226 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISIONS 226 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISIONS

40 kilogram s less of A?

P5-20 A LLOCATION , D EPA RTMEN T RATES, A N D D IRECT LA BOUR HOURS VERSUS MA CHIN E-

HOURS. The Manning Manufacturing company has two producing departments, machining and assembly. Mr. Manning recently automated the machining department. The installation of a computer-aided manufacturing (CAM) system, together with robotic workstations, drastically reduced the amount of direct labour required. Meanwhile the assembly department remained labour-intensive.

Th e com pan y h ad always u sed on e firm wide rate based on direct labou r

h ou rs as th e cost driver for applyin g all costs (except direct m aterials) to th e fin al produ cts. Mr. Man n in g was con siderin g two altern atives: (1) con tin u e u sin g direct labou r h ou rs as th e on ly cost driver, bu t u se differen t rates in m ach in in g an d assem bly, an d (2) u se m ach in e-h ou rs as th e cost driver in th e m ach in in g depart- m en t wh ile con tin u in g with direct labou r h ou rs in assem bly.

Bu dgeted data for 2001 are:

M ACH IN IN G

ASSEM BLY TOTAL

Total cost (except direct materials), after allocating service department costs

Machine hours

Direct labour hours

*Not applicable

M ACH IN E-H O U RS

D IRECT LABO U R H O U RS

O F M ACH IN IN G

IN M ACH IN IN G

IN ASSEM BLY

Product A

Product B

Product C

1. Suppose Manning continued to use one firmwide rate based on direct labour hours to apply all manufacturing costs (except direct materials) to the final products. Compute the cost-application rate that would be used.

2. Su ppose Man n in g con tin u ed to u se direct labou r h ou rs as th e on ly cost driver bu t u sed differen t rates on m ach in in g an d assem bly:

a. Com pu te th e cost-application rate for m ach in in g.

b. Com pu te th e cost-application rate for assem bly.

3. Suppose Manning changed the cost accounting system to use machine- hours as the cost driver in machining and direct labour hours in assembly:

a. Com pu te th e cost-application rate for m ach in in g.

b. Com pu te th e cost-application rate for assem bly.

4. Three products use the following machine-hours and direct labour hours:

Chapter 5 Cost Allocation and Activity-Based Costing Systems

b. Com pu te th e m an u factu rin g cost of each produ ct (exclu din g direct m aterials) u sin g direct labou r h ou rs as th e cost driver, bu t with differen t cost-application rates in m ach in in g an d assem bly.

c. Com pu te th e m an u factu rin g cost of each produ ct (exclu din g direct m aterials) u sin g a cost-application rate based on direct labou r h ou rs in assem bly an d m ach in e-h ou rs in m ach in in g.

d. Com pare an d explain th e resu lt in requ irem en ts 4a, 4b, an d 4c. P5-21 MULTIPLE A LLOCATION BA SES. Th e Glasgow Electron ics Com pan y produ ces th ree types of

circu it boards; L, M, an d N. Th e cost accou n tin g system u sed by Glasgow u n til 1999 applied all costs except direct m aterials to th e produ cts u sin g direct labou r

h ou rs as th e on ly cost driver. In 1999 th e com pan y u n dertook a cost stu dy. Th e stu dy determ in ed th at th ere were six m ain factors cau sin g costs to be in cu rred.

A n ew system was design ed with a separate cost pool for each of th e six factors. Th e factors an d th e costs associated with each are as follows:

1. Direct labou r h ou rs—direct labou r cost an d related frin ge ben efits an d payroll taxes.

2. Mach in e-h ou rs—am ortization an d repairs an d m ain ten an ce costs.

3. Kilogram s of m aterials—m aterials receivin g, h an dlin g, an d storage costs.

4. Nu m ber of produ ction setu ps—labou r u sed to ch an ge m ach in ery an d com pu ter con figu ration s for a n ew produ ction batch .

5. Nu m ber of produ ction orders—costs of produ ction sch edu lin g an d order processin g.

6. Nu m ber of orders sh ipped—all packagin g an d sh ippin g expen ses. Th e com pan y is n ow preparin g a bu dget for 2001. Th e bu dget in clu des th e fol-

lowin g prediction s:

BOARD L

BOARD M

BOARD N

Units to be produced

Direct material cost

Direct labour hours

Machine hours

Kilograms of materials

Number of production setups

Number of production orders

Number of orders shipped

Th e total bu dgeted cost for 2001 is £3,712,250, of wh ich £955,400 was direct m aterials cost, an d th e am ou n t in each of th e six pools defin ed above is:

226 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISIONS 226 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISIONS