Magazine Life develops magazines quarterly across a variety of topics. ML is constantly creating new magazines...

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Magazine Life develops magazines quarterly across a variety of topics. ML is constantly creating new magazines in order to meet new trends. The market is very competitive, and ML's competitors continue to introduce new magazines at historical prices despite rising inflationary costs (sometimes lower than ML can offer). The nature and type of the magazine can require significant investments in overhead (i.e. editors time, fact- checking, etc..) and therefore their largest cost tends to be overhead based. The key distinction for ML, is there are large overhead costs that are incurred on the creation of the content instead of per unit. ML recently hired Jared Wright, a recent accounting graduate. Jared came from a competitor in the magazine business and was constantly working in their costing department, directly on their ABC method. Jared asked the Magazine Development Department Manager Jacob Zine to join him in a pilot activity-based costing study. Jared and Jacob identified the following key activities, related costs, and cost allocation bases: Activity Graphics/Magazine Development Editing Time Fact-Checking Time Print time Estimated indirect activity costs 2,250,000 1,600,000 1,250,000 2,808,000 Allocated base New magazines Hours with editing team Hours with fact- checking team Printing time Estimated quantity of allocation base 6 new developments 80,000 hours 40,000 hours 7,800 hours ML is planning to develop the following new magazines: Classic Cars 2024. This magazine is based on select classic cars from the 1970s. This is a new magazine that has not been previously run Video Game Action 2023 Season. This magazine showcases the recent hit video games. This magazine is run each year, updated based on the new trending game. Classic Cars will require more editing and fact-checking hours than normal, since it's a new style, consisting of 30,000 hours and 15,000 hours, respectively. Video Game Action has been a repetitive issue for ML and as a result it has been fine tuned to only require 10,000 of editing time and 8,000 hours of fact-checking. ML expects printing of Video Game Action to be the normal level of 500,000 magazines, while Classic Cars is anticipating to print/sell 25% less than normal. Classic Cars is primarily focused on showcasing the vehicles, as such it is primarily images vs text and it is shorter than a normal magazine requiring only one minute to complete printing in comparison to the Video Game Action magazine which takes the normal three minutes to print per magazine. Requirements: 7.1 Compute the cost allocation rate for each activity. 7.2 Use the activity-based cost allocation rates to compute the indirect cost of each unit of Classic Cars and Video Game Action. (Hint: Compute the total activity costs allocated to each product line and then compute the cost per unit.) 7.3 ML's original single-allocation-base costing system allocated indirect costs to magazines at $80 per direct labour hour spent to prepare the magazines after printing. Classic Cars requires 75,000 labour hours, while Video Game Action requires 62,500 labour hours. Compute the total indirect costs allocated to Classic Cars and Video Game Action under the original system. Then, compute the indirect cost per unit for each product. 7.4 Compare the activity-based costs per unit to the costs from the simpler original system. How have the unit costs changed? Explain why the costs changed as they did. Do you think it is worthwhile to implement this system? Magazine Life develops magazines quarterly across a variety of topics. ML is constantly creating new magazines in order to meet new trends. The market is very competitive, and ML's competitors continue to introduce new magazines at historical prices despite rising inflationary costs (sometimes lower than ML can offer). The nature and type of the magazine can require significant investments in overhead (i.e. editors time, fact- checking, etc..) and therefore their largest cost tends to be overhead based. The key distinction for ML, is there are large overhead costs that are incurred on the creation of the content instead of per unit. ML recently hired Jared Wright, a recent accounting graduate. Jared came from a competitor in the magazine business and was constantly working in their costing department, directly on their ABC method. Jared asked the Magazine Development Department Manager Jacob Zine to join him in a pilot activity-based costing study. Jared and Jacob identified the following key activities, related costs, and cost allocation bases: Activity Graphics/Magazine Development Editing Time Fact-Checking Time Print time Estimated indirect activity costs 2,250,000 1,600,000 1,250,000 2,808,000 Allocated base New magazines Hours with editing team Hours with fact- checking team Printing time Estimated quantity of allocation base 6 new developments 80,000 hours 40,000 hours 7,800 hours ML is planning to develop the following new magazines: Classic Cars 2024. This magazine is based on select classic cars from the 1970s. This is a new magazine that has not been previously run Video Game Action 2023 Season. This magazine showcases the recent hit video games. This magazine is run each year, updated based on the new trending game. Classic Cars will require more editing and fact-checking hours than normal, since it's a new style, consisting of 30,000 hours and 15,000 hours, respectively. Video Game Action has been a repetitive issue for ML and as a result it has been fine tuned to only require 10,000 of editing time and 8,000 hours of fact-checking. ML expects printing of Video Game Action to be the normal level of 500,000 magazines, while Classic Cars is anticipating to print/sell 25% less than normal. Classic Cars is primarily focused on showcasing the vehicles, as such it is primarily images vs text and it is shorter than a normal magazine requiring only one minute to complete printing in comparison to the Video Game Action magazine which takes the normal three minutes to print per magazine. Requirements: 7.1 Compute the cost allocation rate for each activity. 7.2 Use the activity-based cost allocation rates to compute the indirect cost of each unit of Classic Cars and Video Game Action. (Hint: Compute the total activity costs allocated to each product line and then compute the cost per unit.) 7.3 ML's original single-allocation-base costing system allocated indirect costs to magazines at $80 per direct labour hour spent to prepare the magazines after printing. Classic Cars requires 75,000 labour hours, while Video Game Action requires 62,500 labour hours. Compute the total indirect costs allocated to Classic Cars and Video Game Action under the original system. Then, compute the indirect cost per unit for each product. 7.4 Compare the activity-based costs per unit to the costs from the simpler original system. How have the unit costs changed? Explain why the costs changed as they did. Do you think it is worthwhile to implement this system?

Answer rating: 100% (QA)

Solution To compute the cost allocation rate for each activity we need to divide the estimated indirect costs by the allocated base activity costs For Graphics Magazine Cost Allocation Rate 2250000 16... View the full answer