Cost Management Systems: Activity-Based, Just-inTime, and Quality Management Systems
Horngren'S Financial And Managerial Accounting · 127 exercises
Q38PGA-3
Question: Stella, Inc. is using a costs-of-quality approach to evaluate design engineering efforts for a new skateboard. Stella’s senior managers expect the engineering work to reduce appraisal, internal failure, and external failure activities. The predicted reductions in activities over the two-year life of the skateboards follow. Also shown are the predetermined overhead allocation rates for each activity.
Activity Predicted Predetermined
Reduction in Overhead Allocation
Activity Units Rate per Unit
Inspection of incoming raw materials 390 $ 44
Inspection of finished goods 390 19
Number of defective units discovered in-house 1,200 50
Number of defective units discovered by customers 325 72
Lost profits due to dissatisfied customers 75 102
Requirements
3. What major difficulty would Stella’s managers have in implementing this costs-of-quality approach? What alternative approach could they use to measure quality improvement?
2 step solution
Q.38PGA-1
Question: Stella, Inc. is using a costs-of-quality approach to evaluate design engineering efforts for a new skateboard. Stella’s senior managers expect the engineering work to reduce appraisal, internal failure, and external failure activities. The predicted reductions in activities over the two-year life of the skateboards follow. Also shown are the predetermined overhead allocation rates for each activity.
Activity Predicted Predetermined
Reduction in Overhead Allocation
Activity Units Rate per Unit
Inspection of incoming raw materials 390 $ 44
Inspection of finished goods 390 19
Number of defective units discovered in-house 1,200 50
Number of defective units discovered by customers 325 72
Lost profits due to dissatisfied customers 75 102
Requirements
1. Calculate the predicted quality cost savings from the design engineering work.
2 step solution
Q39PGB_1
Harcourt Pharmaceuticals manufactures an over-the-counter allergy medication. The company sells both large commercial containers of 1,000 capsules to health care facilities and travel packs of 20 capsules to shops in airports, train stations, and hotels. The following information has been developed to determine if an activity-based costing system would be beneficial:
Activity Estimated Estimated Quantity
Indirect Cost Allocation Base of Allocation Base
Materials handling \( 96,000 Number of kilos 24,000 kilos
Packaging 210,000 Number of machine hours 3,000 hours
Quality assurance 114,000 Number of samples 1,900 samples
Total indirect costs \) 420,000
Other production information includes the following:
Commercial Containers Travel Packs
Units produced 2,800 containers 51,000 packs
Weight in kilos 9,800 5,100
Machine hours 1,960 510
Number of samples 560 765
Requirements
1. Harcourt’s original single plantwide overhead allocation rate system allocated indirect costs to products at $140.00 per machine hour. Compute the total indirect costs allocated to the commercial containers and to the travel packs under the original system. Then compute the indirect cost per unit for each product. Round to two decimal places.
2 step solution
Q39PGB_2
Harcourt Pharmaceuticals manufactures an over-the-counter allergy medication. The company sells both large commercial containers of 1,000 capsules to health care facilities and travel packs of 20 capsules to shops in airports, train stations, and hotels. The following information has been developed to determine if an activity-based costing system would be beneficial:
Activity Estimated Estimated Quantity
Indirect Cost Allocation Base of Allocation Base
Materials handling \( 96,000 Number of kilos 24,000 kilos
Packaging 210,000 Number of machine hours 3,000 hours
Quality assurance 114,000 Number of samples 1,900 samples
Total indirect costs \) 420,000
Other production information includes the following:
Commercial Containers Travel Packs
Units produced 2,800 containers 51,000 packs
Weight in kilos 9,800 5,100
Machine hours 1,960 510
Number of samples 560 765
Requirements
2. Compute the predetermined overhead allocation rate for each activity.
3 step solution
Q39PGB_3
Harcourt Pharmaceuticals manufactures an over-the-counter allergy medication. The company sells both large commercial containers of 1,000 capsules to health care facilities and travel packs of 20 capsules to shops in airports, train stations, and hotels. The following information has been developed to determine if an activity-based costing system would be beneficial:
Activity Estimated Estimated Quantity
Indirect Cost Allocation Base of Allocation Base
Materials handling \( 96,000 Number of kilos 24,000 kilos
Packaging 210,000 Number of machine hours 3,000 hours
Quality assurance 114,000 Number of samples 1,900 samples
Total indirect costs \) 420,000
Other production information includes the following:
Commercial Containers Travel Packs
Units produced 2,800 containers 51,000 packs
Weight in kilos 9,800 5,100
Machine hours 1,960 510
Number of samples 560 765
Requirements
3. Use the predetermined overhead allocation rates to compute the activity-based costs per unit of the commercial containers and the travel packs. Round to two decimal places. (Hint: First compute the total activity-based costs allocated to each product line, and then compute the cost per unit.)
2 step solution
Q39PGB_4
Harcourt Pharmaceuticals manufactures an over-the-counter allergy medication. The company sells both large commercial containers of 1,000 capsules to health care facilities and travel packs of 20 capsules to shops in airports, train stations, and hotels. The following information has been developed to determine if an activity-based costing system would be beneficial:
Activity Estimated Estimated Quantity
Indirect Cost Allocation Base of Allocation Base
Materials handling \( 96,000 Number of kilos 24,000 kilos
Packaging 210,000 Number of machine hours 3,000 hours
Quality assurance 114,000 Number of samples 1,900 samples
Total indirect costs \) 420,000
Other production information includes the following:
Commercial Containers Travel Packs
Units produced 2,800 containers 51,000 packs
Weight in kilos 9,800 5,100
Machine hours 1,960 510
Number of samples 560 765
Requirements
4. Compare the indirect activity-based costs per unit to the indirect costs per unit from the traditional system. How have the unit costs changed? Explain why the costs changed as they did.
2 step solution
Q40PGB_1
The Alexander Manufacturing Company in Rochester, Minnesota, assembles and tests electronic components used in smartphones. Consider the following data regarding component T24 (amounts are per unit):
Direct materials cost \( 81.00
Direct labor cost 21.00
Activity-based costs allocated ?
Total manufacturing product cost ?
The activities required to build the component follow:
Activity | Allocation Base | Cost Allocated to Each Unit |
|
|
|
Start Station | Number of raw component chassis | 3 X \)1.50 = \(4.50 |
Dip Insertion | Number of dip insertions | ? X 0.50 = 14.50 |
Manual Insertion | Number of manual insertions | 13 X 0.40 = ? |
Wave solder | Number of components solders | 3 X 1.50 = 4.50 |
Backload | Number of backload insertions | 7 X ? = 2.80 |
Test | Number of testing hours | 0.39 60.0 = ? |
Defect analysis | Number of defect analysis hours | 0.10 X ? = 4.00 |
Total activity-based costs |
| \) ? |
Requirements
1. Complete the missing items for the two tables.
2 step solution
Q40PGB_2
The Alexander Manufacturing Company in Rochester, Minnesota, assembles and tests electronic components used in smartphones. Consider the following data regarding component T24 (amounts are per unit):
Direct materials cost \( 81.00
Direct labor cost 21.00
Activity-based costs allocated ?
Total manufacturing product cost ?
The activities required to build the component follow:
Activity | Allocation Base | Cost Allocated to Each Unit |
|
|
|
Start Station | Number of raw component chassis | 3 X \)1.50 = \(4.50 |
Dip Insertion | Number of dip insertions | ? X 0.50 = 14.50 |
Manual Insertion | Number of manual insertions | 13 X 0.40 = ? |
Wave solder | Number of components solders | 3 X 1.50 = 4.50 |
Backload | Number of backload insertions | 7 X ? = 2.80 |
Test | Number of testing hours | 0.39 60.0 = ? |
Defect analysis | Number of defect analysis hours | 0.10 X ? = 4.00 |
Total activity-based costs |
| \) ? |
Requirements
2. Why might managers favor this ABC system instead of Alexander’s older system, which allocated all manufacturing overhead costs on the basis of direct labor hours?
2 step solution
Q41PGB_1
Martin, Inc. manufactures bookcases and uses an activity-based costing system. Martin’s activity areas and related data follow:
Activity | Budgeted Cost of Activity | Allocation Base | Predetermined Overhead Allocation Rate |
|
|
|
|
Materials handling | \( 230,000 | Number of parts | \)1.50 |
Assembly | 3,200,000 | Number of assembling direct labor hours | 16.00 |
Finishing | 150,000 | Number of finished units* | 3.00 |
*Refers to the number of units receiving the finishing activity, not the number of units transferred to Finished Goods Inventory
Martin produced two styles of bookcases in April: the standard bookcase and an unfinished bookcase, which has fewer parts and requires no finishing. The totals for quantities, direct materials costs, and other data follow:
Product | Total Units Produced | Total Direct materials Costs | Total Direct Labor Costs | Total Number of Parts | Total Assembling Direct Labor Hours |
|
|
|
|
|
|
Standard bookcase | 3,000 | \(54,000 | \)67,500 | 9,000 | 4,500 |
Unfinished bookcase | 3,500 | 56,000 | 52,500 | 7,000 | 3,500 |
Requirements
1. Compute the manufacturing product cost per unit of each type of bookcase.
2 step solution
Q41PGB_2
Martin, Inc. manufactures bookcases and uses an activity-based costing system. Martin’s activity areas and related data follow:
Activity | Budgeted Cost of Activity | Allocation Base | Predetermined Overhead Allocation Rate |
|
|
|
|
Materials handling | \( 230,000 | Number of parts | \)1.50 |
Assembly | 3,200,000 | Number of assembling direct labor hours | 16.00 |
Finishing | 150,000 | Number of finished units* | 3.00 |
*Refers to the number of units receiving the finishing activity, not the number of units transferred to Finished Goods Inventory
Martin produced two styles of bookcases in April: the standard bookcase and an unfinished bookcase, which has fewer parts and requires no finishing. The totals for quantities, direct materials costs, and other data follow:
Product | Total Units Produced | Total Direct materials Costs | Total Direct Labor Costs | Total Number of Parts | Total Assembling Direct Labor Hours |
|
|
|
|
|
|
Standard bookcase | 3,000 | \(54,000 | \)67,500 | 9,000 | 4,500 |
Unfinished bookcase | 3,500 | 56,000 | 52,500 | 7,000 | 3,500 |
Requirements
2. Suppose that pre-manufacturing activities, such as product design, were assigned to the standard bookcases at \(5 each and to the unfinished bookcases at \)3 each. Similar analyses were conducted of post-manufacturing activities such as distribution, marketing, and customer service. The post-manufacturing costs were \(24 per standard bookcase and \)18 per unfinished bookcase. Compute the full product costs per unit.
2 step solution
Q41PGB_3
Martin, Inc. manufactures bookcases and uses an activity-based costing system. Martin’s activity areas and related data follow:
Activity | Budgeted Cost of Activity | Allocation Base | Predetermined Overhead Allocation Rate |
|
|
|
|
Materials handling | \( 230,000 | Number of parts | \)1.50 |
Assembly | 3,200,000 | Number of assembling direct labor hours | 16.00 |
Finishing | 150,000 | Number of finished units* | 3.00 |
*Refers to the number of units receiving the finishing activity, not the number of units transferred to Finished Goods Inventory
Martin produced two styles of bookcases in April: the standard bookcase and an unfinished bookcase, which has fewer parts and requires no finishing. The totals for quantities, direct materials costs, and other data follow:
Product | Total Units Produced | Total Direct materials Costs | Total Direct Labor Costs | Total Number of Parts | Total Assembling Direct Labor Hours |
|
|
|
|
|
|
Standard bookcase | 3,000 | \(54,000 | \)67,500 | 9,000 | 4,500 |
Unfinished bookcase | 3,500 | 56,000 | 52,500 | 7,000 | 3,500 |
Requirements
3. Which product costs are reported in the external financial statements? Which costs are used for management decision making? Explain the difference.
2 step solution
Q41PGB_4
Martin, Inc. manufactures bookcases and uses an activity-based costing system. Martin’s activity areas and related data follow:
Activity | Budgeted Cost of Activity | Allocation Base | Predetermined Overhead Allocation Rate |
|
|
|
|
Materials handling | \( 230,000 | Number of parts | \)1.50 |
Assembly | 3,200,000 | Number of assembling direct labor hours | 16.00 |
Finishing | 150,000 | Number of finished units* | 3.00 |
*Refers to the number of units receiving the finishing activity, not the number of units transferred to Finished Goods Inventory
Martin produced two styles of bookcases in April: the standard bookcase and an unfinished bookcase, which has fewer parts and requires no finishing. The totals for quantities, direct materials costs, and other data follow:
Product | Total Units Produced | Total Direct materials Costs | Total Direct Labor Costs | Total Number of Parts | Total Assembling Direct Labor Hours |
|
|
|
|
|
|
Standard bookcase | 3,000 | \(54,000 | \)67,500 | 9,000 | 4,500 |
Unfinished bookcase | 3,500 | 56,000 | 52,500 | 7,000 | 3,500 |
Requirements
4. What price should Martin’s managers set for unfinished bookcases to earn a net profit of $19 per bookcase?
2 step solution
Q42PGB_1
Rennie Plant Service completed a special landscaping job for Brenton Company. rennie uses ABC and has the following predetermined overhead allocation rates:
Activity Predetermined
Allocation Base Overhead Allocation Rate
Designing Number of designs \( 290 per design
Planting Number of plants \) 20 per plant
The Rennie job included \(1,500 in plants; \)800 in direct labor; one design; and 30 plants.
Requirements
1. What is the total cost of the Brenton job?
2 step solution
Q42PGB_2
Rennie Plant Service completed a special landscaping job for Brenton Company. rennie uses ABC and has the following predetermined overhead allocation rates:
Activity Predetermined
Allocation Base Overhead Allocation Rate
Designing Number of designs \( 290 per design
Planting Number of plants \) 20 per plant
The Rennie job included \(1,500 in plants; \)800 in direct labor; one design; and 30 plants.
Requirements
2. If Brenton paid $3,690 for the job, what is the operating income or loss?
2 step solution
Q42PGB_3
Rennie Plant Service completed a special landscaping job for Brenton Company. rennie uses ABC and has the following predetermined overhead allocation rates:
Activity Predetermined
Allocation Base Overhead Allocation Rate
Designing Number of designs \( 290 per design
Planting Number of plants \) 20 per plant
The Rennie job included \(1,500 in plants; \)800 in direct labor; one design; and 30 plants.
Requirements
3. If Rennie desires an operating income of 30% of cost, how much should the company charge for the Brenton job?
2 step solution
Q43PGB
Question: High Mountain produces fleece jackets. The company uses JIT costing for its JIT production system.
High Mountain has two inventory accounts: Raw and In-Process Inventory and
Finished Goods Inventory. On April 1, 2018, the account balances were Raw and In-Process Inventory, \(10,000; Finished Goods Inventory, \)2,100.
The standard cost of a jacket is \(33, composed of \)12 direct materials plus \(21
conversion costs. Data for April’s activities follow:
Number of jackets completed 19,000
Number of jackets sold (on account for \)50 each) 18,600
Direct materials purchased (on account) \( 220,500
Conversion costs incurred \) 500,000
Requirements
1. What are the major features of a JIT production system such as that of High Mountain?
2. Prepare summary journal entries for April. Underallocated or overallocated
conversion costs are adjusted to Cost of Goods Sold monthly.
3. Use a T-account to determine the April 30, 2018, balance of Raw and In-ProcessInventory.
3 step solution
Q44PGB
Question: Roxi, Inc. is using a costs-of-quality approach to evaluate design engineering efforts for a new skateboard. Roxi’s senior managers expect the engineering work to reduceappraisal, internal failure, and external failure activities. The predicted reductionsin activities over the two-year life of the skateboards follow. Also shown are thepredetermined overhead allocation rates for each activity.
Activity | Predicted Reduction in Activity Units | Predetermined Overhead Allocation Rate per unit |
|
|
|
Inspection of incoming raw materials | 395 | \( 44 |
Inspection of finished goods | 395 | 26 |
Number of defective units discovered in-house | 1,500 | 54 |
Number of defective units discovered by customers | 275 | 73 |
Lost profits due to dissatisfied customers | 100 | 103 |
Requirements
1. Calculate the predicted quality cost savings from the design engineering work.
2. Roxi spent \)106,000 on design engineering for the new skateboard. What is the net benefit of this “preventive” quality activity?
3. What major difficulty would Roxi’s managers have in implementing this costs-of quality approach? What alternative approach could they use to measure quality improvement?
3 step solution
Q46CP
This problem continues the Piedmont Computer Company situation from Chapter 17. Recall that Piedmont Computer Company allocated manufacturing overhead costs to jobs based on a predetermined overhead allocation rate, computed as 25% of direct labor costs. Piedmont Computer Company is now considering using an ABC system. Information about ABC costs for 2020 follows:
Activity Allocation Base Predetermined
Overhead Allocation Rate
Assembly Number of parts \( 0.25
Programming Number of direct labor hours 3.50
Testing Number of tests 125.00
Records for two jobs appear here:
Job Total Direct Total Number Total Direct Total Number
Materials Costs of Parts Labor Hours of Tests
Job 721 \) 23,400 2,500 780 8
Job 722 2,500 300 60 2
Requirements
1. Compute the total cost for each job using activity-based costing. The cost of direct labor is $25 per hour.
2. Is the job cost greater or less than that computed in Chapter 17 for each job? Why?
3. If Piedmont Computer Company wants to earn an operating income equal to 45% of the total cost, what sales price should it charge each of these two customers?
3 step solution
Q1TIAT_1
PetSmart, Inc. is a large specialty pet retailer of services and solutions for the needs of pets. In addition to selling pet food and pet products, PetSmart also offers dog grooming services including bath, nail trim, teeth brushing, aromatherapy to reduce everyday stress, and nail polish and stickers. PetSmart even offers a Top Dog service that includes a premium shampoo, milk bath conditioner, scented cologne spritz, teeth brushing, and bandana or bow.
Assume PetSmart, Inc. expects to incur \(380,000 of indirect costs this year. The company allocates indirect costs based on the following activities:
___________________________________________________________________
Activity Estimated Allocation Base Estimated Quantity
Cost of Allocation
Base____
Admission \) 60,000 Number of admissions 20,000
Cleaning 240,000 Cleaning direct labor hours 100,000
Grooming 80,000 Grooming direct labor hours 4,000
Total indirect costs $ 380,000________________________________________
Requirements
1. Calculate the predetermined overhead allocation rate for each activity.
3 step solution
Q1TIAT_2
PetSmart, Inc. is a large specialty pet retailer of services and solutions for the needs of pets. In addition to selling pet food and pet products, PetSmart also offers dog grooming services including bath, nail trim, teeth brushing, aromatherapy to reduce everyday stress, and nail polish and stickers. PetSmart even offers a Top Dog service that includes a premium shampoo, milk bath conditioner, scented cologne spritz, teeth brushing, and bandana or bow.
Assume PetSmart, Inc. expects to incur \(380,000 of indirect costs this year. The company allocates indirect costs based on the following activities:
___________________________________________________________________
Activity Estimated Allocation Base Estimated Quantity
Cost of Allocation
Base____
Admission \) 60,000 Number of admissions 20,000
Cleaning 240,000 Cleaning direct labor hours 100,000
Grooming 80,000 Grooming direct labor hours 4,000
Total indirect costs \( 380,000________________________________________
Requirements.
2. Assume a customer brought in Sophie, a beagle, for Top Dog service. PetSmart used the following resources:
_____________________________________________
Allocation Base Sophie, Beagle
Number of admissions 1
Cleaning direct labor hours 1
Grooming direct labor hours 0.5______
Determine the total cost of the Top Dog service for Sophie assuming the total direct materials cost was \)3.50 and the total direct labor cost was $12 per DLHr.
2 step solution
Q1TIAT_3
PetSmart, Inc. is a large specialty pet retailer of services and solutions for the needs of pets. In addition to selling pet food and pet products, PetSmart also offers dog grooming services including bath, nail trim, teeth brushing, aromatherapy to reduce everyday stress, and nail polish and stickers. PetSmart even offers a Top Dog service that includes a premium shampoo, milk bath conditioner, scented cologne spritz, teeth brushing, and bandana or bow.
Assume PetSmart, Inc. expects to incur \(380,000 of indirect costs this year. The company allocates indirect costs based on the following activities:
___________________________________________________________________
Activity Estimated Allocation Base Estimated Quantity
Cost of Allocation
Base____
Admission \) 60,000 Number of admissions 20,000
Cleaning 240,000 Cleaning direct labor hours 100,000
Grooming 80,000 Grooming direct labor hours 4,000
Total indirect costs $ 380,000________________________________________
Requirements
3. If PetSmart desires a 30% target operating income after covering all its costs, what would PetSmart have to charge the customer to achieve that operating income?
2 step solution
Q1DC_1
Harris Systems specializes in servers for workgroup, e-commerce, and ERP applications. The company’s original job costing system has two direct cost categories: direct materials and direct labor. Overhead is allocated to jobs at the single rate of \(22 per direct labor hour.
A task force headed by Harris’s CFO recently designed an ABC system with four activities. The ABC system retains the current system’s two direct cost categories. Overhead costs are reflected in the four activities. Pertinent data follow:
___________________________________________________________________
Activity Allocation Base Predetermined Overhead
Allocation Rate____
Materials handling Number of parts \) 0.85
Machine setup Number of setups 500.00
Assembling Number of assembling hours 80.00
Shipping Number of shipments 1,500.00_______
Harris Systems has been awarded two new contracts, which will be produced as Job A and Job B. Budget data relating to the contracts follow:
____________________________________________________________
Job A Job B__
Number of parts 15,000 2,000
Number of setups 6 4
Number of assembling hours 1,500 200
Number of shipments 1 1
Total direct labor hours 8,000 600
Number of units produced 100 10
Direct materials cost \( 220,000 \) 30,000
Direct labor cost \( 160,000 \) 12,000__
Requirements
1. Compute the budgeted product cost per unit for each job, using the original costing system (with two direct cost categories and a single overhead allocation rate).
2 step solution
Q1DC_2
Harris Systems specializes in servers for workgroup, e-commerce, and ERP applications. The company’s original job costing system has two direct cost categories: direct materials and direct labor. Overhead is allocated to jobs at the single rate of \(22 per direct labor hour.
A task force headed by Harris’s CFO recently designed an ABC system with four activities. The ABC system retains the current system’s two direct cost categories. Overhead costs are reflected in the four activities. Pertinent data follow:
___________________________________________________________________
Activity Allocation Base Predetermined Overhead
Allocation Rate____
Materials handling Number of parts \) 0.85
Machine setup Number of setups 500.00
Assembling Number of assembling hours 80.00
Shipping Number of shipments 1,500.00_______
Harris Systems has been awarded two new contracts, which will be produced as Job A and Job B. Budget data relating to the contracts follow:
____________________________________________________________
Job A Job B__
Number of parts 15,000 2,000
Number of setups 6 4
Number of assembling hours 1,500 200
Number of shipments 1 1
Total direct labor hours 8,000 600
Number of units produced 100 10
Direct materials cost \( 220,000 \) 30,000
Direct labor cost \( 160,000 \) 12,000__
Requirements
2. Suppose Harris Systems adopts the ABC system. Compute the budgeted product cost per unit for each job using ABC.
2 step solution
Q1DC_3
Harris Systems specializes in servers for workgroup, e-commerce, and ERP applications. The company’s original job costing system has two direct cost categories: direct materials and direct labor. Overhead is allocated to jobs at the single rate of \(22 per direct labor hour.
A task force headed by Harris’s CFO recently designed an ABC system with four activities. The ABC system retains the current system’s two direct cost categories. Overhead costs are reflected in the four activities. Pertinent data follow:
___________________________________________________________________
Activity Allocation Base Predetermined Overhead
Allocation Rate____
Materials handling Number of parts \) 0.85
Machine setup Number of setups 500.00
Assembling Number of assembling hours 80.00
Shipping Number of shipments 1,500.00_______
Harris Systems has been awarded two new contracts, which will be produced as Job A and Job B. Budget data relating to the contracts follow:
____________________________________________________________
Job A Job B__
Number of parts 15,000 2,000
Number of setups 6 4
Number of assembling hours 1,500 200
Number of shipments 1 1
Total direct labor hours 8,000 600
Number of units produced 100 10
Direct materials cost \( 220,000 \) 30,000
Direct labor cost \( 160,000 \) 12,000__
Requirements
3. Which costing system more accurately assigns to jobs the costs of the resources consumed to produce them? Explain.
2 step solution
Q2DC
Harris Systems has decided to adopt ABC. To remain competitive, Harris Systems’ management believes the company must produce the type of servers produced in Job B (from Decision Case 19-1) at a target cost of \(5,400. Harris Systems has just joined a B2B e-market site that management believes will enable the firm to cut direct materials costs by 10%.
Harris’s management also believes that a value engineering team can reduce assembly time.
Compute the assembling cost savings required per Job B-type server to meet the \)5,400 target cost.
3 step solution
Q1FC
Anu Ghai was a new production analyst at RHI, Inc., a large furniture factory in North Carolina. One of her first jobs was to update the predetermined overhead allocation rates for factory production costs. This was normally done once a year, by analysing the previous year’s actual data, factoring in projected changes, and calculating a new rate for the coming year. What Anu found was strange. The activity rate for “maintenance” had more than doubled in one year, and she was puzzled how that could have happened. When she spoke with Larry McAfee, the factory manager, she was told to spread the increases out over the other activity costs to “smooth out” the trends. She was a bit intimidated by Larry, an imposing and aggressive man, but she knew something wasn’t quite right. Then one night she was at a restaurant and overheard a few employees who worked at RHI talking. They were joking about the work they had done fixing up Larry’s home at the lake last year. Suddenly everything made sense. Larry had been using factory labor, tools, and supplies to have his lake house renovated on the weekends. Anu had a distinct feeling that if she went up against Larry on this issue, she would come out the loser. She decided to look for work elsewhere.
Requirements
1. Besides spotting irregularities, like the case above, what are some other ways that ABC cost data are useful for manufacturing companies?
2. What are some of the other options that Anu might have considered?
3 step solution
Q1EI
Cassidy Manning is assistant controller at LeMar Packaging, Inc., a manufacturer of cardboard boxes and other packaging materials. Manning has just returned from a packaging industry conference on activity-based costing. She realizes that ABC may help LeMar meet its goal of reducing costs by 5% over each of the next three years.
LeMar Packaging’s Order Department is a likely candidate for ABC. While orders are entered into a computer that updates the accounting records, clerks manually check customers’ credit history and hand-deliver orders to shipping. This process occurs whether the sales order is for a dozen specialty boxes worth \(80 or 10,000 basic boxes worth \)8,000.
Manning believes that identifying the cost of processing a sales order would justify (1) further computerization of the order process and (2) changing the way the company processes small orders. However, the significant cost savings would arise from elimination of two positions in the Order Department. The company’s sales order clerks have been with the company many years. Manning is uncomfortable with the prospect of proposing a change that will likely result in terminating these employees.
Use the IMA’s ethical standards (see Chapter 16) to consider Manning’s responsibility when cost savings come at the expense of employees’ jobs.
2 step solution