Problem
Alice Company produces three products, nicknamed as Leopard, Snake, and Cat. Its manufacturing plant in Center City has three production departments and three service departments.
|
Departments
|
Support costs
|
|
Machining (MC)
|
$ 40,000
|
|
Plating (PL)
|
$ 50,000
|
|
Assembly (AS)
|
$ 15,000
|
|
Purchasing and Inventory (PI)
|
$ 120,000
|
|
Setup and scheduling (SS)
|
$ 70,000
|
Support costs are first traced to the six departments. The old cost accounting system allocated the service department costs to the production departments using the following cost drivers:
|
Department
|
Cost driver
|
|
Purchasing and Inventory
|
Material cost
|
|
Setup and scheduling
|
Direct labor hours
|
|
Quality control
|
Machine hours
|
The old cost accounting system applied support costs to the three products on the basis of direct labor hours. A different cost driver rate was determined for each department. The direct labor wage rate at the plant is $ 10 per hour.
|
Department
|
Leopard
|
Snake
|
Cat
|
Machine hour
|
|
Machining
|
7,000
|
2,800
|
2,200
|
5,200
|
|
Plating
|
3,500
|
1,700
|
1,800
|
1,900
|
|
Assembly
|
2,500
|
1,000
|
1,000
|
2,900
|
|
Product sales
|
Batch-related drivers
|
Material cost per unit
|
|
Product
|
Price
|
Sales units
|
Order
|
Setup
|
MC
|
PL
|
|
Leopard
|
$1.25
|
500,000
|
25
|
110
|
$0.30
|
$0.10
|
|
Snake
|
$1.20
|
200,000
|
10
|
43
|
$0.25
|
$0.10
|
|
Cat
|
$1.30
|
200,000
|
40
|
166
|
$0.28
|
$0.10
|
The profitability of the Amazon City's plant has been declining significantly for the past three years despite the successful launch of the new product - Jaguar - which has now captured more than a 60% share of its segment of the industry. In an assiduous endeavor to understand the reasons for its deteriorating profitability, the company has appointed a special task force.
The task force is considering a new cost accounting system based on activity analysis. This system employs five cost drivers: three departmental DLH, setups (SET), and orders (ORD). Each departmental cost pool is divided into homogenous cost pools identified with a unique driver. The following table presents the percent of the departmental support costs that are put in each of the homogenous cost pools. The total amounts in the five cost pools are allocated to the three products based on their respective cost drivers.
|
Department
|
DLH
|
SET
|
ORD
|
|
Machining
|
30%
|
70%
|
0%
|
|
Plating
|
70%
|
30%
|
0%
|
|
Assembly
|
60%
|
40%
|
0%
|
|
Purchasing and Inventory
|
0%
|
40%
|
60%
|
|
Setup and schdeuling
|
?
|
?
|
?
|
|
Quality control
|
0%
|
70%
|
30%
|
Hana Sting is eader of the task force responsible for activity-based cost analysis. She interviewed Mr. Grum who was responsible for the setup and scheduling department, to determine the cost drivers for the departmental support costs. An excerpt from that interview is as follows:
Sting: "How many people work in the setup and scheduling department?"
Grum: "I have twelve people who work on setups. Three more are responsible for production scheduling. I spend most of my time supervising them".
Sting: "How do you assign setup workers to production jobs?"
Grum: "Almost all the time they set up machines in the machining department. The effort depends only on the number of setups".
Sting: "On what does the time spent on scheduling depends?"
Grum: "It depends on the number of orders".
Sting: "So a large batch or order will require the same amount of setup and scheduling time as a small batch or order".
Grum: "Yes, that is absolutely right".
Determine the product costs per unit using the Activity-based accounting system.
Show as clearly as possible all the intermediate steps, including the cost driver rates, amounts in the five new cost pools, as well as a breakdown of product costs into each of their components.