Problem:
(ABC; pricing) Treffle Molding Company manufactures two products: large jar covers and small bottle caps. Large jar covers require special handling. Each cover must be individually sanded on a special machine to remove excess material (referred to as "flash") from the units. Covers are sanded at the rate of 200 jar covers per hour. Jar covers also require special handling during the packaging process as they are hand-packed in special cartons with foam protection to avoid breakage during shipment. Special packaging materials are $5 per carton; each carton holds 250 jar covers.
Small bottle caps are processed in batches of 5,000 units and do not require use of the machine sander. One employee can process a load of small bottle caps in two hours.
The accounting department has established the following information related to overhead cost pools and cost drivers:
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Budgeted Annual
|
|
Budgeted Activity
|
|
Overhead Cost Pool
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Overhead Cost
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Cost Driver
|
of Cost Driver
|
|
Engineering
|
$300,000
|
Engineering hours
|
3,000 hours
|
|
Machine setups
|
$50,000
|
Number of setups
|
100 setups
|
|
Material purchase and
|
$200,000
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Number of pounds
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2,000,000 pounds
|
|
support
|
|
of material
|
|
|
Machine sanding
|
$100,000
|
Machine hours
|
10,000 hours
|
|
Product certification
|
$270,000
|
Number of orders
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6,000 orders
|
Treffle employs 10 direct labor employees. Each employee averages 2,000 hours per year and is paid $25 per hour.
During the month of August, Treffle received an order for 1,000 jar covers from Ravel Cosmetics and an order for 10,000 bottle caps from Nortell Skin Products. Additional information related to each order appears as follows:
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Ravel
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Nortell
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|
Machine setups
|
4
|
1
|
|
Raw material ($0.20 per pound)
|
$200
|
$500
|
|
Engineering hours
|
10
|
2
|
|
Direct labor hours
|
4
|
2
|
a. Compute the total overhead that should be charged to each order using activity-based costing.
b. Compute the total overhead that would be assigned to each order if Treffle uses a single, predetermined overhead rate based on direct labor hours.
c. Compute the full cost per unit under traditional costing and under activity-based costing. The company quotes all orders on a cost-per-1,000-units basis.
d. Analyze the difference in the cost per order between traditional and ABC. To what factors can the difference be attributed?
e. Based on the costs computed in (c), what selling price per unit would Treffle have to charge for each order to earn a gross profit of 40 percent on the order?
f. The President of Treffle Molding Company, James Mahoney, is upset that the buyer for Ravel Cosmetics insists on small deliveries of each order, resulting in frequent setups to complete each order. How can Mahoney improve this situation?