Question:
Kaiser Company is interested in applying Activity Base Costing in the Company. Management appointed a cross-functional team to assist in the implementation.
The team started with the Identification of the Activities and their costs, the result of which were the subsequent:
* Engineering is primarily involved in product and process design work.
* Purchasing involves the acquisition of supplies and material from different suppliers.
* Distribution management involves the movement and storage of goods from the company to the customer.
Company records revealed the subsequent activity cost information for the past seven years:
Year Engineering Purchasing Distribution Management
2004 $ 7,600 $ 18,600 $ 7,800
2005 6,000 16,000 9,300
2006 11,500 15,050 10,500
2007 24,700 13,440 11,550
2008 17,600 19,400 13,000
2009 13,900 28,050 14,230
2010 33,000 34,860 16,080
The second stage in the ABC system design was to evaluate the cost drivers that influence these activities. You, as a member of the team was given the task to present guidelines to help the members in their search for relevant activity cost drivers.
Requirement 1:
a) What are the factors that you should consider to appropriately choose ACDs?
After some time on the above task, the team collected information about a number of possible cost drivers:
Unit Volume: The number of units produced during the current year.
Number of customer accounts: The number of customers that made purchases during the year.
Number of new products: The number of new products introduced during the current year.
Direct materials dollars; the total dollar amount of direct materials used in production during the year.
Number of vendors: the number of suppliers from which materials were purchased during the year.
Company records also revealed the subsequent quantities related to the above possible cost drivers:
Year Unit Volume Number of new products Number of customer accounts Direct Materials Dollars Number of Vendors
2004 4,000 5 65 $360,000 44
2005 4,500 4 78 405,000 38
2006 3,800 8 89 342,000 36
2007 3,200 16 95 288,000 32
2008 3,700 12 108 333,000 46
2009 4,900 9 118 441,000 67
2010 4,300 22 134 387,000 83
Requirement 2:
a) To discover which of the above cost drivers best describes the cost behavior of each of the three activities the team used two methods: Correlation coefficient method and Graphical method. What would the team conclude under each of the above approaches? Defend your answer.
b) Evaluate approximate Activity Cost Driver Rates (ACDR) for the drivers you have chosen.