Question

equired 1

Required 2

Required 3

Identify at least four general advantages associate with activity-based costing. Select "X" if the item is a general advantage.

Allows management to focus on value-added and non-value-added activities, so that non-value-added activities can be controlled or eliminated, thus streamlining production processes.
Highlights the relationship between activities and identifies opportunities to reduce costs (i.e., designing products with fewer parts in order to reduce the cost of the manufacturing process).
Provides management with reports that are easier to interpret because only one manufacturing-overhead cost pool is used per product.
Provides management with a more thorough understanding of complex product costs and product profitability for improved resource management and pricing decisions.
Provides a more appropriate means of charging overhead costs to products.
Requires less resources and is easier to implement than traditional costing systems.

Problem 5-55 Activity-Based Costing (LO 5-1, 5-2, 5-4, 5-5)

Manchester Technology, Inc. manufactures several different types of printed circuit boards; however, two of the boards account for the majority of the company’s sales. The first of these boards, a television circuit board, has been a standard in the industry for several years. The market for this type of board is competitive and price-sensitive. Manchester plans to sell 73,000 of the TV boards in 20x1 at a price of $470 per unit. The second high-volume product, a personal computer circuit board, is a recent addition to Manchester’s product line. Because the PC board incorporates the latest technology, it can be sold at a premium price. The 20x1 plans include the sale of 48,000 PC boards at $860 per unit.

Manchester’s management group is meeting to discuss how to spend the sales and promotion dollars for 20x1. The sales manager believes that the market share for the TV board could be expanded by concentrating Manchester’s promotional efforts in this area. In response to this suggestion, the production manager said, “Why don’t you go after a bigger market for the PC board? The cost sheets that I get show that the contribution from a PC board is significantly larger than the contribution from a TV board. I know we get a premium price for the PC board. Selling it should help overall profitability.”

The cost-accounting system shows that the following costs apply to the PC and TV boards.

	PC Board			TV Board
Direct material	$	227		$	147
Direct labor		3.0	hr.		1.5	hr.
Machine time		1.5	hr.		1.5	hr.

  

Variable manufacturing overhead is applied on the basis of direct-labor hours. For 20x1, variable overhead is budgeted at $2,360,000, and direct-labor hours are estimated at 266,175. The hourly rates for machine time and direct labor are $36 and $44, respectively. The company applies a material-handling charge at 10 percent of material cost. This material-handling charge is not included in variable manufacturing overhead. Total 20x1 expenditures for direct material are budgeted at $21,627,000.

Andrew Fulton, Manchester’s controller, believes that before the management group proceeds with the discussion about allocating sales and promotional dollars to individual products, it might be worthwhile to look at these products on the basis of the activities involved in their production. Fulton has prepared the following schedule to help the management group understand this concept.

“Using this information,” Fulton explained, “we can calculate an activity-based cost for each TV board and each PC board and then compare it to the standard cost we have been using. The only cost that remains the same for both cost methods is the cost of direct material. The cost drivers will replace the direct labor, machine time, and overhead costs in the old standard cost figures.”

  

Budgeted Cost				Cost Driver	Budgeted Annual Activity for Cost Driver
Procurement	$	880,000		Number of parts		6,184,500	parts
Production scheduling		480,000		Number of boards		127,050	boards
Packaging and shipping		960,000		Number of boards		127,050	boards
Total	$	2,320,000
Machine setup	$	924,000		Number of setups		304,500	setups
Hazardous waste disposal		112,000		Pounds of waste		24,759	pounds
Quality control		1,168,000		Number of inspections		431,550	inspections
General supplies		156,000		Number of boards		127,050	boards
Total	$	2,360,000
Machine insertion	$	2,800,000		Number of parts		4,425,000	parts
Manual insertion		8,800,000		Number of parts		1,659,000	parts
Wave-soldering		304,000		Number of boards		127,050	boards
Total	$	11,904,000

  

Required per Unit	PC Board			TV Board
Parts:		71			34
Machine insertions		44			33
Manual insertions		27			1
Machine setups		3			2
Hazardous waste disposal, in lb.		.40			.06
Inspections		4			3

  

Required:

1. Identify at least four general advantages associated with activity-based costing.

2. On the basis of Manchester’s unit cost data given in the problem, calculate the total amount that each of the two product lines will contribute toward covering fixed costs and profit in 20x1.

3. Using activity-based costing, calculate the total amount that each of the two product lines will contribute toward covering fixed costs and profit in 20x1.

equired 1

Required 2

Required 3

Identify at least four general advantages associate with activity-based costing. Select "X" if the item is a general advantage.

Answer 1

1. Identify at least four general advantages associated with activity-based costing.

At least four general advantages associated with activity-based costing include the following.

1. Gives to management a understanding regarding product costs and product profitability for making pricing decisions and effective resource management
2. It identifies cost driver so that management could plan to reduce number of cost drivers which in turn reduce the cost.
3. It provides a better way of charging overhead cost
4. It also specifies value added and non value activities so that non value added can be eliminated