Abc Costing System

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  • Topic: Costs, Variable cost, Fixed cost
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5-47 ABC and TOC     Discuss the similarities and differences between activity-based costing and the theory of constraints, as well as situations in which one approach might be preferable to the other.

5-48 Cycle time efficiency and JIT     Walker Brothers Company is considering installing a JIT manufacturing system in the hope that it will improve its overall processing cycle efficiency. Data from the traditional system and estimates for the JIT system are presented here for their Nosun Product: TIME CATEGORY     TRADITIONAL SYSTEM     JIT SYSTEM Storage     4 hours     1 hour

Inspection     40 minutes     5 minutes
Moving     80 minutes     20 minutes
Processing     2 hours     75 minutes

a.     Calculate processing cycle efficiency (PCE) under the traditional and JIT systems for the Nosun product. b.     Strictly based on your PCE calculations above, should Walker Brothers implement the JIT system? Explain.

5-50 Relevant Costs: dropping a product     Merchant Company manufactures and sells three models of electronic printers. Ken Gail, president of the company, is considering dropping model JT484 from its product line because the company has experienced losses for this product over the past three quarters. The following product-level operating data have been compiled for the most recent quarter: CATEGORY     TOTAL     JT284     JT384     JT484 Sales     $1,000,000     $500,000     $200,000     $300,000 Variable costs     ___600,000     __300,000     __100,000     __200,000 Contribution margin     $400,000     $200,000     $100,000     $100,000 Fixed costs:                    

     Rent     $50,000     $25,000     $10,000     $15,000      Depreciation     60,000     30,000     12,000     18,000      Utilities     40,000     20,000     5,000     15,000      Supervisors     50,000     15,000     5,000     30,000      Maintenance     30,000     15,000     6,000     9,000      Administrative     __100,000     __30,000     __20,000     __50,000 Total fixed costs     _$330,000     $135,000     _$58,000     $137,000 Operating income (loss)     $70,000     $65,000     $42,000     ($37,000)

In addition, the following information is also available:
•     Factory rent and depreciation will not be affected by a decision to drop model JT484. •     Quarterly utility bills will be reduced from $40,000 to $31,000 if JT484 is dropped. •     Supervision costs for JT484 can be eliminated if dropped. •     The maintenance department will be able to reduce quarterly costs by $7,000 if JT484 is dropped. •     Elimination of JT484 will make it possible to eliminate two administrative staff positions with combined salaries of $30,000 per quarter.

a.     Should Merchant Company eliminate JT484?
b.     Merchant’s sales manager believes that it is important to continue to produce JT484 to maintain a full product line. He expects the elimination of JT484 will reduce sales of the remaining two products by 5% each. Will this information change your answer to (a)? Explain. 5-51 Quality improvement programs and cost savings     Garber Valves Company manufactures brass valves meeting precise specification standards. All finished valves are inspected before packing and shipping to customers. Rejected valves are returned to the initial production stage to be melted and recast. Such rework requires no new materials in casting but requires new materials in finishing. The following unit cost data are available:

COSTS     CASTING     FINISHING     INSPECTION     PACKAGING     TOTALS Direct materials      $225     $12     $0     $8     $245 Direct labor     84     121     24     16     245 Variable support     122     164     30     20     336 Fixed support     __63     ___89     ___16     __10     __178      $494     $386     $70     $54     $1,004

As a result of a quality-improvement program, the reject rate has decreased from 6.4% to 5.1% and the number of rejects has decreased by (6.4%-5.1%) x (10,000) units. Improvements in...
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