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(WIP) ACC 350 Exam 1 Study Material

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Milwaukee Problem

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.

Solutions Milwaukee Company Problem Solution 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 2017, 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 would like to allocated facility level costs on a per unit basis and has calculated the following information related to activities: 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 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. $2,581,000 of MOH costs 20,000 units of deluxe model @ 1 DLH/unit = 20,000 DLH 500,000 units of regular model @ ¼ DLH/unit = 125,000 DLH Total DLH = 145,000 MOH Rate = $2,581,000 / 145,000 DLH = $17.80 per DLH