ACTIVITY BASED COSTING
(7-64 & 7-65)
Dr. Felix D. Cena, CPA, MBA
Management Account I
Neil Derrek M. Dullesco
Dan Carlo D. Poblacion
1. Identify the flaws associated with the current method of assigning shipping and warehousing costs to Sharp’s products.
Shipping and warehousing costs are currently assigned using tons of paper produced, a unit-based measure. Many of these costs, however, are not driven by quantity produced. Many products have special handling and shipping requirements involving extra costs. These costs should not be assigned to those products that are shipped directly to customers.
2. Compute the shipping and warehousing cost per ton of LLHC sold by using the new method suggested by Jennifer and Kaylin.
The new method proposed by Jennifer and Kaylin assigns the costs of shipping and warehousing separately for the low volume products. Doing this would require three cost assignments which are receiving, shipping, and carrying. The cost drivers for each cost are tons processed, items shipped, and tons sold.
15 people at an annual cost of
$ 500, 000
Other receiving costs
$ 1, 100, 000 / 56, 000 Tons processed
= $ 19. 64
30 people for picking & 10 for unloading at an annual cost of
$ 1, 200, 000 Other shipping costs
1, 100, 000
$ 2, 300, 000
÷ 190, 000 shipping items
= $ 12.11
(25 tons) x ($ 1,665) x (16%)
$ 6, 660 / 10 tons sold
$ 12.11 x (7 ave. shipments per ton)
84.77 Carrying Cost
3. Using the new costs computed in Requirement 2, compute the profit per ton of LLHC. Compare this with the profit per ton computed by using the old method. Do you think that this same effect would be realized for other low-volume products? Explain.
PROFIT PER TON LLHC
$ 2, 400
$ 2, 400
Shipping and Warehousing Costs
The revised profit, shows a more precise and accurate assignment of shipping and warehousing costs. It presents a different result of LLHC. The product is, in reality, losing money for the company. Its earlier apparent profitability was attributable to a subsidy being received from the high-volume products (by spreading the special shipping and handling costs over all products, using tons produced as the cost driver). The same effect is also true for the other low-volume products. Essentially, the system is understating the handling costs for low-volume products and overstating the cost for high-volume products.
4. Comment on Ryan’s proposal to drop some high-volume products and place more emphasis on low volume products. Discuss the role of the accounting system in supporting this type of decision making.
Ryan’s proposal to drop some high-volume products and place more low-volume products is not a good proposal. LLHC’s apparent profitability is attributable to distorted cost assignments. The change in LLHC was achieved by simply improving the accuracy of shipping and handling costs. Further improvements in accuracy in the overhead assignments may cause the view of LLHC to deteriorate even more. Conversely, the profitability of high-volume products may improve significantly with increased costing accuracy. This case shows the importance of having accurate and reliable accounting information. The accounting system must bear the responsibility of providing reliable and accurate information.
5. After receiving the analysis of LLHC, Ryan decided to expand the analysis to all products. He also had Kaylin re-evaluate the way in which mill overhead was assigned to products. After the restructuring...
Please join StudyMode to read the full document