(WIP) ACC 350 Exam 1 Study Material

Brrrrr Problem Solution
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 selfpropelled
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
Solution
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