Assignment
1. Mallory Luongo, Inc. manufactures five models of kitchen appliances at its Mesa plant. The company is installing activity-based costing and has identified the following activities performed at its Mesa plant. Having analyzed its Mesa plant operations for purposes of installing activity-based costing, Mallory Luongo, Inc. identified its activity cost centers. It now needs to identify relevant activity cost drivers in order to assign overhead costs to its products. Using the activities listed below, identify for each activity one or more cost drivers that might be used to assign overhead to Mallory Luongo's five products. (If several answers appear right, select the answer that lists all the cost drivers that might be used.)
Purchasing raw materials and parts.
Storing and managing inventory.
Receiving and inspecting raw materials and parts.
Interviewing and hiring new personnel.
Machine forming sheet steel into appliance parts.
Manually assembling parts into appliances.
Training all employees of the company.
Insuring all tangible fixed assets.
Supervising production.
Maintaining and repairing machinery and equipment.
Painting and packaging finished appliances.
2. Sorce Instrument, Inc. manufactures two products: missile range instruments and space pressure gauges. During April, 50 range instruments and 300 pressure gauges were produced, and overhead costs of $89,500 were estimated. An analysis of estimated overhead costs reveals the following activities.
Activity Cost Driver Total Cost
1. Materials handling Number of requisitions $35,000
2. Machine setups Number of setups 27,500
3. Quality inspections Number of inspections 27,000
$89,500
The cost driver volume for each product was as follows.
Cost Driver Instruments Gauges Total
Number of requisitions 400 600 1,000
Number of setups 200 300 500
Number of inspections 200 400 600
Determine the overhead rate for each activity.
Assign the manufacturing overhead costs for April to the two products using activity-based costing.
3. Skaros Stairs Co. of Moore designs and builds factory-made premium wooden stairs for homes. The manufactured stair components (spindles, risers, hangers, hand rails) permit installation of stairs of varying lengths and widths. All are of white oak wood. Budgeted manufacturing overhead costs for the year 2011 are as follows.
Overhead Cost Pools Amount
Purchasing 57,000
Handling materials 82,000
Production (cutting, milling, finishing) 210,000
Setting up machines 85,000
Inspecting 90,000
Inventory control (raw materials and finished goods) 126,000
Utilities 180,000
Total budget overhead costs 830,000
For the last 4 years, Skaros Stairs Co. has been charging overhead to products on the basis of machine hours. For the year 2011, 100,000 machine hours are budgeted.
Anthony Morse, owner-manager of Skaros Stairs Co., recently directed his accountant, Neal Seagren, to implement the activity-based costing system that he has repeatedly proposed. At Anthony Morse's request, Neal and the production foreman identify the following cost drivers and their usage for the previously budgeted overhead cost pools.
Activity Cost Pools Expected
Cost Drivers Use of
Cost Drivers
Purchasing Number of orders 600
Handling materials Number of moves 8,000
Production (cutting, milling, finishing) Direct labor hours 100,000
Setting up machines Number of setups 1,250
Inspecting Number of inspections 6,000
Inventory control (raw materials and finished goods) Number of components 168,000
Utilities Square feet occupied 90,000
David Hannon, sales manager, has received an order for 280 stairs from Community Builders, Inc., a large housing development contractor. At David's request, Neal prepares cost estimates for producing components for 280 stairs so David can submit a contract price per stair to Community Builders. He accumulates the following data for the production of 280 stairways.
Direct materials 103,600
Direct labor 112,000
Machine hours 14,500
Direct labor hours 5,000
Number of purchase orders 60
Number of material moves 800
Number of machine setups 100
Number of inspections 450
Number of components 16,000
Number of square feet occupied 8,000
Compute the predetermined overhead rate using traditional costing with machine hours as the basis.
What is the manufacturing cost per stairway under traditional costing?
What is the manufacturing cost per stairway under the proposed activity-based costing?
d)Which of the two costing systems is preferable in pricing decisions and why?
4. Polzin Corporation produces two grades of wine from grapes that it buys from California growers. It produces and sells roughly 3,000,000 liters per year of a low-cost, high-volume product called CoolDay. It sells this in 600,000 5-liter jugs. Polzin also produces and sells roughly 300,000 liters per year of a low-volume, high-cost product called LiteMist. LiteMist is sold in 1-liter bottles. Based on recent data, the CoolDay product has not been as profitable as LiteMist. Management is considering dropping the inexpensive CoolDay line so it can focus more attention on the LiteMist product. The LiteMist product already demands considerably more attention than the CoolDay line.
Greg Kagen, president and founder of Polzin, is skeptical about this idea. He points out that for many decades the company produced only the CoolDay line, and that it was always quite profitable. It wasn't until the company started producing the more complicated LiteMist wine that the profitability of CoolDay declined. Prior to the introduction of LiteMist, the company had simple equipment, simple growing and production procedures, and virtually no need for quality control. Because LiteMist is bottled in 1-liter bottles, it requires considerably more time and effort, both to bottle and to label and box than does CoolDay. The company must bottle and handle 5 times as many bottles of LiteMist to sell the same quantity as CoolDay. CoolDay requires 1 month of aging; LiteMist requires 1 year. CoolDay requires cleaning and inspection of equipment every 10,000 liters; LiteMist requires such maintenance every 600 liters.
Greg has asked the Accounting department to prepare an analysis of the cost per liter using the traditional costing approach and using activity-based costing. The following information was collected.
CoolDay LiteMist
Direct materials per liter 0.4 1.2
Direct labor cost per liter 0.25 0.5
Direct labor hours per liter 0.05 0.09
Total direct labor hours 150,000 27,000
Activity Cost Pool Cost Driver Estimated Overhead Expected Expected Use of
Use of Cost Drivers per Product
Cost Drivers CoolDay LiteMist
Grape processing Cart of grapes $145,860 6600 6,000 600
Aging Total months $396,000 6600000 3,000,000 3,600,000
Bottling and corking Number of bottles $270,000 900000 600,000 300,000
Labeling and boxing Number of bottles $189,000 900000 600,000 300,000
Maintain and inspect equipment Number of inspections $240,800 800 350 450
$1,241,660
a)Under traditional product costing using direct labor hours, compute the total manufacturing cost per liter of both products.
b) Under ABC, prepare a schedule showing the computation of the activity-based overhead rates (per cost driver).
c) Prepare a schedule assigning each activity's overhead cost pool to each product, based on the use of cost drivers. What is the overhead cost per liter?