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	$	185,000		$	215,000
Total direct labor costs	$	650,000		$	370,000
Total machine-hours		126,000			124,000
Total number of setups		135			65
Total pounds of material		12,000			15,000
Total direct labor-hours		6,600			4,350
Number of units produced and shipped		12,000			13,000

Problem 9-62 (Algo) Activity-Based Costing and Predetermined Overhead Rates (LO 9-3, 5, 6)

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?

b. The intern suggests an ABC system using the cost drivers identified above. What unit product costs will be reported for the two products if the ABC system is used?

Answer 1

a.	Computation of overhead recovery rate based on mchine hours
	Cost pools	Costs (in $)
	Receiving	6,00,000
	Manufacturing	55,00,000
	Machine setup	9,00,000
	Shipping	10,00,000
	Total Cost (a)	80,00,000
	Total Machine hours (1,26,000+1,24,000) (b)	2,50,000
	Overhead recovery rate (per Machine hours) (a/b)	32
	Unit Cost for for the two products if current cost system contininue to be followed
		Costs (in $)
		products
		Standard	Deluxe
	No. of Units (a)	12,000	13,000
	Total Direct material costs	1,85,000	2,15,000
	Total Direct Labour costs	6,50,000	3,70,000
	TOTAL Direct costs	8,35,000	5,85,000
	Add:- Overhead Cost @32 per Mh	40,32,000	39,68,000
	Total Costs (b)	48,67,000	45,53,000
	Cost per Unit (b/a)	405.58	350.23
b.	Computation of ABC Rates
	Cost pools	Costs (in $)	Activity Drivers	No. of Cost driver	ABC Rate (Cost/No. of cost driver)
	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
	Unit product costs will be reported for the two products if the ABC system is used
		Costs (in $)
		products
		Standard	Deluxe
	No. of Units (a)	12,000	13,000
	Total Direct material costs	1,85,000	2,15,000
	Total Direct Labour costs	6,50,000	3,70,000
	TOTAL Direct costs	8,35,000	5,85,000
	Add:- Overheads Costs
	Receiving @1.5 per DM cost	2,77,500	3,22,500
	Manufacturing @22 per Mh	27,72,000	27,28,000
	Machine setup@ 4,500 per setup	6,07,500	2,92,500
	Shipping @ 40 per unit shipped	4,80,000	5,20,000
	Total Costs (b)	49,72,000	44,48,000
	Cost Per Unit (b/a)	414.33	342.15