1. Describe activity based management.
2. Why might an organization want to track customer-related costs?
3. Abdullah Motors manufactures cars and currently uses only 50% of its manufacturing facility (20,000 cars). The company could utilize more of its facility by producing its own tires and using the total capacity. It currently purchases tires at $30 per unit. Abdullah would incur $12 per unit for direct materials, $10 for direct labor, and $24 for overhead (which is 30% variable) if it produces the tires.
a. Should Abdullah Motors make or buy the tires? Provide calculations that support your answer.
b. Suppose Abdullah Motors could rent the unused portion of its plant and receive $1,500 a month. Should the company make or buy the tires? Provide calculations that support your answer
c. List two qualitative factors that could affect this decision.
4. Explain the methods used to allocate Supporting department costs.
5. The SABIC Company undertakes the following activities in its production operation and incurred the following costs during the first half of 20x2:
Harvest oranges $25,000
Prepare oranges for processing 20,000
Extract juice from oranges 18,000
Process juice into orange juice concentrate, orange
juice, or orange popsicles 30,000
Package completed products 9,000
In addition to the costs listed above, processing the juice into 3 final products involves the use of 2 machines, each of which incurred depreciation costs of $10,000 for the first half of 20x2. Each product requires a different set up on the processing machines, so SABIC normally sets up the machines to produce concentrate for the first week of each month using 80 machine hours. The machine is then set up to produce orange juice for the next 2 weeks using 160 machine hours. Finally, workers set up the same machines to produce orange popsicles during the last week of each month, using 80 machine hours.
During the first half of 20x2, 20% of the oranges harvested were turned into orange juice concentrate, 50% were processed into orange juice, and 30% became orange popsicles. The orange juice concentrate operation takes up 40% of SABIC's total factory space. Regular orange juice and orange popsicles occupy 35% and 25%, respectively.
a. Calculate the total costs included in the processing activity cost pool.
b. Choose a cost driver for the processing activity and explain your choice. Calculate the ABC allocation rate for this activity.
c. Allocate processing costs to each product line using the ABC allocation rate developed in part (b).