Utica Manufacturing UM was recently acquired by MegaMachines

Utica Manufacturing (UM) was recently acquired by MegaMachines, Inc. (MM), and organized as a separate division within the company. Most manufacturing plants at MM use an ABC system, but UM has always used a traditional product costing system. Bob Miller, the plant controller at UM, has decided to experiment with ABC and has asked you to help develop a simple ABC system that would help him decide if it was useful, The controller\'s staff has identified costs for the first month in the four overhead cost pools along with appropriate cost drivers for each pool: Shipping 440 000 The company manufactures two basic products with model numbers 308 and 510. The following are data for production for the first month as part of MM: of material 17.500 and shipped 25,000 Required: a. The current cost accounting system charges overhead to products based on machine-hours. What unit product costs will be reported for the two products if the current cost system continues to be used? (Round intermediate calculations and \"Per unit cost\" answers to 2 decimal places.) b. A consulting firm has recommended using an activity-based costing system, with the activities based on the cost pools identified by the cost accountant. What are the cost driver rates for the four cost pools identified by the cost accountant? (Round your answers to 2 decimal places.) c. What unit product costs will be reported for the two products if the ABC system suggested by the cost accountant\'s classification of cost pools is used? (Round intermediate calculations and final answers to 2 decimal places.)

Solution

Cost Pools Costs Activity Drivers Product 308 Product 510 Total Incoming inspection $210,000 Direct material cost Total direct material costs $      60,000 $            24,000 $   84,000 Production 1,650,000 Machine-hours Total direct labor costs        165,000              195,000     360,000 Machine setup 700,000 Setups Total machine-hours          60,000                90,000     150,000 Shipping 440,000 Unit shipped Total number of setups                 45                       80            125 Total Cost $3,000,000 Total pounds of material          17,500                  8,500       26,000 Total direct labor-hours            5,500                  8,500       14,000 Number of units produced and shipped          25,000                15,000       40,000 a Product 308 Product 510 Total direct material costs $      60,000 $            24,000 Total direct labor costs        165,000              195,000 Total Manufacturing Cost (3000000*6/15 ; 3000000*9/15)     1,200,000           1,800,000 Total Cost $ 1,425,000 $       2,019,000 ÷ No of units produced          25,000                15,000 Per Unit Cost $        57.00 $            134.60 b Inspection (210000/84000) $          2.50 of material dollars Production (1650000/150000) $        11.00 per machine-hour Machine setup (700000/125) $   5,600.00 per setup Shipping (440000/40000) $        11.00 per unit c Product 308 Product 510 Total direct material costs $      60,000 $            24,000 Total direct labor costs        165,000              195,000 Manufacturing Overhead Cost Incoming inspection (60000 x 2.50 ; 24000 x 2.50)        150,000                60,000 Production (60000 x 11 ; 90000 x 11)        660,000              990,000 Machine setup (45 x 5600 ; 80 x 5600)        252,000              448,000 Shipping (25000 x 11 ; 15000 x 11)        275,000              165,000 Total Manufacturing Cost     1,337,000           1,663,000 Total Cost $ 1,562,000 $       1,882,000 ÷ No of units produced          25,000                15,000 Per Unit Cost $        62.48 $            125.47 d If management implemented an activity-based costing system it should be provided with a more through understanding of product costs.