Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 5

Activity-Based Costing, Value-Chain Analysis Hoover Company uses activity-based costing and provides this information:

Manufacturing Activity	Cost Driver	Overhead Rate
Materials handling	Number of parts	$ 0.45
Machinery	Number of machine-hours	51.00
Assembly	Number of parts	2.85
Inspection	Number of finished units	30.00

Hoover has just completed 80 units of a component for a customer. Each unit required 105 parts and 3 machine-hours. The prime cost is $1,200 per finished unit. All other manufacturing costs are classified as manufacturing overhead.

Required

1. Compute the total manufacturing costs and the unit costs of the 80 units just completed using ABC costing.

2. In addition to the manufacturing costs, the firm has determined that the total cost of upstream activities including research and development and product design is $180 per unit. The total cost of downstream activities, such as distribution, marketing, and customer service is $250 per unit. Compute the full product cost per unit, including upstream, manufacturing, and downstream activities. What are the strategic implications of this new cost result?

3. Explain to Hoover Company the usefulness of calculating the total value-chain cost and of knowing costs of different value-creating activities.

Step 1 of 4

Activity based costing method which is commonly known as ABC method, is a costing method where indirect cost is assigned to product on the basis of activities identified, used in producing the product.