MANAGERIAL ACCOUNTING

Managerial Accounting

Assignment #2: Cost Management Systems

Discussion Question 2

Problem 4-42. Activity Based Costing and Activity Based Management

1.

Cost/Activity Center:

Cost Drivers

Annual

Traceable

Cost

Annual

Cost

Driver

Activity

Cost per

Driver

Unit

Cost

Driver

Consumption,

Part H707

Total Cost,

Part H707

Quality: Pieces scrapped

$ 800,000

10,000

$ 80

120

$ 9,600

Production scheduling: Setups

50,000

500

100

4

400

Setup: Setups

600,000

500

1,200

4

4,800

Shipping: Containers shipped

300,000

60,000

5

10

50

Shipping admin.: Shipments

50,000

1,000

50

5

250

Production: Machine hours

1,500,000

10,000

150

15

2,250

Total indirect cost

$3,300,000

$17,350

Direct materials

5,000

Direct labor

1,000

Total Cost of Part H707

$23,350

Cost per unit ($23,350 ( 2,000)

$11.675

Selling price

7.500

Gross margin

$ (4.175)

Gross margin percentage

(55.7%)

2. Recommendations

Assuming that the results of the activity analysis are accurate, product H707 is much more costly than Reliable Machining Product's existing costing system estimates. The existing system is under-costing product ...