The Impact of ABC and JIT
Pritchett Enterprises manufactures hiking and outdoor equipment. The company’s plant in western Colorado has recently seen dramatic changes in manufacturing processes. Management is concerned that the current cost system no longer captures the impact of the diversity of activities involved in its production processes. As a result, management is evaluating whether activity-based costing may provide more accurate and meaningful cost data. The production environment includes the following primary activities and cost drivers:
The company has decided to implement just-in-time inventory management techniques. Using JIT will reduce the amount of inventory on hand at any point in time and save approximately $50,000 annually on inventory carrying costs. In addition, there will be 70 percent fewer purchase orders for inventory issued, but twice as many setups for production runs. The company will also be able to receive a 2 percent discount on raw materials purchases because of the long-term nature of the orders.
A. If raw materials purchases are $1,000,000 per year (that is, the cost before the above mentioned changes are implemented), what quantitative impact will the change to JIT have on the overall costs for the company?
The impact would be total of $.
B. Switching to a system often improves the quality of products and the timeliness of their delivery.
C. Does it appear that the move to JIT will be positive or negative for the company?
The move will ……… since the JIT system will ……………….the company’s ability to respond more quickly to customers’ needs and reduce the company’s investment in inventories.
Jakubielski and Martin, CPAs, is a full-service CPA firm that provides accounting, tax, and consulting services to its clients. The firm is considering changing to an activity-based costing system and has asked for your input regarding the design of the system. The firm has identified certain activities that are integral to the practice, and it would like your suggestions regarding potential cost drivers.
For each of the following activities, identify a potential cost driver. Please note that you may not use all drivers and some may be used more than once.
|a. Client interview|
|b. Tax return preparation|
|c. Tax return review|
|d. Data input|
|e. Report assembly|
|g. Report writing|
h. Site visits
Brief Exercise 4-3
Timeless Timepieces produces and sells watches. The following data are available for various activities within the company:
Calculate the overhead rates for each of the three activities. Round your answer to the nearest cent, if needed.