Question

Cornerstone Exercise 11.4 (Algorithmic)
Activity-Based Life-Cycle Costing

Kagle design engineers are in the process of developing a new “green” product, one that will significantly reduce impact on the environment and yet still provide the desired customer functionality. Currently, two designs are being considered. The manager of Kagle has told the engineers that the cost for the new product cannot exceed $550 per unit (target cost). In the past, the Cost Accounting Department has given estimated costs using a unit-based system. At the request of the Engineering Department, Cost Accounting is providing both unit- and activity-based accounting information (made possible by a recent pilot study producing the activity-based data).

Unit-based system:
Variable conversion activity rate: $110 per direct labor hour
Material usage rate: $15 per part

ABC system:
Labor usage: $30 per direct labor hour
Material usage (direct materials): $35 per part
Machining: $85 per machine hour
Purchasing activity: $160 per purchase order
Setup activity: $4,000 per setup hour
Warranty activity: $550 per returned unit (usually requires extensive rework)
Customer repair cost: $35 per repair hour (average)

Activity and Resource Information (annual estimates)
	Design A		Design B
Units produced	20,000		20,000
Direct material usage	340,000	parts	315,000	parts
Labor usage	50,000	hours	120,000	hours
Machine hours	50,000		60,000
Purchase orders	3,000		2,500
Setup hours	650		300
Returned units	1,000		300
Repair time (customer)	2,100		500

Required:

1. Select the lower-cost design using unit-based costing.
- Select your answer -Design ADesign BItem 1

Are logistical and post-purchase activities considered in this analysis?
- Select your answer -YesNoItem 2

2. Select the lower-cost design using ABC analysis.
- Select your answer -Design ADesign BItem 3

3. What if the post-purchase cost was an environmental contaminant and amounted to $20 per unit for Design A and $40 per unit for Design B? Compute the Post-purchase cost for each design.

	Post-Purchase Cost
Design A	$
Design B	$

Assume that the environmental cost is borne by society. Now which is the better design?
- Select your answer -Design ADesign B

Answer 1

DESIGN A
UNIT BASIS PER PART		ABC
	$		$
DIRECT MAT		DIRECT MAT
17 X $15	255	17 X $35	595
DIRECT ACTIVITY LABOUR		DIRECT LABOUR
2.5 HRS X 110	275	2.5 HRS X $30	75
TOTAL	530
		MACHINE HOURS
		2.5 X $85	212.50
		PURCHASE ACTIVITY
		.15 X $160	24
		SET UP
		.0325 X 4000	130
		TOTAL	1036.50

		DESIGN B
		UNIT BASIS PER PART		ABC
			$		$
	Design B	DIRECT MAT		DIRECT MAT
Units produced	20,000	$15 X 15.75	236.25	$35 X 15.75	551.25
Direct material usage	315,000 parts	DIRECT ACTIVITY ON LABOUR		DIRECT LABOUR
Labor usage	120,000 hours	6 HRS X $110	660	6 HRS X $30	180
Machine hours	60,000
Purchase orders	2,500	TOTAL	896.25	MACHINE HOURS
Setup hours	300			3 HRS X $85	255
Returned units	300			PURCHASE ACTIVITY
Repair time (customer)	500			.125 X 160	20
				SET UP
				.015 X 4000	60
				TOAL	1066.25

QUESTION 1

UNIT COST - DESIGN A

QUESTION 2

ABC   -   DESIGN A

QUESTION 3 Are logistical and post-purchase activities considered in this analysis?
- Select your answer –No  

3. What if the post-purchase cost was an environmental contaminant and amounted to $20 per unit for Design A and $40 per unit for Design B? Compute the Post-purchase cost for each design.

Post-Purchase Cost
	1036.50	1066.25
Design A	$ 20
Design B		$40
	1056.50	1106.25

Assume that the environmental cost is borne by society. Now which is the better design?
- Select your answer - Design B