Review and reflect on the knowledge you have gained from this course. Based on your review and reflection, write at least 400–600 words on the following:
- What were the most compelling topics learned in this course?
- How did participating in discussions help your understanding of the subject matter? Is anything still unclear that could be clarified?
What approaches could have yielded additional valuable information?
Responses to Other Students: Respond to at least 2 of your fellow classmates with at least a 100–200-word reply about his or her Primary Task Response regarding items you found to be compelling and enlightening. To help you with your discussion, please consider the following questions:
- What did you learn from your classmate’s posting?
- What additional questions do you have after reading the posting?
- What clarification do you need regarding the posting?
What differences or similarities do you see between your posting and other classmates’ postings?
1
ACTIVITY BASED COSTING
CTU
Hollie Gates
7/8/2024
Tuna
2
ACTIVITY BASED COSTING
PART 1
Calculation of the budgeted cost per service for X-rays, ultrasounds, CT scans, and MRI
The steps followed when calculating cost per service using direct technician labor costs as
the allocation basis are as follows. The first step is to calculate the total direct labor costs incurred
by the technician. The second step is to the calculation of total overhead costs. The third is the
calculation of percentage of the labor cost associated with each of the four services. The fourth
step is the allocation of overhead costs to the individual service to determine the total cost per
service. The fifth step is the summation of the overhead costs and labor cost to get the total cost
per service. The last step is the division of the total cost per service by the number of services to
get budgeted cost per service.
Total overhead costs = administration + Maintenance + Sanitation + Utilities
Total overhead costs = 20,000 + 250,000 + 252,500 + 151,100 = 673,600
Overhead percentage per service
X-ray = 62,000/421,000*100 = 14.73%
Ultrasound = 101,000/421,000*100 = 23.99%
CT Scan = 155,000/421,000*100 = 36.82%
MRI = 103,000/421,000*100 = 24.46%
Allocation of overhead rate to each service
X-ray = 14.73%*673,600= 99,221
Ultrasound = 23.99%*673,600= 161,597
3
CT Scan = 36.82%*673,600= 248,020
MRI = 24.46%*673,600= 556,122
Total cost per service
Budgeted overhead rate = Total overhead costs/ Total technician labor
Budgeted overhead rate = 673,100/ 421,000
Budgeted overhead rate = 1.60 per direct labor
Details
X-rays
ultrasounds
CT scans
MRI
Total
Technician
62,000
101,000
155,000
103,000
421,000
Depreciation
42,240
256,000
424,960
876,800
1,600,000
Materials
22,600
16,400
23,600
31,500
94,100
Allocation
99,221
161,597
248,020
164,762
673,600
221,061
534,997
850,980
1,176,062
2,788,700
4,352
2,924
2,482
$122.93
$291.03
473.84
labor
overhead
Total
budgeted
costs
Number
of 3,842
procedures
Budgeted
cost
service
$57.54
per
4
PART 2
Calculation of the budgeted cost per service for X-rays, ultrasounds, CT scans, and MRI
using activity-based costing. The steps to follow include the following. The first the identification
of the activities where the organization incurs costs on. The second is determination of the cost of
each item or activities identified in the first step. The third step is the identification of cost driver
for the four activities. The fourth is calculation of the cost rate for the four services. The last step
is the allocation of cost to each of the four services using the rate per cost driver determined above.
Ther four activities used in calculation and allocation of the costs are administration using
the number of procedures, maintenance services based on cost of the equipment or depreciation,
sanitation using the total cleaning minutes and the last is utilities using total procedure minutes.
The cost drivers’ value for the four service are as follows
Total procedures for administration = (3,842 + 4,352 + 2,924 + 2,482) = 13,600
Total depreciation amount for maintenance services = (42,240 + 256,000 + 424,960 + 876,800) =
1,600,000
Total cleaning minutes for sanitation = (3,842*5 + 4,352*5 + 2,924*15 + 2,482*25) = 171,700
Total procedure minutes for utilities = (3,842*5 + 4,352*15 + 2,924*25 + 2,482*40) = 256,870
Allocation of overhead costs
Administration rate = 20,000/13,600 = 1.47
X-ray = 1.47*3,842= 5,647.74
Ultrasound = 1.47*4,352= 6,397.44
CT scan = 1.47*2,924= 4,298.28
5
MRI = 1.47*2,482= 3,648.54
Maintenance cost per depreciation
Maintenance cost rate = 250,000/1,600,000 = 0.15625
X-ray = 0.15625*42,240 = 6,600
Ultrasound = 0.15625*256,000 = 40,000
CT scan = 0.15625*424,960 = 66,400
MRI = 0.15625*876,800 = 137,000
Sanitation cost per cleaning minute
Sanitation cost rate = 252,500/171,700 = 1.471
X-ray = 1.471*19,210 = 28,257.91
Ultrasound = 1.471*21,760= 32,008.96
CT scan = 1.471*43,860= 64,518.06
MRI = 1.471*86,870= 127,785.77
Utilities cost per procedure minute
Utility cost rate = 151,100/256,870 = 0.588
X-ray = 0.588*19,210 = 11,295.48
Ultrasound = 0.588*65,280= 38,384.64
CT scan = 0.588*73,100= 42,982.80
MRI = 0.588*99,280= 58,376.64
Details
X-rays
ultrasounds
CT scans
MRI
Total
Technician
62,000
101,000
155,000
103,000
421,000
labor
6
Depreciation
42,240
256,000
424,960
876,800
1,600,000
Materials
22,600
16,400
23,600
31,500
94,100
Administration 5,647.74
6,397.44
4,298.28
3,648.54
Maintenance
6,600
40,000
66,400
137,000
Sanitation
28,257.91
32,008.96
64,518.06
127,785.77
Utilities
11,295.48
38,384.64
42,982.80
58,376.64
51,801.13
116,791.04
178,199.14
326,810.95
Allocation
overhead
Total
allocation
overhead
Total budgeted
2,788,700
178,641.13
490,191.04
781,759.14
1,338,110.95
of 3,842
4,352
2,924
2,482
Budgeted cost $46.50
112.64
$267.36
539.13
costs
Number
procedures
per service
PART 3
The differences between the two cost models are as follows: First, the difference is that the
use of direct technician labor costs as the allocation basis over the use of an activity-based costing
approach gives a giver a budgeted cost per service for X-rays, ultrasounds, and CT scans but a
lower value for MRI services (Altawati et al., 2018). The second difference is that the use of direct
7
technician labor costs means application of the same budgeted overhead rate, which is 1.6, thus
making the calculation less accurate, while the allocation of overhead based on an activity-based
approach entails using different values, thus making the calculation more accurate. The analysis
of the difference reveals that it is more accurate to use the activity-based costing method because
it includes actual costs incurred, which enhances the manager’s planning for decision-making and
profitability analysis. The management would make accurate decisions on budgeting and setting
service fees to increase the organization’s profitability.
PART 4
The disaggregation of information could help the organization improve based on the
following: First, the management of the organization would have accurate information on the
activities incurred by the organization and their cost drivers, thus determining the best approach to
minimize costs and make the organization more profitable (Hilton & Platt, 2020). Secondly, it
gives oversight of the areas where the organization may focus to reduce the cost of production and
improve profitability. For example, if the cost of an MRI is high, the management may examine
the different approaches that may help reduce the expenses to make the service more affordable to
more clients. Lastly, the disaggregation of information may help the organization in its planning
after understanding the cost structure and making accurate pricing decisions.
8
References
Altawati, N. O. M. T., Kim-Soon, N., Ahmad, A. R., & Elmabrok, A. A. (2018). A review of
traditional cost system versus activity-based costing approaches. Advanced science
letters, 24(6), 4688-4694.
Hilton, R. W., & Platt, D. E. (2020). Managerial accounting: creating value in a dynamic business
environment. McGraw-Hill.
1
Hollie Gates
CTU
6/30/2024
2
CK&M Company and Robo2000:
Balanced Scorecard Cost Allocation
The battle between cost-effective solutions and high-quality products figures consumer
choices in the tech world. Analyzing CK&M’s strategy offers perceptions into the competitive
setting of home cleaning technology. CK&M Company manufactures and sells the Robo2000, a
budget-friendly robotic vacuum. Competitor Stone Manufacturing offers a more expensive
model with smartphone integration and superior quality. CK&M faces production issues, leading
to high rework costs, while Stone Manufacturing is known for its product excellence. CK&M’s
current strategy focuses on cost leadership, while Stone Manufacturing pursues product
differentiation. To enhance CK&M’s market position, a strategic approach to improve quality
and reduce costs through process improvements and worker training is essential. Therefore, this
paper proposes criteria for a balanced scorecard to support CK&M in achieving its goals.
CK&M’s and Stone Manufacturing’s Current Strategies
CK&M’s Current Strategy
CK&M’s strategy revolves around cost leadership, emphasizing affordability over
advanced features. The company markets the Robo2000 as a budget-friendly alternative to
pricier competitors. The Robo2000’s basic features, such as a remote control, contrast with the
high-tech options from Stone Manufacturing. CK&M’s focus on minimizing production expenses
has led to significant rework costs. For example, rework costs accounted for 20% of CK&M’s
total production costs last year. This approach targets price-sensitive consumers, providing them
with a functional, low-cost robotic vacuum. However, the emphasis on cost-cutting measures
can compromise product reliability and customer satisfaction. Many customers have reported
issues with the Robo2000’s durability and performance. CK&M’s cost leadership strategy has
3
strengths, such as attracting budget-conscious buyers, but also significant weaknesses, leading to
potential market challenges in maintaining product quality and customer loyalty.
Stone Manufacturing’s Strategy
Stone Manufacturing adopts a product differentiation strategy, focusing on quality
and advanced features. Their robotic vacuum offers smartphone integration, allowing remote
control, enhancing user experience. This high-quality reputation attracts customers willing to pay
a premium for reliability and innovation. Industry analysis shows that products with advanced
features and superior performance command higher market prices and customer loyalty. Stone
Manufacturing’s approach targets consumers prioritizing quality and technology over cost,
contrasting sharply with CK&M’s cost-focused strategy. This positions Stone Manufacturing as a
market leader by emphasizing superior product attributes. Consequently, they gain a competitive
advantage through innovation and customer satisfaction, enhancing long-term brand strength and
customer retention.
Improving CK&M’s Quality and Reducing Costs
Importance of Process Improvements
To enhance quality and reduce costs, CK&M must refine its processes by streamlining
production to eliminate inefficiencies. Implementing Lean manufacturing principles and the
Kaizen approach will reduce waste and remove non-value-adding activities, optimizing
productivity and quality. Adopting Six Sigma quality control measures can also significantly
reduce defects to less than 3.4 per million opportunities, ensuring consistency and directly
improving profitability and customer satisfaction. According to McKinsey, such innovations in
manufacturing lead to significant ROI, increased throughput, and lower costs per part, boosting
CK&M’s competitiveness and resilience in the market.
4
Role of Worker Training
Investing in worker training is crucial for CK&M’s quality improvement. Training
enhances employee skills and knowledge, equipping them to manage complex manufacturing
processes. These programs empower workers to identify and address production issues early,
preventing defects and reducing rework costs. Skilled workers contribute to higher production
standards and efficiency. For example, training in equipment operation and safety can lead to
fewer accidents and less downtime, significantly boosting productivity. Additionally, welltrained employees tend to stay longer with the company, reducing turnover and saving
recruitment costs. This continuity fosters a more experienced workforce, further enhancing
operational efficiency. Training initiatives significantly impact product quality and operational
efficiency, making them a critical component of CK&M’s improvement strategy.
Potential Challenges in Process Improvement
Identifying potential challenges in implementing process improvements is fundamental
for CK&M’s success. One significant challenge is resistance to change from employees and
management. People often prefer familiar routines and may fear new methods or technologies,
which can hinder the adoption of process improvements. Another challenge is the initial costs
and investment required for process upgrades. Upgrading equipment, training staff, and
redesigning processes can be expensive, requiring careful financial planning and justification.
Additionally, accurate data collection and analysis are essential but can be difficult to achieve.
Ensuring data quality and using it effectively to guide improvements are critical steps that
require proper tools and training. Addressing these challenges is fundamental for successful
implementation. For instance, fostering a culture of continuous improvement can help overcome
resistance by involving employees in the change process and recognizing their contributions.
5
Proper training and communication can also ease the transition by clarifying the benefits of the
new processes and how they align with organizational goals. Lastly, securing executive
sponsorship and maintaining regular communication with stakeholders can ensure alignment and
support for the process improvement initiatives.
Developing a Balanced Scorecard for CK&M
The Balanced Scorecard, developed in 1992 by Robert Kaplan and David Norton, is a
strategic management tool that aligns CK&M’s strategic objectives with performance metrics
across four key areas: financial performance, customer satisfaction, internal processes, and
learning and growth. This framework merges traditional financial indicators with non-financial
metrics for a holistic view of organizational performance, linking measures to strategic goals to
improve internal processes and customer satisfaction, and aligning all business aspects with the
company’s mission and vision for a balanced success perspective. Examples of metrics include
revenue growth, cost management, customer satisfaction, and retention rates.
Financial Perspective
Financial criteria are essential for monitoring CK&M’s economic performance. Key metrics
include cost per unit, rework costs, and profit margins. Cost per unit measures how much it costs
to produce a single unit of the Robo2000. This metric is crucial for identifying areas where
CK&M can reduce production expenses and improve cost efficiency. Furthermore, Rework costs
indicate the expenses incurred from correcting defective units, which is a significant concern for
CK&M due to their production issues. Monitoring these costs helps the company identify
inefficiencies and potential savings. Profit margins, including gross and net profit margins,
provide insights into overall profitability. The gross profit margin measures the percentage of
6
revenue remaining after deducting the cost of goods sold, while the net profit margin accounts
for all expenses. Therefore, financial performance is a critical aspect of CK&M’s strategic goals.
Customer Perspective
Customer-related metrics are vital for understanding market position and satisfaction.
Key metrics include customer satisfaction, return rates, and market share. Customer satisfaction
scores measure how pleased customers are with a product or service immediately after an
interaction or purchase. Return rates provide insight into the percentage of products that
customers return, often indicating issues with product quality or customer expectations. Market
share measures the percentage of an industry or market’s total sales that a particular company
earns over a specified time period. These metrics reflect product quality and brand perception.
High customer satisfaction scores suggest that products meet or exceed customer expectations,
while high return rates can indicate problems with quality or mismatched customer expectations.
Monitoring market share helps companies understand their competitive position in the market.
Focusing on customer satisfaction can drive sales and market growth by ensuring that customers
remain loyal and continue to purchase from the company.
Internal Processes Perspective
Internal process metrics are crucial for operational efficiency. Key metrics include
production efficiency, defect rates, and training effectiveness. Production efficiency measures
how well resources are used to produce goods, ensuring minimal waste and maximum output.
High efficiency indicates streamlined processes and optimal use of equipment and labor. Defect
rates track the number of defective products produced, reflecting the quality control in
manufacturing. Lower defect rates signify better quality control and fewer resources spent on
7
rework. Training effectiveness evaluates the impact of employee training programs on
performance and productivity, ensuring that workers are skilled and capable of maintaining high
production standards. Monitoring these internal processes ensures continuous improvement and
quality control. Efficient internal processes support both cost leadership and quality enhancement
by minimizing waste, reducing costs, and ensuring high-quality output, ultimately driving better
operational performance and customer satisfaction.
Learning and Growth Perspective
Learning and growth metrics foster long-term development and innovation. Key metrics
include employee training hours, skill levels, and innovation rates. Employee training hours
measure the time invested in developing the workforce’s skills and competencies, which is
crucial for adapting to new technologies and processes. Skill levels indicate the proficiency of
employees in their respective roles, directly impacting productivity and efficiency. Innovation
rates reflect the company’s ability to generate new ideas and improvements, driving competitive
advantage and market leadership. Investing in learning and growth sustains organizational
development by ensuring employees have the necessary skills to meet evolving business
challenges. Companies that prioritize these metrics often experience higher employee
satisfaction, lower turnover rates, and enhanced overall performance. Focusing on learning and
growth metrics drives continuous improvement and helps maintain a competitive edge in the
industry, ultimately supporting both operational and strategic goals.
Conclusion
CK&M’s strategy focuses on cost leadership, emphasizing affordability, but needs
significant improvements in quality to remain competitive. Stone Manufacturing, on the other
hand, excels with its product differentiation strategy, offering high-quality products with
8
advanced features. For CK&M, implementing process improvements and worker training can
address production issues and enhance product quality. The balanced scorecard is crucial for
aligning CK&M’s strategic goals with performance metrics, ensuring continuous improvement
across financial, customer, internal process, and learning and growth perspectives. Focusing on
these strategies enables CK&M to gain market share through improved quality and cost
efficiency. The long-term benefits of balanced scorecard implementation include better decisionmaking and strategic alignment, which can enhance CK&M’s market position. Prioritizing
investments in process improvements and regular updates to the balanced scorecard will ensure
sustainable growth and market success for CK&M. Strategic action and a forward-looking
approach are essential for CK&M to thrive in the competitive market.
9
Bibliography
Acumatica. (n.d.). The best metrics and KPIs to measure for manufacturing. Retrieved from
https://www.acumatica.com/resources/articles/metrics-kpis-for-manufacturers/
ChartExpo. (n.d.). Best data visualization tool. Retrieved from https://chartexpo.com/
ClearPoint Strategy. (n.d.). Balanced scorecard: The comprehensive guide. Retrieved from
https://www.clearpointstrategy.com/
Deskera. (n.d.). Manufacturing analytics: Key metrics, benefits, and solutions. Retrieved from
https://www.deskera.com/blog/manufacturing-analytics-key-metrics/
Harvard Business School Online. (n.d.). Financial metrics and KPIs. Retrieved from
https://online.hbs.edu/blog/post/balanced-scorecard
Harvard Business School Online. (n.d.). What is a balanced scorecard? Retrieved from
https://online.hbs.edu/
Investopedia. (n.d.). Financial performance metrics. Retrieved from
https://www.investopedia.com/
Learn Lean Sigma. (n.d.). The four perspectives of the balanced scorecard: Explained and
analyzed. Retrieved from https://www.learnleansigma.com/
McKinsey & Company. (n.d.). Essential components of a learning and development strategy.
Retrieved from https://www.mckinsey.com/
McKinsey & Company. (n.d.). How to boost growth in industrial services: Better customer
experience. Retrieved from https://www.mckinsey.com/
NetSuite. (n.d.). 73 essential manufacturing metrics and KPIs to guide your industrial
transformation. Retrieved from https://www.netsuite.com/
Hollie Gates
CTU
6/23/2024
Secret word Boom
1
Part 1: Break-even analysis with current equipment
Faucet Model:
•
Selling price: $72
•
Variable cost: $20
•
Contribution margin per unit: $72 – $20 = $52
Pitcher-cum-Filter Model:
•
Selling price: $88
•
Variable cost: $16
•
Contribution margin per unit: $88 – $16 = $72
Sales Mix:
•
Forever Pure sells 2 faucet models for every 3 pitchers sold.
Fixed Costs:
•
Fixed costs: $960,000
To find the break-even point in units and dollars, we use the weighted average contribution margin
based on the sales mix (Broyles et al., 2003).
2
Calculations:
1. Contribution margin per unit weighted by sales mix:
o
Weighted contribution margin = (2/5) * $52 (faucet) + (3/5) * $72 (pitcher)
o
Weighted contribution margin = $20.80 + $43.20
o
Weighted contribution margin = $64 per unit
2. Break-even point in units:
o
Break-even units = Fixed costs / Weighted contribution margin
o
Break-even units = $960,000 / $64
o
Break-even units = 15,000 units
3. Break-even point in dollars:
o
Break-even sales dollars = Break-even units * Weighted average selling price
o
Break-even sales dollars = 15,000 units * [(2/5) * $72 + (3/5) * $88]
o
Break-even sales dollars = 15,000 units * [$28.80 + $52.80]
o
Break-even sales dollars = 15,000 units * $81.60
o
Break-even sales dollars = $1,224,000
Summary Answer:
•
Faucet Model: Break-even point is 6,000 units (since 2 faucets are sold for every 3 pitchers,
and the total break-even is 15,000 units).
•
Pitcher-cum-Filter Model: Break-even point is 9,000 units.
•
Break-even Sales Dollars: $1,224,000
3
This analysis shows that Forever Pure needs to sell 6,000 faucet models and 9,000 pitcher-cumfilter models to break even at the current sales mix, with total sales reaching $1,224,000 to cover
all fixed and variable costs.
Part 2: Break-even analysis with new production equipment
Given the new equipment:
•
Fixed costs increase by $166,400 per year.
•
Variable costs decrease by $4 for the faucet and $8 for the pitcher.
New Contribution Margin per Unit:
For the faucet:
•
New variable cost: $20 – $4 = $16
•
New contribution margin: $72 – $16 = $56
For the pitcher:
•
New variable cost: $16 – $8 = $8
•
New contribution margin: $88 – $8 = $80
Revised Break-even Analysis:
1. Weighted contribution margin with new costs:
o
Weighted contribution margin = (2/5) * $56 + (3/5) * $80
o
Weighted contribution margin = $22.40 + $48
4
o
Weighted contribution margin = $70.40 per unit
2. New break-even point in units:
o
New break-even units = (Fixed costs + Increase in fixed costs) / Weighted
contribution margin
o
New break-even units = ($960,000 + $166,400) / $70.40
o
New break-even units = $1,126,400 / $70.40
o
New break-even units ≈ 16,000 units
3. Break-even sales dollars with new equipment:
o
Break-even sales dollars = New break-even units * Weighted average selling price
o
Break-even sales dollars = 16,000 units * [(2/5) * $72 + (3/5) * $88]
o
Break-even sales dollars = 16,000 units * [$28.80 + $52.80]
o
Break-even sales dollars = 16,000 units * $81.60
o
Break-even sales dollars = $1,305,600
1. Break-even Units for Each Type of Filter: Now, calculate the break-even units for each
type of filter based on their contribution margins and the total break-even units.
o
Faucet Model: Break-even units = (2/5) * Total break-even units
Break-even units = (2/5) * 16,000 units
Break-even units = 6,400 units
o
Pitcher-cum-Filter Model: Break-even units = (3/5) * Total break-even units
Break-even units = (3/5) * 16,000 units
5
Break-even units = 9,600 units
Summary Answer:
•
Faucet Model: Forever Pure needs to sell approximately 6,400 units of the faucet model
to break even.
•
Pitcher-cum-Filter Model: Forever Pure needs to sell approximately 9,600 units of the
pitcher-cum-filter model to break even.
Part 3: Indifference point between old and new equipment
Indifference point = Additional fixed costs/ Increase in contribution margin
= 166,400/ (70.4-64)
= 26,000
Part 4: Decision on buying new equipment
If total sales are expected to be 23,000 units, we compare the total revenue with the break-even
sales dollars from both scenarios:
•
Old equipment break-even sales: $1,224,000
•
New equipment break-even sales: $1,305,600
Since expected sales of 23,000 units exceed both break-even points, Forever Pure should buy the
new production equipment. This decision is based on the fact that the new equipment would allow
the company to cover its costs at a lower sales volume compared to the old equipment.
6
Lessons learned
Smart pricing and cost management decisions are guided by the Cost-Volume-Profit (CVP)
analysis, which illustrates how costs, prices, and sales volume affect profitability and break-even
thresholds (Abdullahi et al., 2017). The products that yield higher revenue are determined by the
sales mix, which in turn impacts overall profitability. CVP analysis aids in evaluating the costs
and profitability of expenditures, such as new equipment, ensuring that choices are sound
financially and promote long-term sustainability. By incorporating CVP analysis into decisionmaking procedures, companies may maximize revenue and develop growth strategies (González,
2001).
7
References
Abdullahi, S. R., Sulaimon, B. A., Mukhtar, I. S., & Musa, M. H. (2017). Cost-Volume-Profit
Analysis as a Management Tool for Decision Making In Small Business Enterprise within Bayero
University,
Kano. IOSR
Journal
of
Business
and
Management, 19(02),
40–
45. https://doi.org/10.9790/487x-1902014045
Broyles, R. W., Narine, L., & Khaliq, A. (2003). Break-even analysis revisited: the need to adjust
for profitability, the collection rate and autonomous income. Health Services Management
Research, 16(3), 194–202. https://doi.org/10.1258/095148403322167951
González, L. (2001). Multiproduct CVP analysis based on contribution rules. International
Journal
of
Production
Economics, 73(3),
5273(01)00116-5
8
273–284. https://doi.org/10.1016/s0925-
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