After reviewing the new activity-based costing system that Janis McGee has imple

Question

After reviewing the new activity-based costing system that Janis McGee has implemented at Joplin Industries’s Port Arthur manufacturing facility, Kris Kristoff, the production supervisor, believes that he can reduce production costs by reducing the time spent on machine setups. He has spent the last month working with employees in the plant to change over the machines more quickly with the same reliability. He plans to produce 120,000 units of J25P and 50,000 units of J40X in the first quarter. He believes that with his more efficient setup routine, he can reduce the number of setup hours for both the J25P and the J40X products by 15 percent.

Required:

Compute the amount of overhead allocated to the J25P and the J40X cameras for the first quarter using activity-based costing. Assume that all events are the same in the first quarter as in the third quarter except for the number of setup hours. Assume the cost of a setup hour remains at $900.

J25P J40X Direct material $ 1,520,000 $ 2,440,000 Direct labor Assembly $ 770,000 $ 640,000 Packaging 1,010,000 400,000 Total direct labor $ 1,780,000 $ 1,040,000 Direct costs $ 3,300,000 $ 3,480,000 Overhead Assembly building Assembling (@ $30 per mh) $ 220,000 $ 940,000 Setting up machine (@ $900 per setup hour) 46,000 380,000 Handling material (@ $3,000 per run) 34,000 140,000 Packaging building Inspecting and Packing (@ $5 per direct labor-hour) 340,000 134,000 Shipping (@ $1,320 per shipment) 152,000 304,000 Total ABC overhead $ 792,000 $ 1,898,000 Total ABC cost $ 4,092,000 $ 5,378,000 Number of units 120,000 50,000 Unit cost $ 34.10 $ 107.56

Explanation / Answer

Solution

Part 1 - Since All Events are Same as in first quarter except Number of setup Hours. Hence calculate Number of Revised setup hours and setup cost

51.1

($46000/$900)

422.22

($380000/$900)

$39100

(43.444 * $900)

$323000

(358.889 * $900)

Part 2 - Calculation of Total overhead cost

Direct Labour - Assembly

Particulars J25P J40X Setup Hours

51.1

($46000/$900)

422.22

($380000/$900)

Reduction 15% 15% Revised setup hours 43.444 358.889 Revised setup cost

$39100

(43.444 * $900)

$323000

(358.889 * $900)

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