Question

Two-Stage ABC for Manufacturing
Assume Sherwin-Williams Company, a large paint manufacturer, has determined the following activity cost pools and cost driver levels for the latest period:

Activity Cost Pool	Activity Cost	Activity Cost Driver
Machine setup	$990,000	2,500 setup hours
Material handling	860,000	5,000 material moves
Machine operation	200,000	20,000 machine hours

The following data are for the production of single batches of two products, Mirlite and Subdue:

	Mirlite	Subdue
Gallons produced	50,000	30,000
Direct labor hours	400	250
Machine hours	800	250
Direct labor cost	$10,500	$8,000
Direct materials cost	$390,000	$190,000
Setup hours	15	12
Material moves	60	35

Determine the batch and unit costs per gallon of Mirlite and Subdue using ABC.
Round cost per gallon to two decimal places.

Product Costs
	Mirlite	Subdue
Direct materials	$Answer	$Answer
Direct labor	Answer	Answer
Manufacturing overhead:
Machine setups	Answer	Answer
Material handling	Answer	Answer
Machine operation	Answer	Answer
Total cost per batch	$Answer	$Answer
Gallons produced	Answer	Answer
Cost per gallon	$Answer	$

Answer 1

• All working forms part of the answer
• Working #1: Calculation of activity rates

Activity Cost Pool	Activity Cost	Activity Cost Driver	Activity Rate per driver
Machine setup	$                        990,000.00	2,500	$                                           396.00 per setup hrs
Material handling	$                        860,000.00	5,000	$                                           172.00 per material move
Machine operation	$                        200,000.00	20,000	$                                              10.00 per machine hour

• Completion of table

Product Costs
	Mirlite	Subdue
Direct materials	$                        390,000.00	$           190,000.00
Direct labor	$                          10,500.00	$               8,000.00
Manufacturing overhead:
Machine setups	$                           5,940.00	$               4,752.00
Material handling	$                          10,320.00	$               6,020.00
Machine operation	$                           8,000.00	$               2,500.00
Total cost per batch	$                        424,760.00	$           211,272.00
Gallons produced	50,000	30,000
Cost per gallon	$                                  8.50	$                     7.04

• Working for above

Product Costs
	Mirlite	Subdue
Direct materials	390000	190000
Direct labor	10500	8000
Manufacturing overhead:
Machine setups	=15*396	=12*396
Material handling	=60*172	=35*172
Machine operation	=800*10	=250*10
Total cost per batch	Total (A)	Total (A)
Gallons produced	50000 (B)	30000 (B)
Cost per gallon	A / B	A / B