Activity-Based Costing; Production and Pricing Decisions
Marconi Manufacturing produces two items in its Trumbull Plant: Tuff Stuff and Ruff Stuff. Since inception. Marconi has used only one manufacturing-overhead cost pool to accumulate costs. Overhead has been allocated to products based on direct-labor hours. Until recently, Marconi was the sole producer of Ruff Stuff and was able to dictate the selling price. However, last year Marvella Products began marketing a comparable product at a price below the cost assigned by Marconi. Market share has declined rapidly. and Marconi must now decide whether to meet the competitive price or to discontinue the product line. Recognizing that discontinuing the product line would place an additional burden on its remaining product. Tuff Stuff, management is using activity-based costing to determine if it would show a different cost structure for the two products.
The two major indirect costs for manufacturing the products arc power usage and setup costs. Most of the power is used in fabricating, while most of the setup costs are required in assembly. The setup costs are predominantly related to the Tuff Stuff product line.
A decision was made to separate the Manufacturing Department costs into two activity cost pools as follows:
Fabricating: machine hours will be the cost driver.
Assembly: number of setups will be the cost driver.
The controller has gathered the following information.
MANUFACTURING DEPARTMENT Annual Budget before Separation of Overhead | |||
Product line | |||
Total | Tuff Stuff | Ruff Stuff | |
Number of units | 20,000 | 20,000 | |
Direct-labor hours- | 2 hours per unit | 3 hours per unit | |
Total direct-labor cost. | $800.00 | ||
Direct material | $5.00 per unit | $3.00per unit | |
Budgeted overhead | |||
Indirect labor. | 24,000 | ||
Fringe benefits.. | 5,000 | ||
Indirect material. | 31,000 | ||
Power. | 180,000 | ||
Setup. | 75,000 | ||
Quality assurance . | 10,000 | ||
Other utilities.. | 10,000 | ||
Depreciation | 15,000 | ||
* Direct-labor hourly rate is the same in both departments
MANUFACTURING DEPARTMENT | ||
Cost Structure after Separation of Overhead into Activity Cost Pools | ||
Fabrication | Assembly | |
Direct-labor cost | 75% | 25% |
Direct material (no change) . | 100% | 0% |
Indirect labor . | 75% | 25% |
Fringe benefits .. | 80% | 20% |
Indirect material .. | $ 20,000 | $11,000 |
Power . | $160,000 | $20,000 |
Setup . | $ 5,000 | $70,000 |
Quality assurance .... | 80% | 20% |
Other utilities . | 50% | 50% |
Depreciation | 80% | 20% |
Cost driver:
Product line | ||
Tuff Stuff | Ruff Stuff | |
Machine-hours per unit | 4.4 | 6 |
Setups | 1,000 | $272.00 |
Required:
1. Assigning overhead based on direct-labor hours. calculate the following:
a. Total budgeted cost of the Manufacturing Department.
b. Unit cost of Tuff Stuff and Ruff Stuff.
2. After separation of overhead into activity cost pools. compute the total budgeted cost of each department: fabricating and assembly.
3. Using activity-based costing. calculate the unit costs for each product. (In computing the pool rates for the fabricating and assembly activity cost pools. round to the nearest cent. Then. in computing unit product costs. round to the nearest cent.:
4. Discuss how a decision regarding the production and pricing of Ruff Stuff will be affected by the results of your calculations in the preceding requirements.
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