Question

Utica Manufacturing (UM) was recently acquired by MegaMachines, Inc. (MM), and organized as a separate division within the company. Most manufacturing plants at MM use an ABC system, but UM has always used a traditional product costing system. Bob Miller, the plant controller at UM, has decided to experiment with ABC and has asked you to help develop a simple ABC system that would help him decide if it was useful. The controller’s staff has identified costs for the first month in the four overhead cost pools along with appropriate cost drivers for each pool.

Cost Pools	Costs			Activity Drivers
Incoming inspection	$	261,000		Direct material cost
Production		1,500,000		Machine-hours
Machine setup		655,000		Setups
Shipping		425,000		Units shipped

The company manufactures two basic products with model numbers 308 and 510. The following are data for production for the first month as part of MM.

	Products
		308			510
Total direct material costs	$	61,000		$	26,000
Total direct labor costs	$	167,000		$	197,000
Total machine-hours		60,000			90,000
Total number of setups		50			81
Total pounds of material		17,300			8,300
Total direct labor-hours		5,300			8,300
Number of units produced and shipped		40,000			10,000

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. A consulting firm has recommended using an activity-based costing system, with the activities based on the cost pools identified by the cost accountant. What are the cost driver rates for the four cost pools identified by the cost accountant?
c. What unit product costs will be reported for the two products if the ABC system suggested by the cost accountant’s classification of cost pools is used?
d. If management should decide to implement an activity-based costing system, what benefits should it expect?

Answer 1

Amounts are in $

Answer is inserted as picture

Total overhead Cost Cost = 261,000 + 1,500,000 af 655,000 + 425,ooo 2,841,000 Total machine hours = 60,000 t 90,000 = 150,000 Allocation rate Total oH machine has 284,000 /150,000 18.94 308 61,000 167,000 510 0 26000 192,60 pireet material Direct labor overhead Cast (60,000.718.94) Cgobo X18.94 ) 1,136, Lod 2 0 1 8 Sunday 22 1,704, boo 1,364,400 1,927, Goo Cast pools Rate (2) 3 0 b Cost Incoming inspection 261,000 Production 6550so Shipping 425 poo 1,500,000 coce 27,000 150,oou 131 50,000 Machine setup 10 5000 8.5 Cost driver quantity CS anned with CamScanner

510 26,60o 127,000 78,000 Calwlating unit Cost under ABC 308 Direed materials G1,000 Direct labour 167,000 locoming lospletion of 183,000 (6,00x3,26600x3) Production of 600,000 (60,000 x 60, 90,000 (10) Machine set up on 250,000 (50x51 81x56 Shipping of 340,000 (hopeoX 8.5, 10,000 X85) 000 900,000 605,ooo 85,000 من راهرا) 1,691,000 CScanned with CamScanner

(d)

ABC costing provides us with following benefits

1. It provides a clear picture about the actual cost related to a product line thus helping in price fixation

2. Helps in decision making (Shut down or Continue)

3. Helps in cost reduction (by restricting cost driver usage)

And many more benefits