Activity-Based Life-Cycle Costing Kagle design engineers are in the process of developing a new "green" product, one that will significantly reduce impact on the environment and yet still provide the desired customer functionality. Currently, two designs are being considered. The manager of Kagle has told the engineers that the cost for the new product cannot exceed $550 per unit (target cost). In the past, the Cost Accounting Department has given estimated costs using a unit-based system. At the request of the Engineering Department, Cost Accounting is providing both unit- and activity-based accounting information (made possible by a recent pilot study producing the activity-based data). Unit-based system: Variable conversion activity rate: $100 per direct labor hour Material usage rate: $20 per part ABC system: Labor usage: $15 per direct labor hour Material usage (direct materials): $20 per part Machining: $75 per machine hour Purchasing activity: $150 per purchase order Setup activity: $3,000 per setup hour Warranty activity: $500 per returned unit (usually requires extensive rework) Customer repair cost: $25 per repair hour (average) Activity and Resource Information (annual estimates) Activity and Resource Information (annual estimates) Design A Design B Units produced 25,000 25,000 Direct material usage 300,000 parts 275,000 parts Labor usage 50,000 hours 120,000 hours Machine hours 50,000 60,000 Purchase orders 2,000 1,500 Setup hours 600 200 Returned units 1,000 250 Repair time (customer) 2,000 500 Required: 1. Select the lower-cost design using unit-based costing. Design A Are logistical and post-purchase activities considered in this analysis? 3. What if the post-purchase cost was an environmental contaminant and amounted to $10 per unit for Design A and $40 per unit for Design B? Compute the Post-purchase cost for each design. Post-Purchase Cost Design A 534 X Design B 550 Assume that the environmental cost is borne by society. Now which is the better design? Design A Feedback Check My Work 1. Unit-based cost = (Direct materials + Conversion cost) - units produced 2. ABC assigns manufacturing costs using both unit and non-unit drivers. It also considers the effects of manufacturing, logistical, and post-purchase activities. 3. Calculate again using new information for post-purchase cost and discuss which would be the better design