1. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Traditional, Volume-Based Product-Costing System [Aerotech produces three complex printed circuit boards referred to as Mode I, Mode II, and Mode III. [The following information is obtained from company records: [Aerotech produces three complex printed circuit boards referred to as Mode I, Mode II, and Mode III. [The following information is obtained from company records:

2. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Traditional, Volume-Based Product-Costing System Aerotech wishes to see what target selling prices would be suggested when using activity-based costing. Let’s see how ABC works.

3. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Overhead Costs Total budgeted cost = $3,894,000 ActivityCostPools Machinery cost pool $1,212,600Setup $3,000Engineering $700,000Facility $507,400 Unit Level Batch Level Product- Sustaining Level Facility Level Identification of Activity Cost Pools Identification of Activity Cost Pools Activity must be done on each unit produced. Activityperformed on each batchproduced. Activities needed to support an entire product line Activity required in order for the production process to occur.

4. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Overhead Costs Total budgeted cost = $3,894,000 ActivityCostPools Machinery cost pool $1,212,600Setup $3,000Engineering $700,000Facility $507,400 More Cost Pools Unit Level Batch Level Product- Sustaining Level Facility Level Identification of Activity Cost Pools Identification of Activity Cost Pools

5. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Receiving/Inspection cost pool $200,000 Material-Handling cost pool $600,000 Quality-Assurance cost pool $421,000 Packaging/Shipping cost pool $250,000 Machinery cost pool $1,212,600Setup $3,000Engineering $700,000Facility $507,400 Unit Level Batch Level Product- Sustaining Level Facility Level

6. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Various overhead costs related to machinery Maintenance Depreciation Computer Support Lubrication Electricity Calibration Machinery Cost Pool Total budgeted cost = $1,212,600Activitycostpool STAGE ONE

7. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Calculate the pool rate Budgeted Machinery Costs $1,212,600 Budgeted Machine Hours 43,000 $28.20/hour $28.20/hour CostAssignment STAGE TWO = =

8. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Calculation of total setup cost Setup Cost Pool Total budgeted cost = $3,000Activitycostpool STAGE ONE

9. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Calculate the pool rate Budgeted Setup Costs $3,000 Planned Production Runs 15 runs $200 per run $200 per run CostAssignment STAGE TWO = =

10. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Various overhead costs related to engineering Engineering salaries Engineering supplies Engineering software Depreciation Engineering Cost Pool Total budgeted cost = $700,000Activitycostpool STAGE ONE

11. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Allocate based on engineering transactions CostAssignment STAGE TWO Engineering Cost Pool Total budgeted cost = $700,000

12. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Exh. 5-9 Various overhead costs related to general operations Plant depr. Plant mgmt. Plant maint. Property taxes Insurance Security Facility Cost Pool Total budgeted cost = $507,400Activitycostpool STAGE ONE

13. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Exh. 5-9 Calculate the pool rate Budgeted Facilities Cost $507,400 Budgeted Direct-Labor Hours 118,000 $4.30/hour $4.30/hour CostAssignment STAGE TWO = =

14. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Optimal Product-Costing System High High Low Low Cost InformationSystemAccuracy Optimalsystem Total Cost Design, implementation and maintenance costs Cost of inferiordecisionsresultingfrominaccurateinformation. Exh. 5-13

15. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Non-Value-Added Costs Suppose our production process looks like this: StorageTimeWaitingTimeProcessTimeMoveTimeInspectionTime VANVANVANVANVA VA = Valued-added activity NVA = Non-value-added activity