COST ACCOUNTING QUESTION . Cost hierarchy. Forrester, Inc., manufactures karaoke
ID: 2423374 • Letter: C
Question
COST ACCOUNTING QUESTION.
Cost hierarchy. Forrester, Inc., manufactures karaoke machines for several well-known companies. The machines differ significantly in their complexity and their manufacturing batch sizes. The following costs were incurred in 2014:
a. Indirect manufacturing labor costs such as supervision that supports direct manufacturing labor, $825,000
b. Procurement costs of placing purchase orders, receiving materials, and paying suppliers related to the number of purchase orders placed, $525,000
c. Cost of indirect materials, $160,000
d. Costs incurred to set up machines each time a different product needs to be manufactured, $365,000
e. Designing processes, drawing process charts, and making engineering process changes for products, $287,500
f. Machine-related overhead costs such as depreciation, maintenance, and production engineering, $950,000 (These resources relate to the activity of running the machines.)
g. Plant management, plant rent, and plant insurance, $512,000
1. Classify each of the preceding costs as output unit–level, batch-level, product-sustaining, or facilitysustaining. Explain each answer.
2. Consider two types of karaoke machines made by Forrester, Inc. One machine, designed for professional use, is complex to make and is produced in many batches. The other machine, designed for home use, is simple to make and is produced in few batches. Suppose that Forrester needs the same number of machine-hours to make each type of karaoke machine and that Forrester allocates all overhead costs using machine-hours as the only allocation base. How, if at all, would the machines be miscosted? Briefly explain why. 3. How is the cost hierarchy helpful to Forrester in managing its business?
Explanation / Answer
1)This is outpul level costs , since the direct labor cost changes with the change in output so will indirect costs which supports direct labor
2)Batch level - this cost relates to a group hence purchase order cost which entails receiving, purchase order and payment are group related cost
3)output units since indirect labor costs generally changes with direct labor
4)Batch level since set ups costs are genrerally group related
5)Product sustaining -becuase they are incurred to support products
6)output - since it changes with level of output
7)Facility since cannot be traced to products but do support organisation
3)Can use this information for product and pricing decisions, it can be used to control costs and improve processess and can be used for planning and managing activities.
1)This is outpul level costs , since the direct labor cost changes with the change in output so will indirect costs which supports direct labor
2)Batch level - this cost relates to a group hence purchase order cost which entails receiving, purchase order and payment are group related cost
3)output units since indirect labor costs generally changes with direct labor
4)Batch level since set ups costs are genrerally group related
5)Product sustaining -becuase they are incurred to support products
6)output - since it changes with level of output
7)Facility since cannot be traced to products but do support organisation
2)the complex machine will use more overhead resources in comparision to the simple one.Also it will use more product sustaining overhead resources.So if only machine hours are used and both use same machine hours the overhead cost per unit will be allocated the same to both machines.As a result complex machine will be undercosted(since it uses high resources but reports low cost), on the other hand simple machine will be overcosted3)Can use this information for product and pricing decisions, it can be used to control costs and improve processess and can be used for planning and managing activities.