Question

Required information [The following information applies to the questions displayed below.] 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: Odds $ Production quantity Direct material Direct labor (not including setup time) Manufacturing overhead 40 20 (2 hr. at $15) 96 (2 hr. at $48) 166 Ends 5,000 units $ 60 15 (3 hr. at $15) 144 (3 hr. at $48) $ 249 Total cost per unit $ 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: $816,000 Budgeted manufacturing overhead Budgeted direct-labor hours = $48 per direct-labor hour (1,000) (2) + (5,000) (3) 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. Budgeted Level of Cost Driver 9,000 hr. Activity Cost Pool Machine-related costs Setup and inspection Engineering Plant-related costs Cost Driver Machine hours Number of production runs Engineering change orders Square footage of space 40 runs 100 change orders 1,920 sq. ft. You have gathered the following additional information: • Each odd requires 4 machine hours, whereas each end requires 1 machine hour. · Odds are manufactured in production runs of 50 units each. Ends are manufactured in 250-unit batches. Three-quarters of the engineering activity, as measured in terms of change orders, is related to Odds. • The plant has 1,920 square feet of space, 80 percent of which is used in the production of Odds.

Answer 1

6		Odds	Ends
	Manufacturing overhead cost per unit
	Machine-related costs	$200.00	$50.00
	Setup and inspection	$90.00	$18.00
	Engineering	$67.50	$4.50
	Plant-related costs	$76.80	$3.84
	Total overhead cost per unit	$434.30	$76.34
	Production volume	1000	5000
		$434,300	$381,700
	Total	$816,000.00
7	Cost allocated under traditional system	$96,000	$720,000
	Cost allocated under ABC	$434,300	$381,700
	Cost distortion	-$338,300	$338,300

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