Prepare a table and Calculate the ABC costs for each product on a per box basis, use the ending inventory costs at the cost driver ti allocate the plant-administrative overhead cost. Include in the columns 1.) activity cost pool, 2) cost driver, 3) estimated overhead $, 4.) estimated use of cost driver per activity 5.) overhead rate by activity 6) estimated use of cost driver by product and 7) total overhead rate by activity.

Ornaments per Box CASE: ZAUNER ORNAMENTS Small glass ball ornaments Large glass ball ornaments Specialty glass ball ornaments *Note: All monetary amounts are expressed in U.S. dollars COST ACCOUNTING AT ZAUNER ORNAMENTS Sales Price per Box 12 6 I Plant depreciation Quality inspection Packing Plant administration Total overhead $9.00 $11,00 $17.00 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 Production scheduling Machine setups Equipment depreciation Annual Cost $ 85,000 160,000 220,000 150,000 70,000 185,000 300,000 109 $1.170.000

Calculation of Product Costs: DM- and DL-Based Costing System As she put the firishing touches on the annual financial statements for Zauner Omaments, Chia-yi Yu contemiplated hischedule for the next few weeks. As the new controller for Zauner Omaments in Taiwan, Yu thought the slow-sales period in January would be the perfect time for her to focus on Zauner's management-accounting procedures. Yu had recently returned to Taiwan from graduate business school in Europe, and she was anxious to apply the knowledge she had gained at school to her new job. As a first step, Yu decided to research Zauner's eurrent costing methods. BACKGROUND Zauner Omaments was a wholly owned subsidiary of Zauner Crystal, Inc., a large manufacturer of erystal and glass products headquartered in Vienna, Austria. Although originally extablished as an industrial-glass producer, Zumer Crystala reinvented itself after the Second World War as a producer of fine crystal, glass tableware, and other similar products. The company enjoyed an international reputation as a producer of highquality glass and erystal at affordable prices owing to the skills of its master artisans, as well as the application of innovative technology in the manufacturing process, Zauner crystal was used in fine restaurants, hotels, and residences throughout the world. ZAUNER ORNAMENTS Several years previously, management at Zauner Crystal recognized that growth in the fine-crystal and glass-tableware markets was beginning to slow, forcing the company to search for other growth opportunities. After exiensive research, management concluded that expanding into glass Christmas-tree omaments would allow the company not only to continue to grow, but also to take advantage of Zauner Crystal's unique capabilities. The company leased a small manufacturing facility in Taiwan, and began producing the following three products there: "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 similer products tvailable in the marketptice 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 adjuctments in the prodiset prices were warranted. To assist Chen in his task, Yu provided him with a sehedule of the factory's annual overhead costs, as follows: 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 traditionat votume-based costing system. Budgeted overhead was allocated to each product line, based on the planned production of omaments. Chen and Yu were dismayed by the results of Chen's analysis; according to his calculations, Zauner was selling small glass omaments for $9.00 a box, but it was costing the company $21.12 a box to produce those ormaments! Yu took these results to the director of Operations, David Metz. I'm really worried about our pricing and the efficiency of our manufacturing processes," Yu told Metz. "According to this product-cost analysis, we are losing money on both the small and lange glass ornaments we produce, while making money on the specialty omamentsSurely, that can't be the case, can in? Are our costs really that much higher than other firms in the industry?" Metz looked at Chen's schedule and shook his head. "I think I see the problem here," he told Yu. "You've allocated overhesd to each product based on production units. Why don't yout try this analysis again, this time allocating overhead to each product based upon direct materials and direct labor? I think that method better approximates the actual use of the overhead resource by each product line, and it should fix your problem," Yu returned to her oflice and instructed Chen to rodo his analysis using direct materials plus direct labor as the allocation base for overhead expenses. Chen soon returned with the product-cost schedule shown in Exhibit 2. "Look!" he told Yy. "I ZAUNER ORNAMENTS Historical Five-Yeir Plant-Administration Costs and Other Data Exhibit 3 ZAUNER ORNAMENTS Activity Data by Product Exthibit 1 ZALNER ORNAMENTS Calculation of Product Costs: Volume-Based Costing System *Note: All monetary amounts are expressed in U.S. dollars ZAUNER ORNAMENTS 109 COST ACCOUNTING AT ZAUNER ORNAMENTS In the third week of Imisary. 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 marketplate and set Zauner's prices accordingly. Yu knew that the company was profitable overall, but woodered if the prices set by the sales department were sufficieat to ensure that the individual prodoct 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 he helpfal in determining whetier any adjutments in the product prices were warranted. To assist Chea in his task, Yu provided him with a schedule of the factory's ansual overhead costs, as follows: Exhibits ZAUNER ORNAMENTS Plant Data by Product Line think Metz was correct. Allocating overhead based on direct materials and direct labor gives us product costs that are below our current sales price for each product line. I think we're fine now:" Yu fell better after secing Chen's second analysis, but she was not fully convinced that the revised schedule captured Zauner's product costs in the most accurate manner. While Chen was working on his analysis, Yu met with the manufacturing department to gain a better understanding of Zuuner's operations. The results of thiese meetings are summarized in Exhibit 3. She learned that, while all three omaments were made on the same production lines, specialty omaments underwent an additional painting process. In the specialty-painting department, 24 fully titilized workers hand-painted intricate designs on the inside of each specialty ornament. Yu tlso discussed with Manufacturing the types of overhead at Zauner and the specific activities that could be generating the company's overhead costs. She discovered that both productionscheduling and machine-setup costs appeared to be driven primarily, by the number of batches required for the annual production Nlume. Because the number of batches varied by product type, Yu concluded that total yearly batches might be an appropriate means of allocating production-scheduling and machine-setup costs to the different product lines. In addition, she had a tittle more dirricalty lascertaining the root cause of equipment depreciation. It was unclear whether equipment depreciation occurted because of the number of machine operations performed or because of the machine run time. Based on feedback from the manufacturing departinent, she decided that the number of machine operations was the betier indicator of equiptinent depreciation. She also thought that plant depreciation could reasonably be based on the factory square footage used to manuficture, paint, and store each boc. Her discussions also led her to conclude that the number of inspections performed drove inspection conts. While the number of boxes used drove packaging costs.) Plant administration (which ineluded supervision, labor relations, and clerical costs) appeared to be the most problematie in deciding how best to allocate these costs. Yu would have to make that decisioe soon, and in the meantime, had gathered the data in Exhibits 4 and 5 . Which she thought might be useful in her deliberations. After seeing Zauner's manufacturing process, Yu recalled reading about activity. based costing (ABC) in groduate school. She remembered that companies used ABC systems to assign indirect manufacturing costs to products based on the activities performed on those products, Yu thought she might be abfe to use ABC to teffect Zauner's product costs more aceurately, thereby improving product-pricing decisions. D 1. Determine the best base for allocating plant-administration costs. 2. Caleulate the ABC cosis for each product on a per-box basis. 3. What do these results tell you about activity-based costing vernu costing based on standard volumie or direct materials plus direct labor? 4. What changes, if any, should management make to Zauner's pricing strategy? Calculation of Product Costs: DM- and DL-Based Costing System As she put the firishing touches on the annual financial statements for Zauner Omaments, Chia-yi Yu contemiplated hischedule for the next few weeks. As the new controller for Zauner Omaments in Taiwan, Yu thought the slow-sales period in January would be the perfect time for her to focus on Zauner's management-accounting procedures. Yu had recently returned to Taiwan from graduate business school in Europe, and she was anxious to apply the knowledge she had gained at school to her new job. As a first step, Yu decided to research Zauner's eurrent costing methods. BACKGROUND Zauner Omaments was a wholly owned subsidiary of Zauner Crystal, Inc., a large manufacturer of erystal and glass products headquartered in Vienna, Austria. Although originally extablished as an industrial-glass producer, Zumer Crystala reinvented itself after the Second World War as a producer of fine crystal, glass tableware, and other similar products. The company enjoyed an international reputation as a producer of highquality glass and erystal at affordable prices owing to the skills of its master artisans, as well as the application of innovative technology in the manufacturing process, Zauner crystal was used in fine restaurants, hotels, and residences throughout the world. ZAUNER ORNAMENTS Several years previously, management at Zauner Crystal recognized that growth in the fine-crystal and glass-tableware markets was beginning to slow, forcing the company to search for other growth opportunities. After exiensive research, management concluded that expanding into glass Christmas-tree omaments would allow the company not only to continue to grow, but also to take advantage of Zauner Crystal's unique capabilities. The company leased a small manufacturing facility in Taiwan, and began producing the following three products there: "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 similer products tvailable in the marketptice 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 adjuctments in the prodiset prices were warranted. To assist Chen in his task, Yu provided him with a sehedule of the factory's annual overhead costs, as follows: 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 traditionat votume-based costing system. Budgeted overhead was allocated to each product line, based on the planned production of omaments. Chen and Yu were dismayed by the results of Chen's analysis; according to his calculations, Zauner was selling small glass omaments for $9.00 a box, but it was costing the company $21.12 a box to produce those ormaments! Yu took these results to the director of Operations, David Metz. I'm really worried about our pricing and the efficiency of our manufacturing processes," Yu told Metz. "According to this product-cost analysis, we are losing money on both the small and lange glass ornaments we produce, while making money on the specialty omamentsSurely, that can't be the case, can in? Are our costs really that much higher than other firms in the industry?" Metz looked at Chen's schedule and shook his head. "I think I see the problem here," he told Yu. "You've allocated overhesd to each product based on production units. Why don't yout try this analysis again, this time allocating overhead to each product based upon direct materials and direct labor? I think that method better approximates the actual use of the overhead resource by each product line, and it should fix your problem," Yu returned to her oflice and instructed Chen to rodo his analysis using direct materials plus direct labor as the allocation base for overhead expenses. Chen soon returned with the product-cost schedule shown in Exhibit 2. "Look!" he told Yy. "I ZAUNER ORNAMENTS Historical Five-Yeir Plant-Administration Costs and Other Data Exhibit 3 ZAUNER ORNAMENTS Activity Data by Product Exthibit 1 ZALNER ORNAMENTS Calculation of Product Costs: Volume-Based Costing System *Note: All monetary amounts are expressed in U.S. dollars ZAUNER ORNAMENTS 109 COST ACCOUNTING AT ZAUNER ORNAMENTS In the third week of Imisary. 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 marketplate and set Zauner's prices accordingly. Yu knew that the company was profitable overall, but woodered if the prices set by the sales department were sufficieat to ensure that the individual prodoct 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 he helpfal in determining whetier any adjutments in the product prices were warranted. To assist Chea in his task, Yu provided him with a schedule of the factory's ansual overhead costs, as follows: Exhibits ZAUNER ORNAMENTS Plant Data by Product Line think Metz was correct. Allocating overhead based on direct materials and direct labor gives us product costs that are below our current sales price for each product line. I think we're fine now:" Yu fell better after secing Chen's second analysis, but she was not fully convinced that the revised schedule captured Zauner's product costs in the most accurate manner. While Chen was working on his analysis, Yu met with the manufacturing department to gain a better understanding of Zuuner's operations. The results of thiese meetings are summarized in Exhibit 3. She learned that, while all three omaments were made on the same production lines, specialty omaments underwent an additional painting process. In the specialty-painting department, 24 fully titilized workers hand-painted intricate designs on the inside of each specialty ornament. Yu tlso discussed with Manufacturing the types of overhead at Zauner and the specific activities that could be generating the company's overhead costs. She discovered that both productionscheduling and machine-setup costs appeared to be driven primarily, by the number of batches required for the annual production Nlume. Because the number of batches varied by product type, Yu concluded that total yearly batches might be an appropriate means of allocating production-scheduling and machine-setup costs to the different product lines. In addition, she had a tittle more dirricalty lascertaining the root cause of equipment depreciation. It was unclear whether equipment depreciation occurted because of the number of machine operations performed or because of the machine run time. Based on feedback from the manufacturing departinent, she decided that the number of machine operations was the betier indicator of equiptinent depreciation. She also thought that plant depreciation could reasonably be based on the factory square footage used to manuficture, paint, and store each boc. Her discussions also led her to conclude that the number of inspections performed drove inspection conts. While the number of boxes used drove packaging costs.) Plant administration (which ineluded supervision, labor relations, and clerical costs) appeared to be the most problematie in deciding how best to allocate these costs. Yu would have to make that decisioe soon, and in the meantime, had gathered the data in Exhibits 4 and 5 . Which she thought might be useful in her deliberations. After seeing Zauner's manufacturing process, Yu recalled reading about activity. based costing (ABC) in groduate school. She remembered that companies used ABC systems to assign indirect manufacturing costs to products based on the activities performed on those products, Yu thought she might be abfe to use ABC to teffect Zauner's product costs more aceurately, thereby improving product-pricing decisions. D 1. Determine the best base for allocating plant-administration costs. 2. Caleulate the ABC cosis for each product on a per-box basis. 3. What do these results tell you about activity-based costing vernu costing based on standard volumie or direct materials plus direct labor? 4. What changes, if any, should management make to Zauner's pricing strategy