Oakley Paints Handout
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Oakley Paints Handout

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    Oakley Paints Handout Oakley Paints Handout Document Transcript

    • INSTITUTE OF CERTIFIED MANAGEMENT ACCOUNTANTS ACTIVITY BASED COSTING CASE STUDY Case Study: Oakley Paints Pty Ltd Keith Jagger, a Re-engineering Consultant was employed by a small spray paint can packaging firm having 4 employees. A synopsis of the Activity Analysis Stage interviews conducted by him with these employees are as follows: Sophie: “I spend half my time phoning suppliers of the spray cans of paint. We order 8 colours from four suppliers who can supply all colours. Usually I get the prices from the suppliers and write out a purchase order to the supplier who gives me the cheapest total price at the time. The calls to suppliers take approximately the same time. I spend 10% of my time writing out the purchase orders, and the time taken in writing depends on the number of colours requested on one purchase order. The more colours I write in the order the more time I take. The balance of my time is spent on maintaining the payroll, which is calculated according to direct labour hours.” Mark: “I drive a truck for about 60% of my time, taking the spray can packs to out 100 customers. All these customers are located in suburbs close to the company. I look at the sales invoice and unload the truck about 30% of the time, and find that I spend on average the same amount of time unloading per customer. The balance 10% of my time is spent in writing the sales invoices at the office, from the orders taken by Santina. The time spent on writing depends on the colours per sales order. If it’s for out single-colour pack, I write one line; if it’s for our 4 colour pack, I write 4 lines!” Santina: “I answer the phone, mainly from customers placing orders for about 40% of my time. The time taken depends on if the customer wants a single colour or a 4 colour pack. I take 4 times as long to write out a 4 colour sales order as I do to write a single-colour order. I also keep the books of the company for half my time and find that this work is heavily dependent on Sophie’s payroll calculations. If she takes a long time on the payroll, I take a long time on the bookkeeping. The balance 10% of the time, I type general letter, mainly to customers.” George: “I am the labourer. I pack the spray cans into packs of 12 for about 60% of time. The colour coded cans are placed in racks in such a way that I can pack a single-colour pack or a 4 colour pack taking the same amount of time. I also look at the sales invoices and load the truck for about 35% of my time, and take about 5% of my time grouping packs by customer, and writing customer labels for each group so that Mark knows what to unload.” /home/pptfactory/temp/oakley-paintshandout-1234966316984342-1/oakley-paintshandout-1234966316984342-1.doc Page 1 of 4 Revised: 24 September, 2002
    • INSTITUTE OF CERTIFIED MANAGEMENT ACCOUNTANTS ACTIVITY BASED COSTING CASE STUDY Keith has obtained the following information with regards to the remuneration of the 4 employees from the Payroll records: Wages On Costs Total $28,000 $4,000 $32,000 Sophie $35,000 $5,000 $40,000 Mark $30,000 $4,000 $34,000 Santina $32,000 $6,000 $38,000 George Keith has also obtained the following cost driver information with regards to two products under investigation. Product A is a single-colour pack of 12 black spray cans and Product B is a 4 colour pack of 3 each in black, red, blue & green (12 in total). The purchase order and sales invoice information were tallied for products on a line-by-line basis. The direct-labour hours were tallied from the production works order, while the packs sold and the number of customers were obtained from the sales invoices and reconciled with the delivery dockets. A B All products No. of purchase orders 50 50 1,000 No. of colours 1 4 8 No. of direct labour hours 200 10 2,000 No. of customers 10 5 100 No. of sales invoices 125 40 1,000 No. of sales invoice lines 125 160 3,520 No. of packs sold 4,000 200 40,000 Required: All direct labour and overhead costs (i.e. value added costs) of the four employees are traditionally 1. allocated to products based on direct labour hours. Therefore, calculate the traditional value-added costs per pack for Product A and B. /home/pptfactory/temp/oakley-paintshandout-1234966316984342-1/oakley-paintshandout-1234966316984342-1.doc Page 2 of 4 Revised: 24 September, 2002
    • INSTITUTE OF CERTIFIED MANAGEMENT ACCOUNTANTS ACTIVITY BASED COSTING CASE STUDY Conduct a re-engineering project in the area of cost analysis by choosing primary and 2. secondary cost drivers for each of the 12 activities listed in the Project Synthesis Chart below. PROJECT SYNTHESIS CHART PERCENTAGE TIME Total Value- Added Costs (to be allocated to products Activity Description Possible Possible Cost Employee No. Employee No. Employee No. Employee Activity Cost Driver Driver 2 1 2 3 No. 4 No. 1 1 Ph. Supplier 2 Write Purch.Ord 3 Calcul. Payroll 4 Drive truck 5 Unload truck 6 Write Sales Inv. 7 Phone/orders 8 Bookkeeping 9 Typing 10 Packaging 11 Load Truck 12 Labelling Total Percentages 100% 100% 100% 100% Total Wages 3. Using your primary cost driver choice from the Project Synthesis Chart above, complete the chart below, and calculate the cost for each cost driver unit. Activity Cost Driver No. of Employee Employee Employee Employee Total Cost Per No.s Cost No. 1 No. 2 No. 3 No. 4 Costs cost Driver Drivers Purchase Orders Colours Dir. Labour hrs Customers Sales Invoices Sales Inv. Lines Packs sold /home/pptfactory/temp/oakley-paintshandout-1234966316984342-1/oakley-paintshandout-1234966316984342-1.doc Page 3 of 4 Revised: 24 September, 2002
    • INSTITUTE OF CERTIFIED MANAGEMENT ACCOUNTANTS ACTIVITY BASED COSTING CASE STUDY 4. Using the information obtained from requirements 2 and 3, calculate the value-added costs per pack for Products A and B based on ABC Cost Analysis Principles, using the following chart: Cost Driver Cost Per Cost PRODUCT A PRODUCT B Driver (requirement 3) No. Drivers Valued-added No. Drivers Value-added Costs Costs Purchase Orders Colours Dir. Labour Hrs Customers Sales Invoices Sales Inv. Lines Packs Sold TOTAL O/H NO. OF PACKS O/H PER PACK 5. Briefly comment on the differences in the valued-added cost calculations under the Traditional and ABC Cost Analysis Principles, and the reasons for such differences. /home/pptfactory/temp/oakley-paintshandout-1234966316984342-1/oakley-paintshandout-1234966316984342-1.doc Page 4 of 4 Revised: 24 September, 2002