JEA Laboratory.(Instructor's Note)

CASE DESCRIPTION The primary subject matter of this case concerns cost/managerial accounting--more specifically, activity-based costing. Secondary issues examined include analyses of marketing and operations. The case has a difficulty level appropriate for junior level courses. The case is designed to be taught in one class hour and is expected to require three hours of outside preparation by students. CASE SYNOPSIS This case involves designing an activity-based costing system for a service-oriented organization--a testing laboratory. Because of this service setting, the case complements activity-based costing material in cost/managerial accounting textbooks, virtually all of which focus heavily on manufacturing settings. The objective of the case is to enable students to understand the issues and procedures for designing a two-stage activity-based costing system as well as how to use the resulting cost information. The case also entails an analysis of marketing and operations based on this costing system. INSTRUCTORS' NOTES Recommendations for Teaching Approaches This case involves designing and analyzing an activity-based costing system for a laboratory. The objective of the case is to enable students to understand the issues and procedures for designing a two-stage activity-based costing system. Students are also asked to analyze marketing and operations issues based on this costing system. Students should have an elementary knowledge of activity-based costing as a background for this case. The case is a blend of computations and analysis. Question 2 requires some analysis, but is largely computational. Students should be encouraged (or required) to use spreadsheet software for this question. Instructors should make sure to allow sufficient time (15 minutes) for discussion of questions 3 and 4, which deal with analyses based on the activity-based costing system implemented. The case begins by describing the formation of the company called JEA Laboratory, as well as its management and strategy. Next, the case discusses the implementation of a new service (i.e., test) and then the duties performed by various personnel. The case concludes with a questioning tone about the profitability of the new service and suggests that the costing method used may not be proper. Students are provided with costs in a typical account format (e.g., salaries, utilities, etc.) and with cost driver information. They need to select the appropriate cost drivers and use them to first assign costs to three different activities. Also, they will need to figure out that some costs are directly assigned to the activities. Then, the students will assign one of the activity's costs to two testing activities. Finally, the costs of the activities, as well as materials costs, are assigned to the two types of tests performed by the company. Based on this cost-assignment exercise, students should be able to offer suggestions on how the costing can be improved. Furthermore, based on the results of their cost assignments, students should be able to offer suggestions relating to marketing and operations issues. DISCUSSION QUESTIONS 1. Discuss the validity of the $2.13 labor and overhead cost assignment shown in Table 5. This cost assignment, which is based on the total number of items tested, presumes that each of the two types of items require the same time, effort, and resources. This is clearly not true, as evidenced by large differences in activities such as setup and marketing. 2. Determine the total cost for each test using the activity-based costing approach suggested by the consultant. What modifications might you recommend to this approach? Before assigning costs to the two types of tests, we use two preliminary stages to assign costs to activities. FIRST PRELIMINARY STAGE: Operations & Resources Driver Used Total Cost Maintenance Salaries-Operations direct $696,500 $696,500 assignment Salaries-Maintenance direct $59,600 $59,600 assignment Salaries-Acctg. …