Manufacturng engineering $21,000 Sales commissions 420,000 Salary, sales supervisor t.000 Suppies 7,000 work 40,000 30,000 During March, the Phone Division purchased materals totaling $312,000. There are no significant inventones of supplies (beginning or endingl. Supplies are accounted for separately from mazeials CB's Phone Division hed ales totaling $1,170,000 for Mer Based on March's eeaults, Bryce decided to meet witht 128 of the Phone Division's menagers: Kim 1875, divisional menager; Jacob Carder, civisional cortrailer, anc! Lary Hartley, sales manager. A Bi transcrip! of their recorded conv st109 ia. given next Bryce: the prob March's profit peHformance is down once again, and | think w id correct itbefore it's tac jate. Kim, what's your need to see if we ca sessment of the stustion?” identify Kim: "Foreign competition is aating ut alive. They ere coming in with I cd ahones of compe her quality thay our own, va talked with savaral of tho rotailers that carry our lines, anc they say the same Theyar at we can sal more ifwe ‘ower ou prices," e convinced ss by 10 to 15 percent, | think that wo'd again mostofour thatshe quality of our products meets thavof ourcompet! icare spending a lotof menay ach menth on rework end warranties, That ws waranty cost cur by 70 to 80 percent, f pmerswould be more Fst that kat shave. Butwe elvo need to make uy youlenon, produess, end ‘would net anly ragain aut market share but increase i,” fering prices without lowering perunit costs wil help us increase our proftapilty. | Lhink we need to improve our gost accountng systein, | am net confident that we really know how much jerpticing so) of our product lines is costing vs. Ie may be that we are of our units ocause we are overcosting tham. We may be underpricing other units Larry: “This sourds p especially i the overcesting is for some of our high-volume lines, A price decrease for these procucts would make the aiggest cifference—andif we knew costed, then we could offer immediate price reductio Bryce the last “Jacob, | need more explanation We have be 0 years. Why would it be a problem?” n using the same cost accounting system for Jacob: *| think that ourmanutacturing environment has changed, Over the yesrs, we have added alot different raduct lines. Some of these jx cowethoad resources, We trece—or atiemat 10 ‘overhead casts to the diflerent produ direct labor cost, a unitioased cost driver. We may be doing more allocation than tracing, If sa, the ‘we prabably don't have a very good idea of our actual product costs, Also, as you kno, with the way computer technology has changed over time, itis easer and cheane’ to collect and use detailed infor: mation—information thet will allow us 19 assign coss more accurately 9A our manufacturing Bryce: "This may be something we should explore, Jaccts, what lo you suggost?" Jacob: “Iie wantmore accurate product pen we nesd to understand perform, why we perform them, a idantiy erase for improvement: Wes alse need tes kno hen cc0s. What tis boils dows to ig the nead io use an actvity-bazedlm his, we need! some des ofwhather non-unitbased drivers adc! anything. Aciwity-based management is nolan inexpensive underaking, Se | susdest doa prelminary study ta see ifdirect labor c for tracing. If not, then mayoe some nor-unit-drivers might'be needed. In fact, if you would lke, gather some data that will provide seme evidence on Japprosch.” ostsandiif we really want to get inthe cost reduction business, sis behave, In particular, we reed to understand ivily cost behavior Knowing whet oct how well we perfor ther vel hele 1 consume activty «es0u agement system. But balore we jump the diferent prota 2 usefulnessor the actvity-bas Bryco: "What de you think, Kin? I's your eli Kim: “what Jacob has said saunds arcrising. think he shoulé pursue it ancl do s0 qui, | also think that we naes to look at imoraving our quality. It sounds like we have a problem there. IF quality could be improved, then cur costs will drop. Fil alk co our quality people. Jacob, in the meantime, find out for usif moving to an activity-based 9 smvis the aay to go. Hew much time do you need?” Jacob: "I have skeady been gather uld probaely have @ repor-within two weeks,Maing the Comession MEMO To: Kim Sreashears ‘ob Carder crinery Analysis Based on my inital analysis, | am confident that an ABC ‘one of our conventional phane plants, Ire cost using the folloaing 15 months of deta: tem will offer significant impravernent. For ressod total monthly ovethead cost on monthly direct labor Overhoad Direct Labor Cost 320,000 380,000 100,000 300,000 90,000 280,000 90,000 340,000 5,000 410,000 115,000 375,006 000 360,000 85,000 340,000 85,000 330,000 90,000 300,000 80,000 ing. Although direct labor ars 0 be a driver af averhead cost, t really doesn't explain a lot of Lie variation, | then searched for other drivers—partcuarly non-unt divers — fat might olfer more in rerhead cost behavior. Every ime a ba:ch is praguced, mavetial movement occurs, regaralloss of the se0 of the batch. The number of moves 9 gather only 10 months of data for thie, {Our infor ‘the number of moves. so | had to build the cata set by intsrvewing production ps mation is provided next like a more logical var. [yas able ation ayatem doesn’t provide for sennel) The Materials Handling Cost Number of Moves $80,000 4,500 1,000 70,000 1.250 72,000 4,300 8,000 1100 85,000 1.700 000 1.200 73,500 1.350 83,000 1.400 84,000 1.700 The regression results were impressive. There is no question in my mind thal the number of moves is a good driver of meterialshandling costs. Using the number of moues to assgn materials-hancling ‘costs to products would Ikely be better than the cost assignment using direct labor cost. Furthermore, snice small batches usa the same number cf moves as large batches, we have some evidence th may be overcosting our high-volume products ‘ole overhead activity: inspecting products, We have 15 inspectors who are paid spection capacity per ly about 80 percent of those hours. The drop in ost behavior here an average of $4,000 per month, Each inspector offers about 160 hours I'm not exactly sure how to treat inspection coss, bu | think that it iz mare relatael to nepoction hours than direct labor cost, Some of the other overnead activities seem to be nen-univlevel, az well— enough, in fact, 1o be conceied adout how we assign costsMaking the Connection After receiving the memo, Kim was intigues. She than asked Jacab to use the same shone plant asa pilet fer a preliminary AEC analyss, She instructed him to assign al overhead costs to the plant's s Regular ane Deluxe mode's), using ony four activities, The four activities were rework, moving mat 19 products, and a general catch-all activity labeled “other manufacturing activiies,” From the special study slready performed, she knew that materials handing ond inspecting seduction reports, she alza knew that the rework activity invalvad signit the ABC and unit based wast assignments cll not aitfar by breaking out theso thiea major 9 ABC may not mater inmolved significant cast; From activities, Pursvant to the request, Jaceb produced the following cast and river information, Aetivity Expected Cost_ Driver, Activity Capacity Deher activities 52.000.000 Direct labor dollars 250,000 Moving materials, 900,000 Number of moves 18,000 Inspecting 720,000 inspection hours 24,000 Reworking 380,000 Rework hours 3,800 Total ovarhoad cost Expected activity demands Rogular Madal___ Deluxe Model ompleted 100,000 49,000 Units Direct iabor dollars 3875.00, $379,000 Number of moves 7,200 19,800 Inspection hours 8,000 Rework hours 1.909 Required Compute two different unt costs for each oF the Cable Service Division's products. What mena geria Objectives are beng served by these unit cost computations? Three diferent @ Cable Senvice Division: ing, end allocation. Discuss the maaning of each, Sasedi.on how costs are assigned, do you think tha the Cable Service Division is using @ hinetonal‘easedl or an activity-based cost accounting system sed cost accounting s/stoms? and the t tracing, driver vac e Diision’s nant for tha Cable Seniice Division for March ina statement for the Phone Division for March, Include a supporting cost of 1d statenen! 5. The Phone Division has been using the sarne cost accounting system for over 10 years. Expla wity its cost accounting system may oe outmoded. What factors determine wren a new cost accounting system is warranted? ing the methed of least squares, calculate two cost formulas: one for overhead using direct lbor cost as the dives, and one for materials hancling cost using number of moves as the drver. Comment on Jacob Carder’s observations concerning the outcomes, 8. How would you describe the cost behavior of tha inspection activity? Assume that the equality feduces the number of defective units by 50 demand for inspection hours will 'so drop by § duction in inspection costs? How did knowledge of contol manager implements 3 program thet cent Because of the improved quality, t sspectian’s cost benavior helo? 9. Colulate the overhead cost por unt for each phone madel using direct labor cost to assigh all Caleulate the overhead cost per unit using the lou! activities and drivers identified by Kien and cobs If you we from th to implement an ABC system bazod on tno aviden 11. Suppose someone urged Kim to loo% into Time-Dnven Acti (of ASC. What would b2 the advantages of using a TDABC aproach? ng [TDABC) instead