Chapter 5, Problem 64P

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. 1. Receipt of parts specifications from the Design Engineering Department.
2. 2. Follow-up with design engineers to answer any questions.
3. 3. Vendor (supplier) identification.
4. 4. Vendor consultations (by phone or in person).
5. 5. Price negotiation.
6. 6. Vendor selection.
7. 7. Ordering (by phone or mail).
8. 8. Order follow-up.
9. 9. Expediting (attempting to speed up delivery).
10. 10. Order receiving.
11. 11. Inspection of parts.
12. 12. Return of parts not meeting specifications.
13. 13. Consultation with design engineers and production personnel if parts do not satisfy intended purpose.
14. 14. Further consultation and/or negotiation with vendor if necessary.
15. 15. Ship parts back to vendor if necessary.
16. 16. If satisfactory, move parts to storage.

Required:

1. 1. Draw a diagram to depict MHFC’s two-dimensional activity-based costing efforts. The diagram should include the following:
   1. a.      The cost assignment role of ABC, with the cost pools, activities, and product lines represented.
   2. 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.)
   3. c.       The activity evaluation phase of two-dimensional ABC.
2. 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. 3. For each of the activities listed in requirement (2), identify the possible root causes.
4. 4. Choose four activities in MHFC’s purchasing function, and suggest a performance measure for each of these activities.