Grand canyon ACC360 week 4 assignment

E5-19Plant-wide, department, and ABC indirect cost rates.Automotive Products (AP) designs and produces automotive parts. In 2014, actual variable manufacturing overhead is $308,600. AP’s simple costing system allocates variable manufacturing overhead to its three customers based on machine-hours and prices its contracts based on full costs. One of its customers has regularly complained of being charged noncompetitive prices, so AP’s controller Devon Smith realizes that it is time to examine the consumption of overhead resources more closely. He knows that there are three main departments that consume overhead resources: design, production, and engineering. Interviews with the department personnel and examination of time records yield the following detailed information.

			Usage of Cost Drivers by Customer Contract
Department	Cost Driver	Manufacturing Overhead in 2014	United Motors	Holden Motors	Leland Auto
Design	CAD-design hours	$39,000	110	200	80
Production	Engineering-hours	29,600	70	60	240
Engineering	Machine-hours	240,000	120	2,800	1,080
Total		$308,600

1. Compute the manufacturing overhead allocated to each customer in 2014 using the simple costing system that uses machine-hours as the allocation base.

2. Compute the manufacturing overhead allocated to each customer in 2014 using department-based manufacturing overhead rates.

3. Comment on your answers in requirements 1 and 2. Which customer do you think was complaining about being overcharged in the simple system? If the new department-based rates are used to price contracts, which customer(s) will be unhappy? How would you respond to these concerns?

4. How else might AP use the information available from its department-by-department analysis of manufacturing overhead costs?

5. AP’s managers are wondering if they should further refine the department-by-department costing system into an ABC system by identifying different activities within each department. Under what conditions would it not be worthwhile to further refine the department costing system into an ABC system?

P5-36Activity-based costing, merchandising.Pharmahelp, Inc., a distributor of special pharmaceutical products, operates at capacity and has three main market segments:

a.General supermarket chains

b.Drugstore chains

c.Mom-and-pop single-store pharmacies

Rick Flair, the new controller of Pharmahelp, reported the following data for 2014

Pharmahelp, 2014
	General Supermarket Chains	Drugstore Chains	Mom-and-Pop Single stores	Pharmahelp
Revenues	$3,708,000	$3,150,000	$1,980,000	$8,838,000
Costs of goods sold	3,600,000	3,000,000	1,800,000	8,400,000
Gross margin	$108,000	$150,000	$180,000	438,000
Other operating costs				301,080
Operating income				$136,920

For many years, Pharmahelp has used gross margin percentage [(Revenue – Cost of goods sold) ÷ Revenue] to evaluate the relative profitability of its market segments. But Flair recently attended a seminar on activity based costing and is considering using it at Pharmahelp to analyze and allocate “other operating costs.” He meets with all the key managers and several of his operations and sales staff, and they agree that there are five key activities that drive other operating costs at Pharmahelp:

Activity Area Cost Driver

Order processing Number of customer purchase orders

Line-item processing Number of line items ordered by customers

Delivering to stores Number of store deliveries

Cartons shipped to store Number of cartons shipped

Stocking of customer store shelves Hours of shelf-stocking

Each customer order consists of one or more line items. A line item represents a single product (such as Extra-Strength Tylenol Tablets). Each product line item is delivered in one or more separate cartons. Each store delivery entails the delivery of one or more cartons of products to a customer. Pharmahelp’s staff stacks cartons directly onto display shelves in customers’ stores. Currently, there is no additional charge to the customer for shelf-stocking and not all customers use Pharmahelp for this activity. The level of each activity in the three market segments and the total cost incurred for each activity in 2014 is as follows:

Activity-based cost data Pharmahelp 2014	Activity Level
General Super Market Chains	Drugstore Chains	Mom-and-pop Single Stores	Total Cost Of Activity In 2014
Activity
Orders processed (number)	140	360	1,500	$80,000
Line-items ordered (number)	1,960	4,320	15,000	63,840
Store deliveries made (number)	120	360	1,000	71,000
Cartons shipped to stores (number)	36,000	24,000	16,000	76,000
Shelf stocking (hours)	360	180	100	10,240
				$301,080

1.Compute the 2014 gross-margin percentage for each of Pharmahelp’s three market segments.

2.Compute the cost driver rates for each of the five activity areas.

3.Use the activity-based costing information to allocate the $301,080 of “other operating costs” to each of the market segments. Compute the operating income for each market segment.

4.Comment on the results. What new insights are available with the activity-based costing information?

P5-37Choosing cost drivers, activity-based costing, activity-based management.Pastel Bags (PB) is a designer of high-quality backpacks and purses. Each design is made in small batches. Each spring, PB comes out with new designs for the backpack and for the purse. The company uses these designs for a year and then moves on to the next trend. The bags are all made on the same fabrication equipment that is expected to operate at capacity. The equipment must be switched over to a new design and set up to prepare for the production of each new batch of products. When completed, each batch of products is immediately shipped to a wholesaler. Shipping costs vary with the number of shipments. Budgeted information for the year is as follows:

Pastel Bags

Budget for Costs and Activities

For the Year Ended February 28, 2014

Direct materials—purses $ 319,155

Direct materials—backpacks 454,995

Direct manufacturing labor—purses 99,000

Direct manufacturing labor—backpacks 113,000

Setup 64,000

Shipping 73,000

Design 169,000

Plant utilities and administration 221,000

Total $1,513,150

Other budget information follows:

Backpacks Purses Total

Number of bags 6,175 3, 075 9, 250

Hours of production 1,665 2,585 4,250

Number of batches 120 80 200

Number of designs 2 2 4

1. Identify the cost hierarchy level for each cost category.

2. Identify the most appropriate cost driver for each cost category. Explain briefly your choice of cost driver.

3. Calculate the budgeted cost per unit of cost driver for each cost category.

4. Calculate the budgeted total costs and cost per unit for each product line.

5. Explain how you could use the information in requirement 4 to reduce costs.