(WIP) ACC 350 Exam 1 Study Material

Brrrrr
Problem
ABC Problem—Brrrrr Company
Brrrrr Company manufactures two models of snowblowers: push and self-propelled. The
company has manufactured the push model for years; the self-propelled model was introduced
recently to tap a new segment of the market. While competitors charge quite a bit more for
similar models, the self-propelled model is extremely profitable for Brrrrr. Although sales of the
self-propelled 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 overhead costs to the two products
on the basis of direct labor hours. For 2006, the company has estimated that it will incur
$3,570,000 in manufacturing support costs and produce 50,000 units of the push model and
10,000 units of the self-propelled model. The push model requires one hour of direct labor and
the self-propelled model requires 2 hours. Direct labor costs $30 per DLH. The push model
requires 1 machine hours and the self-propelled model requires 4 machine hours. Direct costs
and selling prices per unit are as follows:
Push Self-Propelled
Direct Material $38 $54
Selling Price $145 $275
The company is considering switching to an ABC system. A recent cost study revealed the
following activities and costs:
Activity
Annual Cost
Engineering Design $440,000
Inspections $780,000
Production Set-ups $610,000
Scheduling $220,000
Material Handling $295,000
Machine Maintenance $450,000
Facility Costs $775,000
TOTAL $3,570,000
The company schedules each production run. It doesn’t matter what type of product is being
scheduled – they each take about the same amount of time. Material is pulled for each production
run and is moved from workstation to workstation for each production run. The company has
decided that facility-level costs should be allocated based on direct labor hours. They have
calculated the following information related to activities:
Activity Information Push Self-propelled
# of units per batch 500 100
Setup time per batch 0.5 hour 0.5 hour
# of Inspections per batch 1 1
Inspection time per batch 0.5 hour 1.5 hour
Engineering Design Hours 350 hours 650 hours
4 - 15