5-21 Activity-based costing, service company
Quikprint Corporation owns a small printing press that prints leaflets, brochures, and advertising materials. Quikprint classifies its various printing jobs as standard jobs or special jobs. Quikprint's simple job-costing system has two direct cost categories (direct materials and direct labor) and a single indirect cost pool. Quikprint operates at capacity and allocates all indirect costs using printing machine-hours as the allocation base.
Quikprint is concerned about the accuracy of the costs assigned to standard and special jobs and therefore is planning to implement an activity based costing system. However, instead of a single indirect cost pool there would now be six categories for assigning indirect costs: design, purchasing, setup, printing machine operations, marketing, and administration. To see how activity-based costing would affect the costs of standard and special jobs, Quikprint collects the following information for the fiscal year 2009 that just ended.
Standard Job Special Job Total Cause and effect relationship between Allocation base and activity cost
Number of printing jobs 400 200
Price per job $1,200 $1,500
Cost of supplies per job $ 200 $ 250
Direct labor costs per job $ 180 $ 200
Printing machine hrs pr job 10 10
Cost of printing machine ops. $150,000 Indirect costs of operating printing
machines increase with printing
Setup hours per job 4 7
Setup cost $90,000 Indirect setup cost increase with setup hours
Number of purchase orders 400 500
Purchase order costs $36,000 Indirect purchase order costs increase
with number of purchase orders
Design costs $8,000 $32,000 $40,000 Design costs are allocated to standard
and special jobs based on a special
study of the design department
Marketing costs as a
Percentage of sales price 5% 5% $39,000
Administration costs $48,000 Demand for administrative resources
Increases with direct manufacturing
1. Calculate the cost of a standard job and a special job under the simple costing system
2. Calculate the cost of a standard job and a special job under the activity based costing system
3. Compare the costs of a stand job and a special job in requirement 1 and 2. Why do the simple and activity based costing systems differ in the cost of a standard job and a special job?
4. How might Quikprint use the new cost information from its activity based costing system to better manage its business?
5-25 ABC, activity area cost driver rates, product cross subsidization.
Idaho Potatoes (IP) operates at a capacity and processes potatoes into potato cuts at its highly automated Pocatello plant. It sells potatoes to the retail consumer market and to the institutional market, which includes hospitals, cafeterias, and university dormitories.
IP's simple costing system has a single direct cost category (direct materials, which are the raw potatoes) and a single indirect cost pool (production support). Support costs are allocated on the basis of pounds of potato cuts processed. Support costs include packaging materials. The 2009 total actual costs for producing 1,000,000 pounds of potato cuts (900,000 for the retail market and 100,000 for the institutional market) are:
Direct materials used $150,000
Production support $983,000
The simple costing system does not distinguish between potato cuts produced for the retail and the institutional markets.
At the end of 2009, IP unsuccessfully bid for a large institutional contract. Its bid was reported to be 30% above the winning big. This feedback came as a shock because IP included only a minimum profit margin on its bid. Moreover, the Pocatello plant was acknowledged as the most efficient in the industry.
As a result of its review process of the lost contract bid, IP decided to explore ways to refine its costing system. First, it identified that $188,000 of the $983,000 pertaining to packaging materials could be traced to individual jobs ($180,000 for retail and $8,000 for institutional). These costs will now be classified as direct materials. The $150,000 of direct materials used were classified as $135,000 for retail and $15,000 for institutional. Second, it used ABC to examine how the two products (retail potato cuts and institutional potato cuts) used indirect support resources. The finding was that three activity areas could be distinguished.
? Cleaning Activity Area- IP uses 1,200,000 lbs of raw potatoes to yield 1,000,000 lbs of potato cuts. The cost allocation base is lbs of raw potatoes cleaned. Costs in the cleaning activity area is $120,000.
? Cutting Activity Area- IP processes raw potatoes for the retail market independently of those processed for the institutional market. The production line produces (a) 250 lbs of retail potato cuts per cutting hour and (b) 400 lbs of institutional potato cuts per cutting hour. The cost allocation base is cutting hours on the production line. Costs in the cutting activity area are $231,000.
? Packaging Activity Area- IP packages potato cuts for the retail market independently of those packaged for the institutional market. The packaging line packages (a) 25 lbs of retail potato cuts per packaging hour and (b) 100 lbs of institutional potato cuts per packaging hour. The cost allocation base is packaging hours on the production line. Costs in the packaging activity area are $444,000.
1. Using the simple costing system, what is the cost per lb of potato cuts produced by IP?
2. Calculate the cost rate per unit of the cost driver in the (a) cleaning, (b) cutting, and (c) packaging activity areas.
3. Suppose IP uses information from its activity cost rates to calculate costs incurred on retail potato cuts and institutional potato cuts. Using the ABC system, what is the cost per lb of (a) retail potato cuts and (b) institutional potato cuts.
4. Comment on the cost difference s between the two costing systems in 1 and 3. How might IP use the information in 3 to make better decision.
The solution explains some questions relating to traditional costing and activity based costing