Roberta, Inc., manufactures elliptical machines for several well-known companies. The machines differ significantly in their complexity and their manufacturing batch sizes. The following costs were incurred in 2017 : a. Indirect manufacturing labor costs such as supervision that supports direct manufacturing labor, \(\$ 935,000\) b. Procurement costs of placing purchase orders, receiving materials, and paying suppliers related to the number of purchase orders placed, \(\$ 650,000\) c. cost of indirect materials, \(\$ 234,000\) d. costs incurred to set up machines each time a different product needs to be manufactured, \(\$ 392,000\) e. Designing processes, drawing process charts, and making engineering process changes for products, \(\$ 236,900\) f. Machine-related overhead costs such as depreciation, maintenance, and production engineering. \(\$ 865,000\) (These resources relate to the activity of running the machines.) g. Plant management, plant rent, and plant insurance, \(\$ 498,000\) 1\. Classify each of the preceding costs as output unit-level, batch-level, product-sustaining, or facilitysustaining. Explain each answer. 2\. Consider two types of elliptical machines made by Roberta, Inc. One machine, designed for professional use, is complex to make and is produced in many batches. The other machine, designed for home use, is simple to make and is produced in few batches. Suppose that Roberta needs the same number of machine-hours to make each type of elliptical machine and that Roberta allocates all overhead costs using machine-hours as the only allocation base. How, if at all, would the machines be miscosted? Briefly explain why. 3\. How is the cost hierarchy helpful to Roberta in managing its business?
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Fitzgerald Supermarkets (FS) operates at capacity and decides to apply \(A B C\) analysis to three product lines: baked goods, milk and fruit juice, and frozen foods. It identifies four activities and their activity cost rates as follows: The revenues, cost of goods sold, store support costs, activities that account for the store support costs, and activity-area usage of the three product lines are as follows: Under its simple costing system, FS allocated support costs to products at the rate of \(30 \%\) of cost of goods sold. 1\. Use the simple costing system to prepare a product-line profitability report for FS. 2\. Use the ABC system to prepare a product-line profitability report for FS. 3\. What new insights does the ABC system in requirement 2 provide to FS managers?
Why should managers worry about product overcosting or undercosting?
The job-costing system at Melody's Custom Framing has five indirect cost pools (purchasing, material handling, machine maintenance, product inspection, and packaging) The company is in the process of bidding on two jobs: Job \(220,\) an order of 17 intricate personalized frames, and Job 330 , an order of 5 standard personalized frames. The controller wants you to compare overhead allocated under the current simple job-costing system and a newly designed activity-based job-costing system. Total budgeted costs in each indirect-cost pool and the budgeted quantity of activity driver are as follows. Information related to Job 220 and Job 330 follows. Job 220 incurs more batch- level costs because it uses more types of materials that need to be purchased, moved, and inspected relative to Job 330 . 1\. Compute the total overhead allocated to each job under a simple costing system, where overhead is allocated based on machine-hours. 2\. Compute the total overhead allocated to each job under an activity-based costing system using the appropriate activity drivers. 3\. Explain why Melody's Custom Framing might favor the ABC job-costing system over the simple jobcosting system, especially in its bidding process.
What are the key reasons for product cost differences between simple costing systems and ABC systems?
What are the main costs and limitations of implementing ABC systems?
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