Task: Calculating Cost
Ontario, Inc. manufactures two products, Standard and Enhanced, and applies overhead on the basis of direct-labor hours. Anticipated overhead and direct-labor time for the upcoming accounting period is $800,000 and 25,000 hours, respectively. Information about the company's products follows.
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Standard:
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Enhanced:
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Estimated production volume
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3,000 units
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4,000 units
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Direct-material cost
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$25 per unit
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$40 per unit
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Direct labor per unit
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3 hours at $12 per hour
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4 hours at $12 per hour
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Ontario's overhead of $800,000 can be identified with three major activities: order processing ($150,000), machine processing ($560,000), and product inspection ($90,000). These activities are driven by number of orders processed, machine hours worked, and inspection hours, respectively.
Data relevant to these activities follow:
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Orders Processed
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Machine Hours Worked
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Inspection Hours
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Standard
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300
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18,000
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2,000
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Enhanced
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200
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22,000
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8,000
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Total
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500
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40,000
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10,000
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Top management is very concerned about declining profitability despite a healthy increase in sales volume. The decrease in income is especially puzzling because the company recently undertook a massive plant renovation during which new, highly automated machinery was installed—machinery that was expected to produce significant operating efficiencies.
Using a Microsoft Excel format for calculations, complete the following:
• Assuming use of direct-labor hours to apply overhead to production, calculate the unit manufacturing costs of the standard and enhanced products if the expected manufacturing volume is attained.
• Assuming the use of activity-based costing, calculate the unit manufacturing cost of the standard and enhanced products if the expected manufacturing volume is attained.
• Ontario’s selling price is based heavily on cost:
o Calculate which product is over cost and which is under cost by using direct-labor hours as an application base.
o Explain if it is possible that this over costing and under costing is responsible for the profit issues the company is facing.
• Illustrate how the solution will change if the following data changes:
o The overhead associated with order processing is $300,000 and the overhead associated with product inspection is $270,000.