Kenzie Sorensen, controller of Riqueza Company, has been helping an outside consult¬

ing group install an activity-based cost management system. This new accounting sys¬

tem is designed to support the company's efforts to become more competitive (by creat¬

ing a competitive advantage). For the past two weeks, she has been identifying activities, associating workers with activities, and assessing the time and resources consumed by individual activities. Now she and the consulting group have entered into the fourth phase of activity analysis: assessing value content. At this stage, Kenzie and the consul¬

tants also plan to identify drivers for assigning costs to cost objects. Furthermore, as a preliminary step to improving activity efficiency, they decided to identify potential root causes of activity costs. Kenzie's current assignment is to assess the value content of five activities, choose a suitable activity driver, and identify the possible root causes of the activities. Following are the five activities she is investigating along with possible activ¬

ity drivers:

Kenzie ran a regression analysis for each potential activity driver, using the method of least squares to estimate the variable and fixed-cost components. In all five cases, costs were highly correlated with the potential drivers. Thus, all drivers appeared to be good candi¬
dates for assigmng costs to products. The company plans to reward production managers for reducing product costs.
Required:
1. For each activity, assess the value content and classify each activity as value-added or nonvalue-added (justify the classification). Identify some possible root causes of each activity and describe how this knowledge can be used to improve activity management.
For purposes of discussion, assume that the value-added activities are not performed with perfect efficiency.
2. Describe the behavior that each activity driver will encourage, and evaluate the suit¬
ability of that behavior for the company's objective of creating a sustainable competi¬
tive advantage.

Transcribed Image Text:

Activity Setting up equipment Creating scrap* Welding subassemblies Material handling Inspecting parts Possible Activity Drivers Setup time, number of setups Pounds of scrap, number of defective units Welding hours, subassemblies welded Number of moves, distance moved Hours of inspection, number of defective parts *Scrap is defined as a bad product or subassembly that cannot be reworked and so must be discarded.