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first q. ch4, q.2 from ch6\7 ,  q.3 from ch7

College of Administrative and Financial Sciences

Assignment 2

Deadline: 21/03/2020 @ 23:59

Course Name: Cost accounting

Student’s Name:

Course Code: ACCT 301

Student’s ID Number:

Semester: 2

CRN:

Academic Year: 1440/1441 H

For Instructor’s Use only

Instructor’s Name:

Students’ Grade: Marks Obtained/Out of

Level of Marks: High/Middle/Low

Instructions – PLEASE

READ THEM CAREFULLY
· The Assignment must be submitted on Blackboard (WORD format only) via allocated folder.
· Assignments submitted through email will not be accepted.
· Students are advised to make their work clear and well presented, marks may be reduced for poor presentation. This includes filling your information on the cover page.
· Students must mention question number clearly in their answer.
· Late submission will NOT be accepted.
· Avoid plagiarism, the work should be in your own words, copying from students or other resources without proper referencing will result in ZERO marks. No exceptions.
· All answered must be typed using Times New Roman (size 12, double-spaced) font. No pictures containing text will be accepted and will be considered plagiarism).
· Submissions without this cover page will NOT be accepted.

Q 1 Give a numerical example of non routine decision, Determine the relevant costs for this non routine decision and discuss the analysis (quantitative and qualitative) required to make the decision?
(1.5 Marks)
…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………
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Q 2 Which types of companies would most likely use a process costing system? Provide examples of two Saudi Compagnies.
Explain the methods with which the cost per unit will be calculated for this type of companies. Explain how the different items of inventory will be evaluated?
(1.5 Marks)
…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………
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Q 3 KLM Compagny has two departments, Assembly and Testing. You are given the following information about the costs of 5 activities that occur at the manufacturing plant monthly:

Activity Total Costs Total number of units of Cost Driver
Material handling SAR200, 000 400,000 parts
Supervision of direct labor 126,000 90 employees
Janitorial and cleaning 200,000 4,000 hours
Machining 300,000 7,000 machine hours
Total costs SAR826,000

The above activities are used by the two departments as follows:
Assembly Testing
Material handling 200,000 parts 200,000 parts
Supervision of direct labor 40 employees 50 employees
Time spent cleaning 2,000 hours 2,000 hours
Number of machine hours 5,000 machine hours 2,000 machine hours
a. How much of the material handling cost will be allocated to Assembly?
b. What is the ABC allocation rate for supervision of direct labor?
( 2 Marks)

…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………
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Page 3 of 4

Page
1

of
2

College of Administrative and Financial Sciences

Assignment 2

Dead
line: 21/03
/2020

@ 23:59

Course Name: Cost accounting

Student’s Name:

Course Code: ACCT 301

Student’s ID Number:

Semester: 2

CRN:

Academic Year:
1440/1441 H

For Instructor’s Use only

Instructor’s Name:

Students’ Grade: Marks Obtained/Out of

Level of Marks: High/Middle/Low

Instructions

PLEASE

READ THEM CAREFULLY

·

The Assignment must be submitted on Blackboard (
WORD format only
) via
allocated
folder.

·

Assignments submitted through email will not be accepted.

·

Students are advised to make their work clear and well presented, marks may be reduced for
poor presentation. This includes filling your information on the cover page.

·

Students mus
t mention question number clearly in their answer.

·

Late submission

will NOT be accepted.

·

Avoid plagiarism, the work should be in your own words, copying from students or other
resources without proper referencing will result in ZERO marks. No exceptions.

·

All answered must be typed using
Times New Roman (size 12, double

spaced)
font. No
pictures containing text will be accepted and will be considered plagiarism).

·

Submissions
without this cover page

will NOT be accepted.

Page 1 of 2

College of Administrative and Financial Sciences

Assignment 2
Deadline: 21/03/2020 @ 23:59

Course Name: Cost accounting Student’s Name:
Course Code: ACCT 301 Student’s ID Number:
Semester: 2 CRN:
Academic Year: 1440/1441 H

For Instructor’s Use only
Instructor’s Name:
Students’ Grade: Marks Obtained/Out of Level of Marks: High/Middle/Low

Instructions – PLEASE

READ THEM CAREFULLY
 The Assignment must be submitted on Blackboard (WORD format only) via allocated
folder.
 Assignments submitted through email will not be accepted.
 Students are advised to make their work clear and well presented, marks may be reduced for
poor presentation. This includes filling your information on the cover page.
 Students must mention question number clearly in their answer.
 Late submission will NOT be accepted.
 Avoid plagiarism, the work should be in your own words, copying from students or other
resources without proper referencing will result in ZERO marks. No exceptions.
 All answered must be typed using Times New Roman (size 12, double-spaced) font. No
pictures containing text will be accepted and will be considered plagiarism).
 Submissions without this cover page will NOT be accepted.

© John Wiley & Sons, 2011

Chapter 6

:

Process Costing

Eldenburg & Wolcott’s

Cost Management

, 2e

Slide # 1

Cost Management

Measuring, Monitoring, and Motivating Performance

Chapter 6
Process Costing

‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 2
Chapter 6: Process Costing
Learning objectives
Q1: How are costs assigned to mass-produced products?
Q2: What are equivalent units & how do they relate to the production process?
Q3: How is the weighted average method used in process costing?
Q4: How is the FIFO method used in process costing?
Q5: What alternative methods are used for mass production?
Q7: How are spoilage costs handled in process costing?
Q8: How does process costing information affect managers’ incentives and decisions?
Q6: How is process costing performed for multiple production departments?

No animation
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 3
Q1: Job Order versus Process Costing

The t-accounts for job costing are animated.
One click is required for each of the two arrows in the job costing section.
The t-accounts for process costing are automated.
One click is required for each of the four arrows in the process costing section.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 4
Q1: Job Order versus Process Costing

The t-accounts for job costing are animated.
One click is required for each of the two arrows in the job costing section.
The t-accounts for process costing are automated.
One click is required for each of the four arrows in the process costing section.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 5

WIP Inventory – Units
BI
Units started
EI
Units completed
& transferred out

WIP Inventory – $
BI
DM
CC
EI
Units completed
& transferred out
Q1: Introduction to Process Costing
Process costing is a method of averaging costs over the units of production. This is necessary to determine the cost of the units transferred out of a department, as well as the cost of the department’s ending WIP inventory.
This information is all known

Unlike job costing, there are no job cost records to give us this information

This slide is automated, except for the red and blue text.
The first click brings in the red text and the second click brings in the blue text.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 6
Riker Co. had June costs for Department 1 as follows:
DM $60,000
CC 30,000
$90,000
There were no units in beginning or ending WIP inventory in June. During June Department 1 started 45,000 units, and all 45,000 were completed in June. What is the manufacturing cost/unit?
Q1: Process Costing with all Units Completed

WIP Inventory – Units
0
45,000
0

45,000

WIP Inventory – $
0
90,000
0

90,000
The manufacturing cost/unit is $90,000/45,000 units = $2/unit.

Everything on this slide is automated except the text box computing the manufacturing cost/unit.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 7
Suppose that 30,000 units were completed in June, and the units in ending WIP were 1/3 complete. What is the manufacturing cost/unit?

The 15,000 units taken to 1/3 completion are counted as 5,000 equivalent whole units, or 5,000 equivalent units of production (EUP).
Q2: The Concept of Equivalent Units
In order to value partially complete units of inventory, we measure units in equivalent whole units rather than actual units.
The manufacturing cost/unit =
$90,000/[30,000 + 5,000]EUP = $2.57143/EUP.

WIP Inventory – Units
0
45,000
15,000

30,000

WIP Inventory – $
0
90,000

The top text box, the given information in the blue outlined text box and the t-accounts are automated.
The first click brings in the text box about EUP
The second click brings in the computation of the cost/EUP.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 8
Using the cost/EUP of $2.57143 from the prior slide, compute the costs attached to the 30,000 completed units and the costs attached to the 15,000 units in ending WIP inventory.
Q2: The Concept of Equivalent Units
30,000 units x $2.57143
77,143

12,857
5,000 EUP x $2.57143

WIP Inventory – Units
0
45,000

30,000

WIP Inventory – $
0
90,000

15,000

The top text box, the given information in the blue outlined text box and the t-accounts are automated.
The first click brings in the red text and arrows.
The second click brings in the blue text and arrows.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 9
The prior slide simplified the computation of EUP.
Q2-Q4: Equivalent Units &
Process Costing Methods
15,000 units taken to 1/3 completion is equivalent to 5,000 whole units only if costs are incurred evenly.
We will return to this later.
The prior slide ignored the different methods of computing EUP.
The weighted average and FIFO methods compute EUP differently.

The first primary bullet and its 2 secondary bullets are automated.
The first click brings in the second primary bullet and its secondary bullet.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 10
Q2-Q4: Three Categories of Units
In process costing we categorize units according to the time period(s) they were produced.

Prior months
Current month
Next month
BI units: The units in beginning Work in process inventory were worked on in prior months and (we assume) they will be completed in the current month.
EI units: The units in ending Work in process inventory are started (we assume) in the current month and (we assume) they will be completed in the current month.

The top portion of the slide is automated.
The text about BI units, is also automated, but it disappears on the next mouse click.
The first click brings in the text about EI units.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 11
Q2-Q4: Three Categories of Units
In process costing we categorize units according to the time period(s) they were produced.

Prior months
Current month
Next month
S&C units: Any units that are started in the current month and are totally complete by month end are called started & completed units.

This slide is totally automated.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 12
Q2-Q4: Summarizing the
Physical Flow of Production
The number of S&C units can be computed as the number of units transferred out less the number of BI units.
For example, suppose a department had 5,000 units in beginning WIP and started 50,000 units this month. If 35,000 units were completed, what is the number of S&C units?

WIP Inventory – Units
5,000
50,000

35,000
20,000
BI units 5,000
S&C units 30,000
Completed units 35,000

The top portion of this slide is automated.
The first click brings in the computation for S&C units.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 13
Q2-Q4: Two Process Costing Methods
The weighted average and FIFO methods of process costing methods compute EUP differently.

Prior months
Current month
Next month
The weighted average (WA) method gives credit for work performed in the current & prior months.
This means that under the WA method, the EUP for BI units and S&C units is the same as the physical number of units in each category.

This slide is automated except for the text box on the bottom right corner, which requires one click.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 14
Q2-Q4: Two Process Costing Methods
The weighted average and FIFO methods of process costing methods compute EUP differently.

Prior months
Current month
Next month
The weighted average (WA) method gives credit for work performed in the current & prior months.
The EUP for EI units and is based on the stage of completion of the EI units – only the portion of the work done in the current month is included.

This slide is not animated – no clicks are required.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 15
Q2-Q4: Two Process Costing Methods
The weighted average and FIFO methods of process costing methods compute EUP differently.

Prior months
Current month
Next month
The FIFO method gives credit only for work performed in the current month.
This means that the EUP for BI units is based on the completion of these units during the current month.

This slide is entirely automated.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 16
Q2-Q4: Two Process Costing Methods
The weighted average and FIFO methods of process costing methods compute EUP differently.

Prior months
Current month
Next month
The FIFO method gives credit only for work performed in the current month.
The EUP for EI units and is based on the stage of completion of the EI units – only the portion of the work done in the current month is included.

This slide is not animated – no clicks are required.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 17
Q2-Q4: Equivalent Units of Production Example
In July, Rita Corp. had 30,000 units in beginning WIP that were 60% complete and 20,000 units in ending WIP that were 80% complete. There were 100,000 units completed and transferred to FG inventory. Compute EUP for July using both the weighted average and FIFO methods.
WIP Inventory – Units
30,000

100,000
20,000
BI units 30,000
S&C units 70,000
Completed units 100,000

90,000
First, summarize the physical flow of the units and compute S&C.

The given info is automated.
The first click brings in the “First summarize…” text.
The second click brings in the t-account.
The third click brings in the computation of S&C units.
‹#›

© John Wiley & Sons, 2011
Slide # 18
Q2-Q4: Equivalent Units of Production Example
In July, Rita Corp. had 30,000 units in beginning WIP that were 60% complete and 20,000 units in ending WIP that were 80% complete. There were 100,000 units completed and transferred to FG inventory. Compute EUP for July using both the weighted average and FIFO methods.
BI units 30,000
S&C units 70,000
Completed units 100,000

WIP Inventory – Units
30,000

100,000
20,000
90,000
Then, convert the physical units to EUP.

Most of this slide is automated.
The first click brings in the numbers in the physical units row and blue arrows that disappear on the next click.
The 2nd click brings in the 18,000 EUP for BI – its yellow supporting computation disappears on the next click.
The 3rd click brings in the 12,000 EUP for BI – its yellow supporting computation disappears on the next click.
The 4th click brings in the 70,000 for S&C.
The 5th click brings in the 16,000 EUP for EI – its yellow supporting computation disappears on the next click.
The 6th click brings in the 116,000 for WA EUP.
The 7th click brings in the 98,000 for FIFO EUP.

‹#›

© John Wiley & Sons, 2011
Slide # 19
Q2-Q4: Equivalent Units of Production Example
In July, Rita Corp. had 30,000 units in beginning WIP that were 60% complete and 20,000 units in ending WIP that were 80% complete. There were 100,000 units completed and transferred to FG inventory. Compute EUP for July using both the weighted average and FIFO methods.
BI units 30,000
S&C units 70,000
Completed units 100,000

WIP Inventory – Units
30,000

100,000
20,000
90,000
Then, convert the physical units to EUP.

(1-60%)

Most of this slide is automated.
The first click brings in the numbers in the physical units row and blue arrows that disappear on the next click.
The 2nd click brings in the 18,000 EUP for BI – its yellow supporting computation disappears on the next click.
The 3rd click brings in the 12,000 EUP for BI – its yellow supporting computation disappears on the next click.
The 4th click brings in the 70,000 for S&C.
The 5th click brings in the 16,000 EUP for EI – its yellow supporting computation disappears on the next click.
The 6th click brings in the 116,000 for WA EUP.
The 7th click brings in the 98,000 for FIFO EUP.

‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 20
The prior slides simplified the computation of EUP
Q2-Q4: Equivalent Units &
Process Costing Methods
20,000 units started and taken to 80% completion is equivalent to 16,000 whole units only if costs are incurred evenly.
We usually assume that conversion costs are incurred evenly throughout production, but direct materials costs may not be incurred evenly.
Direct materials costs may be incurred at the beginning of processing or in some other uneven manner.
Because costs are incurred at different times, separate EUP computations are done for DM & CC.

This slide is entirely automated.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 21
Q2-Q4: Separate EUP for DM & CC
You are given the information below about the physical flow of the units in Department 1. The BI units were 25% complete and the EI units were 40% complete. Compute EUP for DM and CC if DM costs are incurred at the beginning of production.
WIP Inventory – Units
5,000
20,000

17,000
8,000
BI units 5,000
S&C units 12,000
Completed units 17,000

(1-25%)

Most of this slide is automated, including the physical unit row and the CC row.
The first click brings in 5,000 EUP for DM BI – its yellow supporting comment disappears on the next click.
The 2nd click brings in the 0 EUP for DM BI – its yellow supporting comment disappears on the next click.
The 3rd click brings in the 12,000 for DM S&C and the 8,000 EUP for DM EI – its yellow supporting comment disappears on the next click.
The 4th click brings in the 25,000 for DM WA EUP.
The 5th click brings in the 20,000 for DM FIFO EUP.

‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 22
Q2-Q4: Separate EUP for DM & CC
Use the same information from the prior slide; recall that the BI units were 25% complete and the EI units were 40% complete. Compute EUP for DM and CC if 20% of DM costs are incurred at the beginning of processing and the rest of the DM costs are incurred when the units pass the 60% stage of completion.
(1-20%)
No Change

Most of this slide is automated, including the physical unit row and the CC row.
The first click brings in 5,000 EUP for DM BI – its yellow supporting comment disappears on the next click.
The 2nd click brings in the 0 EUP for DM BI – its yellow supporting comment disappears on the next click.
The 3rd click brings in the 12,000 for DM S&C and the 8,000 EUP for DM EI – its yellow supporting comment disappears on the next click.
The 4th click brings in the 25,000 for DM WA EUP.
The 5th click brings in the 20,000 for DM FIFO EUP.

‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 23
The EUP calculations provide the denominator in the cost per EUP computation.
Q2-Q4: Cost per Equivalent Unit
The numerator for the WA cost per EUP includes total costs (current costs plus the BI costs).
The numerator for the FIFO cost per EUP includes only current costs.
A cost per EUP is computed for each cost category.
The WA and FIFO methods use different numerators in the cost per EUP computation.

This slide is entirely automated.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 24
You are given the information below about May’s production and costs for Slocik Co. The units in ending WIP were 1/3 complete. Direct materials are added at the beginning of processing. What is the manufacturing cost per EUP under both methods?

0
45,000
WIP Inventory – Units

30,000
15,000
0
DM 65,250
CC 28,000
WIP Inventory – $

Q3&4: Process Costing Example, no BI
First, compute the EUP for DM & CC.

This slide is entirely automated – no clicks are required.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 25
0
45,000
WIP Inventory – Units

30,000
15,000
0
DM 65,250
CC 28,000
WIP Inventory – $

Q3&4: Process Costing Example, no BI
When there is no BI, WA and FIFO have the same EUP, and hence the same costs/EUP.

The given info and the solution template are automated.
The first click brings in physical units row.
The second click brings in the DM EUP row.
The third click brings in the CC EUP row.
The fourth click brings in the comment about WA and FIFO having the same EUP.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 26
0
45,000
WIP Inventory – Units

30,000
15,000
0
DM 65,250
CC 28,000
WIP Inventory – $

Q3&4: Process Costing Example, no BI
Now, compute the costs/EUP for DM & CC.
DM cost/EUP = $65,250/45,000 EUP = $1.45/EUP
CC/EUP = $28,000/35,000 EUP = 0.80/EUP
Total manufacturing cost/EUP $2.25/EUP

This slide is mostly automated.
One click brings in the cost/EUP calculations.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 27
0
45,000
WIP Inventory – Units

30,000
15,000
0
DM 65,250
CC 28,000
WIP Inventory – $

Q3&4: Process Costing Example, no BI
The last step is a process cost report that breaks the “total costs to account for” into:
total units to account for = 45,000

total costs to account for = $93,250
$ assigned to completed units
$ assigned to EI units
the portion that is assigned to the units in ending WIP inventory
the portion that is assigned to the completed units, and

This slide is mostly automated.
The first click brings in the green text about $ assigned to completed units.
The second click brings in the burgundy text about $ assigned to EI units.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 28
Q3&4: Process Costing Example, no BI
0
0
30,000 x $2.25
67,500
30,000
67,500
30,000
45,000
93,250
15,000
21,750
4,000
25,750
15,000 x $1.45
5,000 x $0.80
The journal entry to record the costs transferred out is:
FG inventory 67,500
WIP inventory 67,500

The first click brings in the BI row.
The second click brings in the S&C row and the total costs tr’d out row.
The third click brings in all 4 rows for the EI computations, and the total accounted for row.
The fourth click brings in the journal entry text box.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 29
Colors R Us, Inc. uses a process costing system for its sole processing department. There were 6,200 units in beginning WIP inventory for February and 57,500 units were started in February. The beginning WIP units were 60% complete and the 5,000 units in ending WIP were 45% complete. All materials are added at the start of processing. Compute the EUP for DM and CC using both methods.
58,700
Q3&4: Process Costing Example, with BI
First, compute the # of units started & completed:
6,200
WIP Inventory – Units

5,000
57,500
BI units 6,200
S&C units 52,500
Completed units 58,700

The the given information in the blue outlined text box is automated.
The first click brings in the “first compute…” text and the t-account.
The second click brings in 58,700 completed units.
The third click brings in the computation for S&C units.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 30
Q3&4: Process Costing Example, with BI
58,700
6,200
WIP Inventory – Units

5,000
57,500
BI units 6,200
S&C units 52,500
Completed units 58,700

Now, compute the EUP for DM & CC (recall that BI & EI were 60% & 45% complete, respectively, and all DM are added at the start of processing).

The top portion of the slide is automated.
The first click brings in the “now compute…” text and the EUP template.
The second click brings in the physical units row.
The third click brings in the DM EUP row.
The fourth click brings in the CC EUP row.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 31
Beginning WIP inventory was valued at $42,896 [DM costs of $12,850 plus CC of $30,046]. During February Colors incurred DM costs of $178,250, and CC of $274,704. Compute the cost of the goods transferred out the the costs assigned to ending WIP inventory for February, using both methods.
BI 42,896
DM 178,250
CC 274,704
WIP Inventory – $

Q3&4: Process Costing Example, with BI
Under FIFO, the numerator includes only current costs:
The EUP from the prior slide:
DM cost/EUP = $178,250/57,500 EUP = $3.10/EUP
CC/EUP = $274,704/57,230 EUP = 4.80/EUP
Total manufacturing cost/EUP $7.90/EUP

The slide is totally automated, except the computation for cost/EUP, which requires one click.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management,2e
Slide # 32
Beginning WIP inventory was valued at $42,896 [DM costs of $12,850 plus CC of $30,046]. During February Colors incurred DM costs of $178,250, and CC of $274,704. Compute the cost of the goods transferred out the the costs assigned to ending WIP inventory for February, using both methods.
BI 42,896
DM 178,250
CC 274,704
WIP Inventory – $

Q3&4: Process Costing Example, with BI
Under WA, the numerator includes BI and current costs:
The EUP from the prior slide:
DM cost/EUP = $191,100/63,700 EUP = $3.00/EUP
CC/EUP = $307,750/60,950 EUP = 5.00/EUP
Total manufacturing cost/EUP $8.00/EUP

The slide is totally automated, except the computation for cost/EUP.
The first click brings in the DM cost/EUP computation, and the red arrows (which disappear on the next click).
The second click brings in the CC/EUP computation, and the blue arrows (which disappear on the next click).
The third click brings in the total cost/EUP.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 33
6,200
57,500
WIP Inventory – Units

58,700
5,000
42,896
DM 178,250
CC 274,704
WIP Inventory – $

Q3&4: Process Costing Example, with BI
The last step is a process cost report that breaks the “total costs to account for” into:
total units to account for = 63,700

total costs to account for = $495,850
$ assigned to completed units
$ assigned to EI units
the portion that is assigned to the units in ending WIP inventory
the portion that is assigned to the completed units, and

This slide has no animation – no clicks are required.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 34
Q3&4: WA Process Costing Example, with BI
Under the WA method, there is no distinction between the 6,200 BI units and the 52,500 S&C units.

The first click brings in the costs tr’d out row, the top text box & the arrow.
The second click brings in all 4 rows for the EI computations, and the total accounted for row.
‹#›

Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 35
Q3&4: FIFO Process Costing Example, with BI
Under the FIFO method, the cost assigned to the 6,200 BI units is computed separately from the cost of the 52,500 S&C units.
= 2,480 * $4.80
= 52,500 * $7.90
= 5,000 * $3.10
= 2,250 * $4.80

The “under FIFO” text and the red arrow is automated.
The first click brings in the computations for BI.
The second click brings in the computations for S&C and total costs tr’d out.
The third click completed the FIFO calculations.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 36
Q6: Accounting for Transferred-in Costs
“Transferred-in costs” (TI) is merely another cost category like DM or CC
When preparing a process cost report for a department with TI costs:
All processing departments except the first will account for TI costs
Compute EUP for TI costs; all TI costs are incurred at the start of processing
Compute cost/EUP for TI costs
Assign TI costs to EI units

The first bullet is automated.
The first click brings in the second primary bullet.
The second click brings in the third primary bullet and its sub-bullets.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 37
Crusher Drugs manufactures a pain medication in a two-process cycle. In Department 2, direct materials are added as follows: 20% are added at the beginning of processing, and the rest at the 60% stage. There were 5,000 units in Dep’t 2’s beginning WIP inventory that were 40% complete, and 20,000 units were transferred in to Dep’t 2 in May. The Dep’t 2 ending WIP inventory of 6,000 units was 55% complete. Compute the May EUP for all cost categories for Department 2 using both methods.
Q6: Process Costing Example, with TI Costs
First, compute the # of units started & completed:
5,000
Dep’t 2 WIP Inventory – Units

6,000
20,000
BI units 5,000
S&C units 14,000
Completed units 19,000

19,000

The given info is automated, and the “First, compute…” text is on a 3 second delay.
The first mouse click brings in the t-account.
The second mouse click brings in the 19,000.
The 3rd click brings in the computation of S&C.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 38
Q6: Process Costing Example, with TI Costs
19,000
5,000
Dep’t 2WIP Inventory – Units

6,000
20,000
BI units 5,000
S&C units 14,000
Completed units 19,000

Now, compute the EUP for DM & CC (recall that BI & EI were 40% & 55% complete, respectively; 20% of DM costs are incurred at the start of processing, and the rest are incurred at the 60% stage).

The top portion of the slide is automated.
The first click brings in the physical units row.
The 2nd click brings in the DM EUP row.
The 3rd click brings in the CC EUP row.
The 4th click brings in the TI EUP row.
No supporting computations are shown on this slide, but students will ask, especially about the DM row!
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 39
You are given the cost information below. Compute the cost per EUP under both methods.
Under WA, the numerator includes BI and current costs:
Q6: Process Costing Example, with TI Costs
DM cost/EUP = $79,537.50/20,200 EUP = $3.9375/EUP
CC/EUP = $35,122.50/22,300 EUP = 1.5750/EUP
Total manufacturing cost/EUP $10.7625/EUP

TI cost/EUP = $131,250/25,000 EUP = 5.2500/EUP

The slide is totally automated, except the computation for cost/EUP, which all comes in on the first click.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 40
You are given the cost information below. Compute the cost per EUP under both methods.
Under FIFO, the numerator includes only current costs:
Q6: Process Costing Example, with TI Costs
DM cost/EUP = $72,240/19,200 EUP = $3.7625/EUP
CC/EUP = $31,262/20,300 EUP = 1.5400/EUP
Total manufacturing cost/EUP $10.9025/EUP

TI cost/EUP = $112,000/20,000 EUP = 5.6000/EUP
Next, complete the process cost report using both methods….

The slide is totally automated, except the computation for cost/EUP, which all comes in on the first click.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 41
Q6: Process Costing Example, with TI Costs
Given $
4,000 *
3,000 *
14,000 *
* 19,000
1,200 * $3.7625 =
3,300 * $1.5400 =
6,000 * $5.6000 =
1,200 * $3.9375 =
3,300 * $1.5750 =
6,000 * $5.2500 =

The first click brings in the WA total costs tr’d out row.
The 2nd click brings in all 4 rows for the WA EI computations, and the WA total accounted for row.
The 3rd click brings in the FIFO BI cost row.
The 4th click brings in the FIFO cost to complete BI rows.
The 5th click brings in the FIFO S&C and the total costs tr’d out rows.
The 6th click completes the FIFO computations.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 42
Q5: What Alternative Methods are Used for Mass Production?
Adaptations to Traditional Process Costing
Match equivalent units calculations more closely to actual production processes
Separate conversion costs into multiple pools
Standard costs simplify the accounting
Just-in-time production
Hybrid costing, or operation costing

This slide has no animation – no clicks required.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 43
Q7: Accounting for Spoilage in Process Costing
Costs of normal spoilage are absorbed by the good units transferred out.
Costs of abnormal spoilage are charged to a Loss from abnormal spoilage account.
Costs attach to spoilage depending on when spoilage is detected.

This slide has no animation – no clicks required.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 44
Hollidaze makes molded plastic party decorations. In June, there were 800 units in beginning WIP inventory that were 40% complete and the 500 units in ending WIP were 30% complete. The company completed 3,000 units in June, but 200 of these were defective and were discarded. The defective units are located upon inspection before transfer to finished goods. It was determined that 50 of these defective units should be considered normal spoilage. The remaining spoilage occurred because of a rare machine malfunction and should be considered abnormal spoilage. All direct materials are added at the beginning of processing.
Compute the June EUP for DM and CC using both methods.
Q7: Process Costing & Spoilage Example
First, compute the # of units started & completed:
2,700
BI units 800
S&C units 2,200
Completed units 3,000

800
WIP Inventory – Units

500
3,000
this includes 200 defective units

The given info is automated, and the “First, compute…” text is on a 3 second delay.
The first mouse click brings in the rest of the elements on the slide.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 45
Q7: Process Costing & Spoilage Example
Now, compute the EUP for DM & CC (recall that BI & EI were 40% & 30% complete, respectively; DM costs are incurred at the start of processing).
BI units 800
S&C units 2,200
Completed units 3,000

2,700
800
WIP Inventory – Units

500
3,000

The top portion of the slide is automated.
The first click brings in the blue text.
The 2nd click brings in the physical units row.
The 3rd click brings in the DM EUP row.
The 4th click brings in the CC EUP row & the red text & arrow.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 46
You are given the cost information below. Compute the cost per EUP under both methods.
Under WA, the numerator includes BI and current costs:
Q7: Process Costing & Spoilage Example
DM cost/EUP = $11,375/3,500 EUP = $3.25/EUP
CC/EUP = $7,245/3,150 EUP = 2.30/EUP
Total manufacturing cost/EUP $5.55/EUP

The slide is totally automated, except the computation for cost/EUP, which all comes in on the first click.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 47
You are given the cost information below. Compute the cost per EUP under both methods.
Q7: Process Costing & Spoilage Example
DM cost/EUP = $8,640/2,700 EUP = $3.20/EUP
CC/EUP = $5,943/2,830 EUP = 2.10/EUP
Total manufacturing cost/EUP $5.30/EUP

Under FIFO, the numerator includes only current costs:
Next, complete the process cost report using both methods….

The slide is totally automated, except the computation for cost/EUP, which all comes in on the first click.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Q7: WA Process Costing & Spoilage Example
The WA journal entry to record the costs transferred out is:
FG inventory 15,81.50
Loss from abnormal spoilage 832.50
WIP inventory 16,650.00
Note the total good units accounted for is the total units to account for less the spoiled units.

The first click brings in the WA normal spoilage row.
The 2nd click brings in the WA good units S&C row and the blue subtotal. all 4 rows for the WA EI computations, and the WA total accounted for row.
The 3rd click brings in the WA abnormal spoilage row.
The 4th click brings in all 4 rows for the WA EI computations, the WA total accounted for row, and the blue outlined text box about good units accounted for (which disappears on the next mouse click).
The 5th click brings in the journal entry.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 49
Q7: FIFO Process Costing & Spoilage Example
The FIFO journal entry to record the costs transferred out is:
FG inventory 15,910
Loss from abnormal
spoilage 795
WIP inventory 16,705

The first click brings in all of the FIFO BI rows.
The 2nd click brings in the FIFO normal spoilage rows.
The 3rd click brings in the FIFO good S&C row and the blue subtotal for total costs tr’d out.
The 4th click brings in the FIFO abnormal spoilage row.
The 5th click completes the FIFO computations.
The 6th click displays the journal entry under FIFO.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management 2e
Slide # 50
Q8: Process Costing Uses for Decision Making
Used to determine valuation for inventory and cost of goods sold at the end of each period
Required for financial statements and income tax returns
Helps managers evaluate if the production processes are operating as expected
Compare actual results to budget, standards, or prior periods
Identify areas for process improvements
Analyze benefits of quality improvements

This slide is not animated – no clicks are required.
‹#›

© John Wiley & Sons, 2011
Chapter 6: Process Costing
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 51
Q8: Process Costing Limitations & Impacts on Managers’ Decision Making
Process cost information is generally not useful for many short-term decisions because unavoidable fixed costs are allocated to the products.
Need to determine incremental or marginal costs
Separating conversion costs into fixed and variable pools would help
Requires use of estimates:
The point of the production process when DM costs or CC are incurred.
Stage of completion for all units in beginning and ending WIP inventories

This slide is not animated – no clicks are required.
‹#›
PhysicalEquivalent Equivalent
Units SummaryUnitsUnits (WA)Units (FIFO)
Beginning WIP30,000 18,000 60%
This Period’s Work
Complete Beg WIP30,000 12,000 40%12,000 40%
Start & Complete70,000 70,000 100%70,000 100%
Ending WIP20,000 16,000 80%16,000 80%
Total Work120,000 116,000 98,000
slide 17

Beginning Current Total
Cost Summary WIP Cost Cost
Direct Materials 3,050 33,600 36,650
Conversion Costs 2,840 74,925 77,765
Total $ 5,890 $ 108,525 $ 114,415

Physical Equivalent Equivalent
Units Summary Units Units (WA) Units (FIFO)
Beginning WIP 30,000 18,000 60%

This Period’s Work
Complete Beg WIP 30,000 12,000 40% 12,000 40%
Start & Complete 70,000 70,000 100% 70,000 100%
Ending WIP 20,000 16,000 80% 16,000 80%
Total Work 120,000 116,000 98,000

slide 17

Beginning Current Total
Cost Summary WIP Cost Cost
Direct Materials 3,050 33,600 36,650
Conversion Costs 2,840 74,925 77,765
Total $ 5,890 $ 108,525 $ 114,415

Physical Equivalent Equivalent
Units Summary Units Units (WA) Units (FIFO)
Beginning WIP 30,000 18,000 60%

This Period’s Work
Complete Beg WIP 30,000 12,000 40% 12,000 40%
Start & Complete 70,000 70,000 100% 70,000 100%
Ending WIP 20,000 16,000 80% 16,000 80%
Total Work 120,000 116,000 98,000

PhysicalEquivalent Equivalent
Units SummaryUnitsUnits (DM)Units (CC)
Beginning WIP5,000 5,000 100%1,250 25%
This Period’s Work
Complete Beg WIP5,000 – 0%3,750 75%
Start & Complete12,000 12,000 100%12,000 100%
Ending WIP8,000 8,000 100%3,200 40%
FIFO Equivalent Units20,000 18,950
WA Equivalent Units (with Beg WIP)25,000 20,200
slide 17

Beginning Current Total
Cost Summary WIP Cost Cost
Direct Materials 3,050 33,600 36,650
Conversion Costs 2,840 74,925 77,765
Total $ 5,890 $ 108,525 $ 114,415

Physical Equivalent Equivalent
Units Summary Units Units (WA) Units (FIFO)
Beginning WIP 30,000 18,000 60%

This Period’s Work
Complete Beg WIP 30,000 12,000 40% 12,000 40%
Start & Complete 70,000 70,000 100% 70,000 100%
Ending WIP 20,000 16,000 80% 16,000 80%
Total Work 120,000 116,000 98,000

Physical Equivalent Equivalent
Units Summary Units Units (DM) Units (CC)
Beginning WIP 5,000 5,000 100% 1,250 25%

This Period’s Work
Complete Beg WIP 5,000 – 0 0% 3,750 75%
Start & Complete 12,000 12,000 100% 12,000 100%
Ending WIP 8,000 8,000 100% 3,200 40%
FIFO Equivalent Units 20,000 18,950

WA Equivalent Units (with Beg WIP) 25,000 20,200

PhysicalEquivalent Equivalent
Units SummaryUnitsUnits (DM)Units (CC)
Beginning WIP5,000 1,000 20%1,250 25%
This Period’s Work
Complete Beg WIP5,000 4,000 80%3,750 75%
Start & Complete12,000 12,000 100%12,000 100%
Ending WIP8,000 1,600 20%3,200 40%
FIFO Equivalent Units17,600 18,950
WA Equivalent Units (with Beg WIP)18,600 20,200
slide 17

Beginning Current Total
Cost Summary WIP Cost Cost
Direct Materials 3,050 33,600 36,650
Conversion Costs 2,840 74,925 77,765
Total $ 5,890 $ 108,525 $ 114,415

Physical Equivalent Equivalent
Units Summary Units Units (WA) Units (FIFO)
Beginning WIP 30,000 18,000 60%

This Period’s Work
Complete Beg WIP 30,000 12,000 40% 12,000 40%
Start & Complete 70,000 70,000 100% 70,000 100%
Ending WIP 20,000 16,000 80% 16,000 80%
Total Work 120,000 116,000 98,000

slide19 20

Physical Equivalent Equivalent
Units Summary Units Units (DM) Units (CC)
Beginning WIP 5,000 5,000 100% 1,250 25%

This Period’s Work
Complete Beg WIP 5,000 – 0 0% 3,750 75%
Start & Complete 12,000 12,000 100% 12,000 100%
Ending WIP 8,000 8,000 100% 3,200 40%
FIFO Equivalent Units 20,000 18,950

WA Equivalent Units (with Beg WIP) 25,000 20,200

Physical Equivalent Equivalent
Units Summary Units Units (DM) Units (CC)
Beginning WIP 5,000 1,000 20% 1,250 25%

This Period’s Work
Complete Beg WIP 5,000 4,000 80% 3,750 75%
Start & Complete 12,000 12,000 100% 12,000 100%
Ending WIP 8,000 1,600 20% 3,200 40%
FIFO Equivalent Units 17,600 18,950

WA Equivalent Units (with Beg WIP) 18,600 20,200

WA

Beginning Current Total
Cost Summary WIP Cost Cost
Direct Materials 3,042 33,600 36,642
Conversion Costs 2,838 74,925 77,763
Total $ 5,880 $ 108,525 $ 114,405

Physical Equivalent Equivalent
Units Summary Units Units (DM) Units (CC)
Units Completed 10,000 10,000 100% 10,000 100%
Ending WIP 3,000 3,000 100% 1,500 50%
Total Units 13,000 13,000 11,500

Equivalent Unit Cost
Direct Materials $ 2.8186 ($36,642 / 13,000)
Conversion Costs $ 6.7620 ($77,763 / 11,500)
Total Cost per Equivalent Unit $ 9.5806

Cost Assignment Units Cost
Units Completed 10,000 $ 95,806

Ending WIP 3,000
Direct Materials 8,456
Conversion Costs 10,143
Total Ending WIP Cost – 0 18,599

Total Units and Cost Accounted For 13,000 $ 114,405

FIFO

Beginning Current Total
Cost Summary WIP Cost Cost
Direct Materials 3,050 33,600 36,650
Conversion Costs 2,840 74,925 77,765
Total $ 5,890 $ 108,525 $ 114,415

Physical Equivalent Equivalent
Units Summary Units Units (DM) Units (CC)
Beginning WIP 1,000 1,000 100% 400 40%

This Period’s Work
Complete Beg WIP 1,000 – 0 0% 600 60%
Start & Complete 9,000 9,000 100% 9,000 100%
Ending WIP 3,000 3,000 100% 1,500 50%
Total Work 13,000 12,000 11,100

Equivalent Unit Cost
Direct Materials $ 2.80 ($33,600 / 12,000)
Conversion Costs $ 6.75 ($74,925 / 11,100)
Total Cost per Equivalent Unit $ 9.55

Cost Assignment Units Cost
Beginning WIP 1,000 $ 5,890
Direct Materials – 0
Conversion Costs 4,050
Units Completed 9,940
Units Started & Completed 9,000 85,950
Total Transferred Out 10,000 95,890

Ending WIP 3,000
Direct Materials 8,400
Conversion Costs 10,125
Total Ending WIP Cost – 0 18,525

Total Units and Cost Accounted For 13,000 $ 114,415

Sheet3

PhysicalEquivalent Equivalent
Units SummaryUnitsUnits (DM)Units (CC)
Beginning WIP- – –
This Period’s Work
Complete Beg WIP- – –
Start & Complete30,000 30,000 100%30,000 100%
Ending WIP15,000 15,000 100%5,000 33%
FIFO Equivalent Units45,000 35,000
WA Equivalent Units (with Beg WIP)45,000 35,000
slide 17

Beginning Current Total
Cost Summary WIP Cost Cost
Direct Materials 3,050 33,600 36,650
Conversion Costs 2,840 74,925 77,765
Total $ 5,890 $ 108,525 $ 114,415

Physical Equivalent Equivalent
Units Summary Units Units (WA) Units (FIFO)
Beginning WIP 30,000 18,000 60%

This Period’s Work
Complete Beg WIP 30,000 12,000 40% 12,000 40%
Start & Complete 70,000 70,000 100% 70,000 100%
Ending WIP 20,000 16,000 80% 16,000 80%
Total Work 120,000 116,000 98,000

slide19 20

Physical Equivalent Equivalent
Units Summary Units Units (DM) Units (CC)
Beginning WIP 5,000 5,000 100% 1,250 25%

This Period’s Work
Complete Beg WIP 5,000 – 0 0% 3,750 75%
Start & Complete 12,000 12,000 100% 12,000 100%
Ending WIP 8,000 8,000 100% 3,200 40%
FIFO Equivalent Units 20,000 18,950

WA Equivalent Units (with Beg WIP) 25,000 20,200

Physical Equivalent Equivalent
Units Summary Units Units (DM) Units (CC)
Beginning WIP 5,000 1,000 20% 1,250 25%

This Period’s Work
Complete Beg WIP 5,000 4,000 80% 3,750 75%
Start & Complete 12,000 12,000 100% 12,000 100%
Ending WIP 8,000 1,600 20% 3,200 40%
FIFO Equivalent Units 17,600 18,950

WA Equivalent Units (with Beg WIP) 18,600 20,200

Physical Equivalent Equivalent
Units Summary Units Units (DM) Units (CC)
Beginning WIP – 0 – 0 – 0

This Period’s Work
Complete Beg WIP – 0 – 0 – 0
Start & Complete 30,000 30,000 100% 30,000 100%
Ending WIP 15,000 15,000 100% 5,000 33%
FIFO Equivalent Units 45,000 35,000

WA Equivalent Units (with Beg WIP) 45,000 35,000

WA

Beginning Current Total
Cost Summary WIP Cost Cost
Direct Materials 3,042 33,600 36,642
Conversion Costs 2,838 74,925 77,763
Total $ 5,880 $ 108,525 $ 114,405

Physical Equivalent Equivalent
Units Summary Units Units (DM) Units (CC)
Units Completed 10,000 10,000 100% 10,000 100%
Ending WIP 3,000 3,000 100% 1,500 50%
Total Units 13,000 13,000 11,500

Equivalent Unit Cost
Direct Materials $ 2.8186 ($36,642 / 13,000)
Conversion Costs $ 6.7620 ($77,763 / 11,500)
Total Cost per Equivalent Unit $ 9.5806

Cost Assignment Units Cost
Units Completed 10,000 $ 95,806

Ending WIP 3,000
Direct Materials 8,456
Conversion Costs 10,143
Total Ending WIP Cost – 0 18,599

Total Units and Cost Accounted For 13,000 $ 114,405

FIFO

Beginning Current Total
Cost Summary WIP Cost Cost
Direct Materials 3,050 33,600 36,650
Conversion Costs 2,840 74,925 77,765
Total $ 5,890 $ 108,525 $ 114,415

Physical Equivalent Equivalent
Units Summary Units Units (DM) Units (CC)
Beginning WIP 1,000 1,000 100% 400 40%

This Period’s Work
Complete Beg WIP 1,000 – 0 0% 600 60%
Start & Complete 9,000 9,000 100% 9,000 100%
Ending WIP 3,000 3,000 100% 1,500 50%
Total Work 13,000 12,000 11,100

Equivalent Unit Cost
Direct Materials $ 2.80 ($33,600 / 12,000)
Conversion Costs $ 6.75 ($74,925 / 11,100)
Total Cost per Equivalent Unit $ 9.55

Cost Assignment Units Cost
Beginning WIP 1,000 $ 5,890
Direct Materials – 0
Conversion Costs 4,050
Units Completed 9,940
Units Started & Completed 9,000 85,950
Total Transferred Out 10,000 95,890

Ending WIP 3,000
Direct Materials 8,400
Conversion Costs 10,125
Total Ending WIP Cost – 0 18,525

Total Units and Cost Accounted For 13,000 $ 114,415

Sheet3

ComputationUnitsCosts
BI
Cost to complete BI
DM
CC
Total costs added
Total cost of BI
S&C
Total costs tr’d out
EI:
DM
CC
Total EI costs
Total acctd for
FIFO & WA are the same when BI = 0
EUP schedule

BI Comp BI S&C Start EI WA EUP FIFO EUP Total Units
Physical units
Equiv units
DM
CC

Acct for costs

FIFO & WA are the same when BI = 0 Weighted Average
Computation Units Costs Computation Units Costs
BI
Cost to complete BI
DM
CC
Total costs added
Total cost of BI
S&C
Total costs tr’d out
EI:
DM
CC
Total EI costs
Total acctd for

Sheet2

Sheet3

PhysicalEquivalent Equivalent
Units SummaryUnitsUnits (DM)Units (CC)
Beginning WIP6,200 6,200 100%3,720 60%
This Period’s Work
Complete Beg WIP6,200 – 0%2,480 40%
Start & Complete52,500 52,500 100%52,500 100%
Ending WIP5,000 5,000 100%2,250 45%
FIFO Equivalent Units63,700 57,500 57,230
WA Equivalent Units (with Beg WIP)63,700 60,950
slide 17

Beginning Current Total
Cost Summary WIP Cost Cost
Direct Materials 3,050 33,600 36,650
Conversion Costs 2,840 74,925 77,765
Total $ 5,890 $ 108,525 $ 114,415

Physical Equivalent Equivalent
Units Summary Units Units (WA) Units (FIFO)
Beginning WIP 30,000 18,000 60%

This Period’s Work
Complete Beg WIP 30,000 12,000 40% 12,000 40%
Start & Complete 70,000 70,000 100% 70,000 100%
Ending WIP 20,000 16,000 80% 16,000 80%
Total Work 120,000 116,000 98,000

slide19 20

Physical Equivalent Equivalent
Units Summary Units Units (DM) Units (CC)
Beginning WIP 5,000 5,000 100% 1,250 25%

This Period’s Work
Complete Beg WIP 5,000 – 0 0% 3,750 75%
Start & Complete 12,000 12,000 100% 12,000 100%
Ending WIP 8,000 8,000 100% 3,200 40%
FIFO Equivalent Units 20,000 18,950

WA Equivalent Units (with Beg WIP) 25,000 20,200

Physical Equivalent Equivalent
Units Summary Units Units (DM) Units (CC)
Beginning WIP 5,000 1,000 20% 1,250 25%

This Period’s Work
Complete Beg WIP 5,000 4,000 80% 3,750 75%
Start & Complete 12,000 12,000 100% 12,000 100%
Ending WIP 8,000 1,600 20% 3,200 40%
FIFO Equivalent Units 17,600 18,950

WA Equivalent Units (with Beg WIP) 18,600 20,200

Physical Equivalent Equivalent
Units Summary Units Units (DM) Units (CC)
Beginning WIP 6,200 6,200 100% 3,720 60%

This Period’s Work
Complete Beg WIP 6,200 – 0 0% 2,480 40%
Start & Complete 52,500 52,500 100% 52,500 100%
Ending WIP 5,000 5,000 100% 2,250 45%
FIFO Equivalent Units 63,700 57,500 57,230

WA Equivalent Units (with Beg WIP) 63,700 60,950

WA

Beginning Current Total
Cost Summary WIP Cost Cost
Direct Materials 3,042 33,600 36,642
Conversion Costs 2,838 74,925 77,763
Total $ 5,880 $ 108,525 $ 114,405

Physical Equivalent Equivalent
Units Summary Units Units (DM) Units (CC)
Units Completed 10,000 10,000 100% 10,000 100%
Ending WIP 3,000 3,000 100% 1,500 50%
Total Units 13,000 13,000 11,500

Equivalent Unit Cost
Direct Materials $ 2.8186 ($36,642 / 13,000)
Conversion Costs $ 6.7620 ($77,763 / 11,500)
Total Cost per Equivalent Unit $ 9.5806

Cost Assignment Units Cost
Units Completed 10,000 $ 95,806

Ending WIP 3,000
Direct Materials 8,456
Conversion Costs 10,143
Total Ending WIP Cost – 0 18,599

Total Units and Cost Accounted For 13,000 $ 114,405

FIFO

Beginning Current Total
Cost Summary WIP Cost Cost
Direct Materials 3,050 33,600 36,650
Conversion Costs 2,840 74,925 77,765
Total $ 5,890 $ 108,525 $ 114,415

Physical Equivalent Equivalent
Units Summary Units Units (DM) Units (CC)
Beginning WIP 6,200 6,200 100% 3,720 60%

This Period’s Work
Complete Beg WIP 6,200 – 0 0% 2,480 40%
Start & Complete 52,500 52,500 100% 52,500 100%
Ending WIP 5,000 5,000 100% 2,250 45%
Total Work 63,700 57,500 57,230

Equivalent Unit Cost
Direct Materials $ 0.58 ($33,600 / 12,000)
Conversion Costs $ 1.31 ($74,925 / 11,100)
Total Cost per Equivalent Unit $ 1.89

Cost Assignment Units Cost
Beginning WIP 6,200 $ 5,890
Direct Materials – 0
Conversion Costs 3,247
Units Completed 9,137
Units Started & Completed 52,500 99,411
Total Transferred Out 58,700 108,548

Ending WIP 5,000
Direct Materials 2,922
Conversion Costs 2,946
Total Ending WIP Cost – 0 5,867

Total Units and Cost Accounted For 63,700 $ 114,415

Sheet3

Equiv units
WA
EUP
FIFO
EUP
DM63,70057,500
CC60,95057,230
EUP schedule

BI Comp BI S&C Start EI WA EUP FIFO EUP Total Units
Physical units
Equiv units
DM
CC
TI

EUP schedule with TI

BI Comp BI S&C Start EI WA EUP FIFO EUP Total Units
Physical units
Equiv units
DM
CC
TI

EUP schedule with spoilage

BI Comp BI S&C Start EI WA EUP FIFO EUP Total Units Spoiled Units
Physical units
Equiv units
DM
CC

summarize costs

BI Comp BI S&C Start EI WA EUP FIFO EUP Total Units
Physical units
Equiv units
DM
CC

Cost/EUP:

Acct for costs

FIFO Weighted Average
Computation Units Costs Computation Units Costs
BI
Cost to compl BI
DM
CC
TI
Total costs added
Total cost of BI
S&C
Total costs tr’d out
EI:
DM
CC
TI
Total EI costs
Total acctd for

Acct for spoilage

FIFO Weighted Average
Computation Units Costs Computation Units Costs
BI
Cost to compl BI
DM
CC
Total costs added
Total cost of BI
Normal spoilage
S&C
Total costs tr’d out
Abnormal spoilage
EI:
DM
CC
Total EI costs
Total acctd for

Partial EUP colors demo

Equiv units WA EUP FIFO EUP
DM 63,700 57,500
CC 60,950 57,230

Cost/EUP:

Sheet3

EUP schedule

BI Comp BI S&C Start EI WA EUP FIFO EUP Total Units
Physical units
Equiv units
DM
CC
TI

EUP schedule with TI

BI Comp BI S&C Start EI WA EUP FIFO EUP Total Units
Physical units
Equiv units
DM
CC
TI

EUP schedule with spoilage

BI Comp BI S&C Start EI WA EUP FIFO EUP Total Units Spoiled Units
Physical units
Equiv units
DM
CC

summarize costs

BI Comp BI S&C Start EI WA EUP FIFO EUP Total Units
Physical units
Equiv units
DM
CC

Cost/EUP:

Acct for costs

FIFO Weighted Average
Computation Units Costs Computation Units Costs
BI
Cost to compl BI
DM
CC
TI
Total costs added
Total cost of BI
S&C
Total costs tr’d out
EI:
DM
CC
TI
Total EI costs
Total acctd for

Acct for spoilage

FIFO Weighted Average
Computation Units Costs Computation Units Costs
BI
Cost to compl BI
DM
CC
Total costs added
Total cost of BI
Normal spoilage
S&C
Total costs tr’d out
Abnormal spoilage
EI:
DM
CC
Total EI costs
Total acctd for

Partial EUP colors demo

Equiv units WA EUP FIFO EUP
DM 63,700 57,500
CC 60,950 57,230

Cost/EUP:

Sheet3

Cost AssignmentUnitsCost
Units Completed58,700 469,600$
Ending WIP5,000
Direct Materials15,000
Conversion Costs11,250
Total Ending WIP Cost- 26,250
Total Units and Cost Accounted For63,700 495,850$
slide 17

Beginning Current Total
Cost Summary WIP Cost Cost
Direct Materials 3,050 33,600 36,650
Conversion Costs 2,840 74,925 77,765
Total $ 5,890 $ 108,525 $ 114,415

Physical Equivalent Equivalent
Units Summary Units Units (WA) Units (FIFO)
Beginning WIP 30,000 18,000 60%

This Period’s Work
Complete Beg WIP 30,000 12,000 40% 12,000 40%
Start & Complete 70,000 70,000 100% 70,000 100%
Ending WIP 20,000 16,000 80% 16,000 80%
Total Work 120,000 116,000 98,000

slide19 20

Physical Equivalent Equivalent
Units Summary Units Units (DM) Units (CC)
Beginning WIP 5,000 5,000 100% 1,250 25%

This Period’s Work
Complete Beg WIP 5,000 – 0 0% 3,750 75%
Start & Complete 12,000 12,000 100% 12,000 100%
Ending WIP 8,000 8,000 100% 3,200 40%
FIFO Equivalent Units 20,000 18,950

WA Equivalent Units (with Beg WIP) 25,000 20,200

Physical Equivalent Equivalent
Units Summary Units Units (DM) Units (CC)
Beginning WIP 5,000 1,000 20% 1,250 25%

This Period’s Work
Complete Beg WIP 5,000 4,000 80% 3,750 75%
Start & Complete 12,000 12,000 100% 12,000 100%
Ending WIP 8,000 1,600 20% 3,200 40%
FIFO Equivalent Units 17,600 18,950

WA Equivalent Units (with Beg WIP) 18,600 20,200

Physical Equivalent Equivalent
Units Summary Units Units (DM) Units (CC)
Beginning WIP 6,200 6,200 100% 3,720 60%

This Period’s Work
Complete Beg WIP 6,200 – 0 0% 2,480 40%
Start & Complete 52,500 52,500 100% 52,500 100%
Ending WIP 5,000 5,000 100% 2,250 45%
FIFO Equivalent Units 63,700 57,500 57,230

WA Equivalent Units (with Beg WIP) 63,700 60,950

WA

Beginning Current Total
Cost Summary WIP Cost Cost
Direct Materials 12,850 178,250 191,100
Conversion Costs 30,046 274,704 304,750
Total $ 42,896 $ 452,954 $ 495,850

Physical Equivalent Equivalent
Units Summary Units Units (DM) Units (CC)
Units Completed 58,700 58,700 100% 58,700 100%
Ending WIP 5,000 5,000 100% 2,250 45%
Total Units 63,700 63,700 60,950

Equivalent Unit Cost
Direct Materials $ 3.0000
Conversion Costs $ 5.0000
Total Cost per Equivalent Unit $ 8.0000

Cost Assignment Units Cost
Units Completed 58,700 $ 469,600

Ending WIP 5,000
Direct Materials 15,000
Conversion Costs 11,250
Total Ending WIP Cost – 0 26,250

Total Units and Cost Accounted For 63,700 $ 495,850

FIFO

Beginning Current Total
Cost Summary WIP Cost Cost
Direct Materials 12,850 178,250 191,100
Conversion Costs 30,046 274,704 304,750
Total $ 42,896 $ 452,954 $ 495,850

Physical Equivalent Equivalent
Units Summary Units Units (DM) Units (CC)
Beginning WIP 6,200 6,200 100% 3,720 60%

This Period’s Work
Complete Beg WIP 6,200 – 0 0% 2,480 40%
Start & Complete 52,500 52,500 100% 52,500 100%
Ending WIP 5,000 5,000 100% 2,250 45%
Total Work 63,700 57,500 57,230

Equivalent Unit Cost
Direct Materials $ 3.10
Conversion Costs $ 4.80
Total Cost per Equivalent Unit $ 7.90

Cost Assignment Units Cost
Beginning WIP 6,200 $ 42,896
Direct Materials – 0
Conversion Costs 11,904
Units Completed 54,800
Units Started & Completed 52,500 414,750
Total Transferred Out 58,700 469,550

Ending WIP 5,000
Direct Materials 15,500
Conversion Costs 10,800
Total Ending WIP Cost – 0 26,300

Total Units and Cost Accounted For 63,700 $ 495,850

Sheet3

Cost AssignmentUnitsCost
Beginning WIP6,200 42,896$
Direct Materials-
Conversion Costs11,904
Units Completed54,800
Units Started & Completed52,500 414,750
Total Transferred Out58,700 469,550
Ending WIP5,000
Direct Materials15,500
Conversion Costs10,800
Total Ending WIP Cost- 26,300
Total Units and Cost Accounted For63,700 495,850$
slide 17

Beginning Current Total
Cost Summary WIP Cost Cost
Direct Materials 3,050 33,600 36,650
Conversion Costs 2,840 74,925 77,765
Total $ 5,890 $ 108,525 $ 114,415

Physical Equivalent Equivalent
Units Summary Units Units (WA) Units (FIFO)
Beginning WIP 30,000 18,000 60%

This Period’s Work
Complete Beg WIP 30,000 12,000 40% 12,000 40%
Start & Complete 70,000 70,000 100% 70,000 100%
Ending WIP 20,000 16,000 80% 16,000 80%
Total Work 120,000 116,000 98,000

slide19 20

Physical Equivalent Equivalent
Units Summary Units Units (DM) Units (CC)
Beginning WIP 5,000 5,000 100% 1,250 25%

This Period’s Work
Complete Beg WIP 5,000 – 0 0% 3,750 75%
Start & Complete 12,000 12,000 100% 12,000 100%
Ending WIP 8,000 8,000 100% 3,200 40%
FIFO Equivalent Units 20,000 18,950

WA Equivalent Units (with Beg WIP) 25,000 20,200

Physical Equivalent Equivalent
Units Summary Units Units (DM) Units (CC)
Beginning WIP 5,000 1,000 20% 1,250 25%

This Period’s Work
Complete Beg WIP 5,000 4,000 80% 3,750 75%
Start & Complete 12,000 12,000 100% 12,000 100%
Ending WIP 8,000 1,600 20% 3,200 40%
FIFO Equivalent Units 17,600 18,950

WA Equivalent Units (with Beg WIP) 18,600 20,200

Physical Equivalent Equivalent
Units Summary Units Units (DM) Units (CC)
Beginning WIP 6,200 6,200 100% 3,720 60%

This Period’s Work
Complete Beg WIP 6,200 – 0 0% 2,480 40%
Start & Complete 52,500 52,500 100% 52,500 100%
Ending WIP 5,000 5,000 100% 2,250 45%
FIFO Equivalent Units 63,700 57,500 57,230

WA Equivalent Units (with Beg WIP) 63,700 60,950

WA

Beginning Current Total
Cost Summary WIP Cost Cost
Direct Materials 12,850 178,250 191,100
Conversion Costs 30,046 274,704 304,750
Total $ 42,896 $ 452,954 $ 495,850

Physical Equivalent Equivalent
Units Summary Units Units (DM) Units (CC)
Units Completed 58,700 58,700 100% 58,700 100%
Ending WIP 5,000 5,000 100% 2,250 45%
Total Units 63,700 63,700 60,950

Equivalent Unit Cost
Direct Materials $ 3.0000
Conversion Costs $ 5.0000
Total Cost per Equivalent Unit $ 8.0000

Cost Assignment Units Cost
Units Completed 58,700 $ 469,600

Ending WIP 5,000
Direct Materials 15,000
Conversion Costs 11,250
Total Ending WIP Cost – 0 26,250

Total Units and Cost Accounted For 63,700 $ 495,850

FIFO

Beginning Current Total
Cost Summary WIP Cost Cost
Direct Materials 12,850 178,250 191,100
Conversion Costs 30,046 274,704 304,750
Total $ 42,896 $ 452,954 $ 495,850

Physical Equivalent Equivalent
Units Summary Units Units (DM) Units (CC)
Beginning WIP 6,200 6,200 100% 3,720 60%

This Period’s Work
Complete Beg WIP 6,200 – 0 0% 2,480 40%
Start & Complete 52,500 52,500 100% 52,500 100%
Ending WIP 5,000 5,000 100% 2,250 45%
Total Work 63,700 57,500 57,230

Equivalent Unit Cost
Direct Materials $ 3.10
Conversion Costs $ 4.80
Total Cost per Equivalent Unit $ 7.90

Cost Assignment Units Cost
Beginning WIP 6,200 $ 42,896
Direct Materials – 0
Conversion Costs 11,904
Units Completed 54,800
Units Started & Completed 52,500 414,750
Total Transferred Out 58,700 469,550

Ending WIP 5,000
Direct Materials 15,500
Conversion Costs 10,800
Total Ending WIP Cost – 0 26,300

Total Units and Cost Accounted For 63,700 $ 495,850

Sheet3

PhysicalEquivalent Equivalent Equivalent
Units SummaryUnitsUnits (DM)Units (CC)Units (TI)
Beginning WIP5,000 1,000 20%2,000 40%5,000 100%
This Period’s Work
Complete Beg WIP5,000 4,000 80%3,000 60%- 0%
Start & Complete14,000 14,000 100%14,000 100%14,000 100%
Ending WIP6,000 1,200 20%3,300 55%6,000 100%
FIFO Equivalent Units25,000 19,200 20,300 20,000
WA Equivalent Units (with Beg WIP)20,200 22,300 25,000
Sheet1

Beginning Current Total
Cost Summary WIP Cost Cost
Direct Materials 7,298 72,240 79,538
Conversion Costs 3,861 31,262 35,123
Transfer In Costs 19,250 112,000 131,250
Total $ 30,408 $ 215,502 $ 245,910

Physical Equivalent Equivalent Equivalent
Units Summary Units Units (DM) Units (CC) Units (TI)
Beginning WIP 5,000 1,000 20% 2,000 40% 5,000 100%

This Period’s Work
Complete Beg WIP 5,000 4,000 80% 3,000 60% – 0 0%
Start & Complete 14,000 14,000 100% 14,000 100% 14,000 100%
Ending WIP 6,000 1,200 20% 3,300 55% 6,000 100%
FIFO Equivalent Units 25,000 19,200 20,300 20,000

WA Equivalent Units (with Beg WIP) 20,200 22,300 25,000

Sheet2

Sheet3

DMCCTITotal
Work in process, May 1$7,297.50 $3,860.50 $19,250.00 $30,408.00
Costs added in May72,240.0031,262.00112,000.00215,502.00
Total$79,537.50 $35,122.50 $131,250.00 $245,910.00
EUP schedule

BI Comp BI S&C Start EI WA EUP FIFO EUP Total Units
Physical units
Equiv units
DM
CC
TI

EUP schedule with TI

BI Comp-lete BI S&C Start EI WA EUP FIFO EUP Total Units
Physical units
Equiv units
DM
CC
TI

EUP schedule with spoilage

BI Comp BI S&C Start EI WA EUP FIFO EUP Total Units Spoiled Units
Physical units
Equiv units
DM
CC

Acct for costs no TI

FIFO Weighted Average
Computation Units Costs Computation Units Costs
BI
Cost to compl BI
DM
CC
TI
Total costs added
Total cost of BI
S&C
Total costs tr’d out
EI:
DM
CC
TI
Total EI costs
Total acctd for

summarize costs

BI Comp BI S&C Start EI WA EUP FIFO EUP Total Units
Physical units
Equiv units
DM
CC

Cost/EUP:

Acct for costs w TI

FIFO Weighted Average
Computation Units Costs Computation Units Costs
BI
Cost to compl BI
DM
CC
TI
Total costs added
Total cost of BI
S&C
Total costs tr’d out
EI:
DM
CC
TI
Total EI costs
Total acctd for

Acct for spoilage

FIFO Weighted Average
Computation Units Costs Computation Units Costs
BI
Cost to compl BI
DM
CC
Total costs added
Total cost of BI
Normal spoilage
S&C
Total costs tr’d out
Abnormal spoilage
EI:
DM
CC
Total EI costs
Total acctd for

Partial EUP colors demo

Equiv units WA EUP FIFO EUP
DM 63,700 57,500
CC 60,950 57,230

Cost/EUP:

Sheet3

DM CC TI Total
Work in process, May 1 $7,297.50 $3,860.50 $19,250.00 $30,408.00
Costs added in May 72,240.00 31,262.00 112,000.00 215,502.00
Total $79,537.50 $35,122.50 $131,250.00 $245,910.00

EUP schedule

BI Comp BI S&C Start EI WA EUP FIFO EUP Total Units
Physical units
Equiv units
DM
CC
TI

EUP schedule with TI

BI Comp-lete BI S&C Start EI WA EUP FIFO EUP Total Units
Physical units
Equiv units
DM
CC
TI

EUP schedule with spoilage

BI Comp BI S&C Start EI WA EUP FIFO EUP Total Units Spoiled Units
Physical units
Equiv units
DM
CC

Acct for costs no TI

FIFO Weighted Average
Computation Units Costs Computation Units Costs
BI
Cost to compl BI
DM
CC
TI
Total costs added
Total cost of BI
S&C
Total costs tr’d out
EI:
DM
CC
TI
Total EI costs
Total acctd for

summarize costs

BI Comp BI S&C Start EI WA EUP FIFO EUP Total Units
Physical units
Equiv units
DM
CC

Cost/EUP:

Acct for costs w TI

FIFO Weighted Average
Computation Units Costs Computation Units Costs
BI
Cost to compl BI
DM
CC
TI
Total costs added
Total cost of BI
S&C
Total costs tr’d out
EI:
DM
CC
TI
Total EI costs
Total acctd for

Acct for spoilage

FIFO Weighted Average
Computation Units Costs Computation Units Costs
BI
Cost to compl BI
DM
CC
Total costs added
Total cost of BI
Normal spoilage
S&C
Total costs tr’d out
Abnormal spoilage
EI:
DM
CC
Total EI costs
Total acctd for

Partial EUP colors demo

Equiv units WA EUP FIFO EUP
DM 63,700 57,500
CC 60,950 57,230

Cost/EUP:

Sheet3

DM CC TI Total
Work in process, May 1 $7,297.50 $3,860.50 $19,250.00 $30,408.00
Costs added in May 72,240.00 31,262.00 112,000.00 215,502.00
Total $79,537.50 $35,122.50 $131,250.00 $245,910.00

Equivalent Unit CostFIFOWA
Direct Materials3.7625$ 3.9375$
Conversion Costs1.5400 1.5750
Transfer In Costs5.6000 5.2500
Total Cost per Equivalent Unit10.9025$ 10.7625$
Cost AssignmentUnitsFIFO CostUnitsWA Cost
Beginning WIP5,000 30,408$
Cost to Complete BI
Direct Materials15,050
Conversion Costs4,620
Total Cost BI50,078
Units Started & Completed14,000 152,635
Total Transferred Out19,000 202,713$ 19,000 204,488$
Ending WIP6,000 6,000
Direct Materials4,515 4,725
Conversion Costs5,082 5,198
Transfer In Costs33,600 31,500
Total Ending WIP Cost- 43,197$ 41,423$
Total Units and Cost Accounted For25,000 245,910$ 25,000 245,910$
Sheet1

Beginning Current Total
Cost Summary WIP Cost Cost
Direct Materials 7,298 72,240 79,538
Conversion Costs 3,861 31,262 35,123
Transfer In Costs 19,250 112,000 131,250
Total $ 30,408 $ 215,502 $ 245,910

Physical Equivalent Equivalent Equivalent
Units Summary Units Units (DM) Units (CC) Units (TI)
Beginning WIP 5,000 1,000 20% 2,000 40% 5,000 100%

This Period’s Work
Complete Beg WIP 5,000 4,000 80% 3,000 60% – 0 0%
Start & Complete 14,000 14,000 100% 14,000 100% 14,000 100%
Ending WIP 6,000 1,200 20% 3,300 55% 6,000 100%
FIFO Equivalent Units 25,000 19,200 20,300 20,000

WA Equivalent Units (with Beg WIP) 20,200 22,300 25,000

Equivalent Unit Cost FIFO WA
Direct Materials $ 3.7625 $ 3.9375
Conversion Costs 1.5400 1.5750
Transfer In Costs 5.6000 5.2500
Total Cost per Equivalent Unit $ 10.9025 $ 10.7625

Cost Assignment Units FIFO Cost Units WA Cost
Beginning WIP 5,000 $ 30,408
Cost to Complete BI
Direct Materials 15,050
Conversion Costs 4,620
Total Cost BI 50,078
Units Started & Completed 14,000 152,635
Total Transferred Out 19,000 $ 202,713 19,000 $ 204,488

Ending WIP 6,000 6,000
Direct Materials 4,515 4,725
Conversion Costs 5,082 5,198
Transfer In Costs 33,600 31,500
Total Ending WIP Cost – 0 $ 43,197 $ 41,423

Total Units and Cost Accounted For 25,000 $ 245,910 25,000 $ 245,910

Sheet2

Sheet3

PhysicalEquivalent Equivalent
Units SummaryUnitsUnits (DM)Units (CC)
Beginning WIP800 800 100%320 40%
This Period’s Work
Complete Beg WIP800 – 0%480 60%
Good Units Start & Complete2,000 2,000 100%2,000 100%
Ending WIP500 500 100%150 30%
Spoiled Units:
Normal Spoilage50 50 100%50 100%
Abnormal Spoilage150 150 100%150 100%
FIFO Equivalent Units3,500 2,700 2,830
Less Spoilage:(200)
Total Good Units 3,300
WA Equivalent Units (with Beg WIP)3,500 3,150
Sheet1

Beginning Current Total
Cost Summary WIP Cost Cost
Direct Materials 2,735 8,640 11,375
Conversion Costs 1,302 5,943 7,245
Total $ 4,037 $ 14,583 $ 18,620

Physical Equivalent Equivalent
Units Summary Units Units (DM) Units (CC)
Beginning WIP 800 800 100% 320 40%

This Period’s Work
Complete Beg WIP 800 – 0 0% 480 60%
Good Units Start & Complete 2,000 2,000 100% 2,000 100%
Ending WIP 500 500 100% 150 30%
Spoiled Units:
Normal Spoilage 50 50 100% 50 100%
Abnormal Spoilage 150 150 100% 150 100%
FIFO Equivalent Units 3,500 2,700 2,830
Less Spoilage: (200)
Total Good Units 3,300

WA Equivalent Units (with Beg WIP) 3,500 3,150

Equivalent Unit Cost FIFO WA
Direct Materials $ 3.20 $ 3.25
Conversion Costs $ 2.10 $ 2.30
Total Cost per Equivalent Unit $ 5.30 $ 5.55

Cost Assignment Units FIFO Cost Units WA Cost
Beginning WIP 800 $ 4,037
Cost to Complete BI
Direct Materials – 0
Conversion Costs 1,008
Total Cost BI 5,045
Normal Spoilage 265 278
Good Units Started & Completed 2,000 10,600 2,800 $ 15,540
Total Transferred Out 2,800 $ 15,910 2,800 $ 15,818

Abnormal Spoilage 795 833

Ending WIP 500 500
Direct Materials 1,600 1,625
Conversion Costs 315 345
Total Ending WIP Cost $ 1,915 $ 1,970

Total Units and Cost Accounted For 3,300 $ 18,620 3,300 $ 18,620

Sheet2

Sheet3

DMCCTotal
Work in process, June $2,735$1,302$4,037
Costs added in June$8,640$5,943$14,583
Total$11,375$7,245$18,620
EUP schedule

BI Comp BI S&C Start EI WA EUP FIFO EUP Total Units
Physical units
Equiv units
DM
CC
TI

EUP schedule with TI

BI Comp-lete BI S&C Start EI WA EUP FIFO EUP Total Units
Physical units
Equiv units
DM
CC
TI

EUP schedule with spoilage

BI Comp BI S&C Start EI WA EUP FIFO EUP Total Units Spoiled Units
Physical units
Equiv units
DM
CC

Acct for costs no TI

FIFO Weighted Average
Computation Units Costs Computation Units Costs
BI
Cost to compl BI
DM
CC
TI
Total costs added
Total cost of BI
S&C
Total costs tr’d out
EI:
DM
CC
TI
Total EI costs
Total acctd for

summarize costs

BI Comp BI S&C Start EI WA EUP FIFO EUP Total Units
Physical units
Equiv units
DM
CC

Cost/EUP:

Acct for costs w TI

FIFO Weighted Average
Computation Units Costs Computation Units Costs
BI
Cost to compl BI
DM
CC
TI
Total costs added
Total cost of BI
S&C
Total costs tr’d out
EI:
DM
CC
TI
Total EI costs
Total acctd for

Acct for spoilage

FIFO Weighted Average
Computation Units Costs Computation Units Costs
BI
Cost to compl BI
DM
CC
Total costs added
Total cost of BI
Normal spoilage
S&C
Total costs tr’d out
Abnormal spoilage
EI:
DM
CC
Total EI costs
Total acctd for

Partial EUP colors demo

Equiv units WA EUP FIFO EUP
DM 63,700 57,500
CC 60,950 57,230

Cost/EUP:

Crusher given $ info

DM CC TI Total
Work in process, May 1 $7,297.50 $3,860.50 $19,250.00 $30,408.00
Costs added in May 72,240.00 31,262.00 112,000.00 215,502.00
Total $79,537.50 $35,122.50 $131,250.00 $245,910.00

spoilage EUP template

BI Comp-lete BI S&C Start EI WA EUP FIFO EUP Total Units Sp’d Units
Phys units
Equiv units
DM
CC

spoilage

Assumptions
Beginning WIP – units 800 Costs: DM CC Total
% complete DM 100% Beg WIP $2,735 $1,302 $4,037
% complete CC 40% Current 8,640 5,943 $14,583
Units started 2,700 Total $11,375 $7,245 $18,620
Good units completed and transferred out 2,800
Spoiled units 200
NS-% of good units 2%
Ending WIP – units 500 Units to account for:
% complete DM 100% Beginning WIP 800
% complete CC 30% Units started 2,700
3,500

Summarize Physical and Equivalent Units:
Beginning WIP Work This Period Total Work Performed this Period Total Units to Account For Spoiled Units
Complete BI Start and Complete Start Ending WIP
Account for Physical Units 800 2,200 500 2,700 3,500 (200)
Equivalent Units: Total FIFO EUP Total Wtd Avg EUP
DM 800 0 2,200 500 2,700 3,500 (200)
CC 320 480 2,200 150 2,830 3,150 (200)

Total spoilage 200
Less: Normal Spoilage 50
Abnormal Spoilage 150

Calculate Cost per EUP:
Cost EUP Cost/EUP
FIFO:
DM $8,640 2,700 $3.2000
CC $5,943 2,830 2.1000
$5.3000
Weighted average:
DM $11,375 3,500 $3.2500
CC $7,245 3,150 2.3000
$5.5500

Process Cost Report Cost Assignment:
FIFO Weighted Average
Computation Units Costs Computation Units Costs
Beginning WIP 800 $4,037
Cost to complete beginning WIP:
DM (0 x $7.0367) 0
CC (7,200 x $3.0753) 1,008
Total costs added this period 1,008
Total cost of beginning WIP 5,045

Normal spoilage (1,240 x $10.112) 50 265 50 $278
Good units started, completed, & tr’d out (50,000 x $10.112) 2,000 10,600
Good Units Completed & tr’d out (62,000 x $9.8125) 2,800 15,540
Total completed & transferred out (incl spoilage) 2,850 15,910 2,850 15,818

Abnormal spoilage (760 x $10.112) 150 795 (760 x $9.8125) 150 833

Ending WIP: 500 500
DM (8,000 x $7.0367)) 1,600 (8,000 x $6.4444) 1,625
CC (2,400 x $3.0753)) 315 (2,400 x $3.3681) 345
Total ending WIP cost 1,915 1,970
Total accounted for 3,500 $18,620 3,500 $18,620

spoilage cost given info

DM CC Total
Work in process, June 1 $2,735 $1,302 $4,037
Costs added in June $8,640 $5,943 $14,583
Total $11,375 $7,245 $18,620

EUP schedule

BI Comp BI S&C Start EI WA EUP FIFO EUP Total Units
Physical units
Equiv units
DM
CC
TI

EUP schedule with TI

BI Comp-lete BI S&C Start EI WA EUP FIFO EUP Total Units
Physical units
Equiv units
DM
CC
TI

EUP schedule with spoilage

BI Comp BI S&C Start EI WA EUP FIFO EUP Total Units Spoiled Units
Physical units
Equiv units
DM
CC

Acct for costs no TI

FIFO Weighted Average
Computation Units Costs Computation Units Costs
BI
Cost to compl BI
DM
CC
TI
Total costs added
Total cost of BI
S&C
Total costs tr’d out
EI:
DM
CC
TI
Total EI costs
Total acctd for

summarize costs

BI Comp BI S&C Start EI WA EUP FIFO EUP Total Units
Physical units
Equiv units
DM
CC

Cost/EUP:

Acct for costs w TI

FIFO Weighted Average
Computation Units Costs Computation Units Costs
BI
Cost to compl BI
DM
CC
TI
Total costs added
Total cost of BI
S&C
Total costs tr’d out
EI:
DM
CC
TI
Total EI costs
Total acctd for

Acct for spoilage

FIFO Weighted Average
Computation Units Costs Computation Units Costs
BI
Cost to compl BI
DM
CC
Total costs added
Total cost of BI
Normal spoilage
S&C
Total costs tr’d out
Abnormal spoilage
EI:
DM
CC
Total EI costs
Total acctd for

Partial EUP colors demo

Equiv units WA EUP FIFO EUP
DM 63,700 57,500
CC 60,950 57,230

Cost/EUP:

Crusher given $ info

DM CC TI Total
Work in process, May 1 $7,297.50 $3,860.50 $19,250.00 $30,408.00
Costs added in May 72,240.00 31,262.00 112,000.00 215,502.00
Total $79,537.50 $35,122.50 $131,250.00 $245,910.00

spoilage EUP template

BI Comp-lete BI S&C Start EI WA EUP FIFO EUP Total Units Sp’d Units
Phys units
Equiv units
DM
CC

spoilage

Assumptions
Beginning WIP – units 800 Costs: DM CC Total
% complete DM 100% Beg WIP $2,735 $1,302 $4,037
% complete CC 40% Current 8,640 5,943 $14,583
Units started 2,700 Total $11,375 $7,245 $18,620
Good units completed and transferred out 2,800
Spoiled units 200
NS-% of good units 2%
Ending WIP – units 500 Units to account for:
% complete DM 100% Beginning WIP 800
% complete CC 30% Units started 2,700
3,500

Summarize Physical and Equivalent Units:
Beginning WIP Work This Period Total Work Performed this Period Total Units to Account For Spoiled Units
Complete BI Start and Complete Start Ending WIP
Account for Physical Units 800 2,200 500 2,700 3,500 (200)
Equivalent Units: Total FIFO EUP Total Wtd Avg EUP
DM 800 0 2,200 500 2,700 3,500 (200)
CC 320 480 2,200 150 2,830 3,150 (200)

Total spoilage 200
Less: Normal Spoilage 50
Abnormal Spoilage 150

Calculate Cost per EUP:
Cost EUP Cost/EUP
FIFO:
DM $8,640 2,700 $3.2000
CC $5,943 2,830 2.1000
$5.3000
Weighted average:
DM $11,375 3,500 $3.2500
CC $7,245 3,150 2.3000
$5.5500

Process Cost Report Cost Assignment:
FIFO Weighted Average
Computation Units Costs Computation Units Costs
Beginning WIP 800 $4,037
Cost to complete beginning WIP:
DM (0 x $7.0367) 0
CC (7,200 x $3.0753) 1,008
Total costs added this period 1,008
Total cost of beginning WIP 5,045

Normal spoilage (1,240 x $10.112) 50 265 50 $278
Good units started, completed, & tr’d out (50,000 x $10.112) 2,000 10,600
Good Units Completed & tr’d out (62,000 x $9.8125) 2,800 15,540
Total completed & transferred out (incl spoilage) 2,850 15,910 2,850 15,818

Abnormal spoilage (760 x $10.112) 150 795 (760 x $9.8125) 150 833

Ending WIP: 500 500
DM (8,000 x $7.0367)) 1,600 (8,000 x $6.4444) 1,625
CC (2,400 x $3.0753)) 315 (2,400 x $3.3681) 345
Total ending WIP cost 1,915 1,970
Total accounted for 3,500 $18,620 3,500 $18,620

spoilage cost given info

DM CC Total
Work in process, June 1 $2,735 $1,302 $4,037
Costs added in June $8,640 $5,943 $14,583
Total $11,375 $7,245 $18,620

Cost AssignmentUnitsWA Cost
Beginning WIP
Cost to Complete BI
Direct Materials
Conversion Costs
Total Cost BI
Normal Spoilage278
Good Units Started & Completed2,800 15,540$
Total Transferred Out2,800 15,818$
Abnormal Spoilage833
Ending WIP500
Direct Materials1,625
Conversion Costs345
Total Ending WIP Cost1,970$
Total Units and Cost Accounted For3,300 18,620$
Sheet1

Beginning Current Total
Cost Summary WIP Cost Cost
Direct Materials 2,735 8,640 11,375
Conversion Costs 1,302 5,943 7,245
Total $ 4,037 $ 14,583 $ 18,620

Physical Equivalent Equivalent
Units Summary Units Units (DM) Units (CC)
Beginning WIP 800 800 100% 320 40%

This Period’s Work
Complete Beg WIP 800 – 0 0% 480 60%
Good Units Start & Complete 2,000 2,000 100% 2,000 100%
Ending WIP 500 500 100% 150 30%
Spoiled Units:
Normal Spoilage 50 50 100% 50 100%
Abnormal Spoilage 150 150 100% 150 100%
FIFO Equivalent Units 3,500 2,700 2,830
Less Spoilage: (200)
Total Good Units 3,300

WA Equivalent Units (with Beg WIP) 3,500 3,150

Equivalent Unit Cost FIFO WA
Direct Materials $ 3.20 $ 3.25
Conversion Costs $ 2.10 $ 2.30
Total Cost per Equivalent Unit $ 5.30 $ 5.55

Cost Assignment Units FIFO Cost Units WA Cost
Beginning WIP 800 $ 4,037
Cost to Complete BI
Direct Materials – 0
Conversion Costs 1,008
Total Cost BI 5,045
Normal Spoilage 265 278
Good Units Started & Completed 2,000 10,600 2,800 $ 15,540
Total Transferred Out 2,800 $ 15,910 2,800 $ 15,818

Abnormal Spoilage 795 833

Ending WIP 500 500
Direct Materials 1,600 1,625
Conversion Costs 315 345
Total Ending WIP Cost $ 1,915 $ 1,970

Total Units and Cost Accounted For 3,300 $ 18,620 3,300 $ 18,620

Sheet2

Sheet3

Cost AssignmentUnitsFIFO Cost
Beginning WIP800 4,037$
Cost to Complete BI
Direct Materials-
Conversion Costs1,008
Total Cost BI5,045
Normal Spoilage265
Good Units Started & Completed2,000 10,600
Total Transferred Out2,800 15,910$
Abnormal Spoilage795
Ending WIP500
Direct Materials1,600
Conversion Costs315
Total Ending WIP Cost1,915$
Total Units and Cost Accounted For3,300 18,620$
Sheet1

Beginning Current Total
Cost Summary WIP Cost Cost
Direct Materials 2,735 8,640 11,375
Conversion Costs 1,302 5,943 7,245
Total $ 4,037 $ 14,583 $ 18,620

Physical Equivalent Equivalent
Units Summary Units Units (DM) Units (CC)
Beginning WIP 800 800 100% 320 40%

This Period’s Work
Complete Beg WIP 800 – 0 0% 480 60%
Good Units Start & Complete 2,000 2,000 100% 2,000 100%
Ending WIP 500 500 100% 150 30%
Spoiled Units:
Normal Spoilage 50 50 100% 50 100%
Abnormal Spoilage 150 150 100% 150 100%
FIFO Equivalent Units 3,500 2,700 2,830
Less Spoilage: (200)
Total Good Units 3,300

WA Equivalent Units (with Beg WIP) 3,500 3,150

Equivalent Unit Cost FIFO WA
Direct Materials $ 3.20 $ 3.25
Conversion Costs $ 2.10 $ 2.30
Total Cost per Equivalent Unit $ 5.30 $ 5.55

Cost Assignment Units FIFO Cost Units WA Cost
Beginning WIP 800 $ 4,037
Cost to Complete BI
Direct Materials – 0
Conversion Costs 1,008
Total Cost BI 5,045
Normal Spoilage 265 278
Good Units Started & Completed 2,000 10,600 2,800 $ 15,540
Total Transferred Out 2,800 $ 15,910 2,800 $ 15,818

Abnormal Spoilage 795 833

Ending WIP 500 500
Direct Materials 1,600 1,625
Conversion Costs 315 345
Total Ending WIP Cost $ 1,915 $ 1,970

Total Units and Cost Accounted For 3,300 $ 18,620 3,300 $ 18,620

Sheet2

Sheet3

© John Wiley & Sons, 2011

Chapter 7

:

Activity-Based Costing and Management

Eldenburg & Wolcott’s

Cost Management

, 2e

Slide # 1

Cost Management

Measuring, Monitoring, and Motivating Performance

Chapter 7
Activity-Based Costing and Management

‹#›

© John Wiley & Sons, 2011
Chapter 7: Activity-Based Costing and Management
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 2
Chapter 7: Activity-Based Costing and Management
Learning objectives
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?
Q5: What are GPK and RCA?
Q4: What is activity-based management?
Q6: How does information from ABC, GPK, and RCA affect managers’ incentives and decisions?

‹#›

© John Wiley & Sons, 2011
Chapter 7: Activity-Based Costing and Management
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 3
Q1: Activity-Based Costing (ABC)
ABC is a method of cost system refinement.
Indirect costs are divided into “sub-pools” of costs of activities.
Activity costs are then allocated to the final cost objects using a cost allocation base (more commonly called cost drivers in ABC).
Activities are measurable, making it more likely that cost drivers can be found so that a final cost object will absorb indirect costs in proportion to its use of the activity.

The first bullet is automated.
One click is required for each remaining bullet.
‹#›

© John Wiley & Sons, 2011
Chapter 7: Activity-Based Costing and Management
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 4
Q1: Traditional Costing vs. ABC
Product A
Product B
Product C
Traditional costing systems:
Indirect
Costs
Direct Costs

Direct Costs

Direct Costs

Direct costs are traced to the individual products.

The individual products are the final cost objects.
Indirect costs are grouped into one (or a small number) of cost pools; a cost allocation base assigns costs to the individual products

The yellow cost object group is animated.
The first click starts the sequence to show direct cost assignment to the products.
The second click begins the sequence to show indirect cost assignment to the products.
‹#›

Q1: Traditional Costing Systems
© John Wiley & Sons, 2011
Chapter 7: Activity-Based Costing and Management
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 5

‹#›

© John Wiley & Sons, 2011
Chapter 7: Activity-Based Costing and Management
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 6
Q1: Traditional Costing vs. ABC
Activity-based costing systems:
Indirect
Costs
Product A
Product B
Product C
Direct Costs

Direct Costs

Direct Costs

The individual products are the final cost objects & direct costs are traced to the individual products.
Indirect costs are assigned (traced & allocated) to various pools of activity costs.
Activity 1
Activity 2
Activity 3

Activity costs are allocated to products

The text box in the lower right hand corner is automated and disappears on the first mouse click.
The first click starts the sequence to show indirect cost assignment to the activities.
The second click brings in the text box in the middle, about allocating activity costs.
The 3rd click brings in the arrows that assign Activity 1 costs to all 3 products; these arrows disappear on the next click.
The 4th click brings in the arrows that assign Activity 2 costs to Products A & B; these arrows disappear on the next click.
The 5th click brings in the arrows that assign Activity 3 costs to Products B & C.
‹#›

Q1: ABC Costing Systems
© John Wiley & Sons, 2011
Chapter 7: Activity-Based Costing and Management
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 7

‹#›

© John Wiley & Sons, 2011
Chapter 7: Activity-Based Costing and Management
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 8
Q2: What are Activities and How are They Identified?
The ABC cost hierarchy includes the following activities:
organization-sustaining – associated with overall organization
facility-sustaining – associated with single manufacturing plant or service facility
customer-sustaining – associated with a single customer
product-sustaining – associated with product lien or single product
batch-level – associated with each batch of product
unit-level – associated with each unit produced

This slide is completely, so no clicks are required.
‹#›

© John Wiley & Sons, 2011
Chapter 7: Activity-Based Costing and Management
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 9
Q2: ABC Cost Hierarchy Example
Some of the costs incurred by the Dewey Chargem law firm are listed below. This firm specializes in immigration issues and family law. For each cost, identify whether the cost most likely relates to a(n) (1) organiz-ation-sustaining, (2) facility-sustaining, (3) customer-sustaining, (4) product-sustaining, (5) batch-level, or (6) unit-level activity and explain your choice.

This slide is entirely automated – no clicks are required.
No solutions are provided because the problem is meant to generate discussion. The answer for almost every cost is “it depends”. Refer to problem 7.15 in the text and its related solutions as this problem is very similar.
‹#›

© John Wiley & Sons, 2011
Chapter 7: Activity-Based Costing and Management
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 10
Q3: What Process is Used to Assign Costs in an ABC system?
Identify the relevant cost object.
Identify activities and group homogeneous activities.
Assign costs to the activity cost pools.
Choose a cost driver for each activity cost pool.
Calculate an allocation rate for each activity cost pool.
Allocate activity costs to the final cost object.

One click is required for each bullet, including the first one.
‹#›

© John Wiley & Sons, 2011
Chapter 7: Activity-Based Costing and Management
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 11
Q3: How Are Cost Drivers Selected for Activities?
For each activity, determine its place in the ABC cost hierarchy.
Look for drivers that have a good cause-and-effect relationship with the activities’ costs.
Use a reasonable driver when there is no cause-and-effect relationship.

The first bullet is automated. One click is required for each remaining bullet.
‹#›

© John Wiley & Sons, 2011
Chapter 7: Activity-Based Costing and Management
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 12
Q3: ABC in Manufacturing Example
Alphabet Co. makes products A & B. Product A is a low-volume specialty item and B is a high-volume item. Estimated factory- wide overhead is $800,000, and the number of DL hours for the year is estimated to be 50,000 hours. DL costs are $10/hour. Each product uses 2 DL hours. Compute the traditional cost of each product if Products A & B use $25 and $10 in direct materials, respectively.
First, compute the estimated overhead rate:
Estimated overhead rate = $800,000/50,000 hours = $16/hour.
Product A Product B
Direct materials $25 $10
Direct labor (2hrs @ $10) 20 20
Overhead (2 hrs @ $16) 32 32
$77 $62

The given information is automated.
The first click brings in the “First, compute..” text, which disappears on the next mouse click.
The second click brings in the computation of the estimated overhead rate.
The third click brings in the computation of the cost of the 2 products.
‹#›

© John Wiley & Sons, 2011
Chapter 7: Activity-Based Costing and Management
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 13
Q3: ABC in Manufacturing Example
Alphabet Co. is implementing an ABC system. It estimated the costs and activity levels for the upcoming year shown below.
First, compute the estimated overhead rate for each activity:

The given information is automated.
The first click brings in the “First, compute..” text.
‹#›

© John Wiley & Sons, 2011
Chapter 7: Activity-Based Costing and Management
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 14
Q3: ABC in Manufacturing Example

The overhead rates do not appear on the animated slide show until you click once.
‹#›

© John Wiley & Sons, 2011
Chapter 7: Activity-Based Costing and Management
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 15
Q3: ABC in Manufacturing Example
Alphabet recently completed a batch of 100 As and a batch of 100 Bs. Direct material and labor costs were as budgeted. Information about each batch’s use of the cost drivers is given below. Compute the overhead allocated to each unit of A and B.

The given information is automated.
The first click brings in the computations for the overhead allocated to each unit.
‹#›

© John Wiley & Sons, 2011
Chapter 7: Activity-Based Costing and Management
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 16
Q3: ABC in Manufacturing Example
Compute the total cost of each product and compare it to the costs computed under traditional costing.
Traditional costing assigned $77 to a unit of Product A and $62 to a unit of Product B.
The only difference between the two costing systems is that Product A is assigned more overhead costs under ABC.
The additional overhead assigned to Product A reflects Product A’s consumption of resources.

The given information is automated.
The first click brings in the computations of the product cost and the text box to the right.
The second click brings in the first bullet at the bottom of the slide.
The third click brings in the second bullet at the bottom of the slide.
‹#›

© John Wiley & Sons, 2011
Chapter 7: Activity-Based Costing and Management
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 17
ABM is the process of using ABC information to evaluate opportunities for improvements in an organization.
Q4: Activity-Based Management (ABM)
Examples include managing & monitoring
customer profitability
product and process design
environmental costs
quality
constrained resources

The first bullet is automated.
The first click brings in the sequence that displays the remaining slide elements.
‹#›

© John Wiley & Sons, 2011
Chapter 7: Activity-Based Costing and Management
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 18
Activities can be defined so that different costs of servicing customers are accumulated.
Q4: ABM & Customer Profitability
Examples include
analyzing the types of bank transactions used by various categories of customers
comparing the costs of servicing insurance contracts sold to married versus single individuals
comparing the costs of different distribution channels

The first bullet is automated.
The first click brings in the sequence that displays the remaining slide elements.
Several good examples for class discussion are found at http://www.aicpa.org/cefm/value_chain_10.asp
(This is not a live link – you will have to paste it into your browser.)
‹#›

© John Wiley & Sons, 2011
Chapter 7: Activity-Based Costing and Management
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 19
Activities can be defined so that the costs of stages of production or of a business process are accumulated.
Q4: ABM & Product/Process Improvements
Examples include
determining the costs of non-value-added activities so the most costly can be reduced or eliminated
changing the steps in the accounts payable function to reduce the number of personnel
determining the most costly stages of product development so that the time to market is reduced

The first bullet is automated.
The first click brings in the sequence that displays the remaining slide elements.
‹#›

© John Wiley & Sons, 2011
Chapter 7: Activity-Based Costing and Management
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 20
Activities can be defined so that types of environmental costs are accumulated.
Q4: ABM & Environmental Costs
Examples include
capturing the costs of contingent liabilities for waste disposal site remediation
comparing the cost of recycling packaging to the cost of disposal
computing the costs of treating different kinds of emissions

The first bullet is automated.
The first click brings in the sequence that displays the remaining slide elements.
There is a nice paper from the EPA to review at http://www.vision2020.hamilton.ca/downloads/Determining-Costs .
Again, this is not a live link.
‹#›

© John Wiley & Sons, 2011
Chapter 7: Activity-Based Costing and Management
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 21
Activities can be defined so that categories of costs of managing quality are accumulated.
Q4: ABM & Quality Costs
Common categories of quality costs are
costs of prevention activities
costs of appraisal activities
costs of production activities
costs of postsales activities

The first bullet is automated.
One click is required for each remaining bullet and sub-bullet.
‹#›

Q5: What are GPK and RCA?
Costing approaches similar to ABC because they involve multiple pools and multiple drivers
GPK can be described as marginal planning and cost accounting
Each cost is traced to a cost center (smaller than a department) which performs a single repetitive activity, and is the responsibility of one manager)
Output measures tracks the volume of resource use
Costs are segregated into proportional (change with volume in resource use) and fixed
Practical capacity is used for estimated allocation rate volumes
© John Wiley & Sons, 2011
Chapter 7: Activity-Based Costing and Management
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 22

‹#›

Q5: Capacity Definitions
Theoretical capacity – maximum assuming continuous, uninterrupted operations 365 days/year
Practical capacity – typical operating conditions
Budgeted capacity – expected volume for the upcoming time period
Idle/excess capacity – difference between activity capacity used and one of the above measures of capacity
© John Wiley & Sons, 2011
Chapter 7: Activity-Based Costing and Management
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 23

‹#›

Resource Consumption Accounting (RCA)
Builds on GPK and ABC principles
Each cost is assigned to a resource cost pool
Labor and machinery are often placed in different cost pools since they are different types of resources
RCA involves a significantly larger number of cost pools than traditional accounting
Like GPK, segregates proportional and fixed costs
Utilizes theoretical rather than practical capacity for allocating fixed costs
More likely to focus manager attention on reducing idle and non-productive resource time
© John Wiley & Sons, 2011
Chapter 7: Activity-Based Costing and Management
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 24
Q5: What are GPK and RCA?

‹#›

Q5: Benefits/Drawbacks to GPK/RCA
Benefits
Generates multi-level internal income statements useful for short terms decisions because it focuses on marginal cost
Increases cause & effect awareness among managers
Categorizes costs (and generates profit margin) at the product, product group, division, and company level
Avoids arbitrary allocations of fixed costs
Drawbacks
Can be costly to implement
Can result in a large number of variances to analyze
© John Wiley & Sons, 2011
Chapter 7: Activity-Based Costing and Management
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 25

‹#›

Q5: Comparison of ABC, GPK, and RCA
ABC GPK RCA
Character of cost accounting system Full costing Marginal costing Full and marginal costing
Location of data Database separate from general ledger Comprehensive accounting system Comprehensive accounting system
Primary decision relevance Mid- to long-term Short-term Short-, Mid-, and Long term
Allocation of overhead based on Activities Cost Centers Resources and/or activities
Cost Drivers Activity –Based Resource Output related Resource output or activity related
Fixed cost allocation rate denominator Actual, budgeted, or practical capacity Budgeted or practical capacity Theoretical capacity

© John Wiley & Sons, 2011
Chapter 7: Activity-Based Costing and Management
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 26

‹#›

© John Wiley & Sons, 2011
Chapter 7: Activity-Based Costing and Management
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 27
Benefits
more accurate and relevant product cost information
employees focus attention on activities
measurement of the costs of activities and business processes
identify non-value-added activities and reduce costs
Q6: Decision Making with ABC, GPK, and RCA
Costs
systems can be difficult to design and maintain
more information must be captured
decision makers may not use the information appropriately

The first bullet and all of its sub-bullets are automated on 0.5 second delays.
The first click begins the sequence to display the rest of the slide elements.
‹#›

© John Wiley & Sons, 2011
Chapter 7: Activity-Based Costing and Management
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 28
Judgment is required when determining activities.
Q6: Uncertainties in ABC and ABM Implementation
Judgment is required when selecting cost drivers.
Denominator levels for cost drivers are estimates.
ABC information includes unitized fixed costs, so decision makers must use ABC information correctly.

The first bullet is automated.
One click is required for each remaining bullet.
‹#›
CostCost Hierarchy Level
Bookkeeping software
Salary for partner in charge of family law
Office supplies
Subscription to family law update journal
Telephone charges for local calls
Long distance telephone charges
Window washing service
Salary of receptionist
Alphabet given info

Estimated Activity Levels
Prod. A Prod. B Total Cost Driver
Machine set-ups $200,000 3,000 2,000 5,000 # set-ups 40.00
Inspections 140,000 500 300 800 # inspections 175.00
Materials handling 80,000 400 400 800 # mat’l requistions 100.00
Machining dep’t 320,000 12,000 28,000 40,000 # machine hours 8.00
Quality control dep’t 60,000 600 150 750 # tests 80.00
$800,000

Alphabet OH rates

Estimated Activity Overhead Rate
Machine set-ups $200,000 5,000 set-ups $40 /setup
Inspections 140,000 800 inspections $175 /inspection
Materials handling 80,000 800 mat’l requistions $100 /requisition
Machining dep’t 320,000 40,000 machine hours $8 /mach hr
Quality control dep’t 60,000 750 tests $80 /test
$800,000

Alphabet batch info

100 As Overhead Rate
100 Bs
Machine set-ups 60 10 set-ups $40 /setup
Inspections 10 2 inspections $175 /inspection
Materials handling 4 2 mat’l requistions $100 /requisition
Machining dep’t 240 120 machine hours $8 /mach hr
Quality control dep’t 3 1 tests $80 /test
Overhead allocated: 100 As 100 Bs
Machine set-ups $2,400 $400
Inspections 1,750 350
Materials handling 400 200
Machining dep’t 1,920 960
Quality control dep’t 240 80
Overhead for batch $6,710 $0 $1,990
Overhead per unit $67.10 $0.00 $19.90
Prod A Prod B
Direct material $25.00 $10.00
Direct labor 20.00 20.00
Overhead 67.10 19.90
Total $112.10 $0.00 $49.90

Sheet2

Cost Cost Hierarchy Level
Bookkeeping software
Salary for partner in charge of family law
Office supplies
Subscription to family law update journal
Telephone charges for local calls
Long distance telephone charges
Window washing service
Salary of receptionist

Sheet3

Prod. AProd. BTotalCost Driver
Machine set-ups$200,0003,0002,0005,000# set-ups
Inspections140,000500300800# inspections
Materials handling80,000400400800# mat’l requistions
Machining dep’t320,00012,00028,00040,000# machine hours
Quality control dep’t60,000600150750# tests
$800,000
Estimated Activity LevelsEstimated
Costs
Sheet1

Estimated Costs Estimated Activity Levels
Prod. A Prod. B Total Cost Driver
Machine set-ups $200,000 3,000 2,000 5,000 # set-ups 40.00
Inspections 140,000 500 300 800 # inspections 175.00
Materials handling 80,000 400 400 800 # mat’l requistions 100.00
Machining dep’t 320,000 12,000 28,000 40,000 # machine hours 8.00
Quality control dep’t 60,000 600 150 750 # tests 80.00
$800,000

Sheet2

Sheet3

Machine set-ups$200,0005,000set-ups$40/setup
Inspections140,000800inspections$175/inspection
Materials handling80,000800mat’l requistions$100/requisition
Machining dep’t320,00040,000machine hours$8/mach hr
Quality control dep’t60,000750tests$80/test
$800,000
Estimated CostsOverhead RateEstimated Activity
$40/setup
$175/inspection
$100/requisition
$8/mach hr
$80/test
Alphabet given info

Estimated Costs Estimated Activity Levels
Prod. A Prod. B Total Cost Driver
Machine set-ups $200,000 3,000 2,000 5,000 # set-ups 40.00
Inspections 140,000 500 300 800 # inspections 175.00
Materials handling 80,000 400 400 800 # mat’l requistions 100.00
Machining dep’t 320,000 12,000 28,000 40,000 # machine hours 8.00
Quality control dep’t 60,000 600 150 750 # tests 80.00
$800,000

Alphabet OH rates

Estimated Costs Estimated Activity Overhead Rate
Machine set-ups $200,000 5,000 set-ups $40 /setup
Inspections 140,000 800 inspections $175 /inspection
Materials handling 80,000 800 mat’l requistions $100 /requisition
Machining dep’t 320,000 40,000 machine hours $8 /mach hr
Quality control dep’t 60,000 750 tests $80 /test
$800,000

Sheet2

Sheet3

Alphabet given info

Estimated Activity Levels
Prod. A Prod. B Total Cost Driver
Machine set-ups $200,000 3,000 2,000 5,000 # set-ups 40.00
Inspections 140,000 500 300 800 # inspections 175.00
Materials handling 80,000 400 400 800 # mat’l requistions 100.00
Machining dep’t 320,000 12,000 28,000 40,000 # machine hours 8.00
Quality control dep’t 60,000 600 150 750 # tests 80.00
$800,000

Alphabet OH rates

Estimated Activity Overhead Rate
Machine set-ups $200,000 5,000 set-ups $40 /setup
Inspections 140,000 800 inspections $175 /inspection
Materials handling 80,000 800 mat’l requistions $100 /requisition
Machining dep’t 320,000 40,000 machine hours $8 /mach hr
Quality control dep’t 60,000 750 tests $80 /test
$800,000

Sheet2

Sheet3

100 Bs
Machine set-ups6010
Inspections102
Materials handling42
Machining dep’t240120
Quality control dep’t31
100 As
Overhead allocated:100 As100 Bs
Machine set-ups$2,400$400
Inspections1,750350
Materials handling400200
Machining dep’t1,920960
Quality control dep’t24080
Overhead for batch$6,710$1,990
Overhead per unit$67.10$19.90
Alphabet given info

Estimated Activity Levels
Prod. A Prod. B Total Cost Driver
Machine set-ups $200,000 3,000 2,000 5,000 # set-ups 40.00
Inspections 140,000 500 300 800 # inspections 175.00
Materials handling 80,000 400 400 800 # mat’l requistions 100.00
Machining dep’t 320,000 12,000 28,000 40,000 # machine hours 8.00
Quality control dep’t 60,000 600 150 750 # tests 80.00
$800,000

Alphabet OH rates

Estimated Activity Overhead Rate
Machine set-ups $200,000 5,000 set-ups $40 /setup
Inspections 140,000 800 inspections $175 /inspection
Materials handling 80,000 800 mat’l requistions $100 /requisition
Machining dep’t 320,000 40,000 machine hours $8 /mach hr
Quality control dep’t 60,000 750 tests $80 /test
$800,000

Alphabet batch info

100 As Overhead Rate
100 Bs
Machine set-ups 60 10 set-ups $40 /setup
Inspections 10 2 inspections $175 /inspection
Materials handling 4 2 mat’l requistions $100 /requisition
Machining dep’t 240 120 machine hours $8 /mach hr
Quality control dep’t 3 1 tests $80 /test

Sheet2

Sheet3

Alphabet given info

Estimated Costs Estimated Activity Levels
Prod. A Prod. B Total Cost Driver
Machine set-ups $200,000 3,000 2,000 5,000 # set-ups 40.00
Inspections 140,000 500 300 800 # inspections 175.00
Materials handling 80,000 400 400 800 # mat’l requistions 100.00
Machining dep’t 320,000 12,000 28,000 40,000 # machine hours 8.00
Quality control dep’t 60,000 600 150 750 # tests 80.00
$800,000

Alphabet OH rates

Estimated Costs Estimated Activity Overhead Rate
Machine set-ups $200,000 5,000 set-ups $40 /setup
Inspections 140,000 800 inspections $175 /inspection
Materials handling 80,000 800 mat’l requistions $100 /requisition
Machining dep’t 320,000 40,000 machine hours $8 /mach hr
Quality control dep’t 60,000 750 tests $80 /test
$800,000

Alphabet batch info

100 As Overhead Rate
100 Bs
Machine set-ups 60 10 set-ups $40 /setup
Inspections 10 2 inspections $175 /inspection
Materials handling 4 2 mat’l requistions $100 /requisition
Machining dep’t 240 120 machine hours $8 /mach hr
Quality control dep’t 3 1 tests $80 /test
Overhead allocated: 100 As 100 Bs
Machine set-ups $2,400 $400
Inspections 1,750 350
Materials handling 400 200
Machining dep’t 1,920 960
Quality control dep’t 240 80
Overhead for batch $6,710 $0 $1,990
Overhead per unit $67.10 $0.00 $19.90

Sheet2

Sheet3

Prod AProd B
Direct material$25.00$10.00
Direct labor20.0020.00
Overhead67.1019.90
Total
$112.10$49.90
Alphabet given info

Estimated Activity Levels
Prod. A Prod. B Total Cost Driver
Machine set-ups $200,000 3,000 2,000 5,000 # set-ups 40.00
Inspections 140,000 500 300 800 # inspections 175.00
Materials handling 80,000 400 400 800 # mat’l requistions 100.00
Machining dep’t 320,000 12,000 28,000 40,000 # machine hours 8.00
Quality control dep’t 60,000 600 150 750 # tests 80.00
$800,000

Alphabet OH rates

Estimated Activity Overhead Rate
Machine set-ups $200,000 5,000 set-ups $40 /setup
Inspections 140,000 800 inspections $175 /inspection
Materials handling 80,000 800 mat’l requistions $100 /requisition
Machining dep’t 320,000 40,000 machine hours $8 /mach hr
Quality control dep’t 60,000 750 tests $80 /test
$800,000

Alphabet batch info

100 As Overhead Rate
100 Bs
Machine set-ups 60 10 set-ups $40 /setup
Inspections 10 2 inspections $175 /inspection
Materials handling 4 2 mat’l requistions $100 /requisition
Machining dep’t 240 120 machine hours $8 /mach hr
Quality control dep’t 3 1 tests $80 /test
Overhead allocated: 100 As 100 Bs
Machine set-ups $2,400 $400
Inspections 1,750 350
Materials handling 400 200
Machining dep’t 1,920 960
Quality control dep’t 240 80
Overhead for batch $6,710 $0 $1,990
Overhead per unit $67.10 $0.00 $19.90
Prod A Prod B
Direct material $25.00 $10.00
Direct labor 20.00 20.00
Overhead 67.10 19.90
Total $112.10 $0.00 $49.90

Sheet2

Sheet3

© John Wiley & Sons, 2011

Chapter 4

: Relevant Costs for Nonroutine Operating Decisions

Eldenburg & Wolcott’s

Cost Management

, 2e

Slide # 1

Cost Management

Measuring, Monitoring, and Motivating Performance

Chapter 4

Relevant Information for Decision Making

© John Wiley & Sons, 2011
Chapter 4: Relevant Costs for Nonroutine Operating Decisions
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 2
Chapter 4: Relevant Costs for Nonroutine Operating Decisions
Learning objectives
Q1: What is the process for identifying and using relevant information in decision making?
Q2: How is relevant quantitative and qualitative information used in special order decisions?
Q3: How is relevant quantitative and qualitative information used in keep or drop decisions?
Q4: How is relevant quantitative and qualitative information used in outsourcing (make or buy) decisions?
Q5: How is relevant quantitative and qualitative information used in product emphasis and constrained resource decisions?
Q6: What factors affect the quality of operating decisions?

© John Wiley & Sons, 2011
Chapter 4: Relevant Costs for Nonroutine Operating Decisions
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 3
Q1: Nonroutine Operating Decisions
annual budgets and resource allocation decisions
Routine operating decisions are those made on a regular schedule. Examples include:
monthly production planning
weekly work scheduling issues
accept or reject a customer’s special order
Nonroutine operating decisions are not made on a regular schedule. Examples include:
keep or drop business segments
insource or outsource a business activity
constrained (scarce) resource allocation issues

The first primary bullet & its 3 secondary bullets are automated on 1.5 second delays.
The first click brings in the second primary bullet – its 4 secondary bullets are automated on 1.5 second delays.

© John Wiley & Sons, 2011
Chapter 4: Relevant Costs for Nonroutine Operating Decisions
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 4
Q1: Nonroutine Operating Decisions

© John Wiley & Sons, 2011
Chapter 4: Relevant Costs for Nonroutine Operating Decisions
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 5
Q1: Process for Making Nonroutine
Operating Decisions
1. Identify the type of decision to be made.
2. Identify the relevant quantitative analysis technique(s).
3. Identify and analyze the qualitative factors.
4. Perform quantitative and/or qualitative analyses
5. Prioritize issues and arrive at a decision.

One click for each element after the first one, which is automated.

© John Wiley & Sons, 2011
Chapter 4: Relevant Costs for Nonroutine Operating Decisions
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 6
Q1: Identify the Type of Decision
Special order decisions
determine the pricing
accept or reject a customer’s proposal for order quantity and pricing
identify if there is sufficient available capacity
Keep or drop business segment decisions
examples of business segments include product lines, divisions, services, geographic regions, or other distinct segments of the business
eliminating segments with operating losses will not always improve profits

The first primary bullet & its 3 secondary bullets are automated on 1.5 second delays.
The first click brings in the second primary bullet – its 2 secondary bullets are automated on 1.5 second delays.

© John Wiley & Sons, 2011
Chapter 4: Relevant Costs for Nonroutine Operating Decisions
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 7
Q1: Identify the Type of Decision
Outsourcing decisions
make or buy production components
perform business activities “in-house” or pay another business to perform the activity
Constrained resource allocation decisions
determine which products (or business segments) should receive allocations of scarce resources
examples include allocating scarce machine hours or limited supplies of materials to products
Other decisions may use similar analyses

The first primary bullet & its 3 secondary bullets are automated on 1.5 second delays.
The first click brings in the second primary bullet – its 2 secondary bullets are automated on 1.5 second delays.
3. The second click brings in the third primary bullet.

© John Wiley & Sons, 2011
Chapter 4: Relevant Costs for Nonroutine Operating Decisions
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 8
Q1: Identify and Apply the Relevant
Quantitative Analysis Technique(s)
Regression, CVP, and linear programming are examples of quantitative analysis techniques.
Analysis techniques require input data.
Data for some input variables will be known and for other input variables estimates will be required.
Many nonroutine decisions have a general decision rule to apply to the data.
The results of the general rule need to be interpreted.
The quality of the information used must be considered when interpreting the results of the general rule.

One mouse click is required for each of the 4 primary bullets, except the first one, which is automated– the secondary bullets are automated on a 1 second delay.

© John Wiley & Sons, 2011
Chapter 4: Relevant Costs for Nonroutine Operating Decisions
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 9
Q2-Q5 : Identify and Analyze Qualitative Factors
Qualitative information cannot easily be valued in dollars.
can be difficult to identify
Examples of qualitative information that may be relevant in some nonroutine decisions include:
quality of inputs available from a supplier
can be every bit as important as the quantitative information
effects of decision on regular customers
effects of production on the environment or the community
effects of decision on employee morale

The first primary bullet & its 2 secondary bullets are automated on 1.5 second delays.
The first click brings in the second primary bullet – its 4 secondary bullets are automated on 1.5 second delays.

© John Wiley & Sons, 2011
Chapter 4: Relevant Costs for Nonroutine Operating Decisions
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 10
Q1: Consider All Information and Make a Decision
Before making a decision:
Consider all quantitative and qualitative information.
Consider the quality of the information.
Judgment is required when interpreting the effects of qualitative information.
Judgment is also required when user lower-quality information.

The “before making a decision” element is automated.
1. The first mouse click brings in the first secondary bullet – its sole tertiary bullet is automated on a 1.5 second delay.
2. The second mouse click brings in the second secondary bullet – its sole tertiary bullet is automated on a 1.5 second delay.

© John Wiley & Sons, 2011
Chapter 4: Relevant Costs for Nonroutine Operating Decisions
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 11
Q2: Special Order Decisions
A new customer (or an existing customer) may sometimes request a special order with a lower selling price per unit.
The general rule for special order decisions is:
accept the order if incremental revenues exceed incremental costs,
If the special order replaces a portion of normal operations, then the opportunity cost of accepting the order must be included in incremental costs.
subject to qualitative considerations.
Price >= Relevant Relevant Opportunity
Variable Costs + Fixed Costs + Cost

The first primary bullet is automated.
The first mouse click brings in the second primary bullet – its 2 secondary bullets are automated on 1.5 second delays.
The second mouse click brings in the third primary bullet.

© John Wiley & Sons, 2011
Chapter 4: Relevant Costs for Nonroutine Operating Decisions
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 12
RobotBits, Inc. makes sensory input devices for robot manufacturers. The normal selling price is $38.00 per unit. RobotBits was approached by a large robot manufacturer, U.S. Robots, Inc. USR wants to buy 8,000 units at $24, and USR will pay the shipping costs. The per-unit costs traceable to the product (based on normal capacity of 94,000 units) are listed below. Which costs are relevant to this decision?
Q2: Special Order Decisions
Relevant?
yes
$20.00
Relevant?
yes
Relevant?
yes
Relevant?
no
Relevant?
yes
Relevant?
no
Relevant?
no

no

The given cost information is automated.
For each cost element, one click begins the “relevant?” and “yes/no” sequences; the “yes/no” responses are on a 1.5 second delay.
Note for shipping/handling, first the answer comes in as “yes” because this is normally an incremental relevant cost, but then “no” comes in to highlight that this is not relevant in this specific instance.
A final click brings in the circle, arrow, and $20 total for the relevant costs.

© John Wiley & Sons, 2011
Chapter 4: Relevant Costs for Nonroutine Operating Decisions
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 13
Suppose that the capacity of RobotBits is 107,000 units and projected sales to regular customers this year total 94,000 units. Does the quantitative analysis suggest that the company should accept the special order?
Q2: Special Order Decisions
First determine if there is sufficient idle capacity to accept this order without disrupting normal operations:
Projected sales to regular customers 94,000 units
Special order 8,000 units
102,000 units

RobotBits still has 5,000 units of idle capacity if the order is accepted. Compare incremental revenue to incremental cost:
Incremental profit if accept special order =
($24 selling price – $20 relevant costs) x 8,000 units = $32,000

1. The first click brings in the “First determine..” element.
2. The second click begins the sequence to determine if there is idle capacity, and the conclusion that there is sufficient capacity to accept.
3. The third click brings in “incremental profit if accept . . .” and the computation of incremental profit.

© John Wiley & Sons, 2011
Chapter 4: Relevant Costs for Nonroutine Operating Decisions
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 14
What qualitative issues, in general, might RobotBits consider before finalizing its decision?
Will USR expect the same selling price per unit on future orders?
Will other regular customers be upset if they discover the lower selling price to one of their competitors?
Will employee productivity change with the increase in production?
Given the increase in production, will the incremental costs remain as predicted for this special order?
Are materials available from its supplier to meet the increase in production?
Q2: Qualitative Factors in
Special Order Decisions

One mouse click is required for each bullet.

© John Wiley & Sons, 2011
Chapter 4: Relevant Costs for Nonroutine Operating Decisions
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 15
Suppose instead that the capacity of RobotBits is 100,000 units and projected sales to regular customers this year totals 94,000 units. Should the company accept the special order?
Q2: Special Order Decisions and Capacity Issues
Here the company does not have enough idle capacity to accept the order:
Projected sales to regular customers 94,000 units
Special order 8,000 units
102,000 units

If USR will not agree to a reduction of the order to 6,000 units, then the offer can only be accepted by denying sales of 2,000 units to regular customers.

1. The first click brings in the “Here the company…” element.
2. The second click begins the sequence to determine if there is idle capacity, and the conclusion that there is sufficient capacity to accept.
The rest of the elements are automated.

© John Wiley & Sons, 2011
Chapter 4: Relevant Costs for Nonroutine Operating Decisions
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 16
Suppose instead that the capacity of RobotBits is 100,000 units and projected sales to regular customers this year total 94,000 units. Does the quantitative analysis suggest that the company should accept the special order?
Q2: Special Order Decisions and Capacity Issues
CM/unit on regular sales
= $38.00 – $22.50 = $15.50.
The opportunity cost of accepting this order is the lost contribution margin on 2,000 units of regular sales.
Incremental profit if accept special order =
$32,000 incremental profit under idle capacity – opportunity cost =

Variable cost/unit for regular sales = $22.50.

$32,000 – $15.50 x 2,000 = $1,000

The given information is automated.
1. The first click brings in the computation of variable cost per unit for regular sales
2. The second click reveals the computation of the CM/unit on regular sales.
The shadowed box is automated.
3. The third click brings in the sequence that computes the incremental profit if accept.

© John Wiley & Sons, 2011
Chapter 4: Relevant Costs for Nonroutine Operating Decisions
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 17
What additional qualitative issues, in this case of a capacity constraint, might RobotBits consider before finalizing its decision?
What will be the effect on the regular customer(s) that do not receive their order(s) of 2,000 units?
What is the effect on the company’s reputation of leaving orders from regular customers of 2,000 units unfilled?
Will any of the projected costs change if the company operates at 100% capacity?
Are there any methods to increase capacity? What effects do these methods have on employees and on the community?
Notice that the small incremental profit of $1,000 will probably be outweighed by the qualitative considerations.
Q2: Qualitative Factors in
Special Order Decisions

One mouse click is required for each bullet.

© John Wiley & Sons, 2011
Chapter 4: Relevant Costs for Nonroutine Operating Decisions
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 18
Q3: Keep or Drop Decisions
Managers must determine whether to keep or eliminate business segments that appear to be unprofitable.
The general rule for keep or drop decisions is:
keep the business segment if its contribution margin covers its avoidable fixed costs,
If the business segment’s elimination will affect continuing operations, the opportunity costs of its discontinuation must be included in the analysis.
subject to qualitative considerations.
Drop if: Contribution < Relevant Opportunity Margin Fixed Costs + Cost The first primary bullet is automated. The first mouse click brings in the second primary bullet – its 2 secondary bullets are automated on 1.5 second delays. The second mouse click brings in the third primary bullet. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 19 Starz, Inc. has 3 divisions. The Gibson and Quaid Divisions have recently been operating at a loss. Management is considering the elimination of these divisions. Divisional income statements (in 1000s of dollars) are given below. According to the quantitative analysis, should Starz eliminate Gibson or Quaid or both? Q3: Keep or Drop Decisions This slide is entirely automated. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 20 Q3: Keep or Drop Decisions Use the general rule to determine if Gibson and/or Quaid should be eliminated. The general rule shows that we should keep Quaid and drop Gibson. The shadowed text box is automated. The first click brings in the computation for CM – avoidable fixed costs. The second click brings in the conclusion to keep Quaid and drop Gibson. The right arrow is automated. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 21 Q3: Keep or Drop Decisions Using the general rule is easier than recasting the income statements: Quaid & Russell only Profits increase by $11 when Gibson is eliminated. The shadowed text box is automated, as is the recast income statements and the “Quaid & Russell only” notation. The first click brings the arrow and ovals that highlight Gibson’s unavoidable fixed costs. The second click brings in the comment that profits increase by $11. The arrows and ovals to highlight the increase in profits from $70 to $81 are automated. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 22 Suppose that the Gibson & Quaid Divisions use the same supplier for a particular production input. If the Gibson Division is dropped, the decrease in purchases from this supplier means that Quaid will no longer receive volume discounts on this input. This will increase the costs of production for Quaid by $14,000 per year. In this scenario, should Starz still eliminate the Gibson Division? Q3: Keep or Drop Decisions Profits decrease by $3 when Gibson is eliminated. One click brings in the computation for the effect on profit and the comment “profits decrease by 3” is automated on a 1 second delay. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 23 What qualitative issues should Starz consider before finalizing its decision? What will be the effect on the customers of Gibson if it is eliminated? What is the effect on the company’s reputation? What will be the effect on the employees of Gibson? Can any of them be reassigned to other divisions? What will be the effect on the community where Gibson is located if the decision is made to drop Gibson? What will be the effect on the morale of the employees of the remaining divisions? Q3: Qualitative Factors in Keep or Drop Decisions One mouse click is required for each bullet. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 24 Q4: Insource or Outsource (Make or Buy) Decisions Managers often must determine whether to make or buy a production input keep a business activity in house or outsource the activity The general rule for make or buy decisions is: choose the alternative with the lowest relevant (incremental cost), subject to qualitative considerations If the decision will affect other aspects of operations, these costs (or lost revenues) must be included in the analysis. Outsource if: Cost to Outsource < Cost to Insource Where: Cost to Relevant Relevant Opportunity Insource = FC + VC + Cost © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 25 Graham Co. currently of our main product manufactures a part called a gasker used in the manufacture of its main product. Graham makes and uses 60,000 gaskers per year. The production costs are detailed below. An outside supplier has offered to supply Graham 60,000 gaskers per year at $1.55 each. Fixed production costs of $30,000 associated with the gaskers are unavoidable. Should Graham make or buy the gaskers? Advantage of “make” over “buy” = [$1.55 - $1.50] x 60,000 = $3,000 The production costs per unit for manufacturing a gasker are: Direct materials $0.65 Direct labor 0.45 Variable manufacturing overhead 0.40 Fixed manufacturing overhead* 0.50 $2.00 *$30,000/60,000 units = $0.50/unit Relevant? yes $1.50 Relevant? yes Relevant? yes Relevant? no Q4: Make or Buy Decisions The given cost information is automated. For each cost element, one click begins the “relevant?” and “yes/no” sequences; the “yes/no” responses are on a 1.5 second delay. A final click brings in the circle, arrow, $1.50 total for the relevant costs and the “advantage of make over buy” calculation. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 26 The quantitative analysis indicates that Graham should continue to make the component. What qualitative issues should Graham consider before finalizing its decision? Is the quality of the manufactured component superior to the quality of the purchased component? Will purchasing the component result in more timely availability of the component? Would a relationship with the potential supplier benefit the company in any way? Are there any worker productivity issues that affect this decision? Q4: Qualitative Factors in Make or Buy Decisions One mouse click is required for each bullet. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 27 Suppose the potential supplier of the gasker offers Graham a discount for a different sub-unit required to manufacture Graham’s main product if Graham purchases 60,000 gaskers annually. This discount is expected to save Graham $15,000 per year. Should Graham consider purchasing the gaskers? Q3: Make or Buy Decisions Profits increase by $12,000 when the gasker is purchased instead of manufactured. Advantage of “make” over “buy” before considering discount (slide 23) $3,000 Discount 15,000 Advantage of “buy” over “make” $12,000 One click brings in the computation for the effect on profit and the comment “profits increase by $12,000” is automated on a 1 second delay. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 28 Q5: Constrained Resource (Product Emphasis) Decisions Managers often face constraints such as production capacity constraints such as machine hours or limits on availability of material inputs limits on the quantities of outputs that customers demand The general rule for constrained resource allocation decisions with only one constraint is: allocate scarce resources to products with the highest contribution margin per unit of the constrained resource, subject to qualitative considerations. Managers need to determine which products should first be allocated the scarce resources. The first primary bullet and its two secondary bullets are automated. The first mouse click brings in the second primary bullet. The second mouse click brings in the third primary bullet - its 2 secondary bullets are automated on 1.5 second delays © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 29 Regular Deluxe Selling price per unit $40 $110 Variable cost per unit 20 44 Contribution margin per unit $20 $ 66 Contribution margin ratio 50% 60% Required machine hours/unit 0.4 2.0 Urban has only 160,000 machine hours available per year. 0.4R + 2D  160,000 machine hours Q5: Constrained Resource Decisions (Two Products; One Scarce Resource) Urban’s Umbrellas makes two types of patio umbrellas, regular and deluxe. Suppose there is unlimited customer demand for each product. The selling prices and variable costs of each product are listed below. Write Urban’s machine hour constraint as an inequality. The given info is automated, as is the instruction to write the machine hour constraint as an inequality. 1. The first click brings in the inequality for the machine hour constraint. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 30 If D=0, this constraint becomes 0.4R  160,000 machine hours, or R  400,000 units Suppose that Urban decides to make all Regular umbrellas. What is the total contribution margin? Recall that the CM/unit for R is $20. The machine hour constraint is: 0.4R + 2D  160,000 machine hours Total contribution margin = $20*400,000 = $8 million Suppose that Urban decides to make all Deluxe umbrellas. What is the total contribution margin? Recall that the CM/unit for D is $66. If R=0, this constraint becomes 2D  160,000 machine hours, or D  80,000 units Total contribution margin = $66*80,000 = $5.28 million Q5: Constrained Resource Decisions (Two Products; One Scarce Resource) The machine hour constraint is automated. The first click brings in the calculation of the number of units of R that can be made and of the total contribution margin. The second click brings in the instruction to calculate total CM if Urban makes all Ds. The third click bring in the calculation of the number of units of D that can be made and of the total contribution margin. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 31 In a one constraint problem, a combination of Rs and Ds will yield a contribution margin between $5.28 and $8 million. Therefore, Urban will only make one product, and clearly R is the best choice. make all Ds; get $5.28 million make all Rs; get $8 million If the choice is between all Ds or all Rs, then clearly making all Rs is better. But how do we know that some combination of Rs and Ds won’t yield an even higher contribution margin? Q5: Constrained Resource Decisions (Two Products; One Scarce Resource) The shadowed text box is automated. The first click brings in the rest of the elements in an automated sequence. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 32 In Urban’s case, the sole scarce resource was machine hours, so Urban should make only the product with the highest contribution margin per machine hour. The general rule for constrained resource decisions with one scarce resource is to first make only the product with the highest contribution margin per unit of the constrained resource. R: CM/mach hr = $20/0.4mach hrs = $50/mach hr D: CM/mach hr = $66/2mach hrs = $33/mach hr Notice that the total contribution margin from making all Rs is $50/mach hr x 160,000 machine hours to be used producing Rs = $8 million. Q5: Constrained Resource Decisions (Two Products; One Scarce Resource) The first shadowed text box is automated. The first mouse click brings in the “In Urban’s case. . .” element. The second mouse click brings in the computations for the CM per machine hour for each product. The last shadowed text box is automated. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 33 Usually managers face more than one constraint. an algebraic expression of the company’s goal, known as the objective function a list of the constraints written as inequalities Multiple constraints are easiest to analyze using a quantitative analysis technique known as linear programming. Q5: Constrained Resource Decisions (Multiple Scarce Resources) A problem formulated as a linear programming problem contains for example “maximize total contribution margin” or “minimize total costs” The first primary bullet is automated. The first mouse click brings in the second primary bullet. The second mouse click brings in the third primary bullet - its 2 secondary bullets are automated on 2.5 second delays © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 34 Suppose Urban also need 2 and 6 hours of direct labor per unit of R and D, respectively. There are only 120,000 direct labor hours available per year. Formulate this as a linear programming problem. Max 20R + 66D R,D 0.4R+2D  160,000 2R+6D  120,000 R  0 D  0 subject to: objective function R, D are the choice variables constraints mach hr constraint DL hr constraint nonnegativity constraints (can’t make a negative amount of R or D) Q5: Constrained Resource Decisions (Two Products; Two Scarce Resources) The first click starts a sequence to display the formulation of the linear program. The second click begins a sequence that circles & labels the objective function, then the choice variables, and finally the constraints. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 35 20,000 Draw a graph showing the possible production plans for Urban. 80,000 400,000 60,000 R D Every R, D ordered pair is a production plan. But which ones are feasible, given the constraints? To determine this, graph the constraints as inequalities. 0.4R+2D  160,000 mach hr constraint When D=0, R=400,000 When R=0, D=80,000 2R+6D  120,000 DL hr constraint When D=0, R=60,000 When R=0, D=20,000 Q5: Constrained Resource Decisions (Two Products; Two Scarce Resources) The first click begins a sequence about R,D ordered pairs. The second click begins a sequence to graph the machine hour constraint. The third click begins a sequence to graph the DL hour constraint. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 36 20,000 80,000 400,000 60,000 R D There are not enough machine hours or enough direct labor hours to produce this production plan. There are enough machine hours, but not enough direct labor hours, to produce this production plan. This production plan is feasible; there are enough machine hours and enough direct labor hours for this plan. The feasible set is the area where all the production constraints are satisfied. Q5: Constrained Resource Decisions (Two Products; Two Scarce Resources) The first click brings in the comment and arrow about the production plan without sufficient mach hrs or DL hrs. The second click brings in the comment and arrow about the production plan with enough machine hours, but not enough DL hrs. The third click brings in the comment and the arrow about the feasible production plan. The fourth click brings in the definition of the feasible set. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 37 20,000 80,000 400,000 60,000 R D The graph helped us realize an important aspect of this problem – we thought there were 2 constrained resources but in fact there is only one. For every feasible production plan, Urban will never run out of machine hours. The machine hour constraint is non-binding, or slack, but the direct labor hour constraint is binding. We are back to a one-scarce-resource problem. Q5: Constrained Resource Decisions (Two Products; Two Scarce Resources) This slide is entirely automated. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 38 20,000 80,000 400,000 60,000 R D Here direct labor hours is the sole scarce resource. Urban should make all deluxe umbrellas. We can use the general rule for one-constraint problems. R: CM/DL hr = $20/2DL hrs = $10/DL hr D: CM/DL hr = $66/6DL hrs = $11/DL hr Optimal plan is R=0, D=20,000. Total contribution margin = $66 x 20,000 = $1,320,000 Q5: Constrained Resource Decisions (Two Products; One Scarce Resource) The first 2 text elements are automated. The first click brings in the computation of the CM per DL hour for each product. The rest of the slide is automated. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 39 Max 20R + 66D R,D 0.4R+2D  160,000 2R+6D  600,000 R  0 D  0 subject to: mach hr constraint DL hr constraint Q5: Constrained Resource Decisions (Two Products; Two Scarce Resources) Suppose Urban has been able to train a new workforce and now there are 600,000 direct labor hours available per year. Formulate this as a linear programming problem, graph it, and find the feasible set. The formulation of the problem is the same as before; the only change is that the right hand side (RHS) of the DL hour constraint is larger. The first click starts a sequence to display the formulation of the linear program and all the rest of the elements in the slide. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 40 100,000 80,000 400,000 300,000 R D The machine hour constraint is the same as before. 0.4R+2D  160,000 mach hr constraint 2R+6D  600,000 DL hr constraint When D=0, R=300,000 When R=0, D=100,000 Q5: Constrained Resource Decisions (Two Products; Two Scarce Resources) The sequence to draw the machine hour constraint is automated. The first click starts the sequence to draw the direct labor hour constraint. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 41 100,000 80,000 400,000 300,000 R D Q5: Constrained Resource Decisions (Two Products; Two Scarce Resources) There are not enough machine hours or enough direct labor hours for this production plan. This production plan is feasible; there are enough machine hours and enough direct labor hours for this plan. The feasible set is the area where all the production constraints are satisfied. There are enough direct labor hours, but not enough machine hours, for this production plan. There are enough machine hours, but not enough direct labor hours, for this production plan. The first (green) infeasible production plan is an automated sequence. The first click starts the sequence for the brown production plan. The second click starts the sequence for the purple production plan. The third click starts the sequence for the black production plan. The rest of the slide is automated. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 42 100,000 80,000 400,000 300,000 R D Q5: Constrained Resource Decisions (Two Products; Two Scarce Resources) How do we know which of the feasible plans is optimal? We can’t use the general rule for one-constraint problems. We can graph the total contribution margin line, because its slope will help us determine the optimal production plan. The objective “maximize total contribution margin” means that we choose a production plan so that the contribution margin is a large as possible, without leaving the feasible set. If the slope of the total contribution margin line is lower (in absolute value terms) than the slope of the machine hour constraint, then. . . . . . this would be the optimal production plan. The first text element is automated. 1. The first click brings in the “we can graph…” text element and the “if the slope…” element is automated. 2. The second click starts the sequence to show what the optimal production plan would be if the total CM line had this slope. The rest of the slide is automated. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 43 100,000 80,000 400,000 300,000 R D Q5: Constrained Resource Decisions (Two Products; Two Scarce Resources) What if the slope of the total contribution margin line is higher (in absolute value terms) than the slope of the direct labor hour constraint? If the total CM line had this steep slope, . . . . then this would be the optimal production plan. The first text element is automated. The first click brings in the “if the total CM line has this steep slope…” The second click starts the sequence to show what the optimal production plan would be if the total CM line had this slope. The rest of the slide is automated. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 44 100,000 80,000 400,000 300,000 R D Q5: Constrained Resource Decisions (Two Products; Two Scarce Resources) What if the slope of the total contribution margin line is between the slopes of the two constraints? If the total CM line had this slope, . . . . then this would be the optimal production plan. The first text element is automated. The first click brings in the “if the total CM line has this steep slope…” The second click starts the sequence to show what the optimal production plan would be if the total CM line had this slope. The rest of the slide is automated. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 45 100,000 80,000 400,000 300,000 R D Q5: Constrained Resource Decisions (Two Products; Two Scarce Resources) The last 3 slides showed that the optimal production plan is always at a corner of the feasible set. This gives us an easy way to solve 2 product, 2 or more scarce resource problems. R=0, D=80,000 The total contribution margin here is 0 x $20 + 80,000 x $66 = $5,280,000. R=300,000, D=0 The total contribution margin here is 300,000 x $20 + 0 x $66 = $6,000,000. R=?, D=? Find the intersection of the 2 constraints. The first text element is automated. The first click brings in the “R=0, D=80,000” text, arrow and circle. The second click brings in the “R=300,000 D=0” text, arrow and circle. The third click brings in the “R=?, D=?” text, arrow and circle. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 46 100,000 80,000 400,000 300,000 R D Q5: Constrained Resource Decisions (Two Products; Two Scarce Resources) To find the intersection of the 2 constraints, use substitution or subtract one constraint from the other. Total CM = $5,280,000. Total CM = $6,000,000. 0.4R+2D = 160,000 2R+6D = 600,000 2R+10D = 800,000 2R+6D = 600,000 multiply each side by 5 0R+4D = 200,000 D = 50,000 2R+6(50,000) = 600,000 2R = 300,000 R = 150,000 subtract Total CM = $20 x 150,000 + $66 x 50,000 = $6,300,000. The first text element is automated. The first click brings in the sequence to show that D=50,000 for the intersection of the 2 constraints. The second click brings in the sequence to show that R=150,000 for the intersection of the 2 constraints. The third click brings in the computation for the total CM for the intersection of the 2 constraints and the arrow and the circle. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 47 100,000 80,000 400,000 300,000 R D Q5: Constrained Resource Decisions (Two Products; Two Scarce Resources) By checking the total contribution margin at each corner of the feasible set (ignoring the origin), we can see that the optimal production plan is R=150,000, D=50,000. Total CM = $5,280,000. Total CM = $6,000,000. Total CM = $6,300,000. 150,000 50,000 Knowing how to graph and solve 2 product, 2 scarce resource problems is good for understanding the nature of a linear programming problem (but difficult in more complex problems). This slide is entirely automated. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 48 The quantitative analysis indicates that Urban should produce 150,000 regular umbrellas and 50,000 deluxe umbrellas. What qualitative issues should Urban consider before finalizing its decision? The assumption that customer demand is unlimited is unlikely; can this be investigated further? Are there any long-term strategic implications of minimizing production of the deluxe umbrellas? What would be the effects of attempting to relax the machine hour or DL hour constraints? Are there any worker productivity issues that affect this decision? Q5: Qualitative Factors in Scarce Resource Allocation Decisions One mouse click is required for each bullet. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 49 Problems with multiple products, one scarce resource, and one constraint on customer demand for each product are easy to solve. Q5: Constrained Resource Decisions (Multiple Products; Multiple Constraints) The general rule is to make the product with the highest contribution margin per unit of the scarce resource: until its customer demand is satisfied then move to the product with the next highest contribution margin per unit of the scarce resource, etc. Problems with multiple products and multiple scarce resources are too cumbersome to solve by hand – Excel solver is a useful tool here. The first text element is automated. The first click brings in the second primary bullet. The second click brings in the third primary bullet. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 50 Regular Deluxe Selling price per unit $40 $110 Variable cost per unit 20 44 Contribution margin per unit $20 $ 66 Required machine hours/unit 0.4 2.0 CM/machine hour $50 $33 Urban should first concentrate on making Rs. He can make enough to satisfy customer demand for Rs: 300,000 Rs x 0.4 mach hr/R = 120,000 mach hrs. Q5: Constrained Resource Decisions (Two Products; One Scarce Resource) Urban’s Umbrellas makes two types of patio umbrellas, regular and deluxe. Suppose customer demand for regular umbrellas is 300,000 units and for deluxe umbrellas customer demand is limited to 60,000. Urban has only 160,000 machine hours available per year. What is his optimal production plan? How much would he pay (above his normal costs) for an extra machine hour? The given info is automated, as is the instruction to write the machine hour constraint as an inequality. The first click brings in the conclusion that Urban should first concentrate on Rs. The right arrow is automated. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 51 Regular Deluxe Selling price per unit $40 $110 Variable cost per unit 20 44 Contribution margin per unit $20 $ 66 Required machine hours/unit 0.4 2.0 CM/machine hour $50 $33 The 40,000 remaining hours will make 20,000 Ds. Q5: Constrained Resource Decisions (Two Products; One Scarce Resource) Here Urban will be producing Ds when he runs out of machine hours so he’d be willing to pay up to $33 for an additional machine hour. If customer demand for Rs exceeded 400,000 units, Urban would be willing to pay up to an additional $50 for a machine hour. The optimal plan is 300,000 Rs and 20,000 Ds. The CM/mach hr shows how much Urban would be willing to pay, above his normal costs, for an additional machine hour. If customer demand for Rs and Ds could be satisfied with the 160,000 available machine hours, then Urban would not be willing to pay anything to acquire an additional machine hour. The given info is automated, as is the text to the right of the given info. The first click brings in the text element discussing the optimal plan, which is hidden after the next mouse click. The second click brings in the text element that says he’d pay $33/hr for one more machine hr, which is hidden after the next mouse click. The third click brings in the text element that describes when he’d pay $50/hr for one more machine hr, which is hidden after the next mouse click. The fourth click brings in the text element that describes when he’d pay nothing for one more machine hr. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 52 Q5: Constrained Resource Decisions Using Excel Solver To obtain the solver dialog box, choose “Solver” from the Tools pull-down menu. The “target cell” will contain the maximized value for the objective (or “target”) function. Choose “max” for the types of problems in this chapter. Choose one cell for each choice variable (product). It’s helpful to “name” these cells. Add constraint formulas by clicking “add”. Click “solve” to obtain the next dialog box. The first click brings in the black “target cell” label. The second click brings in the red “choose max” label. The third click brings in the purple “choose one cell” label. The fourth click brings in the blue “add constraint formulas” label. The shadowed text box is automated on a 1.5 second delay. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 53 Q5: Constrained Resource Decisions Using Excel Solver =20*Regular + 66*Deluxe Cell B2 was named “Regular” and cell C2 was named Deluxe. =0.4*Regular+2*Deluxe =2*Regular+6*Deluxe =Regular (cell B2) =Deluxe (cell C2) Then click “solve” and choose all 3 reports. The first click brings in the text element that describes the names of the 2 changing cells. The second click brings in the formula for the target cell. The third click brings in the 2 formulas for the scarce resource constraints. The fourth click brings in the 2 formulas for the nonnegativity constraints. The fifth click brings in the shadowed box. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 54 Q5: Excel Solver Answer Report Refer to the problem on Slide #50. The total contribution margin for the optimal plan was $6.3 million. The optimal production plan was 150,000 Rs and 50,000 Ds. The machine and DL hour constraints are binding – the plan uses all available machine and DL hours. The nonnegativity constraints for R and D are not binding; the slack is 50,000 and 150,000 units respectively. The first click brings in the total contribution margin label. The second click brings in the label for the optimal plan. The third click brings in the label for the binding resource constraints. The fourth click brings in the label for the slack nonnegativity constraints. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 55 Q5: Excel Solver Sensitivity Report Refer to the problem on Slide #50. The CM per unit for Regular can drop to $13.20 or increase to $22 (all else equal) before the optimal plan will change. The CM per unit for Deluxe can drop to $60 or increase to $100 (all else equal) before the optimal plan will change. This shows how much the slope of the total CM line can change before the optimal production plan will change. The first click brings in the label for the allowable change in CM. The second click brings the interpretation of the allowable change in contribution margin (at the bottom). The next click advances to the next slide where the discussion of the sensitivity report is continued. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 56 Q5: Excel Solver Sensitivity Report Refer to the problem on Slide #50. The available DL hours could decrease to 480,000 or increase to 800,000 (all else equal) before the shadow price for DL would change. The available machine hours could decrease to 120,000 or increase to 200,000 (all else equal) before the shadow price for machine hours would change. This shows how much the RHS of each constraint can change before the shadow price will change. The first click brings in the label for the allowable change in RHS of constraints. The second click brings the interpretation of the allowable change in RHS of constraints. The next click advances to the next slide where the discussion of the sensitivity report is continued. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 57 Q5: Excel Solver Sensitivity Report Refer to the problem on Slide #50. Urban would be willing to pay up to $8.50 to obtain one more DL hour and up to $7.50 to obtain one more machine hour. The shadow price shows how much a one unit increase in the RHS of a constraint will improve the total contribution margin. The first click brings in the label for the shadow prices. The second click brings the interpretation of the shadow prices. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 58 Q7: Impacts to Quality of Nonroutine Operating Decisions The quality of the information used in nonroutine operating decisions must be assessed. There may be more information quality issues (and more uncertainty) in nonroutine decisions because of the irregularity of the decisions. Business risk (changes in economic condition, consumer demand, regulation, competitors, etc.) Three aspects of the quality of information available can affect decision quality. Information timeliness Assumptions in the quantitative and qualitative analyses The first primary bullet and its secondary bullet are automated. The first click brings in the second primary bullet, and its three secondary bullets are automated. © John Wiley & Sons, 2011 Chapter 4: Relevant Costs for Nonroutine Operating Decisions Eldenburg & Wolcott’s Cost Management, 2e Slide # 59 Short term decision must align to company’s overall strategic plans Must watch for decision maker bias Predisposition for specific outcome Preference for one type of analysis without considering other options Opportunity costs are often overlooked Performing sensitivity analysis can help assess and minimize business risk Established control system incentives (performance bonuses, etc.) can encourage sub-obtimal decision making Q7: Impacts to Quality of Nonroutine Operating Decisions The first primary bullet is automated. The first click brings in the second primary bullet The second click brings in the third primary bullet, and its three secondary bullets are automated. Direct materials$6.20 Direct labor8.00 Variable mfg. overhead5.80 Fixed mfg. overhead3.50 Shipping/handling2.50 Fixed administrative costs0.88 Fixed selling costs0.36 $27.24 RobotBits Direct materials $6.20 Direct labor 8.00 Variable mfg. overhead 5.80 Fixed mfg. overhead 3.50 Shipping/handling 2.50 Fixed administrative costs 0.88 Fixed selling costs 0.36 $27.24 Sheet2 Sheet3 RobotBits Direct materials $6.20 Direct labor 8.00 Variable mfg. overhead 5.80 Fixed mfg. overhead 3.50 Shipping/handling 2.50 Fixed administrative costs 0.88 Fixed selling costs 0.36 $27.24 Sheet2 Sheet3 GibsonQuaidRussellTotal Revenues$390 $433 $837 $1,660 Variable costs2473354721,054 Contribution margin14398365606 Traceable fixed costs166114175455 Division operating income($23)($16)$190 151 81 $70 Avoidable$154 $96 $139 Unavoidable121836 $166 $114 $175 Unallocated fixed costs Operating income Breakdown of traceable fixed costs: RobotBits Direct materials $6.20 Direct labor 8.00 Variable mfg. overhead 5.80 Fixed mfg. overhead 3.50 Shipping/handling 2.50 Fixed administrative costs 0.88 Fixed selling costs 0.36 $27.24 keep drop Gibson Quaid Russell Total Revenues $390 $433 $837 $1,660 Variable costs 247 335 472 1,054 Contribution margin 143 98 365 606 Traceable fixed costs 166 114 175 455 Division operating income ($23) ($16) $190 151 Unallocated fixed costs 81 Operating income $70 Breakdown of traceable fixed costs: Avoidable $154 $96 $139 Unavoidable 12 18 36 $166 $114 $175 Sheet3 GibsonQuaid Contribution margin$143 $98 Avoidable fixed costs15496 Effect on profit if keep($11)$2 RobotBits Direct materials $6.20 Direct labor 8.00 Variable mfg. overhead 5.80 Fixed mfg. overhead 3.50 Shipping/handling 2.50 Fixed administrative costs 0.88 Fixed selling costs 0.36 $27.24 keep drop Gibson Quaid Russell Total Revenues $390 $433 $837 $1,660 Variable costs 247 335 472 1,054 Contribution margin 143 98 365 606 Traceable fixed costs 166 114 175 455 Division operating income ($23) ($16) $190 151 Unallocated fixed costs 81 Operating income $70 Breakdown of traceable fixed costs: Avoidable $154 $96 $139 Unavoidable 12 18 36 $166 $114 $175 Sheet3 RobotBits Direct materials $6.20 Direct labor 8.00 Variable mfg. overhead 5.80 Fixed mfg. overhead 3.50 Shipping/handling 2.50 Fixed administrative costs 0.88 Fixed selling costs 0.36 $27.24 keep drop Gibson Quaid Russell Total Revenues $390 $433 $837 $1,660 Variable costs 247 335 472 1,054 Contribution margin 143 98 365 606 Traceable fixed costs 166 114 175 455 Division operating income ($23) ($16) $190 151 Unallocated fixed costs 81 Operating income $70 Breakdown of traceable fixed costs: Avoidable $154 $96 $139 Unavoidable 12 18 36 $166 $114 $175 Gibson Quaid Contribution margin $143 $98 Avoidable fixed costs 154 96 Effect on profit if keep ($11) $2 Sheet3 GibsonQuaidRussellTotal Revenues$390 $433 $837 $1,270 Variable costs247335472807 Contribution margin14398365$463 Traceable fixed costs166114175289 Division operating income($23)($16)$190 $174 81 Gibson's unavoidable fixed costs12 $81 Unallocated fixed costs Operating income RobotBits Direct materials $6.20 Direct labor 8.00 Variable mfg. overhead 5.80 Fixed mfg. overhead 3.50 Shipping/handling 2.50 Fixed administrative costs 0.88 Fixed selling costs 0.36 $27.24 keep drop Gibson Quaid Russell Total Revenues $390 $433 $837 $1,660 Variable costs 247 335 472 1,054 Contribution margin 143 98 365 606 Traceable fixed costs 166 114 175 455 Division operating income ($23) ($16) $190 151 Unallocated fixed costs 81 Operating income $70 Breakdown of traceable fixed costs: Avoidable $154 $96 $139 Unavoidable 12 18 36 $166 $114 $175 Sheet3 RobotBits Direct materials $6.20 Direct labor 8.00 Variable mfg. overhead 5.80 Fixed mfg. overhead 3.50 Shipping/handling 2.50 Fixed administrative costs 0.88 Fixed selling costs 0.36 $27.24 keep drop Gibson Quaid Russell Total Revenues $390 $433 $837 $1,660 Variable costs 247 335 472 1,054 Contribution margin 143 98 365 606 Traceable fixed costs 166 114 175 455 Division operating income ($23) ($16) $190 151 Unallocated fixed costs 81 Operating income $70 Breakdown of traceable fixed costs: Avoidable $154 $96 $139 Unavoidable 12 18 36 $166 $114 $175 Gibson Quaid Contribution margin $143 $98 Avoidable fixed costs 154 96 Effect on profit if keep ($11) $2 Gibson Quaid Russell Total Revenues $390 $433 $837 $1,270 Variable costs 247 335 472 807 Contribution margin 143 98 365 $463 Traceable fixed costs 166 114 175 289 Division operating income ($23) ($16) $190 $174 Unallocated fixed costs 81 Gibson's unavoidable fixed costs 12 Operating income $81 Sheet3 $11 Opportunity cost of eliminating Gibson (14) ($3) Revised effect on profit if drop Gibson Effect on profit if drop Gibson before considering impact on Quaid's production costs RobotBits Direct materials $6.20 Direct labor 8.00 Variable mfg. overhead 5.80 Fixed mfg. overhead 3.50 Shipping/handling 2.50 Fixed administrative costs 0.88 Fixed selling costs 0.36 $27.24 keep drop Gibson Quaid Russell Total Revenues $390 $433 $837 $1,660 Variable costs 247 335 472 1,054 Contribution margin 143 98 365 606 Traceable fixed costs 166 114 175 455 Division operating income ($23) ($16) $190 151 Unallocated fixed costs 81 Operating income $70 Breakdown of traceable fixed costs: Avoidable $154 $96 $139 Unavoidable 12 18 36 $166 $114 $175 Gibson Quaid Contribution margin $143 $98 Avoidable fixed costs 154 96 Effect on profit if keep ($11) $2 Gibson Quaid Russell Total Revenues $390 $433 $837 $1,270 Variable costs 247 335 472 807 Contribution margin 143 98 365 $463 Traceable fixed costs 166 114 175 289 Division operating income ($23) ($16) $190 $174 Unallocated fixed costs 81 Gibson's unavoidable fixed costs 12 Operating income $81 Effect on profit if drop Gibson before considering impact on Quaid's production costs $11 Opportunity cost of eliminating Gibson (14) Revised effect on profit if drop Gibson ($3) Sheet3 Microsoft Excel 9.0 Answer Report Target Cell (Max) CellName Original Value Final Value $B$3Regular 06,300,000 Adjustable Cells CellName Original Value Final Value $B$2Regular 0150,000 $C$2Deluxe 050000 Constraints CellName Cell Value FormulaStatusSlack $B$9DL hr 600,000$B$9<=$C$9Binding0 $B$8mach hr 160,000$B$8<=$C$8Binding0 $B$11D>0
50,000$B$11>=$C$11
Not
Binding
50,000
$B$10R>0
150,000$B$10>=$C$10
Not
Binding
150,000
Answer Report 2

Microsoft Excel 9.0 Answer Report
Worksheet: [Ch4 part 2 page 3.xls]input
Report Created: 5/22/2003 10:02:23 AM
Target Cell (Max)
Cell Name Original Value Final Value
$B$7 A 0 1320000 This is the value of the objective function at the optimal production plan
Adjustable Cells
Cell Name Original Value Final Value
$B$6 A 0 0 This is the optimal production plan
$C$6 B 0 20000
Constraints
Cell Name Cell Value Formula Status Slack
$B$12 LHS 40000 $B$12<=$C$12 Not Binding 120000 This says the machine hour constraint is slack by 120,000 M Hrs* $B$13 LHS 120000 $B$13<=$C$13 Binding 0 This says the direct labor hour constraint is binding (i.e. all DL hrs used up) $B$14 LHS 0 $B$14>=$C$14 Binding 0 This says the nonnegativity constraint for A is binding (i.e. A=0)
$B$15 LHS 20000 $B$15>=$C$15 Not Binding 20000 This says the nonnegativity constraint for B is slack by 20,000
*This makes sense, because making 20,000 Bs uses 40,000 M Hrs, leaving 120,000 machine hours unused

Sensitivity Report 2

Microsoft Excel 9.0 Sensitivity Report
Worksheet: [Ch4 part 2 page 3.xls]input
Report Created: 5/22/2003 10:02:23 AM
Adjustable Cells
Final Reduced Objective Allowable Allowable
Cell Name Value Cost Coefficient Increase Decrease (CM of A between 0 and 22 gives same sales mix)
$B$6 A 0 0 20 2 1E+30 This is the amount the CM per unit of A can change before the optimal sales mix would change
$C$6 B 20000 0 66 1E+30 6 This is the amount the CM per unit of B can change before the optimal sales mix would change
(CM of B between 60 and any positive number gives same sales mix)
Constraints
Final Shadow Constraint Allowable Allowable
Cell Name Value Price R.H. Side Increase Decrease
$B$12 LHS 40000 0 160000 1E+30 120000 This shows how much you’d be willing to pay to loosen the RHS of the Machine Hour constraint by one M Hr
$B$13 LHS 120000 11 120000 360000 120000 This shows how much you’d be willing to pay to loosen the RHS of the DL Hour constraint by one DL Hr
$B$14 LHS 0 -2 0 60000 450000
$B$15 LHS 20000 0 0 20000 1E+30

Answer Report 3

Microsoft Excel 9.0 Answer Report
Target Cell (Max)
Cell Name Original Value Final Value
$B$3 Regular 0 6,300,000
Adjustable Cells
Cell Name Original Value Final Value
$B$2 Regular 0 150,000
$C$2 Deluxe 0 50000
Constraints
Cell Name Cell Value Formula Status Slack
$B$11 LHS 50,000 $B$11>=$C$11 Not Binding 50,000
$B$8 LHS 160,000 $B$8<=$C$8 Binding 0 $B$10 LHS 150,000 $B$10>=$C$10 Not Binding 150,000
$B$9 LHS 600,000 $B$9<=$C$9 Binding 0 Sensitivity Report 3 Microsoft Excel 9.0 Sensitivity Report Worksheet: [Ch4 part 2 page 50.xls]input Report Created: 7/22/2004 10:18:05 AM Adjustable Cells Final Reduced Objective Allowable Allowable Cell Name Value Cost Coefficient Increase Decrease $B$2 Regular 150,000 0 20 2 6.8 $C$2 Deluxe 50000 0 66 34 6 Constraints Final Shadow Constraint Allowable Allowable Cell Name Value Price R.H. Side Increase Decrease $B$11 LHS 50,000 0 0 50000 1E+30 $B$8 LHS 160,000 8 160000 40000 40000 $B$10 LHS 150,000 0 0 150000 1E+30 $B$9 LHS 600,000 9 600000 200000 120000 Limits Report 3 Microsoft Excel 9.0 Limits Report Worksheet: [Ch4 part 2 page 50.xls]input Report Created: 7/22/2004 10:18:05 AM Target Cell Name Value $B$3 Regular 6,300,000 Adjustable Lower Target Upper Target Cell Name Value Limit Result Limit Result $B$2 Regular 150,000 0 3,300,000 150,000 6,299,999 $C$2 Deluxe 50000 0 3000000 50000.0012631063 6300000.08336501 Answer Report 1 Microsoft Excel 9.0 Answer Report Target Cell (Max) Cell Name Original Value Final Value $B$3 Regular 0 6,300,000 Adjustable Cells Cell Name Original Value Final Value $B$2 Regular 0 150,000 $C$2 Deluxe 0 50000 Constraints Cell Name Cell Value Formula Status Slack $B$9 DL hr 600,000 $B$9<=$C$9 Binding 0 $B$8 mach hr 160,000 $B$8<=$C$8 Binding 0 $B$11 D>0 50,000 $B$11>=$C$11 Not Binding 50,000
$B$10 R>0 150,000 $B$10>=$C$10 Not Binding 150,000

Sensitivity Report 1

Microsoft Excel 9.0 Sensitivity Report
Worksheet: [Ch4 part 2 page 50.xls]input
Report Created: 7/22/2004 10:39:43 AM
Adjustable Cells
Final Reduced Objective Allowable Allowable
Cell Name Value Cost Coefficient Increase Decrease
$B$2 Regular 150,000 0 20 2 6.8
$C$2 Deluxe 50000 0 66 34 6
Constraints
Final Shadow Constraint Allowable Allowable
Cell Name Value Price R.H. Side Increase Decrease
$B$9 LHS 600,000 9 600000 200000 120000
$B$8 LHS 160,000 8 160000 40000 40000
$B$11 LHS 50,000 0 0 50000 1E+30
$B$10 LHS 150,000 0 0 150000 1E+30

Limits Report 1

Microsoft Excel 9.0 Limits Report
Worksheet: [Ch4 part 2 page 50.xls]input
Report Created: 7/22/2004 10:39:43 AM
Target
Cell Name Value
$B$3 Regular 6,300,000
Adjustable Lower Target Upper Target
Cell Name Value Limit Result Limit Result
$B$2 Regular 150,000 0 3,300,000 150,000 6,299,999
$C$2 Deluxe 50000 0 3000000 50000.0012631063 6300000.08336501

input

Regular Deluxe
150,000 50000
6,300,000
Contraints
LHS RHS
160,000 160,000 mach hr constraint
600,000 600,000 DL hr constraint
150,000 0 R nonnegative
50,000 0 D nonnegative

Microsoft Excel 9.0 Sensitivity Report
Adjustable Cells
FinalReducedObjectiveAllowableAllowable
CellNameValueCostCoefficientIncreaseDecrease
$B$2Regular150,00002026.8
$C$2Deluxe50000066346
Constraints
FinalShadowConstraintAllowableAllowable
CellNameValuePriceR.H. SideIncreaseDecrease
$B$9DL hr600,0009600000200000120000
$B$8mach hr160,00081600004000040000
$B$11D>050,00000500001E+30
$B$10R>0150,000001500001E+30
Answer Report 2

Microsoft Excel 9.0 Answer Report
Worksheet: [Ch4 part 2 page 3.xls]input
Report Created: 5/22/2003 10:02:23 AM
Target Cell (Max)
Cell Name Original Value Final Value
$B$7 A 0 1320000 This is the value of the objective function at the optimal production plan
Adjustable Cells
Cell Name Original Value Final Value
$B$6 A 0 0 This is the optimal production plan
$C$6 B 0 20000
Constraints
Cell Name Cell Value Formula Status Slack
$B$12 LHS 40000 $B$12<=$C$12 Not Binding 120000 This says the machine hour constraint is slack by 120,000 M Hrs* $B$13 LHS 120000 $B$13<=$C$13 Binding 0 This says the direct labor hour constraint is binding (i.e. all DL hrs used up) $B$14 LHS 0 $B$14>=$C$14 Binding 0 This says the nonnegativity constraint for A is binding (i.e. A=0)
$B$15 LHS 20000 $B$15>=$C$15 Not Binding 20000 This says the nonnegativity constraint for B is slack by 20,000
*This makes sense, because making 20,000 Bs uses 40,000 M Hrs, leaving 120,000 machine hours unused

Sensitivity Report 2

Microsoft Excel 9.0 Sensitivity Report
Worksheet: [Ch4 part 2 page 3.xls]input
Report Created: 5/22/2003 10:02:23 AM
Adjustable Cells
Final Reduced Objective Allowable Allowable
Cell Name Value Cost Coefficient Increase Decrease (CM of A between 0 and 22 gives same sales mix)
$B$6 A 0 0 20 2 1E+30 This is the amount the CM per unit of A can change before the optimal sales mix would change
$C$6 B 20000 0 66 1E+30 6 This is the amount the CM per unit of B can change before the optimal sales mix would change
(CM of B between 60 and any positive number gives same sales mix)
Constraints
Final Shadow Constraint Allowable Allowable
Cell Name Value Price R.H. Side Increase Decrease
$B$12 LHS 40000 0 160000 1E+30 120000 This shows how much you’d be willing to pay to loosen the RHS of the Machine Hour constraint by one M Hr
$B$13 LHS 120000 11 120000 360000 120000 This shows how much you’d be willing to pay to loosen the RHS of the DL Hour constraint by one DL Hr
$B$14 LHS 0 -2 0 60000 450000
$B$15 LHS 20000 0 0 20000 1E+30

Answer Report 3

Microsoft Excel 9.0 Answer Report
Target Cell (Max)
Cell Name Original Value Final Value
$B$3 Regular 0 6,300,000
Adjustable Cells
Cell Name Original Value Final Value
$B$2 Regular 0 150,000
$C$2 Deluxe 0 50000
Constraints
Cell Name Cell Value Formula Status Slack
$B$11 LHS 50,000 $B$11>=$C$11 Not Binding 50,000
$B$8 LHS 160,000 $B$8<=$C$8 Binding 0 $B$10 LHS 150,000 $B$10>=$C$10 Not Binding 150,000
$B$9 LHS 600,000 $B$9<=$C$9 Binding 0 Sensitivity Report 3 Microsoft Excel 9.0 Sensitivity Report Worksheet: [Ch4 part 2 page 50.xls]input Report Created: 7/22/2004 10:18:05 AM Adjustable Cells Final Reduced Objective Allowable Allowable Cell Name Value Cost Coefficient Increase Decrease $B$2 Regular 150,000 0 20 2 6.8 $C$2 Deluxe 50000 0 66 34 6 Constraints Final Shadow Constraint Allowable Allowable Cell Name Value Price R.H. Side Increase Decrease $B$11 LHS 50,000 0 0 50000 1E+30 $B$8 LHS 160,000 8 160000 40000 40000 $B$10 LHS 150,000 0 0 150000 1E+30 $B$9 LHS 600,000 9 600000 200000 120000 Limits Report 3 Microsoft Excel 9.0 Limits Report Worksheet: [Ch4 part 2 page 50.xls]input Report Created: 7/22/2004 10:18:05 AM Target Cell Name Value $B$3 Regular 6,300,000 Adjustable Lower Target Upper Target Cell Name Value Limit Result Limit Result $B$2 Regular 150,000 0 3,300,000 150,000 6,299,999 $C$2 Deluxe 50000 0 3000000 50000.0012631063 6300000.08336501 Answer Report 1 Microsoft Excel 9.0 Answer Report Target Cell (Max) Cell Name Original Value Final Value $B$3 Regular 0 6,300,000 Adjustable Cells Cell Name Original Value Final Value $B$2 Regular 0 150,000 $C$2 Deluxe 0 50000 Constraints Cell Name Cell Value Formula Status Slack $B$9 LHS 600,000 $B$9<=$C$9 Binding 0 $B$8 LHS 160,000 $B$8<=$C$8 Binding 0 $B$11 LHS 50,000 $B$11>=$C$11 Not Binding 50,000
$B$10 LHS 150,000 $B$10>=$C$10 Not Binding 150,000

Sensitivity Report 1

Microsoft Excel 9.0 Sensitivity Report
Adjustable Cells
Final Reduced Objective Allowable Allowable
Cell Name Value Cost Coefficient Increase Decrease
$B$2 Regular 150,000 0 20 2 6.8
$C$2 Deluxe 50000 0 66 34 6
Constraints
Final Shadow Constraint Allowable Allowable
Cell Name Value Price R.H. Side Increase Decrease
$B$9 DL hr 600,000 9 600000 200000 120000
$B$8 mach hr 160,000 8 160000 40000 40000
$B$11 D>0 50,000 0 0 50000 1E+30
$B$10 R>0 150,000 0 0 150000 1E+30

Limits Report 1

Microsoft Excel 9.0 Limits Report
Worksheet: [Ch4 part 2 page 50.xls]input
Report Created: 7/22/2004 10:39:43 AM
Target
Cell Name Value
$B$3 Regular 6,300,000
Adjustable Lower Target Upper Target
Cell Name Value Limit Result Limit Result
$B$2 Regular 150,000 0 3,300,000 150,000 6,299,999
$C$2 Deluxe 50000 0 3000000 50000.0012631063 6300000.08336501

input

Regular Deluxe
150,000 50000
6,300,000
Contraints
LHS RHS
160,000 160,000 mach hr constraint
600,000 600,000 DL hr constraint
150,000 0 R nonnegative
50,000 0 D nonnegative

Microsoft Excel 9.0 Sensitivity Report
Adjustable Cells
FinalReducedObjectiveAllowableAllowable
CellNameValueCostCoefficientIncreaseDecrease
$B$2Regular150,00002026.8
$C$2Deluxe50000066346
Constraints
FinalShadowConstraintAllowableAllowable
CellNameValuePriceR.H. SideIncreaseDecrease
$B$9DL hr600,0008.50600000200000120000
$B$8mach hr160,0007.501600004000040000
$B$11D>050,0000.000500001E+30
$B$10R>0150,0000.0001500001E+30
Answer Report 2

Microsoft Excel 9.0 Answer Report
Worksheet: [Ch4 part 2 page 3.xls]input
Report Created: 5/22/2003 10:02:23 AM
Target Cell (Max)
Cell Name Original Value Final Value
$B$7 A 0 1320000 This is the value of the objective function at the optimal production plan
Adjustable Cells
Cell Name Original Value Final Value
$B$6 A 0 0 This is the optimal production plan
$C$6 B 0 20000
Constraints
Cell Name Cell Value Formula Status Slack
$B$12 LHS 40000 $B$12<=$C$12 Not Binding 120000 This says the machine hour constraint is slack by 120,000 M Hrs* $B$13 LHS 120000 $B$13<=$C$13 Binding 0 This says the direct labor hour constraint is binding (i.e. all DL hrs used up) $B$14 LHS 0 $B$14>=$C$14 Binding 0 This says the nonnegativity constraint for A is binding (i.e. A=0)
$B$15 LHS 20000 $B$15>=$C$15 Not Binding 20000 This says the nonnegativity constraint for B is slack by 20,000
*This makes sense, because making 20,000 Bs uses 40,000 M Hrs, leaving 120,000 machine hours unused

Sensitivity Report 2

Microsoft Excel 9.0 Sensitivity Report
Worksheet: [Ch4 part 2 page 3.xls]input
Report Created: 5/22/2003 10:02:23 AM
Adjustable Cells
Final Reduced Objective Allowable Allowable
Cell Name Value Cost Coefficient Increase Decrease (CM of A between 0 and 22 gives same sales mix)
$B$6 A 0 0 20 2 1E+30 This is the amount the CM per unit of A can change before the optimal sales mix would change
$C$6 B 20000 0 66 1E+30 6 This is the amount the CM per unit of B can change before the optimal sales mix would change
(CM of B between 60 and any positive number gives same sales mix)
Constraints
Final Shadow Constraint Allowable Allowable
Cell Name Value Price R.H. Side Increase Decrease
$B$12 LHS 40000 0 160000 1E+30 120000 This shows how much you’d be willing to pay to loosen the RHS of the Machine Hour constraint by one M Hr
$B$13 LHS 120000 11 120000 360000 120000 This shows how much you’d be willing to pay to loosen the RHS of the DL Hour constraint by one DL Hr
$B$14 LHS 0 -2 0 60000 450000
$B$15 LHS 20000 0 0 20000 1E+30

Answer Report 3

Microsoft Excel 9.0 Answer Report
Target Cell (Max)
Cell Name Original Value Final Value
$B$3 Regular 0 6,300,000
Adjustable Cells
Cell Name Original Value Final Value
$B$2 Regular 0 150,000
$C$2 Deluxe 0 50000
Constraints
Cell Name Cell Value Formula Status Slack
$B$11 LHS 50,000 $B$11>=$C$11 Not Binding 50,000
$B$8 LHS 160,000 $B$8<=$C$8 Binding 0 $B$10 LHS 150,000 $B$10>=$C$10 Not Binding 150,000
$B$9 LHS 600,000 $B$9<=$C$9 Binding 0 Sensitivity Report 3 Microsoft Excel 9.0 Sensitivity Report Worksheet: [Ch4 part 2 page 50.xls]input Report Created: 7/22/2004 10:18:05 AM Adjustable Cells Final Reduced Objective Allowable Allowable Cell Name Value Cost Coefficient Increase Decrease $B$2 Regular 150,000 0 20 2 6.8 $C$2 Deluxe 50000 0 66 34 6 Constraints Final Shadow Constraint Allowable Allowable Cell Name Value Price R.H. Side Increase Decrease $B$11 LHS 50,000 0 0 50000 1E+30 $B$8 LHS 160,000 8 160000 40000 40000 $B$10 LHS 150,000 0 0 150000 1E+30 $B$9 LHS 600,000 9 600000 200000 120000 Limits Report 3 Microsoft Excel 9.0 Limits Report Worksheet: [Ch4 part 2 page 50.xls]input Report Created: 7/22/2004 10:18:05 AM Target Cell Name Value $B$3 Regular 6,300,000 Adjustable Lower Target Upper Target Cell Name Value Limit Result Limit Result $B$2 Regular 150,000 0 3,300,000 150,000 6,299,999 $C$2 Deluxe 50000 0 3000000 50000.0012631063 6300000.08336501 Answer Report 1 Microsoft Excel 9.0 Answer Report Target Cell (Max) Cell Name Original Value Final Value $B$3 Regular 0 6,300,000 Adjustable Cells Cell Name Original Value Final Value $B$2 Regular 0 150,000 $C$2 Deluxe 0 50000 Constraints Cell Name Cell Value Formula Status Slack $B$9 LHS 600,000 $B$9<=$C$9 Binding 0 $B$8 LHS 160,000 $B$8<=$C$8 Binding 0 $B$11 LHS 50,000 $B$11>=$C$11 Not Binding 50,000
$B$10 LHS 150,000 $B$10>=$C$10 Not Binding 150,000

Sensitivity Report 1

Microsoft Excel 9.0 Sensitivity Report
Adjustable Cells
Final Reduced Objective Allowable Allowable
Cell Name Value Cost Coefficient Increase Decrease
$B$2 Regular 150,000 0 20 2 6.8
$C$2 Deluxe 50000 0 66 34 6
Constraints
Final Shadow Constraint Allowable Allowable
Cell Name Value Price R.H. Side Increase Decrease
$B$9 DL hr 600,000 8.50 600000 200000 120000
$B$8 mach hr 160,000 7.50 160000 40000 40000
$B$11 D>0 50,000 0.00 0 50000 1E+30
$B$10 R>0 150,000 0.00 0 150000 1E+30

Limits Report 1

Microsoft Excel 9.0 Limits Report
Worksheet: [Ch4 part 2 page 50.xls]input
Report Created: 7/22/2004 10:39:43 AM
Target
Cell Name Value
$B$3 Regular 6,300,000
Adjustable Lower Target Upper Target
Cell Name Value Limit Result Limit Result
$B$2 Regular 150,000 0 3,300,000 150,000 6,299,999
$C$2 Deluxe 50000 0 3000000 50000.0012631063 6300000.08336501

input

Regular Deluxe
150,000 50000
6,300,000
Contraints
LHS RHS
160,000 160,000 mach hr constraint
600,000 600,000 DL hr constraint
150,000 0 R nonnegative
50,000 0 D nonnegative

Answer Report 2

Microsoft Excel 9.0 Answer Report
Worksheet: [Ch4 part 2 page 3.xls]input
Report Created: 5/22/2003 10:02:23 AM
Target Cell (Max)
Cell Name Original Value Final Value
$B$7 A 0 1320000 This is the value of the objective function at the optimal production plan
Adjustable Cells
Cell Name Original Value Final Value
$B$6 A 0 0 This is the optimal production plan
$C$6 B 0 20000
Constraints
Cell Name Cell Value Formula Status Slack
$B$12 LHS 40000 $B$12<=$C$12 Not Binding 120000 This says the machine hour constraint is slack by 120,000 M Hrs* $B$13 LHS 120000 $B$13<=$C$13 Binding 0 This says the direct labor hour constraint is binding (i.e. all DL hrs used up) $B$14 LHS 0 $B$14>=$C$14 Binding 0 This says the nonnegativity constraint for A is binding (i.e. A=0)
$B$15 LHS 20000 $B$15>=$C$15 Not Binding 20000 This says the nonnegativity constraint for B is slack by 20,000
*This makes sense, because making 20,000 Bs uses 40,000 M Hrs, leaving 120,000 machine hours unused

Sensitivity Report 2

Microsoft Excel 9.0 Sensitivity Report
Worksheet: [Ch4 part 2 page 3.xls]input
Report Created: 5/22/2003 10:02:23 AM
Adjustable Cells
Final Reduced Objective Allowable Allowable
Cell Name Value Cost Coefficient Increase Decrease (CM of A between 0 and 22 gives same sales mix)
$B$6 A 0 0 20 2 1E+30 This is the amount the CM per unit of A can change before the optimal sales mix would change
$C$6 B 20000 0 66 1E+30 6 This is the amount the CM per unit of B can change before the optimal sales mix would change
(CM of B between 60 and any positive number gives same sales mix)
Constraints
Final Shadow Constraint Allowable Allowable
Cell Name Value Price R.H. Side Increase Decrease
$B$12 LHS 40000 0 160000 1E+30 120000 This shows how much you’d be willing to pay to loosen the RHS of the Machine Hour constraint by one M Hr
$B$13 LHS 120000 11 120000 360000 120000 This shows how much you’d be willing to pay to loosen the RHS of the DL Hour constraint by one DL Hr
$B$14 LHS 0 -2 0 60000 450000
$B$15 LHS 20000 0 0 20000 1E+30

Answer Report 3

Microsoft Excel 9.0 Answer Report
Target Cell (Max)
Cell Name Original Value Final Value
$B$3 Regular 0 6,300,000
Adjustable Cells
Cell Name Original Value Final Value
$B$2 Regular 0 150,000
$C$2 Deluxe 0 50000
Constraints
Cell Name Cell Value Formula Status Slack
$B$11 LHS 50,000 $B$11>=$C$11 Not Binding 50,000
$B$8 LHS 160,000 $B$8<=$C$8 Binding 0 $B$10 LHS 150,000 $B$10>=$C$10 Not Binding 150,000
$B$9 LHS 600,000 $B$9<=$C$9 Binding 0 Sensitivity Report 3 Microsoft Excel 9.0 Sensitivity Report Worksheet: [Ch4 part 2 page 50.xls]input Report Created: 7/22/2004 10:18:05 AM Adjustable Cells Final Reduced Objective Allowable Allowable Cell Name Value Cost Coefficient Increase Decrease $B$2 Regular 150,000 0 20 2 6.8 $C$2 Deluxe 50000 0 66 34 6 Constraints Final Shadow Constraint Allowable Allowable Cell Name Value Price R.H. Side Increase Decrease $B$11 LHS 50,000 0 0 50000 1E+30 $B$8 LHS 160,000 8 160000 40000 40000 $B$10 LHS 150,000 0 0 150000 1E+30 $B$9 LHS 600,000 9 600000 200000 120000 Limits Report 3 Microsoft Excel 9.0 Limits Report Worksheet: [Ch4 part 2 page 50.xls]input Report Created: 7/22/2004 10:18:05 AM Target Cell Name Value $B$3 Regular 6,300,000 Adjustable Lower Target Upper Target Cell Name Value Limit Result Limit Result $B$2 Regular 150,000 0 3,300,000 150,000 6,299,999 $C$2 Deluxe 50000 0 3000000 50000.0012631063 6300000.08336501 Answer Report 1 Microsoft Excel 9.0 Answer Report Target Cell (Max) Cell Name Original Value Final Value $B$3 Regular 0 6,300,000 Adjustable Cells Cell Name Original Value Final Value $B$2 Regular 0 150,000 $C$2 Deluxe 0 50000 Constraints Cell Name Cell Value Formula Status Slack $B$9 LHS 600,000 $B$9<=$C$9 Binding 0 $B$8 LHS 160,000 $B$8<=$C$8 Binding 0 $B$11 LHS 50,000 $B$11>=$C$11 Not Binding 50,000
$B$10 LHS 150,000 $B$10>=$C$10 Not Binding 150,000

Sensitivity Report 1

Microsoft Excel 9.0 Sensitivity Report
Adjustable Cells
Final Reduced Objective Allowable Allowable
Cell Name Value Cost Coefficient Increase Decrease
$B$2 Regular 150,000 0 20 2 6.8
$C$2 Deluxe 50000 0 66 34 6
Constraints
Final Shadow Constraint Allowable Allowable
Cell Name Value Price R.H. Side Increase Decrease
$B$9 DL hr 600,000 8.50 600000 200000 120000
$B$8 mach hr 160,000 7.50 160000 40000 40000
$B$11 D>0 50,000 0.00 0 50000 1E+30
$B$10 R>0 150,000 0.00 0 150000 1E+30

Limits Report 1

Microsoft Excel 9.0 Limits Report
Worksheet: [Ch4 part 2 page 50.xls]input
Report Created: 7/22/2004 10:39:43 AM
Target
Cell Name Value
$B$3 Regular 6,300,000
Adjustable Lower Target Upper Target
Cell Name Value Limit Result Limit Result
$B$2 Regular 150,000 0 3,300,000 150,000 6,299,999
$C$2 Deluxe 50000 0 3000000 50000.0012631063 6300000.08336501

input

Regular Deluxe
150,000 50000
6,300,000
Contraints
LHS RHS
160,000 160,000 mach hr constraint
600,000 600,000 DL hr constraint
150,000 0 R nonnegative
50,000 0 D nonnegative

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