EXERCISE 5-40 (40 MINUTES, PLUS TIME AT RESTAURANT)



Exercise 5-33 (30 minutes)

|1. |Zodiac Model Rocketry Company |

| |Computation of Selling Costs |

| |By Order Size and per Motor Within Each Order Size |

| | |

| | |

| | |Order Size |

| | |Small |Medium |Large |Total |

| |Sales commissionsa | | | | |

| | (Unit cost: $675,000/225,000 | | | | |

| |= $3.00 per box) box) |$   6,000 |$135,000 |$534,000 |$  675,000 |

| | | | | | |

| |Catalogsb | | | | |

| | (Unit cost: $295,400/590,800 | | | | |

| |= $.50 per catalog) catalog) |127,150 |105,650 |62,600 |295,400 |

| | | | | | |

| |Costs of catalog salesc | | | | |

| | (Unit cost: $105,000/175,000 | | | | |

| |= $.60 per motor) skein) |47,400 |31,200 |26,400 |105,000 |

| | | | | | |

| |Credit and collectiond | | | | |

| | (Unit cost: $60,000/6,000 | | | | |

| |= $10.00 per order) order) |   4,850 |  24,150 |  31,000 |   60,000 |

| | | | | | |

| |Total cost for all orders of a given size | | | | |

| | |$185,400 |$296,000 |$654,000 |$1,135,400 |

| | | | | | |

| |Units (motors) solde |103,000 |592,000 |2,180,000 | |

| | | | | | |

| |Unit cost per order of a given sizef | | | | |

| | |$1.80 |$.50 |$.30 | |

| |

|aRetail sales in boxes × unit cost: |

| Small, 2,000 × $3 |

| Medium, 45,000 × $3 |

| Large, 178,000 × $3 |

|bCatalogs distributed × unit cost |

|cCatalog sales × unit cost |

|dNumber of retail orders × unit cost |

|eSmall: (2,000 × 12) + 79,000 = 103,000 |

| Medium: (45,000 × 12) + 52,000 = 592,000 |

| Large: (178,000 × 12) + 44,000 = 2,180,000 |

|fTotal cost for all orders of a given size ÷ units sold |

| | |

Exercise 5-33 (Continued)

|2. |The analysis of selling costs shows that small orders cost more than large orders. This fact could persuade management to market |

| |large orders more aggressively and/or offer discounts for them. |

Exercise 5-40 (40 minutes, plus time at restaurant)

|Several restaurant activities are listed in the following table, along with the required characteristics for each activity. Many other |

|possibilities could be listed, depending on the level of detail. |

| |Value-Added | | |

| |or Non-Value- | | |

|Activity Description |Added |Activity Trigger |Root Cause |

| | | | |

|Taking reservations |VA |Customer calls on phone |Customer desires reservation |

| | | | |

|Customers waiting for a table |NVA |Customer arrives, but no table is |An error was made in reservation; service is |

| | |ready |slow; customers are slow; customers arrive |

| | | |without reservations |

| | | | |

|Seating customers |VA |Table becomes available |Customer's reservation (or turn in line) |

| | | |comes up; table becomes ready |

| | | | |

|Taking orders |VA |Customers indicate readiness to order|Kitchen staff needs to know what to prepare |

| | | | |

|Serving meals to customers |VA |Meals are ready |Meals are ready; customers are hungry |

| | | | |

|Returning meal to kitchen for |NVA |Customer complains about meal |An error was made in explaining the menu; |

|revised preparation | | |there is an error in the printed menu |

| | | |description; meal was prepared wrong; |

| | | |customer is picky |

|Customers eating meal |VA |Meals are served and are satisfactory|Customers are hungry |

| | | | |

|Clearing the table |VA |Customers are finished |Customers have finished eating |

Exercise 5-40 (continued)

| | | | |

|Delivering check to table |VA |Customers are finished ordering and |Customers need to know amount of bill |

| | |eating | |

| | | | |

|Collecting payment |VA |Customers have produced cash or |Restaurant needs to collect payment for |

| | |credit card |services rendered |

Exercise 5-44 (20 minutes)

There are many key activities that can be suggested for each business. Some possibilities are listed below. After each activity, a suggested cost driver is given in parentheses.

|(1) |airline: |(a) |reservations (reservations booked) |

| | |(b) |baggage handling (pieces of baggage handled) |

| | |(c) |flight crew operations (air miles flown) |

| | |(d) |aircraft operations (air miles flown) |

| | |(e) |in-flight service (number of passengers) |

| | | | |

|(2) |restaurant |(a) |purchasing (pounds or cost of food purchased) |

| | |(b) |kitchen operations (meals prepared) |

| | |(c) |table service (meals served) |

| | |(d) |table clearing (meals served) |

| | |(e) |dish washing (dishes washed) |

| | | | |

|(3) |fitness club: |(a) |front desk operations (number of patrons) |

| | |(b) |membership records (number of records) |

| | |(c) |personnel (number of employees) |

| | |(d) |equipment maintenance (maintenance hours) |

| | |(e) |fitness consultation (hours of service) |

| | | | |

|(4) |bank: |(a) |teller window operations (number of customers) |

| | |(b) |loan processing (loan applications) |

| | |(c) |check processing (checks processed) |

| | |(d) |personnel (number of employees) |

| | |(e) |security (number of customers) |

| | | | |

| (5) |hotel: |(a) |front desk operations (number of guests) |

| | |(b) |bell service (pieces of luggage handled) |

| | |(c) |housekeeping service (number of guest-days) |

| | |(d) |room service (meals delivered) |

| | |(e) |telephone service (phone calls made) |

| | | | |

|(6) |hospital: |(a) |admissions (patients admitted) |

| | |(b) |diagnostic lab (tests performed) |

| | |(c) |nursing (nursing hours) |

| | |(d) |surgery (hours in operating room) |

| | |(e) |general patient care (patient-days of care) |

solutions to Problems

PROBLEM 5-45 (35 MINUTES)

1. Activity-based costing results in improved costing accuracy for two reasons. First, companies that use ABC are not limited to a single driver when allocating costs to products and activities. Not all costs vary with units, and ABC allows users to select a host of nonunit-level cost drivers. Second, consumption ratios often differ greatly among activities. No single cost driver will accurately assign costs for all activities in this situation.

2. Allocation of administrative cost based on billable hours:

E-commerce consulting: 2,400 ÷ 6,000 = 40%; $381,760 x 40% = $152,704

Information systems: 3,600 ÷ 6,000 = 60%; $381,760 x 60% = $229,056

| | |Information |

| |E-Commerce |Systems |

| |Consulting |Services |

|Billings: | | |

|3,600 hours x $140………… | |$504,000 |

|2,400 hours x $140………… |$336,000 | |

|Less: Professional staff cost: | | |

| 3,600 hours x $50 | | (180,000) |

| 2,400 hours x $50 | (120,000) | |

| Administrative cost……. | (152,704) | ( 229,056) |

|Income…………………………… |$ 63,296 |$ 94,944 |

| | | |

|Income ÷ billings………………. |18.84% |18.84% |

PROBLEM 5-45 (CONTINUED)

3. Activity-based application rates:

| | | |Activity | |Application |

|Activity |Cost | |Driver | |Rate |

| | | | | | |

|Staff support |$207,000 |÷ |300 clients |= |$690 per client |

| | | | | | |

|In-house computing | 145,000 |÷ |5,000 computer |= |$29 per CH |

| | | |hours (CH) | | |

| | | | | | |

|Miscellaneous | 29,760 |÷ |1,200 client |= |$24.80 per CT |

|office charges | | |transactions (CT) | | |

Staff support, in-house computing, and miscellaneous office charges of e-commerce consulting and information systems services:

| | |Information Systems |

| |E-Commerce Consulting |Services |

|Activity | | |

| | | |

|Staff support: | | |

|240 clients x $690…………... | |$165,600 |

|60 clients x $690……………. |$ 41,400 | |

|In-house computing: | | |

|2,900 CH x $29………………. | | 84,100 |

|2,100 CH x $29………………. | 60,900 | |

|Miscellaneous office charges: | | |

|480 CT x $24.80……………... | | 11,904 |

|720 CT x $24.80……………... | 17,856 | |

|Total ………………………………. |$120,156 |$261,604 |

PROBLEM 5-45 (CONTINUED)

Profitability e-commerce consulting and information systems services:

| | |Information |

| |E-Commerce |Systems |

| |Consulting |Services |

|Billings: | | |

|3,600 hours x $140……….. | |$504,000 |

|2,400 hours x $140……….. |$336,000 | |

|Less: Professional staff cost: | | |

| 3,600 hours x $50 | | (180,000) |

| 2,400 hours x $50 | (120,000) | |

| Administrative cost……. | (120,156) | ( 261,604) |

|Income………………………….. |$ 95,844 |$ 62,396 |

|Income ÷ billings……………... |28.53% |12.38% |

4. Yes, his attitude should change. Even though both services are needed and professionals are paid the same rate, the income percentages show that e-commerce consulting provides a higher return per sales dollar than information systems services (28.53% vs. 12.38%). Thus, all other things being equal, professionals should spend more time with e-commerce.

5. Probably not. Although both services produce an attractive return for Clark and Shiffer, the firm is experiencing a very tight labor market and will likely have trouble finding qualified help. In addition, the professional staff is currently overworked, which would probably limit the services available to new clients.

PROBLEM 5-46 (60 MINUTES)

1. The predetermined overhead rate is calculated as follows:

Predetermined overhead rate = Budgeted manufacturing overhead/budgeted direct-labor hours = $1,224,000/102,000* = $12 per hour

*Direct labor, budgeted hours:

REG: 5,000 units ( 9 hours 45,000 hours

ADV: 4,000 units ( 11 hours 44,000 hours

SPE: 1,000 units ( 13 hours 13,000 hours

Total direct-labor hours 102,000 hours

PROBLEM 5-46 (CONTINUED)

2. Activity-based-costing analysis:

|Activity |Activity Cost Pool |Cost |Cost Driver Quantity |

| | |Driver | |

|Direct material |$129.00 |$151.00 |$203.00 |

|Direct labor (not including | | | |

|set-up time) |171.00 (9 hr. @ $19) |209.00 (11 hr. @ $19) |247.00 (13 hr. @ $19) |

|Total direct costs per unit |$300.00 |$360.00 |$450.00 |

| | | | |

|Manufacturing overhead (based on ABC): |

|Machine-related |$ 27.00 |$ 32.40 |$ 45.90 |

|Material handling |4.20 |5.25 |10.50 |

|Purchasing |5.00 |6.00 |26.00 |

|Setup |6.80 |8.50 |17.00 |

|Inspection |2.00 |2.50 |7.50 |

|Packing/shipping |6.00 |6.00 |12.00 |

|Engineering design |2.50 |2.50 |10.00 |

|Facility |50.00 |60.00 |85.00 |

|Total ABC overhead | | | |

|cost per unit |$103.50 |$123.15 |$213.90 |

|Total product cost per unit |$403.50 |$483.15 |$663.90 |

PROBLEM 5-46 (CONTINUED)

4. Comparison of costs and target prices under two alternative product-costing systems:

| |REG |ADV |GMT |

|Reported unit overhead cost: | | | |

|Traditional, volume-based costing system |$108.00 |$132.00 |$156.00 |

|Activity-based costing system |103.50 |123.15 |213.90 |

|Reported unit product cost (direct material, direct labor and overhead): | | | |

|Traditional, volume-based costing system |408.00 |492.00 |606.00 |

|Activity-based costing system |403.50 |483.15 |663.90 |

|Sales price data: | | | |

|Original target price (130% of product cost based on traditional, volume-based |530.40 |639.60 |787.80 |

|costing system) | | | |

|New target price (130% of product cost based activity-based costing system) |524.55 |628.10 |863.07 |

|Actual current selling price |525.00 |628.00 |800.00 |

5. The REG and ADV products were overcosted by the traditional system, and the GMT product was undercosted by the traditional system

|Reported unit product cost: | | | |

|Traditional, volume-based costing system |$408.00 |$492.00 |$606.00 |

|Activity-based costing system | 403.50 | 483.15 | 663.90 |

|Cost distortion: | | | |

|REG and ADV overcosted by traditional system |$ 4.50 |$ 8.85 | |

| GMT undercosted by traditional system | | |($ 57.90) |

6. The electronic version of the Solutions Manual “BUILD A SPREADSHEET SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website: hilton8e.

PROBLEM 5-48 (30 MINUTES)

1. Deluxe manufacturing overhead cost:

32,000 machine hours x $80 = $2,560,000

$2,560,000 ÷ 16,000 units = $160 per unit

Executive manufacturing overhead cost:

45,000 machine hours x $80 = $3,600,000

$3,600,000 ÷ 30,000 units = $120 per unit

| |Deluxe |Executive |

| | | |

|Direct material………………. |$ 40 |$ 65 |

|Direct labor………………….. | 25 | 25 |

|Manufacturing overhead…. | 160 | 120 |

|Unit cost………………… |$225 |$210 |

2. Activity-based application rates:

| | | | | | |

| | | |Activity | |Application Rate |

|Activity |Cost | |Driver | | |

| | | | | | |

|Manufacturing |$1,344,000 |÷ |160 setups (SU) |= |$8,400 per SU |

|setups | | | | | |

| | | | | | |

|Machine processing | 3,696,000 |÷ |77,000 machine |= |$48 per MH |

| | | |hours (MH) | | |

| | | | | | |

|Product shipping | 1,120,000 |÷ |350 outgoing shipments (OS) |= |$3,200 per OS |

PROBLEM 5-48 (CONTINUED)

Manufacturing setup, machine processing, and product shipping costs of a Deluxe unit and an Executive unit:

|Activity |Deluxe |Executive |

| | | |

|Manufacturing setups: | | |

|100 SU x $8,400…………….. |$ 840,000 | |

| 60 SU x $8,400…………….. | |$ 504,000 |

|Machine processing: | | |

|32,000 MH x $48…………... | 1,536,000 | |

|45,000 MH x $48…………... | | 2,160,000 |

|Product shipping: | | |

|200 OS x $3,200…………… | 640,000 | |

|150 OS x $3,200…………….. | | 480,000 |

|Total ……………………………. |$3,016,000 |$3,144,000 |

| | | |

|Production volume (units)…. |16,000 |30,000 |

| | | |

|Cost per unit………………….. |$188.50* |$104.80** |

* $3,016,000 ÷ 16,000 units = $188.50

** $3,144,000 ÷ 30,000 units = $104.80

The manufactured cost of a Deluxe cabinet is $253.50, and the manufactured cost of an Executive cabinet is $194.80. The calculations follow:

| |Deluxe |Executive |

| | | |

|Direct material………………………………… |$ 40.00 |$ 65.00 |

|Direct labor……………………………………. | 25.00 | 25.00 |

|Manufacturing setup, machine processing, and outgoing shipments.. | | |

| |188.50 |104.80 |

|Total cost………………………………………. |$253.50 |$194.80 |

3. The Deluxe storage cabinet is undercosted. The use of machine hours produced a unit cost of $225; in contrast, the more accurate activity-based-costing approach shows a unit cost of $253.50. The difference between these two amounts is $28.50.

PROBLEM 5-48 (CONTINUED)

4. Cost distortion:

The Deluxe cabinet product line is undercosted by $456,000, and the Executive cabinet product line is overcosted by $456,000. Supporting calculations follow:

Deluxe Executive

$28.50* ( 16,000 = $456,000 $(15.20)† ( 30,000 = $(456,000)

*$253.50 ( $225.00 †$194.80 ( $210.00

5. No, the discount is not advisable. The regular selling price of $270, when compared against the more accurate ABC cost figure, shows that each sale provides a profit to the firm of $16.50 ($270.00 - $253.50). However, a $30 discount will actually produce a loss of $13.50 ($253.50 - $240.00), and the more units that are sold, the larger the loss. Notice that with the less-accurate, machine-hour-based figure ($225), the marketing manager will be misled, believing that each discounted unit sold would boost income by $15 ($240 - $225).

Problem 5-49 (25 minutes)

|1. |a. |Manufacturing overhead costs include all indirect manufacturing costs (all production costs except direct material and direct |

| | |labor). Typical overhead costs include: |

| | |Indirect labor (e.g., a lift-truck driver, maintenance and inspection labor, engineering labor, and supervisors). |

| | |Indirect material. |

| | |Other indirect manufacturing costs (e.g., building maintenance, machine and tool maintenance, property taxes, insurance, |

| | |depreciation on plant and equipment, rent, and utilities). |

| |b. |Companies develop overhead rates before production to facilitate the costing of products as they are completed and shipped, |

| | |rather than waiting until actual costs are accumulated for the period of production. |

|2. |The increase in the overhead rate should not have a negative impact on the company, because the increase in indirect costs was|

| |offset by a decrease in direct labor. |

|3. |Rather than using a plantwide overhead rate, Digital Light could implement separate activity cost pools. Examples are as |

| |follows: |

| |Separate costs into departmental overhead accounts (or other relevant pools), with one account for each production and service|

| |department. Each department would allocate its overhead to products on the basis that best reflects the use of these overhead |

| |services. |

| |Treat individual machines as separate cost centers, with the machine costs collected and charged to the products using machine|

| |hours. |

|4. |An activity-based costing system might benefit Digital Light because it assigns costs to products according to their usage of |

| |activities in the production process. More accurate product costs are the result. |

PROBLEM 5-50 (30 MINUTES)

1. Predetermined overhead rate = budgeted overhead ÷ budgeted direct-labor hours

= $710,000 ÷ 20,000* = $35.50 per direct labor hour

*20,000 budgeted direct-labor hours = (2,500 units of Medform)(3 hrs./unit) +

(3,125 units of Procel)(4 hrs./unit)

| |Medform |Procel |

| | | |

|Direct material |$ 30.00 |$ 45.00 |

|Direct labor: | | |

|3 hours x $15 | 45.00 | |

|4 hours x $15 | | 60.00 |

|Manufacturing overhead: | | |

|3 hours x $35.50 | 106.50 | |

|4 hours x $35.50 | | 142.00 |

|Total cost |$181.50 |$247.00 |

2. Activity-based overhead application rates:

| | | |Activity Cost Driver | |Application |

|Activity |Cost | | | |Rate |

| | | | | | |

|Order |$120,000 |÷ |600 orders |= |$200 per OP |

|processing | | |processed (OP) | | |

| | | | | | |

|Machine processing| 500,000 |÷ |50,000 machine |= |$10 per MH |

| | | |hrs. (MH) | | |

| | | | | | |

|Product | 90,000 |÷ |15,000 inspection |= |$6 per IH |

|inspection | | |hrs. (IH) | | |

PROBLEM 5-50 (CONTINUED)

Order processing, machine processing, and product inspection costs of a Medform unit and an Procel unit:

| Activity |Medform |Procel |

| | | |

|Order processing: | | |

|350 OP x $200 |$ 70,000 | |

|250 OP x $200 | |$ 50,000 |

|Machine processing: | | |

|23,000 MH x $10 | 230,000 | |

|27,000 MH x $10 | | 270,000 |

|Product inspection: | | |

| 4,000 IH x $6 | 24,000 | |

|11,000 IH x $6 | | 66,000 |

|Total |$324,000 |$386,000 |

| | | |

|Production volume (units) |2,500 |3,125 |

|Cost per unit |$129.60* |$123.52** |

* $324,000 ÷ 2,500 units = $129.60

** $386,000 ÷ 3,125 units = $123.52

The manufactured cost of a Medform unit is $204.60, and the manufactured cost of a Procel unit is $228.52:

| |Medform |Procel |

| | | |

|Direct material………………………………. |$ 30.00 |$ 45.00 |

|Direct labor: | | |

|3 hours x $15…………………………… | 45.00 | |

|4 hours x $15…………………………… | | 60.00 |

|Order processing, machine processing, and product | | |

|inspection……………….. |129.60 |123.52 |

|Total cost……………………………………. |$204.60 |$228.52 |

PROBLEM 5-50 (CONTINUED)

3. a. The Procel product is overcosted by $18.48 ($247.00 - $228.52) under the traditional product-costing system. The labor-hour application base resulted in a $247 unit cost; in contrast, the more accurate ABC approach yielded a lower unit cost of $228.52. The opposite situation occurs with the Medform product, which is undercosted by $23.10 under the traditional approach ($181.50 vs. $204.60 under ABC).

The traditional costing system overcosts the Procel product line by a total of $57,750 ($18.48 x 3,125 units), and it undercosts the Medform product line by the same amount, $57,750 ($23.10 x 2,500 units).

b. Yes, especially since Meditech’s selling prices are based heavily on cost. An overcosted product will result in an inflated selling price, which could prove detrimental in a highly competitive marketplace. Customers will be turned off and will go elsewhere, which hurts profitability. With undercosted products, selling prices may be too low to adequately cover a product’s more accurate (higher) cost. This situation is also troublesome and will result in lower income reported for the company.

4. The electronic version of the Solutions Manual “BUILD A SPREADSHEET SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website: hilton8e.

Problem 5-51 (30 minutes)

|1. |Valdosta Vinyl Company (VVC) is currently using a plantwide overhead rate that is applied on the basis of direct-labor dollars. In |

| |general, a plantwide manufacturing-overhead rate is acceptable only if a similar relationship between overhead and direct labor exists |

| |in all departments or the company manufactures products that receive the same proportional services from each department |

| | In most cases, departmental overhead rates are preferable to plantwide overhead rates because plantwide overhead rates do not provide |

| |the following: |

| |A framework for reviewing overhead costs on a departmental basis, identifying departmental cost overruns, or taking corrective action |

| |to improve departmental cost control. |

| |Sufficient information about product profitability, thus increasing the difficulties associated with management decision making. |

|2. |Because the company uses a plantwide overhead rate applied on the basis of direct-labor dollars, the elimination of direct labor in the|

| |Molding Department through the introduction of robots may appear to reduce the overhead cost of the Molding Department to zero. |

| |However, this change will not reduce fixed manufacturing costs such as depreciation and plant supervision. In reality, the use of |

| |robots is likely to increase fixed costs because of increased depreciation. Under the current method of allocating overhead costs, |

| |these costs merely will be absorbed by the remaining departments. |

PROBLEM 5-51 (CONTINUED)

|3. |a. |In order to improve the allocation of overhead costs in the Cutting and Finishing departments, management should move toward an|

| | |activity-based costing system. The firm should: |

| | |Establish activity-cost pools for each significant activity. |

| | |Select a cost driver for each activity that best reflects the relationship of the activity to the overhead costs incurred. |

| |b. |In order to accommodate the automation of the Molding Department in its overhead accounting system, the company should: |

| | |Establish a separate overhead pool and rate for the Molding Department. |

| | |Identify fixed and variable overhead costs and establish fixed and variable overhead rates. |

| | |Apply overhead costs to the Molding Department on the basis of robot or machine hours. |

problem 5-52 (40 minutes)

|1. |Overhead to be assigned to development chemical order: |

| | | | | | |

| | | | | |Assigned Overhead |

| |Activity Cost |Pool | |Level of |Cost |

| |Pool |Rate | |Cost Driver | |

| |Machine setups |$4,000 per setup |( |6 setups |$24,000 |

| |Material handling |$4 per pound |( |9,000 pounds |36,000 |

| |Hazardous waste control |$10 per pound |( |2,100 pounds |21,000 |

| |Quality control |$150 per inspection |( |8 inspections |1,200 |

| |Other overhead costs |$20 per machine hour |( |550 machine hours | 11,000 |

| |Total | | | |$93,200 |

|2. |Overhead cost per | |[pic] |

| |box of chemicals |= | |

| | | | |

|3. |Predetermined | |[pic] |

| |overhead rate |= | |

| | | | = $62.50 per machine hr. |

|4. |Overhead to be assigned to film development chemical order, given a single predetermined overhead rate: |

| | | | | |

| |a. |Total overhead assigned |= |$62.50 per machine hr. ( 550 machine hr. |

| | | |= |$34,375 |

| | | | | |

| |b. |Overhead cost per | |[pic] |

| | |box of chemicals |= | |

|5. |The radiological development chemicals entail a relatively large number of machine setups, a large amount of hazardous materials, and|

| |several inspections. Thus, they are quite costly in terms of driving overhead costs. Use of a single predetermined overhead rate |

| |obscures this characteristic of the production job. Underestimating the overhead cost per box could have adverse consequences for |

| |Rapid City Radiology, Inc. For example, it could lead to poor decisions about product pricing. The activity-based costing system will|

| |serve management much better than the system based on a single, predetermined overhead rate. |

PROBLEM 5-52 (CONTINUED)

6. The electronic version of the Solutions Manual “BUILD A SPREADSHEET SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website: hilton8e.

Problem 5-53 (20 minutes)

1. Calculation of unit cost:

|(a) |Overhead assigned to plates: |

| | | | | | |

| | | | | |Assigned Overhead |

| |Activity Cost |Pool | |Level of |Cost |

| |Pool |Rate | |Cost Driver | |

| |Machine setups |$4,000 per setup |( |4 setups |$16,000 |

| |Material handling |$4 per pound |( |800 pounds |3,200 |

| |Hazardous waste control |$10 per pound |( |400 pounds |4,000 |

| |Quality control |$150 per inspection |( |4 inspections |600 |

| |Other overhead costs |$20 per machine hour |( |60 machine hours |  1,200 |

| |Total | | | |$25,000 |

| | | | | | |

| |[pic] | | | |

|(b) |Unit cost per plate: | | | |

| | | | | |

| |Direct material |$210 | | |

| |Direct labor |60 | | |

| |Manufacturing overhead | 250 | | |

| |Total cost per plate |$520 | | |

2. The electronic version of the Solutions Manual “BUILD A SPREADSHEET SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website: hilton8e.

Problem 5-54 (50 minutes)

|1. |Activity Cost Pool |Type of Activity |

| |I: |Machine-related costs |Unit-level |

| |II: |Setup and inspection |Batch-level |

| |III: |Engineering |Product-sustaining-level |

| |IV: |Plant-related costs |Facility-level |

| |

|2. |Calculation of pool rates: |

| | | | | |

| |I: |Machine-related costs: | | |

| | |[pic] |= |$100 per machine hr. |

| | | | | |

| |II. |Setup and inspection: | | |

| | |[pic] |= |$9,000 per run |

| | | | | |

| |III. |Engineering: | | |

| | |[pic] |= |$1,800 per change order |

| | | | | |

| |IV. |Plant-related costs: | | |

| | |[pic] |= |$100 per sq. ft. |

Problem 5-54 (Continued)

|3. |Unit costs for odds and ends: | |

| | | | | |

| |I: |Machine-related costs: | | |

| | | |Odds: $100 per machine hr. × 8 machine hr. per unit |= |$800 per unit |

| | | |Ends: $100 per machine hr. × 2 machine hr. per unit |= |$200 per unit |

| | | | | | |

| | | | | |

| |II: |Setup and inspection: | | |

| | | |Odds: $9,000 per run ÷ 25 units per run |= |$360 per unit |

| | | |Ends: $9,000 per run ÷ 125 units per run |= |$72 per unit |

| | | | | |

| |III: |Engineering: | | |

| | | |Odds: |[pic] |

| | | | | | | |

| | | |= |[pic] |= |$270 per unit |

| | | |Ends: |[pic] |

| | | |= |[pic] |= |$18 per unit |

| | | |

| |IV. |Plant-related costs: |

| | | |Odds: |[pic] |

| | | |= |[pic] |= |$307.20 per unit |

| | | |Ends: |[pic] |

| | | |= |[pic] |= |$15.36 per unit |

Problem 5-54 (Continued)

|4. |New product cost per unit using the ABC system: |

| | |Odds |Ends |

| |Direct material |$ 160.00 |$240.00 |

| |Direct labor |120.00 |180.00 |

| |Manufacturing overhead: | | |

| | Machine-related |800.00 |200.00 |

| | Setup and inspection |360.00 |72.00 |

| | Engineering |270.00 |18.00 |

| | Plant-related | 307.20 | 15.36 |

| |Total cost per unit |$2,017.20 |$725.36 |

| |

|5. |New target prices: |

| | |Odds |Ends |

| |New product cost (ABC) |$2,017.20 |$725.36 |

| |Pricing policy |(  120% |(  120% |

| |New target price |$2,420.64 |$870.43 |(rounded) |

| | |

|6. |Full assignment of overhead costs: | | |

| | |Odds |Ends |

| |Manufacturing overhead costs: | | |

| | Machine-related |$ 800.00 |$ 200.00 |

| | Setup and inspection |360.00 |72.00 |

| | Engineering |270.00 |18.00 |

| | Plant-related | 307.20 | 15.36 |

| |Total overhead cost per unit |$1,737.20 |$ 305.36 |

| |( Production volume |(  1,000 |(   5,000 |

| |Total overhead assigned |$1,737,200 |$1,526,800 |

| | |Total = $3,264,000 |

Problem 5-54 (Continued)

|7. |Cost distortion: | | |

| | |Odds |Ends |

| |Traditional volume-based costing system: | | | |

| | reported product cost |$ 664.00 | |$996.00 |

| |Activity-based costing system: | | | |

| | reported product cost | 2,017.20 | |  725.36 |

| |Amount of cost distortion per unit |$(1,353.20 |) |$270.64 |

| | | | |

| | |Traditional | |Traditional |

| | |system | |system |

| | |undercosts | |overcosts |

| | |odds by | |ends by |

| | |$1,353.20 | |$270.64 |

| | |per unit | |per unit |

| | | | | |

| | | | | |

| | | | | |

| | | | | |

| | | | | |

| | | | |

| |Production volume |(   1,000 | |(  5,000 |

| |Total amount of cost distortion for entire | | | |

| | product line |$(1,353,200) | |$1,353,200 |

| | | |

| | |Sum of these two |

| | |amounts is zero. |

| | | |

PROBLEM 5-60 (60 minutes)

|1. |Based on the cost data from Gigabyte's traditional, volume-based product-costing system, product G is the firm's least profitable |

| |product. Its reported actual gross margin is only $66.00, as compared with $254.25 and $313.50 for products T and W, respectively. |

| |However, the validity of this conclusion depends on the accuracy of the product costs reported by Gigabyte's product-costing system. |

|2. |Again, based on the product costs reported by the firm's traditional, volume-based product-costing system, product W appears to be |

| |very profitable. As in requirement (1), however, the validity of this assessment depends on the accuracy of the reported product |

| |costs. |

|3. |Gigabyte's competitors have moved aggressively into the market for gismos (product G), but they have abandoned the whatchamacallit |

| |(product W) market to Gigabyte. |

| | |

| | These competing firms apparently believe they can sell gismos at a much lower price than Gigabyte's management feels is feasible. |

| |This evidence suggests that Gigabyte's competitors may believe their product cost for gismos is below Gigabyte's reported product |

| |cost. In contrast, Gigabyte's competitors apparently believe that they cannot afford to sell whatchamacallits at Gigabyte's current |

| |price of $600. Perhaps the competing firms' reported production costs for product W are higher than the cost reported by Gigabyte's |

| |product-costing system. |

| | |

| | The danger to Gigabyte is that the company will be forced out of the market for its second largest selling product. This could be |

| |disastrous to Gigabyte, Inc. |

| | |

|4. |Percentages for raw-material costs: |

| | | | | |Percentage |

| | | | |Annual |of Total |

| | |Raw-Material |Annual |Raw-Material |Raw-Material |

| |Product |Cost per Unit |Volume |Cost |Cost* |

| |G |$105.00 |8,000 |$  840,000 |  25% |

| |T |157.50 |15,000 |2,362,500 |  69% |

| |W |52.50 |4,000 |   210,000 |  6% |

| |Total | | |$3,412,500 |100% |

*Percentages rounded to nearest whole percent.

PROBLEM 5-60 (Continued)

|5. |Product costs based on an activity-based costing system: |

| | |Product |Product |Product |

| | |G |T |W |

| | | | | |

| |Direct material |$105.00 |$157.50 |$ 52.50 |

| |Direct labor |48.00 |36.00 |24.00 |

| |Machinerya |110.25 |122.50 |238.88 |

| |Machine setupb |.43 |.32 |1.89 |

| |Inspectionc |31.50 |46.20 |157.50 |

| |Material handlingd |82.03 |120.75 |39.38 |

| |Engineeringe |  45.25 |   6.90 | 142.21 |

| |Total |$422.46 |$490.17 |$656.36 |

| | | | | | |

| |aMachinery: | | | | | |

| | Product G: |($3,675,000 ( 24%) |( |8,000 units |= |$110.25 |

| | Product T: |($3,675,000 ( 50%) |( |15,000 units |= |$122.50 |

| | Product W: |($3,675,000 ( 26%) |( |4,000 units |= |$238.88 |

| |bMachine setup: | | | | |

| | Product G: |($15,750 ( 22%) |( |8,000 units |= |$  .43 |

| | Product T: |($15,750 ( 30%) |( |15,000 units |= |$  .32 |

| | Product W: |($15,750 ( 48%) |( |4,000 units |= |$ 1.89 |

| |cInspection: | | | | | |

| | Product G: |($1,575,000 ( 16%) |( |8,000 units |= |$ 31.50 |

| | Product T: |($1,575,000 ( 44%) |( |15,000 units |= |$ 46.20 |

| | Product W: |($1,575,000 ( 40%) |( |4,000 units |= |$157.50 |

| |dMaterial handling: | | | | |

| | Product G: |($2,625,000 ( 25%) |( |8,000 units |= |$ 82.03 |

| | Product T: |($2,625,000 ( 69%) |( |15,000 units |= |$120.75 |

| | Product W: |($2,625,000 ( 6%) |( |4,000 units |= |$ 39.38 |

| |eEngineering: | | | | | |

| | Product G: |($1,034,250 ( 35%) |( |8,000 units |= |$ 45.25 |

| | Product T: |($1,034,250 ( 10%) |( |15,000 units |= |$  6.90 |

| | Product W: |($1,034,250 ( 55%) |( |4,000 units |= |$142.21 |

PROBLEM 5-60 (Continued)

|6. |Comparison of reported product costs, new target prices, and actual selling prices: |

| | | | | |

| | |Product |Product |Product |

| | |G |T |W |

| |Reported product costs: | | | |

| | Traditional, volume-based costing system |$573.00 |$508.50 |$286.50 |

| | Activity-based costing system |422.46 |490.17 |656.36 |

| |Target price based on new product costs | | | |

| | (150% × new product cost) |633.69 |735.26 |984.54 |

| |Current actual selling price |639.00 |762.75 |600.00 |

7. The electronic version of the Solutions Manual “BUILD A SPREADSHEET SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website: hilton8e.

PROBLEM 5-61 (20 minutes)

| | |Memorandum |

|Date: |Today |

|To: |President, Gigabyte, Inc. |

|From: |I.M. Student |

|Subject: |Gigabyte's competitive position |

|Gigabyte's product-costing system has been providing misleading product cost information. Our traditional, volume-based costing system |

|overcosted gismos and thingamajigs, but it substantially undercosted whatchamacallits. As a result Gigabyte has been overpricing gismos and |

|thingamajigs and underpricing whatchamacallits. The company has been losing money on every sale in the product W market. Our competitors have |

|taken advantage of our mispricing by moving aggressively into the gismo market and abandoning the whatchamacallit market to Gigabyte. As a |

|result, our profitability has suffered. |

| |I recommend the following courses of action: |

|1. |Implement the new activity-based costing system and revise its database frequently. |

|2. |Lower the target price of gismos to $639, the current actual selling price. This price is slightly over our usual 50 percent markup |

| |over product cost. |

|3. |Consider lowering the price of thingamajigs to $736 in order to increase demand. The lower price still yields Gigabyte a 50 percent |

| |markup over product cost. |

|4. |Raise the price of whatchamacallits to $985. If the product does not sell at that price, consider discontinuing the product line. |

Problem 5-65 (45 minutes)

|1. |Two dimensional ABC: |

Problem 5-65 (Continued)

|2. |Triggers for selected activities: |

| |Activity Number| |

| | |Trigger |

| |(2) |Realization by purchasing personnel that they do not fully understand the part specifications |

| |(9) |Realization by purchasing personnel that the ordered part will be (or may be) late in arriving |

| |(11) |Receipt of order |

| |(12) |Discovery during inspection that parts do not meet specifications |

| |(13) |Discovery that parts do not satisfy intended purpose |

| | |

|3. |Possible root causes: |

| |Activity Number| |

| | |Possible Root Causes* |

| |(2) |Unclear specifications |

| | |Incomplete specifications |

| | |Clear, but apparently wrong, specifications |

| | |Undertrained purchasing personnel |

| | | |

| |(9) |Vendor delay |

| | |Delay in placing order |

| | |Failure by purchasing personnel to make deadline clear |

| | | |

| |(11) |Use of vendor that has not been fully certified as a reliable supplier |

| | |Critical importance of parts |

| | | |

| |(12) |Misspecification of parts |

| | |Error by purchasing personnel in placing order |

| | |Vendor error |

| | |Inspector error |

| | | |

| |(13) |Misspecification of parts |

| | |Incomplete specifications |

| | |Poor product design |

| | |Error by purchasing personnel in placing order |

| | |Vendor error |

| |

| *This list is not necessarily complete. Other root causes may exist. |

Problem 5-65 (Continued)

|4. |Suggested performance measures: |

| |Activity Number| Performance |

| | |Measures |

| |(5) |Average price paid |

| | | |

| |(6) |Number of vendors |

| | |Number of vendors that are precertified as dependable |

| | | |

| |(10) |Percentage of orders received on time |

| | |Average delay for delinquent orders |

| | | |

| |(12) |Number of orders returned |

| | |Percentage of orders returned |

| | | |

| |(16) |Average dollar value tied up in parts inventory |

PROBLEM 5-66 (40 MINUTES)

1. Customer-profitability analysis:

| |Caltex Computer |Trace Telecom |

|Sales revenue |$380,000 |$247,600 |

|Cost of goods sold | 160,000 | 124,000 |

|Gross margin |$220,000 |$123,600 |

|Selling and administrative costs: | | |

|General selling costs |$ 48,000 |$ 36,000 |

|General administrative costs |38,000 |32,000 |

|Customer-related costs: | | |

|Sales activity |16,000 |12,000 |

|Order taking |6,000 |8,000 |

|Special handling |80,000 |60,000 |

|Special shipping | 18,000 | 20,000 |

|Total selling and administrative costs |$206,000 |$168,000 |

|Operating income |$ 14,000 |$ (44,400) |

Problem 5-66 (Continued)

2. The electronic version of the Solutions Manual “BUILD A SPREADSHEET SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website: hilton8e.

PROBLEM 5-67 (45 MINUTES)

1. Customer-profitability profile (supporting details in the table following the profile):

Cumulative Operating Income as a

Percentage of Total Operating Income

*Customers ranked by operating income.

PROBLEM 5-67 (CONTINUED)

Supporting details for customer-profitability profile:

|Customer Numbera |Customer |Operating Income |Cumulative Operating |Cumulative Operating |

| | | |Income |Income as a Percentage of|

| | | | |Total Operating Income |

|(1) |Network-All, Inc. |$186,000 |$186,000 |39% |

|(2) |Golden Gate Service Associates |142,000 |328,000 |69% |

|(3) |Graydon Computer Company |120,000 |448,000 |94% |

|(4) |Mid-State Computing Company |84,000 |532,000 |111% |

|(5) |Caltex Computerb |14,000 |546,000 |114% |

|(6) |The California Group |12,000 |558,000 |117% |

|(7) |Tele-Install, Inc. |(36,000) |522,000 |109% |

|(8) |Trace Telecomc |(44,400) |477,600 |100% |

aCustomer numbers are ranked by operating income.

bFrom solution to preceding problem.

cFrom solution to preceding problem.

2. Memorandum

Date: Today

To: I. Sellit, Vice President for Marketing

From: I. M. Student

Subject: Customer-profitability profile

The attached customer-profitability profile shows that two of our customer relationships are unprofitable (Tele-Install, Inc. and Trace Telecom). As the profile shows, over half of our operating income is generated by our two most profitable customer relationships, and 94 percent of our operating profit is generated by our three most profitable customers.

An activity-based costing analysis of customer-related costs provided the data for the customer-profitability analysis portrayed in the profile.

SOLUTIONS TO CASES

CASE 5-68 (45 minutes)

|1. |Activity-based costing (ABC) differs from traditional costing in that it focuses on activities that consume resources as the fundamental |

| |cost drivers. ABC is a two-stage cost assignment process focused on causality and the determination of cost drivers. It usually uses several|

| |different activities to assign costs to products or services. Therefore, it is more detailed and more accurate than traditional costing. It |

| |also helps managers distinguish between value added and non-value added activities. |

| | |

|2. |Calculations of total activity cost pools and pool rates: |

| | |

| |Material handling |($113,208 ( 1.06) ( [(5 parts ( 5,000 units) + (10 parts ( 5,000 units)] |

| | |= $120,000* ( (25,000 parts + 50,000 parts) |

| | |= $120,000 ( 75,000 parts = $1.60 per part |

| | | |

| | |*Rounded |

| | | |

| |Inspection |($235,850 ( 1.06) ( (5,000 hours + 7,500 hours) |

| | |= $250,000* ( 12,500 hours = $20 per inspection hour |

| | | |

| | |*Rounded |

| |Machining |($849,056 ( 1.06) ( (15,000 hours + 30,000 hours) |

| | |= $900,000* ( 45,000 hours = $20 per machine hour |

| | | |

| | |*Rounded |

| | | |

| |Assembly |($433,962 ( 1.06) ( (6,000 hours + 5,500 hours) |

| | |= $460,000* ( 11,500 hours = $40 per assembly hour |

| | | |

| | |*Rounded |

| | | |

CASE 5-68 (Continued)

|3. | | | | |

| |JY-63 |JY-63 |RX-67 |RX-67 |

| | |Estimated | |Estimated |

| |20x4 |20x5 |20x4 |20x5 |

| |Cost |Product |Cost |Product |

| |Data |Cost |Data |Cost |

|Direct material: | | | | |

| No cost increase | |$2,000,000 | |$3,500,000 |

|Direct labor: | | | | |

| Direct labor |$370,370 | |$185,186 | |

| ( 1.08 cost increase* | |400,000 | |200,000 |

|Material handling: | | | | |

| Number of parts |5 | |10 | |

| ( units produced |(  5,000 | |( 5,000 | |

| |25,000 | |50,000 | |

| ( $1.60 per unit | |40,000 | |80,000 |

|Inspection: | | | | |

| Inspection hours |5,000 | |7,500 | |

| ( $20 per hour | |  100,000 | |   150,000 |

|Machining: | | | | |

| Machining activity in hours |15,000 | |30,000 | |

| ( $20 per hour | |300,000 | |600,000 |

|Assembly: | | | | |

| Assembly activity in hours |6,000 | |5,500 | |

| ( $40 per hour | |240,000 | |220,000 |

| | | | | |

|Total cost | |$3,080,000 | |$4,750,000 |

*$400,000 and $200,000 are both rounded.

CASE 5-68 (Continued)

|4. |Cincinnati Cycle Company |

| |Budgeted Statement of Gross Margin for 20x5 |

| | |

| | | |JY-63 |RX-67 |Total |

| |Sales revenue |$3,621,000 |$4,459,000 |$8,080,000 |

| |Cost of goods manufactured and sold: | | | |

| |Beginning finished-goods inventory |$  480,000 |$ 600,000 |$1,080,000 |

| |Add: |Direct material |2,000,000 |3,500,000 |5,500,000 |

| | |Direct labor |400,000 |200,000 |600,000 |

| | |Material handling |40,000 |80,000 |120,000 |

| | |Inspection | 100,000 | 150,000 | 250,000 |

| | |Machining |300,000 |600,000 |900,000 |

| | |Assembly |240,000 |220,000 |460,000 |

| |Cost of goods available for sale |$3,560,000 |$5,350,000 |$8,910,000 |

| |Less: |Ending finished-goods inventory* | 431,200 | 665,000 | 1,096,200 |

| |Cost of goods sold |$3,128,800 |$4,685,000 |$7,813,800 |

| |Gross margin |$ 492,200 |$ (226,000) |$ 266,200 |

| | | | | |

| *Ending finished-goods inventory = (total product cost [pic] units produced) ( ending inventory in units: |

| |

|JY-63: ($3,080,000 ( 5,000 units) ( 700 units = $431,200 |

| |

|RX-67: ($4,750,000 ( 5,000 units) ( 700 units = $665,000 |

| |CASE 5-69 (60 MINUTES) | | | |

| | | | | |

|1. | | | | |

| | |Regular Model |Advanced Model |Deluxe Model |

| |Product costs based on traditional, volume- | | | |

| | based costing system |$210.00 |$430.00 |$464.00   |

| |× 110% |( 110% |( 110% |( 110%   |

| |Target price |$231.00 |$473.00 |$510.40   |

| | | | |

|2. |Product costs based on activity-based costing system: | | |

| | |Regular Model |Advanced Model |Deluxe Model |

| |Direct material |$ 20.00 |$ 50.00 |$ 84.00 |

| |Direct labor |20.00 |40.00 |40.00 |

| |Machinery depreciation and maintenancea |62.40 |416.00 |153.60 |

| |Engineering, inspection and | | | |

| | repair of defectsb |34.08 |87.00 |68.15 |

| |Purchasing, receiving, shipping, and | | | |

| | material handlingc |30.55 |104.00 |58.50 |

| |Factory depreciation, taxes, insurance, | | | |

| | and miscellaneous overhead costsd |24.99 | 178.50 |  51.17 |

| |Total |$192.02 |$875.50 |$455.42 |

| | |

| |aPool I: |

| | Depreciation, machinery |$2,960,000 |

| | Maintenance, machinery |   240,000 |

| | Total |$3,200,000 |

| | | | | | | |

| | Regular: |($3,200,000 × 39%) |( |20,000 |= |$ 62.40 |

| | Advanced: |($3,200,000 × 13%) |( |1,000 |= |$416.00 |

| | Deluxe: |($3,200,000 × 48%) |( |10,000 |= |$153.60 |

CASE 5-69 (continued)

| |bPool II: | |

| | Engineering |$ 700,000 |

| | Inspection and repair of defects |  750,000 |

| | Total |$1,450,000 |

| | | | | | | |

| | Regular: |($1,450,000 ( 47%) |( |20,000 |= |$ 34.08 |

| | Advanced: |($1,450,000 (  6%) |( |1,000 |= |$ 87.00 |

| | Deluxe: |($1,450,000 ( 47%) |( |10,000 |= |$ 68.15 |

| | | | | | | |

| |cPool III: | |

| | Purchasing, receiving, and shipping |$ 500,000 |

| | Material handling |  800,000 |

| | Total |$1,300,000 |

| | | | | | | |

| | Regular: |($1,300,000 ( 47%) |( |20,000 |= |$ 30.55 |

| | Advanced: |($1,300,000 (  8%) |( |1,000 |= |$104.00 |

| | Deluxe: |($1,300,000 ( 45%) |( |10,000 |= |$ 58.50 |

| | | | | | | |

| |dPool IV: | |

| | Depreciation, taxes, and insurance for factory |$ 600,000 |

| | Miscellaneous manufacturing overhead |  590,000 |

| | Total |$1,190,000 |

| | | | | | | |

| | Regular: |($1,190,000 ( 42%) |( |20,000 |= |$ 24.99 |

| | Advanced: |($1,190,000 ( 15%) |( |1,000 |= |$178.50 |

| | Deluxe: |($1,190,000 ( 43%) |( |10,000 |= |$51.17 |

|3. | |

| | |Regular Model |Advanced |Deluxe Model |

| | | |Model | |

| |Product costs based on activity-based | | | |

| | costing system |$192.02 |$875.50 |$455.42 |

| |× 110% |( 110% |( 110% |( 110% |

| |New target price |$211.22 |$963.05 |$500.96 |

| | | | | |

| |The new target price of the regular model, $211.22, is lower than the current actual selling price, $220. |

CASE 5-69 (Continued)

|4. |Memorandum |

| | |

| |Date: |Today |

| | | |

| |To: |President Madison Electric Pump Corporation |

| | | |

| |From: |I.M. Student |

| | | |

| |Subject: |Product costing |

| | |

| |Based on the cost data from our traditional, volume-based product-costing system, our regular model is not very profitable. Its |

| |reported actual contribution margin is only $10 ($220 – $210). However, the validity of this conclusion depends on the accuracy of |

| |the product costs reported by our product-costing system. Our competitors are selling motors like our standard model for $212. This |

| |price suggests that their product cost is substantially below our previously reported cost of $210. |

| | |

| | Our new, activity-based costing system reveals serious product cost distortions stemming from our old costing system. The new |

| |costing system shows that the regular model costs only $192.02, which implies a target price of $211.22. This price is lower than our|

| |current actual selling price and roughly consistent with the price our competitors are charging. |

| | |

| | In contrast, our new product-costing system reveals that the advanced model's product cost is $875.50 instead of the previously |

| |reported cost of $430. The new product cost suggests a target price of $963.05 for the advanced model, rather than $473, which was |

| |our previous target price for the advanced model. |

| | |

CASE 5-69 (continued)

|5. |The company should adopt and maintain the activity-based costing system. The price of the regular model should be lowered to the |

| |$212. Lowering the price should enable the firm to regain its competitive position in the market for the regular model. Further price|

| |cuts should be considered if marketing studies indicate such a move will increase demand. |

| | |

| | The price of the advanced model should be set near the target price of $963.05. If the advanced model does not sell at this price, |

| |management should consider discontinuing the product line. Input from the marketing staff should be sought before such an action is |

| |taken. An important consideration is the extent to which sales in the regular model and deluxe model markets depend on the firm's |

| |offering a complete product line. |

| | |

| | A slight price reduction should be considered for the deluxe model (from $510.40 down to $500.96). However, the product cost |

| |distortion from the old costing system did not affect this model as seriously as it did the other two. |

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Activity

Triggers

(see req. (2) for examples)

Root

Causes

(see req. (3) for examples)

Activities

Cost Objects

(Product lines: cooking

utensils, tableware, flatware)

Assignment of activity

costs to cost objects

using second-stage

cost drivers

Performance

Measures

(see req. (4) for examples)

Activity evaluation

Activity analysis

Process View

Assignment of resource costs

to activity cost pools

associated with

significant activities

Resource Costs

Cost Assignment View

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11 12

Customers*

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