Paso 4 Comprobar la certificación de eliminación
6. OTRAS CUESTIONES IMPORTANTES
Sales . . . $ 300,000 $ 700,000 $ 800,000 $ 1,800,000 Direct materials . . . (70,000) (150,000) (200,000) (420,000) Direct labor . . . (50,000) (200,000) (250,000) (500,000) Manufacturing overhead . . . (100,000) (400,000) (500,000) (1,000,000) Profit . . . $ 80,000 $ (50,000) $(150,000) $ (120,000)
Practice 8-9
Practice 8-10
Practice 8-11
Practice 8-12
Practice 8-13
(continued)The company traditionally allocates manufacturing overhead based on the level of direct labor cost—$2 of manufacturing overhead are allocated for each $1 of direct labor cost. However, of the company’s $1,000,000 in manufacturing overhead costs, $700,000 is directly related to the number of product batches produced during the year. The number of batches of the three prod- ucts for the year was as follows: Product X, 20 batches; Product Y, 30 batches; Product Z, 50 batches. The remaining $300,000 in overhead is for facility support (property taxes, security costs, general administration, and so forth).
As you can see, the total company loss is $120,000. In an effort to reduce or eliminate this loss, the company has decided to drop Product Z. What would total company profit (or loss) have been in the most recent year if Product Z had been dropped at the beginning of the year?
Unit-Level, Batch-Level, Product Line, and Facility Support Costs
The company has determined that its total manufacturing overhead cost of $900,000 is a mix- ture of unit-level, batch-level, product line, and facility support costs. The company has as- sembled the following information concerning the manufacturing overhead costs, the annual number of units produced, production batches, and number of product lines in each division.
Total Overhead
Costs Division A Division B
Unit-level overhead $210,000 7,500 units 13,500 units
Batch-level overhead 280,000 50 batches 90 batches
Product line overhead 210,000 10 lines 18 lines
Facility support overhead 200,000 — —
Total $900,000
Compute how much total overhead cost would remain if Division A were eliminated.
Activity-Based Management
Which one of the following is a correct flow of information in activity-based management? a. Activities →Costs →Products
b. Activity Cost Drivers →Performance Measures →Activities c. Activity Cost Drivers →Activities →Performance Measures d. Activity Cost Drivers →Activities →Performance Measures e. Products →Activities →Costs
Total Quality Management
Which one of the following statements is false ?
a. Total quality management is simply a general endorsement of quality in a company. b. W. Edward Deming led the quality revolution in Japan during the 1950s.
c. Total quality management shifted some of the companies’ focus from costs to quality. d. Statistical process control can help management know whether a process has serious problems.
Costs of Quality
Which one of the following is not a type of costs of quality? a. Appraisal costs
b. Adaptive costs c. Internal failure costs d. Prevention costs e. External failure costs
Practice 8-14
Practice 8-15
Practice 8-16
Taguchi’s Quality Loss Function
The cost required to fix a product defect and get that product on target would cost the com- pany $500. Currently, the product is three standard units from the target specifications. Using Taguchi’s quality loss function, compute the total quality loss due to external failures.
Practice 8-18
Product Costing Review
Mad Dog Enterprises manufactures computer game control devices such as joysticks and steer- ing wheels. Following is a list of the costs incurred by Mad Dog in 2006:
Wages paid to assembly workers . . . $100,000 Cost of plastic used in making devices . . . 25,000 Insurance on factory building . . . 12,000 Salary of factory supervisor . . . 57,000 Interest on money borrowed to finance operations . . . 34,000 Wages paid to factory maintenance workers . . . 61,000 Cost of computer/controller boards installed in devices . . . 38,000 Advertising costs . . . 127,000 Cost of electricity used in factory . . . 46,000
Compute the total cost for each of the following categories: 1. Direct materials
2. Direct labor
3. Manufacturing overhead 4. Period costs
Importance of Manufacturing Overhead Allocation
The percentages of product costs comprised by direct materials, direct labor, and manufactur- ing overhead for three companies are as follows:
Company A Company B Company C
Direct materials . . . 7% 21% 42%
Direct labor . . . 13 42 49
Manufacturing overhead . . . 80 37 9
100% 100% 100%
Based on this information, which of these three companies would probably improve its prod- uct costing accuracy most by converting to activity-based costing (ABC)? Explain your answer.
Product Cost Hierarchy
For the following list of costs, indicate by the appropriate letter which category of activities each cost applies to: unit level (U), batch level (B), product line (P), or facility support (F):
e
x e r c i s e s
Exercise 8-1
Exercise 8-2
Exercise 8-3
a. Machine fine-tuning adjustment cost (required after the production of each unit) b. Salary of vice president of finance
c. Machine inspection cost (required after the completion of each day’s production) d. Cost of the external audit firm
e. Direct labor
f. Product testing cost (performed at the start of each day’s production) g. Direct materials
h. Factory security cost
i. Machine straight-line depreciation cost (Generally, machines are dedicated to producing a particular type of product.)
j. Warehousing cost (Each type of product has its own warehouse.)
k. Employee training cost (Training is generally specific to different types of products.)
Identifying Cross-Subsidization
Cottrell Company manufactures three products. Gross margin computations for these three products for 2006 are given below.
Product A Product B Product C
Sales . . . $ 300,000 $ 500,000 $ 600,000 Direct materials . . . (50,000) (250,000) (200,000) Direct labor . . . (150,000) (50,000) (100,000) Manufacturing overhead* . . . (225,000) (75,000) (150,000) Gross margin . . . $(125,000) $ 125,000 $ 150,000
*Manufacturing overhead is allocated to production based on the amount of direct labor cost.
Cottrell has reexamined the factors that cause its manufacturing overhead costs and has dis- covered that the annual amount of manufacturing overhead is more closely related to the num- ber of product batches produced during the year than it is to direct labor costs. The number of batches of the three products for 2006 was as follows: Product A, 10 batches; Product B, 60 batches; Product C, 30 batches.
1. Prepare gross margin calculations for Cottrell’s three products assuming that manufacturing overhead is allocated based on the number of batches.
2. Under the direct labor cost method of manufacturing overhead allocation, one of Cottrell’s products received a cross-subsidization from the others. Which product received the subsi- dization, and what was the amount of the subsidization?
Identifying Cross-Subsidization
Halsey, Inc. manufactures two types of baby car seats: standard and deluxe. Information for the year 2006 has been given as follows.
Standard Deluxe
Sales price . . . $50 $80 Units produced and sold . . . 23,400 9,750 Direct materials cost . . . $195,000 $130,000 Direct labor cost per hour . . . $10 $10 Direct labor hours . . . 35,100 42,900 Purchase orders . . . 100 25
Exercise 8-4
Manufacturing overhead for the year totals $650,000. Halsey allocates manufacturing overhead by direct labor hour.
1. Prepare gross margin calculations for each product line using direct labor hours as an alloca- tion base.
2. Management has determined that a more correct method of allocating manufacturing over- head is by the number of purchase orders. Prepare new gross margin calculations for man- agement using purchase orders as the allocation base.
3. Assuming that allocating manufacturing overhead by purchase orders is more correct, did one of the product lines receive a cross-subsidization? If so, how much was the cross-subsidization?
Allocating Batch-Level and Product Line Manufacturing Overhead Costs
Giles Company has two divisions. Gross margin computations for these two divisions for 2006 are as follows: Standard Custom Products Products Sales . . . $1,200,000 $1,800,000 Direct materials . . . (200,000) (300,000) Direct labor . . . (600,000) (600,000) Manufacturing overhead* . . . (500,000) (500,000) Gross margin . . . $ (100,000) $ 400,000
*Manufacturing overhead is allocated to production based on the amount of direct labor cost.
Giles has determined that its total manufacturing overhead cost of $1,000,000 is a mixture of batch-level costs and product line costs. Giles has assembled the following information con- cerning the manufacturing overhead costs, the annual number of production batches in each division, and the number of product lines in each division:
Total Mfg.
Overhead Standard Custom Costs Products Products
Batch-level manufacturing overhead . . . $ 600,000 15 batches 60 batches Product line manufacturing overhead . . . 400,000 10 lines 30 lines
$1,000,000
1. Prepare gross margin calculations for Giles’ two divisions assuming that manufacturing over- head is allocated based on the number of batches and number of product lines.
2. Under the direct labor cost method of manufacturing overhead allocation, which division received a cross-subsidization, and what was the amount of the cross-subsidization?
Allocating Batch-Level and Product Line Manufacturing Overhead Costs
Sundance Skis Company is preparing its end-of-year gross margin computations. Sundance Skis manufactures three types of products: skis, snowboards, and snow skates. The following infor- mation, as of the end of the year, is available for these products.
Exercise 8-6
Exercise 8-7
Skis Snowboards Snow Skates
Total sales revenue . . . $1,250,000 $1,500,000 $750,000
Units produced . . . 4,500 3,750 6,750
Direct materials . . . $(625,000) $(500,000) $(125,000) Direct labor . . . $(125,000) $(250,000) $(375,000)
Number of setups . . . 9 18 3
Number of product styles . . . 5 7 3
Total manufacturing overhead is $1,125,000, with $506,250 related to batch-level activities and $618,750 related to product line activities.
1. In the past, Sundance Skis has allocated manufacturing overhead based on the number of units produced. Prepare gross margin calculations for Sundance Skis’ three divisions allocat- ing manufacturing overhead according to the number of units produced.
2. After investigation, management at Sundance Skis determined that a more accurate alloca- tion of manufacturing overhead would be to assign these costs using batch-level and product line activities. Prepare gross margin calculations for Sundance Skis’ three divisions by assign- ing manufacturing overhead using batch-level and product line activities. Assume that the number of setups is the activity allocation basis for assigning costs of batch-level activities and that the number of product styles is the allocation base for assigning costs of product line activities.
Common Costs and the Death Spiral
Blaine Avenue Company manufactures three products. Gross margin computations for these three products for 2006 are as follows:
Product X Product Y Product Z
Sales . . . $800,000 $ 700,000 $ 600,000 Direct materials . . . (50,000) (150,000) (200,000) Direct labor . . . (50,000) (200,000) (250,000) Manufacturing overhead* . . . (80,000) (320,000) (400,000) Gross margin . . . $620,000 $ 30,000 $(250,000)
*Manufacturing overhead is allocated to production based on the amount of direct labor cost.
Blaine Avenue has reexamined the activities that relate to its manufacturing overhead costs and has discovered that $500,000 of the annual amount of manufacturing overhead is directly re- lated to the number of product batches produced during the year. The number of batches of the three products for 2006 was as follows: Product X, 100 batches; Product Y, 100 batches; Product Z, 50 batches. The remaining $300,000 in overhead is for facility support (property taxes, security costs, general administration, etc.) and does not vary at all with the level of activity.
1. Prepare gross margin calculations for Blaine Avenue’s three products assuming that manu- facturing overhead is allocated based on the number of batches. Also, show a “total” col- umn. Facility support costs are not to be allocated to any of the products, but are to be subtracted in the “total” column in the computation of total company operating profit. 2. Using the gross margin numbers prepared under the direct labor cost method of manufac-
turing overhead allocation, Blaine Avenue’s board of directors has tentatively decided to dis- continue the Z product line. Assume that this was done at the beginning of 2006. What would have happened to total company operating profit for the year? Explain.
Common Costs and the Death Spiral
Wilken Sandwich Shop maintains three separate menus for breakfast, lunch, and dinner. Gross margin computations for the three menu lines for 2006 are as follows:
Breakfast Lunch Dinner
Sales . . . $ 880,000 $1,015,000 $ 720,000 Direct materials . . . (260,000) (217,500) (175,000) Direct labor . . . (325,000) (290,000) (155,000) Overhead* . . . (528,000) (264,000) (264,000) Gross margin . . . $(233,000) $ 243,500 $ 126,000
*Overhead is allocated to the menu lines based on the number of customers served each day. In 2006, 4,000 breakfast customers, 2,000 lunch customers, and 2,000 dinner customers were served.
Management at Wilken has tentatively decided to stop serving breakfast in its restaurants because of poor financial performance. Before doing so, they have reexamined the costs of all three menu lines in order to verify that they are correct. Management determined that direct materials and direct labor costs are correct. However, using an activity-based costing approach, they discovered that $408,000 of overhead costs are related to facility support activities and the rest of the overhead ($648,000) is related to the kitchen setup activities required to prepare the menu line each day (a batch-level activity). They determined that a good cost allocation base for batch-level kitchen activities is number of setups per business day. Wilken was open for business 360 days in 2006. The number of daily setup activities for each menu line is as follows:
Breakfast . . . 10 Lunch . . . 15 Dinner . . . 5
1. Since management has tentatively decided to stop serving breakfast, they have asked to see gross margin calculations for the lunch and dinner menus. Assuming the breakfast menu was dropped at the beginning of 2006, prepare gross margin calculations for the lunch and dinner menu lines assuming overhead is allocated based on the number of customers served. Be sure to show a “total” column.
2. Prepare gross margin calculations for Wilken’s three menu lines assuming that overhead is assigned using activity-based costing. Facility support costs are not to be allocated to any of the menu lines, but are to be subtracted in the “total” column in the computation of total company operating profit.
3. Using the gross margin numbers prepared in parts (1) and (2), what would have happened to total company operating profit for the year 2006 if Wilken would have dropped its breakfast menu at the beginning of the year? Explain.
Costs of Quality
Some of the costs in the list below are costs of quality. For each cost, indicate by the appro- priate letter what type of cost it is: prevention cost (P), appraisal cost (A), internal failure cost (I), external failure cost (E), or not a cost of quality (N/A).
a. Cost of raw materials used in discarded, defective products b. Salary of the president of the company
c. Cost to purchase product testing equipment
d. Lawsuit costs stemming from the sale of defective products e. Cost to repair defective products before shipment
Exercise 8-9
Exercise 8-10
f. Employee quality training costs
g. Employee downtime caused by production halts to repair defective products h. Cost of sampling raw materials to ensure quality
i. Customer warranty costs j. Property taxes
k. Cost of lost reputation (i.e., lost sales)
l. Cost to help suppliers improve their product shipping procedures m. Interest cost on short-term loans
n. Production process design costs
Costs of Quality
Sara’s Stylish Suppers prepares food for wholesale to gourmet restaurants. Quality is very im- portant to consumers of gourmet food. Following is a list of costs that Sara incurred during 2006:
Wages paid during downtime to fix machinery . . . $ 50,000 Cost of spoiled raw materials (cheese, meat, etc.) . . . 85,000 Training cost for new food handlers . . . 12,000 Wages paid to food samplers . . . 15,000 Lawsuits for severe food poisoning . . . 134,000 Cost of refrigerator used to keep food fresh . . . 75,000 Wages paid to quality inspectors . . . 21,000 Wages paid to chefs who create new gourmet dishes . . . 97,000 Wages paid for redoing poor quality food (found before delivery) . . . 46,000
In addition, Sara’s accountants estimated approximately $100,000 in lost sales due to restau- rant managers who are unhappy with Sara’s products and service.
Compute the total cost for each of the following categories: 1. Prevention costs
2. Appraisal costs 3. Internal failure costs 4. External failure costs
Optimal Level of Costs of Quality
Beki Browne is planning to open her own homebuilding company. Beki is trying to decide whether to provide low-quality homes, average-quality homes, or high-quality homes. Beki has analyzed the costs of quality related to building homes and has developed the following analy- sis of the costs of quality:
• Prevention costs: The best way to ensure the quality of a home is to hire good subcontrac- tors and use quality materials. Of course, high-quality subcontractors and materials cost more.
• Appraisal costs: To improve the quality of the homes, Beki can hire independent verifiers to determine whether the home is adequately livable and “up to code.”
• Internal failure costs: Sometimes a defect in the home is found just before the home is to be sold. In such a case, Beki must require the subcontractors to spend extra time fixing the home.
• External failure costs: If a home containing lots of defects is sold, the bad reputation cre- ated will hurt potential future sales. To counteract this effect, Beki must spend more on advertising.
Beki has gathered the following numerical information about the costs of quality in relation to building homes:
Exercise 8-11
Low Average High Quality Quality Quality
Prevention costs:
Hours spent building home . . . 1,400 hours 1,600 hours 1,800 hours Subcontractor salary rate . . . $35/hour $45/hour $55/hour
Materials cost per home . . . $50,000 $60,000 $70,000
Appraisal costs:
Verifier hours spent on home . . . 4 hours 10 hours 20 hours
Verifier salary rate . . . $20/hour $20/hour $20/hour Internal failure costs:
Hours spent fixing home . . . 350 hours 175 hours 15 hours Subcontractor salary rate . . . $35/hour $45/hour $55/hour Materials cost for repairs . . . $10,000 $7,000 $3,000 External failure costs:
Cost of advertising . . . $40,000 $10,000 $2,000
Which type of home—low-, average-, or high-quality—should Beki build in order to minimize her total costs of quality? Show your calculations.
Taguchi Quality Loss Function
Cooley Lane Company manufactures computer disk drives. Occasionally, a defective disk drive (one that spins at the wrong revolutions per minute) is shipped to a customer. Cooley Lane’s policy is to fix the drive for free when it is returned by a complaining customer. Cooley Lane has a standardized statistical defect measure whereby each defective drive is given a score of 0 through 5 to indicate how bad it is, with 5 being the worst. A perfect drive receives a score of 0. The direct material and direct labor cost to fix a defective drive is only $25.
The manager in charge of product quality has recently been reading about the Taguchi quality loss function, and she thinks that Cooley Lane is underestimating the external fail- ure costs associated with a defective disk drive. She thinks that Cooley Lane should consider increasing the amount it spends on prevention and appraisal in order to reduce the number of defective drives returned by customers. In the past month, 15 drives have been returned by customers. The drives had the following standardized defect scores:
Standardized Number of Defect Score Defective Drives
1 2
2 1
3 1
4 4
5 7
Using the Taguchi quality loss function, estimate the dollar value of the quality loss associated with the external failure of these defective drives.
Taguchi Quality Loss Function
Tenille’s Toyshack is an online toy store. Customers can log on to the Internet to see Tenille’s selection of toys and to make purchases. Tenille’s shipping policy is that it will ship any order within 24 hours after the purchase is made. After a purchase has been made, Tenille prepares the purchase order and sends an email notification to all customers as soon as the purchase has been shipped. Tenille provides a $20 store credit if the purchase is not shipped within 24 hours after purchase. Following is information on the purchases that were not shipped within 24 hours of being purchased during the past quarter, listed in order of the number of days the order was actually late.
Number of Purchases Number of Not Shipped in 24 Hours Days Late
4 6 8 5 15 4 9 3 22 2 31 1 89
Using the above information and the Taguchi quality loss function, estimate the dollar value of the quality loss associated with the external failure of Tenille’s shipping methods.
Exercise 8-14
Identifying Cross-Subsidization
Rockwell Company has three operating divisions. Gross margin computations for these three divisions for 2006 are given below.
Division M Division N Division O
Sales . . . $ 600,000 $ 400,000 $ 300,000 Direct materials . . . (100,000) (200,000) (80,000) Direct labor . . . (300,000) (60,000) (140,000) Manufacturing overhead* . . . (210,000) (42,000) (98,000) Gross margin . . . $ (10,000) $ 98,000 $ (18,000)
*Manufacturing overhead is allocated to production based on the amount of direct labor cost.
Rockwell has determined that its total manufacturing overhead cost of $350,000 is a mixture of batch-level costs and product line costs. Rockwell has assembled the following information concerning the overhead costs, the annual number of production batches in each division, and the number of product lines in each division:
p
r o b l e m s
Total Mfg. Overhead
Costs Division M Division N Division O
Batch-level overhead . . . $200,000 20 batches 80 batches 100 batches
Product line overhead . . . 150,000 10 lines 30 lines 40 lines
$350,000
Required:
1. Prepare gross margin calculations for Rockwell’s three divisions assuming that manufacturing overhead is allocated based on the number of batches and the number of product lines. 2. Under the direct labor cost method of manufacturing overhead allocation, one or more of
Rockwell’s divisions received a cross-subsidization from one or more of the others. Which division(s) received subsidizations, and what was the amount of the subsidizations?
3. After preparing the gross margin calculations in part (1), what advice do you have for Rock-