Chapter 13: Chapter 13

Describe four purposes of cost allocation.

Mechanical sells and services plumbing, heating, and air-conditioning systems. \(C \&\) S's cost accounting system tracks two cost categories: direct labor and direct materials. \(C \& S\) uses a time-and-materials pricing system, with direct labor marked up \(90 \%\) and direct materials marked up \(40 \%\) to recover indirect costs of support staff, support materials, and shared equipment and tools and to earn a profit. During a hot summer day, the central air-conditioning in Brooke Lee's home stops working. \(C \& S\) technician John Anderson arrives at Lee's home and inspects the air conditioner. He considers two options: replace the compressor or repair it. The cost information available to Anderson follows: 1. If Anderson presents Lee with the replace or repair options, what price would he quote for each? 2\. If the two options were equally effective for the 3 years that Lee intends to live in the home, which option would she choose? 3\. If Anderson's objective is to maximize profits, which option would he recommend to Lee? What would be the ethical course of action?

Georgia Temps, a large labor contractor, supplies contract labor to building- construction companies. For \(2017,\) Georgia Temps has budgeted to supply 84,000 hours of contract labor. Its variable costs are 13 per hour, and its fixed costs are 168,000 dollar, Roger Mason, the general manager, has proposed a cost-plus approach for pricing labor at full cost plus \(20 \%\) 1\. Calculate the price per hour that Georgia Temps should charge based on Mason's proposal. 2\. The marketing manager supplies the following information on demand levels at different prices: Georgia Temps can meet any of these demand levels. Fixed costs will remain unchanged for all the demand levels. \(0 n\) the basis of this additional information, calculate the price per hour that Georgia Temps should charge to maximize operating income. 3\. Comment on your answers to requirements 1 and 2 . Why are they the same or different?

Global Airlines is a major low-price airline carrier for both domestic and international travel. The company guarantees the "lowest price" ticket for travel within the United States. The "lowest price" ticket guarantee does not apply for travel on Monday mornings and Friday evenings, which are busy travel times for business travelers. 1\. Do these pricing practices of Global Airlines violate any anti-trust laws? Why or why not? 2\. Why is Global Airlines not offering a price guarantee for flights on Monday mornings and Friday evenings? Do you agree with this policy? Explain briefly. 3\. What other factors should Global Airlines consider before implementing these pricing policies?

Instyle Interior Designs has been requested to prepare a bid to decorate four model homes for a new development. Winning the bid would be a big boost for sales representative Jim Doogan, who works entirely on commission. Sara Groom, the cost accountant for Instyle, prepares the bid based on the following cost information: Based on the company policy of pricing at 120 \%of full cost, Groom gives Doogan a figure of 165,600 dollar to submit for the job. Doogan is very concerned. He tells Groom that at that price, Instyle has no chance of winning the job. He confides in her that he spent 600 dollarof company funds to take the developer to a basketball playoff game where the developer disclosed that a bid of 156,000 dollar would win the job. He hadn't planned to tell Groom because he was confident that the bid she developed would be below that amount. Doogan reasons that the 600 dollar he spent will be wasted if Instyle doesn't capitalize on this valuable information. In any case, the company will still make money if it wins the bid at 156,000 dollar because it is higher than the full cost of \(\$ 138,000\) 1\. Is the 600 dollarspent on the basketball tickets relevant to the bid decision? Why or why not? 2\. Groom suggests that if Doogan is willing to use cheaper furniture and artwork, he can achieve a bid of 156,000 dollar. The designs have already been reviewed and accepted and cannot be changed without additional cost, so the entire amount of reduction in cost will need to come from furniture and artwork. What is the target cost of furniture and artwork that will allow Doogan to submit a bid of 156,000 dollar assuming a target markup of 20 \% of full cost? 3\. Evaluate whether Groom's suggestion to Doogan to use the developer's tip is unethical. Would it be unethical for Doogan to reduce the cost of furniture and artwork to arrive at a lower bid? What steps should Doogan and Groom take to resolve this situation?

How is activity-based costing useful for pricing decisions?

Describe two alternative approaches to long-run pricing decisions.

What is a target cost per unit?

Describe value engineering and its role in target costing.

Give two examples of a value-added cost and two examples of a non-value-added cost.