Problem 1:
Activity Allocation Base Cost Allocation Rate
Materials handling Number of parts $1.75 per part
Machine setup Number of setup 300.00 per setup
Insertion of parts Number of parts 4.00 per part
Finishing Finishing direct labor hours 70.00 per hour
The number of parts is now a feasible allocation base because Spokes recently purchased bar coding technology. Spokes produces two wheels models: standard and deluxe. Budgeted data for 20x3 are as follows:
Standard Deluxe
Parts per wheel 5.0 7.0
Setups per 1,000 wheels 3.0 3.0
Finishing direct labor hours per wheel 0.2 1.0
Total direct labor hours per wheel 2.0 3.0
The company’s manager’s expect to produce 1, 000 units of each model during the year.
1. Compute the total budget indirect manufacturing cost for 20x3
2. Compute the ABC indirect manufacturing cost per unit of each model.
3. Using Spokes old direct labor hours single-allocation base system, compute the (single) allocation rate based on direct labor hours. Use this rate to determine the indirect manufacturing cost per wheel for each model under the old single-allocation –base method.
Hint: Deluxe model ABC Cost $111.15
Problem 2.
For 20x4, Spokes manager have decided to use the same indirect manufacturing costs per wheel that they computed in 20x3. In addition to the unit indirect manufacturing costs, the following data are budgeted for the company’s standard and deluxe models for 20x4:
Sale price $155.00 $215.00
Direct materials 15.00 25.00
Direct labor 30.00 45.00
Because of limited machine hour capacity, Spokes can produce either 2,000 standard wheels or 2,000 deluxe wheels.
1. If a managers rely on the ABC unit cost data computed in Problem 1, which model will they produce? (all nonmanufacturing costs are the same for both models)
2. If the managers rely on the single-allocation base cost data, which model will they produce?
3. Which course of action will yield more income for Spokes?
Problem 3.
Wheels Inc., uses activity-based costing to account for its chrome wheel manufacturing process, Company managers have identified four manufacturing activities; materials handling, machine setup, insertion of parts and finishing. The budget activity costs for 20x3 and their allocation bases are as follows:
Activity Total Budgeted Cost Allocation Base
Materials handling $18,000 Number of parts
Machine setup 2,800 Number of setups
Insertion of parts 24,000 Number of parts
Finishing 60,000 Finishing direct labor hours
Wheels, Inc, expects to produce 2, 000 chrome wheels during the year. The wheels are expected to use 12,000 parts, require 8 setups and 1,000 hours of finishing time.
1. Compute the cost allocation for each activity
2. Compute the indirect manufacturing cost of each wheel.
Problem 4.
Refer to problem 1, Controller Lindsay is surprised by the increase in cost of the deluxe model under ABC. Market research shows that to remain a viable cost of $165 for the deluxe wheel. A value engineering study by Spokes employees suggest that modifications to the finishing process could cut finishing cost from $70 to $60 per hour and reduce the finishing direct labor hours per deluxe wheel from 1 hour to 0.8 hour per wheel. Direct materials would remain unchanged at $25 per wheel, as would direct labor at $45 per wheel. The materials handling, machine setups and insertion of parts activity costs would remain the same as in Problem 1. Would implementing the value engineering recommendation allow Spokes to achieve its target ABC-based cost for the deluxe wheel?