232 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISIONS 232 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISIONS

232 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISIONS 232 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISIONS

In terviews were con du cted with th e key m an agers in order to iden tify activities, resou rces, cost drivers, an d th eir in terrelation sh ips.

In t e rv ie w e e : produ ction m an ager Q1: Wh at activities are carried ou t in you r area? A1: All products are manufactured using three similar, complex, and expensive molding

machines. Each molding machine can be used in the production of the three product lines. Each setup takes about the same time irrespective of the product.

Q2: Wh o works in you r area? A2: Last year, we employed thirty machine operators, two maintenance mechanics, and

two supervisors. Q3: How are th e operators u sed in th e m oldin g process? A3: It requires nine operators to support a machine during the actual production process. Q4: Wh at do th e m ain ten an ce m ech an ics do? A4: Their primary function is to perform machine setups. However, they were also

required to provide machine maintenance during the molding process.

Q5: Wh ere do th e su pervisors spen d th eir tim e? A5: They provide supervision for the machine operators and the maintenance mechanics.

For the most part, the supervisors appear to spend the same amount of time with each of the employees that they supervise.

Q6: Wh at oth er resou rces are u sed to su pport m an u factu rin g? A6 : The molding machines use energy during the molding process and during the setups. We put meters on the molding machines to get a better understanding of their energy consumption. We discovered that for each hour that a machine ran, it used 6.3 kilo- watts of energy. The machines also require consumable shop suppliers (e.g., lubri- cants, hoses, etc.). We have found a direct correlation between the amount of suppliers used and the actual processing time.

Q7: How is th e bu ildin g u sed, an d wh at costs are associated with it? A7: We have a 100,000-square-metre building. The total rent and insurance costs for the

year were $675,000. These costs are allocated to production, sales, and administra- tion based on square metres.

Required:

1. Iden tified th e activities, resou rces, an d cost drivers for th e division .

2. For each resource identified in requirement 1, indicate its cost behaviour with respect to the activities it supports (assume a planning period of 1 month).

C5-2 CA SE OF A LLOCATION OF D ATA -PROCESSIN G COSTS. (CMA, adapted) In depen den t Ou tside Un derwriters Co. (IOU) establish ed a System s Departm en t two years ago to im ple- m en t an d operate its own data-processin g system s. IOU believed th at its own sys- tem wou ld be m ore cost effective th an th e service bu reau it h ad been u sin g.

IOU’s th ree departm en ts—Claim s, Records, an d Fin an ce—h ave differen t requ irem en ts with respect to h ardware an d oth er capacity-related resou rces an d operatin g resou rces. Th e system was design ed to recogn ize th ese differin g n eeds. In addition , th e system was design ed to m eet IOU’s lon g-term capacity n eeds. Th e excess capacity design ed in to th e system wou ld be sold to ou tside u sers u n til n eeded by IOU. Th e estim ated resou rce requ irem en ts u sed to design an d im ple- m en t th e system are sh own in th e followin g sch edu le.

Chapter 5 Cost Allocation and Activity-Based Costing Systems

H ARDWARE AN D OTH ER CAPACITY-

O PERATIN G

RELATED RESO U RCES

RESO U RCES

Expansion (outside use)

IOU cu rren tly sells th e equ ivalen t of its expan sion capacity to a few ou tside clien ts. At th e tim e th e system becam e operation al, m an agem en t decided to redistribu te total expen ses of th e System s Departm en t to th e u ser departm en ts based on actu al com pu ter tim e u sed. Th e actu al costs for th e first qu arter of th e cu rren t fiscal year were distribu ted to th e u ser departm en ts as follows:

PERCEN TAGE

D EPARTM EN T

U TILIZATIO N

Th e th ree u ser departm en ts h ave com plain ed abou t th e cost distribu tion m eth od sin ce th e System s Departm en t was establish ed. Th e Records Departm en t’s m on th ly costs h ave been as m u ch as th ree tim es th e costs experien ced with th e service bu reau . Th e Fin an ce Departm en t is con cern ed abou t th e costs distribu ted to th e ou tside-u ser category becau se th ese allocated costs form th e basis for th e fees billed to th e ou tside clien ts.

Jerry Owen s, IOU’s con troller, decided to review th e cost-allocation m eth od. Th e addition al in form ation h e gath ered for h is review is reported in Exh ibits 5A-1, 5A-2, an d 5A-3.

Owen s h as con clu ded th at th e m eth od of cost allocation sh ou ld be ch an ged. He believes th at th e h ardware an d capacity-related costs sh ou ld be allocated to th e u ser departm en ts in proportion to th e plan n ed lon g-term n eeds. An y differ- en ce between actu al an d bu dgeted h ardware costs wou ld n ot be allocated to th e departm en ts bu t rem ain with th e System s Departm en t.

Th e costs for software developm en t an d operation s wou ld be ch arged to th e u ser departm en ts based on actu al h ou rs u sed. A pre-determ in ed h ou rly rate based on th e an n u al bu dget data wou ld be u sed. Th e h ou rly rates th at wou ld be u sed for th e cu rren t fiscal year are as follows:

FU N CTIO N

H O U RLY RATE

Software development

Operations:

Computer related

Input/output related