Background: Elon Musk, the man who is responsible for revolutionizing the automo

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Background: Elon Musk, the man who is responsible for revolutionizing the automotive space is confused. Why you ask? He met with Ms. Static who explained to him that under the current allocation system, engineering costs amount to $46,880 per Model S and $15,630 per Model X. Elon responds: "How - Look at the Model X - its freaking awesome and is insanely over engineered. How can it cost leass than our base model?" he decides to hire you as a consultant to drive transperency into the costs … Problem: Develop ABC to clear the mess up Cost Pool Activity Costs Cost Driver Driver Machine Setup $                       360,000 Setup Hours                              4,000 Materials Handling $                       100,000 Material (lbs)                            20,000 Utility $                         40,000 Kw/hr                            40,000 Information by Product Model S Model X Units                               4,000                    20,000 Direct Materials $                         42,000 $                54,000 Direct Labor $                         24,000 $                40,000 Setup Hours                                  200                         240 Materials                               1,000                      3,000 Kw/Hr                               2,000                      4,000 iii Knowing Tesla's business - are there additional things that you would look into in cost allocation? (Remember: Tesla has significant costs related to battery, R&D, software programming, Qaing, etc.) Background: Elon Musk, the man who is responsible for revolutionizing the automotive space is confused. Why you ask? He met with Ms. Static who explained to him that under the current allocation system, engineering costs amount to $46,880 per Model S and $15,630 per Model X. Elon responds: "How - Look at the Model X - its freaking awesome and is insanely over engineered. How can it cost leass than our base model?" he decides to hire you as a consultant to drive transperency into the costs … Problem: Develop ABC to clear the mess up Cost Pool Activity Costs Cost Driver Driver Machine Setup $                       360,000 Setup Hours                              4,000 Materials Handling $                       100,000 Material (lbs)                            20,000 Utility $                         40,000 Kw/hr                            40,000 Information by Product Model S Model X Units                               4,000                    20,000 Direct Materials $                         42,000 $                54,000 Direct Labor $                         24,000 $                40,000 Setup Hours                                  200                         240 Materials                               1,000                      3,000 Kw/Hr                               2,000                      4,000 iii Knowing Tesla's business - are there additional things that you would look into in cost allocation? (Remember: Tesla has significant costs related to battery, R&D, software programming, Qaing, etc.)

Explanation / Answer

Activity Based Allocation per model Model S Model X DM $42,000 $54,000 Allocation Basis DL $24,000 $40,000 Model S Model X Machine Set Up $36,000 $43,200 Machine Set Up $360,000 Material Handling $5,000 $15,000 Total Set Up Hrs 4000 200 240 Utilities $2,000 $4,000 Allocation Total OH Cost Excluding DM and DL $43,000 $62,200 $360000/2000*200 $36,000 $360000/2000*240 $43,200 Material Handling $100,000 Total materials lbs 20000 1000 3000 Allocation $100000/20000*1000 $5,000 $100000/20000*3000 $15,000 Utility $40,000 Total Kw/Hr 40000 2000 4000 Allocation $40000/40000*2000 $2,000 $40000/40000*4000 $4,000 The cornerstone of ABM is distinguishing between value-added costs and non-value-added costs. A value-added cost is the cost of an activity that cannot be eliminated without affecting a product’s value to the customer. Valueadded costs are necessary (as long as the activity that drives such costs is performed efficiently). In contrast, companies try to minimize non-valueadded costs—costs that can be eliminated without affecting a product’s value to the customer. Activities such as handling and storing inventories, transporting partly finished products from one part of the plant to another, and changing the set-up of production line operations to produce a different model of the product are all non-value-added activities that can be reduced, if not eliminated, by careful redesign of the plant layout and the production process Sinc e Telsa is a automobile manufacturing space which manufactures and allocates costs to the different models in order to find out the profitability of each model Telsa is producing. So from the age old traditional model of allocating cost into Model S and Model X which shows a higher cost in terms of engineering for the machine set up,material handling and utilities than if we use the ABM for Model S which shows lesser cost . So the non value added activties like battery ,R & D should be reduced to make the cost comparable in the market for Tesla

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