Cost Management Systems: Activity-Based, Just-inTime, and Quality Management Systems

Question: The Santos Shirt Company manufactures shirts in two departments: Cutting and Sewing. The company allocates manufacturing overhead using a single plantwide rate with direct labor hours as the allocation base. Estimated overhead costs for the year are\(500,000, and estimated direct labor hours are 200,000. In June, the company incurred 17,500 direct labor hours.

1. Compute the predetermined overhead allocation rate.

2. Determine the amount of overhead allocated in June.

The Santos Shirt Company has refined its allocation system by separating manufacturing overhead costs into two cost pools—one for each department. The estimated costs for the Cutting Department are \)200,000. They will be allocated based on directlabor hours, which are estimated to be 125,000 hours for the year. The estimated costs for the Sewing Department are $300,000.Those costs will be allocated based on machine hours, which are estimated to be 150,000 hours for the year. In June, the companyincurred 10,000 direct labor hours in Cutting and 12,500 machine hours in Sewing.

3. Compute the predetermined overhead allocation rates for each department.

4. Determine the total amount of overhead allocated in June.

Goodwin, Inc. manufactures children’s sandals. Similar sandals manufactured by competitors sell for $12.50 per pair. Goodwin desires a 20% net profit margin. What is Goodwin’s target cost?

Question: Newton Company has analyzed its production process and identified two primary activities. These activities, their allocation bases, and their estimated costs are listed below.

The company manufactures two products: Regular and Super. The products use the following resources in March:

Regular Super

Number of purchase orders 5 purchase orders 7 purchase orders

Number of parts 600 parts 750 parts

5. Compute the predetermined overhead allocation rates using activity-based costing.

6. Determine the amount of overhead allocated to Regular products in March.

7. Determine the amount of overhead allocated to Super products in March.

Clancy’s Carpet Cleaning Services uses ABC to allocate overhead costs and has computed the following predetermined overhead allocation rates:

                 Activity                    Allocation Base                      Allocation Rate

                 Supplies              Number of square feet             \( 0.05 per square foot

                 Travel                   Number of customer sites      \) 20.00 per site

Clancy cleans the carpets for an apartment management firm. When a renter moves out, the apartment management firm contacts Clancy to clean the carpets in preparation for a new tenant. During the past month, Clancy cleaned the carpets of 23 apartments with 1,200 square feet each. What amount of indirect costs should Clancy allocate to the apartment firm for the month?

Malone Company has adopted a JIT management system and has the following transactions in August:

a. Purchased raw materials on account, \(50,000.

b. Incurred labor and overhead costs, \)70,000.

c. Completed 500 units with standard costs of \(95 for direct materials and \)150 for conversion costs.

d. Sold on account 475 units for $300 each.

10. Record the journal entries for Malone Company for August.

11. Open a T-account for Conversion Costs

12. Identify the following costs as prevention, appraisal, internal failure, or external failure:

a. Inspection of final products

b. Sales returns of defective products

c. Employee training

d. Reworking defective products

e. Working with suppliers to ensure delivery of high-quality raw materials

f. Costs of warranty repairs

g. Product testing

What is the formula to compute the predetermined overhead allocation rate?

How is the predetermined overhead allocation rate used to allocate overhead?

Question: Describe how a single plantwide overhead allocation rate is used.

Question: Why is a single plantwide overhead allocation rate not always accurate?

Why is the use of departmental overhead allocation rates considered a refinement over the use of a single plantwide overhead allocation rate?

Question: What is activity-based management? How is it different from activity-based costing?

How many cost pools are in an activity-based costing system?

Question: What are the four steps to developing an activity-based costing system?

Question: Why is ABC usually considered more accurate than traditional costing methods?

Question: List two ways managers can use ABM to make decisions.

Define value engineering. How is it used to control costs?

Explain the difference between the target price and target cost.

How can ABM be used by service companies?

What is a just-in-time management system?

Explain how the work cell manufacturing layout increases productivity.

What are the inventory accounts used in JIT costing?

How is the Conversion Costs account used in JIT costing?

Why is JIT costing sometimes called backflush costing?

Which accounts are adjusted for the underallocated or overallocated overhead in JIT costing?

What is the purpose of quality management systems?

List and define the four types of quality costs.

“Prevention is much cheaper than external failure.” Do you agree with this statement? Why or why not?

What are quality improvement programs?

Why are some quality costs hard to measure?

Question: The Watkins Company is decentralized, and divisions are considered investment centers. Watkins specializes in sports equipment, and one division manufactures netting that is used for basketball hoops, soccer goals, and other sports equipment. The Netting Division reports the following information for a heavy-duty basketball hoop net:

                                          Sales Price per Unit                      \( 18

                                          Variable Cost per Unit                       6

                                          Contribution Margin per Unit       \) 12

The Basketball Equipment Division can purchase a similar heavy-duty net from an outside vendor for $15.

Requirements

1. Determine the negotiable range for the transfer price.

2. What is the minimum transfer price the Netting Division should consider if operating at capacity? Below capacity?

3. What is the maximum transfer price the Basketball Equipment Division should consider?

The Oakman Company manufactures products in two departments: Mixing and Packaging. The company allocates manufacturing overhead using a single plantwide rate with direct labor hours as the allocation base. Estimated overhead costs for the year are $810,000, and estimated direct labor hours are 360,000. In October, the company incurred 20,000 direct labor hours.

Requirements

2. Determine the amount of overhead allocated in October.

The Oakman Company manufactures products in two departments: Mixing and Packaging. The company allocates manufacturing overhead using a single plantwide rate with direct labor hours as the allocation base. Estimated overhead costs for the year are $810,000, and estimated direct labor hours are 360,000. In October, the company incurred 20,000 direct labor hours.

Requirements

1. Compute the predetermined overhead allocation rate. Round to two decimal places.

The Oakman Company (see Short Exercise S19-1) has refined its allocation system by separating manufacturing overhead costs into two cost pools—one for each department. The estimated costs for the Mixing Department, \(510,000, will be allocated based on direct labor hours, and the estimated direct labor hours for the year are 170,000. The estimated costs for the Packaging Department, \)300,000, will be allocated based on machine hours, and the estimated machine hours for the year are 40,000. In October, the company incurred 38,000 direct labor hours in the Mixing Department and 10,000 machine hours in the Packaging Department.

Requirements

1. Compute the predetermined overhead allocation rates. Round to two decimal places.

The Oakman Company (see Short Exercise S19-1) has refined its allocation system by separating manufacturing overhead costs into two cost pools—one for each department. The estimated costs for the Mixing Department, \(510,000, will be allocated based on direct labor hours, and the estimated direct labor hours for the year are 170,000. The estimated costs for the Packaging Department, \)300,000, will be allocated based on machine hours, and the estimated machine hours for the year are 40,000. In October, the company incurred 38,000 direct labor hours in the Mixing Department and 10,000 machine hours in the Packaging Department.

Requirements

2. Determine the total amount of overhead allocated in October.

Bubba and Danny are college friends planning a skiing trip to Killington before the New Year. They estimated the following for the trip:

                  Estimated                                                              Activity Allocation

                      Costs                    Allocation Base                  Bubba          Danny

Food              \( 400              Pounds of food eaten                  24                 26

Skiing               300              Number of lift tickets                     2                   0

Lodging            280              Number of nights                           2                   2

                       \) 980

Requirements

1. Bubba suggests that the costs be shared equally. Calculate the amount each person would pay.

Bubba and Danny are college friends planning a skiing trip to Killington before the new year. They estimated the following for the trip:

                  Estimated                                                              Activity Allocation

                      Costs                    Allocation Base                  Bubba          Danny

Food              \( 400              Pounds of food eaten                  24                 26

Skiing               300              Number of lift tickets                     2                   0

Lodging            280              Number of nights                           2                   2

                       \) 980

Requirements

2. Danny does not like the idea of sharing the costs equally because he plans to stay in the room rather than ski. Danny suggests that each type of cost be allocated to each person based on the above-listed allocation bases. Using the activity allocation for each person, calculate the amount that each person would pay based on his own consumption of the activity.

Activity-based costing requires four steps. List the four steps in the order they are performed.

Darby Corp. is considering the use of activity-based costing. The following information is provided for the production of two product lines:

                   Activity                                           Cost                        Allocation Base

Setup                                                             \( 105,000    Number of setups

Machine maintenance                                      60,000    Number of machine hours

Total indirect manufacturing costs           \) 165,000

                                                                   Product A                Product B          Total

Direct labor hours                                        7,000                        5,000           12,000

Number of setups                                              30                          170                200

Number of machine hours                           1,600                        2,400            4,000

Darby plans to produce 375 units of Product A and 250 units of Product B. Compute the ABC indirect manufacturing cost per unit for each product.

The following information is provided for Orbit Antenna Corp., which manufactures two products: Lo-Gain antennas and Hi-Gain antennas for use in remote areas.

              Activity                                         Cost                       Allocation Base

Setup                                                      \( 58,000             Number of setups

Machine maintenance                              30,000            Number of machine hours

Total indirect manufacturing costs     \) 88,000

                                                     Lo-Gain                    Hi-Gain                        Total

Direct labor hours                        1,200                        3,800                          5,000

Number of setups                              40                            40                               80

Number of machine hours           3,000                        2,000                         5,000

Orbit Antenna plans to produce 125 Lo-Gain antennas and 225 Hi-Gain antennas.

Requirements

1. Compute the indirect manufacturing cost per unit using direct labor hours for the single plantwide predetermined overhead allocation rate.

The following information is provided for Orbit Antenna Corp., which manufactures two products: Lo-Gain antennas and Hi-Gain antennas for use in remote areas.

              Activity                                         Cost                       Allocation Base

Setup                                                      \( 58,000             Number of setups

Machine maintenance                              30,000            Number of machine hours

Total indirect manufacturing costs     \) 88,000

                                                     Lo-Gain                    Hi-Gain                        Total

Direct labor hours                        1,200                        3,800                          5,000

Number of setups                              40                            40                               80

Number of machine hours           3,000                        2,000                         5,000

Orbit Antenna plans to produce 125 Lo-Gain antennas and 225 Hi-Gain antennas.

Requirements

2. Compute the ABC indirect manufacturing cost per unit for each product.

Jaunkas Corp. manufactures mid-fi and hi-fi stereo receivers. The following data have been summarized:

                                                                    Mid-Fi                      Hi-Fi

Direct materials cost per unit                  \( 400                     \) 1,800

Direct labor cost per unit                            600                           400

Indirect manufacturing cost per unit           ?                               ?

Indirect manufacturing cost information includes the following:

The company plans to manufacture 125 units of the mid-fi receivers and 250 units of the hi-fi receivers. Calculate the product cost per unit for both products using activity-based costing.

Refer to Short Exercise S19-8. Spectrum Corp. desires a 25% target gross profit after covering all product costs. Considering the total product costs assigned to the Products C and D in Short Exercise S19-8, what would Spectrum have to charge the customer to achieve that gross profit? Round to two decimal places.

Spectrum Corp. makes two products: C and D. The following data have been summarized:

                                                                         Product C                      Product D

Direct materials cost per unit                           \( 600                            \) 2,400

Direct labor cost per unit                                     300                                  200

Indirect manufacturing cost per unit                    ?                                      ?

Indirect manufacturing cost information includes the following:

Activity                           Predetermined

                                            Overhead

                                        Allocation Rate                Product C                  Product D

Setup                             \( 1,500 per setup               35 setups                 76 setups

Machine maintenance  \) 10 per MHr                       1,500 MHr                3,700 MHr

The company plans to manufacture 250 units of each product. Calculate the product cost per unit for Products C and D using activity-based costing.

Consider the following characteristics of either a JIT production system or a traditional production system. Indicate whether each is characteristic of a JIT production system or a traditional production system.

a. Products are produced in large batches.

b. Large stocks of finished goods protect against lost sales if customer demand ishigher than expected.

c. Suppliers make frequent deliveries of small quantities of raw materials.

d. Employees do a variety of jobs, including maintenance and setups as well as operating machines.

e. Machines are grouped into self-contained production cells or production lines.

f. Machines are grouped according to function. For example, all cutting machines are located in one area.

g. The final operation in the production sequence “pulls” parts from the preceding operation.

h. Each employee is responsible for inspecting his or her own work.

i. Management works with suppliers to ensure defect-free raw materials.

Refer to Short Exercise S19-10. Haworth desires a 20% target operating income after covering all costs. Considering the total costs assigned to the Client 76 job in Short Exercise S19-10, what would Haworth have to charge the customer to achieve that operating income? Round to two decimal places.

Haworth Company is a management consulting firm. The company expects to incur \(167,500 of indirect costs this year. Indirect costs are allocated based on the following activities:

Haworth bills clients at 120% of the direct labor costs. The company has estimated direct labor costs at \)240 per hour. Last month, Haworth completed a consulting job for Client 76 and used the following resources:

                                       Allocation Base                   Client 76

                                       Direct labor hours                     60

                                       Visits                                            5

                                       Pages                                         50

Determine the total cost of the consulting job and the operating income earned.

Prime Products uses a JIT management system to manufacture trading pins. The standard cost per pin is \(2 for direct materials and \)3 for conversion costs. Last month, Prime recorded the following data:

Number of pins completed                                                       4,100 pins

Number of pins sold (on account at \(7 each)                         3,700 pins

Raw material purchases (on account)                                  \) 7,000

Conversion costs                                                                  $ 14,500

Use JIT costing to prepare journal entries for the month, including the entry to adjust the Conversion Costs account.

Stegall, Inc. manufactures motor scooters. For each of the following examples of quality costs, indicate which of the following quality cost categories each example represents: prevention costs, appraisal costs, internal failure costs, or external failure costs.

1. Preventive maintenance on machinery

2. Direct materials, direct labor, and manufacturing overhead incurred to     rework a defective scooter that is detected in-house through inspection

3. Lost profits from lost sales if the company’s reputation is hurt because customers previously purchased a poor-quality scooter

4. Cost of inspecting raw materials, such as chassis and wheels

5. Working with suppliers to achieve on-time delivery of defect-free raw materials

6. Cost of warranty repairs on a scooter that malfunctions at a customer’s location

7. Costs of testing durability of vinyl

8. Cost to reinspect reworked scooters

 Koehler makes handheld calculators in two models: basic and professional. Koehler estimated $721,000 of manufacturing overhead and 515,000 machine hours for the year. The basic model actually consumed 230,000 machine hours, and the professional model consumed 285,000 machine hours.

Compute the predetermined overhead allocation rate using machine hours (MHr) as the allocation base. How much overhead is allocated to the basic model? To the professional model?