230 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISIONS

230 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISIONS

P5-25

A CTIVITY-BA SED COSTIN G. Th e Maori Novelty com pan y m akes a variety of sou ven irs for vis- itors to New Zealan d. Th e Otago Division m an u factu res stu ffed kiwi birds u sin g

a h igh ly au tom ated operation . A recen tly in stalled activity-based costin g system

h as fou r activities:

ACTIVITY

CO ST D RIVER

RATE

Materials receiving and

Kilograms of materials

$1.20 per kilogram

handling Production setup

Number of setups

$60 per setup

Cutting, sewing, and

Number of units

$0.40 per unit

assembly Packing and shipping

Number of orders

$10 per order

Tw o produ cts are called “Stan dard Kiw i” an d “Gian t Kiw i.” Th ey requ ire .20 an d .40 kilogram s of m aterials, respectively, at a m aterials cost of $1.30 for Stan dard Kiw is an d $2.20 for Gian t Kiw is. On e com pu ter-con trolled assem bly lin e m akes all produ cts. Wh en a produ ction ru n of a differen t produ ct is started, a setu p procedu re is requ ired to reprogram th e com pu ters an d m ake oth er ch an ges in th e process. Norm ally, 600 Stan dard Kiw is are produ ced per setu p, bu t on ly 240 Gian t Kiw is. Produ cts are packed an d sh ipped separately, so a requ est from a cu stom er for, say, th ree differen t produ cts is con sidered th ree differen t orders.

Au silan d Waterfron t Market ju st placed an order for 100 Stan dard Kiwis an d 50 Gian t Kiwis.

1. Com pu te th e cost of produ cts sh ipped to Au silan d Waterfron t Market.

2. Su ppose th e produ cts m ade for Au silan d Waterfron t requ ired “AWM” to be prin ted on each kiwi. Becau se of th e au tom ated process, prin tin g th e in itials takes n o extra tim e or m aterials, bu t it requ ires a special produ ction setu p for each produ ct. Com pu te th e cost of produ cts sh ipped to th e Au silan d Waterfron t Market.

3. Explain h ow th e activity-based costin g system h elps Maori Novelty to m easu re costs of in dividu al produ cts or orders better th an a tradition al system th at allocates all n on -m aterials costs based on direct labou r.

P5-26

A CTIVITY-BA SED A LLOCATION S. Win n ipeg Wh olesaler Distribu tors u ses an activity-based costin g system to determ in e th e cost of h an dlin g its produ cts. On e im portan t activity is th e receivin g of sh ipm en ts in th e wareh ou se. Th ree resou rces su pport th at activity: recordin g an d record-keepin g; labou r; an d in spection .

Recordin g an d record-keepin g is a cost driven by n u m ber of sh ipm en ts received. Th e cost per sh ipm en t is $16.50.

Labou r is driven by kilogram s of m erch an dise received. Becau se labou r is

h ired in sh ifts, it is fixed for large ran ges of volu m e. Cu rren tly, labou r costs are ru n n in g $23,000 per m on th for h an dlin g 460,000 kilogram s. Th is sam e cost wou ld apply to all volu m es between 300,000 kilogram s an d 550,000 kilogram s.

Fin ally, in spection is a cost driven by th e n u m ber of boxes received. In spection costs are $2.75 per box.

On e produ ct distribu ted by Win n ipeg Wh olesale Distribu tors is can dy. Th ere is a wide variety of types of can dy, so m an y differen t sh ipm en ts are h an - dled in th e wareh ou se. In Ju ly th e wareh ou se received 550 sh ipm en ts, con sist- in g of 4,000 boxes weigh in g a total of 80,000 kilogram s.

Chapter 5 Cost Allocation and Activity-Based Costing Systems

1. Com pu te th e cost of receivin g sh ipm en ts du rin g Ju ly.

2. Man agem en t is con siderin g elim in ation of bran ds of can dy th at h ave sm all sales levels. Th is wou ld redu ce th e wareh ou se volu m e to 220 sh ipm en ts, con sistin g of 2,500 boxes weigh in g a total of 60,000 kilo- gram s. Com pu te th e am ou n t of savin gs from elim in atin g th e sm all- sales-level bran ds.

3. Su ppose receivin g costs were estim ated on a per kilogram basis. Wh at was th e total receivin g cost per kilogram of can dy received in Ju ly? If m an agem en t h ad u sed th is cost to estim ate th e effect of elim in atin g th e 20,000 kilogram s of can dy, wh at m istake m igh t be m ade?

P5-27 COLLA BORATIVE LEA RN IN G EXERCISE: LIBRA RY RESEA RCH ON A BC. Form grou ps of th ree to six stu den ts. Each stu den t sh ou ld ch oose a differen t article abou t activ- ity-based costin g (ABC) or activity-based m an agem en t (ABM) from th e cu rren t literatu re. Th e article sh ou ld in clu de eviden ce abou t at least on e com pan y’s application of ABC. Su ch articles are available in a variety of sou rces. You m igh t try bibliograph ic search es for “activity-based costin g” or “activity-based m an age- m en t.” Jou rn als th at will h ave articles on ABC an d ABM in clu de:

Management (CMA Magazine) (Can ada) Management Accounting (USA) Management Accounting (Un ited Kin gdom ) Journal of Cost Management

1. After readin g th e article, n ote th e followin g (if given in th e article) for on e com pan y:

a. Th e ben efits of ABC or ABM

b. Th e problem s en cou n tered in im plem en tin g ABC or ABM

c. Su ggestion s by th e au th or(s) abou t em ployin g ABC or ABM

2. As a grou p, u sin g th e collective wisdom garn ered from th e articles, respon d to th e followin g:

a. Wh at kin ds of com pan ies can ben efit from ABC or ABM?

b. Wh at kin ds of com pan ies h ave little to gain from ABC or ABM?

c. Wh at steps sh ou ld be taken to en su re su ccessfu l im plem en tation of ABC or ABM?

d. Wh at poten tial pitfalls are th ere to avoid in im plem en tin g ABC or ABM?