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Chapter Eighteen
referred to as Mode I, Mode II, and Mode III. The following information is obtained from company records:
Mode I P rodu ction : Un its Ru n s 10,000 1 of 10,000 Mode II 20,000 4 of 5,000 Mode III 4,000 10 of 400
$3,894,000 118,000
Mode II $ $
3 33 99
4 33 132
Mode III 2 $ 33 $ 66
209.00 x 1.25
I agree!
Stage One Identify significant activities and assign overhead costs to each activity in proportion to resources used.
Stage Two Identify cost drivers appropriate to each activity and allocate overhead to the products.
Overhead Costs
Total budgeted cost = $3,894,000
Activity must be done on each unit produced.
Overhead Costs
Total budgeted cost = $3,894,000
Batch Level Setup cost pool $3,000 Receiving/Inspection cost pool $200,000 Material-Handling cost pool $600,000 Quality-Assurance cost pool $421,000 Packaging/Shipping cost pool $250,000
STAGE ONE
Various overhead costs related to machinery
Maintenance
Depreciation Computer Support
Lubrication
Electricity Calibration
STAGE TWO
Calculate the pool rate
Budgeted Machinery Costs = $1,212,600 Budgeted Machine Hours 43,000 = $28.20/hour
Cost Assignment
Mode I: $28.20 per hr. 1 hr. per unit $28.20 per unit
Mode II: $28.20 per hr. 1.25 hr. per unit $35.25 per unit
Mode III: $28.20 per hr. 2 hr. per unit $56.40 per unit
STAGE ONE
Calculation of total setup cost
Total budgeted setup cost $20 per hour 10 hr. per setup $200 cost per setup 15 production runs $ 3,000 Total
STAGE TWO
Calculate the pool rate
Budgeted Setup Costs Planned Production Runs = $3,000 15 runs = $200 per run
Cost Assignment
Mode I: (1 Run) $200 per run 10,000 units per run = $.02 per unit
Mode II: (4 Runs) $200 per run 5,000 units per run = $.04 per unit
Mode III: (10 Runs) $200 per run 400 units per run = $.50 per unit
STAGE ONE
Various overhead costs related to engineering
Engineering salaries Engineering supplies Engineering software Depreciation
STAGE TWO
Allocate based on engineering transactions
Cost Assignment
STAGE ONE
Various overhead costs related to general operations
Plant depr.
Plant mgmt. Plant maint.
Property taxes
Insurance Security
STAGE TWO
Calculate the pool rate
Budgeted Facilities Cost = $507,400 Budgeted Direct-Labor Hours 118,000 = $4.30/hour
Cost Assignment
Mode I: $4.30 per hr. 3 hr. per unit $12.90 per unit
Mode II: $4.30 per hr. 4 hr. per unit $17.20 per unit
Mode III: $4.30 per hr. 2 hr. per unit $8.60 per unit
$14.82
% 7% 30% 63%
These are the new product costs when Aerotech uses ABC.
Mode III $ 20.00 40.00 56.40 0.50 52.50 8.60 212.85 $ 390.85
Product Diversity
Both original and ABC target selling prices are based on (Cost 125%).
Tradition al cos tin g ABC cos tin g Origin al targe t s e llin g price ABC targe t s e llin g price Mode I $ 209.00 183.44 261.25 229.30 Mode II $ 302.00 261.81 377.50 327.26 Mode III $ 126.00 390.85 157.50 488.56
The selling price of Mode I and II are reduced and the selling price for Mode III is increased.
[$209.00 1.25] [$183.44 1.25]
Product Diversity
Can you identify any problems Aerotech is likely to face as a result of this distortion?
Mode I Tradition al cos tin g $ 209.00 ABC cos tin g 183.44 Cos t dis tortion pe r u n it 25.56 Un its produ ce d 10,000 Total cos t dis tortion 255,600 Mode II $ 302.00 261.81 40.19 20,000 803,800 Mode III $ 126.00 390.85 (264.85) 4,000 (1,059,400)
The Present
Numerous products with more and complicated production requirements. Labor is becoming an ever smaller part component of total production costs.
Cost Drivers
A characteristic of an event or activity that results in the incurrence of costs. In selecting a cost driver, we must consider . . .
Degree of Correlation Cost of Measurement Behavioral Effects
Transaction Costing
Transaction processing provides a readily measurable gauge of departmental activity.
Usually Result In
Activities
Paperwork
Storyboarding
A procedure used to develop a detailed process flow chart, which visually represents activities and the relationships among activities.
Indirect Costs
Cost of inferior decisions resulting from inaccurate information. Low Low Optimal system
major activities. Identify and evaluate new activities that can improve future performance.
Non-Value-Added Costs
Suppose our production process looks like this:
Non-Value-Added Costs
Our goal is to reduce or eliminate the non-value-added activities.
Implementation Problems
High proportion of facility-level costs
End of Chapter 18