Question

3-B2 Activity Analysis Nampa Technology, an Idaho manufacturer of printed circuit boards, has always estimated the support cost of its circuit boards with a 100% "markup" over its material costs. An activity analysis suggests that support costs are driven primarily by the number of manual operations performed on each board, estimated at $4 per manual operation Compute the estimated support costs of the following two typ- ical circuit boards using the traditional markup and the activity analysis results: Material cost Manual operations Board Z15 $40.00 15 Board 252 $60.00 7 Why are the cost estimates different?

Answer 1

Under traditional markup , support cost allocated 100% markup over of its material cost, which is not appropriate way of allocation of support cost. In this case support cost is depend on the cost of material. On the other hand In case of Activity Analysis system Cost allocated according to the number of Manual operation used by that product which is more appropriate of allocation of support cost to the product. Activity analysis trace cost to the activity and consumption of resources by each product. Approach of allocation of support cost is different in both systems due to this cost estimates different arises.

Computation of Support cost using Traditional markup Board Z15 = Material Cost*(1+Markup) $40*(1+100%) $80 Board Q52 = Material Cost*(1+Markup) $60*(1+100%) $120 Computation of Support cost using Activity Analysis Board Z15 = Manual Operation *$4 15*4 $60 Board Q52 = Manual Operation *$4 7*4 $28