Question

Required information 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 148 points eBook 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: Print Cost Pools Costs Activity Drivers Direct material cost Receiving Manufacturing Machine setup Shipping $ 600,000 5,500,000 HMachine-hours 900,000 1,000,000 References Production runs 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 $175,000 $650,0৩e 122,000 145 11,000 6,700 14,000 Deluxe $225,000 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 $390,000 128,000 55 16,000 4,450 11.000 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? 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? Complete this question by entering your answers in the tabs below. Required A

Answer 1

1. Calculation of the cost of the Products using Traditional Costing Method

Particulars	Standard	Deluxe
Direct Costs	$   825000	$ 615000
Overheads	$ 3904000	$ 4096000
Total Cost	$ 4729000	$ 4711000
Number of Units	14000	11000
Cost per unit	$ 337.79	$ 428.27

Notes:

Total Overheads =$ 80,00,000

Total Machine Hours=250000 hours

Pre-determined Overhead Rate= Total Overheads/ Total Machine Hours

=$ 80,00,000/250000 hours=$ 32 per machine hour

Overheads allocated to Products:

Standard: 122000 machine hours*$ 32 per machine hour=$ 3904000

Deluxe:128000 machine hours*$ 32 per machine hour=$ 4096000

2. Calculation of the cost of the Products using ABC System

Particulars	Standard	Deluxe
Direct Costs	$   825000	$ 615000
Overheads
Receiving	$ 262500	$ 337500
Manufacturing	$ 2684000	$ 2816000
Machine Setup	$ 652500	$ 247500
Shipping	$ 560000	$ 440000
Total Cost	$ 4984000	$ 4456000
Number of Units	14000	11000
Cost per unit	$ 356	$ 405.09

Notes:

Calculation of Activity Rate

Cost Pool	Cost ( $ )	Cost Driver	Cost Driver Rate(2nd column/ 3rd column)
Receiving	$ 600,000	Direct material cost ($ 400,000)	$ 1.5 per dollar of material cost
Manufacturing	$ 5500,000	Machine hours (250000 hours)	$ 22 per machine hour
Machine Setup	$ 900,000	Production runs ( 200 set ups)	$ 4500 per setup
Shipping	$ 1000,000	Units shipped (25000 units)	$ 40 per unit shipped
Total	$ 80,00,000

Statement Showing Allocation of Overheads to the Products

Particulars of cost	Total Cost	Cost Driver	Standard	Deluxe
Receiving	$ 600,000	$ 1.5 per dollar of material cost	$ 262500 ($175000* $ 1.5)	$ 337500 ($ 225000* $ 1.5)
Manufacturing	$ 5500,000	$ 22 per machine hour	$ 2684000 (122000 hours* $ 22 per machine hour)	$ 2816000 (128000 hours* $ 22 per machine hour)
Machine Setup	$ 900,000	$ 4500 per setup	$ 652500 ( 145 setups* $ 4500 per setup)	$ 247500 (55 setups* $ 4500 per setup)
Shipping	$ 1000,000	$ 40 per unit shipped	$ 560000 (14000 units* $ 40 per unit shipped)	$ 440000 (11000 units* $ 40 per unit shipped)
Total	$ 80,00,000		$ 4159000	$ 3841000