Question

Question #1

Perkins National Bank has collected the following information for four activities and two types of credit cards:

Activity	Driver	Classic	Gold	Activity Rate ($)
Processing transactions	Transactions processed	12,000	7,200	0.20
Preparing statements	Number of statements	12,000	7,200	0.95
Answering questions	Number of calls	24,000	36,000	4.00
Providing ATMs	ATM transactions	48,000	14,400	1.50

There are 4,900 holders of Classic cards and 19,600 holders of the Gold cards.

Required:

Calculate the unit cost (rounded to the nearest cent) for Classic and Gold credit cards.

Unit cost for Classic	$_____
Unit cost for Gold	$_____

Question #2

Activity-Based Customer Costing

Sleepeze Company produces mattresses for 20 retail outlets. Of the 20 retail outlets, 19 are small, separately owned furniture stores and one is a retail chain. The retail chain buys 60% of the mattresses produced. The 19 smaller customers purchase mattresses in approximately equal quantities, where the orders are about the same size. Data concerning Sleepeze’s customer activity are as follows:

	Large Retailer		Smaller Retailers
Units purchased	108,000		72,000
Orders placed	36		3,600
Number of sales calls	18		882
Manufacturing costs	$43,200,000		$28,800,000
Order filling costs allocated*	$1,418,040		$945,360
Sales force costs allocated*	$837,000		$558,000
*Currently allocated on sales volume (units sold).

Currently, customer-driven costs are assigned to customers based on units sold, a unit-level driver.

Required:

Assign costs to customers by using an ABC approach. Round your answers and all intermediate calculations to the nearest dollar.

Order filling rate	$ per order
Selling call rate	$ per sales call
Cost assignment	------------
Large retailer	$
Smaller retailers	$

Question #3

Activity-Based Supplier Costing

Clearsound uses Alpha Electronics and La Paz Company to buy two electronic components used in the manufacture of its cell phones: Component 125X and Component 30Y. Consider two activities: testing components and reordering components. After the two components are inserted, testing is done to ensure that the two components in the phones are working properly. Reordering occurs because one or both of the components have failed the test and it is necessary to replenish component inventories. Activity cost information and other data needed for supplier costing are as follows:

I. Activity Costs Caused by Suppliers (testing failures and reordering as a result)

Activity	Costs
Testing components	$1,200,000
Reordering components	300,000

II. Supplier Data

	Alpha Electronics							La Paz Company
	125X			30Y				125X			30Y
Unit purchase price	$10			$26				$12			$28
Units purchased	120,000			75,800				15,000			15,000
Failed tests	2,000			780				10			10
Number of reorders	60			40				0			0

Required:

Determine the cost of each supplier by using ABC. Round Test and Reorder rates to the nearest dollar, and final answers to the nearest cent.

	Alpha Electronics			La Paz Company
	125X	30Y		125X	30Y
Unit cost:	$	$		$	$

Question #4

Nonvalue-Added Costs

Lemmons Inc. has the following two activities: (1) Retesting reworked products, cost: $483,000. The retesting cost of the most efficient competitor is $225,000. (2) Welding subassemblies, cost: $810,000 (67,500 welding hours).

A benchmarking study reveals that the most efficient level for Lemmons would use 54,000 welding hours and entail a cost of $648,000.

Required:

Determine the nonvalue-added cost of each activity.

	Retesting	Welding
Nonvalue-added cost:	$	$

Answer 1

Perkins National Bank Solution: Driver * Activity Rate transaction x $0.20 statements x $0.95 calls x $4.00 ATM transaction x $1.50 total cost Holders Unit Cost Classic $2,400 $11,400 $96,000 $72,000 $1,81,800 4,900 $37.10 Gold $2,400 $6,840 $1,44,000 $21,600 $1,74,840 19,600 $8.92 Classic Unit Cost : $37.10 Gold Unit Cost : $8.92

Sleepeze Company Order filling rate = $650 per order Selling call rate = $1,550 per sales calls Cost to be assigned to large retailer = $51,300 Cost to be assigned to small retailer = $3,707,100. Explanation: 1.Order filling rate = Total order filling cost allocated/Total orders placed ($1,418,040 + $945,360)/(36 +3,600) = $2,363,400 / 3,636 = $650 per order. 2.Selling call rate = Total sales force costs allocated/Total sales calls = ($837,000 + $558,000) / (18+882) = $1,395,000 / 900 = $1,550 per sales calls. Cost assignment: 3.Cost to be assigned to large retailer = Order filling costs + Sales force costs = (36 orders * $650 per order) + (18 sales calls * $1,550 per sales call) = $23,400 + $ 27,900 = $51,300 4.Cost to be assigned to small retailer = Order filling costs + Sales force costs = (3,600 orders * $650 per order) +(882 sales calls * $1,550 per sales call) = $2,340,000 + $1,367,100 = $3,707,100

Clearsound Solution: Activity Rates Testing Rate = $1,200,000/2,800*unit = $429 per failed unit Reordering Rate = $300,000/100** reorders = $3,000 per reorder La Paz Company 125X 30Y $2,25,000 $5,25,000 $4,290 $4,290 Purchase cost Testing cost Reordering cost Total Costs Units Unit Cost Alpha Electronics 125X 30Y $12,00,000 $19,70,800 $8,58,000 $3,34,620 $1,80,000 $1,20,000 $22,38,000 $24,25,420 1,20,000 75,800 $18.65 $32.00 $2,29,290 $5,29,290 15,000 15,000 $15.29 $35.29

Lemmons Inc. Solution: Retesting is non value-added. The cost of competitors has no bearing on analysis [1]. Retesting nonvalue-added cost = $483,000 Welding Subassemblies non value-added cost is (actual quantity - value added quantity) * cost per welding (67,500 - 54,000) * $12 = $162,000 [2]. Welding Subassemblies nonvalue-added cost = $162,000 810000 / 67500 = $12

Perkins National Bank Solution: Driver * Activity Rate transaction x $0.20 statements x $0.95 calls x $4.00 ATM transaction x $1.50 total cost Holders Unit Cost Classic $2,400 $11,400 $96,000 $72,000 $1,81,800 4,900 $37.10 Gold $1,440 $6,840 $1,44,000 $21,600 $1,73,880 19,600 $8.87 Classic Unit Cost : $37.10 Gold Unit Cost : $8.87

Sleepeze Company Order filling rate = $650 per order Selling call rate = $1,550 per sales calls Cost to be assigned to large retailer = $51,300 Cost to be assigned to small retailer = $3,707,100. Explanation: 1.Order filling rate = Total order filling cost allocated/Total orders placed ($1,418,040 + $945,360)/(36 +3,600) = $2,363,400 / 3,636 = $650 per order. 2.Selling call rate = Total sales force costs allocated/Total sales calls = ($837,000 + $558,000) / (18+882) = $1,395,000 / 900 = $1,550 per sales calls. Cost assignment: 3.Cost to be assigned to large retailer = Order filling costs + Sales force costs = (36 orders * $650 per order) + (18 sales calls * $1,550 per sales call) = $23,400 + $ 27,900 = $51,300 4.Cost to be assigned to small retailer = Order filling costs + Sales force costs = (3,600 orders * $650 per order) +(882 sales calls * $1,550 per sales call) = $2,340,000 + $1,367,100 = $3,707,100

Clearsound Solution: Activity Rates Testing Rate = $1,200,000/2,800*unit = $429 per failed unit Reordering Rate = $300,000/100** reorders = $3,000 per reorder La Paz Company 125X 30Y $2,25,000 $5,25,000 $4,290 $4,290 Purchase cost Testing cost Reordering cost Total Costs Units Unit Cost Alpha Electronics 125X 30Y $12,00,000 $19,70,800 $8,58,000 $3,34,620 $1,80,000 $1,20,000 $22,38,000 $24,25,420 1,20,000 75,800 $18.65 $32.00 $2,29,290 $5,29,290 15,000 15,000 $15.29 $35.29

Lemmons Inc. Solution: Retesting is non value-added. The cost of competitors has no bearing on analysis [1]. Retesting nonvalue-added cost = $483,000 Welding Subassemblies non value-added cost is (actual quantity - value added quantity) * cost per welding (67,500 - 54,000) * $12 = $162,000 [2]. Welding Subassemblies nonvalue-added cost = $162,000 810000 / 67500 = $12