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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?

Short Answer

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The costs incurred by Roberta Inc. can be classified as follows: indirect manufacturing labor costs as facility-sustaining, procurement costs as batch-level, indirect materials costs as output unit-level, setup costs as batch-level, designing processes and process changes costs as product-sustaining, machine-related overhead costs as output unit-level, and plant management, rent, and insurance costs as facility-sustaining. Allocating all overhead costs using machine-hours may lead to miscosting of professional machines (undercosted) and home-use machines (overcosted), as batch-level costs are not accurately accounted for. The cost hierarchy is helpful for Roberta, Inc. in managing its business by improving costing accuracy, enabling an appropriate costing system, assisting in strategic decision-making, and reducing the chances of miscosting products.
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Step 1: Classify costs

To classify costs, consider the following explanations for each specific cost category: - Output unit-level costs: These are costs that change with the number of units produced. - Batch-level costs: These are costs that change with the number of batches produced but not directly with the number of units. - Product-sustaining costs: These are costs that support the production of a certain product without changing due to the number of units or batches produced. - Facility-sustaining costs: These are costs that do not change based on any of the production activities. Now use these definitions to classify each cost: a. Indirect manufacturing labor costs: facility-sustaining (supporting direct labor without varying based on production activities) b. Procurement costs: batch-level (related to the number of purchase orders placed, which changes based on the number of batches) c. Indirect materials costs: output unit-level (varying directly with the number of units produced) d. Setup costs: batch-level (varying with the number of different products) e. Designing processes and process changes costs: product-sustaining (related to the product, but do not change with the number of units or batches) f. Machine-related overhead costs: output unit-level (varying with the number of machine-hours) g. Plant management, rent and insurance costs: facility-sustaining (do not change with any production activities)

Step 2: Analyze miscosting for two types of machines

Roberta Inc. produces two types of elliptical machines (professional and home use), both require the same number of machine-hours to manufacture. All overhead costs are allocated using machine-hours as the allocation base. To analyze the miscosting, if any, consider the following points: - Since professional machines are more complex and produced in many batches, the batch-related costs (procurement and setup costs) would be higher. - Home-use machines are simple and produced in fewer batches, thus incurring lower batch-related costs. However, since Roberta is allocating all overhead costs using machine-hours without considering batch-level activities, the professional machines may be undercosted, and home-use machines may be overcosted. This miscosting happens because the batch-level costs are not appropriately accounted for in the allocation process.

Step 3: Explain the usefulness of cost hierarchy in managing the business

The cost hierarchy is helpful for Roberta, Inc. in managing its business by: - Helping them understand each type of cost more accurately and allocate them based on relevant drivers. - Allowing them to design an appropriate costing system, which considers unit-level, batch-level, product-sustaining, and facility-sustaining costs. - Assisting managers in making decisions related to product pricing, resource allocation, cost control, and process improvement. - Reducing the chances of miscosting products, thus leading to more informed pricing and production strategies. By adopting a cost hierarchy approach, Roberta Inc. can improve its costing accuracy and ultimately make better strategic decisions that positively impact the company's overall business performance.

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