OVERVIEW
This is a basic case in Activity-Based Costing (ABC) and Activity-Based Management (ABM). There is enough richness to the fact-situation to create a non-trivial calculational challenge for students without taking the case beyond an "introductory" level. Also, the business context for the calculations is rich enough to support good discussion on the managerial implications.
I use Tijuana Bronze as the introductory case on ABC/ABM in the required managerial accounting course at Tuck and at Babson. The eight assignment questions force students to address the ABC calculations and the ABM managerial implications. Answers to the assigned questions are shown below.
Question 1. Product Costs per Unit - Current System
Valves
Pumps Flow
Controllers
Material $16.00 $20.00 $22.00
Direct Labor 4.00 8.00 6.40
Overhead 17.56 35.12 28.10
(439% of Direct Labor $)
Standard unit cost $37.56 $63.12 $56.50
*Overhead
Machine depreciation $270,000
Set-up labor 2,688
Receiving 20,000
Materials handling 200,000
Engineering 100,000
Packing and shipping 60,000
Maintenance 30,000
Total overhead $682,688
Total run labor = 9,725 hours x $16 = $155,600
Overhead rate = 682,688 / 155,600 = 439%
Question 2.
Estimated "Contribution Margin" for Products
Valves
Pumps Flow
Controllers
Revenue $57.78 $81.26 $97.07
Variable Costs--Material only 16.00 20.00 22.00
Contribution 41.78 61.26 75.07
or
Assume Labor is Variable (case says only direct material is short-run variable).
Run Labor 4.00 8.00 6.40
Set-up Labor ~.02 ~.05 ~.48
4.02 8.05 6.88
Contribution $37.76 $53.21 $68.19
Question 3. Revised Product Unit costs per "More Modern View"
Valves
Pumps Flow
Controllers
Material $16.00 $20.00 $22.00
Material Related Overhead
(48%)
7.68
9.60
10.56
Set-up Labor .02 .05 .48
Direct Labor 4.00 8.00 6.40
Other Overhead
($42.59 per machine hr)* 21.30 21.30 8.52
Revised standard cost $49.00 $58.95 $47.96
*Material Related Overhead
Receiving $ 20,000
Material Handling 200,000
Total $220,000
Overhead Allocation Rate on Materials Cost:...
Tijuana Bronze Machining
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