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CHAPTER 6

Activity-Based Management and CostManagement Tools

ANSWERS TO REVIEW QUESTIONS

6-1 The two-dimensional activity-based costing model provides one way of picturing therelationship between ABC and ABM. The vertical dimension of the model depicts thecost assignment view of an ABC system. rom the cost assignment viewpoint, theABC system uses two-stage cost allocation to assign the costs of resources to thefirm!s cost ob"ects. These cost ob"ects could be products manufactured# servicesproduced# or customers served.

$epicted in the hori%ontal dimension of the model that follows is the processview of an ABC system. The emphasis now is on the activities themselves# theprocesses by which wor& is accomplished in the organi%ation. The left-hand side ofthe model depicts activity analysis# which is the detailed identification anddescription of the activities conducted in the enterprise. Activity analysis entails theidentification not only of the activities# but also of their root causes, the events thattrigger activities# and the linkages among activities. The right-hand side of the modeldepicts the evaluation of activities through performance measures. These processesof activity analysis and evaluation constitute activity-based management.

The two-dimensional ABC model is depicted in the diagram on the ne't page.

6-( Activity analysis is the detailed identification and description of the activitiesconducted in an enterprise. Activity analysis entails the identification not only ofactivities# but also of their root causes# of the events that trigger them# and of thelin&ages among them. Three criteria for determining whether an activity adds valueare as follows)

*a+ ,s the activity necessary

*b+ ,s the activity efficiently performed

*c+ ,s the activity sometimes value-added and sometimes non-value-added

McGraw-Hill/Irwin 2008 The McGraw-Hill Companies,

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$iagram of two-dimensional ABC model *from review uestion 6-1 on preceding page+)


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Cost Assignment View

/023/C0 C2T

Assignment of resource coststo activity cost pools

associated withsignificant activitiesProcess View

Activity analysis Activity evaluation

40/2/MA5C0 M0A3/0

/22TCA30 ACT,,T7

T/,880/

Assignment of activitycosts to cost ob"ectsusing second-stage

cost drivers

C2T 2B90CT*products or servicesproduced: customers+

ACT,,T,0


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6-; An activity!s trigger is the preceding event that indicates that the activity should beperformed. The activity!s root cause is the event or activity that# if it had notoccurred# would have prevented the activity in uestion from happening. ore'ample# the event that triggers the activity of rewor& is the identification of a defective part during inspection. 0'amples of activity sharing include the use of common parts in several relatedproducts# and the use of a common service facility *e.g.# a photocopying center+ byseveral departments.

6.6 Customer profitability analysis refers to using the concepts of activity-based costing todetermine how serving particular customers causes activities to be performed andcosts to be incurred. 0'amples of activities that can be differentially demanded bycustomers include order freuency# order si%e# special pac&aging or handling#customi%ed parts or engineering# and special machine setups. uch activities canma&e some customers more profitable than others.

6-? Activity-based costing is used to analy%e customer-related costs and determine thecost drivers for these costs. This ABC data then forms the basis for the customerprofitability analysis by assigning the appropriate amount of customer-related coststo each customer.

6-@ A customer profitability profile# usually e'pressed in graphical form# shows thecompanys cumulative operating income as a percentage of total operating income.The customers included in the profile generally are ran&ed either by operatingincome or by sales revenue.


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6- ,n some cases# companies do eliminate unprofitable customers.


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improvement through small betterment activities# rather than large or radicalimprovement made through innovation or large investments in technology.

6.1( Dai%en costing is most consistent with the old saying Eslow and steady wins the race.EDai%en costing is the process of cost reduction during the manufacturing phase of

an e'isting product. The 9apanese word kaizen refers to continual and gradualimprovement through small betterment activities# rather than large or radicalimprovement made through innovation or large investments in technology.

6.1; Employee empowerment is the concept that wor&ers are encouraged to ta&e their owninitiative to improve operations# reduce costs# and improve product uality andcustomer service.

enc!marking is the continual search for the most effective method ofaccomplishing a tas by comparing e'isting methods and performance levels withthose of other organi%ations# or with other subunits within the same organi%ation. An

e'ample of benchmar&ing is an airline!s determining how many of its competitors!flights are delayed and comparing the data with its own flight-delay record.

The most effective methods of accomplishing various tas&s in a particular industry#often discovered through benchmar&ing# are referred to as "est practices.

#eengineering is the complete redesign of a process# with an emphasis on findingcreative new ways to accomplish an ob"ective. /eengineering has sometimes beendescribed as ta&ing a blan& piece of paper and starting from scratch to redesign a business process. /ather than searching continually for minute improvements# re-

engineering involves a radical shift in thin&ing about how an ob"ective should bemet.

6-1= The t!eory of constraints *T2C+ is a management approach that see&s to ma'imi%elong-term profit through proper management of organi%ation bottlenec&s orconstrained resources. The &ey idea in T2C is to identify the constraints in a systemthat are preventing the organi%ation from achieving a higher level of success. Thenthe goal is to relieve or rela' those constraints. T2C recommends subordinating allother management goals to the ob"ective of solving the constraint problem. ore'ample# if limited capacity in a particular machining operation is increasing cycletime# reducing throughput# and reducing profits# then management would

concentrate much of its efforts on e'panding the capacity of that bottlenec&operation. ,f efforts are continually made to rela' constraints# continuousimprovement in organi%ational performance is a li&ely result.

6-1> The elimination of production bottlenec& activities is an e'ample of the theory ofconstraints. *ee the preceding answer.+


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6-16 The philosophy of a "ust-in-time *9,T+ inventory and production management systemis that no materials are purchased and no products are manufactured until they areneeded. The essence of the 9,T philosophy is to reduce all inventories to theirabsolute minimum.

6-1? The &ey features of a "ust-in-time inventory and production management system areas follows) a smooth production rate: a pull method of coordinating steps in theproduction process: purchase of materials and manufacture of subassemblies andproducts in small lot si%es: uic& and ine'pensive setups of production machinery:high-uality levels of raw material and finished products: effective preventivemaintenance of euipment: an atmosphere of teamwor& to improve the productionsystem: and multis&illed wor&ers and fle'ible facilities.

6-1@ ETFCE stands for total uality control. ince no parts are purchased or manufactureduntil they are needed for production in a 9,T system# it is crucial that they be "ust

right for their intended purpose.

6-1 ,n a "ust-in-time *9,T+ production system# raw materials and parts are purchased orproduced "ust in time to be used at each stage of the production process. Thisapproach to inventory and production management brings considerable costsavings from reduced inventory levels.

The &ey to the 9,T system is the EpullE approach to controlling manufacturing.The diagram on the ne't page displays a simple multistage production process. Theflow of manufacturing activity is depicted by the solid arrows running down thediagram from one stage of production to the ne't.


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The H4ullI Method in a 9,T ystem

This pull system of production management# which characteri%es the 9,Tapproach# results in a smooth flow of production and significantly reduced inventorylevels.

6-( ive &ey features of 9,T purchasing are as follows) only a few suppliers: long-termcontracts with suppliers: materials and parts delivered in small lot si%es immediatelybefore they are needed: only minimal inspection of delivered parts and materials:and grouped payments to each vendor.


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$emand for raw materials and parts is signaled whenthere is a need in stage , for more inputs.

$emand for production activity in stage , is signaled when there is a need in stage ,, for more inputs.

$emand for production activity in stage ,, is signaled when there is a need in stage ,,, for more inputs.

$emand for finished goods is signaled when salesactivity warrants more finished units. This signaltriggers manufacturing activity in the final stage ofproduction *stage ,,,+.

4urchasing

4roductiontage ,

4roductiontage ,,

4roduction

tage ,,,

ales

$enotes flow of materials# parts# partially finished goods# and finished goods.

$enotes a signal that more goods are needed at the ne't stage of production.


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SO'UTIONS TO E(ERCISES

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1. Airline)

*a+ E$eadheading#E the practice of flying a nonwor&ing flight-crew member toanother city to wor& on a flight departing from that location. The crew membersometimes displaces a paying customer.

*b+ 4reparing e'cess food for a flight# which is not consumed# because the flightoccupancy was misforecast.

*c+ /eturning# repairing# or replacing lost or mishandled luggage.

*d+ Canceling a flight because of an aircraft maintenance problem that should havebeen prevented by routine maintenance.

(. Ban&)

*a+ Correcting customer account errors due to &eypunch errors in the ban&.

*b+ ollowing up on chec&s or deposit slips lost by the ban&.

*c+ 4erforming ban&ing procedures manually when the computer is down.

*d+ $efaulted loans made to ris&y borrowers as a result of inadeuate credit chec&s.

*e+ Kosses due to employee embe%%lement and petty theft.

;.


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everal restaurant activities are listed in the following table# along with the reuiredcharacteristics for each activity. Many other possibilities could be listed# depending on thelevel of detail.

Activity $escription

alue-Addedor 5on-alue-

Added Activity Trigger /oot Cause

Ta&ing reservations A Customer calls onphone

Customer desiresreservation

Customers waitingfor a table

5A Customer arrives# butno table is ready

An error was made inreservation: service is slow:customers are slow:customers arrive withoutreservations

eating customers A Table becomesavailable

Customer!s reservation *orturn in line+ comes up: tablebecomes ready

Ta&ing orders A Customers indicatereadiness to order

Ditchen staff needs to &now what to prepare

erving meals tocustomers

A Meals are ready Meals are ready: customersare hungry

/eturning meal to&itchen for revisedpreparation

5A Customer complainsabout meal

An error was made ine'plaining the menu: thereis an error in the printedmenu description: meal wasprepared wrong: customeris pic&y


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Customers eatingmeal

A Meals are served andare satisfactory

Customers are hungry

Clearing the table A Customers arefinished

Customers have finishedeating

$elivering chec& totable

A Customers arefinished ordering andeating

Customers need to &nowamount of bill

Collecting payment A Customers haveproduced cash orcredit card

/estaurant needs to collectpayment for servicesrendered

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Answers will vary# depending on the registration process at a particular university.

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everal activities performed *or at least supported+ by an airline!s ground employees# along with possible performance measures# are as follows)

Activity 4erformance Measure

Ma&ing reservations over the phone /eservations boo&ed per hour4ercentage of reservations with

errors5umber of customer complaints

Tagging luggage Bags tagged per hour4ercentage of bags incorrectly tagged


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Maintaining aircraft Maintenance procedures per shift# per

employee *both routine and repair+5umber of repair incidents per month5umber of flight delays due to

maintenance problems

0nplaning passengers 5umber of passengers enplaned5umber of customer complaintsAverage time reuired at gate to enplane

passengers

4reparing aircraft for departure 5umber of aircraft departures per month4ercentage of flights with delaysAverage delay per flight delayed

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%emorandum

$ate) Today

To) 4resident# Big Apple $esign Company

rom) ,. M. tudent# Controller# Big Apple $esign Company

ub"ect) Customer-4rofitability Analysis

The customer-profitability analysis ran&s customers on the basis of operating income. Asthe graph shows# customers > and 6 are not profitable for Big Apple $esign Company.There are several possible courses of action# including the following four)

• $rop customers > and 6.

• /aise the prices for customers > and 6.

• Cut the costs of serving customers > and 6 by cutting bac& on services.


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• Try to increase higher-margin services to customers > and 6 in order to ma&e these

customer relationships profitable.

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1. Customers ran&ed by sales revenue)

*1+ 1@ *11+ 11;*(+ 11= *1(+ 1;>*;+ 11( *1;+ 1;;*=+ 116 *1=+ 16*>+ 11 *1>+ 111*6+ 1(= *16+ 1?*?+ 1(1 *1?+ 1;=*@+ 1(? *1@+ 11

*+ 1(> *1+ 1;6*1+ 1(@ *(+ 1;?

7es# the ran&ing by sales revenue is different from that based on operating income. (. 5o# the companys least profitable customers are not the ones with the lowest sales

revenue. The least profitable customers are numbers 11 and 1;=.

;. 7es# the profile would be different# because the ordering of the customers along thehori%ontal a'is would match the order in reuirement *1+ instead of the ordering in

0'hibit 6-?.

=. A customer characteri%ed by high sales revenue would not necessarily be the mostprofitable# because the customer may demand costly services such as specialhandling or pac&aging# freuent small shipments# or uniue design features.

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1. Trend analysis *percentages rounded+)

Customerelated Cost 'tem (ear ) (ear * (ear + (ear (ear -

Cost of engineering changesLLLLLLL. 1.1 1. 1.1 1.1 1(.

pecial pac&agingLLLLLLLLLLLL. 11. 11.> 1;. 1(. 1(.


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(. Conclusions)

The cost of engineering changes for customer number 61=# which remained

consistently low for four years# spi&ed to a very high level in year >. omething unusualmust have occurred in year ># and this should be investigated by management.

pecial pac&aging costs# although consistent across the five-year period# are uite high.This may be necessary# due to the special needs of customer number 61=# but thisconsistently high cost should be investigated by management. There may be a way to cutthis cost# possibly with the cooperation of the customer.

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ed0' could use customer profitability analysis to analy%e which customers *particularlycommercial customers+ are more e'pensive to serve and# thus# less profitable. eethe discussion of ed0's use of customer profitability analysis in Chapter 6 of thete't.

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1. 4rocess time) steps ;# ># 6# ?# @# 1# 11

,nspection time) steps 1#

Move time) steps (# ># 6# ?# 1# 11

Gaiting time) steps =# ># ?

torage time) steps 1# 11


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(. Candidates for non-value-added activities)

*a+ tep () Carrying ingredients on hand carts.

*b+ tep =) toring dough until bagel machine is free. *Could move toward a 9,Tsystem for dough mi'ing.+

*c+ tep >) Deeping cut-out bagels until boiling vat is free. *Could move toward9,T system.+

*d+ tep 6) Carrying trays to vat room.

*e+ tep ?) Carrying bagels to oven room.

*ef tep ?) Continual opening and closing of oven door.

*g+ tep ) Consumption of misshapen bagels by the staff. *Could these faultyproducts be sold at a reduced price+

*h+ tep 1) Carrying wire bas&ets to the pac&aging room.

*i+ tep 11) $riving for&lift to free%er.


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*1+ /edesigned bagel production process)

*a+ ,ngredients# such as flour and raisins# are received and inspected in the morning

or afternoon they are to be used. Then they are placed on a conveyor belt thattransports the ingredients to the mi'ing room ne't door.

*b+ $ough is mi'ed in =-pound batches in four heavy-duty mi'ers. The dough isplaced on large boards# which are set on the conveyor. The conveyor transportsthe boards of dough into the bagel room ne't door.

*c+ The board is tipped automatically and the dough slides into the hopper of a bagel machine. This machine pulls off a piece of dough# rolls it into a cylindricalshape# and then suee%es it into a doughnut shape. The bagel machines can bead"usted in a setup procedure to accommodate different si%es and styles of

bagels. Gor&ers remove the uncoo&ed bagels and place them on a tray. Thetrays are set on the conveyor# which carries the uncoo&ed bagels into anad"oining room.

*d+ This room houses three >-gallon vats of boiling water. The bagels are boiled forappro'imately one minute.

*e+ Bagels are removed from the vats with a long-handled strainer and placed on a wooden board. The boards full of bagels are placed on the conveyor# whichtransports them to the oven room.

*f+ The two ovens contain eight rac&s that rotate but remain upright# much li&e theseats on a erris wheel. A rac& full of bagels is finished ba&ing after onecomplete revolution in the oven. Ghen a rac& full of bagels is removed from theoven# a fresh rac& replaces it. The oven door automatically opens and closes aseach rac& completes a revolution in the oven.

*g+ After the bagels are removed from the oven# they are placed in bas&ets forcooling.

*h+ Ghile the bagels are cooling# they are inspected. Misshapen bagels are removed

and set aside for sale at a reduced price.


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*i+ After the bagels are cool# the wire bas&ets are placed on the conveyor andtransported to the pac&aging room ne't door.

*"+


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1. Target cost O P1(> Q P(> O P1

(. Target profit O P(>

;. Target price O P1(>

=. Target costing involves designing a product# as well as the process used tomanufacture it# so that ultimately the product can be manufactured at a cost that willenable the firm to ma&e a profit when the product is sold at an estimated mar&et-driven price. ,n the case of the photon gismo# the design engineering team needs toredesign the gismo andNor the production process so that the gismo can bemanufactured for P1.

>. alue engineering is a cost-reduction and process-improvement techniue thatutili%es information collected about a product!s design and production process# andthen e'amines this information to identify candidates for improvement. An e'ample# inthe conte't of the photon gismo# is using a machine to assemble several parts#instead of assembling them manually.

6. The activity phase of a two-dimensional ABC system could help solve the problem with the photon gismo. This phase would identify activities in the gismo!s productionprocess# as well as the lin&ages# triggers# and root causes of those activities. ore'ample# suppose that part of the photon gismo!s cost includes the inspection of a particular component that is sometimes damaged in the assembly operation.

urthermore# suppose that the root cause of that damage is subseuently determinedto be e'cessive tightening of a bolt on the mounting chassis for the photon gismo!sparts. 0liminating the problem of e'cessive tightening would potentially also eliminatethe need for inspecting the component.


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A wide range of answers is possible for this e'ercise.

1. All colleges and universities have admissions departments# course registration

procedures# and teaching operations. All aspects of these operations could bebenchmar&ed against similar institutions of higher education. or e'ample# how doesan undergraduate school of business administration with an enrollment of 1#students compare with five other similar business schools on the followingdimensions)

a. Average grade point average *84A+ of students admitted to the business school.

b. 5umber of course offerings.

c. 5umber of corporate recruiters visiting the campus.

d. Average number of employment offers received per student.

e. 4ercentage of graduates who try for professional certification and aresuccessful in doing so. *or e'ample# of the school!s graduates who ta&e theC4A or CMA e'amination# what is the percentage of students who pass thee'am+

(. A college or university could also benefit from benchmar&ing Eoutside the bo'.E Allcolleges and universities have grounds and maintenance departments# food serviceoperations# and housing operations. o do hospitals and hotels. These types of

college operations could be benchmar&ed against similar operations in hospitals orhotels.

Colleges have course scheduling procedures. cheduling is also an important activityin airlines# bus lines# railroads# hospitals# and landscaping firms# to name a few.

4ublic service is an important component of the mission of many colleges anduniversities. 0ffectiveness in this area could be benchmar&ed against a serviceorgani%ation such as the American /ed Cross.

Academic advising and counseling for students in a college or university could bebenchmar&ed against similar operations in employment search firms and humanresources departments in for-profit businesses.

,n short# the s&y!s the limit on the &inds of organi%ations against which a college oruniversity might effectively benchmar& its operations.


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SO'UTIONS TO ,ROB'EMS

4/2BK0M 6-;; *; M,53T0+

1. ,f Delifo 0lectric ehicle Company *D0C2+ implements a Edemand pullE productionphilosophy# both its planning and operating processes could e'perience the followingeffects.

Planning

• 4roduction planning will change from a centrali%ed batch function process to a

more decentrali%ed activity. ,n some cases# production teams will be responsiblefor the entire production process of a product.

• The method and timing of how the company prepares its production schedule

*including capacity reuirements+ will change to parallel the Edemand pullEapproach as opposed to the Eproduction pushE approach.

• The 4urchasing $epartment will need to plan to have high-uality# reliable# and

fle'ible suppliers who can uic&ly deliver orders of varying si%es as needed.

0perations

• Change-over time *set-up time+ will reduce lead times significantly.

•

A &anban-li&e system will have to be implemented. A triggering device such as a &anban card is necessary so that the department or cell &nows when to beginproduction.

• 8reater employee participation will result from cell production team arrangements.


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(. ive benefits to D0C2 in changing to a Edemand pullE production operatingphilosophy are as follows)

• Kess rewor& and fewer defective units because of cell-level accountability and

control and product problem solving at the cell level.

• A lower cash investment in inventory and plant space.


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1. Annual financial impact)/eturn on released funds

R*P;#6# - P6#+ ' 1(SLLLLLLLL P;6#

avings in insurance and property ta'esLLLLL (?#Kease revenue *;# suare feet ' ?> ' P(+LL. =>#$epreciation on remodeled facilities

*P6# ÷ 1 years+LLLLLLLLLLLL.. *6#+

avings in warranty and repair costsLLLLLL... (>#alary savingsLLLLLLLLLLLLLLLL... ;#Added stoc&out costsLLLLLLLLLLLLL... *?#+

avings from 9,T systemLLLLLLLLLL... P;>?#

5ote) The cost of the two transferred employees is e'cluded

because Alliance will continue to have these individuals onthe payroll.

(. Gith a "ust-in-time purchasing system# companies avoid costly build-ups of raw-material inventories because materials and parts are ordered only when needed. Thesuppliers under such a system are highly reliable and deliver uality goods on time.Thus# despite the absence of inventories that firms can rely on if needed# theli&elihood of e'cessive stoc&outs is fairly low.

;. Kong-term contracts under a 9,T purchasing system set tight standards with respect

to the uality of materials purchased. The uality is high# which reduces the needfor incoming inspections.

=. 3nder a traditional purchasing system# goods are purchased *freuently in largelots+ and then placed in inventory until used. ,n contrast# with 9,T# costly inventoriesare avoided by having the materials arrive H"ust-in-timeI to be issued to production.Materials are therefore purchased only when needed# which often translates intonumerous small acuisitions throughout the period.

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1. Activity-based management refers to the use of activity-based costing to improveoperations and eliminate non-value-added costs. These costs arise from non-value-added activitiesUoperations that are either *a+ unnecessary and dispensable or *b+necessary but inefficient and improvable. 4ut simply# such activities can beeliminated without harming overall uality# performance# or perceived value.


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(. Cost of non-value-added activities)

Garehousing) >> moves ' P=a LLLLLLL. P((#

2utgoing shipments) (> shipments ' P1>bLL ;#?>TotalLLLLLLLLLLLLLLLLLL P(>#?>

a Garehousing) P;6# ÷ # inventory moves O P= per moveb2utgoing shipments) P((># ÷ 1># shipments O P1> per shipment

;. 0'tra inventory moves in the warehouse may be caused by boo&s being shelved *i.e.#stoc&ed+ incorrectly# poor planning for the arrival and subseuentplacementNstoc&ing of new titles# and other similar situations. 0'tra shipments

would li&ely be the result of errors in order entry and order filling# goods lost in

transit# or damaged merchandise being sent to customers.

=. As the following figures show# the elimination of non-value-added activities allowsBoo&5et.Com to achieve the target-cost percentage for software only.

ActivityCost-$river

Fuantity

Boo&s

oftware

Cost-$riverFuantity)

Boo&s

Cost-$riverFuantity)oftware

,ncoming

receiptsLL. (# ? ; 1#= 6GarehousingL. # @ ( 6#6> 1#@2utgoing

shipmentsL 1># (> ?> ;#?> 11#

*# moves ' @+ Q >> *1># shipments ' ?>+ Q (>


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Boo&s oftware,ncoming receipts)

1#= purchase orders ' P1>

....................................................................

P(1#

6 purchase orders ' P1>LLLL. P #Garehousing)

6#6> moves ' P=LLLLLLLL... (66#1#@ moves ' P=LLLLLLLL... ?(#

2utgoing shipments);#?> shipments ' P1>LLLLLLL >6#(>11# shipments ' P1>LLLLLL. 16>#

Total costLLLLLLLLLLLLLL. P>;(#(> P;(?#

Cost as a percentage of sales)P>;(#(> ÷ P;##LLLLLLL 1;.6>

P;(?# ÷ P(#6#LLLLLLL 1(.>@

,ncoming receipts)

P;# ÷ (# purchase orders O P1> per purchase order

>. Additional cost cutting of P(>#(> is needed for boo&s to achieve the 1; target ofP>?# *P;## ' 1;+. Tools that the company might use include customer-profitability analysis# target costing# value engineering# &ai%en costing#

benchmar&ing# and reengineering.


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This is a chance to thin& carefully about how detailed and precise an activity analysis canbe. ,t!s also an opportunity to invo&e your sense of humor and air your pet peeves about a couple of errands we all have to do routinely.

There is clearly no single correct answer. /easonable answers will vary widely.

1. Activity seuences and lin&ages)

8rocery tore Ban&

*1+ trategically choose time of day#&eeping in mind *a+ how urgent needis# *b+ li&ely crowding# and *c+ how

well stoc&ed the shelves will be

*1+ trategically choose time of dayand branch location

*(+ $rive or wal& to store *(+ Choose among inside teller window# drive-up lane# or ATM

*;+ 4ar& car *;+ 4ar& car

*=+ Gal& to front door *=+ Gal& to front door

*>+ 8et cart: search par&ing lot if

necessary

*>+ 4repare ban&ing documents

*6+ Gal& aisles to find items *6+ Gait in line

*?+ /ead product labels *?+ 0'plain ban&ing needs to teller*or operate ATM+

*@+ Compare prices *@+ Gait while transaction iscompleted

*+ elect items *+ Chec& teller!s *or ATM!s+ wor&

*1+ trategically choose chec&out line*0'press line Cash only Ghich oneis shortest Ghich one is fastestGhich cler& is fastest etc.+

*1+ Keave ban&


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*11+ Gait in line: "oc&ey for position if newchec&out lane opens

*11+ Keave par&ing lot

*1(+ 3npac& cart

*1;+ ,tems are chec&ed out

*1=+ ,tems are bagged *paper or plastic+

*1>+ Carry out bags *or have bags carriedout+

*16+ Koad car

*1?+ Keave par&ing lot


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(. pecifying whether an activity is value-added or non-value added often depends onhow well the business is organi%ed for the activity. or e'ample# some grocery storesma&e it easier to par& close to the entrance than do others. Thus# getting from your

car to the front door could be value-added or non-value-added# depending on howconvenient the store!s par&ing lot is. The designations of A or 5A will vary widely#depending on individual e'periences.

8rocery tore Ban&Activity A or 5A Activity A or 5A

*1+ A *1+ A*(+ A *(+ A*;+a A# 5A *;+a A# 5A*=+a A# 5A *=+a A# 5A

*>+b A# 5A *>+i A# 5A*6+c A# 5A *6+ " 5A*?+d A# 5A *?+& A# 5A*@+d A# 5A *@+l 5A*+ A *+m 5A

*1+e 5A *1+ A*11+e 5A *11+h A# 5A*1(+ A*1;+ A*1=+f 5A

*1>+g

5A*16+g 5A*1?+h A# 5A

a $epends on the configuration of the par&ing lot in relation to the design of thebuilding and the location of the front door.b8etting a cart in the store or by the front door# A: searching the par&ing lot# 5A.c$epends on the store layout. The author is inclined to say 5A# since it would be animprovement if grocery stores would adopt a standard layout *e.g.# the soda always inaisle =# or the dairy-case pi%%a always in aisle 6 on the end near the registers+.

d$epends on how convenient the store ma&es these tas&s. ,nterestingly# this is onearea where the law has helped the consumer. tores now must display unit pricinginformation# and food companies must include nutritional information on the labels ofmany items.


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eThis part of grocery shopping drives the author up the wall. Ghy not have all non-e'press-lane customers wait in one line and then feed into the ne't available chec&outlane This configuration is typical of ban&s# but the author has seen it done in onlyone grocery store.fBagging can be simultaneous with chec&ing out# especially if bar code scanners arein use.gThe store could adopt the technology of an automated material-handling system*AM


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1. Contribution margin of lost sales *(#+ units)

/evenue.................................................................................. P1(.

ariable costs)Costs of goods sold..................................................... P =.>elling and administrative........................................... 1.Total variable costs...................................................... P >.>

3nit contribution margin....................................................... P 6.>

olume of lost sales.............................................................. (#

Total contribution margin of lost sales...................... P*1;#+

2vertime premiums............................................................... *=#+V

/ental savings....................................................................... 6#

/ental income from owned warehouse

*1(# s. ft. .?> P1.>+............................................ 1;#>

0limination of insurance....................................................... 1=#

2pportunity cost of funds released from inventoryinvestment)

,nvestment in inventory............................................... P6#,nterest before ta'es....................................................

.( 1(#

0stimated before-ta' dollar savings.................................... P ;?#>

Total amount on the income statement ÷ # units

VThe cost of overtime premiums# P=## is less than the additional forgone contributionmargin if the overtime is not used *1># units P6.> O P?#>+. Therefore# the overtime

should be used.


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(. Conditions that should e'ist in order for a company to install "ust-in-time inventorymethods successfully include the following)

• Top management must be committed and provide the necessary leadershipsupport in order to ensure a companywide coordinated effort.

• A detailed system for integrating the seuential operations of the manufacturing

process needs to be developed and implemented. /aw materials must arrive whenneeded for each subassembly so that the production process functions smoothly.

• Accurate sales forecasts are needed for effective finished-goods planning and

production scheduling.

• 4roducts should be designed to use standardi%ed parts to reduce manufacturingtime and decrease costs.

• /eliable vendors who can deliver uality raw materials on time with minimum lead

time must be identified.


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1. Two dimensional ABC)


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6-"+ Solutions Manual

Cost Assignment View

/023/C0 C2T

Assignment of resource coststo activity cost pools

associated withsignificant activitiesProcess View

Activity analysis

Activity evaluation

40/2/MA5C0 M0A3/0*see re. *=+ for e'amples+/22T

CA30*see re. *;+ for

e'amples+

ACT,,T7T/,880/

*see re. *(+ for e'amples+

Assignment of activitycosts to cost ob"ectsusing second-stage

cost drivers

C2T 2B90CT

*4roduct lines) coo&ingutensils# tableware#flatware+

1 ( ; = > 6? @ 111 1(

1; 1= 1>16

ACT,,T,0


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(. Triggers for selected activities)

Activity

5umber Trigger*(+ /eali%ation by purchasing personnel that they do not fully understand the

part specifications

*+ /eali%ation by purchasing personnel that the ordered part will be *or maybe+ late in arriving

*11+ /eceipt of order

*1(+ $iscovery during inspection that parts do not meet specifications

*1;+ $iscovery that parts do not satisfy intended purpose

;. 4ossible root causes)

Activity5umber 4ossible /oot Causes

*(+ 3nclear specifications,ncomplete specificationsClear# but apparently wrong# specifications3ndertrained purchasing personnel

*+ endor delay$elay in placing orderailure by purchasing personnel to ma&e deadline clear

*11+ 3se of vendor that has not been fully certified as a reliable supplierCritical importance of parts

*1(+ Misspecification of parts0rror by purchasing personnel in placing orderendor error,nspector error

*1;+ Misspecification of parts,ncomplete specifications4oor product design0rror by purchasing personnel in placing orderendor error

This list is not necessarily complete. 2ther root causes may e'ist.


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=. uggested performance measures)

Activity

5umber 4erformance Measures*>+ Average price paid

*6+ 5umber of vendors5umber of vendors that are precertified as dependable

*1+ 4ercentage of orders received on timeAverage delay for delinuent orders

*1(+ 5umber of orders returned

4ercentage of orders returned

*16+ Average dollar value tied up in parts inventory


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1. The net cash savings reali%ed by AgriCos ervice $ivision as a result of the "ust-in-time inventory program is P=;## computed as follows)

Cashavings

*loss+unds released from inventory investment....................... P=#,nterest..................................................................................

.1> P6#

,nsurance savings *P@# .6+..................................... =@#

Garehouse rental revenue

R*@# s. ft. .?>+ P(.> per s. ft.S........................... 1>#

Garehouse rental cost) no effect........................................ U Transferred employees) no effect....................................... U Contribution of lost sales *;#@ units at P1.+............. *;@#+2vertime premium *?#> units at P>.6+V........................... *=(#+5et cash savings.................................................................. P=;#

Calculation of unit contribution margin)/evenue *P6#16# ÷ (@# units+............................... P((.Kess variable costs)

Cost of goods sold *P(#66# ÷ (@# units+..................... P.>

elling and administrative e'penses *P?# ÷ (@# units+ (.> 1(.

Contribution margin........................................................................ P1.VThe incremental cost of P>.6 per unit for overtime is less than the additional P1.per unit contribution for the ?#> units that would have been lost sales. Therefore# theovertime hours should be used.


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(. actors# other than financial# that should be considered before a company implementsa 9,T inventory program include)

• Customer dissatisfaction) toc&outs of finished goods or spare parts could resultin customers! downtime# which may be costly.

• $istributor relations) toc&outs of spare parts or finished goods can impair the

manufacturer!s image with its distributors# who represent the direct contacts withthe ultimate customers.

• upplier dissatisfactions) 4lacement of smaller and more freuent orders can

result in higher material and delivery costs from suppliers. Additionally# withchanges in their production and procurement processes# suppliers may choose to

discontinue supplying to a "ust-in-time customer.

• Competition) The mar&etplace will determine the impact of service degradation

due to stoc&outs. Brand loyalty can deteriorate when service standards arelowered. Therefore# it is crucial that before adopting 9,T# management thin&through all the implications. ,t is important to maintain the company!s prior servicestandards and if possible to improve on them.

;. preadsheet is shown on this chapters solutions manual opening screen.


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1. 4redetermined overhead rate Ohourslabor-directbudgeted

overheadingmanufacturbudgeted

O hr(C#CCCP1#=B6#CCC

O P?=.@ per hr.

(. There is no single correct response to this reuirement. 2ne reasonable response isshown in the following table. 2verhead costs are categori%ed into nine cost poolsdesignated *a+ through *i+. Cost drivers are identified as follows)

*a+ 4roduction *in units+

*b+ /aw-material cost

*c+ actory space

*d+ Machine hours

*e+ 4roduction runs

*f+ hipments of finished goods

*g+ hipments of raw materials

*h+ 5umber of different raw materials and parts used in a product

*i+ 0ngineering specifications and change orders

;. ee the following table.

=. ee the following table.


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/e. *(+ /e. *;+ /e. *=+

2verhead ,tem

Cost 4ooland

Cost $river

4roduction

Activity

Candidatefor

0limination

upervision.................................................. h processMachine maintenanceUlabor..................... d processMachine maintenanceUmaterials.............. d process0lectrical power........................................... d process5atural gas *for heating+............................. c processactory supplies.......................................... a processetup labor.................................................. e processKubricants.................................................... d process

4roperty ta'es............................................. c process,nsurance..................................................... c process$epreciation on manufacturing

euipment................................................ d process$epreciation on truc&s and for&lifts.......... b move J$epreciation on material conveyors.......... b moveBuilding depreciation.................................. c process8rinding wheels.......................................... a process$rill bits........................................................ a process4urchasing................................................... b process

Gaste collection.......................................... a process JCustodial labor............................................ c processTelephone service....................................... h process0ngineering design..................................... i process,nspection of raw materials........................ g inspection/eceiving..................................................... g process,nspection of finished goods...................... a inspection4ac&aging.................................................... a processhipping....................................................... f moveGages of parts cler&s *find parts for

production departments+....................... h storage JGages of material handlers........................ b move Juel for truc&s and for&lifts........................ b move J$epreciation on raw-material

warehouse............................................... b storage J$epreciation on finished-goods

warehouse............................................... a storage J


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>. Activity accounting identifies the costs and other performance measures that pertainto significant activities in the firm. ,dentification of activities and their costs helpsmanagement to identify and e'amine non-value-added costs. or e'ample#

management may be able to eliminate *or significantly reduce+ the cost of fuel anddepreciation for the truc&s and for&lifts and the wages of material handlers byinstalling an automated material-handling system. imilarly# adoption of a 9,Tapproach to production could enable management to eliminate or reduce the wages ofparts cler&s and the depreciation on the two warehouses.

6. Computation of pool rate)

/eceiving...................................................................................................... P(#

,nspection of raw material...........................................................................

(#Total............................................................................................................... P=#

4ool rate Odrivercostoflevelbudgeted

costbudgetedO

=CC

P=C#CCC

O P1 per shipment

4/2BK0M 6-=1 *= M,53T0+

1. Customer-profitability analysis)Trace

TelecomCalte'

Computer

ales revenue...................................................................... P1# P1(;#@Cost of goods sold.............................................................. @# 6(#8ross margin....................................................................... P11# P 61#@elling and administrative costs)

8eneral selling costs.................................................... P (=# P 1@#8eneral administrative costs....................................... 1# 16#

Customer-related costs)ales activity........................................................... @# 6#2rder ta&ing............................................................. ;# =#pecial handling...................................................... =# ;#pecial shipping...................................................... # 1#

Total selling and administrative costs............................... P1;# P @=#2perating income................................................................ P ?# P *((#( +4/2BK0M 6-=1 *C25T,530$+


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(. Customer-profitability graph)

Customer 2perating ,ncome *in dollars+


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6-") Solutions Manual

-(>#

-(#

-1>#

-1#

->#

>#

1#

1>#

(#

(>#

P?#

P*((#(+

Customer

Trace

Telecom

Calte'

Computer


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;. preadsheet is shown on this chapters solutions manual opening screen.

4/2BK0M 6-=( *=> M,53T0+

1. Customer-profitability profile *supporting details in the table following the profile+)

Cumulative 2perating ,ncome as a 4ercentage of Total 2perating ,ncome

Customers ran&ed by operating income.


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Customers


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upporting details for customer-profitability profile)

Customer5umbera Customer

2perating4rofit

Cumulative2perating

4rofit

Cumulative

2perating4rofit as a

4ercentage of2perating

,ncome

*1+ 5etwor&-All# ,nc. P;# P ;# ;*(+ 8olden 8ate ervice Associates ?1# 16=# 6*;+ 8raydon Computer Company 6# ((=# =*=+ Mid-tate Computing Company =(# (66# 111

*>+ Trace Telecomb

?# (?;# 11=*6+ The California 8roup 6# (?# 11?*?+ Tele-,nstall# ,nc. *1@#+ (61# 1*@+ Calte' Computerc *((#(+ (;@#@ 1

a Customer numbers are ran&ed by operating income.brom solution to preceding problem.crom solution to preceding problem.

(. Memorandum

$ate) Today

To) ,. ellit# ice 4resident for Mar&eting

rom) ,. M. tudent

ub"ect) Customer-profitability profile

The attached customer-profitability profile shows that two of our customer relationships areunprofitable *Tele-,nstall# ,nc. and Calte' Computer+. As the profile shows# over half of ouroperating income is generated by our two most profitable customers# and = percent of ouroperating profit is generated by our three most profitable customers. Githout our twounprofitable customers# our operating income would be 1? higher.

An activity-based costing analysis of customer-related costs provided the data for thecustomer-profitability analysis portrayed in the profile.


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1. /eferring to the specific ethical standards for management accountants ofcompetence# confidentiality# integrity# and credibility# Marie Gaters violated thefollowing standards of ethical conduct when she as&ed Andrew ulton to suppress

pertinent information.

Competence.) Marie Gaters# controller# has a responsibility to)

• 4rovide decision support information and recommendations that are accurate#

clear# concise# and timely.

,n this instance# Gaters! reuest to ulton# the assistant controller# to suppressinformation about the component failures is unethical. This action &eeps both Gaters

and ulton from performing their duties in accordance with technical standards andhas a favorable impact on earnings as reuested by 9ac& March# vice president ofmanufacturing. The reported financial information# with the omission# lac&s relevanceand reliability for decision ma&ing. Management does not have a clear solution toovercome the component failure problem.

Confidentiality ) $oes not apply.

'ntegrity1 Gaters has a responsibility to)

• /efrain from engaging in any conduct that would pre"udice carrying out duties

ethically.

• Abstain from engaging in or supporting any activity that might discredit the

profession.

Gaters! reuest is unethical since she has responsibilities to report all information ofuse to decision ma&ers in the company. he should protect the overall interests andgoal attainment of /esolute 0lectronics Corporation by encouraging further study ofthe problem by her staff# informing her superiors of this matter# and wor&ing with

others to find solutions.


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Credi"ility1 Gaters has a responsibility to)

• $isclose all relevant information that could reasonably be e'pected to influence

intended users! understanding of the reports# analyses# and recommendations.

Gaters! reuest is unethical because it would suppress information that couldinfluence an understanding of the results of operations. Gaters is also notcommunicating information ob"ectively by withholding information about thecontingent liability.

(. The steps that Andrew ulton# assistant controller# could follow to resolve thissituation are as follows)

• ollow the established policy on ethical conduct at /0C# if a policy e'ists.

• ulton has discussed the matter with Gaters. ,f a satisfactory solution is not found

and losses continue to mount# ulton should discuss it again with Gaters and may write a report detailing the probable economic effects of the situation andmentioning Gaters! reuest to suppress the component failures.

• ulton should advise Gaters that he intends to ta&e the matter further and discuss

the issue with her superior. ,f the matter is not resolved satisfactorily# ultonshould continue up through higher levels in the organi%ation *eventually to theboard of directors+ until the matter is resolved.

• ulton should clarify the relevant concepts with a confidential and ob"ective

advisor to obtain an understanding of possible courses of action.

• ,f# after e'hausting all internal review levels# the ethical conflict still e'ists# ulton

may have no recourse but to resign and write an informative memorandum to theappropriate organi%ational representative.

• 0'cept where legally prescribed# communication of such problems to authorities

or individuals not employed or engaged by the organi%ation is not considered

appropriate.


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1. ee the graph on the following page.

(. ee the graph on the following page.

;. ee the graph on the following page.

=. ee the graph on the following page.

>. ee the graph on the following page.

6. Dai%en costing see&s to lower costs during the manufacturing phase throughcontinuous improvement in the production process. Costs are lowered throughconstant small betterment activities# which every employee in the company is tryingto achieve.

By lowering its costs and improving uality through continuous improvementefforts# the company will be in a better position to compete in the global mar&et onboth price and uality.


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Cost per T set


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1. 4ic&wic& 4aper Company) Current production process.


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Managerial Accounting, 7/e 6-#$

Conveyor

hipping

Koading $oc&

KabelingBuilding

Kabeledrolls

storedKabeling

or&lifts

Ginding

machines

Calenders*polishing+

/efiningarea

*treatmentof

fibers+

4apermachines

4allets

*rolls stored+

4lantBuilding ( $igester

ibersstored

$epressuri%edblow tan&

4allets

*separated fibersstored+

or&lifts


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(. Candidates for non-value-added costs)

*a+ torage time. Kogs in the woodyard and finished rolls of paperboard in the

labeling building are stored for a long time.

*b+ Move time) A lot of effort and employee time is devoted to moving wor& inprocess. Kogs are unloaded from the railroad cars and subseuently reloadedinto the flume. mall truc&s are used to transport chips to the digester in plantbuilding (. or&lifts are used to transport separated fibers to the refining area.inally# for&lifts are used to transport rolls of paperboard to the labelingbuilding.

*c+ Gait time) Gor&-in-process inventory waits at several points in the productionprocess until the ne't operation is ready to receive it. irst# logs are stored in

the wood yard. econd# chips are stored in bins near the chipping machines.Third# fibers are stored near the digester. ourth# separated fibers are stored onpallets near the depressuri%ed blow tan&. ifth# unlabeled rolls of paperboardare stored on pallets near the winding machines. As the problem states# thepartially processed product sometimes waits for two to three days betweenproduction operations.

*d+ Kabor force) The labor force is probably larger than necessary. Much of thise'cess labor is involved in material-handling operations.

;. 4lan for revised production process)

The plan for a new production process involves the following &ey changes)

*a+ $irect transfer of harvested trees from railroad cars to the flume.

*b+ ,nstallation of an automated material-handling system *AM


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A diagram of the new process is shown on the ne't page. The steps in the newprocess are as follows)

*1+


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4ic&wic& 4aper Company) 5ew production process.


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mall uantities oflabeled rolls

stored

Kogs transferred fromrailroad car to flume


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SO'UTION TO CASE

CA0 6-=6 *=> M,53T0+

1. A proliferation of part numbers means that the company may be ordering and stoc&ing

many more types of uniue parts than it needs to. 2verordering and overstoc&ingentail more costs in purchasing# receiving# inspecting# storing# and material handlingthan might otherwise be necessary.

(. Kong production cycles may indicate that the production process is inefficient.,nefficiencies# in turn# imply non-value-added costs.

;. An ABC system can be used to help reduce costs by focusing attention on theproblem of part number proliferation.

a. The division!s strategy is to be a product differentiator. ,t used to be a price

leader# but now it must meet the mar&et price# since new competitors haveentered the mar&et.

b. 4rices are currently being set by the mar&et.

c. Management!s primary need is cost reduction so that the division can meet themar&et-driven price. More accurate product costs# while always desirable# arenot the primary need here. The division will not be able to use cost-basedpricing anyway.

d. Cost reduction is the current goal of management.

e. 4art number proliferation is *at least partially+ to blame for high productioncosts.

f. The design engineers# who strive for Eengineering eleganceE in their productdesigns are largely to blame for part number proliferation. By designing

products Efrom scratch#E engineers often specify new partsthat is# parts that

the division does not already use in its other products.

g. An ABC system can help solve the problem of part number proliferation by

focusing attention on it. 2ne method of directing attention to this problem is tochoose a cost driver that ma&es the design engineers aware of the implicit costsfrom specifying new uniue parts in a product design.


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=. The ob"ective is to find a cost driver that charges to a product the costs associated with purchasing# receiving# inspecting# storing# and handling the parts used in theproduct. 4ossible candidates for such a driver include *1+ direct-material cost# *(+

number of parts# and *;+ number of part numbers.

$river number *;+# the number of part numbers *i.e.# the number of different parts in a product+# would probably wor& the best. ,t focuses most directly on theproblem at hand) part number proliferation. By charging a product for all the myriadsupport costs that go along with using many different types of parts# the designengineers will see more clearly the adverse cost effect of using new parts in a productdesign. They will be encouraged# when it is possible# to use parts that the divisionalready stoc&s. The hope is that the design engineers will begin to ma&e cost-effectivetrade-offs between engineering elegance and product cost.

>. The answer to this uestion is similar in spirit to the answer to reuirement *=+. TheABC system could use cycle time as a cost driver in assigning production-line coststo products. Thus# the longer a product!s cycle time# the longer its assigned productcost. ,n this manner# the costing system focuses attention on a problem thatmanagement feels is unnecessarily inflating production costs.

6. ,n the illustration used in Chapters > and 6# the fundamental role of the ABC system was to achieve more accurate product costs by eliminating *or minimi%ing+ theproblem of cost distortion that is so common in traditional# volume-based product-costing systems. The role of the ABC system here is fundamentally different. The

ob"ective of the ABC system is to modify "e!avior. By choosing cost drivers thatfocus attention on the implicit costs of part number proliferation and long productioncycles# the system encourages employees to change the way they do their wor&. Thedesign engineers# for e'ample# are encouraged to use common parts in productdesigns whenever possible rather than always designing from scratch to achieveengineering elegance.


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OCUS ON ET.ICS /See 0age !"* in t1e te2t34

These scenarios e'plore ethical issues surrounding customer profitability analysis# when it is used to support differential treatment for preferred and nonpreferredcustomers.

tudents usually differ in their opinion about whether there are any ethical issuesinvolved. 0thics aside# however# many students uestion whether these scenariosdescribe sound business practices. Many students# for e'ample# argue that a studentmay be an HundesirableI ban&ing customer during his or her student days# but whatabout later on Gould a ban& not be wise to avoid alienating its future HpreferredIcustomers during their years as students

hilton7e sm ch6

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