ob -b ob -b ob -b -b -b

w.u w.u w.u .uob w.u

ob
ww ww ww www w w

h.c om h .com h . com h .com h . com

.uob-b . uob
- b
.
CHAPTER
uob
- b 5
. uob
- b
. uob
- b
w w
ACTIVITY-BASED w
COSTING w w
ww ww ww AND ACTIVITY-BASED ww MANAGEMENT
ww
5-37
m Activity-based.cjob m costing.
bh . c o
b h o
b h .com b h.com b h .com
- - - - -
w .uob w .uob w.uob .uob Chairman Chair
Executive Chair
w w.uob
ww w
1. Directwmanufacturing costs: w
w ww ww
Direct materials $ 600,000 $25,000
Direct manufacturing om labor,
b h .com $20 × b h
7,500;.c$20 × 500 b h .com 150,000 b h .com10,000 b h .com
- - - - b-
w.uob .uobmanufacturing costsw.uob
Direct
w 750,000
w .uob 35,000 w.uo
ww wwmanufacturing costs ww
Indirect ww ww
Materials handling,
$0.25 × 100,000; $0.25 × 3,500 25,000 875
b h .com Cutting, b h .com b h .com b h .com b h .com
- - - - -
w .uob w .uo×b 100,000; $2.50 × 3,500
$2.50 w .uob w
250,000 .uob 8,750 w .uob
ww ww
Assembly, ww ww ww
$25.00 × 7,500; $25.00 × 500 187,500 12,500
m Total indirect
.co Total manufacturing co m
manufacturing
.costs
costs m 462,500
.co $1,212,500 m 22,125
.co $57,125 .com
b h b h b h b h b h
b-
o b-
.uo b-
o b-o b-
.uo
w.u w w.u w.u w
ww ww
Unit Costs ww ww ww
Executive chair: $1,212,500 ÷ 5,000 = $242.50
co m om ÷ 100 = $571.25 com
Chairman chair: c$57,125
.com om
-bh
.
-bh
. h. h h.c
ob ob .uo b-b o b- b
o b-b
w.u 2. w.u w w.u
Executive w.u
ww ww ww ww Chair Chairman w
w Chair
Upstream costs $ 60.00 $146.00
Manufacturing costs 242.50 571.25
m .com m m .com
h.co .co .co
Downstream costs 110.00 236.00
- b b h b h b h b h
.uob ob-
Total costs ob- $412.50 ob- $953.25 ob-
ww w.u w.u w.u w.u
w ww ww ww ww
3. In requirement 1, the costs for each chair include only manufacturing costs. In
requirement 2, the costs for each chair include manufacturing costs as well as upstream costs and
m
.codownstream m
costs. It .iscoimportant for Schramka m
.coCompany m
to take into.coaccount other than .com
- b h - b h - b h b h b h
.uob uob for strategic decisions,
manufacturing costs
. . uob especially long-term. ob- decisions and product
upricing . uob
-
w w w w w
ww wwWhen comparing the Executive
emphasis. ww ww
Chair and the Chairman ww Chair
Chair, the Chairman
uses more of the upstream and downstream activities per unit than does the Executive Chair. The
Chairman Chair also uses more of the manufacturing activities per unit than the Executive Chair.
m om om om om
bh.co h.c h.c bh.c h.c
.uo b -
.uo b-b .uo b-b ob- .uo b-b
w w w w.u w
ww ww ww ww ww

bh .com h.c om h .com h.co

m
h.com
.uo b- .uo b-b .uo b- b
o b - b
.uo b-b
w w w w.u w
ww ww ww w w ww

m .com .com om .com

bh.co bh b h h.c h
.uo b - o b- ob- 5-1 o b-b .uob- b
w w.u w.u w.u w
ww ww ww ww ww
 ob -b ob -b ob -b -b -b
w.u w.u w.u .uob w.u
ob
ww ww ww w ww w w

h .com h .com h . com h .com .c om

- b
5-38 Activity-based b
job
- costing, unit-cost b
-comparisons. - b -bh
w .uob w.uob w .uob w .uob w .u ob
ww ww ww ww ww
An overview of the product-costing system is:

m .com .com .com om

h.co h.c
 .uo
b b h b h b h
.u ob - INDIRECT b- o b- ob- o b-b
w.uMilling .u w.u
Materials Lathe
ww w wTesting
COST Grinding
w ww
POOL Handling Work
w w ww w w


m COST
.coALLOCATION .ofcomNumber of Numberbofh.coNumber
m com m
- b h b
Number
- h - of
Number of
Units b- b h .
- bh.co
w.uob BASE
w .uobParts Turns
w .uob
Machine-Hours Parts
w .uo
Tested
w .uo b
w w w w w w w w ww

- b h omOBJECT:
.cCOST
COMPONENTS 
- b h.com
Indirect Costs
bh
Direct -Costs
.com
b-b
h.c om
b-b
h.c om
w .uob w .uob w .uob w .uo w .uo
ww ww ww ww ww

.u ob -bh
.c om
 .uo
DIRECT
COST b- bh.co
m
Direct
o b- b h omDirect
.cManufacturing
o b-b
h.c om
.uo b-b
h.c om
w.u w.u
Materials Labor
w w w
ww ww ww ww ww

1.
h .com h .com .c om .c om h.c om
- b - b -bhOrder 410
Job -bhOrder 411
Job
b-b
w .uob .uob costs:
Direct manufacturing
w w.u
ob
w.u
ob
w .uo
ww w
Directwmaterials w w $9,700 w
w $59,900 ww
Direct manufacturing labor
om $30  25; $30 h375
.cIndirect .com
750
om$10,450 11,250 $ 71,150
com om
- bh manufacturing
b- b costs bh.c b-b
h. -bh
.c
.uob .uo$115 .u ob- o ob
w $115 
w 25;  375 ww 2,875 w.u 43,125
ww
.u
ww ww
Total manufacturing costs w $13,325 w
w $114,275 w
Number of units ÷ 10 ÷ 200
om
Manufacturing om
costs per unit $om
1,332.50 $ om 571.375 om
h.c h.c h.c h.c -bh
.c
.uo b-b .uo b-b .uo b-b o b-b ob
w w w w.u w .u
ww ww ww w w ww

m om om om om
bh.co h.c h.c bh.c h.c
.uo b -
.uo b-b .uo b-b ob- .uo b-b
w w w w.u w
ww ww ww ww ww

bh .com h.c om h .com h.co

m
h.com
.uo b- .uo b-b .uo b- b
o b - b
.uo b-b
w w w w.u w
ww ww ww w w ww

m .com om om .com
bh.co bh 5-2ob-bh
.c h.c h
.uo b - o b- o b-b .uo b- b
w w.u w.u w.u w
ww ww ww ww ww
 ob -b ob -b ob -b -b -b
w.u w.u w.u .uob w.u
ob
ww ww ww w ww w w

h.c om h.c om h .com h .com h .com

.uo b-b .uo b-b .uob
- b
.uob
- b
.uob
- b
w 2. w w Job Order 410
w Job Order 411
w
ww ww manufacturing costs: ww
Direct ww ww
Direct materials $9,700 $59,900
m com labor
Direct manufacturing m .com $ 71,150 .com
- bh.co $30  b h .
-25; $30  375 - b h . co750 $10,450 -b h11,250 - b h
.uo b uob
.manufacturing .uob .uob .uob
w w
Indirect costs: w w w
ww w
wMaterials handling
ww ww ww
$0.40  500; $0.40  2,000 200 800
h .com Lathe work .co
h
m
h .com h .com h.co
m
o b-b $0.20o b
u b 20,000; $0.20  60,000
-
uob
b
- 4,000 o
b
b- 12,000 .uo b- b
w w.u w w . w . w.u w
w wMilling ww ww ww
$20.00  150; $20.00  1,050 3,000 21,000
Grinding
b h .com $0.80  500;
b h om  2,000
.c$0.80 b h
m
.co400 h.c om
1,600
h.c om
.uo b- .uob
Testing -
.uob
-
.uo b-b .uo b-b
w w w w w
ww ww$15.00  10; $15.00  w w
200 150 w
w7,750 3,000 ww
38,400
Total manufacturing costs $18,200 $109,550
Number of units per job ÷ 10 ÷ 200
.c om om om o m 547.75 h.com
bh.c cost per job bh.c .c
Unit manufacturing $ 1,820 $
ob -bh ob- ob- ob-
b h
ob-
b
w .u .u w.u . u .u
ww w ww ww w ww ww
w
3. Job Order 410 Job Order 411
Number of units in job 10 200
o m
.c Costs per unit with prior om
.ccosting system .c o m $1,332.50 .c o m $571.375 .com
b h b h b h b h b h
ob- ob-activity-based costing
Costs per unit.with ob- 1,820.00ob- 547.75 .uob-
w.u wu w.u w.u w
ww ww ww ww ww
Job order 410 has an increase in reported unit cost of 36.6% [($1,820 – $1,332.50) ÷
$1,332.50], while job order 411 has a decrease in reported unit cost of 4.1% [($547.75 –
. c o m
$571.375) ÷ $571.375]. .com .com .com .com
- bh - b h b h
- costing is implemented - b h -b h
w.uob .uob finding when activity-based
A common
w w .uob w .uob is that low-volume w .uob
ww w increases in their reported
productswhave ww costs while high-volume ww products have decreasesww in
their reported cost. This result is also found in requirements 1 and 2 of this problem. Costs such
as materials-handling costs vary with the number of parts handled (a function of batches and
o m om than with direct manufacturing
.com m
cooutput-unit m
b h . c complexity of products)
b h .crather b h labor-hours,
b h .an level bh.co
ob- -
.uobwas the only cost driver ob- ob- ob-
w.u cost driver, w
which w.u in the previous job-costing
w.u system. w.u
ww ww ww ww ww
The product cost figures computed in requirements 1 and 2 differ because:
a.m the job orders differ in mthe way they use each ofmfive activity areas, and m
bh . c ob. the activity h
areas
b .c o
differ in their indirect b h .
cost c o
allocation bases h .co each area does bh.com
(specifically,
b
ob- ob- ob- ob- ob-
w.u w.u manufacturing labor-hours
not use the direct w.u indirect cost allocation w.u base). w.u
ww ww ww ww ww
The following table documents how the two job orders differ in the way they use each of
the
m five activity areas included
m in indirect manufacturing
m costs: m
h.co h.c o h.co h.co h.com
b - b b-b b - b b - b b-b
w .uo w .uo w .uo w.u
o
w .uo
ww ww ww w w ww

m .com .com om .com

bh.co bh b h h.c h
.uo b - o b- ob- 5-3 ob-b .uob- b
w w.u w.u w.u w
ww ww ww ww ww
 ob -b ob -b ob -b -b -b
w.u w.u w.u .uob w.u
ob
ww ww ww www w w

h.c om h.c om h .com h .com h .com

.uo b-b b-b -
.uobof
.uoUsage Based on Analysis
b b- b
.uowith .uob
- b
w w w Usage Assumed
w Direct Manuf. w
ww ww wwDrivers
Activity Area Cost ww as Application Base
Labor-Hours ww
Activity Area Job Order 410 Job Order 411 Job Order 410 Job Order 411
Materials
.co mhandling
.com
20.0% 80.0%
.co m 6.25% m
.co93.75% .com
- bh
Lathe work b h
-25.0 75.0ob- b h 6.25 -b h 93.75 - b h
w .uobMilling w .uob 12.5 w .u
87.5 6.25w .uob 93.75 w.uob
ww Grinding
ww 20.0
ww 80.0 ww
6.25 93.75
ww
Testing 4.8 95.2 6.25 93.75
h om
.cThe h. com h . com h . com h .com
- b b b b b
.uobproduct pricing and o -
differences inbproduct
.uproduct
cost figures might- be important to Tracy
.uob The activity-based b- Corporation for .uob-
.uoaccounting
w w emphasis w
decisions. w approach w
ww ww ww ww ww
indicates that job order 410 is being undercosted while job order 411 is being overcosted. Tracy
Corporation may erroneously push job order 410 and deemphasize job order 411. Moreover, by

b h .com Tracy Corporation

its actions,
b h comencourage a competitor
.may bh .com b h . omorder 411
to enter the market for cjob
h.c om
- take market share away
oband
.u ob- from it. ob- ob- .uo b-b
w w.u w .u w .u w
ww 4. ww ww ww
Information from the ABC system can also help Tracy manage its business better in several ww
ways.

b h .com bh . com b h .com b h . com b h . com

-a. Product design. b -
Product designers at Tracy -Corporation likely willobfind
- the numbers in -
w .uobthe activity-based w .uo approach more believable
costing w .uob and credible than w .uthose in the existing w.uob
ww ww
system. In a machine-paced ww environment, it is unlikely
manufacturing ww that direct labor-hours
ww
would be the major cost driver. Activity-based costing provides more credible signals to product

b h .comabout the ways the

designers
bh .comof a product can bbeh.reduced––for
costs com b h . m parts,
example, usecofewer
b h .com
-
require fewer turns on the -
lathe, b- of machine-hours.uinothe
and reduce the number b- milling area. -
w .uobb. Cost w .uob Tracy can reduce
management. w .uothe cost of jobs w
both by making process w .uob
ww ww ww ww
improvements that reduce the activities that need to be done to complete jobs and by reducing
ww
the costs of doing the activities.
c. .coCost m planning. ABC provides .com a more refinedbmodel .comto forecast costs and to m
.coexplain why .com
- b h b h h b h b h
obactual b-
costs differ from obudgeted costs. ob- ob- ob-
w.u w.u w.u w.u w.u
ww ww ww ww ww

h.c om h .com h.c om h.c om .c om

b-b b- b b-b b-b b -bh
w .uo w .uo w .uo w.u
o
w .u o
ww ww ww w w ww

m om om om om
bh.co h.c h.c bh.c h.c
.uo b -
.uo b-b .uo b-b ob- .uo b-b
w w w w.u w
ww ww ww ww ww

bh .com h.c om h .com h.co

m
h.com
.uo b- .uo b-b .uo b- b
o b - b
.uo b-b
w w w w.u w
ww ww ww w w ww

m .com om om .com
bh.co bh 5-4ob-bh
.c h.c h
.uo b - o b- o b-b .uo b- b
w w.u w.u w.u w
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 ob -b ob -b ob -b -b -b
w.u w.u w.u .uob w.u
ob
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h.c om h.c om h.co

m
h.c om .c om
b-b b-b - b b-b -bh
w .uo w.u
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w .uob w.u
o
w .u ob
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m .com .com .com om

bh.co b h b h b h h.c
.uo b -
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w w w.u w.u w.u
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h.c om h.com h.c om h.c om h.co

m
o b-b .uob
- b
.uo b-b o b-b .uo b- b
w w.u w w w.u w
w ww ww ww ww

b h .com b h.com bh.co

m
h.c om h.c om
.uo b- o b- .uo b-
.uo b-b .uo b-b
w w.u w w w
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.c om h.co
m
h.c om h.c om h.c om
ob -bh b- b b-b b-b b-b
w .u w .uo w.u
o
w.u
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w .uo
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.c om .com h.c om .com h.c om

ob -bh ob-
bh
b-b b- b h
b-b
w.u w.u w .uo w .uo w .uo
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m om om om om
bh.co -bh
.c h.c h.c -bh
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.uob
-
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ww w w w.u w .u
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h.c om h .com h.c om h.com .c om

b-b b- b b-b b-b b -bh
w .uo w .uo w .uo w.u
o
w .u o
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m om om om om
bh.co h.c h.c bh.c h.c
.uo b -
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w w w w.u w
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bh .com h.c om h .com h.co

m
h.com
.uo b- .uo b-b .uo b- b
o b - b
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w w w w.u w
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m .com .com om .com

bh.co bh b h h.c h
.uo b - o b- ob- 5-5 ob-b .uo b- b
w w.u w.u w.u w
ww ww ww ww ww