The management of Albatross Packaging Corporation is concerned about overhead cost allocations. The corporation has been using the plant-wide rate based on direct labor costs since it began operations. The CEO, J.J. Smith, has been hearing a lot about Activity Based Costing and is beginning to think the Corporation needs to adopt such a system. He has decided to hire you as a consultant to evaluate overall overhead allocation system and prepare recommendations.
He tells you that a number of problems have arisen in the past few months. Several large, potentially profitable jobs have been lost due to underbidding by the competition. There also seems to erosion in the market share of the generic cardboard boxes as competitors are beginning to undercut the company's current selling price.
In addition, some of the specialty jobs that have been won do not seem to improving the bottom line as much as anticipated. In total, profits in the past three years have been gradually eroding. Since prime costs are fairly standard and stable for the industry, he is beginning to suspect that the overhead costs are not being allocated in the proper manner and/or may be out of line with the competition.
The next part of your analysis concerns the use of activity based costing to assign the overhead to the jobs. Assume the following five cost pools exist in the Albatross Packaging Corp.
|
Overhead costs assigned to activity pools
|
|
Cost drivers
|
Activity
|
Pool rate
|
|
Maintenance
|
975,000.00
|
100,000.00
|
Machine hours
|
|
|
Material handling
|
650,000.00
|
2,600.00
|
material moves
|
|
|
Setups
|
3,250,000.00
|
236.00
|
number of setups
|
|
|
Inspections
|
750,000.00
|
10,000.00
|
Inspection hours
|
|
|
Other
|
600,000.00
|
15,000,000.00
|
Units produced
|
|
|
Total overhead costs
|
6,225,000.00
|
|
|
|
Each of the jobs completed use the number or amount of resources identified in the schedule below.
|
Activities used by each job
|
Generic
|
18
|
19
|
Generic 2
|
20
|
21
|
22
|
23
|
|
Maintenance
|
1800
|
230
|
375
|
1800
|
365
|
220
|
280
|
425
|
|
Material handling
|
10
|
4
|
6
|
10
|
4
|
6
|
4
|
4
|
|
Setups
|
1
|
1
|
1
|
1
|
1
|
1
|
1
|
1
|
|
Inspections
|
345
|
25
|
35
|
340
|
28
|
20
|
27
|
125
|
|
Other
|
500000
|
12500
|
25000
|
500000
|
20000
|
10000
|
15000
|
35000
|
Required
1. Prepare a schedule showing total cost per pool and the pool rates.
2. Prepare another schedule showing the total costs attached to each of the jobs above using the pool rates above to apply the overhead and the prime costs found in part 1. It is suggested that you first prepare a schedule to show the overhead costs assigned.
3. Prepare a final schedule comparing the total cost, unit costs broken down by material, labor and overhead for both ABC and for the traditional costing methods. (Pull the information from the costs computed in the first part and compare to the information calculated for the ABC costing method.)
4. Compare the income statements broken down by job using the plant wide rate and ABC. Compute the gross profit margin for each job as well as gross profit in total.
5. Prepare a chart comparing the costs assigned for overhead for the two methods evaluated in part 1 and part 2.
6. Discuss, in memo format, the impact on the costs and bids using the plant-wide rate and activity based costing. Include the recommendation for one of these two methods. Be sure to include proper rationale and at least one schedule or graph that you've prepared.