Solution Manual For Cost Management Measuring Monitoring and Motivating Performance 2nd Edition by Eldenburg

Solution Manual for Cost Management Measuring
Monitoring and Motivating Performance 2nd Edition

by Eldenburg
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Solution Manual for Cost Management Measuring Monitoring and Motivating Performance 2nd Edit
Chapter 7
Activity-Based Costing and Management
SOLUTIONS
Eldenburg & Wolcott 2e September 2010
LEARNING OBJECTIVES
Chapter 7 addresses the following questions:
Q1 What is activity-based costing (ABC)?

Q2 What are activities, and how are they identified?
Q3 What process is used to assign costs in an ABC system?
Q4 What is activity-based management (ABM)?
Q5 What are GPK and RCA?
Q6 How does information from ABC, GPK, and RCA affect managers’ incentives and
decisions?
These learning questions (Q1 through Q6) are cross-referenced in the textbook to individual
exercises and problems.
COMPLEXITY SYMBOLS
The textbook uses a coding system to identify the complexity of individual requirements in the
exercises and problems.
Visit TestBankBell.com to get complete for all chapters

Chapter 7: Activity-Based Costing and Management Page 7-2
QUESTIONS
7.1 If direct labor hours are used for tending machines and equipment, small batches take
fewer direct labor hours and so are allocated less overhead. However, if overhead costs
increase more with setup time than with direct labor costs, the cost to set up for a large
batch is likely similar to the cost of setting up a small batch. The cost per unit is then
probably much lower for the large batch than for the small batch.
7.2 Organization-sustaining activities are activities related to the overall organization and
unaffected by customers served or by quantities of products, batches, or units. Facility-
sustaining activities are activities related to the overall operations of a production facility
and unaffected by customers served or by quantities of products, batches, or units.
Customer-sustaining activities are customer service activities that are independent of
sales volumes and mix. Product-sustaining activities occur to support a product line or a
single product if it is not part of a product line. Batch-level activities increase as the
number of batches increase. These activities include setup and monitoring batches of
product. Unit-level activities increase proportionately with production volumes or sales
volumes.
7.3 Because ABC uses more cost pools and more cost drivers to reflect cause and effect
relationships, ABC costs usually map the relation between cost and use of resources more
accurately. Hence ABC costs reflect different proportions of the resource costs than do
traditional costs.
7.4 No, increasing the number of cost pools and cost drivers can increase measurement error
because small measurement errors for each pool and each driver can distort total cost
once costs are allocated, simply from the increase in calculations that take place. In
addition, if the production process is very simple and products use the same amount of
resources each, increasing the number of cost pools will not increase the accuracy of the
allocations.
7.5 No, because it is expensive to implement, the costs outweigh the benefits for some firms.
Firms that are already operating efficiently may not benefit from an ABC system,
especially if they have available capacity. Research has shown that ABC is more
successful within organizations that use flexible systems, have integrated information
systems, and produce a variety of products.
7.6 Yes, ABC can be used in service industries. It may be especially helpful if there are
capacity limits. Service industries often have a large proportion of fixed resources, and
understanding the relationship between cost and the use of these resources can improve
the efficiency of the organization.
7.7 Measurement error could decrease because ABC may better allocate costs based on the
use of resources. Better allocation reduces problems such as product cross-subsidization,
in which costs are overallocated to some products and underallocated to others.
Eldenburg & Wolcott 2e Solutions September 2010

However, measurement error could increase because increasing the number of cost pools
and cost drivers may result in small measurement errors for each pool and each driver.
As the number of calculations increase, these small measurement errors interact as costs
are allocated (rates are developed and used as multipliers), and so the size of
measurement error is likely to increase.
7.8 Several costs that are incurred when implementing an ABC system include the time it
takes employees or consultants to determine appropriate cost pools and cost drivers, the
cost to track and measure the number of activities because these may not be recorded in
the accounting system, and the cost to set up an information system to develop ABC
reports. Several benefits include the ability to identify non-value added activities, and a
better understanding of the use of overhead resources.
7.9 First, meet with accounting employees to learn about all of the different activities they
perform. Identify activities that are homogeneous and can be pooled together. For
example, budget preparation for each department is probably similar, but it may take
different amounts of time according to the complexity of the department. Pool all of the
various budgeting activities. Once a list of activities has been identified, employees’
opinions about appropriate cost drivers can be solicited. Activities that have the same
cost drivers could probably be pooled.
7.10 Yes, research has shown that ABC is more successful within organizations that use
flexible systems, have integrated information systems, and produce a variety of products.
With ABC, a better mapping of the use of resources to each product line allows managers
to choose the optimal product mix. In addition, if the processes are complex, ABC
allows analysis of the activities underlying complex processes so improvements are
easier to identify, as are non-value added activities. In these cases, the costs are likely
less than the benefits achieved.
7.11 Activity-based costing analyzes the activities performed in manufacturing and service
production. Once the activities are identified, costs for each activity are collected into
separate cost pools. Next a cost driver is chosen that reflects changes in the costs of
activities. The cost driver is used to allocate the costs of the activity to products,
services, or some other cost object. There are multiple cost pools and drivers.
Traditional costing uses only a few overhead cost pools and allocates the costs based on
drivers such as direct labor hours, direct labor cost, or machine hours. In a traditional
cost system, the cost pools are very large and so it is impossible to find an allocation base
that reflects resource use. It is merely a logical system of assigning part of overhead
costs to each product or service. ABC, on the other hand, selects cost pools around
activities so that a cost driver can be chosen to better reflect a product or service’s use of
resources. Therefore, ABC systems have more cost pools and drivers. Because an ABC
system is more complex, more time, effort, and funds are required to implement ABC
systems than traditional costing systems.
7.12 Activity-based costing is a method of allocating costs to products or other cost objects.
Activity-based management is the process of using ABC information to improve

operations and profitability by analyzing the actual activities and processes to reduce
non-value added activities, and improve the efficiency of activities. In addition,
managers may be able to better understand different products’ uses of fixed resources,
which could be important if there are capacity constraints.
7.13 There are several reasons for using ABC and ABM to improve an organization’s
environmental performance. Environment-related activities, such as disposing of
hazardous substances and cleaning up spills of these substances, are non-value added. If
those types of activities can be minimized, costs are also likely to be reduced. In
addition, most companies would prefer to avoid the negative reputation effects that are
associated with pollution problems. Once managers become aware of environmental
costs, they may realize that investing in prevention activities will actually reduce costs in
the long run. These issues will be further discussed in chapter 17.
7.14 Prevention activities are activities performed to insure defect-free production. These
activities could include
• inspecting incoming direct materials
• designing and redesigning products and manufacturing processes to reduce defect
rates
• identifying areas where defects arise and solving the underlying cause of the
defects
Appraisal activities are activities performed to identify defective units, and include the
following activities:
• Inspection of products
• Inspection of manufacturing process
• Monitoring of service delivery process
• Testing
Production activities are activities undertaken in the production or rework of failed units.
These include
• Labor tasks and materials to produce spoiled units
• Reworking spoiled units
Post-Sales activities are activities undertaken after the product has been sold to remedy
problems caused by defects and failed units. These activities include
• Accepting returned products and exchanging them for good products or refunding
their cost
• Repairing defective units
• Preparing for and participating in legal actions that result from defective units
7.15 ABC, GPK, and RCA are costing systems that use multiple cost pools and more
accurately map costs to the use of resources than traditional costing systems.
Implementation for all three methods requires identifying multiple cost pools and
analyzing activities or resources to discover cause-and-effect relationships of cost and
cost drivers. ABC analyzes activities and uses a specific hierarchy. GPK considers cost

centers that are usually smaller than departments, perform a single repetitive activity and
are under the control of one manager. RCA analyzes cost centers and resource cost pools.
Both GPK and RCA focus on volume of time. GPK uses practical or budgeted capacity
for the denominator level of the cost driver, while RCA uses theoretical capacity. ABC is
best used for cost control, improving efficiency and understanding the relationship
between costs and the use of resources. GPK focuses on marginal costs and so it can be
used for short term decisions, RCA can be used for short-, mid-, and long-term decisions.

EXERCISES
7.16 ABC Cost Hierarchy
A. (1) Receptionist salary is an organization-sustaining cost because the receptionist serves

everyone who comes through the door and thus cannot be identified with one product or
unit.
B. (1) or (4) Financial forecasting software is an organizational-sustaining cost if it is used

to forecast sales for the entire company. However if it used only by one product line, it is
a product-sustaining cost.
C. (2), (3), (4), or (5) Photocopy machine rental is a facility-sustaining cost when everyone
uses the machine, but could be a customer, product, batch or unit related cost if a
password were used to keep track of copies made for each client, product, or department.
D. (2) Janitorial service is a facility-sustaining cost because the entire facility uses this
evenly.
E. (6) Audit manager’s salary is a unit-level cost because the manager is in charge of a
number of different audits and bills his or her time to each audit.
F. (6), (4), or (1) Long distance telephone charges are unit-level if the bill includes details of
to whom the calls were made, and could be product-sustaining if the calls are marketing a
particular product. It just depends upon the purpose of the calls. Some companies have
Watts lines and pay a flat fee for all long distance calls. In this case the cost is an
organization-sustaining cost.
G. (3) or (4) Meal costs for entertaining clients could be a customer-sustaining cost if related
only to that particular customer, or product related if the customer is associated with only
one product.
H. (1) Cost of annual employee golf party is organization-sustaining because it benefits all
departments.
I. (1), (4), or (6) Office supplies such as paperclips and tablets of paper are organization-
level costs unless they can be traced to a particular product or job (unit).
J. (4) or (1) Annual subscription for income tax regulations is a product-sustaining cost if it
pertains to one department of the firm. If it pertains to the entire firm, it is an
organization-sustaining cost.

7.17 MicroBrew Northwest
Following are the CMA answers to this question. However, one could argue that some of the
unit-level costs could instead be categorized as batch-level.
A. Facility-level costs: Manufacturing facility $1,500,000
B. Product-sustaining costs: Product development $1,250,000
C. Batch-level costs: Production setup $700,000
D. Unit-level costs:
Materials handling $ 850,000
Production line labor 2,500,000
Power (assuming most power is to cool beer and
run machines, not for overhead) 500,000
Total unit-level costs $3,850,000
A. Assuming that the cost object is an individual vehicle rental transaction, then unit-level
activities relate to work that occurs for each rental. The cost of washing each car
between rentals is an example of a unit level cost. Costs for the activities of making the
reservation, turning the vehicle over to the renter, and completing the paperwork at the
end of the rental are also unit-level.
Students often list costs such as vehicle maintenance and insurance as unit-level. This
classification would be appropriate if we assume that the cost object is the individual
vehicle. However, if the cost object is an individual vehicle rental, then costs such as
vehicle maintenance and insurance would most likely be facility-sustaining; they result
from the activities of maintaining and owning the fleet of vehicles at the facility.
B. Batch-level activities and costs relate to the number of batches produced. For a car rental
fleet, cars at a number of outlets are probably sent for oil changes or other routine
maintenance in batches. Car rental companies located off-site near an airport usually
operate a shuttle service from the airport to the rental car location. Multiple passengers
are usually picked up and dropped off on each run of shuttle. Batch-level costs for the
shuttle would include vehicle depreciation, maintenance, and gasoline, plus the driver’s
labor costs.
C. Product-sustaining activities and costs relate to entire product lines. For a car rental
company, the different types of cars for rent could be considered product lines, for
example economy cars, mid-sized cars, and so on. Or the company might see its product
lines more broadly, such as a product line of cars and a separate line for trucks.

Advertising and marketing costs are likely to be product-line related if the company
advertises either trucks or cars, but not both.
Advertising and marketing costs are not always product-sustaining. Here are some
additional advertising examples to help clarify that costs are classified based on their
expected behavior: Advertising for the entire company (e.g., Hertz) would be considered
organization-sustaining. Advertising for a particular location would be facility-
sustaining. Advertising aimed at a particular customer group (such as the Hertz #1 Club)
would be customer-sustaining. Advertising for a particular product line (such as luxury
cars or trucks) would be product-sustaining.
D. Customer-sustaining activities and costs relate to the different clients. Sometimes

businesses establish a relationship with car rental agencies if employees need to travel by
car for business. These customers may require special attention, such as car delivery, or
last minute rentals. The costs of these services are customer-sustaining. Rental
companies also have programs such as the Hertz #1 Club, where members receive
preferential treatment. Special costs for these programs include extra personnel to
process the rental and park the vehicle in an easily accessible location.
E. Facility-sustaining costs relate to the facility. For a car rental agency, these could include
depreciation and maintenance of the building and parking lots for each outlet. Facility-
sustaining costs would also include the facility manager’s salary, electricity and janitorial
service, computer terminals, and property taxes. Assuming a fleet of vehicles is
maintained at each facility, then vehicle maintenance and insurance might also be
facility-sustaining (see additional comments under Part A above).
F. Organization-sustaining costs relate to the entire organization. The CEO’s salary, and
building lease, rent or depreciation costs at the company’s headquarters are all
organization-sustaining costs. Companies such as Hertz also have large organization-
wide costs for computerized reservation and vehicle inventory systems.
7.19 Cost Pools and Cost Drivers
F Machining (As machine hours increase, costs such as maintaining machines

increase)
D Purchasing activities (As number of invoices increases, costs such as wages for
employees filling out invoices and supplies used by these employees increase.)
G Inspection (As the number of units produced increases, the number of units
inspected also increases.)
B Assembly (As the number of parts increases, it takes more overhead cost in
material handling, etc. to assemble the product.)
A Payroll (As number of employees increases, more employee time and supplies are
needed to produce paychecks.)

E A special quick freezing process for food (Food is usually frozen in batches. As
the number of batches increases, costs such as electricity and quick-freezing
supplies increases.)
C Laundry in a hospital (As the number of laundry pounds increases, more labor and
supplies costs are incurred because more batches of clothes are washed.
7.20 Kalder Products
A. Total engineering change cost (6$300) $1,800
Machine hours:
AJ40 (11,000) 1,000
AJ60 (1.51,000) 1,500
Total 2,500
Overhead cost rate $1,800/2,500 $0.72 per machine hour
Total allocated cost for AJ40 (1,000$0.72) $ 720

Total allocated cost for AJ60 (1,500$0.72) 1,080
$1,800
B. Total allocated cost for AJ40 (4$300) $1,200

Total allocated cost for AJ60 (2$300) 600
Total engineering change cost (calculated in Part A) $1,800
C. Comparison of costs allocated under the two systems:
AJ40 AJ60 Total

Traditional costing $ 720 $1,080 $1,800
ABC costing 1,200 600 1,800
Product Cross Subsidization
Overcharge (Undercharge) $ (480) $ 480 $ 0
Percent Overcharge (Undercharge) (40%) 80%
Cross subsidization means that one product is allocated more overhead cost relative to its
use of overhead resources and, therefore, other products’ overhead costs are less than
their use of resources.

7.21 Applewood Electronics
A.
1. Manufacturing cost per unit under traditional cost accounting
In the traditional cost accounting system, overhead is allocated to products based on
machine hours. The rate per hour is calculated as follows:
Total estimated overhead $4,800,000
Estimated machine hours:

Monarch (8.0 hours  22,000 units) 176,000
Regal (4.0 hours  4,000 units) 16,000
Total estimated machine hours 192,000
Estimated allocation rate per machine hour ($4,800,000/192,000) $25.00
The total manufacturing cost per unit is the sum of per unit direct material, direct
labor, machine usage, and allocated overhead, as follows:
Monarch Regal
Direct material $208.00 $584.00
Direct labor 1.5 DL hrs  $12 18.00 3.5 DL hrs  $12 42.00
Machine usage 8 mach hrs  $18 144.00 4 mach hrs  $18 72.00
Overhead 8 mach hrs  $25 200.00 4 mach hrs  $25 100.00
Total $570.00 $798.00
2. Manufacturing cost per unit under ABC
First, calculate the allocation rate for each of the ABC pools:
Soldering ($942,000/1,570,000 solder joints) $0.60 per solder joint

Shipments ($860,000/20,000 shipments) $43.00 per shipment
Quality control ($1,240,000/77,500 units inspected) $16.00 per inspection
Purchase orders ($950,400/190,080 purchase orders) $5.00 per purchase order
Machine power ($57,600/192,000 machine hours) $0.30 per machine hour
Machine setups ($750,000/30,000 setups) $25.00 per setup
Next, calculate total manufacturing costs allocated to each product under the ABC
system and then calculate the total manufacturing cost per unit:

Monarch Regal
Soldering 1,185,000 solder jts  $0.60 $ 711,000 385,000 solder jts  $0.60 $ 231,000
Shipments 16,200 shipments  $43 696,600 3,800 shipment  $43 163,400
Quality control 56,200 inspections  $16 899,200 21,300 inspections  $16 340,800
Purchase orders 80,100 POs  $5 400,500 109,980 POs  $5 549,900
Machine power 176,000 mach hrs  $0.30 52,800 16,000 mach hrs  $0.30 4,800
Machine setups 16,000  $25 400,000 14,000  $25 350,000
Total Manufacturing Overhead $3,160,100 $1,639,900
Total Manufacturing
Overhead per Unit $3,160,100/22,000 units $143.64 $1,639,900/4,000 $ 409.98
Direct material 208.00 584.00
Direct labor 1.5 DL hrs  $12 18.00 3.5 DL hrs  $12 42.00
Machine usage 8 mach hrs  $18 144.00 4 mach hrs  $18 72.00
Total Manufacturing Cost per Unit $513.64 $1,107.98
B. The traditional costing system allocates a lump sum of overhead based only on machine
hours, while the ABC system uses six cost pools to allocate the overhead. Allocations
using these cost pools and cost drivers more accurately reflect the flow of resources.
C.
1. Operating profit per unit under traditional cost accounting:
Monarch Regal
Selling Price $ 900.00 $1,140.00
Manufacturing (570.00) (798.00)
Selling, General, and Administrative (265.00) (244.50)
Traditional costing operating profit $ 65.00 $ 97.50
2. Operating profit per unit under ABC:

Monarch Regal
Selling Price $900.00 $1,140.00
Manufacturing (513.64) (1,107.98)
Selling, General, and Administrative (265.00) (244.50)
ABC costing operating profit $121.36 $ (212.48)
D. Based on the profit information using ABC, Applewood should concentrate on the
Monarch. Under ABC, it appears that the organization incurs a loss for each unit sold of
Regal. Using this ABC information would definitely affect the recommendation because
one product appears to have a negative profit margin.
Note: This problem is from an old CMA exam. The calculations shown in this problem
probably include fixed costs. Remember from Chapter 4 that organizations need to
emphasize the product with the highest contribution margin to maximize profits;
however, that product cannot be identified with the information given in this problem.
Applewood would need to separate costs into flexible (those that vary with activity) and
committed (those that do not vary with activity) to determine the ABC contribution

margin for each product. Once this is done, the product with highest contribution margin
can be identified and emphasized.
7.22 Palmer Company
A. Manufacturing cost per unit:
Machine setup 2 setups  $50.00 $ 100

Material handling 19 parts  $0.50  100 units 950
Machining 1.25 machine hours  $26.00  100 units 3,250
Assembly 1.5 direct labor hours  $22.00  100 units 3,300
Inspection 100 units  $12.00 1,200
Direct materials 100 units  $100.00 10,000
Total Costs $18,800
Cost per Unit $18,800/100 units $188
B. Full cost per unit
Total manufacturing cost per unit $188

Research and marketing costs per unit 140
Other non-manufacturing costs per unit 320
Total full cost per unit $648
C. Cost savings required:
First, calculate the maximum full cost that would allow the company to achieve a profit
of 10% based on full cost:
Selling price = Full Cost + 10%  Full Cost

$650.00 = 100%  Full Cost + 10%  Full Cost
$650.00 = 110%  Full Cost
Full Cost = $650.00/110%
Full Cost = $590.91
Next, calculate the difference between the maximum full cost calculated above and the
current full cost. This is the amount of cost savings required to achieve the desired profit.
Full cost per unit $648.00

Full cost needed to achieve desired profit 590.91
Cost savings required $ 57.09

7.23 Tele-Call Center
A. Cost per minute for any phone call = $9,600/38,400 = $0.25 per minute
B. Cost per new order = $0.25 per minute  10 minutes = $2.50

Cost per complaint = $0.25 per minute  15 minutes = $3.75
C. New order cost (2,000 orders  $2.50 per order) $5,000

Complaints cost (500 complaints  $3.75 per complaint) 1,875
Total cost $6,875
D. Unused capacity = $9,600 – $6,875 = $2,725
The cost of unused capacity could also be calculated using the cost rate per minute:
Practical capacity 38,400
Minutes used:
New orders (2,000 orders  10 minutes each) 20,000
Complaints (500 complaints  15 minutes each) 7,500 27,500
Unused minutes 10,900
Times cost per minute  $0.25
Cost of unused capacity $2,725
7.24 Kestral Manufacturing
A. ABC allocation rates:
Activity Cost Activity level Allocation rate

Machine set-up $ 40,000 400 $100
Material handling 160,000 16,000 $10
Product design 100,000 2,000 $50
Number of inspection 260,000 13,000 $20
$560,000
For job 42, overhead costs = (2$100) + (60$10) + (40$20) + (20$50) = $2,600
B. For job 43, overhead costs = (4$100) + (20$10) + (20$20) + (100$50) = $6,000
For the 100 units completed, the cost per unit is calculated as follows:
Direct materials $24,000

Direct labor 4,000
Overhead allocation 6,000
Total job cost $34,000

Cost per unit = $34,000/100 units = $340
C. Non-value added activities are tasks or functions that are unnecessary and waste
resources because they do not increase the worth of an organization’s goods or services to
customers. At Kestral, non-value-added activities include moving materials from place
to place (such as from receiving dock to warehouse to one work area and then to another
work area). The company could reduce costs by minimizing the handling of materials.
Another non-value-added activity is inspection. With sufficient quality improvements
and continuous inspection by workers during production processes, the need for a
separate inspection process can be reduced or eliminated. Set-up costs are also
considered non-value added and the set-up activity could be analyzed to reduce steps and
materials if possible so that costs are reduced.
7.25 Elite Daycare
[Note about problem complexity: Part A is coded as Extend rather than Step 3 because a more
complex problem involving a similar organization was illustrated as a self-study problem in the
chapter.]
A. There are several cost objects that could be chosen for Elite Daycare, depending on the
planned use of information. The director may want to develop a function for total costs
of the daycare for budget or benchmarking purposes. In that case, the cost object is the
daycare itself. Alternatively, she might choose the type of service (full-time or part-time)
as the cost object. If she wanted to better understand the cost per child, she could choose
a per-child cost object. This problem focuses on the daycare cost function, so the cost
object is the daycare program.
Next, cost pools need to be developed. For Elite Daycare, there appear to a number of
different activities: greeting and leaving, preparing and serving food, supervising naps,
supervising recreation, and activity time. The greeting and supervising activities can
probably be combined into one cost pool. However, supplies are probably used during
activity time, and the director may want to know an approximate cost per child for
activity time. Therefore, a single pool can be used for greeting, supervising naps, and
recreation; a pool for supervising activities; and another pool can be used for meal-related
activities (preparing and serving food, monitoring behavior).
Next, cost drivers for each pool need to be chosen. Cost drivers for greeting and
supervising activities could be number of children or time spent. Because supervising
naps and recreation activities are similar to greeting, cost driver choices would be similar
for these two pools. A number of different children can be supervised at one time, so
time spent would be probably be easiest to track and provide an appropriate accounting of
costs related to supervising activities. Cost drivers for preparing and serving food could
be either the number of meals served or the number of children served. Tracking meals
served is probably just as easy as tracking number of children, but meals are more closely
related to food preparation, so number of meals served will be used as the cost driver.

Cost drivers for supplies could be number of art activities or number of children, among
others. It would be easiest to track number of children, and it is likely that each child
uses similar amounts of supplies.
B. Annual cost per child

The percentage of time for the greeting and supervising pool is 30% (20%+10%), 20%
for meal-related activities, and 50% for supervising educational activities. These times
can be further categorized into full-time and after-school by considering the percentage of
total hours each program uses. There are 10 hours available per full-time child, and 3
hours per child after school. Therefore, there are 300 (10 hours  30 children) full-time
child hours available per day and 30 (3 hours  10children) after-school child hours
available. Of the total 330 hours available, 91% (300/330) of the hours are full-time
child hours, and 9% are after-school child hours.
Now the calculation of the ABC meal related activities cost requires several steps, as
follows:
Estimated annual volume of snacks/meals:

(Assume 5 days per week  50 weeks = 250 days)
Full-time (30 children  3 snacks & meals  250 days) 22,500
After-school (10 children  1 snack  250 days) 2,500
Number of meals served 25,000
Total food cost $20,000

Time spent on meal preparation (20%  $100,000) 20,000
Total snacks and meals per year $40,000
Estimated cost per snack/meal ($40,000/25,000) $1.60

The total annual ABC cost per child is calculated as follows:

Full-Time After-School
Snacks/meals:
Full-time (3 snacks/meals  250 days  $1.60) $1,200
After-school (1 snack/meal  250 days  $1.60) $ 400
Supplies:
Full-time ($10,000/30 children) 333
After-school ($8,000/10 children) 800
Supervising educational activities:

Full-time (50%  91%  $100,000)/30 1,517
After-school (50%  9%  $100,000)/10 450
Supervising naps, recreation, and greeting:

Full-time (30%  91%  $100,000)/30 910
After-school (30%  9%  $100,000)/10 ______ 270
Total Annual Cost per Child $3,960 $1,920
C. The employees work with both full-time and after-school children, and there are
uncertainties about how much time they spend with each type of student. If the two
groups of children are combined for some activities, then any allocation of salaries or
wages to each service is arbitrary and unlikely to reflect the two services’ use of
employee time. If the two services are completely separate, the cost of salaries and
wages can be traced directly to the service. However, for activities such as snacks, some
employee time is probably spent preparing snacks for both groups at once, and allocating
this cost would be an uncertain and arbitrary process. It is impossible for employees to
track exact time spent per service for activities undertaken for both services, such as
snacks and possibly meeting parents at the end of the day. There are uncertainties about
whether allocation bases reflect the use of resources because these are fixed resources,
and the cost does not vary proportionately with any type of volume measure. Therefore,
any allocation is arbitrary and will not accurately reflect use of those fixed resources.
7.26 ABM – Customer Profitability
[Note about problem complexity: Item C is coded as Step 1 instead of Step 3 because the chapter
explicitly discusses methods for improving customer profitability.]
A. Activity-based management involves the use of ABC cost information to develop a

comparison of the costs and benefits of tasks and procedures undertaken within the
organization to identify improvements that can be made in quality and efficiency or cost
reductions.

B. A high-cost customer is one for whom contribution margin is low, relative to other
customers, but who requires costly services such as special customized products, special
shipping procedures, small production and delivery quantities, specialized post-sales
service, or customer services before purchasing, and so on. Low-cost customers would
provide relatively more contribution from their orders with little special treatment. These
customers may order large quantities of regular products and not require any special
delivery or help before or after the sale.
C. There are many possible ways to write this paragraph, and the wording depends on the
assumptions that are made about the particular audience for the paragraph, the customer,
and the nature of the company’s business. Below is a sample paragraph.
Several approaches can be taken to improve profitability for high-cost customers.

Accountants can identify costs for these types of customers, and the company can
negotiate with each customer to either charge for some of the specialized services or
motivate the customers to reduce the amount of costly services required. Ways to reduce
costs include improving the predictability of orders, reducing the amount of engineering
changes or other product changes required, and finding standard products that might
substitute for customized products. Customers requiring large amounts of technical
support following a purchase might be willing to pay for this service.
7.27 Krishnan Manufacturing
Following is a multilevel income statement for the Krishnan Manufacturing Plant using a
GPK approach.
Revenues $800,000
Variable costs 200,000
Contribution margin 1 600,000
Fixed costs, product 150,000
Idle capacity costs 75,000
Contribution margin 2 375,000
Fixed costs, company 200,000
GPK profit $175,000
The problem states that “Krishnan’s accountant aggregates the idle capacity costs.” Thus,
the solution above assumes that the $75,000 idle capacity cost relates only to the Krishnan
plant, not to the entire company.

7.28 Diagnostic Services - GPK, RCA Cost Rates
A and B. Cost function calculations:
X-ray supplies
Fixed costs: $3,000 per year
Proportional costs: $2.10 per X-ray hour  5,000 budgeted X-ray hours = $10,500
Electricity
Fixed costs: 6,000 kWh  $0.10 per kWh = $600
Proportional costs: 4kWh per hour of X-ray use  5,000 budgeted X-ray hours 
$0.10 per kWh = $2,000
X-ray technician
Fixed costs: 300 technician hours  $45 per labor hour = $13,500
Proportional costs: 1 technician hour per hour of X-ray use  5,000 budgeted X-ray
hours  $45 per labor hour = $225,000
Maintenance
Fixed costs: 100 maintenance hours  $20 per hour = $2,000
Proportional costs: 0.0424 maintenance hour per hour of X-ray use  5,000 budgeted
X-ray hours  $20 per maintenance hour = $4,240
Facilities
Fixed costs: 1,000 square feet  $25 per square feet = $25,000

A and B (continued). Cost rates under GPK and RCA:
GPK RCA
Cost Center: X-Ray Resource Cost Pool: X-Ray
Fixed Proportional Fixed Proportional
Output Measure – X-Ray Hours: Output Measure – X-Ray Hours:
Practical capacity 5,600 Theoretical capacity 8,760
Budgeted capacity 5,000 Budgeted capacity 5,000
Primary Costs: Primary Costs:
Depreciation $ 93,100 $ 0 Depreciation $ 93,100 $ 0
Supplies 3,000 10,500 Supplies 3,000 10,500
Electricity 600 2,000 Electricity 600 2,000
Total Primary Costs 96,700 12,500 Total Primary Costs 96,700 12,500
From Other Cost Pools (i.e., From Other Resources (i.e.,
Secondary Costs): Secondary Costs):
Labor (technician) 13,500 225,000 Labor (technician) 13,500 225,000
Maintenance - equipment 2,000 4,240 Maintenance - equipment 2,000 4,240
Maintenance - facilities 25,000 0 Maintenance - facilities 25,000 0
Fully Assigned Resource Costs $137,200 $241,740 Fully Assigned Resource Costs $137,200 $241,740
Fully Assigned Cost Rate Per Hour $24.50 $48.348 Fully Assigned Cost Rate Per Hour $15.662 $48.348
C. Cost for patient requiring 0.5 hour of time:
GPK cost = ($24.50 + $48.348)  0.5 hour = $36.424

RCA cost = ($15.662 + $48.348)  0.5 hour = $32.005
D. GPK cost is higher than RCA cost because RCA uses theoretical capacity for fixed costs. Theoretical capacity is larger than
budgeted capacity in the denominator, resulting in a smaller cost rate.

E. The technician needs to be on hand for the hours that the diagnostic center is open. There
are likely certain tasks that need to be done on a daily basis to prepare the machine. Costs
for maintenance are similar; some routine maintenance is done on a regular basis and
does not depend on the number of X-ray hours. Even though these costs are proportional
in the technician and maintenance cost pools, a portion of each cost is fixed with respect
to X-ray equipment usage.
7.29 GPK, RCA Capacity Analysis
Budgeted Practical Theoretical

Capacity Capacity Capacity
Estimated volume – X-ray hours 5,000 5,600 8,760
Fixed cost rate per X-ray hour $27.44 * $24.50 $15.662
Fixed costs allocated to patient services

(5,200 hours × fixed cost rate) $142,688 $127,400 $81,443
Assigned to idle capacity:
Unplanned idle capacity

(5,000 – 5,200) hours × fixed cost rate ($5,488) ($4,900) ($3,132)
Planned idle capacity:

(5,000-5,000) hours × $27.44 0
(5,600-5,000) hours × $24.50 14,700
(8,760-5,000) hours × $15.66 58,889
Total Fixed Costs Assigned $137,200 $137,200 $137,200
* $137,200 fixed costs ÷ 5,000 budgeted capacity = $27.44
7.30 New-Rage Cosmetics
A.
1. Quality control cost per order using ABC
Incoming material inspection 12 types of material  $11.50 $ 138.00

In-process inspection 17,500 units  $0.14 2,450.00
Product certification 25 orders  $77.00 1,925.00
Total quality control costs $4,513.00
Quality control cost per order $4,513.00/25 orders $180.52

2. Quality control cost per order using traditional cost accounting
Total quality control costs assigned

= Direct labor costs  14.5%
= $27,500  14.5%
= $3,987.50
Quality control cost per order = $3,987.50/25 orders = $159.50
B. Under the ABC system, the costs are more related to the resources used to insure quality
control. These costs are primarily product inspection and certification costs, and the
allocated costs change as the types of materials and number of units inspected change.
Under traditional cost accounting, direct labor costs may be related to number of units
inspected if it takes more labor to produce more units, but in automated manufacturing
settings this is not always the case. In addition, direct labor costs are not related to types
of materials. Therefore, using direct labor costs to assign quality costs provides poor
quality information about the variation in quality control costs among different orders.
Accordingly, the ABC system provides more accurate costs for quality control.
7.31 Quality Activities
See Exhibit 7.6 for more details about these answers.

___A___ 1
___P___ 2
___PS__ 3
___PR__ 4
___PS__ 5
_P or A_ 6 (Used to motivate employees to improve quality, also requires appraisal)
___PR__ 7

PROBLEMS
7.32 Steps in ABC
A.
3 Identify and sum the costs into activity-based cost pools
4 Choose a cost driver for each activity
6 For each ABC cost pool, allocate overhead costs to the product or service
1 Identify the relevant cost object
2 Identify the activities necessary for production or service delivery
5 For each ABC cost pool, calculate a cost allocation rate
B. All of these steps include uncertainties.
After a cost object is chosen, uncertainty exists about whether all of the activities
necessary to produce the good or service are identified. Some activities may be
overlooked, or the set of activities may include ones that rarely occur and would be an
immaterial part of the process. In addition, uncertainties exist about the optimal number
of activities for a given cost pool. There is uncertainty about whether the costs for
developing additional cost pools would exceed the benefits. Uncertainties also exist
about whether the system would be more or less accurate when potentially separate
activities are grouped together.
When assigning costs to activities, there is uncertainty about whether all direct costs have
identified and traced to each activity. For example, supplies such as cloths used to wipe
off excess oil during the set-up process may be overlooked. In addition, the assignment
of a common resource cost, such as a supervisor salary, may not reflect the time the
supervisor spends on different activities.
For each cost pool, there is uncertainty about whether all of the potential cost drivers
have been identified and whether the chosen cost driver most accurately reflects the use
of resources within that cost pool. In addition, some activities are interdependent, and the
cost pools and cost drivers may not accurately reflect these interdependencies. Choosing
a cost driver for each activity requires the use of judgment. Some activities may have an
obvious cost driver, while others could have several different drivers. Assembling a box,
for example, may only require direct labor and thus have a clear cost driver. Other
activities could include adding materials, using machine hours, and using direct labor
hours. For these types of activities, several different cost drivers could be chosen. The
accountant implementing ABC must identify the driver that best relates changes in
activities to changes in cost.
Measuring the amount of cost driver used per product is sometimes uncertain. Suppose
time spent cleaning is a cost driver for a housekeeping cost pool. When a new employee
is hired, the actual time may be longer than the normal time for the employee’s first
several months. Therefore, uncertainty exists about whether the allocation base volume
is accurately set, or whether the activity has been correctly measured when allocating the
cost.

C. There are many correct choices for this answer. The key is to focus on uncertainties and
to explain why the need for judgment might be greater in one step than in the others.
Below are two sample answers.
The choice of cost drivers might require the greatest use of judgment because of the large
number of uncertainties involved. There are uncertainties about whether all possible cost
driver choices have been identified, and whether the selected cost driver actually reflects
the use of resources of the cost pool more accurately than other choices. In addition,
some high quality cost drivers may not be measured very accurately, there are certainties
about whether a particular cost driver provides the best information.
The choice of activity cost pools might require the greatest use of judgment because it not
only involves a large number of uncertainties (as discussed in Part B above), but it also
affects all of the remaining steps. Choices that are made about the activities influence the
cost and benefits achieved from the entire system.
A. A cost hierarchy in ABC divides activities into six levels: unit, batch, product, customer,
facility, and organization. These categories reflect specific types of activities that relate
to the particular category. For example, some costs are related specifically to customer
services, such as the salaries for sales personnel. The use of these categories allows
accountants to more carefully identify activities and their associated costs at all levels
within the company.
B. Following are several reasons for uncertainty in classifying costs into the cost hierarchy
categories; students may think of others. As costs are categorized into cost hierarchy
categories, accountants might not completely understand the interdependencies within a
group of activities. For example, costs that appear to be batch-level costs could also be
affected by the number of units or the weight of the batch. Managers cannot be certain
that the chosen cost driver in a specific cost category independently reflects cost changes.
Additionally, costs that appear to be organization-level costs could be driven by changes

in volumes. For example, the costs of billing and interacting with customers regarding
their bills could increase step-wise as a fixed cost. Accountants are uncertain whether
this cost increases as the number of customers increase, or whether it is an organization-
level cost that will not change regardless of volumes.
C. Dividing costs into six levels helps accountants better identify all aspects of costs in a
company. Thinking about a particular level helps accountants focus on activities that
occur at that level. In addition, once activities have been developed for a particular level,
it becomes easier to know how costs change with volumes of activity. For example,
property taxes are a facility-level cost and therefore would not increase based on the
number of batches produced, but only on the value of the building itself. Using these six
levels helps accountants better map resource usage to products and services.

7.34 Flying Carpets
[Note: This problem requires application of knowledge from Chapter 4.]
A. Profitability per customer:
Boutique Store Discount Retailer

Revenues $135,000 $850,000
Direct costs (DM and DL) 80,000 400,000

Sales representatives 1,800 720
Production line supervisor 2,430 972
Delivery costs 20,000 8,000
Customer contribution $ 30,770 $440,308
Calculation of sales representative costs:

60 hours  $20  150% $1,800
24 hours  $20  150% $720
Calculation of production line supervisor costs:

90 hours  $18  150% $2,430
36 hours  $18  150% $972
B. Flying Carpet could ask that the Boutique Store to pay for the extra costs such as sales
representative time, production line supervisor time, and delivery costs. Flying Carpet
could also raise its Boutique Store prices to ensure that direct costs as a percent of
revenues are no higher than for the discount retailer.
C. If the other customer has a higher contribution than the Boutique Store, it’s possible that
it should be replaced. However, managers at Flying Carpets do not know whether sales at
the discount retailer are affected by the featured homes in the local lifestyle magazine.
Without data about potential losses in sales, it may be risky to stop serving the Boutique
Store.

7.35 Flightways
A. ABC cost rate
Simulator supplies:
Fixed $ 1,000
Proportional ($4.50 per simulator hour  3,400
simulator hours) 15,300
Electricity:
Fixed (6,000 kWh  $0.10 per kWh) 600
Proportional (165 kWh per simulator hour  3,400
simulator hours  $0.10 per kWh) 56,100
Simulator depreciation:
Fixed 1,505,160
Maintenance:
Fixed (50 maintenance hours  $70 per maintenance hour) 3,500
Proportional (0.06 maintenance hours per similar hour
 3,400 simulator hours  $70 per maintenance hour) 14,280
Facilities:
Fixed (2,000 square feet  $15 per square foot) 30,000
Total costs $1,625,940
Divided by budgeted simulator hours ÷ 3,400
ABC rate per simulator hour $478.22
B. Based on the calculations in Part A, the sales manager probably should not accept the
special order because the special order price of $400 is less than the ABC cost of $478.22
per similar hour. This answer assumes that all of the ABC costs are relevant (both fixed
and proportional costs). It also assumes that budgeted simulator hours is an appropriate
volume for the allocation base.

C.
RCA
Resource Cost Pool: Flight Simulator
Fixed Proportional
Cost Driver – Number of hours:
Theoretical capacity – fixed costs 8,760
Budgeted capacity - variable costs 3,400
Primary Costs:
Depreciation $1,505,160 $ 0
Supplies 1,000 15,300
Electricity 600 56,100
Total Primary Costs 1,506,760 71,400
From Other Resources (i.e.,
Secondary Costs):
Maintenance - equipment 3,500 14,280
Maintenance - facilities 30,000 0
Fully Assigned Resource Costs $1,540,260 $85,680
Fully Assigned Cost Rate Per Hour $175.8288 $25.20
D. Under the RCA cost allocation method, the proportional cost is $25.20 per hour, and the
special order price of $400 per hour would easily cover the proportional costs. Therefore,
the RCA calculations suggest that the sales manager should accept the offer.
E. RCA provides more accurate cost information for short-term decisions because it more
accurately separates the fixed and proportional costs.
F. There are several qualitative factors that affect special order decisions. If other customers
find out that one customer gets a special rate, they may also demand a lower rate. If using
a lower rate attracts a customer who will later pay a higher rate, it is more likely to be a
worthwhile contract.

G. Capacity analysis:
Offer Offer Not
Accepted Accepted
Theoretical capacity – Number of simulator hours 8,760 8,760
Fixed cost rate per hour $175.8288 $175.8288
Fixed costs allocated to simulator hours:

3,300 hours × $175.8288 $ 580,235
(3,300 + 250) hours × $175.8288 $ 624,192
Allocated to idle capacity:
Unplanned idle capacity

(3,400 – 3,300) hours× $175.8288 17,583
(3,400 – 3,300 – 250) hours× $175.8288 (26,374)
Planned idle capacity

(8,760-3,400) hours × $175.8288 942,442 942,442
Total Fixed Costs Allocated $1,540,260 $1,540,260
7.36 Vines Corporation
A. Per unit cost using the old method:
Job Order 410________ Job Order 411________

Direct materials $9,700/10 units $ 970.00 $59,900/200 units $299.50
Direct labor $750/10 units 75.00 $11,250/200 units 56.25
Indirect $115(25 hrs/10 units) 287.50 $115(375 hrs/200 units) 215.63
Total $1,332.50 $571.38

B. Cost per unit cost using ABC
Job Order 410_______ Job Order 411________

Material handling 500 parts  $0.40 $ 200.00 2,000 parts  $0.40 $ 800.00
Milling 150 mach hrs  $20 3,000.00 1,050 mach hrs  $20 21,000.00
Grinding 500 parts  $0.80 400.00 2,000 parts  $0.80 1,600.00
Assembly 2 assembly hrs  $5 10.00 30 assembly hrs  $5 150.00
Inspection 10 units  $25 250.00 200 units  $25 5,000.00
Shipping 1 order  $1,500 1,500.00 1 order  $1,500 1,500.00
Direct material 9,700.00 59,900.00
Direct labor 750.00 11,250.00
Total costs for order $15,810.00 $101,200.00
Total cost per unit $15,810.00/10 units $1,581.00 $101,200.00/200 units $506.00
C. In the traditional costing system, the indirect costs were combined into a single cost pool
and then allocated based on direct labor hours used by each order. Direct labor hours may
or may not be related to costs in the overhead pool. It’s unlikely that they are related to a
very large portion of those costs. However, under ABC, the indirect costs are divided
into six cost pools and allocated using cost drivers that are more likely to reflect the use
of resources. Therefore, the cost allocations provide more accurate information about
costs.
D. There are many uncertainties about the choice of cost driver for each activity-based cost
pool. There may be several different drivers that could be used, and several of them
could be similar in their ability to relate cost to the activity. For example, if a school has
classrooms that are similar in physical size with similar numbers of students in each
class, number of rooms may be an adequate cost driver. However, if younger students
are messier and cleaning their rooms takes longer, then time spent might be a better cost
driver. Sometimes time spent is not measured. In this case number of rooms could be
used, or square feet if rooms are different sizes. And this is a fairly forthright activity
with easy to identify cost drivers. Other activities can be much more complex, and
finding cost drivers can be more difficult. Identifying the most appropriate cost driver
requires effort, and the best driver may be expensive to measure. If the activity changes
in any way, a new driver might be needed.
E. An ABC system allocates costs using more cost pools and more appropriate cost drivers,
so costs are likely to be less distorted. For example, if direct labor hours were
abnormally high for one job, under the traditional costing system the indirect costs
assigned to that job would be higher even if more costs were not incurred. Under ABC
this possibility for error is minimized because there are more allocation bases than direct
labor hours. The ABC system is more costly to implement because it takes time to
develop and many employees need to be involved. ABC is more useful in analyzing
operations to improve quality and reduce costs. Non-value added activities can be
identified and other activities can be simplified, once they have been identified. This
doesn’t tend to happen with traditional costing.

7.37 Kim Mills
A sample spreadsheet showing the solutions for this problem is available on the Instructor’s web
site for the textbook (available at www.wiley.com/college/eldenburg).
A.
1&2 Following are excerpts from the sample spreadsheet for this problem.

TRADITIONAL PROCESS COSTING

ACTIVITY-BASED COSTING
Note: Some columns in the preceding schedule appear to add incorrectly due to
rounding. The calculations were performed in Excel, which includes decimal places that
are not visible in the preceding schedule.
B.
Light-Weight Heavy-Weight
Denim Cotton Cotton
Process Costing $16.70 $14.70 $18.70
Activity-Based Costing 17.49 12.70 22.29
Cost Per Bolt Overstated (Understated)

by Traditional Process Costing $ (0.79) $ 2.00 $ (3.59)

Under process costing, the cost per bolt of light-weight cotton was overstated; it absorbed
costs incurred by denim and heavy-weight cotton because costs under process costing are
allocated to the department and then to the product. The production volume of light-
weight cotton (4,000 bolts) is much larger than either denim (1,000 bolts) or heavy
weight cotton (2,000 bolts). When conversion costs are allocated based on number of
units rather than based on the flow of resources used, the product with the most units is
allocated relatively more cost. The production of light-weight cotton requires
proportionately fewer set-ups than the other two products, so it should be allocated less of
the cost for set-up. Light-weight cotton also uses proportionately fewer machine hours,
and so it should also be allocated less of the machine activity costs. In addition, light-
weight cotton uses less direct labor per bolt than the other two products. Under
traditional process costing, direct labor is combined with other conversion costs and is
allocated to units without regard to the actual labor used.
C. Managers may want to investigate machine set-up costs and reduce them, or reduce the
number of set-ups required for all products. In addition, perhaps inspection activities
could be analyzed and costs reduced. The managers might also investigate reasons why
light-weight cotton uses significantly less direct labor than the other two products.
Perhaps direct labor could be used more efficiently, reducing the direct labor cost.
7.38 The Pond Kit Company
A. Total cost per batch:
Material handling 20 parts  $1 per part  10 kits $ 200.00

Forming 2 molding hours  $40 per hour  10 kits 800.00
Molding setup 1 batch  $50.00 50.00
Packing and shipping 30 pounds  $1.30 per pound  10 kits 390.00
Inspection $10 per kit  10 kits 100.00
Direct labor $20 per kit  10 kits 200.00
Direct materials $100 per kit  10 kits 1,000.00
Total costs $2,740.00
B. Total budgeted cost per kit

= Total budgeted cost per batch / Number of kits per batch
= $2,740.00 / 10 kits
= $274.00 per kit
C.
Cost per Kit
Cost Per Batch (10 kits per batch)
Total Cost from Parts A and B $2,740 $274.00
Marketing ($15,000/1,000 batches) 15 1.50
Customer Service ($25,000/1,000 batches) 25 2.50
Total $2,780 $278.00

D. There are other potential activities that could be chosen for this company. Some
activities could be separated further into more pools. For example, packing and shipping
could be separated into a packing activity and a shipping activity. Molding may consist
of several different tasks that could be considered separate activities. Alternatively, some
of these cost pools could possibly be combined, such as molding setup and forming.
There are many different choices that could be made for these activities.
E. The new ABC system can lead to identification of non-value-added costs by focusing
manager attention on the organization’s activities and cost drivers. As activities are
analyzed, some tasks or procedures in these activities might be identified as non-value
added, and then eliminated. For example, if the ponds could be redesigned to require
fewer parts, material-handling costs would likely be reduced. If specific types of defects
cause inspection time to increase, redesigning parts or processes to eliminate the defects
would decrease inspection time and also decrease customer service costs for product
failures. The packing and shipping activities could be analyzed to determine whether
steps could be combined or some tasks eliminated or outsourced at lower cost. There are
many other non-value activities that students might have identified.
7.39 Data Processors
A. These activities are not the only possible set. Each of these activities could be separated
into a number of other activities. For example, the activity of issuing new credit cards
could be further separated into the following cost pools:
• Verifying authorization of new credit cards to be issued

• Mailing new credit cards
• Validating new credit cards (before first use of the card)
Each cost pool could be disaggregated into more cost pools. Alternatively, some of these
cost pools could be aggregated in some organizations.
B.
Activity Estimated Cost Estimated Activity Rate
Transaction processing $2,000,000 5,000,000 $ 0.40
Statements 1,000,000 250,000 4.00
New credit cards 500,000 100,000 5.00
Billing disputes 90,000 3,000 30.00
C. The volume of activities cannot be predicted with certainty from one month to the next.
For example, although the number of credit cards issued last period is known, economic
changes affect the number of people who will apply, as will advertising campaigns and
competition among financial institutions. Some activities, such as issuing monthly
statements, are easier to estimate than other activities, such as resolving billing disputes.
The number of customers holding credit card accounts probably remains somewhat
constant, although each month some credit card customers are gained and lost. It is more
difficult to predict the number of billing disputes, which fluctuate with the volume of

transactions and also with the degree of problems such as fraudulent credit card use,
retailer errors, and charges for unsatisfactory goods or services.
Costs will be different than expected because it is not possible to perfectly predict future
costs. There may be unanticipated changes in prices, such as electricity rates, telephone
charges, or employee health care costs. If activity volumes are higher than expected, then
employee overtime pay may exceed expectations. Information technology programming
and operating costs may be higher or lower than expected. For example, there could be
fewer problems than expected when making improvements to the transaction processing
system. There are also likely to be random fluctuations in costs such as office supplies.
D. Practical capacity is the maximum capacity under typical operating conditions, taking
into account regularly scheduled holidays and other down time. This company has
several different types of capacity. The discussions below address three types of
capacity; students may think of others.
One type of capacity for Data Processors is the capacity of the computerized technology
to process transactions. Because transactions occur at any time and anywhere in the
world, this capacity must operate 24 hours per day, 365 days per year. The capacity limit
would be measured in terms of the maximum volume of transactions that could be
processed. The practical capacity of the computerized technology for transaction
processing is almost certainly higher than the estimated activity level. The company’s
contracts with its customers probably include guarantees that the system is capable of
processing a higher volume of transactions than expected. In addition, the company
probably has back-up “hot” sites that are fully operational and can take over processing in
the case of system failure due to technological problems, natural disasters, terrorist
attacks, etc.
Capacity for Data Processors also includes the employee capacity to handle services such
as billing disputes. This type of practical capacity is likely to be higher than estimated
activity levels during slow times, but it could be lower when activities are unexpectedly
high. However, the company probably has contractual commitments to resolve billing
disputes within a maximum number of days. Thus, the company must be capable of
expanding its employee practical capacity, as needed, to meet actual activity levels. The
company may be able to expand this capacity quickly by using employee overtime or
temporary labor.
Another type of capacity for Data Processors is the physical capacity for printing and
mailing monthly statements. Once again, the company is probably contractually
committed to performance of this service in a timely manner, so the company must have
sufficient capacity to handle higher than expected volume. Because it may be difficult to
quickly expand this type of physical capacity, the company’s practical capacity is
probably higher than its expected activity level.

MINI-CASES
7.40 Jefferson County Animal Shelter
A. The staff member identified the following three cost objects. Each cost object represents
one of organization’s three services.
• Animal shelter
• Obedience training
• Veterinarian services
One possibility for cost pools is to create one pool for each cost object. This approach
assumes that all costs can be directly assigned to one of these three services. Based on
the following summary, it appears that some of the costs can be directly traced to the cost
objects. However, some of the costs are indirect. (Note: Judgment is involved in these
classifications; students might have categorized costs differently. For example, students
might have classified veterinarians and technicians as indirect if they assumed that these
employees provide services for the animal shelter in addition to the veterinarian clinic.)
Direct Costs___________
Animal Obedience Veterinarian
Shelter Training Services Indirect Total
Director and staff salaries $ 0 $ 0 $ 0 $ 60,000 $ 60,000
Animal shelter employees’ salaries 100,000 0 0 0 100,000
Veterinarians and technicians 0 0 150,000 0 150,000
Animal trainers* 20,000 20,000 0 0 40,000
Food and supplies** 50,000 0 75,000 0 125,000
Building-related costs 0 0 0 200,000 200,000
Total $170,000 $20,000 $225,000 $260,000 $675,000
* The problem indicates that animal trainers provide training classes and also train
animals housed in the animal shelter. 50% of the animal trainer time is devoted to
obedience classes. The remaining 50% is assumed to relate to training for
animals housed in the animal shelter.
** The problem states that $75,000 of this cost is used by the veterinary clinic. The
remainder ($50,000) is assumed to be used in the animal shelter.
A decision must be made about whether to allocate the two indirect costs to the three
services. “Director and staff salaries” is most likely a facility-level cost for general
administration, which would NOT normally be allocated to individual product lines.
“Building-related costs” is also a facility-level cost. Sometimes this type of cost is
allocated to individual products, and sometimes it is not. The following solution assumes
that the building-related costs are NOT allocated to the shelter’s individual services.
B. There are three cost pools to consider—one for each of the organization’s services. For
the animal shelter, a cost driver could be the number of animal days. On a daily basis,
each animal would require similar time from employees to clean their cages, feed, and
groom, and similar supplies such as food and bedding. Another possible cost driver is the

total number of animals housed. However, this cost driver would not capture differences
in cost caused by lengthy animal stays.
A cost driver for obedience training could be number of classes, number of families
taking classes, or number of weeks in which classes are held. Because each class would
require about the same amount of time regardless of the number of families per class,
number of classes is probably a better cost driver.
A cost driver for veterinary services could be the number of animal-visits. Similar
amounts of time and resources would be used per animal, although this assumes that the
product mix of (e.g., neutering and vaccinations) remains relatively constant.
C. Given the cost pools identified in part A and the cost drivers in part B, the allocation rates
are as follows:
Allocation
Cost Pool Total Cost Cost Driver Volume Rate
Animal shelter $170,000 Animal days 27,375 $ 6.21
Obedience training 20,000 # of classes 125 160.00
Veterinarian services 225,000 Animal visits 5,000 45.00
The allocation rate for the animal shelter indicates that the average cost of housing a pet
for one day is $6.21. The allocation rate for obedience training indicates that it costs on
average $160 to offer a training class. The allocation rate for veterinarian services
indicates that it costs on average $45 to provide veterinarian care per animal-visit.
D.
1. Quality activities include:
• Prevention activities performed to insure defect-free production
• Appraisal activities performed to identify defective units
• Production activities undertaken in the production or rework of failed units
• Post-sales activities undertaken after the product has been sold to remedy
problems caused by defects and failed units
The shelter is experiencing a post-sales activity when animals are returned because of
behavior problems.
2. No, the current ABC system does not include cost pools related to any of the types of
quality activities listed in Part D.1 above. For example, the system does not track the
cost of training dogs while they are housed in the animal shelter (prevention), the cost
of evaluating dog readiness for adoption (appraisal), the cost of additional training for
dogs with greater than normal behavioral problems (production), or the cost of dogs
returned because of behavior problems (post-sales).
3. There are many possible answers to this question; students may think of other cost
pools or drivers. A possible cost pool could be the cost per animal returned. Costs in
this pool could include costs for further training activities, for admitting the animal to
the facility and working with families to find other animals, and the cost to house the
animals while waiting for a new family. The cost driver for this cost pool would be
the number of animals returned. There are some costs that cannot be measured, such
as the cost of potential adopters who decide not to adopt another animal because of a
bad experience.
7.41 Usefulness of ABC
A. Accountants are likely to believe that ABC information would be useful because ABC
separates overhead costs into more cost pools, and cost drivers are chosen to reflect the
cause and effect relationship for costs, accountants might believe that this information
would be useful for their organizations. In addition, the process of implementing ABC
encourages managers to identify and eliminate non-value-added activities.
B. Managers cannot be certain that new ideas will be implemented correctly in their
organization. In addition, because the ideas are new, managers cannot know for certain
that they work for every organization, or just for some types of organizations. Therefore
they cannot know for certain it will be effective for their organization. Furthermore,
managers cannot know for certain whether employees in their organization will support
the new idea or resist, and additional uncertainty arises about the effectiveness of new
ideas when employees are resistant to these changes. Students may have thought of
additional uncertainties.
C. Managers may adopt a new method if they study the method and believe that the benefits
will exceed the costs for their organization. Managers are accustomed to making
decisions under uncertainty; they do not need absolute “proof” before adopting a
potentially beneficial method. In addition, managers are more apt to adopt a new method
if competitors are adopting it. They may feel that competitors will have an edge because
of this new method and worry that their organization will suffer if the method is not
adopted. Or managers may believe they can move ahead of competitors by employing
the new method. Consultants and others who sell the methods may convince managers
that the method is appropriate for their organization, and so the managers adopt it.
D. Over time, many different types of organizations implement a new idea and for some
organizations it works well and for others it does not work well. Evidence accumulates
that the new method is not a cure-all for organizational problems. New methods are
developed and are advertised widely that may overshadow the older methods. In
addition, over time some new method ideas become common practice. For example, a
focus on quality has become commonplace.
E. In a recession, managers focus less attention on expanding operations and more attention
on improving cost effectiveness, competitiveness, and profitability. ABC information
can help organizations identify non-value added activities, reduce costs, improve quality,
and compete more effectively. These results are more important when business
conditions are less favorable.

7.42 Colombo Frozen Yogurt
A.
Impulse Segment Yogurt Shops Total
Sales Revenue $23,880,000 $5,970,000 $29,850,000
Less: Price Promotions (3,600,000) (900,000) (4,500,000)
Net Sales 20,280,000 5,070,000 25,350,000
Less: COGS – Ingredients, Packaging & Storage1 (11,400,000) (2,850,000) (14,250,000)
Less: COGS – Pick/Pack & Shipping2 (2,625,000) (375,000) (3,000,000)
Gross Margin 6,255,000 1,845,000 8,100,000
Less: Merchandising (1,680,000) (45,000) (1,725,000)
Less: SG&A (3,861,000) (39,000) (3,900,000)
Income $ 714,000 $1,761,000 $ 2,475,000
1
The case states that the portion of COGS related to ingredients, packaging, and storage
are the same across segments. Therefore, these costs are allocated equally to all cases:
Impulse segment:
$14,250,000  (1,200,000 cases/1,500,000 cases) $11,400,000
Yogurt shops:
$14,250,000  (300,000 cases/1,500,000 cases) 2,850,000
Total $14,250,000
2
Pick/pack & shipping costs are allocated as follows: Impulse Shops
Full pallets @ $75 each:
Cases in full pallets 60,000 240,000
Divided by cases per pallet ÷ 75 ÷ 75
Number of full pallets 800 3,200
Times cost per full pallet  $75  $75
Total full pallet cost $60,000 $240,000
Individual orders @ $2.25 per case:

Individual cases 1,140,000 60,000
Times cost per case  $2.25  $2.25
Total individual case cost $2,565,000 $135,000
Total pick/pack cost $2,625,000 $375,000
B. No, these were not the only possible cost objects. Alternatives included: geographic
regions, individual manufacturing processes, size of customers (in terms of total annual
sales), product flavors, and sales people.
C.
1. The set of ABC activities is different from traditional cost categories because
traditional costing systems tend to aggregate costs that may be driven by different
factors into single cost pools, but ABC activities and cost pools are associated with
cost drivers. This is more easily done when costs are separated into a larger number
of cost pools.

2. There are many possible answers to this question; students may think of reasons not
listed here. Because past cost data were accumulated using these cost categories,
maintaining the old categories would make it easier for the managers to analyze cost
trends. The managers might have believed that the old cost categories were
sufficient—i.e., that they provided the most appropriate breakdowns of costs under
ABC. The managers might have believed that the cost to identify and gather data for
new categories would exceed the benefit. The use of old categories reduced
implementation time and avoided the need for significant employee training.
D.
1. Pick/pack and shipping costs: Shipping costs are likely to vary with the number of
units shipped, where a unit may be defined as a case or a pound of weight. However,
shipping costs might also vary according to the size of a shipment; it costs less to
deliver a large quantity to one location than to deliver smaller quantities to many
locations. Thus, the shipping costs might be considered batch-level. Picking and
packing costs probably vary with the time needed to locate, obtain, and pack a single
shipment. This cost might be a unit-level cost that varies with number of cases.
However, it probably costs less per case to pick/pack a full pallet than a smaller order.
Therefore, the pick/pack costs are likely to be batch-level, where a batch is an
individual shipment.
[Note: Students often focus on the unit-level aspect of the pick/pack and shipping
costs and fail to recognize potential classification as batch-level. Student difficulty
with this question might be caused partly by a lack of understanding of operations in
a warehouse setting.]
2. Selling, general, and administrative costs: Selling, general and administrative costs
probably include salaries and other costs for sales, general management, accounting,
human resources, etc. These costs are most likely to be considered facility-level
costs. Overall, they probably do not vary with the individual numbers of units,
batches, products, or customers serviced. Although selling costs might vary with
some level of sales activity, these costs are not likely to be a major part of the overall
selling, general and administrative costs. Alternatively, these costs might be
considered product-level from the perspective of General Mills. Colombo Frozen
Yogurt is one product line within a much larger company.
E.
1. Pick/pack and shipping costs: Colombo has chosen two cost drivers for the pick/pack
and shipping costs. One cost driver is the number of full pallets, and the other driver
is the number of individual cases. As discussed in Part D, some parts of the pick/pack
and shipping costs are likely to vary with number of units such as weight, that could
be represented either by number of cases or number of pallets. Other parts of these
costs are likely to vary with the number of batches. The cost drivers chosen by
Colombo allow for lower total cost per batch when a full pallet is shipped. Therefore,
the choice of cost drivers appears to be reasonable.
2. Selling, general, and administrative costs: As discussed in Part D, the selling,

general, and administrative costs are most likely facility-level costs that are not
usually allocated to individual product lines. Thus, it can argued that the cost driver
chosen—and any other cost driver—would not be appropriate.
However, under the assumption that most of the selling, general, and administrative
costs consist of selling costs, then it would be appropriate to allocate these costs to
product lines. In that case, it would be reasonable to use sales representative time as a
cost driver because greater time is likely to cause higher costs.
[Note: Students have a tendency to discuss whether they agree with Colombo’s
method for estimating the volume of the cost driver rather than to discuss the
reasonableness of the cost driver itself. This misunderstanding can lead to a
meaningful class discussion about the difference between cost measurement and cost
behavior.]
F. Student memos will vary. However, a high-quality memo would do all of the following:
• Provide an ABC profit and loss statement, preferably as an exhibit rather than in
the body of the memo
• Identify the major reasons for the difference in profit between ABC and the
traditional allocation method for the two yogurt segments
• Discuss reasons why the ABC profit and loss statement might or might not
provide a reasonable measure of the profit from the two yogurt segments
• Avoid discussing irrelevant issues, such as analyzing whether the yogurt segments
are profitable
• Avoid asserting that the ABC profit and loss statement is either completely
reasonable or completely unreasonable; the memo should objectively convey both
positive and negative aspects of using ABC to measure costs for the two yogurt
segments
• Suggest one or more ways to obtain a more reasonable measure of profit from the
two yogurt segments (e.g., by separating selling costs from general and
administrative costs in the ABC system, by obtaining more accurate data about
the use of selling resources, or by identifying more appropriate cost drivers)
• Provide a reasonably-supported recommendation about whether Colombo should
use an ABC system in the future to report and monitor profit for the two yogurt
segments (this requirement is not explicitly called for in the mini-case)
• Demonstrate a tone of giving advice, with the controller and/or managers as the
ultimate decision makers
• Be written as a cohesive document that does NOT read like a mere list of answers
to Parts A-E
The sample memo shown below satisfies these requirements.

Sample Memo for Mini-Case 7.42

Memo
To: Controller, Colombo Frozen Yogurt

From: Student
Date: September 12, 20XX
Re: ABC Profit and Loss Statement for Yogurt Segments
Thank you for the opportunity to help you analyze the usefulness of ABC profit and loss
statements for the yogurt segments of Colombo Frozen Yogurt. This memo provides a
preliminary ABC profit and loss statement and recommendations.
Traditional Versus ABC Income

Based on the cost information you provided, I have developed an ABC profit and loss
statement for the two yogurt segments (see attached Exhibit 1). I have also prepared a
reconciliation of the differences between segment incomes under the traditional
accounting system compared to ABC (see attached Exhibit 2). Overall, ABC caused a
much higher proportion of costs to be assigned to the impulse segment compared to the
yogurt shops. The higher costs for the impulse segment are caused by greater use of
resources including sales representative time, merchandising kits, and product handling.
Accuracy and Usefulness of ABC Income Statements

In general, ABC more accurately assigns costs to cost objects. Accordingly, income for
the two yogurt segments under ABC should be more accurate than under the traditional
accounting system—and provide managers with better information for monitoring
operations and making decisions. For example, the ABC calculations shown in Exhibits
1 and 2 indicate that the impulse segment uses considerably more resources relative to
sales than the yogurt shops. This result was not apparent from the traditional profit and
loss statement. Managers may use the ABC information to increase emphasis on yogurt
shop sales, identify cost-saving opportunities in the impulse segment, or renegotiate
impulse segment selling prices.
On the other hand, the ABC calculations in Exhibits 1 and 2 are based on a simplified
ABC approach, which kept implementation costs low but may cause the ABC income
statements to be inaccurate. As discussed in Exhibit 3 (attached), managers may need
more accurate information about several of the activities and cost drivers to more closely
monitor operations and make better decisions. Allocations for selling, general, and
administrative costs have a large impact on segment profits, so greater effort to analyze
their cost behavior may be particularly useful.
Recommendations
The ABC approach outlined in the attached exhibits provides more accurate information
and is not costly to implement. Accordingly, I recommend continuing to use ABC to
measure profit for the two yogurt segments.
I also recommend performing further analysis to identify the types of information and
degree of accuracy that management needs for monitoring operations and making
decisions. A more accurate accounting system should be developed for the two yogurt
segments if the benefits would outweigh the costs of developing and using more accurate
information.
Please let me know if you would like to discuss the ABC profit calculations or if I can be
of further assistance.
Attachment: Memo to Controller, Colombo Frozen Yogurt

September 12, 20XX
Exhibit 1 – ABC Income Statements and Calculations
[P&L Statement and supporting computations from Part A;

Not copied here to reduce space used]
Exhibit 2 – Comparison of Income
Impulse Yogurt
($ in thousands) Segment Shops Total
Income per traditional system $4,152 $1,038 $5,190
Changes to cost allocations:

Pick/pack and shipping (225) 225 0
Merchandising (300) 300 0
Selling, general and admin. (2,913) 198 (2,715)
Income under ABC system $ 714 $1,761 $2,475
The differences in cost allocations are caused by the following:
• Pick/pack and shipping: The traditional system allocated these costs based on
number of cases, while ABC differentiates between the costs for full pallets
versus individual cases. The impulse segment includes a higher of proportion
sales in individual cases, which require more time and equipment to pick and
pack. Thus, the total cost for the impulse segment increased, while cost for the
yogurt shops decreased.
• Merchandising: This cost consists mainly of kits costing $500 each. Under the
traditional system, this cost was allocated based on sales. Under ABC, the cost of
kits is allocated based on delivery of kits to customers. Because the impulse
segment receives a larger proportion of kits relative to sales, the cost for this
segment is higher under ABC (and the cost for yogurt shops is lower).
• Selling, general, and administrative: Under the traditional system, these costs
were allocated based on sales. However, diaries maintained by 10% of the sales

force for 60 days indicated that sales representatives spent much more time per
dollar of sale on yogurt than other products, and only a small fraction of time was
spent on the yogurt shops. The diaries were used as estimates to assign costs
under ABC, causing income in the impulse segment to drop considerably and
income for the yogurt shops to increase.
Exhibit 3 – Key ABC Assumptions and Potential Effects
Accuracy of the ABC income statements depends on several key assumptions, described
below.
• We assumed that the cost of ingredients, packaging, and storage is the same
across the two yogurt segments. Further study might reveal differences across
segments in the types of yogurt sold, with associated differences in ingredient
and/or packaging costs.
• The pick/pack and shipping cost estimates of $75 per pallet and $2.25 per case
might be inaccurate, causing ABC costs to be over- or understated. Further
analysis of the costs might lead to more accurate estimates.
• We assumed that merchandising costs consisted mainly of kits and that the
number of kits delivered to each segment was calculated correctly. Significant
deviations from assumptions could cause the costs to be misallocated across
segments.
• We assumed that selling, general, and administrative costs are driven by sales
representative time. Either of these assumptions could be incorrect, leading to
misallocation of costs. Many selling, general, and administrative costs are likely
to be fixed or to vary based on activities other than sales representative time.
Because these costs are a large proportion of total costs, the ABC income
statements are especially sensitive to any misallocations in these costs.
• We assumed that the sample diaries provided accurate estimates of sales

representative time. The activities of sample sales representatives might not be
comparable to other sales representatives. Also, the sales representatives might
not have maintained accurate time records, or they might have had difficulty
assigning time to different products in situations where they serviced multiple
General Mills products for a single customer—a particular issue for the impulse
segment. As discussed above, the ABC allocations are particularly sensitive to
the allocations of selling, general, and administrative costs. Therefore, any
inaccuracies in sales representative time could have a significant impact on the
ABC income statements.

Grading and Assessment Rubric for Mini-Case 7.42

The next page provides a sample rubric that professors can use to grade and assess student
responses to Mini-Case 7.42. Alternatively, students can use the rubric to self-assess their
performance.
Note: Grading points are shown only for illustrative purposes. Each professor should decide on:
(1) the number of points for the entire assignment, (2) the breakdown of points across
computations/schedule, communication, and critical thinking, and (3) the range of points for
each level of performance.
The textbook instructor’s manual provides more information about using this type of rubric.

Grading and Assessment Rubric

Mini-Case 7.42: ABC Profit and Loss Statement for Yogurt Segments
Weak Average Professional

ABC Up to 20 points Up to 25 points Up to 30 points
• Fails to correctly calculation • Correctly calculates income In addition to average:
Computations income for the two segments for the two segments using • Provides a numerical
and Explanations using ABC ABC reconciliation of traditional
Maximum 30 points • Makes incorrect statements • Correctly describes the income to ABC income for
about calculations or differences between the two segments
Points Earned: _ accounting methods traditional and ABC income • Identifies the most significant
difference(s) between
traditional and ABC income
Written Up to 20 points Up to 25 points Up to 30 points
• Spelling or grammar errors • Minor spelling and/or • No spelling or grammar
Communication interfere with grammar errors, which do not errors (or very minor)
Maximum 30 points understandability interfere with • Uses proper memo format
Points Earned: _ • Unprofessional language understandability including useful headings,
and/or improper memo • Uses proper memo format, and uses professional
format but uses some unprofessional language
• Difficult to understand; poor language • Concisely and clearly
organization • Organizes memo into presents purpose,
• Fails to explain calculations paragraphs that enable reader calculations, relevant
or methods to understand the information information, and issues that
presented the Controller would find
useful
Critical Thinking Up to 20 points Up to 30 points Up to 40 points
Maximum 40 points
Points Earned: _
• Focuses primarily on the • Focuses primarily on • Focuses primarily on
numbers presented presenting ABC income and providing the controller with
Overall approach in arguing whether it is or is useful information for
not reasonable deciding whether to rely on
and/or continue using ABC
• Makes erroneous statements • Identifies ABC assumptions • Thoroughly analyzes the
about costs and provides at least some accuracy of the ABC methods
• Fails to acknowledge evaluation of assumption used, identifying both
Identify and analyze assumptions used or reasonableness strengths and weaknesses for
ABC reasonableness; uncertainty about ABC • Focuses on arguing whether measurement of income
calculations the ABC income provides a • Applies judgment to reach a
identify and address
• Discusses segment reasonable measure, with well-founded conclusion
uncertainties about profitability instead of inadequate consideration of about whether ABC provides
ABC methods evaluating whether ABC both strengths and a reasonable measure of
provides a reasonable weaknesses income, taking into account
measure of income management’s expected use
of the information
Total Points Earned: ___ (100 maximum)

7.43 Integrating Across the Curriculum (Environmental and Sustainability

Management)
A. 1. Student answers will vary depending on the firms that they choose to investigate.
Many firms follow GRI reporting guidelines.
2. The following factors affect firms’ willingness to publish environmental reports:

• Desire to develop or maintain a “green” reputation
• Pressure from customers to provide this type of information
• Shareholder requests for this type of information
• Management concern about the environment and sustainable activities
• Cost of reporting this information
• Ease with which the information is collected
• Employee concerns about environmental and sustainable activities
3. The answer to this question depends on the companies that students investigate.
Students often have difficulty distinguishing between “pleasing” presentations and
informative presentations. The answer to this question should include specific
reasons about information on one site being more understandable or easy to find than
on another site.
4. The reporting practices of companies are affected by the factors listed in Part A.2. In
general, firms that are concerned about the environment would also be interested in
reporting about their activities. However, managers may believe that there is some
benefit, such as improved customer relationships or stock price, from presenting such
information. In addition, some companies may engage in “greenwashing,” the
practice of spending significant resources on publicity about being environmentally
friendly without making substantive changes in environmental impact (see more
information in Chapter 17). Conversely, companies may be highly responsible
toward the environment without spending the time and resources to develop complete
environmental performance reporting.
5. The process of preparing and publishing an environmental report can help a company
reduce environmental costs by focusing management attention on environmental
costs and by highlighting areas in which improvements are needed. In addition,
companies using a common reporting framework such as GRI can more readily
benchmark their results against those of other companies.
B. Environmental accounting is an ethical issue because of potential conflicts among the

interests of managers, companies, shareholders, vendors, customers, competitors,
governments, society in general, and future generations. Managers, companies, and
shareholders are often interested in maximizing profits, which often conflicts with
management emphasis on environmental considerations or public disclosure of
environmental information. When companies report more environmental information,
they are more likely to be forced by governmental regulation or by public opinion to
reduce negative environmental effects. Competitors and other companies in the supply
chain (vendors and customers) are also affected by a company’s environmental reporting.

Information about environmental issues related to one company is likely to be

informative about environmental issues for other companies in an industry. Consumers
and public interest groups generally prefer more information about environmental issues
to improve their abilities to monitor companies and take actions against companies they
see as degrading the environmental. Governments are often caught in the middle. While
they want to protect public environmental interests, they also want to promote economic
growth.
For the three GRI core indicators provided in the mini-case:

• Reporting the percentage of materials used that are recycled input materials is
likely to encourage managers to use a greater proportion of recycled materials. In
turn, greater recycling can reduce the environmental and social costs associated
with waste disposal and generation of new raw materials.
• Reporting total direct and indirect greenhouse gas emissions is likely to encourage
managers to adopt more efficient operations and/or invest in projects to offset
greenhouse gas emissions.
• Reporting the percentage of products sold and their packaging materials that are
reclaimed by category is likely to encourage managers to reduce the volume of
packaging materials used and to launch efforts to encourage customer recycling of
package materials.
C. Company responsibilities for reporting environmental information are partly a function of

environmental regulation. In countries where greater disclosure is required, companies
have a clear legal responsibility to provide it. Company responsibilities for voluntary
disclosure are less clear. Because of the conflicts of interest mentioned in Part A above,
managers have no clear-cut responsibility. If viewed from the perspective of
shareholders, the company’s responsibility might be to minimize environmental
disclosure. Employees have a stake in the company’s financial well-being and might also
prefer less disclosure; however, employees and their families might be affected by
environmental problems such as air quality degradation or hazardous waste. In this case,
the company’s responsibility might be to provide greater disclosure. Companies
generally do not assume responsibility for competitors. However, greater disclosure by
one company in an industry might stimulate similar disclosures by competitors. The
responsibility to suppliers and customers includes mixed incentives. Less disclosure
might help all related companies achieve higher profits, but greater disclosure could lead
to improved environmental performance across the supply chain.
Company managers often view their responsibility toward government regulators and the
general public as meeting minimum legal requirements. However, this view of
responsibility assumes that companies have no social responsibility for environmental
matters. An alternative view is that companies are responsible for the stewardship of
resources they use today and for the resources available to future generations. Many
people would argue that company responsibilities lie somewhere in between these two
extremes—that managers have responsibilities to generate profits and also to find ways to
minimize adverse environmental effects. From this viewpoint, managers have a
responsibility to use environmental accounting to help them make better environmental
decisions.

Solution Manual for Cost Management Measuring Monitoring and Motivating Performance 2nd Edit
D. Many factors influence governmental emphasis on matters such as environmental

accounting. Governments in economically stable countries are likely to place a greater
emphasis on the environment and, in turn, on environmental reporting. Countries in
which citizens are more concerned about the environment will also place greater
emphasis on the environment and reporting. Governments are also influenced by the
actions of other governments and by the requirements of international organizations such
as the European Union. The values discussed in Part C are relevant to reaching
conclusions about whether governments should require companies to publish
environmental reports.
E. Products vary in their use of hazardous materials and the types of waste created. If a
single cost pool is used, costs from those products that require higher levels of resources
to clean up environmental hazards will be spread across other products that have few
environmental costs. In this way, the “clean” products will cross-subsidize the “dirty”
products. If all of the environment costs are allocated to the products generating the costs
through an ABC or other system, managers can make better decisions about product
contributions.
F. EN2 – percentage of materials used that are recycled input materials:

This GRI relies on weight or volume, so ABC may not be necessary to measure this
indicator.
EN16 – total direct and indirect greenhouse gas emissions by weight:

ABC is not needed for this GRI; companies would need to track all energy inputs and
outputs and use conversion methods to calculate greenhouse gas emissions. Emission
information would also need to be collected from suppliers of electricity, heat, or steam.
EN27 – percentage of products sold and their packaging materials that are reclaimed by
category:
ABC is not needed for this GRI; systems would need to be established for measuring
packaging materials and for tracking when and how packaging materials are reclaimed.
Some information may be obtained from external contractors.
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Q1 What is activity-based costing (ABC)?

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Eldenburg & Wolcott 2e Solutions September 2010

Eldenburg & Wolcott 2e Solutions September 2010

Eldenburg & Wolcott 2e Solutions September 2010

Eldenburg & Wolcott 2e Solutions September 2010

A. (1) Receptionist salary is an organization-sustaining cost because the receptionist serves

B. (1) or (4) Financial forecasting software is an organizational-sustaining cost if it is used

Eldenburg & Wolcott 2e Solutions September 2010

7.17 MicroBrew Northwest

A. Facility-level costs: Manufacturing facility $1,500,000

B. Product-sustaining costs: Product development $1,250,000

C. Batch-level costs: Production setup $700,000

7.18 ABC Cost Hierarchy

Eldenburg & Wolcott 2e Solutions September 2010

D. Customer-sustaining activities and costs relate to the different clients. Sometimes

7.19 Cost Pools and Cost Drivers

F Machining (As machine hours increase, costs such as maintaining machines

Eldenburg & Wolcott 2e Solutions September 2010

7.20 Kalder Products

A. Total engineering change cost (6$300) $1,800

Overhead cost rate $1,800/2,500 $0.72 per machine hour

Total allocated cost for AJ40 (1,000$0.72) $ 720

B. Total allocated cost for AJ40 (4$300) $1,200

C. Comparison of costs allocated under the two systems:

AJ40 AJ60 Total

Percent Overcharge (Undercharge) (40%) 80%

Eldenburg & Wolcott 2e Solutions September 2010

7.21 Applewood Electronics

Total estimated overhead $4,800,000

Estimated machine hours:

Estimated allocation rate per machine hour ($4,800,000/192,000) $25.00

2. Manufacturing cost per unit under ABC

Soldering ($942,000/1,570,000 solder joints) $0.60 per solder joint

Eldenburg & Wolcott 2e Solutions September 2010

2. Operating profit per unit under ABC:

Eldenburg & Wolcott 2e Solutions September 2010

7.22 Palmer Company

A. Manufacturing cost per unit:

Machine setup 2 setups  $50.00 $ 100

Cost per Unit $18,800/100 units $188

B. Full cost per unit

Total manufacturing cost per unit $188

C. Cost savings required:

Selling price = Full Cost + 10%  Full Cost

Full cost per unit $648.00

Eldenburg & Wolcott 2e Solutions September 2010

7.23 Tele-Call Center

B. Cost per new order = $0.25 per minute  10 minutes = $2.50

C. New order cost (2,000 orders  $2.50 per order) $5,000

D. Unused capacity = $9,600 – $6,875 = $2,725

Cost of unused capacity $2,725

7.24 Kestral Manufacturing

A. ABC allocation rates:

Activity Cost Activity level Allocation rate

Direct materials $24,000

Eldenburg & Wolcott 2e Solutions September 2010

Cost per unit = $34,000/100 units = $340

7.25 Elite Daycare

Eldenburg & Wolcott 2e Solutions September 2010

Job Order 410 Job Order 411

Job Order 410_ Job Order 411__