E! ATC 4-4 Writing Assignment Selection of the appropriate cost driver Bullions
ID: 2475868 • Letter: E
Question
E! ATC 4-4 Writing Assignment Selection of the appropriate cost driver Bullions Enterprises, Inc. (BEI), makes gold, silver, and bronze medals used to recognize out- standing athletic performance in regional and national sporting events The per-unit direct costs of producing the medals follow. Gold Silver Bronze Direct materials Labor $300 120 $130 120 $ 35 120 During 2012, BEI made 1,200 units of each type of medal for a total of 3,600 (1,200 × 3) medals. All medals are created through the same production process, and they are packaged and shipped in identical containers. Indirect overhead costs amounted to $324,000. BEI currently uses the number of units as the cost driver for the allocation of overhead cost. As a result, BEI allocated $90 (S324,000 +3.600 units) of overhead cost to each medal produced. Cost Accumulation, Tracing, and Allocation 199 Required The president of the company has questioned the wisdom of assigning the same amount of over- head to each type of medal. He believes that overhead should be assigned on the basis of the cost to produce the medals In other words, more overhead should be charged to expensive gold med- als less to silver, and even less to bronze. Assume that you are BEI's chief financial officer. Write a memo responding to the president's suggestion. ATC 4-5 Ethical Dilemma Allocation to achieve fairnessExplanation / Answer
4.4-BEI: Memo to the President:
Regarding allocation of overheads:
Overheads are indirect manufacturing costs. As these costs cannot be directly identified with cost units, some suitable basis is to be adopted to allocate these costs where there are more than one product. The basis for allocation should have a reasonable nexus with the incurrence of the overhead cost ie: the basis should be the driver of the overhead cost.
As all the three types of medals are produced by the same production process, the cost of production (material + labor) has no cause and effect relationship with the overhead costs, rather the overhead costs are driven by the number of units produced. If overhead costs are allocated according to the cost of production, gold medals will be charged with the highest overhead cost and bronze with the lowest. Such a practice would lead to wrong costing and wrong pricing and wrong decision making. Hence, it would be appropriate to continue the existing method of overhead cost allocation.
5-4. Sawyer Toy Company:
Memo to Lucy Sawyer:
An analysis of the break up of the expenditure on quality control, reveals the comparative percentages as given below:
The total quality cost has increased by 56% in 2015 when compared to the previous year. The increase in appraisal costs is 79% over the previous year, while at the same time the preventive costs have declined by 33%.
The revised strategy has met with an increase in internal failure costs by 300% over the previous year, though the external failure cost has decreased by 34%.
The strategy of increasing the number of inspectors, over the numbers added last year, is not going to prevent the failures; it helps only in detecting failures before the goods are dispatched, which is evidenced by the increase in internal failure costs in 2015 (by 300%). If this increase in internal failures is correlated with the decrease in the preventive costs, it indicates that the preventive measures should be stepped up.
It is suggested that more allocation of the total budget for quality costs, should be made for preventive measures. The % spent on preventive costs has considerably declined during 2015. Further, a better strategy for strengthening the preventive mesures should be evolved. Increase in number of inspectors should be made only after a review of the testing procedures including the frequency of testing. There may in fact be a case for reducing the number of inspectors and inspections.
8-5 Budget Games:
a) It is 'sandbag'. It is a tactic used by managers to temper the expectations of superiors by giving projections below what they can achieve. Once the better than expected results are presented, they get the reward.
b) Lovelady's behaviour violates the standards relating to integrity and credibility. She does not give full infomation to enable correct decision making; such behaviour being for personal gain. It is situation where there is conflict of interest, in which case the interests of the organisation should prevail.
c) Budgets should be set based on realistic expectations of the future market. A market survey can be conducted by an indendent person, internal or external, and the projectections can be based on that.
increase/ decrease 2014 % 2015 % % change prevention costs 120000 15% 80000 6% -33% appraisal costs 240000 29% 430000 34% 79% internal failure cost 140000 17% 560000 44% 300% external failure cost 320000 39% 210000 16% -34% 820000 1280000 56%Related Questions
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