The Rings Division of ABC Corporation produces two types of rings at its Central
ID: 2341878 • Letter: T
Question
The Rings Division of ABC Corporation produces two types of rings at its Central Plant: Plain and Engraved. The following data exist for production at the Central Plant:
Ring Type
Quantity (units)
Prime Costs*
Machine Hours
Material Moves
Setups
Plain
1,000,000
$2,000,000
100,000
100,000
25
Engraved
150,000
$450,000
25,000
100,000
75
*Prime costs are direct labor and direct materials costs
The division budgeted the following amounts for its indirect activities:
Machine-Related
Material Movement
Machine Setup
$500,000
$850,000
$650,000
The current cost system assigns all indirect costs based on machine hour consumption.
A. The product manager for Plain Rings believes this existing system subsidizes (reduces) the reported cost of Engraved Rings at the expense of the reported cost of Plain Rings. Without performing any cost calculations, explain why the product manager for Plain Rings is correct.
B Compute the reported unit cost of each product using a multiple-allocation-base approach. Show your work clearly and explain any assumptions you make.
C. Identify at least three (3) separate and distinct reasons why the reported unit costs you calculated in Part B might not be equal to economic costs.
Ring Type
Quantity (units)
Prime Costs*
Machine Hours
Material Moves
Setups
Plain
1,000,000
$2,000,000
100,000
100,000
25
Engraved
150,000
$450,000
25,000
100,000
75
Explanation / Answer
A. Manager thinks so because engraved ring takes 75 machine setups while plain rings take only 25 setups and also the material moves are same in both. But since number of plain rings are more than engravesd, it shall have more cost allocated to it under traditional costing system
2. Machine cost/hour = 500000/125000 = $ 4, material movement cost/unit = 850000/200000 = 1.70, machine setup = 650000/100 = 6500
Calculation of cost/unit
Plain Engraves Prime cost $2,000,000 $450,000 Machine related $ 400,000 $ 100,000 material movement $ 425,000 $ 425,000 Machine setup $ 162,500 $ 487,500 Total cost $ 2987500 $ 1462500Related Questions
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