Cain Components manufactures and distributes various plumbing products used in h
ID: 2568311 • Letter: C
Question
Cain Components manufactures and distributes various plumbing products used in homes and other buildings. Over time, the production staff has noticed that products they considered easy to make were difficult to sell at margins considered reasonable, while products that seemed to take a lot of staff time were selling well despite recent price increases. A summer intern has suggested that the cost system might be providing misleading information.
The controller decided that a good summer project for the intern would be to develop, in one self-contained area of the plant, an alternative cost system with which to compare the current system. The intern identified the following cost pools and, after discussion with some plant personnel, appropriate cost drivers for each pool. There were:
In this particular area, Cain produces two of its many products: Standard and Deluxe. The following are data for production for the latest full year of operations:
Required:
a. The current cost accounting system charges overhead to products based on machine-hours.What unit product costs will be reported for the two products if the current cost system continues to be used? (Do not round intermediate calculations.)
b. The intern suggests an ABC system using the cost drivers identified above. What unit product costs will be reported for the two products if the ABC system is used? (Do not round intermediate calculations.)
Cost Pools Costs Activity Drivers Receiving $ 855,000 Direct material cost Manufacturing 11,880,000 Machine-hours Machine setup 1,200,000 Production runs Shipping $ 1,575,000 Units shippedExplanation / Answer
a) Standard Deluxe Direct costs 1150000 660000 (330000+820000) (240000+420000) overhead 9870000 5640000 (15510000*280000/(280000+160000) (15510000*160000/(280000+160000) Total costs 11020000 6300000 Number of units 20000 15000 Unit costs 551 420 Total overhead costs = 855000+11880000+1200000+1575000 = $15510000. b) Standard Deluxe Direct costs 1150000 660000 (330000+820000) (240000+420000) Overhead Receiving 495000 360000 (855000*330000/(330000+240000)) (855000*240000/(330000+240000)) Manufacturing 7560000 4320000 (11880000*280000/(280000+160000)) (11880000*160000/(280000+160000)) Machine setup 480000 720000 (1200000*80/(80+120)) (1200000*120/(80+120)) Shipping 900000 675000 (1575000*20000/(20000+15000)) (1575000*15000/(20000+15000)) Total costs 10585000 6735000 Number of units 20000 15000 Unit cost 529.25 449