Question

a 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 Receiving Manufacturing Machine setup Shipping Costs 660,000 6,500,000 1,210,000 1,225,000 Activity Drivers Direct material cost Machine-hours Number of set-ups 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: 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 Products Standard Deluxe $265,000 $175,000 $690,000 $290,000 150,000 100,000 135 18,000 9,000 8,000 5,000 25,000 10,000 85 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.) Standard Deluxe Direct costs Overhead Total costs Number of units Unit cost b. The inter 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 intermediate calculation Standard Deluxe Direct Costs Overhead: Receiving Manufacturing Machine setup Shipping Total costs Number of units Unit cost

Answer 1

Answer a)

Calculation of unit cost of the two products when overhead are charged on the basis of machine hours

Particulars	Standard	Deluxe
Direct Material Costs	$ 265,000	175000
Direct Labour Costs	$ 690,000	290000
Direct Costs	$ 955,000	465000
Overheads	$ 5,757,000	3838000
Total costs	$ 6,712,000	4303000
Number of units Produced	25,000 units	10,000 units
Unit Cost	$ 268.48	$ 430.30

Therefore overhead cost per unit of Standard product is $ 268.48 and that of Deluxe product is $ 430.30.

Working Notes:

Calculation of Total overheads:

Cost Pools	Overheads costs
Receiving	$ 660,000
Manufacturing	$ 6,500,000
Machine Setup	$ 1,210,000
Shipping	$ 1,22,5000
Total	$ 9,595,000

Calculation of total machine hours

Total machine hours= Machine hours of standard product + Machine hours of deluxe product

                                     = 150,000 machine hours + 100,000 machine hours

                                    = 250,000 machine hours   

Therefore total machine hours of the two products are 250,000.

Calculation of overhead rate based on machine hours

Overhead rate = Total estimated overheads/ Total estimated machine hours

                            = $ 9,595,000/ 250,000 machine hours

                            = $ 38.38 per machine hour

Therefore the overhead rate is $ 38.38 per machine hour.

Calculation of overhead cost allocated to both the products

Total overhead cost of a product = Total machine hours consumed by the product X overhead rate

Standard Product:

Allocated overheads = 150,000 machine hours X $ 38.38 per machine hour

                                       = $ 5,757,000

Therefore overhead cost allocated to Standard Product is $ 5,757,000

Deluxe Product:

Allocated overheads = 100,000 machine hours X $ 38.38 per machine hour

                                       = $ 3,838,000

Therefore overhead cost allocated to Deluxe Product is $ 3,838,000

Answer b)

Calculation of unit cost of the two products when overhead are charged based on Activities consumed

Particulars	Standard	Deluxe
Direct Material Costs	$ 265,000	$ 175,000
Direct Labour Costs	$ 690,000	$ 290,000
Direct Costs	$ 955,000	$ 465,000
Overheads :
Receiving	$ 397,500	$ 262,500
Manufacturing	$ 3,900,000	$ 2,600,000
Machine Setup	$ 467,500	$ 742,500
Shipping	$ 875,000	$ 350,000
Total costs	$ 6,595,000	$ 4,420,000
Number of units Produced	25,000 units	10,000 units
Unit Cost	263.80	442.00

Therefore overhead cost per unit of Standard product is $ 263.80 and that of Deluxe product is $ 442.00

Working Notes:

Calculation of Activity rate for each activity

Cost Pools	Overheads costs	Activity Drivers	Total Number of Activities	Overhead cost per Activity
Receiving	$ 660,000	Direct Material Cost	$ 440,000	$ 1.50 per dollar of material cost
Manufacturing	$6,500,000	Machine hours	250,000 machine hours	$ 26 per machine hour
Machine Setup	$ 1,210,000	Number of Set-ups	220 set-ups	$ 5,500 per set-up
Shipping	$ 1,225,000	Units Shipped	35000 units	$ 35 per unit shipped
Total	$ 9,595,000

Calculation of Total number of activities:

Activity Drivers	Standard Product	Deluxe Product	Total
Direct Material Cost	$ 265,000	$ 175,000	$ 440,000
Machine hours	150,000 machine hours	100,000 machine hours	250,000 machine hours
Number of Set-ups	85 Setups	135 Setups	220 Setups
Units Shipped	25,000 units	10,000 units	35,000 units

Allocation of overhead cost to Standard Product:

Cost Pools	Activity Drivers	Overhead cost per Activity	Actual Activity Consumed	Allocated overhead cost
Receiving	Direct Material Cost	$ 1.50 per dollar of material cost	$ 265,000	$ 397,500
Manufacturing	Machine hours	$ 26 per machine hour	150,000 machine hours	$ 3,900,000
Machine Setup	Number of Set-ups	$ 5,500 per setup	85 setups	$ 467,500
Shipping	Units Shipped	$ 35 per unit shipped	25,000 units shipped	$ 875,000

Allocation of overhead cost to Deluxe Product:

Cost Pools	Activity Drivers	Overhead cost per Activity	Actual Activity Consumed	Allocated overhead cost
Receiving	Direct Material Cost	$ 1.50 per dollar of material cost	$ 175,000	$ 262,500
Manufacturing	Machine hours	$ 26 per machine hour	100,000 machine hours	$ 2,600,000
Machine Setup	Number of Set-ups	$ 5,500 per setup	135 setups	$ 742,500
Shipping	Units Shipped	$ 35 per unit shipped	10,000 units shipped	$ 350,000