Question

Roberta​, ​Inc., manufactures elliptical machines for several​ well-known companies. The machines differ significantly in their complexity and their manufacturing batch sizes. The following costs were incurred in 2017:

C. d. Indirect manufacturing labor costs such as supervision that supports direct manufacturing labor, $935,000 Procurement costs of placing purchase orders, receiving materials, and paying suppliers related to the number of purchase orders placed, $650,000 Cost of indirect materials, $234,000 Costs incurred to set up machines each time a different product needs to be manufactured, $392,000 Designing processes, drawing process charts, and making engineering process changes for products, $236,900 Machine-related overhead costs such as depreciation, maintenance, production engineering, $865,000 (These resources relate to the activity of running the machines.) Plant management, plant rent, and plant insurance, $498,000 g.

Requirement 1. Classify each of the preceding costs as output​ unit-level, batch-level,​ product-sustaining, or​ facility-sustaining. Explain each answer (answer options are in bold on the cost-type row pick one).

Cost Item	Cost Type
a. Indirect manufacturing labor costs such as supervision that supports direct manufacturing​ labor, $935,000	(Batch Level, Facility-sustaining, Output unit-level, Product-sustaining)
b. Procurement costs of placing purchase​ orders, receiving​ materials, and paying suppliers related to the number of purchase orders​ placed, $650,000	(Batch Level, Facility-sustaining, Output unit-level, Product-sustaining)
c. Cost of indirect​ materials, $234,000	(Batch Level, Facility-sustaining, Output unit-level, Product-sustaining)
d. Costs incurred to set up machines each time a different product needs to be​ manufactured, $392,000	(Batch Level, Facility-sustaining, Output unit-level, Product-sustaining)
e. Designing​ processes, drawing process​ charts, making engineering process changes for​ products, $236,900	(Batch Level, Facility-sustaining, Output unit-level, Product-sustaining)
f. Machine-related overhead costs such as​ depreciation, maintenance, production​ engineering, $865,000 (These resources relate to the activity of running the​ machines.)	(Batch Level, Facility-sustaining, Output unit-level, Product-sustaining)
g. Plant​ management, plant​ rent, and plant​ insurance, $498,000	(Batch Level, Facility-sustaining, Output unit-level, Product-sustaining)

Pick one of the options in bold

Output​ unit-level costs are (costs that cannot be traced to individual products but support the company as a whole) (costs used to support individual products reegardless of the number of units or batches tested) (related to a group of units of the product. They are not related to the number of units tested.) (Related to the number of units tested; required for each unit tested.)

Bach-level costs are (costs that cannot be traced to individual products but support the company as a whole) (costs used to support individual products reegardless of the number of units or batches tested) (related to a group of units of the product. They are not related to the number of units tested.) (Related to the number of units tested; required for each unit tested.)

Facility-sustaining costs are (costs that cannot be traced to individual products but support the company as a whole) (costs used to support individual products reegardless of the number of units or batches tested) (related to a group of units of the product. They are not related to the number of units tested.) (Related to the number of units tested; required for each unit tested.)

Product-sustaining costs are (costs that cannot be traced to individual products but support the company as a whole) (costs used to support individual products reegardless of the number of units or batches tested) (related to a group of units of the product. They are not related to the number of units tested.) (Related to the number of units tested; required for each unit tested.)

Requirement 2. Consider two types of elliptical machines made by Roberta, Inc. One​ machine, designed for professional​ use, is complex to make and is produced in many batches. The other machine is simple to make and is produced in few batches. Suppose that Roberta needs the same number of​ machine-hours to make each type of elliptical and that Roberta allocates all overhead costs using​ machine-hours as the only allocation base.​ How, if at​ all, would the machines be​ miscosted? Briefly explain why. (Pick one of the options in bold in each statement)

The complex elliptical machine made in (few, many) batches will use (significantly less, significantly more, the same) bach-level overhead resources compared to the simple elliptical machine that is made in (few, many) batches. In addition, the complex machine will use (less, more) (facility-sustaining, product-sustaining) overhead resources because it is complex.

Because (each elliptical machine requires the same amount of machine-hours, the complex machine requires significantly more machine-hours than the simple machine, the simple machine requires significantly more machine hours than the complex machine),

(both the simple and the complex machines will be allocated the same amount of overhead costs per machine, the complex elliptical machine will be allocated a greater amount of overhead costs per machine than the simple machine, the simple machine will be allocated a greater amount of overhead costs per machine than the complex machine). if Roberta uses only machine-hours to allocate overhead costs to elliptical machines.

As a result, the complex elliptical machine will be (overcoster, properly costed, undercosted) and the simple machine will be (overcoster, properly costed, undercosted).

Answer 1

Roberta, Inc., Requirement 1 Cost Item Cost Type a. Indirect manufacturing labor costs such as supervision that supports direct manufacturing labor, $935,000 Output unit-level b. Procurement costs of placing purchase orders, receiving materials, and paying suppliers related to the number of purchase orders placed, $650,000 Batch-level C. Cost of indirect materials, $234,000 Output unit-level d. Costs incurred to set up machines each time a different product needs to be manufactured, $392,000 Batch-level e. Designing processes, drawing process charts, making engineering process changes for products, $236,900 Product-sustaining f. Machine-related overhead costs such as depreciation, maintenance, production engineering, $865,000 (These resources relate to the activity of running the machines.) Output unit-level g. Plant management, plant rent, and plant insurance, $498,000 Facility-sustaining Output unit-level costs are - (Related to the number of units tested; required for each unit tested.) Bach-level costs are - (related to a group of units of the product. They are not related to the number of units tested.) Facility-sustaining costs are - costs that cannot be traced to individual products but support the company as a whole) Product-sustaining costs are - (costs used to support individual products reegardless of the number of units or batches tested)

Requirement 2

The intricate elliptical machine made in many batches will use considerably more batch level overhead resources related to the simple elliptical machine that is made in a few batches. In addition, the complex elliptical machine will use more product-sustaining overhead resources because it is complex. Because each elliptical machine needs the same amount of machine hours, both the simple and the complex elliptical machine will be assigned the same amount of overhead costs per elliptical machine if Roberta uses only machine-hours to assign overhead costs to elliptical machines. As a result, the complex elliptical machine will be under-costed (it ingests a relatively high level of resources but is reported to have a rather low cost) and the simple elliptical machine will be over-costed (it consumes a relatively low level of resources but is reported to have a relatively high cost).

Requirement 3

Exhausting the cost hierarchy to compute activity-based costs can help Roberta to classify both the costs of individual activities and the cost of activities required by distinct products. Roberta can use this evidence to cope its business in several ways: Ø Pricing and product mix choices. Knowing the resources required to manufacture and sell numerous types of elliptical machines can help Roberta to price the different elliptical machines and identify which elliptical machines are more profitable. It can then highlight its more profitable products. Ø Roberta can use information about the costs of different activities to mend processes and reduce costs of the different activities. Roberta could have a target of reducing costs of activities (setups, order processing, etc.) by, say, 3% and constantly seek to eliminate activities and costs (such as engineering changes) that its customers recognize as not adding value. Ø Roberta management can identify and assess new designs to mend performance by examining how product and process designs affect activities and costs. Ø Roberta can use its ABC systems and cost hierarchy information to plan and manage activities. What activities should be performed in the period and at what cost?