Bob Randall, cost accounting manager for Hemple Products, was asked to determine the costs of the activities performed within the company’s Manufacturing Engineering Department. The department has the following activities: creating bills of materials (BOMs), studying manufacturing capabilities, improving manufacturing process, training, employees, and designing tools. The resources costs (from the general ledger) and the times to perform one unit of each activity are provided below: Resource Cost Activities Unit Time Driver Salaries $500,000 Creating BOMs 0.5 hr. No. of BOMs Equipment 100,000 Designing Tools 5.4 hr. No. of tools designs Supplies 30,000 Improving processes 1.0 hr. Process improvement hrs Total $630,000 Training employees 2.0 hr. No. of training sessions Studying capabilities 1.0 hr. Study hrs. Total machine and labor hours (at practical capacity): Machine hours 2,000 Engineering hours 18,000 Total hours 20,000 The activity, designing tools, uses the number of tools designed as the activity driver. Using a traditional approach, the cost of the designing tools activity was determined to be $179,000 (see Exercise 4.19) with an expected activity output of 1,000 for the coming year. During the first week of the year, two jobs (Job 150 and Job 151) had a demand for 10 and 20 new tools, respectively. Required: Calculate the capacity cost rate for the Manufacturing Engineering Department. Using the capacity cost rate, determine the activity rates for each activity. Calculate the cost of designing tools that would be assigned to each job using the TDABC-derived activity rate and then repeat using the traditional ABC rate. What might be the cause or cause that would explain the differences in the two approaches? Now suppose that time for creating BOMs is 0.50 for a standard product but that creating a BOM for a custom product adds an additional 0.3 hour. Express the time equation for this added complexity and then calculate the activity rate for the activity of creating a BOM for custom products.
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Bob Randall, cost
| Resource Cost | Activities | Unit Time | Driver | |
| Salaries | $500,000 | Creating BOMs | 0.5 hr. | No. of BOMs |
| Equipment | 100,000 | Designing Tools | 5.4 hr. | No. of tools designs |
| Supplies | 30,000 | Improving processes | 1.0 hr. | Process improvement hrs |
| Total | $630,000 | Training employees | 2.0 hr. | No. of training sessions |
| Studying capabilities | 1.0 hr. | Study hrs. |
Total machine and labor hours (at practical capacity):
Machine hours 2,000
Engineering hours 18,000
Total hours 20,000
The activity, designing tools, uses the number of tools designed as the activity driver. Using a traditional approach, the cost of the designing tools activity was determined to be $179,000 (see Exercise 4.19) with an expected activity output of 1,000 for the coming year. During the first week of the year, two jobs (Job 150 and Job 151) had a demand for 10 and 20 new tools, respectively.
Required:
- Calculate the capacity cost rate for the Manufacturing Engineering Department.
- Using the capacity cost rate, determine the activity rates for each activity.
- Calculate the cost of designing tools that would be assigned to each job using the TDABC-derived activity rate and then repeat using the traditional ABC rate. What might be the cause or cause that would explain the differences in the two approaches?
- Now suppose that time for creating BOMs is 0.50 for a standard product but that creating a BOM for a custom product adds an additional 0.3 hour. Express the time equation for this added complexity and then calculate the activity rate for the activity of creating a BOM for custom products.
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