5-54 Volume-based Costing Versus ABC

Transcription

1 5-54 Volume-based Costing Versus ABC 1. Product A Product B Product C Materials $50.00 $ $65.00 Labor Overhead* Total Cost $ $ $ *overhead is applied based on direct labor dollars so the rate is: $5.80/ Direct labor dollar = $493,000/($20x1,000+$12x5,000+$10x500) $116 = 5.8x20; $69.60 = 5.8x12; $58 =5.8x10 2. Current Costing system Product A Product B Product C Actual selling price $280 $250 $300 Product manufacturing cost Gross margin $ 94 $ 54 $167 Gross margin ratio 33.57% 21.6% 55.67% Based on the current cost data, product B is the least profitable product with a gross margin per unit of $54.00 (21.6%) and product C is the most profitable product with a gross margin per unit of $ (55.67%). Product costs based on the activity-based costing system Product A Product B Product C Direct materials $ $ $ Direct labor Factory overhead: Setups (a) Materials handling (b) Hazardous control (c) Quality control (d) Utilities (e) Total Factory overhead $ $41.95 $ Total Cost $ $ $ Actual selling price $ $ $ Product manufacturing cost Gross margin $ $ ($64.30) Gross margin ratio 25.50% 32.66% (21.43)% 1

2 5-54 (continued -1) Notes: (a) Setups: Cost per setup: $8,000 / ( ) = $800 per setup Product A = 2 x $800 = $1,600; $1,600 /1,000 = $1.60 per unit Product B = 5 x $800 = $4,000; $4,000 /5,000 = $0.80 per unit Product C = 3 x $800 = $2,400; $2,400 /500 = $4.80 per unit (b) Materials handling: Cost per pound = $100,000 / ( ) = $100 per pound Product A = 400 x $100 = $40,000; $40,000/1,000 = $40.00 per unit Product B = 250 x $100 = $25,000; $25,000/5,000 = $ 5.00 per unit Product C = 350 x $100 = $35,000; $35,000/500 = $70.00 per unit (c) Waste and hazardous disposals: Cost per disposal: $250,000/( ) = $2,500 per disposal Product A = 25 x $2,500 = $ 62,500; $ 62,500/1,000 = $ 62.50/unit Product B = 45 x $2,500 = $112,500; $112,500/5,000 = $ 22.50/unit Product C = 30 x $2,500 = $ 75,000; $ 75,000/500 = $150.00/unit (d) Quality inspections: Cost per inspection = $75,000/( ) = $750 per inspection Product A = 30 x $750 = $22,500; $22,500/1,000 = $22.50 per unit Product B = 35 x $750 = $26,250; $26,250/5,000 = $ 5.25 per unit Product C = 35 x $750 = $26,250; $26,250/500 = $52.50 per unit (e) Utilities: Cost per MH = $60,000 / (2, , ,000) = $6.00 per MH Product A = 2,000 x $6 = $12,000; $12,000/1,000 = $12.00 per unit Product B = 7,000 x $6 = $42,000; $42,000/5,000 = $ 8.40 per unit Product C = 1,000 x $6 = $ 6,000; $ 6,000/500 = $12.00 per unit 2

3 5-54 (continued-2) 3. Comparison of reported product costs, new target price, actual selling price, and gross margin (loss): Product A Product B Product C Product costs: 1. Direct-labor based system $ $ $ Activity-based system $ $ $ ABC-based product costs: Target price (150%) $ $ $ Actual selling price $ $ $ Difference in price $32.90 $ 2.52 $ Direct-labor based costing system Gross margin $ 94 $ 54 $167 Gross margin ratio 33.57% 21.6% 55.67% Activity-based costing system: Gross margin $71.40 $81.65 $(64.30) Gross margin ratio 25.50% 32.66% (21.43%) 4. Strategic and Competitive Analysis 1. Emphasizing Product C as suggested by the current directlabor-cost based overhead costing system is likely to harm the firm s competitiveness. The activity-based costing system shows that the manufacturing cost of Product C is $ per unit and, at the current selling price, the firm suffers a $64.30 loss for each unit it manufactures and sells. 2. If the actual selling prices of products A & B are fair market prices for these products and a markup of 150% is a common industry practice, the firm needs to examine the manufacturing cost of product A. The fact that the firm s target price, determined using 150% of the manufacturing cost, is more than 10 percent over the fair market price of the product suggests possible waste and inefficiency in the manufacturing of product A. 3

4 5-58 Volume-Based Costing vs. ABC 1. Manufacturing Costs Volume Based Basic Data Units Sold Materials Labor Selling Price Exterior Door 5,000 $40 $24 $150 Interior Door 50,000 $30 $12 $80 Activities Activity Cost Driver Total Activity Exterior Door Interior Door Machine operation Machine-hours $200,000 10,000 2,500 7,500 Support labor overhead Direct labor costs $150,800 $ 720,000 $ 120,000 $ 600,000 Machine setup Setup hours $82,500 2,500 1,200 1,300 Assembly Number of parts $140, , , ,000 Inspection Inspection hours $66,250 4,000 1,800 2,200 Total $640,425 Using the Volume Based Method Overhead allocated on the basis of direct labor cost $ =$640,425/$720,000 Total Per Unit Exterior Door $ 106,738 $ Interior Door 533, Activity Rates and Costs Using ABC: Using the Activity-based Method Activity Exterior Door Interior Door Rate Activity Cost Driver Activities Overhead Activities Overhead Machine operation $ Machine-hours 2,500 $50,000 7,500 $150,000 Support labor overhead $ Direct labor costs 120,000 $25, ,000 $125,667 Machine setup $ Setup hours 1,200 $39,600 1,300 $42,900 Assembly $ Number of parts 192,500 $67, ,000 $73,500 Inspection $ Inspection hours 1,800 $29,813 2,200 $36,438 $211,921 $428,504 4

5 5-58 (continued-1) Exterior Door Interior Door Total Per Unit Total Per Unit Number of units 5,000 50,000 Sales $ 750,000 $ ,000,000 $ Direct materials 200, ,500, Direct Labor 120, , Overhead Machine Operation 50, , Support Labor 25, , Machine Setup 39, , Assembly 67, , Inspection 29, , Total Overhead 211, , Total Manufacturing Costs 531, ,528, Gross Margin $ 218, $ $ 1,471, $ Gross Margin Percent 29.08% 36.79% 3. The above profitability analysis indicates that the Exterior Door is not as profitable as the vice president of marketing thinks it is. 5

6 5-58 (continued-2) 4. Unit Cost Comparison of overhead costs between the current and ABC costing systems Cost Comparison of Overhead costs per unit Ext. Doors Int. Doors Volume-based $ Activity Based Difference (ABC-VB) $ $ (2.10) According to the ABC cost data, a shift to more Exterior Door units and fewer Interior Door units would be ill advised. The apparent higher unit gross margin of the Exterior Doors relative to the Interior Doors indicates that the current costing system distorted relative unit profitability. 5. Among the reasons for the difference are: a. The current direct labor based costing system focused on only one manufacturing activity of the entire production process. It measures only one attribute of the individual product: the number of direct labor hours consumed. By contrast, the ABC system considered all activities of the manufacturing processes. Costs were traced from activities to products based on the product s demand for these activities during the production process. The allocation bases used in ABC were thus measures of the activities performed. For Superior Door Company, the ABC systems listed not only the unit-level activities (machine operation, support labor overhead) but also the batch-level ones (setup, assembly, and inspection.) b. Under the volume-based costing system, the high-volume interior doors were overcosted and the low-volume exterior doors were undercosted. The source of this distortion is the choice of a single volume-related allocation base, direct labor cost, for tracing of costs from manufacturing to products. Using a volumerelated allocation base alone to trace costs to products distorted reported product costs if some of the product-related activities were not related to volume, such as the setup hours. c. Differences in the complexity of the products also contribute to cost distortion. Using a volume-based costing system, overhead costs differ only when different number of units are manufactured. Although the exterior doors were low-volume products, they actually consume more resources a result not related to volume. 6