Activity-Based Costing: Budgeted Operating Margin
Whitestone Company produces two subassemblies, JR-14 and Rr.I-13, used in manufacturing trucks. The company is currently using an absorption costing system that applies overhead based on direct labor hours, The budget for the current year ending December 31, 20xI, is as follows:
WHITESTONE COMPANY Budgeted Statement of Gross Margin for 20xl | |||
JR-14 | RM-13 | Total | |
Sales in units | 5,000 | 5,000 | 10,000 |
Sales revenue | $1 ,700,000 | 2,200,000 | 3,900,000 |
Cost of goods manufactured and sold: | |||
Beginning finished-goods inventor | $240,000 | $300,000 | $540,000 |
Add : Direct material | 1.000,000 | 1,750,000 | $2,750,000 |
Direct labor | 185,185 | 92,593 | $277,778 |
Applied manufacturing overhead' | 544,025.00 | 272,013 | 816,038 |
Cos; of goods available for sale | $1 ,969,210 | $2,41 4,606 | 4,383,816 |
Less: Ending finished-goods inventory | 240,000 | 300,000 | 540,000 |
cost of goods sold | 1,729,210 | $2,114,606 | 3,843,816 |
Gross margin | $ (29,210) | $ 85.394 | $ 56,184 |
* Applied on the basis of direct-labor hours | |||
Machining | 424,528 | ||
Assembly | 216,981 | ||
Material handling | 56,604 | ||
Inspection | 117,925 | ||
Total | $816,038 | ||
Mark Ward, Whitestone's president. has been reading about a product-costing method called activity based costing. Ward is convinced that activity-based costing will cast J new light on future profits. As a result, Brian Walters, Whitestone's director of cost management. has accumulated cost pool information for this year shown on the following chart. This information is based on a product mix of 5,000 units of JR-14 and 5,000 units of RM-13.
Cost Pool Information for 20x1 | |||
Cost Pool. | Activity | .JR-14 | RM-i3 |
Direct labor | Direct-labor hours |
|
|
Machining . | Machine hours . | 10.000 | 5,000 |
Assembly | Assembly hours . | 15.000 | 30,000 |
Material handling . | Number of parts. | 6.000 | 5,500 |
Inspection | Inspection hours | 5.000 | 7,500 |
In addition, the following information is projected fur the next calendar year. 20x2.
JR-14 | RM-13 | |
Beginning inventory, finished goods (in units). | 800 | 600 |
Ending inventory, finished goods(in units). | 700 | 700 |
Sales (in units) | 5,100 | 4,900 |
On January L 20x2. Whitestone is planning to increase the prices of JR-14 to $355 and RM-13 to $455. Material costs are not expected to increase in 20×2. but direct labor will increase by 8 percent. and all manufacturing overhead costs will increase by 6, percent. Due to the nature of the manufacturing process. the company does not have any beginning or ending work-in-process inventories.
Whitestone uses a just-in-time inventory system and has materials delivered to the production facility directly from the vendors. The raw-material inventory at both the beginning and the end of the month is immaterial and can he ignored for the purposes of a budgeted income statement. The company uses the first-in. first-out (FIFO) inventory method.
Required:
1. Explain how activity-based costing differs from traditional product-costing methods.
2. Using activity-based costing. calculate the total cost for the following activity cost pools: machining. assembly. material handling. and inspection. (Round to the nearest dollar.) Then. calculate the pool rate per unit of the appropriate cost driver for each of the four activities. (Hint: Refer to Exhibit 5-6 . regarding calculation of the pool rate.)
3. Prepare a table showing for each product line the estimated20x2 cost for each of the following cost elements: direct material. direct labor. machining. assembly. material handling, and inspection. (Round to the nearest dollar.)
4. Prepare a budgeted statement showing the gross margin for Whitestone Company for 20x2. using activity-based costing. The statement should show each product and a total for the company. Be sure to include detailed calculations for the cost of goods manufactured and sold. (Round each amount in the statement to the nearest dollar.)
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