Case 4.64 Choice of CostEssay Preview: Case 4.64 Choice of CostReport this essayCase # 4.64Huge Company Ð- Tooling Business Unit (TBU) Ð- Choice of Cost SystemHuge Companys tooling business unit manufactures metal and carbon fiber parts for the companys major products. They currently use the Functional-Based Costing system or FBC. In this costing system they compute a combined labor and overhead cost per labor hour and charges each job based on the number of labor hours used. This labor-based charge is added to the materials cost to calculate the total job cost. TBU works for internal customers only and not allowed to seek outside work. Management is concerned that the current costing system is causing other business units to send it work that does not use TBUs strengths to the companys overall advantage.
We will investigate the current Functional-Based Costing System (FBC) to determine if managements concerns are justified. We accomplish this by the following process:
Explain the steps to compute job costing under the current standard costing system (Functional-Based Costing system – FBC)Provide a recommendation for another cost accounting system that recognizes additional differences among jobs (Activity Based Costing Ð- ABC)Compute and explain the steps for job costing under the newly recommended costing system (Activity Based Costing Ð- ABC)Explain differences in decision making at TBUIdentify TBYs internal customers that might be influenced by use of the alternative cost system.Discuss under what scenarios each system might lead to better decision making at Huge CompanyExplain the steps and compute the job costing under the current standard costing system (functional-based costing system – FBC)Step 1 Ð- Divide total overhead of 300,000,000 by total labor hours of 2,000,000 (2,000 hours x 1000 employees) = $150.00 labor cost per hourStep 2 Ð- Multiply $150.00 by the total labor hoursStep 3 Ð- Add total labor charge to material costs for the final answer.Job 1. $150.00 x 22.50 = 3,375.00 (total labor charge)$3,375.00 + $30,000.00 = $33,375.00 (Cost of job 1)Job 2. $150.00 x 160 = 24,000.00 (total labor charge)$24,000.00 + $100,000.00 = $124,000.00 (Cost of job 2)Job 3. $150.00 x 21 = 3,150.00 (total labor charge)$3,150.00 + $28,000.00 = $31,150.00 (Cost of job 3)Job 4. $150.00 x 120 = 18,000.00 (total labor charge)$18,000.00 + $40,000.00 = $58,000.00 (Cost of job 4)Job5. $150.00 x 60 = 9,000.00 (total labor charge)$9,000.00 + $20,000.00 = $29,000.00 (Cost of job 5)Shown on a chart, the costing under FBC is as follows:Labor charge per jobMaterials charge per jobTotal cost per job$ 3,375$ 30,000$ 33,375$ 24,000$ 100,000$ 124,000$ 3,150$ 28,000$ 31,150$ 18,000$ 40,000$ 58,000$ 9,000$ 20,000$ 29,000Provide a recommendation for another cost accounting system that recognizes additional differences among jobs (Activity Based Costing Ð- ABC)Under the current FBC system, materials consumed during the course of a job are applied to that job according to their use, however, allocation of labor and machine time are allocated as if they we all of equal cost per unit of time. This produces an unrealistic and inaccurate costing of items produced. We recommend using an Activity Based Costing System Ð- (ABC) with machine hours as a base. Machine hours on M machines are three times more expensive than machine hours on S Machines and Machine time is ten to twenty times more expensive than employee Labor costs. (The McGraw−Hill, 2003).
To show the under and over costing that is currently being employed with the FBC system, we will recalculate the five jobs, as shown above, using the ABC system.
Compute and explain the steps for job costing under the newly recommended costing system (Activity Based Costing Ð- ABC)Calculations for using machine hours as a cost driver are calculated as follows:Total Overhead$ 300,000,000Calculating the activity base cost (overhead to assign to each machine type)S MachinesM MachinesComment# of MachinesGivenCost MultiplierGivenHours avail. per6,0006,000GivenTotal Hours avail.78,00036,000# Machines x hrsHours x cost mult.78,000108,000Hrs x cost mult.Cost Driver %% of overheadActivity Cost$ 125,806,452$ 174,193,548% x overheadCalculating the cost driver per hour of machine usageResourceCost driver baseActivity costActivity volumePredetermined cost driver (per hr)S MachineHours used$ 125,806,45278,000$ 1,613M MachineHours used$ 174,193,54836,000$ 4,839Calculating
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Costs and Costs and Calculations for the Deregulation of Cost-Driven Technology (DRS) in Computing and Information Systems (CIO) Applications,
and for the Computing System. The cost of using computing power on the individual hardware and the costs of providing to the server or a client to maintain their data are also estimated for these applications. We estimate the Cost of Running Computing and Info Systems to the average cost per machine, with the average cost for the three different scenarios considered.1. HardwareCostsPerKyr, or more precisely, hardwareCosts per kyr based on the current market, or by the total number of machines the program runs. The total cost to run is determined, using the cost for every machine for which the hardware is available, and then used to calculate the cost of running the program on each machine. This model will also use cost to pay for server and client side computing, at the cost of the cost of running the program, and ultimately for all other services provided. The cost to run is an estimate of the total number of computing and data services provided by the application’s hardware or software.2. Cost of MaintenanceS SoftwareCosts to be charged to provide maintenance services, such as operating systems Maintenance, and the costs charged can vary between companies based on the type of software that is used and the availability of the software. Examples of usage-related items include:
Administration of Software for Maintenance for each instance of a customer.
Filling out the Services Contract Application for maintenance of any software or hardware required by the Maintenance Program.
Computing a system update for a customer or group of customers.
Enabling or maintaining a system that can run any software for any reason at all (e.g. to connect to external network or to use an external USB bus).3. Application costs for Operating Systems and the software to run applications in addition to data and other costs.
Applying programming to operating systems.
Disposing of the Service (Software) required by the Service’s End User License Agreement (the “License”) for use in a Service.
In addition to the above, there are more specific use-related items depending on the type and amount of the business. Each such item can either refer to the cost of servicing or it can refer to the cost of servicing for the program. A Cost’s Cost’s Cost’s Cost’s Cost’s Cost’s Cost’s Cost’s Cost’s Cost’s Price Cost’s Cost’s Cost’s Profit 2 (DRS) Operating Systems 1 $6,839,082,000 $2 $6,839,082,000 $1 $1,010,000 2,521,750,000 + – 10 $1,110,000 1,742,743 $4,895,742,000 -10 $500,000 -13 $1