Cornerstone Exercise 11.4 (Algorithmic) Activity-Based Life-Cycle Costing

Kagle design engineers are in the process of developing a new green product, one that will significantly reduce impact on the environment and yet still provide the desired customer functionality. Currently, two designs are being considered. The manager of Kagle has told the engineers that the cost for the new product cannot exceed $500 per unit (target cost). In the past, the Cost Accounting Department has given estimated costs using a unit-based system. At the request of the Engineering Department, Cost Accounting is providing both unit- and activity-based accounting information (made possible by a recent pilot study producing the activity-based data).

Unit-based system: Variable conversion activity rate: $120 per direct labor hour Material usage rate: $25 per part ABC system: Labor usage: $20 per direct labor hour Material usage (direct materials): $25 per part Machining: $90 per machine hour Purchasing activity: $180 per purchase order Setup activity: $3,800 per setup hour Warranty activity: $500 per returned unit (usually requires extensive rework) Customer repair cost: $25 per repair hour (average)

Activity and Resource Information (annual estimates)

Design A Design B Units produced 25,000 25,000 Direct material usage 340,000 parts 315,000 parts Labor usage 60,000 hours 130,000 hours Machine hours 60,000 70,000 Purchase orders 3,000 2,500 Setup hours 750 350 Returned units 1,100 250 Repair time (customer) 2,400 700

Required:

1. Select the lower-cost design using unit-based costing. - Select your answer - Design A Design B Item 1

Are logistical and post-purchase activities considered in this analysis? - Select your answer - Yes No Item 2

2. Select the lower-cost design using ABC analysis. - Select your answer - Design A Design B Item 3

3. What if the post-purchase cost was an environmental contaminant and amounted to $20 per unit for Design A and $40 per unit for Design B? Compute the Post-purchase cost for each design.

Post-Purchase Cost Design A $ Design B $

Assume that the environmental cost is borne by society. Now which is the better design?