Question:
Cost distortions, original activity-based costs At its manufacturing plant in Duluth, Minnesota, Endo Electronics Company manufactures two products, X21 and Y37. For many years, the company has used a simple plantwide manufacturing support cost rate based on direct labor hours. A new plant accountant suggested that the company may be able to assign support costs to products more accurately by using an activity-based costing system that relies on a separate rate for each manufacturing activity that causes support costs.
After studying the plant's manufacturing activities and costs, the plant accountant has collected the following data for last year:
|
ITEM
|
X21
|
Y37
|
|
Units produced and sold
|
50,000
|
100,000
|
|
Direct labor hours used
|
100,000
|
300,000
|
|
Direct labor cost
|
$1,000,000
|
$4,500,000
|
|
Number of times handled
|
40,000
|
20,000
|
|
Number of parts
|
12,000
|
8,000
|
|
Number of design changes
|
2,000
|
1,000
|
|
Number of product setups
|
8,000
|
6,000
|
The accountant has also determined that actual manufacturing support costs incurred last year were as follows:
|
COST POOL
|
ACTIVITY COSTS
|
|
Handling
|
$3,000,000
|
|
Number of parts
|
2,400,000
|
|
Design changes
|
3,300,000
|
|
Setups
|
2,800,000
|
|
Total
|
$11,500,000
|
The direct materials cost for product X21 is $120 per unit, while for product Y37 it is $140 per unit.
Required
(a) Determine the unit cost of each product using direct labor hours to allocate all manufacturing support costs.
(b) Determine the unit cost of each product using activity-based costing.
(c) Which of the two methods from parts a and b produces more accurate estimates of job costs? Explain.
(d) Suppose Endo has been determining its product prices by adding a 25% markup to its reported product cost. Compute the product prices on the basis of the costs computed in parts a and b. What do you recommend to Endo regarding its pricing?
(e) What product-level changes do you suggest on the basis of the activity-based cost analysis? Who would be involved in bringing about your suggested changes?