Exam 5: Activity-Based Costing and Management

Consider the nine activities that follow. 1. Microsoft: Developing computer coding for a new spreadsheet package 2. General Mills: Painting the office of a maintenance supervisor at a plant that produces cereal 3. Mayo Clinic: Examining a new patient 4. American Airlines: The 90 minutes that a Boeing 757 sits idle on the ground between flights 5. Office Depot: Moving cases of paper from one location to another in the same warehouse 6. Rolex: Attaching a watch band to the watch's face 7. United States Postal Service: Reprocessing mail that had been sorted incorrectly on a malfunctioning sorting machine. 8. Fidelity Investments: Correcting errors made by company personnel in customer accounts 9. Marriott: Upgrading the quality of bedding used at hotels in very competitive marketplaces 10. Dell Computer: Re-working defective units found during quality control inspection Required: Categorize each of the activities as either value-added or non-value-added for the companies noted.

Kelly and Logan, an accounting firm, provides consulting and tax planning services. A recent analysis found that 65% of the firm's billable hours to clients resulted from tax planning and for many years, the firm's total administrative cost (currently $250,000) has been allocated to services on the basis of billable hours to clients. The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows: Staff support \ 180,000 In-house computing charges 50,000 Miscellaneous office costs 20.000 Total \ 250.000 A recent analysis of staff support found a strong correlation with the number of clients served (consulting, 20 clients; tax planning, 60 clients). In contrast, in-house computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively. Consulting consumed 30% of the firm's computer hours and had 20% of the total client transactions. If Kelly and Logan switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to consulting services would:

Many traditional product costing systems:

St. Helena Cellars produces wine in southwestern Ontario. Consider the following selected costs that arose during the current year: 1. Safety costs at winery 2. Truckload shipping costs 3. Building maintenance costs 4. Bottle and cork cost 5. Development cost of new, after-dinner wine 6. Tasting and testing costs Required: A. Briefly distinguish between unit-level and product-sustaining activities. B. Classify the six costs listed as arising from a unit-level, batch-level, product-sustaining, or facility-level activity.

When a company adopts a just-in-time inventory system, it would expect:

Vanguard combines all manufacturing overhead into a single cost pool and allocates this overhead to products by using machine hours. Activity-based costing would likely show that with Vanguard's current procedures:

X-Ray Machines Ltd. manufactures three product lines: Standard, Deluxe, and Superior. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below. The following information pertains to the three product lines for next year: Standard Deluxe Supe rior Units to be produced 15,000 10,000 7,000 Orders to be shipped 1,000 500 500 Number of parts per unit 10 15 25 Machine hours per unit 3 5 7 Labour hours per unit 2 2 2 What is X-Ray's pool rate for the packaging activity?

The division of activities into unit-level, batch-level, product-sustaining level, and facility-level categories is commonly known as a cost:

Star Manufacturing, contemplating the adoption of an activity-based costing system, has established three activity-cost pools: machine setup, quality assurance, and engineering. These cost pools, the appropriate cost driver, and the percentage of each cost driver consumed by the company's products (H15, H16, and H17) follow: Machine setup Number of setups Quatity Number of inspections assurance Engineering Number of change orders 50\% 20\% 30\% 70\% 15\% 15\% 15\% 10\% 75\% Estimated costs for these three activities, which account for 80% of the firm's total overhead, are $400,000, $500,000, and $120,000, respectively. Star currently applies manufacturing overhead to products on the basis of machine hours. Required: A. Will activity-based costing systems require more or fewer cost pools than traditional costing systems? No explanation is necessary. B. Calculate the cost of machine setup, quality assurance, and engineering to be charged to products H15, H16, and H17 respectively. C. Consider the company's current overhead application procedure. 1. Is Star emphasizing unit-level activities, batch-level activities, product-sustaining activities, or facility-level activities? Explain. 2. How accurate will the current costing procedure be given the nature of most of the company's activities? Briefly discuss. 3. How accurate will the current costing procedure be given the consumption ratios of the firm? Briefly discuss.

Define the term "cost driver" and discuss the factors that are important in the selection of appropriate cost drivers.

Mainville Corporation recently abandoned its traditional production and inventory system in favor of a just-in-time system. The company typically dealt with 50 suppliers and placed 450 orders throughout the year. All other things being equal, which of the following choices denotes a likely scenario under the just-in-time system? Number of Suppliers Number of Orders 50 300 50 800 100 510 120 300 120 800

X-Ray Machines Ltd. manufactures three product lines: Standard, Deluxe, and Superior. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below. The following information pertains to the three product lines for next year: Standard Deluxe Supe rior Units to be produced 15,000 10,000 7,000 Orders to be shipped 1,000 500 500 Number of parts per unit 10 15 25 Machine hours per unit 3 5 7 Labour hours per unit 2 2 2 Under an activity-based costing system, what is the per-unit cost of Superior?