Knickknack, Inc., manufactures two products: odds and ends. The firm uses a sing
ID: 2406573 • Letter: K
Question
Knickknack, Inc., manufactures two products: odds and ends. The firm uses a single, plantwide overhead rate based on direct-labor hours. Production and product-costing data are as follows:
Knickknack, Inc., prices its products at 120 percent of cost, which yields target prices of $796.80 for odds and $1,195.20 for ends. Recently, however, Knickknack has been challenged in the market for ends by a European competitor, Bricabrac Corporation. A new entrant in this market, Bricabrac has been selling ends for $880 each. Knickknack’s president is puzzled by Bricabrac’s ability to sell ends at such a low cost. She has asked you (the controller) to look into the matter. You have decided that Knickknack’s traditional, volume-based product-costing system may be causing cost distortion between the firm’s two products. Ends are a high-volume, relatively simple product. Odds, on the other hand, are quite complex and exhibit a much lower volume. As a result, you have begun work on an activity-based costing system.
The plant has 3,840 square feet of space, 80 percent of which is used in the production of odds
Knickknack, Inc., manufactures two products: odds and ends. The firm uses a single, plantwide overhead rate based on direct-labor hours. Production and product-costing data are as follows:
4 value: 1.43 points 2. For each activity cost pool, compute a pool rate. Activity Cost Pool Machine-related costs Setup and inspection Engineering Plant-related costs Pool Rate 100 per machine hour per run 1,800 per change order per square feetExplanation / Answer
Activity
Cost Drivers
Total Activity Amount (A)
Level of Activity (B)
Activity Rate (C=A/B)
Machine Related Cost
Machine Houes
1800000
18000.00
$ 100.00
Per Machine Hour
Setup and Inspection
Number of Production Runs
720000
80.00
$ 9,000.00
Per Production Run
Engineering
Engineering Change Order
360000
200.00
$ 1,800.00
Per engineering change order
Pant Related Cost
Square Footage of space
384000
3840.00
$ 100.00
Per squarefoot
$ 3,264,000.00
Overhead per unit
Odds
Activity rate(A)
Activity Driver Incurred (B)
Overhead Assigned (C=A*B)
Machine Related Cost
$ 100.00
$ 8,000.00
$ 800,000.00
Setup and Inspection
$ 9,000.00
40.00
$ 360,000.00
Engineering
$ 1,800.00
0.00
$ -
Pant Related Cost
$ 100.00
3072.00
$ 307,200.00
Total Overheads
$ 1,467,200.00
Production
1000.00
Overhead cost per unit
$ 1,467.20
Overhead per unit
Ends
Activity rate(A)
Activity Driver Incurred (B)
Overhead Assigned (C=A*B)
Machine Related Cost
$ 100.00
$ 10,000.00
$ 1,000,000.00
Setup and Inspection
$ 9,000.00
$ 40.00
$ 360,000.00
Engineering
$ 1,800.00
$ 200.00
$ 360,000.00
Pant Related Cost
$ 100.00
$ 768.00
$ 76,800.00
Total Overheads
$ 1,796,800.00
Production
5000.00
Overhead cost per unit
$ 359.36
statement of Total cost per unit
Odds
Ends
Direct Material
$ 160.00
$ 240.00
Direct Labour
$ 120.00
$ 180.00
Manufacturing Overheads
$ 1,467.20
$ 359.36
$ 1,747.20
$ 779.36
Calculation of New Target Prices
Odds
Ends
Total Cost
$ 1,747.20
$ 779.36
Profit (balancing figure)
$ 349.44
$ 155.87
Price (TOTALCOST*120%)
$ 2,096.64
$ 935.23
Statement showing assignment of total overhead cost
Manufacturing Overhead Cost Per Unit
Odds
Ends
Machine Related Cost
$ 800.00
$ 200.00
Setup and Inspection
$ 360.00
$ 72.00
Engineering
$ -
$ 72.00
Pant Related Cost
$ 307.20
$ 15.36
Total Overhead Cost per unit
$ 1,467.20
$ 359.36
Production Units
1000
5000
Total Overhead Cost
$ 1467200
$ 1796800
$ 3264000
Cost Distortion
Odds
Ends
Total Cost as per Traditional Method
$ 664.00
$ 996.00
Total Cost as per ABC
$ 1,467.20
$ 359.36
$ (803.20)
$ 636.64
Notes
Traditional method showed less cost in comparison to ABC in case of Odds
Traditional method showed high cost in comparison to ABC in case of ends.
Activity
Cost Drivers
Total Activity Amount (A)
Level of Activity (B)
Activity Rate (C=A/B)
Machine Related Cost
Machine Houes
1800000
18000.00
$ 100.00
Per Machine Hour
Setup and Inspection
Number of Production Runs
720000
80.00
$ 9,000.00
Per Production Run
Engineering
Engineering Change Order
360000
200.00
$ 1,800.00
Per engineering change order
Pant Related Cost
Square Footage of space
384000
3840.00
$ 100.00
Per squarefoot
$ 3,264,000.00
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