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.