Lincoln Products manufactures and distributes three types of golf clubs: beginners, intermediate, and advanced. The materials used in these clubs increases in each level and allows for more precise balancing and longer wear. Production is highly automated for the beginners' clubs, whereas the intermediate and advanced clubs require a varying degree of labor, depending on the intricacy of the balancing process. Lincoln applies all indirect costs according to a predetermined rate based on direct labor hours. A consultant recently suggested that Lincoln switch to an activity-based costing system, and identified the following cost breakdown for the upcoming year:
- Activity Recommended Cost Driver Costs Cost Driver
- Order processing # of orders 52500 125 orders
- product set up # of production runs 210000 75 runs
- materials handling pounds of mat. used 375000 125000 lbs
- machine depreciation and maint. machine hrs 322000 20000 hrs
- quality control # of inspections 80000 40 inspect.
- packing # of units 14000 280000 units
In addition, management estimates 50,000 direct labor hours will be used in the upcoming year at a rate of $14 per hour.
Assume that the following activity took place in the first month of the upcoming year:
- Beginners Intermediate Advanced
- Number of units produced 20000 8000 3000
- Direct materials costs 20800 13000 8000
- Direct Labor hrs. 500 1 2000
- # of orders 6 4
Required:
(A) Compute the production costs for each product in the first month of the upcoming year using direct labor hours as the allocation base.
(B) Compute the production costs for each product in the first month of the upcoming year using machine hours as the allocation base.
(C) Compute the production costs for each product in the first month of the upcoming year using activity-based costing.