Draft a memo for the plant manager


Problem:

Activity-Based Costing versus Traditional Costing

Doaktown Products manufactures fishing equipment for recreational uses. The Miramichi plant produces the company's two versions of a special reel used for river fishing. The two models are the M-008, a basic reel, and the M-123, a new and improved version. Cost accountants at company headquarters have prepared costs for the two reels for the most recent period. The plant manager is concerned. The cost report does not coincide with her intuition about the relative costs of the two models. She has asked you to review the cost accounting and help her prepare a response to headquarters.

Manufacturing overhead is currently assigned to products based on their direct labor costs. For the most recent month, manufacturing overhead was $280,000. During that time, the company produced 12,000 units of the M-008 and 2,000 units of the M-123. The direct costs of production were as follows:

 

M-008

M-123

Total

Direct materials

$100,000

$80,000

$180,000

Direct labor

100,000

40,000

140,000

Management determined that overhead costs are caused by three cost drivers. These drivers and their costs for last year were as follows:

Cost Driver

Costs

 

Activity Level

 

M-008

M-123

Total

Number of machine-hours

$120,000

5,000

3,000

8,000

Number of production runs

70,000

10

10

20

Number of inspections

90,000

20

40

60

Total overhead

$280,000

 

 

 

Required

a. How much overhead will be assigned to each product if these three cost drivers are used to allocate overhead? What is the total cost per unit produced for each product?

b. How much of the overhead will be assigned to each product if direct labor cost is used to allocate overhead? What is the total cost per unit produced for each product?

c. Draft a memo for the plant manager explaining why the two systems result in different costs along with your recommendation for which costing system to use.

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Accounting Basics: Draft a memo for the plant manager
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