International Plastics is a multinational, diversified organization. One of its manufacturing divisions, Northeast Plastics, has become less profitable due to increased competition. The division produces three major lines of plastic products within its single plant. Product line A is high-volume, simple pieces produced in large batches. Product line B is medium-volume, more complex pieces. Product line C is low-volume, small-order, highly complex pieces.
Currently, the division allocates indirect production costs based on direct-labor cost. The vice president of manufacturing is uncomfortable using the traditional cost figures. He thinks the company is underpricing the more complex products. He decides to conduct an ABC analysis of the business.
Interviews were conducted with the key managers in order to identify activities, resources, cost drivers, and their interrelationships.

Q1. What activities are carried out in your area?
A1. All products are manufactured using three similar, complex, and expensive molding machines. Each molding machine can be used in the production of the three product lines.
Each setup takes about the same time irrespective of the product.
Q2. Who works in your area?
A2. Last year, we employed 30 machine operators, 2 maintenance mechanics, and 2 supervisors.
Q3. How are the operators used in the molding process?
A3. It requires nine operators to support a machine during the actual production process.
Q4. What do the maintenance mechanics do?
A4. Their primary function is to perform machine setups. However, they are also required to provide machine maintenance during the molding process.
Q5. Where do the supervisors spend their time?
A5. They provide supervision for the machine operators and the maintenance mechanics. For the most part, the supervisors appear to spend the same amount of time with each of the employees that they supervise.
Q6. What other resources are used to support manufacturing?
A6. The molding machines use energy during the molding process and during the setups. We put meters on the molding machines to get a better understanding of their energy consumption. We discovered that for each hour that a machine ran, it used 6.3 kilowatts of energy. The machines also require consumable shop supplies (e.g., lubricants, hoses, and so on). We have found a direct correlation between the amount of supplies used and the actual processing time.
Q7. How is the building used, and what costs are associated with it?
A7. We have a 100,000 sq. ft. building. The total rent and insurance costs for the year were $675,000. These costs are allocated to production, sales, and administration based on square footage.
1. Identify the activities and resources for the division. For each activity, suggest an appropriate cost driver.
2. For each resource identified in requirement 1, indicate its cost behavior with respect to the activities it supports (assume a planning period of 1 month).

  • CreatedNovember 19, 2014
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