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Identifying Activities, Resources, and Cost Drivers in Manufacturing
Upon completion of the Required Readings, write a thorough, well-planned narrative answer to the following discussion question. Rely on your Required Readings and the Lecture and Research Update for specific information to answer the discussion question, but turn to your original thoughts when asked to apply, evaluate, analyze, or synthesize the information. Your Discussion Question responses should be both grammatically and mechanically correct and formatted in the same fashion as the questions themselves. If there is a Part A, your response should identify a Part A, etc. In addition, you must appropriately cite all resources used in your responses and document them in a bibliography using APA style.
Chapter 4 covers the direct and indirect product costs in the manufacturing sector. A key concept is the relationship between product and period costs, as illustrated in Exhibit 4-3 (p. 137). Focus also on the presentation of inventory on the income statement of a manufacturer, as shown in Exhibit 4-4 (p. 139).
Chapter 4 also introduces the concepts and application underlying activity-based costing (ABC), including activity analysis, resources, cost pools, and cost drivers. Chapter 4 prepares you to complete Case 4-49 listed below. This case requires you to list the activities, resources, and cost drivers and to analyze cost behavior for a manufacturing company. (25 points) (A 1-page response is required.)
Case 4-49 Identifying Activities, Resources, and Cost Drivers in Manufacturing
(D. Sandison) Extrusion Plastics is a multinational, diversified organization. One of its manufacturing divisions, Northeast Plastics Division, has become less profitable due to increased compensation. Its single plant. Product Line A is high-volume, simple pieces produced in large batches. Product Line B is medium-volume, more complex pieces. Product C is low-volume, small-order, highly complex pieces.
Currently, the division allocates indirect manufacturing costs based on direct labor. The vice president of manufacturing is uncomfortable using the traditional cost figures. He thinks the company is underpricing the more complex products. He decides to conduct an activity-based costing analysis of the business.
Interviews were conducted with key managers in order to identify activities, resources, cost drivers, and their interrelationships.
Interviewee: Production Manager
Q1: What activities are carried out in your area?
A1: All products are manufactured using three similar, complex, and expensive molding machines. Each molding machine can be used in the production of the three product lines. Each setup takes about the same time irrespective of the product.
Q2: Who works in your area?
A2: Last year, we employed thirty machine operators, two maintenance mechanics, and two supervisors.
Q3: How are the operators used in the molding process?
A3: It requires nine operators to support a machine during the actual production process.
Q4: What do the maintenance mechanics do?
A4: Their primary function is to perform machine setups. However, they were also required to provide maintenance during the molding process.
Q5: Where do the supervisors spend their time?
A5: They provide supervision for the machine operators and the maintenance mechanics. For the most part, the supervisors appear to spend the same amount of time with each of the employees that they supervise.
Q6: What other resources are used to support manufacturing?
A6: The molding machines use energy during the molding process and during the setups. We put meters on the molding machines to get a better understanding of their energy consumption. We discovered that for each hour that a machine ran, it used 6.3 kilowatts of energy. The machines also require consumable shop supplies (e.g., lubricants, hoses, and so on). We have found a direct correlation between the amount of supplies used and the actual processing time.
Q7: How is the building used, and what costs are associated with it?
A7: We have a 100,000-square-foot building. The total rent and insurance costs for the year were $675,000. These costs are allocated to production, sales, and administration based on square footage.
1. Identify the activities, resources, and cost drivers for the division.
2. For each resource identified in requirement 1, indicate its cost behavior with respect to the activities it supports (assume a planning period of 1 month).
Horngren, C. T., Sundem, G. L., & Stratton, W. O. (2002).Introduction to Management Accounting, (12th ed.). NJ: Prentice Hall.
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