Question

Cain Components manufactures and distributes various plumbing products used in homes and other buildings. Over time, the production staff has noticed that products they considered easy to make were difficult to sell at margins considered reasonable, while products that seemed to take a lot of staff time were selling well despite recent price increases. A summer intern has suggested that the cost system might be providing misleading information.

The controller decided that a good summer project for the intern would be to develop, in one self-contained area of the plant, an alternative cost system with which to compare the current system. The intern identified the following cost pools and, after discussion with some plant personnel, appropriate cost drivers for each pool. There were:

Cost Pools		Costs	Activity Drivers
Receiving	$	600,000	Direct material cost
Manufacturing		5,500,000	Machine-hours
Machine setup		900,000	Production runs
Shipping		1,000,000	Units shipped

In this particular area, Cain produces two of its many products: Standard and Deluxe. The following are data for production for the latest full year of operations.

	Products
	Standard			Deluxe
Total direct material costs	$	160,000		$	240,000
Total direct labor costs	$	650,000		$	420,000
Total machine-hours		116,000			134,000
Total number of setups		160			40
Total pounds of material		9,500			17,500
Total direct labor-hours		6,850			4,600
Number of units produced and shipped		17,000			8,000

The intern decides to look more closely at the manufacturing activity and determines that it can be broken down into two activities: production and engineering. Production covers the costs of ongoing manufacturing while engineering includes those activities dealing with engineering changes, design modifications, and so on.

The costs attributed to production are $5,412,000 and the costs attributed to engineering are $9,075,000. After discussion with plant engineers, the intern decides that the best cost driver for engineering is setups, because most of the work arises from changes in the way the product is run.

Required:

a-1. Compute the totals of the cost driver rates shown below.(Round intermediate calculations and "Manufacturing" answer to 2 decimal places.)

a-2. What unit product costs will be reported for the two products if the revised ABC system is used?(Round "Unit cost" answers to 2 decimal places.)

Answer 1

a-1)
Cost pools	Costs	Activity drivers	Qty of Activity drivers	ABC Rate
Receiving	$ 6,00,000	Direct material cost	4,00,000	$                                            1.50
Manufacturing	$ 55,00,000	Machine-hours	2,50,000	$                                          22.00
Machine setup	$ 9,00,000	Production runs	200	$                                     4,500.00
Shipping	$ 10,00,000	Units shipped	25,000	$                                          40.00
a-2)
Particulars	Standard	Deluxe
Total direct material cost	$    1,60,000	$                        2,40,000
Total direct labor costs	$    6,50,000	$                        4,20,000
Overhead costs
Receiving	$    2,40,000	$                        3,60,000
Manufacturing	$ 25,52,000	$                      29,48,000
Machine setup	$    7,20,000	$                        1,80,000
Shipping	$    6,80,000	$                        3,20,000
Total product costs	$ 50,02,000	$                      44,68,000
Units produced	17,000	8,000
Unit product costs	$       294.24	$                           558.50

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