CH 7 Exercises 7-12, 7-20

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Exercise 7-12 (Activity measures) Watch Annin Flagmaking, complete the worksheet about costs 1. Some specific Annin Flagmaking activities 2. Classify level of activity 3. Provide an example of an activity measure (unit, batch, product, customer) (common measures: count, time) Direct labor workers assembling flags unit DL hours or DL costs Product design Product designing hours Equipment setup (tread machine) batch setup hours Machines used to cut and sew flags unit machine hours Monthly bills are sent to customers customer time spent sending bills Forklift and driver to move materials batch hours spent moving materials Final inspection for defects unit inspection hours Plant manager's salary Generally more accurate especially when time consumed differs within activities, but also takes more effort (i.e. cost) Transaction driver: counts of the number of times an activity occurs Duration driver: the amount to time required to perform an activity.

Exercise 7-20 Gallatin Carpet Cleaning is a small, family-owned business operating out of Bozeman, Montana. 1. C For its services, the company has always charged a flat fee per hundred square feet of carpet cleaned. The current fee is $28 per hundred square feet. However, there is some question about whether the company is actually making any money on jobs for some customers--particularly those located on remote ranches that require considerable travel time. The owner's daughter, home for the summer from college, has suggested investigating this question using activity-based costing. After some discussion, she designed a simple system consisting of four activity cost pools. The activity cost pools and their activity measures appear below: Activity Cost Pool Activity Measure Activity for the Year Cleaning carpet Sq. ft. cleaned (00's) 20,000 hundred square feet Travel to jobs miles driven 60,000 miles Job support Number of jobs 2,000 jobs 2. A Other (organization-sustaining costs and idle capacity costs) none n/a The total cost of operating the company includes the following costs: Wages $150,000 Cleaning supplies 40,000 Cleaning equipment dep. 20,000 Vehicle expense 80,000 Office expenses 60,000 Presidents compensation 80,000 total cost $430,000 Resource consumption is distributed across the activities as follows: Other total Wages 70% 20% 0% 10% 100% Cleaning supplies 100% 0% 0% 0% 100% Cleaning equipment dep. 80% 0% 0% 20% 100% Vehicle expense 0% 60% 0% 40% 100% Office expenses 0% 0% 45% 55% 100% Presidents compensation 0% 0% 40% 60% 100% 5. W 3. T 4. P Cleaning carpets travel to jobs Job support

Compute first stage allocation of costs to activity cost pools Cleaning travel to Job carpets jobs support Other total Wages $105,000 $30,000 $0 $15,000 $150,000 Cleaning supplies $40,000 $0 $0 $0 $40,000 Cleaning equipment dep. $16,000 $0 $0 $4,000 $20,000 Vehicle expense $0 $48,000 $0 $32,000 $80,000 Office expenses $0 $0 $27,000 $33,000 $60,000 Presidents compensation $0 $0 $32,000 $48,000 $80,000 Total cost in cost pool $161,000 $78,000 $59,000 $132,000 $430,000 Activity rates Activity cost pool total cost / total activity = Activity rate Cleaning carpet $161,000 20,000 hundred sq. ft. $8.05 per 100 sq ft Travel to jobs $78,000 60,000 miles $1.30 per mile Job support $59,000 2,000 jobs $29.50 per job Activity cost pool Activity rate x Activity = ABC Cost Cleaning carpet $8.05 5 hundred sq. ft. $40.25 Travel to jobs $1.30 75 miles $97.50 Job support $29.50 1 jobs $29.50 $167.25 Sales (5 hundred sqft @ $28/100 sqft) $140.00 costs: Cleaning carpet $40.25 Travel to jobs $97.50 Job support $29.50 $167.25 Margin ($27.25) What advice would you give to the president concerning pricing jobs in the future? The cost for the Flying N Ranch job: Profitability of Flying N Ranch job:

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