Problem 1: Lennox Industries manufactures two products: A and B. A review of the company's accounting records revealed the following per-unit costs and production volumes:
A B
Production volume (units) 2,500 5,000
Direct material $ 40 $ 60
Direct labor:
2 hours at $12 24
3 hours at $12 36
Manufacturing overhead:
2 hours at $93 186
3 hours at $93 279
Manufacturing overhead is currently computed by spreading overhead of $1,860,000 over 20,000 direct labor hours. Management is considering a shift to activity-based costing in an effort to improve the firm's accounting procedures, and the following data are available:
Cost Driver Volume
Cost Pool Cost Cost Driver A B Total
Setups $ 240,000 Number of setups 100 20 120
General factory 1,500,000 Direct labor hours 5,000 15,000 20,000
Machine processing 120,000 Machine hours 2,200 800 3,000
$1,860,000
Lennox determines selling prices by adding 40% to a product's total cost.
Required:
A. Compute the per-unit cost and selling price of product B by using Lennox's current costing procedures.
B. Compute B's per-unit overhead cost of product B if the company switches to activity-based costing.
C. Compute the total per-unit cost and selling price under activity-based costing.
D. Lennox has recently encountered significant international competition for product B, with considerable business being lost to very aggressive suppliers. Will activity-based costing allow the company to be more competitive with product B from a price perspective? Briefly explain.
E. Will the cost and selling price of product A likely increase or decrease if Lennox changes to activity-based costing? Why? Hint: No calculations are necessary.
Problem 2.
Edwards Company had a beginning work-in-process inventory of 30,000 units on June 1. These units contained $120,000 of direct materials and $272,000 of conversion cost. The following data relate to activity during June:
Production completed (units) 70,000
Ending work in process, 60% complete (units) 20,000
Direct materials used ($) 258,000
Conversion cost ($) 695,600
Edwards uses a weighted-average process-costing system. All materials are added at the start of manufacturing; in contrast, conversion cost is incurred evenly throughout production.
Required:
A. Compute the total equivalent units for direct material and conversion cost.
B. Compute the cost per equivalent unit of direct material and conversion cost.
C. Determine the cost of completed production.
D. Determine the cost of the June 30 work in process.