Question

I'm working on a Accounting multi-part question and need guidance to help me study.

E4-23A Use ABC to allocate manufacturing overhead (Learning Objective 2)

Several years after reengineering its production process, Biltmore Corporation hired a new controller, Rachael Johnson. She developed an ABC system very similar to the one used by Biltmore’s chief rival, Westriver. Part of the reason Johnson developed the ABC system was because Biltmore’s profits had been declining even though the company had shifted its product mix toward the product that had appeared most profitable under the old system. Before adopting the new ABC system, Biltmore had used a plantwide overhead rate based on direct labor hours that was developed years ago.

For the upcoming year, Biltmore’s budgeted ABC manufacturing overhead allocation rates are as follows:

Activity Allocation Base Activity Cost Allocation Rate

Materials handling # of parts $3.84 per part

Machine setup # of setups $330.00 per setup

Insertion of parts # of parts $30.00 per part

Finishing Finishing DL hrs $54.00 per hour

The number of parts is now a feasible allocation base because Biltmore recently installed a plantwide computer system. Biltmore produces two wheel models: Standard and Deluxe. Budgeted data for the upcoming year are as follows:

Standard Deluxe

Parts per wheel……………………. 6.0 8.0

Setups per 1,000 wheels…………… 20.0 20.0

Finishing DL hrs per wheel………... 1.2 3.3

Total DL hrs per wheel…………….. 2.0 3.3

The company’s managers expect to produce 1,000 units of each model during the year.

Requirements

1. Compute the total budgeted manufacturing overhead cost for the upcoming year

2. Compute the manufacturing overhead cost per wheel of each model using ABC.

3. Compute Biltmore’s traditional plantwide overhead rate. Use this rate to determine the manufacturing overhead cost per wheel under the traditional system.

MY WORK:

Material Handling (6,000 + 8,000) x 3.84 = $53,760

Machine setups (20 + 20) x 330 = $13.200

Insertion of parts (6,000 + 8,000) x 30 = $420,000

Finishing (1,200 + 3,300) x 54 = $243,000

Total Overhead Cost $729,960

Standard: Deluxe:

Material Handling Cost 6,000 x 3.84 = $23,040 8,000 x 3.84 = $30,720

Machine Setup Cost 20 x 330 = $6,600 20 x 330 = $6,600

Insertion of Parts Cost 6,000 x 30 = $180,000 8,000 x 30 = $240,000

Finishing Cost 1,200 x 54 = $64,800 3,300 x 54 = $178,200

Total MOH Cost $274,440 $455,520

Homework hint: In E4-24A, under the traditional method of applying (allocating) overhead, the Deluxe unit looks like it makes us a gross profit of $65.99. But when we use Activity-Based Costing, it looks like we make only $64.98 in gross profit per Deluxe unit.

E4-24A Continuation of E4-23A: Determine product profitability (Learning Objectives 2 & 3)

Refer to your answer in E4-23A. In addition to the manufacturing overhead costs, the following data are budgeted for the company’s Standard and Deluxe models for next year:

Standard Deluxe

Sales price per wheel………………. $420.00 $620.00

DM per wheel…………………….... $34.00 $47.00

DL per wheel………………………. $45.10 $52.50

Requirements

1. Compute the gross profit per wheel if managers rely on the ABC unit cost data computed in E4-23A.

2. Compute the gross profit per wheel if the managers rely on the plantwide allocation cost data.

3. Which product line is more profitable for Baltimore?

4. Why might the controller have expected ABC to pass the cost-benefit test? Were there any warning signs that Biltmore’s old direct-labor-based allocation system was broken?