Question

Utica Manufacturing (UM) was recently acquired by MegaMachines, Inc. (MM), and organized as a separate division within the company. Most manufacturing plants at MM use an ABC system, but UM has always used a traditional product costing system. Bob Miller, the plant controller at UM, has decided to experiment with ABC and has asked you to help develop a simple ABC system that would help him decide if it was useful. The controller's staff has identified costs for the first month in the four overhead cost pools along with appropriate cost drivers for each pool. Cost Pools Costs Activity Drivers Incoming inspection $ 170,000 Direct material cost Production 1,500,000 Machine-hours Machine setup 700,000 Setups Shipping 488,880 Units shipped The company manufactures two basic products with model numbers 308 and 510. The following are data for production for the first month as part of MM. Products 308 510 $ 50,000 $ 18,000 $166,000 $198,000 60,000 90,000 Total direct material costs Total direct labor costs Total machine-hours Total number of setups Total pounds of material Total direct labor-hours Number of units produced and shipped 18,000 6,080 30,eee 9, eee 9,000 18,000

Answer 1

Utica Manufacturing Requirement a Total cost Per unit cost 308 1356000 45.2 510 1926000 107 Burden rate = (Total overhead costs : Budgeted total machine-hours) Budgeted total machine-hours = 60,000+ 90,000 = 150,000 hours Total overhead costs = $170,000+ $1,500,000 + $700,000+ $480,000 = $2,850,000 Burden rate = $2,850,000 + 150,000 machine-hours = $19 per machine-hour Unit costs: Direct costs Overhead (@$19 per machine-hour) Total costs Number of units Unit costs 308 216000 1140000 1356000 30000 45.2 510 216000 1710000 1926000 18000 107 Requirement b Incoming inspection Production Machine setup Shipping 250 % of material dollars $10 per machine-hour $5000 per machine-hour $10 per machine-hour Incoming inspection: $170,000+ $68,000 material dollars = 250% of material dollars. Production: $1,500,000 + 150,000 machine-hours = $10.00 per machine-hour Machine setup: $700,000 + 140 Setups = $5,000 per setup Shipping: $480,000 + 48,000 units = $10.00 per unit

Requiremento Total cost Per unit cost 308 1491000 49.7 510 1791000 99.5 510 216000 Unit Costs: 308 Direct Costs 216000 Overhead: Incoming inspection 125000 Production 600000 Machine setup 250000 Shipping 300000 Total costs 1491000 Number of units 30000 Unit costs 49.7 45000 900000 450000 180000 1791000 18000 99.5 $125,000 = 250% of material dollars x $50,000. $600,000 = $10.00 per machine-hour x 60,000 machine-hours. $250,000 = $5,000 per setup x 50 setups. $300,000 = $10.00 per unit x 30,000 units. Requirement d If management implemented an activity-based costing system it should be provided with a more thorough understanding of product costs. By breaking down costs into cost drivers, i.e., those activities that drive the costs, management should be able to see the relationship between product complexity, product volume, and product cost. This would be vital information for pricing decisions and profitability strategies. Management should also be able to streamline the production process by reducing those nonvalue-adding activities such as setups and travel time between activity centers or departments. (Management might consider running larger batches, or redesigning the plant layout.)