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(WIP) ACC 350 Exam 1 Study Material

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Problem #2 – Activity

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 # 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

Requirements: 1. Determine the plant-wide overhead rate using the current costing system. $1,000,000/100,000 DLH = $10/DLH 2. Determine the gross margin (in total and per unit) of the regular and deluxe models using the current costing system. Deluxe Regular Total Sales $140 $80 DM 45 30 DL 20 20 OH 20 20 Gross Margin $55 $10 5,000 u. 45,000 u. Total Gross Margin $275,000 $450,000 $725,000 3. For each activity, identify an activity driver and calculate the activity driver rates. Purchasing--Purchase Orders Number of Batches Deluxe: 5,000 units / 50 u/batch = 100 batches Regular: 45,000 units / 450 u/batch = 100 batches 200 batches Number of Purchase Orders Deluxe: 100 batches * 6 POs / batch = 600 POs Regular: 100 batches * 4 POs / batch = 400 POs 1,000 POs $180,000 / 1,000 POs = $180/PO Quality Control—Inspection Time Deluxe: 100 batches * 1 hr/batch = 100 hrs Regular: 100 batches * .25 hr/batch = 25 hrs 125 hrs $250,000/125 hrs = $2,000/Inspection hr