Q1. Comprehensive ABC implementation
Sawyer Pharmaceuticals manufactures an over-the-counter allergy medication called Breathe. Sawyer is trying to win market share from Sudafed and Tylenol. The company has developed several different Breathe products tailored to specific markets. For example, the company sells large commercial containers of 1,000 capsules to health-care facilities and travel packs of 20 capsules to shops in airports, train stations, and hotels.
Sawyer's controller, Sandra Dean, has just returned from a conference on ABC. She asks Kade Yackey, supervisor of the Breathe product line, to help her develop an ABC system. Dean and Yackey identify the following activities, related costs, and cost allocation bases:
|
Activity
|
Estimated indirected Activity Costs
|
Allocation Base
|
Estimated Quantity of Allocation Base
|
|
Materials handling
|
$180,000
|
Kilos
|
18,000 kilos
|
|
Packaging
|
460,000
|
Machine hours
|
2,600 hours
|
|
Quality assurance
|
116,000
|
Samples
|
1,500 samples
|
|
Total indirect costs
|
$756,000
|
|
|
The commercial-container Breathe product line had a total weight of 8,500 kilos, used 1,200 machine hours, and required 240 samples. The travel-pack line had a total weight of 6,000 kilos, used 400 machine hours, and required 340 samples. Sawyer produced 2,500 commercial containers of Breathe and 80,000 travel packs.
Requirements -
1. Compute the cost allocation rate for each activity.
2. Use the activity-based cost allocation rates to compute the indirect cost of each unit of the commercial containers and the travel packs. (Hint: Compute the total activity costs allocated to each product line and then compute the cost per unit.)
3. The company's original single-allocation-based cost system allocated indirect costs to products at $350 per machine hour. Compute the total indirect costs allocated to the commercial containers and to the travel packs under the original system. Then compute the indirect cost per unit for each product.
4. Compare the activity-based costs per unit to the costs from the original system. How have the unit costs changed? Explain why the costs changed as they did.
Q2. Comprehensive ABC
Halo Systems specializes in servers for work-group, e-commerce, and enterprise resource planning (ERP) applications. The company's original job cost system has two direct cost categories: direct materials and direct labor. Overhead is allocated to jobs at the single
rate of $24 per direct labor hour.
A task force headed by Halo's CFO recently designed an ABC system with four activities. The ABC system retains the current system's two direct cost categories. Thus, it budgets only overhead costs for each activity. Pertinent data follow:
|
Activity
|
Allocation Base
|
Cost Allocation Rate
|
|
Materials handling
|
Number of parts
|
$0.90
|
|
Machine setup
|
Number of setups
|
$510.00
|
|
Assembling
|
Assembling hours
|
$70.00
|
|
Shipping
|
Number of shipments
|
$1,600.00
|
Halo Systems has been awarded two new contracts that will be produced as Job A and Job B. Budget data relating to the contracts follow:
|
|
Job A
|
Job B
|
|
Number of parts
|
16,000
|
2,100
|
|
Number of setups
|
6
|
4
|
|
Number of assembling hours
|
1,600
|
220
|
|
Number of shipments
|
1
|
1
|
|
Total direct labor hours
|
9,000
|
700
|
|
Number of output units
|
100
|
10
|
|
Direct material cost
|
$220,000
|
$40,000
|
|
Direct labor cost
|
$175,000
|
$18,000
|
Requirements -
1. Compute the product cost per unit for each job using the original costing system (with two direct cost categories and a single overhead allocation rate).
2. Suppose Halo Systems adopts the ABC system. Compute the product cost per unit for each job using ABC.
3. Which costing system more accurately assigns to jobs the costs of the resources consumed to produce them? Explain.
4. A dependable company has offered to produce both jobs for Halo for 55,700 per out¬put unit. Halo may outsource (buy from the outside company) Job A only, Job B only, or both jobs. Which course of action will Halo's managers take if they base their decision on (a) the original system? (b) ABC system costs? Which course of action will yield more income? Explain.