Chapter 5 Exercises
CHAPTER 5
ACTIVITY-BASED COSTING AND ACTIVITY-BASED MANAGEMENT
5-16 (20 min.) Cost hierarchy. 1. a. Indirect manufacturing labor costs of $1,450,000 support direct manufacturing labor and are output unit-level costs. Direct manufacturing labor generally increases with output units, and so will the indirect costs to support it. b. Batch-level costs are costs of activities that are related to a group of units of a product rather than each individual unit of a product. Purchase order-related costs (including costs of receiving materials and paying suppliers) of $850,000 relate to a group of units of product and are batch-level costs. c. Cost of indirect materials of $275,000 generally changes with labor hours or machine hours which are unit-level costs. Therefore, indirect material costs are output unit-level costs. d. Setup costs of $630,000 are batch-level costs because they relate to a group of units of product produced after the machines are set up. e. Costs of designing processes, drawing process charts, and making engineering changes for individual products, $775,000, are product-sustaining because they relate to the costs of activities undertaken to support individual products regardless of the number of units or batches in which the product is produced. f. Machine-related overhead costs (depreciation and maintenance) of $1,500,000 are output unit-level costs because they change with the number of units produced. g. Plant management, plant rent, and insurance costs of $925,000 are facility-sustaining costs because the costs of these activities cannot be traced to individual products or services but support the organization as a whole.
2. The complex boom box made in many batches will use significantly more batch-level overhead resources compared to the simple boom box that is made in a few batches. In addition, the complex boom box will use more product-sustaining overhead resources because it is complex. Because
ACTIVITY-BASED COSTING AND ACTIVITY-BASED MANAGEMENT
5-16 (20 min.) Cost hierarchy. 1. a. Indirect manufacturing labor costs of $1,450,000 support direct manufacturing labor and are output unit-level costs. Direct manufacturing labor generally increases with output units, and so will the indirect costs to support it. b. Batch-level costs are costs of activities that are related to a group of units of a product rather than each individual unit of a product. Purchase order-related costs (including costs of receiving materials and paying suppliers) of $850,000 relate to a group of units of product and are batch-level costs. c. Cost of indirect materials of $275,000 generally changes with labor hours or machine hours which are unit-level costs. Therefore, indirect material costs are output unit-level costs. d. Setup costs of $630,000 are batch-level costs because they relate to a group of units of product produced after the machines are set up. e. Costs of designing processes, drawing process charts, and making engineering changes for individual products, $775,000, are product-sustaining because they relate to the costs of activities undertaken to support individual products regardless of the number of units or batches in which the product is produced. f. Machine-related overhead costs (depreciation and maintenance) of $1,500,000 are output unit-level costs because they change with the number of units produced. g. Plant management, plant rent, and insurance costs of $925,000 are facility-sustaining costs because the costs of these activities cannot be traced to individual products or services but support the organization as a whole.
2. The complex boom box made in many batches will use significantly more batch-level overhead resources compared to the simple boom box that is made in a few batches. In addition, the complex boom box will use more product-sustaining overhead resources because it is complex. Because