¶ … Allocations What drives consumption of costs?

In Activity-Based Costing (ABC), consumption of costs is driven by a company's activities (Investopedia, LLC, n.d.), such as production, administration and sales (Cokins, 2010, p. 9). The company's product consumes activities, whether main or supporting activities, and those activities consume company resources (Cokins, 2010, pp. 9, 11). In that context, a cost driver is something that drives the cost of a company's activity (Investopedia, LLC, n.d.); it is a "factor which generates occurrence of resource (capacity) expenses" (Cokins, 2010, p. 8). For example, a manufacturing business may have an activity of running machinery, which will have cost drivers such as machinery operating hours, labor, maintenance and power consumption (Investopedia, LLC, n.d.). That same manufacturing company may also have the activity of release into production, which will have cost drivers such as the number of products (Cokins, 2010, p. 13). Cost drivers are chosen according to two major criteria: optional (chosen) and specifying (determined) (Cokins, 2010, p. 9); and they are chosen according to: the degree of complexity, diversity and variation a company's product; the accuracy of calculations, leading to a reasonable number of cost drivers; and the usefulness of information, which is detailed and accurate enough for rational cost drivers (Cokins, 2010, p. 10).

Cost drivers help the allocation process on three basic levels: allocating resources to activities, whether those activities are main activities or support activities, using resource drivers (Mursau, 2014); after reconcentrating support activities into main activities, costs of main activities are assigned and traced to cost objects by using activity drivers (MBAbullshitDotCom, 2010); and finally cost object drivers are assigned and traced to other cost objects and ultimately sum into final cost objects, such as consumers, using final cost object drivers (Cokins, 2010, p. 11).

Works Cited

Cokins, G. (2010). Cost drivers. Evolution and benefits. Theoretical and Applied Economics, XVII, 8(549), 7-16.

Investopedia, LLC. (n.d.). Activity cost drivers. Retrieved February 28, 2015 from www.investopedia.com Web site: http://www.investopedia.com/terms/a/activity-cost-driver.asp

MBAbullshitDotCom. (2010, July 28). Activity-based costing example in 6 easy steps - Managerial accounting with ABC costing. Retrieved February 28, 2015 from www.youtube.com Web site: https://www.youtube.com/watch?v=PcjxRe4EsuY

Mursau, A. (2014, January 4). Activity-based costing (cost hierarchy categories, cost allocation bases, ABC system setup, etc.). Retrieved February 28, 2015 from www.youtube.com Web site: https://www.youtube.com/watch?v=mRt5YMVGOxg

2. Case Assignment: Relevant Cost Case -- Behemoth Motors Corp.

Using the typical accounting steps to advise Wally Wizard:

a. Clearly define the decision to be made (MBAbullshitDotCom, 2010)

Should Behemoth Motors Corp. (BMC) manufacture its own 8,000 GPSNs per month or should it contract with Far East Enterprises, Ltd. (FEE) for the manufacture and delivery of 8,000 GPSNs? Immediately, the decision to be made cannot be clearly defined: the problem states that FEE promises to deliver 8,000 GPSNs on January 1, 2013 and wants a 2-year contract but the problem does not state that FEE promises to deliver the required 8,000 GPSNs every month during the contract period. If BMC is not guaranteed 8,000 GPSNs every month from FEE, then Wally Wizard should immediately know that the FEE contract is inadvisable. For purposes of running through all the steps of this case assignment, it will be assumed that Wally checked back with FEE and they guarantee delivery of 8,000 GPSNs every month for the contract period.

b. Identify all costs related to any of the options, including past, future and opportunity costs (MBAbullshitDotCom, 2010)

Option 1 -- BMC manufactures 8,000 GPSNs per month for 2 years

Cost per unit

Option 2 -- BMC contracts with FEE for 8,000 GPSNs per month for 2 years

Cost per unit

Direct Materials (purchased locally)

$165

Direct materials

0

Direct Labor (6 hours @ $28/hour

0

Penalty for layoffs

0

$66,000/year penalty for 4 years due to layoffs/unit/month

1.38

Factory floor space charges (16,000 sq. ft. @ $2.50/sq. ft. per month allocated over 8,000 units/month)

5

Factory floor space charges with no alternative use

5

Savings on rental space

0

Savings on rental space/month/unit

-0.63

Supervisory labor (monthly cost of $56,000 allocated over 8,000 units/month

7

Supervisory labor

0

General company overhead $640,000/month assigned to GPSN allocated over 8,000 units/month

80

General company overhead reallocated to other departments

80

Outsourced manufacturing cost/unit

0

Outsourced manufacturing cost/unit $Total Unit Cost

$425

Total Unit Cost

$485.75

In determining all costs: option 1 requires $165 in direct materials while option 2 requires $0; Option 1...

Including all the above costs, option 1 costs $425/unit while option 2 costs $485.75 per unit.
c. Determine which costs do not differ between options and eliminate them (MBAbullshitDotCom, 2010)

General company overhead sis $640,000 whether Wally uses option 1, in which BMC manufactures its own GPSNs, or option 2, in which Wally contracts with FEE for manufacture of the GPSN units. Consequently, that cost should be eliminated from the decision. Eliminating the cost of general company overhead, option 1 costs $345/unit while option 2 costs $405.75/unit.

d. Analyze the remaining costs, as they are relevant to the decision (MBAbullshitDotCom, 2010)

With option 1 costing $345/unit and option 2 costing $405.75/unit, it appears that BMC should not contract with FEE; rather, BMC should manufacture its own GPSNs.

e. Consider any qualitative factors that relate to the decision and modify the decision as necessary (MBAbullshitDotCom, 2010)

According to the problem, there is no qualitative difference between the quality of goods manufactured by BMC vs. FEE or in the reliability of the delivery schedule. Consequently, there are no qualitative factors that would modify the decision. Wally should not contract with FEE to manufacture BMC's GPSNs.

Works Cited

MBAbullshitDotCom. (2010, July 28). Activity-based costing example in 6 easy steps - Managerial accounting with ABC costing. Retrieved February 28, 2015 from www.youtube.com Web site: https://www.youtube.com/watch?v=PcjxRe4EsuY

3. SLP: Relevant Costs for Decision-Making -- Starbucks Corporation

Starbucks Corporation is an international coffee company and chain that is outstanding in its industry. Its processes include the manufacture and sale of coffee, as well as the establishment and maintenance of stores for the sale of coffee and related products. Starbucks recently instituted a new type of coffee shop in the nation's capital and could pursue the capital project of opening multiple such shops in all mid-size to major U.S. cities. The upscale type of coffee shop, called "Starbucks Reserve Roastery and Tasting Room," was opened in early December 2014 on Capitol Hill and remains Starbucks' sole upscale coffee shop at this time (Vermillion, 2014). Starbucks opened the facility to bring customers "as close to coffee as humanly possible," with on-site roasting of select coffees, 8 brewing styles and exceptionally spacious and comfortable areas, complete with a fire place, library-like reading room and conference room (Vermillion, 2014). The company filed its building permit with a $2.3 million budget for the current 15,000+ square-foot facility and the DC pilot project supposedly cost $20 million (jseattle, 2014).

Starbucks' decision to open the upscale coffee shop involved numerous relevant costs. Relevant costs are specific to management decisions, and differ depending on the alternative course of action chosen by management (Hermanson, Edwards, & Ivancevich, 2011, p. 128). They can, and in this case, they do consist of opportunity costs because Starbucks made a real sacrifice in choosing to open the upscale store. In this case, two of Starbucks' relevant costs include: the $2.3 million budgeted for building new DC facility, including the construction of areas with fire places, a library-like reading room and a conference room; and the purchase of special equipment for on-site roasting of select coffees. Here, Starbucks incurred decision-specific, high costs that can certainly be deemed relevant costs.

Starbucks' decision to open the upscale coffee shop also involved numerous non-relevant or "irrelevant" costs. Non-relevant costs are ones which will not change as a result of a management decision; those can include sunk costs, fixed costs and allocated costs (Investopedia, LLC, n.d.). In this case, Starbucks had non-relevant costs such as the salaries of employees at the new facility and utility costs for running the facility. The costs of labor and of utilities did not figure into management's decision regarding whether or not to open that new facility.

The inputs used for my assertions are figures reported for this one-of-a-kind pilot facility and the unusual services and amenities offered at the new facility, as opposed to the costs, services and amenities offered at the average Starbucks facility. The results are that Starbucks incurred significant relevant costs in piloting this new project, including the 2.3 million budgeted for erecting a single facility and the special equipment needed for a gourmet multiple-brewing experience. The implications of these costs are…