Cost Management Problems & Exercises

Role of Activity-Based Costing in Implementing Strategy Laurent Products is a manufacturer of plastic packaging products with plants located throughout Europe and customers worldwide. During the past 10 years, Laurent Products has successfully developed a line of packaging materials and a unique bagging system that present an important opportunity to increase the productivity of checkout counters in grocery stores. The plastic bags manufactured by Laurent are produced in several sizes and different plastic film colors and may have attractive multicolor printed designs on one or both sides to meet the specification of a particular grocery store. The advantages provided by the Laurent bagging system include the lower cost of bags and labor at the checkout counter as well as improved customer service. The system has contributed to significant growth in Laurent’s sales in recent years.

Laurent’s success in the grocery chain market has attracted an increasing number of competitors into the market. While the company has been very successful in bringing out a series of new product types with innovative labor-saving features for the grocery stores, Laurent’s competitors have eventually been able to develop quite similar products. The result has been increased competition with a substantial reduction in Laurent’s prices.

As a result of the increased competition in the grocery chain market, Laurent is planning to begin to focus on the small independent grocery stores that purchase bags from large wholesale distributors. The potential sales for this wholesaler segment is about the same size as the grocery chain market but includes a much larger number of independent store customers.

Investments in manufacturing equipment in recent years have been to support two principal objectives: to
increase capacity and to reduce costs. The cost reduction initiatives principally concerned material costs and
reduced processing times. Over the years, Laurent has chosen to invest in machines that are similar to existing
equipment in order to capitalize on the fact that the process is relatively simple and that products can, with
relatively few exceptions, be processed on any machine in the plant. The only major restriction is the number
of colors that a machine can accommodate on a single pass. Future investment proposals now being
considered are based on this rationale.

Questions
1.) What are the key strategic issues facing Laurent, and how can ABC costing assist in resolving these issues?
Activity Levels and Cost Drivers Shroeder Machine Shop has the following activities:
Machine operation

Machine setup
Production scheduling
Materials receiving
page 170Research and development
Machine maintenance
Product design
Parts administration
Final inspection of a sample of products
Materials handling

Questions
1.) Classify each of the activities as a unit-level, batch-level, product-level, or facility-level activity.
2.) Identify a potential cost driver for each activity in requirement 1.

Activity Levels and Cost Drivers Steve’s Slop Shop, a small hamburger shop, has identified the resources used in
its operations (assume each customer’s order is a batch for this example):
Bread
Hourly workers that cook hamburgers
Store rent
Ground beef
Catsup
Advertising for Triple-Burger special
Salary for the store managers
Utilities
$1-off-coupon for each order
Bag for each order

Questions
1.) Classify its costs as unit-level, batch-level, product-level, or facility-level costs.
2.) Suggest a possible cost driver for each of the above items.

Activity-Based Costing in the Fashion Apparel Industry Fleet Street Inc., a manufacturer of high-fashion clothing
for women, is located in South London in the UK. Its product line consists of trousers (45%), skirts (35%),
dresses (15%), and other (5%). Fleet Street has been using a volume-based rate to assign overhead to each
product; the rate it uses is £2.25 per unit produced. The results for the trousers line, using the volume-based
approach, are as follows:

Number of units produced
10,000
Price (all figures in £)
£ 20.525
Total revenue
205,250
Direct materials
33,750
Direct labor
112,500
Overhead (volume-based)
22,500
Total product cost
168,750
Nonmanufacturing expenses
31,500
Total cost
200,250

Profit margin for trousers
5,000

Recently, Fleet Street conducted a further analysis of the trousers line of product, using ABC. In the study,
eight activities were identified, and direct labor was assigned to the activities. The total conversion cost (labor
and overhead) for the eight activities, after allocation to the trousers line, is as follows:
Pattern cutting
£22,000
Grading
19,000
Lay planning
18,500
Sewing
21,000
Finishing
14,300
Inspection
6,500
Boxing up
3,500
Storage
7,000

Questions
1.) Determine the profit margin for the trousers line using ABC
2.) Comment on the difference in comparison to the volume-based calculations.