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# Cost Accounting for Product Grades

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Exhibit 1
Selected product grades with production and financial data

Product (Grade) Caliper Coated/Uncoated Slit Average Reels per Batch Material Cost per Reel Selling Price per Reel

A 0.013 Coated Yes 50 \$4,800 \$12,600
B 0.014 Uncoated No 2 \$5,200 \$13,500
C 0.015 Coated Yes 35 \$5,600 \$14,200
D 0.02 Coated No 175 \$7,400 \$19,500

Exhibit 2

Depreciation \$800,000 \$8,000 \$70,000 \$722,000
Labor \$300,000 \$3,000 \$25,000 \$272,000
Energy \$500,000 \$5,000 \$80,000 \$415,000
Other \$198,470 \$1,000 \$20,000 \$177,470
Unrecoverable Clay and Chemicals from Grade Changeovers \$30,000 \$30,000 \$0 \$0
Total \$1,828,470 \$47,000 \$195,000 \$1,586,470

Calculate the volume-based (traditional) cost per reel for grades A-D identified in Exhibit 1.

What is the cost for Forest Hill to conduct a grade change?

What is the cost for Forest Hill to slit a reel of paperboard? As shown in Exhibit 1, only products A and C are routinely slit. For purposes of your analysis, assume the slitting equipment must be set up and adjusted between each reel slit.

Calculate the new volume-based overhead rate after removing grade change and slitting costs.

Determine the activity-based costs for grades A-D

Prepare a table that illustrates the percentage change in costs between the volume-based system and the strategic activity-based system.