6. A company makes and sells three technology products: A, B, and C. It has a pro- duction plant with 17,000 square feet of floor area, consisting of machine setup (2000 square feet), machining operation (9000 square feet), assembly (4000 square feet), and inspection, packaging, and shipping activities (2000 square feet). The total annual expenditure for the plant is $200,000 for depreciation, $700,000 for utilities, $20,000 for phone and travel services, S150,000 for manufacturing sup- ports, 5200,000 for procurement, and $150,000 for supervision The labor hours and material costs required to manufacture the products are shown in Table 6.17 The labor charges are $25 per hour for machine setup, $35 per hour for machin- ing operation, $30 per hour for assembly, and $20 per hour for inspection, packing, and shipping The company plans to sell Product A at $5000 per unit, Product B at $4,500 per unit and Product Cat S4,100 per unit. All products manufactured during the year TABLE 6.16 Product Costs Product A Products 400 800 Number of units produced per month Total material costs per month (5) Labor hours per unit Laborrate per unit (5 per hour) Machine hour per unit thour) Product 900 4000 1.5 S000 4 25 1 20 1 3 TABLE 6.17 Manufacturing Costs for Three Products B A 2 16 4 3 12 3 2 Machine setup hours) Machine operation hours) Assembly hours) Inspection/packing/shipment (hours) Raw materials/unit of product (5) Purchased components/unit of product (5) Outsourced service/unit of product (5) Number of units produced per your 4 8 2 2 640 90 100 700 are assumed to be sold successfully. Apply the activity-based costing technique to determine the product cost and individual gross margin for each product. 6.2.3 Activity-Based Costing ABC is a cost accounting technique by which indirect and administrative support costs are traced to activitles and processes and then to the cost objects (eg, products, services, and customers) (Hicks 2002). ABC is built on the notion that an organization has to perform certain activities in order to generate products and services. These activities cost money. The cost of each of these activities is only measured by and assigned to those products or services requiring iden- tiflable activities and using appropriate assignment bases (called cost drivers). The results of ABC analyses offer a relatively more accurate picture of the real cost of each product or service, including the cost of serving customers. Nonactivity costs (such as DM, DL, or direct outside services do not need to be included because these costs are readily attribut- able to the specific product or service under consideration. ABC is most useful for companies with diverse products, service centers, channels, and customers, and for those companies whose overhead costs represent a large percentage of their overall product and service costs (Maingi 2013; Moore 2012). All managers should learn to practice ABC, because the traditional method of allocat- ing overhead uses only high-level information about costs, and the general ledger system does not provide information related to time and resources spent on assignments and activities. In contrast, a well-practiced ABC method offers specific insights that include (a) a clearer picture for management of what generates profits and losses for the com- pany; (b) the ability to track operating profits for specific cost objects (such as customers, orders, and products); (c) the ability to determine whether a service center is efficient or deficient; and (d) the possibility of identifying the relative profitability among products and customers. A company may lose money on some products, orders, and customers even with an overall documentable profitability, when the financial data are hidden in the absence of ABC. According to the published best practices of some industrial pioneers (such as Honeywell Inc. and Coca-Cola) on the use of ABC, simpler ABC models deliver better results. ABC has become increasingly popular with industrial companies, partly because it is useful for organizations of any size and does not require a massive effort to imple ment, and partly because of increased processing capabilities of personal computers (PCS), reduced prices for ABC software products, and increased competition forcing companies to achieve a better understanding of their own product costs. ABC software for Microsoft Excel is marketed by MrDashboard.com. There are also comprehensive ABC management tools on the market. Examples include: (1) Profitability and Cost Management (PCM) by SAP, Hyperion Profitability and Cost Management (HPCM) by Oracle, and (3) SAP Activity-Based Cost Management by SAP. 6. A company makes and sells three technology products: A, B, and C. It has a pro- duction plant with 17,000 square feet of floor area, consisting of machine setup (2000 square feet), machining operation (9000 square feet), assembly (4000 square feet), and inspection, packaging, and shipping activities (2000 square feet). The total annual expenditure for the plant is $200,000 for depreciation, $700,000 for utilities, $20,000 for phone and travel services, S150,000 for manufacturing sup- ports, 5200,000 for procurement, and $150,000 for supervision The labor hours and material costs required to manufacture the products are shown in Table 6.17 The labor charges are $25 per hour for machine setup, $35 per hour for machin- ing operation, $30 per hour for assembly, and $20 per hour for inspection, packing, and shipping The company plans to sell Product A at $5000 per unit, Product B at $4,500 per unit and Product Cat S4,100 per unit. All products manufactured during the year TABLE 6.16 Product Costs Product A Products 400 800 Number of units produced per month Total material costs per month (5) Labor hours per unit Laborrate per unit (5 per hour) Machine hour per unit thour) Product 900 4000 1.5 S000 4 25 1 20 1 3 TABLE 6.17 Manufacturing Costs for Three Products B A 2 16 4 3 12 3 2 Machine setup hours) Machine operation hours) Assembly hours) Inspection/packing/shipment (hours) Raw materials/unit of product (5) Purchased components/unit of product (5) Outsourced service/unit of product (5) Number of units produced per your 4 8 2 2 640 90 100 700 are assumed to be sold successfully. Apply the activity-based costing technique to determine the product cost and individual gross margin for each product. 6.2.3 Activity-Based Costing ABC is a cost accounting technique by which indirect and administrative support costs are traced to activitles and processes and then to the cost objects (eg, products, services, and customers) (Hicks 2002). ABC is built on the notion that an organization has to perform certain activities in order to generate products and services. These activities cost money. The cost of each of these activities is only measured by and assigned to those products or services requiring iden- tiflable activities and using appropriate assignment bases (called cost drivers). The results of ABC analyses offer a relatively more accurate picture of the real cost of each product or service, including the cost of serving customers. Nonactivity costs (such as DM, DL, or direct outside services do not need to be included because these costs are readily attribut- able to the specific product or service under consideration. ABC is most useful for companies with diverse products, service centers, channels, and customers, and for those companies whose overhead costs represent a large percentage of their overall product and service costs (Maingi 2013; Moore 2012). All managers should learn to practice ABC, because the traditional method of allocat- ing overhead uses only high-level information about costs, and the general ledger system does not provide information related to time and resources spent on assignments and activities. In contrast, a well-practiced ABC method offers specific insights that include (a) a clearer picture for management of what generates profits and losses for the com- pany; (b) the ability to track operating profits for specific cost objects (such as customers, orders, and products); (c) the ability to determine whether a service center is efficient or deficient; and (d) the possibility of identifying the relative profitability among products and customers. A company may lose money on some products, orders, and customers even with an overall documentable profitability, when the financial data are hidden in the absence of ABC. According to the published best practices of some industrial pioneers (such as Honeywell Inc. and Coca-Cola) on the use of ABC, simpler ABC models deliver better results. ABC has become increasingly popular with industrial companies, partly because it is useful for organizations of any size and does not require a massive effort to imple ment, and partly because of increased processing capabilities of personal computers (PCS), reduced prices for ABC software products, and increased competition forcing companies to achieve a better understanding of their own product costs. ABC software for Microsoft Excel is marketed by MrDashboard.com. There are also comprehensive ABC management tools on the market. Examples include: (1) Profitability and Cost Management (PCM) by SAP, Hyperion Profitability and Cost Management (HPCM) by Oracle, and (3) SAP Activity-Based Cost Management by SAP