(WIP) ACC 350 Exam 1 Study Material

Milwaukee
Problem
Milwaukee Company ABC Problem
The Milwaukee Company manufactures two models of scooters, 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. For 2006, the company has estimated that it will incur $2,581,000
in manufacturing support costs and produce 20,000 units of the deluxe model and 500,000 units
of the regular model. The deluxe model requires one hour of direct labor and the regular model
requires ¼ hour. Direct labor costs $20 per DLH. The deluxe model requires 2 machine hours
and the regular model requires 0.5 machine hours. Direct costs and selling prices per unit are as
follows:
Regular Deluxe
Direct Material $8 $10
Selling Price $25 $60
The company is considering switching to an ABC system. A recent cost study revealed the
following activities and costs:
Activity
Annual Cost
Purchase Orders $246,000
Inspections $600,000
Production Set-ups $710,000
Machine Maintenance $450,000
Facility Costs $575,000
TOTAL $2,581,000
The company would like to allocated facility level costs on a per unit basis and has calculated the
following information related to activities:
Activity Driver Regular Deluxe
# of units per batch 1,000 80
Setup time per batch 0.5 hour 1 hour
# of purchase orders 200 200
# of Inspections per batch 1 1
Requirements:
a. Determine the plant-wide overhead rate using the current costing system.
b. Determine the gross margin (per unit) of the regular and deluxe models using the current costing
system.
c. For each activity, calculate activity rates (round to the nearest penny)
d. Determine the gross margin (per unit) of the regular and deluxe models using the ABC
information.