5-41 Volume-based Costing Versus ABC

Materials
Labor
Overhead*
Total Cost

Product A
$50.00
$20.00
$116.00
$186.00

Product B
$114.40
$12.00
$69.60
$196.00

Product C
$65.00
$10.00
$58.00
$133.00

*overhead is applied based on direct labor dollars so the rate is:

$5.80 per Direct labor dollar = $493,000
[($201,000)+($125,000)+($10500)]
$116 = $5.820; $69.60 = $5.812; $58 = $5.810
1. Current Costing system
Actual Selling Price
Product Manufacturing Cost
Gross Margin
Gross Margin Ratio

Product A
$280.00
$186.00
$94.00
33.57%

Product B
$250.00
$196.00
$54.00
21.60%

Product C
$300.00
$133.00
$167.00
55.67%

Based on the current cost data, product B is the least profitable product
with a gross margin per unit of $54.00 (21.6%) and product C is the most
profitable product with a gross margin per unit of $167.00 (55.67%).

Product costs based on the activity-based costing system

(calculate on per unit basis)

Direct Materials
Direct Labor
Factory Overhead:
Setups (a)
Materials Handling (b)
Hazardous Control (c)
Quality Control (d)
Utilities (e)
TOTAL

Product A
50.00
20.00

Product B
114.40
12.00

Product C
65.00
10.00

1.60
40.00
62.50
22.50
12.00
208.60

0.80
5.00
22.50
5.25
8.40
168.35

4.80
70.00
150.00
52.50
12.00
364.30

Actual Selling Price

Product Manufacturing Cost
Gross Margin
Gross Margin Percentage

$280.00
208.60
$71.40
25.50%

$250.00
168.35
$81.65
32.66%

$300.00
364.30
($64.30)
-21.43%

Notes:
(a) Setups:
Cost per setup: $8,000 (2 + 5 + 3) =$800 per setup
Product A = 2 $800 = $1,600;
$1,600 1,000 = $1.60 per unit
Product B = 5 $800 = $4,000;
$4,000 5,000 = $0.80 per unit
Product C = 3 $800 = $2,400; $2,400 500 = $4.80 per unit
(b) Materials handling:
Cost per pound = $100,000 (400 + 250 + 350) = $100 per pound
Product A = 400 $100 = $40,000; $40,000 1,000 = $40.00 per unit
Product B = 250 $100 = $25,000; $25,000 5,000 = $ 5.00 per unit
Product C = 350 $100 = $35,000; $35,000 500 = $70.00 per unit
(c) Waste and hazardous disposals:
Cost per disposal: $250,000 (25 + 45 + 30) = $2,500 per disposal
Product A = 25 $2,500 = $ 62,500; $ 62,500 1,000 = $ 62.50/unit
Product B = 45 $2,500 = $112,500; $112,500 5,000 = $ 22.50/unit
Product C = 30 $2,500 = $ 75,000; $ 75,000 500 = $150.00/unit
(d) Quality inspections:
Cost per inspection = $75,000 (30 + 35 + 35) = $750 per inspection
Product A = 30 $750 = $22,500; $22,500 1,000 = $22.50 per unit
Product B = 35 $750 = $26,250; $26,250 5,000 = $ 5.25 per unit
Product C = 35 $750 = $26,250; $26,250 500 = $52.50 per unit
(e) Utilities:
Cost per MH = $60,000 (2,000 + 7,000 + 1,000) = $6.00 per MH
Product A = 2,000 $6 = $12,000; $12,000 1,000 = $12.00 per unit
Product B = 7,000 $6 = $42,000; $42,000 5,000 = $ 8.40 per unit
Product C = 1,000 $6 = $ 6,000; $ 6,000 500 = $12.00 per unit

2. Comparison of reported product costs, new target price, actual selling price,
and gross margin (loss):
Product A

Product B

Product C

Product Costs:
Direct-labor system
Activity system

$186.00
$208.60

$196.00
$168.35

$133.00
$364.30

ABC- based product costs:

Target price
Actual selling price
Difference in price

$312.90
$280.00
-32.90

$252.53
$250.00
-2.52

$546.45
$300.00
-246.45

Direct-labor system:
Gross Margin
Gross Margin ratio

$94.00
33.57%

$54.00
21.60%

$167.00
55.67%

ABC system:
Gross Margin
Gross Margin ratio

$71.40
25.50%

$81.65
32.66%

-$64.30
-21.43%

3. Strategic and Competitive Analysis

a. Emphasizing Product C as suggested by the current directlabor-cost based overhead costing system is likely to harm the
firms competitiveness. The activity-based costing system
shows that the manufacturing cost of Product C is $364.30 per
unit and, at the current selling price, the firm suffers a $64.30
loss for each unit it manufactures and sells.
b. If the actual selling prices of products A & B are fair market
prices for these products and a markup of 150% is a common
industry practice, the firm needs to examine the manufacturing
cost of product A. The fact that the firms target price,
determined using 150% of the manufacturing cost, is more than
10 percent over the fair market price of the product suggests
possible waste and inefficiency in the manufacturing of product
A.

5-46 Time-Driven Activity-Based Costing (TDABC) in a Call Center

1. The TDABC rate per minute for MSI is determined as follows:
Total Projected Costs Practical Capacity
= $9,395,100 12,045,000 = $0.78 per minute
The charge to AS should be estimated as follows:
First, the cost of the engagement: 1,614,750 $0.78 = $1,259,505
Second, the markup on the cost: $1,259,505 1.25 = $1,574,381
2. The total time for each type of loan is determined as follows:

Inquiries
Inquire re: Rates and Terms
Autos
Trucks
Inquire re: Loan App Status
Autos
Trucks
Inquire re: Payment Status
Autos
Trucks
Inquire re: Other Matter
Autos
Trucks
Total

Total Calls
Answered

Avg. No. of
Minutes/C
all

96,000
32,000

5
7

480,000

37,500
6,750

6
11

225,000

39,000
12,000

3
4

117,000

29,000
8,500

11
15

319,000

Total Time (minutes)

Autos
Trucks
224,000
74,250
48,000

1,141,000

127,500
473,750

5-46 (continued)
The revised proposal would show:
Cost for Autos (1,141,000 x $.78)
Cost for Trucks (473,750 x $.78)
Total Cost
Time markup
Total Charge for Engagement

$889,980
$369,525
$1,259,505
1.25
$1,574,381

Note: For further information on TDABC and call centers, see Robert S.
Kaplan and Steven R. Anderson, Time-Driven Activity-Based Costing, Harvard
Business School Press, 2007; and Bilbert Y. Uang and Roger C Wu,
Strategic Costing & ABC, Management Accounting, May 1993, pp 33-37.