Question

Toyo Japan plant manufactures three product lines, all multi-purpose kitchenware. The plant’s three product models are the Product 1 (P1), the Product 2(P2), and the Product 3 (P3). Until recently, the plant used a job-order product-costing system, with manufacturing overhead applied on the basis of direct-labor hours. The following table displays the basic data upon which the traditional costing system was based.

Planned annual production
P1
P2
P3
Volume in units
5,000
4,000
1,000
Production runs
40 runs of 125 units
40 runs of 100 units
20 runs of 50 units
Direct Material
$129
$151
$203
Direct labor (not including setup)
9 hours @ $19 per hour
11 hours @ $19 per hour
13 hours @ $19 per hour
Machine Hours (MH) per product unit
10 machine hours
12 machine hours
17 machine hours
Total machine hours consumed by product line in a year

The annual budgeted overhead is $1,224,000, and the company’s predetermined overhead rate is
$12 per direct-labor hour. The product costs for the three product models, as reported under the plant’s traditional costing system, are shown in the following table.

P1
P2
P3
Direct material
$129
$151
$203
Direct labor
9 hours @ 19 per hour
11 hours @ $19 per hour
13 hours @ $19 per hour
Manufacturing overhead
9 hours @ 12 per hour
9 hours @ 12 per hour
9 hours @ 12 per hour
Total

Toyo Japan’s pricing policy is to set a target price for each product equal to 130 percent of the full product cost. Due to price competition from other appliance manufacturers, P1 units were selling at $525, and P2 units were selling for $628. These prices were somewhat below the firm’s target prices. However, these results were partially offset by greater-than-expected profits on the P3 product line. Management had raised the price on the P3 model to $800, which was higher than the original target price. Even at this price, Kitchen King’s customers did not seem to hesitate to place orders, Moreover, the company’s competitiors did not mount a challenge in the market for the P3 product line. Neverthless, concern continued to mount in Toledo about the difficulty in the P1 and P2 markets. After all, these were the plant’s breadand-butter products, with projected annual sales of 5,000 P1 units and 4,000 P2 units.
Toyo Japan’s director of cost management, Angela Ramirez, had been thinking for some time about a refinement in the Toledo plant’s product-costing system. Ramirez wondered if the traditional, volume-based system was providing management with accurate data about product costs. She had read about activity-based costing, and wondered if ABC would be an improvement to the plant’s productcosting system. After some discussion, an ABC proposal was made to the company’s top management, and approval was obtained. The data collected for the new ABC system is displayed in the following table.

Activity
Activity Cost Pool
Cost Driver
Product Line
Cost Driver quantity for product line
Machine Related
$310,500
Machine hours
P1
50,000

P2
48,000

P3
17,000

Total

Material handling
52,500
Production runs
P1
40

P2
40

P3
20

Total

Complete an activity-based costing analysis for Toyo Japan’s three product lines regarding machine related, and material handling activities.

Answer 1

Activity-based-costing analysis:

Activity	Activity Cost Pool	Cost Driver	Cost Driver Quantity	Pool Rate	Product Line	Cost Driver Quantity for Product Line	Activity Cost for Product Line	Product Line Prod. Volume	Activity Cost per   Unit of Product
Machine	$310,500	Machine	115,000	$   2.70	P1	50,000	$135,000	5,000	$27.00
Related		Hours			P2	48,000	129,600	4,000	32.40
					P3	17,000	45,900	1,000	45.90
					Total	115,000	$310,500
Material	52,500	Prod.	100	525.00	P1	40	$  21,000	5,000	4.20
Hand.		Runs			P2	40	21,000	4,000	5.25
					P3	20	10,500	1,000	10.50
					Total	100	$ 52,500
Purch.	75,000	Purch.	300	250.00	P1	100	$  25,000	5,000	5.00
		Orders			P2	96	24,000	4,000	6.00
					P3	104	26,000	1,000	26.00
					Total	300	$ 75,000
Setup	85,000	Prod.	100	850.00	P1	40	$  34,000	5,000	6.80
		Runs			P2	40	34,000	4,000	8.50
					P3	20	17,000	1,000	17.00
					Total	100	$ 85,000
Inspect.	27,500	Inspect.	1,100	25.00	P1	400	$  10,000	5,000	2.00
		Hours			P2	400	10,000	4,000	2.50
					P3	300	7,500	1,000	7.50
					Total	1,100	$ 27,500
Ship.	66,000	Ship.	1,100	60.00	P1	500	$  30,000	5,000	6.00
					P2	400	24,000	4,000	6.00
					P3	200	12,000	1,000	12.00
					Total	1,100	$ 66,000
Eng.	32,500	Eng.	650	50.00	P1	250	$  12,500	5,000	2.50
		Hours			P2	200	10,000	4,000	2.50
					P3	200	10,000	1,000	10.00
					Total	650	$ 32,500
Fac.	575,000	Machine	115,000	5.00	P1	50,000	$250,000	5,000	50.00
		Hours			P2	48,000	240,000	4,000	60.00
					P3	17,000	85,000	1,000	85.00
					Total	115,000	$575,000
Grand Total	$1,224,000				Grand Total		$1,224,000