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Chapter 19: 19-3TI (page 1036)
Goodwin, Inc. manufactures children鈥檚 sandals. Similar sandals manufactured by competitors sell for $12.50 per pair. Goodwin desires a 20% net profit margin. What is Goodwin鈥檚 target cost?
Target Cost: $10
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Harris Systems specializes in servers for workgroup, e-commerce, and ERP applications. The company鈥檚 original job costing system has two direct cost categories: direct materials and direct labor. Overhead is allocated to jobs at the single rate of \(22 per direct labor hour.
A task force headed by Harris鈥檚 CFO recently designed an ABC system with four activities. The ABC system retains the current system鈥檚 two direct cost categories. Overhead costs are reflected in the four activities. Pertinent data follow:
___________________________________________________________________
Activity Allocation Base Predetermined Overhead
Allocation Rate____
Materials handling Number of parts \) 0.85
Machine setup Number of setups 500.00
Assembling Number of assembling hours 80.00
Shipping Number of shipments 1,500.00_______
Harris Systems has been awarded two new contracts, which will be produced as Job A and Job B. Budget data relating to the contracts follow:
____________________________________________________________
Job A Job B__
Number of parts 15,000 2,000
Number of setups 6 4
Number of assembling hours 1,500 200
Number of shipments 1 1
Total direct labor hours 8,000 600
Number of units produced 100 10
Direct materials cost \( 220,000 \) 30,000
Direct labor cost \( 160,000 \) 12,000__
Requirements
2. Suppose Harris Systems adopts the ABC system. Compute the budgeted product cost per unit for each job using ABC.
Question:Stella, Inc. is using a costs-of-quality approach to evaluate design engineering efforts for a new skateboard. Stella鈥檚 senior managers expect the engineering work to reduce appraisal, internal failure, and external failure activities. The predicted reductions in activities over the two-year life of the skateboards follow. Also shown are the predetermined overhead allocation rates for each activity.
Activity Predicted Predetermined
Reduction in Overhead Allocation
Activity Units Rate per Unit
Inspection of incoming raw materials 390 $ 44
Inspection of finished goods 390 19
Number of defective units discovered in-house 1,200 50
Number of defective units discovered by customers 325 72
Lost profits due to dissatisfied customers 75 102
Requirements
3. What major difficulty would Stella鈥檚 managers have in implementing this costs-of-quality approach? What alternative approach could they use to measure quality improvement?
The following information is provided for Orbit Antenna Corp., which manufactures two products: Lo-Gain antennas and Hi-Gain antennas for use in remote areas.
Activity Cost Allocation Base
Setup \( 58,000 Number of setups
Machine maintenance 30,000 Number of machine hours
Total indirect manufacturing costs \) 88,000
Lo-Gain Hi-Gain Total
Direct labor hours 1,200 3,800 5,000
Number of setups 40 40 80
Number of machine hours 3,000 2,000 5,000
Orbit Antenna plans to produce 125 Lo-Gain antennas and 225 Hi-Gain antennas.
Requirements
2. Compute the ABC indirect manufacturing cost per unit for each product.
The Alright Manufacturing Company in Rochester, Minnesota, assembles and tests electronic components used in smartphones. Consider the following data regarding component T24 (amounts are per unit):
Direct materials cost \( 80.00
Direct labor cost 20.00
Activity-based costs allocated ?
Total manufacturing product cost ?
The activities required to build the component follow:
Activity Allocation Base Cost Allocated to Each Unit
Start station Number of raw component chassis 4 * \) 1.50 = \( 6.00
Dip insertion Number of dip insertions ? * 0.30 = 9.60
Manual insertion Number of manual insertions 10 * 0.50 = ?
Wave solder Number of components soldered 4 * 1.90 = 7.60
Backload Number of backload insertions 7 * ? = 4.20
Test Number of testing hours 0.43 * 90.00 = ?
Defect analysis Number of defect analysis hours 0.15 * ? = 12.00
Total activity-based costs \) ?
Requirements
2. Why might managers favor this ABC system instead of Alright鈥檚 older system, which allocated all manufacturing overhead costs on the basis of direct labor hours?
How can ABM be used by service companies?
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