Question

In: Accounting

Cain Components manufactures and distributes various plumbing products used in homes and other buildings. Over time,...

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?

Solutions

Expert Solution

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

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