222 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISIONS

222 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISIONS

4. Describe an y u n desirable beh aviou ral effects of th e m eth od described in requ irem en t 1. How wou ld you cou n teract an y ten den cies toward deliberate false prediction s of lon g-ru n u sage?

P5-15

D IRECT METHOD FOR SERVICE D EPA RTMEN T A LLOCATION . Wh eelock Con trols Com pan y

h as tw o produ cin g departm en ts, Mech an ical In stru m en ts an d Electron ic In stru m en ts. In addition , th ere are two service departm en ts, Bu ildin g Services an d Materials Receivin g an d Han dlin g. Th e com pan y pu rch ases a variety of com - pon en t parts from wh ich th e departm en ts assem ble in stru m en ts for sale in dom estic an d in tern ation al m arkets.

Th e Electron ic In stru m en ts division is h igh ly au tom ated. Th e m an u factu r- in g costs depen d prim arily on th e n u m ber of su bcom pon en ts in each in stru - m en t. In con trast, th e Mech an ical In stru m en ts division relies prim arily on a large labou r force to h an d-assem ble in stru m en ts. Its costs depen d on direct labou r h ou rs.

Th e cost of Bu ildin g Services depen d prim arily on th e squ are m etres occu - pied. Th e costs of Materials Receivin g an d Han dlin g depen d prim arily on th e total n u m ber of com pon en ts h an dled.

In stru m en ts M1 an d M2 are produ ced in th e Mech an ical In stru m en ts departm en t, an d E1 an d E2 are produ ced in th e Electron ic In stru m en ts depart- m en t. In form ation abou t th ese produ cts is as follows:

D IRECT

N U M BER

D IRECT

M ATERIALS CO ST

O F CO M PO N EN TS

LABO U R H O U RS

Bu dget figu res for 2002 in clu de:

M ATERIALS

BU ILD IN G

RECEIVIN G AN D

M ECH AN ICAL ELECTRO N IC

SERVICES

H AN D LIN G

IN STRU M EN TS IN STRU M EN TS

Direct department costs (excluding direct materials cost)

$680,000 $548,000 Square metres occupied

50,000 25,000 Number of final instruments produced

8,000 10,000 Average number of components per instrument

10 16 Direct labour hours

1. Allocate th e costs of th e service departm en ts u sin g th e direct m eth od.

2. Usin g th e resu lts of requ irem en t 1, com pu te th e cost per com on en t in th e Electron ic In stru m en ts departm en t.

3. Usin g th e resu lts of requ irem en t 2, com pu te th e cost per u n it of rodu ct for in sru m en ts M1, M2, E1, an d E2

Chapter 5 Cost Allocation and Activity-Based Costing Systems

P5-16 STEP-D OWN METHOD FOR SERVICE D EPA RTMEN T A LLOCATION . Refer to th e data in

Problem 5-15.

1. Allocate the costs of the service departments using the step-down method.

2. Usin g th e resu lts of requ irem en t 1, com pu te th e cost per direct-labou r

h ou r in th e Mech an ical In stru m en ts departm en t an d th e cost per com - pon en t in th e Electron ic In stru m en ts departm en t.

3. Usin g th e resu lts of requ irem en t 2, com pu te th e cost per u n it of prod- u ct for in stru m en ts M1, M2, E1, an d E2.

P5-17

A CTIVITY-BA SED COSTIN G. Reliable Mach in in g Produ cts (RMP) is an au tom otive com pon en t su pplier. RMP h as been approach ed by Ch rysler with a proposal to sign ifican tly in crease produ ction of Part T151A to a total an n u al qu an tity of 100,000. Ch rysler believes th at by in creasin g th e volu m e of produ ction of Part T151A, RMP sh ou ld realize th e ben efits of econ om ies of scale an d h en ce sh ou ld accept a lower price th an th e cu rren t $6 per u n it. Cu rren tly, RMP’s gross m argin on Part T151A is 3.3 percen t, com pu ted as follows:

Th e 400 percen t overh ead allocation rate is based on $3,300,000 an n u al factory overh ead divided by $825,000 an n u al direct labou r.

Direct materials

Direct labour

Factory overhead [400% × direct labour]

Total cost

Sales price

Gross margin

Gross margin percentage

Annual Cost D river

Activity Centre: Cost D rivers

Q uantity

Quality: No. of pieces scrapped

Production Scheduling and Set-up:

No. of set-ups

Shipping: No. of containers shipped

Shipping Administration: No. of shipments

Production: No. of machine hours

Part T151A seem s to be a m argin al profit produ ct. If addition al volu m e of produ ction of Part T151A is to be added, RMP m an agem en t believes th at th e sales price m u st be in creased, n ot redu ced as requ ested by Ch rysler. Th e m an - agem en t of RMP sees th is qu otin g situ ation as an excellen t opportu n ity to exam - in e th e effectiven ess of th eir tradition al costin g system versu s an activity-based costin g system . Data h ave been collected by a team con sistin g of accou n tin g an d en gin eerin g an alysts.