EXHIBITS:
Assignment Questions
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Determine the best base for allocating plant-administration costs.
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Calculate the ABC costs for each product on a per-box basis.
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What do these results tell you about activity-based costing versus costing based on standard volume or direct materials plus direct labor?
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What changes, if any, should management make to Zauners pricing strategy?
Ornaments Sales Price per Box per Box* Small glass ball ornaments Large glass ball ornaments Specialty glass ball ornaments 12 6 1 $9.00 $11.00 $17.00 *Note: All monetary amounts are expressed in U.S. dollars In the third week of January, Yu called the sales department to inquire about price-setting procedures for the different product lines. She quickly discovered that the sales department investigated the prices of similar products available in the marketplace and set Zauner's prices accordingly. Yu knew that the company was profitable overall, but wondered if the prices set by the sales department were sufficient to ensure that the individual product lines were profitable. She decided to have one of her senior analysts, Yung Chen, prepare an analysis of unit-product costs for each of Zauner's three products. She thought this might be helpful in determining whether any adjustments in the product prices were warranted. To assist Chen in his task, Yu provided him with a schedule of the factory's annual overhead costs, as follows: Overhead Item Annual Cost Production scheduling Machine setups Equipment depreciation Plant depreciation Quality inspection Packing Plant administration $ 85,000 160,000 220,000 150,000 70,000 185,000 300,000 Total overhead $1,170,000 Later that day, Chen returned to Yu's office with a schedule showing his calculation of product costs for each of Zauner's three products (Exhibit 1). Chen calculated the cost per box for each product, using a traditional volume-based costing system. Budgeted overhead was allocated to each product line, based on the planned production of ornaments. Chen and Yu were dismayed by the results of Chen's analysis; according to his calculations, Zauner was selling small glass ornaments for $9.00 a box, but it was costing the company $21.12 a box to produce those ornaments! Exhibit 1 ZAUNER ORNAMENTS Calculation of Product Costs: Volume-Based Costing System Ornaments DM & DL Total Cost Number of Ornaments Number of Boxes Total DM & DL Allocated Overhead Product per Box per Box Total Cost per Box $ $ Small colored glass Large colored glass Specialty ornaments 420,000 300,000 100,000 12 6 1 35,000 50,000 100,000 A A A 4.00 5.00 7.00 140,000 250,000 700,000 599,268 428,049 142,683 739,268 678,049 842,683 $ 21.12 $ 13.56 $ 8.43 820,000 185,000 $ 1,090,000 $ 1,170,000 $ 2,260,000 ZAUNER ORNAMENTS Calculation of Product Costs: DM- and DL-Based Costing System Ornaments DM & DL Total Cost Number of Ornaments Number of Boxes Total DM & DL Allocated Overhead Product per Box per Box Total Cost per Box $ Small colored glass Large colored glass Specialty ornaments 420,000 300,000 100,000 12 6 1 35,000 50,000 100,000 $ $ 4.00 5.00 7.00 140,000 250,000 700,000 $ 150,275 $ 268,349 $ 751,376 $ 290,275 518,349 1,451,376 $ 8.29 $ 10.37 $ 14.51 820,000 185,000 $ 1,090,000 $ 1,170,000 $ 2,260,000 ZAUNER ORNAMENTS Activity Data by Product Ornaments Machine Operations per Ornament Number of Ornaments Inspections Number of Batches Sq. Footage Per Box Product per Box per Box Small colored glass Large colored glass Specialty ornaments 420,000 300,000 100,000 800 750 500 4 4 5 12 6 1 1 2 4 1 0.5 0.2 ZAUNER ORNAMENTS Historical Five-Year Plant-Administration Costs and Other Data 2003 2002 2001 2000 1999 Total Plant Administration Costs $300,000 295,000 285,000 280,000 290,000 Ending Inventory Cost $90,000 83,000 58,000 50,000 76,000 Plant Personnel 122 122 119 112 116 Number of Customers 1200 1250 1100 800 600 Total Direct Labor Costs $520,000 515,000 555,000 540,000 500,000 % of Plant Capacity Used 70% 75% 85% 90% 95% ZAUNER ORNAMENTS Plant Data by Product Line Small Colored Glass Ornaments Large Colored Glass Ornaments Specialty Ornaments Total Ending inventory costs $26,100 $51,300 $12,600 $90,000 Plant personnel: Non-specialty Specialty (painting) N/A N/A N/A 24 98 24 Number of customers 600 420 180 1,200 Total direct labor costs $83,200 $93,600 $343,200 $520,000 % Plant capacity used N/A N/A NA 70% Ornaments Sales Price per Box per Box* Small glass ball ornaments Large glass ball ornaments Specialty glass ball ornaments 12 6 1 $9.00 $11.00 $17.00 *Note: All monetary amounts are expressed in U.S. dollars In the third week of January, Yu called the sales department to inquire about price-setting procedures for the different product lines. She quickly discovered that the sales department investigated the prices of similar products available in the marketplace and set Zauner's prices accordingly. Yu knew that the company was profitable overall, but wondered if the prices set by the sales department were sufficient to ensure that the individual product lines were profitable. She decided to have one of her senior analysts, Yung Chen, prepare an analysis of unit-product costs for each of Zauner's three products. She thought this might be helpful in determining whether any adjustments in the product prices were warranted. To assist Chen in his task, Yu provided him with a schedule of the factory's annual overhead costs, as follows: Overhead Item Annual Cost Production scheduling Machine setups Equipment depreciation Plant depreciation Quality inspection Packing Plant administration $ 85,000 160,000 220,000 150,000 70,000 185,000 300,000 Total overhead $1,170,000 Later that day, Chen returned to Yu's office with a schedule showing his calculation of product costs for each of Zauner's three products (Exhibit 1). Chen calculated the cost per box for each product, using a traditional volume-based costing system. Budgeted overhead was allocated to each product line, based on the planned production of ornaments. Chen and Yu were dismayed by the results of Chen's analysis; according to his calculations, Zauner was selling small glass ornaments for $9.00 a box, but it was costing the company $21.12 a box to produce those ornaments! Exhibit 1 ZAUNER ORNAMENTS Calculation of Product Costs: Volume-Based Costing System Ornaments DM & DL Total Cost Number of Ornaments Number of Boxes Total DM & DL Allocated Overhead Product per Box per Box Total Cost per Box $ $ Small colored glass Large colored glass Specialty ornaments 420,000 300,000 100,000 12 6 1 35,000 50,000 100,000 A A A 4.00 5.00 7.00 140,000 250,000 700,000 599,268 428,049 142,683 739,268 678,049 842,683 $ 21.12 $ 13.56 $ 8.43 820,000 185,000 $ 1,090,000 $ 1,170,000 $ 2,260,000 ZAUNER ORNAMENTS Calculation of Product Costs: DM- and DL-Based Costing System Ornaments DM & DL Total Cost Number of Ornaments Number of Boxes Total DM & DL Allocated Overhead Product per Box per Box Total Cost per Box $ Small colored glass Large colored glass Specialty ornaments 420,000 300,000 100,000 12 6 1 35,000 50,000 100,000 $ $ 4.00 5.00 7.00 140,000 250,000 700,000 $ 150,275 $ 268,349 $ 751,376 $ 290,275 518,349 1,451,376 $ 8.29 $ 10.37 $ 14.51 820,000 185,000 $ 1,090,000 $ 1,170,000 $ 2,260,000 ZAUNER ORNAMENTS Activity Data by Product Ornaments Machine Operations per Ornament Number of Ornaments Inspections Number of Batches Sq. Footage Per Box Product per Box per Box Small colored glass Large colored glass Specialty ornaments 420,000 300,000 100,000 800 750 500 4 4 5 12 6 1 1 2 4 1 0.5 0.2 ZAUNER ORNAMENTS Historical Five-Year Plant-Administration Costs and Other Data 2003 2002 2001 2000 1999 Total Plant Administration Costs $300,000 295,000 285,000 280,000 290,000 Ending Inventory Cost $90,000 83,000 58,000 50,000 76,000 Plant Personnel 122 122 119 112 116 Number of Customers 1200 1250 1100 800 600 Total Direct Labor Costs $520,000 515,000 555,000 540,000 500,000 % of Plant Capacity Used 70% 75% 85% 90% 95% ZAUNER ORNAMENTS Plant Data by Product Line Small Colored Glass Ornaments Large Colored Glass Ornaments Specialty Ornaments Total Ending inventory costs $26,100 $51,300 $12,600 $90,000 Plant personnel: Non-specialty Specialty (painting) N/A N/A N/A 24 98 24 Number of customers 600 420 180 1,200 Total direct labor costs $83,200 $93,600 $343,200 $520,000 % Plant capacity used N/A N/A NA 70%
