Cincinnati cycle company produces two subassemblies, JY-67, used in manufacturing motorcycles. The company is currently using an absorption costing system that applies overhead based on direct-labor hours.
Cincinnati cycle company produces two subassemblies, JY-67, used in manufacturing motorcycles. The company is currently using an absorption costing system that applies overhead based on direct-labor hours.
Cincinnati cycle company produces two subassemblies, JY-67, used in manufacturing motorcycles. The company is currently using an absorption costing system that applies overhead based on direct-labor hours.
Case 5-49 Activity-Based Costing: Budgeted Operating Margin
Cincinnati cycle company produces two subassemblies, JY-67, used in manufacturing
motorcycles. The company is currently using an absorption costing system that applies overhead based on direct-labor hours. The budget for the current year ending ecember !", #$%& is as follows' CINCINNATI CYCL COM!ANY Budgeted "tate#ent o$ Operating Margin $or %&'4 (Y-)* +,-)- Tota. (ales in units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ), $$$ ),$$$
#!),,)$ Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +",6!#,$7 6 Jay *e%ford, Cincinnati Cycle8s president, has been reading about a new type of costing method called activity-based costing. *e%ford is convinced that activity-based costing will cast a new light on future profits. .t a result, Jac9 Canfield, the company8s director of cost management, has accumulated cost pool information for this year shown on the following chart. This information is based on a product mi% of ),$$$ units of JY-6! and ),$$$ units of *:-67. Cost !oo. In$or#ation $or %&'4 Cost poo. Activity (Y-)* +,-)- irect labor . . . . . . . . . . . . . . irect-labor hours 4per product line5. . . . . "$.$$$ ),$$$ 6aterial handling . . . . . . . . . ;umber of parts 4per unit5. . . . . . . . . . . . . ) "$ 7nspection . . . . . . . . . . . . . . . 7nspection hours 4per product line5. . . . . . ),$$$ 7,)$$ 6achining . . . . . . . . . . . . . . . 6achine hours 4per product line5. . . . . . . . "),$$$ !$,$$$ .ssembly. . . . . . . . . . . . . . . . .ssembly hours 4per product line5. . . . . . . 6,$$$ ),)$$ 7n addition, the following information is pro<ected for the ne%t calendar year, #$%) (Y-)* +,-)- (ales 4in units5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ),"$$ &,0$$ -eginning inventory, finished goods 4in units5. . . . . . . . . . . . . . . ,$$ 6$$ 2nding inventory, finished goods 4in units5. . . . . . . . . . . . . . . . . . 7$$ 7$$ =n January ", #$%), *e%ford is planning to increase the prices of JY-6! to +7"$ and *:-67 to +0"$. 6aterial costs are not e%pected to increase in #$%), but direct labor will increase by , percent, and all manufacturing overhead costs will increase by 6 percent. ue to the nature of the manufacturing process, the company does not have any beginning or ending wor9-in-process inventories. Cincinnati Cycle Company uses a <ust-in-time inventory system and has materials delivered to the production facility directly from the vendors. The raw-material inventory both at the beginning and the end of the month is immaterial and can be ignored for the purposes of a budgeted income statement. The company uses the first-in, the first-out 4>7>=5 inventory method. *e?uired' ". 2%plain how activity-based costing differs from traditional product-costing methods. #. @sing activity-based costing, calculate the total cost for #$%) for the following activity cost pools' material handling, inspection, machining, and assembly. 4>or the total costs, round to the nearest dollar5. Then, calculate the pool rate per unit of the appropriate cost driver for each of the four activities. !. Arepare a table showing for each product line the estimated #$%) cost for each of the following cost elements' direct material, direct labor, machining, assembly, material handling, and inspection. 4*ound to the nearest dollar5. &. Arepare a budgeted statement showing the operating margin for Cincinnati Cycle Company for #$%), using activity-based costing. The statement should show each product and a total for the company. -e sure to include detailed calculation for the cost of goods manufactured and sold. 4*ound each amount in the statement to the nearest dollar5. Case )-55 using an activity /ased costing syste# to #odi$y /e0avior 12 The Bospital 7nstruments ivision on med 1ife Technology Corporation manufactures a variety of electronic medical e?uipment. The principal product of the Bospital 7nstruments ivision is a sophisticated instrument for measuring and graphically displaying a variety of medical phenomena, such as heart and respiration rates. The culture throughout the division was primarily engineering- oriented. =ne result of this culture was that the company8s design engineers generally designed new product from scratch, rather than relying on modification of a current design. Chile this approach usually resulted in an DelegantE design from an engineering standpoint, it often resulted in the use of new or uni?ue parts that were not already being used in the company8s other products. The strategy of the Bospital 7nstruments ivision8s management was to position the division as a products differentiator and price leader, not as the industry8s low-cost producer. This means that the division generally led the medical instruments mar9et with new products that e%hibited greater functionality than competing products and that the products were priced at a premium. The company8s competitors then would emulate a new product, produce it at a lower cost, and undercut the 6ed 1ife Technology had moved on to a new product with even greater functionality. This strategy had been ?uite successful until the Japanese entered the medical instruments mar9et in a ma<or way. 6ed 1ife technology8s new competitors were able to set product prices some #) percent below those of 6ed 1ife Technology, while maintaining close to the same level of functionality. 7n order to compete, the Bospital 7nstruments ivision had to lower its prices below its reported product costs. This resulted in significant losses for the division. To remedy the situation, the Bospital 7nstrument ivision8s management began an e%tensive continuous improvement program. The division changed its production and inventory management system to a J7T system, ideas of total ?uality control were aggressively pursued and management attempted to develop an empowered wor9force. .ll of these efforts paid off dramatically. Bowever, production costs were still relatively high for the industry, and cycle time were considered too long by management. The general feeling was that in order to remain competitive in the long run, the division would have to further lower its productions costs and shorten its production cycle times. .s management contemplated the high production costs, one problem that 9ept coming up was the division8s part number proliferation. .s the engineering- dominated company continued to introduce new products, the number of different parts and components that had to be stoc9ed in inventory continued to increase. (ome members of management felt that the division8s cost-reduction goals could be achieved 4at least partially5 by solving the problem of part number proliferation. .s management was pondering the division8s cost-reduction goal, the controller was contemplating the introduction of a new cost-accounting system. The controller was thin9ing about introducing activity-based costing and activity- based management in the Bospital 7nstruments ivision. *e?uired' ". 2%plain why the problem of part number proliferation could increase the division8s production costs. #. 2%plain how long production cycle times could increase the division8s production costs. !. Bow could an .-C system be used to help reduce costs by attac9ing the problem of part number proliferationF .llow yourself to contemplate an entirely new role for .-C that is ?uite different from the ob<ective of more accurate product costs. The following specific ?uestions may help in completing this re?uirement. a. Chat is the division8s strategy in the mar9etplaceF b. Bow are prices currently being determinedF c. oes management really need more accurate product costs, given its strategy and the reality of mar9et-driven pricesF d. Chat is the current goal of managementF e. Chat is 4at least partially5 to blame for high production costsF f. Cho is 4at least partially5 to blame for high production costsF g. Bow could an .-C system help solve the problem and reduce production costsF &. >ollowing up your answer to re?uirement 4!5, what cost drivers could be employed to help solve the problem of part number proliferationF Chich costs driver would wor9 bestF 2%plain. ). Bow could an .-C system help highlight and solve the problem of production cycle times that are too longF 6. .s succinctly as you can, state how the fundamental role of the .-C system differs here from the role described in the .erotech illustration used in Chapter ) and 6.