The case presents five potential allocation bases for assignning the company’s $300,000 in plant-administration costs
case Exhibit 4, you should hypothesize which portential base would be the best choice. To make this decision, you ne
coefficient or regression fit. You need to show your support below, using Excel (insert –> charts–> scatter)
1.Determine the best allocation base for allocating plant-administration costs.
Answer Question 1 here and show support for your choice below.
Exhibit 4
2003
2002
2001
2000
1999
Total Amin
Cost
Ending
Inventory Cost
Plant
Personnel
Number of
Customers
Total Direct
Labor Cost
$300,000
$295,000
$285,000
$280,000
$290,000
$90,000
$83,000
$58,000
$50,000
$76,000
122
122
119
112
116
1200
1250
1100
800
600
$520,000
$515,000
$555,000
$540,000
$500,000
0,000 in plant-administration costs. Using the five years of data presented in
oice. To make this decision, you need to look for the best correlation
nsert –> charts–> scatter)
.
% of Plant
Capacity Used
70.00%
75.00%
85.00%
90.00%
95.00%
2. Calculate the ABC costs for each product on a per-box basis.
Answer Question 2 here and show support below.
Zauner Ornament
Calculations of ABC C
Base Information
(Exhibit 1)
Ornaments
Boxes
Activity
Production Scheduling
Machine Setups
Equipment Depreciation
Plant Depreciation
Quality Inspection
Packing
Plant Administration
Base
(noted within the case)
Small
420,000
35,000
Estimated MOH $
(noted within the case)
Estimated Base
(noted within different e
Small
(Exhibit _)
(Exhibit _)
(Exhibit _)
(Exhibit _)
(Exhibit _)
(Exhibit _)
(Exhibit _)
$0
$/Activity/Product
Production Scheduling
Machine Setups
Equipment Depreciation
Plant Depreciation
Quality Inspection
Packing
Plant Administration
$/Activity
Boxes produced
MOH$/unit
DM+DL/unit
Total ABC Cost/Box
Small
#DIV/0!
auner Ornaments
lations of ABC Costs
Large
300,000
50,000
Specialty
100,000
100,000
Estimated Base
Activity Rate
(noted within different exhibits)
Large
Specialty
#DIV/0! /
Large
Specialty
$
–
Check!
3. What do these results tell you about activity-based costing versus costing based on standard volume or direc
labor?
Answer Question 3 here and show support below.
standard volume or direct materials plus direct
4. What changes, if any, should management make to Zauner’s pricing strategy?
Answer Question 4 here and show support below.
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ZAUNER ORNAMENTS
As she put the finishing touches on the annual financial statements for Zauner
Ornaments, Chia-yi Yu contemplated her schedule for the next few weeks. As the new
controller for Zauner Ornaments in Taiwan, Yu thought the slow-sales period in January would
be the perfect time for her to focus on Zauner’s management-accounting procedures. Yu had
recently returned to Taiwan from graduate business school in Europe, and she was anxious to
apply the knowledge she had gained at school to her new job. As a first step, Yu decided to
research Zauner’s current costing methods.
Background
Zauner Ornaments was a wholly owned subsidiary of Zauner Crystal, Inc., a large
manufacturer of crystal and glass products headquartered in Vienna, Austria. Although
originally established as an industrial-glass producer, Zauner Crystal reinvented itself after the
Second World War as a producer of fine crystal, glass tableware, and other similar products.
The company enjoyed an international reputation as a producer of high-quality glass and crystal
at affordable prices owing to the skills of its master artisans, as well as the application of
innovative technology in the manufacturing process. Zauner crystal was used in fine restaurants,
hotels, and residences throughout the world.
Zauner Ornaments
Several years previously, management at Zauner Crystal recognized that growth in the
fine-crystal and glass-tableware markets was beginning to slow, forcing the company to search
for other growth opportunities. After extensive research, management concluded that expanding
into glass Christmas-tree ornaments would allow the company not only to continue to grow, but
also to take advantage of Zauner Crystal’s unique capabilities. The company leased a small
manufacturing facility in Taiwan, and began producing the following three products there:
This case was prepared by Kristy Lilly (MBA ’03) and Liz Smith (MBA ’04), under the supervision of Professor
Mark Haskins. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling
of an administrative situation. Copyright 2003 by the University of Virginia Darden School Foundation,
Charlottesville, VA. All rights reserved. To order copies, send an e-mail to sales@dardenpublishing.com. No part
of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any
form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of
the Darden School Foundation. ◊
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-2-
Small glass ball ornaments
Large glass ball ornaments
Specialty glass ball ornaments
Ornaments
per Box
12
6
1
Sales Price
per Box*
$9.00
$11.00
$17.00
*Note: All monetary amounts are expressed in U.S. dollars
Cost Accounting at Zauner Ornaments
In the third week of January, Yu called the sales department to inquire about price-setting
procedures for the different product lines. She quickly discovered that the sales department
investigated the prices of similar products available in the marketplace and set Zauner’s prices
accordingly. Yu knew that the company was profitable overall, but wondered if the prices set by
the sales department were sufficient to ensure that the individual product lines were profitable.
She decided to have one of her senior analysts, Yung Chen, prepare an analysis of unit-product
costs for each of Zauner’s three products. She thought this might be helpful in determining
whether any adjustments in the product prices were warranted. To assist Chen in his task, Yu
provided him with a schedule of the factory’s annual overhead costs, as follows:
Overhead Item
Annual Cost
Production scheduling
Machine setups
Equipment depreciation
Plant depreciation
Quality inspection
Packing
Plant administration
$
Total overhead
$1,170,000
85,000
160,000
220,000
150,000
70,000
185,000
300,000
Later that day, Chen returned to Yu’s office with a schedule showing his calculation of
product costs for each of Zauner’s three products (Exhibit 1). Chen calculated the cost per box
for each product, using a traditional volume-based costing system. Budgeted overhead was
allocated to each product line, based on the planned production of ornaments. Chen and Yu were
dismayed by the results of Chen’s analysis; according to his calculations, Zauner was selling
small glass ornaments for $9.00 a box, but it was costing the company $21.12 a box to produce
those ornaments!
Yu took these results to the director of Operations, David Metz. “I’m really worried
about our pricing and the efficiency of our manufacturing processes,” Yu told Metz. “According
to this product-cost analysis, we are losing money on both the small and large glass ornaments
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-3-
UVA-C-2181
we produce, while making money on the specialty ornaments. Surely, that can’t be the case, can
it? Are our costs really that much higher than other firms in the industry?” Metz looked at
Chen’s schedule and shook his head. “I think I see the problem here,” he told Yu. “You’ve
allocated overhead to each product, using production units. Why don’t you try this analysis
again, this time allocating overhead to each product based upon direct materials and direct labor?
I think that method better approximates the actual use of the overhead resource by each product
line, and it should fix your problem.”
Yu returned to her office and instructed Chen to redo his analysis using direct materials
plus direct labor as the allocation base for overhead expenses. Chen soon returned with the
product-cost schedule shown in Exhibit 2. “Look!” he told Yu. “I think Metz was correct.
Allocating overhead based on direct materials and direct labor gives us product costs that are
below our current sales price for each product line. I think we’re fine now.”
Yu felt better after seeing Chen’s second analysis, but she was not fully convinced that
the revised schedule captured Zauner’s product costs in the most accurate manner. While Chen
was working on his analysis, Yu met with the manufacturing department to gain a better
understanding of Zauner’s operations. The results of these meetings are summarized in Exhibit
3. She learned that, while all three ornaments were made on the same production lines, specialty
ornaments underwent an additional painting process. In the specialty-painting department, 24
fully utilized workers hand-painted intricate designs on the inside of each specialty ornament.
Yu also discussed with Manufacturing the types of overhead at Zauner and the specific activities
that could be generating the company’s overhead costs. She discovered that both productionscheduling and machine-setup costs appeared to be driven primarily by the number of batches
required for the annual production volume. Because the number of batches varied by product
type, Yu concluded that total yearly batches might be an appropriate means of allocating
production-scheduling and machine-setup costs to the different product lines.
In addition, she had a little more difficulty ascertaining the root cause of equipment
depreciation. It was unclear whether equipment depreciation occurred because of the number of
machine operations performed or because of the machine run time. Based on feedback from the
manufacturing department, she decided that the number of machine operations was the better
indicator of equipment depreciation. She also thought that plant depreciation could reasonably
be based on the factory square footage used to manufacture, paint, and store each box. Her
discussions also led her to conclude that the number of inspections performed drove inspection
costs, while the number of boxes used drove packaging costs. Plant administration (which
included supervision, labor relations, and clerical costs) appeared to be the most problematic in
deciding how best to allocate these costs. Yu would have to make that decision soon, and in the
meantime, had gathered the data in Exhibits 4 and 5, which she thought might be useful in her
deliberations.
After seeing Zauner’s manufacturing process, Yu recalled reading about activity-based
costing (ABC) in graduate school. She remembered that companies used ABC systems to assign
Page 3 of 9
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indirect manufacturing costs to products based on the activities performed on those products. Yu
thought she might be able to use ABC to reflect Zauner’s product costs more accurately, thereby
improving product-pricing decisions.
Assignment Questions
1. Determine the best base for allocating plant-administration costs.
2. Calculate the ABC costs for each product on a per-box basis.
3. What do these results tell you about activity-based costing versus costing based on
standard volume or direct materials plus direct labor?
4. What changes, if any, should management make to Zauner’s pricing strategy?
Page 4 of 9
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UVA-C-2181
-5Exhibit 1
ZAUNER ORNAMENTS
Calculation of Product Costs: Volume-Based Costing System
Product
Small colored glass
Large colored glass
Specialty ornaments
Number of
Ornaments
420,000
300,000
100,000
Ornaments
per Box
Number
of Boxes
12
6
1
35,000
50,000
100,000
820,000
185,000
Page 5 of 9
DM & DL
per Box
$
$
$
4.00
5.00
7.00
Total
DM & DL
$
140,000
250,000
700,000
$ 1,090,000
Allocated
Overhead
$
599,268
428,049
142,683
$ 1,170,000
Total Cost
$
739,268
678,049
842,683
$ 2,260,000
Total Cost
per Box
$
$
$
21.12
13.56
8.43
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UVA-C-2181
-6Exhibit 2
ZAUNER ORNAMENTS
Calculation of Product Costs: DM- and DL-Based Costing System
Product
Small colored glass
Large colored glass
Specialty ornaments
Number of
Ornaments
420,000
300,000
100,000
Ornaments
per Box
Number
of Boxes
12
6
1
35,000
50,000
100,000
820,000
185,000
Page 6 of 9
DM & DL
per Box
$
$
$
4.00
5.00
7.00
Total
DM & DL
$
140,000
250,000
700,000
$ 1,090,000
Allocated
Overhead
$
$
$
150,275
268,349
751,376
$ 1,170,000
Total Cost
$
290,275
518,349
1,451,376
$ 2,260,000
Total Cost
per Box
$
$
$
8.29
10.37
14.51
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UVA-C-2181
-7Exhibit 3
ZAUNER ORNAMENTS
Activity Data by Product
Product
Number of
Ornaments
Number of
Batches
Machine
Operations
per Ornament
Ornaments
per Box
Inspections
per Box
Sq. Footage
Per Box
Small colored glass
Large colored glass
Specialty ornaments
420,000
300,000
100,000
800
750
500
4
4
5
12
6
1
1
2
4
1
0.5
0.2
Page 7 of 9
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UVA-C-2181
-8Exhibit 4
ZAUNER ORNAMENTS
Historical Five-Year Plant-Administration Costs and Other Data
2003
2002
2001
2000
1999
Total Plant
Administration Costs
$300,000
295,000
285,000
280,000
290,000
Ending Inventory
Cost
$90,000
83,000
58,000
50,000
76,000
Page 8 of 9
Plant Personnel
122
122
119
112
116
Number of
Customers
1200
1250
1100
800
600
Total Direct
Labor Costs
$520,000
515,000
555,000
540,000
500,000
% of Plant
Capacity Used
70%
75%
85%
90%
95%
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UVA-C-2181
-9Exhibit 5
ZAUNER ORNAMENTS
Plant Data by Product Line
Small Colored
Glass
Ornaments
Large Colored
Glass
Ornaments
Specialty
Ornaments
Total
Ending inventory costs
$26,100
$51,300
$12,600
$90,000
Plant personnel:
Non-specialty
Specialty (painting)
N/A
N/A
N/A
24
98
24
Number of customers
600
420
180
1,200
Total direct labor costs
$83,200
$93,600
$343,200
$520,000
% Plant capacity used
N/A
N/A
N/A
70%
Page 9 of 9
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