Percy, Jerry Roberts, Roberts CFO, said happily as he walked into the controllers office. How are you doing? Well, Percy said carefully. I was doing okay What do you mean you were doing okay? Jerry said, frowning. Every time you walk in here with that kind of energy it means that you are going to ask me to do something. Jerry laughed. I guess Im getting a little predictable, huh? Im afraid so. So, what do you want? Well, I have an idea for improving our cost accounting process. Uh, huh. Just come back from a conference, didnt you? As a matter of fact, I did. How did you know? Because you only come up with accounting ideas when youve been to a conference. So, what is it this time? Percy asked. Have you ever thought about switching to an ABC costing system? Percy shuddered. Do you have any idea how much work is involved in creating one of those systems, not to mention maintaining the system after it is supposedly done? Believe me, Uncle Jerry, we dont want to go there, not without a much larger accounting staff than we currently have. I know its a lot of work, Percy, Jerry said after a moment. But I think we need to look into it anyway. The numbers are more accurate and they allow for better decision making. With the new system coming online, I think that we are going to need a solid ABC system in order to really determine which of our new products, if any, are making money. But Percy started to protest. No buts Percy. I want you to do it. Ill talk to Lauren in HR about hiring another staff member to free up some resources. Percy sighed. Alright, if thats your decision. When do you want to hold the first meeting? First meeting? Jerry frowned. To determine the cost centers and other components of the ABC system. Well all have to agree on what they are if this is going to work. That means that youll have to be part of the process in creating this system. Oh, that. I did that on the plane. Heres what I came up with. He handed Percy a set of notes. (In Excel). I started with the questions the presenter at the conference asked us, and realized that I already had a lot of those answers that I could pull from the information I had with me. What do you think? Percy spent a moment going over the notes, nodding to himself as he went. I have to hand it to you, Uncle Jerry. These look really good. When did you learn about accounting? While he was talking to Jerry, he quickly added the actual overhead costs to a spreadsheet (In Excel). Ha, ha. Thats very funny, Jerry said with mock indignation. Just because I dont flaunt my knowledge, doesnt mean that it isnt there. Now, what else do we need? Well, we just need to figure out what activities are consuming the various types of overhead expenses. After I have that information, the rest of the process is long, but pretty straightforward. Okay, Jerry nodded as he looked again at the list of costs and activities.

So, the biggest overhead expenses are the indirect salaries. I would think that 35% of those salaries are paid to the workers who help set up the production runs, 40% are paid to the experts in quality control, 15% paid to the maintenance staff, and the remainder are paid to those who help with transporting materials and goods around the factory and receiving merchandise form vendors. Percy nodded. That sounds about right; so that pool of overhead money needs to be split up between four activities. Lets call those activities setups, quality control, maintenance, and transportation/receiving. He continued examining the document. The cleaning supplies and depreciation are both part of maintaining the equipment. Shipping costs are all part of transportation and receiving. That sounds right, Jerry agreed. Lets see. Well, most of the rent on the warehouse, probably 80%, is part of the transportation and receiving, wouldnt you say? Percy nodded. The rest is for holding merchandise waiting for quality control inspections. Right. And maintenance and setup of production runs each account for 40% of the utility costs. The remainder is pretty evenly split between transportation and quality control. The parts and repair costs are evenly split between maintenance and setups. He pondered a minute more. Finally, the insurance costs are evenly distributed among all four of these activities.

Perfect, Jerry said. That didnt take long at all. No, it didnt, which surprises me. But then, we still have all of the numbers to crunch and drivers to choose. And dont forget that we have to maintain this system. Its still a lot of work. Agreed, but I still think that it will be worth the effort. Well, youre the boss! Percy said with a grin. And dont you ever forget it! With a return grin, Jerry headed out the door.

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Jennifer, Percy looked up as she knocked on his open door. Come in and meet Cassandra Lee. Jennifer shook the hand of the young woman. We just hired Cassandra this morning as another member of our accounting staff. She is from Newark, DE and has just completed her accounting degree at the University of Delaware. Im pleased to meet you, Cassandra Jennifer said as she took a seat. Im excited to work with someone new. Cassandra nodded. So, Percy, what do you need? Now that we have some extra help, we are going to move forward on one of Jerrys pet projects. Jennifer frowned. Why does that not make me feel very excited? Percy laughed. Because of the amount of work his projects usually cause. This one is no exception to that rule, although it might give us some good data. He looked at his to young staff members. Were going to create an ABC costing system. Cassandra nodded. Those do provide the best data. Jennifer added. And they can be difficult to create. Well, in this case we have most of the basics done. We are going to have four activities; setups, quality control, maintenance, and transportation/receiving. After some careful analysis, we will be using the number of set-up hours as the driver for setups, number of batches checked for the quality control activity, machine hours for maintenance, and items transported as the driver for the transportation and receiving activity. Cassandra, he continued for a moment. Im going to have you start the process by determining the various activity rates. Here are my estimates of next years driver usage. He handed a list to Cassandra (In Excel). For right now, youll only need to use the first table on this list. Later, when you are actually allocating costs to the different products, youll need the second table. Okay, she said as she took the paper. Ill get it done right away.

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Cassie? Cassandra looked up as Jennifer stepped into her office. Can I help you? She asked politely. Jennifer smiled. Im not the boss. You dont have to be nervous when I stop by. I only graduated a few months ago myself. Cassandra smiled. This is my first real job; I want to do everything correctly. I know the feeling, which is why I stopped by. Jennifer pulled a form out of her pocket. I thought you might want to take the next step on that ABC project assigned from earlier in the quarter without waiting to be asked. What do you mean? Well, Jennifer put the paper on her desk. I just compiled my end-of-quarter reports for the new special chip division, including my estimates of the drivers they used. Why dont we go ahead and run the numbers and see just how much overhead will be applied to each kind of chip? Cassandra smiled. And surprise Percy with the numbers all ready to go! Exactly.

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1.

a. Using the information from Jerrys notes and his discussion with Percy, calculate the amount of overhead that should be allocated to each of the four ABC activities.

b. Using the information provided by Percy about estimated cost driver usage and your answer to question 1, determine the activity rate for each activity in the new ABC system. c. Using information compiled by Jennifer about the drivers used by each specialty chip line, determine the amount of overhead that will be allocated to each line.

d. Assuming that Roberts produced 180,000 bags of habanero chips; 200,000 bags of garlic & pepper chips; and 70,000 bags of basil & chive chips, how much MOH will be assigned to a bag of each type of chip under the ABC system? 5. Assume that Roberts spends $1.17 in DM and $

Overhead Costs by category (from Jerry's notes) Indirect salaries $405,000 Cleaning supplies $25,000 Shipping costs $150,000 Rent on warehouse $65,000 Depreciation $305,000 Utilities $45,000 Parts and repairs $20,000 Insurance $15,000 Total $1,030,000 Drivers Used by the company last year (Budget for next year) Driver Setups Batches Checked Machine Hours Items transported Budgeted Drivers 24,000 4,000 9,000 565,500 Actual Drivers used by the three specialty chip lines during the 1st cluarter of this year Products Setups Batches Checked Habenero 563 300 Garlic & Pepper 1,400 330 Basil & Chive 844 113 Machine Hours 750 505 1,260 Items Transported 60,938 158,430 24,355 Batches Produced 9,000 10,050 3,425