Forrester, Inc., manufactures karaoke machines for several well-known companies. The machines differ significantly in their complexity and their manufacturing batch sizes.
The following costs were incurred in 2014:
a. Indirect manufacturing labor costs such as supervision that supports direct manufacturing labor, $825,000
b. Procurement costs of placing purchase orders, receiving materials, and paying suppliers related to the number of purchase orders placed, $525,000
c. Cost of indirect materials, $160,000
d. Costs incurred to set up machines each time a different product needs to be manufactured, $365,000
e. Designing processes, drawing process charts, and making engineering process changes for products, $287,500
f. Machine-related overhead costs such as depreciation, maintenance, and production engineering, $950,000 (These resources relate to the activity of running the machines.)
g. Plant management, plant rent, and plant insurance, $512,000
Required:
1. Classify each of the preceding costs as output unit-level, batch-level, product-sustaining, or facility- sustaining. Explain each answer.
2. Consider two types of karaoke machines made by Forrester, Inc. One machine, designed for professional use, is complex to make and is produced in many batches. The other machine, designed for home use, is simple to make and is produced in few batches. Suppose that Forrester needs the same number of machine-hours to make each type of karaoke machine and that Forrester allocates all overhead costs using machine-hours as the only allocation base. How, if at all, would the machines be miscosted? Briefly explain why.
3. How is the cost hierarchy helpful to Forrester in managing its business?