Reference no: EM13334881

1) Precision Lens Company manufactures sophisticated lenses and mirrors used in large optical telescopes. The company is now preparing its annual profit plan. As part of its analysis of the profitability of individual products, the controllable estimates the amount of overhead that should be allocated to the individual product lines from the following information.

	Mirrors	Lenses
Units produced	30	30
Material moves per product line	4	16
Direct-labor hours per unit	250	250

The total budgeted material handling cost for the year is $90,000.

Required:

a. Under a costing system that allocates overhead on the basis of direct-labor hours, the material handling costs allocated to one mirror would be what amount?

b. Answer the same question as in requirement (1), but for lenses.

c. Under activity-based costing (ABC), the material-handling costs allocated to one mirror would be what amount? The cost driver for the material handling activity is the number of material moves.

d. Answer the same question as in requirement (c) above, but for one lens instead of one mirror.

e. Why is the cost allocated in (c) & (d) differ from cost allocated in (a) & (b)?

2) Clark &Schiffer LLP perform activities related to e-commerce consulting and information systems in Vancouver, British Columbia. The firm, which bills $140 per hour for services performed, is in a very tight local labor market and is having difficulty finding quality help for its overworked professional staff. The cost per hour for professional staff time is $50. Selected information follow:

• Billable hours to clients for the year totaled 6,000, consisting of: information systems services, 3,600; e-commerce consulting, 2,400.
• Administrative cost of $381,760 was (and continues to be) allocated to both services based on billable hours. These costs consist of staff support, $207,000; in-house computing, $145,000; and miscellaneous office charges, $29,760.
• A recent analysis of staff support costs found a correlation with the number of clients served. In-house computing and miscellaneous office charges varied directly with the number of computer hours logged and number of client transactions, respectively. A tabulation revealed the following data:

	E-commerce consulting	Information systems services	Total
Number of clients	60	240	300
Number of computer hours	2,100	2,900	5,000
Number of client transactions	720	480	1,200

Required:

a. Activity-based costing (ABC) is said to result in improved costing accuracy when compared with traditional costing procedures. Briefly (use no more than half a page) explain how this improved accuracy is attained.

b. Assume that the firm uses traditional costing procedures, allocating total costs on the basis of billable hours. Determine the profitability of the firm's e-commerce and information systems activities, expressing your answer both in dollars and as a percentage of activity revenue.

c. Repeat requirement (b), using activity-based costing.

d. Stephen Shiffer, one of the firm's partners, doesn't care where his professionals spend their time because, as he notes, "many clients have come to expect both services and we need both to stay in business. Also, information systems and e-commerce professionals are paid the same hourly rate". Should Shiffer's attitude change? Explain.

e. Is an aggressive expansion of either service currently desirable? Briefly discuss.

3) ReadersNet sells books and software over the Internet. A recent article in a trade journal has caught the attention of management, given that the company has experienced soaring inventory handling costs. The article noted that similar firms have purchasing, warehousing, and distribution costs that average 13 percent of sales, which is attractive when compared against ReadersNet.Com's results for the past year. The following information is available:

Activity (Cost)	Cost Driver	Cost Driver Quantity	Percent of Cost Driver Activity for Books	Percent of cost driver activity for Software
Incoming receipts ($600,000)	Number of purchase orders	2,000	70%	30%
Warehousing ($720,000)	Number of inventory moves	9,000	80%	20%
Outgoing shipments	Number of shipments	15,000	25%	75%

Book sales totaled $7,800,000 and software sales totaled $5,200,000. A review of the company's activities found various inefficiencies with respect to the warehousing of books and outgoing shipments of software. These inefficiencies resulted in an extra 550 moves and 250 shipments, respectively.

Required:

a. What is activity-based management? What is a non-value added activity?

b. How much did non value-added activities cost ReadersNet.Com this past year?

c. What could be the possible reasons that may have resulted innon value-added activities for ReadersNet.Com? Please be brief (No more than one paragraph)

d. Will the elimination of non value-added activities allow ReadersNet.Com to achieve a13% cost percentage for each of the product line? Show calculations.

e. Do either of the two product lines require additional cost cutting to achieve the target cost percentage? If so, how much additional cost cutting is needed?