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4.8. Study Process and Costs

The consultant's study of the business revealed the following additional information:

o The accompanying cost analysis details the $116,000,000 in total costs.

o The technology and core components are basically the same for each device.

o The extra material cost in a GLASSESong relates mostly to the polarized lenses.

o The extra labor in a CAPlayer is directly related to the manual labor for sewing.

o Both devices are generally produced in batches on the same automated assembly line, at the same pace, and through the same steps.

o The automated machinery is leased from Rebel Robotics which bases its rental charges on a "units processed" basis.

o There is one production line, and it must be "set up" for each production batch.

o CAPlayers are produced in batches of 9,000 and GLASSESongs are produced in batches of 1,000 units (therefore, CAPlayer required 100 set ups (900,000 units/9,000 units per set up) and GLASSESong required 1,100 set ups (1,100,000 units/1,000 units per set up)).

o Both products were designed by an internal development team.

o CAPlayers are sold in two markets - the Americas and Europe (market research indicated the product would not be popular in Asia).

Cost Analysis

Direct materials

$ 74,000,000

Direct labor

9,000,000

Indirect labor

2,000,000

Indirect material

1,000,000

Factory maintenance

1,500,000

Robotics lease

20,000,000

Insurance

700,000

Other

1.800.000

Total Product Cost

$110,000,000

SG&A

Management salaries

800,000

Selling expenses

500,000

Design and engineering

900,000

GAME on campaign

3,000,000

Business office rent

200,000

Accounting

600.000

Total Period Cost

6.000.000

TOTAL COSTS

$116,000,000

GLASSESongs are sold in three markets - Asia, Europe, and the Americas.

Blast Advertising was hired to provide a comprehensive marketing campaign called "Get Your GAME On." This campaign was conducted in each of the three major markets, at a cost of $1,000,000 per campaign. The campaign in Asia promoted only GLASSESong; both products were promoted in Europe and the Americas.

A tech support department has been established to help customers download music to their devices. The CAPlayers are sold only through the world's 1,000 most exclusive golf courses. The golf pros at these courses usually call once to learn the product and require no further assistance. The GLASSESong units are sold over the internet, and individual purchasers average one call per unit sold.

4.9. Identify Activities

After carefully studying GAME Company, the consultant identified five unique activities. Costs for each of these activities was a significant consumer of resources. The robotics function related to the operation of the highly automated assembly line. A large part of the cost of robotics was tied directly to the number of units produced. Production set up was a batch level activity. The company was required to set up the assembly process for each batch of caps and glasses. Tech support was driven by the number of customers. Each purchaser of the glasses was identified as a "customer" and each golf course was identified as a "customer." The activity driver for product design is the number of products. The advertising activity is driven by the number of markets served.

Identify Activities

4.10. Determine Traceable Costs and Allocation Rates

Of the total costs, direct material and direct labor were traceable directly to the product cost object. The other costs were either deemed attributable to one of the five activities, or otherwise not allocated. The following spreadsheet was prepared based on careful analysis, interviews, and meetings. It shows what percentage of each cost category was attributable to each of the five activities - the percentages in each row must equal 100%.

Notice that none of the direct material and direct labor is attributable to an activity cost pool because it is traced to the end product. Other costs may be wholly attributable to one activity (e.g., the robotics lease cost is all attributable to the robotics activity). Finally, large portions of some costs could not be attributed to any of the identified activities and are simply placed in the Unallocated category.

Each percentage should have a logical basis (e.g., earbud speakers are very inexpensive and carried as indirect material; some of these earpieces were made into key chains to be given out free as part of the advertising campaign, thereby consuming 5% of the indirect materials pool).

B

D

F

H

J

L

N

1

I

2

ACTIVITY COST POOLS

3

COST ANALYSIS

Robotics

Production Set Up

Tech Support

Product Design

Advertising Campaign

Unallocated

4

5

Direct materials

0%

0%

0%

0%

0%

0%

6

Direct labor

0%

0%

0%

0%

0%

0%

7

Indirect labor

40%

20%

10%

15%

0%

15%

8

Indirect material

20%

35%

5%

20%

5%

15%

9

Factory maintenance

25%

30%

0%

5%

0%

40%

10

Robotics lease

100%

0%

0%

0%

0%

0%

11

Insurance

25%

20%

10%

0%

0%

45%

12

Other

50%

30%

10%

5%

5%

0%

13

Total Product Cost

14

15

SGSA

16

Management salaries

10%

10%

20%

20%

25%

15%

17

Selling expenses

0%

0%

15%

15%

60%

10%

18

Design and engineering

5%

5%

15%

75%

0%

0%

19

GAME on campaign

0%

0%

0%

0%

100%

0%

20

Business office rent

0%

0%

35%

25%

5%

35%

21

Accounting

5%

5%

10%

5%

10%

65%

 
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