The Try Corporation has a machining facility specializing in jobs for the aircra

Question

The Try Corporation has a machining facility specializing in jobs for the aircraft-components market. Try’s previous simple job-costing system had two direct-cost categories (direct materials and direct manufacturing labor) and a single indirect-cost pool (manufacturing overhead, allocated using direct manufacturing labor-hours). The indirect cost-allocation rate of the simple system for 2016 would have been $115 per direct manufacturing labor-hour. Recently a team with members from product design, manufacturing, and accounting used an ABC approach to refine its job-costing system. The two direct-cost categories were retained. The team decided to replace the single indirect-cost pool with five indirect-cost pools. The cost pools represent five activity areas at the plant, each with its own supervisor and budget responsibility. Pertinent data are as follows: Activity Area Cost-Allocation Base Cost-Allocation Rate Materials handling Parts $ 0.40 Lathe work Lathe turns 0.20 Milling Machine-hours 20.00 Grinding Parts 0.80 Testing Units tested 15.00 Information-gathering technology has advanced to the point at which the data necessary for budgeting in these five activity areas are collected automatically. Two representative jobs processed under the ABC system at the plant in the most recent period had the following characteristics: Job 410 Job 411 Direct material cost per job $ 9,700 $59,900 Direct manufacturing labor cost per job $750 $11,250 Number of direct manufacturing labor-hours per job 25 375 Parts per job 500 2,000 Lathe turns per job 20,000 59,250 Machine-hours per job 150 1,050 Units per job (all units are tested) 10 200 Required: 1. Compute the manufacturing cost per unit for each job under the previous simple job-costing system. 2. Compute the manufacturing cost per unit for each job under the activity-based costing system. 3. Compare the per-unit cost figures for Jobs 410 and 411 computed in requirements 1 and 2. Why do the simple and the activity-based costing systems differ in the manufacturing cost per unit for each job? Why might these differences be important to Try Corporation? (3 marks + 6 marks + 16 marks)

Explanation / Answer

1.

Manufacturing O/H cost

Job 410 : $115*25 =$2875

Job411 : $115*375 = $43,125

2.

3.

The product cost figures computed in requirements 1 and 2 differ because:

1. The activity pools have different cost drivers used to assign cost to the jobs, and

2. The jobs differ in the way they use each of five cost pool activities (different consumption ratios).

The main importance to Tracy corporation is due to : This has product pricing, mix, and control implications.

Job 410 Job 411 Total Direct Costs:     Direct Materials cost per job $ 9,700 $59,900 $69,600     Direct Manufacturing Labor cost per job $750 $11,250 $12,000 Total Direct Costs $10,450 $71,150 $81,600 Indirect Costs:     Manufacturing O/H cost pool @ $115/DLH 2,285 43,125 46,000 Total Manufacturing Costs Assigned $13,325 $114,275 $127,600 Total number of units manufactured 10 200 Manufacturing Costs per Unit $1,332.50 $571.375

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