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PDFsam - Anthony A. Atkinson, Robert S. Kaplan, Ella Mae Matsumura, S. Mark Young-Management Accounting - Information For Decision-Making and Strategy Execution, 6th Edition - Prentice Hall (2011)

The document discusses a company called Moss Manufacturing that produces multiple products. It recently implemented a new quality control (QC) system that increased manufacturing support costs. The company calculates a manufacturing support cost rate based on direct labor dollars, which increased from 190% to 300% after automation. The president is confused by the large increase in the rate despite claims of increased efficiency from the new system. Tables show budgeted support costs, direct labor costs, and the cost driver rates before and after automation.

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1K views2 pages

PDFsam - Anthony A. Atkinson, Robert S. Kaplan, Ella Mae Matsumura, S. Mark Young-Management Accounting - Information For Decision-Making and Strategy Execution, 6th Edition - Prentice Hall (2011)

The document discusses a company called Moss Manufacturing that produces multiple products. It recently implemented a new quality control (QC) system that increased manufacturing support costs. The company calculates a manufacturing support cost rate based on direct labor dollars, which increased from 190% to 300% after automation. The president is confused by the large increase in the rate despite claims of increased efficiency from the new system. Tables show budgeted support costs, direct labor costs, and the cost driver rates before and after automation.

Uploaded by

Sundaram
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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The operating costs of the new QC system, including the salaries of the

QC engineers, have been included as manufacturing support in calculating


the companys plantwide manufacturing support cost rate, which is based on
direct labor dollars.
Josephine Gugliemo, the companys president, is confused. Her vice
president of production has told her how efficient the new system is, yet
there is a large increase in the manufacturing support cost driver rate. The
computation of the rate before and after automation is shown here:

ITEM BEFORE AFTER

Budgeted support costs $1,900,000 $2,100,000


Budgeted direct labor costs 1,000,000 700,000
Budgeted cost driver rate 190% 300%

Three hundred percent, lamented the president. How can we compete


with such a high manufacturing support cost driver rate?

Required
(a) Define manufacturing support costs and cite three examples of typical costs that would be
included in this category. Explain why companies develop manufacturing support cost
driver rates.
(b) Explain why the increase in the cost driver rate should not have a negative financial impact
on Moss Manufacturing.
(c) Explain, in great detail, how Moss Manufacturing could change its accounting system to
eliminate confusion over product costs.
(d) Discuss how an activity-based costing system may benefit Moss Manufacturing.
LO 1, 3, 4, 6 (Appendix) 5-28 Original activity-based costing for shared services, outsourcing,
implementation issues Smithers, Inc., manufactures and sells a wide
variety of consumer products. The products are viewed as sufficiently
profitable, but recently some product-line managers have complained about
the charges for the call center that handles phone calls from customers about
the products. Product lines are currently charged for call center support costs
on the basis of product sales revenues. The manager of product X is
particularly upset because he has just obtained a report that includes the
following information for last year:

PRODUCT X PRODUCT Y

Number of calls for information 2,000 4,000


Average length of calls for information 3 minutes 5 minutes
Number of calls registering complaints 200 1,000
Average length of complaint calls 5 minutes 10 minutes
Sales volume $400,000 $100,000

Product X is simple to use and consumers have little concern about adverse
health effects. Product Y is more complex to use and has many health hazard
warnings on its label. Smithers currently allocates call center support costs
using a rate of 5% of net sales dollars. The manager of product X argues that
the current system does not trace call center resource usage to specific
products. For example, product X bears four times the call center costs that
product Y does, although fewer calls are related to product X, and the calls
consume far less time.

202 Chapter 5 Activity-Based Cost Systems


Required
(a) What activity cost driver would you recommend to improve the current system of assigning
call center support costs to product lines? Why is your method an improvement?
(b) Suppose Smithers announces that it will now assign call center support costs on the basis of
an activity-based cost system that uses minutes of calls (calls for information and calls for
complaints) as the activity cost driver. Suppose also that the rate is 70 cents per minute.
Compare the call center cost assignments to product X and product Y under the previous
system and the new activity-based cost system.
(c) What actions can the product managers take to reduce the center costs assigned to their
product lines under the previous system and the new system? What other functional areas
might help reduce the number of minutes of calls for product Y?
(d) Who might resist implementation of the new activity-based cost system? In your response,
discuss possible reactions of the call center staff and other staff who might be affected by
efforts to reduce minutes of calls.
(e) From the companys point of view, how might the activity-based costing system help in the
assessment of whether to outsource the call center activities?
LO 1, 3, 4 (Appendix) 5-29 Cost distortions, original activity-based costs At its manufacturing plant
in Duluth, Minnesota, Endo Electronics Company manufactures two
products, X21 and Y37. For many years, the company has used a simple
plantwide manufacturing support cost rate based on direct labor hours.
A new plant accountant suggested that the company may be able to assign
support costs to products more accurately by using an activity-based costing
system that relies on a separate rate for each manufacturing activity that
causes support costs.
After studying the plants manufacturing activities and costs, the plant
accountant has collected the following data for last year:
ITEM X21 Y37

Units produced and sold 50,000 100,000


Direct labor hours used 100,000 300,000
Direct labor cost $1,000,000 $4,500,000
Number of times handled 40,000 20,000
Number of parts 12,000 8,000
Number of design changes 2,000 1,000
Number of product setups 8,000 6,000

The accountant has also determined that actual manufacturing support


costs incurred last year were as follows:
COST POOL ACTIVITY COSTS

Handling $3,000,000
Number of parts 2,400,000
Design changes 3,300,000
Setups 2,800,000
Total $11,500,000

The direct materials cost for product X21 is $120 per unit, while for
product Y37 it is $140 per unit.

Required
(a) Determine the unit cost of each product using direct labor hours to allocate all manufacturing
support costs.
(b) Determine the unit cost of each product using activity-based costing.

Chapter 5 Activity-Based Cost Systems 203

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