I already did the calculations I just need the qualitative questions answered.
- Calculate Activity Cost Pools for each activity.
- Explain how each cost pool can be interpreted in terms of how costly each overhead activity is.
- Calculate Activity Rates for each activity cost pool.
- Explain how each rate can be interpreted in terms of how costly each activity is.
- Comment on the strengths and weaknesses of Mr. Stephens' selection of cost drivers. Identify several theoretical alternatives, and comment on their validity.
- Using the direct labor hour-based manufacturing overhead rate to calculate and assess the profitability of each product line.
- Using the Activity Rates you derive above using Mr. Stephens' cost drivers, re-calculate the average unit product margin for the Custom Design and Standard Design fuel pressure regulators.
- Compare the product margins using activity-based costing with those calculated using the status quo method. Comment on the accuracy of each estimate.
- Which method would you recommend Mr. Stephens use for establishing a selling price for new orders? Why?
- Strategically, comment on whether Mr. Stephens should promote the sales of Custom Designs or Standard Design fuel pressure regulators. Explain your rationale.
Activity-based Management Case Data: Product Labor Customer Cost Design Support Automation Relations Other Total Production Department Indirect Labor $ 2,000,000 5% 75% 10% 0% 10% 100% Material Planning & Logistics 1,200,000 10% 40% 45% 0% 5% 100% Plant Facilities Expense 1,800,000 5% 25% 60% 0% 10% 100% Depreciation Expense 3,500,000 10% 4% 70% 0% 16% 100% Total Production Dept Expense $ 8,500,000 Selling & Administrative Department Design Engineering $ 600,000 75% 5% 10% 5% 5% 100% Administrative Staff Wages 300,000 5% 20% 10% 15% 50% 100% Marketing Expense 400,000 10% 10% 0% 70% 10% 100% Selling Expenses 200,000 0% 0% 0% 30% 10% 100% Total Selling & Admin. Dept Expense $ 1,500,000 Total Overhead $ 10.000.000 PART #1: Assign Costs to Activity Cost Pools Activity Cost Pools Product Labor Customer Design Support Automation Relations Other Production Department Indirect Labor 100,000 $ 1,500,000 200,000 200,000 Material Planning & Logistics 120,000 00 540, 000 ww 60,000 Plant Facilities Expense 90, 000 450,000 1,080,000 180,000 www ww Depreciation Expense $ 350.000 140,000 2,450,000 560,000 Selling & Administrative Department Design Engineering 450, 000 30,000 60, 000 30,000 Administrative Staff Wages 15,000 60, 000 30,000 45,000 150,000 wWWWwww Marketing Expense 40,000 40,000 Selling Expenses $ 180.000 $ 20,000 Activity Cost Pool Totals $ 1.165.000 |$ 2.700.000 $ 4.360.000 $ 535.000 $ 1.240.000Data (continued): Data for Computation of Activity Rates Activity Cost Pools Cost Driver Total Activity Product Design Unique Designs 10 Unique Designs Labor Support Direct Labor Hrs 150,000 Labor Hrs Automation Machine Hrs 50,000 Machine Hrs Customer Relations Unique Customers 40 Unique Customers Other Not Applicable Not applicable PART #2: Calculate Activity Rates Computation of Activity Rates Activity Cost Pools Cost Pool ($) Total Activity Activity Rate Product Design 1,165,000 10 $ 116,500.00 Labor Support 2,700,000 150,000 $ 18.00 Automation 4,360,000 50,000 87.20 Customer Relations 535,000 40 $ 13,375.00 Other 1,240,000 N.A. N.A.Data (continued): Product Lines Product Line Data Specialty Applications Mainstream Sales volume 300,000 3,000,000 Average Selling Price $13.45 $4.56 Direct Materials $600,000 $4,500,000 Direct Labor Hrly Wage $20.00 $24.00 Direct Labor hours 50,000 100,000 Machine hours 1,000 49,000 Unique Designs Unique Customers 10 30 PART #3: Assign Manufacturing Overhead Costs to Product Lines using Absorption Costing (based on Direct Labor Hours) Absorption-based Costing Profit Analysis pecialty Applications Mainstream Entire Business Pre-Determine Overhead Direct Labor Hours Income Statement Direct Labor Hours Income Statement Income Statement Sales $13.45 $4.56 300,000 3000000 $ 4,035,000 $ 13,680,000 $ 17,715,000 Direct Materials $ 600,000 $ 4,500,000 $ 5,100,000 Direct Labor $20.00 $24.00 50000 100000 1,000,000 2,400,000 3,400,000 Manufacturing Overhead 1,165,000 535,000 $ 1,700,000 Total Product Cost $ 2,765,000 $ 7 435,000 Product Line Profit $ 1,270,000 $ 6,245,000 Product Line Profit Margin 31.5% 45.7% Period Expenses $ 10,200,000 Total Business Profit $ 7,515,000 Total Business Profit Margin 42.4%Data (continued): Product Lines Product Line Data Specialty Applications Mainstream Sales volume 300,000 3,000,000 Average Selling Price $13.45 $4.56 Direct Materials $600,000 $4,500,000 Direct Labor Hrly Wage $20.00 $24.00 Direct Labor hours 50,000 100,000 Machine hours 1,000 49,000 Unique Designs 2 Unique Customers 10 30 PART #4: Assign Costs to Product Lines using Activity-based Costing Activity-based Costing Product Line Profit Analysis Specialty Applications Mainstream Entire Business Activity Rates Activity Measure Income Statement Activity Measure Income Statement Income Statement Sales $13.45 $4.56 300,000 3000000 $ 4,035,000 $ 13,680,000 17,715,000 Direct Materials 600,000 4,500,000 5,100,000 Direct Labor $20.00 $24.00 50000 100000 1,000,000 2,400,000 3,400,000 Product Design $ 116,500.00 B 932,000 2 233,000 1,165,000 Labor Support $ 18.00 50,000 900,000 100,000 1,800,000 2,700,000 Automation 37.20 1,000 87,200 19,000 4,272,800 4,360,000 Customer Relations $ 13,375.00 10 133,750 30 4,012,500 4,146,250 Total Product Cost 3,652,950 17,218,300 Product Line Profit 382,050 $ 3,538,300) Product Line Profit Margin 9.5% 25.9% Period Expenses $ 20,871,250 Total Business Profit $ 3,156,250 Total Business Profit Margin -17.8%
