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Activity-Based Costing: a tool to Aid Decision Making

The product margin on the order can be computed as follows:

Sales (1,000 units × $20 per unit)

$20,000.00

Costs:

Direct materials (1,000 units × $8.50 per unit)

$8,500.00

Direct labor (1,000 units × $6.00 per unit)

6,000.00

Volume

1,387.50

Batch processing

214.00

Order processing

     275.00

Customer service overhead
(1 customer × $2,463 per customer)

2,463.00

$18,839.50

Customer margin

$ 1,160.50

Exercise 8-16 (45 minutes)

1. The order from Interstate Trucking requires 250 direct labor-hours (1,000 units @ 0.25 DLH per unit) and is run in two batches. Therefore, the overhead cost of the order according to the activity-based costing system would be computed as follows:

Volume

Batch Processing

Order Processing

Total

Activity

250 DLHs

2 batches

1 order

Production overhead:


Indirect labor

$   150.00

$120.00

$  20.00

$  290.00

Factory equipment depreciation

1,000.00

34.00

0.00

1,034.00

Factory administration

25.00

14.00

25.00

64.00

General selling and administrative overhead:

Wages and salaries

100.00

40.00

160.00

300.00

Depreciation

0.00

6.00

10.00

16.00

Marketing expenses

   112.50

    0.00

   60.00

    172.50

Total cost

$1,387.50

$214.00

$275.00

$1,876.50

Example: 250 DLHs × $0.60 per DLH from the problem statement = $150.00

Exercise 8-16 (continued)

2. An action analysis report for the customer can be prepared by including the customer service costs in the overhead analysis.

Volume

Batch Processing

Order Processing

Customer Service

Total

Activity

250 DLHs

2 batches

1 order

1 customer

Production overhead:


Indirect labor

$  150.00

$120.00

$  20.00

$     0.00

$  290.00

Factory equipment depreciation

1,000.00

34.00

0.00

0.00

1,034.00

Factory administration

25.00

14.00

25.00

150.00

214.00

General selling and administrative overhead:

Wages and salaries

100.00

40.00

160.00

1,600.00

1,900.00

Depreciation

0.00

6.00

10.00

38.00

54.00

Marketing expenses

    112.50

     0.00

   60.00

    675.00

    847.50

Total cost

$1,387.50

$214.00

$275.00

$2,463.00

$4,339.50

Example: 250 DLHs × $0.60 per DLH from the problem statement = $150.00

Exercise 8-16 (continued)

The action analysis report for the customer can be constructed using the row totals from the activity rate table, organized according to the ease of adjustment codes:

Sales (1,000 units × $20 per unit)

$20,000.00

Green costs:

Direct materials (1,000 units × $8.50 per unit)

$8,500.00

   8,500.00

Green margin

11,500.00

Yellow costs:

Direct labor (1,000 units × $6.00 per unit)

6,000.00

Indirect labor

290.00

Marketing expenses

     847.50

   7,137.50

Yellow margin

4,362.50

Red costs:

Factory equipment depreciation

1,034.00

Factory administration

214.00

Selling and administrative wages and salaries

1,900.00

Selling and administrative depreciation

      54.00

     3,202.00

Red margin

$   1,160.50

Exercise 8-17 (15 minutes)

1. and 2.

Activity

Activity Level

Possible Activity Measures

a.

Machine settings are changed between batches of different products.

Batch-level

Number of batches; time to change settings

b.

Parts inventories are maintained in the storeroom.

Product-level

Number of part types maintained in stock

c.

Products are milled on a milling machine

Unit-level

Machine-hours; labor-hours

d.

New employees are hired by the personnel office.

Organization-sustaining

Not applicable*

e.

New products are designed.

Product-level

Hours of design time

f.

Periodic maintenance is performed on general-purpose production equipment.

Organization-sustaining

Not applicable*

g.

A bill is sent to a customer who is late in making payments.

Customer-level

Number of bills

h.

Yearly taxes are paid on the company’s facilities.

Organization-sustaining

Not applicable*

i.

Purchase orders are issued for materials to be used in production.

Batch-level

Number of purchase orders