Lowry Locomotion’s cost accountant has not installed an ABC system before, and is overcome with zeal to create a highly detailed system with many cost pools and associated activity drivers. His first iteration of the implementation plan calls for data collection in the following areas:
Purchasing. Track the number of purchase orders issued, reminder contacts made to suppliers, and supplier visits.
Manufacturing. Track the number of machine minutes per batch, the number of machine setups, and the amount of time spent on rework.
Engineering. Track the time spent on production line layouts, engineering change orders, and research and devel opment.
Marketing. Track the time spent on designing new ad campaigns, the number of ad placements, and the time spent on target costing projects.
In short, the cost accountant wants to track everything about everyone. The best estimate of the cost of tracking the time usage of the 300 affected employees is one hour per week, at an average cost per hour of $30. The total data collection cost is therefore $468,000 (300 employees x $30/hour x 52 weeks). After learning of the projected data entry cost, the president prevails upon the cost accountant to begin with a pilot project that only encompasses the purchase order activity in the purchasing department. Since the purchasing department already tracks the number of purchase orders created, there is no additional data entry cost at all.