Mini-Case

A. The staff member identified the following three cost objects. Each cost object represents one of organization’s three services.

· Animal shelter

· Obedience training

· Veterinarian services

One possibility for cost pools is to create one pool for each cost object. This approach assumes that all costs can be directly assigned to one of these three services. Based on the following summary, it appears that some of the costs can be directly traced to the cost objects. However, some of the costs are indirect. (Note: Judgment is involved in these classifications; students might have categorized costs differently. For example, students might have classified veterinarians and technicians as indirect if they assumed that these employees provide services for the animal shelter in addition to the veterinarian clinic.)

Direct Costs___________

Animal Obedience Veterinarian

Shelter Training Services Indirect Total

Director and staff salaries $ 0 $ 0 $ 0 $ 60,000 $ 60,000

Animal shelter employees’ salaries 100,000 0 0 0 100,000

Veterinarians and technicians 0 0 150,000 0 150,000

Animal trainers* 20,000 20,000 0 0 40,000

Food and supplies** 50,000 0 75,000 0 125,000

Building-related costs 0 0 0 200,000 200,000

Total $170,000 $20,000 $225,000 $260,000 $675,000

* The problem indicates that animal trainers provide training classes and also train animals housed in the animal shelter. 50% of the animal trainer time is devoted to obedience classes. The remaining 50% is assumed to relate to training for animals housed in the animal shelter.

** The problem states that $75,000 of this cost is used by the veterinary clinic. The remainder ($50,000) is assumed to be used in the animal shelter.

A decision must be made about whether to allocate the two indirect costs to the three services. “Director and staff salaries” is most likely a facility-level cost for general administration, which would NOT normally be allocated to individual product lines. “Building-related costs” is also a facility-level cost. Sometimes this type of cost is allocated to individual products, and sometimes it is not. The following solution assumes that the building-related costs are NOT allocated to the shelter’s individual services.

B. There are three cost pools to consider—one for each of the organization’s services. For the animal shelter, a cost driver could be the number of animal days. On a daily basis, each animal would require similar time from employees to clean their cages, feed, and groom, and similar supplies such as food and bedding. Another possible cost driver is the total number of animals housed. However, this cost driver would not capture differences in cost caused by lengthy animal stays.

A cost driver for obedience training could be number of classes, number of families taking classes, or number of weeks in which classes are held. Because each class would require about the same amount of time regardless of the number of families per class, number of classes is probably a better cost driver.

A cost driver for veterinary services could be the number of animal-visits. Similar amounts of time and resources would be used per animal, although this assumes that the product mix of (e.g., neutering and vaccinations) remains relatively constant.

C. Given the cost pools identified in part A and the cost drivers in part B, the allocation rates are as follows:

Allocation

Cost Pool Total Cost Cost Driver Volume Rate

Animal shelter $170,000 Animal days 27,375 $ 6.21

Obedience training 20,000 # of classes 125 160.00

Veterinarian services 225,000 Animal visits 5,000 45.00

The allocation rate for the animal shelter indicates that the average cost of housing a pet for one day is $6.21. The allocation rate for obedience training indicates that it costs on average $160 to offer a training class. The allocation rate for veterinarian services indicates that it costs on average $45 to provide veterinarian care per animal-visit.

D.

1. Quality activities include:

· Prevention activities performed to insure defect-free production

· Appraisal activities performed to identify defective units

· Production activities undertaken in the production or rework of failed units

· Post-sales activities undertaken after the product has been sold to remedy problems caused by defects and failed units

The shelter is experiencing a post-sales activity when animals are returned because of behavior problems.

2. No, the current ABC system does not include cost pools related to any of the types of quality activities listed in Part D.1 above. For example, the system does not track the cost of training dogs while they are housed in the animal shelter (prevention), the cost of evaluating dog readiness for adoption (appraisal), the cost of additional training for dogs with greater than normal behavioral problems (production), or the cost of dogs returned because of behavior problems (post-sales).

3. There are many possible answers to this question; students may think of other cost pools or drivers. A possible cost pool could be the cost per animal returned. Costs in this pool could include costs for further training activities, for admitting the animal to the facility and working with families to find other animals, and the cost to house the animals while waiting for a new family. The cost driver for this cost pool would be the number of animals returned. There are some costs that cannot be measured, such as the cost of potential adopters who decide not to adopt another animal because of a bad experience.