Problem

Happy Cat. Inc.. makes two lines of cat food: ( I) Tabby Treat, and (2) Fresh if Fishy. Th...

Happy Cat. Inc.. makes two lines of cat food: ( I) Tabby Treat, and (2) Fresh if Fishy. The Tabby Treat line is a dry food that is processed almost entirely by an automated process. Fresh if Fishy is a canned food made with real carp from the Mississippi River. Each carp is filleted by hand before being tossed into an automated grinding and canning machine. Tabby Treat sells very well and is priced significantly below competitive brands. Sales of Fresh if Fishy have been on the decline, as the company has failed to keep the brand price competitive. Other information concerning each product line is provided below.

 

Tabby Treat

Fresh n’ Fishy

Number of units* produced and sold per month

  75,000

48,000

Direct materials cost per unit

$1

$3

Direct labor cost per hour 

  $16

$16

Direct labor hours per unit    

  0.04

0.25

Units tor Tabby Treat refer to bags. Units for Fresh n” Fishy refer to cases.

The. company currently allocates manufacturing overhead to each product line on the basis of di­rect labor hours. Budgeted manufacturing overhead per month is $60,000. whereas budgeted direct labor hours amount to 15,000 per month.

Happy Cat recently hired a consultant to examine its cost accounting system. The consultant recommends that the company adopt activity-based costing to allocate manufacturing overhead. He proposes that the following cost pools and cost drivers be used:

Cost Pool

Amount Allocated

Cost Driver

Total Driver Volume

Utilities

$26,000

Kilowatt-hours

250,000 kWh

Maintenance

19,000

Machine set-ups

100 set-ups

Depreciation of plant and equipment

12,000

Square feet occupied

50,000 sq. ft.

Miscellaneous

3,000

Direct labor hours

15,000 DLH

Total allocation

$60,000

 

 

The amount of driver activity corresponding to each product line, is as follows:

Cost Driver

Tabby Treat

Fresh n’ Fishy

Kilowatt-hours

200,000 kWh

50,000 kWh

Machine set-ups

70 mh

30 mh

Square feet occupied

42,000 sq. ft.

8,000 sq. ft.

Direct labor hours   

3,000 DLH

12,000 DLH

a. Allocate manufacturing overhead costs to each product line using direct labor hours as a single cost driver.


b. Allocate manufacturing overhead costs to each product line using the activity based costing approach recommended by the consultant.


c. Compute the total monthly manufacturing costs assigned to each product line activity based costing is used to allocate manufacturing overhead.


d. Assume that the company sets selling prices as a fixed percentage above the total manufacturing costs allocated to each product line. Based on your results from parts a and bdiscuss a possible reason why sales of the Fresh n’ Fishy product line are currently experiencing a decline


e. Discuss reasons why the company should adopt the recommendation of the consultant to implement an activity-based costing system.

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