Question

Knickknack, Inc. manufactures two products: Odds and Ends. The firm uses a single, plantwide overhead rate based on direct-labor hours. Production and product-costing data are as follows: Production quantity Direct material Direct labor (not including setup time) Manufacturing overhead Total cost per unit Odds 1,000 units $ 40 30 (2 hr. at $15) 96 (2 hr. at $48) $ 166 Ends 5,000 units $ 60 45 (3 hr. at $15) 144 (3 hr. at $48) $ 249 Manufacturing overhead budget: Machine-related costs Setup and inspection Engineering Plant-related costs Total $ 450,000 180,000 90,000 96,000 $816,000 Predetermined overhead rate: Budgeted manufacturing overhead Budgeted direct-labor hours $816,000 (1,000) (2) + (5,000) (3) = $48 per direct-labor hour Knickknack, Inc. prices its products at 120 percent of cost, which yields target prices of $199.20 for Odds and $298.80 for Ends. Recently, however, Knickknack has been challenged in the market for Ends by a European competitor, Bricabrac Corporation. A new entrant in this market, Bricabrac has been selling Ends for $220 each. Knickknack's president is puzzled by Bricabrac's ability to sell Ends at such a low cost. She has asked you (the controller) to look into the matter. You have decided that knickknack's traditional, volume-based product-costing system may be causing cost distortion between the firm's two products. Ends are a high-volume, relatively simple product. Odds, on the other hand, are quite complex and exhibit a much lower volume. As a result, you have begun work on an activity-based costing system.

Answer 1

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Knickknack Inc.
Calculation of machine hours used	Odds	Ends	Total	Note
Machine Hours per unit	4.00	1.00		A
Units produced	1,000.00	5,000.00		B
Total Machine Hours	4,000.00	5,000.00	9,000.00	C=A*B
Calculation of production runs
	Odds	Ends	Total
Units produced in each run	50.00	250.00		D
Units produced	1,000.00	5,000.00		See B
Production runs	20.00	20.00	40.00	E=B/D

Calculation of Engineering change orders used
	Total	Note
Engineering change orders	100.00	F
3/4 is used by ODDS	75.00	G=F/4*3
1/4 is used by ENDS	25.00	H=F/4
Calculation of Square footage of space used
	Total	Note
Square footage of space	1,920.00	I
80% is used by ODDS	1,536.00	J=I*80%
20% is used by ENDS	384.00	K=I*20%

Calculation of ABC rates for overhead		L	M	N=L/M
Activity cost pool	Cost Driver	Cost	Quantity	ABC rates
Machine Related costs	Machine hours	450,000.00	9,000.00	50.00
Setup and inspection	Number of production runs	180,000.00	40.00	4,500.00
Engineering	Engineering change orders	90,000.00	100.00	900.00
Plant related costs	Square footage of space	96,000.00	1,920.00	50.00
Total Cost assigned		816,000.00

			See workings above		See workings above
		See N	O	P=N*O	Q	R=N*Q
Allocation table			Odds	Ends
Activity cost pool	Cost Driver	ABC Rates	Activity used	Cost assigned	Activity used	Cost assigned
Machine Related costs	Machine hours	50.00	4,000.00	200,000.00	5,000.00	250,000.00
Setup and inspection	Number of production runs	4,500.00	20.00	90,000.00	20.00	90,000.00
Engineering	Engineering change orders	900.00	75.00	67,500.00	25.00	22,500.00
Plant related costs	Square footage of space	50.00	1,536.00	76,800.00	384.00	19,200.00
Total Cost assigned under ABC				434,300.00		381,700.00	S

Cost assigned under traditional costing:
	Odds	Ends	Note
Manufacturing overhead	96.00	144.00	T
Units produced	1,000.00	5,000.00	See B
Total cost	96,000.00	720,000.00	U=T*B
Answer 7	Odds	Ends
Cost assigned under traditional costing	96,000.00	720,000.00	See U
Cost assigned under ABC	434,300.00	381,700.00	See S
Total amount of cost distortion	(338,300.00)	338,300.00	V=U-S