Question
Activity-Based Cost Analysis Hayvice first identified six categories of support expenses that were currently being allocated to pen production: EXPENSE CATEGORY EXPENSE Indirect labour $25,000
Activity-Based Cost Analysis
Hayvice first identified six categories of support expenses that were currently being allocated to pen production:
EXPENSE CATEGORY | EXPENSE |
Indirect labour | $25,000 |
Fringe Benefits | 15,000 |
Computer systems | 10,000 |
Machinery | 9,000 |
Maintenance | 3,000 |
Energy | 3,000 |
Total | $65,000 |
She determined that fringe benefits were 40% of labour expenses (both direct and indirect) and would thus represent just a percentage markup to be applied on top of direct and indirect labor charges.
Hayvice interviewed department heads in charge of indirect labor and found that three main activities accounted for their work. About half of the indirect labour was involved in scheduling or handling production runs. This proportion included scheduling production orders: purchasing, preparing and releasing materials for the production run; performing a first-item inspection every time the process was changed over, and some scrap loss at the beginning of each run until the process settled down. Another 40% of indirect labour was required just for the physical changeover from one colour pen to another.
The time to change over to BLACK pens was relatively short (about 1 hour) since the previous colour did not have to be completely eliminated from the machinery. Other colours required longer changeover times; RED pens required the most extensive changeover to meet the demanding quality specification for this colour.
The remaining 10% of the time was spent maintaining records on the four products, including the bill of materials and routing information, monitoring and maintaining a minimum supply of raw materials and finished goods inventory for each product, improving the production processes, and performing engineering changes for the products. Hayvice also collected information on potential activity cost drivers for Moderns activities (see Exhibit 2) and the distribution of the cost drivers for each of the four products. Hayvice next turned her attention to the $10,000 of expenses to operate the companys computer system. She interviewed the managers of the Data Center and the Management Information System departments and found that most of the computers time (and software expense) was used to schedule production runs in the factory and to order and pay for the materials required in each production run.
Because each production run was made for a particular customer, the computer time required to prepare shipping documents and to invoice and collect from a customer was also included in this activity. In total, about 80% of the computer resource was involved in the production run activity. Almost all of the remaining computer expense (20%) was used to keep records on the four products, including production process and associated engineering change notice information.
The remaining three categories of overhead expense (machine depreciation, machine maintenance, and the energy to operate the machines) were incurred to supply machine capacity to produce the pens. The machines had a practical capacity of 10,000 hours of productive time that could be supplied to pen production.
Hayvice believed that she now had the information she needed to estimate an activity-based cost model for Modern Pen.
other parts in previous and some more parts to come
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