Utica Manufacturing (UM) was recently acquired by MegaMachines, Inc. (MM), and o
ID: 2562136 • Letter: U
Question
Utica Manufacturing (UM) was recently acquired by MegaMachines, Inc. (MM), and organized as a separate division within the company. Most manufacturing plants at MM use an ABC system, but UM has always used a traditional product costing system. Bob Miller, the plant controller at UM, has decided to experiment with ABC and has asked you to help develop a simple ABC system that would help him decide if it was useful. The controller’s staff has identified costs for the first month in the four overhead cost pools along with appropriate cost drivers for each pool:
The company manufactures two basic products with model numbers 308 and 510. The following are data for production for the first month as part of MM:
Required:
a. The current cost accounting system charges overhead to products based on machine-hours. What unit product costs will be reported for the two products if the current cost system continues to be used? (Round intermediate calculations and "Per unit cost" answers to 2 decimal places.)
b. A consulting firm has recommended using an activity-based costing system, with the activities based on the cost pools identified by the cost accountant. What are the cost driver rates for the four cost pools identified by the cost accountant? (Round your answers to 2 decimal places.)
c. What unit product costs will be reported for the two products if the ABC system suggested by the cost accountant’s classification of cost pools is used?
Cost Pools Costs Activity Drivers Incoming inspection $ 255,000 Direct material cost Production 1,650,000 Machine-hours Machine setup 720,000 Setups Shipping 495,000 Units shippedExplanation / Answer
Solution:
1) Unit Product Cost under current cost accounting system
Products
Model 308
Model 510
Total direct material costs
$50,000
$35,000
Total direct labor costs
$176,000
$206,000
Total Applied Overhead (Refer Note 1)
$1,081,600
(52,000*$20.80)
$2,038,400
(98,000*$20.80)
Total Production Costs
$1,307,600
$2,279,400
Number of Units produced
35000
20000
Unit Product Cost (Total Production Cost / Units Produced)
$37.36
$113.97
Note 1 – Calculation of Overhead Rate per Machine hour
Overhead Costs
Incoming inspection
$255,000
Production
$1,650,000
Machine setup
$720,000
Shipping
$495,000
Total Overhead (A)
$3,120,000
Total Machine Hours (52000+98000) (B)
150000
Overhead Rate per Machine Hour (A/B)
(3120000 / 150,000 MHs)
$20.80 per machine hour
2) The cost driver rates for the four cost pools identified by the cost accountant
Cost Pools
Overhead Costs (a)
Activity Drivers
Total Activity (b)
Cost Driver Rate per activity (a/b)
Incoming inspection
$255,000
Direct material costs
85000
$3
Per Direct material dollar cost
Production
$1,650,000
Machine hours
150000
$11
Per Machine hour
Machine setup
$720,000
Setups
144
$5,000
Per Setup
Shipping
$495,000
Units shipped
55000
$9
Per Unit shipped
TOTAL
$3,120,000
3) Unit Product Cost using ABC Costing
Products
Model 308
Model 510
Total direct material costs
$50,000
$35,000
Total direct labor costs
$176,000
$206,000
Total Applied Overhead (Refer note 2)
$1,307,000
$1,813,000
Total Production Costs
$1,533,000
$2,054,000
Number of Units produced
35000
20000
Unit Product Cost (Total Production Cost / Units Produced)
$43.80
$102.70
Note 2 --- Allocation of Overhead Cost to each product
Model 308
Model 510
Activities
Rate per Cost driver Unit
Activity Consumed
Allocated Indirect Cost
Activity Consumed
Allocated Indirect Cost
(a)
(b)
(a*b)
(s)
(a*s)
Incoming inspection
$3
50000
$150,000
35000
$105,000.00
Production
$11
52000
$572,000
98000
$1,078,000.00
Machine setup
$5,000
54
$270,000
90
$450,000.00
Shipping
$9
35000
$315,000
20000
$180,000.00
Total Allocated Overhead Cost based on ABC system
$1,307,000
$1,813,000
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Products
Model 308
Model 510
Total direct material costs
$50,000
$35,000
Total direct labor costs
$176,000
$206,000
Total Applied Overhead (Refer Note 1)
$1,081,600
(52,000*$20.80)
$2,038,400
(98,000*$20.80)
Total Production Costs
$1,307,600
$2,279,400
Number of Units produced
35000
20000
Unit Product Cost (Total Production Cost / Units Produced)
$37.36
$113.97
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