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Cost Accounting - ABC Case Study

Discussion Question I

Johnson Associates is a catering firm in Tucson, Arizona, with revenue of $4 million. The business began ten years ago as a one-owner bakery, but has dramatically changed in size and function during the past five years. The four partners foresee the business doubling in sales revenue within two years. They expect the firm to expand into other services including flowers, furnishings, decorations, and music.

Johnson Associates employs six full-time and ten part-time employees. The four partners also work full-time, each partner managing a separate business function. The firm currently uses a Volume-Based Costing system installed seven years ago and modified three years later.

With the help of the above information, answer the questions that follow:

Are you of the opinion firms like Johnson Associates, producing and selling large quantities of relatively few products would have no need for an ABC system? Why or why not?
Do you think an ABC system is usually more expensive to implement than a Volume-Based Costing system. Give reasons to substantiate your response.
On the basis of your judgment, express whether Johnson Associates is a viable candidate for an ABC system? If yes, why do you feel so, and if no, what makes you feel that way?
How can the activity rates (i.e. cost per activity) for the various activities be used to target process improvements for Johnson Associates?

Present your views on one side of these discussions and present justifications for your choice.

Discussion Question II

Many management accountants assert that ABC is complex. It needs top management support and cross-functional involvement when implementing an ABC system. Evaluate the statement and explain how top management should be convinced about the advantages of using ABC to allocate overhead costs.

Problem I

Computations Based on ABC Approach

Baxter Company manufactures two products, Product F and Product G4. The company expects to produce and sell 2,600 units of Product F and 6,000 units of Product G during the current year. The company uses ABC method to compute unit product costs. Data relating to the company's three activity cost pools are given below for the current year:
Activity Cost Pool

Estimated Overhead Costs

Estimated Activity
Product F

Product G

Total
Machine setups $10,400 80 180 260
Purchase orders $88,440 810 1,200 2,010
General factory $65,340 2,340 3,600 5,940

On the basis of the given data, complete the following:

Determine the overhead cost per unit for each product using ABC approach.
The activity rates for each activity cost pool.

Problem II

Traditional vs. ABC System

Jonson and Associates Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, B21P and O11L, about which it has provided the following data:

B21P

O11L
Direct materials per unit $21.10 $47.30
Direct labor per unit $16.80 $37.80
DLHs per unit 0.80 1.80
Annual production 45,000 10,000

The Company's estimated total manufacturing overhead for the year is $2,870,100 and the company's estimated total direct labor-hours for the year is 54,000.

The company is considering using a variation of ABC to determine its unit product costs for external reports. Data for this proposed ABC system appear below:
Activities and Activity Measures

Estimated Overhead Cost
Assembling products (DLHs) $1,404,000
Preparing batches (batches) 429,300
Milling (MHs) 1,036,800
Total

$2,870,100

Activities

B21P

O11L

Total
Assembling products (DLHs) 36,000 18,000 54,000
Preparing batches (batches) 972 1,890 2,862
Milling (MHs) 1,728 864 2,592

On the basis of the given data, complete the following:

Determine the unit product cost of each of the company's two products under the traditional costing system.
Determine the unit product cost of each of the company's two products under ABC system.

Support your responses with examples.

Cite any sources in APA format.

Solution Preview

Discussion Question I
Johnson Associates is a catering firm in Tucson, Arizona, with revenue of $4 million. The business began ten years ago as a one-owner bakery, but has dramatically changed in size and function during the past five years. The four partners foresee the business doubling in sales revenue within two years. They expect the firm to expand into other services including flowers, furnishings, decorations, and music.
Johnson Associates employs six full-time and ten part-time employees. The four partners also work full-time, each partner managing a separate business function. The firm currently uses a Volume-Based Costing system installed seven years ago and modified three years later.
With the help of the above information, answer the questions that follow:
Are you of the opinion firms like Johnson Associates, producing and selling large quantities of relatively few products would have no need for an ABC system? Why or why not?
I disagree. ABC can still be used by Johnson Associates in costing its high-value or higher priced products. It can even use ABC to cost those relatively few products as a group to learn whether its pricing system is contributing what they should to the company's bottom ...

Solution Summary

Various cost accounting related tutorials using a case study

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