234 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISIONS
234 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISIONS
EX H I BI T 5 A - 1
Systems-Department Costs and Activity Levels
AN N UAL BU D GET
FIRST QUARTER
D O LLARS
H O U RS
D O LLARS
H O U RS D O LLARS
Hardware and other capacity-related costs
— $155,000 Software development
4,250 130,000 Operations: Computer related
920 187,000 Input/output related
Historical Usage
O PERATIO N S AN D OTH ER
H ARDWARE
D EVELO PM EN T
IN PU T/ O U TPU T D EPARTM EN T
RAN GE AVERAGE
Records 25%
10-30% 15% Claims
15 60-80 75 Finance
50 15-60
40 10-25
20 3-10 5 Outside
O PERATIO N S
Usage of Systems
SO FTWARE
CO M PU TER
Department’s Services
D EVELO PM EN T
RELATED
IN PU T/ O U TPU T
First Quarter (in hours)
Owen s plan s to u se first-qu arter activity an d cost data to illu strate h is recom - m en dation s. Th e recom m en dation s will be presen ted to th e System s Departm en t an d th e u ser departm en ts for th eir com m en ts an d reaction . He th en expects to presen t h is recom m en dation s to m an agem en t for approval.
Required:
1. Calcu late th e am ou n t of data-processin g costs th at wou ld be in clu ded in th e Claim s Departm en t’s first-qu arter bu dget accordin g to th e m eth od Jerry Owen s h as recom m en ded.
Chapter 5 Cost Allocation and Activity-Based Costing Systems
Required:
2. Prepare a sch edu le to sh ow h ow th e actu al first-qu arter costs of th e System s Departm en t wou ld be ch arged to th e u sers if Owen s’ recom m en ded m eth od were adopted.
3. Explain wh eth er Owen s’ recom m en ded system for ch argin g costs to th e u ser departm en ts will
a. im prove cost con trol in th e System s Departm en t, or
b. im prove plan n in g an d cost con trol in th e u ser departm en ts.
C5-3 COST D RIVERS A N D PRICIN G D ECISION S. (SMAC) Th e Eastclock Corporation (EC) m an u fac- tu res tim in g devices th at are u sed in in du strial settin gs. Recen tly, profits h ave fallen an d m an agem en t is seekin g you r advice as an ou tside con su ltan t on
ch an ges wh ich sh ou ld be m ade.
Du rin g its 60-year h istory, EC h as developed a stron g an d loyal cu stom er base du e largely to its repu tation for qu ality tim in g devices. Sign ifican t in vest- m en ts in n ew com pu ter-design ed produ cts an d au tom ated toolin g h ave redu ced operatin g costs an d en abled EC to m ain tain its com petitive edge. However, du r- in g th e past th ree years, sales of its two m ajor produ cts h ave declin ed or h ave becom e stagn an t. Had it n ot been for in creased sales of its “cu stom ” tim in g devices, EC wou ld h ave in cu rred losses.
EC’s basic produ ct lin e con sists of th e “stan dard” m odel an d th e “delu xe” m odel. Th e “stan dard” m odel requ ires $8 in direct m aterials an d requ ires on e
h ou r of direct labou r (0.4 h ou rs of m ach in in g an d 0.6 h ou rs of assem bly). Th e “delu xe” m odel requ ires an addition al $4 worth of direct m aterials an d requ ires
a total of 1.5 h ou rs of direct labou r (0.5 h ou rs of m ach in in g an d on e h ou r of assem bly). Th e stan dard labou r rate is $12 per h ou r.
In addition to th e basic produ ct lin e, th e com pan y m an u factu res cu stom tim in g devices. Th e average direct m aterial an d direct labou r costs for a cu stom tim in g device are approxim ately $20 an d $30 per u n it respectively. Each cu stom u n it requ ires 2.5 h ou rs of direct labou r (0.8 h ou rs of m ach in in g an d 1.7 h ou rs of assem bly).
Indirect manufacturing overhead costs are significant and totalled $1,700,000 in 2001. Variable overhead costs include small tools, lubricants, and indirect labour charges. Fixed overhead costs consist of the following: Engineering (design and esti- m atin g) $80,000; Qu ality Con trol (set-u p tim e an d m aterials) $130,000; Amortization on buildings and equipment $690,000; and other costs such as prop- erty taxes, maintenance and supervisory salaries of $200,000. A complete income statement for 2001 is shown in Exhibit 5B-1 of this case.
As an ou tside con su ltan t, you begin you r an alysis of th e cu rren t situ ation by m eetin g with th e con troller, Jack Down ie, in early Jan u ary, 2002. Jack, wh o
h as n o form al train in g in accou n tin g, is n on eth eless prou d of th e in tern al accou n tin g system an d th e ch an ges th at h e h as in trodu ced du rin g th e past five years. “We’ve spen t a lot of tim e con vertin g to th e con tribu tion form at. We’ve carefu lly an alyzed th e variable an d fixed costs u sin g ou r little m icrocom pu ter an d som e pretty powerfu l software. I’m really con fiden t th at we’ve got an accu rate
h an dle on h ow costs beh ave as volu m e rises an d falls in th e variou s produ ct lin es. Becau se th e volu m e of ‘cu stom ’ orders h as in creased du rin g th e past th ree years, we h ave ch arged relatively m ore overh ead to th is lin e on each of th e sem i- an n u al statem en ts. Th e 5 percen t sales com m ission is tacked on to th e an alysis of each of th e produ ct lin es an d we ch arge ou t th e fixed sellin g an d adm in istra- tive expen ses based on th e volu m e of orders processed.”