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Activity-Based Costing; Budgeted Operating Margin

Activity-Based Costing; Budgeted Operating Margin

Stanley Cycle Company produces two subassemblies, JY-63 and RX-67, used in manufacturing motorcycles. The company is currently using an absorption costing system that applies overhead based on direct-labour hours. The budget for the current year ending December 31, 20x4 is as follows:

STANLEY CYCLE COMPANY
Budgeted Statement of Gross Margin for 20x4
JY-63 RX-67 Total
Sales in units. 5,000 5,000 10,000
Sales revenue $ 3,400,000 $ 4,400,000 $ 7,800,000
Cost of goods manufactured and sold:
Beginning finished-goods inventory. $ 480,000 $ 600,000 $ 1,080,000
Add: Direct material. 2,000,000 3,500,000 5,500,000
  Direct labour 370,370 185,186 555,556
  Applied manufacturing overhead* 1,088,050 544,026 1,632,076
Cost of goods available for sale. 3,938,420 4,829,212 8,767,632
Less: Ending finished-goods inventory. 480,000 600,000 1,080,000
Cost of goods sold. 3,458,420 4,229,212 7,687,632
Gross margin. $(58,420) $170,788 $112,368
* Applied on the basis of direct-labour hours:

Machining $ 849,056
Assembly 433,962
Material handling 113,208
Inspection 235,850
Total $1,632,076
Page 198
Jay Rexford, Stanley Cycle's president, has been reading about a new type of costing method called activity-based costing. Rexford is convinced that activity-based costing will cast a new light on future profits. As a result, Jack Canfield, the company's director of cost management, has accumulated cost pool information for this year shown on the following chart. This information is based on a product mix of 5,000 units of JY-63 and 5,000 units of RX-67.

Cost Pool Information for 20x4
Cost Pool Activity JY-63 RX-67
Direct labour Direct-labour hours (per product line) 10,000 5,000
Material handling Number of parts (per unit) 5 10
Inspection inspection hours (per product line) 5,000 7,500
Machining Machine hours (per product line) 15,000 30,000
Assembly Assembly hours (per product line) 6,000 5,500
In addition, the following information is projected for the next calendar year, 20x5:

JY-63 RX-67
Sales (in units) 5,100 4,900
Beginning inventory, finished goods (in units) 800 600
Ending inventory, finished goods (in units) 700 700
On January 1, 20x5, Rexford is planning to increase the prices of JY-63 to $710 and RX-67 to $910. Material costs are not expected to increase in 20x5, but direct labour will increase by 8 percent, and all manufacturing overhead costs will increase by 6 percent. Due to the nature of the manufacturing process, the company does not have any beginning or ending work-in-process inventories.
Stanley Cycle Company has materials delivered to the production facility directly from the vendors. The raw-material inventory both at the beginning and the end of the month is immaterial and can be ignored for the purposes of a budgeted income statement. The company uses the first-in, first-out (FIFO) inventory method.
Required:
1. Explain how activity-based costing differs from traditional product-costing methods.
2. Using activity-based costing, calculate the total cost for 20x5 for the following activity cost pools: material handling, inspection, machining, and assembly. (For the total costs, round to the nearest dollar.) Then, calculate the pool rate per unit of the appropriate cost driver for each of the four activities.
3. Prepare a table showing for each product line the estimated 20x5 cost for each of the following cost elements: direct material, direct-labour, machining, assembly, material handling, and inspection. (Round to the nearest dollar.)
4. Prepare a budgeted statement showing the gross margin for Stanley Cycle Company for 20x5, using activity-based costing. The statement should show each product and a total for the company. Be sure to include detailed calculations for the cost of goods manufactured and sold. (Round each amount in the statement to the nearest dollar.)

Attached with this is an excel template

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Solution Summary

Activity-based costing for budgeting operating margins are examined for Stanley Cycle Company.

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