Question

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:

Standard Deluxe
Total direct material costs $245,000 $155,000
Total direct labor costs $650,000 $250,000
Total machine-hours 150,000 100,000
Total number of setups 75 125
Total pounds of material 18,000 9,000
Total direct labor-hours 6,000 3,750
Number of units produced and shipped 20,000 5,000

The intern decides to look more closely at the manufacturing activity and determines that it can be broken down into two activities: production and engineering. Production covers the costs of ongoing manufacturing while engineering includes those activities dealing with engineering changes, design modifications, and so on.

The costs attributed to production are $3,300,000 and the costs attributed to engineering are $2,200,000. After discussion with plant engineers, the intern decides that the best cost driver for engineering is setups, because most of the work arises from changes in the way the product is run.

Required:
a. Compute the totals of the cost driver rates.
b. What unit product costs will be reported for the two products if the revised ABC system is used?

Answer 1

Solution :

                                                       Standard               Deluxe          Total

Total cost of direct material           245000               155000        400000

Total cost of direct labor                650000               250000       900000

Total machine hours                       150000                100000       250000

Total setups                                         75                        125             200

Total material pounds                     18000                  9000            27000

Total direct hours of labor               6000                   3750             9750

No. of units shipped                       20000                    5000            25000

a). Cost drivers rates :

Receiving                               150                    Percentage of materials(dollars)  

                                    $\left(600000 \times \frac{100}{400000}\right)$

Manufacturing                        13.20                Per machine hour

                                              $\frac{3300000}{250000}$

Engineering                          11000                  Per set up

                                              $\frac{2200000}{200}$

Machine set up                        4500                per set up

                                               $\frac{900000}{200}$

Shipping                                     40                   per unit

                                             $\frac{1000000}{25000}$

b). Units product cost

                                         Standard                                      Deluxe

Direct cost                        895000                                      405000

                                (245000+650000)                      (155000+250000)  

Overhead :

Receiving                         367500                                       232500

                                  (245000 x 150%)                         (155000 x 150%)

Manufacturing                1980000                                      1320000

                                   (150000 x 13.2)                             (100000 x 13.2)

Engineering                    825000                                         1375000

                                    (75 x 11000)                                   (125 x 11000)

Machine set up              337500                                           562500

                                     (75 x 4500)                                     (125 x 4500)

Shipping                         800000                                             200000

                                      (20000 x 40)                                   (5000 x 40)

Total costs                   5205000                                             4095000

No of units                     20000                                                5000

Unit cost                       260.25                                                   819

                               (5205000/20000)                               (4095000/5000)