Cariari Manufacturing produces two different models of cameras. One model has an automatic focus; the other requires the user to focus manually. The two products are produced in batches (an equal number of batches is used for each product). Each time a batch is produced, the equipment must be configured (set up) for the specifi- cations of the camera model being produced. The machine configuration required for the automatic focus model is more complex and consumes more of the setup activity resources than the manual focus camera does. Total setup costs are $100,000 per year. Total setup hours are 10,000, with 7,000 hours needed for the automatic focus camera and 3,000 hours needed for the manual focus camera.
The manual focus model is more labor-intensive and requires much more assembly time and less machine time. Total direct labor hours used for both prod- ucts are 100,000, with 70,000 hours used for the manual model and 30,000 used for the automatic model. There are 40,000 units of the manual model and 60,000 units of the automatic model produced each year. Cariari currently assigns only manufac- turing costs to the two products. Overhead costs are assigned to the two products in proportion to the direct labor hours used by each product. All other costs are viewed as period costs.
Cariari budgets costs for all departments within the plant-support departments like maintenance and purchasing as well as production departments like machining and assembly. Departmental managers are evaluated and rewarded based on their ability to control costs. Individual managerial performance is assessed by comparing actual costs with budgeted costs.
Required
1. Is Cariari using a functional-based or an activity-based management accounting system? Explain.
2. Setup costs are overhead costs. What is the setup cost assigned per unit for each model using Cariari's current method of assigning overhead costs to products? Would you classify this cost assignment as direct tracing, driver tracing, or allo- cation? Explain.
3. Can you suggest a better way of assigning setup costs? Provide calculations, and explain why you think this method is better. Is this method compatible with production-based costing or with activity-based costing? Explain.