resources in each activity center. Overhead cost functions for each of the operating centers are developed as follows:

Activity Center Calculation Overhead Cost Function

Cooking ($20,000 + $64,000)/(2,000 + 3,000 + 5,000) $8.40 per cooking hour

Serving ($15,000 + $51,000)/(2,500 + 1,500 + 1,000) $13.20 per serving hour

Using these cost functions, the following overhead costs are assigned to the three products:

Breakfast: $8.40(2,000) + $13.20(2,500) = $49,800

Lunch: $8.40(3,000) + $13.20(1,500) = $45,000

Dinner: $8.40(5,000) + $13.20(1,000) = $55,200

Materials and labor costs which are directly traceable are added to determine the total meal costs:

Cost Item Breakfast Lunch Dinner

Materials $ 5,000 $ 8,000 $19,000

Labor 4,000 10,000 16,000

Overhead 49,800 45,000 55,200

Total cost $58,800 $63,000 $90,200

Note that the total cost assigned to these meals equals the sum of the costs reported by the �ive activity centers (i.e., $58,800 + $63,000 + $90,200 = $32,000 + $30,000 + $150,000, or $212,000). Per-unit costs for each meal are:

Breakfast: $58,800 / 22,000 = $2.67

Lunch: $63,000 / 15,000 = $4.20

Dinner: $90,200 / 12,000 = $7.52

Comparing ABC to Traditional Volume-Based Costing

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint… 14/41

As discussed, traditional volume-based cost systems unfortunately have paid less attention to the cause- and-effect relationships between resources used and production activities. Assume that the prior cost system in use by Guttman Cafeterias assigned overhead costs to meals using labor dollars. This is a common approach to assigning overhead. Let us also assume that the preliminary cost assignment steps are the same under either approach. Since $150,000 of total overhead cost is incurred and total labor cost is $30,000, an overhead rate of $5 ($150,000 / $30,000) for each $1 of labor is added to each product. The product costs would be as follows:

Total Breakfast Lunch Dinner

Direct materials $32,000 $5,000 $8,000 $19,000

Direct labor 30,000 4,000 10,000 16,000

Overhead costs ($5 per DL$) 150,000 20,000 50,000 80,000

Total meal costs $212,000 $29,000 $68,000 $115,000

Number of meals 22,000 15,000 12,000

Traditional cost per unit $1.32 $4.53 $9.58

ABC cost per unit $2.67 $4.20 $7.52

Difference

Traditional minus ABC cost $(1.35) $0.33 $2.06

Percentage of ABC cost (50.6%) 7.9% 27.4%

A dramatic picture appears. Using a cost system very common in many companies today, two of the three products have large cost differences: Breakfast and Dinner. Guttman had overcosted Dinners by 27.4%. This is a far more pro�itable meal than Guttman’s management had thought. Guttman may be losing Dinner business because of its higher-than-necessary selling price. Conversely, Breakfast is less pro�itable than previously thought. With traditional costing, Breakfast received a disproportionately low amount of overhead allocation because its labor cost of $4,000 was much lower than those of Lunch and Dinner ($10,000 and $16,000, respectively). However, Breakfast consumed overhead resources, namely serving hours per unit, comparable to the other two meals. Breakfast prices might need to be raised to cover its actual use of resources.

ABC is also considered superior to volume-based costing when a company’s sales mix includes the following two types of products or services:

High volume, low complexity Low volume, high complexity

To illustrate, suppose Reznick Food Corporation produces 50,000 boxes of “Bland,” a breakfast cereal where each piece has the same shape, color, and �lavor (high volume, low complexity). The company also produces 10,000 boxes of “Wow!,” a cereal having a variety of shapes, colors, and �lavors (low volume, high complexity). Setup costs of $2,000 and materials handling costs of $9,000 are to be assigned to the two cereals. The following activity information is obtained:

“Bland” “Wow!”

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint… 15/41

“Bland” “Wow!”

Direct labor hours 25,000 2,500

Production runs 10 20

Materials moves 50 40

Volume-based costing, using direct labor hours, would assign the costs as follows:

“Bland”: ($2,000 + $9,000) × (25,000 / 27,500) = $10,000

“Wow!”: ($2,000 + $9,000) × (2,500 / 27,500) = $1,000

An ABC system would use the number of production runs to assign setup costs and the number of materials moves to assign materials handling costs, as follows:

“Bland”: [$2,000 × (10 / 30)] + [$9,000 × (50 / 90)] = $5,667

“Wow!”: [$2,000 × (20 / 30)] + [$9,000 × (40 / 90)] = $5,333

After dividing these assigned costs by 50,000 boxes for “Bland” and 10,000 boxes for “Wow!,” we obtain the following costs per box:

“Bland” “Wow!”

Volume-based costing $0.20 $0.10

Activity-based costing $0.11 $0.53

Compared to ABC, volume-based costing has overcosted the high volume, low complexity product (“Bland”), while undercosting the low volume, high complexity product (“Wow!”). This distortion is known as product cross-subsidization and has caused companies that use volume-based costing to set high prices for high volume, low complexity products and low prices for low volume, high complexity products. These prices can result in losing customers to competitors for the high volume, low complexity products and incurring operating losses on the low volume, high complexity products. Chrysler experienced this phenomenon and, as a result, now outsources some parts that it previously had manufactured. Signals that companies may be experiencing product cross-subsidization include the inability to break into new markets or to maintain current market share as a result of competitors’ seeming ability to price below cost.

Whether ABC costs are “correct” or not, they would appear to be more accurate than the traditional costs. ABC makes a greater effort to match resource use, costs, activities, and products.

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint… 16/41

4.3 ABC and Nonmanufacturing Activities Historically, manufacturing-related costs comprised the bulk of a manufacturing organization’s total costs. Only manufacturing-related costs are considered product costs for external reporting purposes. In recent times, emphasis on accounting for nonmanufacturing costs such as selling, distribution, general administration, and research and development has grown. One reason is that nonmanufacturing costs are a growing portion of companies’ total costs. Another reason is that, due to computerization, it has become less costly to develop alternate accounting systems within a company. Therefore, in addition to the cost system needed for external reporting, companies now �ind it worthwhile to maintain alternate systems more useful for internal purposes such as pricing, control, decision making, and performance evaluation. With the growing emphasis on accounting for nonmanufacturing costs, manufacturing �irms who have adopted ABC for manufacturing-related activities are increasingly expanding their implementation of ABC to include nonmanufacturing activities.

Contemporary Practice 4.1: Communication Plans for ABC Implementation

A survey of ABC implementation was conducted with responses from 166 �inancial controllers at French companies. “According to the survey results, 77 percent of companies that have implemented ABC deployed a communication and information plan for the ABC project during the implementation. The communication plan covers project objectives (88 percent of respondents), ABC methodology (82 percent of respondents), and methods to avoid project failure (13 percent of respondents).”

Source: Rahmouni, A.F.A. & Charaf, K. (2012, November/December). Success of ABC projects in French companies: The in�luence of organizational and technical factors. Cost Management, 12–23.

In addition to manufacturing �irms, the usage of ABC is growing in the service sector. Competitive pressures in industries such as health care, �inancial services, telecommunications, and transportation have led to increased cost consciousness on the part of managers. Not only is ABC being used to assess costs associated with various services, but, increasingly, it is also being used to determine costs associated with particular customers. Customer pro�itability analysis is becoming an increasingly important issue with management.

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint… 17/41

4.4 Activity-Based Management Aside from product costing purposes, ABC systems are also used to improve the operations of an organization. This extension of ABC is often referred to as activity-based management (ABM). The ABM philosophy is that the activities identi�ied for ABC can also be used for cost management and performance evaluation purposes.

One aspect of ABM that evolves from activity analysis is the identi�ication and elimination of nonvalue- added costs. Activities and their costs that are eliminated without deterioration of product quality and value can reduce total production time and increase pro�itability. For instance, many companies have adopted just-in-time production systems in an effort to eliminate activities related to storing and handling inventories.

Another aspect of ABM is the determination of ef�iciency and effectiveness measures for all cost- generating activities. Traditionally, accountants have been concerned only with �inancial performance measures. With ABM, performance evaluation of activities has been expanded to include many non�inancial measures. Measures dealing with quality and productivity have become particularly prominent. Indeed, the phenomenon of total quality management is considered part of ABM. Examples of non�inancial quality measures include product defect rates, number of customer complaints, number of engineering change orders, and amount of rework. Examples of non�inancial productivity measures include the ratio of value-added time to total production time, amount of production per day per employee, and square footage required per day per unit of output.

ABM also encompasses innovations such as target costing, continuous improvement, employee empowerment, and benchmarking. These cost management and performance evaluation issues are discussed in detail in Chapter 12. The remainder of this chapter covers an ABM topic that deals with product costing: JIT costing.

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint… 18/41

4.5 JIT Costing To reduce nonvalue-added costs, many companies in recent years have adopted just-in-time (JIT) systems. These systems generally have the following characteristics:

1. Raw materials, work in process, and �inished goods inventories are reduced as much as possible, if not eliminated. Costs associated with inventories, such as storage and moving, are considered to add no value to the product. As such, the production system operates on a demand-pull basis. Raw materials are purchased only as demanded by production needs; production is scheduled only as demanded by sales orders.

2. Since little or no inventory buffers exist at various work stations, problems such as defective materials or machine breakdowns not only stop work at that station but also cause shutdowns at subsequent stations. Thus, total quality programs are emphasized in JIT environments.

3. Long-term agreements are negotiated with a small number of suppliers. The criteria for selecting suppliers focus on dependable delivery and quality.

4. Layouts of production facilities are structured in the form of focused factories, i.e., “factories within a factory.” To simplify activities, especially materials handling, machines are grouped in arrangements that allow a worker or a team of workers to perform a variety of sequential operations. These arrangements are often referred to as manufacturing cells.

5. JIT is facilitated by automation in various forms—�lexible manufacturing systems, automated materials handling systems, numerically controlled machines, computer integrated manufacturing systems, etc. Thus, in JIT environments, direct labor cost is usually not signi�icant and sometimes even nonexistent.

Due to these characteristics, �irms with JIT systems sometimes record costs differently from how it is discussed in Chapter 2. Just-in-time (JIT) costing differs from traditional costing with regard to the accounts used and the timing of cost recording. Speci�ically, three major differences exist. First, instead of using separate accounts for Raw Materials and Work in Process, JIT costing combines these into a Raw and In-Process Inventory (RIP) account. The rationale is that the amount of work in process at any particular time will be low.

A second difference is that since direct labor is usually a minor cost item in a JIT setting, no separate account for direct labor in JIT costing is created. Rather, direct labor is combined with overhead into a Conversion Cost account. In some companies, direct labor is actually included in the Overhead account.

The third difference relates to the application of overhead. In traditional environments, overhead is applied to products as they are being produced. As such, overhead is applied to and recorded into the Work in Process account. In JIT costing, overhead is not applied to products until they are completed. No Work in Process account exists to accumulate conversion costs. When products are completed under JIT costing, conversion cost is applied to the Finished Goods account. In more “pure” JIT systems, the conversion cost is applied or added to Cost of Goods Sold, since the goods are sold soon after production is completed. JIT costing is sometimes termed back�lush costing because the product costs are “�lushed” out of the accounting system and are attached to the products only after they are completed. This is the reverse of the traditional approach, which attaches costs to products, via the Work in Process account, as products are being produced.

Just as the Overhead account is closed out in the traditional cost system, the Conversion Cost account in the JIT system is closed out at the end of the period. In Chapter 2 we stated that Overhead should be closed out to Cost of Goods Sold or prorated among Cost of Goods Sold, Work in Process, and Finished Goods. With JIT costing, Conversion Cost would typically be closed out just to Cost of Goods Sold.

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint… 19/41

To illustrate JIT costing, suppose that Rosing Tire Center sells, installs, and repairs auto and truck tires. Recently, the company has begun to consider implementing a JIT inventory system. The following transactions occurred during January:

a. Rosing purchased $17,000 of materials. b. All materials purchased were requisitioned for use. c. Rosing incurred direct labor costs of $8,000. d. Actual overhead costs amounted to $125,000. e. Rosing applied conversion (overhead) costs totaling $130,000. This includes $8,000 of direct

labor. f. All jobs were completed. No jobs were in process on January 1.

These transactions would be recorded in a traditional costing system as follows:

Materials Accounts Payable Work in Process

(a) 17,000 (b) 17,000 (a) 17,000 (b) 17,000 (f ) 147,000

(d) 125,000 (c) 8,000

(e) 122,000

Wages Payable Overhead Finished Jobs on Hand

(c) 8,000 (d) 125,000 (e) 122,000 (f ) 147,000

Under JIT costing, no entries are made for transactions (b), (c), and (e). Entry (b) is not necessary because the placement of materials into use is implied in transaction (a) when the materials are �irst received. No separate entry for (c) is made because direct labor ($8,000) is combined with overhead ($125,000) and recorded as a debit to Conversion Cost ($133,000) as part of entry (d). Finally, entry (e) is omitted because conversion cost is not applied until the jobs are completed. The entry for conversion cost application, therefore, becomes part of entry (f ).

The JIT costing system would record the January transactions in the following manner:

Raw and In-Process Inventory Accounts Payable Conversion Cost

(a) 17,000 (f ) 17,000 (a) 17,000 (d) 133,000 (f ) 130,000

(d) 125,000

Wages Payable Finished Jobs on Hand

(d) 8,000 (f ) 147,000

Note that the JIT costing system is much simpler and less expensive than the traditional system because fewer entries are needed.

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint… 20/41

Summary & Resources

Chapter Summary Activity-based costing is a system of accounting that focuses on activities performed to produce items or services. The activities are the primary building blocks in cost accumulation. Cost drivers are used to identify costs with activities and to identify activities with products. Preliminary stage cost drivers assign support activity costs to other activity centers. Primary stage cost drivers relate costs of activities to products or services.

In designing an activity-based cost system, �ive basic steps are followed. First, assemble similar actions into activity groups. This process involves categorizing activities as unit level, batch level, product level, and facility level. Second, classify costs by activity group and by expense. Third, select the appropriate preliminary stage and primary stage cost drivers. This process eliminates distortions in cost allocations to products that result from production complexity. Fourth, calculate a cost function to link costs and the cost driver activity. Finally, �ifth, assign costs to the cost objective (often the product cost).

ABC can also be applied to nonmanufacturing activities and to service organizations. Activity-based management involves the analysis of activities for cost management and performance evaluation issues.

JIT costing differs from traditional cost systems in three respects. First, JIT costing does not use a Work in Process account. Second, JIT costing combines direct labor and overhead into one account. Third, in JIT costing, overhead is not applied to products until the products are completed.

Key Terms

activity-based costing (ABC) A system of accounting that focuses on activities performed to produce products or services.

activity-based management (ABM) A management approach that focuses on activities with the objective of improving operations.

activity center A segment of the organization for which management wants the costs of a set of activities to be reported separately.

back�lush costing The costing approach used in JIT systems, in which product costs are “�lushed” out of the accounting system and are attached to the products only after they are completed.

batch-level activities Activities that are performed each time a batch of goods is produced or handled.

batch-size diversity The manufacturing of products in different-size batches.

cost center A responsibility center where control exists over the incurrence of cost.

demand-pull

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint… 21/41

A production system in which raw materials are purchased only as demanded by production needs, and production is scheduled only as demanded by sales orders.

facility-level activities Activities that sustain a facility’s general production process.

focused factory A factory layout that permits the production of a single product or family of products.

just-in-time (JIT) costing A method of product costing used for JIT systems.

just-in-time (JIT) systems Systems whose objective is to eliminate waste by producing a product only when it is needed and only in the quantities demanded by customers.

manufacturing cells Machines that are grouped in arrangements that allow a worker or team of workers to perform a variety of sequential operations.

nonvalue-added costs Costs that can be eliminated without deterioration of product quality and value.

preliminary stage cost driver A cost driver in an ABC system that assigns costs from activities to other activities.

primary stage cost driver A cost driver in an ABC system that assigns costs from activities to the cost objectives.

product cross-subsidization Cost distortion resulting from overcosting one product and undercosting another one.

product diversity The degree to which each product differs in the number of activities required.

product-level activities Activities that are performed as needed to support the production of each different type of product or service.

unit-level activities Activities that are performed each time a unit is produced or handled.

Problem for Review Paci�ic Highway Publishing, Inc. publishes two periodicals—North Ryde Post and Macquarie Daily—which involve the following four overhead activities, costs, and cost drivers:

Activity Overhead Cost Activity Driver

Design $275,000 Number of design changes

Receiving 62,000 Number of shipments received

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint… 22/41

Activity Overhead Cost Activity Driver

Setup 159,000 Number of setup hours

Shipping 88,000 Number of outgoing shipments

Additional information:

Shipments Received

Setup Hours

Design Changes

Outgoing Shipments

Number of Periodicals

North Ryde Post

800 4,800 30 4,900 140,000

Macquarie Daily

200 800 10 1,400 105,000

Questions:

1. Determine the overhead cost per unit for each periodical if overhead is allocated based on volume of periodicals.

2. Determine the overhead cost per unit for each periodical if overhead is allocated using activity- based costing.

Solution:

1. Volume-based costing:

Total overhead = ($275,000 + $62,000 + $159,000 + $88,000) = $584,000

Allocation to North Ryde Post = (140,000 ÷ 245,000)($584,000) = $333,714

Unit cost for North Ryde Post = $333,714 ÷ 140,000 = $2.38

Allocation to Macquarie Daily = (105,000 ÷ 245,000)($584,000) = $250,286

Unit cost for Macquarie Daily = $250,286 ÷ 105,000 = $2.38

2. Activity-based costing: North Ryde Post

Design ($275,000) (30 ÷ 40) $206,250

Receiving ($62,000) (800 ÷ 1,000) 49,600

Setup ($159,000) (4,800 ÷ 5,600) 136,286

Shipping ($88,000) (4,900 ÷ 6,300) 68,444

Total $460,580

Divided by number of periodicals ÷ 140,000

Overhead cost per unit $3.29

Macquarie Daily

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint… 23/41

Macquarie Daily

Design ($275,000) (10 ÷ 40) $68,750

Receiving ($62,000) (200 ÷ 1,000) 12,400

Setup ($159,000) (800 ÷ 5,600) 22,714

Shipping ($88,000) (1,400 ÷ 6,300) 19,556

Total $123,420

Divided by number of periodicals ÷ 105,000

Overhead cost per unit $1.18

Questions for Review and Discussion 1. What is a cost driver? What is its role in tracing costs to products? 2. Identify the �ive basic steps in applying activity-based costing to a costing problem. 3. De�ine an activity center. How many activity centers can exist in one production department?

Explain. 4. Describe the differences among unit-level activities, batch-level activities, and product-level

activities. 5. Explain the difference between a preliminary stage cost driver and a primary stage cost driver. 6. What is meant by product diversity? Why is it important in product costing? 7. What factors have led to an increased emphasis on accounting for nonmanufacturing costs, such

as selling, distribution, general administration, and research and development? 8. How does JIT costing differ from traditional costing? 9. Why is JIT costing sometimes referred to as back�lush costing?

Exercises 4-1. Classi�ication of Activities. Baseman Electronics, Inc. makes avionics equipment for private aircraft manufacturers. The production process takes place in three departments. The following costs were budgeted for February:

Computer programming—production $ 27,000

Custodial wages—plant 4,500

Depreciation—machinery 95,000

Depreciation—plant 60,000

Electricity—machinery 11,600

Electricity—plant 7,400

Engineering design 36,000

Equipment maintenance—wages 14,100

Equipment maintenance—parts and supplies 2,900

Heating—plant 3,200

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint… 24/41

Inspection—production 3,800

Insurance—plant 10,000

Property taxes 9,300

Raw materials, components, subassemblies 280,000

Setup wages 19,000

Questions:

1. Identify each of the costs as one of the following: a. A unit-level activity b. A batch-level activity c. A product-level activity d. A facility-level activity

2. Specify an appropriate cost driver for tracing to the products the costs that are associated with the various activity levels previously identi�ied.

4-2. Basic ABC. Starkman Corp. uses activity-based costing and has provided the following data:

Activity Center Cost Drivers Amount of Activity Activity Center Costs

Materials handling Pounds handled 55,000 lbs. $220,000

Painting Units painted 40,000 units $320,000

Assembly Labor hours 6,000 hours $240,000

Job #45 contains 400 units. It weighs 880 pounds and uses 950 hours of labor.

Question:

Compute the total overhead cost that should be assigned to Job #45.

4-3. Primary Stage Assignment. For S. Bierman, Inc., a publisher of magazines, the Materials Handling activity center moved materials for four other activity centers. The cost of materials moved were as follows:

Activity Center Cost of Materials Moved

Receiving $45,000

Typesetting 90,000

Printing 20,000

Shipping 15,000

Materials Handling had $77,000 of direct costs and $49,000 of costs assigned to it from other activity centers. Cost of materials moved is the cost driver.

Question:

Printing will be assigned how much cost from Materials Handling?

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint… 25/41

4-4. Overhead Cost Assignment. House of Tradition manufactures two types of hats: Black and White. The overhead activities, costs, and related data are as follows:

Black White Activity Center Costs

Receiving orders 120 180 $ 9,000

Machine hours 3,000 2,000 $90,000

Setups 50 25 $12,000

Shipping orders 250 150 $22,000

Question:

Using activity-based costing, determine the overhead costs assigned to each of the two hats.

4-5. Cost Control With ABC. The Flying Llama Travel Agency of Lima, Peru, budgets its agents’ expenses based on the following activities, cost drivers, and cost functions:

Activities Cost Drivers Cost Functions

Operations Kilometers traveled 0.60 New Sol per kilometer

Entertainment Admission expenses 15.00 New Sol per passenger

Trips Trip agent costs 300.00 New Sol per trip

Juanita Garcia spent 8,200 New Sol in September. She ran 10 trips, had 20 persons per trip, and traveled a total of 4,000 kilometers. Other agents’ spending averaged 8,600 New Sol.

Question:

Using activity-based costing, comment on Garcia’s spending for September. Also, comment on the spending of the other agents.

4-6. Job Costing With Volume-Based Costing and With ABC. Bergen Corporation has four categories of overhead, with expected costs for next year as follows.

Maintenance $820,000

Materials handling 180,000

Inspection 390,000

Setups 315,000

Job #58 is scheduled for next year and has the following estimates:

Direct materials $82,000

Direct labor (2,000 hours) $97,000

Number of inspections 95

Number of setups 88

Number of machine hours 4,500

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint… 26/41

Number of materials moves 185

Sixty thousand direct labor hours are budgeted for next year. Expected activity for the activity-based cost drivers that could be used are:

Machine hours 34,000

Material moves 18,000

Setups 31,000

Quality inspections 37,000

Questions:

1. Determine the total cost of Job #58 if direct labor hours are used as the cost driver for overhead.

2. Determine the total cost of Job #58 if activity-based costing is used.

4-7. Activity Center Rates. The following budgeted activity data and costs are from Chernin Laundromats:

Activity Centers Direct Costs

Support Costs

Percentage of Space Used

Number of Employees

Preliminary centers:

Administration $64,000 20%

Maintenance 75,000

Primary centers:

Washing $123,000 45,000 60% 30

Drying 69,000 88,000 20% 20

Administration uses number of employees as its cost driver. Maintenance uses percentage of space used as its cost driver. Washing uses machine hours as its cost driver and has budgeted 42,300 hours this month. Drying also uses machine hours as its cost driver and has budgeted 40,100 hours this month.

Question:

Find the cost rates that will be used this month in each primary center.

4-8. Product Costing With ABC. Linda Irvin, the controller of Sonya Electronics, wishes to use activity- based costing for a new circuit board produced for personal computers. Irvin has identi�ied the following activities associated with circuit board production and the related conversion costs forecast for the period:

Activity Conversion Cost

Purchasing of parts $ 72,000

Starting the product 90,000

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint… 27/41

Activity Conversion Cost

Inserting the components 150,000

Soldering the boards 180,000

Testing the quality 140,000

The cost drivers which Irvin intends to use, as well as the amounts of activity forecast for the period, are:

Activity Cost Driver Cost Driver Amounts

Purchasing of parts Number of parts purchased 12 per board

Starting the product Number of boards started 60,000

Inserting the components Number of insertions 10 per board

Soldering the boards Number of boards soldered 60,000

Testing the quality Number of testing hours 2,000

Each circuit board has anticipated direct materials costs of $36. In addition, each circuit board takes, on average, 15 minutes to test.

Question:

Determine the cost of a circuit board produced by Sonya Electronics.

4-9. Finding Missing Costs. Susan Robinson, the operations manager for Goldie’s Towing Service, is unable to locate the 2018 budget. You have managed to recover the following information for her:

Activity Center Budgeted Overhead Cost Cost Driver

Budgeted Cost Driver Level

Dispatching $14,000 Number of calls 350 calls

Towing 42,000 Towing hours 600 hours

Billing and Collection

15,000 Pages of forms processed

5,000 pages

Miscellaneous ? Labor hours 10,000 hours

Overhead

You have also obtained the following information pertaining to the Southern Region, which you learned was assigned an overhead cost of $9,500:

Labor hours 2,000

Number of calls 50

Towing hours 55

Pages of forms processed 430

Question:

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint… 28/41

Determine the amount of Miscellaneous Overhead that was budgeted for 2018.

4-10. Overhead Cost Assignment. Helene’s Tennis Experts is a company that specializes in installing and resurfacing tennis courts. Using ABC, the company has assigned all overhead costs into �ive cost pools. The budgeted amounts for these cost pools and their associated cost drivers are:

Overhead Cost Pool Budgeted Costs Cost Driver

Budgeted Level for Cost Driver

Purchasing and materials- related

$230,000 Materials costs $1,450,000

Engineering 97,000 Engineering hours

5,300 hours

Of�ice and storage rental 125,000 Square feet of jobs

478,500 sq. ft.

Equipment depreciation 150,000 Direct labor cost $998,000

General administration 280,000 Direct labor hours

88,000 hours

The company has just completed resurfacing Thompson Park Tennis Courts, which had the following cost driver data:

Materials cost $39,000

Direct labor cost $15,200

Engineering hours 62

Square feet of jobs 4,100

Direct labor hours 75

Question:

Determine the total overhead cost that would be assigned to Thompson Park Tennis Courts.

4-11. Product Costing With ABC. Budgeted unit costs and production for the two products made by Monica’s Cat Foods, Inc. are as follows:

Kitty Gourmet Cat Yummies

Units of product 375,000 225,000

Direct materials $28 $22

Direct labor $75 $45

Other information for the coming year follows:

Activity Budgeted Costs Cost Driver

Required Units of Cost Drivers

Kitty Gourmet Cat Yummies

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint… 29/41

Activity Budgeted Costs Cost Driver

Required Units of Cost Drivers

Kitty Gourmet Cat Yummies

Machining $5,550,000 Machine hours 34,000 30,000

Inspection 51,000 Number of batches 500 700

Shipping 88,000 Number of shipments 100 750

Purchasing 17,000 Number of orders 35 25

Machine setup 360,000 Setup hours 3,200 1,800

Question:

Using ABC, compute the budgeted unit costs for each of the two products made by Monica’s Cat Foods, Inc.

4-12. Preliminary and Primary Stage Allocations. Maryland Forklift Manufacturing produced 100 electric forklifts and 150 propane forklifts during the year. Amy Mitchell, the controller, reported the following traceable costs, other than direct materials and direct labor, for its activity centers:

Activity Center Costs

Plant Administration $ 66,000

Setup Operations 24,000

Materials Handling 47,000

Machining 180,000

Assembly 150,000

Data for the preliminary stage cost assignment are as follows:

Activity Center

Activity Centers Using Resources and Receiving Costs

Setup Operations Machining Assembly

Plant Administration 5% 40% 55%

Materials Handling 65% 35%

Data for the primary stage cost assignment are as follows:

Activity Center

Cost Driver Activity Linked to Each Product

Cost Driver Electric Propane

Setup Operations Number of setups 30 setups 20 setups

Machining Machine hours 250 hours 150 hours

Assembly Labor hours 6,000 hours 9,000 hours

Question:

Determine the overhead cost per unit assigned to each type of forklift.

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint… 30/41

4-13. Customer Cost With ABC. The following cost data have been accumulated for Shenk Tuxedo Rentals:

Activity Center Cost Driver Amount of Activity Activity Center Costs

Selling Labor hours 825 hours $29,000

Alterations Number altered 200 units 6,500

Cleaning and Preparation Number rented 750 units 16,800

General Overhead Labor hours 825 hours $52,000

Scott Jacobson, a customer, necessitated two hours of selling time. He rented seven tuxedos, and three of them required alterations.

Question:

Compute the total cost that should be assigned to Scott Jacobson.

4-14. Recording Transactions Under JIT Costing. Hyeun-Suk Rhee, owner of Taegu Supply Company in South Korea, which manufactures chopsticks for restaurants, has recently decided to implement a JIT cost system. Transactions (in South Korean won) for August are as follows:

a. Raw materials were purchased at the cost of W950,000. b. All materials purchased were requisitioned for production. c. Direct labor costs of W2,500,000 were incurred. d. Actual factory overhead costs amounted to W6,000,000. e. Applied conversion costs totaled W8,100,000. This included W2,500,000 of direct labor. f. All units were completed.

Question:

Enter the August transactions into T-accounts. Label these entries by the identifying letters.

Problems 4-15. Activities and Cost Drivers for an Employment Agency. Kelsey Relocation Services is an employment agency working speci�ically with mid-level executives looking for new career opportunities or seeking employment after a layoff. The company views its product as placements. These are identi�ied in four categories: employer-paid fee, applicant-paid fee, out-placement contract, and executive-search contract.

The agency incurs a number of costs in performing its services. Those costs are classi�ied as operating expenses as follows:

Acct # Account Title

402 Salaries and Wages

403 Payroll Taxes

404 Employee Bene�its

408 Of�ice Supplies (postage, stationery, etc.)

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint… 31/41

Acct # Account Title

409 Dues and Publications

410 Utilities

412 Rent

413 Repairs and Maintenance (contracted from outside)

420 Business Promotion

421 Auto Expenses

422 Travel Expenses

430 Professional Fees

432 Collection Expenses

435 License

441 Property Taxes

444 Insurance Costs

445 State Franchise Tax

447 Bad Debt Expense

448 Depreciation and Amortization

449 Miscellaneous

Questions:

1. Classify each cost as related to unit-level, batch-level, product-level, or facility-level activities. Indicate an appropriate cost driver for each cost.

2. With the information from Part (1), group costs into logical activity groups and specify a cost driver for each activity group.

3. Explain what differences exist between applying activity-based costing to a manufacturing �irm and to an employment agency.

4-16. Cost Estimation With Volume-Based Costing and ABC. Neil’s Customized Gift Service (NCGS) contracts with corporate clients to print their logos and emblems on small giftware items such as pens, cups, calculators, coasters, etc. Cal Nitz, the controller of NCGS, has provided the following information on overhead cost estimates for 2018:

Activity Estimated Cost Cost Driver

Supervision $855,000 Direct labor hours

Power 450,000 Kilowatt hours

Maintenance 720,000 Machine hours

Setups 225,000 Setup hours

The following are estimated 2018 and planned January activity levels of the cost drivers:

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint… 32/41

Cost Driver Estimated Activity for 2018 Planned Level in Jan. 2018Cost Driver Estimated Activity for 2018 Planned Level in Jan. 2018

Direct labor hours 300,000 35,000

Kilowatt hours 150,000 12,000

Machine hours 120,000 10,000

Setup hours 100,000 8,000

Questions:

1. Estimate overhead costs for January 2018 using direct labor hours as the allocation base. 2. Estimate overhead costs for January 2018 using activity-based costing.

4-17. Overhead Cost Assignment – ABC and Overall Rates. Kallus Airlines uses activity-based costing for its ground handling department. The department has assigned all overhead costs into seven activity cost pools. The budgeted amounts and the associated cost drivers for these cost pools are as follows:

Activity Cost Pool Budgeted Costs Cost Driver

Budgeted Level for Cost Driver

Loading and unloading cargo $ 250,000 Pounds of cargo 2,000,000 lbs.

Directing planes to and from gates

110,000 Directing distance 5,500 miles

Loading and unloading baggage

300,000 Bags loaded & unloaded

100,000 bags

Communicating with pilots 80,000 Communication time 2,000 hours

Fueling planes 450,000 Fueling time 10,000 hours

Deicing planes 75,000 Deicing time 1,000 hours

Locating mishandled bags 200,000 Number of inquiries 5,000 inquiries

Total $1,465,000

A �light has just been completed with the following cost driver information available:

Pounds of cargo 40,000

Directing distance (miles) 1.5

Bags loaded & unloaded 200

Communication hours 0.9

Fueling hours 2.2

Deicing hours 0

Number of inquiries 3

Questions:

1. Determine the total overhead cost that would be assigned to the �light.

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint… 33/41

2. Compare the total overhead cost computed in Part (1) with one obtained by using an overall overhead rate based on number of bags loaded and unloaded.

4-18. ABC and Volume-Based Costing for Marketing Studies. Janet Emerson & Associates, a marketing research �irm, uses ABC and has budgeted the following overhead costs and cost drivers (10,000 direct labor hours were budgeted):

Activities Cost Driver Budgeted Cost Budgeted Activity Level

Phoning Number of calls $25,000 80,000

Mailing Number of mailings 15,000 40,000

Personal visits Miles driven 10,000 50,000

The following data were collected on three market research studies completed:

Study #15 Study #19 Study #23

Direct materials cost $ 6,020 $ 5,425 $ 4,885

Direct labor cost $15,660 $12,235 $19,650

Direct labor hours 140 110 175

Number of calls 500 300 700

Number of mailings 7,000 6,000 2,000

Miles driven 900 1,300 1,600

Questions:

1. Using volume-based costing with direct labor hours as the cost driver, calculate the total cost of each of the three studies.

2. Using ABC, calculate the total cost of each of the three studies.

4-19. Two-stage Allocation and Overhead Rates. Radzeli Corp. has provided the following information about overhead costs traceable to its activity centers:

Activity Center Overhead Cost Cost Driver

Maintenance $90,000 Maintenance hours

Receiving 40,000 Receiving orders

Fabrication 150,000 Labor hours

Assembly 280,000 Machine hours

The following activities were reported:

Activity Center Maintenance Hours Receiving Orders Labor Hours Machine Hours

Fabrication 200 30 1700 450

Assembly 800 120 1300 550

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint… 34/41

Overhead allocations involving Maintenance and Receiving are performed in the preliminary stage; overhead costs for Fabrication and Assembly are assigned to products in the primary stage.

Question:

Compute the overhead rates for product costing in Fabrication and Assembly.

4-20. Distortion of Product Pro�itability. The Chromosome Manufacturing Company produces two products, X and Y. The company president, Gene Mutation, is concerned about the �ierce competition in the market for product X. He notes that competitors are selling X for a price well below Chromosome’s price of $12.70. At the same time, he notes that competitors are pricing product Y almost twice as high as Chromosome’s price of $12.50.

Mr. Mutation has obtained the following data for a recent time period:

Product X Product Y

Number of units 11,000 3,000

Direct materials cost per unit $3.23 $3.09

Direct labor cost per unit $2.22 $2.10

Direct labor hours 10,000 2,500

Machine hours 2,100 2,800

Inspection hours 80 100

Purchase orders 10 30

Mr. Mutation has learned that overhead costs are assigned to products on the basis of direct labor hours. The overhead costs for this time period consisted of the following items:

Overhead Cost Item Amount

Inspection costs $16,200

Purchasing costs 8,000

Machine costs 49,000

Total $73,200

Questions:

1. Using direct labor hours to allocate overhead costs, determine the gross margin per unit for each product.

2. Using activity-based costing, determine the gross margin per unit for each product. 3. How do your answers to Parts (1) and (2) help explain the observations made by Gene Mutation

about competitors?

4-21. Preliminary and Primary Stage Allocations. Krohn Movers has a pricing structure that distinguishes between local and out-of-town moving jobs. During the year, the local jobs involved 175,000 miles; and the out-of-town jobs involved 250,000 miles. The following traceable costs are reported by Anita Stein, the controller, for Krohn’s activity centers:

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint… 35/41

Activity Center Materials Labor Other CostsActivity Center Materials Labor Other Costs

#1100 $75,000

#1200 60,000

#2300 25,000

#3100 $36,000 $45,000 80,000

#3200 52,000 88,000 92,000

Data for the preliminary stage cost assignment are as follows (in the order shown):

Activity Center

Activity Centers Using Resources and Receiving Costs

#2300 #3100 #3200

#1100 10% 40% 50%

#1200 25% 60% 15%

#2300 80% 20%

Data for the primary stage cost assignment are as follows:

Activity Center

Jobs Using Resources and Receiving Costs

 Local  Out-of-Town

#3100 75% 25%

#3200 35% 65%

One-fourth of the materials and labor costs are traceable to local jobs and the remainder to out-of-town jobs.

Question:

Determine the per-mile costs for local jobs and for out-of-town jobs.

4-22. Activity-Based Costing for a Tour Company. Macquarie Tour Company provides tours in Australia and uses an activity-based cost system. The basic 10-day package covers the east coast, including Sydney, Melbourne, Canberra, Brisbane, and the Great Barrier Reef. The deluxe 21-day package adds the outback, west coast, and other areas, including Darwin, Tasmania, Adelaide, Perth, and Alice Springs. Direct labor (drivers, tour guides) and materials costs (e.g., fuel, brochures, various drinks and refreshments) for 2018 were (in Australian dollars):

10-Day Package 21-Day Package

Direct labor A$670,000 A$1,770,000

Materials A$10,800 A$22,400

The following additional information for 2018 was provided by the owner, David Rogut:

Activity Overhead Cost Cost Driver Activity (Cost Driver) Level

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint… 36/41

10-Day Package 21-Day PackageActivity Overhead Cost Cost Driver Activity (Cost Driver) Level

10-Day Package 21-Day Package

Advertising A$56,700 No. of ads 150 175

Organizing itinerary A$89,300 No. of tours 55 72

Touring A$380,500 No. of tourists 2,725 3,130

Question:

Compute the total cost per tour for each of the two tour packages.

4-23. Recording Transactions under JIT Costing. Phil’s Jewelry Factory manufactures a variety of costume jewelry. The owner, Phil Joseph, has recently decided to implement a JIT cost system. Transactions during September were as follows:

a. Raw materials totaling $45,000 were purchased. b. All materials purchased were requisitioned for production. c. Direct labor costs of $11,000 were incurred. d. Indirect labor costs amounted to $120,000. e. Utilities costs totaled $15,000. f. Other actual factory overhead costs amounted to $85,000. g. Applied conversion costs totaled $221,000. This includes the direct labor costs. h. All units were completed.

Questions:

1. Enter the September transactions into T-accounts. Label these entries by the identifying letters. 2. Determine the amount of overapplied or underapplied conversion cost for the month.

4-24. JIT and Conventional Costing. Sidlow Industrial Products manufactures automated materials- handling systems. The company currently uses a conventional job cost system. During November, the company plans to purchase $96,000 of raw materials. Of this amount, 75% will be used for current production, while the remainder will serve as a buffer in inventory. Direct labor cost is expected to be $18,000 during November, and the actual factory overhead is anticipated to total $85,000. The applied factory overhead is expected to be $90,000. By the end of the month, two materials-handling systems should be completed; no systems were in process at the beginning of the month or at the end of the month.

Anne Glaser, the owner, has been considering the use of a JIT inventory system. If implemented at the beginning of November, only the materials needed for current production would be purchased.

Questions:

1. Using T-accounts, enter the November transactions for the purchase and usage of materials under:

a. Conventional costing b. JIT costing

2. Using T-accounts, enter the November transactions for the labor and actual overhead costs under:

a. Conventional costing

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint… 37/41

b. JIT costing 3. Using T-accounts, enter the November transactions for the application of overhead costs and the

completion of the materials-handling systems under: a. Conventional costing b. JIT costing

Case: Druid Valley Apartments

Druid Valley Apartments (DVA) has 18 apartment buildings with a total of 600 units—420 two- bedroom units and 180 one-bedroom units. Also, the complex contains a sports area which has a basketball court, exercise room, tennis court, and two activity rooms. The sports area was used by 475 residents this past year. DVA currently has 1,580 tenants—280 in one-bedroom units and 1,300 in two-bedroom units. The one-bedroom apartments occupy 90,000 square feet, while the two-bedroom apartments occupy 275,000 square feet. The sports area occupies 35,000 square feet.

Jerry Siegel, DVA’s Chief Operations Of�icer, oversees the day-to-day operations of the apartment complex. Doug Ross supervises the sports area. He organizes programs, classes, and other activities. The facilities are managed by Bruce Gaynes, who oversees the staff for building maintenance and grounds. Sylvia Miller does the bookkeeping, and Colleen Weston is the secretary/receptionist.

The following expense report for the past year was given to Jerry Siegel:

Expense Items Amounts

Administrative salaries $ 227,000

Custodial costs 177,000

Maintenance costs 90,000

Instructor/trainer costs 60,000

Grounds costs 55,000

Heat and electricity 42,000

Water 98,000

Of�ice supplies 13,000

Building depreciation 795,000

Equipment depreciation 130,000

Liability and property insurance 720,000

Advertising 51,000

Telephone 17,000

Newsletter 10,000

Interest 20,000

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint… 38/41

Expense Items Amounts

Postage 11,000

Miscellaneous 27,000

Total expenses $2,543,000

Siegel wondered what it cost to operate the apartment units and the sports area. He contacted his CPA, Ian Ratner, who convinced him to install an activity-based costing (ABC) system. Siegel engaged Ratner to do this.

After discussions with DVA staff, Ratner developed a list of eight activities that seemed to capture the operations at DVA:

No. Activity

1 Attracting new residents

2 Servicing current residents

3 Maintaining the buildings

4 Maintaining the grounds

5 Cleaning the apartments/sports area

6 Providing recreational programs

7 Collecting rent and fees

8 Sustaining the business

Activity 6, “providing recreational programs,” included classes, personal training, resident meetings, and any other events that took place in the sports area. Activity 8, “sustaining the business,” is a catchall that includes tasks such as accounting, purchasing, general of�ice management, and human resource management.

Ratner’s next task was to assign costs to the eight activities. He asked all DVA administrative personnel to �ill out estimates of how they spent their time, on average, during the past year. These estimates were as follows:

J. Siegel D. Ross B. Gaynes S. Miller C. Weston

Salary: $67,000 $48,000 $44,000 $35,000 $33,000

Activity:

Attracting new residents 10% 5%

Servicing current residents 20% 20% 15% 10%

Maintaining the buildings 5% 30%

Maintaining the grounds 5% 25%

Cleaning the apts./sports area 5% 30%

Providing rec. programs 65%

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint… 39/41

J. Siegel D. Ross B. Gaynes S. Miller C. Weston

Collecting rent and fees 10% 60%

Sustaining the business 45% 10% 15% 25% 90%

Total 100% 100% 100% 100% 100%

Some costs were assigned entirely to one activity. These included interest expense, instructor/trainer costs, custodial costs, maintenance costs, and grounds costs. The latter three costs consist of wages to workers as well as various supplies. Of�ice supplies, equipment depreciation, telephone, postage, and miscellaneous expenses were distributed evenly to all eight activities. The remaining costs were assigned as follows:

Cost Assignment

Heat and electricity 10% to activity 1; 20% to activity 2; 40% to activity 6; 10% to activity 7; 20% to activity 8

Water 70% to activity 2; 15% to activity 4; 15% to activity 6

Building depreciation 95% to activity 2; 5% to activity 6

Liability and property insurance

60% to activity 2; 10% to activity 6; the remainder evenly

Advertising 90% to activity 1; 10% to activity 6

Newsletter 75% to activity 2; 25% to activity 6

After this cost assignment, Ratner decided to allocate evenly the costs that had been assigned to activity 8 to the other seven activities. Having done this, he then assigned the costs of these seven activities to the one-bedroom units, two-bedroom units, and sports area using the following cost drivers:

Activities Cost Driver Cost Objects

Attracting new residents Number of units 1-bedroom units, 2-bedroom units

Servicing current residents Number of residents 1-br. units, 2-br. units, sports area

Maintaining the buildings Square footage 1-br. units, 2-br. units, sports area

Maintaining the grounds Square footage 1-br. units, 2-br. units, sports area

Cleaning the apts./sports area Number of residents 1-br. units, 2-br. units, sports area

Providing recreational programs sports area

Collecting rent and fees Number of residents 1-br. units, 2-br. units, sports area

Question:

Determine the total costs assigned to the one-bedroom units, two-bedroom units, and sports area. For the apartment units, also compute the costs per unit. Comment on these costs.

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint… 40/41

Practice Problems in Action

Watch the video below for a step-by-step tutorial on how to solve the following problem using Excel. The video is best viewed in full-screen mode. For a transcript of the directions included in this tutorial video click here (https://ne.edgecastcdn.net/0004BA/constellation/PDFs/BUS630_2e/Chapter-4_Tutorial- Transcript_FINAL.pdf) .

Problem A large auto parts manufacturer is organized functionally into three divisions: Operations, Sales, and Administrative. Purchasing, receiving, materials and production control, manufacturing, factory personnel, inventory stores, and shipping activities are under the control of the Chief Of�icer of Operations.

Advertising, market research, and sales are the responsibility of the Director of Sales.

Accounting, budgeting, the �irm's computer center, and general of�ice management are delegated to the corporate controller (Administrative). The following cost categories are found in the company as a whole:

a. Depreciation on factory equipment. b. Assembly foreman's salary. c. Advertising supplies used. d. Direct labor in the Assembly Department. e. Cost of hiring new employees. f. Payroll fringe bene�its for workers in the Shipping Department.

Questions 1. Identify each of the costs with the appropriate division: Operations, Sales, Administrative. 2. Identify each of the costs with one of the following:

a. Unit-level activities b. Batch-level activities c. Product-level activities d. Facility-level activities

Organize these classi�ications by division: Operations, Sales, Administrative. 4. Specify an appropriate cost driver for tracing costs associated with the various levels of activities

to the next cost objective or products, whichever is appropriate.

Tutorial Video: Allocating costs

11/14/2019 Print

https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-36,navpoint-37,navpoint-38,navpoint-39,navpoint-40,navpoint-41,navpoint… 41/41



  0:00 / 3:15 