Question

Utica 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 $ 255,000 Direct material cost Production 1,650,000 Machine-hours Machine setup 720,000 Setups Shipping 495,000 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 $ 50,000 $ 35,000 Total direct labor costs $ 176,000 $ 206,000 Total machine-hours 52,000 98,000 Total number of setups 54 90 Total pounds of material 18,600 9,600 Total direct labor-hours 6,600 9,600 Number of units produced and shipped 35,000 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.) 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.) 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.) 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

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Requirement -a
Predetermined Overhead Rate:	Manufacturing Overhead/Machine Hours
	3120000/150000
	$                                                                            20.80	per Machine Hour
Manufacturing overheads	255000+1650000+720000+495000	$       3,120,000
Mahine Hours	52000+98000	150000
		Product 308	Product 510
Direct Material		$             50,000	$         35,000
Direct Labor		$           176,000	$       206,000
Manufacturing Overheads	52000*20.8 and 98000*20.8	$       1,081,600	$   2,038,400
Product Cost	a	$       1,307,600	$   2,279,400
No of Units	b	35,000	20,000
Product cost per unit	a/b	$                37.36	$         113.97
Requirement -b
				Product 308		Product 510
Acticity Cost Pool	Manufacturing overhead	Total Activity	Activity Rate	no of Activities	Overhead Allocated	no of Activities	Overhead Allocated
	A	B	A/B=C	D	D*C	E	E*C
Incoming Inspection	$                                                                       255,000	85000	$                3.0	50000	$                      150,000	35000	$                      105,000
Production	$                                                                   1,650,000	150000	$              11.0	52000	$                      572,000	98000	$                   1,078,000
Machine Setup	$                                                                       720,000	144	$        5,000.0	54	$                      270,000	90	$                      450,000
Shipping	$                                                                       495,000	55000	$                9.0	35000	$                      315,000	20000	$                      180,000
Total	$                                                                   3,120,000				$                   1,307,000		$                   1,813,000
Requirement -c
		Product 308	Product 510
Direct Material		$             50,000	$         35,000
Direct Labor		$           176,000	$       206,000
Manufacturing Overheads		$       1,307,000	$   1,813,000
Product Cost	a	$       1,533,000	$   2,054,000
No of Units	b	35,000	20,000
Product cost per unit	a/b	$                43.80	$         102.70