Assignment:
Bevans Company makes two products, product X and product Y. Bevans has produced product X for many years without generating any hazardous wastes. Recently, Bevans developed product Y, which is superior to product X in many respects. However, production of product Y generates hazardous wastes. Because of the hazardous wastes, Bevans must deal with hazardous waste disposal, government environmental reports and inspections, and safe handling procedures.
Bevans Company uses a cost driver rate based on machine hours to assign manufacturing support costs to its two products. Because of concerns about the accuracy of the product costing system, Joel Dempsey, the controller, undertook an activity based costing analysis of the manufacturing support costs. The resulting cost information is summarized in the following table:
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Product X
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Product Y
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Direct costs (material and Labor)
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$9,000,000
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$4,000,000
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Unit Level support
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$2,000,000
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$1,000,000
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Batch Level support
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$15,000,000
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$20,000,000
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Product Level support
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$5,000,000
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$8,000,000
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Environmental support
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--
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$14,000,000
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Total machine hours
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10,000,000
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6,000,000
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Number of units
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100,000,000
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40,000,000
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(a) Compute product costs per unit for products X and Y using the current cost driver rate based on machine hours for manufacturing support costs.
(b) Compute product costs per unit per unit for products X and Y using the activity based costing figures provided in the table.
(c) Explain the reasons for the differences in cost for each product using the two cost systems.
(d) Bevans has been selling products X and Y at a price equal to 1.5 times the product cost computed using the machine hour based cost driver rate for manufacturing support costs. Compute these prices and provide recommendations to Bevans management concerning profit improvement through pricing changes and cost reduction through manufacturing improvements.
(a)
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Product X
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Product Y
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Totals
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Direct costs(material plus labor)
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Unit-level support
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Batch-level support
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Product-level support
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Environmental support
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Total support
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Total machine hours
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Number of units
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Current cost driver rate:
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Total support ÷ machine hours
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Costs using current cost driver rate
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Direct costs (material plus labor)
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Applied support:$4.06 per machine hour
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Total costs
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Number of units
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Cost per unit
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(b) Per unit
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Costs
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Unit Costs
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Product X
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Product Y
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X
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Y
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Direct costs(material plus labor)
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Unit-level support
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Batch-level support
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Product-level support
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Environmental support
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Total support
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Total costs
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Number of units
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Cost per unit using ABC
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