Cain Components manufactures and distributes various plumbing products used in h
ID: 2597355 • 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: Cost Pools Costs Activity Drivers Receiving $ 645,000 Direct material cost Manufacturing 6,250,000 Machine-hours Machine setup 1,050,000 Production runs Shipping $ 875,000 Units shipped 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: Products Standard Deluxe Total direct material costs $ 260,000 $ 170,000 Total direct labor costs $ 680,000 $ 280,000 Total machine-hours 160,000 90,000 Total number of setups 80 130 Total pounds of material 17,000 8,500 Total direct labor-hours 7,000 4,375 Number of units produced and shipped 20,000 5,000 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.)
Explanation / Answer
a) Standard Deluxe Direct material 260000 170000 Direct labor 680000 280000 Overhead (Note:1) 5644800 3175200 Total cost 6584800 3625200 Units produced 20000 5000 Cost per unit 329.24 725.04 Notes: 1. Allocation of overhead Total overhead cost=645000+6250000+1050000+875000=8820000 Allocate on machine hour basis @ 160000:90000 Standard=8820000*16/25=5644800 Deluxe=8820000*9/25=3175200 b) Standard Deluxe Direct material 260000 170000 Direct labor 680000 280000 Overhead Receiving (645000 @ 260000:170000) 390000 255000 Manufacturing (6250000 @160000:90000) 4000000 2250000 Machine set up (1050000@ 80:130) 400000 650000 Shipping (875000 @ 20000:5000) 700000 175000 Total cost 6430000 3780000 Units produced 20000 5000 Cost per unit 321.5 756