Activity-Based Costing (ABC) and Variance Analysis: Batch-Level Costs As indicated in the chap- ter (and more fully in Chapter 5), ABC systems deal with the allocation of all support (i.e., indi- rect) costs of an organization. This assignment focuses on batch-related manufacturing support (i.e., overhead) costs allocated to outputs on the basis of an ABC system. ABC fundamentally views these support costs as variable costs in the long run. However, in the short run, these costs may have both fixed and variable components, a situation that has implications for short-term financial analysis. This assignment deals with the issue of short-term cost-variance analysis for batch-level costs in an ABC system.
XYZ Company produces a more-or-less standardized product, normally in batches of 50 units. Each batch requires six hours of setup time, on average. Setup resources are largely in the form of short-term fixed costs; the budget for these costs for the upcoming period is $50,000. Variable setup (i.e., batch-related) manufacturing support costs are budgeted at $10 per setup-hour. For the coming period, the company expects to produce 20,000 units of output. At the end of the current period, you collected the following information: actual production = 21,000 units; actual units per batch (aver- age) = 47; average hours of setup time per batch = 6.4; actual variable setup support cost per setup hour = $9.50; and, actual fixed setup support costs incurred = $75,000.
Required
1. Distinguish between volume-related, batch-related, and product-sustaining manufacturing support costs. What time horizon under an ABC system is assumed in defining the behavior of these costs?