Question

Problem 9-56 Activity-Based Costing and Predetermined Overhead Rates (LO 9-3, 5, 6)

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	$	660,000	Direct material cost
Manufacturing		6,500,000	Machine-hours
Machine setup		1,210,000	Production runs
Shipping	$	1,225,000	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	$	265,000		$	175,000
Total direct labor costs	$	690,000		$	290,000
Total machine-hours		150,000			100,000
Total number of setups		85			135
Total pounds of material		18,000			9,000
Total direct labor-hours		8,000			5,000
Number of units produced and shipped		25,000			10,000

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? (Do not round intermediate calculations.)

	Standard	Deluxe
Direct costs
Ovrhead
Total costs
Number of units
Unit Cost

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? (Do not round intermediate calculations.)

	Standard	Deluxe
Direct Costs
Overhead:
Receiving
Manufacturing
Machine Setup
Shipping
Total costs
Number of units
Unit cost

Answer 1

	Standard	Deluxe
Total direct material costs	265,000	175,000
Total direct labor costs	690,000	290,000
Overhead Cost Machine Hour *38.38	5757000	5,820,000
Number of units	25000	10000
Unit Cost	230.28	582.00

	Standard	Deluxe
Direct Costs	955,000	465,000
Overhead:
Receiving @ Actvities Rate	397500	262500
Manufacturing @ Actvities Rate	3,900,000	2600000
Machine Setup @ Actvities Rate	467,500	742500
Shipping @ Actvities Rate	875,000	350000
Total costs	5640000	3955000
Number of units	25000	10000
Unit cost	225.60	395.50

Workings

Cost Pools	Costs	Total Activities	Activity rate =A / B
Receiving	660,000	440,000	1.5
Manufacturing	6,500,000	250000	26
Machine setup	1,210,000	220	5500
Shipping	1,225,000	35000	35
Total Cost	9,595,000

Overhead Rate =9595000/(250000MH)

38.38