Question

tica Manufacturing (UM) was recently acquired by MegaMachines, Inc. (MM), and organized as a separate division within the company. Most manufacturing plants at MM use an ABC system, but UM has always used a traditional product costing system. Bob Miller, the plant controller at UM, has decided to experiment with ABC and has asked you to help develop a simple ABC system that would help him decide if it was useful. The controller’s staff has identified costs for the first month in the four overhead cost pools along with appropriate cost drivers for each pool:

Cost Pools	Costs			Activity Drivers
Incoming inspection	$	154,000		Direct material cost
Production		1,430,000		Machine-hours
Machine setup		792,000		Setups
Shipping		484,000		Units shipped

The company manufactures two basic products with model numbers 308 and 510. The following are data for production for the first month as part of MM:

	Products
		308			510
Total direct material costs	$	54,000		$	23,000
Total direct labor costs	$	164,000		$	194,000
Total machine-hours		68,000			132,000
Total number of setups		58			86
Total pounds of material		17,600			8,600
Total direct labor-hours		5,600			8,600
Number of units produced and shipped		24,000			20,000

Required:

a. The current cost accounting system charges overhead to products based on machine-hours. What unit product costs will be reported for the two products if the current cost system continues to be used? (Round intermediate calculations and "Per unit cost" answers to 2 decimal places.)

	308 510 Total cost Per unit cost

b. A consulting firm has recommended using an activity-based costing system, with the activities based on the cost pools identified by the cost accountant. What are the cost driver rates for the four cost pools identified by the cost accountant? (Round your answers to 2 decimal places.)

	Incoming inspection: % of material dollars Production: per machine-hour Machine setup: per setup Shipping: per unit

c. What unit product costs will be reported for the two products if the ABC system suggested by the cost accountant’s classification of cost pools is used? (Round intermediate calculations and final answers to 2 decimal places.)

308 510 Total cost Per unit cost

d. If management should decide to implement an activity-based costing system, what benefits should it expect?

	If management implemented an activity-based costing system it should be provided with a more thorough understanding of product costs.
	If management implemented an activity-based costing system it will increase the sales of the company.

Answer 1