Question

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 Costs Activity Drivers

Receiving $ 720,000 Direct material cost

Manufacturing 5,750,000 Machine-hours

Machine setup 860,000 Number of set-ups

Shipping $ 1,650,000 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 Deluxe

Total direct material costs $ 285,000 $ 195,000

Total direct labor costs $ 730,000 $ 330,000

Total machine-hours 150,000 100,000

Total number of setups 80 135

Total pounds of material 22,000 11,000

Total direct labor-hours 8,000 5,000

Number of units produced and shipped 25,000 5,000

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 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? (Do not round intermediate calculations.)

accounts institutional standard silver total

direct materials

indirect costs

processing orders

setting up production

handling materials

using machines

performing quality control

packing

total cost

Answer 1

A F C D F F G Current Accounting System Delux Cost Pools Costs Activity Drivers Standard 2 Direct Material Costs $ 7,20,000.00 Direct Material costs 2,85,000.00 $ 1,95,000.00 Receiving Manufacturing Direct Labor Costs 7,30,000.00 4 3,30,000,00 57,50,000.00 Machine Hours Machine Setup 8,60,000.00 Number of Set uos 10,15,000.00 S 5,25,000.00 S 5 Direct Costs Overhead Costs 16,50,000.00 Units Shipped 6 Shipping 53,88,000.00 S Total Overhead Costs (8980000/250000) 35.92 per Machine hour $ 7 35,92,000.00 89,80,000.00 64.03.000.00 S Total Costs 41,17,000.00 9 Units Produced 10 25000 5000 Unit Cost under Current accounting System 11 S 256.12 $ 823.40 12 13 ABC Accounting System 14 Standard Delux 15 2,85,000.00 S 7.30,000.00 S S 16 Direct Material Costs 1,95,000.00 17 Direct Labor Costs 3,30,000.00 10,15,000.00 S 18 Direct Costs 5.25.000,00 Overhead Costs: 19 Receiving Costs 4,27,500.00 S 20 2,92,500.00 34,50,000.00 S Manufacturing Costs 23,00,000.00 21 22 Machine Setup costs 3,20,000.00 5,40,000.00 2,75,000.00 Shipping Costs 13,75,000.00 23 55,72,500.00 $ 24 Total Overhead Costs 34,07,500,00 25 Total Costs 65,87,500.00 $ 39,32,500.00 Units Produced 26 25000 5000 263.50 S 27 Unit Cost under ABC accounting System 786.50

A C D E H 1 Current Accounting System Standard Delux Cost Pools Activity Drivers 2 Costs Direct Material costs Direct Material Costs 285000 195000 Receiving 720000 Direct Labor Costs Manufacturing 5750000 Machine Hours 4 730000 330000 SUM(C3:C4) Machine Setup Number of Set uos -SUM(D3:D4) Direct Costs 860000 Overhead Costs Shipping Units Shipped 1650000 Total Overhead Costs SUM(G3:G6) (8980000/250000) 35.92 per Machine hour $G$7/250000*150000 SG$7/250000 100000 7 Total Costs C5+C7 ED5+D7 Units Produced 10 25000 5000 -D9 / D10 Unit Cost under Current accounting System 9/C10 .. .. ABC Accounting System Standard Delux Direct Material Costs 285000 195000 16 730000 Direct Labor Costs -.. 330000 17 Direct Costs Overhead Costs: -SUM (D16:D17) SUM(C16:C17) 18 19 SG$3/480000*C16 20 Receiving Costs -$G$3/480000 D16 Manufacturing Costs -SG$4 / 250000*150000 $G$4/250000 SG$5/215 135 $G$6/30000*5000 =SUM(D20:D23) 21 00000 -SG$5/ 215 * 80 Machine Setup costs 22 SG$6/30000 25000 Shipping Costs 23 Total Overhead Costs Total Costs =SUM(C20:C23) 24 25 C18+C24 D18+D24 26 Units Produced 25000 5000 Unit Cost under ABC accounting System EC25/C26 -D25/D26 27