(WIP) ACC 350 Exam 1 Study Material

Problem #2 – Activity Based Costing Problem
The Manhattan Company manufactures two models of compact disc players, deluxe and regular.
The company has manufactured the regular model for years; the deluxe model was introduced
recently to tap a new segment of the market. Although sales of the deluxe model have been
increasing rapidly, the company’s profits have steadily declined. Management has become
increasingly concerned about the accuracy of its costing system.
The current cost accounting system allocates manufacturing support costs to the two products on
the basis of direct labor hours. Information for deluxe and regular products for the next year is
shown below:
Deluxe Regular
Selling Price $140 $80
Number of Units Produced & Sold 5,000 45,000
Direct Material per unit $45 $30
Direct Labor per unit $20 $20
DLH per unit 2 2
MH per unit 3 0.5
Units per batch 50 450
Inspection hrs/batch 1 0.25
Vendors of components 6 4
A machine is setup once for each batch and the setup is the same regardless of the type of
product. There is one inspection performed for each batch and the inspection time is 1 hour for
the deluxe product and ¼ hour for the regular product. The company has a JIT inventory system
and purchases raw materials by batch. For each batch, the purchasing agent has to order from the
various vendors for the appropriate direct material components. There are six different vendors
for various components of the deluxe model (and therefore six purchase orders per batch) and 4
different vendors for components for the regular product (and therefore four purchase orders per
batch).
The company is considering switching to an ABC system. A recent cost study revealed the
company expects $1,000,000 of overhead next year from the following activities:
Activity
Annual Cost
Purchasing $180,000
Quality Control $250,000
Production Set-ups $220,000
Machine Maintenance $350,000
TOTAL $1,000,000