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Group 6 PPT Case
Group 6 PPT Case
SUBMITTED TO-
SUBMITTED BY-
DR.SUVEERA GILL
SAHIL MADAAN
SAGAR
CHIRAG MADAAN
AJAY
DEEPAK
JASHANDEEP SINGH
OUTLINE
Opening the case
Case overview
Concepts
Back to the case
Closing the case
References
CASE OVERVIEW
QuantumTM manufactures electronic testing and measurement
that are relatively simple to produce, and customers are saying that the
company is not price competitive. The company, is however receiving
more small orders for complex instruments.
Temperature
Monitor
Harmonic
Analyzer
$250
$2,500
25
500
120
2,500
395
5,500
Markup at 30%
119
1,650
514
7,150
Number of units
900
$462,600
$7,150
Value of order
Cost Pools
Annual Cost
Product design
$8000000
10000000
3500000
2500000
Labor-related overhead
Depreciation of plant and
equipment
8000000
18000000
$50,000,000
Annual Driver
Value
160,000 design
hours
125,000 unique
part's
560,000 inspections
80,000 setups
$ 10,000,000 direct
labor
225,000 machine
hours
The consultants have also found that the monitor and analyzer make
Number of design
hours
47
Number of unique
parts
17
Number of
inspections
225
Number of setups
1
Machine hours
112
Number of design
hours
110
Number of unique
parts
25
Number of
inspections
20
Number of setups
1
Machine hours
7
CONCEPTS
PRODUCT COSTING
Product costing is also known as traditional costing. This method
the activities that a firm performs and then assigns indirect costs to
products. An activity-based costing (ABC) system recognizes the
relationship between costs, activities and products, and through this
relationship, it assigns indirect costs to products less arbitrarily than
traditional methods.
costs. Many of the non-manufacturing costs are also part of the costs of
products since they can be easily traced to individual products.
A cost is assigned to a product or cost object only if that cost would be
products and other costing objects using its own specific measure of
activity.
BACK TO THE
CASE
Question 1
Based on the consultants work to date,
Solution
Firstly , calculate the activity rates :
COST POOLS
ANNUAL
COSTS (a)
ANNUAL
DRIVER
VALUE (b)
ACTIVITY RATE
(a/b)
Product design
$ 8,000,000
160,000 design
hrs
50 per hour
Material
ordering and
handling
$ 10,000,000
125,000 unique
parts
80 per part
Inspection
$ 3,500,000
560,000
inspections
6.25 per
inspection
Setup
$ 2,500,000
80,000 setups
Labor-related
overhead (OH)
$ 8,000,000
$10,000,000 DL
C
Depreciation of
plant and
equipment
$ 18,000,000
225,000 MH
80 per hour
temperature monitor
Cost pool
Activity rate
(x)
Activity
(y)
Overhead
Cost ( z=
x*y)
Overhead
per unit
(z/900)
Design
50 per hour
47 hours
2350
$2.61
Mat. Order
80 per part
17 parts
1360
$1.51
Inspection
6.25 per
inspection
225 insp.
1406.25
$1.56
Setup
31.25 per
setup
31.25
$0.03
Labour OH
0.8 per
labour cost
$25 labour
cost per
unit
n/a **
$20
112 MH
8960
$9.95
Depreciation 80 per MH
Total
$35.66 per
overhead
unit
per unit ** activity (labour OH) is already given in per unit terms
so, total labour related overheads need not be calculated
Harmonic analyser
Cost pool
Design
Activity
rate (x)
Activity
(y)
50 per
hour
110 hours
Overhead
Cost for
all units
( z= x*y)
Overhead
per unit
(z/1)
$5500
5500
Mat. Order
$2000
2000
Inspection
6.25 per
inspection
20 insp.
$125
125
Setup
31.25 per
setup
$31.25
31.25
Labour OH
0.8 per
labour
$500
labour
per unit
Depreciatio 80 per MH
n
7 MH
N/A**
$560
400
560
Temperature monitor
Component cost per unit
$ 250
$ 25
$ 35.66
$2500
$500
$ 8616.25
Question 2
calculate the ABC cost of the data-
logging device ?
Solution :
overhead cost calculations :
Data logging device (total units=1)
Cost pool
Activity
rate (x)
Activity
(y)
Overhead
Cost for
all units
( z= x*y)
Overhead
per unit
(z/1)
50 per hour
27 hours
$ 1350
$ 1350
Mat. Order
80 per part
17 parts
$ 1360
$1360
Inspection
6.25 per
inspection
12 insp.
$ 75
$ 75
Setup
31.25 per
setup
$ 31.25
$31.25
Labour OH
0.8 per
labour
$3000
labour per
unit
Depreciatio
n
80 per MH
10 MH
Design
N/A**
$2400
$ 800
$ 800
Total
overhead
$6016.25
per unit
$ 9000
$ 3000
$ 6016.25
Therefore
ABC cost of one data logging device =$
18016.25
Question 3
Suppose QuantumTM meets its competitors price and gets
the job. What will be the impact on company profit? In
answering This question, make the following assumptions:
1. 40% of design costs are fixed, and 60% vary with design hours.
2. 30% of material ordering and handling costs are fixed and 70%
vary with the number of unique parts.
3. 50% of inspection costs are fixed, and 50% are variable.
4. 80% of setup costs are fixed and 20% are variable.
5. 20% of labor related costs are fixed, and 80% are variable.
6. Prices charged to this customer or other customers in the future
will not be impacted by the current deal. This follows because
each order is somewhat unique.
SOLUTION :
Firstly , total variable overhead cost of unit are
calculated (depreciation is ignored)
Total
Overhe
ad per
unit
(z/1)
Variable Variable
overhea
overhea d per
d (p)
unit
$ 1350
$ 1350
60%
0.6*1350
=$810
$ 1360
$1360
70%
0.7*1360
= $952
$ 75
$ 75
50%
0.5*75=
$37.5
Setup
31.25
per
setup
$ 31.25
$31.25
20%
0.2*31.2
5=
$ 6.25
Labour
OH
0.8 per
labour
$3000
labour
per unit
$2400
80%
0.8*2400
=
$1920
Design
Mat.
Order
Activity
rate (x)
Activity
(y)
50 per
hour
27 hours
80 per
part
17 parts
Overhe
ad
Cost
for all
units
( z=
x*y)
N/A**
$ 9000
$ 3000
$ 3725.75
= $ 6274.25
REFERENCES
Vaidya S.C. , Gill S. Cost Management : a