4-32 Activity-based management is using the output of an activity-based cost accounting system to aid strategic decision making and to improve operational control of an organization. Therefore, ABC produces the information used in ABM. If managers in companies with ABC systems do not use that information to aid decision making, they are sacrificing many (if not most) of the benefits of the investment in an ABC system.
4-33 No. The main reasons that activity-based costing is becoming so popular relate to
planning and control, not product costing, including (1) decisions about product mix, prices, and other product-related decisions, and (2) control of costs focused on managing activities instead of products. The term activity-based management refers to the use of activity-based costs for planning and control purposes.
4-34 In such a company the ABC system would not produce more accurate product costs. However, cost planning and control (the strategic and operational purposes of a cost management system) require information about processes, activities, and resources regardless of how many or few products are made. Cost reduction programs are most effective when managers understand the interrelationships between activities and resources. Thus, an ABC system often contributes significantly to an effective planning and control environment, even in a single-product firm.
4-35 Benchmarking financial measures should be done with care. Many factors outside the influence of responsible managers can reduce the comparability of performance measures. For example, labor costs can vary substantially across regions. If the local labor rates in Youngstown are low compared to rates in Los Angeles, Youngstown may have lower cost per driver unit for those activities that are labor intensive such as processing deposits and withdrawals. Another factor is the scope of the ABC system. The Youngstown area billing center may have chosen not to allocate many indirect costs that the Los Angeles center allocates. This would lower the costs accumulated in the Youngstown activity-cost pools and therefore lower the resulting cost per driver unit.
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4-36 (10 min.) This exercise emphasizes how a given cost item may be seen from different viewpoints. Classroom use of such exercises will get students thinking instead of memorizing. Surely, classroom discussion at this early stage of the course will not settle the student's mind on many issues. Exceptions can be cited for nearly every answer. The class will rarely be able to discuss more than half the items. This should not disturb the instructor. To accomplish the purpose of these problems, every item need not be discussed in prolonged detail.
Manufacturing Costs Direct (D) or Variable (V) or Indirect (I) Fixed (F) 1. I F 2. I F 3. D V
4. I F
5. I V 6. I V 7. I V 8. I V 9. D V 10. I V
4-37 (10 min.)
1. The cost of components used in products is almost always directly traceable and is a variable cost.
2. As volume changes over a wide range, the amount of supplies consumed for maintenance will also change so this cost is variable. However, there usually would not be an economically feasible way to trace these costs to individual products, so these costs would be indirect and allocated (often the cost driver would be machine hours).
3. The wages of machine operators who work on only one product can be easily traced to the product. If these wages would not vary over wide ranges of volume, they would be a fixed cost. If increases in production require paying for additional wages for machine operators, they would be variable. We should note that if volume increases rapidly in a short time frame, it is often necessary to work overtime. In this case, the overtime portion of operator wages would be a variable cost even if the base wage is fixed.
4. Training costs for mechanics would not vary as a function of volume of production assuming that no new products would be made and that no new mechanics would be hired. Training costs are indirect assuming that the training cannot be associated with only one product.
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4-38
1. 2. 3. 4. 5. 6.
(20 min.) b, f d, f d, e b, e b, e b, e
7. 8. 9. 10. 11. 12.
b, f g* b, f c, e b, f b, g
13. 14. 15. 16. 17. 18.
d, f b or c, e a**, f b, e b, f d, e
*Non-recurring items such as this are not classified as either variable or fixed. **Could possibly be (b) if immaterial.
This problem emphasizes how a given cost item may be seen from different viewpoints. Classroom use of such problems causes students to think instead of memorize. Surely, classroom discussion at this early stage of the course will not settle the student's mind on many issues. Exceptions can be cited for nearly every answer. The class will rarely be able to discuss more than half the items. This should not disturb the instructor. To accomplish the purpose of these problems, every item need not be discussed in prolonged detail.
4-39 (10 min.)
Using Exhibit 4-7 and the chapter discussion of the Lopez Plastics production and cost accounting system, the classification of these costs and resources is: 1. I 2. D 3. I 4. I 5. I or U 6. I 7. D 8. U
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4-40 (20-25 min.)
The first step is determining the revised activity-cost pool amounts (stage 1).
Processing Activity Cost = .90 × $180,000 + .30 × $40,000 = $162,000 + $12,000 = $174,000
Production Support Cost = .10 × $180,000 + .70 × $40,000 = $18,000 + $28,000 = $46,000
Using the format from page 139 of the text, Contribution to Corporate Costs and Profit Pen Casings Cell Phone Casings Sales $360,000 $80,000 Cost of goods sold: Direct material 22,500 12,000 Direct labor 135,000 15,000 Processing 156,600 1 17,400 3 Production support 9,200 2 36,800 4 Cost of goods sold 323,300 81,200 Gross margin $ 36,700 $ (1,200)
1 $174,000 × .9 2 $46,000 × .2 3 $174,000 × .1 4 $46,000 × .8
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4-41 1. 2.
(20-30 min.)
Unit costs:
Direct materials
Materials receiving and handling Production setup (60÷600, 60÷240) Cutting, sewing, and assembly Total unit cost × Number of units
Cost before packing and shipping Packing and shipping Total cost
Hansel Dolls