Question

Zarson​'s Netballs is a manufacturer of​ high-quality basketballs and volleyballs. Setup costs are driven by the number of batches. Equipment and maintenance costs increase with the number of​ machine-hours, and lease rent is paid per square foot. Capacity of the facility is 12,000 square​ feet, and Zarson is using only 70​% of this capacity. Zarson records the cost of unused capacity as a separate line item and not as a product cost. The following is the budgeted information for Zarson​:

Zarson's Netballs

Budgeted Costs and Activities

For the Year Ended December 31, 2017

Direct materials—basketballs $234,200

Direct materials—volleyballs 263,460

Direct manufacturing labor—basketballs 110,400

Direct manufacturing labor—volleyballs 100,640

Setup 117,000

Equipment and maintenance costs 81,900

Lease rent 240,000

Total $1,147,600

Other budget information​ follows:

	Basketballs	Volleyballs
Number of balls	62,000	85,000
Machine-hours	10,000	11,000
Number of setups	350	300
Square footage of production space used	3,400	5,000

1.	Calculate the budgeted cost per unit of cost driver for each indirect cost pool.
2.	What is the budgeted cost of unused​ capacity?
3.	What is the budgeted total cost and the cost per unit of resources used to produce​ (a) basketballs and​ (b) volleyballs?
4.	Why might excess capacity be beneficial for Zarson​? What are some of the issues Zarson should consider before increasing production to use the​ space?

Answer 1

Solution

Zarson’s Netballs

Calculation of the budgeted cost per unit of cost driver for each indirect cost pool:

Computations –

Budgeted cost per unit of cost driver = budgeted cost/total cost pool usage

Setup –

Cost pool usage = 300 + 350 setups = 650 setups

Budgeted cost per unit = 117,000/650 = $180 per setup

Equipment and Maintenance Costs –

Total machine hours = 10,000 + 11,000 = 21,000 machine hours

Cost per machine hour = 81,900/21,000 = $3.90 per MH

Lease Rent –

Total square footage of production space used = 3,400 + 5,000 = 8,400

Cost per square footage = 240,000/12,000 = $20 per square foot

1. Budgeted cost of unused capacity:

Total capacity of the facility = 12,000 square feet

Used capacity = 70% x 12,000 = 8,400 square feet

Unused capacity = 70% x 12,000 = 3,600 square feet

Lease cost per square foot = $20

Cost of unused capacity = $20 x 3,600 square feet

Cost of unused capacity = $72,000

2. Budgeted total cost and the cost per unit of resources used to produce

a. basketballs -

b. Volleyballs -

1. The excess capacity might be beneficial for use to increase production of any one of the balls.

However, before considering increasing production the expected return on the balls need to be analyzed. The space should be used to produce the product that earns highest contribution margin per square foot so as to maximize earnings.