elring, Inc.

– Unit Cost Computation: Departmental Rate
Prime costs Overhead costs:
($6.30 x 4,000) + ($1.35 x 3,000)

Cordless $ 78,000

Regular $738,000 --330,750 $1,068,750  100,000 $ 10.69 ========
1

29,250 ($6.30 x 36,000) + ($1.35 x 77,000) --Total mfg. costs $107,250 Units produced  10,000 Unit cost $ 10.73 =======
Chapter 1 -

Symptoms of an Outdated Functional Cost System
 The outcome of bids is difficult to explain.
 Competitors’ prices appear unrealistically low.  Products that are difficult to produce show high profits.  Operational managers want to drop products that appear profitable.  Profit margins are difficult to explain.
Chapter 1 2

Symptoms of an Outdated Functional Cost System (continued)
 The company has a highly profitable niche all to itself.  Customers do not complain about price increases.  The accounting department spends a lot of time supplying cost data for special projects.  Some departments are using their own accounting system.  Product costs change because of changes in financial reporting regulations.
Chapter 1 3

Belring, Inc.

– Activity Usage
Cordless Regular 100,000 $738,000 90,000 45,000 10 Total 110,000 $816,000 100,000 50,000 30

Units produced per year Prime costs Direct labor hours Machine hours Production runs

10,000 $78,000 10,000 5,000 20

Number of moves

60

30

90

Chapter 1 -

4

Belring, Inc. – Additional OH Cost Data
Activity Setups Material handling Machining Testing Total Activity Cost $120,000 60,000 100,000 80,000 $360,000 =======

Chapter 1 -

5

ABC: Two-Stage Assignment
Cost Of Resources

Direct Tracing

Assign Costs Activities

Driver tracing

Driver Tracing

Assign Costs Products

Chapter 1 -

6

Belring, Inc. – Activity Rates
Activity rates are computed below:
Setup rate: Material-handling rate: $120,000/30 =$4,000 per run $60,000/90 = $666.67 per move

Machining rate:
Testing rate:

$100,000/50,000 = $2 per MH
$80,000/100,000 = $0.80 per DLH

Chapter 1 -

7

Belring, Inc. – Activity-Based Costing Unit Cost Computation
Prime costs Overhead costs: Setups Material handling Machining Testing Total mfg. costs Units produced Unit cost

Cordless $ 78,000
80,000 40,000 10,000 8,000 $216,000  10,000 $ 21.60

Regular $ 738,000
40,000 20,000 90,000 72,000 $ 960,000  100,000 $ 9.60

=====
Chapter 1 -

=====
8

Comparison of Unit Costs
Cordless
Plantwide rate Departmental rate $11.40 10.73

Regular
$10.62 10.69

Activity rate

21.60

9.60

Chapter 1 -

9

Activity Categories

Unit-level Activities are those that are performed each time a unit is produced.
Examples: Power and machine hours are used each time a unit is produced. Direct materials and direct labor activities are also unit-level activities, even though they are not overhead costs.
Chapter 1 10

Activity Categories (continued)

Batch-level Activities are those that are performed each time a batch of products is produced.
Examples: Setups, inspections, production scheduling, and material handling.

Chapter 1 -

11

Activity Categories (continued)

Product-level (Sustaining) Activities are those that are performed as needed to support the various products produced by a company. These activities consume inputs that develop products or allow products to be produced and sold.
Examples: Engineering changes, and expediting.

Chapter 1 -

12

Activity Categories (continued)

Facility-level Activities are those that sustain a factory's general manufacturing processes.
Examples: Plant management, landscaping, maintenance, security, property taxes, and plant depreciation.
Chapter 1 13

When To Use An ABC System
Cost Measurement Cost

Error Costs Optimal Cost Level Low High
Chapter 1 14

Comparison of JIT with Traditional Manufacturing
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. JIT Pull-through system Insignificant inventories Small supplier base Long-term supplier contracts Cellular structure Multiskilled labor Decentralized services High employee involvement Facilitating management style Total quality control 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Traditional Push-through system Significant inventories Large supplier base Short-term supplier contracts Departmental structure Specialized labor Centralized services Low employee involvement Supervisory management style Acceptable quality level
15

Chapter 1 -

End of Chapter 4

Chapter 1 -

16