Exercise 4-11 (Algorithmic)
ABC Overhead Calculation
Alaine Productions is a progressive company that is considering the implementation of activity-based costing techniques to better understand and control costs associated with its human resources (HR) department. Currently, the department incurs annual costs of $748,000. Velma Alaine, the company’s president, believes that there are four primary activities within the department: recruiting new employees, responding to employee questions about benefits, general employee administration, and employee termination/separation. She asked the HR manager to identify possible drivers and costs associated with each of these activities. The manager provided the following data:
|Number of applicants
|Number of questions
|Number of employees
|Number of terminations/separations
The HR manager determined that in the most recent year there were 2,000 applications received; 2,300 benefits-related questions from employees; an average monthly employment of 400 individuals; and 100 employees who either were terminated or otherwise left the company.
A. Estimate the overhead cost for each activity. Round your answers to the nearest dollar, if required.
|$ per applicant
|$ per question
|$ per employee
|$ per termination/separation
B. Which activity is the most expensive and which is the least expensive?
Pritchett Enterprises manufactures hiking and outdoor equipment. The company’s plant in western Colorado has recently seen dramatic changes in manufacturing processes. Management is concerned that the current cost system no longer captures the impact of the diversity of activities involved in its production processes. As a result, management is evaluating whether activity-based costing may provide more accurate and meaningful cost data. The production environment includes the following primary activities and cost drivers:
The company has decided to implement just-in-time inventory management techniques. Using JIT will reduce the amount of inventory on hand at any point in time and save approximately $50,000 annually on inventory carrying costs. In addition, there will be 70 percent fewer purchase orders for inventory issued, but twice as many setups for production runs. The company will also be able to receive a 2 percent discount on raw materials purchases because of the long-term nature of the orders.
A. If raw materials purchases are $1,000,000 per year (that is, the cost before the above mentioned changes are implemented), what quantitative impact will the change to JIT have on the overall costs for the company?
B. Switching to a system often improves the quality of products and the timeliness of their delivery.
C. Does it appear that the move to JIT will be positive or negative for the company?
Jakubielski and Martin, CPAs, is a full-service CPA firm that provides accounting, tax, and consulting services to its clients. The firm is considering changing to an activity-based costing system and has asked for your input regarding the design of the system. The firm has identified certain activities that are integral to the practice, and it would like your suggestions regarding potential cost drivers.
For each of the following activities, identify a potential cost driver. Please note that you may not use all drivers and some may be used more than once.