MBA620 midterm final draft

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School

Western Michigan University *

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620

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Business

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Feb 20, 2024

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Uploaded by DeaconSnake481

Memorandum To: Jeri Cooper, Sales Manager Shane McClellan, managerial accountant Date: September 19, 2023 Subject: Cost Estimate for Proposed Job and Activity-Based Management Analysis Introduction As requested, the following document will provide you with a total cost estimate for the proposed job, and to evaluate the accuracy of our current costing system. I have also been asked to use activity-based management (ABM) to identify potential process inefficiencies that could be driving up costs. Cost Estimate: Costing System Total Cost Estimate Traditional $24,800 Activity Based Costing $26,700 Traditional Costing System Our current costing system is a traditional (plantwide) costing system, with overhead costs allocated based on total direct labor hours. Using this system, the total cost estimate for the proposed job is $24,800 . Activity Based Costing System The proposed ABC system allocates overhead costs to products based on the amount of resources they consume. Using this system, the total cost estimate for the proposed job is $26,738 . The ABC cost estimate is more accurate than the traditional cost estimate because it allocates overhead costs to products based on the amount of resources they consume. The traditional costing system allocates overhead costs based on total direct labor hours, which is not an accurate measure of resource consumption for the proposed job.

For example, the proposed job requires more setups and color changes than typical jobs. The ABC system allocates the cost of setups and color changes to the proposed job more accurately than the traditional costing system. Activity Based Management While reviewing through an ABM lens, one potential process inefficiency that I identified using ABM is the high cost of the correction activity. The correction activity consumes a significant amount of direct labor hours and materials. This suggests that there may be opportunities to improve the production process to reduce the need for correction. Evaluation of the ABC System The proposed ABC system is a good start, but there are a few changes that I would recommend. First, I would recommend that the ABC implementation team identify a cost driver for the setup activity. The setup activity is a significant cost driver for the proposed job, but it is not currently included in the ABC system. Second, I would recommend that the ABC implementation team evaluate the cost driver for the inspection activity. The number of inspections is not always an accurate measure of resource consumption for the inspection activity. For example, a job that requires a high level of quality control may require more inspections than a job that requires a lower level of quality control. Conclusion I recommend that you use the ABC cost estimate to develop your bid for the proposed job. The ABC cost estimate is more accurate than the traditional cost estimate because it allocates overhead costs to products based on the amount of resources they consume. I also recommend that you use ABM to identify and improve your processes. ABM can help you identify activities that are costly and inefficient. I am happy to discuss any of the information in this memorandum further with you. Please do not hesitate to contact me if you have any questions or concerns. Shane McClellan, managerial accountant Please note that the appendices are not included in this memorandum but will be attached to the document.

Appendix A – Traditional Costing System Direct materials: $7,400 Direct labor: $11,600 Overhead: $5,800 (1,000 machine hours * $1.58 per machine hour + 3,500 lbs of materials * $0.18 per lb + 575 DLH * $21.57 per DLH + 15 inspections * $145 per inspection) Thus, $24,800, based on overhead based on total direct labor hours. Cost Amount Direct materials $7,400 Direct labor $11,600 Overhead (allocated based on direct labor hours) $5,800 Total cost $24,800 Appendix B – Activity Based Costing System Direct materials: $7,400 Direct labor: $11,600 Overhead: $7,700 (1,000 machine hours * $1.58 per machine hour + 3,500 lbs of materials * $0.18 per lb + 575 DLH * $21.57 per DLH + 15 inspections * $145 per inspection + 6 setups * $100 per setup + 4 color changes * $50 per color change) Thus, $26,700, based on where overhead is consumed and when. Cost Amount Direct materials $7,400 Direct labor $11,600 Overhead (allocated based on activity cost drivers) $7,700 Total cost $26,700 Appendix D – Total Overhead Calculations Activity Cost driver Cost driver usage Activity cost rate Overhead Production Machine hours 1,000 $1.58 $1,580 Materials lbs of materials 3,500 $0.18 $630 Correction DLH (trimming) 575 $21.57 $12,388 Inspection # of inspections 15 $145 $2,175 Setups # of setups 6 $100 $600 Color changes # of color changes 4 $50 $200 Total overhead - - - $7,700

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MBA620 midterm final draft

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