Question

Churchill Products is considering updating its cost system to an activity-based costing system and is interested in understanding the effects. The company’s cost accountant has identified three overhead cost pools along with appropriate cost drivers for each pool.

Cost Pools	Costs			Activity Drivers
Utilities	$	280,000		56,000	machine-hours
Scheduling and setup		280,000		560	setups
Material handling		785,000		1,570,000	pounds of material

The company manufactures three models of water basins (Oval, Round, and Square). The plans for production for the next year and the budgeted direct costs and activity by product line are as follows:

	Products
	Oval			Round			Square
Total direct costs (material and labor)	$	90,000		$	70,000		$	90,000
Total machine-hours		30,000			8,000			18,000
Total number of setups		60			280			220
Total pounds of material		490,000			290,000			790,000
Total direct labor-hours		3,500			1,500			5,000
Number of units produced		3,800			2,000			5,500

Required:

a. The current cost accounting system charges overhead to products based on direct labor-hours. What unit product costs will be reported for the three products if the current cost system continues to be used? (Do not round intermediate calculations. Round "Per unit cost" answers to 2 decimal places.)

c. What are the cost driver rates for the three cost pools identified by the cost accountant? (Round your answers to 2 decimal places.)

d. What unit product costs will be reported for the three products if the ABC system suggested by the cost accountant's classification of cost pools is used? (Do not round intermediate calculations. Round "Per unit cost" answers to 2 decimal places.)

e. 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

	units		3,800	2,000	5,500
	total direct labor hrs		3500	1500	5000	10000
			Oval	Round	Square
a)	Total cost		560,750	271,750	762,500
	per unit cost		147.57	135.88	138.64
	total direct costs		90,000	70,000	90,000	250,000
	overhead assigned		470750	201750	672500	1345000
	totalcost		560,750	271,750	762,500	1,595,000
c)	Utilities		5	per machine hour
	Scheduling and setup		500	per setup
	materials handling		0.5	per pound
d)			Oval	Round	Square
	Total cost		515,000	395,000	685,000	1,595,000
	per unit cost		135.53	197.50	124.55
e)	if management implemented an activity based costing system
	it should be provided with a more thorough understanding
	of product costs