...more complex in nature. In this case, Greetings. INC has added a new product line, Wall Decor, which permits them to grow without expanding their physical stores; however, they have significantly raised their overhead costs by multiplying their cost drivers. Not to mention the fact that they have incorporated a largely automated system into their product line, which we know calls for an ABC system. The main reason to move to ABC though, I’d say, would be because it will allow management to make better decisions and move away from the “cash machine” and “lemonade stand” metaphor simply because overhead costs will be allocated in such a way that corresponds to either framed or unframed prints instead of considering the same overhead for both products. By doing so managers will be able to price the prints competitively while still maintaining a profitable margin. An activity-based costing system may be appropriate for Wall Décor, when overhead allocation based job-order costing provides product cost distortion. Wall Décor should change its costing system for selling its high volume produced products whereas low-volume produced products have good profit. 2. The activity-based overhead rates: | Activity | Estimated Overhead | Expected use of Cost Drivers | Activity-Based Overhead Rates | | | | | | |Picking prints |$36,000 |102,000 prints |$0.30 per print | | | | | | |Inventory selection and management |$91,700 |131,000 components |$0.70 per component | | | | | |...
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...when a provider is reimbursed primarily by fee-for-service? Explain b. Variable cost structure is best because each visit would incur cost but at the same time create revenue. 6.3 A. What are the three primary methods of cost allocations? a. Direct method – a cost allocation method in which all overhead costs are allocated directly to the patient services department with no recognition that overhead service are provided to other departments. b. Reciprocal method - a cost allocation method that completely recognizes the overhead services provided by one department to another c. Step down a cost allocation method that recognize some of the overhead services provided by one department to another. B. What are the differences among them? d. Direct method is widely used, because it must easier to understand and compute. Completely disregards any services provided by one service department to another. e. The difference between the step-down and reciprocal method is that after each allocation is made in the step-down method, a department is removed from the process. f. Reciprocal method capture all of the intrasupport departments’ relationships and no biased is introduced into the allocation process. It require on the simultaneous solutions of series of equations that represents the utilizations of each department services. It is more complex and cost more to...
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...costing system may be appropriate for Wall Décor, when traditional overhead allocation based job-order costing system provides product line cost bias. For example, Greetings. INC has added a new product line, Wall Décor. However, they have noticeably raised their overhead costs by increasing their cost drivers. In this circumstance, Wall Décor should amend its costing system so that overhead costs will be allocated in such a way that parallels to either frame or unframed prints instead of taking into consideration the same overhead for both products. ABC Overhead Rates Activity / Est. Overhead / Expected use of Cost Drivers / Activity-Based Overhead Rates Picking prints $30,600 /102,000 prints /$0.30 per print Inventory selection and management $91,700 /131,000 comp. /$0.70 per comp. Web-site optimization: Unframed $25,800 /100,000 prints /$0.26 per print Framed $103,200 /25,000 prints /$4.13 per print ABC Product Costs Lance Armstrong (unframed) Activity Rate/Usage/Overhead Allocated Picking Prints 0.30/80,000/$24,000 Inventory Selection and Management 0.70/ 80,000 /$56,000 Website Optimization- Unframed 0.26 /80,000 /20,640 Website Optimization- framed $4.13 Framing and Matting costs $2.10 Total Overhead $100,640 Total Prints $80,000 Overhead per print $1.26 Print Cost ...
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... 1. Calculate the budgeted cost of trophies and plaques based on a single plant-wide overhead rate, if total overhead is allocated based on total direct costs. 2. Calculate the budgeted cost of trophies and plaques based on department overhead rates, where forming department overhead costs are allocated based on direct labor costs of the forming department , and assembly department overhead costs are allocated based on total direct costs of the assembly department. 3. Calculate the budgeted cost of trophies and plaques if Tarquin allocated overhead costs in each department using activity-based costing. 4. Explain how the disaggregation of information could improve or reduce decision quality. Overhead rate = Total overhead 56,346 0.712113744 Total Direct costs $79,125 Tarquin's Trophies Budgeted Information For the Year Ended November 30, 2011 Forming Department Trophies Plaques Total Direct materials $13,000 $11,250 $24,250 Direct labor 15,600 9,000 24,600 Overhead Costs Setup 12,000 Supervision 10,386 Allocated overhead 20,366 14,420 Assembly Department Trophies Plaques Total Direct materials $2,600 $9,375 $11,975 Direct labor 7,800 10,500 18,300 Overhead Costs Setup 23,000 Supervision 10,960 Allocated overhead 7,406 14,153 Recap of total costs Trophies Plaques Total Direct materials $15,600...
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...costing, nonmanufacturing as well as manufacturing costs may be assigned to products. And, some manufacturing costs—including the costs of idle capacity—may be excluded from prod-uct costs. An activity-based costing system typically includes a number of activity cost pools, each of which has its unique measure of activity. These measures of activity often differ from the allocation bases used in traditional costing systems. 8-2 When direct labor is used as an allocation base for overhead, it is implicitly assumed that overhead cost is directly proportional to direct labor. When cost systems were originally devel-oped in the 1800s, this assumption may have been reasonably accurate. However, direct labor has declined in importance over the years while overhead has been increasing. This suggests that there is no longer a direct link between the level of direct labor and overhead. Indeed, when a company automates, direct labor is replaced by machines; a decrease in direct labor is accompa-nied by an increase in overhead. This violates the assumption that overhead cost is directly propor-tional to direct labor. Overhead cost appears to be driven by factors such as product diversity and complexity as well as by volume, for which direct labor has served as a convenient measure. 8-3 Top managers provide leadership that is needed to properly motivate all employees to embrace the need to implement ABC. Top man-agers also have the authority to link ABC data to the employee evaluation and reward...
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...Corporation Analysis ETO’s existing cost system contains only one cost pool, which is the entire facility. All manufacturing overhead is collected into this pool, and the total overhead cost uses total number of direct labor dollars as its cost allocation base. These labor hours are consumed to give a single direct labor dollar burden rate. Failure of the Existing System: The major flaw in ETO’s existing system is that it assumes that all products consume direct labor and overhead in the same proportion. The critical problem that caused the existing cost system to fail is that the organization uses a single cost pool accounting system. The system considers all products to use direct labor and overhead in the same proportion. The different cost structure show some products are produced on equipment that is labor intensive while others require machine hours. Cost under Existing System: ICA: $2247 ICB: $5025 Capacitor: $2680 Amplifier: $1286 Diode $1272 Cost under System Proposed by the Accountant ICA: $2580 ICB: $5661 Capacitor: $1913 Amplifier: $1030 Diode: $1583 Cost under System Proposed by the Consultant ICA: $2765 ICB: $6281 Capacitor: $2011 Amplifier: $995 Diode: $1629 Preferred System The three-center system is preferred because it provides the most accurate information. The cost system shows differences in the way overhead is used in different parts of production. Recommendations We recommend that ETO revisits its market share structure. External...
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...To: Audrey Hausner From: Heather Varez HV Subject: G.G. Toys Internal Cost Study and Costing Methods Date: Tuesday, December 09, 2008 The internal cost study has brought up issues of costs related to alternative drivers for the machine related expenses, increased setups, production runs and work in packaging and shipping. Cost System Recommendation I recommend that G.G. Toys institute an Activity Based Costing (ABC) system in their Chicago plant. In allocating overhead as a percentage of direct labor cost, the margins of 9% and 34% in the Geoffrey doll and the specialty branded doll #106 respectively, do not reflect the true cost of manufacturing. When using the ABC system, we see that a tremendous misallocation in “Receiving and Production Control” and in “Packaging and Shipping” occurred using the previous system. These skewed allocations of costs also distorted the margins as shown below. Comparison of Alternative Costing Approaches | | | | | | Unit Overhead Cost | | Geoffrey Doll | | Specialty #106 | Volume-based | | $11.19 | | $13.99 | Activity-based | | 7.22 | | 25.01 | Difference | | $3.97 | | $11.02 | Unit Margin | | | | | Volume-based | | 1.81 | | $12.26 | Activity-based | | 5.78 | | 1.24 | Difference | | $3.97 | | $11.02 | Return on Sales | | | | | Volume-based | | 8.62% | | 34.06% | Activity-based | | 27.51% | | 3.43% | Difference | | 18.89% | | 30.62% | If G.G. can reduce the number...
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...Manufacturing Overhead Costs Allocation The report provided will assist you with selecting an allocation base to assign your budgeted manufacturing overhead costs of producing the two camera boxes the company manufactures. The report also addresses the questions and concerns you had regarding the allocation bases. First, the predetermined overhead rate is computed. The predetermined overhead rate is used to charge overhead costs to products or jobs. This rate is established in advance for each period by use of estimates of total manufacturing overhead cost and of the total allocation base for the period. Based on the information you provided, your estimated manufacturing overhead costs will be $171,400. The most common allocation bases are machine hours, direct labor hours and direct labor costs. The predetermined overhead rates for each allocation base are as follows: Predetermined overhead based on L&L’s machine hours used 171,400/6,000 = 28.5667 Predetermined overhead based on L&L‘s direct labor hours used 171,400/5,000 = 34.28 Predetermined overhead based on L&L’s direct labor costs 171,400/100,000 = 1.714 Selecting an allocation base is arbitrary. The decision is based on your own judgment or preference. My advice is to use direct labor hours as the allocation base. The direct labor hours indicates the amount of time and effort utilized in manufacturing each product. For each hour used to make an individual product the appropriate amount...
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...Practice set for Chapters 15 and 16 1) The single-rate cost-allocation method may base the denominator choice on: A) master-budget capacity utilization B) normal capacity utilization C) practical capacity D) All of these answers are correct. 2) Benefits of the single-rate method include: A) the low cost of implementation B) fixed costs that are transformed into variable costs for user decision making C) signals regarding how variable and fixed costs behave differently D) information that leads to outsourcing decisions that benefit the organization as a whole 3) Benefits of the dual-rate method include: A) variable costs that are transformed into fixed costs for user decision making B) the low cost of implementation C) avoidance of expensive analysis for categorizing costs as either fixed or variable D) information that leads to outsourcing decisions that benefit the organization as a whole 4)The advantage of using practical capacity to allocate costs: A) is that it allows a downward demand spiral to develop B) is that it focuses management's attention on managing unused capacity C) is that budgets are much easier to develop D) Either A or B are correct. Answer the following questions using the information below: The Bonawitz Corporation has a central copying facility. The copying facility has only two users, the Marketing Department and the Operations Department. The following data apply to the coming budget...
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...Q 1: The overhead allocation rate using the 1987 model year budget was 437%, while the official overhead allocation rate used in the 1987 model year strategy study was 435%. The difference was because the official overhead allocation rate was based on actual labor costs and overhead expenses, when the budget overhead allocation rate was calculated on budget labor costs and overhead expenses. Q2: There was a slight change in overhead allocation rate from 1987 (437%) to 1988 (434%). However, the rate rose significantly at 1989 (577%), and went down a little at 1990 (563%). The main reason for the increase was because at the end of the 1988 model year, oil pans and muffler-exhaust systems were outsourced. Direct labor costs for those two components then fell to 0 at 1989 and 1990, since the reduced labor were transferred and paid by the union, and this was no longer a plant burden cost. Therefore, direct labor went down 46% from 1988 to 1989, when total budget overhead just dropped 28%. Q3: Q4: The product costs reported by the cost system were not appropriate for use in the strategic analysis. This cost accounting system used a single cost pool, and 435% of direct labor was used to allocate total overhead. However, direct labor was not compatible with the characteristics of certain overhead. For instance, overhead 8000 was depreciation, and depreciation should have been allocated to machine hours rather than labor cost. What’s more, setup overhead 11000 was not closely related...
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...Activity-Based Costing Activity-Based Costing (ABC) attempts to more accurately assign overhead costs to the users of overhead by focusing on activities. The basic principle underlying activity-based costing is that an activity, which is a task, operation, or procedure, is what causes costs to be incurred. For example, cutting raw materials consumes, labor and machine hours. Likewise, warehousing products consumes resources (costs) such as employee time for driving a forklift, the electricity to power the forklift, and the wear and tear on a forklift. Also, training employees drives costs such as fees or salaries paid to trainers and the training supplies, required. Generally, all activities of an organization can be linked to use of resources. An activity cost pool is a collection of costs that are related to the same or similar activity. Pooling costs to determine an activity overhead (pool) rate for all costs incurred by the same activity reduces the number of cost assignments required. There are two basic stages to ABC. The first stage of ABC cost assignment is to identify the activities (cost objects) involved in manufacturing products and match those activities with the costs they cause (drive). To reduce the total number of activities ABC accumulates overhead costs into activity cost pools and then uses activity rates to allocate those costs to products. This involves 4 steps: 1) identify activities and the costs they cause; 2) group similar activities into activity cost...
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...4-14. Traditional vs. ABC The following cost information is available for Senkowski, Ltd.: Activity | Allocation Base | Volume of Activity | Overhead Cost | Purchasing | Purchase orders | 30,000 | $150,000 | Receiving | Shipments received | 15,000 | 60,000 | Machine setups | Setups | 2,500 | 200,000 | Quality control | Inspections | 18,000 | 90,000 | Direct materials are $15 per unit for luxury handbags and $11 per unit for deluxe handbags. There were 12,500 direct labor hours, each of which was charged to inventory at $18 per hour. Required A. Management is trying to decide between using the traditional allocation method based on direct labor hours and using activity-based costing. Calculate the overhead rates for each method. B. One particular batch of 40 luxury handbags had the following specifications: Direct labor hours | 8 | Purchase orders | 4 | Shipments received | 3 | Setups | 2 | Inspections | 12 | Calculate the overhead to be allocated to the bags under the traditional and activity-based costing techniques. C. Which costing method do you think is better for the company? Why? 4-14 (LO2, 3, and 4—Traditional versus ABC) A. Traditional allocation: The overhead rate based on direct labor hours is $40.00 per direct labor hour ($500,000 total overhead ÷ 12,500 direct labor hours). ABC allocation: The overhead rate for each activity is as follows: Purchasing: | $150,000 ÷ 30,000 = $5.00 per purchase order | ...
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...services. (Gapenski, pg. 27) The outpatient services section of the hospital is used by the Outpatient Clinic, as well as the Dialysis Center. The Outpatient Clinic, which makes up about 80 percent of the outpatient services section, has recently grown in volume and has created a need for 25 percent more space than it currently has. Moving the Dialysis Center to a new building was decide to allow expansion of the Outpatient Clinic. A change and focus on the allocation of costs has some department heads angry and claiming of unfairness; and some are less likely to receive their end-of-year bonus. Rick Simmons, CFO, is completely in charge of how indirect costs are allocated, but the only restriction was they must be done within outpatient services. Before leaving Big Bend, Rick drafted an indirect cost allocation that had concerned the Director of the Dialysis Center, John Van Pelt. His concerns must be taken into consideration as well as fairness and promoting overall cost savings for the organization while a new allocation is created and Executive Summary The Dialysis Center at Big Bend Medical Center performs hemodialysis and peritoneal dialysis, which are alternative processes that remove wastes and excess water from the blood for patients with end-stage renal (kidney) disease. In hemodialysis, blood is pumped from the patient’s arm through a shunt into a dialysis machine, which uses a cleansing solution and an artificial membrane to perform the functions of a healthy kidney...
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...suppliers related to the number of purchase orders placed, $525,000 c. Cost of indirect materials, $160,000 d. Costs incurred to set up machines each time a different product needs to be manufactured, $365,000 e. Designing processes, drawing process charts, and making engineering process changes for products, $287,500 f. Machine-related overhead costs such as depreciation, maintenance, and production engineering, $950,000 (These resources relate to the activity of running the machines.) g. Plant management, plant rent, and plant insurance, $512,000 Required: 1. Classify each of the preceding costs as output unit–level, batch-level, product-sustaining, or facility- sustaining. Explain each answer. 2. Consider two types of karaoke machines made by Forrester, Inc. One machine, designed for professional use, is complex to make and is produced in many batches. The other machine, designed for home use, is simple to make and is produced in few batches. Suppose that Forrester needs the same number of machine-hours to make each type of karaoke machine and that Forrester allocates all overhead costs using machine-hours as the only allocation base. How, if at all, would the machines be miscosted? Briefly explain why. 3. How is the cost hierarchy helpful to...
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...with the single indirect cost allocation base (direct labor hours), compute the total budgeted cost per package for the headless shrimp and then for the peeled and deveined shrimp. Round to two decimal places. (Hint: First, compute the predetermined overhead allocation rate. Then compute the total budgeted cost per package for each product.) 2. Use activity-based costing to re-compute the total budgeted cost per package for the headless shrimp and then for the peeled and deveined shrimp. Round to two decimal places. (Hint: First, calculate the predetermined overhead allocation rate for each activity. Then calculate the total indirect costs of (a) the entire headless shrimp product line and (b) the entire peeled and deveined shrimp product line. Next, compute the indirect cost per package of each product. Finally, calculate the total cost per package of each product.) 3. Write a memo to Bronson CEO Gary Pololu explaining the results of the ABC study. Compare the costs reported by the ABC system with the costs reported by the original system. Point out whether the ABC system shifted costs toward headless shrimp or toward peeled and deveined shrimp, and explain why. Finally, explain whether Pololu should feel more comfortable making decisions using cost data from the original system or from the new ABC system. 4. In 75 words or fewer, explain the difference between allocating manufacturing overhead using traditional cost allocation and activity-based costing...
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