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Activity based costing

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There are 3 problems.

I have attached 2 excel sheet which go with these problems and a txt file
which is the problems as shown below.

Problem 1. Borealis manufacturing has just completed a major change in its quality control (QC) process. Previously, products had been reviewed by QC inspectors at the end of each major process, and the company's 10 QC inspectors were charged as direct labor to the operation or job.

In an effort to improve efficiency and quality, a computerized video QC system was purchsed for $250,000. The system consists of a minicompuer, 15 video cameras, other peripheral hardware, and software. The new system uses cameras stationed by QC engineers at key points in the production process. Each time an operation changes or there is a new operation, the cameras are moved, and a new master picture is loaded into the computer compares them to the picture of a "good" unit. Any differences are sent ot a QC engineer, who removes the bad units and discusses the flaws with the production supervisors. The new system has replaced the 10 QC inspectors with two QC engineers.

The operating costs of the new QC system, including the salaries of the QC engineers, have been included
as factory overhead in calculating the company's plantwide manufacturing-overhead rate, which is based on direct-labor
dollars. The company's president is confused. His vice president of production has told him how efficeint the new system
is. yet there is a large increase in the overhead rate. The computtion of the rate before and after automation is as follows:

Before After
Budgeted manufacturing overhead $1,900,000 $2,100,000
Budgeted direct-labor cost 1,000,000 700,000
Budgeted overhead rate 190% 300%

Three hundred percent, lamented the president. "How can we compete with such a high overhead rate?"

1. a. Define "manufacturing overhead" and cite three examples of typical cost that would be included in manufactucturing overhead.
b. Explain why companies develop predetermined overhead rates.
2. Explain why the increase in the overhead rate should not have a negative financial impact on Borealis Manufacturing.
3. Explain how Borealis Manufacturing could change its overhead application system to eliminate confusion over product costs.
4. Discuss how an activity-based costing system might benefit Borealis Manufacturing.

Problem 2. World Gourmet Coffee Company (WGCC) is a distributor and processor of different blends of coffee.
The company buys coffee beans from around the world and roasts, blends, and packages them for resale. WGCC currently has 15 different coffees that it offers to gourmet shops in one-pound bags. The major cost is raw materials; however, there is a substantial amount of manufacturing overhead in the predominatly automated roasting and packing process. The company uses relatively little direct labor.

Some of the coffees are very popular and sell in large volumes, while a few of the newer blends have very low volumes. WGCC prices its coffee at full product cost, including allocated overhead, plus a markup of 30 percent. If the prices for certain coffees are significantly higher than market, adjustments are made. The company completes primarily on the qualit of its products, but customers are price-conscious as well.

Data for the 20x1 budget includ manufacturing overhead of $3,000,000, which has been allocated on the basis of each produt's direct-labor cost. The budgeted direct-labor cost for 20x1 totals $600,000. Based on the sales budget and raw-material budget, purchases and use of raw materials(mostly coffee beans) will total $6,000,000.

The expected prime costs for one-pound bags of two of the company's products are as follows:

Kona Malaysian
Direct Material $3.20 $4.20
Direct labor .30 .30

WGCC's controller believes the traditonal product-costing system may be providing misleading cost information.
She has developed an analysis of the 20x1 budgeted manufacturing-overhead cost shown in the following chart.
Activity Cost Driver Budgeted Activity Budgeted Cost
Purchasing Purchase orders 1,158 $579,000
Material handling Setups 1,800 720,000
Quality control Batches 720 144,000
Roasting Roasting hours 96,100 961,000
Blending Blending hours 33,600 336,000
Packaging Packaging hours 26,000 260,000
total manufacturing-overhead cost...............................................................$3,000,000

Data regarding the 20x1 production of Kona and Malaysian coffee are shown in the following table.
There will be no raw-material inventory for either of these coffees at the beginning of the year.

Kona Malaysian
Budgeted sales 2,000 lb. 100,000 lb.
Batch size 500 lb. 10,000 lb.
Setups 3 per batch 3 per batch
Purchase order size 500 lb. 25,000 lb.
Roasting time 1 hr. per 100lb. 1 hr per 100 lb
Blending time .5 hr per 100 lb .5 hr per 100lb
Packaging time .1 hr per 100 lb .1 hr per 100 lb

1. Using WGCC's current roduct-costing system:
a. Determine the company's predetermined overhead rate using ldirect-labor cost as the single cost driver.
b. Determien the full product costs and selling prices of one pound of Kona coffee and one pound of malaysian coffee.

2. Develop a new product cost, using an activity-based costing approach, for one pound of Kona coffee and
one pound of Malaysian coffee.

3. What are the implications of the activity-based costing system wiht respect to
a. The use of direct labor as a basis for applying overhead to products?
b. The use of the existing product-costing system as the basis for pricing?

Problem 3. Marconi Manufacturing produces two items in its Trumbull Plant: Tuff Stuff an Ruff Stuff. Since inception,
Marconi has used only one manufacturing-overhead cost pool to accumulate costs. Overhead
has been allocated to products based on direct-abor hours. Until recently, Marconi was the sole
producer of Ruff Suff and was able to dictate the selling price. However, last year marvella Proucts began marketing a comparable
product at a price below the cost assigned by Marconi. Market share has declined rapidly, and Marconi must now
decide whether to meet the competitive price or to disontinue the product line. Recogniing that discountinuing the
product line wold place an additonal burden on its remaining product, Tuff Stuff, management is using
activity-based costing to determine if it would show a different cost structure for the two products.
The two major indirect costs for manufacturing the products are power usage and setup costs.
Most of the power is used in fabricating, while most of the setup costs are requiredin assembly. The setup
costs are predominately related to Tuff Stuff product line.
A decision was made to separate the Manufacturing Department costs into two activity cost pools as
Fabricating: machines hours will be the cost driver.
Assembly: number of setups will be the cost driver.

The controlller has gathered the following information.

Manufacturing Department
annual budget before separation of overhead
Product Line
Total Tuff Stuff Ruff Stuff
Number of units 20,000 20,000
Direct labor hours 2 hrs per unit 3 hours per unit
Total direct-labor cost $800,000
Direct material $5.00 per unit $3.00 per unit
Budgeted overhead:
Indirect labor $24,000
Fringe benefits 5,000
Indirect material 31,000
Power 180,000
Setup 75,000
Quality assurance 10,000
Other utilities 10,000
Depreciation 15,000

Manufacturing Department
Cost Structure after Separation of Overhead into Activity Cost Pools
Fabrication Assembly
Direct labor cost 75% 25%
Direct material (no change) 100% 0%
Indirect labor 75% 25%
Fringe benefits 80% 20%
Indirect material $20,000 $11,000
Power $160,000 $20,000
Setup $5,000 $70,000
Quality assurance 80% 20%
Other utilites 50% 50%
Depreciation 80% 80%

Cost driver Product Line
Tuff Stuff Ruff Stuff
Machine hrs per unit 4.4 6.0
Setups 1,000 272

1. Assigning overhead based on direct-labor hours, calculate the following:
a. Total budgeted cost of the Manufacturing Department.
b. Unit cost of Tuff Stuff and Ruff Stuff.
2. After separation of overhead into activity cost pools, compute the total budgeted cost of each department:
fabricating and assembly.
3. Using activity-based costing, calculate the unit costs for each product. ( In computing the pool
rates for th efabricating and assembly activity cost pools, round to the nearest cent. Then, in computing
unit product cost, round to the nearest cent).
4. Discuss how a ecisio regarding theproduction and pricing of Ruff Stuff will be affected by the
results of your calculations in the preceding requirements.

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Solution Summary

Excel files and word file contains answers of 3 management accounting problems.