Abc Case

5.19

A) The time driven ABC model should be updated to include the production related computer resource expenses of $18,000 per month as this cost was overlooked. Due to the fact that Madison Dairy uses the time driven ABC model this will make it easy to add to the cost rate.

The cost rate for the production line needs to be modified to reflect the change in operating expense associated with the expense. This can be completed by completing the following two steps:

First, Madison Dairy needs to determine the cost for the computer resource expense. This was already provided in the question. The total per month is $18,000.

Second, Madison Dairy needs to identify the capacity supplied by the resource. Where the expense is a computer related and directly related to the production line the measurement could be based on megabyte or gigabyte. In this case they will need to know how many megabyte or gigabyte the computer system uses in a month. Once, Madison decides to measure the computer costs by megabyte or gigabyte. They must determine how many megabyte or gigabyte is used by each product line.

(Cost per megabyte or gigabyte = Cost ($18,000 per month) / Capacity of Supply (megabyte or gigabyte per month))

B) The activity base cost model should be updated by adding the energy cost to the cost rate. This can be done by completing the following:

First, we were provided with information that the two machines have a capacity of 308 hours per month. This hours per month will be used as the capacity of supplied and the energy cost of $4000 is the cost in the equation for finding the cost rate. ($4000/308hours=$12.99per hour)

Second, the energy cost will incur an additional $12.99 per hour which needs to be included in the machine hour rate. This will increase the machine hour rate from $50 per hour to $62.99 per hour.

C) If the company introduces a new flavor the company will need the following information:

* Machine Usage time, which includes;

- Product run time for the new favor

- Changeover time required for the new flavor

- Number of production runs for the new flavor

- Product Volume produced for the new flavor

- Run Time per gallon for the new flavor

* Indirect Labour Time per product

- Indirect labour hours - schedule production runs

- Set up time per run

- Number of employees per setup

- Indirect labour hours per setup