Cost Management Accounting & Control 6th Edition By Hansen – Test Bank
11–3
1. Supplier cost:
First, calculate the activity rates for assigning costs to suppliers:
Inspecting components: $1,200,000/1,000 = $1,200 per sampling hour
Expediting work: $960,000/100 = $9,600 per order
Reworking products: $6,844,500/1,500 = $4,563 per rework hour
Warranty work: $21,600,000/4,000 = $5,400 per warranty hour
Next, calculate the cost per component by supplier:
Supplier cost:
Grayson Lambert
Purchase cost:
$144 200,000 $ 28,800,000
$129 800,000 $ 103,200,000
Inspecting components:
$1,200 20 24,000
$1,200 980 1,176,000
Expediting work:
$9,600 10 96,000
$9,600 90 864,000
Reworking products:
$4,563 90 410,670
$4,563 1,410 6,433,830
Warranty work:
$5,400 200 1,080,000
$5,400 3,800 20,520,000
Total supplier cost $ 30,410,670 $ 132,193,830
Units supplied ÷ 200,000 ÷ 800,000
Unit cost $ 152.05* $ 165.24*
*Rounded to the nearest cent.
The difference favors Grayson; furthermore, when the price concession is considered ($135 – $144), the cost of Grayson is $143.05, which is much less than the Lambert component. Zavner should give serious consideration to accepting the contractual offer made by Grayson. The savings are in the mil-lions.
11–3 Concluded
2. To assign the lost sales cost, it would be helpful to know the number of de-fective units using the Grayson component versus those using the Lambert component. Warranty hours would act as a very good substitute driver. Using this driver, the rate is $4,500,000/4,000 = $1,125 per warranty hour. The cost assigned to each component would be:
Grayson Lambert
Lost sales:
$1,125 200 $ 225,000
$1,125 3,800 $ 4,275,000
This increases the cost of the Lambert component by $4,275,000/800,000 = $5.34 *.
*Rounded.
11–4
1. Sales revenue = $0.75 10,000,000 = $7,500,000 for each customer type. (Note: The total number of parts is the average order size times the number of sales orders.) Thus, the total customer-related activity costs are split equally:
Cost allocation = 0.50 $5,900,000 = $2,950,000
The profitability of each category is calculated as follows:
Sales revenue $ 7,500,000
Less: Noncustomer-related cost ($0.40 10,000,000) 4,000,000
Less: Customer-related activity costs 2,950,000
Customer profitability $ 550,000
This profitability measure is suspect because the customer-related costs are assigned using revenues, a driver that is not causally related to the custom-er-related activity costs. This approach may actually have one set of custom-ers subsidizing the other.
11–4 Concluded
2. Activity-based customer costing:
First, calculate the activity rates for assigning costs to suppliers:
Processing sales orders: $1,100,000/11,000 = $100 per order
Scheduling production: $600,000/20,000 = $30 per scheduling hour
Setting up equipment: $1,800,000/15,000 = $120 per setup
Inspecting batches: $2,400,000/15,000 = $160 per inspection
Next, assign the costs to the customers (those who place frequent orders and those who place infrequent orders):
Frequent Infrequent
Processing sales orders:
$100 10,000 $ 1,000,000
$100 1,000 $ 100,000
Scheduling production:
$30 17,500 525,000
$30 2,500 75,000
Setting up equipment:
$120 12,500 1,500,000
$120 2,500 300,000
Inspecting batches:
$160 12,500 2,000,000
$160 2,500 400,000
Total customer cost $ 5,025,000 $ 875,000
Profitability:
Frequent Infrequent
Sales revenue $ 7,500,000 $ 7,500,000
Less: Other costs 4,000,000 4,000,000
Less: Customer-related costs 5,025,000 875,000
Customer profitability $ (1,525,000) $ 2,625,000
This outcome reveals that customers who place smaller, more frequent or-ders are not profitable. Actions must be taken to make this segment profita-ble, or this category of customers could be dropped. One possibility is to impose a charge for orders below a certain size, thus reducing the demands on the four customer-related activities with a subsequent reduction in cost. Another possibility is to offer quantity discounts to encourage larger orders.
11–5
DA = Direct attribution (tracing)
DT = Driver tracing
AL = Allocation
Cost Item Before JIT After JIT
a. Inspection costs DT DA
b. Power to heat, light, and cool plant AL AL
c. Minor repairs on production equipment DT DA
d. Salary of production supervisor (dept./cell) AL DA
e. Oil to lubricate machinery DT DA
f. Salary of plant supervisor AL AL
g. Costs to set up machinery DT DA
h. Salaries of janitors AL AL
i. Power to operate production equipment DT DTa
j. Taxes on plant and equipment AL AL
k. Depreciation on production equipment DT DA
l. Raw materials DA DA
m. Salary of industrial engineer DT DAb
n. Parts for machinery DT DA
o. Pencils and paper clips for production
supervisor (dept./cell) DT DA
p. Insurance on plant and equipment AL AL
q. Overtime wages for cell workers DT DA
r. Plant depreciation AL ALc
s. Materials handling DT DA
t. Preventive maintenance DT DA
aDA, if each cell has a meter.
bAssumes engineers are assigned to cells.
cSome might argue that cell square footage would be a good driver so this is now DT. (We now know how much space is dedicated to each product.)
11–6
1. Maintenance cost per maintenance hour = $1,960,000/200,000
= $9.80 per maintenance hour
Wheels: $9.80 60,000/52,500 = $11.20 per unit
Seats: $9.80 60,000/52,500 = $11.20 per unit
Handle bars: $9.80 80,000/70,000 = $11.20 per unit
2. Wheels: $532,000/52,500 = $10.13* per unit
Seats: $588,000/52,500 = $11.20 per unit
Handle bars: $840,000/70,000 = $12.00 per unit
*Rounded to the nearest cent.
3. The JIT cost is more accurate because maintenance cost is directly traced to each product. There is no need to use an activity driver such as maintenance hours to assign this cost to each product. This improved traceability can be explained by two factors: multitask training and decentralization of services.
11–7
1. Materials Inventory 810,000
Accounts Payable 810,000
Work-in-Process Inventory 810,000
Materials Inventory 810,000
Work-in-Process Inventory 135,000
Wages Payable 135,000
Overhead Control 675,000
Accounts Payable 675,000
Work-in-Process Inventory 742,500
Overhead Control 742,500
11–7 Concluded
Finished Goods Inventory 1,687,500
Work-in-Process Inventory 1,687,500
Cost of Goods Sold 1,687,500
Finished Goods Inventory 1,687,500
Accounts Receivable 2,700,000
Sales Revenue 2,700,000
Overhead Control 67,500
Cost of Goods Sold 67,500
To close out the overapplied overhead
variance.
2. Raw Materials and In Process Inventory 810,000
Accounts Payable 810,000
Conversion Cost Control 810,000
Accounts Payable 675,000
Wages Payable 135,000
Finished Goods Inventory 1,687,500
Conversion Cost Control 877,500
Receivables-in-Process Inventory 810,000
Cost of Goods Sold 1,687,500
Finished Goods Inventory 1,687,500
Accounts Receivable 2,700,000
Sales Revenue 2,700,000
Conversion Cost Control 67,500
Cost of Goods Sold 67,500
To close out the conversion cost
variance.
11–8
Raw Materials and In Process Inventory 810,000
Accounts Payable 810,000
Conversion Cost Control 810,000
Accounts Payable 675,000
Wages Payable 135,000
Cost of Goods Sold 1,687,500
Receivables-in-Process Inventory 810,000
Conversion Cost Control 877,500
Accounts Receivable 2,700,000
Sales Revenue 2,700,000
Conversion Cost Control 67,500
Cost of Goods Sold 67,500
To close out the conversion cost
variance.
11–9
1. Conversion Cost Control 810,000
Accounts Payable 675,000
Wages Payable 135,000
Finished Goods Inventory 1,687,500
Conversion Cost Control 877,500
Accounts Payable 810,000
Cost of Goods Sold 1,687,500
Finished Goods Inventory 1,687,500
Accounts Receivable 2,700,000
Sales Revenue 2,700,000
Conversion Cost Control 67,500
Cost of Goods Sold 67,500
To close out the conversion cost
variance.
2. Conversion Cost Control 810,000
Accounts Payable 675,000
Wages Payable 135,000
Cost of Goods Sold 1,687,500
Accounts Payable 810,000
Conversion Cost Control 877,500
Accounts Receivable 2,700,000
Sales Revenue 2,700,000
Conversion Cost Control 67,500
Cost of Goods Sold 67,500
To close out the conversion cost
variance.
11–10
1. Fabrication Assembly
Allocation ratio* 0.75 0.25
Maintenance:
0.75 $160,000 $ 120,000
0.25 $160,000 $ 40,000
Direct overhead costs 240,000 68,000
Total $ 360,000 $ 108,000
*Allocation based on number of moves.
Overhead rate (based on direct labor hours for each department):
Fabrication: $360,000/24,000 = $15 per direct labor hour
Assembly: $108,000/12,000 = $9 per direct labor hour
Unit cost:
Regular: ($15 1) + ($9 0.5) = $19.50
Super: ($15 2) + ($9 1) = $39
2. Regular: $76,000/8,000 = $9.50 per unit
Super: $240,000/8,000 = $30 per unit
The JIT cost is more accurate because it has more costs that can be as-signed using direct tracing.
3. JIT manufacturing should result in more efficient production, and, thus, costs would be reduced. For example, a cell structure would almost eliminate the materials handling requirements, and most of this cost should disappear.
Multidisciplinary labor and decentralization could produce additional sav-ings.
PROBLEMS
11–11
1. Cost per labor hour = ($5,000,000 + $7,500,000*)/250,000
= $50 per hour
*($30 250,000 DLH = $7,500,000).
Cost per unit of average product = $50 1.25 = $62.50
2. Cost per hour = ($6,600,000 + $6,000,000*)/200,000 = $63.00 per hour
*($30 200,000 DLH = $6,000,000).
Cost per unit of average product = $63 1 = $63
3. The design changes increased non-unit-based overhead activities, while de-creasing unit-based costs. This is suggested by the fact that engi¬neering change orders triggered a number of overhead-related activities such as changes in setup, inspection, and purchasing activities. Thus, so-called fixed overhead increased by $1,600,000. Reduction in labor content may have come at the expense of increasing the demand for non-unit-related activities. This is supported by the analysis of the effects of the design changes on setups and purchasing:
Setups:
Change in demand for setups = (40,000 – 20,000)/2,000
= 10 steps
Change in resource spending = 10 steps $90,000 = $900,000
Purchasing:
Change in demand for purchasing = 250 – 100
= 150 component types
Change in steps demanded = 150/20 = 7.5, thus requiring 8 steps (partial steps cannot be acquired)
Change in variable activity cost = $150 $2,000
= $300,000
Change in step-fixed cost = 8 $50,000
= $400,000
Total change = $300,000 + $400,000 = $700,000
The engineers did not have a correct view of the existing internal linkages. To exploit internal linkages, it is imperative that internal value-chain activi-ties be identified with their associated cost drivers.
11–11 Concluded
4. The cost of producing decreases by $250,000 for the rejected design:
Unit-level activities:
Unit-level cost change = (260,000 – 250,000) $30
= 10,000 $30
= $300,000
Setups:
Setup cost change = (10,000 – 20,000)/2,000
= 5-step reduction $90,000
= ($450,000) savings
Purchasing:
Purchasing demand change = (75 – 100) = (25)
Decrease in steps = 25/20 = 1 (rounded down to nearest whole unit)
Decrease in variable cost = $2,000 (25) = ($50,000)
Decrease in step cost = $50,000 (1) = ($50,000)
Total change = $300,000 – $450,000 – $50,000 – $50,000
= ($250,000)
The rejected design actually produces a $250,000 savings relative to the cur-rent design. Relative to the accepted new design, the savings is $1,600,000 more! This emphasizes the importance of having the facts correct when mak-ing strategic changes. ABC links output with activities and activities with costs. Thus, any change in product design with an impact on activities could be associated with cost changes. By describing cost behavior better and es-tablishing the indicated linkages, ABC can help a manager identify the best cost reduction strategies.
11–12
1. Supplier cost:
First, calculate the activity rates for assigning costs to suppliers:
Testing engines: $240,000/1,000 = $240 per engine
Reworking products: $400,000/5,000 = $80 per rework hour
Expediting orders: $300,000/100 = $3,000 per late shipment
Repairing engines: $540,000/1,250 = $432 per engine
Next, calculate the cost per engine by supplier:
Supplier cost:
Bach Rivera
Purchase cost:
$270 10,800 $ 2,916,000
$300 2,400 $ 720,000
Replacing engines:
$240 990 237,600
$240 10 2,400
Rework:
$80 4,900 392,000
$80 100 8,000
Expediting orders:
$3,000 99 297,000
$3,000 1 3,000
Repairing engines:
$432 1,220 527,040
$432 30 12,960
Total supplier cost $ 4,369,640 $ 746,360
Units supplied ÷ 10,800 ÷ 2,400
Unit cost $ 404.60 $ 310.98
The Rivera engine costs less when the full supplier effects are considered. This is a better assessment of cost because it considers the costs that are caused by the supplier due to poor quality, poor reliability, and poor delivery performance.
2. Given that Plata needs both suppliers, it seems sensible to first shift more business to the true low-cost supplier and then take actions to help improve behavior of Bach engines. Plata could share the ABC analysis with Bach and show how the poor quality and delivery performance are affecting the costs of Plata. Plata may offer to share expertise so that Bach can improve its per-formance. ABC helps in strategic analysis by tracing costs to their sources—even if those sources are outside the factory walls. It reveals opportunities for reducing costs and improving relations with external parties (suppliers in this case).
11–13
1. Following GAAP is fine for external financial reporting; however, for internal reporting it may not be a good practice. By expensing order-filling costs, management has no indication of the profitability of various customer groups because there is no cost assigned to customers. Knowing the sources of profitability can affect customer mix and product mix decisions. It can also have a significant effect on deciding which customer segments to serve (fo-cusing strategy).
2. The total product consists of all benefits—both tangible and intangible—that a customer receives. One of the benefits is the order-filling service provided by Jazon. Thus, it can be argued that these costs should be product costs, and not assigning them to products undercosts all products. There are more small orders than large (70,000 orders average 600 units), and these small orders consume more of the order-filling resources. They should, therefore, receive more of the order-filling costs. Furthermore, since segmenting prod-ucts is equivalent to segmenting customers, we obtain insight as to how much it is costing to service different customer categories.
The average order-filling cost per unit produced is:
$6,300,000/126,000,000 units = $0.5/unit
Note: Each product has 42 million units (e.g., 600 70,000 for A); thus, there are 126,000,000 units in total.
Order-filling costs are about 6%–8% of the selling price—clearly not a trivial amount.
The per-unit cost for individual product families can be computed using the number of orders as the activity driver:
Activity rate = $6,300,000/140,000 orders = $45 per order
The per-unit ordering cost for each product family is:
Family A: $45/600 = $0.075 per unit
Family B: $45/1,000 = $0.045 per unit
Family C: $45/1,500 = $0.030 per unit
Family A, with the smallest batches, is the most undercosted of the three families. Furthermore, the unit ordering cost is quite high relative to Family A’s selling price (9%–15% of the selling price). This suggests that something should be done to reduce the order-filling costs.
11–13 Concluded
3. With the pricing incentive feature, the average order size has been increased to 2,000 units for all three product families. The number of orders now pro-cessed can be calculated as follows:
Orders = [(600 70,000) + (1,000 42,000) + (1,500 28,000)]/2,000
= 63,000
Reduction in orders = 140,000 – 63,000 = 77,000
Steps to be reduced = 77,000/2,000 = 38 (rounding down to nearest whole number)
There were initially 70 steps: 140,000/2,000
Reduction in resource spending:
Step-fixed costs ($70,000 38) $ 2,660,000
Variable activity costs ($28 77,000) 2,156,000
$ 4,816,000
Customers placed smaller, more frequent orders than necessary. They re-ceived a benefit without being charged for it. By charging for the benefit and allowing customers to decide whether it was worth the cost, Jazon was able to reduce its costs (potentially by shifting the cost of the service to the cus-tomers). The customers, however, apparently did not feel that the benefit was worth paying for and so increased their order size. Fewer, larger orders meant that the demand for the order-filling activity decreased, as did its cost. Other benefits may also be realized. The order size affects such activities as scheduling, setups, and materials handling. Larger orders should also de-crease the demand for these activities and explain why the costs for these activities were also reduced.
4. If Jazon is to be a JIT supplier, then it should enjoy some of the benefits. One possibility is to seek help from the buyer so that Jazon can become more of a lean manufacturer. Another possibility is to seek long-term con-tracts to reduce some of the ordering costs so that smaller orders can be supplied. As part of this, Jazon might seek direct data entry to the buyer’s database. By accessing the buyer’s production schedule, Jazon can deliver the needed parts where they are needed just in time. This also reduces Jazon’s uncertainty and facilitates its own scheduling, lowering costs.
5. Competitive advantage is created by providing the same customer value for less cost or better value for the same or less cost. By reducing the cost, Jazon can increase customer value by providing a lower price (decreasing customer sacrifice) or by providing some extra product features without in-creasing the price (increasing customer realization). This is made possible by the decreased cost of producing and selling the bolts.
11–14
1. Target cost = Target price – Target profit
= $130 – $15
= $115 per unit
The projected cost is $122 [$120 + ($100,000/50,000 units)], so the target is not met. The projected total life-cycle profit is ($130 – $122) 50,000 = $400,000.
2. a. New target cost = $125 – $15 = $110 per unit
b. The current projected cost is $115.43* [$120 + ($100,000/70,000) – $6].
Thus, cost reductions of $5.43 per unit still must be achieved.
c. Total life-cycle profits = ($125 – $115.43) 70,000 = $669,900
d. Three general approaches are used to reduce costs in the design stage: (1) reverse engineering, to see if some efficiencies can be learned from competitors; (2) value analysis, to see if the functional design can be im-proved; and (3) process improvement, to see if a more efficient process design can be realized. Of the three, the most promising are the last two (this is a new product—not a redesign of an existing product).
*Rounded.
3. Projected life-cycle profits, new designs:
Design A:
Sales ($125 70,000) $ 8,750,000
Less life-cycle costs:
Production and logistics ($106 70,000) (7,420,000)
Preproduction activities* (250,000)
Life-cycle income $ 1,080,000
Units ÷ 70,000
Profit per unit $ 15.43**
Total profits = $15.43 70,000 = $1,080,100
*Includes the $100,000 spent on the first design effort.
**Rounded.
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