Moss Manufacturing produces several types of bolts. The products are produced in batches according to customer order. Although there are a variety of bolts, they can be grouped into three product families. The number of units sold is the same for each family. The selling prices for the three families range from $0.50 to $0.80 per unit. Because the product families are used in different kinds of products, customers also can be grouped into three categories, corresponding to the product family they purchase. Historically, the costs of order entry, processing, and handling were expensed and not traced to individual products. These costs are not trivial and totaled $6,300,000 for the most recent year. Furthermore, these costs had been increasing over time. Recently, the company had begun to emphasize a cost reduction strategy; however, any cost reduction decisions had to contribute to the creation of a competitive advantage.
Because of the magnitude and growth of order-filling costs, management decided to explore the causes of these costs. They discovered that order-filling costs were driven by the number of customer orders processed. Further investigation revealed the following cost behavior:
Step-fixed cost component: $70,000 per step; 2,000 orders define a step*
Variable cost component: $28 per order
*Moss currently has sufficient steps to process 100,000 orders.
The expected customer orders for the year total 140,000. The expected usage of the order-filling activity and the average size of an order by product family are as follows:
As a result of the cost behavior analysis, the marketing manager recommended the imposition of a charge per customer order. The president of the company concurred. The charge was implemented by adding the cost per order to the price of each order (computed using the projected ordering costs and expected orders). This ordering cost was then reduced as the size of the order increased and eliminated as the order size reached 2,000 units. (The marketing manager indicated that any penalties imposed for orders greater than this size would lose sales from some of the smaller customers.) Within a short period of communicating this new price information to customers, the average order size for all three product families increased to 2,000 units.
Required:
- 1. Moss traditionally has expensed order-filling costs (following GAAP guidelines). Under this approach, how much cost is assigned to customers? Do you agree with this practice? Explain.
- 2. Consider the following claim: by expensing the order-filling costs, all products were undercosted; furthermore, products ordered in small batches are significantly undercosted. Explain, with supporting computations where possible. Explain how this analysis also reveals the costs of various customer categories.
- 3. Calculate the reduction in order-filling costs produced by the change in pricing strategy. (Assume that resource spending is reduced as much as possible and that the total units sold remain unchanged.) Explain how exploiting customer linkages produced this cost reduction. Moss also noticed that other activity costs, such as those for setups, scheduling, and materials handling costs, were reduced significantly as a result of this new policy. Explain this outcome, and discuss its implications.
- 4. Suppose that one of the customers complains about the new pricing policy. This buyer is a lean, JIT firm that relies on small, frequent orders. In fact, this customer accounted for 30 percent of the Family A orders. How should Moss deal with this customer?
- 5. One of Moss’s goals is to reduce costs so that a competitive advantage might be created. Describe how the management of Moss might use this outcome to help create a competitive advantage.
Trending nowThis is a popular solution!
Chapter 11 Solutions
Cornerstones of Cost Management (Cornerstones Series)
- Grundvig Manufacturing produces several types of bolts used in aircraft. The bolts are produced in batches and grouped into three product families. Because the product families are used in different kinds of aircraft, customers also can be grouped into three categories, corresponding to the product family that they purchase. The number of units sold to each customer class is the same. The selling prices for the three product families range from 0.50 to 0.80 per unit. Historically, the costs of order entry, processing, and handling were expensed and not traced to individual customer groups. These costs are not trivial and totaled 9,000,000 for the most recent year. Recently, the company started emphasizing a cost reduction strategy with an emphasis on creating a competitive advantage. Upon investigation, management discovered that order-filling costs were driven by the number of customer orders processed with the following cost behavior: Step-fixed cost component: 50,000 per step (2,000 orders define a step) Variable cost component: 20 per order Grundvig currently has sufficient steps to process 200,000 orders. The expected customer orders for the year total 200,000. The expected usage of the order-filling activity and the average size of an order by customer category follow: As a result of cost behavior analysis, the marketing manager recommended the imposition of a charge per customer order. The charge was implemented by adding the cost per order to the price of each order (computed by using the projected ordering costs and expected orders). This ordering cost was then reduced as the size of the order increased and was eliminated as the order size reached 2,000 units. Within a short period of communicating this new price information to customers, the average order size for all three product families increased to 2,000 units. Required: 1. CONCEPTUAL CONNECTION Grundvig traditionally has expensed order-filling costs. What is the most likely reason for this practice? 2. Calculate the cost per order for each customer category. (Note: Round to two decimal places.) 3. CONCEPTUAL CONNECTION Calculate the reduction in order-filling costs produced by the change in pricing strategy (assuming that resource spending is reduced as much as possible and that the total units sold remain unchanged). Explain how exploiting customer activity information produced this cost reduction. Would any other internal activities benefit from this pricing strategy?arrow_forwardLucky Clothing creates and sells t-shirts that can be customized. The cost of sales order processing and shipping is calculated using activity-based costing at Lucky Clothing. The sales order processing activity has a $9 per sales order activity rate, and the shipping activity has a $18 per shipment activity rate. Lucky Clothing sold a total of 25,300 personalized t-shirts, including 4,000 orders and 1,300 shipping. The total activity cost is calculated through: Sales order activity costs = Number of orders * sales order activity rate = 4000*9 = $36,000Shipping Activity costs = Number of shipping * Shipping Activity rate= 1300*18 = $23400Total activity costs = Sales order activity costs + Shipping Activity costsWhile the per-unit sales order processing and shipping activity cost for customizable t-shirts is solved as follows:Per unit sales order processing costs = Sales order processing costs/ Number of t shirts = $36000 + $23400 = $59400 Per unit sales order processing costs = Sales…arrow_forwardBusiness Systems, Inc., sells computer hardware to end consumers. The CX30 is sold as a "bundle", which includes three hardware products: a personal computer (PC) tower, a 26-inch monitor, and a color laser printer. Each of these products is made in a separate manufacturing division of Business Systems and can be purchased individually as well as in a bundle. Business Systems sells roughly equal quantities of the three products. The individual selling prices and per unit costs are as follows: Read the requirements2. Requirement 1. Allocate the revenue from the computer bundle purchase to each of the hardware products using the stand-alone method based on the individual selling price per unit. (Enter the allocation proportion as a decimal rounded to five decimal places. Round the revenue allocated to the nearest whole dollar.) Computer component Allocation Proportion Revenue Allocated PC tower Monitor Color laser printer…arrow_forward
- Zapato Company produces two types of boots: vaquero and vaquera. There are four activities associated with the two products. Drivers for the four activities are as follows: Vaquero Vaquera Cutting hours 2,120 5,400 Assembly hours 2,850 4,650 Inspection hours 980 2,430 Rework hours 150 450 Required: 1. Calculate the consumption ratios for the four drivers. Round your answers to two decimal places. Activity Driver Vaquero Vaquera Cutting hours Assembly hours Inspection hours Rework hoursarrow_forwardHi Tech Products manufactures three (3) types of CD players: Cheap, Econo and Deluxe. Hi Tech uses an activity-based product costing system. The company has identified five (5) activities. Each activity, its cost and related activity driver are identified below: Under an activity-based product costing system, what is the cost per unit of Cheap?arrow_forwardFigure Four is a distributor of pharmaceutical products. Its activity-based costing system has five activity areas: Activity Area Cost Driver and Rate Order processing $40 per order Line item ordering $3 per line item Store deliveries $50 per store delivery Carton deliveries $1 per carton Shelf-stocking $16 per stocking-hour Rick Flair, the controller of Figure Four, wants to use this activity-based costing system to examine individual customer profitability within each distribution market. Two customers are used to exemplify the insights available with the activity-based costing approach. Data pertaining to these two customers in August are as follows: Charleston Pharmacy Chapel Hill Pharmacy Total orders 12 10 Average line items per order 10 18 Total store deliveries 6 10 Average cartons shipped per store delivery 24 20 Average hours of shelf-stocking per store delivery 0 0.5 Average…arrow_forward
- Atlanta Systems produces two different products, Product A, which sells for $650 per unit, and Product B, which sells for $1,200 per unit, using three different activities: Design, which uses Engineering Hours as an activity driver; Machining, which uses machine hours as an activity driver; and Inspection, which uses number of batches as an activity driver. The cost of each activity and usage of the activity drivers are as follows: Usage by Product A Usage by Cost Product B Design (Engineering Hours) Machining (Machine Hours) Inspection (Batches) $ 230,000 $2,600,000 $ 240,000 116 134 2,320 2,680 34 46 Atlanta manufactures 12,500 units of Product A and 10,172 units of Product B per month. Each unit of Product A uses $100 of direct materials and $45 of direct labor, while each unit of Product B uses $140 of direct materials and $75 of direct labor. Required: a. Calculate the activity rate for design. Rate for Design per hour b. Calculate the activity rate for machining. Rate for…arrow_forwardWalnut Systems produces two different products, Product A, which sells for $127 per unit, and Product B, which sells for $209 per unit, using three different activities: Design, which uses Engineering Hours as an activity driver; Machining, which uses machine hours as an activity driver; and Inspection, which uses number of batches as an activity driver. The cost of each activity and usage of the activity drivers are as follows: Cost Usage by Product A Usage by Product B Design (Engineering Hours) $ 158,080 216 304 Machining (Machine Hours) $ 542,720 1,150 3,090 Inspection (Batches) $ 25,480 36 16 Walnut manufactures 10,900 units of Product A and 6,600 units of Product B per month. Each unit of Product A uses $40 of direct materials and $18 of direct labor, while each unit of Product B uses $74 of direct materials and $26 of direct labor. Required: a. Calculate the activity rate for design.b. Calculate the activity rate for machining.c.…arrow_forwardWalnut Systems produces two different products, Product A, which sells for $127 per unit, and Product B, which sells for $209 per unit, using three different activities: Design, which uses Engineering Hours as an activity driver; Machining, which uses machine hours as an activity driver; and Inspection, which uses number of batches as an activity driver. The cost of each activity and usage of the activity drivers are as follows: Cost Usage by Product A Usage by Product B Design (Engineering Hours) $ 158,080 216 304 Machining (Machine Hours) $ 542,720 1,150 3,090 Inspection (Batches) $ 25,480 36 16 Walnut manufactures 10,900 units of Product A and 6,600 units of Product B per month. Each unit of Product A uses $40 of direct materials and $18 of direct labor, while each unit of Product B uses $74 of direct materials and $26 of direct labor. Required: a. Calculate the activity rate for design. (304)b. Calculate the activity rate for machining.…arrow_forward
- Shanghai Company sells glasses, fine china, and everyday dinnerware. It uses activity-based costing to determine the cost of the shipping and handling activity. The shipping and handling activity has an activity rate of $13 per pound. A box of glasses weighs 2 pounds, a box of fine china weighs 4 pounds, and a box of everyday dinnerware weighs 6 pounds. a Determine the shipping and handling activity cost to be allocated to each unit of product. Product Amount Glasses $fill in the blank 1 Fine China $fill in the blank 2 Everyday dinnerware $fill in the blank 3 b Determine the total shipping and receiving costs to be allocated to the fine china if 1,900 boxes are shipped.fill in the blank 1 of 1$arrow_forwardGood Scent, Inc., produces two colognes: Rose and Violet. Of the two, Rose is more popular. Data concerning the two products follow: Rose Violet Expected sales (in cases) Selling price per case Direct labor hours Machine hours Receiving orders Packing orders Material cost per case Direct labor cost per case $9 The company uses a conventional costing system and assigns overhead costs to products using direct labor hours. Annual overhead costs follow. They are classified as fixed or variable with respect to direct labor hours. Fixed Direct labor benefits Machine costs Receiving department Packing department Total costs * All depreciation 55,000 11,000 $101 36,650 5,550 10,350 3,200 $ 50 - 97 $49 $82 27 53 Variable $215,220 218,500* 291,180 241,000 126,000 $585,500 $506,400 $42 $6 Required: 1. Using the conventional approach, compute the number of cases of Rose and the number of cases of Violet that must be sold for the company to break even. In your computations, round variable unit cost…arrow_forwardShanghai company sells glasses, fine China, and everyday dinnerware. It uses activity-based costing to determine the cost of the shipping and handeling activity. The shipping and handling activity has an activity rate of 10$ per pound. A box of glasses weighs 2 pounds, a box of fine China weighs 4 pounds, and a box of everyday dinnerware weighs 6 pounds. a. Determine the shipping and handling activity cost to be allocated to each unit of product. Glasses : $___Fine china: $___Everyday dinnerware: $ ____ b. Determine the total shipping and receiving costs to be allocated to the fine China if 4,400 boxes are shipped. $______arrow_forward
- Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage LearningCornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning