Sue, the corporate controller, has thus far been impressed with your performance at the Charlotte plant. She thinks it is time for the Company to move forward with a more precise costing system. She meets with you to discuss if you are able to implement Activity Based Costing at Charlotte. Being on the fast-track, you are eager to demonstrate that you should be the successor to Sue and agreed to pilot ABC at Charlotte. You have gathered the following interim data for envelopes and cups.
Total production overhead $5,017,500
- Envelopes Cups
- Direct costs $8,250,000 $8,750,000
- Units produced 1,500,000 350,000
- Machine hours 200,000 50,000
- Direct labor hours 34,500 153,625
- Number of quality inspections 1,000 6,500
- Revenue generated by the two products $15,000,000 $16,800,000
You have determined, using ABC, that overhead can be assigned to separate cost pools specifically:
- Pool 1 = $1,260,000 using machine hours as the cost driver
- Pool 2 = $2,257,500 using direct labor hours as the cost driver
- Pool 3 = $1,500,000 using the number of quality inspections as the cost
- driver
Historically, Charlotte has used a single plant-wide rate, machine hours for the allocation of overhead.
Required:
1. What are the steps in ABC implementation?
2. Provide 3 possible non-value added activities that the Charlotte facility may be experiencing?
3. Using the old plant-wide rate calculate gross profit and the rate of return on the two products.
4. Using the new cost pools and cost drivers calculate gross profit and the rate of return of the two products.