Cost hierarchy. Telecom Inc. manufactures boom boxes (music systems with radio, cassette, and compact disc players) for different well-known companies. The boom boxes differ signif¬

icantly in their complexity and the batch sizes in which they are manufactured. The following costs were incurred in 2007:

a. Designing processes, drawing process charts, making engineering process changes for prod¬

ucts, $960,000

b. Procurement costs of placing purchase orders, receiving materials, and paving suppliers that are related to the number of purchase orders placed, $600,000 CHAPTER 5

c. Direct materials costs, $7,200,000

d. Costs incurred to set up machines each time a different product needs to be manufactured, $720,000

e. Direct manufacturing labour costs, $1,200,000

f. Machine-related overhead costs such as amortization, maintenance, production engineering, $1,320,000. These resources are related to the activity ofrunning the machines.
g. Plant management, plant rent, and insurance, $1,080,000 Required 1. Classify each of the preceding costs as output unit level, batch level, product sustaining, or facility sustaining. Explain your answers.
2. Consider two boom boxes made by Telecom Inc. One boom box is complex to make and is made in many batches. The other boom box is simple to make and is made in few batches.
$uppose that Telecom needs the same number of machine-hours to make either boom box. If Telecom allocated all overhead costs using machine-hours as the only allocation base, how, if at all, would the boom boxes be miscosted? Briefly explain why.
3. How is the cost hierarchy helpful to Telecom in managing its business?