Question:
(Activity analysis, ABC; pricing; cost drivers; decision making) Hurley Corporation has identified the following overhead costs and cost drivers for the coming year:
|
Overhead Item
|
Cost Driver
|
Budgeted Cost
|
Budgeted Activity Level
|
|
Machine setup
|
Number of setups
|
$ 20,000
|
200
|
|
Inspection
|
Number of inspections
|
130,000
|
6,500
|
|
Material handling
|
Number of material moves
|
80,000
|
8,000
|
|
Engineering
|
Engineering hours
|
50,000
|
1,000
|
|
|
$280,000
|
|
The following information was collected on three jobs that were completed during the year:
|
Job 101
|
Job 102
|
Job 103
|
|
Direct material
|
$5,000
|
$12,000
|
$8,000
|
|
Direct labor
|
$2,000
|
$ 2,000
|
$4,000
|
|
Units completed
|
100
|
50
|
200
|
|
Number of setups
|
1
|
2
|
4
|
|
Number of inspections
|
20
|
10
|
30
|
|
Number of material moves
|
30
|
10
|
50
|
|
Engineering hours
|
10
|
50
|
10
|
Budgeted direct labor cost was $100,000, and budgeted direct material cost was $280,000.
a. If the company uses activity-based costing, how much overhead cost should be assigned to Job 101?
b. If the company uses activity-based costing, compute the cost of each unit of Job 102.
c. The company prices its products at 140 percent of cost. If the company uses activity-based costing, what price should it set for each unit of Job 103?
d. If the company used a traditional accounting system and allocated overhead based on direct labor cost, by how much would each unit of Job 103 be over- or under-costed compared to activity-based costing? What would be the management implications of this difference?
e. Identify any non-value-added activities or activities that may be currently necessary but appear to be inefficient in Hurley's production process. Explain what steps the company management could take to improve the production process and potentially lower manufacturing costs.
f. The company is considering outsourcing inspections to an outside company that would perform the inspections for $10 apiece. What are the potential total savings if Hurley outsources the inspections? What other factors should company management consider before making this decision?