The regression results were impressive. There is no question in my mind that the number of moves is a good driver of materials-handling costs. Using the number of moves to assign materials-handling costs to products would likely be better than the cost assignment using direct labor cost. Furthermore, since small batches use the same number of moves as large batches, we have some evidence that we may be overcosting our high-volume products.

Kim, you expressed the desire of reducing the costs of inspection, reworking, and warranties. In addition to the pilot study for one plant, I also collected information about these three activities for the division. For the inspection activity, we have 15 inspectors who are paid an average of $4,000 per month. Each inspector offers a practical inspection capacity of 2,000 hours per year. However, it appears that inspectors actually work only about 80 percent of those hours. Rework cost is simply the cost of replacing some faulty components and the associated direct labor. The rework cost per unit is predictable and constant per unit regardless of the product model. Warranty cost, on the other hand, involves the salaries of two technicians, with the remaining cost, the cost of replacement components, which is relatively constant per unit repaired. The technicians are paid $5,000 per month and provide 2,000 hours of service per year. Warranty service usually requires 3,600 technician hours per year.

After receiving the memo, Kim was intrigued, both by the activity-based costing pilot study and by the potential savings for the division by improving quality. She then asked Jacob to use the same phone plant as a pilot for a preliminary ABC analysis. She instructed him to assign all overhead costs to the plants two products (Regular and Deluxe models), using only four activities. The four activities were rework, moving materials, inspecting products, and a general catch-all activity labeled other manufacturing activities. From the special study already performed, she knew that materials handling and inspecting involved significant cost; from production reports, she also knew that the rework activity involved significant cost. If the ABC and unit-based cost assignments did not differ by breaking out these three major activities, then ABC may not matter.

Pursuant to the request, Jacob produced the following cost and driver information:

Activity	Expected Cost		Driver		Activity Capacity
Other activities		$2,000,000			Direct labor dollars			$1,250,000
Moving materials		900,000			Number of moves			18,000
Inspecting		720,000			Inspection hours			24,000
Reworking		380,000			Rework hours			3,800
Total overhead cost		$4,000,000

Expected activity demands:

	Regular Model	Deluxe Model
Units completed		100,000			40,000
Direct labor dollars		$875,000			$375,000
Number of moves		7,200			10,800
Inspection hours		6,000			18,000
Rework hours		1,900			1,900

Required:

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1. Answer the following regarding the product costing system of the Cable Service Division:

a. Complete the following table with the appropriate product costs for the Cable Service Division: Round the answers to two decimal places.

	Basic	Enhanced	Premium
Product cost for pricing		$fill in the blank 789c8d007fd103e_1			$fill in the blank 789c8d007fd103e_2			$fill in the blank 789c8d007fd103e_3
Product cost for cost of services sold		fill in the blank 789c8d007fd103e_4			fill in the blank 789c8d007fd103e_5			fill in the blank 789c8d007fd103e_6

The product cost for the

pricing decisioncost of services soldpricing decision

includes all production, marketing, and customer service costs. There may be, and very likely is, very little R&D function in the Cable Service Division. Thus, this

firstsecondfirst

unit cost could be used for other managerial objectives, such as product mix decisions and strategic and tactical profitability analysis. The

firstsecondsecond

cost includes only production costs; complying with external financial reporting guidelines is the primary managerial objective of this method.

b. Allocation relies on:

exclusive physically observable causal relationships to assign costs.causal factors to assign costs.assumed linkages or convenience to assign costs.none of the above.assumed linkages or convenience to assign costs.

c. Direct tracing relies on:

exclusive physically observable causal relationships to assign costs.causal factors to assign costs.assumed linkages or convenience to assign costs.none of the above.exclusive physically observable causal relationships to assign costs.

d. Driver tracing relies on:

exclusive physically observable causal relationships to assign costs.causal factors to assign costs.assumed linkages or convenience to assign costs.none of the above.causal factors to assign costs.

e. Based on how costs are assigned, do you think that the Cable Service Division is using a functional-based or an activity-based costing system?

activity-basedfunctional-basedfunctional-based

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1. Total unit costs provided. Use percentage given to multiply by total unit costs to determine cost of services sold.

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2. Prepare an income statement for the Cable Service Division for March.

Accounts payableAccounts receivableCashSales revenueSuppliesSales revenue	$Sales revenue
CashCost of services soldRent expenseSupplies expenseSuppliesCost of services sold	Cost of services sold
CashGross marginIncome before income taxesRent revenueSales revenueGross margin	$Gross margin
Add: Operating expensesGross marginIncome before income taxesLess: Operating expensesSales revenueLess: Operating expenses	Less: Operating expenses
Cost of services soldGross marginIncome before income taxesOperating expensesSales revenueIncome before income taxes	$Income before income taxes

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2. Prepare in good form subtracting operating expenses from gross margin to equal income before income taxes for the Income Statement for the Cable Service Division. For the Phone Division, remember to consider beginning and ending finished goods inventory to calculate cost of goods sold. Subtract selling expenses from gross margin to calculate income before income taxes. In calculating the Statement of Cost of Goods Manufactured for the Phone Division, remember to consider beginning and ending materials inventory as well as beginning and ending work in process inventory. Be sure to include all overhead costs.

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Prepare an income statement for the Phone Division for March.

Beginning finished goods inventoryCashSalesSelling expensesSuppliesSales		$Sales
Cost of goods sold:
Add: Selling expensesBeginning finished goods inventoryLess: Selling expensesMaterials handlingSalesBeginning finished goods inventory	$Beginning finished goods inventory
Add: Cost of goods manufacturedAdd: Ending inventoryLess: Cost of goods manufacturedLess: Ending inventorySales revenueAdd: Cost of goods manufactured	Add: Cost of goods manufactured
Goods available for sale	$fill in the blank e606830a900c023_7
Add: Cost of goods manufacturedAdd: Ending finished goods inventoryLess: Cost of goods manufacturedLess: Ending finished goods inventorySales revenueLess: Ending finished goods inventory	Less: Ending finished goods inventory	Less: Ending finished goods inventory
Gross lossGross marginNet incomeNet lossSales revenueGross margin		$Gross margin
Add: Cost of goods manufacturedAdd: Selling expensesLess: Cost of goods manufacturedLess: Selling expensesSales revenueLess: Selling expenses		Less: Selling expenses
Beginning inventoryEnding work in processIncome before income taxesPurchasesSalesIncome before income taxes		$Income before income taxes

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Partially correct

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For the income statement associated with the Phone Division, include a supporting cost of goods manufactured statement.

Direct materials:
Beginning inventoryBeginning work in processEnding work in processManufacturing engineeringSales revenueBeginning inventory	$Beginning inventory
Add: InspectionsAdd: PurchasesAdd: SchedulingLess: InspectionsLess: PurchasesAdd: Purchases	Add: Purchases
Materials available	$fill in the blank 918793f6df87021_5
Add: Beginning work in processAdd: Ending inventoryLess: Beginning work in processLess: Ending inventoryLess: Manufacturing engineeringLess: Ending inventory	Less: Ending inventory
Direct materials used		$fill in the blank 918793f6df87021_8
Direct labor		fill in the blank 918793f6df87021_9
Overhead:
Beginning inventoryEnding work in processPlant and equipment depreciationPurchasesSales revenuePlant and equipment depreciation	$Plant and equipment depreciation
Beginning work in processEnding work in processMaterials handlingPurchasesSales revenueMaterials handling	Materials handling
Beginning work in processEnding inventoryInspectionsPurchasesSales revenueInspections	Inspections
CashEnding inventoryPurchasesSales revenueSchedulingScheduling	Scheduling
Accounts receivableEnding inventoryPowerPurchasesSales revenuePower	Power
Accounts receivableEnding inventoryPlant supervisionPurchasesSales revenuePlant supervision	Plant supervision
Accounts receivalbeCashManufacturing engineeringPurchasesSales revenueManufacturing engineering	Manufacturing engineering
Accounts receivalbeCashPurchasesSales revenueSuppliesSupplies	Supplies
CashEnding inventoryPurchasesReworkSales revenueRework	Rework	Rework
Total manufacturing costs added:		$fill in the blank 918793f6df87021_29
Add: Beginning work in processAdd: PurchasesLess: PurchasesLess: Beginning work in processSales revenueAdd: Beginning work in process		Add: Beginning work in process
Add: Ending work in processAdd: PurchasesLess: PurchasesLess: Ending work in processSales revenueLess: Ending work in process		Less: Ending work in process
Cost of goods manufactured	blank	$fill in the blank 918793f6df87021_34