ABC and Practical Capacity The ABC Manufacturing Company produces two products, S-101 and C-110. You have obtained the following information regarding the annual manufacturing support (i.e., factory overhead) costs associated with the manufacturing process used to produce these two products:
| Budgeted Costs | Activity Measure (Cost Driver) | Practical Capacity | Budgeted Activities for the Coming Year | |
Cost Pools |
|
|
| S-101 | C-110 |
Setup activity | $ 250,000 | Setup hours | 5,000 | 2,500 | 2,350 |
Packing and shipping | $ 50,000 | Number of shipments | 2,000 | 1,200 | 775 |
Inspection | $ 30,000 | Number of batches | 1,000 | 250 | 700 |
Machining | $ 750,000 | Units produced | 150,000 | 100,000 | 40,000 |
Purchase ordering | $ 40,000 | Number of orders | 300 | 50 | 110 |
Total | $1,120,000 |
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|
|
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Estimated production for the coming year: S-101 = 100,000 units; C-110 = 40,000 units.
Required
1. Prepare an Excel spreadsheet that would provide ABC allocation rates based on budgeted activity units for the coming year. (a) What is the budgeted manufacturing support cost per unit of S-101? (b) What is the budgeted manufacturing support cost per unit of C-110?
2. Using your spreadsheet, recalculate the ABC allocation rates, this time based on practical capacity as the denominator activity level. (a) What is the budgeted manufacturing support cost per unit of S-101? (b) What is the budgeted manufacturing support cost per unit of C-110?
3. Compute, for each cost pool listed above, the difference between the budgeted cost for the year and the total cost allocated to production. How do you interpret these variances (differences)?
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