chapter 12--activity-based costingdocshare01.docshare.tips/files/24120/241209689.pdf · provide a...

Activity-Based Costing 245

CHAPTER 12Activity-Based Costing

LEARNING OBJECTIVESAfter studying this chapter, you should be able to:

1. Discuss the limitations of using only unit-based drivers to assign costs.

2. Provide a detailed description of activity-based product costing.

3. Describe how homogeneous cost pools can be used to reduce the number of activity rates.

4. Describe activity-based system concepts including an ABC relational database and ABCsoftware.

CHAPTER SUMMARYThis chapter explains how activity-based costing systems produce more accurate product costinformation than traditional costing systems that use unit-based drivers. Potential users of ABCsystems are those companies that produce multiple products, have high degree of productdiversity, and have a significant percentage of nonunit-level overhead costs. This chapter alsooutlines the essential steps in designing an ABC system in order for it to be implementedsuccessfully. The chapter concludes by describing an ABC relational database and ABC software.

CHAPTER REVIEWI. Unit-Based Product Costing

A. Functional-based costing uses only unit-based drivers to assign overhead costs toproducts.

a. Functional-based costing first assigns overhead costs to a functional unit, creatingplant or departmental cost pools. Next, these pooled costs are assigned toproducts using only unit-based drivers.

b. Unit-based drivers are factors that cause changes in cost as the unitsproduced change.

Functional-based costing uses only unit-based drivers because it assumes thatoverhead consumed by products is highly correlated with the units produced.

Review textbook Exhibit 12-1, which provides a model of the functional-based product costing system.

Learning Objective #1

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B. Plantwide and Departmental Rates

1. Both plantwide rates and departmental rates are used to assign overhead costs toproducts using unit-based cost drivers.

2. A plantwide rate uses a single cost pool for the entire plant.

3. Departmental rates use separate cost pools for the different departments.

Review textbook Exhibits 12-3 and 12-4, which show product unit cost computations using plantwide rates and departmental rates, respectively.

C. The Failure of Plantwide and Departmental Rates

Using plantwide or departmental rates to assign overhead costs will produceinaccurate product costs when:

1. The proportion of nonunit-related overhead costs to total overhead costs is large(e.g., reaching more than 40 or 50 percent of the total).

a. Using only unit-based activity drivers to assign nonunit-based costs can createcost distortions.

b. Nonunit-related overhead costs refer to those costs that are unrelated to thenumber of units produced but more logically relate to nonunit-based drivers.

Nonunit-based drivers are factors, other than the number of unitsproduced, that measure the demands that cost objects place on activities.

c. Examples:

(1) Setup costs relate to the number of batches of products produced.

(2) Product engineering costs depend on the number of differentengineering work orders.

(3) Material-moving costs relate to the number of moves required, not tothe number of units produced.

2. The degree of product diversity is great.

a. Product diversity means that products consume overhead activities indifferent proportions because of their differences in product size, productcomplexity, setup time, and size of batches.

b. The consumption ratio measures the proportion of each activity consumed bya product.

D. Potential users of ABC systems can be identified when these companies:

1. Produce multiple products,

2. Have a high degree of product diversity, and

3. Have a significant percentage of nonunit-level overhead in production costs.


Review textbook Exhibit 12-5, which provides examples ofconsumption ratios of various activities by different products.

Note that the special product (scented cards) usesmore setup and material-moving activities.

II. Activity-Based Costing System

A. An activity-based costing (ABC) system first assigns costs to activities and thentraces costs from activities to products.

1. ABC assumes that activities consume resources, and products andother cost objects consume activities.

2. ABC cost assignment is made possible through the identification ofactivities, their costs, and the use of cost drivers. Thus, it better reflects the patternof overhead consumption and is more accurate than functional-based costing.

Review textbook Exhibit 12-8, which provides an activity-based costing model.

B. Six essential steps in designing an ABC system include:

Step 1: Identify, define, and classify activities and key attributes.

Step 2: Assign the cost of resources to activities.

Step 3: Assign the cost of secondary activities to primary activities.

Step 4: Identify cost objects and specify the amount of each activity consumedby specific cost objects.

Step 5: Calculate primary activity rates.

Step 6: Assign activity costs to cost objects.

Step 1: Identify, define, and classify activities and key attributes.

1. To identify an activity means to describe the work performed by people orequipment.

a. Use an action verb and an object that receives the action to name the activity.

b. An activity inventory is a list of the activities that are performed within theorganization.

Review textbook Exhibit 12-10, which provides a sample activity inventory for an electronics manufacturer.

2. To define an activity means to use activity attributes to describe it.

Activity attributes are nonfinancial and financial information items thatdescribe individual activities (for example, description of the tasks that make up


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the activity, resources consumed by the activity, amount or percentage of timespent on the activity, the cost objects, and the activity driver.)

An activity dictionary lists the activities in an organization along withdesired attributes.

3. To classify an activity means to recognize the difference between it and otheractivities for different purposes.

a. For product costing purposes, activities can be classified as primary orsecondary.

(1) A primary activity is consumed by a final cost object (e.g., a product orcustomer).

(2) A secondary activity is consumed by intermediate cost objects (e.g.,primary activities, materials, or other secondary activities).

b. Many other useful activity classifications exist. For example, activities can beclassified as value-added or nonvalue-added, as quality-related orenvironmental-related.

4. Methods to be used to gather activity information include interviews, surveys, andobservations.

Review textbook Exhibit 12-11, which provides an example of an activity dictionary.

Note that the activity dictionary names the activity, describesthe tasks that make up the activity, classifies the activity as primary or

secondary, lists the cost object(s), and identifies the activity driver.

Step 2: Assign the cost of resources to activities.

1. Costs may be assigned to activities using:

a. Direct tracing, when resources are exclusive to the activity.

b. Driver tracing, when resources are shared by several activities.

2. Resource drivers are the factors that measure the consumption of resources byactivities.

a. Resource driver data can be collected using interviews, survey forms,questionnaires, and timekeeping systems.

b. A work distribution matrix helps identify the amount of labor consumed by eachactivity. It is a means of collecting the data required to assign labor resourcecosts to activities.

Step 3: Assign the cost of secondary activities to primary activities.

If there are secondary activities, then the costs of those must be assigned to the primaryactivities.

Review textbook Exhibit 12-13, which provides an example of the cost of asecondary activity (supervising nurses) being reassigned to the primary activities.


Compare the costs of the primary activities after the reassignment(Exhibit 12-13) with those before the reassignment (Exhibit 12-12).

Step 4: Identify cost objects and specify the amount of each activity consumed by specific cost objects.

1. Costs can be assigned to products or other cost objects in proportion to theirusage of the activity by:

a. Identifying the cost objects.

b. Measuring the demand that cost objects place on the activities.

2. Activity drivers measure the demands that cost objects place on activities.

3. Most ABC system designs choose between two types of activity drivers:

a. Transaction drivers measure the number of times an activity is performed.

Examples: Number of treatments, number of requests

b. Duration drivers measure the time it takes to perform an activity.

Duration drivers should be used when the time required to performan activity varies from transaction to transaction.

Examples: Hours of hygienic care, monitoring hours

4. A bill of activities can be created to specify the product, expected product quantity,activities, and amount of each activity expected to be consumed by each product.

Review textbook Exhibit 12-14, which provides an example of a bill of activity for acardiology

ward. It includes activities, activity drivers, and types of services that consume activities.

Step 5: Calculate primary activity rates.

Primary activity rates are computed by dividing the budgeted activity costs by practicalactivity capacity.

Step 6: Assign activity costs to cost objects.

Using the primary activity rates, costs are assigned to the cost objects.

Review textbook Exhibit 12-15, which illustrates the final assignment of costs to costobjects.

C. Materials as an Intermediate Cost Object

1. Material-related activities, such as purchasing, inspecting, and moving materials,are secondary activities because they are not directly consumed by the final costobjects.

2. The cost of material-related secondary activities will be first assigned to materials(an intermediate cost object) and then to the final cost objects through direct tracing.


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III. Homogeneous Pools of Activities

In the final stage of ABC, homogeneous cost pools can be used to reduce the number ofactivity rates because fewer rates may

Produce more readable and manageable product cost reports.

Reduce the perceived complexity of an ABC system and increase its likelihood ofmanagerial acceptance.

Increase the accuracy of cost assignments.

A. Activity Classification: The Key for Reducing the Number of Rates

1. Activities can be grouped in homogeneous sets if

a. They are logically related, and

b. They have the same consumption ratios for all products.

2. A homogenous cost pool is the collection of overhead costs associated with a setof activities that has the same process, the same activity level, and can use thesame driver to assign cost to products.

The pool rate is the cost per unit of the chosen activity driver that can becomputed as:

Pool rate = capacity practical s driver Activity

costs pool sHomogeneou

3. Attributes that are useful for grouping activities into homogeneous cost poolsinclude process, activity-level, and activity-driver classifications.

a. Using process classification to create homogeneous cost pools.

(1) A process is a series of activities that are linked to perform a specificobjective.

(2) The key to grouping activities is the notion of sharing a commonobjective or purpose.

(3) Example: The procurement process’ common objective is to obtain parts for production. Activities that can be linked together include purchasing,receiving, and paying suppliers.

Review textbook Exhibit 12-17, which illustrates process classification.

b. Using activity-level classification to create homogeneous cost pools.

(1) Activities can be grouped together if they are performed at the samegeneral activity level (same activity-level attribute).

(2) Classifying activities by the activity level helps management identify theappropriate activity drivers because the costs of activities associated withthe different levels respond to different types of activity drivers.

(3) Four general activity categories include:

Unit-level activities are those that are performed each time a unit isproduced.

’


Batch-level activities are those that are performed each time a batchis produced.

Examples: Setup, inspections (if done by sampling units from a batch), purchasing, material handling

Product-level activities are those performed that enable the variousproducts of a company to be produced.

Examples: Engineering changes to products, developing product- testing procedures, introducing new products, expediting goods

Facility-level activities are those that sustain a factory’s generalmanufacturing processes.

Examples: Providing facilities, maintaining grounds, providing plant security

Review textbook Exhibit 12-18, which illustrates activity-level classification.

c. Using activity-driver classification to create homogeneous cost pools.

(1) The unit-level, batch-level, and product-level activities can be groupedtogether if they have the same consumption ratio and share the sameactivity driver.

(2) Facility-level activities do not undergo the driver classification because theyare common to a variety of products.

Review textbook Exhibit 12-19, which illustrates activity driver classification and the formation of homogeneous cost pools.

B. Comparison with Functional-Based Costing

1. In a functional-based system, the consumption of overhead is assumed to beexplained only by unit-level activity drivers.

This may not reflect the activities actually being consumed by the products.

Many of the costs being assigned in the functional-based fixed overheadcategory are really batch-level, product-level, and facility-level costs that varywith drivers other than unit-based drivers.

2. ABC systems recognize nonunit-based drivers and by better tracing costs toindividual products will:

Improve product costing accuracy and decision making.

Allow managers to exert more control over the activities that cause the costs.

Allow managers to identify which of the activities add value and which donot.

IV. ABC System Concepts Learning Objective #4

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Advances in information technology facilitate the development of an ABC database andERP systems.

A. An ABC database is the collected data sets that are organized and interrelated foruse by an organization’s activity-based costing information system.

A data set is a grouping of logically related data.


1. Creating an ABC database involves the following steps:

a. Define and model the entities that are involved in ABC.

b. Develop a conceptual view of the entities and the logical relationships betweenthe entities.

c. Identify the attributes associated with each entity.

d. Select a model that reflects the data structure implied by the entities andattributes, such as relational structure.

A relational structure uses a table to represent the overall logical viewwithin a database.

ABC software typically uses a relational structure for data.

2. Activity relational table in an ABC database

a. The activity relational table provides important information to formhomogeneous cost pools and calculate pool rates.

b. Each activity is identified by an activity number, which serves as the uniqueprimary key.

A primary key is the attribute that uniquely identifies each row of data inthe table, i.e., a record.

Review textbook Exhibit 12-20, which provides an example of an activity relational table.

3. Product relational table in an ABC database

a. The product relational table is used to assign costs to products based on theactivity demands specified in the table.

b. The product number or name that uniquely identifies each product is used asthe primary key.

c. The use of concatenated keys helps assign costs to individual products.

Concatenated keys are two or more keys that uniquely identify a record.

Example: The product number and activity driver number are both used to assign costs to individual products.

Review textbook Exhibit 12-22, which provides an example of a product relational table.

B. ABC and ERP Systems

1. ABC software selection is very important because:

It should have the features that correlate with the functional capabilities of afirm’s ABC system design.

It should have at least three distinct modules: resources, activities, and costobjects.

2. ABC software selection must consider the firm’s ERP systems because ABC andERP should be integrated so that they can exchange vital information.

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a. ERP systems are a major source of data for the ABC model by providing muchof the input data, including resource drivers, activity drivers, and resourcecosts.

b. ABC supports the ERP system as the operational control system by:

Supplying accurate costs for products, customers, activities, andprocesses.

Sending signals for directing continuous improvement efforts.

Providing key information to support tactical and strategic decisions.


KEY TERMS TESTFrom the list that follows, select the term that best completes each statement and write it in thespace provided.

ABC databaseactivity attributesactivity dictionaryactivity driversactivity inventoryactivity-based costing systembatch-level activitiesbill of activitiesconcatenated keysconsumption ratiodata setduration driversfacility-level activitieshomogeneous cost pool

nonunit-based driverspool rateprimary activityprimary keyprocessproduct diversityproduct-level activitiesrelational structureresource driverssecondary activitytransaction driversunit-based driversunit-level activities

1. The costing system that first traces costs to activities and then traces costs fromactivities to products is a(n) ____________________________________________.

2. ___________________________ provide descriptive labels for individual activities.

3. ____________________________________ are performed each time a batch is produced;____________________________________ are performed to enable the production ofeach different type of product.

4. __________________________________ are factors that cause changes in cost as theunits produced change; __________________________________ are factors other thanthe number of units produced.

5. The listing of the activities performed within the organization is the ___________________________.

6. Factors that measure the demand placed on overhead activities by individual products arecalled ________________________.

7. The data structure that uses a table to represent the logical connections of a database iscalled a(n) ______________________________.

8. The proportion of an overhead activity consumed by a product is the____________________ ________.

9. A(n) ______________ is a grouping of logically related data.

10. Activities that are performed each time a unit is produced are __________________.

11. A(n) ___________ is a series of activities that are linked to perform a specific objective.

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12. If the collection of overhead costs associated with activities has the same process, the samelevel, and can use the same driver to assign costs to products, it is a(n) ________ _____________________________________.

13. When products consume overhead in different proportions, there is __________________________.

14. The collected data sets that are organized and interrelated for use by an organization’sactivity-based costing information system is the _________________________.

15. The homogeneous pool costs divided by the activity driver’s practical capacity is the________________.

16. ____________________________ sustain a facility’s general manufacturingprocess.

17. The attribute that uniquely identifies each row of data in a table is the____________________ ________; two or more needed to uniquely identify a record are____________________ ________.

MULTIPLE-CHOICE QUIZComplete each of the following statements by circling the letter of the best answer.

1. The activities that are performed each time a batch is produced are:a. batch-level activities.b. facility-level activities.c. process-level activities.d. product-level activities.e. unit-level activities.

2. In a functional-based cost accounting system, which of the following activity drivers is usedto assign fixed overhead costs to products?a. batch-level activitiesb. facility-level activitiesc. process-level activitiesd. product-level activitiese. unit-level activities


3. In a “pure” ABC system, which of the following would not be assigned to products?a. batch-level activitiesb. facility-level activitiesc. process-level activitiesd. product-level activitiese. unit-level activities

4. Which of the following would be classified as a product-level activity?a. plant managementb. production schedulingc. engineering changesd. material handlinge. machine hours

5. Which of the following would be classified as a batch-level activity?a. plant managementb. process engineeringc. engineering changesd. material handlinge. machine hours

6. Which of the following is a true statement?a. If nonunit-based overhead costs are a large proportion of overhead costs, the use of

nonunit-based drivers will cause large distortions in product costs.b. If nonunit-based overhead costs are a small proportion of overhead costs, the use of

nonunit-based drivers will cause large distortions in product costs.c. Nonunit-based activity drivers are factors that are proportional to the number of

units produced.d. If products consume the nonunit overhead activities in the same proportion as unit

overhead activities, using a traditional overhead assignment method will cause coststo be distorted.

e. If products consume the nonunit overhead activities in the same proportion as unitoverhead activities, using a traditional overhead assignment method will not cause coststo be distorted.

7. Consumption ratios are:a. the activities performed every time a batch is produced.b. the proportion of each activity consumed by a product.c. necessary for unit-level activities but not for batch- or product-level activities.d. factors that cause costs to change as the level of activities change.e. none of the above.

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8. An activity-based costing system is one that:a. traces costs to activities and then to products.b. traces costs to resources and then to activities.c. traces activities to costs and then to resources.d. traces products to activities and then to resources.e. uses a single plantwide rate for allocating overhead costs to products.

9. A homogeneous cost pool is one that:a. does not change over time.b. needs many activity drivers to be allocated to a cost object.c. has only one type of material assigned to it.d. can be explained with a single activity driver.e. can be used only by the dairy industry.

10. Which of the following statements is incorrect regarding ABC and service industries?a. Since service organizations do not have inventories, product costing (and thus ABC)

will not be necessary.b. The output is more easily defined for a service organization than for a

manufacturing organization.c. Activities in a service organization tend to be more standardized than activities in a

manufacturing organization.d. Since the output of a service organization is consumed when produced, there will be no

batch-level activities.e. None of the above statements are correct.

11. “Inspection of the first unit produced” is what type of activity?a. batch-levelb. facility-levelc. process-leveld. product-levele. unit-level

12. “Extruding plastic parts” is what type of activity?a. batch-levelb. facility-levelc. process-leveld. product-levele. unit-level


PRACTICE TEST

EXERCISE 1

XYZ Company has identified the following overhead activities, costs, and activity drivers for thecoming year:

Activity Expected Cost Activity Driver Activity Capacity

Material-handling costs......... $45,000 Number of moves................ 450Machine costs....................... 80,000 Machine hours..................... 20,000Order costs........................... 15,000 Number of orders................ 750Receiving costs..................... 30,000 Number of parts.................. 50,000Setup costs........................... 50,000 Number of setups................ 250

Assume that each activity corresponds to a process. XYZ’s normal activity is 5,000 direct laborhours. The following two jobs were completed during March:

Job X-1 Job Y-4

Direct materials..................................... $1,500 $2,000Direct labor ($15 per hour)................... $750 $750Units completed.................................... 200 200Number of moves................................. 3 6Machine hours...................................... 125 75Number of orders................................. 3 12Number of parts.................................... 200 800Number of setups................................. 1 4

Required:

1. Determine the unit cost for each job using direct labor hours to apply overhead.

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EXERCISE 1 (Continued)

2. Determine the unit cost for each job using the activity drivers to apply overhead.

3. Which method produces the more accurate cost assignment? Why?


EXERCISE 2

Required:

Classify the following activities as unit-level, batch-level, product-level, or facility-level.

1. Marketing a product

2. Paying rent

3. Drilling a hole

4. Lighting the factory

5. Running the machines

6. Moving a batch

7. Engineering a product

8. Inspecting a machined part when it is completed

9. Ordering a purchased part

10. Setting up a machine

11. Using janitorial services

12. Paying insurance

EXERCISE 3

Acme Enterprises is a custom manufacturer of specialty circuit boards. The boards are producedin batches in a single manufacturing facility. Each board requires an engineer to prepare thespecifications and schematic drawings. Once this design is complete, the equipment is set upfor the batch production. As each batch is completed, a sample of the units is inspected forquality and tolerances. Costs have been assigned as follows:

Engineering............................... $75,000Setups....................................... 60,000Labor......................................... 50,000Inspection................................. 75,000Factory lease............................ 30,000Factory utilities.......................... 12,000

The following activity drivers have been identified and their capacities determined:

Activity Driver Practical Capacity

Labor hours............................... 5,000Setup hours.............................. 2,000Engineering hours..................... 2,500Inspection hours........................ 6,000Machine hours.......................... 10,000

The cost of the facility-level activities are assigned using machine hours.

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Required:

1. Identify each activity as unit-level, batch-level, product-level, or facility-level.

2. Create homogeneous cost pools. Identify the activities that belong to each pool and theactivity driver that will be used for computing pool rates. (Use machine hours as the activitydriver for the factory lease and factory utilities cost pools.)

3. Compute the pool rate for each pool you have identified in Requirement 2.


EXERCISE 4

Alcatraz Company makes two models of an antitheft device. The portable model is relativelysmall and is primarily for use in automobiles. The standard model is much larger and isdesigned for houses and buildings. The Fabricating Department cuts, bends, and welds sheetmetal to produce the external box of the device. The box is also painted in this department. TheAssembly Department uses purchased parts to produce the internal workings and fits them intothe prepared metal boxes.

Alcatraz has conducted a special study to determine if an activity-based costing system would bebeneficial in determining the costs of the two products. The Fabricating Department is a morecomplex department than the Assembly Department and has been chosen for a pilot test of anABC system. The following activities have been identified, along with their associated costs:

Depreciation......................................... $250,000Factory lease........................................ 125,000Inspection............................................. 75,000Factory maintenance............................ 150,000Materials handling................................ 100,000Power................................................... 50,000Product engineering changes............... 25,000Setups.................................................. 125,000Department manager salaries.............. 60,000

The analysts have identified the following potential activity drivers and the capacity of each:

Portable Standard

Direct labor ($10 per hour) ................... $75,000 $90,000Machine hours...................................... 4,000 6,000Materials............................................... $450,000 $650,000Number of moves................................. 1,500 1,500Number of products.............................. 1 1Number of setups................................. 150 350Units produced..................................... 15,000 17,500

Required:

1. Classify each activity according to activity level and identify an appropriate driver for each.

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2. Create homogeneous cost pools and calculate pool rates. (Use the number of setups as theactivity driver for both inspection and setups costs. Machine hours serve as the activity driverfor depreciation, factory lease, factory maintenance, and department manager salaries.)

3. Use the pool rates to compute per unit overhead costs for the two products.


“CAN YOU?” CHECKLIST

Can you explain why functional-based costing systems may produce distorted costs?

Can you explain why departmental rates, although better than plantwide rates, may still beinadequate?

Can you explain how product diversity can affect overhead costs?

Can you identify the signals that may indicate that functional-based costing is no longerworking?

Can you describe how an activity-based cost accounting system works? What are itsfeatures?

Can you describe the differences between the various classifications or levels of activitiesand give several examples of each?

Can you describe how a firm’s ABC and ERP systems should be integrated and supportive ofeach other by exchanging vital information?

ANSWERS

KEY TERMS TEST1. activity-based costing system2. Activity attributes3. Batch-level activities, product-level activities4. Unit-based drivers, nonunit-based drivers5. activity inventory6. activity drivers7. relational structure8. consumption ratio9. data set

10. unit-level activities11. process12. homogeneous cost pool13. product diversity14. ABC database15. pool rate16. Facility-level activities17. primary key, concatenated keys

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MULTIPLE-CHOICE QUIZ1. a2. e3. b

4. c5. d6. e

7. b8. a9. d

10. e11. a12. e

PRACTICE TEST

EXERCISE 1 (XYZ Company)

1. Total overhead = $45,000 + $80,000 + $15,000 + $30,000 + $50,000 = $220,000 / 5,000 DL hours = $44 per DL hour

Job X-1 Job Y-4Materials..................... $1,500 $2,000Labor........................... 750 750Overhead.................... 2,200 (50 × $44) 2,200 (50 × $44)Total............................ $4,450 $4,950Divided by units.......... ÷ 200 ÷ 200 Per unit........................ $22.25 $24.75

2. Materials handling $45,000 / 450 = $100 per moveMachine time $80,000 / 20,000 = $4 per machine hourOrdering $15,000 / 750 = $20 per orderReceiving $30,000 / 50,000 = $0.60 per partSetup $50,000 / 250 = $200 per setup

Job X-1 Job Y-4Materials..................... $1,500 $2,000Direct labor.................. 750 750Moves.......................... 300 (3 × $100) 600 (6 × $100)Machine....................... 500 (125 × $4) 300 (75 × $4)Orders......................... 60 (3 × $20) 240 (12 × $20)Parts............................ 120 (200 × $0.60) 480 (800 × $0.60)Setups......................... 200 (1 × $200) 800 (4 × $200)Total............................ $3,430 $5,170Divided by units.......... ÷ 200 ÷ 200 Per unit........................ $17.15 $25.85

3. Costs determined using the activity drivers are more accurate. The consumption ratios of the resources differgreatly between the two products. The direct labor approach to apply overhead implicitly assumes the two productsconsume the overhead resources in the same pattern as direct labor (50%-50%).

EXERCISE 2 (Activity Classifications)

1. Marketing a product product-level

2. Paying rent facility-level

3. Drilling a hole unit-level

4. Lighting the factory facility-level

5. Running the machines unit-level

6. Moving a batch batch-level

7. Engineering a product product-level

8. Inspecting a machined part when it is completed unit-level

9. Ordering a purchased part batch-level

10. Setting up a machine batch-level

11. Using janitorial services facility-level

12. Paying insurance facility-level

EXERCISE 3 (Acme Enterprises)

1. Engineering...................... Batch-levelSetups.............................. Batch-levelLabor................................ Unit-levelInspection........................ Batch-levelFactory lease................... Facility-levelFactory utilities................ Facility-level

2.–3. At most, there will be five cost pools. It is possible that the three batch-level activities could be combined into asingle pool. If this were the case, the driver could be setup hours, engineering hours, or inspection hours.

Pool Activity Driver Rate1 Engineering Engineering hours $30.00 ($75,000 / 2,500)2 Setups Setup hours 30.00 ($60,000 / 2,000)3 Inspection Inspection hours 12.50 ($75,000 / 6,000)4 Labor Labor hours 10.00 ($50,000 / 5,000)5 Lease and utilities Machine hours 4.20 [($30,000 + $12,000) / 10,000]

EXERCISE 4 (Alcatraz Company)

1. Activity Level DriverDepreciation Facility Machine hoursFactory lease Facility Machine hoursInspection Batch Number of setupsFactory maintenance Facility Machine hoursMaterials handling Batch Number of movesPower Unit Machine hoursProduct engineering changes Product Number of productsSetups Batch Number of setupsDepartment manager salaries Facility Machine hours

2. Pool Activities Costs Driver Quantity Rate1 Inspection $ 75,000

Setups 125,000 $200,000 Number of setups 500 $400.00

2 Materials handling $100,000 Number of moves 3,000 $33.33

3 Product engineering changes $ 25,000 Number of products 2 $12,500.00

4 Depreciation $250,000Factory lease 125,000Factory maintenance 150,000Power 50,000Department manager salaries 60,000

$635,000 Machine hours 10,000 $63.50

3. Pool Portable StandardSetups......................... $ 60,000 (150 × $400) $140,000 (350 × $400)Moves.......................... 50,000* (1,500 × $33.33) 50,000* (1,500 × $33.33)Products...................... 12,500 (1 × $12,500) 12,500 (1 × $12,500)Machine hours............ 254,000 (4,000 × $63.50) 381,000 (6,000 × $63.50)Total............................ $376,500 $583,500Divided by units.......... ÷ 15,000 ÷ 17,500 Per unit........................ $ 25.10 $ 33.34

*rounded

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