P4-3A Stellar Stairs Co. of Poway designs and builds factory-made premium wooden
stairs for homes. The manufactured stair components (spindles, risers, hangers, hand
rails) permit installation of stairs of varying lengths and widths. All are of white oak
wood. Its budgeted manufacturing overhead costs for the year 2006 are as follows.
For the last 4 years, Stellar Stairs Co. has been charging overhead to products on
the basis of machine hours. For the year 2006, 100,000 machine hours are budgeted.
Heather Fujar, owner-manager of Stellar Stairs Co., recently directed her accountant,
Lindsay Baker, to implement the activity-based costing system that she has repeatedly
proposed. At Heather Fujar’s request, Lindsay and the production foreman identify
the following cost drivers and their usage for the previously budgeted overhead cost
pools.
Jason Dion, sales manager, has received an order for 280 stairs from Community
Builders, Inc., a large housing development contractor. At Jason’s request, Lindsay prepares
cost estimates for producing components for 280 stairs so Jason can submit a contract
price per stair to Community Builders. She accumulates the following data for the
production of 280 stairways.
| Direct materials | 103,600 | ||
| Direct labor | 112,000 | ||
| Machine hours | 14,500 | ||
| Direct labor hours | 5,000 | ||
| Number of purchase orders | 60 | ||
| Number of material moves | 800 | ||
| Number of machine setups | 100 | ||
| Number of inspections | 450 | ||
| Number of components | 16,000 | ||
| Number of square feet occupied | 8,000 | ||
Instructions
(a) Compute the predetermined overhead rate using traditional costing with machine
hours as the basis.
(b) What is the manufacturing cost per stairway under traditional costing?
(c) What is the manufacturing cost per stairway under the proposed activity-based costing?
(Prepare all of the necessary schedules.)
(d) Which of the two costing systems is preferable in pricing decisions and why?
P4-4A Mendocino Corporation produces two grades of wine from grapes that it buys
from California growers. It produces and sells roughly 3,000,000 liters per year of a low cost,
high-volume product called CoolDay. It sells this in 600,000 5-liter jugs. Mendocino
also produces and sells roughly 300,000 liters per year of a low-volume, high-cost product
called LiteMist. LiteMist is sold in 1-liter bottles. Based on recent data, the CoolDay
product has not been as profitable as LiteMist. Management is considering dropping
the inexpensive CoolDay line so it can focus more attention on the LiteMist product.
The LiteMist product already demands considerably more attention than the CoolDay
line.
| Coolday | LiteMist | ||
| Direct materials per liter | 0.40 | 1.20 | |
| Direct labor cost per liter | 0.25 | 0.50 | |
| Direct labor hours per liter | 0.05 | 0.09 | |
| Total direct labor hours | 120,000 | 25,000 | |
Tyler Silva, president and founder of Mendocino, is skeptical about this idea. He
points out that for many decades the company produced only the CoolDay line, and that
it was always quite profitable. It wasn’t until the company started producing the more
complicated LiteMist wine that the profitability of CoolDay declined. Prior to the introduction
of LiteMist, the company had simple equipment, simple growing and production
procedures, and virtually no need for quality control. Because LiteMist is bottled in
1-liter bottles, it requires considerably more time and effort, both to bottle and to label
and box than does CoolDay. The company must bottle and handle 5 times as many bottles
of LiteMist to sell the same quantity as CoolDay. CoolDay requires 1 month of aging;
LiteMist requires 1 year. CoolDay requires cleaning and inspection of equipment every
10,000 liters; LiteMist requires such maintenance every 600 liters.
Tyler has asked the accounting department to prepare an analysis of the cost per liter
using the traditional costing approach and using activity-based costing. The following information
was collected.
Instructions
Answer each of the following questions. (Round all calculations to three decimal places.)
(a) Under traditional product costing using direct labor hours, compute the total manufacturing
cost per liter of both products.
(b) Under ABC, prepare a schedule showing the computation of the activity-based
overhead rates (per cost driver).
(c) Prepare a schedule assigning each activity’s overhead cost pool to each product, based
on the use of cost drivers. Include a computation of overhead cost per liter.
(d) Compute the total manufacturing cost per liter for both products under ABC.
BYP 4-2 Ideal Manufacturing Company of Sycamore, Illinois has supported a research
and development (R&D) department that has for many years been the sole contributor to
the company’s new farm machinery products. The R&D activity is an overhead cost center
that provides services only to in-house manufacturing departments (four different product
lines), all of which produce agricultural/farm/ranch related machinery products
The department has never sold its services outside, but because of its long history of
success, larger manufacturers of agricultural products have approached Ideal to hire its R&D
department for special projects. Because the costs of operating the R&D department have
been spiraling uncontrollably, Ideal’s management is considering entertaining these outside
approaches to absorb the increasing costs. But, (1) management doesn’t have any cost basis
for charging R&D services to outsiders, and (2) it needs to gain control of its R&D costs.
Management decides to implement an activity-based costing system in order to determine
the charges for both outsiders and the in-house users of the department’s services.
R&D activities fall into four pools with the following annual costs.
Instructions
(a) Compute the activity-based overhead rate for each activity cost pool.
(b) How much cost would be charged to an in-house manufacturing department that
consumed 1,800 hours of market analysis time, was provided 280 designs relating to
10 products, and requested 92 engineering tests?
(c) How much cost would serve as the basis for pricing an R&D bid with an outside
company on a contract that would consume 800 hours of analysis time, require 178
designs relating to 3 products, and result in 70 engineering tests?
(d) What is the benefit to Ideal Manufacturing of applying activity-based costing to its
R&D activity for both in-house and outside charging purposes?
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