Response to the following problem:
Wilson Company produces lawn mowers. One of its plants produces two versions of mowers: a basic model and a deluxe model. The deluxe model has a sturdier frame, a higher horsepower engine, a wider blade, and mulching capability. At the begin- ning of the year, the following data were prepared for this plant:
Basic Model Deluxe Model
Expected quantity 40,000 20,000
Selling price $180 $360
Prime costs $160 $320
Machine hours 5,000 5,000
Direct labor hours 10,000 10,000
Engineering support (hours) 1,500 4,500
Receiving (orders processed) 250 500
Material handling (number of moves) 1,200 4,800
Purchasing (number of requisitions) 100 200
Maintenance (hours used) 1,000 3,000
Paying suppliers (invoices processed) 250 500
Setting up equipment (number of setups) 16 64
Additionally, the following overhead activity costs are reported:
|
Maintaining equipment
|
$114,000
|
|
Engineering support
|
120,000
|
|
Material handling
|
?
|
|
Setting up equipment
|
96,000
|
|
Purchasing materials
|
60,000
|
|
Receiving goods
|
40,000
|
|
Paying suppliers
|
30,000
|
|
Providing space
|
20,000
|
|
Total
|
$ ?
|
Facility-level costs are allocated in proportion to machine hours (provides a measure of time the facility is used by each product). Material handling uses three inputs: two forklifts, gasoline to operate the forklift, and three operators. The three operators are paid a salary of $60,000 each. The operators spend 25 percent of their time on the receiving activity and 75 percent on moving goods (material handling).
Gasoline costs $4.50 per move. Depreciation amounts to $9,000 per forklift per year.
Required
1. Calculate the cost of the material-handling activity. Label the cost assignments as driver tracing and direct tracing. Identify the resource drivers.
2. Calculate the cost per unit for each product using direct labor hours to assign all overhead costs.
3. Calculate activity rates and assign costs to each product. Calculate a unit cost for each product and compare these costs with those calculated in Requirement 2.
4. Calculate consumption ratios for each activity.
5. Explain how the consumption ratios calculated in Requirement 4 can be used to reduce the number of rates. Calculate the rates that would apply under this approach.