See attached file.
5-17 ABC, cost hierarchy, service. ( CMA, adapted) Plymouth Test Laboratories does heat testing ( HT) and stress testing ( ST) on materials and operates at capacity. Under its current simple costing system, Plymouth aggregates all operating costs of $ 1,280,000 into a single overhead cost pool. Plymouth calculates a rate per test- hour of $ 16 ($ 1,280,000 80,000 total test- hours). HT uses 50,000 test- hours, and ST uses 30,000 test- hours. Gary Celeste, Plymouth's controller, believes that there is enough variation in test procedures and cost structures to establish separate costing and billing rates for HT and ST. The market for test services is becoming competitive. Without this information, any miscosting and mispricing of its services could cause Plymouth to lose business. Celeste divides Plymouth's costs into four activity- cost categories.
a. Direct- labor costs, $ 243,000. These costs can be directly traced to HT, $ 183,000, and ST, $ 60,000.
b. Equipment- related costs ( rent, maintenance, energy, and so on), $ 400,000. These costs are allocated to HT and ST on the basis of test- hours.
c. Setup costs, $ 385,000. These costs are allocated to HT and ST on the basis of the number of setup-hours required. HT requires 13,500 setup- hours, and ST requires 4,000 setup- hours.
d. Costs of designing tests, $ 252,000. These costs are allocated to HT and ST on the basis of the time required to design the tests. HT requires 2,800 hours, and ST requires 1,400 hours.
1. Classify each activity cost as output unit- level, batch- level, product- or service- sustaining, or facility-sustaining. Explain each answer.
2. Calculate the cost per test- hour for HT and ST. Explain briefly the reasons why these numbers differ from the $ 16 per test- hour that Plymouth calculated using its simple costing system.
3. Explain the accuracy of the product costs calculated using the simple costing system and the ABC sys-tem. How might Plymouth's management use the cost hierarchy and ABC information to better manage its business?
5-28 Job costing with single direct- cost category, single indirect- cost pool, law firm. Wigan Associates is a recently formed law partnership. Ellery Hanley, the managing partner of Wigan Associates, has just fin-ished a tense phone call with Martin Offiah, president of Widnes Coal. Offiah strongly complained about the price Wigan charged for some legal work done for Widnes Coal.
Wigan Associates operates at capacity and uses a cost- based approach to pricing ( billing) each job. Currently it uses a simple costing system with a single direct- cost category ( professional labor- hours) and a single indirect- cost pool ( general support). Indirect costs are allocated to cases on the basis of professional labor- hours per case. The job files show the following:
Widness coal St. Helen's Glass
Professional labor 104 hours 96 hours
Professional labor costs at Wigan Associates are $ 70 an hour. Indirect costs are allocated to cases at $ 105 an hour. Total indirect costs in the most recent period were $ 21,000.
1. Why is it important for Wigan Associates to understand the costs associated with individual jobs?
2. Compute the costs of the Widnes Coal and St. Helen's Glass jobs using Wigan's simple costing system.
5- 33 Choosing cost drivers, activity- based costing, activity- based management. Annie Warbucks runs a dance studio with childcare and adult fitness classes. Annie's budget for the upcoming year is as follows:
Annie Warbuck's Dance Studio Budgeted Costs and Activities For the Year Ended June 30, 2010
Dance teacher salaries-school year $48,600
Dance teacher salaries-summer programme 13,500
Child care teacher salaries 24,300
Fitness instructor salaries 39,060
Total salaries $125,460
Supplies (art, dance accessories,fitness) 21,984
Rent, maintenance and utilities 97,511
Administration salaries 50,075
Marketing expense 21,000
Dance classes 3 per hour
Hours of operations
(Dance, Childcare and Fitness)-school years (36 weeks) 2 p.m. to 8 p.m. M-F
Hours of operations
(Dance, Childcare and Fitness)-summer programme (10 weeks) 9 a.m. to noon; 1 p.m. to 4 p.m. M-F
Dance Childcare Fitness Total
Square footage 6,000 3,150 2,500 11,650
Number of participants 1,485 450 270 2,205
Teachers per hour 3 3 1 7
Number of advertisements 26 24 20 70
1. Determine which costs are direct costs and which costs are indirect costs of different programs.
2. Choose a cost driver for the indirect costs and calculate the cost per unit of the cost driver. Explain briefly your choice of cost driver.
3. Calculate the budgeted costs of each program.
4. How can Annie use this information for pricing? What other factors should she consider?