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Symptoms of an Outdated Functional Cost System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Symptoms of an Outdated Functional Cost System (continued)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 -

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 -

ABC: Two-Stage Assignment

Cost Of Resources

Direct Tracing

Assign Costs Activities

Driver tracing

Driver Tracing

Assign Costs Products

Chapter 1 -

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 -

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 -

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