Question

Widget Manufacturer A plant produces several related models of widgets. Production of each model involves the same machinery. The plant produces each model in separate production runs. Each production run has significant setup costs and the cost per setup is the same for every model. Also, the assembly of each unit requires hand labor (direct labor). The following costs were incurred during a recent year: a) direct labor costs. b) costs of placing orders to procure parts. c) costs of receiving and inspecting purchase orders. d) direct material costs. e) setups costs incurred to adjust machinery each time a different model is produced f) salaries of production supervisors who oversee hand labor. g) machine related overhead costs. This involves primarily maintenance and electric. Each model requires 20 to 40 minutes of machine time per output unit depending upon the model. h) plant insurance. i) cost of transporting finished units to customers. An independent trucking company ships the units and charges by the pound. j) salary of chief executive officer. k) cost of design-related engineering changes for different models. Required 1. Classify the preceding costs as unit-level, production run/batch level, product sustaining, or facility/organization sustaining. 2. Consider two widget models. One model is simple and one model is complex. The company produces roughly the same number of units of each model. The engineering department expends considerable time and effort upgrading the product features of the complex model and very little time and effort on the simple model. Currently, the plant allocates the same engineering cost to each unit produced in the plant, regardless of model total engineering costs divided by total number of units produced in plant). Regarding engineering costs, how are the simple and complex models mis-costed?

Answer 1

1a Unit Level

b Batch Level

c Batch Level

d Unit Level

e Product Sustaining

f Unit Level

g Unit Level

h Organization Sustaining

i Product Sustaining

j Organization Sustaining

k Product Sustaining

2 The models are mis-costed because equal amount of costs are being reported by the organisation whereas the complex model is being given a lot more time than the simple model. The simple model is over-costed and has costs lower than what is reported whereas the complex model is under-costed and has costs which are higher than what is reported. The engineering costing by the company should be done on the basis of time spent by the engineering department on the respective models and not equally.