Managerial Accounting (5th Edition)
5th Edition
ISBN: 9780134128528
Author: Karen W. Braun, Wendy M. Tietz
Publisher: PEARSON
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Chapter 4, Problem 4.50BP
Comprehensive ABC (Learning Objectives 2 & 3)
FirstServer Systems specializes in servers for work-group, e-commerce, and enterprise resource planning (ERP) applications. The company’s original
A task force headed by FirstServer’s CFO recently designed an ABC system with four activities. The ABC system retains the current system s two direct cost categories. Thus, it budgets only overhead costs for each activity. Pertinent data follow:
| Activity | Allocation Base | Cost Allocation Rate |
| Materials handling | Number of parts | $ 1 10 |
| Machine setup | Number of setups | $ 500.00 |
| Assembling | Assembling hours | $ 80 00 |
| Shipping | Number of shipments | $1,700.00 |
FirstServer Systems has been awarded two new contracts that will be produced as Job A and Job B. Budget data relating to the contracts follow:
| Job A | Job B | |
| Number of parts | 10,000 | 2,000 |
| Number of setups | 20 | 8 |
| Number of assembling hours | 1,000 | 200 |
| Number of shipments | 1 | 1 |
| Total direct labor hours | 9,200 | 500 |
| Number of output units | 100 | 10 |
| Direct materials cost | $246,000 | $46,900 |
| Direct labor cost | $180,000 | $18,000 |
Requirements
- 1. Compute the product cost per unit for each job using the original costing system (with two direct cost categories and a single overhead allocation rate).
- 2. Suppose FirstServer Systems adopts the ABC system. Compute the product cost per unit for each job using ABC.
- 3. Which costing system more accurately assigns to jobs the costs of the resources consumed to produce them? Explain.
- 4. A dependable company has offered to produce both jobs for FirstServer for $5,600 per output unit. FirstServer may outsource (buy from the outside company) Job A only. Job B only, or both jobs. Which course of action will FirstServer managers take if they base their decision on (a) the original system? (b) ABC system costs? Which course of action will yield more income? Explain.
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The activity-based costing (ABC) system has been used by manufacturing companies for a long period of time. Recently, the ABC system has been used by banks, insurance companies, not-for-profit organizations, government agencies, and service companies. Assume that you were hired as a cost accountant to develop a plan to implement the ABC system for one of these service organizations.
Create an ABC system development plan, including detailed steps needed to effectively implement the system. Then present the plan in the discussion. Response should include:
A brief background on the organization's main activities.
Whether there will be any limitation on implementing the ABC system in the organization selected.
Data Master is a computer software consulting company. Its three major functional areas are computer programming, information systems consulting, and
software training. Cynthia Moore, a pricing analyst in the Accounting Department, has been asked to develop total costs for the functional areas. These costs
will be used as a guide in pricing a new contract. In computing these costs, Moore is considering three different methods of allocating overhead costs: the
direct method, the step method, and the reciprocal method. Moore assembled the following data on overhead from its two service departments, the
Information Systems Department and the Facilities Department.
Service Departments
User Departments
Info Systems Facilities Computer Program Consulting
$ 50,000
$110,000
600
$25,000
400
$75,000
1,100
400,000
200,000
600,000
information systems are allocated on the basis of hours of computer usage; facilities are allocated on the basis of floor space.
Required:
Allocate the service…
Data Master is a computer software consulting company. Its three major functional areas are computer programming, information systems consulting, and software training. Cynthia Moore, a pricing analyst in the Accounting Department, has been asked to develop total costs for the functional areas. These costs will be used as a guide in pricing a new contract. In computing these costs, Moore is considering three different methods of allocating overhead costs-the direct method, the step method, and the reciprocal method. Moore assembled the following data on overhead from its two service departments, the Information Systems Department and the Facilities Department.
Service Departments
User Departments
Info Systems
Facilities
Computer Program
Consult
Training
Total
Budgeted Overhead
$
50,000
$
25,000
$
75,000
$
110,000
$
85,000
$
345,000
Info Systems (hrs.)
400
1,100
600
900
3,000
Facilities (Square feet)
200,000…
Chapter 4 Solutions
Managerial Accounting (5th Edition)
Ch. 4 - (Learning Objective 1) Cost distortion is more...Ch. 4 - (Learning Objective 2) The first step in computing...Ch. 4 - (Learning Objective 2) Activities incurred...Ch. 4 - (Learning Objective 3) Which of the following is...Ch. 4 - (Learning Objective 3) The potential benefits of...Ch. 4 - (Learning Objective 4) Lean operations are...Ch. 4 - Prob. 7QCCh. 4 - (Learning Objective 4) Concerning lean operations,...Ch. 4 - (Learning Objective 5) Which of the following is...Ch. 4 - (Learning Objective 5) Which of the following...
Ch. 4 - Understanding key terms (Learning Objectives 1, 2,...Ch. 4 - Use departmental overhead rates to allocate...Ch. 4 - Compute departmental overhead rates (Learning...Ch. 4 - Prob. 4.4SECh. 4 - Prob. 4.5SECh. 4 - Calculate a job cost using ABC (Learning Objective...Ch. 4 - Classifying costs within the cost hierarchy...Ch. 4 - Classifying costs within the cost hierarchy...Ch. 4 - Determine the usefulness of refined costing...Ch. 4 - Prob. 4.10SECh. 4 - Identifying costs as value-added or...Ch. 4 - Identify lean production characteristics (Learning...Ch. 4 - Identify the DOWNTIME activities at a manufacturer...Ch. 4 - Prob. 4.14SECh. 4 - Classifying costs of quality (Learning Objective...Ch. 4 - Quality initiative decision (Learning Objective 5)...Ch. 4 - Assess the impact of a quality initiative...Ch. 4 - Identify ethical standards violated (Learning...Ch. 4 - Compare traditional and departmental cost...Ch. 4 - Compute activity rates and apply to jobs (Learning...Ch. 4 - Apply activity cost allocation rates (Learning...Ch. 4 - Using ABC to bill clients at a service firm...Ch. 4 - Compare traditional and ABC allocations at a...Ch. 4 - Compare traditional and ABC allocations on a job...Ch. 4 - Use ABC to allocate manufacturing overhead...Ch. 4 - Continuation of E4-25A: Determine product...Ch. 4 - Prob. 4.27AECh. 4 - Classify costs and make a quality-initiative...Ch. 4 - Prob. 4.29AECh. 4 - Compare traditional and departmental cost...Ch. 4 - Prob. 4.31BECh. 4 - Prob. 4.32BECh. 4 - Prob. 4.33BECh. 4 - Compare traditional and ABC cost allocations at a...Ch. 4 - Prob. 4.35BECh. 4 - Prob. 4.36BECh. 4 - Prob. 4.37BECh. 4 - Prob. 4.38BECh. 4 - Classify costs and make a quality-initiative...Ch. 4 - Prob. 4.40BECh. 4 - Prob. 4.41APCh. 4 - Use ABC to compute full product costs (Learning...Ch. 4 - Prob. 4.43APCh. 4 - Prob. 4.44APCh. 4 - Prob. 4.45APCh. 4 - Prob. 4.46BPCh. 4 - Prob. 4.47BPCh. 4 - Comprehensive ABC implementation (Learning...Ch. 4 - Using ABC in conjunction with quality decisions...Ch. 4 - Comprehensive ABC (Learning Objectives 2 3)...Ch. 4 - Prob. 4.51SCCh. 4 - Discussion Questions 1. Explain why departmental...Ch. 4 - ABC in Real Companies Choose a company in any of...Ch. 4 - Value-Added versus Non-Value-Added at a Restaurant...Ch. 4 - Ethics involved with ABC and hazardous waste costs...
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