Question

Home Insert A Page Layout B С D G H Cause-and-Effect Relationship Between Allocation Base and Activity Cost Total Standard Job Special Job 400 200 $ 600 $ 750 $ 100 $ 125 $ 90 $ 100 10 10 $ 75,000 Indirect costs of operating printing machines increase with printing machine hours 7 1 2 Number of printing jobs 3 Price per job 4 Cost of supplies per job 5 Direct labor costs per job 6 Printing machine-hours per job 7 Cost of printing machine operations 8 9 Setup-hours per job 10 Setup costs 11 Total number of purchase orders 12 Purchase order costs 13 14 Design costs 15 Marketing costs as a percentage of 16 revenues $ 45,000 Indirect setup costs increase with setup-hours 400 500 $4,000 $16.000 $ 18,000 Indirect purchase order costs increase with number of purchase orders $ 20,000 Design costs are allocated to standard and special jobs based on a special study of the design department ead cost per 5% 5% ng system to $ 19,500 $ 24,000 Demand for administrative resources increases with direct labor costs 17 Administration costs Required builds build- simple cost in 2017. One competitive e if overhead She gathers 1. Calculate the cost of a standard job and a special job under the simple costing system. 2 Calculate the cost of a standard job and a special job under the activity-based costing system. 2. Compare the costs of a standard job and a special job in requirements 1 and 2. Why do the simple and activity-based costing systems differ in the cost of a standard job and a special job? How might Speediprint use the new cost information from its activity-based costing system to better manage its business? s Used by ors, inte-

Answer 1

1.

Total indirect costs = $75,000 + $45,000 + $18,000 + $20,000 + $19,500 + $24,000

= $201,500

Total machine-hours = (400 10) + (200 10) = 6,000

Indirect cost rate per machine-hour = $201,5006,000

= $33.583 per machine-hour

Standard Job $100.00 Special Job $125.00 90.00 100.00 Simple Costing System Cost of supplies per job Direct labor cost per job Indirect cost allocated to each job (10 machine hours $33.583 per machine hour) Total costs 335.83 335.83 $525.83 $560.83

2.   

Activity-based costing system

Quantity of Cost Driver Consumed during 2017 (see column (1)) Total Cost Standard Special of Activity Allocation Activity Cost Driver Job Job (given) Rate (1) (2) (5) (6)=(5) =((3) + (4)), or given Machine operations Machine hours 4,000 2,000 $75,000 $12.50 per machine hour (400 jobs x 10 mach. hrs. per job; 200 jobs x 10 mach. hrs. per job) Setups (4 x 400; 7 Setup hours 1,600 1,400 $45,000 $ 15.00 per setup hour x 200) Purchase orders (given) No. of purchase 400 500 $18,000 $ 20.00 per purchase orders order Design $20,000 Marketing Percentage of $240,0001 $150,0001 $19,500 $ 0.05 per dollar of sales revenue Administration Dir. labor costs $36,0002 $20,0002 $24,000 $0.42857 per dollar of direct manuf. labor cost Revenue from standard jobs, $600 x 400 = $240,000; Revenue from special jobs, $750 < 200 = $150,000 Direct labor costs of standard jobs. $90 x 400 jobs = $36,000: Direct labor costs of special jobs, $100 x 200 jobs = $20,000

Total Costs Standard Special Job Job $ 40,000 36,000 $ 25,000 20,000 Cost of supplies ($100 x 400; $125 x 200) Direct labor costs ($90 x 400; $100 x 200) Indirect costs allocated: Machine operations ($12.50 per mach. hr. 4,000: 2,000) Setups ($15 per setup hr. x 1,600: 1,400) Purchase orders ($20 per order x 400, 500) Design Marketing (0.05x $240,000: 0.05 x $150,000) Administration (0.42857 × $36.000; $20,000) Total costs Cost of each job ($189,429 = 400: $133,071 = 200) 50,000 24,000 8,000 4,000 25,000 21,000 10,000 16,000 7,500 12,000 15.429 $189.429 8.571 $133,071 $ 473.57 $ 665.36

3.

Standard Job Special Job $525.83 $560.83 Cost per job Simple Costing System Activity-based Costing System Difference (Simple - ABC) $665.36 $473.57 $ 52.26 S(104.53)

Relative to the ABC system, the simple costing system overcosts standard jobs and undercosts special jobs. Both types of jobs need 10 machine hours per job, so in the simple system, they are each allocated $335.83 in indirect costs. But, the ABC study reveals that each standard job consumes less of the indirect resources such as setups, purchase orders, and design costs than a special job, and this is reflected in the lower indirect costs allocated to the standard jobs and higher indirect costs allocated to special jobs in the ABC system.

4.

Speediprint can use the information revealed by the ABC system to change its pricing based on the ABC costs. Under the simple system, Speediprint was making a gross margin of 12% on each standard job ([$600 – $525.83] $600) and 25% on each special job ([$750 – $560.83] $750). But, the ABC system reveals that it is actually making a gross margin of 21% ([$600 – $473.57]$600) on each standard job and about 11% ([$750 – $665.36] $750) on each special job. Depending on the market competitiveness, Speediprint may either want to reprice the different types of jobs, or it may choose to market standard jobs more aggressively than before.

Speediprint can also use the ABC information to improve its own operations. It could examine each of the indirect cost categories and analyze whether it would be possible to deliver the same level of service, but consume fewer indirect resources, or find a way to reduce the per-unit-cost-driver cost of some of those indirect resources.