• Author / Uploaded
• Ram Knowles

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Activity-Based Costing Lean Operations and the Costs of Quality

Traditional Costing System versus an ABC System Three roommates began sharing the costs ($900 per month) equally but were not participating in the activities of living there equally: eating, watching TV, and surfing the Internet. The roommates called a meeting to discuss the allocation of the costs to each roommate. David

Matt

Brian

$190

$190

$190

25

-

25

High-Speed Internet Access

-

40

-

Groceries

-

80

160

$215

$310

$375

Original cost allocation system

$300

$300

$300

Difference

-$85

$10

$75

More-refined cost allocation system: Rent and utilities Cable TV

Total costs allocated

________________________: allocates cost based on the activity that causes the cost; goal is to allocate indirect costs more accurately to jobs to get a clearer picture of what each product costs to manufacture; helps managers make better decisions.

Blake and Roscoe are college friends planning a skiing trip to Aspen before the New Year. They estimate the following cots for the trip: Estimated

Activity allocation

Costs

Cost driver

Blake

Roscoe

Food

$ 600

Pounds of food eaten

20

30

Skiing

210

# of lift tickets

3

0

Lodging

400

# of nights

2

2

Blake suggests that the costs be shared equally. Calculate the amount each person would pay. Roscoe does not like the idea because he plans to stay in the room rather than ski. Roscoe suggests that each type of cost be allocated to each person based on the cost driver listed above. Using the allocation for each person, calculate the amount that each person would pay based on his own consumption of the activity.

Longview, Corp. is considering the use of activity-based costing. The following information is provided for the production of two product lines: Activity

Cost

Cost Driver

Setup

$107,000

Number of setups

Machine Maintenance

50,000

Machine hours

Total indirect manufacturing costs

$157,000

Product A

Product B

Total

Direct Labor hours

7,000

3,000

10,000

Number of setups

30

70

100

Number of Machine hours

1,200

3,800

5,000

Longview plans to produce 350 units of Product A and 225 units of Product B. Compute the ABC indirect manufacturing cost per unit for each product.

Monthly, Corp. makes two products: C and D. The following data have been summarized: Product C

Product D

Direct materials cost per unit

$900

$2,100

Direct labor cost per unit

400

200

Indirect manufacturing cost per unit

?

? Allocation Base Units

Activity

Allocation Rate

Product C

Product D

Setup

$1,000

37

77

Machine Maintenance

$11

1,350

3,850

The company plans to manufacture 225 units of each product. Calculate the product cost per unit for Product C and D using ABC.

The following information is provided for the Asteroid Antenna, Corp. which manufactures two products: Lo-Gain antennas and Hi-Gain antennas for use in remote areas. Asteroid plans to produce 200 Lo-Gain antennas and 325 HI-Gain antennas.

Activity

Cost

Cost Driver

Setup

$55,000

Number of Setups

Machine Maintenance

39,000

Machine Hours

Total indirect manufacturing costs

$94,000

Lo-Gain

Hi-Gain

Total

Direct Labor hours

1,700

5,800

7,500

Number of setups

25

25

50

Number of machine hours

2,100

1,400

3,500

Compute the ABC indirect manufacturing cost per unit for each product.

The following information is provided for the Asteroid Antenna, Corp. which manufactures two products: Lo-Gain antennas and Hi-Gain antennas for use in remote areas. Asteroid plans to produce 200 Lo-Gain antennas and 325 HI-Gain antennas.

Activity

Cost

Cost Driver

Setup

$55,000

Number of Setups

Machine Maintenance

39,000

Machine Hours

Total indirect manufacturing costs

$94,000

Lo-Gain

Hi-Gain

Total

Direct Labor hours

1,700

5,800

7,500

Number of setups

25

25

50

Number of machine hours

2,100

1,400

3,500

Compute the indirect manufacturing cost per unit using direct labor hours from the single-allocation base system.

Calculate the cost per test-our for HT and ST. Explain briefly the reasons why these numbers differ from the $16 per test-hour that Cougar calculated using its simple costing system.

Engineering Production

Engineering Production