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	$	755,000	Direct material cost
Manufacturing		5,746,000	Machine-hours
Machine setup		911,020	Number of setups
Shipping	$	1,010,520	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:

   

			Products
		Standard			Deluxe
Total direct material costs	$	295,000		$	205,000
Total direct labor costs	$	660,000		$	260,000
Total machine-hours		155,000			105,000
Total number of setups		76			126
Total pounds of material		19,000			10,000
Total direct labor-hours		6,500			4,000
Number of units produced and shipped		20,100			5,100

Required:

(a)	The current cost accounting system charges overhead to products based on machine-hours.What unit product costs will be reported for the two products if the current cost system continues to be used? (Do not round intermediate calculations. Round costs to the nearest dollar.)

  

  

(b)	The intern suggests an ABC system using the cost drivers identified above. What unit product costs will be reported for the two products if the ABC system is used? (Do not round your intermediate computations.)

  

Answer 1

	Cost Pools	Total Costs
	Receiving	7,55,000
	Manufacturing	57,46,000
	Mahine Setup	9,11,020
	Shopping	10,10,520
	Total Costs:	84,22,540
	Total Machine Hours	2,60,000	(155000+105000)
A	Cost Per Machine Hour	32.39
		Standard	Deluxe
	Machine Hours	1,55,000	1,05,000
	Total Allocated Cost	50,21,130	34,01,410
B	Cost Pools	Total Costs	Allocation Base	Total Allocation Base	PU Allocation
	Receiving	7,55,000	Direct material cost	500000	1.51
	Manufacturing	57,46,000	Machine-hours	260000	22.10
	Mahine Setup	9,11,020	Number of setups	202	4,510.00
	Shopping	10,10,520	Units shipped	25200	40.10
	Total Costs:	84,22,540
		Allocated Cost(Usage*PU Allocation)		Allocation Usage
		Standard	Deluxe	Standard	Deluxe
	Receiving	4,45,450	3,09,550	295000	205000
	Manufacturing	34,25,500	23,20,500	155000	105000
	Mahine Setup	3,42,760	5,68,260	76	126
	Shopping	8,06,010	2,04,510	20100	5100
	Total Allocated Cost	50,19,720	34,02,820