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Identifying Activities, Resources, And Cost Drivers In Manufacturing

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Identifying Activities, Resources, And Cost Drivers In Manufacturing.

Question:

Extrusion Plastics is a multinational, diversified organization. One of its manufacturing divisions,Northeast Plastics Division, has become less profitable due to increased competition. The division produces three major lines of plastic products within its single plant. Product Line A is high-volume, simple pieces produced in large batches. Product Line B is medium-volume, more complex pieces. Product Line C is low-volume, small-order, highly complex pieces.

Currently, the division allocates indirect manufacturing costs based on direct labour. The VP manufacturing is uncomfortable using the traditional cost figures. He thinks the company is under-pricing the more complex products. He decides to conduct an activity-based costing analysis of the business. Interviews were conducted with the key managers in order to identify activities, resources, cost drivers, and their interrelationships.

Interviewee: production manager

Q1: What activities are carried out in your area?
A1: All products are manufactured using three similar, complex, and expensive molding
machines. Each molding machine can be used in the production of the three product
lines. Each setup takes about the same time irrespective of the product.

Q2: Who works in your area?
A2: Last year, we employed thirty machine operators, two maintenance mechanics, and two supervisors.

Q3: How are the operators used in the molding process?
A3: It requires nine operators to support a machine during the actual production process.

Q4: What do the maintenance mechanics do?
A4: Their primary function is to perform machine setups. However, they were also required to provide machine maintenance during the molding process.

Q5: Where do the supervisors spend their time?
A5: They provide supervision for the machine operators and the maintenance mechanics. For the most part, the supervisors appear to spend the same amount of time with each of the employees that they supervise.

Q6: What other resources are used to support manufacturing?
A6: The molding machines use energy during the molding process and during the setups. We put meters on the molding machines to get a better understanding of their energy consumption. We discovered that for each hour that a machine ran, it used 6.3 kilowatts
of energy. The machines also require consumable shop suppliers (e.g., lubricants, hoses, etc.). We have found a direct correlation between the amount of suppliers used and the actual processing time.

Q7: How is the building used, and what costs are associated with it?
A7: We have a 100,000-square-metre building. The total rent and insurance costs for the year were $675,000. These costs are allocated to production, sales, and administration based on square meters.

Required

1. Identified the activities, resources, and cost drivers for the division.
2. For each resource identified in requirement 1, indicate its cost behavior with
respect to the activities it supports (assume a planning period of 1 month).

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Solution Preview

1. Identified the activities, resources, and cost drivers for the division.

Activities - molding machine operation; setting up machines, maintaining machine, supervision of employees
Resources - machines, machine operators, maintenance mechanics, supervisors, energy consumed, shop supplies, building rent, ...

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