Concept explainers
Midwest Home Furnishings Corporation (MHFC) manufactures a variety of house wares for the consumer market in the Midwest. The company’s three major product lines are cooking utensils, tableware, and flatware. MHFC implemented activity-based costing four years ago and now has a well-developed ABC system in place for determining product costs. Only recently, however, has the ABC system been systematically used for the purposes of activity-based management. As a pilot project, MHFC’s controller asked the ABC project team to do a detailed activity analysis of the purchasing activity. The following specific activities were identified.
- 1. Receipt of parts specifications from the Design Engineering Department.
- 2. Follow-up with design engineers to answer any questions.
- 3. Vendor (supplier) identification.
- 4. Vendor consultations (by phone or in person).
- 5. Price negotiation.
- 6. Vendor selection.
- 7. Ordering (by phone or mail).
- 8. Order follow-up.
- 9. Expediting (attempting to speed up delivery).
- 10. Order receiving.
- 11. Inspection of parts.
- 12. Return of parts not meeting specifications.
- 13. Consultation with design engineers and production personnel if parts do not satisfy intended purpose.
- 14. Further consultation and/or negotiation with vendor if necessary.
- 15. Ship parts back to vendor if necessary.
- 16. If satisfactory, move parts to storage.
Required:
- 1. Draw a diagram to depict MHFC’s two-dimensional activity-based costing efforts. The diagram should include the following:
- a. The cost assignment role of ABC, with the cost pools, activities, and product lines represented.
- b. The process view of ABC, with the purchasing activities displayed. Also indicated here will be the linkages among the activities. (To save space, indicate the activities by their numbers.)
- c. The activity evaluation phase of two-dimensional ABC.
- 2. Identify the triggers for each of the following activities in MHFC’s purchasing activity analysis:
Follow-up with design engineers (activity 2)
Expediting (activity 9)
Inspection of parts (activity 11)
Return of parts (activity 12)
Consultation with design engineers and production personnel (activity 13)
- 3. For each of the activities listed in requirement (2), identify the possible root causes.
- 4. Choose four activities in MHFC’s purchasing function, and suggest a performance measure for each of these activities.
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Managerial Accounting: Creating Value in a Dynamic Business Environment
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