Question

Cain Components manufactures and distributes various plumbing products used in homes and other buildings. Over time, the production staff has noticed that products they considered easy to make were difficult to sell at margins considered reasonable, while products that seemed to take a lot of staff time were selling well despite recent price increases. A summer intern has suggested that the cost system might be providing misleading information.

The controller decided that a good summer project for the intern would be to develop, in one self-contained area of the plant, an alternative cost system with which to compare the current system. The intern identified the following cost pools and, after discussion with some plant personnel, appropriate cost drivers for each pool. There were:

Cost Pools		Costs	Activity Drivers
Receiving	$	600,000	Direct material cost
Manufacturing		5,500,000	Machine-hours
Machine setup		900,000	Production runs
Shipping	$	1,000,000	Units shipped

In this particular area, Cain produces two of its many products: Standard and Deluxe.The following are data for production for the latest full year of operations:

	Products
	Standard			Deluxe
Total direct material costs	$	245,000		$	155,000
Total direct labor costs	$	650,000		$	250,000
Total machine-hours		150,000			100,000
Total number of setups		75			125
Total pounds of material		18,000			9,000
Total direct labor-hours		6,000			3,750
Number of units produced and shipped		20,000			5,000

The intern decides to look more closely at the manufacturing activity and determines that it can be broken down into two activities: production and engineering. Production covers the costs of ongoing manufacturing while engineering includes those activities dealing with engineering changes, design modifications, and so on.

The costs attributed to production are $3,300,000 and the costs attributed to engineering are $2,200,000. After discussion with plant engineers, the intern decides that the best cost driver for engineering is setups, because most of the work arises from changes in the way the product is run.

Required:

1. Compute the totals of the cost driver rates shown below. (Round "Manufacturing" answer to 2 decimal places.)

  

2. What unit product costs will be reported for the two products if the revised ABC system is used?

Answer 1

STATEMENT SHOWING ACTIVITY RATE OF ACTIVITY POOL
			Activity	Total	Expected	Activity
ACTIVITY COST POOL			Measures	Overheads	Activity	Rate
Receiving			DMC	600000	400000	1.50
manufacturing			MH	3300000	250000	13.20
Engineering			Setups	2200000	200	11000.00
machine setup			Runs	900,000	200	4500.00
Shipping			Shipped	1,000,000	25,000	40.00
			Standard	Deluxe
Direct Material			245000	155000
Direct Labour			650000	250000
overheads:
Receiving			367500	232500
Manufacturing			1980000	1320000
Engineering			825000	1375000
Machine setup			337500	562500
Shipping			800000	200000
Total Cost			5205000	4095000
Divide: Unit produced			20000	5000
Unit product cost			260.25	819