Solution manual cost accounting by lauderbach ACTIVITY BASED COSTING AND MANAGEMENT

4-6 Quality CostsExternal failure costs are the hardest to estimate because so much of the cost is the opportunity cost of lost sales because of your defects.. Prevention, though again s

of the costs of the mill relate to the one product flour

The River City Bakery is a perfect candidate for ABC It makes a wide range of products that are highly diverse It makes them in very different quantities It uses a variety of materials and processes

Some students think that ABC should be applied in any circumstances

Simply having a customer generates costs related to recordkeeping, credit-checking, and other services

4-3 Cost Drivers

One driver is probably the total base of customers, regardless of when they bought the packages, but recent sales probably are the key driver becausebuyers who have had the software for shorter time periods are more likely to require assistance

4-4 Costs and Activities

Zydeco's narrower product line reduces costs generally regarded as fixed,because they do not change with volume Such costs nonetheless increase or decrease with significant changes in activities Zydeco's operations are less diverse and less complex than those of its competitors, so its costs are lower Zydeco probably does not deal with as many suppliers, keep as many records, engage in as many transactions, use as much space, or employ as many

people as its competitors Therefore, Zydeco’s breakeven point should be lowerthan it’s competitors.

4-6 Quality Costs

External failure costs are the hardest to estimate because so much of the cost is the opportunity cost of lost sales because of your defects The other categories contain recorded costs and some involve allocations that generate disagreement, but not to the degree of external failure costs

4-7 Classifying Quality Costs

1 Prevention, though some of the cost is not quality-related

2 Prevention, though again some of the cost does not relate to quality

Maintenance $ 75,000 25,000 $3/hour

Scheduling and transport 45,000 5,000 $9/hour

General 60,000 $160,000 $0.375/hour Total $180,000

2

Residential Commercial Totals Revenues $100,000 $300,000 $400,000 Labor costs 60,000 100,000 160,000 Overhead costs:

Maintenance, $3 x 5,000, 20,000 15,000 60,000 75,000

Scheduling, transport at $9/hour 9,000 36,000 45,000

General at $0.375/labor dollar 22,500 37,500 60,000 Total costs 106,500 233,500 340,000 Income ($ 6,500) $ 66,500 $ 60,000 3 Residential work still appears to be unprofitable in the long term Roberts might think about raising prices to residential customers, making explicit charges for travel time, or dropping the residential business over time In this situation, the conclusions one might reach do not differ between a single-driver analysis and an ABC analysis, but the numbers do differ Another reasonable suggestion is to leave the general overhead unassigned, though we are told that it is driven by labor cost That labor cost does drive all of the general overhead is doubtful 4-10 Basic Allocations (15 minutes) 1 110,000 hours, (10 x 10,000) + (20 x 500) 2 $6/hour, $660,000/110,000 3 Doodler Sketcher Material cost $ 20 $ 45

Assembly labor at $20/hour 200 400

Overhead at $6/assembly hour 60 120

Total cost $280 $565

4 Doodler Sketcher Revenue $320 $950

Cost 280 565

Profit $ 40 $385

4-11 ABC Estimates (Extension of 4-10) (15 minutes)

1

Setups Testing Assembly

Total cost in pool $140,000 $190,000 $330,000Activity 350 4,750 110,000Rate $400 $40 $3

Doodler Sketcher

Material cost $ 20 $ 45

Assembly labor at $20/ hour 200 400

Overhead: Setup-related, $400 x 1/100 4

$400 x 1/2 200

Testing-related, $40 x 0.20 8

$40 x 5.5 220

Assembly labor-related 30 60

Total cost $262 $925

3 Doodler Sketcher Revenue $320 $950

Cost 262 925

Profit $ 58 $ 25

4 The costs of the two workstations differ considerably under the two approaches The ABC approach better captures the consumption of resources, especially setups and testing, than does the simple, one-driver approach The profitability of the two products changes as well, with the Doodler now seeming more profitable, while the Sketcher is just barely profitable 4-12 Basic Allocations (5 minutes) 1 $18, $3,600,000/200,000 2 $0.45, $3,600,000/$8,000,000 3 $50,400, 2,800 x $18 $63,900, $142,000 x $0.45 The amounts differ because Barron used relatively high-salaried people The actual average salary was $50.71 per hour ($142,000/2,800) on work done for Barron, compared to the $40 average ($8,000,000/200,000) Barron might argue that overhead costs are more likely to be driven by hours than by dollars Why should a $70/hour consultant generate more overhead cost than a $30/hour one? The argument is reasonable, as far as it goes 4-13 ABC Estimates (Extension of 4-12) (15 minutes) 1 Market Product Research Promotion Feasibility

Annual overhead $800,000 $1,800,000 $1,000,000 Annual billable hours 100,000 60,000 40,000 Rate $8 $30 $25

4-14 Quality Costs (15 minutes)

1 If no inspection is made:

8%  1,000 units  $300 = $24,000 external failure costs

If inspection is made:

1,000 units  $10 inspection cost = $10,000 appraisal cost

8%  95%  1,000 units  $50 repair cost = $3,800 internal failure cost8%  5%  1,000 units  $300 = $1,200 external failure cost

2 No inspection: $24,000

Inspect: $10,000 + 3,800 + 1,200 = $15,000

Acme should institute the additional inspection

4-15 Classifying Quality Costs (10 minutes)

4-16 ABC for Shipping Department (20-25 minutes)

1 The rate per dollar of orders is $0.1043, $1,252,000/$12,000,000

Supermarkets Convenience Stores Shipping cost, $0.1043 x $9,000,000 $938,700

$0.1043 x $3,000,000 $312,900

The total allocated is $1,251,600, $400 off because of rounding

2 Amount Amount of

Cost Pool/Driver in Pool Activity Rate

Dollar volume of orders $492,000 $12,000,000 $0.04100

Number of customers 360,000 560 642.86

Number of orders 160,000 1,360 117.65

Number of stocks 240,000 6,400 37.50

Total shipping costs $1,252,000

Supermarkets Convenience Stores

Dollar volume of orders at $0.041 $369,000 $123,000 Number of customers at $643 102,880 257,200 Number of orders at $118 51,920 108,560 Number of stocks at $37.50 150,000 90,000 Totals $673,800 $578,760 The ABC costs total $1,252,560 because of rounding Students need

reminding that precision is not the issue here, no one will make a different decision based on $560 out of hundreds of thousands The assignment also states that this analysis is rough and preliminary, so striving for

computational accuracy is not useful

3 The results are quite different Convenience stores use considerable amounts of resources that are not driven by dollar volume and so are

undercosted using the single driver It should prove worthwhile to extend andrefine the analysis

4-17 Cost Drivers (20 minutes)

Note to the Instructor: Good students will give a wide variety of answers here and will be able to justify most of them One point to make is that drivers do not come up and introduce themselves: accountants and other managers must seek them out

Machine maintenance Machine hours

Wages of workers who reset machinery when Number of production runs products change

Costs of inspecting incoming materials and Number of incoming shipments components

Costs of keeping records on workers how much Number of employees

they produce, what they earn

Costs of inspecting finished products Production in units

Costs to rework defective units Production in units, if

defectives run a fairly

constant relationship to

output

Building maintenance Space in factory

Personnel department costs, including Number of employees

payroll processing costs

Purchasing department costs, including Number of vendors,

soliciting bids from vendors Number of parts stocked

preparing, reviewing, and auditing

purchase orders

Customer billing Number of customers

Some of these are arguable, and you might wish to discuss the conditions

under which a different driver, listed or not, is appropriate For instance,

machine maintenance might depend partly on the number of runs because setting

and tearing down generates additional wear-and-tear Or, the costs of

recordkeeping might be driven partly by the types of workers, whether salaried

or on wages Time-keeping for workers subject to overtime pay is costlier

than for salaried employees

The number of purchase orders probably drives some costs in the purchasing

department A more important driver in some purchasing departments is the

complexity or uniqueness of orders That is, the department might spend a lot

of time obtaining and evaluating bids on major, unique items This is

characteristic of university purchasing departments

4-18 Activity-Based Cost Analysis (15-20 minutes)

Regression output from Excel including both units produced and number of

products appears below

Intercept (25,580.10) 55,835.90 -0.458 0.666 (169,110.63) 117,950.43 Units Produced 0.2348 0.1942 1.209 0.281 (0.2644) 0.7340 Number of Products 101.4761 17.8851 5.674 0.002 55.5010 147.4513

It is clear from the output that Units Produced is not a statistically significant variable since the 95% confidence interval includes a value of zero.Therefore, the regression should be performed using only Number of Products asthe x-variable.

Intercept 41,454.58 6,837.10 6.063 0.001 24,724.80 58,184.36 Number of Products 92.3155 16.8127 5.491 0.002 51.1764 133.4547 The output shows that the quarterly fixed costs are about $41,455 and that

there is a variable component of $92.32 per product The variable component is

most likely step-variable Using quarterly data helps to make the point that

some costs respond slowly to changes in activity

The measures of fit are good About 83.4% of the variation in cost is

associated with changes in the number of products The standard error of the

estimate is 4,082, so that 68% of the observations should be within $4,082 of

the predicted value and 95% within $8,160 The variable Number of Products

has a 95% confidence interval ranging from 51.17 to 133.45 Since this range

does not include zero, the variable is statistically significant We can

conclude that the number of products is a cost driver in the production

scheduling department

The major conclusion about cost reduction is that reducing the number of

products will reduce these costs It might be possible to achieve some

reductions by standardizing products

4-19 Product Line Report (25 minutes)

1 Paper Products Detergents Total

Line sustaining costs 110,000 150,000 260,000

Product line margin $ 290,000 $ 210,000 500,000

Company sustaining costs 350,000

Profit $ 150,000

* 70% of sales and 60% of sales

2 Paper products

Paper Products Detergents

Current contribution margin $400,000 $360,000

Paper Products Detergents

Sales after increase $2,200,000 $1,320,000

Cost of goods sold* 1,540,000 792,000

Commissions at 12% 264,000 158,400

Total variable costs 1,804,000 950,400

Contribution margin $ 396,000 $ 369,600

Original contribution margin 400,000 360,000

Increase (decrease) in profit ($ 4,000) $ 9,600

* $1,400,000 x 110%; $720,000 x 110%

Note to the Instructor: Some students will try to solve by dealing only with changes, as they could in requirement 2 Most of these students will reach an incorrect answer because of failure to recognize that the new

commission rate applies to all sales, not just to the increased sales

Paper Products DetergentsSales increase $200,000 $120,000times contribution margin percentage,

30% - 12%; 40% - 12% 18% 28%Contribution from sales increase $ 36,000 $ 33,600Additional commissions on existing sales

$2,000,000 x 2%; $1,200,000 x 2% 40,000 24,000Increase (decrease) in profit ($ 4,000) $ 9,600

4 This format shows how each line is performing and also makes CVP analysiseasier because the contribution margin percentage is readily calculated from the report A report showing only the combined results does not permit you tomake decisions about individual lines, only about the business as a whole (e.g., increase volume of both lines by the same percentage)

Note to the Instructor: One purpose of this assignment is to show how profitability and changes in it depend on both volume and contribution margin The answer to requirement 2 must be either paper products or neither line, because a 10% increase in volume will increase total contribution margin of that product line by 10%, and paper products have a higher total contribution margin than detergents The question is then whether the increase in

contribution margin is greater than the increase in fixed costs

In requirement 3, the problem is more subtle because not only is volume increasing but the contribution margin percentage is decreasing by two

percentage points It is therefore not so clear that one line will do better than the other, much less whether changing either commission will be

profitable The schedule below shows the effects in a different way

Paper Products Detergents Original contribution margin percentage:

$400,000/$2,000,000; $360,000/$1,200,000 20% 30%

Less two points increased commission 18% 28%

Times new volume $2,200,000 $1,320,000

Equals new total contribution margin $ 396,000 $ 369,600

In general, reducing contribution margin percentage (by dropping prices, increasing variable costs such as commissions) to increase volume is not profitable for low contribution margin products It might be profitable for high contribution margin products but not necessarily

4-20 Quality Costs (10-15 minutes)

Inspection of outgoing shipments $ 70,000

Salaries of laboratory personnel 150,000

Inspection of incoming shipments 40,000

Total $260,000

Internal failure

Rework of defective units $ 40,000

External failure

Salaries of customer service personnel, 40% $ 80,000

Some alternatives are possible Some employee training might relate to quality inspection, an appraisal cost Customer service personnel salaries are included above at 40%, the percentage of time spent fixing products Some

of the remaining 60% of those salaries might be prevention costs if service representatives take customer recommendations back to designers

2 The point of this question is that opportunity costs of lost sales from external failure are not recorded, nor are internal costs of lost output from time spent making and reworking defective product

Note to the Instructor: You might wish to introduce the question of allocating indirect costs Some of the costs above are salaries only, but thecompany incurs costs to support the laboratory and the customer service

representatives, as well as other quality-related activities The rework costs might be labor only, or include applied overhead as well