Cost Accounting (14th Edition)

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506 CHAPTER 14 COST ALLOCATION, CUSTOMER-PROFITABILITY ANALYSIS, AND SALES-VARIANCE ANALYSIS Learning Objective 3 Discuss decisions faced when collecting costs in indirect-cost pools . . . determining the number of cost pools and the costs to be included in each cost pool Cost Allocation Decisions In this section, we focus on the first purpose of cost allocation: to provide information for economic decisions, such as pricing, by measuring the full costs of delivering products based on an ABC system. Chapter 5 described how ABC systems define indirect-cost pools for different activities and use cost drivers as allocation bases to assign costs of indirect-cost pools to products (the second stage of cost allocation). In this section, we focus on the first stage of cost allocation, the assignment of costs to indirect-cost pools. We will use Consumer Appliances, Inc. (CAI), to illustrate how costs incurred in different parts of a company can be assigned, and then reassigned, for costing products, services, customers, or contracts. CAI has two divisions; each has its own manufacturing plant. The refrigerator division has a plant in Minneapolis, and the clothes dryer division has a plant in St. Paul. CAI’s headquarters is in a separate location in Minneapolis. Each division manufactures and sells multiple products that differ in size and complexity. CAI’s management team collects costs at the following levels: Corporate costs—There are three major categories of corporate costs: 1. Treasury costs—$900,000 of costs incurred for financing the construction of new assembly equipment in the two divisions. The cost of new assembly equipment is $5,200,000 in the refrigerator division and $3,800,000 in the clothes dryer division. 2. Human resource management costs—recruitment and ongoing employee training and development, $1,600,000. 3. Corporate administration costs—executive salaries, rent, and general administration costs, $5,400,000. Division costs—Each division has two direct-cost categories (direct materials and direct manufacturing labor) and seven indirect-cost pools—one cost pool each for the five activities (design, setup, manufacturing, distribution, and administration), one cost pool to accumulate facility costs, and one cost pool for the allocated corporate treasury costs. Exhibit 14-3 presents data for six of the division indirect-cost pools and cost-allocation bases. (In a later section, we describe how corporate treasury Exhibit 14-3 Division Indirect-Cost Pools and Cost-Allocation Bases, CAI, for Refrigerator Division (R) and Clothes Dryer Division (CD) Division Total Cost Cost- Cause-and-Effect Relationship Indirect- Example of Indirect Hierarchy Allocation That Motivates Management’s Cost Pools Costs Costs Category Base Choice of Allocation Base Design Design (R) $6,000,000 Product Parts times Complex products (more parts and larger engineering (CD) 4,250,000 sustaining cubic feet size) require greater design resources. salaries Setup of Setup labor and (R) $3,000,000 Batch Setup- Overhead costs of the setup activity machines equipment cost (CD) 2,400,000 level hours increase as setup-hours increase. Manufacturing Plant and (R) $25,000,000 Output Machine- Manufacturing-operations overhead costs operations equipment, (CD) 18,750,000 unit level hours support machines and, hence, increase energy with machine usage. Distribution Shipping (R) $8,000,000 Output Cubic Distribution-overhead costs increase with labor and (CD) 5,500,000 unit level feet cubic feet of product shipped. equipment Administration Division (R) $1,000,000 Facility Revenues Weak relationship between division executive executive (CD) 800,000 sustaining salaries and revenues, but justified by salaries CAI on a benefits-received basis. Facility Annual (R) $4,500,000 All Square Facility costs increase with square building and (CD) 3,500,000 feet feet of space. space costs
costs are allocated to each division to create the seventh division indirect-cost pool.) CAI identifies the cost hierarchy category for each cost pool: output-unit level, batch level, product sustaining level, and facility-sustaining level (as described in Chapter 5, p. 149). Exhibit 14-4 presents an overview diagram of the allocation of corporate and division indirect costs to products of the refrigerator division. Note: The clothes dryer division has its own seven indirect-cost pools used to allocate costs to products. These cost pools and cost-allocation bases parallel the indirect-cost pools and allocation bases for the refrigerator division. Look first at the middle row of the exhibit, where you see “Division Indirect-Cost Pools,” and scan the lower half. It is similar to Exhibit 5-3 (p. 150), which illustrates ABC COST ALLOCATION DECISIONS 507 Exhibit 14-4 Overview Diagram of Allocation of Corporate and Division Indirect Costs to Products of the Refrigerator Division, CAI CORPORATE COSTS Corporate Treasury Costs Corporate Human Resource Management (CHRM) Costs Corporate Administration (CA) Costs CORPORATE COST-ALLOCATION BASE Cost of New Assembly Equipment Salary and Labor Costs Division Administration Costs CORPORATE COSTS ALLOCATED TO DIVISIONS Refrigerator Division Clothes Dryer Division DIVISION INDIRECT- COST POOLS Allocated Corporate Treasury Costs Design (including CHRM costs) Machine Setup (including CHRM costs) Manufacturing Operations (including CHRM costs) Distribution (including CHRM costs) Administration (including CHRM and CA costs) Facility Costs DIVISION COST-ALLOCATION BASE Machine-Hours on New Equipment Parts Cubic feet Setup-Hours Machine-Hours Cubic Feet Revenues COST OBJECT: REFRIGERATOR DIVISION PRODUCTS Indirect Costs Direct Costs DIRECT COSTS Direct Materials Direct Manufacturing Labor
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A 1 E=mc 2 This eBook is provided b
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Editorial Director: Sally Yagan Edi
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Contents 1 The Manager and Manageme
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VI CONTENTS Organization Structure
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VIII CONTENTS Irrelevance of Past
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X CONTENTS Comparison of Weighted-
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XII CONTENTS Residual Income 810 E
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XIV ABOUT THE AUTHORS Visa, and th
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XVI PREFACE simplified presentatio
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XVIII PREFACE Chapter 5 has been r
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XX PREFACE We would also like to e
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1 The Manager and Management Accoun
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4 CHAPTER 1 THE MANAGER AND MANAGE
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10 CHAPTER 1 THE MANAGER AND MANAG
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2 An Introduction to Cost Terms and
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28 CHAPTER 2 AN INTRODUCTION TO CO
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3 Cost-Volume-Profit Analysis Lear
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64 CHAPTER 3 COST-VOLUME-PROFIT AN
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4 Job Costing Learning Objectives
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100 CHAPTER 4 JOB COSTING refers t
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102 CHAPTER 4 JOB COSTING Learning
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104 CHAPTER 4 JOB COSTING Decision
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106 CHAPTER 4 JOB COSTING direct m
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108 CHAPTER 4 JOB COSTING Concepts
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110 CHAPTER 4 JOB COSTING monitori
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112 CHAPTER 4 JOB COSTING Manufact
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114 CHAPTER 4 JOB COSTING at the b
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116 CHAPTER 4 JOB COSTING subsidia
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118 CHAPTER 4 JOB COSTING Learning
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120 CHAPTER 4 JOB COSTING proporti
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122 CHAPTER 4 JOB COSTING because
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124 CHAPTER 4 JOB COSTING Required
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126 CHAPTER 4 JOB COSTING 6. How a
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130 CHAPTER 4 JOB COSTING Material
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132 CHAPTER 4 JOB COSTING Budgeted
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134 CHAPTER 4 JOB COSTING 3. Compu
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5 Activity-Based Costing and Activi
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140 CHAPTER 5 ACTIVITY-BASED COSTI
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6 Master Budget and Responsibility
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184 CHAPTER 6 MASTER BUDGET AND RE
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7 Flexible Budgets, Direct-Cost Var
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228 CHAPTER 7 FLEXIBLE BUDGETS, DI
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8 Flexible Budgets, Overhead Cost V
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264 CHAPTER 8 FLEXIBLE BUDGETS, OV
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9 Inventory Costing and Capacity An
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302 CHAPTER 9 INVENTORY COSTING AN
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10 Determining How Costs Behave Le
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342 CHAPTER 10 DETERMINING HOW COS
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11 Decision Making and Relevant Inf
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392 CHAPTER 11 DECISION MAKING AND
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12 Pricing Decisions and Cost Manag
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434 CHAPTER 12 PRICING DECISIONS A
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556 CHAPTER 15 ALLOCATION OF SUPPO
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16 Cost Allocation: Joint Products
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578 CHAPTER 16 COST ALLOCATION: JO
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17 Process Costing Learning Object
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608 CHAPTER 17 PROCESS COSTING Con
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610 CHAPTER 17 PROCESS COSTING Lea
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612 CHAPTER 17 PROCESS COSTING Exh
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616 CHAPTER 17 PROCESS COSTING equ
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620 CHAPTER 17 PROCESS COSTING Kee
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622 CHAPTER 17 PROCESS COSTING Dat
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624 CHAPTER 17 PROCESS COSTING Tra
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626 CHAPTER 17 PROCESS COSTING Dec
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628 CHAPTER 17 PROCESS COSTING Ope
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630 CHAPTER 17 PROCESS COSTING Pro
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632 CHAPTER 17 PROCESS COSTING 4.
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636 CHAPTER 17 PROCESS COSTING Ter
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638 CHAPTER 17 PROCESS COSTING and
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640 CHAPTER 17 PROCESS COSTING The
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18 Spoilage, Rework, and Scrap Lea
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646 CHAPTER 18 SPOILAGE, REWORK, A
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19 Balanced Scorecard: Quality, Tim
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672 CHAPTER 19 BALANCED SCORECARD:
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20 Inventory Management, Just-in-Ti
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704 CHAPTER 20 INVENTORY MANAGEMEN
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21 Capital Budgeting and Cost Analy
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740 CHAPTER 21 CAPITAL BUDGETING A
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22 Management Control Systems, Tran
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776 CHAPTER 22 MANAGEMENT CONTROL
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23 Performance Measurement, Compens
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808 CHAPTER 23 PERFORMANCE MEASURE
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840 APPENDIX A NOTES ON COMPOUND I
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842 Table 1 Compound Amount of $1.0
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844 Table 3 Compound Amount of Annu
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Glossary Abnormal spoilage. Spoilag
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848 GLOSSARY Cost estimation. The
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850 GLOSSARY Flexible budget. Budg
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852 GLOSSARY Merchandising-sector
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854 GLOSSARY Real rate of return.
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856 GLOSSARY Time driver. Any fact
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858 INDEX N Nahmias, S., 416n Nara
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860 INDEX Wells Fargo, 474 Wendy
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862 INDEX Costing systems ABC, 146
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864 INDEX Graph method, in CVP ana
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866 INDEX Ordering costs, 704 Orga
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868 INDEX for process costing, 632
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Cost Accounting (14th Edition)

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