Question

Crane Products manufactures two component parts: AJ40 and AJ60. AJ40 components are being introduced currently, and AJ60 parts have been in production for several years. For the upcoming period, 1,100 units of each product are planned for manufacturing. Assume that the only relevant overhead cost is for engineering change orders (any requested changes in product design or the manufacturing process). AJ40 components are expected to require 4 change orders and AJ60 only 2. Each AJ40 requires 1 machine hour, and each AJ60 requires 1.5 machine hours. The cost of a change order is $300. Estimate the cost of engineering change orders for AJ40 and AJ60 components if Crane uses a traditional costing method and machine hours as the allocation base. (Round machine hour rate to 2 decimal places, e.g. 25.69 and final answers to 0 decimal places, e.g. 5,275.) Total allocated cost for AJ40 Total allocated cost for AJ60 LINK TO TEXT LINK TO TEXT Now suppose that Crane uses an ABC system and allocates the cost of change orders by using as cost driver the number of change orders. Estimate the cost for change orders for each unit of AJ40 and AJ60. Total allocated cost for AJ40 Total allocated cost for AJ60

Answer 1

	AJ40	AJ60
Units planned	1100	1100
No. of change orders	4	2
Total number of change orders	275	550	825
Machine hours per unit	1	1.5
Total machine hours required	1100	1650	2750
Total cost of change order	$247,500
Traditional system
Total allocated cost for AJ40	$99,000	(247,500*1100/2750)
Total allocated cost for AJ60	$148,500	(247,500*1650/2750)
	$247,500
ABC system
Total allocated cost for AJ40	82500	(247500/825*275)
Total allocated cost for AJ60	165000	(247500/825*550)
	$247,500
Overcharged(undercharged) for AJ40	$16,500
Overcharged(undercharged) for AJ60	-$16,500